Technical Analysis For Dummies^®

by Barbara Rockefeller (Rockefeller Treasury Services, Stamford, Connecticut)

• ISBN13: 9780764540448
• ISBN10: 0764540440
• Format: Paperback
• Copyright: 2004-03-01
• Publisher: For Dummies

Summary

A simple, straightforward guide to the fundamentals of technical analysis For active traders and investors who don't understand the complicated art of technical analysis, this commonsense resource covers all the bases. Explaining the basic principles of analysis and showing how to implement them, Technical Analysis For Dummies dumps the confusing jargon and unreadable charts for basic explanations and practical guidance. In no time at all, readers will see how to make better trading decisions. Barbara Rockefeller (Stamford, CT) is one of the foremost authorities on technical analysis and founder of Rockefeller Treasury Services.

Author Biography

Barbara Rockefeller is one of the world’s foremost authorities on technical analysis and is the author of two newsletters and three popular books, including CNBC 24/7 Trading: Around the Clock, Around the World and The Global Trader.

Table of Contents

Introduction	1	(8)
Beating the Market	1	(1)
Finding Order	2	(1)
About This Book	3	(1)
Conventions Used in This Book	4	(1)
Foolish Assumptions	4	(1)
How This Book Is Organized	5	(1)
Part I: Defining Technical Analysis	5	(1)
Part II: Preparing Your Mind for Technical Analysis	5	(1)
Part III: Observing Market Behavior	5	(1)
Part IV: Finding Patterns	5	(1)
Part V: Dynamic Analysis	6	(1)
Part VI: The Part of Tens	6	(1)
Icons Used in This Book	6	(1)
What You Need to Get Started	7	(1)
Where to Go from Here	7	(2)
Part I: Defining Technical Analysis	9	(50)
Chapter 1: Opening the Technical Analysis Toolbox	11	(12)
What Is Technical Analysis?	11	(3)
Trading or investing: The many faces of technical analysis	12	(1)
Setting new rules	12	(1)
Making the case for managing the trade	13	(1)
It's All about the Trend	14	(3)
Focusing on the price is right (and respectable)	14	(2)
Charting your path	16	(1)
Looking at the Many Faces of Trendedness	17	(2)
Quantifying trendedness	17	(1)
Identifying your definition of trendedness	18	(1)
Why Technical Analysis Does and Doesn't (Always) Work	19	(1)
Viewing the Scope of Technical Analysis	20	(3)
Charting	20	(1)
Market timing	21	(1)
Trend-following	21	(1)
Technical analysis	21	(2)
Chapter 2: Uncovering the Essence of Market Movement	23	(18)
The eBay Model of Supply and Demand	24	(1)
Securities aren't socks	24	(1)
Demand creates demand	24	(1)
Creating demand from scratch	25	(1)
Identifying Crowd Behavior	25	(2)
The individual versus the crowd	26	(1)
Playing games with traders' heads	26	(1)
Figuring Out What's Normal: Drawing a Market Profile	27	(3)
Explaining the standard deviation	28	(1)
Trading normalcy	29	(1)
Identifying Crowd Extremes and What to Do about Them	30	(5)
Overbought and oversold	31	(1)
Retracements	32	(1)
Catch a falling knife	33	(2)
Big-Picture Crowd Theories	35	(6)
The Gann 50 percent retracement	35	(2)
Magic numbers: "The secret of the universe"	37	(1)
Seeing too many retracements	38	(3)
Chapter 3: Going with the Flow: Market Sentiment	41	(18)
Defining Market Sentiment	42	(1)
Tracking Volume	42	(4)
Leading the way with spikes	43	(1)
Tracking on-balance volume	43	(2)
Refining volume indicators	45	(1)
Thinking Outside the Chart	46	(6)
Sampling information about sentiment	47	(3)
Following the earth's axis: Seasonality and calendar effects	50	(2)
Using calendar effects	52	(1)
Blindsiding the Crowd	52	(3)
