Synthesizing Tharp and Alexander

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Al Brooks synthesis and application...

Al Brooks published Trading Price Action in 2011, two years after publishing Reading Price Charts Bar by Bar in 2009. But the manuscript was so long that the publisher decided to divide the text into three separate books.

Brooks writes that “every chart has an incredible amount of information that can be used to make profitable trades, but much of it can be used effectively only if traders spend time to carefully understand what each bar on the chart is telling them about what institutional money is doing.”

However, from my perspective, if I have to try to decipher what a bar on some chart is telling me, then I need to switch to a chart with a lower time frame so I can actually see what’s going on. Brooks goes on to write that “you should always be trading in the direction of the majority of institutional dollars because they control where the market is heading,” and that is exactly what I believe trading via charts with a lower time frame empowers me to do.

I conceptualize price action as consisting of (1) waves, (2) currents, and (3) tides; and it is by going with the flow of the currents that I seek to accomplish the above. Though this is also hypothetically (or theoretically) possible to do by trading the tides, as a retail trader, this would require my experiencing draw-downs, losses, and success rates at levels I would find unacceptable.

Brooks describes a couple of examples of mistakes “weak traders” make due to the fact that sometimes, when the market is working higher, a bar will trade below the low of the prior bar, yet the trend will continue higher. In such situations, institutional players will often buy exactly where some so-called weak traders let themselves get stopped out with a loss, or where other weak traders short, believing the market is selling off.

Al’s answer to this is “don’t think too hard about it.” He advises traders to follow the behavior of the institutions and not use too much logic to deny what is happening right in front of them—but my question is, exactly how does one go about doing this? Numerical Price Prediction (the system I use) arrives at an answer from a slightly different angle.

NPP aims to apply as much logic and reason as humanly possible by turning to mathematical data and statistical probability to identify central tendency, thereby conveying the “true” intent of the big institutions without permitting variability of data sets (dispersion) to trick retail traders into making fallacious decisions.

 

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In his book on trading price action trends, Brooks writes that, given the fact that computer-generated trading now accounts for as much as 70 percent of the day's volume, if you are a day trader, “ignore the news and look at the chart, because the programs will create patterns that are purely statistically based and have nothing to do with fundamentals, yet offer great trading opportunities.”

However, I now pretty much ignore the news for three different reasons: (1) more often than not, news drives a given exchange rate in the direction I was already set up for it to go; (2) it’s not that big of a deal if a given pair moves against me because I will simply be stopped out of the position; and (3) given that my system is based on historical data, the behavior of exchange rates during the release of economic information is already built into its mechanisms, which are therefore fully equipped to handle (operate during) such events.

Another reason Brooks cites for ignoring news is that markets might rise or fall because of perceived fundamentals, but the extent of the climb or fall is determined by the charts.

 

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Friday, August 9, 2019 / 1:00 a.m. PST

I have cut back sharply on how much trading I’m doing partly because my “research” is now pretty much over (so there is no longer any point in making trades to see what happens) and partly because a number of my trades now realize gains of from 20 to 30 pips as opposed to just 4 to 7 pips. Consequently, I was just now thinking about limiting my trades to just two specific situations, and was therefore struck by the coincidence of what I encountered in the next little section of the book I’m reading (just a couple of paragraphs at a time).

Brooks writes…

The most important message that I can deliver is to:

1. Focus on the absolute best trades
2. Avoid the absolute worst setups
3. Use a profit objective (reward) that is at least as large as your protective stop (risk)
4. Work on increasing the number of shares that you are trading.

I colored the candlestick chart below to reflect the way I now conceptualize the Forex market.

The fluctuating strip constitutes waves/price flow. The blue areas are the current or river. The yellow green area is the inner bank, and the darker green area is the outer bank. I don’t know what to call the yellow strips, so for now I’m thinking of them as defining the “flood zone,” even though this doesn’t really fit because they are often situated in the middle of the river.

