Video duration 1hr 6min. Podcast first published January 28, 2020 by Portal Price Action, Brazil, for the Brazilian Brooks Price Action community.
Brazil’s legion of Al Brooks price action fans
FELIPPE: Hi, Al. How are you?
AL: I’m very well, Felippe. Thank you for inviting me.
FELIPPE: Thank you for being here, for attending this interview. As you know, Portal Price Action is a community dedicated to price action with over 15,000 fanatics for your methodology here in Brazil. We study and apply it every day. The following questions are the results of those questions from these traders that I compiled and rephrased here to fit.
The first question is about it. You are an Amazon bestselling author and have fans all over the world, but are you aware that thousands of people love you here in Brazil? How do you feel about having a legion of engaged fans from a country that cannot even speak your language, nor have access to the crème de la crème of material you have produced?
AL: I’m flattered, but that’s not my motivation. I wanted to help people. It took me a long time to understand how to trade, and it’s amazing to me that there are no very good resources out there to help people learn how to trade. If you work for Goldman Sachs or JP Morgan, they’ll teach you. They’ll teach you some things in business school. But the vast majority of other people, they have no way to learn how to trade except on their own.
I thought, “Wow, I can do something useful.” It makes me feel like I’m doing something good, and I like helping people. I like doing good things.
Keeping focus to succeed at trading
FELIPPE: Great. I actually felt that in my skin because I lost money for so many years before I found your first book. Really amazing what you do for traders, Al.
Second question: you’ve said that you decided to become a full-time trader just a few months before you became a father. I imagine your costs probably rose. Since you stayed a long period without making any money – 10 years, if I’m not mistaken – you probably were under a lot of pressure and anxiety. To make things worse, over this long period, you tried to learn and apply different approaches without success, and that brought a lot of frustration, I can imagine.
You had the option to get back to work as a doctor, which is way more stable, but decided to keep trying trading and developing your own style with no guarantees. What kept you focused and confident that you would succeed, and what do you have to say to traders that are facing similar challenging moments?
AL: I have a few things. Let me give some background information. I’m in the United States, and it’s easy to assume everybody in the United States is rich. I was not born rich. There were six of us, four kids and my parents. We lived in a small house. No shower. We had a bathtub. I did not get a shower until I was in high school.
My father was born in 1904, and he stopped going to school when he was 8 years old and he worked in a factory all his life. I never had new clothes. We always bought our clothes at secondhand stores. So I grew up poor, and I hated being poor. I just decided I was not going to stay poor.
My mother – back then, in the 1950s and 1960s when I was young, doctors were held in very high esteem in our community. My mother, her dream was for her son – first of all, her dream was for her son to become a priest because back then, every Catholic family had to have a son or daughter become a priest or a nun. I was the oldest son, and it became clear that she did not think of me as priest material. Therefore, the second-best choice was to become a doctor. That was the second most honorable or prestigious thing that she could have for her son.
So she decided that she wanted me to become an eye surgeon. I don’t know why she picked eye surgeon, but that’s what she picked. So all my life, I grew up thinking “I’m going to become an eye surgeon because that’s the honorable thing to do. My parents want me to do that. That’s what I have to do.” So I went ahead and I did everything I could to become an eye surgeon.
Among the different medical specialties, eye surgery, ophthalmology, is one of the most difficult to get in, in part because you work relatively few hours as an ophthalmologist in private practice and you can make an incredible amount of money. So a lot of doctors in medical school want to get into eye surgery residencies. They’re hard to get in. I was fortunate and I got in.
But all of the time that I was in Chicago – Chicago was the home of Chicago Board of Trade and Chicago Mercantile Exchange, so commodity futures, bond futures, and the stock index futures market was there. All the time when I was in Chicago, I just kept feeling like, “I’m in the wrong place, and I should be in the business school or I should be in downtown Chicago, trading the pit. That’s what I really want to do. I don’t want to be cutting out eyeballs. I don’t want to be seeing a bunch of patients. I want to be a trader.”
I just so much wanted to do that, and I was afraid. I was afraid of disappointing my family, and also, here I was on a path that would make me have a very good lifestyle in the United States – I would make a lot of money as an eye surgeon – and I was afraid to give it up.
Anyway, I did it for a number of years. I was a young guy. I was very aggressive. I built up a very big practice. I was maybe 34 years old with 17 employees, which is really pretty remarkable. I also built a surgical center and got it approved by the United States government, Medicare. So I had a big operation going. I was making an incredible amount of money. I was making over a million dollars a year back in the ’80s. That’s take-home pay, and that is a lot of money.
Fortunately, I was able to save a lot of money. I decided that I really should not be doing this. I’ve got one life, and as much as I want to be honorable and do what my mother wants me to do, I have one life, and I want to do what I want to do. I felt like I did what she wanted me to do for long enough, and I decided, “I really want to trade. I’m going to start trading.” That’s what I started doing.
I picked a funny month to begin. I started trading in October of 1987, and I traded aggressively, traded very big volume – much more volume than I should have for a beginner. On the day of the stock market crash in 1987, I had a very large short position. I put it on that morning. But I also had a very full surgery schedule, and I had to exit my position and go to work and do my eye surgery.
As I was driving to work, the stock market was crashing. Nobody knew how much it was crashing. I liked listening to the stock market news reports, and nobody knew what the stock market was doing. Nobody knew what the price was, which was crazy. At the end of the day, they came up with a final price. The stock market was down about 25%. Had I held onto my position, I would have made $400,000 on that one day, and in today’s dollars that would be over a million dollars in a single day of trading.
