Schematic of the Wyckoff distribution on a Bitcoin chart.
1) Preliminary offer (PSY)
This phase usually occurs after a significant rise in prices. Dominant traders will sell a larger portion of their positions, resulting in increased trading volume.
2) Purchase Climax (BC)
The increase in supply forces retail traders to open positions. This demand causes the price to continue to rise. Dominant traders can sell their positions at a higher price. However, this phase is dependent on high demand from retail traders, so a sell-off by dominant traders will not cause the price of the asset to decline.
3) Automatic response (AR)
The end of the BC phase is marked by a fall in price. This comes as fewer traders are buying up positions, even though supply is still high. An increase in the number of sales or supply orders causes the price to fall. It will eventually reach the AR level, which is the lower price limit of the Wyckoff distribution cycle.
4) Secondary test (ST)
In this phase, the price returns to the BC range. This is where traders check the balance of supply and demand. The maximum price of this test occurs when supply exceeds demand. When the price reaches the BC price range, the number of trades decreases.
5) Sign of weakness, last supply point, upthrust after distribution (SOW, LPSY, UTAD)
SOW occurs when the price of an asset falls near or below the initial boundaries of the corresponding Wyckoff distribution cycle. This occurs when supply is greater than demand and signals price weakness. After SOW comes LPSY. At this stage, traders test the asset's price support at these lower levels. There may be a small rally, but any rally will be difficult due to either high supply or low demand. The last possible phase is UTAD, which is what it sounds like. This phase of the Wyckoff distribution cycle is not guaranteed to occur, but if it does occur, it will usually be toward the end of the overall cycle.
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