smilingsynic trading observations etc.

[smilingsynic]

Brooks, continued:
The two most important concepts in trading are that there is a mathematical basis for everything, and that at any moment when you are convinced of the market’s direction, there is someone equally smart who believes the opposite. Never be convinced of anything, and always be open to the possibility that the market will do the exact opposite of what you believe. Although the market at times is imbalanced and move strongly upward down for many bars, most of the time it is relatively now balanced, even though it might not appear to be so do a beginner.

Remember, you can rarely be 60% certain of the market’s direction, and I can quickly change to 50-50 or even 60% in the other direction. Every bar is either a trend bar or a doji bar. A doji bar means that the bulls and bears are in balance.

Although most trading ranges are flags on higher timeframe charts, and most of them break out in the direction of the trend, almost all reversals begin as trading ranges.

The single most important skill that a trader can develop is the ability to determine the times when there will be more buyers or sellers above or below the price bar.

Strong trends do everything possible to keep traders out, forcing them to chase the trend as it progresses relentlessly. Second-entry reversal setups at the tops of trading ranges often have signal bars with bull bodies, and buy setups at the bottom often have signal bars with bear bodies.

As a general rule, the stronger the trend, the less important the appearance of the signal bar is, and the more countertrend that your entry is, the more important it is to see a strong signal bar. In strong trends, most signal bars look bad and very few are trained ours in the direction of the trend.

Traders will not develop a key conviction in a reversal until the old extreme has been tested.

[smilingsynic]

Brooks, continued:

How much overlap is acceptable? As a guideline whenever the midpoint of a bull reversal bar is above the low of the prior are in a possible bull (or if the midpoint of a bear reversal bar is below the high of the prior bar in a possible bear reversal), the overlap might be excessive and be indicating that a trading range is developing instead of a tradable reversal. This is far more important when you are looking to enter countertrend or attempting to pick the reversal of a trend, instead of with trend at the end of a pullback, when you have two be much less fussy about perfect setups.

Although a classic reversal bar is one of the most reliable signal bars, most reversals occur in their absence.

An unusually large trend bar that forms in a trend that has lasted for 10 or more bars usually means that the market is exhausted and will correct for at least 10 bars and sometimes it leads to a reversal.

A climax is usually followed by a two-legged correction that lasts for many bars, at least an hour on a five minute chart. Whenever there is a trading range just below the moving average, the odds favor a downside breakout.

The current bar can always be the start of a big move in either direction, and you have to watch carefully as the price action unfolds to see if a pattern is changing into something that will lead to a trade in the opposite direction.

The single most important point about the trend line break is that it is the first sign that the market is no longer being controlled by just one side and the chances of further two-sided trading are now much greater.

One the most important points that everyone needs to as reality if they are to become successful traders – most breakouts fail.

[smilingsynic]

Brooks continued:

The key point is that most trends and to be very strong when starting out and lose momentum as they mature, and the market eventually as larger pullbacks and evolves into a trading range.

About 80 percent of breakout attempts will fail.

One of the best ways to trade a trend is to anticipate when the next spike will begin and to enter on a stop as it is starting.

Wherever the market goes up far enough above the breakout to enable a trader to make at least a profitable scalp before there is a pullback, then assume that there was mostly new buying at the high. If it goes sideways, soon that there was profit taking and that the bulls are looking to buy again a little lower. If the market reverses down hard, assume that the strong bears dominated at the new high and that the market will likely trade down for at least a couple of legs and a least 10 bars.

As the trend weakens, the price action at a new low will the less clear, which means that the strong bears are using the new low as an area to take profits on their shorts rather than as an area to add to their shorts. As the bear trend further loses strength, eventually the strong bulls will see a new low as a great place to initiate longs and they will eventually be able to create a reversal pattern and then a significant rally.

[smilingsynic]

Brooks, continued:

A trend that has gone on for 30 or more bars will often have an unusually strong breakout, but it can be an exhaustive climax.

As the two-sided trading increases and the selloffs have more bear trends and last for more bars, the strong bulls will want to buy only at the bottom of the developing trading range and will look to take profits at the top. The strong bears begin to short at new highs and they are now willing to scale in higher. They might take partial profits near the button of the developing trading range if they think that the market might reverse up and break out to a new high, but they will keep looking to short new highs. At some point the market becomes a 50-50 market and neither the bulls nor bears are in control. Eventually the bears become dominant, a bear trend begins, and the opposite process unfolds.

Traders who are trading on the motion are competing against computers, which do not have the motion as one of the variables in their algorithms.

Often the largest in bars are countertrend, trapping traders into looking for countertrend trades and missing with-trend trades. The countertrend setups almost always look better than the with trend setups.

Over time, the trend weakens; more signs of two-sided trading develop, and the signs of strength began to disappear. For example, in a bull trend traders begin to take profits above the highs of prior bars and above swing highs, and aggressive bears begin to short above the highs of bars and above swing highs and will scale in higher. The strong bulls will eventually only buy pullbacks. The initial bull spike is replaced by a bull channel, and eventually evolves into a trading range.

