"The law of action and reactions seems to be a fact that a primary movement in the market will generally have a secondary movement in the opposite direction of at least 3/8 of the primary movements." -- Charles H. Dow
That quote, sometimes referred to as the "reaction principle," captures the rationale behind channel bounce trading. In other words, market movements tend to yo-yo. When a trader is said to "buy a bounce," it means the trader is buying a trading instrument after its price has fallen and reached a support level. The theory is that the support level causes the secondary movement, allowing the trader to profit from the short-term correction. If the trader is able to wait until the price reaches the bottom of a channel, and then enters at the right time, buying a bounce works. There are three major variables that make this difficult, however.
The first is the existence of an actual, determinable support level; otherwise a bear trend continues and provides no secondary opportunity. The other two important variables involve timing. The trader must time the entry point correctly, hoping to avoid the last of the bear momentum and simultaneously capture most of the bull momentum. Lastly, the trader must know when to exit the position. There is no hard and fast rule about how far a bounce carries, and the trader does not want to risk losing profits by holding on too long. For this reason, traders want to use other technical tools to confirm a bounce and time their exit/entry positions. The buy a bounce strategy is considered high risk regardless of the tools involved.