Who this entry is for — Readers who want to follow the selection sequence documented in Wyckoff teaching instead of choosing a stock first and seeking confirmation afterward.
The five steps are a procedure for moving from broad context to a possible entry. They are not an algorithm: each step requires consistent data, comparison with alternatives, and an explicit decision about invalidation and risk.
Recommended prerequisites: Three Wyckoff laws, Composite Man, and Point and Figure.
| Step | Question | Tools and checks |
|---|---|---|
| 1 | What is the market's present position and probable trend? | Bar and P&F charts of market indices |
| 2 | Which stocks are in harmony with that trend? | Stock versus relevant index comparison |
| 3 | Is the count's estimated potential compatible with the objective and risk? | Stock P&F count |
| 4 | Does the stock show readiness? | Nine buying or selling tests |
| 5 | Is timing aligned with a compatible index turn? | Bar/P&F charts, invalidation, and stop |
1. Market position and probable trend
The first step distinguishes a trending market from a consolidation, then evaluates structure, supply, and demand. Its output is not certainty but a conditional bias — long, short, or no position — that must be updated as evidence changes.
The reference market should be relevant. A broad index may be inadequate for a stock tied to a specific sector or venue; the benchmark choice should be stated.
The bar chart compares structure, rallies, and reactions; P&F examines position and causes. If the two views do not converge, the method does not require choosing the favorable one: no position remains a possible Step 1 result.
2. Stocks in harmony with the trend
In a rising market, the teaching favors stocks that advance more on rallies and decline less on reactions; in a falling market, it looks for the reverse. Wyckoff compared swings on charts. A stock/index ratio is a useful modern adaptation, not the only historical technique.
Relative strength is a filter, not a guarantee: it can change and depends on the chosen benchmark and window.
| Market bias | Consistent candidate | Exclusion signal |
|---|---|---|
| Bullish | Stronger rallies and shallower reactions than the benchmark | Persistent underperformance |
| Bearish | Stronger reactions and weaker rallies than the benchmark | Persistent relative resilience |
| Uncertain | No forced selection | Benchmark and stock give conflicting evidence |
3. Cause consistent with the objective
The horizontal Point-and-Figure count across a trading range produces a projection to compare with the objective and risk. Box size, reversal, count line, and selected phases must be explicit. The projection is not a guaranteed minimum target and does not replace support, resistance, or liquidity analysis.
Step 3 and Test 9 answer different questions: Step 3 asks whether the cause can meet the objective; Test 9 compares estimated potential with loss at the initial stop. A broad projection does not make an arbitrary stop or excessive size acceptable.
4. Readiness and the nine tests
The main modern source lists the following tests and says that it adapts them from Hank Pruden, The Three Skills of Top Trading (2007), pp. 136–137. They are a contextual checklist, not a universal scoring system.
Buying tests for accumulation
- Prior downside objective accomplished — P&F.
- Preliminary Support, Selling Climax, and Secondary Test — bar and P&F.
- Bullish activity: volume increases on rallies and diminishes on reactions — bar.
- Downward stride broken — bar or P&F.
- Higher lows — bar or P&F.
- Higher highs — bar or P&F.
- Stock stronger than the market — bar.
- Horizontal base forming — bar or P&F.
- Estimated upside potential at least three times the loss at the initial stop — P&F and bar.
Selling tests for distribution
- Prior upside objective accomplished — P&F.
- Bearish activity: volume decreases on rallies and increases on reactions — bar and P&F.
- Preliminary Supply and Buying Climax — bar and P&F.
- Stock weaker than the market — bar.
- Upward stride broken — bar or P&F.
- Lower highs — bar or P&F.
- Lower lows — bar or P&F.
- “Crown,” or lateral top, forming — P&F.
- Estimated downside potential at least three times the risk at the initial stop — P&F and bar.
Labels do not remove ambiguity. If PS, SC, or ST cannot be distinguished, the reading should remain incomplete; boxes should not be filled retrospectively.
5. Timing with the market and risk
The final step seeks a market-index turn compatible with the stock setup. The source also calls for a stop and, where appropriate, trailing it, but it does not provide a distance suitable for every instrument. Invalidation, size, and exposure to gaps or slippage must be set before entry.
Complete example
An index stops declining and forms a still-uncertain range (Step 1). Among sector stocks, one shows shallower reactions than the benchmark (Step 2). A documented P&F count offers enough projected room for the objective (Step 3). On the right side of the range, higher highs/lows, relative strength, and a horizontal base appear, but the index has not yet turned compatibly (Step 4). The process stops: the candidate remains on watch until Step 5. This example illustrates the funnel and is not a recommendation.
Decision record
| Field | What to record |
|---|---|
| Market | Benchmark, timeframe, proposed phase, and invalidation |
| Selection | Relative comparisons used |
| Cause | P&F settings, conservative count, and projection |
| Readiness | Tests present, absent, and ambiguous |
| Timing/risk | Trigger, invalidation, stop, size, gaps, and slippage |
Recording rejected candidates as well reduces the risk of reconstructing a process after the outcome is known.
Limitation — Agreement across all five steps does not establish that a trade will succeed. It organizes the decision and exposes its assumptions; the market can invalidate them without warning.
Sources
- StockCharts ChartSchool, The Wyckoff Method: A Tutorial — “A Five-Step Approach to the Market” and “Nine Buying/Selling Tests”.
- Wyckoff Analytics, Wyckoff Method, accessible version listing the required chart types and test order.
- Henry O. Pruden and Bernard Belletante, Wyckoff Laws and Tests, CMT Association.