I decided, “Hmm, maybe I can do this,” and I decided to become a trader. But all my years trying to get into medical school, and then once in medical school, the routine that worked was you read books, you listen to people ahead of you, and you try to copy what they’re doing.
You’re too young to know this, but back in the ’80s, the trading world was filled with dishonest people – liars, thieves, crooks. In the United States the government has cracked down on that, so now that’s much less a problem, but back then it was just filled with very, very dishonest people. I paid all kinds of money to hire tutors, to go to conferences. I read every book out there. I was very good at following the rules, just like as an eye surgeon, I was very good at following the rules and was a good eye surgeon.
But I was losing money, and I kept losing money, and I didn’t understand how that could possibly be. Growing up, everybody I knew was honest, so I just assumed that everybody in the world was honest. I came to the inescapable conclusion that all of these people who were teaching people how to trade were liars. It was just all fraud. I decided that, well, obviously there are big companies out there who were making money, and why can’t I do it? I’ve been successful all my life, and I should be able to be successful at this.
So I decided to get rid of all the indicators on my charts and just look at charts, just look at the bars and try to look for patterns. I thought that trading was based upon rational human behavior and repeatable human behavior, and therefore there would be patterns, and if I could learn enough patterns, I should be able to trade. It took me years to come to that conclusion, about 10 years. As I said, I made a lot of money as an eye surgeon, and I could have retired and stayed retired for the rest of my life. I had a lot of money. So for me it was not a big financial problem quitting eye surgery and staying home to raise my kids.
Anyway, I decided to build it from scratch, ignore what everyone else has said, and try to understand it for myself and try to put it into words. I’m very good at classifying things and trying to put things into words. At least, I think I am. At least, in my mind I can eventually solve problems and come to peace. That’s how I approach the market. I try to look at patterns, understand why they were forming, and then understand what is the likelihood that they will lead to the market going up or down.
I just spent years and years and years doing that. For the past more than 30 years, I’ve been looking at charts real-time, tick by tick by tick. I can’t imagine that there’s another person on the planet who has looked at charts as much as I have looked at charts. I save charts every day. I’ve been doing that for 30 years, so I have a big collection of charts, and I have them classified into different patterns, and now I’m very good at seeing patterns unfold and anticipating what patterns will unfold.
I want to say one other thing about my career change. In 1988, I had a daughter, and then 15 months later I had identical twin daughters. So I had three daughters until the age of 15 months, and that was a big, big focus for me. So yes, I was trading in 1988, 1989, but I was also trying to raise daughters, and I also thought, “Gosh, I am so fortunate to have three really healthy young girls who appear to be very, very smart. I don’t want to go to my office in downtown Los Angeles every day. I want to be home with my kids, and I want to trade.”
So for me, it was a big magnet at home, and I decided that I was just going to sell my practice and stay at home, raise my kids and trade. For the first few years, it was more raising kids than it was trading, but as time went on, it became more and more trading, and I became very good at figuring things out. After about 10 years, I finally felt like I understood enough and I had enough confidence – one of the things that’s difficult for a trader starting out is confidence. “Do I trust what I’m doing? Do I believe that the patterns will be profitable?” It takes years to get the confidence, trust the math.
One of the problems with trading is everybody wants 100%, right? They want to take a trade and they want 100% certainty that they will make money, and that’s not how trading is. Trading, you’re in a gray fog. Nothing is ever as clear as you want.
Every trade that you take, you have to assume that there’s an institution taking the opposite side of your trade. There’s also an institution taking your side of the trade, but there are always two institutions trading. Therefore, you’ve got to be thinking that at every given instant, the math is pretty close for the buyers and the sellers, and that’s true for all markets. You have to assume that there’s probably a way to make money buying and probably a way to make money selling at every instant, all day long, if you know how to structure the trade and if you know how to manage the trade.
Over the course of years, I developed a set of rules that I use for trading, and it works. I’m sorry for the long answer to your question.
Does ‘Mr Average’ have any chance in market?
FELIPPE: No, it was great. I’m almost applauding here. In fact, it’s very difficult for people to think in probabilities. We want to be sure before we put a trade. It’s very hard to think that it’s real. The chance to lose money on any trade is real, so it’s hard for most people. I think you are the world champion in thinking about patterns, Al. I really do.
Third question: you are a successful trader, a surgeon, a bestselling author, and a fast thinker, so I think we can safely say you have an above-average intelligence. That’s also the case for many good institutional traders, which we trade against every day. Do you think an average guy has any chance in the market? If a guy is not a fast thinker and he is aware of that, how do you think he can improve his odds?
AL: I want to say two things. First I want to brag. I have three daughters. They graduated from the University of California at Berkeley, Yale University, Harvard University, Stanford University, they got into Princeton, Columbia, Penn – in the United States, these are the absolute best schools in the country.
FELIPPE: Wow.
AL: You can assume that they must have a very smart mother.
FELIPPE: [laughs] Well, I’m sure they do. I believe you. I believe all of them, the so-called Ivy League, all of these –
AL: Ivy Leagues, yeah. They’re the best schools in the country. Best schools in the world. Let me go back to your question.
FELIPPE: Okay.
AL: Are you familar with Warren Buffett?
FELIPPE: Of course, yes.
