A failure is any trade that does not reach its goal, resulting in either a smaller profit or, more commonly, a loss. For a scalper, the goal is a scalper’s profit, but if traders were expecting more and the market failed to meet their expectations, even if it provided a scalper’s profit, it is still a failure. Every failed bull setup is a sign of weakness by the bulls and strength by the bears and every failed sell setup is a sign of weakness by the bears and strength by the bulls. Since the most common good setups have about a 60 percent success rate, they have about a 40 percent failure rate. When a setup fails, it often creates an excellent setup for a trade in the opposite direction. The traders who were just forced out will be hesitant to reenter in the same direction, making the market one-sided. In addition, as they exit with their losses, they drive the market even further in the opposite direction.
This chapter discusses some of the more common occurrences of patterns that fail and reverse enough for a scalp. When the pattern is large enough and the context is right, they sometimes can even lead to a major trend reversal. It is critical to understand that every pattern fails some of the time, and traders should accept that as a normal occurrence. Look at a failure as a potential opportunity, because, as mentioned, it will often set up a profitable trade in the opposite direction. At other times the failure will result in a second signal in the direction ...