Searching for historic key reversals	52	(1)
Enduring randomness	53	(1)
Remembering the last price	54	(1)
Thinking Scientifically	55	(6)
Conditions and contingencies	55	(1)
Sample size	56	(3)
Part II: Preparing Your Mind For Technical Analysis	59	(34)
Chapter 4: Using Chart Indicators	61	(16)
Squelching Emotion	61	(4)
Classifying indicators	62	(1)
Choosing style	63	(2)
Examining How Indicators Work	65	(4)
Finding relevant time frames	65	(2)
Heeding indicator signals	67	(2)
Establishing Benchmark Levels	69	(1)
Choosing Indicators	70	(1)
Optimizing: The Necessary Evil	71	(6)
Constructing a back-test optimization	72	(2)
Fixing the indicator	74	(1)
Applying the indicator again	75	(1)
Why back-testing is risky	76	(1)
Chapter 5: Managing the Trade	77	(16)
Building Trading Rules	77	(4)
Answering common questions about trading	78	(1)
Establishing your rules	79	(1)
Having an emergency plan	79	(2)
Taking Money off the Table	81	(1)
Relying on indicators	81	(1)
Using averages	81	(1)
Securing satisfaction	81	(1)
Controlling Losses	82	(1)
The Stop-Loss Order	83	(6)
Mental stops are hogwash	83	(1)
Sorting out the types of stops	84	(5)
Adjusting Positions	89	(6)
Reducing positions	90	(1)
Adding to positions	90	(1)
Applying stops to adjusted positions	91	(1)
More from the frontier of technical knowledge	92	(1)
Part III: Observing Market Behavior	93	(58)
Chapter 6: Reading Basic Bars: Showing How Security Prices Move	95	(20)
Building Basic Bars	96	(9)
Setting the tone: The opening price	98	(2)
Summarizing sentiment: The closing price	100	(3)
The high	103	(1)
The low	103	(2)
Putting It All Together: Using Bars to Identify Trends	105	(2)
Identifying an uptrend	105	(1)
Identifying a downtrend	106	(1)
But Wait...Nothing Is That Simple	107	(4)
Bar components influence the next bar	107	(1)
Understanding relativity	108	(1)
Your eyes can deceive you	109	(1)
Bar-reading doesn't always work	110	(1)
Zooming Out and Zooming In	111	(4)
Using daily data	111	(1)
Zooming out	112	(1)
Zooming in	112	(3)
Chapter 7: Reading Special Bar Combinations: Small Patterns	115	(22)
Finding Clues to Trader Sentiment	116	(2)
Tick and bar placement	116	(1)
Types of configurations	117	(1)
Trading range	117	(1)
Concerning Common Special Bars	118	(3)
Closing on a high note	118	(1)
Spending the day inside	119	(1)
Getting outside for the day	120	(1)
Finding the close at the open	121	(1)
Understanding Spikes	121	(2)
Grasping Gaps	123	(6)
Lacking opportunity: Common gaps	125	(1)
Kicking things off: Breakaway gaps	126	(1)
Continuing the push: Runaway gaps	127	(1)
Calling it quits: Exhaustion gaps	127	(1)
Scoring big: Island reversals	128	(1)
Will the Gap Be Filled?	129	(1)
Using the Trading Range to Deal with Change Effectively	130	(7)
Paying attention to a changing range	131	(1)
Determining the meaning of a range change	131	(1)
Looking at the average trading range	132	(5)
Chapter 8: Redrawing the Price Bar: Japanese Candlesticks	137	(14)
Candlesticks in the Spotlight	137	(1)
Anatomy of a Candlestick	138	(5)
Drawing the real body	138	(1)
Doji: No real body	139	(1)
The shadow	140	(3)
Sizing Up Emotions	143	(1)
Identifying Emotional Extremes	144	(2)
Turning to Reversal Patterns	146	(1)
Bearish engulfing candlestick	146	(1)
Shooting star	146	(1)
Continuation Patterns	147	(1)
Rising window	147	(1)
Three white soldiers	148	(1)
Combining Candlesticks with Other Indicators	148	(2)
Trading on Candlesticks Alone	150	(1)
Part IV: Finding Patterns	151	(54)
Chapter 9: Seeing Patterns	153	(14)
Introducing Patterns	153	(3)
