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Forex Price Action Scalping

6simple strategies for trading forex - TradingPub

Forex Price Action Scalping Excerpts on the idiotic To see the skeptic's point, one only needs to follow the route of common logic in a line of business where so  HOW TO READ THE PRICE ACTION OF ANY MARKETS (AND DETERMINE THE Forex

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Description

FOREX PRICE ACTION

SCALPING an in-depth look into the field of professional scalping

Bob Volman

Copyright © 2011 by Bob Volman

All rights reserved

Published by: Light Tower Publishing ISBN 978-90-9026411-0

ProRealTime charts used with permission of ProRealTime

com No part of this publication may be reproduced,

or transmitted in any form or by any means,

or other electronic or mechanical methods,

without the prior written permission of the author,

except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law

For permission requests,

write to the author at the address below

[email protected] Disclaimer: This publication is solely designed for the purposes of information and education

Neither the publisher nor author shall be liable for any loss,

claims or damage incurred by any person as a consequence of the use of,

Table of Contents

Preface ��������������������������������������������������������������������������������������������������������������������������������������� V

Section 1 The Basics of Scalping Chapter 1 Trading Currencies ����������������������������������������������������������������������������������������� 3 Chapter 2 The Tick Chart �������������������������������������������������������������������������������������������������� 7 Chapter 3: Scalping as a Business ������������������������������������������������������������������������������ 13 Chapter 4: Target,

Stop and Orders ��������������������������������������������������������������������������� 19 Chapter 5: The Probability Principle ��������������������������������������������������������������������������� 27

Section 2 Trade Entries Chapter 6: The Setups ����������������������������������������������������������������������������������������������������� 33 Chapter 7: Double Doji Break���������������������������������������������������������������������������������������� 39 Chapter 8: First Break ����������������������������������������������������������������������������������������������������� 61 Chapter 9: Second Break ������������������������������������������������������������������������������������������������ 79 Chapter 10: Block Break ����������������������������������������������������������������������������������������������� 109 Chapter 11: Range Break ���������������������������������������������������������������������������������������������� 137 Chapter 12: Inside Range Break �������������������������������������������������������������������������������� 175 Chapter 13: Advanced Range Break ������������������������������������������������������������������������� 209

Section 3 Trade Management Chapter 14: Tipping Point Technique ���������������������������������������������������������������������� 241

Section 4 Trade Selection Chapter 15: Unfavorable Conditions������������������������������������������������������������������������� 283

Section 5 Account Management Chapter 16: Trade Volume �������������������������������������������������������������������������������������������� 309 Chapter 17: Words of Caution ������������������������������������������������������������������������������������� 321 About the Author �������������������������������������������������������������������������������������������������������������� 323 Glossary �������������������������������������������������������������������������������������������������������������������������������� 325 Index �������������������������������������������������������������������������������������������������������������������������������������� 345

Forex Price Action Scalping

Excerpts

Preface

Ever since the days of old,

the markets have suffered no shortage of ­volunteers ready to sacrifice themselves on the ever-growing battlefields of supply and demand

Fortune-hunters,

and a motley crew of optimists and adventurers,

the marketplace in search for quick-and-easy gains

Yet no other venture has led to more carnage of capital,

more broken dreams and shattered hopes,

than the act of reckless speculation

Strangely enough,

despite the ill-boding facts and the painful fate of all those who perished before him,

the typical trader still shows up on the scene wholly unprepared

And those who do take the trouble to build themselves a method,

in most instances seem to only postpone their inevitable fall

On the slippery slope of the learning curve,

things can get pretty unpleasant and many never recover from the tuition bills presented on the job

Not surprisingly,

this has led to an endless debate on the actual feasibility of profitable trading,

in which skeptics and romantics fight out a battle of their own

To the skeptic,

the glorified image of a consistently profitable trader seems highly suspect

After all,

the only ones who have always prospered in the trading field,

at the expense of the ignorant,

And if it is already hard to picture himself a proficient long-term investor surviving the odds,

the idea of a consistently profitable scalper must be bordering

Forex Price Action Scalping

Excerpts

To see the skeptic’s point,

one only needs to follow the route of common logic: in a line of business where so many traders have tried,

to successfully trade the long-term charts,

those venturing out on the miniature frames can only be setting themselves up for an even uglier fate,

And indeed,

the more erratic the moves on the chart

and with spreads and commissions cutting deep into a scalper’s average trade,

the odds seem stacked against the enterprise from the very onset

Success stories are few and far between and it’s hard to not take note of the sobering statistics that appear to confirm all reservations,

at least way more than defy them

That being said,

should never demoralize the dedicated

Scalping the charts profitably on a consistent basis is by no means an illusion

Nor does it have to take years to acquire the necessary skills

It is done every day again by many traders all over the markets,

and it can be done by anyone who is determined to educate himself properly and diligently in all aspects of the field

