Chapter 3 Price Action Principles-Practice

trade of the session, let us simply explore if we could have seen this op­
portunity coming.
First off, if we consider the opening rally 1-3, there was no denying
the bullish pressure in it, but its starting point was somewhat uncom­
fortably located. Coming up from well below the 25ema and with no
buildup prior to breaking through, activity like this is known to raise
suspicion among a wide variety of participants. For this reason, these
rallies may not make for the best of continuation candidates on any
first pullback correction. This is not to promote rebellion against the
pressure itself, but before playing along, we better find out first how the
market handles this situation. Chances are, we are not the only ones
who need extra time to absorb and assess the implications.
Another element of concern was the fact that prices had taken out
the 50-level on the way up but not tested it back since. This doesn't
have to be an absolute deal-breaker, but on balance, the less built up
this initial perforation, the stronger the adverse magnet potential; just
an extra incentive to be a little more cautious on the bull side.
When the first serious correction set in (3-4) , bulls successfully de­
fended the intermediate low of 2 , which created a double bottom at 4: a
praiseworthy feat in open defiance of the round number magnet. With
this supportive element in place, the bulls' next task was to get the bars
trading back above the 25ema again, so as to visibly reclaim their tech­
nical advantage (4-5).
The 5-6 progression is essentially a ten-bar skirmish over the pos­
session of the average. Within it, bulls repeatedly bought themselves in
from the base of the 25ema, but as soon as prices headed out a little,
they were shorted right back. Something had to give. When yet another
strong bearish bar popped up (6) , the bulls were the first to call it a
day, which then led to the 6-7 correction. From a conservative sideline
perspective, none of this may have set up a trade yet, but the series of
descending highs in the UK morning session did allow for a very fine
pattern line to be plotted and extended for future purposes.
Note: When putting in pattern boundary that spans at least several
hours, it is easy to plot it slightly off, particularly when the highs or
lows of relevance do not line up so neatly. Always try to get in as many

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Understanding Price Aaion

touches as possible and then extend the line well beyond the current
bar in progress. Should the line maintain its value for an even longer
period, just extend it some more. At times, you may have to adjust it a
little along the way in order to find a better alignment with the follow-up
action. If your pattern line has become invalid or redundant, erase it to
keep the chart clean, but do not do so immediately when prices break
away: the extension of the line could still play a role in a pullback situ­
ation. (Will be taken up in Chapter 5 . )
Since we shouldn't have been looking to short this chart, there was
no real reason to put in the horizontal line here. It is plotted to show
a textbook example of a false break trap (7) . As we can see, bulls may
have given up on the 25ema support below bar 6, they were quick to
return when bears came to pierce the double bottom lows of 2-4. Rec­
ognizing very well the absence of buildup, contrarian parties simply
responded by doing what they love to do most, which is to counter the
non-buildup break. This tactic worked out wonderfully well and now
left a triple bottom in its wake (2-4-7).
Ironically, just a few bars after the failed break through support,
bulls let themselves get trapped in almost identical fashion, in the high
of bar 8. Although more in line with the overall pressure, this break was
of poor quality also. Now prices had come straight up from the lows,
only to break out with virtually no pausing (buildup) underneath the
pattern line: not a great way to set a break either. Once again contrar­
ian parties stepped in, this time anticipating a failure of the bulls. As
trapped bulls hurriedly sold out, this added to the bearish pressure of
the 8-9 swing.
Failed perforations at either end of a pattern are very common in­
deed and they clearly illustrate the danger in playing breaks without the
backup of buildup. How about another false break at 9.
Obviously, these stand-off situations can't last. Sooner or later, one
side will force its way through the defense of the other. But how can we
tell a tradable break from a potential trap? By following closely the pres­
sure in the bars. A situation that definitely warrants attention is when
prices tighten up in cluster format while pushing up or down against a
pattern line of interest.

42 www.rasabourse.com
Chapter 3 Price Aaion Principles-Praaice

One of the most telling clues to obtain that a breakout is near is

when a strong bar gets printed on the right of a cluster progression. Bar

10 is a good example (and so was bar 6 earlier on) . Granted, when bar

10 was broken topside, prices were still trapped within the bigger pat­

tern, but the event did let on that the bears were once again beaten in
support, and this time with buildup. That basically put the overhanging
pattern line next on the agenda. Time for a conservative breakout trader
to sharpen up the focus some more.

There is another form of buildup that can really put the pressure

up. Whenever prices in a potential breakout area are capped on one

side by a pattern line and on the other by the 25ema, we have what

can be referred to as a squeeze situation. Although this chart is actu­

ally not the best candidate to introduce this highly effective form of

pre-breakout tension, it does show us, prior to the breakout, one tiny

bar squeezed tight between the pattern line and the average (bar 1 1).
Preferably, squeezes contain at least two or three, if not many more

bars, which can really make the tension coil up like a spring. We will see

plenty of examples soon enough.

Very interesting also was to see the break above bar 11 stem from a

W-pattem, progression 8-9- 1 0- 1 1 . When such a potent pattern is posi­

tioned favorably within the price action, it is widely known to portend

a breakout on the bull side (as is its bearish counterpart, the M-pattem
on the bear side) . W and M-patterns come in many different shapes and

sizes and they can serve a very useful purpose in both entry and exit

technique. We will take up their appearances and implications in more

detail in the discussions and chapters to come.

To top it off, this pattern breakout found itself assisted by a very

powerful ally. Have a look at how the round number of 1 . 38 literally

sucked prices in from the moment the "proper" break was set. Not a

bear in sight until the level was hit upon. Such can be the power of a

favorable magnet.

www.rasabourse.com 43
 Understanding Price Aaion

IFig 3.31 www.ProR••lTime.com eur/usd 5-minut.

1.305

· 1.3
4
., ProReelfine .com
05:00 06:00 07:00 00:00 00:00 10:00 11:00

Figure 3.3 Whenever the action goes more or less sideways for a number
of hours, we can generally identify the market as traveling in a range.
In most such cases it shouldn't be too hard to wrap and extend a box
around the activity. Aside from establishing a clearer view on the barri­
ers of interest, a box will help to visualize the pressures and the buildup
within the range itself. It is certainly possible to do all of your analysis
without ever drawing a single box or line on your charts; but just by
looking at the picture above, it's hard to deny the benefits of a little vi­
sual assistance.
Note: Before delving into the range breakout, let us briefly discuss an
interesting characteristic of the eurj usd market: with the big UK and
US traders absent, and news and incentives often scant, it makes sense
that there isn't much firework to be expected during the latter half of the
Asian session. Understandably, Asian traders aren't particularly keen
on taking positions that will probably travel relatively flat for the rest of
their day. How is this useful? Without carving things in stone, we can
generally state that when the latter half of the Asian session contains a
pretty tight range, it is highly prone to be broken when volume picks up,
first thing in the EU JUK morning. A good indication of volume revival is
the way the bars immediately grow in length, usually from 08:00 on (EU
Open), but almost certainly in or around the more powerful UK Open at
09:00. As a result, not seldom the first decent trade of the new session
is found within this voluminous hour and it will pay to be alert when
trading in this time zone. As for other markets, it could never hurt to
check your instruments for similar kind of particulars.

44 www.rasabourse.com
Chapter 3 Price Action Principles-Practice

Figure 3.3 provides a fine example of a UK morning breakout. The

box may already have been plotted when the high of bar 2 had put in
the double top with bar 1 . With the bars currently traveling above the
25ema, the bottom barrier was of less significance and could always be
adjusted later on.
From 08:00 on, the activity did pick up a bit, but the bars remained
very tight in span. Prior to the UK Open at 09:00, bears had managed to
take out the low of bar 3 in bar 4, but then failed to reach the obvious
round number magnet. Already a telling clue. Not only did this show
bullish resilience (or bearish weakness, if you wish), it put a false low in
the chart. And since the low of 4 undercut the low of 3 by a mere one
or two pip, it pretty much resembled a double bottom also (3-4). Not
much later prices were trading back above the 25ema again. All very
bullish.
Have a close look at progression 2-3-4-T. This shows us another W­
pattern, a flatter version of the 8- 1 1 variant in Figure 3-2 . By tracking
the bars from left to right, it is easy to see why these patterns harbor
such strong breakout potential: with a double bottom built in and the
right leg swinging up, the pressure definitely points north.
From the false low at 4, eager bulls immediately pushed on to set the
bull break at T (tease). This can be seen as a little premature (not much
buildup prior to the break), but the situation definitely called for atten­
tion. We already addressed the fact that attacking parties can be very
persistent, even when forced to retreat on first try. The more they have
the chart's pressure working in their favor, the bigger the chance they
will give it another shot in the bars to come.
Note that the retreat from the tease breakout was very modest. The
next few bars simply kept pushing up against the top barrier, a defi­
nite sign of bullish determination. In fact, these four bars in the ellipse
represent a textbook squeeze: not only did they push up against the
top barrier (ignoring the tease high), the 25ema at the other end was
lending a supportive hand, gently squeezing the bars out of the box.
To a conservative breakout trader, this is one of the best setups in the
field, and it gets even better when the buildup hangs from the right leg
of a W -variant. The bullish response to the breakout may have been a

www.rasabourse.com 45
 Understanding Price Action

bit over the top, but the mechanics in play are evident: bulls buying in,
bears buying out.

