Al Brooks on trading countertrend pullbacks

“The single most reliable Countertrend trade is entering Countertrend to a pullback, which is a small trend in the opposite direction of the major trend. Once the pullback traders have exhausted themselves and the trend traders have again demonstrated their resolve by breaking the trendline that contained the pullback, any small pullback to test this breakout is a great Breakout Pullback entry. This entry is counter to the trend of the pullback, but in the direction of the major trend, and will usually lead to at least a test of the major trend’s extreme. The more momentum that is present in the trendline break, the more likely it is that trade will be profitable.”

Al Brooks is writing about two breakouts in this method. The first is a larger countertrend move against the underlying trend. This can be a few bars on the 5 minutes timeframe that he is trading. The second is a small pullback when the trend resumes and the countertrend move’s trendline is broken. This minor pullback can happen within one bar and in my experience rarely happens more than three bars later than the breakout. If it does than the break is likely to be a false one.
It all sounds clear and easy but when trading in real time at the hard right edge it is not so simple.

Why am I quoting Al Brooks when his focus is 5 minutes timeframe? Because due to the fractal nature of the financial price movements (self-similar in scale), the same method can be traded on longer timeframes as well.

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