Trading Price Action Reversals: Technical Analy... !NEW!
The key to being a successful trader is finding a system that works and sticking with it. Author Al Brooks has done just that. By simplifying his trading system and trading only 5-minute price charts he's found a way to capture profits regardless of market direction or economic climate. His first book, Reading Price Charts Bar by Bar, offered an informative examination of his system, but it didn't allow him to get into the real nuts and bolts of the approach. Now, with this new series of books, Brooks takes you step by step through the entire process.
Trading Price Action Reversals: Technical Analy...
By breaking down his trading system into its simplest pieces: institutional piggybacking or trend trading, trading ranges, and transitions or reversals (the focus of this book), this three book series offers access to Brooks' successful methodology. Trading Price Action Reversals reveals the various types of reversals found in today's markets and then takes the time to discuss the specific characteristics of these reversals, so that you can use them in your everyday trading endeavors. While price action analysis works on all time frames, there are different techniques that you can use in trading intraday, daily, weekly and monthly charts. This, among many other issues, is also addressed throughout these pages.
The first chart we are looking at shows us a bearish fakey sell signal pattern. In this example, the trend was already down, as we can see the overall downward track starting at the top left of the chart and falling as price moves toward the left side of the chart. Thus, this fakey sell signal was in-line with the overall daily chart downtrend, this is good. Trading with the trend generally gives a price action setup a better chance of working in your favor.
The last chart we are looking shows examples of the pin bar pattern. Note the large up moves that followed both of these pin bar buy signals. Also, note how these pin bars both had long tails in comparison to some of the other bars on this chart that you might identify as pin bars. Pin bars wit nice long tails like these two, and that are clearly protruding out from the surrounding price action, often are very good setups to trade.
For a complete education and in-depth insight into simple yet powerful price action strategies, as well as insight into the world of professional trading from an experienced trading veteran, checkout my price action trading course for more information.
Al Brooks is a technical analysis contributor for Futures magazine and an independent day trader. His approach to reading price charts was developed over two decades in which he changed careers from ophthalmology to trading. Brooks graduated from The University of Chicago Pritzker School of Medicine in 1978 and received a BS in mathematics with honors from Trinity College in 1974.
Price action is a method of analysis of the basic price movements to generate trade entry and exit signals that is considered reliable while not requiring the use of indicators. It is a form of technical analysis, as it ignores the fundamental factors of a security and looks primarily at the security's price history. However, this method is different from other forms of technical analysis, as it focuses on the relation of the security's current price to its price history, which consists of all price movements, as opposed to values derived from the price history.
At its most simplistic, it attempts to describe the human thought processes invoked by experienced, non-disciplinary traders as they observe and trade their markets. Price action is simply how prices change - the action of price. It is most noticeable in markets with high liquidity and price volatility, but anything that is traded freely (in price) in a market will per se demonstrate price action.
Price action trading can be considered a part of the technical analysis, but it is highly complex compared to most forms of technical analysis, and it incorporates the behavioural analysis of market participants as a crowd from evidence displayed in price action - a type of analysis whose academic coverage isn't focused in any one area, rather is widely described and commented on in the literature on trading, speculation, gambling and competition generally, and therefore, requires a separate article. It includes a large part of the methodology employed by floor traders and tape readers. It can also optionally include analysis of volume and level 2 quotes.
A price action trader typically observes the relative size, shape, position, growth (when watching the current real-time price) and volume (optionally) of bars on an OHLC bar or candlestick chart (although simple line charts also work), starting as simple as a single bar, most often combined with chart formations found in broader technical analysis such as moving averages, trend lines and trading ranges. The use of price action analysis for financial speculation doesn't exclude the simultaneous use of other techniques of analysis, although many minimalist price action traders choose to rely completely on the behavioural interpretation of price action to build a trading strategy.
Various authors who write about price action, e.g. Brooks, Duddella, assign names to many common price action chart bar formations and behavioural patterns they observe, which introduces a discrepancy in naming of similar chart formations between many authors, or definition of two different formations of the same name. Some patterns can often only be described subjectively, and a textbook pattern formation may occur in reality with great variations.
There is no evidence that these explanations are correct even if the price action trader who makes such statements is profitable and appears to be correct. Since the disappearance of most pit-based financial exchanges, the financial markets have become anonymous, buyers do not meet sellers, and so the feasibility of verifying any proposed explanation for the other market participants' actions during the occurrence of a particular price action pattern is exceedingly small. Also, price action analysis can be subject to survivorship bias for failed traders do not gain visibility. Hence, for these reasons, the explanations should only be viewed as subjective rationalisations and may quite possibly be wrong, but at any point in time they offer the only available logical analysis with which the price action trader can work.
The implementation of price action analysis is difficult, requiring the gaining of experience under live market conditions and prior knowledge of "market states." There is every reason to assume that the percentage of price action speculators who fail, give up or lose their trading capital will be similar to the percentage failure rate across all fields of speculation. It is commonly thought to be 90%, although analysis of data from US forex brokers' regulatory disclosures since 2010 puts the figure for failed accounts at around 75% and suggests this is typical.
Some skeptical authors dismiss the financial success of individuals using technical analysis such as price action and state that the occurrence of individuals who appear to be able to profit in the markets can be attributed solely to the Survivorship bias.
A price action trader's analysis may start with classical price action technical analysis, e.g. Edwards and Magee patterns including trend lines, break-outs and pullbacks, which are broken down further and supplemented with extra bar-by-bar analysis, sometimes including volume. This observed price action gives the trader clues about the current and likely future behaviour of other market participants. The trader can explain why a particular pattern is predictive, in terms of bulls (buyers in the market), bears (sellers), the crowd mentality of other traders, change in volume and other factors. A good knowledge of the market's make-up is required.
Price action patterns occur with every bar and the trader watches for multiple patterns to coincide or occur in a particular order, creating a set-up that results in a signal to enter or exit. Individual traders can have widely varying preferences for the type of setup that they concentrate on in their trading.
Al Brooks, a price action trading author, is capable of naming price action formations and provide a rational explanation for the observed market movement for every single bar on a bar chart, regularly publishing such charts with descriptions and explanations covering 50 or 100 bars. He admits that his explanations may be wrong, but states that his explanations allow the trader to build a mental scenario around the current 'price action' as it unfolds.
The price action trader will use setups to determine entries and exits for positions. Each setup has its optimal entry point. Some traders also use price action signals to exit, simply entering at one setup and then exiting the whole position on the appearance of a negative setup. Alternatively, the trader might simply exit instead at a profit target of a specific cash amount or at a predetermined level of loss. This style of exit is often based on the previous support and resistance levels of the chart. A more experienced trader will have their own well-defined entry and exit criteria, built from experience.
An experienced price action trader are adept at spotting multiple bars, patterns, formations and setups during real-time market observation. However, a chart can be interpreted in multiple different ways, which may lead to discrepancy of interpretations between two traders, despite using the same method of analysis.
Most price action authors state that a simple setup on its own is rarely enough to signal a trade. There should be strength in the direction of the trade that a trader is thinking of taking and at least two reasons to enter the trade. When the trader finds that the price action signals are strong enough, the trader tend to continue to wait for the appropriate entry point or exit point. 041b061a72