Introduction 1
About This Book 1
Foolish Assumptions 3
Icons Used in This Book 3
Beyond the Book 4
Where to Go from Here 4
Part 1: Getting Started with Technical Analysis 5
Chapter 1: Introducing Technical Analysis 7
Stepping Up to Science 9
Unpacking Lingo 10
Buy-and-Hold Is Bunk 11
Recognizing Who Uses Technical Analysis 13
Remembering the Trend Is Your Friend 13
Charting your path 14
Picking a time frame 14
Viewing the Scope of Technical Analysis 15
Charting 16
Market timing 16
Trend-following 16
Technical analysis 16
Algorithmic trading 17
Why Technical Analysis Works and What Can Go Wrong 20
Setting new rules 21
Controlling losses to protect gains 21
Why Technical Analysis Gets a Bad Rap 22
Beating the Market Is Hard Work 23
Finding Order 24
What You Need to Get Started 25
Chapter 2: Tapping into the Wisdom of the Crowd 27
Securities Are Not Socks 28
The eBay Model of Supply and Demand 30
Securities have their own economics 30
Creating demand from scratch 31
Identifying Crowd Behavior 32
Defining Normal 33
Reverting to the mean 33
Trading mean reversion 34
Breaking Normal 35
Going against the grain: Retracements 36
Recognizing why retracements happen 37
Accepting When the Crowd Is Extreme 40
Avoiding stampedes 41
Lesser devilry — playing games with traders' heads 42
Chapter 3: Trade What You See: Market Sentiment 43
The Origin of Market Sentiment 44
Thinking Outside the Chart: Defending Sentiment 47
Monitoring investors: The bull/bear ratio 47
Following the money: Breadth indicators 47
Viewing volatility: The VIX 48
New and improved sentiment indicators 48
Getting the Lowdown on Volume 49
Tracking on-balance volume 50
Refining volume indicators 50
Leading the way with spikes 51
Getting a two-for-the price-of-one coupon 52
Blindsiding Yourself 52
Understanding confirmation bias and anchoring 53
Being aware of potential errors 54
Thinking Scientifically 55
Humility: Conditions and contingencies 55
Sample size 56
Chapter 4: Gaining Critical Advantage from Indicators 59
Overcoming Noise 60
Distinguishing between noise and an Event 61
Knowing where noise comes from 61
Noise from inside the market 62
Indicators Give You the Edge 62
Classifying indicators 63
Understanding what indicators identify 64
Choosing your trading style 64
Examining How Indicators Work 66
Finding relevant time frames 66
Heeding indicator signals 67
Establishing Benchmark Levels 69
Choosing Indicators 70
Examining Indicators in Detail 71
Constructing a backtest 71
The other top metrics 73
Fixing the indicator 73
Evaluating the risks of backtesting 74
Chapter 5: Managing the Trade 75
Finding Your Risk Profile 76
What's your ratio? 76
Introducing positive expectancy 76
Measuring the trade 77
Considering your stake 77
Adhering to the no-guru rule 78
Building Trading Rules 78
Creating your trading plan with four easy rules 79
Combining indicators with trading rules 79
Trading styles 80
Knowing How Much Is Enough 81
Using the First Line of Defense: Stop-Loss Orders 81
Mental stops are hogwash 82
Sorting out the types of stops 83
Chapter 6: Taming Uncertainty: How to Use Technical Analysis 87
Numbers Are Better than Words 87
Distinguishing between feeling and thinking 88
Realizing cognitive psychology is useful to technical trading 88
Between a rock and a hard place 90
Introducing Positive Expectancy 91
Measuring the trade 92
Considering your stake 92
Adopting the Technical Mindset 94
Chapter 7: Slicing the Pie 95
Adjusting Positions 96
Scaling in 96
Scaling out 97
What Is Asset Allocation? 97
Tharp method 98
Vince method 98
Chapter 8: Using AI in Technical Analysis-Based Trading 101
Exploring the Wonders of Perfect Memory 102
Reviewing the Drawbacks of Using AI 103
Not knowing what to ask 103
Incomplete training 104
Cost 105
Picking an AI Program 105
Getting Acquainted with AI Tools 106
Part 2: Building Indicators From the Ground Up 109
Chapter 9: Reading Basic Bars: How to Pounce on Opportunities 111
Building Basic Bars 112
Reality in a nutshell 112
Setting the tone: The opening price 114
Summarizing sentiment: The closing price 115
Going up: The high 117
Getting to the bottom of it: The low 119
Putting It All Together: Using Bars to Identify Trends 119
Identifying an uptrend 120
