The Finance Book Club

Quite so. Remember those 98 hours of videos?

W D Gann was amongst the first to try this kinda scam in trading commodities. No superlative is sufficient to describe his elaborate hoax. Its easier reading Dostoyevsky.

Oh, it works. Like, every turning point can be predicted. In hindsight. Borderline autistic traits.

An utter waste of time. A basic knowledge of statistics (available degrees of freedom, tests of significance etc) discredits many systems such that any testing becomes irrelevant and would invariably serve only to tell you what theory suggests.

Parallels exist in neural network systems. In the early days astonishing results could be had. Until they realised that the algorithms had learnt everything they had seen ("overfitting"), and so anything they hadn't seen (new data - Black Swans every day) was met with unacceptable confidence interval tolerances. Things have progressed a bit (designers have to deliberately dumb things down, which sounds counter-intuitive), but still a waste of time for most punters.

By the way, poor writing and editing etc is not uncommon amongst gurus, although some do hire a sub-editor (like their spouse!) before going to print.

ETFs and Inverse Charts

1. In this very next section Brooks contradicts what he just wrote above and counsels that you can get clearer price action if you change something about the chart, like switching to line/bar or volume/ticks or “a higher or lower time frame” or simply print it out. WTF
2. SPY is almost identical to the Emini and sometimes has clearer price action
3. If something doesn't seem quite right, consider looking at the SDS, which is an ETF that is based on the inverse of the SPY (but with twice the leverage).”
4. “The bull flag that you were seeing on the Emini and SPY might now look like a rounding bottom on the SDS. If it does, you would be wise not to buy the Emini flag and instead wait for more price action”

Probably more fun too!

Second Entries

1. “Bottoms on the daily chart usually require a second reversal off the low to convince enough traders to trade the market as a possible new bull.”
2. This second entry is “almost always” more likely to be profitable
3. “if the market fails in two attempts to do something, it usually will attempt to do the opposite.”
4. If the second entry price is better than the first entry, regard it with suspicion
5. The market “usually” makes you pay a little more for additional information, and if it’s charging you less it “could be” a failed High/Low 2 to steal your money.
6. “Most of the time, a good fill equals a bad trade (and a bad fill equals a good trade!)”
7. When to avoid fading a move
   1. When the original move had “about” four “strong” trend bars or
   2. Two or three “large” trend bars so large > strong
   3. There is too much momentum to get in the way of the trend
   4. Better to wait for an entry, pass, then wait for a second pullback bar and enter on the second attempt to reverse

8. Since second entries in good setups usually succeed, if one fails, assume that you are reading the market incorrectly and do not take a third entry unless it is a Wedge (a failed trend channel line breakout).

these gurus exist and will always exist because the mother of stupidity is always pregnant.


here's a good example:

btw I think the worst "gurus" are are those who actually trade, especially FX or penny stocks and give advice on forums.

at least brokers and their gurus give you risk warnings.

Truth

But isn't it worse being a talking head on some FX website where you dress up in a suit and tie and make mostly random predictions about the market, while drawing (probably a paltry) salary? At least gurus who trade are playing the game, although there is still no accountability, and no clue what their actual risk levels are. The worst are probably not even in FX, it's the ones on Seeking Alpha and similar sites. They have official sounding business names and CMA/CMT's and they are after fees and subscriptions.

Late and Missed Entries

1. “If you look at any chart and think that, if you had taken the original entry, you would still be holding the swing portion of your trade, then you need to enter at the market. However, you should only enter with the number of shares or contracts that you would still be holding had you taken the original entry, and you should use the same trailing stop.”
2. Enter without hesitation when it’s time
3. “Entering late and using the original stop is absolutely identical to being long the swing portion of the original position, using the same protective stop.” But again, doesn’t this defy his admonition to take only the best and highest probability trades? Entering ‘late’ means we can’t be sure of having time to get out profitably.

Trendlines and Trend Channels

1. “Trendlines most often set up With Trend trades, and trend channel lines are most helpful [in] finding tradable reversals.”
2. “Curved lines are too subjective and therefore require too much thought when you are trying to place trades quickly.”
3. Trendlines are most helpful looking for With-Trend setups, on pullbacks, and then after they are broken, looking for trends the opposite direction
4. The way trendlines are drawn hardly matters, though Brooks doesn’t come right and say it, he just says you can use linear regression, or swing points or ‘rough approximations’. And you can also use other methods that are ‘rarely needed’ like moving a parallel trend channel to the trendline side of the bars. This is padding! Why tell us about methods that are not needed!?
5. ‘Sometimes’ trendlines are drawn using candle bodies only, ‘commonly’ in Wedge patterns
6. Drawing the actual line is usually unnecessary as they are obvious
7. Until a trendline is broken the most profitable trades are with the trendline, even if it undershoots or overshoots the trendline, look for trendline reversals. But then isn’t the trendline broken on the overshoot??
8. “The test can be followed by the trend continuing, the trend reversing, or the market entering a trading range.” Yup, that’s all the things that can happen all right!
9. The slope of successive trendlines gets smaller, indicating trend weakening.
10. “The ‘bigger and faster’ the Countertrend move, the more likely that a reversal will occur after the market comes back to test the trend's extreme (for example, after a Lower High or a Higher High in the test of the high of the bull).”
11. Gap openings and large bars are effectively one bar trends and prone to failure, so prepare to fade them
12. Sideways bars that break a trend and then signal a reversal are 'good' fades
13. Brooks proceeds to find trends absolutely everywhere in a diagram.

