Book:

Reading Price Charts Bar By Bar:

The Technical Analysis of Price Action for the Serious
Trader
(Wiley, 2009)

Available on Amazon (I make very little from it so only

buy it if you think you would enjoy it):
http://www.amazon.com/Reading-Price-Charts-Bar-Tech
nical/dp/0470443952/ref=sr_1_1?ie=UTF8&s=books&q
id=1240802725&sr=1-1
Brookspriceaction.com
Three New Books: (530,000 words)

Trading Price Action Trends

Trading Price Action Trading Ranges

Trading Price Action Reversals

(Wiley, November, 2011)

Brookspriceaction.com
Websites:
 Free articles:
Brookspriceaction.com

 Free detailed analysis of 5 min Emini for past

several months:
http://www.brookspriceaction.com/viewforum.php?f
=1

 Free videos of daily Emini analysis:

http://www.youtube.com/user/brookspriceaction

 Real-time daily webinar ($99/month)

http://www.brookspriceaction.com/portal.php?page
=9
What is Price Action?

The broadest definition: any representation of price

movement during the course of trading for any
financial instrument, on any type of chart, and in
any timeframe.

Since price is changing with every tick (trade)

during the day, each price change becomes an
example of price action.

You cannot dismiss anything because very often

something that initially appears minor leads to a
great trade.
My setup

Laptop, single 5 min candle chart, 20 bar ema

No indicators!
Blinds closed, don’t take calls, don’t watch TV
Ignore the news and pundits
I don’t want any distractions or opinions
I am very focused
My job: take money from your account and
put it into mine (that is simply the game we
are playing!)
Brookspriceaction.com
Why does PA trading work if
everyone knows it?
Simple…Trading is very difficult to do well! The
margin for error is tiny and every little mistake
works against you being profitable.

Even the best analysis is right only about 60-

70% of the time.

 You are competing against the best traders in

the world in a zero sum game, and they want
your money.

There is a huge difference between knowing

how to play golf and playing it well enough to
 Edges are Fleeting and Small
This is a zero sum game and you are trying to
take money from very smart people.

All trading is subjective and hard.

Holy Grails do not exist. If you had one, those

smart people would stop giving you their
money and in fact would start doing what you
are doing.

There wouldn’t be anyone left to take the other

side of the trade and it would stop working.
Brookspriceaction.
 Successful traders base
every trade on math
They ask, “Will I probably make money on this trade?”

They might determine the probability by using computer

testing or
by relying on years of personal experience.
Everyone at least subconsciously, uses the Trader’s
Equation.
Only take a trade if:
the chance of success times the reward (how far your profit
target is)
is “significantly” greater than
the chance of failure times the risk (how far your stop is)
(“significantly”, to cover commissions, slippage, mistakes,
Brookspriceactio
Trader’s Equation
Example: An Emini setup looks good enough to
make
2 points, using a 2 point stop. For you to believe
that, you have to be at least 60% certain, so the
probability of success is 60% and the chance of
failure is 40%. Commissions = $5, or 0.1 pt.

Chance of success x reward = 60% x 2 pts = 1.2

pts
Chance of failure x risk = 40% x 2 pts = 0.8 pts

Since 1.2 pts is more than 0.1 (“significantly”)

greater than 0.8, the trade has a positive Trader’s
Equation, and you have a mathematical
advantage (an “edge”) when taking the trade.
Institutions control the
market
The large moves on the 5 minute chart and
all of the swings on daily charts are due to
traditional institutions placing trades based
on fundamentals.

The small swings on the 5 minute chart are

due to program trading and most of it is
based on statistics and not fundamentals.

60 Minutes reported that a High Frequency

Trading firm was placing 40 million trades a
day on a basket of 4,000 stocks with a goal
of making a penny per trade. Brookspriceactio
The day is controlled by
program trading.
The algorithms are based on every imaginable
concept.

Even in quiet trading ranges, the volume is huge

and countless firms are continuing to buy and
countless others are continuing to sell.

The bullish programs are fighting to create an

upside breakout and the bearish programs are
fighting to create a downside breakout.

Eventually one side wins and the other side

covers.
Brookspriceaction.com
 MARKET INERTIA
Always bet that the market will continue to do
what it has been doing

When the market is trending, 80% of attempts

to reverse will fail (so trade in the direction of
the trend)

When the market is in a trading range, 80% of

attempts to breakout into a trend will fail (so
trade in the opposite direction of the incipient
trend)
Brookspriceactio
n.com
Starting Out
 Starting out, be very selective and take only the
best 1 – 3 trades per day. Never risk more than
your reward.

 After becoming consistently profitable, work on

increasing position size rather than the number of
trades.

 Trade small enough to be in “I don’t care” mode

 If you can average just 1 point/day:

10 contracts per trades = $100,000/year
25 contracts = $250,000
100 contracts = $1 million
Brookspriceaction.com
Can anyone really make
money at this?
 Yes, but it is difficult. Some supposedly make a
fortune:
 Do a search for Paul Rotter
 Supposedly places up to a hundred trades a day
for 3 ticks and made $60M a year for many years

http://www.trading-naked.com/paul_rotter.htm
and
http://www.traderdaily.com/?p=4399

Brookspriceaction.com
Brookspriceaction.com
Brookspriceaction.
com
Spikes (Breakouts) are
common
They form every few bars all day long

In trends, they are followed by pullbacks or

pauses and then more trending.
Only 20% of climaxes in trends lead to trend
reversals.

