Understanding Price Action – Chapter 5: Trade Setups .EP4 Pattern Break Combi

Pattern Break Combi

The pattern break combi harbors many features of both the regular pattern break setup and the pattern break pullback variant. The suffix combi is referring to a two-bar pattern, a powerbar followed by an inside

bar. The possible combinations that make up this duo are plenty, but

the message is essentially the same in all: the powerbar displays directional pressure, the inside bar builds up tension next to it. In conditions that favor the direction of the powerbar, it is the inside bar that functions as our signal bar.

Even though a combi breakout is often acted on in relative isolation (inside bar tactics) , the follow-through response is generally the strongest when the combi is part of a bigger breakout of sorts. Hence the pattern break combi.

pattern break combi.

Figure 5. 10 shows a number of standalone combi setups; the first

three are bullish, the last three bearish. Note that the last example shows a reversed combi, meaning the inside bar came before the powerbar; interestingly, this doesn’t have to affect the implications of the

pattern itself. To see why, imagine the taller doji on the right to be broken at the bottom by a third bar: that would technically confirm a false high (bull break followed by a bear break) , which harbors bearish implications of its own.

Less common, but no less powerful, is for a combi to contain two tall dojis standing next to each other, both closing in the same direction away from their center. Yet another version is to see the small inside bar replaced by a powerful doji.

Preferably, the color of the inside bar’s body, if not a neutral dash, is the same as that of the powerbar. Favorable also is when both bars share the same high or low at the breaking end (double-bar break) . But these features are not a specific requirement for a combi pattern to earn setup status. For example, it doesn’t have to be a deal-breaker to see a bearish inside bar alongside a bullish powerbar, as long as the inside bar is still situated in the higher region of the powerbar.

And lastly, should a second inside bar pop up next to the first, this can only add to the tension; therefore, all else equal, the implications of a three-bar combi are the same as those of a regular two-bar combi (perhaps even stronger).

In the majority of combi breakouts, position can be taken on the break of the inside bar, but on occasion it may be an option to postpone entry until the powerbar is taken out also. Whether this would indeed provide a “stronger” signal is up to the assessment of the situation at hand. Always keep in mind, though, that the presence of a combi pattern by itself is never a reason to think long or short. It is just a tool with which to time an entry in a breakout situation.

pattern break combi.

Figure 5.11 When it comes to the eurjusd instrument, the first few hours of the Asian session may show some decent price swings still,

but it usually doesn’t take long for prices to enter into a stale, lackluster phase that can last all the way to the European Open. Caution is always recommended when volume visibly dries up. In Figure 5. 1 1 , the phase between 05 :00 and 06:30 shows the classic features of a market lying dead in the water. It is very important not to mistake this kind of price action for bUildup. Whereas a little cluster of sideways bars in an active environment can already build up tension fairly well, a lengthy phase in a dead market is often no more than a pointless set of price bars trading into nothingness. Not surprisingly, such a climate sits much better with the contrarian game than that of the breakout trader.

On the good side, no price action is ever lost on the careful observer and even a stale Asian session can provide valuable hints and clues that can be of help later on. Let us therefore establish an overview on Figure 5. 1 1 first before zooming in on the details of the pattern break combi setup in the ellipse.

Telling by the slope of the 25ema on the far left, bears were the dominant party in the early Asian session. In the sideways hours that followed, bulls repeatedly tried to make a stand, but they weren’t very convincing and never really made it past the 25ema defense.

The fact that the bulls could not reclaim possession of the 25ema was a strong bearish clue to obtain. After al, how on earth were these bulls to topple the bears if they couldn’t even stay on top of the average. Great markers of bullish failure were the false highs at 1, 2, 3 and 4:

instead of triggering follow-through on the upside, these breaks invited bears to play short.

Since we have no way of knowing how exactly our breaks will come about, if at all, it is best not to entertain any preset notions or preferences on the event itself. With mUltiple setups at our disposal, we can simply sit back and see what the market has in store. For visual guidance, maybe we can put in a pattern line or a box, but most of the work is done by simply watching the bars get printed in a buildup area of interest.

By putting in a powerful doji in pattern line support (5) , right in the EU Open at 08:00, bulls had given it one last shot, but to little avail it turned out. If this bar was capable at all to rekindle hope in the bullish camp, we can imagine the next bar to have crushed all further illusions then and there (6). From where we stand, this was a clear sign to get ready for combat.