I Fig 3.4\ www.ProRealTime.com eurlusd 5-minule · 1 .31 5

«> ProRealTrne.com
1 2:00 13:00 14:00 15:00 1f>00 17:00 16:00

Figure 3.4 Squeeze progressions do not solely occur in the top or bottom
of a range; they can just as well form above or. below an angular pattern
line, with the 2 5ema pushing at the other end (first ellipse) .
A little before this took shape, bulls had broken through a bigger
boundary in bar 4. The buildup leading up to this break was a bit on the
thin side, but the overall conditions were definitely supportive. While
not visible in the snapshot above, we can grasp the bullish nature of
the forgoing action by monitoring the uptrending slope of the 25ema on
the far left. That tells us a bull rally had preceded the 1 - 3 progression.
The latter pattern is often referred to as a bull-flag formation (only the
flag showing) .
The general consensus on a favorable flag pattern is that (a) prices
tend to break away in line with the pole from which the flag is hanging,
and (b) the follow-through on the breakout tends to mimic the length
of the flagpole. Naturally, such fine prospects make these flag patterns
interesting candidates to be traded for continuation (trading a break in
line with the earlier dominance).
Understandable also is that when prices break away from a flag (or
any other pattern) with relatively little buildup preceding the event,
plenty of breakout traders may be left empty-handed on the sidelines.
But there is hope for these parties still. After all, it is quite common for
prices to briefly revisit the pattern they broke away from. We can refer to

46 www.rasabourse.com
Chapter 3 Price Action Principles-Practice

this type of pullback as a technical test of the breakout; in many a chart

this is a highly sought-after event for it could offer an opportunity to
catch the breakout in "second instance".
We can tell by the small bars in progression 4-5 that the pullback
was calm and orderly, devoid of bearish aggression. To those who aim
to hop on, this is a favorable development. The more subdued the con­
trarian pressure in the correction, the better the odds for a turnaround
once the pullback's momentum peters out. Opinions may differ on how
to best position oneself for the ride, but two elements are likely to play
a role in the tactics; the first is a pullback line (if one can be drawn
neatly) , the other is a break of a crucial bar in the lows or highs of the
correction.
Sometimes the most "useful" slope of a minor pattern line becomes
evident only at the very last touch before its perforation; still, with every
bar taking five minutes to complete, in most cases there is ample time
to experiment with the angle, even when using the high or low of the
current bar in progress.
Interesting also was the subtle false low of bar 5. This bar had briefly
dipped below its two neighbors but closed back above the 25ema. To
bulls lying in wait to buy themselves in on a pullback reversal, a false
low, even when seemingly minute, is always a welcome feature, for it
shows weakness on the part of the opponent. When bar 5 was taken out
topside, this "technically confirmed" the false low incident (bear break
followed by a bull break) , while coinciding pleasantly with the break of
the pullback line, if plotted as depicted.
Looking closely, the perforation of the pullback line was in fact an­
other bull-flag break (swing 2-4 the pole, progression 4-5 the flag) . It is
very common indeed to see a pullback transform itself into a little flag
variant on top of a bigger broken pattern. Should these smaller flags get
broken in turn, away from the bigger pattern, not seldom that is when
prices pop for real. This chart really shows a textbook example.
Bar the occasional exception of a very stale session, at some point
either a 50 or OO-level will become the topic of a more lengthy fight.
Since many parties tend to focus their attention on these round num­
bers, it is easy to understand the many clashes around them. A tricky

www.rasabourse.com 47
Understanding Price Action

feature of a typical round number skirmish, however, is that the initial

perforation of the level frequently takes place without much protest. It
is when prices start to run out of steam above or below the broken level
that the true fight begins. This tendency of prices to retrace to a broken
round number is what we have termed the adverse magnet effect. There
is no need for the market to immediately put in this test on any first cor­
rection, but it can play a nagging role in the coming action and possibly
keep many traders on the sidelines.
Like the EU / UK morning, the early US session is another volumi­
nous environment. It is often referred to as the UK/US overlap, which
more or less starts an hour before the major US stock markets open for
the day and ends shortly after the close of the London markets (14:30-
18:00 CET). In the event of a strong rally leading up to the US Open (as
was the case above) , the overlap is known not for its compliance with
but more for its rebellion against this pre-Open pressure. If aware of
these mechanics, bulls sitting tight on their profitable positions will
surely have kept a sharp eye on the action. With no correction of sub­
stance yet, and with even a small bull leg added to the 5-6 breakout,
the current situation was practically untenable. Note the sneaky false
high in bar 7, and the way the bar spun bearishly around, right in the
US Open at 1 5:30.
Technically seen, the total box progression was the market's way
to absorb and assess the 5-7 bull rally. Although no significant lows
were broken yet, the gradual succession of lower tops clearly indicated
that bull parties were no longer so keen on buying in the highs of the
market. Or else their enthusiasm was easily curbed by whatever supply
came forth (including that of fellow bulls selling out) .
In the few bars that preceded the collapse of the box (second ellipse),
tension had been building up in a textbook squeeze: the bars, though
tiny in span, were jammed tight between 25ema on one side and the
box barrier on the other. An interesting cue, favoring the bear side, was
the tiny false high in bar 8; in an attempt to escape the bearish implica­
tions of the squeeze, bulls had taken a shot at an upside break, only to
see their efforts attract no follow-through whatsoever. Such failure may
appear almost nondescript on the chart, but it can have a big impact on

48 www.rasabourse.com
Chapter 3 Price Action Principles-Practice

the bullish morale a little further down the line.

Ironically, prior to the box collapse, bears were dealt a little trap of
their own: within its 5-minute span, bar 8 had broken below the range
barrier also, only to close above it again. Such can be the fickle behavior
in a pattern barrier skirmish.
Without delving yet into details of how exactly to have traded this, if
at all, we can imagine the break of the range to be somewhat compro­
mised by the round number level directly below it. Although the number
itself possessed little technical value in this chart (no prior fight around
it, and thus no technical support offered) , the earlier price action had
been very bullish, which may still have left a lot of buy orders lying in
wait to get filled on a pullback to 1 . 3 1 , or even a little below it (com­
mon contrarian practice). On the other hand, with the UK/US overlap
already in its final stage, would bulls really want to step in against a
downside break of the box, knowing that volume would probably be thin
in the hours ahead?
Although we can never be sure of how a break will play out, it is es­
sential to always look at the situation from both sides of the field prior to
taking position. By also reflecting on the vantage point of the opponent,
as opposed to merely looking on the bright side of our own intentions,
we may obtain a better take on the true prospects of the wager at hand.
As it turned out, bulls ostentatiously threw in the towel on the break
of bar 8. The dotted line is put in to mark the near perfect ceiling test
with the high of bar 2 . Whether it was a ceiling test, a double bottom or
even a false low that would have stopped this decline is basically irrel­
evant (we shouldn't be trading there anyway) . But to bears in position,
this level provided an excellent marker to cash in some or all of their
windfall profits from the mini crash; at the same time, it offered heroic
bulls an opportunity to take their chances on a double-pressure pull­
back to the 25ema (9- 1 0 ; not recommended) .

www.rasabourse.com 49
 Understanding Price Action

IFig 3.51 WHW.ProReaITime.com eur/usd 5-minute U55

1.35

It ProRelfTime.com
14:00 15:00 16:00 17:00 19:00

Figure 3.5 Examine for a moment what happened to a bull who bought
himself in when bar 3 surpassed the high of 1 , bar 4 the high of 3, and
bar 6 the high of 4. These breaks may all have been in line with the
current dominant pressure, but that doesn't necessarily make for great
opportunity. There was no buildup prior to any of them and the moves
that led up to each breakout were already quite "extended". That makes
these breaks very prone to (temporary) failure.
Of course, it is not our business to comment on the tactics of our
fellow traders in the field. Maybe they are tiny scalpers cleverly aim­
ing for a couple of pip as stops are hit above a previous high or low;
or maybe they are trading from a much bigger frame, with their stops
safely placed well above or below the market. But from where we stand,
trading such non-buildup breaks as mentioned above is a losing propo­
sition on the whole.
Pullback 4-5 came to test the broken round number (adverse mag­
net), a feat that coincided with the first touch of the 25ema since the
start of the bull rally-always an interesting development to monitor.
Prices may have sunk a little through, but they held up well in the area
of the big 1 .35.
While it usually requires quite some buildup to set up a barrier break
of a range (at least a small cluster of bars) , pullback reversals, on the
other hand, can be very swift. Sometimes it takes no more than a single
"turnaround bar" in the 2 5ema to set up the reversal in tradable fashion
(5) . In a bull trend, a popular practice is indeed to trade the break of a
bullish bar in the low of a bearish correction, with a stop below the low

50 www.rasabourse.com
Chapter 3 Price Action Principles-Praaice

of the pullback. When going this route, however, traders are well ad­
vised to make distinctions between a highs-odds turn and its low-odds
counterpart. Bar 7, for example, may have been a classic turnaround
bar also (a so-called doji, showing a very small body on a long tail), but
it set up very poorly for breakout purposes. First off, an entry above it
would have been very close to the high of the foregoing swing (6), leaving
prices little room to "reverse" before running into potential resistance.
Second, the tall span of bar 7 would have demanded a rather wide
technical stop. And third, this stop would have resided quite unpleas­
antly on the path to the OO-level adverse magnet. When compared to
the break of bar 5, the break above bar 7 was of much lesser standing,
if not plain unsavory.
The 25ema by itself never provides support or resistance, it is just
an average. Yet in the continual seesaw motions of price action it is
extremely common to see a pullback of about 40 to 60 percent coin­
cide with the average closing price of the last 25 bars-and not seldom
with some form of technical support as well. The low of bar 7 is a good
example: it tested both the 25ema and the high of bar 5 and this simul­
taneously represented (a) a ceiling test (floor in the 4-5-6 arch) , (b) a
technical test of a former breakout and (c) a 60 percent retracement of
the forgoing swing 5-6. This type of "obvious" support will surely have
contributed to the aggression with which the low of bar 7 was bought
(a popular scalper's tactic) . No such aggression came forth, however, on
the break of bar 7.
On the way down, pullback 8-9 undercut the low of bar 7, but the
more prominent low of pullback 4-5 stood its ground well. This may
have kept the bullish pressure up for the moment, but it was hard to
ignore the magnetic power of that round number level; prices kept com­
ing back to it.
If an initial pattern line had been drawn to connect the turnarounds
of 2 and 5, bar 9 will have fallen below the extension. This doesn't au­
tomatically warrant adjustment, but we best keep the perforation in
mind. Should future price action better line up with the new low, per­
haps it is wise to adjust. Considering the squeeze progression in the
ellipse later on, the line is indeed best plotted as depicted.

