Breakouts, Trading Ranges, Tests, and Reversals
Just like a bar can be a trend bar or a trading range bar, any segment of a chart can be classified as trending where either the bulls or the bears are dominant, or two-sided where both the bulls and the bears alternately assume relative control. When the market breaks out into a trend, there is usually a trend bar, which can be small or large, followed by many bars that are trending as the market spikes away from the trading range. One of the most important skills that a trader can develop is the ability to reliably distinguish between a successful and a failed breakout (a reversal). Will the breakout lead to a swing in the direction of the breakout or in the opposite direction? This is discussed in detail in the second book. In thinly traded markets, the breakout can appear as a gap rather than a trend bar, and that is why a trend bar should be thought of as a type of gap (discussed in detail in book 2). At some point, the market begins to have pullbacks and then the trend slows into a shallower slope and becomes more of a channel where a trend line and a trend channel line can be drawn. As the trend continues, the lines should be redrawn to contain the developing price action. Usually the slope becomes shallower and the channel becomes wider.
Some form of this spike and channel behavior happens to some extent every day in all markets. The start of the channel usually becomes the start of an incipient trading range. For ...