Reading Price Charts Bar by Bar - Comprehensive Notes

  • The book provides technical analysis of price action for traders.

Reading Price Charts Bar by Bar

  • A guide to understanding price action.
  • Aimed at traders and market professionals, but useful for all levels.
  • Focuses on individual bars and how they enhance risk-reward ratio.
  • Advocates learning from every tick and avoiding dismissing any bars as unimportant.
  • Emphasizes understanding why trading is taking place to profit from it.
  • Offers a rationale for why particular patterns are reliable setups.
  • Provides a trader's perspective on market technician terms.
  • Aims to maximize trading profits through a style that suits individual personalities.
  • Explains the author's 10-year journey to successful trading. Includes problem correction (daughter's, personality, confidence).
  • Trading seems easy to non-traders, but real-time execution is difficult.
  • Advocates using wide stops to some extent, but traders hit big losses and become too scared to continue using that approach.
  • Recommends adapting Edwards and Magee's techniques to day trading with candle charts for timely entries and smaller risk.
  • Advocates reading charts to enter precisely when moves take off.
  • Recommends minimal additions to trading strategies to avoid distractions.
  • The author relies entirely on price action on intraday Emini S&P 500 Futures charts.
  • Indicators can work, but complicate instead of elucidate.
  • Price action is more important than any other information; giving some of it up for other information is a bad decision.
  • Maximize profits by minimizing what is considered when placing a trade.
  • A single chart with a 20-bar exponential moving average is sufficient.
  • Volume on 1-minute charts can be useful for spotting imminent trend reversals.
  • Suggests that if a pattern is not perfect but resembles a reliable setup, it will likely behave similarly.
  • Recommends operating in the "gray fog" rather than seeking concrete rules.
  • States that the chart is the only thing to consider when trading, not the news or opinions of others.
  • The skills that make money in trading may be viewed as flaws by laypersons.
  • Price action is the only instrument the author wants to play to make money.
  • Discusses applying price action to Costco's earnings and resulting stock movement.
  • "AB = CD" measured moves and trends: Any trend that covers a lot of points in very few bars will eventually have a pullback.

-The odds favor a test of the trend’s extreme after pullback. Odds substantially fall if the pullback retraces beyond 75 percent.

  • Do dial down to a 1-minute chart and tighten your stop because you will lose.
  • If you want to compete, you must minimize all distractions and all inputs other than what is on the chart in front of you.
  • Trading becomes less stressful, boring, and more profitable as one understands price action.
  • Blackjack card counters are very similar to trading range traders. The card counter is trying to determine when the math has gone too far in one direction.

-Wait for clarity. It will always come.
-Any losses that are not caught will add up (and therefore, it is smart to enter only reliable trades).

  • Aspects of trading are similar to gambling and it is important to distinguish.
  • If you double (or even triple) your position size and reverse at each loss, you will theoretically make money.
  • Some pundits recommend a combination of time frames, indicators, wave counting, and Fibonacci retracements and extensions, but when it comes time to place the trade, they will only do it if there is a good price action setup.
  • Crashes intraday are common and simply an extreme bear swing with tradable price action.
  • Divergences are not a losing strategy in the absence of a Countertrend momentum surge that breaks a trendline is a losing strategy.
  • There are countless ways to make money trading stocks and Eminis, but all require movement.
  • Minimizing what you have to consider when placing a trade helps make more money consistently.
  • Minimally useful for reversal sign, but too unreliable for trading itself.
  • Minimizing focus for successful entries with tight stops via price action.
  • Volume is less useful on smaller time frames.
  • Divergences without breaks are usually a bad strategy.
  • Candlestick charts can provide an advantage.

Chapter 1 Price Action

  • Price action is any change in price on any chart type or time frame.
  • Tick is the smallest unit of change in price that a market can make; also, every trade that takes place is a tick.
  • Volume on bars is as important as volume on obvious bars.
  • Fundamentals control stock prices in the long run, set by institutional traders.
  • No secret meetings by institutions to manipulate prices.
  • Price moves up one tick due to more volume bid than offered.
  • It is reasonable to wonder whether the institutions are basing their entries on price action, or whether their actions are causing the price action. Price action that traders see during the day is the result of institutional activity and much less the cause of the activity.
  • The setup is the actual first phase of a move that is already underway.
  • Some beginners will need a complex mathematical formula and high-powered software that gives them an edge insuring success.
  • Profitable strategy on price action entry is jumping onto an already existing wave.
  • Trapped traders, price action, and stops are critical to success.
  • After initial buy, Vanguard or Fidelity will use any small pullback to add on in the direction of what they were originally planning.
  • Institutional computer programs buy and sell, completing programs and influencing price action.
  • Price action entry involves a piggyback trade on institutional activity where the firm day trades substantial volume.
  • Reversal bar changes the perspective of smart traders.
  • Pay close attention to critical time frames to influence the appearance of bars.
  • Best way to learn price action: print charts and look for every profitable trade.
  • Minimizing what you have to consider when placing a trade helps make more money consistently.
  • You will likely have at least a couple of trades each week that run to four or more times your initial target before setting up a reverse entry pattern.
  • Maximize trading profits by only taking partial profits and following certain entries.
  • Every bar is either a trend bar or a doji bar.
  • The market is either trending on the chart in front of you, or it is not.

Trend Bars And Doji Bars

  • Think of all bars as either trend bars or nontrend (trading range) bars/dojis. If there is no/tiny body, the bar is a doji.
  • The determination is relative and depends on market and time frame.
  • If there is a body, bar is a trend bar with the close trending away from open; large bodies indicate more strength.
  • Exhaustion: extremely large body after protracted move, trade is taken after more price action unfolds.
  • Healthy trends: series of strong trend bars.

-Ideal trend bar is one with a moderate-size body.

