Price Action: Major Trend Reversal (Summary)

Once traders determine the market is in a bear trend,
they assume all reversal attempts are minor,
will only lead to bear flags and continue the existing trend,
or just enter a trading range,
rather than reversing into a new bull trend.

But at some point,
if a minor reversal shows stronger buying pressure,
such as 10 consecutive bull bars, gap bars appearing,
and more importantly, price breaking above the upper boundary of the bear channel,
traders begin to wonder
whether the next reversal will no longer be minor, but a major reversal —
one that triggers a new bull trend.

What does "major reversal" mean?
Traders expect at least several legs up,
forming a swing rally
with a reward of at least twice the risk, usually lasting 20 bars or more.

A "moving average gap bar" also typically signals the final leg of the bear trend,
after which bulls will attempt to initiate a major reversal.

A qualifying minor reversal pattern
must contain at least 5 bars, preferably 10 or more,
and must break above the channel upper boundary and the moving average.
Of course, it could also be just one very large bull bar,
but generally, traders need 5 to 10 consecutive, well-performing bull bars
before they will consider it a major reversal.

Until traders generally believe the market is "clearly Always In Long" —
for example, three or four consecutive bull bars closing at their highs —
only then can you say the probability of profit has risen to 60% or higher.
Of course, sometimes just one very large bull bar is enough to demonstrate bull strength,
but more often it takes three or four normal bull bars to form the signal.

When you are looking for any type of trading opportunity,
anticipation is critical.
Observe what the market is trying to do;
if you can see a pattern forming,
then you can prepare for the next trade.
For example, the market declined, bounced, declined again, bounced again,
and now it is the third decline.
Although there is no perfect "Wedge" structure,
the buying during the previous two bounces was decent.
When the market produces a third decline,
even if the shape does not look like a wedge,
it often functions as a wedge bottom
and may trigger a swing rally.
This third decline did not touch the lower channel line,
but that does not matter,
because wedge bottoms often "undershoot."
When you see the third decline forming,
you must be prepared —
the market may be about to reverse.
In other words: this could be a wedge bottom,
and a wedge bottom means at least two sideways or upward legs,
usually lasting 10 or more bars
in a sideways or gently rising structure.
But the prerequisite is:
the channel must be broad enough,
meaning if each rally leg within the channel is relatively strong,
then the probability of reversal after the third decline is higher.

There is no "best pattern."
However, every two or three bars, a decent pattern appears.
And whenever you enter any trade,
you must always have a profit-taking plan.

The market has been running below the moving average for a long time;
traders are willing to sell well below the average price.
So what happens when price returns to the moving average?
They say: "I've been selling at low prices all along, and now I can finally sell at the moving average!"
Of course they will sell.
And they have indeed been doing so.
This is the trading principle behind the 20 Gap Bar.

Traders sell with limit orders at the moving average;
they sell at the close of bull bars at the moving average;
they sell when reversal signals appear,
especially below bear bars.
They see the market weakening
and beginning to enter a tight trading range.
But unless a clear reversal appears,
they will continue to go short.

Beginners always want to find the "best pattern," the perfect trade,
but there is no perfect trade.
Because if a trade looks perfect,
everyone would participate,
and then there would be no counterparty, and the trade could not drive the market or function.
So there is no "best pattern."
And you never need to worry about entering too late,
because every few bars, there will be a decent entry opportunity.

Every trade is a choice:
one side gets a better "reward-to-risk ratio,"
while the other side gets a higher "probability of success."
If you enter with a tight stop loss,
the risk is small and the "reward-to-risk ratio" is good,
but the probability of success is also lower.
If you enter after a strong reversal,
your stop loss will be farther away,
but the probability of success will be higher.

A "minor reversal."
But if the bear trend resumes afterward,
and then another reversal occurs,
that minor reversal could become the precursor to a major reversal.

A "gap bar" — meaning there is a gap between the bar's low and the moving average —
is a sign of strong bulls.
When the bear trend resumes after a "gap bar,"
a "major trend reversal" attempt typically follows.
Every "major bottom trend reversal"
is some variation of a "double bottom."

When you see a clear and forceful breakout to a new high,
raising your stop loss becomes easier.
This constitutes a major high or low.
In fact, any of these lows are major highs or lows.
If the market drops below this small double bottom,
or drops below the bottom of this bull breakout,
most bulls will choose to exit,
because the premise is that you believe the market is in a bull trend.
If this is a successful breakout,
price should not drop below the bottom of the breakout,
nor should it drop below these higher lows.
Placing the stop loss below the breakout bottom is reasonable,
especially after this bar closes.