AL: Warren Buffett is probably the world’s greatest, most highly respected trader. He’s now I think 89 years old. What most people don’t know is he has a partner, Charlie Munger. Have you heard of Charlie Munger?
FELIPPE: I heard, but I don’t know much about him.
AL: I know two things about him. One is he was a lawyer, and he started a very prestigious law firm. It’s a very high-end law firm. All of his lawyers went to Harvard, Stanford, and Yale, the three best law schools in the county. One of my daughters is one of his lawyers. So I have that connection to Charlie Munger.
And then Charlie Munger also says something – he occasionally says what I’m about to tell you, and it directly answers your question. Charlie Munger says he would rather have someone with an IQ of 130 who thinks his IQ is 110 than someone with an IQ of 150 who thinks his IQ is 170. He wants people who can accept being wrong. For trading, it’s really important to accept being wrong.
As far as being a fast thinker goes, you and I are both competing against high frequency trading firms, and most of the buying that takes place every day is being traded by high frequency trading firms. So how can I possibly think fast enough to make a living if I’m competing against computers that are thinking infinitely faster? Theoretically, those computers are much smarter than I am and they can make decisions and place trades much faster than I can – yet how can I make money?
The reason is because there are other ways to make money than being super fast and super smart. What you have to do is find a timeframe where you have time to think about things and come up with logical conclusions, and you don’t have to have exceptional intelligence to do that. I think a person with average intelligence can do that.
Also, just trading stocks. Apple, they make good products. Microsoft makes good products. So you know that those stocks are going to go up over time. There are lots of company like that, and a very simple way to look at it is, “Apple is going to go higher; I’m going to wait to buy Apple when it’s on sale. I’ll wait till it drops 10% or 20% and then buy Apple.” You don’t have to be a genius to know that. That is a very profitable strategy.
If somebody simply tries to buy Apple, Microsoft, Google, Amazon, Coca-Cola, Pepsi-Cola, Johnson & Johnson – there are a whole bunch of companies that are really good companies, and you don’t have to be a genius to know that they’re in bull trends and they’re going to be in bull trends for the next 10 years, even if they lose 50% at some point during those 10 years. You don’t have to be a genius to know that if you buy Apple when it’s down 20%, or Coca-Cola when it’s down 20%, and you just hold onto it, you’re going to make money.
So anybody can make money as a trader if they have a long enough timeframe. If you’re willing to buy Apple or Coca-Cola and hold it for 5 or 10 years, you are going to make money. The odds are astronomically good that you’re going to make money. Therefore, you’re a trader and you’re making a successful trade, and you don’t have to be a genius to do that.
What you’re talking about, though, is a trader trading on a much shorter timeframe, without that fundamental information. With Apple, there’s fundamental information. You know that they’re going to be profitable. As a short-term trader, you’re not trading on fundamentals. You’re trading on technicals. You’re looking for short patterns.
But the same rule applies. If you see a chart, let’s say a daily chart, and a [unclear 00:20:33], anything, and the chart is going up – there’s pullbacks, 3%, 5%, 10% pullbacks, but it’s going up – all you have to do is look at it and say, “If it falls 5% or 10%, if I buy it and hold onto it, I’m going to make money.” So on a daily chart, anybody can make money without being a genius. And the same is true on an hourly chart, and if you think faster, you can do it on a 5-minute chart or a 1-minute chart. If you’re a high frequency trading firm, a computer, you can do it on a tick chart based upon the ticks of the past 5 seconds or the ticks of the past 2 seconds.
So you don’t have to have a very big IQ to trade profitably. Anybody can do it; they just have to be patient and find a timeframe where they can comfortably make decisions. For some people, it’s a 5-minute chart; other people, it’s a day chart or an hourly chart. For me, I can trade on a 1-minute chart or a 15-second chart, but it’s stressful and it’s really unpleasant, so that’s why I don’t do it.
I trade on a 5-minute chart. I’m comfortable on that timeframe. I can make a very good living on that timeframe, and I don’t worry that if I traded a 1-minute chart that might have 400 bars during the day in the Emini and 50 or 60 or 100 trades – I don’t care. I’m in a timeframe where I’m comfortable and I can consistently make money trading on my timeframe.
That’s true for a 60-minute chart or an hourly chart, an hourly chart or a daily chart. There are timeframes where anyone can make money if they just follow some simple rules and look for repeating patterns.
FELIPPE: That’s very interesting, Al. It’s a matter of finding the right timeframe, the right strategy, right? Very interesting.
AL: Yeah.
Advice on being patient
FELIPPE: Fourth question. You stress that patience is one of the most important personality traits for a trader, especially when he is starting out. But patience is a rare quality to find in a person nowadays, especially amongst youngsters. With your experience, what would be your advice for a novice trader to convince him to not jump stages?
AL: I have a couple thoughts about that. Do you have Walmart stores in Brazil?
FELIPPE: We do, yeah.
AL: We have them all over the place up here. Probably within three or four miles, there are probably five Walmart stores. I like shopping at Walmart. It’s interesting; last year, one of my buddies was shopping at Walmart and he ran into me and he said, “Al? You shop at Walmart? I thought guys like you shop at all the expensive stores.” I said, “Nah, I grew up poor. I love Walmart.” When I was a kid, I used to go to stores like that and I would just dream of buying anything. I couldn’t buy anything, and I used to just dream of buying anything. Now I can go to Walmart and I feel like I can buy anything and I’m happy. So for me, I like going to Walmart. I go to Walmart every week.
