Price Action: Trend Continuation and Reversal (Part 1)

Why do we give different names to these patterns? Price simply moves from one level to another, but the specific mechanisms differ. Their algorithmic logic is indeed different, which leads to different practical applications, different interpretations by traders, and different trading approaches. This is precisely why the distinction is so important.

Climax patterns convey a signal: when a phenomenon deviates from the norm, it constitutes an anomaly and often indicates it cannot be sustained. Therefore, such a move cannot continue indefinitely.

A trade setup refers to a specific pattern formed in the chart's historical price action, with entry based on a bull-bear imbalance.

When analyzing any pattern or studying any trading concept, maintain this mindset: every signal on the chart is predicting a certain price direction — what move is it hinting at? Sometimes the market is building a continuation pattern, sometimes it is brewing a reversal pattern, after which the original trend continues. Every simple thrust is laying the groundwork for a reversal — that is when an abnormal thrust appears in the market.

A spike itself is an ordinary price thrust that produces a gap, while also forming a climax. These all set the stage for a price reversal. If multiple such events occur consecutively — for example, a spike up, then a pullback, then another spike up, then another pullback — when the third spike appears, what happens? Together they form a stronger climax. When the market spikes up and then enters a consolidation phase, multiple consecutive spikes are essentially consecutive climaxes. Such price action is usually unsustainable and often triggers a larger pullback.

When judging the nature of the market, remember: all pullbacks initially appear as reversal patterns, but eventually the reversal pattern fails. People are prone to misjudging double-thrust patterns. For instance, when the first thrust appears, they think a second thrust will follow — and it does. But what people easily overlook is that when they see the first thrust, it is actually a potential reversal signal, because traders often ignore this key point and only focus on what comes next — the second thrust in the same direction.

But do not forget there are algorithms in the market that interpret every spike as a potential turning point. Therefore, these algorithms often take the opposite trade. Once they detect a price spike, they measure how long the spike lasts, then place orders in the opposite direction. When everyone is selling, the algorithms are buying, performing short-term arbitrage. This strategy works because spikes are turning points — the market usually needs to pull back to correct itself, and then continue the move. Trends do not start in a straight line. Pullbacks are a market law. Therefore, the market always corrects itself.

Similarly, when multiple consecutive spike bars push in the same direction — spike, pullback, then spike again — this triggers stronger breakouts but also lays the groundwork for larger corrections. Major corrections also contain secondary spikes, which themselves constitute reversal signals.

When a reversal pattern first appears, you cannot predict whether the reversal will materialize. You can only confirm that a reversal pattern is forming. This awareness is critical — recognizing that a single thrust or spike could be the precursor to a reversal is extremely important.

If the move is strong — such as a parabolic wedge — the correction will form a technical pullback, after which the trend will resume.

What you need to understand about pullback price action is that it is actually composed of simple thrusts. When multiple thrusts occur, the market will eventually stabilize somewhere, and the influence of the original trend will reassert itself. This too is important — have reasonable expectations for subsequent price action.