Price Action: Microchannels (Part 7)

The fifth approach is buying at the prior bar's low (or lower), betting the first breakout will fail. This is a "formal breakout" because price has dropped below the prior bar's low. Whether to take this counter-trade depends on your reversal criteria and urgency level. In high-urgency situations — such as a strong microchannel just starting, a new market cycle, or the early phase of a strong breakout — even if the breakout bar is in the opposite direction, you can place a buy limit order below the low (or a sell limit order above the high), because the probability of the first breakout failing is very high. In low-urgency situations — such as a microchannel in a consolidation market, a microchannel late in a move, or a weak microchannel with heavy overlap — it is more appropriate to wait for a strong signal bar and then place a counter-trend limit order. For example, in a bull microchannel, wait for a strong bull bar to appear, then place a buy limit order below its low. This reduces trading frequency but is safer.

There are three advantages to choosing a strong bar to counter-trade. First, strong bars are often the starting points of important swings on lower time frames. On a lower time frame, a three-bar strong bear move might be the end of the "first leg — pullback — second leg — pullback — third leg" sequence, and the end of the third leg often encounters resistance and enters consolidation. Therefore, placing a sell limit order at the high of a strong bear bar has a high win rate. Second, a strong bar represents clear active participation at that price level — for example, the high of a strong bear bar is where large numbers of bears sold, so when price returns to that level, selling pressure is likely. The low of a strong bull bar often has active buying. Third, this approach allows you to see how price approaches your expected level, giving you more information to adjust your trading decision before entry.

One benefit of this method is high forgiveness — even if your judgment is wrong, there is often an opportunity to exit at breakeven or with a small profit, especially in consolidation markets, extreme moves, or parabolic endpoints. For example, selling at the high of a strong bear bar at the top of a trading range — even if price briefly breaks above, you may exit without a loss on the retest.

The sixth approach is the more conservative method of waiting for the breakout to fail before entering. The first through fifth methods all involve counter-trading with limit orders before seeing direct evidence of a failed breakout; the sixth method waits until failure signs appear, then enters with a stop order in the direction of the failure. The approach is: when you see a strong microchannel, do not rush to place a counter-trend limit order at the prior bar's low (or high). Instead, wait for the first breakout and observe the bars after the breakout. If it is a bear microchannel and a bear signal bar immediately appears after the upward break, you can buy above this signal bar, expecting at least one bar or one leg of continuation; for a bull microchannel, do the opposite. This "High 1 buy / Low 1 sell after a failed breakout" approach is one of the higher-probability types in stop-order trading. If you are a swing trader, you can also place the stop loss at the other end of the initial spike as a swing entry. But pay attention to context — for example, if a bear microchannel shows a High 1 buy signal, but it is in the third leg of a larger bear channel, then going long has much less significance.

There is also a method between the fifth and sixth approaches, which can be called "5.5." It is not placing a limit order in advance, nor waiting for a complete High 1/Low 1 signal, but waiting for the breakout bar to close and looking at its pattern. If it is not strong, take the opposite side at its close. For example, in a bear microchannel, if the first upward break produces a large bear bar with a lower shadow, this breakout will most likely fail. You can buy directly at the close of this bear bar without waiting for a High 1 signal.

When using the sixth method, combine context to judge the probability of continuation after the breakout fails. In trending markets, failed breakouts often have good continuation, so you can enter on the High 1/Low 1 breakout or the breakout bar itself. In consolidation markets, the continuation space after a failed breakout may be small, requiring more caution — try to only trade the side consistent with the expected direction of the trading range.

Judging the response after a breakout fails also requires watching the breakout continuation response. For example, in a bear microchannel, if an upward break produces a High 1 buy and is immediately followed by a strong bull continuation bar, bulls may continue to push higher. If it is just a hesitant doji, it means bull continuation is weak and bears may regain control. Similarly, in a bull microchannel, if a downward break produces a Low 1 sell and is immediately followed by a strong bear continuation bar, bears may continue pushing down. If it is a hesitant bar or bull counterattack, bear continuation is not promising.

The High 1/Low 1 breakout response can also be used to determine whether it will develop into a second entry. For example, after a bull microchannel upward break fails, the first decline becomes a Low 1 sell. If continuation is very weak (e.g., strong bull counterattack), it may develop into a second buy (High 2 buy). Conversely, after a bear microchannel downward break fails, the first bounce becomes a High 1 buy. If continuation is very weak, it may develop into a second sell (Low 2 sell).

The reason the High 1 method ranks later on the list is that it is more conservative. While it avoids some traps, it sometimes also misses good opportunities. For example, in the early stages of a strong trend, if you only wait for High 1/Low 1 signals, you may wait indefinitely and miss the entire move. But in consolidation markets or late trends, waiting for signals can often help avoid getting trapped in unfavorable positions.

At this point, the seven methods ranked from highest urgency to lowest urgency are complete: buy/sell at the close; enter in the buy/sell zone; emergency entry; micro trendline breakout; counter-trade at the low/high of the prior strong bar; enter with a stop order after confirmed breakout failure; combine breakout response to determine whether it converts to a second entry.

Situations requiring caution when counter-trading microchannels include: betting on failed breakouts within trading ranges; when the internal structure of the microchannel is complete (three legs, multiple pauses); when the microchannel itself is a complete market cycle (spike + channel); microchannels within flag patterns, especially when reaching the moving average; microchannels after potential top/bottom patterns (such as small double tops/bottoms, pause + secondary small breakout); microchannels after consecutive extreme moves (the first breakout is more likely to succeed — trade with the trend, not against it).