The true issue is not the feasibility of profitable scalping but simply the quality of one’s education

Even so,

scalping may not be for everyone

If nothing else,

this book could be an excellent way to find out

Its sole objective is to show the reader all there is to know about the profession to effectively take on the job himself

Countless charts,

setups and trade examples will be presented to fully ingrain the necessary techniques into the mind

The contract of focus in all of the coming chapters will be the eur/ usd currency pair

To a nimble scalper,

this instrument is an absolute delight

It offers highly repetitive intraday characteristics,

a low dealing spread and is accessible to even the smallest of traders

since price action principles are quite universal,

not too many adjustments would have to be made to take the method to another market with similar volatility and attractive trading costs

In that respect,

this guide may serve many non-Forex traders as well

The benefits of scalping are plenty and speak for themselves

Just one single chart

No fancy indicators

One-click in and out

Everything preset

And opportunities abound in an almost repetitive loop

Forex Price Action Scalping

Excerpts

Have a look at the example below

Figure P

The vertical axis shows the price of the instrument

the horizontal axis displays the passing of time and the curved line in the chart is an exponential moving average,

The boxes encapsulate some of the price action patterns that we will get to discuss later on

Figure P

the market offered an alert scalper numerous textbook trades

To build a solid foundation beneath a scalping method,

it will not suffice to merely deal with the technical side of trade selection

We have to examine all aspects of the profession from every possible angle so as to filter potentially disruptive elements completely out of the equation

Each of the coming chapters will take on a part of the journey

We will delve into the specifics of chart selection,

favorable and unfavorable markets,

accounting matters—basically anything that comes to pass in the field of professional scalping

Forex Price Action Scalping

Excerpts

Whether a beginning trader,

or even a veteran in other fields of speculation,

I sincerely hope this book will be enjoyed by all and that within its pages the necessary information is found to be able to scalp one’s way through the market for many profitable years to come

This work will not insult the reader’s intelligence by showing him all kinds of stuff that do not reflect the reality of trading

There is no plowing through endless chapters of meaningless babble and industry gobbledygook

Forex Price Action Scalping truly is about scalping

It is written by a trader at heart,

and at all times with the aspiring trader in mind

Forex Price Action Scalping

Excerpts

Excerpts from Chapter 10:

Block Break (BB)

If all setups were to qualify in one of three categories,

the options being either with-trend,

then the patterns we have discussed so far—DD,

FB and SB—are unmistakably with-trend ventures

They not only acknowledge the presence of a trend,

they try to capitalize on its continuation as well

And that makes sense,

Although opinions on its definition may differ widely across the board,

the love for the trend in general is quite universal

Almost any trading method will incorporate at least a couple of clever withtrend plays to hop on or ride out a good move

Unfortunately,

as any chartist will surely admit,

things seldom materialize in the most desirable way

Many times there is a lot of pulling and pushing and backing and filling,

and this often ruins the possibility of using the classic with-trend setups to get ourselves in position

It is all part and parcel of the trading game

However,

the opportunities are not necessarily lost and with a little luck and patience we may just be able to pull a nice trump card from our sleeve: the multipurpose Block Break setup (BB)

This setup comes in many shapes and forms and we would probably not do it justice if we were to casually generalize on its appearance

A most simplistic description would be to characterize the pattern as a cluster of price bars tightly grouped together in a narrow vertical span

Preferably,

the barriers of this block of bars are made up of several

Forex Price Action Scalping

Excerpts

meaning that the top and bottom side of the pattern clearly represent resistance and support

On occasion,

depending on the speed of the market,

this group of bars could appear and be broken in a matter of seconds,

but the formation itself could best be seen as a miniature trading range

If we were to draw a rectangular box around all the bars that make up this pattern,

what should emerge is a distinctive block of price action in which a relatively large amount of contracts changed hands without price being really affected

But the tension within should almost be tangible,

like that of a coil being suppressed by a weakening force that is bound to give in

If prices eventually break free in the direction of the path of least resistance,

we immediately enter the market on a break of the box

This makes the broken horizontal barrier the signal line to our entry point

Should prices break out at the less favorable side,

then no action is taken just yet

When encountering this cluster of bars at the possible end of a pullback in the area of the 20ema,

a trendside breakout would require similar action as would a break of a regular DD or SB setup

In fact,

if we would also wrap a box around a group of dojis that make up a typical DD,

we would basically create a miniature BB setup

The same goes for the SB pattern as a whole,

though be it that the entry in this setup usually shows up before the highs or lows of the complete pattern are taken out

But make no mistake,

when it comes to the BB setup,

we are not just dealing here with another trick to take a with-trend trade at the end of a pullback,

although that is one of its functions

What gives this pattern its unique quality and personal character is its multipurpose application

