jwbt576-fm jwbt576-brooks october 18, 2011 1:8 … · al brooks john wiley & sons, inc. p1: ......
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TradingPriceAction
TRENDS
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Founded in 1807, John Wiley & Sons is the oldest independent publishing com-pany in the United States. With offices in North America, Europe, Australia, andAsia, Wiley is globally committed to developing and marketing print and electronicproducts and services for our customers’ professional and personal knowledge andunderstanding.
The Wiley Trading series features books by traders who have survived themarket’s ever changing temperament and have prospered—some by reinventingsystems, others by getting back to basics. Whether a novice trader, professional, orsomewhere in-between, these books will provide the advice and strategies neededto prosper today and well into the future.
For a list of available titles, please visit our Web site at www.WileyFinance.com.
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TradingPriceAction
TRENDSTECHNICAL ANALYSIS OF PRICE CHARTS
BAR BY BAR FOR THE SERIOUS TRADER
AL BROOKS
John Wiley & Sons, Inc.
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Copyright C© 2012 by Al Brooks. All rights reserved.
The first edition of this book, titled Reading Price Charts Bar by Bar: The Technical Analysis of Price
Action for the Serious Trader, was published in 2009.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.
All charts were created with TradeStation. C© TradeStation Technologies, Inc. All rights reserved.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any formor by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except aspermitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the priorwritten permission of the Publisher, or authorization through payment of the appropriate per-copy feeto the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax(978) 646-8600, or on the Web at www.copyright.com. Requests to the Publisher for permission shouldbe addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts inpreparing this book, they make no representations or warranties with respect to the accuracy or com-pleteness of the contents of this book and specifically disclaim any implied warranties of merchantabil-ity or fitness for a particular purpose. No warranty may be created or extended by sales representativesor written sales materials. The advice and strategies contained herein may not be suitable for your situ-ation. You should consult with a professional where appropriate. Neither the publisher nor author shallbe liable for any loss of profit or any other commercial damages, including but not limited to special,incidental, consequential, or other damages.
For general information on our other products and services or for technical support, please contactour Customer Care Department within the United States at (800) 762-2974, outside the United States at(317) 572-3993 or fax (317) 572-4002.
Wiley also publishes its books in a variety of electronic formats. Some content that appears in print maynot be available in electronic books. For more information about Wiley products, visit our web site atwww.wiley.com.
Library of Congress Cataloging-in-Publication Data:
Brooks, Al, 1952–Trading price action trends : technical analysis of price charts bar by bar for the serious trader / Al
Brooks.p. cm. – (The Wiley trading series)
“The first edition of this book titled, Reading price charts bar by bar : the technical analysis of priceaction for the serious trader, was published in 2009”–T.p. verso.
Includes index.ISBN 978-1-118-06651-5 (cloth); ISBN 978-1-118-16623-9 (ebk);ISBN 978-1-118-16624-6 (ebk); ISBN 978-1-118-16625-3 (ebk)1. Stocks–Prices–Charts, diagrams, etc. I. Brooks, Al, 1952– Reading price charts bar by bar.
II. Title.HG4638.B765 2012332.63′2042–dc23
2011029297
Printed in the United States of America
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I would like to dedicate this book to my wonderfully kind daughter, Tess Brooks,
who sees life as filled with opportunities and seeks them out around the world
without hesitation. She is a bold, original thinker and a doer, and fills her life
with the dreams that the rest of us have but are too afraid to pursue.