www.rasabourse.com 51
Understanding Price Aaion

Before we take up the ellipse situation, let us first address the bull
swing 9 - 1 0 . This leg headed out quite happily but suffered a nasty blow
when prices approached the former high of bar 8. Try to imagine how
bar 1 0 must have shown a tall white body at some point, only to do a
full turn and close on its low. Bearish dojis in the high of a bull swing
(8 and 10), like bullish dojis in the low of a bear swing (7), can be some­
what intimidating. They are often looked upon as reversal bars, but by
themselves these dojis do not deserve such status. To judge their po­
tential impact, we should always regard them in the light of the overall
picture.
Things indeed had started to look a little less promising for the bulls.
Despite their repeated efforts to leave 1 .35 behind, the adverse magnet
never lost its pull. With now two lower tops standing (8 and 1 0), it was
evident that supply kept coming in at lower levels. If this continued, it
wouldn't take long before the bears would start to sink their teeth in the
round number itself.
On the other hand, let us not overlook the fact that the three major
lows of 2, 5 and 9 were all put in at higher levels, which was still a sign
of underlying demand. Neutrally regarded, the chart showed a standoff
situation with descending tops on one side and ascending bottoms on
the other, in essence a triangle pattern. As with all triangular patterns,
at some point they demand a conclusion.
The four bars within the ellipse set the stage for the chain of events
about to unfold. With prices stuck between pattern line support on one
side and resistance of the 25ema on the other, this was a make-or­
break situation. As long as the line held up, there was hope for the
bulls still, but it wasn't hard to imagine the consequences if they failed
to defend it properly.
The bears, obviously, had a task of their own. With the bars caught
in a classic squeeze, they now had their opponents in striking distance
of defeat. It was crucial not to let them escape.
What will certainly help your understanding of price action is not
just to look at the bars from a technical perspective but to really try to
grasp the extent of psychological forces at work. In the marketplace,
hopes and dreams are built and shattered by the minute and in this

52 www.rasabourse.com
Chapter 3 Price Action Principles-Praaice

emotional rat race it is never sure to anyone which side the axe will
fall. One thing is certain, though: the losses of one party will pay for the
profits of the other. Arguably no technical development better illustrates
the pivotal line between victory and defeat than a little squeeze progres­
sion in a critical level of support or resistance.
As prices flipped back and forth between the pattern line and the
25ema, ultimately the market had no choice but to pick sides. For a
brief moment in time, bulls may have felt a sweet tingle of victory when
bar 1 1 managed to break the high of the bullish bar before it. But alas,
as is often seen in a squeeze, follow-through appeared nonexistent and
the break turned out to be a trap.
This is a yet another fine example of how a tiny false break on one
side of the price action can be a harbinger of a major break on the other.
If you were a bull in position and you saw bar 1 1 produce that upside
break only to fully turn around and end on its "lows" (lower region of
the bar), how would you feel? And as the market then proceeded to take
out this bar at the bottom, breaking a major pattern line and round
number in the process, would you still stick around in hopes of sideline
assistance? Or would you rather let go of the rope and sooth your ach­
ing hands. Or better still, take position on the short side yourself1

features of a market slowly turning around from bullish to bearish. It is

The total progression on top of the pattern line shows the typical

interesting to note also that throughout this pattern, plenty of bulls had
taken position on bearish corrections to the round number, and they
even bought a little below it. But the very moment this support caved
in from a buildup situation, the chart dropped 50 pip without a bull in
sight. This shows us most evidently that in the marketplace, it is never
about price, it is all about pressure.

www.rasabourse.com 53
 Understanding Price Action

IFig 3.61 WW'N,ProRearTtme.com eur/usd S-minute

00:00 10:00 11:00 13:00

Figure 3.6 From the start of the first bar in the EU Open at 08:00, bulls
had shown their intentions quite unambiguously, which had left little
room for bearish opposition. As prices moved higher, bears repeatedly
tried to squeeze out a pullback of substance, but they were all cut short
even before the 25ema was reached. These . failed counterattacks re­
sulted in a number of false lows during the opening rally, of which bar
1 was probably the most distinctive. That was indeed a terrible break to
open up a short and it didn't take much bullish prowess to shake out
the bears involved in that wager.
As is often seen when the market puts in a strong rally, contrar­
ians of the clever variety tend to back off until at least a former area of
support or resistance is touched upon. If no such level is found within
reasonable distance, round numbers tend to make attractive substi­
tutes. It is seldom a smart idea, though, to short or buy straight into a
round number in the hopes of an immediate bounce. As much as you
can "expect" these levels to put up a fight, not seldom they are taken
out more than a bit before the defenders come in. In that respect, the
perforation of the 50-level in bar 2 was actually quite modest.
Pullback 2-3 ate back about 50 percent of the opening rally, which
we know is very common even in the best of trends. Note how bar 3
slightly undercut the low of bar 1 , but then was quickly bought up. An
interesting false low. As prices moved up again to reclaim their position
above the average, they soon ran into resistance of a pattern line com­
ing down from former highs. The initial perforation of this boundary,
despite being in line with dominance, was poorly built up and thus a

54 www.rasabourse.com
Chapter 3 Price Action Principles-Praaice

likely candidate to provoke contrarian aggression (4).

The horizontal pattern line points out the triple bottom features of
the 1 -3-5 progression. Being so common an occurrence, we may almost
take for granted that prices tend to bounce on a 50 percent correction
of an earlier rally, but let us not discard the bravery involved to make
this happen. After all, plenty of pullbacks do move on to deeper levels.
By comparison, the task of the breakout trader is not nearly as heroic,
for he will not meddle with the forming of the buildup itself. His job is
simply to piggyback the breakout, should one come forth in tradable
fashion. So how about the break of bar 5?
It's not hard to see why bar 5 was a crucial bar. The low of it helped
to form the triple bottom element and the high ran up against an over­
hanging flag line (squeeze variant) . With both pattern lines converging
sharply, a break, either way, was practically unavoidable. Considering
the bullish dominance from earlier on, and not to mention the bullish
close of bar 5, the odds definitely favored a bull-side breakout.
Bar 6 was a false high with bar 2 and another sign of round number
resistance (note the topping tail) . Leaving also a double top behind (2-
6), this development was likely to produce a pullback of sorts; but not
every bull in position will immediately have feared the pending adverse
pressure. In fact, a modest correction can indirectly favor the trend-side
prospects, for it offers sideline parties a chance to join the trend more
economically, which could serve to put new life in it. Of course, not all
pullbacks will "help the trend along", but it is not for nothing that so
many strategies are specifically designed to exploit the corrective mo­
tions of the market.
Shortly after the 50-level was broken in the 7-8 bull swing, prices fell
prey to the pull of the magnet (8-9) , but confident bulls quickly retali­
ated with another upside attack. This time, however, they failed to take
out their former high. And this put in a lower top at 1 0 .
With nothing but higher lows o n the board and with most prices
trading well above the 25ema, there can be no debate as to the bullish
supremacy in this session. In such an environment, conservative trad­
ers are much advised to shun all bets on the sell side. As to the prospects
for further advance, however, there was a notable indication present

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Understanding Price Action

that the market had entered a zone of stronger resistance. Have a look
at the 7-8-9- 1 0- 1 1 progression, and particularly the part on top of the
round number. It is an interesting variant of the classic double top and
we can refer to it as the M-pattem. Earlier on, we already came across
its bullish counterpart, the W -pattern. Both are very potent buildup
formations and seldom hard to detect; but their breaks are best traded
in line with dominance. When broken the other way around, as with
the M-pattern here, the market's response can still be quite powerful,
because the event could prompt many parties to exit. We should never
take these patterns lightly.
The dotted line is put in to point out a classic ceiling test example
(low of 1 2 tests high of 7), but with the M-pattern block now hanging
ominously above, there wasn't much room for a serious bounce .

. WW'W.ProRealTIma.com eur/usd 5-minute IFig 3.71

Figure 3.7 It took the bears a mere five candles in the UK morning to
produce a vicious 80 pip rally that would put its undeniable mark on
the rest of the session ( 1 -2). Once the action calmed down a bit, bulls
tried to regain some of the territory lost, but all they could manage, re­
ally, was to stem the decline. This formed what is generally referred to
as a bear-flag progression (2-4). Common perception has it that a flag
pattern builds up to a break in line with the pole from which it hangs
(continuation break). This is indeed a regular occurrence, but some im­
portant distinctions need to be made; when acting on the implications
of our technical patterns too eagerly, we may end up getting hurt more
than benefit from them.

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Cllapter 3 Price Action Principles-Praaice

A first major factor in the way a break is received is its location in

relation to the 25ema. On balance, the "further away" entry is taken
from the average, the more riskier the trade, particularly when using
tight stops. Even in a trending market, prices will always try to correct
towards the 25ema, which basically turns the average into a perpetual
magnet. With this tendency in mind, one of the most effective filters you
can build into you trading method is to allow prices, in the vast major­
ity of cases, to reach the average first before participating on a venture
away from it. Such simple selectivity stands to improve the odds for a
successful start of your trade most dramatically.
Another issue to take into account is the shape of the flag in rela­
tion to the size of the pole. When a relatively small flag hangs from a
relatively large pole, participants may view the relation between the two
as a bit "off' and thus be reluctant to trade the break of the flag. This
concept is related to the principle of harmony and we will take it up in
more detail in the section on our entry techniques in Chapter 5 .
A flag break of the poisonous variety is shown below bar 4. Not only
did this break originate from a rather small flag (in relation to its pole
1 -2), just look at the distance away from the 25ema-that is huge!
Another thing that strongly contributes to the danger of trading a

and, rest assured, they do possess a very keen eye for their favorite play.
premature break is that contrarians are always on the lookout for them

In other words, next to finding few companions to get his poor break
going, the premature trader stands to encounter lots of participants
of the dreaded other camp. Further adding to his troubles is the often
treacherous behavior of his fellow traders at the first signs of faltering
follow-through. Consider the 5-6 maneuver. That was not just the doing
of powerful bulls, bears were toppling over one another in their hurried
flight to safety.
Interesting to note also is that it took just one bar to fully crush the
prospect of bearish continuation (5). We can refer to a bar of this cali­
ber (in relation to the average size of neighboring bars) as a powerbar,
meaning that it opens at one end and then closes strongly at the other.
Looking closely, we can detect a virtual copy of this bar at 3 . That, too,
was a strong powerbar in defiance of the bearish pressure, but since it

