Price Action Traders

I trade differently and use a different time frame, so I may not be fully appreciating the setup. However, was there not a green bar a couple of bars before that one you refer to and another one before that one? Those might not have worked out quite as well. How do you decide when there is exploitable consolidation? 3 bars? 5 bars? More? At some point there has to be a line of demarcation. Personally, I prefer a bit more objectivity and a lot more clarity.

 

What I prefer about time-based charts is their reliable cadence. Some time ago, I looked at volume charts in what approximated my time frame. Depending on volume, there might emerge a number of bars almost at once, leaving my entry point in the dust before I could react. Unfortunately, I can only determine my entry point an instant or so earlier. Therefore, whatever advantages volume bars may have for some people, this unfortunate disadvantage precludes me from considering it further.

 

An aside, to womb it may concern, there are rumors of the death of Le Chien Qui Tonne here:

http://www.elitetrader.com/vb/showthread.php?s=&postid=2904042#post2904042

Sick transmit, Gloria!

 

I take it you do not trade in front of, in the middle of or immediately following news reports, right?

 

I’ve read through this thread with some curiosity, since I am a price action trader that adopted many of Al Brook’s concepts about a year ago when I read his book. I understand and empathize with the frustrations most have when trying to learn his methodology, as I had them too and in fact consistently lost money the first few months I tried employing his techniques. It wasn’t until I stepped back, took inventory of the major, memorable concepts he puts forth, and then passed them through the filter of my own market experience to decide which concepts I believed had merit, that I was able to develop my own custom, rule-based setups that have proved to be profitable for me. I still occasionally use the setups I used before I read his book, but now most of my daily volume is based on setups that contain, at some level, a principle that I gleaned from his methodology.

To this day, trying to read Al’s articles or book is a frustrating experience for me. He has so many guidelines, so many things to consider, so many permutations, that it’s very difficult to clearly know which setup is the best to take at any given time. I seriously doubt any student of his could trade a session the same way Al does, there are just too many variables. I doubt Al would trade the same day repeated twice in the same way. So again, to create sanity for myself, I decided to selectively ignore much of his material and only focus on the concepts that made sense to me and that I could actually execute in real time. At risk of giving away a piece of the farm, I’ll list below the concepts that I found most useful, and have incorporated into my trading. I considered making this post in my journal (Filter_Sweep’s Hong Kong Journal) but that thread is a ghost town and I figured maybe some poor soul would find this post more helpful if I put it here:

Basic trade entry / management concepts

- Enter trades using stop or stop-limit orders, one tick above/below the bar that you consider to be the setup bar

- Place initial protective stop one tick behind the setup bar, and then tighten to one tick behind the entry bar. One difference between me and Al is I will almost always continue to tighten my stops behind the close of each subsequent bar, thereby trailing my stop

- Know the market you trade, and know how many ticks is a normal scalper’s profit. Al talks about 4 ticks for ES, but I think 8 ticks is better for ES when the VIX is high. For HSI a scalper’s profit is generally 20 ticks, for HHI it varies between 10 and 15 ticks depending on the setup and volatility. Again, know your market, study how your setups perform during differing levels of volatility, and know how much pop you can expect before your market usually comes back and tests your break-even point

Best setups (or put another way, which bars are good setup bars)

- When a move is fresh and strong (for example, the first strong breakout from the opening range) look for H1/L1 setup bars. Basically the first red bar after 3-4 large green bars in an up-move, or the first green bar after several large red bars in a down-move. The first pullback in a new trend is usually shallow, and this is a great way to enter the new trend objectively. If this first pullback takes more than 2-3 bars to form, something unexpected is happening and you should look for a different with-trend setup, such as the two listed below, before placing a trade.

- If a trend is well established, and the initial panic from those who were on the wrong side has dispersed, look for the following two types of with-trend setups:
* Double bottom / top pullbacks - I assume everyone knows what this is, the setup bar is the one that tests the low/high of the pullback, and if the next bar exceeds it in the direction of the trend, would result in a double bottom / top. A key thing to remember here is that this is a with-trend pullback setup, not a counter-trend setup, so it should only take a 3-5 bars to form, and should be part of a pullback (look at higher highs / higher lows, etc.) so you could also call it a mini-double bottom/top
* Two-legged pullbacks – If the pullback is deep and/or has several bars, the first H1/L1 trigger will likely fail (I make this mistake all the time because I’m too impatient). Wait for a second leg to the pullback (that isn’t deep enough to violate the trend) before entering on a stop above/below the setup bar. The key piece of wisdom that Al shares in this area is that if the market tries to do something twice and fails, it will likely do the opposite.

