Warning: Following my trades may be hazardous to your financial health. See Disclaimer.

Friday, January 06, 2012

Notes on Al Brooks' Price Action Trading

Al Brooks' style of trading is based on price action only.  He does not look at any technical indicators, only candle sticks, trend lines, and moving averages.  He trades mainly S&P futures, but I am trying to apply the techniques to stock equities (SPY).
Chart Setting
  • 5 minute chart with 20 EMA.  The point is to be simple and nimble.  Too much information will simply paralyze you from making quick trading decisions.
  • H1, H2 Signals:  The first and second occurrences where the high of the current bar is greater than the preceding bar during a given pull back of an up trend.
  • L1, L2 Signals:  The first and second occurrences where the low of the current bar is lower than the preceding bar during a given pull back of a down trend.
  • Signal Bar:  The bar preceding the H1, H2, ... or L1, L2, ... triggers.
  • Entry Bar:  The bar after the signal bar.
  • Range Bar: A doji or near doji.
  • Trend Bar: A large white body candle is a bull trend bar; a red/black one is a bear trend bar.
  • H1 long or L1 short with-trend entries.  These work well on a strong trend.
  • H2 long or L2 long entries near the 20 EMA.  These work well based on the observation that a prevailing trend normally uses a 2 legged pull back before resuming the trend.
  • Parallel channel over-shoot and failure.  Stay-in-the-channel, don't chase.
  • Reversal counter-trend entries only after trend line break AND a retest of the low (long entry) or the high (short entry).   Look especially for 3 pushes for better reliable trade.
  • For scalping SPY: Exit 1/3 after the first .10, another 1/3 after .20, and let the remaining 1/3 run.
  • Stop exits:   Initially 1 tick "beyond" the signal bar; after the entry bar transpires, move the stop to 1 tick "beyond" the entry bar;  after taking the first target profit, move the stop to break-even.
Miscellaneous Notes
  • Do not look for perfect patterns.  Resembling one is good enough.
  • Don't over-trade.  Be selective.  3-4 trades per day is enough.  If you're consistently profitable, simply increase the shares.
  • Most of reversals fail, so make with-trend trades.
  • Beginners tend to make reversal trades, so areas where they'd be stopped out would be good entries.
  • Market usually makes 2 attempts to do something; if failure, it would do the opposite.
  • Bail out if the signal bar is weak. E.g. a doji range bar or a bull trend bar on a L1/L2.
  • Reversal long entries - if lower low then expect 2 legged up; if higher low, then perhaps only 1 legged up.  (Reverse for reversal short entries.)
  • Non-trending days: if long tails and overlapping bars during the 1st hour, then try fading at extremes.  There tends to be 2 trading ranges.
  • Trending days: may want to have a swing trade rather than just a scalp.
  • Spike and channel trend day: a gap can be a spike; the channel would be in the direction of a spike.
  • Scalping requires higher percentage of winning trades. Swing trades require less winning percentage.
  • Only use 1 minute or 3 minute charts for with-trend trades, never counter trend trades.