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Technical Analysis: The Complete Resource for Financial Market Technicians, Third Edition

Book Description

Master technical analysis, step-by-step! Already the field's most comprehensive, reliable, and objective introduction, this guidebook has been thoroughly updated to reflect the field's latest advances.

Selected by the Market Technicians Association as the official companion to its prestigious Chartered Market Technician (CMT) program, Technical Analysis, Third Edition systematically explains the theory of technical analysis, presenting academic evidence both for and against it. Using hundreds of fully updated illustrations and examples, the authors explain the analysis of both markets and individual issues, and present complete investment systems and portfolio management plans. They present authoritative, up-to-date coverage of tested sentiment, momentum indicators, seasonal effects, flow of funds, testing systems, risk mitigation strategies, and many other topics.

Offering 30% new coverage, Technical Analysis, Third Edition thoroughly addresses recent advances in pattern recognition, market analysis, systems management, and confidence testing; Kagi, Renko, Kase, Ichimoku, Clouds, and DeMark indicators; innovations in exit stops, portfolio selection, and testing; implications of behavioral bias, and the recent performance of old formulas and methods. For traders, researchers, and serious investors alike, this is the definitive guide to profiting from technical analysis.

Table of Contents

  1. About This eBook
  2. Title Page
  3. Copyright Page
  4. Dedication Page
  5. Contents
  6. Acknowledgments
  7. About the Authors
  8. Part I: Introduction
    1. Chapter 1. Introduction to Technical Analysis
    2. Chapter 2. The Basic Principle of Technical Analysis—The Trend
      1. Chapter Objectives
      2. How Does the Technical Analyst Make Money?
      3. What Is a Trend?
      4. How Are Trends Identified?
      5. Trends Develop from Supply and Demand
      6. What Trends Are There?
      7. What Other Assumptions Do Technical Analysts Make?
      8. Conclusion
      9. Review Questions
    3. Chapter 3. History of Technical Analysis
      1. Chapter Objectives
      2. Early Financial Markets and Exchanges
      3. Modern Technical Analysis
      4. Current Advances in Technical Analysis
    4. Chapter 4. The Technical Analysis Controversy
      1. Chapter Objectives
      2. Do Markets Follow a Random Walk?
        1. Fat Tails
        2. Large Unexpected Drawdowns
        3. Proportions of Scale
      3. Can Past Patterns Be Used to Predict the Future?
      4. What About Market Efficiency?
        1. New Information
        2. Are Investors Rational?
        3. Will Arbitrage Keep Prices in Equilibrium?
      5. Behavioral Finance and Technical Analysis
      6. Pragmatic Criticisms of Technical Analysis
      7. What Is the Empirical Support for Technical Analysis?
      8. Conclusion
      9. Review Questions
  9. Part II: Markets and Market Indicators
    1. Chapter 5. An Overview of Markets
      1. Chapter Objectives
      2. In What Types of Markets Can Technical Analysis Be Used?
      3. Types of Contracts
        1. Cash Market
        2. Derivative Markets
        3. Swaps and Forwards
      4. How Does a Market Work?
      5. Who Are the Market Players?
      6. How Is the Market Measured?
        1. Price-Weighted Average
        2. Market Capitalization Weighted Average
        3. Equally Weighted (or Geometric) Average
      7. Conclusion
      8. Review Questions
    2. Chapter 6. Dow Theory
      1. Chapter Objectives
      2. Dow Theory Theorems
        1. The Primary Trend
        2. The Secondary Trend
        3. The Minor Trend
        4. Concept of Confirmation
        5. Importance of Volume
      3. Criticisms of the Dow Theory
      4. Conclusion
      5. Review Questions
    3. Chapter 7. Sentiment
      1. Chapter Objectives
      2. What Is Sentiment?
      3. Market Players and Sentiment
      4. How Does Human Bias Affect Decision Making?
      5. Crowd Behavior and the Concept of Contrary Opinion
      6. How Is Sentiment of Uninformed Players Measured?
        1. Sentiment Indicators Based on Options and Volatility
        2. Polls
        3. Other Measures of Contrary Opinion
        4. Unquantifiable Contrary Indicators
        5. Historical Indicators
        6. Unusual Indicators
      7. How Is the Sentiment of Informed Players Measured?
        1. Insiders
      8. Sentiment in Bonds
        1. Treasury Bond Futures Put/Call Ratio
        2. Treasury Bond COT Data
