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Reading Price Charts Bar by Bar: The Technical Analysis of Price Action for the Serious Trader

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Reading Price Charts Bar by Bar: The Technical Analysis of Price Action for the Serious Trader

Al Brooks

ISBN: 978-0-470-44395-8 May 2009 432 Pages

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Description

While complex strategies and systems may work for some traders, understanding price action is all you really need to succeed in this arena. Price action analysis is an effective approach to trading today's markets—whether you're involved in stocks, futures, or options. It allows you to focus on the process of trading without being overwhelmed by a complicated collection of trading techniques. And while this method may appear elementary, it can significantly enhance returns as well as minimize downside risk.

One way to apply price action analysis to your trading endeavors is with chart patterns. Nobody understands this better than author Al Brooks, a technical analyst for Futures magazine and an independent trader for more than twenty years. Brooks discovered ten years ago that reading price charts without indicators proved to be the most simple, reliable, and profitable way for him to trade. Mastering that discipline is what made him consistently successful in trading. Now, with Reading Price Charts Bar by Bar, Brooks shares his extensive experience on how to read price action.

At the end of the day, anyone can look at a chart, whether it is a candle chart for E-mini S&P 500 futures trading or a bar chart for stock trading, and see very clear entry and exit points. But doing this in real time is much more difficult. Reading Price Charts Bar by Bar will help you become proficient in the practice of reading price action—through the use of trendlines and trend channel lines, prior highs and lows, breakouts and failed breakouts, and other tools—and show you how this approach can improve the overall risk-reward ratio of your trades.

Written with the serious trader in mind, this reliable resource addresses the essential elements of this discipline, including the importance of understanding every bar on a price chart, why particular patterns are reliable setups for trades, and how to locate entry and exit points as markets are trading in real time. Brooks focuses on five-minute candle charts to illustrate basic principles, but discusses daily and weekly charts as well. Along the way, he also explores intraday swing trades on several stocks and details option purchases based on daily charts—revealing how using price action alone can be the basis for this type of trading.

There's no easy way to trade, but if you learn to read price charts, find reliable patterns, and get a feel for the market and time frame that suits your situation, you can make money. While price action trading doesn't require sophisticated software or an abundance of indicators, this straightforward approach can still put you in a better position to profit in almost any market. Reading Price Charts Bar by Bar will show you how.

Preface xiii

CHAPTER 1 Price Action 1

Trend Bars and Doji Bars 7

Bar Basics: Signal Bars, Entry Bars, Setups, and Candle Patterns 11

Signal Bars: Reversal Bars 13

Signal Bars: Other Types 17

Outside Bars 36

The Importance of the Close of the Bar 42

Exchange Traded Funds (ETFs) and Inverse Charts 45

Second Entries 46

Late and Missed Entries 49

CHAPTER 2 Trendlines and Trend Channels 51

Trendlines 51

Micro Trendlines: Small, Steep Trendlines in Strong Trends 55

Horizontal Lines: Swing Points and Other Key Price Levels 61

Trend Channel Lines 63

Dueling Lines: Intersecting Trendline and Trend Channel Line 68

CHAPTER 3 Trends 71

Two Legs 75

Signs of Strength 76

Common Trend Patterns 81

Trend from the Open 82

Reversal Day 86

Trend Resumption Day 86

Trending Trading Range Days 88

Tight Channels and Spike and Channel Bull or Bear 91

Stairs: Broad Channel Trend 95

CHAPTER 4 Pullbacks 99

First Pullback Sequence: Bar, Minor Trendline, EMA, EMA Gap, Major Trendline 101

Double Top Bear Flags and Double Bottom Bull Flags 104

EMA and Gap EMA Pullbacks 108

2 HM: If Away from EMA for Two or More Hours, Then Fade EMA and First EMA Gap Bar 110

Trend Day 11:30 Stop Run Pullback to Trap You Out 112

Counting the Legs of a Trend 114

High/Low 1, 2, 3, and 4 118

Variations of High/Low 2 Setups 128

Three Push Pullbacks 132

CHAPTER 5 Trading Ranges 137

Tight Trading Ranges 138

Barb Wire 142

Middle of the Day, Middle of the Range 148

Big Up, Big Down 150

Trading Ranges Setting Up Trend Reversals 152

CHAPTER 6 Breakouts 155

Breakout Entries in Strong Trend 156

Breakout Pullbacks and Breakout Tests 158

CHAPTER 7 Magnets 165

Measured Moves Based on the First Pullback (AB = CD) 165

Measured Moves on Breakouts Based on Thin Areas and on Flags 167

Reversals Often End at Signal Bars from Prior Failed Reversals 171

Other Price Magnets 172

CHAPTER 8 Trend Reversals 175

Trendline Break 184

Trend Channel Line Failed Breakouts: Climaxes, Parabolas, and V Tops and Bottoms 187

Signs of Strength in the First Leg of a Reversal 188

Trends Reverse with a Test: Either an Undershoot or an Overshoot 190

Double Top and Bottom Pullbacks 202

Climax: Spike and Trading Range Reversals 207

Climax: Three Pushes and Wedges (Trend Channel Line Overshoots and Reversals) 210

Expanding Triangles 215

CHAPTER 9 Minor Reversals: Failures 221

Failed Signal and Entry Bars and One-Tick Failed Breakouts 222

Failed High/Low 2 226

Failed Higher High and Lower Low Breakouts 229

Failed Trendlines and Trend Channel Lines 234

Failed Reversals 239

Failed Final Flags: Tight Trading Range 243

Failed Final Flags: Huge Trend Bar 245

Failed Wedges 247

Failed Scalps: Five-Tick Failed Breakouts and Failure to Reach a Scalper’s Profit Target 251

CHAPTER 10 Day Trading 255

Selecting a Market 256

Time Frames and Chart Types 258

Globex, Pre-Market, Post-Market, and Overnight Market 267

Scalping, Swinging, Trading, and Investing 269

Always in the Market 273

Have at Least Two Reasons to Enter a Trade 275

Entering on Stops 277

Protective Stops and Getting Trapped In or Out of a Trade 281

CHAPTER 11 The First Hour 289

Patterns Related to the Premarket 291

Patterns Related to Yesterday 292

Trend Bar on Gap Open: First or Second Bar 302

Gap Openings: Reversals and Continuations 303

Trend from the Open or Trend from the First Bar 305

Third Bar of the Day and the 15-Minute Close 310

Strong Trend Bars in the First Hour Often Predict Strength Later in the Day in the Same Direction 311

Opening Patterns and Reversals 313

Double Bottom and Double Top Flags 317

Trading Range Breakouts 319

First Pullback 321

CHAPTER 12 Detailed Day Trading Examples 325

CHAPTER 13 Daily, Weekly, and Monthly Charts 331

Huge Volume Reversals 343

CHAPTER 14 Options 347

CHAPTER 15 Best Trades 353

Major Reversals 357

Minor Reversal Scalps during Trading Range Days 368

Pullbacks in a Strong Trend 369

Intraday Stocks 374

Trading Guidelines 381

Glossary 387

About the Author 395

Index 397

Chapter 1
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Chapter 2
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Chapter 3
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Chapter 4
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Chapter 5
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Chapter 6
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Chapter 7
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Chapter 8
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Chapter 9
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Chapter 10
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Chapter 11
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Chapter 12
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Chapter 13
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Chapter 14
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Frontmatter
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Reading Price Charts
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