5 Steps to Finding Today's Trades

Hi, I’m Al Brooks.  Thank you for watching this video.  I want to share with you today an approach  that I’ve had for more than three decades.  At the end of every day,  I look at my chart and I mark it up.  I draw lines on it.  I think about possible entries, possible exits, how to manage trades.  What I’m trying to do is recognize patterns so that when I see them tomorrow  or next week or next month, real time,  I can anticipate what will follow  and I can structure a trade  and then manage my trade successfully.  I have the same routine,  and I’ve been doing it for 30 years,  and I want to go through it.  I’ll give you the 5 steps  that I use every day,  and I hope that you find it useful.  Thank you.  As many of you know, I’m a physician.  I got my medical degree  and I did my ophthalmology residency  at the University of Chicago.  I taught eye surgery at Emory University,  and I was on the clinical faculty at UCLA.  I published dozens of scientific papers on eye diseases way back in the 1980s.  As a trader, I’ve been day trading in five decades since the 1980s.  I’ve lectured on four continents.  I write a daily blog, which reaches about a million people a month worldwide.  And I am a Master Trading Class instructor  at the Chicago Mercantile Exchange (the CME).  I’m also an author, and I’ve received some nice compliments from people  who run very big platforms in the trading world.  I created the Brooks Trading Course, which is available at brookstradingcourse.com,  and I also speak daily in  a trading room at brookspriceaction.com.  I think it’s really important as a trader  to do the same thing every day,  to develop a routine.  I want to talk about the routine that I use.  You may have seen many charts from me,  either in books or on websites  or on my daily blog, or on  my daily blog on other websites.  You’ll see lines and boxes and textboxes.  I want to talk today  about how I create all of that.  It’s important to approach every market  and every timeframe the same.  When you think about trading, trading is exactly that: it’s trading.  You’re buying and somebody else is selling; you’re selling, somebody else is buying.  It’s rational human behavior.  Every chart is just a portrayal of rational human behavior,  and it doesn’t matter what market it is.  Doesn’t matter if you’re trading fruit in Africa.  It doesn’t matter if you’re trading property in Europe.  Buying an apartment, selling an apartment.  It doesn’t matter if you’re doing stocks or commodities.  It’s all the same.  It doesn’t matter on the timeframe, either.  Therefore, when I look at a chart,  a map of interaction between humans,  it doesn’t matter what the market is.  It doesn’t matter what the timeframe is.  It’s all going to be the same.  It’s based upon the same  rational human behavior.  When I look at a chart and  I’m going to mark it up, put lines on it,  and try to look for patterns, I typically begin with the lines.  I look for channels, Wedges.  I look for Double Tops, Double Bottoms, and Triangles,  and I draw lines to highlight those things.  Next I look at unusual bars, special bars.  Very big bars.  A bar that is small,  its low above the low of the prior bar,  its high below the high of the prior bar.  An inside bar.  Consecutive inside bars.  An outside bar.  A big bar followed by a bigger big bar.  And then a combination of an inside-outside-inside bar.  Things like that.  I’ll talk about those as we go on.  Then finally, after I’ve highlighted the lines and the special bars,  I next draw red and green boxes  for where I would enter  or where I think an ideal entry is.  Then finally, I add textboxes.  I have hundreds of patterns that I rely on when I’m trading.  I’ve developed them over the years.  I’ve been watching pretty much every tick  in the stock market now  for well over 30 years.  When you do that for such a long time,  you tend to notice things.  I have names for things.  I classify things.  I have an Encyclopedia of Chart Patterns available to traders on my website.  I have things categorized.  I look for those patterns  to repeat every day,  and I know what the market will tend to do  once it starts to develop a pattern,  and that helps me structure a trade.  When I’m marking up a chart at the end  of the day for other people to study,  I put the names of the patterns  and some information about the pattern  to help traders understand  what they should do  the next time they come across that pattern.  Traders must practice.  If you’re a professional football player,  you play on Sunday.  You’re not staying home watching TV the rest of the week.  You’re practicing every day.  If you’re a professional musician  and play for a major symphony orchestra,  you’re going to practice as well.  