al-brooksDoctor turned trader, Al Brooks, started out trading before the ’87 crash. The day of the crash he stood to earn $400k but had to closed out his position (before he went to work) at a loss of $5k. That day he decided there was pretty good upside to being a trader and two years later when his girls were born he decided to sell his practice and become a full time trader. He’s now the author of four books on price action trading and still trades to this day.

In the show Al reveals:

  • 3 indicator types that will trip you up
  • How you should be trading a range and a trend
  • His unique discretionary approach to trading
  • Where you should place your stops
  • Why he’s no longer an automated trader
  • What’s missing if you just look at risk and reward

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40: Al Brooks on Dominating Price Action, Understanding Probability & When to Buy vs Sell
00:00:00 00:00:00

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Interview links

Key Insights

General Lessons

  • A doctors approach to learning to trade was a failure, i.e. trying to copy what other people were doing
  • Nobody uses Gann lines anymore because they’re a fraud – Al doesn’t know anyone who consistently makes money using Gann lines
  • Indicators are just another variation of a price chart
  • Trend lines on time charts are very reliable
  • There are 81 five minute bars in the day – an average day he’ll see 40 one point scalps, 20 two point scalps and 60-70 setups
  • A lot of Fibonacci is fraudulent
  • 50%, 75% and 100% retracements are extremely important
  • There are a lot of things out there that look like they are the cause of something when in fact they are just correlated, e.g. an average Emini day has 10 points (40 ticks vertically – top to bottom) – There are probably 40 Fibonacci levels during that day, so almost at every level of the day
  • Most Oscillators are fraudulent and useless
  • Starting out, traders should use a stop, but for most of the bars on the chart a stop order is a losing strategy
  • On most of the bars on the chart a trader stands to make more money with limit orders, using wide protective stops, scaling in and trading small
  • If you can read a chart you don’t need indicators to know if a trend is about to reverse or resume
  • On the Emini every tick is important. Some people call it noise. Every time Al hears that he thinks, either the person is ignorant or they just haven’t taken the time to understand what the market is doing – everything that happens; happens for a reason
  • 70% of the trades on the Emini now are placed by computers, based around logic and algorithms
  • Risk to reward is really deceptive. There’s actually three variables. Risk to reward is meaningless unless you talk about probability. Every trade, every trader takes is either from risk to reward or probability. They rarely get a great risk to reward trade with high probability of success. There always has to be a reason for somebody to take the other side of your trade. So if your trade has a high risk to reward ratio, you have very little chance of winning, so the guy on the other side has a very high probability of winning.
  • Scalpers have a very high winning percentage, but end up having a bad reward relative to the risk. But if you win a higher enough percentage you can offset a bad risk reward.
  • Traders who are looking for great reward with very little risk are going to lose most of the time
  • For 90% of bars on any chart, you could buy or sell and you’d have between a 40% and 60% chance of success
  • When 10% of the bars are in a breakout (up or down), during those times the probability is (overwhelmingly) in one direction
  • Start out trading Forex because you don’t need a large deposit or to risk a lot per trade
  • The market can do one of three things, it can be in a breakout (no pull backs), it can be in a channel, it can be in a trend with a lot of pull backs, or it can be in a trading range
  • Learn the market cycles mentioned above first and foremost
  • A lot of times the market will be in a channel, pay attention to how deep the pullbacks are. Are they only lasting 1-2 bars or 10-20 bars, i.e. is the market making big swings. When the market starts making pullbacks, traders always start to fade (they start imagining tops in a bull channel), but if the pullbacks are only a bar or two or three, and not very deep, if you look at a higher timeframe chart (15 or 60 min), that bull channel on the 5 minute chart is in fact a very strong breakout on the 15 or 60 minute chart. So, if the pullbacks are not deep (only lasting a bar or two or three and they’re not falling down many points), even though you’re seeing pullbacks, only trade in the direction of the trend.
  • A mistake new traders make is looking for reversals when a trend is going on
  • A trading range is made up of two legs up and two legs down and the second leg is usually strong. People are naturally hopeful and because of that, when it’s in a trading range, traders see it going up and think that it’s going to be a breakout which will lead into a trend. So they buy a very strong bull bar at the top betting that it’s the start of a trend. They sell a very strong bear bar at the bottom thinking “this time, for sure, we’re going to breakout and get into a big trend”. But if you’re buying at the top, you’re stop is going to be far away (risk is big) and you’re probability is low. So, here is a trade with big risk and low probability. So, do I want to sell that strong bear bar at the bottom? No, I’m doing the opposite. So, the guy who is selling has big risk and low probability and if I’m doing the opposite, I have much less risk and a higher probability.
  • 80% of the time the market is going to continue doing what it’s currently doing, e.g. if it’s trending 80% of reversal attempts are going to fail (so you shouldn’t be looking for reversals). Same goes for if it’s in a trading range and 80% of breakout attempts up or down will fail.
  • Understanding probability is key to being a successful trader
  • Get to the point where you “truly” don’t care about the position size – so start small with Forex until you truly don’t care
  • A lot of traders exit too early – so place a logical stop loss and take profit then go for a walk

