failed H2 & failed L2 Setups

Definition: A fH2/fL2 (failed H2 and failed L2) is a high probability price action setup. If it occurs within the right context, the setup usually generates both a good scalp and a swing trade. In general, a failed H2 occurs after the bulls have failed to create a new H twice in a row and a failed L2 occurs after the bears have failed twice to create a new L. The market usually reverses and does the opposite.

A fH2 or fL2 pattern along may not mean anything, but combined with the correct context information, the patterns becomes a solid price action setup. For this setup to work, the best context is a sense of exhaustion. This is easy to understand, after the bull have exhausted and if they continue to fail twice, the market is likely to crash; if the bears have exhausted and they failed twice to get a new L, they will give up and the market usually breaks to the upside.

Where to look for the setups?

Here I will use the bull case (fL2) as an illustration.

The minimal requirements to take a fL2 setup:

• There must be signs of bear exhaustion.
• There must be two short trades that fail.
• In a well-developed Trading Range (that has at least 2 legs up & 2 legs down previously), a 2nd bear leg is the minimal requirement for bear exhaustion. Trading Ranges usually have 2-legged moves from one side to another. Experience traders usually wait for the strong 1st leg and scalp the 2nd. If, however, there have already been a 2-legged move to the bottom of the trading range, traders will be extremely cautious about taking another short. A fL2 is usually a signal that the bears might just give up.