Contents Cover Series Title Page Copyright Dedication Acknowledgments List of Terms Used in This Book Introduction Part I: Price Action HIGH-FREQUENCYTRADING HOWTOREADTHESEBOOKS SIGNSOFSTRENGTH:TRENDS,BREAKOUTS,REVERSALBARS,ANDREVERSALS BARCOUNTINGBASICS:HIGH1,HIGH2,LOW1,LOW2 Chapter 1: The Spectrum of Price Action: Extreme Trends to Extreme Trading Ranges Chapter 2: Trend Bars, Doji Bars, and Climaxes Chapter 3: Breakouts, Trading Ranges, Tests, and Reversals Chapter 4: Bar Basics: Signal Bars, Entry Bars, Setups, and Candle Patterns Chapter 5: Signal Bars: Reversal Bars Chapter 6: Signal Bars: Other Types STRONGTRENDBAR REVERSALPATTERNS ALLBARSINACHANNEL Chapter 7: Outside Bars Chapter 8: The Importance of the Close of the Bar Chapter 9: Exchange-Traded Funds and Inverse Charts Chapter 10: Second Entries Chapter 11: Late and Missed Entries Chapter 12: Pattern Evolution Part II: Trend Lines and Channels Chapter 13: Trend Lines Chapter 14: Trend Channel Lines Chapter 15: Channels Chapter 16: Micro Channels Chapter 17: Horizontal Lines: Swing Points and Other Key Price Levels Part III: Trends Chapter 18: Example of How to Trade a Trend Chapter 19: Signs of Strength in a Trend Chapter 20: Two Legs Part IV: Common Trend Patterns Chapter 21: Spike and Channel Trend Chapter 22: Trending Trading Range Days Chapter 23: Trend from the Open and Small Pullback Trends Chapter 24: Reversal Day Chapter 25: Trend Resumption Day Chapter 26: Stairs: Broad Channel Trend About the Author About the Website Index Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding. TheWileyTradingseriesfeaturesbooksbytraderswhohavesurvivedthemarket’severchangingtemperament and have prospered—some by reinventing systems, others by getting back to basics. Whether a novice trader, professional, or somewhere in-between, these books will provide the advice and strategies needed to prosper todayandwellintothefuture. Foralistofavailabletitles,pleasevisitourWebsiteat www.WileyFinance.com. Copyright©2012byAlBrooks.Allrightsreserved. Thefirsteditionofthisbook,titled ReadingPriceChartsBarbyBar:TheTechnicalAnalysisofPriceActionforthe SeriousTrader,waspublishedin2009. PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey. PublishedsimultaneouslyinCanada. AllchartswerecreatedwithTradeStation.©TradeStationTechnologies,Inc.Allrightsreserved. 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HG4638.B7652012 332.63′2042–dc23 2011029297 Iwouldliketodedicatethisbooktomywonderfullykinddaughter,TessBrooks,whoseeslifeasfilledwith opportunitiesandseeksthemoutaroundtheworldwithouthesitation.Sheisabold,originalthinkerandadoer, andfillsherlifewiththedreamsthattherestofushavebutaretooafraidtopursue. Acknowledgments Myprimarygoalistopresentaseriesofcomprehensivebooksonpriceactionthataddressesthegreatestconcern amongreaders,whichwashowdifficultmyearlierbook, ReadingPriceChartsBarbyBar,wastoread.Iamdeeply appreciativeofalloftheconstructivecommentsthatreadershaveprovidedandthosefromtheparticipantsinmy daily live webinars. Many of these comments were incredibly insightful, and I have incorporated them in this currentedition.Iamalsothankfultoallofthetraderswhohavebeeninmylivetradingroom,becausetheyhave givenmetheopportunitytosaythingsrepeatedlyuntilIcouldclearlyarticulatewhatIamseeinganddoing.They havealsoaskedmanyquestionsthathavehelpedmefindthewordstocommunicatemoreeffectively,andIhave putthosewordsintothesebooks. Iwouldliketogiveaspecialthank-youtoVictorBrancale,whospentlonghoursproofreadingthemanuscripts andprovidinghundredsofveryhelpfuleditsandsuggestions,andtoRobertGjerde,whobuiltandadministersmy websiteandhasgivenmecandidfeedbackonthechatroomandthewebsite.Finally,IwanttothankGingerSzala, the Group Editorial Director of Futures magazine, for giving me ongoing opportunities to publish articles and speak in webinars, and for regularly giving me very helpful advice on how to become more involved with the tradingcommunity. List