Al Brooks - Taking Action in The E-Mini PDF

TRADING TECHNIQUES
Price-action lines are simple setups that work surprisingly well on a five-minute
E-mini candlestick chart. With patience, practice and a flexible mindset, they
can be a versatile tool for the discretionary day-trader.
Taking action
in the E-mini
BY AL BROOKS
ou learn a lot about what

doesnt work day-trading the
S&P market for two decades,
but luckily, if you dont try to
get too complex, you also can stumble upon a setup or two that work
quite well. Once such technique is
based on price action around easily
identifiable support and resistance
levels. Applied to a five-minute candle chart, it can identify reliable
entry and exit points in E-mini S&P
500 futures.
At the heart of this strategy
are price-action lines. This is
a broad category of support and
resistance identifiers that include
trendlines, trend channel lines and
regression lines.
This non systematic approach
offers considerable flexibility for
traders willing to take the time to
learn its details and practice its
application. This article will follow a
typical trading day, broken down
into a series of charts, to demonstrate
how to use price-action lines for
entries and exits.
40
FUTURES | August 2007
BULL OR BEAR?
First, a bull or bear leg is identified
with a trendline. For a bull leg, the
trendline is drawn by connecting two
significant lows with a straight line.
This line is then usually extended up
and to the right. For a bear leg, the
trendline is drawn by connecting two
significant highs.
Note that the trendline can be horizontal when drawn across the lows of a
double bottom in a bull flag, for example.
The objective is to observe how
the price acts on subsequent tests
(touches, penetrations or approaches) of the trendline. In the case of a
support line, if it bounces off the
line, this is often a buy signal. If
instead it collapses in a big range bar
through the trendline and the bar
closes near its low, the bull swing
might be over.
However, this is generally
unknown until more price action
unfolds. It is possible that the
market is creating a trend with a
wider channel and a flatter slope.
Such a scenario would require a
new trendline and another period

of observation.
Once it appears likely that the
market is in a bull swing, start the
trendline at the low of the bar that
started the swing. For the second bar,
look for the first bar that has a low
below the low of the prior bar. This
line becomes the first bull trendline
drawn amid the new price action.
As time unfolds, this bull trendline
should be redrawn. In most cases,
each subsequent line typically has a
flatter slope, but in a runaway bull
swing, the trendlines can get steeper.
It is common for there to be a higher
low within a few bars of the start of
the trend, and frequently you will
have to switch to using this bar for
the first bar of the bull trendline
because it will result in a line with a
flatter slope and will likely provide
more reliable signals.
The first chart in Getting started
(right) shows an example of a bull
trendline drawn across the lows of
bars 3 and 5 and then extended a
few bars up and to the right until it is
Reproduction or use of the text or pictorial content in any manner without written permission is prohibited.
Copyright 2008 by Futures Magazine Group, 222 S. Riverside Plaza, Suite 620, Chicago, IL 60606
penetrated by bar 8. As a visual aid,

it is helpful to use a thick line
between the two bars that provide
the high or low points and a thin line
to indicate where the line was
extended to the right.
CHANNELING PRICE
A trend channel line is a line drawn
on the other side of the bars used
to form the trendline. In a bull leg,
the trendline connects the lows and
the trend channel line is drawn
across the highs. Usually, but not
always in this case, it is parallel to
the original trendline.
To create a trend channel line that
is parallel to the trendline, draw the
most logical trendline, create a parallel line, then drag it to the other side
of the trend, creating a channel.
Make sure the trend channel line is
positioned so that it contains all of
the other highs in the bars between
those used to make the trendline.
Often, the channel created by these
two lines will contain the price
action for many more bars. In a bull
trend, the trendline is below the lows
and the trend channel line is across
the highs, while the opposite is true
for a bear channel.
shows an example of a trend channel
line parallel to a trendline. It was
dragged to the high of bar 4
so that it would be above all of the
highs between bars 3 and 5,
which are the starting and ending
points of the trendline.
Sometimes, however, no good
trendline is apparent, even though
prices appear to be moving in a channel. In these cases, you can still draw
a trend channel line by connecting
significant highs in a bull leg and significant lows in a bear leg.
Note that this is opposite of trendlines, which are drawn using lows in
a bull market and highs in a bear
market. An example of this type of
trend channel line is shown in the
first chart in Back in action (page
43) between bar 2 and bar 5.
GETTING STARTED
The first chart below shows how a bull channel sets up a quick bear trade that ends after
price bounces off the regression line drawn earlier in the chart and extended to the right.
The second chart shows how a bullish trendline drawn almost immediately following the
reversal and a trend channel line contain the price action for several more bars.
HOY
1
4
5
2
10
8
12
Trend Lines: from Bars 3-5 and 6-7

Trend Channel Line: Bar 4
Linear Regression Line: from Bars 1-2
11:00
11:30
12:00
12:30
11
ii
13:00 Apr
Regression Line: from Bars 1-2

Trend Lines: Bars 4-5
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4
12:30
10
ii
MM
12:00
8:30
MM
11:30
8:00
Exit long
11:00
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6:55 short
6 7 16t
Exit short
9
13:00 Apr
7:00
7:55 long
15t
7:30
8:00
8:30
9:00
Source: Tradestation
Less frequently, a regression channel line will be the most useful line
for monitoring price action. Its helpful during times when market action
makes it appear that trendlines will
be too steep for the market to ever
reach them.
First, two points are needed. The
first point is the first bar of the new
swing. The second bar is the bar at
end of the first leg of the new swing;
however, this bar will change as the
trend proceeds and the line will be
redrawn. Typically, you will have the
option to use several different prices,
such as the open, high, low or close,
to calculate the regression. A good
choice is the midpoint of each bar.
After these lines are calculated and
drawn, like the others, they should

be extended to the right and price
action should be monitored as it
approaches these levels.
again demonstrates this tool. A
regression line is drawn between bars
1 and 2. This is a good place for
this line because a bear trend
channel line drawn to connect the
lows of the spike down bars would
be too steep for the market to likely
reach it, rendering it useless for
generating signals.
MONITORING PRICE
All three price-action line types are
most often useful during the next
three to 10 bars, but sometimes the
www.futuresmag.com | August 2007
41
Trading Techniques continued
SIDEWAYS HURTS
The first chart shows a short trade that ended up scratched. Although the bounce
off the trendline appear significant, the market languished afterward. Again in the
second chart, it appeared there was an opportunity for a short trade but the market
still dragged sideways.
HOY
8:45 short
0t
3 5 7
MM
10
8
4 6
Exit breakeven

(It is also a small trendline.)
12:00
12:30
13:00 Apr
7:00
7:30
8:00
1
13:00 Apr
7:00
7:30
8:00
9:00
9:30
10:00
9:55 short
0t
Exit breakeven
9
11
5 6
2
8:30
8
10
All 3 lines are trendlines but the line

from bars 1-2 becomes a Bear Flag
Channel Line from bars 5-7.
8:30
9:00
9:30
10:00
10:30
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11:00
market will come back to test lines

created hours earlier in the day.
You would never catch this unless
you extended the lines to the right
of their component bars. In the second chart in Getting started bar
4 demonstrates just such a test,
while in the second chart in
Sideways hurts (above), a bull
trendline from bar 1 and bar 2
becomes a bear flag channel line
later in the day at bar 7.
The key point as price action plays
out is to keep drawing lines because
the best line defined by the
line most useful in identifying
entries and exits usually only
becomes evident after observing it
42
FUTURES | August 2007
through several tests.

As price action approaches the
lines, look for approaches (near
touches), which are touches and
penetrations that quickly fail and
reverse. The bar that tests the line is
the signal bar, and the bar used for
entry is the entry bar.
A signal bar can sometimes be the
final bar of a multi-bar pattern. For
example, a pair of inside bars, or an
ii, forms a two-bar signal (as shown
in the second chart in Back in
action) where bar 5 is the signal
bar. Almost all entries should be
made on a stop placed one tick
beyond the signal bar.
For a buy signal, the buy stop is
one tick above the high of the signal

bar. If the entry were selected
correctly, rarely will more than four
ticks have to be risked. If its a solid
trade, the market will not come back
because by then the rest of the market will have identified the condition
and orders will gobble up any one- or
two-tick pullback.
For example, if the market falls
away from a bear trend after poking
above it, this is a often a signal to
sell one tick below the low of the
bar that just tested the line. This
happened in the first chart in Back
in action at bar 7. The high of
the bar went above the bear trendline drawn across the highs of
bars 3 and 6. There was also a
horizontal bear trendline drawn
across the double top (bear flag)
formed by bars 4 and 6. In this
case, bar 7 approached that line
but could not reach it and then the
market resumed its drop.
CONFIRMATION AND EXIT
Fibonacci extensions and retracements arent always reliable entry
and exit signals by themselves, but
they can sometimes provide reliable
confirmation for trades based off
price-action lines. For example, in
the first chart in Sideways hurts,
bar 3 was a Fibonacci level (a measured move above bars 1 to 2)
and in the first chart in Back in
action, bar 9 was one tick below a
62% retracement of the days range.
It also tested the breakout of bar 1,
which led to the days bull move.
Whenever considering an entry,
its always good to have two or
more reasons for the trade. In the
first chart in Getting started, bar
6 penetrated a bull trend channel
line but closed below the midpoint of
the bar, indicating that the bears
were gaining strength. Also, bar 6
poked above the prior days high
(HOY, or high of yesterday) on the
chart). Even though bar 6 closed
below its midpoint, the close was still
above the open of the bar, indicating
strength. Also, while its a subjective

determination, the bull channel
appeared fairly steep.
Whenever there is still reasonable
strength in a bull, its good to have a
second signal for a sell. Thanks to its
close near the low and off the small
trendline drawn across bars 6 and
7, bar 9 provides our second
signal with a close near its low.
Once the trade looks promising,
its time to start looking for an opposite swing set-up. If the opposite signal is weak, it can be used to exit
(but not reverse) the original position. If it is strong (two or more reasons), a reverse is in order. An example of a good reverse is shown in the
first chart in Back in action where
bar 10 was an inside bar and bar
9 was a 62% Fibonacci pullback. In
this case, a reversal was placed after
the price action penetrated the trend
channel line.
Although a particular money
management strategy depends on
account size and risk tolerance,
a workable approach is to trade in
multiples of two contracts, looking to
scalp half for four ticks and swing
the other half, using a breakeven
stop after taking profits on the
scalp portion.
On most days, the potential profit
on the swing and scalp portions are
usually each equal in points to roughly the daily range. Opportunity
knocks, right, shows that this day
had the potential to make eight
swings for 39 ticks, and all eight were
also good scalp entries.
With a strategy based on priceaction lines and careful and swift
adaptation to price action, an alert
and disciplined trader can come out in
the black more often than not.
FM
BACK IN ACTION
We are tipped off to a sell when price closes down while bouncing off one down
trendline one bar after approaching another. The second chart shows how new
trendline and trend channel lines drawn along the new up swing provide the support to
for a new long trade.
11:00 short
1t
11 ii
3
4 6 7
8
10
12
ii
5 .62
Exit long
9
2
1
11:20 reverse to long

8t
Apr 7:00 7:30 8:00 8:30 9:00 9:30 10:00 10:30 11:00 11:30 12:00 12:30 13:00 4/3
12:25 reverse to short

-1t
Trend Lines: From Bars 2-3, 5-8.