Bar Basics

  • Traders look for setup all day long, setups are chart pattern composed of one or more bars, that leads trader to believe order can be placed.
  • Traders need with trend or countertrend set up, or prevailing trend and look to enter.
  • Examples are uptrend and you buy = with trend and if you short that same uptrend= countertrend.
  • Signal bar is always labeled in hindsight, after the bar has closed and after a trade is entered.
  • After order if filled prior bar signal, current bar is entry.
  • Candle/bar chart is either a trend bar(body), or a doji (equilibrium).
  • Tail is descriptive for reversal bars.

Signal Bars Reversal Bars

  • Setup and signal bars identified only after entry.
  • With Trend always wisest.
  • Better after bulls/bears have taken control.
  • Better to get the market after correct side has taken control.
  • A reversal bar alone is not enough of a reason to take a trade.
  • When considering a Countertrend trade in a strong trend, you must wait for a trendline to be broken and then a strong reversal bar to form on the test of the extreme, or else the chances of a profitable trade are too small.
  • Do not enter on 1-minute reversal bar; majority failed.
  • At the end of a bear market, buyers take control and the market rallies. When the market comes back down to the same area of that final low, it is testing to see whether the buyers will again aggressively come in around that price or if they will be overwhelmed by sellers who are trying again to push prices below that earlier low.
  • Even if the bar has the shape of a perfect bull reversal bar, since no bears were trapped, there will likely be no follow-through buying, and a new long will spend several bars hoping that the market will come back to his entry price so he can get out at breakeven.
  • If the body is tiny or the bar is a doji, the bar is a one bar trading range and cannot be used as the basis for a trade.
  • Better if reversal bar has moderate body and good support by prior price action.

Other Types of Signal Bars

  • Remember, a signal bar is a setup bar that led to an entry, but does it make the trade worthwhile (for example, many signals in Barb Wire are best avoided).
  • Note that doji bars are rarely good signal bars because they are one bar trading ranges, and when the market is in a trading range, you should not be looking to buy above the high or go short below the low.

Outside Bars as a Singal

  • If high of the current bar is above-high-of-prior-bar, and low is below-low-of-prior, then current is "outside".
  • The increase size of the bar means bulls and bears are willing to be more aggressive.

The Importance of the Close of the Bar

  • A bar usually assumes something similar to its final appearance seconds to at least a minute or more before the bar closes.
  • However, once or twice every day, the signal that you thought was going to happen does not, and you will lose about eight ticks.

Exchange Traded Funds (ETFS) and Inverse Charts

  • Can switch to a bar or line chart, or a chart based on volume or ticks, or charts based on higher or lower time frame.

Second Entries

  • Bottoms usually require a second reversal off low to convince traders to possibly trade a new bull.
  • If second entry is letting you at better price something wrong.

Late and Missed Entries

  • If you look at a chart and think that, if you would have taken the original entry, you would still be holding the swing portion of your trade, then you need to enter at the market.

TRENDLINES AND TREND CHANNELS

  • Use trendlines and trendlines and trend channels

Trendlines

  • Trendlines set up ''with-trend'' trades.

  • Trendlines also draw with channels lines.

  • If the trendline is broken after two or more hours, chances high that the trend extreme will be taken with pullback.

  • Trendline strength break provides indicator of the countertrend.

  • Any new trendline break, broken trendline has become more important.

  • Parallel trendlines will work.

Micro Trendlines:

  • Micro Trendline small, steep trendlines in strong trends, horizontal lines, horizontal lines swing points, steep trendlines in strong

Trend Channel Lines

  • opposite side priceline / channel.
  • helps trade reversals.
  • usually broken and generate a new swing point that creates a new, longer trendline with a shallower slope.

Dueling Lines:

  • When a longer trendline is tested and the test occurs at a shorter-term trend channel line of opposite slope, look to enter in the direction of the trend if the test is successful.

TRENDS CHAPTER 3

  • It is crucial to recognize trends as the source of consistent income in trading.
    -The strongest trend pattern has its movement at the beginning or at the end during its day or has the trending high or lows, this happens often.
  • To recognize the trend, the volume of buyers and sellers must be understood, this allows for you to adapt accordingly.
  • It is imperative for the non-trader to not allow their anxiety to drive you, this can become damaging for your success as a trader.
  • A trend is a series of prices changes either trending up or down.

Two legs trends

  • trend: you can not have one side, must have two or more sides to trend.
  • The start big move in a short that breaks a trend needs 2 or more legs down.
  • In practice to draw best results, all you need is a trendline

Signs of strengths

-Big gap opening/ or trending

  • Trending high and trending low
  • No climax.
  • Small pullback
  • Trend for at least 2 hours: two HMT
  • Few profitable or none counter trades.
  • No large tail
  • With trend entry.
  • For good trade must be at least 7 or more.

Common Trend patterns: strong, but only take partial trends

TREND FROM THE OPEN
TREND CONTINUATION
TREND FROM TRADING RANGE
TIGHT CHANNELS TREND
STAIR BULL OR BEAR STAIR

Chapter 4: Pullback.

  • If you use indicators and look to do reversals you need 2 things, trend line with strong reversals and EMA formation.
  • Everything test prior to pull to see to what point a potential pull can do/go.

CHAPTER 5 Trading range.

  • Horizontal lines swing high swing low. failed breakouts reversed to be a fade to original trading zone or a low point.
  • The middle of the days ranges are often traded.
  • Also look for the trend, for the set up.

BREAKOUT

  • To help predict move, use breakout and candlestick to make trade/decision.
  • It's good to wait for breakouts.

NOTE

  • AB-CD MAGMENT.

Reversals.

  • Are test failed results.
    Trend lines.
    Failed wedges.
    Volume is essential with reversals