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Understanding Price Action

was the first to show up, its intimidating presence possessed less of a
bite. Bar 5 , on the other hand, showed up after a sideways progression
had already stalled the bearish momentum (buildup) , and it confirmed
a failed flag breakout to boot. Understandably, this time around more
bears will have taken heed of the adverse implications, not in the least
since progression 2-5 bore all the characteristics of a W-reversal break.
To visualize the full W-pattern, start out with the left leg at 1 , follow
the up/down motions in the bottom of the bear rally and then imagine
the upside break of bar 5 to provoke a bull rally all the way up to the
level of 1 . In practice, however, such symmetry is quite exceptional, and
not very relevant either. In the vast majority of cases, the element of
most significance in the W-pattern is not the right leg, but the middle­
part progression following the left leg (2-5). The blockier this cluster
shows up, the more likely that bears will bail out on an upside break of
it. Moreover, when this block shows a powerbar on the right, as was the
case with bar 5, bears with tight stops may not even wait for the middle­
part's high to be taken out; they may use the break of the powerbar to
exit immediately. (Naturally, in the highs of a bull swing, the same thing
applies to an M-pattern situation.)
Do bear in mind, though, that when set against the dominant
pressure, a middle-part break may still fail to attract substantial follow­
through, or could even be a trap. In most cases it is recommended not
to jump in on these breaks, but to use them mainly for exiting purposes
when already in position. (See Chapter 6 on Manual Exits.)
On the way to fill the gap with the average, the 5-7 pullback had
encountered little bearish opposition. But the tiny bars in the top of the
correction let on that the bullish enthusiasm was wearing awfully thin.
Surely the round number zone will have played its part here as well;
sooner bears would short from that level than get out of the way above
it. There are multiple ways to have traded this turn, but the conservative
route is to wait for a decent sell signal first. This came presented when
the bull break in bar 7 failed to attract any follow-through whatsoever
and then was followed by a bear break in turn (false high confirmation) .
An added bonus, for the bears, was to see the break coincide with the
perforation of the dotted pullback line.

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Chapter 3 Price Action Principles-Practice

On the way down again, suddenly a mean bullish powerbar came to

attack the round number from below (8). It is never a pleasant sight to
see a strong adverse move defy a fresh trade, but it is good to remember
that the markets are not designed for comfort. By remaining calm and
attentive, a bear could assess that none of the favorable elements on
which his position was based had been overthrown by that bullying bar.
The trend was still down, prices were still below the 25ema, the round
number could work as resistance and so could the ceiling test with the
low of bar 7, which was also a technical test of a former breakout.
Given all the violence from earlier on, it may seem a bit odd that no
further follow-through came forth in the new low at 9, but it is actually
quite common. We very often see the UK morning put in a strong rally
in no more than a handful of bars, only to then absorb that action in a
sideways meandering motion until the US Open at 1 5 :30 CET. In these
slower phases, breakout traders tend to be more picky and this usu­
ally sits well with the contrarian game. Their favorite practice, however,
is to counter a break against dominance in a 40/60 percent retrace­
ment area (seen from the viewpoint of the rally) . For example, notice
the typical contrarian response when bar 1 1 had surpassed the high of
bar 10, or when bar 13 had come to take out the high of bar 7. True,
contrarians hadn't back away from the break in bar 9 either, if only for
its total lack of buildup, but this had required more bravery to pull off,
simply because the break through the session low was set in line with
dominance.
There are bear and bull opportunities in any market, but when it
comes to finding substantial follow-through (say, at least 20 pip), it is
much advised to position oneself in line with the dominant pressure.
In a lengthy sideways correction, it may take quite a while for a break
to set up in high-odds fashion, but do not let this discourage you from
staying put. In almost any session, sooner or later an opportunity will
come. Always handy is to already put in a pattern line across the highs
or lows of most relevance and then extend it to the right for future
purposes (9- 1 2- 1 4 plus extension); with a fine line in place, it is then
merely a matter of keeping good track of the buildup.
Note how the bars immediately fattened up around the US Open

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 Understanding Price Action

at 1 5: 30, as is often seen also in the EU and UK Open. The five bars
in the ellipse represent a pattern line battle. Although the 25ema was
running flatly through this progression, this was a squeeze variant too,
because the bars were now caught between support of the pattern line
and resistance of the round number. Despite an initial perforation of
the pattern line, bulls did their best to prevent the break from following
through (note the three identical lows outside of it), but ultimately were
forced to throw in the towel.

IFig 3.81 .....P,oR

..w ••lTime. com eu,fusd 5-minut.

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2
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04:00 09:00
I
05'00 06:00 07:00 ceoo

Figure 3.8 We can tell by the slope of the 25ema on the far left that there
had been a decent selloff in the early Asian hours. What followed was a
50-level fight that lasted all the way to the start of UK session. Around
07:00 there was still no denying the bearish dominance, but with the
EU and UK Open coming up shortly (08:00 and 09: 00), it remained to
be seen how this Asian trend would stand its ground against the often
rebellious thrusts of the new morning volume.
Pullback 2-3 was the first bull attack to emerge, but as soon as the
charge petered out, a little above the round number, the market sold
off again (3-T). The subsequent barrier perforation at T, however, was a
break of the poor variety. It is kindly annotated as a tease, but we might
as well classify it as a false break trap (no buildup whatsoever). This
left the bears very exposed, right in the EU Open at 08:00. The T -4 bull
response is the textbook answer to such situation.
Note: Even before the low of 6 had come to match the low of 2 , the
bottom barrier of the box could already have been plotted as depicted.

60 www.rasabourse.com
Chapter 3 Price Action Principles-Practice

Whenever there is a false high or low involved (T), here's a tip: sooner
place your range barrier at the level before the perforation. On subse­
quent touches, the market tends to show more respect for the earlier
high or low (6 matches 2 instead of T). As a technical rationale, we
could say that a false perforation sooner acknowledges the foregoing
level than invalidates it. For another example, have a look at how the
high of bar 9 lined up with the high of bar 1 , thereby ignoring F. (For
an earlier variant, check Figure 3.6 and the 1 -3-5 situation.) Although
applicable in basically any box situation, this principle of barrier prefer­
ence may come in real handy when having to plot a box over a much
wider span, so as not to lose track of the level of most relevance when
buildup starts to form. Of course, when the current price action starts
to line up more neatly with a level of a false perforation, we should see
no problem in adjusting our barriers accordingly.
When the high of bar 4 hit upon the low of bar 3 , a ceiling test was
a fact and it was now up to the bears to take advantage of it. It took a
little skirmish in the round number, and a mini false high at 5 , but then
the bulls were forced to retreat, and not much later prices were pushing
down against the bottom barrier once more (6) .
At this stage, we can imagine the bears to have felt pretty content
with the way things were going. Not only had they successfully fended
off the first bull attack in the EU Open (T -5) , the overall pressure still
pointed pleasantly south and prices were now favorably positioned in
the low of the market again. Little did they know they were in for a rude
awakening.
Ironically, even though the powerful 6- F bull surge had crushed all
bearish hopes for further decline, it ended with a classic bull trap of its
own (F) . Notice also that the F-8 response was a virtual mirror image of
the T -4 response at the other end of the range.
When confronted with a failed breakout, the attacking parties basi­
cally face two options: they could either retreat in full or give it another
shot. Apart from market pressure, an element that tends to have large
say in this matter is whether the initial break was set with or without
buildup. In case of a non-buildup failure, as shown at T and F, chances
are good that the attackers will want to give it another try.

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Understanding Price Action

Always a strategic base for prices to recoup from a false break rep­
rimand is a level of support or resistance back inside the range. In this
regard, bulls had no reason to complain with what was offered. When
the low of bar 8 came to test the 4-7 cluster (technical support) , this
favorably coincided with a touch on the round number and the 25ema;
on top of that, the correction had hit upon the 50/ 60 percent retrace­
ment level of the 6-F swing. If we further take into account that the UK
Open volume poured in at that very same instant (8), this harbored all
the ingredients for a swift bull attack on the top of the range, perhaps
followed by a break soon after.
Granted, all this may have been in defiance of the earlier Asian bear
pressure, but that is seldom a deal-breaker in the powerful UK Open.
To further examine the market's change of heart, have a look also at
the elongated W-progression-and the triple-bottom element within­
stretching itself throughout the second half of the box ( I -F); this was
already a major hint regarding the shift in consensus from bearish to
bullish. And how about progression 3-F, a W-pattern within a bigger
W-pattern. And lastly, hanging from the right leg of this pattern was a
two-bar squeeze progression, building up pressure between the 25ema
underfoot and the barrier overhead (8-9).
Since the latter element contained only two bars, and not very tight
in span, we cannot blame a conservative bull for deeming the break
above bar 9 a little too aggressive; it would have been nice indeed to
have seen the squeeze fatten up a bit with maybe one or two extra bars,
preferably getting a smaller in span. The UK Open is known to speed
things up a little, though.

62 www.rasabourse.com
 Chapter 3 Price Action Principles-Practice

IFig 3.91 W!'oW.ProRealTime.com eur/usd 5-minute

1 17

06:00 07:00 08:00 oaoo

Figure 3.9 Let's take up one last example of price action principles at
work before digging into the finer mechanics of our trading method.
Initially, the top barrier of this range may have been plotted across
the highs of 1 and 2. That would have turned the high of bar 3 in a false
high, or a tease break if you wish. But when not much later the high
of 3 was hit again, and prices retraced from it, a new double top was a
fact (3-4), which allowed us to experiment with the barrier as depicted.
With all the bars closing above the 25ema, bulls had kept the best of
the action since the start of the EU Open at 08:00, but prior to the UK
Open at 09 :00 their dominance was far from outspoken. Their task was
evident, though: to get prices trading away from that round number.
Let's examine how it was done.
Following the double top of 3-4, bar 5 had dipped briefly below the
25ema but managed to close above it; a little sign of bullish resilience.
It was also a higher low in the box.
From the tiny base of bar 6, bulls had forced their way through the
top barrier in powerbar fashion (T). These tease breakouts can be a
bit tricky at times. On the one hand they lack solid buildup, but they
may not be completely devoid of appeal; this could leave many breakout
traders confused on whether to hop along or decline. From where we
stand, tease break perforations are best considered premature, but we
should never lose track of the follow-up action.
Earlier on we addressed the authority of the powerbar and its pow­
erful implications when broken; equally interesting is this bar's little
cousin, the so-called inside bar. By definition, this is any bar that nei-

