Price Action: Microchannels (Part 4)

Buying at the close is reasonable in certain situations, for example, when price strongly breaks above the moving average and continues. If you wait until the third bar to enter, you might get a lower buying opportunity — such as buying below the third bar's low, betting the breakout will fail. But buying at the close without waiting also has its rationale, because even if price drops below the prior bar, there will likely be buying support.

Some traders choose to wait for more confirmation, but others regret not entering earlier. In certain scenarios, price breaks out and continues directly without any pullback, and traders waiting for a pullback miss the opportunity. Therefore, if you are willing to add below the bar, buying at the close sometimes makes sense.

For example, when price transitions from consolidation to a trend and a strong breakout suddenly appears and continues, many traders will buy at the close because they know that in this type of situation there is almost no pullback — at most a few ticks of retracement. In a high-momentum environment, especially for traders willing to add below the bar, buying at the close is a relatively comfortable approach.

The same applies in a bearish environment. When price forms a bear flag below the moving average and then two strong breakout bars drop straight through the entire trading range, this kind of fresh and strong breakout makes selling at the close reasonable, especially if you are willing to add shorts at higher levels. This way, scalpers can quickly capture profits, and swing traders can catch a trend leg.

If you only wait to counter-trade after the microchannel breaks (for example, waiting for price to break above the prior bar's high to go short), you often have to wait a very long time for an opportunity and miss many trades in between. Flexible traders can find multiple trading opportunities within a single microchannel rather than waiting until the breakout to start trading.

Another approach is to buy in the buy zone, betting the first pullback will fail. The buy zone refers to the lower half of a bar's body, excluding the very low. The sell zone is the upper half of a bear bar's body, excluding the very high. The reason for distinguishing the buy zone from "buying at the prior bar's low" is that breaking below the prior bar's low constitutes a real breakout — a new significant event; whereas a pullback to the buy zone is just entering a price area that may occur multiple times within a microchannel.

When three consecutive strong bull bars appear, many traders stop chasing highs and buying at the close because the probability of a pullback increases. Instead, they wait for price to pull back to the buy zone before entering. Similarly, when three consecutive strong bear bars appear, some traders wait for a pullback to the sell zone before entering.