The Art and Science of Technical Analysis

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

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