Section 3 - Chapter 2 - Trend Four Phases - CMT Level 1 2025

Chapter 2 – Trend Four Phases
Section 3 – Trend Analysis
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Agenda
 Describe Wyckoff’s four primary
market structure phases
 Outline the four primary trades
 Define a retracement
 Explain the difference between the
special breakout retracements called
throwbacks and pullbacks

Wyckoff’s Four Primary Market Structure Phases
1. Accumulation Phase (Bottoming Process)
Key Facts:
o Occurs after a downtrend when large players (institutions) start buying.
o Characterized by sideways price movement.
o Volume gradually increases as demand overtakes supply.
o Stops forming lower lows, indicating seller exhaustion.
Interpretation:
o Institutions accumulate shares at low prices before the next uptrend.
o Good time for long trades when price breaks resistance with strong demand.
Comparison with Other Phases:
o Opposite of Distribution (where institutions sell).
o Leads to Markup Phase if accumulation is successful.

1. Accumulation Phase (Bottoming Process)
• Wyckoff Events:
o PS (Preliminary Support): Initial signs of demand with increased volume.
o SC (Selling Climax): Panic selling; strong downward move, followed by significant
buying.
o AR (Automatic Rally): Sharp rebound due to excessive selling pressure easing.
o ST (Secondary Test): Retest of SC level to confirm demand.
o Spring (Optional): A final shakeout below support to trap weak hands before a rally.
o Sign of Strength (SOS): Breakout with high volume, confirming accumulation.

2. Markup Phase (Uptrend)
• Key Facts:
o Buyers gain control, leading to a sustained uptrend.
o Higher highs and higher lows form as demand exceeds supply.
o Volume spikes during breakouts and consolidations.
o Pullbacks occur but are relatively shallow.
• Wyckoff Events:
o Sign of Strength (SOS): Strong price movement with high volume.
o Breakout Above Resistance: Confirms the uptrend.
o Higher Lows & Demand Tests: Price retests support but holds.

2. Markup Phase (Uptrend)
• Interpretation:
o Best phase for long positions.
o Trend-following strategies work well (buying pullbacks, breakout trades).
o Institutions gradually offload positions into retail buying pressure.
• Comparison with Other Phases:
o Follows Accumulation phase.
o Precedes Distribution, where smart money exits.

3. Distribution Phase (Topping Process)
• Key Facts:
o Opposite of accumulation; institutions start selling.
o Price moves sideways after an uptrend.
o Volume decreases on up-moves, indicating buying exhaustion.
o Supply starts to overtake demand.
• Interpretation:
o A sign that the uptrend is ending.
o Smart money exits, leaving retail traders with weak positions.
o Good time for short trades after breakdowns.

3. Distribution Phase (Topping Process)
o Opposite of Accumulation (where institutions buy).
o Leads to Markdown Phase if distribution is successful.
• Wyckoff Events:
o Preliminary Supply (PSY): First signs of increased selling pressure.
o Buying Climax (BC): Sharp move up with high volume but fails to continue.
o Automatic Reaction (AR): Initial drop after BC due to selling pressure.
o Secondary Test (ST): A retest of the BC level; often forms a double top or lower high.
o Upthrust (UT/UTAD - Upthrust After Distribution): False breakout above resistance to trap breakout buyers.
o Sign of Weakness (SOW): Price breaks below support with volume, confirming sellers’ dominance.

4. Markdown Phase (Downtrend)
• Key Facts:
o Price moves downward as supply dominates demand.
o Lower highs and lower lows form.
o Volume increases on down-moves and decreases on rallies.
o Panic selling occurs in later stages.
• Wyckoff Events:
o Break Below Support: Confirms sellers’ control.
o Lower Highs Form: Indicates weak rallies.
o Final Capitulation: Strong selloff with massive volume before bottoming.

4. Markdown Phase (Downtrend)
• Interpretation:
o Best phase for short trades or staying out of the market.
o Avoid catching falling knives; wait for accumulation signs.
o Opposite of Markup Phase (where buyers control price).
o Ends when Accumulation Phase begins again.

Cheat Sheet Summary
This cycle repeats as markets move between accumulation, markup, distribution, and markdown.
Recognizing these phases can help traders anticipate price movements and make informed
trading decisions. 🚀
Phase Key Characteristic Institutional Activity Best Trade Strategy
Accumulation
Sideways after
downtrend
Buying Long after breakout
Markup Higher highs & lows Holding & Distributing Trend-following, Buy Dips
Distribution Sideways after uptrend Selling Short after breakdown
Markdown Lower highs & lows Liquidation Short or Avoid

The Four Primary Trades in Market Structure
Support and Resistance Failing (Breakout Trading)
• Key Facts:
o Occurs when price breaks above resistance (bullish) or below support (bearish).
o Driven by an increase in demand (buyers) or supply (sellers).
o Often accompanied by high volume, confirming the breakout.
o Can lead to strong directional moves.
• Entry Triggers:
o Breakout with Volume: Price closes above resistance or below support with strong volume.
o Retest of Broken Level: Price pulls back to test the breakout level and holds.
o Momentum Confirmation: Use of trend indicators (e.g., Moving Averages, RSI) for
confirmation.

