John Wiley & Sons, 2012
$225 for all three volumes, 1,582 pages
Al Brooks is a self-taught trader who has traded his own account successfully for more than 20 years. He received a BS with honors in mathematics from Trinity College in 1974 and then went on to graduate in ophthalmology from the University of Chicago Pritzker School of Medicine in 1978. The attraction of trading was with him early; during his entire stay in Chicago he wondered if he should drop out of school and work on the floor of the Chicago Mercantile Exchange. But he continued with his medical career, taught for a year at the EmoryUniversitySchoolof Medicine and then practiced in Los Angles for about 10 years before deciding to leave medicine. He sold his practice, moved to a small town near Sacramento, CAand started trading full time. In addition to trading his own account, Brooks has written feature articles for Futures magazine and has published a previous book.
Each volume of the set starts with the same 34-page introduction. Brooks cautions us to ignore the news, investment experts, financial news stations, fundamentals such as earnings, dividends, etc., and instead concentrate only on price charts. Nothing else matters. He says, “All I need is a single chart on my laptop computer with no indicators except a 20-bar exponential moving average.” He also makes the point that price action is driven by institutions, not individual traders, so we must look at the motivations and reactions of institutions to understand price action. Throughout the books he constantly refers to specific institutional thinking and actions as the reason for the price patterns he is discussing.
The introduction goes on to say: “The market is either trending or in a trading range. That is true of every time frame down to even an individual bar.” Identification of the type of market, trending or trading range, is important because the interpretation of bar relationships is different in the two kinds of markets. He lists 24 characteristics of a trending market, such as: There is a big gap opening on the day; there are trending highs and lows; there is very little overlap of the bodies of consecutive candlestick bars. He concludes with long lists of characteristics of breakouts and reversals.
Each volume also contains a glossary defining more than 160 terms he uses throughout the texts to describe these bar patterns. Brooks is a discretionary trader, so there are very few numbers in the definitions or in the rest of the books. The definition of terms and chart discussions center on subjective interpretation of the relationships between bars. For example, he talks about a “climax” price action, which he defines as: “A move that has gone too far, too fast, and has now reversed direction to either a trading range or an opposite trend.” But how far is too far and how fast is too fast? Brooks has 20 years experience looking at price charts and trading the patterns, so he has a good intuitive sense of what is too far or too fast. But for the rest of us, it would be helpful to be a bit more quantitative.
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.