In a way, we could look upon the inside bar in the ellipse as a onebar mini flag hanging from the powerbar pole. Note also how this tiny bar, before closing near the bottom of its powerful neighbor, had managed to put in a subtle “double” with the pattern line extension and the 25ema. However insignificant in the bigger scheme of things, this little upstroke had already taken care of two adverse magnets prior to entry, meaning there was now a smaller chance for these elements to get tested after entry.

Looking closely, this particular inside bar showed a “bullish” close, but on such a tiny body that is not an issue of concern. We can take position on the sell side the very moment the low of the inside bar is taken out.

pattern break combi.

Figure 5.12 Traders familiar with Japanese candlestick analysis may have heard the combi referred to as a Harami, a Knight-with-Cross, or maybe a Spinning Tops setup; who knows what other fancy names

have been coined to acknowledge this very potent pattern. Of course, the actual names are all irrelevant, and in many instances so is the pattern itself.

Zooming in on the action in the chart above, we can detect a number of combis that may have been playable on a tinier scale but didn’t really set up well for anything substantial. Nimble scalpers may have taken their chances on the breaks of combi 2, 5 and 7, if only to extract a handful of pip in the wake of each break. An offer to have declined for sure, was the break of combi 3 at 4: this breakout appeared right in the level of a previous high, quite a few pip away from the 25ema, and suffered the adverse magnet of the round number to boot. A poisonous combi to trade, even for a quick scalp.

To minimize the danger of getting caught in a noncompliant break, always a mandatory routine is to monitor first how well the environment favors the wager at hand. Prior to taking position, we should check the pace of the market, the dominant pressures in it, the thickness of the buildup and the presence or absence of adverse magnets and obstructive elements on the way to target. With a little experience, such a checklist should take no more than a few seconds to run. But it can do wonders for your bottom line.

Granted, the ways to perceive price action are countless and what may seem a wholly unsavory proposition to one may very well represent

a textbook opportunity to another. While all is indeed a matter of perception, there is never much reason to get caught in a very conspicuous trap, as in the bull break at 4, or the bear break at 6.

The breaks of combi 2, 5, and 7, stemming from buildup, all possessed merit, yet it seems fair to have questioned whether they set up thick enough to have anticipated a 20 pip break.

To understand the distinction between “thin” and “fat” setups, let us compare for a moment the cluster progressions 1-2 and 6-7 with the buildup leading up to the combi in the ellipse (8- 1 0). The latter definitely showed a lot more substance. Note also that prior to breaking away in the ellipse, bulls had taken possession of the 25ema first, meaning their

buildup resided favorably on top of the average, which wasn’t the case yet at 2 and 7. Within this cluster, another interesting tell was the aggressive way the bulls had responded to the bear break at 9, which had

left a strong false low on the chart.

Since bar 10 showed up bearishly in our squeeze, it did not serve well as a signal bar for the bull-side breakout. So we can skip the offer above it, but we should not lose track of the action here; after all, with the combi setup in our toolbox, it may only take one extra bar for a valid

break to set up (fire long above the inside bar in the ellipse) .

Note: If your trading hours include the UK Open (09 :00 CET) and the market sets up a solid trade right in it, don’t be shy to accept. While opening activity can be dangerously fickle, it does tend to respect a properly built up break. As will be demonstrated in the long series of

consecutive charts in Part 2, the first decent trade of the EU/UK morning is likely to be found in and around the UK Open, when there is usually sufficient volume being pumped around to back up the break. However, do avoid shoddy breakouts or anything that sets up as a continuation trade in the high or low of a swing leading up to the UK Open.

These type of breaks are more likely to provoke rebellion when the first wave of volume pours in.

pattern break combi.

Figure 5.13 Reversal formations come in many shapes and sizes but there is one version that has earned quite a reputation for itself: the

head-and-shoulders variant. In its most textbook appearance, this pattern shows a triple-arch formation standing on a horizontal or slightly tilted pattern line, often referred to as a neckline. The arch in the middle is the most prominent (head), but it is the shoulder on the right that warrants the most attention. Should it start to build up pressure on the neckline, a serious bear break may follow. As is the case with all patterns, inverse versions are equally common. Figure 5.13 shows a bullish variant: the triple-arch progression hanging below the pattern line from 07:00 up to the first ellipse.

It is one thing to be able to identify these “classic” patterns, it is quite another to trade their breaks with acceptable odds. At least two conditions demand attention in all situations: the break of the pattern should not be set against explicit dominant pressure, and there should be sufficient buildup prior to the break.