When everything is important, nothing is.

I was not too familiar with Mr. Brooks as I posted earlier, but as I read your posts and remember back to a video that I watched of him embarrassing himself trying to make live trade calls at some trading seminar years ago it has become clear that he sells books and courses and does not trade. At least not profitably. I also don't think anyone has ever successfully pressured him into providing any proof that he trades.

I mean worse because thousands of newbies act like they are successful.. ignoring reality, not to mention the risks.

Quite so. It is so shameful it makes me wonder how these things are moderated.

There is so little skepticism it makes me shudder. For those of us to whom it is bleeding obvious, saying nothing is a bit like walking away from someone needing an ambulance. I have spoken up a little bit in the past where what was conveyed was utter snake oil.

This bloke sets the bar so low Satan uses it for chin-ups.

I feel a little bit unwell just reading through your summaries of his dross. How on earth you do it astonishes me, you must have a high pain threshold. I cut my losses short when I realise that something is pointless, nothing to see here folks, move right along, kinda thing.

Nevertheless, what can we learn and take away from all this? I can't make up my mind whether he is clever in knowing that people love complexity and cashing in on this common psychological need, or just dumb and kinda believing it himself.

if you say something on their threads 10 more newbies will come and post some motivational stuff.

what you gain is just a huge amount of stress IMO.

only some serious meditation helped me in this journey.

I've considered moving on but I do have an (hopefully) interesting experiment planned for later. Although it seems unlikely now, it's possible there are some gold nuggets among the tonnes of ore.

Also, in the unlikely event a brave student of Brooks comes along to defend him, I want to show I've done my homework (or made an honest attempt). At least enough to deflect criticisms of the 'you need to go deeper to really get it' type.

If I can disprove Brooks I can put to rest most of the other 'pattern traders' like Ross, etc.

However, if some part of this meets the evidence threshold then it will be worthwhile to try to determine why. At the root of it all, he has a compelling hypothesis, that these patterns form because they are the natural result of "a huge number of smart people independently trying to make the most money that they can in the market". That makes some intuitive sense to me, though it contradicts my belief that the market erases patterns, so looking for significance in individual bars is possibly madness.

Meditation is extremely useful. I keep a copy of Hesse's 'Siddhartha' on my desktop to remind me.

A big dump of general info and then I'll look at the 'common trend patterns' and general advice on trading ranges and trends. Then I'll start the quantitative analysis.

Micro Trendlines: Small, Steep Trendlines in Strong Trends

1. “A Micro Trendline is drawn across from 2 to ‘about’ 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 a With Trend entry and is the most reliable type of a High I long in a bull or a Low I short in a bear. These are tiny (usually just one or two bars long) but strong bull and bear flags.”
2. When they fail they signal counter-trend trades, effectively Breakout Pullbacks and Failed Final Flags
3. “Enter on the failed breakout (in a bull, enter at one tick above the bar that dips below the trendline”
4. "If the Breakout Pullback entry fails, for example in a falling market with a bear Micro Trendline, then look at the size of the bodies of the bars. If the bars are trend bars, then [after] this second failure (the failed breakout and then the failed breakout Pullback), the odds are ‘high’ that the market is giving you a tradable Low 2 short.”
5. If the bars are more doji-like it’s likely going to form ‘barbed wire’ though with a bearish bias.
6. If a channel persists for ‘like about’ ten bars, the odds increase ‘substantially’ that the breakout failure will itself fail and become a Breakout Pullback reversal
7. Every new break of a micro trendline becomes a new point on a longer, flatter trendline, in other words, trends get steeper as they go, up to a point and begin to flatten.
8. “Price action trading works even at the tiniest level.” Which is what we’d expect from something with a fractal structure.
9. “Small trendlines in strong trends, even when drawn using adjacent bars, ‘often’ have failure tests (failed breakouts) that set up good With Trend entries. Basically saying buy/sell on dips?
10. “Each successive trendline gets shallower until trendlines in the other direction dominate the price action.”

