diff --git a/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/021_16 Money Management and Trading Tactics.md b/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/021_16 Money Management and Trading Tactics.md deleted file mode 100644 index afd9001363f59d27a6172fef9ed84d34ca9f1de9..0000000000000000000000000000000000000000 --- a/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/021_16 Money Management and Trading Tactics.md +++ /dev/null @@ -1,195 +0,0 @@ -### **MONEY MANAGEMENT** - -After having spent many years in the research department of a major brokerage firm, I made the inevitable switch to managing money. I quickly discovered the major difference between recommending trading strategies to others and implementing them myself. What surprised me was that the most difficult part of the transition had little to do with market strategies. The way I went about analyzing the markets and determining entry and exit points didn't change much. What did change was my perception of the importance of money management. I was amazed at the impact such things as the size of the account, the portfolio mix, and the amount of money committed to each trade could have on the final results. - -Needless to say, I am a believer in the importance of money management. The industry is full of advisors and advisory services telling clients *what* to buy or sell and *when* to do it. Very little is said about *how much* of one's capital to commit to each trade. - -Some traders believe that money management is the most important ingredient in a trading program, even more crucial than the trading approach itself. I'm not sure I'd go that far, but I don't think it's possible to survive for long without it. Money management deals with the question of survival. It tells the trader how to handle his or her money. Any good trader should win in the long run. Money management increases the odds that the trader will survive to reach the long run. - -#### **Some General Money Management Guidelines** - -Admittedly, the question of portfolio management can get very complicated, requiring the use of advanced statistical measures. We'll approach it here on a relatively simple level. The following are some general guidelines that can be helpful in allocating one's funds and in determining the size of one's trading commitments. These guidelines refer primarily to futures trading. - -- 1. *Total invested funds should be limited to 50% of total capital.* The balance is placed in Treasury Bills. This means that at any one time, no more than half of the trader's capital should be committed to the markets. The other half acts as a reserve during periods of adversity and drawdown. If, for example, the size of the account is \$100,000, only \$50,000 would be available for trading purposes. -- 2. *Total commitment in any one market should be limited to 10-15% of total equity.* Therefore, in a \$100,000 account, only \$10,000 to \$15,000 would be available for margin deposit in any one market. This should prevent the trader from placing too much capital in any one trade. -- 3. *The total amount risked in any one market should be limited to 5% of total equity.* This 5% refers to how much the trader is willing to lose if the trade doesn't work. This is an important consideration in deciding how many contracts to trade and how far away a protective stop should be placed. A \$100,000 account, therefore, should not risk more than \$5,000 on a single trade. -- 4. *Total margin in any market group should be limited to 20-25% of total equity.* The purpose of this criteria is to protect against getting too heavily involved in any one market group. Markets within groups tend to move together. Gold and silver are part of the precious metals group and usually trend in the same direction. Putting on full positions in each market in the same group would frustrate the principle of diversification. Market commitments in the same group should be controlled. - -These guidelines are fairly standard in the futures industry, but can be modified to the trader's needs. Some traders are more aggressive than others and take bigger positions. Others are more conservative. The important consideration is that some form of diversification be employed that allows for preservation of capital and some measure of protection during losing periods. (Although these guidelines relate to futures trading, the general principles of money management and asset allocation can be applied to all forms of investing.) - -#### **Diversification Versus Concentration** - -While diversification is one way to limit risk exposure, it can be overdone. If a trader has trading commitments in too many markets at the same time, a few profitable trades may be diluted by a larger number of losing trades. A tradeoff exists and the proper balance must be found. Some successful traders concentrate their trading in a handful of markets. That's fine as long as those markets are the ones that are trending at that time. The more negative correlation between the markets, the more diversification is achieved. Holding long positions in four foreign currency markets at the same time would not be a good example of diversification, since foreign currencies usually trend in the same direction against the U.S. dollar. - -#### **Using Protective Stops** - -I strongly recommend the use of protective stops. Stop placement, however, is an art. The trader must combine technical factors on the price chart with money management considerations. We'll show how this is done later in the chapter in the section on tactics. The trader must consider the volatility of the market. The more volatile the market is, the looser the stop that must be employed. Here again, a tradeoff exists. The trader wants the protective stop to be close enough so that losing trades are as small as possible. Protective stops placed too close, however, may result in unwanted liquidation on short term market swings (or "noise"). Protective stops placed too far away may avoid the noise factor, but will result in larger losses. The trick is to find the right middle ground. - -### **REWARD TO RISK RATIOS** - -The best futures traders make money on only 40% of their trades. That's right. Most trades wind up being losers. How then do traders make money if they're wrong most of the time? Because futures contracts require so little margin, even a slight move in the wrong direction results in forced liquidation. Therefore, it may be necessary for a trader to probe a market several times before catching the move he or she is looking for. - -This brings us to the question of reward-to-risk ratios. Because most trades are losers, the only way to come out ahead is to ensure that the dollar amount of the winning trades is greater than that of the losing trades. To accomplish this, most traders use a reward-to-risk ratio. For each potential trade, a profit objective is determined. That profit objective (the reward) is then balanced against the potential loss if the trade goes wrong (the risk). A commonly used yardstick is a 3 to 1 reward-to-risk ratio. The profit potential must be at least three times the possible loss if a trade is to be considered. - -"Letting profits run and cutting losses short" is one of the oldest maxims of trading. Large profits in trading are achieved by staying with persistent trends. Because only a relative handful of trades during the course of a year will generate large profits, it's necessary to maximize those few big winners. Letting profits run is the way that is done. The other side of the coin is to keep losing trades as small as possible. You'd be surprised how many traders do just the opposite. - -### **TRADING MULTIPLE POSITIONS: TRENDING VERSUS TRADING UNITS** - -Letting profits run isn't as easy as it sounds. Picture a situation where a market starts to trend, producing large profits in a relatively short period of time. Suddenly, the trend stalls, the oscillators show an overbought situation and there's some resistance visible on the chart. What to do? You believe the market has much higher potential, but you're worried about losing your paper profits if the market should fail. Do you take profits or ride out a possible correction? - -One way to resolve that problem is to always trade in multiple units. Those units can be divided into *trading* and *trending* positions. The trending portion of the position is held for the long pull. Loose protective stops are employed and the market is given plenty of room to consolidate or correct itself. These are the positions that produce the largest profits in the long run. - -The trading portion of the portfolio is earmarked for shorter term in-andout trading. If the market reaches a first objective, is near resistance and overbought, some profits could be taken or a tight protective stop utilized. The purpose is to lock up or protect profits. If the trend then resumes, any liquidated positions can be reinstated. It's best to avoid trading only one unit at a time. The increased flexibility that is achieved from trading multiple units makes a big difference in overall trading results. - -### **WHAT TO DO AFTER PERIODS OF SUCCESS AND ADVERSITY** - -What does a trader do after a losing or a winning streak? Suppose your trading equity is down by 50%. Do you change your style of trading? If you've already lost half of your money, you now have to double what you have remaining just to get back to where you were in the first place. Do you get more selective choosing trades, or keep doing the same things you were - -doing before? If you become more conservative, it will be that much harder to win back your losses. - -A more pleasant dilemma occurs after a winning streak. What do you do with your winnings? Suppose you've doubled your money. One alternative is to put your money to maximum use by doubling the size of your positions. If you do that, however, what will happen during the inevitable losing period that's sure to follow? Instead of giving back 50% of your winnings, you'll wind up giving it all back. So the answers to these two questions aren't as simple or obvious as they might first appear. - -Every trader's track record is a series of peaks and troughs, much like a price chart. The trend of the equity chart should be pointing upward if the trader is making money on balance. The worst time to increase the size of one's commitments is after a winning streak. That's much like buying into an overbought market in an uptrend. The wiser thing to do (which goes against basic human nature) is to begin increasing one's commitments after a dip in equity. This increases the odds that the heavier commitments will be made near the equity troughs instead of the peaks. - -### **TRADING TACTICS** - -Upon completion of the market analysis, the trader should know whether he or she wants to buy or sell the market. By this time, money management considerations should have dictated the level of involvement. The final step is the actual purchase or sale. This can be the most difficult part of the process. The final decision as to how and where to enter the market is based on a combination of technical factors, money management parameters, and the type of trading order to employ. Let's consider them in that order. - -#### **Using Technical Analysis in Timing** - -There's nothing really new in applying the technical principles discussed in previous chapters to the timing process. The only real difference is that timing covers the very short term. The time frame that concerns us here is measured in days, hours, and minutes as opposed to weeks and months. But the technical tools employed remain the same. Rather than going through all of the technical methods again, we'll limit our discussion to some general concepts. - -- 1. Tactics on breakouts -- 2. The breaking of trendlines -- 3. The use of support and resistance -- 4. The use of percentage retracements - -### 5. The use of gaps - -#### **Tactics on Breakouts: Anticipation or Reaction?** - -The trader is forever faced with the dilemma of taking a position in anticipation of a breakout, taking a position on the breakout itself, or waiting for the pullback or reaction after the breakout occurs. There are arguments in favor of each approach or all three combined. If the trader is trading several units, one unit can be taken in each instance. If the position is taken in anticipation of an upside breakout, the payoff is a better (lower) price if the anticipated breakout takes place. The odds of making a bad trade, however, are increased. Waiting for the actual breakout increases the odds of success, but the penalty is a later (higher) entry price. Waiting for the pullback after the breakout is a sensible compromise, providing the pullback occurs. Unfortunately, many dynamic markets (usually the most profitable ones) don't always give the patient trader a second chance. The risk involved in waiting for the pullback is the increased chance of missing the market. - -This situation is an example of how trading multiple positions simplifies the dilemma. The trader could take a small position in anticipation of the breakout, buy some more on the breakout, and add a little more on the corrective dip following the breakout. - -#### **The Breaking of Trendlines** - -This is one of the most useful early entry or exit signals. If the trader is looking to enter a new position on a technical sign of a trend change or a reason to exit an old position, the breaking of a tight trendline is often an excellent action signal. Other technical factors must, of course, always be considered. Trendlines can also be used for entry points when they act as support or resistance. Buying against a major up trendline or selling against a down trendline can be an effective timing strategy. - -#### **Using Support and Resistance** - -Support and resistance are the most effective chart tools to use for entry and exit points. The breaking of resistance can be a signal for a new long position. Protective stops can then be placed under the nearest support point. A closer protective stop could be placed just below the actual breakout point, which should now function as support. Rallies to resistance in a downtrend or declines to support in an uptrend can be used to initiate new positions or add to old profitable ones. For purposes of placing protective stops, support and resistance levels are most valuable. - -#### **Using Percentage Retracements** - -In an uptrend, pullbacks that retrace 40-60% of the prior advance can be utilized for new or additional long positions. Because we're talking primarily about timing, percentage retracements can be applied to very short term action. A 40% pullback after a bullish breakout, for example, might provide an excellent buying point. Bounces of 40-60% usually provide excellent shorting opportunities in downtrends. Percentage retracements can be used on intraday charts also. - -#### **Using Price Gaps** - -Price gaps on bar charts can be used effectively in the timing of purchases or sales. After an upmove, for example, underlying gaps usually function as support levels. Buy a dip to the upper end of the gap or a dip into the gap itself. A protective stop can be placed below the gap. In a bear move, sell a rally to the lower end of the gap or into the gap itself. A protective stop can be kept over the gap. - -#### **Combining Technical Concepts** - -The most effective way to use these technical concepts is to combine them. Remember that when we're discussing timing, the basic decision to buy or sell has already been made. All we're doing here is fine tuning the entry or exit point. If a buy signal has been given, the trader wants to get the best price possible. Suppose prices dip into the 40-60% buying zone, show a prominent support level in that zone, and/or have a potential support gap. Suppose further that a significant up trendline is nearby. - -All of these factors used together would improve the timing of the trade. The idea is to buy near support, but to exit quickly if that support is broken. Violation of a tight down trendline drawn above the highs of a downside reaction could also be used as a buying signal. During a bounce in a downtrend, the breaking of a tight up trendline could be a shorting opportunity. - -### **COMBINING TECHNICAL FACTORS AND MONEY MANAGEMENT** - -Besides using chart points, money management guidelines should play a role in how protective stops are set. Assuming an account size of \$100,000, and using the 10% criteria for maximum commitment, only \$10,000 is available for the trade. The maximum risk is 5%, or \$5,000. Therefore, protective stops on the total position must be placed in such a way that no more than \$5,000 would be lost if the trade doesn't work. - -A closer protective stop would permit the taking of larger positions. A looser stop would reduce the size of the position. Some traders use only money management factors in determining where to place a protective stop. It's critically important, however, that the protective stop be placed over a *valid* resistance point for a short position or below a *valid* support point for a long position. The use of intraday charts can be especially effective in finding closer support or resistance levels that have some validity. - -### **TYPES OF TRADING ORDERS** - -Choosing the right type of trading order is a necessary ingredient in the tactical process. We'll concern ourselves only with some of the more common types of orders: market, limit, stop, stop limit, and market-if-touched (M.I.T.). - -- 1. The *market order* simply instructs your broker to buy or sell at the current market price. This is usually preferable in fast market conditions or when the trader wants to ensure that a position is taken and to protect against missing a potentially dynamic market move. -- 2. The *limit order* specifies a price that the trader is willing to pay or accept. A *buy limit* order is placed below the current market price and states the highest price the trader is willing to pay for a purchase. A *sell limit* order is placed over the current market price and is the lowest price the seller is willing to accept. This type of resting order is used, for example, after a bullish breakout when the buyer wants to buy a downside reaction closer to support. -- 3. A *stop order* can be used to establish a new position, limit a loss on an existing position, or protect a profit. A stop order specifies a price at which an order is to be executed. A *buy stop* is placed over the market and a *sell stop* under the market (which is the opposite of the limit order). Once the stop price is hit, the order becomes a *market* order and is executed at the best price possible. On a long position, a sell stop is placed below the market to limit a loss. After the market moves higher, the stop can be raised to protect the profit (a trailing stop). A buy stop could be placed above resistance to initiate a long position on a bullish breakout. Since the stop order becomes a market order, the actual "fill" price may be beyond the stop price, especially in a fast market. -- 4. A *stop limit order* combines both a stop and a limit order. This type of order specifies both a stop price where the trade is activated and a limit price. Once the stop is elected, the order becomes a limit order. This type - -of order is useful when the trader wants to buy or sell a breakout, but wants to control the price paid or received. - -5. The *market-if-touched (M.I.T.) order* is similar to a limit order, except that it becomes a market order when the limit price is touched. An M.I.T. order to buy would be placed under the market like a limit order. When the limit price is hit, the trade is made at the market. This type of trade has one major advantage over the limit order. The buy limit order placed under the market does not guarantee a fill even if the limit price is touched. Prices may bounce sharply from the limit price, leaving the order unfilled. An M.I.T. order is most useful when the trader wants to buy the dip, but doesn't want to risk missing the market after the limit price is hit. - -Each of these orders is appropriate at certain times. Each has its own strong and weak points. Market orders guarantee a position, but may result in "chasing" the market. Limit orders provide more control and better prices, but risk missing the market. Stop limit orders also risk missing the market if prices gap beyond the limit price. Stop prices are strongly recommended to limit losses and protect profits. However, the use of a buy or sell stop to initiate new positions may result in bad fills. The market-if-touched order is particularly useful, but is not allowed on some exchanges. Familiarize yourself with the different types of orders and learn their strengths and weaknesses. Each of them has a place in your trading plan. Be sure to find out which types of orders are permitted on the various financial exchanges. - -### **FROM DAILY CHARTS TO INTRADAY PRICE CHARTS** - -Because timing deals with very short term market action, intraday price charts are especially useful. Intraday charts are indispensable for day trading purposes, although that's not our focus here. We're mainly interested in how intraday activity can be used to aid the trader in the timing of purchases and sales once the basic decision to enter or exit a market has been made. - -It bears repeating that the trading process must begin with a long range view and then gradually work toward the shorter term. Analysis begins with monthly and weekly charts for long term perspective. Then the daily chart is consulted, which is the basis for the actual trading decision. The intraday chart is the last one viewed for even greater precision. The long term chart gives a telescopic view of a market. The intraday chart allows more microscopic study. The technical principles already discussed are clearly visible on these very sensitive charts. (See Figures 16.1-16.3.) - -**Figure 16.1** *A 5 minute bar chart of an S&P 500 futures contract showing a day and a half of trading. The last five stochastic signals (see arrows) worked pretty well. Intraday charts are used for very short term trading purposes.* - -**Figure 16.2** *A 10 minute bar chart of a Treasury Bond futures contract showing three days of trading. The last two stochastic signals show a sell just after 10:10 on the morning of 2/26 and then a buy signal the following morning around the same time.* - -**Figure 16.3** *A one hour bar chart of a Deutschemark futures contract showing ten trading days. Three stochastic signals are shown (see arrows). A buy signal on 2/17 turned to a sell on 2/24 and then another buy on 2/26.* - -### **THE USE OF INTRADAY PIVOT POINTS** - -In order to achieve earlier entry with even tighter protective stops, some traders try to anticipate where a market will close by the use of pivot points. This technique combines seven key price levels with four time periods. The seven pivot points are the previous day's high, low, and close and the current day's open, high, low, and close. The four time periods are applied to the current trading day. They are the open, 30 minutes after the open, midday (about 12:30 New York time), and 35 minutes before the close. - -These are average times and can be adjusted to the individual markets. The idea is to use pivot points only as a timing device when the trader believes a market is topping or bottoming. Buy or sell signals are given as the pivot points are broken during the day. The later in the day the signal is given, the stronger it is. As an illustration of a buy signal, if the market opens above the previous day's close, but is below the previous day's high, a buy stop is placed above the previous day's high. If the buy stop is elected, a protective sell stop is placed below the current day's low. At 35 minutes before the close, if no position has been taken, a buy stop is placed above the current day's high, with a protective stop under today's open. No action is generally taken during the first 30 minutes of trading. As the day progresses, the pivot - -points are narrowed as are the protective stops. As a final requirement on a buy signal, prices must close above both the previous day's closing price and today's opening price. - -### **SUMMARY OF MONEY MANAGEMENT AND TRADING GUIDELINES** - -The following list pulls together most of the more important elements of money management and trading. - -- 1. Trade in the direction of the intermediate trend. -- 2. In uptrends, buy the dips; in downtrends, sell bounces. -- 3. Let profits run, cut losses short. -- 4. Use protective stops to limit losses. -- 5. Don't trade impulsively; have a plan. -- 6. Plan your work and work your plan. -- 7. Use money management principles. -- 8. Diversify, but don't overdo it. -- 9. Employ at least a 3 to 1 reward-to-risk ratio. -- 10. When pyramiding (adding positions), follow these guidelines. - - a. Each successive layer should be smaller than before. - - b. Add only to winning positions. - - c. Never add to a losing position. - - d. Adjust protective stops to the breakeven point. -- 11. Never meet a margin call; don't throw good money after bad. -- 12. Close out losing positions before the winning ones. -- 13. Except for very short term trading, make decisions away from the market, preferably when the markets are closed. -- 14. Work from the long term to the short term. -- 15. Use intraday charts to fine-tune entry and exit. -- 16. Master interday trading before trying intraday trading. -- 17. Try to ignore conventional wisdom; don't take anything said in the financial media too seriously. -- 18. Learn to be comfortable being in the minority. If you're right on the market, most people will disagree with you. -- 19. Technical analysis is a skill that improves with experience and study. Always be a student and keep learning. -- 20. Keep it simple; more complicated isn't always better. - -## **APPLICATION TO STOCKS** - -The trading tactics that we've covered in this chapter (and the analytical tools in preceding chapters) also apply to the stock market, with some minor adjustments. While futures traders focus on short to intermediate trends, stock investors are more concerned with intermediate to longer term trends. Stock trading places less emphasis on the very short term and makes less use of intraday charts. But the general principles remain the same for analyzing and trading markets—whether they're in the futures pits of Chicago or on the floor of the New York Stock Exchange. - -### **ASSET ALLOCATION** - -The money management guidelines presented in this chapter refer mainly to futures trading. However, many of the principles included in that discussion relate to the need for proper diversification in one's investment portfolio and touches on the subject of asset allocation. Asset allocation refers to how a person's portfolio is divided among stocks, bonds, and cash (usually in the form of a money market fund or Treasury Bills). It can also refer to how much of one's portfolio should be allocated to foreign markets. Asset allocation also refers to how one's stockholdings are spread among the various market sectors and industry groups. And, more recently, it deals with how much of one's portfolio should be allocated to traditional commodity markets. - -### **MANAGED ACCOUNTS AND MUTUAL FUNDS** - -Managed accounts have been available in the futures markets for several years and have provided a vehicle for those wishing to put some money into futures but lacked the expertise to do so themselves. Managed accounts have provided a sort of mutual fund approach to futures. Even though managed futures accounts invest in all futures markets—including currencies, commodities, bonds, and stock index futures—they still provide some measure of diversification from bonds and stocks. Part of the diversification is due to their practice of trading from both the long and the short side. Another part comes from the commodity portion itself. However, the ability to devote some of one's assets to commodities was made even easier during 1997. - -Oppenheimer Real Assets, launched in March 1997, is the first mutual fund devoted exclusively to commodity investing. By investing in commodity-linked notes, the fund is able to fashion a commodity portfolio that tracks the Goldman Sachs Commodity Index, which includes 22 - -commodity markets. Since commodities often trend in opposite directions to bonds and stocks, they provide an excellent diversification vehicle. Proper diversification requires spreading one's assets among market groups or classes that have a low correlation to each other—in other words, they don't always trend in the same direction. Commodities certainly fit that criteria. - -We point these things out for two reasons. One is to show that the areas of money management and asset allocation are very much intertwined. The second is to show that the markets themselves are very much intertwined. In the next two chapters, you'll see how closely linked the futures and stock markets really are, and why it's important that stock investors keep informed of what's going on in the futures markets. Chapter 17 will introduce you to intermarket technical analysis. - -### **MARKET PROFILE** - -We couldn't leave the subject of intraday charts without introducing one of the most innovative approaches to intraday trading called *Market Profile.* This trading technique was developed by J. Peter Steidlmayer, a former floor trader on the Chicago Board of Trade. Mr. Steidlmayer's approach has gained an enthusiastic following over the past decade, especially in the futures markets. Market Profile can, however, be applied to common stocks as well. It's not an easy approach to grasp. But those traders that have done so give it very high marks. Dennis Hynes, an expert in Market Profile trading, explains the approach in Appendix B. - -When the first edition of this book was published in 1986 the separation of the commodity futures world from the more traditional world of stocks and bonds was already starting to break down. Twenty years ago, commodities referred to such things as corn, soybeans, porkbellies, gold, and oil. These were traditional commodities that could be grown, mined, or refined. Dramatic changes took place from 1972 to 1982 with the introduction of futures contracts on currencies, Treasury Bonds, and stock index futures. The term "commodities" gave way to "futures" since bonds and stocks were hardly commodities. But they were futures contracts. Since then, the world of futures trading has blended with that of traditional stocks and bonds to the point that they can hardly be separated. As a result, the technical analysis methods used to analyze the different financial markets have become more universally applied. - -On any given day, quotes are readily available for dollar futures, bond futures, and stock index futures—and they often move in sync with one another. The direction those three markets move is often affected by what happens in the commodity pits. *Program trading*, which occurs when the price of the S&P 500 futures contract is out of line with the S&P 500 cash index, is a day-to-day reality. For those reasons, it seems clear that the more understanding you have about the world of futures trading, the more insight you will gain into the entire financial marketplace. - -It has become clear that action in the futures markets can have an important influence on the stock market itself. Early warnings signs of inflation and interest rate trends are usually spotted in the futures pits first, which often determine the direction stock prices will take at any given time. Trends in the dollar tell us a lot about the strength or weakness of the American economy, which also has a major impact on corporate earnings and the valuation of stock prices. But the linkage goes even deeper than that. The stock market is divided into sectors and industry groups. Rotation into and out of those groups is often dictated by action in futures. With the tremendous growth in mutual funds, and sector funds in particular, the ability to capitalize on sector rotation into winning groups and out of losing ones has become much simpler. - -In this chapter, we'll deal with the broader subject of intermarket analysis as it deals with the interplay between currencies, commodities, bonds, and stocks. Our primary message is how closely the four markets are linked. We'll show how to use the futures markets in the process of sector and industry group rotation within the stock market itself. diff --git a/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/022_17 The Link Between Stocks and Futures - Intermarket Analysis.md b/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/022_17 The Link Between Stocks and Futures - Intermarket Analysis.md deleted file mode 100644 index 69f7a9508139ca3525ee58724705bcf727861b7c..0000000000000000000000000000000000000000 --- a/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/022_17 The Link Between Stocks and Futures - Intermarket Analysis.md +++ /dev/null @@ -1,132 +0,0 @@ -### **INTERMARKET ANALYSIS** - -In 1991, I wrote a book entitled *Intermarket Technical Analysis.* That book described the interrelationships between the various financial markets, which are universally accepted today. The book provided a guide, or blueprint, to help explain the sequence that develops among the various markets and to show how interdependent they really are. The basic premise of intermarket analysis is that all financial markets are linked in some way. That includes international markets as well as domestic ones. Those relationships may shift on occasion, but they are always present in one form or another. As a result, a complete understanding of what's going on in one market—such as the stock market—isn't possible without some understanding of what's going on in other markets. Because the markets are now so intertwined, the technical analyst has an enormous advantage. The technical tools described in this book can be applied to all markets, which greatly facilitates the application of intermarket analysis. You'll also see why the ability to follow the charts of so many markets is a tremendous advantage in today's complex marketplace. - -### **PROGRAM TRADING: THE ULTIMATE LINK** - -Nowhere is the close link between stocks and futures more obvious than in the relationship between the S&P 500 cash index and the S&P 500 futures contract. Normally, the futures contract trades at a premium to the cash index. The size of that premium is determined by such things as the level of short term interest rates, the yield on the S&P 500 index itself, and the number of - -days until the futures contract expires. The premium (or spread) between S&P 500 futures over the cash index diminishes as the futures contract approaches expiration. (See Figure 17.1.) Each day, institutions calculate what the actual premium should be—called *fair value.* That fair value remains constant throughout the trading day, but changes gradually with each new day. When the futures premium [moves](#page-376-0) above its fair value to the cash index by some predetermined amount, an arbitrage trade is automatically activated—called *program buying.* When the futures are too high relative to the cash index, program traders sell the futures contract and buy a basket of stocks in the S&P 500 to bring the two entities back into line. The result of program buying is positive for the stock market since it pushes the S&P 500 cash index higher. Program selling is just the opposite and occurs when the premium of the futures over the cash narrows too far below its fair value. In that case, *program selling* is activated which results in the buying of S&P 500 futures and selling of the basket of stocks. Program selling is negative for the market. Most traders understand this relationship between the two related markets. What they don't always understand is that the sudden moves in the S&P 500 futures contract, which activate the program trading, are often caused by sudden moves in other futures markets—like bonds. - -**Figure 17.1** *S&P 500 futures normally trade at a premium to the cash index as shown in this chart. Notice that the premium narrows as the March contract nears expiration.* - -## **THE LINK BETWEEN BONDS AND STOCKS** - -The stock market is influenced by the direction of interest rates. The direction of interest rates (or yield) can be monitored on a minute-to-minute basis by tracking the movements in the Treasury Bond futures contract. Bond prices move in the opposite direction of interest rates or yields. Therefore, when bond prices are rising, yields are falling. That is normally considered positive for stocks.\* Falling bond prices, or rising yields, are considered negative for stocks. From a technician's point of view, it is very easy to compare the charts of Treasury Bond futures with the charts of either the S&P 500 cash index or its related futures contract. You'll see that they have generally trended in the same direction. (See Figure 17.2.) On a short term basis, sudden changes in trend in the S&P 500 futures contract are often influenced by sudden changes in the Treasury Bond futures contract. On a longer range basis, changes in the trend of the Treasury [Bond](#page-377-1) contract often warn of similar turns in the S&P 500 cash index itself. In that sense, bond futures can be viewed as a leading indicator for the stock market. Bond futures, in turn, are usually influenced by trends in the commodity markets. - -**\* In a deflationary environment, bonds and stocks usually decouple. Bond prices rise while stock prices fall.** - -**Figure 17.2** *Rising bond prices are usually good for stock prices. The bond market bottoms in 1981, 1984, 1988, 1991, and 1995 led to major upturns in stocks. Bond peaks in 1987, 1990, and 1994 warned of bad stock market years.* - -### **THE LINK BETWEEN BONDS AND COMMODITIES** - -Treasury Bond prices are influenced by expectations for inflation. Commodity prices are considered to be leading indicators of inflationary trends. As a result, commodity prices usually trend in the opposite direction of bond prices. If you study the market's history since the 1970s, you'll see that sudden upturns in commodity markets (signaling higher price inflation) have usually been associated with corresponding declines in Treasury Bond prices. The flip side of that relationship is that strong Treasury Bond gains have normally corresponded with falling commodity prices. (See Figure 17.3). Commodity prices, in turn, are impacted by the direction of the U.S. dollar. - -**Figure 17.3** *Commodity prices and bond prices normally trend in opposite directions as shown here. The bond bottoms in the spring of 1996 and 1997 coincided with major peaks in commodity prices (see boxes).* - -### **THE LINK BETWEEN COMMODITIES AND THE DOLLAR** - -A rising U.S. dollar normally has a depressing effect on most commodity prices. In other words, a rising dollar is normally considered to be noninflationary. (See Figure 17.4.) One of the commodities most effected by the dollar is the gold market. If you study their relationship over time, you'll - -see that the prices of gold and the U.S. dollar usually trend in opposite directions. (See Figure 17.5.) The gold market, in turn, usually acts as a leading indicator for other commodity markets. So, if you're analyzing the gold market, it's necessary to know what the dollar is doing. If you're studying the co[mmodity](#page-380-1) price trend in general (using one of the better known commodity price indexes), it's necessary to know what the gold market is doing. The fact of the matter is that all four markets are linked—the dollar influences commodities, which influence bonds, which influence stocks. To fully comprehend what's happening in any one asset class, it's necessary to know what's happening in the other three. Fortunately, that's easily done by simply looking at their respective price charts. - -**Figure 17.4** *A rising dollar normally has a depressing effect on commodity markets. In 1980, the dollar bottom coincided with a major peak in commodities. The dollar bottom in 1995 contributed to a sharp decline in commodities a year later.* - -**Figure 17.5** *The U.S. Dollar and gold prices usually trend in opposite directions as shown in this example. Gold prices, in turn, usually lead other commodities.* - -### **STOCK SECTORS AND INDUSTRY GROUPS** - -An understanding of these intermarket relationships also sheds light on the interaction between the various stock market sectors and industry groups. The stock market is divided into market sectors which are then subdivided into industry groups. These market categories are influenced by what's happening on the intermarket scene. For example, when bonds are strong and commodities weak, interest rate-sensitive stock groups—such as the utilities, financial stocks, and consumer staples—usually do well relative to the rest of the stock market. At the same time, inflation-sensitive stock groups—like gold, energy, and cyclical stocks—usually underperform. When commodity markets are strong relative to bonds, the opposite is the case. By monitoring the relationship between Treasury Bond prices and commodity prices, you can determine which sectors or industry groups will do better at any given time. - -Since there is such a close relationship between stock market sectors and their related futures markets, they can be used in conjunction with each other. Utility stocks, for example, are closely linked to Treasury Bond prices. (See Figure 17.6.) Gold mining shares are closely linked to the price of gold. What's more, the related stock groups often tend to lead their respective - -futures markets. As a result, utility stocks can be used as leading indicators for Treasury Bonds. Gold mining shares can be used as leading indicators for gold prices. Another example of intermarket influence is the impact of the trend of oil prices on energy and airline stocks. Rising oil prices help energy shares but hurt airlines. Falling oil prices have the opposite effect. - -**Figure 17.6** *There is usually very close linkage between bond prices and utilities. In addition, utilities often make their turns a little before bonds.* - -### **THE DOLLAR AND LARGE CAPS** - -Another intermarket relationship involves how the dollar affects large and small cap stocks. Large multinational stocks can be negatively impacted by a very strong dollar, which may make their products too expensive in foreign markets. By contrast, the more domestically oriented small cap stocks are less affected by dollar movements and may actually do better than larger stocks in a strong dollar environment. As a result, a stronger dollar may favor smaller stocks (like those in the Russell 2000), while a weaker dollar may benefit the large multinationals (like those in the Dow Industrial Average.) - -### **INTERMARKET ANALYSIS AND MUTUAL FUNDS** - -It should be obvious that some understanding of these intermarket relationships can go a long way in mutual fund investing. The direction of the U.S. dollar, for example, might influence your commitment to small cap funds versus large cap funds. It may also help determine how much money you might want to commit to gold or natural resource funds. The availability of so many sector-oriented mutual funds actually complicates the decision of which ones to emphasize at any given time. That task is made a good deal easier by comparing the relative performance of the futures markets and the various stock market sectors and industry groups. That is easily accomplished by a simple charting approach called *relative strength* analysis. - -### **RELATIVE STRENGTH ANALYSIS** - -This is an extremely simple but effective charting tool. All you do is divide one market entity by another—in other words, plot a ratio of two market prices. When the ratio line is rising, the numerator price is stronger than the denominator. When the ratio line is declining, the denominator market is stronger. Consider some examples of what you can do with this simple indicator. Divide a commodity index (such as the CRB Futures Price Index) by Treasury Bond futures prices. (See Figure 17.7.) When the ratio line is rising, commodity prices are outperforming bonds. In that scenario, futures traders would be buying commodity markets and selling bonds. At the same time, stock traders would be buying i[nflation](#page-383-0) sensitive stocks and selling interest-rate sensitive stocks. When the ratio line is falling, they would be doing the opposite. That is, they would sell commodities and buy bonds. At the same time, stock investors would be selling the golds, the oils, and the cyclicals, while buying the utilities, the financials, and consumer staples. (See Figure 17.8.) - -**Figure 17.7** *The CRB Index/Treasury Bond ratio tells us which asset class is stronger. 1994 favored commodities, while 1995 favored bonds. The ratio took a sharp downturn in mid-1997 owing to the Asian crisis and fears of deflation.* - -**Figure 17.8** *During October 1997, the Asian crisis caused funds to flow out of cyclicals and into consumer staples, which coincided with a falling CRB/Bond ratio in Figure 17.7.* - -## **RELATIVE STRENGTH AND SECTORS** - -Many exchanges now trade index options on various stock market sectors. The Chicago Board Options Exchange has the greatest selection and includes such diverse groups as automotive, computer software, environmental, gaming, real estate, healthcare, retail, and transportation. The American and Philadelphia Stock Exchanges offer popular index options on banks, gold, oil, pharmaceuticals, semiconductors, technology, and utilities. All of these index options can be charted and analyzed like any other market. The best way to use relative strength analysis on them is to divide their price by some industry benchmark such as the S&P 500. You can then determine which are outperforming the overall market (a rising RS line) or underperforming (a falling RS line). Employing some simple charting tools like trendlines and moving averages on the relative strength lines themselves will help you spot important changes in their trend. (See Figure 17.9.) The general idea is to rotate your funds into those sectors of the market whose relative strength lines are just turning up, and to rotate out of those market groups whose relative strength lines are just turning down. Those [moves](#page-384-1) can be implemented either with the index options themselves or through mutual funds that match the various market sectors and industry groups. - -**Figure 17.9** *A relative strength (ratio) comparison of the PSE High Tech Index to the S&P 500. Simple trendline analysis helped spot the downturn in technology stocks during October 1997 and the upturn at year-end.* - -### **RELATIVE STRENGTH AND INDIVIDUAL STOCKS** - -Investors have two ways to go at that point. They can simply rotate their funds out of one market group into another and stop there. Or, if they wish, they can continue on to choose individual stocks within those groups. *Relative strength* analysis plays a role here as well. Once the desired index has been chosen, the next step is to divide each of the individual stocks within the index by the index itself. In that way, you can easily spot the individual stocks that are showing the greatest relative strength. (See Figure 17.10.) You can purchase the stocks showing the strongest ratio lines, or you can buy a cheaper stock whose ratio line may just be turning up. The idea, however, is to avoid stocks whose relative strength (ratio) lines are still [fallin](#page-385-2)g. - -**Figure 17.10** *A ratio analysis of Dell Computer versus the PSE High Tech Index at the end of 1997 showed Dell to be one of the better stock picks in the tech sector.* - -### **TOP-DOWN MARKET APPROACH** - -What we've described here is a *top down* market approach. You begin by studying the major market averages to determine the trend of the overall market. Then you select those market sectors or industry groups that are showing the best relative strength. Then you select individual stocks within those groups that are also showing the best relative strength. By incorporating intermarket principles into your decision making process, you can also determine whether the current market climate favors bonds, commodities, or stocks which can play a role in your asset allocation decisions. The same principles can also be applied to international investing by simply comparing the relative strength of the various global stock markets. And, finally, all of these technical tools described herein can be applied to charts of mutual funds as a final check on your analysis. All of this work is easily done with price charts and a computer. Imagine trying to apply fundamental analysis to so many markets at the same time. - -### **DEFLATION SCENARIO** - -The intermarket principles described herein are based on market trends since 1970. The 1970s saw runaway inflation which favored commodity assets. The decades of the 1980s and 1990s have been characterized by falling commodities (disinflation) and strong bull markets in bonds and stocks. During the second half of 1997, a severe downturn in Asian currency and stock markets was especially damaging to markets like copper, gold, and oil. For the first time in decades, some market observers expressed concern that a beneficial disinflation (prices rising at a slower level) might turn into a harmful deflation (falling prices). To add to the concerns, producer prices fell on an annual basis for the first time in more than a decade. As a result, the bond and stock markets began to decouple. For the first time in four years, investors were switching out of stocks and putting more money into bonds and rate-sensitive stock groups like utilities. The reason for that asset allocation adjustment is that deflation changes the intermarket scenario. The inverse relationship between bond prices and commodities is maintained. Commodities fall while bond prices rise. The difference is that the stock market can react negatively in that environment. We point this out because it's been a long time since the financial markets had to deal with the problem of price deflation. If and when deflation does occur, intermarket relationships will still be present but in a different way. Disinflation is bad for commodities, but good for bonds and stocks. Deflation is good for bonds and bad for commodities, but may also be bad for stocks. - -The deflationary trend that started in Asia in mid-1997 spread to Russia and Latin America by mid-1998 and began to hurt all global equity markets. A plunge in commodity prices had an especially damaging impact on commodity exporters like Australia, Canada, Mexico, and Russia. The deflationary impact of falling commodity and stock prices had a positive impact on Treasury bond prices, which hit record highs. Market events of 1998 were a dramatic example of the existence of global intermarket linkages - -## **INTERMARKET CORRELATION** - -Two markets that normally trend in the same direction, such as bonds and stocks, are positively correlated. Markets that trend in opposite directions, like bonds and commodities, are negatively correlated. Charting software allows you to measure the degree of correlation between different markets. A high positive reading suggests a strong positive correlation. A high negative reading suggests a strong negative correlation. A reading near zero suggests little or no correlation between two markets. By measuring the degree of correlation, the trader is able to establish how much emphasis to place on a particular intermarket relationship. More weight should be placed on those with higher correlations, and less weight on those closer to zero. (See Figure 17.11.) - -**Figure 17.11** *The line along the bottom shows the positive correlation between T-bond prices and the S&P500. During the second half of 1997, the Asian crisis caused an unusual decoupling. Investors bought bonds and sold stocks.* - -In his book, *Cybernetic Trading Strategies*, Murray Ruggiero, Jr. presents creative work on the subject of intermarket correlations. He also shows how to use intermarket filters on trading systems. He demonstrates, for example, how a moving-average crossover system in the bond market can be - -used as a filter for stock index trading. Ruggiero explores the application of state-of-the-art artificial intelligence methods like chaos theory, fuzzy logic, and neural networks to the development of technical trading systems. He also explores the application of neural networks to the field of intermarket analysis. - -### **INTERMARKET NEURAL NETWORK SOFTWARE** - -One major problem with the study of intermarket relationships is that there are so many of them—and they're all interacting at the same time. That's where neural networks come into play. Neural networks provide a more quantitative framework for identifying and tracking the complex relationships that exist among the financial markets. Louis Mendelsohn, president of Market Technologies Corporation (25941 Apple Blossom Lane, Wesley Chapel, FL 33544; e-mail address: *45141@ProfitTaker.com;* website URL: www.ProfitTaker.com/45141), was the first person to develop intermarket analysis software in the financial industry during the 1980s. Mendelsohn is the leading pioneer in the application of microcomputer software and neural networks to intermarket analysis. His VantagePoint software, first introduced in 1991, uses intermarket principles to trade interest rate markets, stock indexes, currency markets, and energy futures. VantagePoint uses neural network technology to detect the hidden patterns and correlations that exist between related markets. - -### **CONCLUSION** - -This chapter summarizes the main points included in my book, *Intermarket Technical Analysis.* It discusses the ripple effect that flows from the dollar to commodities to bonds to stocks. Intermarket work also recognizes the existence of global linkages. What happens in Asia, Europe, and Latin America has an impact on U.S. markets and vice versa. Intermarket analysis sheds light on sector rotation within the stock market. Relative strength analysis is helpful for seeking out asset classes, market sectors, or individual stocks that are likely to outperform the general market. In his book, *Leading Indicators for the 1990s*, Dr. Geoffrey Moore shows how the interaction between commodity prices, bond prices, and stock prices follows a sequential pattern that tracks the business cycle. Dr. Moore substantiates the intermarket rotation within the three asset classes, and argues for their use in economic - -forecasting. In doing so, Dr. Moore elevates intermarket work and technical analysis in general into the realm of economic forecasting. Finally, technical analysis can be applied to mutual funds like any other market (with some minor modifications). That being the case, all of the techniques discussed in this book can be applied right on the mutual fund charts themselves. Even better, the lower degree of volatility in mutual fund charts make them excellent vehicles for chart analysis. My latest book, *The Visual Investor*, deals more extensively with the subject of sector analysis and trading, and shows how mutual funds can be charted and then used to implement various trading strategies. (See Figure 17.12.) - -**Figure 17.12** *Chart analysis can be done on mutual fund charts. You didn't have to be a chart expert to see that Asia was headed for trouble by tracking this mutual fund.* - -### **MEASURING MARKET BREADTH** - -In the previous chapter, we described the top-down approach that is most commonly employed in stock market analysis. With that approach, you begin your analysis with a study of the health of the overall market. Then you work down to market sectors and industry groups. The final step is the study of individual stocks. Your goal is to pick the best stocks in the best groups in an environment when the stock market is technically healthy. The study of market sectors and individual stocks can be accomplished with the technical tools employed throughout this book—including chart patterns, volume analysis, trendlines, moving averages, oscillators, etc. Those same indicators can also be applied to the major market averages. But there's another class of market indicators widely employed in stock market analysis whose purpose is to determine the health of the overall stock market by measuring market breadth. The data used in their construction are advancing versus declining issues, new highs versus new lows, and up volume versus down volume. - -### **SAMPLE DATA** - -If you check the Stock Market Data Bank section of *The Wall Street Journal* (Section C, page 2) each day, you'll find the following data for the previous trading day. The numbers shown are based on an actual day's trading results. - -| Diaries | | -|------------------|--------| -| NYSE | Monday | -| Issues
Traded | 3,432 | -| Advances | 1,327 | - -| Declines | 1,559 | -|---------------------------|---------| -| Unchanged | 546 | -| New
highs | 78 | -| New
lows | 43 | -| Adv
vol
(000) | 248,215 | -| Decl
vol
(000) | 279,557 | -| Total
vol
(000) | 553,914 | -| Closing
tick | -135 | -| Closing
Arms
(trin) | .96 | - -The above figures are derived from New York Stock Exchange (NYSE) data. A similar breakdown is also shown for the NASDAQ and the American Stock Exchange. We'll concentrate on the NYSE in this discussion. It just so happens that on that particular day the Dow Jones Industrial Average had gained 12.20 points. So the market was up as measured by the Dow. However, there were more declining stocks (1,559) than advancing stocks (1,327), suggesting that the broader market didn't fare as well as the Dow. There was also more declining volume than advancing volume. Those two sets of figures suggest that market breadth was actually negative for that particular day—even though the Dow itself closed higher. The other figures present a more mixed picture. The number of stocks hitting new 52 week highs (78) was greater than those hitting new lows (43) suggesting a positive market environment. However, the closing tick (the number of stocks that closed on an uptick versus a downtick) was a negative, -135. That meant that 135 more stocks closed on a downtick than an uptick, a short term negative factor. The negative closing tick, however, is offset by a closing Arms (Trin) reading of .96 which is mildly positive. We'll explain why that is later in the chapter. All of these internal market readings have one intended purpose—to give us a more accurate reading on the health of the overall market that isn't always reflected in the movement of the Dow itself. diff --git a/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/023_18 Stock Market Indicators.md b/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/023_18 Stock Market Indicators.md deleted file mode 100644 index a68ccf933742457989efc709dcdadde2b0e914cb..0000000000000000000000000000000000000000 --- a/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/023_18 Stock Market Indicators.md +++ /dev/null @@ -1,125 +0,0 @@ -### **COMPARING MARKET AVERAGES** - -Another way to study the breadth of the market is to compare the performance of the stock averages themselves. Using the same day's trading as an example, the following data lists the relative performance of the major stock averages: - -| Dow | +12.20 | -|-------------|---------| -| Industrials | (+.16%) | -| S&P | -.64 | -| 500 | (-.07%) | - -| Nasdaq Composite | $-14.47(-92%)$ | -|------------------|----------------| -| Russell 2000 | $-3.80(-.89%)$ | - -The first thing that is clear is that the Dow Industrials was the only market average to gain on the day. On all the TV news programs that night, investors were told that the market (represented by the Dow) was up for the day. Yet all the other measures were actually down. Notice also that the broader the average (the more stocks included) the worse it did. Compare the percentage changes. The 30 stock Dow gained .16%. The S&P 500 lost .07%. The Nasdaq Composite, which includes more than 5,000 stocks, was the day's worst performer and lost .92%. Almost as bad as the Nasdaq was the Russell 2000 (-.89%), which is a measure of 2000 small cap stocks. The message in this brief comparison is that even though the Dow gained on the day, the overall market lost ground as measured by the more broader based stock averages. We'll revisit the idea of comparing market averages again. But first, let's show the different ways market technicians can analyze the market's breadth numbers. - -### **THE ADVANCE-DECLINE LINE** - -This is the best known of the breadth indicators. The construction of the advance decline line is extremely simple. Each day's trading on the New York Stock Exchange produces a certain number of stocks that advanced, a number that declined, and a number that remained unchanged. These figures are reported each day in *The Wall Street Journal* and *Investor's Business Daily*, and are used to construct a daily advance-decline (AD) line. The most common way to calculate the AD line is to take the difference between the number of advancing issues and the number of declining issues. If there are more advances than declines, the AD number for that day is positive. If there are more declines than advances, the AD line for that day is negative. That positive or negative daily number is then added to the cumulative AD line. The AD line displays a trend of its own. The idea is to make sure the AD line and the market averages are trending in the same direction. (See Figure 18.1.) - -**Figure 18.1** *The NYSE advance-decline line versus the Dow Industrials. In a healthy market, both lines should be trending upward together as they are here.* - -### **AD DIVERGENCE** - -What does the advance-decline line measure? The advance-decline line tells us whether or not the broader universe of 3500 NYSE stocks is advancing in line with the most widely followed stock averages, which include only the 30 Dow Industrials or the 500 stocks in the S&P 500. To paraphrase a Wall Street maxim: the advance-decline line tells us if the "troops" are keeping up with the "generals." As long as the AD line is advancing with the Dow Industrials, for example, the breadth or health of the market is good. The danger appears when the AD line begins to diverge from the Dow. In other words, when you have a situation where the Dow Industrials are hitting new highs while the broader market (measured by the AD line) isn't following, technicians begin to worry about "bad market breadth" or an AD divergence. Historically, the AD line peaks out well ahead of the market averages, which is why it's watched so closely. - -### **DAILY VERSUS WEEKLY AD LINES** - -The daily AD line, which we have described herein, is better used for short to intermediate comparisons with the major stock averages. It is less useful for - -comparisons going back several years. A weekly advance-decline line measures the number of advancing versus declining stocks for the entire week. Those figures are published in *Barron's* each weekend. A weekly advance-decline line is considered more useful for trend comparisons spanning several years. While a negative divergence in the daily AD line may warn of short to intermediate problems in the market, it's necessary to also show a similar divergence in the weekly AD line to confirm that a more serious problem is developing. - -### **VARIATIONS IN AD LINE** - -Since the number of stocks traded on the NYSE has grown over the years, some market analysts believe the method of subtracting the number of declining issues from the number of advancing issues gives greater weight to the more recent data. To combat that problem, many technicians prefer to use an advance/decline ratio which divides the number of advancing issues by the number of declining issues. Some also believe that there's value in including the number of unchanged issues in the calculation. Whichever way the AD line is calculated, its use is always the same—that is, to measure the direction of the broader market and to ensure it's moving in the same direction as the more narrowly constructed, but popular market averages. Advance decline lines can also be constructed for the American Stock Exchange and the Nasdaq Market. Market technicians like to construct overbought/oversold oscillators on the AD lines to help measure short to intermediate term market extremes in the breadth figures themselves. One of the better known examples is the McClellan Oscillator. - -### **McCLELLAN OSCILLATOR** - -Developed by Sherman McClellan, this oscillator is constructed by taking the difference between two exponential moving averages of the daily NYSE advance-decline figures. The McClellan Oscillator is the difference between the 19 day (10% trend) and the 39 day (5% trend) exponential moving averages of the daily net advance decline figures. The oscillator fluctuates around a zero line with its upper and lower extremes ranging from +100 and -100. A McClellan Oscillator reading above +100 is a signal of an overbought stock market. A reading below -100 is considered an oversold stock market. Crossings above and below the zero line are also interpreted as short to intermediate term buying and selling signals respectively. (See Figure 18.2.) - -**Figure 18.2** *The McClellan oscillator shown as a histogram. Crossings above the zero line are positive signals. Readings above* +100 *are overbought, while readings below -100 are oversold. Notice the extreme oversold reading during October of 1997.* - -### **McCLELLAN SUMMATION INDEX** - -The Summation Index is simply a longer range version of the McClellan Oscillator. The McClellan Summation Index is a cumulative sum of each day's positive or negative readings in the McClellan Oscillator. Whereas the McClellan Oscillator is used for short to intermediate trading purposes, the Summation Index provides a longer range view of market breadth and is used to spot major market turning points. (See Figure 18.3.) - -**Figure 18.3** *The McClellan Summation Index is simply a longer range version of the McClellan Oscillator. The Summation Index is used for major trend analysis. Crossings below zero are negative. The February 1998 signal was positive.* - -### **NEW HIGHS VERSUS NEW LOWS** - -In addition to the number of advancing and declining stocks, the financial press also publishes the number of stocks hitting new 52 week highs or new 52 week lows. Here again, these figures are available on a daily and weekly basis. There are two ways to show these figures. One way is to plot the two lines separately. Since the daily values can sometimes be erratic, moving averages (usually 10 days) are plotted to present a smoother picture of the two lines. (See Figure 18.4.) In a strong market, the number of new highs should be much greater than the number of new lows. When the number of new highs start to decline, or the number of new lows start to expand, a caution signal is given. A [nega](#page-397-0)tive market signal is activated when the moving average of new lows crosses above the moving average of new highs. It can also be shown that whenever the new highs reach an extreme, the market has a topping tendency. Similarly, whenever new lows reach an extreme, the market is near a bottom. Another way to use the new highs versus new lows numbers is to plot the difference between the two lines. - -**Figure 18.4** *A 10 day average of new highs versus a 10 day average of new lows. A healthy market should see more stocks hitting new highs than new lows. During October 1997, the two lines almost crossed before reasserting their bullish alignment.* - -### **NEW HIGH-NEW LOW INDEX** - -The advantage of a New High-New Low index is that it can be directly compared to one of the major market averages. In that way, the high-low line can be used just like an advance-decline line. (See Figure 18.5.) The trend of the high-low line can be charted and it can be used to spot market divergences. A new high in the Dow, for example, that is not matched by a corresponding new high in the high-low line could be a [sign](#page-398-0) of weakness in the broader market. Trendline and moving-average analysis can be applied to the line itself. But its major value is in either confirming or diverging from the major stock trends and giving early warning of potential trend changes in the overall market. Dr. Alexander Elder describes the New High-New Low index as "probably the best leading indicator of the stock market" *Trading for a Living*, (Wiley). - -**Figure 18.5** *The New High-New Low Index versus the NYSE Composite Index. This line plots the difference between the number of stocks hitting new highs and new lows. A rising line is positive. Notice the sharp drop during October of 1997.* - -Elder suggests plotting the indicator as a histogram with a horizontal reference point at its zero line, making divergences easier to spot. He points out that crossings above and below the zero line also reflect bullish and bearish shifts in market psychology. - -### **UPSIDE VERSUS DOWNSIDE VOLUME** - -This is the third and final piece of data that is utilized to measure the breadth of the market. The New York Stock Exchange also provides the level of volume in both the advancing and declining issues. That data is also available the next day in the financial press. It is then possible to compare the upside volume versus the downside volume to measure which is dominant at any given time. (See Figure 18.6.) The upside volume and downside volume can be shown as two separate lines (just as we did with the new highs and new lows figures) or the difference can be shown as a single line. Either way, the interpretation is [always](#page-399-1) the same. When the upside volume is dominant, the market is strong. When downside volume is greater, the market is weak. It's possible to combine the number of advancing and declining issues with - -advancing and declining volume. That's what Richard Arms did in the creation of the Arms Index. - -**Figure 18.6** *A 10 day average of stock market upside volume (dark line) versus downside volume. A strong market should have more upside than downside volume.* - -### **THE ARMS INDEX** - -The Arms Index, named after its creator Richard Arms, is a ratio of a ratio. The numerator is the ratio of the number of advancing issues divided by the number of declining issues. The denominator is the advancing volume divided by declining volume. The purpose of the Arms Index is to gauge whether there's more volume in rising or falling stocks. A reading below 1.0 indicates more volume in rising stocks and is positive. A reading above 1.0 reflects more volume in declining issues and is negative. On an intraday basis, a very high Arms Index reading is positive, while a very low reading is negative. The Arms Index, therefore, is a contrary indicator that trends in the opposite direction of the market. It can be used for intraday trading by tracking its direction and for spotting signs of short term market extremes. (See Figure 18.7.) - -## **TRIN VERSUS TICK** - -The Arms Index (TRIN) can be used in conjunction with the TICK indicator for intraday trading. TICK measures the difference between the number of stocks trading on an uptick versus the number trading on a downtick. The TICK is a minute-by-minute version of the daily advance-decline line and is used for the same purpose. When combining the two during the day, a rising TICK indicator and a falling Arms Index (TRIN) are positive, while a falling TICK indicator and a rising Arms Index (TRIN) are negative. The Arms Index, however, can also be used for longer range analysis. - -**Figure 18.7** *The Arms Index (also called TRIN) trends in the opposite direction of the market. Exceptionally high spikes usually signal market bottoms. A 10-day moving average of the Arms Index is a popular way to view this contrary indicator.* - -### **SMOOTHING THE ARMS INDEX** - -While the Arms Index is quoted throughout the trading day and has some short term forecasting value, most traders use a 10 day moving average of its values. According to Arms himself, a 10 day average of the Arms Index above 1.20 is considered oversold, while a 10 day Arms value below .70 is overbought, although those numbers may shift depending on the overall trend of the market. Arms expresses a preference for Fibonacci numbers as well. He suggests using a 21 day Arms Index in addition to the 10 day version. He also utilizes 21 day and 55 day moving-average crossovers of the Arms Index to generate good intermediate term trades. For more in-depth treatment, read *The Arms Index (TRIN*) by Richard W. Arms, Jr. - -### **OPEN ARMS** - -In calculating the 10 day Arms Index, each day's closing value is determined using the four inputs and that final value is smoothed with a 10 day moving average. In the "Open" version of the Arms Index, each of the four components in the formula is averaged separately over a period of 10 days. The Open Arms Index is then calculated from those four different averages. Many analysts prefer the Open Arms version to the original version. Different moving average lengths, like 21 and 55 days, can also be applied to the Open Arms version. (See Figure 18.8.) - -**Figure 18.8** *The 10 day Open Arms Index gives a much smoother look to this indicator, but still trends in the opposite direction of the market. A crossing of its 10-day moving average (darker line) often signals turning points.* - -### **EQUIVOLUME CHARTING** - -Although Arms is best known for creating the Arms Index, he has also pioneered other ways of combining price and volume analysis. In doing so, he created an entirely new form of charting called Equivolume. In the traditional bar chart, the day's trading range is shown on the price bar with the volume bar plotted at the bottom of the chart. Since technical analysts combine price and volume analysis, they have to look at both parts of the chart at the same time. On the Equivolume chart, each price bar is shown as a rectangle. The height of the rectangle measures the day's trading range. The width of the rectangle is determined by that day's volume. Heavier volume days produce a wider rectangle. Lighter volume days are reflected in a narrower rectangle. (See Figure 18.9.) - -**Figure 18.9** *Equivolume charts combine price and volume. The width of each rectangle (daily bar) is determined by the volume. Wider rectangles show heavier volume. The rectangles started to widen during Intel's last sell-off—a negative sign.* - -As a rule, a bullish price breakout should always be accompanied by a burst of trading activity. On an Equivolume chart, therefore, a bullish price breakout should be accompanied by a noticeably wider rectangle. Equivolume charting combines price and volume analysis into one chart and makes for much easier comparisons between price and volume. In an uptrend, for example, up days should see wider rectangles while down days should see narrower rectangles. Equivolume charting can be applied to market averages - -as well as individual stocks and can be plotted for both daily and weekly charts. For more information, consult *Volume Cycles in the Stock Market* by Richard Arms (Dow Jones-Irwin, 1983). - -### **CANDLEPOWER** - -In Chapter 12, Greg Morris explained candlestick charting. In a 1990 article published in *Technical Analysis of Stocks and Commodities* magazine entitled "East Meets West: CandlePower Charting," Morris proposed combining ca[ndlestick](#page-273-0) charts with Arms' Equivolume charting method. Morris' version shows the candlestick chart in an Equivolume format. In other words, the width of the candlestick is determined by the volume. The greater the volume, the wider the candlestick. Morris called the combination CandlePower charting. Quoting from the article: "…the CandlePower chart offers similar if not better information than Equivolume or candlestick charting and is as visually appealing as either of them." Morris' CandlePower technique is available on Metastock charting software (published by Equis International, 3950 S. 700 East, Suite 100, Salt Lake City, UT 84107 [800] 882-3040, www.equis.com). However its name has been changed to Candlevolume. (See Figure 18.10.) - -**Figure 18.10** *A CandlePower chart (also called Candlevolume) combines equivolume and candlesticks. The width of each candle (daily bar) is* - -## **COMPARING MARKET AVERAGES** - -At the start of the chapter, we mentioned that another way to gauge market breadth was to compare the different market averages themselves. We're talking here primarily about the Dow Industrials, the S&P 500, the New York Stock Exchange Index, the Nasdaq Composite, and the Russell 2000. Each measures a slightly different portion of the market. The Dow and the S&P 500 capture the trends of a relatively small number of large capitalization stocks. The NYSE Composite Index includes all stocks traded on the New York Stock Exchange, and gives a slightly broader perspective. Breakouts in the Dow Industrials should, as a rule, be confirmed by similar breakouts in both the S&P 500 and the NYSE Composite Index if the breakout is to have staying power. - -Most important divergences involve the Nasdaq and the Russell 2000. The Nasdaq Composite has the largest number of stocks (5000). However, since the Nasdaq is a capitalization-weighted index, it is usually dominated by the one hundred largest technology stocks like Intel and Microsoft. Because of that, the Nasdaq is more often a measure of the direction of the technology sector. The Russell 2000 is a truer measure of the smaller stock universe. Both indexes, however, should be trending upward along with the Dow and the S&P 500 if the trend of the market is truly healthy. - -Relative strength (RS) analysis plays a useful role here. A ratio of the Nasdaq to the S&P 500 tells us whether the technology stocks are leading or lagging. It's usually better for the market if they're leading and the ratio line is rising. (See Figure 18.11.) A comparison of the Russell 2000 and the S&P 500 tells us whether the "troops" are following the "generals." When the small stocks are showing poor relative strength, or are lagging too far behind the large stocks, [that's](#page-405-0) often a warning that market breadth is weakening. (See Figure 18.12.) - -**Figure 18.11** *The Nasdaq/S&P 500 ratio tells us whether technology stocks are leading or lagging the market. It's usually better for the market when the ratio line is rising.* - -**Figure 18.12** *An overlay comparison of the small cap Russell 2000 and the large cap Dow. It's usually better when both lines are rising together.* - -### **CONCLUSION** - -Another example of comparing two market averages for signs of confirmation or divergence involves the Dow Theory. In Chapter 2, we discussed the importance of the relationship between the Dow Industrials and the Dow Transports. A Dow Theory buy signal is present when both averages hit new highs. When one diverges from the other, a [caution](#page-40-0) signal is given. It can be seen then that the study of market breadth, and the related issues of confirmation and divergence, can take many forms. The general rule to follow is that the greater the number of stock market averages that are trending in the same direction, the greater the chances are for that trend continuing. In addition, be sure to check the advance-decline line, the new highs-new lows line, and the upside-downside volume lines to make sure that they're also trending in the same direction. - -As this book has demonstrated, technical analysis is a blend of many approaches. Each approach adds something to the analyst's knowledge of the market. Technical analysis is much like putting together a giant jigsaw puzzle. Each technical tool holds a piece of the puzzle. My approach to market analysis is to combine as many techniques as possible. Each works better in certain market situations. The key is knowing which tools to emphasize in the current situation. That comes with knowledge and experience. - -All of these approaches overlap to some extent and complement one another. The day the user sees these interrelationships, and is able to view technical analysis as the sum of its parts, is the day that person deserves the title of technical analyst. The following checklist is provided to help the user touch all the bases, at least in the early going. Later on, the checklist becomes second nature. The checklist is not all-inclusive, but does have most of the more important factors to keep in mind. Sound market analysis seldom consists of doing the obvious. The technician is constantly seeking clues to future market movement. The final clue that leans the trader in one direction or the other is often some minor factor that has gone largely unnoticed by others. The more factors the analyst considers, the better the chances of finding that right clue. diff --git "a/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/024_19 Pulling It All Together\342\200\224A Checklist.md" "b/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/024_19 Pulling It All Together\342\200\224A Checklist.md" deleted file mode 100644 index 9928fa6ba518ba0943faa39d18af544638a84afc..0000000000000000000000000000000000000000 --- "a/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/024_19 Pulling It All Together\342\200\224A Checklist.md" +++ /dev/null @@ -1,85 +0,0 @@ -### **TECHNICAL CHECKLIST** - -- 1. What is the direction of the overall market? -- 2. What is the direction of the various market sectors? - -- 3. What are the *weekly* and *monthly* charts showing? -- 4. Are the major, intermediate, and minor *trends* up, down, or sideways? -- 5. Where are the important *support* and *resistance* levels? -- 6. Where are the important *trendlines* or *channels?* -- 7. Are *volume* and *open interest* confirming the price action? -- 8. Where are the 33%, 50%, and 66% *retracements?* -- 9. Are there any price gaps and what type are they? -- 10. Are there any *major reversal patterns* visible? -- 11. Are there any *continuation patterns* visible? -- 12. What are the *price objectives* from those patterns? -- 13. Which way are the *moving averages* pointing? -- 14. Are the *oscillators* overbought or oversold? -- 15. Are any *divergences* apparent on the oscillators? -- 16. Are *contrary opinion* numbers showing any extremes? -- 17. What is the *Elliot Wave* pattern showing? -- 18. Are there any obvious *3 or 5 wave patterns?* -- 19. What about *Fibonacci* retracements or projections? -- 20. Are there any *cycle* tops or bottoms due? -- 21. Is the market showing *right or left translation?* -- 22. Which way is the *computer trend* moving: up, down, or sideways? -- 23. What are the *point and figure* charts or *candlesticks* showing? - -After you've arrived at a bullish or bearish conclusion, ask yourself the following questions. - -- 1. Which way will this market trend over the next several months? -- 2. Am I going to buy or sell this market? -- 3. How many units will I trade? -- 4. How much am I prepared to risk if I'm wrong? -- 5. What is my profit objective? -- 6. Where will I enter the market? -- 7. What type of order will I use? -- 8. Where will I place my protective stop? - -Going through the checklist won't guarantee the right conclusions. It's only meant to help you ask the right questions. Asking the right questions is the surest way of finding the right answers. The keys to successful trading are knowledge, discipline, and patience. Assuming that you have the knowledge, the best way to achieve discipline and patience is doing your homework and having a plan of action. The final step is putting that plan of action to work. Even that won't guarantee success, but it will greatly increase the odds of winning in the financial markets. - -### **HOW TO COORDINATE TECHNICAL AND FUNDAMENTAL ANALYSIS** - -Despite the fact that technicians and fundamentalists are often at odds with one another, there are ways they can work together for mutual benefit. Market analysis can be approached from either direction. While I believe that technical factors do lead the known fundamentals, I also believe that any important market move must be caused by underlying fundamental factors. Therefore, it simply makes sense for a technician to have some awareness of the fundamental condition of a market. If nothing else, the technician can inquire from his or her fundamental counterpart as to what would have to happen fundamentally to justify a significant market move identified on a price chart. In addition, seeing how the market reacts to fundamental news can be used as an excellent technical indication. - -The fundamental analyst can use technical factors to confirm an analysis or as an alert that something important may be happening. The fundamentalist can consult a price chart or use a computer trend-following system as a filter to prevent him or her from assuming a position opposite an existing trend. Some unusual action on a price chart can act as an alert for the fundamental analyst and cause him or her to examine the fundamental situation a bit closer. During my years in the technical analysis department of a major brokerage firm, I often approached our fundamental department to discuss some market move that seemed imminent on the price charts. I often received responses like "that can never happen" or "no way." Very often, that same person was scrambling a couple of weeks later to find fundamental reasons to explain a sudden and "unexpected" market move. There's obviously room for much more coordination and cooperation in this area. - -### **CHARTERED MARKET TECHNICIAN (CMT)** - -A lot of people use technical analysis and offer opinions on the technical condition of the various markets. But are they really qualified to do so? How would you know? After all, you wouldn't go to a doctor who didn't have a medical degree on the wall. Nor would you consult a lawyer who hadn't passed the bar exam. Your accountant is undoubtedly a CTA. If you asked a security analyst for an assessment on a common stock, you would certainly make sure that he or she was a Chartered Financial Analyst (CFA). Why wouldn't you take the same precautions with a technical analyst? - -The Market Technicians Association (MTA) resolved this question by instituting a Chartered Market Technician (CMT) program. The CMT program is a three step examination process that qualifies the analyst to carry the CMT letters after his or her name. Most professional technical analysts have gone through the program. The next time someone offers you his or her technical opinion, ask to see the CMT. - -### **MARKET TECHNICIANS ASSOCIATION (MTA)** - -The Market Technicians Association (MTA) is the oldest and best known technical society in the world. It was founded in 1972 to encourage the exchange of technical ideas, educate the public and the investment community, and establish a code of ethics and professional standards among technical analysts. (On March 11, 1998 the MTA celebrated the 25th birthday of its incorporation. The event was highlighted by a special presentation at the New York monthly meeting by three of the organization's founding members —Ralph Acampora, John Brooks, and John Greeley.) MTA membership includes full-time technical analysts and other interested parties (called affiliates). Monthly meetings are held in New York (Market Technicians Association, Inc., One World Trade Center, Suite 4447, New York, NY 10048 (212) 912-0995, e-mail: shelleymta@aol.com), and an annual seminar is held each May at various locations around the country. Members have access to the MTA library and a computer bulletin board. A monthly newsletter and a periodic MTA Journal are published. Some regional chapters have even been formed. MTA members also become colleagues of the International Federation of Technical Analysts (IFTA). - -## **THE GLOBAL REACH OF TECHNICAL ANALYSIS** - -During the fall of 1985, a meeting was held in Japan with technical representatives of several different countries to draft a constitution for the International Federation of Technical Analysts (IFTA, Post Office Box 1347, New York, NY 10009 USA). Since then, the organization has grown to include technical analysis organizations from more than twenty countries. One of the nice things about being a member is that annual meetings are held in places like Australia, Japan, Paris, and Rome since a different national organization hosts each seminar. I'm proud to say that in 1992 I received the first award ever given at an IFTA conference for "outstanding contribution to global technical analysis." - -### **TECHNICAL ANALYSIS BY ANY NAME** - -After a century of use in this country (and 300 years in Japan), technical analysis is more popular than ever. Of course, it's not always called technical analysis. In my book, *The Visual Investor*, I called it *visual* analysis. That was simply an attempt to get people beyond the intimidating title of technical analysis and to get them to examine this valuable approach more closely. Whatever you want to call it, technical analysis is practiced under many names. A lot of financial organizations employ analysts whose job it is to number-crunch market prices to find stocks or stock groups that are expensive (overbought) or cheap (oversold). They're called quantitative analysts, but the numbers they crunch are often the same ones the technicians are crunching. The financial press has written about a "new" class of trader called "momentum" players. These traders move funds out of stocks and stock groups that are showing poor momentum and into those that are showing good momentum. They use a technique called relative strength. Of course, we recognize "momentum" and "relative strength" as technical terms. - -Then there are the brokerage firms' "fundamental" upgrades and downgrades. Have you noticed how often these "fundamental" changes take place the day after a significant "chart" breakout or breakdown? Economists, who certainly don't consider themselves technical analysts, use charts all the time to measure the direction of inflation, interest rates, and all sorts of economic indicators. And they talk about the "trend" of those charts. Even fundamental tools like the price/earnings ratio have a technical side to them. Anytime you introduce price into the equation, you're moving into the realm of technical analysis. Or when security analysts say the dividend yield of the stock market is too low, aren't they saying prices are too high? Isn't that the same thing as saying a market is overbought? - -Finally, there are the academics who have reinvented technical analysis under the new name of *Behavioral Finance.* For years, the academics espoused the Efficient Market Hypothesis to prove that technical analysis simply didn't work. No less an authority than the Federal Reserve Board has thrown some doubt on those ideas. - -### **FEDERAL RESERVE FINALLY APPROVES** - -During August of 1995, the Federal Reserve Bank of New York published a Staff Report under the title: "Head and Shoulders: Not Just a Flaky Pattern." The report was intended to examine the validity of the head and shoulders pattern in foreign exchange trading. (The first edition of this book was cited as one of the primary sources on technical analysis.) The opening sentence in the introduction reads: - -Technical analysis, the prediction of price movements based on past price movements, has been shown to generate statistically significant profits despite its incompatibility with most economists' notions of "efficient markets." (Federal Reserve Bank of New York, C.L. Osier and P.H. Kevin Chang, Staff Report No. 4, August 1995.) - -A more recent report, published in the fall of 1997 by the Federal Reserve Bank of St. Louis, also addresses the use of technical analysis and the relative merits of the Efficient Market Hypothesis. (*Technical Analysis of the Futures Markets* was again cited as a primary source of information on technical analysis.) Under the paragraph titled, "Rethinking the Efficient Markets Hypothesis," the author writes: - -The success of technical trading rules shown in the previous section is typical of a number of later studies showing that the simple efficient market hypothesis fails in important ways to describe how the foreign exchange market actually functions. While these results did not surprise market practitioners, they have helped persuade economists to examine features of the market…that might explain the profitability of technical analysis. (Neely) - -### **CONCLUSION** - -If imitation is the sincerest form of flattery, then market technicians should feel very flattered. *Technical analysis* is practiced under many different names, and often by those who may not realize they're using it. But it *is* being practiced. Technical analysis has also evolved. The introduction of *intermarket* analysis, for example, has changed the focus away from "single market" analysis to a more interdependent view of the financial markets. The idea that all global markets are linked isn't questioned much anymore either. That's why the universal language of technical analysis makes it especially useful in a world where the financial markets, here and abroad, have become so intertwined. In a world where computer technology and lightning-fast communications require quick responses, the ability to read the market's signals is more crucial than ever. And reading market signals is what technical analysis is all about. Charles Dow introduced technical analysis at the start of the twentieth century. As the twentieth century draws to a close, Mr. Dow - -w o u l d b e p r o u d o f w h a t h e s t a r t e d. - -# **APPENDICES** diff --git a/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/025_A Advanced Technical Indicators.md b/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/025_A Advanced Technical Indicators.md deleted file mode 100644 index 4151e856849a23b210c1826f1c58ebe6840c2108..0000000000000000000000000000000000000000 --- a/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/025_A Advanced Technical Indicators.md +++ /dev/null @@ -1,87 +0,0 @@ -# **Appendix A: Advanced Technical Indicators\*** - -This appendix introduces several more advanced technical methods that can be used by themselves or with other technical studies. As with any technical approach, it is always recommended that investors do their own independent testing and research before actually investing. - -### **DEMAND INDEX (DI)** - -Most technicians will agree that volume analysis is an important ingredient in determining a market's direction. The *Demand Index* (DI) is one of the early volume indicators that was developed in the 1970s by James Sibbett. The formula is quite complex (see end of this appendix). The Demand Index is the ratio of buying pressure to selling pressure. When the buying pressure is greater than the selling pressure, the DI is above the zero line, which is positive. Greater selling pressure means the DI is below zero, which implies prices will move lower. Most traders also look for divergences between the DI and prices. - -Figure A.1 is a weekly chart of T-Bond futures from early 1994 until late 1997. From April to November 1994, the DI was mostly below the zero line as bonds declined from 104 to the 96 area. While prices made lower lows (line [A\),](#page-416-0) the DI formed higher lows (line B). This is a classic positive, or bullish divergence, which suggested that bond prices were bottoming. The divergence was confirmed when the DI moved above the zero line at point 1. The DI reached its highest level for this rally in late May 1995 at point 2, and then dropped for the next six weeks before crossing below the zero line at point 3. It stayed negative for five weeks before it again turned positive. On the next rally the DI formed a significantly lower high in late November at point 4. While the DI was lower (line D), the bond contract was almost six points higher (line C). This negative or bearish divergence warned of a price peak. - -**Figure A.1** *The Demand Index (DI), which incorporates price and volume, is shown here as a histogram. Values above zero are positive; below zero they are negative. Notice the bullish divergence in late 1994 and the bearish divergence in late 1995. (Courtesy MetaStock Equis International.*) - -This indicator can also be used with stocks. The weekly chart of General Motors (Figure A.2) shows the DI plotted as a line rather than a histogram. This allows for trendlines to more easily be drawn on the indicator. I have personally found trendline analysis of indicators to be quite valuable. Indicator [trendlines](#page-417-1) are often broken ahead of price trendlines. This was the case in late 1995 as the downtrend in the DI (line A) was broken a week before the corresponding price downtrend (line B). As this chart indicates, buying just one week earlier could have significantly improved the entry price. The DI also warned of a price high in mid-April 1996. While GM was making a new price high (line C), the DI had formed lower highs (line D). This warning signal came well ahead of the serious price decline in June and July. - -**Figure A.2** *The Demand Index (solid line) compared to a weekly chart of GM. Trendline breaks on the DI line often preceded trendline breaks on the price chart. Notice the negative (bearish) divergence in April 1996. (Courtesy MetaStock, Equis International.*) - -### **HERRICK PAYOFF INDEX (HPI)** - -This indicator was developed by the late John Herrick as a way of analyzing commodity futures through changes in the open interest. As discussed in Chapter 7, changes in the open interest can give traders important clues as to whether a market trend is well supported or not. - -The *Herrick Payoff Index* uses price, volume, and open interest to [determine](#page-153-0) money flow into or out of a given commodity. This helps the trader spot divergences between the price action and the open interest. This is often quite important as buying or selling panics can often be identified through analysis of the open interest by the Herrick Payoff Index. - -The most basic interpretation of the HPI is whether it is above or below the zero line. A positive value means that the HPI is projecting higher prices and that open interest is rising along with prices. Conversely, negative readings suggest that funds are flowing out of the commodity being analyzed. - -One of the more volatile commodity markets is coffee, featured in Figure A.3. During March and April of 1997, the HPI had four crossings of the zero line with the last positive signal in early April (B) lasting until early June. The - -HPI dropped below zero in June, and even though prices were well below the highs, coffee dropped another 70 cents. Once again the HPI turned positive in late July very close to the lows. Over the next two months there were two short term signals and then another longer term sell signal. This is characteristic of the HPI when used on the daily data as it will cross above and below the zero line several times before a longer lasting buy or sell signal is given. - -**Figure A.3** *The Herrick Payoff Index (HPI) shown as a histogram with coffee prices. HPI uses price, volume, and open interest in its calculation and is used in futures markets. Crossings above zero are buys (B); crossings below are sells (S).* - -The HPI, like the Demand Index, is most effective when used on the weekly data, as fewer false signals are evident. Divergence analysis can also be used to warn the trader of a change from positive to negative money flow. There are several good examples on the weekly T-Bond futures charts (Figure A.4) that covers approximately six years of trading. The HPI stayed positive from late 1992 until late 1993. The HPI peaked in early 1993 and, when bonds were almost 10 points higher (line A), the HPI was forming a lower high (line B). This negative [divergence](#page-419-0) warned bond traders of the decline in prices that took place in 1994. The HPI violated the zero line in late October of 1993, but then turned slightly positive in early 1994 before plunging back below the zero line. The HPI reached its lowest level in the first half of 1994 and bottomed well ahead of prices. As prices were making lower lows (line - -C), the HPI was forming higher lows and therefore a positive divergence (line D). The HPI moved back into positive territory in December 1994 as bonds were very close to their lows. A negative divergence was formed in late 1995 (line F), after bonds had rallied over 25 points from the late 1994 lows. The zero line was crossed several times in 1996 and early 1997 before the HPI moved firmly into positive territory. These two examples should illustrate why the HPI and its analysis of open interest can be helpful in analyzing a commodity market's direction. - -**Figure A.4** *A weekly version of Herrick Payoff Index with Treasury Bonds. Notice the bearish divergences in 1993 and 1995, and the bullish divergence in 1994.* - -### **STARC BANDS AND KELTNER CHANNELS** - -As discussed in Chapter 9, banding techniques have been used for many years. Two types that I prefer are based on the *Average True Range.* Despite this common factor, these two types of bands are used in very different ways. Average True R[ange](#page-186-0) is the average of true price ranges over x periods. *True Range* is the greatest distance from today's high to low, yesterday's close to today's high, or yesterday's close to today's low. See Welles Wilder's *New Concepts in Technical Trading Systems.* - -Manning Stoller, a well known expert in the commodity business, developed the Stoller Average Range Channels or *starc* bands. In his formula the 15 period *Average True Range* is doubled and added to or subtracted from a 6 period moving average (MA). The upper band is starc+; the lower is starc-. Movement outside of these bands is uncommon and indicates an extreme situation. In this manner they can be used as trading filters. When prices are near or above the starc+ band, it is a high risk time to buy and a low risk time to sell. Conversely, if prices are at or below the starc- band, then it is a high risk selling zone and a more favorable point to buy. - -The weekly continuation chart of gold futures (Figure A.5) is plotted with both the starc+ and starc- bands. In Feb. 1997 at point 1, gold prices slightly overshot the starc- band. Though the price action was weak, the stare bands indicated that this was not a good time to sell. By [waiting](#page-420-0), a better selling opportunity was likely to occur. Just three weeks later gold was \$22 higher and at the starc+ band (point 2). Point 2 was a low risk selling opportunity. In July (point 3), gold prices dropped well below the starc-band, but instead of declining further, prices moved sideways for the next 12 weeks. Gold prices then started to move lower from November to December 1997 and touched the starc- band three times (points 4). In all instances prices did stabilize or move higher for 1-2 weeks. These bands work well in all time frames even as short as 5 to 10 minute bar charts. Starc bands can help the trader avoid chasing the market, which almost always results in a poor entry price. - -**Figure A.5** *Starc bands plotted around a 6 week moving average of weekly gold prices. Points 1 and 3 show prices bouncing after dipping below the lower band. Point 2 shows prices falling after rising above the upper band.* - -The *Keltner channels* were originally developed by Chester Keltner in his 1960 book *How to Make Money in Commodities.* Linda Raschke, a very successful commodity trader, has reintroduced them to technicians. In her modification, the bands are also based on the *average true range (ATR*), but the ATR is calculated over 10 periods. This ATR value is then doubled and added to a 20 period exponential moving average for the plus band and subtracted from it for the minus band. - -The recommended use of the Keltner channels is much different from the starc bands. When prices close above the plus band, a positive signal is given as it indicates a breakout in upward volatility. Conversely, when prices close below the lower band, it is negative and indicates prices will move lower. In many respects, this is just a graphical representation of a four week channel breakout system discussed in Chapter 9. - -Figure A-6 is a daily chart of March 1998 copper futures. Prices closed below the minus band in late October 1997 at point 1. This indicated that prices should begin a new do[wntrend](#page-186-0) and copper prices dropped 16 cents in the next two months. - -**Figure A.6** *Keltner Channels plotted around a 20 day exponentially smoothed average of daily copper prices. With this indicator, moves below the lower channel (such as point 1) are interpreted as a sign of weakness.* - -There were many other closes below the minus band during this period. Until prices close above the plus band, the negative signal will stay in effect. The second chart is March 1998 coffee prices (Figure A.7) and illustrates a - -positive signal at point 1. After two consecutive closes above the plus band, prices then declined to the 20 period EMA. In a rising market the 20 period EMA should act as support. Several days after the EMA was touched (point 2), coffee prices began a dramatic 30 cent rise in just a few weeks. - -**Figure A.7** *Keltner Channels with a daily coffee chart. Point 1 shows prices breaking the upper channel which is a sign of strength. Notice that after that buy signal, prices found support at the 20 day exponential moving average (middle line) at point 2.* - -Both of these techniques offer an alternative approach to either percentage envelopes or standard deviation bands (like Bollinger Bands). Neither is presented as a stand-alone trading system but should be considered as additional tools of the trade. - -### **FORMULA FOR DEMAND INDEX** - -The Demand Index (DI) calculates two values, Buying Pressure (BP) and Selling Pressure (SP), and then takes a ratio of the two. DI is BP/SP. There are some slight variations in the formula. Here's one version: If prices rise: - -> BP=V or Volume SP=V/P where P is the % change in price - -If prices decline: - -BP=V/P where P is the % change in price SP=V or Volume - -Because P is a decimal (less than 1), P is modified by multiplying it by the constant K. - -$$ -P = P(K) -$$ - -K=(3 × C)/VA - -Where C is the closing price and VA (Volatility Average) is the 10 day average of a two day price range (highest high – lowest low). - -If BP > SP then DI=SP/BP - -The Demand Index is included on the MetaStock charting menu. - -\*This Appendix was prepared by Thomas E. Aspray. diff --git a/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/026_B Market Profile.md b/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/026_B Market Profile.md deleted file mode 100644 index b7885f287a7e34e1b8584f8358c4dafa2831a819..0000000000000000000000000000000000000000 --- a/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/026_B Market Profile.md +++ /dev/null @@ -1,150 +0,0 @@ -# **Appendix B: Market Profile\*** - -### **INTRODUCTION** - -The purpose of this writing is to illustrate what Market Profile is and to define its underlying principles. Before the early 1980s, the only technical tools available were the bar chart and the point and figure chart. Since then Market Profile® 1 was introduced to expand the arsenal of technical tools. Market Profile is essentially a statistical approach to the analysis of price data. 2 For those without a statistics background, a familiar example may be helpful. Consider [a](#page-438-0) group of students taking an exam. Typically, some score very high (say 90 or higher), some score very low (say 60 or lower), but most sc[or](#page-438-1)es tend to be clustered around the average score (say 75). A *histogram* can be used to depict the *frequency distribution* of these test scores in a "statistical picture" (Figure B.1). - -**Figure B.1** - -As can be seen, the most frequent score, or *modal* score, is 75 (6 students) while the *range* of scores is defined by the lowest and highest scores (55 and 95). Note how the scores distribute evenly around the modal score. For a perfectly *symmetric* distribution, the modal score will be equal to the *mean*, or average score. Next observe that the distribution is "bell-shaped," the telltale sign of a *normal* distribution. For a perfect normal distribution, specific *standard deviation* intervals correlate to specific numbers of - -observations. For example, if the test scores are, in fact, perfectly normally distributed, then 68.3% of these scores will fall within one (1) standard deviation of the mean. While actual data is unlikely to form a perfect normal distribution, it is often close enough that these relationships can be employed. - -Prices, like other physical measurements (e.g., school test grades, population heights, etc.), *distribute* around a mean price level as well. What is the Market Profile *graphic?* Visualize it as simply, a frequency distribution of prices displayed as a price histogram turned on its side (see Figures B.2a and B.2b). - -**Figure B.2a** *Traditional.* - -**Figure B.2b** *Flipped on its side.* - -The centerpiece of the Market Profile graphic is the (bell-shaped) *normal* curve used to display the evolving price distribution. Once the normal curve assumption is acknowledged, a modal or average price can be identified, a price dispersion (standard derivation) can be computed and probability statements can be made regarding the price distribution. For example, virtually all values fall within three (3) standard deviations of the average while about 70% (68.3% to be exact) fall within one (1) standard deviation of the average (see Figure B.3). - -Market Profile provides a picture of what's happening *here and now* in the marketplace. In its pursuit of promoting trade, the market is either in equilibrium or [moving](#page-426-1) toward it. The profile's natural tendency toward - -symmetry defines, in a simple way, the degree of balance (equilibrium) or imbalance (disequilibrium) that exists between buyers and sellers. As the market is dynamic, the profile *graphic* portrays equilibrium as periods of market balance—when price distributions are symmetric, and represents disequilibrium as periods of market imbalance—when price distributions are not symmetric or are skewed. - -**Figure B.3** *The profile graphic reveals that market activity is regularly normally distributed.* - -Market Profile is not a trading system nor does it provide trade recommendations. The aim of the profile graphic is to allow the user to witness a market's developing value on price *reoccurrence* over time. As such, Market Profile is a *decision support* tool requiring the user to exercise personal judgment in the trading process. - -## **MARKET PROFILE GRAPHIC** - -The Market Profile format organizes price and time into a visual representation of what happens over the course of a single session. It provides a logical framework for observing market behavior in the *present tense* displaying price distributions over a period of time. The price range evolves both vertically and horizontally throughout the session. How is a profile graphic constructed? - -Consider a 4 period bar chart (see Figure B.3a). This traditional bar chart can be converted to a profile graphic as follows: (1) assign a letter for each price within each period's price range, letter A for the 1 stperiod, B for the 2 nd, and so on (see Figure B.3b) and then (2) [collapse](#page-427-1) each price range to the leftmost or first column (see Figure B.3c). The completed profile graphic reflects prices on the left and period frequency of price occurrence on the right, represented by the [letter](#page-427-2)s A through D. - -**Figure B.3a** - - - -| Figure | B.3a | | -|--------|------|--| -| | | | -| | | | -| | | | -| | | | -| | | | -| | | | -| | | | -| | | | -| | | | -| | | | -| | | | - -Each letter represents a *Time Price Opportunity* or TPO to identify a specific price at which the market traded during a specific time period (e.g., in B period prices traded between 163 and 166). These TPOs are the basic units of analysis for the day's activity. In other words, each TPO is an *opportunity* created by the market at a certain *time* and certain *price.* Market Profile distributions are constructed of TPOs. The Chicago Board of Trade (CBOT) assigns a letter to each half-hour trading period on a 24 hour basis; uppercase letters A through X represent the half-hour periods from midnight to noon while lowercase letters from a through x represent the half-hour periods from noon to midnight. 3 - -### **MARKET [ST](#page-438-2)RUCTURE** - -When you visit a commodities trading pit on a busy day, you observe what is best described as "controlled chaos." Beneath the screaming and gesturing *locals* and other traders, there is a describable process. Think of the market as a place where participants with differing price needs and time constraints compete with each other to get business done. Emotions can run high as anxiety levels soar. - -The Market Profile concept was introduced by Mr. Steidlmayer in an attempt to help describe this process. As a CBOT floor trader (*local*) and student of market behavior, he observed recurring patterns of market activity, which ultimately lay the foundation for his understanding of the market. Since the CBOT trading floor conducts trade in an auction-like manner, he defined Market Profile principles in auction terms. For example, an off-the-floor trader would describe an advancing market as one that is *rallying* or *trading up*, whereas Mr. Steidlmayer would instead say something like, "the market continues to *auction up, advertising* for sellers to appear in order to *shut off* buying." - -| Price | | | | | -|-------|---|---|---|---| -| 168 | | | | | -| 167 | D | | | | -| 166 | B | c | D | | -| 165 | A | B | c | D | -| 164 | A | в | C | D | -| 163 | A | в | c | D | -| 162 | A | c | | | -| 161 | A | | | | -| 160 | | | | | -| 159 | | | | | - -**Figure B.3c** - -To explain why a trading pit auction process works the way it does, he invented some new terms unfamiliar to off-the-floor traders. He began with a definition of a market's purpose, which is to *facilitate* trade. Next, he defined some operational procedures, namely that the market operates in a *dual auction* mode as prices *rotate* around a fair or mean price area (i.e., similar to the way school grades were distributed). Lastly, he defined the behavior characteristics of market participants, namely that traders with a short term time frame seek a *fair* price, while traders with a longer term time frame seek an *advantageous* price. - -### **MARKET PROFILE ORGANIZING PRINCIPLES** - -Auction Setting: The purpose of the marketplace is to *facilitate* or promote trade. All market activity occurs within this auction setting. Initially, as price moves higher, more buying comes in, as price moves lower, more selling comes in. The market moves up to *shut off* buying (i.e., auctioning up until the last buyer buys) and moves down to *shut off* selling (i.e., auctioning down until the last seller sells). The market actually operates through a *dual auction* process. When price moves up and more buying comes in, the up-move *advertises* for an opposite response (i.e., selling) to stop the directional move. The opposite is true when price moves down. - -**Continuous Negotiation**: When a market moves directionally it establishes price parameters, an *unfair high* and an *unfair low*, and then trades between them to establish a *fair value* area. All trade takes place through this *negotiating process* and remains within these parameters until one side or the other side is eventually taken out (i.e., a new high or new low is formed). (see Figure B.4.) - -**Market Balance and Imbalance**: The market is either in equilibrium or working toward equilibrium between buyers and sellers. To facilitate trade, the [market](#page-430-0) moves from a state of balance (equilibrium) to one of *imbalance* (disequilibrium) and back to balance again. This pattern of market behavior occurs in all times frames, from intraday session activity to single session activity to aggregated or consolidated sessions activity which form the longer term auction. - -**Time Frames and Trader Behavior**: The concept of different time frames was introduced to help explain the behavioral patterns of market participants. Market activity is divided into two timeframe categories, short term and longer term. The short term activity is defined as *day time frame* activity where traders are forced to trade today (e.g., locals, day traders and options traders on expiration day fall into this category). With limited time to act, the short term trader is seeking a *fair* price. Short term buyers and sellers *do* trade with each other at the same time and at the same price. Longer term activity is defined by all *other timeframe* activity (e.g., commercials, swing traders, and all other position traders fall into this category). Not forced to trade today and with time as an ally, these traders can seek a more *advantageous price.* In pursuit of their interests, longer term buyers seek lower prices while longer term sellers seek higher prices. As their price objectives differ, longer term buyers and sellers generally *do not* trade with each other at the same price and at the same time. It is the behavioral interaction between these two distinct timeframe types of activity that causes the profile to develop as it does. - -**Figure B.4** - -**The Short Term Trader and Longer Term Trader Play Different Roles**: Short term and longer term traders play key, but different, roles in facilitating trade. A market's *initial balance* (i.e., a place where two-sided trade can occur) is usually established in the first hour of trade by short term buyers and sellers (day timeframe activity) in their pursuit of a fair price. Most of the day's activity occurs in the fair price or value area. Prices above and below this developed fair value area offer opportunity and are advantageous to longer term traders. With time on their side, longer term traders can either accept or reject prices away from fair value. By entering the market with large enough volume, longer term buyers and sellers can upset the *initial balance*, thereby extending the price range higher or lower. The longer term trader is responsible for the way the day's range develops and for the duration of the longer term auction. In other words, the role of the longer term trader is to move the market directionally. - -**Price and Value**: The distinction between price and value defines a market-generated opportunity. There are two kinds of prices: 1) those that are accepted—defined as a price area where the market trades over time and 2) those that are rejected—defined as a price area where the market spends very little time. A rejected price is considered excessive in the market—defined as an unfair high or unfair low. Price and value are all but synonymous for short term traders as they ordinarily trade in the fair value area. For longer term traders, however, the concept that price equals value is often inaccurate. Price - -is *observable* and *objective* while value is *perceived* and *subjective*, depending upon the particular needs of longer term traders. For example, a price at the top of today's range, while excessive or unfair for today, is *cheap* to the longer term trader who believes that prices next week will be much higher (i.e., today's price is *below* next week's anticipated value). - -**Figure B.5** *By combining daily consecutive profile graphics (upper) into a larger cumulative profile graphic (lower), an evolving picture of long term balance or imbalance emerges. (See explanation on page 489.*) - -The longer term trader distinguishes between price and value by accepting or rejecting current prices away from his perception of [fair](#page-436-0) value. Recall that rising prices advertise for sellers while falling prices advertise for buyers. When the longer term trader responds to an advertised price, this behavior is expected and is referred to as *responsive.* On the other hand, if the longer term trader did the opposite (i.e., buy after prices rose or sell after prices declined), then this unexpected activity is referred to as *initiating.* Classifying longer term activity as responsive or initiating relative to yesterday's or today's evolving value area provides anecdotal evidence of longer term trader confidence. The more confident the trader becomes, the more likely he is to take initiating action. - -### **RANGE DEVELOPMENT AND PROFILE PATTERNS** - -Since market activity is not arbitrary, it's not surprising that over time recognizable price patterns reveal themselves. A skillful trader able to anticipate such pattern development in its early stage may be able to capitalize. Mr. Steidlmayer loosely identifies the following daily *range development* patterns: - -- 1. A *normal day* occurs when the longer term trader is relatively inactive. The day's range is established in the *pioneer range* (defined as the first column of prices) during the session's first half-hour period of trade. The short term trader establishes the initial balance, the unfair high and low, and then prices rotate between these *parameters* for balance of the day (see Figure B.6: *Panel #1*—Orange Juice). -- 2. A *normal variation day* occurs when the longer term trader is more active and extends the range beyond the initial balance. In this instance, the short [term](#page-433-0) traders initial balance parameters do not hold and there is some directional movement which extends the range and sets a new high or new low parameter. As a rule, the range extension beyond the initial balance can be anywhere from a couple of ticks to double the initial balance. This profile type is probably the most common (see Figure B.6: *Panel #2*—Dow Jones Industrial Average). -- 3. A *trend day* occurs when the longer term trader extends the range successively further. In this instance, the range is considerably [more](#page-433-0) than double the initial balance with the longer term trader controlling direction as the market continues its search for a fair price. Here the market moves in one direction and closes at or near the directional extreme (see Figure B.6: *Panel #3*—Japanese Yen). -- 4. A *neutral day* occurs when the longer term trader extends the range after the initial balance in one direction, then reverses and extends the range in the opposite [direction.](#page-433-0) Neutral days indicate trader uncertainty and occur when the market probes or tests for price trend continuation or change (see Figure B.6: *Panel #4*—Cattle). - -**Figure B.6** - -### **TRACKING LONGER TERM MARKET ACTIVITY** - -With the exception of option sellers who profit when prices remain static, the profit strategy of most traders requires directional price movement. The trader wins when he gets the direction right and loses when he is incorrect. Because the longer term trader is responsible for determining the market's directional movement, we monitor this activity to help detect evidence of a price trend. After identifying and evaluating longer term trader activity, an educated conclusion regarding price direction can be reached. We begin the process by identifying the longer term trader's influence in today's session and then - -considering how that influence extends into the future. - -- **Influence in day's range development**: The profile graphic helps identify longer term trader behavior during daily range development. By monitoring longer term activity throughout the range, particularly at the *extremes*, at *range extension*, and after *value area* completion, we can determine whether longer term buyers or sellers are more active and hence control market direction. Activity at the extremes provides the clearest indication of longer term trader influence, followed by range extension and then value area buying and selling. - - **1.** *Extremes* are formed when the longer term trader competes with the short term trader for opportunities at a particular price level (which later becomes either the session high or low). A minimum of two single prints is required to establish an extreme. The more eager the longer term trader is in this price competition, the more the single prints and the longer the single print extreme. Anything less than two prints suggests that the longer term trader is not very interested in competing at that price. A *local* top or bottom is formed when only one single print defines the top or bottom of the range. This condition implies that the market offered a price opportunity which no one really wanted (i.e., no evidence of competition [see Figure B.7: *Panel #1*—Intel Corporation]. - - - -- **2.** *Range Extension* occurs when the longer term trader enters the market with enough volume to tip the initial balance and extend the range up or down. Range extension up indicates longer term buying while range extension *down* indicates longer term selling. However, there are occasions when both the longer term buyer and seller are active at a range extreme, but not at the same price and time (recall that longer term buyers and sellers generally do not trade with each other). For example, if an extreme is formed after a range extension up, the market moves up first to shut off buying and then moves down to shut off selling. This is an example of both longer term buyers and sellers trading in the same price area but at different times. Both kinds of activity at the extremes are identified to evaluate the impact of longer term buying and selling (see Figure B.7: *Panel #2*—Coffee). -- 3. The *Value Area* is determined each trading session by price rotations - -around the modal price (i.e., the price with the highest TPO count or the *fairest* price). The value area is computed by counting 70% of all TPOs surrounding the fairest price. In other words, the value area is an estimate of fair value which is approximated by one standard deviation of the session's trading volume (recall the student example earlier). When a longer term trader makes a trade in the value area, he is buying low or selling high in relation to a longer term view, not in relation to today's value. This behavior creates an imbalance in today's value area. Longer term trader activity is measured by counting TPOs. The following procedure can be used to determine which side contains the longer term imbalance, 1) a line is drawn through the fairest price, and 2) TPOs are counted on either side of the fairest price until a single print is encountered. The imbalance is assigned to the side with the smaller number of TPOs because the longer term trader activity represents the smaller percentage of total trade in the value area. For example, if the TPO count was 22 above and 12 below the fairest price, that would indicate net TPO selling with a mild bias toward lower prices (see Figure B.7: *Panel #3*— S&P 500 Index). Note that TPO buying and selling in the value area *is not applicable on trend days*, as the market is still in search of a fair [value](#page-435-0) area. - -After identifying and evaluating longer term trader activity correctly in today's profile graphic, the user can readily determine whether longer term buyers or sellers were in control of the current trading session. - -**Influence beyond today**: The profile graphic also helps identify longer term trader behavior beyond today's range development. A key goal of the trader is to determine whether the current market price trend will continue or is likely to change. A change in market direction is a *reversal* of the current price trend. The standard technical approach to trend assessment, without Market Profile, is to draw an appropriate trendline and monitor subsequent price action against it. Unless the trendline is violated, the current price trend is expected to continue. Trendline analysis is the most important of basic technical tools, particularly given its universal usage and applicability to different time intervals (i.e., hourly, daily, weekly, monthly, etc.). - -Market Profile, on the other hand, offers an alternative approach to traditional trend analysis by evaluating market activity over different time periods. In its simplest form, an evaluation of the profile graphic on consecutive days can help define the start or continuation of the short term price trend. For example, if today's value area is higher than - -yesterday's value area, then the current market price trend is up. Moreover, if tomorrow's value area is higher than today's, then the current market uptrend has continued. By monitoring market activity in this fashion, the trader is able to readily identify trend continuation or change. Similarly by combining daily consecutive profile graphics into a larger cumulative profile graphic, an evolving picture of longer term balance or imbalance emerges. The profile graphic in Figure B.5 (*Sugar*) on page 483 illustrate this point. A cursory review of the individual sessions ( 2⁄ 10—2⁄ 13) in the upper panel suggest an uptrending market without a hint of reversal. When these four (4) consecutive [sessio](#page-431-0)ns are co[mbined](#page-431-1) (lower panel), however, a cumulative balanced picture springs forth. Once balanced, a market moves to a state of imbalance which, more often than not, begins after a final test at the fairest price. - -### **CONCLUSION** - -The Market Profile method can be used to analyze any price data series for which continuous transaction activity is available. This includes listed and unlisted equities, U.S. government notes and bonds (prices or yields), commodity futures and options, where applicable. The *profile graphic* presents the movement of prices, per unit of time, in two dimensions vertically (i.e., directionally) and horizontally (i.e., frequency of occurrence). When price action is viewed in this way, a picture of *price discovery* unfolds which is unavailable in the traditional one dimensional (vertical) bar chart. The profile graphic offers unique advantages over the standard bar chart: - -- The *symmetry* attribute of the profile graphic allows the trader to assess the market's state of *balance* (or *imbalance*) in any timeframe. When a market is symmetric, a condition of balance or equilibrium exists between buyers and sellers. A market imbalance implies price trend continuation, as the market works toward a new equilibrium. Market balance, however, is fleeting and implies market *change* or a directional move (either up or down) is likely to occur, a signal for traders to consider employing trend following methodologies. -- Every trend change occurs at a single moment in time, not conveniently at the end of the hour, day, week or month. The profile graphic can be used to more accurately identify that specific time where control changed hands between buyers and sellers. By pinning down such control shifts, the profile graphic allows the trader to identify key support and resistance levels. - -In short, the profile graphic provides a substantial amount of price information per unit of time, allowing the trader to identify patterns and dynamics which would not be readily apparent using other methods. - -\*This appendix was prepared by Dennis C. Hynes. - -1The Market Profile® is a registered trademark of the Chicago Board of Tra[de](#page-424-1) (CBOT), hereafter referred to as Market Profile or the *profile.* The concept was developed by J. Peter Steidlmayer, formerly of the CBOT. For furt[h](#page-424-2)er information on the subject, contact the CBOT or read Mr. Steidlmayer's latest book: *141 WEST JACKSON*—1996. - -2Originally introduced for commodity futures prices, the format can be used for any price data series where continuous transaction activity is available. - -[3](#page-424-3)Letter assignments can vary between vendors. For example, CQG assigns uppercase letters **A** through **Z** from 8:00 am CST while lowercase letters from **a** through **z** from 10:00 p.m. CST. diff --git a/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/027_C The Essentials of Building a Trading System.md b/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/027_C The Essentials of Building a Trading System.md deleted file mode 100644 index 459d3a6dc88ffaf2b8b7caaec31586429071f067..0000000000000000000000000000000000000000 --- a/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/027_C The Essentials of Building a Trading System.md +++ /dev/null @@ -1,143 +0,0 @@ -# **Appendix C: The Essentials of Building a Trading System\*** - -Trading system development is part art, part science, and part common sense. Our goal is not to develop a system that achieves the highest returns using historical data, but to formulate a sound concept that has performed reasonably well in the past and can be expected to continue to perform reasonably well in the future. - -Ideally, we would prefer an approach that is 100% mechanical, increasing the odds that past performance can be replicated in the future. Mechanical means objective: if 10 people follow the same rules and achieve the same results, those rules are said to be objective. It does not matter whether a mechanical system is written on paper or entered into a computer. - -Here, however, we'll assume that we are using a computer and will use the terms "mechanical" and "computerized" interchangeably. This does not imply that a computer is mandatory for trading system development, although it certainly helps. - -The mechanical approach offers us three main benefits: - -- **We can back test ideas before trading them.** A computer allows us to test ideas on historical data rather than on hard earned cash. By helping us see how a system would have performed in the past, it allows us to make better decisions when it really counts—in the present. -- **We can be more objective and less emotional.** Most people have trouble applying their objective analysis to actual trading situations. Analysis (where we have no money at risk) is easy, trading (where we have money at risk) is stressful. Therefore, why not let the computer pull the trigger for us? It is free of human emotion and will do exactly what we had instructed it to do at the time when we developed our system. -- **We can do more work, increasing our opportunities.** A mechanical approach takes less time to apply than a subjective one, which allows us to cover more markets, trade more systems, and analyze more time frames each day. This is especially true for those of us who use a - -computer, since it can work faster and longer than we can, without losing its concentration. - -### **5 STEP PLAN** - -- 1. Start with a concept -- 2. Turn it into a set of objective rules -- 3. Visually check it out on the charts -- 4. Formally test it with a computer -- 5. Evaluate the results - -### **STEP 1: START WITH A CONCEPT (AN IDEA)** - -Develop your own concepts of how markets work. You can begin by looking at as many charts as you can, trying to identify moving average crossovers, oscillator configurations, price patterns or other pieces of objective evidence which precede major market moves. Also attempt to recognize clues that provide advance warning on moves that are likely to fail. I studied chart after chart after chart in the hope of finding such answers. This "visual" approach has worked for me, and I highly recommend it. - -In addition to studying price charts and reading books such as this one, I suggest you read about trading systems and study what others have done. Although no one is going to reveal the "Holy Grail" to you, there is a great deal of useful information out there. Most importantly, think for yourself. I have found that the most profitable ideas are rarely original, but frequently our own. - -Most of the successful trading systems are trend following. Counter trend systems should not be overlooked, however, because they bring a degree of negative correlation to the table. This means that when one system is making money, the other is losing money, resulting in a smoother equity curve for the two systems combined, than for either one alone. - -#### **Principles of Good Concept Design** - -Good concepts usually make good sense. If a concept seems to work, but makes little sense, you may be sliding into the realm of coincidence, and the odds of this concept continuing to work in the future diminishes considerably. Your concepts must fit your personality in order to give you the discipline to follow them even when they are losing money (i.e. during periods of drawdown). Your concepts should be straightforward and objective, and if - -trend following, should trade with the major trend, let profits run and cut losses short. Most importantly, your concepts must make money in the long run (i.e. they must have a positive expectation). - -Designing entries is hard, but designing exits is harder and more important. Entry logic is fairly straightforward, but exits have to take various contingencies into account, such as how fast to cut losses or what to do with accumulated profits. I prefer systems that do not reverse automatically—I like to exit a trade first, before putting on another trade in the opposite direction. Work hard to improve your exits, and your returns will improve relative to your risk. - -Another suggestion—try to optimize as little as possible. Optimization using historical data often leads one to expect unrealistic returns that cannot be replicated in real trading. Try to use few parameters and apply the same technique across a number of different markets. This will improve your chances of long run success, by reducing the pitfalls of over optimization. - -The three main categories of trading systems are: - -- **Trend following.** These systems trade in the direction of the major trend, buying after the bottom and selling after the top. Moving averages and Donchian's weekly rule are popular methodologies among money managers. -- **Counter trend** - - Support/Resistance. Buy a decline into support; sell a rally into resistance. - - Retracements. Here we buy pullbacks in a bull market and sell rallies in a bear market. For example, buy a 50% pullback of the last advance, but only if the major trend remains up. The danger of such systems is that you never know how far a retracement will go and it becomes difficult to implement an acceptable exit technique. - - Oscillators. The idea is to buy when the oscillator is oversold and to sell when it is overbought. If divergence between the price series and the oscillator is also present, a much stronger signal is given. However, it is usually best to wait for some sign of a price reversal before buying or selling. -- **Pattern recognition** (visual and statistical). Examples include the highly reliable head and shoulders formation (visual), and seasonal price patterns (statistical). - -### **STEP 2: TURN YOUR IDEA INTO A SET OF OBJECTIVE RULES** - -This is the most difficult step in our 5 step plan, much more difficult than many of us would at first expect! To complete this step successfully, we must express our idea in such objective terms that 100 people following our rules will all arrive at exactly the same conclusions. - -Determine what our system is supposed to do and how it will do it. It is with this step that we produce the details needed to accomplish the programming task. We need to take the overall problem and break it down into more and more detail until we finalize all the details. - -## **STEP 3: VISUALLY CHECK IT OUT ON THE CHARTS** - -Following the explicit rules we just determined in Step 2, let us visually check the trading signals that are produced on a price chart. This is an informal process, meant to achieve two results: first, we want to see whether our idea has been stated properly; and second, before writing complicated computer code, we want some proof that the idea is a potentially profitable one. - -## **STEP 4: FORMALLY TEST IT WITH A COMPUTER** - -Now its time to convert our logic into computer code. For my own work, I use a program called TradeStation®, Omega Research, Inc. in Miami, FL. TradeStation is the most comprehensive technical analysis software package available for formulating and testing trading systems. It brings together everything from the visualization of your idea, to assistance in trading your system in real time. - -Writing code in any computer language is no easy task and TradeStation's EasyLanguage™ is no exception. The job with EasyLanguage, however, is greatly simplified because of the program's user friendly editor and the inclusion of many built in functions and plenty of sample code. See Figure C.1. - -Once our program has been written, we then move into the testing phase. To begin with, we must choose one or more data series to test. For stock [traders](#page-444-0) this is an easy task. Futures traders, however, are faced with contracts that expire after a relatively short period of time. I like to do my initial testing - -using a continuous (spread adjusted) price series popularized by Jack Schwager. (*Schwager on Futures: Technical Analysis*, Wiley, 1996.) If those results look promising, I then move on to actual contracts. - -Next, we must decide how much data to use when building our system. I use the entire data series, without saving any for out-of-sample testing (building your system on part of the data and then testing it on the remaining "unseen" data). Many experts would disagree with this approach, but I believe it to be the best with my methodology that relies on good solid concepts, virtually no optimization, and a testing procedure that covers a wide range of parameter sets and markets. I start with a methodology that I believe to be sound and then test it to either prove or disprove my theory. I have found that most individuals do the reverse, they test a data series to arrive at a trading system. - -I do not account for transaction costs (slippage and commissions) when testing systems, but instead factor them in at the end. I believe that this keeps the evaluation process more pure and allows my results to remain useful should certain assumptions change in the future. - -I require my systems to work across: - -**Different sets of parameters.** If I were considering using a 5/20 moving average crossover system, then I would expect 6/18, 6/23, 4/21, and 5/19 to also perform reasonably well. If not, I immediately become skeptical of the 5/20 results. - -**Figure C.1** (*EasyLanguage Code): This EasyLanguage code was written using TradeStation's Power Editor™. It has the look—and power—of a full blown programming language. See Figures C.2 and C.3 for the results on this trend following system described by Martin Zweig.* - -- **Different periods of time** (e.g. 1990-95 and [1981-86\).](#page-447-0) A s[ystem](#page-447-1) that tests well in the Japanese Yen over a recent five year period should also test reasonably well over any other five year interval. This is another area where I appear to hold the minority point of view. -- **Many different markets.** A system that has worked well in crude oil should also work well in heating oil and unleaded gasoline over the same period of time. If not, I will look for an explanation and will usually discard the system. I go even further than this, however, and test that same system across my entire database of markets, expecting it to - -perform well in the majority of them. - -Once our testing is complete, let us visually inspect the computer generated trading signals on a price chart to ensure that the system does what we intended it to do. TradeStation facilitates this process by placing buy and sell arrows directly on the chart for us! If the system does not do what it is supposed to do, we need to make the necessary corrections to the code and test it again. Keep in mind that very few ideas will test out profitably, usually less than 5%. And, for one reason or another, most of these "successful" ideas will not even be tradable. - -### **STEP 5: EVALUATE RESULTS** - -Let us try to understand the concept behind our trading system. Does it make sense or is it just a coincidence? Analyze the equity curve. Can we live through the drawdowns? Evaluate the system on a trade-by-trade basis. What happens if a signal is a bad one? How quickly does the system exit from losers? How long does it stay with the winners? Make sure we are completely comfortable with the test results, otherwise we will not be able to trade this system in real time. - -Three key TradeStation statistics to analyze are: - -- **Profit factor.** Equals *Gross profit* on winning trades/Gross *loss* on losing trades. This statistic tells us how many dollars our system made for every \$1 it lost, and is a measure of risk. Long term traders should aim for profit factors of 2.00 or higher. Short term traders can accept slightly lower numbers. -- **Avg trade (win & loss).** This is our system's mathematical expectation. It should at least be high enough to cover transaction costs (slippage and commissions); otherwise we will be losing money. -- **Max intraday drawdown.** This is the biggest drop, in dollar terms, from an equity peak to an equity trough. I prefer to do this calculation on a percentage basis. I also differentiate between drawdowns from a standing start (where I am losing money from my own pocket) versus drawdowns from an equity peak (where I am giving back profits taken from the markets). I am usually more lenient with the latter. - -### **MONEY MANAGEMENT** - -Money management, while outside the scope of this appendix, is an extremely - -important topic. It is the key to profitable trading, every bit as important as a good trading system. - -Money management techniques should be well thought out. Accept the fact that losses are part of the game. Control your downside and profits will take care of themselves. - -In this area, practice diversification as much as possible. Diversification will enable you to increase your returns while holding your risk constant, or decrease your risk while holding your returns constant. Diversify among markets, systems, parameters, and time frames. - -### **CONCLUSION** - -We have discussed the basic philosophy of trading systems and why objective is better than subjective. We covered the three main benefits of a computerized approach and designed a 5 step plan for building a trading system. And last, but not least, we touched upon the importance of money management and diversification. - -Trading systems can improve your performance and help to make you a successful trader. The reasons for that are clear: - -- they force you to do your homework *before* making a trade -- they provide a disciplined framework, making it easier for you to follow the rules -- they enable you to increase your level of diversification - -With lots of hard work and dedication, anyone can build a successful trading system. It is not easy, but it certainly is within reach. As with most things in life, what you get out of this effort will be directly related to what you put into it. (See Figures C.2 and C.3.) - -**Figure C.2** (*Price Chart): This trading system was designed to be applied to a weekly chart of the Value Line Composite Index (VLCI), but also tested well on a daily chart of the VLCI and on both weekly and daily charts in other markets, votes of confidence in the underlying concept. This is the system described in Figure C.1.* - - - -| UMBook Four%Model Value Line Geometric - UNDE-Weekly | | 08/30/61 - 02/08/98 | | -|------------------------------------------------------|----------|---------------------------------|---------------| -| | | Performance Summary: All Trades | | -| Total net profit | 718.01 | Open position P/L | 0.00 | -| Gross profit | 1118.15 | Gross loss | $-400.14$ | -| Total # of trades | 137 | Percent profitable | 49% | -| Number winning trades | 67 | Number losing trades | 70 | -| Largest winning trade | 78.06 | Largest losing trade | $-15.95$ | -| Average winning trade | 16.69 | Average losing trade | \$
