smilingsynic trading observations etc.
By Lawrencesmilingsynic’s trading observations, techniques, etc.
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Trading Edges That Last
By LawrenceOnline Series
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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.
ty for the notes from Brooks SS. Very much appreciated. Excellent advice !
“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
2011:
http://www.ritholtz.com/blog/2012/01/2011-how-volatile-a-year/
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.
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.
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.
Thanks, Vertigo. Hadn’t really thought of those.
Brooks, book 2 (Trading Ranges), notes, part one:
The market is always trying to break out, and then the market tries to make every breakout fail. This is the most fundamental aspect of all trading and is at the heart of everything that we do. Remember, every trend bar is a breakout, and there are buyers and sellers at the top and bottom of every bull and bear trend bar, no matter how strong the bar appears. Since every trend bar is a breakout, and trend bars are common, traders must understand that they have to be assessing every few bars all day long whether a breakout will continue or fail and then reverse. This is the most fundamental concept in trading, and it is crucial to a trader’s financial success to understand it.
Big traders do not hesitate to enter a trend during its spike phase, because they expect significant follow through, even if there is a pullback immediately after their entry. If the pullback occurs, they increase the size of their position.
At some resistance level, the early buyers take some profits, and then the market pulls back a little. When it does, the traders who want a large position quickly buy, thereby keeping the initial pullback small. Also, the bulls who missed the earlier entries will use the pullback to finally get long.
Trading ranges regularly have sharp bull spikes that race to the top, only to reverse. The market races to the bottom, and that breakout attempt also fails. Because of this, buying the closes of strong bull bars near the top of the trading range is risky, and it is usually better to look to buy pullbacks instead. Traders should trade the market like a trading range until it is clearly in a trend.
A move above the prior high in a bull trend will generally lead to one of three outcomes: more buying, profit taking, or shorting. When the trend is strong, strong bulls will press – add to –their longs by buying the breakout of the old high, and there will be a measured move up of some kind. If the market goes up far enough up 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 and the breakout shows signs of weakness, assume that there was profit taking and that the bulls are looking to buy 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 at least 10 bars.
Every new high is a potential top, but most reversal attempts fail and become the beginning of bull flags, only to be followed by another new high.
Traders must force themselves to take at least a small position as soon as they believe that there is a reliable breakout spike. When they feel themselves hoping for a pullback but fearing that it will not come for many more bars, they should assume that the breakout is strong.
When everyone wants a pullback, it usually will not come for a long time this is because everyone believes that the market will soon be higher but they do not necessarily believe it will be lower anytime soon. Smart traders notice and therefore start buying in pieces. Since they have to risk to the bottom of the spike, they buy small. If the risk is three times normal, they will buy only one- third of their usual size to keep their absolute risk within their normal range. When the strong bulls keep buying in small pieces, this buying pressure works against the formulation of a pullback. The strong bears see the trend and they do believe that the market will soon be higher. If they think it will be higher soon they will stop looking to short. It does not make sense for them to short if they think that they can short at a better price after a few more bars. So the strong bears are not shorting and the strong bulls are buying in small pieces in case there is no pullback for a long time.
The important point is that as soon as you decide that buying a pullback is a great idea, you should do exactly what the strong bulls are doing and buy at least a small position at the market.
More Brooks, TRADING RANGES:
As a trend becomes more two-sided, it is better to look to buy pullbacks. Once the two – sided trading becomes strong enough and the prior pullbacks have been deeper and lasted for more than five bars or so, traders can begin to short for scalps. After the market has transitioned into a trading range, the bears will begin to short for swing trades, expecting deeper pullbacks and a possible trend reversal.
In general, whenever there is an initial pullback in a trend that has just become strongly always-in long, a trader should immediately place a buy stop to buy above the high of the spike.
Traders know that most attempts to reverse a trend fail, and many like to fade the attempts.
A successful bear breakout usually is followed by another bear trend bar or at least a doji bar, and if there is instead a bull body, even a small one, the odds of a failed breakout attempt become higher, especially when the bar is at the moving average in a bull trend.
After a series of three or so sell/buy climaxes, the odds are that the market will correct up/down for about 10 bars, probably to the moving average.
