Al Brooks - Trading Price Action Trends

Great post, SteveH!

That's exactly how you decide what stop you need. By taking Excel (well, I use OpenOffice, but it doesn't matter much :) ) and working hard with spreadsheet and your trading setups.

I would strongly recommend every newbie to pay attention to Steve's post, because it describes the tactics of optimal stop-loss placement.
 
Quote from SteveH:

While I don't trade the Euro Dollar futures (Globex 6E contract), I hand-checked what stop I would need to trade it intraday on a mid-level volume chart (350-400 contracts per price bar) with a nice volatility study. I found all of the winning trades, recorded the MAE (Maximum Adverse Excursion...aka the drawdown) and the MFE (Maximum Favorable Excursion...minus 1 pip)

Sure enough, it matches what cornixforex is saying. A 6 pip stop would have kept me in 95% of the winning trades.

That same study on the CL, which I do trade, requires a 10 tick stop to capture 94% of the winners. The average winner on the 6E was 18 pips ($225) and 29 ticks ($290) on the CL. About the same on a ratio basis. 50% of the 6E winners are 12+ pips while 61% of the CL winners are 20+ ticks. No great surprise. The CL is more volatile and is a better reward for the risk on a per contract basis.

Here's the bigger picture. EVERY winner has a measurable MFE / MAE. Focus on THAT when you're researching your possible edges. You know what all the winners are paying out and what you had to risk to capture a significant pct of them.

Look. We all know that the hard part is finding a way for the losers to not overcome the winners on a monetary basis (duh!). But from reading trading forums, I get the impression that the majority of trader hopefuls cannot even tell you something similar to the above. The MAE stat will stand out in your research and tell you what your best stop area is to catch 90-95% of the winning trades. For example, On the CL, everything which works out well for me on a 5 min chart and below over 100's of trades doesn't need more than 10-15 ticks [heck, 65% of the winners in the study above only need a 6 tick stop!]. Any more and my risk of throwing money away needlessly goes up because the few big winners I may get from a bigger stop is going to get eaten up by the losers on the average trade which never needed that much of a stop to begin with.

Summary to newbies: Your winners tell you how much to lose on the losers.
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Correct, but it is more than just the tight stop and the great RR; it is the emotional control factor.

If you understand the trade set ups that allow for tight stops, an excellent RR and a high ratio of winners to losers then you never need to think about psychology. The more damage caused to any of these three components the more it plays on the emotions and the more psychological repair is needed.

Getting down 6 pips was a jump but now 6 pips is a large stop and you can see why. You can hit the hourly/daily reversal and let it roll through the larger time frames and take over a 100 pips on a trade and it is no different from scalping 5 pips in noise except you recognize the different potential. A bigger return doesn't need a bigger stop is what I am trying to say.

You will probably find that most of your biggest wins had the smallest MAE.
 
Quote from Xspurt:

A bigger return doesn't need a bigger stop is what I am trying to say.
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Yeah, definitely.

The great power of context is exactly that: entering all trades as scalps, but seeing which have potential to turn into multi-hour one way trend (today is the great example of such an event, Euro squeeze, sort of shorts bailing panic).
 
Quote from cornixforex:

Yeah, definitely.

The great power of context is exactly that: entering all trades as scalps, but seeing which have potential to turn into multi-hour one way trend (today is the great example of such an event, Euro squeeze, sort of shorts bailing panic).
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Exactly. Today we scalped around the squeeze and then sat in the run up to the top. The big trade was the same risk as the scalps.
 
Quote from Xspurt:

Exactly. Today we scalped around the squeeze and then sat in the run up to the top. The big trade was the same risk as the scalps.
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Yea. :)

Actually, those big trades often have the smallest risk of all, because when you enter at the point of probable strong huge volume breakout, momentum very quickly takes away your trade in the money.
 
Quote from NoDoji:

Ammo, only one of the setups I trade is not Brooks; it's a pure counter-trend play that works quite well under certain conditions on the instrument I trade and I always use a tight stop and tight risk management with it.

The other five setups I trade are pure Brooks.

That said, I've come to believe that no successful trader can hand someone else their methods and expect similar results. There's too much psychology involved, too many conflicting belief systems among people, and a helluva lot of ego.

In an effort to pay forward the immense help that experienced traders here attempted to provide to me as a beginner, I spent much time over the past year and a half working with a variety of traders who were struggling to become consistently profitable. I offered many of them a complete description of my own trading strategies and trade management processes, and even tried to help them overcome the emotional pitfalls that destroy the best of plans.

