Wyckoff's five-step approach

What it is

Wyckoff set out a five-step process. One: work out the position and likely direction of the overall market. Two: pick instruments moving in harmony with it, and stronger (for longs) or weaker (for shorts) than it. Three: pick those with enough cause built up, a range big enough for the move you want. Four: check they are ready to move, using his buying and selling tests. Five: time the entry with a turn in the overall market.

The buying and selling tests are checklists, nine of each, of the conditions that show a range has finished accumulating or distributing.

How to spot it

• For index futures, step one is the trend of the index itself and its related markets.
• For forex, the dollar index often plays the 'overall market' role.

How to use it

• Use it as a top-down routine before each session or week.
• Skip setups where the market's direction and the instrument's disagree.

Common mistakes

• Jumping to step five, the timing, without the earlier steps.
• Choosing an instrument that's lagging the market for a long.

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