$-5.72$ | -| Ratio avg win/avg loss | 2.92 | Avg trade(win & loss) | 5.24 | -| Max consec, winners | | Max consec. losers | | -| Avg # bars in winners | 21 | Avg # bars in losers | | -| Max intraday drawdown | $-45.01$ | | | -| Profit factor | 2.79 | Max # contracts held | | -| Account size required | 45.01 | Return on account | 1595% | - -**Figure C.3** (*Performance Summary): Here is a 36 year Performance Summary of the system shown in Figures C.1 and C.2. Performance over the last 12 years has been consistent with the overall results. The Profit factor, Avg trade (win and loss) and Max intraday drawdown are all excellent* - -\*This appendix was prepared by Fred G. Schutzman. diff --git a/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/028_D Continuous Futures Contracts.md b/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/028_D Continuous Futures Contracts.md deleted file mode 100644 index d20fef576910b5d1a503a260348be8cc1065cf72..0000000000000000000000000000000000000000 --- a/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/028_D Continuous Futures Contracts.md +++ /dev/null @@ -1,55 +0,0 @@ -# **Appendix D: Continuous Futures Contracts\*** - -With a clean database of "raw" commodity data, there are numerous types of contracts that can be gleaned from the raw data, such as: Nearest Contracts, Next Contracts, Gann Contracts, and Continuous Contracts. Following, are ideas for constructing these futures contracts derivatives. The symbols used are for illustration purposes only. These continuous contracts can be created through the Dial Data Service (56 Pine Street, New York, NY 10005, [212] 422-1600.) - -### **NEAREST CONTRACT** - -A nearest contract is primarily used by traders who just want a large file of continuous data made up of actual trading prices. They are content with the data going to expiration and then rolling over automatically. - -It is quite probable that no one trades the nearest contract within 15 to 30 days of expiration. This is because the liquidity dries up very fast in the latter days of a contract. The number of days before expiration that an individual rolls over to the next contract is a function of the commodity that is being traded (the number of months till the next contract), and the individual's trading style. It is quite conceivable that the same individual will rollover at different times for different commodities. - -When to rollover to the next contract will more than likely be based upon the current contract's volume. When it begins to erode, that is the time to roll forward. - -Therefore, one should have available a choice as to when to rollover his Nearest Contract. Remember, Nearest Contracts are made up of actual data. Here are some examples: Portfolio Manager A is content to rollover at expiration; so all he wants is the "standard" Nearest Contract with symbol TRNE00 (Treasury Bonds). Manager A is probably managing money and needs equity calculations which he can derive from the data. Trader B feels - -that trading in the month of expiration is not liquid enough for him; so he wants his Nearest Contract to roll over 15 days prior to expiration—the symbol could be TRNE15. Analyst C would like to evaluate different rollover dates, so he might like to download multiple Nearest Contracts, such as: TRNE00, TRNE05, TRNE12, and TRNE21 (which roll-over 5, 12, and 21 days before expiration). - -Keep in mind that all of these contracts are Nearest Contracts and contain actual contract data. The only difference is which actual contract the data comes from. - -### **NEXT CONTRACT** - -A Next Contract is a unique offspring of the Nearest Contract. It is exactly the same as the Nearest Contract except that it is *always* the contract that follows the Nearest Contract. In other words, if the Nearest Contract is using December data for T-Bonds (TR), then the Next Contract is using data from the March T-Bond contract. When the December contract expires, the Nearest rolls to the March and the Next rolls to the June contract. This is defined as the Next-1 contract. - -From this concept, another Next Contract is available, called a Next-2. Here, the data is always coming from the contract that is two contracts away from the Nearest Contract. Keeping with the above example, if the Nearest is using data from the December contract, the Next-2 Contract is using data from the June contract. When the December contract expires, the Nearest begins to use data from the March contract and the Next-2 Contract uses data from the September contract and so on. - -Ticker symbols for the Next contracts are: TRNXT1 and TRNXT2. Of course, the actual futures ticker will be used instead of the TR used in this example. - -### **GANN CONTRACT** - -Gann Contracts refer to the use of a specific contract month and rolling over only to the same contract in the next year. For example, July Wheat would be used until the July contract expires, then the Gann Contract would start using data from the July Wheat contract of the next year. - -Examples of ticker symbols for Gann Contracts are: W07GN, GC04GN, JY12GN, etc. (representing July Wheat, April gold, December Japanese yen). - -## **CONTINUOUS CONTRACTS** - -Continuous Contracts were developed to help analysts overcome the problem of liquidity dry up and premium (or discount) gaps in futures data. This becomes a problem whenever an analyst is testing a trading model or system over many years of data. It allows for a continuous stream of data with compensation being made for rollover jumps in price trends. - -## **CONSTANT FORWARD CONTINUOUS CONTRACTS** - -A Constant Forward Continuous Contract looks a constant length of time into the future. It uses more than one contract to do this. A common method is to use the nearest two contracts and do a linear extrapolation of the data. (See Figure D.1.) - -**Figure D.1** *A visual representation of a continuous contract.* - -One possibility is to give the futures trader (as with the Nearest Contracts) the ability to construct his own Constant Forward Continuous Contract. Three things are needed to do this: The commodity symbol, the number of contracts he wants used in the calculation, and the number of weeks into the futures he wants to look. For instance, if he wanted T-Bonds, using 3 of the nearest contracts, and looking 14 weeks into the future, the - -symbol could be: TRCF314. TR is the symbol, CF is for Continuous (Forward Looking), 3 is the number of contracts used, and 14 is the number of weeks the price is projected. - -The mechanics of this are fairly simple. First, a fixed rollover date would need to be set for each commodity. A good one to start with could be 10 days prior to expiration. What is important is that there is a rollover sometime prior to actual expiration. Second, the number of contracts used will never be less than 2 and probably never greater than 4. The number of weeks used should probably always be greater that 3 and could go up to 40 in some cases. - -Example: This is the method used by Commodity Systems, Inc. (See *Perpetual Contract* in Chapter 8.) - -T-Bonds will be used again, because they have a uniform expiration cycle of every 3 months. Let's say a trader wants a Continuous Contract of T-Bonds using the 2 nearest [month](#page-174-0)s and looking 12 weeks into the future (symbol=TRCF212). Today's date is December 1. A graphical portrayal makes this easier to understand (see Figure D.1). The vertical axis is price and the horizontal axis is time. Today's date is marked on the horizontal axis and the expiration dates of the two nearest contracts (December and March), are also marked. He wants to look 12 w[eeks](#page-451-2) into the future so a mark is made 12 weeks from today which is about February 25. The close price of the December contract was 88.25 and the close of the March contract was 87.75 These points are then put above their expiration dates at the corresponding prices. Then a linear extrapolation is made by merely drawing a line between the two points. The slope of this line will vary up and down depending upon the outlook for long term interest rates (in this T-Bond example). In this particular example the outlook is for higher rates because the March futures price is lower than the December price. - -To find the value of the TRCF212 close price for today, find the point on the horizontal axis that is 12 weeks from today (Feb 25th) and go up to the line drawn on the chart. Then from the line go to the right and that is the price of the close for this Constant Forward Continuous Contract (about 87.91). You can also visually see from the chart that the March contract is carrying more weight than the December contract because the point of interception is closer to March. This method can be done on the Open, High, Low, and Close in the exact manner. Of course, a computer does it mathematically; this is just a visual explanation of how a Perpetual Contract is constructed. - -\*This appendix was prepared by Greg Morris. diff --git a/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/029_Glossary.md b/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/029_Glossary.md deleted file mode 100644 index 43954c7004cf6c27a200e107bee39a0d91db798d..0000000000000000000000000000000000000000 --- a/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/029_Glossary.md +++ /dev/null @@ -1,76 +0,0 @@ -# **Glossary** - -- **Advance-decline line**: One of the most widely used indicators to measure the breadth of a stock market advance or decline. Each day (or week) the number of advancing issues is compared to the number of declining issues. If advances outnumber declines, the net total is added to the previous cumulative total. If declines outnumber advances, the net difference is subtracted from the previous cumulative total. The advancedecline line is usually compared to a popular stock average, such as the Dow Jones Industrial Average. They should trend in the same direction. When the advance-decline line begins to diverge from the stock average, an early indication is given of a possible trend reversal. -- **Arms index**: Developed by Richard Arms, this contrary indicator is a ratio of the average volume of declining stocks divided by the average volume of advancing stocks. A reading below 1.0 indicates more volume in rising stocks. A reading above 1.0 reflects more volume in declining issues. A 10 day average of the Arms index over 1.20 is oversold, while a 10 day average below .70 is overbought. -- **Ascending triangle**: A sideways price pattern between two converging trendlines, in which the lower line is rising while the upper line is flat. This is generally a bullish pattern. (*See* Triangles.) -- **Bar chart**: On a daily bar chart, each bar represents one day's activity. The vertical bar is drawn from the day's highest price to the day's lowest price (the range). A tic to the left of the bar marks the opening price, while a tic to the right of the bar marks the closing price. Bar charts can be constructed for any time period, including monthly, weekly, hourly, and minute periods. -- **Bollinger bands**: Developed by John Bollinger, this indicator plots trading bands two standard deviations above and below a 20 period moving average. Prices will often meet resistance at the upper band and support at the lower band. - -- **Breakaway gap**: A price gap that forms on the completion of an important price pattern. A breakaway gap usually signals the beginning of an important price move. (*See* Gaps.) -- **Channel line**: Straight lines drawn parallel to the basic trendline. In an uptrend, the channel line slants up to the right and is drawn above rally peaks; in a downtrend, the channel line is drawn below price troughs and slants down to the right. Prices will often meet resistance at rising channel lines and support at falling channel lines. -- **Confirmation**: Having as many market factors as possible agreeing with one another. For example, if prices and volume are rising together, volume is confirming the price action. The opposite of confirmation is divergence. -- **Continuation patterns**: Price formations that imply a pause or consolidation in the prevailing trend. The most common types are triangles, flags, and pennants. -- **Descending triangle**: A sideways price pattern between two converging trendlines, in which the upper line is declining while the lower line is flat. This is generally a bearish pattern. (*See* Triangles.) -- Divergence: A situation where two indicators are not confirming each other. For example, in oscillator analysis, prices trend higher while an oscillator starts to drop. Divergence usually warns of a trend reversal. (*See* Confirmation.) -- **Double top**: This price pattern displays two prominent peaks. The reversal is complete when the middle trough is broken. The double bottom is a mirror image of the top. -- **Down trendline**: A straight line drawn down and to the right above successive rally peaks. A violation of the down trendline usually signals a reversal of the downtrend. (*See* Trendlines.) -- **Dow Theory**: One of the oldest and most highly regarded technical theories. A Dow Theory buy signal is given when the Dow Industrial and Dow Transportation Averages close above a prior rally peak. A sell signal is given when both averages close below a prior reaction low. -- **Elliott wave analysis**: An approach to market analysis that is based on repetitive wave patterns and the Fibonacci number sequence. An ideal Elliott wave pattern shows a five wave advance followed by a 3-wave - -decline. (*See* Fibonacci numbers). - -- **Envelopes**: Lines placed at fixed percentages above and below a moving average line. Envelopes help determine when a market has traveled too far from its moving average and is overextended. -- **Exhaustion gap**: A price gap that occurs at the end of an important trend, and signals that the trend is ending. (*See* Gaps.) -- **Exponential smoothing**: A moving average that uses all data points, but gives greater weight to more recent price data. (*See* Moving average.) -- **Fibonacci numbers**: The Fibonacci number sequence (1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144…) is constructed by adding the first two numbers to arrive at the third. The ratio of any number to the next larger number is 62 percent, which is a popular Fibonacci retracement number. The inverse of 62 percent, which is 38 percent, is also used as a Fibonacci retracement number. The ratio of any number to the next smaller number is 1.62 percent, which is used to arrive at Fibonacci price targets. (*See* Elliott wave analysis). -- **Flag**: A continuation price pattern, generally lasting less than three weeks, which resembles a parallelogram that slopes against the prevailing trend. The flag represents a minor pause in a dynamic price trend. (*See* Pennant.) -- **Fundamental analysis**: The opposite of technical analysis. Fundamental analysis relies on economic supply and demand information, as opposed to market activity. -- **Gaps**: Gaps are spaces left on the bar chart where no trading has taken place. An up gap is formed when the lowest price on a trading day is higher than the highest high of the previous day. A down gap is formed when the highest price on a day is lower than the lowest price of the prior day. An up gap is usually a sign of market strength, while a down gap is a sign of market weakness. Three types of gaps are breakaway, runaway (also called measuring), and exhaustion gaps. -- **Head and shoulders**: The best known of the reversal patterns. At a market top, three prominent peaks are formed with the middle peak (or head) slightly higher than the two other peaks (shoulders). When the trendline (neckline) connecting the two intervening troughs is broken, the pattern is complete. A bottom pattern is a mirror image of a top and is called an inverse head and shoulders. - -- **Intermarket analysis**: An additional aspect of market analysis that takes into consideration the price action of related market sectors. The four sectors are currencies, commodities, bonds, and stocks. International markets are also included. This approach is based on the premise that all markets are interrelated and impact on one another. -- **Island reversal**: A combination of an exhaustion gap in one direction and a breakaway gap in the other direction within a few days. Toward the end of an uptrend, for example, prices gap upward and then downward within a few days. The result is usually two or three trading days standing alone with gaps on either side. The island reversal usually signals a trend reversal. (*See* Gaps.) -- **Key reversal day**: In an uptrend, this one day pattern occurs when prices open in new highs, and then close below the previous day's closing price. In a downtrend, prices open lower and then close higher. The wider the price range on the key reversal day and the heavier the volume, the greater the odds that a reversal is taking place. (*See* Weekly Reversal.) -- **Line charts**: Price charts that connect the closing prices of a given market over a span of time. The result is a curving line on the chart. This type of chart is most useful with overlay or comparison charts that are commonly employed in intermarket analysis. It is also used for visual trend analysis of open end mutual funds. -- **MACD**: Developed by Gerald Appel, the moving average convergence divergence system shows two lines. The first (MACD) line is the difference between two exponential moving averages (usually 12 and 26 periods) of closing prices. The second (signal) line is usually a 9 period EMA of the first (MACD) line. Signals are given when the two lines cross. -- **MACD histogram**: A variation of the MACD system that plots the difference between the signal and MACD lines. Changes in the spread between the two lines can be spotted faster, leading to earlier trading signals. -- **McClellan oscillator**: Developed by Sherman McClellan, this oscillator is the difference between the 19 day (10% trend) and the 39 day (5% trend) exponentially smoothed averages of the daily net advance decline figures. Crossings above the zero line are positive and below zero are negative. Readings above +100 are overbought while readings below -100 are oversold. - -- **McClellan summation index**: A cumulative sum of all daily McClellan oscillator readings that provides longer range analysis of market breadth. Used in the same way as an advance-decline line. -- **Momentum**: A technique used to construct an overbought-oversold oscillator. Momentum measures price differences over a selected span of time. To construct a 10 day momentum line, the closing price 10 days earlier is subtracted from the latest price. The resulting positive or negative value is plotted above or below a zero line. (*See* Oscillators.) -- **Moving average**: A trend following indicator that works best in a trending environment. Moving averages smooth out price action but operate with a time lag. A simple 10 day moving average of a stock, for example, adds up the last 10 days' closing prices and divides the total by 10. That procedure is repeated each day. Any number of moving averages can be employed, with different time spans, to generate buy and sell signals. When only one average is employed, a buy signal is given when the price closes above the average. When two averages are employed, a buy signal is given when the shorter average crosses above the longer average. There are three types: simple, weighted, and exponentially smoothed averages. -- **On balance volume**: Developed by Joseph Granville, OBV is a running cumulative total of upside and downside volume. Volume is added on up days and subtracted on down days. The OBV line is plotted with the price line to see if the two lines are confirming each other. (*See* Volume.) -- **Open interest**: The number of options or futures contracts that are still unliquidated at the end of a trading day. A rise or fall in open interest shows that money is flowing into or out of a futures contract or option, respectively. In futures markets, rising open interest is considered good for the current trend. Open interest also measures liquidity. -- **Oscillators**: Indicators that determine when a market is in an overbought or oversold condition. When the oscillator reaches an upper extreme, the market is overbought. When the oscillator line reaches a lower extreme, the market is oversold. (*See* Momentum, Rate of change, Relative strength index, and Stochastics.) -- **Overbought**: A term usually used in reference to an oscillator. When an oscillator reaches an upper extreme, it is believed that a market has risen too far and is vulnerable to a selloff. -- **Oversold**: A term usually used in reference to an oscillator. When an - -oscillator reaches a lower extreme, it is believed that a market has dropped too far and is due for a bounce. - -- **Pennant**: This continuation price pattern is similar to the flag, except that it is more horizontal and resembles a small symmetrical triangle. Like the flag, the pennant usually lasts from one to three weeks and is typically followed by a resumption of the prior trend. -- **Percent investment advisors bullish**: This measure of stock market bullish sentiment is published weekly by Investor's Intelligence of New Rochelle, New York. When only 35% of professionals are bullish, the market is considered oversold. A reading of 55% is considered to be overbought. -- **Price patterns**: Patterns that appear on price charts and that have predictive value. Patterns are divided into reversal and continuation patterns. -- **Rate of change**: A technique used to construct an overbought-oversold oscillator. Rate of change employs a price ratio over a selected span of time. To construct a 10 day rate of change oscillator, the last closing price is divided by the closing price 10 days earlier. The resulting value is plotted above or below a value of 100. -- **Ratio analysis**: The use of a ratio to compare the relative strength between two entities. An individual stock or industry group divided by the S&P 500 index can determine whether that stock or industry group is outperforming or underperforming the stock market as a whole. Ratio analysis can be used to compare any two entities. A rising ratio indicates that the numerator in the ratio is outperforming the denominator. Trend analysis can be applied to the ratio line itself to determine important turning points. -- **Relative strength index (RSI)**: A popular oscillator developed by Welles Wilder, Jr. and described in his self published 1978 book, *New Concepts in Technical Trading Systems.* RSI is plotted on a vertical scale from 0 to 100. Values above 70 are considered to be overbought and values below 30, oversold. When prices are over 70 or below 30 and diverge from price action, a warning is given of a possible trend reversal. RSI usually employs 9 or 14 time periods. -- **Resistance**: The opposite of support. Resistance is marked by a previous price peak and provides enough of a barrier above the market to halt a price advance. (*See* Support.) - -- **Retracements**: Prices normally retrace the prior trend by a percentage amount before resuming the original trend. The best known example is the 50% retracement. Minimum and maximum retracements are normally one third and two thirds, respectively. Elliott wave analysis uses Fibonacci retracements of 38% and 62%. -- **Reversal patterns**: Price patterns on a price chart that usually indicate that a trend reversal is taking place. The best known of the reversal patterns are the head and shoulders and double and triple tops and bottoms. -- **Runaway gap**: A price gap that usually occurs around the midpoint of an important market trend. For that reason, it is also called a measuring gap. (*See* Gaps.) -- **Sentiment indicators**: Psychological indicators that attempt to measure the degree of bullishness or bearishness in a market. These are contrary indicators and are used in much the same fashion as overbought or oversold oscillators. Their greatest value is when they reach upper or lower extremes. -- **Simple average**: A moving average that gives equal weight to each day's price data. (*See* Exponential smoothing and Weighted average.) -- **Stochastics**: An overbought-oversold oscillator popularized by George Lane. A time period of 14 is usually employed in its construction. Stochastics uses two lines—%K and its 3 period moving average, %D. These two lines fluctuate in a vertical range between 0 and 100. Readings above 80 are overbought, while readings below 20 are oversold. When the faster %K line crosses above the slower %D line and the lines are below 20, a buy signal is given. When the %K crosses below the %D line and the lines are over 80, a sell signal is given. -- **Support**: A price, or price zone, beneath the current market price, where buying power is sufficient to halt a price decline. A previous reaction low usually forms a support level. -- **Symmetrical triangle**: A sideways price pattern between two converging trendlines in which the upper trendline is declining and lower trendline is rising. This pattern represents an even balance between buyers and sellers, although the prior trend is usually resumed. The breakout through either trendline signals the direction of the price trend. (*See* Ascending and Descending triangles.) - -- **Technical analysis**: The study of market action, usually with price charts, which includes volume and open interest patterns. Also called chart analysis, market analysis and, more recently, visual analysis. -- **Trend**: Refers to the direction of prices. Rising peaks and troughs constitute an uptrend; falling peaks and troughs constitute a downtrend. A trading range is characterized by horizontal peaks and troughs. Trends are generally classified into major (longer than a year), intermediate (one to six months), or minor (less than a month). -- **Trendlines**: Straight lines drawn on a chart below reaction lows in an uptrend, or above rally peaks in a downtrend, that determine the steepness of the current trend. The breaking of a trendline usually signals a trend reversal. -- **Triangles**: Sideways price patterns in which prices fluctuate within converging trendlines. The three types of triangles are the symmetrical, the ascending, and the descending. -- **Triple top**: A price pattern with three prominent peaks, similar to the head and shoulders top, except that all three peaks occur at about the same level. The triple bottom is a mirror image of the top. -- **Up trendline**: A straight line drawn upward and to the right below reaction lows. The longer the up trendline has been in effect and the more times it has been tested, the more significant it becomes. Violation of the trendline usually signals that the uptrend may be changing direction. (*See* Down trendline.) -- **Visual analysis**: A form of analysis that utilizes charts and market indicators to determine market direction. -- **Volume**: The level of trading activity in a stock, option, or futures contract. Expanding volume in the direction of the current price trend confirms the price trend. (*See* On-balance volume.) -- **Weekly reversal**: An upside weekly reversal is present when prices open lower on Monday and then on Friday close above the previous week's close. A downside weekly reversal opens the week higher but closes down by Friday. (*See* Key reversal day.) -- **Weighted average**: A moving average that uses a selected time span, but gives greater weight to more recent price data. (See Moving average.) diff --git a/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/030_Selected Bibliography.md b/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/030_Selected Bibliography.md deleted file mode 100644 index a3dc3ab834ac0a2124f3eb9fde0395814b6dbd6c..0000000000000000000000000000000000000000 --- a/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/030_Selected Bibliography.md +++ /dev/null @@ -1,57 +0,0 @@ -# **Bibliography** - -- Achelis, Steven B., *Technical Analysis from A to Z*, Probus, 1995. -- Allen, R.C., *How to Build a Fortune in Commodities* (Windsor Books, Brightwaters, NY) (Best Books, Chicago) 1972. -- Allen, R.C., *How to Use the 4 Day, 9 Day, and 18 Day Moving Averages to Earn Large Profits in Commodities*, Best Books 1974. -- Arms, Richard W., *The Arms Index (TRIN*), Dow Jones-Irwin, 1989. -- —–*Volume Cycles in the Stock Market: Market Timing Through Equivolume —Charting*, Dow Jones-Irwin, 1983. -- Bressert, Walter J., *The Power of Oscillator/Cycle Combinations*, Bressert & Associates, 1991. -- Burke, Michael L., *Three-Point Reversal Method of Point & Figure Construction and Formations*, Chartcraft, 1990. -- Colby, Robert W. and Thomas A. Meyers, *The Encyclopedia of Technical Market Indicators*, Dow Jones-Irwin, 1988. -- deVilliers, Victor, *The Point and Figure Method of Anticipating Stock Price Movements* (1933: available from Traders' Library, P.O. Box 2466, Ellicott City, MD 20141 [1-800-222-2855]). -- Dewey, Edward R. with Og Mandino, *Cycles, the Mysterious Forces That Trigger Events*, Manor Books, 1973. -- Dorsey, Thomas J., *Point & Figure Charting*, Wiley, 1995. -- Edwards, Robert D. and John Magee, *Technical Analysis of Stock Trends*, 5 thEdition, John Magee, 1966. - -Ehlers, John F., *MESA and Trading Market Cycles*, Wiley, 1992. - -Elder, Alexander Dr., *Trading for a Living*, Wiley, 1993. - -—–*Study Guide* for Trading for a Living. - -- Freund, John E. and Frank J. Williams, *Modem Business Statistics*, Prentice-Hall. -- Frost, Alfred J. and Robert R. Prechter, *Elliott Wave Principle, Key to Stock Market Profits*, New Classics Library, 1978. -- Gann, W.D., *How to Make Profits in Commodities*, revised edition, Lambert-Gann Publishing, orig. 1942, reprinted in 1976. -- Granville, Joseph, *Granville's New Key to Stock Market Profits*, Prentice Hall, Englewood Cliffs, NJ, 1963. -- Hadady, R. Earl, *Contrary Opinion: How to Use It for Profit in Trading Commodity Futures*, Hadady Publications, 1983. -- Hamilton, William Peter, *The Stock Market Barometer.* Robert Rhea developed the theory even further in the *Dow Theory* (New York: Barron's), published in 1932. -- Hurst, J.M., *The Profit Magic of Stock Transaction Timing*, Prentice-Hall, 1970. -- Kaufman, Perry, *Smarter Trading*, McGraw-Hill, 1995. -- Kondratieff, Nikolai, translated by Guy Daniels, *The Long Wave Cycle*, New York: Richardson and Snyder, 1984. (Two other books on the subject are *The K Wave* by David Knox Barker and *The Great Cycle* by Dick Stoken.) -- LeBeau, Charles and David W. Lucas, *Technical Traders Guide to Computer Analysis of the Futures Market*, Business One Irwin, 1992. -- Lukac, Louis, B. Wade Brorsen, and Scott Irwin, *A Comparison of Twelve Technical Trading Systems*, Traders Press, Greenville, SC, 1990. - -McMillan, Lawrence G., *McMillan on Options*, Wiley, 1996. - -Moore, Geoffrey H., *Leading Indicators for the 1990s*, Dow Jones-Irwin, 1990. - -- Morris, Gregory L., *Candlestick Charting Explained*, Dow Jones-Irwin, 1995 (Originally published as CandlePower in 1992). -- Murphy, John J., *Intermarket Technical Analysis*, Wiley, 1991. -- —–*The Visual Investor: How to Spot Market Trends*, Wiley, 1996. -- Neely, Christopher, J., *Technical Analysis in the Foreign Exchange Market: A Layman's Guide*, Federal Reserve Bank of St. Louis Review, September/October 1997. -- Neill, Humphrey B., *The Art of Contrary Thinking*, Caldwell, OH: The Caxton Printers, 1954. -- Nelson, S.A., *ABC of Stock Market Speculation*, First published in 1903, Reprinted in 1978 by Frasier Publishing Co. -- Nison, Steve, *Japanese Candlestick Charting Techniques*, NY Institute of Finance, 1991. -- —–*Beyond Candlesticks*, Wiley, 1994. -- Prechter, Jr., Robert R., *The Major Works of R. N. Elliott*, Gainesville, GA: New Classics Library, 1980. -- Pring, Martin J., *Technical Analysis Explained*, Third Edition, McGraw-Hill, 1991. -- —–*Pring on Market Momentum*, Intl. Institute for Economic Research, 1993. -- Ruggiero, Murray A., *Cybernetic Trading Strategies*, Wiley, 1997. -- Schwager, Jack D., *Schwager on Futures Technical Analysis*, Wiley, 1996. -- Steidlmayer, Peter J., *141 West Jackson*, Steidlmayer Software, 1996. -- —–Steidlmayer on Markets, A New Approach to Trading, Wiley, 1989. -- Teweles, Richard J., Charles V. Harlow, Herbert L. Stone, *The Commodity Futures Game*, McGraw-Hill. -- Wheelan, Alexander, *Study Helps in Point & Figure Technique*, Morgan Rogers & Roberts, 1954, reprinted in 1990 by Traders Press. - -- Wilder J. Welles, *New Concepts in Technical Trading Systems*, Greensboro, NC: Trend Research, 1978. -- Wilkinson, Chris, *Technically Speaking: Tips and Strategies from 16 Top Analysts*, Traders Press, 1997. diff --git a/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/031_Selected Resources.md b/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/031_Selected Resources.md deleted file mode 100644 index 131856e521bed5618948cb866dc9f6624872e5f5..0000000000000000000000000000000000000000 --- a/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/031_Selected Resources.md +++ /dev/null @@ -1,35 +0,0 @@ -# **Selected Resources** - -### **FINANCIAL BOOK DEALERS** - -Fraser Publishing Company, P.O. Box 494, Burlington, VT 05402, (800) 253- 0900 - -Traders Library, PO Box 2466, Ellicott City MD 21041 (800) 272-2855 - -- Traders Press, PO Box 6206, Greenville, SC 29606 (800) 927-8222 TECHNICAL MAGAZINES -- Futures Magazine, 250 S. Wacker Drive, #1150, Chicago, IL 60606 (312) 977-0999 -- Technical Analysis of Stocks & Commodities, 4757 California Avenue S.W., Seattle, WA 98116 (800) 832-4642 - -### **TECHNICAL SOFTWARE** - -- Metastock, Equis International, 3950 S. 700 East, Suite 100, Salt Lake City, UT 84107 (800) 882-3040 -- North Systems, Inc., CandlePower, S. Salem, OR (503) 364-3829 -- SuperCharts and TradeStation, Omega Research, 8700 Flager Street, Suite 250, Miami, FL (305) 551-9991 - -### **MARKET DATA** - -- Dial Data, Track Data Corp., 56 Pine Street, New York, NY 10005 (800) 275- 5544 -- Telescan, 5959 Corporate Drive, Suite 2000, Houston, TX 77036 (800) 324- 8246 - -### **CHART SERVICES** - -Chartcraft, 30 Church Street, New Rochelle, NY 10801 (914) 632-0422 - -- Futures Charts, Commodity Trend Service, PO Box 32309, Palm Beach Gardens, FL 33420 (800) 331-1069 -- SRC Stock Charts, Securities Research Company, 101 Prescott Street, Wellesley Hills, MA 02181 (781) 235-0900 -- The Business Picture, Gilman Research Corporation, PO Box, 20567, Oakland, CA 94620 (510) 655-3103 - -### **TECHNICAL ORGANIZATIONS** - -- International Federation of Technical Analysts (IFTA), PO Box 1347, New York, NY 10009 -- Market Technicians Association (MTA), One World Trade Center, Suite 4447, New York, NY 10048 (212) 912-0995 diff --git a/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/032_Index.md b/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/032_Index.md deleted file mode 100644 index 32c8dda207c8214e2afed880c13c127486e4659d..0000000000000000000000000000000000000000 --- a/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/032_Index.md +++ /dev/null @@ -1,75 +0,0 @@ -# **INDEX** - -The page numbers in this index refer to the printed version of this book. To find the corresponding locations in the text of this digital version, please use the "search" function on your e-reader. Note that not all terms may be searchable. - -Abandoned Baby candle pattern, 312 *ABC of Stock Speculation, The* (Nelson), 24 Acampora, Ralph, 457 Adaptive moving average (AMA), 222 Advance Block candle pattern, 315 Advance-decline (AD) line, 436 AD divergence, 437 daily vs. weekly AD lines, 437 variations in, 437-438 Advanced technical indicators, 463-473 Demand Index (DI), 463-466, 473 Herrick Payoff Index (HPI), 466-468 Keltner channels, 470-472 starc bands, 469-470 Allen, R.C., 204 Alpha cycles, 359 Analysis vs. timing, 6-7 Appel, Gerald, 252 Arithmetic scale, 39-40 Arms Index (TRIN), 444, 445 Open Arms, 446 smoothing, 445-446 TICK vs., 444 Arms, Richard, 444, 448 Art charting, 11 *Art of Contrary Thinking, The* (Neill), 258 Ascending triangle, 130, 131, 136-138, 331 - -as bottoming pattern, 138 bullish breakout, 136-137 measuring technique, 137-138 volume pattern, 140 Asset allocation, 409-410 Average, True Range, 469 Barker, David Knox, 359 Bar charts, 35, 40-46 compared to point and figure charts, 266-270 futures open interest, 35, 42-44 volume, 35, 41-42 Behavioral Finance, use of term, 21, 459 Belt Hold candle pattern, 310 Beta cycles, 359 Blowoffs, 175 Bollinger Bands, 209-211, 221 using as targets, 210 Bollinger Bands and volatility, 211 Bollinger, John, 209 Bolton, A. Hamilton, 319 Bottom failure swings, 242-243 Bottom reversal day, 91, 92 Breakaway candle pattern, 313 Breakaway gaps, 94-95 Breakouts, tactics on, 400-401 Bressert, Walt, 359, 374, 375 Broadening formation, 130, 140-141 Brooks, John, 457 Bullish speedline, constructing, 88-89 Bull trap, 122 Buy-and-hold strategy: and futures, 7 and Random Walk Theory, 16 Buy limit order, 403-404 Buy stop order, 404 Call open interest, 177 Candle pattern analysis, 301-306 computerized, 306 continuation candle patterns, 304-305 - -reversal candle patterns, 301-304 CandlePower charting, 448-449 Candlestick charts, 37-39, 297-299, 309-317 *See also* Japanese candlesticks Channel line (return line), 80-85 measuring implications, 85 Chart construction, 35-47 arithmetic vs. logarithmic scale, 39-40 candlestick charts, 37-39 of daily bar charts, 36, 40-41 futures open interest, 35, 42-44 volume, 35, 41-42 intraday chart, 35 line charts, 36-37 point and figure charts, 37, 38, 278-282 types of charts available, 36-37 weekly and monthly charts, 35, 45-46 Chart patterns, 185 *Chartcraft Method of Point and Figure Trading, The* (Cohen), 277 Chartered market technician (CMT), 456-457 Charting, 9, 10-12 purpose of, 3 subjectivity of, 11, 16 Charting software, 378-379 Chartist, 10-12 Closing prices, 30-31 Cohen, A.W., 277 Coil, *See* Symmetrical triangle Collins, Charles J., 319 Commitments of Traders (COT) Report, 175-176 and large commercial hedgers, 176 Commodities Futures Trading Commission (CFTC), 175 Commodity Channel Index (CCI), 237-239, 374 Commodity market analysis, 15 Commodity markets, chart of, 10 Commodity Research Bureau Futures, 15 Commodity Systems, Inc., 184 Commodity Trend Service, 177 Complex head and shoulders patterns, 113-115 tactics, 113 Computers: charting software, 378-379 - -*Directional Movement System* (Welles Wilder), 378, 380, 384-387, 390 and ADX, 384-387 *Parabolic System* (Welles Wilder), 378, 380, 381-384, 390 system trading pros/cons, 387-389 tools/indicators, 380 using, 380 TradeStation (Omega Research), 389-390 and trading systems, 377-391 Concealing Baby Swallow candle pattern, 314 Concentration, diversification vs., 396-397 Confirmation, 155-156 Congestion area, 147-150, 274 *Consensus National Commodity Futures Weekly*, 258 Constant Forward Contracts vs. Continuous Contracts, 508-510 Continuation candle patterns, 304-305 Continuation charts for futures, construction of, 182-183 Continuation head and shoulders, 153-155 Continuation patterns, 100-101, 129-156 confirmation, 155-156 continuation head and shoulders, 153-155 divergence, 155-156 triangles, 130-147 *See also* Triangles Continuous futures contracts, 505-510 Continuous Contracts, 507-510 Constant Forward Contracts vs., 508-510 Gann Contract, 507 Nearest Contract, 506 Next Contract, 506-507 Contract details, futures markets, 12 Contrary Opinion, 226, 257-261 combining with other technical tools, 261 interpreting bullish consensus numbers, 258, 260 market's reaction to fundamental news, 260-261 open interest (futures), importance of, 260 and remaining buying/selling power, 259 and strong vs. weak hands, 259 Corrective waves, 320-323, 324-331 flats, 326-329 triangles, 329-331 zig-zags, 324-326 CRB Futures Price Index, 423-424 Crests, 348-351 - -*Cybernetic Trading Strategies* (Ruggiero), 428 Cycles: and 4 week rule, 218-219 and moving averages, 212 *Cycles: The Mysterious Forces That Trigger Events* (Dewey and Mandino), 344 *Cycle Trader*, 375 Daily bar charts, 36, 40-41, 181 horizontal axis, 41-42 open interest, 35, 42-44 vertical axis, 41-42 volume, 35, 41-42 Dark Cloud Cover candle pattern, 302, 311 Day trading, 9 Deliberation candle pattern, 314 Demand Index (DI), 167, 463-466, 473 Descending triangle, 130, 138-140, 331 as a top, 138 volume pattern, 140 Descriptive statistics, 18 deVilliers, Victor, 265 Dewey, Edward R., 344-348 Dial Data Service, 505 *Directional Movement System* (Welles Wilder), 378, 380, 384-387, 390 and ADX, 384-387 Divergence, 27, 155-156, 227 Diversification vs. concentration, 396-397 Dobson, Edward D., 342 Doji candlesticks, 300-301 Doji Star candle pattern, 311, 312 Dominant cycles, 358-360 Donchian, Richard, 215-216, 362 Dorsey, Thomas, 292 Double crossover method, 203-204 Double tops and bottoms, 57, 100, 117-121, 122-124 measuring technique, 120-121 Dow, Charles, 23-24, 265, 460 Dow Jones & Company, 23 Dow Jones Industrial Average, 14, 33, 320, 422, 449-451 Dow Jones Transportation Average, 33 Dow Jones Utility Index, 33 - -Downside Gap Three Methods candle pattern, 316 Downside Tasuki Gap candle pattern, 316 Downtrend, 50-52 Dow Theory, 23-33, 319, 452 applied to futures trading, 32 basic tenets of, 24-30 averages discount everything, 24-25 averages must confirm each other, 27 major trends have three phases, 26-27 market has three trends, 25-26 trend is in effect until it signals reversal, 28-30 volume must confirm trend, 27 closing prices, 30-31 criticisms of, 31-32 lines, 31 stocks as economic indicators, 32 Dragonfly Doji, 301 Dunn & Hargitt's Financial Services, 215 Easy Language (Omega), 390, 498-500 Economic forecasting, 10 Efficient market hypothesis, 19-21, 459 Ehlers, John, 374, 375 Ehrlich Cycle Finder, 363-365 Ehrlich Cycle Forecaster, 365, 366, 375 Ehrlich, Stan, 363 Elder, Alexander, 442 Elliott, R.N., 27, 319 *Elliott Wave Supplement to the Bank Credit Analyst*, 319-320 Elliott Wave Theory, 27, 76, 86, 319-342 alternation, rule of, 331-332 applied to stocks vs. commodities, 340 basic tenets of, 320-323 channeling, 332-334 combining all aspects of, 338-340 connection between Dow Theory and, 324 corrective waves, 320-323, 324-331 flats, 326-329 triangles, 329-331 zig-zags, 324-326 degrees of trend, 320-321 *Elliott Wave Principle*, 320, 342 - -Fibonacci numbers, 212-213, 322-323, 334-335 Fibonacci ratios and retracements, 335-338 Fibonacci time targets, 338 historical background, 319-320 impulse waves, 320 pattern, 320 ratio analysis, 320 time relationships, 320 using with other technical tools, 342 wave 4 as support area, 334 Engulfing candle pattern, 310 Equivolume charting, 447-448 Evening Star candle pattern, 303-304, 312 Exhaustion gaps, 96-97 Exponentially smoothed moving average, 197, 199-200 Extremes, 486-487 Failed head and shoulders pattern, 113-115 Failure swing, 29-31, 242 Fair value, 415 Falling Three Methods candle pattern, 304-305, 315 Fan principle, 74-76 Fibonacci fan lines, 90 Fibonacci numbers, 212-213, 322-323, 334-335 Fibonacci number sequence, 322-323 Fibonacci percentage retracements, 335-338 Fibonacci ratios, 86 and retracements, 335-338 Fibonacci time targets, 338 50% retracement, 85-87 Filtered candle patterns, 306-307 Filters, 71-72, 122 Financial futures, 8 Flagpole, 143-144 Flags, 141-145 construction of, 142-143 measuring implications, 143-144 Flat corrections, 326-329 Flow of funds analysis, 15 Foreign currencies, 8 Foundation for the Study of Cycles, 348, 375 4-9-18 day moving average combination, 204 - -how to use, 205-207 4 week rule, 212, 215-219, 362 Frost, A.J., 320, 342 Fulcrum, use of term, 275 Fundamental forecasting, technical forecasting vs., 5-6 Futures, 8 blowoffs, 175 life span, 12-13 margin requirements, 13 pricing structure, 12 time frame, 14 and timing, 14 *Futures Charts*, 177 Gann Contract, 507 Gann fan lines, 90 Gann, W.D., 87, 90, 183 Gaps, 76 Goldman Sachs Commodity Index, 410 Gould, Edson, 87-88 Granville, Joseph, 165 *Granville's New Key to Stock Market Profits*, 165 Gravestone Doji, 300 *Great Cycle, The*, (Stoken), 359 Greeley, John, 457 Hamilton, William Peter, 24 Hammer candle pattern, 310 Hanging Man candle pattern, 310 Harami candle pattern, 310-311 Harami Cross candle pattern, 311 Harmonicity, principle of, 351, 352, 354 Harmonic relationships, cycles, 212, 218 Head and shoulders, 74, 76 continuation pattern, 153-155 reversal pattern: basic ingredients of, 106 neckline, breaking of, 106 price objective, 108-110 adjusting, 109-110 finding, 108-110 return move, 106-107 - -volume, 107-108 Hedging process, 8 Herrick, John, 466 Herrick Payoff Index (HPI), 167, 466-468 Hirsch, Yale, 373 Histogram, 234-237, 476 Homing Pigeon candle pattern, 315 Horizontal count, 274-275 *How to Build a Fortune in Commodities* (Allen), 204 *How to Use the 4-Day, 9-Day and 18-Day Moving Averages to Earn Larger Profits from Commodities* (Allen), 204 Hurst, J.M., 348, 355-358 Identical Three Crows candle pattern, 314 Impulse waves, 320 Inductive statistics, 18 In Neck Line candle pattern, 317 Interest rate markets, 8 Intermarket analysis, 413-431 bonds: link between commodities and, 418 link between stocks and, 416-417 commodities, link between dollar and, 419-420 deflation scenario, 427-428 dollar and large caps, 422 intermarket correlation, 428-429 intermarket neural network software, 429-430 and mutual funds, 422 program trading, 414, 415-416 relative strength: and individual stocks, 426 and sectors, 424-425 relative strength analysis, 422-426 stock sectors and industry groups, 420-422 top-down market approach, 427 Intermarket correlation, 428-429 Intermarket neural network software, 429-430 *Intermarket Technical Analysis* (Murphy), 414, 430 Intermediate cycle, 359 Intermediate trend, 25, 52-54 Internal trendlines, 90 International Federation of Technical Analysts (IFTA), 457, 458 - -International stock markets, 8, 9 Intraday pivot points, 407-408 Intraday point and figure charts, construction of, 270-273 Intraday price charts, 45, 405-408 Market Profile, 411 Inverse head and shoulders, 110-112 neckline, slope of, 111-112 Inverted Hammer candle pattern, 310 Investor Sentiment Readings, 261-262 Investors Intelligence numbers, 262-263 Island reversal pattern, 97 January Barometer, 373 Japanese candlesticks, 37-39, 297-317 basic candlesticks, 299-301 candle pattern analysis, 301-306 computerized, 306 continuation candle patterns, 304-305 reversal candle patterns, 301-304 candle patterns, 309-317 filtered, 306-307 candlestick charting, 297-299 Doji candlesticks, 300-301 Long Days, 299 Short Days, 299 Spinning Tops, 299-300 Jones, Edward, 23 - -*K Wave, The* (Barker), 359 Kaufman, Perry, 222 Keltner channels, 470-472 Key reversal day, 91 Kicking candle pattern, 313 Kondratieff Wave, 359-360 - -Ladder Bottom candle pattern, 315 Ladder Top candle pattern, 315 Lambert, Donald R., 237, 307 Lane, George, 246 Larry Williams %R, 249 *Leading Indicators for the 1990s* (Moore), 10, 430 Life span, futures contracts 12-13 - -Limit days, 168 Limit order, 403-404 Linearly weighted moving average, 197, 199 Line charts, 36-37 Lines, 31, 57, 147-148 Logarithmic charts, 39-40 Longer range technical forecasting, 9 Long-legged Doji, 300 Long-term charts, 181-194 adjusting for inflation, 186-187 continuation charts for futures, construction of, 182-183 examples of, 188-194 longer range perspective, importance of, 182 long term trends, persistence of, 184-185 and moving averages, 214 patterns on, 185 Perpetual Contract, 184 and trading, 188 Long term cycles, 359 Long term to short term charts, 185-186 *Long Wave Cycle* (Kondratieff), 359 Lukac, Louis, 216 Lunar cycle, 362 McClellan oscillator, 438-439 McClellan, Sherman, 438 McClellan Summation Index, 439-440 Major reversal patterns, 99-128 double tops and bottoms, 100, 117-121 filters, 122 head and shoulders, 100, 103-107 complex, 113-115 as consolidation pattern, 115 failed, 113-115 inverse, 110-112 ideal pattern, variations from, 121-125 price patterns, 100-103 continuation, 100, 129-156 measuring techniques, 101 reversal, 99-128 volume, 100, 107-108 saucers/spikes, 100, 125-127 - -triple tops and bottoms, 100, 115-117 Major trend, 52-54 *Major Works of R.N. Elliott, The*, 320, 342 Managed accounts, 410-411 Mandino, Og, 344 Margin requirements, stocks vs. futures, 13 Market averages, comparing, 435, 449-451 Market breadth, measuring, 433 Market-if-touched (M.I.T.) order, 404 Market order, 403, 404 Market price, as leading indicator of fundamentals, 6 Market Profile, 411, 475-491 graphic, 476-479 defined, 476 longer term market activity, tracking, 486-490 market structure, 479-480 organizational principles, 480-483 auction setting, 480 continuous negotiation, 481 market balance/imbalance, 481 price and value, 482-483 short term trader/long term trader roles, 482 time frames and trader behavior, 481-482 range development and profile patterns, 484-485 Market Technicians Association (MTA), 24, 457 Market Technologies Corporation, 429 Matching High candle pattern, 314 Matching Low candle pattern, 314 Maximum Entropy Spectral Analysis (MESA), 374-375 Maximum retracement parameter, 86 Measured move, 151-153 Measuring gaps, 95-96 Meeting Line candle pattern, 311 Mendelsohn, Louis, 429-430 *MESA and Trading Market Cycles* (Ehlers), 374 Metastock charting software (Equis International), 448 M.I.T. order, 404 Momentum: ascent/descent rates, 230 crossing of zero line, 231-232 measuring, 228-233 momentum line, and price action, 230 - -upper/lower boundary, need for, 232-233 Money management, 393-411, 501 asset allocation, 409-410 combining with technical factors, 403 diversification vs. concentration, 396-397 guidelines for, 395-396 managed accounts, 410-411 mutual funds, 410-411 reward-to-risk ratios, 397-398 trading multiple positions, 398-399 Monthly charts, 35, 45-46, 181-182 Monthly cycle, and moving averages, 212 Monthly reversals, 93, 185 Moore, Geoffrey, 430 Morning Doji Star candle pattern, 312 Morning Star candle pattern, 303, 312 Morris, Greg, 184, 296, 297fn, 306, 448 Moving Average Convergence/Divergence (MACD), 214, 252-255, 374 MACD histogram, 255 Moving average, 195-215 adaptive (AMA), 222 alternatives to, 223 applied to long term charts, 213-215 Bollinger bands, 209-211, 221 using as targets, 210 and volatility, 211 defined, 195-196 double crossover method, 203-204 envelopes, 207-208 exponentially smoothed, 197, 199-200 Fibonacci numbers used as, 212-213 4-9-18 day moving average combination, 204 how to use, 205-207 linearly weighted, 197, 199 optimization, 220-221 as oscillators, 214 and point and figure charts, 294-295 pros/cons of, 214 simple, 197, 199 as smoothing devices with time lag, 197-207 and time cycles, 212 triple crossover method, 204 - -using one, 201-203 using three, 204 using two, 203-204 which prices to average, 197-198 Moving average envelopes, 207-208 Multiple positions, trading, 398-399 Mutual funds, 410-411 and intermarket analysis, 422 NASDAQ composite, 435, 449-451 *Nature's Law—The Secret of the Universe*, 319, 334 Nearest Contract, 506 Near term trend, 52-54 Neill, Humphrey B., 258 Nelson, S.A., 24 Neutral day, 484-486 *New Concepts in Technical Trading Systems* (Wilder), 239, 469 New High-New Low index, 440-442 New York Stock Exchange Index, 449-451 Next Contract, 506-507 Nominality, principle of, 353-355 Nonfailure swing, 30-31 Normal day, 484-486 Normal variation day, 484-486 On-balance volume (OBV), 165-167 One-third retracement, 85-87 On Neck Line candle pattern, 316, 317 Open Arms Index, 446 Open interest, 35, 42-44, 159-162 defined, 159 in futures, 42-44, 159-161 how changes occur in, 160-161 interpreting: in futures, 169-174 general rules for, 161-162 in options, 177 put/call ratios, 178-179 as secondary indicator, 159-162 Oppenheimer Real Assets, 410 Optimization, 220-221, 496 Options, open interest in, 177 - -Options hedging, 8 Oscillators, 223, 225-263 Commodity Channel Index (CCI), 237-239 constructing, using two moving averages, 234-237 Oscillators Contrary Opinion, 257-261 interpretation of, 226-227 Investor Sentiment Readings, 261-262 Investors Intelligence numbers, 262-263 Larry Williams %R, 249 momentum, measuring, 228-233 Moving Average Convergence/Divergence (MACD), 214, 252-255 MACD histogram, 255 moving averages as, 214 rate of change (ROC), measuring, 234 Relative Strength Index (RSI), 239-245 interpreting, 242-245 70 and 30 lines, using to generate signals, 245-246 Stochastic oscillator, 246-249 and trend, 226-228 importance of, 251 usefulness of, 251-252 uses for, 227 *See also* Contrary Opinion Outside day, 92 *Parabolic System* (Welles Wilder), 378, 380, 381-384, 390 Peaks, time between, 125 Pelletier, Robert, 184 Pennants, 141-145 construction of, 142-143 measuring implications, 143-144 Percentage envelopes, 207-208 Percentage retracements, 85-87, 402 Fibonacci, 86, 336-338 Perpetual Contract, 184 Piercing Line candle pattern, 303, 311 Pioneer range, 484 *Point and Figure Charting* (Dorsey), 292 Point and figure charts, 37, 38, 265-296 advantages of, 288 - -bar charts compared to, 266-270 computerized charting, 292-294 horizontal count, 274-275 intraday, construction of, 270-273 moving averages, 294-295 price patterns, 275-277 technical indicators, 292 3 box reversal, 277-282 trading tactics, 286-288 trend analysis and trendlines, 277 vertical count, 286 *Point and Figure Method of Anticipating Stock Price Movements* (deVilliers), 265 *Power of Oscillator/Cycle Combinations* (Bressert), 374, 375 Prechter, Robert, 320, 331, 342 Presidential Cycle, 373 Price action, and shifts in supply and demand, 2 Price channels, 219-220, 332-334 Price filters, 71-72, 122 Price forecasting, 393-394 Price gaps, 94-97, 402 breakaway gaps, 94-95 exhaustion gaps, 96-97 island reversal pattern, 97 runaway (measuring) gaps, 95-96 types of, 94 Price patterns, 57, 100-103, 185 continuation, 100-101, 129-156 measuring techniques, 101 and point and figure charts, 275-277 reversal, 99-128 volume, 100 as confirmation in, 162-164 *See also* Continuation patterns; Reversal patterns Pricing structure, futures, 12 Primary cycle, 359 Primary trends, 25-26 *Profit Magic of Stock Transaction Timing* (Hurst), 348 Program buying, 415 Program selling, 415-416 Program trading, 414, 415-416 Proportionality, principle of, 351, 353 - -Protective stops, 397 Pugh, Burton, 362 Put/call ratios, 178-179 Put open interest, 177 Quantitative analyst, 11 Random Walk Theory, 19-21 and buy-and-hold strategy, 16 Range development and profile patterns, 484-485 Range extension, 486-488 Rate of change (ROC), measuring, 234 Rectangle formation, 147-151 similarities/differences, 151 swings within range, trading, 150-151 volume pattern, 150 Rectangles, 31 Relative strength analysis, 422-426, 450-451 Relative Strength Index (RSI), 239-245, 374 interpreting, 242-245 Return line, 80-85 measuring implications, 82-85 Reversal days, 90-93 Reversal candle patterns, 301-304 Dark Cloud Cover, 302, 311 Evening Star, 303-304, 312 Morning Star, 303, 312 Piercing Line, 302-303, 311 Reversal patterns, 99-128 double tops and bottoms, 100, 117-121 filters, 122 head and shoulders, 100, 103-107 complex, 113-115 as consolidation pattern, 115 failed, 113-115 inverse, 110-112 ideal pattern, variations from, 121-125 saucers/spikes, 100, 125-127 triple tops and bottoms, 100, 115-117 Reward-to-risk ratios, 397-398 Rhea, Robert, 24, 319 Right angle triangles, 138 - -Rising Three Methods candle pattern, 304-305, 315 Ruggiero, Murray, Jr., 428 Runaway gaps, 95-96 Russell 2000, 422, 435, 449-451 Russell, Richard, 24 - -S…P 500, 14, 32, 415-416, 425, 449-451 Saucers, 125-127 Seasonal cycles, 359, 369-372 Secondary trends, 25, 52-54 Self-fulfilling prophecy, and technical analysis, 15-18 Selling climax, 91, 92, 93, 175 Sell limit order, 403-404 Sell stop order, 404 Semilog chart scaling, 188 Sentiment indicators, 15 Separating Lines candle pattern, 315 70 line, using to generate signals, 245-246 Shooting Star candle pattern, 310 Side by Side White Lines candle pattern, 316 Sideways trend, 50-52 Simple moving average, 197, 199 *Smarter Trading* (Kaufman), 222 Speedlines, 87-89 Spikes, 125-127 Spinning Tops, 299-300 Standard deviation, 209, 476 Starc bands, 469-470 Statistical analyst, 11 Steidlmayer, J. Peter, 411, 475fn, 479-480 Stick Sandwich candle pattern, 314 Stochastic oscillator, 246-249, 374 Stock index futures, 8 Stock market analysis, 14-15 *Stock Market Barometer* (Rhea), 24 Stock market cycles, 373 Stock market indicators, 433-452 advance-decline (AD) line, 436 AD divergence, 437 daily vs. weekly AD lines, 437 variations in, 437-438 Arms Index (TRIN), 444, 445 - -Open Arms, 446 smoothing, 445-446 TICK vs., 444 CandlePower charting, 448-449 Equivolume charting, 447-448 McClellan oscillator, 438-439 McClellan Summation Index, 439-440 market averages, comparing, 435, 449-451 market breadth, measuring, 433 New High-New Low index, 440-442 sample data, 434-435 upside vs. downside volume, 443-444 *See also* Advanced technical indicators *Stock Market Timing* (Cohen), 277 Stocks, 8 as economic indicators, 32 life span, 12-13 margin requirements, 13 pricing structure, 12 time frame, 14 and timing, 14 *Stock Trader's Almanac* (Hirsch), 373 Stoller, Manning, 469 Stop limit order, 404 Stop order, 404 Summation, principle of, 351-352 Support and resistance, 55-65, 401 psychology of, 59-61 resistance, defined, 55-56 reversal of roles, 56-59 support, defined, 55 and volume, 60 Swing measurement, 151-153 Symmetrical triangle, 130, 131-135, 331 defined, 132 measuring technique, 135 triangle resolution, time limit for, 133-134 volume, 134-135 Symmetric distribution, 476 Synchronicity, principle of, 351, 353, 354 Technical analysis: applied to time dimensions, 9-10 - -applied to trading mediums, 8 chartered market technician (CMT), 456-457 coordinating with fundamental analysis, 455-456 criticisms of, 15-19 defined, 1 economic forecasting, 10 Federal Reserve approval, 459-460 flexibility/adaptability of, 7-8 flow of funds analysis, 15 global reach of, 458 International Federation of Technical Analysts (IFTA), 457, 458 Market Technicians Association (MTA), 457 names for, 458-459, 460 number three, importance of, 76 philosophy of, 1-22 history repeats itself, 4-5 market action discounts everything, 2-3 prices move in trends, 3-4 and self-fulfilling prophecy, 15-18 sentiment indicators, 15 in stocks and futures, comparison of, 12-14 technical checklist, 454-455 using in timing, 400 *Technical analysis of Stock trends* (Edwards et al.), 33, 448 Technical analyst, 10-12 Technical forecasting, fundamental forecasting vs., 5-6 Technical tools, 15, 374 Technician, 10-12 Telescan, 380 30 line, using to generate signals, 245-246 3% penetration criterion, 71 Three Black Crows candle pattern, 312 3 box reversal point and figure chart, 277-282 chart patterns, 280-282 construction of, 278-282 measuring techniques, 286 trendlines, 282-286 Three Inside Down candle pattern, 313 Three Inside Up candle pattern, 313 Three Line Strike candle pattern, 316 Three Outside Down candle pattern, 313 Three Outside Up candle pattern, 313 - -Three Stars in the South candle pattern, 314 Three White Soldiers candle pattern, 312 Time cycles, 212, 343-375 basic concepts, 348-351 and charting techniques, 355-358 classification of, 359 combining cycle lengths, 361 combining cycles with other technical Tools, 374 crests, 348-351 cyclic principles, 351-353 dominant cycles, 358-360 Ehrlich Cycle Finder, 363-366 and 4 week rule, 212, 215-216, 362 isolating cycles, 363-368 January Barometer, 373 Kondratieff Wave, 359-360 left and right translation, 362-363 Maximum Entropy Spectral Analysis (MESA), 374-375 and moving averages, 212 Presidential Cycle, 365, 373 qualities of, 348-351 seasonal cycles, 359, 369-372 stock market cycles, 373 and trend, 361-362 troughs, 348-351 Time dimensions, technical analysis applied To, 9-10 Time filter, 71 Time Price Opportunity (TPO), 479 Time series analysis, 19 Timing, 393-394 analysis vs., 6-7 using technical analysis in, 400 Top failure swing, 242-243 Top reversal day, 91, 92 Tower, Kenneth, 292-294, 296 Trader's Library, 375 *Trader's Notebook*, 215 TradeStation (Omega Research), 389-390, 497-500 Trading: elements of, 393-394 after periods of success/adversity, 399 Trading cycle, 359, 362 - -*Trading for a Living* (Elder), 442 Trading mediums, technical analysis applied to, 8 Trading multiple positions, 398-399 Trading orders, types of, 403-405 Trading range, 51, 147-150 Trading system: building, 493-503 concept design, 495-497 evaluating results, 500-501 money management, 501 objective rules, 497 testing code, 497-500 trading signals, checking on computer, 497 Trading tactics, 393-394, 400-402 applied to stocks, 409 and point and figure charts, 286-288 timing, using technical analysis in, 400 Trend, 49-98 classifications of, 52-54 definition of, 49 downtrend, 50-52 fan principle, 74-76 Fibonacci fan lines, 90 Gann fan lines, 90 intermediate trend, 52-54 internal trendlines, 90 major trend, 52-54 monthly reversals, 93 near term trend, 52-54 percentage retracements, 85-87 price gaps, 94-97 reversal days, 90-92 sideways trend, 50-52 speed resistance lines, 87-89 support and resistance, 55-65 and time cycles, 361-362 trading range, 51 trendlines, 65-74 uptrend, 50-52 weekly reversals, 93 *See also* Price gaps; Support and resistance; Trendlines Trend day, 484-486 - -Trending vs. trading units, 398-399 Trendlines, 65-74 adjusting, 77-79 breaking of, 68, 71-72, 102 channel line (return line), 80-85 determining significance of, 69 down trendline, 65-66 drawing, 67 how to use, 67-68 internal, 90 measuring implications of, 72-74 and price action, 69 price filters, 71-72 relative steepness of, 76-80 and reversal of roles, 72-73 small penetrations, how to handle, 70-71 tentative vs. valid, 67 3 box reversal point and figure chart, 282-286 up trendline, 65-66 Trend trading, 9 Triangles, 76, 130-147 ascending, 130, 131, 136-138, 331 broadening formation, 130, 140-144 descending, 130, 138-140, 331 and Elliott Wave Theory, 329-331 flags, 141-145 measured move, 153 minimum requirement for, 132 pennants, 141-145 rectangle formation, 147-151 symmetrical, 130, 131-135, 331 time factor in, 140 wedge formation, 146-147, 148 Triangles *See also* Ascending triangle; Descending Triangle; Symmetrical triangle Triple crossover method, 204 triple tops and bottoms, 76, 115-117, 164 Tri-Star candle pattern, 312, 313 Troughs, 348-351 time between, 125 28 day trading cycle, 362 Two Crows candle pattern, 315 - -2 day rule, 71-72 Two-thirds retracement, 85-87 2 week rule, 212 - -*Understanding Fibonacci Numbers* (Dobson), 342 Unique Three River candle pattern, 314 Upside Gap Three Methods candle pattern, 314 Upside Gap Two Crows candle pattern, 314 Upside Tasuki Gap candle pattern, 316 Uptrend, 50-52 UST Securities, 292, 294 - -Value Area, 487, 488-489 Van Nice, Nick, 177 Vantage Point software, 430 Variation, principle of, 353-355 *Visual Investor, The*, 430, 458 Volatility, and Bollinger bands, 211 Volume: on-balance volume (OBV), 165-166 alternatives to, 166-167 on bar charts, 41-42 as confirmation in price patterns, 163-164 defined, 158 degree of penetration, 61-64 head and shoulders reversal pattern, 100, 107-108 interpreting: for all markets, 162-169 general rules for, 161-162 and price, 163-165 and price patterns, 100 round numbers as, 64-65 as secondary indicator, 158-162 and support and resistance, 60 *Volumes Cycles in the Stock Market* (Arms), 448 V-pattern, 125-127 - -*Wall Street Journal, The*, 23-24, 265-266, 434, 436 *Wave Principle, The*, 319 Wedge formation, 146-147, 148 Weekly charts, 35, 45-46, 181-182 Weekly price channel (weekly rule), 215-220 - -Weekly reversals, 93, 185 Weekly rule, 215-220 4 week rule, 212, 219 adjustments to, 217-218 and cycles, 218-219 Wilder, J. Welles, 239, 307, 378, 380, 381-387, 469 Wizard Trading, 216 Wyckoff, R.D., 265 - -Zig-zags, 324-326 - -### *What's next on your reading list?* - -Discover your next great read! - -Get personalized book picks and [up-to-date](http://links.penguinrandomhouse.com/type/prhebooklanding/isbn/9781101659199/display/1) news about this author. - -Sign up now. \ No newline at end of file diff --git a/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/archive/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy.md b/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/archive/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy.md deleted file mode 100644 index 484d2d0c86ca8d850e1486dc3595ae804e364b1f..0000000000000000000000000000000000000000 --- a/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/archive/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy.md +++ /dev/null @@ -1,4641 +0,0 @@ -JOHN J. MURPHY - -#### **NEW YORK INSTITUTE OF FINANCE** - -#### **Published by the Penguin Group** - -**Penguin Group (USA) Inc.** - -#### **375 Hudson Street, New York, New York 10014, USA** - -Penguin Group (Canada), 90 Eglinton Avenue East, Suite 700, Toronto, Ontario M4P 2Y3, Canada (a division of Pearson Penguin Canada Inc.) - -Penguin Books Ltd., 80 Strand, London WC2R 0RL, England - -Penguin Group Ireland, 25 St. Stephen's Green, Dublin 2, Ireland (a division of Penguin Books Ltd.) Penguin Group (Australia), 250 Camberwell Road, Camberwell, Victoria 3124, Australia (a division of Pearson Australia Group Pty. Ltd.) - -Penguin Books India Pvt. Ltd., 11 Community Centre, Panchsheel Park, New Delhi—110 017, India Penguin Group (NZ), 67 Apollo Drive, Rosedale, Auckland 0632, New Zealand (a division of Pearson New Zealand Ltd.) - -Penguin Books (South Africa) (Pty.) Ltd., 24 Sturdee Avenue, Rosebank, Johannesburg 2196, South Africa - -Penguin Books Ltd., Registered Offices: 80 Strand, London WC2R 0RL, England - -While the author has made every effort to provide accurate telephone numbers and Internet addresses at the time of publication, neither the publisher nor the author assumes any responsibility for errors or for changes that occur after publication. Further, the publisher does not have any control over and does not assume any responsibility for author or third-party websites or their content. - -Portions of this book were previously published as *Technical Analysis of the Futures Markets* (New York Institute of Finance, 1985). - -Copyright © 1999 by John J. Murphy - -All rights reserved. - -No part of this book may be reproduced, scanned, or distributed in any printed or electronic form without permission. Please do not participate in or encourage piracy of copyrighted materials in violation of the author's rights. Purchase only authorized editions. - -NEW YORK INSTITUTE OF FINANCE and NYIF are trademarks of Executive Tax Reports, Inc., used under license by Penguin Group (USA) Inc. - -First edition: January 1999 - -Library of Congress Cataloging-in-Publication Data - -Murphy, John J. - -Technical analysis of the financial markets / John J. Murphy. p. cm. Rev. ed. of: Technical analysis of the futures markets. c1986. Includes bibliographical references and index. ISBN: 978-1-101-65919-9 1. Futures market. 2. Commodity exchanges. I. Murphy, John J. Technical analysis of the future markets. II. Title. HG6046.M87 1999 98-38531 332.64'4—dc21 CIP - -PUBLISHER'S NOTE: This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. If you require legal advice or - -other expert assistance, you should seek the services of a competent professional. - -Most New York Institute of Finance books are available at special quantity discounts for bulk purchases for sales promotions, premiums, fund-raising, or educational use. Special books, or book excerpts, can also be created to fit specific needs. For details, write: Special Markets, Penguin Group (USA) Inc., 375 Hudson Street, New York, New York 10014. - -Version\_2 - -*To my parents, Timothy and Margaret and To Patty, Clare, and Brian* - -# **Contents** - -**About the Author About the Contributors [Introduction](#page-18-0) [Acknowledgments](#page-19-0)** - -# **1 [Philosophy](#page-22-0) of Technical Analysis** - -Introduction [Philosophy](#page-23-0) or Rationale [Technical](#page-23-1) versus Fundamental Forecasting [Analysis](#page-23-2) versus Timing Flexibility and [Adaptability](#page-26-0) of Technical Analysis [Technical](#page-27-0) Analysis Applied to Different Trading Mediums [Technical](#page-28-0) Analysis Applied to Different Time Dimensions Economic [Forecasting](#page-29-0) [Technician](#page-29-1) or Chartist? A Brief [Comparison](#page-30-0) of Technical Analysis in Stocks and Futures Less [Reliance](#page-30-1) on Market Averages and Indicators Some [Criticisms](#page-31-0) of the Technical Approach [Random](#page-34-0) Walk Theory Universal [Principles](#page-34-1) - -# **2 Dow Theory** - -Introduction Basic [Tenets](#page-40-0) The [Use](#page-40-1) of Closing Prices and the Presence of Lines Some [Critici](#page-41-0)sms of Dow Theory Stocks as [Economic](#page-46-0) Indicators Dow Theory [Applied](#page-47-0) to Futures Trading [Conclusion](#page-48-0) - -# **[3](#page-49-0) Chart Construction** - -Introduction Types of Charts [Available](#page-50-0) [Candlesticks](#page-50-1) [Arithmetic](#page-50-2) versus Logarithmic Scale [Construction](#page-52-0) of the Daily Bar Chart [Volume](#page-53-0) [Futures](#page-54-0) Open Interest [Weekly](#page-55-0) and Monthly Bar Charts [Conclusion](#page-56-0) - -# **[4](#page-60-0) Basic Concepts of Trend** - -Definition of Trend Trend Has Three [Directions](#page-61-0) [Trend](#page-61-1) Has Three Classifications Support and [Resistance](#page-63-0) [Trendlines](#page-64-0) The Fan [Principle](#page-66-0) - -The Importance of the Number Three The Relative Steepness of the Trendline The [Channel](#page-84-0) Line Percentage [Retracements](#page-84-1) Speed [Resistance](#page-88-0) Lines Gann and [Fibonacci](#page-93-0) Fan Lines Internal [Trendlines](#page-95-0) [Reversal](#page-97-0) Days Price [Gaps](#page-98-0) [Conclusion](#page-98-1) - -# **[5](#page-104-0) Major Reversal Patterns** - -Introduction Price [Patterns](#page-105-0) Two [Types](#page-105-1) of Patterns: Reversal and Continuation The [Head](#page-105-2) and Shoulders Reversal Pattern The [Importance](#page-106-0) of Volume Finding a Price [Objective](#page-108-0) The [Inverse](#page-112-0) Head and Shoulders [Complex](#page-112-1) Head and Shoulders Patterns Triple Tops and [Bottoms](#page-114-0) Double Tops and [Bottoms](#page-116-0) [Variations](#page-118-0) from the Ideal Pattern [Saucers](#page-120-0) and Spikes [Conclusion](#page-123-0) - -# **[6](#page-128-0) Continuation Patterns** - -Introduction - -Triangles The Symmetrical Triangle The [Asce](#page-130-0)nding Triangle The [Descending](#page-131-0) Triangle The [Broadening](#page-134-0) Formation Flags and [Pennants](#page-136-0) The Wedge [Formation](#page-138-0) The [Rectangle](#page-139-0) Formation The [Measured](#page-143-0) Move The [Continuation](#page-144-0) Head and Shoulders Pattern [Confirmation](#page-148-0) and Divergence [Conclusion](#page-149-0) - -# **[7](#page-152-0) Volume and Open Interest** - -Introduction [Volume](#page-153-0) and Open Interest as Secondary Indicators [Interpretatio](#page-153-1)n of Volume for All Markets [Interpretation](#page-153-2) of Open Interest in Futures [Summary](#page-157-0) of Volume and Open Interest Rules Blowoffs and Selling [Climaxes](#page-163-0) [Commitments](#page-168-0) of Traders Report Watch the [Commercials](#page-168-1) Net Trader [Positions](#page-168-2) Open [Interest](#page-169-0) In Options [Put/Call](#page-170-0) Ratios [Combine](#page-170-1) Option Sentiment With Technicals [Conclusion](#page-171-0) - -# **8 Long Term Charts** - -Introduction The [Importance](#page-174-0) of Longer Range Perspective [Construction](#page-174-1) of Continuation Charts for Futures The Perpetual [Contract™](#page-174-2) Long Term Trends Dispute [Randomness](#page-175-0) [Patterns](#page-176-0) on Charts: Weekly and Monthly Reversals Long Term to Short Term [Charts](#page-177-0) Why Should Long Range Charts Be [Adjusted](#page-177-1) for Inflation? Long Term Charts Not [Intended](#page-177-2) for Trading Purposes [Examples](#page-178-0) of Long Term Charts - -# **9 Moving [Averages](#page-180-0)** - -Introduction The Moving [Average:](#page-186-0) A Smoothing Device with a Time Lag [Moving](#page-186-1) Average Envelopes [Bollinger](#page-187-0) Bands Using [Bollinger](#page-196-0) Bands as Targets Band [Width](#page-197-0) Measures Volatility Moving [Averages](#page-199-0) Tied to Cycles [Fibonacci](#page-199-1) Numbers Used as Moving Averages Moving [Averages](#page-200-0) Applied to Long Term Charts The [Weekly](#page-201-0) Rule To [Optimize](#page-201-1) or Not [Summary](#page-203-0) The [Adaptive](#page-208-0) Moving Average [Alternativ](#page-208-1)es to the Moving Average - -# **10 Oscillators and Contrary Opinion** - -Introduction Oscillator Usage in [Conjunction](#page-211-0) with Trend [Measuring](#page-211-1) Momentum [Measuring](#page-212-0) Rate of Change (ROC) [Constructing](#page-213-0) an Oscillator Using Two Moving Averages [Commodity](#page-218-0) Channel Index The Relative [Strength](#page-218-1) Index (RSI) [Using](#page-221-0) the 70 and 30 Lines to Generate Signals [Stochastics](#page-223-0) (K%D) Larry [Williams](#page-229-0) %R The [Importance](#page-229-1) of Trend When [Oscillators](#page-232-0) are Most Useful Moving [Average](#page-233-0) Convergence/Divergence (MACD) MACD [Histogram](#page-234-0) [Combine](#page-235-0) Weeklies and Dailies The [Principle](#page-237-0) of Contrary Opinion in Futures Investor [Sentiment](#page-238-0) Readings Investors [Intelligence](#page-239-0) Numbers - -# **[11](#page-243-0) Point and Figure Charting** - -Introduction The Point and Figure [Versus](#page-245-0) the Bar Chart [Construction](#page-245-1) of the Intraday Point and Figure Chart The [Horizontal](#page-245-2) Count Price [Patterns](#page-249-0) 3 Box [Reversal](#page-252-0) Point and Figure Charting [Construction](#page-253-0) of the 3 Point Reversal Chart - -The Drawing of Trendlines Measuring Techniques [Trading](#page-260-0) Tactics [Advantages](#page-263-0) of Point and Figure Charts P&F [Technical](#page-264-0) Indicators [Computerized](#page-265-0) P&F Charting P&F Moving [Averages](#page-269-0) [Conclusion](#page-269-1) - -# **[12](#page-272-0) Japanese Candlesticks** - -Introduction [Candlestick](#page-273-0) Charting Basic [Candle](#page-273-1)sticks [Candle](#page-273-2) Pattern Analysis [Filtered](#page-275-0) Candle Patterns [Conclusion](#page-277-0) Candle [Patterns](#page-282-0) - -# **[13](#page-284-0) Elliott Wave Theory** - -Historical Background Basic [Tenets](#page-293-0) of the Elliott Wave Principle [Connection](#page-293-1) Between Elliott Wave and Dow Theory [Corrective](#page-293-2) Waves The Rule of [Alternation](#page-297-0) [Channeling](#page-298-0) Wave 4 as a [Support](#page-306-0) Area [Fibonacci](#page-307-0) Numbers as the Basis of the Wave Principle [Fibonacci](#page-308-0) Ratios and Retracements - -Fibonacci Time Targets Combining All Three Aspects of Wave Theory Elliott Wave [Applied](#page-312-0) to Stocks Versus Commodities Summary and [Conclusions](#page-312-1) [Reference](#page-314-0) Material - -# **[14](#page-316-0) Time Cycles** - -Introduction [Cycles](#page-317-0) How [Cyclic](#page-317-1) Concepts Help Explain Charting Techniques [Domin](#page-318-0)ant Cycles [Combining](#page-327-0) Cycle Lengths The [Importance](#page-330-0) of Trend Left and Right [Translation](#page-332-0) How to Isolate [Cycles](#page-333-0) [Seasonal](#page-334-0) Cycles Stock [Market](#page-334-1) Cycles The [January](#page-339-0) Barometer The [Presidential](#page-343-0) Cycle [Combining](#page-343-1) Cycles with Other Technical Tools [Maximum](#page-344-0) Entropy Spectral Analysis Cycle Reading and [Software](#page-344-1) - -# **[15](#page-345-0) Computers and Trading Systems** - -Introduction Some [Computer](#page-346-0) Needs [Grouping](#page-346-1) Tools and Indicators [Using](#page-347-0) the Tools and Indicators - -Welles Wilder's Parabolic and Directional Movement Systems Pros and Cons of System Trading Need [Expert](#page-349-0) Help? Test [Systems](#page-355-0) or Create Your Own [Conclusion](#page-356-0) - -# **[16](#page-357-0) Money Management and Trading Tactics** - -Introduction The Three Elements of [Successful](#page-359-0) Trading [Money](#page-359-1) Management [Reward](#page-359-2) to Risk Ratios Trading [Multiple](#page-360-0) Positions: Trending versus Trading Units [What](#page-362-0) to Do After Periods of Success and Adversity [Trading](#page-363-0) Tactics [Combining](#page-363-1) Technical Factors and Money Management Types of [Tradin](#page-364-0)g Orders From Daily Charts to [Intraday](#page-366-0) Price Charts The Use of [Intraday](#page-367-0) Pivot Points Summary of Money [Management](#page-368-0) and Trading Guidelines [Application](#page-370-0) to Stocks Asset [Allocation](#page-371-0) Managed [Accounts](#page-372-0) and Mutual Funds [Market](#page-372-1) Profile - -## **[17](#page-373-0) The Link Between Stocks and Futures: Intermarket Analysis** - -[Intermarket](#page-374-0) Analysis Program Trading: The Ultimate Link The Link Between Bonds and Stocks The Link Between Bonds and Commodities The Link Between [Commodities](#page-377-0) and the Dollar Stock Sectors and [Industry](#page-378-0) Groups The [Dollar](#page-378-1) and Large Caps [Intermarket](#page-380-0) Analysis and Mutual Funds Relative Strength [Analysis](#page-381-0) Relative [Strength](#page-381-1) and Sectors Relative [Strength](#page-382-0) and Individual Stocks [Top-Down](#page-384-0) Market Approach [Deflation](#page-385-0) Scenario [Intermarket](#page-385-1) Correlation [Intermarket](#page-386-0) Neural Network Software [Conclusion](#page-387-0) - -# **[18](#page-388-0) Stock Market Indicators** - -Measuring Market Breadth [Sample](#page-390-0) Data [Comparing](#page-390-1) Market Averages The [Advance](#page-390-2)-Decline Line AD [Divergence](#page-391-0) Daily Versus [Weekly](#page-392-0) AD Lines [Variations](#page-393-0) in AD Line [McClellan](#page-393-1) Oscillator McClellan [Summation](#page-394-0) Index New Highs [Versus](#page-394-1) New Lows New [High-New](#page-395-0) Low Index Upside Versus [Downside](#page-396-0) Volume The Arms Index TRIN Versus TICK [Smoothing](#page-399-0) the Arms Index Open [Arms](#page-400-0) [Equivolume](#page-400-1) Charting [Candlepowe](#page-401-0)r [Comparing](#page-401-1) Market Averages [Conclusion](#page-403-0) - -# **[19](#page-406-0) Pulling It All Together—A Checklist** - -Technical Checklist How to Coordinate Technical and [Fundamental](#page-407-0) Analysis [Chartered](#page-407-1) Market Technician (CMT) Market [Technicians](#page-409-0) Association (MTA) The Global Reach of [Technical](#page-409-1) Analysis [Technical](#page-410-0) Analysis by Any Name Federal Reserve Finally [Approves](#page-410-1) [Conclusion](#page-411-0) - -# **[A](#page-412-0)Advanced Technical Indicators** - -Demand Index (DI) [Herrick](#page-415-0) Payoff Index (HPI) Starc [Bands](#page-415-1) and Keltner Channels [Formula](#page-417-0) for Demand Index - -# **[B](#page-422-0) Market Profile** - -Introduction - -Market Profile Graphic Market Structure Market Profile [Organizi](#page-426-0)ng Principles Range [Developm](#page-427-0)ent and Profile Patterns [Tracking](#page-428-0) Longer Term Market Activity [Conclusion](#page-432-0) - -# **[C](#page-437-0)The Essentials of Building a Trading System** - -5-Step Plan Step 1: Start with a [Concept](#page-439-0) (an Idea) [Step](#page-440-0) 2: Turn Your Idea into a Set of Objective Rules Step 3: [Visually](#page-440-1) Check It Out on the Charts Step 4: Formally Test It with a [Computer](#page-442-0) Step 5: [Evaluate](#page-442-1) Results Money [Management](#page-442-2) [Conclusion](#page-445-0) - -# **[D](#page-446-0)Continuous Futures Contracts** - -Nearest Contract Next [Contract](#page-449-0) Gann [Contract](#page-449-1) [Continuous](#page-450-0) Contracts [Constant](#page-450-1) Forward Continuous Contracts **[Glossary](#page-451-0) Selected [Bibliography](#page-451-1) [Selected](#page-453-0) Resources [Index](#page-461-0)** - -# **About the Author** - -**John J. Murphy** has been applying technical analysis for three decades. He was formerly Director of Futures Technical Research and the senior managed account trading advisor with Merrill Lynch. Mr. Murphy was the technical analyst for CNBC-TV for seven years. He is the author of three books, including *Technical Analysis of the Futures Markets*, the predecessor to this book. His second book, *Intermarket Technical Analysis*, opened up a new branch of analysis. His third book, *The Visual Investor*, applies technical work to mutual funds. - -In 1996, Mr. Murphy founded MURPHYMORRIS, Inc., along with software developer Greg Morris, to produce interactive educational products and online analysis for investors. Their Web site address is: - -#### www.murphymorris.com. - -He is also head of his own consulting firm, JJM Technical Advisors, located in Oradell, New Jersey. - -# **About the Contributors** - -**Thomas E. Aspray** (Appendix A) is a Capital Market Analyst with Princeton Economic Institute Ltd., located in Princeton, New Jersey. Mr. Aspray has been trading markets since the 1970s. Many of the techniques he pioneered in the early 1980s are now [used](#page-415-0) by other professional traders. - -**Dennis C. Hynes** (Appendix B) is Managing Director and cofounder of R.W. Pressprich & Co., Inc., a fixed income broker/dealer located in New York City. He also serves as the firm's Chief Market Strategist. Mr. Hynes is a futures and options trader and a [CTA](#page-424-0) (Commodity Trading Advisor). He has an MBA in Finance from the University of Houston. - -**Greg Morris** (Chapter 12 and Appendix D) has been developing trading systems and indicators for 20 years for investors and traders to be used with major technical analysis software programs. He is the author of two books on candlestick charting (see [Chapt](#page-273-0)er 12). In [August](#page-449-0) 1996, Mr. Morris teamed with John Murphy to found MURPHYMORRIS Inc., a Dallas-based firm dedicated to educating investors. - -**Fred G. Schutzman, [CMT](#page-273-0)** (Appendix C) is the President and Chief Executive Officer of Briarwood Capital Management, Inc., a New York-based Commodity Trading Advisor. He is also responsible for technical research and trading system development at [Emcor](#page-439-0) Eurocurrency Management Corporation, a risk management consulting firm. Mr. Schutzman is a member of the Market Technicians Association and is currently serving on their Board of Directors. - -# **Introduction** - -I had no idea when *Technical Analysis of the Futures Markets* was published in 1986 that it would create such an impact on the industry. It has been referred to by many in the field as the "Bible" of technical analysis. The Market Technicians Association uses it as a primary source in their testing process for the Chartered Market Technician program. The Federal Reserve has cited it in research studies that examine the value of the technical approach. In addition, it has been translated into eight foreign languages. I was also unprepared for the long shelf life of the book. It continues to sell as many copies ten years after it was published as it did in the first couple of years. - -It became clear, however, that a lot of new material had been added to the field of technical analysis in the past decade. I added some of it myself. My second book, *Intermarket Technical Analysis* (Wiley, 1991), helped create that new branch of technical analysis, which is widely used today. Old techniques like Japanese candlestick charting and newer ones like Market Profile have become part of the technical landscape. Clearly, this new work needed to be included in any book that attempted to present a comprehensive picture of technical analysis. The focus of my work changed as well. - -While my main interest ten years ago was in the futures markets, my recent work has dealt more with the stock market. That also brought me full circle, since I began my career as a stock analyst thirty years ago. That was also one of the side effects of my being the technical analyst for CNBC-TV for seven years. That focus on what the general public was doing also led to my third book, *The Visual Investor* (Wiley, 1996). That book focused on the use of technical tools for market sectors, primarily through mutual funds, which have become extremely popular in the 1990s. - -Many of the technical indicators that I wrote about ten years ago, which had been used primarily in the futures markets, have been incorporated into stock market work. It was time to show how that was being done. Finally, like any field or discipline, writers also evolve. Some things that seemed very important to me ten years ago aren't as important today. As my work has evolved into a broader application of technical principles to all financial - -markets, it seemed only right that any revision of that earlier work should reflect that evolution. - -I've tried to retain the structure of the original book. Therefore, many of the original chapters remain. However, they have been revised with new material and updated with new graphics. Since the principles of technical analysis are universal, it wasn't that difficult to broaden the focus to include all financial markets. Since the original focus was on futures, however, a lot of stock market material has been added. - -Three new chapters have been added. The two previous chapters on point and figure charting (Chapters 11 and 12) have been merged into one. A new Chapter 12 on candlestick charting has been inserted. Two additional chapters have also been added at the end of the book. Chapter 17 is an introduction to my work on [intermarke](#page-245-0)t an[aly](#page-273-0)sis. Chapter 18 deals with stock market [indicator](#page-273-0)s. We've replaced the previous appendices with new ones. Market Profile is introduced in Appendix B. The other [appendice](#page-374-0)s show some of the more advanced technical indicators and ex[plain](#page-390-0) how to build a technical trading system. There's also a glossary. - -I approached this revision with [some](#page-424-0) trepidation. I wasn't sure redoing a book considered a "classic" was such a good idea. I hope I've succeeded in making it even better. I approached this work from the perspective of a more seasoned and mature writer and analyst. And, throughout the book, I tried to show the respect I have always had for the discipline of technical analysis and for the many talented analysts who practice it. The success of their work, as well as their dedication to this field, has always been a source of comfort and inspiration to me. I only hope I did justice to it and to them. - -*John Murphy* - -# **Acknowledgments** - -The person who deserves the most credit for the second edition of this book is Ellen Schneid Coleman, Executive Editor at Simon & Schuster. She convinced me that it was time to revise *Technical Analysis of the Futures Markets* and broaden its scope. I'm glad she was so persistent. Special thanks go to the folks at Omega Research who provided me with the charting software I needed and, in particular, Gaston Sanchez who spent a lot of time on the phone with me. The contributing authors—Tom Aspray, Dennis Hynes, and Fred Schutzman—added their particular expertise where it was needed. In addition, several analysts contributed charts including Michael Burke, Stan Ehrlich, Jerry Toepke, Ken Tower, and Nick Van Nice. The revision of Chapter 2 on Dow Theory was a collaborative effort with Elyce Picciotti, an independent technical writer and market consultant in New Orleans, Louisiana. Greg Morris deserves special mention. He wrote the chapter on [candlestic](#page-40-0)k charting, contributed the article in Appendix D, and did most of the graphic work. Fred Dahl of Inkwell Publishing Services (Fishkill, NY), who handled production of the first edition of this book, did this one as well. It was great working with him again. - -### **INTRODUCTION** - -Before beginning a study of the actual techniques and tools used in technical analysis, it is necessary first to define what technical analysis is, to discuss the philosophical premises on which it is based, to draw some clear distinctions between technical and fundamental analysis and, finally, to address a couple of criticisms frequently raised against the technical approach. - -The author's strong belief is that a full appreciation of the technical approach must begin with a clear understanding of what technical analysis claims to be able to do and, maybe even more importantly, the philosophy or rationale on which it bases those claims. - -First, let's define the subject. *Technical analysis is the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends.* The term "market action" includes the three principal sources of information available to the technician—price, volume, and open interest. (Open interest is used only in futures and options.) The term "price action," which is often used, seems too narrow because most technicians include volume and open interest as an integral part of their market analysis. With this distinction made, the terms "price action" and "market action" are used interchangeably throughout the remainder of this discussion. - -### **PHILOSOPHY OR RATIONALE** - -There are three premises on which the technical approach is based: - -- 1. Market action discounts everything. -- 2. Prices move in trends. -- 3. History repeats itself. - -#### **Market Action Discounts Everything** - -The statement "market action discounts everything" forms what is probably the cornerstone of technical analysis. Unless the full significance of this first premise is fully understood and accepted, nothing else that follows makes much sense. The technician believes that anything that can possibly affect the price—fundamentally, politically, psychologically, or otherwise—is actually reflected in the price of that market. It follows, therefore, that a study of price action is all that is required. While this claim may seem presumptuous, it is hard to disagree with if one takes the time to consider its true meaning. - -All the technician is really claiming is that price action should reflect shifts in supply and demand. If demand exceeds supply, prices should rise. If supply exceeds demand, prices should fall. This action is the basis of all economic and fundamental forecasting. The technician then turns this statement around to arrive at the conclusion that if prices are rising, for whatever the specific reasons, demand must exceed supply and the fundamentals must be bullish. If prices fall, the fundamentals must be bearish. If this last comment about fundamentals seems surprising in the context of a discussion of technical analysis, it shouldn't. After all, the technician is indirectly studying fundamentals. Most technicians would probably agree that it is the underlying forces of supply and demand, the economic fundamentals of a market, that cause bull and bear markets. The charts do not in themselves cause markets to move up or down. They simply reflect the bullish or bearish psychology of the marketplace. - -As a rule, chartists do not concern themselves with the reasons why prices rise or fall. Very often, in the early stages of a price trend or at critical turning points, no one seems to know exactly why a market is performing a certain way. While the technical approach may sometimes seem overly simplistic in its claims, the logic behind this first premise—that markets discount everything—becomes more compelling the more market experience one gains. It follows then that if everything that affects market price is ultimately reflected in market price, then the study of that market price is all that is necessary. By studying price charts and a host of supporting technical indicators, the chartist in effect lets the market tell him or her which way it is most likely to go. The chartist does not necessarily try to outsmart or outguess the market. All of the technical tools discussed later on are simply techniques used to aid the chartist in the process of studying market action. The chartist knows there are reasons why markets go up or down. He or she just doesn't - -believe that knowing what those reasons are is necessary in the forecasting process. - -#### **Prices Move in Trends** - -The concept of trend is absolutely essential to the technical approach. Here again, unless one accepts the premise that markets do in fact trend, there's no point in reading any further. The whole purpose of charting the price action of a market is to identify trends in early stages of their development for the purpose of trading in the direction of those trends. In fact, most of the techniques used in this approach are trend-following in nature, meaning that their intent is to identify and follow existing trends. (See Figure 1.1.) - -**Figure 1.1** *Example of an uptrend. Technical analysis is based on the premise that markets trend and that those trends tend to persist.* - -There is a corollary to the premise that prices move in trends—*a trend in motion is more likely to continue than to reverse.* This corollary is, of course, an adaptation of Newton's first law of motion. Another way to state this corollary is that a trend in motion will continue in the same direction until it reverses. This is another one of those technical claims that seems almost circular. But the entire trend-following approach is predicated on riding an existing trend until it shows signs of reversing. - -### **History Repeats Itself** - -Much of the body of technical analysis and the study of market action has to - -do with the study of human psychology. Chart patterns, for example, which have been identified and categorized over the past one hundred years, reflect certain pictures that appear on price charts. These pictures reveal the bullish or bearish psychology of the market. Since these patterns have worked well in the past, it is assumed that they will continue to work well in the future. They are based on the study of human psychology, which tends not to change. Another way of saying this last premise—that history repeats itself—is that the key to understanding the future lies in a study of the past, or that the future is just a repetition of the past. - -### **TECHNICAL VERSUS FUNDAMENTAL FORECASTING** - -While technical analysis concentrates on the study of market action, fundamental analysis focuses on the economic forces of supply and demand that cause prices to move higher, lower, or stay the same. The fundamental approach examines all of the relevant factors affecting the price of a market in order to determine the intrinsic value of that market. The intrinsic value is what the fundamentals indicate something is actually worth based on the law of supply and demand. If this intrinsic value is under the current market price, then the market is overpriced and should be sold. If market price is below the intrinsic value, then the market is undervalued and should be bought. - -Both of these approaches to market forecasting attempt to solve the same problem, that is, to determine the direction prices are likely to move. They just approach the problem from different directions. *The fundamentalist studies the cause of market movement, while the technician studies the effect.* The technician, of course, believes that the effect is all that he or she wants or needs to know and that the reasons, or the causes, are unnecessary. The fundamentalist always has to know why. - -Most traders classify themselves as either technicians or fundamentalists. In reality, there is a lot of overlap. Many fundamentalists have a working knowledge of the basic tenets of chart analysis. At the same time, many technicians have at least a passing awareness of the fundamentals. The problem is that the charts and fundamentals are often in conflict with each other. Usually at the beginning of important market moves, the fundamentals do not explain or support what the market seems to be doing. It is at these critical times in the trend that these two approaches seem to differ the most. Usually they come back into sync at some point, but often too late for the trader to act. - -One explanation for these seeming discrepancies is that *market price* - -*tends to lead the known fundamentals.* Stated another way, *market price acts as a leading indicator of the fundamentals* or the conventional wisdom of the moment. While the known fundamentals have already been discounted and are already "in the market," prices are now reacting to the unknown fundamentals. Some of the most dramatic bull and bear markets in history have begun with little or no perceived change in the fundamentals. By the time those changes became known, the new trend was well underway. - -After a while, the technician develops increased confidence in his or her ability to read the charts. The technician learns to be comfortable in a situation where market movement disagrees with the so-called conventional wisdom. A technician begins to enjoy being in the minority. He or she knows that eventually the reasons for market action will become common knowledge. It is just that the technician isn't willing to wait for that added confirmation. - -In accepting the premises of technical analysis, one can see why technicians believe their approach is superior to the fundamentalists. If a trader had to choose only one of the two approaches to use, the choice would logically have to be the technical. Because, by definition, the technical approach includes the fundamental. If the fundamentals are reflected in market price, then the study of those fundamentals becomes unnecessary. Chart reading becomes a shortcut form of fundamental analysis. The reverse, however, is not true. Fundamental analysis does not include a study of price action. It is possible to trade financial markets using just the technical approach. It is doubtful that anyone could trade off the fundamentals alone with no consideration of the technical side of the market. - -### **ANALYSIS VERSUS TIMING** - -This last point is made clearer if the decision making process is broken down into two separate stages—analysis and timing. Because of the high leverage factor in the futures markets, timing is especially crucial in that arena. It is quite possible to be correct on the general trend of the market and still lose money. Because margin requirements are so low in futures trading (usually less than 10%), a relatively small price move in the wrong direction can force the trader out of the market with the resulting loss of all or most of that margin. In stock market trading, by contrast, a trader who finds him or herself on the wrong side of the market can simply decide to hold onto the stock, hoping that it will stage a comeback at some point. - -Futures traders don't have that luxury. A "buy and hold" strategy doesn't apply to the futures arena. Both the technical and the fundamental approach can be used in the first phase—the forecasting process. However, the question - -of timing, of determining specific entry and exit points, is almost purely technical. Therefore, considering the steps the trader must go through before making a market commitment, it can be seen that the correct application of technical principles becomes indispensable at some point in the process, even if fundamental analysis was applied in the earlier stages of the decision. Timing is also important in individual stock selection and in the buying and selling of stock market sector and industry groups. - -### **FLEXIBILITY AND ADAPTABILITY OF TECHNICAL ANALYSIS** - -One of the great strengths of technical analysis is its adaptability to virtually any trading medium and time dimension. There is no area of trading in either stocks or futures where these principles do not apply. - -The chartist can easily follow as many markets as desired, which is generally not true of his or her fundamental counterpart. Because of the tremendous amount of data the latter must deal with, most fundamentalists tend to specialize. The advantages here should not be overlooked. - -For one thing, markets go through active and dormant periods, trending and nontrending stages. The technician can concentrate his or her attention and resources in those markets that display strong trending tendencies and choose to ignore the rest. As a result, the chartist can rotate his or her attention and capital to take advantage of the rotational nature of the markets. At different times, certain markets become "hot" and experience important trends. Usually, those trending periods are followed by quiet and relatively trendless market conditions, while another market or group takes over. The technical trader is free to pick and choose. The fundamentalist, however, who tends to specialize in only one group, doesn't have that kind of flexibility. Even if he or she were free to switch groups, the fundamentalist would have a much more difficult time doing so than would the chartist. - -Another advantage the technician has is the "big picture." By following all of the markets, he or she gets an excellent feel for what markets are doing in general, and avoids the "tunnel vision" that can result from following only one group of markets. Also, because so many of the markets have built-in economic relationships and react to similar economic factors, price action in one market or group may give valuable clues to the future direction of another market or group of markets. - -### **TECHNICAL ANALYSIS APPLIED TO DIFFERENT TRADING MEDIUMS** - -The principles of chart analysis apply to both *stocks* and *futures.* Actually, technical analysis was first applied to the stock market and later adapted to futures. With the introduction of *stock index futures*, the dividing line between these two areas is rapidly disappearing. *International stock markets* are also charted and analyzed according to technical principles. (See Figure 1.2.) - -*Financial futures*, including *interest rate markets* and *foreign currencies*, have become enormously popular over the past decade and have proven to be excellent subjects for chart analysis. - -Technical principles play a role in *options trading.* Technical forecasting can also be used to great advantage in the *hedging process.* - -**Figure 1.2** *The Japanese stock market charts very well as do most stock markets around the world.* - -### **TECHNICAL ANALYSIS APPLIED TO DIFFERENT TIME DIMENSIONS** - -Another strength of the charting approach is its ability to handle different time dimensions. Whether the user is trading the intraday tic-by-tic changes for *day trading purposes* or *trend trading* the intermediate trend, the same principles apply. A time dimension often overlooked is *longer range technical* - -*forecasting.* The opinion expressed in some quarters that charting is useful only in the short term is simply not true. It has been suggested by some that fundamental analysis should be used for long term forecasting with technical factors limited to short term timing. The fact is that longer range forecasting, using weekly and monthly charts going back several years, has proven to be an extremely useful application of these techniques. - -Once the technical principles discussed in this book are thoroughly understood, they will provide the user with tremendous flexibility as to how they can be applied, both from the standpoint of the medium to be analyzed and the time dimension to be studied. - -### **ECONOMIC FORECASTING** - -Technical analysis can play a role in economic forecasting. For example, the direction of commodity prices tells us something about the direction of inflation. They also give us clues about the strength or weakness of the economy. Rising commodity prices generally hint at a stronger economy and rising inflationary pressure. Falling commodity prices usually warn that the economy is slowing along with inflation. The direction of interest rates is affected by the trend of commodities. As a result, charts of commodity markets like gold and oil, along with Treasury Bonds, can tell us a lot about the strength or weakness of the economy and inflationary expectations. The direction of the U.S. dollar and foreign currency futures also provide early guidance about the strength or weakness of the respective global economies. Even more impressive is the fact that trends in these futures markets usually show up long before they are reflected in traditional economic indicators that are released on a monthly or quarterly basis, and usually tell us what has already happened. As their name implies, futures markets usually give us insights into the future. The S&P 500 stock market index has long been counted as an official leading economic indicator. A book by one of the country's top experts on the business cycle, *Leading Indicators for the 1990s* (Moore), makes a compelling case for the importance of commodity, bond, and stock trends as economic indicators. All three markets can be studied employing technical analysis. We'll have more to say on this subject in Chapter 17, "The Link Between Stocks and Futures." - -### **[TECHN](#page-374-0)ICIAN OR CHARTIST?** - -There are several different titles applied to practitioners of the technical approach: technical analyst, chartist, market analyst, and visual analyst. Up until recently, they all meant pretty much the same thing. However, with increased specialization in the field, it has become necessary to make some further distinctions and define the terms a bit more carefully. Because virtually all technical analysis was based on the use of charts up until the last decade, the terms "technician" and "chartist" meant the same thing. This is no longer necessarily true. - -The broader area of technical analysis is being increasingly divided into two types of practitioners, the traditional chartist and, for want of a better term, statistical technicians. Admittedly, there is a lot of overlap here and most technicians combine both areas to some extent. As in the case of the technician versus the fundamentalist, most seem to fall into one category or the other. - -Whether or not the traditional chartist uses quantitative work to supplement his or her analysis, charts remain the primary working tool. Everything else is secondary. Charting, of necessity, remains somewhat subjective. The success of the approach depends, for the most part, on the skill of the individual chartist. The term "art charting" has been applied to this approach because chart reading is largely an art. - -By contrast, the statistical, or quantitative, analyst takes these subjective principles, quantifies, tests, and optimizes them for the purpose of developing mechanical trading systems. These systems, or trading models, are then programmed into a computer that generates mechanical "buy" and "sell" signals. These systems range from the simple to the very complex. However, the intent is to reduce or completely eliminate the subjective human element in trading, to make it more scientific. These statisticians may or may not use price charts in their work, but they are considered technicians as long as their work is limited to the study of market action. - -Even computer technicians can be subdivided further into those who favor mechanical systems, or the "black box" approach, and those who use computer technology to develop better technical indicators. The latter group maintains control over the interpretation of those indicators and also the decision making process. - -One way of distinguishing between the chartist and the statistician is to say that all chartists are technicians, but not all technicians are chartists. Although these terms are used interchangeably throughout this book, it should be remembered that charting represents only one area in the broader subject of technical analysis. - -### **A BRIEF COMPARISON OF TECHNICAL** - -## **ANALYSIS IN STOCKS AND FUTURES** - -A question often asked is whether technical analysis as applied to futures is the same as the stock market. The answer is both yes and no. The basic principles are the same, but there are some significant differences. The principles of technical analysis were first applied to stock market forecasting and only later adapted to futures. Most of the basic tools—bar charts, point and figure charts, price patterns, volume, trendlines, moving averages, and oscillators, for example—are used in both areas. Anyone who has learned these concepts in either stocks or futures wouldn't have too much trouble making the adjustment to the other side. However, there are some general areas of difference having more to do with the different nature of stocks and futures than with the actual tools themselves. - -### **Pricing Structure** - -The pricing structure in futures is much more complicated than in stocks. Each commodity is quoted in different units and increments. Grain markets, for example, are quoted in cents per bushel, livestock markets in cents per pound, gold and silver in dollars per ounce, and interest rates in basis points. The trader must learn the contract details of each market: which exchange it is traded on, how each contract is quoted, what the minimum and maximum price increments are, and what these price increments are worth. - -### **Limited Life Span** - -Unlike stocks, futures contracts have expiration dates. A March 1999 Treasury Bond contract, for example, expires in March of 1999. The typical futures contract trades for about a year and a half before expiration. Therefore, at any one time, at least a half dozen different contract months are trading in the same commodity at the same time. The trader must know which contracts to trade and which ones to avoid. (This is explained later in this book.) This limited life feature causes some problems for longer range price forecasting. It necessitates the continuing need for obtaining new charts once old contracts stop trading. The chart of an expired contract isn't of much use. New charts must be obtained for the newer contracts along with their own technical indicators. This constant rotation makes the maintenance of an ongoing chart library a good deal more difficult. For computer users, it also entails greater time and expense by making it necessary to be constantly obtaining new historical data as old contracts expire. - -### **Lower Margin Requirements** - -This is probably the most important difference between stocks and futures. - -All futures are traded on margin, which is usually less than 10% of the value of the contract. The result of these low margin requirements is tremendous leverage. Relatively small price moves in either direction tend to become magnified in their impact on overall trading results. For this reason, it is possible to make or lose large sums of money very quickly in futures. Because a trader puts up only 10% of the value of the contract as margin, then a 10% move in either direction will either double the trader's money or wipe it out. By magnifying the impact of even minor market moves, the high leverage factor sometimes makes the futures markets seem more volatile than they actually are. When someone says, for example, that he or she was "wiped out" in the futures market, remember that he or she only committed 10% in the first place. - -From the standpoint of technical analysis, the high leverage factor makes timing in the futures markets much more critical than it is in stocks. The correct timing of entry and exit points is crucial in futures trading and much more difficult and frustrating than market analysis. Largely for this reason, technical trading skills become indispensable to a successful futures trading program. - -#### **Time Frame Is Much Shorter** - -Because of the high leverage factor and the need for close monitoring of market positions, the time horizon of the commodity trader is much shorter of necessity. Stock market technicians tend to look more at the longer range picture and talk in time frames that are beyond the concern of the average commodity trader. Stock technicians may talk about where the market will be in three or six months. Futures traders want to know where prices will be next week, tomorrow, or maybe even later this afternoon. This has necessitated the refinement of very short term timing tools. One example is the moving average. The most commonly watched averages in stocks are 50 and 200 days. In commodities, most moving averages are under 40 days. A popular moving average combination in futures, for example, is 4, 9, and 18 days. - -#### **Greater Reliance on Timing** - -*Timing is everything in futures trading.* Determining the correct direction of the market only solves a portion of the trading problem. If the timing of the entry point is off by a day, or sometimes even minutes, it can mean the difference between a winner or a loser. It's bad enough to be on the wrong side of the market and lose money. Being on the right side of the market and still losing money is one of the most frustrating and unnerving aspects of futures trading. It goes without saying that timing is almost purely technical in nature, because the fundamentals rarely change on a day-to-day basis. - -### **LESS RELIANCE ON MARKET AVERAGES AND INDICATORS** - -Stock market analysis is based heavily on the movement of broad market averages—such as the Dow Jones Industrial Average or the S&P 500. In addition, technical indicators that measure the strength or weakness of the broader market—like the NYSE advance-decline line or the new highs-new lows list—are heavily employed. While commodity markets can be tracked using measures like the Commodity Research Bureau Futures Price Index, less emphasis is placed on the broader market approach. Commodity market analysis concentrates more on individual market action. That being the case, technical indicators that measure broader commodity trends aren't used much. With only about 20 or so active commodity markets, there isn't much need. - -### **Specific Technical Tools** - -While most of the technical tools originally developed in the stock market have some application in commodity markets, they are not used in the exact same way. For example, chart patterns in futures often tend not to form as fully as they do in stocks. - -Futures traders rely more heavily on shorter term indicators that emphasize more precise trading signals. These points of difference and many others are discussed later in this book. - -Finally, there is another area of major difference between stocks and futures. Technical analysis in stocks relies much more heavily on the use of *sentiment indicators* and *flow of funds* analysis. *Sentiment indicators* monitor the performance of different groups such as odd lotters, mutual funds, and floor specialists. Enormous importance is placed on sentiment indicators that measure the overall market bullishness and bearishness on the theory that the majority opinion is usually wrong. *Flow of funds* analysis refers to the cash position of different groups, such as mutual funds or large institutional accounts. The thinking here is that the larger the cash position, the more funds that are available for stock purchases. - -*Technical analysis in the futures markets is a much purer form of price analysis.* While contrary opinion theory is also used to some extent, much more emphasis is placed on basic trend analysis and the application of traditional technical indicators. - -### **SOME CRITICISMS OF THE TECHNICAL APPROACH** - -A few questions generally crop up in any discussion of the technical approach. One of these concerns is the *self-fulfilling prophecy.*Another is the question of whether or not past price data can really be used to forecast future price direction. The critic usually says something like: "Charts tell us where the market has been, but can't tell us where it is going." For the moment, we'll put aside the obvious answer that a chart won't tell you anything if you don't know how to read it. The Random Walk Theory questions whether prices trend at all and doubts that any forecasting technique can beat a simple *buy and hold* strategy. These questions deserve a response. - -#### **The Self-Fulfilling Prophecy** - -The question of whether there is a self-fulfilling prophecy at work seems to bother most people because it is raised so often. It is certainly a valid concern, but of much less importance than most people realize. Perhaps the best way to address this question is to quote from a text that discusses some of the disadvantages of using chart patterns: - -- a. The use of most chart patterns has been widely publicized in the last several years. Many traders are quite familiar with these patterns and often act on them in concert. This creates a "self-fulfilling prophecy," as waves of buying or selling are created in response to "bullish" or "bearish" patterns… -- b. Chart patterns are almost completely subjective. No study has yet succeeded in mathematically quantifying any of them. They are literally in the mind of the beholder…. (Teweles et al.) - -These two criticisms contradict one another and the second point actually cancels out the first. If chart patterns are "completely subjective" and "in the mind of the beholder," then it is hard to imagine how everyone could see the same thing at the same time, which is the basis of the self-fulfilling prophecy. Critics of charting can't have it both ways. They can't, on the one hand, criticize charting for being so objective and obvious that everyone will act in the same way at the same time (thereby causing the price pattern to be fulfilled), and then also criticize charting for being too subjective. - -The truth of the matter is that charting is very subjective. Chart reading is an art. (Possibly the word "skill" would be more to the point.) Chart patterns are seldom so clear that even experienced chartists always agree on their interpretation. There is always an element of doubt and disagreement. As this book demonstrates, there are many different approaches to technical analysis that often disagree with one another. - -Even if most technicians did agree on a market forecast, they would not all necessarily enter the market at the same time and in the same way. Some - -would try to anticipate the chart signal and enter the market early. Others would buy the "breakout" from a given pattern or indicator. Still others would wait for the pullback after the breakout before taking action. Some traders are aggressive; others are conservative. Some use stops to enter the market, while others like to use market orders or resting limit orders. Some are trading for the long pull, while others are day trading. Therefore, the possibility of all technicians acting at the same time and in the same way is actually quite remote. - -Even if the self-fulfilling prophecy were of major concern, it would probably be "self-correcting" in nature. In other words, traders would rely heavily on charts until their concerted actions started to affect or distort the markets. Once traders realized this was happening, they would either stop using the charts or adjust their trading tactics. For example, they would either try to act before the crowd or wait longer for greater confirmation. So, even if the self-fulfilling prophecy did become a problem over the near term, it would tend to correct itself. - -It must be kept in mind that bull and bear markets only occur and are maintained when they are justified by the law of supply and demand. Technicians could not possibly cause a major market move just by the sheer power of their buying and selling. If this were the case, technicians would all become wealthy very quickly. - -Of much more concern than the chartists is the tremendous growth in the use of computerized technical trading systems in the futures market. These systems are mainly trend-following in nature, which means that they are all programmed to identify and trade major trends. With the growth in professionally managed money in the futures industry, and the proliferation of multimillion-dollar public and private funds, most of which are using these technical systems, tremendous concentrations of money are chasing only a handful of existing trends. Because the universe of futures markets is still quite small, the potential for these systems distorting short term price action is growing. However, even in cases where distortions do occur, they are generally short term in nature and do not cause major moves. - -Here again, even the problem of concentrated sums of money using technical systems is probably self-correcting. If all of the systems started doing the same thing at the same time, traders would make adjustments by making their systems either more or less sensitive. - -The self-fulfilling prophecy is generally listed as a criticism of charting. It might be more appropriate to label it as a compliment. After all, for any forecasting technique to become so popular that it begins to influence events, it would have to be pretty good. We can only speculate as to why this concern is seldom raised regarding the use of fundamental analysis. - -#### **Can the Past Be Used to Predict the Future?** - -Another question often raised concerns the validity of using past price data to predict the future. It is surprising how often critics of the technical approach bring up this point because every known method of forecasting, from weather predicting to fundamental analysis, is based completely on the study of past data. What other kind of data is there to work with? - -The field of statistics makes a distinction between *descriptive statistics* and *inductive statistics. Descriptive statistics* refers to the graphical presentation of data, such as the price data on a standard bar chart. *Inductive statistics* refers to generalizations, predictions, or extrapolations that are inferred from that data. Therefore, the price chart itself comes under the heading of the descriptive, while the analysis technicians perform on that price data falls into the realm of the inductive. - -As one statistical text puts it, "The first step in forecasting the business or economic future consists, thus, of gathering observations from the past." (Freund and Williams) Chart analysis is just another form of *time series analysis*, based on a study of the past, which is exactly what is done in all forms of time series analysis. The only type of data anyone has to go on is past data. We can only estimate the future by projecting past experiences into that future. - -So it seems that the use of past price data to predict the future in technical analysis is grounded in sound statistical concepts. If anyone were to seriously question this aspect of technical forecasting, he or she would have to also question the validity of every other form of forecasting based on historical data, which includes all economic and fundamental analysis. - -### **RANDOM WALK THEORY** - -The *Random Walk Theory*, developed and nurtured in the academic community, claims that price changes are "serially independent" and that price history is not a reliable indicator of future price direction. In a nutshell, price movement is random and unpredictable. The theory is based on the *efficient market hypothesis*, which holds that prices fluctuate randomly about their intrinsic value. It also holds that the best market strategy to follow would be a simple "buy and hold" strategy as opposed to any attempt to "beat the market." - -While there seems little doubt that a certain amount of randomness or "noise" does exist in all markets, it's just unrealistic to believe that *all* price movement is random. This may be one of those areas where empirical observation and practical experience prove more useful than sophisticated statistical techniques, which seem capable of proving anything the user has in mind or incapable of disproving anything. It might be useful to keep in mind that randomness can only be defined in the negative sense of an inability to uncover systematic patterns in price action. The fact that many academics have not been able to discover the presence of these patterns does not prove that they do not exist. - -The academic debate as to whether markets trend is of little interest to the average market analyst or trader who is forced to deal in the real world where market trends are clearly visible. If the reader has any doubts on this point, a casual glance through any chart book (randomly selected) will demonstrate the presence of trends in a very graphic way. How do the "random walkers" explain the persistence of these trends if prices are serially independent, meaning that what happened yesterday, or last week, has no bearing on what may happen today or tomorrow? How do they explain the profitable "real life" track records of many trend-following systems? - -How, for example, would a buy and hold strategy fare in the commodity futures markets where timing is so crucial? Would those long positions be held during bear markets? How would traders even know the difference between bull and bear markets if prices are unpredictable and don't trend? In fact, how could a bear market even exist in the first place because that would imply a trend? (See Figure 1.3.) - -**Figure 1.3** *A "random walker" would have a tough time convincing a holder of gold bullion that there's no real trend on this chart.* - -It seems doubtful that statistical evidence will ever totally prove or disprove the Random Walk Theory. However, the idea that markets are - -random is totally rejected by the technical community. If the markets were truly random, no forecasting technique would work. Far from disproving the validity of the technical approach, the *efficient market hypothesis* is very close to the technical premise that *markets discount everything.* The academics, however, feel that because markets quickly discount all information, there's no way to take advantage of that information. The basis of technical forecasting, already touched upon, is that important market information is discounted in the market price long before it becomes known. Without meaning to, the academics have very eloquently stated the need for closely monitoring price action and the futility of trying to profit from fundamental information, at least over the short term. - -Finally, it seems only fair to observe that any process appears random and unpredictable to those who do not understand the rules under which that process operates. An electrocardiogram printout, for example, might appear like a lot of random noise to a layperson. But to a trained medical person, all those little blips make a lot of sense and are certainly not random. The working of the markets may appear random to those who have not taken the time to study the rules of market behavior. *The illusion of randomness gradually disappears as the skill in chart reading improves.* Hopefully, that is exactly what will happen as the reader progresses through the various sections of this book. - -There may even be hope for the academic world. A number of leading American universities have begun to explore Behavioral Finance which maintains that human psychology and securities pricing are intertwined. That, of course, is the primary basis of technical analysis. - -### **UNIVERSAL PRINCIPLES** - -When an earlier version of this book was published twelve years ago, many of the technical timing tools that were explained were used mainly in the futures markets. Over the past decade, however, these tools have been widely employed in analyzing stock market trends. The technical principles that are discussed in this book can be applied universally to all markets—even mutual funds. One additional feature of stock market trading that has gained wide popularity in the past decade has been sector investing, primarily through index options and mutual funds. Later in the book we'll show how to determine which sectors are hot and which are not by applying technical timing tools. - - - -### **INTRODUCTION** - -Charles Dow and his partner Edward Jones founded Dow Jones & Company in 1882. Most technicians and students of the markets concur that much of what we call *technical analysis* today has its origins in theories first proposed by Dow around the turn of the century. Dow published his ideas in a series of editorials he wrote for the *Wall Street Journal.* Most technicians today recognize and assimilate Dow's basic ideas, whether or not they recognize the source. *Dow Theory* still forms the cornerstone of the study of technical analysis, even in the face of today's sophisticated computer technology, and the proliferation of newer and supposedly better technical indicators. - -On July 3, 1884, Dow published the first stock market average composed of the closing prices of eleven stocks: nine railroad companies and two manufacturing firms. Dow felt that these eleven stocks provided a good indication of the economic health of the country. In 1897, Dow determined that two separate indices would better represent that health, and created a 12 stock industrial index and a 20 stock rail index. By 1928 the industrial index had grown to include 30 stocks, the number at which it stands today. The editors of *The Wall Street Journal* have updated the list numerous times in the ensuing years, adding a utility index in 1929. In 1984, the year that marked the one hundredth anniversary of Dow's first publication, the Market Technicians Association presented a Gorham-silver bowl to Dow Jones & Co. According to the MTA, the award recognized "the lasting contribution that Charles Dow made to the field of investment analysis. His index, the forerunner of what today is regarded as the leading barometer of stock market activity, remains a vital tool for market technicians 80 years after his death." - -Unfortunately for us, Dow never wrote a book on his theory. Instead, he set down his ideas of stock market behavior in a series of editorials that *The* - -*Wall Street Journal* published around the turn of the century. In 1903, the year after Dow's death, S.A. Nelson compiled these essays into a book entitled *The ABC of Stock Speculation.* In that work, Nelson first coined the term "Dow's Theory." Richard Russell, who wrote the introduction to a 1978 reprint, compared Dow's contribution to stock market theory with Freud's contribution to psychiatry. In 1922, William Peter Hamilton (Dow's associate and successor at the Journal) categorized and published Dow's tenets in a book entitled *The Stock Market Barometer.* Robert Rhea developed the theory even further in the *Dow Theory* (New York: Barron's), published in 1932. - -Dow applied his theoretical work to the stock market averages that he created; namely the Industrials and the Rails. However, most of his analytical ideas apply equally well to all market averages. This chapter will describe the six basic tenets of Dow Theory and will discuss how these ideas fit into a modern study of technical analysis. We will discuss the ramifications of these ideas in the chapters that follow. - -### **BASIC TENETS** - -#### **1. The Averages Discount Everything.** - -The sum and tendency of the transactions of the Stock Exchange represent the sum of all Wall Street's knowledge of the past, immediate and remote, applied to the discounting of the future. There is no need to add to the averages, as some statisticians do, elaborate compilations of commodity price index numbers, bank clearings, fluctuations in exchange, volume of domestic and foreign trades or anything else. Wall Street considers all these things (Hamilton, pp. 40–41). - -Sound familiar? The idea that the markets reflect every possible knowable factor that affects overall supply and demand is one of the basic premises of technical theory, as was mentioned in Chapter 1. The theory applies to market averages, as well as it does to individual markets, and even makes allowances for "acts of God." While the markets cannot anticipate events such as earthquakes and various other natural [calamit](#page-23-0)ies, they quickly discount such occurrences, and almost instantaneously assimilate their affects into the price action. - -#### **2. The Market Has Three Trends.** - -Before discussing how trends behave, we must clarify what Dow considered a trend. Dow defined an uptrend as a situation in which each successive rally - -closes higher than the previous rally high, and each successive rally low also closes higher than the previous rally low. In other words, an uptrend has a pattern of rising peaks and troughs. The opposite situation, with successively lower peaks and troughs, defines a downtrend. Dow's definition has withstood the test of time and still forms the cornerstone of trend analysis. - -Dow believed that the laws of action and reaction apply to the markets just as they do to the physical universe. He wrote, "Records of trading show that in many cases when a stock reaches top it will have a moderate decline and then go back again to near the highest figures. If after such a move, the price again recedes, it is liable to decline some distance" (Nelson, page 43). - -Dow considered a trend to have three parts, *primary, secondary*, and *minor*, which he compared to the tide, waves, and ripples of the sea. The primary trend represents the tide, the secondary or intermediate trend represents the waves that make up the tide, and the minor trends behave like ripples on the waves. - -An observer can determine the direction of the tide by noting the highest point on the beach reached by successive waves. If each successive wave reaches further inland than the preceding one, the tide is flowing in. When the high point of each successive wave recedes, the tide has turned out and is ebbing. Unlike actual ocean tides, which last a matter of hours, Dow conceived of market tides as lasting for more than a year, and possibly for several years. - -The secondary, or intermediate, trend represents corrections in the primary trend and usually lasts three weeks to three months. These intermediate corrections generally retrace between one-third and two-thirds of the previous trend movement and most frequently about half, or 50%, of the previous move. - -According to Dow, the minor (or near term) trend usually lasts less than three weeks. This near term trend represents fluctuations in the intermediate trend. We will discuss trend concepts in greater detail in Chapter 4, "Basic Concepts of Trends," where you will see that we continue to use the same basic concepts and terminology today. - -#### **3. Major Trends Have Three Phases.** - -Dow focused his attention on primary or major trends, which he felt usually take place in three distinct phases: an accumulation phase, a public participation phase, and a distribution phase. The accumulation phase represents informed buying by the most astute investors. If the previous trend was down, then at this point these astute investors recognize that the market has assimilated all the so-called "bad" news. The public participation phase, where most technical trend-followers begin to participate, occurs when prices - -begin to advance rapidly and business news improves. The distribution phase takes place when newspapers begin to print increasingly bullish stories; when economic news is better than ever; and when speculative volume and public participation increase. During this last phase the same informed investors who began to "accumulate" near the bear market bottom (when no one else wanted to buy) begin to "distribute" before anyone else starts selling. - -Students of Elliott Wave Theory will recognize this division of a major bull market into three distinct phases. R. N. Elliott elaborated upon Rhea's work in *Dow Theory*, to recognize that a bull market has three major, upward movements. In Chapter 13, "Elliott Wave Theory," we'll show the close similarity between Dow's three phases of a bull market and the five wave Elliott sequence. - -#### **4. The Averages Must Confirm Each Other.** - -Dow, in referring to the Industrial and Rail Averages, meant that no important bull or bear market signal could take place unless both averages gave the same signal, thus confirming each other. He felt that both averages must exceed a previous secondary peak to confirm the inception or continuation of a bull market. He did not believe that the signals had to occur simultaneously, but recognized that a shorter length of time between the two signals provided stronger confirmation. When the two averages diverged from one another, Dow assumed that the prior trend was still maintained. (Elliott Wave Theory only requires that signals be generated in a single average.) Chapter 6, "Continuation Patterns," will cover the key concepts of confirmation and divergence. (See Figures 2.1 and 2.2.) - -#### **5. Volume Must Confirm the Trend.** - -Dow recognized [volume](#page-44-0) as a sec[ond](#page-45-0)ary but important factor in confirming price signals. Simply stated, *volume should expand or increase in the direction of the major trend.* In a major uptrend, volume would then increase as prices move higher, and diminish as prices fall. In a downtrend, volume should increase as prices drop and diminish as they rally. Dow considered volume a secondary indicator. He based his actual buy and sell signals entirely on closing prices. In Chapter 7, "Volume and Open Interest," we'll cover the subject of volume and build on Dow's ideas. Today's sophisticated volume indicators help determine whether volume is increasing or falling off. Savvy traders then compare this [inform](#page-153-0)ation to price action to see if the two are confirming each other. - -**Figure 2.1** *A long term view of the Dow Theory at work. For a major bull trend to continue, both the Dow Industrials and the Dow Transports must advance together.* - -#### **6. A Trend Is Assumed to Be in Effect Until It Gives Definite Signals That It Has Reversed.** - -This tenet, which we touched upon in Chapter 1, forms much of the foundation of modern trend-following approaches. It relates a physical law to market movement, which states that an object in motion (in this case a trend) tends to continue in motion until some [external](#page-23-0) force causes it to change direction. A number of technical tools are available to traders to assist in the difficult task of spotting reversal signals, including the study of support and resistance levels, price patterns, trendlines, and moving averages. Some indicators can provide even earlier warning signals of loss of momentum. All of that not withstanding, the odds usually favor that the existing trend will continue. - -**Figure 2.2** *Examples of two Dow Theory confirmations. At the start of 1997 (point 1), the Dow Transports confirmed the earlier breakout in the Industrials. The following May (point 2), the Dow Industrials confirmed the earlier new high in the Transports.* - -The most difficult task for a Dow theorist, or any trend-follower for that matter, is being able to distinguish between a normal secondary correction in an existing trend and the first leg of a new trend in the opposite direction. Dow theorists often disagree as to when the market gives an actual reversal signal. Figures 2.3a and 2.3b show how this disagreement manifests itself. - -Figures 2.3a and 2.3b illustrate two different market scenarios. In Figure 2.3a, notice that the rally at point C is lower than the previous peak at A. Price then declines [below](#page-45-1) point [B.](#page-46-1) The presence of these two lower peaks and two lower troughs [giv](#page-45-1)es a [clear](#page-46-1)-cut sell signal at the point where the low at B is [brok](#page-45-1)en (point S). This reversal pattern is sometimes referred to as a "failure swing." - -**Figure 2.3a** *Failure Swing. The failure of the peak at C to overcome A, followed by the violation of the low at B, constitutes a "sell" signal at S.* - -**Figure 2.3b** *Nonfailure Swing. Notice that C exceeds A before falling below B. Some Dow theorists would see a "sell" signal at S1, while others would need to see a lower high at E before turning bearish at S2.* - -In Figure 2.3b, the rally top at C is higher than the previous peak at A. Then price declines below point B. Some Dow theorists would not consider the clear violation of support, at S1, to be a bona fide sell signal. They would point out that [only](#page-46-1) lower lows exist in this case, but not lower highs. They would prefer to see a rally to point E which is lower than point C. Then they would look for another new low under point D. To them, S2 would represent the actual sell signal with two lower highs and two lower lows. - -The reversal pattern shown in Figure 2.3b is referred to as a "nonfailure swing." A failure swing (shown in Figures 2.3a) is a much weaker pattern than the nonfailure swing in Figure 2.3b. Figures 2.4a and 2.4b show the same scenarios at a market bottom. - -### **THE USE OF CLOSING PRICES AND THE PRESENCE OF LINES** - -Dow relied exclusively on *closing prices.* He believed that averages had to *close* higher than a previous peak or lower than a previous trough to have significance. Dow did not consider intraday penetrations valid. - -**Figure 2.4a** *Failure Swing Bottom. The "buy" signal takes place when point B is exceeded (at B1).* - -**Figure 2.4b** *Nonfailure Swing Bottom. "Buy" signals occur at points B1 or B2.* - -When traders speak of *lines* in the averages, they are referring to horizontal patterns that sometimes occur on the charts. These sideways trading ranges usually play the role of corrective phases and are usually referred to as consolidations. In more modern terms, we might refer to such lateral patterns as "rectangles." - -### **SOME CRITICISMS OF DOW THEORY** - -Dow Theory has done well over the years in identifying major bull and bear markets, but has not escaped criticism. On average, Dow Theory misses 20 to 25% of a move before generating a signal. Many traders consider this to be too late. A Dow Theory buy signal usually occurs in the second phase of an uptrend as price penetrates a previous intermediate peak. This is also, incidentally, about where most trend-following technical systems begin to - -identify and participate in existing trends. - -In response to this criticism, traders must remember that Dow never intended to anticipate trends; rather he sought to recognize the emergence of major bull and bear markets and to capture the large middle portion of important market moves. Available records suggest that Dow's Theory has performed that function reasonably well. From 1920 to 1975, Dow Theory signals captured 68% of the moves in the Industrial and Transportation Averages and 67% of those in the S&P 500 Composite Index (Source: Barron's). Those who criticize Dow Theory for failing to catch actual market tops and bottoms lack a basic understanding of the trend-following philosophy. - -## **STOCKS AS ECONOMIC INDICATORS** - -Dow apparently never intended to use his theory to forecast the direction of the stock market. He felt its real value was to use stock market direction as a barometric reading of general business conditions. We can only marvel at Dow's vision and genius. In addition to formulating a great deal of today's price forecasting methodology, he was among the first to recognize the usefulness of stock market averages as a leading economic indicator. - -## **DOW THEORY APPLIED TO FUTURES TRADING** - -Dow's work considered the behavior of stock averages. While most of that original work has significant application to commodity futures, there are some important distinctions between stock and futures trading. For one thing, Dow assumed that most investors follow only the major trends and would use intermediate corrections for timing purposes only. Dow considered the minor or near term trends to be unimportant. Obviously, this is not the case in futures trading in which most traders who follow trends trade the intermediate instead of the major trend. These traders must pay a great deal of attention to minor swings for timing purposes. If a futures trader expected an intermediate uptrend to last for a couple of months, he or she would look for short term dips to signal purchases. In an intermediate downtrend, the trader would use minor bounces to signal short sales. The minor trend, therefore, becomes extremely important in futures trading. - -### **NEW WAYS TO TRADE THE DOW AVERAGES** - -For the first 100 years of its existence, the Dow Jones Industrial Average could only be used as a market indicator. That all changed on October 6, 1997 when futures and options began trading on Dow's venerable average for the first time. The Chicago Board of Trade launched a futures contract on the Dow Jones Industrial Average, while options on the Dow (symbol: DJX) started trading at the Chicago Board Options Exchange. In addition, options were also launched on the Dow Jones Transportation Average (symbol: DJTA) and the Dow Jones Utility Index (symbol: DJUA). In January 1998, the American Stock Exchange started trading the Diamonds Trust, a unit investment trust that mimics the 30 Dow industrials. In addition, two mutual funds were offered based on the 30 Dow benchmark. Mr. Dow would probably be happy to know that, a century after their creation, it would now be possible to trade his Dow averages, and actually put his Dow Theory into practice. - -### **CONCLUSION** - -This chapter presented a relatively quick review of the more important aspects of the Dow Theory. It will become clear, as you continue through this book, that an understanding and appreciation of Dow Theory provides a solid foundation for any study of technical analysis. Much of what is discussed in the following chapters represents some adaptation of Dow's original theory. The standard definition of a trend, the classification of a trend into three categories and phases, the principles of confirmation and divergence, the interpretation of volume, and the use of percentage retracements (to name a few), all derive, in one way or another, from Dow Theory. - -In addition to the sources already cited in this chapter, an excellent review of the principles of Dow Theory can be found in *Technical Analysis of Stock Trends* (Edwards & Magee). - -### **INTRODUCTION** - -This chapter is primarily intended for those readers who are unfamiliar with bar chart construction. We'll begin by discussing the different types of charts available and then turn our focus to the most commonly used chart—*the daily bar chart.* We'll look at how the price data is read and plotted on the chart. *Volume and open interest* are also included in addition to price. We'll then look at other variations of the bar chart, including *longer range weekly and monthly charts.* Once that has been completed, we'll be ready to start looking at some of the analytical tools applied to that chart in the following chapter. Those readers already familiar with the charts themselves might find this chapter too basic. Feel free to move on to the next chapter. - -### **TYPES OF CHARTS AVAILABLE** - -The daily bar chart has already been acknowledged as the most widely used type of chart in technical analysis. There are, however, other types of charts also used by technicians, such as line charts, point and figure charts, and more recently, candlesticks. Figure 3.1 shows a standard daily bar chart. It's called a bar chart because each day's range is represented by a vertical bar. The bar chart shows the open, high, low, and closing prices. The tic to the right of the vertical bar is the closing [price.](#page-51-0) The opening price is the tic to the left of the bar. - -Figure 3.2 shows what the same market looks like on a line chart. In the line chart, only the closing price is plotted for each successive day. Many chartists believe that because the closing price is the most critical price of the trading [day,](#page-51-1) a line (or close-only) chart is a more valid measure of price - -activity. - -**Figure 3.1** *A daily bar chart of Intel. Each vertical bar represents one day's action.* - -**Figure 3.2** *A line chart of Intel. This type of chart produces a solid line by connecting the successive closing prices.* - -A third type of chart, the point and figure chart, is shown in Figure 3.3. Notice here that the point and figure chart shows the same price action but in a more compressed format. Notice the alternating column of x's and o's. The x columns show rising prices and the o columns, declining prices. [Buy](#page-52-1) and sell signals are more precise and easier to spot on the point and figure chart than on the bar chart. This type of chart also has a lot more flexibility. Chapter 11 covers point and figure charts. - -### **[CANDLESTICKS](#page-245-0)** - -Candlestick charts are the Japanese version of bar charting and have become very popular in recent years among western chartists. The Japanese candlestick records the same four prices as the traditional bar chart—the open, the close, the high, and the low. The visual presentation differs however. On the candlestick chart, a thin line (called the *shadow)* shows the day's price range from the high to the low. A wider portion of the bar (called the *real body)* measures the distance between the open and the close. If the close is higher than the open, the real body is white (positive). If the close is lower than the open, the real body is black (negative). (See Figure 3.4.) - -**Figure 3.3** *A point and figure chart of Intel. Notice the alternating columns of x's and o's. The x column shows rising prices. The o column shows falling prices. Buy and sell signals are more precise on this type of chart.* - -The key to candlestick charts is the relationship between the open and - -the close. Possibly because of the growing popularity of candlesticks, western chartists now pay a lot more attention to the opening tic on their bar charts. You can do everything with a candlestick chart that you can do with a bar chart. In other words, all the technical tools and indicators we'll be showing you for the bar chart can also be used on candlesticks. We'll show you a bit later in the chapter how to construct bar charts for weekly and monthly periods. You can do the same with candlesticks. Chapter 12, "Japanese Candlesticks," provides a more thorough explanation of candlestick charting. - -**Figure 3.4** *A candlestick chart of Intel. The color of the candlestick is determined by the relationship between the open and the close. White candlesticks are positive, while black candlesticks are negative.* - -### **ARITHMETIC VERSUS LOGARITHMIC SCALE** - -Charts can be plotted using arithmetic or logarithmic price scales. For some types of analysis, particularly for very long range trend analysis, there may be some advantage to using logarithmic charts. (See Figures 3.5 and 3.6.) Figure 3.5 shows what the different scales would look like. On the arithmetic scale, the vertical price scale shows an equal distance for each price unit of change. Notice in this example that each point on the arit[hmetic](#page-54-1) scale is [eq](#page-54-1)[ui](#page-55-1)[distant.](#page-54-1) On the log scale, however, note that the percentage increases get smaller as the price scale increases. The distance from points 1 to 2 is the same as the distance from points 5 to 10 because they both represent the same doubling in - -price. For example, a move from 5 to 10 on an arithmetic scale would be the same distance as a move from 50 to 55, even though the former represents a doubling in price, while the latter is a price increase of only 10%. Prices plotted on ratio or log scales show equal distances for similar percentage moves. For example, a move from 10 to 20 (a 100% increase) would be the same distance on a log chart as a move from 20 to 40 or 40 to 80. Many stock market chart services use log charts, whereas futures chart services use arithmetic. Charting software packages allow both types of scaling, as shown in Figure 3.6. - -**Figure 3.5** *A comparison of an arithmetic and logarithmic scale. Notice the equal spacing on the scale to the left. The log scale shows percentage changes (right scale).* - -### **CONSTRUCTION OF THE DAILY BAR CHART** - -The construction of the daily bar chart is extremely simple. The bar chart is both a price and a time chart. The vertical axis (the *y* axis) shows a scale representing the price of the contract. The horizontal axis (the *x* axis) records the passage of time. Dates are marked along the bottom of the chart. All the user has to do is plot a vertical bar in the appropriate day from the day's high to the day's low (called the range). Place a horizontal tic to the right of the vertical bar identifying the daily closing price. (See Figure 3.7.) - -The reason for placing the tic to the right of the bar is to distinguish it from the opening price, which chartists record to the left of the bar. Once that day's activity has been plotted, the user moves one day to [the](#page-56-1) right to plot the - -next day's action. Most chart services use five day weeks. Weekends are not shown on the chart. Whenever an exchange is closed during the trading week, that day's space is left blank. The bars along the bottom of the chart measure volume. (See Figure 3.7.) - -**Figure 3.6** *Longer view of Intel using two different price scales. The chart to the left shows the traditional arithmetic scale. The chart on the right shows a logarithmic scale. Notice that the three year up trendline worked better on the log chart.* - -### **VOLUME** - -Another piece of important information should be included on the bar chart volume. *Volume* represents the total amount of trading activity in that market for that day. It is the total number of futures contracts traded during the day or the number of common stock shares that change hands on a given day in the stock market. The volume is recorded by a vertical bar at the bottom of the chart under that day's price bar. A higher volume bar means the volume was heavier for that day. A smaller bar represents lighter volume. A vertical scale along the bottom of the chart is provided to help plot the data, as shown in Figure 3.7. - -**Figure 3.7** *A closer look at the Intel daily bar chart. Each bar measures the day's price range. The opening price is marked by the small tic to the left of each bar. The closing tic is to the right. The bars along the bottom measure each day's volume.* - -### **FUTURES OPEN INTEREST** - -*Open interest* is the total number of outstanding futures contracts that are held by market participants at the end of the day. Open interest is the number of outstanding contracts held by the longs or the shorts, not the total of both. Remember, because we're dealing with futures contracts, for every long there must also be a short. Therefore, we only have to know the totals on one side. Open interest is marked on the chart with a solid line along the bottom, usually just above the volume but below the price. (See Figure 3.8.) - -**Figure 3.8** *A daily line chart of a Treasury Bond futures contract The vertical bars along the bottom measure the total daily volume. The solid line along the middle represents the total outstanding open interest for the Treasury Bond futures market.* - -#### **Total Versus Individual Volume and Open Interest Numbers in Futures** - -Futures chart services, along with most futures technicians, use only the *total* volume and open interest figures. Although figures are available for each individual delivery month, the total figures for each commodity market are the ones that are used for forecasting purposes. There is a good reason for this. - -In the early stages of a futures contract's life, volume and open interest are usually quite small. The figures build up as the contract reaches maturity. In the last couple of months before expiration, however, the numbers begin to drop again. Obviously, traders have to liquidate open positions as the contract approaches expiration. Therefore, the increase in the numbers in the first few months of life and the decline near the end of trading have nothing to do with market direction and are just a function of the limited life feature of a commodity futures contract. To provide the necessary continuity in volume and open interest numbers, and to give them forecasting value, the total numbers are generally used. (Stock charts plot total volume figures, but do not include open interest.) - -Futures volume and open interest numbers are reported a day late. Therefore, the chartist must be content with a day's lag in obtaining and interpreting the figures. The numbers are usually reported during the following day's trading hours, but too late for publication in the day's financial newspapers. Estimated volume figures are available, however, after the markets close and are included in the following morning's paper. Estimated volume numbers are just that, but they do at least give the futures technician some idea of whether trading activity was heavier or lighter the previous day. In the morning paper, therefore, what the reader gets is the last day's futures prices along with an estimated volume figure. Official volume and open interest numbers, however, are given for the day before. Stock chartists don't have that problem. Volume totals for stocks are immediately available. - -#### **The Value of Individual Volume and Open Interest Numbers in Futures** - -The individual open interest numbers in futures do provide valuable information. They tell us which contracts are the most liquid for trading purposes. *As a general rule, trading activity should be limited to those delivery months with the highest open interest. Months with low open interest numbers should be avoided.* As the term implies, higher open interest means that there is more interest in certain delivery months. - -### **WEEKLY AND MONTHLY BAR CHARTS** - -We've focused so far on the daily bar chart. However, be aware that a bar chart can be constructed for any time period. The intraday bar chart measures the high, low, and last prices for periods as short as five minutes. The average daily bar chart covers from six to nine months of price action. For longer range trend analysis, however, weekly and monthly bar charts must be used. The value of using these longer range charts is covered in Chapter 8. But the method of constructing and updating the charts is essentially the same. (See Figures 3.9 and 3.10.) - -On the weekly chart, one bar represents the price acti[vity](#page-174-0) for the entire week. On the monthly chart, each bar shows the entire month's price action. [Obviously,](#page-59-0) wee[kly](#page-59-1) and monthly charts compress the price action to allow for much longer range trend analysis. A weekly chart can go back as much as five years and a monthly chart up to 20 years. It's a simple technique that helps the chartist study the markets from a longer range perspective—a valuable perspective that is often lost by relying solely on daily charts. - -**Figure 3.9** *A weekly bar chart of the U.S. Dollar Index. Each bar represents one week's price data. By compressing the price data, the weekly chart allows for chart analysis of longer range price trends, usually in the vicinity of five years.* - -**Figure 3.10** *A monthly bar chart of the U.S. Dollar Index. Each bar represents one month's price data. By compressing the data even further, the monthly chart allows chart analysis for periods as long as twenty years.* - -## **CONCLUSION** - -Now that we know how to plot a bar chart, and having introduced the three basic sources of information—price, volume, and open interest—we're ready to look at how that data is interpreted. Remember that the chart only records the data. In itself, it has little value. It's much like a paint brush and canvas. By themselves, they have no value. In the hands of a talented artist, however, they can help create beautiful images. Perhaps an even better comparison is a scalpel. In the hands of a gifted surgeon, it can help save lives. In the hands of most of us, however, a scalpel is not only useless, but might even be dangerous. A chart can become an extremely useful tool in the art or skill of market forecasting once the rules are understood. Let's begin the process. In the next chapter, we'll look at some of the basic concepts of trend and what I consider to be the building blocks of chart analysis. - -### **DEFINITION OF TREND** - -The concept of *trend* is absolutely essential to the technical approach to market analysis. All of the tools used by the chartist—support and resistance levels, price patterns, moving averages, trendlines, etc.—have the sole purpose of helping to measure the trend of the market for the purpose of participating in that trend. We often hear such familiar expressions as "always trade in the direction of the trend," "never buck the trend," or "the trend is your friend." So let's spend a little time to define what a trend is and classify it into a few categories. - -In a general sense, the trend is simply the direction of the market, which way it's moving. But we need a more precise definition with which to work. First of all, markets don't generally move in a straight line in any direction. Market moves are characterized by a series of *zigzags.* These zigzags resemble a series of successive waves with fairly obvious peaks and troughs. *It is the direction of those peaks and troughs that constitutes market trend.* Whether those peaks and troughs are moving up, down, or sideways tells us the trend of the market. An *uptrend* would be defined as a series of successively higher peaks and troughs; a *downtrend* is just the opposite, a series of declining peaks and troughs; horizontal peaks and troughs would identify a sideways price trend. (See Figures 4.1a-d.) - -**Figure 4.1a** *Example of an uptrend with ascending peaks and troughs.* - -**Figure 4.1b** *Example of a downtrend with descending peaks and troughs.* - -**Figure 4.1c** *Example of a sideways trend with horizontal peaks and troughs. This type of market is often referred to as "trendless."* - -**Figure 4.1d** *Example of a downtrend turning into an uptrend. The first portion to the left shows a downtrend. From April 1996 to April 1997, the market traded sideways. During the summer 1997, the trend turned up.* - -### **TREND HAS THREE DIRECTIONS** - -We've mentioned an uptrend, downtrend, and sideways trend for a very good reason. Most people tend to think of markets as being always in either an uptrend or a downtrend. The fact of the matter is that markets actually move in three directions—up, down, and sideways. It is important to be aware of this distinction because for at least a third of the time, by a conservative estimate, prices move in a flat, horizontal pattern that is referred to as a *trading range.* This type of sideways action reflects a period of equilibrium in the price level where the forces of supply and demand are in a state of relative balance. (If you'll recall, Dow Theory refers to this type of pattern as a *line.*) Although we've defined a flat market as having a sideways trend, it is more commonly referred to as being *trendless.* - -Most technical tools and systems are trend-following in nature, which means that they are primarily designed for markets that are moving up or down. They usually work very poorly, or not at all, when markets enter these lateral or "trendless" phases. It is during these periods of sideways market movement that technical traders experience their greatest frustration, and systems traders their greatest equity losses. A trend-following system, by its very definition, needs a trend in order to do its stuff. The failure here lies not - -with the system. Rather, the failure lies with the trader who is attempting to apply a system designed for trending markets into a nontrending market environment. - -There are three decisions confronting the trader—whether to buy a market (go long), sell a market (go short), or do nothing (stand aside). When a market is rising, the buying strategy is preferable. When it is falling, the second approach would be correct. *However, when the market is moving sideways, the third choice—to stay out of the market—is usually the wisest.* - -### **TREND HAS THREE CLASSIFICATIONS** - -In addition to having three directions, trend is usually broken down into the three categories mentioned in the previous chapter. Those three categories are the *major, intermediate*, and *near term trends.* In reality, there are almost an infinite number of trends interacting with one another, from the very short term trends covering minutes and hours to superlong trends lasting 50 or 100 years. Most technicians, however, limit trend classifications to three. There is a certain amount of ambiguity, however, as to how different analysts define each trend. - -Dow Theory, for example, classifies the *major trend* as being in effect for longer than a year. Because futures traders operate in a shorter time dimension than do stock investors, I would be inclined to shorten the major trend to anything over six months in the commodity markets. Dow defined the intermediate, or secondary, trend as three weeks to as many months, which also appears about right for the futures markets. The near term trend is usually defined as anything less than two or three weeks. - -Each trend becomes a portion of its next larger trend. For example, the intermediate trend would be a *correction* in the major trend. In a long term uptrend, the market pauses to correct itself for a couple of months before resuming its upward path. That secondary correction would itself consist of shorter waves that would be identified as near term dips and rallies. This theme recurs many times—that each trend is part of the next larger trend and is itself comprised of smaller trends. (See Figures 4.2a and b.) - -In Figure 4.2a, the major trend is up as reflected by the rising peaks and troughs (points 1, 2, 3, 4). The corrective phase (2-3) represents an intermediate correction within the major [uptrend.](#page-65-0) But notic[e](#page-65-1) that the wave 2-3 also breaks [down](#page-65-0) into three smaller waves (A, B, C). At point C, the analyst would say that the major trend was still up, but the intermediate and near term trends were down. At point 4, all three trends would be up. It is important to understand the distinction between the various degrees of trend. When someone asks what the trend is in a given market, it is difficult, if not - -impossible, to respond until you know which trend the person is inquiring about. You may have to respond in the manner previously discussed by defining the three different trend classifications. - -**Figure 4.2a** *Example of the three degrees of trend: major, secondary, and near term. Points 1, 2, 3, and 4 show the major uptrend. Wave 2-3 represents a secondary correction within the major uptrend. Each secondary wave in turn divides into near term trends. For example, secondary wave 2-3 divides into minor waves A-B-C.* - -**Figure 4.2b** *The major trend (over a year) is up during 1997. A short term correction occurred during March. An intermediate correction lasted from August to November (three months). The intermediate correction broke down* - -#### *into three short term trends.* - -Quite a bit of misunderstanding arises because of different traders' perceptions as to what is meant by a trend. To long term position traders, a few days' to a few weeks' price action might be insignificant. To a day trader, a two or three day advance might constitute a major uptrend. It's especially important, then, to understand the different degrees of trend and to make sure that all involved in a transaction are talking about the same ones. - -As a general statement, most trend-following approaches focus on the intermediate trend, which may last for several months. The near term trend is used primarily for timing purposes. In an intermediate uptrend, short term setbacks would be used to initiate long positions. - -### **SUPPORT AND RESISTANCE** - -In the previous discussion of trend, it was stated that prices move in a series of peaks and troughs, and that the direction of those peaks and troughs determined the trend of the market. Let's now give those peaks and troughs their appropriate names and, at the same time, introduce the concepts of *support* and *resistance.* - -The troughs, or reaction lows, are called *support.* The term is selfexplanatory and indicates that support is a level or area on the chart *under the market* where buying interest is sufficiently strong to overcome selling pressure. As a result, a decline is halted and prices turn back up again. Usually a support level is identified beforehand by a previous reaction low. In Figure 4.3a, points 2 and 4 represent support levels in an uptrend. (See Figures 4.3a and b.) - -*Resistance* is the opposite of support and represents a price level or area *[over](#page-67-0) the market* where selling pressure overcomes buying pressure and a price advance [is](#page-67-0) turned [b](#page-67-1)ack. Usually a resistance level is identified by a previous peak. In Figure 4.3a, points 1 and 3 are resistance levels. Figure 4.3a shows an uptrend. In an uptrend, the support and resistance levels show an ascending pattern. Figure 4.3b shows a downtrend with descending peaks and troughs. In the d[owntrend,](#page-67-0) points 1 and 3 are support levels under the [market](#page-67-0) and points 2 and 4 are resistance levels over the market. - -**Figure 4.3a** *Shows rising support and resistance levels in uptrend. Points 2 and 4 are support levels which are usually previous reaction lows. Points 1 and 3 are resistance levels, usually marked by previous peaks.* - -**Figure 4.3b** *Shows support and resistance in a downtrend.* - -In an uptrend, the resistance levels represent pauses in that uptrend and are usually exceeded at some point. In a downtrend, support levels are not sufficient to stop the decline permanently, but are able to check it at least temporarily. - -A solid grasp of the concepts of support and resistance is necessary for a full understanding of the concept of trend. For an uptrend to continue, each successive low (support level) must be higher than the one preceding it. Each rally high (resistance level) must be higher than the one before it. If the corrective dip in an uptrend comes all the way down to the previous low, it - -may be an early warning that the uptrend is ending or at least moving from an uptrend to a sideways trend. If the support level is violated, then a trend *reversal* from up to down is likely. - -Each time a previous resistance peak is being tested, the uptrend is in an especially critical phase. Failure to exceed a previous peak in an uptrend, or the ability of prices to bounce off the previous support low in a downtrend, is usually the first warning that the existing trend is changing. Chapters 5 and 6 on *price patterns* show how the testing of these support and resistance levels form pictures on the charts that suggest either a trend reversal in progress or merely a pause in the existing trend. But the basic building [blocks](#page-105-0) on whic[h](#page-129-0) those price patterns are based are support and resistance levels. - -Figures 4.4a-c are examples of a classic trend reversal. Notice, in Figure 4.4a, that at point 5 prices failed to exceed the previous peak (point 3) before turning down to violate the previous low at point 4. This trend reversal could have been [identifi](#page-68-0)[ed](#page-69-0) simply by watching the support and [resistance](#page-68-0) levels. In our coverage of price patterns, this type of reversal pattern will be identified as a *double top.* - -#### **How Support and Resistance Levels Reverse Their Roles** - -So far we've defined "support" as a previous low and "resistance" as a previous high. However, this is not always the case. This leads us to one of the more interesting and lesser known aspects of support and resistance their reversal of roles. *Whenever a support or resistance level is penetrated by a significant amount, they reverse their roles and become the opposite.* In other words, a resistance level becomes a support level and support becomes resistance. To understand why this occurs, perhaps it would be helpful to discuss some of the psychology behind the creation of support and resistance levels. - -**Figure 4.4a** *Example of a trend reversal. The failure of prices at point 5 to exceed the previous peak at point 3 followed by a downside violation of the previous low at point 4 constitutes a downside trend reversal. This type of* - -*pattern is called a double top.* - -**Figure 4.4b** *Example of a bottom reversal pattern. Usually the first sign of a bottom is the ability of prices at point 5 to hold above the previous low at point 3. The bottom is confirmed when the peak at 4 is overcome.* - -**Figure 4.4c** *Example of a bottom reversal. During January 1998 prices retested the December support low and bounced off it, forming a second support level. The upside penetration of the middle resistance peak signaled a new uptrend.* - -#### **The Psychology of Support and Resistance** - -To illustrate, let's divide the market participants into three categories—the longs, the shorts, and the uncommitted. The longs are those traders who have already purchased contracts; the shorts are those who have already committed themselves to the sell side; the uncommitted are those who have either gotten out of the market or remain undecided as to which side to enter. - -Let's assume that a market starts to move higher from a support area where prices have been fluctuating for some time. The longs (those who bought near the support area) are delighted, but regret not having bought more. If the market would dip back near that support area again, they could add to their long positions. The shorts now realize (or strongly suspect) that they are on the wrong side of the market. (How far the market has moved away from that support area will greatly influence these decisions, but we'll come back to that point a bit later.) The shorts are hoping (and praying) for a dip back to that area where they went short so they can get out of the market where they got in (their break even point). - -Those sitting on the sidelines can be divided into two groups—those who never had a position and those who, for one reason or another, liquidated previously held long positions in the support area. The latter group are, of course, mad at themselves for liquidating their longs prematurely and are hoping for another chance to reinstate those longs near where they sold them. - -The final group, the undecided, now realize that prices are going higher and resolve to enter the market on the long side on the next good buying opportunity. All four groups are resolved to "buy the next dip." They all have a "vested interest" in that support area under the market. Naturally, if prices do decline near that support, renewed buying by all four groups will materialize to push prices up. - -The more trading that takes place in that support area, the more significant it becomes because more participants have a vested interest in that area. The amount of trading in a given support or resistance area can be determined in three ways: the amount of time spent there, volume, and how recently the trading took place. - -*The longer the period of time that prices trade in a support or resistance area, the more significant that area becomes.