Trend Channel Line: Bar 6.
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8:30
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6 7
iii
10
11
Exit breakeven
12:00 long
8t
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OPPORTUNITY KNOCKS
Theres a lot of opportunity to capture short-term swings in the E-mini when trading off
five-minute charts.
-1t
16t
0t
0t
1t
8t
Al Brooks has been a private day-trader for the

last 20 years.
Visit Your DAILY Futures Resource:
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Trend Lines: From Bars 3-6 and 4-6.

Trend Channel Line: From Bars 2-5.
Horizontal Line from original Bull Breakout, from bar 1.
15t
Net total 39t (9.75 points).
(About $440 after commissions.)
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13:00A pr 7:00 7:30 8:00 8:30 9:00 9:30 10:00 10:30 11:00 11:30 12:00 12:30 13:00 4/3 7:00
www.futuresmag.com | August 2007
43
TRADING TECHNIQUES
Although more complex strategies work for some, a proficiency in reading price
action itself is sufficient to succeed in trading for most retail traders. Here, we
define this concept and quantify some ways to profit from it.
Price action fundamentals

BY AL BROOKS
he term price action is vague

and means different things to
different people. The broadest
definition refers to any representation on a chart of any aspect of
price movement during the course of
trading. This includes any financial
instrument, on any type of chart, in any
time frame. Most day-traders are technicians and many use indicators to help
them determine when to enter or exit a
trade. However, if you become proficient in reading price action itself, it
alone can provide you with all the cues
you need to enter and exit trades.
Price action analysis, demonstrated
here in the E-mini S&P 500, is an elegant approach to trading the markets.
The approach is largely discretionary
and is open to the standard criticisms
that systematic traders lob at such techniques, but it has a lot going for it, as
well. Price-action analysis requires little
up-front investment in expensive analysis software, and can allow you to focus
on mastering the process of trading
without being overly consumed with
mastering a rigorous and complex collection of techniques. It may appear elementary, but that makes it a good place
46
FUTURES | October 2007
to start for a beginning trader and an

excellent way to re-invent a trading
program that has fallen on hard times.
Taking Action in the E-mini,
August 2007, already examined some
slightly more advanced, specific
techniques of price-action analysis,
and future articles will take the concept
further. This article, however, backs up
a bit to offer a more solid grounding on
this philosophy, as well as provides
examples of simple price-action
strategies that work.
MOVING ON UP
One way to apply price action analysis is
with chart patterns, but most traders
quickly learn that the common ones
have a lot of exceptions and nuances
that can result in losses if ignored.
These exceptions and nuances highlight
an important lesson of trading: For most
of us, it is necessary to focus on one
technique, market and even time frame
and then spend hundreds, if not
thousands, of hours studying that
combination. Its a hard fact of trading,
but only a few can be successful actively
trading multiple markets, across
many times using a diverse collection of
indicators. For most traders, a minimalist approach is best.

Another reason focusing on one
approach is so important is logistics and
risk tolerance. Trading is about transferring money from other peoples
accounts to your own. You do not have
to take 20 trades in a day for this to
occur. Although it is not advisable to
commit an entire account balance to
one trade, with $5,000 of available
account equity, you can trade 10 contracts of the 10-year T-note futures with
the goal of making one trade a day that
nets four ticks of profit. After commissions, this is about $575. For many, this
market and time frame might be boring
or logistically unworkable; for others, it
might be perfectly reasonable. You need
to decide this early and go from there.
If a strategy is valid, it fits into your
schedule, your equity can handle it and
your risk parameters are intact, you
should be able to develop a reasonably
high winning percentage if you take
your time to hone your technique.
Then, real success is a matter of increasing position size, rather than changing
the frequency of your trading, which
inherently affects your strategy.
Copyright 2007 by Futures Magazine Group, 111 W. Jackson Blvd., Suite 2210, Chicago, IL 60604
11 WAYS TO PAYDAY
Here are 11 possible trades on the five-minute S&P 500 chart, contained in one trading day. The first step to identifying patterns that work
is to study several charts like this and learn the recurring tendencies of markets.
10
1,539.00
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11
6
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7
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35,000
15,000
5/18
For example, if you find a single

pattern on a five-minute E-mini chart
that consistently generates one-point
profit (four ticks) while risking only one
point for your stop, its only necessary to
place one or two entries a day. This will
net about $45 per trade per contract
after commissions. Its small, but on a
25-contract position, it equates to about
$250,000 a year. Such size is reasonable,
as well. The E-mini S&P futures can
easily absorb a 25-lot position with no
movement in price.
FINDING THE PATTERNS
Finding patterns that have high
winning percentages requires studying
many charts during a long period. The
amount of study required is why its critical for most of us to pick one market
and one time frame. This choice is your
own, but you certainly can do worse
than examining the E-minis on a fiveminute chart.
There are two prime advantages to the
E-mini S&P 500 futures: movement
and liquidity. There is always opportunity (volatility), and retail traders can
almost always get their price in this
electronically traded market. As for the
five-minute chart, even on a bad day,
there are usually 10 possible trades that

present themselves. While one- and
three-minute charts offer more trades,
keep in mind that a great trade on these
time frames also will become a great
trade on a five-minute time frame. Also,
the shorter-term intraday charts frequently produce countertrend setups
that often are losers, and when you have
too many losers, it affects your focus.
Each market and time frame combination has a profit target and a stop
size that are more effective than others. For the five-minute E-mini chart,
a six-tick profit target combined with
a six-tick stop works well through
time (except on unusual days when
the days range or the range of the
five-minute bars is unusually large,
then you should double the profit target to eight ticks and the stop to 12
ticks). When starting out with this
market/time frame combination, it
helps to concentrate on scalping these
six ticks, rigidly adhering to the sixtick stop loss. As you become proficient and gain confidence, you can
start scalping out part of your position
and letting the rest swing with a
breakeven stop in place. This is especially useful when you might be catch-
ing the high or low of the day,

or at the end of a strong pullback in
a powerful trend.
As a logistical rule of thumb, entering
on a stop order results in a higher winning percentage at the expense of
potential profit (all else equal). For
example, if you want to go long, place a
buy stop at one tick above the high of
the prior bar (your signal bar). The bar
where you enter is the entry bar. Next,
place an OCO order (one-cancels-theother) to exit either on a limit at four
ticks above your entry (your profit target) or a stop at six ticks below your
entry (your stop loss). A market will
almost always trade at least one tick
above your limit order for you to get
filled, so a successful six-tick scalp will
require the market to rise at least six
ticks above the high of the signal bar.
SIMPLE METHODS THAT WORK
One technique for finding reliable
patterns, although study intensive,
is to examine numerous charts and
find several that have 10 or more
successful trades if you had used the
four-ticks profit, six-ticks risk approach.
Then you physically mark them
for study, as shown in the chart in
Reproduction or use of the text or pictorial content in any manner without written permission is prohibited. www.futuresmag.com | October 2007
47

11 ways to payday (page 47).
Next, look for recurring patterns
among these trades. It will take some
time, but you will eventually discover
many patterns that work. Then, learn to
understand when these patterns fail and
try to understand why. Then, begin
trading just one contract, placing two or
three trades a day. At this point, overtrading and stress, which can derail the
learning process not to mention
result in big losses are your biggest
enemies. Do not put yourself in a
position where emotions interfere with
your analysis and execution.
One method demonstrated in 11
ways to payday might seem too obvious
to ever be effective, but it works. On
the majority of days, the market will not
be trending (defined as opening on one
extreme and closing on the other).
Instead, it will have four to six swings
up and down. Once the market makes a
new high or low, sell the high or buy
the low. Just after Entry 9 in the chart,
the market made a new high for the
day. At the completion of each subsequent bar, you would place a sell stop at
one tick below the low of the just completed bar. You would have been filled
at Entry 10.
Another important observation is
that the market often makes a second
attempt to do something if the first
attempt fails. The second attempt is
usually a good entry in the opposite
direction when that second attempt also
fails. For example, Entry 3 is a short
after there were two attempts at a bull
move. (There were two instances in this
pullback where a bar extended above
the high of the prior bar.)
This also occurred with the Entry
11 short, which developed after two
attempts at going higher (the first
attempt was just before the Entry 10
short). Entry 6 is also a short after
two failed long attempts. Entry 2
demonstrates the opposite effect: It was
the second attempt at a move higher,
and it worked.
Do not limit yourself to examining
only the highs and lows of bars. On the
five-minute E-mini chart, every part of
48
FUTURES | October 2007
the bar tells you something important.

Look at where the close is relative to
the high and low, as well as relative to
the close of one or several bars earlier.
Note the sizes of the tails and at how
many ticks the current bar extends
beyond the prior bar or series of bars.
For example, if down momentum is
strong, you would not look to buy,
expecting any buy signal to fail. Look at
the bar that formed two bars before
Entry 11. The tail extended only one
tick above the prior bars high, immediately trapping new longs into a losing
trade. Entering on traps is one of the
highest percentage trades that you can
make. You know the longs are trapped,
so think about where they will be
stopped out. Place a sell stop order to go
short at that price. The chart has a 20bar exponential moving average
(EMA). Youll want to get a feel for
how price acts around the EMA. Entry
4 was after the market had a bear trend
bar break below the EMA, immediately
followed by a bull trend bar that closed
just below the indicator. Other simple
tools are trendlines and trend channel
lines. These can help you to better analyze potential breakouts, tests of past
extremes and false breakouts.
There is no quick or easy way to
become a good price-action trader.
However, if you spend the hours
needed to get a feel for the right
market and time frame for your situation, find reliable patterns and ease
slowly into applying them on a large
scale, you can make money. For many
of us, long-term success in trading is
rooted in simplicity. Price-action
trading may not exploit the latest
technologies, require thousands
of dollars in seminars and software,
and be difficult to quantify in a
rigorous sense, but for the right trader,
it simply works.
FM
Al Brooks stopped practicing medicine 20 years
ago to day-trade for his personal account full
time, and has been doing so ever since.
TRADING TECHNIQUES
Reversal bars indicate the traders who drove the price in one direction are
unable to hold ground. While that sometimes portends an upcoming price drop,
certain attributes are necessary for reliable forecasts.
Predicting equity
index reversals
BY AL BROOKS
reversal bar on a candlestick