Support and Resistance Failing (Breakout Trading)
• Interpretation:
o Works best when price consolidates before the breakout (e.g., ascending
triangle, flag patterns).
o False breakouts (fake outs) are common; use confirmation signals.
o Stops placed below (for long) or above (for short) the breakout level.
• Comparison with Other Trades:
o Opposite of Range bound Trading (where price respects support/resistance).
o Can lead into Trend Continuation Trading if breakout sustains.

Support and Resistance Persisting (Rangebound Trading)
• Key Facts:
o Price repeatedly bounces between established support and resistance levels.
o Indicates a market in consolidation (no clear trend).
o Volume tends to decrease as price moves within the range.
• Entry Triggers:
o Buying at Support: Enter long when price reaches support and shows rejection.
o Selling at Resistance: Enter short when price reaches resistance and fails to break higher.
o Confirmation from Indicators: RSI overbought/oversold levels or Bollinger Bands.

Support and Resistance Persisting (Range bound Trading)
Interpretation:
o Works well in sideways markets.
o Stops placed just beyond support (long) or resistance (short) to protect
against breakouts.
o Can eventually transition into a breakout trade if price breaks the range.
Comparison with Other Trades:
o Opposite of Breakout Trading (where price breaks support/resistance).
o Can precede a Trend Termination Trade if range leads to a reversal.

3. Trend Termination (Trend Reversal or Transition to Range)
• Key Facts:
o Occurs when a strong trend loses momentum and shifts into either a range or reversal.
o Marked by lower highs in an uptrend or higher lows in a downtrend.
o Volume often declines as trend strength weakens.
• Entry Triggers:
o Divergence with Indicators: RSI/MACD showing divergence from price movement.
o Break of Trendline: A strong break of trendline support or resistance.
o Lower Highs or Higher Lows: Formation of reversal patterns (e.g., head and shoulders,
double top/bottom).

3. Trend Termination (Trend Reversal or Transition to Range)
• Interpretation:
o Can signal the end of a trend, leading into either rangebound trading or a full reversal.
o Ideal for counter-trend traders or early trend reversal entries.
o Stops placed beyond recent swing highs/lows for protection.
o Opposite of Trend Continuation Trading (which follows the existing trend).
o Can lead into Rangebound Trading or Breakout Trading, depending on price action.

4. Trend Continuation (Trend Trading)
• Key Facts:
o Price follows a sustained uptrend (higher highs, higher lows) or downtrend (lower highs,
lower lows).
o Works best with pullback entries in the direction of the trend.
o Institutional traders prefer trend continuation for low-risk, high-reward trades.
• Entry Triggers:
o Pullback to Support (Uptrend) or Resistance (Downtrend): Buying dips or selling rallies.
o Breakout from a Consolidation Zone: Trend resumes after brief sideways movement.
o Confirmation from Trend Indicators: Moving averages, ADX (trend strength), or Fibonacci
retracements.

4. Trend Continuation (Trend Trading)
• Interpretation:
o Works well in strong trending markets.
o Stops placed below higher low (uptrend) or above lower high (downtrend)
to stay in the trade.
o Best suited for swing traders and trend followers.
o Opposite of Trend Termination Trade (which signals the end of a trend).
o Follows Breakout Trading when trend sustains.

Trade Type Market Behavior Entry Signal Best Strategy Opposite Trade
Breakout Trading
Support/Resistance
Fails
Breakout with
volume, retest
Trade breakouts,
follow momentum
Rangebound
Trading
Rangebound
Trading
Support/Resistance
Holds
Rejection at
support/resistance
Buy at support, sell
at resistance
Breakout Trading
Trend Termination
Trend Weakens or
Reverses
Divergence,
trendline break
Look for reversals or
range formations
Trend Continuation
Trend Continuation Trend Resumes
Pullback entry,
breakout
Buy dips (uptrend),
sell rallies
(downtrend)
Trend Termination

Final Takeaway:
Understanding these four trade setups helps traders align their
strategies with market conditions—whether price is trending,
ranging, or reversing. Mastering these concepts leads to better
trade timing, risk management, and overall profitability. 🚀

Next Chapter 3 – Trend Identification and Following
Section 3 – Trend Analysis
Presented By :

Section 3 - Chapter 2 - Trend Four Phases - CMT Level 1 2025

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