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Markets cycle between constricted ranges and directional trends through all time frames. Congestion reflects negative feedback energy that invokes price movement between well-marked boundaries but does not build direction. Rallies and selloffs reflect positive feedback energy that invokes directional price movement. Conges tion breakouts shift market force from negative to positive feedback. Climax events shift market force from positive to negative feedback. Profit opportunity rises sharply at all feedback interfaces. Momentum generates great force as increasing volatility resolves into directional price movement. It quickly awakens the positive feedback state that invokes chart bar expansion out of congestion. The crowd takes notice of this new, dynamic condition and participation rises. This fuels an escalating momentum engine and generates further price change. This dynamic mechanism continues to feed on itself until a climax finally shuts it down and forces a reversal into new congestion. Trend marks territory as it spikes through relative highs and lows within all time frames. This signature behavior appears through all markets and in all historical chart activity. Trends print rising or falling prices over time. A series of lower highs and lower lows identify downtrends while uptrends reverse this sequence with higher highs and higher lows. Individual markets reflect a powerful trend relativity phenomenon when viewed through different time frames. The same stock may exhibit an uptrend on the daily chart, a bear market on the weekly, and sideways congestion when seen through 60-minute bars. Quiet periods characterize most market action. Strong directional movement requires an extended rest to absorb instability. Long sideways or countertrend ranges after trends reflect lower participation while they establish new support and resistance. Volatility slowly declines through this congestion as price action recedes. As noted earlier, these dull markets finally invoke conditions that encourage the next trend leg. Price reaches stability and momentum quickly returns to start a new round of activity. Price patterns represent dynamic trend or range systems that invoke measurable outcomes. Each setup formation exhibits a directional probability that reflects current internal and external conditions. Swing traders execute positions to capitalize on the pattern’s highest-odds tendency. They also measure risk and apply defensive techniques to exit their trades if the pattern fails to respond according to expectations. Different tactics capitalize on each stage of the trend-range axis. But many participants misinterpret their location and apply the wrong strategy at the wrong time. Or they limit execution to a narrow trading style that fails through most market stages. Swing traders avoid these dangerous pitfalls when they learn diverse strategies that apply to many different conditions and environments. But first they must understand the complex mechanics of the trend-range axis: • Price movement demonstrates both directional trend and nondirectional range. • Range motion alternates with trend movement. • Trends reflect a state of positive feedback where price movement builds incrementally in a single direction. • Ranges reflect a state of negative feedback where price movement pulses between minimum and maximum points but does not build direction. • Trends reflect an upward or downward bias. • Trends change and reverse at certain complex points of development. • Ranges reflect their repeating patterns, bias for continuation or reversal, and the trend intensity expected to follow them. • Movement out of ranges continues the existing trend or reverses it. • Range volatility peaks at the interface between a trend climax and the inception point of a new congestion pattern. • Range volatility ebbs at the apex point just prior to the inception of a new trend. • High range volatility = wide range bars, high volume, and low price rate of change. • Low range volatility = narrow range bars, low volume, and low price rate of change. • Congestion pattern breakouts reflect a shift from negative feedback to positive feedback. • High volatility associated with the end of positive feedback induces nondirectional price movement. • Low volatility associated with the end of negative feedback induces directional price movement. • Negative feedback registers on oscillators as shifts between overbought and oversold states but does not register on momentum gauges. • Positive feedback registers on momentum indicators as directional movement but gives false readings on oscillators. The pendulum swings endlessly between trend and range. As a market completes one dynamic thrust, it pauses to test boundaries of the prior move and draw in new participants. Price finally absorbs volatility and another trend leg begins. This cyclical movement invokes predictive chart patterns over and over again through all time frames. Profitable trade execution arises through early recognition of these formations and custom rules that capitalize on them. Markets must continuously digest new information. Their future discounting mechanism drives cyclical impulses of stability and instability. Each fresh piece of information shocks the common knowledge and builds a dynamic friction that dissipates through volatility-driven price movement. In its purest form, volatility generates negative feedback as price swings randomly back and forth. But when focused in a single direction, positive feedback awakens to generate momentum into a strong trend. Proper recognition of these active-passive states will determine the swing trader’s success or failure in market speculation. Pattern Cycles organize trading strategy along this important trend-range axis. When breakouts erupt, follow the instincts of the momentum player. Buy high and sell higher as long as a greater fool waits to assume the position. But quickly recognize when volume falls and bars contract. Then focus to classic swing trading tactics and use price boundaries to fade the short-shift direction. FIGURE Markets alternate between directional trend and congested range through all time frames. After a rally or selloff, stability slowly returns as a new range evolves. This quiet market eventually offers the right conditions for a new trend to erupt. Notice how the end of each range exhibits a narrow empty zone interface just before a new trend suddenly appears to start a fresh cycle. RealTick