chart is any bar with a tail
on one end and its close
near the other end. A
bullish reversal bar has a close near its
high, and a bearish reversal bar has a
close near its low. The occurrence of a
reversal bar indicates that traders
drove the price in one direction but
were over-powered by traders taking
positions in the other direction.
Most times, though, a reversal bar is
not a reliable stand alone signal, and
should not be used as the basis for a
countertrend trade. However, when they
are shaped well, have an appropriate size,
and occur in certain locations relative to
the prior price action, they are consistently one of the best indicators.
STRUCTURE
An ideally shaped bullish reversal bar has
its open around the middle of the bar,
a tail at the bottom that is at least
one-third of the entire candle, and a
close that is at or near the high. This
structure is reversed for a bearish
reversal bar.
This shape stems from the market
condition that at the start of the bar,
42
sellers overwhelm buyers and drive the

price down. However, the lower prices
attract more buyers than sellers and
these buyers drive the price back up
above the open of the bar, causing the
bar to close near its high. In other
words, the bulls simply take control.
When other factors are present,
traders looking to buy should be willing
to buy at these higher prices with the
expectation that the bulls are now in
control and will push prices even higher over the next several bars. What a
buyer is looking for is some indication
from the price action that the market
will continue to go up and allow him
to exit at a profit with not too much
risk. A bullish reversal bar can often
provide that indication.
It is important to recognize that
there is tremendous variation in the
shape of reversal bars that result in
profitable trades. They can have long
tails, small or large bodies, and closes
below the open, as long as the close is
above the midpoint and preferably
near the high. In any case, the best way
to enter a long position is to wait for
the bar to close and then place a buy
stop at one tick above the high of the
bar. The traditional approach also

involves placing the protective sell
stop at one tick below the low of the
bar but if you read the price action correctly, you often only have to risk
about four ticks on a five-minute Emini chart.
Once the bulls are in control, they
are not going to let the market drop
five or six ticks to let other traders
come in lower. Instead, they will buy
more on a one- or two-tick dip. Also, if
the market did in fact drop six ticks,
smart traders would question the
premise that the bulls are in control
and probably want out of the trade.
Finally, once the five-minute chart
has turned bullish, longer timeframes,
such as the 15-, 30- and 60-minute
charts will follow, drawing in even
more buyers above the market. Though
we are using five-minute E-mini S&P
500 price action for illustration, the
principles apply to all markets, charts
(such as volume-based charts), and
timeframes.
This is also true for volume charts of
all sizes (for example, charts where the
bars are based on 10,000, 50,000, or
100,000 contracts).
FUTURES | December 2007
FOLLOW-THROUGH
Once a bull move begins, smart bulls
will look at the close of every bar. If the
bars continue to close near their highs,
new bulls will enter as soon as the next
bar begins; causing the bar to go up
immediately after it opens. This will create a series of bars that open near the
lows and close near the highs.
If there is enough upward momentum, buyers will buy at any price
because they are confident that even
if the market reverses back down, buyers will soon again overwhelm sellers
and the market will make a new swing
high, allowing them to exit with
a profit.
The size of a reversal bar is also
important. For example, in Size is relative (right) Bar 6 is a reversal bar
that is only five ticks tall. However, it
formed after the market just dropped
seven points (28 ticks) and it is relatively small compared to the prior bars.
The market just traded below a swing
low (seven bars earlier) and traders are
watching the price action to see who is
in control. What they see is a weak
reversal bar, and weak reversal bars are
better viewed as continuation patterns
and not reversal set-ups.
The following bar was a small inside
bar with a down close. Smart bulls who
bought the reversal bar would have had
enough disappointment and would
exit. Smarter bulls would not have
bought in the first place and instead
would place an order to go short on a
stop at one tick below that small bar.
The smarter bull would know that all
those traders who bought that small
reversal bar will dump and look for a
better entry.
THE ROLE OF CONTEXT
Location and context are crucial in
deciding whether to place a trade based
on a reversal bar. An important observation is that Size is relative shows a bear
trend day with at least 11 reversal bars,
yet nine of the 11 are bull reversal bars
and only two are bear reversal bars. This
is not an aberration.
Trend days typically have lots of
reversal bars that sucker traders into

the wrong direction; these traders subsequently provide much of the fuel
that drives the trend. They buy and
the market never gives them more
than a couple ticks of profit and
quickly puts them at a two- or threetick loss. These weak buyers are
turned into sellers, adding momentum
to the downward trend.
The reason there are so many
bullish reversal bars on a bear trend
day is while even the most nave bulls
can tell its a down day, these traders

live on hope. Also, if they are looking
to get long, that means they missed
the downtrend. Once you miss a
trend, you look for an opportunity for
the market to reverse rather than
joining the party late.
Often, these traders will be looking
at one- and three-minute charts or
5,000-share charts to get long at each
reversal off each new swing low. They
will buy quickly at the first sign that a
bullish reversal bar might be forming,
SIZE IS RELATIVE
A relatively small reversal bar with a close at its open, such as Bar 6 shown here, is usually
a sign that the market is pausing and not reversing.
Bear Trend Day but only 2 Bearish Reversal Bars
2
5 6
13 4
10
11
1,558.00
1,556.00
1,554.00
1,552.00
1,550.00
1,548.00
1,546.00
1,544.00
1,542.00
1,540.00
1,538.00
1,536.00
1,534.00
1,532.00
1,530.00
1,528.00
1,526.00
1,524.00
1,522.00
1,520.00
70,000
30,000
6/20 7:00 7:30 8:00 8:30 9:00 9:30 10:00 10:30 11:00 11:30 12:00 12:30 13:00 6/21
Source: TradeStation
THIRD TIMES THE CHARM

Youll often find several pushes higher before a market finally breaks. Here, Bar 6 marks
the third such move in the rally.
2 3
7 89
1 A
1,553.00
1,552.00
1,551.00
1,550.00
1,549.00
1,548.00
1,547.00
1,546.00
1,545.00
1,544.00
1,543.00
1,542.00
1,541.00
1,540.00
1,539.00
24,000
12,000
6/19 7:00 7:30 8:00 8:30 9:00 9:30 10:00 10:30 11:00 11:30 12:00 12:30 13:00
www.futuresmag.com | December 2007
43

thinking that a one-minute bar is only
about three or four ticks tall has very
little risk. This happens on the oneminute chart, and then the threeminute, and finally the five-minute.
At this point, all of the weakest longs
have bought, and they will not buy
any higher because they have already
had five losing countertrend trades
that day and know that there is too
much risk at buying any higher.
Some smart bears who added to their
short a few bars earlier will see this
bullish reversal bar and take some

scalpers profits. However, they are looking to reload. They simply dont know
how high the market will go before the
inevitable stall develops, followed by the
forced liquidation of the weak new
longs. Also, they dont want to exit most
of their short position because they are
expecting new lows and dont want to
have to worry about finding a place to
re-enter shorts. They are holding short,
looking to add on at higher prices, and
they certainly are not buying.
SIDEWAYS ACTION
Sideways markets require different considerations, such as Bar 1 shown here where a
reversal bar also took on the attributes of an outside bar.
2
6
1
3
5
1,555.00
1,554.00
1,553.00
1,552.00
1,551.00
1,550.00
1,549.00
1,548.00
1,547.00
1,546.00
55,000
25,000
7:00 7:30 8:00 8:30 9:00 9:30 10:00 10:30 11:00 11:30 12:00 12:30 13:00 6/18
ANOTHER PERSPECTIVE
When price action indicates a market is reversing, but theres no reversal bar, that
doesnt mean there isnt one on another time frame.
7 minute
1
11:00 11:30 12:00 12:30 13:00 6/19 7:00 7:30 8:00 8:30 9:00 9:30 10:00 10:30 11:00 11:30 12:00 12:30 13:00
44
1,553.00
1,552.00
1,551.00
1,550.00
1,549.00
1,548.00
1,547.00
1,546.00
1,545.00
1,544.00
1,543.00
1,542.00
1,541.00
1,540.00
1,539.00
35,000
15,000
WHEN THE BEAR BREAKS

The bear rally starts off quickly with a
bullish reversal bar and a strong close
near the high of the bar. However, there
will only be a few ticks of follow-through
buying because no one will buy much
above the high of the reversal bar.
The new longs are weak and are
hoping for a countertrend scalp. As
such, they will only buy the bull reversal bar and perhaps a few ticks above.
The smart bears will take profits on the
scalp portion of their shorts when the
bullish reversal bar forms, but they will
not buy any higher. They are only
looking to sell more, but there is no
one left to buy after the bullish reversal
bar forms. This results in one or two
small up bars and then a stall once the
buying stops.
The weak bulls are very nervous at
this point. They were hoping for a
huge up bar so they could move their
protective stops to breakeven.
Instead, they have at most a couple
ticks of profit and the market has
stopped going up. They immediately
place a sell stop order to exit below
the low of the prior bar to minimize
their losses. The bears have been
waiting for the small rally to run its
course and will be looking to sell
more once it stalls. Everyone is now
looking to sell, so the bear resumes
below the quiet pause bar in the
absence of a bearish reversal bar.
Third times the charm (page 41)
has a large bearish reversal bar at the
high of the day (Bar 6). The close is
above the open but well below the
midpoint. This is the third push up in
this rally, which is a common reversal
pattern. After a market has a strong
move (the top of the strong up move
was Bar 4), it often needs two attempts
at a top before there is a correction,
resulting in whats known as a three
push-up top.
Bar 5 was the first attempt, but the
next bar did not give a signal; it did
not trade below the low. Also, both it
and the next bar were small and
closed at the open, which usually
identifies them as continuation pat-
FUTURES | December 2007
terns. The market made one more

push higher and formed a large bearish reversal bar. A second attempt at a
reversal is usually a strong signal.
Combined with a large bearish reversal bar, the odds were high that the
market would make a down move that
should last at least an hour and
extend at least twice the range of the
large reversal bar, which it did.
Bar 1 in Sideways action (left) is a
large reversal bar but it developed in a
sideways market so there was nothing
to reverse. It was also an outside bar;
its high and low are outside of those of
the prior bar. Outside bars in sideways
markets do not give direction.
However, this outside bar had a low
that was the low of the day and it had
a strong close, indicating that the
bulls were showing some strength.
The next three bars were inside of
each other, indicating that everyone
was waiting for a breakout, which
came on the upside. This was the
more likely possibility because of the
upward momentum of Bar 1. It would
have made sense to have a buy stop at
one tick above the second inside bar
and a protective stop below that bar.
Bar 4 in Sideways action also has
great shape but a bad location. Its body
is entirely within the body of the prior
bar. Too much overlap with the prior
bar often results in sideways action,
and it did here. However, Bar 5 was a
breakout to the downside, but it closed
above its open and midpoint, creating
a second, albeit weak, reversal bar.
Second attempts at reversing are
always worth considering and a long
entry here would have resulted in at
least a scalpers profit.
CONFIRMATION KEYS
The reliability of a reversal bar is
increased significantly if it occurs after
a trendline is broken. A broken trendline is another sign that the trend has
ended or is at least weakening. If the
market then forms a reversal bar, the
chances of a profitable entry are much
better. For example, Bar 6 in Third
times the charm followed a broken
trendline, as did Bars 2 and 4 in