* For example, if prices trade sideways for three weeks in a congestion area before moving higher, that support area would be more important than if only three days of trading had occurred. - -*Volume is another way to measure the significance of support and resistance.* If a support level is formed on heavy volume, this would indicate that a large number of units changed hands, and would mark that support level as more important than if very little trading had taken place. Point and figure charts that measure the intraday trading activity are especially useful in identifying these price levels where most of the trading took place and, consequently, where support and resistance will be most likely to function. - -*A third way to determine the significance of a support or resistance area is how recently the trading took place.* Because we are dealing with the - -reaction of traders to market movement and to positions that they have already taken or failed to take, it stands to reason that the more recent the activity, the more potent it becomes. - -Now let's turn the tables and imagine that, instead of moving higher, prices move lower. In the previous example, because prices advanced, the combined reaction of the market participants caused each downside reaction to be met with additional buying (thereby creating new support). However, if prices start to drop and move below the previous support area, the reaction becomes just the opposite. All those who bought in the support area now realize that they made a mistake. For futures traders, their brokers are now calling frantically for more margin money. Because of the highly leveraged nature of futures trading, traders cannot sit with losses very long. They must put up additional margin money or liquidate their losing positions. - -What created the previous support in the first place was the predominance of buy orders under the market. Now, however, all of the previous buy orders under the market have become sell orders over the market. *Support has become resistance.* And the more significant that previous support area was—that is, the more recent and the more trading that took place there—the more potent it now becomes as a resistance area. All of the factors that created support by the three categories of participants—the longs, the shorts, and the uncommitted—will now function to put a ceiling over prices on subsequent rallies or bounces. - -It is useful once in a while to pause and reflect on why the price patterns used by chartists, and concepts like support and resistance, actually do work. It's not because of some magic produced by the charts or some lines drawn on those charts. These patterns work because they provide pictures of what the market participants are actually doing and enable us to determine their reactions to market events. Chart analysis is actually a study of human psychology and the reactions of traders to changing market conditions. Unfortunately, because we live in the fast-paced world of financial markets, we tend to rely heavily on chart terminology and shortcut expressions that overlook the underlying forces that created the pictures on the charts in the first place. There are sound psychological reasons why support and resistance levels can be identified on price charts and why they can be used to help predict market movements. - -#### **Support Becoming Resistance and Vice Versa: Degree of Penetration** - -A support level, penetrated by a significant margin, becomes a resistance level and vice versa. Figures 4.5a-c are similar to Figures 4.3a and b but with one added refinement. Notice that as prices are rising in Figure 4.5a the reaction at point 4 stops at or above the top of the peak at point 1. That previous peak at - -point 1 had been a resistance level. But once it was decisively penetrated by wave 3, that previous resistance peak became a support level. All of the previous selling near the top of wave 1 (creating the resistance level) has now become buying under the market. In Figure 4.5b, showing declining prices, point 1 (which had been a previous support level under the market) has now become a resistance level over the market [acting](#page-72-0) as a ceiling at point 4. - -**Figure 4.5a** *In an uptrend, resistance levels that have been broken by a significant margin become support levels. Notice that once resistance at point 1 is exceeded, it provides support at point 4. Previous peaks function as support on subsequent corrections.* - -**Figure 4.5b** *In a downtrend, violated support levels become resistance levels on subsequent bounces. Notice how previous support at point 1 became resistance at point 4.* - -**Figure 4.5c** *Role reversal at play. Once the early 1997 resistance peak was broken, it reversed roles to become a support level. A year later, the intermediate price decline found support right at that prior resistance peak which had become new support.* - -It was mentioned earlier that the distance prices traveled away from support or resistance increased the significance of that support or resistance. This is particularly true when support and resistance levels are penetrated and reverse roles. For example, it was stated that support and resistance levels reverse roles only after a significant penetration. But what constitutes significant? There is quite a bit of subjectivity involved here in determining whether a penetration is significant or not. As a benchmark, some chartists use a 3% penetration as a criteria, particularly for major support and resistance levels. Shorter term support and resistance areas would probably require a much smaller number, like 1%. In reality, each analyst must decide for himself or herself what constitutes a significant penetration. It's important to remember, however, that support and resistance areas only reverse roles when the market moves far enough away to convince the market participants that they have made a mistake. The farther away the market moves, the more convinced they become. - -#### **The Importance of Round Numbers as Support and Resistance** - -There is a tendency for round numbers to stop advances or declines. Traders tend to think in terms of important round numbers, such as 10, 20, 25, 50, 75, 100 (and multiples of 1000), as price objectives and act accordingly. These - -round numbers, therefore, will often act as "psychological" support or resistance levels. A trader can use this information to begin taking profits as an important round number is approached. - -The gold market is an excellent example of this phenomenon. The 1982 bear market low was right at \$300. The market then rallied to just above \$500 in the first quarter of 1983 before falling to \$400. A gold rally in 1987 stopped at \$500 again. From 1990 to 1997, gold failed each attempt to break through \$400. The Dow Jones Industrial Average has shown a tendency to stall at multiples of 1000. - -One trading application of this principle is to *avoid placing trading orders right at these obvious round numbers.* For example, if the trader is trying to buy into a short term market dip in an uptrend, it would make sense to place limit orders just above an important round number. Because others are trying to buy the market at the round number, the market may never get there. Traders looking to sell on a bounce should place resting sell orders just below round numbers. The opposite would be true when placing protective stops on existing positions. As a general rule, *avoid placing protective stops at obvious round numbers.* - -In other words, protective stops on long positions should be placed below round numbers and on short positions, above such numbers. The tendency for markets to respect round numbers, and especially the more important round numbers previously referred to, is one of those peculiar market characteristics that can prove most helpful in trading and should be kept in mind by the technically oriented trader. - -### **TRENDLINES** - -Now that we understand support and resistance, let's add another building block to our arsenal of technical tools—*the trendline.* (See Figures 4.6a-c.) The basic trendline is one of the simplest of the technical tools employed by the chartist, but is also one of the most valuable. An *up trendline* is a straight line drawn upward to the right along successive reaction lows as [shown](#page-75-0) [b](#page-76-0)y the solid line in Figure 4.6a. A *down trendline* is drawn downward to the right along successive rally peaks as shown in Figure 4.6b. - -**Figure 4.6a** *Example of an up trendline. The up trendline is drawn under the rising reaction lows. A tentative trendline is first drawn under two successively higher lows (points 1 and 3), but needs a third test to confirm the validity of the trendline (point 5).* - -**Figure 4.6b** *A down trendline is drawn over the successively lower rally highs. The tentative down trendline needs two points (1 and 3) to be drawn and a third test (5) to confirm its validity.* - -**Figure 4.6c** *Long term up trendline at work. The up trendline was drawn upward and to the right along the first two reaction lows (see arrows). The third low at the start of 1998 bounced right off the rising trendline, thereby keeping the uptrend intact.* - -#### **Drawing a Trendline** - -The correct drawing of trendlines is a lot like every other aspect of charting and some experimenting with different lines is usually necessary to find the correct one. Sometimes a trendline that looks correct may have to be redrawn. But there are some useful guidelines in the search for that correct line. - -First of all, there must be evidence of a trend. This means that, for an up trendline to be drawn, there must be at least two reaction lows with the second low higher than the first. Of course, it always takes two points to draw any straight line. In Figure 4.6a, for example, only after prices have begun to move higher from point 3 is the chartist reasonably confident that a reaction low has been formed, and only then can a tentative up trendline be drawn under points 1 [and](#page-75-0) 3. - -Some chartists require that the peak at point 2 be penetrated to confirm the uptrend before drawing the trendline. Others only require a 50% retracement of wave 2-3, or that prices approach the top of wave 2. While the criteria may differ, the main point to remember is that the chartist wants to be reasonably sure that a reaction low has been formed before identifying a valid reaction low. Once two ascending lows have been identified, a straight line is drawn connecting the lows and projected up and to the right. - -#### **Tentative Versus the Valid Trendline** - -So far, all we have is a *tentative trendline.* In order to confirm the validity of a trendline, however, that line should be touched a third time with prices bouncing off of it. Therefore, in Figure 4.6a, the successful test of the up trendline at point 5 confirmed the validity of that line. Figure 4.6b shows a downtrend, but the rules are the same. The successful test of the trendline occurs at point 5. To summarize, two [points](#page-75-0) are needed to [draw](#page-75-1) the trendline, and a third point to make it a *valid trendline.* - -#### **How to Use the Trendline** - -Once the third point has been confirmed and the trend proceeds in its original direction, that trendline becomes very useful in a variety of ways. One of the basic concepts of trend is that a trend in motion will tend to remain in motion. As a corollary to that, once a trend assumes a certain slope or rate of speed, as identified by the trendline, it will usually maintain the same slope. The trendline then helps not only to determine the extremities of the corrective phases, but maybe even more importantly, tells us when that trend is changing. - -In an uptrend, for example, the inevitable corrective dip will often touch or come very close to the up trendline. Because the intent of the trader is to buy dips in an uptrend, that trendline provides a support boundary under the market that can be used as a buying area. A down trendline can be used as a resistance area for selling purposes. (See Figures 4.7a and b.) - -As long as the trendline is not violated, it can be used to determine buying and selling areas. However, at point 9 in Figures 4.7a-b, the violation of the trendline signals a trend change, c[alling](#page-77-0) for liquidat[io](#page-78-0)n of all positions in the direction of the previous trend. Very often, *the breaking of the trendline is one of the best early warnings of a change in [trend.](#page-77-0)* - -**Figure 4.7a** *Once the up trendline has been established, subsequent dips near* - -*the line can be used as buying areas. Points 5 and 7 in this example could have been used for new or additional longs. The breaking of the trendline at point 9 called for liquidation of all longs by signaling a downside trend reversal.* - -**Figure 4.7b** *Points* 5 *and 7 could have been used as selling areas. The breaking of the trendline at point 9 signaled an upside trend reversal.* - -#### **How to Determine the Significance of a Trendline** - -Let's discuss some of the refinements of the trendline. First, what determines the significance of a trendline? The answer to that question is twofold—*the longer it has been intact and the number of times it has been tested.* A trendline that has been successfully tested eight times, for example, that has continually demonstrated its validity, is obviously a more significant trendline than one that has only been touched three times. Also, a trendline that has been in effect for nine months is of more importance than one that has been in effect for nine weeks or nine days. The more significant the trendline, the more confidence it inspires and the more important is its penetration. - -#### **Trendlines Should Include All Price Action** - -Trendlines on bar charts should be drawn over or under the entire day's price range. Some chartists prefer to draw the trendline by connecting only the closing prices, but that is not the more standard procedure. The closing price may very well be the most important price of the day, but it still represents only a small sample of that day's activity. The technique of including the day's price range takes into account all of the activity and is the more common usage. (See Figure 4.8.) - -**Figure 4.8** *The correct drawing of a trendline should include the entire day's trading range.* - -#### **How to Handle Small Trendline Penetrations** - -Sometimes prices will violate a trendline on an intraday basis, but then close in the direction of the original trend, leaving the analyst in some doubt as to whether or not the trendline has actually been broken. (See Figure 4.9.) Figure 4.9 shows how such a situation might look. Prices did dip under the trendline during the day, but closed back above the up trendline. Should the [tren](#page-79-0)dline be [redrawn?](#page-79-0) - -**Figure 4.9** *Sometimes an intraday violation of a trendline will leave the chartist in doubt as to whether the original trendline is still valid or if a new line should be drawn. A compromise is to keep the original trendline, but draw a new dotted line until it can be better determined which is the truer line.* - -Unfortunately, there's no hard and fast rule to follow in such a situation. Sometimes it is best to ignore the minor breach, especially if subsequent market action proves that the original line is still valid. - -#### **What Constitutes a Valid Breaking of a Trendline?** - -As a general rule, *a close beyond the trendline is more significant than just an intraday penetration.* To go a step further, sometimes even a closing penetration is not enough. Most technicians employ a variety of time and price filters in an attempt to isolate valid trendline penetrations and eliminate bad signals or "whipsaws." One example of a price filter is the 3% *penetration criteria.* This price filter is used mainly for the breaking of longer term trendlines, but requires that the trendline be broken, on a closing basis, by at least 3%. (The 3% rule doesn't apply to some financial futures, such as the interest rate markets.) - -If, for example, gold prices broke a major up trendline at \$400, prices would have to close below that line by 3% of the price level where the line was broken (in this case, prices would have to close \$12 below the trendline, or at \$388). Obviously, a \$12 penetration criteria would not be appropriate for shorter term trading. Perhaps a 1% criterion would serve better in such cases. The % rule represents just one type of price filter. Stock chartists, for example, might require a full point penetration and ignore fractional moves. There is tradeoff involved in the use of any type of filter. If the filter is too small, it won't be very useful in reducing the impact of whipsaws. If it's too big, then much of the initial move will be missed before a valid signal is given. Here again, the trader must determine what type of filter is best suited to the degree of trend being followed, always making allowances for the differences in the individuals markets. - -An alternative to a price filter (requiring that a trendline be broken by some predetermined price increment or percentage amount) is a *time filter.* A common time filter is the *two day rule.* In other words, to have a valid breaking of a trendline, prices must close beyond the trendline for two successive days. To break an up trendline, therefore, prices must close under the trendline two days in a row. A one day violation would not count. The 1- 3% rule and the two day rule are also applied to the breaking of important support and resistance levels, not just to major trendlines. Another filter would require a Friday close beyond a major breakout point to ensure a weekly signal. - -#### **How Trendlines Reverse Roles** - -It was mentioned earlier that support and resistance levels became the opposite once violated. The same principle holds true of trendlines. (See Figures 4.10a-c.) In other words, an up trendline (a support line) will usually become a resistance line once it's decisively broken. A down trendline (a resistance line) will often become a support line once it's decisively broken. [This](#page-81-0) is why it['s](#page-82-0) usually a good idea to project all trendlines as far out to the - -right on the chart as possible even after they've been broken. It's surprising how often old trendlines act as support and resistance lines again in the future, but in the opposite role. - -### **Measuring Implications of Trendlines** - -Trendlines can be used to help determine price objectives. We'll have a lot more to say about price objectives in the next two chapters on price patterns. In fact, some of the price objectives addressed that are derived from various price patterns are similar to the one we'll cover here with trendlines. Stated briefly, once a trendline is broken, prices will usually move a distance beyond the trendline equal to the vertical distance that prices achieved on the other side of the line, prior to the trend reversal. - -**Figure 4.10a** *Example of a rising support line becoming resistance. Usually a support line will function as a resistance barrier on subsequent rallies, after it has been broken on the downside.* - -**Figure 4.10b** *Very often a down trendline will become a support line once it's been broken on the upside.* - -**Figure 4.10c** *Trendlines also reverse roles. On this chart, the broken up trendline became a resistance barrier on the following rally attempt.* - -In other words, if in the prior uptrend, prices moved \$50 above the up trendline (measured vertically), then prices would be expected to drop that same \$50 below the trendline after it's broken. In the next chapter, for example, we'll see that this measuring rule using the trendline is similar to that used for the well-known *head and shoulders* reversal pattern, where the distance from the "head" to the "neckline" is projected beyond that line once it's broken. - -### **THE FAN PRINCIPLE** - -This brings us to another interesting use of the trendline—the *fan principle.* (See Figures 4.11a-c.) Sometimes after the violation of an up trendline, prices will decline a bit before rallying back to the bottom of the old up trendline (now a resistance line). In Figure 4.11a, notice how prices rallied to but failed to pe[netrate](#page-83-0) line 1. [A](#page-83-1) second trendline (line 2) can now be drawn, which is also broken. After another failed rally attempt, a third line is drawn (line 3). *The breaking of that third [trendline](#page-83-0) is usually an indication that prices are headed lower.* In Figure 4.11b, the breaking of the third down trendline (line 3) constitutes a new uptrend signal. Notice in these examples how previously broken support lines became resistance and resistance lines became support. The term "fan pr[inciple"](#page-83-1) derives from the appearance of the lines that gradually flatten out, resembling a fan. *The important point to remember here* - -*is that the breaking of the third line is the valid trend reversal signal.* - -**Figure 4.11a** *Example of the fan principle. The breaking of the third trendline signals the reversal of a trend. Notice also that the broken trendlines 1 and 2 often become resistance lines.* - -**Figure 4.11b** *The fan principle at a bottom. The breaking of the third trendline signals the upside trend reversal. The previously broken trendlines (1 and 2) often become support levels.* - -**Figure 4.11c** *Fan lines are drawn along successive peaks as shown in this chart. The breaking of the third fan line usually signals the start of the uptrend.* - -### **THE IMPORTANCE OF THE NUMBER THREE** - -In examining the three lines in the fan principle, it's interesting to note how often the number three shows up in the study of technical analysis and the important role it plays in so many technical approaches. For example, the fan principle uses three lines; major bull and bear markets usually have three major phases (Dow Theory and Elliott Wave Theory); there are three kinds of *gaps* (to be covered shortly); some of the more commonly known reversal patterns, such as the *triple top* and the *head and shoulders*, have three prominent peaks; there are three different classifications of trend (major, secondary, and minor) and three trend directions (up, down, and sideways); among the generally accepted continuation patterns, there are three types of *triangles*—the symmetrical, ascending, and descending; there are three principle sources of information—price, volume, and open interest. For whatever the reason, the number three plays a very prominent role throughout the entire field of technical analysis. - -### **THE RELATIVE STEEPNESS OF THE** - -### **TRENDLINE** - -The relative steepness of the trendline is also important. In general, most important up trendlines tend to approximate an average slope of 45 degrees. Some chartists simply draw a 45 degree line on the chart from a prominent high or low and use this as a major trendline. The 45 degree line was one of the techniques favored by W. D. Gann. Such a line reflects a situation where prices are advancing or declining at such a rate that price and time are in perfect balance. - -**Figure 4.12** *Most valid trendlines rise at an angle approximating 45 degrees (see line 2). If the trendline is too steep (line 1), it usually indicates that the rate of ascent is not sustainable. A trendline that is too flat (line 3) suggests that the uptrend is too weak and probably suspect. Many technicians use 45 degree lines from previous tops or bottoms as major trendlines.* - -If a trendline is too steep (see line 1 in Figure 4.12), it usually indicates that prices are advancing too rapidly and that the current steep ascent will not be sustained. The breaking of that steep trendline may be just a reaction back to a more sustainable slope closer to the 45 [degree](#page-85-0) line (line 2). If a trendline is too flat (see line 3), it may indicate that the uptrend is too weak and not to be trusted. - -#### **How to Adjust Trendlines** - -Sometimes trendlines have to be adjusted to fit a slowing or an accelerating trend. (See Figure 4.13 and Figures 4.14a and b.) For example, as shown in the previous case, if a steep trendline is broken, a slower trendline might have to be drawn. If the original trendline is too flat, it may have to be redrawn at a steeper angle. [Figure](#page-86-0) 4.13 shows a [situatio](#page-87-0)n w[he](#page-87-1)re the breaking of the steeper - -trendline (line 1) necessitated the drawing of a slower line (line 2). - -**Figure 4.13** *Example of a trendline that is too steep (line 1). The original up trendline proved too steep. Often the breaking of a steep trendline is only an adjustment to a slower and more sustainable up trendline (line 2).* - -In Figure 4.14a, the original trendline (line 1) is too flat and has to be redrawn at a steeper angle (line 2). The uptrend accelerated, requiring a steeper line. A trendline that is too far away from the price action is obviously of little use in [trackin](#page-87-0)g the trend. - -In the case of an accelerating trend, sometimes several trendlines may have to be drawn at increasingly steeper angles. In my experience, however, where steeper trendlines become necessary, it is best to resort to another tool —the moving average—which is the same as a curvilinear trendline. One of the advantages of having access to several different types of technical indicators is being able to choose the one most appropriate for a given situation. All of the techniques covered in this book work well in certain situations, but not so well in others. By having an arsenal of tools to fall back on, the technician can quickly switch from one tool to another that might work better in a given situation. An accelerated trend is one of those cases where a moving average would be more useful than a series of steeper and steeper trendlines. - -**Figure 4.14a** *Example of an up trendline that is too flat (line 1). Line 1 proved too slow as the uptrend accelerated. In this case, a second and steeper trendline (line 2) should be drawn to more closely track the rising trend.* - -**Figure 4.14b** *An accelerating uptrend requires the drawing of steeper trendlines as shown in this chart. The steepest trendline becomes the most important one.* - -Just as there are several different degrees of trend in effect at any one time, so is there a need for different trendlines to measure those various trends. A major up trendline, for example, would connect the low points of the major uptrend, while a shorter and more sensitive line might be used for secondary swings. An even shorter line can measure the short term - -#### movements. (See Figure 4.15.) - -**Figure 4.15** *Different trendlines are used to define the different degrees of trend. Line 1 in the above example is the major up trendline, defining the major uptrend. Lines 2, 3, and 4 define the intermediate uptrends. Finally, line* 5 *defines a shorter term advance within the last intermediate uptrend. Technicians use many different trendlines on the same chart.* - -### **THE CHANNEL LINE** - -The *channel line*, or the *return line* as it is sometimes called, is another useful variation of the trendline technique. Sometimes prices trend between two parallel lines—the basic trendline and the channel line. Obviously, when this is the case and when the analyst recognizes that a channel exists, this knowledge can be used to profitable advantage. - -The drawing of the channel line is relatively simple. In an uptrend (see Figure 4.16a), first draw the basic up trendline along the lows. Then draw a dotted line from the first prominent peak (point 2), which is parallel to the basic up trendline. Both lines move up to the right, forming a channel. If the next [rally](#page-89-0) reaches and backs off from the channel line (at point 4), then a channel may exist. If prices then drop back to the original trendline (at point - -5), then a channel probably does exist. The same holds true for a downtrend (Figure 4.16b), but of course in the opposite direction. - -**Figure 4.16a** *Example of a trend channel. Once the basic up trendline is drawn (below points 1 and 3) a channel, or return, line (dotted line) can be projected over the first peak at* 2, *which is parallel to the basic up trendline.* - -**Figure 4.16b** *A trend channel in a downtrend. The channel is projected downward from the first low at point 2, parallel to the down trendline along the 1 and 3 peaks. Prices will often remain within such a trend channel.* - -**Figure 4.16c** *Notice how prices fluctuated between the upper and lower parallel channels over a period of 25 years. The 1987, 1989, and 1993 tops occurred right at the upper channel line. The 1994 bottom bounced off the lower trendline.* - -The reader should immediately see the value of such a situation. The basic up trendline can be used for the initiation of new long positions. The channel line can be used for short term profit taking. More aggressive traders might even use the channel line to initiate a countertrend short position, although trading in the opposite direction of the prevailing trend can be a dangerous and usually costly tactic. As in the case of the basic trendline, the longer the channel remains intact and the more often it is successfully tested, the more important and reliable it becomes. - -The breaking of the major trendline indicates an important change in trend. But the breaking of a rising channel line has exactly the opposite meaning, and signals an acceleration of the existing trend. Some traders view the clearing of the upper line in an uptrend as a reason to add to long positions. - -**Figure 4.17** *The failure to reach the upper end of the channel is often an early warning that the lower line will be broken. Notice the failure to reach the upper line at point* 5 *is followed by the breaking of the basic up trendline at point 6.* - -Another way to use the channel technique is to spot failures to reach the channel line, usually a sign of a weakening trend. In Figure 4.17, the failure of prices to reach the top of the channel (at point 5) may be an early warning that the trend is turning, and increases the odds that the other line (the basic up trendline) will be broken. As a general rule of thu[mb,](#page-91-0) the failure of any move within an established price channel to reach one side of the channel usually indicates that the trend is shifting, and increases the likelihood that the other side of the channel will be broken. - -The channel can also be used to adjust the basic trendline. (See Figures 4.18 and 4.19.) If prices move above a projected rising channel line by a significant amount, it usually indicates a strengthening trend. Some chartists then draw a steeper basic up trendline from the last reaction low parallel to the new [chann](#page-92-1)el line (as [demonstrated](#page-92-0) in Figure 4.18). Often, the new steeper support line functions better than the old flatter line. Similarly, the failure of an uptrend to reach the upper end of a channel justifies the drawing of a new support line under the last reaction low p[arallel](#page-92-0) to the new resistance line over the past two peaks (as shown in Figure 4.19). - -**Figure 4.18** *When the upper channel line is broken (as in wave 5), many chartists will redraw the basic up trendline parallel to the new upper channel line. In other words, line 4-6 is drawn parallel to line 3-5. Because the uptrend is accelerating, it stands to reason that the basic up trendline will do likewise.* - -**Figure 4.19** *When prices fail to reach the upper channel line, and a down trendline is drawn over the two declining peaks (line 3-5), a tentative channel line can be drawn from the low at point 4 parallel to line 3-5. The lower* - -*channel line sometimes indicates where initial support will be evident.* - -Channel lines have measuring implications. *Once a breakout occurs from an existing price channel, prices usually travel a distance equal to the width of the channel.* Therefore, the user has to simply measure the width of the channel and then project that amount from the point at which either trendline is broken. - -It should always be kept in mind, however, that of the two lines, the basic trendline is by far the more important and the more reliable. The channel line is a secondary use of the trendline technique. But the use of the channel line works often enough to justify its inclusion in the chartist's toolkit. - -### **PERCENTAGE RETRACEMENTS** - -In all of the previous examples of uptrends and downtrends, the reader has no doubt noticed that after a particular market move, prices retrace a portion of the previous trend before resuming the move in the original direction. These countertrend moves tend to fall into certain predictable percentage parameters. The best known application of the phenomenon is the 50% *retracement.* Let's say, for example, that a market is trending higher and travels from the 100 level to the 200 level. Very often, the subsequent reaction retraces about half of the prior move, to about the 150 level, before upward momentum is regained. This is a very well-known market tendency and happens quite frequently. Also, these percentage retracements apply to any degree of trend—major, secondary, and near term. - -Besides the 50% retracement, there are minimum and maximum percentage parameters that are also widely recognized—*the one-third and the two-thirds retracements.* In other words, the price trend can be divided into thirds. Usually, a minimum retracement is about 33% and a maximum about 66%. What this means is that, in a correction of a strong trend, the market usually retraces at least a third of the previous move. This is very useful information for a number of reasons. If a trader is looking for a buying area under the market, he or she can just compute a 33-50% zone on the chart and use that price zone as a general frame of reference for buying opportunities. (See Figures 4.20a and b.) - -**Figure 4.20a** *Prices often retrace about half of the prior trend before resuming in the original direction. This example shows a 50% retracement. The minimum retracement is one-third and the maximum, two-thirds of the prior trend.* - -The maximum retracement parameter is 66%, which becomes an especially critical area. If the prior trend is to be maintained, the correction must stop at the two-thirds point. This then becomes a relatively low risk buying area in an uptrend or selling area in a downtrend. If prices move beyond the two-thirds point, the odds then favor a trend reversal rather than just a retracement. The move usually then retraces the entire 100% of the prior trend. - -You may have noticed that the three percentage retracement parameters we've mentioned so far—50%, 33%, and 66%—are taken right from the original Dow Theory. When we get to the Elliott Wave Theory and Fibonacci ratios, we will see that followers of that approach use percentage retracements of 38% and 62%. I prefer to combine both approaches for a minimum retracement zone of 33-38% and a maximum zone of 62-66%. Some technicians round off these numbers even further to arrive at a 40-60% retracement zone. - -**Figure 4.20b** *The three horizontal lines mark the 38%, 50%, and 62% retracement levels measured from the April 1997 low to the August high. The first decline fell to the 38% line, the second decline to the 62% line, and the third near the 50% line. Most corrections will find support in the 38% to 50% retracement zones. The 38% and 62% lines are Fibonacci retracements and are popular with chartists.* - -Students of W. D. Gann are aware that he broke down the trend structure into eighths—1/8, 2/8, 3/8, 4/8, 5/8, 6/8, 7/8, 8/8. However, even Gann attached special importance to the 3/8 (38%), 4/8 (50%), and 5/8 (62%) retracement numbers and also felt it was important to divide the trend into thirds—1/3 (33%) and 2/3 (66%). - -### **SPEED RESISTANCE LINES** - -Speaking of thirds, let's touch on another technique that combines the trendline with percentage retracements—*speedlines.* This technique, developed by Edson Gould, is actually an adaptation of the idea of dividing the trend into thirds. The main difference from the percentage retracement concept is that the speed resistance lines (or speedlines) measure the rate of ascent or descent of a trend (in other words, its speed). - -To construct a bullish *speedline*, find the highest point in the current uptrend. (See Figure 4.21a.) From that high point on the chart, a vertical line is drawn toward the bottom of the chart to where the trend began. That - -vertical line is then divided into thirds. A trendline is then drawn from the beginning of the trend through the two points marked off on the vertical line, representing the one-third and two-thirds points. In a downtrend, just reverse the process. Measure the vertical distance from the low point in the downtrend to the beginning of the trend, and draw two lines from the beginning of the trend through the one-third and two-thirds points on the vertical line. (See Figures 4.21a and b.) - -**Figure 4.21a** *Examples of speed resistance lines in an uptrend. The vertical distance from the peak to the beginning of the trend is divided into thirds. Two trendlines are then drawn from point 1 through points 2 and 3. The upper line is the 2/3 speedline and the lower, the 1/3*. *The lines should act as support during market corrections. When they're broken, they revert to resistance lines on bounces. Sometimes these speedlines intersect price action.* - -**Figure 4.21b** *Speedlines in a downtrend.* - -Each time a new high is set in an uptrend or a new low in a downtrend, a new set of lines must be drawn (because there is now a new high or low point). Because the *speedlines* are drawn from the beginning of the trend to the one-third and two-thirds points, those trendlines may sometimes move through some of the price action. This is one case where trendlines are not drawn under lows or over highs, but actually through the price action. - -If an uptrend is in the process of correcting itself, the downside correction will usually stop at the higher speedline (the 2/3 speedline). If not, prices will drop to the lower speedline (the 1/3 speedline). If the lower line is also broken, prices will probably continue all the way to the beginning of the prior trend. In a downtrend, the breaking of the lower line indicates a probable rally to the higher line. If that is broken, a rally to the top of the prior trend would be indicated. - -As with all trendlines, speedlines reverse roles once they are broken. Therefore, during the correction of an uptrend, if the upper line (2/3 line) is broken and prices fall to the 1/3 line and rally from there, that upper line becomes a resistance barrier. Only when that upper line is broken would a signal be given that the old highs will probably be challenged. The same principle holds true in downtrends. - -### **GANN AND FIBONACCI FAN LINES** - -Charting software also allows the drawing of *Gann* and *Fibonacci* fan lines. *Fibonacci* fan lines are drawn in the same fashion as the speedline. Except that Fibonacci lines are drawn at 38% and 62% angles. (We'll explain where those 38% and 62% numbers come from in Chapter 13, "Elliott Wave Theory.") *Gann* lines (named after the legendary commodity trader, W.D. Gann) are trendlines drawn from prominent tops or bottoms at specific geometric angles. The most important Gann [line](#page-293-0) is drawn at a 45 degree angle from a peak or trough. Steeper Gann lines can be drawn during an uptrend at 63 3⁄ 4 degree and 75 degree angles. Flatter Gann lines can be drawn at 26 1⁄ 4 and 15 degree lines. It's possible to draw as many as nine different Gann lines. - -Gann and Fibonacci lines are used in the same way as speedlines. They are supposed to provide support during downward corrections. When one line is broken, prices will usually fall to the next lower line. Gann lines are somewhat controversial. Even if one of them works, you can't be sure in advance which one it will be. Some chartists question the validity of drawing geometric trendlines at all. - -## **INTERNAL TRENDLINES** - -These are variations of the trendline that don't rely on extreme highs or lows. Instead, *internal* trendlines are drawn through the price action and connect as many internal peaks or troughs as possible. Some chartists develop a good eye for this type of trendline and find them useful. The problem with internal trendlines is that their drawing is very subjective; whereas the rules for drawing of more traditional trendlines along the extreme highs and lows are more exact. (See Figure 4.21c.) - -## **REVERSAL [DAYS](#page-98-2)** - -Another important building block is the *reversal day.* This particular chart formation goes by many names—the top reversal day, the bottom reversal day, the *buying* or *selling climax*, and the key reversal day. By itself, this formation is not of major importance. But, taken in the context of other technical information, it can sometimes be significant. Let's first define what a reversal day is. - -**Figure 4.21c** *Internal trendlines are drawn through the price action connecting as many highs and lows as possible. This internal trendline drawn along the early 1996 highs provided support a year later during the spring of 1997.* - -A *reversal day* takes place either at a top or a bottom. The generally - -accepted definition of a *top reversal day* is the setting of a new high in an uptrend, followed by a lower close on the same day. In other words, prices set a new high for a given upmove at some point during the day (usually at or near the opening) then weaken and actually close lower than the previous day's closing. A *bottom reversal day* would be a new low during the day followed by a higher close. - -The wider the range for the day and the heavier the volume, the more significant is the signal for a possible near term trend reversal. Figures 4.22ab show what both would look like on a bar chart. Note the heavier volume on the reversal day. Also notice that both the high and low on the reversal day exceed the range of the previous day, forming an *outside day.* [While](#page-99-0) an [o](#page-100-0)utside day is not a requirement for a reversal day, it does carry more significance. (See Figure 4.22c.) - -The bottom reversal day is sometimes referred to as a *selling climax.* This is usually a dramatic turnaround at the bottom of a down move where all the discouraged longs [have](#page-100-1) finally been forced out of the market on heavy volume. The subsequent absence of selling pressure creates a vacuum over the market, which prices quickly rally to fill. The selling climax is one of the more dramatic examples of the reversal day and, while it may not mark the final bottom of a falling market, it usually signals that a significant low has been seen. - -**Figure 4.22a** *Example of a top reversal day. The heavier the volume on the reversal day and the wider the range, the more important it becomes.* - -**Figure 4.22b** *Example of a bottom reversal day. If volume is especially heavy, bottom reversals are often referred to as "selling climaxes."* - -**Figure 4.22c** *The chart action of October 28, 1997 was a classic example of an upside reversal day or a "selling climax." Prices opened sharply lower and closed sharply higher. The unusually heavy volume bar for that day added to its importance. Two less dramatic upside reversal days (see arrows) also marked price bottoms.* - -#### **Weekly and Monthly Reversals** - -This type of reversal pattern shows up on weekly and monthly bar charts, and with much greater significance. On a weekly chart, each bar represents the entire week's range with the close registered on Friday. An *upside weekly* - -*reversal*, therefore, would occur when the market trades lower during the week, makes a new low for the move, but on Friday closes above the previous Friday's close. - -Weekly reversals are much more significant than daily reversals for obvious reasons and are watched closely by chartists as signaling important turning points. By the same token, monthly reversals are even more important. - -### **PRICE GAPS** - -Price *gaps* are simply areas on the bar chart where no trading has taken place. In an uptrend, for example, prices open above the highest price of the previous day, leaving a gap or open space on the chart that is not filled during the day. In a downtrend, the day's highest price is below the previous day's low. Upside gaps are signs of market strength, while downside gaps are usually signs of weakness. Gaps can appear on long term weekly and monthly charts and, when they do, are usually very significant. But they are more commonly seen on daily bar charts. - -Several myths exist concerning the interpretation of gaps. One of the maxims often heard is that "gaps are always filled." This is simply not true. Some should be filled and others shouldn't. We'll also see that gaps have different forecasting implications depending on which types they are and where they occur. - -### **Three Types of Gaps** - -There are three general types of gaps—the *breakaway, runaway (or measuring)*, and *exhaustion gaps.* - -*The Breakaway Gap.* The *breakaway gap* usually occurs at the completion of an important price pattern, and usually signals the beginning of a significant market move. After a market has completed a major basing pattern, the breaking of resistance often occurs on a breakaway gap. Major breakouts from topping or basing areas are breeding grounds for this type of gap. The breaking of a major trendline, signaling a reversal of trend, might also see a breakaway gap. - -Breakaway gaps usually occur on heavy volume. More often than not, breakaway gaps are not filled. Prices may return to the upper end of the gap (in the case of a bullish breakout), and may even close a portion of the gap, but some portion of the gap is often left unfilled. As a rule, the heavier the volume after such a gap appears, the less likely it is to be filled. Upside gaps usually act as support areas on subsequent market corrections. It's important - -that prices not fall below gaps during an uptrend. In all cases a close below an upward gap is a sign of weakness. (See Figures 4.23a and b.) - -**Figure 4.23a** *The three types of gaps. The breakaway gap signaled the completion of the basing pattern. The runaway gap occurred at about the midway point (which is why it is also called the measuring gap). An exhaustion gap to the upside, followed within a week by a breakaway gap to the downside, left an island reversal top. Notice that the breakaway and runaway gaps were not filled on the way up, which is often the case.* - -*The Runaway or Measuring Gap.* After the move has been underway for awhile, somewhere around the middle of the move, prices will leap forward to form a second type of gap (or a series of gaps) called the *runaway gap.* This type of gap reveals a situation where the market is moving effortlessly on moderate volume. In an uptrend, it's a sign of market strength; in a downtrend, a sign of weakness. Here again, runaway gaps act as support under the market on subsequent corrections and are often not filled. As in the case of the breakaway, a close below the runaway gap is a negative sign in an uptrend. - -**Figure 4.23b** *The first box shows an "exhaustion" gap near the end of the rally. Prices falling below that gap signaled a top. The second box is a "measuring" gap about halfway through the downtrend. The third box is another "exhaustion" gap at the bottom. The move back above that gap signaled higher prices.* - -This variety of gap is also called a *measuring gap* because it usually occurs at about the halfway point in a trend. By measuring the distance the trend has already traveled, from the original trend signal or breakout, an estimate of the probable extent of the remaining move can be determined by doubling the amount already achieved. - -*The Exhaustion Gap.* The final type of gap appears near the end of a market move. After all objectives have been achieved and the other two types of gaps (breakaway and runaway) have been identified, the analyst should begin to expect the *exhaustion gap.* Near the end of an uptrend, prices leap forward in a last gasp, so to speak. However, that upward leap quickly fades and prices turn lower within a couple of days or within a week. When prices close under that last gap, it is usually a dead giveaway that the exhaustion gap has made its appearance. This is a classic example where falling below a gap in an uptrend has very bearish implications. - -#### **The Island Reversal** - -This takes us to *the island reversal pattern.* Sometimes after the upward exhaustion gap has formed, prices will trade in a narrow range for a couple of days or a couple of weeks before gapping to the downside. Such a situation leaves the few days of price action looking like an "island" surrounded by space or water. The exhaustion gap to the upside followed by a breakaway gap to the downside completes the island reversal pattern and usually indicates a trend reversal of some magnitude. Of course, the major significance of the reversal depends on where prices are in the general trend structure. (See Figure 4.23c.) - -**Figure 4.23c** *The two gaps on this daily chart form an "island reversal" top. The first box shows an up gap after a rally. The second box shows a down gap three weeks later. That combination of gaps usually signals an important top.* - -### **CONCLUSION** - -This chapter introduced introductory technical tools that I consider to be the building blocks of chart analysis—support and resistance, trendlines and channels, percentage retracements, speed resistance lines, reversal days, and gaps. Every technical approach covered in later chapters uses these concepts and tools in one form or another. Armed with a better understanding of these concepts, we're now ready to begin a study of price patterns. - -### **INTRODUCTION** - -So far we've touched on Dow Theory, which is the basis of most trend following work being used today. We've examined the basic concepts of trend, such as support, resistance, and trendlines. And we've introduced volume and open interest. We're now ready to take the next step, which is a study of chart patterns. You'll quickly see that these patterns build on the previous concepts. - -In Chapter 4, the definition of a trend was given as a series of ascending or descending peaks and troughs. As long as they were ascending, the trend was up; if they were descending, the trend was down. It was stressed, however, [that](#page-61-0) markets also move sideways for a certain portion of the time. It is these periods of sideways market movement that will concern us most in these next two chapters. - -It would be a mistake to assume that most changes in trend are very abrupt affairs. The fact is that important changes in trend usually require a period of transition. The problem is that these periods of transition do not always signal a trend reversal. Sometimes these sideways periods just indicate a pause or consolidation in the existing trend after which the original trend is resumed. - -### **PRICE PATTERNS** - -The study of these transition periods and their forecasting implications leads us to the question of price patterns. First of all, what are price patterns? Price patterns are pictures or formations, which appear on price charts of stocks or commodities, that can be classified into different categories, and that have - -## **TWO TYPES OF PATTERNS: REVERSAL AND CONTINUATION** - -There are two major categories of price patterns—reversal and continuation. As these names imply, reversal patterns indicate that an important reversal in trend is taking place. The continuation patterns, on the other hand, suggest that the market is only pausing for awhile, possibly to correct a near term overbought or oversold condition, after which the existing trend will be resumed. The trick is to distinguish between the two types of patterns as early as possible during the formation of the pattern. - -In this chapter, we'll be examining the five most commonly used major reversal patterns: the head and shoulders, triple tops and bottoms, double tops and bottoms, spike (or V) tops and bottoms, and the rounding (or saucer) pattern. We will examine the price formation itself, how it is formed on the chart, and how it can be identified. We will then look at the other important considerations—the accompanying *volume pattern* and *measuring implications.* - -*Volume* plays an important confirming role in all of these price patterns. In times of doubt (and there are lots of those), a study of the volume pattern accompanying the price data can be the deciding factor as to whether or not the pattern can be trusted. - -Most price patterns also have certain *measuring techniques* that help the analyst to determine minimum price objectives. While these objectives are only an approximation of the size of the subsequent move, they are helpful in assisting the trader to determine his or her reward to risk ratio. - -In Chapter 5, we'll look at a second category of patterns—the continuation variety. There we will examine triangles, flags, pennants, wedges, and rectangles. These patterns usually reflect pauses in the existing trend rather [than](#page-105-0) trend reversals, and are usually classified as intermediate and minor as opposed to major. - -### **Preliminary Points Common to All Reversal Patterns** - -Before beginning our discussion of the individual major reversal patterns, there are a few preliminary points to be considered that are common to all of these reversal patterns. - -- 1. A prerequisite for any reversal pattern is the existence of a prior trend. -- 2. The first signal of an impending trend reversal is often the breaking of an - -important trendline. - -- 3. The larger the pattern, the greater the subsequent move. -- 4. Topping patterns are usually shorter in duration and more volatile than bottoms. -- 5. Bottoms usually have smaller price ranges and take longer to build. -- 6. Volume is usually more important on the upside. - -*The Need for a Prior Trend.* The existence of a prior major trend is an important prerequisite for any reversal pattern. A market must obviously have something to reverse. A formation occasionally appears on the charts, resembling one of the reversal patterns. If that pattern, however, has not been preceded by a trend, there is nothing to reverse and the pattern is suspect. Knowing where certain patterns are most apt to occur in the trend structure is one of the key elements in pattern recognition. - -A corollary to this point of having a prior trend to reverse is the matter of measuring implications. It was stated earlier that most of the measuring techniques give only *minimum* price objectives. The *maximum* objective would be the total extent of the prior move. If a major bull market has occurred and a major topping pattern is being formed, the maximum implication for the potential move to the downside would be a 100% retracement of the bull market, or the point at which it all began. - -*The Breaking of Important Trendlines.* The first sign of an impending trend reversal is often the breaking of an important trendline. Remember, however, that the violation of a major trendline does not necessarily signal a trend reversal. What is being signaled is a change in trend. The breaking of a major up trendline might signal the beginning of a sideways price pattern, which later would be identified as either the reversal or consolidation type. Sometimes the breaking of the major trendline coincides with the completion of the price pattern. - -*The Larger the Pattern, the Greater the Potential.* When we use the term "larger," we are referring to the height and the width of the price pattern. The height measures the volatility of the pattern. The width is the amount of time required to build and complete the pattern. The greater the size of the pattern —that is, the wider the price swings within the pattern (the volatility) and the longer it takes to build—the more important the pattern becomes and the greater the potential for the ensuing price move. - -Virtually all of the measuring techniques in these two chapters are based on the *height* of the pattern. This is the method applied primarily to bar charts, which use a *vertical* measuring criteria. The practice of measuring the *horizontal* width of a price pattern usually is reserved for point and figure charting. That method of charting uses a device known as the *count*, which - -assumes a close relationship between the width of a top or bottom and the subsequent price target. - -*Differences Between Tops and Bottoms.* Topping patterns are usually shorter in duration and are more volatile than bottoms. Price swings within the tops are wider and more violent. Tops usually take less time to form. Bottoms usually have smaller price ranges, but take longer to build. For this reason it is usually easier and less costly to identify and trade bottoms than to catch market tops. One consoling factor, which makes the more treacherous topping patterns worthwhile, is that *prices tend to decline faster than they go up.* Therefore, the trader can usually make more money a lot faster by catching the short side of a bear market than by trading the long side of a bull market. Everything in life is a tradeoff between reward and risk. The greater risks are compensated for by greater rewards and vice versa. Topping patterns are harder to catch, but are worth the effort. - -*Volume is More Important on the Upside.* Volume should generally increase in the direction of the market trend and is an important confirming factor in the completion of all price patterns. The completion of each pattern should be accompanied by a noticeable increase in volume. However, in the early stages of a trend reversal, *volume is not as important at market tops.* Markets have a way of "falling of their own weight" once a bear move gets underway. Chartists like to see an increase in trading activity as prices drop, but it is not critical. At bottoms, however, the volume pickup is absolutely essential. If the volume pattern does not show a significant increase during the upside price *breakout*, the entire price pattern should be questioned. We will be taking a more in-depth look at volume in Chapter 7. - -### **THE HEAD AND SH[OULDE](#page-153-0)RS REVERSAL PATTERN** - -Let's take a close look now at what is probably the best known and most reliable of all major reversal patterns—*the head and shoulders reversal.* We'll spend more time on this pattern because it is important and also to explain all the nuances involved. Most of the other reversal patterns are just variations of the head and shoulders and will not require as extensive a treatment. - -This major reversal pattern, like all of the others, is just a further refinement of the concepts of trend covered in Chapter 4. Picture a situation in a major uptrend, where a series of ascending peaks and troughs gradually begin to lose momentum. The uptrend then levels off for awhile. During this time the forces of supply and demand are in re[lative](#page-61-0) balance. Once this distribution phase has been completed, support levels along the bottom of the horizontal trading range are broken and a new downtrend has been established. That new downtrend now has descending peaks and troughs. - -Let's see how this scenario would look on a *head and shoulders* top. (See Figures 5.1a and b.) At point A, the uptrend is proceeding as expected with no signs of a top. Volume expands on the price move into new highs, which is normal. The corrective dip to point B is on lighter volume, which is also to be [expecte](#page-109-0)d. A[t](#page-110-0) point C, however, the alert chartist might notice that the volume on the upside breakout through point A is a bit lighter than on the previous rally. This change is not in itself of major importance, but a little yellow caution light goes on in the back of the analyst's head. - -**Figure 5.1a** *Example of a head and shoulders top. The left and right shoulders (A and E) are at about the same height. The head (C) is higher than either shoulder. Notice the lighter volume on each peak. The pattern is completed on a close under the neckline (line 2). The minimum objective is the vertical distance from the head to the neckline projected downward from the breaking of the neckline. A return move will often occur back to the neckline, which should not recross the neckline once it has been broken.* - -**Figure 5.1b** *A head and shoulders top. The three peaks show the head higher than either shoulder. The return move (see arrow) back to the neckline occurred on schedule.* - -Prices then begin to decline to point D and something even more disturbing happens. The decline carries below the top of the previous peak at point A. Remember that, in an uptrend, a penetrated peak should function as support on subsequent corrections. The decline well under point A, almost to the previous reaction low at point B, is another warning that something may be going wrong with the uptrend. - -The market rallies again to point E, this time on even lighter volume, and isn't able to reach the top of the previous peak at point C. (That last rally at point E will often retrace one-half to two-thirds of the decline from points C to D.) To continue an uptrend, each high point must exceed the high point of the rally preceding it. The failure of the rally at point E to reach the previous peak at point C fulfills half of the requirement for a new downtrend—namely, descending peaks. - -By this time, the major up trendline (line 1) has already been broken, usually at point D, constituting another danger signal. But, despite all of these warnings, all that we know at this point is that the trend has shifted from up to sideways. This might be sufficient cause to liquidate long positions, but not necessarily enough to justify new short sales. - -#### **The Breaking of the Neckline Completes the Pattern** - -By this time, a flatter trendline can be drawn under the last two reaction lows - -(points B and D), which is called a *neckline* (see line 2). This line generally has a slight upward slope at tops (although it's sometimes horizontal and, less often, tilts downward). *The deciding factor in the resolution of the head and shoulders top is a decisive closing violation of that neckline.* The market has now violated the trendline along the bottom of points B and D, has broken under support at point D, and has completed the requirement for a new downtrend—descending peaks and troughs. The new downtrend is now identified by the declining highs and lows at points C, D, E, and F. Volume should increase on the breaking of the neckline. A sharp increase in downside volume, however, is not critically important in the initial stages of a market top. - -### **The Return Move** - -Usually a *return move* develops which is a bounce back to the bottom of the neckline or to the previous reaction low at point D (see point G), both of which have now become overhead resistance. The return move does not always occur or is sometimes only a very minor bounce. Volume may help determine the size of the bounce. If the initial breaking of the neckline is on very heavy trading, the odds for a return move are diminished because the increased activity reflects greater downside pressure. Lighter volume on the initial break of the neckline increases the likelihood of a return move. That bounce, however, should be on light volume and the subsequent resumption of the new downtrend should be accompanied by noticeably heavier trading activity. - -### **Summary** - -Let's review the basic ingredients for a head and shoulders top. - -- 1. A prior uptrend. -- 2. A left shoulder on heavier volume (point A) followed by a corrective dip to point B. -- 3. A rally into new highs but on lighter volume (point C). -- 4. A decline that moves below the previous peak (at A) and approaches the previous reaction low (point D). -- 5. A third rally (point E) on noticeably light volume that fails to reach the top of the head (at point C). -- 6. A close below the neckline. -- 7. A return move back to the neckline (point G) followed by new lows. - -What has become evident is three well defined peaks. The middle peak (the head) is slightly higher than either of the two shoulders (points A and E). The pattern, however, is not complete until the neckline is decisively broken on a closing basis. Here again, the 1-3% penetration criterion (or some variation thereof) or the requirement of two successive closes below the neckline (the two day rule) can be used for added confirmation. Until that downside violation takes place, however, there is always the possibility that the pattern is not really a head and shoulders top and that the uptrend may resume at some point. - -### **THE IMPORTANCE OF VOLUME** - -The accompanying volume pattern plays an important role in the development of the head and shoulders top as it does in all price patterns. As a general rule, the second peak (the head) should take place on lighter volume than the left shoulder. This is not a requirement, but a strong tendency and an early warning of diminishing buying pressure. The most important volume signal takes place during the third peak (the right shoulder). Volume should be noticeably lighter than on the previous two peaks. Volume should then expand on the breaking of the neckline, decline during the return move, and then expand again once the return move is over. - -As mentioned earlier, volume is less critical during the completion of market tops. But, at some point, volume should begin to increase if the new downtrend is to be continued. Volume plays a much more decisive role at market bottoms, a subject to be discussed shortly. Before doing so, however, let's discuss the measuring implications of the head and shoulders pattern. - -### **FINDING A PRICE OBJECTIVE** - -The method of arriving at a price objective is based on the *height* of the pattern. Take the vertical distance from the head (point C) to the neckline. Then project that distance from the point where the neckline is broken. Assume, for example, that the top of the head is at 100 and the neckline is at 80. The vertical distance, therefore, would be the difference, which is 20. That 20 points would be measured downward from the level at which the neckline is broken. If the neckline in Figure 5.1a is at 82 when broken, a downside objective would be projected to the 62 level (82 – 20=62). - -Another technique that accomplishes about the same task, but is a bit easier, is to simply measure the [length](#page-109-0) of the first wave of the decline (points C to D) and then double it. In either case, the greater the height or volatility of the pattern, the greater the objective. Chapter 4 stated that the measurement taken from a trendline penetration was similar to that used in the head and - -shoulders pattern. You should be able to see that now. Prices travel roughly the same distance below the broken neckline as they do above it. You'll see throughout our entire study of price patterns that *most price targets on bar charts are based on the height or volatility of the various patterns.* The theme of measuring the height of the pattern and then projecting that distance from a breakout point will be constantly repeated. - -*It's important to remember that the objective arrived at is only a minimum target.* Prices will often move well beyond the objective. Having a minimum target to work with, however, is very helpful in determining beforehand whether there is enough potential in a market move to warrant taking a position. If the market exceeds the price objective, that's just icing on the cake. The *maximum* objective is the size of the prior move. If the previous bull market went from 30 to 100, then the maximum downside objective from a topping pattern would be a complete retracement of the entire upmove all the way down to 30. Reversal patterns can only be expected to reverse or retrace what has gone before them. - -#### **Adjusting Price Objectives** - -A number of other factors should be considered while trying to arrive at a price objective. The measuring techniques from price patterns, such as the one just mentioned for the head and shoulders top, are only the first step. There are other technical factors to take into consideration. For example, where are the prominent support levels left by the reaction lows during the previous bull move? Bear markets often pause at these levels. What about percentage retracements? The *maximum objective* would be a 100% retracement of the previous bull market. But where are the 50% and 66% retracement levels? Those levels often provide significant support under the market. What about any prominent gaps underneath? They often function as support areas. Are there any long term trendlines visible below the market? - -The technician must consider other technical data in trying to pinpoint price targets taken from price patterns. If a downside price measurement, for example, projects a target to 30, and there is a prominent support level at 32, then the chartist would be wise to adjust the downside measurement to 32 instead of 30. As a general rule, when a slight discrepancy exists between a projected price target and a clearcut support or resistance level, it's usually safe to adjust the price target to that support or resistance level. It is often necessary to adjust the measured targets from price patterns to take into account additional technical information. The analyst has many different tools at his or her disposal. The most skillful technical analysts are those who learn to blend all of those tools together properly. - -## **THE INVERSE HEAD AND SHOULDERS** - -The head and shoulders bottom, or the *inverse head and shoulders* as it is sometimes called, is pretty much a mirror image of the topping pattern. As Figure 5.2a shows, there are three distinct bottoms with the head (middle trough) a bit lower than either of the two shoulders. A decisive close through the neckline is also necessary to complete the pattern, and the measuring [technique](#page-114-1) is the same. One slight difference at the bottom is the greater tendency for the return move back to the neckline to occur after the bullish breakout. (See Figure 5.2b.) - -**Figure 5.2a** *Example of an inverse head and shoulders. The bottom version of this pattern is a mirror image of the top. The only significant difference is the volume pattern in the second half of the pattern. The rally from the head should see heavier volume, and the breaking of the neckline should see a burst of trading activity. The return move back to the neckline is more common at bottoms.* - -The most important difference between the top and bottom patterns is the volume sequence. Volume plays a much more critical role in the identification and completion of a head and shoulders bottom. This point is generally true of all bottom patterns. It was stated earlier that markets have a tendency to "fall of their own weight." At bottoms, however, markets require a significant increase in buying pressure, reflected in greater volume, to launch a new bull market. - -**Figure 5.2b** *A head and shoulders bottom. The neckline has a slight downward slant, which is normally the case. The pullback after the breakout (see arrow) nicked the neckline a bit, but then resumed the uptrend.* - -A more technical way of looking at this difference is that a market can fall just from inertia. Lack of demand or buying interest on the part of traders is often enough to push a market lower; but a market does not go up on inertia. Prices only rise when demand exceeds supply and buyers are more aggressive than sellers. - -The volume pattern at the bottom is very similar to that at the top for the first half of the pattern. That is, the volume at the head is a bit lighter than that at the left shoulder. The rally from the head, however, should begin to show not only an increase in trading activity, but the level of volume often exceeds that registered on the rally from the left shoulder. The dip to the right shoulder should be on very light volume. The critical point occurs at the rally through the neckline. This signal must be accompanied by a sharp burst of trading volume if the breakout is for real. - -This point is where the bottom differs the most from the top. At the bottom, heavy volume is an absolutely essential ingredient in the completion of the basing pattern. The return move is more common at bottoms than at tops and should occur on light volume. Following that, the new uptrend should resume on heavier volume. The measuring technique is the same as at the top. - -The neckline at the top usually slopes slightly upward. Sometimes, however, it is horizontal. In either case, it doesn't make too much of a difference. Once in a while, however, a top neckline slopes downward. This slope is a sign of market weakness and is usually accompanied by a weak right shoulder. However, this is a mixed blessing. The analyst waiting for the breaking of the neckline to initiate a short position has to wait a bit longer, because the signal from the down sloping neckline occurs much later and only after much of the move has already taken place. For basing patterns, most necklines have a slight downward tilt. A rising neckline is a sign of greater market strength, but with the same drawback of giving a later signal. - -### **COMPLEX HEAD AND SHOULDERS PATTERNS** - -A variation of the head and shoulders pattern sometimes occurs which is called the *complex head and shoulders pattern.* These are patterns where two heads may appear or a double left and right shoulder. These patterns are not that common, but have the same forecasting implications. A helpful hint in this regard is the strong tendency toward symmetry in the head and shoulders pattern. This means that a single left shoulder usually indicates a single right shoulder. A double left shoulder increases the odds of a double right shoulder. - -### **Tactics** - -Market tactics play an important role in all trading. Not all technical traders like to wait for the breaking of the neckline before initiating a new position. As Figure 5.3 shows, more aggressive traders, believing that they have correctly identified a head and shoulders bottom, will begin to probe the long side during the formation of the right shoulder. Or they will buy the first tec[hnical](#page-117-0) signal that the decline into the right shoulder has ended. - -Some will measure the distance of the rally from the bottom of the head (points C to D) and then buy a 50% or 66% retracement of that rally. Still others would draw a tight down trendline along the decline from points D to E and buy the first upside break of that trendline. Because these patterns are reasonably symmetrical, some will buy into the right shoulder as it approaches the same level as the bottom of the left shoulder. A lot of anticipatory buying takes place during the formation of the right shoulder. If the initial long probe proves to be profitable, additional positions can be added on the actual penetration of the neckline or on the return move back to the neckline after the breakout. - -#### **The Failed Head And Shoulders Pattern** - -Once prices have moved through the neckline and completed a head and shoulders pattern, *prices should not recross the neckline again.* At a top, once the neckline has been broken on the downside, any decisive close back above the neckline is a serious warning that the initial breakdown was probably a bad signal, and creates what is often called, for obvious reasons, *a failed head and shoulders.* This type of pattern starts out looking like a classic head and shoulders reversal, but at some point in its development (either prior to the breaking of the neckline or just after it), prices resume their original trend. - -**Figure 5.3** *Tactics for a head and shoulders bottom. Many technical traders will begin to initiate long positions while the right shoulder (E) is still being formed. One-half to two-thirds pullback of the rally from points C to D, a decline to the same level as the left shoulder at point A*, *or the breaking of a short term down trendline (line 1) all provide early opportunities for market entry. More positions can be added on the breaking of the neckline or the return move back to the neckline.* - -There are two important lessons here. The first is that none of these chart patterns are infallible. They work most of the time, but not always. The second lesson is that technical traders must always be on the alert for chart signs that their analysis is incorrect. One of the keys to survival in the financial markets is to keep trading losses small and to exit a losing trade as quickly as possible. One of the greatest advantages of chart analysis is its ability to quickly alert the trader to the fact that he or she is on the wrong side of the market. The ability and willingness to quickly recognize trading errors and to take defensive action immediately are qualities not to be taken lightly in the financial markets. - -#### **The Head And Shoulders as a Consolidation Pattern** - -Before moving on to the next price pattern, there's one final point to be made on the head and shoulders. We started this discussion by listing it as the best known and most reliable of the major reversal patterns. You should be warned, however, that this formation can, on occasion, act as a consolidation rather than a reversal pattern. When this does happen, it's the exception rather than the rule. We'll talk more about this in Chapter 6, "Continuation Patterns." - -### **TRIPLE TOPS AND BOTTOMS** - -Most of the points covered in the treatment of the head and shoulders pattern are also applicable to other types of reversal patterns. (See Figures 5.4a-c.) The *triple top* or *bottom*, which is much rarer in occurrence, is just a slight variation of that pattern. The main difference is that the three peaks or troughs in the *triple top* or *bottom* are at about the same level. (See [Figure](#page-118-1) 5.4a.[\)](#page-119-0) Chartists often disagree as to whether a reversal pattern is a head and shoulders or a triple top. The argument is academic, because both patterns imply the exact same thing. - -The volume tends to decline with each successive peak at the top and should increase at the breakdown point. The triple top is not complete until support levels along both of the intervening lows have been broken. Conversely, prices must close through the two intervening peaks at the bottom to complete a triple bottom. (As an alternate strategy, the breaking of the nearest peak or trough can also be used as a reversal signal.) Heavy upside volume on the completion of the bottom is also essential. - -**Figure 5.4a** *A triple top. Similar to the head and shoulders except that all peaks are at the same level. Each rally peak should be on lighter volume. The pattern is complete when both troughs have been broken on heavier volume. The measuring technique is the height of the pattern projected downward from the breakdown point. Return moves back to the lower line are not unusual.* - -**Figure 5.4b** *A triple bottom. Similar to a head and shoulders bottom except that each low is at the same level. A mirror image of the triple top except that volume is more important on the upside breakout.* - -**Figure 5.4c** *A triple bottom reversal pattern. Prices found support just* - -*below 12 three times on this chart before launching a major advance. The bottom formation on this weekly chart lasted two full years, thereby giving it major significance.* - -The measuring implication is also similar to the head and shoulders, and is based on the height of the pattern. Prices will usually move a minimum distance from the breakout point at least equal to the height of the pattern. Once the breakout occurs, a return move to the breakout point is not unusual. Because the triple top or bottom represents only a minor variation of the head and shoulders pattern, we won't say much more about it here. - -### **DOUBLE TOPS AND BOTTOMS** - -A much more common reversal pattern is the *double top or bottom.* Next to the *head and shoulders*, it is the most frequently seen and the most easily recognized. (See Figures 5.5a-e.) Figures 5.5a and 5.5b show both the top and bottom variety. For obvious reasons, the top is often referred to as an "M" and the bottom as a "W." The general characteristics of a *double top* are similar to that of the head and [shoulders](#page-120-1) [a](#page-123-1)nd [triple](#page-120-1) top except [that](#page-121-0) only two peaks appear instead of three. The volume pattern is similar as is the measuring rule. - -**Figure 5.5a** *Example of a double top. This pattern has two peaks (A and C) at about the same level. The pattern is complete when the middle trough at point B is broken on a closing basis. Volume is usually lighter on the second peak (C) and picks up on the breakdown (D). A return move back to the lower line is not unusual. The minimum measuring target is the height of the top projected downward from the breakdown point.* - -**Figure 5.5b** *Example of a double bottom. A mirror image of the double top. Volume is more important on the upside breakout. Return moves back to the breakout point are more common at bottoms.* - -**Figure 5.5c** *Example of a double bottom. This stock bounced sharply off the 68 level twice over a span of three months. Note that the second bottom was also an upside reversal day. The breaking of resistance at 80 completed the bottom.* - -In an uptrend (as shown in Figure 5.5a), the market sets a new high at point A, usually on increased volume, and then declines to point B on declining volume. So far, everything is proceeding as expected in a normal uptrend. The next rally to point C, [however,](#page-120-1) is unable to penetrate the previous peak at A on a closing basis and begins to fall back again. A - -potential *double top* has been set up. I use the word "potential" because, as is the case with all reversal patterns, the reversal is not complete until the previous support point at B is violated on a closing basis. Until that happens, prices could be in just a sideways consolidation phase, preparing for a resumption of the original uptrend. - -**Figure 5.5d** *Example of a double top. Sometimes the second peak doesn't quite reach the first peak as in this example. This two month double top signaled a major decline. The actual signal was the breaking of support near 46 (see box).* - -The ideal top has two prominent peaks at about the same price level. Volume tends to be heavier during the first peak and lighter on the second. A decisive close under the middle trough at point B on heavier volume completes the pattern and signals a reversal of trend to the downside. A return move to the breakout point is not unusual prior to resumption of the downtrend. - -#### **Measuring Technique for the Double Top** - -The measuring technique for the double top is the height of the pattern projected from the breakdown point (the point where the middle trough at point B is broken). As an alternative, measure the height of the first downleg (points A to B) and project that length downward from the middle trough at point B. Measurements at the bottom are the same, but in the other direction. - -**Figure 5.5e** *Price patterns show up regularly on the charts of major stock averages. On this chart, the Nasdaq Composite Index formed a double bottom near the 1470 level before turning higher. The break of the down trendline (see box) confirmed the upturn.* - -### **VARIATIONS FROM THE IDEAL PATTERN** - -As in most other areas of market analysis, real-life examples are usually some variation of the ideal. For one thing, sometimes the two peaks are not at exactly the same price level. On occasion, the second peak will not quite reach the level of the first peak, which is not too problematical. What does cause some problems is when the second peak actually exceeds the first peak by a slight margin. What at first may appear to be a valid upside breakout and resumption of the uptrend may turn out to be part of the topping process. To help resolve this dilemma, some of the filtering criteria already mentioned may come in handy. - -#### **Filters** - -Most chartists require a close beyond a previous resistance peak instead of just an intraday penetration. Second, a price filter of some type might be used. One such example is a percentage penetration criterion (such as 1% or 3%). Third, the two day penetration rule could be used as an example of a time filter. In other words, prices would have to close beyond the top of the first peak for two consecutive days to signal a valid penetration. Another time - -filter could be a Friday close beyond the previous peak. The volume on the upside breakout might also provide a clue to its reliability. - -These filters are certainly not infallible, but do serve to reduce the number of false signals (or whipsaws) that often occur. Sometimes these filters are helpful, and sometimes they're not. The analyst must face the realization that he or she is dealing with percentages and probabilities, and that there will be times when bad signals occur. That's simply a fact of trading life. - -It's not that unusual for the final leg or wave of a bull market to set a new high before reversing direction. In such a case, the final upside breakout would become a "bull trap." (See Figures 5.6a and b.) We'll show you some indicators later on that may help you spot these false breakouts. - -#### **The Term "Double Top" Greatly Overuse[d](#page-124-0)** - -The terms "double top and bottom" are greatly overused in the financial markets. Most potential double tops or bottoms wind up being something else. The reason for this is that prices have a strong tendency to back off from a previous peak or bounce off a previous low. These price changes are a natural reaction and do not in themselves constitute a reversal pattern. Remember that, at a top, prices must actually violate the previous reaction low before the double top exists. - -**Figure 5.6a** *Example of a false breakout, usually called a bull trap. Sometimes near the end of a major uptrend, prices will exceed a previous peak before failing. Chartists use various time and price filters to reduce such whipsaws. This topping pattern would probably qualify as a double top.* - -**Figure 5.6b** *Example of a false breakout. Notice that the upside breakout was on light volume and the subsequent decline on heavy volume—a negative chart combination. Watching the volume helps avoid some false breakouts, but not all.* - -Notice in Figure 5.7a that the price at point C backs off from the previous peak at point A. This is perfectly normal action in an uptrend. Many traders, however, will immediately label this pattern as a double top as soon as prices fail to [clear](#page-126-0) the first peak on the first attempt. Figure 5.7b shows the same situation in a downtrend. It is very difficult for the chartist to determine whether the pullback from the previous peak or the bounce from the previous low is just a temporary setback in the existing trend or the [start](#page-126-1) of a double top or bottom reversal pattern. Because the technical odds usually favor continuation of the present trend, it is usually wise to await completion of the pattern before taking action. - -**Figure 5.7a** *Example of a normal pullback from a previous peak before resumption of the uptrend. This is normal market action and not to be confused with a double top. The double top only occurs when support at point B is broken.* - -**Figure 5.7b** *Example of a normal bounce off a previous low. This is normal market action and not to be confused with a double bottom. Prices will normally bounce off a previous low at least once, causing premature calls for a double bottom.* - -#### **Time Between Peaks or Troughs Is Important** - -Finally, the size of the pattern is always important. The longer the time period between the two peaks and the greater the height of the pattern, the greater the potential impending reversal. This is true of all chart patterns. In general, most valid double tops or bottoms should have at least a month between the two peaks or troughs. Some will even be two or three months apart. (On longer range monthly and weekly charts, these patterns can span several years.) Most of the examples used in this discussion have described market tops. The reader should be aware by now that bottoming patterns are mirror images of tops except for some of the general differences already touched - -### **SAUCERS AND SPIKES** - -Although not seen as frequently, reversal patterns sometimes take the shape of saucers or rounding bottoms. The *saucer bottom* shows a very slow and very gradual turn from down to sideways to up. It is difficult to tell exactly when the saucer has been completed or to measure how far prices will travel in the opposite direction. Saucer bottoms are usually spotted on weekly or monthly charts that span several years. The longer they last, the more significant they become. (See Figure 5.8.) - -*Spikes* are the hardest market turns to deal with because the spike (or V pattern) happens very quickly with little or no transition period. They usually take place in a [market](#page-127-0) that has gotten so overextended in one direction, that a sudden piece of adverse news causes the market to reverse direction very abruptly. A daily or weekly reversal, on very heavy volume, is sometimes the only warning they give us. That being the case, there's not much more we can say about them except that we hope you don't run into too many of them. Some technical indicators we discuss in later chapters will help you determine when markets have gotten dangerously over-extended. (See Figure 5.9.) - -**Figure 5.8** *This chart shows what a saucer (or rounding) bottom looks like. They're very slow and gradual, but usually mark major turns. This bottom lasted four years.* - -**Figure 5.9** *Example of a v reversal pattern. These sudden reversals take place with little or no warning. A sudden price drop on heavy volume is usually the only telltale sign. Unfortunately, these sudden turns are hard to spot in advance.* - -### **CONCLUSION** - -We've discussed the five most commonly used major reversal patterns—the head and shoulders, double and triple tops and bottoms, the saucer, and the V, or spike. Of those, the most common are the head and shoulders, and double tops and bottoms. These patterns usually signal important trend reversals in progress and are classified as major reversal patterns. There is another class of patterns, however, which are shorter term in nature and usually suggest trend consolidations rather than reversals. They are aptly called *continuation* patterns. Let's look at this other type of pattern in Chapter 6. - -### **INTRODUCTION** - -The chart patterns covered in this chapter are called *continuation* patterns. These patterns usually indicate that the sideways price action on the chart is nothing more than a pause in the prevailing trend, and that the next move will be in the same direction as the trend that preceded the formation. This distinguishes this group of patterns from those in the previous chapter, which usually indicate that a major trend reversal is in progress. - -Another difference between reversal and continuation patterns is their time duration. Reversal patterns usually take much longer to build and represent major trend changes. Continuation patterns, on the other hand, are usually shorter term in duration and are more accurately classified as near term or intermediate patterns. - -Notice the constant use of the term "usually." The treatment of all chart patterns deals of necessity with general tendencies as opposed to rigid rules. There are always exceptions. Even the grouping of price patterns into different categories sometimes becomes tenuous. Triangles are usually continuation patterns, but sometimes act as reversal patterns. Although triangles are usually considered intermediate patterns, they may occasionally appear on long term charts and take on major trend significance. A variation of the triangle—the inverted variety—usually signals a major market top. Even the head and shoulders pattern, the best known of the major reversal patterns, will on occasion be seen as a consolidation pattern. - -Even with allowances for a certain amount of ambiguity and the occasional exception, chart patterns do generally fall into the above two categories and, if properly interpreted, can help the chartist determine what the market will probably do most of the time - -### **TRIANGLES** - -Let's begin our treatment of continuation patterns with the *triangle.* There are three types of triangles—*symmetrical, ascending*, and *descending.* (Some chartists include a fourth type of triangle known as an *expanding triangle*, or *broadening formation.* This is treated as a separate pattern later.) Each type of triangle has a slightly different shape and has different forecasting implications. - -Figures 6.1a-c show examples of what each triangle looks like. The symmetrical triangle (see Figure 6.1a) shows two converging trendlines, the upper line descending and the lower line ascending. The vertical line at the left, [measuring](#page-130-1) th[e](#page-131-1) height of the pattern, is called the *base.* The point of intersection at the right, [where](#page-130-1) the two lines meet, is called the *apex.* For obvious reasons, the symmetrical triangle is also called a *coil.* - -The ascending triangle has a rising lower line with a flat or horizontal upper line (see Figure 6.1b). The descending triangle (Figure 6.1c), by contrast, has the upper line declining with a flat or horizontal bottom line. Let's see how each one is interpreted. - -**Figure 6.1a** *Example of a bullish symmetrical triangle. Notice the two converging trendlines. A close outside either trendline completes the pattern. The vertical line at the left is the base. The point at the right where the two lines meet is the apex.* - -**Figure 6.1b** *Example of an ascending triangle. Notice the flat upper line and the rising lower line. This is generally a bullish pattern.* - -**Figure 6.1c** *Example of a descending triangle. Notice the flat bottom line and the declining upper line. This is usually a bearish pattern.* - -### **THE SYMMETRICAL TRIANGLE** - -The *symmetrical triangle* (or the *coil)* is usually a continuation pattern. It represents a pause in the existing trend after which the original trend is resumed. In the example in Figure 6.1a, the prior trend was up, so that the percentages favor resolution of the triangular consolidation on the upside. If the trend had been down, then the symmetrical triangle would have bearish implications. - -The minimum requirement for a triangle is four reversal points. Remember that it always takes two points to draw a trendline. Therefore, in order to draw two converging trendlines, each line must be touched at least twice. In Figure 6.1a, the triangle actually begins at point 1, which is where the consolidation in the uptrend begins. Prices pull back to point 2 and then rally to point 3. Point 3, however, is lower than point 1. The upper trendline can only be [drawn](#page-130-1) once prices have declined from point 3. - -Notice that point 4 is higher than point 2. Only when prices have rallied from point 4 can the lower upslanting line be drawn. It is at this point that the analyst begins to suspect the he or she is dealing with the symmetrical triangle. Now there are four reversal points (1, 2, 3, and 4) and two converging trendlines. - -While the minimum requirement is four reversal points, many triangles have six reversal points as shown in Figure 6.1a. - -This means that there are actually three peaks and three troughs that combine to form five waves within the triangle [before](#page-130-1) the uptrend resumes. (When we get to the Elliott Wave Theory, we'll have more to say about the five wave tendency within triangles.) - -#### **Time Limit for Triangle Resolution** - -There is a time limit for the resolution of the pattern, and that is the point where the two lines meet—at the apex. As a general rule, prices should break out in the direction of the prior trend somewhere between two-thirds to threequarters of the horizontal width of the triangle. That is, the distance from the vertical base on the left of the pattern to the apex at the far right. Because the two lines must meet at some point, that time distance can be measured once the two converging lines are drawn. An upside breakout is signaled by a penetration of the upper trendline. If prices remain within the triangle beyond the three-quarters point, the triangle begins to lose its potency, and usually means that prices will continue to drift out to the apex and beyond - -The triangle, therefore, provides an interesting combination of price and time. The converging trendlines give the price boundaries of the pattern, and indicate at what point the pattern has been completed and the trend resumed by the penetration of the upper trendline (in the case of an uptrend). But these trendlines also provide a time target by measuring the width of the pattern. If the width, for example, were 20 weeks long, then the breakout should take place sometime between the 13th and the 15th week. (See Figure 6.1d.) - -The actual trend signal is given by a closing penetration of one of the trendlines. Sometimes a return move will occur back to the penetrated trendline after the breakout. In an uptrend, that line has be[come](#page-133-0) a support line. In a downtrend, the lower line becomes a resistance line once it's broken. The apex also acts as an important support or resistance level after the breakout occurs. Various penetration criteria can be applied to the breakout, similar to those covered in the previous two chapters. A minimum penetration criterion would be a closing price outside the trendline and not just an intraday penetration. - -**Figure 6.1d** *Dell formed a bullish symmetrical triangle during the fourth quarter of 1997. Measured from left to right, the triangle width is 18 weeks. Prices broke out on the 13th week (see circle), just beyond the two-thirds point.* - -#### **Importance of Volume** - -Volume should diminish as the price swings narrow within the triangle. This tendency for volume to contract is true of all consolidation patterns. But the volume should pick up noticeably at the penetration of the trendline that completes the pattern. The return move should be on light volume with heavier activity again as the trend resumes. - -Two other points should be mentioned about volume. As is the case with reversal patterns, volume is more important on the upside than on the downside. An increase in volume is essential to the resumption of an uptrend in all consolidation patterns. - -The second point about volume is that, even though trading activity diminishes during formation of the pattern, a close inspection of the volume usually gives a clue as to whether the heavier volume is occurring during the upmoves or down-moves. In an uptrend, for example, there should be a slight tendency for volume to be heavier during the bounces and lighter on the price dips. - -#### **Measuring Technique** - -Triangles have measuring techniques. In the case of the symmetrical triangle, - -there are a couple of techniques generally used. The simplest technique is to measure the height of the vertical line at the widest part of the triangle (the base) and measure that distance from the breakout point. Figure 6.2 shows the distance projected from the breakout point, which is the technique I prefer. - -The second method is to draw a trendline from the top of the base (at point A) parallel to the lower trendline. This upper channel [line](#page-134-1) then becomes the upside target in an uptrend. It is possible to arrive at a rough time target for prices to meet the upper channel line. Prices will sometimes hit the channel line at the same time the two converging lines meet at the apex. - -**Figure 6.2** *There are two ways to take a measurement from a symmetrical triangle. One is to measure the height of the base (AB); project that vertical distance from the breakout point at C. Another method is to draw a parallel line upward from the top of the baseline (A) parallel to the lower line in the triangle.* - -### **THE ASCENDING TRIANGLE** - -The ascending and descending triangles are variations of the symmetrical, but have different forecasting implications. Figures 6.3a and b show examples of an *ascending triangle.* Notice that the upper trendline is flat, while the lower line is rising. This pattern indicates that buyers are more aggressive than sellers. It is considered a bullish pattern and is [usuall](#page-135-0)y resolved with a breakout to the upside. - -Both the ascending and descending triangles differ from the symmetrical in a very important sense. No matter where in the trend structure the ascending or descending triangles appear, they have very definite forecasting implications. The ascending triangle is bullish and the descending triangle is - -bearish. The symmetrical triangle, by contrast, is inherently a neutral pattern. This does not mean, however, that the symmetrical triangle does not have forecasting value. On the contrary, because the symmetrical triangle is a continuation pattern, the analyst must simply look to see the direction of the previous trend and then make the assumption that the previous trend will continue. - -**Figure 6.3a** *An ascending triangle. The pattern is completed on a decisive close above the upper line. This breakout should see a sharp increase in volume. That upper resistance line should act as support on subsequent dips after the breakout. The minimum price objective is obtained by measuring the height of the triangle (AB) and projecting that distance upward from the breakout point at C.* - -**Figure 6.3b** *The Dow Transports formed a bullish ascending triangle near the end of 1997. Notice the flat upper line at 3400 and the rising lower line. This is normally a bullish pattern no matter where it appears on the chart.* - -Let's get back to the ascending triangle. As already stated, more often than not, the ascending triangle is bullish. The bullish breakout is signaled by a decisive closing above the flat upper trendline. As in the case of all valid upside breakouts, volume should see a noticeable increase on the breakout. A return move back to the support line (the flat upper line) is not unusual and should take place on light volume. - -#### **Measuring Technique** - -The measuring technique for the ascending triangle is relatively simple. Simply measure the height of the pattern at its widest point and project that vertical distance from the breakout point. This is just another example of using the volatility of a price pattern to determine a minimum price objective. - -#### **The Ascending Triangle as a Bottom** - -While the ascending triangle most often appears in an uptrend and is considered a continuation pattern, it sometimes appears as a bottoming pattern. It is not unusual toward the end of a downtrend to see an ascending triangle develop. However, even in this situation, the interpretation of the pattern is bullish. The breaking of the upper line signals completion of the base and is considered a bullish signal. Both the ascending and descending triangles are sometimes also referred to as *right angle* triangles. - -### **THE DESCENDING TRIANGLE** - -The *descending triangle* is just a mirror image of the ascending, and is generally considered a bearish pattern. Notice in Figures 6.4a and b the descending upper line and the flat lower line. This pattern indicates that sellers are more aggressive than buyers, and is usually resolved on the downside. The downside signal is registered by a [decisive](#page-137-0) close u[nd](#page-137-1)er the lower trendline, usually on increased volume. A return move sometimes occurs which should encounter resistance at the lower trendline. - -The measuring technique is exactly the same as the ascending triangle in the sense that the analyst must measure the height of the pattern at the base to the left and then project that distance down from the breakdown point. - -While the descending triangle is a continuation pattern and usually is found within downtrends, it is not unusual on occasion for the descending triangle to be found at market tops. This type of pattern is not that difficult to recognize when it does appear in the top setting. In that case, a close below the flat lower line would signal a major trend reversal to the downside. - -**Figure 6.4a** *A descending triangle. The bearish pattern is completed with a decisive close under the lower flat line. The measuring technique is the height of the triangle (AB) projected down from the breakout at point C.* - -**Figure 6.4b** *A bearish descending triangle formed in Du Pont during the autumn of 1997. The upper line is descending while the lower line is flat. The break of the lower line in early October resolved the pattern to the downside.* - -#### **The Volume Pattern** - -The volume pattern in both the ascending and descending triangles is very similar in that the volume diminishes as the pattern works itself out and then increases on the breakout. As in the case of the symmetrical triangle, during the formation the chartist can detect subtle shifts in the volume pattern coinciding with the swings in the price action. This means that in the ascending pattern, the volume tends to be slightly heavier on bounces and lighter on dips. In the descending formation, volume should be heavier on the downside and lighter during the bounces. - -#### **The Time Factor in Triangles** - -One final factor to be considered on the subject of triangles is that of the time dimension. The triangle is considered an intermediate pattern, meaning that it usually takes longer than a month to form, but generally less than three months. A triangle that lasts less than a month is probably a different pattern, such as a pennant, which will be covered shortly. As mentioned earlier, triangles sometimes appear on long term price charts, but their basic meaning is always the same. - -### **THE BROADENING FORMATION** - -This next price pattern is an unusual variation of the triangle and is relatively rare. It is actually an inverted triangle or a triangle turned backwards. All of the triangular patterns examined so far show converging trendlines. The *broadening formation*, as the name implies, is just the opposite. As the pattern in Figure 6.5 shows, the trendlines actually diverge in the broadening formation, creating a picture that looks like an expanding triangle. It is also called a megaphone top. - -[The](#page-139-1) volume pattern also differs in this formation. In the other triangular patterns, volume tends to diminish as the price swings grow narrower. Just the opposite happens in the broadening formation. *The volume tends to expand along with the wider price swings.* This situation represents a market that is out of control and unusually emotional. Because this pattern also represents an unusual amount of public participation, it most often occurs at major market tops. *The expanding pattern, therefore, is usually a bearish formation.* It generally appears near the end of a major bull market. - -**Figure 6.5** *A broadening top. This type of expanding triangle usually occurs at major tops. It shows three successively higher peaks and two declining troughs. The violation of the second trough completes the pattern. This is an unusually difficult pattern to trade and fortunately is relatively rare.* - -### **FLAGS AND PENNANTS** - -The *flag* and *pennant* formations are quite common. They are usually treated together because they are very similar in appearance, tend to show up at about the same place in an existing trend, and have the same volume and measuring criteria. - -The *flag* and *pennant* represent brief pauses in a dynamic market move. In fact, one of the requirements for both the flag and the pennant is that they be preceded by a sharp and almost straight line move. They represent situations where a steep advance or decline has gotten ahead of itself, and where the market pauses briefly to "catch its breath" before running off again in the same direction. - -Flags and pennants are among the most reliable of continuation patterns and only rarely produce a trend reversal. Figures 6.6a-b show what these two patterns look like. To begin with, notice the steep price advance preceding the formations on heavy volume. Notice also the dramatic drop off in activity as the consolidation patterns form and then the [sudden](#page-140-0) b[ur](#page-140-1)st of activity on the upside breakout. - -The construction of the two patterns differs slightly. The flag resembles a parallelogram or rectangle marked by two parallel trendlines that tend to slope against the prevailing trend. In a downtrend, the flag would have a slight upward slope. - -**Figure 6.6a** *Example of a bullish flag. The flag usually occurs after a sharp move and represents a brief pause in the trend. The flag should slope against the trend. Volume should dry up during the formation and build again on the breakout. The flag usually occurs near the midpoint of the move.* - -**Figure 6.6b** *A bullish pennant. Resembles a small symmetrical triangle, but* - -### *usually lasts no longer than three weeks. Volume should be light during its formation. The move after the pennant is completed should duplicate the size of the move preceding it.* - -The pennant is identified by two converging trendlines and is more horizontal. It very closely resembles a small symmetrical triangle. An important requirement is that volume should dry up noticeably while each of the patterns is forming. - -Both patterns are relatively short term and should be completed within one to three weeks. Pennants and flags in downtrends tend to take even less time to develop, and often last no longer than one or two weeks. Both patterns are completed on the penetration of the upper trendline in an uptrend. The breaking of the lower trendline would signal resumption of downtrends. The breaking of those trendlines should take place on heavier volume. As usual, upside volume is more critically important than downside volume. (See Figures 6.7a-b.) - -#### **Measuring Implications** - -The [measuri](#page-141-0)[ng](#page-142-0) implications are similar for both patterns. Flags and pennants are said to "fly at half-mast" from a *flagpole.* The flagpole is the prior sharp advance or decline. The term "half-mast" suggests that these minor continuation patterns tend to appear at about the halfway point of the move. In general, the move after the trend has resumed will duplicate the flagpole or the move just prior to the formation of the pattern. - - - -### **Figure 6.7a** *A bullish flag in International Paper. The flag looks like a downsloping parallelogram. Notice that the flag occurred right at the halfway point of the uptrend.* - -To be more precise, measure the distance of the preceding move from the original breakout point. That is to say, the point at which the original trend signal was given, either by the penetration of a support or resistance level or an important trendline. That vertical distance of the preceding move is then measured from the breakout point of the flag or pennant—that is, the point at which the upper line is broken in an uptrend or the lower line in a downtrend. - -#### **Summary** - -Let's summarize the more important points of both patterns. - -**Figure 6.7b** *A couple of pennants are flying on this Caterpillar chart. Pennants are short term continuation patterns that look like small symmetrical triangles. The pennant to the left continued the uptrend, while the one to the right continued the downtrend.* - -- 1. They are both preceded by an almost straight line move (called a flagpole) on heavy volume. -- 2. Prices then pause for about one to three weeks on very light volume. -- 3. The trend resumes on a burst of trading activity. -- 4. Both patterns occur at about the midpoint of the market move. -- 5. The pennant resembles a small horizontal symmetrical triangle. - -- 6. The flag resembles a small parallelogram that slopes against the prevailing trend. -- 7. Both patterns take less time to develop in downtrends. -- 8. Both patterns are very common in the financial markets. - -### **THE WEDGE FORMATION** - -The *wedge* formation is similar to a symmetrical triangle both in terms of its shape and the amount of time it takes to form. Like the symmetrical triangle, it is identified by two converging trendlines that come together at an *apex.* In terms of the amount of time it takes to form, the wedge usually lasts more than one month but not more than three months, putting it into the intermediate category. - -What distinguishes the *wedge* is its noticeable slant. The wedge pattern has a noticeable slant either to the upside or the downside. As a rule, like the flag pattern, the wedge slants against the prevailing trend. Therefore, a *falling wedge is considered bullish and a rising wedge is bearish.* Notice in Figure 6.8a that the bullish wedge slants downward between two converging trendlines. In the downtrend in Figure 6.8b, the converging trendlines have an [unmistakable](#page-143-1) upward slant. - -**Figure 6.8a** *Example of a bullish falling wedge. The wedge pattern has two converging trendlines, but slopes against the prevailing trend. A falling wedge is usually bullish.* - -**Figure 6.8b** *Example of a bearish wedge. A bearish wedge should slope upward against the prevailing downtrend.* - -#### **Wedges as Tops and Bottom Reversal Patterns** - -*Wedges* show up most often within the existing trend and usually constitute continuation patterns. The wedge can appear at tops or bottoms and signal a trend reversal. But that type of situation is much less common. Near the end of an uptrend, the chartist may observe a clearcut rising wedge. Because a continuation wedge in an uptrend should slope downward against the prevailing trend, the rising wedge is a clue to the chartist that this is a bearish and not a bullish pattern. At bottoms, a falling wedge would be a tip-off of a possible end of a bear trend. - -Whether the wedge appears in the middle or the end of a market move, the market analyst should always be guided by the general maxim that *a rising wedge is bearish and a falling wedge is bullish.* (See Figure 6.8c.) - -### **THE RECTANGLE FORMATION** - -The *rectangle formation* often goes by other names, but is usually easy to spot on a price chart. It represents a pause in the trend during which prices move sideways between two parallel horizontal lines. (See Figures 6.9a-c.) - -The rectangle is sometimes referred to as a *trading range* or a *congestion area.* In Dow Theory parlance, it is referred to as a *line.* Whatever it is called, it usually represents just a consolidation period in the [existing](#page-145-0) tre[nd](#page-146-0), and is usually resolved in the direction of the market trend that preceded its occurrence. In terms of forecasting value, it can be viewed as being similar to the symmetrical triangle but with flat instead of converging trendlines. - -**Figure 6.8c** *Example of a bearish rising wedge. The two converging trendlines have a definite upward slant. The wedge slants against the prevailing trend. Therefore, a rising wedge is bearish, and a falling wedge is bullish.* - -**Figure 6.9a** *Example of a bullish rectangle in an uptrend. This pattern is also called a trading range, and shows prices trading between two horizontal trendlines. It is also called a congestion area.* - -**Figure 6.9b** *Example of a bearish rectangle. While rectangles are usually considered continuation patterns, the trader must always be alert for signs that it may turn into a reversal pattern, such as a triple bottom.* - -**Figure 6.9c** *A bullish rectangle. Compaq's uptrend was interrupted for four months while it traded sideways. The break above the upper line in early May completed the pattern and resumed the uptrend. Rectangles are usually continuation patterns.* - -A decisive close outside either the upper or lower boundary signals completion of the rectangle and points the direction of the trend. The market analyst must always be on the alert, however, that the rectangular consolidation does not turn into a reversal pattern. In the uptrend shown in Figure 6.9a, for example, notice that the three peaks might initially be viewed as a possible triple top reversal pattern. - -#### **The Importance of the Volume Pattern** - -One important clue to watch for is the volume pattern. Because the price swings in both directions are fairly broad, the analyst should keep a close eye on which moves have the heavier volume. If the rallies are on heavier and the setbacks on lighter volume, then the formation is probably a continuation in the uptrend. If the heavier volume is on the downside, then it can be considered a warning of a possible trend reversal in the works. - -#### **Swings Within the Range Can Be Traded** - -Some chartists trade the swings within such a pattern by buying dips near the bottom and selling rallies near the top of the range. This technique enables the short term trader to take advantage of the well defined price boundaries, and profit from an otherwise trendless market. Because the positions are being taken at the extremes of the range, the risks are relatively small and well defined. If the trading range remains intact, this countertrend trading approach works quite well. When a breakout does occur, the trader not only exits the last losing trade immediately, but can reverse the previous position by initiating a new trade in the direction of the new trend. Oscillators are especially useful in sideways trading markets, but less useful once the breakout has occurred for reasons discussed in Chapter 10. - -Other traders assume the rectangle is a continuation pattern and take long positions near the lower end of the price band in an uptrend, or initiate short positions near the top of the range in downtrends. [Others](#page-211-0) avoid such trendless markets altogether and await a clearcut breakout before committing their funds. Most trend-following systems perform very poorly during these periods of sideways and trendless market action. - -#### **Other Similarities and Differences** - -In terms of duration, the rectangle usually falls into the one to three month category, similar to triangles and wedges. The volume pattern differs from other continuation patterns in the sense that the broad price swings prevent the usual dropoff in activity seen in other such patterns. - -The most common measuring technique applied to the rectangle is based on the height of the price range. Measure the height of the trading range, from top to bottom, and then project that vertical distance from the breakout point. This method is similar to the other vertical measuring techniques already mentioned, and is based on the volatility of the market. When we cover the count in point and figure charting, we'll say more on the question of horizontal price measurements. - -Everything mentioned so far concerning volume on breakouts and the probability of return moves applies here as well. Because the upper and lower boundaries are horizontal and so well defined in the rectangle, support and resistance levels are more clearly evident. This means that, on upside breakouts, the top of the former price band should now provide solid support on any selloffs. After a downside breakout in downtrends, the bottom of the trading range (the previous support area) should now provide a solid ceiling over the market on any rally attempts. - -### **THE MEASURED MOVE** - -The *measured move*, or the *swing* measurement as it is sometimes called, describes the phenomenon where a major market advance or decline is divided into two equal and parallel moves, as shown in Figure 6.10a. For this approach to work, the market moves should be fairly orderly and well defined. The measured move is really just a variation of some of the techniques we've already touched on. We've seen that [some](#page-148-1) of the consolidation patterns, such as flags and pennants, usually occur at about the halfway point of a market move. We've also mentioned the tendency of markets to retrace about a third to a half of a prior trend before resuming that trend. - -**Figure 6.10a** *Example of a measured move (or the swing measurement) in an uptrend. This theory holds that the second leg in the advance (CD) duplicates the size and slope of the first upleg (AB). The corrective wave (BC) often retraces a third to a half of AB before the uptrend is resumed.* - -**Figure 6.10b** *A measured move takes the prior upleg (AB) and adds that value to the bottom of the correction at C. On this chart, the prior uptrend (AB) was 20 points. Adding that to the lowpoint at C (62) yielded a price target to 82 (D).* - -In the measured move, when the chartist sees a well-defined situation, such as in Figure 6.10a, with a rally from point A to point B followed by a countertrend swing from point B to point C (which retraces a third to a half of wave AB), it is assumed that the next leg in the uptrend (CD) will come close to duplicating the [first](#page-148-1) leg (AB). The height of wave (AB), therefore, is simply measured upward from the bottom of the correction at point C. - -### **THE CONTINUATION HEAD AND SHOULDERS PATTERN** - -In the previous chapter, we treated the head and shoulders pattern at some length and described it as the best known and most trustworthy of all reversal patterns. The head and shoulders pattern can sometimes appear as a continuation instead of a reversal pattern. - -In the continuation head and shoulders variety, prices trace out a pattern that looks very similar to a sideways rectangular pattern except that the middle trough in an uptrend (see Figure 6.11a) tends to be lower than either of the two shoulders. In a downtrend (see Figure 6.11b), the middle peak in the consolidation exceeds the other two peaks. The result in both cases is a head - -and shoulders pattern turned upside down. Because it is turned upside down, there is no chance of confusing it with the reversal pattern. - -**Figure 6.11a** *Example of a bullish continuation head and shoulders pattern.* - -**Figure 6.11b** *Example of a bearish continuation head and shoulders pattern.* - -**Figure 6.11c** *General Motors formed a continuation head and shoulders pattern during the first half of 1997. The pattern is very clear but shows up in an unusual place. The pattern was completed and the uptrend resumed with the close above the neckline at 60.* - -### **CONFIRMATION AND DIVERGENCE** - -The principle of *confirmation* is one of the common themes running throughout the entire subject of market analysis, and is used in conjunction with its counterpart—*divergence.* We'll introduce both concepts here and explain their meaning, but we'll return to them again and again throughout the book because their impact is so important. We're discussing confirmation here in the context of chart patterns, but it applies to virtually every aspect of technical analysis. *Confirmation* refers to the comparison of all technical signals and indicators to ensure that most of those indicators are pointing in the same direction and are confirming one another. - -*Divergence* is the opposite of confirmation and refers to a situation where different technical indicators fail to confirm one another. While it is being used here in a negative sense, divergence is a valuable concept in market analysis, and one of the best early warning signals of impending trend reversals. We'll discuss the principle of divergence at greater length in Chapter 10, "Oscillators and Contrary Opinion." - -## **CONCLUSION** - -This concludes our treatment of price patterns. We stated earlier that the three pieces of raw data used by the technical analyst were *price, volume*, and *open interest.* Most of what we've said so far has focused on price. Let's take a closer look now at volume and open interest and how they are incorporated into the analytical process. - -## **INTRODUCTION** - -Most technicians in the financial markets use a multidimensional approach to market analysis by tracking the movement of three sets of figures—*price, volume*, and *open interest.* Volume analysis applies to all markets. Open interest applies primarily to futures markets. Chapter 3 discussed the construction of the daily bar chart and showed how the three figures were plotted on that type of chart. It was stated then that even though volume and open interest figures are available for each d[elivery](#page-50-0) month in futures markets, the *total* figures are the ones generally used for forecasting purposes. Stock chartists simply plot total volume along with the accompanying price. - -Most of the discussion of charting theory to this point has concentrated mainly on price action with some mention of volume. In this chapter, we'll round out the three dimensional approach by taking a closer look at the role played by volume and open interest in the forecasting process. - -### **VOLUME AND OPEN INTEREST AS SECONDARY INDICATORS** - -Let's begin by placing volume and open interest in their proper perspective. *Price* is by far the most important. *Volume* and *open interest* are secondary in importance and are used primarily as confirming indicators. Of those two, volume is the more important. - -**Volume** - -*Volume* is the number of entities traded during the time period under study. Because we'll be dealing primarily with daily bar charts, our main concern is with daily volume. That daily volume is plotted by a vertical bar at the bottom of the chart under the day's price action. (See Figure 7.1.) - -**Figure 7.1** *Notice that the volume bars are noticeably larger as prices are rallying (see circles). That means that volume is confirming the price rise and is bullish.* - -Volume can be plotted for *weekly* bar charts as well. In that case, total volume for the week would simply be plotted under the bar representing that week's price action. Volume is usually not used, however, on *monthly* bar charts. - -#### **Open Interest in Futures** - -The total number of outstanding or unliquidated contracts at the end of the day is *open interest.* In Figure 7.2, open interest is the solid line plotted on the chart under its corresponding price data for the day, but above the volume bars. Remember that official volume and open interest figures are reported a day late in the futures [markets](#page-156-0) and are, therefore, plotted with a one day lag. (Only estimated volume figures are available for the last trading day.) That means that each day the chartist plots the high, low, and closing price bar for the last day of trading, but plots the official volume and open interest figures for the previous day. - -Open interest represents the total number of outstanding longs or shorts - -in the market, *not the sum of both.* Open interest is the number of contracts. A contract must have both a *buyer* and a *seller.* Therefore, two market participants—a *buyer* and a *seller—*combine to create only one contract. The open interest figure reported each day is followed by either a positive or negative number showing the increase or decrease in the number of contracts for that day. It is those changes in the open interest levels, either up or down, that give the chartist clues as to the changing character of market participation and give open interest its forecasting value. - -*How Changes in Open Interest Occur.* In order to grasp the significance of how changes in the open interest numbers are interpreted, the reader must first understand how each trade produces a change in those numbers. - -Every time a trade is completed on the floor of the exchange, the open interest is affected in one of three ways—it increases, decreases, or stays unchanged. Let's see how those changes occur. - -| Buyer | Seller | Change in
Open Interest | | -|-------------------|-----------------|----------------------------|--| -| 1. Buys new long | Sells new short | Increases | | -| 2. Buys new long | Sells old long | No change | | -| 3. Buys old short | Sells new short | No change | | -| 4. Buys old short | Sells old long | Decreases | | - -In the first case, both the buyer and seller are initiating a new position and a new contract is established. In case 2, the buyer is initiating a new long position, but the seller is merely liquidating an old long. One is entering and the other exiting a trade. The result is a standoff and no change takes place in the number of contracts. In case 3, the same thing happens except this time it is the seller who is initiating a new short and the buyer who is only covering an old short. Because one of the traders is entering and the other exiting a trade, again no change is produced. In case 4, both traders are liquidating an old position and the open interest decreases accordingly. - -To sum up, if both participants in a trade are initiating a new position, the open interest will increase. If both are liquidating an old position, the open interest will decline. If, however, one is initiating a new trade while the other is liquidating an old trade, open interest will remain unchanged. By looking at the net change in the total open interest at the end of the day, the chartist is able to determine whether money is flowing into or out of the market. This information enables the analyst to draw some conclusions about the strength or weakness of the current price trend. - -#### **General Rules for Interpreting Volume and Open Interest** - -The futures technician incorporates volume and open interest information into market analysis. The rules for the interpretation of volume and open interest are generally combined because they are so similar. There are, however, some distinctions between the two that should be addressed. We'll begin here with a statement of the general rules for both. Having done that, we'll then treat each one separately before combining them again at the end. - -| separately
before | combining | them
again
at
the
end. | | -|----------------------|-----------|------------------------------------|--| -| | | | | -| | | | | -| | | | | - -If volume and open interest are both increasing, then the current price trend will probably continue in its present direction (either up or down). If, however, volume and open interest are declining, the action can be viewed as a warning that the current price trend may be nearing an end. Having said that, let's now take a look at volume and open interest separately. (See Figure 7.2.) - -**Figure 7.2** *A daily chart of crude oil futures shows volume and open interest (solid line). The open interest line is rising as prices are falling, which is bearish.* - -### **INTERPRETATION OF VOLUME FOR ALL MARKETS** - -The level of volume measures the intensity or urgency behind the price move. Heavier volume reflects a higher degree of intensity or pressure. By monitoring the level of volume along with price action, the technician is better able to gauge the buying or selling pressure behind market moves. This information can then be used to confirm price movement or warn that a price move is not to be trusted. (See Figures 7.3 and 7.4.) - -To state the rule more concisely, *volume should increase or expand in the direction of the existing price trend.* In an uptrend, volume should be heavier as the price moves higher, and [should](#page-157-1) decrease [or](#page-158-0) contract on price dips. As long as this pattern continues, volume is said to be confirming the price trend. - -**Figure 7.3** *The upside price breakout by McDonalds through the November 1997 peak was accompanied by a noticeable burst of trading activity. That's bullish.* - -**Figure 7.4** *The volume bars are following Intel's price uptrend. Volume is heavier as prices are rising, and drops off as prices weaken. Notice the burst of trading activity during the last three days' price jump.* - -The chartist is also watching for signs of *divergence* (there's that word again). Divergence occurs if the penetration of a previous high by the price trend takes place on declining volume. This action alerts the chartist to diminishing buying pressure. If the volume also shows a tendency to pick up on price dips, the analyst begins to worry that the uptrend is in trouble. - -#### **Volume as Confirmation in Price Patterns** - -During our treatment of price patterns in Chapters 5 and 6, volume was mentioned several times as an important confirming indicator. One of the first signs of a *head and shoulders* top occurred when prices moved into new highs during the formation of the *head* on light [volume](#page-105-0) with h[ea](#page-129-0)vier activity on the subsequent decline to the *neckline.* The *double* and *triple tops* saw lighter volume on each successive peak followed by heavier downside activity. Continuation patterns, like the *triangle*, should be accompanied by a gradual drop off in volume. As a rule, the resolution of all price patterns (the breakout point) should be accompanied by heavier trading activity if the signal given by that breakout is real. (See Figure 7.5.) - -In a downtrend, the volume should be heavier during down moves and lighter on bounces. As long as that pattern continues, the selling pressure is greater than buying pressure [and](#page-159-0) the downtrend should continue. It's only when that pattern begins to change that the chartist starts looking for signs of - -### a bottom. - -### **Volume Precedes Price** - -By monitoring the price and volume together, we're actually using two different tools to measure the same thing—pressure. By the mere fact that prices are trending higher, we can see that there is more buying than selling pressure. It stands to reason then that the greater volume should take place in the same direction as the prevailing trend. Technicians believe that *volume precedes price*, meaning that the loss of upside pressure in an uptrend or downside pressure in a downtrend actually shows up in the volume figures before it is manifested in a reversal of the price trend. - -**Figure 7.5** *The first half of this chart shows a positive trend with heavier volume on up days. The box at the top shows a sudden downturn on heavy volume—a negative sign. Notice the increase in trading as the continuation triangle is broken on the downside.* - -### **On Balance Volume** - -Technicians have experimented with many volume indicators to help quantify buying or selling pressure. Trying to "eyeball" the vertical volume bars along the bottom of the chart is not always precise enough to detect significant shifts in the volume flow. The simplest and best known of these volume indicators is *on balance volume* or *OBV.* Developed and popularized by Joseph Granville in his 1963 book, *Granville's New Key to Stock Market Profits*, OBV actually produces a curving line on the price chart. This line can - -be used either to confirm the quality of the current price trend or warn of an impending reversal by diverging from the price action. - -Figure 7.6 shows the price chart with the OBV line along the bottom of the chart instead of the volume bars. Notice how much easier it is to follow the volume trend with the OBV line. - -The [constr](#page-160-0)uction of the OBV line is simplicity itself. The total volume for each day is assigned a plus or minus value depending on whether prices close higher or lower for that day. A higher close causes the volume for that day to be given a plus value, while a lower close counts for negative volume. A running cumulative total is then maintained by adding or subtracting each day's volume based on the direction of the market close. - -It is the direction of the OBV line (its trend) that is important and not the actual numbers themselves. The actual OBV values will differ depending on how far back you are charting. Let the computer handle the calculations. Concentrate on the direction of the OBV line. - -The *on balance volume* line should follow in the same direction as the price trend. If prices show a series of higher peaks and troughs (an uptrend), the OBV line should do the same. If prices are trending lower, so should the OBV line. It's when the volume line fails to move in the same direction as prices that a divergence exists and warns of a possible trend reversal. - -**Figure 7.6** *The line along the bottom shows on balance volume (OBV) for the same Compaq chart. Notice how much easier it was to spot the downturn in October 1997.* - -#### **Alternatives to OBV** - -The *on balance volume* line does its job reasonably well, but it has some shortcomings. For one thing, it assigns an entire day's volume a plus or minus value. Suppose a market closes up on the day by some minimal amount such as one or two tics. Is it reasonable to assign all of that day's activity a positive value? Or consider a situation where the market spends most of the day on the upside, but then closes slightly lower. Should all of that day's volume be given a negative value? To resolve these questions, technicians have experimented with many variations of OBV in an attempt to discover the true upside and downside volume. - -One variation is to give greater weight to those days where the trend is the strongest. On an up day, for example, the volume is multiplied by the amount of the price gain. This technique still assigns positive and negative values, but gives greater weight to those days with greater price movement and reduces the impact of those days where the actual price change is minimal. - -There are more sophisticated formulas that blend volume (and open interest) with price action. James Sibbet's Demand Index, for example, combines price and volume into a leading market indicator. The Herrick Payoff Index uses open interest to measure money flow. (See Appendix A for an explanation of both indicators.) - -It should be noted that volume reporting in the stock market is much more useful than in the futures markets. Stock trading volume is [reported](#page-415-0) immediately, while it is reported a day late for futures. Levels of upside and downside volume are also available for stocks, but not in futures. The availability of volume data for stocks on each price change during the day has facilitated an even more advanced indicator called Money Flow, developed by Laszlo Birinyi, Jr. This real-time version of OBV tracks the level of volume on each price change in order to determine if money is flowing into or out of a stock. This sophisticated calculation, however, requires a lot of computer power and isn't readily available to most traders. - -These more sophisticated variations of OBV have basically the same intent—to determine whether the heavier volume is taking place on the upside (bullish) or the downside (bearish). Even with its simplicity, the OBV line still does a pretty good job of tracking the volume flow in a market—either in futures or stocks. And OBV is readily available on most charting software. Most charting packages even allow you to plot the OBV line right over the price data for even easier comparison. (See Figures 7.7 and 7.8.) - -**Figure 7.7** *An excellent example of how a bearish divergence between the on balance volume line (bottom) and the price of Intel correctly warned of a major downturn.* - -#### **Other Volume Limitations in Futures** - -We've already mentioned the problem of the one day lag in reporting futures volume. There is also the relatively awkward practice of using total volume numbers to analyze individual contracts instead of each contract's actual volume. There are good reasons for using total volume. But how does one deal with situations when some contracts close higher and others lower in the same futures market on the same day? *Limit* days produce other problems. Days when markets are locked *limit up* usually produce very light volume. This is a sign of strength as the numbers of buyers so overwhelm the sellers that prices reach the maximum trading limit and cease trading. According to the traditional rules of interpretation, light volume on a rally is bearish. The light volume on *limit* days is a violation of that principle and can distort OBV numbers. - -**Figure 7.8** *Overlaying the OBV (solid line) right over the price bars makes for easier comparison between price and volume. This chart of McDonalds shows the OBV line leading the price higher and warning in advance of the bullish breakout.* - -Even with these limitations, however, volume analysis can still be used in the futures markets, and the technical trader would be well advised to keep a watchful eye on volume indications. - -### **INTERPRETATION OF OPEN INTEREST IN FUTURES** - -The rules for interpreting open interest changes are similar to those for volume, but require additional explanation. - -1. With prices advancing in an uptrend and total open interest increasing, *new money is flowing into the market reflecting aggressive new buying, and is considered bullish.* (See Figure 7.9.) - -**Figure 7.9** *The uptrend in silver prices was confirmed by a similar rise in the open interest line. The boxes to the right show some normal liquidation of outstanding contracts as prices start to correct downward.* - -- 2. If, however, prices are rising and open interest declines, *the rally is being caused primarily by short covering* (holders of losing short positions being forced to cover those positions). *Money is leaving rather than entering the market.* This action is considered bearish because the uptrend will probably run out of steam once the necessary short covering has been completed. (See Figure 7.10.) -- 3. With prices in a downtrend and open interest rising, the technician knows that *new money is flowing into the market, reflecting aggressive new short selling.* This action increases the [odds](#page-165-0) that the downtrend will continue and is considered bearish. (See Figure 7.11.) -- 4. If, however, total open interest is declining along with declining prices, *the price decline is being caused by discouraged or losing longs being forced to liquidate their positions.* This [action](#page-166-0) is believed to indicate a strengthening technical situation because the downtrend will probably end once open interest has declined sufficiently to show that most losing longs have completed their selling. - -**Figure 7.10** *An example of a weak price rebound in gold futures. The price rise is accompanied by falling open interest, while the price decline shows rising open interest. A strong trend would see open interest trending with price, not against it.* - -Let's summarize these four points: - -- 1. *Rising open interest in an uptrend is bullish.* -- 2. *Declining open interest in an uptrend is bearish.* -- 3. *Rising open interest in a downtrend is bearish.* -- 4. *Declining open interest in a downtrend is bullish.* - -**Figure 7.11** *The downturn in copper during the summer of 1997 and the subsequent price decline was accompanied by rising open interest. Rising open interest during a price decline is bearish because it reflects aggressive short selling.* - -#### **Other Situations Where Open Interest Is Important** - -In addition to the preceding tendencies, there are other market situations where a study of open interest can prove useful. - -1. Toward the end of major market moves, where open interest has been increasing throughout the price trend, *a leveling off or decline in open interest is often an early warning of a change in trend.* - -2. *A high open interest figure at market tops can be considered bearish if the price drop is very sudden.* This means that all of the new longs established near the end of the uptrend now have losing positions. Their forced liquidation will keep prices under pressure until the open interest has declined sufficiently. As an example, let's assume that an uptrend has been in effect for some time. Over the past month, open interest has increased noticeably. Remember that every new open interest contract has one new long and one new short. Suddenly, prices begin to drop sharply and fall below the lowest price set over the past month. Every single new long established during that month now has a loss. - -The forced liquidation of those longs keeps prices under pressure until they have all been liquidated. Worse still, their forced selling often begins to feed on itself and, as prices are pushed even lower, causes additional margin selling by other longs and intensifies the new price decline. As a corollary to the preceding point, *an unusually high open interest in a bull market is a danger signal.* - -3. *If open interest builds up noticeably during a sideways consolidation or a horizontal trading range, the ensuing price move intensifies once the breakout occurs.* This only stands to reason. The market is in a period of indecision. No one is sure which direction the trend breakout will take. The increase in open interest, however, tells us that a lot of traders are taking positions in anticipation of the breakout. Once that breakout does occur, a lot of traders are going to be caught on the wrong side of the market. - -Let's assume we've had a three month trading range and that the open interest has jumped by 10,000 contracts. This means that 10,000 new long positions and 10,000 new short positions have been taken. Prices then break out on the upside and new three month highs are established. Because prices are trading at the highest point in three months, every single short position (all 10,000 of them) initiated during the previous three months now shows a loss. The scramble to cover those losing shorts naturally causes additional upside pressure on prices, producing even more panic. Prices remain strong until all or most of those 10,000 short positions have been offset by buying into the market strength. If the breakout had been to the downside, then it would have been the longs doing the scrambling. - -The early stage of any new trend immediately following a breakout is usually fueled by forced liquidation by those caught on the wrong side of the market. The more traders caught on the wrong side (manifested in the high open interest), the more severe the response to a sudden adverse market move. On a more positive note, the new trend is further aided by those on the right side of the market whose judgment has been vindicated, and who are now using accumulated paper profits to finance additional positions. It can be seen why *the greater the increase in open interest during a trading range (or any price formation for that matter), the greater the potential for the subsequent price move.* - -4. *Increasing open interest at the completion of a price pattern is viewed as added confirmation of a reliable trend signal.* The breaking of the *neckline*, for example, of a *head and shoulders* bottom is more convincing if the breakout occurs on increasing open interest along with the heavier volume. The analyst has to be careful here. Because the impetus following the initial trend signal is often caused by those on the wrong side of the market, *sometimes the open interest dips slightly at the beginning of a new trend.* This initial dip in the open interest can mislead the unwary chart reader, and argues against focusing too much attention on the open interest changes over the very short term. - -### **SUMMARY OF VOLUME AND OPEN INTEREST RULES** - -Let's summarize some of the more important elements of price, volume, and open interest. - -- 1. Volume is used in all markets; open interest mainly in futures. -- 2. Only the *total* volume and open interest are used for futures. -- 3. Increasing volume (and open interest) indicate that the current price trend will probably continue. -- 4. Declining volume (and open interest) suggest that the price trend may be changing. -- 5. Volume precedes price. Changes in buying or selling pressure are often detected in volume before price. -- 6. On balance volume (OBV), or some variation thereof, can be used to more accurately measure the direction of volume pressure. -- 7. Within an uptrend, a sudden leveling off or decline in open interest often warns of a change in trend. (This applies only to futures.) -- 8. Very high open interest at market tops is dangerous and can intensify downside pressure. (This applies only to futures.) -- 9. A buildup in open interest during consolidation periods intensifies the ensuing breakout. (This applies only to futures.) -- 10. Increases in volume (and open interest) help confirm the resolution of price patterns or any other significant chart developments that signal the beginning of a new trend. - -## **BLOWOFFS AND SELLING CLIMAXES** - -One final situation not covered so far that deserves mention is the type of dramatic market action that often takes place at tops and bottoms—*blowoffs* and *selling climaxes. Blowoffs* occur at major market tops and *selling climaxes* at bottoms. In futures, blowoffs are often accompanied by a drop in open interest during the final rally. In the case of a blowoff at market tops, prices suddenly begin to rally sharply after a long advance, accompanied by a large jump in trading activity and then peak abruptly. (See Figure 7.12.) In a selling climax bottom, prices suddenly drop sharply on heavy trading activity and rebound as quickly. (Refer back to Figure 4.22c.) - -## **COMMITMENTS OF T[RADERS](#page-100-1) REPORT** - -Our treatment of open interest would not be complete without mentioning the *Commitments of Traders (COT) Report*, and how it is used by futures technicians as a forecasting tool. The report is released by the Commodity Futures Trading Commission (CFTC) twice a month—a mid-month report and one at month's end. The report breaks down the open interest numbers into three categories—large hedgers, large speculators, and small traders. The large hedgers, also called commercials, use the futures markets primarily for hedging purposes. Large speculators include the large commodity funds, who rely primarily on mechanical trend-following systems. The final category of small traders includes the general public, who trade in much smaller amounts. - -**Figure 7.12** *A couple of blowoff tops in coffee futures. In both cases, prices rallied sharply on heavy volume. The negative warnings came from the decline in open interest (solid line) during both rallies (see arrows).* - -### **WATCH THE COMMERCIALS** - -The guiding principle in analyzing the Commitments Report is the belief that the large commercial hedgers are usually right, while the traders are usually wrong. That being the case, the idea is to place yourself in the same positions as the hedgers and in the opposite positions of the two categories of traders. For example, a bullish signal at a market bottom would occur when the commercials are heavily net long while the large and small traders are heavily net short. In a rising market, a warning signal of a possible top would take - -place when the large and small traders become heavily net long at the same time that the commercials are becoming heavily net short. - -### **NET TRADER POSITIONS** - -It is possible to chart the trends of the three market groups, and to use those trends to spot extremes in their positions. One way to do that is to study the net trader positions published in *Futures Charts* (Published by Commodity Trend Service, PO Box 32309, Palm Beach Gardens, FL 33420). That charting service plots three lines that show the net trader positions for all three groups on a weekly price chart for each market going back four years. By providing four years of data, historical comparisons are easily done. Nick Van Nice, the publisher of that chart service, looks for situations where the commercials are at one extreme, and the two categories of traders at the other, to find buying and selling opportunities (as shown in Figures 7.13 and 7.14). Even if you don't use the COT Report as a primary input in your trading decisions, it's not a bad idea to keep an eye on what those three groups are doing. - -### **OPEN INTEREST IN OPTIONS** - -Our coverage of open interest has concentrated on the *futures* markets. Open interest plays an important role in *options* trading as well. Open interest figures are published each day for *put* and *call* options on futures markets, stock averages, industry indexes, and individual stocks. While open interest in options may not be interpreted in exactly the same way as in futures, it tells us essentially the same thing—where the interest is and the liquidity. Some option traders compare *call* open interest (bulls) to *put* open interest (bears) in order to measure market sentiment. Others use option volume. - -**Figure 7.13** *This weekly chart of S&P 500 futures shows three buy signals (see arrows). The lines along the bottom show the commercials (solid line) heavily net long and the large speculators (dashed line) heavily net short at each buy signal.* - -### **PUT/CALL RATIOS** - -Volume figures for the options markets are used essentially the same way as in futures and stocks—that is, they tell us the degree of buying or selling pressure in a given market. Volume figures in options are broken down into *call* volume (bullish) and *put* volume (bearish). By monitoring the volume in calls versus puts, we are able to determine the degree of bullishness or bearishness in a market. One of the primary uses of volume data in options trading is the construction of put/call volume ratios. When options traders are bullish, call volume exceeds put volume and the put/call ratio falls. A bearish attitude is reflected in heavier put volume and a higher put/call ratio. The put/call ratio is usually viewed as a contrary indicator. A very high ratio signals an oversold market. A very low ratio is a negative warning of an overbought market. - -**Figure 7.14** *This weekly chart of copper futures shows three sell signals marked by the arrows. Each sell signal shows net long positions by the two categories of speculators and a net short position by the commercials. The commercials were right.* - -### **COMBINE OPTION SENTIMENT WITH TECHNICALS** - -Options traders use open interest and volume put/call figures to determine extremes in bullish or bearish sentiment. These sentiment readings work best when combined with technical measures such as support, resistance, and the trend of the underlying market. Since timing is so crucial in options, most option traders are technically oriented. - -### **CONCLUSION** - -That concludes our coverage of volume and open interest, at least for now. Volume analysis is used in all financial markets—futures, options, and stocks. Open interest applies only to futures and options. But, since futures and options are traded on so many stock market vehicles, some understanding of how open interest works can be useful in all three financial arenas. In most of our discussions so far, we've concentrated on daily bar charts. The next step is to broaden our time horizon and to learn how to apply the tools we've - -learned to weekly and monthly charts in order to perform long range trend analysis. We'll accomplish that in the next chapter. - -### **INTRODUCTION** - -Of all the charts utilized by the market technician for forecasting and trading the financial markets, the *daily* bar chart is by far the most popular. The daily bar chart usually covers a period of only six to nine months. However, because most traders confine their interest to relatively short term market action, daily bar charts have gained wide acceptance as the primary working tool of the chartist. - -The average trader's dependence on these daily charts, however, and the preoccupation with short term market behavior, cause many to overlook a very useful and rewarding area of price charting—*the use of weekly and monthly charts for longer range trend analysis and forecasting.* - -The daily bar chart covers a relatively short period of time in the life of any market. A thorough trend analysis of a market, however, should include some consideration of how the daily market price is moving in relation to its long range trend structure. To accomplish that task, *longer range charts must be employed.* Whereas on the daily bar chart each bar represents one day's price action, on the weekly and monthly charts each price bar represents one week's and one month's price action, respectively. *The purpose of weekly and monthly charts is to compress price action in such a way that the time horizon can be greatly expanded and much longer time periods can be studied.* - -### **THE IMPORTANCE OF LONGER RANGE PERSPECTIVE** - -*Long range price charts provide a perspective on the market trend that is impossible to achieve with the use of daily charts alone.* During our - -introduction to the technical philosophy in Chapter 1, it was pointed out that one of the greatest advantages of chart analysis is the application of its principles to virtually any time dimension, including long range forecasting. We also addressed the fallacy, espoused by [some,](#page-23-0) that technical analysis should be limited to short term "timing" with longer range forecasting left to the fundamental analyst. - -The accompanying charts will demonstrate that the principles of technical analysis—including trend analysis, support and resistance levels, trendlines, percentage retracements, and price patterns—lend themselves quite well to the analysis of long range price movements. *Anyone who is not consulting these longer range charts is missing an enormous amount of valuable price information.* - -### **CONSTRUCTION OF CONTINUATION CHARTS FOR FUTURES** - -The average futures contract has a trading life of about a year and a half before expiration. This *limited life* feature poses some obvious problems for the technician interested in constructing a long range chart going back several years. Stock market technicians don't have this problem. Charts are readily available for individual common stocks and the market averages from the inception of trading. How then does the futures technician construct longer range charts for contracts that are constantly expiring? - -The answer is the *continuation* chart. Notice the emphasis on the word "continuation." The technique most commonly employed is simply to link a number of contracts together to provide continuity. When one contract expires, another one is used. In order to accomplish this, the simplest method, and the one used by most chart services, is to *always use the price of the nearest expiring contract.* When that nearest expiring contract stops trading, the next in line becomes the nearest contract and is the one plotted. - -#### **Other Ways to Construct Continuation Charts** - -The technique of linking prices of the nearest expiring contracts is relatively simple and does solve the problem of providing price continuity. However, there are some problems with that method. Sometimes the expiring contract may be trading at a significant premium or discount to the next contract, and the changeover to the new contract may cause a sudden price drop or jump on the chart. Another potential distortion is the extreme volatility experienced by some spot contracts just before expiration. - -Futures technicians have devised many ways to deal with these - -occasional distortions. Some will stop plotting the nearest contract a month or two before it expires to avoid the volatility in the spot month. Others will avoid using the nearest contract altogether and will instead chart the second or third contract. Another method is to chart the contract with the highest open interest on the theory that that delivery month is the truest representation of market value. - -Continuation charts can also be constructed by linking specific calendar months. For example, a November soybean continuation chart would combine only the historic data provided by each successive year's November soybean contract. (This technique of linking specific delivery months was favored by W.D. Gann.) Some chartists go even further by averaging the prices of several contracts, or constructing indices that attempt to smooth the changeover by making adjustments in the price premium or discount. - -### **THE PERPETUAL CONTRACT™** - -An innovative solution to the problem of price continuity was developed by Robert Pelletier, president of Commodity Systems, Inc., a commodity and stock data service (CSI. 200 W. Palmetto Park Road, Boca Raton, FL 33422), called the *Perpetual Contract.