To understand the dangers of unfavorable pressure, have a quick look at the box progression on the far right, around 12 :00. Although a lot smaller than its more elongated counterpart hanging below, this box represented a head-and-shoulders variant too (three arches) , but we can immediately see why the bear break stood poor chance to succeed: it clearly defied the dominant pressure in the chart. It’s nice to know your patterns, but without a respectful eye for the bigger picture, such “knowledge” may do more harm than good.

Before we take up the combi setup in the first ellipse, let us briefl

discuss a couple of combis of the tricky kind. Combi 1, for example, represented a typical bull trap, quite like combi 3 in our previous chart, Figure 5. 12. Before stepping in on a thin break like this, it may help to ask and answer two essential questions first: (a) does this look like an offer that many other bulls would want to accept? And (b) how demoralized are the bears at this point; would they rather throw in the towel on the break at 2, or open up new shorts?

As always, the true answer will only be known after the fact, but we can usually gather a fair view on the most likely outcome simply by following pressure, conditions and buildup.

How about the break of combi 4? Small as a combi can be, this one possessed a little more merit. Not only was the combi favorably positioned in the base of the 25ema, it found technical footing in a small pattern line extension. Even so, since the market had only just sprung up from the lows, it would have been rather optimistic to have anticipated immediate continuation at this point. And there was overhead resistance to deal with as well (pattern line extension of former highs) .

An offer to have declined for sure was the break of combi 5. If we now consider the preceding bull swing 3-5, which had come up from the lows with little pausing on the way, this pattern breakout had all the makings of a tease break trap.

Combi 5 did possess an interesting feature: the high of the inside bar resided slightly higher than the high of the powerbar. This is actually quite common in a combi setup and does not have to affect the implications of the pattern itself. The reason for declining the break was simply the poor buildup preceding the event.

The market did manage to break out for a handful of pip (6), but then follow-through dried up and a correction set in. On the way back, it was only when prices had reached a 60 percent retracement of the 3-6 swing that bulls came in with more verve (7) . Note the ceiling test bounce when the low of bar 7 hit upon the high of bar 3.

This brings us to the combi setup in the first ellipse. The powerbar in it already betrayed the eagerness of bulls to position themselves for the head-and-shoulders breakout. Should this bar have been broken straightaway, however, that would have qualified as another tease (from

where we stand) , on account of the meager buildup involved.

When considering a breakout but deeming the current buildup too thin, always welcome is to see the market not break but instead put in an extra bar of pre-breakout tension. In this case, the extra bar was an

inside bar and thus formed a combi setup with its powerful predecessor. An added bonus here was to see both highs in the combi line up, which set up a double-bar break.

In the meantime, the 25ema had come to support the inside bar from below, basically turning the latter into a one-bar squeeze. With the right shoulder of the head-and-shoulders pattern now “rounded”, and prices pushing up against a pretty straightforward neckline (ignoring the tease breakout), it wasn’t hard to locate the sweetspot of the moment. Should we ask ourselves again whether an upside break would be reason for concern for a bear in position, I believe it is now justified to answer that afrmatively. Perhaps an extra bar of buildup would have been nice (think three-bar combi), but it would have been overly prudent to decline this offer. Hence the long as depicted (first arrow) .

Note: As much as we all want our trades to dash for their target from the get-go, in plenty of instances this will not be the case. Next to the inevitable struggles right from the start, a common occurrence is to see prices first take off nicely, only to then turn around and confiscate all of the earlier gains (8-9). Although unpleasant to witness, it is crucial to train your mind to withstand these mishaps gracefully without the need to do anything silly, like bailing out at break-even to prevent the trade from turning red. Nine times out of ten, if you cast your dread aside and look at things neutrally, all you see is a pullback to test the validity of the break. And frankly, if the pullback ranks so high on the wish-list when still empty-handed on the sidelines (think pattern break pullback

setup), why be freaked out by one when already in position? Particularly on a first correction after a fresh breakout, one of the worst things you can do is not allow your trade a chance to recoup in a technical test. Apart from occasionally saving yourself a full stop-out, this nervous

practice stands to abort a multitude of trades that may have otherwise worked out. Furthermore, the 8-9 correction here was not just a test of the breakout; it also touched upon the 25ema in a 50 percent correction

of the 7-8 swing. And we all know the powerful implications of such a bullish triple.

The second tradable combi of the session, in the ellipse on the far right, serves well to demonstrate the resilience of a trending market, as well as the dangers of trading against it. The first parties forced to bail out on the bn�ak of combi 11 were no doubt the unfortunate bears who had shorted the bear break of the little box a few bars earlier.