This setup could essentially show up anywhere in the chart,

while still conforming to the requirements of a tradable event

Its abundant presence makes it one of the better weapons to tackle almost any market,

There are some factors to assess,

before we can start to regard this pattern as a valid setup

We cannot simply trade any odd block break and expect the market to take off for at least a 10 pip run

As is the case with any other setup,

Forex Price Action Scalping

Excerpts

as just an aid to get in on a market that has already been identified as favorable

it would be a painful mistake to use it as a pet setup with little or no regard for underlying conditions

But what exactly is a favorable market

? As we have already observed,

leaves little room for discussion on that part

But how about a sideways market that just printed a nice double bottom and a higher bottom in support

? How about a market that broke so violently that countertrend traders cannot even force a noteworthy pullback in it

? How about an uptrending market that shows clear signs of resistance,

like double tops and lower tops

? And what about a market that seems chaotic in any respect,

apart from the fact that it successfully slammed back all attempts to break a round number zone

may be as different from each other as night and day,

but they do have one particular characteristic in common: not so much that they paint a very vivid picture of the perpetual clash between the bulls and bears,

but more that they show us who is currently winning

The market may put up a fight,

prices simply have no choice but to succumb to whoever is pushing the hardest

Just when and how,

that is for a trader to find out

But maybe it is nice to know that the point of surrender is often preceded by a suppressed block of candles ready to pop

Since there are just too many variations of the BB setup,

it is best to get to the charts and see them in the flesh

Before we do that,

let us first point out the most likely places for this setup to show up

In essence there are only three

In case this pullback is quite extended,

the setup may at times show the characteristics of a countertrend trade

This block usually shows up in a very brisk move that just cannot seem to pull back

Whereas a typical pullback seems to move somewhat diagonally against the trend,

this one merely travels sideways,

and then breaks out in the direction of the trend

This block can be found in topping or bottoming price action and even in the midst

Forex Price Action Scalping

Excerpts

It can be played with-trend as well as countertrend

As we will see in the next three chapters on Range Breaks,

the BB setup can also be involved in the breakout of a bigger pattern,

but we best take on that correlation once we have familiarized ourselves with the more individual block breaks first

In the coming charts we will see all of the BBs encapsulated by a rectangular box,

aiding the visual process of identifying the highs and lows within each block

Although it is not necessary to draw these boxes when engaged in a live session,

it does come in handy to at least plot the signal line in the chart

That way we can keep a real good eye on the exact break,

because the highs or lows that make up the signal line may be several bars apart

Note: When looking at the chart,

it is quite tempting to focus mainly on the moving price action and on the possible development of a tradable setup

Yet the status of the overall picture deserves the most attention

Whatever price bar is currently being formed,

it can only derive value from its relation to the bigger picture

It is this wider view on the price action that ultimately determines our setups to be valid or not

On average,

an hour and a half of price action will usually do just fine

To stay sharp and not lose focus,

repeatedly force yourself to judge the price action in its present light

Do you see higher bottoms,

? Keeping track of the 20ema is just one way of assessing the current pressure in the market,

But the whole array of actual tops and bottoms in the chart determines the overall pressure

More distinctive higher bottoms than lower tops: the pressure is currently up

More distinctive lower tops than higher bottoms: the pressure is currently down

Alternating tops and bottoms: the current pressure is evenly distributed

Forex Price Action Scalping

Excerpts

Figure 10

the BB setup in the chart above looks treacherously non-descriptive

However,

this one little pattern may very well represent the near perfect box,

should there exist such a thing as perfection in the tricky nature of the market

Let us see how exactly this pattern earned its credentials

Earlier on,

the bullish character of the market was somewhat curbed by the resistance of the 1

After a little backing and filling,

as aimless price action is often referred to,

the market drifted lower in the next 30 minutes of trading and then established its most distinctive low so far (2)

Of course,

we can only identify this low once the bulls start to buy themselves into the market again and take prices back up

Since it is our primary intention to trade this particular chart to the upside,

we have to wait patiently for some sort of resistance to come in

This resistance can then later be cracked

The first sign of it was portrayed by the first distinctive top of (3) that followed the low of (2)

That gives a scalper a potential level to put his signal line on

Now that we have a high and a low to go by,

it is just a matter of following the price action until anything tradable develops

Preferably,

we like to see a number of equal highs hitting the potential signal line,

but the market is not always so kind as to serve a trader on his every

Forex Price Action Scalping

Excerpts

Should prices break out immediately,

There are many ways to play the market and should a scalper have to forgo a particular setup,

then he just moves on to the next tradable event

In this case,

prices very orderly stayed within the boundaries of the low and high and even managed to produce 7 equal tests of the first high in the box,

