The Handbook of Technical Analysis + Test Bank
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Foreword xiii
Preface xv
Acknowledgments xxi
About the Author xxiii
Chapter 1 Introduction to the Art and Science of Technical Analysis 1
1.1 Main Objective of Technical Analysis 1
1.2 Dual Function of Technical Analysis 3
1.3 Forecasting Price and Market Action 3
1.4 Classifying Technical Analysis 11
1.5 Subjectivity in Technical Analysis 16
1.6 Basic Assumptions of Technical Analysis 30
1.7 Four Basic Assumptions in the Application of Technical Analysis 39
1.8 Market Participants 40
1.9 Chapter Summary 42
Chapter 1 Review Questions 43
Chapter 2 Introduction to Dow Theory 45
2.1 Origins and Proponents of Dow Theory 45
2.2 Basic Assumptions of Dow Theory 46
2.3 Challenges to Dow Theory 62
2.4 Chapter Summary 64
Chapter 2 Review Questions 64
Chapter 3 Mechanics and Dynamics of Charting 65
3.1 The Mechanics and Dynamics of Charting 65
3.2 Gap Action: Four Types of Gaps 72
3.3 Constant Chart Measures 73
3.4 Futures Contracts 89
3.5 Chapter Summary 97
Chapter 3 Review Questions 98
Chapter 4 Market Phase Analysis 99
4.1 Dow Theory of Market Phase 99
4.2 Chart Pattern Interpretation of Market Phase 104
4.3 Volume and Open Interest Interpretation of Market Phase 112
4.4 Moving Average Interpretation of Market Phase 115
4.5 Divergence and Momentum Interpretation of Market Phase 116
4.6 Sentiment Interpretation of Market Phase 118
4.7 Sakata's Interpretation of Market Phase 119
4.8 Elliott's Interpretation of Market Phase 120
4.9 Cycle Analysis Interpretation of Market Phase 122
4.10 Chapter Summary 124
Chapter 4 Review Questions 124
Chapter 5 Trend Analysis 125
5.1 Definitions of a Trend 125
5.2 Quality of Trend: 16 Price Characteristics Impacting Future Price Action and Trend Strength 132
5.3 Price and Trend Filters 144
5.4 Trend Participation 145
5.5 Price Inflection Points 148
5.6 Trendlines, Channels, and Fan Lines 155
5.7 Trend Retracements 166
5.8 Gaps and Trends 166
5.9 Trend Directionality 168
5.10 Drummond Geometry 169
5.11 Forecasting Trend Reversals 170
5.12 Chapter Summary 171
Chapter 5 Review Questions 171
Chapter 6 Volume and Open Interest 173
6.1 The Mechanics of Volume Action 173
6.2 Volume Oscillators 203
6.3 Chapter Summary 208
Chapter 6 Review Questions 208
Chapter 7 Bar Chart Analysis 209
7.1 Price Bar Pattern Characteristics 209
7.2 Price Bar Pattern Characteristics 211
7.3 Popular Bar Reversal Patterns 218
7.4 Volatility-Based Breakout Patterns 230
7.5 Chapter Summary 233
Chapter 7 Review Questions 233
Chapter 8 Window Oscillators and Overlay Indicators 235
8.1 Defining Indicators and Oscillators 235
8.2 Eight Ways to Analyze an Oscillator 240
8.3 Cycle Period, Multiple Timeframes, and Lagging Indicators 252
8.4 Input Data 253
8.5 Trend Trading Using Oscillators 255
8.6 Window Oscillators 255
8.7 Overlay Indicators 262
8.8 Chapter Summary 266
Chapter 8 Review Questions 266
Chapter 9 Divergence Analysis 267
9.1 Definition of Divergence 268
9.2 General Concept of Divergence 272
9.3 Standard and Reverse Divergence 291
9.4 Price Confirmation in Divergence Analysis 323
9.5 Signal Alternation between Standard and Reverse Divergence 337
9.6 More Examples of Divergence 338
9.7 Chapter Summary 354
Chapter 9 Review Questions 355
Chapter 10 Fibonacci Number and Ratio Analysis 357
10.1 The Fibonacci Number Series 357
10.2 Fibonacci Ratios 359
