Thursday, November 19, 2009

Brooks, Reading Price Charts Bar by Bar

Al Brooks’s Reading Price Charts Bar by Bar: The Technical Analysis of Price Action for the Serious Trader (Wiley, 2009) is a book I keep picking up and putting down. It’s a detailed analysis of intraday price action, primarily on the five-minute e-mini S&P 500. The book is a testament to how difficult it is to put pictures into words. When I first started trading, I tried to write up intraday price action; in addition I always saved a couple of intraday charts. A few days later when I went back to my prose summary, I had absolutely no idea what had happened. A quick glance at the charts made everything crystal clear. And I’m not a particularly visual person.

I suspect my problem with this book is that I learn in a different way. When I was starting out as a trader, I read everything I could get my hands on. (It seems that trend is still intact!) What stuck in my brain were the basics, compliments of such writers as Edwards & Magee and Steve Nison. What didn’t stick (other than all the stuff that should never have seen the light of day) were the step-by-step manuals. I desperately need this kind of manual to assemble, let’s say, Ikea furniture where for me a picture is definitely not worth a thousand words. But when it comes to a non-engineering task, I live in the world of general principles and challenging ideas that I strive to apply intelligently and that are sometimes obvious visually. I’m not talented at putting little pieces together to forge a new whole or at creating pictures out of words.

As you can see, I’m struggling with this post in a way that I rarely do. Brooks has written a serious, competent book. It’s not one of those throwaways. For me the problem is that he’s an Aristotelian with a microscope. Even though I think he’s good at what he does, I would rather be reading a first principles book.

That said, Brooks steps back now and again to give general recommendations. He claims, for instance, that “trading stocks on a 5-minute chart is fairly easy if you limit yourself to three types of trades: EMA pullbacks in strong trends, clear and strong reversals after major trendline breaks, and first hour failed breakouts and breakout pullbacks of patterns from the prior day.” (p. 374) He also ends the book with a set of 39 trading guidelines that distill some of his thoughts. Here are a few: “1. Everything you see is in a gray fog. Nothing is perfectly clear. Close is close enough. If something looks like a reliable pattern, it will likely trade like a reliable pattern. 2. Every bar is a signal bar for both directions and the market can begin a trend up or down on the next bar. Be open to all possibilities and when the surprise happens, don’t question or deny it. Just read it and trade it. . . . 8. All patterns fail, and the failures often fail, but a failed failure is a second entry in the original direction and has a high probability of success. . . . 28. You will not make consistent money until you stop trading Countertrend scalps. You will win often enough to keep you trying to improve your technique, but over time your account will slowly disappear.” (pp. 381-84)

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