The Art and Science of Technical Analysis

The Art and Science of Technical Analysis Market Structure, Price Action, and Trading Strategies

ADAM GRIMES

WILEY John Wiley & Sons, Inc.

Contents

PART I

Preface

xi

Acknowledgments

xv

The Foundation of Technical Analysis

CHAPTER 1 The Trader's Edge Denning a Trading Edge Finding and Developing Your Edge General Principles of Chart Reading Indicators The Two Forces: Toward a New Understanding of Market Action Price Action and Market Structure on Charts Charting by Hand

CHAPTER 2 The Market Cycle and the Four Trades Wyckoffs Market Cycle The Four Trades Summary

PART 11

3 4 7 8 12 13 15 28

31 32 40 45

Market Structure

CHAPTER 3 On Trends The Fundamental Pattern Trend Structure A Deeper Look at Pullbacks: The Quintessential Trend Trading Pattern

49 49 51 65

vii

viii

CONTENTS

Trend Analysis Summary

CHAPTER 4 On Trading Ranges Support and Resistance Trading Ranges as Functional Structures Summary

CHAPTER 5 Interfaces between Trends and Ranges Breakout Trade: Trading Range to Trend Trend to Trading Range Trend to Opposite Trend (Trend Reversal) Trend to Same Trend (Failure of Trend Reversal) Summary

PART III

77 95 97 97 113 120 121 122 134 137 143 145

Trading Strategies

CHAPTER 6 Practical Trading Templates Failure Test Pullback, Buying Support or Shorting Resistance Pullback, Entering Lower Time Frame Breakout Trading Complex Pullbacks The Anti Breakouts, Entering in the Preceding Base Breakouts, Entering on First Pullback Following Failed Breakouts Summary

CHAPTER 7 Tools for Confirmation The Moving Average—The Still Center Channels: Emotional Extremes Indicators: MACD Multiple Time Frame Analysis

149 150 154 162 165 170 174 181 183 186 189 190 195 202 213

CHAPTER 8 Trade Management

231

Placing the Initial Stop Setting Price Targets

232 235

ix

Contents

Active Management Portfolio Considerations Practical Issues

CHAPTER 9

Risk Management Risk and Position Sizing Theoretical Perspectives on Risk Misunderstood Risk Practical Risks in Trading Summary

CHAPTER 10 Trade Examples Trend Continuation Trend Termination Failure Test Failures Trading Parabolic Climaxes The Anti Trading at Support and Resistance Summary

PART IV

240 251 253 263

263 279 282 283 290 291 293 313 319 323 327 336 343

The Individual, Self-Directed Trader

CHAPTER 11 The Trader's Mind Psychological Challenges of the Marketplace Evolutionary Adaptations

Cognitive Biases The Random Reinforcement Problem Emotions: The Enemy Within Intuition Flow Practical Psychology Summary

CHAPTER 12 Becoming a Trader The Process Record Keeping Statistical Analysis of Trading Results Summary

347

348 349 353 356 357 360 364 367 372 375

376 385 388 397

CONTENTS

APPENDIX A Trading Primer

399

APPENDIX B A Deeper Look at Moving Averages and the MACD

409

APPENDIX C Sample Trade Data

425

Glossary

~

427

Bibliography

443

About the Author

447

Index

449