What I say in my chatroom is some traders, they’ll put on a trade and they’ve lost five of the past six or seven trades. They’re so desperate a win that they’ll put on a trade and it just goes a few ticks in their direction and they’ll take the trade. Let’s just use dollars as an example.
FELIPPE: No problem.
AL: Let’s say their stop is $10 away and they have a $2 profit. They’re so desperate for a win that they’ll wait for the perfect setup, they’ll see the setup, they’ll take the trade, and they’ll just get out with $2, risking $10. That is a losing strategy. You cannot have a risk that much greater than your reward and make money unless you’re going to win 90% of the time, and if you’re starting out, you’re not going to do that.
So one of the rules that I recommend traders starting out is find a credible setup, find out where your stop has to be – if your stop has to be $5 below, always go for a reward that is at least twice your stop. So if your stop is $5, go for a profit that is $10. If you find yourself exiting with $2, what you do is you take the trade – let’s say it’s a buy. You put your stop in. Let’s say it’s $5 below. You place a limit order $10 above, so your reward is $10. Your risk is $5. You tell the broker, “Set it up as an OCO order,” so if one gets filled, the other order gets cancelled.
Then you go to Walmart. If you’re trading a 5-minute chart, you put the trade on and you go to Walmart. You come back in an hour or two, and what you’ll find out is that 40% of the time, you’ll make $10. Maybe 20%, 30% of the time, your $5 stop will be hit. And then some of the time, you’ll either make a little bit or lose a little bit. The market will be around where you entered when you get back from Walmart. That is a profitable trading strategy.
If you’re exiting too quickly, you should think about the Walmart trade. Find your setup, place your stop, place a profit-taking order twice the distance of your stop, and then go to Walmart.
FELIPPE: Can I say something about it?
AL: Yeah.
FELIPPE: I think it’s actually a very interesting strategy, the Walmart thing, because if you think about this anxiety thing, the lack of patience people have nowadays, the regular session here has – for the minis here, 9 hours. I think it’s 8 hours, the mini S&P, if I’m not mistaken. So it’s a lot of hours every day. If a person is anxious, to trade two or three times only along 9 hours is really painful, right?
AL: Right.
FELIPPE: It’s very difficult for a beginner to wait – before the session starts, it’s easy for the beginner to think, “Yeah, I’m going to concentrate. I’m only going to trade the best trades, two or three during the day.” But during 9 hours, especially if he loses in the first trade, for instance, it’s very difficult. So going to Walmart is very good advice. I’ve heard before you saying that, but this thought just occurred right now. All right, are you going to keep answering this question, or we’ll jump to the next one?
AL: Let’s move to the next one. I can come back to it.
What problem habits to unlearn?
FELIPPE: Sorry if I interrupted your thinking. Five: what habits or behaviors do you remember having to unlearn to become consistently profitable? How long did it take to unhook from bad habits and create the new habits needed? What habits do you remember being a problem for you as a novice trader?
AL: One of the things is – the brain works in a really interesting way. If something is very, very painful to you, if you’re going through a very, very painful experience, over time the feeling of pain is gone, but the memory of the event is still there. I’m sure all of us have had very, very painful things happen to us when we were kids. We lose a soccer game or whatever. It was very painful at the time, and 10 years later you remember that it was very hurtful, but you don’t feel the pain anymore.
I’m at that point as a trader. I know all kinds of things that I did that were stupid. I did a lot of really stupid things. At the time, the pain was unbelievable. It was just horrible. But now I look back and I cannot recapture the pain. So in a way, the people who are on the other side who haven’t gone through it yet, they have the pain and they’re desperate, “Gosh, how do I get rid of this pain?”, and I’m over there no longer having the pain, saying, I don’t know. Somehow I got from there to here, and I don’t know how it happened. It’s kind of like I lost my hair. I don’t know when that happened. But somewhere along the line it just happened.
I think most traders discover everything possible that they could ever do wrong, and they try it. When you’re starting out, you’re trying everything, and along the way you discover that you do every stupid thing that you should not be doing as a trader, and you do it many, many times before you finally conclude that it’s stupid and you’ve got to stop doing it.
One of the things is you keep doing the same thing over and over again, hoping that it’ll finally become successful, and that works sometimes, in some things. If you’re trying to knock a fence over to replace it and you keep pushing on it, eventually the fence falls over and then you can put the new fence up. Well, with trading, that’s not the way it works. If you keep doing something over and over and over again, brute force is not going to work. You have to back off and try something else.
One of the things is a lot of logical things in life that work for us in society do not work as a trader. If you’re walking on the right side of the sidewalk and everybody is going the same direction, it’s easy to go in that direction. But as a trader, if the market is going up and up and up and up and you finally decide to buy, but because everyone has been buying, the market is going up, that’s usually a mistake. A lot of times you have to be thinking about doing the exact opposite of what seems logical. That is very hard to do.
Some of the best trades are the most difficult because you’re doing the opposite of what seems logical and rational. Also, some of the very easiest things to do are usually the worst. For example, today I took a short in the Emini, and I had a profit order to get out with a limit order. The market went right down to my price, did not go through my price, and yet it filled me. So what does that tell you?