Psychologically, the bull break of combi 1 1 may have been harder to accept than the head-and-shoulders break earlier on, if only for the fact that the market had already rallied quite a bit and that bears had shown themselves rather defiant above the 50-level. But if we consider the trending slope of the 25ema, this shows us most evidently that the market was still very strong, and thus likely to find new buyers in the base of the average.

This particular setup holds the middle between a regular combi and its reversed counterpart in which a powerbar comes second to the inside bar. But the bullish implications are practically the same. Furthermore, before closing high up and outside the pattern line, the low of combi 1 1 had found support in the high of bar 10, while touching on the round number and the 25ema (bullish triple). A very nice setup indeed-but it did lack the favorable magnet that was present on the earlier trade; and not insignificant either, the break was set in the often less voluminous lunch-hour doldrums (12:00- 14 :00). In a normally active environment, however, as above, this is generally of minor concern and perhaps not a good reason to skip an otherwise valid offer; in a staler climate, the lunch-hour aspect definitely adds a con to the prospects of a continuation break. Best not to worry about this for now; we will have a closer look at the pros and cons of conditions in Chapter 7.

pattern break combi.

Figure 5.14 Few charts better illustrate the fickle nature of a round number fight. Prior to the pattern line’s collapse, there were repeated

attempts to trade away from the 50-level center, both up and down, but the magnet effect kept kicking in, pulling prices right back. In such an environment, both bull and bear can get trapped multiple times if they do not pay close attention to what the market is saying. And even more caution is warranted when the bars start to exceed their average span while feverishly alternating between bullish and bearish. More often than not, this indicates a big player clash and in it, a tight stop is easily found.

The horizontal pattern line may have had few connectors to be drawn in nondebatable fashion, it was still a useful tool to mark the barrier between bullish and bearish territory in the early UK session. Of the four arches standing on top, the last three had evolved into an unmistakable

head-and-shoulders progression (07: 00-09 :45).

Before this reversal formation had fully materialized, early-bird bears had to pay the price for stepping in too eagerly on the breaks at T and F,

a tease and false break trap respectively. The latter venture in particular (a terribly built up break in the UK Open) was just begging for a contrarian whack. As to the tease (T) , the price action there did contain elements

of a squeeze (a few bars caught between the pattern line and the 25ema) , but this is not the kind of buildup we should be looking to short; prices had not tightened up below a slowly descending average, and the level of the pattern barrier wasn’t too clear either. On top ofthat, the “signal” bar in question was a bullish doji (2) . Not a great short setup by any means.

On the other side of the round number, bulls suffered troubles of their own. Each time they had come to attack the highs of the session, they were forced to retreat almost instantaneously. Bar 3 was a double top with 1, and bar 4 a false high with 3. A similar fate befell bar 6 when it came to take out the high of 4. But was it any wonder? Look how poorly built up these bull attacks on the highs were deployed.

If a single former high or low can already form a technical magnet, then range barriers can do so even more. It is therefore not just the breakout trader who runs a risk of getting trapped in a false break event; any player who trades within the range with a protective stop a little outside of it can get trapped in equal fashion. Consider the predicament of a bull who had “safely” placed his stop a few pip below the low of T. And what about a bear who had placed his stop above the high of 3 or 4. The message is clear: when the action shows a high degree of fickleness, it is best not to pick sides until things truly build up.

Seen in this light, the bull break of combi 5 was best left alone, and so was the bear break of combi 7, although of better quality in terms of pressure.

Taking into account the length of breakout swing 6-8, pullback 8-9 was just too shallow a correction for bar 9 to set up a valid pattern break pullback short. Not only would the break below this bar offer an entry far removed from the 25ema, lurking above was a ceiling test magnet with the low of combi 7, if not a round number test a few pip higher up. Whenever there are conspicuous adverse magnets still on the radar, traders may be less willing to play the turn of a pullback in fear of the correction not having run its full course yet. This is why it is so preferable to have these magnets “out of the way” prior to taking position, the 25ema touch in particular.

From 10:00 to 1 1 :00, the market formed what can be referred to as a bear-flag variant (flag 8- 12 hanging bearishly from the pole 6-8). So, not only had the bulls to weather the implications of the broken headand-shoulders formation, now adding to their troubles was the danger of a pole-flag-swing situation: the flag breakout could trigger a response equal to the span of the 6-8 swing. And the almost tangible pull of the big 1 .35 level certainly didn’t help their cause much either.