*™ ("Perpetual Contract™" is a registered trademark of that firm.) - -The purpose of the Perpetual Contract™ is to provide years of futures price history in one continuous time series. That is accomplished by constructing a time series based on a constant forward time period. For example, the series would determine a value three months or six months into the future. The time period varies and can be chosen by the user. The Perpetual Contract™ is constructed by taking a weighted average of two futures contracts that surround the time period desired. - -The value for the Perpetual Contract™ is not an actual price, but a weighted average of two other prices. The main advantage of the Perpetual Contract™ is that it eliminates the need for using only the nearest expiring contract and smoothes out the price series by eliminating the distortions that can take place during the transition between delivery months. For chart analysis purposes, the nearest-month continuation charts published by chart services are more than adequate. A continuous price series, however, is more useful for back-testing trading systems and indicators. A more complete explanation of ways to construct continuous futures contracts is provided by Greg Morris in Appendix D. - -### **LONG TERM TRENDS DISPUTE RANDOMNESS** - -The most striking features of long range charts is that not only are trends very clearly defined, but that long range trends often last for years. Imagine making a forecast based on one of these long range trends, and not having to change that forecast for several years! - -The persistence of long range trends raises another interesting question that should be mentioned—the question of randomness. While technical analysts do not subscribe to the theory that market action is random and unpredictable, it seems safe to observe that whatever randomness does exist in price action is probably a phenomenon of the very short term. *The persistence of existing trends over long periods of time, in many cases for years, is a compelling argument against the claims of Random Walk Theorists that prices are serially independent and that past price action has no effect on future price action.* - -### **PATTERNS ON CHARTS: WEEKLY AND MONTHLY REVERSALS** - -*Price patterns* appear on the long range charts, which are interpreted in the same way as on the daily charts. *Double tops and bottoms* are very prominent on these charts, as are head and shoulder reversals. *Triangles*, which are usually continuation patterns, are frequently seen. - -Another pattern that occurs quite frequently on these charts is the *weekly and monthly reversal.* For example, on the monthly chart, a new monthly high followed by a close below the previous month's close often represents a significant turning point, especially if it occurs near a major support or resistance area. Weekly reversals are quite frequent on the weekly charts. These patterns are the equivalent of the *key reversal day* on the daily charts, except that on the long range charts these reversals carry a great deal more significance. - -### **LONG TERM TO SHORT TERM CHARTS** - -It's especially important to appreciate the order in which price charts should be studied in performing a thorough trend analysis. The proper order to follow in chart analysis is to begin with the long range and gradually work to the near term. The reason for this should become apparent as one works with the different time dimensions. If the analyst begins with only the near term - -picture, he or she is forced to constantly revise conclusions as more price data is considered. A thorough analysis of a daily chart may have to be completely redone after looking at the long range charts. By starting with the big picture, going back as far as 20 years, all data to be considered are already included in the chart and a proper perspective is achieved. Once the analyst knows where the market is from a longer range perspective, he or she gradually "zeros in" on the shorter term. - -The first chart to be considered is the 20 year monthly chart. The analyst looks for the more obvious chart patterns, major trendlines, or the proximity of major support or resistance levels. He or she then consults the most recent five years on the weekly chart, repeating the same process. Having done that, the analyst narrows his or her focus to the last six to nine months of market action on the daily bar chart, thus going from the "macro" to the "micro" approach. If the trader wants to proceed further, intraday charts can then be consulted for an even more microscopic study of recent action. - -### **WHY SHOULD LONG RANGE CHARTS BE ADJUSTED FOR INFLATION?** - -A question often raised concerning long term charts is whether or not historic price levels seen on the charts should be adjusted for inflation. After all, the argument goes, do these long range peaks and troughs have any validity if not adjusted to reflect the changes in the value of the U.S. dollar? This is a point of some controversy among analysts. - -I do not believe that any adjustment is necessary on these long range charts for a number of reasons. The main reason is my belief that the markets themselves have already made the necessary adjustments. A currency declining in value causes commodities quoted in that currency to increase in value. The declining value of the dollar, therefore, would contribute to rising commodity prices. A rising dollar would cause the price of most commodities to fall. - -The tremendous price gains in commodity markets during the 1970s and declining prices in the 1980s and 1990s are classic examples of inflation at work. To have suggested during the 1970s that commodity price levels that had doubled and tripled in price should then be adjusted to reflect rising inflation would make no sense at all. The rising commodity markets already were a manifestation of that inflation. Declining commodity markets since the 1980s reflect a long period of disinflation. Should we take the price of gold, which is now worth less than half of its value in 1980, and adjust it to reflect the lower inflation rate? The market has already taken care of that. - -The final point in this debate goes to the heart of the technical theory, which states that price action discounts everything, even inflation. All financial markets adjust to periods of inflation and deflation and to changes in currency values. The real answer to whether long range charts should be adjusted for inflation lies in the charts themselves. Many markets fail at historic resistance levels set several years earlier and then bounce off support levels not seen in several years. It's also clear that falling inflation since the early 1980s has helped support bull markets in bonds and stocks. It would seem that those markets have already made their own inflation adjustment. (See Figure 8.1.) - -**Figure 8.1** *The gold price peak in 1980 ushered in two decades of low inflation. Low inflation normally causes falling gold prices and rising stock prices as this chart shows. Why adjust the charts again for inflation? It's already been done.* - -### **LONG TERM CHARTS NOT INTENDED FOR TRADING PURPOSES** - -Long term charts are not meant for trading purposes. A distinction has to be made between market *analysis* for forecasting purposes and the *timing* of market commitments. Long term charts are useful in the analytical process to help determine the major trend and price objectives. They are not suitable, however, for the timing of entry and exit points and should not be used for - -that purpose. For that more sensitive task, daily and intraday charts should be utilized. - -## **EXAMPLES OF LONG TERM CHARTS** - -The following pages contain examples of long term weekly and monthly charts (Figures 8.2–8.12). The drawings on the charts are limited to long term support and resistance levels, trendlines, percentage retracements, weekly reversals, and an occasional price pattern. Be aware, however, that anything that can be [done](#page-180-1) on a [dai](#page-185-0)ly chart can also be done on a weekly or monthly. We'll show you later in the book how the application of various technical indicators to these long term charts is accomplished, and how signals on weekly charts become valuable filters for shorter term timing decisions. Remember also that *semilog* chart scaling becomes more valuable when studying long range price trends. - -**Figure 8.2** *This chart of semiconductor stocks shows the valuable perspective of a weekly chart. The late 1997 price fall stopped right at the 62% retracement level and bounced off chart support formed the previous spring (see circle).* - -**Figure 8.3** *The early 1998 bottom in General Motors began right at the trendline drawn along the 1995-1996 lows. That's why it's a good idea to track weekly charts.* - -**Figure 8.4** *This monthly chart shows the 1997 rally in Burlington Resources stopping right at the same level that stopped the 1989 and 1993 rallies. The 1995 bottom was at the same level as the 1991 bottom. Who says charts don't have a memory?* - -**Figure 8.5** *An investor in Inco Ltd. during the 1997 rally could have benefited from the knowledge that the 1989, 1991, and 1995 tops occurred right at 38.* - -**Figure 8.6** *Do long term charts matter? The 1993 bottom in IBM was at the same level as the bottom formed 20 years earlier in 1974. The break of an 8 year down trendline (see box) in 1995 confirmed the new major uptrend.* - -**Figure 8.7** *Helmerich & Payne finally broke out above 19 in 1996 after failing in 1987, 1990, and 1993. The late 1996 pullback at 28 occurred near the 1980 peak.* - -**Figure 8.8** *This monthly chart of Dow Jones shows a head and shoulders bottom forming for 10 years from 1988 to 1997. The right shoulder also has the shape of a bullish ascending triangle. The breakout over the neckline at 42 completed the bottom.* - -**Figure 8.9** *A bullish symmetrical triangle was easy to spot on the monthly chart of Southwest Airlines. But you probably wouldn't have spotted it on a daily chart.* - -**Figure 8.10** *The 1994 bottom in the Dow Utilities bounced off a trendline lasting 20 years. There are those who claim that past price action has no bearing on the future. If you still believe that, go back and look at these long term charts again.* - -**Figure 8.11** *On this linear-scaled chart of the Japanese stock market, the long term up trendline (line 1) drawn under the 1982 and 1984 lows was broken in early 1992 (see circle) near 22,000. That was two years after the actual peak.* - -**Figure 8.12** *The same Japanese chart from Figure 8.11 using log scaling. Line 1 is the trendline from the previous figure. The steeper line 2 was broken in mid-1990 (see box) at 30,000. Up trendlines on log charts are broken sooner than linear up t[rendlines.](#page-185-1)* - -### **INTRODUCTION** - -The *moving average* is one of the most versatile and widely used of all technical indicators. Because of the way it is constructed and the fact that it can be so easily quantified and tested, it is the basis for many mechanical trend-following systems in use today. - -Chart analysis is largely subjective and difficult to test. As a result, chart analysis does not lend itself that well to computerization. Moving average rules, by contrast, can easily be programmed into a computer, which then generates specific buy and sell signals. While two technicians may disagree as to whether a given price pattern is a *triangle* or a *wedge*, or whether the volume pattern favors the bull or bear side, moving average trend signals are precise and not open to debate. - -Let's begin by defining what a *moving average* is. As the second word implies, it is an *average* of a certain body of data. For example, if a 10 day average of closing prices is desired, the prices for the last 10 days are added up and the total is divided by 10. The term *moving* is used because only the latest 10 days' prices are used in the calculation. Therefore, the body of data to be averaged (the last 10 closing prices) moves forward with each new trading day. The most common way to calculate the moving average is to work from the total of the last 10 days' closing prices. Each day the new close is added to the total and the close 11 days back is subtracted. The new total is then divided by the number of days (10). (See Figure 9.1a.) - -The above example deals with a simple 10 day moving average of closing prices. There are, however, other types of moving averages that are not simple. There are also many questions as to the [best](#page-187-1) way to employ the moving average. For example, how many days should be averaged? Should a short term or a long term average be used? Is there a *best* moving average for - -all markets or for each individual market? Is the closing price the best price to average? Would it be better to use more than one average? - -**Figure 9.1a** *A 10 day moving average applied to a daily bar chart of the S&P 500. Prices crossed the average line several times (see arrows) before finally turning higher. Prices stayed above the average during the subsequent rally.* - -Which type of average works better—a simple, linearly weighted or exponentially smoothed? Are there times when moving averages work better than others? - -There are many questions to be considered when using moving averages. We'll address many of these questions in this chapter and show examples of some of the more common usages of the moving average. - -### **THE MOVING AVERAGE: A SMOOTHING DEVICE WITH A TIME LAG** - -The *moving average* is essentially a trend following device. Its purpose is to identify or signal that a new trend has begun or that an old trend has ended or reversed. Its purpose is to track the progress of the trend. It might be viewed as a curving trendline. It does not, however, predict market action in the same sense that standard chart analysis attempts to do. The moving average is a follower, not a leader. It never anticipates; it only reacts. The moving average follows a market and tells us that a trend has begun, but only after the fact. - -The moving average is a smoothing device. By averaging the price data, a smoother line is produced, making it much easier to view the underlying trend. By its very nature, however, the moving average line also lags the market action. A shorter moving average, such as a 20 day average, would hug the price action more closely than a 200 day average. The time lag is reduced with the shorter averages, but can never be completely eliminated. Shorter term averages are more sensitive to the price action, whereas longer range averages are less sensitive. In certain types of markets, it is more advantageous to use a shorter average and, at other times, a longer and less sensitive average proves more useful. (See Figure 9.1b.) - -#### **Which Prices to Average** - -We have been using the closing price in all of our [exam](#page-188-0)ples so far. However, while the closing price is considered to be the most important price of the trading day and the price most commonly used in moving average construction, the reader should be aware that some technicians prefer to use other prices. Some prefer to use a *midpoint* value, which is arrived at by dividing the day's range by two. - -**Figure 9.1b** *A comparison of a 20 day and a 200 day moving average. During the sideways period from August to January, prices crossed the shorter average several times. However, they remained above the 200 day average throughout the entire period.* - -Others include the closing price in their calculation by adding the high, - -low, and closing prices together and dividing the sum by three. Still others prefer to construct *price bands* by averaging the high and low prices separately. The result is two separate moving average lines that act as a sort of volatility buffer or neutral zone. Despite these variations, the closing price is still the price most commonly used for moving average analysis and is the price that we'll be focusing most of our attention on in this chapter. - -#### **The Simple Moving Average** - -The *simple moving average*, or the arithmetic mean, is the type used by most technical analysts. But there are some who question its usefulness on two points. The first criticism is that only the period covered by the average (the last 10 days, for example) is taken into account. The second criticism is that the simple moving average gives equal weight to each day's price. In a 10 day average, the last day receives the same weight as the first day in the calculation. Each day's price is assigned a 10% weighting. In a 5 day average, each day would have an equal 20% weighting. Some analysts believe that a heavier weighting should be given to the more recent price action. - -#### **The Linearly Weighted Moving Average** - -In an attempt to correct the weighting problem, some analysts employ a *linearly weighted moving average.* In this calculation, the closing price of the 10th day (in the case of a 10 day average) would be multiplied by 10, the ninth day by nine, the eighth day by eight, and so on. The greater weight is therefore given to the more recent closings. The total is then divided by the sum of the multipliers (55 in the case of the 10 day average: 10 + 9 + 8 +…+ 1). However, the linearly weighted average still does not address the problem of including only the price action covered by the length of the average itself. - -#### **The Exponentially Smoothed Moving Average** - -This type of average addresses both of the problems associated with the simple moving average. First, the exponentially smoothed average assigns a greater weight to the more recent data. Therefore, it is a weighted moving average. But while it assigns lesser importance to past price data, it does include in its calculation all of the data in the life of the instrument. In addition, the user is able to adjust the weighting to give greater or lesser weight to the most recent day's price. This is done by assigning a percentage value to the last day's price, which is added to a percentage of the previous day's value. The sum of both percentage values adds up to 100. For example, the last day's price could be assigned a value of 10% (.10), which is added to the previous day's value of 90% (.90). That gives the last day 10% of the total weighting. That would be the equivalent of a 20 day average. By giving the last day's price a smaller value of 5% (.05), lesser weight is given to the last day's data and the average is less sensitive. That would be the equivalent of a 40 day moving average. (See Figure 9.2.) - -**Figure 9.2** *The 40 day exponential moving average (dotted line) is more sensitive than the simple arithmetic 40 day moving average (solid line).* - -The computer makes this all very easy for you. You just have to choose the number of days you want in the moving average—10, 20, 40, etc. Then select the type of average you want—simple, weighted, or exponentially smoothed. You can also select as many averages as you want—one, two, or three. - -### **The Use of One Moving Average** - -The simple moving average is the one most commonly used by technicians, and is the one that we'll be concentrating on. Some traders use just one moving average to generate trend signals. The moving average is plotted on the bar chart in its appropriate trading day along with that day's price action. When the closing price moves above the moving average, a buy signal is generated. A sell signal is given when prices move below the moving average. For added confirmation, some technicians also like to see the moving average line itself turn in the direction of the price crossing. (See Figure 9.3.) - -If a very short term average is employed (a 5 or 10 day), the average - -tracks prices very closely and several crossings occur. This action can be either good or bad. The use of a very sensitive average produces more trades (with higher commission costs) and results in many false signals (whipsaws). If the average is too sensitive, some of the short term random price movement (or "noise") activates bad trend signals. - -**Figure 9.3** *Prices fell below the 50 day average during October (see left circle). The sell signal is stronger when the moving average also turns down (see left arrow). The buy signal during January was confirmed when the average itself turned higher.* - -While the shorter average generates more false signals, it has the advantage of giving trend signals earlier in the move. It stands to reason that the more sensitive the average, the earlier the signals will be. So there is a tradeoff at work here. The trick is to find the average that is sensitive enough to generate early signals, but insensitive enough to avoid most of the random "noise." (See Figure 9.4.) - -**Figure 9.4** *A shorter average gives earlier signals. The longer average is slower, but more reliable. The 10 day turned up first at the bottom. But it also gave a premature buy signal during November and an untimely sell signal during February (see boxes).* - -Let's carry the above comparison a step further. While the longer average performs better while the trend remains in motion, it "gives back" a lot more when the trend reverses. The very insensitivity of the longer average (the fact that it trailed the trend from a greater distance), which kept it from getting tangled up in short term corrections during the trend, works against the trader when the trend actually reverses. Therefore, we'll add another corollary here: The longer averages work better as long as the trend remains in force, but a shorter average is better when the trend is in the process of reversing. - -It becomes clearer, therefore, that the use of one moving average alone has several disadvantages. It is usually more advantageous to employ two moving averages. - -#### **How to Use Two Averages to Generate Signals** - -This technique is called the *double crossover method.* This means that a buy signal is produced when the shorter average crosses above the longer. For example, two popular combinations are the 5 and 20 day averages and the 10 and 50 day averages. In the former, a buy signal occurs when the 5 day average crosses above the 20, and a sell signal when the 5 day moves below the 20. In the latter example, the 10 day crossing above the 50 signals an - -uptrend, and a downtrend takes place with the 10 slipping under the 50. This technique of using two averages together lags the market a bit more than the use of a single average but produces fewer whipsaws. (See Figures 9.5 and 9.6.) - -**Figure 9.5** *The double crossover method uses two moving averages. The 5 and 20 day combination is popular with futures traders. The 5 day fell below the 20 day during October (see circle) and caught the entire downtrend in crude oil prices.* - -#### **The Use of Three Averages, or the Triple Crossover Method** - -That brings us to the *triple crossover method.* The most widely used triple crossover system is the popular *4-9-18-day moving average combination.* The 4-9-18 method is used mainly in futures trading. This concept was first mentioned by R.C. Allen in his 1972 book, *How to Build a Fortune in Commodities* and again later in a 1974 work by the same author, *How to Use the 4-Day, 9-Day and 18-Day Moving Averages to Earn Larger Profits from Commodities.* The 4-9-18-day system is a variation on the 5, 10, and 20 day moving average numbers, which are widely used in commodity circles. Many commercial chart services publish the 4-9-18-day moving averages. (Many charting software packages use the 4-9-18-day combination as their default values when plotting three averages.) - -**Figure 9.6** *Stock traders use 10 and 50 day moving averages. The 10 day fell below the 50 day in October (left circle), giving a timely sell signal. The bullish crossover in the other direction took place during January (lower circle).* - -#### **How to Use the 4-9-18-Day Moving Average System** - -It's already been explained that the shorter the moving average, the closer it follows the price trend. It stands to reason then that the shortest of the three averages—the 4 day—will follow the trend most closely, followed by the 9 day and then the 18. In an uptrend, therefore, the proper alignment would be for the 4 day average to be above the 9 day, which is above the 18 day average. In a downtrend, the order is reversed and the alignment is exactly the opposite. That is, the 4 day would be the lowest, followed by the 9 day and then the 18 day average. (See Figures 9.7a-b.) - -A buying alert takes place in a downtrend when the 4 day crosses above both the 9 and the 18. A confirmed buy signal occurs when the 9 day then crosses above the 18. This pla[ces](#page-195-0) the 4 day [o](#page-196-1)ver the 9 day which is over the 18 day. Some intermingling may occur during corrections or consolidations, but the general uptrend remains intact. Some traders may take profits during the intermingling process and some may use it as a buying opportunity. There is obviously a lot of room for flexibility here in applying the rules, depending on how aggressively one wants to trade. - -**Figure 9.7a** *Futures traders like the 9 and 18 day moving average combination. A sell signal was given in late October (first circle) when the 9 day fell below the 18. A buy signal was given in early 1998 when the 9 day crossed back above the 18 day.* - -When the uptrend reverses to the downside, the first thing that should take place is that the shortest (and most sensitive) average—the 4 day—dips below the 9 day and the 18 day. This is only a selling alert. Some traders, however, might use that initial crossing as reason enough to begin liquidating long positions. Then, if the next longer average—the 9 day—drops below the 18 day, a confirmed sell short signal is given. - -**Figure 9.7b** *The 4-9-18 day moving average combo is also popular with futures traders. At a bottom, the 4 day (solid line) turns up first and crosses the other two lines. Then the 9 day crosses over the 18 day (see circle), signaling a bottom.* - -### **MOVING AVERAGE ENVELOPES** - -The usefulness of a single moving average can be enhanced by surrounding it with envelopes. *Percentage envelopes* can be used to help determine when a market has gotten overextended in either direction. In other words, they tell us when prices have strayed too far from their moving average line. In order to do this, the envelopes are placed at fixed percentages above and below the average. Shorter term traders, for example, often use 3% envelopes around a simple 21 day moving average. When prices reach one of the envelopes (3% from the average), the short term trend is considered to be overextended. For long range analysis, some possible combinations include 5% envelopes around a 10 week average or a 10% envelope around a 40 week average. (See Figures 9.8a-b.) - -**Figure 9.8a** *3% envelopes placed around a 21 day moving average of the Dow. Moves outside the envelopes suggest an overextended stock market.* - -**Figure 9.8b** *For longer range analysis, 5% envelopes can be placed around a 10 week average. Moves outside the envelopes helped identify market extremes.* - -### **BOLLINGER BANDS** - -This technique was developed by John Bollinger. Two trading bands are - -placed around a moving average similar to the envelope technique. Except that Bollinger Bands are placed two standard deviations above and below the moving average, which is usually 20 days. *Standard deviation* is a statistical concept that describes how prices are dispersed around an average value. Using two standard deviations ensures that 95% of the price data will fall between the two trading bands. As a rule, prices are considered to be overextended on the upside (overbought) when they touch the upper band. They are considered overextended on the downside (oversold) when they touch the lower band. (See Figures 9.9a-b.) - -**Figure 9.9a** *Bollinger bands plotted around a 20 day moving average. During the sideways period from August to January, prices kept touching the outer bands. Once the uptrend resumed, prices traded between the upper band and 20 day average.* - -**Figure 9.9b** *Bollinger bands work on weekly charts as well, by using a 20 week average as the middle line. Each touch of the lower band (see circles) signaled an important market bottom and a buying opportunity.* - -### **USING BOLLINGER BANDS AS TARGETS** - -The simplest way to use Bollinger Bands is to use the upper and lower bands as price targets. In other words, if prices bounce off the lower band and cross above the 20 day average, the upper band becomes the upper price target. A crossing below the 20 day average would identify the lower band as the downside target. In a strong uptrend, prices will usually fluctuate between the upper band and the 20 day average. In that case, a crossing below the 20 day average warns of a trend reversal to the downside. - -### **BAND WIDTH MEASURES VOLATILITY** - -Bollinger Bands differ from envelopes in one major way. Whereas the envelopes stay a *constant* percentage width apart, Bollinger Bands *expand* and *contract* based on the last 20 days' volatility. During a period of rising price volatility, the distance between the two bands will widen. Conversely, during a period of low market volatility, the distance between the two bands will contract. There is a tendency for the bands to alternate between expansion and contraction. When the bands are unusually far apart, that is - -often a sign that the current trend may be ending. When the distance between the two bands has narrowed too far, that is often a sign that a market may be about to initiate a new trend. Bollinger Bands can also be applied to weekly and monthly price charts by using 20 *weeks* and 20 *months* instead of 20 *days.* Bollinger Bands work best when combined with overbought/oversold oscillators that are explained in the next chapter. (See Appendix A for additional band techniques.) - -#### **Centering the Average** - -The more statistically correct way to plot a moving average is to *center* it. That means to place it in the middle of the time period it covers. A 10 day average, for example, would be placed five days back. A 20 day average would be plotted 10 days back in time. *Centering* the average, however, has the major flaw of producing much later trend change signals. Therefore, moving averages are usually placed at the end of the time period covered instead of the middle. The centering technique is used almost exclusively by cyclic analysts to isolate underlying market cycles. - -### **MOVING AVERAGES TIED TO CYCLES** - -Many market analysts believe that *time cycles* play an important role in market movement. Because these time cycles are repetitive and can be measured, it is possible to determine the approximate times when market tops or bottoms will occur. Many different time cycles exist simultaneously, from a short term 5 day cycle to Kondratieff's long 54 year cycle. We'll delve more into this fascinating branch of technical analysis in Chapter 14. - -The subject of cycles is introduced here only to make the point that there seems to be a relationship between the underlying cycles that affect a certain market and the correct moving averages to use. In other [words](#page-317-0), the moving averages can be adjusted to fit the dominant cycles in each market. - -There appears to be a definite relationship between moving averages and cycles. For example, the *monthly cycle* is one of the best known cycles operating throughout the commodity markets. A month has 20-21 trading days. Cycles tend to be related to their next longer and shorter cycles *harmonically*, or by a factor of two. That means that the next longer cycle is double the length of a cycle and the next shorter cycle is half its length. - -The monthly cycle, therefore, may explain the popularity of the 5, 10, 20, and 40 day moving averages. The 20 day cycle measures the monthly cycle. The 40 day average is double the 20 day. The 10 day average is half of 20 and the 5 day average is half again of 10. - -Many of the more commonly used moving averages (including the 4, 9, and 18 day averages, which are derivatives of 5, 10, and 20) can be explained by cyclic influences and the harmonic relationships of neighboring cycles. Incidentally, the 4 week cycle may also help explain the success of the *4 week rule*, covered later in the chapter, and its shorter counterpart—the *2 week rule.* - -### **FIBONACCI NUMBERS USED AS MOVING AVERAGES** - -We'll cover the Fibonacci number series in the chapter on Elliott Wave Theory. However, I'd like to mention here that this mysterious series of numbers—such as 13, 21, 34, 55, and so on—seem to lend themselves quite well to moving average analysis. This is true not only of daily charts, but for weekly charts as well. The *21 day moving average* is a Fibonacci number. On the weekly charts, the 13 week average has proven valuable in both stocks and commodities. We'll postpone a more in depth discussion of these numbers until Chapter 13. - -### **MOVING [AVERA](#page-293-0)GES APPLIED TO LONG TERM CHARTS** - -The reader should not overlook using this technique in longer range trend analysis. Longer range moving averages, such as 10 or 13 weeks, in conjunction with the 30 or 40 week average, have long been used in stock market analysis, but haven't been given as much attention in the futures markets. The 10 and 40 week moving averages can be used to help track the primary trend on weekly charts for futures and stocks. (See Figure 9.10.) - -**Figure 9.10** *Moving averages are valuable on weekly charts. The 40 week moving average should provide support during bull market corrections as it did here.* - -#### **Some Pros and Cons of the Moving Average** - -One of the great advantages of using moving averages, and one of the reasons they are so popular as trend-following systems, is that they embody some of the oldest maxims of successful trading. They trade in the direction of the trend. They let profits run and cut losses short. The moving average system forces the user to obey those rules by providing specific buy and sell signals based on those principles. - -Because they are trend-following in nature, however, moving averages work best when markets are in a trending period. They perform very poorly when markets get choppy and trade sideways for a period of time. And that might be a third to a half of the time. - -The fact that they do not work that well for significant periods of time, however, is one very compelling reason why it is dangerous to rely too heavily on the moving average technique. In certain trending markets, the moving average can't be beat. Just switch the program to automatic. At other times, a nontrending method like the overbought–oversold oscillator is more appropriate. (In Chapter 15, we'll show you an indicator called ADX that tells you when a market is trending and when it is not, and whether the market climate favors a trending moving average technique or a nontrending oscillator appro[ach.\)](#page-346-0) - -#### **Moving Averages As Oscillators** - -One way to construct an oscillator is to compare the difference between two moving averages. The use of two moving averages in the double crossover method, therefore, takes on greater significance and becomes an even more useful technique. We'll see how this is done in Chapter 10. One method compares two exponentially smoothed averages. That method is called Moving Average Convergence/Divergence (MACD). It is used partially as an oscillator. Therefore, we'll postpone our expla[nation](#page-211-0) of that technique until we deal with the entire subject of oscillators in Chapter 10. - -#### **The Moving Average Applied to Other Technical Data** - -The moving average can be applied to virtually any [technic](#page-211-0)al data or indicator. It can be used on open interest and volume figures, including on balance volume. The moving average can be used on various indicators and ratios. It can be applied to oscillators as well. - -### **THE WEEKLY RULE** - -There are other alternatives to the moving average as a trend-following device. One of the best known and most successful of these techniques is called the *weekly price channel* or, simply, *the weekly rule.* This technique has many of the benefits of the moving average, but is less time consuming and simpler to use. - -With the improvements in computer technology over the past decade, a considerable amount of research has been done on the development of technical trading systems. These systems are mechanical in nature, meaning that human emotion and judgment are eliminated. These systems have become increasingly sophisticated. At first, simple moving averages were utilized. Then, double and triple crossovers of the averages were added. The averages were then linearly weighted and exponentially smoothed. These systems are primarily trend-following, which means their purpose is to identify and then trade in the direction of an existing trend. - -With the increased fascination with fancier and more complex systems and indicators, however, there has been a tendency to overlook some of the simpler techniques that continue to work quite well and have stood the test of time. We're going to discuss one of the simplest of these techniques—the weekly rule. - -In 1970, a booklet entitled the *Trader's Notebook* was published by Dunn & Hargitt's Financial Services in Lafayette, Indiana. The best known commodity trading systems of the day were computer-tested and compared. - -The final conclusion of all that research was that the most successful of all the systems tested was the *4 week rule*, developed by Richard Donchian. Mr. Donchian has been recognized as a pioneer in the field of commodity trend trading using mechanical systems. (In 1983, *Managed Account Reports* chose Donchian as the first recipient of the Most Valuable Performer Award for outstanding contributions to the field of futures money management, and presents The Donchian Award to other worthy recipients.) - -More recent work done by Louis Lukac, former research director at Dunn & Hargitt and currently president of Wizard Trading (a Massachusetts CTA) supports the earlier conclusions that breakout (or channel) systems similar to the weekly rule continue to show superior results. (Lukac et al.)\* - -Of the 12 systems tested from 1975-84, only 4 generated significant profits. Of those 4, 2 were channel breakout systems and one was a dual moving average crossover system. A later article by Lukac and Brorsen in *[T](#page-210-0)he Financial Review* (November 1990) published the results of a more extensive study done on data from 1976–86 that compared 23 technical trading systems. Once again, channel breakouts and moving average systems came out on top. Lukac finally concluded that a channel breakout system was his personal choice as the best starting point for all technical trading system testing and development. - -#### **The 4 Week Rule** - -The 4 week rule is used primarily for futures trading. The system based on the 4 week rule is simplicity itself: - -- 1. Cover short positions and buy long whenever the price exceeds the highs of the four preceding full calendar weeks. -- 2. Liquidate long positions and sell short whenever the price falls below the lows of the four preceding full calendar weeks. - -The system, as it is presented here, is continuous in nature, which means that the trader always has a position, either long or short. As a general rule, continuous systems have a basic weakness. They stay in the market and get "whipsawed" during trendless market periods. It's already been stressed that trend-following systems do not work well when markets are in these sideways, or trendless phases. - -The 4 week rule can be modified to make it noncontinuous. This can be accomplished by using a shorter time span—such as a one or two week rule for liquidation purposes. In other words, a four week "breakout" would be necessary to initiate a new position, but a one or two week signal in the opposite direction would warrant liquidation of the position. The trader would then remain out of the market until a new four week breakout is registered. - -The logic behind the system is based on sound technical principles. Its signals are mechanical and clearcut. Because it is trend following, it virtually guarantees participation on the right side of every important trend. It is also structured to follow the often quoted maxim of successful trading—"let profits run, while cutting losses short." Another feature, which should not be overlooked, is that this method tends to trade less frequently, so that commissions are lower. Another plus is that the system can be implemented with or without the aid of a computer. - -The main criticism of the weekly rule is the same one leveled against all trend-following approaches, namely, that it does not catch tops or bottoms. But what trend-following system does? The important point to keep in mind is that the four week rule performs at least as well as most other trendfollowing systems and better than many, but has the added benefit of incredible simplicity. - -#### **Adjustments to the 4 Week Rule** - -Although we're treating the four week rule in its original form, there are many adjustments and refinements that can be employed. For one thing, the rule does not have to be used as a trading system. Weekly signals can be employed simply as another technical indicator to identify breakouts and trend reversals. Weekly breakouts can be used as a confirming filter for other techniques, such as moving average crossovers. One or 2 week rules function as excellent filters. A moving average crossover signal could be confirmed by a two week breakout in the same direction in order for a market position to be taken. - -#### **Shorten or Lengthen Time Periods for Sensitivity** - -The time period employed can be expanded or compressed in the interests of risk management and sensitivity. For example, the time period could be shortened if it is desirable to make the system more sensitive. In a relatively high priced market, where prices are trending sharply higher, a shorter time span could be chosen to make the system more sensitive. Suppose, for example, that a long position is taken on a 4 week upside breakout with a protective stop placed just below the low of the past 2 weeks. If the market has rallied sharply and the trader wishes to trail the position with a closer protective stop, a one week stopout point could be used. - -In a trading range situation, where a trend trader would just as soon stay on the sidelines until an important trend signal is given, the time period could be expanded to eight weeks. This would prevent taking positions on shorter term and premature trend signals. - -#### **The 4 Week Rule Tied to Cycles** - -Earlier in the chapter reference was made to the importance of the monthly cycle in commodity markets. The 4 week, or 20 day, trading cycle is a dominant cycle that influences all markets. This may help explain why the 4 week time period has proven so successful. Notice that mention was made of 1, 2, and 8 week rules. The principle of *harmonics* in cyclic analysis holds that each cycle is related to its neighboring cycles (next longer and next shorter cycles) by 2. - -In the previous discussion of moving averages, it was pointed out how the monthly cycle and harmonics explained the popularity of the 5, 10, 20, and 40 day moving averages. The same time periods hold true in the realm of weekly rules. Those daily numbers translated into weekly time periods are 1, 2, 4, and 8 weeks. Therefore, adjustments to the 4 week rule seem to work best when the beginning number (4) is divided or multiplied by 2. To shorten the time span, go from 4 to 2 weeks. If an even shorter time span is desired, go from 2 to 1. To lengthen, go from 4 to 8. Because this method combines price and time, there's no reason why the cyclic principle of harmonics should not play an important role. The tactic of dividing a weekly parameter by 2 to shorten it, or doubling it to lengthen it, does have cycle logic behind it. - -The 4 week rule is a simple breakout system. The original system can be modified by using a shorter time period—a 1 or 2 week rule—for liquidation purposes. If the user desires a more sensitive system, a 2 week period can be employed for entry signals. Because this rule is meant to be simple, it is best addressed on that level. The 4 week rule is simple, but it works. (Charting packages allow you to plot *price channels* above and below current prices to spot channel breakouts. Price channels can be used on daily, weekly, or monthly charts. See Figures 9.11 and 9.12.) - -**Figure 9.11** *A 20 day (4 week) price channel applied to Treasury Bond futures prices. A buy signal was given when prices closed above the upper channel (see circle). Prices have to close beneath the lower channel to reverse the signal.* - -**Figure 9.12** *A 4 month price channel applied to the S&P 500 Index. Prices crossed the upper channel in early 1995 (see circle) to give a buy signal which remains in effect 3 years later. A close beneath the lower line is needed to give a sell signal.* - -## **TO OPTIMIZE OR NOT** - -The first edition of this book included the results of extensive research produced by Merrill Lynch, which published a series of studies on computerized trading techniques applied to the futures markets from 1978-82. Extensive testing of various moving average and channel breakout parameters was performed to find the best possible combinations in each futures market. The Merrill Lynch researchers produced a different set of optimized indicator values for each market. - -Most charting packages allow you to optimize systems and indicators. Instead of using the same moving average in all markets, for example, you could ask the computer to find the moving average, or moving average combinations, that have worked the best in the past for that market. That could also be done for daily and weekly breakout systems and virtually all technical indicators included in this book. Optimization allows technical parameters to adapt to changing market conditions. - -Some argue that optimization helps their trading results and others that it doesn't. The heart of the debate centers on how the data is optimized. Researchers stress that the correct procedure is to use only part of the price data to choose the best parameters, and another portion to actually test the results. Testing the optimized parameters on "out of sample" price data helps ensure that the final results will be closer to what one might experience from actual trading. - -The decision to optimize or not is a personal one. Most evidence, however, suggests that optimization is not the Holy Grail some think it to be. I generally advise traders following only a handful of markets to experiment with optimization. Why should Treasury Bonds or the German mark have the exact same moving averages as corn or cotton? Stock market traders are a different story. Having to follow thousands of stocks argues against optimizing. If you specialize in a handful of markets, try optimizing. If you're a generalist who follows a large number of markets, use the same technical parameters for all of them. - -### **SUMMARY** - -We've presented a lot of variations on the moving average approach. Let's try to simplify things a bit. Most technicians use a combination of two moving averages. Those two averages are usually simple averages. Although exponential averages have become popular, there's no real evidence to prove that they work any better than the simple average. The most commonly used daily moving average combinations in futures markets are 4 and 9, 9 and 18, - -5 and 20, and 10 and 40. Stock traders rely heavily on a 50 day (or 10 week) moving average. For longer range stock market analysis, popular weekly moving averages are 30 and 40 weeks (or 200 days). Bollinger Bands make use of 20 day and 20 week moving averages. The 20 week average can be converted to daily charts by utilizing a 100 day average, which is another useful moving average. Channel breakout systems work extremely well in trending markets and can be used on daily, weekly, and monthly charts. - -### **THE ADAPTIVE MOVING AVERAGE** - -One of the problems encountered with the moving average is choosing between a fast or a slow average. While one may work better in a trading range market, the other may be preferable in a trending market. The answer to the problem of choosing between the two may lie with an innovative approach called the "adaptive moving average." - -Perry Kaufman presents this technique in his book *Smarter Trading.* The speed of Kaufman's "adaptive moving average" automatically adjusts to the level of noise (or volatility) in a market. The AMA moves more slowly when markets are trending sideways, but then moves more swiftly when the market is trending. That avoids the problem of using a faster moving average (and getting whipsawed more frequently) during a trading range, and using a slower average that trails too far behind a market when it is trending. - -Kaufman does that by constructing an Efficiency Ratio that compares price direction with the level of volatility. When the Efficiency Ratio is high, there is more direction than volatility (favoring a faster average). When the ratio is low, there's more volatility than direction (favoring a slower average). By incorporating the Efficiency Ratio, the AMA automatically adjusts to the speed most suitable for the current market. - -### **ALTERNATIVES TO THE MOVING AVERAGE** - -Moving averages don't work all of the time. They do their best work when the market is in a trending phase. They're not very helpful during trendless periods when prices trade sideways. Fortunately, there's another class of indicator that performs much better than the moving average during those frustrating trading ranges. They're called *oscillators* and we'll explain them in the next chapter. - -\*See Bibliography - -### **INTRODUCTION** - -In this chapter, we're going to talk about an alternative to trend-following approaches—the *oscillator.* The oscillator is extremely useful in nontrending markets where prices fluctuate in a horizontal price band, or trading range, creating a market situation where most trend-following systems simply don't work that well. The oscillator provides the technical trader with a tool that can enable him or her to profit from these periodic sideways and trendless market environments. - -The value of the oscillator is not limited to horizontal trading ranges, however. Used in conjunction with price charts during trending phases, the oscillator becomes an extremely valuable ally by alerting the trader to short term market extremes, commonly referred to as *overbought* or *oversold* conditions. The oscillator can also warn that a trend is losing momentum before that situation becomes evident in the price action itself. Oscillators can signal that a trend may be nearing completion by displaying certain divergences. - -We'll begin by explaining first what an oscillator is and the basis for its construction and interpretation. We'll then discuss the meaning of momentum and its implications for market forecasting. Some of the more common oscillator techniques will be presented from the very simple to the more complicated. The important question of divergence will be covered. We'll touch on the value of coordinating oscillator analysis with underlying market cycles. Finally, we'll discuss how oscillators should be used as part of the overall technical analysis of a market. - -## **OSCILLATOR USAGE IN CONJUNCTION WITH TREND** - -The oscillator is only a secondary indicator in the sense that it must be subordinated to basic trend analysis. As we go through the various types of oscillators used by technicians, the importance of trading in the direction of the overriding market trend will be constantly stressed. The reader should also be aware that there are times when oscillators are more useful than at others. For example, near the beginning of important moves, oscillator analysis isn't that helpful and can even be misleading. Toward the end of market moves, however, oscillators become extremely valuable. We'll address these points as we go along. Finally, no study of market extremes would be complete without a discussion of Contrary Opinion. We'll talk about the role of the contrarian philosophy and how it can be incorporated into market analysis and trading. - -### **Interpretation of Oscillators** - -While there are many different ways to construct momentum oscillators, the actual interpretation differs very little from one technique to another. Most oscillators look very much alike. They are plotted along the bottom of the price chart and resemble a flat horizontal band. The oscillator band is basically flat while prices may be trading up, down, or sideways. However, the peaks and troughs in the oscillator coincide with the peaks and troughs on the price chart. Some oscillators have a midpoint value that divides the horizontal range into two halves, an upper and a lower. Depending on the formula used, this midpoint line is usually a *zero line.* Some oscillators also have upper and lower boundaries ranging from 0 to 100. - -#### **General Rules for Interpretation** - -As a general rule, when the oscillator reaches an extreme value in either the upper or lower end of the band, this suggests that the current price move may have gone too far too fast and is due for a correction or consolidation of some type. As another general rule, the trader should be buying when the oscillator line is in the lower end of the band and selling in the upper end. The crossing of the midpoint line is often used to generate buy and sell signals. We'll see how these general rules are applied as we deal with the various types of oscillators. - -#### **The Three Most Important Uses for the Oscillator** - -There are three situations when the oscillator is most useful. You'll see that these three situations are common to most types of oscillators that are used. - -- 1. The oscillator is most useful when its value reaches an extreme reading near the upper or lower end of its boundaries. The market is said to be *overbought* when it is near the upper extreme and *oversold* when it is near the lower extreme. This warns that the price trend is overextended and vulnerable. -- 2. A divergence between the oscillator and the price action when the oscillator is in an extreme position is usually an important warning. -- 3. The crossing of the zero (or midpoint) line can give important trading signals in the direction of the price trend. - -**Figure 10.1a** *The 10 day momentum line fluctuates around a zero line. Readings too far above the zero line are overbought, while values too far below the line are oversold. Momentum should be used in conjunction with the trend of the market.* - -### **MEASURING MOMENTUM** - -The concept of *momentum* is the most basic application of oscillator analysis. Momentum measures the velocity of price changes as opposed to the actual price levels themselves. Market momentum is measured by continually taking price differences for a fixed time interval. To construct a 10 day momentum line, simply subtract the closing price 10 days ago from the last closing price. This positive or negative value is then plotted around a zero line. The formula for momentum is: - -#### M=V – V x - -where V is the latest closing price and V x is the closing price x days ago. - -**Figure 10.1b** *A comparison of 10 and 40 day momentum lines. The longer version is more helpful in catching major market turns (see circles).* - -If the latest closing price is greater than that of 10 days ago (in other words, prices have moved higher), then a positive value would be plotted above the zero line. If the latest close is below the close 10 days earlier (prices have declined), then a negative value is plotted below the zero line. - -While the 10 day momentum is a commonly used time period for reasons discussed later, any time period can be employed. (See Figure 10.1a.) A shorter time period (such as 5 days) produces a more sensitive line with more pronounced oscillations. A longer number of days (such as 40 days) results in a much smoother line in which the oscillator swings are [less](#page-213-1) volatile. (See Figure 10.1b.) - -#### **Momentum Measures Rates of Ascent or Descent** - -Let's talk a bit more [about](#page-214-0) just what this momentum indicator is measuring. By plotting price differences for a set period of time, the chartist is studying rates of ascent or descent. If prices are rising and the momentum line is above the zero line and rising, this means the uptrend is accelerating. If the upslanting momentum line begins to flatten out, this means that the new gains being achieved by the latest closes are the same as the gains 10 days earlier. While prices may still be advancing, the rate of ascent (or the velocity) has - -leveled off. When the momentum line begins to drop toward the zero line, the uptrend in prices is still in force, but at a decelerating rate. The uptrend is losing momentum. - -When the momentum line moves below the zero line, the latest 10 day close is now under the close of 10 days ago and a near term downtrend is in effect. (And, incidentally, the 10 day moving average also has begun to decline.) As momentum continues to drop farther below the zero line, the downtrend gains momentum. Only when the line begins to advance again does the analyst know that the downtrend is decelerating. - -It's important to remember that momentum measures the differences between prices at two time intervals. In order for the line to advance, the price gains for the last day's close must be greater than the gains of 10 days ago. If prices advance by only the same amount as 10 days ago, the momentum line will be flat. If the last price gain is less than that of 10 days ago, the momentum line begins to decline even though prices are still rising. This is how the momentum line measures the acceleration or deceleration in the current advance or decline in the price trend. - -#### **The Momentum Line Leads the Price Action** - -Because of the way it is constructed, the momentum line is always a step ahead of the price movement. It leads the advance or decline in prices, then levels off while the current price trend is still in effect. It then begins to move in the opposite direction as prices begin to level off. - -#### **The Crossing of the Zero Line as a Trading Signal** - -The momentum chart has a *zero line.* Many technicians use the crossing of the zero line to generate buy and sell signals. A crossing above the zero line would be a buy signal, and a crossing below the zero line, a sell signal. It should be stressed here again, however, that basic trend analysis is still the overriding consideration. Oscillator analysis should not be used as an excuse to trade against the prevailing market trend. Buy positions should only be taken on crossings above the zero line if the market trend is up. Short positions should be taken on crossings below the zero line only if the price trend is down. (See Figures 10.2a and b.) - -**Figure 10.2a** *The trendlines on the momentum chart are broken sooner than those on the price chart. The value of the momentum indicator is that it turns sooner than the market itself, making it a leading indicator.* - -**Figure 10.2b** *Some traders regard a crossing above the zero line as a buy signal and a crossing below the line as a sell signal (see circles). A moving average is helpful to confirm trend changes. The momentum line peaked before the price (see arrows).* - -#### **The Need for an Upper and Lower Boundary** - -One problem with the momentum line, as it is described here, is the absence of a fixed upper and lower boundary. It was stated earlier that one of the major values of oscillator analysis is being able to determine when markets are in extreme areas. But, how high is too high and how low is too low on the momentum line? The simplest way to solve this problem is by visual inspection. Check the back history of the momentum line on the chart and draw horizontal lines along its upper and lower boundaries. These lines will have to be adjusted periodically, especially after important trend changes have occurred. But it is the simplest and probably the most effective way of identifying the outer extremities. (See Figures 10.3 and 10.4.) - -**Figure 10.3** *By visual inspection, the analyst can find the upper and lower momentum boundaries that are suitable for each market (see horizontal lines).* - -**Figure 10.4** *A 13 week momentum line on a weekly chart of Treasury Bonds. The arrows mark the turning points from momentum extremes. The momentum line changed direction before the price at each major turn (points 1, 2, and 3).* - -### **MEASURING RATE OF CHANGE (ROC)** - -To measure the *rate of change*, a ratio is constructed of the most recent closing price to a price a certain number of days in the past. To construct a 10 day rate of change oscillator, the latest closing price is divided by the close 10 days ago. The formula is as follows: - -Rate of change=100 (V/V*x*) - -where V is the latest close and V*x* is the closing price *x* days ago. - -In this case, the 100 line becomes the midpoint line. If the latest price is higher than the price 10 days ago (prices are rising), the resulting rate of change value will be above 100. If the last close is below 10 days ago, the ratio would be below 100. (Charting software sometimes uses variations of the preceding formulas for momentum and rate of change. While the construction techniques may vary, the interpretation remains the same.) - -### **CONSTRUCTING AN OSCILLATOR USING TWO MOVING AVERAGES** - -Chapter 9 discussed two moving averages being used to generate buy and sell - -signals. The crossing of the shorter average above or below the longer average registered buy and sell signals, respectively. It was mentioned at that time that these dual moving average combinations could also be used to construct oscillator charts. This can be done by plotting the difference between the two averages as a histogram. These histogram bars appear as a plus or minus value around a centered zero line. This type of oscillator has three uses: - -- 1. To help spot divergences. -- 2. To help identify short term variations from the long term trend, when the shorter average moves too far above or below the longer average. -- 3. To pinpoint the crossings of the two moving averages, which occur when the oscillator crosses the zero line. - -The shorter average is divided by the longer. In both cases, however, the shorter average oscillates around the longer average, which is in effect the zero line. If the shorter average is above the longer, the oscillator would be positive. A negative reading would be present if the shorter average were under the longer. (See Figures 10.5-10.7.) - -When the two moving average lines move too far apart, a market extreme is created calling for a pause in the trend. (See Figure 10.6.) Very often, the trend remains [stalled](#page-220-0) until [the](#page-221-1) shorter average line moves back to the longer. When the shorter line approaches the longer, a critical point is reached. In an uptrend, for example, the shorter line dips [back](#page-220-1) to the longer average, but should bounce off it. This usually represents an ideal buying area. It's much like the testing of an up trendline. If the shorter average crosses below the longer average, however, a trend reversal is signaled. - -**Figure 10.5** *The histogram lines measure the difference between the two moving averages. Crossing above and below the zero line give buy and sell signals (see arrows). Notice that the histogram turns well before the actual signals (see circles).* - -**Figure 10.6** *A histogram measuring the difference between the 10 and 50 day averages. The histogram always turns well before the zero line crossover. In an uptrend, the histogram will find support at the zero line and turn up again (third arrow).* - -In a downtrend, a rise in the shorter average to the longer usually represents an ideal selling area unless the longer line is crossed, in which case a trend reversal signal would be registered. The relationships between the two averages can be used, therefore, not only as an excellent trend-following system, but also to help identify short term overbought and oversold conditions. - -**Figure 10.7** *A histogram plotting the difference between 2 weekly averages. The histogram turned in the direction of the new price trend weeks before the actual zero line crossings on the histogram. Notice how easily the overbought and oversold levels are seen.* - -### **COMMODITY CHANNEL INDEX** - -It is possible to normalize an oscillator by dividing the values by a constant divisor. In the construction of his Commodity Channel Index (CCI), Donald R. Lambert compares the current price with a moving average over a selected time span—usually 20 days. He then normalizes the oscillator values by using a divisor based on mean deviation. As a result, the CCI fluctuates in a constant range from +100 on the upside to -100 on the downside. Lambert recommended long positions in those markets with values over +100. Markets with CCI values below -100 were candidates for short sales. - -It seems, however, that most chartists use CCI simply as an overbought/oversold oscillator. Used in that fashion readings over +100 are considered overbought and under -100 are oversold. While the Commodity Channel Index was originally developed for commodities, it is also used for trading stock index futures and options like the S&P 100 (OEX). Although 20 days is the common default value for CCI, the user can vary the number to adjust its sensitivity. (See Figures 10.8 and 10.9.) - -**Figure 10.8** *A 20 day Commodity Channel Index. The original intent of this indicator was to buy moves above +100 and sell moves below -100 as shown here.* - -**Figure 10.9** *The Commodity Channel Index can be used for stock indexes like this one and can also be used like any other oscillator to measure market extremes. Notice that the CCI turns before prices at each top and bottom. The default length is 20 days.* - -### **THE RELATIVE STRENGTH INDEX (RSI)** - -The RSI was developed by J. Welles Wilder, Jr. and presented in his 1978 book, *New Concepts in Technical Trading Systems.* We're only going to cover the main points here. A reading of the original work by Wilder himself is recommended for a more in-depth treatment. Because this particular oscillator is so popular among traders, we'll use it to demonstrate most of the principles of oscillator analysis. - -As Wilder points out, one of the two major problems in constructing a momentum line (using price differences) is the erratic movement often caused by sharp changes in the values being dropped off. A sharp advance or a decline 10 days ago (in the case of a 10 day momentum line) can cause sudden shifts in the momentum line even if the current prices show little change. Some smoothing is therefore necessary to minimize these distortions. The second problem is that there is the need for a constant range for comparison purposes. The RSI formula not only provides the necessary smoothing, but also solves the latter problem by creating a constant vertical range of 0 to 100. - -The term "relative strength," incidentally, is a misnomer and often - -causes confusion among those more familiar with that term as it is used in stock market analysis. *Relative strength* generally means a ratio line comparing two different entities. A ratio of a stock or industry group to the S&P 500 Index is one way of gauging the *relative strength* of different stocks or industry groups against one objective benchmark. We'll show you later in the book how useful *relative strength* or *ratio* analysis can be. Wilder's *Relative Strength Index* doesn't really measure the relative strength between different entities and, in that sense, the name is somewhat misleading. The RSI, however, does solve the problem of erratic movement and the need for a constant upper and lower boundary. The actual formula is calculated as follows: - -Fourteen days are used in the calculation; 14 weeks are used for weekly charts. To find the average up value, add the total points gained on up days during the 14 days and divide that total by 14. To find the average down value, add the total number of points lost during the down days and divide that total by 14. Relative strength (RS) is then determined by dividing the *up* average by the *down* average. That RS value is then inserted into the formula for RSI. The number of days can be varied by simply changing the value of *x.* - -Wilder originally employed a 14 day period. *The shorter the time period, the more sensitive the oscillator becomes and the wider its amplitude.* RSI works best when its fluctuations reach the upper and lower extremes. Therefore, if the user is trading on a very short term basis and wants the oscillator swings to be more pronounced, the time period can be shortened. The time period is lengthened to make the oscillator smoother and narrower in amplitude. The amplitude in the 9 day oscillator is therefore greater than the original 14 day. While 9 and 14 day spans are the most common values used, technicians experiment with other periods. Some use shorter lengths, such as 5 or 7 days, to increase the volatility of the RSI line. Others use 21 or 28 days to smooth out the RSI signals. (See Figures 10.10 and 10.11.) - -**Figure 10.10** *The 14 day Relative Strength Index becomes overbought over 70 and oversold below 30. This chart shows the S&P 100 being oversold in October and overbought during February.* - -**Figure 10.11** *The amplitude of the RSI line can be widened by shortening the time period. Notice that the 7 day RSI reaches the outer extremes more frequently than the 14 day RSI. That makes the 7 day RSI more useful to short term traders.* - -#### **Interpreting RSI** - -RSI is plotted on a vertical scale of 0 to 100. Movements above 70 are considered overbought, while an oversold condition would be a move under 30. Because of shifting that takes place in bull and bear markets, the 80 level usually becomes the overbought level in bull markets and the 20 level the oversold level in bear markets. - -"Failure swings," as Wilder calls them, occur when the RSI is above 70 or under 30. A *top failure swing* occurs when a peak in the RSI (over 70) fails to exceed a previous peak in an uptrend, followed by a downside break of a previous trough. A *bottom failure swing* occurs when the RSI is in a downtrend (under 30), fails to set a new low, and then proceeds to exceed a previous peak. (See Figures 10.12a-b.) - -**Figure 10.12a** *A bottom failure swing in the RSI line. The second RSI trough (point 2) is higher than the first (point 1) while it is below 30 and prices are still falling. The upside penetration of the RSI peak (point 3) signals a bottom.* - -**Figure 10.12b** *A top failure swing. The second peak (2) is lower than the first (1) while the RSI line is over 70 and prices are still rallying. The break by the RSI line below the middle trough (point 3) signals the top.* - -Divergence between the RSI and the price line, when the RSI is above 70 or below 30, is a serious warning that should be heeded. Wilder himself considers divergence "the single most indicative characteristic of the Relative Strength Index" [Wilder, p. 70]. - -Trendline analysis can be employed to detect changes in the trend of the RSI. Moving averages can also be used for the same purpose. (See Figure 10.13.) - -**Figure 10.13** *Trendlines work very effectively on the RSI line. The breaking of the two RSI trendlines gave timely buy and sell signals on this chart (see arrows).* - -In my own personal experience with the RSI oscillator, its greatest value lies in failure swings or divergences that occur when the RSI is over 70 or under 30. Let's clarify another important point on the use of oscillators. Any strong trend, either up or down, usually produces an extreme oscillator reading before too long. In such cases, claims that a market is overbought or oversold are usually premature and can lead to an early exit from a profitable trend. In strong uptrends, overbought markets can stay overbought for some time. Just because the oscillator has moved into the upper region is not reason enough to liquidate a long position (or, even worse, short into the strong uptrend). - -The first move into the overbought or oversold region is usually just a warning. The signal to pay close attention to is the second move by the oscillator into the *danger zone.* If the second move fails to confirm the price move into new highs or new lows (forming a double top or bottom on the oscillator), a possible divergence exists. At that point, some defensive action can be taken to protect existing positions. If the oscillator moves in the opposite direction, breaking a previous high or low, then a divergence or failure swing is confirmed. - -The 50 level is the RSI midpoint value, and will often act as support during pullbacks and resistance during bounces. Some traders treat RSI crossings above and below the 50 level as buying and selling signals - -respectively. - -## **USING THE 70 AND 30 LINES TO GENERATE SIGNALS** - -Horizontal lines appear on the oscillator chart at the 70 and 30 values. Traders often use those lines to generate buy and sell signals. We already know that a move under 30 warns of an oversold condition. Suppose the trader thinks a market is about to bottom and is looking for a buying opportunity. He or she watches the oscillator dip under 30. Some type of divergence or double bottom may develop in the oscillator in that oversold region. A crossing back above the 30 line at that point is taken by many traders as a confirmation that the trend in the oscillator has turned up. Accordingly, in an overbought market, a crossing back under the 70 line can often be used as a sell signal. (See Figure 10.14.) - -**Figure 10.14** *The RSI oscillator can be used on monthly charts. Notice the two major oversold buy signals in 1974 and 1994. The overbought peaks in the RSI line did a pretty good job of pinpointing important tops in the utilities.* - -## **STOCHASTICS (K%D)** - -The *Stochastic* oscillator was popularized by George Lane (president of - -Investment Educators, Inc., Watseka, IL). It is based on the observation that as prices increase, closing prices tend to be closer to the upper end of the price range. Conversely, in downtrends, the closing price tends to be near the lower end of the range. Two lines are used in the Stochastic Process—the %K line and the %D line. The %D line is the more important and is the one that provides the major signals. - -The intent is to determine where the most recent closing price is in relation to the price range for a chosen time period. Fourteen is the most common period used for this oscillator. To determine the K line, which is the more sensitive of the two, the formula is: - -%K=100 [(C - L14) / (H14 - L14)] - -where C is the latest close, L14 is the lowest low for the last 14 periods, and H14 is the highest high for the same 14 periods (14 periods can refer to days, weeks, or months). - -The formula simply measures, on a percentage basis of 0 to 100, where the closing price is in relation to the total price range for a selected time period. A very high reading (over 80) would put the closing price near the top of the range, while a low reading (under 20) near the bottom of the range. - -The second line (%D) is a 3 period moving average of the %K line. This formula produces a version called *fast* stochastics. By taking another 3 period average of %D, a smoother version called *slow* stochastics is computed. Most traders use the *slow* stochastics because of its more reliable signals.\* - -These formulas produce two lines that oscillate between a vertical scale from 0 to 100. The K line is a faster line, while the D line is a slower line. The major signal to watch for is a divergence between the D line and th[e](#page-244-0) price of the underlying market when the D line is in an overbought or oversold area. The upper and lower extremes are the 80 and 20 values. (See Figure 10.15.) - -A bearish divergence occurs when the D line is over 80 and forms two declining peaks while prices continue to move higher. A bullish divergence is present when the D line is under 20 and forms two rising bottoms [while](#page-231-0) prices continue to move lower. Assuming all of these factors are in place, the actual buy or sell signal is triggered when the faster K line crosses the slower D line. - -There are other refinements in the use of Stochastics, but this explanation covers the more essential points. Despite the higher level of sophistication, the basic oscillator interpretation remains the same. An alert or set-up is present when the %D line is in an extreme area and diverging from the price action. The actual signal takes place when the D line is crossed by the faster K line. - -The Stochastic oscillator can be used on weekly and monthly charts for longer range perspective. It can also be used effectively on intraday charts for shorter term trading. (See Figure 10.16.) - -One way to combine daily and weekly stochastics is to use weekly signals to determine market direction and daily signals for timing. It's also a good idea to combine stochastics with RSI. (See Figure 10.17.) - -**Figure 10.15** *The down arrows show two sell signals which occur when the faster %K line crosses below the slower %D line from above the 80 level. The %K line crossing above the %D line below 20 is a buy signal (up arrow).* - -**Figure 10.16** *Turns in the 14 week stochastics from above 80 and below 20 did a nice job of anticipating major turns in the Treasury Bond market. Stochastics charts can be constructed for 14 days, 14 weeks, or 14 months.* - -**Figure 10.17** *A comparison of the 14 week RSI and stochastics. The RSI line is less volatile and reaches extremes less frequently than stochastics. The best signals occur when both oscillators are in overbought or oversold territory.* - -### **LARRY WILLIAMS %R** - -Larry Williams %R is based on a similar concept of measuring the latest close in relation to its price range over a given number of days. Today's close is subtracted from the price high of the range for a given number of days and that difference is divided by the total range for the same period. The concepts already discussed for oscillator interpretation are applied to %R as well, with the main factors being the presence of divergences in overbought or oversold areas. (See Figure 10.18.) Since %R is subtracted from the high, it looks like an upside down stochastics. To correct that, charting packages plot an inverted version of %R. - -**Figure 10.18** *Larry Williams %R oscillator is used in the same fashion as other oscillators. Readings over 80 or under 20 identify market extremes.* - -#### **Choice of Time Period Tied to Cycles** - -Oscillator lengths can be tied to underlying market cycles. A time period of 1/2 the cycle length is used. Popular time inputs are 5, 10, and 20 days based on calendar day periods of 14, 28, and 56 days. Wilder's RSI uses 14 days, which is half of 28. In the previous chapter, we discussed some reasons why the numbers 5, 10, and 20 keep cropping up in moving average and oscillator formulations, so we won't repeat them here. Suffice it to mention here that 28 calendar days (20 trading days) represent an important dominant monthly trading cycle and that the other numbers are related harmonically to that monthly cycle. The popularity of the 10 day momentum and the 14 day RSI lengths are based largely on the 28 day trading cycle and measure 1/2 of the value of that dominant trading cycle. We'll come back to the importance of cycles in Chapter 14. - -### **THE [IMPORT](#page-317-0)ANCE OF TREND** - -In this chapter, we've discussed the use of the oscillator in market analysis to help determine near term overbought and oversold conditions, and to alert traders to possible divergences. We started with the momentum line. We discussed another way to measure rates of change (ROC) by using price ratios instead of differences. We then showed how two moving averages could be - -compared to spot short term extremes and crossovers. Finally, we looked at RSI and Stochastics and considered how oscillators should be synchronized with cycles. - -Divergence analysis provides us with the oscillator's greatest value. However, the reader is cautioned against placing too much importance on divergence analysis to the point where basic trend analysis is either ignored or overlooked. Most oscillator buy signals work best in uptrends and oscillator sell signals are most profitable in downtrends. The place to start your market analysis is always by determining the general trend of the market. If the trend is up, then a buying strategy is called for. Oscillators can then be used to help time market entry. Buy when the market is oversold in an uptrend. Sell short when the market is overbought in a downtrend. Or, buy when the momentum oscillator crosses back above the zero line when the major trend is bullish and sell a crossing under the zero line in a bear market. - -The importance of trading in the direction of the major trend cannot be overstated. The danger in placing too much importance on oscillators by themselves is the temptation to use divergence as an excuse to initiate trades contrary to the general trend. This action generally proves a costly and painful exercise. The oscillator, as useful as it is, is just one tool among many others and must always be used as an aid, not a substitute, for basic trend analysis. - -### **WHEN OSCILLATORS ARE MOST USEFUL** - -There are times when oscillators are more useful than at others. During choppy market periods, as prices move sideways for several weeks or months, oscillators track the price movement very closely. The peaks and troughs on the price chart coincide almost exactly with the peaks and troughs on the oscillator. Because both price and oscillator are moving sideways, they look very much alike. At some point, however, a price breakout occurs and a new uptrend or downtrend begins. By its very nature, the oscillator is already in an extreme position just as the breakout is taking place. If the breakout is to the upside, the oscillator is already overbought. An oversold reading usually accompanies a downside breakout. The trader is faced with a dilemma. Should he or she buy the bullish breakout in the face of an overbought oscillator reading? Should the downside breakout be sold into an oversold market? - -In such cases, the oscillator is best ignored for the time being and the position taken. The reason for this is that in the early stages of a new trend, following an important breakout, oscillators often reach extremes very quickly and stay there for awhile. Basic trend analysis should be the main consideration at such times, with oscillators given a lesser role. Later on, as the trend begins to mature, the oscillator should be given greater weight. (We'll see in Chapter 13, that the fifth and final wave in Elliott Wave analysis is often confirmed by bearish oscillator divergences.) Many dynamic bull moves have been missed by traders who saw the major trend signal, but decided to wait for [their](#page-293-0) oscillators to move into an oversold condition before buying. To summarize, give less attention to the oscillator in the early stages of an important move, but pay close attention to its signals as the move reaches maturity. - -### **MOVING AVERAGE CONVERGENCE/DIVERGENCE (MACD)** - -We mentioned in the previous chapter an oscillator technique that uses 2 exponential moving averages and here it is. The Moving Average Convergence/Divergence indicator, or simply MACD, was developed by Gerald Appel. What makes this indicator so useful is that it combines some of the oscillator principles we've already explained with a dual moving average crossover approach. You'll see only two lines on your computer screen although three lines are actually used in its calculation. The faster line (called the MACD line) is the difference between two exponentially smoothed moving averages of closing prices (usually the last 12 and 26 days or weeks). The slower line (called the signal line) is usually a 9 period exponentially smoothed average of the MACD line. Appel originally recommended one set of numbers for buy signals and another for sell signals. Most traders, however, utilize the default values of 12, 26, and 9 in all instances. That would include daily and weekly values. (See Figure 10.19a.) - -The actual buy and sell signals are given when the two lines cross. A crossing by the faster MACD line above the slower signal line is a buy signal. A crossing by the faster line below the slower is a sell [signa](#page-236-0)l. In that sense, MACD resembles a dual moving average crossover method. However, the MACD values also fluctuate above and below a zero line. That's where it begins to resemble an oscillator. An overbought condition is present when the lines are too far above the zero line. An oversold condition is present when the lines are too far below the zero line. The best buy signals are given when prices are well below the zero line (oversold). Crossings above and below the zero line are another way to generate buy and sell signals respectively, similar to the momentum technique we discussed previously. - -**Figure 10.19a** *The Moving Average Convergence Divergence system shows two lines. A signal is given when the faster MACD line crosses the slower signal line. The arrows show five trading signals on this chart of the Nasdaq Composite Index.* - -Divergences appear between the trend of the MACD lines and the price line. A negative, or bearish, divergence exists when the MACD lines are well above the zero line (overbought) and start to weaken while prices continue to trend higher. That is often a warning of a market top. A positive, or bullish, divergence exists when the MACD lines are well below the zero line (oversold) and start to move up ahead of the price line. That is often an early sign of a market bottom. Simple trendlines can be drawn on the MACD lines to help identify important trend changes. (See Figure 10.19b.) - -**Figure 10.19b** *The MACD lines fluctuate around a zero line, giving it the quality of an oscillator. The best buy signals occur below the zero line. The best sell signals come from above. Notice the negative divergence given in October (see down arrow).* - -### **MACD HISTOGRAM** - -We showed you earlier in the chapter how a histogram could be constructed that plots the difference between two moving average lines. Using that same technique, the two MACD lines can be turned into an MACD histogram. The histogram consists of vertical bars that show the difference between the two MACD lines. The histogram has a zero line of its own. When the MACD lines are in positive alignment (faster line over the slower), the histogram is above its zero line. Crossings by the histogram above and below its zero line coincide with actual MACD crossover buy and sell signals. - -The real value of the histogram is spotting when the spread between the two lines is widening or narrowing. When the histogram is over its zero line (positive) but starts to fall toward the zero line, the uptrend is weakening. Conversely, when the histogram is below its zero line (negative) and starts to move upward toward the zero line, the downtrend is losing its momentum. Although no actual buy or sell signal is given until the histogram crosses its zero line, the histogram turns provide earlier warnings that the current trend is losing momentum. Turns in the histogram back toward the zero line always precede the actual crossover signals. Histogram turns are best used for - -spotting early exit signals from existing positions. It's much more dangerous to use the histogram turns as an excuse to initiate new positions against the prevailing trend. (See Figure 10.20a.) - -**Figure 10.20a** *The MACD histogram plots the difference between the two MACD lines. Signals are given on the zero line crossings. Notice that the histogram turns earlier than the crossover signals, giving the trader some advanced warning.* - -### **COMBINE WEEKLIES AND DAILIES** - -As with all technical indicators, signals on weekly charts are always more important than those on daily charts. The best way to combine them is to use weekly signals to determine market direction and the daily signals to fine-tune entry and exit points. A daily signal is followed only when it agrees with the weekly signal. Used in that fashion, the weekly signals become trend filters for daily signals. That prevents using daily signals to trade against the prevailing trend. Two crossover systems in which this principle is especially true are MACD and Stochastics. (See Figure 10.20b.) - -**Figure 10.20b** *The MACD histogram works well on weekly charts. At the middle peak, the histogram turned down 10 weeks before the sell signal (down arrow). At the two upturns, the histogram turned up 2 and 4 weeks before the buy signals (up arrows).* - -### **THE PRINCIPLE OF CONTRARY OPINION IN FUTURES** - -Oscillator analysis is the study of market extremes. One of the most widely followed theories in measuring those market extremes is the principle of Contrary Opinion. At the beginning of the book, two principal philosophies of market analysis were identified—fundamental and technical analysis. Contrary Opinion, although it is generally listed under the category of technical analysis, is more aptly described as a form of psychological analysis. Contrary Opinion adds the important third dimension to market analysis—the psychological—by determining the degree of bullishness or bearishness among participants in the various financial markets. - -The principle of *Contrary Opinion* holds that when the vast majority of people agree on anything, they are generally wrong. A true contrarian, therefore, will first try to determine what the majority are doing and then will act in the opposite direction. - -Humphrey B. Neill, considered the dean of contrary thinking, described his theories in a 1954 book entitled, *The Art of Contrary Thinking.* Ten years later, in 1964, James H. Sibbet began to apply Neill's principles to commodity futures trading by creating the Market Vane advisory service, which includes the Bullish Consensus numbers (Market Vane, P.O. Box 90490, Pasadena, CA 91109). Each week a poll of market letters is taken to determine the degree of bullishness or bearishness among commodity professionals. The purpose of the poll is to quantify market sentiment into a set of numbers that can be analyzed and used in the market forecasting process. The rationale behind this approach is that most futures traders are influenced to a great extent by market advisory services. By monitoring the views of the professional market letters, therefore, a reasonably accurate gauge of the attitudes of the trading public can be obtained. - -Another service that provides an indication of market sentiment is the "Consensus Index of Bullish Market Opinion," published by *Consensus National Commodity Futures Weekly* (Consensus, Inc., 1735 McGee Street, Kansas City, MO 64108). These numbers are published each Friday and use 75% as an overbought and 25% as an oversold measurement. - -#### **Interpreting Bullish Consensus Numbers** - -Most traders seem to employ a fairly simple method of analyzing these weekly numbers. If the numbers are above 75%, the market is considered to be overbought and means that a top may be near. A reading below 25% is interpreted to warn of an oversold condition and the increased likelihood that a market bottom is near. - -#### **Contrary Opinion Measures Remaining Buying or Selling Power** - -Consider the case of an individual speculator. Assume that speculator reads his or her favorite newsletter and becomes convinced that a market is about to move substantially higher. The more bullish the forecast, the more aggressively that trader will approach the market. Once that individual speculator's funds are fully committed to that particular market, however, he or she is overbought—meaning there are no more funds to commit to the market. - -Expanding this situation to include all market participants, if 80-90% of market traders are bullish on a market, it is assumed that they have already taken their market positions. Who is left to buy and push the market higher? This then is one of the keys to understanding Contrary Opinion. If the overwhelming sentiment of market traders is on one side of the market, there simply isn't enough buying or selling pressure left to continue the present trend. - -#### **Contrary Opinion Measures Strong Versus Weak Hands** - -A second feature of this philosophy is its ability to compare strong versus weak hands. Futures trading is a zero sum game. For every long there is also a short. If 80% of the traders are on the long side of a market, then the remaining 20% (who are holding short positions) must be well financed enough to absorb the longs held by the other 80%. The shorts, therefore, must be holding much larger positions than the longs (in this case, 4 to 1). - -This means further that the shorts must be well capitalized and are considered to be strong hands. The 80%, who are holding much smaller positions per trader, are considered to be weaker hands who will be forced to liquidate those longs on any sudden turn in prices. - -#### **Some Additional Features of the Bullish Consensus Numbers** - -Let's consider a few additional points that should be kept in mind when using these numbers. The norm or equilibrium point is at 55%. This allows for a built-in bullish bias on the part of the general public. The upper extreme is considered to be 90% and the lower extreme, 20%. Here again, the numbers are shifted upward slightly to allow for the bullish bias. - -A contrarian position can usually be considered when the bullish consensus numbers are above 90% or under 20%. Readings over 75% or under 25% are also considered warning zones and suggest that a turn may be near. However, it is generally advisable to await a change in the trend of the numbers before taking action against the trend. A change in the direction of the Bullish Consensus numbers, especially if it occurs from one of the danger zones, should be watched closely. - -#### **The Importance of Open Interest (Futures)** - -Open interest also plays a role in the use of Bullish Consensus numbers. In general, the higher the open interest figures are, the better the chance that the contrarian positions will prove profitable. A contrarian position should not be taken, however, while open interest is still increasing. A continued rise in open interest numbers increases the odds that the present trend will continue. Wait for the open interest numbers to begin to flatten out or to decline before taking action. - -Study the Commitments of Traders Report to ensure that hedgers hold less than 50% of the open interest. Contrary Opinion works better when most of the open interest is held by speculators, who are considered to be weaker hands. It is not advisable to trade against large hedging interests. - -#### **Watch the Market's Reaction to Fundamental News** - -Watch the market's reaction to fundamental news very closely. The failure of - -prices to react to bullish news in an overbought area is a clear warning that a turn may be near. The first adverse news is usually enough to quickly push prices in the other direction. Correspondingly, the failure of prices in an oversold area (under 25%) to react to bearish news can be taken as a warning that all the bad news has been fully discounted in the current low price. Any bullish news will push prices higher. - -#### **Combine Contrarian Opinion with Other Technical Tools** - -As a general rule, trade in the same direction as the trend of the consensus numbers until an extreme is reached, at which time the numbers should be monitored for a sign of a change in trend. It goes without saying that standard technical analytical tools can and should also be employed to help identify market turns at these critical times. The breaking of support or resistance levels, trendlines, or moving averages can be utilized to help confirm that the trend is in fact turning. Divergences on oscillator charts are especially useful when the Bullish Consensus numbers are overbought or oversold. - -### **INVESTOR SENTIMENT READINGS** - -Each weekend *Barron's* includes in its Market Laboratory section a set of numbers under the heading "Investor Sentiment Readings." In that space, four different investor polls are included to gauge the degree of bullishness and bearishness in the stock market. The figures are given for the latest week and the period two and three weeks back for comparison purposes. Here's a random sample of what the latest week's figures might look like. Remember that these numbers are contrary indicators. Too much bullishness is bad. Too much bearishness is good. - -| investor's intelligence | | -|--------------------------------------------------------------------------------------------------------------|-----| -| Bulls | 48% | -| Bears | 27 | -| Correction | 24 | -| Consensus Index | | -| Bullish Opinion | 77% | -| AAII Index
(American Association of
Individual Investors
625 N. Michigan Ave.
Chicago, IL 60611) | | -| Bullish | 53% | -| Bearish | 13 | -| Neutral | 34 | -| Market Vane | | -| Bullish Consensus | 66% | - -### **INVESTORS INTELLIGENCE NUMBERS** - -Investors Intelligence (30 Church Street, New Rochelle, NY 10801) takes a weekly poll of investment advisors and produces three numbers—the percent of investment advisors that are bullish, those that are bearish, and those that are expecting a market correction. Bullish readings over 55% warn of too much optimism and are potentially negative for the market. Bullish readings below 35% reflect too much pessimism and are considered positive for the market. The correction figure represents advisers who are bullish but expecting short term weakness. - -Investors Intelligence also publishes figures each week that measure the number of stocks that are above their 10 and 30 week moving averages. Those numbers can also be used in a contrary fashion. Readings above 70% suggest an overbought stock market. Readings below 30% suggest an oversold market. The 10 week readings are useful for measuring short to intermediate market turns. The 30 week numbers are more useful for measuring major market turns. The actual signal of a potential change in trend takes place when the numbers rise back above 30 or fall back below 70. - -\*The second smoothing produces 3 lines. Fast stochastics uses the first 2 lines. Slow stochastics uses the last 2 lines. - -### **INTRODUCTION** - -The first charting technique used by stock market traders before the turn of the century was point and figure charting. The actual name "point and figure" has been attributed to Victor deVilliers in his 1933 classic, *The Point and Figure Method of Anticipating Stock Price Movements.* The technique has had various names over the years. In the 1880s and 1890s, it was known as the "book method." This was the name Charles Dow gave it in a July 20, 1901 editorial of *The Wall Street Journal.* - -Dow indicated that the book method had been used for about 15 years, giving it a starting date of 1886. The name "figure charts" was used from the 1920s until 1933 when "point and figure" became the accepted name for this technique of tracking market movement. R.D. Wyckoff also published several works dealing with the point and figure method in the early 1930s. - -*The Wall Street Journal* started publishing daily high, low, and closing stock prices in 1896, which is the first reference to the more commonly known bar chart. Therefore, it appears that the point and figure method predates bar charting by at least 10 years. - -We're going to approach point and figure charting in two steps. We'll look at the original method that relies on intraday price moves. Then we'll show you a simpler version of point and figure charting that can be constructed by using only the high and low prices for any market. - -### **THE POINT AND FIGURE VERSUS THE BAR** - -### **CHART** - -Let's begin with some of the basic differences between point and figure charting and bar charting and look at a couple of chart examples. - -*The point and figure chart is a study of pure price movement.* That is to say, it does not take time into consideration while plotting the price action. A bar chart, by contrast, combines both price and time. Because of the way the bar chart is constructed, the vertical axis is the price scale and the horizontal axis, a time scale. On a daily chart, for example, each successive day's price action moves one space or bar to the right. This happens even if prices saw little or no change for that day. Something must always be placed in the next space. On the point and figure chart, only the price changes are recorded. If no price change occurs, the chart is left untouched. During active market periods, a considerable amount of plotting may be required. During quiet market conditions, little or no plotting will be needed. - -*An important difference is the treatment of volume.* Bar charts record volume bars under the day's price action. Point and figure charts ignore volume numbers, as a separate entity. This last phrase, "as a separate entity," is an important one. Although the volume numbers are not recorded on the point and figure chart, it does not necessarily follow that volume, or trading activity, is totally lost. On the contrary, since intraday point and figure charts record all price change activity, the heavier or lighter volume is reflected in the amount of price changes recorded on the chart. Because volume is one of the more important ingredients in determining the potency of support and resistance levels, point and figure charts become especially useful in determining at which price levels most of the trading activity took place and, hence, where the important support and resistance numbers are. - -Figure 11.1 compares a bar chart and a point and figure chart covering the same time span. In one sense, the charts look similar, but, in another sense, quite different. The general price and trend picture is captured on both charts, [but](#page-247-0) the method of recording prices is different. Notice in Figure 11.2 the alternating columns of x's and o's. The *x columns* represent rising prices, while the *o columns* show declining prices. Each time a column of x's moves one box above a previous column of x's, an upside breakout occurs. [\(See](#page-247-1) arrows in Figure 11.2.) - -**Figure 11.1** *A comparison of a daily bar chart for the S&P 500 Index (left) and a point and figure chart (right) for the same time period. The point and figure chart uses x columns for rising prices and o columns for declining prices.* - -**Figure 11.2** *A buy signal is given when one x column rises above the top of a previous x column (see up arrows). A sell signal is given when a column of o's falls below a previous o column (see down arrows). Signals are more precise* - -Correspondingly, when a column of o's declines one box under a previous column of o's, a downside breakout occurs. Notice how much more precise these breakouts are than those on the bar chart. These breakouts can, of course, be used as buy and sell signals. We'll have more to say on buy and sell signals a bit later. But the charts demonstrate one of the advantages of the point and figure chart, mainly the greater precision and ease in recognizing trend signals. - -Figures 11.3 and 11.4 reveal another major advantage of the point and figure chart: flexibility. While all three of the p&f charts cover the same price action, we can make them look very different to serve different purposes. One way to [change](#page-248-0) the p&f [cha](#page-249-1)rt is to vary the *reversal criteria* (let's say from a 3 box reversal to a 5 box reversal). The larger the number of boxes required for a reversal, the less sensitive the chart becomes. The second way to vary the chart is to change the *box size*. Figure 2 uses a box size of 5 points. Figure 11.3 changes the box size from 5 points to 10 points. The number of columns has been reduced from 44 in the 5×3 chart in Figure 11.2 to only 16 columns in Figure 11.3. By using the larger box size in Figure 11.3, fewer signals are given. That allows the investor to [concentrate](#page-248-0) on the major trend of a market by avoiding all the short term sell signals that are [elimina](#page-247-1)ted from the less se[nsitive](#page-248-0) chart. - -**Figure 11.3** *Increasing the box size from 5 points to 10 makes the point and figure chart less sensitive and fewer signals are given. This is more suitable for a long term investor.* - -**Figure 11.4** *Reducing the box size to 3 points produces more signals. This is better for shorter term trading. The last rally from 920 to 1060 produced 6 different buy signals. Protective sell stops can be placed under the highest column of o's (see S1-S5).* - -Figure 11.4 reduces the box size from 5 to 3. That increases the sensitivity of the chart. Why would anyone want to do that? Because it's better for shorter term trading. Compare the last rally from 920 to 1060 in all three [charts.](#page-249-1) The 10×3 chart (Figure 11.3) shows the last column as a series of x's with no o columns. The 5×3 chart (Figure 11.2) shows the last upleg in 5 columns—3 x columns and 2 o columns. The 3×3 chart (Figure 11.4) breaks the last upleg into 11 columns—6 x [colum](#page-248-0)ns and 5 o columns. By increasing the number of corrections during the u[ptrend](#page-247-1) (by increasing the number of o columns), more repeat buy signals are given either for later [entry](#page-249-1) or for adding to winning positions. It also allows the trader to raise protective sell stops below the latest columns of o's. The bottom line is that you can alter the look of the point and figure chart to adjust its sensitivity to suit your own needs. - -### **CONSTRUCTION OF THE INTRADAY POINT AND FIGURE CHART** - -We've already stated that the intraday chart was the original type used by point and figure chartists. The technique was originally used to track stock market movement. The intent was to capture and record on paper each one point move of the stocks under consideration. It was felt that accumulation - -(buying) and distribution (selling) could be better detected in this manner. Only whole numbers were employed. Each box was given a value of one point and each one point move in either direction was recorded. Fractions were largely ignored. When the technique was later adopted to commodity markets, the value of the box had to be adjusted to fit each different commodity market. Let's construct an intraday chart using some actual price data. - -The following numbers describe 9 actual days of trading in a Swiss franc futures contract. The box size is 5 points. Therefore, every 5 point swing in either direction is plotted. We'll start with a 1 box reversal chart. - -Figure 11.5a is what the previously listed numbers would look like on the chart. Let's begin on the left side of the chart. First the chart is scaled to reflect a 5 point increment for every box. - -- Column 1: [Put](#page-251-0) a dot at 4875. Because the next number—4880—is higher, fill in the next box up to 4880. -- Column 2: The next number is 4860. Move 1 column to the right, go down 1 box, and fill in all the o's down to 4860. -- Column 3: The next number is 4865. Move 1 column to the right, move up 1 box and put an x at 4865. Stop here. So far you have only 1 x marked in column 3 because prices have only moved up 1 box. On a 1 box reversal chart, there must always be at least 2 boxes filled in each column. Notice that the next number is 4850, calling for o's down to that number. Do you go to the next column to record the column of declining o's? The answer is no because that would leave only 1 mark, the x, in column 3. Therefore, in the column with the lone x (column 3) fill in o's down to 4850. - -**Figure 11.5a** *A 5×1 point and figure chart of a Deutsche mark contract is shown in the upper chart. The blackened boxes show the end of each day's trading. Figure 11.5b shows the same price data with a 3 box reversal. Notice the compression. Figure 11.5c shows a 5 box reversal.* - -- Column 4: The [next](#page-252-1) number is 4860. Move to the next column, move 1 box up, and plot in the x's up to [4860.](#page-252-1) -- Column 5: The next number is 4855. Because this is a move down, go to the next column, move down a box, and fill the o at 4860. Notice on the table that this is the last price of the day. Let's do one more. -- Column 6: The first number on 5/2 is 4870. So far, you only have one o in column 5. You must have at least 2 marks in each column. Therefore, fill in x's (because prices are advancing) up to 4870. But notice that the last price on the previous day is blacked out. This is to help keep track of time. By blacking in the last price each day, it's much easier to keep track of the separate days' trading. - -Feel free to continue through the remainder of the chart to sharpen your understanding of the plotting process. Notice that this chart has several columns where both x's and o's are present. This situation will only develop on the 1 point reversal chart and is caused by the necessity of having at least 2 boxes filled in each column. Some purists might argue with combining the x's and o's. Experience will show, however, that this method of plotting prices makes it much easier to follow the order of the transactions. - -Figure 11.5b takes the same data from Figure 11.5a and transforms it into a 3 box reversal chart. Notice that the chart is condensed and a lot of data is lost. Figure 11.5c shows a 5 box reversal. These are the 3 reversal criteria that have [tradition](#page-252-1)ally been used—the 1, 3, and 5 [box](#page-251-0) reversal. The 1 box - -reversal is generally used for very short term activity and the 3 box for the study of the intermediate trend. The 5 box reversal, because of its severe condensation, is generally used for the study of long term trends. The correct order to use is the one shown here, that is, begin with the 1 point reversal chart. The 3 and 5 box reversals can then be constructed right off the first chart. For obvious reasons, a 1 point reversal chart could not possibly be constructed from a 3 or 5 box reversal. - - - -### **THE HORIZONTAL COUNT** - -One principal advantage of the intraday 1 box reversal chart is the ability to obtain price objectives through use of the *horizontal count.* If you think back to our coverage of bar charts and price patterns, the question of price objectives was discussed. However, virtually all methods of obtaining price objectives off bar charts were based on what we call *vertical measurements.* This meant measuring the height of a pattern (the volatility) and projecting that distance upward or downward. For example, the head and shoulders pattern measured the distance from the head to the neckline and swung that objective from the break of that neckline. - -### **Point and Figure Charts Allow Horizontal Measurement** - -The principle of the horizontal count is based on the premise that there is a direct relationship between the width of a congestion area and the subsequent move once a breakout occurs. If the *congestion area* represents a basing pattern, some estimate can be made of the upside potential once the base is completed. Once the uptrend has begun, subsequent congestion areas can be used to obtain additional counts which can be utilized to confirm the original counts from the base. (See Figure 11.6.) - -The intent is to measure the width of the pattern. Remember we're talking here of intraday 1 box reversal charts. The technique requires some modifications for other types of [charts](#page-253-1) that we'll come back to later. Once a topping or basing area has been identified, simply count the number of columns in that top or base. If there are 20 columns, for example, the upside or downside target would be 20 boxes from the measuring point. The key is to determine which line to measure from. Sometimes this is easy and, at other times, more difficult. - -Usually, the horizontal line to count across is near the middle of the congestion area. A more precise rule is to use the line that has the least number of empty boxes in it. Or put the other way, the line with the most number of filled in x's and o's. Once you find the correct line to count across, it's important that you include every column in your count, even the ones that are empty. Count the number of columns in the congestion area and then project that number up or down from the line that was used for the count. - -**Figure 11.6** *By counting the number of columns across the horizontal congestion area, price objectives can be determined. The wider the congestion area, the greater the objective.* - -### **PRICE PATTERNS** - -Pattern identification is also possible on point and figure charts. Figure 11.7 shows the most common types. - -As you can see, they're not much different from ones already discussed on bar charting. Most of the patterns are variations on the double and triple tops and bottoms, head and shoulders, V's and inverted V's, and saucers. The term "fulcrum" shows up quite a bit in the point and figure literature. Essentially, the *fulcrum* is a well defined congestion area, occurring after a significant advance or decline, that forms an accumulation base or a distribution top. In a base, for example, the bottom of the area is subjected to repeated tests, interrupted by intermittent rally attempts. Very often, the fulcrum takes on the appearance of a double or triple bottom. The basing pattern is completed when a breakout (catapult) occurs over the top of the congestion area. - - - -| BOTTOMS | TOPS | -|----------------------------------------------------------|-------------------------------------------------------------------------| -| | Fade 4 % | -| پښې
Ī,
FULCRUM
$\mathbf{u}^{\mathbf{r}}$ | ļË.
.ia.
$\mathbf{F}^{\dagger}$ | -| ħ. | INVERSE FULCRUM | -| وأيتها
मसन | ਦਿੰ
≠≕ | -| Manufacture | æ | -| | Property
Hiddle | -| 46
COMPOUND, FULCRUM | | -| ļm
æ, | ₩ | -| | INVERSE COMPOUND FULCRUM
- क्रम | -| أأسأسل
Тч, | | -| | 西西 | -| Ħ | | -| DELAYED ENDING
t. | ₩ | -| Ţ | DELAYED ENDING | -| زاج وزغبت أشتشينها
Alberta | ᅭ
ŧ | -| ببيق
ÿ | | -| INVERSE HEAD & SHOULDERS
一 | .मे ५
œ | -| جت
ĨН | W
30 | -| in Trais
Program | e la la
HEAD & SHOULDERS | -| ħ
21 | čμ. | -| в | | -| ling | يعترا الملهزع | -| v | P, | -| رية.
مناطق | 画生
تلهي | -| $4.11 -$ | NVERTED
v | -| | | -| | $\overline{\mathbb{F}_{2}}_{\mathbb{F}^2}$ | -| ₩.
And find
V EXTENDED | فسلو
an
T
yan, | -| airig
Tirada | | -| | .
برايا
#at
INVERTED
EXTENDED
v | -| March | ж | -| à, | | -| * تاتين
DUPLEX
HORIZONTAL | بالإنبانيانية | -| | HORIZONTAL 11
DUPLEX | -| نبادوا الينينانية
lių. | h
÷m, | -| | ₩ | -| | PERS | -| $\mathbb{F}^{\overline{\mathbb{F}^{\mu}}}$
÷ | | -| SAUCER | Fig.
₩.
INVERSE SAUCER | -| | 4
المبية | -| 三种
Service | | -| | | -| | | - -**Figure 11.7** *Reversal patterns. (Source: Alexander H. Wheelan*, Study Helps in Point and Figure Technique *[New York, NY: Morgan, Rogers and Roberts,* - -### *Inc., 1954] p. 25.) Reprinted in 1990 by Traders Press, P.O. Box 6206, Greenville, SC 29606.]* - -Those reversal patterns with the most pronounced horizontal ranges obviously lend themselves quite well to the taking of count measurements. The V base, in contrast, because of the absence of a significant horizontal price area, would not be amenable to the taking of a horizontal count. The blackened boxes in the chart examples in Figure 11.7 represent suggested buying and selling points. Notice that those entry points generally coincide with the retesting of support areas in a base or resistance areas in a top, breakout points, and the breaking of tren[dlines.](#page-254-0) - -#### **Trend Analysis and Trendlines** - -The price patterns in Figure 11.7 show trendlines drawn as part of those patterns. Trendline analysis on intraday charts is the same as that applied to bar charts. Up trendlines are drawn under successive lows and down trendlines are drawn over [success](#page-254-0)ive peaks. This is not true of the simplified point and figure chart, which we're going to study next. It utilizes 45 degree lines and plots them differently. - -### **3 BOX REVERSAL POINT AND FIGURE CHARTING** - -In 1947, a book on point and figure was written by A.W. Cohen entitled, *Stock Market Timing.* The following year, when the *Chartcraft Weekly Service* was started, the book's name was changed to *The Chartcraft Method of Point & Figure Trading.* Several revised editions have been published since then to include commodities and options. In 1990, Michael Burke wrote *The All New Guide to the Three-Point Reversal Method of Point & Figure Construction and Formations* (Chartcraft, New Rochelle, NY). - -The original 1 box reversal method of plotting markets required intraday prices. The 3 box reversal was a condensation of the 1 box and was meant for intermediate trend analysis. Cohen reasoned that because so few 3 box reversals occurred in stocks during the day that it was not necessary to use intraday prices to construct the 3 box reversal chart. Hence the decision to use only the high and low prices, which were readily available in most financial newspapers. This modified technique, which is the basis of the Chartcraft service, greatly simplified point and figure charting and made it accessible to the average trader. - -### **CONSTRUCTION OF THE 3 POINT REVERSAL CHART** - -The construction of the chart is relatively simple. First, the chart must be scaled in the same way as the intraday chart. A value must be assigned to each box. These tasks are performed for subscribers to the *Chartcraft* service because the charts are already constructed and the box values assigned. The chart shows a series of alternating columns with x's representing rising prices and the o columns showing falling prices. (See Figure 11.8.) - -The actual plotting of the x's and o's requires only the high and low prices for the day. If the last column is an x column (showing rising prices), then look at the high price for the day. If the daily [high](#page-257-0) permits the filling in of 1 or more x's, then fill in those boxes and stop. That's all you do for that day. Remember that the entire value of the box must be filled. Fractions or partial filling of the box don't count. Repeat the same process the next day, looking only at the high price. As long as prices continue to rise, permitting the plotting of at least one x, continue to fill in the boxes with x's, ignoring the low price. - -The day finally comes when the daily high price is not high enough to fill the next x box. At that point, look at the low price to determine if a 3 box reversal has occurred in the other direction. If so, move one column to the right, move down one box, and fill the next 3 boxes with o's to signify a new down column. Because you are now in a down column, the next day consult the low price to see if that column of o's can be continued. If one or more o's can be filled in, then do so. Only when the daily low does not permit the filling in of any more o's do you look at the daily high to see if a 3 box reversal has occurred to the upside. If so, move 1 column to the right and begin a new x column. - -**Figure 11.8** *Source: Courtesy of Chartcraft, Inc., New Rochelle, NY.* - -#### **Chart Patterns** - -Figure 11.9 shows 16 price patterns most common to this type of point and figure chart—8 buy signals and 8 sell signals. - -Let's take a look at the patterns. Since column 2, showing signals S-1 [through](#page-259-0) S-8, is just a mirror image of column 1, we'll concentrate on the buy side. The first 2 signals, B-1 and B-2, are simple formations. All that is required for the *simple bullish buy signal* is 3 columns, with the second column of x's moving 1 box above the previous column of x's. B-2 is similar to B-1 with one minor difference—there are now 4 columns, with the bottom of the second column of o's higher than the first. B-1 shows a simple breakout through resistance. B-2 shows the same bullish breakout but with the added bullish feature of rising bottoms. B-2 is a slightly stronger pattern than B-1 - -for that reason. - -The third pattern (B-3), *breakout of a triple top*, begins the complex formations. Notice that the simple bullish buy signal is a part of each complex formation. Also, as we move down the page, these formations become increasingly stronger. The triple top breakout is stronger because there are 5 columns involved and 2 columns of x's have been penetrated. Remember that the wider the base, the greater the upside potential. The next pattern (B-4), *ascending triple top*, is stronger than B-3 because the tops and bottoms are both ascending. The *spread triple top* (B-5) is even stronger because there are 7 columns involved, and 3 columns of x's are exceeded. - -The *upside breakout above a bullish triangle* (B-6) combines two signals. First, a simple buy signal must be present. Then the upper trendline must be cleared. (We'll cover the drawing of trendlines on these charts in the next section). Signal B-7, *upside breakout above a bullish resistance line*, is self-explanatory. Again, two things must be present. A buy signal must have already been given; and the upper channel line must be completely cleared. The final pattern, the *upside breakout above a bearish resistance line* (B-8), also requires two elements. A simple buy signal must be combined with a clearing of the down trendline. Of course, everything we've said regarding patterns B-1 through B-8 applies equally to patterns S-1 through S-8 except that, in the latter case, prices are headed down instead of up. - -**Figure 11.9** *Source: K.C. Zieg, Jr., and P.J. Kaufman*, Point and Figure Commodity Trading Techniques *(New Rochelle, NY: Investors Intelligence) p. 73.* - -*There is a difference between how these patterns are applied to commodity markets as opposed to common stocks.* In general, all 16 signals can be used in stock market trading. However, because of the rapid movement so characteristic of the futures markets, the *complex* patterns are not as common in the commodity markets. Much greater emphasis is therefore placed on the *simple* signals. Many futures traders utilize the simple signals alone. If the trader chooses to wait for the more complex and stronger patterns, many profitable trading opportunities will be missed. - -## **THE DRAWING OF TRENDLINES** - -In our discussion of intraday charts, it was pointed out that trendlines were drawn in the conventional way. This is not the case on these 3 point reversal charts. Trendlines on these charts are drawn at 45 degree angles. Also, trendlines do not necessarily have to connect previous tops or bottoms. - -#### **The Basic Bullish Support Line and Bearish Resistance Line** - -These are your basic up and down trendlines. Because of the severe condensation on these charts, it would be impractical to try to connect rally tops or reaction lows. The 45 degree line is, therefore, used. In an uptrend, the *bullish support line* is drawn at a *45 degree angle* upward to the right from under the lowest column of o's. As long as prices remain above that line, the major trend is considered to be bullish. In a downtrend, the bearish resistance line is drawn at a 45 degree angle downward to the right from the top of the highest column of x's. As long as prices remain below that down trendline, the trend is bearish. (See Figures 11.10-11.12.) - -At times, those lines may have to be adjusted. For example, sometimes a correction in an uptrend breaks below the rising support line after which the uptrend resumes. In such [cases,](#page-261-0) a new s[uppor](#page-263-1)t line must be drawn at a 45 degree angle from the bottom of that reaction low. Sometimes a trend is so strong that the original up trendline is simply too far away from the price action. In that case, a tighter trendline should be drawn in an attempt to arrive at a "best fitting" support line. - -**Figure 11.10** *Examples of the Chartcraft three point reversal stock charts. Notice that the trendlines are drawn at 45 degree angles. (Source: Courtesy of Chartcraft, New Rochelle, NY.)* - -**Figure 11.11** *Two more examples of the Chartcraft 3 point reversal method of point and figure charting. Trendlines on these charts are drawn at 45 degree angles. (Source: Courtesy of Chartcraft, New Rochelle, NY.)* - -**Figure 11.12** *The box to the bottom left shows a horizontal target to 92 in British Telecomm PLC arrived at by tripling the base and adding to 50. To the right, a vertical target to 102 is arrived at by tripling the x column and adding to 63. (Source: Courtesy of Chartcraft, New Rochelle, NY.)* - -### **MEASURING TECHNIQUES** - -Three point reversal charts allow the use of two different measuring techniques—the *horizontal* and the *vertical.* For the horizontal, count the number of columns in a bottom or topping pattern. That number of columns must then be multiplied by the value of the reversal or the number of boxes needed for a reversal. For example, let's assign a \$1.00 box value to a chart with a 3 box reversal. We count the number of boxes across a base and come up with 10. Because we're using a 3 box reversal, the value of that reversal is \$3.00 (3x\$1.00). Multiply the 10 columns across the base by \$3 for a total of \$30. That number is then added to the bottom of the basing pattern or subtracted from the top of a topping pattern to arrive at the price objective. - -The *vertical* count is a bit simpler. Measure the number of boxes in the first column of the new trend. In an uptrend, measure the first up column of x's. In a downtrend, measure the first down column of o's. Multiply that value by 3 and add that total to the bottom or subtract it from the top of the column. What you're doing in effect with a 3 box reversal chart is tripling the size of the first leg. If a double top or bottom occurs on the chart, use the second column of o's or x's for the vertical count. (See Figure 11.12.) - -### **TRADING TACTICS** - -Let's look at the various ways that these point and figure charts can be used to determine specific entry and exit points. - -- 1. A simple buy signal can be used for the covering of old shorts and/or the initiation of new longs. -- 2. A simple sell signal can be used for the liquidation of old longs and/or the initiation of new shorts. -- 3. The simple signal can be used only for liquidation purposes with a complex formation needed for a new commitment. -- 4. The trendline can be used as a filter. Long positions are taken above the trendline and short positions below the trendline. -- 5. For stop protection, always risk below the last column of o's in an uptrend and over the last column of x's in a downtrend. -- 6. The actual entry point can be varied as follows: - - a. Buy the actual breakout in an uptrend. - - b. Buy a 3 box reversal after the breakout occurs to obtain a lower entry point. - - c. Buy a 3 box reversal in the direction of the original breakout after a correction occurs. Not only does this require the added confirmation of a positive reversal in the right direction, but a closer stop point can now be used under the latest column of o's. - - d. Buy a second breakout in the same direction as the original breakout signal. - -As you can readily see from the list, there are many different ways that the point and figure chart can be used. Once the basic technique is - -understood, there is almost unlimited flexibility as to how to best enter and exit a market using this approach. - -### **Adjusting Stops** - -The actual buy or sell signal occurs on the first signal. However, as the move continues, several other signals appear on the chart. These repeat buy or sell signals can be used for additional positions. Whether or not this is done, the protective stop point can be raised to just below the latest o column in an uptrend and lowered to just over the latest x column in a downtrend. This use of a *trailing stop* allows the trader to stay with the position and protect accumulated profits at the same time. - -### **What to Do After a Prolonged Move** - -Intermittent corrections against the trend allow the trader to adjust stops once the trend has resumed. How is this accomplished, however, if no 3 box reversals occur during the trend? The trader is then faced with a long column of x's in an uptrend or o's in a downtrend. This type of market situation creates what is called a *pole*, that is, a long column of x's and o's without a correction. The trader wants to stay with the trend but also wants some technique to protect profits. There is at least one way to accomplish this. After an uninterrupted move of 10 or more boxes, place a protective stop at the point where a 3 box reversal would occur. If the position does get stopped out, reentry can be done on another 3 box reversal in the direction of the original trend. In that case, an added advantage is the placement of the new stop under the most recent column of o's in an uptrend or over the latest column of x's in a downtrend. - -## **ADVANTAGES OF POINT AND FIGURE CHARTS** - -Let's briefly recap some of the advantages of point and figure charting. - -- 1. By varying the box and reversal sizes, these charts can be adapted to almost any need. There are also many different ways these charts can be used for entry and exit points. -- 2. Trading signals are more precise on point and figure charts than on bar charts. -- 3. By following these specific point and figure signals, better trading discipline can be achieved. (See Figures 11.13-11.18.) - -**Figure 11.13** *This chart of Treasury Bond futures prices covers more than two years. The arrows mark the buy and sell signals. Most of the signals captured the market trend very well. Even when a bad signal is given, the chart quickly corrects itself.* - -**Figure 11.14** *The early 1994 sell signal (first down arrow) lasted all the way through 1994. The buy signal at the start of 1995 (first up arrow) lasted for two years until 1997. A sell signal in mid-1997 turned into a buy at the start of 1998.* - -**Figure 11.15** *This chart condenses the previous dollar chart by doubling the box size. Only two signals are given on this less sensitive version. The last signal was a buy (see up arrow) in mid-1995 near 85, which has lasted for almost three years.* - -**Figure 11.16** *This point and figure chart of gold gave a sell signal (see down arrow) near \$380 during 1996. Gold prices fell another \$100 over the next two years.* - -**Figure 11.17** *The crude oil point and figure chart gave a sell signal (see down arrow) near \$20 during October 1997 and caught the subsequent \$6 tumble. Crude oil prices would have to rise above the last x column at 16.50 to reverse the downtrend.* - -**Figure 11.18** *This point and figure chart of the Semiconductor Index gave four signals over a period of two and a half years. The down arrows mark two timely sell signals in 1995 and 1997. The buy signal during 1996 (first up arrow) caught most of the ensuing rally.* - -## **P&F TECHNICAL INDICATORS** - -In his 1995 book, *Point & Figure Charting* (John Wiley & Sons), Thomas J. Dorsey espouses the Chartcraft method of 3 point reversal charting of stocks. He also discusses point and figure application to commodity and options trading. In addition to explaining how to construct and read the charts, Dorsey also shows how the P&F technique can be applied to relative strength analysis, sector analysis, and in the construction of an NYSE Bullish Percent Index. He shows how p&f charts can be constructed for the NYSE advance decline line, the NYSE High-Low Index, and the percentage of stocks over their 10 and 30 week averages. Dorsey credits Michael Burke, the publisher of Chartcraft, (Chartcraft, Inc., Investors Intelligence, 30 Church Street, New Rochelle, N.Y. 10801) with the actual development of these innovative p&f indicators which are available in that chart service. - -### **COMPUTERIZED P&F CHARTING** - -Computers have taken the drudgery out of point and figure charting. The days of laboriously constructing columns of x's and o's are gone. Most charting software packages do the charting for you. In addition, you can vary the box and reversal sizes with a keystroke to adjust the chart for shorter or longer term analysis. You can construct p&f charts from real-time (intraday) and end of day data, and you can apply them to any market you want. But you can do a lot more with a computer. - -Kenneth Tower (CMT), technical analyst for UST Securities Corporation, (5 Vaughn Drive, CN5209, Princeton, N.J. 08543) uses a logarithmic method of point and figure charting. A screening process that measures the volatility of a stock over the last 3 years determines the right percentage box size for each stock. Figures 11.19 and 11.20 show examples of Tower's logarithmic p&f charts applied to America Online and Intel. The box size for AOL in Figure 11.19 is 3.6%. A 1 box reversal, therefore, would require a retracement of 3.6%. Since that [happens](#page-270-0) to be a [2](#page-270-1) box reversal chart, prices would have to retrace 7.2% to start a new column. Each box size for the Intel chart shown in [Figur](#page-270-0)e 11.20 is worth 3.2%. - -**Figure 11.19** *A logarithmic point and figure chart of America Online. The reversal criteria is based on percentages. Each box is worth 3.6%. Since this is a two box reversal chart, a reversal is worth 7.2%. Notice the horizontal upside counts to 69.7 and 136.5 (see arcs). (Chart courtesy of UST Securities Corp.)* - -**Figure 11.20** *A one box reversal point and figure chart of Intel using percentages. A reversal of 3.2% is needed to move into the next column. Measuring horizontally from right to left along the base, upside counts can be made to 33 and then to 87.6 (see arcs). (Chart courtesy of UST Securities Corp.)* - -The arcs you see on both charts are examples of using horizontal price counts across a price base to arrive at short and long term price objectives. The Intel chart, for example, shows a short term objective to 33, arrived at by measuring halfway across the price base (lower arc). The larger arc, which measures to 87.6, is arrived at by measuring across the entire price base and - -projecting that distance upward. If you look closely at Figures 11.19 and 11.20, you'll also see price dots trailing the price action. Those dots happen to be moving averages. - -### **P&F MOVING AVERAGES** - -Moving averages are usually applied to bar charts. But here they are on point & figure charts, courtesy of Ken Tower and UST Securities. Tower uses two moving averages on his charts, a 10 column and a 20 column moving average. The dots you see in Figures 11.19 and 11.20 are 10 column averages. These moving averages are constructed by first finding an average price for each column. That is done by simply adding up the prices in each column and dividing the total by the nu[mber](#page-270-0) of x's or [o's](#page-270-1) in that column. The resulting numbers are then averaged over 10 and 20 columns. The moving averages are used in the same way as on bar charts. - -Figure 11.21 shows two point and figure charts of the same stock with 10 column averages (dots) and 20 column averages (dashes). The bottom chart is a 2.7% reversal logarithmic chart of Royal Dutch Petroleum going back to 1992. [Notice](#page-272-1) that the faster moving average stayed above the slower moving average from 1993 to the 1997 during the four year uptrend. You can see the two moving averages coming together during the second half of 1997 in what turned out to be a consolidation year for that stock. To the far right, you can see that Royal Dutch may be on the verge of resuming its major uptrend. A closer look at that potential upside breakout is seen in the upper chart in Figure 11.21. - -The upper chart is a traditional one point reversal linear chart of the same stock. The time frame covered in the linear chart is much shorter than the long [chart.](#page-272-1) But you get a closer look at the late 1997 and early 1998 price action and can see the short term upside breakout at the start of 1998. The stock still needs to close through 60 to confirm a major bullish breakout. The moving averages haven't been much help during the trading range (they never are), but should begin to trend higher once again if the bullish breakout materializes. By adding moving averages to point and figure charts, Ken Tower brings another valuable technical indicator to p&f charting. The use of logarithmic charts also adds a modern wrinkle to this old charting method. - -**Figure 11.21** *Two point and figure versions of Royal Dutch Petroleum. The bottom chart is a log chart spanning several years. The upper chart is a linear chart for one year. The dots and dashes represent 10 and 20 column moving averages, respectively. (Prepared by UST Securities Corp. Updated through March 26, 1998.)* - -### **CONCLUSION** - -Point and figure charting isn't the oldest technique in the world. That credit goes to the Japanese candlestick chart, which has been used in that country for centuries. In the next chapter Greg Morris, author of two books on candlesticks, will introduce that ancient technique that has gained new popularity in recent years among Western technical analysts. - -### **INTRODUCTION** - -While the Japanese have used this charting and analysis technique for centuries, only in recent years has it become popular in the West. The term, candlesticks, actually refers to two different, but related subjects. First, and possibly the more popular, is the method of displaying stock and futures data for chart analysis. Secondly, it is the art of identifying certain combinations of candlesticks in defined and proven combinations. Fortunately, both techniques can be used independently or in combination. - -### **CANDLESTICK CHARTING** - -Charting market data in candlestick form uses the same data available for standard bar charts; open, high, low, and close prices. While using the exact same data, candlestick charts offer a much more visually appealing chart. Information seems to jump off the page (computer screen). The information displayed is more easily interpreted and analyzed. The box below is a depiction of of a single day of prices showing the difference between the bar (left) and the candlestick(s). (See Figure 12.1.) - -#### **Figure 12.1** - -You can see how the name "candlesticks" came about. They look somewhat like a candle with a wick. The rectangle represents the difference between the open and close price for the day, and is called the *body.* Notice that the body can be either black or white. A *white body* means that the close price was greater (higher) than the open price. Actually, the body is not white, but open (not filled), which makes it work better with computers. This is so that it will print correctly when printing charts on a computer. This is one of the adaptations that have occurred in the West; the Japanese use red for the open body. The *black body* means that the close price was lower than the open price. The open and close prices are given much significance in Japanese candlesticks. The small lines above and below the body are referred to as *wicks* or *hairs* or *shadows.* Many different names for these lines appear in Japanese reference literature, which is odd since they represent the high and low prices for the day and are normally not considered vital in the analysis by the Japanese. (See Figure 12.2.) - -Figure 12.2 shows the same data in both the popular bar chart and in a Japanese candlestick format. You can quickly see that information not readily available on the bar [chart](#page-274-0) seems to jump from the page (screen) on the cand[lestick](#page-274-0) chart. Initially, it takes some getting use to, but after a while you may prefer it. - -**Figure 12.2** - -The different shapes for candlesticks have different meanings. The Japanese have defined different primary candlesticks, based upon the relationship of open, high, low, and close prices. Understanding these basic candlesticks is the beginning of candlestick analysis. - -### **BASIC CANDLESTICKS** - -Different body/shadow combinations have different meanings. Days in which the difference between the open and close prices is great are called *Long Days.* Likewise, days in which the difference between the open and close price is small, are called *Short Days.* Remember, we are only talking about the size of the body and no reference is made to the high and/or low prices. (See Figure 12.3.) - -*Spinning Tops* are days in which the candlesticks have small bodies with upper and lower shadows that are of greater length than that of the body. The body [color](#page-275-1) is relatively unimportant in spinning top candlesticks. These candlesticks are considered as days of indecision. (See Figure 12.4.) - -**Figure 12.3** - -**Figure 12.4** *Spinning tops.* - -When the open price and the close price are equal, they are called Doji lines. *Doji candlesticks* can have shadows of varying length. When referring to Doji candlesticks, there is some consideration as to whether the open and close price must be exactly equal. This is a time when the prices must be almost equal, especially when dealing with large price movements. - -There are different Doji candlesticks that are important. The Longlegged Doji has long upper and lower shadows and reflects considerable indecision on the part of market participants. The Gravestone Doji has only a long upper shadow and no lower shadow. The longer the upper shadow, the more bearish the interpretation. The Dragonfly Doji is the opposite of the Gravestone Doji, the lower shadow is long and there is no upper shadow. It is usually considered quite bullish. (See Figure 12.5.) - -**Figure 12.5** *Doji candlesticks.* - -The single candlestick lines are essential to Japanese candlestick analysis. You will find that all Japanese candle patterns are made from combinations of these basic candlesticks. - -### **CANDLE PATTERN ANALYSIS** - -A Japanese candle pattern is a psychological depiction of traders' mentality at the time. It vividly shows the actions of the traders as time unfolds in the market. The mere fact that humans react consistently during similar situations makes candle pattern analysis work. - -A Japanese candle pattern can consist of a single candlestick line or be a combination of multiple lines, normally never more than five. While most candle patterns are used to determine reversal points in the market, there are a few that are used to determine trend continuation. They are referred to as reversal and continuation patterns. Whenever a reversal pattern has bullish implications, an inversely related pattern has bearish meaning. Similarly, whenever a continuation pattern has bullish implications, an opposite pattern gives bearish meaning. When there is a pair of patterns that work in both bullish and bearish situations, they usually have the same name. In a few cases, however, the bullish pattern and its bearish counterpart have completely different names. - -#### **Reversal Patterns** - -A *reversal candle pattern* is a combination of Japanese candlesticks that normally indicate a reversal of the trend. One serious consideration that must be used to help identify patterns as being either bullish or bearish is the trend of the market preceding the pattern. You cannot have a bullish reversal pattern in an uptrend. You can have a series of candlesticks that resemble the bullish pattern, but if the trend is up, it is not a bullish Japanese candle pattern. Likewise, you cannot have a bearish reversal candle pattern in a downtrend. - -This presents one of the age-old problems when analyzing markets: What is the trend? You must determine the trend, before you can utilize Japanese candle patterns effectively. While volumes have been written on the subject of trend determination, the use of a moving average will work quite well with Japanese candle patterns. Once the short term (ten periods or so) trend has been determined, Japanese candle patterns will significantly assist in identifying the reversal of that trend. - -Japanese literature consistently refers to approximately forty reversal candle patterns. These vary from single candlestick lines to more complex patterns of up to five candlestick lines. There are many good references on candlesticks, so only a few of the more popular patterns will be discussed here. - -*Dark Cloud Cover.* This is a two day reversal pattern that only has bearish implications. (See Figure 12.6.) This is also one of the times when the pattern's counterpart exists but has a different name (see Piercing Line). The first day of this pattern is a long white candlestick. This reflects the current trend of the market and helps confirm the uptrend to traders. The next day opens above the high price of the previous day, again adding to the bullishness. However, trading for the rest of the day is lower with a close price at least below the midpoint of the body of the first day. This is a significant blow to the bullish mentality and will force many to exit the market. Since the close price is below the open price on the second day, the body is black. This is the dark cloud referred to in the name. - -*Piercing Line.* The opposite of the Dark Cloud Cover, the Piercing Line, has bullish implications. (See Figure 12.7.) The scenario is quite similar, but opposite. A downtrend is in place, the first candlestick is a long black day which solidifies traders' confidence in the downtrend. The next day, prices open at a new low and then [trade](#page-279-0) higher all day and close above the midpoint of the first candlestick's body. This offers a significant change to the downtrend mentality and many will reverse or exit their positions. - -**Figure 12.6** *Dark cloud cover -.* - -*Evening Star and Morning Star.* The Evening Star and its cousin, the Morning Star, are two powerful reversal candle patterns. These are both three day patterns that work exceptionally well. The scenario for understanding the change in trader psychology for the Evening Star will be thoroughly discussed here since the opposite can be said for the Morning Star. (See Figures 12.8 and 12.9.) - -**Figure 12.7** *Piercing line +.* - -**Figure 12.8** *Evening star -.* - -**Figure 12.9** *Morning star +.* - -The Evening Star is a bearish reversal candle pattern, as its name suggests. The first day of this pattern is a long white candlestick which fully enforces the current uptrend. On the open of the second day, prices gap up above the body of the first day. Trading on this second day is somewhat restricted and the close price is near the open price while remaining above the body of the first day. The body for the second day is small. This type of day following a long day is referred to as a Star pattern. A Star is a small body day that gaps away from a long body day. The third and last day of this pattern opens with a gap below the body of the star and closes lower with the close price below the midpoint of the first day. - -The previous explanation was the perfect scenario. Many references will accept as valid, an Evening Star which does not meet each detail exactly. For instance, the third day might not gap down or the close on the third day might not be quite below the midpoint of the first day's body. These details are subjective when viewing a candlestick chart, but not when using a computer program to automatically identify the patterns. That is because computer programs require explicit instructions to read the candle chart, and don't allow for subjective interpretation. - -#### **Continuation Patterns** - -Each trading day, a decision needs to be made, whether it is to exit a trade, enter a trade, or remain in a trade. A candle pattern that helps identify the fact that the current trend is going to continue is more valuable than may first appear. It helps answer the question as to whether or not you should remain in a trade. Japanese literature refers to 16 continuation candle patterns. One continuation pattern and its related opposite cousin are particularly good at - -trend continuation identification. - -*Rising and Falling Three Methods.* The Rising Three Methods continuation candle pattern is the bullish counterpart to this duo and will be the subject of this scenario building. A bullish continuation pattern can only occur in an uptrend and a bearish continuation pattern can only occur in a downtrend. This restates the required relationship to the trend that is so necessary in candle pattern analysis. (See Figures 12.10 and 12.11.) - -**Figure 12.10** *Rising Three Methods +.* - -**Figure 12.11** *Falling Three Methods -.* - -The first day of the Rising Three Methods pattern is a long white day which fully supports the uptrending market. However, over the course of the next three trading periods, small body days occur which, as a group, trend downward. They all remain within the range of the first day's long white body and at least two of these three small-bodied days have black bodies. This period of time when the market appears to have gone nowhere is considered by the Japanese as a "period of rest." On the fifth day of this pattern, another long white day develops which closes at a new high. Prices have finally broken out of the short trading range and the uptrend will continue. - -A five day pattern such as the Rising Three Methods requires a lot of detail in its definition. The above scenario is the perfect example of the Rising Three Methods pattern. Flexibility can be applied with some success and this only comes with experience. For example, the three small reaction days could remain within the first day's high-low range instead of the body's range. The small reaction days do not always have to be predominantly black. And finally, the concept of the "period of rest" could be expanded to include more than three reaction days. Don't ignore the Rising and Falling Three Methods pattern; it can give you a feeling of comfort when worrying about protecting profits in a trade. - -#### **Using Computers for Candle Pattern Identification** - -A personal computer with software designed to recognize candle patterns is a great way to remove emotion, especially during a trade. However, there are a couple of things to keep in mind when viewing candlesticks on a computer screen. A computer screen is made up of small light elements called pixels. There are only so many pixels on your computer screen, with the amount based upon the resolution of your video card/monitor combination. If you are viewing price data that has a large range of prices in a short period of time, you may think that you are seeing many Doji days (open and close price are equal) when in fact, you are not. With a large range of prices on the screen, each pixel element will have a price range of its own. A computer software program that identifies patterns based on a mathematical relationship will overcome this visual anomaly. Hopefully, the above explanation will keep you from thinking that your software isn't working. - -### **FILTERED CANDLE PATTERNS** - -A revolutionary concept developed by Greg Morris in 1991, called candle pattern filtering, provides a simple method to improve the overall reliability of candle patterns. While the short term trend of the market must be identified before a candle pattern can exist, determination of overbought and oversold markets using traditional technical analysis will enhance a candle pattern's predictive ability. Concurrently, this technique helps eliminate bad or premature candle patterns. - -One must first grasp how a traditional technical indicator responds to price data. In this example, Stochastics %D will be used. The stochastic indicator oscillates between 0 and 100, with 20 being oversold and 80 being overbought. The primary interpretation for this indicator is when %D rises above 80 and then falls below 80, a sell signal has been generated. Similarly, when it drops below 20 and then rises above 20, a buy signal is given. (See Chapter 10 for more on Stochastics.) - -Here is what we know about stochastics %D: When it enters the area above 80 or below 20, it will eventually generate a signal. In other words, it is just a [matte](#page-211-0)r of time until a signal is given. The area above 80 and below 20 is called the presignal area and represents the area that %D must get to before it can give a trading signal of its own. (See Figure 12.12.) - -**Figure 12.12** - -The filtered candle pattern concept uses this presignal area. Candle patterns are considered *only* when %D is in its presignal area. If a candle pattern occurs when stochastics %D is at, say 65, the pattern is ignored. Also, only reversal candle patterns are considered using this concept. - -Candle pattern filtering is not limited to using stochastics %D. Any technical oscillator that you might normally use for analysis can be used to filter candle patterns. Wilder's RSI, Lambert's CCI, and Williams' %R are a few that will work equally as well. (These oscillators are explained in Chapter 10.) - -### **[CONCLUSION](#page-211-0)** - -Japanese candlestick charting and candle pattern analysis are essential tools for making market timing decisions. One should use Japanese candle patterns in the same manner as any other technical tool or technique; that is, to study - -the psychology of market participants. Once you become used to seeing your price charts using candlesticks, you may not want to use bar charts again. Japanese candle patterns, used in conjunction with other technical indicators in the filtering concept, will almost always offer a trading signal prior to using other price-based indicators. - -### **CANDLE PATTERNS** - -The candle patterns listed below comprise the library that is used to identify candlestick signals. The number in parentheses at the end of each name represents the number of candles that are used to define that particular pattern. The bullish and bearish patterns are divided into two groups signifying either reversal or continuation patterns. - -Long White Body (1) Long Black Body (1) Hammer (1) Hanging Man (1) Inverted Hammer (1) Shooting Star (1) Belt Hold (1) Belt Hold (1) Engulfing Pattern (2) Engulfing Pattern (2) Harami (2) Harami (2) Harami Cross (2) Harami Cross (2) Piercing Line (2) Dark Cloud Cover (2) Doji Star (2) Doji Star (2) Meeting Lines (2) Meeting Lines (2) Three White Soldiers (3) Three Black Crows (3) Morning Star (3) Evening Star (3) Morning Doji Star (3) Evening Doji Star (3) Abandoned Baby (3) Abandoned Baby (3) Tri-Star (3) Tri-Star (3) Breakaway (5) Breakaway (5) Three Inside Up (3) Three Inside Down (3) Three Outside Up (3) Three Outside Down (3) Kicking (2) Kicking (2) Unique Three Rivers Bottom (3) Latter Top (5) Three Stars in the South (3) Matching High (2) Concealing Swallow (4) Upside Gap Two Crows (3) Stick Sandwich (3) Identical Three Crows (3) - -### **Bullish Reversals Bearish Reversals** - -Homing Pigeon (2) Deliberation (3) Ladder Bottom (5) Advance Block (3) Matching Low (2) Two Crows (3) - -Separating Lines (2) Separating Lines (2) Rising Three Methods (5) Falling Three Methods (5) Upside Tasuki Gap (3) Downside Tasuki Gap (3) Side by Side White Lines (3) Side by Side White Lines (3) Three Line Strike (4) Three Line Strike (4) On Neck Line (2) On Neck Line (2) In Neck Line (2) In Neck Line (2) - -### **Bullish Continuation Bearish Continuation** - -Upside Gap Three Methods (3) Downside Gap Three Methods (3) - -\*This chapter was contributed by Gregory L. Morris. - -### **HISTORICAL BACKGROUND** - -In 1938, a monograph entitled *The Wave Principle* was the first published reference to what has come to be known as the *Elliott Wave Principle.* The monograph was published by Charles J. Collins and was based on the original work presented to him by the founder of the Wave Principle, Ralph Nelson (R.N.) Elliott. - -Elliott was very much influenced by the Dow Theory, which has much in common with the Wave Principle. In a 1934 letter to Collins, Elliott mentioned that he had been a subscriber to Robert Rhea's stock market service and was familiar with Rhea's book on Dow Theory. Elliott goes on to say that the Wave Principle was "a much needed complement to the Dow Theory." - -In 1946, just two years before his death, Elliott wrote his definitive work on the Wave Principle, *Nature's Law—The Secret of the Universe.* - -Elliott's ideas might have faded from memory if A. Hamilton Bolton hadn't decided in 1953 to publish the *Elliott Wave Supplement* to the *Bank Credit Analyst*, which he did annually for 14 years, until his death in 1967. A.J. Frost took over the Elliott Supplements and collaborated with Robert Prechter in 1978 on the *Elliott Wave Principle.* Most of the diagrams in this chapter are taken from Frost and Prechter's book. Prechter went a step further and in 1980 published *The Major Works of R.N. Elliott*, making available the original Elliott writings that had long been out of print. - -### **BASIC TENETS OF THE ELLIOTT WAVE PRINCIPLE** - -There are three important aspects of wave theory—*pattern, ratio*, and *time* in that order of importance. *Pattern* refers to the wave patterns or formations that comprise the most important element of the theory. *Ratio analysis* is useful in determining retracement points and price objectives by measuring the relationships between the different waves. Finally, *time* relationships also exist and can be used to confirm the wave patterns and ratios, but are considered by some Elliotticians to be less reliable in market forecasting. - -Elliott Wave Theory was originally applied to the major stock market averages, particularly the Dow Jones Industrial Average. In its most basic form, the theory says that the stock market follows a repetitive rhythm of a five wave advance followed by a three wave decline. Figure 13.1 shows one complete cycle. If you count the waves, you will find that one complete cycle has eight waves—five up and three down. In the advancing portion of the cycle, notice that each of the five waves are numbered. [Waves](#page-295-0) 1, 3, and 5 called *impulse* waves—are rising waves, while waves 2 and 4 move against the uptrend. Waves 2 and 4 are called *corrective* waves because they correct waves 1 and 3. After the five wave numbered advance has been completed, a three wave correction begins. The three corrective waves are identified by the letters a, b, c. - -Along with the constant form of the various waves, there is the important consideration of degree. There are many different degrees of trend. Elliott, in fact, categorized nine different degrees of trend (or magnitude) ranging from a *Grand Supercycle* spanning two hundred years to a *subminuette* degree covering only a few hours. The point to remember is that the basic eight wave cycle remains constant no matter what degree of trend is being studied. - -**Figure 13.1** *The Basic Pattern. (A.J. Frost and Robert Prechter*, Elliott Wave Principle *[Gainesville, GA: New Classics Library, 1978], p. 20. Copyright © 1978 by Frost and Prechter.)* - -Each wave subdivides into waves of one lesser degree that, in turn, can also be subdivided into waves of even lesser degree. It also follows then that each wave is itself part of the wave of the next higher degree. Figure 13.2 demonstrates these relationships. The largest two waves—1 and 2—can be subdivided into eight lesser waves that, in turn, can be subdivided into 34 even lesser waves. The two largest waves—1 and 2—are only the [first](#page-296-0) two waves in an even larger five wave advance. Wave 3 of that next higher degree is about to begin. The 34 waves in Figure 13.2 are subdivided further to the next smaller degree in Figure 13.3, resulting in 144 waves. - -**Figure 13.2** *(Frost and Prechter, p. 21. Copyright © 1978 by Frost and Prechter.)