The Art & Science of Technical Analysis: Market Structure, Price Action & Trading Strategies

CHAPTER 5

Interfaces between Trends and Ranges

What we call the beginning is often the end. And to make an end is to make a beginning.

—T.S. Eliot

Even the most powerful market trends eventually come to an end, and they can do so in several ways. Traders riding trends need to understand the patterns of trend termination, but it is also equally important to consider what follows the end of a trend. At best, these interfaces between trends and trading ranges are periods of great uncertainty and potential volatility. At worst, many traders will find that these are the most difficult areas of market structure to read reliably, and that they are the source of consistent losses. These areas also offer the greatest opportunity for many traders, but this opportunity is accompanied by risks and uncertainty. Using a simplified model of market structure where markets are always either trending or in trading ranges, there are only three possible transitions:

1. Breakout: A market breaks out of a trading range, and enters a trend.

2. Trend termination into trading range: An established trend ends, and the market enters a trading range.

3. Trend reversal: An established trend ends, and reverses into a trend in the opposite direction.

To this list we must add a few failures that may complicate issues. After the fact, we might miss these areas as they will simply be continuations of previous conditions, but a trader making decisions at the hard right edge of the chart would likely have placed ...