So, my thought was to only execute trades when either: (1) the “tide” is extraordinarily pronounced/definitive (i.e., the slope of the river is extremely steep), or (2) when the flow is reversing off the flood zone, or off the inner or outer bank, to rejoin the direction of the current.

In the image above, the tide is never all that strong. But the flow reverses off the flood zone to rejoin the direction of the current where I have drawn the first and the last two red circles. It reverses off the inner bank to rejoin the current where I drew the first of the middle two circles (near the middle of the chart).

The third circle on the chart does not fit either of the scenarios I mentioned, but the flow is so far off course at that point (to the outside of the outer bank) that I would feel comfortable executing a trade upon a reversal in the flow anyway.

Profits can be taken when the waves reach the opposite river bank or the opposite side of the flood zone.

 

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Al Brooks...

"I read charts bar by bar and look for any information that each bar is telling me."

Not me, not at all! I step way back and try to get a bird's-eve view. My goal is to get a sense of what the market is doing overall. In fact, the image I posted above kind of illustrates this point.

Al Brooks...

"I learned from performing thousands of operations through a microscope that some of the most important things can be very small."

I don't disagree with this at all, which is why I often use one-minute charts to select my entry and exit points. But even then, I'm not looking at isolated elements, but rather, the picture that emerges after evaluating how all the little pieces fit together, relate, or interact as a whole.

 

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I colored the candlestick chart below to reflect the way I now conceptualize the Forex market.

I replaced the inner and outer banks of the river, which were formerly defined by standard simple moving average envelopes (see Post #53) with the outer "flood zone" boundaries, in that they follow the path cut by the river more closely.

Replacing the moving average envelopes that formed the river itself are proprietary indicators that I coded personally, which serve as a more accurate representation of the general price flow. Due to the greater precision characterizing this chart configuration, entries and exits must be executed by referring to one-minute charts.

 

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I replaced the inner and outer banks of the river, which were formerly defined by standard simple moving average envelopes (see Post #53) with the outer "flood zone" boundaries, in that they follow the path cut by the river more closely.

Saturday, August 10, 2019 / 9:00 a.m. PST

With all the subtle, nuanced adjustments I made to my chart configurations in the past few days as a result of last week’s performance results, last night I took the time to reconcile or align my fifteen-, five-, and one-minute charts with one another as closely as possible, with each setup informing/influencing modifications made to the other two. Hence, I have already changed the image I pasted in the previous post.

Given that Numerical Price Prediction (NPP) is all about evaluating the relationships existing between trend lines, price ranges, support/resistance levels, market structure, and reoccurring price patterns; though it is permissible to consider executing a trade any time the candlesticks “clear the field” of indicators, this is not a decision that can be made blindly or automatically. There are at least three factors that must be taken into consideration beforehand, as listed below.

1. What is the positional relationship of each of the moving averages to one another?
2. What is the slope of each of the moving averages/trend lines?
3. What is the slope of “the tube” (i.e., the short-term adaptive price range envelope)?

Technically, a position can be entered any time the candlesticks cross over to the opposite side of the purple and gray moving average clusters, but this might not be advisable depending on…

1. The slope of the gray moving average cluster
2. The degree of separation between the candlesticks and the bold crimson trendline (The greater the amount of distance between the two, the more acceptable it is to make the trade based solely on the above-mentioned crossover, even if the trade opposes or is in conflict with the directional flow of the overall intraday trend.

Generally speaking, however, it is best to limit trades to those in which all the conditions are properly aligned. In other words,…

• The candlesticks have “cleared the field”
• The ordinal arrangement of the moving averages matches the overall direction of the intraday trend (i.e., match the slope of the bold crimson moving average
• The slopes of all the moving averages match the direction of the overall intraday trend
• The slope of “the tube” (i.e., the short-term adaptive price range envelope) matches the direction of the overall intraday trend

Again, generally speaking, remain in trades (do not exit positions) so long as the purple moving average cluster remains on the same side of the gray moving average cluster on which it was located when the trade was executed. However, this counsel applies primarily to when the gray moving average cluster is sloping steeply.

 

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Last night I took the time to align my fifteen-, five-, and one-minute charts with one another as closely as possible.

