Reading Price Charts Bar by Bar - Technical Analysis of Price Action by Al Brooks

Chapter 1: Price Action

Table of Contents

• Trend Bars and Doji Bars
• Bar Basics
• Signal Bars
• Entry Bars
• Setups and Candle Patterns
• Signal Bars and Reversal Bars
• Signal Bars and Other Types
• Outside Bars
• Importance of the Close of the Bar
• Exchange Traded ETFs and Inverse Charts
• Second Entries
• Late and Missed Entries

Trend Bars and Doji Bars

• Trend Bars: Controlled by Bulls or Bears with a large body and minimal tails.
  • Reflect trends on smaller time frames.
  • Start on the high or low and move to the extreme with a strong close.
• Doji Bars: Neutral range bars with a one-tick body and long tails on both sides.
  • Market trades at both ends and closes in the middle.
• Examples:
  • Uptrend: Open on the low and close on the high.
  • Downtrend: Open on the high and close on the low.
  • Doji in Trend: Presence of long tails indicating indecision.

Bar Basics

• Signal and Setup Bars: Indicate potential entry points, only confirmed if the order gets filled on the following bar.
  • With Trend Entries: Follow the current trend.
  • Counter Trend Entries: Go against the main trend (not recommended for beginners).
• Candle Patterns: Formed through price action, no mystical value, context is essential.
• Examples: Bull flags, bear flags, signal bars turned entry bars when filled.

Signal Bars and Reversal Bars

• Reversal Bars: Indicate a change in direction, can be with trend or counter trend.
  • Should have a strong close with minimal tail.
  • Analyze prior price action before taking reversal bars.
• Examples:
  • Good Reversal: With the trend, strong close.
  • Bad Reversal: Counter trend reversal, strong close but trapped traders.

Signal Bars and Other Types

• Any Bar Can Be a Signal Bar: If taken by the trader, success depends on context.
• Types of Signal Bars:
  • Outside Bar: Range exceeds previous bar's range.
  • Bull/Bear Two-Bar Reversal: Changes direction over two bars.
  • Shaved Bar: No wicks, indicating urgency in trending direction.
  • Exhaustion Bar: Large bar indicating the end of a trend, often hitting support or resistance.
• Examples: Bullish/bearish outside bar, two-bar reversals, shaved bars, exhaustion bars.
• Importance of Context: Good signal bars match market context; bad ones appear similar but fail contextually.

Outside Bars

• Often confused for breakout bars.
• Good context: Follow trendline breaks, clear direction reversal signals.
• Bad context: Sideways market, trapping traders.
• Examples: Bullish and bearish outside bars in context.

Importance of the Close of the Bar

• Wait for bars to close to confirm signals.
• Avoid front-running breakouts, which can lead to failed breakout setups.
• Quick market movements can trap traders.

Exchange Traded ETFs and Inverse Charts

• Use ETFs like SPY to clarify price action.
• Inverse charts help see trends from a different perspective.
• Stick to your trading instrument, use alternates for clarity.

Second Entries

• Indicate trend failure twice, creating traps.
• Second entries usually come at better prices but offer more information.
• Examples: Bull flag, double top/bottom scenarios.

Late and Missed Entries

• Scale into trends using partial position size to mitigate risk (e.g., micros for e-mini contracts).
• Trail stops appropriately and avoid large losses.

Conclusion

• Context is key in all trades.
• Follow trend-related setups and signal bars for better trading outcomes.