This is an example of Forex exchange market trading, showing how to trade a weak breakout in the EURUSD. It is from my Futures Magazine webinar for the Traders Expo earlier this week.
This is a transcript that was created by YouTube’s Close Caption voice to text, so it probably is not perfect.
Hi. I’m Al Brooks and today is July twenty first, two thousand thirteen. I am a professional trader I’ve trade for my counts for about twenty six years now and I’ve had a number of requests from people asking me to speak more about foreign exchange, the Forex market, so I’m using this blog today to do that. Earlier this week I gave a webinar for Futures magazine and Traders Expo I talked about a number of trades within that webinar and I do not know if the webinar was recorded and posted because of that I am going to be talking about one of the trades today to illustrate a point about forex trading.
Now when I look at magazines and websites, I come away with the impression that this is how you’re supposed to trade. You’re supposed that a lot of indicators and then on place trades and make money, and I totally think this is wrong. You know if you listen to the traders on Fast Money, or any professional trader, you do you don’t hear them talking about Fibonaccis and bands and oscillators and cycles and can Gann lines and or hear them talking more support and resistance and moving averages and prior highs and prior lows and trendlines. And this is that same chart and this is how I think most professional traders view the market. They draw trend lines below trends they put trend channel lines above and they look for patterns. You know for example here three pushes up a triangle so those short that in a bear channel. Here we got for central reversal a second entry and then a third. They’ll probably by this or they’ll wait for the strong bull breakup and then the by the breakout above the triangle another strong breakout built by the resumption of the trend here and this is how on I think most professional traders trade. this is price action, just looking for how the bars appear on the chart and the patterns that they create.
This is a common question that I get from traders. Now, what time frame does price action trading work, on different time frames, does it work in different markets? Well, this is to illustrate that point. if you take away the on vertical axis the price in the horizontal axis the time charts look the same. Here are three charts and if you did not see these labels below, you would not be able to tell that this is a daily chart of the stock market, General Electric during the nineteen eighty seven crash, you would also not be able to tell that this is a one minute chart on the forex market, the Euro versus the dollar, or that this is a five minute chart of gold, and that’s because price action, the movement of prices, is a reflection of human behavior, and it’s been that way since the beginning of time. I look at charts from a hundred years ago, and if I remove the labels I cannot tell them from today, even though most major markets are traded seventy percent by computers. The price action still the same.
Same basic rule for traders, traders not investors, you know, day traders, traders, holding for day or two or three, right…markets gravitate toward balance, the bulls and bears. The bulls want to buy the Bears want to sell, and market quickly gets to a price where both for them can do with the plan to do in the market, right, and that means confusion. Most the time the market is sideways and confused. Nothing wrong with that, right? You know that’s what the market is trying to achieve. It’s trying to find a price where the bulls are happy buying and the Bears are happy selling. If you take trades during those times, the probability of any long and the probability of any short is going to be between forty and sixty percent.it sometimes it favors one side sixty percent but it still forty percent for the other side, and the other side with a lower percentage probably has higher profit potential.
So, if you get better a probability of success, you probably have less profit left to the trade and probably a stop further away. It’s just a trade-off. Fundamentals are useless. They’re okay for investors holding for months at a time but for trader, fundamentals are useless, and I think that’s one of the main reasons why the CNBC show «money in motion» went out of business because they stressed fundamentals and the viewers knew that it was nonsense, nothing to do with making money. You can use any time frame, but I think it’s a mistake to use more than twenty bars per hour because you will not be able to do it profitably year after year after year. Another basic principle of trading. You should be going for reward at least two times as great as your risk except in a very high probability situation in which case you can go for reward equal to your risk.
Remember the higher the probability the lower the reward relative to risk because otherwise the trade would be too perfect, and perfect rates cannot exist because there has to be someone to take the other side, and that would be nobody to take the other side. I’m simple when it comes to how i view markets. They are either trending or they’re in a trading range. A trend begins with the breakout.as soon as the markets starts to have a pullback, the breakout was replaced by channel, and then the channel s followed by a correction and that results in a trading range, and then eventually you get another trend. You get a break out and either direction.