        3. Treasury Bond Primary Dealer Positions
        4. T-Bill Rate Expectations by Money Market Fund Managers
      9. Gold Sentiment
      10. Conclusion
      11. Review Questions
    4. Chapter 8. Measuring Market Strength
      1. Chapter Objectives
      2. Market Breadth
        1. The Breadth Line or Advance-Decline Line
        2. Double Negative Divergence
        3. Traditional Advance-Decline Methods That No Longer Are Profitable
        4. Advance-Decline Line to Its 32-Week Simple Moving Average
        5. Breadth Differences
        6. Breadth Ratios
        7. Breadth Thrust
        8. Summary of Breadth Indicators
      3. Up and Down Volume Indicators
        1. The Arms Index
        2. Volume Thrust with Up Volume and Down Volume
        3. Ninety Percent Downside Days (NPDD)
        4. 10-to-1 Up Volume Days and 9-to-1 Down Volume Days
      4. Net New Highs and Net New Lows
        1. New Highs Versus New Lows
        2. High Low Logic Index
        3. Hindenburg Omen
      5. Using Moving Averages
        1. Coppock Curve
        2. Number of Stocks Above Their 30-Week Moving Average
      6. Very Short-Term Indicators
        1. Breadth and New Highs to New Lows
        2. Net Ticks
      7. Conclusion
      8. Review Questions
    5. Chapter 9. Temporal Patterns and Cycles
      1. Chapter Objectives
      2. Periods Longer Than Four Years
        1. Kondratieff Waves, or K-Waves
        2. Population Waves
        3. 17–18-Year Alternating Stock Market Cycles
        4. Decennial Pattern
      3. Periods of Four Years or Less
        1. Four-Year or Presidential Cycle
        2. Election Year Pattern
        3. Seasonal Patterns
      4. January Signals
        1. January Barometer
        2. January Effect
      5. Events
      6. Conclusion
      7. Review Questions
    6. Chapter 10. Flow of Funds
      1. Chapter Objectives
      2. Funds in the Marketplace
        1. Money Market Funds
        2. Margin Debt
      3. Funds Outside the Security Market
        1. Household Financial Assets
        2. Money Supply (M1 & M2)
        3. Money Velocity
        4. Yield Curve
        5. Bank Liquidity
      4. The Cost of Funds and Alternative Investments
        1. Short-Term Interest Rates
        2. Long-Term Interest Rates (or Inversely, the Bond Market)
        3. Corporate Bond and Stock Market Yield Spread
        4. The Misery Indices
      5. Fed Policy
        1. The Federal Reserve Valuation Model
        2. Federal Funds
        3. Free Reserves
        4. Three Steps and a Stumble and Two Tumbles and a Jump
      6. Conclusion
      7. Review Questions
  10. Part III: Trend Analysis
    1. Chapter 11. History and Construction of Charts
      1. Chapter Objectives
      2. History of Charting
      3. What Data Is Needed to Construct a Chart?
      4. What Types of Charts Do Analysts Use?
        1. Line Charts
        2. Bar Charts
        3. Candlestick Charts
      5. What Type of Scale Should Be Used?
        1. Arithmetic Scale
        2. Semi-Logarithmic Scale
      6. Point and Figure Charts
        1. One-Box (Point) Reversal
        2. Box Size
        3. Multibox Reversal
        4. Time
        5. Arithmetic Scale
        6. Logarithmic Scale
      7. Cloud Charts (Ichimoku Kinko Hyo)
      8. Other Charting Methods Independent of Time
        1. Kagi Chart
        2. Renko Chart
        3. Line-Break Chart (2 or 3 Lines)
      9. Conclusion
      10. Review Questions
    2. Chapter 12. Trends—The Basics
      1. Chapter Objectives
      2. Trend—The Key to Profits
      3. Trend Terminology
      4. Basis of Trend Analysis—Dow Theory
      5. How Does Investor Psychology Impact Trends?
      6. How Is the Trend Determined?
        1. Peaks and Troughs
      7. Determining a Trading Range
        1. What Is Support and Resistance?
        2. Why Do Support and Resistance Occur?
        3. What About Round Numbers?
        4. How Are Important Reversal Points Determined?
        5. How Do Analysts Use Trading Ranges?
      8. Directional Trends (Up and Down)
        1. What Is a Directional Trend?
        2. How Is an Uptrend Spotted?
        3. Channels
        4. Internal Trend Lines
      9. Other Types of Trend Lines
        1. Trend Lines on Point and Figure Charts
        2. Speed Lines
        3. Andrews Pitchfork
        4. Gann Fan Lines
      10. Conclusion
      11. Review Questions
    3. Chapter 13. Breakouts, Stops, and Retracements
      1. Chapter Objectives
      2. Breakouts
        1. How Is Breakout Confirmed?
        2. Can a Breakout Be Anticipated?
      3. Stops
        1. What Are Entry and Exit Stops?
