Three Fundamental Laws

1. The law of supply and demand determines the price direction. When demand is greater than supply, prices will rise, and when supply is greater than demand, prices will fall. Using a bar chart, the traderanalyst can study the relationship between supply and demand by
monitoring price and volume over time.

2. The law of cause and effect provides an insight into the extent of the coming price move up or down. In order to have an effect you must first have a cause; the effect will be in proportion to the cause. This law’s operation can be seen as the force of accumulation or distribution within a
trading range—and how this force works itself out in a subsequent trend or movement out of that trading range. Point-and-figure chart counts are used to measure a cause and to project the extent of its effect.

3. The law of effort versus result provides an early-warning indication of a forthcoming possible change in trend. Disharmonies and divergences between volume and price often signal a change in the direction of a price trend. The Wyckoff Optimism/Pessimism Index is an on-balance volume type of indicator helpful for identifying accumulation versus distribution, thereby gauging effort.

Taken together, these three Wyckoff laws shed light on the intentions of the smart money, the Composite Man. The law of cause and effect reveals the extent of preparation of the subsequent campaign to be conducted by the Composite Man, while the loss of supply indicates the Composite Man’s intentions to carry out the campaign now to the upside or the downside. Anticipation of the direction of the movement out of the sideways area of preparation is often foreshadowed by the divergences or disharmonies that define the law of effort versus result. The power available to the trader that results from these three laws acting in concert is demonstrated in the next section.