Behaviors of Trends from Beginning to End
Market trends often begin innocuously, emerging from periods of sideways consolidation that frustrate most traders. These consolidation zones typically form after significant directional moves, when market participants expect the prior trend to continue. What follows is a period of failed breakouts in both directions—a volatile stalemate that ultimately resolves into a new trend when conditions are right.
The Psychology of Consolidation
Initially, consolidation zones attract substantial attention. Momentum traders position themselves for the anticipated continuation of the previous trend, creating high volume during early breakout attempts. This action creates a pattern of failed breakouts with diminishing intensity.
Over time, this pattern repeats with decreasing volume. Each successive breakout attempt occurs with progressively lower volume, as traders become frustrated and move on to more promising opportunities.
We can see this in NVDA. After 10x’ing in about a year’s time, it has spent nine months within a trading range, while the volume continues to decline. And it’s still something everyone talks about.
The Paradox of Breakouts
A market cannot truly break out when participants are already positioned for that outcome. The natural resolution requires a shift in market participants:
“When everyone has boarded the train expecting it to leave the station, it remains stationary. Only when passengers give up and disembark does the train finally depart.”
Trading volume drops significantly during this period of disinterest, and options implied volatility often decreases, signaling reduced market attention. It is precisely at this point of disinterest that the market begins its sustained trend.
Not to speak for my business partner Brandon here, but this is a specialty of his as you can see in this chart of DB. After spending 9 years in that sideway stationary market, the train is finally attempting to leave the station, and the folks who were trying to catch this trend in the past haven’t even started to pay attention to it yet.
The Changing Participant Base
When a genuine breakout finally occurs, the participant base has fundamentally changed. The impatient momentum traders have departed, replaced by longer-term participants who are less concerned with immediate price action. These investors provide the foundation for sustained trends.
During successful breakouts, the buying typically comes from institutions and long-term investors rather than speculative traders. These participants are generally unfazed by small pullbacks that might trigger stop losses for many short-term traders.
Breakout Retests and Their Significance
A common characteristic of genuine breakouts is the retest—when price returns to the breakout area after the initial move. This price action shakes out remaining momentum traders before the price ultimately continues in the breakout direction.
Long-term participants who form the foundation of trends are less price-sensitive than momentum traders. This explains why markets can often dip below obvious stop-loss levels during retests, clearing out technical traders before resuming the primary trend.
This is why we can see overshoots outside the range, convincing everyone the breakout is on, only to see the range resume.
EURUSD gives us a good example here.
Volatility-Based Position Sizing: The Strategic Advantage
Here lies a profound insight for traders: as trends develop, the percentage price changes typically increase. This progression demands a different approach to position sizing.
How It Works in Practice
Let’s examine how volatility-based position sizing works conceptually:
- Early Trend Phase: During the initial breakout from consolidation, price movements are small—perhaps 0.5-1% per day. To capture a target profit, a trader would need a larger position size.
- Mid-Trend Phase: As momentum builds and more participants recognize the trend, daily moves increase to 1-2%. Now, a smaller position achieves the same profit target.
- Late Trend Phase: By the time the trend enters its final, parabolic phase with 5-10% daily moves, a fraction of the original position size might generate the same profit.
The Strategic Advantage
Volatility-adjusted position sizing offers several key advantages:
- Risk Management: Fixed position sizing leads to dramatically higher risk exposure during later trend phases. The equity curve becomes increasingly volatile—potentially catastrophic if a reversal occurs.
- Consistent Returns: By adjusting position size inversely to volatility, traders can target consistent dollar returns throughout the entire trend cycle.
- Longevity Indicator: When a trader finds themselves using minimal position sizes to achieve target returns, it signals the potential end of a trend as volatility has reached extreme levels.
The Cycle Completes: Master It or Be Mastered By It
When your position size shrinks to almost nothing yet still delivers your target profit—brace yourself. This isn’t just a mathematical curiosity—it’s the market screaming that the trend is nearing exhaustion. The parabolic volatility that made tiny positions profitable now attracts momentum traders in droves, setting the stage for the inevitable collapse and consolidation.
This isn’t just theory—it’s the relentless rhythm of markets that has crushed amateurs and enriched professionals for centuries. The traders who survive don’t just ride waves; they anticipate the tides.
Looking at this chart of Apple, as the prices peak you can see that the ATR (Average True Range) is spiking similarly.
Volatility-based position sizing isn’t merely a risk management technique—it’s your early warning system. While others are celebrating their windfall profits with maximum exposure, you’re already scaling back, protecting your capital from the coming storm. While they’re nursing catastrophic drawdowns, you’re preserving firepower for the next opportunity.
Think about it: Would you rather make 100% returns but suffer 65% drawdowns that might break you mentally, or make “only” 40% with manageable 12% drawdowns that let you sleep at night and stay in the game?
The market will complete its cycle with or without you. The only question is whether you’ll be the predator or the prey. Transform volatility from your enemy into your ally, and you’ll not only survive—you’ll thrive through every phase of the market’s eternal cycle.
If you are interested in the strategies that I use.
Swing Beast Momentum System
Curvy Mean Reversion System
Crypto Momentum System
And you can work with me on building out your trading business in the Trading Thunderdome
Until then, stay disciplined.
