Price Action: Trading Tight Bear Channels (Part 1)

When the market is in a breakout state,
most of the time you will see small tight bull channels within this tight bear channel.
They are pullbacks in the bear trend —
in other words, bear flags.
But if you see an "endless pullback" —
the market first pulls back for 5 bars, then 10, 15, or even 20 bars —
it may no longer be a bear flag
but the beginning of a bull trend.
You must observe whether a series of consecutive bull bars appears,
especially accompanied by a strong bear breakout and follow-through bar.
Only then can you confirm that the bear flag has indeed been broken
and the market is transitioning to a bull trend.

Sometimes a bull channel appears within a bear trend,
and this bull channel continues to expand, reaching 10 or more bars.
This situation can be called an "endless pullback."
It is often the beginning of a bull trend,
or at least the end of the bear trend.
If some kind of "sell climax" appears in the bear trend,
followed by a strong reversal and then a pullback lasting more than 10 bars,
especially with large bull bars appearing,
then this is likely not a bear flag
but rather a bull leg within a trading range,
or even a strong minor reversal that eventually evolves into a major trend reversal
and brings a second leg up.

I focus on two key points:
First, whether some kind of "sell climax" appeared before this bull channel;
Second, whether there are at least 3 bull bars in this bull channel
that all close above their midpoints,
especially if two or more of them have relatively large bull bodies.

If I see some kind of sell climax or parabolic wedge,
especially followed by an upward reversal with three or more strong bull bars,
then traders will start to think that this may not be a continuation of the bear trend.
This tight bull channel is no longer a bear flag
but the beginning of a bull trend.
Initially, the market still favors bears, and probability still tilts toward bear continuation.
But once three or more strong bull bars appear, especially with large bodies,
the bear trend has very likely ended, and the market may enter a trading range
or even begin a new bull trend.

Remember the market cycle:
A tight channel is a very strong trend,
so without first experiencing a trading range,
the risk of reversal is very small.
This means that if the market has not first consolidated sideways for at least 10 or 20 bars,
the probability of reversing upward from here is very small.
If it does consolidate for 10-20 bars
and you are short at this low,
and you judge the market has entered a trading range,
then the probability of closing your position profitably is very high,
especially if you add to your position at higher levels —
the chance of a loss becomes even smaller.

The key is:
Regardless of where you go short or what your reason for going short is,
you must trust your stop loss.
As long as you still believe the market is in a "small pullback bear trend,"
the first upward reversal will most likely form a "lower high" and then retest the prior low,
allowing you to exit with either a small profit or a small loss.
Even if you are short at the worst possible location — the very low —
the probability of a large loss is still very small.