5 Steps to finding today’s trades

 

Video duration 29min 21sec.

Download: Al Brooks’s Daily Setups Powerpoint Objects (3MB ZIP File)

5 Steps to finding today’s trades — Video transcript

Introduction

Hi, I’m Al Brooks. Thank you for watching this video. I want to share with you today an approach that I’ve had for more than three decades. At the end of every day, I look at my chart and I mark it up. I draw lines on it. I think about possible entries, possible exits, how to manage trades.

What I’m trying to do is recognize patterns so that when I see them tomorrow or next week or next month, real time, I can anticipate what will follow and I can structure a trade and then manage my trade successfully. I have the same routine, and I’ve been doing it for 30 years, and I want to go through it. I’ll give you the 5 steps that I use every day, and I hope that you find it useful. Thank you.

Al Brooks, MD: Biography

As many of you know, I’m a physician. I got my medical degree and I did my ophthalmology residency at the University of Chicago. I taught eye surgery at Emory University, and I was on the clinical faculty at UCLA. I published dozens of scientific papers on eye diseases way back in the 1980s.

As a trader, I’ve been day trading in five decades since the 1980s. I’ve lectured on four continents. I write a daily blog, which reaches about a million people a month worldwide. And I am a Master Trading Class instructor at the Chicago Mercantile Exchange (the CME). I’m also an author, and I’ve received some nice compliments from people who run very big platforms in the trading world. I created the Brooks Trading Course, which is available at brookstradingcourse.com, and I also speak daily in a trading room at brookspriceaction.com.

Main points

I think it’s really important as a trader to do the same thing every day, to develop a routine. I want to talk about the routine that I use. You may have seen many charts from me, either in books or on websites or on my daily blog, or on my daily blog on other websites. You’ll see lines and boxes and textboxes. I want to talk today about how I create all of that.

It’s important to approach every market and every timeframe the same. When you think about trading, trading is exactly that: it’s trading. You’re buying and somebody else is selling; you’re selling, somebody else is buying. It’s rational human behavior. Every chart is just a portrayal of rational human behavior, and it doesn’t matter what market it is. Doesn’t matter if you’re trading fruit in Africa. It doesn’t matter if you’re trading property in Europe. Buying an apartment, selling an apartment. It doesn’t matter if you’re doing stocks or commodities. It’s all the same.

It doesn’t matter on the timeframe, either. Therefore, when I look at a chart, a map of interaction between humans, it doesn’t matter what the market is. It doesn’t matter what the timeframe is. It’s all going to be the same. It’s based upon the same rational human behavior.

When I look at a chart and I’m going to mark it up, put lines on it, and try to look for patterns, I typically begin with the lines. I look for channels, Wedges. I look for Double Tops, Double Bottoms, and Triangles, and I draw lines to highlight those things.

Next I look at unusual bars, special bars. Very big bars. A bar that is small, its low above the low of the prior bar, its high below the high of the prior bar. An inside bar. Consecutive inside bars. An outside bar. A big bar followed by a bigger big bar. And then a combination of an inside-outside-inside bar. Things like that. I’ll talk about those as we go on.

Then finally, after I’ve highlighted the lines and the special bars, I next draw red and green boxes for where I would enter or where I think an ideal entry is. Then finally, I add textboxes.

I have hundreds of patterns that I rely on when I’m trading. I’ve developed them over the years. I’ve been watching pretty much every tick in the stock market now for well over 30 years. When you do that for such a long time, you tend to notice things. I have names for things. I classify things. I have an Encyclopedia of Chart Patterns available to traders on my website. I have things categorized. I look for those patterns to repeat every day, and I know what the market will tend to do once it starts to develop a pattern, and that helps me structure a trade.

When I’m marking up a chart at the end of the day for other people to study, I put the names of the patterns and some information about the pattern to help traders understand what they should do the next time they come across that pattern.

Traders must practice!

Traders must practice. If you’re a professional football player, you play on Sunday. You’re not staying home watching TV the rest of the week. You’re practicing every day. If you’re a professional musician and play for a major symphony orchestra, you’re going to practice as well. You may perform a few times a month, but you’re going to be practicing every day.

