The art and science of technical analysis : market structure, price action, and trading strategies

480 Pages·2012·9.75 MB·English

by  Adam Grimes

P1:OTA/XYZ P2:ABC
JWBT634-fm JWBT634-Grimes May11,2012 8:28 Printer:HamiltonPrinting
The Art and
Science of
Technical
Analysis
P1:OTA/XYZ P2:ABC
JWBT634-fm JWBT634-Grimes May11,2012 8:28 Printer:HamiltonPrinting
Foundedin1807,JohnWiley&Sonsistheoldestindependentpublishingcompanyinthe
UnitedStates.WithofficesinNorthAmerica,Europe,Australia,andAsia,Wileyisglob-
allycommittedtodevelopingandmarketingprintandelectronicproductsandservices
forourcustomers’professionalandpersonalknowledgeandunderstanding.
The Wiley Trading series features books by traders who have survived the mar-
ket’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,thesebookswillprovidetheadviceandstrategiesneededtoprospertoday
andwellintothefuture.
Foralistofavailabletitles,pleasevisitourWebsiteatwww.WileyFinance.com.
P1:OTA/XYZ P2:ABC
JWBT634-fm JWBT634-Grimes May11,2012 8:28 Printer:HamiltonPrinting
The Art and
Science of
Technical
Analysis
Market Structure, Price Action,
and Trading Strategies
ADAM GRIMES
JohnWiley&Sons,Inc.
P1:OTA/XYZ P2:ABC
JWBT634-fm JWBT634-Grimes May11,2012 8:28 Printer:HamiltonPrinting
Copyright(cid:2)C 2012byAdamGrimes.Allrightsreserved.
PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey.
PublishedsimultaneouslyinCanada.
Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmittedinanyformorby
anymeans,electronic,mechanical,photocopying,recording,scanning,orotherwise,exceptaspermittedun-
derSection107or108ofthe1976UnitedStatesCopyrightAct,withouteitherthepriorwrittenpermissionof
thePublisher,orauthorizationthroughpaymentoftheappropriateper-copyfeetotheCopyrightClearance
Center,Inc.,222RosewoodDrive,Danvers,MA01923,[phone],fax[phone],orontheWebat
www.copyright.com.RequeststothePublisherforpermissionshouldbeaddressedtothePermissionsDepart-
ment,JohnWiley&Sons,Inc.,111RiverStreet,Hoboken,NJ07030,[phone],fax[phone],or
onlineathttp://www.wiley.com/go/permissions.
LimitofLiability/DisclaimerofWarranty:Whilethepublisherandauthorhaveusedtheirbesteffortsinprepar-
ingthisbook,theymakenorepresentationsorwarrantieswithrespecttotheaccuracyorcompletenessofthe
contentsofthisbookandspecificallydisclaimanyimpliedwarrantiesofmerchantabilityorfitnessforapar-
ticularpurpose.Nowarrantymaybecreatedorextendedbysalesrepresentativesorwrittensalesmaterials.
Theadviceandstrategiescontainedhereinmaynotbesuitableforyoursituation.Youshouldconsultwitha
professionalwhereappropriate.Neitherthepublishernorauthorshallbeliableforanylossofprofitorany
othercommercialdamages,includingbutnotlimitedtospecial,incidental,consequential,orotherdamages.
ChartsgeneratedwiththeTradeStationplatformandcodeinEasyLanguageformatareusedwithpermission.
(cid:2)C TradeStationTechnologies,Inc.2001–2011,Allrightsreserved.
Forgeneralinformationonourotherproductsandservicesorfortechnicalsupport,pleasecontactourCus-
tomerCareDepartmentwithintheUnitedStatesat(800)762-2974,outsidetheUnitedStatesat(317)572-3993
orfax(317)572-4002.
Wileyalsopublishesitsbooksinavarietyofelectronicformats.Somecontentthatappearsinprintmaynotbe
availableinelectronicbooks.FormoreinformationaboutWileyproducts,visitourwebsiteatwww.wiley.com.
LibraryofCongressCataloging-in-PublicationData:
Grimes,Adam,1973–
Theartandscienceoftechnicalanalysis:marketstructure,priceaction,andtradingstrategies/
