What is Distribution in Markets?

What is Distribution?

Distribution is the market phase where institutional investors and large players systematically sell their positions into strength following an uptrend. Price typically moves sideways in a trading range as smart money offloads shares to late-arriving retail buyers. This topping process precedes a downtrend and represents the transition from bullish to bearish control.

Distribution is the opposite of accumulation. After price has rallied significantly, informed participants recognize overvaluation or weakening fundamentals and begin exiting. They sell gradually to avoid crashing the market, distributing their holdings over weeks or months while retail traders, attracted by the prior uptrend, provide liquidity by buying the highs.

Distribution Clues

• Lower highs: Price struggles to set new peaks despite multiple attempts, showing weakening buying pressure.
• Volume divergence: Declining volume on rallies but rising volume on down days indicates selling dominance.
• Widening ranges: Increased volatility and larger swings suggest disagreement and loss of consensus.
• Sentiment extremes: Widespread optimism, bullish media coverage, and retail FOMO even as price stalls—classic contrary indicator.
• Failed breakouts: Attempts to push through resistance quickly reverse, trapping late buyers.

Trading Distribution Phases

• Fade rallies: Sell bounces into resistance with clearly defined risk above recent highs.
• Avoid new longs: Resist the temptation to buy dips during distribution—the risk-reward is unfavorable.
• Watch for breakdown: When price breaks below the distribution range support, it often accelerates lower as stops are triggered.
• Scale into shorts: Build bearish positions gradually as evidence accumulates rather than committing fully at the first sign.

Wyckoff Distribution Schematic

Richard Wyckoff identified key phases within distribution: preliminary supply (PSY), buying climax (BC), automatic reaction (AR), secondary test (ST), upthrust (UT), and sign of weakness (SOW). Recognizing these phases helps time exits and short entries with precision.