Let me answer. Okay, I’m buying back my short for a profit. I always assume that the other side of my trade is an institution, so if I’m buying, that institution is selling. Why would that institution sell as the market is going down and allow me to get out without the market having to fall through my limit order? It’s because that institution is very confident that the market is going lower. I talked about this in the room. I said, oh, the market fell to my limit order. Normally it has to go below my limit order for me to get out, and here it just touched my limit order and bounced.
FELIPPE: By the tick.
AL: Exactly to the tick. I said in the chatroom that the market is probably going lower because some institution sold – I bought, so they sold. They sold on the low tick, presumably because the market is going lower. So usually if I get filled exactly on the low tick and the market starts to turn up, it’s going to go lower – and it did. It went lower and kept going lower for about an hour or so.
There’s a saying that I use. It’s a fairly common Wall Street saying: good fill, bad trade. If I get a fill and it seems really good, it’s usually a bad trade. Usually if I’m getting a good fill, it’s because it’s not a good fill. I could get a much better fill if I held on.
When did your “I don’t care” position sizing appear?
FELIPPE: Very interesting, Al. Never thought about it that way. Sixth question: when you approached trading psychology, when and how did you come up with your “I don’t care” position sizing rule to help manage your emotions and trade with more success? What was the moment that happened?
AL: I think it’s really important not to care because you’re trading against a lot of very smart people. You’re trading against machines, and they’re purely logical. They’re purely logical, and all they’re doing is analyzing price action and they’re making decisions based upon the analysis of price action. So if I’m adding another variable, like “I’m afraid, I’m afraid” or “I need to make money,” if I’m adding some other variable, I’m looking at something that they are not looking at. I’m partially being logical and partially distracted because I’m considering other things that computers are not considering.
So I had to figure out some way to stay logical, and the easiest way to do it – well, the easiest way is to paper trade so there’s not much emotion at all. But you can’t make a living paper trading. You have to make a living by trading more money. The way to do it, I think, is to get rid of the emotion, and that means you have to trade a small enough position so you don’t care if you lose. You can just focus on doing the right thing, following your rules and managing your trade properly. That’s how I arrived at the “I do not care” size. You have to trade at that size.
As time goes on – well, let me say one other thing. One of the nice things about the “I do not care” size is you’re never going to lose much money. But the flipside of that is you’re never going to make a lot of money either. So the trick is to do it to build up the experience of doing the right thing, and then slowly increasing your size so that you are making enough money, and you’re still maintaining the “I do not care” size. I have enough experience trading, I have enough confidence in what I’m doing, I can increase my position size and I can start to make money that’s truly worthwhile.
FELIPPE: This is simple advice, but it’s one of the best advices, in my opinion, that you give to traders, ever – and this is not a big technique. This is something simple. It’s in the reach of every trader. But still, lots of beginners refuse to do that and they keep blowing their accounts.
AL: It’s a big, big mistake. People starting out, especially if they were successful in business and they have a lot of money, they think that “I don’t have to trade one contract. I can trade 10 contracts or 20 contracts, and I have enough cushion so I can be wrong a lot and still have a lot of money left over.” That’s a big, big mistake. Starting out, traders should trade the smallest possible position.
In the United States now, they have a Micro Emini contract. An Emini contract is $12.50 a tick, and the Micro Emini is one-tenth that size. It’s like Forex positions. You can trade very small Forex positions. Yes, you’re not going to get rich, but you are going to get practice, and you can develop confidence in your trading style with that practice, and that would allow you eventually to increase your position size.
FELIPPE: How is the volume of this Micro contract?
AL: The Micro Emini?
FELIPPE: Yeah. It was launched last May, if I’m not mistaken. Is it tradeable nowadays?
AL: Oh, it’s totally tradeable. If you think about it, it has to be totally arbitrage with the full size Emini, right?
FELIPPE: Yeah, of course. And it’s computers.
AL: Yeah. If it gets more than a tick out of sync, the computers are going to buy one, sell the other, and bring them back together again.
FELIPPE: Perfect.
AL: So it’s very, very tradeable. Even if the volume is small, it cannot get more than a tick away from the Emini. If you’re scalping for 1 point, that could still be a problem. But if you’re willing to hold for a swing trade – 5 points, 10 points – then a tick one way or the other does not matter. So it’s definitely very tradeable.
Impact of Al’s books
FELIPPE: Great. Seventh: it’s been already 10 years since your first book, Bar by Bar, was published, and I was lucky enough to have access to it just a few weeks after the publishing. Thank you so much, Al. That book was a revelation to me and to many other traders. We were instantly hooked on the first few pages. Since then, I’ve studied and traded your methods every day, so I’ve been a witness to your effort and commitments since 2009.
Did you have any idea back then that what you were writing was the starting point of a revolutionary movement in trading that was going to have a positive impact on so many lives on a global scale? As you were writing, did you have any idea of what you were about to start? Because it’s huge nowadays, right?
AL: Yeah.
FELIPPE: I don’t even know if you know that is huge.
AL: I’m actually pretty much not aware because I just sit here in my office and I trade. I come out of the office a couple times a year and talk at conferences, and I see people and I get emails from people, so I know a certain number of people appreciate that I do. But that was not my intention. My intention was I was frustrated for years by the lack of reliable information about how to do this. There’s information on how to do everything – how to salsa dance, how to play the violin, how to kick a soccer ball – but there was not good information on how to trade.
