Wednesday, July 13, 2011
A channel is normally a flag and after 3 pushes or so will resume the prior move to at least test the original trend extreme. Any movement of the price outside the channel tends to push the price action to the other extreme of the channel (b29 to b34, b40 to b46). The more extreme the violation, the sharper the bounce.
Very deep excursions can result in a very sharp snapback especially if the price action early in the day (b7-13) showed strength in the same direction. However, if this snapback fails to rush to the other extreme of the channel and instead gives a 2 legged move (b60-67), then we have a TCL failure and the result is often a measured move of the extent of the channel (met at b75). This acts like a fH1 and usually is one on a higher timeframe.
The correct trade is to take both the expected snapback and reverse on its failure since both are likely to move around the same number of points (b16 hi to b24 hi is the same as b66 low to b75 low)