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Understanding Price Action

ther takes out the high nor low of its predecessor. When showing up
next to a tall neighbor, even an inside bar can have a sizable span, but
on the whole they are quite small and thus easily recognizable within
the chart.
Like the powerbar break, the break of an inside bar, too, can have a
serious impact on the price action. Particularly when the bar is situated
at a crucial spot, its break is known to trigger quite a few traders in and
out of position. With this tendency in mind, another way to look at the
inside bar is to regard it as a one-bar buildup progression.
Although the majority of bars in this chart were all of modest span,
there were some interesting inside bars to be detected. How about bar
6, as a prelude to the powerbar breakout at T; and bar 7, from which
downward break the market responded with a pullback to support. And
how about bar 9 , which set up a pullback reversal in the top of the bro­
ken range.
Bar 9 was indeed an interesting bar. It presented itself bullishly next
to bar 8, which had just performed a very telling feat of its own: the low
of bar 8 had put in what we can refer to as a triple. This is a simultane­
ous touch of a pullback on the 25ema, a round number and a technical
test of sorts. Since the low of bar 8 hit upon the high of bar 6, the tech­
nical test here was a ceiling test.
In a bullish chart, a triple represents threefold support, and plenty of
bulls love to buy straight in it. In a bearish chart, a triple is likely to get
shorted. However, it is the element of the technical test more than that
of the 25ema and the round number that earns the triple's true bounce
reputation (principle of support and resistance). This is why we very
often see prices fail to bounce "properly" in a weak double (25ema and
round number) , where the technical test is missing. A double of, say,
a 25ema and a ceiling test may already hold up much better because
of the technical test within (strong double) . But triples are definitely the
most potent of bounce generators. For a recent example of an excellent
triple, check the previous chart, Figure 3.8: the triple is found where the
low of bar 8 hits upon the 25ema, the round number and a technical
test with the highs of the 4-7 cluster.
When there is no round number involved, but instead the pullback

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Chapter 3 Price Action Principles-Practice

hits upon a 50/60 percent correction of the foregoing swing, that repre­
sents a triple, too (provided it coincides with a touch on the 25ema and
a technical test) . We will see countless more examples in the pages and
chapters to come.
For more inside bars, have a look also at the two little dojis at 1 0 .
Although the second doji was basically an inside bar to the first, they
were both inside bars to the big powerbar on the left (actually, they
stuck out a bit, but that hardly mitigates the implications). Naturally,
if one of them already builds up tension, then two will do so even more.
The break below the second doji represents a popular contrarian entry
to scalp some pip on the way down to support ( 1 0- 1 1 ) .
Although this chart was far from trending, it is still relatively easy
to identify the party in charge. From 07:00 on, the session had printed
nothing but higher lows and higher highs, a clear indication that bulls
were prepared to risk their capital at gradually higher prices. This is
not to suggest that we should simply play along for the ride, but it does
mean that we should be extra cautious when aiming to trade in the op­
posite direction (or best shun it altogether) .
Note how bulls twice used a correction to the top barrier of the box,
in conjunction with the rising 25ema, to buy themselves in.
This concludes our introductory discussions on the core principles
of price action. Throughout all coming chapters, all of the above will
find our attention again, since no chart ever gets printed without these
essential building blocks in place. Our task now is to examine how we
can put our understanding of these principles into a practical trading
method.

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www.rasabourse.com
Chapter 4

Orders, Target and Stop

If you search the internet for information on position sizing and trade
management, chances are you will soon find yourself flooded by an
endless stream of possible techniques, one more exotic than the other.
Some traders prefer to scale in, others jump in fully packed; some scale
out on flexible targets, others strongly advocate preset objectives; many
traders trail their stops for protection, while more others just use a
bracket and be done. In short, there are myriad ways to go about enter­
ing and exiting and most likely there is something to be said in defense
of each and every technique.
This guide will offer some ideas on the matter as well, but do take
note that none of it is ever carved in stone. I firmly believe, though, that
the more a trader adheres to a strict set of entry and exit rules, the less
likely he is to fall prey to challenges of the emotional kind. The first
suggestion, therefore, is a popular management technique specifically
designed to keep things very simple. At a later stage, we will dig a bit
deeper into the finer subtleties of trade management.
Most trading platforms will offer a wide array of order types, but for
our purposes, two standard settings will do: to enter the position, a
market order will be fired by hand. Once in the market, a bracket order
will automatically spring to life to close out the position at preset levels
for either a profit or loss.
The market order is a logical choice. When the chart calls for action,
agility is a must. By firing "at the market" no opportunities will ever be

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Understanding Price Action

missed due to a limit order not being filled (the limit order has a specific
price attached). The moment we spot our break, one click on the buy or
sell ticket will ensure position in the market.
For exiting purposes, the market order is an option, too, but this would
require a constant tracking of the open position and there is always the
possibility of a connection failure to consider. More user-friendly and
safer also is to use the bracket order option. As the name suggests, the
bracket encloses an open position by having both a target and a stop
automatically attached to the level of entry. Both sides of the bracket can
be set to any desirable distance and each will close out the position when
hit. A nice feature of this order type is that when one side gets hit, the
pending order at the other end instantaneously gets cancelled. Hence
the bracket also being referred to as an OCO (one-cancels-other) .
Following are the suggested settings for a standard bracket on the
eurjusd 5-minute in accordance with the trading method to be dis­
cussed in the next chapter. The target side is set at a distance of 20 pip
from entry, the stop at a distance of 1 0 .
These settings are not merely chosen for their ease of application. In
a normally active eurjusd session, a 20 pip target complies fairly well
with an average double-pressure pop from a buildup situation that is
likely to have our interest. As to the 1 0 pip stop, to some readers this
may seem awfully tight, but it is thoughtfully chosen as well: it allows
a trade some room to breathe, but not to the point of hope-and-pray.
Observation has it that if we position ourselves on a break in line with
dominance, carefully selected and stemming from a buildup situation,
there is usually little to be gained by setting protection at a level further
out. Hundreds of trade examples in the chapters ahead will aim to vali­
date this bold premise.
To ensure a protective exit at all times, the stop-side of the bracket
is a market order too; when hit, this order will close out the position no
matter what. Inherent to the use of a market order is the occasional is­
sue of slippage. This happens when an order gets filled at a price worse
than intended due to the fact that the market moved disadvantageously
in the split second it took the platform to work the order request. This
is best accepted as a little cost of business. In relatively normal condi-

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Chapter 4 Orders, Target and Stop

tions, slippage will be minimal, maybe one or two pipettes (tenths of a

pip); in faster conditions, it may cost some more to get in or out of a
trade. On occasion, slippage may even work to one's advantage.
In any case, never consider swopping the market order for a limit
order to cheapskate on protection. This could turn out to be a costly
mistake if no counterparty is found to fill your trade at the desired exit
level: prices could march straight through your stop without ever tak­
ing you out. For this reason, most platforms do not even provide a limit
order option at the stop side of the bracket. At the target side, a limit
order will do.
With a 10 pip stop and a 20 pip target in place, spread and/ or com­
missions included, these settings are said to show a ratio between risk
and reward of 1 :2 . In other words, if we get stopped out twice for each
time our target is hit, this will yield a break-even result over time. More
encouragingly, if one winner is pocketed for every one loser incurred,
things are progressing in very promising fashion.
Note: Certain bracket order settings can hold up for ages, but it is
wise to evaluate at regular intervals whether the current market condi­
tions still justify the settings of the past. For example, should intraday
activity significantly pick up, or even go haywire like in the height of the
euro crisis back in 2008/ 2009 , it may very well be that the standard l O
pip stop would no longer suffice. A simple solution could be to set the
distance for protection at a wider level (while taking off some volume to
compensate) . Should we adjust the target level more or less proportion­
ally, we can even maintain a similar risk/ reward ratio as before. (For
instance by setting the stop at 13 pip from entry and the target at 26,
and so on.)
Variations on the bracket order theme are easy to implement. It is
certainly not a requirement to have the target level at all times double
the level of the stop. Should a 20 pip target be deemed acceptable but
a 1 0 pip stop too tight, setting the latter a little wider is always an op­
tion, even on a discretionary basis. Of course, this will affect the risk/
reward ratio.
As an alternative to a preset target, a trader could decide to let the
price action determine when it's time to cash in a profitable trade. Theo-

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Understanding Price Action

retically, such flexibility makes perfect sense, but it may not serve all
traders equally well. Anyone even vaguely susceptible to spur-of-the­
moment paranoia, or greed for that matter, is probably better off putting
faith in his bracket rather than in his own perceptions. It is not for
nothing that this type of management is so popular among traders of
all levels.
Since we have yet to discuss our entry techniques in the coming
chapter on Trade Setups, let us not busy ourselves too much at this
point with the finer subtleties of exiting. This is not to imply that the
discretionary method does not deserve exploration-quite the contrary.
We will have a closer look at some of these techniques in Chapter 6 on
Manual Exits.
If we embrace the standard bracket order model, we will put on a
full position on entry and take off all units on exit. The actual unit size
(trade volume) with which to enter the market is of course a personal
choice and very much dependent on the current level of competence as
well as the amount of capital in the account. At this stage we need not
bother with it, but the virtues of what is commonly referred to as com­
pounding do deserve the utmost attention from anyone who is serious
about his trading business. In Chapter 10 we will address this matter
of unit sizing in detail.
When it comes to spreads and commissions, in Forex there are two
kinds of broker models to choose from: the first, generally referred to as
the retail model, charges no commissions but adds to the spread; the
other usually offers a lower spread but adds a commission on top. On
the eur/ usd, both models should work out more or less to the same cost
of business per trade (round-turn) . The retail broker will probably offer
a 1 pip spread during the active phases of the session; the commission
broker may offer a 0.5 pip spread, or even less, but on top will charge a
commission of about 0.5 pip round-turn.
When still in the learning stages, it is highly recommended to keep
the volume very low and thus not worry too much about where to find
the tightest spreads. Rather than trying to save a couple of pipettes
on entry, way more effective, in these early stages, is to work on your
price action knowledge and trading techniques. With no less than a 100

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Chapter 4 Orders, Target and Stop

pipettes in a single 1 0 pip stop, avoiding just one unnecessary loss per
week will more than offset a few extra pipettes paid in the spread.
That being said, as you progress over time and your volume goes
up, and you would like to trade multiple markets as well, a commis­
sion type broker is probably the best way to go; most popular pairs will
be offered at a reasonable spread and commission. Retail brokers may
charge a slightly bigger spread on some of the other pairs; but over the
years, the costs of business have gone down considerably with all par­
ties, and may go down further still. In any case, always do your due
diligence when it comes to choosing brokers and never take for granted
what they offer on their sites. Best to apply for a free trial first, just to
see how their spreads hold up in real-time, particularly in the hours of
your time zone.