* - -The numbers shown so far 1,2,3,5,8,13,21,34,55,89,144—are not just random numbers. They are part of the *Fibonacci number sequence*, which forms the mathematical basis for the Elliott Wave Theory. We'll come back to them a little later. For now, look at Figures 13.1-13.3 and notice a very significant characteristic of the waves. Whether a given wave divides into five waves or three waves is determined by the direction of the next larger wave. For example, in Figure 13.2, waves [\(1\),](#page-295-0) (3), and [\(5\)](#page-297-1) subdivide into five waves because the next larger wave of which they are part—wave 1—is an advancing wave. Because waves (2) and (4) are moving against the trend, they subdivide into [only](#page-296-0) three waves. Look more closely at corrective waves (a), (b), and (c), which comprise the larger corrective wave 2. Notice that the two declining waves—(a) and (c)—each break down into five waves. This is because they are moving in the same direction as the next larger wave 2. Wave (b) by contrast only has three waves, because it is moving against the next larger wave 2. - -**Figure 13.3** *(Frost and Prechter, p. 22. Copyright © 1978 by Frost and Prechter.)* - -Being able to determine between threes and fives is obviously of tremendous importance in the application of this approach. That information tells the analyst what to expect next. A completed five wave move, for example, usually means that only part of a larger wave has been completed and that there's more to come (unless it's a fifth of a fifth). *One of the most important rules to remember is that a correction can never take place in five waves.* In a bull market, for example, if a five wave decline is seen, this means that it is probably only the first wave of a three wave (a-b-c) decline and that there's more to come on the downside. In a bear market, a three wave advance should be followed by resumption of the downtrend. A five wave rally would warn of a more substantial move to the upside and might possibly even be the first wave of a new bull trend. - -### **CONNECTION BETWEEN ELLIOTT WAVE AND DOW THEORY** - -Let's take a moment here to point out the obvious connection between Elliott's idea of five advancing waves and Dow's three advancing phases of a bull market. It seems clear that Elliott's idea of three up waves, with two intervening corrections, fits nicely with the Dow Theory. While Elliott was no doubt influenced by Dow's analysis, it also seems clear that Elliott believed - -he had gone well beyond Dow's theory and had in fact improved on it. It's also interesting to note the influence of the sea on both men in the formulation of their theories. Dow compared the major, intermediate, and minor trends in the market with the tides, waves, and ripples on the ocean. Elliott referred to "ebbs and flows" in his writing and named his theory the "wave" principle. - -### **CORRECTIVE WAVES** - -So far, we've talked mainly about the impulse waves in the direction of the major trend. Let's turn our attention now to the corrective waves. In general, corrective waves are less clearly defined and, as a result, tend to be more difficult to identify and predict. One point that is clearly defined, however, is that corrective waves can never take place in five waves. Corrective waves are threes, never fives (with the exception of triangles). We're going to look at three classifications of corrective waves—zig-zags, flats, and triangles. - -### **Zig-Zags** - -A zig-zag is a three wave corrective pattern, against the major trend, which breaks down into a 5-3-5 sequence. Figures 13.4 and 13.5 show a bull market zig-zag correction, while a bear market rally is shown in Figures 13.6 and 13.7. Notice that the middle wave B falls short of the beginning of wave A and that wave C moves well beyond the [end](#page-298-1) of wave [A.](#page-299-0) - -A less common variation of the zig-zag is the double [zigzag](#page-299-1) shown in [Figu](#page-299-2)re 13.8. This variation sometimes occurs in larger corrective patterns. It is in effect two different 5-3-5 zig-zag patterns connected by an intervening a-bc pattern. - -**Figure 13.4** *Bull Market Zig-Zag (5-3-5). (Frost and Prechter, p. 36. Copyright © 1978 by Frost and Prechter.)* - -**Figure 13.5** *Bull Market Zig-Zag (5-3-5). (Frost and Prechter, p. 36. Copyright © 1978 by Frost and Prechter.)* - -**Figure 13.6** *Bear Market Zig-Zag (5-3 5). (Frost and Prechter, p. 36. Copyright © 1978 by Frost and Prechter.)* - -**Figure 13.7** *Bear Market Zig-Zag (5-3-5). (Frost and Prechter, p. 36* - -*Copyright © 1978 by Frost and Prechter.)* - -**Figure 13.8** *Double Zig-Zag. (Frost and Prechter, p. 37. Copyright © 1978 by Frost and Prechter.)* - -**Flats** - -What distinguishes the flat correction from the zig-zag correction is that the flat follows a 3-3-5 pattern. Notice in Figures 13.10 and 13.12 that the A wave is a 3 instead of a 5. In general, the flat is more of a consolidation than a correction and is considered a sign of strength in a bull market. Figures 13.9- 13.12 show examples of normal flats. In a bull [mark](#page-301-0)et, for [exa](#page-302-0)mple, wave B rallies all the way to the top of wave A, showing greater market strength. The final wave C terminates at or just below the bottom of wave A in contrast [to](#page-301-1) a [zig-za](#page-302-0)g, which moves well under that point. - -There are two "irregular" variations of the normal *flat* correction. Figures 13.13-13.16 show the first type of variation. Notice in the bull market example (Figures 13.13 and 13.14) that the top of wave B exceeds the top of A and that wave C violates the bottom of A. - -[Anothe](#page-303-0)r [variation](#page-302-1) occurs when wave B reaches the top of A, but wave C fails to reach the [bottom](#page-302-1) of A. [Nat](#page-302-2)urally, this last pattern denotes greater market strength in a bull market. This variation is shown in Figures 13.17- 13.20 for bull and bear markets. - -**Figure 13.9** *Bull Market Flat (3-3-5), Normal Correction. (Frost and Prechter, p. 38. Copyright © 1978 by Frost and Prechter.)* - -**Figure 13.10** *Bull Market Flat (3-3-5), Normal Correction. (Frost and Prechter, p. 38. Copyright © 1978 by Frost and Prechter.)* - -**Figure 13.11** *Bear Market Flat (3-3-5), Normal Correction. (Frost and Prechter, p. 38. Copyright © 1978 by Frost and Prechter.)* - -**Figure 13.12** *Bear Market Flat (3-3-5), Normal Correction. (Frost and Prechter, p. 38. Copyright © 1978 by Frost and Prechter.)* - -**Figure 13.13** *Bull Market Flat (3-3-5), Irregular Correction. (Frost and Prechter,p. 39. Copyright © 1978 by Frost and Prechter.)* - -**Figure 13.14** *Bull Market Flat (3-3-5), Irregular Correction. (Frost and* - -*Prechter, p. 39. Copyright © 1918 by Frost and Prechter.)* - -**Figure 13.15** *Bear Market Flat (3-3-5), Irregular Correction. (Frost and Prechter, p. 39. Copyright © 1978 by Frost and Prechter.)* - -**Figure 13.16** *Bear Market Flat (3-3-5), Irregular Correction. (Frost and Prechter, p. 39. Copyright © 1978 by Frost and Prechter.)* - -**Figure 13.17** *Bull Market Flat (3-3-5), Inverted Irregular Correction. (Frost and Prechter, p. 40. Copyright © 1978 by Frost and Prechter.)* - -**Figure 13.18** *Bull Market flat (3-3-5), Inverted Irregular Correction. (Frost and Prechter, p. 40. Copyright © 1978 by Frost and Prechter.)* - -**Figure 13.19** *Bear Market Flat (3-3-5), Inverted Irregular Correction (Frost and Prechter, p. 40. Copyright © 1978 by Frost and Prechter.)* - -**Figure 13.20** *Bear Market Flat (3-3-5), Inverted Irregular Correction. (Frost and Prechter, p. 40. Copyright © 1978 by Frost and Prechter.)* - -#### **Triangles** - -Triangles usually occur in the fourth wave and precede the final move in the direction of the major trend. (They can also appear in the b wave of an a-b-c correction.) In an uptrend, therefore, it can be said that triangles are both bullish and bearish. They're bullish in the sense that they indicate resumption of the uptrend. They're bearish because they also indicate that after one more wave up, prices will probably peak. (See Figure 13.21.) - -**Figure 13.21** *Corrective Wave (Horizontal) Triangles. (Frost and Prechter, p. 43. Copyright © 1978 by Frost and Prechter.)* - -Elliott's interpretation of the triangle parallels the classical use of the pattern, but with his usual added precision. Remember from Chapter 6 that the triangle is usually a continuation pattern, which is exactly what Elliott said. Elliott's triangle is a sideways consolidation pattern that breaks down into five waves, each wave in turn having three waves of its [own.](#page-129-0) Elliott also classifies four different kinds of triangles—*ascending, descending, symmetrical*, and *expanding*—all of which were seen in Chapter 6. Figure 13.21 shows the four varieties in both uptrends and downtrends. - -Because chart patterns in commodity futures contracts sometimes don't form as fully as they do in the stock market, it is not unusual for triangles in the futures markets to have only three waves instead of five. (Remember, however, that the minimum requirement for a triangle is still four points—two upper and two lower—to allow the drawing of two converging trendlines.) Elliott Wave Theory also holds that the fifth and last wave within the triangle sometimes breaks its trendline, giving a false signal, before beginning its "thrust" in the original direction. - -Elliott's measurement for the fifth and final wave after completion of the triangle is essentially the same as in classical charting—that is, the market is expected to move the distance that matches the widest part of the triangle (its height). There is another point worth noting here concerning the timing of the final top or bottom. According to Prechter, the apex of the triangle (the point where the two converging trendlines meet) often marks the timing for the completion of the final fifth wave. - -### **THE RULE OF ALTERNATION** - -In its more general application, this rule or principle holds that the market usually doesn't act the same way two times in a row. If a certain type of top or bottom occurred the last time around, it will probably not do so again this time. The rule of alternation doesn't tell us exactly what will happen, but tells us what probably won't. In its more specific application, it is most generally used to tell us what type of corrective pattern to expect. Corrective patterns tend to alternate. In other words, if corrective wave 2 was a simple a-b-c pattern, wave 4 will probably be a complex pattern, such as a triangle. Conversely, if wave 2 is complex, wave 4 will probably be simple. Figure 13.22 gives some examples. - -### **CHANNELING** - -Another important aspect of wave theory is the use of *price channels.* You'll recall that we covered trend channeling in Chapter 4. Elliott used price channels as a method of arriving at price objectives and also to help confirm the completion of wave counts. Once an uptrend has been established, an initial trend channel is constructed by dra[wing](#page-61-0) a basic up trendline along the bottoms of waves 1 and 2. A parallel channel line is then drawn over the top of wave 1 as shown in Figure 13.23. The entire uptrend will often stay within those two boundaries. - -If wave 3 begins to accelerate to the point that it exceeds the upper channel line, the lines [have](#page-307-1) to be redrawn along the top of wave 1 and the bottom of wave 2 as shown in Figure 13.23. The final channel is drawn under the two corrective waves—2 and 4—and usually above the top of wave 3 as shown in Figure 13.24. If wave 3 is unusually strong, or an extended wave, the upper line may have to be [drawn](#page-307-1) over the top of wave 1. The fifth wave should come close to the upper channel line before terminating. For the drawing of [channel](#page-308-1) lines on long term trends, it's recommended that semilog charts be employed along with arithmetic charts. - -**Figure 13.23** *Old and New Channels. (Frost and Prechter, p. 62. Copyright © 1978 by Frost and Prechter.)* - -**Figure 13.24** *Final Channel. (Frost and Prechter, p. 63. Copyright © 1978 by Frost and Prechter.)* - -### **WAVE 4 AS A SUPPORT AREA** - -In concluding our discussion of wave formations and guidelines, one important point remains to be mentioned, and that is the significance of wave 4 as a support area in subsequent bear markets. Once five up waves have been completed and a bear trend has begun, that bear market will usually not move below the previous fourth wave of one lesser degree; that is, the last fourth wave that was formed during the previous bull advance. There are exceptions to that rule, but usually the bottom of the fourth wave contains the bear market. This piece of information can prove very useful in arriving at a maximum downside price objective. - -### **FIBONACCI NUMBERS AS THE BASIS OF THE WAVE PRINCIPLE** - -Elliott stated in *Nature's Law* that the mathematical basis for his Wave Principle was a number sequence discovered by Leonardo Fibonacci in the thirteenth century. That number sequence has become identified with its discoverer and is commonly referred to as the *Fibonacci numbers.* The number sequence is 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, and so on to - -infinity. - -The sequence has a number of interesting properties, not the least of which is an almost constant relationship between the numbers. - -- 1. The sum of any two consecutive numbers equals the next higher number. For example, 3 and 5 equals 8, 5 and 8 equals 13, and so on. -- 2. The ratio of any number to its next higher number approaches .618, after the first four numbers. For example, 1/1 is 1.00, 1/2 is .50, 2/3 is .67, 3/5 is .60, 5/8 is .625, 8/13 is .615, 13/21 is .619, and so on. Notice how these early ratio values fluctuate above and below .618 in narrowing amplitude. Also, notice the values of 1.00, .50, .67. We'll comment further on these values when we talk more about ratio analysis and percentage retracements. -- 3. The ratio of any number to its next lower number is approximately 1.618, or the inverse of .618. For example, 13/8 is 1.625, 21/13 is 1.615, 34/21 is 1.619. The higher the numbers become, the closer they come to the values of .618 and 1.618. -- 4. The ratios of alternate numbers approach 2.618 or its inverse, .382. For example, 13/34 is .382, 34/13 is 2.615. - -### **FIBONACCI RATIOS AND RETRACEMENTS** - -It was already stated that wave theory is comprised of three aspects—wave form, ratio, and time. We've already discussed wave form, which is the most important of the three. Let's talk now about the application of the *Fibonacci ratios and retracements.* These relationships can apply to both price and time, although the former is considered to be the more reliable. We'll come back later to the aspect of time. - -First of all, a glance back at Figures 13.1 and 13.3 shows that the basic wave form always breaks down into Fibonacci numbers. One complete cycle comprises eight waves, five up and three down—all Fibonacci numbers. Two further subdivisions will produce 34 and [144](#page-295-0) wav[es—a](#page-297-1)lso Fibonacci numbers. The mathematical basis of the wave theory on the Fibonacci sequence, however, goes beyond just wave counting. There's also the question of proportional relationships between the different waves. The following are among the most commonly used Fibonacci ratios: - -- 1. One of the three impulse waves sometimes extends. The other two are equal in time and magnitude. If wave 5 extends, waves 1 and 3 should be about equal. If wave 3 extends, waves 1 and 5 tend toward equality. -- 2. A minimum target for the top of wave 3 can be obtained by multiplying - -the length of wave 1 by 1.618 and adding that total to the bottom of 2. - -- 3. The top of wave 5 can be approximated by multiplying wave 1 by 3.236 (2×1.618) and adding that value to the top or bottom of wave 1 for maximum and minimum targets. -- 4. Where waves 1 and 3 are about equal, and wave 5 is expected to extend, a price objective can be obtained by measuring the distance from the bottom of wave 1 to the top of wave 3, multiplying by 1.618, and adding the result to the bottom of 4. -- 5. For corrective waves, in a normal 5-3-5 zig-zag correction, wave c is often about equal to the length of wave a. -- 6. Another way to measure the possible length of wave c is to multiply .618 by the length of wave a and subtract that result from the bottom of wave a. -- 7. In the case of a flat 3-3-5 correction, where the b wave reaches or exceeds the top of wave a, wave c will be about 1.618 the length of a. -- 8. In a symmetrical triangle, each successive wave is related to its previous wave by about .618. - -#### **Fibonacci Percentage Retracements** - -The preceding ratios help to determine price objectives in both impulse and corrective waves. Another way to determine price objectives is by the use of *percentage retracements.* The most commonly used numbers in retracement analysis are 61.8% (usually rounded off to 62%), 38%, and 50%. Remember from Chapter 4 that markets usually retrace previous moves by certain predictable percentages—the best known ones being 33%, 50%, and 67%. The Fibonacci sequence refines those numbers a bit further. In a strong trend, a mi[nimum](#page-61-0) retracement is usually around 38%. In a weaker trend, the maximum percentage retracement is usually 62%. (See Figures 13.25 and 13.26.) - -**Figure 13.25** *The three horizontal lines show Fibonnaci retracement levels of 38%, 50%, and 62% measured from the 1981 bottom to the 1993 peak in Treasury Bonds. The 1994 correction in bond prices stopped right at the 38% retracement line.* - -**Figure 13.26** *The three Fibonacci percentage lines are measured from the 1994 bottom in bond prices to the early 1996 top. Bond prices corrected to the 62% line.* - -It was pointed out earlier, that the Fibonacci ratios approach .618 only after the first four numbers. The first three ratios are 1/1 (100%), 1/2 (50%), and 2/3 (66%). Many students of Elliott may be unaware that the famous 50% retracement is actually a Fibonacci ratio, as is the two-thirds retracement. A complete retracement (100%) of a previous bull or bear market also should mark an important support or resistance area. - -### **FIBONACCI TIME TARGETS** - -We haven't said too much about the aspect of time in wave analysis. Fibonacci time relationships exist. It's just that they're harder to predict and are considered by some Elliotticians to be the least important of the three aspects of the theory. Fibonacci time targets are found by counting forward from significant tops and bottoms. On a daily chart, the analyst counts forward the number of trading days from an important turning point with the expectation that future tops or bottoms will occur on Fibonacci days—that is, on the 13th, 21st, 34th, 55th, or 89th trading day in the future. The same technique can be used on weekly, monthly, or even yearly charts. On the weekly chart, the analyst picks a significant top or bottom and looks for weekly time targets that fall on Fibonacci numbers. (See Figures 13.27 and 13.28.) - -### **[COM](#page-313-0)BINING ALL THREE ASPECTS OF WAVE THEORY** - -The ideal situation occurs when wave form, ratio analysis, and time targets come together. Suppose that a study of waves reveals that a fifth wave has been completed, that wave 5 has gone 1.618 times the distance from the bottom of wave 1 to the top of wave 3, and that the time from the beginning of the trend has been 13 weeks from a previous low and 34 weeks from a previous top. Suppose further that the fifth wave has lasted 21 days. Odds would be pretty good that an important top was near. - -**Figure 13.27** *Fibonacci time targets measured in months from the 1981 bottom in Treasury Bonds. It may be coincidence, but the last four Fibonacci time targets (vertical bars) coincided with important turns in bond prices.* - -**Figure 13.28** *Fibonacci time targets in months from the 1982 bottom in the Dow. The last three vertical bars coincide with bear market years in stocks— 1987, 1990, and 1994. The 1987 peak was 13 years from the 1982 bottom—a Fibonacci number.* - -A study of price charts in both stocks and futures markets reveals a number of Fibonacci time relationships. Part of the problem, however, is the variety of possible relationships. Fibonacci time targets can be taken from top to top, top to bottom, bottom to bottom, and bottom to top. These relationships can always be found after the fact. It's not always clear which of the possible relationships are relevant to the current trend. - -### **ELLIOTT WAVE APPLIED TO STOCKS VERSUS COMMODITIES** - -There are some differences in applying wave theory to stocks and commodities. For example, wave 3 tends to extend in stocks and wave 5 in commodities. The unbreakable rule that wave 4 can never overlap wave 1 in stocks is not as rigid in commodities. (Intraday penetrations can occur on futures charts.) Sometimes charts of the cash market in commodities give a clearer Elliott pattern than the futures market. The use of continuation charts in commodity futures markets also produces distortions that may affect long term Elliott patterns. - -Possibly the most significant difference between the two areas is that major bull markets in commodities can be "contained," meaning that bull market highs do not always exceed previous bull market highs. It is possible in commodity markets for a completed five wave bull trend to fall short of a previous bull market high. The major tops formed in many commodity markets in the 1980 to 1981 period failed to exceed major tops formed seven and eight years earlier. As a final comparison between the two areas, it appears that the best Elliott patterns in commodity markets arise from breakouts from long term extended bases. - -It is important to keep in mind that wave theory was originally meant to be applied to the stock market averages. It doesn't work as well in individual common stocks. It's quite possible that it doesn't work that well in some of the more thinly traded futures markets as well because mass psychology is one of the important foundations on which the theory rests. Gold, as an illustration, is an excellent vehicle for wave analysis because of its wide following. - -### **SUMMARY AND CONCLUSIONS** - -Let's briefly summarize the more important elements of wave theory and then try to put it into proper perspective. - -- 1. A complete bull market cycle is made up of eight waves, five up waves followed by three down waves. -- 2. A trend divides into five waves in the direction of the next longer trend. - -- 3. Corrections always take place in three waves. -- 4. The two types of simple corrections are zig-zags (5-3-5) and flats (3-3- 5). -- 5. Triangles are usually fourth waves, and always precede the final wave. Triangles can also be B corrective waves. -- 6. Waves can be expanded into longer waves and subdivided into shorter waves. -- 7. Sometimes one of the impulse waves extends. The other two should then be equal in time and magnitude. -- 8. The Fibonacci sequence is the mathematical basis of the Elliott Wave Theory. -- 9. The number of waves follows the Fibonacci sequence. -- 10. Fibonacci ratios and retracements are used to determine price objectives. The most common retracements are 62%, 50%, and 38%. -- 11. The rule of alternation warns not to expect the same thing twice in succession. -- 12. Bear markets should not fall below the bottom of the previous fourth wave. -- 13. Wave 4 should not overlap wave 1 (not as rigid in futures). -- 14. The Elliott Wave Theory is comprised of wave forms, ratios, and time, in that order of importance. -- 15. The theory was originally applied to stock market averages and does not work as well on individual stocks. -- 16. The theory works best in those commodity markets with the largest public following, such as gold. -- 17. The principal difference in commodities is the existence of contained bull markets. - -The Elliott Wave Principle builds on the more classical approaches, such as Dow Theory and traditional chart patterns. Most of those price patterns can be explained as part of the Elliott Wave structure. It builds on the concept of "swing objectives" by using Fibonacci ratio projections and percentage retracements. The Elliott Wave Principle takes all of these factors into consideration, but goes beyond them by giving them more order and increased predictability. - -### **Wave Theory Should Be Used in Conjunction with Other Technical Tools** - -There are times when Elliott pictures are clear and other times when they are not. Trying to force unclear market action into an Elliott format, and ignoring other technical tools in the process, is a misuse of the theory. The key is to view Elliott Wave Theory as a partial answer to the puzzle of market - -forecasting. Using it in conjunction with all of the other technical theories in this book will increase its value and improve your chances for success. - -### **REFERENCE MATERIAL** - -Two of the best sources of information on Elliott Wave Theory and the Fibonacci numbers are *The Major Works of R.N. Elliott*, (Prechter, Jr.) and the *Elliott Wave Principle* (Frost and Prechter). All of the diagrams used in Figures 13.1-13.24 are from the *Elliott Wave Principle* and are reproduced in this chapter through the courtesy of New Classics Library. - -A primer booklet on the Fibonacci numbers, *Understanding Fibonacci [Numbers](#page-295-0)* by [Edwar](#page-308-1)d D. Dobson, is available from Traders Press (P.O. Box 6206, Greenville, S.C. 29606 (800-927-8222). - - - -### **INTRODUCTION** - -Our main focus up to this point has been on price movement, and not too much has been said about the importance of *time* in solving the forecasting puzzle. The question of time has been present by implication throughout our entire coverage of technical analysis, but has generally been relegated to secondary consideration. In this chapter, we're going to view the problem of forecasting through the eyes of cyclic analysts who believe that *time cycles* hold the ultimate key to understanding why markets move up or down. In the process, we're going to add the important dimension of time to our growing list of analytical tools. Instead of just asking ourselves *which way* and *how far* a market will go, we'll start asking *when* it will arrive there or even *when* the move will begin. - -Consider the standard daily bar chart. The vertical axis gives the price scale. But that's only half of the relevant data. The horizontal scale gives the time horizon. Therefore, the bar chart is really a time and price chart. Yet, many traders concentrate solely on price data to the exclusion of time considerations. When we study chart patterns, we're aware that there is a relationship between the amount of time it takes for those patterns to form and the potential for subsequent market moves. The longer a trendline or a support or resistance level remains in effect, the more valid it becomes. Moving averages require input as to the proper time period to use. Even oscillators require some decision as to how many days to measure. In the previous chapter, we considered the usefulness of Fibonacci time targets. - -It seems clear then that all phases of technical analysis depend to some extent on time considerations. Yet those considerations are not really applied in a consistent and dependable manner. That's where time cycles come into play. Instead of playing a secondary or supporting role in market movement, - -cyclic analysts hold that time cycles are the determining factor in bull and bear markets. Not only is time the dominant factor, but all other technical tools can be improved by incorporating cycles. Moving averages and oscillators, for example, can be optimized by tying them to dominant cycles. Trendline analysis can be made more precise with cyclic analysis by determining which are valid trendlines and which are not. Price pattern analysis can be enhanced if combined with cyclic peaks and troughs. By the use of "time windows," price movement can be filtered in such a way that extraneous action can be ignored and primary emphasis placed only on such times when important cycle tops and bottoms are due to occur. - -### **CYCLES** - -The most intriguing book I've ever read on the subject of cycles was written by Edward R. Dewey, one of the pioneers of cyclic analysis, with Og Mandino entitled *Cycles: The Mysterious Forces That Trigger Events.* Thousands of seemingly unrelated cycles were isolated spanning hundreds and, in some cases, thousands of years. Everything from the 9.6 year cycle in Atlantic salmon abundance to the 22.20 year cycle in international battles from 1415 to 1930 was tracked. An average cycle of sunspot activity since 1527 was found to be 11.11 years. Several economic cycles, including the 18.33 year cycle in real estate activity and a 9.2 year stock market cycle, were presented. (See Figures 14.1 and 14.2.) - -**Figure 14.1** *The 22.2 year cycle of incidence of sunspots. Drought often follows two years after the sunspot minima which last occurred in the early 1970s, and is due again in the mid 1990s. In the chart, the dotted line is the "ideal" cycle, and the solid line is the actual detrended data. (Courtesy of the Foundation for the Study of Cycles, Wayne, PA.)* - -**Figure 14.2** *The 22.2 year cycle in international battles was due to top in 1982. In the chart, the dotted line is the "ideal" cycle, and the solid line is the actual detrended data. (Courtesy of the Foundation for the Study of Cycles, Wayne, PA.* - -Two startling conclusions are discussed by Dewey. First, that many of the cycles of seemingly unrelated phenomena clustered around similar periods. On p. 188 of his book, Dewey listed 37 different examples of the 9.6 year cycle, including caterpillar abundance in New Jersey, coyote abundance in Canada, wheat acreage in the U.S., and cotton prices in the U.S. Why should such unrelated activities show the same cycles? - -The second discovery was that these similar cycles acted in synchrony, that is, they turned at the same time. Figure 14.3 shows 12 different examples of the 18.2 year cycle including marriages, immigration, and stock prices in the U.S. Dewey's startling conclusion was that something "out there" in the universe must be causing these cycles; that [there](#page-320-0) seemed to be a sort of *pulse* to the universe that accounted for the pervasive presence of these cycles throughout so many areas of human existence. - -**Figure 14.3** *The 18.2 year cycles on parade. (Source: Dewey, Edward R.*, Cycles: The Mysterious Forces That Trigger Events *(New York: Manor Books, 1973.)* - -In 1941, Dewey organized the Foundation for the Study of Cycles (900 W. Valley Rd., Suite 502, Wayne, PA 19087). It is the oldest organization engaged in cycles research and the recognized leader in the field. The Foundation publishes *Cycles* magazine, which presents research in many different areas including economics and business. It also publishes a monthly report, *Cycle Projections*, which applies cyclical analysis to stocks, commodities, real estate and the economy. - -#### **Basic Cyclic Concepts** - -In 1970, J.M. Hurst authored *The Profit Magic of Stock Transaction Timing.* Although it deals mainly with stock market cycles, this book represents one of the best explanations of cycle theory available in print, and is highly recommended reading. The following diagrams are derived from Hurst's original work. - -First, let's see what a cycle looks like and discuss its three main - -characteristics. Figure 14.4 shows two repetitions of a price cycle. The cycle bottoms are called *troughs* and the tops referred to as *crests.* Notice that the two waves shown here are measured from trough to trough. *Cyclic analysts prefer to measure [cycle](#page-321-0) lengths from low to low.* Measurements can be taken between crests, but they are not considered to be as stable or reliable as those taken between the troughs. Therefore, common practice is to measure the beginning and end of a cyclic wave at a low point, as shown in this example. - -The three qualities of a cycle are *amplitude, period*, and *phase.* Amplitude measures the height of the wave as shown in Figure 14.5, and is expressed in dollars, cents, or points. The period of a wave, as shown in Figure 14.6, is the time between troughs. In this example, the period is 20 days. The phase is a measure of the time location of a wave [trough.](#page-322-0) In Figure 14.7, the phase difference between two waves is shown. Because there are [several](#page-322-1) different cycles occurring at the same time, *phasing* allows the cyclic analyst to study the [relationships](#page-323-0) between the different cycle lengths. Phasing is also used to identify the date of the last cycle low. If, for example, a 20 day cycle bottomed 10 days earlier, the date of the next cycle low can be determined. Once the amplitude, period, and phase of a cycle are known, the cycle can theoretically be extrapolated into the future. Assuming the cycle remains fairly constant, it can then be used to estimate future peaks and troughs. That is the basis of the cyclic approach in its simplest form. - -**Figure 14.4** *Two cycles of a price wave. A simple, single price wave of the* - -*kind that combines to form stock and commodity price action. Only two cycles of this wave are shown, but the wave itself extends infinitely far to the left and to the right. Such waves repeat themselves cycle after cycle. As a result, once the wave is identified, its value can be determined at any past or future time. It is this characteristic of waves that provides a degree of predictability for equity price action.* - -**Figure 14.5** *The amplitude of a wave. In this figure, the wave has an amplitude of ten dollars (from minus five dollars to plus five dollars). Amplitude is always measured from wave trough to wave crest.* - -**Figure 14.6** *The period of a wave. In this figure, the wave has a period of 20 days, which is shown measured between two consecutive wave troughs. The period could just as well have been measured between wave crests. But in the case of price waves, the wave troughs are usually more clearly defined than the wave crests for reasons that will be discussed later. Consequently, price wave periods are most often measured from trough to trough.* - -**Figure 14.7** *The phase difference between two waves. The phase difference between the two waves shown is 6 days. This phase difference is measured between the troughs of the two waves because, again, wave troughs are the most convenient points to identify in the case of price waves.* - -#### **Cyclic Principles** - -Let's take a look now at some of the principles that underlie the cyclic philosophy. The four most important ones are the Principles of Summation, Harmonicity, Synchronicity, and Proportionality. - -The Principle of Summation holds that all price movement is the simple addition of all active cycles. Figure 14.8 demonstrates how the price pattern on the top is formed by simply adding together the two different cycles at the bottom of the chart. Notice, in particular, the appearance of the double top in composite wave C. Cycle theory [holds](#page-324-0) that all price patterns are formed by the interaction of two or more different cycles. We'll come back to this point again. The Principle of Summation gives us an important insight into the rationale of cyclic forecasting. Let's assume that all price action is just the sum of different cycle lengths. Assume further that each of those individual cycles could be isolated and measured. Assume also that each of those cycles will continue to fluctuate into the future. Then by simply continuing each cycle into the future and summing them back together again, the future price trend should be the result. Or, so the theory goes. - -**Figure 14.8** *The summation of two waves. The dotted lines show how, at each point in time, the value of wave A is added to the value of wave B to produce the value of composite wave C.* - -The Principle of Harmonicity simply means that neighboring waves are usually related by a small, whole number. That number is usually *two.* For example, if a 20 day cycle exists, the next shorter cycle will usually be half its length, or 10 days. The next longer cycle would then be 40 days. If you'll remember back to the discussion on the 4 *week rule* (Chapter 9), the principle of harmonics was invoked to explain the validity of using a shorter 2 week rule and a longer 8 weeks. - -The Principle of Synchronicity refers to the strong [tendenc](#page-186-0)y for waves of differing lengths to bottom at about the same time. Figure 14.9 is meant to show both harmonicity and synchronicity. Wave B at the bottom of the chart is half the length of wave A. Wave A includes two repetitions of the smaller wave B, showing harmonicity between the two waves. [Notice](#page-326-0) also that when wave A bottoms, wave B tends to do the same, demonstrating synchronicity between the two. Synchronicity also means that similar cycle lengths of different markets will tend to turn together. - -The Principle of Proportionality describes the relationship between cycle period and amplitude. Cycles with longer periods (lengths) should have proportionally wider amplitudes. The amplitude, or height, of a 40 day cycle, for example, should be about double that of a 20 day cycle. - -#### **The Principles of Variation and Nominality** - -There are two other cyclic principles that describe cycle behavior in a more general sense—*The Principles of Variation and Nominality.* - -The Principle of Variation, as the name implies, is a recognition of the fact that all of the other cyclic principles already mentioned—summation, harmonicity, synchronicity, and proportionality—are just strong tendencies and not hard and fast rules. Some "variation" can and usually does occur in the real world. - -The Principle of Nominality is based on the premise that, despite the differences that exist in the various markets and allowing for some variation in the implementing of cyclic principles, there seems to be a nominal set of harmonically related cycles that affect all markets. And that nominal model of cycle lengths can be used as a starting point in the analysis of any market. Figure 14.10 shows a simplified version of that nominal model. The model begins with an 18 year cycle and proceeds to each successively lower cycle *half its* length. The only exception is the relationship between 54 and 18 [months](#page-326-1) which is a *third* instead of a *half.* - -When we discuss the various cycle lengths in the individual markets, we'll see that this nominal model does account for most cyclic activity. For now, look at the "Days" column. Notice 40, 20, 10, and 5 days. You'll recognize immediately that these numbers account for most of the popular moving average lengths. Even the well known 4, 9, and 18 day moving average technique is a variation of the 5, 10, and 20 day numbers. Many oscillators use 5, 10, and 20 days. Weekly rule breakouts use the same numbers translated into 2, 4, and 8 weeks. - -**Figure 14.9** *Harmonicity and synchronicity.* - - - -| Days | Weeks | Months | Years | -|------|-----------------|--------|-------| -| | | | 18 | -| | | | 9 | -| | | 54 | | -| | | 18 | | -| | 40 | | | -| | $\overline{20}$ | | | -| 80 | | | | -| 40 | | | | -| 20 | | | | -| 10 | | | | -| | | | | - -### **HOW CYCLIC CONCEPTS HELP EXPLAIN CHARTING TECHNIQUES** - -Chapter 3 in Hurst's book explains in great detail how the standard charting techniques—trendlines and channels, chart patterns, and moving averages can be better understood and used to greater advantage when coordinated with [cyclic](#page-50-0) principles. Figure 14.11 helps explain the existence of trendlines and channels. The flat cycle wave along the bottom becomes a rising price channel when it is summed with a rising line representing the long term uptrend. Notice how [much](#page-328-0) the horizontal cycle along the bottom of the chart resembles an oscillator. - -Figure 14.12 from the same chapter shows how a *head and shoulders* topping pattern is formed by combining two cycle lengths with a rising line representing the sum of all longer duration components. Hurst goes on to explain [double](#page-329-0) tops, triangles, flags, and pennants through the application of cycles. The "V" top or bottom, for example, occurs when an intermediate cycle turns at the exact same time as its next longer and next shorter duration cycles. - -**Figure 14.11** *Channel formation. (Source: Hurst, J.M.*, The Profit Magic of Stock Transaction Timing *[Englewood Cliffs, N.J.: Prentice-Hall, Inc., 1970].)* - -**Figure 14.12a** *Adding another component. (Source: Hurst, J.M.*, The Profit Magic of Stock Transaction Timing *[Englewood Cliffs, N.J.: Prentice-Hall, Inc., 1970].)* - -**Figure 14.12b** *The Summation principle applied. (Source: Hurst, J.M.*, The Profit Magic of Stock Transaction Timing *[Englewood Cliffs, N.J.: Prentice Hall. Inc., 19701].)* - -Hurst also addresses how moving averages can be made more useful if their lengths are synchronized with dominant cycle lengths. Students of traditional charting techniques should gain additional insight into how these popular chart pictures form and maybe even why they work by reading - -Hurst's chapter, entitled "Verify Your Chart Patterns." - -### **DOMINANT CYCLES** - -There are many different cycles affecting the financial markets. The only ones of real value for forecasting purposes are the *dominant cycles.* Dominant cycles are those that consistently affect prices and that can be clearly identified. Most futures markets have at least five dominant cycles. In an earlier chapter on the use of long term charts, it was stressed that all technical analysis should begin with the long term picture, gradually working toward the shorter term. That principle holds true in the study of cycles. The proper procedure is to begin the analysis with a study of long term dominant cycles, which can span several years; then work toward the intermediate, which can be several weeks to several months; finally, the very short term cycles, from several hours to several days, can be used for timing of entry and exit points and to help confirm the turning points of the longer cycles. - -**Figure 14.13** *(Source: The Power of Oscillator/Cycle Combinations by Walt* - -### *Bressert.)* - -#### **Classification of Cycles** - -The general categories are: *long term cycles* (2 or more years in length), the *seasonal cycle* (1 year), the *primary or intermediate cycle* (9 to 26 weeks), and the *trading cycle* (4 weeks). The trading cycle breaks down into two shorter *alpha* and *beta* cycles, which average 2 weeks each. (The labels Primary, Trading, Alpha, and Beta are used by Walt Bressert to describe the various cycle lengths.) (See Figure 14.13.) - -#### **The Kondratieff Wave** - -There are even longer range [cycles](#page-330-1) at work. Perhaps the best known is the approximate 54 year Kondratieff cycle. This controversial long cycle of economic activity, first discovered by a Russian economist in the 1920s by the name of Nikolai D. Kondratieff, appears to exert a major influence on virtually all stock and commodity prices. In particular, a 54 year cycle has been identified in interest rates, copper, cotton, wheat, stocks, and wholesale commodity prices. Kondratieff tracked his "long wave" from 1789 using such factors as commodity prices, pig iron production, and wages of agricultural workers in England. (See Figure 14.14.) The Kondratieff cycle has become a popular subject of discussion in recent years, primarily owing to the fact that its last top occurred in the 1920s, and its next top is long overdue. Kondratieff himself paid a heavy price for his [cycli](#page-332-1)c view of capitalistic economies. He is believed to have died in a Siberian labor camp. For more information, see *The Long Wave Cycle* (Kondratieff), translated by Guy Daniels. (Two other books on the subject are *The K Wave* by David Knox Barker and *The Great Cycle* by Dick Stoken.) - -**Figure 14.14** *Kondratieff's long wave. For more information, see* The Long Wave Cycle *by Nikolai Kondratieff, translated by Guy Daniels (New York: Richardson and Snyder, 1984). That translation is the first ever from the original Russian text. (Copyright ©1984 by The New York Times Company. Reprinted by permission [May 27, 1984, p. F11.])* - -### **COMBINING CYCLE LENGTHS** - -As a general rule, long term and seasonal cycles determine the major trend of a market. Obviously, if a two year cycle has bottomed, it can be expected to advance for at least a year, measured from its trough to its crest. Therefore, the long term cycle exerts major influence on market direction. Markets also have annual seasonal patterns, meaning that they tend to peak or trough at certain times of the year. Grain markets, for example, usually hit their low point around harvest time and rally from there. Seasonal moves usually last for several months. - -For trading purposes, *the weekly primary cycle is the most useful.* The 3 to 6 month primary cycle is the equivalent of the intermediate trend, and generally determines which side of a market to trade. The next shorter cycle, the 4 week trading cycle, is used to establish entry and exit points in the direction of the primary trend. If the primary trend is up, troughs in the trading cycle are used for purchases. If the primary trend is down, crests in the trading cycles should be sold short. The 10 day *alpha* and *beta* cycles can be used for further fine tuning. (See Figure 14.13.) - -### **THE IMPORTANCE OF TREND** - -The concept of trading in the direction of the trend is stressed throughout the body of technical analysis. In an earlier chapter, it was suggested that short term dips should be used for purchases if the intermediate trend was up, and that short term bulges be sold in downtrends. In the chapter on Elliott Wave Theory, it was pointed out that five wave moves only take place in the direction of the next larger trend. Therefore, it is necessary when using any short term trend for timing purposes to first determine the direction of the next longer trend and then trade in the direction of that longer trend. That concept holds true in cycles. *The trend of each cycle is determined by the direction of its next longer cycle.* Or stated the other way, once the trend of a longer cycle is established, the trend of the next shorter cycle is known. - -#### **The 28 Day Trading Cycle in Commodities** - -There is one important short term cycle that tends to influence most commodity markets—*the 28 day trading cycle.* In other words, most markets have a tendency to form a trading cycle low every 4 weeks. One possible explanation for this strong cyclic tendency throughout all commodity markets is the *lunar cycle.* Burton Pugh studied the 28 day cycle in the wheat market in the 1930s *(Science and Secrets of Wheat Trading*, Lambert-Gann, Pomeroy, WA, 1978, orig., 1933) and concluded that the moon had some influence on market turning points. His theory was that wheat should be bought on a full moon and sold on a new moon. Pugh acknowledged, however, that the lunar effects were mild and could be overridden by the effects of longer cycles or important news events. - -Whether or not the moon has anything to do with it, the average 28 day cycle does exist and explains many of the numbers used in the development of shorter term indicators and trading systems. First of all, the 28 day cycle is based on calendar days. Translated into actual trading days, the number becomes 20. We've already commented on how many popular moving averages, oscillators, and weekly rules are based on the number 20 and its harmonically related shorter cycles, 10 and 5. The 5, 10, and 20 day moving averages are widely used along with their derivatives, 4, 9, and 18. Many traders use 10 and 40 day moving averages, with the number 40 being the next harmonically related longer cycle at twice the length of 20. - -In Chapter 9, we discussed the profitability of the 4 week rule developed by Richard Donchian. Buy signals were generated when a market set new 4 week highs and a sell signal when a 4 week low was established. Knowledge of the e[xistence](#page-186-0) of a 4 week trading cycle gives a better insight into the significance of that number and helps us to understand why the 4 week rule has worked so well over the years. When a market exceeds the high of the - -previous 4 weeks, cycle logic tells us that, at the very least, the next longer cycle (the 8 week cycle) has bottomed and turned up. - -### **LEFT AND RIGHT TRANSLATION** - -The concept of translation may very well be the most useful aspect of cycle analysis. Left and right translation refers to the shifting of the cycle peaks either to the left or the right of the ideal cycle midpoint. For example, a 20 day trading cycle is measured from low to low. The ideal peak should occur 10 days into the cycle, or at the halfway point. That would allow for a 10 day advance followed by a 10 day decline. Ideal cycle peaks, however, rarely occur. Most variations in cycles occur at the peaks (or crests) and not at the troughs. That's why cycle troughs are considered more reliable and are used to measure cycle lengths. - -The cycle crests act differently depending on the trend of the next longer cycle. If the trend is up, the cycle crest shifts to the right of the ideal midpoint, causing right translation. If the longer trend is down, the cycle crest shifts to the left of the midpoint, causing left translation. Therefore, right translation is bullish and left translation is bearish. Stop to think about it. All we're saying here is that in a bull trend, prices will spend more time going up than down. In a bear trend, prices spend more time going down than up. Isn't that the basic definition of a trend? Only, in this case, we're talking about time instead of price. (See Figure 14.15.) - -## **HOW TO [ISOLAT](#page-335-0)E CYCLES** - -In order to study the various cycles affecting any given market, it is necessary to first isolate each dominant cycle. There are various ways of accomplishing this task. The simplest is by visual inspection. By studying daily bar charts, for example, it is possible to identify obvious tops and bottoms in a market. By taking the average time periods between those cyclic tops and bottoms, certain average lengths can be found. - -There are tools available to make that task a bit easier. One such tool is the *Ehrlich Cycle Finder*, named after its inventor, Stan Ehrlich (ECF, 112 Vida Court, Novato, CA 94947 [415] 892-1183). The Cycle Finder is an accordion-like device that can be placed on the price chart for visual inspection. The distance between the points is always equidistant and can be expanded or contracted to fit any cycle length. By plotting a distance between any two obvious cycle lows, it can be quickly determined if other cycle lows of the same length exist. An electronic version of that device, called the - -*Ehrlich Cycle Forecaster*, is now available as an analysis technique on Omega Research's Trade Station and Super Charts (#Omega Research, 8700 West Flagler Street, Suite 250, Miami, FL 33174, [305] 551-9991, www.omegaresearch.com). (See Figures 14.16-14.18.) - -**Figure 14.15** *Example of left and right translation. Figure A shows a simple cycle. Figure B shows the trend of the larger cycle. Figure C shows the combined effect. When the longer trend is up, the midpeak shifts to the right. When the longer trend is down, the midpeak shifts to the left. Right translation is bullish, left translation is bearish. (Source: The Power of Oscillator/Cycle Combination by Walt Bressert.)* - -Computers can help you find cycles by visual inspection. The user first puts a price chart on the screen. The next step is to pick a prominent bottom - -on the chart as a starting point. Once that is done, vertical lines (or arcs) appear every 10 days (the default value). The cycle periods can be lengthened, shortened, or moved left or right to find the right cycle fit on the chart. (See Figures 14.19 and 14.20.) - -**Figure 14.16** *The 4 year presidential cycle is clearly identified with the Ehrlich Cycle Forecaster (see vertical lines). If the cycle is still working, the next major low would be expected to occur during 1998.* - -**Figure 14.17** *The Ehrlich Cycle Forecaster has identified a 49 day trading cycle in S&P 500 futures prices (see vertical lines). The ECF estimates that the next cycle low will be formed 49 days from the last cycle low, which would be on March 30, 1998.* - -**Figure 14.18** *The ECF has uncovered a 133 day cycle in Boeing (see vertical lines). Since the last cycle low occurred during November, 1997, the ECF estimates that the next cycle low is due to occur 133 days later on June 3, 1998.* - -**Figure 14.19a** *The bottoms in the cycle arcs coincide with important reaction lows in the Dow when spaced 40 weeks apart. That suggests a 40 week cycle in the Dow. The last two cycle troughs were in the spring of 1997 and the start* - -*of 1998 (see arrows).* - -**Figure 14.19b** *The daily cycle arcs reveal the presence of 50 day cycle bottoms in the Dow during the second half of 1997 and the start of 1998. The idea is to shift the arcs until their lows coincide with a number of reaction lows on the price chart.* - -**Figure 14.20a** *Beginning with the major bottom in 1981, the cycle finder arcs reveal that bonds have shown a tendency to form important bottoms every 75 months (6.25 years). These numbers may shift with time, but still provide useful trading information.* - -**Figure 14.20b** *Applied to this daily chart, the cycle arcs showed a tendency for bond prices to bottom every 55 trading days during this time span (see arrows).* - -### **SEASONAL CYCLES** - -All markets are affected to some extent by an annual seasonal cycle. The seasonal cycle refers to the tendency for markets to move in a given direction at certain times of the year. The most obvious seasonals involve the grain markets where seasonal lows usually occur around harvest time when supply is most plentiful. In soybeans, for example, most seasonal tops occur between April and June with seasonal bottoms taking place between August and October. (See Figure 14.21.) One well known seasonal pattern is the "February Break" where grain and soybean prices usually drop from late December or early January into February. - -**Figure 14.21** *Soybeans usually peak in May and bottom in October.* - -Although the reasons for seasonal tops and bottoms are more obvious in the agricultural markets, virtually all markets experience seasonal patterns. Copper, for example, shows a strong seasonal uptrend from the January/February period with a tendency to top in March or April. (See Figure 14.22.) Silver has a low in January with higher prices into March. Gold shows a tendency to bottom in August. Petroleum products have a tendency to peak during October and usually don't bottom until the end of the [winter.](#page-341-0) (See Figure 14.23.) Financial markets also have seasonal patterns. - -**Figure 14.22** *Copper usually bottoms during October and February, but peaks during the April-May period.* - -**Figure 14.23** *Crude oil prices peak during October and turn up during* - -#### *March.* - -The U.S. Dollar has a tendency to bottom during January. (See Figure 14.24.) Treasury Bond prices usually hit important highs during January. Over the entire year, Treasury Bond prices are usually weaker during the first half of the year and stronger during the second half. (See Figure 14.25.) The [examples](#page-342-0) of seasonal charts are provided by the Moore Research Center (Moore Research Center, 321 West 13th Avenue, Eugene, OR 97401, (800) 927-7259), which specializes in seasonal analysis of [futures](#page-343-2) markets. - -**Figure 14.24** *The peak in the German mark during January coincides with a lowpoint in the U.S. dollar that usually occurs at the start of the new year.* - -**Figure 14.25** *Treasury Bonds prices usually peak around the new year, and then remain weak for most of the first half. The second half of the year is better for bond bulls.* - -### **STOCK MARKET CYCLES** - -Did you know that the strongest three month span for the stock market is November through January? February is then weaker, but is followed by a strong March and April. After a soft June, the market turns strong during July (the start of the traditional summer rally). The weakest month of the year is September. The strongest month is December (ending with the well known Santa Claus rally just after Christmas). That information, and a whole lot more about stock market cycles, can be found in Yale Hirsch's annual *Stock Trader's Almanac* (The Hirsch Organization, 184 Central Avenue, Old Tappen, NJ 07675). - -### **THE JANUARY BAROMETER** - -According to Hirsch: "as January goes, so goes the year." The well known January Barometer holds that what the S&P 500 does during January will determine what kind of year the market as a whole will have. Another variation on that theme is the belief that the direction of the S&P 500 during the first 5 trading days of the year gives some hint of what's ahead for the year. The January Barometer shouldn't be confused with the January Effect, which is the tendency for smaller stocks to outperform larger stocks during - -January. - -### **THE PRESIDENTIAL CYCLE** - -Another well known cycle that affects stock market behavior is the 4 year cycle, also called the Presidential Cycle, because it coincides with the elected term of U.S. presidents. Each of the 4 years has a different historical return. The election year (1) is normally strong. The postelection and midyears (2 and 3) are normally weak. The preelection year (4) is normally strong. According to Hirsch's *Trader's Almanac*, election years since 1904 have seen averages gains of 224%; postelection years, gains of 72%; midterm years, gains of 63%; and preelection years, gains of 217%. (See Figure 14.16.) - -### **COMBINING CYCLES WITH OTH[ER](#page-336-0) TECHNICAL TOOLS** - -Two of the most promising areas of overlap between cycles and traditional technical indicators are in the use of moving averages and oscillators. It is believed that the usefulness of both indicators can be enhanced if the time periods used are tied to each market's dominant cycles. Let's assume that a market has a dominant 20 day trading cycle. Normally, when constructing an oscillator, it's best to use half the length of the cycle. In this case, the oscillator period would be 10 days. To trade a 40 day cycle, use a 20 day oscillator. Walt Bressert discusses in his book, *The Power of Oscillator/Cycle Combinations*, how cycles can be used to adjust time spans for the Commodity Channel Index, the Relative Strength Index, Stochastics, and Moving Average Convergence Divergence (MACD). - -Moving averages can also be tied to cycles. You could use different moving averages to track different cycle lengths. To generate a moving average crossover system for a 40 day cycle, you could use a 40 day moving average in conjunction with a 20 day average (one-half of the 40 day cycle) or a 10 day average (one-quarter of the 40 day cycle). The main problem with this approach is determining what the dominant cycles are at a particular point in time. - -## **MAXIMUM ENTROPY SPECTRAL ANALYSIS** - -The search for the right dominant cycles in any market is complicated by the belief that cycle lengths aren't static; in other words, they keep changing over time. What worked a month ago may not work a month from now. In his book, *MESA and Trading Market Cycles*, John Ehlers uses a statistical approach called Maximum Entropy Spectral Analysis (MESA). Ehlers explains that one of the main advantages of MESA is its high-resolution measurement of cycles with relatively small time periods, which is crucial for shorter term trading. Ehlers also explains how cycles can be used to optimize moving average lengths and many of the oscillator-type indicators we've already mentioned. Uncovering cycles allows for the dynamic adjusting of technical indicators to fit current market conditions. Ehlers also addresses the problem of distinguishing between a market in a *cycle* mode versus one that is in a *trend* mode. When a market is in a trend mode, a trend-following indicator like a moving average is needed to implement trades. A cycle mode would favor the use of oscillator-type indicators. Cycle measurement can help determine which mode the market is currently in, and which type of technical indicator is more appropriate to use for trading strategies. - -### **CYCLE READING AND SOFTWARE** - -Most of the books referred to in this chapter on cycles can be obtained through mail order firms like Traders Press (see reference in previous chapter) or Traders' Library, P.O. Box 2466, Ellicott City, MD 21041, [800] 272- 2855). There's also a lot more software to help you perform cycle analysis with your computer. The *Ehrlich Cycle Forecaster* and Walt Bressert's *CycleTrader* are both available as add-on options to run with charting software provided by Omega Research. Bressert's *CycleTrader* integrates the concepts he describes in his book, *The Power of Oscillator/Cycle Combinations.* (Bressert Marketing Group, 100 East Walton, Suite 200, Chicago, IL 60611 (312) 867-8701). More information on the MESA computer program can be gotten from John Ehlers (Box 1801, Goleta, CA 93116 (805) 969-6478). For ongoing cycle research and analysis, don't forget the Foundation for the Study of Cycles. - -### **INTRODUCTION** - -The computer has played an increasingly important role in the field of technical analysis. In this chapter, we'll see how the computer can make the technical trader's task a good deal easier by providing quick and easy access to an arsenal of technical tools and studies that would have required an enormous amount of work just a few years earlier. This assumes, of course, that the trader knows how to use these tools, which brings us to one of the disadvantages of the computer. - -The trader not properly schooled in the concepts that underlie the various indicators, and who is not comfortable with how each indicator is interpreted, may find him- or herself overwhelmed with the vast array of computer software currently available. Even worse, the amount of impressive technical data at one's fingertips sometimes fosters a false sense of security and competence. Traders mistakenly assume that they are automatically better simply because they have access to so much computer power. - -The theme emphasized in this discussion is that the computer is an extremely valuable tool in the hands of a technically oriented trader who has already done his or her basic homework. When we review many of the routines available in the computer, you'll see that a fair number of the tools and indicators are quite basic and have already been covered in previous chapters. There are, of course, more sophisticated tools that require more advanced charting software. - -Much of the work involved in technical analysis can be performed without the computer. Certain functions can be more easily performed with a simple chart and ruler than with a computer printout. Some types of longer - -range analysis don't require a computer. As useful as it is, the computer is only a tool. It can make a good technical analyst even better. It won't, however, turn a poor technician into a good one. - -### **Charting Software** - -Several of the technical routines available in charting software have been covered in previous chapters. We'll review some of the tools and indicators currently available. We'll then address some additional features such as the ability to automate the various functions chosen by the user. In addition to providing us with the various technical studies, the computer also enables us to test various studies for profitability, which may be the most valuable feature of the program. Some software allows the user, with little or no programming background, to construct indicators and systems. - -#### **Welles Wilder's Directional Movement and Parabolic Systems** - -We'll take a close look at a couple of Welles Wilder's more popular systems, the *Directional Movement System* and the *Parabolic System.* We'll use those two systems in our discussion of the relative merits of relying on mechanical trading systems. It will be demonstrated that mechanical trend following systems only work well in certain types of market environments. It will also be shown how a mechanical system can be incorporated into one's market analysis and used simply as a confirming technical indicator. - -#### **Too Much of a Good Thing** - -It may strike you that there are *too many* indicators from which to choose. Instead of simplifying our lives, has the computer only served to complicate things by giving us so much more to look at? Charting packages offer 80 different studies that are available to the technician. How does one possibly reach any conclusions (and find the time to trade) with so much data to contend with? We'll say a few words about some work being done in that direction. - -### **SOME COMPUTER NEEDS** - -Charting software can be applied to virtually any financial market. Most software is user-friendly, meaning that it can be easily implemented by choosing from successive lists of available routines. The place to start is with a charting software package that works for the computer you already own or are thinking of buying. Bear in mind that most charting software has been written for IBM-compatible computers. - -Charting packages do not provide daily market data. The user must obtain that data elsewhere. Data can be collected automatically from a data service over telephone lines (requiring a phone modem). Charting packages provide the names of various data vendors from which to choose. These data vendors provide all the software and instructions needed to set up and collect the data files. - -When first starting out, the user must collect historical data going back for at least several months to have something to work with. After that, data should be collected daily. It is possible to analyze "on line" data during the trading day by hooking up to a quote service. However, in our use of daily data, we will be referring to end-of-day data, which is available after the markets close. The final piece of equipment you might want is a printer to obtain a copy of whatever appears on the terminal screen. CD-Rom capability is highly recommended since some software vendors provide you with several years of historical data on a CD-Rom disk to get you started. There are some data vendors that also provide charting capability, which simplifies your task even more. One such service is Telescan (5959 Corporate Drive, Suite 2000, Houston, TX 77036, (800) 324-8246, www.telescan.com). - -### **GROUPING TOOLS AND INDICATORS** - -The following list groups some of the chart and indicator options. - -- *Basic Charts:* Bar, line, point and figure, and candlesticks -- *Chart Scales:* Arithmetic and semilogarithmic -- *Bar Chart:* Price, volume, and open interest (for futures) -- *Volume:* Bars, on balance, and Demand Index -- *Basic Tools:* Trendlines and channels, percentage retracements, moving averages, and oscillators -- *Moving Averages:* Reference envelopes, Bollinger Bands -- *Oscillators:* Commodity Channel Index, momentum, rate of change, MACD, Stochastic, Williams %R, RSI -- *Cycles:* Cycle Finder -- *Fibonacci Tools:* Fan lines, arcs, time zones and retracements -- *Wilder:* RSI, Commodity Selection Index, Directional Movement, Parabolic, Swing Index, ADX line - -### **USING THE TOOLS AND INDICATORS** - -How does one cope with so much from which to choose? A suggestion is to - -first use the basic tools such as price, volume, trendlines, percentage retracements, moving averages, and oscillators. Notice the large number of oscillators available. Pick one or two that you are most comfortable with and go with them. Use such things as cycles and Fibonacci tools as secondary inputs unless you have a special interest in those areas. Cycles can help fine tune moving average and oscillator lengths, but require study and practice. For mechanical trading systems, Wilder's Parabolic and DMI are especially noteworthy. - -### **WELLES WILDER'S PARABOLIC AND DIRECTIONAL MOVEMENT SYSTEMS** - -We're going to spend some time on two studies that are especially useful. Both studies were developed by J. Welles Wilder Jr. and discussed in his book, *New Concepts in Technical Trading Systems.* Three of Wilder's other studies included on the computer menu—Commodity Selection Index, Relative Strength Index, and the Swing Index—are also included in the same book. - -#### **Parabolic System (SAR)** - -Wilder's Parabolic system (SAR) is a time/price reversal system that is always in the market. The letters "SAR" stand for "stop and reverse," meaning that the position is reversed when the protective stop is hit. It is a trend-following system. It gets its name from the shape assumed by the trailing stops that tend to curve like a parabola. (See Figures 15.1-15.4. Notice that as prices trend higher, the rising dots below the price action (the stop and reverse points) tend to start out slower and then accelerate with the trend. In a downtrend, the same thing happens but in the opposite [direction](#page-350-0) ([the](#page-351-0) dots are above the price action). The SAR numbers are calculated and available to the user for the following day. - -Wilder built an acceleration factor into the system. Each day the stop moves in the direction of the new trend. At first, the movement of the stop is relatively slow to allow the trend time to become established. As the acceleration factor increases, the SAR begins to move faster, eventually catching up to the price action. If the trend falters, or fails to materialize, the result is usually a stop and reverse signal. As the accompanying charts show, the Parabolic system works extremely well in trending markets. Notice that while the trending portions were captured well, the system whipsawed constantly during the sideways, nontrending periods. - -**Figure 15.1** *The Parabolic SARs look like dots on the chart. A buy signal was given when the upper SAR was hit (first arrow). Notice how the SARs accelerated upward during the rally and caught most of the uptrend. A small whipsaw occurred to the upper right, which was quickly corrected. This system works when a trend is present.* - -**Figure 15.2** *A longer range version of the previous chart shows the good and bad aspects of Parabolics and any trend-following system. They work during trending periods (to the left and right of the chart). But are useless during the type of trading range that occurred from August to January.* - -**Figure 15.3** *Parabolics can be used on a monthly chart to track the primary trend. A sell signal in early 1994 was followed by a buy in late summer. Except for one whipsaw during 1996, this system has stayed positive for almost four years.* - -**Figure 15.4** *Parabolics applied to weekly chart of Dell Computer. After staying positive through most of 1997, a sell signal was given during October. That sell signal was reversed and a buy signal given as 1997 ended.* - -That demonstrates both the strength and weakness of most trendfollowing systems. They work well during strong trending periods, which Wilder himself estimates occur only about 30% of the time. If that estimate is even close to reality, then a trend-following system will not work for about 70% of the time. How then does one deal with this problem? - -#### **DMI and ADX** - -One possible solution is to use some type of filter or a device to determine if the market is in a trending mode. Wilder's ADX line rates the directional movement of the various markets on a scale of 0 to 100. A rising ADX line means the market is trending and a better candidate for a trend-following system. A falling ADX line indicates a nontrending environment, which would not be suitable for a trend-following approach. (See Figure 15.5.) - -**Figure 15.5** *The ADX line measures the degree of directional movement. A downturn from above 40 (left arrow) signaled the onset of a trading range. The upturn from below 20 (right arrow) signaled the resumption of a trending phase.* - -Because the ADX line is on a scale from 0 to 100, the trend trader could simply trade those markets with the highest trend ratings. Nontrending systems (oscillators, for example) could be utilized on markets with low directional movement. - -Directional Movement can be used either as a system on its own or as a filter on the Parabolic or any other trend-following system. Two lines are generated in the DMI study, +DI and -DI. The first line measures positive (upward) movement and the second number, negative (downward) movement). Figure 15.6 shows the two lines. The darker line is + DI and the lighter line -DI. A buy signal is given when the +DI line crosses over the - DI line and a sell signal when it crosses below the - DI line. - -Figure 15.6 [also](#page-353-0) shows both the Parabolic and Directional Movement - -systems. The Parabolic is clearly a more sensitive system, meaning that more frequent and earlier signals are given. However, by using the Directional Movement as a filter, several of the bad signals in the Parabolic could be avoided by following only those signals in the same direction as the Directional Movement lines. It appears then that the Parabolic and Directional Movement systems should be used together, with Directional Movement acting as a screen or filter on the more sensitive Parabolic. - -**Figure 15.6** *The Directional Movement lines along the bottom of the chart can be used as a filter on Parabolics (upper chart). When the +DI line is above the -DI line (far left and far right of chart), all Parabolic sell signals can be ignored. That would have eliminated several whipsaws during the rally phases.* - -The best time to use a trending system is when the ADX line is rising. (See Figures 15.7 and 15.8.) Be forewarned, however, that when the ADX line starts to drop from above the 40 level, that is an early sign that the trend is weakening. A rise back above the 20 level is often a sign of the start of a new [trend.](#page-354-0) (The ADX [line](#page-354-1) is essentially a smoothed difference between the +DI and -DI lines.) - -**Figure 15.7** *The 14 week ADX line peaked in early 1996 from well over 40, and initiated an 18 month trading range in utilities. The ADX upturn during the summer of 1997 from below 20 signaled that utilities were starting to trend.* - -**Figure 15.8** *An ADX line overlaid over a monthly chart of the AMEX Oil Index (XOI). The ADX peaked above 40 in 1990, ending the oil stock rally. The upturn in the ADX line from below 20 at the start of 1995 signaled the end of a 4 year trading range in oil stocks, and correctly spotted the start of a* - -### *new upleg.* - -### **PROS AND CONS OF SYSTEM TRADING** - -#### **Advantages of Mechanical Systems** - -- 1. Human emotion is eliminated. -- 2. Greater discipline is achieved. -- 3. More consistency is possible. -- 4. Trades are taken in the direction of the trend. -- 5. Participation is virtually guaranteed in the direction of every important trend. -- 6. Profits are allowed to run. -- 7. Losses are minimized. - -#### **Disadvantages of Mechanical Systems** - -- 1. Most mechanical systems are trend-following. -- 2. Trend-following systems rely on major trends in order to be profitable. -- 3. Trend-following systems are generally nonprofitable when markets are not trending. -- 4. There are long periods of time when markets are not trending and, therefore, not suitable for a trending approach. - -The major problem is the failure of the system to recognize when the market is not trending and its inability to turn itself off. The measure of a good system is not only its ability to make money in trending markets, but its ability to preserve capital during nontrending periods. It is this inability of the system to monitor itself that is its greatest weakness. This is where some overriding filtering device, such as Welles Wilder's Directional Movement system or the ADX line could prove especially useful by allowing the trader to determine which markets are most suitable for a trending system. - -Another drawback is that no allowance is generally made for anticipating market reversals. Trend-following systems ride with the trend until it turns. They don't recognize when a market has reached a long term support or resistance level, when oscillator divergences are being given, or when an Elliott Wave fifth pattern is clearly visible. Most traders would get more defensive at that point, and begin taking some profits. The system, however, will stay with the position until well after the market has changed direction. Therefore, it's up to the trader to determine how best to employ the system. - -That is to say, whether it should be followed blindly or whether it should be incorporated into a trading plan with other technical factors. That brings us to our next section on how a mechanical system can be used as just another technical input into the forecasting and trading process. - -#### **Using System Signals as a Disciplining Device** - -The system signals can be used simply as a mechanical confirmation along with other technical factors. Even if the system is not being traded mechanically, and other technical factors are being employed, the signals could be used as a disciplined way to keep the trader on the right side of the major trend. No short positions would be taken as long as the computer trend was up. No longs would be taken in a computer downtrend. (This would be a simple way for fundamentally oriented traders to use a technical device as a filter or trigger on their own trading ideas.) Trend direction can be a matter of judgment. The computer signals relieve the trader of some degree of uncertainty. They can prevent him or her from falling into the trap of "top and bottom picking." - -### **Using Signals as Alerts** - -System signals can also be used as an excellent screening device to alert the trader to recent trend changes. The trader can simply glance at the trend signals and instantly has several trading candidates. The same information could be found by studying all of the charts. The computer just makes that task quicker, easier, and more authoritative. The ability of the computer to automate system signals and then alert the trader when signals are triggered is an enormous asset, especially when the universe of financial markets has grown so large. - -### **NEED EXPERT HELP?** - -One of the products offered by Omega Research called TradeStation offers a variety of Expert Features (Omega Research, Miami, FL 33174, (305) 551- 9991). You can call up its Expert Commentary, which interprets indicators for you based on current market conditions. Omega's Expert Analyst will determine which indicators should work best in the current market and interpret them for you. In addition, it has two Expert Tools. The Trendlines Automatic Indicator actually draws trendlines for you. The Candlestick Patterns Indicator reads the more common candlestick chart patterns. - -### **TEST SYSTEMS OR CREATE YOUR OWN** - -Omega Research also includes a library of the most popular trading systems used by traders. You can test them, change them, or create your own if you wish. All of Omega's charting tools, indicators, and trading systems are written in a relatively simple language called EasyLanguage. EasyLanguage takes trading ideas that you have described in plain language and converts them into the machine code needed to run the program. It's hard to overestimate the value of being able to develop, test, optimize if you wish, and then automate your own trading ideas—without being a computer programmer. The computer will even generate the appropriate trading orders for you and alert you via your alphanumeric pager that signals have been triggered. (In Appendix C, we'll use Omega Research's EasyLanguage and TradeStation to show you how to go about creating a trading system of your own.) - -### **CONCLUSION** - -This chapter introduced a couple more of Welles Wilder's systems to you— Parabolics and Directional Movement (DMI). Parabolics can generate useful trading signals, but probably shouldn't be used alone. The two Dl lines can be used as a filter on Parabolics or any other sensitive trend-following trading system. The ADX line, which is part of the DMI system, provides one way to determine which type of market you're dealing with—a trending or a trading market. A rising ADX line suggests a trend and favors moving averages. A falling ADX line suggests a trading range and favors oscillators. We also used the Parabolic examples to show the good and bad sides of most trendfollowing systems. They work well when a trend is present. They're useless during a trading range. You have to be able to tell the difference. We also touched on the merits of mechanical trading systems. These systems remove human emotion and can be very helpful in the right market climate. They can also be used as technical alerts and used in conjunction with fundamental analysis. (See Appendix C for more on system trading.) - -There's no question that the computer has revolutionized financial market analysis and trading. While our interest is primarily in technical analysis, software [program](#page-439-0)s also allow you to blend fundamental analysis with the technical. When the first edition of this book was published in 1986, it cost about \$5,000 to outfit yourself with the necessary computer hardware to perform serious technical analysis. The leading software package of the day cost close to \$2,000. How things have changed. You can now obtain incredibly powerful computers for less than \$2,000. Most software packages - -can be had for less than \$300. The better ones provide you with up to 20 years of historical price data on a CD-Rom disk at little or no additional cost. - -Another big benefit is the amount of educational help that you can obtain with those software packages. The user manuals alone are the size of a book and include technical formulas and all kinds of useful explanations. The screening and alert capabilities of today's computer are especially helpful to those monitoring global bond and stock markets and thousands of individual common stocks, not to mention mutual funds. In Chapter 17, we'll talk about an even more sophisticated use of computer technology for developing *neural networks.* But the message to you is clear. If you are serious about investing or trading financial markets, get a computer and [learn](#page-374-0) how to use it. You'll be glad you did. - -## **INTRODUCTION** - -The previous chapters presented the major technical methods used to forecast and trade financial markets. In this chapter, we'll round out the trading process by adding to the task of *market forecasting* the crucial elements of *trading tactics* (or timing) and the often overlooked aspect of *money management.* No trading program can be complete without all three elements. - -## **THE THREE ELEMENTS OF SUCCESSFUL TRADING** - -Any successful trading program must take into account three important factors: price forecasting, timing, and money management. - -- 1. *Price forecasting* indicates which way a market is expected to trend. It is the crucial first step in the trading decision. The forecasting process determines whether the trader is bullish or bearish. It provides the answer to the basic question of whether to enter the market from the long or short side. If the price forecast is wrong, nothing else that follows will work. -- 2. *Trading tactics*, or timing, determines specific entry and exit points. Timing is especially crucial in futures trading. Because of the low margin requirements and the resulting high leverage, there isn't much room for error. It's quite possible to be correct on the direction of the market, but still lose money on a trade if the timing is off. Timing is - -almost entirely technical in nature. Therefore, even if the trader is fundamentally oriented, technical tools must be employed at this point to determine specific entry and exit points. - -3. *Money management* covers the allocation of funds. It includes such areas as portfolio makeup, diversification, how much money to invest or risk in any one market, the use of stops, reward-to-risk ratios, what to do after periods of success or adversity, and whether to trade conservatively or aggressively. - -The simplest way to summarize the three different elements is that price forecasting tells the trader *what* to do (buy or sell), timing helps decide *when* to do it, and money management determines *how much* to commit to the trade. The subject of price forecasting has been covered in the previous chapters. We'll deal with the other two aspects here. We'll discuss money management first because that subject should be taken into consideration when deciding on the appropriate trading tactics. - -### **MONEY MANAGEMENT** - -After having spent many years in the research department of a major brokerage firm, I made the inevitable switch to managing money. I quickly discovered the major difference between recommending trading strategies to others and implementing them myself. What surprised me was that the most difficult part of the transition had little to do with market strategies. The way I went about analyzing the markets and determining entry and exit points didn't change much. What did change was my perception of the importance of money management. I was amazed at the impact such things as the size of the account, the portfolio mix, and the amount of money committed to each trade could have on the final results. - -Needless to say, I am a believer in the importance of money management. The industry is full of advisors and advisory services telling clients *what* to buy or sell and *when* to do it. Very little is said about *how much* of one's capital to commit to each trade. - -Some traders believe that money management is the most important ingredient in a trading program, even more crucial than the trading approach itself. I'm not sure I'd go that far, but I don't think it's possible to survive for long without it. Money management deals with the question of survival. It tells the trader how to handle his or her money. Any good trader should win in the long run. Money management increases the odds that the trader will survive to reach the long run. - -#### **Some General Money Management Guidelines** - -Admittedly, the question of portfolio management can get very complicated, requiring the use of advanced statistical measures. We'll approach it here on a relatively simple level. The following are some general guidelines that can be helpful in allocating one's funds and in determining the size of one's trading commitments. These guidelines refer primarily to futures trading. - -- 1. *Total invested funds should be limited to 50% of total capital.* The balance is placed in Treasury Bills. This means that at any one time, no more than half of the trader's capital should be committed to the markets. The other half acts as a reserve during periods of adversity and drawdown. If, for example, the size of the account is \$100,000, only \$50,000 would be available for trading purposes. -- 2. *Total commitment in any one market should be limited to 10-15% of total equity.* Therefore, in a \$100,000 account, only \$10,000 to \$15,000 would be available for margin deposit in any one market. This should prevent the trader from placing too much capital in any one trade. -- 3. *The total amount risked in any one market should be limited to 5% of total equity.* This 5% refers to how much the trader is willing to lose if the trade doesn't work. This is an important consideration in deciding how many contracts to trade and how far away a protective stop should be placed. A \$100,000 account, therefore, should not risk more than \$5,000 on a single trade. -- 4. *Total margin in any market group should be limited to 20-25% of total equity.* The purpose of this criteria is to protect against getting too heavily involved in any one market group. Markets within groups tend to move together. Gold and silver are part of the precious metals group and usually trend in the same direction. Putting on full positions in each market in the same group would frustrate the principle of diversification. Market commitments in the same group should be controlled. - -These guidelines are fairly standard in the futures industry, but can be modified to the trader's needs. Some traders are more aggressive than others and take bigger positions. Others are more conservative. The important consideration is that some form of diversification be employed that allows for preservation of capital and some measure of protection during losing periods. (Although these guidelines relate to futures trading, the general principles of money management and asset allocation can be applied to all forms of investing.) - -#### **Diversification Versus Concentration** - -While diversification is one way to limit risk exposure, it can be overdone. If a trader has trading commitments in too many markets at the same time, a few profitable trades may be diluted by a larger number of losing trades. A tradeoff exists and the proper balance must be found. Some successful traders concentrate their trading in a handful of markets. That's fine as long as those markets are the ones that are trending at that time. The more negative correlation between the markets, the more diversification is achieved. Holding long positions in four foreign currency markets at the same time would not be a good example of diversification, since foreign currencies usually trend in the same direction against the U.S. dollar. - -#### **Using Protective Stops** - -I strongly recommend the use of protective stops. Stop placement, however, is an art. The trader must combine technical factors on the price chart with money management considerations. We'll show how this is done later in the chapter in the section on tactics. The trader must consider the volatility of the market. The more volatile the market is, the looser the stop that must be employed. Here again, a tradeoff exists. The trader wants the protective stop to be close enough so that losing trades are as small as possible. Protective stops placed too close, however, may result in unwanted liquidation on short term market swings (or "noise"). Protective stops placed too far away may avoid the noise factor, but will result in larger losses. The trick is to find the right middle ground. - -### **REWARD TO RISK RATIOS** - -The best futures traders make money on only 40% of their trades. That's right. Most trades wind up being losers. How then do traders make money if they're wrong most of the time? Because futures contracts require so little margin, even a slight move in the wrong direction results in forced liquidation. Therefore, it may be necessary for a trader to probe a market several times before catching the move he or she is looking for. - -This brings us to the question of reward-to-risk ratios. Because most trades are losers, the only way to come out ahead is to ensure that the dollar amount of the winning trades is greater than that of the losing trades. To accomplish this, most traders use a reward-to-risk ratio. For each potential trade, a profit objective is determined. That profit objective (the reward) is then balanced against the potential loss if the trade goes wrong (the risk). A commonly used yardstick is a 3 to 1 reward-to-risk ratio. The profit potential must be at least three times the possible loss if a trade is to be considered. - -"Letting profits run and cutting losses short" is one of the oldest maxims of trading. Large profits in trading are achieved by staying with persistent trends. Because only a relative handful of trades during the course of a year will generate large profits, it's necessary to maximize those few big winners. Letting profits run is the way that is done. The other side of the coin is to keep losing trades as small as possible. You'd be surprised how many traders do just the opposite. - -### **TRADING MULTIPLE POSITIONS: TRENDING VERSUS TRADING UNITS** - -Letting profits run isn't as easy as it sounds. Picture a situation where a market starts to trend, producing large profits in a relatively short period of time. Suddenly, the trend stalls, the oscillators show an overbought situation and there's some resistance visible on the chart. What to do? You believe the market has much higher potential, but you're worried about losing your paper profits if the market should fail. Do you take profits or ride out a possible correction? - -One way to resolve that problem is to always trade in multiple units. Those units can be divided into *trading* and *trending* positions. The trending portion of the position is held for the long pull. Loose protective stops are employed and the market is given plenty of room to consolidate or correct itself. These are the positions that produce the largest profits in the long run. - -The trading portion of the portfolio is earmarked for shorter term in-andout trading. If the market reaches a first objective, is near resistance and overbought, some profits could be taken or a tight protective stop utilized. The purpose is to lock up or protect profits. If the trend then resumes, any liquidated positions can be reinstated. It's best to avoid trading only one unit at a time. The increased flexibility that is achieved from trading multiple units makes a big difference in overall trading results. - -### **WHAT TO DO AFTER PERIODS OF SUCCESS AND ADVERSITY** - -What does a trader do after a losing or a winning streak? Suppose your trading equity is down by 50%. Do you change your style of trading? If you've already lost half of your money, you now have to double what you have remaining just to get back to where you were in the first place. Do you get more selective choosing trades, or keep doing the same things you were - -doing before? If you become more conservative, it will be that much harder to win back your losses. - -A more pleasant dilemma occurs after a winning streak. What do you do with your winnings? Suppose you've doubled your money. One alternative is to put your money to maximum use by doubling the size of your positions. If you do that, however, what will happen during the inevitable losing period that's sure to follow? Instead of giving back 50% of your winnings, you'll wind up giving it all back. So the answers to these two questions aren't as simple or obvious as they might first appear. - -Every trader's track record is a series of peaks and troughs, much like a price chart. The trend of the equity chart should be pointing upward if the trader is making money on balance. The worst time to increase the size of one's commitments is after a winning streak. That's much like buying into an overbought market in an uptrend. The wiser thing to do (which goes against basic human nature) is to begin increasing one's commitments after a dip in equity. This increases the odds that the heavier commitments will be made near the equity troughs instead of the peaks. - -### **TRADING TACTICS** - -Upon completion of the market analysis, the trader should know whether he or she wants to buy or sell the market. By this time, money management considerations should have dictated the level of involvement. The final step is the actual purchase or sale. This can be the most difficult part of the process. The final decision as to how and where to enter the market is based on a combination of technical factors, money management parameters, and the type of trading order to employ. Let's consider them in that order. - -#### **Using Technical Analysis in Timing** - -There's nothing really new in applying the technical principles discussed in previous chapters to the timing process. The only real difference is that timing covers the very short term. The time frame that concerns us here is measured in days, hours, and minutes as opposed to weeks and months. But the technical tools employed remain the same. Rather than going through all of the technical methods again, we'll limit our discussion to some general concepts. - -- 1. Tactics on breakouts -- 2. The breaking of trendlines -- 3. The use of support and resistance -- 4. The use of percentage retracements - -### 5. The use of gaps - -#### **Tactics on Breakouts: Anticipation or Reaction?** - -The trader is forever faced with the dilemma of taking a position in anticipation of a breakout, taking a position on the breakout itself, or waiting for the pullback or reaction after the breakout occurs. There are arguments in favor of each approach or all three combined. If the trader is trading several units, one unit can be taken in each instance. If the position is taken in anticipation of an upside breakout, the payoff is a better (lower) price if the anticipated breakout takes place. The odds of making a bad trade, however, are increased. Waiting for the actual breakout increases the odds of success, but the penalty is a later (higher) entry price. Waiting for the pullback after the breakout is a sensible compromise, providing the pullback occurs. Unfortunately, many dynamic markets (usually the most profitable ones) don't always give the patient trader a second chance. The risk involved in waiting for the pullback is the increased chance of missing the market. - -This situation is an example of how trading multiple positions simplifies the dilemma. The trader could take a small position in anticipation of the breakout, buy some more on the breakout, and add a little more on the corrective dip following the breakout. - -#### **The Breaking of Trendlines** - -This is one of the most useful early entry or exit signals. If the trader is looking to enter a new position on a technical sign of a trend change or a reason to exit an old position, the breaking of a tight trendline is often an excellent action signal. Other technical factors must, of course, always be considered. Trendlines can also be used for entry points when they act as support or resistance. Buying against a major up trendline or selling against a down trendline can be an effective timing strategy. - -#### **Using Support and Resistance** - -Support and resistance are the most effective chart tools to use for entry and exit points. The breaking of resistance can be a signal for a new long position. Protective stops can then be placed under the nearest support point. A closer protective stop could be placed just below the actual breakout point, which should now function as support. Rallies to resistance in a downtrend or declines to support in an uptrend can be used to initiate new positions or add to old profitable ones. For purposes of placing protective stops, support and resistance levels are most valuable. - -#### **Using Percentage Retracements** - -In an uptrend, pullbacks that retrace 40-60% of the prior advance can be utilized for new or additional long positions. Because we're talking primarily about timing, percentage retracements can be applied to very short term action. A 40% pullback after a bullish breakout, for example, might provide an excellent buying point. Bounces of 40-60% usually provide excellent shorting opportunities in downtrends. Percentage retracements can be used on intraday charts also. - -#### **Using Price Gaps** - -Price gaps on bar charts can be used effectively in the timing of purchases or sales. After an upmove, for example, underlying gaps usually function as support levels. Buy a dip to the upper end of the gap or a dip into the gap itself. A protective stop can be placed below the gap. In a bear move, sell a rally to the lower end of the gap or into the gap itself. A protective stop can be kept over the gap. - -#### **Combining Technical Concepts** - -The most effective way to use these technical concepts is to combine them. Remember that when we're discussing timing, the basic decision to buy or sell has already been made. All we're doing here is fine tuning the entry or exit point. If a buy signal has been given, the trader wants to get the best price possible. Suppose prices dip into the 40-60% buying zone, show a prominent support level in that zone, and/or have a potential support gap. Suppose further that a significant up trendline is nearby. - -All of these factors used together would improve the timing of the trade. The idea is to buy near support, but to exit quickly if that support is broken. Violation of a tight down trendline drawn above the highs of a downside reaction could also be used as a buying signal. During a bounce in a downtrend, the breaking of a tight up trendline could be a shorting opportunity. - -### **COMBINING TECHNICAL FACTORS AND MONEY MANAGEMENT** - -Besides using chart points, money management guidelines should play a role in how protective stops are set. Assuming an account size of \$100,000, and using the 10% criteria for maximum commitment, only \$10,000 is available for the trade. The maximum risk is 5%, or \$5,000. Therefore, protective stops on the total position must be placed in such a way that no more than \$5,000 would be lost if the trade doesn't work. - -A closer protective stop would permit the taking of larger positions. A looser stop would reduce the size of the position. Some traders use only money management factors in determining where to place a protective stop. It's critically important, however, that the protective stop be placed over a *valid* resistance point for a short position or below a *valid* support point for a long position. The use of intraday charts can be especially effective in finding closer support or resistance levels that have some validity. - -### **TYPES OF TRADING ORDERS** - -Choosing the right type of trading order is a necessary ingredient in the tactical process. We'll concern ourselves only with some of the more common types of orders: market, limit, stop, stop limit, and market-if-touched (M.I.T.). - -- 1. The *market order* simply instructs your broker to buy or sell at the current market price. This is usually preferable in fast market conditions or when the trader wants to ensure that a position is taken and to protect against missing a potentially dynamic market move. -- 2. The *limit order* specifies a price that the trader is willing to pay or accept. A *buy limit* order is placed below the current market price and states the highest price the trader is willing to pay for a purchase. A *sell limit* order is placed over the current market price and is the lowest price the seller is willing to accept. This type of resting order is used, for example, after a bullish breakout when the buyer wants to buy a downside reaction closer to support. -- 3. A *stop order* can be used to establish a new position, limit a loss on an existing position, or protect a profit. A stop order specifies a price at which an order is to be executed. A *buy stop* is placed over the market and a *sell stop* under the market (which is the opposite of the limit order). Once the stop price is hit, the order becomes a *market* order and is executed at the best price possible. On a long position, a sell stop is placed below the market to limit a loss. After the market moves higher, the stop can be raised to protect the profit (a trailing stop). A buy stop could be placed above resistance to initiate a long position on a bullish breakout. Since the stop order becomes a market order, the actual "fill" price may be beyond the stop price, especially in a fast market. -- 4. A *stop limit order* combines both a stop and a limit order. This type of order specifies both a stop price where the trade is activated and a limit price. Once the stop is elected, the order becomes a limit order. This type - -of order is useful when the trader wants to buy or sell a breakout, but wants to control the price paid or received. - -5. The *market-if-touched (M.I.T.) order* is similar to a limit order, except that it becomes a market order when the limit price is touched. An M.I.T. order to buy would be placed under the market like a limit order. When the limit price is hit, the trade is made at the market. This type of trade has one major advantage over the limit order. The buy limit order placed under the market does not guarantee a fill even if the limit price is touched. Prices may bounce sharply from the limit price, leaving the order unfilled. An M.I.T. order is most useful when the trader wants to buy the dip, but doesn't want to risk missing the market after the limit price is hit. - -Each of these orders is appropriate at certain times. Each has its own strong and weak points. Market orders guarantee a position, but may result in "chasing" the market. Limit orders provide more control and better prices, but risk missing the market. Stop limit orders also risk missing the market if prices gap beyond the limit price. Stop prices are strongly recommended to limit losses and protect profits. However, the use of a buy or sell stop to initiate new positions may result in bad fills. The market-if-touched order is particularly useful, but is not allowed on some exchanges. Familiarize yourself with the different types of orders and learn their strengths and weaknesses. Each of them has a place in your trading plan. Be sure to find out which types of orders are permitted on the various financial exchanges. - -### **FROM DAILY CHARTS TO INTRADAY PRICE CHARTS** - -Because timing deals with very short term market action, intraday price charts are especially useful. Intraday charts are indispensable for day trading purposes, although that's not our focus here. We're mainly interested in how intraday activity can be used to aid the trader in the timing of purchases and sales once the basic decision to enter or exit a market has been made. - -It bears repeating that the trading process must begin with a long range view and then gradually work toward the shorter term. Analysis begins with monthly and weekly charts for long term perspective. Then the daily chart is consulted, which is the basis for the actual trading decision. The intraday chart is the last one viewed for even greater precision. The long term chart gives a telescopic view of a market. The intraday chart allows more microscopic study. The technical principles already discussed are clearly visible on these very sensitive charts. (See Figures 16.1-16.3.) - -**Figure 16.1** *A 5 minute bar chart of an S&P 500 futures contract showing a day and a half of trading. The last five stochastic signals (see arrows) worked pretty well. Intraday charts are used for very short term trading purposes.* - -**Figure 16.2** *A 10 minute bar chart of a Treasury Bond futures contract showing three days of trading. The last two stochastic signals show a sell just after 10:10 on the morning of 2/26 and then a buy signal the following morning around the same time.* - -**Figure 16.3** *A one hour bar chart of a Deutschemark futures contract showing ten trading days. Three stochastic signals are shown (see arrows). A buy signal on 2/17 turned to a sell on 2/24 and then another buy on 2/26.* - -### **THE USE OF INTRADAY PIVOT POINTS** - -In order to achieve earlier entry with even tighter protective stops, some traders try to anticipate where a market will close by the use of pivot points. This technique combines seven key price levels with four time periods. The seven pivot points are the previous day's high, low, and close and the current day's open, high, low, and close. The four time periods are applied to the current trading day. They are the open, 30 minutes after the open, midday (about 12:30 New York time), and 35 minutes before the close. - -These are average times and can be adjusted to the individual markets. The idea is to use pivot points only as a timing device when the trader believes a market is topping or bottoming. Buy or sell signals are given as the pivot points are broken during the day. The later in the day the signal is given, the stronger it is. As an illustration of a buy signal, if the market opens above the previous day's close, but is below the previous day's high, a buy stop is placed above the previous day's high. If the buy stop is elected, a protective sell stop is placed below the current day's low. At 35 minutes before the close, if no position has been taken, a buy stop is placed above the current day's high, with a protective stop under today's open. No action is generally taken during the first 30 minutes of trading. As the day progresses, the pivot - -points are narrowed as are the protective stops. As a final requirement on a buy signal, prices must close above both the previous day's closing price and today's opening price. - -### **SUMMARY OF MONEY MANAGEMENT AND TRADING GUIDELINES** - -The following list pulls together most of the more important elements of money management and trading. - -- 1. Trade in the direction of the intermediate trend. -- 2. In uptrends, buy the dips; in downtrends, sell bounces. -- 3. Let profits run, cut losses short. -- 4. Use protective stops to limit losses. -- 5. Don't trade impulsively; have a plan. -- 6. Plan your work and work your plan. -- 7. Use money management principles. -- 8. Diversify, but don't overdo it. -- 9. Employ at least a 3 to 1 reward-to-risk ratio. -- 10. When pyramiding (adding positions), follow these guidelines. - - a. Each successive layer should be smaller than before. - - b. Add only to winning positions. - - c. Never add to a losing position. - - d. Adjust protective stops to the breakeven point. -- 11. Never meet a margin call; don't throw good money after bad. -- 12. Close out losing positions before the winning ones. -- 13. Except for very short term trading, make decisions away from the market, preferably when the markets are closed. -- 14. Work from the long term to the short term. -- 15. Use intraday charts to fine-tune entry and exit. -- 16. Master interday trading before trying intraday trading. -- 17. Try to ignore conventional wisdom; don't take anything said in the financial media too seriously. -- 18. Learn to be comfortable being in the minority. If you're right on the market, most people will disagree with you. -- 19. Technical analysis is a skill that improves with experience and study. Always be a student and keep learning. -- 20. Keep it simple; more complicated isn't always better. - -## **APPLICATION TO STOCKS** - -The trading tactics that we've covered in this chapter (and the analytical tools in preceding chapters) also apply to the stock market, with some minor adjustments. While futures traders focus on short to intermediate trends, stock investors are more concerned with intermediate to longer term trends. Stock trading places less emphasis on the very short term and makes less use of intraday charts. But the general principles remain the same for analyzing and trading markets—whether they're in the futures pits of Chicago or on the floor of the New York Stock Exchange. - -### **ASSET ALLOCATION** - -The money management guidelines presented in this chapter refer mainly to futures trading. However, many of the principles included in that discussion relate to the need for proper diversification in one's investment portfolio and touches on the subject of asset allocation. Asset allocation refers to how a person's portfolio is divided among stocks, bonds, and cash (usually in the form of a money market fund or Treasury Bills). It can also refer to how much of one's portfolio should be allocated to foreign markets. Asset allocation also refers to how one's stockholdings are spread among the various market sectors and industry groups. And, more recently, it deals with how much of one's portfolio should be allocated to traditional commodity markets. - -### **MANAGED ACCOUNTS AND MUTUAL FUNDS** - -Managed accounts have been available in the futures markets for several years and have provided a vehicle for those wishing to put some money into futures but lacked the expertise to do so themselves. Managed accounts have provided a sort of mutual fund approach to futures. Even though managed futures accounts invest in all futures markets—including currencies, commodities, bonds, and stock index futures—they still provide some measure of diversification from bonds and stocks. Part of the diversification is due to their practice of trading from both the long and the short side. Another part comes from the commodity portion itself. However, the ability to devote some of one's assets to commodities was made even easier during 1997. - -Oppenheimer Real Assets, launched in March 1997, is the first mutual fund devoted exclusively to commodity investing. By investing in commodity-linked notes, the fund is able to fashion a commodity portfolio that tracks the Goldman Sachs Commodity Index, which includes 22 - -commodity markets. Since commodities often trend in opposite directions to bonds and stocks, they provide an excellent diversification vehicle. Proper diversification requires spreading one's assets among market groups or classes that have a low correlation to each other—in other words, they don't always trend in the same direction. Commodities certainly fit that criteria. - -We point these things out for two reasons. One is to show that the areas of money management and asset allocation are very much intertwined. The second is to show that the markets themselves are very much intertwined. In the next two chapters, you'll see how closely linked the futures and stock markets really are, and why it's important that stock investors keep informed of what's going on in the futures markets. Chapter 17 will introduce you to intermarket technical analysis. - -### **MARKET PROFILE** - -We couldn't leave the subject of intraday charts without introducing one of the most innovative approaches to intraday trading called *Market Profile.* This trading technique was developed by J. Peter Steidlmayer, a former floor trader on the Chicago Board of Trade. Mr. Steidlmayer's approach has gained an enthusiastic following over the past decade, especially in the futures markets. Market Profile can, however, be applied to common stocks as well. It's not an easy approach to grasp. But those traders that have done so give it very high marks. Dennis Hynes, an expert in Market Profile trading, explains the approach in Appendix B. - -When the first edition of this book was published in 1986 the separation of the commodity futures world from the more traditional world of stocks and bonds was already starting to break down. Twenty years ago, commodities referred to such things as corn, soybeans, porkbellies, gold, and oil. These were traditional commodities that could be grown, mined, or refined. Dramatic changes took place from 1972 to 1982 with the introduction of futures contracts on currencies, Treasury Bonds, and stock index futures. The term "commodities" gave way to "futures" since bonds and stocks were hardly commodities. But they were futures contracts. Since then, the world of futures trading has blended with that of traditional stocks and bonds to the point that they can hardly be separated. As a result, the technical analysis methods used to analyze the different financial markets have become more universally applied. - -On any given day, quotes are readily available for dollar futures, bond futures, and stock index futures—and they often move in sync with one another. The direction those three markets move is often affected by what happens in the commodity pits. *Program trading*, which occurs when the price of the S&P 500 futures contract is out of line with the S&P 500 cash index, is a day-to-day reality. For those reasons, it seems clear that the more understanding you have about the world of futures trading, the more insight you will gain into the entire financial marketplace. - -It has become clear that action in the futures markets can have an important influence on the stock market itself. Early warnings signs of inflation and interest rate trends are usually spotted in the futures pits first, which often determine the direction stock prices will take at any given time. Trends in the dollar tell us a lot about the strength or weakness of the American economy, which also has a major impact on corporate earnings and the valuation of stock prices. But the linkage goes even deeper than that. The stock market is divided into sectors and industry groups. Rotation into and out of those groups is often dictated by action in futures. With the tremendous growth in mutual funds, and sector funds in particular, the ability to capitalize on sector rotation into winning groups and out of losing ones has become much simpler. - -In this chapter, we'll deal with the broader subject of intermarket analysis as it deals with the interplay between currencies, commodities, bonds, and stocks. Our primary message is how closely the four markets are linked. We'll show how to use the futures markets in the process of sector and industry group rotation within the stock market itself. - -### **INTERMARKET ANALYSIS** - -In 1991, I wrote a book entitled *Intermarket Technical Analysis.* That book described the interrelationships between the various financial markets, which are universally accepted today. The book provided a guide, or blueprint, to help explain the sequence that develops among the various markets and to show how interdependent they really are. The basic premise of intermarket analysis is that all financial markets are linked in some way. That includes international markets as well as domestic ones. Those relationships may shift on occasion, but they are always present in one form or another. As a result, a complete understanding of what's going on in one market—such as the stock market—isn't possible without some understanding of what's going on in other markets. Because the markets are now so intertwined, the technical analyst has an enormous advantage. The technical tools described in this book can be applied to all markets, which greatly facilitates the application of intermarket analysis. You'll also see why the ability to follow the charts of so many markets is a tremendous advantage in today's complex marketplace. - -### **PROGRAM TRADING: THE ULTIMATE LINK** - -Nowhere is the close link between stocks and futures more obvious than in the relationship between the S&P 500 cash index and the S&P 500 futures contract. Normally, the futures contract trades at a premium to the cash index. The size of that premium is determined by such things as the level of short term interest rates, the yield on the S&P 500 index itself, and the number of - -days until the futures contract expires. The premium (or spread) between S&P 500 futures over the cash index diminishes as the futures contract approaches expiration. (See Figure 17.1.) Each day, institutions calculate what the actual premium should be—called *fair value.* That fair value remains constant throughout the trading day, but changes gradually with each new day. When the futures premium [moves](#page-376-0) above its fair value to the cash index by some predetermined amount, an arbitrage trade is automatically activated—called *program buying.* When the futures are too high relative to the cash index, program traders sell the futures contract and buy a basket of stocks in the S&P 500 to bring the two entities back into line. The result of program buying is positive for the stock market since it pushes the S&P 500 cash index higher. Program selling is just the opposite and occurs when the premium of the futures over the cash narrows too far below its fair value. In that case, *program selling* is activated which results in the buying of S&P 500 futures and selling of the basket of stocks. Program selling is negative for the market. Most traders understand this relationship between the two related markets. What they don't always understand is that the sudden moves in the S&P 500 futures contract, which activate the program trading, are often caused by sudden moves in other futures markets—like bonds. - -**Figure 17.1** *S&P 500 futures normally trade at a premium to the cash index as shown in this chart. Notice that the premium narrows as the March contract nears expiration.* - -## **THE LINK BETWEEN BONDS AND STOCKS** - -The stock market is influenced by the direction of interest rates. The direction of interest rates (or yield) can be monitored on a minute-to-minute basis by tracking the movements in the Treasury Bond futures contract. Bond prices move in the opposite direction of interest rates or yields. Therefore, when bond prices are rising, yields are falling. That is normally considered positive for stocks.\* Falling bond prices, or rising yields, are considered negative for stocks. From a technician's point of view, it is very easy to compare the charts of Treasury Bond futures with the charts of either the S&P 500 cash index or its related futures contract. You'll see that they have generally trended in the same direction. (See Figure 17.2.) On a short term basis, sudden changes in trend in the S&P 500 futures contract are often influenced by sudden changes in the Treasury Bond futures contract. On a longer range basis, changes in the trend of the Treasury [Bond](#page-377-1) contract often warn of similar turns in the S&P 500 cash index itself. In that sense, bond futures can be viewed as a leading indicator for the stock market. Bond futures, in turn, are usually influenced by trends in the commodity markets. - -**\* In a deflationary environment, bonds and stocks usually decouple. Bond prices rise while stock prices fall.** - -**Figure 17.2** *Rising bond prices are usually good for stock prices. The bond market bottoms in 1981, 1984, 1988, 1991, and 1995 led to major upturns in stocks. Bond peaks in 1987, 1990, and 1994 warned of bad stock market years.* - -### **THE LINK BETWEEN BONDS AND COMMODITIES** - -Treasury Bond prices are influenced by expectations for inflation. Commodity prices are considered to be leading indicators of inflationary trends. As a result, commodity prices usually trend in the opposite direction of bond prices. If you study the market's history since the 1970s, you'll see that sudden upturns in commodity markets (signaling higher price inflation) have usually been associated with corresponding declines in Treasury Bond prices. The flip side of that relationship is that strong Treasury Bond gains have normally corresponded with falling commodity prices. (See Figure 17.3). Commodity prices, in turn, are impacted by the direction of the U.S. dollar. - -**Figure 17.3** *Commodity prices and bond prices normally trend in opposite directions as shown here. The bond bottoms in the spring of 1996 and 1997 coincided with major peaks in commodity prices (see boxes).* - -### **THE LINK BETWEEN COMMODITIES AND THE DOLLAR** - -A rising U.S. dollar normally has a depressing effect on most commodity prices. In other words, a rising dollar is normally considered to be noninflationary. (See Figure 17.4.) One of the commodities most effected by the dollar is the gold market. If you study their relationship over time, you'll - -see that the prices of gold and the U.S. dollar usually trend in opposite directions. (See Figure 17.5.) The gold market, in turn, usually acts as a leading indicator for other commodity markets. So, if you're analyzing the gold market, it's necessary to know what the dollar is doing. If you're studying the co[mmodity](#page-380-1) price trend in general (using one of the better known commodity price indexes), it's necessary to know what the gold market is doing. The fact of the matter is that all four markets are linked—the dollar influences commodities, which influence bonds, which influence stocks. To fully comprehend what's happening in any one asset class, it's necessary to know what's happening in the other three. Fortunately, that's easily done by simply looking at their respective price charts. - -**Figure 17.4** *A rising dollar normally has a depressing effect on commodity markets. In 1980, the dollar bottom coincided with a major peak in commodities. The dollar bottom in 1995 contributed to a sharp decline in commodities a year later.* - -**Figure 17.5** *The U.S. Dollar and gold prices usually trend in opposite directions as shown in this example. Gold prices, in turn, usually lead other commodities.* - -### **STOCK SECTORS AND INDUSTRY GROUPS** - -An understanding of these intermarket relationships also sheds light on the interaction between the various stock market sectors and industry groups. The stock market is divided into market sectors which are then subdivided into industry groups. These market categories are influenced by what's happening on the intermarket scene. For example, when bonds are strong and commodities weak, interest rate-sensitive stock groups—such as the utilities, financial stocks, and consumer staples—usually do well relative to the rest of the stock market. At the same time, inflation-sensitive stock groups—like gold, energy, and cyclical stocks—usually underperform. When commodity markets are strong relative to bonds, the opposite is the case. By monitoring the relationship between Treasury Bond prices and commodity prices, you can determine which sectors or industry groups will do better at any given time. - -Since there is such a close relationship between stock market sectors and their related futures markets, they can be used in conjunction with each other. Utility stocks, for example, are closely linked to Treasury Bond prices. (See Figure 17.6.) Gold mining shares are closely linked to the price of gold. What's more, the related stock groups often tend to lead their respective - -futures markets. As a result, utility stocks can be used as leading indicators for Treasury Bonds. Gold mining shares can be used as leading indicators for gold prices. Another example of intermarket influence is the impact of the trend of oil prices on energy and airline stocks. Rising oil prices help energy shares but hurt airlines. Falling oil prices have the opposite effect. - -**Figure 17.6** *There is usually very close linkage between bond prices and utilities. In addition, utilities often make their turns a little before bonds.* - -### **THE DOLLAR AND LARGE CAPS** - -Another intermarket relationship involves how the dollar affects large and small cap stocks. Large multinational stocks can be negatively impacted by a very strong dollar, which may make their products too expensive in foreign markets. By contrast, the more domestically oriented small cap stocks are less affected by dollar movements and may actually do better than larger stocks in a strong dollar environment. As a result, a stronger dollar may favor smaller stocks (like those in the Russell 2000), while a weaker dollar may benefit the large multinationals (like those in the Dow Industrial Average.) - -### **INTERMARKET ANALYSIS AND MUTUAL FUNDS** - -It should be obvious that some understanding of these intermarket relationships can go a long way in mutual fund investing. The direction of the U.S. dollar, for example, might influence your commitment to small cap funds versus large cap funds. It may also help determine how much money you might want to commit to gold or natural resource funds. The availability of so many sector-oriented mutual funds actually complicates the decision of which ones to emphasize at any given time. That task is made a good deal easier by comparing the relative performance of the futures markets and the various stock market sectors and industry groups. That is easily accomplished by a simple charting approach called *relative strength* analysis. - -### **RELATIVE STRENGTH ANALYSIS** - -This is an extremely simple but effective charting tool. All you do is divide one market entity by another—in other words, plot a ratio of two market prices. When the ratio line is rising, the numerator price is stronger than the denominator. When the ratio line is declining, the denominator market is stronger. Consider some examples of what you can do with this simple indicator. Divide a commodity index (such as the CRB Futures Price Index) by Treasury Bond futures prices. (See Figure 17.7.) When the ratio line is rising, commodity prices are outperforming bonds. In that scenario, futures traders would be buying commodity markets and selling bonds. At the same time, stock traders would be buying i[nflation](#page-383-0) sensitive stocks and selling interest-rate sensitive stocks. When the ratio line is falling, they would be doing the opposite. That is, they would sell commodities and buy bonds. At the same time, stock investors would be selling the golds, the oils, and the cyclicals, while buying the utilities, the financials, and consumer staples. (See Figure 17.8.) - -**Figure 17.7** *The CRB Index/Treasury Bond ratio tells us which asset class is stronger. 1994 favored commodities, while 1995 favored bonds. The ratio took a sharp downturn in mid-1997 owing to the Asian crisis and fears of deflation.* - -**Figure 17.8** *During October 1997, the Asian crisis caused funds to flow out of cyclicals and into consumer staples, which coincided with a falling CRB/Bond ratio in Figure 17.7.* - -## **RELATIVE STRENGTH AND SECTORS** - -Many exchanges now trade index options on various stock market sectors. The Chicago Board Options Exchange has the greatest selection and includes such diverse groups as automotive, computer software, environmental, gaming, real estate, healthcare, retail, and transportation. The American and Philadelphia Stock Exchanges offer popular index options on banks, gold, oil, pharmaceuticals, semiconductors, technology, and utilities. All of these index options can be charted and analyzed like any other market. The best way to use relative strength analysis on them is to divide their price by some industry benchmark such as the S&P 500. You can then determine which are outperforming the overall market (a rising RS line) or underperforming (a falling RS line). Employing some simple charting tools like trendlines and moving averages on the relative strength lines themselves will help you spot important changes in their trend. (See Figure 17.9.) The general idea is to rotate your funds into those sectors of the market whose relative strength lines are just turning up, and to rotate out of those market groups whose relative strength lines are just turning down. Those [moves](#page-384-1) can be implemented either with the index options themselves or through mutual funds that match the various market sectors and industry groups. - -**Figure 17.9** *A relative strength (ratio) comparison of the PSE High Tech Index to the S&P 500. Simple trendline analysis helped spot the downturn in technology stocks during October 1997 and the upturn at year-end.* - -### **RELATIVE STRENGTH AND INDIVIDUAL STOCKS** - -Investors have two ways to go at that point. They can simply rotate their funds out of one market group into another and stop there. Or, if they wish, they can continue on to choose individual stocks within those groups. *Relative strength* analysis plays a role here as well. Once the desired index has been chosen, the next step is to divide each of the individual stocks within the index by the index itself. In that way, you can easily spot the individual stocks that are showing the greatest relative strength. (See Figure 17.10.) You can purchase the stocks showing the strongest ratio lines, or you can buy a cheaper stock whose ratio line may just be turning up. The idea, however, is to avoid stocks whose relative strength (ratio) lines are still [fallin](#page-385-2)g. - -**Figure 17.10** *A ratio analysis of Dell Computer versus the PSE High Tech Index at the end of 1997 showed Dell to be one of the better stock picks in the tech sector.* - -### **TOP-DOWN MARKET APPROACH** - -What we've described here is a *top down* market approach. You begin by studying the major market averages to determine the trend of the overall market. Then you select those market sectors or industry groups that are showing the best relative strength. Then you select individual stocks within those groups that are also showing the best relative strength. By incorporating intermarket principles into your decision making process, you can also determine whether the current market climate favors bonds, commodities, or stocks which can play a role in your asset allocation decisions. The same principles can also be applied to international investing by simply comparing the relative strength of the various global stock markets. And, finally, all of these technical tools described herein can be applied to charts of mutual funds as a final check on your analysis. All of this work is easily done with price charts and a computer. Imagine trying to apply fundamental analysis to so many markets at the same time. - -### **DEFLATION SCENARIO** - -The intermarket principles described herein are based on market trends since 1970. The 1970s saw runaway inflation which favored commodity assets. The decades of the 1980s and 1990s have been characterized by falling commodities (disinflation) and strong bull markets in bonds and stocks. During the second half of 1997, a severe downturn in Asian currency and stock markets was especially damaging to markets like copper, gold, and oil. For the first time in decades, some market observers expressed concern that a beneficial disinflation (prices rising at a slower level) might turn into a harmful deflation (falling prices). To add to the concerns, producer prices fell on an annual basis for the first time in more than a decade. As a result, the bond and stock markets began to decouple. For the first time in four years, investors were switching out of stocks and putting more money into bonds and rate-sensitive stock groups like utilities. The reason for that asset allocation adjustment is that deflation changes the intermarket scenario. The inverse relationship between bond prices and commodities is maintained. Commodities fall while bond prices rise. The difference is that the stock market can react negatively in that environment. We point this out because it's been a long time since the financial markets had to deal with the problem of price deflation. If and when deflation does occur, intermarket relationships will still be present but in a different way. Disinflation is bad for commodities, but good for bonds and stocks. Deflation is good for bonds and bad for commodities, but may also be bad for stocks. - -The deflationary trend that started in Asia in mid-1997 spread to Russia and Latin America by mid-1998 and began to hurt all global equity markets. A plunge in commodity prices had an especially damaging impact on commodity exporters like Australia, Canada, Mexico, and Russia. The deflationary impact of falling commodity and stock prices had a positive impact on Treasury bond prices, which hit record highs. Market events of 1998 were a dramatic example of the existence of global intermarket linkages - -## **INTERMARKET CORRELATION** - -Two markets that normally trend in the same direction, such as bonds and stocks, are positively correlated. Markets that trend in opposite directions, like bonds and commodities, are negatively correlated. Charting software allows you to measure the degree of correlation between different markets. A high positive reading suggests a strong positive correlation. A high negative reading suggests a strong negative correlation. A reading near zero suggests little or no correlation between two markets. By measuring the degree of correlation, the trader is able to establish how much emphasis to place on a particular intermarket relationship. More weight should be placed on those with higher correlations, and less weight on those closer to zero. (See Figure 17.11.) - -**Figure 17.11** *The line along the bottom shows the positive correlation between T-bond prices and the S&P500. During the second half of 1997, the Asian crisis caused an unusual decoupling. Investors bought bonds and sold stocks.* - -In his book, *Cybernetic Trading Strategies*, Murray Ruggiero, Jr. presents creative work on the subject of intermarket correlations. He also shows how to use intermarket filters on trading systems. He demonstrates, for example, how a moving-average crossover system in the bond market can be - -used as a filter for stock index trading. Ruggiero explores the application of state-of-the-art artificial intelligence methods like chaos theory, fuzzy logic, and neural networks to the development of technical trading systems. He also explores the application of neural networks to the field of intermarket analysis. - -### **INTERMARKET NEURAL NETWORK SOFTWARE** - -One major problem with the study of intermarket relationships is that there are so many of them—and they're all interacting at the same time. That's where neural networks come into play. Neural networks provide a more quantitative framework for identifying and tracking the complex relationships that exist among the financial markets. Louis Mendelsohn, president of Market Technologies Corporation (25941 Apple Blossom Lane, Wesley Chapel, FL 33544; e-mail address: *45141@ProfitTaker.com;* website URL: www.ProfitTaker.com/45141), was the first person to develop intermarket analysis software in the financial industry during the 1980s. Mendelsohn is the leading pioneer in the application of microcomputer software and neural networks to intermarket analysis. His VantagePoint software, first introduced in 1991, uses intermarket principles to trade interest rate markets, stock indexes, currency markets, and energy futures. VantagePoint uses neural network technology to detect the hidden patterns and correlations that exist between related markets. - -### **CONCLUSION** - -This chapter summarizes the main points included in my book, *Intermarket Technical Analysis.* It discusses the ripple effect that flows from the dollar to commodities to bonds to stocks. Intermarket work also recognizes the existence of global linkages. What happens in Asia, Europe, and Latin America has an impact on U.S. markets and vice versa. Intermarket analysis sheds light on sector rotation within the stock market. Relative strength analysis is helpful for seeking out asset classes, market sectors, or individual stocks that are likely to outperform the general market. In his book, *Leading Indicators for the 1990s*, Dr. Geoffrey Moore shows how the interaction between commodity prices, bond prices, and stock prices follows a sequential pattern that tracks the business cycle. Dr. Moore substantiates the intermarket rotation within the three asset classes, and argues for their use in economic - -forecasting. In doing so, Dr. Moore elevates intermarket work and technical analysis in general into the realm of economic forecasting. Finally, technical analysis can be applied to mutual funds like any other market (with some minor modifications). That being the case, all of the techniques discussed in this book can be applied right on the mutual fund charts themselves. Even better, the lower degree of volatility in mutual fund charts make them excellent vehicles for chart analysis. My latest book, *The Visual Investor*, deals more extensively with the subject of sector analysis and trading, and shows how mutual funds can be charted and then used to implement various trading strategies. (See Figure 17.12.) - -**Figure 17.12** *Chart analysis can be done on mutual fund charts. You didn't have to be a chart expert to see that Asia was headed for trouble by tracking this mutual fund.* - -### **MEASURING MARKET BREADTH** - -In the previous chapter, we described the top-down approach that is most commonly employed in stock market analysis. With that approach, you begin your analysis with a study of the health of the overall market. Then you work down to market sectors and industry groups. The final step is the study of individual stocks. Your goal is to pick the best stocks in the best groups in an environment when the stock market is technically healthy. The study of market sectors and individual stocks can be accomplished with the technical tools employed throughout this book—including chart patterns, volume analysis, trendlines, moving averages, oscillators, etc. Those same indicators can also be applied to the major market averages. But there's another class of market indicators widely employed in stock market analysis whose purpose is to determine the health of the overall stock market by measuring market breadth. The data used in their construction are advancing versus declining issues, new highs versus new lows, and up volume versus down volume. - -### **SAMPLE DATA** - -If you check the Stock Market Data Bank section of *The Wall Street Journal* (Section C, page 2) each day, you'll find the following data for the previous trading day. The numbers shown are based on an actual day's trading results. - -| Diaries | | -|------------------|--------| -| NYSE | Monday | -| Issues
Traded | 3,432 | -| Advances | 1,327 | - -| Declines | 1,559 | -|---------------------------|---------| -| Unchanged | 546 | -| New
highs | 78 | -| New
lows | 43 | -| Adv
vol
(000) | 248,215 | -| Decl
vol
(000) | 279,557 | -| Total
vol
(000) | 553,914 | -| Closing
tick | -135 | -| Closing
Arms
