Price Action Trading System Manual (5)
I don't know what I'm thinking until I write it down.
Before, I kept thinking about a question: many people study price action, but what does it mean to have learned it? How would you describe having learned it?
Many people would say, once I'm consistently profitable, I'll have learned it. But what does your consistent profitability have to do with me? Is this skill of yours transferable? For someone who has focused on a single domain for a long time, you don't actually need to show your profits — you only need to describe your understanding of the concepts, and we can automatically recognize whether it's the best explanation. Good explanations always displace bad ones. This is described in great detail in the book The Beginning of Infinity.
If, like me, you want to become an expert in this field, there are really only two things you need to do.
The first: when listening to someone explain a concept, judge whether there is missing knowledge — in other words, whether the explanation is exhaustive.
The second: determine whether the description of that concept is the best explanation.
Look at the market — there are many people who talk about trading philosophy, but very few who explain specifically how to execute.
It's not that they don't want to explain. It's that the task itself is extremely difficult. It takes an enormous amount of time to put this kind of tacit knowledge into words and truly make it teachable.
Another common problem is the divergence in evaluation. Because different people are at different stages of learning, there is an inherent information gap, so at different stages they will have completely different understandings of the same viewpoint or method. As I mentioned: look at the signal bar first, then think about direction — this can help avoid trading illusions. Some people find this enormously valuable, while others will say it's completely useless, even claiming you've wasted three years studying.
But we don't care about other people's evaluations, because we ourselves are the standard. This divergence in evaluation comes mainly from differences in information and learning progress. Our own learning journey is one of continuous improvement, and the people we attract will only be those at the same stage.
So if you truly want to master this material, the most important thing is just one: you have to write it out yourself — write clearly what you have actually learned. This process is essentially one of continuously seeking out each concept, understanding its components, and finding the best explanation for your current stage. Then you index yourself, index your own understanding, and continuously update and iterate. This is what I currently consider the best learning method.
The Market Cycle: Spike → Channel → Trading Range
The market follows a cyclically recurring process that can be summarized in three stages:
Spike → Channel → Trading Range
This cycle is not a mechanical time-based pattern. It describes the process by which market momentum erupts, decays, and then accumulates again.
Spike Phase
Price breaks through a range or trend line with a sharp one-directional move, typically characterized by:
- Multiple consecutive strong trend bars in the same direction
- Minimal overlap between bars
- Price rapidly departing from the prior structure
Channel Phase
When spike momentum begins to wane, the market enters the channel phase:
Bull Channel: Price moves higher overall, but with a shallower slope and small pullbacks
Bear Channel: Price moves lower overall, with pullbacks but maintaining a downward direction
The key characteristic of the channel phase is: trend continuation with diminishing force.
Trading Range Phase
When the channel exhausts its momentum, the market enters a trading range:
- Price oscillates horizontally within a defined range
- Both bulls and bears are actively trading, forming two-sided trading
- Breakout attempts frequently fail, with price returning inside the range
The essence of a trading range is a balance of forces. This is not the time to chase breakouts — wait for the range to be genuinely broken.
Transitions Between Phases
- Spike to channel: the first meaningful pullback occurs
- Channel to trading range: channel boundaries are frequently crossed but cannot hold, bars begin to overlap heavily
- Trading range to new spike: price breaks the range boundary with consecutive trend bars
Market Context: The Always In Mechanism
Always In is one of the core concepts in Al Brooks' price action system.
If you had to always hold a position — either long or short — which side should you be on right now?
The Inertia Principle: The Market Tends to Continue Its Current Action
Most reversal attempts will fail and become flags (trend continuation patterns).
This principle is the theoretical foundation for why most trades should go with the trend.
- Reversals failing is the norm
- Trading with the trend allows more room for error
- When trading with the trend, the signal bar can be lower quality, because the trend's force will "rescue" an imperfect entry
- When trading against the trend, you must wait for a near-perfect signal bar, because failure is the high-probability outcome
The 75% Rule: Most Breakout Attempts Fail
Approximately 75% of bullish breakout attempts from bull channels, or bearish breakout attempts from bear channels, ultimately fail and move in the opposite direction.
This pattern is a concrete expression of the inertia principle: a channel is itself a form of "orderly decay," and attempts to break that decay rhythm typically do not succeed.
The 40%–60% Probability Rule: Accept Uncertainty
The win rate of most trades falls between 40% and 60%.
