Michael 1.

Parsons

The two most common fai lures are trading ranges and pullbacks and in both,
price will usually stall. New trends tend to form very quickly and even
though it is common for price to kiss the channel line goodbye, any
excessive delay makes the new trend suspect. This leads us to the second
way the changing of the guard takes place.

When the trend continues after pausing

A failed reversal usually translates into a continuation ofthe current trend
fol lowing a brief pause, such as a consolidation pattern. Pauses act as a
breather and after the market is refreshed it trends to pick up where it left
off. They come in various forms that you can literally spend a lifetime
learning to identify and analyze. But there is no need to do all of that.
They fol low the same principles of Channel Surfing as you have already
learned. Most pauses have too little movement to make the actual pattern
worthwhile to trade, but they still offer a great trading opportunity for two
other reasons.

1. They predict the next leg ofthe trend.

2. They offer a low risk entry.

Although they are too narrow to trade, the real value of pauses is derived
by what they can tell you about any upcoming move. If you look closely
at most charts you will notice that pauses are generally found at the center
of trends. In other words, they tend to be the halfway point of trends. So
once a trend resumes, you can normally expect it to go approximately
the same distance as it did in the first leg of the trend. Translated, this
means that if you have a trend that started at 900 and it then paused at
950 then it is li kely to go on to 1000. Markets are more likely to continue
than reverse direction and pauses offer a way of taking advantage of this
phenomenon.
But it gets better than this. Not only do you know where the market is
li kely to go, but market pauses also provide a low risk entry. Since they
are generally narrow patterns to start with you will in turn have a narrow
or close stop attached to your entry. A low risk entry with a defined high
reward makes this pattern a favorite of many professional traders today.
It is easy to see why when you look at figure 3-2.

50