In trading ranges, they are climaxes that

lead to reversals.
Only 20% of breakout attempts lead to trends.

Brookspriceaction
…and so are Failed
Breakouts!
 There are traders buying above the high of every
bar, and other smart traders selling, believing the
opposite of you.

 There are traders selling below the low of every bar,

and other smart traders buying, believing the
opposite of you.

 Traders must constantly look for edges, which are

mathematical advantages.

 If a trader believes that the buyers will win above or

below a bar, he should buy.
 If he believes that the sellers will win, he should sell.
 If he is uncertain, he should wait.
Brookspriceactio
n.com
Brookspriceactio
n.com
Brookspriceactio
n.com
Brookspriceactio
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Brookspriceactio
n.com
Brookspriceactio
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Trading ranges
and the vacuum effect

Strong bull spikes near top:

The bears think the market will go a little higher
so they wait for it to get there and then short
heavily and relentlessly. The bulls expect the
same and wait to take profits there.

Strong bear spike near bottom:

The bulls think the market will go a little lower
so they wait for it to get there and then buy
heavily and relentlessly. The bears wait to take
profits there.
Brookspriceaction.
Vacuum effect
For example, near the top of a trading range:

Once bearish institutions believe that the market

will test a little higher to the top of the range,
they stop selling. The bulls expect the test as well
and wait to sell out of longs.

Both believe the market will go a point or two

higher so it does not make sense for them to sell
until market gets there.

This creates a buy imbalance and market races

up.

Bears appear out of nowhere once in their sell

Brookspriceaction.c
Brookspriceactio
n.com
Brookspriceactio
n.com
The more of the following
characteristics that a bull
breakout has, the more likely
the breakout will be strong:
The breakout bar has a large bull trend
body and small tails or no tails. The larger
the bar, the more likely the breakout will
succeed.
Brookspriceactio
n.com
The more of the following
characteristics that a bull
breakout has, the more likely
the breakout will be strong:
The spike goes very far, lasts several bars,
and breaks several resistance levels like
the moving average, prior swing highs, and
trend lines, and each by many ticks.
Brookspriceactio
n.com
The more of the following
characteristics that a bull
breakout has, the more likely
the breakout will be strong:
As the first bar of the breakout bar is
forming, it spends most of its time near its
high and the pullbacks are small (less than
a quarter of the height of the growing bar).
Brookspriceactio
n.com
The more of the following
characteristics that a bull
breakout has, the more likely
the breakout will be strong:
There is a sense of urgency. You feel like
you have to buy but you want a pullback,
yet it never comes.
Brookspriceactio
n.com
The more of the following
characteristics that a bull
breakout has, the more likely
the breakout will be strong:
The next two or three bars also have bull
bodies that are at least the average size of
the recent bull and bear bodies. Even if the
bodies are relatively small and the tails are
prominent, if the follow-through bar (the
bar after the initial breakout bar) is large,
the odds of the trend continuing are
greater.
Brookspriceactio
n.com
The more of the following
characteristics that a bull
breakout has, the more likely
the breakout will be strong:
The spike grows to five to ten bars without
pulling back for more than a bar or so.
Brookspriceactio
n.com
The more of the following
characteristics that a bull
breakout has, the more likely
the breakout will be strong:
As a bull breakout goes above a prior
significant swing high, the move above the
high goes far enough for a scalper to make
a profit if he entered on a stop at one tick
above that swing high.
Brookspriceactio
n.com
The more of the following
characteristics that a bull
breakout has, the more likely
the breakout will be strong:
One or more bars in the spike has a low
that is at or just one tick below the close of
the prior bar.
Brookspriceactio
n.com
The more of the following
characteristics that a bull
breakout has, the more likely
the breakout will be strong:
One or more bars in the spike has an open
that is above the close of the prior bar.
Brookspriceactio
n.com
The more of the following
characteristics that a bull
breakout has, the more likely
the breakout will be strong:
One or more bars in the spike has a close
on its high or just one tick below its high.
Brookspriceactio
n.com
The more of the following
characteristics that a bull
breakout has, the more likely
the breakout will be strong:
The low of the bar after a bull trend bar is
at or above the high of the bar before the
bull trend bar, creating a micro gap, which
is a sign of strength. These gaps
sometimes become measuring gaps.
Although it is not significant to trading,
they probably represent the space between
a smaller time frame Elliott wave 1 high
and a wave 4 pullback, which can touch but
not overlap.
Brookspriceactio
n.com
The more of the following
characteristics that a bull
breakout has, the more likely
the breakout will be strong:
The overall context makes a breakout
likely, like the resumption of a trend after a
pullback, or a higher low or lower low test
of the bear low after a strong break above
the bear trend line.
The market has had several strong bull
trend days recently.
Brookspriceactio
n.com
The more of the following
characteristics that a bull
breakout has, the more likely
the breakout will be strong:
There was growing buying pressure in the
trading range, represented by many large
bull trend bars and the bull trend bars were
clearly more prominent than the bear trend
bars in the range.
Brookspriceactio
n.com
The more of the following
characteristics that a bull
breakout has, the more likely
the breakout will be strong:
The first pullback occurs only after three or
more bars of breaking out.
Brookspriceactio
n.com
The more of the following
characteristics that a bull
breakout has, the more likely
the breakout will be strong:
The first pullback lasts only one or two bars
and it follows a bar that is not a strong bear
reversal bar.
Brookspriceactio
n.com
The more of the following
characteristics that a bull
breakout has, the more likely
the breakout will be strong:
The first pullback does not reach the
breakout point and does not hit a
breakeven stop (the entry price).
Brookspriceactio
n.com
The more of the following
characteristics that a bull
breakout has, the more likely it
will fail and lead to either a
trading range or a reversal:

The breakout bar has a small or average

size bull trend body and a large tail on top.
Brookspriceactio
n.com
The more of the following
characteristics that a bull
breakout has, the more likely it
will fail and lead to either a
trading range or a reversal:

The next bar has a bear body and is either

a bear reversal bar or a bear inside bar,
and 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).
Brookspriceactio
n.com
The more of the following
characteristics that a bull
breakout has, the more likely it
will fail and lead to either a
trading range or a reversal:

The overall context makes a breakout unlikely,

like 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 market has been in a trading range for
several days.
Brookspriceactio
n.com
The more of the following
characteristics that a bull
breakout has, the more likely it
will fail and lead to either a
trading range or a reversal:

The bar after the breakout bar is a strong

bear reversal bar or a bear inside bar.
Brookspriceactio
n.com
The more of the following
characteristics that a bull
breakout has, the more likely it
will fail and lead to either a
trading range or a reversal:

The bar after a bull trend bar has a low that

is below the high of the bar before the bull
trend bar.
Brookspriceactio
n.com
The more of the following
characteristics that a bull
breakout has, the more likely it
will fail and lead to either a
trading range or a reversal:

The first pullback occurs two bars after the

reversal.
Brookspriceactio
n.com
The more of the following
characteristics that a bull
breakout has, the more likely it
will fail and lead to either a
trading range or a reversal:

The pullback extends for several bars.

Brookspriceactio
n.com
The more of the following
characteristics that a bull
breakout has, the more likely it
will fail and lead to either a
trading range or a reversal:

The trend resumption after the pullback

stalls and the market forms a lower high
with a bear signal bar.
Brookspriceactio
n.com
The more of the following
characteristics that a bull
breakout has, the more likely it
will fail and lead to either a
trading range or a reversal:

The spike breaks above a resistance level

like a swing high, a bear trend line, or a bull
trend channel line by only a tick or so and
then reverses down.
Brookspriceactio
n.com
The more of the following
characteristics that a bull
breakout has, the more likely it
will fail and lead to either a
trading range or a reversal:

The spike barely breaks above a single

resistance level but pulls back before
breaking above other levels that are just a
little higher.
Brookspriceactio
n.com
The more of the following
characteristics that a bull
breakout has, the more likely it
will fail and lead to either a
trading range or a reversal:

A trader who bought on a stop above a

prior swing high would not be able to make
a scalper’s profit before there was a
pullback.
Brookspriceactio
n.com
The more of the following
characteristics that a bull
breakout has, the more likely it
will fail and lead to either a
trading range or a reversal:

As the breakout bar is forming, it pulls back

more than two thirds of the height of the
bar.
Brookspriceactio
n.com
The more of the following
characteristics that a bull
breakout has, the more likely it
will fail and lead to either a
trading range or a reversal:

As the breakout bar is forming, it pulls back

for at least a third of its height two or more
times.
Brookspriceactio
n.com
The more of the following
characteristics that a bull
breakout has, the more likely it
will fail and lead to either a
trading range or a reversal:

The pullback falls below the breakout point.

There are no gaps between the low of any
bar and the high of the bar two bars earlier.
Brookspriceactio
n.com
The more of the following
characteristics that a bull
breakout has, the more likely it
will fail and lead to either a
trading range or a reversal:

The pullback falls below the low of the first

bar of the spike.
Brookspriceactio
n.com
The more of the following
characteristics that a bull
breakout has, the more likely it
will fail and lead to either a
trading range or a reversal:

The pullback hits the breakeven stop.

Brookspriceactio
n.com
The more of the following
characteristics that a bull
breakout has, the more likely it
will fail and lead to either a
trading range or a reversal:

There is a sense of confusion. You feel like

you are not certain that the breakout will
succeed or fail.
Brookspriceactio
n.com
Additional Information on Price
Action

Where to find lots of other free examples of

5 min Emini charts that are analyzed bar by
bar?

http://www.brookspriceaction.com/viewforum.p
hp?f=1

Brookspriceaction.com