Sideways action.
Another aspect to consider is that
sometimes the market appears to be
reversing over the course of two or
three bars, but there is no reversal bar.
In most cases, if you looked at different timeframes or styles of chart (such
as a volume chart), you will eventually see a perfect reversal bar. While
this is not practical when trading, it is
reassuring to know. For example,
Another perspective (left) is the
same chart as, Third times the
charm, except it is a seven-minute
chart instead of a five-minute. Bar 1 is
a great bullish reversal bar and corresponds to the two-bar higher low on
the five-minute chart.
Take this advice with this warning
however: Looking at anything other
than a single chart when trading off
price action is difficult because the
charts will all show different patterns
and rarely will confirm one another.
By the time that you decide that you
should take the trade, the move has
already begun without you. Its only
worth mentioning to understand that
if you were trading these other time
frames, reversal bars could certainly
occur independent of, say, the fiveminute chart.
Trade whats familiar and keep it
simple. Pick one time frame and stick
to it so that you will not have to make
a lot of extra decisions regarding stop
placement and exits. If you have rules
based on experience, everything will be
automatic and you will be much better
able to follow your rules with little
thought or emotion. If you are experimenting with new time frames, you
will not have rules and instead will be
guessing, which is expensive.
FM
ago to day-trade for his personal account full
time, and has been doing so ever since.
www.futuresmag.com | December 2007
45
TRADING TECHNIQUES
Some aspects of trading are painfully simple. A technical condition can
be either right or wrong. A reliable pattern in the E-mini S&P 500 futures
market is a flag formation on a five-minute chart. However, its when
they fail that you often have the best chance to profit.
Failed flags can lead

to E-mini success
BY AL BROOKS
five-minute E-mini S&P 500

chart provides an incredible
amount of information. But
despite this massive flow of
information, simple analysis of its
price action is all that is needed to
trade successfully. One such strategy is
based on flag formations, and it usually presents several profitable entries
every day.
A flag formation occurs when the
market forms an area of congestion following a surge of activity. This indicates that both buyers and sellers are equally active
at the current price. If the previous surge was upward, the breakout will usually be to the upside.
However, if the flag extended
far enough to break an up trendline, then buyers will be wary
because this is a sign that the
momentum is waning. Many bulls
will scalp out with a small profit
on the breakout to the new swing
high. Also, bears will look for
another opportunity to sell at the
slightly better price that the new
high offers. This often leads to a
reversal that may be either a scalp-
34
ing opportunity or the start of a protracted downswing. In either case, it is

a low-risk, high-probability entry.
One of the most reliable entry methods
is on a stop at one tick beyond the prior
bar. If the market is in a bull flag and you
are looking to buy, place a buy stop order
one tick above the high of the prior bar. If
by the time the current bar is complete,
the bar does not extend beyond the high
of the prior bar,
lower the buy stop to

one tick above the current bar that just
completed itself. (Do the opposite when
trying to sell a breakout from a bear flag;
enter it on a sell stop at one tick below
the low of the prior bar).
On a five-minute E-mini S&P 500
chart, if you picked your entry cor-
rectly, an initial four-tick protective

stop works in more than 80% of the
breakouts. If the bars are large or the
flag looks like it has more to go, either
risk six ticks or, even better, wait for a
second entry.
Waiting for a second entry means
that you do not take the initial trade.
Instead of buying the breakout of the
high of the prior bar, wait to see if the
bar after the breakout has a lower high.
If it does, place an order to buy one tick
above its high. (This move represents
the second attempt at a bull breakout.)
In the first chart in When the bear
turns (right), TL1 is a steep down
trendline that is broken by Flag 1. In
general, fading a strong trend is a losing proposition. However, in this particular case, there were three large bear
bars and the previous two had decent
tails; thus, the bears might be temporarily exhausted. Also, because the
downward trend bars did not close
within a couple ticks of their lows, the
sellers are showing that they are not as
aggressive as they could be.
The next bar is a small bull reversal
bar, with its low below the prior bars
low, and a close above the open and
FUTURES | January 2008
above the close of the prior bar. This is

a mark of buying. Also, four of the five
bars of the bear flag had closes above
their opens, again indicating that buyers are active. Once the bear flag broke
to the downside, the breakout bar was
not large. The next bar was even smaller and its close was near its high. All of
this increases the odds that there will
be at least a second leg up (the bear
flag being the first leg up).
This is a low-risk long entry and it
has a high probability of extending at
least six ticks. A six-tick breakout is a
magical number for E-mini day traders.
Many traders scalp for four ticks and to
do so, the move has to extend six ticks.
Why do you need a six-tick move to
make four ticks? You enter on a stop
that is one tick above the prior bar,
and you are trying to exit at four ticks
above that. Most of the time, a sell
limit order will not be filled unless the
market goes above it by at least one
tick, meaning that a six-tick move is
required to net four ticks on a scalp.
MARKET TURNS
When trading counter trend, it is natural to be hopeful that the trend has
reversed and that your trade will make a
fortune. The reality is that you just
bought a bear trend and the odds are
high that the bear trend will resume. As
such, it is wise to take profit on most of
your position after just a small up-move.
For example, if you bought three
contracts, you might take profit on two
at four ticks (that is, scalp when trading counter trend). Then, place a protective stop at breakeven on the
remaining contract. If a sell signal
develops in the meantime, take the sell
signal and exit your remaining long at
the same time. If it turns out that you
did just buy the low of the next 10
years and you are angry for taking a
scalpers profit instead of holding on
for a fortune, remember that every
strong trend will have plenty of great
entries that you can swing for more
profits. Also, it is important to maintain discipline. This is a strategy to
take advantage of short-term correc-
tions and it should be treated as such.

This second leg of the up-move in
the first chart in When the bear
turns formed a bull flag (Flag 2).
There was a small breakout bar (Bar 2)
that failed on the next bar, which had
a low below the low of the breakout
bar. You dont want to buy the breakout because it follows several small bars
that closed near their open, which
indicates indecision. When bars are
small and closes are near the opens, a
better play is to watch for an entry,
dont take it and then wait for it to fail
and trap one side; enter as the trapped
traders are forced to reverse.
In this example, most bulls would not
have bought at Bar 2 because of the
small sideways bars that made up the
flag. Likewise, bears would be hesitant to
sell on the bar after Bar 2 when the bull

breakout failed, because there was not
enough up momentum to trap many
longs. However, when the market made
a second breakout to the upside at Bar 3,
this is a great long entry, again only for a
scalp because there is no evidence that
the market is in a bull swing.
Flag 3 had two bull breakouts and
both failed. Again, the bars in the flag
were tiny, indicating lack of conviction. However, this second failure of
the bull flag breakout is a great short (a
second entry is almost always a good
trade), especially because the down
momentum of the first 90 minutes of
the day was so strong. Also, three legs
up in a bear often works like a wedge,
resulting in a new low.
Flag 4 broke a steep trendline and
WHEN THE BEAR TURNS

We can see several examples where failed flag formations provided short, but high-probability,
trades against the prevailing trends.
Flag 3
TL1
1,474.00
1,473.00
1,472.00
1,471.00
1,470.00
1,469.00
1,468.00
1,467.00
1,466.00
1,465.00
1,464.00
1,463.00
1,462.00
1,461.00
1,460.00
1,459.00
4 56
Flag 1 Flag 2 2
TL2
TL4
TL3
Flag 4
7
4/11 7:00 7:30 8:00 8:30 9:00 9:30 10:00 10:30 11:00 11:30 12:00 12:30 13:00
3
TL1
Flag 2
Flag 1
Double
Bottom
TL2
Flag 3
1 2
55,000
25,000
1,534.00
1,533.00
1,532.00
1,531.00
1,530.00
1,529.00
1,528.00
1,527.00
1,526.00
1,525.00
1,524.00
1,523.00
1,522.00
1,521.00
1,520.00
1,519.00
1,518.00
1,517.00
1,516.00
35,000
15,000
6/11 7:00 7:30 8:00 8:30 9:00 9:30 10:00 10:30 11:00 11:30 12:00 12:30 13:00
www.futuresmag.com | January 2008
35

reversed the low of earlier in the day
(two of the bars in the flag were above
the highs of the prior bar). When the
market reversed upward again at Bar 7,
it was the second attempt to reverse
after a new low of the day and it also
followed a bear flag breakout. Also,
both the flag and the new low had lots
of tails and the closes were above the
opens, indicating that buyers were
coming into the market by the time
the bars closed. This makes a long at
Bar 7 a high probability long scalp.
The second chart in When the bear
turns shows a bear trendline (TL1)

followed by a small, two-bar bear flag
that broke the trendline. There was a
bear breakout that failed on the next
bar, which was a great long entry.
What made this particularly strong was
that the low of this leg was exactly at
the low price of the opening range, creating a double bottom. Also, the range
of the day at this point was only about
six points and the average range had
been more than 10 points, indicating
that there would likely be a breakout of
the range either up or down.
READING THE BREAKDOWN

Flag 2 provided second chance at a long entry following the failed attempt at the breakout,
while Bar 2 was an excellent short entry trade.
Trend Channel Line