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Contents
Acknowledgments xi
List of Terms Used in This Book xiii
Introduction 1
PART I Price Action 35
CHAPTER 1 The Spectrum of Price Action: ExtremeTrends to Extreme Trading Ranges 55
CHAPTER 2 Trend Bars, Doji Bars, and Climaxes 59
CHAPTER 3 Breakouts, Trading Ranges, Tests,and Reversals 77
CHAPTER 4 Bar Basics: Signal Bars, Entry Bars,Setups, and Candle Patterns 83
CHAPTER 5 Signal Bars: Reversal Bars 89
CHAPTER 6 Signal Bars: Other Types 101
CHAPTER 7 Outside Bars 155
CHAPTER 8 The Importance of the Close of the Bar 169
CHAPTER 9 Exchange-Traded Funds andInverse Charts 173
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viii CONTENTS
CHAPTER 10 Second Entries 177
CHAPTER 11 Late and Missed Entries 181
CHAPTER 12 Pattern Evolution 185
PART II Trend Lines and Channels 191
CHAPTER 13 Trend Lines 195
CHAPTER 14 Trend Channel Lines 209
CHAPTER 15 Channels 219
CHAPTER 16 Micro Channels 249
CHAPTER 17 Horizontal Lines: Swing Pointsand Other Key Price Levels 269
PART III Trends 275
CHAPTER 18 Example of How to Tradea Trend 289
CHAPTER 19 Signs of Strength in a Trend 307
CHAPTER 20 Two Legs 319
PART IV Common Trend Patterns 323
CHAPTER 21 Spike and Channel Trend 325
CHAPTER 22 Trending Trading Range Days 359
CHAPTER 23 Trend from the Open and SmallPullback Trends 383
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CONTENTS ix
CHAPTER 24 Reversal Day 415
CHAPTER 25 Trend Resumption Day 423
CHAPTER 26 Stairs: Broad Channel Trend 431
About the Author 437
About the Website 439
Index 441
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Acknowledgments
My primary goal is to present a series of comprehensive books on price action thataddresses the greatest concern among readers, which was how difficult my earlierbook, Reading Price Charts Bar by Bar, was to read. I am deeply appreciative ofall of the constructive comments that readers have provided and those from theparticipants in my daily live webinars. Many of these comments were incrediblyinsightful, and I have incorporated them in this current edition. I am also thankfulto all of the traders who have been in my live trading room, because they have givenme the opportunity to say things repeatedly until I could clearly articulate what Iam seeing and doing. They have also asked many questions that have helped mefind the words to communicate more effectively, and I have put those words intothese books.
I would like to give a special thank-you to Victor Brancale, who spent longhours proofreading the manuscripts and providing hundreds of very helpful editsand suggestions, and to Robert Gjerde, who built and administers my website andhas given me candid feedback on the chat room and the website. Finally, I wantto thank Ginger Szala, the Group Editorial Director of Futures magazine, for giv-ing me ongoing opportunities to publish articles and speak in webinars, and forregularly giving me very helpful advice on how to become more involved with thetrading community.
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List of TermsUsed in This Book
All of these terms are defined in a practical way to be helpful to traders and notnecessarily in the theoretical way often described by technicians.
always in If you have to be in the market at all times, either long or short, this iswhatever your current position is (always in long or always in short). If at any timeyou are forced to decide between initiating a long or a short trade and are confidentin your choice, then the market is in always-in mode at that moment. Almost all ofthese trades require a spike in the direction of the trend before traders will haveconfidence.
barbwire A trading range of three or more bars that largely overlap and one ormore is a doji. It is a type of tight trading range with prominent tails and oftenrelatively large bars.
bar pullback In an upswing, a bar pullback is a bar with a low below the low ofthe prior bar. In a downswing, it is a bar with a high above that of the prior bar.
bear reversal A change in trend from up to down (a bear trend).
blown account An account that your losses have reduced below the minimummargin requirements set by your broker, and you will not be allowed to place atrade unless you deposit more money.
breakout The high or low of the current bar extends beyond some prior price ofsignificance such as a swing high or low, the high or low of any prior bar, a trendline, or a trend channel.
breakout bar (or bar breakout) A bar that creates a breakout. It is usually astrong trend bar.
breakout mode A setup where a breakout in either direction should have follow-through.
breakout pullback A small pullback of one to about five bars that occurs withina few bars after a breakout. Since you see it as a pullback, you are expecting the
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