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The Traders Wheel
8/22/98 by Alan Farley

Trend-Range Axis

Do you see order in price movement? Can you identify and trade with the flow? When opportunity appears, are you ready to act?

All markets tend to cycle between constricted range and directional trend in all time frames. Organize your market knowledge and trading strategy along this important trend-range axis. When breakouts erupt, follow the skills of the momentum trader. But recognize when price contracts and predictable patterns emerge. Use these repeating formations to execute the contrary tactics of the swing trader.

Find your place on the trend-range axis with these key observations:

  1. Price movement demonstrates both directional trend and non-directional range activity.
  2. Range motion alternates with trend movement.
  3. Trends are classified by their upward or downward bias.
  4. Trends change and reverse at certain complex points of development.
  5. Movement out of ranges will either continue the existing trend or reverse it.
  6. Ranges are classified by their repeating patterns, bias for continuation or reversal and the trends expected to follow them.
  7. Range volatility is highest at the interface between the prior trend and inception point of the new pattern.
  8. Range volatility is lowest at the apex point just prior to inception of the new trend.
  9. High range volatility is characterized by wide range bars, high volume and low ROC (Rate of Change).
  10. Low range volatility is characterized by narrow range bars, low volume and low ROC.
  11. Ranges exist in a state of negative feedback where price movement pulses between minimum and maximum points but does not build direction (momentum).
  12. Trends exist in a state of positive feedback where price movement builds incrementally in a single direction.
  13. Breakouts from patterns are characterized by their shift from a state of negative feedback to positive feedback.
  14. Non-directional price movement arises from a state of high volatility associated with the end of positive feedback.
  15. Directional price movement arises from a state of low volatility associated with the end of negative feedback.
  16. Negative feedback registers on oscillators as shifts between overbought and oversold states but does not register on momentum gauges.
  17. Positive feedback registers on momentum indicators as directional movement but gives false readings on oscillators.
The market pendulum swings back and forth endlessly between trend and range. Over and over again, price completes a thrust and then pauses to test the boundaries of the new level. Similar patterns develop constantly in these constricted zones, allowing profitable entries through early recognition. Use custom trading rules to capitalize on the characteristics of each unique formation.
 
Alan Farley is a full-time trader and author residing in Denver, CO. He publishes The Hard Right Edge premier web site for trader education, technical analysis and trader resources featuring both Morning Trader and Traders Workshop. The site provides traders with comprehensive resources including original tactics and strategies on multi-trend technical analysis and short-term trading .

  Alan also authors on-line training technical analysis in association with independent sites. His most recent publications include the Mastering The Trade on-line workshop, Momentum: Riding The Tiger, and Time of Day. In addition to writing, he is an outstanding speaker and lecturer on short term trading strategies.

 He has been featured in Barrons, Smart Money magazine, Tech Week, MoneyCentral and TheStreet.com.

 

 

 
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Last modified: April 02, 2001

Published By Tulips and Bears LLC