Friday, May 13, 2011

Obnoxious overshoots

When the price overshoots a trend channel by multiple points and one or two huge bars, the overshoot is obnoxious. If the overshoot ends in a well-formed reversal bar, the trend reversal will be very strong and is likely to erase the entire move.

Often when the last one or two bars are very large, the trend will terminate but not reverse. The large bar(s) effectively form a trading range and the price action behavior resembles trading range movement. The price will try to breakout of either end and usually fail the first attempt. The best way to trade this is to scalp two legged moves and occasionally swing a failed breakout from one end if the range is sufficiently large.

If the range is extremely large, the price may try to consolidate in a narrowing triangle before it finds new direction. 

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