Rounding Channels
Sometimes markets make sharp bottoms — other times they are less abrupt. By drawing tentative trendlines using each pivot top and bottom you can often follow the change of direction as it happens.
Today started with a drop down through flat moving averages and then took about an hour to find the first real bottom at “A.” Drawing a lower trendline and its parallel caught the top at “B.”
Parallels aren’t quite as exact as trendlines confirmed by several pivots, and price overran this one by several ticks. That’s why you look for some type of trigger at potential turns. In this case an entry as the Dunnigan bar turned red would have worked quite well.
The bottom at “C” looked like a good setup. It was both a Measured Move and formed a divergence right at the continuation of the lower trendline. That could easily be taken as a reversal, and is a good illustration of why many traders don’t try to pick bottoms.
You’ll have to decide whether the losing trades in this situation outweigh the winners. My entry would have been the first green bar after the bottom with an exit as price came back down through the blue moving average. Probably a breakeven trade or perhaps a small loss, depending upon execution. Personally, I like reversal trades when there is a clear setup.
The “real” bottom created a Spring setup as the continuously modified channels (in first magenta and then green) defined the reversal. If you didn’t take the Spring (which is again picking bottoms), the safe entry was the pullback to the green parallel trendline. Notice that in this case it is at about the same price as the bad entry at “C.”
Trying to pick tops and bottoms, finding pullbacks, or following breakouts are three different methods of trading the markets. Each has its advantages and disadvantages. In specific situations I may trade any of them. Part of your trading plan should include when (or if) you want to use each technique.
