Forex Price Action Scalping

I – Trading Currencies
It has never been so easy to trade nowadays, but, as straightforward as this may sound, behind the curtains of online
currency trading hides an immensely complicated network of banks, organizations, investment corporations, hedge
funds, etc., all doing business together.
The foreign exchange is in no way similar to the average stock market or futures pit where all shares and contracts are
traded orderly in one place; it is literally a melting pot of over a million participants, big and small, scattered all over
the globe.
The small trader needs to understand that he will be up against some of the mightiest opponents in the business. To
level the playing field to an acceptable degree, he has to operate under conditions that will not put him at an
immediate disadvantage. That means he has to find himself a broker that deals him fair prices.
 Freezing platforms, widened spread, failed executions, terrible fills, requotes, hostile helpdesks, funds
gone missing, etc., etc.
While it could be not so much of a problem for swing and day traders, it can be catastrophic for a scalper.
Using a retail broker means you are not connected to the real volume of the market. The platforms are essentially
copycats, mimicking the actions created by the professional currency traders. This is not necessarily a bad way to trade,
though, particularly when still operating on the smaller scale, as long as the orders are filled smoothly and correctly.
Spread being a heavy toll on any scalper’s daily business, the methods that will follow will focus on the one pair that
should be able to meet all the necessary requirements of a tradable instrument: the immensely popular eur/usd
contract. In terms of quotation, intraday opportunities and repetitive characteristics, this pair simply has no equal.
However, any scalper should not trade this pair if the platform does not provide a spread less than 1 pip (IG: between
0.6-1.2)
New traders have to check each and every platform to decide which one ties in with his expectations, checking the
spread throughout many days, paying attention to the interface, etc. etc.

II – The Tick Chart

The crucial factor to consider when choosing a market, apart from the mandatory tight spread, is the way an
instrument behaves price technically on the chart.
Within his frame of choice, the scalper needs to see the typical characteristics of a tradable market: an acceptable
number of intraday moves, repetition in behavioral patterns, buildup before breaks, pullbacks, breakouts, trends,
ranges, and the like.
Not too many currency pairs will match these. The eur/usd pair does not fail to oblige.
With an average daily range of close to a 150 pip, the intraday moves on the chart are highly exploitable from the long
as well as the short side, and there appear to be plenty of opportunities in almost any session.
But even if the market provides everything one can need, developing a strategy on a technical chart is one thing, taking
that strategy to the market is quite another.
There is a lot more to it than initially meets the eye, and all aspects of it demand equal attention.
The beating heart of any scalping operation is the technical chart. All a scalper ever need in terms of information can
be found within a single graph. Since there is little sense in trading intraday movements on fundamental vision, an
aspiring scalper has no option but to get acquainted with all the specifics of price action charting.
But the question is, what chart should he look at? The time frames to choose from are practically limitless, and surely
there are pros and cons to each of them.
Although all charts monitor the everlasting battle between supply and demand, each frame will also have its own
individual pulse. This can be measured by the length of the average moves, the buildup of pressures leading up to the
breaks, the presence of tradable patterns, and even by the way most classic tricks and traps will play themselves out.
Once a trader decides on his chart, it is crucial to commit to it, to study it inside out, to learn how it breaths, moves,
and dances, to understand its beat.
A great chart to explore is the 70-tick, but, if the tick count in all of our charts was set to 65 or 75, it would not change
much, not altering the patterns, nor their tradability.
A calm market will show most of the bars in the range of 2 to 4 pips, a vivid trend may easily exceed that, but usually
not for long. A good trick is to set the tick number to a level that resembles a regular 30-sec time frame (this depends
of the platform, as I am using prorealtime, same as in the books, the 70-tick chart is good).
Tick charts possess a distinctive advantage over time charts, primarily because the patterns in them are more compact
in shape, which makes them somewhat easier to identify. When trading is slow, a tick chart will not print that many
useless bars that flatten out the chart, and take up unnecessary space; when trading is fast, it gives on all the more to
work with.
The 70-ticks setting is not a magical number, nor is it the best chart settings you will ever come across. Because such
a setting does not exist.
What we need is a chart from which to time our trades with sniper precision. In that respect, the 70 tick captures the
scalping beat of the eur/usd pair with remarkable accuracy.
In many instances, the prices move may seem rather chaotic, complex, or highly diverse, but to an observant eye, the
actual variables are quite limited.
In the end, there are only so many moves choreographically possible before repetition sets in. It is this repetitive
tendency of price behavior that we must try to anticipate in order to cleverly time our way into the market, or to find
our way out.
The 70-tick mode is a fast chart, but not so fast as to be completely disconnected from the more classic time frames
used by plenty of others in the field. This is essential because we need those other players to come in after us to bring
our trades to target. Basically, a clever scalper wants the majority of other trades to see the same thing, ride the
same trends, catch the same pullbacks, and trade the same breaks; he just wants to beat them to it. To be faster.
Apart from a single moving average, there will be no indicators messing up the screen. There is no need-to-know
yesterday’s high or low, whether the market is in an up or downtrend on a bigger frame, or if it is running into some
kind of major support or resistance level from the day before. In fact, in most instances, it is totally irrelevant what
happened a few hours back.
A chart that shows about one and a half hour of price bars in one go should definitely suffice. The more information a
scalper tries to cram into his chart, the more all this data will start to conflict. In order not to freeze up in the line of
duty, it is best to not complicate the decision-making process, but rather to simplify it.
As for the technical side of our entries, there will only be seven individual setups to get acquainted with. These patterns
form the core of the scalping method about to be presented. Each setup will be discussed in full detail, along with
many examples taken from actual market activity.
Entries and exits of trades will be pointed out precisely to the pip.
All of these entry patterns will have both a bullish and a bearish version, and serve to set up either a long or a short
trade.
Trend, countertrend, ranges, everything can be traded. When the objective is only a quick scalp, why discriminate.
Allowing oneself the freedom to trade anything at any time, that is the prerogative of scalping.
III – Scalping as a Business
No matter how many years a trader has been active in the markets, the undeniable marvel of a price pattern coming
to fruition will never cease to amaze the technical eye. One might think that the hundreds of books on crowd sentiment
and technical analysis over the years would have fully destroyed the tradability of price action patterns, but nothing
could be further from the truth.
The price moves are solely the result of traders with opposing opinions fighting it out in the marketplace.
There are only 2 groups to distinguish: the bulls, thinking the market will go up, the bears, thinking the market will go
down. It is irrelevant whether they are in it for a short ride or a long ride.
The only thing that truly moves prices is their actual buying and selling of contracts at the present moment. If one
group is more aggressive, price will travel in their favor.
It is widely believed that the activity in the chart is sending out clear signals as to who is currently toppling who in the
market: there would be little point in technical trading if that was not the case.
But that leaves us with a rather interesting question: if all these moves and patterns are so well-documented, and
their applications unambiguous, why is it so hard to succeed in the trading game?
We can safely state that at the core of a typical trader’s misery lies a very simple fact that is often overlooked:
The typical trader does not look upon his trading as a business. As a consequence, he approaches the market without
a sound business plan.
 Classic and very common mistake.
Somehow, this is very specific to the markets. In any other field, a sloppy attitude towards one’s own profession will
quickly stand corrected.
Banks will not grant credit without seeing a proper business plan; partners will not hook up when confronted with a
flaky organization, if one carries a flimsy product, customers will soon play judge & jury.
Yet, when it comes to trading, the freedom is overwhelming, the anonymity complete. A trader could simply decide
not to take any responsibility at all, to hide himself completely in a make-believe world, to deviate at whim from
whatever rules he laid out for himself, and not give it a moment’s thought. He has no customers to satisfy, no partners
to answer to, no banks to please.
As long as there are still funds left to trade, it is just so easy to entertain the illusion that things will turn around,
that good times will come and that eventually the inevitable profits will come falling from the sky.
 A trader should consider himself fortunate to recognize this absence of structure, and the self-foolery it
brings about, before his funds run out.
Interviews with top traders have discovered that even these widely acclaimed masters had to learn many of their
valuable lessons the hard way, and not having a proper plan was usually one of them.
But what is a proper plan? Is it a bunch of rules that one should never break? A rigid formula to abide by?
 What works well for someone may prove detrimental to another. There is no final answer.
However, what they all have in common, is that they take their trading very seriously.
They acquired the mindset of a regular business entrepreneur. They have invested in education, know their field well
and do not indulge in unrealistic expectations. They understand the long-term aspect of their enterprise, hence they
seldom get caught in the heat of the moment.
They fully understand the cost of doing business and accept the losses that come with the job.
They will not walk around with a checklist of dos and don’ts, nor will they be constantly anxious about their capital at
work, or feel the need to check their bank accounts to see if they are up or down on the day.
They will remain calm, focused, and will always have the bigger scheme of things in mind. They operate from a
structured frame.
They are businessman.
Do not be the fearless-minded ignorant that will rush to the markets with barely any education.
The single most important factor contributing to either success or failure in the markets is a trader’s ability to
distinguish fiction from reality.
If you are trapped in your own mind, then you are doomed.
That is actually the most difficult part, as even people who are fully competent and rational in other fields and
vocations, when thrust into the markets, they are just as prone to emotional folly, false perception, and irrational
behavior, as any ordinary fool. Such is the treacherous nature of speculation.
When exposed to the markets, all previous images of the self can crumble in a very short space of time.
In a way, this process of self-destruction can be very beneficial. It is even argued that in order to ever reach the desired
rationale of master, a trader first has to pay the obligatory visit to the very depths of desperation and emotional
despondency.
If strong enough to survive and rise from the ashes of the self, he can then reinvent himself, and emerge as a trader
who looks upon the profession in a completely different light.
At some point, most traders will have to deal with it, and it may not be pretty, nor will it be pleasurable. One can
deeply question all he knew, and wonder if he is cut out for the job.
It is all part and parcel of the wondrous business that ban bring such generous rewards and misery alike.

IV – Target, Stop & Orders

What possibilities can be expected within a single scalping day? Many, new to the ways of the faster chart, will be
anxious to know what kind of profits can be attained.
The answer to that is very straightforward; in scalping, is it foolhardy to expect anything. So, we best not go that route.
Similarly, it would be silly to think one can simply switch one’s trading platform in the morning and start scalping away.
At all times, the price action in the chart needs to align itself in a favorable way before we can even begin to think of
trading a particular setup.
This holds up for any chart, regardless of time frame or instrument. On a 70-tick, it may take minutes, or hours, for
something to set itself up. To a smart scalper, it is all the same, because he has no need for a trade. He will be able to
idly watch the market from the sidelines, for hours on end, if need be, and be totally okay with that. At other times,
he will fire off his trades in quick succession, exploiting every possible opportunity a favorable market may present.
On balance, the 70-tick will offer numerous opportunities throughout the day. This tick frame is carefully chosen, and
it can serve a trader excellently in trending conditions as well as in slow and ranging ones.
When planning a trader, however, it is of crucial significance to opt for a reasonable profit target that should be
obtainable within the length of a typical move. Also, to not have the mandatory 1 pip spread weigh too heavily on our
trades, we have to choose a minimum target that sufficiently offsets these costs without compromising the likelihood
of it being reached.
We also have to take our protective stop into consideration. Preferably, we will like to see it set as close to the entry
as possible, but not so close as to run a risk of constantly getting hit before our position has time to prosper.
Obviously, these are matters to consider before delving into the heat of the market, and they are best taken up as a
rigid part of the method that is not to be tampered with. To neutralize the ever-present demons of fear and greed, it
makes sense to prefer hard targets over adjustable ones. Many trading strategies are designed around the latter,
though.
The objective is to reap as much as possible from a favorable market.
And this may present a trader with the occasional huge winner. But as a scalper, the strategies are not geared towards
catching the occasional huge winner, rather than reaping small profits from the market on a regularly basis
throughout the day.
In any case, our setting should not just reflect our personal desires; they have to comply with what is technically
obtainable, within the span of a typical price move on our 70-tick chart.
The following settings have proven their value over time and they are used in all of the examples discussed in this
scalping method without exception.
The target on each trade is a non-adjustable one and set to 10 pips of profit. Likewise, the stop is also set at a 10 pips
distance from entry, but it is adjustable in the direction of the target only; either to close out a losing trade with
minimal damage, or to close out a profitable trade that has lost its validity and needs to be scratched.
 Careful with the 10 pips TP, maybe start with 5/5.
This will however not prevent a scalper from getting fully stopped out on occasion, nor will it prevent him from exiting
a trade that would have been a winner had he not hit the close-out button. Regardless of these outcomes, there is a
fine technique that could be applied to help a trader decide on the proper course of action (-> see money management
chapter).
Author note: Start out very conservatively until one slowly starts to come out ahead. In the Account management
section, we will look into the matter of volume in more detail, and in particular on how to build up it up in stepwise
fashion to effectively run up an account.
 It is better to aim for 10 pips, pocket it, re-enter, and pocket another 10 pips, and do it again to get maybe
30/40 pips out of a 60 pips move, than to risk everything by not closing once 10 pips are reached.
Even if the market goes for days without direction, it is still very likely to produce countless scalping opportunities.
Since scalping requires split second execution, it is better to keep things simple, and only use orders that will be
executed either automatically by the platform, or manually in one-click mode.
This means you have to set your take profit and stop loss before, so you know beforehand that it represents the right
amount of volume and distance from entry.
On the entry side, we will only make use of the market order type. There is no fumbling around with limit orders in
the scalping game. If we want in, we simply click the buy or sell button the moment the market hits our chosen level
of entry.
Since we already decided on a 10-pip target and a 10 pip stop, it makes sense to have the platform send out these
orders automatically the moment we take position.
Using the bracket order option (= entry position + SL/TP automatically set up), and then let the market cast its verdict
on the trade is a pretty relaxing way of managing an open position, but it may not represent the most effective
approach. Arguably, a better way to go about it is to follow the price action attentively from the moment of entry and
look for technical clues in the chart that could possibly negate a trade’s validity status. Of course, this level to get out
will be determined on technical grounds.
This is where our tipping point technique comes in.
At all times, we should strive to send our orders in one-click fashion. In doing so, inexperienced traders may
occasionally slip up by hitting an order to exit not in the opposite direction, but accidentally in that of the original
position. Instead of flattening out, that will leave them with a double open position. It happens.
NB: It is always better to have only one screen to look at, with only the price and a close/entry button. That way, it
hides all other information from view. Once in position, all we have to monitor is how the market responds after our
entry.
We have no need to know the status of our account, nor the current loss or profit on the running trade.
That kind of information is not only useless, it may affect the decision-making process in a non-desirable manner (fear,
or greed may kick in).
It is vital to realize that mental stability, more than technical skill, is the most important ingredient in the process of
doing what needs to be done. The more we create ourselves an environment that protects us from harmful distraction,
the more we will be able to focus on the chart and diligently execute our plan.
V – The Probability Principle
This particular scalping method takes a very minimalistic approach to chart reading and shies away from anything that
might clutter up the screen and distract a trader from concentrating on the sole thing that truly matters, which, of
course, is price.
In fact, apart from a single EMA20, there is nothing on the screen but price.
 It might feel strangely bereft not having any indicators and other lines all over the chart.
May it be suggested to give up that fight. It is a losing proposition and will only add confusion and doubt to one’s
trading. What is more, depending on indicators might keep a scalper out of perfectly healthy trades, or suck him into
the market at precisely the wrong time.
When it gets to pulling the trigger, no algorithm code could ever compete with sound observation.
The best way to look at a live price chart is as if it were a non-moving snapshot. Forget the next coming candles for a
moment and loot at what is already there. What does it tell us? Do we see higher highs, lower lows? Are levels being
defended? Are prices contained in a narrow range? Are they swinging wildly? It is not that hard to do. Barring the
occasional erratic mishmash, the market, one way or another, usually tips its hand quite transparently.
But it will not hold up a sign saying when you buy or sell. That is why he have to scrape all available pieces of
information together before we can even begin to think of taking a trade.
Strangely enough, most amateur traders tend to do exactly the opposite. They appear to have little regard for the
overall picture and seem to concentrate mainly on their beloved setups. And it shows up in the chart.
We may never be able to tell what drives other traders to do what they do at any given moment, but it is obvious,
just by looking at the terrible spots that get traded every day, that plenty of traders have very little clue themselves.
The point to grasp is that we have to have a very good reason to step into the market and put capital at risk. We
cannot just go around firing off trades and hope for the best. Hope, as well as greed and fear, is the worst enemy you
could have.
In order to really feel confident about what we are doing, we have to find an edge in our trading, a tiny technical
advantage that puts the odds in favor of our trades.
This magical edge being the most sought-after element in the game of clever speculation.
We could say it is a trader’s equivalent of the philosopher’s stone. Possess the edge, and you may be able to turn lead
in to gold?
And quite like our ancient alchemists, in an almost universal desperation to find it, most traders are looking for it in
all the wrong places.
Try as they may, they will not find their edge in a box full of indicators. All the money in the world could not buy it on
the internet. A trader will not stumble upon it in a stroke of good fortune. Simply because this edge is not a thing that
can surface by itself. It can only be obtained through the blood, sweat, and tears, of committing oneself to countless
hours of studying markets, patterns, setups, and price action principles.
Bear in mind, though, that no edge will ever make a trader beat the market. For the market is not a beatable object.
A trader can only strive to beat those in it less proficient than himself.
Hence the value of proper education. The true edge in the market, it is safe to say, is simply one’s ability to recognize
and exploit the incompetence of others.
Even so, it is important no understand that trading is very much a probability play.
It is not a game of win or lose. The objective is not to score a winning trade, or to beat another trader.
In fact, the outcome of any one trade is totally irrelevant. At all times, the clever scalper should have the bigger scheme
of things in mind. Detaching oneself from the need to reap profits from each and every trade has enormous benefits.
For example, if one truly understands the principle of probability play there can be no agony in temporary adversity.
If a trader executes his method correctly and consistently, all results, good and bad, only reflect the typical variance
to be expected in a random distribution of outcomes.
The good part is that even a marginal edge will eventually prove its value. Or it would not be an edge. This is an
essential concept to grasp.
It is foolish to be upset after a losing trade, or to feel euphoria after a winning one.
So, more than aiming for profit, the objective should be to do what needs to be done. If so, then the edge in one’s play
will take care of the rest. Diligently executing a particular method is the only way to fully exploit probability in the
market. Accepting whatever outcome the market has in store is all part of it.
It is quite amazing how little this approach is practiced.
Most people will try to predict where goes the market. But there really is no point in that.
A clever trader is more an observer then a participant. Regardless of circumstance, he will remain neutral and
observant, paying equal attention to the forces that oppose his potential trade as to those in favor of it.
He will show no preference for direction, nor will he try to predict the next coming move.
At times, he may take a conservative stance; at other times, he will show more aggression. It is all up to the scalper.
But whatever he does, he will make sure it is in accordance with his personal method or else he will not put his capital
at risk.
A tiny little edge can go a long way; it could even run up the smallest account to any desirable height. But it will only
serve those who understand the concept of probability and the long-term aspect of it.
VI – The Setups
Scalping a market profitably requires a very disciplined mindset and a carefully chosen array of trade setups that allow
for a minimum of freehand interpretation. Even the novice trader will quickly understand that simply shooting from
the hip is the fastest way to blow up an account.
The problem lies in the misleading assumption that a trading plan is in place when in fact there is no such thing as
a solid plan at all.
This can be a painful basis to trade from, and it is not uncommon for even the promising trader to be fully unaware of
it. Especially when there are some successes along the way, a trader may be let to believe that he is doing everything
right, even though his results keep lagging far behind the potential of the strategy at hand.
More often than not, this will bring all sorts of negative emotions into play, such as frustration, anger, agony,
vengeance, fear – ultimately pushing the baffled trader only further downhill.
When it comes to trading, misinterpretation of the notorious rut is not exactly atypical and often leads to an erroneous
revision of the original plan, if not a total distrust towards the setups used.
And so, the dire quest for the holy grail can start all over again.
However, despite what plan is chosen, there a number of questions that need to be thoroughly addressed before any
plan could pass the viability test: Are the setups well defined? What are the conditions to step in? The ones to step
out? What are the objectives? When is a running trade no longer valid? How to exit? What is the maximum stop-loss?
When it looks the same, but slightly different, can it be traded? How to handle slippage? When to scratch a new trade?
How to handle a new setup when already in position?
As already stated, a trading plan, by itself, is not a checklist of dos and don’ts. That kind of rigidity will only serve to
stifle a trader in a field of work where he may need to be flexible more than stiff-minded and apply logic more than
rules. For the market itself is never rigid and no situation will ever present itself exactly as it has done in the past.
Arguably, the best way to obtain an understanding of what scalping is about is to dive into the waters and learn to
swim with the sharks.
Yet very few will survive the audition.
Fortunately, there is a much healthier way that is almost just as effective, which is to rehearse every imaginable
situation beforehand by studying countless examples of setups, trades, half-trades, missed trades, re-entered trades,
and basically anything that might occur in the line of duty. The coming chapters of this book will have that mission in
mind and hopefully provide most of the answers to the question above.
Next chapters are dedicated to identify the seven setups. But it is important to understand that the setups by
themselves have very little meaning. They are just tolls to get us into the market.
Our first aim is to assess the overall price action in terms of possible future direction.
Only when the current forces in play put pressure on prices more on way than another can we begin to consider
deploying our entry techniques. In a later stage we will discuss when and why to forgo even the best-looking setups
on account of unfavorable conditions.
Every setup has its own set of characteristics although some of them can appear rather similar in structure. It is not
uncommon for a setup, at a particular moment in time, to contain all the making of another. Some setups perform
extremely well in trending price action, while others set themselves up to exploit the many ranging phases of the
market.
Most of the setups will appear several times during the day, yet the conditions under which to trade them may not
always be optimal. Furthermore, not every taken trade will lead to the desired 10-pips target.
To identify these setups, all of them are named according to their main characteristic and each will have a chapter of
its own.
The setups are:
 1 – DD: Double Doji Break
 2 – FB: First Break
 3 – SB: Second Break
 4 – BB: Block Break
 5 – RB: Range Break
 6 – IRB: Inside Range Break
 7 – ARB: Advanced Range Break
All of these setups, one way or another, revolve around the EMA20. This widely followed indicator plots the average
closing price of the last 20 candles, giving the present closing prices somewhat more weight than the earlier ones.
(Pick one from 15 to 25, it does not change much.)
Note that, if it is slopping up = long only. If it is slopping down, then it is the other way around. In topping/bottoming
markets or heavy chart resistance, when prices cannot seem to make further advances, a trader should look to go
short/long but still have an open mind towards going long/short.
When the average is not trending but more waving sideways, with prices not staying on one side of the average but
alternating above and below it, it acts as a warning sign to be more selective in picking trades, as the market has
entered a very indecisive phase that needs to be cleared up first.
Bear in mind that this EMA20 should always act as a guide, and not as a rule. Sometimes, you even may have to
disregard it.
The Double Doji (DD), the First Break (FB), and the Second Break (SB), are typical with-trend setups, meaning that
they deliver their best results when originating from a pullback situation in a strong visible trend (pullback = trend
taking a breather by allowing prices to go against it, ultimately short-lived if the trend is strong and healthy).
The Block Break (BB) is seen in all markets, trending, ranging, topping, and bottoming.
The Range Break (RB), Inside Range Break (IRB), and Advanced Range Break (ARB), are setups that appear in sideways,
topping & bottoming markets.
Range information could also appear in trending markets, but since these consolidations, by nature, are somewhat
extended, it is best to look at them as standalone patterns, and trade them without too much regard for the current
trade.
When it comes to the difference between a patten and a setup, both terms can be used interchangeably, for a setup
is always a pattern, even if it contains only one bar. But technically, the term pattern is mostly used for a somewhat
larger formation, or a number of bars, in which a smaller formation the setup, can appear.
Despite any terminology, trading is, first and foremost, a visual endeavor.
VII – Double Doji Break (DD)
The Double Doji Break (DD) is the most straightforward setup in the method and is just as easy to identify as it is to
trade.
A doji marks a market indecision. But when the chart prints another doji next to the first, the temporary indecision
obviously builds up. In most instances, however, a brief stalling of prices bears little significance; but when two or
more dojis appear in what might be the end of a pullback to a nice trend, somewhere in the ema20 zone, a trader
better place his finger on the trigger and get ready to trade.
Once princes have retraced about 40 to 60% of the most recent swing (due to the activity of countertrend traders),
the original trend stands a good chance to resume. It is fair to imagine that a large number of traders who missed out
on the move will not let this opportunity escape.
Grateful for the more attractive levels to trade from, they will fire their with-trend orders the moment they sense the
pullback to peter out. This is a well-trodden strategy, and a clever one at that. After all, more attractive levels not only
reduce the potential loss, a trader also stands to reap more profit from the trend should it indeed continue on its
march.
Still, it can be a tricky proposition to decide when exactly to step in.
In the scenario of a waning pullback, countertrend traders, that are in position, face an important decision of their
own: either book their profits and get out of the way, or hold on still, in anticipation of more countertrend activity, or,
who knows, even a complete failure of the trend.
It is impossible to predict whether a pullback is just a harmless little countertrend, or the beginning of a new trend in
the opposite direction.
But that is essentially irrelevant. In a probability play, we have no need for guarantees. We just trade probability.
And trading a pullback situation in the area of the ema20 is simply one of the better ways to enter the market with-
trend on any chart.
However, we do have to assess the validity of the trend itself.
A firm trend on a 70-tick chart is characterized by having the majority of bars close in the trend’s direction, while at
the same time, these bars, on average, are a few pips taller than the overall bar in a non-trending market phase. We
could say that trending bars look somewhat more aggressive than non-trending one.
In all its simplicity, the DD setup is a powerful tool to capitalize on a continuation of a trend and in most instances,
it is best acted on without second thoughts.
The trend itself does not necessarily have to be overly explicit for this setup to prove its value, in fact, it could even be
a newborn trend, a fresh move that just broke out of a sideways consolidation phase.
An important requirement, though, is that prices, from the moment of entry, have to have a clear path ahead of
them, at least on the chart at hand.
Therefore, the DD trade should only be taken in the absence of immediate chart resistance, meaning the path to the
10 pips target should not be blocked by visible clustering price action not far to the left of the setup.
Not uncommonly, it is the pullback itself that obstructs the path to target. The pullback, when deemed harmless, is
ideally running diagonally against the trend and pretty much 1-directional. When it presents itself as a block of
clustering and sideways trailing price bars, it could seriously cut short a future advance or decline of the previous trend.
The dojis in this setup do not have to be dojis in the absolute sense. Small candles, usually no more than 3 pip in length,
are best considered to express similar indecision as any regular doji and therefore can also serve as valid candles in
this particular pattern.
The more compressed the doji bars are compared to the overall price action, and in particular to that of the trend,
the better the market’s current indecision is displayed within the DD setup. In contrast, the smaller the average bar
in the trend, the less the DD setup, with similar small bars, will stand out among the rest.
It is not uncommon, in these cases, for the market to show a rather subdued reaction to the break of the DD pattern
(if at all).
In all instances, a trader has to call on his personal experience to determine whether the current technical conditions
are supportive enough to engage in a particular setup play. In other words, due to circumstance, he may have to skip
what appears to be a solid setup on its own. For now, though, it is best not to worry too much about the subtleties
of skipping or trading trades, as it will be covered in chapter 15.
In general, most setups will show up under conditions that will not put much strain on the decision-making process.
We either trade the setup or we just skip it.
Note: Although we should basically strive to scalp the chart like we would in the safety of a solid backtest, obtaining
similar results in the actual market will be extremely difficult, if not completely impossible to achieve. Therefore, as
much as even a thin edge theoretically should hold up over time, it may not do so when taken into account all the
situations that could affect its potential. This is the main reason why so many strategies that show excellent
performance records derived from historical testing simply fail to deliver when taken to the real market. Because they
do not incorporate the disruptive effect of the human hand.
The solution: refraining from strategies that show a marginal edge under idea circumstances. It is not the strategy
itself that should be distrusted, though, just the crippling effect of those at helm of it (ourselves included).
Ideally, all bars in a DD setup show equal extremes on the trend-side (the side from which the break is to be traded),
but more often than not, that is just not the case. For this reason, the most important candle to watch in the DD setup
is the one with the highest high – for possible long trades – or the one with the lowest low – for possible shorts. The
position of this bar in the doji group is irrelevant; its extreme on the trend-side, on the other hand, is crucial.
This bar is called the signal bar. When dealing with a setup in the making, the signal bar is the one to watch most
attentively. The moment its trend-side extreme gets taken out by another bar; we have got ourselves a signal to
trade. The bar that takes out the high, or low, of this signal bar is called the entry bar.
Obviously, this is the bar in which to take position. This terminology holds up in all of our other setups as well.
One more distinction can be made regarding the tradability of the pattern. When the setup is currently showing 2 dojis
that have their trend-side extremes more than one pip apart, the pattern has to be judged in relation to the trend
before it to see if it is still eligible as a tradable event.
In case of a rather weak trend, for instance, it may be wise to skip the DD trade altogether when the extremes are
more than one, but certainly more than 2 pip apart. In a very strong trend, on the other hand, it may pay off to be less
conservative and just trade the pattern on a break of the extreme (-> All this will be clarified in the upcoming examples).
Before we get to the charts, let us walk through a DD setup example and see how it is best approached in the situation
of a possible upside break: Once the uptrend has been identified, either well on its way or just starting out, it is simply
a matter of waiting for a pullback to emerge. The ema20 should now be sloping up with most bars traveling above it.
At some point, the trend may lose a bit of steam and a number of bars will start to travel in the opposite direction,
towards the average that is. Not long after, average and price may collide.
Since the trend is up, this pullback is widely considered to be a temporary event and so a lot of scalpers will be watching
the possible low of it attentively. It would be silly to just fire a long order on account of prices reaching the ema20.
It is better to watch out for some sort of sign that prices may be about to reverse.
Watching a bar pierce the average to the downside, for instance, only to see it quickly close above it again, is a pretty
good starting point.
In case the current bottom of the pullback is represented by 2 or more neighboring dojis, more or less resting on the
ema20 (their tails preferably dipping below it), a scalper calmly waits for a new bar to take out the highest high of the
doji group.
By definition, the high of any signal bar is taken out when the current price bar in the chart hoes exactly one pip above
it.
Upon seeing the signal bar being taken out by another bar (the entry bar), the scalper immediately enters long at the
market.
In the event of a downtrend, and a potential short position, all of the above is simply reversed: once the inevitable
pullback emerges and prices arrive at the now down-sloping ema20, the alert scalper will start to monitor the price
action with close scrutiny, comfortably knowing that a number of setups are at his disposal to trade this market from
the short side. Once he spots two or more dojis colliding with the average, or around it, and then another bar that
takes out the lowest low of the pack, he knows he is dealing with a DD break and he will fire an order to sell an already
predefined number of units at that sport.
This sell order, when set properly, will be instantly bracketed by a 10 pips stop above the entry price and a 10 pips
target below it.
It is important to understand that the highly regarded ema20 is just a tweaked moving average of the last 20 closing
prices and does not in any way offer support or resistance to the market on account of its presence. It does point out
a dynamic visual level of where prices tend to stall when countering a particular trend. But that, most probably, has
more to do with the seesaw characteristics of the market than with the average itself. Quite similar to the two-step-
forward-one-step-back principle. This ema20 just so happens to catch the bulk of the pullbacks quite well. On any
chart.
Hence its practical usefulness. Admittedly, there may be a strong self-fulfilling prophecy aspect attached to this
average, but then again, that basically holds up for price action in general.
A clever scalper will not concern himself with the actual reasons behind the moves in his chart. For there is no point
in speculating over other traders’ motives. All he has to go by is what takes place in the chart on a recurring basis. And
his task should be to exploit repetition.
Now let us see how the DD setup is effectively traded in the real-world environment on a 70-tich chart.

