Price Action: Trading Broad Bull Channels (Part 3)

Every bull move requires a series of "major higher highs" and "major higher lows."
"Major higher lows" are very important.
A broad channel is very similar to a trading range;
it contains a large amount of trading range price action inside it.

Just as in a trading range, the market frequently produces "second leg traps":
a seemingly very strong second leg up
that appears about to break out, luring traders into breakout trades,
only for the market to reverse.
Because a broad bull channel
is essentially a slightly upward-sloping trading range.

Bears typically sell at new highs and add at higher levels.
Similarly, bulls also sell at new highs to take profits.
Many traders do not like to trade frequently —
they do not like entering and exiting, then entering and exiting again.
They worry about sometimes missing a large swing trade.

As long as the stop loss has not been hit,
as long as the market has not clearly turned bearish,
they will hold their long positions,
even if five bear bars close at their lows appear.

If a person intends to hold a long position and use a swing stop loss,
they will raise the stop loss below each "major high or low."
A "major high/low" is a "higher low"
followed by a strong upward reversal
that usually makes a new high, though not always.

If price does drop below this "major high/low,"
then it is very likely no longer a bull trend
but possibly a trading range or even a bear trend.

As long as the market continues to form "major higher lows," it is still a bull trend.
Most traders do not let their stop loss get hit —
the stop loss is there to prevent catastrophic losses.
If a trader believes the premise of the trade is no longer valid,
or sees a reasonable opposing signal,
they will actively exit before the stop loss is triggered.

Remember, a broad channel is essentially a trading range.
Do not go long near the top of a trading range
or at the highs of a broad bull channel.
If it is a trading range,
then a breakout below any support is a reasonable buying opportunity
because most breakouts will fail.

A strong bull breakout —
a series of bull bars closing at their highs with almost no overlap.
One bar opens above the close of the prior bar.
Bulls are eager to buy.
When a bar closes, many people buy at market
and get filled at the open of the next bar.
So even before the breakout, there was already decent buying pressure.
The market is clearly in an "Always In Long" state.

Whenever traders see a deep pullback after a strong bull breakout,
they will think the market has very likely entered a trading range.
It could also be a bear channel —
we could be experiencing a series of "lower highs" and "lower lows."
Or it could be a bull channel, forming "higher highs" and "higher lows."

Generally, if there is a big rally followed by a big decline,
that is highly confusing.
Traders tend to buy low, sell high, and scalp.

When "big up, big down" occurs,
the market will at least consolidate sideways for 10 bars or more
because a trading range is more likely.