(Wedge)
TL1
1,530.00
1,525.00
1,520.00
1,515.00
TL2
Flag 2
Flag 1
1,510.00
1,505.00
70,000
30,000
6/11 7:00 7:30 8:00 8:30 9:00 9:30 10:00 10:30 11:00 11:30 12:00 12:30 13:00
EASY STREET
There are times when you wont want to play the counter-trend game. Here, conditions
supported a continuation of the larger bear move.
1,539.00
1,537.00
1,535.00
1,533.00
1,531.00
1,529.00
1,527.00
1,525.00
1,523.00
1,521.00
1,519.00
1,517.00
1,515.00
1,513.00
1,511.00
1,509.00
1,507.00
1,505.00
1,503.00
TL1
2
Flag 1
55,000
25,000
7:00 7:30 8:00 8:30 9:00 9:30 10:00 10:30 11:00 11:30 12:00 12:30 13:00 6/8
36
Because the market made an exact

test of the low followed by a bear flag
breakout, creating another attempt at a
breakout into a bear swing and a measured move down, and both attempts
failed, there was a great chance that
the market would attempt an upside
breakout. When an entry has a reasonable chance of being the low (or high)
of the day, it is best to scalp out only
part and let most of your trade swing.
For example, if you traded three contracts, you might scalp one at four ticks
and hold the other two with a
breakeven stop.
The market formed an extended bull
move to a new high, but Flag 2 broke
below the bull trendline (TL2). After
the bull flag breakout, Bar 3 traded
below the low of the prior bar, providing a short entry. This entry is against a
strong trend, so you should scalp all or
most of your trade. The market formed
a larger bull flag (Flag 3), which was a
well-shaped bull flag on higher timeframe charts (such as the 15-minute
chart). Bar 3 was a short entry below
the low of the prior bar, creating a
failed bull flag breakout.
More examples of these formations
are shown in Reading the breakdown
(left). It shows a powerful failed flag at
Bar 1, which was a possible low of the
day (every new low is a possible low of
the day). Flag 2 was protracted and
broke below a bull trendline (TL2).
There was a large breakout bar that
failed on the following bar. The breakout was so strong and the prior up
move so convincing that you should
not be looking to short here (wait for a
second sell signal). This failure became
just a test of the breakout (a failed
attempt at a failed breakout), and was a
great second-chance long entry.
Bar 2 was a wonderful short entry.
The bull poked above a bull trend channel line and reversed back down, indicating exhaustion. The move had three
thrusts up, making it a wedge. The
move was basically a measured move up
that tested yesterdays close and immediately reversed down. The entry bar
was a second entry (remember the first
entry that occurred on the bar after the

breakout?). A climactic move usually
results in an extended move in the
opposite direction. This is a great short
and you should swing most of your
shorts, expecting at least an hour or so
down and usually at least two clear legs
(here, there was just one extended leg).
GOING WITH THE FLOW
Easy street (page 40) shows when you
should stick with the trend. Bear Flag 1
broke the down trendline (TL1), providing a great long scalp at Bar 1. Because it
is a counter trend, you should scalp
most or all of your contracts. If you hold
some, you would exit the balance at
breakeven. Following the long entry,
there was a bar that poked above the 20period exponential moving average
(EMA) but closed below its midpoint,
indicating that the bears won the bar.
Bar 2 was a second attempt at cross-
ing above the 20-period EMA, and this

time the bar closed near its low and the
range was larger than that of the prior
EMA test bar, showing that the bears
were now even more aggressive. Also,
this leg up had a lower high than the
high of Flag 1 (a bear trend has lower
lows and highs). Finally, this was the
first touch of the 20-period EMA in a
couple hours, indicating that the bears
have been aggressive all day.
When you see this much bear
strength, you need to start looking for
bull set-ups. The reason is each will be
seen as a possible low of the day,
month or even year by lots of generous
traders who will buy, lifting the market
for only a few ticks. When no strong
bull bar forms after their entry, they
will feel trapped with no profit and
likely a one- or two-tick loss that never
seems to go away. They will place their
sell stops to exit at one tick below the
low of the prior bar. They will exit at a

loss and not be eager to buy again until
the next small up-close bar forms.
The most reliable trading opportunities always occur when someone is
trapped. Each of these small long set-ups
saw weak bulls trapped with losses, with
their protective stops providing the perfect area to get short, at one tick below
the low of the prior bar. Because you are
trading with the trend, you should
swing most of your contracts because a
trend will always extend much further
FM
than anyone thinks it should.
ago to stay home and raise his kids and has been
day trading for his personal account ever since.
37
TRADING TECHNIQUES
Trading E-mini futures profitably is difficult and can become nearly impossible
when relying on too many time frames and indicators. Here is a relatively
simple approach that involves price action and a basic five-minute E-mini chart.
Five minutes to
fame in the E-mini
BY AL BROOKS
rading does not have to be
complicated. For most traders, if
they take time to look carefully
at candle or bar charts, they will
quickly discover that price action alone
is all you need to observe to be successful. As a bar develops, consider the tone
of the market, whether the bulls or
bears are in control, and more importantly, who is trapped and who will
have to get out. It can be that simple.
While this approach works with all
time frames and all markets, it is efficient on five-minute charts of the Emini S&P 500. Typically, there are
from 10 to 20 set ups per day on the
five-minute time frame, which is far
more than needed to do well. If you
trade enough contracts, you only need
to net one or two points a day
to succeed.
Its typical (right) is a five-minute
chart depicting a normal day in the Emini S&P 500, while First shift (page
42) is a closer look at the first four
hours of trading. For example, 37 is the
37th bar of the day. By reviewing the
price action as this day unfolds, we can
point out several opportunities as they
occur. Along the way, we might refer
to various formations, but general price
40
FUTURES | May 2008
action, not specific patterns, will be

our primary guide.
As a rule, it is usually best to enter a
trade on a stop one tick above or below
the prior bar because you want the market to take you into the trade. Place
your protective stop at one tick beyond
the prior bar until you can scalp out of
part or all of your trade. Alternatively,
risk four to 12 ticks, depending on the
size of the average bar.
If youre letting some contracts
swing, move the stop to breakeven
after taking four ticks profit on the
scalp portion. Often, it is more profitable to just scalp for four ticks, but
when there is a strong reversal at a possible high or low of the day, or when
there is a strong trend, it is far better to
swing part or all of your position.
SET UPS
One important concept is that of a
High or Low 1 or 2. Heres how it
works. The first time in an upswing
that there is a bar that has a low below
the low of the prior bar, that bar is
labeled L1 (Low 1). Examples are Bars
5 and 41 in First shift. The next
occurrence is an L2, such as Bars 7, 28
and 45. Bar 38 is an H1 and Bar 15 is
an H2. There are several nuances to

this approach, and one or two will be
seen as the day unfolds.
Another concept involves signal and
entry bars. A signal bar is a set up but
not yet an entry. If the next bar extends
one tick beyond the high or low of the
signal bar, then that bar becomes the
entry bar. Often, it is wise to enter on a
breakout of either side of a signal bar.
For example, if there is a bull signal bar
and if the next bar takes out the low
instead of the high, then its usually a
good idea to go short because the existing trapped longs will drive the market
down as they cover. Bar 25 is such an
example. It is a bear reversal bar at a
new swing high that never triggered a
short entry. It also demonstrates why its
important to place an entry stop at one
tick below the signal bar to go short and
another to go long on a stop at one tick
above the high of the signal bar.
The example day opens with a large
gap down from the previous days strong
close, leaving all traders who bought
into the close with a substantial open
loss. Whenever there is a large gap
down, the bears are momentarily in
control. Bar 1 has a down close but a
five-tick downward tail, indicating that
some buyers do come into the market.

At this point, two things are worth
looking for over the next hour or so.
First, theres a bullish reversal bar after
some additional selling (this occurs at
Bar 3), and then a short entry on an L2
near the 20-bar exponential moving
average, which forms at Bar 6, leading
to a new low of the day. Because the
bears are in control, an appropriate
order would be a short entry on a stop
one tick below the low of Bar 1, with a
plan to scalp four ticks of profit.
However, a good option might be to
swing up to one-third of the position
because some gap days form the high on
the first bar; although its rare, the
rewards sometimes warrant the risk.
Considering the market is above the
starting level of the previous days
strong bull close and Bar 1 is attracting
some buying pressure, its probably a
good move to forego carrying any swing
contracts until more bearish strength
presents itself.
The four ticks of scalp profits we
were after come on Bar 2. It was a
strong bear bar with a large body and a
close near its low.
Bar 3 is always critical because it
determines the look of the first 15minute bar of the day. Bar 3 is often a
smaller bar and a reversal bar, and it
often works well to enter on its breakout
in either direction. Here, it forms a
strong bull reversal bar with a low below
the low of the prior bar and a close near
its high and well above the close of
the prior bar. Whenever a strong reversal bar occurs in the first 15 minutes or
so on a day with a large gap open, odds
are high for at least a scalpers profit on
the trade (four ticks net, which requires
a move that extends at least six ticks
beyond the high of the signal bar).
An L1 within a bar or two of the long
entry often also traps bears into shorts
and traps longs out of a good long, so
consider exiting the long on a threepoint stop since the set up is particularly
strong. Consider exiting prior to the
stop being hit if there is a new swing
low or a pullback that reaches about
75% of the move up (the low of Bar 3
ITS TYPICAL
This chart shows a typical day in the E-mini S&P 500. Theres sideways action, big trend
moves and numerous opportunities for profit.
1,449.00
1,447.00
1,445.00
1,443.00
1,441.00
1,439.00
1,437.00
1,435.00
1,433.00
1,431.00
1,429.00
1,427.00
1,425.00
1,423.00
1,421.00
1,419.00
1,417.00
1,415.00
12:30 11/21 7:00 7:30 8:00 8:30 9:00 9:30 10:00 10:30 11:00 11:30 12:00 12:30 11/22
@ ES.D 5-min CME L=1417.75 -28.25 -1.95% MAX (20) 1425.87
to the top of Bar 4); however, neither

could happen in the example case
because the three-point stop would be
hit first. If Bar 5 extends more than two
or three ticks below the low of Bar 4,
the bulls are likely in trouble, but one
tick is usually safe.
ADDING & REVERSING
Often, any move below the low of the
bar after the entry bar (if the set-up is
strong) is a stop run trap, making that a
good place to increase any existing long
position. In this case, because Bar 5
reaches 11 ticks below the entry of the
long from Bar 4, the market probably
will run up about 11 ticks or more above
the entry. The market often moves the
same distance as the risk it forces you to
assume. Here, a good trade would be to
take half of profits at four ticks, which
happens on Bar 5, and to take another
25% off at 10 ticks (just shy of the 11tick goal). This is reached on Bar 6. The
stop now can go to breakeven on the
remaining 25%, with a consideration of
reversing to short on an L2 near the
EMA. Countertrend moves often end
after two legs and often around the
EMA. Bar 6 has a large bear tail that
tags the EMA, and it breaks above the
prior high of the day (Bar 1), forming
something of an awkward double top
(Bars 1 and 6). We should look to
reverse any longs under this bars low.
Again, the price action calls for a scalp

of four ticks on half or a third of the
position, with the protective stop moving to breakeven for the remainder, and
the rest coming off at any new low for
the day (and possibly another reversal
to long) if the market keeps dropping.
In this case, with an order to reverse to
long at one tick above the high of Bar 8,
Bar 9 will get us long. Because the market has had several reversals this day, it
is a signal to switch to scalp-only mode
until a strong swing.
However, markets are fundamentally
unpredictable, and we get that on the
next bar. Bar 10 again tests the EMA
and fails, forming a bear reversal bar.
This is the second test of the EMA, and
second tests usually lead to big moves.
Also, it forms a downward-sloping double top with the high of Bar 7 (it could
not go above this entry bar of an earlier
short). So, its fair to expect a breakout
of the range for a measured move down
(a move that extends below the range
for as many points that made up the
range, here nine points from the high of
Bar 6 to the low of Bar 8). Scalp out
four ticks on Bar 11 and move the stop
to breakeven. Plan to take more profit
at just shy of nine points, which happens on bar 17.
Bar 13 is a large bear trend bar and a
breakout to a new low of the day. Large
trend bars that break out often fail on
www.futuresmag.com | May 2008
41