        2. Changing Stop Orders
        3. What Are Protective Stops?
        4. What Are Trailing Stops?
        5. What Are Time Stops?
        6. What Are Money Stops?
        7. How Can Stops Be Used with Breakouts?
        8. Using Stops When Gaps Occur
        9. Placing Stops for a False (or “Specialist”) Breakout
      4. Retracements
        1. Pullbacks and Throwbacks
        2. Waiting for Retracement
        3. Calculating a Risk/Return Ratio for Breakout Trading
      5. Conclusion
      6. Review Questions
    4. Chapter 14. Moving Averages
      1. Chapter Objectives
      2. What Is a Moving Average?
      3. How Is a Simple Moving Average Calculated?
        1. Length of Moving Average
        2. Using Multiple Moving Averages
      4. What Other Types of Moving Averages Are Used?
        1. The Linearly Weighted Moving Average (LWMA)
        2. The Exponentially Smoothed Moving Average (EMA)
        3. Wilder Method
        4. Geometric Moving Average (GMA)
        5. Triangular Moving Average
        6. Variable EMAs
      5. Strategies for Using Moving Averages
        1. Determining Trend
        2. Determining Support and Resistance
        3. Determining Price Extremes
        4. Giving Specific Signals
      6. What Is Directional Movement?
        1. Constructing Directional Movement Indicators
        2. Using Directional Movement Indicators
      7. What Are Envelopes, Channels, and Bands?
        1. Percentage Envelopes
        2. Bands
        3. Trading Strategies Using Bands and Envelopes
        4. Channel
      8. Conclusion
      9. Review Questions
  11. Part IV: Chart Pattern Analysis
    1. Chapter 15. Bar Chart Patterns
      1. Chapter Objectives
      2. What Is a Pattern?
        1. Common Pattern Characteristics
      3. Do Patterns Exist?
        1. Behavioral Finance and Pattern Recognition
      4. Computers and Pattern Recognition
      5. Market Structure and Pattern Recognition
      6. Bar Charts and Patterns
      7. How Profitable Are Patterns?
      8. Classic Bar Chart Patterns
        1. Double Top and Double Bottom
        2. Rectangle (Also “Trading Range” or “Box”)
        3. Triple Top and Triple Bottom
        4. Standard Triangles
        5. Descending Triangle
        6. Ascending Triangle
        7. Symmetrical Triangle (Also “Coil” or “Isosceles Triangle”)
        8. Broadening Patterns
        9. Diamond Top
        10. Wedge and Climax
      9. Patterns with Rounded Edges—Rounding and Head-and-Shoulders
        1. Rounding Top, Rounding Bottom (Also “Saucer,” “Bowl,” or “Cup”)
        2. Head-and-Shoulders
        3. Shorter Continuation Trading Patterns—Flags and Pennants (Also “Half-Mast Formation”)
      10. Long-Term Bar Chart Patterns with the Best Performance and the Lowest Risk of Failure
      11. Conclusion
      12. Review Questions
    2. Chapter 16. Point and Figure Chart Patterns
      1. Chapter Objectives
      2. What Is Different About a Point and Figure Chart?
        1. Time and Volume Omitted
        2. Continuous Price Flow Necessary
        3. “Old” and “New” Methods
      3. History of Point and Figure Charting
      4. One-Box Reversal Point and Figure Charts
        1. Consolidation Area on the One-Box Chart (Also “Congestion Area”)
        2. Trend Lines in One-Box Charts
        3. The Count in a One-Point Chart
        4. Head-and-Shoulders Pattern
        5. The Fulcrum
        6. Action Points
      5. Three-Point (or Box) Reversal Point and Figure Charts
        1. Trend Lines with Three-Box Charts
        2. The Count Using Three-Box Reversal Charts
        3. The Eight Standard Patterns for Three-Box Reversal Charts
        4. Other Patterns
      6. Conclusion
      7. Review Questions
    3. Chapter 17. Short-Term Patterns
      1. Chapter Objectives
      2. Pattern Construction and Determination
      3. Traditional Short-Term Patterns
        1. Gaps
        2. Spike (or Wide-Range or Large-Range Bar)
        3. Dead Cat Bounce (DCB)
        4. Island Reversal
        5. One- and Two-Bar Reversal Patterns
        6. Other Multiple-Bar Patterns
        7. Volatility Patterns
        8. Intraday Patterns
      4. Summary of Short-Term Patterns
      5. Candlestick Patterns
        1. One- and Two-Bar Candlestick Patterns
        2. Multiple-Bar Patterns
        3. Candlestick Pattern Results
      6. Conclusion
      7. Review Questions
  12. Part V: Trend Confirmation
    1. Chapter 18. Confirmation
      1. Chapter Objectives
      2. Analysis Methods
        1. Overbought/Oversold
        2. Failure Swings
        3. Divergences
        4. Reversals
        5. Trend ID