Trading is essentially about finding a probabilistic edge in the fog.
- Even excellent trade setups are far from "sure things"
- Consecutive losses are mathematically inevitable and a normal occurrence
- A single losing trade should not invalidate an entire strategy
- Let go of the obsession with "high win rate" — do not pursue perfection
Perfect trade signals virtually never exist. You must get comfortable making decisions with incomplete information.
The metaphor of "fog" illustrates: the market always contains uncertainty.
Profit Comes from the Equation, Not the Win Rate
If win rate is only 40%–60%, then profit must come from optimizing the risk-reward ratio.
Do not try to be "right" on every trade. Instead, ensure the long-term expected value is positive.
The Trader's Equation
- Win Rate (Probability): the probability of a successful trade
- Reward: the amount gained when profitable
- Risk: the amount lost when a loss occurs
Basic formula for positive expected value:
Expected Value = (Win Rate × Average Profit) − (Loss Rate × Average Loss)
A 2:1 risk-reward ratio can ensure long-term positive expectancy.
It provides room for decisions made in the "fog," and offsets commissions, slippage, and other transaction costs.
Transaction costs erode profits — a higher risk-reward ratio provides the buffer.
Magnets and the Vacuum Effect
Certain price levels have a gravitational pull on price.
Magnets
Specific price points that attract price. Once price approaches these levels, it tends to be "pulled" there to complete a test.
Vacuum Effect
The phenomenon of price being rapidly drawn toward a support or resistance level.
Common Magnet Types
- Yesterday's closing price
- Yesterday's high / low
- Today's opening price
- Edges of prior trading ranges
- Climax bar high / low
- Breakout points
- Gaps
- Moving averages (e.g., the 20-bar moving average)
Price Behavior Under the Vacuum Effect
- Price accelerates
- Bars in between tend to pass through quickly with little pause
- Once the magnet level is reached, momentum may rapidly decay
Magnets are a manifestation of market memory. Traders remember what happened at a certain price level, and that memory causes them to take similar actions when price approaches again.
Practical Applications
As a profit target
- When long, target the overhead yesterday's high or climax bar high
- When short, target the below yesterday's low or channel origin
As an entry reference
- Enter when price tests the prior close, today's open, or the prior high/low
- Enter with the trend on a pullback to the breakout point
Assessing breakout validity
- If price cannot move away from a magnet after breaking out, it may signal a failed breakout
- If price rapidly moves away from a magnet after breaking out, the breakout is confirmed
The market does not forget prior value-buying zones. Even when price makes a new low, value buyers tend to buy at lower prices. The collective memory of traders creates the magnet effect.
Key Support and Resistance Levels
(1) Time-Frame Related Levels
| Level | Function |
|---|---|
| Yesterday's high | Overhead resistance / becomes support after breakout |
| Yesterday's low | Below support / becomes resistance after breakdown |
| Yesterday's closing price | Two-way reference, price often oscillates around it |
| Today's opening price | Key intraday reference, often retested |
(2) Structure-Related Levels
| Level | Function |
|---|---|
| Breakout point | Often retested after breakout for confirmation |
| Channel origin | Potential target for pullbacks |
| Trading range edge | Upper and lower boundaries of the range |
| Swing high / low | Recent local extremes |
(3) Bar-Related Levels
| Level | Function |
|---|---|
| Climax bar high / low | Extreme values of the climax bar |
| Signal bar high / low | Entry reference and stop loss placement |
It is absolutely forbidden to sell at support or buy at resistance — this is the most foolish way to lose money.
- Do not go long when there is obvious resistance overhead
- Do not go short when there is obvious support below
- Before entering, you must assess whether there is enough room to the target
- Resistance that has been broken may convert to support (price continues up after retest)
- Support that has been broken may convert to resistance (price continues down after bounce)
This conversion provides the theoretical basis for "retest entries":
- After breaking resistance, wait for price to retest that level (now support), and go long at support
- After breaking support, wait for price to bounce to that level (now resistance), and go short at resistance
Measured Move
A method for projecting price targets based on the height of a pattern.
The second leg is expected to be equal in length to the first leg.
Understanding Targets
- Targets are a reference, not a guarantee
- Price may reverse before reaching the target
- Price may also exceed the target and continue moving
Measured moves are more useful for:
- Assessing whether the risk-reward ratio is reasonable
- Setting an initial profit target
- Judging the value of the current entry location
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