Price Action: Trading Tight Bull Channels (Part 3)

After the rally has lasted 20 bars or more,
continuing to buy these bull bars at new highs becomes quite dangerous
because deeper pullbacks are more likely at this point.
As the trend progresses, the later it gets, the less suitable it is to chase highs.
You should focus more on buying pullbacks
because all bull channels eventually evolve into trading ranges.

Because every bull channel ultimately evolves into a trading range,
if you continue to chase highs late in the channel,
you will very likely get trapped:
the market starts transitioning into a consolidation phase,
and what you thought was a continuing uptrend actually turns into sideways action.
This is the greatest danger late in a channel,
especially after the rally has lasted more than 20 bars.
Early in a rally, the success rate of chasing highs is higher;
but the later it gets, the lower the success rate and the greater the risk of failure.

Therefore, late in a bull channel,
you should only take reversal buys after obvious pullbacks,
rather than chasing highs after consecutive bull bars.
Late in the channel, pullbacks are usually deeper
and reversal signals are stronger.
If you see a large bull bar
that has reversed up from a support level (such as a prior swing high or the moving average),
that is a buy signal worth taking.
You can place a buy stop order above the high of this bull bar,
or wait for the next follow-through bull bar to close and buy at market price.

Late in a trend, traders' confidence gradually weakens.
You will see that the market has increasing difficulty making new highs.
Bulls take profits quickly after each new high,
and bears also enter short positions after each new high.
The market gradually transitions into a trading range
through this tug-of-war between bulls and bears.

This is also a very important principle in trend trading:
The stronger the trend, the more you should chase highs;
the later the trend, the more you should buy pullbacks.

Finally, it must be emphasized:
All tight bull channels eventually evolve into trading ranges —
this is not "possible" but "certain."
No trend continues indefinitely.
The market will eventually lose momentum and transition to consolidation or reversal.

Therefore, no matter how strong the channel,
you must be clear that it will end at some point.
Once you begin to see the following signals:
– Pullbacks deepening
– Rallies stalling
– Failure to make new highs
– Gaps decreasing or disappearing
– Heavy overlap between bars
– Moving average flattening
– Bulls buying but no longer pushing price higher
This indicates the channel is exhausting, and the market is about to enter consolidation.
At this point, you should avoid buying at new highs
and instead look for reversal buys at lows within the trading range,
or simply step aside and wait for the next trend to form.

You cannot decide to trade based on risk alone —
you must also consider the probability of success.
Going long in a tight bear channel has a very low probability of success.
You must also consider the potential reward.
A tight bear channel will at most form a bear flag or trading range,
so the potential reward is also very small.
This small reward combined with low probability
is far from enough to offset even a relatively small risk.

Do not go long,
because even if there is a reversal, it is only a minor reversal,
likely just a lower high within the bear channel.

But going long in a small pullback bear trend
means accumulating losses throughout the entire day.