Thursday, December 15, 2011

Brooks, Trading Price Action Trends

In 2009 Al Brooks wrote Reading Price Charts Bar by Bar, a book I struggled with, as I explained in my review. It seems I was not alone. Brooks therefore re-engineered his project instead of simply writing a second edition. The result is a three-book series, of which Trading Price Action Trends: Technical Analysis of Price Charts Bar by Bar for the Serious Trader (Wiley, 2012) is the first volume. The other two, forthcoming in January, will deal with trading ranges and reversals.

Trading Price Action Trends is still no spine-tingling thriller, but it’s a tremendous improvement over Brooks’s first effort. For starters, the prose is cleaner and the charts are larger. And instead of merely describing bars, individually and as parts of patterns, he explains what they may reveal about the intentions and expectations of traders, both bulls and bears.

Brooks himself trades primarily off of 5-minute e-mini S&P 500 candlestick charts using only price action—no indicators (with the exception of a 20-bar EMA and hand-drawn trend lines), news, or multiple time frames. He sees everything “in shades of gray” and thinks “in terms of probabilities.” (p. 12) He recognizes that “everything can change to the exact opposite in an instant, even without any movement in price.” (p. 37) When he looks at a chart, he is “constantly thinking about the bullish case and the bearish case with every tick, every bar, and every swing.” (p. 39) He dissects bars but also realizes that ultimately they have meaning only contextually. If he were dealing with animals instead of charts he would be both an anatomist and an ecologist.

About half of this volume is devoted to the fundamentals of price action, the other half to trends. Of course, there is no clear demarcation line between the two. It’s impossible to write about the fundamentals of price action without discussing trends. At the level of individual bars, for instance, Brooks differentiates between trend bars and dojis (where the bulls and bears are in balance).

Who should read this book? Novices who think that trading is easy; this book should definitely dissuade them and perhaps prevent yet another account from being blown out. Serious traders, as Brooks himself suggests—and I would add serious traders with a penchant for detailed analysis who are willing to log thousands of hours of screen time and after-hours study in order to stand a chance of becoming a successful discretionary trader.

Trading Price Action Trends is a tough book to absorb. One pass is certainly not enough. But even on the first pass I found some extremely useful pointers. So it goes on to the shelf awaiting a second read.

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