You may perform a few times a month, but you’re going to be practicing every day.  Traders should not just show up  when the market opens and expect to do well.  They should practice  after the market closes.  Spend some time reviewing  the day’s price action on the charts  that you trade and look for patterns.  Think about what you did and what you could have done.  I said I use the same approach for all markets and all timeframes, and that’s true.  What’s the key to practicing as a trader?  It’s simply looking at charts and trying to find patterns.  It’s obvious.  The more you understand about what the market is doing  and the better able you are  to anticipate what it’s about to do,  the more money you stand to make.  The quicker you recognize a pattern,  the faster you’ll be able  to structure a trade.  Here we’ve got a bear channel  and we have a line drawn in  across the top, but we’re trending down.  We have a channel.  We’re breaking below the channel  and we are reversing up.  We have three legs in a channel  – one, two, and three.  It’s a Wedge.  Also, on this bar, we went down, we went up.  On this bar, we went down and we went up.  That’s a Micro Double Bottom.  I call it a Micro Double Bottom because it takes place over 2, 3, or 4 bars.  If you were looking at  a much smaller timeframe chart,  it would be an actual Double Bottom.  The lows could be 10  or 20 bars apart depending  on what timeframe that you looked at.  So it’s important to recognize this.  You have a Wedge Bottom and a Micro Double Bottom,  and now you have a bull bar  closing on its high,  and it’s a second consecutive bull bar.  The odds are we’re going higher.  It’s reasonable to buy on a stop 1 tick above the high of that bar.  So you’d get filled on this bar.  At a minimum, you should always be trying to go for a profit  that is at least twice your risk.  If you buy on a stop above this bar and you put your stop just below it,  this is two times your risk.  So your risk is from  your entry price to your stop,  and that’s twice that distance.  Therefore, your reward is twice your risk.  If you do that, you’ll have structured a good trade.  And if you do that consistently,  you have a very good chance of being a consistently profitable trader.  When I talk about structuring a trade,  I’m talking about thinking about your position size.  Where’s your profit target?  How much risk?  How likely is it that  you’re going to make your profit?  You also have to be aware of what the market would do that  would make you decide your plan is no longer valid.  You should get out early sometimes.  I create my charts in PowerPoint.  What I do is I use a capture program,  like Snagit or the Windows snipping program.  On my trading platform,  I just capture the chart,  and then I paste it  into a slide on PowerPoint.  Then I add the lines and the entry boxes,  sometimes the exit boxes.  Then I add text with  the reason for my behavior.  Then look on the right over here.  I have a bunch of objects,  and I have that on all  the slides in my PowerPoint.  What I did was I created  a bunch of little objects,  and they allow me to quickly mark up a chart.  So I have a small line.  I can just hold the Control key, grab that line, move it over here,  and then I can change its orientation, its starting point, its end point.  A textbox, if I want to create a textbox, I just grab this,  hold the Control key, drag it down here,  and then just change the text.  If I want to change the color of the text,  I just click on this and then over here,  the format painter,  and then drag it through the text.  That’s how I create these charts.  I create charts every day.  You’ll see them on my blog.  I call them my Daily Setups.  In my blog, it’s free.  Anybody can look at them.  This is a sample of a Daily Setup chart  that is on my blog for anyone to see.  It’s for the Emini, a 5-minute chart.  I have price over here,  I have time over here.  I have lines, I have boxes,  I have big things highlighted.  And then for people who subscribe to my charts – I have a service  that they can subscribe to  – I have much more information  about what’s going on on the chart.  Some people prefer the extra detail.  This is a 4-hour chart of  the euro versus the dollar, Forex market.  So every bar is 4 hours.  Here’s price here, here’s time here.  I said before that  traders trade based upon logic.  It results in reliable patterns.  People use the same logic  in everything they do,  and the result is that the patterns are present on all markets and all timeframes.  And therefore, traders look  at all charts and all markets the same.  I don’t pay attention to price.  I don’t pay attention to time.  I just look at the charts.  