As illustrated in Chapter 3, a trend does not develop in a straight line. A typical intermediate- or long-term trend is strung together by shorter moves within it. Thus, a trend may be punctuated with one to several recognizable events within its lifespan that serve to interrupt its movement for a period of time. Those events become part of the chart landscape, thereby influencing your analysis, and they may offer opportunities to position yourself for potential price moves.
Unfortunately, there is not a standard set of labels that I am aware of used to classify the various trend interruptions that occur. For instance, when reference is made to consolidation, a trader may be referring to a very brief sideways move (e.g., a couple of days). Another trader may use that term to refer to several days of sideways movement; and yet another refers to several weeks or more of sideways movement as consolidation. While those are all forms of consolidation, following are some important differences between the events:
- The duration of the consolidation.
- The magnitude of the interruption.
- Its role in a trend's development.
- The screening method used to find the formation if utilizing it for trading setups.
- The techniques used to manage trades that are impacted by, or based on, the formation.
In order to help aspiring traders recognize the interruptions that may occur within trends, I have categorized and labeled them as indicated in Table 4.1. I distinguish them ...