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www.rasabourse.com
Chapter 5

Trade Setups

With the bulk of price action essentials now under our belt, it is time to
sharpen the eye for combat. Recognizing the market's lust for repetition
is one thing, it is quite another to take advantage of it. Without some
specific rules of engagement, even the price action specialist is merely
at the mercy of his own perceptions. Especially when coming in with a
tight stop, there can be no such thing as trading on a hunch or shoot­
ing from the hip just because a situation has merit. Every single entry
in the market should always be justifiable from a technical perspective
and defensible in terms of protection as well.
From where we stand, there are three core requirements to meet
on any one trading idea, two of which we have already addressed quite
extensively: to trade in line with dominance and to take position on a
break away from a buildup situation. The third requirement is a func­
tion of the buildup progression itself: within it, we need to look for a
development that sets up the trade.
The interesting thing about trading breakouts is that despite the
endless ways in which price action can manifest itself, there aren't that
many ways for buildup to break. In this chapter we will cover four spe­
cific trade setups, three of which designed to take on a pattern breakout
of sorts, the last to tackle the pullback reversal (which is often a pattern
break variant as well).
The fact that a pattern can "break" implies the presence of a bound­
ary of sorts. On this point, we already took up the benefits of curbing

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Understanding Price Aaion

a progression of interest with a line or a box; these tools can indeed

provide excellent assistance in detecting the pivotal levels in the chart
from where prices might break or bounce. But let us be mindful not to
clutter our charts, and our view, with all sorts of graphics that bear little
relevance in terms of future purpose. In most instances, a single line or
a box is all it takes to stay focused on the development at hand.
Once we have established a visual on a boundary of interest, our
next task is to monitor how well this barrier holds up when raided. As
we know, a mere perforation may not call for action yet (think tease and
false break traps), but things always get interesting when attackers and
defenders start to battle it in a tight group of alternating bars push­
ing up or down against the barrier. Within this buildup we then need
to identify a crucial bar-the bar from which break to take position. In
a textbook example of a bull-side breakout, this will be a bullish bar
positioned at the end of the current cluster, with a close against the pat­
tern barrier. When a subsequent bar takes out this bar at the top, the
pattern defense is now considered broken and we can enter long at the
market. On a bear-side trade, the situation is simply reversed (shorting
the break of a bearish bar). We can refer to the bar that sets up the trade
as our signal bar, and to the breakout bar in which position is taken as
our entry bar.
Note: Although not an absolute requirement, Forex traders are rec­
ommended to use a chart that prints prices in increments of a full pip.
This way, the highs and lows of neighboring bars, or those within a box
pattern, can line up more neatly, which can only improve clarity on the
barrier in question. Unfortunately, quite a few trading platforms print
prices they way they quote them, in pipettes. In this setting it takes a
mere pipette for a crucial bar to be broken by another, but this break
may not yet surface on the more widely consulted "one-pip" charts,
potentially leading to premature entries. Trading from a pipette chart
is not undoable, but the advantages of the one-pip setting are hard to
dismiss. If this is not available on the charts that come integrated with
your broker platform, renting a standalone charting package for a small
monthly fee solves the issue (highly recommended anyway, if only for
studying purposes). By the way, the one-pip setting should regard the

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Chapter 5 Trade Setups

chart only, not the way prices are quoted on the order tickets.
In a perfect world, a pattern gets broken in a four-step fashion: ( 1 )
aggressors attack the boundary line, (2) defenders fend off the initial
charge, (3) a little cluster of alternating bars builds up tension in the
boundary region, and (4) prices break out and follow through.
In numerous instances, however, it will take a lot more pulling and
pushing and tricking and trapping to see a pattern boundary give in (if
at all). On the good side, there is no need for the market to behave "per­
fectly" in order to set up a tradable wager.
For example, when forced to retreat from a tease breakout on the
bull side, prices may hit upon a level of support back inside the pattern
from where a new attack on the boundary may be launched (think ceil­
ing test and the re-break follow-up). At other times, a pattern is broken
somewhat sloppy, with the next few bars freezing up outside the barrier;
even though this may not look very promising from a follow-through
perspective, the fact that contrarians can only stem the breakout but
not undo it may ultimately work in favor of continuation. In other cas­
es, we may see a pattern get broken quite substantially without much
buildup, but then prices pull back to put in a technical test with the
broken boundary line. These examples are clearly not representative
of the "ideal" break, which may prompt us to decline the initial event.
But the follow-up action could still set up a playable wager one way or
another.
Pattern breakouts can be very choppy also, with little clue as to the
ultimate resolution. In such cases, we may have to adjust the position
of the pattern barrier, or perhaps erase it completely and take it from
there.
All in all, trading pattern breakouts is a pretty straightforward prac­
tice, but things can get tricky if unaware of the finer mechanics. As far
as our entry techniques are concerned, we will make a threefold distinc­
tion between all variations by either naming the setups a pattern break,
a pattern break pullback or a pattern break combi. Each version will be
introduced below, with detailed explanation on its typical appearance,
accompanied by a number of chart examples to get the idea. Mter we
have addressed one last setup, the pullback reversal, we have all the

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Understanding Price Action

weapons needed to take on basically any chart from a conservative yet

highly effective breakout perspective. In Chapter 7 we will expand our
range of breakout techniques somewhat further with the powerful but
slightly more advanced trade-for-failure setup.

Pattern Break

Despite the many variations, not to mention the tricks and traps, a very
straightforward pattern break is still a regular occurrence. During the
process of pattern formation, things may start out a bit fuzzy, but usu­
ally not much tweaking is needed to define the "pattern of the moment"
with a respectable line, or box, on a 5-minute chart. Generally speak­
ing, the more touches involved to form a pattern boundary of relevance,
the "harder" this barrier, and the more buildup needed to push the
defenders out of the way.
In a tradable scenario, this buildup materializes as a small cluster
of alternating bars, known also as pre-breakout tension and in some
cases referred to as a squeeze. Within it, there are strong psychological
forces at work. If it is a level of support that is currently attacked, bulls
in position can only hope that their sideline companions will come to
the rescue on this level of last resort. But bears in position face chal­
lenges of their own. To see the bullish defense cracked, they, too, are
in need of assistance, which may not be so easy to come by in a level
of support. Surely many sideline bears would want to short below sup­
port, but who then is to do the dirty work of cracking it first.
Granted, these hopes and fears may be present at any random level
in the chart, but whenever prices build up in an area of support or
resistance, at least we have a clear visual on a particular level under
stress-and plenty of parties, both in and out of the market, are likely
to have their eyes cocked on the very same boundary as well.
Do understand that the way the break is set is only one part of the
total of elements to be consulted prior to taking position. Always de­
manding attention is the chart's overall pressure; equally essential is
to scan for potential obstruction on the way to target, as well as for ad-

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Chapter 5 Trade Setups - Pattern Break

verse magnets that may work to the detriment of the intended stop. All
this will be addressed shortly.
But even when the situation sets up relatively well in terms of gen­
eral conditions, patience is still key. To justify our tight stop, of utmost
importance is to allow the price action the time to set up our trades
properly; we either step in on a break that fully complies with our entry
requirements, or we do nothing at all . It is never our task to meddle with
the forming of the buildup itself, nor to participate in breakouts that
can be deemed premature or otherwise suspect.
Our first discussions on entry technique regard the standard pattern
break setup. A small series of charts will serve to explain the tactics in­
volved, but do realize that in the endless variety of price action patterns,
this can only offer a snapshot of practical implementation. Throughout
all coming chapters, though, we will see countless more examples of
each breakout technique; so whatever is not fully palpable on first in­
troduction will surely fall into place at some later point.
Before exploring the accompanying text, again take a brief moment
to assess the global nature of each chart first. See if you can already
detect the hints and clues of most relevance-like the line of least resis­
tance, round number fights, obstructive elements, cluster progressions,
crucial highs and lows, and so on. This practice will not only playfully
activate your price action senses, it is likely to ease the absorption of the
technical discussions below the charts as well.

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 Understanding Price Action

· IFig 5.11 www. ProReaITime.com eur/usd s..min� E

o ProRetliTirne.com
01:00 02:00 03JXl 04:00 05:00 0000 07:00

Figure 5.1 A typical characteristic of a sideways market is the way prices

tend to alternate above and below a rather flat 2 5ema. In the early
stages of it, in the absence of a dominant party, there may not be much
telling who will come out on top. But by patiently monitoring the way
the price action revolves around the average and by carefully tracking
the highs and lows along the way, we can usually obtain a pretty good
idea on the side of the market that is slowly getting the upper hand.
The first notable event in the session above was the sideways "cor­
rection" 2-3, hanging from the pole 1 -2 . Horizontal pullbacks are the
market's way to absorb the implications of a foregoing move. Inevitably,
at some point, prices can only do one of two things: they either break
away in the dominant direction (think flag) , or they break away at the
other end, possibly setting up a reversal of sorts (think M and W-pat­
tern middle-parts) .
Bears will not have been amused to see the latter outcome come
about (4) . Just moments before they had been well on their way to the
50-level below, only to suddenly see their opponents aim for the round
number above. (Note the completion of the W-pattern in the 3-4 swing.)
Following this countercharge was a lengthy skirmish over the pos­
session of the 25ema, which ultimately resolved in favor of the bears. A
development that may have played a decisive role in this victory was the
fact that bulls, despite repeated attempts, had proved unable to reach,
let alone retake, the round number of 1 .36. At some point these misad­
ventures were bound to affect their morale.
But let us zoom in on the initial bull attack first (4) . When the ave-