If you watch TV and you see  professional traders talk  about a chart – they’ll sometimes talk about gold, crude oil, stocks,  stock index futures  – you never hear them say,  “Oh, this is Apple, and therefore I’m going to trade it differently  from how I trade gold  or stock index futures.”  They don’t say that,  because they understand  that the chart is just a representation of rational human behavior,  and it’s going to be the same for all markets and all timeframes.  If I were to mark up this  4-hour chart of the euro versus the dollar,  I would do it something like this.  If you did not know it was a Forex chart,  you would not be able to tell  that it was a Forex chart.  It could also be a stock index futures chart, an Emini chart.  It could be gold.  Because all charts look the same,  and patterns are the same.  Here’s a gold futures chart, and it’s a monthly chart.  If I remove the price and time  and mark up the chart,  it looks the same as  any other market and any other timeframe.  Again, this is the monthly chart,  but it has the same patterns  that you see on any other chart  and any other timeframe.  When I’m marking up any chart, I’m always beginning with lines.  As I said, I think it’s  really important to develop routines  to do the same things every time, and  I want to talk to you about my daily routine.  How do I go from this slide  to the next slide?  I’m going to show you step by step.  I start with this slide,  a slide with nothing on it  other than a 20-bar  Exponential Moving Average – again,  this is a 5-minute Emini chart.  81 bars to the day session.  At the end of the day,  when I’m marking up the chart,  this is what I have,  and that’s the end of my practice.  I have everything drawn in.  I have a lot of textboxes explaining why I would do certain things.  This is an example of  a typical Daily Setup chart  that is available for traders on my website.  All right, let’s talk about how I got there.  First of all, I have  a chart with nothing on it.  Then I look for channels, Wedges.  A Wedge is a channel,  and it has three or more points.  I can draw a channel up like this.  There’s Point 1, Point 2, and Point 3.  Sometimes Wedges are contracting;  sometimes they’re not.  This one’s fairly parallel, maybe a little bit contracting the way I have it drawn.  When a Wedge is rising,  I’m looking for a reversal down,  so I’m really only  interested in the top line.  I don’t want too many things on my chart,  so I don’t even draw that bottom line.  No pattern is perfect.  Most patterns are not perfect,  and therefore I would not expect  the three points to be exactly at the line.  One of the two points here or here  is going to be above the line.  The more perfect a pattern is, the more computers will find it,  the more computers will trade it, and the more reliable the pattern will be.  The higher the probability it  will unfold the way you want it to unfold.  I always start with Point 1,  and then I could draw a line using Point 2,  and the line would be there.  Or I could use Point 3 to draw the line.  Point 1 and Point 3.  So there are two ways to draw the line.  All lines start with Point 1,  and I can either create  a line using Point 2 or Point 3.  It’s rare to have a perfect Wedge where the three points are on the line.  Almost all Wedges have either one of the two points above the line,  or one of the two points below the line.  The blue line, Point 3 is below,  but the pink line,  Point 2 is above the pink line.  Point 2 overshot the pink line.  Point 3 undershot the blue line.  My routine is to always choose the line where there’s an overshoot.  I like overshoots.  Since the blue line has an undershoot, I’m not going to use the blue line.  The pink line, here, Point 2, is an overshoot,  and I want an overshoot either at Point 2 or Point 3.  So I’m going to use the pink line  and get rid of the blue line.  I’m looking to sell a reversal down  from the top of a channel.  If we start to reverse somewhere around a possible line using 1 or 2,  I’m going to look to sell a reversal down,  especially below a bear bar  closing on its low, expecting lower prices.  After I draw the first line, I then look for other channels,  other Wedges, and there are many varieties.  I have an Encyclopedia of Chart Patterns that talks about all the different ways  that patterns can unfold and appear.  For example, we have another channel here.  This is a bear channel, and we’ve got three or more points – one, two, and three.  You can draw the line using Point 1 and Point 3.  You can draw the line using Point 1 and Point 2.  If I do that, Point 3 overshot the line.  And remember, I want lines that overshoot.  Here, Point 2 overshot.  Here, Point 3.  Point 2 here undershot the line.  I don’t want lines that undershoot; I want lines that overshoot.  So, I’ll get rid of the blue line.  