The Spectrum of Price Action: Extreme Trends to Extreme Trading

FOREXCOM:XAUUSD   Gold Spot / U.S. Dollar
Whenever anyone looks at a chart, she will see areas where the market is moving diagonally and other areas where the market is moving sideways and not covering many points. The market can exhibit a spectrum of price behavior from an extreme trend where almost every tick is higher or lower than the last to an extreme trading range where every one- or two-tick up move is followed by a one- or two-tick down move and vice versa. Only rarely will the market exist in either of these extreme states, and when it does, it does so only briefly, but the market often trends for a protracted time with only small pullbacks and it often moves up and down in a narrow range for hours. Trends create a sense of certainty and urgency, and trading ranges leave traders feeling confused about where the market will go next. All trends contain smaller trading ranges, and all trading ranges contain smaller trends. Also, most trends are just parts of trading ranges on higher time frame (HTF) charts, and most trading ranges are parts of trends on HTF charts. Even the stock market crashes of 1987 and 2009 were just pullbacks to the monthly bull trend line. The following chapters are largely arranged along the spectrum from the strongest trends to the tightest trading ranges, and then deal with pullbacks, which are transitions from trends to trading ranges, and breakouts, which are transitions from trading ranges to trends.
An important point to remember is that the market constantly exhibits inertia and tends to continue to do what is has just been doing. If it is in a trend, most attempts to reverse it will fail. If it is in a trading range, most attempts to break out into a trend will fail.


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