Traders should not just show up when the market opens and expect to do well. They should practice after the market closes. Spend some time reviewing the day’s price action on the charts that you trade and look for patterns. Think about what you did and what you could have done.

Same approach for all markets and all time frames

I said I use the same approach for all markets and all timeframes, and that’s true. What’s the key to practicing as a trader? It’s simply looking at charts and trying to find patterns. It’s obvious. The more you understand about what the market is doing and the better able you are to anticipate what it’s about to do, the more money you stand to make. The quicker you recognize a pattern, the faster you’ll be able to structure a trade.

How should traders practice? Look at charts

Here we’ve got a bear channel and we have a line drawn in across the top, but we’re trending down. We have a channel. We’re breaking below the channel and we are reversing up. We have three legs in a channel – one, two, and three. It’s a Wedge. Also, on this bar, we went down, we went up. On this bar, we went down and we went up. That’s a Micro Double Bottom. I call it a Micro Double Bottom because it takes place over 2, 3, or 4 bars. If you were looking at a much smaller timeframe chart, it would be an actual Double Bottom. The lows could be 10 or 20 bars apart depending on what timeframe that you looked at.

So it’s important to recognize this. You have a Wedge Bottom and a Micro Double Bottom, and now you have a bull bar closing on its high, and it’s a second consecutive bull bar. The odds are we’re going higher. It’s reasonable to buy on a stop 1 tick above the high of that bar. So you’d get filled on this bar.

At a minimum, you should always be trying to go for a profit that is at least twice your risk. If you buy on a stop above this bar and you put your stop just below it, this is two times your risk. So your risk is from your entry price to your stop, and that’s twice that distance. Therefore, your reward is twice your risk. If you do that, you’ll have structured a good trade. And if you do that consistently, you have a very good chance of being a consistently profitable trader.

When I talk about structuring a trade, I’m talking about thinking about your position size. Where’s your profit target? How much risk? How likely is it that you’re going to make your profit? You also have to be aware of what the market would do that would make you decide your plan is no longer valid. You should get out early sometimes.

Write on charts: Find setups everyday

I create my charts in PowerPoint. What I do is I use a capture program, like Snagit or the Windows snipping program. On my trading platform, I just capture the chart, and then I paste it into a slide on PowerPoint. Then I add the lines and the entry boxes, sometimes the exit boxes. Then I add text with the reason for my behavior.

Then look on the right over here. I have a bunch of objects, and I have that on all the slides in my PowerPoint. What I did was I created a bunch of little objects, and they allow me to quickly mark up a chart. So I have a small line. I can just hold the Control key, grab that line, move it over here, and then I can change its orientation, its starting point, its end point.

A textbox, if I want to create a textbox, I just grab this, hold the Control key, drag it down here, and then just change the text. If I want to change the color of the text, I just click on this and then over here, the format painter, and then drag it through the text. That’s how I create these charts.

Daily Setups: Blog and members’ version

I create charts every day. You’ll see them on my blog. I call them my Daily Setups. In my blog, it’s free. Anybody can look at them. This is a sample of a Daily Setup chart that is on my blog for anyone to see. It’s for the Emini, a 5-minute chart. I have price over here, I have time over here. I have lines, I have boxes, I have big things highlighted.

And then for people who subscribe to my charts – I have a service that they can subscribe to – I have much more information about what’s going on on the chart. Some people prefer the extra detail.

EURUSD Forex: 4-hour chart

This is a 4-hour chart of the euro versus the dollar, Forex market. So every bar is 4 hours. Here’s price here, here’s time here. I said before that traders trade based upon logic. It results in reliable patterns. People use the same logic in everything they do, and the result is that the patterns are present on all markets and all timeframes. And therefore, traders look at all charts and all markets the same. I don’t pay attention to price. I don’t pay attention to time. I just look at the charts.

If you watch TV and you see professional traders talk about a chart – they’ll sometimes talk about gold, crude oil, stocks, stock index futures – you never hear them say, “Oh, this is Apple, and therefore I’m going to trade it differently from how I trade gold or stock index futures.” They don’t say that, because they understand that the chart is just a representation of rational human behavior, and it’s going to be the same for all markets and all timeframes.