I ended up baffled by the fact that so many people with a solid understanding of these consistently profitable methods were having such difficulty simply trading them. By the time I had done the months of work necessary to make a set of price action strategies my own and come to trust them, I had totally forgotten that when I was struggling to find my way and experienced traders gave me everything I needed to be successful (one of them even called every trade in advance with stops and targets for the better part of a year), I never followed along either!

I didn�t trust the methods because they weren�t mine. I was still looking for certainty in an environment of constant uncertainty; therefore, to me, any system that could potentially produce three losses in a row (gasp!) was extremely suspect.

When I later encountered the same thing from others as I handed them profitable strategies on a silver platter, it was frustrating. I had a plan that worked, so why can�t they just take it and trade it? Why so many questions, why so much drama? I had moved on from my past, filled with excitement about having found the Holy Grail, and didn�t recognize my previous self in these struggling traders.

During the latter part of the year, it became clear to me that it�s critical for a trader to do ample study and research, develop a concise trading plan that's their own even if it uses the tactics of others, test the plan thoroughly and master trading it with faith and discipline, preferably in a simulated environment.

These are the most important steps an aspiring trader can take, and it�s difficult to fail once they're completed.

My own trading plan is based on a few standard price action strategies covered comprehensively by Brooks. However, there are many other solid time-tested trading strategies you can borrow and adapt, or you can come up with your own through careful study if you want to re-invent the wheel.

Before finalizing my written trading plan, I spent a couple hours at the end of each day logging a complete analysis of the day�s price action including descriptions of each of my chosen setups and the result of each one under various styles of trade management (risk management and profit-taking). I had around 100 days of spreadsheets with this sort of detailed data before I began to truly trust my plan-in-progress, and I had been logging my notes in bits and pieces. Finally, I put the plan in into a full written format which included screen shots from the hard right edge where it looks a lot more uncertain than it does on a static chart at the end of the day.

My educational recommendations for those who are just beginning to explore short term trading opportunities or who have tried various strategies that failed:

An excellent primer on reading price action:

http://www.daytradingcoach.com/daytrading-candlestick-course.htm

And an excellent primer on common chart patterns:

http://www.daytradingcoach.com/daytrading-technicalanalysis-course.htm

My favorite books I�ve found to be superb sources of ideas for studying and developing trading strategies:

Al Brooks� �Reading Price Charts Bar By Bar�

Alan Farley�s �The Master Swing Trader�

Jack Schwager�s �Getting Started in Technical Analysis�

The finest trading plan is worthless without the discipline to follow it. The bible of trading psychology for those who already have a proven trading plan but are struggling to follow it:

Mark Douglas� �Trading in the Zone�

Confidence is important in trading, but confidence does not mean having a big ego. In my opinion, trading is best done by checking your ego at the door.

The majority of the population are constantly living in the past and the future, are highly ego-driven and often engaged in proving themselves right and proving others wrong. This has a negative influence on most aspects of our lives. It�s especially dangerous in the already difficult and risky world of trading for a living.

Here are my favorite books for ego reduction and emotional centeredness:

Don Miguel Ruiz� �The Four Agreements: A Practical Guide To Personal Freedom�

Eckhardt Tolle�s �The Power of Now: A Guide to Spiritual Enlightement�

Eckhardt Tolle�s �Practicing the Power of Now: Essential Teachings, Meditations, and Exercises From The Power of Now�

Ammo, thanks for all the help you gave me!

That old offer of mine to totally confuse you with Brooks price action as applied to CL still stands :p
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Hello NoD:

Agree on what you say, and would say this is good honest advice to anyone starting in this game.

Forget about handout, those are from guru who ain't getting enough kicks sitting in front of their screens,

I would add Richard Wyckoff to the list, it's actually good supplement to Brook's idea.
 
Quote from cornixforex:

Yea. :)

Actually, those big trades often have the smallest risk of all, because when you enter at the point of probable strong huge volume breakout, momentum very quickly takes away your trade in the money.
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What are you doing here, Cornix? :D
 
Quote from cornixforex:

Breakouts can be very profitable. Honestly I can say I even prefer good breakout to a reversal signal.
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yeah, but you need a good understanding of the big picture, anyone starting at this game, will just enter at breakout/down of any pattern, and wonder why they don't work consistantly
 
Quote from Willleung:

yeah, but you need a good understanding of the big picture, anyone starting at this game, will just enter at breakout/down of any pattern, and wonder why they don't work consistantly
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Ya, Will, as everything in our life, trading craft demands a lot of practice, before you start to "see proper things".

The key is not run in circles by looking what else to add or replace in your trading tactics, but stick to simple and watch, watch, watch it. Until it starts to shine. :)
 
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