This chart shows us a classic DD break example. In this case, no less than four dojis had formed into the ema20 zone
(1). One of them broke the average briefly to the upside, but all four of them shared equal lows below it. True, the
pullback was more a thin horizontal string of price bars than a diagonal move against the trend; as a result, it did not
really bring prices any closer to those players on the sidelines. But that is not necessarily a requirement.
The very fact that prices are unable to travel against a trend often betrays a lack of countertrend interest. This could
very well be interpreted as a with-trend play incentive.
Not uncommonly, sideliners harboring with-trend views on the market only need to see a tiny break in the direction
of the earlier trend to deploy new with-trend positions at the speed of light.
One price bar taking out another bar’s high or low by a pip can already trigger a waterfall of with-trend orders cascading
into the market. This activity could leave a serious trail of countertrend sorrow in its wake. In many instances, the
degree of with-trend aggression after a pullback mimics the strength of the trend before it. In this chart the follow-
up action between 00:40 and 01:00 is very similar to the pre-pullback action from 23:58 to 00:10. This trend-equals-
trend principle is only a rule of thumb, so by no means a rule, but it is handy to keep in mind when contemplating the
likelihood of a possible 10 pip ride. The weaker the trend before the pullback, the more any potential chart resistance
after it might play an obstructing role.
In general, the most dependable DD setups are the ones occurring at the end of a one-directional, diagonal pullback
in a very strong trend.
Here, each of the four dojis could pass as a signal bar, because they all share equal lows. The arrow in the chart points
towards the first bar that took out these lows, and this bar is therefore called the entry bar.
A scalper does not wait for this entry bar to finish. The moment it takes out the signal bar’s low, by traveling exactly
one pip below it, a market order is fired and the short trade is on.
Note: It should be stressed that no matter what charting software the scalper holds preference to, the bars in it should
have a price scale in increments of one full pip. The trading platform may show prices in increments of pipettes (tenths
of a pip), but that will not do for the chart. If this is neglected, a series of price bars with otherwise equal extremes will
most probably show a jagged edge of fluctuating extremes, making it seriously harder, if not impossible, to determine
a proper break level to base an entry on. If this could already pose a problem in the event of a simple DD setup, then
it will certainly do so when it comes to the more streamlined setups that we get to discuss later on.

Look how small the two little dojis are (1) compared to most of the other candles in the trend. This exhibits the
compressed indecision a scalper likes to see. Any trend, no matter how strong, will have pullbacks in it. That is just the
nature of the markets where so many opposing ideas are traded up and down. A trader may not like it while in a trade,
but when seen from a sideline perspective, the pullback brings great opportunities about. For instance, to trade a
little DD in the ema20, like the first setup in the chart above.
The second DD setup (2) broke eight minutes later.
There is nothing wrong with this particular trade. The setup is slightly inferior to the first since the dojis highs are not
equal but two pip apart. Still, there is no technical reason not to take the trade.
The trend is clear and so is the pullback. Fact is, that this trade would have had to be scratched for what looks like a
7-pip loss when prices dipped below the setup lows (do not worry about the exits yet). It shows us actually a very good
example of how important it is to immediately accept any loss as just a cost of doing business and to remain on the
alert for another setup in the same direction. Not from a vindictive stance towards the market, but simply because the
chart may still be eligible to be traded in the same direction of the earlier trade.
Any proper setup will do. In this situation, the market printed another DD pattern just a few minutes later (3). Have a
look at the four dojis, all with equal highs pushing against the ema20. The moment this tiny block of price action was
broken to the upside, with-trend players quickly stepped in. And equally fast, countertrend traders ran for cover.
Note: By definition, when a countertrend trader bails out of his position, he can only do so by firing a with-trend order,
turning himself into a with-trend trader, whether he likes or not. When enough countertrend traders are forced to bail
out (to protect themselves) and at the same time, enough with-trend traders step in, the chart is likely to show a
continuation of the trend because of double pressure in the trend’s direction. And vice versa for with-trend traders
who are forced to bail out due to strong countertrend activity. That will turn a with-trend trader in a countertrend one
the moment he bails out.
The principle of double pressure is a crucial concept to grasp; in fact, it forms the core of our edge in the market. If
we cannot picture double pressure to kick in, we simply do not put capital at risk.

Here the
downtrend was unmistakably strong. Just look at the many tall black bars in it and compare them to the smaller white
bars in most of the pullbacks. Still, that does not mean that all bears are on board. It just shows a temporary lack of
bullish enthusiasm. In fact, it is fair to assume that the sharp downswing in the first half of the chart caught many bears
by surprise. As a result, there will always be a large number on the sidelines with only thing in mind: to find a tradable
pullback to get in on the party, and sooner rather than later.
It can be a painful sight to see an obvious trend take off and not be in it, but patience and discipline need to be
practiced. The pullback will come.
If it does not set up a proper trade, then so be it. In this chart a very tradable DD setup emerged once prices finally
reached the ema20 (3).
As far as the DD setup is concerned, basically three things can happen when a pullback approaches the ema20. Let
us look at it from the perspective of a downtrend.
1 – The highs of the dojis barely touch or not even touch the average before prices turn south again and break the low
of the DD. This could be traded in a very clear trend but every now and then it may suck a scalper into the market a
bit too early, meaning the pullback may not be quite finished yet and is likely to have another go at the average. It is
not uncommon for this kind of price action to activate the exit strategy. It should be noted that countertrend traders,
the ones causing the pullback to happen, can be very persistent. But how can we blame them. They just want to make
a profit and show guts in their attempts. Should they manage to take control of the ema20 and keep prices above it,
the first part of their job is accomplished, for they have turned the trend from down to sideways (at least temporarily).
2 – The dojis (or one of them), pierce the average but are immediately pushed back and close below it again. This is
arguably the most favorable way to trade a DD. A good example of it is the first DD setup in this chart.
3 – The dojis pierce the average but are not pushed back so easily. This is the somewhat riskier version because it
shows conviction in the pullback. Still, it can be very tradable, provided the trend is very strong and the break of the
low of the DD is not occurring too long after the average was taken back.
Once a number of bars start to rest on the average, turning it sideways or even lifting it up, the market may be dealing
with a trend change. In these situations, it may be wise to wait for a more distinctive setup like a SB or BB.
The 2nd DD setup in this chart (5), although less attractive, is still very tradable. The first doji in the setup is the one
that pierced the average. The two neighboring doji bars remained below it. This setup is slightly inferior to the first
on account of the distance between the highest low and the lowest low. It is 2 pip apart. Preferably, we like to see
the extremes just one pip apart, or better yet, have equal lows. However, with a downtrend still very much in tanking
mode and the pullback being very orderly and diagonal, this setup is good enough to trade.
It may be interesting to compare for a moment the first DD setup at (3) to the situation at the end of the chart, at (8).
Here we can see why the latter setup, a triple doji pattern in the ema20 zone (technically a DD), is best skipped on
account of its inferior quality. There are a couple of reasons why that is the case.
First of all, the pullback leading up to the three dojis it is not an orderly, one-directional countermove against the trend.
In it, we can spot a higher low (7), which is technically a sign of bullish strength.
It means that countertrend traders bravely aborted a trend continuation. It is a higher low because the bottom of it
sits higher than the low of the previous bottom of (6). If we also bring the earlier low of (4) into the equation, then we
can count three lows in the area (4-6-7). To a classic technical trader that spells a well-known bottoming pattern, also
known as a reversed-head-and-shoulders formation (far from picture perfect, though).
It is not necessary at all to be acquainted with these rather esoteric patterns that will surely warm the heart of the
typical technical analyst.
Applying a bit of logic to our chart reading may just as well do the trick.
In its most basic form, technical trading is no more than (a) reading the overall pressure of the market, (b) opting for
a trade that corresponds with that reading and (c) to assess whether the path to the target is paved with chart
resistance or relatively safe to venture out on.
Looking at the first DD setup, it is not hard to see that it is showing up in an unmistakable downtrend.
Not even the little double bottom pattern from ten minutes before could challenge that fact.
In more subdued markets, this pattern may have given off a clear warning sign, but compared to the power of the
trend at hand, it is best perceived as a countertrend attempt that is most likely to fail. In fact, had the three dojis from
the skipped setup at the end of the chart (8) shown up in the area of the first setup (3), similarly a bit above the average,
then trading a break of them to the downside should have been administered without hesitation.
So, in other words, the reason for skipping the DD short trade is not necessarily the fact that the doji bars display
themselves on top of the average, but more than they do so in combination with a couple of other hints that could be
interpreted as warning signs that the current downtrend may be coming to a (temporary) hold.

Fig 7.4 Things are not always so evident in the market as displayed in the wonderful chart above. All the more reason
to fully exploit the opportunities when they are offered on a silver platter. Both setups are quite self-explanatory.
How could a scalper not grab his chance when confronted with a perfect DD setup in what looks to be the end of a
pullback in the ema20 (1). Four tiny dojis, gently nestling in the average, three of them with equal highs – if that does
not spell a great opportunity, then what does.
The second pattern (2), though much higher up in the trend, still provides an excellent opportunity to reap some more
profits from this generous market. The fact that the trend was already 50 pips underway does not in any way diminish
its longevity prospect. At least not from a technical perspective.
Only when the pullbacks start to be more persistent, maybe forming double tops or bottoms, or clustering blocks
of horizontal price action, should a scalper be more careful in picking his next with-trend trade.
With no signs whatsoever even remotely suggesting that the market is about to give up on its trending inclination, a
scalper is best advised to just bite the bullet and pull the trigger on any next trade that comes along. If that trade does
not work out, then that is okay. What would not be okay, is a scalper being affected by it.
Fig 7.5 Although the market at the point of entry is hardly trending, this DD break (1) can be safely traded because the
little pullback leading up to it is actually not only a pullback in the ema20, but also a test of the range breakout zone
from about 10 mins before (the 1.2890 area).
When prices reside above a horizontal level (a support zone) and then finally break through it by a number of pip, the
market has a strong tendency to climb back up to that former support level to touch it from below. This is technically
called testing the breakout zone, and it is very likely to be welcomed by traders on the sidelines, for these higher prices
now give them more favorable odds to start shorting the market.
This principle is equally capitalized on if it is not a level of support that cracks to the downside but a horizontal level of
resistance that cracks to the upside and then is test back. In fact, one could say that all the market ever does is cracking
and testing support and resistance, even on the tiniest of scales.
Pullbacks, for instance, quite often have their bottoms or tops acting as a test of some former resistance or support
level. So, as much as we think the ema20 is stopping the pullback in its tracks, in many cases it is the former price
action a bit to the left that is either offering support or showing resistance.
And just like the pullback in a very strong trend is likely to be short-lived, so is the typical pullback to a broken horizontal
zone.
Countertrend traders, by nature, anticipate the break to be false and they will buy it back up or short it back down.
In most instances, it will not take long for them to see the folly of it because no matter how you look at it, they present
their opponents, those that did not trade the initial break for whatever reasons, with more favorable levels to trade
from. Of course, either party could win in any kind of battle, but in the long run it will pay off to not trade against a
trade, nor against a proper horizontal break, for that matter.
Take a look at the 2 bars in the ema20 zone at the end of the chart (2). They provide a good example of when to ignore
a setup that under other circumstances may have been tradable.
First of all, the second bar, the black bodied one, is not really a doji, but still it is attractively bearish (price closed in
the lower region of the bar), and not overly tall.
So, seeing this two-bar pattern appear in the ema20, we could basically regard it as a proper DD short setup. On top
of that, the trend is pointing down, and the pullback is rather straightforward; why would it be wise to skip this DD?
Because the DD bars, compared to the overall length of the price bars preceding them, in both trend and pullback, are
not compressed at all. In fact, they both are about the biggest bars in the neighborhood. One could argue, and rightly
so, that a break of the DD did not materialize until two new little dojis underneath the average were broken by a third
candle a few minutes later (3). Even so, with the entry on this trade almost equaling the low of the pullback, and the
overall price action quite slow and subdued, it is recommended to not engage in a short at this point in time.
Note: It may be interesting to contemplate for a moment the reason why any trader would want to buy or sell
something at any moment in time. After all, even if the value of the underlying instrument was to be accurately
estimated, it is highly unimaginable, if not plainly impossible, for anyone to be able to put an absolute price tag on
it. At the end of the day, value is nothing more than a perception in the eye of the beholder. And price a mere
reflection of consensual appraisal of many. The real world shows us that both are very brittle items with a rather
short lifespan. The more obscure and unfathomable the underlying instrument, the crazier the notion that the
average trader would be qualified to make a proper call on the price/value relationship.
Trading currencies by the trillions just about tops the list of daily irrational behaviors, for there is no way a mere
mortal would be able to make sense of the many global Powers That Be on a fundamental basis. With that in mind,
how is it possible that a trader would be able to trade anything at all, and walk away with consistent profits to
boot? The answer to that is simply that the smart trader does not trade the underlying instrument, he trades other
traders. And more so, he trades their pain and incompetence. He trades the fact that they have to react to their
many mistakes to protect themselves. He exploits predicament and agony, all of it highly visible on a technical chart.
To exploit others more than being exploited himself should be the ultimate satisfaction of any trader who is not in
this business out of philanthropic idealism or to indulge in masochistic tendencies.
The sideways action in the beginning of the chart was broken to the downside by a series of bearish candles. Then
formed a classic pullback eating back about 40% of the move, stalling into the ema20 (1). Two nice little dojis, both no
more than 2 pip tall and with identical lows, presented a patient scalper with a safe opportunity to enter the market
short once the lows were broken.
Note: Since a trader has to be very alert and immediately act on a break of a candle’s extreme, it is handy to check the
box of the tick counter in the charting software should this option be provided. This tick counter will appear and counts
down the number of ticks per bar, and then starts all over again for each new candle. Why is this handy? Quite often,
a signal bar will show a closing price at one of its extremes; should a trade have to be entered on a break of this bar,
chances are that this trigger may be presented right on the first tick of the next bar in case this entry bar open with a
one pip gap. Although most new bars will show an opening price equal to the previous close, gaps do occur quite
frequently, and particularly in setup situations, where the price action could be a bit jumpy.
A scalper, not alert enough to act on an entry bar that takes out a signal bar, runs a risk of missing his trade. Surprises
are not uncommon, even to the focused, which is why it is good to keep track of the signal bar’s lifespan. Hence the
very handy tick counter. It also works the other way around, by helping a trader to relax a bit when there are still quite
a number of ticks to go in a particular bar of interest.
The second DD setup broke about fifteen minutes later (2). With both trend and pullback of very fine, almost
harmonious quality (trend bars all bearish, pullback bars all bullish), it was safe to anticipate the market to fall further
still. The five-bar doji formation in the top of the pullback, four of them sharing equal lows, presented the scalper with
a great signal line (a series of equal trend-side extremes) to trade a downward break from. A small discomfort had to
be weathered when, two bars after the break, prices briefly pierced the average a bit. That is all part and parcel of
trading. A trader cannot expect the market to not put up a fight. As long as that fight remains within the boundaries
of his risk profile (as will be discussed later on), the scalper has no option but to stand pat and see what happens. In
any case, it is only a trade.
The third DD setup in this chart (3) presents us with a bit of a judgement call. Trade or skip? Technically, it is a DD
pattern in the ema20 at the possible end of a diagonal pullback. However, it has three things going against it that
would make me want to skip this offer: first, the pullback, though diagonal and one-directional, retraces not just a part
of the with-trend move before it, bull all of it, implying growing bullish enthusiasm in the area; second, the pullback
bars are taller than those in the with-trend move it is countering, which may be another sign of countertrend strength;
third, the setup stands rather tall, which would make a possible scratch rather expensive (we will get to that later as
well). Prices did halt nicely, though, in the resistance of the previous DD setup’s signal line. Still, a conservative scalper
would probably decline this offer. But we could not really argue with a more aggressive individual having a go at it.
Fig 7.7 It is important not to jump the gun when it comes to taking trades. Always wait for the proper setup to be
broken before entering, no matter how much you can already picture prices to move a certain way. Expectation and
bias are terrible companions to put faith in.
When presented with a group of four or five neighboring dojis, like setups (1) and (2), all with equal extremes, it can
be tempting to already fire an order to the trend-side of the market without waiting for the setup to be actually broken.
Such can be the anxiety of anticipation (or greed). But not being able to wait for a true break to materialize is a serious
shortcoming that is best addressed as soon as possible in a scalper’s career. Quite ironically, the impatient trader, after
pulling the trigger, is prone to not only find himself caught up in a market that somehow does not want to break as
anticipated, his very patience may now stand to be tested with a lot more venom to it.
Of course, from an educational viewpoint, that is an excellent reprimand. Another thing that might help to avoid this
kind of behavior, is to ask oneself what exactly is gained by front-running a break.
In case the anticipated continuation of the trend indeed emerges, then, in the event of a profitable trade, the standard
entry would have probably delivered the same 10 pips profit. So little gain there. In case the trade did not set itself
up as a tradable event, because the break never materialized, the scalper actually loses out due to his own impatience,
maybe so much as by having to close out this non-trade for a 5 pips loss (a scratch).
The gain that may come out of this is when a valid trade, too, would have had to be scratched; now his more
economical entry (probably no more than a pip to his advantage) will provide the front-running scalper with a more
economical exit compared to the patient trader who entered on the actually break. Is it worth it? one may ponder.
The first DD setup (1) consisted of no less than four neighboring dojis, all sharing equals highs. Patiently waiting for
the break of the highs is always the proper thing to do.
Note: Next to the trend being obvious here, alert traders could also anticipate further price advance by keeping track
of the round number zone of 1.2700. The currency chart is full of round numbers (the last two digits ending at 00, 10,
20, 30, etc.) but two zones in particular stand out on any currency pair as being the most relevant: the 50-level and
the 00-level round number zones (the half cent and full cent levels). It means that these zones have a tendency to
represent – either visible or hidden – chart support or resistance, making it rather difficult for prices to proceed straight
through them without some hesitation at best, if not a serious bull/bear clash. Bear in mind, these are zones, not
actual pip levels, so when they get breached, even by a fair amount of pip, they could still hold up as support or
resistance (we will take on this phenomenon in more detail in the Range Break chapters).

