Wyckoff's Three Laws: Supply/Demand, Cause/Effect, Effort/Result

The Wyckoff Method rests on three laws derived from economics and physics. Together they explain why price moves, how far it should move, and whether the current move is genuine. Every Wyckoff reading — every schematic, every spring, every sign of strength — is an application of these three laws.

Law 1: Supply and Demand

Price rises when demand exceeds supply, and falls when supply exceeds demand. Price stops moving when the two are in balance.

This is the foundational law. Price is a function of the balance between buyers (demand) and sellers (supply). The skilled Wyckoff reader learns to gauge this balance directly from the price/volume bar data — not from oscillators or averages.

Reading the balance:

• Wide range up bars on high volume: demand dominates
• Wide range down bars on high volume: supply dominates
• Narrow range bars on declining volume: equilibrium; the market is deciding
• Long upper shadows on high volume: supply meeting demand at highs — bearish
• Long lower shadows on high volume: demand meeting supply at lows — bullish

The law of supply and demand tells you the current state of the market. The next two laws tell you about magnitude and authenticity.

Law 2: Cause and Effect

The size of the cause (accumulation or distribution range) determines the size of the effect (subsequent markup or markdown).

Wyckoff visualized accumulation and distribution as a coiled spring. The longer and tighter the coil — the larger the cause — the further the spring will release. A stock that accumulates for six months in a narrow range has a larger cause than one that accumulates for two weeks.

Measuring the cause:

Wyckoff developed a point-and-figure counting method to estimate the size of the effect from the cause:

1. Identify the accumulation range (from the selling climax low to the top of the range)
2. Count the columns on a 3-box reversal point-and-figure chart across the range
3. Multiply by the box size (and reversal amount) to project the price target

A 30-column accumulation at $1 box size, for example, projects roughly a $30 move once the markup begins. This gives Wyckoff traders objective price targets — something few other methods provide.

Why this matters: traders who enter breakouts without measuring the cause often buy stocks whose accumulation was too small to sustain a meaningful move. They get the breakout but no follow-through.

Law 3: Effort vs. Result

Volume is the effort; price movement is the result. When effort and result agree, the move is genuine. When they diverge, something is wrong.

This is Wyckoff's most powerful diagnostic. Volume reveals the intent behind price action. A price bar with high volume (great effort) but small price movement (small result) signals that the effort is being absorbed — buyers are meeting sellers who refuse to give way, or vice versa.

Classic divergences:

The spring as effort/result: the classic Wyckoff spring — price breaking below an accumulation range on high volume, then reversing sharply — is a textbook effort/result divergence. The high-volume effort to break lower failed to produce follow-through (result), revealing that supply was exhausted.

Applying the three laws together

A high-conviction Wyckoff setup combines all three:

1. Supply/demand: identify that demand is beginning to dominate within a range
2. Cause/effect: measure the range to confirm a sufficient target exists
3. Effort/result: confirm with volume/price harmony — a spring, a sign of strength, or an effort/result agreement on the breakout

Summary

The three laws are not separate tools but a single integrated reading system. Supply and demand tells you the state of the battle. Cause and effect tells you how far the victor can run. Effort and result tells you whether the victor's advance is real. Master these three, and the rest of the Wyckoff Method falls into place.