FIRST SHIFT
Each bar provides a plethora of information about whos in control, the bulls or the bears.
Armed with this information and careful entry points, you can produce significant profits.
@ ES.D 5-min CME L=1417.75 -28.25 -1.95% MAX (20) 1425.87
1,450.00
1,448.00
1,446.00
1,444.00
1,442.00
1,440.00
1,438.00
1,436.00
1,434.00
1,432.00
1,430.00
1,428.00
1,426.00
1,424.00
1,422.00
1,420.00
1,418.00
1,416.00
43
6
10
31
16
28
22
3
41
8
37
13
20
12:30
13:00
11/21
7:00
7:30
8:00
8:30
9:00
9:30
10:00
the following bar. However, there have

been several signs of the bears controlling this market, so the move likely will
extend for at least a second leg down.
Bar 16 is also a test of earlier short
entries (below Bar 8 and again below
Bar 12). At the close of Bar 14, you
should place an order to add to your
shorts at one tick below its low. This is
not filled. Bar 16 is the third up bar, but
both it and the prior bar have small bull
bodies and big tails, indicating that the
bulls are not strong. Move your sell stop
order up to one tick below the low of
Bar 16. You are filled on Bar 17.
THE TURNAROUND
Bar 18 is a small inside bull bar (neither
high nor low extend beyond the prior
bar). Inside bars often proceed a reversal
and usually indicate a higher low on a
smaller time frame. A higher low is a
necessary component of a bull swing, so
place an order to reverse to long at one
tick above the high of Bar 18 and an
order to add to your shorts at one tick
below its low. The result would be a
new short on Bar 19 and a four-tick
scalpers profit during Bar 20.
Bar 20 is another small bull reversal
bar. This second attempt at a bull reversal adds to the conviction that the bulls
are taking control and that the bears are
taking final profits. Having been
stopped out of all remaining short posi-
42
FUTURES | May 2008
tions, we would place an order to go

long at one tick above Bar 20 and a second order to go short at one tick below
its low. Bar 21 extends above the high
of Bar 18, the first bull signal bar that
wasnt confirmed. Bar 18 appears to be a
one-minute swing high, and now the
market has a higher high. Though the
first high was not part of the bull leg,
going above it is a sign of strength. Bar
21 also breaks the bear trendline across
the tops of Bars 10 and 16.
Bar 23 reaches down exactly to the
high of the long signal bar (Bar 20), just
far enough to run stops. If you exit, you
would have to return to long at one tick
above its high because you would now
have a small higher low and a successful
test of the breakout into a bull swing.
Also, it is a test of the trendline breakout. Signs that the bulls are gaining
strength is confirmed on Bars 24 and 26.
Bar 24 reaches above the high of the
minor prior high at Bar 22, so there is
now a higher high after a higher low.
Bar 26 extends above the Bar 16 high,
forming a higher high. The market runs
up to Bar 31 without a major pullback,
which is a sign of sufficient bullish
strength that traders will be looking for
at least a second leg up after a pullback.
Bars 26 to 33 all close above the EMA.
At this point, you should expect at least
one more leg up after an attempt by the
bears to reassert themselves.
BIGGER SWINGS
The sell off down to Bar 37 also breaks
the bull trendline from Bar 20 to 31.
The bear trap is set and the new bears
are worried by their inability to move
the market down forcefully. Also, bulls
are eagerly looking for any sign of
strength to add to their longs near the
EMA. Bars 35 and 37 have down closes,
and they are two attempts by the bears
to gain control and both fail. Bulls go
long and bears exit at one tick above
Bar 37. This results in a significant
higher low. Bar 38 is a strong bull trend
bar that broke above the EMA and
broke above the bear trendline from Bar
32 to Bar 34.
Now, you should expect at least two
legs up, which the market gives you:
one ending at Bar 41, and the other at
Bar 45. Bar 43 is a new high for the day
and a huge second leg up (Bar 20 to Bar
31 was the first). This second leg up also
had two legs (Bar 37 to Bar 39 and Bar
41 to Bar 43).When the day is not a
clear and strong trend day, you should
always be looking for set ups that allow
you to fade new swing moves and new
highs and lows for the day. Bar 43 gives
you several and you would sell, expecting at least a scalpers profit and likely
two legs down.
This approach is difficult to quantify
and requires practice to develop a feel
for the market; however, once learned,
it works consistently. For most of us, the
five-minute chart is the best time frame,
providing enough time to spot most set
ups and enter the market. The fiveminute chart offers an incredible opportunity to a day-trader if you remain
patient, trade within your means and
take time to understand what the price
action is telling you.
FM
Al Brooks, M.D., stopped practicing medicine 20
years ago to raise his kids. He has been day
trading for his personal account ever since. He
can be reached at Albrooks223@gmail.com.
TRADING TECHNIQUES
If you enjoy the excitement of being in the market, you might want to consider
an always-in approach to trading. Heres how to use price action analysis in an
always-in swing strategy in the E-mini S&Ps.
Always in the E-mini

BY AL BROOKS
ost traders dont have the

temperament to watch
every tick of the market,
finding it more profitable
to specialize in intraday swing trading.
You can trade successfully with just a
five-minute chart and a 20-bar exponential moving average (EMA). If you
arent greedy and if you have patience,
you dont need to process a slate of
technical indicators to make money.
That said, the specific execution of
this approach can vary. Some traders
employ heavy volume when a favorite
set-up occurs, even if it develops only a
few times a week. However, most daytraders look to trade several times
every day and enjoy being part of the
market. These traders might want to
consider an always-in approach.
While you will have to think about
the market constantly, you will find
yourself learning price action quickly.
Although you theoretically can trade
every reversal on the five-minute chart
profitably, in practice, this is almost
impossible. However, if you cherry
pick, you invariably will miss the best
cherries. Staying in the market all day,
and being patient with your reversals,
is usually a forgiving approach.
38
FUTURES | July 2008
ITS A PROCESS
Whenever you try something new, it is
best to take your time. With this trading strategy, print out several days of
charts and study them before you risk
real money. When you are ready to
trade, start with one contract, regardless of how large a position your
account size can support.
Next, consider trade management.
Even though this strategy requires you
to switch back and forth between long
and short, you can get distracted and
lose money. Therefore, whenever you
are in a trade, always have a stop in the
market, risking about six ticks. Once a
trade moves at least six ticks in your
direction, move your stop to breakeven
or to one tick beyond the entry bar (a
good trade should never reverse the
entry bar). Sometimes, however, you
may consider continuing to risk one or
two more ticks if the first move in your
direction was strong. Often, the best
moves will have pullbacks that do not
hit a breakeven stop and often just
miss it by one tick.
All entries and reversals are on a
stop, one tick beyond the high or low
of the prior bar. If you are long one
contract and there is a set-up for a
short trade, place a sell stop for two lots

at one tick below the set-up (signal)
bar. If the stop is hit, this bar becomes
the entry and you will reverse to being
short one contract. You continue to
hold this short position until there is a
long entry, which will cause you to
reverse, or until your six-tick stop
is hit.
If you miss the first few entries or if
you exited at some point during the
day, you simply resume the process.
Look for the next long or short set-up,
place your order, and let the market
take you in on a stop. If the order is not
hit, cancel it and look for the next setup. You will soon be in the market and
then you can use the always-in
approach for the rest of the day.
Even if you overtrade and take every
five-minute reversal, you might theoretically be profitable, but when you
hit a day with a small range, your losses
will be significant, and you will find it
difficult to try this approach again.
The key is to focus on swing highs
and lows for possible reversal entries
and to avoid trading in the middle of
the range. On small sideways days, only
enter on false breakouts near the high
and low of the day and never enter or
reverse in the middle of the range.

Also, use common sense. If the market gaps down, say, eight points on the
open and doesnt touch the EMA for
two hours, you are in a strong bear
trend and you should rarely consider
long entries. Instead, look for a strong
bull trend bar that pokes above the
EMA and is followed by a small bar.
Place an order to go short at one tick
below the small bar. When there is a
strong trend, most traders should only
look to enter the countertrend if a
strong countertrend leg first breaks the
downtrend line and pulls back. Look to
enter at one tick above any prior bar.
SET-UPS TO CONSIDER
For set-ups, see previous Futures articles on price action. The best reversals
will be those near the high and low of
the day and those near significant
intraday swing highs and lows.
For example, in Bull before the
bear (right) the day before ended with
a rally, and the first bar on the open is
a bull-trend bar. The second bar goes
one tick higher but has a down close.
This is a bear set-up bar and a short
entry is triggered on a stop order at one
tick below its low.
With an always-in approach, it is
imperative that you look at every bar
as a possible set-up bar and be ready to
place reversal stop orders, especially
when you are near the high or low of
the day. Bar 5 falls through the EMA
but has an up-close, successfully testing
the EMA, making it a bull signal bar.
You would place a stop to buy two contracts (one to exit an existing short and
the second to make you long) at one
tick above the high of the signal bar.
Bar 6 becomes your entry bar and you
are now long one contract. Your short
trade generated three ticks profit.
The up momentum to a new high is
strong, so even though its a new swing
high, do not reverse to short. A scalp
trader would short most reversals at
new highs and lows but here we are
swing trading and the swing is probably
going to continue up, despite a
likely pullback.
BULL BEFORE THE BEAR

