...contd
8)Trading range reversals
Even before a trading range is obvious, the market usually has signs of two-sided trading that alerts traders to a possible trading range day. When that is the case, the market often races to the top with enough momentum to make traders erroneously believe that they can buy a small pullback and reasonably expect a second leg up. Similarly, they see a big bear trend bar at the bottom and then begin to sell bounces because they do not understand what is actually happening. The market regularly gets vacuumed to the top, where bulls take profits instead of buying more, and the bears appear out of nowhere. Both the bulls and bears expect the test of resistance to lead to a failed breakout.
The opposite is true at the bottom. When the market gets near support, bear scalpers sell even more, expecting the market to fall just a little more. Bulls stop buying because they are confident that the market will reach the support and probably poke through it. Why buy now when they can buy lower in a few minutes? The result is that the market creates strong bear bars at the bottom as it is vacuumed down to support. Instead of follow-through selling, buyers come. The bears buy to take profits and the bulls buy to initiate longs.
When traders start out, they often do not realize that the market is forming a trading range until the day is over. The bars often give early signs, as they did here. There were many bars with prominent tails, lots of pullbacks, yesterday ended in a tight trading range (markets have inertia and tend to continue what they have been doing), and few areas of 2 or 3 consecutive big trend bars. This means that the bulls and bears were disappointed by the follow-through.
Beginners feel confused and disappointed by the repeated reversals, not realizing that these feelings are the hallmarks of trading ranges. When experienced traders detect those feelings, they look at them as opportunities…they bet that every breakout will reverse and they look to buy low, sell high, and scalp. Even when the market trended down at midday, they expected the breakout to the new low of the day to fail, because that’s what usually happens on trading range days. They bought the reversal up, betting that the rally would get back above the breakout point (the low of the first hour) and back into the trading range.