The stronger the significance of the signal line,

the more traders will spot the break and have to react

Either to get in or to get out

Within the setup,

a number of higher bottoms can be counted (4,

5 and 6),

lending extra credit to the possibility of a bullish breakout

As the coil is now being suppressed to the max,

We can imagine it to be the signal line,

but as clever scalpers we will never act before our turn

Notice how gently the 20ema eventually guides the bars through the top of the box,

The six small bars right before the break,

five of them sharing equal highs,

represent what we will refer to as classic pre-breakout tension (6)

We could say it is a miniature box within the box itself

The subsequent reaction to the break speaks volumes

With the 1

prices were simply sucked into the vacuum below the round number zone of 1

Note: Similar as in the previous chart (Figure 10

Would that not be worrisome

? To a tiny DD pattern it most probably would

There may just be too little tension building up within the dojis to counter the resistance overhead

But the BB pattern,

is quite different: it has tension written all over it

What’s more,

the most likely reason why the BB set itself up in the first place is because of that same overhead resistance

Which is also why the break of it stands to cause a sharp reaction

Once the defenders give up and step out of the way,

the path is usually cleared for at least a number of pip

Aspiring scalpers,

when slowly taking a liking to this method,

are recommended to study the characteristics of boxes like those of Figures 10

1 and 10

Hardly a session will go by without these very tell-tale patterns showing up in the chart,

However,

Forex Price Action Scalping

Excerpts

to never lose sight of the overall pressure in the market,

because that is what ultimately determines the future direction of prices

Obviously,

assessing the overall pressure in a trending chart will not cause much problems

In more sideways progressions,

this process requires a little more subtlety on the part of the chartist,

Figure 10

the sideways action before 05:00 could be interpreted as ordinary backing and filling

price merely dances above and below the sideways trailing 20ema without showing particular preference to go one way more than another

the observant scalper may have already spotted a series of almost nonchalantly printed higher bottoms in this sideways progression (1,

3 and 4)

When that fourth higher bottom was printed,

forming a cluster together with the handful of price bars next to it,

things are starting to get interesting

Take a moment to compare the sharp upmove initiating from the second bottom (2) with the move that emerged out of the cluster (3 and 4)

Although they look quite similar in their thrust,

the first one shot through the average with hardly any buildup preceding it,

whereas the latter first saw a cluster of bars build up tension before breaking out

As subtle as these differences may be,

they are of great significance

Forex Price Action Scalping

Excerpts

Both moves seem to appear equally strong,

but the one that emerged out of the cluster stands a much better chance of holding up

Not only does it stem from a slightly higher bottom,

the fact that it broke free from a cluster puts a solid foundation beneath the current market

This means that if prices were to retrace back to where they broke free from,

they are most likely to be halted right at the level of the earlier break (resistance becoming support)

After all,

it is much harder for prices to dig themselves a way through a solid group of bars than when there is very little standing in their way

The mere implication of potential support can already be so strong that a market doesn’t even feel the need to test its validity

In a similar way,

tension was also building up within the first BB setup in the chart

No less than seven equal touches of the top barrier can be counted within that block before the market finally broke through to the upside

Notice how prices bounced off of the signal line,

which clearly shows us the power of cluster support (6)

Have a look at the three very small dojis leading up to the break of the box (5)

They are displaying in miniature the same pre-breakout tension as the complete box is displaying in the bigger picture of the chart (just wrap an imaginary box around the highs and lows of the price action from 04:16 to 05:16)

At the risk of being overly elaborative,

I am pointing this out for a very valid reason

If you learn to train your eye to recognize these subtleties in a live market environment,

you will eventually be doing yourself a tremendous favor

The rise and fall of prices is not a result of somebody swinging a giant wheel of fortune

There are actual people in the market,

feeling actual pain and actual pleasure

You may never know for sure what motivates them to do what they do at any given moment in time,

yet of one thing you can be sure: their actions are reactions to other traders actions,

which is why most of the time everything happens in such repetitive manner

Markets may be random,

Despite the upward pressure,

the cluster below and the magnetic pull of the round number above,

with-trend participation after the break quickly died out

Eventually,

this trade would have had to be scratched for a loss (where exactly to bail out on a failing trade will be discussed

Forex Price Action Scalping

Excerpts

in Chapter 14 on Tipping Point Technique)

Although they clearly lost a round,

we can expect the bulls in this chart to not just crawl up in a turtle position

Given all the higher bottoms earlier on,

they will surely be on the lookout to buy themselves back into the market at more economical levels

The most logical area to pick up new contracts would be in the 1

In fact,

they didn’t even wait for prices to hit the level spot on (7)

With the market traveling a few pip higher because of this buying activity,

touching the 20ema from below,

the bears were now offered a more favorable level to become a little more aggressive (8)