I spend ninety nine percent of my minutes during the day looking at a five-minute Emini chart, but every five, ten, fifteen minutes, twenty – thirty minutes, depending on how active the Emini is. I’ll take a look at this window which has six charts the bonds, gold, Euro versus the dollar, Forex, the dollar versus the yen, Forex, crude oil, and natural gas. Most the time the market looks like this and I don’t trade it. When it’s like this, I don’t trade it. Here I don’t trade it. This is where I make my money. Right. This is where I make money, this is where I make money. It’s hard to sit there for an hour or two at a time, waiting for these brief breakouts, but that’s work but you do if you want to make money. So when I look at the chart and if I see the early-stage a breakout, I’ll a place to trade. I glanced over at these charts, many times throughout the day, just for two seconds at a time, looking to see if on one of them is in the early stages of a breakout. if it is, then I’ll take a trade.
For example, here’s the Euro versus the dollar, and you can see it sideways. we have a wedge Bear Flag, three pushes up, one, two, three and instead of a bear breakout, we have a bull breakout. Had I noticed this chart at this point, as this bar was forming, I’d wait for the close. If it closed in the top half, top third, I’d buy the market, put a stop one tick below. If I happen to see the chart at this point, I’d buy that close and put a stop below the bottom of the breakup, which is below the low of this bar. Now this bars interesting. It closed in the middle, actually it closed below the midpoint and closed below this high, and a fairly prominent tail, and you look back and say, «Well, that’s a fairly prominent tail,» and so was that, and although these bodies are big relative to this, they’re not particularly big overall. They’re only about five pips tall, so this is not a strong breakup, so although I’d buy that close, I’d buy that close, I would not buy this close. At this point I say, «Yeah, I better start to look to buy pullbacks.» Now, the entire break up is only, you know, not twenty to thirty pips tall, right. So, I’m not going to go for a twenty pip scalp I’m going to go for ten pips scalp. Initially, I want to buy pullbacks, right. Traders look at this and see an expanding triangle. Three pushes up, one two three failed breakout. To me, we have a Bear Flag and a bull breakout.
Whenever you have a flag and a bull breakout, the market usually has two legs up. That means that there will be a pullback and then a second attempt up. I want to buy the pullback since I believe there’ll be a second attempt up. I think someone shorting below the low of this bar will not make a profit. So if they’re not going to make a profit, that means it’s a bad short, and if it’s a bad short, it’s a good long. So if I’m trading this chart and I look at it, and this is the first time I see this chart, I said weak break out, I want to buy pullbacks. I place a limit order to buy at the low this bar. okay, add-on thirty seven and I put a stop below the low this bar.so I’d put my stop below nineteen so I’d be risking pips I would also place a limit order to buy more about ten pips down. why ten pips?
Well, the Bears, if they’re shorting below this bar, beginning at thirty-six, they want to get out at twenty-six, which means the market has to fall to twenty-five.it has to fall twelve below the low of that bar for them to make ten pips on a short. I think they probably will not make their profit.so I think the market will not fall pips. Might fall ten pips or eleven perhaps, but probably not twelve. So for me, I’m going to buy this low. I’m going to look to add on ten pips lower so I’ll try to buy more at twenty-six and open to stop twelve below this low. Alternatively, I could simply place a limit order to buy ten or twenty pips below this close. So I’ll try to buy at thirty-six, which corresponds to a pip below this low, or try to buy twenty-six again, stop one pip below this bar. And this is what followed. Right? So, to me, I’d buy here, try to add on ten pips lower, at twenty-seven, and look what happened. the market fell by twenty-six, so I would have been filled my second order, so I’d be long at this low, and ten pips lower and I would get out of half at this original entry price, and I’d try to get out of the other half at this close because that was my original target.
Traders are buying closes here and then buying more here, and buying more here. It’s a reasonable thing to do. The market usually tries to come back to the closes after any pull back as long as it stays above this low. Chances are, it’ll come back to this close. Chances are, you know, high, you know, seventy percent eighty percent, right? So, that’s where I’d go flat. You can see lots of traders did just that, and that’s all I had to say about that trade.
I have a couple of websites BrooksTradingCourse.com and I sell videos, twenty-seven hours of videos on the site, and they go into great detail about price action trading. I have a second website, BrooksPriceAction.com. Traders run it, I provide content, and I also speak all daylong in my trading room. I talk mainly about the Emini, but I sometimes talk about commodities and stocks. And I talk about trades and again everything that I do is on a price action trading and I appreciated your time and attention. Thank you.