There are numerous opportunities here to manage an always-in approach for the E-mini.
All you need is a close eye on price action and a clear, uncluttered view of the markets.
+18
BAR 37
1,467.00
1,466.00
1,465.00
1,464.00
1,463.00
BAR 50
-3
1,462.00
1,461.00
BAR 62
1,460.00
+17
1,459.00
BAR 26
1,458.00
-6
1,457.00
1,456.00
BAR 18
-2
1,455.00
BAR 5
1,454.00
+19
BAR 56
1,453.00
-1
Net +73 Ticks (about $850)
1,452.00
+22
1,451.00
V() 31144.00
1,450.00
BAR 71
45,000
15,000
1/3 7:00 7:30 8:00 8:30 9:00 9:30 10:00 10:30 11:00 11:30 12:00 12:30 13:00
BAR 8
BAR 14
+3
BAR 2
DIFFERENT DAYS
The first chart shows sideways action preceded by a big gap down, which often leads to a
huge trend. The second shows a small sideways day prior to a holiday. Despite the lack of
big trends, both days were profitable swing trading days if you followed your rules.
1,462.00
1,458.00
1,454.00
1,450.00
1,446.00
+2
BAR 7+10
+26
1,442.00
+4 BAR 33
1,438.00
+24
BAR
25
BAR 46
+12
1,434.00
BAR
54
+14
+3
1,430.00
-10
BAR
73
BAR 13
1,426.00
+13
BAR
38
-6
-8 BAR 20
1,422.00
BAR 50
1,418.00
+13 Net 109 Ticks (about $1,200) +6
-1
BAR 66
BAR 79 1,414.00
-2
V() 31144.00
+9
50,000
20,000
1/4 7:00 7:30 8:00 8:30 9:00 9:30 10:00 10:30 11:00 11:30 12:00 12:30 13:00
+8
BAR 72
BAR 67
1,502.00
1,500.00
1,498.00
+6
1,496.00
BAR 11
1,494.00
+6
BAR 4
BAR 37
+4 1,492.00
BAR 77 1,490.00
BAR 62
1,488.00
-2
1,486.00
+14
BAR 51
BAR
44
-2 +3
BAR 19 BAR 29
1,484.00
+11
-1
-2
1,482.00
0
+3
1,480.00
1,478.00
Sideways for 4 1/2 hours
1,476.00
1,474.00
1,472.00
Net 44 Ticks (about $500)
1,470.00
50,000
V() 31144.00
20,000
12/21 7:00 7:30 8:00 8:30 9:00 9:30 10:00 10:30 11:00 11:30 12:00 12:30 13:00
-3
BAR 57
www.futuresmag.com | July 2008
39

Place your stop to exit and go flat at
breakeven or one or two ticks below
breakeven. If the market hits your stop
(Bar 15 would have hit your stop for a
net loss of two ticks), give the market
time to tell you if the upswing is still
intact. If it is, look for a bull set-up,
like a 2 high (when a bar goes above
the high of the prior bar twice in a
pullback). A 2 high is a second entry,
which is almost always profitable. If a
second entry fails, it is a reversal set-up.
For example, you would have gone
long after the two-leg pullback through
the EMA that ended with Bar 18. Bar
18 had a bull close, and Bar 19 is the
second attempt to resume the bull and,
as such, it is a perfect long entry. Bar
19 extends six ticks above the signal
bar, so place a protective stop around
breakeven and certainly no worse than
below the low of the entry bar, which
has to hold if the trade is valid. Risk
two ticks and place the stop, at this
point, one tick below the high of Bar
18. After this entry bar closes, place
another stop to go short at one tick
below the low of Bar 19; the odds are
high that the market is now forming a
series of lower lows and highs and
would then be in a bear swing.
BEING PATIENT
Bar 23 extends above the Bar 14 swing
high, but dont look to short just yet
because Bars 18 through 20 had strong
up momentum through the EMA and
the first possible signal bar, Bar 23, is
weak. Bar 23 had a close at its open, no
bearish body, no close in the lower
half, and there was too much overlap
in the prior three bars, making it more
of a flag than a climactic up move.
Rely on your breakeven stop and
dont be too eager to reverse to short.
Wait for something clear and strong.
Bars 24 and 26 are bear-trend bars,
forming two small legs weakly down to
sideways. Bar 25 is an up bar, indicating that on a smaller time frame, there
was a clear ABC down. However, keep
your eyes off a one-minute chart as it is
too much information to process.
Because Bar 26 is the second leg down
40
FUTURES | July 2008
in a pullback, if the trend is still up,

Bar 26 should be a bull set-up, and it is.
Bar 34 forms a double top with Bar
8, but it also has a close on its high and
is the fourth bull bar in a row. This is
too much strength to consider a short.
You will need a second entry signal,
either as a higher high or a lower high.
Bar 37 pokes through a bull channel
line in an attempt to accelerate
upward, and it has a small body and a
big tail, making it a bear set-up bar and
a possible failed breakout.
Think about this signal bar for a
moment. It had to be quite close to a
one-minute double top because it
opened near its high, traded down, and
then traded back up, making two
attempts to break above the bull channel line. So, if the market breaks below
its low, you now have a one-minute
lower low and a possible new swing
down. Place a stop to sell two contracts
at one tick below its low. If filled, place
a stop to reverse back to long at one
tick above its high. The attempted
breakout above the bull channel line
and above the Bar 8 swing high fails.
You would be short on Bar 38, netting
19 ticks from the prior upswing.
Bars 38 and 39 are large bear trend
bars that extend through the EMA,
and they break a bull trendline from
Bars 18 and 26. It is likely there will be
at least two legs down, which is common on all new swings. The small rally
to Bar 50 breaks the down trendline, so
you should be looking for a long entry
on a higher low or a lower low. Bar 54
is a small bar and bar 55 is even smaller
as an inside bar.
Small inside bars are often reversals
(especially if there are two in a row)
and are often the final flags of a swing,
leading to breakouts that reverse within one or two bars. After the sharp
breakout to the downside, place a stop
to buy two contracts at one tick above
the high of the inside bar. You would
be filled and would now be long one
contract on Bar 56.
This bar also is a perfect test of the
bear channel line and reverses strongly
up from it. Also, it is a lower low after
a bear trendline break, so it could lead

to a strong upswing. However, instead
of forming big uptrend bars that extend
well above the EMA, Bars 58 and 59
are small bars with closes in the middle
of their range, indicating a lack of
strength. Bar 61 is a second attempt to
resume the bull move. However, if it
fails, then lots of bulls will be trapped
and will drive the market down. Place
a stop to reverse to short at one tick
below the low of Bar 61. If it is hit, you
would have a 2 low below the moving average, and this is often a strong
bear signal (because two bull attempts
failed and the bulls will be forced to
join the bears, leaving no one interested in buying for at least several bars).
Bar 71 is a new low of the day that
breaks below the bear channel line. Its
followed by a small bar that has an up
close. This is a bull set-up. Place a stop
to reverse to long at one tick above its
high. You would exit at the close of the
day for a net of 73 ticks, or about $850
per contract after commissions.
Examples of other price action are
shown in Different days (page 39).
Although they are extreme examples
of sideways price action, they also were
quite profitable using this always-in
approach to trading, demonstrating
how effective and satisfying it can be.
Traders who scalp part and swing
part of every entry probably have discovered that on most days, your profit
from your scalps is about the same as
your profit from swings. The point? It
doesnt matter whether you scalp or
swing, and the same is true for alwaysin traders. They are essentially equally
profitable when done correctly. Just
choose a method that suits your temperament and follow your rules.
FM
ago to stay home and raise his kids. He has been
day-trading for his personal account ever since.
Send questions to editors@futuresmag.com.
See Al Brooks present E-mini strategies at the
Futures I-Trade Show, now on demand at
futuresmag.com.
TRADING TECHNIQUES
You dont need a complicated approach to trade the E-minis. By keeping a close
eye on price action and taking the time to learn a few simple setups, you are
well on your way to reliably capturing numerous intraday profit opportunities
Trading breakouts
and micro trendlines
BY AL BROOKS
verything on a price chart

represents either a trend or a
non-trend. Non-trending swings
are trading ranges, and nontrending bars (bars with small or non-existent bodies) are dojis. When the market
is in strong trend mode, look for setups to
trade with the trend, such as buying near
the high of the swing. Dont place countertrend trades in a strong trend. When
the market is in a trading range, that is the
time to look for countertrend moves.
One of the most useful techniques
involves what happens during a breakout. A price action trader rarely enters
on a breakout to a new swing high or low
because theyre always looking for the earliest possible entry to minimize risk (see
Price action fundamentals, right). This
usually means entering on some minor
pullback before or after the breakout.
For example, if you just bought a flag
breakout before a new swing high, sell part
of the long to the breakout traders who are
getting long at the new high. Dont buy
at a price where people are taking profits
on their longs because then the risk of
failure is too great; too large a stop would
be needed, and you would have to trade
fewer contracts, limiting flexibility.
32
ENTRY SETUPS
Two of the most reliable entries are
failed breakouts and breakout pullbacks
because both involve trapped traders
who will be forced to liquidate and
move the market in my direction.
A breakout is a breakout of anything,
including a trendline, a trend channel
line, a swing high or low, the high of
today or yesterday, a trading range, or
any pattern identified on the chart. A
failed breakout is a breakout that reverses
within a bar or a few bars of the breakout.
For example, if there was a breakout to a
new low of the day and the breakout bar
became a strong bull reversal bar, then if
the next bar trades one tick above that
breakout bar, the breakout has failed.
If within a bar or two of the tentative
failure, the market again trades one tick
below the low of the prior bar, then that
failed breakout has also failed. This scenario is called a breakout pullback. Because it
is with the trend (in the direction of the
trend that led up to the pattern) as well as a
second attempt, it is a very reliable signal.
A setup related to the breakout pullback occurs just before a breakout rather
than after. If the market quickly moves
to the verge of breaking out but instead
forms a flag just before the breakout, this is

close enough to a breakout pullback and it
should behave like one. One of the most
useful rules in trading is that if something
resembles a reliable pattern, it will likely
behave like the reliable pattern. In any
case, nothing is ever perfect or certain, so
close is usually close enough.
Second attempts are especially reliable
because the market is always trying to do
something twice. If the second attempt
fails, the market will usually try to do the
opposite. That is why so many pullbacks
have two legs. The market is making a
second attempt to reverse and when that
second attempt fails, the countertrend
traders liquidate and the trend resumes.
This is also why High 2 and Low 2 entries
are so reliable in pullbacks (see Five
minutes to fame in the E-mini, Futures,
May 2005).
The second-attempt tendency also
explains why a trend reversal through a
trendline is usually followed by a test of
the old extreme. If the test fails to resume
the trend, the trend will try to go the
other way, and it usually will make two
attempts in the new direction, forming
a two-legged correction or even a new
trend. For example, if there was a bear
32-35_FTS0109_TradeTech.indd 32
12/10/08 5:43:59 PM
trend and then a rally broke the bear

trendline, there almost always will be a
test of the low. If the test does not quite
reach the low and forms a higher low, the
market will then rally at least one more
time, creating a second leg up. On the
other hand, if the test dropped below the
old low before reversing up, it usually will
have two legs up from there.
While these setups produce numerous
trade opportunities on the five-minute
E-mini chart, its strongly recommended
that you spend most of the day watching
and waiting for a High 2 pullback in a
bull trend or a Low 2 in a bear trend. On
a trading range day, take a second entry
on a reversal from a new swing high
or low. Also, entering with the trend
on micro trendline failed breakouts is
another great trade.
A micro trendline is a trendline that is
drawn across two to 10 bars where most
of the bars touch or are close to the trendline, and then one of the bars has a false
breakout through the trendline. This false
breakout sets up an entry with the trend
(usually a High 1 or a Low 1). If it fails
within a bar or two, then there is usually
a countertrend trade where the initial
trendline breakout pulled back and now
is providing a breakout pullback entry.
Once you can consistently make one or
two points a day, it is far better to work on
increasing your position size than it is on
increasing the number of trades per day or
setups that you trade.
Trading 10 E-mini contracts and
netting only one point a day is about
$100,000 per year, and 100 contracts is
$1 million. However, most traders have a
hard time sitting there, doing nothing. It
may feel far more fun to trade all day than
it is to sit there for hour after boring hour,
but if you want to trade for a living that is
what you must be willing to do until you
are consistently profitable.
SETUP EXAMPLES
In the first hour of trading, just about
every market has a breakout, usually
related to the prior day. There is often
a gap opening, which is a breakout
beyond the close of the prior day, but it
often also is a breakout of a swing high
or low, a trading range, or a trendline.
PRICE ACTION FUNDAMENTALS