Laughing at squiggles	154	(1)
Got imagination?	154	(1)
Coloring inside the lines	155	(1)
Continuation Patterns	156	(3)
Ascending and descending triangles	156	(1)
Pennants and flags	157	(1)
Dead-cat bounce-phony reversal	158	(1)
Classic Reversal Patterns	159	(5)
Double bottom	160	(1)
Double tops	161	(1)
The ultimate triple top: Head-and-shoulders	162	(2)
The Measured Move	164	(3)
Taking dictation from the pattern	164	(1)
Resuming the trend after retracement	165	(1)
Measuring from the gap	166	(1)
Chapter 10: Drawing Trendlines	167	(18)
Looking Closely at a Price Chart	167	(3)
Forming an Impression of Trends	170	(3)
Talking like a Trader	173	(1)
Creating Rule-Based Trendlines	174	(6)
Using the support line to enter and exit	175	(2)
The other side of the coin: Using resistance to enter and exit	177	(2)
Fine-tuning support and resistance	179	(1)
Playing games with support and resistance lines	180	(1)
Drawing Internal Trendlines	180	(5)
Identifying trendedness	181	(1)
How to use the linear regression	182	(3)
Chapter 11: Transforming Channels into Forecasts	185	(20)
Channel-Drawing Basics	186	(4)
Drawing channels by hand	187	(1)
Letting software do the drawing	188	(1)
Benefits of straight-line channels	188	(1)
Drawbacks of straight-line channels	189	(1)
Using Channels to Make Profit and Avoid Loss	190	(1)
Dealing with Breakouts	190	(6)
Distinguishing between false breakouts and the real thing	191	(3)
Putting breakouts into context	194	(2)
Riding the Regression Range	196	(6)
Introducing the standard error	197	(1)
Drawing a linear regression channel	198	(1)
Confirming hand-drawn channels	199	(1)
Special features of the linear regression channel	200	(1)
Drawbacks of linear regression channels	201	(1)
Pivot Point Support and Resistance Channel	202	(5)
Calculating the first zone of support and resistance	202	(1)
Calculating the second zone of support and resistance	203	(1)
Using pivot support and resistance	204	(1)
Part V: Dynamic Analysis	205	(94)
Chapter 12: Using Dynamic Lines	207	(22)
The Simple Moving Average	207	(10)
Starting with the crossover rule	208	(4)
Using the moving average level rule	212	(1)
Dealing with limitations	213	(2)
Magic moving average numbers	215	(2)
Adjusting the Moving Average	217	(2)
Weighted and exponential moving averages	217	(1)
Adaptive moving averages	218	(1)
Choosing a moving average type	218	(1)
Multiple Moving Averages	219	(4)
Using two moving averages	220	(2)
Trying the three-way approach	222	(1)
Moving Average Convergence-Divergence	223	(6)
Calculating convergence and divergence	224	(1)
Creating a decision tool	224	(2)
Interpreting the MACD	226	(3)
Chapter 13: Measuring Momentum	229	(16)
Exploring the Concept of Momentum	229	(2)
Doing the Math	231	(3)
Calculating rate of change	231	(1)
Figuring momentum	232	(1)
Adding context: Percentage rate of change	233	(1)
Oscillating	234	(1)
Pondering the Trickier Aspects of Momentum	234	(4)
Detrending the price series	235	(1)
Smoothing price changes	235	(1)
Filtering momentum	236	(1)
Seeing cycles and questioning them	236	(2)
Applying Momentum	238	(1)
Divergence	238	(1)
Confirming trend indicators	239	(1)
Relative Strength Index (RSI)	239	(3)
Calculating the RSI	239	(1)
Picturing RSI	240	(1)
Sorting through RSI ambiguities	241	(1)
Using the Rest of the Price Bar-the Stochastic Oscillator	242	(3)
Step 1 (and its logic)	243	(1)
Step 2: Refining %K	244	(1)
Chapter 14: Estimating Volatility	245	(14)
Catching a Slippery Concept	245	(4)
How volatility arises	247	(1)
Low volatility with trending	247	(1)