Big banks, institutions, and the like, are the players actually taking prices up or down in the currency game, not the
average independent trader trading from his home. These big guys usually do not fret over a couple of meaningless
pip in the middle of nowhere, but they do tend to attack and defend the round number levels rather vigorously.
Trading can be rather thin when prices approach these zones, meaning that a lot of traders prefer to stay on the
sidelines to await how the market handles these major levels. This can show a very peculiar side-effect of prices
being literally drawn towards these round number levels, simply because there are not too many traders standing in
the path of them.
What will happen when these round number are hit is impossible to tell, but before impact has taken place, prices
tend to be sucked straight towards theme. We will refer to it as the vacuum effect.
In case of a proven trend, it is not necessary to be intimidated by those round numbers. They are easily breached
enough for a trade to still finish profitably (i.e.: do not take your time to get out).
What is more, it is fair to assume that a number of stop-loss orders will reside beyond these obvious levels and once
hit they may even help a trade along. Still, when it comes to the DD setup, it may pay off to be a bit more conservative
when contemplating a possible trade straight into a round number level. Since the DD setup anticipates an immediate
continuation of the trend, we need a large number of players to think the same thing (double pressure).
And participation in the round number zones may just be too thin to call a break of the DD setup a high probability
trade. Some of the other setups are better suited to take on these situations, because they really build themselves up.
The DD setup, often representing just a tiny two-bar buildup at the end of a pullback, is always best acted on when
there is nothing standing in the way of the direction of the trade, not even a round number that, chart technically,
appears to be quite harmless.
For example, the second DD setup at (2) is of inferior quality when compared to the first (1). Not only is the round
number zone of 1.27 directly hovering above it, to the left of the setup some clustering price action has formed, no
doubt as a result of that same round number resistance. Any cluster of price bars nearby on a level higher than a long
entry, or on a level lower than a short entry, is likely to represent resistance.
It would depend on the chart at hand whether that resistance is perceived too big to overcome to grand a trade
permission. So, it would be best to see if there are some other signs pointing either in favor of the trade or against it.
Quite often, determining whether to step in or not, weighing the pros and cons, can be a delicate proposition. For
example, some might argue that the price action preceding the first DD setup is also of the clustering kind. Still, I would
not hesitate one moment to fire off that trade.
Sometimes it is hard to explain, because the differences seem so subtle; but I would not go so far as to suggest that
gut feel has anything to do with it. At all times, the decisions should be based on technical grounds.
On balance, when the trend is not overly explicit and things look a bit shady in terms of possible resistance, it is best
to stay out in DD situations.
The third DD setup (3) is even worse than the skipped second. The entry price may be more economical, since it is
lower in the chart, but way more important than that is what lies above it on the path to target. The clustering price
action below that round number is clearly blocking the path, so it is best to not risk capital on this trade.
Price actually ran through it without any trouble, but that is totally irrelevant. Scalping is all about probability, not
about outcomes.
Fig 7.8 Another nice DD break in the ema20 (1). How hard is it to trade these sort of setups? Not hard at all, one would
think. As a nice bonus, we can clearly spot the trend-equals-trend possibility on this trade. The more distinctive the
trend before the pullback, the more the one after it is likely to mirror the first. This is not a perpetual phenomenon,
though: it works best on a strong first move, followed by either a first pullback or a sideways progression from which
the second move is built up.
How about the DD setup about twelve minutes later (3)? Had the pullback preceding it been more straightforward
and more diagonal, like the one leading up to the first DD, then this setup, too, would have been quite tradable. In
this situation, however, the pullback is presenting itself more as a block of prices (2) than as an angular pullback into
the ema20.
Shorting a break of the DD pattern from the perspective of the overall pressure is essentially the proper thing to do, if
not for the fact that prices now face the troublesome task of having to pave their way through chart resistance, as any
horizontal clusters of bars blocking the way can be looked upon.
That is not to say that the current downtrend is perceived to be over, not in the least, but just that the likelihood of
reaching a 10-pip target without being forced to scratch the trade first has now clearly diminished. If it has diminished
up to the point of resembling a mere coin flip or worse, a scalper is better off at the sidelines than inside the market.
At this point of the journey, telling the subtle difference between a proper setup and its questionable counterpart
could appear to be quite challenging; if so, it should be comforting to know that everything will fall into place soon
enough. Well before a trader has earned his full degree of proficiency, he will have seen just about any trick the market
might pull. After all, patterns, ranges, trends, minor ripples, shock waves, trapes, even the freak oddity – if the
seasoned trader has seen them all a thousand times before, then so too will the dedicated novice once he gets the
hang of these price action principles.
VIII – First Break (FB)
The first break setup (FB) provides an alternative way to pick up the trend in the event of a stalling pullback. Whereas
the DD setup needs a minimum of two neighboring bars to locate a possible turning point, the FB setup, under the
right circumstances, is perceived to be such a powerful signal that no further confirmation is needed to trade a break
of it. The signal bar to the break is simply the first bar in a substantial pullback that gets taken out in the direction of
the trend.
Once that break is set, a scalper enters with-trend to capitalize on a quick resumption of the market’s original intent.
There are some requirements to be met, though, before the FB pattern can be considered a valid trade setup. In fact,
in the majority of cases, a scalper may be better off skipping the trade altogether. Despite its discretionary nature,
this setup is certainly worth studying because in the right environment it produces excellent odds.
The first condition concerns the trend itself. In ideal situations (in term of FB acceptance), the trend is formed by a
very determined one-directional surge of price action, preferably shooting out of a sideways consolidation. The price
bars in it should ideally be longer in length than the overall price action before it and also be printed in rapid
succession. At times, these moves can appear out of nothing, but they are most likely to show up when the market
has already been slowly building up pressure to set a significant break.
Once that break becomes a fact, the market may see a sudden burst of activity that logically traps a lot of traders on
the wrong side of the field.
In a downward surge we will see the chart spit out a number of black bars closing on their lows; in an upward surge, a
number of white bars closing on their highs. By the looks of these sudden moves, or spikes as they are often called, it
can safely be derived that the current action is not just a reflection of tiny scalpers stepping in and out but that the
bigger time frame participants are also involved in them.
The second condition deals with the shape of the pullback that tries to counter this flurry of one-directional activity.
Nothing ever climbs or falls in a straight line, so even an aggressive move sooner or later will find the notorious
countertrend traders on its path. Logically, seeing these new players come in against the trend, a number of with-
trend players will quickly start to pocket some profits. This double pressure will accelerate the speed of the pullback
and chances are we may easily see a retracement of 40 to 60% of the trending move before it.
When opting to accept the FB setup, we indeed want to see this pullback materialize in full-fledged fashion. Not
necessarily equally strong as the move it is trying to counter, but definitely not as a weak attempt either. Preferably,
the candles in the pullback are also one-directional in their closes, meaning that if the trend was down, printing black
bodied candles, this pullback will have mostly white bodied candles in it.
And it should not stop or falter in its run before the area of the ema20 is reached. Take heed of the word area,
because when the trend is formed by only a few very tall bars that broke free from a consolidation zone, the moving
average may be lagging behind and thus be out of reach, even to a substantial pullback.
At other times, the pullback itself is so violent that it might easily perforate the average more than it normally would
before calming down. So, the ema20 is a guide, not a barrier.
When both required conditions are met – a strong trending surge and a firm straight pullback in it – the chart will
show a very visible fishhook pattern. Most of the time, the pullback (hook) will not exceed the halfway mark of the
trend, although it is not exceptional to see a retracement even further than that.
The third and last condition to grant the FB setup validity is that the pullback is the first to go against the trend. The
first pullback in any newborn trend is highly prone to be slammed back itself by with-trend traders the very moment it
stalls. Latter pullbacks, on average, tend to put up more of a fight in the ema20 zone before giving in to the with-trend
traders (if at all).
By now a very legitimate question may have arisen among readers trying to figure out the logic behind some of the
price action principles already discussed: what is it with these countertrend traders, what makes them so persistent
in their need to constantly swim against the tide? Are they self-indulgent masochists, suicidal maniacs, utterly mad?
Can’t they tell when a trend is on and don’t, they know the odds are technically in favor of the trend to continue?
To answer these questions, we may have to ask another. What is a trend to begin with? We may perceive our trend
to be so obvious that even a novice could spot it a mile off, but still the move itself may only be a minor ripple in the
trend on a bigger time frame. And this other trend, in turn, may simply be a pullback in an even bigger trend.
This pattern of hierarchy could even go on until we are looking at the monthly charts and beyond.
So, who is actually countering who at any given moment in time? There is no feasible answer to this riddle. It all
depends on perspective and opinion.
That is why trading is such a fascinating clash of opposing ideas and insights. It is this perpetual disagreement on price
and value that causes the market to provide endless liquidity to all participants involved. And luckily so, or there would
not be any trading done.
Just imagine a market where everybody would agree. Who would be so generous to sell us a contract should we want
to go long, or buy our contract should we want to go short? Nobody would. Therefore, a trader should be very happy
knowing that he can buy and sell his contracts at any moment in time.
Despite the multitude of strategies bombarding the marketplace, for the scalper there is only one world to consider
and that is his own particular set of choice. Everything else is irrelevant. That one chart is the frame in which to decide
whether the market is trending, ranging, or pulling back, and any decision to enter or exit the market should be based
on the setups and the candles in that chart alone.
Now let us have a look at this FB setup and see if it is easy to identify.
Keep the three required conditions in mind: a bursting move, a straight pullback, the first pullback to the move. The
moment a bar in the (substantial) pullback gets taken out by its neighbor in the direction of the trend, we have our
signal to enter the market with-trend for a quick 10-pip scalp.

This chart shows a perfect example of the FB trade (1). Although not necessary, it can be a nice bonus to see the candle
that needs to be broken (the signal bar) turn out to be a full-grown doji, with its closing price very close to the side of
the break. Despite the fact that such a bar closes more or less at the same level as it opened, it shows visible evidence
of the bull/bear fight within it.
When it closes back on its lows in a downtrend, it hands us a strong signal that the trend may be about to resume. But
basically, any candle in this setup will do.
Note how most of the bars in the downswing are firm black bodied candles, whereas those in the pullback are all
smaller in size, yet nonetheless white bodied and non-hesitant, aiming for the ema20 or beyond. Not even one bar in
the pullback got broken to the downside until the signal bar in the ema20 appeared. It is also the first pullback to
materialize. One could not ask for a better FB setup.
Technically, this particular FB is also a DD setup. After all, there are two dojis – with equal lows – appearing in the ema
20. That would render the necessity of the pullback to be the first a non-issue, because now a scalper could simply
trade a DD setup, which does not have that kind of restriction.
As we march through all of our setups in this book, we will most likely see many more examples of situations in which
one setup is part of, or equal to another. The reader should not let himself be confused as to what to call it. The names
of all patterns are essentially irrelevant.

Fig 8.2 In the beginning of this chart there is a nice ten-minute buildup to break the 1.2820 zone (1). The tops of most
of the bars remain capped at a horizontal level, but the lows are slowly progressing upward. That is a clear sign of
tension building up towards an upside break.
The reader is prompted to always check the chart for any kind of clustering price action int it.
Whatever is compressed will eventually wind.
It is referred to as pre-breakout tension. The later-to-be-discussed Block Break (BB) setup is solely designed around
that principle. But all throughout the chart, setup or not, we can expect tension to build, one way or another.
Once a break is convincingly set and the move jumping out of it sufficiently strong and one-directional (no mini-
pullbacks in it), it is a matter of waiting for the shape of the inevitable pullback to assess whether the situation will
present us with a legitimate FB. Pullbacks that retrace about 40 to 60% of the trend and simultaneously collide with
the ema20 provide excellent opportunities for a with-trend scalp. Whether it is a DD, FB, SB, or BB that sets itself up,
a scalper welcomes them all. In this chart, it turned out to be a proper FB setup (2). However, when compared to the
previous chart, Fig 8.1, the bars in both trend and pullback are not so outspokenly one-sided. The trend has some black
bars in it, the pullback some white ones. On close inspection, though, we can see that no bar in the trend had its
bottom broken to the downside until the last one in the top; in the pullback, no bar was broken to the upside until the
signal bar appeared in the ema20. All in all, that makes for a tradable FB. A long order can be fired the moment the
signal bar gets broken to the upside.
This setup provides a good example of how a tick counter can help to indicate when a signal bar is about to end and
a possible entry bar about to begin. When prices travel in the top range of a potential signal bar (for an upside break),
or in the bottom range (for a downward break), it is smart to keep track of the tick count in it. There is always the
possibility that the entry bar will open with a one pip gap, which will be an immediate break of the signal bar on the
first tick, and thus a valid reason to fire an order. Hesitating in that spot may result in a worse entry price or even lead
to missing the trade altogether.
When using market orders instead of limit orders, it is unavoidable to occasionally incur some slippage when entering
on a trade. Since a market order aims to grab the price of the moment, but has no specific price attached to it, it could
be filled disadvantageously in the event of the market moving away. There are basically two reasons that could cause
this to happen.
The 1st is a technical one, meaning the market moved away from the entry price in the split second the order was
surfing the internet to get filled.
That happens even on the best of platforms. The 2nd reason is self-inflicted, as a result of acting too slow.
The technical reason, obviously, cannot be avoided. We will certainly not be using any limit orders and see half of our
trades move away from us without being filled. Even if we were to operate a high-tech platform that allowed us to put
in limit orders at the speed of light, that would not eliminate the risk of not getting filled. Therefore, if we want in, we
hit the market order button.
The self-inflicted slippage as a result of hesitating at the moment of entry is more common than one might think.
Balancing on the brink of a trade can trigger a lot of anxiety within a trader’s mind. As a result, some will act
prematurely without waiting for a proper break; others simply act too slow and some may not act at all.
These things happen and they are only natural. It may take many months for a trader to routinely fire off his trades
without the slightest sense of discomfort.
A thing to strive for, of course, is to act when action is required, whether that still provokes anxiety or not. Eventually
all these feelings will wear off.
Should a trade be entered with somewhat larger slippage, like a pip and a half or so, just remain calm and manage the
trade as if it was executed properly. Most winning trades surpass the 10-pip target without too much trouble, so even
being filled uneconomically, and thus having a target objective a little further out (by the same amount the entry got
slipped by), should not make that much difference. It may cause the damage control to be more expensive, though –
so be it. But on occasion, it does happen that purely due to slippage, a trade never makes it to the target and eventually
has to be scratched, maybe even for a loss. Still, that is no reason to get upset.
Nothing in the market ever is.
Should a trade be missed, for whatever reason, it is important not to whine over it but to quickly adapt and see if the
situation can still be saved. Just as often as the market tends to shoot off and not look back, it shows a tendency to
stall right after the break.
And even if it spikes away without us in it, in many instances, just a few bars later, price will quickly pull back to revisit
the breakout level. Both situations provide us with an excellent opportunity to step in after all. We may even be dealt
the exact same price as the original missed entry.
However, in case a trade is truly missed and does not pull back, it is essential to not chase price up or down, no matter
how much a scalper want in. That is very poor trading and reeks of amateurism. If the moment is really gone, it has
gone and a scalper moves on.
Figure 8.3. The speed of that spiky trend around 16:15 says it all. Price action like this is very often caused by traders
responding to a news release. The fact that is also broke a technical pattern (1-2, a so-called bull flag, do not worry
about it) and cracked a round number zone (1.14), no doubt caused this sudden burst of one-directional activity to be
even more violent.
Whenever a trader sees something like this happen on his chart, he should immediately think: FB! For that is the fastest
entry into a new trend after a pullback (4).
Notice how the ema20 could not keep up with the strength of this move, in spite of the reasonable pullback that ate
back about 40% of it. This is typical for sharp moves that contain only a few very long bars. The average may have an
exponential calculation to it, which puts more weight to the most recent closing prices, it is still an average made up
of the closing prices of the last 20 bars, and at the end of the pullback about half of them had their closes way lower
in the market (below the average).
This is why the average can only act as a visual aid and not as a definitive level that needs to be touched first.
A handy trick to determine whether a FB entry may be imminent in situations like this is to watch out for an opposite-
colored bar to get printed in the pullback (could also be a doji without a colored body). In this example the pullback is
bearish, with the candle bodies being black; the moment a white bodied candle appears, the scalper may be dealing
with a possible signal bar. But only once the high of that bar gets taken out does it signal an entry to go long.
This is only a handy aid, though, because by itself, the color of the signal bar is irrelevant. Any bar in this setup that
gets broken in the direction of the trend should be considered a valid signal bar.
The time scale below this chart gives the reader a good impression of the occasional huge difference between a tick
frame and a time frame chart. The action between 16:15 and 16:18, just 3 minutes, printed about the same number
of bars as in the 40minutes before that. That is about 13 times faster. Shock effects, like news releases, can be
extremely volatile and fast paced, but with a bit of luck, an alert scalper may still reap some profits from them before
they wear off. It is not uncommon for a target to be reached within a matter of seconds. To the downside, it should
be noted, there is the possibility of being stopped out equally fast. Under calm conditions, it is quite rare for a full
stop of 10 pip to be hit, yet it is a market like the second half of Fig 8.3 that makes for an excellent candidate to produce
this feat. The mere speed of it could make it impossible to scratch an invalid trade at a better level. Therefore,
accepting a FB trade in super-fast conditions is synonymous to accepting the risk of a larger stop than normal. But
since these trades come with nice odds, getting stopped out on occasion is just part of the normal distribution of
outcomes in a probability play.
In this chart, the market, within a minute or so, almost printed an exact copy of the earlier situation that led up to the
first FB trade. Both trend and pullback are almost identical. It is a bit of a judgment call to decide whether or not to
trade the break of the second pullback (5) in similar fashion as the first. The pros to this trade are the facts that the
market’s pressure is still pointing very much in the direction of the current trend and that the bottom of the second
pullback neatly tested the top of the earlier upswing (5 tests 3). And of course, that a signal bar got taken out to the
upside. On the other hand, the pullback is not the first to the trend, which basically renders the option of a FB invalid,
due to strategy restrictions.
It is not for nothing that a FB trade is often skipped in favor of a better setup under relatively normal conditions. But
these are not exactly normal conditions. So, the judgment call is purely a result of the exceptional quality of the market.
Does it matter what a trader decides to do, skip, or trade? Probably not. It would only matter if these situations occur
almost every day, for then they need to be implemented into the strategy and not be looked upon as an oddity
anymore. For what it is worth, skipping the trade here is probably the best thing to do, because, after all, we are dealing
with a second pullback. Taking the trade anyway and getting stopped out could harm the not yet confident scalper,
for he may be prone to the negative illusion of being reprimanded for strategy deviation.
Should the trade work out, then he may start to foolishly entertain the idea that he is allowed to deviate from his
strategy at will on account of his excellent insights. The proficient scalper, on the other hand, will just look upon any
trade as just another trade.
It either delivered on its potential, or it did not.

The first 20 minutes of this chart show what is referred to as a sideways consolidation, also called a range. It actually
appeared after an already extensive run-up of the market (not visible on the chart). Still, it makes sense to regard a
trending move that shoots out of a sideways consolidation as a new event. And so, we can look upon that huge move
here as a newborn one; therefore, the pullback in it should count as a first.
In scalping, it will pay off to keep things very simple and not scroll too far back in time to search for more information,
and in particular for information to either validate or reject a trade.
On average, about one and a half hour of price action on a 70-tick scalping chart will show more than enough bars to
assess the current forces in play in proper light, and so it is best to just act upon a valid signal without too much second
thoughts. In hindsight, sometimes a trader may regret not having scrolled a little further back in time to spot the huge
resistance that caused a particular trade to lose. But then he should also consider the possibility of not having traded
a large number of his winners on account of similar perceived resistance further back in the chart.
In the faster paced markets, it is not uncommon to be filled with some slippage. Being aware of a terrible fill and at
the same time seeing the trade not want to take off can be quite a mental challenge.
Just imagine to be filled at about three pip above the close of the signal bar (1). That would have taken the trade about
6 pip in the minus at the low of that tiny pullback a few minutes later (2). Technically, though, all the market did was
pull back a couple of pip. Despite the discomfort of being so many pip in the minus, it is vital to stay calm and
composed throughout any trade and only resort to bailing out when the technical conditions warrant such action
and never because the current loss becomes mentally unbearable.
What point is there in setting a 10 pip stop to anticipate an extraordinary condition, only to reject that measure when
such a condition finally arrives?
It is crucial to understand, and accept, that a large number of trades at some point before the target is reached will
see at least some, if not all of the paper profits being eaten away; and a great many more will simply have to endure
the initial hesitation before finally taking off.
It is just the way the markets work and in essence also the very mechanism that makes pullback trading possible in the
first place. It would be very selective reasoning to welcome a pullback when looking to trade, yet to despise one while
in position. When in the market, a trader, at all times, should keep his eyes on the chart and not on the mesmerizing
fluctuations of his profit and loss window.
If the traded break is picked with care, it most probably will defend its very existence and send these countertrend
traders packing.
The uncertainty of whether a trade will work out our not, and the fear of having capital at risk, can trigger all sorts of
unhealthy emotions that will hardly contribute to managing the open position in proper manner. It may help to ask
yourself what exactly there is to be uncertain about? Since we all know that certainty is nothing but an illusion in the
marketplace, how could uncertainty really be an issue?
Many times, though, a trader’s discomfort is not caused by the possibility of a losing trade, but more by the disturbing
uncertainty of whether it was the right thing to do to take the trade in the first place. This immediately shows us the
necessity of proper education. Whereas a trader can never be certain about the market’s response, he has got to be
certain about his method. All a trader can go by is the likelihood of his edge to comply with probability over a longer
term.
Therefore, he has got to trust his setups and take every valid trade.
It is pointless trying to imagine oneself being able to predict just these situations where probability will not work in
favor of a trade. At times, it can be very tempting, though. But it is crucial not to give in to this treacherous temptation.
Prediction and hunches are like the ever-present hecklers who thrive on confusing the performer. Since they cannot
be denied a ticket to the show, it is best to ignore them and just do what you have to do, even if it hurts.

Seeing a number of textbook FB setups appear in a row may give the impression that this sort of price action happens
all the time.
It does not.
And when it finally does, maybe once or twice a week, it may not necessarily present itself in a tradable fashion. In
the unfortunate event a trader is signed up with one of these shameless brokers that outrageously mark up the spread
in wild markets, or prior to, and in the wake of, a news release, any trading venture will be reduced to a foolish act
of gambling.
Even on the eur/usd pair, spreads are known to go up as high as 10 pip. Under these conditions, a scalper is strongly
advised not to step into the market anyway, no matter how tempting the chart. That would be a clear demonstration
of poor judgement.
According to sound probability, every trade should be looked upon in the same manner and regarded as equal in terms
of probable outcome.
They either work, or they do not. Accepting a trade under terrible conditions – which would be considered wholly
untradable under other circumstances – is the same as saying: I can afford this because I know what is going to happen
next.
Delusions of grandeur are not uncommon amongst those traders not yet ready to grasp the probability principle.

