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Book Discussion: Reading Price Charts Bar by Bar by Al Brooks
You have to enter both a win/loss percentage and an avg win/loss ratio.
Your expectancy equation is % wins * avg win - % loss * avg loss. 1:1 ratio is only part of the equation. If you believe 1:1 cannot be profitable then you have a misunderstanding about expectancy. With 1:1 you only need to win more than you loose. If you win more than 50% of your trades then you're profitable.
Every must understand this completely before trading, it's very important. This book covers the subject in way more detail than one needs but I recommend it:
Also I add that Brook's ratio is often less than 1:1. He risks up to 2 pts and his scalp profit target is 1pt. He even says you have to win 67% of your trades or something like that but then goes on to show how trailing your stop and catching runners increases your reward/risk ratio and lowers the percentage required.
The runner makes up for it but right now ES has a very low range (14 pts) so runners are rare
I think 14 pts is a pretty big range, almost 1.50 %. I remember a few years back 5 pts was considered a big range. The increased volatility has to do with the growing number of derivative instruments. Certainly good for the brokers (commissions), but maybe not so for a healthy market.
I guess it's relative. It was up to 50 in the past year. It hasn't been as low as it is now for a few years. since I've only been trading 2 years, I've never seen it this low.
Here's my thinking: Unless you catch the absolute top or bottom, your chance of a big win is pretty slim.
14 pts = - 2-3 pts off the top - 2-3 pts off the bottom = around 9 pts in the middle.
The chance of getting a good runner is low. Back before the summer I was often getting 4-6 pts on my ES trades. Then July & August came and the range trimmed down and I was no longer profitable because I was still using setups for a 4-6 pt trade. Since then I've changed to trade primarily Euro & CL where I don't have this problem. I don't see much reason to trade ES & YM when currencies & oil move so much more.
Yes but you got spoiled last year. That was a record year in terms of volatility. It even beat the great depression. Now it's more like back to reality.
I don't think so. I think the markets have changed and will be more volatile for a while. When the next leg of the bear market starts up I think we'll see a return to high volatility. Right now the day range is around 14 and volume is very low (except the past couple days). People aren't interested at the current prices. Once it starts down people will trade more and we'll have a lot of volatility again. Who knows maybe even some of my automated strategies will start working again (they were optimized during the bear market).
This book makes my head want to explode. Okay not really but wow this book is very intense. I haven't had as much time to read it as I would have liked but I'm slowly grinding through it. That being said I think this book is an absolute wealth of information. My goal from this book is to continue to trade my style as described in my journal but to refine my entries and exits using Brook's price analysis.
As I begin to understand more of Brook's setups I plan on posting the charts in this thread as I see them. Hopefully after reading the book a few times and watching the charts spotting the setups will become second nature.
I was reading a journal this weekend of a guy's volatility breakout system and back in 2002 he was concerned that his system would stop working if the ES range went below 7 pts. Amazing. I wasn't around at that time so 14 seems low to me. Now it could happen with us, if it goes back to 7 our current strategies counting on 14+ may no longer work.
This is exactly my goal too. I quit trading a system because I became unprofitable for a while. Well that's when I removed indicators and tried something different. So last night I was looking at my charts using my old setup (indicators) and I saw things differently. I saw that where I'd usually enter would be too early, but waiting for a TL break and a retest it would have been profitable. I started doing some perfect trading charts and I found myself applying Brooks concepts. I think the Brooks ideas could be what I was missing. That and going for 1 month without indicators taught me to read price better. So this week I'm going to trade my old system on simulator and see how I do. For example I was using 4 pt stop. Using a brooks entry criteria (an event such as TL break + reversal bar) I can now get in at a better time and use a 2 pt stop. This alone should make a huge improvement. Before I was trying to time entries on a smaller timeframe. That didn't work and I realize that by going to a smaller timeframe I was just entering on noise.