of Terms Used in This Book Allofthesetermsaredefinedinapracticalwaytobehelpfultotradersandnotnecessarilyinthetheoreticalway oftendescribedbytechnicians. alwaysin Ifyouhavetobeinthemarketatalltimes,eitherlongorshort,thisiswhateveryourcurrent positionis(alwaysinlongoralwaysinshort).Ifatanytimeyouareforcedtodecidebetweeninitiatinga longorashorttradeandareconfidentinyourchoice,thenthemarketisinalways-inmodeatthat moment.Almostallofthesetradesrequireaspikeinthedirectionofthetrendbeforetraderswillhave confidence. barbwire Atradingrangeofthreeormorebarsthatlargelyoverlapandoneormoreisadoji.Itisatypeof tighttradingrangewithprominenttailsandoftenrelativelylargebars. barpullback Inanupswing,abarpullbackisabarwithalowbelowthelowofthepriorbar.Ina downswing,itisabarwithahighabovethatofthepriorbar. bearreversal Achangeintrendfromuptodown(abeartrend). blownaccount Anaccountthatyourlosseshavereducedbelowtheminimummarginrequirementssetby yourbroker,andyouwillnotbeallowedtoplaceatradeunlessyoudepositmoremoney. breakout Thehighorlowofthecurrentbarextendsbeyondsomepriorpriceofsignificancesuchasaswing highorlow,thehighorlowofanypriorbar,atrendline,oratrendchannel. breakoutbar(orbarbreakout) Abarthatcreatesabreakout.Itisusuallyastrongtrendbar. breakoutmode Asetupwhereabreakoutineitherdirectionshouldhavefollow-through. breakoutpullback Asmallpullbackofonetoaboutfivebarsthatoccurswithinafewbarsafterabreakout. Sinceyouseeitasapullback,youareexpectingthebreakouttoresumeandthepullbackisasetupforthat resumption.Ifinsteadyouthoughtthatthebreakoutwouldfail,youwouldnotusetheterm pullback and insteadwouldseethepullbackasafailedbreakout.Forexample,iftherewasafive-barbreakoutabovea beartrendlinebutyoubelievedthatthebeartrendwouldcontinue,youwouldbeconsideringshortingthis bearflagandnotlookingtobuyapullbackimmediatelyafteritbrokeouttothedownside. breakouttest Abreakoutpullbackthatcomesclosetotheoriginalentrypricetotestabreakevenstop.It mayovershootitorundershootitbyafewticks.Itcanoccurwithinabarortwoofentryorafteran extendedmoveoreven20ormorebarslater. bullreversal Achangeintrendfromadowntrendtoanuptrend(abulltrend). buyingpressure Strongbullsareassertingthemselvesandtheirbuyingiscreatingbulltrendbars,barswith tailsatthebottoms,andtwo-barbullreversals.Theeffectiscumulativeandusuallyiseventuallyfollowed byhigherprices. candle Achartrepresentationofpriceactioninwhichthebodyistheareabetweentheopenandtheclose. Ifthecloseisabovetheopen,itisabullcandleandisshownaswhite.Ifitisbelow,itisabearcandleandis black.Thelinesaboveandbelowarecalledtails(sometechnicianscallthemwicksorshadows). charttype Aline,bar,candle,volume,tick,orothertypeofchart. climax Amovethathasgonetoofartoofastandhasnowreverseddirectiontoeitheratradingrangeoran oppositetrend.Mostclimaxesendwithtrendchannelovershootsandreversals,butmostofthosereversals resultintradingrangesandnotanoppositetrend. countertrend Atradeorsetupthatisintheoppositedirectionfromthecurrenttrend(thecurrentalways- indirection).Thisisalosingstrategyformosttraderssincetheriskisusuallyatleastaslargeasthereward andtheprobabilityisrarelyhighenoughtomakethetrader'sequationfavorable. countertrendscalp Atradetakeninthebeliefthatthereismoretogointhetrendbutthatasmallpullback isdue;youentercountertrendtocaptureasmallprofitasthatsmallpullbackisforming.Thisisusuallya mistakeandshouldbeavoided. daytrade Atradewheretheintentistoexitonthedayofentry. directionalprobability Theprobabilitythatthemarketwillmoveeitherupordownanynumberofticks beforeitreachesacertainnumberofticksintheoppositedirection.Ifyouarelookingatanequidistant moveupanddown,ithoversaround50percentmostofthetime,whichmeansthatthereisa50–50 chancethatthemarketwillmoveupbyXticksbeforeitmovesdownXticks,anda50–50chancethatitwill movedownXticksbeforeitmovesupXticks. doji Acandlewithasmallbodyornobodyatall.Ona5minutechart,thebodywouldbeonlyoneortwo ticks;butonadailychart,thebodymightbe10ormoreticksandstillappearalmostnonexistent.Neither