Another very straightforward example of a quick trend shooting out of a sideways pattern and a pullback taking back
about 50% of the move.
The pullback candles neatly follow one another to the ema20 zone without the with-trend traders trying to take over
yet. It is also the first pullback in the (new) trend, so this action makes for a great FB setup (1).
What is different, compared to the FB examples seen so far, is the shape of the signal bar leading up to the first break.
That one could not be tinier, yet is a very valid signal nonetheless.
Small as it is, there are just as many transaction done in it as in any of the other bars (not necessarily the same volume,
though; tick bars do not count the number of contracts changing hands, they only indicate the number of transactions
taking place).
The fact that price is stalling in it does not make it any less a signal bar. On the contrary. Sellers and buyers are
apparently in complete harmony with each other, at least for the duration of that one bar.
When that happens at the possible end of a pullback, an alert scalper should get very ready to trade. Every time prices
stall in the area of the ema20, countertrend traders will be extremely quick to exit their positions once the chart starts
to move in the opposite direction again – especially so when the pullback was countering a very strong move.
A scalper should capitalize on these countertrend traders running for cover and fire his order as quick as he can in the
direction of the trend once a signal bar gets taken out. If all goes well, then in just a matter of seconds new with-trend
traders will pick up on the action and jump in themselves, helping the trade along.
Note: To produce the 1 pip signal bar, for educational purposes, I actually cheated on this particular chart by setting it
no to 70 but 69 tick. Compare this chart to figure P.1 in the preface pages; They are essentially the same, if not for the
tiny difference in tick setting. As you can see, adjusting the tick number by a mere tick can already alter the way most
bars are displayed. Yet both charts are equally tradable.
The situation above does present us with a technical issue regarding proper trade management. It concerns the matter
of stop placement. Although we will delve into this in a later section, this chart shows a rarity that we might as well
address straightaway. In a normal FB situation, a stop will be placed a pip below or above the signal bar that gets
taken out at the other end. But there are circumstances under which the stop is best placed a little further out to give
the trade a little wiggle room. When signal bars are extremely tiny, as is the case in this chart, it may be wise to apply
this; but it should never be applied indiscriminately. Usually, a technical point of resistance or support will be taken
into account to derive the maximum amount of this extra leeway. In the section on trade management, we will look
into this more closely. Note that the opening of the entry bar (on top of the arrow) coincided with the level of the high
of the signal bar. By looking at the bar alone, it is not possible to tell whether this trade would have been entered
before prices briefly dipped below the signal bar of after. Such is the limitation of hindsight.
Here the ema20 is not supporting the trend literally, but that is not necessarily an issue in these sort of trades. Come
to think of it, it can even be a plus to see prices pierce the ema20 and close below it.
The deeper the pullback, the lesser the chance of the market trying to test an even deeper level in the trend, which
makes for a reasonable safe trade.
On the other hand, if the pullback is dipping so deep that it retraces about 70% or more of the with-trend move, then,
despite the lower levels, sideline players may get a little bit more cautious, which may cause the trade to fail.
Regardless, when it comes to taking a valid trade, a scalper should not make distinctions between deep and not so
deep, or safe and not so safe. A setup is a setup, and a trade is a trade. And an ema20 is just an ema20 that may be
lagging behind, or even be too fast.
Still, it cannot be denied that some trades just look a lot better than others. But as long as the setup meets the
requirements of validity, the trade should be taken.
After all, any setup that stands a better chance than 50% to work out, no matter how shady its appearance, is a tradable
event. Such is the nature of long-term positive expectancy.
Note: A trade that stand a better chance than 50% to work out does not necessarily imply that in more than half of
the occasions the target will be reached. Since a winning trade results in 10 pips of profits and a losing one in about 6
pips of loss on average, the target only needs to be reached in about 40% of the occasions for our trades to be
profitable in the long run (though marginally).
In a random play, like a game of dice, a bigger profit on a smaller chance of winning would offset the smaller loss on a
bigger chance of losing. Eventually, both players would statistically break even. But not so in the markets.
If we truly have an edge, we can tip the scale of fortune to our benefit by playing only these situations that deliver
favorable odds. That is a major advantage. In fact, it even allows us to throw in the spread and still come out ahead.
Naturally, stating to have an edge in the market is a daring assumption, and one that is often scorned.
But those that educate themselves diligently and in proper manner will find it. And the best place to look for it is in
the disability of other traders to educate themselves in similar fashion.
This chart should not leave any doubt behind as to whether that pullback in the right-hand corner was a valid pullback
in term of price action. Nothing but white colored bodies, and not one candle in it broke the bottom of another until
the very last bar at the top (1).
A point of discussion could be the origin of the trend leading up to it.
Should we consider the trend to have started at the stop of the chart around 14:00, then this very nice pullback is
technically not the first. But how can we ignore such a harmonious pullback to such a lovely trend? Even despite the
fact that it broke the ema20 to the upside, it is just begging to be shorted on first break.
Granted, allowing oneself the freedom to deviate from an original plan of attack could be a tricky proposition. But
every now and then, it may be wise to let logic prevail over rigidity.
With time and experience, this will become second nature; however, it should only be applied sparsely and certainly
not as a means to jump the gun on a trade.
As to the situation in the chart at hand: imagine this kind of a pullback to surface, say, fifty times in the course of a
year’s trading, and every one of these situations would have been traded on first break. Chances are extremely high
that, on balance, these trades would have rendered themselves profitable.
That is what long-term positive expectancy means in trading. And why a trader cannot go around cherry-picking his
valid trades. He has to take them all.
IX – Second Break (SB)
Next to the DD and FB setups, which are very straightforward standalone reversal patterns, the Second Break (SB) is
one more chart formation that sets itself up to reverse a pullback in the area of the ema20.
But this time it requires a little more chart action to determine the exact spot to step into the market.
It is a pattern that could be seen as two FBs following each other in relatively quick succession.
As was explained in the previous chapter, a reliable FB setup is a rare occurrence. It was recommended to wait for
certain exceptional circumstances to take advantage of this particular setup.
That leaves it fair to deduct that, under normal conditions, the first break is considered an inferior proposition. If we
cannot expect a particular setup to return a healthy profit over the long haul, then the only sound thing to do is to skip
such a setup.
The good news is that skipping a FB does not mean the potential for a trade in the direction of the trend has fully
blown over. On the contrary. The FB, if it indeed fails, can actually play an important role in the development of a
much better trade setup, the so-called Second Break.
If the chart sets itself up favorably, a scalper may have an excellent trade on his hands to capitalize on the resumption
of the trend after all.
Let us see how this SB setup is ideally constructed. Since it is a pullback trade, we first need to see a trend to begin
with. This does not have to be a very outspoken trend, but we do need to see the overall market pressure point in
favor of the trend’s direction. The pullback should be very orderly and preferably somewhat diagonal.
In all cases, a potential trade should not have to crack a lot of chart resistance in order to get to target. We could say
that the conditions that favor this setup very much resemble those of the earlier discussed DD setup. And as is the
case with most with-trend plays, no matter how inviting the trend in the chart at hand, ultimately, it is the shape of
the pullback that has the biggest say on the matter of participation.
If you think of it, there exists a strange symbioses between with-trend traders and countertrend traders, for either
party needs the activity of the other.
Since trends sooner continue than reverse, it is not hard to imagine who is losing out the most in this fragile
cooperation. That is not to say that a consistently profitable contrarian is merely an illusion. When equipped with great
technical insight and a magical sense of timing, a clever countertrend scalper can really live it up, even in the best of
trends.
But the trick is not to overstay the hospitality of the market. This can be a delicate balancing act between pushing for
profit and running for cover. Fortunately, it is not our task to defy the countertrend professionals.
We will just let them be and even thank them for bringing prices to more favorable levels.
Our tactical aim is to cleverly exploit the predicaments of less skillful players who have little concept of what they are
doing and who will find themselves repeatedly trapped on the wrong side of the market.
Let us walk through a hypothetical short example in a downtrend to see how this could play itself out.
After having witnessed the bullish pullback from the sidelines, with-trend traders, at a certain moment, will start to
re-enter the market somewhat more aggressively. Many will try to pick a spot in the vicinity of the ema20 to deploy
new short positions. This renewed with-trend enthusiasm will put pressure on the pullback and force a lot of
contrarians to quickly bail out.
As a result, prices may stall and slowly turn around in the direction of the trend again. If this is done aggressively
enough to take out a signal bar’s low, then a first break is a fact. As has already been stated, under normal
circumstances, this break is not acted upon in our method. Still, the market has given off a clear signal that the pullback
party may be coming to an end.
Naturally, not all market participants will pick up on the hint or deem it trustworthy. In fact, sideline contrarians may
look upon the with-trend bounce as a welcome opportunity to now counter the market at more economical levels.
If so, they will put pressure on the trend again and as a result prices may once again be lifted up towards the ema20.
From our sideline perspective, things are now getting very interesting; at this point, we like to see a second with-trend
attempt to topple the pullback, and preferably executed with a little more aggression.
But as clever scalpers, we will not do the dirty work ourselves. We will remain on the sidelines and simply sit back
to watch how the situation unfolds.
We should be on high alert, though, and ready to fire off our shorts in one-click fashion. After all, since the overall
trend is still down, the chart may soon present a major with-trend opportunity to put these obnoxious and resilient
contrarians where they belong: out of the market. A second with-trend attack will most likely do the trick. If it indeed
materializes, our task is to hop on the bandwagon as soon as we can. The moment a second signal bar gets broken in
the direction of the trend, we will enter the market short and hope to enjoy a nice ride of pullback implosion.
So, why not trade that first break to begin with? After all, should the market immediately take off, then we are already
on board; and if not, then at least we would be nicely positioned for that possible SB later on?
That is a very fair question, but since we have not yet touched upon the various exit techniques regarding the faltering
trade, it may prove a little difficult to provide a satisfying answer just yet.
For the moment, it should suffice to explain that a failed first break is often looked upon as a countertrend signal to
push new life in the pullback; and thus, an incentive to once more attack the trend. Although this second thrust runs
a solid chance to be countered itself, it may just be strong enough to activate our exit strategy, meaning the FB trade
has to be closed out for a small loss in order to protect the account. Remember that the maximum of a full 10 pip is
solely a worst-case scenario measure.
That means our average stop will be much closer than that.
To avoid the risk of getting ourselves stopped out prematurely, it is best to forgo the FB trade in anticipation of a
superior setup. This approach, it is fair to say, does contain the occasional drawback of seeing prices take off and never
look back.
Let us recap what we have gathered so far on the hypothetical short and then dig in a little deeper.
First, there was a firm swing down (the trend), then a minor swing up (the pullback to the ema20), then, a tiny move
down (the FB), and then a tiny move back up (second thrust in the pullback, defying the with-trend bounce).
Having fenced off the first with-trend attack, countertrend traders now face the critical task of having to crack the high
of the pullback from just moments ago. That would be a technical feat of significance.
The general premise may very well be that upon cracking that high, even by as little as 1 pip, at least a respectable
number of with-trend traders will start to get cold feet. No doubt, a big part of their paper profit has already been
eaten away during the pullback and at a certain point they have to protect what is left of it.
If scared enough, they may very well bail out on a break of that earlier high, and in doing so become countertrend
traders themselves. After all, one can only close out a position by taking an opposite position, such is the nature of the
game.
And while these with-trend traders are bailing out to protect themselves, new contrarians, smelling predicament, will
quickly try to capitalize on the situation by taking fresh countertrend positions, challenging the trend even more.
Brilliant as the plan may be improvised, there is one little oversight that might just spoil the fun: it is a plan against
the trend.
Therefore, despite this countertrend persistence, it is safe to assume that in most instances with-trend traders will not
let themselves be intimidated that easily. They know they have the trend on their side, and the stronger it is before
the pullback, the more they will look upon that very pullback as a great opportunity to short the market at very
economical levels.
If so, then for a second time in the same area countertrend traders will take a beating. Should it turn out that they
have exhausted themselves in their two attempts to turn the trend, and now lack the courage or the funds to cook
up a third, the chart, at some point, will print a bearish candles that takes out the low of a previous candle. This is the
second break (SB) a sideline scalper has been waiting for.
He will short the market the moment the break becomes visible on his screen.
Hopefully the point is taken that the smart scalper does no recklessly join in because he expects the countertrend attack
to fail. He waits patiently for his fellow with-trend traders to start pushing their weight first.
With a bit of imagination, one can picture in a downtrend a M-pattern at the top end of the bullish pullback, usually
in the area of the ema20 (resistance). In case of an up-trending market, the pullback will be bearish and in bottom end
of it one might see a W-pattern in the ema20 (support). Both are extremely dependable stepping stones for a
continuation of the trend. Technical traders may recognize the very common double top and double bottom reversal
patterns. Here they are called reversal patterns because they reverse the pullback (not the trend).
Since the SB setup is made up of two individual breaks that very much appear on their own terms, its formation comes
in many shapes and forms.
The most visual variations deal with the number of bars between the first break and the second. In similar examples as
the one described above, the SB will occur not long after the 1st, maybe within one to four bars.
This will keep both breaks rather close together, making the pattern quite compact in shape and easy to identify (the
M- or W-pattern).
Quite frequently, however, the number of bars between the 1st and 2nd break will surpass that of only a handful,
turning the SB pattern in a more elongated, wave-like formation. Still, this does not compromise the high probability
factor in any way.
The exact same forces and principles are at work, it just takes the market a little more effort to get the message
across.
Now let us see how some of these SB setups present themselves on a real-time chart. There is no need to memorize
any of the bar sequences because in practice, the market may come up with an infinite number of variations. If one
understands the idea behind the setup, recognizing it in the market will soon become second nature.
The concept by itself is rather simple to grasp: countertrend traders try something twice, fail on both occasions, and
then, either demoralized or panic-stricken, give up on their plan by quickly bailing out.
This simultaneous activity of with-trend traders entering and countertrend traders exiting (-> Double pressure!)
creates a temporary hiatus of countertrend interest, which reinforces the trend with every newly conquered pip until
it simply wears off.
Needless to say that somewhere down the line, countertrend traders will come out on top or else the markets would
indefinitely rise of fall.
It is crucial, though, to not let ourselves be scared out of perfectly healthy trades just because we are afraid to get
trapped in what might be the exact turning point of the trend. As long as the market is trending and not running into
obvious resistance, we should consider every orderly pullback a temporary event, and use it to our advantage by
trading our setups at every possible turning point.
Once we start denying ourselves trades because we think the market has gone too far, we enter the realm of the
paranoid amateur who lives in a fantasy world of being able to predict what is going to happen next.
Essentially, there are only two reasons to skip a valid trade: obvious chart resistance and unfavorable trading
conditions.
In all other instances, probability traders should just trade probability. And there is arguably no higher probability of
a winning trade in the markets than to take that trade with-trend after a pullback peters out.
Classic SB setup with only one bar between both breaks. From a technical viewpoint, it would have been defensible
to regard that first break (1) as a regular FB setup and trade it as such. After all, the market did crack a nice level of
support earlier on (the 1.3315 zone), to which prices were definitely responding to the downside. However, both
trend and the two-bar pullback somehow lack the distinctiveness and fervor necessary to allow for that kind of
aggression.
But sometimes this hinges on personal preference more than on chart technicals.
My favorite FB should ideally come out of a strong bullback that ate back at least 40% of an even stronger move,
with the market showing obvious signs of shock or turmoil. If that is not the case, my bet will be on the occurrence
of a second break (so either a perfect FB, see chapter 8, or you wait for the SB).
In practice, the market will hand the trader a lot of borderline situations that balance on the brink of being either this
or that. Aggressive scalpers may trade these borderline cases with similar enthusiasm as they do the textbook
setups, whereas more conservative individuals may opt to wait for a superior trade. It will take hundreds of trades
to determine which of the two is the more profitable approach.
In the end, the differences may very well be negligible. From a psychological point of view, however, being
consistent in the approach may prove to be more relevant than the actual strategy itself.
If nothing else, it will bring peace and harmony to the table and leave doubt and regret out the door.
One look at the chart above and you can see why it is so important to not lose track of the bars in the area of the
ema20, and particularly once the FB is set. It took the market just two candles after the first break to print a second
break (2), and off it went again.
The trend may be our friend, as goes the saying, but it will not exactly ask us out on a date. As scalpers we have to be
assertive and grab whatever opportunity is offered.
By the way, did you see the M-like pattern unfold in the ema20? As already explained, we can also look upon the SB
short setup as being a double top at the end of a pullback. As any technical trader will acknowledge, a single top is
perceived much less a tell-tale sign than a double or even triple top. Hence the SB being superior over the FB.
Fig9.2 This chart seems a little rough at first glance, but if one follows the forces in play, it is actually quite a decent
chart price technically. It needs no further clarification why skipping that FB (first arrow) is the logical thing to do. At
that point, the market may have been showing a preference for the upside (printing higher bottoms as it goes along),
but it is way too early for a trader to display FB aggression.
If you look closely at the price scale on the vertical axis, you can see that the 1.2850 round number level is playing a
major resistance in this chart. When breached for the first time (2), it must have made a lot of countertrend traders
very happy, for these important levels are best not broken in an overly eager one-directional move. A better way to
go about it, is to do it in a stepwise fashion.
As is often the case after an extensive run-up, once prices start to stall and then break down (3), clever countertrend
traders aggressively step in.
In this chart, they managed to force back the bulls quite significantly. Prices did not stop to drop until they found
support in the chart (4 tests 1). That pretty much evened the score. However, it did not take long for the bulls to try
their luck again. Not encountering too much resistance on their path, they quickly brought prices back up to
challenge the round number zone once more (5).
A pip below the previous top, countertrend traders typically deployed a fresh wave of shorts, forcing prices back
again, but with a little less zeal. This time the pullback neatly halted in the ema20 (6).
When this signal bar to the FB cracked to the upside, so did the round number and prices now even surpassed the
former top to the left by a pip or so (7). And then were forced back down again.
This is the point where a sideline scalper has got to be on high alert.
There is only one pressing question that needs to be answered by the market and chances are it won’t take long for
that answer to arrive: is that round number zone going to hold up as resistance or will it give in to the bullish forces
that are attacking it? In the space of just a few minutes, the market has seen three breaches of it, all three of them
cut short. Something’s got to give. Either the bulls will give up on their attempts, or the bears will succumb to the
upward pressure.
At the point of the second touch on the ema20 (8), obviously by a very bearish looking candle at the moment of
impact, there is still no telling which side of the market is the more dominant party. Prices could bounce up once
more, stall completely, or drop like a rock and never look back. Still, in these situations, it would be wise to already
place the cursor on the buy button and anticipate a bullish breakout. Not because of preference but simply because
only a bullish breakout will require immediate action, which is to enter long at the market after a second signal bar
gets broken to the upside (9); a victory of the bears, on the other hand, will most probably not generate a short
setup for at least a fair amount of bars.
Let’s look at this SB situation more closely. It is safe to assume that at this particular moment in time, little scalpers
are not the only ones ready to trade that upside break.
All sort of traders, big and small, active on a variety of time frames, will be sitting up straight, either dreading or
hoping for the market to pop. Although the cracking of a round number zone regularly passed as a total non-event,
this particular chart shows the level being strongly defended as well as attacked.
It isn’t hard to imagine a large number of stop-loss orders floating above it (of traders currently short); should the
number crack, the market could show a mean reaction that could even be the start of a major rally (double
pressure!).
Big players love to take these orders out when given the chance. They thrive on other traders’ paranoia and take
pleasure in testing these resistance zones multiple times, just to see how the defenders react to either pinpricks or
more aggressive attacks.
Bear in mind, though, that big players cannot have their way with the market completely unchallenged. It would be
incorrect to assume that they are only opposing the smaller participants. On their path, they will encounter loads of
other big players for sure.
And each of these opponents will also have great technical insight and no doubt a bunch of allies to join forces with;
together they just may possess the power to swing the market in another direction. And each party will feel no
shame revising its strategy in a flick of a moment. To the tiny scalper, the trick, of course, is to not get trampled in
this parade of dancing elephants, but to cleverly ride their backs.
Note: In hindsight, everything is easy and the chart, like the one above, may show perfect looking bullish dojis in the
ema20 that make for excellent signal bars to a possible break (bars 6 & 8). But try to imagine that in real-time, these
candles looked very bearish the moment the average got hit. So, when it comes to reading candles, do not let first
impressions deceive you, but stay alert and expect any bar to fully change shape when there are still ticks to go in it.
What’s more, very bullish or bearish candles with a perfect hindsight hit on the ema20 (no piercing), in real-time may
not even have touched the average at all up until the very last tick that closed the bar. Exponential averages, after
all, put more weight to current prices than older ones, which explains a possible sudden lift or drop of the average in
case the current candle is very strong and ends on its high or low.
Keep this in mind when looking for a signal bar to set up a possible trade. Although we do not actually need visual
confirmation in the shape of a tell-tale bar (we trade breaks, not bars), it is always nice to see some distinctiveness in
a particular signal bar.
Let’s compare this SB setup to the one in the previous chart, fig 9.1. Apart from the fact that the first chart is bearish
and the second one is bullish, are these patterns really that different? Visually, sure. But technically, the same
unmistakable forces are in play:
A trend (or strong move), a pullback, a failed continuation of the trend, another pullback, a continuation of trend.
The bearish chart shows the M-pattern, the bullish one the W. In any case, both reaction to each second break
literally speak volumes.
 It is a great
technical plus to see a trend present itself with indisputable clarity. The 70-tick chart may be a speedy one and set to
serve a scalper’s short-term strategy, it is not so tiny a chart that it is completely disconnected from the somewhat
slower tick or time frames.
That means that a nice solid trend on our chart is very likely to be picked up by a great number of other participants
as well. Maybe all the way up to traders trading a 10-minute chart.
The clearer the trend, the tougher the job to counter it. Although countertrend traders can be rather persistent and
courageous in their attempts to fight the market’s direction – and at time quite successful – it would suit them to
make a clear distinction of when to and when not to undertake these tricky ventures.
Those that entertain the folly of trying to obstruct a very determined trend will simply find themselves tossing
pebbles at a giant. There are just too many with-trend traders around hoping to treat themselves to a piece of the
pie, and they will welcome any countertrend attempt with open arms.
The first SB pattern in this chart above has a FB in it that is rightfully skipped (4). The pullback leading up to it does
not have the makings of a standard one-directional countertrend move, nor is it the first to counter the trend. It is
best to wait and see how the situation unfolds.
On close inspection, we can see that the signal bar that led up to that first break actually cracked a series of highs to
the upside (3). In combination with the little double bottom pattern from a few minutes before (1-2), this must have
looked very promising from a contrarian perspective. And it must have inspired at least a number of with-trend
traders to start dumping their profitable positions out of fear of seeing their paper profits being fully eaten away.
And still the market did not budge. That spells short with a capital S.
When searching for a with-trend setup, and then be presented with one, a novice trader is still very prone to make a
rather classic mistake. And that is to be intimidated by the very activity that brings prices towards him (-> Scared
of the pullback like “if there’s a trend, then it goes down, maybe it will just go down and I’ll long for nothing” kind
of?)
False perceptions show the nasty habit of emerging right before having to take a trade. Fight them and trade (6).
In a way, it is highly understandable for a trader to become at least a little paranoid in a line of business where every
move simply revolves around trapping and trampling, or luring and betraying the fellow businessman. But let us face
it, this is what it is, and a trader is best advised to come to terms with the treacherous nature of his profession as
soon as possible. If it is any consolation, even the seasoned trader gets trapped. Everyday again. No trader will ever
have control over the market. But it is important to not let the market control the trader, either.
In other words, you cannot go around predicting when your setup will not work. If it is a valid setup, you have to
take it. In a later section, we will look into those situations where an otherwise valid setup loses its validity on
account of the current conditions being unfavorable to the trade. For now, that is not relevant.
The second SB pattern is a beauty, and quite of the textbook variety.
First there was a strong one-directional pullback leading up to a first break that could be legitimately skipped at that
point in time (8). But look at these white bodied candles, not even a black body in it; it means that every candle
closed higher than it opened, which is a strong display of bullish sentiment.
Should such a move scare a trader out of the idea to still go short on a possible second break? Not in this chart.
Moves like this, in the opposite direction of a strong trend, are extremely prone to exhaust themselves; it is like
running up a hill without a break. Running downhill without a break is a lot easier, hence the principle of the
(down)trend being your friend.
The little doji at the top of the pullback is the signal bar to the first break (7). A scalper can rightfully skip the FB (8),
but he should not lose sight of the activity in the ema20 zone. The market now resides at a crucial spot. Will the
next coming candles manage to stay above the average, or will prices continue their decline?
The odds strongly favor the latter. Firstly, because the trend is down to begin with. Secondly, because that pullback
is running into the technical resistance of the previous pullback from 20 minutes ago, no doubt making a lot of
traders want to short it; remember how pullbacks tend to test earlier broken levels, and then bounce back.
Here that pullback tested the level from where the first SB setup broke down (7 tests 5).
Thirdly, because in a strong downtrend new highs as well as news lows are very likely to get shorted. New highs,
because they provide more favorable prices to short from. New lows, because they break in the trend’s direction.
Look what happened when a second signal bar low was cracked and the SB setup completed (10): the market
dropped like a stone, just like it did 10 minutes ago.
Traders that can appreciate a nice touch of pattern repetition should have a close look at both of the SB setups here,
and particularly at the three-bar price action leading up to each second break (the bars above 5 and 9).
Both situations, though minute in shape, provide excellent examples of how the psychological warfare among
traders can be displayed in a small number of crucial bars. We could simply see a doji, a bullish bar or a bearish bar.
Or we could read: countertrend doubt, countertrend hope, and countertrend fear. And one only needs to look at
the ensuing price action to see what happens when fear turns into its uglier variant: panic.
Looking at all of the setups so far, the impression may have arisen that in the majority of winning trades prices will
make a one-directional, dedicated dash for the profit target from the moment the break is set. What a wonderful
world that would be. It may be a bit disheartening to realize that this will simply not be the case in a vast number
of our trades. Understanding this principle is one thing, accepting it is quite another.
Staying calm after entry and not being tricked into prematurely bailing out of still very valid trades (although slightly
in the minus) is what separates the professional from the amateur. The reader, by now, may have become a bit
anxious to learn about the specific exit techniques attaches to this scalping method, but it is really deemed
preferable to go through all of the setups first and not front-run any of our future lessons.
For now, it should suffice to say that, as a rule of thumb, most running trades will simply keep their validity as long as
prices travel in the target’s direction, and if not, as long as they do not take out any specific highs or lows,
particularly those of a setup.
Irrespective of strategy and bail out techniques, let us contemplate a hypothetical situation in which a trader acted
upon that first break in the chart above (2).
It shows the typical predicament of having to decide whether to stay in and still believe in the trade, or bail out to
prevent further damage. Technically, this trader did the right thing by trading a very trending chart from the long
side. Should his strategy allow him to trade any first break in a respectable pullback, then he did not slip up in that
department either. Still, his trade is about 6 to 7 pip in the minus at the lows of the pullback (3), with no certainty of
that being the end of the agony. What to do?
It is irrelevant what this particular trader would do. What is important, is to realize that getting trapped in a tough
spot is not merely the privilege of traders acting before their turn. Situations like this will most certainly present
themselves in almost any session, no matter what setup is involved or what strategy is used.
Trades do show the tendency to stumble and falter in relation to the entry price probably more often than not. Chart
technically, however, the market may only be exhibiting its typical hesitation before making another swing in the
direction of the trend (and the trade). If we look at the chart in question, for instance, and imagine ourselves to be in
that first break trade, then being so many pip in the minus is hardly a comforting prospect for a winning trade.
The market, on the other hand, is completely oblivious to a trader’s hopes and fears. All it did here is what it usually
does before moving on, and that is to test, very technically, a former level of support or resistance.
Here it tested, to the exact pip, the low of the first little pullback from about seven minutes before (3 tests 1).
Still, this is where a trader, quite unwillingly but forceful nonetheless, may get swept into an emotional battle with
the market should the latter force him to take a loss, only to treacherously turn around and provide the anticipated
swing after all. Unfortunately, this is a very common and often painful experience, and even more so to those not
alert enough to recognize the trap and immediately re-enter (4).
First of all, not being able to re-enter as a result of having faced a little loss just moments ago is a clear case of burnt-
finger anxiety. Apparently, a recent loss has negatively affected the decision-making process – at least long enough
to miss the next trade – which is a sign that the trader is no longer thinking in probabilities. Having one’s emotional
balance rock up and down as a function of the outcomes of one’s trades is a surefire way to burn out eventually.
Whether a trader freezes up after a loss or prematurely re-enters to vindicate himself, both equally common, his
decisions are no longer based on exploiting a technical edge but find their footing in emotional instability.
Needless to say, things can quickly go from bad to worse.
But let us also examine a common psychological knot even a more stable scalper might himself wrapped up in.
Seeing his stop getting hit for, say, a 6-pip loss, but alert enough to re-enter, technically, and obtain the 10-pip
winner after all, this trader may still experience very uncomfortable feelings of being trapped, tricked, and even
bereft by the very market that just allowed him to make a 4-pip profit on balance.
Why would that be? Most probably, because even a lot of experienced traders cannot shake the idea of having to
prove themselves right in every trade – to justify the risk they take with each position in the market. They are not
thinking in probabilities either.
They may survive on technical proficiency, but inside they are a psychological mess. Imagine for a moment that the
market had neither presented the first nor the second trade and no position had therefore been taken. Our trader
would probably feel alright, calm, and open minded towards the market. But now that he got his 4-pip profit, he
feels bad and bereft!
And it is very logical why he would feel that way; after all, since he was right on the direction of the market, he feels
the market owes him these 10 pips, but he only got a measly 4.
Really, all this agony – the inner battles, the compulsive desire to prove oneself, the irritation when contradicted by
the market – will simply pass once a trader fully accepts the risks, the losses, and any outcome the market may come
up with. In other words: once he starts to think in probabilities. It is the only road to relaxed trading and ultimately
to consistent, profitable results.
No individual trade, not even a nasty string of losers, should be able to disrupt a trader’s confidence in his abilities or
in the method used.
As long as a particular strategy is not proven counterproductive – which is to be assessed by analyzing many
hundreds of traders over a specified period of time – a trader should just trade his setups, and thus probability.
There is no point in counting pip on a trade per trade basis. Count them at the end of a session or over the weekend.
Inside a session it is simply trading time.
Let us get back to the chart; although not every first break trade will falter like this, this case serves to show how
dangerously these FBs can be challenged; and it also shows us how well a second break in the pullback is likely to be
picked up by with-trend traders awaiting their chance (4). The signal bars to the SB trade (two dojis with equal
highs) also function as a regular DD setup in this chart (3).
Note: If the entry on the SB (in the bar taking out the two dojis) was somehow missed, it does not have to mean the
opportunity is lost. The market, quite frequently, will offer a trader a second chance to get in, usually within the first
couple of bars after a break. After all, there exists a strong tendency of prices to revisit, test, the level they just broke
out of.
This phenomenon, if it indeed presents itself, may even allow a trader to get in on his missed trade at no extra cost.
It may depend on the situation to determine the point were trying to get in is best forgone. This is more a matter of
bars than it is of price.
On average, it is fair to say that in calm markets a trade can still be entered within the next couple of bars. But that
should never be a reason to deliberately miss an entry! Thousands of good trades, no doubt, are missed out on each
day because of traders trying to outsmart the market by waiting for a more economical level that never shows up.
If you look closely, in the strict sense of the setup there was another SB about 12 minutes later (the FB at 5 and the
SB at 6), but it is not hard to see why this market situation is definitely of inferior quality.
Let me explain: in a bull trend, for instance, the low of the pullback leading up to the first break counts as a standard
measure to be tested later on should the market not immediately want to proceed (the first low in the W-pattern).
If it is tested and holds up (the second low in the W-pattern), the trend is often perceived to be technically sound
and thus prices could very well live up to their upward projection. The idea of the SB being such a high probability
trade is based on the premise that this low is indeed tested, even if it is not exactly to the pip. But having to enter a
SB about 7 pip above the entry of the first, without having seen a proper test of the earlier low or even the ema20,
just does not make for a high probability trade anymore.
Admittedly, in this chart the distinction between the proper SB trade and its ugly counterpart was not exactly subtle.
In many situations, however, there will run a much finer line between taking and skipping a trade. That may put the
trader a little more to the test. In the end, a trader can only make do with his current state of proficiency and hope
to grow with each new day in the market.
Note: When studying a questionable situation in hindsight, it is always essential to evaluate the case with an open
mind. That way one stands to learn and benefit the most from whatever happened in the past. Skipped trades, for
instance, that turn out a winners, and accepted trades that turn out a losers, may only represent outcomes in the
normal variance of a probability play and should not necessarily be interpreted as a reason to act differently next
time.

