Download Subtitles for Counting Legs the Al Brooks Way

hey everybody this is Joseph imbernon and in this video I'm going to be talking about leg counting using methods provided to us by Dr Al Brooks as well as Concepts and ideas I've learned through my other mentors Ali Mo afshari and Brad wolf Ali and Brad are also students of Al so all of the material covered in this video is inspired by Brooks price action I will provide links to their YouTube channels in the description of this video and if you visit their channels you will find lots of informative content my goals for this video are to be concise and comprehensive and my hope is that you learn something new or gain a deeper understanding of leg Counting I'm making this video with the assumption that if you are watching it you also study Al Brooks and are at least mostly familiar with the topics and terms that I will be discussing or at least have his books on hand to refer to the definitions of terms I'm going to start by talking about what a leg is we cannot learn how how to count legs until we can Define what a leg is in price action next I will explain why Traders count legs often times the reasons why we do things are just as important if not more important as how we do things leg counting is a first principle of price action it is one of the most important Concepts a Trader can understand and an important skill that they should develop to understand why Traders count legs we have to understand the market cycle I'm not going into too much depth on the market cycle in this video but it is important that you understand the market cycle in order to count legs correctly I will then talk about how Traders count legs the different methods to leg counting and how learning how to count legs can vastly improve improve your results I will end by briefly talking about when Traders count legs and I will conclude with a summary of what was covered in this video like I said before we can understand leg counting we have to be able to understand what a leg is in price action according to Al Brooks a leg is a small Trend that breaks a trend line of any size the term is used only when there are at least two legs on the chart so any price movement made of less than two legs on the chart is considered a swing or a trend it goes on it is any smaller Trend that is part of a larger Trend and it can be a pullback a swing in a trend or an a sideways Market or a with Trend move in a trend that occurs between any two pullbacks within the trend I know that's a lot of words and might not be very clear yet I will share examples on charts of each of the definitions he's providing here a little later in the video it's important to be able to visualize the charts along with reading and understanding the definitions by the way I am citing all four of Al's current books on price action because the definition is in each book in one of the first sections where he lists the terms used in the books after the acknowledgements you'll also notice I highlighted the term Trend because it is used nine times in the definition of a leg so we will also refer to his definition of what he a trend is a trend is a series of price changes that are either mostly up or mostly down in other words a bull trend is a trend where the price moves from the bottom left to the top right of the screen and a be trend is the opposite where the price moves from the top left to the bottom right of the screen the three smaller versions of Trends are called swings legs and pullbacks depending on the context and their size to put all of this together simply in other words the market probes up and down in small Trends called legs there are three terms for different types of Trends which are swing leg and pullback and they are used in that order to describe more major to only minor Trends a swing is a major Trend a leg is a minor Trend within a larger Trend or within a trading range a pullback is the most minor Trend this slide shows an example of a bear swing and a bull swing since this video is about about legs I'm only including it for completeness Price action is fractal and every move is a trend on some time frame whether it's a higher or lower time frame chart than the one you are viewing a leg is simply a small Trend and legs can be made of only a couple of bars or they can be many many bars for example a two bar leg on the monthly chart is thousands of bars on the five minute chart since price action is fractal and because not everybody is trading the same chart there are usually different ways to count legs trading ranges often probe up and down in small Trends called legs and there are usually two or three pushes up and down and those legs often have two or three smaller legs within them if all this sounds overwhelming and confusing just know that just like with anything it becomes easier with practice and before you know it you'll be seeing all sorts of ways to count legs fairly easily here's a quick example of what legs are on a chart I will go more in depth on this chart later in the section on how to count legs but for now let's just look at what the legs are not how to count them we know that a leg is just a small Trend it's easy to see Trends the market is either rising or falling in this example we can see that the market is falling in the beginning of the day with a pullback and then a second leg down each of these bare Trends are called legs I won't go through every example this is more for a visual plus leg counting has a subjective element to it so the way I count legs on this five minute chart may be different from how someone else counts them that's the inherent problem with trading ranges they are confusing and there are often many ways to count the legs remember that there are also Traders viewing smaller time frame charts so the way they view the chart and count legs will likely differ from someone who's watching the F minute chart and the same is true for higher time frames