Al’s Trading

  • He removed all indicators from his charts and just looks at price
  • He uses time charts only, not tick charts or other types of charts
  • He trades the 5 minute chart only and doesn’t need any other timeframes or charts
  • He likes watching every tick during the day
  • On an average day he’ll take 10-30 trades
  • On a good day he’ll win 100% of trades (He knows several day traders who win 90% of the time, every day or almost every day)
  • He’s never had a year where he’s won every day of the year, he’ll always mess up one day for some reason – his goal is to do a full year of winning days
  • He looks at every bar in the chart and asks himself, “Are there more buyers? Are there more sellers?”
  • When the bar closes he asks himself, “Above the high of the bar, are there more buyers or are there more sellers?” and asks the same for the low of that bar
  • If the market is going sideways and above the high of the bar there will be bulls buying 1 tick above the high of the bar and bears selling 1 tick below the low of the bar. The flip side of that is “limit order traders” taking the other side of the trade, e.g. we have a bar that looks like a buy signal, you know there are bulls buying 1 tick above the high of that bar (well, guess what, Al is selling with a limit order at the high of that bar, taking the other side of the trade, thinking that there are more sellers than buyers above the high of that bar). The same is true below the bar. There are always traders saying, “if it’s goes 1 tick below this bar it’s going down”. Half the time Al is setting a buy limit order to buy the low betting that the bear breakout fails because most breakout fails.
  • If the market is in a trend, that’s another story. Al is looking for stop entry trades as well as limit order trades. If the market is in a trading range and is reversing up from the bottom he will take a stop entry trade
  • He doesn’t need to look at Order Flow or Depth of Market, he can see where the orders are – he can see areas of support and resistance during the day and knows there are huge orders at those prices
  • His trading is 100% discretionary
  • He’s spent over 10,000 hours designing, testing and trading automated strategies – he then decided that he was too controlling and obsessive to be an automated trader because he kept overriding his automated systems
  • A lot of what Al does, people can automate – people have automated different parts of what he teaches and have done well from themselves
  • Al doesn’t get big draw downs and keeps his risk to 1-2% of his trading accounts
  • Sometimes he’ll get 2 losers in a row, rarely he’ll get 3
  • He’s always drawing line of charts when he trades, i.e. trend lines, measured moves, 5 minute and 60 minute moving averages, yesterday’s high and other significant prior highs/lows
  • If the market is sideways he’s looking to buy below prior lows, sell above prior highs and sell more higher and scalp. So, buy low, sell high, scale in, use wide stops and scalp.
  • He’s always thinking about the market in terms of a cycle, i.e. it’s either in a trend or a trading range
  • He loves strong breakouts because it’s the highest probability time for trading (but high probability means smaller reward and less risk). By the time you’ve had a big breakout there’s probably not much left to the move and your stop is far away.
  • When the market starts to enter the channel he starts doing limit order trades against the channel, once it starts to become broad.
  • Whenever Al is confused as to the type of market it is, it’s probably in a trading range and he can be confident the market is not going to go very far so he’s not going to be swing trading (he’ll be looking for scalps)
  • When he places a trade most of the time he want’s his reward to be twice his initial risk, but once the trade starts going his way he ignore’s initial risk and looks at his actual risk – “How many ticks do I have to risk to stay in the trade at that point” – and he would take a reward that was twice that amount. But if it’s a high probability trade he’ll look at a profit target equal to his risk.

Al’s Trading Strategy

al-brooks-strategy

  • If the market is flat for a while and then it breaks out and rally’s for 100 pips, buy for any reason (at the market, below the low of the prior bar, above the high of the prior bar, any reason)
  • But only buy the breakout if it’s well above the highs of the past few days to be sure that it’s truly broken out of everything
  • The stop will be 100 pips away below the flat trading range
  • It’s a high probability trade, so we need a reward at least equal to risk. So the initial take profit is 100 pips
  • Let’s say we then have a 20 pip pull back and the market starts to go up strongly again. At that point the actual risk turned out to be just 20 pips, so mathematically we could exit with a 20 pip profit at this point. However, because the breakout was so big we have a good chance of making 100 pips. So we sit patiently and wait for the 100 pips.

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