Horizontal lines: Swing Points and other Key Price Levels

1. During ‘trading range days’ (defined when and where??) horizontal lines drawn across swings high and low will provide what basically works out to be ‘support and resistance’.
   1. Expect swing high breakouts to fail and form higher highs
   2. Expect swing low breakouts to fail and form lower lows
   3. ‘Sometimes’ these failures fail and form a new local peak or trough (a more extreme higher high or lower low), and fading these is ‘even more likely’ to succeed because ‘many’ are variants of Three Push patterns

   
   

2. On ‘trend days’ horizontal lines should only be used to enter on pullbacks The catch, of course, is how to distinguish ‘trend days’ from ‘range days’?
   1. “Once there has been a clear trendline break, a failed test of the extreme can be a good reversal setup, especially if there is a strong reversal bar and a second entry (a High/Low 2).”
   2. ‘Most’ days are not ‘strong’ trend days

   
   

Trend Channel Lines

1. “Trend channel lines are on the opposite side of the price action from a trendline and have the same general slope.”
2. “ ‘Most’ trend channel line overshoots reverse back into the channel but ‘sometimes’ one will continue and this results in a steeper trend.” Says nothing.
3. “ ‘most’ trendline breaks fail but they generate a new swing point that creates a new, less steep trendline, indicating that the trend ‘may’ have become weaker,” Wishy washy
4. “Since ‘most’ trendline and trend channel line breakouts fail, entering on the breakouts is a losing strategy. It is far more profitable to look to enter on the failure, (but we’re still waiting for a definition of ‘failure’!) but if the breakout extends ‘far’, then you should wait for a pullback and then enter in the direction of the breakout.” Impossible to act on advice this vague.
5. Trend channel line overshoots should be viewed the same as Wedges, as ‘most’ wedges have failed trend channel breakouts as the trigger for a reversal trade
   1. ‘Most’ trend channel overshoots and reversals are also Wedge Reversals, though the shape may not ‘be obvious’.

   
   

6. “Why do so many reversals occur after trend channel line overshoots when everyone knows that it commonly leads to a reversal?”
   1. Common wisdom is that novice traders hold their positions too long then suddenly capitulate as a group
   2. However smart traders won’t trade countertrend until a pullback from a ‘strong’ trendline break or a reversal from a trend channel overshoot
   3. Smart money traders will stop buying once they believe the top is in and they won’t budge unless there is a ‘rare’ failed second entry or a ‘huge’ (3 point) failure. “There are no buyers left so the market only has one way to go.”
   4. At ‘key’ turning points the volume is ‘huge’ because institutions are exiting one direction and entering the other, while hedgers take the opposite positions.
   5. “The reversal at an overshoot happens because it is such an entrenched part of institutional trading psyche that it has to happen.”

   
   

Intersecting Trendline and Trend Channel lines

1. “When a longer trendline is tested and the test occurs at a shorter-term trend channel line of opposite slope, look to enter in the direction of the trend if the test is successful (failed breakout and reversal). The trend channel line test indicates that the correction is over and the location is perfect, since it is a test of a longer trendline.”
2. Large gaps that don't reverse early usually mark the start of a strong trend for the day and the day often closes at or near the high (or low, in a bear).” Yes, because they didn’t reverse early - being a sign that sentiment is with the trend - not because there was a large gap.
3. Quiet markets with lots of small bars often lead to the biggest trends. OMG. Yes, eventually they would have to! A meaningless statement without a time value added to it.
   1. The reasoning is that institutions need to unload/load after a period of quiet selling but they didn’t get the lower prices they wanted, so they are forced to take fills piecemeal all day long.

   
   

A couple things.

I don't think the "smart" condition is either necessary or sufficient.

The hypothesis is what is known as an assumption in theoretical microeconomics. Dates back at least to Adam Smith and beyond, but in more general terms (maximizing utility, but that came later).

Insurmountable problem is imperfect and asymmetrical information in general (very wide definition - everyone acts on information differently due to different real life circumstances) which does cause patterns, not confined to individual bars.

Which leads me to think that patterns (however defined) will and do exist, but impossible to place any degree of statistical certainty on them (was mentioned by someone how Brooks found himself embarrassed in real time trading, surprise!).

Edit - by the way, it is pretty easy to test patterns if you know your way around Excel and have sufficient data. Its OK if you have time to satisfy an itch.

In my opinion, by the screen time I have, most people lose because they copy other people.

I'm not undoing the work of the big traders that exist, but I think the market itself should be questioned by the individual, he should understand what drives prices and leave "patterns" sometimes aside!



I was accompanying Clemmo17 in reading Livermore's book, Because of the philosophy of the market and I find it very interesting by the development itself, subjective,

but I do not follow in this book Brooks, because his method of analysis creates conflict with my understanding, and I prefer to avoid the information written here so as not to hinder my own trade and development, my intellect and understanding of the world.