Introduction: Three Approaches to Tracking Market Moves
Market participants often look for ways to track price moves without simply chasing breakouts. The study notes describe three pattern-based schemes for doing so: the failed test, the extreme reversal or exhaustion pattern, and the pullback pattern. Each scheme is built on observations of how markets behave around previous highs, lows, and trend days. The failed test focuses on attempts to exceed a prior extreme that ultimately fail, creating false breakout points. The exhaustion pattern looks for additional signs that a move has reached its limit, often through gap behavior. The pullback pattern waits for a retracement within a larger trend and enters when the trend resumes. None of these schemes is presented as a guaranteed method. The notes repeatedly stress that they are only a small part of a complete trading plan. They can provide useful context and potential entry or exit signals, but they must be combined with risk management and other forms of analysis. The underlying principle across all three is that markets often test extremes before reversing or continuing, and that these tests can be observed and used to structure trades. This article explains the logic, statistical observations, conditions, failure scenarios, and common misuses of each scheme. It is intended for educational purposes only and does not constitute investment advice.
The "Failed Test" Pattern: Testing Previous Highs and Lows
A failed test occurs when the market attempts to move beyond a previous high or low but fails to hold that level, then reverses. The study notes explain that after a specific high or low is established, many interesting patterns emerge. These tests work as signals partly because they are widely used by traders as entry points. When a market appears to break out to a new high or low, it attracts attention from breakout traders. If the breakout fails, those traders may be forced to exit, which can fuel a reversal. The logic behind using failed tests as entry signals is to design trades around these fictitious breakout points. One high-probability observation is that when the market closes at the high of its trading range, it tends to open higher the next day with a probability of about 70% to 80%. The same applies in reverse for closes at the low. This observation can be used as part of an exit strategy or as a test scheme. However, the notes caution that these signals are not highly reliable on their own. A failed test is simply a pattern that may offer a slight edge when combined with other factors. Another key observation is that although the market often opens in the same direction as the previous close, it closes in that direction much less frequently. If the previous day was a trend day—opening at one extreme and closing at the other—the probability of a reversal increases. This can form the basis of a test pattern that requires only a reversal signal.