These are the basic building blocks of price action trading.
Trade off five-minute E-mini charts
The only indicator is the 20-bar exponential moving average
Enter on a stop at one tick beyond the signal bar
Initially risk eight ticks in the E-mini, but can be as high as 12 if the bars and the average daily range are large
After the entry bar closes, tighten stop to one tick beyond the entry bar
After taking a four-tick profit on the scalpers portion of the position, move the stop to break even on the
remaining (swing) portion
For most trades, if you pick the correct entry, the market immediately goes your way and does not
come back to let other traders come in at a better price
Often, the market attempts to close some

or all of the gap, which means that the market attempts to make the breakout fail. This
is a possible setup if there is a good signal
bar or a second entry. Then, after moving
to close the gap, the market will reverse
after testing the gap or a trendline or the
exponential moving average (EMA). This
sets up a breakout pullback entry in the
opposite direction (failed breakout fails)
where the market just pulls back and the
breakout resumes.
The first chart in Price breaks (page 34)
is the five-minute E-mini chart. During the
course of a typical day, trendlines may have
to be drawn only a few times to confirm what
appears to be happening. The goal is to find
overshoots of trendlines and trend channel
lines and then enter on the failed breakout. Sometimes the overshoot may not be
clear without the line. Once the breakout
has been confirmed, however, the line can
be erased.
The next two charts in Price breaks
display many lines that were useful as this
particular day unfolded. Note that in practice, its better to erase lines as they are confirmed and certainly many are so obvious,
they dont need to be drawn at all.
Trend channel lines can be drawn
using swing points or by using a parallel of
a trendline. In the example shown, there
are several failed breakouts of trend channel lines, such as Bars 7, 15, 20, 25, 26 and
30. This should encourage a trade in the
opposite direction if there is a good signal
bar or a second entry. If the move that you
want to fade is not strong, take a first entry,
such as selling on Bar 8 and 25. If the trend
is strong, wait for a second entry. The Bar
21 short is a variation of a second entry
because it was a failed second attempt at

where Bars 20 and 21 tried to extend the
rally. The move up to Bar 30 was strong
and required a second entry, which was set
up by the inside trend bar that followed it.
The first entry was Bar 29, which failed and
became an outside up bar. Bar 26 was a great
first entry long because it was a bull reversal
bar that was a failed breakout of a bear trend
channel line during a bull trend day. (It was
the second higher low after a higher high
and it was close to the bull trendline.)
There were several micro trendline
entries, and the best ones followed the Bar
13 higher low, which was a possible bull
setup. A higher low pullback after a break
of the bear trendline is a second attempt
to move the market down. When it fails,
the market usually makes at least a second
leg up. The four bars before Bar 14 all had
lows that were close to the trendline, while
Bar 14 dipped below the line but had a bull
close. This is a setup for a long on the failed
breakout below the micro trendline in a
bull move. Bars 16, 19, 27, 28 and 29 are
failed breakouts of bull micro trendlines.
The break below the trendline can occur
by simply a sideways bar without the bar
extending below the low of the prior bar,
and this is still a valid long setup (Bar 28,
for example).
The Bar 16 long is especially strong
because the Bar 15 outside down bar was
a Low 2 short in a possible trading range
day. A failed Low 2 usually runs for at least a
couple more legs. It is the second attempt to
go lower, and when a second attempt fails,
the market usually tries to do the opposite.
Bars 5 and 29 are also failed Low 2s, and
Bar 12 set up a short on a failed H2 in a
trading range.
33
12/10/08 5:43:59 PM

FINDING FOCUS
When there are multiple trendlines and
trend channel lines, it may be difficult
to determine which ones are important.
The short answer is, they all are. You
should always prefer to trade with the
trend, and that makes the H1 and L1

entries off micro trendline failed breakouts great setups. They are attempts to
reverse the trend that quickly fail and
usually result in a quick scalp at a minimum. Second entries on trend rever-
PRICE BREAKS
The first chart shows a single days price action in the E-mini S&P 500 with the EMA. The next
two charts include the micro trendlines that captured the dynamics of the trading sessions many
moves. Drawing such trendlines helps you gauge the probability of whether your best chance is
with the trend or against it. Notice the two main trendlines extend for the entire day.
34
sals also are reliable but sometimes the

market takes five or 10 minutes before
it takes off, so being in a countertrend
position during this initial period can
be stressful. Examples of second entries
for trend reversals are Bars 2 (long), 13,
21 and 30.
As far as which direction you should
be trading, a reasonable guide is to look
at the major reversals, which usually
lead to at least two legs. Because a gap
down is essentially the same as a large,
invisible bear trend bar, any sideways to
higher price action breaks a bear trendline and forms a large flag. There should
be a breakout that tests the gap low. The
first major turning point of the day shown
occurred on the failed breakout at the
open. The first bar was a bear trend bar
that failed on the second bar, a bull trend
bar. The third bar was also a bear trend
bar, creating a second attempt to drive the
market down. Two failed attempts usually
result in the opposite happening, so there
should be at least two legs up, which there
was. During this stretch, you should focus
on long setups.
This first up move ended around the
EMA at the failed trend channel line
overshoot at Bar 7, which should lead to
at least two legs down, which it did. This
is also a large breakout pullback. This suggests that the gap down opening was the
correct direction for the day and the rally
was only a test of the breakout from the
previous days close. Most of your trades
on the way down to test the low should
be on the short side.
The test of the low of the day failed in
a higher low at Bar 13. This means that
there should be at least a second leg up
from there and you should focus on longs.
The rally up to Bar 20 was strong and,
therefore, its high will likely be tested
after a pullback. But when a strong rally
ends, especially in three pushes, the pullback usually has at least two legs. Most
climax reversals result in at least two legs
and at least an hour or so of countertrend
movement. During the pullback, you
should focus on shorts.
Bar 26 was the end of the second leg
down and formed another higher low in
what is turning out to be a bull trend day.
12/10/08 5:43:59 PM
It was also a wedge reversal up three

pushes down and a trend channel line
overshoot and reversal both are effectively wedge climaxes and should have
at least two legs. During this phase, your
focus should be on long entries.
Bar 30 ended a strong rally and it was a
wedge top. There should be two legs down
and then a test up because the move up
was so strong.
Although this was a bull trend day, it
was not a strong bull. It is a trend channel
type of bull trend day. On strong trend
days, you should only trade with the trend.
During these weaker forms of trends, you
can safely take trades in both directions.
When there appear to be too many
lines presenting too many choices, first
look for a micro trendline, and if one is
present, fade the false breakout. Bar 13
is interesting because it is a failed failed
breakout. Bar 12 was the failed breakout
of a micro trendline, and although the
short yielded a scalpers profit, the market quickly reversed up two bars later,
which means that the failure to break
above the trendline failed and was followed by a failure to resume the bear
trend. It can be viewed as a breakout pullback from the Bar 12 breakout above the
micro trendline.
Any three-push move should be treated
exactly like a wedge even if it does not
have a wedge shape. Bars 7, 20, 26 and
30 are good examples. Bar 15 is a failed
wedge and a failed wedge top usually runs
in approximately a measured move up.
Since the wedge was from Bars 14 to 15,
the move up to Bar 20 was close to a measured move up. Close is close enough.
If you pay attention to every bar and
every possible trendline and trend channel line, you will find failed breakout and
breakout pullback trades all day in every
market. Some days its simply just how the
market moves. However, until you are
consistently profitable, you should restrict
yourself to one market and only the best
two or three setups every day.
Subscribe at futuresmag.com
by clicking on eNewsletters
Al Brooks is the author of Reading Price Charts

Bar by Bar: The Technical Analysis of Price
Action for the Serious Trader (John Wiley &
Sons). It will be available in 2009.
35
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TRADING TECHNIQUES

ou learn a lot about what

FUTURES | August 2007

new trendline and another period

penetrated by bar 8. As a visual aid,

Trend Lines: from Bars 3-5 and 6-7

Regression Line: from Bars 1-2

drawn, like the others, they should

www.futuresmag.com | August 2007

Trading Techniques continued

Trend Channel Line: Bar 5

All 3 lines are trendlines but the line

market will come back to test lines

FUTURES | August 2007

through several tests.

one tick above the high of the signal

strength. Also, while its a subjective

11:20 reverse to long

12:25 reverse to short

Trend Lines: From Bars 2-3, 5-8.

Al Brooks has been a private day-trader for the

Visit Your DAILY Futures Resource:

Trend Lines: From Bars 3-6 and 4-6.

www.futuresmag.com | August 2007

Price action fundamentals

he term price action is vague

FUTURES | October 2007

to start for a beginning trader and an

indicators. For most traders, a minimalist approach is best.

For example, if you find a single

there are usually 10 possible trades that

ing the high or low of the day,

Trading Techniques continued

FUTURES | October 2007

the bar tells you something important.

Visit Your DAILY Futures Resource:

reversal bar on a candlestick

sellers overwhelm buyers and drive the

bar. The traditional approach also

FUTURES | December 2007

reversal bars that sucker traders into

can tell its a down day, these traders

THIRD TIMES THE CHARM

www.futuresmag.com | December 2007

Trading Techniques continued

bullish reversal bar and take some

WHEN THE BEAR BREAKS

FUTURES | December 2007

terns. The market made one more

trendline, as did Bars 2 and 4 in

Visit Your DAILY Futures Resource:

www.futuresmag.com | December 2007

Failed flags can lead

five-minute E-mini S&P 500

ing opportunity or the start of a protracted downswing. In either case, it is

lower the buy stop to

rectly, an initial four-tick protective

FUTURES | January 2008

above the close of the prior bar. This is

tions and it should be treated as such.

sell on the bar after Bar 2 when the bull

WHEN THE BEAR TURNS

www.futuresmag.com | January 2008