(trin) | .96 | - -The above figures are derived from New York Stock Exchange (NYSE) data. A similar breakdown is also shown for the NASDAQ and the American Stock Exchange. We'll concentrate on the NYSE in this discussion. It just so happens that on that particular day the Dow Jones Industrial Average had gained 12.20 points. So the market was up as measured by the Dow. However, there were more declining stocks (1,559) than advancing stocks (1,327), suggesting that the broader market didn't fare as well as the Dow. There was also more declining volume than advancing volume. Those two sets of figures suggest that market breadth was actually negative for that particular day—even though the Dow itself closed higher. The other figures present a more mixed picture. The number of stocks hitting new 52 week highs (78) was greater than those hitting new lows (43) suggesting a positive market environment. However, the closing tick (the number of stocks that closed on an uptick versus a downtick) was a negative, -135. That meant that 135 more stocks closed on a downtick than an uptick, a short term negative factor. The negative closing tick, however, is offset by a closing Arms (Trin) reading of .96 which is mildly positive. We'll explain why that is later in the chapter. All of these internal market readings have one intended purpose—to give us a more accurate reading on the health of the overall market that isn't always reflected in the movement of the Dow itself. - -### **COMPARING MARKET AVERAGES** - -Another way to study the breadth of the market is to compare the performance of the stock averages themselves. Using the same day's trading as an example, the following data lists the relative performance of the major stock averages: - -| Dow | +12.20 | -|-------------|---------| -| Industrials | (+.16%) | -| S&P | -.64 | -| 500 | (-.07%) | - -| Nasdaq Composite | $-14.47(-92%)$ | -|------------------|----------------| -| Russell 2000 | $-3.80(-.89%)$ | - -The first thing that is clear is that the Dow Industrials was the only market average to gain on the day. On all the TV news programs that night, investors were told that the market (represented by the Dow) was up for the day. Yet all the other measures were actually down. Notice also that the broader the average (the more stocks included) the worse it did. Compare the percentage changes. The 30 stock Dow gained .16%. The S&P 500 lost .07%. The Nasdaq Composite, which includes more than 5,000 stocks, was the day's worst performer and lost .92%. Almost as bad as the Nasdaq was the Russell 2000 (-.89%), which is a measure of 2000 small cap stocks. The message in this brief comparison is that even though the Dow gained on the day, the overall market lost ground as measured by the more broader based stock averages. We'll revisit the idea of comparing market averages again. But first, let's show the different ways market technicians can analyze the market's breadth numbers. - -### **THE ADVANCE-DECLINE LINE** - -This is the best known of the breadth indicators. The construction of the advance decline line is extremely simple. Each day's trading on the New York Stock Exchange produces a certain number of stocks that advanced, a number that declined, and a number that remained unchanged. These figures are reported each day in *The Wall Street Journal* and *Investor's Business Daily*, and are used to construct a daily advance-decline (AD) line. The most common way to calculate the AD line is to take the difference between the number of advancing issues and the number of declining issues. If there are more advances than declines, the AD number for that day is positive. If there are more declines than advances, the AD line for that day is negative. That positive or negative daily number is then added to the cumulative AD line. The AD line displays a trend of its own. The idea is to make sure the AD line and the market averages are trending in the same direction. (See Figure 18.1.) - -**Figure 18.1** *The NYSE advance-decline line versus the Dow Industrials. In a healthy market, both lines should be trending upward together as they are here.* - -### **AD DIVERGENCE** - -What does the advance-decline line measure? The advance-decline line tells us whether or not the broader universe of 3500 NYSE stocks is advancing in line with the most widely followed stock averages, which include only the 30 Dow Industrials or the 500 stocks in the S&P 500. To paraphrase a Wall Street maxim: the advance-decline line tells us if the "troops" are keeping up with the "generals." As long as the AD line is advancing with the Dow Industrials, for example, the breadth or health of the market is good. The danger appears when the AD line begins to diverge from the Dow. In other words, when you have a situation where the Dow Industrials are hitting new highs while the broader market (measured by the AD line) isn't following, technicians begin to worry about "bad market breadth" or an AD divergence. Historically, the AD line peaks out well ahead of the market averages, which is why it's watched so closely. - -### **DAILY VERSUS WEEKLY AD LINES** - -The daily AD line, which we have described herein, is better used for short to intermediate comparisons with the major stock averages. It is less useful for - -comparisons going back several years. A weekly advance-decline line measures the number of advancing versus declining stocks for the entire week. Those figures are published in *Barron's* each weekend. A weekly advance-decline line is considered more useful for trend comparisons spanning several years. While a negative divergence in the daily AD line may warn of short to intermediate problems in the market, it's necessary to also show a similar divergence in the weekly AD line to confirm that a more serious problem is developing. - -### **VARIATIONS IN AD LINE** - -Since the number of stocks traded on the NYSE has grown over the years, some market analysts believe the method of subtracting the number of declining issues from the number of advancing issues gives greater weight to the more recent data. To combat that problem, many technicians prefer to use an advance/decline ratio which divides the number of advancing issues by the number of declining issues. Some also believe that there's value in including the number of unchanged issues in the calculation. Whichever way the AD line is calculated, its use is always the same—that is, to measure the direction of the broader market and to ensure it's moving in the same direction as the more narrowly constructed, but popular market averages. Advance decline lines can also be constructed for the American Stock Exchange and the Nasdaq Market. Market technicians like to construct overbought/oversold oscillators on the AD lines to help measure short to intermediate term market extremes in the breadth figures themselves. One of the better known examples is the McClellan Oscillator. - -### **McCLELLAN OSCILLATOR** - -Developed by Sherman McClellan, this oscillator is constructed by taking the difference between two exponential moving averages of the daily NYSE advance-decline figures. The McClellan Oscillator is the difference between the 19 day (10% trend) and the 39 day (5% trend) exponential moving averages of the daily net advance decline figures. The oscillator fluctuates around a zero line with its upper and lower extremes ranging from +100 and -100. A McClellan Oscillator reading above +100 is a signal of an overbought stock market. A reading below -100 is considered an oversold stock market. Crossings above and below the zero line are also interpreted as short to intermediate term buying and selling signals respectively. (See Figure 18.2.) - -**Figure 18.2** *The McClellan oscillator shown as a histogram. Crossings above the zero line are positive signals. Readings above* +100 *are overbought, while readings below -100 are oversold. Notice the extreme oversold reading during October of 1997.* - -### **McCLELLAN SUMMATION INDEX** - -The Summation Index is simply a longer range version of the McClellan Oscillator. The McClellan Summation Index is a cumulative sum of each day's positive or negative readings in the McClellan Oscillator. Whereas the McClellan Oscillator is used for short to intermediate trading purposes, the Summation Index provides a longer range view of market breadth and is used to spot major market turning points. (See Figure 18.3.) - -**Figure 18.3** *The McClellan Summation Index is simply a longer range version of the McClellan Oscillator. The Summation Index is used for major trend analysis. Crossings below zero are negative. The February 1998 signal was positive.* - -### **NEW HIGHS VERSUS NEW LOWS** - -In addition to the number of advancing and declining stocks, the financial press also publishes the number of stocks hitting new 52 week highs or new 52 week lows. Here again, these figures are available on a daily and weekly basis. There are two ways to show these figures. One way is to plot the two lines separately. Since the daily values can sometimes be erratic, moving averages (usually 10 days) are plotted to present a smoother picture of the two lines. (See Figure 18.4.) In a strong market, the number of new highs should be much greater than the number of new lows. When the number of new highs start to decline, or the number of new lows start to expand, a caution signal is given. A [nega](#page-397-0)tive market signal is activated when the moving average of new lows crosses above the moving average of new highs. It can also be shown that whenever the new highs reach an extreme, the market has a topping tendency. Similarly, whenever new lows reach an extreme, the market is near a bottom. Another way to use the new highs versus new lows numbers is to plot the difference between the two lines. - -**Figure 18.4** *A 10 day average of new highs versus a 10 day average of new lows. A healthy market should see more stocks hitting new highs than new lows. During October 1997, the two lines almost crossed before reasserting their bullish alignment.* - -### **NEW HIGH-NEW LOW INDEX** - -The advantage of a New High-New Low index is that it can be directly compared to one of the major market averages. In that way, the high-low line can be used just like an advance-decline line. (See Figure 18.5.) The trend of the high-low line can be charted and it can be used to spot market divergences. A new high in the Dow, for example, that is not matched by a corresponding new high in the high-low line could be a [sign](#page-398-0) of weakness in the broader market. Trendline and moving-average analysis can be applied to the line itself. But its major value is in either confirming or diverging from the major stock trends and giving early warning of potential trend changes in the overall market. Dr. Alexander Elder describes the New High-New Low index as "probably the best leading indicator of the stock market" *Trading for a Living*, (Wiley). - -**Figure 18.5** *The New High-New Low Index versus the NYSE Composite Index. This line plots the difference between the number of stocks hitting new highs and new lows. A rising line is positive. Notice the sharp drop during October of 1997.* - -Elder suggests plotting the indicator as a histogram with a horizontal reference point at its zero line, making divergences easier to spot. He points out that crossings above and below the zero line also reflect bullish and bearish shifts in market psychology. - -### **UPSIDE VERSUS DOWNSIDE VOLUME** - -This is the third and final piece of data that is utilized to measure the breadth of the market. The New York Stock Exchange also provides the level of volume in both the advancing and declining issues. That data is also available the next day in the financial press. It is then possible to compare the upside volume versus the downside volume to measure which is dominant at any given time. (See Figure 18.6.) The upside volume and downside volume can be shown as two separate lines (just as we did with the new highs and new lows figures) or the difference can be shown as a single line. Either way, the interpretation is [always](#page-399-1) the same. When the upside volume is dominant, the market is strong. When downside volume is greater, the market is weak. It's possible to combine the number of advancing and declining issues with - -advancing and declining volume. That's what Richard Arms did in the creation of the Arms Index. - -**Figure 18.6** *A 10 day average of stock market upside volume (dark line) versus downside volume. A strong market should have more upside than downside volume.* - -### **THE ARMS INDEX** - -The Arms Index, named after its creator Richard Arms, is a ratio of a ratio. The numerator is the ratio of the number of advancing issues divided by the number of declining issues. The denominator is the advancing volume divided by declining volume. The purpose of the Arms Index is to gauge whether there's more volume in rising or falling stocks. A reading below 1.0 indicates more volume in rising stocks and is positive. A reading above 1.0 reflects more volume in declining issues and is negative. On an intraday basis, a very high Arms Index reading is positive, while a very low reading is negative. The Arms Index, therefore, is a contrary indicator that trends in the opposite direction of the market. It can be used for intraday trading by tracking its direction and for spotting signs of short term market extremes. (See Figure 18.7.) - -## **TRIN VERSUS TICK** - -The Arms Index (TRIN) can be used in conjunction with the TICK indicator for intraday trading. TICK measures the difference between the number of stocks trading on an uptick versus the number trading on a downtick. The TICK is a minute-by-minute version of the daily advance-decline line and is used for the same purpose. When combining the two during the day, a rising TICK indicator and a falling Arms Index (TRIN) are positive, while a falling TICK indicator and a rising Arms Index (TRIN) are negative. The Arms Index, however, can also be used for longer range analysis. - -**Figure 18.7** *The Arms Index (also called TRIN) trends in the opposite direction of the market. Exceptionally high spikes usually signal market bottoms. A 10-day moving average of the Arms Index is a popular way to view this contrary indicator.* - -### **SMOOTHING THE ARMS INDEX** - -While the Arms Index is quoted throughout the trading day and has some short term forecasting value, most traders use a 10 day moving average of its values. According to Arms himself, a 10 day average of the Arms Index above 1.20 is considered oversold, while a 10 day Arms value below .70 is overbought, although those numbers may shift depending on the overall trend of the market. Arms expresses a preference for Fibonacci numbers as well. He suggests using a 21 day Arms Index in addition to the 10 day version. He also utilizes 21 day and 55 day moving-average crossovers of the Arms Index to generate good intermediate term trades. For more in-depth treatment, read *The Arms Index (TRIN*) by Richard W. Arms, Jr. - -### **OPEN ARMS** - -In calculating the 10 day Arms Index, each day's closing value is determined using the four inputs and that final value is smoothed with a 10 day moving average. In the "Open" version of the Arms Index, each of the four components in the formula is averaged separately over a period of 10 days. The Open Arms Index is then calculated from those four different averages. Many analysts prefer the Open Arms version to the original version. Different moving average lengths, like 21 and 55 days, can also be applied to the Open Arms version. (See Figure 18.8.) - -**Figure 18.8** *The 10 day Open Arms Index gives a much smoother look to this indicator, but still trends in the opposite direction of the market. A crossing of its 10-day moving average (darker line) often signals turning points.* - -### **EQUIVOLUME CHARTING** - -Although Arms is best known for creating the Arms Index, he has also pioneered other ways of combining price and volume analysis. In doing so, he created an entirely new form of charting called Equivolume. In the traditional bar chart, the day's trading range is shown on the price bar with the volume bar plotted at the bottom of the chart. Since technical analysts combine price and volume analysis, they have to look at both parts of the chart at the same time. On the Equivolume chart, each price bar is shown as a rectangle. The height of the rectangle measures the day's trading range. The width of the rectangle is determined by that day's volume. Heavier volume days produce a wider rectangle. Lighter volume days are reflected in a narrower rectangle. (See Figure 18.9.) - -**Figure 18.9** *Equivolume charts combine price and volume. The width of each rectangle (daily bar) is determined by the volume. Wider rectangles show heavier volume. The rectangles started to widen during Intel's last sell-off—a negative sign.* - -As a rule, a bullish price breakout should always be accompanied by a burst of trading activity. On an Equivolume chart, therefore, a bullish price breakout should be accompanied by a noticeably wider rectangle. Equivolume charting combines price and volume analysis into one chart and makes for much easier comparisons between price and volume. In an uptrend, for example, up days should see wider rectangles while down days should see narrower rectangles. Equivolume charting can be applied to market averages - -as well as individual stocks and can be plotted for both daily and weekly charts. For more information, consult *Volume Cycles in the Stock Market* by Richard Arms (Dow Jones-Irwin, 1983). - -### **CANDLEPOWER** - -In Chapter 12, Greg Morris explained candlestick charting. In a 1990 article published in *Technical Analysis of Stocks and Commodities* magazine entitled "East Meets West: CandlePower Charting," Morris proposed combining ca[ndlestick](#page-273-0) charts with Arms' Equivolume charting method. Morris' version shows the candlestick chart in an Equivolume format. In other words, the width of the candlestick is determined by the volume. The greater the volume, the wider the candlestick. Morris called the combination CandlePower charting. Quoting from the article: "…the CandlePower chart offers similar if not better information than Equivolume or candlestick charting and is as visually appealing as either of them." Morris' CandlePower technique is available on Metastock charting software (published by Equis International, 3950 S. 700 East, Suite 100, Salt Lake City, UT 84107 [800] 882-3040, www.equis.com). However its name has been changed to Candlevolume. (See Figure 18.10.) - -**Figure 18.10** *A CandlePower chart (also called Candlevolume) combines equivolume and candlesticks. The width of each candle (daily bar) is* - -## **COMPARING MARKET AVERAGES** - -At the start of the chapter, we mentioned that another way to gauge market breadth was to compare the different market averages themselves. We're talking here primarily about the Dow Industrials, the S&P 500, the New York Stock Exchange Index, the Nasdaq Composite, and the Russell 2000. Each measures a slightly different portion of the market. The Dow and the S&P 500 capture the trends of a relatively small number of large capitalization stocks. The NYSE Composite Index includes all stocks traded on the New York Stock Exchange, and gives a slightly broader perspective. Breakouts in the Dow Industrials should, as a rule, be confirmed by similar breakouts in both the S&P 500 and the NYSE Composite Index if the breakout is to have staying power. - -Most important divergences involve the Nasdaq and the Russell 2000. The Nasdaq Composite has the largest number of stocks (5000). However, since the Nasdaq is a capitalization-weighted index, it is usually dominated by the one hundred largest technology stocks like Intel and Microsoft. Because of that, the Nasdaq is more often a measure of the direction of the technology sector. The Russell 2000 is a truer measure of the smaller stock universe. Both indexes, however, should be trending upward along with the Dow and the S&P 500 if the trend of the market is truly healthy. - -Relative strength (RS) analysis plays a useful role here. A ratio of the Nasdaq to the S&P 500 tells us whether the technology stocks are leading or lagging. It's usually better for the market if they're leading and the ratio line is rising. (See Figure 18.11.) A comparison of the Russell 2000 and the S&P 500 tells us whether the "troops" are following the "generals." When the small stocks are showing poor relative strength, or are lagging too far behind the large stocks, [that's](#page-405-0) often a warning that market breadth is weakening. (See Figure 18.12.) - -**Figure 18.11** *The Nasdaq/S&P 500 ratio tells us whether technology stocks are leading or lagging the market. It's usually better for the market when the ratio line is rising.* - -**Figure 18.12** *An overlay comparison of the small cap Russell 2000 and the large cap Dow. It's usually better when both lines are rising together.* - -### **CONCLUSION** - -Another example of comparing two market averages for signs of confirmation or divergence involves the Dow Theory. In Chapter 2, we discussed the importance of the relationship between the Dow Industrials and the Dow Transports. A Dow Theory buy signal is present when both averages hit new highs. When one diverges from the other, a [caution](#page-40-0) signal is given. It can be seen then that the study of market breadth, and the related issues of confirmation and divergence, can take many forms. The general rule to follow is that the greater the number of stock market averages that are trending in the same direction, the greater the chances are for that trend continuing. In addition, be sure to check the advance-decline line, the new highs-new lows line, and the upside-downside volume lines to make sure that they're also trending in the same direction. - -As this book has demonstrated, technical analysis is a blend of many approaches. Each approach adds something to the analyst's knowledge of the market. Technical analysis is much like putting together a giant jigsaw puzzle. Each technical tool holds a piece of the puzzle. My approach to market analysis is to combine as many techniques as possible. Each works better in certain market situations. The key is knowing which tools to emphasize in the current situation. That comes with knowledge and experience. - -All of these approaches overlap to some extent and complement one another. The day the user sees these interrelationships, and is able to view technical analysis as the sum of its parts, is the day that person deserves the title of technical analyst. The following checklist is provided to help the user touch all the bases, at least in the early going. Later on, the checklist becomes second nature. The checklist is not all-inclusive, but does have most of the more important factors to keep in mind. Sound market analysis seldom consists of doing the obvious. The technician is constantly seeking clues to future market movement. The final clue that leans the trader in one direction or the other is often some minor factor that has gone largely unnoticed by others. The more factors the analyst considers, the better the chances of finding that right clue. - -### **TECHNICAL CHECKLIST** - -- 1. What is the direction of the overall market? -- 2. What is the direction of the various market sectors? - -- 3. What are the *weekly* and *monthly* charts showing? -- 4. Are the major, intermediate, and minor *trends* up, down, or sideways? -- 5. Where are the important *support* and *resistance* levels? -- 6. Where are the important *trendlines* or *channels?* -- 7. Are *volume* and *open interest* confirming the price action? -- 8. Where are the 33%, 50%, and 66% *retracements?* -- 9. Are there any price gaps and what type are they? -- 10. Are there any *major reversal patterns* visible? -- 11. Are there any *continuation patterns* visible? -- 12. What are the *price objectives* from those patterns? -- 13. Which way are the *moving averages* pointing? -- 14. Are the *oscillators* overbought or oversold? -- 15. Are any *divergences* apparent on the oscillators? -- 16. Are *contrary opinion* numbers showing any extremes? -- 17. What is the *Elliot Wave* pattern showing? -- 18. Are there any obvious *3 or 5 wave patterns?* -- 19. What about *Fibonacci* retracements or projections? -- 20. Are there any *cycle* tops or bottoms due? -- 21. Is the market showing *right or left translation?* -- 22. Which way is the *computer trend* moving: up, down, or sideways? -- 23. What are the *point and figure* charts or *candlesticks* showing? - -After you've arrived at a bullish or bearish conclusion, ask yourself the following questions. - -- 1. Which way will this market trend over the next several months? -- 2. Am I going to buy or sell this market? -- 3. How many units will I trade? -- 4. How much am I prepared to risk if I'm wrong? -- 5. What is my profit objective? -- 6. Where will I enter the market? -- 7. What type of order will I use? -- 8. Where will I place my protective stop? - -Going through the checklist won't guarantee the right conclusions. It's only meant to help you ask the right questions. Asking the right questions is the surest way of finding the right answers. The keys to successful trading are knowledge, discipline, and patience. Assuming that you have the knowledge, the best way to achieve discipline and patience is doing your homework and having a plan of action. The final step is putting that plan of action to work. Even that won't guarantee success, but it will greatly increase the odds of winning in the financial markets. - -### **HOW TO COORDINATE TECHNICAL AND FUNDAMENTAL ANALYSIS** - -Despite the fact that technicians and fundamentalists are often at odds with one another, there are ways they can work together for mutual benefit. Market analysis can be approached from either direction. While I believe that technical factors do lead the known fundamentals, I also believe that any important market move must be caused by underlying fundamental factors. Therefore, it simply makes sense for a technician to have some awareness of the fundamental condition of a market. If nothing else, the technician can inquire from his or her fundamental counterpart as to what would have to happen fundamentally to justify a significant market move identified on a price chart. In addition, seeing how the market reacts to fundamental news can be used as an excellent technical indication. - -The fundamental analyst can use technical factors to confirm an analysis or as an alert that something important may be happening. The fundamentalist can consult a price chart or use a computer trend-following system as a filter to prevent him or her from assuming a position opposite an existing trend. Some unusual action on a price chart can act as an alert for the fundamental analyst and cause him or her to examine the fundamental situation a bit closer. During my years in the technical analysis department of a major brokerage firm, I often approached our fundamental department to discuss some market move that seemed imminent on the price charts. I often received responses like "that can never happen" or "no way." Very often, that same person was scrambling a couple of weeks later to find fundamental reasons to explain a sudden and "unexpected" market move. There's obviously room for much more coordination and cooperation in this area. - -### **CHARTERED MARKET TECHNICIAN (CMT)** - -A lot of people use technical analysis and offer opinions on the technical condition of the various markets. But are they really qualified to do so? How would you know? After all, you wouldn't go to a doctor who didn't have a medical degree on the wall. Nor would you consult a lawyer who hadn't passed the bar exam. Your accountant is undoubtedly a CTA. If you asked a security analyst for an assessment on a common stock, you would certainly make sure that he or she was a Chartered Financial Analyst (CFA). Why wouldn't you take the same precautions with a technical analyst? - -The Market Technicians Association (MTA) resolved this question by instituting a Chartered Market Technician (CMT) program. The CMT program is a three step examination process that qualifies the analyst to carry the CMT letters after his or her name. Most professional technical analysts have gone through the program. The next time someone offers you his or her technical opinion, ask to see the CMT. - -### **MARKET TECHNICIANS ASSOCIATION (MTA)** - -The Market Technicians Association (MTA) is the oldest and best known technical society in the world. It was founded in 1972 to encourage the exchange of technical ideas, educate the public and the investment community, and establish a code of ethics and professional standards among technical analysts. (On March 11, 1998 the MTA celebrated the 25th birthday of its incorporation. The event was highlighted by a special presentation at the New York monthly meeting by three of the organization's founding members —Ralph Acampora, John Brooks, and John Greeley.) MTA membership includes full-time technical analysts and other interested parties (called affiliates). Monthly meetings are held in New York (Market Technicians Association, Inc., One World Trade Center, Suite 4447, New York, NY 10048 (212) 912-0995, e-mail: shelleymta@aol.com), and an annual seminar is held each May at various locations around the country. Members have access to the MTA library and a computer bulletin board. A monthly newsletter and a periodic MTA Journal are published. Some regional chapters have even been formed. MTA members also become colleagues of the International Federation of Technical Analysts (IFTA). - -## **THE GLOBAL REACH OF TECHNICAL ANALYSIS** - -During the fall of 1985, a meeting was held in Japan with technical representatives of several different countries to draft a constitution for the International Federation of Technical Analysts (IFTA, Post Office Box 1347, New York, NY 10009 USA). Since then, the organization has grown to include technical analysis organizations from more than twenty countries. One of the nice things about being a member is that annual meetings are held in places like Australia, Japan, Paris, and Rome since a different national organization hosts each seminar. I'm proud to say that in 1992 I received the first award ever given at an IFTA conference for "outstanding contribution to global technical analysis." - -### **TECHNICAL ANALYSIS BY ANY NAME** - -After a century of use in this country (and 300 years in Japan), technical analysis is more popular than ever. Of course, it's not always called technical analysis. In my book, *The Visual Investor*, I called it *visual* analysis. That was simply an attempt to get people beyond the intimidating title of technical analysis and to get them to examine this valuable approach more closely. Whatever you want to call it, technical analysis is practiced under many names. A lot of financial organizations employ analysts whose job it is to number-crunch market prices to find stocks or stock groups that are expensive (overbought) or cheap (oversold). They're called quantitative analysts, but the numbers they crunch are often the same ones the technicians are crunching. The financial press has written about a "new" class of trader called "momentum" players. These traders move funds out of stocks and stock groups that are showing poor momentum and into those that are showing good momentum. They use a technique called relative strength. Of course, we recognize "momentum" and "relative strength" as technical terms. - -Then there are the brokerage firms' "fundamental" upgrades and downgrades. Have you noticed how often these "fundamental" changes take place the day after a significant "chart" breakout or breakdown? Economists, who certainly don't consider themselves technical analysts, use charts all the time to measure the direction of inflation, interest rates, and all sorts of economic indicators. And they talk about the "trend" of those charts. Even fundamental tools like the price/earnings ratio have a technical side to them. Anytime you introduce price into the equation, you're moving into the realm of technical analysis. Or when security analysts say the dividend yield of the stock market is too low, aren't they saying prices are too high? Isn't that the same thing as saying a market is overbought? - -Finally, there are the academics who have reinvented technical analysis under the new name of *Behavioral Finance.* For years, the academics espoused the Efficient Market Hypothesis to prove that technical analysis simply didn't work. No less an authority than the Federal Reserve Board has thrown some doubt on those ideas. - -### **FEDERAL RESERVE FINALLY APPROVES** - -During August of 1995, the Federal Reserve Bank of New York published a Staff Report under the title: "Head and Shoulders: Not Just a Flaky Pattern." The report was intended to examine the validity of the head and shoulders pattern in foreign exchange trading. (The first edition of this book was cited as one of the primary sources on technical analysis.) The opening sentence in the introduction reads: - -Technical analysis, the prediction of price movements based on past price movements, has been shown to generate statistically significant profits despite its incompatibility with most economists' notions of "efficient markets." (Federal Reserve Bank of New York, C.L. Osier and P.H. Kevin Chang, Staff Report No. 4, August 1995.) - -A more recent report, published in the fall of 1997 by the Federal Reserve Bank of St. Louis, also addresses the use of technical analysis and the relative merits of the Efficient Market Hypothesis. (*Technical Analysis of the Futures Markets* was again cited as a primary source of information on technical analysis.) Under the paragraph titled, "Rethinking the Efficient Markets Hypothesis," the author writes: - -The success of technical trading rules shown in the previous section is typical of a number of later studies showing that the simple efficient market hypothesis fails in important ways to describe how the foreign exchange market actually functions. While these results did not surprise market practitioners, they have helped persuade economists to examine features of the market…that might explain the profitability of technical analysis. (Neely) - -### **CONCLUSION** - -If imitation is the sincerest form of flattery, then market technicians should feel very flattered. *Technical analysis* is practiced under many different names, and often by those who may not realize they're using it. But it *is* being practiced. Technical analysis has also evolved. The introduction of *intermarket* analysis, for example, has changed the focus away from "single market" analysis to a more interdependent view of the financial markets. The idea that all global markets are linked isn't questioned much anymore either. That's why the universal language of technical analysis makes it especially useful in a world where the financial markets, here and abroad, have become so intertwined. In a world where computer technology and lightning-fast communications require quick responses, the ability to read the market's signals is more crucial than ever. And reading market signals is what technical analysis is all about. Charles Dow introduced technical analysis at the start of the twentieth century. As the twentieth century draws to a close, Mr. Dow - -w o u l d b e p r o u d o f w h a t h e s t a r t e d. - -# **APPENDICES** - -# **Appendix A: Advanced Technical Indicators\*** - -This appendix introduces several more advanced technical methods that can be used by themselves or with other technical studies. As with any technical approach, it is always recommended that investors do their own independent testing and research before actually investing. - -### **DEMAND INDEX (DI)** - -Most technicians will agree that volume analysis is an important ingredient in determining a market's direction. The *Demand Index* (DI) is one of the early volume indicators that was developed in the 1970s by James Sibbett. The formula is quite complex (see end of this appendix). The Demand Index is the ratio of buying pressure to selling pressure. When the buying pressure is greater than the selling pressure, the DI is above the zero line, which is positive. Greater selling pressure means the DI is below zero, which implies prices will move lower. Most traders also look for divergences between the DI and prices. - -Figure A.1 is a weekly chart of T-Bond futures from early 1994 until late 1997. From April to November 1994, the DI was mostly below the zero line as bonds declined from 104 to the 96 area. While prices made lower lows (line [A\),](#page-416-0) the DI formed higher lows (line B). This is a classic positive, or bullish divergence, which suggested that bond prices were bottoming. The divergence was confirmed when the DI moved above the zero line at point 1. The DI reached its highest level for this rally in late May 1995 at point 2, and then dropped for the next six weeks before crossing below the zero line at point 3. It stayed negative for five weeks before it again turned positive. On the next rally the DI formed a significantly lower high in late November at point 4. While the DI was lower (line D), the bond contract was almost six points higher (line C). This negative or bearish divergence warned of a price peak. - -**Figure A.1** *The Demand Index (DI), which incorporates price and volume, is shown here as a histogram. Values above zero are positive; below zero they are negative. Notice the bullish divergence in late 1994 and the bearish divergence in late 1995. (Courtesy MetaStock Equis International.*) - -This indicator can also be used with stocks. The weekly chart of General Motors (Figure A.2) shows the DI plotted as a line rather than a histogram. This allows for trendlines to more easily be drawn on the indicator. I have personally found trendline analysis of indicators to be quite valuable. Indicator [trendlines](#page-417-1) are often broken ahead of price trendlines. This was the case in late 1995 as the downtrend in the DI (line A) was broken a week before the corresponding price downtrend (line B). As this chart indicates, buying just one week earlier could have significantly improved the entry price. The DI also warned of a price high in mid-April 1996. While GM was making a new price high (line C), the DI had formed lower highs (line D). This warning signal came well ahead of the serious price decline in June and July. - -**Figure A.2** *The Demand Index (solid line) compared to a weekly chart of GM. Trendline breaks on the DI line often preceded trendline breaks on the price chart. Notice the negative (bearish) divergence in April 1996. (Courtesy MetaStock, Equis International.*) - -### **HERRICK PAYOFF INDEX (HPI)** - -This indicator was developed by the late John Herrick as a way of analyzing commodity futures through changes in the open interest. As discussed in Chapter 7, changes in the open interest can give traders important clues as to whether a market trend is well supported or not. - -The *Herrick Payoff Index* uses price, volume, and open interest to [determine](#page-153-0) money flow into or out of a given commodity. This helps the trader spot divergences between the price action and the open interest. This is often quite important as buying or selling panics can often be identified through analysis of the open interest by the Herrick Payoff Index. - -The most basic interpretation of the HPI is whether it is above or below the zero line. A positive value means that the HPI is projecting higher prices and that open interest is rising along with prices. Conversely, negative readings suggest that funds are flowing out of the commodity being analyzed. - -One of the more volatile commodity markets is coffee, featured in Figure A.3. During March and April of 1997, the HPI had four crossings of the zero line with the last positive signal in early April (B) lasting until early June. The - -HPI dropped below zero in June, and even though prices were well below the highs, coffee dropped another 70 cents. Once again the HPI turned positive in late July very close to the lows. Over the next two months there were two short term signals and then another longer term sell signal. This is characteristic of the HPI when used on the daily data as it will cross above and below the zero line several times before a longer lasting buy or sell signal is given. - -**Figure A.3** *The Herrick Payoff Index (HPI) shown as a histogram with coffee prices. HPI uses price, volume, and open interest in its calculation and is used in futures markets. Crossings above zero are buys (B); crossings below are sells (S).* - -The HPI, like the Demand Index, is most effective when used on the weekly data, as fewer false signals are evident. Divergence analysis can also be used to warn the trader of a change from positive to negative money flow. There are several good examples on the weekly T-Bond futures charts (Figure A.4) that covers approximately six years of trading. The HPI stayed positive from late 1992 until late 1993. The HPI peaked in early 1993 and, when bonds were almost 10 points higher (line A), the HPI was forming a lower high (line B). This negative [divergence](#page-419-0) warned bond traders of the decline in prices that took place in 1994. The HPI violated the zero line in late October of 1993, but then turned slightly positive in early 1994 before plunging back below the zero line. The HPI reached its lowest level in the first half of 1994 and bottomed well ahead of prices. As prices were making lower lows (line - -C), the HPI was forming higher lows and therefore a positive divergence (line D). The HPI moved back into positive territory in December 1994 as bonds were very close to their lows. A negative divergence was formed in late 1995 (line F), after bonds had rallied over 25 points from the late 1994 lows. The zero line was crossed several times in 1996 and early 1997 before the HPI moved firmly into positive territory. These two examples should illustrate why the HPI and its analysis of open interest can be helpful in analyzing a commodity market's direction. - -**Figure A.4** *A weekly version of Herrick Payoff Index with Treasury Bonds. Notice the bearish divergences in 1993 and 1995, and the bullish divergence in 1994.* - -### **STARC BANDS AND KELTNER CHANNELS** - -As discussed in Chapter 9, banding techniques have been used for many years. Two types that I prefer are based on the *Average True Range.* Despite this common factor, these two types of bands are used in very different ways. Average True R[ange](#page-186-0) is the average of true price ranges over x periods. *True Range* is the greatest distance from today's high to low, yesterday's close to today's high, or yesterday's close to today's low. See Welles Wilder's *New Concepts in Technical Trading Systems.* - -Manning Stoller, a well known expert in the commodity business, developed the Stoller Average Range Channels or *starc* bands. In his formula the 15 period *Average True Range* is doubled and added to or subtracted from a 6 period moving average (MA). The upper band is starc+; the lower is starc-. Movement outside of these bands is uncommon and indicates an extreme situation. In this manner they can be used as trading filters. When prices are near or above the starc+ band, it is a high risk time to buy and a low risk time to sell. Conversely, if prices are at or below the starc- band, then it is a high risk selling zone and a more favorable point to buy. - -The weekly continuation chart of gold futures (Figure A.5) is plotted with both the starc+ and starc- bands. In Feb. 1997 at point 1, gold prices slightly overshot the starc- band. Though the price action was weak, the stare bands indicated that this was not a good time to sell. By [waiting](#page-420-0), a better selling opportunity was likely to occur. Just three weeks later gold was \$22 higher and at the starc+ band (point 2). Point 2 was a low risk selling opportunity. In July (point 3), gold prices dropped well below the starc-band, but instead of declining further, prices moved sideways for the next 12 weeks. Gold prices then started to move lower from November to December 1997 and touched the starc- band three times (points 4). In all instances prices did stabilize or move higher for 1-2 weeks. These bands work well in all time frames even as short as 5 to 10 minute bar charts. Starc bands can help the trader avoid chasing the market, which almost always results in a poor entry price. - -**Figure A.5** *Starc bands plotted around a 6 week moving average of weekly gold prices. Points 1 and 3 show prices bouncing after dipping below the lower band. Point 2 shows prices falling after rising above the upper band.* - -The *Keltner channels* were originally developed by Chester Keltner in his 1960 book *How to Make Money in Commodities.* Linda Raschke, a very successful commodity trader, has reintroduced them to technicians. In her modification, the bands are also based on the *average true range (ATR*), but the ATR is calculated over 10 periods. This ATR value is then doubled and added to a 20 period exponential moving average for the plus band and subtracted from it for the minus band. - -The recommended use of the Keltner channels is much different from the starc bands. When prices close above the plus band, a positive signal is given as it indicates a breakout in upward volatility. Conversely, when prices close below the lower band, it is negative and indicates prices will move lower. In many respects, this is just a graphical representation of a four week channel breakout system discussed in Chapter 9. - -Figure A-6 is a daily chart of March 1998 copper futures. Prices closed below the minus band in late October 1997 at point 1. This indicated that prices should begin a new do[wntrend](#page-186-0) and copper prices dropped 16 cents in the next two months. - -**Figure A.6** *Keltner Channels plotted around a 20 day exponentially smoothed average of daily copper prices. With this indicator, moves below the lower channel (such as point 1) are interpreted as a sign of weakness.* - -There were many other closes below the minus band during this period. Until prices close above the plus band, the negative signal will stay in effect. The second chart is March 1998 coffee prices (Figure A.7) and illustrates a - -positive signal at point 1. After two consecutive closes above the plus band, prices then declined to the 20 period EMA. In a rising market the 20 period EMA should act as support. Several days after the EMA was touched (point 2), coffee prices began a dramatic 30 cent rise in just a few weeks. - -**Figure A.7** *Keltner Channels with a daily coffee chart. Point 1 shows prices breaking the upper channel which is a sign of strength. Notice that after that buy signal, prices found support at the 20 day exponential moving average (middle line) at point 2.* - -Both of these techniques offer an alternative approach to either percentage envelopes or standard deviation bands (like Bollinger Bands). Neither is presented as a stand-alone trading system but should be considered as additional tools of the trade. - -### **FORMULA FOR DEMAND INDEX** - -The Demand Index (DI) calculates two values, Buying Pressure (BP) and Selling Pressure (SP), and then takes a ratio of the two. DI is BP/SP. There are some slight variations in the formula. Here's one version: If prices rise: - -> BP=V or Volume SP=V/P where P is the % change in price - -If prices decline: - -BP=V/P where P is the % change in price SP=V or Volume - -Because P is a decimal (less than 1), P is modified by multiplying it by the constant K. - -$$ -P = P(K) -$$ - -K=(3 × C)/VA - -Where C is the closing price and VA (Volatility Average) is the 10 day average of a two day price range (highest high – lowest low). - -If BP > SP then DI=SP/BP - -The Demand Index is included on the MetaStock charting menu. - -\*This Appendix was prepared by Thomas E. Aspray. - -# **Appendix B: Market Profile\*** - -### **INTRODUCTION** - -The purpose of this writing is to illustrate what Market Profile is and to define its underlying principles. Before the early 1980s, the only technical tools available were the bar chart and the point and figure chart. Since then Market Profile® 1 was introduced to expand the arsenal of technical tools. Market Profile is essentially a statistical approach to the analysis of price data. 2 For those without a statistics background, a familiar example may be helpful. Consider [a](#page-438-0) group of students taking an exam. Typically, some score very high (say 90 or higher), some score very low (say 60 or lower), but most sc[or](#page-438-1)es tend to be clustered around the average score (say 75). A *histogram* can be used to depict the *frequency distribution* of these test scores in a "statistical picture" (Figure B.1). - -**Figure B.1** - -As can be seen, the most frequent score, or *modal* score, is 75 (6 students) while the *range* of scores is defined by the lowest and highest scores (55 and 95). Note how the scores distribute evenly around the modal score. For a perfectly *symmetric* distribution, the modal score will be equal to the *mean*, or average score. Next observe that the distribution is "bell-shaped," the telltale sign of a *normal* distribution. For a perfect normal distribution, specific *standard deviation* intervals correlate to specific numbers of - -observations. For example, if the test scores are, in fact, perfectly normally distributed, then 68.3% of these scores will fall within one (1) standard deviation of the mean. While actual data is unlikely to form a perfect normal distribution, it is often close enough that these relationships can be employed. - -Prices, like other physical measurements (e.g., school test grades, population heights, etc.), *distribute* around a mean price level as well. What is the Market Profile *graphic?* Visualize it as simply, a frequency distribution of prices displayed as a price histogram turned on its side (see Figures B.2a and B.2b). - -**Figure B.2a** *Traditional.* - -**Figure B.2b** *Flipped on its side.* - -The centerpiece of the Market Profile graphic is the (bell-shaped) *normal* curve used to display the evolving price distribution. Once the normal curve assumption is acknowledged, a modal or average price can be identified, a price dispersion (standard derivation) can be computed and probability statements can be made regarding the price distribution. For example, virtually all values fall within three (3) standard deviations of the average while about 70% (68.3% to be exact) fall within one (1) standard deviation of the average (see Figure B.3). - -Market Profile provides a picture of what's happening *here and now* in the marketplace. In its pursuit of promoting trade, the market is either in equilibrium or [moving](#page-426-1) toward it. The profile's natural tendency toward - -symmetry defines, in a simple way, the degree of balance (equilibrium) or imbalance (disequilibrium) that exists between buyers and sellers. As the market is dynamic, the profile *graphic* portrays equilibrium as periods of market balance—when price distributions are symmetric, and represents disequilibrium as periods of market imbalance—when price distributions are not symmetric or are skewed. - -**Figure B.3** *The profile graphic reveals that market activity is regularly normally distributed.* - -Market Profile is not a trading system nor does it provide trade recommendations. The aim of the profile graphic is to allow the user to witness a market's developing value on price *reoccurrence* over time. As such, Market Profile is a *decision support* tool requiring the user to exercise personal judgment in the trading process. - -## **MARKET PROFILE GRAPHIC** - -The Market Profile format organizes price and time into a visual representation of what happens over the course of a single session. It provides a logical framework for observing market behavior in the *present tense* displaying price distributions over a period of time. The price range evolves both vertically and horizontally throughout the session. How is a profile graphic constructed? - -Consider a 4 period bar chart (see Figure B.3a). This traditional bar chart can be converted to a profile graphic as follows: (1) assign a letter for each price within each period's price range, letter A for the 1 stperiod, B for the 2 nd, and so on (see Figure B.3b) and then (2) [collapse](#page-427-1) each price range to the leftmost or first column (see Figure B.3c). The completed profile graphic reflects prices on the left and period frequency of price occurrence on the right, represented by the [letter](#page-427-2)s A through D. - -**Figure B.3a** - - - -| Figure | B.3a | | -|--------|------|--| -| | | | -| | | | -| | | | -| | | | -| | | | -| | | | -| | | | -| | | | -| | | | -| | | | -| | | | - -Each letter represents a *Time Price Opportunity* or TPO to identify a specific price at which the market traded during a specific time period (e.g., in B period prices traded between 163 and 166). These TPOs are the basic units of analysis for the day's activity. In other words, each TPO is an *opportunity* created by the market at a certain *time* and certain *price.* Market Profile distributions are constructed of TPOs. The Chicago Board of Trade (CBOT) assigns a letter to each half-hour trading period on a 24 hour basis; uppercase letters A through X represent the half-hour periods from midnight to noon while lowercase letters from a through x represent the half-hour periods from noon to midnight. 3 - -### **MARKET [ST](#page-438-2)RUCTURE** - -When you visit a commodities trading pit on a busy day, you observe what is best described as "controlled chaos." Beneath the screaming and gesturing *locals* and other traders, there is a describable process. Think of the market as a place where participants with differing price needs and time constraints compete with each other to get business done. Emotions can run high as anxiety levels soar. - -The Market Profile concept was introduced by Mr. Steidlmayer in an attempt to help describe this process. As a CBOT floor trader (*local*) and student of market behavior, he observed recurring patterns of market activity, which ultimately lay the foundation for his understanding of the market. Since the CBOT trading floor conducts trade in an auction-like manner, he defined Market Profile principles in auction terms. For example, an off-the-floor trader would describe an advancing market as one that is *rallying* or *trading up*, whereas Mr. Steidlmayer would instead say something like, "the market continues to *auction up, advertising* for sellers to appear in order to *shut off* buying." - -| Price | | | | | -|-------|---|---|---|---| -| 168 | | | | | -| 167 | D | | | | -| 166 | B | c | D | | -| 165 | A | B | c | D | -| 164 | A | в | C | D | -| 163 | A | в | c | D | -| 162 | A | c | | | -| 161 | A | | | | -| 160 | | | | | -| 159 | | | | | - -**Figure B.3c** - -To explain why a trading pit auction process works the way it does, he invented some new terms unfamiliar to off-the-floor traders. He began with a definition of a market's purpose, which is to *facilitate* trade. Next, he defined some operational procedures, namely that the market operates in a *dual auction* mode as prices *rotate* around a fair or mean price area (i.e., similar to the way school grades were distributed). Lastly, he defined the behavior characteristics of market participants, namely that traders with a short term time frame seek a *fair* price, while traders with a longer term time frame seek an *advantageous* price. - -### **MARKET PROFILE ORGANIZING PRINCIPLES** - -Auction Setting: The purpose of the marketplace is to *facilitate* or promote trade. All market activity occurs within this auction setting. Initially, as price moves higher, more buying comes in, as price moves lower, more selling comes in. The market moves up to *shut off* buying (i.e., auctioning up until the last buyer buys) and moves down to *shut off* selling (i.e., auctioning down until the last seller sells). The market actually operates through a *dual auction* process. When price moves up and more buying comes in, the up-move *advertises* for an opposite response (i.e., selling) to stop the directional move. The opposite is true when price moves down. - -**Continuous Negotiation**: When a market moves directionally it establishes price parameters, an *unfair high* and an *unfair low*, and then trades between them to establish a *fair value* area. All trade takes place through this *negotiating process* and remains within these parameters until one side or the other side is eventually taken out (i.e., a new high or new low is formed). (see Figure B.4.) - -**Market Balance and Imbalance**: The market is either in equilibrium or working toward equilibrium between buyers and sellers. To facilitate trade, the [market](#page-430-0) moves from a state of balance (equilibrium) to one of *imbalance* (disequilibrium) and back to balance again. This pattern of market behavior occurs in all times frames, from intraday session activity to single session activity to aggregated or consolidated sessions activity which form the longer term auction. - -**Time Frames and Trader Behavior**: The concept of different time frames was introduced to help explain the behavioral patterns of market participants. Market activity is divided into two timeframe categories, short term and longer term. The short term activity is defined as *day time frame* activity where traders are forced to trade today (e.g., locals, day traders and options traders on expiration day fall into this category). With limited time to act, the short term trader is seeking a *fair* price. Short term buyers and sellers *do* trade with each other at the same time and at the same price. Longer term activity is defined by all *other timeframe* activity (e.g., commercials, swing traders, and all other position traders fall into this category). Not forced to trade today and with time as an ally, these traders can seek a more *advantageous price.* In pursuit of their interests, longer term buyers seek lower prices while longer term sellers seek higher prices. As their price objectives differ, longer term buyers and sellers generally *do not* trade with each other at the same price and at the same time. It is the behavioral interaction between these two distinct timeframe types of activity that causes the profile to develop as it does. - -**Figure B.4** - -**The Short Term Trader and Longer Term Trader Play Different Roles**: Short term and longer term traders play key, but different, roles in facilitating trade. A market's *initial balance* (i.e., a place where two-sided trade can occur) is usually established in the first hour of trade by short term buyers and sellers (day timeframe activity) in their pursuit of a fair price. Most of the day's activity occurs in the fair price or value area. Prices above and below this developed fair value area offer opportunity and are advantageous to longer term traders. With time on their side, longer term traders can either accept or reject prices away from fair value. By entering the market with large enough volume, longer term buyers and sellers can upset the *initial balance*, thereby extending the price range higher or lower. The longer term trader is responsible for the way the day's range develops and for the duration of the longer term auction. In other words, the role of the longer term trader is to move the market directionally. - -**Price and Value**: The distinction between price and value defines a market-generated opportunity. There are two kinds of prices: 1) those that are accepted—defined as a price area where the market trades over time and 2) those that are rejected—defined as a price area where the market spends very little time. A rejected price is considered excessive in the market—defined as an unfair high or unfair low. Price and value are all but synonymous for short term traders as they ordinarily trade in the fair value area. For longer term traders, however, the concept that price equals value is often inaccurate. Price - -is *observable* and *objective* while value is *perceived* and *subjective*, depending upon the particular needs of longer term traders. For example, a price at the top of today's range, while excessive or unfair for today, is *cheap* to the longer term trader who believes that prices next week will be much higher (i.e., today's price is *below* next week's anticipated value). - -**Figure B.5** *By combining daily consecutive profile graphics (upper) into a larger cumulative profile graphic (lower), an evolving picture of long term balance or imbalance emerges. (See explanation on page 489.*) - -The longer term trader distinguishes between price and value by accepting or rejecting current prices away from his perception of [fair](#page-436-0) value. Recall that rising prices advertise for sellers while falling prices advertise for buyers. When the longer term trader responds to an advertised price, this behavior is expected and is referred to as *responsive.* On the other hand, if the longer term trader did the opposite (i.e., buy after prices rose or sell after prices declined), then this unexpected activity is referred to as *initiating.* Classifying longer term activity as responsive or initiating relative to yesterday's or today's evolving value area provides anecdotal evidence of longer term trader confidence. The more confident the trader becomes, the more likely he is to take initiating action. - -### **RANGE DEVELOPMENT AND PROFILE PATTERNS** - -Since market activity is not arbitrary, it's not surprising that over time recognizable price patterns reveal themselves. A skillful trader able to anticipate such pattern development in its early stage may be able to capitalize. Mr. Steidlmayer loosely identifies the following daily *range development* patterns: - -- 1. A *normal day* occurs when the longer term trader is relatively inactive. The day's range is established in the *pioneer range* (defined as the first column of prices) during the session's first half-hour period of trade. The short term trader establishes the initial balance, the unfair high and low, and then prices rotate between these *parameters* for balance of the day (see Figure B.6: *Panel #1*—Orange Juice). -- 2. A *normal variation day* occurs when the longer term trader is more active and extends the range beyond the initial balance. In this instance, the short [term](#page-433-0) traders initial balance parameters do not hold and there is some directional movement which extends the range and sets a new high or new low parameter. As a rule, the range extension beyond the initial balance can be anywhere from a couple of ticks to double the initial balance. This profile type is probably the most common (see Figure B.6: *Panel #2*—Dow Jones Industrial Average). -- 3. A *trend day* occurs when the longer term trader extends the range successively further. In this instance, the range is considerably [more](#page-433-0) than double the initial balance with the longer term trader controlling direction as the market continues its search for a fair price. Here the market moves in one direction and closes at or near the directional extreme (see Figure B.6: *Panel #3*—Japanese Yen). -- 4. A *neutral day* occurs when the longer term trader extends the range after the initial balance in one direction, then reverses and extends the range in the opposite [direction.](#page-433-0) Neutral days indicate trader uncertainty and occur when the market probes or tests for price trend continuation or change (see Figure B.6: *Panel #4*—Cattle). - -**Figure B.6** - -### **TRACKING LONGER TERM MARKET ACTIVITY** - -With the exception of option sellers who profit when prices remain static, the profit strategy of most traders requires directional price movement. The trader wins when he gets the direction right and loses when he is incorrect. Because the longer term trader is responsible for determining the market's directional movement, we monitor this activity to help detect evidence of a price trend. After identifying and evaluating longer term trader activity, an educated conclusion regarding price direction can be reached. We begin the process by identifying the longer term trader's influence in today's session and then - -considering how that influence extends into the future. - -- **Influence in day's range development**: The profile graphic helps identify longer term trader behavior during daily range development. By monitoring longer term activity throughout the range, particularly at the *extremes*, at *range extension*, and after *value area* completion, we can determine whether longer term buyers or sellers are more active and hence control market direction. Activity at the extremes provides the clearest indication of longer term trader influence, followed by range extension and then value area buying and selling. - - **1.** *Extremes* are formed when the longer term trader competes with the short term trader for opportunities at a particular price level (which later becomes either the session high or low). A minimum of two single prints is required to establish an extreme. The more eager the longer term trader is in this price competition, the more the single prints and the longer the single print extreme. Anything less than two prints suggests that the longer term trader is not very interested in competing at that price. A *local* top or bottom is formed when only one single print defines the top or bottom of the range. This condition implies that the market offered a price opportunity which no one really wanted (i.e., no evidence of competition [see Figure B.7: *Panel #1*—Intel Corporation]. - - - -- **2.** *Range Extension* occurs when the longer term trader enters the market with enough volume to tip the initial balance and extend the range up or down. Range extension up indicates longer term buying while range extension *down* indicates longer term selling. However, there are occasions when both the longer term buyer and seller are active at a range extreme, but not at the same price and time (recall that longer term buyers and sellers generally do not trade with each other). For example, if an extreme is formed after a range extension up, the market moves up first to shut off buying and then moves down to shut off selling. This is an example of both longer term buyers and sellers trading in the same price area but at different times. Both kinds of activity at the extremes are identified to evaluate the impact of longer term buying and selling (see Figure B.7: *Panel #2*—Coffee). -- 3. The *Value Area* is determined each trading session by price rotations - -around the modal price (i.e., the price with the highest TPO count or the *fairest* price). The value area is computed by counting 70% of all TPOs surrounding the fairest price. In other words, the value area is an estimate of fair value which is approximated by one standard deviation of the session's trading volume (recall the student example earlier). When a longer term trader makes a trade in the value area, he is buying low or selling high in relation to a longer term view, not in relation to today's value. This behavior creates an imbalance in today's value area. Longer term trader activity is measured by counting TPOs. The following procedure can be used to determine which side contains the longer term imbalance, 1) a line is drawn through the fairest price, and 2) TPOs are counted on either side of the fairest price until a single print is encountered. The imbalance is assigned to the side with the smaller number of TPOs because the longer term trader activity represents the smaller percentage of total trade in the value area. For example, if the TPO count was 22 above and 12 below the fairest price, that would indicate net TPO selling with a mild bias toward lower prices (see Figure B.7: *Panel #3*— S&P 500 Index). Note that TPO buying and selling in the value area *is not applicable on trend days*, as the market is still in search of a fair [value](#page-435-0) area. - -After identifying and evaluating longer term trader activity correctly in today's profile graphic, the user can readily determine whether longer term buyers or sellers were in control of the current trading session. - -**Influence beyond today**: The profile graphic also helps identify longer term trader behavior beyond today's range development. A key goal of the trader is to determine whether the current market price trend will continue or is likely to change. A change in market direction is a *reversal* of the current price trend. The standard technical approach to trend assessment, without Market Profile, is to draw an appropriate trendline and monitor subsequent price action against it. Unless the trendline is violated, the current price trend is expected to continue. Trendline analysis is the most important of basic technical tools, particularly given its universal usage and applicability to different time intervals (i.e., hourly, daily, weekly, monthly, etc.). - -Market Profile, on the other hand, offers an alternative approach to traditional trend analysis by evaluating market activity over different time periods. In its simplest form, an evaluation of the profile graphic on consecutive days can help define the start or continuation of the short term price trend. For example, if today's value area is higher than - -yesterday's value area, then the current market price trend is up. Moreover, if tomorrow's value area is higher than today's, then the current market uptrend has continued. By monitoring market activity in this fashion, the trader is able to readily identify trend continuation or change. Similarly by combining daily consecutive profile graphics into a larger cumulative profile graphic, an evolving picture of longer term balance or imbalance emerges. The profile graphic in Figure B.5 (*Sugar*) on page 483 illustrate this point. A cursory review of the individual sessions ( 2⁄ 10—2⁄ 13) in the upper panel suggest an uptrending market without a hint of reversal. When these four (4) consecutive [sessio](#page-431-0)ns are co[mbined](#page-431-1) (lower panel), however, a cumulative balanced picture springs forth. Once balanced, a market moves to a state of imbalance which, more often than not, begins after a final test at the fairest price. - -### **CONCLUSION** - -The Market Profile method can be used to analyze any price data series for which continuous transaction activity is available. This includes listed and unlisted equities, U.S. government notes and bonds (prices or yields), commodity futures and options, where applicable. The *profile graphic* presents the movement of prices, per unit of time, in two dimensions vertically (i.e., directionally) and horizontally (i.e., frequency of occurrence). When price action is viewed in this way, a picture of *price discovery* unfolds which is unavailable in the traditional one dimensional (vertical) bar chart. The profile graphic offers unique advantages over the standard bar chart: - -- The *symmetry* attribute of the profile graphic allows the trader to assess the market's state of *balance* (or *imbalance*) in any timeframe. When a market is symmetric, a condition of balance or equilibrium exists between buyers and sellers. A market imbalance implies price trend continuation, as the market works toward a new equilibrium. Market balance, however, is fleeting and implies market *change* or a directional move (either up or down) is likely to occur, a signal for traders to consider employing trend following methodologies. -- Every trend change occurs at a single moment in time, not conveniently at the end of the hour, day, week or month. The profile graphic can be used to more accurately identify that specific time where control changed hands between buyers and sellers. By pinning down such control shifts, the profile graphic allows the trader to identify key support and resistance levels. - -In short, the profile graphic provides a substantial amount of price information per unit of time, allowing the trader to identify patterns and dynamics which would not be readily apparent using other methods. - -\*This appendix was prepared by Dennis C. Hynes. - -1The Market Profile® is a registered trademark of the Chicago Board of Tra[de](#page-424-1) (CBOT), hereafter referred to as Market Profile or the *profile.* The concept was developed by J. Peter Steidlmayer, formerly of the CBOT. For furt[h](#page-424-2)er information on the subject, contact the CBOT or read Mr. Steidlmayer's latest book: *141 WEST JACKSON*—1996. - -2Originally introduced for commodity futures prices, the format can be used for any price data series where continuous transaction activity is available. - -[3](#page-424-3)Letter assignments can vary between vendors. For example, CQG assigns uppercase letters **A** through **Z** from 8:00 am CST while lowercase letters from **a** through **z** from 10:00 p.m. CST. - -# **Appendix C: The Essentials of Building a Trading System\*** - -Trading system development is part art, part science, and part common sense. Our goal is not to develop a system that achieves the highest returns using historical data, but to formulate a sound concept that has performed reasonably well in the past and can be expected to continue to perform reasonably well in the future. - -Ideally, we would prefer an approach that is 100% mechanical, increasing the odds that past performance can be replicated in the future. Mechanical means objective: if 10 people follow the same rules and achieve the same results, those rules are said to be objective. It does not matter whether a mechanical system is written on paper or entered into a computer. - -Here, however, we'll assume that we are using a computer and will use the terms "mechanical" and "computerized" interchangeably. This does not imply that a computer is mandatory for trading system development, although it certainly helps. - -The mechanical approach offers us three main benefits: - -- **We can back test ideas before trading them.** A computer allows us to test ideas on historical data rather than on hard earned cash. By helping us see how a system would have performed in the past, it allows us to make better decisions when it really counts—in the present. -- **We can be more objective and less emotional.** Most people have trouble applying their objective analysis to actual trading situations. Analysis (where we have no money at risk) is easy, trading (where we have money at risk) is stressful. Therefore, why not let the computer pull the trigger for us? It is free of human emotion and will do exactly what we had instructed it to do at the time when we developed our system. -- **We can do more work, increasing our opportunities.** A mechanical approach takes less time to apply than a subjective one, which allows us to cover more markets, trade more systems, and analyze more time frames each day. This is especially true for those of us who use a - -computer, since it can work faster and longer than we can, without losing its concentration. - -### **5 STEP PLAN** - -- 1. Start with a concept -- 2. Turn it into a set of objective rules -- 3. Visually check it out on the charts -- 4. Formally test it with a computer -- 5. Evaluate the results - -### **STEP 1: START WITH A CONCEPT (AN IDEA)** - -Develop your own concepts of how markets work. You can begin by looking at as many charts as you can, trying to identify moving average crossovers, oscillator configurations, price patterns or other pieces of objective evidence which precede major market moves. Also attempt to recognize clues that provide advance warning on moves that are likely to fail. I studied chart after chart after chart in the hope of finding such answers. This "visual" approach has worked for me, and I highly recommend it. - -In addition to studying price charts and reading books such as this one, I suggest you read about trading systems and study what others have done. Although no one is going to reveal the "Holy Grail" to you, there is a great deal of useful information out there. Most importantly, think for yourself. I have found that the most profitable ideas are rarely original, but frequently our own. - -Most of the successful trading systems are trend following. Counter trend systems should not be overlooked, however, because they bring a degree of negative correlation to the table. This means that when one system is making money, the other is losing money, resulting in a smoother equity curve for the two systems combined, than for either one alone. - -#### **Principles of Good Concept Design** - -Good concepts usually make good sense. If a concept seems to work, but makes little sense, you may be sliding into the realm of coincidence, and the odds of this concept continuing to work in the future diminishes considerably. Your concepts must fit your personality in order to give you the discipline to follow them even when they are losing money (i.e. during periods of drawdown). Your concepts should be straightforward and objective, and if - -trend following, should trade with the major trend, let profits run and cut losses short. Most importantly, your concepts must make money in the long run (i.e. they must have a positive expectation). - -Designing entries is hard, but designing exits is harder and more important. Entry logic is fairly straightforward, but exits have to take various contingencies into account, such as how fast to cut losses or what to do with accumulated profits. I prefer systems that do not reverse automatically—I like to exit a trade first, before putting on another trade in the opposite direction. Work hard to improve your exits, and your returns will improve relative to your risk. - -Another suggestion—try to optimize as little as possible. Optimization using historical data often leads one to expect unrealistic returns that cannot be replicated in real trading. Try to use few parameters and apply the same technique across a number of different markets. This will improve your chances of long run success, by reducing the pitfalls of over optimization. - -The three main categories of trading systems are: - -- **Trend following.** These systems trade in the direction of the major trend, buying after the bottom and selling after the top. Moving averages and Donchian's weekly rule are popular methodologies among money managers. -- **Counter trend** - - Support/Resistance. Buy a decline into support; sell a rally into resistance. - - Retracements. Here we buy pullbacks in a bull market and sell rallies in a bear market. For example, buy a 50% pullback of the last advance, but only if the major trend remains up. The danger of such systems is that you never know how far a retracement will go and it becomes difficult to implement an acceptable exit technique. - - Oscillators. The idea is to buy when the oscillator is oversold and to sell when it is overbought. If divergence between the price series and the oscillator is also present, a much stronger signal is given. However, it is usually best to wait for some sign of a price reversal before buying or selling. -- **Pattern recognition** (visual and statistical). Examples include the highly reliable head and shoulders formation (visual), and seasonal price patterns (statistical). - -### **STEP 2: TURN YOUR IDEA INTO A SET OF OBJECTIVE RULES** - -This is the most difficult step in our 5 step plan, much more difficult than many of us would at first expect! To complete this step successfully, we must express our idea in such objective terms that 100 people following our rules will all arrive at exactly the same conclusions. - -Determine what our system is supposed to do and how it will do it. It is with this step that we produce the details needed to accomplish the programming task. We need to take the overall problem and break it down into more and more detail until we finalize all the details. - -## **STEP 3: VISUALLY CHECK IT OUT ON THE CHARTS** - -Following the explicit rules we just determined in Step 2, let us visually check the trading signals that are produced on a price chart. This is an informal process, meant to achieve two results: first, we want to see whether our idea has been stated properly; and second, before writing complicated computer code, we want some proof that the idea is a potentially profitable one. - -## **STEP 4: FORMALLY TEST IT WITH A COMPUTER** - -Now its time to convert our logic into computer code. For my own work, I use a program called TradeStation®, Omega Research, Inc. in Miami, FL. TradeStation is the most comprehensive technical analysis software package available for formulating and testing trading systems. It brings together everything from the visualization of your idea, to assistance in trading your system in real time. - -Writing code in any computer language is no easy task and TradeStation's EasyLanguage™ is no exception. The job with EasyLanguage, however, is greatly simplified because of the program's user friendly editor and the inclusion of many built in functions and plenty of sample code. See Figure C.1. - -Once our program has been written, we then move into the testing phase. To begin with, we must choose one or more data series to test. For stock [traders](#page-444-0) this is an easy task. Futures traders, however, are faced with contracts that expire after a relatively short period of time. I like to do my initial testing - -using a continuous (spread adjusted) price series popularized by Jack Schwager. (*Schwager on Futures: Technical Analysis*, Wiley, 1996.) If those results look promising, I then move on to actual contracts. - -Next, we must decide how much data to use when building our system. I use the entire data series, without saving any for out-of-sample testing (building your system on part of the data and then testing it on the remaining "unseen" data). Many experts would disagree with this approach, but I believe it to be the best with my methodology that relies on good solid concepts, virtually no optimization, and a testing procedure that covers a wide range of parameter sets and markets. I start with a methodology that I believe to be sound and then test it to either prove or disprove my theory. I have found that most individuals do the reverse, they test a data series to arrive at a trading system. - -I do not account for transaction costs (slippage and commissions) when testing systems, but instead factor them in at the end. I believe that this keeps the evaluation process more pure and allows my results to remain useful should certain assumptions change in the future. - -I require my systems to work across: - -**Different sets of parameters.** If I were considering using a 5/20 moving average crossover system, then I would expect 6/18, 6/23, 4/21, and 5/19 to also perform reasonably well. If not, I immediately become skeptical of the 5/20 results. - -**Figure C.1** (*EasyLanguage Code): This EasyLanguage code was written using TradeStation's Power Editor™. It has the look—and power—of a full blown programming language. See Figures C.2 and C.3 for the results on this trend following system described by Martin Zweig.* - -- **Different periods of time** (e.g. 1990-95 and [1981-86\).](#page-447-0) A s[ystem](#page-447-1) that tests well in the Japanese Yen over a recent five year period should also test reasonably well over any other five year interval. This is another area where I appear to hold the minority point of view. -- **Many different markets.** A system that has worked well in crude oil should also work well in heating oil and unleaded gasoline over the same period of time. If not, I will look for an explanation and will usually discard the system. I go even further than this, however, and test that same system across my entire database of markets, expecting it to - -perform well in the majority of them. - -Once our testing is complete, let us visually inspect the computer generated trading signals on a price chart to ensure that the system does what we intended it to do. TradeStation facilitates this process by placing buy and sell arrows directly on the chart for us! If the system does not do what it is supposed to do, we need to make the necessary corrections to the code and test it again. Keep in mind that very few ideas will test out profitably, usually less than 5%. And, for one reason or another, most of these "successful" ideas will not even be tradable. - -### **STEP 5: EVALUATE RESULTS** - -Let us try to understand the concept behind our trading system. Does it make sense or is it just a coincidence? Analyze the equity curve. Can we live through the drawdowns? Evaluate the system on a trade-by-trade basis. What happens if a signal is a bad one? How quickly does the system exit from losers? How long does it stay with the winners? Make sure we are completely comfortable with the test results, otherwise we will not be able to trade this system in real time. - -Three key TradeStation statistics to analyze are: - -- **Profit factor.** Equals *Gross profit* on winning trades/Gross *loss* on losing trades. This statistic tells us how many dollars our system made for every \$1 it lost, and is a measure of risk. Long term traders should aim for profit factors of 2.00 or higher. Short term traders can accept slightly lower numbers. -- **Avg trade (win & loss).** This is our system's mathematical expectation. It should at least be high enough to cover transaction costs (slippage and commissions); otherwise we will be losing money. -- **Max intraday drawdown.** This is the biggest drop, in dollar terms, from an equity peak to an equity trough. I prefer to do this calculation on a percentage basis. I also differentiate between drawdowns from a standing start (where I am losing money from my own pocket) versus drawdowns from an equity peak (where I am giving back profits taken from the markets). I am usually more lenient with the latter. - -### **MONEY MANAGEMENT** - -Money management, while outside the scope of this appendix, is an extremely - -important topic. It is the key to profitable trading, every bit as important as a good trading system. - -Money management techniques should be well thought out. Accept the fact that losses are part of the game. Control your downside and profits will take care of themselves. - -In this area, practice diversification as much as possible. Diversification will enable you to increase your returns while holding your risk constant, or decrease your risk while holding your returns constant. Diversify among markets, systems, parameters, and time frames. - -### **CONCLUSION** - -We have discussed the basic philosophy of trading systems and why objective is better than subjective. We covered the three main benefits of a computerized approach and designed a 5 step plan for building a trading system. And last, but not least, we touched upon the importance of money management and diversification. - -Trading systems can improve your performance and help to make you a successful trader. The reasons for that are clear: - -- they force you to do your homework *before* making a trade -- they provide a disciplined framework, making it easier for you to follow the rules -- they enable you to increase your level of diversification - -With lots of hard work and dedication, anyone can build a successful trading system. It is not easy, but it certainly is within reach. As with most things in life, what you get out of this effort will be directly related to what you put into it. (See Figures C.2 and C.3.) - -**Figure C.2** (*Price Chart): This trading system was designed to be applied to a weekly chart of the Value Line Composite Index (VLCI), but also tested well on a daily chart of the VLCI and on both weekly and daily charts in other markets, votes of confidence in the underlying concept. This is the system described in Figure C.1.* - - - -| UMBook Four%Model Value Line Geometric - UNDE-Weekly | | 08/30/61 - 02/08/98 | | -|------------------------------------------------------|----------|---------------------------------|---------------| -| | | Performance Summary: All Trades | | -| Total net profit | 718.01 | Open position P/L | 0.00 | -| Gross profit | 1118.15 | Gross loss | $-400.14$ | -| Total # of trades | 137 | Percent profitable | 49% | -| Number winning trades | 67 | Number losing trades | 70 | -| Largest winning trade | 78.06 | Largest losing trade | $-15.95$ | -| Average winning trade | 16.69 | Average losing trade | \$
$-5.72$ | -| Ratio avg win/avg loss | 2.92 | Avg trade(win & loss) | 5.24 | -| Max consec, winners | | Max consec. losers | | -| Avg # bars in winners | 21 | Avg # bars in losers | | -| Max intraday drawdown | $-45.01$ | | | -| Profit factor | 2.79 | Max # contracts held | | -| Account size required | 45.01 | Return on account | 1595% | - -**Figure C.3** (*Performance Summary): Here is a 36 year Performance Summary of the system shown in Figures C.1 and C.2. Performance over the last 12 years has been consistent with the overall results. The Profit factor, Avg trade (win and loss) and Max intraday drawdown are all excellent* - -\*This appendix was prepared by Fred G. Schutzman. - -# **Appendix D: Continuous Futures Contracts\*** - -With a clean database of "raw" commodity data, there are numerous types of contracts that can be gleaned from the raw data, such as: Nearest Contracts, Next Contracts, Gann Contracts, and Continuous Contracts. Following, are ideas for constructing these futures contracts derivatives. The symbols used are for illustration purposes only. These continuous contracts can be created through the Dial Data Service (56 Pine Street, New York, NY 10005, [212] 422-1600.) - -### **NEAREST CONTRACT** - -A nearest contract is primarily used by traders who just want a large file of continuous data made up of actual trading prices. They are content with the data going to expiration and then rolling over automatically. - -It is quite probable that no one trades the nearest contract within 15 to 30 days of expiration. This is because the liquidity dries up very fast in the latter days of a contract. The number of days before expiration that an individual rolls over to the next contract is a function of the commodity that is being traded (the number of months till the next contract), and the individual's trading style. It is quite conceivable that the same individual will rollover at different times for different commodities. - -When to rollover to the next contract will more than likely be based upon the current contract's volume. When it begins to erode, that is the time to roll forward. - -Therefore, one should have available a choice as to when to rollover his Nearest Contract. Remember, Nearest Contracts are made up of actual data. Here are some examples: Portfolio Manager A is content to rollover at expiration; so all he wants is the "standard" Nearest Contract with symbol TRNE00 (Treasury Bonds). Manager A is probably managing money and needs equity calculations which he can derive from the data. Trader B feels - -that trading in the month of expiration is not liquid enough for him; so he wants his Nearest Contract to roll over 15 days prior to expiration—the symbol could be TRNE15. Analyst C would like to evaluate different rollover dates, so he might like to download multiple Nearest Contracts, such as: TRNE00, TRNE05, TRNE12, and TRNE21 (which roll-over 5, 12, and 21 days before expiration). - -Keep in mind that all of these contracts are Nearest Contracts and contain actual contract data. The only difference is which actual contract the data comes from. - -### **NEXT CONTRACT** - -A Next Contract is a unique offspring of the Nearest Contract. It is exactly the same as the Nearest Contract except that it is *always* the contract that follows the Nearest Contract. In other words, if the Nearest Contract is using December data for T-Bonds (TR), then the Next Contract is using data from the March T-Bond contract. When the December contract expires, the Nearest rolls to the March and the Next rolls to the June contract. This is defined as the Next-1 contract. - -From this concept, another Next Contract is available, called a Next-2. Here, the data is always coming from the contract that is two contracts away from the Nearest Contract. Keeping with the above example, if the Nearest is using data from the December contract, the Next-2 Contract is using data from the June contract. When the December contract expires, the Nearest begins to use data from the March contract and the Next-2 Contract uses data from the September contract and so on. - -Ticker symbols for the Next contracts are: TRNXT1 and TRNXT2. Of course, the actual futures ticker will be used instead of the TR used in this example. - -### **GANN CONTRACT** - -Gann Contracts refer to the use of a specific contract month and rolling over only to the same contract in the next year. For example, July Wheat would be used until the July contract expires, then the Gann Contract would start using data from the July Wheat contract of the next year. - -Examples of ticker symbols for Gann Contracts are: W07GN, GC04GN, JY12GN, etc. (representing July Wheat, April gold, December Japanese yen). - -## **CONTINUOUS CONTRACTS** - -Continuous Contracts were developed to help analysts overcome the problem of liquidity dry up and premium (or discount) gaps in futures data. This becomes a problem whenever an analyst is testing a trading model or system over many years of data. It allows for a continuous stream of data with compensation being made for rollover jumps in price trends. - -## **CONSTANT FORWARD CONTINUOUS CONTRACTS** - -A Constant Forward Continuous Contract looks a constant length of time into the future. It uses more than one contract to do this. A common method is to use the nearest two contracts and do a linear extrapolation of the data. (See Figure D.1.) - -**Figure D.1** *A visual representation of a continuous contract.* - -One possibility is to give the futures trader (as with the Nearest Contracts) the ability to construct his own Constant Forward Continuous Contract. Three things are needed to do this: The commodity symbol, the number of contracts he wants used in the calculation, and the number of weeks into the futures he wants to look. For instance, if he wanted T-Bonds, using 3 of the nearest contracts, and looking 14 weeks into the future, the - -symbol could be: TRCF314. TR is the symbol, CF is for Continuous (Forward Looking), 3 is the number of contracts used, and 14 is the number of weeks the price is projected. - -The mechanics of this are fairly simple. First, a fixed rollover date would need to be set for each commodity. A good one to start with could be 10 days prior to expiration. What is important is that there is a rollover sometime prior to actual expiration. Second, the number of contracts used will never be less than 2 and probably never greater than 4. The number of weeks used should probably always be greater that 3 and could go up to 40 in some cases. - -Example: This is the method used by Commodity Systems, Inc. (See *Perpetual Contract* in Chapter 8.) - -T-Bonds will be used again, because they have a uniform expiration cycle of every 3 months. Let's say a trader wants a Continuous Contract of T-Bonds using the 2 nearest [month](#page-174-0)s and looking 12 weeks into the future (symbol=TRCF212). Today's date is December 1. A graphical portrayal makes this easier to understand (see Figure D.1). The vertical axis is price and the horizontal axis is time. Today's date is marked on the horizontal axis and the expiration dates of the two nearest contracts (December and March), are also marked. He wants to look 12 w[eeks](#page-451-2) into the future so a mark is made 12 weeks from today which is about February 25. The close price of the December contract was 88.25 and the close of the March contract was 87.75 These points are then put above their expiration dates at the corresponding prices. Then a linear extrapolation is made by merely drawing a line between the two points. The slope of this line will vary up and down depending upon the outlook for long term interest rates (in this T-Bond example). In this particular example the outlook is for higher rates because the March futures price is lower than the December price. - -To find the value of the TRCF212 close price for today, find the point on the horizontal axis that is 12 weeks from today (Feb 25th) and go up to the line drawn on the chart. Then from the line go to the right and that is the price of the close for this Constant Forward Continuous Contract (about 87.91). You can also visually see from the chart that the March contract is carrying more weight than the December contract because the point of interception is closer to March. This method can be done on the Open, High, Low, and Close in the exact manner. Of course, a computer does it mathematically; this is just a visual explanation of how a Perpetual Contract is constructed. - -\*This appendix was prepared by Greg Morris. - -# **Glossary** - -- **Advance-decline line**: One of the most widely used indicators to measure the breadth of a stock market advance or decline. Each day (or week) the number of advancing issues is compared to the number of declining issues. If advances outnumber declines, the net total is added to the previous cumulative total. If declines outnumber advances, the net difference is subtracted from the previous cumulative total. The advancedecline line is usually compared to a popular stock average, such as the Dow Jones Industrial Average. They should trend in the same direction. When the advance-decline line begins to diverge from the stock average, an early indication is given of a possible trend reversal. -- **Arms index**: Developed by Richard Arms, this contrary indicator is a ratio of the average volume of declining stocks divided by the average volume of advancing stocks. A reading below 1.0 indicates more volume in rising stocks. A reading above 1.0 reflects more volume in declining issues. A 10 day average of the Arms index over 1.20 is oversold, while a 10 day average below .70 is overbought. -- **Ascending triangle**: A sideways price pattern between two converging trendlines, in which the lower line is rising while the upper line is flat. This is generally a bullish pattern. (*See* Triangles.) -- **Bar chart**: On a daily bar chart, each bar represents one day's activity. The vertical bar is drawn from the day's highest price to the day's lowest price (the range). A tic to the left of the bar marks the opening price, while a tic to the right of the bar marks the closing price. Bar charts can be constructed for any time period, including monthly, weekly, hourly, and minute periods. -- **Bollinger bands**: Developed by John Bollinger, this indicator plots trading bands two standard deviations above and below a 20 period moving average. Prices will often meet resistance at the upper band and support at the lower band. - -- **Breakaway gap**: A price gap that forms on the completion of an important price pattern. A breakaway gap usually signals the beginning of an important price move. (*See* Gaps.) -- **Channel line**: Straight lines drawn parallel to the basic trendline. In an uptrend, the channel line slants up to the right and is drawn above rally peaks; in a downtrend, the channel line is drawn below price troughs and slants down to the right. Prices will often meet resistance at rising channel lines and support at falling channel lines. -- **Confirmation**: Having as many market factors as possible agreeing with one another. For example, if prices and volume are rising together, volume is confirming the price action. The opposite of confirmation is divergence. -- **Continuation patterns**: Price formations that imply a pause or consolidation in the prevailing trend. The most common types are triangles, flags, and pennants. -- **Descending triangle**: A sideways price pattern between two converging trendlines, in which the upper line is declining while the lower line is flat. This is generally a bearish pattern. (*See* Triangles.) -- Divergence: A situation where two indicators are not confirming each other. For example, in oscillator analysis, prices trend higher while an oscillator starts to drop. Divergence usually warns of a trend reversal. (*See* Confirmation.) -- **Double top**: This price pattern displays two prominent peaks. The reversal is complete when the middle trough is broken. The double bottom is a mirror image of the top. -- **Down trendline**: A straight line drawn down and to the right above successive rally peaks. A violation of the down trendline usually signals a reversal of the downtrend. (*See* Trendlines.) -- **Dow Theory**: One of the oldest and most highly regarded technical theories. A Dow Theory buy signal is given when the Dow Industrial and Dow Transportation Averages close above a prior rally peak. A sell signal is given when both averages close below a prior reaction low. -- **Elliott wave analysis**: An approach to market analysis that is based on repetitive wave patterns and the Fibonacci number sequence. An ideal Elliott wave pattern shows a five wave advance followed by a 3-wave - -decline. (*See* Fibonacci numbers). - -- **Envelopes**: Lines placed at fixed percentages above and below a moving average line. Envelopes help determine when a market has traveled too far from its moving average and is overextended. -- **Exhaustion gap**: A price gap that occurs at the end of an important trend, and signals that the trend is ending. (*See* Gaps.) -- **Exponential smoothing**: A moving average that uses all data points, but gives greater weight to more recent price data. (*See* Moving average.) -- **Fibonacci numbers**: The Fibonacci number sequence (1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144…) is constructed by adding the first two numbers to arrive at the third. The ratio of any number to the next larger number is 62 percent, which is a popular Fibonacci retracement number. The inverse of 62 percent, which is 38 percent, is also used as a Fibonacci retracement number. The ratio of any number to the next smaller number is 1.62 percent, which is used to arrive at Fibonacci price targets. (*See* Elliott wave analysis). -- **Flag**: A continuation price pattern, generally lasting less than three weeks, which resembles a parallelogram that slopes against the prevailing trend. The flag represents a minor pause in a dynamic price trend. (*See* Pennant.) -- **Fundamental analysis**: The opposite of technical analysis. Fundamental analysis relies on economic supply and demand information, as opposed to market activity. -- **Gaps**: Gaps are spaces left on the bar chart where no trading has taken place. An up gap is formed when the lowest price on a trading day is higher than the highest high of the previous day. A down gap is formed when the highest price on a day is lower than the lowest price of the prior day. An up gap is usually a sign of market strength, while a down gap is a sign of market weakness. Three types of gaps are breakaway, runaway (also called measuring), and exhaustion gaps. -- **Head and shoulders**: The best known of the reversal patterns. At a market top, three prominent peaks are formed with the middle peak (or head) slightly higher than the two other peaks (shoulders). When the trendline (neckline) connecting the two intervening troughs is broken, the pattern is complete. A bottom pattern is a mirror image of a top and is called an inverse head and shoulders. - -- **Intermarket analysis**: An additional aspect of market analysis that takes into consideration the price action of related market sectors. The four sectors are currencies, commodities, bonds, and stocks. International markets are also included. This approach is based on the premise that all markets are interrelated and impact on one another. -- **Island reversal**: A combination of an exhaustion gap in one direction and a breakaway gap in the other direction within a few days. Toward the end of an uptrend, for example, prices gap upward and then downward within a few days. The result is usually two or three trading days standing alone with gaps on either side. The island reversal usually signals a trend reversal. (*See* Gaps.) -- **Key reversal day**: In an uptrend, this one day pattern occurs when prices open in new highs, and then close below the previous day's closing price. In a downtrend, prices open lower and then close higher. The wider the price range on the key reversal day and the heavier the volume, the greater the odds that a reversal is taking place. (*See* Weekly Reversal.) -- **Line charts**: Price charts that connect the closing prices of a given market over a span of time. The result is a curving line on the chart. This type of chart is most useful with overlay or comparison charts that are commonly employed in intermarket analysis. It is also used for visual trend analysis of open end mutual funds. -- **MACD**: Developed by Gerald Appel, the moving average convergence divergence system shows two lines. The first (MACD) line is the difference between two exponential moving averages (usually 12 and 26 periods) of closing prices. The second (signal) line is usually a 9 period EMA of the first (MACD) line. Signals are given when the two lines cross. -- **MACD histogram**: A variation of the MACD system that plots the difference between the signal and MACD lines. Changes in the spread between the two lines can be spotted faster, leading to earlier trading signals. -- **McClellan oscillator**: Developed by Sherman McClellan, this oscillator is the difference between the 19 day (10% trend) and the 39 day (5% trend) exponentially smoothed averages of the daily net advance decline figures. Crossings above the zero line are positive and below zero are negative. Readings above +100 are overbought while readings below -100 are oversold. - -- **McClellan summation index**: A cumulative sum of all daily McClellan oscillator readings that provides longer range analysis of market breadth. Used in the same way as an advance-decline line. -- **Momentum**: A technique used to construct an overbought-oversold oscillator. Momentum measures price differences over a selected span of time. To construct a 10 day momentum line, the closing price 10 days earlier is subtracted from the latest price. The resulting positive or negative value is plotted above or below a zero line. (*See* Oscillators.) -- **Moving average**: A trend following indicator that works best in a trending environment. Moving averages smooth out price action but operate with a time lag. A simple 10 day moving average of a stock, for example, adds up the last 10 days' closing prices and divides the total by 10. That procedure is repeated each day. Any number of moving averages can be employed, with different time spans, to generate buy and sell signals. When only one average is employed, a buy signal is given when the price closes above the average. When two averages are employed, a buy signal is given when the shorter average crosses above the longer average. There are three types: simple, weighted, and exponentially smoothed averages. -- **On balance volume**: Developed by Joseph Granville, OBV is a running cumulative total of upside and downside volume. Volume is added on up days and subtracted on down days. The OBV line is plotted with the price line to see if the two lines are confirming each other. (*See* Volume.) -- **Open interest**: The number of options or futures contracts that are still unliquidated at the end of a trading day. A rise or fall in open interest shows that money is flowing into or out of a futures contract or option, respectively. In futures markets, rising open interest is considered good for the current trend. Open interest also measures liquidity. -- **Oscillators**: Indicators that determine when a market is in an overbought or oversold condition. When the oscillator reaches an upper extreme, the market is overbought. When the oscillator line reaches a lower extreme, the market is oversold. (*See* Momentum, Rate of change, Relative strength index, and Stochastics.) -- **Overbought**: A term usually used in reference to an oscillator. When an oscillator reaches an upper extreme, it is believed that a market has risen too far and is vulnerable to a selloff. -- **Oversold**: A term usually used in reference to an oscillator. When an - -oscillator reaches a lower extreme, it is believed that a market has dropped too far and is due for a bounce. - -- **Pennant**: This continuation price pattern is similar to the flag, except that it is more horizontal and resembles a small symmetrical triangle. Like the flag, the pennant usually lasts from one to three weeks and is typically followed by a resumption of the prior trend. -- **Percent investment advisors bullish**: This measure of stock market bullish sentiment is published weekly by Investor's Intelligence of New Rochelle, New York. When only 35% of professionals are bullish, the market is considered oversold. A reading of 55% is considered to be overbought. -- **Price patterns**: Patterns that appear on price charts and that have predictive value. Patterns are divided into reversal and continuation patterns. -- **Rate of change**: A technique used to construct an overbought-oversold oscillator. Rate of change employs a price ratio over a selected span of time. To construct a 10 day rate of change oscillator, the last closing price is divided by the closing price 10 days earlier. The resulting value is plotted above or below a value of 100. -- **Ratio analysis**: The use of a ratio to compare the relative strength between two entities. An individual stock or industry group divided by the S&P 500 index can determine whether that stock or industry group is outperforming or underperforming the stock market as a whole. Ratio analysis can be used to compare any two entities. A rising ratio indicates that the numerator in the ratio is outperforming the denominator. Trend analysis can be applied to the ratio line itself to determine important turning points. -- **Relative strength index (RSI)**: A popular oscillator developed by Welles Wilder, Jr. and described in his self published 1978 book, *New Concepts in Technical Trading Systems.* RSI is plotted on a vertical scale from 0 to 100. Values above 70 are considered to be overbought and values below 30, oversold. When prices are over 70 or below 30 and diverge from price action, a warning is given of a possible trend reversal. RSI usually employs 9 or 14 time periods. -- **Resistance**: The opposite of support. Resistance is marked by a previous price peak and provides enough of a barrier above the market to halt a price advance. (*See* Support.) - -- **Retracements**: Prices normally retrace the prior trend by a percentage amount before resuming the original trend. The best known example is the 50% retracement. Minimum and maximum retracements are normally one third and two thirds, respectively. Elliott wave analysis uses Fibonacci retracements of 38% and 62%. -- **Reversal patterns**: Price patterns on a price chart that usually indicate that a trend reversal is taking place. The best known of the reversal patterns are the head and shoulders and double and triple tops and bottoms. -- **Runaway gap**: A price gap that usually occurs around the midpoint of an important market trend. For that reason, it is also called a measuring gap. (*See* Gaps.) -- **Sentiment indicators**: Psychological indicators that attempt to measure the degree of bullishness or bearishness in a market. These are contrary indicators and are used in much the same fashion as overbought or oversold oscillators. Their greatest value is when they reach upper or lower extremes. -- **Simple average**: A moving average that gives equal weight to each day's price data. (*See* Exponential smoothing and Weighted average.) -- **Stochastics**: An overbought-oversold oscillator popularized by George Lane. A time period of 14 is usually employed in its construction. Stochastics uses two lines—%K and its 3 period moving average, %D. These two lines fluctuate in a vertical range between 0 and 100. Readings above 80 are overbought, while readings below 20 are oversold. When the faster %K line crosses above the slower %D line and the lines are below 20, a buy signal is given. When the %K crosses below the %D line and the lines are over 80, a sell signal is given. -- **Support**: A price, or price zone, beneath the current market price, where buying power is sufficient to halt a price decline. A previous reaction low usually forms a support level. -- **Symmetrical triangle**: A sideways price pattern between two converging trendlines in which the upper trendline is declining and lower trendline is rising. This pattern represents an even balance between buyers and sellers, although the prior trend is usually resumed. The breakout through either trendline signals the direction of the price trend. (*See* Ascending and Descending triangles.) - -- **Technical analysis**: The study of market action, usually with price charts, which includes volume and open interest patterns. Also called chart analysis, market analysis and, more recently, visual analysis. -- **Trend**: Refers to the direction of prices. Rising peaks and troughs constitute an uptrend; falling peaks and troughs constitute a downtrend. A trading range is characterized by horizontal peaks and troughs. Trends are generally classified into major (longer than a year), intermediate (one to six months), or minor (less than a month). -- **Trendlines**: Straight lines drawn on a chart below reaction lows in an uptrend, or above rally peaks in a downtrend, that determine the steepness of the current trend. The breaking of a trendline usually signals a trend reversal. -- **Triangles**: Sideways price patterns in which prices fluctuate within converging trendlines. The three types of triangles are the symmetrical, the ascending, and the descending. -- **Triple top**: A price pattern with three prominent peaks, similar to the head and shoulders top, except that all three peaks occur at about the same level. The triple bottom is a mirror image of the top. -- **Up trendline**: A straight line drawn upward and to the right below reaction lows. The longer the up trendline has been in effect and the more times it has been tested, the more significant it becomes. Violation of the trendline usually signals that the uptrend may be changing direction. (*See* Down trendline.) -- **Visual analysis**: A form of analysis that utilizes charts and market indicators to determine market direction. -- **Volume**: The level of trading activity in a stock, option, or futures contract. Expanding volume in the direction of the current price trend confirms the price trend. (*See* On-balance volume.) -- **Weekly reversal**: An upside weekly reversal is present when prices open lower on Monday and then on Friday close above the previous week's close. A downside weekly reversal opens the week higher but closes down by Friday. (*See* Key reversal day.) -- **Weighted average**: A moving average that uses a selected time span, but gives greater weight to more recent price data. (See Moving average.) - -# **Bibliography** - -- Achelis, Steven B., *Technical Analysis from A to Z*, Probus, 1995. -- Allen, R.C., *How to Build a Fortune in Commodities* (Windsor Books, Brightwaters, NY) (Best Books, Chicago) 1972. -- Allen, R.C., *How to Use the 4 Day, 9 Day, and 18 Day Moving Averages to Earn Large Profits in Commodities*, Best Books 1974. -- Arms, Richard W., *The Arms Index (TRIN*), Dow Jones-Irwin, 1989. -- —–*Volume Cycles in the Stock Market: Market Timing Through Equivolume —Charting*, Dow Jones-Irwin, 1983. -- Bressert, Walter J., *The Power of Oscillator/Cycle Combinations*, Bressert & Associates, 1991. -- Burke, Michael L., *Three-Point Reversal Method of Point & Figure Construction and Formations*, Chartcraft, 1990. -- Colby, Robert W. and Thomas A. Meyers, *The Encyclopedia of Technical Market Indicators*, Dow Jones-Irwin, 1988. -- deVilliers, Victor, *The Point and Figure Method of Anticipating Stock Price Movements* (1933: available from Traders' Library, P.O. Box 2466, Ellicott City, MD 20141 [1-800-222-2855]). -- Dewey, Edward R. with Og Mandino, *Cycles, the Mysterious Forces That Trigger Events*, Manor Books, 1973. -- Dorsey, Thomas J., *Point & Figure Charting*, Wiley, 1995. -- Edwards, Robert D. and John Magee, *Technical Analysis of Stock Trends*, 5 thEdition, John Magee, 1966. - -Ehlers, John F., *MESA and Trading Market Cycles*, Wiley, 1992. - -Elder, Alexander Dr., *Trading for a Living*, Wiley, 1993. - -—–*Study Guide* for Trading for a Living. - -- Freund, John E. and Frank J. Williams, *Modem Business Statistics*, Prentice-Hall. -- Frost, Alfred J. and Robert R. Prechter, *Elliott Wave Principle, Key to Stock Market Profits*, New Classics Library, 1978. -- Gann, W.D., *How to Make Profits in Commodities*, revised edition, Lambert-Gann Publishing, orig. 1942, reprinted in 1976. -- Granville, Joseph, *Granville's New Key to Stock Market Profits*, Prentice Hall, Englewood Cliffs, NJ, 1963. -- Hadady, R. Earl, *Contrary Opinion: How to Use It for Profit in Trading Commodity Futures*, Hadady Publications, 1983. -- Hamilton, William Peter, *The Stock Market Barometer.* Robert Rhea developed the theory even further in the *Dow Theory* (New York: Barron's), published in 1932. -- Hurst, J.M., *The Profit Magic of Stock Transaction Timing*, Prentice-Hall, 1970. -- Kaufman, Perry, *Smarter Trading*, McGraw-Hill, 1995. -- Kondratieff, Nikolai, translated by Guy Daniels, *The Long Wave Cycle*, New York: Richardson and Snyder, 1984. (Two other books on the subject are *The K Wave* by David Knox Barker and *The Great Cycle* by Dick Stoken.) -- LeBeau, Charles and David W. Lucas, *Technical Traders Guide to Computer Analysis of the Futures Market*, Business One Irwin, 1992. -- Lukac, Louis, B. Wade Brorsen, and Scott Irwin, *A Comparison of Twelve Technical Trading Systems*, Traders Press, Greenville, SC, 1990. - -McMillan, Lawrence G., *McMillan on Options*, Wiley, 1996. - -Moore, Geoffrey H., *Leading Indicators for the 1990s*, Dow Jones-Irwin, 1990. - -- Morris, Gregory L., *Candlestick Charting Explained*, Dow Jones-Irwin, 1995 (Originally published as CandlePower in 1992). -- Murphy, John J., *Intermarket Technical Analysis*, Wiley, 1991. -- —–*The Visual Investor: How to Spot Market Trends*, Wiley, 1996. -- Neely, Christopher, J., *Technical Analysis in the Foreign Exchange Market: A Layman's Guide*, Federal Reserve Bank of St. Louis Review, September/October 1997. -- Neill, Humphrey B., *The Art of Contrary Thinking*, Caldwell, OH: The Caxton Printers, 1954. -- Nelson, S.A., *ABC of Stock Market Speculation*, First published in 1903, Reprinted in 1978 by Frasier Publishing Co. -- Nison, Steve, *Japanese Candlestick Charting Techniques*, NY Institute of Finance, 1991. -- —–*Beyond Candlesticks*, Wiley, 1994. -- Prechter, Jr., Robert R., *The Major Works of R. N. Elliott*, Gainesville, GA: New Classics Library, 1980. -- Pring, Martin J., *Technical Analysis Explained*, Third Edition, McGraw-Hill, 1991. -- —–*Pring on Market Momentum*, Intl. Institute for Economic Research, 1993. -- Ruggiero, Murray A., *Cybernetic Trading Strategies*, Wiley, 1997. -- Schwager, Jack D., *Schwager on Futures Technical Analysis*, Wiley, 1996. -- Steidlmayer, Peter J., *141 West Jackson*, Steidlmayer Software, 1996. -- —–Steidlmayer on Markets, A New Approach to Trading, Wiley, 1989. -- Teweles, Richard J., Charles V. Harlow, Herbert L. Stone, *The Commodity Futures Game*, McGraw-Hill. -- Wheelan, Alexander, *Study Helps in Point & Figure Technique*, Morgan Rogers & Roberts, 1954, reprinted in 1990 by Traders Press. - -- Wilder J. Welles, *New Concepts in Technical Trading Systems*, Greensboro, NC: Trend Research, 1978. -- Wilkinson, Chris, *Technically Speaking: Tips and Strategies from 16 Top Analysts*, Traders Press, 1997. - -# **Selected Resources** - -### **FINANCIAL BOOK DEALERS** - -Fraser Publishing Company, P.O. Box 494, Burlington, VT 05402, (800) 253- 0900 - -Traders Library, PO Box 2466, Ellicott City MD 21041 (800) 272-2855 - -- Traders Press, PO Box 6206, Greenville, SC 29606 (800) 927-8222 TECHNICAL MAGAZINES -- Futures Magazine, 250 S. Wacker Drive, #1150, Chicago, IL 60606 (312) 977-0999 -- Technical Analysis of Stocks & Commodities, 4757 California Avenue S.W., Seattle, WA 98116 (800) 832-4642 - -### **TECHNICAL SOFTWARE** - -- Metastock, Equis International, 3950 S. 700 East, Suite 100, Salt Lake City, UT 84107 (800) 882-3040 -- North Systems, Inc., CandlePower, S. Salem, OR (503) 364-3829 -- SuperCharts and TradeStation, Omega Research, 8700 Flager Street, Suite 250, Miami, FL (305) 551-9991 - -### **MARKET DATA** - -- Dial Data, Track Data Corp., 56 Pine Street, New York, NY 10005 (800) 275- 5544 -- Telescan, 5959 Corporate Drive, Suite 2000, Houston, TX 77036 (800) 324- 8246 - -### **CHART SERVICES** - -Chartcraft, 30 Church Street, New Rochelle, NY 10801 (914) 632-0422 - -- Futures Charts, Commodity Trend Service, PO Box 32309, Palm Beach Gardens, FL 33420 (800) 331-1069 -- SRC Stock Charts, Securities Research Company, 101 Prescott Street, Wellesley Hills, MA 02181 (781) 235-0900 -- The Business Picture, Gilman Research Corporation, PO Box, 20567, Oakland, CA 94620 (510) 655-3103 - -### **TECHNICAL ORGANIZATIONS** - -- International Federation of Technical Analysts (IFTA), PO Box 1347, New York, NY 10009 -- Market Technicians Association (MTA), One World Trade Center, Suite 4447, New York, NY 10048 (212) 912-0995 - -# **INDEX** - -The page numbers in this index refer to the printed version of this book. To find the corresponding locations in the text of this digital version, please use the "search" function on your e-reader. Note that not all terms may be searchable. - -Abandoned Baby candle pattern, 312 *ABC of Stock Speculation, The* (Nelson), 24 Acampora, Ralph, 457 Adaptive moving average (AMA), 222 Advance Block candle pattern, 315 Advance-decline (AD) line, 436 AD divergence, 437 daily vs. weekly AD lines, 437 variations in, 437-438 Advanced technical indicators, 463-473 Demand Index (DI), 463-466, 473 Herrick Payoff Index (HPI), 466-468 Keltner channels, 470-472 starc bands, 469-470 Allen, R.C., 204 Alpha cycles, 359 Analysis vs. timing, 6-7 Appel, Gerald, 252 Arithmetic scale, 39-40 Arms Index (TRIN), 444, 445 Open Arms, 446 smoothing, 445-446 TICK vs., 444 Arms, Richard, 444, 448 Art charting, 11 *Art of Contrary Thinking, The* (Neill), 258 Ascending triangle, 130, 131, 136-138, 331 - -as bottoming pattern, 138 bullish breakout, 136-137 measuring technique, 137-138 volume pattern, 140 Asset allocation, 409-410 Average, True Range, 469 Barker, David Knox, 359 Bar charts, 35, 40-46 compared to point and figure charts, 266-270 futures open interest, 35, 42-44 volume, 35, 41-42 Behavioral Finance, use of term, 21, 459 Belt Hold candle pattern, 310 Beta cycles, 359 Blowoffs, 175 Bollinger Bands, 209-211, 221 using as targets, 210 Bollinger Bands and volatility, 211 Bollinger, John, 209 Bolton, A. Hamilton, 319 Bottom failure swings, 242-243 Bottom reversal day, 91, 92 Breakaway candle pattern, 313 Breakaway gaps, 94-95 Breakouts, tactics on, 400-401 Bressert, Walt, 359, 374, 375 Broadening formation, 130, 140-141 Brooks, John, 457 Bullish speedline, constructing, 88-89 Bull trap, 122 Buy-and-hold strategy: and futures, 7 and Random Walk Theory, 16 Buy limit order, 403-404 Buy stop order, 404 Call open interest, 177 Candle pattern analysis, 301-306 computerized, 306 continuation candle patterns, 304-305 - -reversal candle patterns, 301-304 CandlePower charting, 448-449 Candlestick charts, 37-39, 297-299, 309-317 *See also* Japanese candlesticks Channel line (return line), 80-85 measuring implications, 85 Chart construction, 35-47 arithmetic vs. logarithmic scale, 39-40 candlestick charts, 37-39 of daily bar charts, 36, 40-41 futures open interest, 35, 42-44 volume, 35, 41-42 intraday chart, 35 line charts, 36-37 point and figure charts, 37, 38, 278-282 types of charts available, 36-37 weekly and monthly charts, 35, 45-46 Chart patterns, 185 *Chartcraft Method of Point and Figure Trading, The* (Cohen), 277 Chartered market technician (CMT), 456-457 Charting, 9, 10-12 purpose of, 3 subjectivity of, 11, 16 Charting software, 378-379 Chartist, 10-12 Closing prices, 30-31 Cohen, A.W., 277 Coil, *See* Symmetrical triangle Collins, Charles J., 319 Commitments of Traders (COT) Report, 175-176 and large commercial hedgers, 176 Commodities Futures Trading Commission (CFTC), 175 Commodity Channel Index (CCI), 237-239, 374 Commodity market analysis, 15 Commodity markets, chart of, 10 Commodity Research Bureau Futures, 15 Commodity Systems, Inc., 184 Commodity Trend Service, 177 Complex head and shoulders patterns, 113-115 tactics, 113 Computers: charting software, 378-379 - -*Directional Movement System* (Welles Wilder), 378, 380, 384-387, 390 and ADX, 384-387 *Parabolic System* (Welles Wilder), 378, 380, 381-384, 390 system trading pros/cons, 387-389 tools/indicators, 380 using, 380 TradeStation (Omega Research), 389-390 and trading systems, 377-391 Concealing Baby Swallow candle pattern, 314 Concentration, diversification vs., 396-397 Confirmation, 155-156 Congestion area, 147-150, 274 *Consensus National Commodity Futures Weekly*, 258 Constant Forward Contracts vs. Continuous Contracts, 508-510 Continuation candle patterns, 304-305 Continuation charts for futures, construction of, 182-183 Continuation head and shoulders, 153-155 Continuation patterns, 100-101, 129-156 confirmation, 155-156 continuation head and shoulders, 153-155 divergence, 155-156 triangles, 130-147 *See also* Triangles Continuous futures contracts, 505-510 Continuous Contracts, 507-510 Constant Forward Contracts vs., 508-510 Gann Contract, 507 Nearest Contract, 506 Next Contract, 506-507 Contract details, futures markets, 12 Contrary Opinion, 226, 257-261 combining with other technical tools, 261 interpreting bullish consensus numbers, 258, 260 market's reaction to fundamental news, 260-261 open interest (futures), importance of, 260 and remaining buying/selling power, 259 and strong vs. weak hands, 259 Corrective waves, 320-323, 324-331 flats, 326-329 triangles, 329-331 zig-zags, 324-326 CRB Futures Price Index, 423-424 Crests, 348-351 - -*Cybernetic Trading Strategies* (Ruggiero), 428 Cycles: and 4 week rule, 218-219 and moving averages, 212 *Cycles: The Mysterious Forces That Trigger Events* (Dewey and Mandino), 344 *Cycle Trader*, 375 Daily bar charts, 36, 40-41, 181 horizontal axis, 41-42 open interest, 35, 42-44 vertical axis, 41-42 volume, 35, 41-42 Dark Cloud Cover candle pattern, 302, 311 Day trading, 9 Deliberation candle pattern, 314 Demand Index (DI), 167, 463-466, 473 Descending triangle, 130, 138-140, 331 as a top, 138 volume pattern, 140 Descriptive statistics, 18 deVilliers, Victor, 265 Dewey, Edward R., 344-348 Dial Data Service, 505 *Directional Movement System* (Welles Wilder), 378, 380, 384-387, 390 and ADX, 384-387 Divergence, 27, 155-156, 227 Diversification vs. concentration, 396-397 Dobson, Edward D., 342 Doji candlesticks, 300-301 Doji Star candle pattern, 311, 312 Dominant cycles, 358-360 Donchian, Richard, 215-216, 362 Dorsey, Thomas, 292 Double crossover method, 203-204 Double tops and bottoms, 57, 100, 117-121, 122-124 measuring technique, 120-121 Dow, Charles, 23-24, 265, 460 Dow Jones & Company, 23 Dow Jones Industrial Average, 14, 33, 320, 422, 449-451 Dow Jones Transportation Average, 33 Dow Jones Utility Index, 33 - -Downside Gap Three Methods candle pattern, 316 Downside Tasuki Gap candle pattern, 316 Downtrend, 50-52 Dow Theory, 23-33, 319, 452 applied to futures trading, 32 basic tenets of, 24-30 averages discount everything, 24-25 averages must confirm each other, 27 major trends have three phases, 26-27 market has three trends, 25-26 trend is in effect until it signals reversal, 28-30 volume must confirm trend, 27 closing prices, 30-31 criticisms of, 31-32 lines, 31 stocks as economic indicators, 32 Dragonfly Doji, 301 Dunn & Hargitt's Financial Services, 215 Easy Language (Omega), 390, 498-500 Economic forecasting, 10 Efficient market hypothesis, 19-21, 459 Ehlers, John, 374, 375 Ehrlich Cycle Finder, 363-365 Ehrlich Cycle Forecaster, 365, 366, 375 Ehrlich, Stan, 363 Elder, Alexander, 442 Elliott, R.N., 27, 319 *Elliott Wave Supplement to the Bank Credit Analyst*, 319-320 Elliott Wave Theory, 27, 76, 86, 319-342 alternation, rule of, 331-332 applied to stocks vs. commodities, 340 basic tenets of, 320-323 channeling, 332-334 combining all aspects of, 338-340 connection between Dow Theory and, 324 corrective waves, 320-323, 324-331 flats, 326-329 triangles, 329-331 zig-zags, 324-326 degrees of trend, 320-321 *Elliott Wave Principle*, 320, 342 - -Fibonacci numbers, 212-213, 322-323, 334-335 Fibonacci ratios and retracements, 335-338 Fibonacci time targets, 338 historical background, 319-320 impulse waves, 320 pattern, 320 ratio analysis, 320 time relationships, 320 using with other technical tools, 342 wave 4 as support area, 334 Engulfing candle pattern, 310 Equivolume charting, 447-448 Evening Star candle pattern, 303-304, 312 Exhaustion gaps, 96-97 Exponentially smoothed moving average, 197, 199-200 Extremes, 486-487 Failed head and shoulders pattern, 113-115 Failure swing, 29-31, 242 Fair value, 415 Falling Three Methods candle pattern, 304-305, 315 Fan principle, 74-76 Fibonacci fan lines, 90 Fibonacci numbers, 212-213, 322-323, 334-335 Fibonacci number sequence, 322-323 Fibonacci percentage retracements, 335-338 Fibonacci ratios, 86 and retracements, 335-338 Fibonacci time targets, 338 50% retracement, 85-87 Filtered candle patterns, 306-307 Filters, 71-72, 122 Financial futures, 8 Flagpole, 143-144 Flags, 141-145 construction of, 142-143 measuring implications, 143-144 Flat corrections, 326-329 Flow of funds analysis, 15 Foreign currencies, 8 Foundation for the Study of Cycles, 348, 375 4-9-18 day moving average combination, 204 - -how to use, 205-207 4 week rule, 212, 215-219, 362 Frost, A.J., 320, 342 Fulcrum, use of term, 275 Fundamental forecasting, technical forecasting vs., 5-6 Futures, 8 blowoffs, 175 life span, 12-13 margin requirements, 13 pricing structure, 12 time frame, 14 and timing, 14 *Futures Charts*, 177 Gann Contract, 507 Gann fan lines, 90 Gann, W.D., 87, 90, 183 Gaps, 76 Goldman Sachs Commodity Index, 410 Gould, Edson, 87-88 Granville, Joseph, 165 *Granville's New Key to Stock Market Profits*, 165 Gravestone Doji, 300 *Great Cycle, The*, (Stoken), 359 Greeley, John, 457 Hamilton, William Peter, 24 Hammer candle pattern, 310 Hanging Man candle pattern, 310 Harami candle pattern, 310-311 Harami Cross candle pattern, 311 Harmonicity, principle of, 351, 352, 354 Harmonic relationships, cycles, 212, 218 Head and shoulders, 74, 76 continuation pattern, 153-155 reversal pattern: basic ingredients of, 106 neckline, breaking of, 106 price objective, 108-110 adjusting, 109-110 finding, 108-110 return move, 106-107 - -volume, 107-108 Hedging process, 8 Herrick, John, 466 Herrick Payoff Index (HPI), 167, 466-468 Hirsch, Yale, 373 Histogram, 234-237, 476 Homing Pigeon candle pattern, 315 Horizontal count, 274-275 *How to Build a Fortune in Commodities* (Allen), 204 *How to Use the 4-Day, 9-Day and 18-Day Moving Averages to Earn Larger Profits from Commodities* (Allen), 204 Hurst, J.M., 348, 355-358 Identical Three Crows candle pattern, 314 Impulse waves, 320 Inductive statistics, 18 In Neck Line candle pattern, 317 Interest rate markets, 8 Intermarket analysis, 413-431 bonds: link between commodities and, 418 link between stocks and, 416-417 commodities, link between dollar and, 419-420 deflation scenario, 427-428 dollar and large caps, 422 intermarket correlation, 428-429 intermarket neural network software, 429-430 and mutual funds, 422 program trading, 414, 415-416 relative strength: and individual stocks, 426 and sectors, 424-425 relative strength analysis, 422-426 stock sectors and industry groups, 420-422 top-down market approach, 427 Intermarket correlation, 428-429 Intermarket neural network software, 429-430 *Intermarket Technical Analysis* (Murphy), 414, 430 Intermediate cycle, 359 Intermediate trend, 25, 52-54 Internal trendlines, 90 International Federation of Technical Analysts (IFTA), 457, 458 - -International stock markets, 8, 9 Intraday pivot points, 407-408 Intraday point and figure charts, construction of, 270-273 Intraday price charts, 45, 405-408 Market Profile, 411 Inverse head and shoulders, 110-112 neckline, slope of, 111-112 Inverted Hammer candle pattern, 310 Investor Sentiment Readings, 261-262 Investors Intelligence numbers, 262-263 Island reversal pattern, 97 January Barometer, 373 Japanese candlesticks, 37-39, 297-317 basic candlesticks, 299-301 candle pattern analysis, 301-306 computerized, 306 continuation candle patterns, 304-305 reversal candle patterns, 301-304 candle patterns, 309-317 filtered, 306-307 candlestick charting, 297-299 Doji candlesticks, 300-301 Long Days, 299 Short Days, 299 Spinning Tops, 299-300 Jones, Edward, 23 - -*K Wave, The* (Barker), 359 Kaufman, Perry, 222 Keltner channels, 470-472 Key reversal day, 91 Kicking candle pattern, 313 Kondratieff Wave, 359-360 - -Ladder Bottom candle pattern, 315 Ladder Top candle pattern, 315 Lambert, Donald R., 237, 307 Lane, George, 246 Larry Williams %R, 249 *Leading Indicators for the 1990s* (Moore), 10, 430 Life span, futures contracts 12-13 - -Limit days, 168 Limit order, 403-404 Linearly weighted moving average, 197, 199 Line charts, 36-37 Lines, 31, 57, 147-148 Logarithmic charts, 39-40 Longer range technical forecasting, 9 Long-legged Doji, 300 Long-term charts, 181-194 adjusting for inflation, 186-187 continuation charts for futures, construction of, 182-183 examples of, 188-194 longer range perspective, importance of, 182 long term trends, persistence of, 184-185 and moving averages, 214 patterns on, 185 Perpetual Contract, 184 and trading, 188 Long term cycles, 359 Long term to short term charts, 185-186 *Long Wave Cycle* (Kondratieff), 359 Lukac, Louis, 216 Lunar cycle, 362 McClellan oscillator, 438-439 McClellan, Sherman, 438 McClellan Summation Index, 439-440 Major reversal patterns, 99-128 double tops and bottoms, 100, 117-121 filters, 122 head and shoulders, 100, 103-107 complex, 113-115 as consolidation pattern, 115 failed, 113-115 inverse, 110-112 ideal pattern, variations from, 121-125 price patterns, 100-103 continuation, 100, 129-156 measuring techniques, 101 reversal, 99-128 volume, 100, 107-108 saucers/spikes, 100, 125-127 - -triple tops and bottoms, 100, 115-117 Major trend, 52-54 *Major Works of R.N. Elliott, The*, 320, 342 Managed accounts, 410-411 Mandino, Og, 344 Margin requirements, stocks vs. futures, 13 Market averages, comparing, 435, 449-451 Market breadth, measuring, 433 Market-if-touched (M.I.T.) order, 404 Market order, 403, 404 Market price, as leading indicator of fundamentals, 6 Market Profile, 411, 475-491 graphic, 476-479 defined, 476 longer term market activity, tracking, 486-490 market structure, 479-480 organizational principles, 480-483 auction setting, 480 continuous negotiation, 481 market balance/imbalance, 481 price and value, 482-483 short term trader/long term trader roles, 482 time frames and trader behavior, 481-482 range development and profile patterns, 484-485 Market Technicians Association (MTA), 24, 457 Market Technologies Corporation, 429 Matching High candle pattern, 314 Matching Low candle pattern, 314 Maximum Entropy Spectral Analysis (MESA), 374-375 Maximum retracement parameter, 86 Measured move, 151-153 Measuring gaps, 95-96 Meeting Line candle pattern, 311 Mendelsohn, Louis, 429-430 *MESA and Trading Market Cycles* (Ehlers), 374 Metastock charting software (Equis International), 448 M.I.T. order, 404 Momentum: ascent/descent rates, 230 crossing of zero line, 231-232 measuring, 228-233 momentum line, and price action, 230 - -upper/lower boundary, need for, 232-233 Money management, 393-411, 501 asset allocation, 409-410 combining with technical factors, 403 diversification vs. concentration, 396-397 guidelines for, 395-396 managed accounts, 410-411 mutual funds, 410-411 reward-to-risk ratios, 397-398 trading multiple positions, 398-399 Monthly charts, 35, 45-46, 181-182 Monthly cycle, and moving averages, 212 Monthly reversals, 93, 185 Moore, Geoffrey, 430 Morning Doji Star candle pattern, 312 Morning Star candle pattern, 303, 312 Morris, Greg, 184, 296, 297fn, 306, 448 Moving Average Convergence/Divergence (MACD), 214, 252-255, 374 MACD histogram, 255 Moving average, 195-215 adaptive (AMA), 222 alternatives to, 223 applied to long term charts, 213-215 Bollinger bands, 209-211, 221 using as targets, 210 and volatility, 211 defined, 195-196 double crossover method, 203-204 envelopes, 207-208 exponentially smoothed, 197, 199-200 Fibonacci numbers used as, 212-213 4-9-18 day moving average combination, 204 how to use, 205-207 linearly weighted, 197, 199 optimization, 220-221 as oscillators, 214 and point and figure charts, 294-295 pros/cons of, 214 simple, 197, 199 as smoothing devices with time lag, 197-207 and time cycles, 212 triple crossover method, 204 - -using one, 201-203 using three, 204 using two, 203-204 which prices to average, 197-198 Moving average envelopes, 207-208 Multiple positions, trading, 398-399 Mutual funds, 410-411 and intermarket analysis, 422 NASDAQ composite, 435, 449-451 *Nature's Law—The Secret of the Universe*, 319, 334 Nearest Contract, 506 Near term trend, 52-54 Neill, Humphrey B., 258 Nelson, S.A., 24 Neutral day, 484-486 *New Concepts in Technical Trading Systems* (Wilder), 239, 469 New High-New Low index, 440-442 New York Stock Exchange Index, 449-451 Next Contract, 506-507 Nominality, principle of, 353-355 Nonfailure swing, 30-31 Normal day, 484-486 Normal variation day, 484-486 On-balance volume (OBV), 165-167 One-third retracement, 85-87 On Neck Line candle pattern, 316, 317 Open Arms Index, 446 Open interest, 35, 42-44, 159-162 defined, 159 in futures, 42-44, 159-161 how changes occur in, 160-161 interpreting: in futures, 169-174 general rules for, 161-162 in options, 177 put/call ratios, 178-179 as secondary indicator, 159-162 Oppenheimer Real Assets, 410 Optimization, 220-221, 496 Options, open interest in, 177 - -Options hedging, 8 Oscillators, 223, 225-263 Commodity Channel Index (CCI), 237-239 constructing, using two moving averages, 234-237 Oscillators Contrary Opinion, 257-261 interpretation of, 226-227 Investor Sentiment Readings, 261-262 Investors Intelligence numbers, 262-263 Larry Williams %R, 249 momentum, measuring, 228-233 Moving Average Convergence/Divergence (MACD), 214, 252-255 MACD histogram, 255 moving averages as, 214 rate of change (ROC), measuring, 234 Relative Strength Index (RSI), 239-245 interpreting, 242-245 70 and 30 lines, using to generate signals, 245-246 Stochastic oscillator, 246-249 and trend, 226-228 importance of, 251 usefulness of, 251-252 uses for, 227 *See also* Contrary Opinion Outside day, 92 *Parabolic System* (Welles Wilder), 378, 380, 381-384, 390 Peaks, time between, 125 Pelletier, Robert, 184 Pennants, 141-145 construction of, 142-143 measuring implications, 143-144 Percentage envelopes, 207-208 Percentage retracements, 85-87, 402 Fibonacci, 86, 336-338 Perpetual Contract, 184 Piercing Line candle pattern, 303, 311 Pioneer range, 484 *Point and Figure Charting* (Dorsey), 292 Point and figure charts, 37, 38, 265-296 advantages of, 288 - -bar charts compared to, 266-270 computerized charting, 292-294 horizontal count, 274-275 intraday, construction of, 270-273 moving averages, 294-295 price patterns, 275-277 technical indicators, 292 3 box reversal, 277-282 trading tactics, 286-288 trend analysis and trendlines, 277 vertical count, 286 *Point and Figure Method of Anticipating Stock Price Movements* (deVilliers), 265 *Power of Oscillator/Cycle Combinations* (Bressert), 374, 375 Prechter, Robert, 320, 331, 342 Presidential Cycle, 373 Price action, and shifts in supply and demand, 2 Price channels, 219-220, 332-334 Price filters, 71-72, 122 Price forecasting, 393-394 Price gaps, 94-97, 402 breakaway gaps, 94-95 exhaustion gaps, 96-97 island reversal pattern, 97 runaway (measuring) gaps, 95-96 types of, 94 Price patterns, 57, 100-103, 185 continuation, 100-101, 129-156 measuring techniques, 101 and point and figure charts, 275-277 reversal, 99-128 volume, 100 as confirmation in, 162-164 *See also* Continuation patterns; Reversal patterns Pricing structure, futures, 12 Primary cycle, 359 Primary trends, 25-26 *Profit Magic of Stock Transaction Timing* (Hurst), 348 Program buying, 415 Program selling, 415-416 Program trading, 414, 415-416 Proportionality, principle of, 351, 353 - -Protective stops, 397 Pugh, Burton, 362 Put/call ratios, 178-179 Put open interest, 177 Quantitative analyst, 11 Random Walk Theory, 19-21 and buy-and-hold strategy, 16 Range development and profile patterns, 484-485 Range extension, 486-488 Rate of change (ROC), measuring, 234 Rectangle formation, 147-151 similarities/differences, 151 swings within range, trading, 150-151 volume pattern, 150 Rectangles, 31 Relative strength analysis, 422-426, 450-451 Relative Strength Index (RSI), 239-245, 374 interpreting, 242-245 Return line, 80-85 measuring implications, 82-85 Reversal days, 90-93 Reversal candle patterns, 301-304 Dark Cloud Cover, 302, 311 Evening Star, 303-304, 312 Morning Star, 303, 312 Piercing Line, 302-303, 311 Reversal patterns, 99-128 double tops and bottoms, 100, 117-121 filters, 122 head and shoulders, 100, 103-107 complex, 113-115 as consolidation pattern, 115 failed, 113-115 inverse, 110-112 ideal pattern, variations from, 121-125 saucers/spikes, 100, 125-127 triple tops and bottoms, 100, 115-117 Reward-to-risk ratios, 397-398 Rhea, Robert, 24, 319 Right angle triangles, 138 - -Rising Three Methods candle pattern, 304-305, 315 Ruggiero, Murray, Jr., 428 Runaway gaps, 95-96 Russell 2000, 422, 435, 449-451 Russell, Richard, 24 - -S…P 500, 14, 32, 415-416, 425, 449-451 Saucers, 125-127 Seasonal cycles, 359, 369-372 Secondary trends, 25, 52-54 Self-fulfilling prophecy, and technical analysis, 15-18 Selling climax, 91, 92, 93, 175 Sell limit order, 403-404 Sell stop order, 404 Semilog chart scaling, 188 Sentiment indicators, 15 Separating Lines candle pattern, 315 70 line, using to generate signals, 245-246 Shooting Star candle pattern, 310 Side by Side White Lines candle pattern, 316 Sideways trend, 50-52 Simple moving average, 197, 199 *Smarter Trading* (Kaufman), 222 Speedlines, 87-89 Spikes, 125-127 Spinning Tops, 299-300 Standard deviation, 209, 476 Starc bands, 469-470 Statistical analyst, 11 Steidlmayer, J. Peter, 411, 475fn, 479-480 Stick Sandwich candle pattern, 314 Stochastic oscillator, 246-249, 374 Stock index futures, 8 Stock market analysis, 14-15 *Stock Market Barometer* (Rhea), 24 Stock market cycles, 373 Stock market indicators, 433-452 advance-decline (AD) line, 436 AD divergence, 437 daily vs. weekly AD lines, 437 variations in, 437-438 Arms Index (TRIN), 444, 445 - -Open Arms, 446 smoothing, 445-446 TICK vs., 444 CandlePower charting, 448-449 Equivolume charting, 447-448 McClellan oscillator, 438-439 McClellan Summation Index, 439-440 market averages, comparing, 435, 449-451 market breadth, measuring, 433 New High-New Low index, 440-442 sample data, 434-435 upside vs. downside volume, 443-444 *See also* Advanced technical indicators *Stock Market Timing* (Cohen), 277 Stocks, 8 as economic indicators, 32 life span, 12-13 margin requirements, 13 pricing structure, 12 time frame, 14 and timing, 14 *Stock Trader's Almanac* (Hirsch), 373 Stoller, Manning, 469 Stop limit order, 404 Stop order, 404 Summation, principle of, 351-352 Support and resistance, 55-65, 401 psychology of, 59-61 resistance, defined, 55-56 reversal of roles, 56-59 support, defined, 55 and volume, 60 Swing measurement, 151-153 Symmetrical triangle, 130, 131-135, 331 defined, 132 measuring technique, 135 triangle resolution, time limit for, 133-134 volume, 134-135 Symmetric distribution, 476 Synchronicity, principle of, 351, 353, 354 Technical analysis: applied to time dimensions, 9-10 - -applied to trading mediums, 8 chartered market technician (CMT), 456-457 coordinating with fundamental analysis, 455-456 criticisms of, 15-19 defined, 1 economic forecasting, 10 Federal Reserve approval, 459-460 flexibility/adaptability of, 7-8 flow of funds analysis, 15 global reach of, 458 International Federation of Technical Analysts (IFTA), 457, 458 Market Technicians Association (MTA), 457 names for, 458-459, 460 number three, importance of, 76 philosophy of, 1-22 history repeats itself, 4-5 market action discounts everything, 2-3 prices move in trends, 3-4 and self-fulfilling prophecy, 15-18 sentiment indicators, 15 in stocks and futures, comparison of, 12-14 technical checklist, 454-455 using in timing, 400 *Technical analysis of Stock trends* (Edwards et al.), 33, 448 Technical analyst, 10-12 Technical forecasting, fundamental forecasting vs., 5-6 Technical tools, 15, 374 Technician, 10-12 Telescan, 380 30 line, using to generate signals, 245-246 3% penetration criterion, 71 Three Black Crows candle pattern, 312 3 box reversal point and figure chart, 277-282 chart patterns, 280-282 construction of, 278-282 measuring techniques, 286 trendlines, 282-286 Three Inside Down candle pattern, 313 Three Inside Up candle pattern, 313 Three Line Strike candle pattern, 316 Three Outside Down candle pattern, 313 Three Outside Up candle pattern, 313 - -Three Stars in the South candle pattern, 314 Three White Soldiers candle pattern, 312 Time cycles, 212, 343-375 basic concepts, 348-351 and charting techniques, 355-358 classification of, 359 combining cycle lengths, 361 combining cycles with other technical Tools, 374 crests, 348-351 cyclic principles, 351-353 dominant cycles, 358-360 Ehrlich Cycle Finder, 363-366 and 4 week rule, 212, 215-216, 362 isolating cycles, 363-368 January Barometer, 373 Kondratieff Wave, 359-360 left and right translation, 362-363 Maximum Entropy Spectral Analysis (MESA), 374-375 and moving averages, 212 Presidential Cycle, 365, 373 qualities of, 348-351 seasonal cycles, 359, 369-372 stock market cycles, 373 and trend, 361-362 troughs, 348-351 Time dimensions, technical analysis applied To, 9-10 Time filter, 71 Time Price Opportunity (TPO), 479 Time series analysis, 19 Timing, 393-394 analysis vs., 6-7 using technical analysis in, 400 Top failure swing, 242-243 Top reversal day, 91, 92 Tower, Kenneth, 292-294, 296 Trader's Library, 375 *Trader's Notebook*, 215 TradeStation (Omega Research), 389-390, 497-500 Trading: elements of, 393-394 after periods of success/adversity, 399 Trading cycle, 359, 362 - -*Trading for a Living* (Elder), 442 Trading mediums, technical analysis applied to, 8 Trading multiple positions, 398-399 Trading orders, types of, 403-405 Trading range, 51, 147-150 Trading system: building, 493-503 concept design, 495-497 evaluating results, 500-501 money management, 501 objective rules, 497 testing code, 497-500 trading signals, checking on computer, 497 Trading tactics, 393-394, 400-402 applied to stocks, 409 and point and figure charts, 286-288 timing, using technical analysis in, 400 Trend, 49-98 classifications of, 52-54 definition of, 49 downtrend, 50-52 fan principle, 74-76 Fibonacci fan lines, 90 Gann fan lines, 90 intermediate trend, 52-54 internal trendlines, 90 major trend, 52-54 monthly reversals, 93 near term trend, 52-54 percentage retracements, 85-87 price gaps, 94-97 reversal days, 90-92 sideways trend, 50-52 speed resistance lines, 87-89 support and resistance, 55-65 and time cycles, 361-362 trading range, 51 trendlines, 65-74 uptrend, 50-52 weekly reversals, 93 *See also* Price gaps; Support and resistance; Trendlines Trend day, 484-486 - -Trending vs. trading units, 398-399 Trendlines, 65-74 adjusting, 77-79 breaking of, 68, 71-72, 102 channel line (return line), 80-85 determining significance of, 69 down trendline, 65-66 drawing, 67 how to use, 67-68 internal, 90 measuring implications of, 72-74 and price action, 69 price filters, 71-72 relative steepness of, 76-80 and reversal of roles, 72-73 small penetrations, how to handle, 70-71 tentative vs. valid, 67 3 box reversal point and figure chart, 282-286 up trendline, 65-66 Trend trading, 9 Triangles, 76, 130-147 ascending, 130, 131, 136-138, 331 broadening formation, 130, 140-144 descending, 130, 138-140, 331 and Elliott Wave Theory, 329-331 flags, 141-145 measured move, 153 minimum requirement for, 132 pennants, 141-145 rectangle formation, 147-151 symmetrical, 130, 131-135, 331 time factor in, 140 wedge formation, 146-147, 148 Triangles *See also* Ascending triangle; Descending Triangle; Symmetrical triangle Triple crossover method, 204 triple tops and bottoms, 76, 115-117, 164 Tri-Star candle pattern, 312, 313 Troughs, 348-351 time between, 125 28 day trading cycle, 362 Two Crows candle pattern, 315 - -2 day rule, 71-72 Two-thirds retracement, 85-87 2 week rule, 212 - -*Understanding Fibonacci Numbers* (Dobson), 342 Unique Three River candle pattern, 314 Upside Gap Three Methods candle pattern, 314 Upside Gap Two Crows candle pattern, 314 Upside Tasuki Gap candle pattern, 316 Uptrend, 50-52 UST Securities, 292, 294 - -Value Area, 487, 488-489 Van Nice, Nick, 177 Vantage Point software, 430 Variation, principle of, 353-355 *Visual Investor, The*, 430, 458 Volatility, and Bollinger bands, 211 Volume: on-balance volume (OBV), 165-166 alternatives to, 166-167 on bar charts, 41-42 as confirmation in price patterns, 163-164 defined, 158 degree of penetration, 61-64 head and shoulders reversal pattern, 100, 107-108 interpreting: for all markets, 162-169 general rules for, 161-162 and price, 163-165 and price patterns, 100 round numbers as, 64-65 as secondary indicator, 158-162 and support and resistance, 60 *Volumes Cycles in the Stock Market* (Arms), 448 V-pattern, 125-127 - -*Wall Street Journal, The*, 23-24, 265-266, 434, 436 *Wave Principle, The*, 319 Wedge formation, 146-147, 148 Weekly charts, 35, 45-46, 181-182 Weekly price channel (weekly rule), 215-220 - -Weekly reversals, 93, 185 Weekly rule, 215-220 4 week rule, 212, 219 adjustments to, 217-218 and cycles, 218-219 Wilder, J. Welles, 239, 307, 378, 380, 381-387, 469 Wizard Trading, 216 Wyckoff, R.D., 265 - -Zig-zags, 324-326 - -### *What's next on your reading list?* - -Discover your next great read! - -Get personalized book picks and [up-to-date](http://links.penguinrandomhouse.com/type/prhebooklanding/isbn/9781101659199/display/1) news about this author. - -Sign up now. \ No newline at end of file diff --git a/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/catalog_entry.json b/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/catalog_entry.json deleted file mode 100644 index 15917594ec978cf84f51dc6e63eb788e97a7ec1a..0000000000000000000000000000000000000000 --- a/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/catalog_entry.json +++ /dev/null @@ -1,1552 +0,0 @@ -{ - "doc_id": "technical_analysis_of_the_financial_market_-_john_j_murphy", - "file_name": "Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy.pdf", - "title": "Technical Analysis of the Financial Markets", - "author": "John J. Murphy", - "subject": "", - "keywords": "", - "creator": "calibre 3.48.0 [https://calibre-ebook.com]", - "producer": "calibre 3.48.0 [https://calibre-ebook.com]", - "category": "trading", - "tags": [ - "_john_j_murphy", - "technical_analysis_of_the_financial_market_" - ], - "publication_year": "2020", - "total_pages": 494, - "md_url": "processed_docs/technical_analysis_of_the_financial_market_-_john_j_murphy/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy.md", - "layout_url": "processed_docs/technical_analysis_of_the_financial_market_-_john_j_murphy/technical_analysis_of_the_financial_market_-_john_j_murphy.layout.json", - "pdf_url": "Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy.pdf", - "toc": [ - { - "level": 1, - "title": "Title Page", - "page": 3 - }, - { - "level": 1, - "title": "Copyright", - "page": 4 - }, - { - "level": 1, - "title": "Dedication", - "page": 6 - }, - { - "level": 1, - "title": "Contents", - "page": 7 - }, - { - "level": 1, - "title": "About the Author", - "page": 19 - }, - { - "level": 1, - "title": "About the Contributors", - "page": 20 - }, - { - "level": 1, - "title": "Introduction", - "page": 21 - }, - { - "level": 1, - "title": "Acknowledgments", - "page": 23 - }, - { - "level": 1, - "title": "1 Philosophy of Technical Analysis", - "page": 24 - }, - { - "level": 2, - "title": "Introduction", - "page": 24 - }, - { - "level": 2, - "title": "Philosophy or Rationale", - "page": 24 - }, - { - "level": 2, - "title": "Technical versus Fundamental Forecasting", - "page": 27 - }, - { - "level": 2, - "title": "Analysis versus Timing", - "page": 28 - }, - { - "level": 2, - "title": "Flexibility and Adaptability of Technical Analysis", - "page": 29 - }, - { - "level": 2, - "title": "Technical Analysis Applied to Different Trading Mediums", - "page": 30 - }, - { - "level": 2, - "title": "Technical Analysis Applied to Different Time Dimensions", - "page": 30 - }, - { - "level": 2, - "title": "Economic Forecasting", - "page": 31 - }, - { - "level": 2, - "title": "Technician or Chartist?", - "page": 31 - }, - { - "level": 2, - "title": "A Brief Comparison of Technical Analysis in Stocks and Futures", - "page": 32 - }, - { - "level": 2, - "title": "Less Reliance on Market Averages and Indicators", - "page": 35 - }, - { - "level": 2, - "title": "Some Criticisms of the Technical Approach", - "page": 35 - }, - { - "level": 2, - "title": "Random Walk Theory", - "page": 38 - }, - { - "level": 2, - "title": "Universal Principles", - "page": 40 - }, - { - "level": 1, - "title": "2 Dow Theory", - "page": 41 - }, - { - "level": 2, - "title": "Introduction", - "page": 41 - }, - { - "level": 2, - "title": "Basic Tenets", - "page": 42 - }, - { - "level": 2, - "title": "The Use of Closing Prices and the Presence of Lines", - "page": 47 - }, - { - "level": 2, - "title": "Some Criticisms of Dow Theory", - "page": 48 - }, - { - "level": 2, - "title": "Stocks as Economic Indicators", - "page": 49 - }, - { - "level": 2, - "title": "Dow Theory Applied to Futures Trading", - "page": 49 - }, - { - "level": 2, - "title": "Conclusion", - "page": 50 - }, - { - "level": 1, - "title": "3 Chart Construction", - "page": 51 - }, - { - "level": 2, - "title": "Introduction", - "page": 51 - }, - { - "level": 2, - "title": "Types of Charts Available", - "page": 51 - }, - { - "level": 2, - "title": "Candlesticks", - "page": 53 - }, - { - "level": 2, - "title": "Arithmetic versus Logarithmic Scale", - "page": 54 - }, - { - "level": 2, - "title": "Construction of the Daily Bar Chart", - "page": 55 - }, - { - "level": 2, - "title": "Volume", - "page": 56 - }, - { - "level": 2, - "title": "Futures Open Interest", - "page": 57 - }, - { - "level": 2, - "title": "Weekly and Monthly Bar Charts", - "page": 59 - }, - { - "level": 2, - "title": "Conclusion", - "page": 61 - }, - { - "level": 1, - "title": "4 Basic Concepts of Trend", - "page": 62 - }, - { - "level": 2, - "title": "Definition of Trend", - "page": 62 - }, - { - "level": 2, - "title": "Trend Has Three Directions", - "page": 64 - }, - { - "level": 2, - "title": "Trend Has Three Classifications", - "page": 65 - }, - { - "level": 2, - "title": "Support and Resistance", - "page": 67 - }, - { - "level": 2, - "title": "Trendlines", - "page": 75 - }, - { - "level": 2, - "title": "The Fan Principle", - "page": 83 - }, - { - "level": 2, - "title": "The Importance of the Number Three", - "page": 85 - }, - { - "level": 2, - "title": "The Relative Steepness of the Trendline", - "page": 85 - }, - { - "level": 2, - "title": "The Channel Line", - "page": 89 - }, - { - "level": 2, - "title": "Percentage Retracements", - "page": 94 - }, - { - "level": 2, - "title": "Speed Resistance Lines", - "page": 96 - }, - { - "level": 2, - "title": "Gann and Fibonacci Fan Lines", - "page": 98 - }, - { - "level": 2, - "title": "Internal Trendlines", - "page": 99 - }, - { - "level": 2, - "title": "Reversal Days", - "page": 99 - }, - { - "level": 2, - "title": "Price Gaps", - "page": 102 - }, - { - "level": 2, - "title": "Conclusion", - "page": 105 - }, - { - "level": 1, - "title": "5 Major Reversal Patterns", - "page": 106 - }, - { - "level": 2, - "title": "Introduction", - "page": 106 - }, - { - "level": 2, - "title": "Price Patterns", - "page": 106 - }, - { - "level": 2, - "title": "Two Types of Patterns: Reversal and Continuation", - "page": 107 - }, - { - "level": 2, - "title": "The Head and Shoulders Reversal Pattern", - "page": 109 - }, - { - "level": 2, - "title": "The Importance of Volume", - "page": 113 - }, - { - "level": 2, - "title": "Finding a Price Objective", - "page": 113 - }, - { - "level": 2, - "title": "The Inverse Head and Shoulders", - "page": 115 - }, - { - "level": 2, - "title": "Complex Head and Shoulders Patterns", - "page": 117 - }, - { - "level": 2, - "title": "Triple Tops and Bottoms", - "page": 119 - }, - { - "level": 2, - "title": "Double Tops and Bottoms", - "page": 121 - }, - { - "level": 2, - "title": "Variations from the Ideal Pattern", - "page": 124 - }, - { - "level": 2, - "title": "Saucers and Spikes", - "page": 128 - }, - { - "level": 2, - "title": "Conclusion", - "page": 129 - }, - { - "level": 1, - "title": "6 Continuation Patterns", - "page": 130 - }, - { - "level": 2, - "title": "Introduction", - "page": 130 - }, - { - "level": 2, - "title": "Triangles", - "page": 131 - }, - { - "level": 2, - "title": "The Symmetrical Triangle", - "page": 132 - }, - { - "level": 2, - "title": "The Ascending Triangle", - "page": 135 - }, - { - "level": 2, - "title": "The Descending Triangle", - "page": 137 - }, - { - "level": 2, - "title": "The Broadening Formation", - "page": 139 - }, - { - "level": 2, - "title": "Flags and Pennants", - "page": 140 - }, - { - "level": 2, - "title": "The Wedge Formation", - "page": 144 - }, - { - "level": 2, - "title": "The Rectangle Formation", - "page": 145 - }, - { - "level": 2, - "title": "The Measured Move", - "page": 149 - }, - { - "level": 2, - "title": "The Continuation Head and Shoulders Pattern", - "page": 150 - }, - { - "level": 2, - "title": "Confirmation and Divergence", - "page": 152 - }, - { - "level": 2, - "title": "Conclusion", - "page": 153 - }, - { - "level": 1, - "title": "7 Volume and Open Interest", - "page": 154 - }, - { - "level": 2, - "title": "Introduction", - "page": 154 - }, - { - "level": 2, - "title": "Volume and Open Interest as Secondary Indicators", - "page": 154 - }, - { - "level": 2, - "title": "Interpretation of Volume for All Markets", - "page": 158 - }, - { - "level": 2, - "title": "Interpretation of Open Interest in Futures", - "page": 164 - }, - { - "level": 2, - "title": "Summary of Volume and Open Interest Rules", - "page": 169 - }, - { - "level": 2, - "title": "Blowoffs and Selling Climaxes", - "page": 169 - }, - { - "level": 2, - "title": "Commitments of Traders Report", - "page": 169 - }, - { - "level": 2, - "title": "Watch the Commercials", - "page": 170 - }, - { - "level": 2, - "title": "Net Trader Positions", - "page": 171 - }, - { - "level": 2, - "title": "Open Interest In Options", - "page": 171 - }, - { - "level": 2, - "title": "Put/Call Ratios", - "page": 172 - }, - { - "level": 2, - "title": "Combine Option Sentiment With Technicals", - "page": 173 - }, - { - "level": 2, - "title": "Conclusion", - "page": 173 - }, - { - "level": 1, - "title": "8 Long Term Charts", - "page": 175 - }, - { - "level": 2, - "title": "Introduction", - "page": 175 - }, - { - "level": 2, - "title": "The Importance of Longer Range Perspective", - "page": 175 - }, - { - "level": 2, - "title": "Construction of Continuation Charts for Futures", - "page": 176 - }, - { - "level": 2, - "title": "The Perpetual Contract™", - "page": 177 - }, - { - "level": 2, - "title": "Long Term Trends Dispute Randomness", - "page": 178 - }, - { - "level": 2, - "title": "Patterns on Charts: Weekly and Monthly Reversals", - "page": 178 - }, - { - "level": 2, - "title": "Long Term to Short Term Charts", - "page": 178 - }, - { - "level": 2, - "title": "Why Should Long Range Charts Be Adjusted for Inflation?", - "page": 179 - }, - { - "level": 2, - "title": "Long Term Charts Not Intended for Trading Purposes", - "page": 180 - }, - { - "level": 2, - "title": "Examples of Long Term Charts", - "page": 181 - }, - { - "level": 1, - "title": "9 Moving Averages", - "page": 187 - }, - { - "level": 2, - "title": "Introduction", - "page": 187 - }, - { - "level": 2, - "title": "The Moving Average: A Smoothing Device with a Time Lag", - "page": 188 - }, - { - "level": 2, - "title": "Moving Average Envelopes", - "page": 197 - }, - { - "level": 2, - "title": "Bollinger Bands", - "page": 198 - }, - { - "level": 2, - "title": "Using Bollinger Bands as Targets", - "page": 200 - }, - { - "level": 2, - "title": "Band Width Measures Volatility", - "page": 200 - }, - { - "level": 2, - "title": "Moving Averages Tied to Cycles", - "page": 201 - }, - { - "level": 2, - "title": "Fibonacci Numbers Used as Moving Averages", - "page": 202 - }, - { - "level": 2, - "title": "Moving Averages Applied to Long Term Charts", - "page": 202 - }, - { - "level": 2, - "title": "The Weekly Rule", - "page": 204 - }, - { - "level": 2, - "title": "To Optimize or Not", - "page": 209 - }, - { - "level": 2, - "title": "Summary", - "page": 209 - }, - { - "level": 2, - "title": "The Adaptive Moving Average", - "page": 210 - }, - { - "level": 2, - "title": "Alternatives to the Moving Average", - "page": 210 - }, - { - "level": 1, - "title": "10 Oscillators and Contrary Opinion", - "page": 212 - }, - { - "level": 2, - "title": "Introduction", - "page": 212 - }, - { - "level": 2, - "title": "Oscillator Usage in Conjunction with Trend", - "page": 213 - }, - { - "level": 2, - "title": "Measuring Momentum", - "page": 214 - }, - { - "level": 2, - "title": "Measuring Rate of Change (ROC)", - "page": 219 - }, - { - "level": 2, - "title": "Constructing an Oscillator Using Two Moving Averages", - "page": 219 - }, - { - "level": 2, - "title": "Commodity Channel Index", - "page": 222 - }, - { - "level": 2, - "title": "The Relative Strength Index (RSI)", - "page": 224 - }, - { - "level": 2, - "title": "Using the 70 and 30 Lines to Generate Signals", - "page": 230 - }, - { - "level": 2, - "title": "Stochastics (K%D)", - "page": 230 - }, - { - "level": 2, - "title": "Larry Williams %R", - "page": 233 - }, - { - "level": 2, - "title": "The Importance of Trend", - "page": 234 - }, - { - "level": 2, - "title": "When Oscillators are Most Useful", - "page": 235 - }, - { - "level": 2, - "title": "Moving Average Convergence/Divergence (MACD)", - "page": 236 - }, - { - "level": 2, - "title": "MACD Histogram", - "page": 238 - }, - { - "level": 2, - "title": "Combine Weeklies and Dailies", - "page": 239 - }, - { - "level": 2, - "title": "The Principle of Contrary Opinion in Futures", - "page": 240 - }, - { - "level": 2, - "title": "Investor Sentiment Readings", - "page": 243 - }, - { - "level": 2, - "title": "Investors Intelligence Numbers", - "page": 244 - }, - { - "level": 1, - "title": "11 Point and Figure Charting", - "page": 246 - }, - { - "level": 2, - "title": "Introduction", - "page": 246 - }, - { - "level": 2, - "title": "The Point and Figure Versus the Bar Chart", - "page": 246 - }, - { - "level": 2, - "title": "Construction of the Intraday Point and Figure Chart", - "page": 250 - }, - { - "level": 2, - "title": "The Horizontal Count", - "page": 253 - }, - { - "level": 2, - "title": "Price Patterns", - "page": 254 - }, - { - "level": 2, - "title": "3 Box Reversal Point and Figure Charting", - "page": 256 - }, - { - "level": 2, - "title": "Construction of the 3 Point Reversal Chart", - "page": 257 - }, - { - "level": 2, - "title": "The Drawing of Trendlines", - "page": 261 - }, - { - "level": 2, - "title": "Measuring Techniques", - "page": 264 - }, - { - "level": 2, - "title": "Trading Tactics", - "page": 265 - }, - { - "level": 2, - "title": "Advantages of Point and Figure Charts", - "page": 266 - }, - { - "level": 2, - "title": "P&F Technical Indicators", - "page": 270 - }, - { - "level": 2, - "title": "Computerized P&F Charting", - "page": 270 - }, - { - "level": 2, - "title": "P&F Moving Averages", - "page": 272 - }, - { - "level": 2, - "title": "Conclusion", - "page": 273 - }, - { - "level": 1, - "title": "12 Japanese Candlesticks", - "page": 274 - }, - { - "level": 2, - "title": "Introduction", - "page": 274 - }, - { - "level": 2, - "title": "Candlestick Charting", - "page": 274 - }, - { - "level": 2, - "title": "Basic Candlesticks", - "page": 276 - }, - { - "level": 2, - "title": "Candle Pattern Analysis", - "page": 278 - }, - { - "level": 2, - "title": "Filtered Candle Patterns", - "page": 283 - }, - { - "level": 2, - "title": "Conclusion", - "page": 284 - }, - { - "level": 2, - "title": "Candle Patterns", - "page": 285 - }, - { - "level": 1, - "title": "13 Elliott Wave Theory", - "page": 294 - }, - { - "level": 2, - "title": "Historical Background", - "page": 294 - }, - { - "level": 2, - "title": "Basic Tenets of the Elliott Wave Principle", - "page": 294 - }, - { - "level": 2, - "title": "Connection Between Elliott Wave and Dow Theory", - "page": 298 - }, - { - "level": 2, - "title": "Corrective Waves", - "page": 299 - }, - { - "level": 2, - "title": "The Rule of Alternation", - "page": 307 - }, - { - "level": 2, - "title": "Channeling", - "page": 308 - }, - { - "level": 2, - "title": "Wave 4 as a Support Area", - "page": 309 - }, - { - "level": 2, - "title": "Fibonacci Numbers as the Basis of the Wave Principle", - "page": 309 - }, - { - "level": 2, - "title": "Fibonacci Ratios and Retracements", - "page": 310 - }, - { - "level": 2, - "title": "Fibonacci Time Targets", - "page": 313 - }, - { - "level": 2, - "title": "Combining All Three Aspects of Wave Theory", - "page": 313 - }, - { - "level": 2, - "title": "Elliott Wave Applied to Stocks Versus Commodities", - "page": 315 - }, - { - "level": 2, - "title": "Summary and Conclusions", - "page": 315 - }, - { - "level": 2, - "title": "Reference Material", - "page": 317 - }, - { - "level": 1, - "title": "14 Time Cycles", - "page": 318 - }, - { - "level": 2, - "title": "Introduction", - "page": 318 - }, - { - "level": 2, - "title": "Cycles", - "page": 319 - }, - { - "level": 2, - "title": "How Cyclic Concepts Help Explain Charting Techniques", - "page": 328 - }, - { - "level": 2, - "title": "Dominant Cycles", - "page": 331 - }, - { - "level": 2, - "title": "Combining Cycle Lengths", - "page": 333 - }, - { - "level": 2, - "title": "The Importance of Trend", - "page": 334 - }, - { - "level": 2, - "title": "Left and Right Translation", - "page": 335 - }, - { - "level": 2, - "title": "How to Isolate Cycles", - "page": 335 - }, - { - "level": 2, - "title": "Seasonal Cycles", - "page": 340 - }, - { - "level": 2, - "title": "Stock Market Cycles", - "page": 344 - }, - { - "level": 2, - "title": "The January Barometer", - "page": 344 - }, - { - "level": 2, - "title": "The Presidential Cycle", - "page": 345 - }, - { - "level": 2, - "title": "Combining Cycles with Other Technical Tools", - "page": 345 - }, - { - "level": 2, - "title": "Maximum Entropy Spectral Analysis", - "page": 345 - }, - { - "level": 2, - "title": "Cycle Reading and Software", - "page": 346 - }, - { - "level": 1, - "title": "15 Computers and Trading Systems", - "page": 347 - }, - { - "level": 2, - "title": "Introduction", - "page": 347 - }, - { - "level": 2, - "title": "Some Computer Needs", - "page": 348 - }, - { - "level": 2, - "title": "Grouping Tools and Indicators", - "page": 349 - }, - { - "level": 2, - "title": "Using the Tools and Indicators", - "page": 349 - }, - { - "level": 2, - "title": "Welles Wilder’s Parabolic and Directional Movement Systems", - "page": 350 - }, - { - "level": 2, - "title": "Pros and Cons of System Trading", - "page": 356 - }, - { - "level": 2, - "title": "Need Expert Help?", - "page": 357 - }, - { - "level": 2, - "title": "Test Systems or Create Your Own", - "page": 358 - }, - { - "level": 2, - "title": "Conclusion", - "page": 358 - }, - { - "level": 1, - "title": "16 Money Management and Trading Tactics", - "page": 360 - }, - { - "level": 2, - "title": "Introduction", - "page": 360 - }, - { - "level": 2, - "title": "The Three Elements of Successful Trading", - "page": 360 - }, - { - "level": 2, - "title": "Money Management", - "page": 361 - }, - { - "level": 2, - "title": "Reward to Risk Ratios", - "page": 363 - }, - { - "level": 2, - "title": "Trading Multiple Positions: Trending versus Trading Units", - "page": 364 - }, - { - "level": 2, - "title": "What to Do After Periods of Success and Adversity", - "page": 364 - }, - { - "level": 2, - "title": "Trading Tactics", - "page": 365 - }, - { - "level": 2, - "title": "Combining Technical Factors and Money Management", - "page": 367 - }, - { - "level": 2, - "title": "Types of Trading Orders", - "page": 368 - }, - { - "level": 2, - "title": "From Daily Charts to Intraday Price Charts", - "page": 369 - }, - { - "level": 2, - "title": "The Use of Intraday Pivot Points", - "page": 371 - }, - { - "level": 2, - "title": "Summary of Money Management and Trading Guidelines", - "page": 372 - }, - { - "level": 2, - "title": "Application to Stocks", - "page": 373 - }, - { - "level": 2, - "title": "Asset Allocation", - "page": 373 - }, - { - "level": 2, - "title": "Managed Accounts and Mutual Funds", - "page": 373 - }, - { - "level": 2, - "title": "Market Profile", - "page": 374 - }, - { - "level": 1, - "title": "17 The Link Between Stocks and Futures: Intermarket Analysis", - "page": 375 - }, - { - "level": 2, - "title": "Intermarket Analysis", - "page": 376 - }, - { - "level": 2, - "title": "Program Trading: The Ultimate Link", - "page": 376 - }, - { - "level": 2, - "title": "The Link Between Bonds and Stocks", - "page": 378 - }, - { - "level": 2, - "title": "The Link Between Bonds and Commodities", - "page": 379 - }, - { - "level": 2, - "title": "The Link Between Commodities and the Dollar", - "page": 379 - }, - { - "level": 2, - "title": "Stock Sectors and Industry Groups", - "page": 381 - }, - { - "level": 2, - "title": "The Dollar and Large Caps", - "page": 382 - }, - { - "level": 2, - "title": "Intermarket Analysis and Mutual Funds", - "page": 382 - }, - { - "level": 2, - "title": "Relative Strength Analysis", - "page": 383 - }, - { - "level": 2, - "title": "Relative Strength and Sectors", - "page": 385 - }, - { - "level": 2, - "title": "Relative Strength and Individual Stocks", - "page": 386 - }, - { - "level": 2, - "title": "Top-Down Market Approach", - "page": 386 - }, - { - "level": 2, - "title": "Deflation Scenario", - "page": 387 - }, - { - "level": 2, - "title": "Intermarket Correlation", - "page": 388 - }, - { - "level": 2, - "title": "Intermarket Neural Network Software", - "page": 389 - }, - { - "level": 2, - "title": "Conclusion", - "page": 389 - }, - { - "level": 1, - "title": "18 Stock Market Indicators", - "page": 391 - }, - { - "level": 2, - "title": "Measuring Market Breadth", - "page": 391 - }, - { - "level": 2, - "title": "Sample Data", - "page": 391 - }, - { - "level": 2, - "title": "Comparing Market Averages", - "page": 392 - }, - { - "level": 2, - "title": "The Advance-Decline Line", - "page": 393 - }, - { - "level": 2, - "title": "AD Divergence", - "page": 394 - }, - { - "level": 2, - "title": "Daily Versus Weekly AD Lines", - "page": 394 - }, - { - "level": 2, - "title": "Variations in AD Line", - "page": 395 - }, - { - "level": 2, - "title": "McClellan Oscillator", - "page": 395 - }, - { - "level": 2, - "title": "McClellan Summation Index", - "page": 396 - }, - { - "level": 2, - "title": "New Highs Versus New Lows", - "page": 397 - }, - { - "level": 2, - "title": "New High-New Low Index", - "page": 398 - }, - { - "level": 2, - "title": "Upside Versus Downside Volume", - "page": 399 - }, - { - "level": 2, - "title": "The Arms Index", - "page": 400 - }, - { - "level": 2, - "title": "TRIN Versus TICK", - "page": 401 - }, - { - "level": 2, - "title": "Smoothing the Arms Index", - "page": 401 - }, - { - "level": 2, - "title": "Open Arms", - "page": 402 - }, - { - "level": 2, - "title": "Equivolume Charting", - "page": 402 - }, - { - "level": 2, - "title": "Candlepower", - "page": 404 - }, - { - "level": 2, - "title": "Comparing Market Averages", - "page": 405 - }, - { - "level": 2, - "title": "Conclusion", - "page": 407 - }, - { - "level": 1, - "title": "19 Pulling It All Together—A Checklist", - "page": 408 - }, - { - "level": 2, - "title": "Technical Checklist", - "page": 408 - }, - { - "level": 2, - "title": "How to Coordinate Technical and Fundamental Analysis", - "page": 410 - }, - { - "level": 2, - "title": "Chartered Market Technician (CMT)", - "page": 410 - }, - { - "level": 2, - "title": "Market Technicians Association (MTA)", - "page": 411 - }, - { - "level": 2, - "title": "The Global Reach of Technical Analysis", - "page": 411 - }, - { - "level": 2, - "title": "Technical Analysis by Any Name", - "page": 412 - }, - { - "level": 2, - "title": "Federal Reserve Finally Approves", - "page": 412 - }, - { - "level": 2, - "title": "Conclusion", - "page": 413 - }, - { - "level": 1, - "title": "A Advanced Technical Indicators", - "page": 416 - }, - { - "level": 2, - "title": "Demand Index (DI)", - "page": 416 - }, - { - "level": 2, - "title": "Herrick Payoff Index (HPI)", - "page": 418 - }, - { - "level": 2, - "title": "Starc Bands and Keltner Channels", - "page": 420 - }, - { - "level": 2, - "title": "Formula for Demand Index", - "page": 423 - }, - { - "level": 1, - "title": "B Market Profile", - "page": 425 - }, - { - "level": 2, - "title": "Introduction", - "page": 425 - }, - { - "level": 2, - "title": "Market Profile Graphic", - "page": 427 - }, - { - "level": 2, - "title": "Market Structure", - "page": 428 - }, - { - "level": 2, - "title": "Market Profile Organizing Principles", - "page": 429 - }, - { - "level": 2, - "title": "Range Development and Profile Patterns", - "page": 433 - }, - { - "level": 2, - "title": "Tracking Longer Term Market Activity", - "page": 434 - }, - { - "level": 2, - "title": "Conclusion", - "page": 438 - }, - { - "level": 1, - "title": "C The Essentials of Building a Trading System", - "page": 440 - }, - { - "level": 2, - "title": "5-Step Plan", - "page": 441 - }, - { - "level": 2, - "title": "Step 1: Start with a Concept (an Idea)", - "page": 441 - }, - { - "level": 2, - "title": "Step 2: Turn Your Idea into a Set of Objective Rules", - "page": 443 - }, - { - "level": 2, - "title": "Step 3: Visually Check It Out on the Charts", - "page": 443 - }, - { - "level": 2, - "title": "Step 4: Formally Test It with a Computer", - "page": 443 - }, - { - "level": 2, - "title": "Step 5: Evaluate Results", - "page": 446 - }, - { - "level": 2, - "title": "Money Management", - "page": 446 - }, - { - "level": 2, - "title": "Conclusion", - "page": 447 - }, - { - "level": 1, - "title": "D Continuous Futures Contracts", - "page": 450 - }, - { - "level": 2, - "title": "Nearest Contract", - "page": 450 - }, - { - "level": 2, - "title": "Next Contract", - "page": 451 - }, - { - "level": 2, - "title": "Gann Contract", - "page": 451 - }, - { - "level": 2, - "title": "Continuous Contracts", - "page": 452 - }, - { - "level": 2, - "title": "Constant Forward Continuous Contracts", - "page": 452 - }, - { - "level": 1, - "title": "Glossary", - "page": 454 - }, - { - "level": 1, - "title": "Selected Bibliography", - "page": 462 - }, - { - "level": 1, - "title": "Selected Resources", - "page": 466 - }, - { - "level": 1, - "title": "Index", - "page": 469 - } - ] -} \ No newline at end of file diff --git a/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/llm.txt b/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/llm.txt deleted file mode 100644 index 15a24a1b445a09273c8dabbabfd333c6e2af0fe0..0000000000000000000000000000000000000000 --- a/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/llm.txt +++ /dev/null @@ -1,198 +0,0 @@ -# Book Title: Technical Analysis of the Financial Markets -> Author: John J. Murphy | Category: trading | Pages: 494 | Year: 2020 - -## Overview & Metadata -- Document ID: technical_analysis_of_the_financial_market_-_john_j_murphy -- Category: trading -- Tags: _john_j_murphy, technical_analysis_of_the_financial_market_ -- Primary Markdown HF Raw URL: https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/technical_analysis_of_the_financial_market_-_john_j_murphy.md -- Original PDF HF Download: https://huggingface.co/datasets/learner20011/CloverTexts-Data/resolve/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/technical_analysis_of_the_financial_market_-_john_j_murphy.pdf -- Layout Coordinates JSON: https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/technical_analysis_of_the_financial_market_-_john_j_murphy.layout.json -- Book LLM Text URL: https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/llm.txt -- Online Web Reader: /book?id=technical_analysis_of_the_financial_market_-_john_j_murphy - -## Table of Contents -- Title Page - Page 3 -- Copyright - Page 4 -- Dedication - Page 6 -- Contents - Page 7 -- About the Author - Page 19 -- About the Contributors - Page 20 -- Introduction - Page 21 -- Acknowledgments - Page 23 -- 1 Philosophy of Technical Analysis - Page 24 - - Introduction - Page 24 - - Philosophy or Rationale - Page 24 - - Technical versus Fundamental Forecasting - Page 27 - - Analysis versus Timing - Page 28 - - Flexibility and Adaptability of Technical Analysis - Page 29 - - Technical Analysis Applied to Different Trading Mediums - Page 30 - - Technical Analysis Applied to Different Time Dimensions - Page 30 - - Economic Forecasting - Page 31 - - Technician or Chartist? - Page 31 - - A Brief Comparison of Technical Analysis in Stocks and Futures - Page 32 - - Less Reliance on Market Averages and Indicators - Page 35 - - Some Criticisms of the Technical Approach - Page 35 - - Random Walk Theory - Page 38 - - Universal Principles - Page 40 -- 2 Dow Theory - Page 41 - - Introduction - Page 41 - - Basic Tenets - Page 42 - - The Use of Closing Prices and the Presence of Lines - Page 47 - - Some Criticisms of Dow Theory - Page 48 - - Stocks as Economic Indicators - Page 49 - - Dow Theory Applied to Futures Trading - Page 49 - - Conclusion - Page 50 -- 3 Chart Construction - Page 51 - - Introduction - Page 51 - - Types of Charts Available - Page 51 - - Candlesticks - Page 53 - - Arithmetic versus Logarithmic Scale - Page 54 - - Construction of the Daily Bar Chart - Page 55 - - Volume - Page 56 - - Futures Open Interest - Page 57 - - Weekly and Monthly Bar Charts - Page 59 - - Conclusion - Page 61 -- 4 Basic Concepts of Trend - Page 62 - - Definition of Trend - Page 62 - - Trend Has Three Directions - Page 64 - - Trend Has Three Classifications - Page 65 - - Support and Resistance - Page 67 - - Trendlines - Page 75 - - The Fan Principle - Page 83 - - The Importance of the Number Three - Page 85 - - The Relative Steepness of the Trendline - Page 85 - - The Channel Line - Page 89 - - Percentage Retracements - Page 94 - - Speed Resistance Lines - Page 96 - - Gann and Fibonacci Fan Lines - Page 98 - - Internal Trendlines - Page 99 - - Reversal Days - Page 99 - - Price Gaps - Page 102 - - Conclusion - Page 105 -- 5 Major Reversal Patterns - Page 106 - - Introduction - Page 106 - - Price Patterns - Page 106 - - Two Types of Patterns: Reversal and Continuation - Page 107 - - The Head and Shoulders Reversal Pattern - Page 109 - - The Importance of Volume - Page 113 - - Finding a Price Objective - Page 113 - - The Inverse Head and Shoulders - Page 115 - - Complex Head and Shoulders Patterns - Page 117 - - Triple Tops and Bottoms - Page 119 - - Double Tops and Bottoms - Page 121 - - Variations from the Ideal Pattern - Page 124 - - Saucers and Spikes - Page 128 - - Conclusion - Page 129 -- 6 Continuation Patterns - Page 130 - - Introduction - Page 130 - - Triangles - Page 131 - - The Symmetrical Triangle - Page 132 - - The Ascending Triangle - Page 135 - - The Descending Triangle - Page 137 - - The Broadening Formation - Page 139 - - Flags and Pennants - Page 140 - - The Wedge Formation - Page 144 - - The Rectangle Formation - Page 145 - - The Measured Move - Page 149 - - The Continuation Head and Shoulders Pattern - Page 150 - - Confirmation and Divergence - Page 152 - - Conclusion - Page 153 -- 7 Volume and Open Interest - Page 154 - - Introduction - Page 154 - - Volume and Open Interest as Secondary Indicators - Page 154 - - Interpretation of Volume for All Markets - Page 158 - - Interpretation of Open Interest in Futures - Page 164 - - Summary of Volume and Open Interest Rules - Page 169 - - Blowoffs and Selling Climaxes - Page 169 - - Commitments of Traders Report - Page 169 - - Watch the Commercials - Page 170 - - Net Trader Positions - Page 171 - - Open Interest In Options - Page 171 - - Put/Call Ratios - Page 172 - - Combine Option Sentiment With Technicals - Page 173 - - Conclusion - Page 173 -- 8 Long Term Charts - Page 175 - - Introduction - Page 175 - - The Importance of Longer Range Perspective - Page 175 - - Construction of Continuation Charts for Futures - Page 176 - - The Perpetual Contract™ - Page 177 - - Long Term Trends Dispute Randomness - Page 178 - - Patterns on Charts: Weekly and Monthly Reversals - Page 178 - - Long Term to Short Term Charts - Page 178 - - Why Should Long Range Charts Be Adjusted for Inflation? - Page 179 - - Long Term Charts Not Intended for Trading Purposes - Page 180 - - Examples of Long Term Charts - Page 181 -- 9 Moving Averages - Page 187 - - Introduction - Page 187 - - The Moving Average: A Smoothing Device with a Time Lag - Page 188 - - Moving Average Envelopes - Page 197 - - Bollinger Bands - Page 198 - - Using Bollinger Bands as Targets - Page 200 - - Band Width Measures Volatility - Page 200 - - Moving Averages Tied to Cycles - Page 201 - - Fibonacci Numbers Used as Moving Averages - Page 202 - - Moving Averages Applied to Long Term Charts - Page 202 - - The Weekly Rule - Page 204 - - To Optimize or Not - Page 209 - - Summary - Page 209 - - The Adaptive Moving Average - Page 210 - - Alternatives to the Moving Average - Page 210 -- 10 Oscillators and Contrary Opinion - Page 212 - - Introduction - Page 212 - - Oscillator Usage in Conjunction with Trend - Page 213 - - Measuring Momentum - Page 214 - - Measuring Rate of Change (ROC) - Page 219 - - Constructing an Oscillator Using Two Moving Averages - Page 219 - - Commodity Channel Index - Page 222 - - The Relative Strength Index (RSI) - Page 224 - - Using the 70 and 30 Lines to Generate Signals - Page 230 - - Stochastics (K%D) - Page 230 - - Larry Williams %R - Page 233 - - The Importance of Trend - Page 234 - - When Oscillators are Most Useful - Page 235 - - Moving Average Convergence/Divergence (MACD) - Page 236 - - MACD Histogram - Page 238 - - Combine Weeklies and Dailies - Page 239 - - The Principle of Contrary Opinion in Futures - Page 240 - - Investor Sentiment Readings - Page 243 - - Investors Intelligence Numbers - Page 244 -- 11 Point and Figure Charting - Page 246 - - Introduction - Page 246 - - The Point and Figure Versus the Bar Chart - Page 246 - - Construction of the Intraday Point and Figure Chart - Page 250 - - The Horizontal Count - Page 253 - -## Available Raw Markdown Chunks (Direct Hugging Face Raw URLs - 0 Bot Protection) -- [001_Title Page.