Preface

The Handbook of Technical Analysis provides a unique and comprehensive reference for serious traders, analysts, and practitioners of technical analysis. This book explains the definitions, concepts, applications, integration, and execution of many technical-based trading tools and approaches, with detailed coverage of various technical and advanced money management issues. It also exposes the many strengths and weaknesses of various popular technical approaches and offers effective solutions wherever possible. Innovative techniques for pinpointing and handling potential market breakouts and reversals are also discussed throughout the handbook. A dedicated chapter on advanced money management helps complete the trader's education.

This handbook will prove indispensable to foreign exchange, bond, stock, commodity futures, CFD, and option traders, especially if they are looking for a fast and comprehensive route to mastering some of the most powerful tools and techniques available for analyzing price and market behavior. It is replete with hundreds of illustrations, tables, and charts, giving the trader and investor an instant visual understanding of the underlying principles and concepts discussed. Markets analyzed include bonds, commodity, equities, and foreign exchange.

With extensive content and coverage, The Handbook of Technical Analysis also provides the perfect self-contained, self-study exam preparatory guide for students intending to sit for examinations in financial technical analysis. This book helps prepare students to sit for various professional examinations in financial technical analysis, such as the International Federation of Technical Analysts CFTe Levels I and II (USA), STA Diploma (UK), Dip TA (AUS), as well as the Market Technicians Association CMT Levels I, II, and III (USA) examinations in financial technical analysis. This hand- book is organized in an accessible manner that allows the students to readily identify the topics and concepts that they will need to know for the exam. It covers the most important topics, as well as incorporating the latest technical developments in the markets so as to give the students a real-world appreciation of the topics learned. The student will find important learning outcomes at the beginning of each chapter.

The Handbook of Technical Analysis aims to be as visual as possible. Most of the charts and illustrations in this handbook were created with the objective that they would provide a rapid and efficient review of all the concepts and applications upon the second or third reading. This makes it the perfect tool for students reviewing for an examination.

OVERVIEW OF THE BOOK CONTENTS

Chapter 1 (Introduction to the Art and Science of Technical Analysis) introduces the reader to the general assumptions, approaches, and classifications associated with the application of technical analysis. It introduces the concept of the self-fulfilling prophecy and information discounting and deals with the issue of subjectivity in technical analysis.

Chapter 2 (Introduction to Dow Theory) introduces the basic concept of Dow Theory and its various tenets. It also deals with the current challenges and applicability of Dow Theory. Much of modern classical technical analysis is derived on the original assumptions of Dow Theory, and as such represents an important chapter.

Chapter 3 (Mechanics and Dynamics of Charting) describes the mechanics of chart construction and how price is quantized and filtered into OHLC data. The significance of OHLC data is dealt with in detail, including four different definitions of gaps. Charts are classified in terms of five different constant measures and how they are affected by the type of chart scaling employed. There is also a detailed discussion about how trade performance and reward to risk ratios are affected by the bid-ask spread, with respect to long and short entry and exit orders. Finally, various types of futures contracts are covered, focusing on rollover premiums and discounts, backwardation, contango, and back-adjusted and unadjusted futures charts.

Chapter 4 (Market Phase Analysis) deals specifically with market phase, describing the various phases via numerous technical approaches. It analyzes and interprets market phase in terms of volume and open interest action, chart patterns, moving averages, divergence, price momentum, sentiment, cyclic action, Elliott waves, and Sakata's method. This helps the practitioner better anticipate and forecast potential phases in the market with more consistency.

Chapter 5 (Trend Analysis) deals with the various definitional issues associated with trend action. It also introduces the reader to the concept of wave degrees or cycles. It points out that the inability to identify wave degrees may very well result in ineffective technical analysis and trade performance. The chapter then covers the 16 important price action characteristics that will greatly improve the forecastibility of potential reversal and continuation in the markets. The bar stochastic ratio oscillator is also introduced. Price filters are discussed in detail and classified into three main categories. This is followed by the description of the various types of trade orders and their functions. The chapter also covers stoplosses and their relationship with proportional sizing. Trendlines, channel construction, fan lines, trend retracements, price gaps, trend reversal forecasts, and continuations are also covered in detail.

Chapter 6 (Volume and Open Interest) deals with volume and open interest action and defines volume divergence with respect to price-based and non-price-based volume indicators. VWAP, volume filters, volume cycles, and various volume oscillators are also discussed, pinpointing some of their weaknesses and possible solutions.

Chapter 7 (Bar Chart Analysis) covers bar chart analysis. It presents the reader various generic reversal and continuation setups with respect to single, double, triple, and multiple price bar formations. It also describes the significance of the 16 price action characteristics and how they can be employed to forecast potential price bar reversals and continuations in the market. Finally, various popular price bar formations are discussed via numerous chart examples.

Chapter 8 (Window Oscillators and Overlay Indicators) classifies indicators into window oscillators and price overlay indicators. Overlay indicators are further subdivided into numerical, geometrical, horizontal, and algorithmic indicators. The differences between static and dynamic indicators are also explained. The practitioner is then introduced to the seven main approaches to analyzing oscillators. Cycle tuned oscillators, multiple timeframe oscillator analysis, and various popular oscillators and indicators are described in detail.

Chapter 9 (Divergence Analysis) describes the application of divergence in technical analysis. Detailed coverage of the definitional issues helps clarify the confusion surrounding the topic. The practitioner is introduced to bullish, bearish, standard, and reverse divergence. Various explanations are also presented with respect to the functioning of reverse divergence. The concepts of double divergence, detrending, and signal alternation are also covered in detail. The chapter concludes with numerous chart examples illustrating the various forms of divergence in equities and commodities.

Chapter 10 (Fibonacci Number and Ratio Analysis) introduces the practitioner to Fibonacci ratio and number analysis. It covers Fibonacci retracements, extensions, expansions, and projections with numerous chart examples. All Fibonacci calculations are clearly explained and illustrated. The differences between numerically and geometrically based Fibonacci operations are also discussed. Guidelines for drawing Fibonacci retracements in single, double, and multiple leg retracements are covered in detail. Fibonacci price and time ratio analysis of Elliot waves are also explored. Various popular Fibonacci applications such as fan lines, channel expansions, and arc projections are illustrated via real-world charts.

Chapter 11 (Moving Averages) analyzes various moving averages, such as exponential, simple, and weighted moving averages. The practitioner is shown how to calculate various averages. The chapter extensively covers the seven main components and nine main applications of moving averages. Moving averages functioning as signals and triggers are also discussed.

Chapter 12 (Envelopes and Methods of Price Containment) covers price bands or envelopes and their various modes of price containment. The practitioner is introduced to the six main functions of a price envelope. The different forms of central value that may be adopted by an envelope and the construction of the upper and lower bands are also analyzed in detail. The practitioner is then shown how to tune the bands with respect to the dominant cycles in the markets. The five main forms of price containment are illustrated with suggestions for effective entry and exit of the bands.

Chapter 13 (Chart Pattern Analysis) discusses the application of chart pattern analysis. A detailed breakdown of the classification of chart patterns is presented with specific examples. There is extensive coverage of the minimum measuring objective, conditions for pattern completion, and alternative price targets. The chapter concludes with the extensive treatment of many popular reversal and continuation chart patterns.

Chapter 14 (Japanese Candlestick Analysis) introduces the practitioner to Japanese candlestick analysis. Many of the most popular Japanese...