A quién sirve esta entrada — For anyone who tends to fall in love with a single stock and then hunt for reasons to buy it. The five steps reverse the order: you start with the market, arrive at the stock last, and each step filters the candidates before the next.
Fuente: the five-step procedure is codified by the modern teaching of the Stock Market Institute and taken up by Wyckoff Analytics (Roman Bogomazov) and the StockCharts ChartSchool. It is the methodological backbone with which Cyclepedia organises the operational Wyckoff entries.
Prerrequisitos
Three Wyckoff laws, Composite Man. Useful: Point & figure for step 3.
The logic of the five steps
The procedure is a funnel. It does not ask «is this stock buyable?» but a sequence of questions that progressively narrow the field: what is the tide of the market, which boats follow it best, how far can the chosen boat travel, whether it is ready to leave now, and whether the tide is actually turning at the moment you want to climb aboard. The method is deliberately judgmental: steps 3 and 4 have objective tools (P&F count, nine tests), but steps 1, 2, and 5 require judgement on context. Wyckoff never promised automation; he promised an order of reasoning that avoids the most costly mistakes, first among them trading a good stock against a hostile market.
| Step | Question | Tool | Output |
|---|---|---|---|
| 1 | Position and probable trend of the market? | Bar chart + P&F on the index | General directional bias |
| 2 | Which stocks are in harmony with that trend? | Relative strength/weakness | Short watchlist |
| 3 | Does the cause cover the price objective? | Horizontal P&F count | Minimum target |
| 4 | Is the stock ready? | Nine tests | Mature structure confirmed |
| 5 | Does timing coincide with the index turn? | Index signal + stop | Entry with defined risk |
Step 1 — Market position and trend
In plain terms — Before hunting a long, ask whether the general market favours it. The best accumulation stock can sit still for months if the index is in distribution.
The first step places the reference index (or the relevant sector) into one of the four phases of the cycle — accumulation, markup, distribution, markdown — using in parallel the bar chart, to read the structure of highs and lows and the relationship between rally and reaction, and the Point & Figure chart, for the count of the cause. The conclusion is not a target but a bias: the market favours longs, shorts, or demands standing aside. Wyckoff insisted that most stocks move with their market area; ignoring this step means fighting the main current.
Ejemplo — The index shows a Buying Climax followed by an AR and early signs of weakness at the highs: it is in incipient distribution. Even if a single stock draws a convincing local spring, step 1 imposes caution on longs — the general wind is blowing against.
Step 2 — Selecting stocks in harmony
In a market favourable to longs not all stocks are equivalent. Wyckoff looks for harmony with relative strength: in markup he wants the stocks that rise more than the index and correct less; in markdown he wants the weakest, which fall more than the index and bounce less. The comparison is done in practice by overlaying the stock on the index or watching the stock/index ratio: if the ratio rises while the market rises, the stock is a leader; if it falls, it is a laggard and should be dropped from longs even if you «like» it. This is the step that separates the technically strong candidate from the emotionally attractive one.
| Market context | Seek | Avoid |
|---|---|---|
| Markup / long bias | Relatively strong stocks vs index | Relative weakness |
| Markdown / short bias | Relatively weak stocks vs index | Relative strength |
| Uncertain range | Clear A–E structure, measurable cause | Ambiguous patterns, congestion without events |
Step 3 — Cause and price objective
Once the candidate is selected, step 3 verifies that the range has built sufficient cause to justify the expected move. You measure the width of the congestion with the horizontal P&F count and project it into a minimum objective, to be compared with known resistances and with the cause/effect law. If the target implicit in the setup far exceeds what the cause can sustain, the trade has an inflated reward: better to drop it. The full procedure, including the distinction between bar-chart phases and count phases, is in Cause count with P&F.
Card — Step 3
- Input: validated accumulation (or reaccumulation) range
- Tool: horizontal P&F count on the same range as the bar chart
- Output: minimum objective, compared with resistances and reward/risk
- Typical mistake: deriving the target from a chart pattern without measuring the cause
Step 4 — Readiness: the nine tests
The fourth step establishes whether the structure is mature, i.e. whether the Composite Man has finished accumulating (or distributing) and the move can start. Wyckoff Analytics formalises here two objective checklists: the nine buying tests for accumulation/longs and the nine selling tests, their mirror, for distribution/shorts. They are not mechanical checkboxes — they need context (step 1) and harmony (step 2) — but they constitute the method's most precise verification standard. They should be read on the bar chart for structure and volume, with tests 1 and 9 requiring the P&F for objectives.
Nine buying tests (accumulation)
- Previous downside objective reached or nearly so (the downtrend has «paid» its P&F count).
- Preliminary support, selling climax, secondary test present.
- Bullish activity on rallies exceeding bearish activity on reactions (demand gains ground faster than supply).
- Correction of the downtrend line (the old bearish trendline is broken or bent).
- Higher lows — rising lows in the final part of the range.
- Higher highs — rising highs on internal rallies.
- Stock stronger than the index (harmony and relative strength, bridge with step 2).
- Base built — a well-defined horizontal trading range that provides the cause.
- Price objective estimated from the P&F count covering the expected upside potential.
Nine selling tests (distribution) — the logic is the mirror: upside objective reached; presence of preliminary supply, buying climax, and secondary test; bearish activity on reactions exceeding bullish activity on rallies; break of the bullish trendline; lower highs; lower lows; stock weaker than the index; well-built top; downside objective from the P&F count covering the decline potential.
Frequent mistake — Counting «five tests out of nine» and anticipating entry in phase B. The tests carry different weight: without a completed phase A (test 2) and without higher lows (test 5) the structure is not ready, however many boxes are ticked. And an isolated SOS in a market markdown stays weak anyway, because it violates step 1.
Reference schematics: Accumulation phases A–E and Distribution phases A–E.
Step 5 — Timing with the index
The last step synchronises the entry with an index turn consistent with the bias: you enter when the general market confirms the setup direction, not before. If the long candidate has passed the first four steps, step 5 waits, for example, for an LPS on the index after a correction — the proof that the general tide is resuming. It is also the step where risk is defined: the stop goes below the spring or the LPS for a long, above the UTAD or the LPSY for a short, and the trailing follows the subsequent support (or supply) points as the trend proceeds.
Ejemplo — A stock with a validated spring and SOS (step 4), a P&F count covering a +20% target (step 3), relative strength against an index in advanced accumulation (steps 1–2). You enter when the index prints an LPS after a minor correction, with the stop below the stock's spring: the five steps converge and risk is defined before the entry.
Summary card
| Step | Tools | Typical mistake |
|---|---|---|
| 1 Market | Bar + P&F on the index | Ignoring a distribution in progress |
| 2 Selection | Relative strength/weakness | Choosing the «nice» but weak stock |
| 3 Cause | P&F count | Target without measuring the cause |
| 4 Readiness | Nine tests | Anticipating before phase C/D |
| 5 Timing | Index turn + stop | Entering against the market |