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/001_Title%20Page.md) — Contents -- [002_Copyright.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/002_Copyright.md) — About the Author -- [003_About the Contributors.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/003_About%20the%20Contributors.md) — About the Contributors -- [004_Introduction.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/004_Introduction.md) — Introduction -- [005_Acknowledgments.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/005_Acknowledgments.md) — Acknowledgments -- [006_1 Philosophy of Technical Analysis.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/006_1%20Philosophy%20of%20Technical%20Analysis.md) — INTRODUCTION -- [007_2 Dow Theory.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/007_2%20Dow%20Theory.md) — SOME CRITICISMS OF DOW THEORY -- [008_3 Chart Construction.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/008_3%20Chart%20Construction.md) — CONSTRUCTION OF THE DAILY BAR CHART -- [009_4 Basic Concepts of Trend.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/009_4%20Basic%20Concepts%20of%20Trend.md) — DEFINITION OF TREND -- [010_5 Major Reversal Patterns.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/010_5%20Major%20Reversal%20Patterns.md) — TWO TYPES OF PATTERNS: REVERSAL AND CONTINUATION -- [011_6 Continuation Patterns.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/011_6%20Continuation%20Patterns.md) — TRIANGLES -- [012_7 Volume and Open Interest.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/012_7%20Volume%20and%20Open%20Interest.md) — VOLUME AND OPEN INTEREST AS SECONDARY INDICATORS -- [013_8 Long Term Charts.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/013_8%20Long%20Term%20Charts.md) — LONG TERM TO SHORT TERM CHARTS -- [014_9 Moving Averages.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/014_9%20Moving%20Averages.md) — How to Use the 4-9-18-Day Moving Average System -- [015_10 Oscillators and Contrary Opinion.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/015_10%20Oscillators%20and%20Contrary%20Opinion.md) — OSCILLATOR USAGE IN CONJUNCTION WITH TREND -- [016_11 Point and Figure Charting.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/016_11%20Point%20and%20Figure%20Charting.md) — CHART -- [017_12 Japanese Candlesticks.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/017_12%20Japanese%20Candlesticks.md) — BASIC CANDLESTICKS -- [018_13 Elliott Wave Theory.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/018_13%20Elliott%20Wave%20Theory.md) — CONNECTION BETWEEN ELLIOTT WAVE AND DOW THEORY -- [019_14 Time Cycles.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/019_14%20Time%20Cycles.md) — CYCLES -- [020_15 Computers and Trading Systems.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/020_15%20Computers%20and%20Trading%20Systems.md) — Too Much of a Good Thing -- [021_16 Money Management and Trading Tactics.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/021_16%20Money%20Management%20and%20Trading%20Tactics.md) — MONEY MANAGEMENT -- [022_17 The Link Between Stocks and Futures - Intermarket Analysis.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/022_17%20The%20Link%20Between%20Stocks%20and%20Futures%20-%20Intermarket%20Analysis.md) — INTERMARKET ANALYSIS -- [023_18 Stock Market Indicators.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/023_18%20Stock%20Market%20Indicators.md) — COMPARING MARKET AVERAGES -- [024_19 Pulling It All Together—A Checklist.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/024_19%20Pulling%20It%20All%20Together%E2%80%94A%20Checklist.md) — APPENDICES -- [025_A Advanced Technical Indicators.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/025_A%20Advanced%20Technical%20Indicators.md) — Appendix A: Advanced Technical Indicators -- [026_B Market Profile.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/026_B%20Market%20Profile.md) — Appendix B: Market Profile -- [027_C The Essentials of Building a Trading System.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/027_C%20The%20Essentials%20of%20Building%20a%20Trading%20System.md) — Appendix C: The Essentials of Building a Trading System -- [028_D Continuous Futures Contracts.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/028_D%20Continuous%20Futures%20Contracts.md) — Appendix D: Continuous Futures Contracts -- [029_Glossary.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/029_Glossary.md) — Glossary -- [030_Selected Bibliography.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/030_Selected%20Bibliography.md) — Bibliography -- [031_Selected Resources.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/031_Selected%20Resources.md) — Selected Resources -- [032_Index.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/032_Index.md) — INDEX \ No newline at end of file diff --git a/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/technical_analysis_of_the_financial_market_-_john_j_murphy.layout.json b/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/technical_analysis_of_the_financial_market_-_john_j_murphy.layout.json deleted file mode 100644 index b37e52f88edee21669df2edb55459c74ce900735..0000000000000000000000000000000000000000 --- a/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/technical_analysis_of_the_financial_market_-_john_j_murphy.layout.json +++ /dev/null @@ -1,37863 +0,0 @@ -{ - "doc_id": "technical_analysis_of_the_financial_market_-_john_j_murphy", - "file_name": "Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy.pdf", - "title": "Technical Analysis of the Financial Markets", - "author": "John J. Murphy", - "total_pages": 494, - "pages": [ - { - "page_num": 1, - "width": 595.28, - "height": 841.89, - "blocks": [] - }, - { - "page_num": 2, - "width": 595.28, - "height": 841.89, - "blocks": [] - }, - { - "page_num": 3, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p3-b0", - "global_id": 1, - "bbox": [ - 127.42, - 395.85, - 288.08, - 416.01 - ], - "text": "JOHN J. MURPHY", - "type": "text" - } - ] - }, - { - "page_num": 4, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p4-b0", - "global_id": 2, - "bbox": [ - 72.0, - 94.8, - 517.19, - 287.04 - ], - "text": "NEW YORK INSTITUTE OF FINANCE\nPublished by the Penguin Group\nPenguin Group (USA) Inc.\n375 Hudson Street, New York, New York 10014, USA\nPenguin Group (Canada), 90 Eglinton Avenue East, Suite 700, Toronto, Ontario M4P 2Y3, Canada (a\ndivision of Pearson Penguin Canada Inc.)\nPenguin Books Ltd., 80 Strand, London WC2R 0RL, England\nPenguin Group Ireland, 25 St. Stephen’s Green, Dublin 2, Ireland (a division of Penguin Books Ltd.)\nPenguin Group (Australia), 250 Camberwell Road, Camberwell, Victoria 3124, Australia (a division of\nPearson Australia Group Pty. Ltd.)\nPenguin Books India Pvt. Ltd., 11 Community Centre, Panchsheel Park, New Delhi—110 017, India\nPenguin Group (NZ), 67 Apollo Drive, Rosedale, Auckland 0632, New Zealand (a division of Pearson\nNew Zealand Ltd.)\nPenguin Books (South Africa) (Pty.) Ltd., 24 Sturdee Avenue, Rosebank, Johannesburg 2196, South\nAfrica", - "type": "text" - }, - { - "block_id": "p4-b1", - "global_id": 3, - "bbox": [ - 72.0, - 300.0, - 426.05, - 310.8 - ], - "text": "Penguin Books Ltd., Registered Offices: 80 Strand, London WC2R 0RL, England", - "type": "text" - }, - { - "block_id": "p4-b2", - "global_id": 4, - "bbox": [ - 72.0, - 323.77, - 519.7, - 373.46 - ], - "text": "While the author has made every effort to provide accurate telephone numbers and Internet addresses at\nthe time of publication, neither the publisher nor the author assumes any responsibility for errors or for\nchanges that occur after publication. Further, the publisher does not have any control over and does not\nassume any responsibility for author or third-party websites or their content.", - "type": "text" - }, - { - "block_id": "p4-b3", - "global_id": 5, - "bbox": [ - 72.0, - 386.42, - 501.48, - 410.19 - ], - "text": "Portions of this book were previously published as Technical Analysis of the Futures Markets (New\nYork Institute of Finance, 1985).", - "type": "text" - }, - { - "block_id": "p4-b4", - "global_id": 6, - "bbox": [ - 72.0, - 423.15, - 234.59, - 433.95 - ], - "text": "Copyright © 1999 by John J. Murphy", - "type": "text" - }, - { - "block_id": "p4-b5", - "global_id": 7, - "bbox": [ - 72.0, - 446.92, - 503.12, - 522.54 - ], - "text": "All rights reserved.\nNo part of this book may be reproduced, scanned, or distributed in any printed or electronic form\nwithout permission. Please do not participate in or encourage piracy of copyrighted materials in\nviolation of the author’s rights. Purchase only authorized editions.\nNEW YORK INSTITUTE OF FINANCE and NYIF are trademarks of Executive Tax Reports, Inc.,\nused under license by Penguin Group (USA) Inc.", - "type": "text" - }, - { - "block_id": "p4-b6", - "global_id": 8, - "bbox": [ - 72.0, - 535.5, - 187.96, - 546.3 - ], - "text": "First edition: January 1999", - "type": "text" - }, - { - "block_id": "p4-b7", - "global_id": 9, - "bbox": [ - 72.0, - 559.27, - 296.7, - 570.07 - ], - "text": "Library of Congress Cataloging-in-Publication Data", - "type": "text" - }, - { - "block_id": "p4-b8", - "global_id": 10, - "bbox": [ - 72.0, - 583.03, - 141.45, - 593.83 - ], - "text": "Murphy, John J.", - "type": "text" - }, - { - "block_id": "p4-b9", - "global_id": 11, - "bbox": [ - 82.8, - 596.0, - 344.7, - 606.8 - ], - "text": "Technical analysis of the financial markets / John J. Murphy.", - "type": "text" - }, - { - "block_id": "p4-b10", - "global_id": 12, - "bbox": [ - 82.8, - 608.96, - 363.58, - 710.5 - ], - "text": "p. cm.\nRev. ed. of: Technical analysis of the futures markets. c1986.\nIncludes bibliographical references and index.\nISBN: 978-1-101-65919-9\n1. Futures market. 2. Commodity exchanges. I. Murphy, John J.\nTechnical analysis of the future markets. II. Title.\nHG6046.M87 1999 98-38531\n332.64’4—dc21 CIP", - "type": "text" - }, - { - "block_id": "p4-b11", - "global_id": 13, - "bbox": [ - 72.0, - 723.47, - 513.32, - 760.19 - ], - "text": "PUBLISHER’S NOTE: This publication is designed to provide accurate and authoritative information\nin regard to the subject matter covered. It is sold with the understanding that the publisher is not\nengaged in rendering legal, accounting, or other professional services. If you require legal advice or", - "type": "text" - } - ] - }, - { - "page_num": 5, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p5-b0", - "global_id": 14, - "bbox": [ - 72.0, - 73.15, - 422.84, - 83.95 - ], - "text": "other expert assistance, you should seek the services of a competent professional.", - "type": "text" - }, - { - "block_id": "p5-b1", - "global_id": 15, - "bbox": [ - 72.0, - 96.91, - 520.65, - 146.6 - ], - "text": "Most New York Institute of Finance books are available at special quantity discounts for bulk purchases\nfor sales promotions, premiums, fund-raising, or educational use. Special books, or book excerpts, can\nalso be created to fit specific needs. For details, write: Special Markets, Penguin Group (USA) Inc., 375\nHudson Street, New York, New York 10014.", - "type": "text" - }, - { - "block_id": "p5-b2", - "global_id": 16, - "bbox": [ - 279.78, - 160.49, - 314.77, - 169.13 - ], - "text": "Version_2", - "type": "text" - } - ] - }, - { - "page_num": 6, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p6-b0", - "global_id": 17, - "bbox": [ - 86.39, - 130.96, - 242.02, - 195.05 - ], - "text": "To my parents, \nTimothy and Margaret \nand \nTo Patty, Clare, and Brian", - "type": "text" - } - ] - }, - { - "page_num": 7, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p7-b0", - "global_id": 18, - "bbox": [ - 72.0, - 133.73, - 182.32, - 162.52 - ], - "text": "Contents", - "type": "text" - }, - { - "block_id": "p7-b1", - "global_id": 19, - "bbox": [ - 72.0, - 230.34, - 181.51, - 244.74 - ], - "text": "About the Author", - "type": "text" - }, - { - "block_id": "p7-b2", - "global_id": 20, - "bbox": [ - 72.0, - 254.11, - 217.46, - 268.51 - ], - "text": "About the Contributors", - "type": "text" - }, - { - "block_id": "p7-b3", - "global_id": 21, - "bbox": [ - 72.0, - 277.88, - 150.08, - 292.27 - ], - "text": "Introduction", - "type": "text" - }, - { - "block_id": "p7-b4", - "global_id": 22, - "bbox": [ - 72.0, - 301.64, - 184.69, - 316.04 - ], - "text": "Acknowledgments", - "type": "text" - }, - { - "block_id": "p7-b5", - "global_id": 23, - "bbox": [ - 72.0, - 353.38, - 322.04, - 382.18 - ], - "text": "1 Philosophy of Technical Analysis", - "type": "text" - }, - { - "block_id": "p7-b6", - "global_id": 24, - "bbox": [ - 72.0, - 393.04, - 143.13, - 407.44 - ], - "text": "Introduction", - "type": "text" - }, - { - "block_id": "p7-b7", - "global_id": 25, - "bbox": [ - 72.0, - 416.81, - 211.08, - 431.21 - ], - "text": "Philosophy or Rationale", - "type": "text" - }, - { - "block_id": "p7-b8", - "global_id": 26, - "bbox": [ - 72.0, - 440.57, - 317.53, - 454.97 - ], - "text": "Technical versus Fundamental Forecasting", - "type": "text" - }, - { - "block_id": "p7-b9", - "global_id": 27, - "bbox": [ - 72.0, - 464.34, - 208.18, - 478.74 - ], - "text": "Analysis versus Timing", - "type": "text" - }, - { - "block_id": "p7-b10", - "global_id": 28, - "bbox": [ - 72.0, - 488.11, - 360.68, - 502.51 - ], - "text": "Flexibility and Adaptability of Technical Analysis", - "type": "text" - }, - { - "block_id": "p7-b11", - "global_id": 29, - "bbox": [ - 72.0, - 511.87, - 409.07, - 526.27 - ], - "text": "Technical Analysis Applied to Different Trading Mediums", - "type": "text" - }, - { - "block_id": "p7-b12", - "global_id": 30, - "bbox": [ - 72.0, - 535.64, - 408.26, - 550.04 - ], - "text": "Technical Analysis Applied to Different Time Dimensions", - "type": "text" - }, - { - "block_id": "p7-b13", - "global_id": 31, - "bbox": [ - 72.0, - 559.4, - 201.06, - 573.8 - ], - "text": "Economic Forecasting", - "type": "text" - }, - { - "block_id": "p7-b14", - "global_id": 32, - "bbox": [ - 72.0, - 583.17, - 206.03, - 597.57 - ], - "text": "Technician or Chartist?", - "type": "text" - }, - { - "block_id": "p7-b15", - "global_id": 33, - "bbox": [ - 72.0, - 606.94, - 445.44, - 621.34 - ], - "text": "A Brief Comparison of Technical Analysis in Stocks and Futures", - "type": "text" - }, - { - "block_id": "p7-b16", - "global_id": 34, - "bbox": [ - 72.0, - 630.7, - 357.83, - 645.1 - ], - "text": "Less Reliance on Market Averages and Indicators", - "type": "text" - }, - { - "block_id": "p7-b17", - "global_id": 35, - "bbox": [ - 72.0, - 654.47, - 323.92, - 668.87 - ], - "text": "Some Criticisms of the Technical Approach", - "type": "text" - }, - { - "block_id": "p7-b18", - "global_id": 36, - "bbox": [ - 72.0, - 678.23, - 199.53, - 692.63 - ], - "text": "Random Walk Theory", - "type": "text" - }, - { - "block_id": "p7-b19", - "global_id": 37, - "bbox": [ - 72.0, - 702.0, - 189.07, - 716.4 - ], - "text": "Universal Principles", - "type": "text" - } - ] - }, - { - "page_num": 8, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p8-b0", - "global_id": 38, - "bbox": [ - 72.0, - 76.11, - 178.33, - 104.91 - ], - "text": "2 Dow Theory", - "type": "text" - }, - { - "block_id": "p8-b1", - "global_id": 39, - "bbox": [ - 72.0, - 115.77, - 143.13, - 130.17 - ], - "text": "Introduction", - "type": "text" - }, - { - "block_id": "p8-b2", - "global_id": 40, - "bbox": [ - 72.0, - 139.54, - 144.91, - 153.94 - ], - "text": "Basic Tenets", - "type": "text" - }, - { - "block_id": "p8-b3", - "global_id": 41, - "bbox": [ - 72.0, - 163.31, - 374.49, - 177.7 - ], - "text": "The Use of Closing Prices and the Presence of Lines", - "type": "text" - }, - { - "block_id": "p8-b4", - "global_id": 42, - "bbox": [ - 72.0, - 187.07, - 259.82, - 201.47 - ], - "text": "Some Criticisms of Dow Theory", - "type": "text" - }, - { - "block_id": "p8-b5", - "global_id": 43, - "bbox": [ - 72.0, - 210.84, - 249.02, - 225.24 - ], - "text": "Stocks as Economic Indicators", - "type": "text" - }, - { - "block_id": "p8-b6", - "global_id": 44, - "bbox": [ - 72.0, - 234.6, - 305.27, - 249.0 - ], - "text": "Dow Theory Applied to Futures Trading", - "type": "text" - }, - { - "block_id": "p8-b7", - "global_id": 45, - "bbox": [ - 72.0, - 258.37, - 137.55, - 272.77 - ], - "text": "Conclusion", - "type": "text" - }, - { - "block_id": "p8-b8", - "global_id": 46, - "bbox": [ - 72.0, - 310.17, - 229.8, - 338.97 - ], - "text": "3 Chart Construction", - "type": "text" - }, - { - "block_id": "p8-b9", - "global_id": 47, - "bbox": [ - 72.0, - 350.55, - 143.13, - 364.95 - ], - "text": "Introduction", - "type": "text" - }, - { - "block_id": "p8-b10", - "global_id": 48, - "bbox": [ - 72.0, - 374.32, - 221.37, - 388.72 - ], - "text": "Types of Charts Available", - "type": "text" - }, - { - "block_id": "p8-b11", - "global_id": 49, - "bbox": [ - 72.0, - 398.08, - 145.52, - 412.48 - ], - "text": "Candlesticks", - "type": "text" - }, - { - "block_id": "p8-b12", - "global_id": 50, - "bbox": [ - 72.0, - 421.85, - 284.15, - 436.25 - ], - "text": "Arithmetic versus Logarithmic Scale", - "type": "text" - }, - { - "block_id": "p8-b13", - "global_id": 51, - "bbox": [ - 72.0, - 445.62, - 278.6, - 460.02 - ], - "text": "Construction of the Daily Bar Chart", - "type": "text" - }, - { - "block_id": "p8-b14", - "global_id": 52, - "bbox": [ - 72.0, - 469.38, - 116.5, - 483.78 - ], - "text": "Volume", - "type": "text" - }, - { - "block_id": "p8-b15", - "global_id": 53, - "bbox": [ - 72.0, - 493.15, - 196.68, - 507.55 - ], - "text": "Futures Open Interest", - "type": "text" - }, - { - "block_id": "p8-b16", - "global_id": 54, - "bbox": [ - 72.0, - 516.91, - 258.68, - 531.31 - ], - "text": "Weekly and Monthly Bar Charts", - "type": "text" - }, - { - "block_id": "p8-b17", - "global_id": 55, - "bbox": [ - 72.0, - 540.68, - 137.55, - 555.08 - ], - "text": "Conclusion", - "type": "text" - }, - { - "block_id": "p8-b18", - "global_id": 56, - "bbox": [ - 72.0, - 592.48, - 262.26, - 621.28 - ], - "text": "4 Basic Concepts of Trend", - "type": "text" - }, - { - "block_id": "p8-b19", - "global_id": 57, - "bbox": [ - 72.0, - 632.14, - 184.17, - 646.54 - ], - "text": "Definition of Trend", - "type": "text" - }, - { - "block_id": "p8-b20", - "global_id": 58, - "bbox": [ - 72.0, - 655.91, - 232.5, - 670.31 - ], - "text": "Trend Has Three Directions", - "type": "text" - }, - { - "block_id": "p8-b21", - "global_id": 59, - "bbox": [ - 72.0, - 679.67, - 257.28, - 694.07 - ], - "text": "Trend Has Three Classifications", - "type": "text" - }, - { - "block_id": "p8-b22", - "global_id": 60, - "bbox": [ - 72.0, - 703.44, - 207.08, - 717.84 - ], - "text": "Support and Resistance", - "type": "text" - }, - { - "block_id": "p8-b23", - "global_id": 61, - "bbox": [ - 72.0, - 727.21, - 133.02, - 741.61 - ], - "text": "Trendlines", - "type": "text" - }, - { - "block_id": "p8-b24", - "global_id": 62, - "bbox": [ - 72.0, - 750.97, - 175.08, - 765.37 - ], - "text": "The Fan Principle", - "type": "text" - } - ] - }, - { - "page_num": 9, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p9-b0", - "global_id": 63, - "bbox": [ - 72.0, - 73.28, - 288.15, - 87.68 - ], - "text": "The Importance of the Number Three", - "type": "text" - }, - { - "block_id": "p9-b1", - "global_id": 64, - "bbox": [ - 72.0, - 97.05, - 302.03, - 111.45 - ], - "text": "The Relative Steepness of the Trendline", - "type": "text" - }, - { - "block_id": "p9-b2", - "global_id": 65, - "bbox": [ - 72.0, - 120.82, - 175.88, - 135.21 - ], - "text": "The Channel Line", - "type": "text" - }, - { - "block_id": "p9-b3", - "global_id": 66, - "bbox": [ - 72.0, - 144.58, - 217.0, - 158.98 - ], - "text": "Percentage Retracements", - "type": "text" - }, - { - "block_id": "p9-b4", - "global_id": 67, - "bbox": [ - 72.0, - 168.35, - 207.85, - 182.75 - ], - "text": "Speed Resistance Lines", - "type": "text" - }, - { - "block_id": "p9-b5", - "global_id": 68, - "bbox": [ - 72.0, - 192.11, - 248.63, - 206.51 - ], - "text": "Gann and Fibonacci Fan Lines", - "type": "text" - }, - { - "block_id": "p9-b6", - "global_id": 69, - "bbox": [ - 72.0, - 215.88, - 181.35, - 230.28 - ], - "text": "Internal Trendlines", - "type": "text" - }, - { - "block_id": "p9-b7", - "global_id": 70, - "bbox": [ - 72.0, - 239.64, - 155.51, - 254.04 - ], - "text": "Reversal Days", - "type": "text" - }, - { - "block_id": "p9-b8", - "global_id": 71, - "bbox": [ - 72.0, - 263.41, - 134.73, - 277.81 - ], - "text": "Price Gaps", - "type": "text" - }, - { - "block_id": "p9-b9", - "global_id": 72, - "bbox": [ - 72.0, - 287.18, - 137.55, - 301.58 - ], - "text": "Conclusion", - "type": "text" - }, - { - "block_id": "p9-b10", - "global_id": 73, - "bbox": [ - 72.0, - 338.98, - 264.83, - 367.78 - ], - "text": "5 Major Reversal Patterns", - "type": "text" - }, - { - "block_id": "p9-b11", - "global_id": 74, - "bbox": [ - 72.0, - 378.64, - 143.13, - 393.04 - ], - "text": "Introduction", - "type": "text" - }, - { - "block_id": "p9-b12", - "global_id": 75, - "bbox": [ - 72.0, - 402.41, - 151.5, - 416.8 - ], - "text": "Price Patterns", - "type": "text" - }, - { - "block_id": "p9-b13", - "global_id": 76, - "bbox": [ - 72.0, - 426.17, - 361.71, - 440.57 - ], - "text": "Two Types of Patterns: Reversal and Continuation", - "type": "text" - }, - { - "block_id": "p9-b14", - "global_id": 77, - "bbox": [ - 72.0, - 449.94, - 312.15, - 464.34 - ], - "text": "The Head and Shoulders Reversal Pattern", - "type": "text" - }, - { - "block_id": "p9-b15", - "global_id": 78, - "bbox": [ - 72.0, - 473.7, - 227.17, - 488.1 - ], - "text": "The Importance of Volume", - "type": "text" - }, - { - "block_id": "p9-b16", - "global_id": 79, - "bbox": [ - 72.0, - 497.47, - 219.44, - 511.87 - ], - "text": "Finding a Price Objective", - "type": "text" - }, - { - "block_id": "p9-b17", - "global_id": 80, - "bbox": [ - 72.0, - 521.23, - 259.82, - 535.63 - ], - "text": "The Inverse Head and Shoulders", - "type": "text" - }, - { - "block_id": "p9-b18", - "global_id": 81, - "bbox": [ - 72.0, - 545.0, - 294.2, - 559.4 - ], - "text": "Complex Head and Shoulders Patterns", - "type": "text" - }, - { - "block_id": "p9-b19", - "global_id": 82, - "bbox": [ - 72.0, - 568.77, - 214.75, - 583.17 - ], - "text": "Triple Tops and Bottoms", - "type": "text" - }, - { - "block_id": "p9-b20", - "global_id": 83, - "bbox": [ - 72.0, - 592.53, - 222.48, - 606.93 - ], - "text": "Double Tops and Bottoms", - "type": "text" - }, - { - "block_id": "p9-b21", - "global_id": 84, - "bbox": [ - 72.0, - 616.3, - 259.77, - 630.7 - ], - "text": "Variations from the Ideal Pattern", - "type": "text" - }, - { - "block_id": "p9-b22", - "global_id": 85, - "bbox": [ - 72.0, - 640.06, - 183.1, - 654.46 - ], - "text": "Saucers and Spikes", - "type": "text" - }, - { - "block_id": "p9-b23", - "global_id": 86, - "bbox": [ - 72.0, - 663.83, - 137.55, - 678.23 - ], - "text": "Conclusion", - "type": "text" - }, - { - "block_id": "p9-b24", - "global_id": 87, - "bbox": [ - 72.0, - 715.63, - 248.19, - 744.43 - ], - "text": "6 Continuation Patterns", - "type": "text" - }, - { - "block_id": "p9-b25", - "global_id": 88, - "bbox": [ - 72.0, - 756.01, - 143.13, - 770.41 - ], - "text": "Introduction", - "type": "text" - } - ] - }, - { - "page_num": 10, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p10-b0", - "global_id": 89, - "bbox": [ - 72.0, - 73.28, - 125.82, - 87.68 - ], - "text": "Triangles", - "type": "text" - }, - { - "block_id": "p10-b1", - "global_id": 90, - "bbox": [ - 72.0, - 97.05, - 223.29, - 111.45 - ], - "text": "The Symmetrical Triangle", - "type": "text" - }, - { - "block_id": "p10-b2", - "global_id": 91, - "bbox": [ - 72.0, - 120.82, - 211.34, - 135.21 - ], - "text": "The Ascending Triangle", - "type": "text" - }, - { - "block_id": "p10-b3", - "global_id": 92, - "bbox": [ - 72.0, - 144.58, - 217.73, - 158.98 - ], - "text": "The Descending Triangle", - "type": "text" - }, - { - "block_id": "p10-b4", - "global_id": 93, - "bbox": [ - 72.0, - 168.35, - 228.64, - 182.75 - ], - "text": "The Broadening Formation", - "type": "text" - }, - { - "block_id": "p10-b5", - "global_id": 94, - "bbox": [ - 72.0, - 192.11, - 183.11, - 206.51 - ], - "text": "Flags and Pennants", - "type": "text" - }, - { - "block_id": "p10-b6", - "global_id": 95, - "bbox": [ - 72.0, - 215.88, - 201.11, - 230.28 - ], - "text": "The Wedge Formation", - "type": "text" - }, - { - "block_id": "p10-b7", - "global_id": 96, - "bbox": [ - 72.0, - 239.64, - 219.03, - 254.04 - ], - "text": "The Rectangle Formation", - "type": "text" - }, - { - "block_id": "p10-b8", - "global_id": 97, - "bbox": [ - 72.0, - 263.41, - 191.9, - 277.81 - ], - "text": "The Measured Move", - "type": "text" - }, - { - "block_id": "p10-b9", - "global_id": 98, - "bbox": [ - 72.0, - 287.18, - 336.94, - 301.58 - ], - "text": "The Continuation Head and Shoulders Pattern", - "type": "text" - }, - { - "block_id": "p10-b10", - "global_id": 99, - "bbox": [ - 72.0, - 310.94, - 243.56, - 325.34 - ], - "text": "Confirmation and Divergence", - "type": "text" - }, - { - "block_id": "p10-b11", - "global_id": 100, - "bbox": [ - 72.0, - 334.71, - 137.55, - 349.11 - ], - "text": "Conclusion", - "type": "text" - }, - { - "block_id": "p10-b12", - "global_id": 101, - "bbox": [ - 72.0, - 386.51, - 276.68, - 415.31 - ], - "text": "7 Volume and Open Interest", - "type": "text" - }, - { - "block_id": "p10-b13", - "global_id": 102, - "bbox": [ - 72.0, - 426.17, - 143.13, - 440.57 - ], - "text": "Introduction", - "type": "text" - }, - { - "block_id": "p10-b14", - "global_id": 103, - "bbox": [ - 72.0, - 449.94, - 363.45, - 464.34 - ], - "text": "Volume and Open Interest as Secondary Indicators", - "type": "text" - }, - { - "block_id": "p10-b15", - "global_id": 104, - "bbox": [ - 72.0, - 473.7, - 307.08, - 488.1 - ], - "text": "Interpretation of Volume for All Markets", - "type": "text" - }, - { - "block_id": "p10-b16", - "global_id": 105, - "bbox": [ - 72.0, - 497.47, - 308.94, - 511.87 - ], - "text": "Interpretation of Open Interest in Futures", - "type": "text" - }, - { - "block_id": "p10-b17", - "global_id": 106, - "bbox": [ - 72.0, - 521.23, - 333.89, - 535.63 - ], - "text": "Summary of Volume and Open Interest Rules", - "type": "text" - }, - { - "block_id": "p10-b18", - "global_id": 107, - "bbox": [ - 72.0, - 545.0, - 251.97, - 559.4 - ], - "text": "Blowoffs and Selling Climaxes", - "type": "text" - }, - { - "block_id": "p10-b19", - "global_id": 108, - "bbox": [ - 72.0, - 568.77, - 258.91, - 583.17 - ], - "text": "Commitments of Traders Report", - "type": "text" - }, - { - "block_id": "p10-b20", - "global_id": 109, - "bbox": [ - 72.0, - 592.53, - 209.89, - 606.93 - ], - "text": "Watch the Commercials", - "type": "text" - }, - { - "block_id": "p10-b21", - "global_id": 110, - "bbox": [ - 72.0, - 616.3, - 190.56, - 630.7 - ], - "text": "Net Trader Positions", - "type": "text" - }, - { - "block_id": "p10-b22", - "global_id": 111, - "bbox": [ - 72.0, - 640.06, - 214.66, - 654.46 - ], - "text": "Open Interest In Options", - "type": "text" - }, - { - "block_id": "p10-b23", - "global_id": 112, - "bbox": [ - 72.0, - 663.83, - 159.5, - 678.23 - ], - "text": "Put/Call Ratios", - "type": "text" - }, - { - "block_id": "p10-b24", - "global_id": 113, - "bbox": [ - 72.0, - 687.6, - 326.96, - 702.0 - ], - "text": "Combine Option Sentiment With Technicals", - "type": "text" - }, - { - "block_id": "p10-b25", - "global_id": 114, - "bbox": [ - 72.0, - 711.36, - 137.55, - 725.76 - ], - "text": "Conclusion", - "type": "text" - } - ] - }, - { - "page_num": 11, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p11-b0", - "global_id": 115, - "bbox": [ - 72.0, - 76.11, - 222.31, - 104.91 - ], - "text": "8 Long Term Charts", - "type": "text" - }, - { - "block_id": "p11-b1", - "global_id": 116, - "bbox": [ - 72.0, - 115.77, - 143.13, - 130.17 - ], - "text": "Introduction", - "type": "text" - }, - { - "block_id": "p11-b2", - "global_id": 117, - "bbox": [ - 72.0, - 139.54, - 334.51, - 153.94 - ], - "text": "The Importance of Longer Range Perspective", - "type": "text" - }, - { - "block_id": "p11-b3", - "global_id": 118, - "bbox": [ - 72.0, - 163.31, - 348.95, - 177.7 - ], - "text": "Construction of Continuation Charts for Futures", - "type": "text" - }, - { - "block_id": "p11-b4", - "global_id": 119, - "bbox": [ - 72.0, - 187.07, - 219.54, - 201.47 - ], - "text": "The Perpetual Contract™", - "type": "text" - }, - { - "block_id": "p11-b5", - "global_id": 120, - "bbox": [ - 72.0, - 210.84, - 304.68, - 225.24 - ], - "text": "Long Term Trends Dispute Randomness", - "type": "text" - }, - { - "block_id": "p11-b6", - "global_id": 121, - "bbox": [ - 72.0, - 234.6, - 365.78, - 249.0 - ], - "text": "Patterns on Charts: Weekly and Monthly Reversals", - "type": "text" - }, - { - "block_id": "p11-b7", - "global_id": 122, - "bbox": [ - 72.0, - 258.37, - 260.59, - 272.77 - ], - "text": "Long Term to Short Term Charts", - "type": "text" - }, - { - "block_id": "p11-b8", - "global_id": 123, - "bbox": [ - 72.0, - 282.14, - 414.89, - 296.53 - ], - "text": "Why Should Long Range Charts Be Adjusted for Inflation?", - "type": "text" - }, - { - "block_id": "p11-b9", - "global_id": 124, - "bbox": [ - 72.0, - 305.9, - 380.99, - 320.3 - ], - "text": "Long Term Charts Not Intended for Trading Purposes", - "type": "text" - }, - { - "block_id": "p11-b10", - "global_id": 125, - "bbox": [ - 72.0, - 329.67, - 253.2, - 344.07 - ], - "text": "Examples of Long Term Charts", - "type": "text" - }, - { - "block_id": "p11-b11", - "global_id": 126, - "bbox": [ - 72.0, - 381.47, - 212.94, - 410.27 - ], - "text": "9 Moving Averages", - "type": "text" - }, - { - "block_id": "p11-b12", - "global_id": 127, - "bbox": [ - 72.0, - 421.85, - 143.13, - 436.25 - ], - "text": "Introduction", - "type": "text" - }, - { - "block_id": "p11-b13", - "global_id": 128, - "bbox": [ - 72.0, - 445.62, - 421.67, - 460.02 - ], - "text": "The Moving Average: A Smoothing Device with a Time Lag", - "type": "text" - }, - { - "block_id": "p11-b14", - "global_id": 129, - "bbox": [ - 72.0, - 469.38, - 232.39, - 483.78 - ], - "text": "Moving Average Envelopes", - "type": "text" - }, - { - "block_id": "p11-b15", - "global_id": 130, - "bbox": [ - 72.0, - 493.15, - 165.91, - 507.55 - ], - "text": "Bollinger Bands", - "type": "text" - }, - { - "block_id": "p11-b16", - "global_id": 131, - "bbox": [ - 72.0, - 516.91, - 264.96, - 531.31 - ], - "text": "Using Bollinger Bands as Targets", - "type": "text" - }, - { - "block_id": "p11-b17", - "global_id": 132, - "bbox": [ - 72.0, - 540.68, - 256.98, - 555.08 - ], - "text": "Band Width Measures Volatility", - "type": "text" - }, - { - "block_id": "p11-b18", - "global_id": 133, - "bbox": [ - 72.0, - 564.45, - 261.45, - 578.84 - ], - "text": "Moving Averages Tied to Cycles", - "type": "text" - }, - { - "block_id": "p11-b19", - "global_id": 134, - "bbox": [ - 72.0, - 588.21, - 339.9, - 602.61 - ], - "text": "Fibonacci Numbers Used as Moving Averages", - "type": "text" - }, - { - "block_id": "p11-b20", - "global_id": 135, - "bbox": [ - 72.0, - 611.98, - 348.07, - 626.38 - ], - "text": "Moving Averages Applied to Long Term Charts", - "type": "text" - }, - { - "block_id": "p11-b21", - "global_id": 136, - "bbox": [ - 72.0, - 635.74, - 172.34, - 650.14 - ], - "text": "The Weekly Rule", - "type": "text" - }, - { - "block_id": "p11-b22", - "global_id": 137, - "bbox": [ - 72.0, - 659.51, - 184.88, - 673.91 - ], - "text": "To Optimize or Not", - "type": "text" - }, - { - "block_id": "p11-b23", - "global_id": 138, - "bbox": [ - 72.0, - 683.27, - 127.95, - 697.67 - ], - "text": "Summary", - "type": "text" - }, - { - "block_id": "p11-b24", - "global_id": 139, - "bbox": [ - 72.0, - 707.04, - 251.16, - 721.44 - ], - "text": "The Adaptive Moving Average", - "type": "text" - }, - { - "block_id": "p11-b25", - "global_id": 140, - "bbox": [ - 72.0, - 730.81, - 278.73, - 745.21 - ], - "text": "Alternatives to the Moving Average", - "type": "text" - } - ] - }, - { - "page_num": 12, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p12-b0", - "global_id": 141, - "bbox": [ - 72.0, - 76.11, - 344.37, - 104.91 - ], - "text": "10 Oscillators and Contrary Opinion", - "type": "text" - }, - { - "block_id": "p12-b1", - "global_id": 142, - "bbox": [ - 72.0, - 115.77, - 143.13, - 130.17 - ], - "text": "Introduction", - "type": "text" - }, - { - "block_id": "p12-b2", - "global_id": 143, - "bbox": [ - 72.0, - 139.54, - 324.44, - 153.94 - ], - "text": "Oscillator Usage in Conjunction with Trend", - "type": "text" - }, - { - "block_id": "p12-b3", - "global_id": 144, - "bbox": [ - 72.0, - 163.31, - 204.31, - 177.7 - ], - "text": "Measuring Momentum", - "type": "text" - }, - { - "block_id": "p12-b4", - "global_id": 145, - "bbox": [ - 72.0, - 187.07, - 269.41, - 201.47 - ], - "text": "Measuring Rate of Change (ROC)", - "type": "text" - }, - { - "block_id": "p12-b5", - "global_id": 146, - "bbox": [ - 72.0, - 210.84, - 396.84, - 225.24 - ], - "text": "Constructing an Oscillator Using Two Moving Averages", - "type": "text" - }, - { - "block_id": "p12-b6", - "global_id": 147, - "bbox": [ - 72.0, - 234.6, - 228.67, - 249.0 - ], - "text": "Commodity Channel Index", - "type": "text" - }, - { - "block_id": "p12-b7", - "global_id": 148, - "bbox": [ - 72.0, - 258.37, - 270.18, - 272.77 - ], - "text": "The Relative Strength Index (RSI)", - "type": "text" - }, - { - "block_id": "p12-b8", - "global_id": 149, - "bbox": [ - 72.0, - 282.14, - 339.75, - 296.53 - ], - "text": "Using the 70 and 30 Lines to Generate Signals", - "type": "text" - }, - { - "block_id": "p12-b9", - "global_id": 150, - "bbox": [ - 72.0, - 305.9, - 182.68, - 320.3 - ], - "text": "Stochastics (K%D)", - "type": "text" - }, - { - "block_id": "p12-b10", - "global_id": 151, - "bbox": [ - 72.0, - 329.67, - 184.9, - 344.07 - ], - "text": "Larry Williams %R", - "type": "text" - }, - { - "block_id": "p12-b11", - "global_id": 152, - "bbox": [ - 72.0, - 353.43, - 216.52, - 367.83 - ], - "text": "The Importance of Trend", - "type": "text" - }, - { - "block_id": "p12-b12", - "global_id": 153, - "bbox": [ - 72.0, - 377.2, - 268.61, - 391.6 - ], - "text": "When Oscillators are Most Useful", - "type": "text" - }, - { - "block_id": "p12-b13", - "global_id": 154, - "bbox": [ - 72.0, - 400.96, - 374.52, - 415.36 - ], - "text": "Moving Average Convergence/Divergence (MACD)", - "type": "text" - }, - { - "block_id": "p12-b14", - "global_id": 155, - "bbox": [ - 72.0, - 424.73, - 179.52, - 439.13 - ], - "text": "MACD Histogram", - "type": "text" - }, - { - "block_id": "p12-b15", - "global_id": 156, - "bbox": [ - 72.0, - 448.5, - 249.46, - 462.9 - ], - "text": "Combine Weeklies and Dailies", - "type": "text" - }, - { - "block_id": "p12-b16", - "global_id": 157, - "bbox": [ - 72.0, - 472.26, - 332.54, - 486.66 - ], - "text": "The Principle of Contrary Opinion in Futures", - "type": "text" - }, - { - "block_id": "p12-b17", - "global_id": 158, - "bbox": [ - 72.0, - 496.03, - 238.24, - 510.43 - ], - "text": "Investor Sentiment Readings", - "type": "text" - }, - { - "block_id": "p12-b18", - "global_id": 159, - "bbox": [ - 72.0, - 519.79, - 252.61, - 534.19 - ], - "text": "Investors Intelligence Numbers", - "type": "text" - }, - { - "block_id": "p12-b19", - "global_id": 160, - "bbox": [ - 72.0, - 571.59, - 291.03, - 600.39 - ], - "text": "11 Point and Figure Charting", - "type": "text" - }, - { - "block_id": "p12-b20", - "global_id": 161, - "bbox": [ - 72.0, - 611.98, - 143.13, - 626.38 - ], - "text": "Introduction", - "type": "text" - }, - { - "block_id": "p12-b21", - "global_id": 162, - "bbox": [ - 72.0, - 635.74, - 316.97, - 650.14 - ], - "text": "The Point and Figure Versus the Bar Chart", - "type": "text" - }, - { - "block_id": "p12-b22", - "global_id": 163, - "bbox": [ - 72.0, - 659.51, - 369.72, - 673.91 - ], - "text": "Construction of the Intraday Point and Figure Chart", - "type": "text" - }, - { - "block_id": "p12-b23", - "global_id": 164, - "bbox": [ - 72.0, - 683.27, - 198.28, - 697.67 - ], - "text": "The Horizontal Count", - "type": "text" - }, - { - "block_id": "p12-b24", - "global_id": 165, - "bbox": [ - 72.0, - 707.04, - 151.5, - 721.44 - ], - "text": "Price Patterns", - "type": "text" - }, - { - "block_id": "p12-b25", - "global_id": 166, - "bbox": [ - 72.0, - 730.81, - 314.18, - 745.21 - ], - "text": "3 Box Reversal Point and Figure Charting", - "type": "text" - }, - { - "block_id": "p12-b26", - "global_id": 167, - "bbox": [ - 72.0, - 754.57, - 317.37, - 768.97 - ], - "text": "Construction of the 3 Point Reversal Chart", - "type": "text" - } - ] - }, - { - "page_num": 13, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p13-b0", - "global_id": 168, - "bbox": [ - 72.0, - 73.28, - 228.52, - 87.68 - ], - "text": "The Drawing of Trendlines", - "type": "text" - }, - { - "block_id": "p13-b1", - "global_id": 169, - "bbox": [ - 72.0, - 97.05, - 202.47, - 111.45 - ], - "text": "Measuring Techniques", - "type": "text" - }, - { - "block_id": "p13-b2", - "global_id": 170, - "bbox": [ - 72.0, - 120.82, - 161.17, - 135.21 - ], - "text": "Trading Tactics", - "type": "text" - }, - { - "block_id": "p13-b3", - "global_id": 171, - "bbox": [ - 72.0, - 144.58, - 296.2, - 158.98 - ], - "text": "Advantages of Point and Figure Charts", - "type": "text" - }, - { - "block_id": "p13-b4", - "global_id": 172, - "bbox": [ - 72.0, - 168.35, - 219.62, - 182.75 - ], - "text": "P&F Technical Indicators", - "type": "text" - }, - { - "block_id": "p13-b5", - "global_id": 173, - "bbox": [ - 72.0, - 192.11, - 238.24, - 206.51 - ], - "text": "Computerized P&F Charting", - "type": "text" - }, - { - "block_id": "p13-b6", - "global_id": 174, - "bbox": [ - 72.0, - 215.88, - 205.23, - 230.28 - ], - "text": "P&F Moving Averages", - "type": "text" - }, - { - "block_id": "p13-b7", - "global_id": 175, - "bbox": [ - 72.0, - 239.64, - 137.55, - 254.04 - ], - "text": "Conclusion", - "type": "text" - }, - { - "block_id": "p13-b8", - "global_id": 176, - "bbox": [ - 72.0, - 291.45, - 263.49, - 320.24 - ], - "text": "12 Japanese Candlesticks", - "type": "text" - }, - { - "block_id": "p13-b9", - "global_id": 177, - "bbox": [ - 72.0, - 331.11, - 143.13, - 345.51 - ], - "text": "Introduction", - "type": "text" - }, - { - "block_id": "p13-b10", - "global_id": 178, - "bbox": [ - 72.0, - 354.87, - 193.87, - 369.27 - ], - "text": "Candlestick Charting", - "type": "text" - }, - { - "block_id": "p13-b11", - "global_id": 179, - "bbox": [ - 72.0, - 378.64, - 181.08, - 393.04 - ], - "text": "Basic Candlesticks", - "type": "text" - }, - { - "block_id": "p13-b12", - "global_id": 180, - "bbox": [ - 72.0, - 402.41, - 211.05, - 416.8 - ], - "text": "Candle Pattern Analysis", - "type": "text" - }, - { - "block_id": "p13-b13", - "global_id": 181, - "bbox": [ - 72.0, - 426.17, - 211.03, - 440.57 - ], - "text": "Filtered Candle Patterns", - "type": "text" - }, - { - "block_id": "p13-b14", - "global_id": 182, - "bbox": [ - 72.0, - 449.94, - 137.55, - 464.34 - ], - "text": "Conclusion", - "type": "text" - }, - { - "block_id": "p13-b15", - "global_id": 183, - "bbox": [ - 72.0, - 473.7, - 162.7, - 488.1 - ], - "text": "Candle Patterns", - "type": "text" - }, - { - "block_id": "p13-b16", - "global_id": 184, - "bbox": [ - 72.0, - 525.5, - 248.31, - 554.3 - ], - "text": "13 Elliott Wave Theory", - "type": "text" - }, - { - "block_id": "p13-b17", - "global_id": 185, - "bbox": [ - 72.0, - 565.89, - 202.67, - 580.28 - ], - "text": "Historical Background", - "type": "text" - }, - { - "block_id": "p13-b18", - "global_id": 186, - "bbox": [ - 72.0, - 589.65, - 312.76, - 604.05 - ], - "text": "Basic Tenets of the Elliott Wave Principle", - "type": "text" - }, - { - "block_id": "p13-b19", - "global_id": 187, - "bbox": [ - 72.0, - 613.42, - 368.94, - 627.82 - ], - "text": "Connection Between Elliott Wave and Dow Theory", - "type": "text" - }, - { - "block_id": "p13-b20", - "global_id": 188, - "bbox": [ - 72.0, - 637.18, - 174.33, - 651.58 - ], - "text": "Corrective Waves", - "type": "text" - }, - { - "block_id": "p13-b21", - "global_id": 189, - "bbox": [ - 72.0, - 660.95, - 209.84, - 675.35 - ], - "text": "The Rule of Alternation", - "type": "text" - }, - { - "block_id": "p13-b22", - "global_id": 190, - "bbox": [ - 72.0, - 684.72, - 138.34, - 699.11 - ], - "text": "Channeling", - "type": "text" - }, - { - "block_id": "p13-b23", - "global_id": 191, - "bbox": [ - 72.0, - 708.48, - 221.51, - 722.88 - ], - "text": "Wave 4 as a Support Area", - "type": "text" - }, - { - "block_id": "p13-b24", - "global_id": 192, - "bbox": [ - 72.0, - 732.25, - 384.93, - 746.65 - ], - "text": "Fibonacci Numbers as the Basis of the Wave Principle", - "type": "text" - }, - { - "block_id": "p13-b25", - "global_id": 193, - "bbox": [ - 72.0, - 756.01, - 275.37, - 770.41 - ], - "text": "Fibonacci Ratios and Retracements", - "type": "text" - } - ] - }, - { - "page_num": 14, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p14-b0", - "global_id": 194, - "bbox": [ - 72.0, - 73.28, - 207.66, - 87.68 - ], - "text": "Fibonacci Time Targets", - "type": "text" - }, - { - "block_id": "p14-b1", - "global_id": 195, - "bbox": [ - 72.0, - 97.05, - 341.78, - 111.45 - ], - "text": "Combining All Three Aspects of Wave Theory", - "type": "text" - }, - { - "block_id": "p14-b2", - "global_id": 196, - "bbox": [ - 72.0, - 120.82, - 373.76, - 135.21 - ], - "text": "Elliott Wave Applied to Stocks Versus Commodities", - "type": "text" - }, - { - "block_id": "p14-b3", - "global_id": 197, - "bbox": [ - 72.0, - 144.58, - 227.08, - 158.98 - ], - "text": "Summary and Conclusions", - "type": "text" - }, - { - "block_id": "p14-b4", - "global_id": 198, - "bbox": [ - 72.0, - 168.35, - 182.65, - 182.75 - ], - "text": "Reference Material", - "type": "text" - }, - { - "block_id": "p14-b5", - "global_id": 199, - "bbox": [ - 72.0, - 220.15, - 191.46, - 248.95 - ], - "text": "14 Time Cycles", - "type": "text" - }, - { - "block_id": "p14-b6", - "global_id": 200, - "bbox": [ - 72.0, - 259.81, - 143.13, - 274.21 - ], - "text": "Introduction", - "type": "text" - }, - { - "block_id": "p14-b7", - "global_id": 201, - "bbox": [ - 72.0, - 283.58, - 111.16, - 297.97 - ], - "text": "Cycles", - "type": "text" - }, - { - "block_id": "p14-b8", - "global_id": 202, - "bbox": [ - 72.0, - 307.34, - 401.07, - 321.74 - ], - "text": "How Cyclic Concepts Help Explain Charting Techniques", - "type": "text" - }, - { - "block_id": "p14-b9", - "global_id": 203, - "bbox": [ - 72.0, - 331.11, - 172.3, - 345.51 - ], - "text": "Dominant Cycles", - "type": "text" - }, - { - "block_id": "p14-b10", - "global_id": 204, - "bbox": [ - 72.0, - 354.87, - 223.86, - 369.27 - ], - "text": "Combining Cycle Lengths", - "type": "text" - }, - { - "block_id": "p14-b11", - "global_id": 205, - "bbox": [ - 72.0, - 378.64, - 216.52, - 393.04 - ], - "text": "The Importance of Trend", - "type": "text" - }, - { - "block_id": "p14-b12", - "global_id": 206, - "bbox": [ - 72.0, - 402.41, - 224.52, - 416.8 - ], - "text": "Left and Right Translation", - "type": "text" - }, - { - "block_id": "p14-b13", - "global_id": 207, - "bbox": [ - 72.0, - 426.17, - 199.47, - 440.57 - ], - "text": "How to Isolate Cycles", - "type": "text" - }, - { - "block_id": "p14-b14", - "global_id": 208, - "bbox": [ - 72.0, - 449.94, - 165.9, - 464.34 - ], - "text": "Seasonal Cycles", - "type": "text" - }, - { - "block_id": "p14-b15", - "global_id": 209, - "bbox": [ - 72.0, - 473.7, - 192.68, - 488.1 - ], - "text": "Stock Market Cycles", - "type": "text" - }, - { - "block_id": "p14-b16", - "global_id": 210, - "bbox": [ - 72.0, - 497.47, - 207.04, - 511.87 - ], - "text": "The January Barometer", - "type": "text" - }, - { - "block_id": "p14-b17", - "global_id": 211, - "bbox": [ - 72.0, - 521.23, - 203.04, - 535.63 - ], - "text": "The Presidential Cycle", - "type": "text" - }, - { - "block_id": "p14-b18", - "global_id": 212, - "bbox": [ - 72.0, - 545.0, - 339.72, - 559.4 - ], - "text": "Combining Cycles with Other Technical Tools", - "type": "text" - }, - { - "block_id": "p14-b19", - "global_id": 213, - "bbox": [ - 72.0, - 568.77, - 286.59, - 583.17 - ], - "text": "Maximum Entropy Spectral Analysis", - "type": "text" - }, - { - "block_id": "p14-b20", - "global_id": 214, - "bbox": [ - 72.0, - 592.53, - 237.03, - 606.93 - ], - "text": "Cycle Reading and Software", - "type": "text" - }, - { - "block_id": "p14-b21", - "global_id": 215, - "bbox": [ - 72.0, - 644.33, - 336.75, - 673.13 - ], - "text": "15 Computers and Trading Systems", - "type": "text" - }, - { - "block_id": "p14-b22", - "global_id": 216, - "bbox": [ - 72.0, - 684.72, - 143.13, - 699.11 - ], - "text": "Introduction", - "type": "text" - }, - { - "block_id": "p14-b23", - "global_id": 217, - "bbox": [ - 72.0, - 708.48, - 205.48, - 722.88 - ], - "text": "Some Computer Needs", - "type": "text" - }, - { - "block_id": "p14-b24", - "global_id": 218, - "bbox": [ - 72.0, - 732.25, - 248.04, - 746.65 - ], - "text": "Grouping Tools and Indicators", - "type": "text" - }, - { - "block_id": "p14-b25", - "global_id": 219, - "bbox": [ - 72.0, - 756.01, - 248.44, - 770.41 - ], - "text": "Using the Tools and Indicators", - "type": "text" - } - ] - }, - { - "page_num": 15, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p15-b0", - "global_id": 220, - "bbox": [ - 72.0, - 73.28, - 432.01, - 87.68 - ], - "text": "Welles Wilder’s Parabolic and Directional Movement Systems", - "type": "text" - }, - { - "block_id": "p15-b1", - "global_id": 221, - "bbox": [ - 72.0, - 97.05, - 265.34, - 111.45 - ], - "text": "Pros and Cons of System Trading", - "type": "text" - }, - { - "block_id": "p15-b2", - "global_id": 222, - "bbox": [ - 72.0, - 120.82, - 182.27, - 135.21 - ], - "text": "Need Expert Help?", - "type": "text" - }, - { - "block_id": "p15-b3", - "global_id": 223, - "bbox": [ - 72.0, - 144.58, - 267.36, - 158.98 - ], - "text": "Test Systems or Create Your Own", - "type": "text" - }, - { - "block_id": "p15-b4", - "global_id": 224, - "bbox": [ - 72.0, - 168.35, - 137.55, - 182.75 - ], - "text": "Conclusion", - "type": "text" - }, - { - "block_id": "p15-b5", - "global_id": 225, - "bbox": [ - 72.0, - 220.15, - 395.42, - 248.95 - ], - "text": "16 Money Management and Trading Tactics", - "type": "text" - }, - { - "block_id": "p15-b6", - "global_id": 226, - "bbox": [ - 72.0, - 259.81, - 143.13, - 274.21 - ], - "text": "Introduction", - "type": "text" - }, - { - "block_id": "p15-b7", - "global_id": 227, - "bbox": [ - 72.0, - 283.58, - 318.0, - 297.97 - ], - "text": "The Three Elements of Successful Trading", - "type": "text" - }, - { - "block_id": "p15-b8", - "global_id": 228, - "bbox": [ - 72.0, - 307.34, - 191.51, - 321.74 - ], - "text": "Money Management", - "type": "text" - }, - { - "block_id": "p15-b9", - "global_id": 229, - "bbox": [ - 72.0, - 331.11, - 201.88, - 345.51 - ], - "text": "Reward to Risk Ratios", - "type": "text" - }, - { - "block_id": "p15-b10", - "global_id": 230, - "bbox": [ - 72.0, - 354.87, - 410.16, - 369.27 - ], - "text": "Trading Multiple Positions: Trending versus Trading Units", - "type": "text" - }, - { - "block_id": "p15-b11", - "global_id": 231, - "bbox": [ - 72.0, - 378.64, - 369.32, - 393.04 - ], - "text": "What to Do After Periods of Success and Adversity", - "type": "text" - }, - { - "block_id": "p15-b12", - "global_id": 232, - "bbox": [ - 72.0, - 402.41, - 161.17, - 416.8 - ], - "text": "Trading Tactics", - "type": "text" - }, - { - "block_id": "p15-b13", - "global_id": 233, - "bbox": [ - 72.0, - 426.17, - 389.5, - 440.57 - ], - "text": "Combining Technical Factors and Money Management", - "type": "text" - }, - { - "block_id": "p15-b14", - "global_id": 234, - "bbox": [ - 72.0, - 449.94, - 213.15, - 464.34 - ], - "text": "Types of Trading Orders", - "type": "text" - }, - { - "block_id": "p15-b15", - "global_id": 235, - "bbox": [ - 72.0, - 473.7, - 320.53, - 488.1 - ], - "text": "From Daily Charts to Intraday Price Charts", - "type": "text" - }, - { - "block_id": "p15-b16", - "global_id": 236, - "bbox": [ - 72.0, - 497.47, - 261.02, - 511.87 - ], - "text": "The Use of Intraday Pivot Points", - "type": "text" - }, - { - "block_id": "p15-b17", - "global_id": 237, - "bbox": [ - 72.0, - 521.23, - 405.59, - 535.63 - ], - "text": "Summary of Money Management and Trading Guidelines", - "type": "text" - }, - { - "block_id": "p15-b18", - "global_id": 238, - "bbox": [ - 72.0, - 545.0, - 196.68, - 559.4 - ], - "text": "Application to Stocks", - "type": "text" - }, - { - "block_id": "p15-b19", - "global_id": 239, - "bbox": [ - 72.0, - 568.77, - 168.3, - 583.17 - ], - "text": "Asset Allocation", - "type": "text" - }, - { - "block_id": "p15-b20", - "global_id": 240, - "bbox": [ - 72.0, - 592.53, - 291.83, - 606.93 - ], - "text": "Managed Accounts and Mutual Funds", - "type": "text" - }, - { - "block_id": "p15-b21", - "global_id": 241, - "bbox": [ - 72.0, - 616.3, - 156.3, - 630.7 - ], - "text": "Market Profile", - "type": "text" - }, - { - "block_id": "p15-b22", - "global_id": 242, - "bbox": [ - 72.0, - 668.1, - 471.36, - 716.98 - ], - "text": "17 The Link Between Stocks and Futures: Intermarket\nAnalysis", - "type": "text" - }, - { - "block_id": "p15-b23", - "global_id": 243, - "bbox": [ - 72.0, - 727.93, - 193.06, - 742.33 - ], - "text": "Intermarket Analysis", - "type": "text" - }, - { - "block_id": "p15-b24", - "global_id": 244, - "bbox": [ - 72.0, - 751.69, - 284.84, - 766.09 - ], - "text": "Program Trading: The Ultimate Link", - "type": "text" - } - ] - }, - { - "page_num": 16, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p16-b0", - "global_id": 245, - "bbox": [ - 72.0, - 73.28, - 285.81, - 87.68 - ], - "text": "The Link Between Bonds and Stocks", - "type": "text" - }, - { - "block_id": "p16-b1", - "global_id": 246, - "bbox": [ - 72.0, - 97.05, - 324.96, - 111.45 - ], - "text": "The Link Between Bonds and Commodities", - "type": "text" - }, - { - "block_id": "p16-b2", - "global_id": 247, - "bbox": [ - 72.0, - 120.82, - 346.11, - 135.21 - ], - "text": "The Link Between Commodities and the Dollar", - "type": "text" - }, - { - "block_id": "p16-b3", - "global_id": 248, - "bbox": [ - 72.0, - 144.58, - 272.64, - 158.98 - ], - "text": "Stock Sectors and Industry Groups", - "type": "text" - }, - { - "block_id": "p16-b4", - "global_id": 249, - "bbox": [ - 72.0, - 168.35, - 228.36, - 182.75 - ], - "text": "The Dollar and Large Caps", - "type": "text" - }, - { - "block_id": "p16-b5", - "global_id": 250, - "bbox": [ - 72.0, - 192.11, - 301.39, - 206.51 - ], - "text": "Intermarket Analysis and Mutual Funds", - "type": "text" - }, - { - "block_id": "p16-b6", - "global_id": 251, - "bbox": [ - 72.0, - 215.88, - 226.24, - 230.28 - ], - "text": "Relative Strength Analysis", - "type": "text" - }, - { - "block_id": "p16-b7", - "global_id": 252, - "bbox": [ - 72.0, - 239.64, - 242.61, - 254.04 - ], - "text": "Relative Strength and Sectors", - "type": "text" - }, - { - "block_id": "p16-b8", - "global_id": 253, - "bbox": [ - 72.0, - 263.41, - 301.37, - 277.81 - ], - "text": "Relative Strength and Individual Stocks", - "type": "text" - }, - { - "block_id": "p16-b9", - "global_id": 254, - "bbox": [ - 72.0, - 287.18, - 239.64, - 301.58 - ], - "text": "Top-Down Market Approach", - "type": "text" - }, - { - "block_id": "p16-b10", - "global_id": 255, - "bbox": [ - 72.0, - 310.94, - 180.26, - 325.34 - ], - "text": "Deflation Scenario", - "type": "text" - }, - { - "block_id": "p16-b11", - "global_id": 256, - "bbox": [ - 72.0, - 334.71, - 208.22, - 349.11 - ], - "text": "Intermarket Correlation", - "type": "text" - }, - { - "block_id": "p16-b12", - "global_id": 257, - "bbox": [ - 72.0, - 358.47, - 291.33, - 372.87 - ], - "text": "Intermarket Neural Network Software", - "type": "text" - }, - { - "block_id": "p16-b13", - "global_id": 258, - "bbox": [ - 72.0, - 382.24, - 137.55, - 396.64 - ], - "text": "Conclusion", - "type": "text" - }, - { - "block_id": "p16-b14", - "global_id": 259, - "bbox": [ - 72.0, - 434.04, - 278.64, - 462.84 - ], - "text": "18 Stock Market Indicators", - "type": "text" - }, - { - "block_id": "p16-b15", - "global_id": 260, - "bbox": [ - 72.0, - 473.7, - 227.85, - 488.1 - ], - "text": "Measuring Market Breadth", - "type": "text" - }, - { - "block_id": "p16-b16", - "global_id": 261, - "bbox": [ - 72.0, - 497.47, - 145.91, - 511.87 - ], - "text": "Sample Data", - "type": "text" - }, - { - "block_id": "p16-b17", - "global_id": 262, - "bbox": [ - 72.0, - 521.23, - 238.76, - 535.63 - ], - "text": "Comparing Market Averages", - "type": "text" - }, - { - "block_id": "p16-b18", - "global_id": 263, - "bbox": [ - 72.0, - 545.0, - 228.6, - 559.4 - ], - "text": "The Advance-Decline Line", - "type": "text" - }, - { - "block_id": "p16-b19", - "global_id": 264, - "bbox": [ - 72.0, - 568.77, - 162.44, - 583.17 - ], - "text": "AD Divergence", - "type": "text" - }, - { - "block_id": "p16-b20", - "global_id": 265, - "bbox": [ - 72.0, - 592.53, - 253.07, - 606.93 - ], - "text": "Daily Versus Weekly AD Lines", - "type": "text" - }, - { - "block_id": "p16-b21", - "global_id": 266, - "bbox": [ - 72.0, - 616.3, - 199.46, - 630.7 - ], - "text": "Variations in AD Line", - "type": "text" - }, - { - "block_id": "p16-b22", - "global_id": 267, - "bbox": [ - 72.0, - 640.06, - 193.05, - 654.46 - ], - "text": "McClellan Oscillator", - "type": "text" - }, - { - "block_id": "p16-b23", - "global_id": 268, - "bbox": [ - 72.0, - 663.83, - 239.04, - 678.23 - ], - "text": "McClellan Summation Index", - "type": "text" - }, - { - "block_id": "p16-b24", - "global_id": 269, - "bbox": [ - 72.0, - 687.6, - 245.46, - 702.0 - ], - "text": "New Highs Versus New Lows", - "type": "text" - }, - { - "block_id": "p16-b25", - "global_id": 270, - "bbox": [ - 72.0, - 711.36, - 229.85, - 725.76 - ], - "text": "New High-New Low Index", - "type": "text" - }, - { - "block_id": "p16-b26", - "global_id": 271, - "bbox": [ - 72.0, - 735.13, - 264.79, - 749.53 - ], - "text": "Upside Versus Downside Volume", - "type": "text" - } - ] - }, - { - "page_num": 17, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p17-b0", - "global_id": 272, - "bbox": [ - 72.0, - 73.28, - 166.31, - 87.68 - ], - "text": "The Arms Index", - "type": "text" - }, - { - "block_id": "p17-b1", - "global_id": 273, - "bbox": [ - 72.0, - 97.05, - 184.69, - 111.45 - ], - "text": "TRIN Versus TICK", - "type": "text" - }, - { - "block_id": "p17-b2", - "global_id": 274, - "bbox": [ - 72.0, - 120.82, - 228.27, - 135.21 - ], - "text": "Smoothing the Arms Index", - "type": "text" - }, - { - "block_id": "p17-b3", - "global_id": 275, - "bbox": [ - 72.0, - 144.58, - 138.74, - 158.98 - ], - "text": "Open Arms", - "type": "text" - }, - { - "block_id": "p17-b4", - "global_id": 276, - "bbox": [ - 72.0, - 168.35, - 196.28, - 182.75 - ], - "text": "Equivolume Charting", - "type": "text" - }, - { - "block_id": "p17-b5", - "global_id": 277, - "bbox": [ - 72.0, - 192.11, - 148.72, - 206.51 - ], - "text": "Candlepower", - "type": "text" - }, - { - "block_id": "p17-b6", - "global_id": 278, - "bbox": [ - 72.0, - 215.88, - 238.76, - 230.28 - ], - "text": "Comparing Market Averages", - "type": "text" - }, - { - "block_id": "p17-b7", - "global_id": 279, - "bbox": [ - 72.0, - 239.64, - 137.55, - 254.04 - ], - "text": "Conclusion", - "type": "text" - }, - { - "block_id": "p17-b8", - "global_id": 280, - "bbox": [ - 72.0, - 291.45, - 361.67, - 320.24 - ], - "text": "19 Pulling It All Together—A Checklist", - "type": "text" - }, - { - "block_id": "p17-b9", - "global_id": 281, - "bbox": [ - 72.0, - 331.11, - 185.66, - 345.51 - ], - "text": "Technical Checklist", - "type": "text" - }, - { - "block_id": "p17-b10", - "global_id": 282, - "bbox": [ - 72.0, - 354.87, - 398.67, - 369.27 - ], - "text": "How to Coordinate Technical and Fundamental Analysis", - "type": "text" - }, - { - "block_id": "p17-b11", - "global_id": 283, - "bbox": [ - 72.0, - 378.64, - 284.74, - 393.04 - ], - "text": "Chartered Market Technician (CMT)", - "type": "text" - }, - { - "block_id": "p17-b12", - "global_id": 284, - "bbox": [ - 72.0, - 402.41, - 301.21, - 416.8 - ], - "text": "Market Technicians Association (MTA)", - "type": "text" - }, - { - "block_id": "p17-b13", - "global_id": 285, - "bbox": [ - 72.0, - 426.17, - 305.53, - 440.57 - ], - "text": "The Global Reach of Technical Analysis", - "type": "text" - }, - { - "block_id": "p17-b14", - "global_id": 286, - "bbox": [ - 72.0, - 449.94, - 266.01, - 464.34 - ], - "text": "Technical Analysis by Any Name", - "type": "text" - }, - { - "block_id": "p17-b15", - "global_id": 287, - "bbox": [ - 72.0, - 473.7, - 268.99, - 488.1 - ], - "text": "Federal Reserve Finally Approves", - "type": "text" - }, - { - "block_id": "p17-b16", - "global_id": 288, - "bbox": [ - 72.0, - 497.47, - 137.55, - 511.87 - ], - "text": "Conclusion", - "type": "text" - }, - { - "block_id": "p17-b17", - "global_id": 289, - "bbox": [ - 72.0, - 549.27, - 316.0, - 578.07 - ], - "text": "A Advanced Technical Indicators", - "type": "text" - }, - { - "block_id": "p17-b18", - "global_id": 290, - "bbox": [ - 72.0, - 589.65, - 185.49, - 604.05 - ], - "text": "Demand Index (DI)", - "type": "text" - }, - { - "block_id": "p17-b19", - "global_id": 291, - "bbox": [ - 72.0, - 613.42, - 230.37, - 627.82 - ], - "text": "Herrick Payoff Index (HPI)", - "type": "text" - }, - { - "block_id": "p17-b20", - "global_id": 292, - "bbox": [ - 72.0, - 637.18, - 269.4, - 651.58 - ], - "text": "Starc Bands and Keltner Channels", - "type": "text" - }, - { - "block_id": "p17-b21", - "global_id": 293, - "bbox": [ - 72.0, - 660.95, - 229.85, - 675.35 - ], - "text": "Formula for Demand Index", - "type": "text" - }, - { - "block_id": "p17-b22", - "global_id": 294, - "bbox": [ - 72.0, - 712.75, - 200.23, - 741.55 - ], - "text": "B Market Profile", - "type": "text" - }, - { - "block_id": "p17-b23", - "global_id": 295, - "bbox": [ - 72.0, - 752.41, - 143.13, - 766.81 - ], - "text": "Introduction", - "type": "text" - } - ] - }, - { - "page_num": 18, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p18-b0", - "global_id": 296, - "bbox": [ - 72.0, - 73.28, - 206.25, - 87.68 - ], - "text": "Market Profile Graphic", - "type": "text" - }, - { - "block_id": "p18-b1", - "global_id": 297, - "bbox": [ - 72.0, - 97.05, - 169.89, - 111.45 - ], - "text": "Market Structure", - "type": "text" - }, - { - "block_id": "p18-b2", - "global_id": 298, - "bbox": [ - 72.0, - 120.82, - 285.5, - 135.21 - ], - "text": "Market Profile Organizing Principles", - "type": "text" - }, - { - "block_id": "p18-b3", - "global_id": 299, - "bbox": [ - 72.0, - 144.58, - 306.95, - 158.98 - ], - "text": "Range Development and Profile Patterns", - "type": "text" - }, - { - "block_id": "p18-b4", - "global_id": 300, - "bbox": [ - 72.0, - 168.35, - 298.22, - 182.75 - ], - "text": "Tracking Longer Term Market Activity", - "type": "text" - }, - { - "block_id": "p18-b5", - "global_id": 301, - "bbox": [ - 72.0, - 192.11, - 137.55, - 206.51 - ], - "text": "Conclusion", - "type": "text" - }, - { - "block_id": "p18-b6", - "global_id": 302, - "bbox": [ - 72.0, - 243.91, - 409.14, - 272.71 - ], - "text": "C The Essentials of Building a Trading System", - "type": "text" - }, - { - "block_id": "p18-b7", - "global_id": 303, - "bbox": [ - 72.0, - 283.58, - 138.73, - 297.97 - ], - "text": "5-Step Plan", - "type": "text" - }, - { - "block_id": "p18-b8", - "global_id": 304, - "bbox": [ - 72.0, - 307.34, - 288.96, - 321.74 - ], - "text": "Step 1: Start with a Concept (an Idea)", - "type": "text" - }, - { - "block_id": "p18-b9", - "global_id": 305, - "bbox": [ - 72.0, - 331.11, - 372.94, - 345.51 - ], - "text": "Step 2: Turn Your Idea into a Set of Objective Rules", - "type": "text" - }, - { - "block_id": "p18-b10", - "global_id": 306, - "bbox": [ - 72.0, - 354.87, - 322.1, - 369.27 - ], - "text": "Step 3: Visually Check It Out on the Charts", - "type": "text" - }, - { - "block_id": "p18-b11", - "global_id": 307, - "bbox": [ - 72.0, - 378.64, - 308.75, - 393.04 - ], - "text": "Step 4: Formally Test It with a Computer", - "type": "text" - }, - { - "block_id": "p18-b12", - "global_id": 308, - "bbox": [ - 72.0, - 402.41, - 212.25, - 416.8 - ], - "text": "Step 5: Evaluate Results", - "type": "text" - }, - { - "block_id": "p18-b13", - "global_id": 309, - "bbox": [ - 72.0, - 426.17, - 191.51, - 440.57 - ], - "text": "Money Management", - "type": "text" - }, - { - "block_id": "p18-b14", - "global_id": 310, - "bbox": [ - 72.0, - 449.94, - 137.55, - 464.34 - ], - "text": "Conclusion", - "type": "text" - }, - { - "block_id": "p18-b15", - "global_id": 311, - "bbox": [ - 72.0, - 501.74, - 311.72, - 530.54 - ], - "text": "D Continuous Futures Contracts", - "type": "text" - }, - { - "block_id": "p18-b16", - "global_id": 312, - "bbox": [ - 72.0, - 542.12, - 169.08, - 556.52 - ], - "text": "Nearest Contract", - "type": "text" - }, - { - "block_id": "p18-b17", - "global_id": 313, - "bbox": [ - 72.0, - 565.89, - 153.11, - 580.28 - ], - "text": "Next Contract", - "type": "text" - }, - { - "block_id": "p18-b18", - "global_id": 314, - "bbox": [ - 72.0, - 589.65, - 156.32, - 604.05 - ], - "text": "Gann Contract", - "type": "text" - }, - { - "block_id": "p18-b19", - "global_id": 315, - "bbox": [ - 72.0, - 613.42, - 197.1, - 627.82 - ], - "text": "Continuous Contracts", - "type": "text" - }, - { - "block_id": "p18-b20", - "global_id": 316, - "bbox": [ - 72.0, - 637.18, - 304.2, - 651.58 - ], - "text": "Constant Forward Continuous Contracts", - "type": "text" - }, - { - "block_id": "p18-b21", - "global_id": 317, - "bbox": [ - 72.0, - 661.01, - 126.36, - 675.41 - ], - "text": "Glossary", - "type": "text" - }, - { - "block_id": "p18-b22", - "global_id": 318, - "bbox": [ - 72.0, - 684.78, - 206.66, - 699.18 - ], - "text": "Selected Bibliography", - "type": "text" - }, - { - "block_id": "p18-b23", - "global_id": 319, - "bbox": [ - 72.0, - 708.54, - 188.0, - 722.94 - ], - "text": "Selected Resources", - "type": "text" - }, - { - "block_id": "p18-b24", - "global_id": 320, - "bbox": [ - 72.0, - 732.31, - 107.18, - 746.71 - ], - "text": "Index", - "type": "text" - } - ] - }, - { - "page_num": 19, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p19-b0", - "global_id": 321, - "bbox": [ - 72.0, - 133.73, - 291.07, - 162.52 - ], - "text": "About the Author", - "type": "text" - }, - { - "block_id": "p19-b1", - "global_id": 322, - "bbox": [ - 72.0, - 230.28, - 522.51, - 360.63 - ], - "text": "John J. Murphy has been applying technical analysis for three decades. He\nwas formerly Director of Futures Technical Research and the senior managed\naccount trading advisor with Merrill Lynch. Mr. Murphy was the technical\nanalyst for CNBC-TV for seven years. He is the author of three books,\nincluding Technical Analysis of the Futures Markets, the predecessor to this\nbook. His second book, Intermarket Technical Analysis, opened up a new\nbranch of analysis. His third book, The Visual Investor, applies technical work\nto mutual funds.", - "type": "text" - }, - { - "block_id": "p19-b2", - "global_id": 323, - "bbox": [ - 72.0, - 362.8, - 512.73, - 410.32 - ], - "text": "In 1996, Mr. Murphy founded MURPHYMORRIS, Inc., along with\nsoftware developer Greg Morris, to produce interactive educational products\nand online analysis for investors. Their Web site address is:", - "type": "text" - }, - { - "block_id": "p19-b3", - "global_id": 324, - "bbox": [ - 72.0, - 412.49, - 510.6, - 460.02 - ], - "text": "www.murphymorris.com.\nHe is also head of his own consulting firm, JJM Technical Advisors, located\nin Oradell, New Jersey.", - "type": "text" - } - ] - }, - { - "page_num": 20, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p20-b0", - "global_id": 325, - "bbox": [ - 72.0, - 133.73, - 363.01, - 162.52 - ], - "text": "About the Contributors", - "type": "text" - }, - { - "block_id": "p20-b1", - "global_id": 326, - "bbox": [ - 72.0, - 230.28, - 520.4, - 294.37 - ], - "text": "Thomas E. Aspray (Appendix A) is a Capital Market Analyst with Princeton\nEconomic Institute Ltd., located in Princeton, New Jersey. Mr. Aspray has\nbeen trading markets since the 1970s. Many of the techniques he pioneered in\nthe early 1980s are now used by other professional traders.", - "type": "text" - }, - { - "block_id": "p20-b2", - "global_id": 327, - "bbox": [ - 72.0, - 296.54, - 522.39, - 377.19 - ], - "text": "Dennis C. Hynes (Appendix B) is Managing Director and cofounder of\nR.W. Pressprich & Co., Inc., a fixed income broker/dealer located in New\nYork City. He also serves as the firm’s Chief Market Strategist. Mr. Hynes is a\nfutures and options trader and a CTA (Commodity Trading Advisor). He has\nan MBA in Finance from the University of Houston.", - "type": "text" - }, - { - "block_id": "p20-b3", - "global_id": 328, - "bbox": [ - 72.0, - 379.36, - 519.34, - 476.58 - ], - "text": "Greg Morris (Chapter 12 and Appendix D) has been developing trading\nsystems and indicators for 20 years for investors and traders to be used with\nmajor technical analysis software programs. He is the author of two books on\ncandlestick charting (see Chapter 12). In August 1996, Mr. Morris teamed\nwith John Murphy to found MURPHYMORRIS Inc., a Dallas-based firm\ndedicated to educating investors.", - "type": "text" - }, - { - "block_id": "p20-b4", - "global_id": 329, - "bbox": [ - 72.0, - 478.74, - 521.8, - 592.53 - ], - "text": "Fred G. Schutzman, CMT (Appendix C) is the President and Chief\nExecutive Officer of Briarwood Capital Management, Inc., a New York-based\nCommodity Trading Advisor. He is also responsible for technical research\nand trading system development at Emcor Eurocurrency Management\nCorporation, a risk management consulting firm. Mr. Schutzman is a member\nof the Market Technicians Association and is currently serving on their Board\nof Directors.", - "type": "text" - } - ] - }, - { - "page_num": 21, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p21-b0", - "global_id": 330, - "bbox": [ - 72.0, - 133.73, - 228.2, - 162.52 - ], - "text": "Introduction", - "type": "text" - }, - { - "block_id": "p21-b1", - "global_id": 331, - "bbox": [ - 72.0, - 230.28, - 512.95, - 393.76 - ], - "text": "I had no idea when Technical Analysis of the Futures Markets was published\nin 1986 that it would create such an impact on the industry. It has been\nreferred to by many in the field as the “Bible” of technical analysis. The\nMarket Technicians Association uses it as a primary source in their testing\nprocess for the Chartered Market Technician program. The Federal Reserve\nhas cited it in research studies that examine the value of the technical\napproach. In addition, it has been translated into eight foreign languages. I\nwas also unprepared for the long shelf life of the book. It continues to sell as\nmany copies ten years after it was published as it did in the first couple of\nyears.", - "type": "text" - }, - { - "block_id": "p21-b2", - "global_id": 332, - "bbox": [ - 72.0, - 395.92, - 520.75, - 526.27 - ], - "text": "It became clear, however, that a lot of new material had been added to\nthe field of technical analysis in the past decade. I added some of it myself.\nMy second book, Intermarket Technical Analysis (Wiley, 1991), helped create\nthat new branch of technical analysis, which is widely used today. Old\ntechniques like Japanese candlestick charting and newer ones like Market\nProfile have become part of the technical landscape. Clearly, this new work\nneeded to be included in any book that attempted to present a comprehensive\npicture of technical analysis. The focus of my work changed as well.", - "type": "text" - }, - { - "block_id": "p21-b3", - "global_id": 333, - "bbox": [ - 72.0, - 528.44, - 509.15, - 658.78 - ], - "text": "While my main interest ten years ago was in the futures markets, my\nrecent work has dealt more with the stock market. That also brought me full\ncircle, since I began my career as a stock analyst thirty years ago. That was\nalso one of the side effects of my being the technical analyst for CNBC-TV\nfor seven years. That focus on what the general public was doing also led to\nmy third book, The Visual Investor (Wiley, 1996). That book focused on the\nuse of technical tools for market sectors, primarily through mutual funds,\nwhich have become extremely popular in the 1990s.", - "type": "text" - }, - { - "block_id": "p21-b4", - "global_id": 334, - "bbox": [ - 72.0, - 660.95, - 521.46, - 758.17 - ], - "text": "Many of the technical indicators that I wrote about ten years ago, which\nhad been used primarily in the futures markets, have been incorporated into\nstock market work. It was time to show how that was being done. Finally, like\nany field or discipline, writers also evolve. Some things that seemed very\nimportant to me ten years ago aren’t as important today. As my work has\nevolved into a broader application of technical principles to all financial", - "type": "text" - } - ] - }, - { - "page_num": 22, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p22-b0", - "global_id": 335, - "bbox": [ - 72.0, - 73.28, - 495.17, - 104.25 - ], - "text": "markets, it seemed only right that any revision of that earlier work should\nreflect that evolution.", - "type": "text" - }, - { - "block_id": "p22-b1", - "global_id": 336, - "bbox": [ - 72.0, - 106.41, - 516.33, - 203.63 - ], - "text": "I’ve tried to retain the structure of the original book. Therefore, many of\nthe original chapters remain. However, they have been revised with new\nmaterial and updated with new graphics. Since the principles of technical\nanalysis are universal, it wasn’t that difficult to broaden the focus to include\nall financial markets. Since the original focus was on futures, however, a lot\nof stock market material has been added.", - "type": "text" - }, - { - "block_id": "p22-b2", - "global_id": 337, - "bbox": [ - 72.0, - 205.8, - 521.19, - 352.71 - ], - "text": "Three new chapters have been added. The two previous chapters on\npoint and figure charting (Chapters 11 and 12) have been merged into one. A\nnew Chapter 12 on candlestick charting has been inserted. Two additional\nchapters have also been added at the end of the book. Chapter 17 is an\nintroduction to my work on intermarket analysis. Chapter 18 deals with stock\nmarket indicators. We’ve replaced the previous appendices with new ones.\nMarket Profile is introduced in Appendix B. The other appendices show some\nof the more advanced technical indicators and explain how to build a\ntechnical trading system. There’s also a glossary.", - "type": "text" - }, - { - "block_id": "p22-b3", - "global_id": 338, - "bbox": [ - 72.0, - 354.87, - 521.53, - 485.22 - ], - "text": "I approached this revision with some trepidation. I wasn’t sure redoing a\nbook considered a “classic” was such a good idea. I hope I’ve succeeded in\nmaking it even better. I approached this work from the perspective of a more\nseasoned and mature writer and analyst. And, throughout the book, I tried to\nshow the respect I have always had for the discipline of technical analysis and\nfor the many talented analysts who practice it. The success of their work, as\nwell as their dedication to this field, has always been a source of comfort and\ninspiration to me. I only hope I did justice to it and to them.", - "type": "text" - }, - { - "block_id": "p22-b4", - "global_id": 339, - "bbox": [ - 446.13, - 487.38, - 523.28, - 501.78 - ], - "text": "John Murphy", - "type": "text" - } - ] - }, - { - "page_num": 23, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p23-b0", - "global_id": 340, - "bbox": [ - 72.0, - 133.73, - 297.44, - 162.52 - ], - "text": "Acknowledgments", - "type": "text" - }, - { - "block_id": "p23-b1", - "global_id": 341, - "bbox": [ - 72.0, - 230.28, - 523.11, - 509.71 - ], - "text": "The person who deserves the most credit for the second edition of this book is\nEllen Schneid Coleman, Executive Editor at Simon & Schuster. She\nconvinced me that it was time to revise Technical Analysis of the Futures\nMarkets and broaden its scope. I’m glad she was so persistent. Special thanks\ngo to the folks at Omega Research who provided me with the charting\nsoftware I needed and, in particular, Gaston Sanchez who spent a lot of time\non the phone with me. The contributing authors—Tom Aspray, Dennis Hynes,\nand Fred Schutzman—added their particular expertise where it was needed. In\naddition, several analysts contributed charts including Michael Burke, Stan\nEhrlich, Jerry Toepke, Ken Tower, and Nick Van Nice. The revision of\nChapter 2 on Dow Theory was a collaborative effort with Elyce Picciotti, an\nindependent technical writer and market consultant in New Orleans,\nLouisiana. Greg Morris deserves special mention. He wrote the chapter on\ncandlestick charting, contributed the article in Appendix D, and did most of\nthe graphic work. Fred Dahl of Inkwell Publishing Services (Fishkill, NY),\nwho handled production of the first edition of this book, did this one as well.\nIt was great working with him again.", - "type": "text" - } - ] - }, - { - "page_num": 24, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p24-b0", - "global_id": 342, - "bbox": [ - 72.0, - 339.77, - 522.35, - 443.45 - ], - "text": "INTRODUCTION\nBefore beginning a study of the actual techniques and tools used in technical\nanalysis, it is necessary first to define what technical analysis is, to discuss the\nphilosophical premises on which it is based, to draw some clear distinctions\nbetween technical and fundamental analysis and, finally, to address a couple\nof criticisms frequently raised against the technical approach.", - "type": "text" - }, - { - "block_id": "p24-b1", - "global_id": 343, - "bbox": [ - 72.0, - 445.62, - 513.46, - 509.71 - ], - "text": "The author’s strong belief is that a full appreciation of the technical\napproach must begin with a clear understanding of what technical analysis\nclaims to be able to do and, maybe even more importantly, the philosophy or\nrationale on which it bases those claims.", - "type": "text" - }, - { - "block_id": "p24-b2", - "global_id": 344, - "bbox": [ - 72.0, - 511.87, - 511.93, - 658.78 - ], - "text": "First, let’s define the subject. Technical analysis is the study of market\naction, primarily through the use of charts, for the purpose of forecasting\nfuture price trends. The term “market action” includes the three principal\nsources of information available to the technician—price, volume, and open\ninterest. (Open interest is used only in futures and options.) The term “price\naction,” which is often used, seems too narrow because most technicians\ninclude volume and open interest as an integral part of their market analysis.\nWith this distinction made, the terms “price action” and “market action” are\nused interchangeably throughout the remainder of this discussion.", - "type": "text" - }, - { - "block_id": "p24-b3", - "global_id": 345, - "bbox": [ - 72.0, - 702.74, - 457.17, - 740.16 - ], - "text": "PHILOSOPHY OR RATIONALE\nThere are three premises on which the technical approach is based:", - "type": "text" - } - ] - }, - { - "page_num": 25, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p25-b0", - "global_id": 346, - "bbox": [ - 82.08, - 73.28, - 307.79, - 120.81 - ], - "text": "1. Market action discounts everything.\n2. Prices move in trends.\n3. History repeats itself.", - "type": "text" - }, - { - "block_id": "p25-b1", - "global_id": 347, - "bbox": [ - 72.0, - 144.49, - 241.88, - 155.29 - ], - "text": "Market Action Discounts Everything", - "type": "text" - }, - { - "block_id": "p25-b2", - "global_id": 348, - "bbox": [ - 72.0, - 163.31, - 518.47, - 293.65 - ], - "text": "The statement “market action discounts everything” forms what is probably\nthe cornerstone of technical analysis. Unless the full significance of this first\npremise is fully understood and accepted, nothing else that follows makes\nmuch sense. The technician believes that anything that can possibly affect the\nprice—fundamentally, politically, psychologically, or otherwise—is actually\nreflected in the price of that market. It follows, therefore, that a study of price\naction is all that is required. While this claim may seem presumptuous, it is\nhard to disagree with if one takes the time to consider its true meaning.", - "type": "text" - }, - { - "block_id": "p25-b3", - "global_id": 349, - "bbox": [ - 72.0, - 295.82, - 521.95, - 525.55 - ], - "text": "All the technician is really claiming is that price action should reflect\nshifts in supply and demand. If demand exceeds supply, prices should rise. If\nsupply exceeds demand, prices should fall. This action is the basis of all\neconomic and fundamental forecasting. The technician then turns this\nstatement around to arrive at the conclusion that if prices are rising, for\nwhatever the specific reasons, demand must exceed supply and the\nfundamentals must be bullish. If prices fall, the fundamentals must be bearish.\nIf this last comment about fundamentals seems surprising in the context of a\ndiscussion of technical analysis, it shouldn’t. After all, the technician is\nindirectly studying fundamentals. Most technicians would probably agree that\nit is the underlying forces of supply and demand, the economic fundamentals\nof a market, that cause bull and bear markets. The charts do not in themselves\ncause markets to move up or down. They simply reflect the bullish or bearish\npsychology of the marketplace.", - "type": "text" - }, - { - "block_id": "p25-b4", - "global_id": 350, - "bbox": [ - 72.0, - 527.72, - 521.98, - 757.45 - ], - "text": "As a rule, chartists do not concern themselves with the reasons why\nprices rise or fall. Very often, in the early stages of a price trend or at critical\nturning points, no one seems to know exactly why a market is performing a\ncertain way. While the technical approach may sometimes seem overly\nsimplistic in its claims, the logic behind this first premise—that markets\ndiscount everything—becomes more compelling the more market experience\none gains. It follows then that if everything that affects market price is\nultimately reflected in market price, then the study of that market price is all\nthat is necessary. By studying price charts and a host of supporting technical\nindicators, the chartist in effect lets the market tell him or her which way it is\nmost likely to go. The chartist does not necessarily try to outsmart or outguess\nthe market. All of the technical tools discussed later on are simply techniques\nused to aid the chartist in the process of studying market action. The chartist\nknows there are reasons why markets go up or down. He or she just doesn’t", - "type": "text" - } - ] - }, - { - "page_num": 26, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p26-b0", - "global_id": 351, - "bbox": [ - 72.0, - 73.64, - 502.36, - 104.97 - ], - "text": "believe that knowing what those reasons are is necessary in the forecasting\nprocess.", - "type": "text" - }, - { - "block_id": "p26-b1", - "global_id": 352, - "bbox": [ - 72.0, - 127.93, - 174.98, - 138.73 - ], - "text": "Prices Move in Trends", - "type": "text" - }, - { - "block_id": "p26-b2", - "global_id": 353, - "bbox": [ - 72.0, - 146.74, - 521.14, - 260.53 - ], - "text": "The concept of trend is absolutely essential to the technical approach. Here\nagain, unless one accepts the premise that markets do in fact trend, there’s no\npoint in reading any further. The whole purpose of charting the price action of\na market is to identify trends in early stages of their development for the\npurpose of trading in the direction of those trends. In fact, most of the\ntechniques used in this approach are trend-following in nature, meaning that\ntheir intent is to identify and follow existing trends. (See Figure 1.1.)", - "type": "text" - }, - { - "block_id": "p26-b3", - "global_id": 354, - "bbox": [ - 73.54, - 551.48, - 521.73, - 565.94 - ], - "text": "Figure 1.1 Example of an uptrend. Technical analysis is based on the premise", - "type": "text" - }, - { - "block_id": "p26-b4", - "global_id": 355, - "bbox": [ - 138.69, - 568.04, - 456.59, - 582.44 - ], - "text": "that markets trend and that those trends tend to persist.", - "type": "text" - }, - { - "block_id": "p26-b5", - "global_id": 356, - "bbox": [ - 72.0, - 599.01, - 520.23, - 712.8 - ], - "text": "There is a corollary to the premise that prices move in trends—a trend in\nmotion is more likely to continue than to reverse. This corollary is, of course,\nan adaptation of Newton’s first law of motion. Another way to state this\ncorollary is that a trend in motion will continue in the same direction until it\nreverses. This is another one of those technical claims that seems almost\ncircular. But the entire trend-following approach is predicated on riding an\nexisting trend until it shows signs of reversing.", - "type": "text" - }, - { - "block_id": "p26-b6", - "global_id": 357, - "bbox": [ - 72.0, - 736.48, - 511.59, - 768.97 - ], - "text": "History Repeats Itself\nMuch of the body of technical analysis and the study of market action has to", - "type": "text" - } - ] - }, - { - "page_num": 27, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p27-b0", - "global_id": 358, - "bbox": [ - 72.0, - 73.28, - 523.17, - 220.2 - ], - "text": "do with the study of human psychology. Chart patterns, for example, which\nhave been identified and categorized over the past one hundred years, reflect\ncertain pictures that appear on price charts. These pictures reveal the bullish\nor bearish psychology of the market. Since these patterns have worked well in\nthe past, it is assumed that they will continue to work well in the future. They\nare based on the study of human psychology, which tends not to change.\nAnother way of saying this last premise—that history repeats itself—is that\nthe key to understanding the future lies in a study of the past, or that the future\nis just a repetition of the past.", - "type": "text" - }, - { - "block_id": "p27-b1", - "global_id": 359, - "bbox": [ - 72.0, - 264.15, - 521.99, - 457.85 - ], - "text": "TECHNICAL VERSUS FUNDAMENTAL\nFORECASTING\nWhile technical analysis concentrates on the study of market action,\nfundamental analysis focuses on the economic forces of supply and demand\nthat cause prices to move higher, lower, or stay the same. The fundamental\napproach examines all of the relevant factors affecting the price of a market in\norder to determine the intrinsic value of that market. The intrinsic value is\nwhat the fundamentals indicate something is actually worth based on the law\nof supply and demand. If this intrinsic value is under the current market price,\nthen the market is overpriced and should be sold. If market price is below the\nintrinsic value, then the market is undervalued and should be bought.", - "type": "text" - }, - { - "block_id": "p27-b2", - "global_id": 360, - "bbox": [ - 72.0, - 460.02, - 521.55, - 573.8 - ], - "text": "Both of these approaches to market forecasting attempt to solve the same\nproblem, that is, to determine the direction prices are likely to move. They\njust approach the problem from different directions. The fundamentalist\nstudies the cause of market movement, while the technician studies the effect.\nThe technician, of course, believes that the effect is all that he or she wants or\nneeds to know and that the reasons, or the causes, are unnecessary. The\nfundamentalist always has to know why.", - "type": "text" - }, - { - "block_id": "p27-b3", - "global_id": 361, - "bbox": [ - 72.0, - 575.97, - 522.34, - 739.44 - ], - "text": "Most traders classify themselves as either technicians or fundamentalists.\nIn reality, there is a lot of overlap. Many fundamentalists have a working\nknowledge of the basic tenets of chart analysis. At the same time, many\ntechnicians have at least a passing awareness of the fundamentals. The\nproblem is that the charts and fundamentals are often in conflict with each\nother. Usually at the beginning of important market moves, the fundamentals\ndo not explain or support what the market seems to be doing. It is at these\ncritical times in the trend that these two approaches seem to differ the most.\nUsually they come back into sync at some point, but often too late for the\ntrader to act.", - "type": "text" - }, - { - "block_id": "p27-b4", - "global_id": 362, - "bbox": [ - 100.79, - 741.61, - 496.77, - 756.01 - ], - "text": "One explanation for these seeming discrepancies is that market price", - "type": "text" - } - ] - }, - { - "page_num": 28, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p28-b0", - "global_id": 363, - "bbox": [ - 72.0, - 73.53, - 516.43, - 187.07 - ], - "text": "tends to lead the known fundamentals. Stated another way, market price acts\nas a leading indicator of the fundamentals or the conventional wisdom of the\nmoment. While the known fundamentals have already been discounted and\nare already “in the market,” prices are now reacting to the unknown\nfundamentals. Some of the most dramatic bull and bear markets in history\nhave begun with little or no perceived change in the fundamentals. By the\ntime those changes became known, the new trend was well underway.", - "type": "text" - }, - { - "block_id": "p28-b1", - "global_id": 364, - "bbox": [ - 72.0, - 189.23, - 516.33, - 303.02 - ], - "text": "After a while, the technician develops increased confidence in his or her\nability to read the charts. The technician learns to be comfortable in a\nsituation where market movement disagrees with the so-called conventional\nwisdom. A technician begins to enjoy being in the minority. He or she knows\nthat eventually the reasons for market action will become common\nknowledge. It is just that the technician isn’t willing to wait for that added\nconfirmation.", - "type": "text" - }, - { - "block_id": "p28-b2", - "global_id": 365, - "bbox": [ - 72.0, - 305.18, - 515.53, - 485.22 - ], - "text": "In accepting the premises of technical analysis, one can see why\ntechnicians believe their approach is superior to the fundamentalists. If a\ntrader had to choose only one of the two approaches to use, the choice would\nlogically have to be the technical. Because, by definition, the technical\napproach includes the fundamental. If the fundamentals are reflected in\nmarket price, then the study of those fundamentals becomes unnecessary.\nChart reading becomes a shortcut form of fundamental analysis. The reverse,\nhowever, is not true. Fundamental analysis does not include a study of price\naction. It is possible to trade financial markets using just the technical\napproach. It is doubtful that anyone could trade off the fundamentals alone\nwith no consideration of the technical side of the market.", - "type": "text" - }, - { - "block_id": "p28-b3", - "global_id": 366, - "bbox": [ - 72.0, - 529.17, - 520.1, - 715.68 - ], - "text": "ANALYSIS VERSUS TIMING\nThis last point is made clearer if the decision making process is broken down\ninto two separate stages—analysis and timing. Because of the high leverage\nfactor in the futures markets, timing is especially crucial in that arena. It is\nquite possible to be correct on the general trend of the market and still lose\nmoney. Because margin requirements are so low in futures trading (usually\nless than 10%), a relatively small price move in the wrong direction can force\nthe trader out of the market with the resulting loss of all or most of that\nmargin. In stock market trading, by contrast, a trader who finds him or herself\non the wrong side of the market can simply decide to hold onto the stock,\nhoping that it will stage a comeback at some point.", - "type": "text" - }, - { - "block_id": "p28-b4", - "global_id": 367, - "bbox": [ - 72.0, - 717.84, - 520.99, - 765.37 - ], - "text": "Futures traders don’t have that luxury. A “buy and hold” strategy doesn’t\napply to the futures arena. Both the technical and the fundamental approach\ncan be used in the first phase—the forecasting process. However, the question", - "type": "text" - } - ] - }, - { - "page_num": 29, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p29-b0", - "global_id": 368, - "bbox": [ - 72.0, - 73.53, - 518.35, - 187.07 - ], - "text": "of timing, of determining specific entry and exit points, is almost purely\ntechnical. Therefore, considering the steps the trader must go through before\nmaking a market commitment, it can be seen that the correct application of\ntechnical principles becomes indispensable at some point in the process, even\nif fundamental analysis was applied in the earlier stages of the decision.\nTiming is also important in individual stock selection and in the buying and\nselling of stock market sector and industry groups.", - "type": "text" - }, - { - "block_id": "p29-b1", - "global_id": 369, - "bbox": [ - 72.0, - 231.02, - 515.54, - 325.34 - ], - "text": "FLEXIBILITY AND ADAPTABILITY OF\nTECHNICAL ANALYSIS\nOne of the great strengths of technical analysis is its adaptability to virtually\nany trading medium and time dimension. There is no area of trading in either\nstocks or futures where these principles do not apply.", - "type": "text" - }, - { - "block_id": "p29-b2", - "global_id": 370, - "bbox": [ - 72.0, - 327.51, - 501.56, - 391.6 - ], - "text": "The chartist can easily follow as many markets as desired, which is\ngenerally not true of his or her fundamental counterpart. Because of the\ntremendous amount of data the latter must deal with, most fundamentalists\ntend to specialize. The advantages here should not be overlooked.", - "type": "text" - }, - { - "block_id": "p29-b3", - "global_id": 371, - "bbox": [ - 72.0, - 393.76, - 519.95, - 590.37 - ], - "text": "For one thing, markets go through active and dormant periods, trending\nand nontrending stages. The technician can concentrate his or her attention\nand resources in those markets that display strong trending tendencies and\nchoose to ignore the rest. As a result, the chartist can rotate his or her\nattention and capital to take advantage of the rotational nature of the markets.\nAt different times, certain markets become “hot” and experience important\ntrends. Usually, those trending periods are followed by quiet and relatively\ntrendless market conditions, while another market or group takes over. The\ntechnical trader is free to pick and choose. The fundamentalist, however, who\ntends to specialize in only one group, doesn’t have that kind of flexibility.\nEven if he or she were free to switch groups, the fundamentalist would have a\nmuch more difficult time doing so than would the chartist.", - "type": "text" - }, - { - "block_id": "p29-b4", - "global_id": 372, - "bbox": [ - 72.0, - 592.53, - 522.33, - 706.32 - ], - "text": "Another advantage the technician has is the “big picture.” By following\nall of the markets, he or she gets an excellent feel for what markets are doing\nin general, and avoids the “tunnel vision” that can result from following only\none group of markets. Also, because so many of the markets have built-in\neconomic relationships and react to similar economic factors, price action in\none market or group may give valuable clues to the future direction of another\nmarket or group of markets.", - "type": "text" - } - ] - }, - { - "page_num": 30, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p30-b0", - "global_id": 373, - "bbox": [ - 72.0, - 74.02, - 522.05, - 201.47 - ], - "text": "TECHNICAL ANALYSIS APPLIED TO\nDIFFERENT TRADING MEDIUMS\nThe principles of chart analysis apply to both stocks and futures. Actually,\ntechnical analysis was first applied to the stock market and later adapted to\nfutures. With the introduction of stock index futures, the dividing line between\nthese two areas is rapidly disappearing. International stock markets are also\ncharted and analyzed according to technical principles. (See Figure 1.2.)", - "type": "text" - }, - { - "block_id": "p30-b1", - "global_id": 374, - "bbox": [ - 72.0, - 203.63, - 519.89, - 251.16 - ], - "text": "Financial futures, including interest rate markets and foreign currencies,\nhave become enormously popular over the past decade and have proven to be\nexcellent subjects for chart analysis.", - "type": "text" - }, - { - "block_id": "p30-b2", - "global_id": 375, - "bbox": [ - 72.0, - 253.32, - 518.33, - 284.29 - ], - "text": "Technical principles play a role in options trading. Technical forecasting\ncan also be used to great advantage in the hedging process.", - "type": "text" - }, - { - "block_id": "p30-b3", - "global_id": 376, - "bbox": [ - 90.15, - 575.24, - 505.12, - 589.71 - ], - "text": "Figure 1.2 The Japanese stock market charts very well as do most stock", - "type": "text" - }, - { - "block_id": "p30-b4", - "global_id": 377, - "bbox": [ - 221.55, - 591.81, - 373.72, - 606.21 - ], - "text": "markets around the world.", - "type": "text" - }, - { - "block_id": "p30-b5", - "global_id": 378, - "bbox": [ - 72.0, - 650.16, - 522.46, - 761.05 - ], - "text": "TECHNICAL ANALYSIS APPLIED TO\nDIFFERENT TIME DIMENSIONS\nAnother strength of the charting approach is its ability to handle different time\ndimensions. Whether the user is trading the intraday tic-by-tic changes for\nday trading purposes or trend trading the intermediate trend, the same\nprinciples apply. A time dimension often overlooked is longer range technical", - "type": "text" - } - ] - }, - { - "page_num": 31, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p31-b0", - "global_id": 379, - "bbox": [ - 72.0, - 73.53, - 514.76, - 170.5 - ], - "text": "forecasting. The opinion expressed in some quarters that charting is useful\nonly in the short term is simply not true. It has been suggested by some that\nfundamental analysis should be used for long term forecasting with technical\nfactors limited to short term timing. The fact is that longer range forecasting,\nusing weekly and monthly charts going back several years, has proven to be\nan extremely useful application of these techniques.", - "type": "text" - }, - { - "block_id": "p31-b1", - "global_id": 380, - "bbox": [ - 72.0, - 172.67, - 509.2, - 236.76 - ], - "text": "Once the technical principles discussed in this book are thoroughly\nunderstood, they will provide the user with tremendous flexibility as to how\nthey can be applied, both from the standpoint of the medium to be analyzed\nand the time dimension to be studied.", - "type": "text" - }, - { - "block_id": "p31-b2", - "global_id": 381, - "bbox": [ - 72.0, - 280.71, - 515.92, - 665.99 - ], - "text": "ECONOMIC FORECASTING\nTechnical analysis can play a role in economic forecasting. For example, the\ndirection of commodity prices tells us something about the direction of\ninflation. They also give us clues about the strength or weakness of the\neconomy. Rising commodity prices generally hint at a stronger economy and\nrising inflationary pressure. Falling commodity prices usually warn that the\neconomy is slowing along with inflation. The direction of interest rates is\naffected by the trend of commodities. As a result, charts of commodity\nmarkets like gold and oil, along with Treasury Bonds, can tell us a lot about\nthe strength or weakness of the economy and inflationary expectations. The\ndirection of the U.S. dollar and foreign currency futures also provide early\nguidance about the strength or weakness of the respective global economies.\nEven more impressive is the fact that trends in these futures markets usually\nshow up long before they are reflected in traditional economic indicators that\nare released on a monthly or quarterly basis, and usually tell us what has\nalready happened. As their name implies, futures markets usually give us\ninsights into the future. The S&P 500 stock market index has long been\ncounted as an official leading economic indicator. A book by one of the\ncountry’s top experts on the business cycle, Leading Indicators for the 1990s\n(Moore), makes a compelling case for the importance of commodity, bond,\nand stock trends as economic indicators. All three markets can be studied\nemploying technical analysis. We’ll have more to say on this subject in\nChapter 17, “The Link Between Stocks and Futures.”", - "type": "text" - }, - { - "block_id": "p31-b3", - "global_id": 382, - "bbox": [ - 72.0, - 709.22, - 504.73, - 763.21 - ], - "text": "TECHNICIAN OR CHARTIST?\nThere are several different titles applied to practitioners of the technical\napproach: technical analyst, chartist, market analyst, and visual analyst. Up", - "type": "text" - } - ] - }, - { - "page_num": 32, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p32-b0", - "global_id": 383, - "bbox": [ - 72.0, - 73.06, - 521.09, - 170.5 - ], - "text": "until recently, they all meant pretty much the same thing. However, with\nincreased specialization in the field, it has become necessary to make some\nfurther distinctions and define the terms a bit more carefully. Because\nvirtually all technical analysis was based on the use of charts up until the last\ndecade, the terms “technician” and “chartist” meant the same thing. This is no\nlonger necessarily true.", - "type": "text" - }, - { - "block_id": "p32-b1", - "global_id": 384, - "bbox": [ - 72.0, - 172.67, - 514.74, - 269.89 - ], - "text": "The broader area of technical analysis is being increasingly divided into\ntwo types of practitioners, the traditional chartist and, for want of a better\nterm, statistical technicians. Admittedly, there is a lot of overlap here and\nmost technicians combine both areas to some extent. As in the case of the\ntechnician versus the fundamentalist, most seem to fall into one category or\nthe other.", - "type": "text" - }, - { - "block_id": "p32-b2", - "global_id": 385, - "bbox": [ - 72.0, - 272.05, - 521.9, - 369.27 - ], - "text": "Whether or not the traditional chartist uses quantitative work to\nsupplement his or her analysis, charts remain the primary working tool.\nEverything else is secondary. Charting, of necessity, remains somewhat\nsubjective. The success of the approach depends, for the most part, on the\nskill of the individual chartist. The term “art charting” has been applied to this\napproach because chart reading is largely an art.", - "type": "text" - }, - { - "block_id": "p32-b3", - "global_id": 386, - "bbox": [ - 72.0, - 371.44, - 519.17, - 518.35 - ], - "text": "By contrast, the statistical, or quantitative, analyst takes these subjective\nprinciples, quantifies, tests, and optimizes them for the purpose of developing\nmechanical trading systems. These systems, or trading models, are then\nprogrammed into a computer that generates mechanical “buy” and “sell”\nsignals. These systems range from the simple to the very complex. However,\nthe intent is to reduce or completely eliminate the subjective human element\nin trading, to make it more scientific. These statisticians may or may not use\nprice charts in their work, but they are considered technicians as long as their\nwork is limited to the study of market action.", - "type": "text" - }, - { - "block_id": "p32-b4", - "global_id": 387, - "bbox": [ - 72.0, - 520.51, - 509.92, - 601.17 - ], - "text": "Even computer technicians can be subdivided further into those who\nfavor mechanical systems, or the “black box” approach, and those who use\ncomputer technology to develop better technical indicators. The latter group\nmaintains control over the interpretation of those indicators and also the\ndecision making process.", - "type": "text" - }, - { - "block_id": "p32-b5", - "global_id": 388, - "bbox": [ - 72.0, - 603.34, - 522.41, - 683.99 - ], - "text": "One way of distinguishing between the chartist and the statistician is to\nsay that all chartists are technicians, but not all technicians are chartists.\nAlthough these terms are used interchangeably throughout this book, it should\nbe remembered that charting represents only one area in the broader subject\nof technical analysis.", - "type": "text" - }, - { - "block_id": "p32-b6", - "global_id": 389, - "bbox": [ - 72.0, - 727.94, - 454.06, - 748.1 - ], - "text": "A BRIEF COMPARISON OF TECHNICAL", - "type": "text" - } - ] - }, - { - "page_num": 33, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p33-b0", - "global_id": 390, - "bbox": [ - 72.0, - 74.27, - 513.9, - 277.09 - ], - "text": "ANALYSIS IN STOCKS AND FUTURES\nA question often asked is whether technical analysis as applied to futures is\nthe same as the stock market. The answer is both yes and no. The basic\nprinciples are the same, but there are some significant differences. The\nprinciples of technical analysis were first applied to stock market forecasting\nand only later adapted to futures. Most of the basic tools—bar charts, point\nand figure charts, price patterns, volume, trendlines, moving averages, and\noscillators, for example—are used in both areas. Anyone who has learned\nthese concepts in either stocks or futures wouldn’t have too much trouble\nmaking the adjustment to the other side. However, there are some general\nareas of difference having more to do with the different nature of stocks and\nfutures than with the actual tools themselves.", - "type": "text" - }, - { - "block_id": "p33-b1", - "global_id": 391, - "bbox": [ - 72.0, - 300.77, - 152.38, - 311.57 - ], - "text": "Pricing Structure", - "type": "text" - }, - { - "block_id": "p33-b2", - "global_id": 392, - "bbox": [ - 72.0, - 319.58, - 522.26, - 433.37 - ], - "text": "The pricing structure in futures is much more complicated than in stocks.\nEach commodity is quoted in different units and increments. Grain markets,\nfor example, are quoted in cents per bushel, livestock markets in cents per\npound, gold and silver in dollars per ounce, and interest rates in basis points.\nThe trader must learn the contract details of each market: which exchange it is\ntraded on, how each contract is quoted, what the minimum and maximum\nprice increments are, and what these price increments are worth.", - "type": "text" - }, - { - "block_id": "p33-b3", - "global_id": 393, - "bbox": [ - 72.0, - 457.05, - 521.14, - 704.88 - ], - "text": "Limited Life Span\nUnlike stocks, futures contracts have expiration dates. A March 1999\nTreasury Bond contract, for example, expires in March of 1999. The typical\nfutures contract trades for about a year and a half before expiration.\nTherefore, at any one time, at least a half dozen different contract months are\ntrading in the same commodity at the same time. The trader must know which\ncontracts to trade and which ones to avoid. (This is explained later in this\nbook.) This limited life feature causes some problems for longer range price\nforecasting. It necessitates the continuing need for obtaining new charts once\nold contracts stop trading. The chart of an expired contract isn’t of much use.\nNew charts must be obtained for the newer contracts along with their own\ntechnical indicators. This constant rotation makes the maintenance of an\nongoing chart library a good deal more difficult. For computer users, it also\nentails greater time and expense by making it necessary to be constantly\nobtaining new historical data as old contracts expire.", - "type": "text" - }, - { - "block_id": "p33-b4", - "global_id": 394, - "bbox": [ - 72.0, - 728.56, - 206.45, - 739.36 - ], - "text": "Lower Margin Requirements", - "type": "text" - }, - { - "block_id": "p33-b5", - "global_id": 395, - "bbox": [ - 72.0, - 747.37, - 502.11, - 761.77 - ], - "text": "This is probably the most important difference between stocks and futures.", - "type": "text" - } - ] - }, - { - "page_num": 34, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p34-b0", - "global_id": 396, - "bbox": [ - 72.0, - 73.64, - 521.69, - 369.27 - ], - "text": "All futures are traded on margin, which is usually less than 10% of the value\nof the contract. The result of these low margin requirements is tremendous\nleverage. Relatively small price moves in either direction tend to become\nmagnified in their impact on overall trading results. For this reason, it is\npossible to make or lose large sums of money very quickly in futures.\nBecause a trader puts up only 10% of the value of the contract as margin, then\na 10% move in either direction will either double the trader’s money or wipe\nit out. By magnifying the impact of even minor market moves, the high\nleverage factor sometimes makes the futures markets seem more volatile than\nthey actually are. When someone says, for example, that he or she was\n“wiped out” in the futures market, remember that he or she only committed\n10% in the first place.\nFrom the standpoint of technical analysis, the high leverage factor makes\ntiming in the futures markets much more critical than it is in stocks. The\ncorrect timing of entry and exit points is crucial in futures trading and much\nmore difficult and frustrating than market analysis. Largely for this reason,\ntechnical trading skills become indispensable to a successful futures trading\nprogram.", - "type": "text" - }, - { - "block_id": "p34-b1", - "global_id": 397, - "bbox": [ - 72.0, - 392.95, - 207.83, - 403.75 - ], - "text": "Time Frame Is Much Shorter", - "type": "text" - }, - { - "block_id": "p34-b2", - "global_id": 398, - "bbox": [ - 72.0, - 411.77, - 520.78, - 591.81 - ], - "text": "Because of the high leverage factor and the need for close monitoring of\nmarket positions, the time horizon of the commodity trader is much shorter of\nnecessity. Stock market technicians tend to look more at the longer range\npicture and talk in time frames that are beyond the concern of the average\ncommodity trader. Stock technicians may talk about where the market will be\nin three or six months. Futures traders want to know where prices will be next\nweek, tomorrow, or maybe even later this afternoon. This has necessitated the\nrefinement of very short term timing tools. One example is the moving\naverage. The most commonly watched averages in stocks are 50 and 200\ndays. In commodities, most moving averages are under 40 days. A popular\nmoving average combination in futures, for example, is 4, 9, and 18 days.", - "type": "text" - }, - { - "block_id": "p34-b3", - "global_id": 399, - "bbox": [ - 72.0, - 615.49, - 523.15, - 763.93 - ], - "text": "Greater Reliance on Timing\nTiming is everything in futures trading. Determining the correct direction of\nthe market only solves a portion of the trading problem. If the timing of the\nentry point is off by a day, or sometimes even minutes, it can mean the\ndifference between a winner or a loser. It’s bad enough to be on the wrong\nside of the market and lose money. Being on the right side of the market and\nstill losing money is one of the most frustrating and unnerving aspects of\nfutures trading. It goes without saying that timing is almost purely technical in\nnature, because the fundamentals rarely change on a day-to-day basis.", - "type": "text" - } - ] - }, - { - "page_num": 35, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p35-b0", - "global_id": 400, - "bbox": [ - 72.0, - 74.02, - 522.45, - 284.29 - ], - "text": "LESS RELIANCE ON MARKET AVERAGES\nAND INDICATORS\nStock market analysis is based heavily on the movement of broad market\naverages—such as the Dow Jones Industrial Average or the S&P 500. In\naddition, technical indicators that measure the strength or weakness of the\nbroader market—like the NYSE advance-decline line or the new highs-new\nlows list—are heavily employed. While commodity markets can be tracked\nusing measures like the Commodity Research Bureau Futures Price Index,\nless emphasis is placed on the broader market approach. Commodity market\nanalysis concentrates more on individual market action. That being the case,\ntechnical indicators that measure broader commodity trends aren’t used much.\nWith only about 20 or so active commodity markets, there isn’t much need.", - "type": "text" - }, - { - "block_id": "p35-b1", - "global_id": 401, - "bbox": [ - 72.0, - 307.97, - 181.47, - 318.77 - ], - "text": "Specific Technical Tools", - "type": "text" - }, - { - "block_id": "p35-b2", - "global_id": 402, - "bbox": [ - 72.0, - 326.79, - 508.77, - 390.88 - ], - "text": "While most of the technical tools originally developed in the stock market\nhave some application in commodity markets, they are not used in the exact\nsame way. For example, chart patterns in futures often tend not to form as\nfully as they do in stocks.", - "type": "text" - }, - { - "block_id": "p35-b3", - "global_id": 403, - "bbox": [ - 72.0, - 393.04, - 515.67, - 440.57 - ], - "text": "Futures traders rely more heavily on shorter term indicators that\nemphasize more precise trading signals. These points of difference and many\nothers are discussed later in this book.", - "type": "text" - }, - { - "block_id": "p35-b4", - "global_id": 404, - "bbox": [ - 72.0, - 442.74, - 522.09, - 606.21 - ], - "text": "Finally, there is another area of major difference between stocks and\nfutures. Technical analysis in stocks relies much more heavily on the use of\nsentiment indicators and flow of funds analysis. Sentiment indicators monitor\nthe performance of different groups such as odd lotters, mutual funds, and\nfloor specialists. Enormous importance is placed on sentiment indicators that\nmeasure the overall market bullishness and bearishness on the theory that the\nmajority opinion is usually wrong. Flow of funds analysis refers to the cash\nposition of different groups, such as mutual funds or large institutional\naccounts. The thinking here is that the larger the cash position, the more funds\nthat are available for stock purchases.", - "type": "text" - }, - { - "block_id": "p35-b5", - "global_id": 405, - "bbox": [ - 72.0, - 608.37, - 507.68, - 672.47 - ], - "text": "Technical analysis in the futures markets is a much purer form of price\nanalysis. While contrary opinion theory is also used to some extent, much\nmore emphasis is placed on basic trend analysis and the application of\ntraditional technical indicators.", - "type": "text" - }, - { - "block_id": "p35-b6", - "global_id": 406, - "bbox": [ - 72.0, - 715.7, - 465.29, - 759.62 - ], - "text": "SOME CRITICISMS OF THE TECHNICAL\nAPPROACH", - "type": "text" - } - ] - }, - { - "page_num": 36, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p36-b0", - "global_id": 407, - "bbox": [ - 72.0, - 73.28, - 519.52, - 220.2 - ], - "text": "A few questions generally crop up in any discussion of the technical\napproach. One of these concerns is the self-fulfilling prophecy.Another is the\nquestion of whether or not past price data can really be used to forecast future\nprice direction. The critic usually says something like: “Charts tell us where\nthe market has been, but can’t tell us where it is going.” For the moment,\nwe’ll put aside the obvious answer that a chart won’t tell you anything if you\ndon’t know how to read it. The Random Walk Theory questions whether\nprices trend at all and doubts that any forecasting technique can beat a simple\nbuy and hold strategy. These questions deserve a response.", - "type": "text" - }, - { - "block_id": "p36-b1", - "global_id": 408, - "bbox": [ - 72.0, - 243.88, - 202.41, - 254.67 - ], - "text": "The Self-Fulfilling Prophecy", - "type": "text" - }, - { - "block_id": "p36-b2", - "global_id": 409, - "bbox": [ - 72.0, - 262.69, - 521.95, - 343.35 - ], - "text": "The question of whether there is a self-fulfilling prophecy at work seems to\nbother most people because it is raised so often. It is certainly a valid concern,\nbut of much less importance than most people realize. Perhaps the best way to\naddress this question is to quote from a text that discusses some of the\ndisadvantages of using chart patterns:", - "type": "text" - }, - { - "block_id": "p36-b3", - "global_id": 410, - "bbox": [ - 100.79, - 359.91, - 507.57, - 374.31 - ], - "text": "a. The use of most chart patterns has been widely publicized in the last", - "type": "text" - }, - { - "block_id": "p36-b4", - "global_id": 411, - "bbox": [ - 100.79, - 376.48, - 515.38, - 457.13 - ], - "text": "several years. Many traders are quite familiar with these patterns and\noften act on them in concert. This creates a “self-fulfilling prophecy,”\nas waves of buying or selling are created in response to “bullish” or\n“bearish” patterns…\nb. Chart patterns are almost completely subjective. No study has yet", - "type": "text" - }, - { - "block_id": "p36-b5", - "global_id": 412, - "bbox": [ - 115.18, - 459.3, - 481.58, - 490.26 - ], - "text": "succeeded in mathematically quantifying any of them. They are\nliterally in the mind of the beholder…. (Teweles et al.)", - "type": "text" - }, - { - "block_id": "p36-b6", - "global_id": 413, - "bbox": [ - 72.0, - 506.83, - 519.45, - 637.18 - ], - "text": "These two criticisms contradict one another and the second point\nactually cancels out the first. If chart patterns are “completely subjective” and\n“in the mind of the beholder,” then it is hard to imagine how everyone could\nsee the same thing at the same time, which is the basis of the self-fulfilling\nprophecy. Critics of charting can’t have it both ways. They can’t, on the one\nhand, criticize charting for being so objective and obvious that everyone will\nact in the same way at the same time (thereby causing the price pattern to be\nfulfilled), and then also criticize charting for being too subjective.", - "type": "text" - }, - { - "block_id": "p36-b7", - "global_id": 414, - "bbox": [ - 72.0, - 639.34, - 523.11, - 736.56 - ], - "text": "The truth of the matter is that charting is very subjective. Chart reading\nis an art. (Possibly the word “skill” would be more to the point.) Chart\npatterns are seldom so clear that even experienced chartists always agree on\ntheir interpretation. There is always an element of doubt and disagreement. As\nthis book demonstrates, there are many different approaches to technical\nanalysis that often disagree with one another.", - "type": "text" - }, - { - "block_id": "p36-b8", - "global_id": 415, - "bbox": [ - 72.0, - 738.73, - 513.57, - 769.69 - ], - "text": "Even if most technicians did agree on a market forecast, they would not\nall necessarily enter the market at the same time and in the same way. Some", - "type": "text" - } - ] - }, - { - "page_num": 37, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p37-b0", - "global_id": 416, - "bbox": [ - 72.0, - 73.64, - 520.76, - 204.35 - ], - "text": "would try to anticipate the chart signal and enter the market early. Others\nwould buy the “breakout” from a given pattern or indicator. Still others would\nwait for the pullback after the breakout before taking action. Some traders are\naggressive; others are conservative. Some use stops to enter the market, while\nothers like to use market orders or resting limit orders. Some are trading for\nthe long pull, while others are day trading. Therefore, the possibility of all\ntechnicians acting at the same time and in the same way is actually quite\nremote.", - "type": "text" - }, - { - "block_id": "p37-b1", - "global_id": 417, - "bbox": [ - 72.0, - 205.8, - 522.32, - 336.14 - ], - "text": "Even if the self-fulfilling prophecy were of major concern, it would\nprobably be “self-correcting” in nature. In other words, traders would rely\nheavily on charts until their concerted actions started to affect or distort the\nmarkets. Once traders realized this was happening, they would either stop\nusing the charts or adjust their trading tactics. For example, they would either\ntry to act before the crowd or wait longer for greater confirmation. So, even if\nthe self-fulfilling prophecy did become a problem over the near term, it would\ntend to correct itself.", - "type": "text" - }, - { - "block_id": "p37-b2", - "global_id": 418, - "bbox": [ - 72.0, - 338.31, - 515.15, - 418.96 - ], - "text": "It must be kept in mind that bull and bear markets only occur and are\nmaintained when they are justified by the law of supply and demand.\nTechnicians could not possibly cause a major market move just by the sheer\npower of their buying and selling. If this were the case, technicians would all\nbecome wealthy very quickly.", - "type": "text" - }, - { - "block_id": "p37-b3", - "global_id": 419, - "bbox": [ - 72.0, - 421.13, - 522.33, - 601.17 - ], - "text": "Of much more concern than the chartists is the tremendous growth in the\nuse of computerized technical trading systems in the futures market. These\nsystems are mainly trend-following in nature, which means that they are all\nprogrammed to identify and trade major trends. With the growth in\nprofessionally managed money in the futures industry, and the proliferation of\nmultimillion-dollar public and private funds, most of which are using these\ntechnical systems, tremendous concentrations of money are chasing only a\nhandful of existing trends. Because the universe of futures markets is still\nquite small, the potential for these systems distorting short term price action is\ngrowing. However, even in cases where distortions do occur, they are\ngenerally short term in nature and do not cause major moves.", - "type": "text" - }, - { - "block_id": "p37-b4", - "global_id": 420, - "bbox": [ - 72.0, - 603.34, - 500.78, - 667.43 - ], - "text": "Here again, even the problem of concentrated sums of money using\ntechnical systems is probably self-correcting. If all of the systems started\ndoing the same thing at the same time, traders would make adjustments by\nmaking their systems either more or less sensitive.", - "type": "text" - }, - { - "block_id": "p37-b5", - "global_id": 421, - "bbox": [ - 72.0, - 669.59, - 520.04, - 750.25 - ], - "text": "The self-fulfilling prophecy is generally listed as a criticism of charting.\nIt might be more appropriate to label it as a compliment. After all, for any\nforecasting technique to become so popular that it begins to influence events,\nit would have to be pretty good. We can only speculate as to why this concern\nis seldom raised regarding the use of fundamental analysis.", - "type": "text" - } - ] - }, - { - "page_num": 38, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p38-b0", - "global_id": 422, - "bbox": [ - 72.0, - 73.19, - 275.34, - 83.99 - ], - "text": "Can the Past Be Used to Predict the Future?", - "type": "text" - }, - { - "block_id": "p38-b1", - "global_id": 423, - "bbox": [ - 72.0, - 92.01, - 519.58, - 172.66 - ], - "text": "Another question often raised concerns the validity of using past price data to\npredict the future. It is surprising how often critics of the technical approach\nbring up this point because every known method of forecasting, from weather\npredicting to fundamental analysis, is based completely on the study of past\ndata. What other kind of data is there to work with?", - "type": "text" - }, - { - "block_id": "p38-b2", - "global_id": 424, - "bbox": [ - 72.0, - 174.82, - 511.12, - 288.61 - ], - "text": "The field of statistics makes a distinction between descriptive statistics\nand inductive statistics. Descriptive statistics refers to the graphical\npresentation of data, such as the price data on a standard bar chart. Inductive\nstatistics refers to generalizations, predictions, or extrapolations that are\ninferred from that data. Therefore, the price chart itself comes under the\nheading of the descriptive, while the analysis technicians perform on that\nprice data falls into the realm of the inductive.", - "type": "text" - }, - { - "block_id": "p38-b3", - "global_id": 425, - "bbox": [ - 72.0, - 290.78, - 516.37, - 404.56 - ], - "text": "As one statistical text puts it, “The first step in forecasting the business\nor economic future consists, thus, of gathering observations from the past.”\n(Freund and Williams) Chart analysis is just another form of time series\nanalysis, based on a study of the past, which is exactly what is done in all\nforms of time series analysis. The only type of data anyone has to go on is\npast data. We can only estimate the future by projecting past experiences into\nthat future.", - "type": "text" - }, - { - "block_id": "p38-b4", - "global_id": 426, - "bbox": [ - 72.0, - 406.73, - 523.16, - 487.38 - ], - "text": "So it seems that the use of past price data to predict the future in\ntechnical analysis is grounded in sound statistical concepts. If anyone were to\nseriously question this aspect of technical forecasting, he or she would have to\nalso question the validity of every other form of forecasting based on\nhistorical data, which includes all economic and fundamental analysis.", - "type": "text" - }, - { - "block_id": "p38-b5", - "global_id": 427, - "bbox": [ - 72.0, - 530.61, - 522.74, - 683.99 - ], - "text": "RANDOM WALK THEORY\nThe Random Walk Theory, developed and nurtured in the academic\ncommunity, claims that price changes are “serially independent” and that\nprice history is not a reliable indicator of future price direction. In a nutshell,\nprice movement is random and unpredictable. The theory is based on the\nefficient market hypothesis, which holds that prices fluctuate randomly about\ntheir intrinsic value. It also holds that the best market strategy to follow would\nbe a simple “buy and hold” strategy as opposed to any attempt to “beat the\nmarket.”", - "type": "text" - }, - { - "block_id": "p38-b6", - "global_id": 428, - "bbox": [ - 72.0, - 686.16, - 518.75, - 766.81 - ], - "text": "While there seems little doubt that a certain amount of randomness or\n“noise” does exist in all markets, it’s just unrealistic to believe that all price\nmovement is random. This may be one of those areas where empirical\nobservation and practical experience prove more useful than sophisticated\nstatistical techniques, which seem capable of proving anything the user has in", - "type": "text" - } - ] - }, - { - "page_num": 39, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p39-b0", - "global_id": 429, - "bbox": [ - 72.0, - 73.17, - 513.21, - 153.94 - ], - "text": "mind or incapable of disproving anything. It might be useful to keep in mind\nthat randomness can only be defined in the negative sense of an inability to\nuncover systematic patterns in price action. The fact that many academics\nhave not been able to discover the presence of these patterns does not prove\nthat they do not exist.", - "type": "text" - }, - { - "block_id": "p39-b1", - "global_id": 430, - "bbox": [ - 72.0, - 156.1, - 516.69, - 303.02 - ], - "text": "The academic debate as to whether markets trend is of little interest to\nthe average market analyst or trader who is forced to deal in the real world\nwhere market trends are clearly visible. If the reader has any doubts on this\npoint, a casual glance through any chart book (randomly selected) will\ndemonstrate the presence of trends in a very graphic way. How do the\n“random walkers” explain the persistence of these trends if prices are serially\nindependent, meaning that what happened yesterday, or last week, has no\nbearing on what may happen today or tomorrow? How do they explain the\nprofitable “real life” track records of many trend-following systems?", - "type": "text" - }, - { - "block_id": "p39-b2", - "global_id": 431, - "bbox": [ - 72.0, - 305.18, - 516.27, - 402.4 - ], - "text": "How, for example, would a buy and hold strategy fare in the commodity\nfutures markets where timing is so crucial? Would those long positions be\nheld during bear markets? How would traders even know the difference\nbetween bull and bear markets if prices are unpredictable and don’t trend? In\nfact, how could a bear market even exist in the first place because that would\nimply a trend? (See Figure 1.3.)", - "type": "text" - }, - { - "block_id": "p39-b3", - "global_id": 432, - "bbox": [ - 75.08, - 691.91, - 520.19, - 706.38 - ], - "text": "Figure 1.3 A “random walker” would have a tough time convincing a holder", - "type": "text" - }, - { - "block_id": "p39-b4", - "global_id": 433, - "bbox": [ - 142.87, - 708.48, - 452.39, - 722.88 - ], - "text": "of gold bullion that there’s no real trend on this chart.", - "type": "text" - }, - { - "block_id": "p39-b5", - "global_id": 434, - "bbox": [ - 72.0, - 739.45, - 485.15, - 770.41 - ], - "text": "It seems doubtful that statistical evidence will ever totally prove or\ndisprove the Random Walk Theory. However, the idea that markets are", - "type": "text" - } - ] - }, - { - "page_num": 40, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p40-b0", - "global_id": 435, - "bbox": [ - 72.0, - 73.28, - 522.71, - 253.32 - ], - "text": "random is totally rejected by the technical community. If the markets were\ntruly random, no forecasting technique would work. Far from disproving the\nvalidity of the technical approach, the efficient market hypothesis is very close\nto the technical premise that markets discount everything. The academics,\nhowever, feel that because markets quickly discount all information, there’s\nno way to take advantage of that information. The basis of technical\nforecasting, already touched upon, is that important market information is\ndiscounted in the market price long before it becomes known. Without\nmeaning to, the academics have very eloquently stated the need for closely\nmonitoring price action and the futility of trying to profit from fundamental\ninformation, at least over the short term.", - "type": "text" - }, - { - "block_id": "p40-b1", - "global_id": 436, - "bbox": [ - 72.0, - 255.49, - 522.35, - 418.96 - ], - "text": "Finally, it seems only fair to observe that any process appears random\nand unpredictable to those who do not understand the rules under which that\nprocess operates. An electrocardiogram printout, for example, might appear\nlike a lot of random noise to a layperson. But to a trained medical person, all\nthose little blips make a lot of sense and are certainly not random. The\nworking of the markets may appear random to those who have not taken the\ntime to study the rules of market behavior. The illusion of randomness\ngradually disappears as the skill in chart reading improves. Hopefully, that is\nexactly what will happen as the reader progresses through the various sections\nof this book.", - "type": "text" - }, - { - "block_id": "p40-b2", - "global_id": 437, - "bbox": [ - 72.0, - 421.13, - 519.94, - 485.22 - ], - "text": "There may even be hope for the academic world. A number of leading\nAmerican universities have begun to explore Behavioral Finance which\nmaintains that human psychology and securities pricing are intertwined. That,\nof course, is the primary basis of technical analysis.", - "type": "text" - }, - { - "block_id": "p40-b3", - "global_id": 438, - "bbox": [ - 72.0, - 529.17, - 522.78, - 715.68 - ], - "text": "UNIVERSAL PRINCIPLES\nWhen an earlier version of this book was published twelve years ago, many of\nthe technical timing tools that were explained were used mainly in the futures\nmarkets. Over the past decade, however, these tools have been widely\nemployed in analyzing stock market trends. The technical principles that are\ndiscussed in this book can be applied universally to all markets—even mutual\nfunds. One additional feature of stock market trading that has gained wide\npopularity in the past decade has been sector investing, primarily through\nindex options and mutual funds. Later in the book we’ll show how to\ndetermine which sectors are hot and which are not by applying technical\ntiming tools.", - "type": "text" - } - ] - }, - { - "page_num": 41, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p41-b0", - "global_id": 439, - "bbox": [ - 72.0, - 309.52, - 521.12, - 479.46 - ], - "text": "INTRODUCTION\nCharles Dow and his partner Edward Jones founded Dow Jones & Company\nin 1882. Most technicians and students of the markets concur that much of\nwhat we call technical analysis today has its origins in theories first proposed\nby Dow around the turn of the century. Dow published his ideas in a series of\neditorials he wrote for the Wall Street Journal. Most technicians today\nrecognize and assimilate Dow’s basic ideas, whether or not they recognize the\nsource. Dow Theory still forms the cornerstone of the study of technical\nanalysis, even in the face of today’s sophisticated computer technology, and\nthe proliferation of newer and supposedly better technical indicators.", - "type": "text" - }, - { - "block_id": "p41-b1", - "global_id": 440, - "bbox": [ - 72.0, - 481.62, - 523.23, - 727.92 - ], - "text": "On July 3, 1884, Dow published the first stock market average composed\nof the closing prices of eleven stocks: nine railroad companies and two\nmanufacturing firms. Dow felt that these eleven stocks provided a good\nindication of the economic health of the country. In 1897, Dow determined\nthat two separate indices would better represent that health, and created a 12\nstock industrial index and a 20 stock rail index. By 1928 the industrial index\nhad grown to include 30 stocks, the number at which it stands today. The\neditors of The Wall Street Journal have updated the list numerous times in the\nensuing years, adding a utility index in 1929. In 1984, the year that marked\nthe one hundredth anniversary of Dow’s first publication, the Market\nTechnicians Association presented a Gorham-silver bowl to Dow Jones & Co.\nAccording to the MTA, the award recognized “the lasting contribution that\nCharles Dow made to the field of investment analysis. His index, the\nforerunner of what today is regarded as the leading barometer of stock market\nactivity, remains a vital tool for market technicians 80 years after his death.”", - "type": "text" - }, - { - "block_id": "p41-b2", - "global_id": 441, - "bbox": [ - 72.0, - 730.09, - 515.09, - 761.05 - ], - "text": "Unfortunately for us, Dow never wrote a book on his theory. Instead, he\nset down his ideas of stock market behavior in a series of editorials that The", - "type": "text" - } - ] - }, - { - "page_num": 42, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p42-b0", - "global_id": 442, - "bbox": [ - 72.0, - 73.28, - 522.38, - 220.2 - ], - "text": "Wall Street Journal published around the turn of the century. In 1903, the year\nafter Dow’s death, S.A. Nelson compiled these essays into a book entitled The\nABC of Stock Speculation. In that work, Nelson first coined the term “Dow’s\nTheory.” Richard Russell, who wrote the introduction to a 1978 reprint,\ncompared Dow’s contribution to stock market theory with Freud’s\ncontribution to psychiatry. In 1922, William Peter Hamilton (Dow’s associate\nand successor at the Journal) categorized and published Dow’s tenets in a\nbook entitled The Stock Market Barometer. Robert Rhea developed the theory\neven further in the Dow Theory (New York: Barron’s), published in 1932.", - "type": "text" - }, - { - "block_id": "p42-b1", - "global_id": 443, - "bbox": [ - 72.0, - 222.36, - 519.08, - 319.58 - ], - "text": "Dow applied his theoretical work to the stock market averages that he\ncreated; namely the Industrials and the Rails. However, most of his analytical\nideas apply equally well to all market averages. This chapter will describe the\nsix basic tenets of Dow Theory and will discuss how these ideas fit into a\nmodern study of technical analysis. We will discuss the ramifications of these\nideas in the chapters that follow.", - "type": "text" - }, - { - "block_id": "p42-b2", - "global_id": 444, - "bbox": [ - 72.0, - 363.53, - 218.13, - 383.69 - ], - "text": "BASIC TENETS", - "type": "text" - }, - { - "block_id": "p42-b3", - "global_id": 445, - "bbox": [ - 72.0, - 391.51, - 245.61, - 402.31 - ], - "text": "1. The Averages Discount Everything.", - "type": "text" - }, - { - "block_id": "p42-b4", - "global_id": 446, - "bbox": [ - 100.79, - 418.97, - 491.6, - 549.32 - ], - "text": "The sum and tendency of the transactions of the Stock Exchange\nrepresent the sum of all Wall Street’s knowledge of the past,\nimmediate and remote, applied to the discounting of the future.\nThere is no need to add to the averages, as some statisticians do,\nelaborate compilations of commodity price index numbers, bank\nclearings, fluctuations in exchange, volume of domestic and foreign\ntrades or anything else. Wall Street considers all these things\n(Hamilton, pp. 40–41).", - "type": "text" - }, - { - "block_id": "p42-b5", - "global_id": 447, - "bbox": [ - 72.0, - 565.89, - 518.87, - 696.23 - ], - "text": "Sound familiar? The idea that the markets reflect every possible\nknowable factor that affects overall supply and demand is one of the basic\npremises of technical theory, as was mentioned in Chapter 1. The theory\napplies to market averages, as well as it does to individual markets, and even\nmakes allowances for “acts of God.” While the markets cannot anticipate\nevents such as earthquakes and various other natural calamities, they quickly\ndiscount such occurrences, and almost instantaneously assimilate their affects\ninto the price action.", - "type": "text" - }, - { - "block_id": "p42-b6", - "global_id": 448, - "bbox": [ - 72.0, - 719.91, - 226.35, - 730.71 - ], - "text": "2. The Market Has Three Trends.", - "type": "text" - }, - { - "block_id": "p42-b7", - "global_id": 449, - "bbox": [ - 72.0, - 738.73, - 521.97, - 769.69 - ], - "text": "Before discussing how trends behave, we must clarify what Dow considered a\ntrend. Dow defined an uptrend as a situation in which each successive rally", - "type": "text" - } - ] - }, - { - "page_num": 43, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p43-b0", - "global_id": 450, - "bbox": [ - 72.0, - 73.53, - 514.8, - 153.94 - ], - "text": "closes higher than the previous rally high, and each successive rally low also\ncloses higher than the previous rally low. In other words, an uptrend has a\npattern of rising peaks and troughs. The opposite situation, with successively\nlower peaks and troughs, defines a downtrend. Dow’s definition has\nwithstood the test of time and still forms the cornerstone of trend analysis.", - "type": "text" - }, - { - "block_id": "p43-b1", - "global_id": 451, - "bbox": [ - 72.0, - 156.1, - 509.6, - 236.76 - ], - "text": "Dow believed that the laws of action and reaction apply to the markets\njust as they do to the physical universe. He wrote, “Records of trading show\nthat in many cases when a stock reaches top it will have a moderate decline\nand then go back again to near the highest figures. If after such a move, the\nprice again recedes, it is liable to decline some distance” (Nelson, page 43).", - "type": "text" - }, - { - "block_id": "p43-b2", - "global_id": 452, - "bbox": [ - 72.0, - 238.92, - 510.75, - 319.58 - ], - "text": "Dow considered a trend to have three parts, primary, secondary, and\nminor, which he compared to the tide, waves, and ripples of the sea. The\nprimary trend represents the tide, the secondary or intermediate trend\nrepresents the waves that make up the tide, and the minor trends behave like\nripples on the waves.", - "type": "text" - }, - { - "block_id": "p43-b3", - "global_id": 453, - "bbox": [ - 72.0, - 321.75, - 520.74, - 435.53 - ], - "text": "An observer can determine the direction of the tide by noting the highest\npoint on the beach reached by successive waves. If each successive wave\nreaches further inland than the preceding one, the tide is flowing in. When the\nhigh point of each successive wave recedes, the tide has turned out and is\nebbing. Unlike actual ocean tides, which last a matter of hours, Dow\nconceived of market tides as lasting for more than a year, and possibly for\nseveral years.", - "type": "text" - }, - { - "block_id": "p43-b4", - "global_id": 454, - "bbox": [ - 72.0, - 437.69, - 521.86, - 518.35 - ], - "text": "The secondary, or intermediate, trend represents corrections in the\nprimary trend and usually lasts three weeks to three months. These\nintermediate corrections generally retrace between one-third and two-thirds of\nthe previous trend movement and most frequently about half, or 50%, of the\nprevious move.", - "type": "text" - }, - { - "block_id": "p43-b5", - "global_id": 455, - "bbox": [ - 72.0, - 520.51, - 514.25, - 601.17 - ], - "text": "According to Dow, the minor (or near term) trend usually lasts less than\nthree weeks. This near term trend represents fluctuations in the intermediate\ntrend. We will discuss trend concepts in greater detail in Chapter 4, “Basic\nConcepts of Trends,” where you will see that we continue to use the same\nbasic concepts and terminology today.", - "type": "text" - }, - { - "block_id": "p43-b6", - "global_id": 456, - "bbox": [ - 72.0, - 624.85, - 239.95, - 635.65 - ], - "text": "3. Major Trends Have Three Phases.", - "type": "text" - }, - { - "block_id": "p43-b7", - "global_id": 457, - "bbox": [ - 72.0, - 643.67, - 518.7, - 757.45 - ], - "text": "Dow focused his attention on primary or major trends, which he felt usually\ntake place in three distinct phases: an accumulation phase, a public\nparticipation phase, and a distribution phase. The accumulation phase\nrepresents informed buying by the most astute investors. If the previous trend\nwas down, then at this point these astute investors recognize that the market\nhas assimilated all the so-called “bad” news. The public participation phase,\nwhere most technical trend-followers begin to participate, occurs when prices", - "type": "text" - } - ] - }, - { - "page_num": 44, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p44-b0", - "global_id": 458, - "bbox": [ - 72.0, - 73.64, - 522.34, - 171.22 - ], - "text": "begin to advance rapidly and business news improves. The distribution phase\ntakes place when newspapers begin to print increasingly bullish stories; when\neconomic news is better than ever; and when speculative volume and public\nparticipation increase. During this last phase the same informed investors who\nbegan to “accumulate” near the bear market bottom (when no one else wanted\nto buy) begin to “distribute” before anyone else starts selling.", - "type": "text" - }, - { - "block_id": "p44-b1", - "global_id": 459, - "bbox": [ - 72.0, - 172.67, - 516.18, - 269.89 - ], - "text": "Students of Elliott Wave Theory will recognize this division of a major\nbull market into three distinct phases. R. N. Elliott elaborated upon Rhea’s\nwork in Dow Theory, to recognize that a bull market has three major, upward\nmovements. In Chapter 13, “Elliott Wave Theory,” we’ll show the close\nsimilarity between Dow’s three phases of a bull market and the five wave\nElliott sequence.", - "type": "text" - }, - { - "block_id": "p44-b2", - "global_id": 460, - "bbox": [ - 72.0, - 293.57, - 272.18, - 304.37 - ], - "text": "4. The Averages Must Confirm Each Other.", - "type": "text" - }, - { - "block_id": "p44-b3", - "global_id": 461, - "bbox": [ - 72.0, - 312.38, - 519.93, - 492.42 - ], - "text": "Dow, in referring to the Industrial and Rail Averages, meant that no important\nbull or bear market signal could take place unless both averages gave the\nsame signal, thus confirming each other. He felt that both averages must\nexceed a previous secondary peak to confirm the inception or continuation of\na bull market. He did not believe that the signals had to occur simultaneously,\nbut recognized that a shorter length of time between the two signals provided\nstronger confirmation. When the two averages diverged from one another,\nDow assumed that the prior trend was still maintained. (Elliott Wave Theory\nonly requires that signals be generated in a single average.) Chapter 6,\n“Continuation Patterns,” will cover the key concepts of confirmation and\ndivergence. (See Figures 2.1 and 2.2.)", - "type": "text" - }, - { - "block_id": "p44-b4", - "global_id": 462, - "bbox": [ - 72.0, - 516.1, - 518.07, - 714.24 - ], - "text": "5. Volume Must Confirm the Trend.\nDow recognized volume as a secondary but important factor in confirming\nprice signals. Simply stated, volume should expand or increase in the\ndirection of the major trend. In a major uptrend, volume would then increase\nas prices move higher, and diminish as prices fall. In a downtrend, volume\nshould increase as prices drop and diminish as they rally. Dow considered\nvolume a secondary indicator. He based his actual buy and sell signals\nentirely on closing prices. In Chapter 7, “Volume and Open Interest,” we’ll\ncover the subject of volume and build on Dow’s ideas. Today’s sophisticated\nvolume indicators help determine whether volume is increasing or falling off.\nSavvy traders then compare this information to price action to see if the two\nare confirming each other.", - "type": "text" - } - ] - }, - { - "page_num": 45, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p45-b0", - "global_id": 463, - "bbox": [ - 85.08, - 346.95, - 510.21, - 361.41 - ], - "text": "Figure 2.1 A long term view of the Dow Theory at work. For a major bull", - "type": "text" - }, - { - "block_id": "p45-b1", - "global_id": 464, - "bbox": [ - 86.44, - 363.51, - 508.83, - 377.91 - ], - "text": "trend to continue, both the Dow Industrials and the Dow Transports must", - "type": "text" - }, - { - "block_id": "p45-b2", - "global_id": 465, - "bbox": [ - 246.88, - 380.08, - 348.39, - 394.48 - ], - "text": "advance together.", - "type": "text" - }, - { - "block_id": "p45-b3", - "global_id": 466, - "bbox": [ - 72.0, - 418.16, - 488.37, - 428.96 - ], - "text": "6. A Trend Is Assumed to Be in Effect Until It Gives Definite Signals That It Has Reversed.", - "type": "text" - }, - { - "block_id": "p45-b4", - "global_id": 467, - "bbox": [ - 72.0, - 436.97, - 517.54, - 600.45 - ], - "text": "This tenet, which we touched upon in Chapter 1, forms much of the\nfoundation of modern trend-following approaches. It relates a physical law to\nmarket movement, which states that an object in motion (in this case a trend)\ntends to continue in motion until some external force causes it to change\ndirection. A number of technical tools are available to traders to assist in the\ndifficult task of spotting reversal signals, including the study of support and\nresistance levels, price patterns, trendlines, and moving averages. Some\nindicators can provide even earlier warning signals of loss of momentum. All\nof that not withstanding, the odds usually favor that the existing trend will\ncontinue.", - "type": "text" - } - ] - }, - { - "page_num": 46, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p46-b0", - "global_id": 468, - "bbox": [ - 78.75, - 345.51, - 516.52, - 359.97 - ], - "text": "Figure 2.2 Examples of two Dow Theory confirmations. At the start of 1997", - "type": "text" - }, - { - "block_id": "p46-b1", - "global_id": 469, - "bbox": [ - 79.41, - 362.07, - 515.86, - 393.03 - ], - "text": "(point 1), the Dow Transports confirmed the earlier breakout in the\nIndustrials. The following May (point 2), the Dow Industrials confirmed the", - "type": "text" - }, - { - "block_id": "p46-b2", - "global_id": 470, - "bbox": [ - 197.3, - 395.2, - 397.96, - 409.6 - ], - "text": "earlier new high in the Transports.", - "type": "text" - }, - { - "block_id": "p46-b3", - "global_id": 471, - "bbox": [ - 72.0, - 426.17, - 515.69, - 506.83 - ], - "text": "The most difficult task for a Dow theorist, or any trend-follower for that\nmatter, is being able to distinguish between a normal secondary correction in\nan existing trend and the first leg of a new trend in the opposite direction.\nDow theorists often disagree as to when the market gives an actual reversal\nsignal. Figures 2.3a and 2.3b show how this disagreement manifests itself.", - "type": "text" - }, - { - "block_id": "p46-b4", - "global_id": 472, - "bbox": [ - 72.0, - 508.99, - 523.13, - 606.21 - ], - "text": "Figures 2.3a and 2.3b illustrate two different market scenarios. In Figure\n2.3a, notice that the rally at point C is lower than the previous peak at A. Price\nthen declines below point B. The presence of these two lower peaks and two\nlower troughs gives a clear-cut sell signal at the point where the low at B is\nbroken (point S). This reversal pattern is sometimes referred to as a “failure\nswing.”", - "type": "text" - } - ] - }, - { - "page_num": 47, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p47-b0", - "global_id": 473, - "bbox": [ - 89.03, - 80.48, - 506.25, - 111.44 - ], - "text": "Figure 2.3a Failure Swing. The failure of the peak at C to overcome A,\nfollowed by the violation of the low at B, constitutes a “sell” signal at S.", - "type": "text" - }, - { - "block_id": "p47-b1", - "global_id": 474, - "bbox": [ - 78.84, - 285.01, - 516.45, - 299.48 - ], - "text": "Figure 2.3b Nonfailure Swing. Notice that C exceeds A before falling below", - "type": "text" - }, - { - "block_id": "p47-b2", - "global_id": 475, - "bbox": [ - 82.4, - 301.58, - 512.87, - 315.98 - ], - "text": "B. Some Dow theorists would see a “sell” signal at S1, while others would", - "type": "text" - }, - { - "block_id": "p47-b3", - "global_id": 476, - "bbox": [ - 129.43, - 318.14, - 465.84, - 332.54 - ], - "text": "need to see a lower high at E before turning bearish at S2.", - "type": "text" - }, - { - "block_id": "p47-b4", - "global_id": 477, - "bbox": [ - 72.0, - 349.11, - 515.57, - 462.9 - ], - "text": "In Figure 2.3b, the rally top at C is higher than the previous peak at A.\nThen price declines below point B. Some Dow theorists would not consider\nthe clear violation of support, at S1, to be a bona fide sell signal. They would\npoint out that only lower lows exist in this case, but not lower highs. They\nwould prefer to see a rally to point E which is lower than point C. Then they\nwould look for another new low under point D. To them, S2 would represent\nthe actual sell signal with two lower highs and two lower lows.", - "type": "text" - }, - { - "block_id": "p47-b5", - "global_id": 478, - "bbox": [ - 72.0, - 465.06, - 523.23, - 529.15 - ], - "text": "The reversal pattern shown in Figure 2.3b is referred to as a “nonfailure\nswing.” A failure swing (shown in Figures 2.3a) is a much weaker pattern\nthan the nonfailure swing in Figure 2.3b. Figures 2.4a and 2.4b show the same\nscenarios at a market bottom.", - "type": "text" - }, - { - "block_id": "p47-b6", - "global_id": 479, - "bbox": [ - 72.0, - 573.1, - 501.96, - 667.43 - ], - "text": "THE USE OF CLOSING PRICES AND THE\nPRESENCE OF LINES\nDow relied exclusively on closing prices. He believed that averages had to\nclose higher than a previous peak or lower than a previous trough to have\nsignificance. Dow did not consider intraday penetrations valid.", - "type": "text" - } - ] - }, - { - "page_num": 48, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p48-b0", - "global_id": 480, - "bbox": [ - 76.42, - 244.68, - 518.85, - 259.15 - ], - "text": "Figure 2.4a Failure Swing Bottom. The “buy” signal takes place when point", - "type": "text" - }, - { - "block_id": "p48-b1", - "global_id": 481, - "bbox": [ - 234.72, - 261.25, - 360.56, - 275.65 - ], - "text": "B is exceeded (at B1).", - "type": "text" - }, - { - "block_id": "p48-b2", - "global_id": 482, - "bbox": [ - 80.01, - 463.62, - 515.27, - 478.08 - ], - "text": "Figure 2.4b Nonfailure Swing Bottom. “Buy” signals occur at points B1 or", - "type": "text" - }, - { - "block_id": "p48-b3", - "global_id": 483, - "bbox": [ - 287.84, - 480.18, - 307.42, - 494.58 - ], - "text": "B2.", - "type": "text" - }, - { - "block_id": "p48-b4", - "global_id": 484, - "bbox": [ - 72.0, - 511.15, - 506.76, - 591.81 - ], - "text": "When traders speak of lines in the averages, they are referring to\nhorizontal patterns that sometimes occur on the charts. These sideways\ntrading ranges usually play the role of corrective phases and are usually\nreferred to as consolidations. In more modern terms, we might refer to such\nlateral patterns as “rectangles.”", - "type": "text" - }, - { - "block_id": "p48-b5", - "global_id": 485, - "bbox": [ - 72.0, - 635.76, - 519.17, - 756.01 - ], - "text": "SOME CRITICISMS OF DOW THEORY\nDow Theory has done well over the years in identifying major bull and bear\nmarkets, but has not escaped criticism. On average, Dow Theory misses 20 to\n25% of a move before generating a signal. Many traders consider this to be\ntoo late. A Dow Theory buy signal usually occurs in the second phase of an\nuptrend as price penetrates a previous intermediate peak. This is also,\nincidentally, about where most trend-following technical systems begin to", - "type": "text" - } - ] - }, - { - "page_num": 49, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p49-b0", - "global_id": 486, - "bbox": [ - 72.0, - 73.53, - 311.74, - 87.93 - ], - "text": "identify and participate in existing trends.", - "type": "text" - }, - { - "block_id": "p49-b1", - "global_id": 487, - "bbox": [ - 72.0, - 89.85, - 515.49, - 253.32 - ], - "text": "In response to this criticism, traders must remember that Dow never\nintended to anticipate trends; rather he sought to recognize the emergence of\nmajor bull and bear markets and to capture the large middle portion of\nimportant market moves. Available records suggest that Dow’s Theory has\nperformed that function reasonably well. From 1920 to 1975, Dow Theory\nsignals captured 68% of the moves in the Industrial and Transportation\nAverages and 67% of those in the S&P 500 Composite Index (Source:\nBarron’s). Those who criticize Dow Theory for failing to catch actual market\ntops and bottoms lack a basic understanding of the trend-following\nphilosophy.", - "type": "text" - }, - { - "block_id": "p49-b2", - "global_id": 488, - "bbox": [ - 72.0, - 297.27, - 512.31, - 417.52 - ], - "text": "STOCKS AS ECONOMIC INDICATORS\nDow apparently never intended to use his theory to forecast the direction of\nthe stock market. He felt its real value was to use stock market direction as a\nbarometric reading of general business conditions. We can only marvel at\nDow’s vision and genius. In addition to formulating a great deal of today’s\nprice forecasting methodology, he was among the first to recognize the\nusefulness of stock market averages as a leading economic indicator.", - "type": "text" - }, - { - "block_id": "p49-b3", - "global_id": 489, - "bbox": [ - 72.0, - 460.76, - 523.13, - 720.72 - ], - "text": "DOW THEORY APPLIED TO FUTURES\nTRADING\nDow’s work considered the behavior of stock averages. While most of that\noriginal work has significant application to commodity futures, there are some\nimportant distinctions between stock and futures trading. For one thing, Dow\nassumed that most investors follow only the major trends and would use\nintermediate corrections for timing purposes only. Dow considered the minor\nor near term trends to be unimportant. Obviously, this is not the case in\nfutures trading in which most traders who follow trends trade the intermediate\ninstead of the major trend. These traders must pay a great deal of attention to\nminor swings for timing purposes. If a futures trader expected an intermediate\nuptrend to last for a couple of months, he or she would look for short term\ndips to signal purchases. In an intermediate downtrend, the trader would use\nminor bounces to signal short sales. The minor trend, therefore, becomes\nextremely important in futures trading.", - "type": "text" - }, - { - "block_id": "p49-b4", - "global_id": 490, - "bbox": [ - 118.78, - 750.84, - 476.5, - 767.4 - ], - "text": "NEW WAYS TO TRADE THE DOW AVERAGES", - "type": "text" - } - ] - }, - { - "page_num": 50, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p50-b0", - "global_id": 491, - "bbox": [ - 84.96, - 73.28, - 508.36, - 303.02 - ], - "text": "For the first 100 years of its existence, the Dow Jones Industrial Average\ncould only be used as a market indicator. That all changed on October 6,\n1997 when futures and options began trading on Dow’s venerable\naverage for the first time. The Chicago Board of Trade launched a futures\ncontract on the Dow Jones Industrial Average, while options on the Dow\n(symbol: DJX) started trading at the Chicago Board Options Exchange.\nIn addition, options were also launched on the Dow Jones Transportation\nAverage (symbol: DJTA) and the Dow Jones Utility Index (symbol:\nDJUA). In January 1998, the American Stock Exchange started trading\nthe Diamonds Trust, a unit investment trust that mimics the 30 Dow\nindustrials. In addition, two mutual funds were offered based on the 30\nDow benchmark. Mr. Dow would probably be happy to know that, a\ncentury after their creation, it would now be possible to trade his Dow\naverages, and actually put his Dow Theory into practice.", - "type": "text" - }, - { - "block_id": "p50-b1", - "global_id": 492, - "bbox": [ - 72.0, - 367.13, - 523.08, - 537.07 - ], - "text": "CONCLUSION\nThis chapter presented a relatively quick review of the more important aspects\nof the Dow Theory. It will become clear, as you continue through this book,\nthat an understanding and appreciation of Dow Theory provides a solid\nfoundation for any study of technical analysis. Much of what is discussed in\nthe following chapters represents some adaptation of Dow’s original theory.\nThe standard definition of a trend, the classification of a trend into three\ncategories and phases, the principles of confirmation and divergence, the\ninterpretation of volume, and the use of percentage retracements (to name a\nfew), all derive, in one way or another, from Dow Theory.", - "type": "text" - }, - { - "block_id": "p50-b2", - "global_id": 493, - "bbox": [ - 72.0, - 539.24, - 519.45, - 586.77 - ], - "text": "In addition to the sources already cited in this chapter, an excellent\nreview of the principles of Dow Theory can be found in Technical Analysis of\nStock Trends (Edwards & Magee).", - "type": "text" - } - ] - }, - { - "page_num": 51, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p51-b0", - "global_id": 494, - "bbox": [ - 72.0, - 310.24, - 520.38, - 496.74 - ], - "text": "INTRODUCTION\nThis chapter is primarily intended for those readers who are unfamiliar with\nbar chart construction. We’ll begin by discussing the different types of charts\navailable and then turn our focus to the most commonly used chart—the daily\nbar chart. We’ll look at how the price data is read and plotted on the chart.\nVolume and open interest are also included in addition to price. We’ll then\nlook at other variations of the bar chart, including longer range weekly and\nmonthly charts. Once that has been completed, we’ll be ready to start looking\nat some of the analytical tools applied to that chart in the following chapter.\nThose readers already familiar with the charts themselves might find this\nchapter too basic. Feel free to move on to the next chapter.", - "type": "text" - }, - { - "block_id": "p51-b1", - "global_id": 495, - "bbox": [ - 72.0, - 540.7, - 521.97, - 694.07 - ], - "text": "TYPES OF CHARTS AVAILABLE\nThe daily bar chart has already been acknowledged as the most widely used\ntype of chart in technical analysis. There are, however, other types of charts\nalso used by technicians, such as line charts, point and figure charts, and more\nrecently, candlesticks. Figure 3.1 shows a standard daily bar chart. It’s called\na bar chart because each day’s range is represented by a vertical bar. The bar\nchart shows the open, high, low, and closing prices. The tic to the right of the\nvertical bar is the closing price. The opening price is the tic to the left of the\nbar.", - "type": "text" - }, - { - "block_id": "p51-b2", - "global_id": 496, - "bbox": [ - 72.0, - 696.24, - 516.68, - 760.33 - ], - "text": "Figure 3.2 shows what the same market looks like on a line chart. In the\nline chart, only the closing price is plotted for each successive day. Many\nchartists believe that because the closing price is the most critical price of the\ntrading day, a line (or close-only) chart is a more valid measure of price", - "type": "text" - } - ] - }, - { - "page_num": 52, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p52-b0", - "global_id": 497, - "bbox": [ - 72.0, - 73.53, - 117.8, - 87.93 - ], - "text": "activity.", - "type": "text" - }, - { - "block_id": "p52-b1", - "global_id": 498, - "bbox": [ - 79.35, - 387.28, - 515.92, - 401.74 - ], - "text": "Figure 3.1 A daily bar chart of Intel. Each vertical bar represents one day’s", - "type": "text" - }, - { - "block_id": "p52-b2", - "global_id": 499, - "bbox": [ - 277.86, - 403.84, - 317.42, - 418.24 - ], - "text": "action.", - "type": "text" - }, - { - "block_id": "p52-b3", - "global_id": 500, - "bbox": [ - 84.16, - 709.2, - 511.12, - 723.66 - ], - "text": "Figure 3.2 A line chart of Intel. This type of chart produces a solid line by", - "type": "text" - }, - { - "block_id": "p52-b4", - "global_id": 501, - "bbox": [ - 179.95, - 725.76, - 415.32, - 740.16 - ], - "text": "connecting the successive closing prices.", - "type": "text" - } - ] - }, - { - "page_num": 53, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p53-b0", - "global_id": 502, - "bbox": [ - 72.0, - 73.28, - 522.99, - 187.07 - ], - "text": "A third type of chart, the point and figure chart, is shown in Figure 3.3.\nNotice here that the point and figure chart shows the same price action but in\na more compressed format. Notice the alternating column of x’s and o’s. The\nx columns show rising prices and the o columns, declining prices. Buy and\nsell signals are more precise and easier to spot on the point and figure chart\nthan on the bar chart. This type of chart also has a lot more flexibility. Chapter\n11 covers point and figure charts.", - "type": "text" - }, - { - "block_id": "p53-b1", - "global_id": 503, - "bbox": [ - 72.0, - 231.02, - 512.73, - 400.96 - ], - "text": "CANDLESTICKS\nCandlestick charts are the Japanese version of bar charting and have become\nvery popular in recent years among western chartists. The Japanese\ncandlestick records the same four prices as the traditional bar chart—the\nopen, the close, the high, and the low. The visual presentation differs\nhowever. On the candlestick chart, a thin line (called the shadow) shows the\nday’s price range from the high to the low. A wider portion of the bar (called\nthe real body) measures the distance between the open and the close. If the\nclose is higher than the open, the real body is white (positive). If the close is\nlower than the open, the real body is black (negative). (See Figure 3.4.)", - "type": "text" - }, - { - "block_id": "p53-b2", - "global_id": 504, - "bbox": [ - 73.36, - 691.19, - 521.91, - 705.66 - ], - "text": "Figure 3.3 A point and figure chart of Intel. Notice the alternating columns of", - "type": "text" - }, - { - "block_id": "p53-b3", - "global_id": 505, - "bbox": [ - 85.44, - 707.76, - 509.83, - 722.16 - ], - "text": "x’s and o’s. The x column shows rising prices. The o column shows falling", - "type": "text" - }, - { - "block_id": "p53-b4", - "global_id": 506, - "bbox": [ - 107.78, - 724.32, - 487.48, - 738.72 - ], - "text": "prices. Buy and sell signals are more precise on this type of chart.", - "type": "text" - }, - { - "block_id": "p53-b5", - "global_id": 507, - "bbox": [ - 100.79, - 755.29, - 503.17, - 769.69 - ], - "text": "The key to candlestick charts is the relationship between the open and", - "type": "text" - } - ] - }, - { - "page_num": 54, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p54-b0", - "global_id": 508, - "bbox": [ - 72.0, - 73.53, - 520.37, - 203.63 - ], - "text": "the close. Possibly because of the growing popularity of candlesticks, western\nchartists now pay a lot more attention to the opening tic on their bar charts.\nYou can do everything with a candlestick chart that you can do with a bar\nchart. In other words, all the technical tools and indicators we’ll be showing\nyou for the bar chart can also be used on candlesticks. We’ll show you a bit\nlater in the chapter how to construct bar charts for weekly and monthly\nperiods. You can do the same with candlesticks. Chapter 12, “Japanese\nCandlesticks,” provides a more thorough explanation of candlestick charting.", - "type": "text" - }, - { - "block_id": "p54-b1", - "global_id": 509, - "bbox": [ - 96.9, - 493.86, - 498.37, - 508.33 - ], - "text": "Figure 3.4 A candlestick chart of Intel. The color of the candlestick is", - "type": "text" - }, - { - "block_id": "p54-b2", - "global_id": 510, - "bbox": [ - 97.89, - 510.43, - 497.38, - 524.83 - ], - "text": "determined by the relationship between the open and the close. White", - "type": "text" - }, - { - "block_id": "p54-b3", - "global_id": 511, - "bbox": [ - 114.55, - 526.99, - 480.71, - 541.39 - ], - "text": "candlesticks are positive, while black candlesticks are negative.", - "type": "text" - }, - { - "block_id": "p54-b4", - "global_id": 512, - "bbox": [ - 72.0, - 585.35, - 520.35, - 755.29 - ], - "text": "ARITHMETIC VERSUS LOGARITHMIC SCALE\nCharts can be plotted using arithmetic or logarithmic price scales. For some\ntypes of analysis, particularly for very long range trend analysis, there may be\nsome advantage to using logarithmic charts. (See Figures 3.5 and 3.6.) Figure\n3.5 shows what the different scales would look like. On the arithmetic scale,\nthe vertical price scale shows an equal distance for each price unit of change.