Price Action: Trading Tight Bear Channels (Part 2)

If the market is in a bear trend,
especially a strong bear trend like a breakout or tight bear channel,
then reversals are usually minor reversals.
This means they typically evolve into bear flags or trading ranges,
but the market is more likely to continue the bear trend.

At some point,
everyone will agree the market is in a tight bear channel —
in other words, a bear trend.
The market keeps attempting reversals,
but after each reversal, prices go lower.
This indicates that each reversal
is either a trading range or a bear flag,
and traders should look for shorting opportunities at reversals
rather than going long.
Even if a seller goes short at the lowest closing price in the trend,
as long as they manage the trade properly, the risk of loss is small.

What "managing the trade" means
is using a reasonable stop loss.
And if a trader can add to the position, the probability of profit increases,
because any reversal is most likely a minor reversal
and will eventually retest the bear trend's low.

In a bear trend,
once a pullback rally reaches around 20 bars,
I will start using the term "trading range."
However, the probability still favors the trend continuing down
rather than reversing up.
If buying pressure is not strong enough
to convince traders that bulls are truly in control and forming a bull trend,
and there is no obvious major trend reversal pattern,
no wedge bottom — the latter usually signals a major reversal —
then the probability of any reversal leading to a bull trend is only 30%,
while there is a 70% probability that these reversals are only minor reversals,
leading to bull legs within a trading range, or simply continuing as bear flags.

If the channel is very tight,
reversal attempts will almost certainly fail.
Therefore, you can sell at the close of bull bars.
If the bear trend starts to resume for the second time,
bulls will usually give up.
This is also one of the reasons why
"low II shorts" are so reliable in a strong bear trend.

If you do this trade 10 times with a tight stop loss
versus using a wider stop loss,
your total profit will likely be about the same.
With a tight stop loss, you will get stopped out more frequently;
but when you use a wide stop loss, although stops are less frequent,
a single loss may be comparable to the total losses from tight stops.

Whenever the market is in a bear trend,
the first thing to consider is: can limit-order bulls make money?
If a bull buys at the prior low and adds at lower levels,
can the bounce get above the breakout point
so that the first long entry exits at breakeven
and the added entry earns a scalp profit?

A gap —
the market not giving limit-order bulls any chance to profit —
indicates a "small pullback bear trend,"
and the market will most likely continue to fall.
But once bulls start being able to profit,
it becomes a "staircase pattern,"
which means the probability of the market evolving into a trading range increases.

Whenever a breakout occurs
and then a bar breaks above the prior bar's high,
that is a pullback,
and I usually assume the market is in the early stage of a channel.
If a staircase pattern forms —
meaning after the breakout, the pullback exceeds the breakout point —
that is a signal of two-sided trading
rather than a one-sided breakout.
This indicates the market now has some two-sided activity
and may no longer be in the breakout phase but in the channel phase.
This is a clear signal that the breakout phase has ended and the market is entering the channel phase.