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Brooks, Trading Price Action Reversals

The third and final volume of Al Brooks’s series is Trading Price Action Reversals: Technical Analysis of Price Charts Bar by Bar for the Serious Trader (Wiley, 2012). A trader does indeed have to be serious to read all three volumes because, according to the author himself, the task is daunting: some 570,000 words.
Only half of the final volume is about trend reversals. The rest deals with day trading, the first hour (the opening range), and putting it all together, including 78 trading guidelines, some of which you may not have encountered elsewhere.
This volume is the most accessible of the three, but then my very tired eyes did a lot of work before getting here. It would be difficult to skip the first two volumes and expect to understand the third.
Brooks himself is not primarily a reversal trader. As he writes, “I prefer high-percentage trades, and my most common trades are pullback entries and trading range fades. I especially like breakouts because when they are strong the probability of follow-through is often more than 70 percent. I look less often for reversal trades, because most reversal attempts fail, but I will take a strong reversal setup.” (p. 463) (more…)

The psychophysiology of trading

The paper is old (2002) but still interesting. Andrew W. Lo and Dmitry V. Repin in “The Psychophysiology of Real-Time Financial Risk Processing” report the results of their experiment to measure the emotional responses of ten traders—five highly experienced and five with low to moderate experience. They wired up these traders to plot real-time changes in their skin conductance, blood volume pulse, heart rate, electromyographical signals, respiration, and body temperature.

Although the sample is very small and hence just a first stab, the authors noted some significant differences between the two types of traders. The less experienced traders, for instance, seem to be more sensitive to short-term changes in such market variables as deviations and trend reversals. Both sets of traders, however, saw spikes in their blood volume pulse in the face of volatility events.

Lo and Repin conclude that “emotion is a significant determinant of the evolutionary fitness of financial traders.”

The Best 10 things George Soros Ever Said About Trading

On September 16, 1992 – later dubbed “Black Wednesday” — the day the  British government abandoned the European Exchange Rate Mechanism (ERM), and the pound was devalued by 20% George Soros made over $1.2 billion  on his short sterling trade  and was dubbed  “The Man Who Broke the Bank of England.”  His Quantum Hedge Fund has returned about 20 percent a year, on average, since 1969. These are amazing results, and some of the best ever achieved. Many of the years he was personally running it he had 30% returns and two years returned an amazing 100%.

Risk Management

“I’m only rich because I know when I’m wrong…I basically have survived by recognizing my mistakes.”

“My approach works not by making valid predictions but by allowing me to correct false ones.”

Trader Psychology

“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”

“The markets are always on the side of exuberance or fear. It’s fear and greed. Right now greed has the better of it, which is rather nice (for investors) as long as it doesn’t get out of hand,” (more…)