Spike and Channel Trend
Primary characteristics of spike and channel trend days:
- There is a spike that is made up of one or more trend bars, and it signals that the market is breaking into a clear always-in situation. During the spike, there is a sense of urgency and traders add to their position as they press the trade. The spike is effectively a breakaway gap (discussed in book 2).
- The spike usually forms in the first hour and often within the first few bars of the day.
- The stronger the breakout, the more likely there will be follow-through in the form of a channel, and the more likely the channel will go far (see the sections on the strength of trends in Chapter 19, and the strength of breakouts in Chapter 2 of book 2).
- When the breakout is strong, it is often the basis for a measured move where the channel may end and you can ultimately take partial or complete profits.
- Immediately after the spike, there is a pullback that can be as short as a single bar or as long as a couple of dozen bars.
- The trend resumes in the form of a channel. During the channel, there is a sense of worry and uncertainty, due to the two-sided trading.
- When the market is channeling, it is better to trade it like a trending trading range (for example, in a bull channel, it is better to buy below the low of the prior bar and hold part of the trade for a swing, and if you take any shorts, sell above swing highs or the highs of prior bars and primarily scalp).
- The channel will rarely break out ...