Price Action: Concept Notes (2)

I have been studying Price Action with Al Brooks for 2 years. Today is my 222nd article. You should also learn Price Action.

The basis for identifying a pullback is a prominent lower tail. In this situation, it is more likely to form a breakout pullback pattern rather than a trap reversal.

Your trading decisions must stay in sync with the price pattern the market is currently building. You shouldn't go short counter-trend on a sharply falling bar; instead, you should go short counter-trend within a trading range on the declining leg.

With-trend breakouts are crucial. Go long on breakouts in a bull market; go short on breakouts in a bear market.

When you notice the market is building a four-bar impulse leg, it often means it's nearing its limit. Four bars is the common maximum extent; the probability of exceeding five or six bars drops significantly. For example, if the fifth bar gives you an entry point, but you know the recent market rhythm has been six bars, then you'd better pass on this trade. If you develop the habit of counting automatically, it becomes a conditioned reflex, making judgments naturally easier—you only need to watch one key number.

The core idea behind channel lines is: don't trade when price is near the channel line; instead, buy at the trendline. The first step is to identify the channel pattern and the buying zone. The primary condition is that price must be within the buying zone. This is the most critical prerequisite. When price enters this zone, you can also combine other conditions, such as a strong bull bar, a breakout level, a gap, or a micro gap. At least two of these elements need to appear simultaneously—a single basis is often insufficient. Only when two reliable signals appear together does the win rate for the trade significantly improve.

When price is running above the moving average (MA), the moving average often serves as support.

The second entry appears near the first signal, with the second entry price slightly above the first. This subtle difference is actually very important. It reduces the risk of encountering a bull trap, making subsequent trend continuation more likely.

In live trading, when you encounter a pattern where a sharp bear decline is followed by a consolidation zone, it is usually a triangle, even though it might appear as a rectangular range—this doesn't affect the analysis. Most of the time it manifests as a triangle, followed typically by one or two impulse legs. There is a magnetic effect here: price tends to retrace to the midpoint of the pattern. If a rectangular range forms, then its midline corresponds to the midpoint of the triangle, which is typically the measured target.

When you need to "stretch" to identify a pattern, this itself is a warning that the signal's probability is low. Obvious patterns don't require deliberation. Many wedges are actually not standard. Whenever I find myself wondering "is this a wedge?"—it usually means the wedge has a low success rate. If the wedge is nearly flat, it looks more like a trading range. The key is momentum—only with sufficient momentum can the pattern be valid.

The further price deviates from the momentum zone, the more obvious the struggle between bulls and bears becomes, and the less ideal the pattern. A typical characteristic of a wedge is consolidation on declining volume followed by gaining momentum, with the ascending slope gradually forming. But if the move changes and turns into an expanding formation, even if it still maintains a three-leg rally structure, it cannot be considered a wedge. Once it loses the core characteristics of a wedge, it is no longer a wedge.

When price first drops below and then rises above the moving average (MA), direct penetration through the moving average is actually uncommon. The more common situation is that price consolidates sideways near the moving average, testing it multiple times. Ultimately, either the downward breakout fails or the trend continues. This often originates from a higher time frame, because on a larger cycle, this moving average corresponds to a key level on the higher time frame chart.