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Chapter 5 Trade Setups - Pattern Break

rage is perforated from below, and the next so many bars manage to
close above it, we can refer to this as bulls retaking possession ofthe av­
erage. From here on, prices may still have a hard time reaching higher,
but they do stand a pretty good chance of getting picked up whenever
they hit back on the average, particularly on first touch; and even more
so when this coincides with an element of technical support.
In a rather slow and compressed session, support or resistance is
never far away. For example, when the low of bar 7 hit upon the high of
bar 5, this was a spot-on ceiling test that coincided with a touch on the
25ema and a 50/ 60 percent correction of the 5-6 maneuver. In an ear­
lier discussion, we referred to this threefold collision as a triple: a strong
turning point candidate. Scalpers in particular love to take advantage
of these little pullbacks to support, if only to rake in a handful of pip in
the initial bounce. But for prices to head out more authoritatively, or
lastingly, decent sideline assistance is usually required. In the session
above, this never convincingly materialized for the bulls. Not long after
taking possession of the average, they were twice forced to retreat below
it (8-9 and lO- l l )-and then failed to recoup third time around.
Note: As previously noted, there is no point in overanalyzing every
little skirmish in the chart; most of the time there are no trades near
and it will do to sit back with just an overview perspective on the open
session. Yet always interesting to monitor in any chart are the attempts
of either side to reach the next round number in line. Both parties have
their own level to gun for, and these pursuits, in the end, will either fail
or succeed. Of course, these levels do not have to be reached on any
first try. But whenever we see one side repeatedly fail to make it to their
magnet and then lose the initiative, a power shift is likely at hand. Put
differently, the failure of one side to reach their round number very often
sets the stage for a successful attack on the number at the other end.
This is essentially what happened in the chart above. Moreover, the
failed attempts to reach the OO-level-at 1 , 4, 6, 8, 10, and finally at
12-will not only have had an impact on the bullish morale, they will
have boosted the confidence of the bears with equal prowess.
Initially, the pattern line may have been plotted slightly more as­
cended to connect the 2-3 element with the low of bar 9. But when

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Understanding Price Action

the 1 1 - 1 3 progression took shape later on in the session, the situation

called for a little adjustment. When drawn as depicted, the seven bars
caught between the pattern line and the average represent a textbook
squeeze. Whenever prices break away from such a "trapped" progres­
sion, the double-pressure response can be very powerful.
Textbook in it also was a failed attempt of the bulls to break away
from the bearish grip ( 1 2). You may not think much of such a tiny
false high, but it can be a great harbinger of bullish capitulation further
down the line. Just try to imagine the predicament of the bulls: so far all
their upside attacks had failed and now they were being reprimanded
yet again, and in support of a pattern line to boot. If not even an upside
break in support could tempt a sideline bull to come to the rescue, then
what is a bull in position to think.
With a bear break now seriously on the boil, this leaves us to discuss
our pattern break entry technique. Despite its excellent tip-off, bar 1 2
itself did not qualify a s a signal bar. Should we have shorted below it,
our entry would have been straight into the support of the pattern line.
On certain occasions, a trader could decide to apply a little more ag­
gression (we'll take it up later on), but this is seldom a smart idea in a
relatively slow chart. Best to give the market a fair chance to set up the
trade properly.
There were at least five reasons why bar 1 3 fit the description of
a valid signal bar: ( 1 ) it was part of a solid squeeze; (2) it nicely filled
the space between the 2 5ema and the pattern line, leaving virtually
no room for another bar to get printed in the squeeze; (3) it confirmed
the false high at 1 2 ; (4) it closed bearishly, in line with the anticipated
break and right up against the pattern line; and (5) there was a highly
favorable 50-level magnet waiting about 25 pip below. What more does
a bear want to see to get ready for action.
In the vast majority of entries, position is taken the very moment
the entry bar surpasses the high or low of the signal bar by a pip (fire
short below bar 13). When this moment draws near, get ready with your
cursor on the buy or sell ticket, but never front-run the event; fire only
when the signal bar is truly taken out.
The very moment position is taken in the market, a preset bracket

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Chapter 5 Trade Setups - Pattern Break

will automatically spring into action to eventually close out the trade
for either a profit or loss. As already stated, there are countless ways
to set these orders, but let us for now agree on the suggested 1 0 pip
stop and the 20 pip target. As we will come see many times over in the
pages and chapters ahead, this is an excellent bracket to work with
on a "normally active" 5-minute frame. Should you prefer to manage
your trades on a more discretionary basis, if only on occasion, this is
of course heartily encouraged, but at this stage of our studies our pur­
poses are best served by keeping things both simple and unambiguous.
(Alternative management techniques will be taken up in Chapter 6 on
Manual Exits.)
Note: In most breakout situations, and this regards all setups, we
should only step in if the close of our signal bar is in line with the direc­
tion of the anticipated break. This means we will short below a bearish
bar and enter long above a bullish one. At times, though, neutral dojis
can qualify as signal bars as well, and on occasion we may even accept
a short below a small bullish bar or go long above a small bearish one
(think inside bars) . But at all times it is highly recommended not to
short below a strong bullish bar, or to enter long above a strong bearish
one. These type of entries are less likely to provoke an immediate follow­
through response and thus more likely to present the trade with a bad
start. And that is a situation best avoided, especially when working with
tight stops.

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 Understanding Price Action

IFig 5.21 'tIiIINI. ProReamme.com eur/usd 5·minU1e

....

08:00 moo '0:00 11:00 12;00

Figure 5.2 There's no denying the pressure was up from the moment the
European opening bell rang at 08:00. Just look at that bull swing 1 -2,
not a bearish bar in it. Savvy contrarians may have smacked their lips
at the sight of it, but from where we stand, there will be no selling such
an opening rally.
Bar 2 , and the two bars before it, show what is referred to as top­
ping tails. In Japanese candlestick analysis, a tail is the part of the bar
outside the body (can be a bottoming tail also). If rather tall, it indicates
that in the course of bar formation, prices reached a certain high or
low but then closed significantly away from that level (price rejection).
Tail bars in the current highs or lows of a rally can provide valuable
information indeed, but to take a reversal position merely on account of
their presence can be a very dangerous practice. Aspiring contrarians
should take note.
Even so, no rally can last forever and all have to face a serious pull­
back at some point. Yet if the trending move was any good, we can
almost be certain that there will be many parties on the lookout to pick
up prices on a correction of sorts. If so, the key question is, how far will
prices retrace?
We have already voiced the dangers of trying to simply guess the
turning point of a pullback. Arguably, a safer approach would be to wait
for prices to stall first and then try to hop on. Unfortunately, that can
be tricky also; many times the initial stalling is only temporary and the
pullback may retrace a little deeper still. For example, bulls who entered
long in bar 3 , or above it, were the first casualties to fall in the failed

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Chapter 5 Trade Setups - Pattern Break

pullback reversal. Those who stepped in on the break of bar 4 (better

already) may soon have regretted their purchases also.
Troubling the bulls here was the fact that the 1 -2 rally had been so
one-sided (no stalling on the way up) that it failed to offer a decent level
of support for a pullback to gun for and turn around in. In such cases,
there is usually less consensus on where to pick up the reversal, even
when plenty of bulls are aiming to buy. And as the buying thus comes
in less unanimously, prices tend to respond less unanimously also. The
25ema can sometimes help out, as it tried to do at 4, but without a
technical element to coincide with its slope, the supporting powers of a
moving average are usually little more than an optical illusion.
As it turned out, it needed a deeper pullback for the bulls to come
out and defend the opening rally with a little more verve (5-6). Even
though the tiny bottoming tail of bar 6 was not a great marker of bullish
enthusiasm yet, bears did take heed of this bar's message, if only for
the fact that prices now resided in the notorious 60 percent retracement
wne of the 1 -2 rally: a last resort for the bulls to keep the pressure up.
To the careless eye, progression 6-8 may seem like a nondescript set
of little doji bars; but if we examine the action more closely, these bars
tell us the interesting story of how the bulls and bears fought it out in
the lows of that pullback. Note that within this progression most bars
closed away from their lows, already a fair indication that bears were
slowly being pushed aside.
Let's worn in a little further. With the two doji bars at 8 together
taking ten minutes to complete there was ample time to plot the de­
scending pattern line as depicted. While the highs of these dojis were
thus curbed by the resistance of a pattern line, their lows found support
in the highs of another doji duo, the two bars at 7 . Perhaps not a perfect
squeeze, but there was little room to move without breaking out either
way, and this always adds to the tension.
A development that favored the bull breakout was the fact that the
entry bar (above the arrow) had first taken out the low of its direct
neighbor only to reverse strongly up (false low). From this still picture,
though, we cannot tell with certainty whether this took place before or
after the pattern line was broken, but if we consider the opening price

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Understanding Price Action

of our entry bar, it is fair to assume that the false low was put in first.
While this particular break may have been accepted either way, given
the bullish prospects, the false low scenario prior to entry is of course
the preferable order.
Next to examining the conditions that favor a positive outcome, we
should also scan the chart for elements of potential obstruction on the
road to target. When doing so, it is good to realize that a free path out is
probably more rare than common. A former swing high or low may not
pose too big a problem; double tops and bottoms can be a little tougher
to crack but need not necessarily be feared when not too prominently
displayed in the chart. Never pleasant, though, are fat, blocky clusters
of price action not too far to the left that need to be eaten through to get
to target. (We will see plenty of this soon enough.)
As to the bull trade in question, there was little call for pessimism
when aiming for a 20 pip target; in fact, there were two eventualities
likely to help the trade along: first there was the magnetic pull of the
50-level to get prices going, and then there was the former high of 2 to
finish off the job. Recalling our discussions on price action principles,
former highs and lows can be strong magnets also.
In this instance, resistance may have kicked in just a pip shy of
target (9) . Since few trades will reach destination without suffering at
least a little setback on the way, it's best to stay calm when this hap­
pens and just wait for the trade to recoup. Of course, never pleasant is
to see a pullback suddenly eat back all the open profits on a trade and
then even go on to challenge the stop. But it is vital to accept that this is
an inevitable part of the trading game and best taken in stride. Cleverly
pulling away a stop in the hopes of a favorable bounce (at 1 O?) may oc­
casionally save a trade from annihilation, but it is a terrible practice to
engage in and a losing proposition on the whole. Regardless of style and
technique, one of the first tasks in trading, for any trader, is to learn
how to take a loss gracefully.
Bulls did come out to defend their pattern line ( 1 -6- 1 0), but few were
prepared to join higher up. We can imagine the round number overhead
and the now prominent double top a little above it (2-9) to have played
their part in this lack of buying enthusiasm.