Pinpointing a downtrend 121
Overcoming Murky Bar Waters 121
Paying heed to bar series 122
Knowing when bar reading doesn't work 122
Framing Your Bars 123
Using daily data 124
Zooming out to a higher time frame 124
Zooming in to a shorter time frame 125
Applying Bar Reading in Real Time 128
Chapter 10: Special Bars: An Early Warning System 129
Finding Clues to Trader Sentiment 129
Tick and bar placement 130
Williams three-bar system 130
Trading range 131
Identifying Common Special Bars 132
Closing on a high note 132
Spending the day inside 133
Getting outside for the day 133
Finding the close at the open 133
Decoding Spikes 133
Getting Gaps 135
Pinpointing a gap 135
Using gaps to your advantage 137
Filling the Gap 141
Using the Trading Range as a Tool 142
Paying attention to a changing range 142
Determining the meaning of a range change 143
Looking at the average trading range 144
Chapter 11: Redrawing the Price Bar: Japanese Candlesticks 149
Appreciating the Candlestick Advantage 150
Dissecting the Anatomy of a Candlestick 150
Drawing the real body 151
Doing without a real body: The doji 152
Catching the shadow 152
Sizing Up Emotions 155
Identifying Special Emotional Extreme Candlestick Patterns 157
Interpreting candlestick patterns 157
Turning to reversal patterns 159
Bearish engulfing candlestick 159
Shooting star 159
Continuation patterns 159
Combining Candlesticks with Other Indicators 161
Trading on Candlesticks Alone 163
Part 3: Finding Patterns 165
Chapter 12: Seeing Patterns 167
Introducing Patterns 168
Using imagination 168
Coloring inside the lines 170
Cozying Up to Continuation Patterns 170
Ascending and descending triangles 170
Dead-cat bounce 171
Cup and handle 172
Recognizing Classic Reversal Patterns 173
Double bottom 173
Double tops 175
The ultimate triple top: Head-and-shoulders 176
Evaluating the Measured Move 177
Taking dictation from the pattern 177
Resuming the trend after retracement 179
Measuring from the gap 179
Current-day warning 179
Chapter 13: Drawing Trendlines 181
Looking Closely at a Price Chart 182
Following the Rules with Rule-Based Trendlines 182
Drawing support and resistance lines 182
Using the support line to enter and exit 183
Noting breakouts and false breakouts 184
Using resistance to enter and exit 185
Being aware of the 1-2-3 Rule 187
Playing games with support and resistance lines 188
Do Prices Pivot? 189
Drawing Internal Trendlines 191
Rules for drawing a linear regression 191
Identifying trendedness 192
Using the linear regression 194
Chapter 14: Transforming Channels into Forecasts 197
Diving into Channel-Drawing Basics 197
The swing bar problem 198
Drawing channels by hand 198
Benefitting from channels 200
Delving into the drawbacks of channels 201
Channeling to make gains and avoid losses 201
Riding the Regression Range 201
Introducing the standard deviation 202
Drawing a linear regression channel 202
Confirming hand-drawn channels 204
Sizing up the special features of the linear regression channel 204
Discovering the drawbacks of linear regression channels 205
Dealing with Breakouts 206
Distinguishing between false breakouts and the real thing 207
Putting breakouts into context 210
Part 4: Dynamic Analysis 213
Chapter 15: Using Dynamic Lines 215
Introducing the Simple Moving Average 216
Starting with the crossover rule 217
Using the moving average level rule 219
Dealing with limitations 220
Comparing moving average rules with Donchian rules 223
Magic moving average numbers 223
Adjusting the Moving Average 224
Weighted and exponential moving averages 225
Adaptive moving averages 225
Wild and woolly moving averages 226
Choosing a moving average type 226
Using Multiple Moving Averages 227
Putting two moving averages into play 228
Trying the three-way approach 229
Throw them all at the wall and see what sticks 230
Delving into Moving Average Convergence and Divergence 231
Calculating convergence and divergence 232
Creating a decision tool 233
Interpreting the MACD 234
Chapter 16: Measuring Momentum 237
Doing the Math: Calculating Momentum 238
Simple momentum 239
Using the rate-of-change method 240
Pondering the Trickier Aspects of Momentum 242
Smoothing price changes 242
Filtering momentum 243
Applying Momentum 244