Although not technically identical, these two setups are very similar in price action, but there are some subtle
differences that may be interesting to point out.
In the first setup, the skipped FB (3), resulted in a short resumption of the trend before countertrend traders
brought the market once again up to the ema20 (4).
The thrust of this second leg of buying activity, however, never made it past the earlier high of (2). Apparently, not
even the comforting thought of having the round number level of 1.40 right below the current prices (as support)
could inspire new countertrend traders to finish what their companions had started. That may be an indication of
underlying weakness. Still, things in the market are never fully evident and not seldom it takes only a couple of
bars to change an outlook completely.
Nevertheless, when prices could not muster the strength to lift themselves any higher, the situation got nasty quite
rapidly for the bulls. An alert scalper would surely have recognized a very promising M-pattern develop below the
ema20 and not much later a textbook SB entry (5).
In situations like this there is no need to postpone entering on the SB out of fear of that round number support (as
resistance to a short). Waiting for the round number to crack first, as if to have weakness confirmed, is certainly not
advisable. Not only does it deliver a terrible entry (in relation to the stop), the same danger of the level holding up is
still lurking. Because the possible resilience of a round number is more a zone than it is an exact level. In other
words, for the sake of a healthier scratch, it is better to be short a pip above a round number than one below it.
There is arguably no notion more highly regarded among technical traders than the popular wisdom of cracked
support becoming resistance and cracked resistance becoming support. This is indeed a wondrous phenomenon that
relentlessly shows up in any time frame, in any market. A fine example can be seen in the chart above when the first
pullback to the second setup touched the 1.40 level from below (6). Why any scalper would want to buy straight into
a first test of cracked support (now resistance) simply baffles the smart trader’s mind, for it must be about the
lowest probability trade in the field.
Put yourself in the position of a bull for a moment and imagine your buy order being filled right there in the ema20
at 1.40. What do prices need to do for this trade to render itself profitable? They would have to dig their way
through the very visible resistance of the clustering activity directly to the left (the M-pattern of the first setup).
And not only that – they would have to do that after already having climbed up about 10 pips against the trend
without pausing. These conditions provide a bull with terrible odds.
Needless to say that a clever bear will welcome any bull with open arms, for such foolish bravery provides his own
setup with the near power of foresight. After all, if going long at a particular spot makes for a terrible low odds trade,
then taking the other side of that contract should basically be a formality.
Of course, it is not any of our business to judge whoever is doing what at any given moment in the marketplace. It is
just information.
In that light, we would simply see prices stall in the ema20 after a nice pullback. That makes it interesting for us. If
two tiny dojis would set themselves up, then maybe we have got ourselves a nice DD trade in the making. If a first
bar gets broken to the downside and prices travel up again, then a very dependable SB may still set itself up. All the
more reason to stay focused and alert.
This particular setup shows a fine example of why it is wise to skip most first breaks in favor of a possible SB. The
reaction to the FB (7) was simply non-existent. No doubt some countertrend traders will look upon this as a sign that
the bears were a bit reluctant to push on. And with-trend reluctance equals countertrend hope: if somehow prices
could be brought back up above 1.40, cracking the high of the earlier attempt in the process, maybe that would
scare a number of with-trend traders out of their shorts, trigger some stops and convince new buyers to join the
countertrend attack.
The reason for being so elaborative on this four-bar setup, is to explain the buildup to yet another technical marvel
that in the hierarchy of tradable patterns may rank among the top of them all: the notorious false break.
Take a close look at that fine doji (8) that becomes the signal bar to the SB just moments later (9). For a brief
moment, at least within the space of 70 ticks, that bar must have looked very bullish, white bodied and leading the
countertrend parade.
But the moment it stucks its head above the previous high (and simultaneously above the round number), with-
trend traders ruthlessly slammed back the countertrend attack, warning every potential buyer on the sidelines to
either back off or perish.
Seeing a strong bullish candle also transpose in a very bearish looking doji is the perfect deterrent to anyone still
entertaining countertrend affinity. Particularly so, when that candle also represents a very classic false break (it
falsely broke the earlier highs of bar 6 and 7). By definition, a false break traps any trader trading it as a true break,
so these unfortunates are the first to feel the pain and they will have to act almost immediately to stop it. Of course,
they can only do so by closing their trades in the opposite direction, enhancing the falseness in the process.
 Double pressure.
What makes the false break more dangerous than most other market traps or tricks (from the perspective of those
trapped in it) is its visual clarity. Especially when it tried to break the trend. The more traders see the same thing, the
less chance for countertrend folly. Up to a certain point, of course. But usually long enough for us to scalp another
10 pips out of the market.
Just looking at these two SB setups show us clearly the path of least resistance in the market. Why go against it,
when you can go with it?
Note: This chart also provides a nice example of why being biased on the direction of the market could prove to be a
terrible guide in scalping. At the left side of the chart, just 10 minutes before the first SB setup, the market looked to
be trading in an uptrend (prices well above the ema20). We cannot derive from this chart whether the 1.4020 zone
represented chart resistance further to the left, but let us assume for a moment it did not. Then the chart presented
a scalper with a textbook DD setup in the ema20 (1). The trade that came out of it, obviously never got anywhere.
Clever bulls will immediately switch into neutral, accept the loss and move on.
A biased scalper on the other hand, after being stopped out, would probably feel slightly uncomfortable with this
little mishap. Since he pictured the market to travel higher, seeing it travel lower instead just does not feel right.
How could the market be so wrong? The point is: would this scalper be able to reset his mind from bullish to neutral
to bearish in time to take that first SB short entry just a few minutes later? A good question.
The first SB entry (4) in this slowly trending chart broke a cluster of no less than five dojis, all sharing equal highs.
Notice how nicely the lows of the dojis (3) tested the earlier low of the signal bar leading up to the first break (2),
which in turn was a test of the 50-level that had been broken a few minutes before (1, resistance becoming support).
Note: A test of a level does not necessarily have to occur in opposite direction. In this chart, the lows of (3) test the
low of (2); the low of (2) tests the earlier high of (1).
By now, the observant trader will surely have noticed the remarkable tendency of prices to move in an orderly,
stepwise fashion when traveling from one level to the next. Our 70-tick chart provides us with a wondrous view on
these technical dynamics. With amazing clarity, it portrays, often to the very pip, the way most levels get attacked,
defended, conquered, tested, and abandoned. And that is not all.
Technical chartists could have a field day just counting the many popular chart patterns that keep on reappearing in
this excellent chart. Bull flags, bear flags, triangles, channels, double tops, pennants, head-and-shoulders, cup-and-
handles, triple bottoms – it is a nonstop parade of technical phenomena.
So, if that is the case, are we not missing something here, and in all of the examples shown so far? Why aren’t there
any trendlines or pattern boundaries drawn on these charts?
The answer to that is even simpler than the question itself: these is no need to. All you ever need is already within
your grasp. It is easy, effective, and very, very profitable. Why look for more?
Surrendering to simplicity, it is fair to say, does not come natural to the human mind. Even when the desire is very
much present.
In fact, it can be a daunting struggle, almost like a ritual event, a rite of passage of some sort.
And it is a journey that must be traveled alone, in the solitude of one’s own perceptions.
One might even call it a leap of faith.
But believe me, once a trader makes it through that gate, he will experience a sense of freedom that seemed
unreachable just days before.
The second SB setup in the chart could not be tinier a pattern, yet it has all the makings of a perfect W-formation,
comfortably supported by the gentle slope of the ema20. You can almost visualize how the average is holding up its
palm to cup the price bars in it, providing just enough push to help them through the current 1.4060 resistance.
But this situation does present us with a classic dilemma that sooner or later will surface on any trader’s screen:
what to do with a new setup (5) while already in position?
Since the appearance of a second trade is by no means a rarity, we have to reflect on it for a moment to see how it
is best resolved.
In trading there can exist some interesting conflicts among what is statistically justified, practically preferred, or
logically demanded.
Let us first examine some of the typical options that come to mind when presented with that second trade while
already in caught up in a first.
 1: Ignore the new trade.
 2: Take the new trade as a stand-alone event and manage both trades individually.
 3: Skip the new trade but adjust the stop and profit levels of the current trade to those of the new trade, had
it been taken.
And one could even opt to add some subtleties like pocketing the current profits on the first trade right before the
break of the next, and then re-enter again when this second trade comes into effect; that does not sound so bad, if
not for spread and slippage.
If we look at the options from a mere statistical viewpoint, then it leaves us little room for discussion as to what the
proper action should be: take any trade that provides an edge.
But that may not be enough to go ahead with the trade. To evaluate our options wisely, we have to take into
account every possible factor – physical, mental, technical, and financial – that could theoretically compromise our
play.
When opting for the adjustable target model, for instance, having to juggle two trades simultaneously may turn out
to be a challenging task, even to the experienced trader. Adjusting stop and target levels correctly with only seconds
to spare will be virtually impossible in any market, let alone in one that is moving fast. Even worst, manual scratches
may accidentally cause unwanted open positions.
Why? Because many traders are used to exit their positions by clicking on the opposite order ticket. For instance,
when in a long trade, instead of hitting a close out button, they just click on the sell ticket. This one-click exit usually
works fine, because the majority of trades get scratched well before the market has time to activate the automated
bracket-stop.
But if one starts to hastily adjust the bracket levels, due to a second position overlapping a first, a trader may lose
valuable seconds to act appropriately and he may find himself exiting his position just as the platform beat him to it.
The result: a freshly taken, yet uncalled-for position.
Even in a calm market with no intention to adjust anything, taking the second trade may prove to be too heavy a
burden on either the account of on the trader’s comfort zone.
In other words, things can go from orderly to very messy in just a small space of time. The culprit: blindly following
a statistical edge and disrespecting practical circumstances.
Am I painting too negative a picture here, or just being realistic? That may depend on the trader in question, the
sophistication of the platform used, the amount in the account the experiences in the market, or what have you.
My personal preference, as you may have already guessed, goes out to sticking to the original trade and letting
everything else pass by until that trade is over.
Firstly, with so many possibilities to scalp the market in a relaxed state of mind, I do not see the need to complicate
matters for the sake of a few extra pip. But there is another reason I would have to pass up on that second trade,
and one that easily outmatches the mere freedom of skipping trades for the sake of simplicity.
It is called maximum risk per trade.
Although we will delve into this in more detail in a later section on Account Management, let us look into some of
the particulars briefly to clear up some common misunderstandings regarding this matter.
First of all, there is the issue of margin requirements. Margin, in general, is the minimum amount of capital in the
account required to trade a certain amount of volume with. This differs per company, but Forex brokers, on average,
allow a trader a huge leverage to play with, going from as low as 20:1 up to a whopping 400:1, or even higher than
that.
A leverage of 100:1 simply means that a trader can trade a 100 000$ worth of units, but only needs a 1000$ in the
account as margin.
What does this have to do with not being able to trade a double position, the reader may wonder; would a
consistently profitable trader, especially with the huge leverage offered to him, not have enough funds in his
account to trade that second position?
The answer to this is that it may not be an issue of funds.
There are a few things to address here that may be of importance to a trader unfamiliar with proper account
management.
First there is the common mistake of confusing broker margin with allowable risk. As much as a 1000:1 leverage may
represent an ideal circumstance for trading, to actually use that kind of leverage would border on the suicidal. It is
not a broker’s call to decide on the matter of risk.
The smart trader puts no more than a certain percentage of his capital at risk on any one trade; he will then simply
adjust his volume to match his risk model. For instance, should he want to use a 10 pips stop on a trade, his volume
will be twice as large in comparison with another of his strategies that requires a 20 pips stop. But his risk per trade
will be the same.
This is an important concept to grasp. Even traders who have proven themselves to be consistently profitable over
time are highly unlikely to go overboard on allowable risk per trade.
Chances are, they would not have reached their state of consistency in the first place had they not respected the
universal law of account protection: Anything can and will happen, even to the best of traders, so rule number 1, at
all times, is to protect the account.
Many experiences traders do not risk more than 2% of capital on a single trade. Overall, that is a fair percentage
and it would probably suit the consistently profitable scalper in similar fashion.
But they key issue here is consistency. Any scalper not yet proficient enough to reap profits from the market on a
regularly basis (many weeks on end) is best advised to approach the market with a lot more prudence, preferably
risking no more than 1% of capital per trade.
But regardless of the percentage chosen, once a trader has agreed on his maximum risk per trade, he should exploit
his granted leverage to the fullest and assign the maximum volume possible to his position without violating his
choice of risk.
That simply means that there will be no trading a second position while already caught up in a first, because the
maximum number of units is already at work. Doubling up would seriously violate the risk per trade rule, with no less
than 100%.
Of course, one could argue that the second position is a trade on its own and therefore is entitled the same amount
of volume as the 1st position, but that does not really hold up, if you think of it.
Trading two positions simultaneously in the same market and in the same direction is essentially one position
entered in two instances.
There is much more to be said on the relationship between volume, leverage, and risk, and all of it will be discussed
in chapter 16.
The first SB setup here looks a bit messy at first glance, but on close inspection it meets all the demands to qualify
for a perfect W-pattern in support (2 and 4 tests 1).
The average clearly, had a hard time keeping up with the sudden burst of activity: first a bullish buying frenzy that
came out of nowhere (long line of white bodies candles around 20:00) and then that sharp, three candle decline (tall
black bodies) that ate back almost 50% of the earlier swing. But look where that pullback came to a halt; straight
into the earlier resistance (now support) of the 1.3860 zone.
That sharp sudden upswing could have led to an excellent FB setup (3), if not for the pullback failing the
requirements (it showed a two-step decline, basically a double top). No reason for disappointment, because a
scalper can always switch to plan B, which is to patiently wait for a superior break to appear (6).
Interesting how that very bearish black bar (4) – that tested the earlier low of (2) to the exact pip, forming the
second bottom in the W-pattern – was immediately countered by an equally bullish bar that managed to close back
just above the ema20 (5).
Such can be the power of support. If you do not know what to make of a strong bearish bar countered by a similar
strong bullish bar, whether that is neutral or bullish (relatively speaking), then try to imagine them as one, meaning
as if the chart printed not 70, but 140 ticks per bar.
Then you get a bar that open on its high, runs all the way down, looking very black and bearish, only to close back on
its high again. The result: a perfect looking bullish doji – just like the signal bar leading up to the first break. Two dojis
in the bottom of a pullback in technical support: that spells W-pattern!
Note how the technical buildup to the second SB entry (11) is quite similar to the first. In the first setup the lows of
(2) and (4) made up the bottom of the W-pattern. In the second setup, the lows of (8) and (10) do the same. Now
that the market calmed down, the ema20 is once again typically running below the lows of the setup. Even more
technically, these lows find support in the highs of the previous setup (the highs of the W-pattern). All in all, this
represents very stepwise price action and things look quite good from a bullish perspective.
A nice bullish doji (10) became the signal bar to the ensuing break. However, as discussed in the text below Fig 9.6,
this second SB trade is skipped when already in position on the earlier SB. If still on the sidelines, for whatever
reason, it provides a nice opportunity to get into the market after all.
That being said, chances are a sideline trader may feel a bit uncomfortable getting in on that second SB trade
knowing that he missed a more economical entry just moments before. All very logical, in a way, but remember that
entering a trade is never an issue of price.
It is just a matter of probability.
Let us go back to that first SB setup for a moment. If we follow the path of this trade from the point of entry (6), we
can see that it flourished for about 8 consecutive pips, only to see the market take a sudden turn and demand back
all of the paper profits in its trip back to the ema20 (8).
Very few traders remain completely unaffected by this drastic change in prospect.
Seeing a trade almost hit target and then crumble apart like a house of cards is often perceived as a personal attack,
a mean and vindictive act of the market, just to spite a hard-working trader aching for profit.
Needless to say that this perception sneakily triggers all sorts of unhealthy emotions, with feelings of bereavement,
unjustness and deception ranking among the top.
This personal fight with the market, looking upon it as if it is an entity, a living, breathing organism, a mighty
opponent, is a typical trader’s illusion, and not only on the part of the novice. As usual, the enemy here is obviously
not the market but the demon within.
If you find yourself being able to look at the market technically, analytically and above all in a calmly manner when
not in position, only to see yourself lose all objectivity and emotional serenity when stuck in a trade, particularly one
that appears to be faltering, then you have no option but to embark on some serious soul-searching.
What is it that you want out of this trading business? What do you expect the market to offer you? What do you
expect yourself to accomplish? What makes you want to obstruct your own path to success, time, and time again, by
wrapping your sense of reality every time you are exposed to either losses or gains? Why can’t you look at the
market from a statistical viewpoint?
Or better yet: why can you think in probabilities in hindsight, but fail to do so in the reality of a running trade?
Maybe there is one single question that encapsulates all queries more than any other: what is it that you are afraid
of?
The answer to this will undoubtedly differ from trader to trader and one could probably take his pick from an almost
infinite supply. Just to name a few: fear of being ridiculed, of being wrong, of losing capital, of getting trapped, of
missing out, of commitment, of boredom, of pressure, of failure. And who knows, even fear of success.
Unfortunately, there is no ready-made solution on how to distance oneself from the many perceptions that obstruct
clear and analytical thinking when under pressure.
A trader could be told a hundred times over to think in probabilities, but when the mind is not yet ready for
structural change, it will simply ignore even the soundest advice.
Just like it is pointless to tell somebody grieving over a shattered dream, for instance, to just get over it. It is a
process.
And therein lies also the good news. We know it can be done. Eventually, a trader will come to realize that he has no
alternative but to start detaching himself emotionally from all his actions in the market.
Only then can he begin to look upon his trading as merely exercising a carefully crafted business plan.
This thought-process may take its time to surface – weeks, months, sometimes even years. In many cases, this
transition comes about so gradually that the trader may not even be aware of it; other times, it may occur rather
unexpectedly; who knows, one might even hear the proverbial click.
X – Block Break (BB)
If all setups were to qualify in one of three categories, the options being either with-trend, non-trend, or
countertrend, then the patterns we have discussed so far are unmistakably with-trend ventures.
They not only acknowledge the presence of a trend; they try to capitalize on its continuation as well.
And that makes sense, if you think of it. Although opinions on its definition may differ widely across the board, the
love for the trend in general is quite universal. Almost any trading method will incorporate at least a couple of clever
with-trend plays to hop on or ride out a good move.
Unfortunately, as any chartist will surely admit, things seldom materialize in the most desirable way. Many times,
there is a lot of pulling and pushing and backing and filling, even in a very visible trend, and this often ruins the
possibility of using the classic with-trend setups to get ourselves in position.
It is all part and parcel of the trading game.
However, in many such instances, the opportunities are not necessarily lost and with a little luck and patience we
may just be able to pull a nice trump card from our sleeve: the multipurpose Block Break setup (BB).
This setup comes in many shapes and forms and we would probably not do it justice if we were to casually
generalize on its appearance. A most simplistic description would be to characterize the pattern as a cluster of price
bars tightly grouped together in a narrow vertical span.
Preferably, the barriers of this block of bars are made up of several touches each, meaning that the top and bottom
side of the pattern clearly represent resistance and support. On occasion, depending on the speed of the market,
this group of bars could appear and be broken in a matter of seconds, but the formation itself could best be seen as
a miniature trading range.
If we were to draw a rectangular box around all the bars that make up this pattern, what should emerge is a
distinctive block of price action in which a relatively large number of contracts changed hands without price being
really affected. But the tension within should almost be tangible, like that of a coil being suppressed by a weakening
force that is bound to give in. If prices eventually break free in the direction of the path of least resistance, we
immediately enter the market on a break of the bow. This makes the broken horizontal barrier the signal line to our
entry point.
Should prices break out at the less favorable side, then no action is taken just yet.
When encountering this cluster of bars at the possible end of a pullback in the area of the ema20, a trend side
breakout would require similar action as would a break of a regular DD or SB setup. In fact, if we would also wrap a
box around a group of dojis that make up a typical DD, we would basically create a miniature BB setup. The same
goes for the SB pattern as a whole, though be it that the entry in this setup usually shows up before the highs or lows
of the complete pattern are taken out.
But make no mistake, when it comes to the BB setup, we are not just dealing here with another trick to take a with-
trend trade at the end of the pullback, although that is one of its functions. What gives this pattern its unique quality
and personal character is its multipurpose application. This setup could essentially show up anywhere in the chart,
while still conforming to the requirements of a tradable event. Its abundant presence makes it one of the better
weapons to tackle almost any market, trending or not.
There are some factors to assess, though, before we can start to regard this pattern as a valid setup.
We cannot simply trade any odd block break and expect the market to take off for at least a 10 pips run. As is the
case with any other setup, the BB, too, should be seen as just and aid to get in on a market that has already been
identified as favorable; it would be a painful mistake to use it as a pet setup with little or no regard for underlying
conditions.
But what exactly is a favorable market?
As we have already observed, a pullback in a trend, for one, leaves little room for discussion on that part. But how
about a sideways market that just printed a nice double bottom and a higher bottom in support? How about a
market that broke so violently that countertrend traders cannot even force a noteworthy pullback in it? How about
an up-trending market that shows clear signs of resistance, like double tops and lower tops? And what about a
market that seems in any respect, apart from the fact that it successfully slammed back all attempts to break a round
number zone?
The situations above, just randomly chosen, may be as different from each other as night and day, but they do have
one particular characteristic in common: not so much that they paint a very vivid picture of the perpetual clash
between the bulls and bears, but more that they show us who is currently winning.
The market may put up a fight, as it tends to do, but in the end, prices simply have no choice but to succumb to
whoever is pushing the hardest. Just when and how, that is for a trader to find out.
But maybe it is nice to know that the point of surrender is often preceded by a suppressed block of candles ready to
pop.
Since there are just too many variations of the BB setup, it is best to get to the charts and see them in the flesh.
Before we do that, let us first point out the most likely places for this setup to show up.
In essence, there are only three:
 1: As a block of bars in the end of a pullback. In case this pullback is quite extended, the setup may at time
show the characteristics of countertrend trade.
 2: As a horizontal pullback in a strong trend. This block usually shows up in a very brisk move that just cannot
seem to pull back. Whereas a typical pullback seems to move somewhat diagonally against the trend, this
one merely travels sideways, forms a block, and then breaks out in the direction of the trend.
 3: As a block of bars in a non-trending market. This block can be found in topping or bottoming price action
and even in the midst of a sideways consolidation. It can be played with-trend as well as countertrend.
As we will see in the next three chapters on Range Breaks, the BB setup can also be involved in the breakout of a
bigger pattern, the range, but we best take on that correlation once we have familiarized ourselves with the more
individual block breaks first.
In the coming charts we will see all of the BBs encapsulated by a rectangular box, aiding the visual process of
identifying the highs and lows within each block. Although it is not necessary to draw these boxes when engaged in a
live session, it does come in handy to at least plot the signal line in the chart.
That way, we can keep a real good eye on the exact break, because the highs or lows that make up the signal line
may be several bars apart.
Note: When looking at the chart, it is quite tempting to focus mainly on the moving price action and on the possible
development of a tradable setup. Yet the status of the overall picture deserves the most attention. Whatever price
bar is currently being formed; it can only derive value from its relation to the bigger picture. It is this wider view on
the price action that ultimately determines our setups to be valid or not. On average, an hour and a half of price
action will usually do just fine. To stay sharp and not lose focus, repeatedly force yourself to judge the price action
in its present light.
 Do you see higher bottoms, lower tops, horizontal breakouts, round number fights?
 Is the market trending, running in resistance, testing support?
Keeping track of the ema20 is just one way of assessing the current pressure in the market, and an excellent one at
that. But the whole array of actual tops and bottoms in the chart determines the overall pressure.
More distinctive higher bottoms than lower tops: the pressure is currently up
More distinctive lower tops than higher bottoms: the pressure is currently down.
Alternating tops and bottoms: the pressure is evenly distributed.
You may not think much of it at first glance, but honestly, you can hardly get any closer to a free ride in the market
than by trading patterns like this to the upside on a break of the box.
1st of all, looking at the left half of this chart, we can clearly see that this market is in an uptrend. Maybe an alert
scalper already took some profits home.
Maybe he had to give some back when prices finally dipped below the ema20 a little before 06:00. It is irrelevant.
What is important is to keep the radar scanning for trades to the long side; with a market looking like this, it is way
too early to entertain bearish fantasies. It is not so much the pip gain that defines this market as bullish, but more
the calmly manner in which it trails higher, finding hardly any obstacles on its path (the path of least resistance).
Even below the ema20, countertrend traders kept their activities to a minimum. That is a very bullish tell-tale sign.
But with prices currently below the ema20, how do we prepare ourselves for a possible continuation of the bullish
pressure?
This is where a block break pattern could supply a simple solution.
Let us examine why the box is drawn like it is. For starters, in a bullish setup, the exact bottom of the barrier of the
box is not a crucial element; after all, since we have identified the overall pressure to be up, we are not going to
trade a break to the downside, at least not for a while.
Still, curbing both sides of the pattern with horizontal lines (or wrapping a box around it), a trader does obtain clarity
as to what is going on within the boundaries of the setup: it shows him the most prominent level of resistance as
well as that of support.
It should take little technical insight to see why the top barrier – here the potential signal line – is drawn as depicted.
The first top it is resting on (4) is the first high after a little bottom was set in at (3). Of course, we can only identify
this high once prices have retraced from it relatively strongly. At this stage, the market is not talking BB yet, but at
least we now have a low and a high to monitor.
A few bars down the line, the market manages to test both the low and high to the exact pip (5 and 6), which is
excellent – the test of the high in particular. A successful test of the low, although not essential, is always a welcome
sight to anyone contemplating a long position. The test of the high, on the other hand, is crucial. If our first high is
tested to the very pip and not broken, then we have got ourselves an equal high – and thus a valid reference point to
draw our top barrier from.
Every new candle that manages to touch this top barrier without breaking it is only confirming its significance. The
premise involved is a simple one: the longer the barrier holds, the sharper the reaction when it finally succumbs.
Although the price action within the box has an amplitude of a mere five pip, the battle between the bulls and bears
could not be more technically displayed. The highs run into resistance of earlier support (2). The lows of the box
find support created by the earlier highs of a little bull flag pattern (1).
After the lows of the box are put in (four equal touches of the bottom barrier), the market gives us another major
tell-tale sign: a higher bottom in the box (7); yes, by a mere pip, but in scalping that is vital information nonetheless.
Granted, the initial reaction to the break (8) in this particular example is not exactly brutal; we might even say it is
quite hesitant (9). Although many block breaks can be sharp and brisk, the hesitant version is certainly not
uncommon. Who is to say what traders are thinking when price cracks the box – false break or not? Especially in a
quiet market, prices tend to take their time.
When this happens while in position, it is important to remain calm, even when the bars crawn back inside the
box. It is all part of trading breaks.
It may offer peace of mind to keep a good eye on the ema20 while in position. Despite the fact that the average may
be traveling sideways for the biggest part of a developing block, once the box break is set it often jumps into trending
mode and shows a strong tendency to guide price along.
And you may be surprised how often it will play a role in the actual breakout, too. In fact, the most reliable
breakouts are those where the average literally pushes the bars out of the box. To see how this works, have a look at
the next chart below, which shows us a stunning example of this phenomenon.

