From the May 01, 2012 issue of Futures Magazine • Subscribe!

Trading Price Action series

Book Review

The three-volume set is a massive work.  The 1,500 pages contain 500 charts, mostly five-minute candlesticks. These charts illustrate virtually every relationship imaginable between price bars. Each chart is accompanied by a page or more discussion of the bar patterns and their application to trade setup and entry.  Setup patterns simply alert the trader to the possibility of a trade entry in the next few bars.  The trade entry patterns then pull the trigger and initiate the trade.  He also talks about stop placement, but there is little discussion of where to take profits.

The second volume contains a chapter called “The Mathematics of Trading.”  In this chapter, Brooks states that most traders consider only the risk/reward ratio where risk is the distance from entry to the stop and reward is the distance from entry to the profit target.  He then devotes some 40 pages to convincing us that one also needs to consider the probability that the profit target will be hit before the stop.  But he doesn’t tell us how to find that probability for a given strategy. He only states in general terms that the probability of a profitable trade usually is between 40 and 60 percent.  Again, it would be helpful to be more quantitative.

Almost all the charts Brooks uses to illustrate his ideas are five-minute candlestick bars.  So you might say that the entire work deals with day trading, or at least intraday entry and exits from longer-term trades.  However, in Volume Three he devotes six chapters specifically to day trading.  In one of these, he divides the day into three periods:  The first hour or two, the middle of the day and the remainder of the day through the close.  He discusses the characteristics of each of these periods and the implications for day trading.  For example, he says many traders make most of their money in the first couple of hours of the day and generally lose later.  He says the final period of the day often resumes the trend from earlier.  Another day trading chapter discusses characteristics of Globex, premarket, postmarket and overnight activity.

In summary, the three volumes are a very impressive work documenting the subjective observations Brooks has made over 20 years of successful trading.  Any discretionary trader with enough experience to recognize the patterns that Brooks describes certainly will improve his profitability.  On the other hand, there is no quantitative definition of the patterns or their historical profitability. A systematic trader will be frustrated by the lack of objective, numerical data that can be tested for historical profitability.  Brooks even admits his methods are subjective.  In the third volume he says, “Rules imply absolutes and easy trading if only you follow them.  However, trading is subjective, your edge is always going to be small, and it is very difficult to get to the point where you are consistently successful.”  He then goes on to list 78 subjective guidelines for successful trading.

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