Traders watching a higher time frame chart don't see as many minor reversals and that will cause them to count legs differently as well the purple numbers show how a Trader on a smaller time frame chart might fear the leg count again we're not learning how to count them just yet we just want to recognize them for what they are and that is small Trends the more minor the leg the less of an effect its reaction will have you can compare this 5-minute chart with the three minute chart above and see the more minor legs more clearly on the 5minute chart the legs are hidden between bars and disguised as Tails on bars you can see on this chart the market rallied on this Bear bar pulled back rallied up to this bull bar pulled back and then rallied a third time it's more clear on a lower time frame where each leg has at least one big bull Trend bar so up here this is the same chart but this is the three minute chart and it's more clearly leg one leg two and leg three finally here's an example of how a Trader viewing a higher time frame chart might view the legs on this chart represented by the black numbers the more major the leg the more of an impact it will have there's also something to be said about when Traders on several different time frames can agree upon something like that this Rally or this rally is a late leg a second or third leg high in a trading range on at least three different charts this gets into nested patterns and calibrated expectations which I won't get very much into in this video but the point is that more Traders agree on something the more major the reaction is to be expected this slide shows the problem with counting with Trend legs in a trend and why Traders count the legs of pullbacks instead leg counting is for minor Trends pullbacks are minor Trends against a major Trend also known as minor reversals and continuation patterns you can see what would happen if a Trader tried to look for a wedge top and major reversal today every time the market had three pushes up it had a brief pullback and then continued so here one two three minor pullback continued we here one two three only a pause or here one 2 3 and the point is every time the reversal was minor it's more effective to count the legs of the pullbacks and look to enter in the direction of the trend after one two or three legs against the trend a high two is a two-legged counter Trend move that is better to look to fade and enter in the direction of the trend here the market went sideways to down for two legs and before it continued after a high two buy setup there are even nested two or three-legged patterns Within These small pullbacks like this one two three legs down but that's implied and I will talk about that more a little later a high three is a three-legged counter Trend move also known as a wedge bull flag that is a buy setup and a bull Trend there are a couple cple of examples on this chart but both of them also include implied pullbacks on smaller time frames just like in the bull Trend this slide shows the problem with counting with Trend legs in a bare Trend and why Traders count the legs of pullbacks instead leg counting is for minor Trends pullbacks are minor trends against a major Trend also known as minor reversals and continuation patterns you can see what would happen if a Trader tried to look for a wedge bottom and major reversal today every time the market had three pushes down it had a minor pullback and then the trend continued down even here maybe it's a nested wedge but it's a tight bare Channel and therefore a bare breakout on a higher time frame the pullback stayed below the most recent major lower high the market had a lower high here broke out strongly to a new low and then rallied for a couple of legs but stayed below the last major lower high this means the pullback is minor and the be trend is still in effect it is more effective to count the legs of the pullbacks and look to enter in the direction of the trend after one two or three legs against the trend a low two is a two-legged counter Trend move that is better to look to fade and enter in the direction of the trend of these pullbacks one of them could be viewed as a low two or a low three this one here some Traders see leg one pullback leg two and then Trend continuation others might see leg one pullback leg two pause and then a bull breakout like three and then the low three the market continues what you call it doesn't matter what matters is that you can recognize that there have been a couple of legs against a strong Trend that is testing the moving average and is below the most recent major lower high and it's important to look to enter short the reason Traders count legs is to know when the market is going to reverse this gets intertwined with the market cycle which I'm assuming you are you are already familiar with u but if not I have a simple description of it but first if you think about it the reason Traders count legs suggest a hint if Traders count legs to know when the market is going to reverse that implies that Traders only count legs in trading ranges and during pullbacks in Trends since 80% of trend reversal attempts fail if you count legs in a trend in the direction of the trend you may be making the mistake of finding wedge tops in Bulls or wedge Bottoms in Bears only for the market to have a minor reversal and then continue in the direction of the trend to refresh your memory the market cycle has three phases one the breakout phase which is typically High momentum range expansion and the strongest part of the trend two the channel phase which has waning momentum and is weaker than the breakout phase and three the trading range phase where the market is sideways breakout direction is near 5050 and the bulls and bears are in Balance trading ranges are also considered breakout mode and that is when the market is in balance in the trading range environment Traders are counting legs and looking for reversals