Understanding when breakouts and continuations may occur is essential to trading a trending pattern. The market cycle as indicated by Initial Trend reading on the chart alert (below) will indicate whether a continuation or breakout is more likely, and based on this analysis a trader can prepare for the eventual entry.
There is, however, a period of time after a trending pattern has formed during which the trend strength may suggest that price action will remain within the pattern’s support and resistance.
The Initial Trend reading for the 30-minute chart on the USD/CHF is four bars, which lets us know that this is a distribution cycle; within this type of cycle, prices tend to exhaust at the pattern’s support and resistance lines. What that means here is that the 1.0840 (R) and 1.0930 (S) levels may be faded. (A fade is also known as an Inside the Range because a short-sell is triggered as prices reach the top of the range, while a buy is initiated if prices reach the range’s bottom.)
As long as prices are trading within a distribution cycle on this 30-minute USD/CHF, look for exhaustion at the pattern’s support and resistance, and don’t expect follow-through above the top line of the pattern, nor lower through the bottom line.
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