This is an example of a channel where the line  from Point 1 to Point 2 created an overshoot at Point 3.  Here’s an example of a line using Point 1 and 3 as an overshoot at Point 2,  and therefore I’m going to choose 1 and 3 to draw the line here,  but I’m going to choose 1 and 2  to draw the line there.  There were many other Wedges on this chart as well,  and I just keep adding lines for every conceivable Wedge.  Some of them are hard to see.  For example, there are three pushes down here – one, two, three.  I have a little pink line there.  It’s hard to see.  And here, there are three points down  – one, two, and three.  When the pattern is small,  it’s a Micro Wedge.  And then here, I could also use one, two, three or four.  Remember, a Wedge is at least three lines.  So we have a channel with at least three points in it,  so that blue line is another way to draw a Wedge, and I’m looking for a reversal.  We’ve got a reversal.  I want to buy above a bull bar  that closes near its high,  hoping that we get a trend up.  Sometimes patterns fail.  We got a push up here, big bar, and then a small bar.  Then a big bar, a second push up, and then a bear bar, and then a third push up.  So we have a Wedge and a very Tight Channel.  I would call that a Parabolic Wedge.  But we did not get a reversal down below the bear bar.  Instead we get an upside breakout.  So I would look to buy above the high of this bar,  betting that the Wedge Top has failed.  Next I’m going to look for Double Tops and Double Bottoms.  Double Tops and Double Bottoms  are rarely perfect.  If you look for a perfect pattern, you’re not going to find many setups  and you’re not going to trade very much.  It’s better to be flexible.  The more perfect something is, the more likely it will lead to a profitable trade.  Here we’re rallying.  We broke above this high.  But I always look to the left  to see the context.  If there’s a possible Double Top,  we might get a reversal down.  Here, we rallied, and  it looks like we’re turning down.  I’d be inclined to sell below this bar depending on reasons.  I’ll look to the left to see if there’s a Double Top.  This high might simply be  a test of these highs,  so it might be a Double Top  with these highs.  Remember, I also had a Wedge here  – one, two, three.  So it’s a Wedge and possibly a Double Top with that high,  maybe a Lower High  Double Top with that high.  So a Wedge and a Double Top is an added reason to look for a reversal down,  selling below a bear bar  closing near its low.  There’s also a Micro Double Top here.  This bar went up and down, and  this bar went up, and here we’re going down.  So we have a Micro Double Top,  a Double Top, and a Wedge.  So there are several things going on here  that would make me  more inclined to take that short.  Here’s another Double Top.  The market tried to reverse up, but  it failed in the neighborhood of that high.  So it’s a Double Top bear flag.  I also want to look for Double Bottoms.  The second low of a Double Bottom can be below the low of the first low.  Here we tried to get a Double Bottom.  Did not go very far.  And here we have  a Higher Low Double Bottom.  Here’s a Lower Low Double Bottom.  This low is below that low,  and here, this low is above that low.  So it’s a Higher Low Double Bottom.  Again, a Micro Double Bottom.  We went down here, we went up, we went down,  and now we’re trying to go up again.  You could buy above this bar or above a bar buying on its high.  Here we have a very big Double Bottom  and it’s a Higher Low  above the bottom of the bear trend.  So it’s a Double Bottom Higher Low,  and that has the possibility  of being a Major Trend Reversal  into a bull trend.  There are often Triangles on charts, and again, they’re rarely perfect.  We have rising lows here  and we’re basically sideways here.  We tried to break to the upside  and that reversed down.  So that’s a contracting Triangle.  Sometimes Triangles are expanding.  Here we have this high above that high,  and this high is above that high.  So we’re going up,  and then here we’re going down.  So an Expanding Triangle, five points  – one, two, three, four, five  – and we keep getting false breakouts.  A new low, new high, new low, new high.  Again, a reversal pattern.  I’ll sell below that bar.  I also look for special bars, big bars  or small bars, inside bars or outside bars.  Here we have 3 consecutive bull bars.  Not much overlap,  and this bar was closing on its high,  this bar was closing on its high.  So this is sustained,  strong buying, and the context is good.  Remember, it’s possibly  a Double Bottom with this low,  and the Double Bottom  is above that low, so it’s possibly  a Double Bottom Higher Low  Major Trend Reversal.  It’s a surprisingly strong rally.  It’s a bull surprise rally, and  bull surprises tend to have higher prices.  