If I were to mark up this 4-hour chart of the euro versus the dollar, I would do it something like this. If you did not know it was a Forex chart, you would not be able to tell that it was a Forex chart. It could also be a stock index futures chart, an Emini chart. It could be gold. Because all charts look the same, and patterns are the same.

Gold futures: Monthly chart

Here’s a gold futures chart, and it’s a monthly chart. If I remove the price and time and mark up the chart, it looks the same as any other market and any other timeframe. Again, this is the monthly chart, but it has the same patterns that you see on any other chart and any other timeframe. When I’m marking up any chart, I’m always beginning with lines.

Early selloff: Late bull trend reversal

As I said, I think it’s really important to develop routines to do the same things every time, and I want to talk to you about my daily routine. How do I go from this slide to the next slide? I’m going to show you step by step. I start with this slide, a slide with nothing on it other than a 20-bar Exponential Moving Average – again, this is a 5-minute Emini chart. 81 bars to the day session.

At the end of the day, when I’m marking up the chart, this is what I have, and that’s the end of my practice. I have everything drawn in. I have a lot of textboxes explaining why I would do certain things. This is an example of a typical Daily Setup chart that is available for traders on my website.

Begin by looking for Wedges: 3 legs in a channel

All right, let’s talk about how I got there. First of all, I have a chart with nothing on it. Then I look for channels, Wedges. A Wedge is a channel, and it has three or more points. I can draw a channel up like this. There’s Point 1, Point 2, and Point 3. Sometimes Wedges are contracting; sometimes they’re not. This one’s fairly parallel, maybe a little bit contracting the way I have it drawn.

Rising Wedge: Only draw top line

When a Wedge is rising, I’m looking for a reversal down, so I’m really only interested in the top line. I don’t want too many things on my chart, so I don’t even draw that bottom line.

Perfect Wedges are rare: Usually 2 ways to draw line

No pattern is perfect. Most patterns are not perfect, and therefore I would not expect the three points to be exactly at the line. One of the two points here or here is going to be above the line. The more perfect a pattern is, the more computers will find it, the more computers will trade it, and the more reliable the pattern will be. The higher the probability it will unfold the way you want it to unfold.

I always start with Point 1, and then I could draw a line using Point 2, and the line would be there. Or I could use Point 3 to draw the line. Point 1 and Point 3. So there are two ways to draw the line. All lines start with Point 1, and I can either create a line using Point 2 or Point 3.

It’s rare to have a perfect Wedge where the three points are on the line. Almost all Wedges have either one of the two points above the line, or one of the two points below the line. The blue line, Point 3 is below, but the pink line, Point 2 is above the pink line. Point 2 overshot the pink line. Point 3 undershot the blue line.

Choose line with overshoot: Look for reversal at point 3

My routine is to always choose the line where there’s an overshoot. I like overshoots. Since the blue line has an undershoot, I’m not going to use the blue line. The pink line, here, Point 2, is an overshoot, and I want an overshoot either at Point 2 or Point 3. So I’m going to use the pink line and get rid of the blue line.

I’m looking to sell a reversal down from the top of a channel. If we start to reverse somewhere around a possible line using 1 or 2, I’m going to look to sell a reversal down, especially below a bear bar closing on its low, expecting lower prices.

Want line with overshoot: At either point 2 or 3

After I draw the first line, I then look for other channels, other Wedges, and there are many varieties. I have an Encyclopedia of Chart Patterns that talks about all the different ways that patterns can unfold and appear.

For example, we have another channel here. This is a bear channel, and we’ve got three or more points – one, two, and three. You can draw the line using Point 1 and Point 3. You can draw the line using Point 1 and Point 2. If I do that, Point 3 overshot the line. And remember, I want lines that overshoot. Here, Point 2 overshot. Here, Point 3. Point 2 here undershot the line. I don’t want lines that undershoot; I want lines that overshoot. So, I’ll get rid of the blue line.

