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

This book, written for both the self–directed and institutionaltrader, explores the tools and techniques of discretionarytrading the art of trading. Not just a collection of tradingpatterns and ideas, this is a book that looks deeply into the artof technical analysis, and gives traders the tools and techniquesthey need to profit in today′s competitive marketplace.

Divided into four informative parts, this reliable guide showstraders how to incorporate a rigorously researched tradingmethodology into a discretionary framework. Along the way, you′lllearn a method of looking at charts that focuses on thesupply/demand dynamics that move all markets, specific tradingpatterns the author has used profitably for over a decade, andpsychological techniques to deal with the stresses of trading. Youwill also come to a new understanding of the role risk managementand position sizing play in the trading process, and dive into thepath of growth and trader development that leads a trader frombeginner to professional.

Created with the serious trader in mind whether individualor institutional The Art and Science of TechnicalAnalysis puts the author′s approach in perspective and will putyou on a path to consistent profits. Topics covered throughout thebook include everything from the foundations of technical analysisand market structure to trading strategies, indicators and otherconfirming factors, sizing trades and managing positions, and tipsfor evaluating your performance and growth as a trader.

Engaging and accessible, The Art and Science of TechnicalAnalysis along with its informative appendices willgive you the edge needed to improve your trading endeavors.

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 Action13

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 TradingPattern 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

ADAM GRIMES is the CIO of Waverly Advisors, an assetmanagement and risk advisory firm headquartered in New York. Hebegan his career as an independent trader focused on agriculturaland currency futures, and moved on to manage a successful privateinvestment partnership. Grimes′s experience as a trader coversfutures, equities, currencies, and derivatives, in time framesranging from intraday to multi–month swings. Though he is primarilya discretionary swing trader, his methodology rests on a firmfoundation of statistical and quantitative research. Grimes holdsan MBA with an emphasis in finance and market microstructure, andhas worked for a number of private investment firms, as well ashaving spent several years at the New York Mercantile Exchange.