If the breakout bar has a large bull trend body and small tails or no tails, the more likely the breakout will succeed.
If there is a rally to test the high of a trading range day, but the rally has bear bars, many overlapping bars, bars with prominent tails, and a couple of pullbacks along the way, the breakout will likely fail.
If the next bar after the breakout or a bear body and is either a bear reversal bar or a bear inside bar, that bar closes on or near its low, and the body is about the size of the average bodies of the bars before the breakout, not just a one- tick-tall bear body, the breakout will likely fail.
Trends do everything they can to keep traders out, which is the only way they can keep traders chasing the market all day.
If you are thinking about taking a countertrend scalp, do so only if you would immediately look to get long again if the trend reverses back up. You do not want to exit a long, take a short scalp, and then miss out on a swing up as the trend resumes.
If three bars are trending up and the low of the third bar is at or above the high of the first bar, there is a pocket. The high bar one is the breakout point and it is tested by the low of bar three, which becomes the breakout test. On a smaller time frame chart, you can see the swing high at the top of bar one and the swing low at the bottom of bar three. It is easy to overlook this setup, but if you study charts you will see that these pockets often get tested within the next many bars but not filled, and therefore become evidence that the buyers are strong.
Most major tops do not come from climaxes made of huge bars, which are more common at major bottoms. More often, a top comes from a trading range, like any double top or a head and shoulders top, followed by a breakout in the form of a bear spike.
Market bottoms more often come from sell climaxes. Market tops more often come from trading ranges.
Any upwardly-sloping channel should be thought of as a bear flag, even if it is part of a bull market, because eventually there will be a break below the trendline and the market will behave as if the channel was a bear flag for trading purposes. Likewise any downward/sloping channel should be thought of as a bull flag and its eventual breakup should be treated as a bull leg is underway.
Once the market turns up, it will usually try to form a trading range, and first possibilities for the top of the incipient trading range are those earlier long entry prices. The market will try to rally to the top of those bull signal bars.
Pullback = trends converting to trading ranges.
If the market is a strong trend that everyone expects continue, why would a pullback ever happen? To understand why, consider the example of the bull trend. A reversal down into the pullback is due to profit taking by the bulls and, to a lesser extent, scalping by the Bears.
Some of the buying also begins to dry up as bulls become unwilling to continue providing only one to three – tick dips. They grow cautious and suspect that a larger pullback is imminent.
Bears also see the weakening of the trend and begin to sell above the highs of bars and above swing highs for scalps, and they scale in higher. Once they see more selling pressure, they will also short below the lows of bars, expecting a deeper pullback.
In a bull trend, there is a series of higher highs and lower lows. When the trend is strong, bulls will buy for any reason, and many will trail their protective stops. If the market makes a new high, they will raise their stops to below the most recent low. If enough bears short and enough bulls take profits, the reversal can be stronger than what traders initially expected. This often happens later in the trend after several prior pullbacks were followed by new highs. However, both the bulls and the bears believe that the market will turn back up above the most recent swing low, and both will usually buy at or above that low. This results in either a double bottom bull flag or another higher low. The selloff can be sharp, but as long as enough traders believe that the bull trend is intact, traders will buy and the market will test the old high, where bulls will take partial or full profits, and the Bears will short again.
Once the market begins to make lower highs, the bulls will usually only look to buy deeper pullbacks, and their absence of buying helped to create those deeper pullbacks to the Bears see the same price action, and transition to holding on to their shorts or larger profits, expecting the sell-offs to become larger.
Weak reversal bar= small trend bar with tails.
Markets tend to test areas of two – sided trading.
You are never going to be 100% certain of any trade, but when you are reasonably confident that a trade looks good, you have to trust the math, take the trade, and simply accept the reality that you will lose some of the time. That is the nature of the business, and you cannot make a living as a trader unless you are willing to take losses.
If a pullback is small compared to the trend, it is usually safe to enter as soon as it ends. If it is large enough to be a tradable, strong countertrend move, it is better to wait until a second signal sets up.