Considering the nature of their predicament, we do have to give the bulls some credit for standing up to the bears below the broken headand-shoulders. In an act of utter rebellion, they had even successfully fended off the OO-level magnet by hammering out a double bottom of sorts (8- 10). But alas, this only provided the bears with more economical levels to short from. As a result, prices never put in that ceiling test with the low of combi 7, and they never made it to the 25ema.

As much as the bearish dominance was evident, the activity within the flag didn’t really build up in a very compressed fashion as seen in some of our earlier flag break examples. Nor was the flag line itself of very fine quality (arbitrarily drawn) . In most such instances, when sticking to conservative tactics, this would render participation invalid. On occasion, however, the odds for follow-through on a certain break can appear attractive enough to justifiably deviate from standard operating procedure. But do take heed that this is best applied sparingly and with appropriate attention for detail.

As to the prospects of the flag breakout, I believe a little aggression here was called for. Granted, the 25ema had yet to be properly tested, but with no less than four consecutive bearish dojis building up tension in the flag (combis 1 1 and 12), it is fair to deduce that the bullish defiance was wearing awfully thin. Think of it this way: if you were a bull in position, would you sit tight and hope for the best below combi 12-or

would you gracefully accept defeat and get out of the way?

Conservative traders can of course skip, but it’s hard to argue with a bear for taking a chance on a short like this. As it turned out, the very moment combi 12 was broken, the pole-flag-swing principle kicked in with not a contrarian bull in sight. It’s just an outcome, though.

pattern break combi.

Figure 5.1 5 Squeeze progression 1-2 may have favored the buy side, it still needed volunteers from the bullish camp to initiate the break. As

tliis failed to come forth, bears had tried to take over at 3, but with little to show for it in the end. During the forming of progression 3-4, bulls had slowly managed to take control of the situation again, demoralizing bears and building up tension while at it.

The break above bar 4 represents a valid pattern break entry, but let us assume to have missed it for whatever reason. This means we would now have to follow the coming action closely to see if we could possibly catch our ride on the bandwagon still. For this purpose, we have at our disposal the pattern break pullback setup and its equally powerful cousin, the pattern break cambi.

It took 45 minutes, nine bars, for a combi setup to show up (ellipse). If we take into account that the combi appeared at the end of a pullback to pattern line support, this qualified as a pattern break pullback setup, too. Of course, it is totally irrelevant how we name our setups.

In a way, the market’s initial response to the break above bar 4 couldn’t have been more textbook. First there was the pop towards the round number magnet (5), then a little stalling in that level for a handful of bars, followed by a pullback to the pattern line extension. On arrival, the low of bar 7 had hit upon the 25ema while correcting about 60 percent of the breakout swing 4-5 (triple) . How many times have we not seen similar post-breakout activity.

By running a line across the highs of the pullback, we can see that when the combi was added, the blocky features of the 5-6 cluster had

transformed into a more angular-shaped flag formation. This illustrates a concept that we have touched upon in an earlier discussion: the forming of a small flag outside the boundary of a bigger pattern. Should this smaller flag be broken as well, this shows a failure of contrarians to undo the break of the bigger pattern and thus sends out a strong continuation message.

Note: Not all traders adhere to the breakout strategy. A very popular play is to buy or sell straight into a technical test. For instance, sideline bulls may have liked the outlook enough to already have bought

themselves in on the low of bar 7 the very moment it touched upon the

triple. This tactic differs strongly from our own but is not necessarily without merit. In fact, in this particular case one could argue that if an entry above bar 4 was valid but missed, the breakout trader, too, could now pick up an entry in the low of bar 7, so as to correct the mishap of missing his break at no extra cost. Although it is hard to battle the logic within this reasoning, any entry is always best judged in the light

of the current circumstances. In that respect, before progressing into a flag pattern, the 5-6 cluster had shown the bearish features of an M-pattern middle-part. Therefore, for us to have bought the low of bar

7 would have been in defiance of this bear block development. So yes, it can sometimes prove beneficial to have missed an entry on first go: instead of being positioned in a noncompliant trade, we are offered a

chance to re-evaluate the situation from the safety of the sidelines. (In the long run, of course, missing our breaks wil surely backfire.) But this then brings up another issue. What to do in bar 7 when already in position on the initial break above bar 4? After all, by declining entry in

bar 7, we basically suggest that the original bull wager above bar 4 had lost validity. And that implies that we should have scratched the trade below bar 6. Frankly, that may indeed have been a valid option, but we wil look at this in more detail in Chapter 6 on Manual Exits.