The obvious reason is because most successful traders are in it to make a lot of money, and they don’t want to spend a lot of time – even if they want to teach how to do it, it takes so much time to do it, to teach, that they just don’t want to do the time. For me, I just love teaching my girls all kinds of things, and I like living a very quiet life, very simple life. So I have a lot of time. I have a lot of time to think, and I enjoy trying to organize things. I also enjoy trying to put things into words.
So for me, it’s very satisfying to write my blog, to write books. When I did it, to be honest, I didn’t really care if it sold a single copy, and I didn’t really care if anybody liked it. I didn’t care if everybody hated it. I thought what I was putting out there was honest and helpful, and if somebody liked it, that’s wonderful. If people found it useless, that’s okay too. It’s working for me, and it’s out there, and if somebody wants to find it and if they find it helpful, that makes me happy.
But that was not my intention. I didn’t do it to become famous or to have people say, “That’s a Brooks idea.” I don’t care. When I’m trading, I don’t care about losing, and when I write, I don’t care if I’m famous or not famous. That’s not what motivates me. What motivates me is trying to do the right thing and trying to think about things logically and trying to find words that I can use to communicate what I’m thinking and what I’m doing so that other people can understand if they’re interested.
FELIPPE: Great, Al. You talked before, in the first question or in the second question, about dishonest people that you used to have – well, you still have in America, but you used to have way more dishonest people in the ’80s. I think in Brazil, in the markets, we are at that point right now. There are a lot of dishonest people, crooks. It’s booming. It’s really booming here. There’s like three times more people investing in the stock market or futures market than we had a few years ago. So it’s booming now, and with YouTube, you can imagine all kinds of scams.
AL: Yeah. That’s very frustrating for somebody starting out because a lot of the – there’s a term called a con artist.
FELIPPE: I never heard of that.
AL: What a con artist is, is a confidence artist. The best con artists, the best scammers, are the best-looking, the most articulate, most convincing, most charismatic people, and they get the most attention because they’re charismatic, they look good, they have good presentation. But if you think about it, the most effective scammer, the most effective fraud, is always going to look very convincing and persuasive.
That makes it very hard for the consumer to know who’s honest and who’s not because this charismatic guy has a very good presentation and it looks like, “Gosh, he has to be good to have this wonderful presentation.” But it’s all fraud. It’s all a show. There’s not substance to it. If you listen to what he says and you think carefully about what he’s saying, he’s promising things that are too good to be true.
Anything that’s too good to be true is not true. Anybody who’s making it sound like you can have a big edge and win a lot of money doing anything is lying to you. The market is filled with lots of smart, hardworking people, and therefore, no matter how good you are, your advantage, your edge over anybody else, is always going to be small. So if you see somebody making it sound like it’s easy, “just learn these 5 rules or these 10 candlestick patterns,” the person is a fraud. He’s a fraud.
I always talk about trading – you’re living in a gray fog. You’re never as certain as you want to be, but if you develop enough systems and enough confidence and enough consistency, even though you’re in a gray fog and you’re going to make a lot of mistakes, you’re going to make money. You’re going to be successful.
FELIPPE: Yeah, it’s true, unfortunately for beginners.
AL: Yeah.
What motivates, drives Al?
FELIPPE: The eighth question: most other successful traders never bother helping anyone. You said before that you like to help other people, but the energy you put in on this is way beyond what any other trader has done. It’s really kind of ridiculous what you do for traders. You give way more than whatever people give you back. What motivates you? What’s behind your drive? You have spoken about that before today, but if you can just talk a little bit more about this?
AL: I like thinking. I like thinking about markets and I like trying to come up with words – it’s like a game for me. It’s like a complex, never-ending game. I just like what I’m doing. I like thinking about it. I like trying to come up with words to describe what I’m thinking. I like to try to come up with ways of organizing things. It’s a lot of fun for me during the day, if I watch the market and I see patterns unfold and I anticipate what the market’s going to do. It’s fun. It’s profitable, but it’s fun. I just love doing it.
At the end of the day, I like thinking about it, and one of the things – I like writing about it too because when I’m writing about it, it’s a game. Can I come up with words quickly to describe what I’m seeing and what I think the market is doing? I just find it satisfying.
I don’t like to compare myself to a painter or an artist, but a lot of famous artists spent all their time painting. You say, “Why are they doing that? Why don’t they go do something else? They’ve got all this money. Why don’t they go do something else?” Or a famous athlete. “Why doesn’t he go do more of something else? Why doesn’t he enjoy his money?” Or a famous actor.
For me, it’s like any endeavor. If you get really good at it and you really love what you’re doing, you like doing that more than anything else, so I don’t want to go do that other stuff. I just want to sit here in my little office and think and type and trade. Every day, I can’t wait for the markets to open. Every day, I’m just excited and happy to have the markets open. I like to be in sync, I like to be synchronized with what the market is doing. It’s a very satisfying thing.
So I don’t think of it as trying to do more than anybody else. I think of it as it’s fun. It’s part of my routine. It’s how I think about the market. It helps me, tomorrow, see patterns better if I’m typing at the end of the day about the patterns.
How simple can trading be?
FELIPPE: Awesome. If more people spent more time thinking on things that they like, whatever, humankind would be on a higher level, for sure. But people waste time on television and other stuff. [laughs] Great, Al. Ninth question: some people complain that your methodology can be hard to learn and apply. Do you agree with that? How simple can trading be, and how do you think traders can make trading simple and pleasurable for a happier life?