Discovering divergence 244
Confirming trend indicators 245
Determining the Relative Strength Index (RSI) 245
Calculating the RSI 246
Picturing RSI 247
Filtering RSI 249
Using the Rest of the Price Bar: The Stochastic Oscillator 250
Step 1: Putting a number to the fast stochastic %K 250
Step 2: Refining %K with %D 252
Fiddling with the stochastic oscillator on the chart 252
Chapter 17: Estimating Volatility 255
Catching a Slippery Concept 256
How volatility arises 257
Low volatility with trending 257
Low volatility without trending 258
High volatility with trending 258
High volatility without trending 258
Measuring Volatility 259
Tracking the maximum move 259
Considering the standard deviation 260
Using the average true range indicator 260
Applying Volatility Measures: Bollinger Bands 262
Applying Stops with Average True Range Bands 263
Chapter 18: Ignoring Time to Create Better Timing 267
Focusing on Tick Bars: In the Spirit of Ignoring Time 268
Narrowing the Focus to the Move Itself: The Constant Range Bar 269
Defining a constant range bar 269
Identifying what criteria are needed 270
Catching the Big Kahuna: Point-and-Figure Charts 270
Visualizing What's Important 271
Putting each move into a column 271
Dealing with box size 273
Applying Patterns 274
Support and resistance 274
Double and triple tops and bottoms 275
Projecting Prices after a Breakout 276
Using vertical price projection 276
Applying horizontal projection 277
Combining P&F Techniques with Other Indicators 278
Chapter 19: Combining Techniques 279
Adding a New Indicator: Introducing Complexity 280
Choosing primary and secondary indicators 281
Inserting unexpected validators 281
Studying a classic combination 282
Sailing into Outer Space 286
The Conquistador 286
Wave with relative strength 287
Enhancing gains with selective timing 288
Trading with Limited Expectancy: Semi-System, Setup, and Guerilla Trading 288
Semi-system "discretionary" trading 289
Solving the squaring problem — setups 290
Guerrilla trading 293
Chapter 20: Judging Cycles and Waves 295
Defining a Cycle and a Wave 295
Starting with economics 297
Combining market metrics with cycles 298
Moving on to magic numbers 299
Using cycles 299
Cycling with Supply and Demand: The Pragmatic Mr Wyckoff 300
Finding Universal Harmony: Hurst's Magic Numbers 301
Looking to the Moon and the Stars 302
Examining the lunar cycle 302
Adding more celestial bodies 303
Including the sun 303
Figuring out what's (maybe) wrong with astronomy cycle theories 303
Following the Earth's Axis: Seasonality and Calendar Effects 304
Differentiating between seasonality and calendar effects 304
The most well-known calendar effects 304
Examining Big-Picture Cycle Theories 305
Shining a Spotlight on the Magnificent Mr Gann 306
Applying core Gann concepts 306
Celebrating Gann's 50 percent retracement rule 307
Embracing the Most Popular Wave Idea: The Elliott Wave 308
Looking closer at the Elliott Wave 309
Validating retracements 310
Chapter 21: The Mind-Blowing Ichimoku 313
Taking a Closer Look at Ichimoku 313
Defining ichimoku and its characteristics 314
Eyeing ichimoku's differences with conventional technical analysis 314
Adapting to new core concepts 315
Building a cloud: Starting with moving averages 316
Grasping Why Analysts Rely on Ichimoku and Why You Can 319
Using Ichimoku in Your Analysis 321
Venturing inside the cloud 321
Changing time frames 321
Trading with Ichimoku 322
Part 5: the Part of Tens 325
Chapter 22: Ten Secrets of the Top Technical Traders 327
Appreciate Probability 328
Recordkeeping Matters 328
The Trend Is Your Friend 328
Entries Count as Much as Exits 329
Stops Aren't Optional 329
Treat Trading as a Business 330
Eat Your Spinach 330
Technical Stuff Never Goes Out of Date 331
Diversify 331
Swallow Hard and Accept Some Math 332
Chapter 23: Ten Rules for Working with Indicators 333
Don't Jump the Gun 333
Defeat Your Math Gremlins 334
Embrace Patterns 334
Use Support and Resistance 335
Follow the Breakout Principle 335
Watch for Convergence and Divergence 335
Backtest or Practice-Trade Honestly 336
Accept That Your Indicators Will Fail 337
Get Over the Idea of Secret Indicators 337
Open Your Mind 338
Appendix: Additional Resources 339
Index 345