AdamGrimes.
pagescm.–(Wileytradingseries;544)
Includesbibliographicalreferencesandindex.
ISBN978-1-118-11512-1(cloth);ISBN978-1-118-22427-4(ebk);
ISBN978-1-118-23814-1(ebk);ISBN978-1-118-26247-4(ebk)
1.Investmentanalysis. I.Title.
HG4529.G752012
332.63(cid:3)2042–dc23
2012000874
PrintedintheUnitedStatesofAmerica
10 9 8 7 6 5 4 3 2 1
P1:OTA/XYZ P2:ABC
JWBT634-fm JWBT634-Grimes May11,2012 8:28 Printer:HamiltonPrinting
TomywifeBetsy.Withoutherunfailingloveandsupport
Icouldhaveaccomplishednothing.
P1:OTA/XYZ P2:ABC
JWBT634-fm JWBT634-Grimes May11,2012 8:28 Printer:HamiltonPrinting
P1:OTA/XYZ P2:ABC
JWBT634-fm JWBT634-Grimes May11,2012 8:28 Printer:HamiltonPrinting
Contents
Preface xi
Acknowledgments xv
PART I The Foundation of Technical Analysis
CHAPTER 1 The Trader’s Edge 3
DefiningaTradingEdge 4
FindingandDevelopingYourEdge 7
GeneralPrinciplesofChartReading 8
Indicators 12
TheTwoForces:TowardaNewUnderstanding
ofMarketAction 13
PriceActionandMarketStructureonCharts 15
ChartingbyHand 28
CHAPTER 2 The Market Cycle and the Four Trades 31
Wyckoff’sMarketCycle 32
TheFourTrades 40
Summary 45
PART II Market Structure
CHAPTER 3 On Trends 49
TheFundamentalPattern 49
TrendStructure 51
ADeeperLookatPullbacks:TheQuintessentialTrend
TradingPattern 65
vii
P1:OTA/XYZ P2:ABC
JWBT634-fm JWBT634-Grimes May11,2012 8:28 Printer:HamiltonPrinting
viii CONTENTS
TrendAnalysis 77
Summary 95
CHAPTER 4 On Trading Ranges 97
SupportandResistance 97
TradingRangesasFunctionalStructures 113
Summary 120
CHAPTER 5 Interfaces between Trends and Ranges 121
BreakoutTrade:TradingRangetoTrend 122
TrendtoTradingRange 134
TrendtoOppositeTrend(TrendReversal) 137
TrendtoSameTrend(FailureofTrendReversal) 143
Summary 145
PART III Trading Strategies
CHAPTER 6 Practical Trading Templates 149
FailureTest 150
Pullback,BuyingSupportorShortingResistance 154
Pullback,EnteringLowerTimeFrameBreakout 162
TradingComplexPullbacks 165
TheAnti 170
Breakouts,EnteringinthePrecedingBase 174
Breakouts,EnteringonFirstPullbackFollowing 181
FailedBreakouts 183
Summary 186
CHAPTER 7 Tools for Confirmation 189
TheMovingAverage—TheStillCenter 190
Channels:EmotionalExtremes 195
Indicators:MACD 202
MultipleTimeFrameAnalysis 213
CHAPTER 8 Trade Management 231
PlacingtheInitialStop 232
SettingPriceTargets 235
P1:OTA/XYZ P2:ABC
JWBT634-fm JWBT634-Grimes May11,2012 8:28 Printer:HamiltonPrinting
Contents ix
ActiveManagement 240
PortfolioConsiderations 251
PracticalIssues 253
CHAPTER 9 Risk Management 263
RiskandPositionSizing 263
TheoreticalPerspectivesonRisk 279
MisunderstoodRisk 282
PracticalRisksinTrading 283
Summary 290
CHAPTER 10 Trade Examples 291
TrendContinuation 293
TrendTermination 313
FailureTestFailures 319
TradingParabolicClimaxes 323
TheAnti 327
TradingatSupportandResistance 336
Summary 343
PART IV The Individual, Self-Directed Trader
CHAPTER 11 The Trader’s Mind 347
PsychologicalChallengesoftheMarketplace 348
EvolutionaryAdaptations 349
CognitiveBiases 353
TheRandomReinforcementProblem 356
Emotions:TheEnemyWithin 357
Intuition 360
Flow 364
PracticalPsychology 367
Summary 372
CHAPTER 12 Becoming a Trader 375
TheProcess 376
RecordKeeping 385
StatisticalAnalysisofTradingResults 388
Summary 397
P1:OTA/XYZ P2:ABC
JWBT634-fm JWBT634-Grimes May11,2012 8:28 Printer:HamiltonPrinting
x 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