And indeed,

they managed to squeeze out one more low (9)

They were given little time to enjoy that feat,

as a large number of sidelines bulls quickly stepped in

It is the information necessary to keep a trader on high alert for another bullish attempt to take control of the market

With no less than six equal highs testing one another,

a scalper did not have to think very long about where to draw the signal line of the second box

What is the major difference between the first box and the second

box number one originated from a more favorable position (above the 20ema),

whereas the second box popped up in sideways action (flat 20ema)

Keep in mind,

that the market couldn’t care less about our 20-bar exponential moving average

That is only an instrument in our own personal toolbox

In fact,

in a somewhat sideways environment,

buying above it could at times be more dangerous than buying below it

Therefore,

both patterns here are very similar in nature: sideways action,

a buildup of tension and a subsequent break

Take a mental note of the two little dojis right before the break of the second box (10)

We will see this duo many times over throughout this guide

They represent classic pre-breakout tension: a final attempt of those who operate against the current pressure to keep the box from breaking

Both bulls and bears will be very quick to act,

should the proverbial jack pop out

In the first block pattern there are even three of these dojis to be detected,

together forming not only a higher bottom in the box but also the very welcome pressure underneath the signal line (5)

Forex Price Action Scalping

Excerpts

Figure 10

a lower top got printed in what can only be described as a horizontal pullback (2)

As pleasurable as it may be to occasionally stumble upon the near perfect trade,

it also poses a rather interesting challenge on the topic of volume versus predictability

If we were to assign a rating to each individual trade—by counting the number of valid reasons to either skip or trade a setup—and came to conclude that the probability factor is apparently not a constant but varies visibly from setup to setup,

should this not force an intelligent strategy to alter the volume per trade in compliance with the degree of predictability

I strongly suggested to not put more than 2 percent of capital at risk on any one trade (when consistently profitable)

I also suggested to cram as much volume in these 2 percent as allowed in order to exploit our edge to the fullest

Forex Price Action Scalping

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no matter how good-looking the trade,

because the maximum amount of units are already at work

On the other hand,

one could argue that if there is such a thing as a superior trade,

there must also be its counterpart,

the inferior trade (though still possessing a positive expectancy)

when opting to trade the latter,

could one not take off volume and tread lightly

? The true statistical mathematician,

the one that eats bell curves and standard deviations for breakfast,

would probably cringe at the typical layman’s view on probability

And rightly so

it remains to been seen whether his clinical calculations hold up in a real market environment,

where nothing is what it seems,

where dubious emotions play a major role in assessing the odds to begin with,

and where his faithful law of probability may even be defied by the very same forces that are causing it

Once again,

my take on this matter is to not delve into the complexities of individual outcomes,

but to at all times keep things simple,

with the bigger picture in mind

Once consistently profitable in the market,

a trader could best explore every valid setup with appropriate passion and just load up

Whenever we picture ourselves to have an edge,

each setup deserves to be treated with equal respect,

no matter how shady or pretty its appearance

And that means assigning the maximum allowable amount of units per trade to fully capitalize on the principle of positive expectancy

Note: Contrary to common perception,

the least important of all your trades is the one you are currently in

All your previous trades,

though insignificant by themselves,

at least have a statistical relevance

Together they determine the power of your edge

Your current trade,

has yet to earn its notch on the historical slate

It is just a trade in process

And it is totally irrelevant whether it will win or lose

In fact,

in a consistently profitable strategy that has proven to stand the test of time,

a losing trade is basically a false assumption

Why is that

? Reflect for a moment on the following: if a 1000 individual outcomes would show an assembled profit of 2000 pip and your next trade came up a loser of 6,

would you say you just lost 6 pip,

or rather that you made another 2 on balance

embracing a losing trade as if it

Forex Price Action Scalping

Excerpts

were a winner may be stretching it a bit

But the point does show the importance of a proper understanding of distribution in a probability play

All individual outcomes are just data

The only thing that truly matters is the collective result of all your scalping actions in the market

Figure 10

like the first half of the chart above,

it is not uncommon for a trader to start experiencing a somewhat uncomfortable mixture of impatience,

It can indeed be a mental challenge to have to sit out these times of inactivity,

hoping for action and not getting any,

especially to those traders who look upon their trading platform as a slot machine in a penny arcade

A word of caution may be in place here,

because these sideways ranges do have the nasty habit of luring a trader in one of two very classic mistakes

The first one is to start seeing and taking trades where there are none to be found

This warped sense of reality is typical for a trader who just needs action

And wrath be upon the market if he doesn’t get it

Apart from the occasional winner that may come out of this,

seeing a growing bunch of scratched trades eat their way into earlier profits will sooner or later present this trader with the unsettling notion of being reprimanded by the very market he is trying to punish