but eventually the market will have a new breakout which resets the market cycle or in other words it will have a leg one Breakout below is an example of a bull breakout from Bar 23 to 25 the market pulled back fell below the low of the prior bar on bar 26 and that is the beginning of the channel phase eventually the channel phase converts into a trading range and here we see a complete Market cycle from start to finish is common for the market to test the start of the channel and that price often becomes the bottom of the trading range one of the most important skills a Trader can develop is the ability to recognize a leg one breakout or in other words a market cycle reset this is because a leg one breakout has a greater than 80% chance of getting a second leg in the same direction again I don't want to spend too much time on this because this video is for leg counting but it's important to understand that breakouts get second legs because of Trapped traders in this example there were limit order Bears Who Sold above the Bear bar 21 and got trapped into a successful bull breakout or for them a losing short you also have Bulls who doubted the breakout and they did not take the buy Above the weak dogey signal bar and they are also trapped out but they are trapped out of a winning trade both the Bears and the Bulls are hoping for a pullback the Bears scale in higher and look to exit on any small pullback to exit with a smaller loss the Bulls are looking for a pullback to enter at a brief discount before the market continues higher the result is a demand from the combined buying pressure from the Bears trying to avoid a loss and buy back their shorts and eager Bulls looking to get long and this produces a brief and shallow pullback and the Traders trapped provide fuel that drives the market higher in a subsequent leg with the market cycle out of the way I want to get back into why Traders count legs and again it is to know when the market is going to reverse if a Trader can start to understand this first principle of price action it can help them to take good trades or optimize entries avoid bad trades and optimize exits and it helps to calibrate your expectations for how a trade should pan out or what the market is likely to do next now that we know what a leg is and why Traders count legs we can get into how it's done when counting legs there's a mix of objectivity and subjectivity and that is due to the fractal nature of price action and the major and minor patterns unfolding simultaneously this means that there is a right way and a wrong way to count legs which leads to an optimal and less optimal way to trade them in trading ranges there are often many different ways to count legs because of nested patterns reading charts and Counting legs is developed through practice and experience it takes time and patience but it gets easier over time Traders have to have an imagination and again that is developed through practice and experience as you start learning Concepts on a subconscious level and gain the ability to visualize any chart pattern in your mind without actually seeing it when trading and reading charts the goal is to be able to visualize what the higher and lower time frame charts look like ideally you can do this without having to look at the other charts but it is okay to glance at them once in a while however when you're trading it's best to stay focused on the one chart that you're executing trades on or else it can get overwhelming and confusing and you will start to contradict yourself one way to practice this is through top- down analysis where you start with a higher time frame like the daily chart and work your way down to maybe one time frame below your execution chart for example let's say you traded the F minute chart you might start by looking at the context on the daily chart then look at the 45 minute chart then see what the 15minute chart looks like then your execution chart and then a lower time frame like the 100 second or the one minute chart you can choose any time frames you want you can look at more or less charts and you can start as big or go down to as small as you want the point of the exercise is to do what works for you to gain a better sense of what the market is doing and gain a big picture understanding it's like a puzzle you don't just start in the middle you start on the outside edge and work your way inward Brad uses that analogy to explain the importance of always in swing trading and stop orders in trading it's similar to a puzzle where you start with the higher time frame context and then work your way down into the finer details of the smaller time frame charts with the big picture and the back of your mind it's about having an awareness and this keeps you out of trouble in general the more confusing the leg count is and the more overlap there is the more likely the market is in a trading range as always context trumps everything Traders count legs differently when the market is trending versus is when the market is in a trading range we already discussed that the leg count is for minor legs and Traders count legs to know when the market is going to reverse the minor legs in Trends are pullbacks remember that 80% of trend reversals fail so the legs Traders are looking for in Trends are the small counter Trend legs and the reversal that Traders are looking to pinpoint are actually Trend resumption in other words it is useful to use leg counting as a method to understand when a pullback is likely to end and a trend is likely to resume counting the legs of pullbacks is fairly simple and is easier to be objective compared to Counting legs in a trading range mostly everybody is in a agreement on the leg count of pullbacks within trends when it comes to Counting legs in a sideways Market Traders count the swings up and down they do this to predict when the market will reverse when the market is in a late leg especially near one of the extremes of