Price Action: Trading Broad Bull Channels (Part 5)

Whenever the market pulls back from a new high to the middle third of the previous bull leg,
that is the buying zone —
where bulls look for buy points.
They hope to take profits somewhere above the prior high.

50% pullbacks are very common.
The market often pulls back to exactly or nearly exactly 50% of the previous bull leg
and then reverses up.
Therefore, traders should look for buy points near the 50% pullback level.

Every trading range is actually a bull flag
because it is essentially a broad bull channel.
The market will very likely continue to rise,
so if the market enters a trading range within the channel,
traders should expect the trend to resume upward.

Ultimately, every channel evolves into a larger trading range.

A better approach is: buy on upward reversals using stop orders,
especially if you are a trader just starting to learn.
This gives you a higher probability of success.

The market is in a bull trend,
clearly forming higher highs and higher lows.
Therefore, you can buy at any point
as long as you place your stop loss below the most recent "major high/low."

Even buying at the high can be profitable,
especially if you are willing to add at lower levels.

Because a broad bull channel is essentially like a trading range,
it is generally not advisable to buy at the high.
It is more suitable to buy low and sell high: buy at lows, sell at highs for profit.

The stop loss level is very clear:
after a very strong bull rally, a "major high/low" appears —
this is an ideal stop loss location.

Again,
you can buy for any reason,
but the best approach is to buy in the middle third of the previous bull leg,
then take partial or full profits at or above the prior high,
or take profits when a downward reversal occurs.

Some traders do not want to place limit orders at the prior high to take profits
because they worry the market might continue higher.
Instead, they choose to wait until price approaches the prior high
and then exit once a downward reversal appears.

Sometimes the market even enters an "Always In Short" state,
giving them a swing decline.

A broad bull channel
is really just an upward-sloping trading range
that exhibits trading range characteristics.
So bulls must expect deep pullbacks
and therefore need to place their stop loss below the most recent "major high/low."

If you believe this is a bull channel,
then every downward reversal attempt will most likely fail.
Therefore, some bulls will buy at the close of "large bear bars,"
betting that the follow-through will be disappointing.

Essentially, they are treating it as a "second leg trap":
they are betting that the bear breakout will trap some weak bears into selling at lows,
and then the market will reverse up.

Remember, bulls want to buy on pullbacks.
They want to buy below the high
because they know
that at the high there will be a lot of selling pressure:
other bulls will sell at the high to take profits,
and bears will sell at the high to go short.

Therefore, if everyone wants to buy at lows,
there will be a buying vacuum near the highs.

Bulls do not want to chase highs,
so when the market starts to decline,
it often falls quickly,
and then suddenly a large amount of bull buying appears.

When the market has fallen far enough,
bulls suddenly enter aggressively and overwhelm the bears.

No structure lasts forever.
Eventually everything evolves into something else.

Channels usually evolve into trading ranges,
which means:
in a bull channel, there is a 75% probability
that eventually a bear breakout will occur,
producing a bear swing decline,
and the entire chart will ultimately become a large trading range.

There is only a 25% probability
that a successful bull breakout will occur above the bull channel,
restarting a new market cycle.

75% of the time,
the breakout above the bull channel will ultimately fail,
and the market will eventually form a bear channel
that evolves into a large trading range.