Price Action: Trading Tight Bear Channels (Part 5)

You see a breakout, and once there is a pullback,
the channel starts to form.

For beginners, the best approach is to enter using stop orders.
When you see the market reversing up,
you should place a sell stop order when the market reverses back down.
It is always better to go short below a bear bar.

For "Always In" traders,
if they have exited for any reason,
they must re-enter short below a bear bar.

In a tight bear channel, selling the first or second low pullback
is a very good strategy
and a very profitable strategy.
Because bulls will give up —
they know the channel is tight and the market will continue lower,
so they will not hold long positions for extended periods.
Going short on pullbacks to resistance makes sense.
For example, after the market breaks down with several consecutive declining bars,
even though there are decent bull bars here,
the channel is still tight.
The first reversal is still a minor reversal,
which means it is either a bear flag
or part of a trading range.
In either case, the probability of further decline is high, around 70%.
Therefore, traders look for shorting opportunities at resistance.

If the pullback reaches the moving average, or reverses down at the moving average,
that is a very good sell point.
Similarly, you can continuously draw trendlines.
Once you have two points, you can draw a trendline.
You can sell at the trendline
or sell when price reverses down from the trendline.

The reason the channel is tight
is that reversals never last long —
after one or two bars up, the trend resumes down.
Here, three bars rally, then continue to decline.
Therefore, many bears place limit orders to sell at the high of the prior bar.
Even if that bar is a bull bar,
betting the pullback will only last one bar
is a very good way to go short.

Sometimes, if traders think buying pressure might be quite strong,
they will not sell at the high of the prior bar.
Instead, they will wait for the market to pull back one bar
and then sell at the high of that bar.

Traders only choose one of these methods,
not all of them.
They will not simultaneously sell at the prior bar's high,
one bar higher, two bars later,
at the one-third retracement, at the 50% retracement,
at the reversal point,
near the close of a strong bull bar...
These are all ways to go short,
but you would not use all of them.
You choose only one method.

There was a very strong bear breakout,
but the pullback exceeded the breakout point.
So how do bulls view the possibility of a new low?
They will think the trend is weakening.
Therefore, since this very strong breakout
ultimately led to a pullback above the breakout point,
if we break to a new low again,
there will most likely be another bounce of some magnitude.
So bulls will start considering buying.
They might place limit buy orders at this low and add at lower levels,
or they will buy when price reverses up,
betting the market will bounce again like it did here.
Setting the stop loss correctly is very important.
You must always look for reasons to take profits,
because if you do not,
the profit will eventually disappear.