[smilingsynic]

Brooks, continued:

Large gaps that the reverse early usually mark the start of a strong trend for the day and today often closes at or near the high ( or low in a bear).

Be patient and take only trades where you are comfortable with your read.

Spike channel = most likely
Spiketrading range
Spikereversal = least likely

Almost all spike and channel bull patterns end with a breakout through the bottom of the channel and a test to around the bottom of the channel.

If it forms a spike and channel, it is better to treat it only in the direction of the trend.

After a spike, expect a channel.

In strong trends, the signal bars look bad.

When a trend has gone on for a long time and then has unusual further strength, it usually signals the end of the move for the time being and the start of a two-legged a pullback that will last about 10 bars or so.

All pullbacks in trend from the open days are great with trend entries, even though they almost always look weak.

Experienced traders understand that bad buy signal bars and bear trend bars in a trend day with very small pullbacks are signs of the very strong bull trend. They made sure to buy despite the weak setups.

The first trend line break usually fails.

Always be ready for the opposite of what might appear likely, because it will happen about 40% of the time.

Most reversal days start as trending trading-range days.

After a morning trend, and consolidation during lunch time, look for a failed afternoon reversal that traps countertrend traders.

[smilingsynic]

Takes these notes from Brooks with a grain of salt.

Question everything, and believe in something only if there is a good reason to do so. The fact that it appears in a book or on a website is not enough of a reason.

Most of the notes are from Brooks directly; sometimes I paraphrased them, because his writing is not his strength. Nevertheless, his books imo represent the best work in print on price action and on trading the ES. I strongly recommend reading them.

His second book came in the mail yesterday. I will get to it on my vacation, which starts tomorrow.

[Jimmy]

Thank you. The notes are much appreciated.

[Han777]

Ditto on the thanks, Prof. It’s generous of you to summarize your research. Usually the professor has the student/assistant summarizing research for him, not the other way around as here. FWIW I notice that Dragon dictate made quite a few mistakes. Maybe an efficient solution that would still spare hand typing would be to run a grammar check program on the dictation, which might pick up some of the irregularities, (although I’d rather parse the irregularities than have no book report at all.

[RoloRolo]

ty for the notes from Brooks SS. Very much appreciated. Excellent advice !

[smilingsynic]

“Paradoxically, the most effective way to operate at work is like a sprinter, working with single-minded focus for periods of no longer than 90 minutes, and then taking a break. That way when you’re working, you’re really working, and when you’re recovering, you’re truly refueling the tank.”

http://blogs.hbr.org/schwartz/2011/10/the-core-rhythem-weve-lost.html#ixzz1f1iHJVUa

[smilingsynic]

2011:

http://www.ritholtz.com/blog/2012/01/2011-how-volatile-a-year/

[smilingsynic]

Gaps on December contract: 1253, 1244.25, 1236.25
1198.50, 1191, 1146.75

Is this the year we go back to 1525-1575 SPX, to test the all-time high? If so, a potential expanding triangle on the monthly charts. 1550, and then back to under 700?

Who cares? Focus on the here and now.

Back at school for the first week of Spring semester. Cleaned out the chair’s office today and am back to being just faculty. More time to trade.

Free.

[smilingsynic]

Posted a review of Al Brooks’s second book on Amazon.com.

There must be a good number of kool-aid drinkers out there who like Al’s concoction.

Of course his books have value–and I will post my notes on book 2 when I can–but his books are lacking in some key areas, such as consistency.

[vertigo3]

I saw Jimmy’s post in realtime asking about posts to this thread and some observations/questions he might have about DMA for SS.

Here’s something for the soup pot: I look at the dma even in the AH. I will continue to look at the 24hour pricing DMA for the first 30minutes of the RTH. But then I focus on the RTH only.

I also will look at the DMA relative to the consolidations or swing Hs and swing Lows on the left side of the chart. The more chart items, the more trading disciplines are paying attention to a particular level…the more likely a reaction.

How about some strength of trend (intraday) observations…
Looking at RTH only.
If DMA gets above the current day’s PAH, dont expect to make anything trying to call an intraday top. (Don’t even try to play a counter-trend scalp, with DMA above PAH you should be looking for a dip and then buy) (only valid for the day it occurs)

and one more… this is a little more valid when 20 is above DMA and crosses down through it, when/if that happens, look at the range (size) of the bars generated near the time of the downward cross (20 cross down through DMA) big bars on the cross mean multiple downside legs, have patience, wait for a bounce then look for shorting opportunity. For this, price has to be right in the area of the 20 and DMA (as opposed to having a huge gap and 30 minutes later, 20 and DMA (way up there, out of current day’s range) cross.

[smilingsynic]

Thanks, Vertigo. Hadn’t really thought of those.

[Author]

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