To summarize on the above, if the market shoots away from a missed break and no immediate second instance entries are offered (like a mini pullback in the entry bar itself, or maybe in the bar after) , the best way

to deal with the mishap is to simply accept that it happened and not look upon it as something that needs to be corrected. Just regard the

situation with neutral eyes again and take it from there.

As we can see, when a blocky pullback is not that extensive (5-6), it may only take a few extra bars to transform it into a continuation progression (5-ellipse). The combi in the ellipse was reversed, meaning the “powerbar” came second to the inside bar, but such order does not affect the implications of the setup itself (enter long above it) .

Was it an option to already have taken position above the first bar of the combi, the bullish inside bar? Opinions may differ, but that would have set up the break quite thinly; although residing in the pleasant support of the 25ema and the pattern line extension, that little bar was the first to defy the blocky pattern overhead, and not too intimidating at that; not a great marker of bullish enthusiasm yet. With the doji bar added, the situation had definitely changed for the better. Notice also

that this bar had first taken out the inside bar at the bottom, only to turn around and close high up (false low) . Always a favorable element when thinking long.

About an hour later there appeared another interesting combi setup, a three-bar variant (9- 10). The two inside bars following powerbar 9 set themselves up outside of a broken flag progression (8-9), while building up tension towards another bullish pop. In strict technical terms these bars were not really inside bars (sticking out a bit), but they did build up tension and set up a nice double-bar break. But what about the surrounding conditions? Were they as favorable as they had been on the first combi trade?

To answer this, let’s start out by comparing the technical support underneath this setup with that of the earlier combi on the left. Immediately we can see a major difference in backup. The combi in the ellipse rested on the fat cluster of progression 1 -4, while being guided along by the 25ema. Beneath the three-bar combi 9- 10, on the other hand, there was no support to be found, at least not within the range of our stop. Instead there were two adverse magnets that stood good chance to meddle with the trade: the 25ema about 12 pip below entry and the DO-level a few pip further south. A touch on the latter was certainly not unthinkable considering the fact that the number had been broken earlier on but not yet tested back.

But there was another issue of concern and telling enough to skip the trade altogether. Looking closely, we can see that the break in bar 1 1 was presented right at 14:30 CET, which is the time of major US news releases, if on the agenda (one hour before the US stock markets open). By the look of that huge bar, it is safe to deduce that this particular bull spike had come about as a result of such a release. It takes little time in the markets for any trader to understand that these events can really tear the technical picture apart, and cause great slippage on both entry and stop. (We will take up the news report issue in more detail in Chapter 6.)

The high of the news spike nearly touched the 50-level magnet (1 1), but then the notorious counterstrike set in and down the market went again, taking out every bull brave or silly enough to stand in its path. The drop did not halt until prices had exhausted themselves in the earlier highs of progression 1-4, which again acted as support (12). As it turned out, the low of bar 12 matched the low of bar 7 to the pip: a good spot for a happy bear to cash in his windfall profits from the mini crash, or for an aggressive bull to take his chances on a bounce away from support (not recommended).

Next up was a bull/bear skirmish that bore all the makings of a bear-flag hanging from the news spike flagpole 1 1 -12 . A flag line underneath this progression was easily found and turned out to be well respected until there was virtually no more room left for another bar to get printed in the pattern. During flag formation, there were several bull attempts to break away from the bearish grip, of which bar 13 was the most notable failure (false high in a squeeze) .

It is quite common for a combi to set up a break from a squeeze progression (second ellipse). Note that the inside bar, our signal bar, showed a bullish body, which isn’t preferable when aiming short; but on such a tiny bar, that is hardly an issue of concern.

Even so, it should be noted that this trade, too, was not of the same quality as our first combi long. The trade on the long side could boast of excellent support and really had the market’s pressure working in its favor. The flag break on the short side was more a result of a midsession change in environment, which in turn was initiated by a news spike

collapse. Not the most exemplary conditions for a continuation bet. But then again, we do not necessarily need the best possible odds to justify participation, reasonable odds can do equally well. Seen in this light,

the bear-flag breakout is probably worth a shot-one winner pays for

two failures. Such optimistic reasoning, however, is best not applied when dealing with a news break event, simply because the maximum risk on the trade cannot be guaranteed (adverse spike potential). Hence the earlier skip above bar 10.

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