The volume is not from small individual traders, because they are responsible for less than 5 percent of the volume at major turning points. The reversal at an overshoot happens because it is such an entrenched part of institutional trading psyche that it has to happen. Even if institutions do not look at charts, they will have some other criterion that tells them that the market has gone too far and it is time to exit or reverse, and this will invariably coincide with what price action traders are seeing. Remember, price action is the inescapable footprint of what is happening to price as a huge number of smart people are independently trying to make the most money they can in the market. In a big market, the price action cannot be manipulated and will always be basically the same.

One nal minor observation is that the slope of the nal ag of a trend often provides an approximation of the slope of the new trend. This has limited value to a trader because there will be other much more important factors involved in the decision leading up to placing a trade, but it is an interesting observation. 213 P1: OTA JWBT576-c14 JWBT576-Brooks October 11, 2011 10:40 Printer: Donnelly 214 TREND LINES AND CHANNELS Figure 14.1

FIGURE 14.1 Testing a Trend Channel Line A trend channel line points in the direction of the trend but is on the opposite side of the trend from the trend line. Extend it to the right and watch how the price acts when it penetrates the channel line. Does it reverse or does the trend accelerate, ignoring the line? Trend channel lines are commonly drawn in one of two ways. The rst way is to draw it as a parallel line (dashed lines in Figure 14.1) of a trend line (solid lines), drag it to the opposite side of the action, and place it to touch a swing point located between the two bars used to create the trend line. Choose the point that will result in all of the bars between the trend and channel lines being contained between the lines. The second type (dotted lines in Figure 14.1) of a trend channel line is drawn across swing points and is independent of any trend line. You can also simply draw a best t, but these are usually not helpful in trading. P1: OTA JWBT576-c14

JWBT576-Brooks October 11, 2011 10:40 Printer: Donnelly Figure 14.2 TREND CHANNEL LINES FIGURE 14.2 Slope of the Final Flag The slope of the nal ag of the bull trend provided direction for the subsequent bear trend in Figure 14.2. A linear regression trend line drawn between bars 1 and 2 became a rough bear trend channel line for the sell-off that extended into the next day. It is possible that it contributed to the buying at bar 7, but bar 7 was a buy simply based on the break of the trend line drawn over the rst hour of trading, and the second attempt to reverse the breakout below the bar 5 low of the open. It is usually far better to place orders based on the most recent price action if it provides a justication for a trade than to look back 30 or more bars. In hindsight, the bull trend effectively ended at bar 1, even though the market made a higher high after bar 2. The move down to bar 2 was the rst leg down in the bear channel. 215 P1: OTA JWBT576-c14 216