Trading Price Action Trends

Market inertia is the most exploitable tendency in price action. About 80% of attempts to reverse a trend fail and become continuation flags. Similarly, about 80% of attempts to break out of a trading range fail. This is the opposite of coin-flip reasoning, where beginners assume three losses mean the next trade must win.

This principle should govern every trade. In a bull trend, most sell setups fail — so stop hunting perfect short entries and start buying imperfect pullbacks. In a trading range, fade the extremes rather than chasing breakouts. Smart traders wait for the reversal attempt to fail, then enter with the trend exactly where trapped countertrend traders are forced to exit at a loss. Their panic becomes your fuel.

On small pullback trend days — the strongest type of trend, occurring once or twice monthly — virtually every countertrend setup looks better than the with-trend entries. Bear trend bars and multi-bar bear spikes appear constantly in bull trends, trapping beginners into repeated shorts. Meanwhile, the buy signal bars are small dojis or even bear bars. They look terrible.

This is how strong trends sustain themselves. If entries were obvious, everyone would take them, the move would be small, and no one could swing for large profits. Experienced traders recognize the telltale combination: weak-looking signal bars + pullbacks that never reach the moving average + no two consecutive closes on the wrong side of the EMA = an extremely strong trend. Bad-looking entries are the highest-probability swings.

Spike and channel is Brooks's most essential structural framework. The spike is a breakout — one or more strong trend bars where both bulls and bears agree the current price is wrong, so the market rushes to a new level. After a pause or pullback, the channel begins: momentum slows, bars overlap, and two-sided trading appears. Brooks calls this "the wall of worry."

Trade each phase differently. During the spike, enter aggressively — at the market, on strong closes, or on tiny pullbacks. During the channel, treat it as a sloping trading range where the trend constantly looks like it's ending but isn't. Once the channel finally breaks, expect a correction back to the channel's starting point. Some form of this pattern appears every single day.

The always-in concept simplifies trading's most paralyzing question: "What do I do right now?" Imagine you must hold a position at all times — long or short. If the answer is clearly long, only buy. If clearly short, only sell. If you can't decide, the market is in a trading range — either wait or trade both sides carefully.

This mental model prevents the costliest beginner mistake: shorting a bull trend because it "looks overdone." When the always-in direction flips — typically after a strong spike with follow-through in the new direction — switch immediately. Brooks is emphatic that most traders should trade only in the always-in direction. Countertrend trades require a prior trend line break, a strong reversal bar, and ideally a second entry.

The final seconds of a bar can completely reverse its meaning. Brooks describes a recurring trap: a perfect bull reversal bar forms at a climactic bottom, traders enter early for a better price, then with five seconds remaining the price collapses and the bar closes on its low. Premature longs lose two points or more. This happens multiple times daily, and you need roughly eight successful early entries to offset each one that reverses — odds Brooks says "simply won't happen."

The only exception is entering with-trend during an obvious strong spike, where waiting risks missing the entire move. For countertrend entries, patience is non-negotiable. Brooks also warns against switching to a 1-minute chart to manage 5-minute trades — the smaller chart tempts you with tighter stops that consistently get hit.

When Costco reported 32% earnings growth above expectations, the stock gapped up, rallied briefly, then crashed $3 below the prior day's low. A price action trader would have shorted the failed trend line break at the moving average — no report needed. When Microsoft offered to buy Yahoo at $31, the stock rallied to the offer, then collapsed 50% over six months. Fundamentals failed; the chart worked.

Brooks's rule is absolute: never watch financial news while trading. Television pundits are selected for charisma, not accuracy — their predictions are essentially 50-50. If a Wall Street head trader could consistently predict short-term direction, he'd make 1,000% annually day trading instead of managing money. The chart shows institutional consensus in real time; everything else is slower and less reliable.

Two-legged moves pervade every time frame. Pullbacks typically have two pushes (ABC corrections). Trends subdivide into two major legs. After a sell climax, expect a correction with at least two legs lasting about 10 bars. After a trend line break, expect a test of the trend's extreme. Brooks tracks these systematically through bar counting: in a bull pullback, the first bar breaking above the prior bar's high is a High 1; the second occurrence is a High 2 — his bread-and-butter entry setup.

This framework builds patience. Knowing a second leg is likely helps you hold through a painful first pullback instead of panicking out. It also prevents chasing after just one leg. When the market fails twice at something — like breaking below support — it usually tries the opposite.

Every rising channel eventually breaks to the downside — making it functionally a bear flag — regardless of how bullish it appears. The channel's starting point is usually tested within a day or two; the entire channel is merely the first leg of a forming trading range. In a spike and channel bull: the market spikes up, channels higher, then breaks below the channel and corrects to the channel's start, creating a double bottom bull flag and revealing the trading range.

Experienced bears exploit this by scaling into shorts throughout bull channels — selling above swing highs and above prior bar highs — planning to take profits when the market tests the channel's starting point. Most upside breakouts from bull channels fail within five bars and lead to two-legged corrections. The channel phase constantly looks like it's reversing, but rarely does — until it finally does.