Climactic Reversals: A Spike Followed by a Spike in the Opposite Direction
The market is always trying to break out, and then the market tries to make every breakout fail. This is the most fundamental aspect of all trading and is at the heart of everything that we do. Every trend bar is a breakout, which might have follow-through and succeed, or fail and lead to a reversal. Even a climactic reversal like a V bottom is simply a breakout and then a failed breakout. The better traders become at assessing whether a breakout will succeed or fail, the better positioned they are to make a living as a trader. Will the breakout succeed? If yes, then look to trade in that direction. If no (and it becomes a failed breakout, which is a reversal), then look to trade in the opposite direction. All trading comes down to this decision.
Many people restrict the definition of a climax to a sharp move at the end of a trend that is followed by a sharp move in the opposite direction, resulting in a trend reversal. A broader definition is more useful to traders: any type of unsustainable behavior should be considered to be a type of climax, whether or not a reversal follows. Just how small can a climax be? As mentioned in Chapter 2 of book 1, every trend bar is a climax, although most do not result in climactic reversals. Any trend bar or series of trend bars where the bar or bars have relatively large ranges are climaxes, even though most traders would not think of them this way. A climax ...