the range they will anticipate a reversal and either fade the late breakouts or look to to enter on reversals as you can see here leg counting gets more confusing and subjective in trading ranges it's helpful to think multi-dimensionally when counting the legs in a trading range because the legs often subdivide into smaller two or three-legged patterns that is how leg counting in trading ranges becomes more subjective and it's important to knock get caught up in the most recent information and lose track of where you are relative to the big picture context there are three main methods to leg counting the first method I'm showing is Spike breaks this is when there's a pullback on the chart you are viewing and this terminates the leg count so in this example the bull leg was terminated by the bare bar that fell below the low of the prior bar the second method for counting legs is when there are bars closing in the opposite direction of the legs but no technical pullback here the bare legs are terminated by bull bars closing against them so a Trader counting legs with this method could count one two 3 four five legs down a Trader using method one would view this entire micr Channel as one simple leg the third method is implied pullbacks where a Trader can infer that there are pullbacks on a smaller time frame based on the Tails and amount of overlap on the bars on the chart they're viewing even if there are no technical pullbacks in this example there might be two or three legs up here and then a trading range and then maybe two more legs up here but a Trader who is using method one and watching for Spike breaks or method two and looking for opposite bars would view this entire rally as one simple leg so which Trader is correct all of them think they are right and technically they're all correct but the Tails and the overlap provide more information we know that it's a channel on a smaller time frame a tight channel on this time frame and a breakout on a higher time frame technically the trader using the first method is not wrong because there hasn't been a pullback among any of these bars the trader using method two isn't wrong either because there are no opposite bars and method three of course also correct it's just the method three is counting the implied pullbacks this sort of situation is where context plays a bigger role if this was occurring in a late leg and high in a trading range it might be viewed as a weak breakout but if it's an early leg low in a trading range it might be viewed as a decent breakout and the reality of this example is that even limit order bears are having a hard time making money so as much overlap as there is this is a fairly strong breakout lasting many bars and moving a big distance it's helpful to be aware of each method and maybe even combine them I mentioned before that there's a certain amount of subjectivity involved in leg counting especially in trading ranges there will always be multiple ways to count legs so I can't give you a black and white right or wrong guide to Counting legs on this chart I've shown several examples of method one Spike braks in Bull legs in a trading range again we don't have to go through each one because you get the point the market rallies here's leg one and then the market pulls back and that terminates leg one and then the market rallies again leg two and then the leg is terminated by a pullback or in this case a reversal this is the most straightforward way to count leg and usually counts the more major legs in this example we rallied leg one pullback which terminated leg one and then rallied again leg two and another pullback which led to a reversal this is the opposite case Spike breaks in bare legs within a trading range the market sold off and pulled back which ended like one and then it resumed down for leg two and then when it pulled back again that ended leg two and we ended up getting a deeper pullback on the same chart I'm pointing out how a Trader using method two might count the bull legs here we have a bull bar Bear bar Bull Bar Bear bar Bull Bar Bear bar and then a couple bull bars so we have one 2 3 four legs up using the bar Direction method the bar Direction method is typically a minor way to count legs but since it's occurring in a larger second leg leg one leg two or maybe leg one leg two or even one two 3 and it's occurring at the top of a trading range trying to break out of a swing Point here the reaction here could be more major than minor and that's what we got here and then of course the opposite counting be legs using method two Bear bar Bull Bar Bar Bear bar bull bar and then some bear bars some Traders view this as three legs down but since there were no pullbacks on this chart others see the entire selloff as one simple leg opposite bar direction is a form of implied pullback if you look at a smaller time frame chart there would probably be Spike breaks Within These bullbars but we don't see them on this chart the third method of counting legs is implied pullbacks this is the most minor form of leg counting and is often used inside larger legs within nested patterns what I'm demonstrating here is that these bull bars rallied and pulled back inra bar what that shows is is there may have been a pullback on a lower time frame chart but here there is no pullback that we see therefore some traders who are counting legs with method one Spike breaks or method two bar direction see this all as one simple leg While others counting implied pullbacks see two or three legs here maybe this is one or one two three this would be a truncated wedge on a smaller time frame where there are three pushes up but the third push does not exceed the second Traders know that implied pullbacks mean the reversals are minor unless they are occurring in a late leg so in this case a minor reversal was expected and a minor reversal is what we got here in this example the Bears had four consecutive bars without a pullback