Needless to say

Forex Price Action Scalping

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that this sort of attitude towards trading is of the backfiring kind,

and it remains to be seen whether this trader can pick himself back up in time for when the real action begins

The second classic mistake is made by traders who on the surface seem to stay composed rather well in a sideways market

You won’t catch them doing anything irrational like taking silly trades,

nor will you see them get angry with the market or force their will upon it

They can watch the proverbial grass grow for what seems like an eternity without any sense of discomfort

Proficient enough to recognize the current indecision of the market as something that needs to cleared by powers bigger than themselves,

Up until that one amazing moment that boredom abruptly kicks in

For reasons unbeknownst to themselves they suddenly have to get up to make these phone calls,

watch the news on the TV or even take a stroll outside

Anything to get away from that screen and that market

! Although not nearly as detrimental to a trader’s overall results as the other case,

giving in to a sudden burst of boredom after a prolonged spell of inactivity is like walking away from an investment that is just about to sprout

It is a pity that traders are so caught up in the notion that trading trending markets is the only way to go

Contrary to popular believe,

sideways markets deliver excellent opportunities,

for the simple reason that they have to break out eventually,

just like a trending market will eventually come to a halt or even reverse

Whereas it is impossible to define the exact moment when a trending market will move into the sideways phase,

can give off very strong signals that it is about to move into a trending phase

A good example of such a predictable breakout can be found in the chart above

The first hour of price action obviously shows the market in consolidation mode

With the moving average traveling sideways and price bars alternating above and below it,

there is not much to make of it

This is your typical round number zone tug-o-war in the absence of a clear incentive (1

But of one thing we can be sure: unless it is a national holiday,

or lunchtime in an already dead Asian session,

price will not stay put for hours on end

Sooner or later some party will give the market a push and that will be incentive

Forex Price Action Scalping

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The trick is to recognize the buildup that most often precedes it

This is why it is so important to familiarize yourself with pre-breakout tension

What will help is to draw,

a box around any clustering price action that might lead to a break

It may take some practice to recognize the right set of bars to wrap a box around,

but essentially there are not too many variations to grasp

The first box here,

is almost an exact copy of the fourth box in the previous chart (Figure 10

By extending the signal line to the right,

we can see that the pullback following the break successfully tested the breakout level as well as the broken round number of 1

3150 (1)

That will certainly have inspired a number of bears to just throw in the towel

And a number of bulls to quickly enter the ring

However,

despite this potential for double pressure,

markets do not always immediately pop

In this chart the bears still put up a reasonable fight,

as we can tell by the cluster of hesitating bars (3) that eventually led up to the forming of the second box

If you look closely,

you can see that the top barrier of this second BB setup is not exactly running across the absolute high (2) but one pip below it,

across the equal extremes of four consecutive bars

As much as it may be preferable to see a signal line unbroken by an earlier bar,

we definitely do not need to see the perfect box in order to trade

Whenever there is room for a little doubt regarding the actual breakout level,

it is best to let yourself be guided by technical logic

Here it seems logical to put more weight to the four equal highs than to that one single high sticking out on the left

It would be overly prudent to wait for this high to be taken out,

But let us ignore our setup for a moment and see what the market has to say about this: it put in a series of distinctive higher bottoms within the course of two hours

it broke a round number zone and saw it successfully tested

it built up towards a possible bullish breakout and now it breaks a cluster of four bars with equal highs

I think it is telling us to trade

Forex Price Action Scalping

Excerpts from Chapter 11:

Excerpts

Range Break (RB)

Figure 11

Once again,

the breaking of a round number zone trapped traders on the wrong side of the market

In the previous chart,

it was a downward break through the zone that not long after turned bullish,

here it was an upward break that soon turned bearish

Is there a reason these round number breaks don’t hold up

? Probably no more than there is to any other break or move that fails or falls short: a lack of follow-through

It is not uncommon to see enthusiasm dwindle in rather subdued markets,

or in situations where the round numbers are more of a symbolic nature than that they actually represent true technical levels of resistance and support

In these cases,

it is fair to assume that not too many stop-losses reside above or below the levels

As a result,

as much as those in position do not see the need to get out,

those on the sidelines are not exactly scrambling to get in,

More practical than trying to figure out the reason (foolish in any respect) is asking ourselves if these failed round number breaks could somehow be anticipated and possibly exploited

Interestingly,

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majority of cases there is indeed a pattern to be spotted

First the round number is broken,

quite often with hardly any fight

Not much later the break is tested,

On seeing this,

a number of new players step in,

thinking they’re in for a treat

And then,

the play dies out like a flame

Traders at any moment in time may buy as cheaply or sell as dearly as the market allows them,

but if no new players pick up on their idea of direction (follow-through),

they are trapped on the wrong side of the field

All of this is not uncommonly captured within the confines of an unmistakable range very close to the round number of interest