10.3 Fibonacci Retracements, Extensions, Projections, and Expansions 363
10.4 Fibonacci (F-Based) Percentage Retracement Levels within an Observed Price Range 368
10.5 Fibonacci (F-Based) Percentage Extension Levels beyond an Observed Price Range 375
10.6 Fibonacci (F-Based) Percentage Expansion Levels beyond an Observed Price Range 379
10.7 Fibonacci (F-Based) Percentage Projection Levels from a Significant Peak or Trough 384
10.8 Why Should Fibonacci Ratios or Numbers Work at All? 388
10.9 Geometrically versus Numerically Based Fibonacci Operations 389
10.10 The Fibonacci Trader's Technical Toolbox 392
10.11 Area of Application 394
10.12 Selecting Effective Inflection Points for Fibonacci Operations 396
10.13 Fibonacci, Dow, Gann, and Floor Trader's Pivot Point Levels 397
10.14 Probability of Continuation and Reversal in Fibonacci Retracements and Extensions 400
10.15 Fibonacci-Based Entries, Stoplosses, and Minimum Price Objectives 400
10.16 Fibonacci Two- and Three-Leg Retracements 402
10.17 Fibonacci Fan Lines 409
10.18 Fibonacci Channel Expansions 412
10.19 Fibonacci Arcs 414
10.20 Supportive and Resistive Fibonacci Clusters 415
10.21 Potential Barriers in Fibonacci Projections 417
10.22 Fibonacci Time and Ratio Projection Analysis on Elliott Waves 417
10.23 Chapter Summery 431
Chapter 10 Review Questions 431
Chapter 11 Moving Averages 433
11.1 Seven Main Components of Moving Averages 433
11.2 Nine Main Applications of Moving Averages 451
11.3 Chapter Summary 462
Chapter 11 Review Questions 463
Chapter 12 Envelopes and Methods of Price Containment 465
12.1 Containing Price Action and Volatility about a Central Value 465
12.2 Adjusting Bands for Effective Price Containment 475
12.3 Methods of Price Containment 477
12.4 Chapter Summery 492
Chapter 12 Review Questions 492
Chapter 13 Chart Pattern Analysis 495
13.1 Elements of Chart Pattern Analysis 495
13.2 Preconditions for Reliable Chart Pattern Reversals 499
13.3 Popular Chart Patterns 502
13.4 Chapter Summery 540
Chapter 13 Review Questions 540
Chapter 14 Japanese Candlestick Analysis 541
14.1 Elements of Candlestick Analysis 541
14.2 Popular Candlestick Patterns and Their Psychology 555
14.3 Integrating Candlestick Analysis 578
14.4 Filtered Candlesticks 583
14.5 Trading with Candlesticks 584
14.6 Chapter Summary 588
Chapter 14 Review Questions 588
Chapter 15 Point-and-Figure Charting 589
15.1 Basic Elements of Point-and-Figure Charts 589
15.2 Basic Point-and-Figure Chart Patterns 600
15.3 Point-and-Figure Minimum Price Objectives 619
15.4 Bullish Percent Index and Relative Strength 623
15.5 Chapter Summary 624
Chapter 15 Review Questions 624
Chapter 16 Ichimoku Charting and Analysis 627
16.1 Constructing the Five Ichimoku Overlays 627
16.2 Functional Aspect of Ichimoku Overlays 633
16.3 Advantages and Disadvantages of Using Ichimoku Charting 643
16.4 Time and Price Domain Characteristics of Ichimoku Overlays 644
16.5 Basic Ichimoku Price-Projection Techniques 649
16.6 Chapter Summary 649
Chapter 16 Review Questions 650
Chapter 17 Market Profile 651
17.1 The Search for Fair Price or Value 651
17.2 The Daily Profile Formations 665
17.3 Chapter Summary 671
Chapter 17 Review Questions 671
Chapter 18 Basic Elliott Wave Analysis 673
18.1 Elements of Elliott Wave Analysis 673
18.2 Rules and Guidelines 676
18.3 Motive Waves 676
18.4 Corrective Waves 678