AL: I think it’s very easy. As you know, I have hundreds of variations of different patterns. Someone starting out, if they look at that or if they look at 50 hours of videos, they can be overwhelmed. I think the best thing to do is start small. Just look for one type of pattern, like a strong breakout. Buy a strong bull breakout. Or a pullback, a bull flag. Buy a bull flag. Or a Wedge Top or a Wedge Bottom. Just pick one pattern and look for it every day and develop confidence in it, and just trade one pattern.
I honestly think that a person can make a living off a single pattern if he learns the different variations of that pattern. Now, if they understand money management, one of the key things, I think, is find out where the stop has to be and then go for a reward that is twice your stop and start from there. So look for a pattern, see where the stop is, try to go for a reward twice the distance to your stop. If the trade is falling apart, you get out early, but that’s the basic. You go for a reward equal to twice your risk, and even if you’re right only 40% of the time, it’s a profitable strategy.
So yes, it’s complicated if you just look at it and say, “Ugh, there are hundreds of patterns and hundreds of variations. How can I do all that?” You don’t do all that. Pick one or two things and just look for them every day. As time goes on, once you get comfortable with those, then you can start looking at other things or variations of those patterns.
But you’re looking at making a career, making a lot of money. No matter what career you do – accountant, “Oh my gosh, I’ve got to learn all this balance sheet stuff and tax law?” Yeah, you do. Engineer, “Ugh, I’ve got to learn all these formulas?” Yeah, you do. You’ve got to learn them. Doctor, you’ve got to learn all these medicines and all these diseases? Yep, that’s what you have to do. In trading, there’s a certain amount of stuff that you have to learn if you’re going to make money doing it.
FELIPPE: Yeah. Great advice, too. Master one pattern, go for swings, and go to Walmart, right?
AL: That’s right. [laughs]
FELIPPE: Great. Recently, we had some research from a local university, FGV, stating that over 95% of the day traders lose money on a consistent basis and that most would be better off as an Uber driver. This same research also concluded that results for day traders are not a function of time and the activity. Therefore, one can try all his life to make money as a day trader without any results. What are your thoughts on this, Al?
AL: Without reading the study, my immediate thought is the guy is trying to get on TV. When he starts to say, “Don’t be a day trader, go drive Uber,” when you say things like that, it’s ridiculous, and you’re trying to get attention. That immediately makes me question the conclusions.
I do think most day traders lose money, but I also think that a lot of day traders eventually make money. I get emails all the time from people who are doing very well. I agree that most traders starting out, if they’re day trading – most day traders are hobbyists. They’re doing it as a hobby. Some people play golf for a hobby. Golf course money. Some people go to soccer games. If going to soccer games is your hobby, it costs money. Some people day trade, and they do it as a hobby, not as a career.
So if you lump in – let’s take a look at soccer players. Most people who play soccer lose money. They pay for soccer balls, they pay for soccer tickets, and they lose money. So should they stop playing soccer? No. It’s their hobby. Most people who do any activity – most people play golf. They spend money to buy golf clubs. They spend money on lessons. They spend money for greens fees. So they spend a lot of money, and they’re not making money. But they’re not doing it to make money.
Most day traders are not really doing it to make money. Most day traders are doing it as an experiment. “Can I make a career change into as a trader?” So yes, if you lump in everybody who day trades, which is pretty much everybody – everybody tries it at one time or another; everybody tries some version of it – you’re going to come up with a very high number of losers. If most of those people are doing it to make money, yeah, they probably would make more money working at McDonald’s or driving an Uber car.
But if you just look at the serious people, the people who are doing it for a career and who are making a serious effort to get good at it, it’s not 95% who lose money. I think it’s a much, much lower percent. I think depending on which group you look at – if you just look at a basket of everybody who plays soccer or everybody who plays golf or everybody who tries day trading at one time or another, you’re going to come up with a very high percentage of people losing money and very few people making money as a career.
But if you look at the group, a much smaller group of people who are really dedicated to doing it and who are serious about doing it and are doing it in a very careful, systematic way, I think those people have a very high probability of making money.
But making money is not enough, because I made a lot of money as an eye surgeon, but I didn’t like what I was doing. Therefore, simply making money as a day trader is not enough of a reason to become a professional day trader. It has to be for fun and for profit. Profit alone is not enough reason to do it. You have to be enjoying it.
For me, for years, I didn’t enjoy it. I hated it because I was so stressed out all the time. But I was confident that I could find some way of doing it that would be compatible with my personality. It took me a long time, but eventually I did. So that study is sensational. There have been variations of that study forever, that 90% – or 95% in that study – 90% of day traders lose money. That’s true, but what about people who don’t day trade? What about traders who buy stock in their 401(k)? Do 95% of them lose money? No, 95% of them make money.
Most people’s retirement money makes money. So if you’re willing to hold things for a year or two or three, or 10 or 20, you’re going to make money. The majority of people in the United States, their retirement money, part of it at least, is in stocks. And if they’re managing their money themselves, they’re buying stocks. And they’re doing it successfully.
So the difference is that group who does it with a long timeframe, a long horizon, they’re making money, and the people who do it trading a 1-minute chart are losing money. There’s somewhere in between there where the dividing line between losing and winning is, and you have to find out where the dividing line is for you. We talked about that earlier.
FELIPPE: Yeah.
AL: Some traders cannot profitably trade a 1-minute chart or a 5-minute chart or an hourly chart, and they’re better off just looking for trades on the daily chart, looking to buy and hold something for a day or two or three or a week or two or three. That study probably did not pay attention to that group. Does that answer the question?
