Price Action: Calibrating Expectations

I have been studying Price Action with Al Brooks for 2 years. Today is my 253rd article. You should also learn Price Action.

If a 75% or 80% pullback occurs after a breakout, the market will now enter sideways consolidation.

A micro channel needs at least two bars to form a trend. But usually you need three bars, giving the market a chance to form a micro channel and a micro gap.

Certain signals indicate this is a high-probability trade, so you enter. The market's reaction may be one of the following scenarios.

The first is a successful trade. The outcome matches expectations.

The second reaction is that the outcome is better than expected, which can also happen. This scenario further divides into two types: slightly better, which we call a small surprise; and much better, which we call a big surprise.

Usually everyone worries about the trade going wrong, but sometimes the result is much better than expected. So what do you do when this happens? This also needs to be considered in advance, with a contingency plan prepared.

The third reaction is that the outcome is worse than the calibrated expectation—similarly divided into two types: slightly worse, a small surprise; and much worse, a big surprise.

There is also a fourth scenario: sideways movement. No volatility at all, stuck in a narrow trading range, where time becomes the key factor, and you can only exit.

If the outcome is slightly better than expected—a small surprise—this usually means you can hold the trade longer.

If the outcome is much better—a big surprise—you may get a second leg, but a pullback is also very likely.

So either you use this big surprise to employ profit maximization techniques to exit;

Or, if you believe there will be another leg in the same direction, you use the pullback to scale in.

The market is always full of ambiguity and uncertainty. It shows you one signal, then does another thing. So every trade should anticipate: once you get a clear signal and enter, the market may move against you.

But if it's a small surprise, you typically choose to exit at breakeven.

If you can exit at slightly better than breakeven, you're still making money.

This gives you unlimited opportunities to bet—either profitable or breakeven.

If that's the case, you can trade as often as possible, because there is almost no downside risk—only breakeven or profit—so you want to maximize the number of trades.

This is actually one of the core secrets of trading.

Either it immediately works in my favor, or I don't do it.

The market operates on the principle of uncertainty, so most of these trades will close at breakeven, small profit, or small loss.

This is an extremely low-stress trading approach, and also a great way to learn. Many so-called "failed trades" aren't actually failures. They're just pullbacks that eventually lead to a second leg.

But the key is: if your trade encounters a small adverse surprise, you typically will have the opportunity to exit at breakeven.

If you don't want to take that risk, you can only accept the loss.

So you must judge your response based on the size of the surprise. If it's a big surprise, exit immediately. If it's a small surprise, you might be able to scale in, and then exit at breakeven or even a small profit.

But these are all options available to you. This means you now need to do the research yourself, understanding what these scenarios mean across all the setups you want to trade.

What is a small surprise? What is a big surprise? How do they specifically manifest? In what context can a particular bar be defined as a small or big surprise?

But this is actually a framework for setting up all your homework. This is the core of the homework.

This is the continuous evaluation process.

Every assignment you set—whether it's researching reversal patterns, signal bars with closes breaking key levels, etc.—this framework should almost always be used alongside it.

The purpose of the homework should be to give you a thorough understanding of trading patterns.

So this is essentially a trade management framework.

When you open a trade based on calibrated expectations, the expectations come from the trading pattern, and the calibration comes from the market context.

Once you're in the market, you continuously receive information. Every new price tick tells you how the trade is progressing.

And this activates the continuous evaluation process.

You must focus on the continuous evaluation process.