What is Distribution Phase?

Understanding market cycles is very important for traders, and distribution phases play a key role in forming investment strategies. In this article, we will explore what distribution phases are, their characteristics, Wyckoff distribution patterns, and effective trading strategies to deal with this market situation.

What is Distribution Phase?

The distribution phase is a condition that is opposite to the accumulation phase. This occurs when the market is flat and range-bound after experiencing a long uptrend.

During this phase, smart money and institutional investors strategically sell their holdings, distributing the asset without having a significant impact on the price.

Richard Wyckoff's guidelines help identify distribution phases by analyzing certain patterns.

Five Phases of Distribution in Crypto

Below are the five distribution phases in crypto: 

• Phase A: The previous uptrend stops, previous demand is exhausted, and supply enters the market, causing initial supply (PSY) and peak purchases (BC). The automatic reaction (AR) and secondary test (ST) followed, with reduced volume and a less strong rally.
• Phase B: Institutions and large players prepare for a new downtrend, slowly replacing buyers with sellers. This phase mirrors the accumulation phase in reverse, signaling a shift from demand to supply.
• Phase C: An upthrust signal tests supply before reversing and remaining back in the distribution zone. This is the last remaining wish and is also known as a bull trap. This phase confuses both beginners and the public, serving for large investors to absorb the short positions of small players.
• Phase D: Price tests support and breaks it, accompanied by weak rallies that are exhausted by late initial supply (LPSY). The smart money is out of long positions at this point.
• Phase E: A downtrend is visible, and supply now completely controls price movements. A break below the support level could be tested by a failed rally around the support. This is another opportunity for experienced traders to add to their short positions.

Later, the rally showed signs of exhaustion. This move may end in a climactic action reflecting the peak of upward buying.

Best Strategy for Distribution Trading

Traders can adopt various strategies below during the distribution phase:

Range Bound Strategy

Identify the highs and lows in the consolidation phase, considering a sell position when price is rejected at the top of the range, and a buy position when it is rejected at the bottom.

Use a tight stop-loss as the price may break upwards or downwards.

Aggressive Entry

If the price appears to be entering the final stages of the distribution phase, traders can take aggressive positions to gain profits.

If there is a fundamental cause for a downtrend, aggressive traders can counter the upthrust. The stop-loss in this case is slightly above the upthrust to protect against a possible breakout to the upside.

Conservative Entry

Traders can also choose to enter conservative positions with a clear LPSY. By entering a short sell position with a tight stop-loss above LPSY, traders can get a good risk to reward ratio before the distribution enters its final selling stage.

How to Identify Distribution Phase

Below are the key factors to identify the distribution phase in crypto trading:

• The chart movement up and down in one day appears even. 
• The price is moving around the 200-days moving average indicator .
• The rally volume is decreasing and the rejection volume is increasing.
• Price reaction is weaker than the market average.
• Candles with long wicks or blow-off peaks indicate supply pressure.
• A fast wash-out candle flips into the distribution range.
• The distribution can best be observed on the daily time frame.

Conclusion

The distribution phase is one of the critical points in the market cycle, guiding traders in adjusting their positions.

Recognizing distribution patterns and implementing effective strategies empowers traders to successfully navigate this phase, optimizing risk management and taking advantage of market dynamics.

Also read:

What is a High Frequency Trader (HFT)?

What Is Threshold (T): Cryptographic Innovation For dApps

What is a Directed Acyclic Graph (DAG)?

What Are Asset-Based Tokens & How Do They Work?

DISCLAIMER: This article is informational in nature and is not an offer or invitation to sell or buy any crypto assets. Trading crypto assets is a high-risk activity. Crypto asset prices are volatile, where prices can change significantly from time to time and Bittime is not responsible for changes in fluctuations in crypto asset exchange rates.