It is a scalper’s task to figure out when the predicament of the trapped becomes unbearable from a technical perspective

Naturally,

the idea is to capitalize on their instinct of flight

Everything is very easy in hindsight,

yet if you managed to grasp the concept of the forces in play that caused the upside break in Figure 11

I am sure you can also see why this particular range,

started to develop a fancy for a downward break

Let us examine up close what exactly went on from the moment the third top was set (4)

It started to go wrong for the bulls when the reaction to this top (a tiny countermove) was not being picked up by new bulls in the 20ema a few bars later

That would have been a perfect opportunity to swing prices back up

From there on,

they could have created themselves a nice squeeze by not giving in to whatever bearish pressure and then force themselves a way through the top barrier of the range

In fact,

However,

instead of working on that upside break,

the market set out on its way to the bottom of the range again (5) and now even showed a classic triple top in its wake

These are not bullish signs

But there was hope still

After all,

the round number zone was cracked to the upside and successfully tested earlier on,

and that should at least amount to something

If somehow new bulls found it in their heart to aggressively step in above the 1

33 level,

inspiring even more bulls to jump in after them and bring prices once again to the top of the range,

the chart would show an unmistakable double bottom in round number support (2 and 5)

And that would look quite bullish

Forex Price Action Scalping

Excerpts

Sometimes it only needs one bar to turn pleasurable hope into the idle variety

How about that little doji (7) that stuck its head a pip above the high to the left of it (6)

A higher high in a bullish market after a possible double bottom in round number support,

that should have attracted new bulls to the scene

What kept them away

? We can imagine it to be the triple top pattern to the left

but it is not our business to decipher or explain the actions or non-actions of our fellow traders

Everything is just information

As observant scalpers our task is not just to monitor a chart,

The more crucial the signs we can assemble,

the more we can solve the puzzle of who is possibly toppling who in the market

Any sign or hint that leaves a distinctive mark in the chart will work to the benefit of our assessment

These signs,

like triple tops and other well-known reversal patterns,

but they can also be rather tiny,

The best indication to determine the value of a particular chart event is to consider its place in the chart in relation to whatever price action preceded it

To give an example,

the tiny false upside break of (7) would have been considerably less indicative had the market not printed that triple top shortly before

With prices now trapped below the 20ema,

the market was on the brink of being sandwiched into a bearish breakout through the bottom barrier of the range

That brings us to the interesting part that you may have already spotted: the first breakout below the barrier

Why did I mark this one as a tease (T)

Granted,

this one reflects the proverbial close call and I couldn’t really argue with anyone looking upon it as a valid break

For my own personal comfort,

I would like to see prices get squeezed a little bit more before breaking down

Preferably,

I would like to see the market print a couple of dojis right on the bottom level of the range (as in a regular BB setup)

It must be stated,

that a conservative stance is not always the most successful approach

It would be nice if we could really put a rule of thumb on these false breaks,

particularly on the tease variant,

it often depends on the situation at hand

Here the market was extremely slow and the price

Forex Price Action Scalping

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action very subdued (almost every bar a doji)

That makes me want to wait for superior conditions just a little bit longer than,

where I might run the risk of fully missing the break on account of being too conservative

Note: As for the difference between the false break trap and the tease break variant,

imagine for a moment the 05:00 low (5) to have dipped a pip below the range barrier

That would have turned it into a false break of the earlier bottom of (2) and not a tease

? Because prices came straight down from the high of the pattern (4) to the low of it and then immediately broke through without any buildup

That typifies a classic false break (in terms of potential,

may find follow-through and prove itself true)

When it comes to the tease break,

the cracking of the range usually starts with a move that originates not at the top or bottom of the pattern,

but more from the middle of it,

or at least from the 20ema zone

In case of a downward break,

prices usually first touch the bottom barrier and then bounce up to make an intermediate high in the 20ema

From that point on there may be some squeezing between the average and the bottom barrier,

but usually too little of it to consider it sufficient buildup to a tradable break

It would be preferable to see prices bounce up and down at least a few times between the bottom barrier and the average,

until they are finally being squeezed out

And that makes sense

the more contracts change hands in the squeeze,

the more traders will find themselves on the wrong side of the market once support gives in

And most of them will have no choice but to sell back to the market what they had bought at bottom prices just moments before

Add to this a number of sideline bears eagerly stepping in and we have ourselves the perfect ingredients of double pressure and thus follow-through

At times,

the anticipation of this little chain of events is very straightforward

At other times,

the assessment of the squeeze can be a lot more subtle and it may leave a scalper wondering whether or not to trade

