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

by Grimes, Adam

• ISBN13: 9781118115121
• ISBN10: 1118115120
• Edition: 1st
• Format: Hardcover
• Copyright: 2012-07-03
• Publisher: Wiley

Summary

A breakthrough trading book that provides powerful insights on profitable technical patterns and strategies The Art and Science of Technical Analysis is a groundbreaking work that bridges the gaps between the academic view of markets, technical analysis, and profitable trading. The book explores why randomness prevails in markets most, but not all, of the time and how technical analysis can be used to capture statistically validated patterns in certain types of market conditions. The belief of the book is that buying and selling pressure causes patterns in prices, but that these technical patterns are only effective in the presence of true buying/selling imbalance. The Art and Science of Technical Analysis is supported by extensive statistical analysis of the markets, which will debunk some tools and patterns such as Fibonacci analysis, and endorse other tools and trade setups. In addition, this reliable resource discusses trader psychology and trader learning curves based on the authors extensive experience as a trader and trainer of traders. Offers serious traders a way to think about market problems, understand their own performance, and help find a more productive path forward Includes extensive research to validate specific money-making patterns and strategies Written by an experienced market practitioner who has trained and worked with many top traders Filled with in-depth insights and practical advice, The Art and Science of Technical Analysis will give you a realistic sense of how markets behave, when and how technical analysis works, and what it really takes to trade successfully.

Author Biography

ADAM GRIMES is the CIO of Waverly Advisors, an asset management and risk advisory firm headquartered in New York. He began his career as an independent trader focused on agricultural and currency futures, and moved on to manage a successful private investment partnership. Grimes's experience as a trader covers futures, equities, currencies, and derivatives, in time frames ranging from intraday to multi-month swings. Though he is primarily a discretionary swing trader, his methodology rests on a firm foundation of statistical and quantitative research. Grimes holds an MBA with an emphasis in finance and market microstructure, and has worked for a number of private investment firms, as well as having spent several years at the New York Mercantile Exchange.

Table of Contents

Preface xi

Acknowledgments xv

PART I The Foundation of Technical Analysis

CHAPTER 1 The Trader’s Edge 3

Defining a Trading Edge 4

Finding and Developing Your Edge 7

General Principles of Chart Reading 8

Indicators 12

The Two Forces: Toward a New Understanding of Market Action 13

Price Action and Market Structure on Charts 15

Charting by Hand 28

CHAPTER 2 The Market Cycle and the Four Trades 31

Wyckoff’s Market Cycle 32

The Four Trades 40

Summary 45

PART II Market Structure

CHAPTER 3 On Trends 49

The Fundamental Pattern 49

Trend Structure 51

A Deeper Look at Pullbacks: The Quintessential Trend Trading Pattern 65

Trend Analysis 77

Summary 95

CHAPTER 4 On Trading Ranges 97

Support and Resistance 97

Trading Ranges as Functional Structures 113

Summary 120

CHAPTER 5 Interfaces between Trends and Ranges 121

Breakout Trade: Trading Range to Trend 122

Trend to Trading Range 134

Trend to Opposite Trend (Trend Reversal) 137

Trend to Same Trend (Failure of Trend Reversal) 143

Summary 145

PART III Trading Strategies

CHAPTER 6 Practical Trading Templates 149

Failure Test 150

Pullback, Buying Support or Shorting Resistance 154

Pullback, Entering Lower Time Frame Breakout 162

Trading Complex Pullbacks 165

The Anti 170

Breakouts, Entering in the Preceding Base 174

Breakouts, Entering on First Pullback Following 181

Failed Breakouts 183

Summary 186

CHAPTER 7 Tools for Confirmation 189

The Moving Average—The Still Center 190

Channels: Emotional Extremes 195

Indicators: MACD 202

Multiple Time Frame Analysis 213

CHAPTER 8 Trade Management 231

Placing the Initial Stop 232

Setting Price Targets 235

Active Management 240

Portfolio Considerations 251

Practical Issues 253

CHAPTER 9 Risk Management 263

Risk and Position Sizing 263

Theoretical Perspectives on Risk 279

Misunderstood Risk 282

Practical Risks in Trading 283

Summary 290

CHAPTER 10 Trade Examples 291

Trend Continuation 293

Trend Termination 313

Failure Test Failures 319

Trading Parabolic Climaxes 323

The Anti 327

Trading at Support and Resistance 336

Summary 343

PART IV The Individual, Self-Directed Trader

CHAPTER 11 The Trader’s Mind 347

Psychological Challenges of the Marketplace 348

Evolutionary Adaptations 349

Cognitive Biases 353

The Random Reinforcement Problem 356

Emotions: The Enemy Within 357

Intuition 360

Flow 364

Practical Psychology 367

Summary 372

CHAPTER 12 Becoming a Trader 375

The Process 376

Record Keeping 385

Statistical Analysis of Trading Results 388

Summary 397

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