Clear signals, favorable risk/reward parameters, and well-defined entry and stop levels make these two set-ups the "best" ones for less-experienced traders, says veteran Al Brooks.
My guest today is Al Brooks. We’re talking about what constitutes a “best” trade when you’re first starting out. So Al, what is a best trade for a new trader?
I think when everyone starts out trading, they obviously can enter with stop orders, limit orders, or market orders, but a person starting out should begin with stop orders because at least the market is going in their direction. So a best trade for a beginner begins with a stop order.
It next has both a protective stop and a profit-taking limit order. In terms of the two best choices for a trader starting out, they should look for major trend reversals, in general.
That means if you’re in a bear trend, the market has to rally at least five or ten bars above the bear trend line, and preferably at least to some moving average like a 20-bar exponential moving average.
Then you wait for a pullback that tests the bear trend low. The pullback can be in the form of a higher low, a lower low, or a double bottom. Then you look for a signal bar—a bull reversal bar—and then you buy above that bar.
What is the signal bar? What does that look like?
It’s a bar that has a close above its open; preferably well above the open.
If you’re buying a lower low, for example, let’s say the pullback drops to below the bear low, I don’t want it to drop three or four bars below the bear low; one bar or two bars. Then if it reverses up, I’ll look to buy.
Another best trade for a trader is after that reversal becomes clearly a bull trend. Then I start looking to buy pullbacks, so preferably a pullback in the area of the moving average, and preferably one that has two legs like an ABC-type pullback to the moving average.
Again, when you have a bull signal bar—a bar with a close above the open—and then look to buy at one tick above the high of that bar.
Are these good for newer traders because they’re the easiest to spot, or the most highly probable of finishing profitably? What is the criteria?
To me they’re the ones with the strongest trader’s equation, where the chance of making money is greatest with limited risk.
See related: How to Use the “Trader’s Equation”
With more advanced traders, you can enter with market orders and limit orders. For example, in that bear trend, when the market rallies up to the moving average and then it starts to sell off, an advanced trader who’s very confident about what the market is doing, if he expects that the reversal up to the moving average was so strong that there would not be much of a selloff to test the low, he’ll place a limit order below the low of the prior bar. So advanced traders can enter on limit orders.