but the bars started to have a lot of overlap and small bodies with big tails that represents two-sided trading and it is probably a Channel with two or three maybe even four legs down seen more clearly on a smaller time frame chart we had a bare breakout maybe a pullback another leg another leg another leg down you can see the market went sideways for three bars and there was a pullback this bar went above the high of the prior bar which was a minor reversal and then the move continued to the downside this is a spike and channel pattern and it's more clear on a smaller time frame but on this time frame it was a simple leg or a breakout and and we got a minor reversal and then a second leg to the downside there is an exception to the leg counting rule in Trends sometimes you do count the width Trend legs like for example in a parabolic wedge a parabolic wedge is a three push pattern where the third leg breaks the channel line drawn from the first to the second leg and the expectation after a parabolic wedge is a minor reversal and then Trend resumption the reason for this is that in this case the Bears are exhausted and the behavior becomes unsustainable consecutive cell climaxes however the channel is tight which means it's a breakout on a higher time frame although the pullback may be deep it is expected to be a bare flag and that is what we got here when it comes to leg counting the most important thing is to recognize a leg one breakout which is when the market cycle resets and to look to enter on the second leg of that breakout leg one breakouts get second legs more than 80% of the time it is the highest probability setup in trading the next most important thing is to be able to recognize late legs which are legs three or later because those legs have a much higher probability of having deep pullbacks or reversals you want to avoid entering in late legs because the market is then late in the market cycle and more likely to reverse leg two is the most context dependent leg meaning you can trade in the direction of it or you can fade it trading ranges are notorious for having second leg traps which are good to fade and Trends have second legs which can be treated similar to leg one again the most important skill you need to develop is the ability to recognize leg one and trade it and recognize leg three and avoid trading it or fade it the more Traders can agree on light count the more reliable the patterns should behave this is an example of a surprise breakout the market rallied and was in a bull flag and the expectation is a bull breakout of a bull flag but instead we got a huge bare Breakout the breakout reset the market cycle so Traders should be looking to enter short for a second leg you can sell the market as the price is falling or you can sell the close of any strong Bear bar some Traders might want to wait for a pullback maybe they sell the breakout Point here maybe they sell the low two maybe below this be bar some Traders will even sell above the bull bars betting that this is a two two legged pullback a minor reversal and a test of the moving average in a bare Trend it doesn't matter how you get short as long as you get short it's important to recognize a strong leg one and not to get fooled into buying minor reversals for swings and only look for with Trend setups after leg one breakouts when the market is in breakout mode it is a 50 50 Market the market is in a trading range and one of the types of trading ranges is a Contracting triangle which is what we see here there were three or four reversals and in this case we got the bull breakout Traders might buy the close of the breakout bar and hold for a measured move based on the height of the breakout or hold for leg one equals leg two measured move you can see later in the day the market came back and tested where the bull breakout occurred the test was successful and Traders bought the breakout point on limit orders or above the second reversal or above consecutive bull bars closing on their highs crossing the moving average it's also an expanding triangle which is another form of of breakout mode and it was also a wedge bottom this is an example of a leg count reset from a completed price structure we have a wedge bottom testing support in a trading range the bull breakout is strong it has growing bull bodies micro Gap and it's crossing the moving average and the bar is closing near its high fairly far above the moving average Traders are expecting a second leg up because of the trapped Traders some may buy the close of the big breakout bar scale in lower others might simply wait for the pull back by below the low one some Traders might buy the breakout point with a limit order and others might buy Above the high one on a stop order the bols got a minor second leg which was symmetrical in size to the first the problem is that this was tight enough to be a breakout on a higher time frame and to be its own leg one breakout there was a more complex two-legged pullback and then it tested the breakout Point again and then a larger second leg to the upside leg one leg two this is kind of a trick question just like how Traders are always paying attention to the Traders equation or context they are also always aware of the leg count remember I said leg counting is a first principle of price action it is one of the most important methods for determining context and identifying where the market is in the market cycle in trading ranges Traders are counting legs up and down and in Trends they are counting the legs of pullbacks in either case they are counting minor Trends in this video I talked about what a leg is in price action and why Traders count legs I also explained how Traders assign numbers to legs when leg counting and how they use leg counting to their advantage I also talked about when Traders count legs this is Joseph Imon and I want to thank you for sticking around to the end of the video thanks a lot for watching