18.5 Wave Extensions and Truncation 682
18.6 Alternation 683
18.7 Wave Equality 683
18.8 Fibonacci Ratio and Number Analysis of Elliott Waves 684
18.9 Chapter Summary 684
Chapter 18 Review Questions 684
Chapter 19 Basics of Gann Analysis 687
19.1 Techniques of W. D. Gann 687
19.4 Chapter Summary 710
Chapter 19 Review Questions 711
Chapter 20 Cycle Analysis 713
20.1 Elements of Cycle Analysis 713
20.2 Principles of Cycle Analysis 720
20.3 Additional Cyclic Characteristics 724
20.4 Tuning Oscillator and Overlay Indicators to the Dominant Cycle Period 725
20.5 Identifying Price Cycles 726
20.6 Chapter Summary 731
Chapter 20 Review Questions 731
Chapter 21 Volatility Analysis 733
21.1 The Concept of Change and Volatility 733
21.2 Some Statistical Measures of Price Volatility 743
21.3 Other Measures of Market Volatility 754
21.4 Chapter Summary 757
Chapter 21 Review Questions 757
Chapter 22 Market Breadth 759
22.1 Elements of Broad Market Action 759
22.2 Components of Market Breadth 762
22.3 Market-Breadth Indicators in Action 765
22.4 Chapter Summary 777
Chapter 22 Review Questions 777
Chapter 23 Sentiment Indicators and Contrary Opinion 779
23.1 Assessing the Emotion and Psychology of Market Participants 779
23.2 Price-Based Indicators versus Sentiment Indicators 783
23.3 Assessing Participant Actions 784
23.4 Assessing Participants' Opinions 788
23.5 Chapter Summary 791
Chapter 23 Review Questions 791
Chapter 24 Relative Strength Analysis 793
24.1 Measuring Relative Performance 793
24.2 Chapter Summary 811
Chapter 24 Review Questions 811
Chapter 25 Investor Psychology 813
25.1 General Behavioral Aspects 813
25.2 Behavioral Elements Associated with Chart Patterns 815
25.3 Behavioral Elements Associated with Market Trends 817
25.4 Behavioral Aspects of Market Consolidations 820
25.5 Behavioral Aspects of Market Reversals 821
25.6 Chapter Summary 823
Chapter 25 Review Questions 823
Chapter 26 Trader Risk Profiling and Position Analysis 825
26.1 Fulfilling Client Objectives and Risk Capacity 826
26.2 Aggressive and Conservative Market Participation 827
26.3 Categorizing Clients according to Term Outlook and Sentiment 835
26.4 The Seven Participatory Options 838
26.5 Triggers, Signals, Price Targets, and Stoplosses 838
26.6 Confirming and Non-Confirming Price Action and Filters 841
26.7 Collecting, Categorizing, and Organizing Technical Data 843
26.8 Multi-Timeframe Confirmation 845
26.9 Reconciling Technical Outlook with Client Interest 846
26.10 Hedging Positions with Derivatives 847
26.11 Chapter Summary 847
Chapter 26 Review Questions 847
Chapter 27 Integrated Technical Analysis 849
27.1 The Integrated Components of Technical Analysis 849
27.2 Classification of Clusters and Confluences 854
27.3 Chapter Summary 877
Chapter 27 Review Questions 877
Chapter 28 Money Management 879
28.1 Elements of Money Management 879
Chapter 28 Review Questions 912
Chapter 29 Technical Trading Systems 913
29.1 Conceptualizing a Trading System 913
29.2 Basic Components of a Trading System 915
29.3 System Testing and Optimization 915
29.4 Performance Measurement 919
29.5 Chapter Summary 920
Chapter 29 Review Questions 920
Appendix A Basic Investment Decision Making Based on Chart Analysis 923
Appendix B Official IFTA CFTe, STA Diploma (UK), and MTA CMT Exam Reading Lists 933
About the Test Bank and Website 937
Index 939
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...
