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16 Flashcards

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1
Q

What is the basic definition of a channel in price action analysis?

A

It is two lines, which are often parallel, that contain the price action.

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2
Q

How many points are needed to draw a line for a channel?

A

A minimum of two points are needed to draw a line.

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3
Q

In a bull trend, what is the name for the line drawn below the price action?

A

It is called the bull trend line.

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4
Q

In a bull trend, what is the name for the line drawn above the price action?

A

It is called the trend channel line.

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5
Q

In a bear trend, what is the name for the line drawn above the price action?

A

It is called the bear trend line.

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6
Q

In a bear trend, what is the name for the line drawn below the price action?

A

It is called the trend channel line.

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7
Q

What is the ‘70% rule’ regarding channel breakouts?

A

About 70% of the time, a breakout of a channel will fail and reverse.

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8
Q

According to the 70% rule, where will the price likely go after a failed breakout?

A

It will likely reverse and go to the opposite side of the channel.

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9
Q

What is the typical timeframe for a failed breakout to reverse, according to the 70% rule?

A

The reversal usually occurs within about five bars.

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10
Q

On which time frame chart should the 70% rule for channel breakouts be applied?

A

It should be applied on the highest time frame chart where the channel is visible.

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11
Q

What is a ‘trading range’ often described as in the context of channels?

A

A trading range is a horizontal or sideways channel.

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12
Q

What are the three components of the typical market cycle described by Al Brooks?

A

The market cycle consists of a breakout, a channel, and a trading range.

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13
Q

A breakout typically accounts for what percentage of bars on a chart?

A

A strong breakout typically accounts for only 5-10% of the bars on a chart.

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14
Q

What is it called when price action extends beyond a channel line before reversing?

A

This is called an overshoot.

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15
Q

What is it called when price action reverses before reaching a channel line?

A

This is called an undershoot.

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16
Q

A channel will evolve into a _____ approximately 75% of the time.

A

trading range

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17
Q

Why does Al Brooks consider every bull channel to be a potential bear flag?

A

Because there is a 75% chance it will eventually have a breakout to the downside.

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18
Q

Why does Al Brooks consider every bear channel to be a potential bull flag?

A

Because most bear channels eventually have a bull breakout.

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19
Q

What happens to the market cycle when a bull channel has a successful bull breakout?

A

The market cycle starts over again with a new breakout phase.

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20
Q

What is a ‘give up bar’ in the context of a channel breakout?

A

It is a large trend bar indicating that one side (bulls or bears) is giving up, strengthening the breakout.

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21
Q

A _____ is a type of channel where the lines converge or get closer together.

A

triangle

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22
Q

What is an expanding triangle in the context of channels?

A

It is a channel where the lines are divergent, or getting further apart.

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23
Q

What is a primary reason for redrawing channel lines?

A

Channel lines are redrawn as new price action provides more information, like new reversals.

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24
Q

What type of highs and lows are preferable for drawing significant channel lines?

A

Traders prefer to use major highs and major lows to draw lines.

