Price Action: How to Understand Counter-Trend Microchannels

When counter-trend microchannels appear repeatedly, the market has entered a trading range. So when you notice that the current thrust is forming a wedge pattern, you should also pay special attention to the quality of the pullback bars — that is, all the pullback bars throughout the entire trend. If these pullbacks form microchannel patterns, the probability of the wedge reversal succeeding is significantly higher — compared to pullbacks that do not form microchannels, these have greater reversal potential.

Pullbacks should not become simple thrusts.

When a trend is established, in a strong trend, price continues to move higher, and pullbacks often manifest as just single weak bars, after which the trend resumes. Although two-legged pullbacks may occur, they do not form microchannel patterns, and the trend continues. However, once the trend is established and a counter-trend microchannel appears, followed by a rally, and then another counter-trend microchannel appears, the market has already entered a trading range. These counter-trend microchannel pullbacks indicate that this is price movement within a trading range, meaning the market has entered a trading range. The current rally is just testing the market's target resistance level, and a reversal will follow.

The market may have already entered a trading range. When even a weak sell signal bar appears, it may end the final upward thrust, and the market begins to reverse. However, the probability of success is still relatively low. At this point, trading conditions have clearly improved, but traders tend to lower their standards. What they do is comprehensively evaluate other indicators on the chart. By analyzing various technical indicators on the chart, when all technical indicators give the same signal, even if the signal bar pattern is poor, traders will still view it as a short entry opportunity. This requires some experience, but remember — context is the primary consideration. If the market environment supports a certain move, the initial signal may be very subtle and inconspicuous, but in a specific market context, this signal becomes critical.

But all signals must be interpreted in the context of the chart. Systematically study the win rates of various wedge patterns. As it stands, wedge patterns that go against the major trend often have the highest practical win rates and effectiveness. So when you see a bearish bar, if the market has experienced three pushes up followed by a strong bearish bar, this is not the time to rush into looking for a second leg up — you need to wait for a pullback.