Painted by the magical hand of the market in the space of just twenty minutes, the BB setup in the chart above looks
treacherously non-descriptive. However, this one little pattern may very well represent the near perfect box, should
there exist such a thing as perfection in the tricky nature of the market.
Let us see how exactly this pattern earned its credentials. Earlier on, the bullish character of the market was
somewhat curbed by the resistance of the 1.3480 level (1). After a little backing and filling, as aimless price action is
often referred to, the market drifted lower in the next 30 minutes of trading and then established its most distinctive
low so far (2). Of course, we can only identify this low once the bulls start to buy themselves into the market again
and take prices back up.
Since it is our primary intention to trade this particular chart to the upside, we have to wait patiently for some sort
of resistance to come in. This resistance can then later be cracked.
The first sign of it was portrayed by the first distinctive top of (3) that follow the low of (2). That gives a scalper a
potential level to put his signal line on.
Now that we have a high and a low to go by, it is just a matter of following the price action until anything tradable
develops.
Preferably, we like to see a number of equal highs hitting the potential signal line, but the market is not always so
kind as to serve a trader on his every wish.
Should prices break out immediately, then that is just too bad.
There are many ways to play the market and should a scalper have to forgo a particular setup, then he just moves
on to the next tradable event.
In this case, prices very orderly stayed within the boundaries of the low and high and even managed to produce 7
equal tests of the first high in the box, which is excellent.
The stronger the significance of the signal, the more traders will spot the break and have to react. Either to get in or
to get out.
Within the setup, a number of higher bottoms can be counted (4, 5, and 6), lending extra credit to the possibility of a
bullish breakout.
As the coil is now being suppressed to the max, something has got to give.
We can imagine it to be the signal line, but as clever scalpers we will never act before our turn.
Notice how gently the ema20 eventually guides the bars through the top of the box, literally pushing them out. The
six small bars right before the break, five of them sharing equal highs, represent what we will refer to as classic pre-
breakout tension (6).
We could say it is a miniature box within the box itself. The subsequent reaction to the break speaks volumes. With
the 1.3480 resistance area now cleared, prices were simply sucked into the vacuum below the round number zone of
1.35.
Note: Similar as in the previous chart (fig 10.1) there is a little overhead resistance to be spotted to the left of the
setup (1). Would that not be worrisome? To a tiny DD pattern, it most probably would.
There may just be too little tension building up within the dojis to counter the resistance overhead. But the BB
pattern, in that respect, is quite different: it has tension written all over it.
What is more, the most likely why the BB set itself up in the first place is because of that same overhead resistance.
Which is why the break of it stands to cause a sharp reaction. Once the defenders give up and step out of the way,
the path is usually cleared for at least a number of pip.
Aspiring scalpers, when slowly taking a liking to this method, are recommended to study the characteristics of boxes
like those of Figures 10.1 and 10.2 (and their reversed counterparts) with great attention to detail. (?)
Hardly a session will go by without these very tell-tale patterns showing up in the chart, one way or another.
However, it is important to never lose sight of the overall pressure in the market, because that is what ultimately
determines the future direction of prices.
Obviously, assessing the overall pressure in a trending chart will not cause much problems.
In more sideways progressions, this process requires a little more subtlety on the part of the chartist, as is the case in
the next chart below.
When casually regarded, the sideways action before 05:00 could be interpreted as ordinary backing and filling; after
all, price merely dances above and below the sideways trailing ema20 without showing particular preference to go
one way more than another.
Still, the observant scalper may have already spotted a series of almost non-chalantly printed higher bottoms in
this sideways progression (1, 2, 3, and 4). When that fourth higher bottom was printed, forming a cluster together
with the handful of price bars next to it, things are starting to get interesting. Take a moment to compare the sharp
up move initiating from the second bottom (2) with the move that emerged out of the cluster (3 and 4). Although
they look quite similar in their thrust, the first one shot through the average with hardly any buildup preceding it,
whereas the latter first saw a cluster of bars build up tension before breaking out. As subtle as these differences may
be, they are of great significance technically.
Both moves seem to appear equally strong, but the one that emerged out of the cluster stands a much better
chance of holding up. Not only does it stem from a slightly higher bottom, the fact that it broke free from a cluster
puts a solid foundation beneath the current market.
This means that if prices were to retrace back to where they broke free from, as they often do, they are most likely
to be halted right at the level of the earlier break (resistance becoming support). After all, it is much harder for prices
to dig themselves a way through a solid group of bars than when there is very little standing in their way.
The mere implication of potential support can already be so strong that a market does not even feel the need to test
its validity.
In a similar way, tension was also building up within the first BB setup in the chart. No less than seven equal touches
of the top barrier can be counted within that block before the market finally broke through to the upside.
Notice how prices bounced off of the signal line, a few bars after the break, which clearly shows us the power of
cluster support (6).
Have a look at the three very small dojis leading up to the break of the box (5). They are displaying in miniature the
same pre-breakout tension as the complete box is displaying in the bigger picture of the chart (just wrap an
imaginary box around the highs and lows of the price action from 04:16 to 05:16). At the risk of being overly
elaborative, I am pointing this out for a very valid reason.
If you learn to train your eye to recognize these subtleties in a live market environment, you will eventually be
doing yourself a tremendous favor.
The rise and fall of prices are not a result of somebody swinging a giant wheel of fortune.
There are actual people in the market, trading actual ideas. Feeling actual pain, and actual pressure. You may never
know for sure what motivates them to do what they do at any given moment in time, yet of one thing you can be
sure: their actions are reactions to other traders actions, which is why most of the time everything happens in such
repetitive manner.
Markets may be random, as it is often stated, but traders surely are not.
Despite the upward pressure, the cluster below and the magnetic pull of the round number above, with-trend
participation after the break quickly died out. Eventually, this trade would have had to be scratched for a loss (where
exactly to bail out on a failing trade will be discussed in Chapter 14 on Tipping Point Technique).
Although they clearly lost a round, we can expect the bulls in this chart to not just crawl up in a turtle position. Given
all the higher bottoms earlier on, they will surely be on the lookout to buy themselves back into the market at more
economical levels.
The most logical area to pick up new contracts would be in the 1.3480 support zone. In fact, they did not even wait
for prices to hit the level spot on (7).
With the market traveling a few pip higher because of this buying activity, touching the ema20 from below, the
bears were now offered a more favorable level to become a little more aggressive (8). And indeed, they managed to
squeeze out one more low (9). They were given little time to enjoy that feat, though, as a large number of sidelines
bulls quickly stepped in. It is the information necessary to keep a trader on high alert for another bullish attempt to
take control of the market.
With no less than six equal highs testing one another, a scalper did not have to think very long about where to draw
the signal line of the second box.
What is the major difference between the first box and the second? At first glance, box number one originated from
a more favorable position (above the ema20), whereas the second box popped up in sideways action (flat ema20).
Keep in mind though, that the market could not care less about our 20-bar exponential moving average. That is
only an instrument in our own personal toolbox.
In fact, in a somewhat sideways environment, buying above it could at times be more dangerous than buying below
it.
Therefore, from a technical perspective, both patterns here are very similar in nature: sideways action, support
holding up, a buildup of tension and a subsequent break. Take a mental note of the two little dojis right before the
break of the second box (10). We will see this duo many times over throughout this guide.
They represent classic pre-breakout tension: a final attempt of those who operate against the current pressure to
keep the box from breaking.
Both bulls and bears will be very quick to act, though, should the proverbial jack pop out.
In the first block pattern, there are even three of these dojis to be detected, together forming not only a higher
bottom in the box but also the very welcome pressure underneath the signal line (5).
No less than six reasons immediately come to mind why this short trade has excellent potential to pocket a trader
another 10 pips of easy profits.
 1: The market gave up a rather lengthy support zone (first half of the chart).
 2: Countertrend traders lacked enthusiasm to test the broken support properly (1).
 3: Instead, a lower top got printed in what can only be described as a horizontal pullback (2).
 4: Two tiny dojis represented pre-breakout tension (3, basically another low top).
 5: A solid signal line succumbed to the bearish pressure (4).
 6: The magnetic pull of the round number below may just finish off the job (1.31)
As pleasurable as it may be to occasionally stumble upon the near perfect trade, it also poses a rather interesting
challenge on the topic of volume versus predictability.
If we were to assign a rating to each individual trade – by counting the number of valid reasons to either skip or
trade a setup – and came to conclude that the probability factor is apparently not a constant but varies visibly from
setup to setup, should this not force an intelligent strategy to alter the volume per trade in compliance with the
degree of predictability?
As you may recall, I strongly suggested to not put more than 2% of capital at risk on any one trade (when
consistently profitable). I also suggested to cram as much volume in these 2 percent as allowed in order to exploit
our edge to the fullest.
If so, then that rules out adding anything extra, no matter how good-looking the trade, because the maximum
number of units is already at work.
On the other hand, one could argue that if there is such a thing as a superior trade, then, naturally, there must also
be its counterpart, the inferior trade (though still possessing a positive expectancy); when opting to trade the latter,
could one not take off volume and tread lightly?
The true statistical mathematician, the one that eats bell curves and standard deviations for breakfast, would
probably cringe at the typical layman’s view on probability.
And rightly so. Still, it remains to been seen whether his clinical calculations hold up in a real market environment,
where nothing is what it seems, where dubious emotions play a major role in assessing the odds to begin with, and
where his faithful law of probability may even be defied by the very same forces that are causing it.
Once again, my take on this matter is to not delve into the complexities of individual outcomes, but to at all times
keep things simple, with the bigger picture in mind.
Once consistently profitable in the market, even marginally, a trader could best explore every valid setup with
appropriate passion and just load up.
Whenever we picture ourselves to have an edge, each setup deserves to be traded with equal respect, no matter
how shady or pretty its appearance. And that means assigning the maximum allowable number of units per trade to
fully capitalize on the principle of positive expectancy.
Note: Contrary to common perception, the least important of all your trades is the one you are currently in.
All your previous trades, though insignificant by themselves, at least have a statistical relevance.
Together they determine the power of your edge. Your current trade, on the other hand, has yet to earn its notch on
the historical slate.
It is just a trade in process. And it is totally irrelevant whether it will win or lose. In fact, in a consistently profitable
strategy that has proven to stand the test of time, a losing trade is basically a false assumption.
Why is that? Reflect for a moment on the following: if a 1000 individual outcomes would show an assembled profit
of 2000 pips, and your next trade came up a loser of 6, would you say you just lost 6 pips, or rather that you made
another 2 on balance? Granted, embracing a losing trade as if it were a winner may be stretching it a bit. But the
point does show the importance of a proper understanding of distribution in a probability play.
All individual outcomes are just data. The only thing that truly matters is the collective result of all your scalping
actions in the market.

This chart offers a great example of the benefits of scalping with a predefined target objective: no stress, and with a
minimum of exposure a trader could still participate in a big chunk of any solid move.
He does not need to wonder where to take profits. His only concern is how to get back in the market in case of a
distinctive trend. Armed with a proper set of setups and aided by the fact that prices seldom climb or falls in a
straight line, a proficient scalper should not encounter too much trouble in getting himself back in position.
In this chart alone there were no less than four block break setups to be counted in the space of an hour. True,
positions taken on box 2 and 3 may have overlapped; still, it would have been rather easy to scalp 30 pip out of this
chart, which is about the same number in pip the market managed to climb from the moment of the first BB setup
(1).
By extending the boxes somewhat to the right, you can clearly spot the market’s tendency to test almost any
breakout before moving on. It is not uncommon to see a test to the exact pip, as is the case, for example, with the
first and the fourth box in this chart. Note that this market does not care whether the boxes are formed from above
a rising moving average or below a flattening one; to determine if the uptrend is still eligible for further advance, a
quick look at the bottoms in it will usually be enough to make a proper assessment.
In this chart, every noticeable bottom was put in at a higher spot than the previous one. As long as that is the case,
we can expect the bulls to be aggressive and the bears to be in trouble.
On close inspection, we can see that the first box (1) contains a DD setup that would have already taken an alert
scalper in the market before the box itself got cracked. It goes to show, though, that if for some reason a trade is
missed, the market may still provide a trader with a valid opportunity to get in.
Of course, it may come with the penalty of a less economical entry price.
The following box (2) contains a miniature bull/bear fight in the round number zone. Take not of the two little dojis
right before the break. Preferably, these dojis have their extremes touching the signal line of the box, but things do
not always have to be perfect in order to be tradable.
The third box (3) is an excellent opportunity to pick up a trade into the simultaneous support of a round number
zone and some previous price action to the left; it more or less uses the cluster of bars within box 2 as support.
Technical traders may recognize a tiny reversed-head-and-shoulders pattern within the box (?). Once again, two
littles dojis (the right shoulder) very typically build up pressure by pressing themselves against the signal line prior to
the break.
The fourth box (4) makes a strong case for higher prices by not allowing the bears to test the round number zone to
the pip (it used the third box as support). Instead, the market prints higher bottoms within it and starts to work its
way up to a top barrier breakout. Another very classic tell-tale sign.
Note: No matter how you look at it, break trading, when done properly, and in a favorable market, can be very
profitable.
The fact that so many traders are so paranoid about it, constantly dreading the notorious false break to haunt them,
in many cases is only due to their limited understanding of what it means to have an edge.
And yes, false breaks do occur on a regular basis. But what exactly is there to fear when, on the whole, the odds are
favoring a particular approach? Have you ever seen a casino owner tremble in agony in the midst of his circle of
roulette tables? He loves every spin of every wheel, win, or lose.
The same holds up in the markets once you put your edge to work. So, there is no need to fear. Who should be
fearful, though, are either those traders taking the other side of your contract, or those who do trade breakout
themselves but lack the ability to recognize an unfavorable condition?
Have a look at the first and the third box again; the lows in both boxes represent typical false breaks to the
downside.
You may not think much of a candle dipping a mere pip below its companions, yet on a scalping chart these are false
breaks nonetheless. And somebody traded those breaks or else the chart would not have printed these prices.
When confronted with a dull and rather lengthy non-trending market, like the first half of the chart above, it is not
uncommon for a trader to start experiencing a somewhat uncomfortable mixture of impatience, boredom, and
even agitation. It can indeed be a mental challenge to have to sit out these times of inactivity, hoping for action and
not getting any, especially to those traders who look upon their trading platform as a slot machine in a penny
arcade.
A word of caution may be in place here, because these sideways ranges do have the nasty habit of luring a trader in
one of two very classic mistakes.
The first one is to start seeing and taking trades where there are none to be found. This warped sense of reality is
typical for a trader who just needs action.
And wrath be upon the market if he does not get it. Apart from the occasional winner that may come out of this,
seeing a growing bunch of scratched trades eat their wait into earlier profits will sooner or later present this trader
with the unsettling notion of being reprimanded by the very market he is trying to punish.
Needless to say, this sort of attitude towards trading is of the backfiring kind, and it remains to be seen whether this
trader can pick himself back up in time for when the real action begins.
The second classic mistake is made by traders who on the surface seem to stay composed rather well in a sideways
market. You will not catch them doing anything irrational like taking silly trades, nor will you see them get angry with
the market of force their will upon it. They can watch the proverbial grass grow for what seems like an eternity
without any sense of discomfort.
Proficient enough to recognize the current indecision of the market as something that needs to be cleared by
powers bigger than themselves, they simply sit back. Up until that one amazing moment that boredom abruptly kicks
in.
For reasons unbeknownst to themselves they suddenly have to get up to make these phone calls, do their exercises,
watch the news on the TV or even take a stroll outside. Anything to get away from that screen and that market!
Although not nearly as detrimental to a trader’s overall results as the other case, giving in to a sudden burst of
boredom after a prolonged spell of inactivity is like walking away from an investment that is just about to sprout.
It is a pity that traders are so caught up in the notion that trading trending markets is the only way to go.
Contrary to popular beliefs, sideways markets deliver excellent opportunities, for the simple reason that they have
to break out eventually, just like a trending market will eventually come to a halt of even reverse.
Whereas it is impossible to define the exact moment when a trending market will move into the sideways phase,
the sideways market, on the other hand, can give off very strong signals that it is about to move into a trending
phase.
A good example of such a predictable breakout can be found in the chart above. The first hour of price action
obviously shows the market in consolidation mode.
With the moving average traveling sideways and price bars alternating above and below it, there is not much to
make of it. This is your typical round number zone tug-o-war in the absence of a clear incentive (1.3150). But of one
thing we can be sure: unless it is a national holiday, late Friday evening, or lunchtime in an already dead Asian
session, price will not stay put for hours on end. Sooner or later some party will give the market a push and that will
be incentive enough for others to react.
The trick is to recognize the buildup that most often precedes it. This is why it is so important to familiarize yourself
with pre-breakout tension.
What will help is to draw, or imagine, a box around any clustering price action that might lead to a break. It may take
some practice to recognize the right set of bars to wrap a box around, but essentially there are not too many
variations to grasp. The first box here, for instance, is almost an exact copy of the fourth box in the previous chart
(chart 10.5, box 4).
By extending the signal line to the right, we can see that the pullback following the break successfully tested the
breakout level as well as the broken round number zone of 1.3150 (1). That will certainly have inspired a number of
bears to just throw in the towel. And a number of bulls to quickly enter the ring (double pressure!). However,
despite this potential for double pressure, markets do not immediately pop.
In this chart, the bears still put up a reasonable fight, as we can tell by the cluster of hesitating bears (3) that
eventually led up to the forming of the second box.
If you look closely, you can see that the top barrier of this second BB setup is not exactly running across the absolute
high of (2) but one pip below it, across the equal extremes of four consecutive bars.
As much as it may be preferable to see a signal line unbroken by an earlier bar, we definitely do not need to see
the perfect box in order to trade.
Whenever there is room for a little doubt regarding the actual breakout level, it is best to let yourself be guided by
technical logic.
Here it seems logical to put more weight to the four equal highs than to that one single high sticking out on the
left. It would be overly prudent to wait for this high to be taken out, too.
But let us ignore our setup for a moment and see what the market has to say about this: it put in a series of
distinctive higher bottoms within the course of two hours; it broke a round number zone and saw it successfully
tested; it built up towards a possible bullish breakout and now it breaks a cluster of bars with equal highs. I think it is
telling us to trade.
Notwithstanding the very bullish trend earlier on, it is hard to miss the obvious signs of resistance on top of the
round number line of 1.36.
A triple top, a M-pattern, an extended head-and-shoulders pattern – no matter what you call it, the action between
05:12 and 05:30 represents a serious attempt of the bars to put a lid on the bullish fun.
Does this mean the bull party is really over and we should go about shorting this market at the first sign of a
countertrend setup?
As you may have gathered by now, I am not particularly fond of countertrend trading; but there are situations in
which a setup against the trend can be just as tradable as any other valid pattern.
However, since it is a somewhat riskier undertaking, it will pay off to carefully assess the overall conditions because
the mere appearance of a setup alone is arguably not enough.
One of the simplest ways to figure out the validity of a questionable setup is to balance out the pros and cons of
forces in the market and then see if the scale is tipped in favor of either aggression or prudence.
When applying this tactic to the chart in question, while considering a countertrend trade, we first need to take into
account the exact breaking point of the box. Ideally, we want to see the break occur immediately after some
significant support gets taken out.
Although we may only strive to take a quick 10 pips out of the market, the longer we postpone entering against a
strong trend, the harder it will be to reach our desired profit target. For a strong up-market, at some point, will be
bought.
When trading countertrend, it is vital to not mistake the trade for a with-trend trade in the other direction.
A countertrend trader should go in and out and be as nimble as a thief in the night.
After all, if the real trend is any good, the countertrend, quite logically, can be expected to have a rather short life-
span. Therefore, the validity of the countertrend trade, and particularly its entry point, is best based on the price
action sentiment directly to the left of it, not on overall conditions that seem to have turned against the trend. If that
was the case, the trade could better be considered a with-trend trade, at least from a scalper’s perspective.
Scalping a quick 10 pips against the trend, that is the objective of a countertrend trade.
What can we bring to the table to defend the idea of a countertrend scalp? How about the top next to the earlier
triple top formation (3)?
With a bit of imagination (and a touch of self-deceit) the initial triple top could still be regarded by a bull as just a
temporary pause in the bullish trend. Although a true technician would probably cringe at the mere thought of it,
there is something to be said in defense of that idea – the bulls do have the trend on their side.
And trends are known to continue rather than reverse. And indeed, should a BB setup have been formed
underneath the top barrier of the triple top range – as a mirror image of the actual BB resting on the bottom barrier
– a scalper may very well try and trade a break to the upside.
Technically, though, after a triple top, the lower top is the more likely variant. Any bull not paying attention to the
waning resources of his fellow companions (which is what the lower top represents) might be up for a rude
awakening should he decide to stay on the bullish team.
Fortunately, there is no such thing as honor, duty, or moral obligation in this trading business.
Most bulls will simply abandon ship on seeing that lower top appear and many of them will even start to join the
other side.
What else can we make out of this chart? How about the fact that the bottom barrier of our box not only coincides
with the strong support to the left of it, but also with the round number support in general (1.3).
On seeing it crack under downward pressure, we can imagine a large number of bulls to pull the plug on their
positions.
From the perspective of the trapped, the reaction to a pattern break is usually a three-step process.
The fastest traders react to the break almost instantaneously by dumping whatever they own. Another group of
individuals often grab their chance in second instance should the market be so forgiving as to kindly revisit the
breakout level.
Then there is the confused and slightly surprised trader who, in the absence of a bailout plan, will try to hang on to
his losing positions for as long as possible, hoping for the market to turn around. And yes, miracles do happen on
occasion, but usually not before a tormented trader has dumped the last of his remaining contracts in an act of
disgust.
Quite similar to this three-step process of bailing out, those who want to get in on the break also move in stepwise
formation; either (a) instantaneously, (b) a bit more conservatively, or (c) quite late to the party. Bear in mind, the
fastest ones are not always the happy bunch, for they can be trapped equally fast in a premature break.
Therefore, to maximize the potential of a successful trade, we have to pick our spots of entry with sniper precision.
And in this process of trade selection, proper buildup is always our best ally.
A good example of why it is so important could not be better illustrated than by the earlier false break through 1.36
(2): the market fell from the high of the topping pattern straight to the bottom of it, and then almost immediately
dipped below it, completely lacking buildup. Prices were quickly bought up. A classic bear trap. What else do we
have to support the idea of a countertrend trade?
How about the fact that, in case of a trade, the first real resistance to be encountered on the way to the target lies
about 10 pip below the entry point: from a technical standpoint, we can imagine the clustering group of bars of (1)
to offer some support to a falling market. It is a bit tight, but it may give the trade just enough room to reach target
before the anticipated buying pressure could possibly ruin our fun.
It may seem like quite a task to weigh these pros and cons of a countertrend trade when under pressure of having to
decide what to do.
In practice, though, this may turn out to be a lot easier than one might think.
Just imagine the myriad of information that comes to you when you are about to cross a street.
There is traffic and sound coming to you from every possible direction – a slow car, a faster car, a biker, an old
pedestrian, a honking horn, a bunch of kids, a runaway ball, a truck unloading – yet, somehow, all this data is
processed within your brain in a matter of seconds, allowing you to safely cross that street without so much as
slowing down your pace.
It is the same thing with the market once you have trained your eye to automatically sift through whatever
information it throws at you. When reaching that desired state of proficiency, you will often find that the setup is
only the finishing touch to what you are already anticipating for minutes on end – more like a crown on your
analysis, as opposed to a wave of new information that needs to be processed before the dreaded deadline of a
break.
Let us look at the BB setup in question and see how the signal line was derived. The earlier false break (2) was
basically ignored and so the line was drawn across the five equal lows two pips higher – the most logical level, which
also happened to coincide with the earlier lows of the M-pattern, just a pip below the round number.
Having gone over all the technicalities at hand it is safe to say that this countertrend option had all the makings of a
valid trade. But it did lack a welcome ingredient, proper pre-breakout tension.
As much as any box, as a whole, represents pre-breakout tension within the box right before the break really puts
the pressure up. Therefore, it would have been preferable if prices in the bar of (4) had not dipped below the signal
line at that moment in time but maybe one or two bars later.
Can you visualize how nicely the ema20 would have squeezed two more dojis out of the box?
Unfortunately, as already stated, the market is not always so kind as to print our setups in the most desirable way.
The good thing is that a conservative scalper can always decide to pass up on a trade if he does not perceive the
odds to be favorable. A more aggressive scalper could have fired his short as depicted, to capitalize on a quick
countertrend opportunity.
He must have kept his cool, though, when prices decided to crawl back in the box immediately after the break.
Should you get caught in similar fashion (and you will), the first thing to monitor is the ema20. As long as the average
manages to cap the little false break and then slowly starts to push the bars out of the box again (as a figure of
speech), the trade stands a solid chance of working out still.
Do not be tempted in these situations to bail out within the box for a minor loss of, say, a pip or three, fooling
yourself to get off cheaply.
As is the same with any other setup, a little fight around the entry point is all part of the breaking game.
Final note on the first BB trade: After the market broke out of the box a second time, persistent bulls still stubbornly
tried to force prices back up, but this time they could not get any further than a test of the breakout level (5). All
very standard price action, and I probably would not have mentioned it, if not for one last bullish attempt: that
lovely false upside break back through 1.36 a few candles later (6).
*In any cases, as we are more looking for shorts than longs, the breaks-that-appear-to-be-false should not have been
traded at all.
What a classic bull trap. In order for a trade like that to succeed, it would have to dig its way up through a giant wall
of resistance (the triple M-pattern, and the lower top next to it). Apart from the fact that anything can happen,
trading such breaks is a losing proposition in terms of probability.
Sure, the overall trend was up, but initiating a long at that moment in time is simply trading along the path of
most resistance.
As a side note: It is hard to tell whether this countertrend trade actually reached target or not.
If not, it sure came close. Assuming the trade did not get filled on target, an alert scalper would have scratched it for
a tiny profit at the very level of the entry on the second box (10).
But it is best not to concern yourself with exits at this point in time.
If you look closely, the second box in the chart is actually part of a little triple bottom reversal pattern (7-8-9), in
essence, a smaller mirror image of the earlier triple top.
Seeing a W-pattern develop, not only in support but also in what could very well be the end of a pullback (a more or
less 50% retracement in a distinctive trend), and alert scalper should start to set his radar to the long side again and
monitor the action attentively.
If we examine the total pullback for a moment, from the top of the M-pattern to the bottom of the W-pattern, we
can see that it very technically produced nothing but lower bottoms and lower tops, all the way to the end of it.
These are the typical seesaw characteristics of a downtrend. But since this downtrend is actually a countertrend in
an uptrend – even on our chart – it is safe to assume that a vast number of smart traders are patiently awaiting their
chance to buy themselves back into the market again.
They only need a valid incentive.
To some, recognizing the bottoming pattern in support (no more lower lows) may be all the incentive needed to
warrant a bullish position, hence the stalling of prices in that area (the second box). But the majority of traders will
most probably not act upon their hunches until they see a very classic break of a previous top, too.
After all, that would fully negate the bearish pattern of lower lows and lower highs and thus offer a huge technical
incentive to bears and bulls alike. To the bears to get out, and to the bulls to get in (10).
Note: If you shorted the first box and had to bail out on the break of the second, do yourself a favor and click on the
buy button twice. That will close out the short and initiate the long.

