Price Alternation Principle
So far, we have covered the Trend Continuity Principle and the Momentum Principle that underscore price behavior. These help build a foundation for why we expect certain price moves in the future, which provides an edge to use for entering and exiting low-risk trades. In this chapter, we will discuss the third foundation principle of price behavior, which is described as the Price Alternation Principle. This principle covers the periods of time a stock is trading in a sideways trading range as opposed to a persistent up or down trend on the charts.
While separate from the trend continuity and momentum principles, the price alternation principle helps us to understand range alternation between contraction phases and expansion phases in the price structure. After all, you've almost certainly heard that price on charts can travel in three types of trends: up, down, or sideways. Most traders discover that the easiest opportunities for profits come from up or down trending moves. In fact, many traders gain steady profits during up-trending periods but then lose money consistently as a stock devolves into a lengthy sideways trend.
This chapter will explain how to recognize and position yourself within the context of a trading range on the charts. We will learn how to identify horizontal support and resistance price lines, how to trade within them, and what to do when price breaks free of its trading range. Finally, the Price Alternation Principle ...