FELIPPE: Yes. It’s a matter of how serious you are about it, right?
AL: How serious and who you put in your study group. Are you including people who buy Apple and hold it for 10 years? They’re traders.
FELIPPE: Very interesting. We are in historical highs all over the world. If you think about it, nobody would ever lose money if they managed it correctly. Never. They wouldn’t lose money in stocks because we are in historical highs. Very interesting.
Should traders develop their own trading style?
Eleventh: how important do you believe it is for a trader to develop his or her own style of trading? Should they back test it in a demo account or trade small in the real market? Also, Al, in the same question, for traders that are studying your methodology, do you think they should stick to exactly what you say or they should try to adapt to their personality?
AL: I think, as I said, you cannot make a living as a trader unless two things: you’re doing it profitably and you’re having fun. There are countless ways to trade profitably. What you have to do is find a way that’s compatible with your personality. It’s not as if my approach to the market is the only approach. There are also a lot of people who do what I do, and they use other words to describe what they’re doing. But they’re doing what I’m doing; they’re just talking about it using different words.
I think a person starting out should paper trade for a certain period of time, but within months, I would start trading real money, but I would trade very small, like Forex markets, and trade 10,000 units. Or trade Micro Eminis, because you need to engage the emotions, which are real. Unless you have real money on the line, even if it’s very small money, you cannot start to work through the emotional aspects of trading. So I think it’s important to soon, within months, start to make little trades – at least, for example, trading 10,000 Forex units and holding a trade, looking for a trade to hold for a day or two or three, and then reduce your timeframe if you want.
Funny experiences as a trader
FELIPPE: Great. This is the last question. I can see you’re losing your voice. With such a long career as a trader, do you remember any funny situations, such as people that could not understand what you do for a living, or even suggesting what a big screw-up you’ve made moving to be a big trader? Or even something really stupid you did in the market.
For instance, every time I say to people – I’ve been trading for many, many, many years as well. Not as many as you, but when I say to people – they ask, “What do you do for a living?” “Oh, I trade. I trade the markets.” They say, “Oh, great, that’s awesome. But what’s your real job?” [laughs] Things like that happen, right? Do you remember any funny situations?
AL: I can tell you back in the ’90s, when day trading started to become popular, it was portrayed in the media as gambling and addicted people were losing all their money. The image of a day trader was really a terrible image. At least, the media presented it that way. So in the United States, the perception among people was if you’re a day trader, you’re a gambling addict and you’re a loser and you’re going to end up broke and you’re going to ruin your family. You’ll just ruin your life.
I thought about it and I said, hmm, it’s an honest profession, and if I do it profitably and I’m doing an honest profession and I’m doing something good – I think of myself as a liquidity provider. There are tens of thousands of people like me, and we add liquidity to the system. I take a lot of trades, it adds volume, and if enough people do it, the bid-ask spreads become small and it becomes difficult, virtually impossible, for firms or anybody to manipulate the market. So I feel like I’m making a contribution to the market by adding my little piece of volume to it.
So here I am thinking that I’m doing something good, I’m following the rules, I’m 100% totally honest about what I’m doing, what I’m doing is entirely legal, and I’m doing a tiny thing of what Warren Buffett is doing. He’s trading over a timeframe of years; I’m trading over a timeframe of minutes, but it’s comparable. Why should I be embarrassed? Why should I be embarrassed about this, no matter how the press is presenting it? I’m proud of what I’m doing.
People would ask me, “Al, what do you do for a living?” and I’d say, “I’m a day trader.” I would say it kind of in their face, look at them right in the eye and say, “I’m a day trader. What’ve you got to say about that?”
FELIPPE: [laughs] You like to see their reaction. It’s fun.
AL: Yeah, I dare them to say, “You’re a gambling addict, you’re a loser.” That’s not – what I do, I do it well.
I want to say one other thing about this. There are lots of jobs in society. There are people who clean the streets. There are people who clean the sewers. There are people who do all kinds of horrible jobs that we would never, ever consider doing. Some of them, they’ve done it well and they’ve organized big businesses.
I have a friend who makes a million dollars a year running a janitor company. He has hundreds of janitors working for him. I have another friend who owns a trucking company and has several hundred trucks. When I go fishing with him, every now and then someone will say, “Hey, what do you guys do for a living?” I’ll say, “I’m a day trader” and he’ll say, “I’m a truck driver.” He’s a truck driver. He owns hundreds of trucks and he makes a fortune.
My point is, there are all kinds of things in society that are legal. A lot of them you would never imagine doing, but people can make a lot of money doing anything, including being a janitor or being a truck driver. If you build the business up enough, you can make a lot of money. I think anybody who is doing something that’s honest and following the rules and being very successful about it, they deserve admiration, not scorn or disdain or ridicule.
So as a day trader, I feel like I’m doing a good thing, and I’m proud of it. I don’t care if someone looks at me and says, “You’re trash.” I don’t care.
FELIPPE: All right. Al, thank you so much for this interview. It was really not only an honor, but I learned a lot talking here to you. Thank you so much for everything you do for traders like me and people that are trying to learn. Thank you for your efforts and time, every time, trying to help people. Thank you very much.
AL: I appreciate that. I appreciate the kind words and I appreciate having the opportunity to speak with your community. Thank you very much.
FELIPPE: Thank you.