Sometimes point 2 overshoots: Sometimes point 3

This is an example of a channel where the line from Point 1 to Point 2 created an overshoot at Point 3. Here’s an example of a line using Point 1 and 3 as an overshoot at Point 2, and therefore I’m going to choose 1 and 3 to draw the line here, but I’m going to choose 1 and 2 to draw the line there.

Find all: More opportunities to make money

There were many other Wedges on this chart as well, and I just keep adding lines for every conceivable Wedge. Some of them are hard to see. For example, there are three pushes down here – one, two, three. I have a little pink line there. It’s hard to see. And here, there are three points down – one, two, and three. When the pattern is small, it’s a Micro Wedge. And then here, I could also use one, two, three or four.

Remember, a Wedge is at least three lines. So we have a channel with at least three points in it, so that blue line is another way to draw a Wedge, and I’m looking for a reversal. We’ve got a reversal. I want to buy above a bull bar that closes near its high, hoping that we get a trend up.

Sometimes patterns fail. We got a push up here, big bar, and then a small bar. Then a big bar, a second push up, and then a bear bar, and then a third push up. So we have a Wedge and a very Tight Channel. I would call that a Parabolic Wedge. But we did not get a reversal down below the bear bar. Instead we get an upside breakout. So I would look to buy above the high of this bar, betting that the Wedge Top has failed.

Look for Double Tops and Bottoms: Use loose definitions

Next I’m going to look for Double Tops and Double Bottoms. Double Tops and Double Bottoms are rarely perfect. If you look for a perfect pattern, you’re not going to find many setups and you’re not going to trade very much. It’s better to be flexible. The more perfect something is, the more likely it will lead to a profitable trade.

Here we’re rallying. We broke above this high. But I always look to the left to see the context. If there’s a possible Double Top, we might get a reversal down. Here, we rallied, and it looks like we’re turning down. I’d be inclined to sell below this bar depending on reasons. I’ll look to the left to see if there’s a Double Top. This high might simply be a test of these highs, so it might be a Double Top with these highs.

Remember, I also had a Wedge here – one, two, three. So it’s a Wedge and possibly a Double Top with that high, maybe a Lower High Double Top with that high. So a Wedge and a Double Top is an added reason to look for a reversal down, selling below a bear bar closing near its low. There’s also a Micro Double Top here. This bar went up and down, and this bar went up, and here we’re going down.

So we have a Micro Double Top, a Double Top, and a Wedge. So there are several things going on here that would make me more inclined to take that short. Here’s another Double Top. The market tried to reverse up, but it failed in the neighborhood of that high. So it’s a Double Top bear flag.

I also want to look for Double Bottoms. The second low of a Double Bottom can be below the low of the first low. Here we tried to get a Double Bottom. Did not go very far. And here we have a Higher Low Double Bottom. Here’s a Lower Low Double Bottom. This low is below that low, and here, this low is above that low. So it’s a Higher Low Double Bottom. Again, a Micro Double Bottom. We went down here, we went up, we went down, and now we’re trying to go up again. You could buy above this bar or above a bar buying on its high.

Here we have a very big Double Bottom and it’s a Higher Low above the bottom of the bear trend. So it’s a Double Bottom Higher Low, and that has the possibility of being a Major Trend Reversal into a bull trend.

Sometimes Triangles: Contracting or expanding

There are often Triangles on charts, and again, they’re rarely perfect. We have rising lows here and we’re basically sideways here. We tried to break to the upside and that reversed down. So that’s a contracting Triangle. Sometimes Triangles are expanding. Here we have this high above that high, and this high is above that high. So we’re going up, and then here we’re going down. So an Expanding Triangle, five points – one, two, three, four, five – and we keep getting false breakouts. A new low, new high, new low, new high. Again, a reversal pattern. I’ll sell below that bar.

Special bars can be signal bars: Strong breakouts

I also look for special bars, big bars or small bars, inside bars or outside bars. Here we have 3 consecutive bull bars. Not much overlap, and this bar was closing on its high, this bar was closing on its high. So this is sustained, strong buying, and the context is good. Remember, it’s possibly a Double Bottom with this low, and the Double Bottom is above that low, so it’s possibly a Double Bottom Higher Low Major Trend Reversal. It’s a surprisingly strong rally. It’s a bull surprise rally, and bull surprises tend to have higher prices.