Low volatility without trending	248	(1)
High volatility with trending	248	(1)
High volatility without trending	248	(1)
Time Frame Is Everything	249	(2)
Profiling the position trader	249	(1)
Embracing volatility	250	(1)
Revisiting the old conventional wisdom	251	(1)
Measuring Volatility	251	(4)
Tracking the maximum move	251	(2)
Considering the standard deviation	253	(1)
Using the average true range indicator	254	(1)
Applying Volatility Measures-Bollinger Bands	255	(2)
Reviewing Another Volatility Breakout Idea	257	(2)
Chapter 15: Ignoring Time: Point-and-Figure Charting	259	(12)
Visualizing What's Important	259	(6)
Doing nothing is okay	260	(1)
Putting each move into a column	261	(1)
Picturing the point-and-figure chart	261	(1)
Defining box size	262	(1)
Choosing a box size	263	(1)
Adding the reversal amount to the picture	264	(1)
Drawing the daily chart	264	(1)
Simple point-and-figure trading	265	(1)
Applying Patterns	265	(3)
Support and resistance	265	(2)
Double and triple tops and bottoms	267	(1)
Projecting Prices after a Breakout	268	(3)
Using vertical price projection	268	(1)
Applying horizontal projection	269	(2)
Chapter 16: Combining Techniques	271	(16)
Standing the Test of Time: Simple Ideas	271	(2)
Reviewing two classics	272	(1)
Confirmation is the key	272	(1)
Introducing Complexity	273	(6)
Choose a ruling concept	274	(1)
A case study in complexity	275	(4)
Expecting a Positive Result	279	(4)
Calculating positive expectancy technically	279	(3)
Enhancing probability: Entering gradually and exiting at once	282	(1)
Incorporating environment and event risk	282	(1)
Efficient Entries and Ruthless Exits-Setups	283	(4)
Starting off early	284	(1)
Exiting the game	284	(1)
Working hard while trading like a pro	285	(1)
Reading promotions carefully	285	(2)
Chapter 17: Should You Build a Trading System?	287	(12)
Defining a Trading System	287	(3)
Meeting the strict requirements	288	(1)
Finding your place on the spectrum	288	(2)
Why Mechanical Systems Fail	290	(3)
Fooling around with new ideas	290	(1)
Back-testing until you're blue in the face	290	(1)
Not knowing your time frame	291	(1)
Practicing self-sabotage	292	(1)
Following Big-Picture Rules	293	(2)
Stopping out versus the stop-and-reverse	293	(1)
Trade more than one security	294	(1)
Don't trade on too little capital	295	(1)
Buying a Trading System	295	(2)
Overcoming phony track records	296	(1)
Looking under the hood	297	(1)
Pick the Tool, Not the Security	297	(2)
Part VI: The Part of Tens	299	(12)
Chapter 18: Ten Secrets of the Top Technical Traders	301	(6)
Trust the Chart	302	(1)
The Trend Is Your Friend	302	(1)
You Make Money Only when You Sell	302	(1)
Take Responsibility	303	(1)
Avoid Euphoria and Despair	304	(1)
Making Money Is Better Than Being Right	304	(1)
Don't Let a Winning Trade Turn into a Losing Trade	305	(1)
Don't Curve-Fit	305	(1)
Trade the Right Amount	306	(1)
Diversify	306	(1)
Chapter 19: Ten Rules for Working with Indicators	307	(4)
Listen to the Price Bars	307	(1)
Understand Your Indicator	307	(1)
Use Support and Resistance	308	(1)
Use the Breakout Principle	308	(1)
Watch for Convergence/Divergence	308	(1)
Choose a Ruling Concept	309	(1)
Back-test Your Indicators Properly	309	(1)
Acknowledge that Your Indicator Will Fail	310	(1)
There Are No Secret Indicators	310	(1)
Be Original	310	(1)
Appendix: Resources	311	(6)
The Bare Minimum	311	(1)
Market Technicians Association (MTA)	312	(1)
Software and System-testing	312	(1)
Library Essentials	312	(2)
Training Courses	314	(1)
Technical Analysis Web Sites	315	(2)
Index	317