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25
What does 'bad symmetry' refer to when identifying three points on a trend line?
It refers to a large difference in the number of bars between points 1-2 and points 2-3.
26
If channel lines are too divergent, why might computers ignore the outer line?
Computers may ignore it because the market is unlikely to ever reach that line.
27
Why are channel lines that are parallel or nearly parallel considered more reliable?
They are more reliable because more computer algorithms will use them, creating support and resistance.
28
What is a 'spike and channel' pattern?
It is a pattern that begins with a strong breakout (spike) followed by a weaker trend (channel).
29
A micro double bottom at the bottom of a channel _____ the probability of a successful reversal up.
increases
30
What does it mean for a market to be in 'breakout mode'?
It means the market is in a trading range or triangle and is close to starting a new trend.
31
A failed breakout below a double bottom is treated as a type of what pattern?
It is treated as a type of wedge bottom.
32
What does bad follow-through after strong bear bars in a bear trend suggest?
It suggests the bear trend is likely a bear leg in what will become a trading range.
33
What is the minimum target for a reversal from a wedge bottom?
The minimum target is two legs moving sideways to up.
34
What is the 'stairs' pattern in a bear channel?
It's when pullbacks go above the prior breakout point, allowing bulls to profit by buying new lows.
35
What does a 'stairs' pattern suggest about the strength of a trend?
It suggests the trend is weakening and will soon evolve into a trading range.
36
What is a nested wedge?
It is a wedge pattern where the third leg of the wedge itself subdivides into a smaller wedge.
37
When a new trend begins, how does it often relate to the end of the prior trend?
The new trend often begins before the prior trend has completely ended.
38
The final pullback in a bull trend can often be the _____ in a new bear trend.
first pullback
39
A wedge bull flag with strong selling pressure often becomes the _____ flag in the bull trend.
final bull
40
What advantage do traders gain by finding patterns on higher time frames and entering on lower time frames?
They can often enter with less risk and at a better price.
41
When is it better to wait for a second signal before shorting a rally?
It's better to wait after a very strong bull breakout, as the first reversal is likely minor.
42
How do trends typically change as they mature and more bars are added?
They tend to become weaker, meaning flatter and broader.
43
What is a 'micro channel'?
It is a breakout with no pullbacks on the current time frame.
44
On a higher time frame chart, what does a tight bull channel typically look like?
It typically looks like a breakout (e.g., one or two large bull bars).
45
What is the recommended trading strategy in a very tight bull channel?
The recommended strategy is to only look to buy.
46
What is a key characteristic of a broad bull channel?
The pullbacks are deep, and the market can even be temporarily 'always in short'.
47
In a broad bull channel, why will bears also look to place trades?
Because the reversals are deep enough for them to make a profit on scalp trades.
48
A broad bull channel often behaves like a _____ that is sloped upward.
trading range
49
What is the recommended trading strategy in a tight bear channel?
The recommended strategy is to only look to sell.
50
How can traders decide if a channel is broad enough for two-sided trading?
If you cannot easily decide, assume it's too tight and only trade in the direction of the trend.
51
The broader and flatter a channel is, the more it resembles a ____.
trading range
52
What do prominent tails and opposite-colored bodies on trend bars indicate in a channel?
They indicate two-sided trading and a weaker trend, characteristic of a broad channel.
53
What is the target for a rally following a spike and channel bear trend?
The target is often the start of the channel phase (the top of the first pullback).
54
What happens to the confidence of bulls as a bull channel progresses?
They become less confident and begin to take profits sooner, often scalping.
55
Most spike and channel patterns have how many pushes before evolving into a trading range?
They typically have three pushes.
56
What is the probability that a trading range in a bull trend will lead to trend resumption up?
The odds are slightly higher for resumption, but approach 50/50 as the range grows.
57
A wedge bottom with a good shape can lead to the start of a new _____ instead of just a trading range.
bull trend
58
What is the minimum objective traders expect after any kind of reversal or breakout?
They expect about 10 bars and two legs (tbtl) of movement.
59
What is the risk of placing a limit order to buy the bottom of a bull channel if the context for a reversal is strong?
The risk is that bulls will give up, leading to a sharp breakout to the downside.
60
A big trend bar against the trend, like a big bear bar in a bull trend, is called a ____ bar.
give up
61
What is a 'second entry short' at the top of a channel?
It is selling after the market has made a second attempt to rally and failed.
62
Most bear trends end with a failed _____ below the bottom of a channel.
breakout
63
When is the biggest trend bar of a move most likely an exhaustive end to the trend?
When it occurs 20 or more bars into the trend.
64
An exhaustive sell climax is most often followed by a _____ rather than an immediate bull trend.
trading range
65
After a reversal from the bottom of a channel, what is the minimum price target?
The minimum target is a test of the top of the channel.
66
What is the probability that a breakout above a wedge top will fail and reverse?
There is a 50% chance the breakout will fail and lead to a reversal down.
67
Does it matter if you call a pattern a broad bear channel or a trading range?
No, because you trade them the same way: buy low, sell high, and scalp.
68
Every trading range contains the early stages of both a _____ and a _____.
bull trend; bear trend
69
Once a trading range lasts for 20 or more bars, what is the probability of a bull vs. bear breakout?
The probability becomes about equal (50/50) for a breakout in either direction.
70
Within a trading range, any reasonable swing setup has about a ____ chance of success.
0.4
71
A failed breakout above the top of a trading range that creates a bear bar is known as a ____.
bull trap
72
What is the effect of having trapped bulls (who missed buying) and trapped bears (who sold too early) after a strong breakout?
Both groups are eager to buy any pullback, often leading to a second leg up.
73
If a bull channel is very flat and horizontal, what is the approximate chance of a bull breakout?
It is closer to 50%, rather than the typical 25% for a steeper channel.
74
What is a 'second leg trap'?
It is a strong second leg of a move that appears to be a breakout but quickly fails and reverses.
75
A bull trend on a 5-minute chart could simply be a _____ on a 60-minute chart.
bear flag
76
A _____ pattern is an old-fashioned reversal pattern that resembles a convergent and then divergent channel.
diamond
77
A breakout on a 5-minute chart could be part of a _____ on a 15-minute chart.
tight channel
78
What is the risk of buying a new low in a tight bear channel?
The risk is high, as the market may not pull back far enough to even exit at breakeven.
79
A Head and Shoulders top pattern is essentially a ____.
trading range
80
What are 'consecutive tops'?
A pattern where the market tries to top (e.g., with a wedge), fails, and then forms another top.
81
The 1987 and 2009 market crashes both bottomed at what technical feature?
They both bottomed at a major bull trend line on a long-term chart.
82
What does the term 'fading' a test of a channel line mean?
It means to trade in the opposite direction of the test, for example, selling a test of the top of a channel.
83
What does a gap at the open after a reversal signal indicate?
It signals eagerness from traders on the side of the reversal and strengthens the move.
84
What is an ioi pattern?
An inside bar, followed by an outside bar, followed by an inside bar (inside-outside-inside).
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