Special bars can be signal bars: ii, OO, ioi

What took place here? This bar, its high is at the high of that bar; its low is below. So that’s a variation of an outside bar. Look at the bar before it, this bar. Its high is above that bar; its low is below that bar, and therefore it’s an outside bar, and this is a bigger outside bar. So outside-outside, consecutive outside bars. It’s a BreakOut Mode pattern. Traders will buy if the market goes above, and they’ll sell if it goes below. So I’m looking for an OO, and I would sell below the low of that bar and below that bar. A bear bar closing near its low, I’d sell below that bar as well.

Buy setups: Buy above bull bar closing near its high

Here is the chart with all those lines drawn in and with the special boxes drawn in. Next, I’m looking for entries. If I’m looking to buy, I want to buy above a bull bar, preferably one that is closing near its high. If I’m looking to sell, I want to sell below a bear bar, preferably one that’s closing near its low.

Theoretically we have consecutive bull bars here. It’s reasonable to take that buy. However, it turned out to be a failure, and I would get out either below this outside bar or certainly below that, because at this point there’s a sell. Sometimes I’ll put an outline around a green box or a red box, and when I do that, I’m trying to highlight setups that are particularly good. They’re ones that a person starting out should try to take. Nobody’s going to take all of these setups. What you’re trying to do is take as many as you possibly can.

Stuff happens. You could be trading on the markets, you have to go to the bathroom, you’ve got to eat lunch, you could get a phone call. All kinds of things happen. It’s hard to watch every tick all day long. If this was a daily chart, it would be easier. You could simply look at the chart at the end of the day and place your orders for the open of the next day. But if you’re day trading and if this is a 5-minute chart – in this case, it is a 5-minute chart – it’s very easy to miss a lot of setups.

Sell setups: Sell below bear bar closing near its low

After I draw in the buy entries, I then draw in the red boxes, or sell setups. So this bar, reasonable to sell below. And here we have an OO pattern below the Moving Average. It’s an especially good sell, so I would sell below that or I’d sell the first pullback. And then here we have a whole bunch of things. We have an Expanding Triangle, a Micro Double Top, possibly a Double Top here, and we have a Wedge rally to a Double Top, and it’s nested.

We have a smaller Wedge here and a bigger Wedge here. So this is a very good sell. We have a second consecutive bear bar closing on its low. That’s also a higher probability sell, so I put a blue outline around the red box.

Add text: Highlight major terms (from Encyclopedia)

Then I add textboxes so people can understand some of the rationale for why I’m taking the trades. This is something you should consider doing every day at the end of the day, marking up your charts. You don’t have to write the textboxes in, but I would certainly draw lines and highlight special bars. If you do this for several months, you’ll begin to recognize patterns unfold during the day, and that will allow you to anticipate trades, and then when the trade triggers, you’ll be able to take it and you’ll be able to manage it well. That is what I mean by practicing trading.

Review

Again, it’s important as a trader to do the same thing every day, have routines. One routine is to mark up a chart at the end of every day to practice so that you’ll develop a lot of experience in your ability to recognize patterns.

Second, use the same approach for every market and every timeframe.

When I’m marking up a chart, I begin with lines. I usually begin looking for channels, Wedges, and then Double Tops, Double Bottoms, and Triangles.

After that I’m looking for unusual bars – for example, big bars or a series of big bars, Surprise Bars. I also look for small patterns like consecutive inside bars or consecutive outside bars, or an outside bar followed by an inside bar. That is an ioi pattern.

Finally, on my daily charts that I mark up for my website, I add boxes for buy entries and for sell entries, and then finally, I add textboxes that explain why I think something is a good buy or a good sell.

Concluding comments

Again, this is Al Brooks, and I want to thank you very much for watching this video. I hope that you found it helpful. I think it’s very important to have a routine every day that you do at the end of trading. It’s good to practice recognizing patterns and thinking about how you’ll manage them real-time, because you’re going to keep encountering the same patterns. The more patterns that you know, the faster you are at recognizing them, the more chance you’ll have at structuring and managing profitable trades. Thank you very much.

---