Monday, June 8, 2009

Someones comments on L1 2s and H1 2s

Let Lx = L1 or L2 and Hx = H1 or H2.

You are correct to observe that there are many Lx and Hx that Brooks
did not mark.

Brooks marks only the Lx or Hx that fit his PRECONCEPTION of the
market direction.
He has ALREADY forecasted market direction BEFORE he marks Lx or Hx.
If he thinks the trend is up, he's only looking to enter on Hx.
If he thinks the trend is down, he's only looking to enter on Lx.
That is why he does not mark all possible Lx and Hx.

All Brooks is trying to do is enter the trend at what he hopes will be
the end of a pullback. The supposed pullback can have 1, 2, 3 or MORE
countertrend pushes.
So, for example, if you short on L1, you are assuming the pullback has
ended after only 1 push. If you short on L2, you are assuming the
pullback has ended after 2 pushes.

An Lx is merely a bar where he would have gone short had he previously
placed a sell stop 1 tick below the low of the previous the setup bar.
An Hx is merely a bar where he would have gone long had he previously
placed a buy stop 1 tick above the high of the previous the setup bar.

It is conceivable that he might place a buy stop 1 tick above AND a
sell stop 1 tick below the SAME setup bar.

So these are the basic steps:
(1) Assess trend direction.
(2) Wait for a correction to begin.
(3) When a suitable (depends on whether you expect the correction will
have 1 or 2 pushes) setup bar appears within the correction, place the
appropriate entry stop order 1 tick above/below the setup bar. You may
have to adjust the entry stop order if you stop is not filled and a
new setup bar develops.

In practice, the process of finding Lx or Hx is dynamic. You may have
to trail your entry stop to find it. You won't know you've found it
until your entry stop order price is touched.

Do not confuse the process of identification of Lx and Hx with the
process of forecasting market direction.
You must forecast market direction BEFORE you can even decide whether
to look for Lx or Hx.

1 comment:

  1. Good post! I think Brooks always talks about Hx/Lx in the context of a pullback, and a pullback suggests a directional bias.

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