Pullbacks are often strong spikes that make traders wonder if the trend has reversed. For example, in any bull trend, there might be a large bear trend bar or two that break below the moving average and maybe several ticks below a trading range. Traders will then wonder if the always – in direction is in the process of flipping to down. What they need to see is follow – through selling in the form of maybe just one more bear trend bar. Everyone will watch that next bar closely. If it is a large bear trend bar, most traders will believe the reversal has been confirmed and will start shorting the market and on pullbacks. If the bar instead has a bull close, they will suspect that the reversal attempt has failed and that the soul is just a brief but short markdown price and therefore a chance to buy. New traders see the strong bear spike and ignore the strong bull trend in which it is occurring. They sell the close of the bear trend bar, below its low, and at any small bounce over the next few bars. Smart bulls are taking the opposite side of these trades because they understand what is happening.
The market is always trying to reverse, but 80% of those reversal attempts fail and become bull flags.
A reversal attempt without follow through= great opportunity for a with-trend trade.
A pullback that lasts too long= trading range.
Once you believe that the market has reversed, it usually will pull back to test the prior trends extreme before a new trend begins.
When the trend is strong, it is often better to enter the market then to wait for a pullback.
One of the cardinal rules about trading reversals is to exit on the market’s second attempt to resume the trend.
Every pullback begins with some kind of reversal set up. The reversal is needed for many with – trend traders to begin to take profits, and for countertrend traders to initiate trades.
When a channel is steep, it is better not to enter a reversal trade on the breakout through the trend line and instead wait to see if there is a breakout pullback that sets up a second signal.
As a bull trend progresses, eventually as momentum, becomes more two – decided, it starts to have pulled back. The pullbacks become larger and evolve into a trading range, and eventually a trading range will reverse into a bear trend.
A double bottom bull flag is a reliable set up for at least a scalp.
Market stays on one side of the moving average without touching it for 20 consecutive bars or more, the trend is strong, but it is overdone and will likely soon pull back to the moving average, creating a 20 gap bar set up.
More Brooks:
Once you become aware 20 consecutive gap bars are present, look to trade all touches of the moving average. After one or more moving average tests, there will likely be a test that goes through the moving average and forms a moving average gap Bar where the bar is completely on the other side of the moving average, so that there is a gap between the bar and the moving average. Look to fade the first gap bar ( in a bull trend, buy one tick above the high of the previous bar if the high is below the exponential moving average) and. If the first entry fails, buy again on the second entry, if there is one.
Since a parabolic move is not sustainable, it is a type of climax, and any climax is usually followed by at least a two – legged correction that lasts at least 10 bars, and a kid even be followed by a trend reversal.
If the high of a bar is below the moving average, then there is a gap between that bar and the moving average. In a bull or sideways market, there is a good chance that the market will move to fill that gap. Sometimes a bar will go above the high of the previous bar, but then, within a bar or two, the pullback continues down again. If the market again goes above the high of a prior bar, this is a second moving average gap bar setup, or a second attempt to fill a moving average gap in a bull trend, and the odds are excellent that there will be a tradable rally off this setup.
The first countertrend breakout of the moving average usually fails and provides a great fade for the expected trend resumption.
More Brooks later, when I have time.
For the record, I think that this book on TRADING RANGES is weak, compared to his other efforts. I am growing tired of his lack of evidence for his conclusions, the charts with no losing trades and with plenty of inconsistencies, and with his poor writing ability, as if every sentence has to be a two independent clauses linked together with a coordinating conjunction.
The notes are from Dragon software, so there may be a few typos, like “couple bottom” for “double bottom”, lol.
Thanks for the excerpts, SS.
I have studied your fattail.org journal in detail, too bad that it is now offline. Big loss.
Since you have developed your own trading methodology based on the 5 min chart, independent of Al Brooks, in what areas has Brooks’ work provided new insights beyond those you had already established in your own work?
I am not thinking here about his entry setups, but more about using Brooks principles to evaluate market context.
Any thoughts, comments?
Isn’t that interesting –
9:30 – 11:00 is the most crowed trading hours for the locals trading index futures.
Many will stop trading until after 2:30 in the afternoon to see thru the close.
90 mins each round as well.