Particularly when the space between the 20ema and the barrier line is no more than a few pip in width,

the tease break may be almost indistinguishable from a valid break

Forex Price Action Scalping

Excerpts

If you ever find yourself caught in a tease break,

or in any other valid break that acts as a tease,

similar calm is required as in the case of the BB trade where prices break out of the box and then crawl back in

As we have seen already in several examples,

can still guide prices back out in favor of the trade

In many cases that is also the final incentive for the market to really pop

Take a moment to compare the string of black bars after the break in this chart with the string of white bars after the break in Figure 11

What do these moves represent

? They clearly show us the unwinding of positions of those traders trapped on the wrong side of the market

In the chart above,

all scalpers that picked up long contracts inside of the range are carrying losing positions the moment prices break down below 1

That string of black bars represents their predicament and their panic,

so in essence a rapid unwinding of long positions that are being sold back to the market

Naturally,

clever bears on the sidelines,

will be happy to add fuel to the fire by quickly selling contracts to whoever still entertains bullish fantasies

Of course,

even a falling market will always find traders ready to buy,

but these bulls will not be so eager as to not demand lower prices to trade at

As a result,

prices will fall even more until eventually the market calms down and more bulls than bears are willing to trade

is the principle of supply and demand

It works the other way around in equal fashion

And it is our job to anticipate it before it even takes place

To the non-initiated this may seem like quite a daunting task

Yet those who observe,

study and learn will most likely come to see the repetitive nature of it all

And soon they will be able to exploit those who do not

Forex Price Action Scalping

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Figure 11

For example,

and then tested back and proven sound,

the market’s next stop will be 1

Variations on this pattern repeat themselves with such relentless persistence that it is not hard to imagine how numerous intraday strategies are solely built to exploit this phenomenon

And yes,

the market’s fixation with these round number levels at times is truly astonishing

Of course,

as scalpers we are only interested in one thing: can we exploit it

? Psychologists have us believe that the omnipresent round number effect,

visible also in many other aspects of life,

has no coherent relation to value whatsoever but is simply a way for the human brain to filter out noise to protect itself from information overload

From a practical perspective,

there may even be a strong self-fulfilling aspect attached to it: if we all believe that round numbers bear significance,

our actions concerning these numbers bring significance about

Anyhow,

round numbers do have the pleasant side-effect of framing things in organized manner,

just like wrapping boxes around ranges gives us clarity on resistance and support

Forex Price Action Scalping

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it comes to the 20-levels (00,

you will have noticed that I have set up my software to plot these levels thinly in the chart

but I use them solely for guidance and try not to look upon them as absolute levels of resistance and support

They may do so at the moment,

but I rather leave that to the price action itself

Frankly,

in the never-ending quest for simplicity I have tried to scalp with a clean chart,

meaning without the 20-lines in it,

but somehow my conditioned brain felt less comfortable without these levels framing the action

This may very well be a personal quirk and any scalper can try for himself what suits him best

One last thing: on the road from 40 to 60,

Currency trading,

and the 50-level is arguably their favorite toy

Unlike the 00 round number,

this level is not a 20-level itself

Hence the occasional conflicting mishmash between 40 and 60

However,

do not expect anything to happen around this level

Just be on the alert

Always monitor any action carefully,

but keep a special eye on the two major round number zones of 00 and 50

More often than not,

these levels are what the bigger chart is all about and why we see so many ranges appear as a result

Let us look at Figure 11

Halfway through the chart,

the options are very much open

There are no trades near and a scalper should just relax and apply patience

To obtain an idea on support and resistance,

he may have already drawn a horizontal line across the first top of (1) and then another below the low that followed it (2)

Tip: you do not necessarily need to draw boxes,

a horizontal line across the tops and one beneath the lows will do just fine

At any moment in time there are always three ways to look at a chart

Through bullish eyes,

Needless to say,

observing the price action with a neutral disposition is the way to go

Many traders,

can’t help themselves looking at the market from the perspective of their current positions (or intentions),

so either from a bullish or a bearish stance

It is a bit the same as with the novice chess player who only moves his pieces around in order to attack

this player usually pays very little attention to position play or even to the

Forex Price Action Scalping

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many gaping holes in his own defense

When biased towards the upside,

a bull may view the triple bottom pattern (4,

And with reason

the market definitely shows signs of support in the 1

3120 area

Should it continue its pattern of slightly higher bottoms,

then breaking out to the upside,

would technically be the most logical result

When looking at things from the bearish side,

traders may find comfort in the triple top pattern (3,

As neutral scalpers,

we can only sit back and enjoy whatever the market has in store for each party

If you place your thumb on the chart for a moment,

to block the prices after 17:00,

you can see that it wouldn’t have taken that much of an effort from the Powers That Be to give this chart a more bearish look