Let's have a look at the Key High-Low Reversal Pattern: A market is said to top when it makes a higher high and a higher low but closes down for the day or week. At a bottom, it makes a lower low and a lower high but closes up. 
But does this "Textbook" Reversal Pattern actually work?
Most technical analysis books describe this as a "classic reversal pattern." But when you examine actual charts, it doesn't consistently work that way.
This can be in fact a dangerous pattern to rely on.
Major tops and bottoms rarely produce a key reversal. Instead, markets often top by closing near the high and bottom by closing near the low. Key reversal signals are relatively rare, and many fail. So be careful with them. What happens after the reversal may be more useful, particularly when the reversal fails. So, what does work?
Small ranges often precede large, explosive moves.
Markets tend to cycle from small ranges to large ranges. When we see a series of small ranges, we know that a significant move may be developing. The important point is that small ranges tell us something is coming, but not necessarily which direction.
What are we waiting for? Small ranges.
The Average True Range (ATR) provides a useful way to identify small and large ranges. When the ATR is low, the market is often preparing for an explosive move. We don't know whether that move will be up or down, but we know volatility may be about to expand. Conversely, very high ranges often occur near market lows. Markets frequently decline on larger ranges and rally on smaller ranges.
Markets tend to decline on larger ranges and rally on smaller ranges.
Very low ranges can signal that an explosive move is approaching, while very high ranges can occur near selling extremes.
Small ranges therefore provide a useful setup, not a complete trading signal. You still need to consider trend, overbought/oversold conditions, and other indicators to determine direction. This requires patience. Most short-term traders struggle to wait for the right conditions. Jesse Livermore put it well: "There are times to speculate and times not to speculate." Short-term traders often want to trade constantly, but patience is essential. As Livermore said, "I permitted impatience to outmaneuver good judgment." Think of trading like a card game: you have to wait for the right cards.
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