Price Action: Trend Bars (Part 1)

The definition of a trend bar is that the close is relatively far from the open, with the body having a moderate size, measured against the average range of recent bars. A sign of a trend bar's strength is that its body is larger than the median of the past 5 to 10 bars. For bull trend bars, a characteristic of strength is opening at the low and closing at the high. A bull bar whose high or close is above the highs or closes of many prior bars is also a sign of strength.

Every trend bar can be viewed as a breakout. A breakout is one bar or a group of bars that may trigger a measured move or initiate a spike-and-channel trend. If you understand trend bars this way, you will find there is always a possibility of extending into a channel or measured move, but whether it succeeds depends on context. If the background environment is wrong, this breakout may just be a failure. Pullbacks are often breakouts in the opposite direction, misleading traders into thinking the trend is about to reverse. In trends, these counter-direction breakouts or strong opposing bars frequently appear, making people think the trend might be ending. But most bulls will buy into these bear breakouts, betting it is just a pullback.

A trend bar itself is also a breakout. All trend bars are attempting to break out, trying to start a new trend. But most breakouts fail. A trend bar represents market imbalance — it may be a breakout toward a new equilibrium zone. If it travels far enough, it could become a swing trade. For bull trend bars, for the breakout to succeed, the market must have at least a 40% probability of achieving twice the initial risk or reaching the measured move target. But most trend bars cannot initiate a trend of this magnitude, so more of them are failures. Every trend bar is trying to break above the prior high, trying to drive a new trend, but most do not go far. This is precisely why many trend bars ultimately are just failed breakouts. Experienced traders exploit this by counter-trading these breakouts, especially in trading ranges.

In trading ranges, breakouts usually fail; and counter-trend breakouts have an even higher failure rate. These counter-trend breakouts or breakouts without follow-through end up being just pullbacks. Experienced traders will buy in these situations — either buying at the close directly or adding on pullbacks, betting that the market will make a new high or new low within the next few bars.

Inexperienced traders often ignore the trend and only see a bear breakout, thinking it is a new breakout. But this is not the case — it is actually often a "buy the close" opportunity. Especially in counter-trend breakouts, particularly those appearing in microchannels or tight channels, they are very likely just pullbacks, so the expectation should be that the breakout will fail.

If a breakout is truly going to start a trend, it usually does not happen within a tight channel but should emerge from a trading range or two-sided trading area. Breakouts that truly start new trends usually come from trading ranges. They must have strong follow-through, and once strong follow-through appears, it greatly increases the chance of reaching the measured move target or achieving twice the initial risk.

Conversely, breakouts that appear within tight channels are more likely to only produce sideways movement, or just make a new high or new low, rather than starting a new trend. Every trend bar can be viewed as a type of gap — it represents market imbalance. Similarly, every gap can also be viewed as a trend bar.

A trend bar is both an extreme move and a vacuum effect.

Finally, trend bars are signals of buying and selling pressure. Buying and selling pressure is cumulative. For example, in a trading range or during a bull trend, as selling pressure gradually accumulates, it increases the probability of a bear trend emerging.