Since there is no way of knowing how a market will respond to any individual break, whether substantial or minor,
there is no point in expecting things to happen.
That will only lead to disappointment and confusion, or even worse: bias. All a trader can do is simply follow the
price action before him and act according to his own personal approach.
Whatever tricks the market may have in store, to the disciplined trader it is all the same.
There are no mysteries to be solved. No surprises to fence off. No scary monster to beat. Just a bunch of candles
marching through the chart.
Could a scalper have predicted the trend in fig 10.8 to almost fall off the charts like it did? Not in any way. Was it
very hard then, to trade the market from the short side and scalp 20, if not 30 pips out of this little mini crash? Not in
the least.
Should a trader be annoyed that he only pocketed about half of the size of the trend? Of course, he should not; he
can only act on what is offered.
These fine BB setups above are almost self-explanatory. Being a mere three to four pips in length, the candles within
the boxes have no option but to present themselves as non-descriptive dojis.
Still, it was very easy to wrap an imaginary box around them or to draw a horizontal signal line below the many equal
lows.
There are two events here that deserve a little attention.
The first one is of a practical nature and is good to point out on account of it occurring regularly in many similar
situation. As I mentioned earlier on, my intention is to take the element of surprise completely out of the game, so
allow me to pose the following hypothesis.
Imagine yourself to have shorted the break of the first block (1). Depending on your fill, your current profit is about 6
pips when the market starts to show some sideways motion (forming the second box).
For argument’s sake, let us say the current profit is about 8 pips, so very close to target.
After seeing the little horizontal pullback appear within your running trade, chances are you may be dealing with
another BB setup. Assuming that all of your assets are caught up in your one running position (as we discussed
before) there will be no double trading this market should the second box break to the downside.
Your margin will only become available again when your current position hits target. But that does not mean you are
out of options when it comes to participating in that second BB.
You may have to nimble, though, for the trick to work. Here is what you could do: the moment that second box
cracks and the market slips a few pips to the downside; you make sure you are filled for a 10 pips profit on your first
trade (2).
Instead of doing something silly like celebrating or uttering sighs of relief, it is best to stay super alert because any
moment the market may tick a few pip back up, even within the same candle that broke the box and filled your first
trade for a 10 pips profit.
That would be an excellent opportunity to get in on that second BB after all, sometimes without so much as paying a
penalty for coming in late.
As we have already seen so many times, breaks do get tested a lot and these tests make for excellent entry points,
provided the price action has not altered the outlook of the trade. That is an important distinction.
To give an example: you missed a short trade and 7 pips below your missed entry, the market now starts to print a
little double bottom.
Should the market trade back up to the bottom barrier of your box, things are not quite the same anymore. Now this
short trade has to eat its way through a potential reversal pattern (the double bottom) to get to target, which usually
reduces the odds of a winning trade considerably.
In general, one could say that within the first couple of bars after a missed break (sometimes even within the entry
bar itself), the odds of a belated entry are just as good as those of a trade at the original break.
In most other cases, the situation is best assessed anew, just like a trader who did act on the initial break would
have to assess whether it is wise to stay in the trade of best to bail out. Anyway, always be alert when a profit fill on
a current position is very close to, or accidentally coincides with, an entry signal to another trade. With a bit of luck,
you can enter on the second trade, too.
The second point of interest in the chart is of a technical nature and concerns the thirds box in the trend.
If you ever wonder whether you should go on trading to the downside when a market has already sold off so much
and so fast, my advice would be to not burden yourself with such futile reservations and just keep trading what you
see. That same perception – that a particular trend is way overdone – is actually the main reason why these trends
are so persistent. I am sure the early-bird bull, who traded the false break of the third box to the upside (3, *to avoid
the false break, either use a really close SL, or wait for confirmation, but waiting for confirmation with the help of
the next candle might, in the long term, prove not to be the wise choice, maybe see chapter 14), cannot appreciate
that irony when forced to close out his contracts for a loss, contributing to the very trend he tried to fight (double
pressure).
XI – Range Break (RB)
It has been my intention from the very onset of this book to not just hand the reader a bunch of workable setups to
only play certain phases of the market, but to present to him a complete series of scalping techniques that, when
properly applied, could be set to work in virtually any kind of market, be it a trending, a countertrending, or a non-
trending one.
The reader should bear in mind, though, that the key to sophisticated scalping is not found in the mere ability to
recognize these setups, but to truly understand their role in relation to the overall picture.
Disrespecting this subtle distinction, or being fully ignorant of it, could very well mean the difference between
marginal and extraordinary results.
For example, acting on an otherwise excellent pullback setup in an environment that does not allow for immediate
continuation can seriously hurt a scalper’s performance, and not uncommonly without him really understanding
why.
Particularly in a sideways market, a scalper’s all-round proficiency, or lack thereof, is easily brought to light. The
novice, on average, finds it much harder to reap profits from a ranging market than from a trending one.
Whether it is discomfort, fear, hesitance, or simply lack of understanding of price action principles, it is not
uncommon for the struggling trader to even decide to skip the ranges altogether.
Although very understandable – after all, trending markets do possess a visual clarity that is not easily matched – this
inhibition towards trading the non-trending phases of the market is totally unnecessary.
In fact, the progressive nature of the ranging market offers a huge benefit over trend trading, because it allows a
scalper ample time to assess the current price action and to pick a moment of entry with sniper precision.
No matter what preferences the aspiring trader may secretly entertain – whether he favors complexity over
simplicity, speedy markets over dull ones, trends over rangers, countertrend over with-trend – his overall results are
best served by mastering the full array of trading techniques available to him.
After all, remaining on the sidelines for countless hours on end, waiting for a pet setup to appear, could not be the
intention of scalping (although at times there is no way around it).
After having studied the DD, the FB, the SB, and the BB setups, it is now time to take a look at the very interesting
Range Break Setup (RB).
Believe it or not, most of our trades, one way or another, will be related to a sideways pattern of sorts; the BB
pattern, for instance, is nothing other than a miniature trading range. But even the very trendy double dojis
appearing in the end of a pullback could also be regarded as a trading range, though be it on a micro-level.
It all depends on whether one is looking at the market through a telescope or a microscope.
For our purposes, a range could be defined as a somewhat extended sideways market phase in which prices seem to
be contained between a horizontal top level and a horizontal bottom level.
Ideally, these barriers are very straightforward, with at least two equal tops and two equal lows touching them, but
in practice we will often find the ranges not to be so textbook defined.
Still, a range by itself should be easy to spot, its main characteristics being a lacking of trend.
A very wide range could easily have trends in them, but unless the highs and lows are clearly visible on our scalping
chart, we scalpers may be totally unaware of these wider patterns.
On a 70-tick chart, range formations usually last anywhere from around 15 minutes to a couple of hours, with the
best part of an hour being a very good average.
Its most spending characteristics, and the one a scalper should try to exploit to the fullest, is the simple fact that the
range will ultimately crack.
The longer it lasts, and the more defined the barriers can be drawn, the more players will spot the same break,
which will enhance the likelihood of necessary follow-through (a term for visible market participation in the direction
of a new event).
But not all breaks are created equal. As is the same with the BB setup, pre-breakout tension is one of the better
leads to a dependable breakout.
In chapter 10 on Block Breaks we have observed the interesting phenomenon of how a small set of little dojis
underneath a signal line often acts as a precursor to the upcoming break. This concept holds up for the range
breakout as well, the main difference being that there are usually more bars involved to build up sufficient pressure
to warrant a break.
Yet the price action principle behind the event is completely identical. If you grasp the concept of the BB setup and
the typical way it is broken, then you will understand the range and the nature of its breaks as well.
But does that make the range breakout as recognizable and tradable as the average breakout of the smaller block?
In most instances, very much so. But there are a few things to consider.
First of all, as is the same with the signal line of the BB setup, we may have to apply similar flexibility when it comes
to drawing the smartest barriers.
It is not uncommon for the range box to show the majority of equal highs at a level one or two pip above the
absolute lows.
In other words, it demands flexibility and technical logic on the part of the scalper to pick the most strategic highs
and lows to draw the barriers by.
In general, the absolute extremes should be our first choice, but every now and then we may be able to create a
better barrier, and thus a better entry level, by squeezing the width of a box a bit. This tactic is most useful in the
more volatile markets where the absolute extremes tend to be a bit spiky and may not even be duplicated by
another bar.
When dealing with very slow or compressed ranges, it may pay off to just concentrate on the absolute extremes
instead of opting for a more economical entry below or above them.
The usual starting point of a range barrier is often a visible top or bottom from which the market clearly bounced. As
the forming of the range progresses, new highs and lows get printed, often very close to or equaling previous ones.
It is very common to have to adjust the barrier levels along the way as the market slowly defines the most
prominent highs and lows (by respecting them) and dismisses the less significant ones.
On average, the majority of ranges will be rather straightforward and their boxes can be drawn with little room for
debate. And even if a barrier is slightly off, it may still offer a tradable entry level, especially so since the underlying
forces will be pushing in the direction of the trade (when scalping along the path of least resistance, that is).
Overall and with a little experience, a flexible chartist will not encounter much difficulty in identifying the proper
extremes to draw his barriers by.
Usually, the barrier from which a potential break is to be traded will show the most streamlined resistance, whereas
its counterpart on the other side of the box can be very choppy or not even have one high or low match another.
When it comes to trading range break, however, a scalper’s biggest challenge is not how to draw the ideal box, but
to be able to identify, in time, two very tricky phenomena that are definitely known to wreak havoc amongst those
traders not yet fully up to date with range break tactics.
I am referring to two typical traps that appear on a regular basis and the scalper is best advised to study them with
some extra attention.
The first one is the infamous false break trap, and the second, less malign but deceitful nonetheless, I have come to
address as the tease break trap.
Let us look at the false break version first.
The reader may remember the false break discussed in the previous chapter (Figure 10.7, 2), where the market came
down from the high of a pattern straight to the low of it and then went on to break that low almost instantaneously.
That indeed is a terrible way to set a break and it often leads to a very classic trap.
With next to none pre-breakout buildup, prices that break through a pattern barrier are highly prone to have
exhausted themselves; this offers countertrend traders excellent odds to do what they love to do, which is to prove
the break false.
They may only be successful to a certain extent, but their activity is usually forceful enough to shake at least a large
number of unsophisticated break traders out of the market.
Getting trapped in a false break is arguably the main concern of any trader exercising a pattern breakout strategy.
After all, there are always two opposing forces at work: traders that anticipate the barrier to fail, and those that
trade in the opposite direction, anticipating the barrier to hold, even despite a temporary breach.
The good part is that both parties can buy and sell contracts from each other without having to chase price (they just
exchange their opposing ideas); the bad part is that one of these parties will soon be on the wrong side of the
market.
But what is wrong and right in the melting pot of strategies, time frames, opinions, and perceptions? Of course, we
can only look at this from the perspective of our personal chart.
But even though we may technically put on a trade in the right direction of the market (in terms of overall pressure),
when our timing is seriously off, it is nothing other than trading along the path of most resistance, and that is
certainly a folly to avoid. It stands to reason that in the face of any faltering trade, a scalper with a tight spot is in
much more danger than someone trading the same break from a bigger frame or with a much wider stop.
This is the reason why timing the entry on a trade correctly, to any scalper, is so crucial. In the market, it can be a
costly proposition to be at the right place, but at the wrong time.
As we have already reflected on, our best ally in a breakout trade is the occurrence of pre-breakout tension leading
up to the break.
Not only may it cause prices to literally jump out of the box, very often it will also hinder the market from crawling
back in afterwards.
After all, it is much harder for prices to eat their way back through a cluster of bars that led up to a break than when
there is nothing standing in their way.
The forming of this pre-breakout tension is actually such a visual process in the chart that getting caught in a break
that shows no buildup, or just too little of it, should essentially be a non-issue. We just don’t trade that.
I hope the point is noted, though, that there can be no avoiding the false break entirely. Even the best-looking trade
in the field could still turn out a loser.
But there really is no reason to let ourselves get caught in the obvious trap.
Not nearly as dangerous as engaging in what could be a typical false break trap, but still very much to avoid, if
possible, is getting ourselves tricked in the tease break variant.
This break has almost all the makings of a valid trade, yet is technically still bordering on the premature side of
things.
At times, it can be a thin line, though, between a valid break and a tease break trap. Usually, some tension has
already been building up before the break will take effect: a number of bars hanging below a top barrier (for a
possible long) or resting on the bottom barrier (for a possible short).
However, what should be missing in the picture for our break to deserve the tease status is what we can refer to as a
proper squeeze: prices being literally sandwiched between the ema20 and the barrier line.
When they are contained like this for at least a handful of bars, then things are building up nicely towards a
potential break; but it should be added, though, that pre-breakout tension does not always show up in its most ideal
form and sometimes we may just have to accept the middle way between a tease and a proper break.
On occasion, it can be a delicate choice between risking to miss a range break entirely and acting prematurely.
However, the less malign characteristic of the break trap, as opposed to the meanness of the false break variety, is
displayed in the fact that the market tends to be a little bit more forgiving on the part of this premature entry.
The break is usually not so violently countered as its uglier counterpart.
Practice shows us that a faltering trade of this type still has a reasonable chance of working out, even though prices
may come dangerously close to a scalper’s protective stop.
Regardless, we should definitely aim to avoid the tease break trap as well.
As we have already noticed when studying the BB setup, the 20-bar exponential moving average can be an excellent
aid in not only pushing prices through a barrier defense, but also in keeping them from slipping back into the box
after a break. In the RB setup, it often plays a similar role.
Of course, it is not the ema20 itself that has such magical powers, but the visual illusion can be so impressive that it
is easy to forget that the average is merely a reflection of what the bars are already showing us.
All of the above is going to make proper sense, I am sure, once the reader gets himself acquainted with the RB
setups in the charts.
It will pay off to study the coming examples with great attention to detail, because we can expect these ranged to
pop up multiple times in any 24-hour session. Also, take note of the vertical price axis in all of the coming charts,
because more often than not, the 00 and 50 round number levels will play major roles in the forming and breaking
of a range.

Let’s start out with an almost picture perfect, yet very common range formation. The action within the box is about
an hour’s worth of price data. I am sure you can see why the barriers are drawn as depicted.
When you are watching this develop in real-time there is no way of knowing, of course, that the market will set itself
up in such orderly fashion. In many instances, the initial extremes that mark the beginning of a range do not hold up
and so a scalper has got to be flexible in drawing his barriers and be ready to adjust them along the way.
In this chart, the initial levels were very well respected. The bottom barrier is the first to appear. A scalper could
have immediately drawn it below the first lows in the chart after prices bounced up, but only once they came to
challenge this level again and bounced up once more did the barrier truly earn any significance (1 & 3). The top
barrier may already have been plotted the moment a first top was put in (2), but most certainly after a second top
matched the earlier one spot on (4).
With two highs suggesting resistance and two lows offering support there is not much to make of this chart in terms
of future direction. All we can do is watch the action with an open mind and let the market run its course.
Prices will not bounce back and forth between the bottom and top of a range forever. If they do not force
themselves out in an overly eager one-directional attack, then, at some point, they will either start to stall below the
top barrier, or somewhere above the bottom barrier.
When the market came down from the second top but could not proceed beyond the level of the ema20 again,
things started to look up for the bulls (5). If nothing else, at least they got clarity on the job ahead, which is to keep
the market in the top right corner of the box and aim for a clever bullish breakout. Now that they’ve got themselves
a slight advantage over the bears, it would be a strategic default to let prices fall below the average once more.
That would put more significance to the second top of (4). In fact, the chart would print a bearish double top below a
round number zone (1.3250), which would not look particularly pretty from a bullish perspective. It may very well
provoke new bears to start selling more aggressively.
So, the bulls have a task: keep prices in the top of the range, preferably at all times above the average, and then
slowly work themselves a way out of that box.
The bears, of course, have a task of their own: to prevent that from happening, and sooner rather than later.
As you can see, when the barrier on the side of the break is of exemplary quality, it is very easy to determine the
point of an RB entry (7).
Was there anything the bears could have done to prevent that break from happening? Of course, there was. They
only needed to sell more aggressively than the bulls were buying. Apparently, something in the chart kept them from
doing so.
Was it our squeeze (6)? Who knows? A technical pattern trader may have recognized the bullish implication of a cup-
and-handle pattern that formed itself in the last third of the range (3-7). Taking a step back, he may have spotted the
elongated and rather tell-tale W-pattern stretching itself throughout the box from left to right.
Others may have noticed a lack of follow-through after the market drifted below the 50 round number zone in the
beginning of the chart, which implied very little selling interest.
No matter how much the individual setup, as a stand-alone event, may already serve the trader well, it is an
absolute necessity to look at the complete picture in the chart. Only when the setup complies with the bigger
forces at work should a trade be considered.

