Contents Series Title Page Copyright Dedication Preface Acknowledgments Part I: The Foundation of Technical Analysis Chapter 1: The Trader’s Edge DEFINING 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 WYCKOFF’S MARKET CYCLE THE FOUR TRADES SUMMARY Part II: Market Structure Chapter 3: On Trends THE FUNDAMENTAL PATTERN TREND STRUCTURE A DEEPER LOOK AT PULLBACKS: THE QUINTESSENTIAL TREND TRADING PATTERN 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: 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 CHAPTER 8: Trade Management PLACING THE INITIAL STOP SETTING PRICE TARGETS ACTIVE MANAGEMENT PORTFOLIO CONSIDERATION 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: 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 Appendix A: Trading Primer THE SPREAD TWO TYPES OF ORDERS CHARTS Appendix B: A Deeper Look at Moving Averages and the MACD MOVING AVERAGES THE MACD Appendix C: Sample Trade Data Glossary Bibliography About the Author Index Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers' professional and personal knowledge and understanding. The Wiley Trading series features books by traders who have survived the market's ever changing temperament and have prospered—some by reinventing systems, others by getting back to basics. Whether a novice trader, professional, or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future.
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Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www. Library of Congress Cataloging-in-Publication Data: Grimes, Adam, 1973– The art and science of technical analysis : market structure, price action, and trading strategies Adam Grimes. – (Wiley trading series ; 544) Includes bibliographical references and index.63′2042–dc23 2012000874 To my wife Betsy.
Without her unfailing love and support I could have accomplished nothing. Preface The book you are holding in your hands is the product of nearly two decades of my study and experience as a trader, covering the full span of actively traded markets and time frames. I owe much to authors and traders who have come before me, for no one produces anything significant in a vacuum. I would not have been successful without the help and guidance of my mentors, but I learned many of the lessons here from my own mistakes.
In some ways, this work represents a radical break from many of the books that have preceded it, and I hope it encourages you to question much of the traditional thinking of technical analysis. This book does not present a rigid system to be strictly followed, nor a set of setups and patterns that can be assembled at the trader’s whim. Rather, it offers a comprehensive approach to the problems of technically motivated, directional trading. The book is structured to be read from beginning to end, but individual sections and chapters stand on their own.
Through the entire work, deliberate repetition of important concepts helps to build a complete perspective on many of the problems traders face. The tools and techniques must be adapted to the trader’s personality and business situation, but most will find a firm foundation between these covers. There are some underlying themes, perhaps not expressed explicitly, that tie this work together, and they may be surprising to many readers: Trading is hard. Markets are extremely competitive.
They are usually very close to efficient, and most observed price movements are random. It is therefore exceedingly difficult to derive a method that makes superior risk-adjusted profits, and it is even more difficult to successfully apply such a method in actual trading. Last, it is essential to have a verifiable edge in the markets —otherwise no consistent profits are possible. This approach sets this work apart from the majority of trading books published, which suggest that simple patterns and proper psychology can lead a trader to impressive profits.
Perhaps this is possible, but I have never seen it work in actual practice. This book is divided into four parts: Part One begins with a look at some of the probability theory supporting the concepts of successful trading. Next comes an in-depth look at a specific