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Chapter 5 Trade Setups - Pattern Break

A development of attention is progression 1 0 - 1 3 ; even though the

25ema is running flatly through this buildup, this is a squeeze variant,
too, with the bars now caught between pattern line support and 50-level
resistance. Whenever a cluster of bars shows up between two opposing
elements, of whatever kind, this always raises the tension-and sooner
or later demands a conclusion.
Let us zoom in on this seven-bar squeeze to find out if we could
have seen the break below bar 1 3 coming. To begin, the buildup had
started out with the 1 0- 1 1 bull swing, which was a perfect ceiling test
with the 8-9- 1 0 arch, and also a failure of the bulls to reach the 50-level
magnet. As prices fell back to the pattern line, bulls quickly responded
by swinging them back up (higher low) . But before the high of bar 1 1
was reached, prices fell back to the pattern line once more (lower high).
With now two false highs in the squeeze, and prices closing bearishly on
the pattern line as well ( 1 3), the situation had reached a critical phase.
Should bar 13 be broken at the bottom, not only would this technically
confirm the false high in bar 1 2 (bull break followed by a bear break),
it would show that sideline bulls were no longer able, or willing, to de­
fend their pattern line support. And that left the bulls in position highly
exposed, possibly prompting many of them to bail out to keep their
damages small. Couple that to the bearish outlook, and we indeed have
all the ingredients here for a nice double-pressure pop on the sell side
(enter short on the break of bar 1 3) .
Notice that our entry bar, below the arrow, did not sell off right away.
Evidently, even in the face of a solid break, contrarian parties can be
very resilient. But do not let this disturb you. A bit of pulling and push­
ing in the breakout area is all part of the game for dominance. Whatever
you do, avoid exiting in the entry bar itself. Nine times out of ten that will
be a fear-based exit, and a poor one at that. Also, with a stop safely in
place, what is there to fear? This is not to suggest that an open position
cannot be validly exited before either the stop or target is reached, but
bailing out in the entry bar is seldom a valid display of such technique.
For now, let's just stick to a rigid application of the 20/ 1 0 bracket and
see what that brings.

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 Understanding Price Action

IFig 5.31 _.ProRoammo.com our/usd 5-minuto

1 .335

1 .33

o ProReaTine.com
05:00 06:00 07:00 08:00 09:00 10;00

Figure 5.3 To avoid trading against dominance, our first task in any
session is to examine the bigger picture. An excellent starting point is
to monitor the directional efforts of the 25ema. Is the average sloping
down, with most bars traveling below it, we are currently dealing with
a southbound market and our trades are best chosen in line with this
slope (lengthy flag-type corrections may form an exception).
Another way to get a dependable idea on the pressures in play-and
very handy also when the average is running more or less flat-is to
track the last so many arches in the chart and see how they relate to
one another. Figure 5.3 demonstrates how this can be helpful. Starting
from 07:00, we can count four arches standing in support of the round
number of 1 .33: progressions 1 -2-F, F-3-T, T -4-5 and 5-6-7. As is often
the case, the first arch is the biggest of the series and the rest gradually
goes down in size. Sometimes an arch in the middle will be the most
prominent, as in a head-and-shoulders variant, but whenever there is
a smaller arch following, the implications are basically the same. Natu­
rally, the last arch is the one to observe with most attention for detail,
particularly when compressed. Not seldom this arch is so flattened out,
as was the case with the 5-6-7 progression, that it is hardly recogniz­
able as an actual arch (think squeeze) . Needless to say, all this applies
to a bullish chart also, with V-shaped arches hanging below a barrier,
working up to an upside break. Furthermore, we will not only find these
arches standing on or hanging below a horizontal barrier, they can just
as well reside beneath or on top of a tilted pattern line. Have a look
again at our previous chart, Figure 5.2, and check out the three arches

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Chapter 5 Trade Setups - Pattern Break

standing on top of the ascending pattern line. Note also that the last
arch was a squeeze progression leading up to the break below bar 1 3 .
The great benefit o f these arch progressions is that they are very
easy to track and seldom demand a high level of attention when still in
development. When dealing with a multiple-arch formation in the mak­
ing, we usually get fair warning as to when to sharpen our focus. For
example, even though the false break at F, the tease break at T and the
false highs at 3 and 4 were all interesting elements to detect, none of
them got us anywhere near a trade at the time. In the end, all we had to
do was keep a half eye on the action until things called for a little more
attention, probably somewhere around bar 5.
Although in most sessions we can usually tell the bullying party from
the underlying one in little more than a glance, we should never make
assumptions on the outcomes of their battles. What we can do, howev­
er, is promise ourselves not to trade in favor of the oppressed for as long
as their underlying status has not been set straight. In the chart above,
the down-sloping 25ema and the shrinking arches clearly let on that
the bears currently had the best of the action; in fact, bulls could do
little else than bravely defend themselves against the repeated attacks
on the round number of 1 .33. Without thinking short yet, this tells us
that all bets on the buy side are off for the moment.
As is very common in a: round number fight, there were incidental
perforations below the level but they did not lead to immediate collapse.
Always keep in mind that round number defense can be very tenacious
and perforations seldom follow through without at least some form of
buildup backing up the charge.
Notice that the false break at F was no cause to redraw the box yet
(its falseness validated the prior low of 1 ) ; but when later on the lows of
5 and 6 came to match the low of F, the barrier could have been lowered
to the level of the dotted line (now ignoring the break at T) . It remained
to be seen, though, how indicative a mere break of this "tricky" barrier
would be with the round number still very much in play. While it could
never hurt to put the level in, this is one such situation in which we
should be extra cautious not to get trapped into a premature break; a
careful tracking of the buildup in the round number area is paramount.

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Understanding Price Action

Progression 5-8 was a four-bar squeeze caught between the barrier

and the 25ema; but prior to its bearish close, bar 8 had already per­
forated the dotted line by a pip. Perhaps a less conservative bear may
have deemed this a good enough signal to have fired short straightaway,
as opposed to waiting for bar 8 to close and be broken by another bar.
But that would have left the squeeze rather thinly built up. In most
similar situations, and in the tricky environment of round number de­
fense in particular, my advice would be to sooner wait for an extra bar
to fatten up the squeeze than to act on a somewhat premature break
in fear of missing out. In this view, the entry below bar 8 is the more
textbook pattern break short.
If fear of missing out is an issue in your trading, causing you to act
before your turn a little too often, consider concentrating on indisput­
able breakouts only; a great benefit of this approach is that you can now
validly skip all breaks that do not qualify as such, without feeling upset
if they do follow through.
Granted, since there are no absolutes in trading, at times there can
exist a thin line between a "proper" break and its premature counter­
part. As a rule of thumb, the bigger the total pattern and the stronger
its relevant barrier, the more work to be done by the assailers to crack
it convincingly. There is never a specific minimum of bars required, but
the fatter the buildup (say, at least four bars), the better we can form
ourselves an idea on who is likely to come out on top in the squeeze. In
a pullback reversal, on the other hand (as opposed to a bigger pattern
breakout) , the break in the turn may set up much faster and it may
take no more than a single bar for a setup to earn validity status. (Will
be taken up later in this chapter.)
Situations like the one above show us also that it isn't necessary to
always work with a nondebatable pattern line and a perfect signal bar
to match it. The general idea is to trade off the most cmcial bar in the
barrier area. Sometimes we may even find our entry before the pattern
boundary is visibly broken, but more common is for the signal bar to
either line up with the barrier or reside slightly out, as was the case
with bar 8.

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Chapter 5 Trade Setups - Pattern Break

Note: When trading off a signal bar that is sticking out, we do not
want this bar to be overly tall, or produce an entry too far away from
the broken pattern line. While nothing is ever carved in stone, always
a preferable condition in a pattern break scenario is to have the stop
reside inside the pattern; this will allow for a pullback to test back the
broken barrier without immediately getting shaken out.
Countless charts in this guide will show that if you trade from build­
up, it is absolutely doable to come in with a 10 pip stop and a 20 pip
target. Surely, in the early stages of your price action journey, it may
not always be so evident to tell the difference between an indisputable
entry and one that can be deemed a little premature still, but this is
hardly your immediate concern. Way more crucial to your bottom line--­
at any stage, really-is to learn to recognize the wagers of the unsavory
kind. In other words, rather than aiming to maximize the positive, more
essential is to minimize the negative. And it is an easier task as well.
Protect your account from unnecessary setbacks and chances are good
it will grow pleasantly over time as you grow along with it.
Let's check out some more examples.

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 Understanding Price Action

IFig 5.41 www.ProReal1ime.com eur/usd 5-minute

'335

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Figure 5.4 The first half of this chart shows another triple-arch forma­
tion on top of a pattern line. The short below bar 1 0 represents a rather
straightforward pattern break venture, but there is an element involved
that deserves some extra attention; it is the issue of the adverse round
number magnet.
The three bullish turnaround bars ( 1 , 2 and 3) perfectly illustrate
the pull of a round number magnet. Bears may have had the best of
the action in terms of overall pressure, this had not kept the bulls from
putting in this triple-bottom variant. To understand the concept of the
adverse magnet, and the dangers involved, consider for a moment the
fate of a bear who had opened a short, say, somewhere around 13:30.
But check out also what happened to a bull who let himself get trapped
into longing the re-break of the round number, for example in bar 4 or
5. Both parties fell prey to the pull of the adverse magnet (adverse in
terms of their positions taken) .
The point is that we need to be extra cautious when aiming to trade
away from a round number level. It is quite different from trading to­
wards one. Especially in the early stages of a round number fight, the
price action can be very fickle and this can be a dangerous environment
to pick sides, even in line with dominance. Should these skirmishes
persist, at some point the price action will probably start to tighten up,
possibly showing more failures on one side than the other; that is a
good sign to start paying more attention again.
What were the giveaways that led to the short below bar 1 O? First
off, the chart was rather bearish on the whole (25ema sloping down,

90 www.rasabourse.com