This chart is almost the mirror image of the previous example. Once again, the breaking of a round number zone
trapped traders on the wrong side of the market. In the previous chart, it was a downward break through the zone
that not long after turned bullish, here it was an upward break that soon turned bearish.
Is there a reason these round number breaks don’t hold up? Probably no more than there is to any other break or
move that fails or falls short: a lack of follow-through. It is not uncommon to see enthusiasm dwindle in rather
subdued markets, or in situations where the round numbers are more of a symbolic nature than they actually
represent true technical levels of resistance and support.
In these cases, it is faire to assume that not too many stop-losses reside above or below the levels. As a result, the
price action remains calm; as much as those in position do not see the need to get out, those on the sidelines are not
exactly scrambling to get in, either.
More practical than trying to figure out the reason (foolish in any respect) is asking ourselves if these failed round
number breaks could somehow be anticipated and possibly exploited.
Interestingly, in the majority of cases there is indeed a pattern to be spotted. First the round number is broken, quite
often with hardly any fight.
Not much later the break is tested, usually successful.
On seeing this, a number of new players step in, thinking they’re in for a treat. And then, for some reason or
another, the play dies out like a flame.
Traders at any moment in time may buy as cheaply or sell as dearly as the market allows them, but if no new players
pick up on their idea of direction (follow-through), they are trapped on the wrong side of the field. All of this is not
uncommonly captured within the confines of an unmistakable range very close to the round number of interest. It is
a scalper’s task to figure out when the predicament of the trapped becomes unbearable from a technical
perspective. Naturally, the idea is to capitalize on their instinct of flight.
Everything is very easy in hindsight, yet if you managed to grasp the concept of the forces in play that caused the
upside break in the fig 11.1, I am sure you can also see why this particular range, halfway through, started to develop
a fancy for a downward break.
Let us examine up close what exactly went on from the moment the third top was set (4). It started to go wrong for
the bulls when the reaction to this top (a tiny countermove) was not being picked up by new bulls in the ema20 a
few bars later.
That would have been a perfect opportunity to swing prices back up.
From there on, they could have created themselves a nice squeeze by not giving in to whatever bearish pressure and
then force themselves a way through the top barrier of the range. In fact, the three earlier tops (1, 3 & 4) would have
made for an excellent barrier to trade that upside break from.
However, instead of working on that upside break, the market set out on its way to the bottom of the range again (5)
and now even showed a classic triple top in its wake.
These are not bullish signs. But there was hope still. After all, the round number zone was cracked to the upside and
successfully tested earlier on, and that should at least amount to something. If somehow new bulls found it in their
heart to aggressively step in above the 1.33 level, inspiring even more bulls to jump in after them and bring prices
once again to the top of the range, the chart would show an unmistakable double bottom in round number support
(2 & 5). And that would look quite bullish.
Sometimes, it only needs one bar to turn pleasurable hope into the idle variety. How about that little doji (7) that
stuck its head a pip above the high to the left of it (6). A higher high in a bullish market after a possible double
bottom in round number support, that should have attracked new bulls to the scene.
What kept them away? We can imagine it to be the triple top pattern to the left; but it is not our business to
decipher or explain the actions or non-actions of our fellow traders.
Everything is just information. As observant scalpers our task is not just to monitor a chart, but to look for clues in it.
The more crucial the signs we can assemble, the more we can solve the puzzle of who is possibly toppling who in
the market.
Any sign or hint that leaves a distinctive mark in the chart will work to the benefit of our assessment. These signs, at
times, can be quite obvious, like triple tops and other well-known reversal patterns, but they can also be rather tiny,
like a one pip false break. The best indication to determine the value of a particular chart event is to consider its
place in the chart in relation to whateved price action preceded it.
To give an example, the tiny false upside break of (7) would have been considerably less indicative had the market
not printed that triple top shortly before.
With prices now trapped below the ema20, the market was on the brink of being sandwiched into a bearish
breakout through the bottom barrier of the range.
That brings us to the interesting part that you may have already spotted: the first breakout below the barrier. Why
did I mark this one as a tease (T)?
Granted, this one reflects the proverbial close call and I couldn’t really argue with anyone looking upon it as a valid
break. For my own personal comfort, I would like to see prices get squeezed a little bit more before breaking down.
Preferably, I would like to see the market print a couple of dojis right on the bottom level of the range (as in a
regular BB setup). It must be stated, though, that a conservative stance is not always the most successful approach.
It would be nice if we could put a rule of thumb on these false breaks, particularly on the tease variant, but alas, it
often depends on the situation at hand. Here the market was extremely slow and the price action very subdued
(almost every bar a doji). That makes me want to wait for superior condititons just a little bit longer than, for
instance, in case of a speedy market, where I might run the risk of fully missing the break on account of being too
conservative.
Note: As for the difference between the false break trap and the tease break variant, imagine for a moment the
05:00 low (5) to have dipped a pip below the range barrier. That would turned it into a false break of the earlier
bottom of (2) and not a tease. Why? Because prices came straight down from the high of the pattern (4) to the low
of it and then immediately broke through without any buildup. That typifies a classic false break (in terms of
potential, of course, for any break, even a silly one, may find follow-through and prove itself true).
When it comes to the tease, on the other hand, the cracking of the range usually starts with a move that originates
not at the top or the bottom of the pattern, but more from the middle of it, or at least from the ema20 zone.
In case of a downward break, for example, before breaking out, prices usually first touch the bottom barrier and
then bounce up to make an intermediate high in the ema20.
From that point on there may be some squeezing between the average and the bottom barrier, but usually too little
of it to consider it sufficient buildup to a tradable break. It would be preferable to see prices bounce up and down at
least a few times between the bottom barrier and the average, until they are finally being squeezed out.
And that makes sense; the more contracts change hands in the squeeze, the more traders will find themselves on
the wrong side of the market once support gives in. And most of them will have no choice but to sell back to the
market what they ahd bought at bottom prices just moments before. Add to this a number of sideline bears eagerly
stepping in and we have ourselves the perfect ingredients of double pressure and thus follow-through.
At times, the anticipation of this little chain of events is very straightforward. At other times, the assessment of the
squeeze can be a lot more subtle and it may leave a scalper wondering whether or not to trade.
Particularly when the space between the ema20 and the barrier line is no more than a few pip in width, the tease
break may be almost indistinguishable from a valid break.
If you ever find yourself caught in a tease break, or in any other valid break that acts as a tease, similar calm is
required as in the case of the BB trade where prices break out of the box and then crawl back in. As we have seen
already in several examples, the ema20, just like in the chart above, can still guide prices back out in favor of the
trade. In many cases, that is also the final incentive for the market to really pop.
Take a moment to compare the string of black bars after the break in this chart with the string of white bars after the
break in Figure 11.1. What do these moves represent? They clearly show us the unwinding of positions of those
traders trapped on the wrong side of the market.
In the chart above, for instance, all scalpers that picked up long contract inside of the range are carrying losing
positions the moment prices break down below 1.33. That string of black bars represents their predicament and
their panic, so in essence a rapid unwinding of long positions that are being sold back to the market. Naturally,
clever bears on the sidelines, smelling blood, will be happy to add fuel to the fire by quickly selling contracts to
whoever still entertains bullish fantasies.
Of course, even a falling market will always find traders ready to buy, but these bulls will not be so eager as to not
demand lower prices to trade at. As a reasult, prices will fall even more until eventually the market calms down and
more bulls than bears are willing to trade.
This, in short, is the principle of supply and demand. It works the other way around in equal fashion. And it is our
job to anticipate it before it even takes place. To the non-initiated this may seem like quite a daunting task. Yet those
who observe, study and learn will most likely come to see the repetitive nature of it all.
And soon they will be able to exploit those who do not.

Anyone who has ever studied the eur/usd pair on intraday basis will surely have noticed this market’s remarkable
tendency to move in stepwise increments of 20 pips. For example, if, say, 1.3120 is cracked to the upside, as in the
chart above, and then tested back and proven sound, then, more often than not, the market’s next stop will be
1.3140.
Variations on this pattern repeat themselves with such relentless persistence that it is not hard to imagine how
numerous intraday strategies are solely build to exploit this phenomenon.
And yes, the market’s fixation with these round number levels at times is truly astonishing. Of course, as scalpers we
are only interested in one thing: can we exploit it?
Psychologist have us believe that the omnipresent round number effect, visible also in may other aspects of life, has
no coherent relation to value whatsoever but is simply a way for the human brain to filter out noise to protect itself
from information overload. From a practical perspective, there may even be a strong self-fulfilling aspect attached to
it: if we all believe that round numbers bear significance, then, naturally, our actions concerning these numbers
bring significance about.
Anyhow, if nothing else, round number do have the pleasant side-effect of framing things in organized manner, just
like wrapping boxes around ranges gives us clarity on resistance and support.
When it comes to the 20-levels (00, 20, 40 ,60 & 80), you will have noticed that I have set up my software to plot
these levels thinly in the chart; but I use them solely for guidance and try not to look upon them as absolute levels
of resistance and support.
They may do so at the moment, but I rather leave that to the price action itself. Frankly, in the never-ending quest
for simplicity I have tried to scalp with a clean chart, meaning without the 20-lines in it, but somehow my
conditioned brain felt less comfortable without these levels framing the action.
This may very well be a personal quirk and any scalper can try for himself what suits him best. One last thing: on the
road from 40 to 60, and the other way around, things can get very tricky. Currency trading, like it or not, is a big
players game, and the 50-level is arguably their favorite toy. Unlike the 00 round number, this level is not a 20-level
itself.
Hence the occasional conflicting mishmash between 40 and 60. However, do not expect anything to happen around
this level. Just be on the alert. Always monitor any action carefully, but keep a special eye on the two major round
number zones of 00 and 50. More often than not, these levels are what the bigger chart is all about and why we see
so many ranges appear as a result.
Let us look at Fig 11.3 and see if that RB trade was easy to spot.
Halfway through the chart, the options are very much open. There are no trades near and a scalper should just relax
and apply patience. To obtain an idea on support and resistance, he may have already drawn a horizontal line across
the first top (1) and then another below the low that followed it (2). Tip: you do not necessarily need to draw boxes,
a horizontal line across the tops and one beneath the lows will do just fine.
At any moment in time there are always three ways to look at a chart. Through bullish eyes, bearish eyes, or neutral
eyes.
Needless to say, observing the price action with a neutral disposition is the way to go. Many traders, however,
can’t help themselves looking at the market from the perspective of their current positions (or intentions), so either
from a bullish or a bearish stance. It is a bit the same as the novice chess player who only moves his pieces around in
order to attack; this player usually pays very little attention to position play or even to the many gaping holes in his
own defense.
When biased towards the upside, a bull may view the triple bottom pattern (4, 6 & 8) as a very healthy token that
the market is building up towards a bullish breakout. And with reason; the market definitely shows signs of support
in the 1.3120 area. Should it continue its pattern of slightly higher bottoms, then breaking out to the upside,
eventually, would technically be the most logical result.
When looking at things from the bearish side, traders may find comfort in the triple top pattern (3, 5 & 7) that
appeared on a lower level than the earlier, more dominant top of (1).
As neutral scalpers, we can only sit back and enjoy whatever the market has in store for each part. If you place your
thumb on the chart, to block the prices after 17:00, you can see that it wouldn’t have taken that much of an effort
from the Powers That Be to give this chart a more bearish look; cracking the 1.3120 level by a few pips would have
probably done the trick.
One thing is of importance, though, and that is to not walk away from this chart in a silly act of boredom. If the
bulls show a bit more persistence, particularly when entering a potential squeeze phase, we may have a trade on our
hands in a matter of minutes.
The first break through the upper barrier could be cassified as a typical tease on account of it not originating from a
proper squeeze situation yet (T) (-> Yet if you take that trade, it would have been ok with same result as proper
entry).
In order for the market to deliver a more reliable break, it is preferable to see prices first retest the ema20 again and
then attack the barrier in buildup fashion.
As a matter of fact, the subsequent price action after the tease, that is the perfect squeeze that led to an excellent
textbook RB trade (9).
If these tease breaks, after breaking back, are so often caught by the ema20 and then still manage to break out
eventually, couldn’t we just always look upon them as valid breaks and trade them no matter what?
That is a very fair question. So far, the examples here show outcomes that point in favor of that option. It is my
observation, though, that in most cases you can get away with being a little more patient.
In other words, missing a range break trade due to a conservative stance is less common than one might think.
Secondly, there is also the matter of protection to take into consideration. As we will se in the section on Trade
Mangement, squeezes provide excellent levels for stop placement. Conversely, a tease break situation, in essence a
somewhat hastier break, seldom delivers the same technical clarity in terms of where to place the stop. When
trading breaks, patience truly is a virtue.
Therefore, my advice would be to shun the non-buildup breaks entirely (false break traps) and those resulting from
little buildup as much as you can (tease break traps).
Note: If prices after a tease break are pushed back inside the range but not much later break out again as in a valid
RB, then it is not necessary to postpone entering until the tease level is taken out, too. It is usually best to just take
the trade as if the tease had not occurred, which means firing a market order on a break of the original range barrier.
An exception would be if there are multiple tease breaks in a row that together form a new barrier by themselves.
Then it may be recommended to assess the situation from the perspective of that new barrier (see Fig 11.6 for good
example).

On a bigger time frame this kind of price action could be seen as just a brief stalling of prices before the market
continued its downward momentum. It is not hard to imagine two little dojis bars, for instance, representing the
action from 18:00 to 18:30 on a 15-minute chart. Sometimes, a trader cannot help himself noticing things that have
no informational value regarding his method. A good example would be for a scalper to accidentally spot a huge
reversal pattern on a daily chart.

That sort of information may easily inspire him to enter his next session with strong directional bias, if only on a
subconscious level. A scalper is best advised to not look upon himself as being immune to this trait.

My personal take on how to protect myself from the dangers of intuitive bias is to acknowledge that I am only
human and thus prone to the folly. As a countermeasure, I do not read or watch other people’s market opinions and
deliberately curb any unnecessary information by have my 70-tick chart show me no more than about two hours of
data in one go, which is about twice the size of the overall chart in this guide. On average, a couple of hundred of
printed bars will suit our scalping purposed just fine.

In term of individual bars, you could compare it to at least nine months of price action on any daily chart. It remains
to be seen, though, whether any nine months’ worth of daily data would be able to print such a picture-perfect
range formation as depicted in the chart above.

No less than 12 equal touches made up the bottom barrier of the range before prices finally give in to the downward
pressure.

Hopefully you can see why there is no need to postpone entering here in fear of a tease. The bears dealt the bulls a
perfect little squeeze that is best acted upon straight away (1). There is never a way to foresee a market’s reluctance
to accept its most likely fate (2). Whatever happens, happens, and whether in or outside of the market, we also have
to accept. The next few bars remained capped very well, though by the ema20, as is often the case, and since no
new bulls came to the rescue, eventually prices chose the path of least resistance.
The round number zone about a dozen pip bellow the bottom of the range will surely have contributed to the
success of the downward break, simply by hauling prices in through the vacuum above it. Why the vacuum? You will
not find too many traders ready to buy in front of a round number level with so much resistance (the broken range)
hovering above them. They rather wait for the round number to be tested first, or even perforated.

Hence the so-called vacuum, which, of course, is nothing more than a temporary shortage of buying interest.

Note: Maybe this is a good time to address a little luxury problem that may arise when confronted with an almost
perfect vacuum trade in front of a round number.

For the sake of a hypothetical argument, let us imagine we get filled on a short at 13 pips above a 00 number. With
the touch of that round number as one of the most likely occurrences in case of a proper break, would it not be a
smart idea to stretch our 10 pips profit target by another 2 pips, to capitalize on the odds of that 13 pips move?

Let us do the math and see if can come up with a satisfactory answer. If the trick works, then that pockets 2 extra
pips. If the trade offers 10 pips of profit but then starts to turn sour and somehow needs to be scratched, say, for a 2
pips loss (a pretty good scratch), then that pockets a 12 pips loser (10 pips of missed profit, plus a 2 pips loss). So, in
order for this strategy to break even, a trader needs to successfully repeat this little act of greed no less than six
times for every time it fails. And it just to break even from a clinical viewpoint. It is not hard to imagine the original
loss being accompanied with a loss of emotional balance as well. And that needs to be regained, too.

After all, not sticking to the plan and seeing it backfire is a true classic and known to torment a trader way beyond
the actual damage done.

Of course, you could alter the numbers here and try again. But remember that the odds for a winning trade diminish
in tandem with every pip you think to add to your original target.

My advice would be to stick to what is already working well than to try and force some extra profits out of the
market by deviating from an already sound strategy. Over time, improvements can be made to even the best
approach, but these changes will usually come about gradually through a growing awareness, and should better not
stem from an impulsive need to score more pips. Once consistently profitable in the scalping field, volume, of
course, is free to be adjusted to keep with a growing account.

If a profitable scalper works up to bigger volume by progressively trading more units per trade there is simply no
need to score more pip.

The chart above, on the whole, does not exactly paint a very vivid picture of market activity. The bars were printed in
an almost lethargic fashion and the range that came out of it took over two and half hours to crack (more than twice
the average). But this is what we get every now and then, particularly during the Asian sessions, and it couldn’t hurt
to go over some of the technicalities in play to see if maybe a lesson or two could still be learned from it.
Without too much of a fight, the market had fallen through the round number zone of 1.34 in the beginning of the
chart. As has already been stated, this does not necessarily mean the round number is truly given up; but from a
technical viewpoint we should regard it as such until proven otherwise. Here, the bulls initially seemed rather
reluctant to prove the break false. A first, and rather weak, attempt to bring prices up for maybe a retest of 1.34 was
easily countered in the area of the ema20 (1). Not long after, the market slowly drifted lower to a level below the
previous low (2).

Another round won by the bears.

Despite the technical incentive of a lower low in a slowly falling market, bearish follow-through turned out to be
almost non-existent. This is an interesting information and it will not go unnoticed by the ever-present countertrend
opportunists lying in wait: to them, it may be just the incentive needed to try and swing prices back up.

In the marketplace, the best way for one party to regain possession of lost territory is to move in on the opponent in
a stepwise fashion. With prices well below the ema20, for instance, it is seldom a smart idea of the bulls to buy
themselves so aggressively in to the market that prices spike through a bearish defense, only to exhaust themselves.

That is asking for a good whack, and not seldom after a false break of some kind.

The first step in taking back some control over the direction of the market starts with re-conquering the ema20. One
of the better wats for the bulls to convince sideline watchers to join in on a countertrend mission (and provoke with-
trend players to exit) is to first print some sort of technical sign below the ema20 as a token of support. This could be
a very tiny double bottom, a higher low, a strong doji in technical support, or basically anything that stalls, at least
temporarily, the bearish momentum. Here it was a tiny higher low (3).

The next step is to try and perforate the ema20, a crucial moment in the counterattack because this area is so often
used by with-trend traders to deploy a new wave of activity in the direction of the trend. Regaining control over the
average will definitely earn some technical respect and convince at least a part of the market to exit their with-trend
positions, and another part to enter on some countertrend ones. In that respect, the first attempt after the higher
bottom to take out the ema20 was pretty convincing (4).

One only need to look at the very bullish bar – more than twice the size of its neighboring candles – to acknowledge
that bullish feat. Is this the sign needed to convince the market that the bearish party is over? Not in the least. But it
did flatten the momentum and take away the bearish advantage of having prices below the ema20.

Trying to immediately push through and attack the earlier high was a bit on the greedy side (5). A smarter idea
would have been to calmly establish the re-conquered ema20 as a base of support by printing some candles on top
of it and then take it from there.

It is all about slowly convincing other parties to join in, for hastiness usually backfires pretty fast. The failed attempt
did present the market with an equal high, though, confirming the level of resistance suggested by the earlier top of
(1). In case of a potential range breakout to the upside, a scalper now has something to go by: a proper barrier
connecting two standalone tops.

Had this market been of a faster pace, a scalper may have placed his top barrier one pip below the range extremes.
Even before 04:00 this level seemed to be way more respected than the actual highs a pip above it.
Still, with a market running so slow as this one, a scalper is recommended not to try to front-run the breaking of the
actual extremes, certainly not by a mere pip. Even so, just in case a trader had opted to draw his barrier a pip lower
than depicted, the new high peeking through it (5) would not have been a valid breakout but more a midway
between a potential false break trap and its tease break cousin (false, because the move that led up to it originated
from the bottom of the range; tease, because prices did attempt to form a bit of sideways tension before breaking
out topside).

Next up in the range is a dull half hour fight over the ema20 (6-7) that eventually got resolved in favor of the bulls.
They not only managed to keep the ema20 sloping up, they also had two higher bottoms to show for it (6 & 7).

All in all, the activity within the range, though tedious to some, is slowly starting to tip its hand. Technical chartist
may have already recognized the very familiar, and quite dependable, reversed-head-and-shoulders formation
stretching itself throughout the box. No doubt the reversal implication of the pattern must have inspired some
bullish enthusiasts to aggressively force a break through the top barrier without the proper buildup necessary to
accompany such an attempt (no squeeze whatsoever). The result: a typical false break that we can classify as a tease
since it originated from the area of the ema20 (7).

Had there been sufficient tension building up below the top of the range, then the expectable resistance of the 1.34
round number level a few pips above it (8) should not have kept a trader from trading this RB. However, starting
from 10 pips below (7), breaking a range in the process and expecting the bullish strike not to run out of steam at
1.34 is just asking for more than a calm market will normally give.

It took a few bars, but eventually prices re-entered the range, proving the break false.

Apparently, this did not demoralize the bulls for long. Prices, though back in the range, kept themselves glued to the
top barrier, also forming another higher bottom in technical support (9). The fact that the ema20 did not squeeze
the bars out so nicely as in some of the previous examples bears little significance (10). It is mainly due to the
hesitance of prices to crawl back into the box after that earlier tease.
With six consecutive candle closes above the barrier line, the average had no choice but to follow and lift itself up.
But bear in mind, the aid of the average, though remarkably visual and accurate at times, is not a requirement to
trade. We will always base our decisions on the price action itself.

There is no escaping these long ranges, even as a scalper. It is important, though, to not let impatience disturb your
analytical skills or make you feel grumpy with the market. You do not always need to trade. Other traders do not
move the market just to oblige your scalping needs.

They need a good reason to step in. If you don’t see one, why would they.

Before delving into the specifics of this particular RB entry (10), let us take a step back and look at some of the
technical key points in the first half of this chart. Obviously, things started out rather well for the bulls.

Not only did they manage to break the round number of 1.33 in quite a daring move, the bears couldn’t even
produce a noteworthy pullback in return. Instead of retracing, prices merely drifted sideways, forming what is widely
known as a classic bull flag pattern (1). This pattern broke in textbook fashion, but the moment the new thrust of
buying activity fell short of breath (2), countertrend traders immediately sprang into action and started slamming
the market make some decent profits themselves.

Although prices tried to bounce up from this in the first 20-level they came upon, the bearish pressure remained
persistent and did not falter until the market was brought all the way back to test the only valid level of support in
sight: the top of the bull flag (3). Not only was that an excellent spot to pocket some countertrend profits, it offered
a sideline bull a perfect opportunity to pick up a with-trend position. We could even imagine a very nimble scalper
scoring a number of pip on the way to support and then profiting again as a with-trend trader in the subsequent
technical bounce. Scalping can be fun to those apt and able.

But it is not our business to speculate on how other traders make their living. Our task is to observe the price action
from our own perspective and then see if anything develops that may lead to a textbook trade. So far, things were
evolving in very technical manner.

In a bullish looking chart like this, our radar should naturally be scanning the horizon for trades to the long side. This
is not to be confused with entertaining direction bias. It is simply based on an assessment of current pressure.

To understand the importance of that distinction, we only need to cast one look at the second half of this chart; it
shows us a stunning example of how even a very trending market can falter and crumble in just a matter of minutes.

Was there any way a scalper could have seen that shift in prospect coming? To answer that, let us pick up the action
from the moment the market put up that second top (4). The fact that it fell a few pips short of the earlier top was
not a problem at that point. But it would have been nice, for the bulls, to see new players step in when prices
retraced to the ema20. That level would have been an excellent stepping stone for yet another bullish attack and
maybe one strong enough to take out the earlier highs.

Instead, prices slid all the way back to support for a second time and even managed to dip a pip below it (F). A round
won by the bears. However, those bears late to the party immediately saw themselves caught in a classic false break
trap (F). But they only had themselves to blame; with no buildup whatsoever to back up that break through support,
shorting a bullish market at that level makes for terrible odds. Clever bulls did not have to think twice about what to
do and thus the market quickly moved up once more. A round won by the bulls (5).

But things were about to get ugly pretty fast for the latter party. To answer the question of whether it was possible
to identify the shift in moment from bullish to bearish (at least in time to trade that break), we only need to follow
the price action as it developed in the next ten minutes of trading.

Granted, despite the resistance they encountered, the bulls kept on buying in support, which showed their resilience
and their belief in the earlier trend; but the bears kept shorting at lower and lower levels, which obviously showed
they cherished some beliefs of their own. In fact, that series of lower tops popping up in the ema20 slowly formed a
textbook squeeze (though a bit rough) and sooner or later something had to give.

Either the bulls would give up on defending their beloved support, or the bears would come to see the folly of
shorting into it.

Allow me to dig into this particular squeeze for a moment, because there are some interesting little clues to discover
that may be worthwhile remembering for future purposes. As you can see, the original box could be drawn the
moment a third low in support matched the first (6 matches 3). At that point, the false break level of (F) had no low
to connect with, so it makes sense to ignore it for the moment and draw the barrier a pip above it.
Not much later, after yet another lower top in the ema20, a fourth low hit support (T), and this little tease matched
the level of the earlier false break (F). That’s interesting, because now there are two equal lows below the original
barrier, and this last one, too, is obviously respected and being bought.

Frankly, this situation clearly shows us the tricky proposition of considering a countertrend trade against a strong
trend: if the trend is indeed any good, traders will keep buying into support and they may even buy below it;
therefore, it is much harder to tell a true break from a tease break trap.
After seeing that tease successfully test the earlier false break, it may be wise to reconsider the level of support. It is
fair to say that the actual extremes (F & T) have earned themselves enough credit to justify lowering the barrier to
the level of the dotted line.

Although on the alert for a bearish break, let us not underestimate the bullish resilience just yet. As long as their
support is holding up, there is a fair chance that they may still worm themselves a way out of that squeeze.

As a matter of fact, they produced an interesting little feat just moments after bouncing up from the dotted line: a
higher low (7) and a subsequent higher high (8). And this brings us to another technical marvel that is certainly