What took place here?  This bar, its high is at  the high of that bar; its low is below.  So that’s a variation of an outside bar.  Look at the bar before it, this bar.  Its high is above that bar; its low is below that bar,  and therefore it’s an outside bar, and this is a bigger outside bar.  So outside-outside, consecutive outside bars.  It’s a BreakOut Mode pattern.  Traders will buy if the market goes above,  and they’ll sell if it goes below.  So I’m looking for an OO,  and I would sell below  the low of that bar and below that bar.  A bear bar closing near its low, I’d sell below that bar as well.  Here is the chart with  all those lines drawn in  and with the special boxes drawn in.  Next, I’m looking for entries.  If I’m looking to buy,  I want to buy above a bull bar,  preferably one that is closing near its high.  If I’m looking to sell,  I want to sell below a bear bar,  preferably one that’s closing near its low.  Theoretically we have consecutive bull bars here.  It’s reasonable to take that buy.  However, it turned out  to be a failure, and I would get out  either below this outside bar  or certainly below that,  because at this point there’s a sell.  Sometimes I’ll put an outline around a green box or a red box,  and when I do that, I’m trying to  highlight setups that are particularly good.  They’re ones that a person starting out should try to take.  Nobody’s going to take all of these setups.  What you’re trying to do  is take as many as you possibly can.  Stuff happens.  You could be trading on the markets, you have to go to the bathroom,  you’ve got to eat lunch, you could get a phone call.  All kinds of things happen.  It’s hard to watch every tick all day long.  If this was a daily chart,  it would be easier.  You could simply look at the chart  at the end of the day  and place your orders  for the open of the next day.  But if you’re day trading and if this  is a 5-minute chart – in this case,  it is a 5-minute chart  – it’s very easy to miss a lot of setups.  After I draw in the buy entries, I then draw in the red boxes, or sell setups.  So this bar, reasonable to sell below.  And here we have an OO pattern  below the Moving Average.  It’s an especially good sell, so I would sell below that  or I’d sell the first pullback.  And then here we have  a whole bunch of things.  We have an Expanding Triangle, a Micro Double Top, possibly a Double Top here,  and we have a Wedge rally  to a Double Top, and it’s nested.  We have a smaller Wedge here  and a bigger Wedge here.  So this is a very good sell.  We have a second consecutive bear bar closing on its low.  That’s also a higher probability sell,  so I put a blue outline around the red box.  Then I add textboxes  so people can understand  some of the rationale  for why I’m taking the trades.  This is something you should consider doing every day at the end of the day,  marking up your charts.  You don’t have to write the textboxes in,  but I would certainly draw lines  and highlight special bars.  If you do this for several months, you’ll begin to recognize patterns  unfold during the day, and that will allow you to anticipate trades,  and then when the trade triggers,  you’ll be able to take it  and you’ll be able to manage it well.  That is what I mean by practicing trading.  Again, it’s important as a trader to do the same thing every day, have routines.  One routine is to mark up a chart at the end of every day to practice  so that you’ll develop a lot of experience in your ability to recognize patterns.  Second, use the same approach for every market and every timeframe.  When I’m marking up a chart,  I begin with lines.  I usually begin  looking for channels, Wedges,  and then Double Tops, Double Bottoms, and Triangles.  After that I’m looking for unusual bars – for example,  big bars or a series  of big bars, Surprise Bars.  I also look for small patterns like consecutive inside bars  or consecutive outside bars, or  an outside bar followed by an inside bar.  That is an ioi pattern.  Finally, on my daily charts that I mark up for my website,  I add boxes for buy entries  and for sell entries, and then finally,  I add textboxes that explain why I think something is a good buy or a good sell.  Again, this is Al Brooks, and I want to thank you very much for watching this video.  I hope that you found it helpful.  I think it’s very important to have a routine every day  that you do at the end of trading.  It’s good to practice recognizing patterns and thinking  about how you’ll manage them real-time,  because you’re going to  keep encountering the same patterns.  The more patterns that you know, the faster you are at recognizing them,  the more chance you’ll have at structuring and managing profitable trades.  Thank you very much.