Saturday, August 10, 2019 / 3:00 p.m. PST

When I compared my newly aligned setup with the previous chart, I discovered that the bold crimson trend line that served to convey the directional tendency of price (as opposed to its “actionable” trajectory) was missing (compare the image on the left to the one on the right).

Without this line, there was nothing on the chart to suggest the day-to-day flow. But wait! Of course there was, for the dashed brown lines were still right there. So, should I keep the bold crimson moving average or not. To resolve this dilemma, I turned to the daily chart.

On August 1st and 2nd the asset formed green candlesticks when the southbound daily trend line called for red ones. Consequently, August 5th was primed for selling the pair. Yet, what actually happen was the formation of a long green candlestick.

The dashed brown lines did eventually rollover (or rather, roll upward) near the beginning of that day, but the crimson trend line crossed above the dashed brown lines the day before! So then, was this a better prognosticator of major trend reversals?

On July 26th and 29th the pair had to decide if it would continue falling or turn north. It ultimately turned north on the 30th—but it came right back down on the 31st. Sure, I could simply look to see if the candlesticks were forming above or below the dashed brown lines, but raw price action is too erratic to get a good sense of where the rate is ultimately headed. Such analysis therefore requires an evaluation of the numbers (of the moving averages). So, this clarifies the necessity of keeping the crimson line, and also suggests how it might best be used.

As long as it is above the daily trendlines, I will consider the day-to-day sentiment bullish. As soon as it drops below the daily trend lines, I will consider the day-to-day sentiment bearish.

 

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Sunday, August 11, 2019 / 1:00 a.m. PST

List of required considerations before making each trade...

1. Are the candlesticks and the purple moving average cluster (not pictured) crossing the gray moving average cluster?
2. If so, how steep is the slope of the gray moving average cluster (not pictured) and how much distance is there between the candlesticks and the actionable trend lines?
3. Have the candlesticks "cleared the field?"
4. What is the slope of the bias line?
5. Is the bias line above or below the day-to-day trend lines?
6. What is the slope of the tube?
7. What are the slopes of the actionable trend lines?
8. What is the ordinal configuration of the actionable trend lines?
9. Where is price (the exchange rate) located in relation to market structure?

 

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Compare & Contrast with Al Brooks

In Trading Price Action Trends, Al Brooks writes that one of the issues he had when he began trading was lack of confidence. He wrote that he had always been confident to the point of arrogance in so many things that those who knew him would have been surprised to learn that, deep inside, he believed he really would never come up with a consistently profitable approach that he would enjoy employing for many years.

However, this was not my experience. Though I did go through something else that he described later… (i.e., Any non-trader who looks at a chart will invariably conclude that trading has to be extremely easy, and that is part of the appeal. At the end of the day, anyone can look at any chart and see very clear entry and exit points. However, it is much more difficult to do it in real time.)

Nonetheless, I never lost the belief that I would somehow find a way to do it in real time. But due to Al's lack of confidence, he did several things I have never done…

1. He bought many systems. (I never bought any.)
2. He read many books and magazines. (I did not read any books or magazines until 2010, when I bought Abe Confas’ book on trading binary options via Nadex. The next book I read was one I picked up in 2014 for a single buck at a dollar bookstore on trading stocks written by Norman G. Fosback, and I got only two useful pieces of information out of its roughly 400 pages. Now here in this year [2019] I’m skimming books by the likes of Alexander, Tharp, Kroll, Chande, and Brooks—but just for the heck of it, since I have a little more free time now that my system is essentially completely developed.)
3. He went to seminars. (Not me.)
4. He hired tutors. (Not me.)
5. He joined chat rooms. (Not me, though I did visit five to ten of them for free when they opened their doors for one- or two-week trial periods.)
6. He tested countless indicators and systems. (I definitely tried, wrote, and tested countless indicators! But I only tested a handful [or less] of systems before concluding that I would be better off developing my own, which, pretty much from the beginning, has been a multiple simple moving average envelope-based system.)