        6. Crossovers
        7. Classic Patterns
      3. Volume Confirmation
        1. What Is Volume?
        2. How Is Volume Portrayed?
        3. Do Volume Statistics Contain Valuable Information?
        4. How Are Volume Statistics Used?
        5. Which Indexes and Oscillators Incorporate Volume?
        6. Volume Spikes
        7. Examples of Volume Spikes
      4. Open Interest
        1. What Is Open Interest?
        2. Open Interest Indicators
      5. Price Confirmation
        1. What Is Momentum?
        2. How Successful Are Momentum Indicators?
        3. Specific Indexes and Oscillators
      6. Conclusion
      7. Review Questions
  13. Part VI: Other Technical Methods and Rules
    1. Chapter 19. Cycles
      1. Chapter Objectives
      2. What Are Cycles?
        1. Other Aspects of Cycle Analysis
      3. Translation
      4. How Can Cycles Be Found in Market Data?
        1. Fourier Analysis (Spectral Analysis)
        2. Maximum Entropy Spectral Analysis
        3. Simpler (and More Practical) Methods
      5. Projections
        1. Projecting Period
        2. Projecting Amplitude
      6. Conclusion
      7. Review Questions
    2. Chapter 20. Elliott, Fibonacci, and Gann
      1. Chapter Objectives
      2. Elliott Wave Theory (EWT)
        1. Ralph Nelson Elliott
        2. Basic Elliott Wave Theory
        3. Impulse Waves
        4. Corrective Waves
        5. Guidelines and General Characteristics in EWT
        6. Projected Targets and Retracements
        7. Alternatives to EWT
        8. Using EWT
      3. The Fibonacci Sequence
        1. Fibonacci
        2. The Fibonacci Sequence
        3. The Golden Ratio
        4. Price and Time Targets
        5. W. D. Gann
      4. Conclusion
      5. Review Questions
  14. Part VII: Selection
    1. Chapter 21. Selection of Markets and Issues: Trading and Investing
      1. Chapter Objectives
      2. Which Issues Should I Select?
        1. Trading (Swing and Day)
        2. Choosing Between Futures Markets and Stock Markets
      3. Which Issues Should I Select for Investing?
      4. Top-Down Analysis
        1. Secular Emphasis
        2. Cyclical Emphasis
        3. Stock Market Industry Sectors
      5. Bottom Up—Specific Stock Selection and Relative Strength
        1. Relative Strength
        2. Academic Studies of Relative Strength
        3. Measuring Relative Strength
      6. Examples of How Selected Professionals Screen for Favorable Stocks
        1. William O’Neil CANSLIM Method
        2. James P. O’Shaughnessy Method
        3. Charles D. Kirkpatrick Method
        4. Value Line Method
        5. Richard D. Wyckoff Method
      7. Conclusion
      8. Review Questions
  15. Part VIII: System Testing and Management
    1. Chapter 22. System Design and Testing
      1. Chapter Objectives
      2. Why Are Systems Necessary?
        1. Discretionary Versus Nondiscretionary Systems
      3. A Complete Trading System
      4. How Do I Design a System?
        1. Requirements for Designing a System
        2. Initial Decisions
        3. Types of Technical Systems
      5. How Do I Test a System?
        1. Clean Data
        2. Special Data Problems for Futures Systems
        3. Testing Methods and Tools
        4. Test Parameter Ranges
      6. Optimization
        1. Methods of Optimizing
        2. Measuring System Results for Robustness
      7. Conclusion
      8. Review Questions
    2. Chapter 23. Money and Portfolio Risk Management
      1. Chapter Objectives
      2. Risk and Money Management
      3. Testing Money-Management Strategies
      4. Money-Management Risks
        1. Concepts
        2. Reward to Risk
        3. Normal Risks
        4. Unusual Risks
      5. Money-Management Risk Strategies
        1. Protective Stop
        2. Trailing Stop
        3. Other Kinds of Stops
        4. Targets
        5. Execution
      6. Monitoring Systems and Portfolios
      7. If Everything Goes Wrong
      8. Conclusion
      9. Review Questions
  16. Part IX: Appendices
    1. Appendix A. Basic Statistics
      1. Appendix Objectives
      2. Returns
      3. Probability and Statistics
      4. Descriptive Statistics
        1. Measures of Central Tendency
        2. Measures of Dispersion
        3. Relationships Between Variables
      5. Inferential Statistics
      6. Modern Portfolio Theory
      7. Performance Measurement
      8. Advanced Statistical Methods
      9. Artificial Intelligence
      10. Review Questions
    2. Appendix B. Types of Orders and Other Trader Terminology
      1. An Order Ticket
  17. Bibliography
  18. Index
  19. Financial Times Press