- Once a trend has had 3 or more legs, usually with each leg having declining volatility, start to look for counter-trend setups. The best setup bars in my opinion are:
* 3-pushes (look it up in the book, I also posted an example in my journal)
* Double bottoms / tops, only if the retest of the trend extreme slightly exceeds the extreme (breakout players are about to get screwed), the move to retest the extreme isn’t too fierce, and the setup bar is a very convincing reversal bar. Otherwise I’ve found double bottoms / tops to be sucker plays
* One-bar reversal bars after the trend has 3 legs, the price has extended beyond the previous swing high / low, and in doing so overextends (think blow-off capitulation, no follow-through orders are coming and a vacuum will be created once it reverses)

I’m sure there’s more that I’m missing, but these are the main concepts that I learned from Al that I’ve found useful. Below I will list out some additional thoughts related to these methods, some of which came from Al, some of which are my own :

Advanced trade entry / management concepts

- When the market gets volatile, drop down to a lower timeframe to avoid getting left in the dust. When the opposite occurs, consider going to a higher timeframe (e.g. 15 minute chart). I know ProfLogic would say use volume bars, but I like the predictability of when a time bar will close so I know when to place / adjust my orders. I also like knowing that other traders are looking at the same bars as me.

- If a setup bar forms that you think could be a case for either a long or a short on a breakout from the bar, wait for price to violate one side of the bar, and then enter on a stop on the other side of the bar if the setup you didn’t take fails. The key concept that Al shares here is that of “trapped traders,” and the fact that they will exit en masse, so you can take advantage of them.
* The most common example I see of this nearly every day is failed double-bottom/top counter-trend setups (I’m not talking about double-bottom/top pullbacks here). Many traders get sucked into the double bottom, and when it fails, they all get flushed out very quickly and the trend continues to expand its range.
* To that point, if the failure of any setup that you take results in an equally good setup in the opposite direction, you should reverse on your stop

- Be aware of time-of day considerations:
* Consider using a quicker timeframe during the first 45 minutes of the session.
* If the market starts off choppy, realize that a breakout is coming, because the market will seek its average daily range. However, once the market has reached its ATR, it will start looking for reasons to consolidate or contract.
* Don’t expect strong breakouts during the lunch hour, instead expect chop.
* Look for H1/L1 setups during the last 30 minutes of the session, as there won’t be enough time for a double bottom/top to form.
* Etc.

- Develop a plan for how to deal with gap days, knowing there is typically an attempt to close the gap, although the gap itself is really a trend leg. I personally find gap days to be very difficult, and I have to deal with them almost daily because I trade Hong Kong.

- Beware of the middle of the day, middle of the range setups. This is where randomness lives, and it takes a lot of experience with your market to know which setups are likely to fail vs. those which are likely to succeed. Reliable setups occur when panic is in the air… during range expansion (because someone is finding out, or about to find out, that they were wrong)


I hope the above can help some poor sap whose trying to find useful info while studying Al Brook’s confusing book.

 

There was actually a very bearish red bar preceding the small green bar I mentioned at that time. The bearish bar was not a valid short entry until X happened. X didn't happen and so the trend-in-play remained intact, revealed by the seemingly meaningless little green bar and trend-followers were welcome to buy there with a tight stop or add to an existing long position.

There are so many ways to make money trading. I found a method that works very well for me and much of what I do is based on a wealth of information I got from Brooks, and am still learning to interpret in real time much of what I learned from his book.

Proflogic appears to have a method that works for him based on stuff I've no clue about and no interest in. (I say "appears to have" because I've never seen him trade live; it's easy to post charts later and point out correlations and buy/sell points.)

The whole point is that we find our individual ways, and we either find ways that work or we move onto to a different career. Al Brooks' methods (combined with tactics I've gotten from other traders and from my own 7000 hours of study) work beautifully for me.

 

I make it a point to be flat just before, during, and immediately after any scheduled reports.

 

You can miss out on a lot of dough doing that.

 

Okay, perhaps we are not looking at the same thing. Regardless, I won't pretend to know his methods from the limited time I spent on the book, so I can't really get into a discussion about his setups. My apologies.

That's all that matters.