Wait! I did pay for access to ONE chat room for a month, because I kept reading about "market makers," but could not find anywhere on the Web that explained what they were. In the years since then, I have seen several sites which explain that market makers are the biggest multinational financial institutions in the world (the top ten or so banks), but at that time, the only way I found this out was to pay to access the services offered by Scott Barkley at ProAct Traders.

Brooks also talked with people who presented themselves as successful traders, but he never saw their account statements and suspected that most could teach but few, if any, could trade. (I didn’t talk with anyone, but I listened to a few. I suspected that most people who presented themselves as successful traders could neither trade nor teach, so I mostly limited my attention to Scott Barkley, AJ Monte, Nick McDonald, Anne Marie Baiynd, Harry Boxer, Jarratt Davis, and Jim Roof—though Barkley was the only one I ever paid for any information.)

Al writes that usually in trading, those who know don't talk, and those who talk don't know, which I find puzzling due to my agreeing with something he wrote later on…

Namely…that there is no need for traders to be concerned that making information available will create lots of great price action traders, all doing the same thing at the same time, thereby removing the late entrants needed to drive the market to your price target, because the institutions control the market and they already have the smartest traders in the world and those traders already know everything retail traders know.

HSBC, J.P. Morgan Chase, Goldman Sachs and the like are going to push the exchange rates to wherever they want them to go, regardless of what I or a handful of other retail traders are doing with our miniscule little 0.02 lots or even our measly single 1.0 Lots. In fact, my goal is to figure out what they are doing and join them! Consequently, the last thing I’m worried about is them trying to counter what I’m doing.

Like Al says, “at every moment, there is an extremely smart institutional bull taking the opposite side of the trade being placed by an extremely smart institutional bear. Since the most important players already know price action, having more players know it will not tip the balance one way or the other. I therefore have no concern that what I am sharing will stop price action from working.”

Brooks writes that there is a natural tendency to want to buy the exact low and never have the trade come back, and if it does, a novice will take the loss to avoid a bigger loss, resulting in a series of losing trades that will ultimately bust the trader's account.

But this is part of the reason why I threw harmonic patterns and Fibonacci ratios out the window and trade based solely on statistically calculated price ranges and horizontal support and resistance levels.

Al also writes that using wide stops solves the above problem to some extent, but invariably traders will soon hit a few big losses that will put them into the red and make them too scared to continue using that approach.

But again, this is why I use price ranges and painstakingly selected moving averages. As a result, I don’t need wide stops, and if a pair is genuinely coming back on me, I know this thanks to my moving averages, which immediately tell me to reverse direction and go with the new trajectory.

Finally, Brooks says that "although it is very difficult to make money as a trader without understanding price action, that knowledge alone is not enough. It takes a long time to learn how to trade after a trader learns to read charts, and trading is just as difficult as chart reading."

I suspect however that the real problem probably has more to do with the fact that most people simply can’t control themselves—and not with the trading itself.

 

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Al Brooks seems to make a big deal about a couple of guys named Edwards and Magee. However, he describes their basis for trading as largely using trend lines, breakouts, and pullbacks, which doesn’t sound like anything more than what I’ve already seen all over the Internet. So, I’m not inclined to look into what they’ve written. I suspect that if I did, I’d likely find that much of what I have viewed previously was based on their ideas anyway.

Al goes on to write… “It seemed obvious to me that if one could simply read the charts well enough to be able to enter at the exact times when the move would take off and not come back, then that trader would have a huge advantage.”

I totally agree. That’s why I pretty much ignored warnings not to try to find tops and bottoms—and I’m glad I did. What better way to maximize one’s returns, not to mention one’s success rate? In fact, Brooks continues…

“The trader would have a high winning percentage, and the few losses would be small. I decided that this would be my starting point, and what I discovered was that nothing had to be added. In fact, any additions are distractions that result in lower profitability. This sounds so obvious and easy that it is difficult for most people to believe.”

Not me ! In fact, I couldn’t be talked out of it, thank goodness. It was my starting point too, and has turned out to be my ending point as well.