\nNotice in this example that each point on the arithmetic scale is equidistant.\nOn the log scale, however, note that the percentage increases get smaller as\nthe price scale increases. The distance from points 1 to 2 is the same as the\ndistance from points 5 to 10 because they both represent the same doubling in", - "type": "text" - } - ] - }, - { - "page_num": 55, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p55-b0", - "global_id": 513, - "bbox": [ - 72.0, - 73.53, - 519.23, - 220.2 - ], - "text": "price. For example, a move from 5 to 10 on an arithmetic scale would be the\nsame distance as a move from 50 to 55, even though the former represents a\ndoubling in price, while the latter is a price increase of only 10%. Prices\nplotted on ratio or log scales show equal distances for similar percentage\nmoves. For example, a move from 10 to 20 (a 100% increase) would be the\nsame distance on a log chart as a move from 20 to 40 or 40 to 80. Many stock\nmarket chart services use log charts, whereas futures chart services use\narithmetic. Charting software packages allow both types of scaling, as shown\nin Figure 3.6.", - "type": "text" - }, - { - "block_id": "p55-b1", - "global_id": 514, - "bbox": [ - 72.09, - 478.74, - 523.17, - 509.7 - ], - "text": "Figure 3.5 A comparison of an arithmetic and logarithmic scale. Notice the\nequal spacing on the scale to the left. The log scale shows percentage changes", - "type": "text" - }, - { - "block_id": "p55-b2", - "global_id": 515, - "bbox": [ - 260.47, - 511.87, - 334.79, - 526.27 - ], - "text": "(right scale).", - "type": "text" - }, - { - "block_id": "p55-b3", - "global_id": 516, - "bbox": [ - 72.0, - 570.22, - 515.09, - 707.04 - ], - "text": "CONSTRUCTION OF THE DAILY BAR CHART\nThe construction of the daily bar chart is extremely simple. The bar chart is\nboth a price and a time chart. The vertical axis (the y axis) shows a scale\nrepresenting the price of the contract. The horizontal axis (the x axis) records\nthe passage of time. Dates are marked along the bottom of the chart. All the\nuser has to do is plot a vertical bar in the appropriate day from the day’s high\nto the day’s low (called the range). Place a horizontal tic to the right of the\nvertical bar identifying the daily closing price. (See Figure 3.7.)", - "type": "text" - }, - { - "block_id": "p55-b4", - "global_id": 517, - "bbox": [ - 72.0, - 709.2, - 517.18, - 756.73 - ], - "text": "The reason for placing the tic to the right of the bar is to distinguish it\nfrom the opening price, which chartists record to the left of the bar. Once that\nday’s activity has been plotted, the user moves one day to the right to plot the", - "type": "text" - } - ] - }, - { - "page_num": 56, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p56-b0", - "global_id": 518, - "bbox": [ - 72.0, - 73.53, - 520.37, - 137.37 - ], - "text": "next day’s action. Most chart services use five day weeks. Weekends are not\nshown on the chart. Whenever an exchange is closed during the trading week,\nthat day’s space is left blank. The bars along the bottom of the chart measure\nvolume. (See Figure 3.7.)", - "type": "text" - }, - { - "block_id": "p56-b1", - "global_id": 519, - "bbox": [ - 72.98, - 377.92, - 522.29, - 425.44 - ], - "text": "Figure 3.6 Longer view of Intel using two different price scales. The chart to\nthe left shows the traditional arithmetic scale. The chart on the right shows a\nlogarithmic scale. Notice that the three year up trendline worked better on the", - "type": "text" - }, - { - "block_id": "p56-b2", - "global_id": 520, - "bbox": [ - 269.66, - 427.61, - 325.62, - 442.01 - ], - "text": "log chart.", - "type": "text" - }, - { - "block_id": "p56-b3", - "global_id": 521, - "bbox": [ - 72.0, - 485.96, - 521.01, - 655.9 - ], - "text": "VOLUME\nAnother piece of important information should be included on the bar chart—\nvolume. Volume represents the total amount of trading activity in that market\nfor that day. It is the total number of futures contracts traded during the day or\nthe number of common stock shares that change hands on a given day in the\nstock market. The volume is recorded by a vertical bar at the bottom of the\nchart under that day’s price bar. A higher volume bar means the volume was\nheavier for that day. A smaller bar represents lighter volume. A vertical scale\nalong the bottom of the chart is provided to help plot the data, as shown in\nFigure 3.7.", - "type": "text" - } - ] - }, - { - "page_num": 57, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p57-b0", - "global_id": 522, - "bbox": [ - 79.56, - 345.51, - 515.72, - 376.47 - ], - "text": "Figure 3.7 A closer look at the Intel daily bar chart. Each bar measures the\nday’s price range. The opening price is marked by the small tic to the left of", - "type": "text" - }, - { - "block_id": "p57-b1", - "global_id": 523, - "bbox": [ - 81.27, - 378.64, - 514.01, - 393.03 - ], - "text": "each bar. The closing tic is to the right. The bars along the bottom measure", - "type": "text" - }, - { - "block_id": "p57-b2", - "global_id": 524, - "bbox": [ - 243.22, - 395.2, - 352.06, - 409.6 - ], - "text": "each day’s volume.", - "type": "text" - }, - { - "block_id": "p57-b3", - "global_id": 525, - "bbox": [ - 72.0, - 453.55, - 520.61, - 590.37 - ], - "text": "FUTURES OPEN INTEREST\nOpen interest is the total number of outstanding futures contracts that are held\nby market participants at the end of the day. Open interest is the number of\noutstanding contracts held by the longs or the shorts, not the total of both.\nRemember, because we’re dealing with futures contracts, for every long there\nmust also be a short. Therefore, we only have to know the totals on one side.\nOpen interest is marked on the chart with a solid line along the bottom,\nusually just above the volume but below the price. (See Figure 3.8.)", - "type": "text" - } - ] - }, - { - "page_num": 58, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p58-b0", - "global_id": 526, - "bbox": [ - 72.48, - 346.95, - 522.78, - 377.91 - ], - "text": "Figure 3.8 A daily line chart of a Treasury Bond futures contract The vertical\nbars along the bottom measure the total daily volume. The solid line along the", - "type": "text" - }, - { - "block_id": "p58-b1", - "global_id": 527, - "bbox": [ - 81.67, - 380.08, - 513.6, - 394.48 - ], - "text": "middle represents the total outstanding open interest for the Treasury Bond", - "type": "text" - }, - { - "block_id": "p58-b2", - "global_id": 528, - "bbox": [ - 254.34, - 396.64, - 340.93, - 411.04 - ], - "text": "futures market.", - "type": "text" - }, - { - "block_id": "p58-b3", - "global_id": 529, - "bbox": [ - 72.0, - 434.72, - 399.13, - 445.52 - ], - "text": "Total Versus Individual Volume and Open Interest Numbers in Futures", - "type": "text" - }, - { - "block_id": "p58-b4", - "global_id": 530, - "bbox": [ - 72.0, - 453.53, - 515.98, - 534.19 - ], - "text": "Futures chart services, along with most futures technicians, use only the total\nvolume and open interest figures. Although figures are available for each\nindividual delivery month, the total figures for each commodity market are\nthe ones that are used for forecasting purposes. There is a good reason for\nthis.", - "type": "text" - }, - { - "block_id": "p58-b5", - "global_id": 531, - "bbox": [ - 72.0, - 536.36, - 519.06, - 716.4 - ], - "text": "In the early stages of a futures contract’s life, volume and open interest\nare usually quite small. The figures build up as the contract reaches maturity.\nIn the last couple of months before expiration, however, the numbers begin to\ndrop again. Obviously, traders have to liquidate open positions as the contract\napproaches expiration. Therefore, the increase in the numbers in the first few\nmonths of life and the decline near the end of trading have nothing to do with\nmarket direction and are just a function of the limited life feature of a\ncommodity futures contract. To provide the necessary continuity in volume\nand open interest numbers, and to give them forecasting value, the total\nnumbers are generally used. (Stock charts plot total volume figures, but do\nnot include open interest.)", - "type": "text" - }, - { - "block_id": "p58-b6", - "global_id": 532, - "bbox": [ - 72.0, - 740.08, - 342.39, - 750.88 - ], - "text": "Volume and Open Interest Reported a Day Late in Futures", - "type": "text" - } - ] - }, - { - "page_num": 59, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p59-b0", - "global_id": 533, - "bbox": [ - 72.0, - 73.28, - 520.75, - 269.89 - ], - "text": "Futures volume and open interest numbers are reported a day late. Therefore,\nthe chartist must be content with a day’s lag in obtaining and interpreting the\nfigures. The numbers are usually reported during the following day’s trading\nhours, but too late for publication in the day’s financial newspapers.\nEstimated volume figures are available, however, after the markets close and\nare included in the following morning’s paper. Estimated volume numbers are\njust that, but they do at least give the futures technician some idea of whether\ntrading activity was heavier or lighter the previous day. In the morning paper,\ntherefore, what the reader gets is the last day’s futures prices along with an\nestimated volume figure. Official volume and open interest numbers,\nhowever, are given for the day before. Stock chartists don’t have that\nproblem. Volume totals for stocks are immediately available.", - "type": "text" - }, - { - "block_id": "p59-b1", - "global_id": 534, - "bbox": [ - 72.0, - 293.57, - 400.42, - 304.37 - ], - "text": "The Value of Individual Volume and Open Interest Numbers in Futures", - "type": "text" - }, - { - "block_id": "p59-b2", - "global_id": 535, - "bbox": [ - 72.0, - 312.38, - 516.95, - 409.6 - ], - "text": "The individual open interest numbers in futures do provide valuable\ninformation. They tell us which contracts are the most liquid for trading\npurposes. As a general rule, trading activity should be limited to those\ndelivery months with the highest open interest. Months with low open interest\nnumbers should be avoided. As the term implies, higher open interest means\nthat there is more interest in certain delivery months.", - "type": "text" - }, - { - "block_id": "p59-b3", - "global_id": 536, - "bbox": [ - 72.0, - 452.83, - 519.03, - 606.21 - ], - "text": "WEEKLY AND MONTHLY BAR CHARTS\nWe’ve focused so far on the daily bar chart. However, be aware that a bar\nchart can be constructed for any time period. The intraday bar chart measures\nthe high, low, and last prices for periods as short as five minutes. The average\ndaily bar chart covers from six to nine months of price action. For longer\nrange trend analysis, however, weekly and monthly bar charts must be used.\nThe value of using these longer range charts is covered in Chapter 8. But the\nmethod of constructing and updating the charts is essentially the same. (See\nFigures 3.9 and 3.10.)", - "type": "text" - }, - { - "block_id": "p59-b4", - "global_id": 537, - "bbox": [ - 72.0, - 608.38, - 522.76, - 722.16 - ], - "text": "On the weekly chart, one bar represents the price activity for the entire\nweek. On the monthly chart, each bar shows the entire month’s price action.\nObviously, weekly and monthly charts compress the price action to allow for\nmuch longer range trend analysis. A weekly chart can go back as much as five\nyears and a monthly chart up to 20 years. It’s a simple technique that helps the\nchartist study the markets from a longer range perspective—a valuable\nperspective that is often lost by relying solely on daily charts.", - "type": "text" - } - ] - }, - { - "page_num": 60, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p60-b0", - "global_id": 538, - "bbox": [ - 73.44, - 346.95, - 521.82, - 377.91 - ], - "text": "Figure 3.9 A weekly bar chart of the U.S. Dollar Index. Each bar represents\none week’s price data. By compressing the price data, the weekly chart allows", - "type": "text" - }, - { - "block_id": "p60-b1", - "global_id": 539, - "bbox": [ - 79.3, - 380.08, - 515.98, - 394.48 - ], - "text": "for chart analysis of longer range price trends, usually in the vicinity of five", - "type": "text" - }, - { - "block_id": "p60-b2", - "global_id": 540, - "bbox": [ - 280.25, - 396.64, - 315.02, - 411.04 - ], - "text": "years.", - "type": "text" - }, - { - "block_id": "p60-b3", - "global_id": 541, - "bbox": [ - 78.14, - 701.28, - 517.13, - 732.24 - ], - "text": "Figure 3.10 A monthly bar chart of the U.S. Dollar Index. Each bar\nrepresents one month’s price data. By compressing the data even further, the", - "type": "text" - }, - { - "block_id": "p60-b4", - "global_id": 542, - "bbox": [ - 90.18, - 734.4, - 505.08, - 748.8 - ], - "text": "monthly chart allows chart analysis for periods as long as twenty years.", - "type": "text" - } - ] - }, - { - "page_num": 61, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p61-b0", - "global_id": 543, - "bbox": [ - 72.0, - 74.02, - 521.32, - 293.65 - ], - "text": "CONCLUSION\nNow that we know how to plot a bar chart, and having introduced the three\nbasic sources of information—price, volume, and open interest—we’re ready\nto look at how that data is interpreted. Remember that the chart only records\nthe data. In itself, it has little value. It’s much like a paint brush and canvas.\nBy themselves, they have no value. In the hands of a talented artist, however,\nthey can help create beautiful images. Perhaps an even better comparison is a\nscalpel. In the hands of a gifted surgeon, it can help save lives. In the hands of\nmost of us, however, a scalpel is not only useless, but might even be\ndangerous. A chart can become an extremely useful tool in the art or skill of\nmarket forecasting once the rules are understood. Let’s begin the process. In\nthe next chapter, we’ll look at some of the basic concepts of trend and what I\nconsider to be the building blocks of chart analysis.", - "type": "text" - } - ] - }, - { - "page_num": 62, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p62-b0", - "global_id": 544, - "bbox": [ - 72.0, - 308.08, - 520.76, - 461.46 - ], - "text": "DEFINITION OF TREND\nThe concept of trend is absolutely essential to the technical approach to\nmarket analysis. All of the tools used by the chartist—support and resistance\nlevels, price patterns, moving averages, trendlines, etc.—have the sole\npurpose of helping to measure the trend of the market for the purpose of\nparticipating in that trend. We often hear such familiar expressions as “always\ntrade in the direction of the trend,” “never buck the trend,” or “the trend is\nyour friend.” So let’s spend a little time to define what a trend is and classify\nit into a few categories.", - "type": "text" - }, - { - "block_id": "p62-b1", - "global_id": 545, - "bbox": [ - 72.0, - 463.62, - 515.95, - 643.66 - ], - "text": "In a general sense, the trend is simply the direction of the market, which\nway it’s moving. But we need a more precise definition with which to work.\nFirst of all, markets don’t generally move in a straight line in any direction.\nMarket moves are characterized by a series of zigzags. These zigzags\nresemble a series of successive waves with fairly obvious peaks and troughs.\nIt is the direction of those peaks and troughs that constitutes market trend.\nWhether those peaks and troughs are moving up, down, or sideways tells us\nthe trend of the market. An uptrend would be defined as a series of\nsuccessively higher peaks and troughs; a downtrend is just the opposite, a\nseries of declining peaks and troughs; horizontal peaks and troughs would\nidentify a sideways price trend. (See Figures 4.1a-d.)", - "type": "text" - } - ] - }, - { - "page_num": 63, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p63-b0", - "global_id": 546, - "bbox": [ - 94.45, - 205.79, - 500.82, - 220.26 - ], - "text": "Figure 4.1a Example of an uptrend with ascending peaks and troughs.", - "type": "text" - }, - { - "block_id": "p63-b1", - "global_id": 547, - "bbox": [ - 86.06, - 376.47, - 509.21, - 390.94 - ], - "text": "Figure 4.1b Example of a downtrend with descending peaks and troughs.", - "type": "text" - }, - { - "block_id": "p63-b2", - "global_id": 548, - "bbox": [ - 77.47, - 542.12, - 517.8, - 556.58 - ], - "text": "Figure 4.1c Example of a sideways trend with horizontal peaks and troughs.", - "type": "text" - }, - { - "block_id": "p63-b3", - "global_id": 549, - "bbox": [ - 141.76, - 558.68, - 453.51, - 573.08 - ], - "text": "This type of market is often referred to as “trendless.”", - "type": "text" - } - ] - }, - { - "page_num": 64, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p64-b0", - "global_id": 550, - "bbox": [ - 85.72, - 346.23, - 509.55, - 377.19 - ], - "text": "Figure 4.1d Example of a downtrend turning into an uptrend. The first\nportion to the left shows a downtrend. From April 1996 to April 1997, the", - "type": "text" - }, - { - "block_id": "p64-b1", - "global_id": 551, - "bbox": [ - 93.05, - 379.36, - 502.22, - 393.75 - ], - "text": "market traded sideways. During the summer 1997, the trend turned up.", - "type": "text" - }, - { - "block_id": "p64-b2", - "global_id": 552, - "bbox": [ - 72.0, - 437.71, - 521.49, - 640.78 - ], - "text": "TREND HAS THREE DIRECTIONS\nWe’ve mentioned an uptrend, downtrend, and sideways trend for a very good\nreason. Most people tend to think of markets as being always in either an\nuptrend or a downtrend. The fact of the matter is that markets actually move\nin three directions—up, down, and sideways. It is important to be aware of\nthis distinction because for at least a third of the time, by a conservative\nestimate, prices move in a flat, horizontal pattern that is referred to as a\ntrading range. This type of sideways action reflects a period of equilibrium in\nthe price level where the forces of supply and demand are in a state of relative\nbalance. (If you’ll recall, Dow Theory refers to this type of pattern as a line.)\nAlthough we’ve defined a flat market as having a sideways trend, it is more\ncommonly referred to as being trendless.", - "type": "text" - }, - { - "block_id": "p64-b3", - "global_id": 553, - "bbox": [ - 72.0, - 642.94, - 514.65, - 756.73 - ], - "text": "Most technical tools and systems are trend-following in nature, which\nmeans that they are primarily designed for markets that are moving up or\ndown. They usually work very poorly, or not at all, when markets enter these\nlateral or “trendless” phases. It is during these periods of sideways market\nmovement that technical traders experience their greatest frustration, and\nsystems traders their greatest equity losses. A trend-following system, by its\nvery definition, needs a trend in order to do its stuff. The failure here lies not", - "type": "text" - } - ] - }, - { - "page_num": 65, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p65-b0", - "global_id": 554, - "bbox": [ - 72.0, - 73.53, - 505.75, - 120.81 - ], - "text": "with the system. Rather, the failure lies with the trader who is attempting to\napply a system designed for trending markets into a nontrending market\nenvironment.", - "type": "text" - }, - { - "block_id": "p65-b1", - "global_id": 555, - "bbox": [ - 72.0, - 122.98, - 522.38, - 203.63 - ], - "text": "There are three decisions confronting the trader—whether to buy a\nmarket (go long), sell a market (go short), or do nothing (stand aside). When a\nmarket is rising, the buying strategy is preferable. When it is falling, the\nsecond approach would be correct. However, when the market is moving\nsideways, the third choice—to stay out of the market—is usually the wisest.", - "type": "text" - }, - { - "block_id": "p65-b2", - "global_id": 556, - "bbox": [ - 72.0, - 247.58, - 519.08, - 400.96 - ], - "text": "TREND HAS THREE CLASSIFICATIONS\nIn addition to having three directions, trend is usually broken down into the\nthree categories mentioned in the previous chapter. Those three categories are\nthe major, intermediate, and near term trends. In reality, there are almost an\ninfinite number of trends interacting with one another, from the very short\nterm trends covering minutes and hours to superlong trends lasting 50 or 100\nyears. Most technicians, however, limit trend classifications to three. There is\na certain amount of ambiguity, however, as to how different analysts define\neach trend.", - "type": "text" - }, - { - "block_id": "p65-b3", - "global_id": 557, - "bbox": [ - 72.0, - 403.12, - 523.2, - 516.91 - ], - "text": "Dow Theory, for example, classifies the major trend as being in effect\nfor longer than a year. Because futures traders operate in a shorter time\ndimension than do stock investors, I would be inclined to shorten the major\ntrend to anything over six months in the commodity markets. Dow defined the\nintermediate, or secondary, trend as three weeks to as many months, which\nalso appears about right for the futures markets. The near term trend is usually\ndefined as anything less than two or three weeks.", - "type": "text" - }, - { - "block_id": "p65-b4", - "global_id": 558, - "bbox": [ - 72.0, - 519.07, - 514.05, - 632.86 - ], - "text": "Each trend becomes a portion of its next larger trend. For example, the\nintermediate trend would be a correction in the major trend. In a long term\nuptrend, the market pauses to correct itself for a couple of months before\nresuming its upward path. That secondary correction would itself consist of\nshorter waves that would be identified as near term dips and rallies. This\ntheme recurs many times—that each trend is part of the next larger trend and\nis itself comprised of smaller trends. (See Figures 4.2a and b.)", - "type": "text" - }, - { - "block_id": "p65-b5", - "global_id": 559, - "bbox": [ - 72.0, - 635.02, - 521.89, - 765.37 - ], - "text": "In Figure 4.2a, the major trend is up as reflected by the rising peaks and\ntroughs (points 1, 2, 3, 4). The corrective phase (2-3) represents an\nintermediate correction within the major uptrend. But notice that the wave 2-3\nalso breaks down into three smaller waves (A, B, C). At point C, the analyst\nwould say that the major trend was still up, but the intermediate and near term\ntrends were down. At point 4, all three trends would be up. It is important to\nunderstand the distinction between the various degrees of trend. When\nsomeone asks what the trend is in a given market, it is difficult, if not", - "type": "text" - } - ] - }, - { - "page_num": 66, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p66-b0", - "global_id": 560, - "bbox": [ - 72.0, - 73.53, - 497.26, - 120.81 - ], - "text": "impossible, to respond until you know which trend the person is inquiring\nabout. You may have to respond in the manner previously discussed by\ndefining the three different trend classifications.", - "type": "text" - }, - { - "block_id": "p66-b1", - "global_id": 561, - "bbox": [ - 76.24, - 354.15, - 519.02, - 385.11 - ], - "text": "Figure 4.2a Example of the three degrees of trend: major, secondary, and\nnear term. Points 1, 2, 3, and 4 show the major uptrend. Wave 2-3 represents", - "type": "text" - }, - { - "block_id": "p66-b2", - "global_id": 562, - "bbox": [ - 77.49, - 387.28, - 517.78, - 418.24 - ], - "text": "a secondary correction within the major uptrend. Each secondary wave in\nturn divides into near term trends. For example, secondary wave 2-3 divides", - "type": "text" - }, - { - "block_id": "p66-b3", - "global_id": 563, - "bbox": [ - 226.1, - 420.41, - 369.16, - 434.81 - ], - "text": "into minor waves A-B-C.", - "type": "text" - }, - { - "block_id": "p66-b4", - "global_id": 564, - "bbox": [ - 82.72, - 722.88, - 512.55, - 737.35 - ], - "text": "Figure 4.2b The major trend (over a year) is up during 1997. A short term", - "type": "text" - }, - { - "block_id": "p66-b5", - "global_id": 565, - "bbox": [ - 75.82, - 739.45, - 519.44, - 770.41 - ], - "text": "correction occurred during March. An intermediate correction lasted from\nAugust to November (three months). The intermediate correction broke down", - "type": "text" - } - ] - }, - { - "page_num": 67, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p67-b0", - "global_id": 566, - "bbox": [ - 217.23, - 73.28, - 378.05, - 87.68 - ], - "text": "into three short term trends.", - "type": "text" - }, - { - "block_id": "p67-b1", - "global_id": 567, - "bbox": [ - 72.0, - 104.25, - 518.19, - 201.47 - ], - "text": "Quite a bit of misunderstanding arises because of different traders’\nperceptions as to what is meant by a trend. To long term position traders, a\nfew days’ to a few weeks’ price action might be insignificant. To a day trader,\na two or three day advance might constitute a major uptrend. It’s especially\nimportant, then, to understand the different degrees of trend and to make sure\nthat all involved in a transaction are talking about the same ones.", - "type": "text" - }, - { - "block_id": "p67-b2", - "global_id": 568, - "bbox": [ - 72.0, - 203.64, - 516.3, - 267.73 - ], - "text": "As a general statement, most trend-following approaches focus on the\nintermediate trend, which may last for several months. The near term trend is\nused primarily for timing purposes. In an intermediate uptrend, short term\nsetbacks would be used to initiate long positions.", - "type": "text" - }, - { - "block_id": "p67-b3", - "global_id": 569, - "bbox": [ - 72.0, - 311.68, - 508.78, - 415.36 - ], - "text": "SUPPORT AND RESISTANCE\nIn the previous discussion of trend, it was stated that prices move in a series\nof peaks and troughs, and that the direction of those peaks and troughs\ndetermined the trend of the market. Let’s now give those peaks and troughs\ntheir appropriate names and, at the same time, introduce the concepts of\nsupport and resistance.", - "type": "text" - }, - { - "block_id": "p67-b4", - "global_id": 570, - "bbox": [ - 72.0, - 417.53, - 519.82, - 531.31 - ], - "text": "The troughs, or reaction lows, are called support. The term is self-\nexplanatory and indicates that support is a level or area on the chart under the\nmarket where buying interest is sufficiently strong to overcome selling\npressure. As a result, a decline is halted and prices turn back up again.\nUsually a support level is identified beforehand by a previous reaction low. In\nFigure 4.3a, points 2 and 4 represent support levels in an uptrend. (See\nFigures 4.3a and b.)", - "type": "text" - }, - { - "block_id": "p67-b5", - "global_id": 571, - "bbox": [ - 72.0, - 533.47, - 522.79, - 663.83 - ], - "text": "Resistance is the opposite of support and represents a price level or area\nover the market where selling pressure overcomes buying pressure and a price\nadvance is turned back. Usually a resistance level is identified by a previous\npeak. In Figure 4.3a, points 1 and 3 are resistance levels. Figure 4.3a shows\nan uptrend. In an uptrend, the support and resistance levels show an ascending\npattern. Figure 4.3b shows a downtrend with descending peaks and troughs.\nIn the downtrend, points 1 and 3 are support levels under the market and\npoints 2 and 4 are resistance levels over the market.", - "type": "text" - } - ] - }, - { - "page_num": 68, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p68-b0", - "global_id": 572, - "bbox": [ - 80.25, - 300.14, - 515.01, - 314.6 - ], - "text": "Figure 4.3a Shows rising support and resistance levels in uptrend. Points 2", - "type": "text" - }, - { - "block_id": "p68-b1", - "global_id": 573, - "bbox": [ - 81.46, - 316.7, - 513.81, - 331.1 - ], - "text": "and 4 are support levels which are usually previous reaction lows. Points 1", - "type": "text" - }, - { - "block_id": "p68-b2", - "global_id": 574, - "bbox": [ - 118.78, - 333.26, - 476.49, - 347.66 - ], - "text": "and 3 are resistance levels, usually marked by previous peaks.", - "type": "text" - }, - { - "block_id": "p68-b3", - "global_id": 575, - "bbox": [ - 128.41, - 583.17, - 466.87, - 597.63 - ], - "text": "Figure 4.3b Shows support and resistance in a downtrend.", - "type": "text" - }, - { - "block_id": "p68-b4", - "global_id": 576, - "bbox": [ - 72.0, - 614.14, - 509.97, - 678.23 - ], - "text": "In an uptrend, the resistance levels represent pauses in that uptrend and\nare usually exceeded at some point. In a downtrend, support levels are not\nsufficient to stop the decline permanently, but are able to check it at least\ntemporarily.", - "type": "text" - }, - { - "block_id": "p68-b5", - "global_id": 577, - "bbox": [ - 72.0, - 680.39, - 517.6, - 761.05 - ], - "text": "A solid grasp of the concepts of support and resistance is necessary for a\nfull understanding of the concept of trend. For an uptrend to continue, each\nsuccessive low (support level) must be higher than the one preceding it. Each\nrally high (resistance level) must be higher than the one before it. If the\ncorrective dip in an uptrend comes all the way down to the previous low, it", - "type": "text" - } - ] - }, - { - "page_num": 69, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p69-b0", - "global_id": 578, - "bbox": [ - 72.0, - 73.28, - 519.96, - 120.81 - ], - "text": "may be an early warning that the uptrend is ending or at least moving from an\nuptrend to a sideways trend. If the support level is violated, then a trend\nreversal from up to down is likely.", - "type": "text" - }, - { - "block_id": "p69-b1", - "global_id": 579, - "bbox": [ - 72.0, - 122.98, - 516.54, - 253.32 - ], - "text": "Each time a previous resistance peak is being tested, the uptrend is in an\nespecially critical phase. Failure to exceed a previous peak in an uptrend, or\nthe ability of prices to bounce off the previous support low in a downtrend, is\nusually the first warning that the existing trend is changing. Chapters 5 and 6\non price patterns show how the testing of these support and resistance levels\nform pictures on the charts that suggest either a trend reversal in progress or\nmerely a pause in the existing trend. But the basic building blocks on which\nthose price patterns are based are support and resistance levels.", - "type": "text" - }, - { - "block_id": "p69-b2", - "global_id": 580, - "bbox": [ - 72.0, - 255.49, - 517.13, - 352.71 - ], - "text": "Figures 4.4a-c are examples of a classic trend reversal. Notice, in Figure\n4.4a, that at point 5 prices failed to exceed the previous peak (point 3) before\nturning down to violate the previous low at point 4. This trend reversal could\nhave been identified simply by watching the support and resistance levels. In\nour coverage of price patterns, this type of reversal pattern will be identified\nas a double top.", - "type": "text" - }, - { - "block_id": "p69-b3", - "global_id": 581, - "bbox": [ - 72.0, - 376.39, - 332.8, - 387.19 - ], - "text": "How Support and Resistance Levels Reverse Their Roles", - "type": "text" - }, - { - "block_id": "p69-b4", - "global_id": 582, - "bbox": [ - 72.0, - 395.2, - 521.83, - 542.12 - ], - "text": "So far we’ve defined “support” as a previous low and “resistance” as a\nprevious high. However, this is not always the case. This leads us to one of\nthe more interesting and lesser known aspects of support and resistance—\ntheir reversal of roles. Whenever a support or resistance level is penetrated by\na significant amount, they reverse their roles and become the opposite. In\nother words, a resistance level becomes a support level and support becomes\nresistance. To understand why this occurs, perhaps it would be helpful to\ndiscuss some of the psychology behind the creation of support and resistance\nlevels.", - "type": "text" - }, - { - "block_id": "p69-b5", - "global_id": 583, - "bbox": [ - 81.5, - 716.4, - 513.78, - 747.36 - ], - "text": "Figure 4.4a Example of a trend reversal. The failure of prices at point 5 to\nexceed the previous peak at point 3 followed by a downside violation of the", - "type": "text" - }, - { - "block_id": "p69-b6", - "global_id": 584, - "bbox": [ - 85.6, - 749.53, - 509.68, - 763.93 - ], - "text": "previous low at point 4 constitutes a downside trend reversal. This type of", - "type": "text" - } - ] - }, - { - "page_num": 70, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p70-b0", - "global_id": 585, - "bbox": [ - 211.3, - 73.64, - 383.96, - 88.04 - ], - "text": "pattern is called a double top.", - "type": "text" - }, - { - "block_id": "p70-b1", - "global_id": 586, - "bbox": [ - 76.82, - 280.69, - 518.45, - 295.16 - ], - "text": "Figure 4.4b Example of a bottom reversal pattern. Usually the first sign of a", - "type": "text" - }, - { - "block_id": "p70-b2", - "global_id": 587, - "bbox": [ - 86.68, - 297.26, - 508.6, - 311.65 - ], - "text": "bottom is the ability of prices at point 5 to hold above the previous low at", - "type": "text" - }, - { - "block_id": "p70-b3", - "global_id": 588, - "bbox": [ - 110.06, - 313.82, - 485.21, - 328.22 - ], - "text": "point 3. The bottom is confirmed when the peak at 4 is overcome.", - "type": "text" - }, - { - "block_id": "p70-b4", - "global_id": 589, - "bbox": [ - 73.29, - 615.57, - 521.97, - 663.1 - ], - "text": "Figure 4.4c Example of a bottom reversal. During January 1998 prices\nretested the December support low and bounced off it, forming a second\nsupport level. The upside penetration of the middle resistance peak signaled a", - "type": "text" - }, - { - "block_id": "p70-b5", - "global_id": 590, - "bbox": [ - 260.32, - 665.27, - 334.94, - 679.67 - ], - "text": "new uptrend.", - "type": "text" - }, - { - "block_id": "p70-b6", - "global_id": 591, - "bbox": [ - 72.0, - 703.35, - 267.68, - 714.15 - ], - "text": "The Psychology of Support and Resistance", - "type": "text" - }, - { - "block_id": "p70-b7", - "global_id": 592, - "bbox": [ - 72.0, - 722.16, - 520.32, - 769.69 - ], - "text": "To illustrate, let’s divide the market participants into three categories—the\nlongs, the shorts, and the uncommitted. The longs are those traders who have\nalready purchased contracts; the shorts are those who have already committed", - "type": "text" - } - ] - }, - { - "page_num": 71, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p71-b0", - "global_id": 593, - "bbox": [ - 72.0, - 73.64, - 517.14, - 104.97 - ], - "text": "themselves to the sell side; the uncommitted are those who have either gotten\nout of the market or remain undecided as to which side to enter.", - "type": "text" - }, - { - "block_id": "p71-b1", - "global_id": 594, - "bbox": [ - 72.0, - 106.41, - 513.15, - 269.89 - ], - "text": "Let’s assume that a market starts to move higher from a support area\nwhere prices have been fluctuating for some time. The longs (those who\nbought near the support area) are delighted, but regret not having bought\nmore. If the market would dip back near that support area again, they could\nadd to their long positions. The shorts now realize (or strongly suspect) that\nthey are on the wrong side of the market. (How far the market has moved\naway from that support area will greatly influence these decisions, but we’ll\ncome back to that point a bit later.) The shorts are hoping (and praying) for a\ndip back to that area where they went short so they can get out of the market\nwhere they got in (their break even point).", - "type": "text" - }, - { - "block_id": "p71-b2", - "global_id": 595, - "bbox": [ - 72.0, - 272.05, - 523.24, - 352.71 - ], - "text": "Those sitting on the sidelines can be divided into two groups—those who\nnever had a position and those who, for one reason or another, liquidated\npreviously held long positions in the support area. The latter group are, of\ncourse, mad at themselves for liquidating their longs prematurely and are\nhoping for another chance to reinstate those longs near where they sold them.", - "type": "text" - }, - { - "block_id": "p71-b3", - "global_id": 596, - "bbox": [ - 72.0, - 354.87, - 517.45, - 452.09 - ], - "text": "The final group, the undecided, now realize that prices are going higher\nand resolve to enter the market on the long side on the next good buying\nopportunity. All four groups are resolved to “buy the next dip.” They all have\na “vested interest” in that support area under the market. Naturally, if prices\ndo decline near that support, renewed buying by all four groups will\nmaterialize to push prices up.", - "type": "text" - }, - { - "block_id": "p71-b4", - "global_id": 597, - "bbox": [ - 72.0, - 454.26, - 518.3, - 534.91 - ], - "text": "The more trading that takes place in that support area, the more\nsignificant it becomes because more participants have a vested interest in that\narea. The amount of trading in a given support or resistance area can be\ndetermined in three ways: the amount of time spent there, volume, and how\nrecently the trading took place.", - "type": "text" - }, - { - "block_id": "p71-b5", - "global_id": 598, - "bbox": [ - 72.0, - 537.07, - 518.74, - 617.73 - ], - "text": "The longer the period of time that prices trade in a support or resistance\narea, the more significant that area becomes. For example, if prices trade\nsideways for three weeks in a congestion area before moving higher, that\nsupport area would be more important than if only three days of trading had\noccurred.", - "type": "text" - }, - { - "block_id": "p71-b6", - "global_id": 599, - "bbox": [ - 72.0, - 619.9, - 519.87, - 733.68 - ], - "text": "Volume is another way to measure the significance of support and\nresistance. If a support level is formed on heavy volume, this would indicate\nthat a large number of units changed hands, and would mark that support\nlevel as more important than if very little trading had taken place. Point and\nfigure charts that measure the intraday trading activity are especially useful in\nidentifying these price levels where most of the trading took place and,\nconsequently, where support and resistance will be most likely to function.", - "type": "text" - }, - { - "block_id": "p71-b7", - "global_id": 600, - "bbox": [ - 72.0, - 735.84, - 517.79, - 766.81 - ], - "text": "A third way to determine the significance of a support or resistance area\nis how recently the trading took place. Because we are dealing with the", - "type": "text" - } - ] - }, - { - "page_num": 72, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p72-b0", - "global_id": 601, - "bbox": [ - 72.0, - 73.28, - 493.52, - 120.81 - ], - "text": "reaction of traders to market movement and to positions that they have\nalready taken or failed to take, it stands to reason that the more recent the\nactivity, the more potent it becomes.", - "type": "text" - }, - { - "block_id": "p72-b1", - "global_id": 602, - "bbox": [ - 72.0, - 122.98, - 515.38, - 286.45 - ], - "text": "Now let’s turn the tables and imagine that, instead of moving higher,\nprices move lower. In the previous example, because prices advanced, the\ncombined reaction of the market participants caused each downside reaction\nto be met with additional buying (thereby creating new support). However, if\nprices start to drop and move below the previous support area, the reaction\nbecomes just the opposite. All those who bought in the support area now\nrealize that they made a mistake. For futures traders, their brokers are now\ncalling frantically for more margin money. Because of the highly leveraged\nnature of futures trading, traders cannot sit with losses very long. They must\nput up additional margin money or liquidate their losing positions.", - "type": "text" - }, - { - "block_id": "p72-b2", - "global_id": 603, - "bbox": [ - 72.0, - 288.62, - 517.12, - 435.53 - ], - "text": "What created the previous support in the first place was the\npredominance of buy orders under the market. Now, however, all of the\nprevious buy orders under the market have become sell orders over the\nmarket. Support has become resistance. And the more significant that\nprevious support area was—that is, the more recent and the more trading that\ntook place there—the more potent it now becomes as a resistance area. All of\nthe factors that created support by the three categories of participants—the\nlongs, the shorts, and the uncommitted—will now function to put a ceiling\nover prices on subsequent rallies or bounces.", - "type": "text" - }, - { - "block_id": "p72-b3", - "global_id": 604, - "bbox": [ - 72.0, - 437.69, - 521.98, - 650.86 - ], - "text": "It is useful once in a while to pause and reflect on why the price patterns\nused by chartists, and concepts like support and resistance, actually do work.\nIt’s not because of some magic produced by the charts or some lines drawn on\nthose charts. These patterns work because they provide pictures of what the\nmarket participants are actually doing and enable us to determine their\nreactions to market events. Chart analysis is actually a study of human\npsychology and the reactions of traders to changing market conditions.\nUnfortunately, because we live in the fast-paced world of financial markets,\nwe tend to rely heavily on chart terminology and shortcut expressions that\noverlook the underlying forces that created the pictures on the charts in the\nfirst place. There are sound psychological reasons why support and resistance\nlevels can be identified on price charts and why they can be used to help\npredict market movements.", - "type": "text" - }, - { - "block_id": "p72-b4", - "global_id": 605, - "bbox": [ - 72.0, - 674.54, - 387.4, - 685.34 - ], - "text": "Support Becoming Resistance and Vice Versa: Degree of Penetration", - "type": "text" - }, - { - "block_id": "p72-b5", - "global_id": 606, - "bbox": [ - 72.0, - 693.36, - 523.09, - 757.45 - ], - "text": "A support level, penetrated by a significant margin, becomes a resistance level\nand vice versa. Figures 4.5a-c are similar to Figures 4.3a and b but with one\nadded refinement. Notice that as prices are rising in Figure 4.5a the reaction at\npoint 4 stops at or above the top of the peak at point 1. That previous peak at", - "type": "text" - } - ] - }, - { - "page_num": 73, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p73-b0", - "global_id": 607, - "bbox": [ - 72.0, - 73.64, - 519.13, - 171.22 - ], - "text": "point 1 had been a resistance level. But once it was decisively penetrated by\nwave 3, that previous resistance peak became a support level. All of the\nprevious selling near the top of wave 1 (creating the resistance level) has now\nbecome buying under the market. In Figure 4.5b, showing declining prices,\npoint 1 (which had been a previous support level under the market) has now\nbecome a resistance level over the market acting as a ceiling at point 4.", - "type": "text" - }, - { - "block_id": "p73-b1", - "global_id": 608, - "bbox": [ - 73.77, - 375.75, - 521.51, - 406.72 - ], - "text": "Figure 4.5a In an uptrend, resistance levels that have been broken by a\nsignificant margin become support levels. Notice that once resistance at point", - "type": "text" - }, - { - "block_id": "p73-b2", - "global_id": 609, - "bbox": [ - 91.53, - 408.88, - 503.73, - 439.85 - ], - "text": "1 is exceeded, it provides support at point 4. Previous peaks function as\nsupport on subsequent corrections.", - "type": "text" - }, - { - "block_id": "p73-b3", - "global_id": 610, - "bbox": [ - 75.7, - 654.46, - 519.56, - 668.93 - ], - "text": "Figure 4.5b In a downtrend, violated support levels become resistance levels", - "type": "text" - }, - { - "block_id": "p73-b4", - "global_id": 611, - "bbox": [ - 91.85, - 671.03, - 503.42, - 685.43 - ], - "text": "on subsequent bounces. Notice how previous support at point 1 became", - "type": "text" - }, - { - "block_id": "p73-b5", - "global_id": 612, - "bbox": [ - 237.55, - 687.59, - 357.73, - 701.99 - ], - "text": "resistance at point 4.", - "type": "text" - } - ] - }, - { - "page_num": 74, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p74-b0", - "global_id": 613, - "bbox": [ - 80.9, - 346.95, - 514.37, - 361.41 - ], - "text": "Figure 4.5c Role reversal at play. Once the early 1997 resistance peak was", - "type": "text" - }, - { - "block_id": "p74-b1", - "global_id": 614, - "bbox": [ - 81.29, - 363.51, - 513.99, - 394.48 - ], - "text": "broken, it reversed roles to become a support level. A year later, the\nintermediate price decline found support right at that prior resistance peak", - "type": "text" - }, - { - "block_id": "p74-b2", - "global_id": 615, - "bbox": [ - 205.11, - 396.64, - 390.17, - 411.04 - ], - "text": "which had become new support.", - "type": "text" - }, - { - "block_id": "p74-b3", - "global_id": 616, - "bbox": [ - 72.0, - 427.61, - 519.1, - 673.91 - ], - "text": "It was mentioned earlier that the distance prices traveled away from\nsupport or resistance increased the significance of that support or resistance.\nThis is particularly true when support and resistance levels are penetrated and\nreverse roles. For example, it was stated that support and resistance levels\nreverse roles only after a significant penetration. But what constitutes\nsignificant? There is quite a bit of subjectivity involved here in determining\nwhether a penetration is significant or not. As a benchmark, some chartists\nuse a 3% penetration as a criteria, particularly for major support and\nresistance levels. Shorter term support and resistance areas would probably\nrequire a much smaller number, like 1%. In reality, each analyst must decide\nfor himself or herself what constitutes a significant penetration. It’s important\nto remember, however, that support and resistance areas only reverse roles\nwhen the market moves far enough away to convince the market participants\nthat they have made a mistake. The farther away the market moves, the more\nconvinced they become.", - "type": "text" - }, - { - "block_id": "p74-b4", - "global_id": 617, - "bbox": [ - 72.0, - 697.59, - 361.46, - 708.39 - ], - "text": "The Importance of Round Numbers as Support and Resistance", - "type": "text" - }, - { - "block_id": "p74-b5", - "global_id": 618, - "bbox": [ - 72.0, - 716.4, - 517.68, - 763.93 - ], - "text": "There is a tendency for round numbers to stop advances or declines. Traders\ntend to think in terms of important round numbers, such as 10, 20, 25, 50, 75,\n100 (and multiples of 1000), as price objectives and act accordingly. These", - "type": "text" - } - ] - }, - { - "page_num": 75, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p75-b0", - "global_id": 619, - "bbox": [ - 72.0, - 73.64, - 508.75, - 121.53 - ], - "text": "round numbers, therefore, will often act as “psychological” support or\nresistance levels. A trader can use this information to begin taking profits as\nan important round number is approached.", - "type": "text" - }, - { - "block_id": "p75-b1", - "global_id": 620, - "bbox": [ - 72.0, - 122.98, - 519.95, - 220.2 - ], - "text": "The gold market is an excellent example of this phenomenon. The 1982\nbear market low was right at $300. The market then rallied to just above $500\nin the first quarter of 1983 before falling to $400. A gold rally in 1987\nstopped at $500 again. From 1990 to 1997, gold failed each attempt to break\nthrough $400. The Dow Jones Industrial Average has shown a tendency to\nstall at multiples of 1000.", - "type": "text" - }, - { - "block_id": "p75-b2", - "global_id": 621, - "bbox": [ - 72.0, - 222.36, - 516.67, - 369.27 - ], - "text": "One trading application of this principle is to avoid placing trading\norders right at these obvious round numbers. For example, if the trader is\ntrying to buy into a short term market dip in an uptrend, it would make sense\nto place limit orders just above an important round number. Because others\nare trying to buy the market at the round number, the market may never get\nthere. Traders looking to sell on a bounce should place resting sell orders just\nbelow round numbers. The opposite would be true when placing protective\nstops on existing positions. As a general rule, avoid placing protective stops\nat obvious round numbers.", - "type": "text" - }, - { - "block_id": "p75-b3", - "global_id": 622, - "bbox": [ - 72.0, - 371.44, - 501.55, - 468.66 - ], - "text": "In other words, protective stops on long positions should be placed\nbelow round numbers and on short positions, above such numbers. The\ntendency for markets to respect round numbers, and especially the more\nimportant round numbers previously referred to, is one of those peculiar\nmarket characteristics that can prove most helpful in trading and should be\nkept in mind by the technically oriented trader.", - "type": "text" - }, - { - "block_id": "p75-b4", - "global_id": 623, - "bbox": [ - 72.0, - 512.61, - 523.19, - 649.42 - ], - "text": "TRENDLINES\nNow that we understand support and resistance, let’s add another building\nblock to our arsenal of technical tools—the trendline. (See Figures 4.6a-c.)\nThe basic trendline is one of the simplest of the technical tools employed by\nthe chartist, but is also one of the most valuable. An up trendline is a straight\nline drawn upward to the right along successive reaction lows as shown by the\nsolid line in Figure 4.6a. A down trendline is drawn downward to the right\nalong successive rally peaks as shown in Figure 4.6b.", - "type": "text" - } - ] - }, - { - "page_num": 76, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p76-b0", - "global_id": 624, - "bbox": [ - 76.27, - 272.05, - 519.0, - 286.51 - ], - "text": "Figure 4.6a Example of an up trendline. The up trendline is drawn under the", - "type": "text" - }, - { - "block_id": "p76-b1", - "global_id": 625, - "bbox": [ - 73.48, - 288.61, - 521.78, - 319.58 - ], - "text": "rising reaction lows. A tentative trendline is first drawn under two\nsuccessively higher lows (points 1 and 3), but needs a third test to confirm the", - "type": "text" - }, - { - "block_id": "p76-b2", - "global_id": 626, - "bbox": [ - 202.0, - 321.74, - 393.27, - 336.14 - ], - "text": "validity of the trendline (point 5).", - "type": "text" - }, - { - "block_id": "p76-b3", - "global_id": 627, - "bbox": [ - 82.06, - 564.44, - 513.2, - 595.41 - ], - "text": "Figure 4.6b A down trendline is drawn over the successively lower rally\nhighs. The tentative down trendline needs two points (1 and 3) to be drawn", - "type": "text" - }, - { - "block_id": "p76-b4", - "global_id": 628, - "bbox": [ - 179.0, - 597.57, - 416.26, - 611.97 - ], - "text": "and a third test (5) to confirm its validity.", - "type": "text" - } - ] - }, - { - "page_num": 77, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p77-b0", - "global_id": 629, - "bbox": [ - 82.2, - 344.07, - 513.07, - 391.59 - ], - "text": "Figure 4.6c Long term up trendline at work. The up trendline was drawn\nupward and to the right along the first two reaction lows (see arrows). The\nthird low at the start of 1998 bounced right off the rising trendline, thereby", - "type": "text" - }, - { - "block_id": "p77-b1", - "global_id": 630, - "bbox": [ - 220.77, - 393.76, - 374.49, - 408.16 - ], - "text": "keeping the uptrend intact.", - "type": "text" - }, - { - "block_id": "p77-b2", - "global_id": 631, - "bbox": [ - 72.0, - 431.84, - 167.5, - 442.64 - ], - "text": "Drawing a Trendline", - "type": "text" - }, - { - "block_id": "p77-b3", - "global_id": 632, - "bbox": [ - 72.0, - 450.66, - 521.11, - 514.75 - ], - "text": "The correct drawing of trendlines is a lot like every other aspect of charting\nand some experimenting with different lines is usually necessary to find the\ncorrect one. Sometimes a trendline that looks correct may have to be redrawn.\nBut there are some useful guidelines in the search for that correct line.", - "type": "text" - }, - { - "block_id": "p77-b4", - "global_id": 633, - "bbox": [ - 72.0, - 516.91, - 523.13, - 630.7 - ], - "text": "First of all, there must be evidence of a trend. This means that, for an up\ntrendline to be drawn, there must be at least two reaction lows with the second\nlow higher than the first. Of course, it always takes two points to draw any\nstraight line. In Figure 4.6a, for example, only after prices have begun to\nmove higher from point 3 is the chartist reasonably confident that a reaction\nlow has been formed, and only then can a tentative up trendline be drawn\nunder points 1 and 3.", - "type": "text" - }, - { - "block_id": "p77-b5", - "global_id": 634, - "bbox": [ - 72.0, - 632.86, - 520.32, - 746.65 - ], - "text": "Some chartists require that the peak at point 2 be penetrated to confirm\nthe uptrend before drawing the trendline. Others only require a 50%\nretracement of wave 2-3, or that prices approach the top of wave 2. While the\ncriteria may differ, the main point to remember is that the chartist wants to be\nreasonably sure that a reaction low has been formed before identifying a valid\nreaction low. Once two ascending lows have been identified, a straight line is\ndrawn connecting the lows and projected up and to the right.", - "type": "text" - } - ] - }, - { - "page_num": 78, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p78-b0", - "global_id": 635, - "bbox": [ - 72.0, - 73.19, - 239.41, - 83.99 - ], - "text": "Tentative Versus the Valid Trendline", - "type": "text" - }, - { - "block_id": "p78-b1", - "global_id": 636, - "bbox": [ - 72.0, - 92.0, - 521.6, - 205.79 - ], - "text": "So far, all we have is a tentative trendline. In order to confirm the validity of a\ntrendline, however, that line should be touched a third time with prices\nbouncing off of it. Therefore, in Figure 4.6a, the successful test of the up\ntrendline at point 5 confirmed the validity of that line. Figure 4.6b shows a\ndowntrend, but the rules are the same. The successful test of the trendline\noccurs at point 5. To summarize, two points are needed to draw the trendline,\nand a third point to make it a valid trendline.", - "type": "text" - }, - { - "block_id": "p78-b2", - "global_id": 637, - "bbox": [ - 72.0, - 229.47, - 521.13, - 377.91 - ], - "text": "How to Use the Trendline\nOnce the third point has been confirmed and the trend proceeds in its original\ndirection, that trendline becomes very useful in a variety of ways. One of the\nbasic concepts of trend is that a trend in motion will tend to remain in motion.\nAs a corollary to that, once a trend assumes a certain slope or rate of speed, as\nidentified by the trendline, it will usually maintain the same slope. The\ntrendline then helps not only to determine the extremities of the corrective\nphases, but maybe even more importantly, tells us when that trend is\nchanging.", - "type": "text" - }, - { - "block_id": "p78-b3", - "global_id": 638, - "bbox": [ - 72.0, - 380.08, - 516.73, - 460.74 - ], - "text": "In an uptrend, for example, the inevitable corrective dip will often touch\nor come very close to the up trendline. Because the intent of the trader is to\nbuy dips in an uptrend, that trendline provides a support boundary under the\nmarket that can be used as a buying area. A down trendline can be used as a\nresistance area for selling purposes. (See Figures 4.7a and b.)", - "type": "text" - }, - { - "block_id": "p78-b4", - "global_id": 639, - "bbox": [ - 72.0, - 462.9, - 519.7, - 543.55 - ], - "text": "As long as the trendline is not violated, it can be used to determine\nbuying and selling areas. However, at point 9 in Figures 4.7a-b, the violation\nof the trendline signals a trend change, calling for liquidation of all positions\nin the direction of the previous trend. Very often, the breaking of the trendline\nis one of the best early warnings of a change in trend.", - "type": "text" - }, - { - "block_id": "p78-b5", - "global_id": 640, - "bbox": [ - 73.22, - 748.81, - 522.06, - 763.27 - ], - "text": "Figure 4.7a Once the up trendline has been established, subsequent dips near", - "type": "text" - } - ] - }, - { - "page_num": 79, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p79-b0", - "global_id": 641, - "bbox": [ - 78.74, - 73.28, - 516.54, - 104.24 - ], - "text": "the line can be used as buying areas. Points 5 and 7 in this example could\nhave been used for new or additional longs. The breaking of the trendline at", - "type": "text" - }, - { - "block_id": "p79-b1", - "global_id": 642, - "bbox": [ - 92.05, - 106.41, - 503.21, - 120.81 - ], - "text": "point 9 called for liquidation of all longs by signaling a downside trend", - "type": "text" - }, - { - "block_id": "p79-b2", - "global_id": 643, - "bbox": [ - 272.53, - 122.97, - 322.75, - 137.37 - ], - "text": "reversal.", - "type": "text" - }, - { - "block_id": "p79-b3", - "global_id": 644, - "bbox": [ - 94.39, - 341.91, - 500.89, - 356.37 - ], - "text": "Figure 4.7b Points 5 and 7 could have been used as selling areas. The", - "type": "text" - }, - { - "block_id": "p79-b4", - "global_id": 645, - "bbox": [ - 98.05, - 358.47, - 497.22, - 372.87 - ], - "text": "breaking of the trendline at point 9 signaled an upside trend reversal.", - "type": "text" - }, - { - "block_id": "p79-b5", - "global_id": 646, - "bbox": [ - 72.0, - 396.55, - 298.99, - 407.35 - ], - "text": "How to Determine the Significance of a Trendline", - "type": "text" - }, - { - "block_id": "p79-b6", - "global_id": 647, - "bbox": [ - 72.0, - 415.37, - 521.29, - 562.28 - ], - "text": "Let’s discuss some of the refinements of the trendline. First, what determines\nthe significance of a trendline? The answer to that question is twofold—the\nlonger it has been intact and the number of times it has been tested. A\ntrendline that has been successfully tested eight times, for example, that has\ncontinually demonstrated its validity, is obviously a more significant trendline\nthan one that has only been touched three times. Also, a trendline that has\nbeen in effect for nine months is of more importance than one that has been in\neffect for nine weeks or nine days. The more significant the trendline, the\nmore confidence it inspires and the more important is its penetration.", - "type": "text" - }, - { - "block_id": "p79-b7", - "global_id": 648, - "bbox": [ - 72.0, - 585.96, - 514.65, - 717.84 - ], - "text": "Trendlines Should Include All Price Action\nTrendlines on bar charts should be drawn over or under the entire day’s price\nrange. Some chartists prefer to draw the trendline by connecting only the\nclosing prices, but that is not the more standard procedure. The closing price\nmay very well be the most important price of the day, but it still represents\nonly a small sample of that day’s activity. The technique of including the\nday’s price range takes into account all of the activity and is the more\ncommon usage. (See Figure 4.8.)", - "type": "text" - } - ] - }, - { - "page_num": 80, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p80-b0", - "global_id": 649, - "bbox": [ - 76.28, - 251.88, - 518.99, - 266.35 - ], - "text": "Figure 4.8 The correct drawing of a trendline should include the entire day’s", - "type": "text" - }, - { - "block_id": "p80-b1", - "global_id": 650, - "bbox": [ - 256.06, - 268.45, - 339.21, - 282.85 - ], - "text": "trading range.", - "type": "text" - }, - { - "block_id": "p80-b2", - "global_id": 651, - "bbox": [ - 72.0, - 306.53, - 278.64, - 317.33 - ], - "text": "How to Handle Small Trendline Penetrations", - "type": "text" - }, - { - "block_id": "p80-b3", - "global_id": 652, - "bbox": [ - 72.0, - 325.35, - 523.14, - 422.57 - ], - "text": "Sometimes prices will violate a trendline on an intraday basis, but then close\nin the direction of the original trend, leaving the analyst in some doubt as to\nwhether or not the trendline has actually been broken. (See Figure 4.9.) Figure\n4.9 shows how such a situation might look. Prices did dip under the trendline\nduring the day, but closed back above the up trendline. Should the trendline\nbe redrawn?", - "type": "text" - }, - { - "block_id": "p80-b4", - "global_id": 653, - "bbox": [ - 78.28, - 622.06, - 516.99, - 653.02 - ], - "text": "Figure 4.9 Sometimes an intraday violation of a trendline will leave the\nchartist in doubt as to whether the original trendline is still valid or if a new", - "type": "text" - }, - { - "block_id": "p80-b5", - "global_id": 654, - "bbox": [ - 85.03, - 655.18, - 510.24, - 686.15 - ], - "text": "line should be drawn. A compromise is to keep the original trendline, but\ndraw a new dotted line until it can be better determined which is the truer", - "type": "text" - }, - { - "block_id": "p80-b6", - "global_id": 655, - "bbox": [ - 285.06, - 688.31, - 310.22, - 702.71 - ], - "text": "line.", - "type": "text" - }, - { - "block_id": "p80-b7", - "global_id": 656, - "bbox": [ - 72.0, - 719.28, - 515.45, - 766.81 - ], - "text": "Unfortunately, there’s no hard and fast rule to follow in such a situation.\nSometimes it is best to ignore the minor breach, especially if subsequent\nmarket action proves that the original line is still valid.", - "type": "text" - } - ] - }, - { - "page_num": 81, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p81-b0", - "global_id": 657, - "bbox": [ - 72.0, - 73.19, - 305.05, - 83.99 - ], - "text": "What Constitutes a Valid Breaking of a Trendline?", - "type": "text" - }, - { - "block_id": "p81-b1", - "global_id": 658, - "bbox": [ - 72.0, - 92.0, - 520.53, - 238.92 - ], - "text": "As a general rule, a close beyond the trendline is more significant than just an\nintraday penetration. To go a step further, sometimes even a closing\npenetration is not enough. Most technicians employ a variety of time and\nprice filters in an attempt to isolate valid trendline penetrations and eliminate\nbad signals or “whipsaws.” One example of a price filter is the 3%\npenetration criteria. This price filter is used mainly for the breaking of longer\nterm trendlines, but requires that the trendline be broken, on a closing basis,\nby at least 3%. (The 3% rule doesn’t apply to some financial futures, such as\nthe interest rate markets.)", - "type": "text" - }, - { - "block_id": "p81-b2", - "global_id": 659, - "bbox": [ - 72.0, - 241.09, - 521.03, - 454.25 - ], - "text": "If, for example, gold prices broke a major up trendline at $400, prices\nwould have to close below that line by 3% of the price level where the line\nwas broken (in this case, prices would have to close $12 below the trendline,\nor at $388). Obviously, a $12 penetration criteria would not be appropriate for\nshorter term trading. Perhaps a 1% criterion would serve better in such cases.\nThe % rule represents just one type of price filter. Stock chartists, for\nexample, might require a full point penetration and ignore fractional moves.\nThere is tradeoff involved in the use of any type of filter. If the filter is too\nsmall, it won’t be very useful in reducing the impact of whipsaws. If it’s too\nbig, then much of the initial move will be missed before a valid signal is\ngiven. Here again, the trader must determine what type of filter is best suited\nto the degree of trend being followed, always making allowances for the\ndifferences in the individuals markets.", - "type": "text" - }, - { - "block_id": "p81-b3", - "global_id": 660, - "bbox": [ - 72.0, - 456.42, - 514.68, - 619.89 - ], - "text": "An alternative to a price filter (requiring that a trendline be broken by\nsome predetermined price increment or percentage amount) is a time filter. A\ncommon time filter is the two day rule. In other words, to have a valid\nbreaking of a trendline, prices must close beyond the trendline for two\nsuccessive days. To break an up trendline, therefore, prices must close under\nthe trendline two days in a row. A one day violation would not count. The 1-\n3% rule and the two day rule are also applied to the breaking of important\nsupport and resistance levels, not just to major trendlines. Another filter\nwould require a Friday close beyond a major breakout point to ensure a\nweekly signal.", - "type": "text" - }, - { - "block_id": "p81-b4", - "global_id": 661, - "bbox": [ - 72.0, - 643.57, - 513.59, - 758.89 - ], - "text": "How Trendlines Reverse Roles\nIt was mentioned earlier that support and resistance levels became the\nopposite once violated. The same principle holds true of trendlines. (See\nFigures 4.10a-c.) In other words, an up trendline (a support line) will usually\nbecome a resistance line once it’s decisively broken. A down trendline (a\nresistance line) will often become a support line once it’s decisively broken.\nThis is why it’s usually a good idea to project all trendlines as far out to the", - "type": "text" - } - ] - }, - { - "page_num": 82, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p82-b0", - "global_id": 662, - "bbox": [ - 72.0, - 73.28, - 522.75, - 120.81 - ], - "text": "right on the chart as possible even after they’ve been broken. It’s surprising\nhow often old trendlines act as support and resistance lines again in the future,\nbut in the opposite role.", - "type": "text" - }, - { - "block_id": "p82-b1", - "global_id": 663, - "bbox": [ - 72.0, - 144.49, - 245.08, - 155.29 - ], - "text": "Measuring Implications of Trendlines", - "type": "text" - }, - { - "block_id": "p82-b2", - "global_id": 664, - "bbox": [ - 72.0, - 163.31, - 520.22, - 277.09 - ], - "text": "Trendlines can be used to help determine price objectives. We’ll have a lot\nmore to say about price objectives in the next two chapters on price patterns.\nIn fact, some of the price objectives addressed that are derived from various\nprice patterns are similar to the one we’ll cover here with trendlines. Stated\nbriefly, once a trendline is broken, prices will usually move a distance beyond\nthe trendline equal to the vertical distance that prices achieved on the other\nside of the line, prior to the trend reversal.", - "type": "text" - }, - { - "block_id": "p82-b3", - "global_id": 665, - "bbox": [ - 72.28, - 475.86, - 523.0, - 506.82 - ], - "text": "Figure 4.10a Example of a rising support line becoming resistance. Usually a\nsupport line will function as a resistance barrier on subsequent rallies, after it", - "type": "text" - }, - { - "block_id": "p82-b4", - "global_id": 666, - "bbox": [ - 200.37, - 508.99, - 394.9, - 523.39 - ], - "text": "has been broken on the downside.", - "type": "text" - }, - { - "block_id": "p82-b5", - "global_id": 667, - "bbox": [ - 74.36, - 738.0, - 520.9, - 752.47 - ], - "text": "Figure 4.10b Very often a down trendline will become a support line once it’s", - "type": "text" - }, - { - "block_id": "p82-b6", - "global_id": 668, - "bbox": [ - 220.56, - 754.57, - 374.71, - 768.97 - ], - "text": "been broken on the upside.", - "type": "text" - } - ] - }, - { - "page_num": 83, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p83-b0", - "global_id": 669, - "bbox": [ - 90.99, - 345.51, - 504.28, - 359.97 - ], - "text": "Figure 4.10c Trendlines also reverse roles. On this chart, the broken up", - "type": "text" - }, - { - "block_id": "p83-b1", - "global_id": 670, - "bbox": [ - 100.34, - 362.07, - 494.93, - 376.47 - ], - "text": "trendline became a resistance barrier on the following rally attempt.", - "type": "text" - }, - { - "block_id": "p83-b2", - "global_id": 671, - "bbox": [ - 72.0, - 393.04, - 513.91, - 506.83 - ], - "text": "In other words, if in the prior uptrend, prices moved $50 above the up\ntrendline (measured vertically), then prices would be expected to drop that\nsame $50 below the trendline after it’s broken. In the next chapter, for\nexample, we’ll see that this measuring rule using the trendline is similar to\nthat used for the well-known head and shoulders reversal pattern, where the\ndistance from the “head” to the “neckline” is projected beyond that line once\nit’s broken.", - "type": "text" - }, - { - "block_id": "p83-b3", - "global_id": 672, - "bbox": [ - 72.0, - 550.78, - 518.99, - 770.41 - ], - "text": "THE FAN PRINCIPLE\nThis brings us to another interesting use of the trendline—the fan principle.\n(See Figures 4.11a-c.) Sometimes after the violation of an up trendline, prices\nwill decline a bit before rallying back to the bottom of the old up trendline\n(now a resistance line). In Figure 4.11a, notice how prices rallied to but failed\nto penetrate line 1. A second trendline (line 2) can now be drawn, which is\nalso broken. After another failed rally attempt, a third line is drawn (line 3).\nThe breaking of that third trendline is usually an indication that prices are\nheaded lower. In Figure 4.11b, the breaking of the third down trendline (line\n3) constitutes a new uptrend signal. Notice in these examples how previously\nbroken support lines became resistance and resistance lines became support.\nThe term “fan principle” derives from the appearance of the lines that\ngradually flatten out, resembling a fan. The important point to remember here", - "type": "text" - } - ] - }, - { - "page_num": 84, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p84-b0", - "global_id": 673, - "bbox": [ - 72.0, - 73.53, - 467.93, - 87.93 - ], - "text": "is that the breaking of the third line is the valid trend reversal signal.", - "type": "text" - }, - { - "block_id": "p84-b1", - "global_id": 674, - "bbox": [ - 73.56, - 279.25, - 521.7, - 293.72 - ], - "text": "Figure 4.11a Example of the fan principle. The breaking of the third trendline", - "type": "text" - }, - { - "block_id": "p84-b2", - "global_id": 675, - "bbox": [ - 77.07, - 295.81, - 518.21, - 310.21 - ], - "text": "signals the reversal of a trend. Notice also that the broken trendlines 1 and 2", - "type": "text" - }, - { - "block_id": "p84-b3", - "global_id": 676, - "bbox": [ - 211.59, - 312.38, - 383.68, - 326.78 - ], - "text": "often become resistance lines.", - "type": "text" - }, - { - "block_id": "p84-b4", - "global_id": 677, - "bbox": [ - 79.0, - 516.19, - 516.25, - 547.15 - ], - "text": "Figure 4.11b The fan principle at a bottom. The breaking of the third\ntrendline signals the upside trend reversal. The previously broken trendlines", - "type": "text" - }, - { - "block_id": "p84-b5", - "global_id": 678, - "bbox": [ - 187.53, - 549.32, - 407.74, - 563.72 - ], - "text": "(1 and 2) often become support levels.", - "type": "text" - } - ] - }, - { - "page_num": 85, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p85-b0", - "global_id": 679, - "bbox": [ - 84.0, - 347.67, - 511.28, - 362.13 - ], - "text": "Figure 4.11c Fan lines are drawn along successive peaks as shown in this", - "type": "text" - }, - { - "block_id": "p85-b1", - "global_id": 680, - "bbox": [ - 95.53, - 364.23, - 499.74, - 378.63 - ], - "text": "chart. The breaking of the third fan line usually signals the start of the", - "type": "text" - }, - { - "block_id": "p85-b2", - "global_id": 681, - "bbox": [ - 273.72, - 380.8, - 321.56, - 395.2 - ], - "text": "uptrend.", - "type": "text" - }, - { - "block_id": "p85-b3", - "global_id": 682, - "bbox": [ - 72.0, - 439.15, - 520.36, - 691.91 - ], - "text": "THE IMPORTANCE OF THE NUMBER THREE\nIn examining the three lines in the fan principle, it’s interesting to note how\noften the number three shows up in the study of technical analysis and the\nimportant role it plays in so many technical approaches. For example, the fan\nprinciple uses three lines; major bull and bear markets usually have three\nmajor phases (Dow Theory and Elliott Wave Theory); there are three kinds of\ngaps (to be covered shortly); some of the more commonly known reversal\npatterns, such as the triple top and the head and shoulders, have three\nprominent peaks; there are three different classifications of trend (major,\nsecondary, and minor) and three trend directions (up, down, and sideways);\namong the generally accepted continuation patterns, there are three types of\ntriangles—the symmetrical, ascending, and descending; there are three\nprinciple sources of information—price, volume, and open interest. For\nwhatever the reason, the number three plays a very prominent role throughout\nthe entire field of technical analysis.", - "type": "text" - }, - { - "block_id": "p85-b4", - "global_id": 683, - "bbox": [ - 72.0, - 735.14, - 422.43, - 755.3 - ], - "text": "THE RELATIVE STEEPNESS OF THE", - "type": "text" - } - ] - }, - { - "page_num": 86, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p86-b0", - "global_id": 684, - "bbox": [ - 72.0, - 73.79, - 511.03, - 210.83 - ], - "text": "TRENDLINE\nThe relative steepness of the trendline is also important. In general, most\nimportant up trendlines tend to approximate an average slope of 45 degrees.\nSome chartists simply draw a 45 degree line on the chart from a prominent\nhigh or low and use this as a major trendline. The 45 degree line was one of\nthe techniques favored by W. D. Gann. Such a line reflects a situation where\nprices are advancing or declining at such a rate that price and time are in\nperfect balance.", - "type": "text" - }, - { - "block_id": "p86-b1", - "global_id": 685, - "bbox": [ - 76.74, - 449.93, - 518.53, - 464.4 - ], - "text": "Figure 4.12 Most valid trendlines rise at an angle approximating 45 degrees", - "type": "text" - }, - { - "block_id": "p86-b2", - "global_id": 686, - "bbox": [ - 79.74, - 466.5, - 515.54, - 514.02 - ], - "text": "(see line 2). If the trendline is too steep (line 1), it usually indicates that the\nrate of ascent is not sustainable. A trendline that is too flat (line 3) suggests\nthat the uptrend is too weak and probably suspect. Many technicians use 45", - "type": "text" - }, - { - "block_id": "p86-b3", - "global_id": 687, - "bbox": [ - 115.62, - 516.19, - 479.64, - 530.59 - ], - "text": "degree lines from previous tops or bottoms as major trendlines.", - "type": "text" - }, - { - "block_id": "p86-b4", - "global_id": 688, - "bbox": [ - 72.0, - 547.16, - 517.52, - 644.38 - ], - "text": "If a trendline is too steep (see line 1 in Figure 4.12), it usually indicates\nthat prices are advancing too rapidly and that the current steep ascent will not\nbe sustained. The breaking of that steep trendline may be just a reaction back\nto a more sustainable slope closer to the 45 degree line (line 2). If a trendline\nis too flat (see line 3), it may indicate that the uptrend is too weak and not to\nbe trusted.", - "type": "text" - }, - { - "block_id": "p86-b5", - "global_id": 689, - "bbox": [ - 72.0, - 668.06, - 190.56, - 678.86 - ], - "text": "How to Adjust Trendlines", - "type": "text" - }, - { - "block_id": "p86-b6", - "global_id": 690, - "bbox": [ - 72.0, - 686.88, - 519.94, - 767.53 - ], - "text": "Sometimes trendlines have to be adjusted to fit a slowing or an accelerating\ntrend. (See Figure 4.13 and Figures 4.14a and b.) For example, as shown in\nthe previous case, if a steep trendline is broken, a slower trendline might have\nto be drawn. If the original trendline is too flat, it may have to be redrawn at a\nsteeper angle. Figure 4.13 shows a situation where the breaking of the steeper", - "type": "text" - } - ] - }, - { - "page_num": 87, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p87-b0", - "global_id": 691, - "bbox": [ - 72.0, - 73.64, - 455.56, - 88.04 - ], - "text": "trendline (line 1) necessitated the drawing of a slower line (line 2).", - "type": "text" - }, - { - "block_id": "p87-b1", - "global_id": 692, - "bbox": [ - 77.43, - 269.89, - 517.85, - 284.35 - ], - "text": "Figure 4.13 Example of a trendline that is too steep (line 1). The original up", - "type": "text" - }, - { - "block_id": "p87-b2", - "global_id": 693, - "bbox": [ - 78.89, - 286.45, - 516.38, - 300.85 - ], - "text": "trendline proved too steep. Often the breaking of a steep trendline is only an", - "type": "text" - }, - { - "block_id": "p87-b3", - "global_id": 694, - "bbox": [ - 107.71, - 303.02, - 487.55, - 317.42 - ], - "text": "adjustment to a slower and more sustainable up trendline (line 2).", - "type": "text" - }, - { - "block_id": "p87-b4", - "global_id": 695, - "bbox": [ - 72.0, - 333.99, - 520.72, - 398.08 - ], - "text": "In Figure 4.14a, the original trendline (line 1) is too flat and has to be\nredrawn at a steeper angle (line 2). The uptrend accelerated, requiring a\nsteeper line. A trendline that is too far away from the price action is obviously\nof little use in tracking the trend.", - "type": "text" - }, - { - "block_id": "p87-b5", - "global_id": 696, - "bbox": [ - 72.0, - 400.24, - 516.8, - 596.85 - ], - "text": "In the case of an accelerating trend, sometimes several trendlines may\nhave to be drawn at increasingly steeper angles. In my experience, however,\nwhere steeper trendlines become necessary, it is best to resort to another tool\n—the moving average—which is the same as a curvilinear trendline. One of\nthe advantages of having access to several different types of technical\nindicators is being able to choose the one most appropriate for a given\nsituation. All of the techniques covered in this book work well in certain\nsituations, but not so well in others. By having an arsenal of tools to fall back\non, the technician can quickly switch from one tool to another that might\nwork better in a given situation. An accelerated trend is one of those cases\nwhere a moving average would be more useful than a series of steeper and\nsteeper trendlines.", - "type": "text" - } - ] - }, - { - "page_num": 88, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p88-b0", - "global_id": 697, - "bbox": [ - 73.35, - 287.17, - 521.93, - 318.14 - ], - "text": "Figure 4.14a Example of an up trendline that is too flat (line 1). Line 1\nproved too slow as the uptrend accelerated. In this case, a second and steeper", - "type": "text" - }, - { - "block_id": "p88-b1", - "global_id": 698, - "bbox": [ - 89.61, - 320.3, - 505.67, - 334.7 - ], - "text": "trendline (line 2) should be drawn to more closely track the rising trend.", - "type": "text" - }, - { - "block_id": "p88-b2", - "global_id": 699, - "bbox": [ - 85.15, - 624.94, - 510.14, - 655.9 - ], - "text": "Figure 4.14b An accelerating uptrend requires the drawing of steeper\ntrendlines as shown in this chart. The steepest trendline becomes the most", - "type": "text" - }, - { - "block_id": "p88-b3", - "global_id": 700, - "bbox": [ - 255.26, - 658.07, - 340.0, - 672.46 - ], - "text": "important one.", - "type": "text" - }, - { - "block_id": "p88-b4", - "global_id": 701, - "bbox": [ - 72.0, - 689.04, - 508.37, - 769.69 - ], - "text": "Just as there are several different degrees of trend in effect at any one\ntime, so is there a need for different trendlines to measure those various\ntrends. A major up trendline, for example, would connect the low points of\nthe major uptrend, while a shorter and more sensitive line might be used for\nsecondary swings. An even shorter line can measure the short term", - "type": "text" - } - ] - }, - { - "page_num": 89, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p89-b0", - "global_id": 702, - "bbox": [ - 72.0, - 73.28, - 249.44, - 87.68 - ], - "text": "movements. (See Figure 4.15.)", - "type": "text" - }, - { - "block_id": "p89-b1", - "global_id": 703, - "bbox": [ - 84.49, - 437.69, - 510.78, - 452.15 - ], - "text": "Figure 4.15 Different trendlines are used to define the different degrees of", - "type": "text" - }, - { - "block_id": "p89-b2", - "global_id": 704, - "bbox": [ - 84.09, - 454.25, - 511.18, - 501.79 - ], - "text": "trend. Line 1 in the above example is the major up trendline, defining the\nmajor uptrend. Lines 2, 3, and 4 define the intermediate uptrends. Finally,\nline 5 defines a shorter term advance within the last intermediate uptrend.", - "type": "text" - }, - { - "block_id": "p89-b3", - "global_id": 705, - "bbox": [ - 123.58, - 503.95, - 471.69, - 518.35 - ], - "text": "Technicians use many different trendlines on the same chart.", - "type": "text" - }, - { - "block_id": "p89-b4", - "global_id": 706, - "bbox": [ - 72.0, - 562.3, - 519.02, - 665.99 - ], - "text": "THE CHANNEL LINE\nThe channel line, or the return line as it is sometimes called, is another useful\nvariation of the trendline technique. Sometimes prices trend between two\nparallel lines—the basic trendline and the channel line. Obviously, when this\nis the case and when the analyst recognizes that a channel exists, this\nknowledge can be used to profitable advantage.", - "type": "text" - }, - { - "block_id": "p89-b5", - "global_id": 707, - "bbox": [ - 72.0, - 668.15, - 510.75, - 765.37 - ], - "text": "The drawing of the channel line is relatively simple. In an uptrend (see\nFigure 4.16a), first draw the basic up trendline along the lows. Then draw a\ndotted line from the first prominent peak (point 2), which is parallel to the\nbasic up trendline. Both lines move up to the right, forming a channel. If the\nnext rally reaches and backs off from the channel line (at point 4), then a\nchannel may exist. If prices then drop back to the original trendline (at point", - "type": "text" - } - ] - }, - { - "page_num": 90, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p90-b0", - "global_id": 708, - "bbox": [ - 72.0, - 73.53, - 508.79, - 104.25 - ], - "text": "5), then a channel probably does exist. The same holds true for a downtrend\n(Figure 4.16b), but of course in the opposite direction.", - "type": "text" - }, - { - "block_id": "p90-b1", - "global_id": 709, - "bbox": [ - 78.76, - 328.22, - 516.51, - 375.75 - ], - "text": "Figure 4.16a Example of a trend channel. Once the basic up trendline is\ndrawn (below points 1 and 3) a channel, or return, line (dotted line) can be\nprojected over the first peak at 2, which is parallel to the basic up trendline.", - "type": "text" - }, - { - "block_id": "p90-b2", - "global_id": 710, - "bbox": [ - 79.39, - 586.77, - 515.88, - 617.73 - ], - "text": "Figure 4.16b A trend channel in a downtrend. The channel is projected\ndownward from the first low at point 2, parallel to the down trendline along", - "type": "text" - }, - { - "block_id": "p90-b3", - "global_id": 711, - "bbox": [ - 91.35, - 619.9, - 503.94, - 634.29 - ], - "text": "the 1 and 3 peaks. Prices will often remain within such a trend channel.", - "type": "text" - } - ] - }, - { - "page_num": 91, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p91-b0", - "global_id": 712, - "bbox": [ - 80.18, - 348.39, - 515.1, - 379.35 - ], - "text": "Figure 4.16c Notice how prices fluctuated between the upper and lower\nparallel channels over a period of 25 years. The 1987, 1989, and 1993 tops", - "type": "text" - }, - { - "block_id": "p91-b1", - "global_id": 713, - "bbox": [ - 83.88, - 381.52, - 511.4, - 395.92 - ], - "text": "occurred right at the upper channel line. The 1994 bottom bounced off the", - "type": "text" - }, - { - "block_id": "p91-b2", - "global_id": 714, - "bbox": [ - 251.95, - 398.08, - 343.33, - 412.48 - ], - "text": "lower trendline.", - "type": "text" - }, - { - "block_id": "p91-b3", - "global_id": 715, - "bbox": [ - 72.0, - 429.05, - 515.94, - 559.4 - ], - "text": "The reader should immediately see the value of such a situation. The\nbasic up trendline can be used for the initiation of new long positions. The\nchannel line can be used for short term profit taking. More aggressive traders\nmight even use the channel line to initiate a countertrend short position,\nalthough trading in the opposite direction of the prevailing trend can be a\ndangerous and usually costly tactic. As in the case of the basic trendline, the\nlonger the channel remains intact and the more often it is successfully tested,\nthe more important and reliable it becomes.", - "type": "text" - }, - { - "block_id": "p91-b4", - "global_id": 716, - "bbox": [ - 72.0, - 561.56, - 516.73, - 642.22 - ], - "text": "The breaking of the major trendline indicates an important change in\ntrend. But the breaking of a rising channel line has exactly the opposite\nmeaning, and signals an acceleration of the existing trend. Some traders view\nthe clearing of the upper line in an uptrend as a reason to add to long\npositions.", - "type": "text" - } - ] - }, - { - "page_num": 92, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p92-b0", - "global_id": 717, - "bbox": [ - 72.09, - 323.9, - 523.18, - 338.37 - ], - "text": "Figure 4.17 The failure to reach the upper end of the channel is often an early", - "type": "text" - }, - { - "block_id": "p92-b1", - "global_id": 718, - "bbox": [ - 80.55, - 340.47, - 514.73, - 371.43 - ], - "text": "warning that the lower line will be broken. Notice the failure to reach the\nupper line at point 5 is followed by the breaking of the basic up trendline at", - "type": "text" - }, - { - "block_id": "p92-b2", - "global_id": 719, - "bbox": [ - 275.65, - 373.59, - 319.62, - 387.99 - ], - "text": "point 6.", - "type": "text" - }, - { - "block_id": "p92-b3", - "global_id": 720, - "bbox": [ - 72.0, - 404.57, - 522.33, - 534.91 - ], - "text": "Another way to use the channel technique is to spot failures to reach the\nchannel line, usually a sign of a weakening trend. In Figure 4.17, the failure\nof prices to reach the top of the channel (at point 5) may be an early warning\nthat the trend is turning, and increases the odds that the other line (the basic\nup trendline) will be broken. As a general rule of thumb, the failure of any\nmove within an established price channel to reach one side of the channel\nusually indicates that the trend is shifting, and increases the likelihood that the\nother side of the channel will be broken.", - "type": "text" - }, - { - "block_id": "p92-b4", - "global_id": 721, - "bbox": [ - 72.0, - 537.08, - 521.5, - 683.99 - ], - "text": "The channel can also be used to adjust the basic trendline. (See Figures\n4.18 and 4.19.) If prices move above a projected rising channel line by a\nsignificant amount, it usually indicates a strengthening trend. Some chartists\nthen draw a steeper basic up trendline from the last reaction low parallel to\nthe new channel line (as demonstrated in Figure 4.18). Often, the new steeper\nsupport line functions better than the old flatter line. Similarly, the failure of\nan uptrend to reach the upper end of a channel justifies the drawing of a new\nsupport line under the last reaction low parallel to the new resistance line over\nthe past two peaks (as shown in Figure 4.19).", - "type": "text" - } - ] - }, - { - "page_num": 93, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p93-b0", - "global_id": 722, - "bbox": [ - 74.76, - 349.11, - 520.53, - 380.07 - ], - "text": "Figure 4.18 When the upper channel line is broken (as in wave 5), many\nchartists will redraw the basic up trendline parallel to the new upper channel", - "type": "text" - }, - { - "block_id": "p93-b1", - "global_id": 723, - "bbox": [ - 76.2, - 382.24, - 519.06, - 413.2 - ], - "text": "line. In other words, line 4-6 is drawn parallel to line 3-5. Because the\nuptrend is accelerating, it stands to reason that the basic up trendline will do", - "type": "text" - }, - { - "block_id": "p93-b2", - "global_id": 724, - "bbox": [ - 272.67, - 415.36, - 322.6, - 429.76 - ], - "text": "likewise.", - "type": "text" - }, - { - "block_id": "p93-b3", - "global_id": 725, - "bbox": [ - 73.91, - 707.04, - 521.37, - 738.0 - ], - "text": "Figure 4.19 When prices fail to reach the upper channel line, and a down\ntrendline is drawn over the two declining peaks (line 3-5), a tentative channel", - "type": "text" - }, - { - "block_id": "p93-b4", - "global_id": 726, - "bbox": [ - 90.07, - 740.17, - 505.2, - 754.56 - ], - "text": "line can be drawn from the low at point 4 parallel to line 3-5. The lower", - "type": "text" - } - ] - }, - { - "page_num": 94, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p94-b0", - "global_id": 727, - "bbox": [ - 95.31, - 73.28, - 499.98, - 87.68 - ], - "text": "channel line sometimes indicates where initial support will be evident.", - "type": "text" - }, - { - "block_id": "p94-b1", - "global_id": 728, - "bbox": [ - 72.0, - 104.25, - 510.37, - 184.91 - ], - "text": "Channel lines have measuring implications. Once a breakout occurs\nfrom an existing price channel, prices usually travel a distance equal to the\nwidth of the channel. Therefore, the user has to simply measure the width of\nthe channel and then project that amount from the point at which either\ntrendline is broken.", - "type": "text" - }, - { - "block_id": "p94-b2", - "global_id": 729, - "bbox": [ - 72.0, - 187.07, - 509.56, - 267.73 - ], - "text": "It should always be kept in mind, however, that of the two lines, the\nbasic trendline is by far the more important and the more reliable. The\nchannel line is a secondary use of the trendline technique. But the use of the\nchannel line works often enough to justify its inclusion in the chartist’s\ntoolkit.", - "type": "text" - }, - { - "block_id": "p94-b3", - "global_id": 730, - "bbox": [ - 72.0, - 311.68, - 522.34, - 514.75 - ], - "text": "PERCENTAGE RETRACEMENTS\nIn all of the previous examples of uptrends and downtrends, the reader has no\ndoubt noticed that after a particular market move, prices retrace a portion of\nthe previous trend before resuming the move in the original direction. These\ncountertrend moves tend to fall into certain predictable percentage\nparameters. The best known application of the phenomenon is the 50%\nretracement. Let’s say, for example, that a market is trending higher and\ntravels from the 100 level to the 200 level. Very often, the subsequent reaction\nretraces about half of the prior move, to about the 150 level, before upward\nmomentum is regained. This is a very well-known market tendency and\nhappens quite frequently. Also, these percentage retracements apply to any\ndegree of trend—major, secondary, and near term.", - "type": "text" - }, - { - "block_id": "p94-b4", - "global_id": 731, - "bbox": [ - 72.0, - 516.91, - 518.58, - 680.39 - ], - "text": "Besides the 50% retracement, there are minimum and maximum\npercentage parameters that are also widely recognized—the one-third and the\ntwo-thirds retracements. In other words, the price trend can be divided into\nthirds. Usually, a minimum retracement is about 33% and a maximum about\n66%. What this means is that, in a correction of a strong trend, the market\nusually retraces at least a third of the previous move. This is very useful\ninformation for a number of reasons. If a trader is looking for a buying area\nunder the market, he or she can just compute a 33-50% zone on the chart and\nuse that price zone as a general frame of reference for buying opportunities.\n(See Figures 4.20a and b.)", - "type": "text" - } - ] - }, - { - "page_num": 95, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p95-b0", - "global_id": 732, - "bbox": [ - 81.01, - 291.49, - 514.27, - 322.46 - ], - "text": "Figure 4.20a Prices often retrace about half of the prior trend before\nresuming in the original direction. This example shows a 50% retracement.", - "type": "text" - }, - { - "block_id": "p95-b1", - "global_id": 733, - "bbox": [ - 83.21, - 324.62, - 512.06, - 339.02 - ], - "text": "The minimum retracement is one-third and the maximum, two-thirds of the", - "type": "text" - }, - { - "block_id": "p95-b2", - "global_id": 734, - "bbox": [ - 264.31, - 341.19, - 330.95, - 355.59 - ], - "text": "prior trend.", - "type": "text" - }, - { - "block_id": "p95-b3", - "global_id": 735, - "bbox": [ - 72.0, - 372.16, - 507.17, - 485.94 - ], - "text": "The maximum retracement parameter is 66%, which becomes an\nespecially critical area. If the prior trend is to be maintained, the correction\nmust stop at the two-thirds point. This then becomes a relatively low risk\nbuying area in an uptrend or selling area in a downtrend. If prices move\nbeyond the two-thirds point, the odds then favor a trend reversal rather than\njust a retracement. The move usually then retraces the entire 100% of the\nprior trend.", - "type": "text" - }, - { - "block_id": "p95-b4", - "global_id": 736, - "bbox": [ - 72.0, - 488.11, - 521.87, - 618.45 - ], - "text": "You may have noticed that the three percentage retracement parameters\nwe’ve mentioned so far—50%, 33%, and 66%—are taken right from the\noriginal Dow Theory. When we get to the Elliott Wave Theory and Fibonacci\nratios, we will see that followers of that approach use percentage retracements\nof 38% and 62%. I prefer to combine both approaches for a minimum\nretracement zone of 33-38% and a maximum zone of 62-66%. Some\ntechnicians round off these numbers even further to arrive at a 40-60%\nretracement zone.", - "type": "text" - } - ] - }, - { - "page_num": 96, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p96-b0", - "global_id": 737, - "bbox": [ - 76.02, - 346.95, - 519.25, - 377.91 - ], - "text": "Figure 4.20b The three horizontal lines mark the 38%, 50%, and 62%\nretracement levels measured from the April 1997 low to the August high. The", - "type": "text" - }, - { - "block_id": "p96-b1", - "global_id": 738, - "bbox": [ - 73.74, - 380.08, - 521.53, - 411.04 - ], - "text": "first decline fell to the 38% line, the second decline to the 62% line, and the\nthird near the 50% line. Most corrections will find support in the 38% to 50%", - "type": "text" - }, - { - "block_id": "p96-b2", - "global_id": 739, - "bbox": [ - 79.21, - 413.2, - 516.06, - 427.6 - ], - "text": "retracement zones. The 38% and 62% lines are Fibonacci retracements and", - "type": "text" - }, - { - "block_id": "p96-b3", - "global_id": 740, - "bbox": [ - 221.15, - 429.77, - 374.12, - 444.17 - ], - "text": "are popular with chartists.", - "type": "text" - }, - { - "block_id": "p96-b4", - "global_id": 741, - "bbox": [ - 72.0, - 460.74, - 519.46, - 541.4 - ], - "text": "Students of W. D. Gann are aware that he broke down the trend structure\ninto eighths—1/8, 2/8, 3/8, 4/8, 5/8, 6/8, 7/8, 8/8. However, even Gann\nattached special importance to the 3/8 (38%), 4/8 (50%), and 5/8 (62%)\nretracement numbers and also felt it was important to divide the trend into\nthirds—1/3 (33%) and 2/3 (66%).", - "type": "text" - }, - { - "block_id": "p96-b5", - "global_id": 742, - "bbox": [ - 72.0, - 585.35, - 506.4, - 705.6 - ], - "text": "SPEED RESISTANCE LINES\nSpeaking of thirds, let’s touch on another technique that combines the\ntrendline with percentage retracements—speedlines. This technique,\ndeveloped by Edson Gould, is actually an adaptation of the idea of dividing\nthe trend into thirds. The main difference from the percentage retracement\nconcept is that the speed resistance lines (or speedlines) measure the rate of\nascent or descent of a trend (in other words, its speed).", - "type": "text" - }, - { - "block_id": "p96-b6", - "global_id": 743, - "bbox": [ - 72.0, - 707.76, - 512.76, - 755.29 - ], - "text": "To construct a bullish speedline, find the highest point in the current\nuptrend. (See Figure 4.21a.) From that high point on the chart, a vertical line\nis drawn toward the bottom of the chart to where the trend began. That", - "type": "text" - } - ] - }, - { - "page_num": 97, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p97-b0", - "global_id": 744, - "bbox": [ - 72.0, - 73.53, - 514.52, - 187.07 - ], - "text": "vertical line is then divided into thirds. A trendline is then drawn from the\nbeginning of the trend through the two points marked off on the vertical line,\nrepresenting the one-third and two-thirds points. In a downtrend, just reverse\nthe process. Measure the vertical distance from the low point in the\ndowntrend to the beginning of the trend, and draw two lines from the\nbeginning of the trend through the one-third and two-thirds points on the\nvertical line. (See Figures 4.21a and b.)", - "type": "text" - }, - { - "block_id": "p97-b1", - "global_id": 745, - "bbox": [ - 72.96, - 442.73, - 522.32, - 473.69 - ], - "text": "Figure 4.21a Examples of speed resistance lines in an uptrend. The vertical\ndistance from the peak to the beginning of the trend is divided into thirds. Two", - "type": "text" - }, - { - "block_id": "p97-b2", - "global_id": 746, - "bbox": [ - 73.84, - 475.86, - 521.43, - 490.26 - ], - "text": "trendlines are then drawn from point 1 through points 2 and 3. The upper line", - "type": "text" - }, - { - "block_id": "p97-b3", - "global_id": 747, - "bbox": [ - 85.0, - 492.42, - 510.28, - 506.83 - ], - "text": "is the 2/3 speedline and the lower, the 1/3. The lines should act as support", - "type": "text" - }, - { - "block_id": "p97-b4", - "global_id": 748, - "bbox": [ - 86.55, - 508.99, - 508.72, - 523.39 - ], - "text": "during market corrections. When they’re broken, they revert to resistance", - "type": "text" - }, - { - "block_id": "p97-b5", - "global_id": 749, - "bbox": [ - 102.21, - 525.55, - 493.04, - 539.95 - ], - "text": "lines on bounces. Sometimes these speedlines intersect price action.", - "type": "text" - }, - { - "block_id": "p97-b6", - "global_id": 750, - "bbox": [ - 179.52, - 741.61, - 415.74, - 756.07 - ], - "text": "Figure 4.21b Speedlines in a downtrend.", - "type": "text" - } - ] - }, - { - "page_num": 98, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p98-b0", - "global_id": 751, - "bbox": [ - 72.0, - 73.28, - 519.59, - 170.5 - ], - "text": "Each time a new high is set in an uptrend or a new low in a downtrend, a\nnew set of lines must be drawn (because there is now a new high or low\npoint). Because the speedlines are drawn from the beginning of the trend to\nthe one-third and two-thirds points, those trendlines may sometimes move\nthrough some of the price action. This is one case where trendlines are not\ndrawn under lows or over highs, but actually through the price action.", - "type": "text" - }, - { - "block_id": "p98-b1", - "global_id": 752, - "bbox": [ - 72.0, - 172.67, - 523.13, - 286.45 - ], - "text": "If an uptrend is in the process of correcting itself, the downside\ncorrection will usually stop at the higher speedline (the 2/3 speedline). If not,\nprices will drop to the lower speedline (the 1/3 speedline). If the lower line is\nalso broken, prices will probably continue all the way to the beginning of the\nprior trend. In a downtrend, the breaking of the lower line indicates a probable\nrally to the higher line. If that is broken, a rally to the top of the prior trend\nwould be indicated.", - "type": "text" - }, - { - "block_id": "p98-b2", - "global_id": 753, - "bbox": [ - 72.0, - 288.62, - 505.53, - 385.84 - ], - "text": "As with all trendlines, speedlines reverse roles once they are broken.\nTherefore, during the correction of an uptrend, if the upper line (2/3 line) is\nbroken and prices fall to the 1/3 line and rally from there, that upper line\nbecomes a resistance barrier. Only when that upper line is broken would a\nsignal be given that the old highs will probably be challenged. The same\nprinciple holds true in downtrends.", - "type": "text" - }, - { - "block_id": "p98-b3", - "global_id": 754, - "bbox": [ - 72.0, - 429.79, - 521.93, - 633.58 - ], - "text": "GANN AND FIBONACCI FAN LINES\nCharting software also allows the drawing of Gann and Fibonacci fan lines.\nFibonacci fan lines are drawn in the same fashion as the speedline. Except\nthat Fibonacci lines are drawn at 38% and 62% angles. (We’ll explain where\nthose 38% and 62% numbers come from in Chapter 13, “Elliott Wave\nTheory.”) Gann lines (named after the legendary commodity trader, W.D.\nGann) are trendlines drawn from prominent tops or bottoms at specific\ngeometric angles. The most important Gann line is drawn at a 45 degree angle\nfrom a peak or trough. Steeper Gann lines can be drawn during an uptrend at\n63 3⁄ 4 degree and 75 degree angles. Flatter Gann lines can be drawn at 26 1⁄ 4\nand 15 degree lines. It’s possible to draw as many as nine different Gann\nlines.", - "type": "text" - }, - { - "block_id": "p98-b4", - "global_id": 755, - "bbox": [ - 72.0, - 635.74, - 520.02, - 732.96 - ], - "text": "Gann and Fibonacci lines are used in the same way as speedlines. They\nare supposed to provide support during downward corrections. When one line\nis broken, prices will usually fall to the next lower line. Gann lines are\nsomewhat controversial. Even if one of them works, you can’t be sure in\nadvance which one it will be. Some chartists question the validity of drawing\ngeometric trendlines at all.", - "type": "text" - } - ] - }, - { - "page_num": 99, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p99-b0", - "global_id": 756, - "bbox": [ - 72.0, - 74.02, - 523.2, - 210.83 - ], - "text": "INTERNAL TRENDLINES\nThese are variations of the trendline that don’t rely on extreme highs or lows.\nInstead, internal trendlines are drawn through the price action and connect as\nmany internal peaks or troughs as possible. Some chartists develop a good eye\nfor this type of trendline and find them useful. The problem with internal\ntrendlines is that their drawing is very subjective; whereas the rules for\ndrawing of more traditional trendlines along the extreme highs and lows are\nmore exact. (See Figure 4.21c.)", - "type": "text" - }, - { - "block_id": "p99-b1", - "global_id": 757, - "bbox": [ - 72.0, - 254.78, - 514.7, - 375.03 - ], - "text": "REVERSAL DAYS\nAnother important building block is the reversal day. This particular chart\nformation goes by many names—the top reversal day, the bottom reversal\nday, the buying or selling climax, and the key reversal day. By itself, this\nformation is not of major importance. But, taken in the context of other\ntechnical information, it can sometimes be significant. Let’s first define what\na reversal day is.", - "type": "text" - }, - { - "block_id": "p99-b2", - "global_id": 758, - "bbox": [ - 73.66, - 665.27, - 521.62, - 696.23 - ], - "text": "Figure 4.21c Internal trendlines are drawn through the price action\nconnecting as many highs and lows as possible. This internal trendline drawn", - "type": "text" - }, - { - "block_id": "p99-b3", - "global_id": 759, - "bbox": [ - 75.04, - 698.4, - 520.22, - 712.79 - ], - "text": "along the early 1996 highs provided support a year later during the spring of", - "type": "text" - }, - { - "block_id": "p99-b4", - "global_id": 760, - "bbox": [ - 281.45, - 714.96, - 313.83, - 729.36 - ], - "text": "1997.", - "type": "text" - }, - { - "block_id": "p99-b5", - "global_id": 761, - "bbox": [ - 100.79, - 745.93, - 491.03, - 760.33 - ], - "text": "A reversal day takes place either at a top or a bottom. The generally", - "type": "text" - } - ] - }, - { - "page_num": 100, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p100-b0", - "global_id": 762, - "bbox": [ - 72.0, - 73.53, - 519.86, - 170.5 - ], - "text": "accepted definition of a top reversal day is the setting of a new high in an\nuptrend, followed by a lower close on the same day. In other words, prices set\na new high for a given upmove at some point during the day (usually at or\nnear the opening) then weaken and actually close lower than the previous\nday’s closing. A bottom reversal day would be a new low during the day\nfollowed by a higher close.", - "type": "text" - }, - { - "block_id": "p100-b1", - "global_id": 763, - "bbox": [ - 72.0, - 172.67, - 517.2, - 286.45 - ], - "text": "The wider the range for the day and the heavier the volume, the more\nsignificant is the signal for a possible near term trend reversal. Figures 4.22a-\nb show what both would look like on a bar chart. Note the heavier volume on\nthe reversal day. Also notice that both the high and low on the reversal day\nexceed the range of the previous day, forming an outside day. While an\noutside day is not a requirement for a reversal day, it does carry more\nsignificance. (See Figure 4.22c.)", - "type": "text" - }, - { - "block_id": "p100-b2", - "global_id": 764, - "bbox": [ - 72.0, - 288.61, - 519.56, - 418.96 - ], - "text": "The bottom reversal day is sometimes referred to as a selling climax.\nThis is usually a dramatic turnaround at the bottom of a down move where all\nthe discouraged longs have finally been forced out of the market on heavy\nvolume. The subsequent absence of selling pressure creates a vacuum over\nthe market, which prices quickly rally to fill. The selling climax is one of the\nmore dramatic examples of the reversal day and, while it may not mark the\nfinal bottom of a falling market, it usually signals that a significant low has\nbeen seen.", - "type": "text" - }, - { - "block_id": "p100-b3", - "global_id": 765, - "bbox": [ - 81.23, - 636.46, - 514.05, - 650.92 - ], - "text": "Figure 4.22a Example of a top reversal day. The heavier the volume on the", - "type": "text" - }, - { - "block_id": "p100-b4", - "global_id": 766, - "bbox": [ - 98.53, - 653.02, - 496.74, - 667.42 - ], - "text": "reversal day and the wider the range, the more important it becomes.", - "type": "text" - } - ] - }, - { - "page_num": 101, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p101-b0", - "global_id": 767, - "bbox": [ - 72.86, - 274.21, - 522.42, - 288.67 - ], - "text": "Figure 4.22b Example of a bottom reversal day. If volume is especially heavy,", - "type": "text" - }, - { - "block_id": "p101-b1", - "global_id": 768, - "bbox": [ - 124.25, - 290.77, - 471.03, - 305.17 - ], - "text": "bottom reversals are often referred to as “selling climaxes.”", - "type": "text" - }, - { - "block_id": "p101-b2", - "global_id": 769, - "bbox": [ - 77.74, - 596.13, - 517.53, - 610.59 - ], - "text": "Figure 4.22c The chart action of October 28, 1997 was a classic example of", - "type": "text" - }, - { - "block_id": "p101-b3", - "global_id": 770, - "bbox": [ - 82.88, - 612.69, - 512.39, - 627.09 - ], - "text": "an upside reversal day or a “selling climax.” Prices opened sharply lower", - "type": "text" - }, - { - "block_id": "p101-b4", - "global_id": 771, - "bbox": [ - 75.28, - 629.26, - 520.01, - 660.22 - ], - "text": "and closed sharply higher. The unusually heavy volume bar for that day\nadded to its importance. Two less dramatic upside reversal days (see arrows)", - "type": "text" - }, - { - "block_id": "p101-b5", - "global_id": 772, - "bbox": [ - 219.3, - 662.39, - 375.98, - 676.79 - ], - "text": "also marked price bottoms.", - "type": "text" - }, - { - "block_id": "p101-b6", - "global_id": 773, - "bbox": [ - 72.0, - 700.47, - 215.55, - 711.27 - ], - "text": "Weekly and Monthly Reversals", - "type": "text" - }, - { - "block_id": "p101-b7", - "global_id": 774, - "bbox": [ - 72.0, - 719.28, - 518.79, - 766.81 - ], - "text": "This type of reversal pattern shows up on weekly and monthly bar charts, and\nwith much greater significance. On a weekly chart, each bar represents the\nentire week’s range with the close registered on Friday. An upside weekly", - "type": "text" - } - ] - }, - { - "page_num": 102, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p102-b0", - "global_id": 775, - "bbox": [ - 72.0, - 73.64, - 521.99, - 121.53 - ], - "text": "reversal, therefore, would occur when the market trades lower during the\nweek, makes a new low for the move, but on Friday closes above the previous\nFriday’s close.", - "type": "text" - }, - { - "block_id": "p102-b1", - "global_id": 776, - "bbox": [ - 72.0, - 122.98, - 506.8, - 187.07 - ], - "text": "Weekly reversals are much more significant than daily reversals for\nobvious reasons and are watched closely by chartists as signaling important\nturning points. By the same token, monthly reversals are even more\nimportant.", - "type": "text" - }, - { - "block_id": "p102-b2", - "global_id": 777, - "bbox": [ - 72.0, - 231.02, - 521.61, - 384.4 - ], - "text": "PRICE GAPS\nPrice gaps are simply areas on the bar chart where no trading has taken place.\nIn an uptrend, for example, prices open above the highest price of the\nprevious day, leaving a gap or open space on the chart that is not filled during\nthe day. In a downtrend, the day’s highest price is below the previous day’s\nlow. Upside gaps are signs of market strength, while downside gaps are\nusually signs of weakness. Gaps can appear on long term weekly and monthly\ncharts and, when they do, are usually very significant. But they are more\ncommonly seen on daily bar charts.", - "type": "text" - }, - { - "block_id": "p102-b3", - "global_id": 778, - "bbox": [ - 72.0, - 386.56, - 506.35, - 467.22 - ], - "text": "Several myths exist concerning the interpretation of gaps. One of the\nmaxims often heard is that “gaps are always filled.” This is simply not true.\nSome should be filled and others shouldn’t. We’ll also see that gaps have\ndifferent forecasting implications depending on which types they are and\nwhere they occur.", - "type": "text" - }, - { - "block_id": "p102-b4", - "global_id": 779, - "bbox": [ - 72.0, - 490.9, - 460.69, - 539.95 - ], - "text": "Three Types of Gaps\nThere are three general types of gaps—the breakaway, runaway (or\nmeasuring), and exhaustion gaps.", - "type": "text" - }, - { - "block_id": "p102-b5", - "global_id": 780, - "bbox": [ - 72.0, - 549.32, - 516.14, - 663.11 - ], - "text": "The Breakaway Gap. The breakaway gap usually occurs at the completion of\nan important price pattern, and usually signals the beginning of a significant\nmarket move. After a market has completed a major basing pattern, the\nbreaking of resistance often occurs on a breakaway gap. Major breakouts\nfrom topping or basing areas are breeding grounds for this type of gap. The\nbreaking of a major trendline, signaling a reversal of trend, might also see a\nbreakaway gap.", - "type": "text" - }, - { - "block_id": "p102-b6", - "global_id": 781, - "bbox": [ - 72.0, - 665.27, - 511.96, - 762.49 - ], - "text": "Breakaway gaps usually occur on heavy volume. More often than not,\nbreakaway gaps are not filled. Prices may return to the upper end of the gap\n(in the case of a bullish breakout), and may even close a portion of the gap,\nbut some portion of the gap is often left unfilled. As a rule, the heavier the\nvolume after such a gap appears, the less likely it is to be filled. Upside gaps\nusually act as support areas on subsequent market corrections. It’s important", - "type": "text" - } - ] - }, - { - "page_num": 103, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p103-b0", - "global_id": 782, - "bbox": [ - 72.0, - 73.17, - 521.15, - 104.25 - ], - "text": "that prices not fall below gaps during an uptrend. In all cases a close below an\nupward gap is a sign of weakness. (See Figures 4.23a and b.)", - "type": "text" - }, - { - "block_id": "p103-b1", - "global_id": 783, - "bbox": [ - 86.46, - 430.49, - 508.82, - 461.45 - ], - "text": "Figure 4.23a The three types of gaps. The breakaway gap signaled the\ncompletion of the basing pattern. The runaway gap occurred at about the", - "type": "text" - }, - { - "block_id": "p103-b2", - "global_id": 784, - "bbox": [ - 78.48, - 463.62, - 516.79, - 494.58 - ], - "text": "midway point (which is why it is also called the measuring gap). An\nexhaustion gap to the upside, followed within a week by a breakaway gap to", - "type": "text" - }, - { - "block_id": "p103-b3", - "global_id": 785, - "bbox": [ - 90.94, - 496.74, - 504.32, - 511.14 - ], - "text": "the downside, left an island reversal top. Notice that the breakaway and", - "type": "text" - }, - { - "block_id": "p103-b4", - "global_id": 786, - "bbox": [ - 101.47, - 513.31, - 493.81, - 527.71 - ], - "text": "runaway gaps were not filled on the way up, which is often the case.", - "type": "text" - }, - { - "block_id": "p103-b5", - "global_id": 787, - "bbox": [ - 72.0, - 544.28, - 522.72, - 691.19 - ], - "text": "The Runaway or Measuring Gap. After the move has been underway for\nawhile, somewhere around the middle of the move, prices will leap forward to\nform a second type of gap (or a series of gaps) called the runaway gap. This\ntype of gap reveals a situation where the market is moving effortlessly on\nmoderate volume. In an uptrend, it’s a sign of market strength; in a\ndowntrend, a sign of weakness. Here again, runaway gaps act as support\nunder the market on subsequent corrections and are often not filled. As in the\ncase of the breakaway, a close below the runaway gap is a negative sign in an\nuptrend.", - "type": "text" - } - ] - }, - { - "page_num": 104, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p104-b0", - "global_id": 788, - "bbox": [ - 83.12, - 347.67, - 512.15, - 362.13 - ], - "text": "Figure 4.23b The first box shows an “exhaustion” gap near the end of the", - "type": "text" - }, - { - "block_id": "p104-b1", - "global_id": 789, - "bbox": [ - 87.97, - 364.23, - 507.31, - 395.2 - ], - "text": "rally. Prices falling below that gap signaled a top. The second box is a\n“measuring” gap about halfway through the downtrend. The third box is", - "type": "text" - }, - { - "block_id": "p104-b2", - "global_id": 790, - "bbox": [ - 90.6, - 397.36, - 504.67, - 411.76 - ], - "text": "another “exhaustion” gap at the bottom. The move back above that gap", - "type": "text" - }, - { - "block_id": "p104-b3", - "global_id": 791, - "bbox": [ - 231.49, - 413.92, - 363.78, - 428.32 - ], - "text": "signaled higher prices.", - "type": "text" - }, - { - "block_id": "p104-b4", - "global_id": 792, - "bbox": [ - 72.0, - 444.89, - 510.73, - 525.55 - ], - "text": "This variety of gap is also called a measuring gap because it usually\noccurs at about the halfway point in a trend. By measuring the distance the\ntrend has already traveled, from the original trend signal or breakout, an\nestimate of the probable extent of the remaining move can be determined by\ndoubling the amount already achieved.", - "type": "text" - }, - { - "block_id": "p104-b5", - "global_id": 793, - "bbox": [ - 72.0, - 534.91, - 521.14, - 681.83 - ], - "text": "The Exhaustion Gap. The final type of gap appears near the end of a market\nmove. After all objectives have been achieved and the other two types of gaps\n(breakaway and runaway) have been identified, the analyst should begin to\nexpect the exhaustion gap. Near the end of an uptrend, prices leap forward in\na last gasp, so to speak. However, that upward leap quickly fades and prices\nturn lower within a couple of days or within a week. When prices close under\nthat last gap, it is usually a dead giveaway that the exhaustion gap has made\nits appearance. This is a classic example where falling below a gap in an\nuptrend has very bearish implications.", - "type": "text" - }, - { - "block_id": "p104-b6", - "global_id": 794, - "bbox": [ - 72.0, - 705.51, - 164.31, - 716.31 - ], - "text": "The Island Reversal", - "type": "text" - }, - { - "block_id": "p104-b7", - "global_id": 795, - "bbox": [ - 72.0, - 724.32, - 519.14, - 755.29 - ], - "text": "This takes us to the island reversal pattern. Sometimes after the upward\nexhaustion gap has formed, prices will trade in a narrow range for a couple of", - "type": "text" - } - ] - }, - { - "page_num": 105, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p105-b0", - "global_id": 796, - "bbox": [ - 72.0, - 73.64, - 509.11, - 187.79 - ], - "text": "days or a couple of weeks before gapping to the downside. Such a situation\nleaves the few days of price action looking like an “island” surrounded by\nspace or water. The exhaustion gap to the upside followed by a breakaway\ngap to the downside completes the island reversal pattern and usually\nindicates a trend reversal of some magnitude. Of course, the major\nsignificance of the reversal depends on where prices are in the general trend\nstructure. (See Figure 4.23c.)", - "type": "text" - }, - { - "block_id": "p105-b1", - "global_id": 797, - "bbox": [ - 72.38, - 477.3, - 522.9, - 508.26 - ], - "text": "Figure 4.23c The two gaps on this daily chart form an “island reversal” top.\nThe first box shows an up gap after a rally. The second box shows a down gap", - "type": "text" - }, - { - "block_id": "p105-b2", - "global_id": 798, - "bbox": [ - 75.46, - 510.43, - 519.8, - 524.83 - ], - "text": "three weeks later. That combination of gaps usually signals an important top.", - "type": "text" - }, - { - "block_id": "p105-b3", - "global_id": 799, - "bbox": [ - 72.0, - 568.78, - 513.18, - 689.03 - ], - "text": "CONCLUSION\nThis chapter introduced introductory technical tools that I consider to be the\nbuilding blocks of chart analysis—support and resistance, trendlines and\nchannels, percentage retracements, speed resistance lines, reversal days, and\ngaps. Every technical approach covered in later chapters uses these concepts\nand tools in one form or another. Armed with a better understanding of these\nconcepts, we’re now ready to begin a study of price patterns.", - "type": "text" - } - ] - }, - { - "page_num": 106, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p106-b0", - "global_id": 800, - "bbox": [ - 72.0, - 308.08, - 507.22, - 428.33 - ], - "text": "INTRODUCTION\nSo far we’ve touched on Dow Theory, which is the basis of most trend\nfollowing work being used today. We’ve examined the basic concepts of\ntrend, such as support, resistance, and trendlines. And we’ve introduced\nvolume and open interest. We’re now ready to take the next step, which is a\nstudy of chart patterns. You’ll quickly see that these patterns build on the\nprevious concepts.", - "type": "text" - }, - { - "block_id": "p106-b1", - "global_id": 801, - "bbox": [ - 72.0, - 430.49, - 517.76, - 527.71 - ], - "text": "In Chapter 4, the definition of a trend was given as a series of ascending\nor descending peaks and troughs. As long as they were ascending, the trend\nwas up; if they were descending, the trend was down. It was stressed,\nhowever, that markets also move sideways for a certain portion of the time. It\nis these periods of sideways market movement that will concern us most in\nthese next two chapters.", - "type": "text" - }, - { - "block_id": "p106-b2", - "global_id": 802, - "bbox": [ - 72.0, - 529.88, - 522.33, - 627.1 - ], - "text": "It would be a mistake to assume that most changes in trend are very\nabrupt affairs. The fact is that important changes in trend usually require a\nperiod of transition. The problem is that these periods of transition do not\nalways signal a trend reversal. Sometimes these sideways periods just indicate\na pause or consolidation in the existing trend after which the original trend is\nresumed.", - "type": "text" - }, - { - "block_id": "p106-b3", - "global_id": 803, - "bbox": [ - 72.0, - 671.05, - 514.71, - 758.17 - ], - "text": "PRICE PATTERNS\nThe study of these transition periods and their forecasting implications leads\nus to the question of price patterns. First of all, what are price patterns? Price\npatterns are pictures or formations, which appear on price charts of stocks or\ncommodities, that can be classified into different categories, and that have", - "type": "text" - } - ] - }, - { - "page_num": 107, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p107-b0", - "global_id": 804, - "bbox": [ - 72.0, - 73.53, - 167.88, - 87.93 - ], - "text": "predictive value.", - "type": "text" - }, - { - "block_id": "p107-b1", - "global_id": 805, - "bbox": [ - 72.0, - 131.63, - 519.55, - 292.21 - ], - "text": "TWO TYPES OF PATTERNS: REVERSAL AND\nCONTINUATION\nThere are two major categories of price patterns—reversal and continuation.\nAs these names imply, reversal patterns indicate that an important reversal in\ntrend is taking place. The continuation patterns, on the other hand, suggest\nthat the market is only pausing for awhile, possibly to correct a near term\noverbought or oversold condition, after which the existing trend will be\nresumed. The trick is to distinguish between the two types of patterns as early\nas possible during the formation of the pattern.", - "type": "text" - }, - { - "block_id": "p107-b2", - "global_id": 806, - "bbox": [ - 72.0, - 294.38, - 519.19, - 408.16 - ], - "text": "In this chapter, we’ll be examining the five most commonly used major\nreversal patterns: the head and shoulders, triple tops and bottoms, double tops\nand bottoms, spike (or V) tops and bottoms, and the rounding (or saucer)\npattern. We will examine the price formation itself, how it is formed on the\nchart, and how it can be identified. We will then look at the other important\nconsiderations—the accompanying volume pattern and measuring\nimplications.", - "type": "text" - }, - { - "block_id": "p107-b3", - "global_id": 807, - "bbox": [ - 72.0, - 410.32, - 513.94, - 474.42 - ], - "text": "Volume plays an important confirming role in all of these price patterns.\nIn times of doubt (and there are lots of those), a study of the volume pattern\naccompanying the price data can be the deciding factor as to whether or not\nthe pattern can be trusted.", - "type": "text" - }, - { - "block_id": "p107-b4", - "global_id": 808, - "bbox": [ - 72.0, - 476.58, - 517.18, - 540.68 - ], - "text": "Most price patterns also have certain measuring techniques that help the\nanalyst to determine minimum price objectives. While these objectives are\nonly an approximation of the size of the subsequent move, they are helpful in\nassisting the trader to determine his or her reward to risk ratio.", - "type": "text" - }, - { - "block_id": "p107-b5", - "global_id": 809, - "bbox": [ - 72.0, - 542.84, - 522.68, - 623.5 - ], - "text": "In Chapter 5, we’ll look at a second category of patterns—the\ncontinuation variety. There we will examine triangles, flags, pennants,\nwedges, and rectangles. These patterns usually reflect pauses in the existing\ntrend rather than trend reversals, and are usually classified as intermediate and\nminor as opposed to major.", - "type": "text" - }, - { - "block_id": "p107-b6", - "global_id": 810, - "bbox": [ - 72.0, - 647.18, - 513.11, - 712.8 - ], - "text": "Preliminary Points Common to All Reversal Patterns\nBefore beginning our discussion of the individual major reversal patterns,\nthere are a few preliminary points to be considered that are common to all of\nthese reversal patterns.", - "type": "text" - }, - { - "block_id": "p107-b7", - "global_id": 811, - "bbox": [ - 82.08, - 729.37, - 522.35, - 760.33 - ], - "text": "1. A prerequisite for any reversal pattern is the existence of a prior trend.\n2. The first signal of an impending trend reversal is often the breaking of an", - "type": "text" - } - ] - }, - { - "page_num": 108, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p108-b0", - "global_id": 812, - "bbox": [ - 82.08, - 73.17, - 506.58, - 170.5 - ], - "text": "important trendline.\n3. The larger the pattern, the greater the subsequent move.\n4. Topping patterns are usually shorter in duration and more volatile than\nbottoms.\n5. Bottoms usually have smaller price ranges and take longer to build.\n6. Volume is usually more important on the upside.", - "type": "text" - }, - { - "block_id": "p108-b1", - "global_id": 813, - "bbox": [ - 72.0, - 187.07, - 519.94, - 300.86 - ], - "text": "The Need for a Prior Trend. The existence of a prior major trend is an\nimportant prerequisite for any reversal pattern. A market must obviously have\nsomething to reverse. A formation occasionally appears on the charts,\nresembling one of the reversal patterns. If that pattern, however, has not been\npreceded by a trend, there is nothing to reverse and the pattern is suspect.\nKnowing where certain patterns are most apt to occur in the trend structure is\none of the key elements in pattern recognition.", - "type": "text" - }, - { - "block_id": "p108-b2", - "global_id": 814, - "bbox": [ - 72.0, - 303.02, - 521.56, - 416.8 - ], - "text": "A corollary to this point of having a prior trend to reverse is the matter of\nmeasuring implications. It was stated earlier that most of the measuring\ntechniques give only minimum price objectives. The maximum objective\nwould be the total extent of the prior move. If a major bull market has\noccurred and a major topping pattern is being formed, the maximum\nimplication for the potential move to the downside would be a 100%\nretracement of the bull market, or the point at which it all began.", - "type": "text" - }, - { - "block_id": "p108-b3", - "global_id": 815, - "bbox": [ - 72.0, - 433.37, - 517.94, - 563.72 - ], - "text": "The Breaking of Important Trendlines. The first sign of an impending trend\nreversal is often the breaking of an important trendline. Remember, however,\nthat the violation of a major trendline does not necessarily signal a trend\nreversal. What is being signaled is a change in trend. The breaking of a major\nup trendline might signal the beginning of a sideways price pattern, which\nlater would be identified as either the reversal or consolidation type.\nSometimes the breaking of the major trendline coincides with the completion\nof the price pattern.", - "type": "text" - }, - { - "block_id": "p108-b4", - "global_id": 816, - "bbox": [ - 72.0, - 565.88, - 520.13, - 679.67 - ], - "text": "The Larger the Pattern, the Greater the Potential. When we use the term\n“larger,” we are referring to the height and the width of the price pattern. The\nheight measures the volatility of the pattern. The width is the amount of time\nrequired to build and complete the pattern. The greater the size of the pattern\n—that is, the wider the price swings within the pattern (the volatility) and the\nlonger it takes to build—the more important the pattern becomes and the\ngreater the potential for the ensuing price move.", - "type": "text" - }, - { - "block_id": "p108-b5", - "global_id": 817, - "bbox": [ - 72.0, - 681.83, - 522.74, - 762.49 - ], - "text": "Virtually all of the measuring techniques in these two chapters are based\non the height of the pattern. This is the method applied primarily to bar charts,\nwhich use a vertical measuring criteria. The practice of measuring the\nhorizontal width of a price pattern usually is reserved for point and figure\ncharting. That method of charting uses a device known as the count, which", - "type": "text" - } - ] - }, - { - "page_num": 109, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p109-b0", - "global_id": 818, - "bbox": [ - 72.0, - 73.28, - 496.8, - 104.25 - ], - "text": "assumes a close relationship between the width of a top or bottom and the\nsubsequent price target.", - "type": "text" - }, - { - "block_id": "p109-b1", - "global_id": 819, - "bbox": [ - 72.0, - 106.41, - 520.13, - 303.02 - ], - "text": "Differences Between Tops and Bottoms. Topping patterns are usually\nshorter in duration and are more volatile than bottoms. Price swings within\nthe tops are wider and more violent. Tops usually take less time to form.\nBottoms usually have smaller price ranges, but take longer to build. For this\nreason it is usually easier and less costly to identify and trade bottoms than to\ncatch market tops. One consoling factor, which makes the more treacherous\ntopping patterns worthwhile, is that prices tend to decline faster than they go\nup. Therefore, the trader can usually make more money a lot faster by\ncatching the short side of a bear market than by trading the long side of a bull\nmarket. Everything in life is a tradeoff between reward and risk. The greater\nrisks are compensated for by greater rewards and vice versa. Topping patterns\nare harder to catch, but are worth the effort.", - "type": "text" - }, - { - "block_id": "p109-b2", - "global_id": 820, - "bbox": [ - 72.0, - 319.58, - 522.8, - 499.62 - ], - "text": "Volume is More Important on the Upside. Volume should generally increase in\nthe direction of the market trend and is an important confirming factor in the\ncompletion of all price patterns. The completion of each pattern should be\naccompanied by a noticeable increase in volume. However, in the early stages\nof a trend reversal, volume is not as important at market tops. Markets have a\nway of “falling of their own weight” once a bear move gets underway.\nChartists like to see an increase in trading activity as prices drop, but it is not\ncritical. At bottoms, however, the volume pickup is absolutely essential. If the\nvolume pattern does not show a significant increase during the upside price\nbreakout, the entire price pattern should be questioned. We will be taking a\nmore in-depth look at volume in Chapter 7.", - "type": "text" - }, - { - "block_id": "p109-b3", - "global_id": 821, - "bbox": [ - 72.0, - 543.58, - 521.46, - 671.03 - ], - "text": "THE HEAD AND SHOULDERS REVERSAL\nPATTERN\nLet’s take a close look now at what is probably the best known and most\nreliable of all major reversal patterns—the head and shoulders reversal. We’ll\nspend more time on this pattern because it is important and also to explain all\nthe nuances involved. Most of the other reversal patterns are just variations of\nthe head and shoulders and will not require as extensive a treatment.", - "type": "text" - }, - { - "block_id": "p109-b4", - "global_id": 822, - "bbox": [ - 72.0, - 673.19, - 517.2, - 770.41 - ], - "text": "This major reversal pattern, like all of the others, is just a further\nrefinement of the concepts of trend covered in Chapter 4. Picture a situation\nin a major uptrend, where a series of ascending peaks and troughs gradually\nbegin to lose momentum. The uptrend then levels off for awhile. During this\ntime the forces of supply and demand are in relative balance. Once this\ndistribution phase has been completed, support levels along the bottom of the", - "type": "text" - } - ] - }, - { - "page_num": 110, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p110-b0", - "global_id": 823, - "bbox": [ - 72.0, - 73.53, - 492.84, - 104.25 - ], - "text": "horizontal trading range are broken and a new downtrend has been\nestablished. That new downtrend now has descending peaks and troughs.", - "type": "text" - }, - { - "block_id": "p110-b1", - "global_id": 824, - "bbox": [ - 72.0, - 106.41, - 516.01, - 236.76 - ], - "text": "Let’s see how this scenario would look on a head and shoulders top.\n(See Figures 5.1a and b.) At point A, the uptrend is proceeding as expected\nwith no signs of a top. Volume expands on the price move into new highs,\nwhich is normal. The corrective dip to point B is on lighter volume, which is\nalso to be expected. At point C, however, the alert chartist might notice that\nthe volume on the upside breakout through point A is a bit lighter than on the\nprevious rally. This change is not in itself of major importance, but a little\nyellow caution light goes on in the back of the analyst’s head.", - "type": "text" - }, - { - "block_id": "p110-b2", - "global_id": 825, - "bbox": [ - 73.0, - 540.68, - 522.26, - 571.64 - ], - "text": "Figure 5.1a Example of a head and shoulders top. The left and right\nshoulders (A and E) are at about the same height. The head (C) is higher than", - "type": "text" - }, - { - "block_id": "p110-b3", - "global_id": 826, - "bbox": [ - 78.3, - 573.8, - 516.97, - 621.33 - ], - "text": "either shoulder. Notice the lighter volume on each peak. The pattern is\ncompleted on a close under the neckline (line 2). The minimum objective is\nthe vertical distance from the head to the neckline projected downward from", - "type": "text" - }, - { - "block_id": "p110-b4", - "global_id": 827, - "bbox": [ - 90.42, - 623.5, - 504.86, - 654.46 - ], - "text": "the breaking of the neckline. A return move will often occur back to the\nneckline, which should not recross the neckline once it has been broken.", - "type": "text" - } - ] - }, - { - "page_num": 111, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p111-b0", - "global_id": 828, - "bbox": [ - 74.92, - 348.39, - 520.34, - 362.85 - ], - "text": "Figure 5.1b A head and shoulders top. The three peaks show the head higher", - "type": "text" - }, - { - "block_id": "p111-b1", - "global_id": 829, - "bbox": [ - 95.14, - 364.95, - 500.12, - 379.35 - ], - "text": "than either shoulder. The return move (see arrow) back to the neckline", - "type": "text" - }, - { - "block_id": "p111-b2", - "global_id": 830, - "bbox": [ - 234.15, - 381.52, - 361.12, - 395.92 - ], - "text": "occurred on schedule.", - "type": "text" - }, - { - "block_id": "p111-b3", - "global_id": 831, - "bbox": [ - 72.0, - 412.49, - 515.19, - 509.71 - ], - "text": "Prices then begin to decline to point D and something even more\ndisturbing happens. The decline carries below the top of the previous peak at\npoint A. Remember that, in an uptrend, a penetrated peak should function as\nsupport on subsequent corrections. The decline well under point A, almost to\nthe previous reaction low at point B, is another warning that something may\nbe going wrong with the uptrend.", - "type": "text" - }, - { - "block_id": "p111-b4", - "global_id": 832, - "bbox": [ - 72.0, - 511.87, - 522.34, - 625.66 - ], - "text": "The market rallies again to point E, this time on even lighter volume, and\nisn’t able to reach the top of the previous peak at point C. (That last rally at\npoint E will often retrace one-half to two-thirds of the decline from points C\nto D.) To continue an uptrend, each high point must exceed the high point of\nthe rally preceding it. The failure of the rally at point E to reach the previous\npeak at point C fulfills half of the requirement for a new downtrend—namely,\ndescending peaks.", - "type": "text" - }, - { - "block_id": "p111-b5", - "global_id": 833, - "bbox": [ - 72.0, - 627.82, - 521.58, - 708.48 - ], - "text": "By this time, the major up trendline (line 1) has already been broken,\nusually at point D, constituting another danger signal. But, despite all of these\nwarnings, all that we know at this point is that the trend has shifted from up to\nsideways. This might be sufficient cause to liquidate long positions, but not\nnecessarily enough to justify new short sales.", - "type": "text" - }, - { - "block_id": "p111-b6", - "global_id": 834, - "bbox": [ - 72.0, - 732.16, - 312.38, - 742.96 - ], - "text": "The Breaking of the Neckline Completes the Pattern", - "type": "text" - }, - { - "block_id": "p111-b7", - "global_id": 835, - "bbox": [ - 72.0, - 750.97, - 515.91, - 765.37 - ], - "text": "By this time, a flatter trendline can be drawn under the last two reaction lows", - "type": "text" - } - ] - }, - { - "page_num": 112, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p112-b0", - "global_id": 836, - "bbox": [ - 72.0, - 73.64, - 519.19, - 254.04 - ], - "text": "(points B and D), which is called a neckline (see line 2). This line generally\nhas a slight upward slope at tops (although it’s sometimes horizontal and, less\noften, tilts downward). The deciding factor in the resolution of the head and\nshoulders top is a decisive closing violation of that neckline. The market has\nnow violated the trendline along the bottom of points B and D, has broken\nunder support at point D, and has completed the requirement for a new\ndowntrend—descending peaks and troughs. The new downtrend is now\nidentified by the declining highs and lows at points C, D, E, and F. Volume\nshould increase on the breaking of the neckline. A sharp increase in downside\nvolume, however, is not critically important in the initial stages of a market\ntop.", - "type": "text" - }, - { - "block_id": "p112-b1", - "global_id": 837, - "bbox": [ - 72.0, - 277.0, - 154.11, - 287.8 - ], - "text": "The Return Move", - "type": "text" - }, - { - "block_id": "p112-b2", - "global_id": 838, - "bbox": [ - 72.0, - 295.81, - 509.48, - 475.86 - ], - "text": "Usually a return move develops which is a bounce back to the bottom of the\nneckline or to the previous reaction low at point D (see point G), both of\nwhich have now become overhead resistance. The return move does not\nalways occur or is sometimes only a very minor bounce. Volume may help\ndetermine the size of the bounce. If the initial breaking of the neckline is on\nvery heavy trading, the odds for a return move are diminished because the\nincreased activity reflects greater downside pressure. Lighter volume on the\ninitial break of the neckline increases the likelihood of a return move. That\nbounce, however, should be on light volume and the subsequent resumption\nof the new downtrend should be accompanied by noticeably heavier trading\nactivity.", - "type": "text" - }, - { - "block_id": "p112-b3", - "global_id": 839, - "bbox": [ - 72.0, - 499.54, - 435.23, - 532.03 - ], - "text": "Summary\nLet’s review the basic ingredients for a head and shoulders top.", - "type": "text" - }, - { - "block_id": "p112-b4", - "global_id": 840, - "bbox": [ - 82.08, - 548.6, - 519.56, - 712.08 - ], - "text": "1. A prior uptrend.\n2. A left shoulder on heavier volume (point A) followed by a corrective dip\nto point B.\n3. A rally into new highs but on lighter volume (point C).\n4. A decline that moves below the previous peak (at A) and approaches the\nprevious reaction low (point D).\n5. A third rally (point E) on noticeably light volume that fails to reach the\ntop of the head (at point C).\n6. A close below the neckline.\n7. A return move back to the neckline (point G) followed by new lows.", - "type": "text" - }, - { - "block_id": "p112-b5", - "global_id": 841, - "bbox": [ - 72.0, - 728.65, - 517.57, - 759.61 - ], - "text": "What has become evident is three well defined peaks. The middle peak\n(the head) is slightly higher than either of the two shoulders (points A and E).", - "type": "text" - } - ] - }, - { - "page_num": 113, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p113-b0", - "global_id": 842, - "bbox": [ - 72.0, - 73.28, - 511.37, - 187.07 - ], - "text": "The pattern, however, is not complete until the neckline is decisively broken\non a closing basis. Here again, the 1-3% penetration criterion (or some\nvariation thereof) or the requirement of two successive closes below the\nneckline (the two day rule) can be used for added confirmation. Until that\ndownside violation takes place, however, there is always the possibility that\nthe pattern is not really a head and shoulders top and that the uptrend may\nresume at some point.", - "type": "text" - }, - { - "block_id": "p113-b1", - "global_id": 843, - "bbox": [ - 72.0, - 231.02, - 522.75, - 400.96 - ], - "text": "THE IMPORTANCE OF VOLUME\nThe accompanying volume pattern plays an important role in the development\nof the head and shoulders top as it does in all price patterns. As a general rule,\nthe second peak (the head) should take place on lighter volume than the left\nshoulder. This is not a requirement, but a strong tendency and an early\nwarning of diminishing buying pressure. The most important volume signal\ntakes place during the third peak (the right shoulder). Volume should be\nnoticeably lighter than on the previous two peaks. Volume should then expand\non the breaking of the neckline, decline during the return move, and then\nexpand again once the return move is over.", - "type": "text" - }, - { - "block_id": "p113-b2", - "global_id": 844, - "bbox": [ - 72.0, - 403.13, - 512.11, - 483.78 - ], - "text": "As mentioned earlier, volume is less critical during the completion of\nmarket tops. But, at some point, volume should begin to increase if the new\ndowntrend is to be continued. Volume plays a much more decisive role at\nmarket bottoms, a subject to be discussed shortly. Before doing so, however,\nlet’s discuss the measuring implications of the head and shoulders pattern.", - "type": "text" - }, - { - "block_id": "p113-b3", - "global_id": 845, - "bbox": [ - 72.0, - 527.01, - 522.85, - 680.39 - ], - "text": "FINDING A PRICE OBJECTIVE\nThe method of arriving at a price objective is based on the height of the\npattern. Take the vertical distance from the head (point C) to the neckline.\nThen project that distance from the point where the neckline is broken.\nAssume, for example, that the top of the head is at 100 and the neckline is at\n80. The vertical distance, therefore, would be the difference, which is 20. That\n20 points would be measured downward from the level at which the neckline\nis broken. If the neckline in Figure 5.1a is at 82 when broken, a downside\nobjective would be projected to the 62 level (82 – 20=62).", - "type": "text" - }, - { - "block_id": "p113-b4", - "global_id": 846, - "bbox": [ - 72.0, - 682.55, - 521.92, - 763.21 - ], - "text": "Another technique that accomplishes about the same task, but is a bit\neasier, is to simply measure the length of the first wave of the decline (points\nC to D) and then double it. In either case, the greater the height or volatility of\nthe pattern, the greater the objective. Chapter 4 stated that the measurement\ntaken from a trendline penetration was similar to that used in the head and", - "type": "text" - } - ] - }, - { - "page_num": 114, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p114-b0", - "global_id": 847, - "bbox": [ - 72.0, - 73.06, - 520.73, - 170.5 - ], - "text": "shoulders pattern. You should be able to see that now. Prices travel roughly\nthe same distance below the broken neckline as they do above it. You’ll see\nthroughout our entire study of price patterns that most price targets on bar\ncharts are based on the height or volatility of the various patterns. The theme\nof measuring the height of the pattern and then projecting that distance from a\nbreakout point will be constantly repeated.", - "type": "text" - }, - { - "block_id": "p114-b1", - "global_id": 848, - "bbox": [ - 72.0, - 172.66, - 521.52, - 336.14 - ], - "text": "It’s important to remember that the objective arrived at is only a\nminimum target. Prices will often move well beyond the objective. Having a\nminimum target to work with, however, is very helpful in determining\nbeforehand whether there is enough potential in a market move to warrant\ntaking a position. If the market exceeds the price objective, that’s just icing on\nthe cake. The maximum objective is the size of the prior move. If the previous\nbull market went from 30 to 100, then the maximum downside objective from\na topping pattern would be a complete retracement of the entire upmove all\nthe way down to 30. Reversal patterns can only be expected to reverse or\nretrace what has gone before them.", - "type": "text" - }, - { - "block_id": "p114-b2", - "global_id": 849, - "bbox": [ - 72.0, - 359.82, - 195.41, - 370.62 - ], - "text": "Adjusting Price Objectives", - "type": "text" - }, - { - "block_id": "p114-b3", - "global_id": 850, - "bbox": [ - 72.0, - 378.64, - 523.12, - 558.68 - ], - "text": "A number of other factors should be considered while trying to arrive at a\nprice objective. The measuring techniques from price patterns, such as the one\njust mentioned for the head and shoulders top, are only the first step. There\nare other technical factors to take into consideration. For example, where are\nthe prominent support levels left by the reaction lows during the previous bull\nmove? Bear markets often pause at these levels. What about percentage\nretracements? The maximum objective would be a 100% retracement of the\nprevious bull market. But where are the 50% and 66% retracement levels?\nThose levels often provide significant support under the market. What about\nany prominent gaps underneath? They often function as support areas. Are\nthere any long term trendlines visible below the market?", - "type": "text" - }, - { - "block_id": "p114-b4", - "global_id": 851, - "bbox": [ - 72.0, - 560.84, - 521.64, - 740.88 - ], - "text": "The technician must consider other technical data in trying to pinpoint\nprice targets taken from price patterns. If a downside price measurement, for\nexample, projects a target to 30, and there is a prominent support level at 32,\nthen the chartist would be wise to adjust the downside measurement to 32\ninstead of 30. As a general rule, when a slight discrepancy exists between a\nprojected price target and a clearcut support or resistance level, it’s usually\nsafe to adjust the price target to that support or resistance level. It is often\nnecessary to adjust the measured targets from price patterns to take into\naccount additional technical information. The analyst has many different tools\nat his or her disposal. The most skillful technical analysts are those who learn\nto blend all of those tools together properly.", - "type": "text" - } - ] - }, - { - "page_num": 115, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p115-b0", - "global_id": 852, - "bbox": [ - 72.0, - 74.02, - 513.98, - 227.4 - ], - "text": "THE INVERSE HEAD AND SHOULDERS\nThe head and shoulders bottom, or the inverse head and shoulders as it is\nsometimes called, is pretty much a mirror image of the topping pattern. As\nFigure 5.2a shows, there are three distinct bottoms with the head (middle\ntrough) a bit lower than either of the two shoulders. A decisive close through\nthe neckline is also necessary to complete the pattern, and the measuring\ntechnique is the same. One slight difference at the bottom is the greater\ntendency for the return move back to the neckline to occur after the bullish\nbreakout. (See Figure 5.2b.)", - "type": "text" - }, - { - "block_id": "p115-b1", - "global_id": 853, - "bbox": [ - 72.35, - 480.18, - 522.94, - 494.64 - ], - "text": "Figure 5.2a Example of an inverse head and shoulders. The bottom version of", - "type": "text" - }, - { - "block_id": "p115-b2", - "global_id": 854, - "bbox": [ - 75.36, - 496.74, - 519.92, - 511.14 - ], - "text": "this pattern is a mirror image of the top. The only significant difference is the", - "type": "text" - }, - { - "block_id": "p115-b3", - "global_id": 855, - "bbox": [ - 88.28, - 513.31, - 506.98, - 544.27 - ], - "text": "volume pattern in the second half of the pattern. The rally from the head\nshould see heavier volume, and the breaking of the neckline should see a", - "type": "text" - }, - { - "block_id": "p115-b4", - "global_id": 856, - "bbox": [ - 96.95, - 546.44, - 498.32, - 560.84 - ], - "text": "burst of trading activity. The return move back to the neckline is more", - "type": "text" - }, - { - "block_id": "p115-b5", - "global_id": 857, - "bbox": [ - 239.47, - 563.0, - 355.79, - 577.4 - ], - "text": "common at bottoms.", - "type": "text" - }, - { - "block_id": "p115-b6", - "global_id": 858, - "bbox": [ - 72.0, - 593.97, - 522.89, - 707.76 - ], - "text": "The most important difference between the top and bottom patterns is the\nvolume sequence. Volume plays a much more critical role in the identification\nand completion of a head and shoulders bottom. This point is generally true of\nall bottom patterns. It was stated earlier that markets have a tendency to “fall\nof their own weight.” At bottoms, however, markets require a significant\nincrease in buying pressure, reflected in greater volume, to launch a new bull\nmarket.", - "type": "text" - } - ] - }, - { - "page_num": 116, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p116-b0", - "global_id": 859, - "bbox": [ - 77.34, - 345.51, - 517.93, - 376.47 - ], - "text": "Figure 5.2b A head and shoulders bottom. The neckline has a slight\ndownward slant, which is normally the case. The pullback after the breakout", - "type": "text" - }, - { - "block_id": "p116-b1", - "global_id": 860, - "bbox": [ - 103.61, - 378.64, - 491.66, - 393.03 - ], - "text": "(see arrow) nicked the neckline a bit, but then resumed the uptrend.", - "type": "text" - }, - { - "block_id": "p116-b2", - "global_id": 861, - "bbox": [ - 72.0, - 409.61, - 516.72, - 490.26 - ], - "text": "A more technical way of looking at this difference is that a market can\nfall just from inertia. Lack of demand or buying interest on the part of traders\nis often enough to push a market lower; but a market does not go up on\ninertia. Prices only rise when demand exceeds supply and buyers are more\naggressive than sellers.", - "type": "text" - }, - { - "block_id": "p116-b3", - "global_id": 862, - "bbox": [ - 72.0, - 492.43, - 522.33, - 622.78 - ], - "text": "The volume pattern at the bottom is very similar to that at the top for the\nfirst half of the pattern. That is, the volume at the head is a bit lighter than that\nat the left shoulder. The rally from the head, however, should begin to show\nnot only an increase in trading activity, but the level of volume often exceeds\nthat registered on the rally from the left shoulder. The dip to the right shoulder\nshould be on very light volume. The critical point occurs at the rally through\nthe neckline. This signal must be accompanied by a sharp burst of trading\nvolume if the breakout is for real.", - "type": "text" - }, - { - "block_id": "p116-b4", - "global_id": 863, - "bbox": [ - 72.0, - 624.94, - 515.98, - 722.16 - ], - "text": "This point is where the bottom differs the most from the top. At the\nbottom, heavy volume is an absolutely essential ingredient in the completion\nof the basing pattern. The return move is more common at bottoms than at\ntops and should occur on light volume. Following that, the new uptrend\nshould resume on heavier volume. The measuring technique is the same as at\nthe top.", - "type": "text" - }, - { - "block_id": "p116-b5", - "global_id": 864, - "bbox": [ - 72.0, - 745.84, - 189.44, - 756.64 - ], - "text": "The Slope of the Neckline", - "type": "text" - } - ] - }, - { - "page_num": 117, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p117-b0", - "global_id": 865, - "bbox": [ - 72.0, - 73.28, - 522.36, - 236.76 - ], - "text": "The neckline at the top usually slopes slightly upward. Sometimes, however,\nit is horizontal. In either case, it doesn’t make too much of a difference. Once\nin a while, however, a top neckline slopes downward. This slope is a sign of\nmarket weakness and is usually accompanied by a weak right shoulder.\nHowever, this is a mixed blessing. The analyst waiting for the breaking of the\nneckline to initiate a short position has to wait a bit longer, because the signal\nfrom the down sloping neckline occurs much later and only after much of the\nmove has already taken place. For basing patterns, most necklines have a\nslight downward tilt. A rising neckline is a sign of greater market strength, but\nwith the same drawback of giving a later signal.", - "type": "text" - }, - { - "block_id": "p117-b1", - "global_id": 866, - "bbox": [ - 72.0, - 280.71, - 519.61, - 441.29 - ], - "text": "COMPLEX HEAD AND SHOULDERS\nPATTERNS\nA variation of the head and shoulders pattern sometimes occurs which is\ncalled the complex head and shoulders pattern. These are patterns where two\nheads may appear or a double left and right shoulder. These patterns are not\nthat common, but have the same forecasting implications. A helpful hint in\nthis regard is the strong tendency toward symmetry in the head and shoulders\npattern. This means that a single left shoulder usually indicates a single right\nshoulder. A double left shoulder increases the odds of a double right shoulder.", - "type": "text" - }, - { - "block_id": "p117-b2", - "global_id": 867, - "bbox": [ - 72.0, - 464.97, - 516.76, - 580.28 - ], - "text": "Tactics\nMarket tactics play an important role in all trading. Not all technical traders\nlike to wait for the breaking of the neckline before initiating a new position.\nAs Figure 5.3 shows, more aggressive traders, believing that they have\ncorrectly identified a head and shoulders bottom, will begin to probe the long\nside during the formation of the right shoulder. Or they will buy the first\ntechnical signal that the decline into the right shoulder has ended.", - "type": "text" - }, - { - "block_id": "p117-b3", - "global_id": 868, - "bbox": [ - 72.0, - 582.45, - 522.78, - 745.93 - ], - "text": "Some will measure the distance of the rally from the bottom of the head\n(points C to D) and then buy a 50% or 66% retracement of that rally. Still\nothers would draw a tight down trendline along the decline from points D to E\nand buy the first upside break of that trendline. Because these patterns are\nreasonably symmetrical, some will buy into the right shoulder as it\napproaches the same level as the bottom of the left shoulder. A lot of\nanticipatory buying takes place during the formation of the right shoulder. If\nthe initial long probe proves to be profitable, additional positions can be\nadded on the actual penetration of the neckline or on the return move back to\nthe neckline after the breakout.", - "type": "text" - } - ] - }, - { - "page_num": 118, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p118-b0", - "global_id": 869, - "bbox": [ - 72.0, - 73.19, - 257.48, - 83.99 - ], - "text": "The Failed Head And Shoulders Pattern", - "type": "text" - }, - { - "block_id": "p118-b1", - "global_id": 870, - "bbox": [ - 72.0, - 92.01, - 520.37, - 222.36 - ], - "text": "Once prices have moved through the neckline and completed a head and\nshoulders pattern, prices should not recross the neckline again. At a top, once\nthe neckline has been broken on the downside, any decisive close back above\nthe neckline is a serious warning that the initial breakdown was probably a\nbad signal, and creates what is often called, for obvious reasons, a failed head\nand shoulders. This type of pattern starts out looking like a classic head and\nshoulders reversal, but at some point in its development (either prior to the\nbreaking of the neckline or just after it), prices resume their original trend.", - "type": "text" - }, - { - "block_id": "p118-b2", - "global_id": 871, - "bbox": [ - 78.4, - 462.9, - 516.88, - 493.86 - ], - "text": "Figure 5.3 Tactics for a head and shoulders bottom. Many technical traders\nwill begin to initiate long positions while the right shoulder (E) is still being", - "type": "text" - }, - { - "block_id": "p118-b3", - "global_id": 872, - "bbox": [ - 78.56, - 496.02, - 516.73, - 543.55 - ], - "text": "formed. One-half to two-thirds pullback of the rally from points C to D, a\ndecline to the same level as the left shoulder at point A, or the breaking of a\nshort term down trendline (line 1) all provide early opportunities for market", - "type": "text" - }, - { - "block_id": "p118-b4", - "global_id": 873, - "bbox": [ - 87.15, - 545.72, - 508.13, - 560.12 - ], - "text": "entry. More positions can be added on the breaking of the neckline or the", - "type": "text" - }, - { - "block_id": "p118-b5", - "global_id": 874, - "bbox": [ - 202.0, - 562.28, - 393.27, - 576.68 - ], - "text": "return move back to the neckline.", - "type": "text" - }, - { - "block_id": "p118-b6", - "global_id": 875, - "bbox": [ - 72.0, - 593.25, - 521.14, - 756.73 - ], - "text": "There are two important lessons here. The first is that none of these chart\npatterns are infallible. They work most of the time, but not always. The\nsecond lesson is that technical traders must always be on the alert for chart\nsigns that their analysis is incorrect. One of the keys to survival in the\nfinancial markets is to keep trading losses small and to exit a losing trade as\nquickly as possible. One of the greatest advantages of chart analysis is its\nability to quickly alert the trader to the fact that he or she is on the wrong side\nof the market. The ability and willingness to quickly recognize trading errors\nand to take defensive action immediately are qualities not to be taken lightly\nin the financial markets.", - "type": "text" - } - ] - }, - { - "page_num": 119, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p119-b0", - "global_id": 876, - "bbox": [ - 72.0, - 73.19, - 313.23, - 83.99 - ], - "text": "The Head And Shoulders as a Consolidation Pattern", - "type": "text" - }, - { - "block_id": "p119-b1", - "global_id": 877, - "bbox": [ - 72.0, - 92.01, - 520.31, - 205.79 - ], - "text": "Before moving on to the next price pattern, there’s one final point to be made\non the head and shoulders. We started this discussion by listing it as the best\nknown and most reliable of the major reversal patterns. You should be\nwarned, however, that this formation can, on occasion, act as a consolidation\nrather than a reversal pattern. When this does happen, it’s the exception rather\nthan the rule. We’ll talk more about this in Chapter 6, “Continuation\nPatterns.”", - "type": "text" - }, - { - "block_id": "p119-b2", - "global_id": 878, - "bbox": [ - 72.0, - 249.02, - 521.63, - 402.4 - ], - "text": "TRIPLE TOPS AND BOTTOMS\nMost of the points covered in the treatment of the head and shoulders pattern\nare also applicable to other types of reversal patterns. (See Figures 5.4a-c.)\nThe triple top or bottom, which is much rarer in occurrence, is just a slight\nvariation of that pattern. The main difference is that the three peaks or troughs\nin the triple top or bottom are at about the same level. (See Figure 5.4a.)\nChartists often disagree as to whether a reversal pattern is a head and\nshoulders or a triple top. The argument is academic, because both patterns\nimply the exact same thing.", - "type": "text" - }, - { - "block_id": "p119-b3", - "global_id": 879, - "bbox": [ - 72.0, - 404.57, - 522.66, - 518.35 - ], - "text": "The volume tends to decline with each successive peak at the top and\nshould increase at the breakdown point. The triple top is not complete until\nsupport levels along both of the intervening lows have been broken.\nConversely, prices must close through the two intervening peaks at the bottom\nto complete a triple bottom. (As an alternate strategy, the breaking of the\nnearest peak or trough can also be used as a reversal signal.) Heavy upside\nvolume on the completion of the bottom is also essential.", - "type": "text" - } - ] - }, - { - "page_num": 120, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p120-b0", - "global_id": 880, - "bbox": [ - 74.51, - 73.28, - 520.77, - 104.24 - ], - "text": "Figure 5.4a A triple top. Similar to the head and shoulders except that all\npeaks are at the same level. Each rally peak should be on lighter volume. The", - "type": "text" - }, - { - "block_id": "p120-b1", - "global_id": 881, - "bbox": [ - 78.35, - 106.41, - 516.92, - 120.81 - ], - "text": "pattern is complete when both troughs have been broken on heavier volume.", - "type": "text" - }, - { - "block_id": "p120-b2", - "global_id": 882, - "bbox": [ - 86.74, - 122.97, - 508.53, - 137.37 - ], - "text": "The measuring technique is the height of the pattern projected downward", - "type": "text" - }, - { - "block_id": "p120-b3", - "global_id": 883, - "bbox": [ - 94.4, - 139.54, - 500.87, - 153.94 - ], - "text": "from the breakdown point. Return moves back to the lower line are not", - "type": "text" - }, - { - "block_id": "p120-b4", - "global_id": 884, - "bbox": [ - 273.04, - 156.1, - 322.22, - 170.5 - ], - "text": "unusual.", - "type": "text" - }, - { - "block_id": "p120-b5", - "global_id": 885, - "bbox": [ - 74.85, - 409.6, - 520.43, - 440.57 - ], - "text": "Figure 5.4b A triple bottom. Similar to a head and shoulders bottom except\nthat each low is at the same level. A mirror image of the triple top except that", - "type": "text" - }, - { - "block_id": "p120-b6", - "global_id": 886, - "bbox": [ - 154.68, - 442.73, - 440.6, - 457.13 - ], - "text": "volume is more important on the upside breakout.", - "type": "text" - }, - { - "block_id": "p120-b7", - "global_id": 887, - "bbox": [ - 90.74, - 748.09, - 504.54, - 762.55 - ], - "text": "Figure 5.4c A triple bottom reversal pattern. Prices found support just", - "type": "text" - } - ] - }, - { - "page_num": 121, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p121-b0", - "global_id": 888, - "bbox": [ - 77.5, - 73.28, - 517.77, - 104.24 - ], - "text": "below 12 three times on this chart before launching a major advance. The\nbottom formation on this weekly chart lasted two full years, thereby giving it", - "type": "text" - }, - { - "block_id": "p121-b1", - "global_id": 889, - "bbox": [ - 242.08, - 106.41, - 353.18, - 120.81 - ], - "text": "major significance.", - "type": "text" - }, - { - "block_id": "p121-b2", - "global_id": 890, - "bbox": [ - 72.0, - 137.38, - 518.34, - 234.6 - ], - "text": "The measuring implication is also similar to the head and shoulders, and\nis based on the height of the pattern. Prices will usually move a minimum\ndistance from the breakout point at least equal to the height of the pattern.\nOnce the breakout occurs, a return move to the breakout point is not unusual.\nBecause the triple top or bottom represents only a minor variation of the head\nand shoulders pattern, we won’t say much more about it here.", - "type": "text" - }, - { - "block_id": "p121-b3", - "global_id": 891, - "bbox": [ - 72.0, - 278.55, - 522.31, - 415.36 - ], - "text": "DOUBLE TOPS AND BOTTOMS\nA much more common reversal pattern is the double top or bottom. Next to\nthe head and shoulders, it is the most frequently seen and the most easily\nrecognized. (See Figures 5.5a-e.) Figures 5.5a and 5.5b show both the top and\nbottom variety. For obvious reasons, the top is often referred to as an “M” and\nthe bottom as a “W.” The general characteristics of a double top are similar to\nthat of the head and shoulders and triple top except that only two peaks\nappear instead of three. The volume pattern is similar as is the measuring rule.", - "type": "text" - }, - { - "block_id": "p121-b4", - "global_id": 892, - "bbox": [ - 72.68, - 616.29, - 522.6, - 630.76 - ], - "text": "Figure 5.5a Example of a double top. This pattern has two peaks (A and C) at", - "type": "text" - }, - { - "block_id": "p121-b5", - "global_id": 893, - "bbox": [ - 73.7, - 632.86, - 521.58, - 647.26 - ], - "text": "about the same level. The pattern is complete when the middle trough at point", - "type": "text" - }, - { - "block_id": "p121-b6", - "global_id": 894, - "bbox": [ - 76.49, - 649.42, - 518.78, - 680.39 - ], - "text": "B is broken on a closing basis. Volume is usually lighter on the second peak\n(C) and picks up on the breakdown (D). A return move back to the lower line", - "type": "text" - }, - { - "block_id": "p121-b7", - "global_id": 895, - "bbox": [ - 97.45, - 682.55, - 497.82, - 696.95 - ], - "text": "is not unusual. The minimum measuring target is the height of the top", - "type": "text" - }, - { - "block_id": "p121-b8", - "global_id": 896, - "bbox": [ - 161.19, - 699.12, - 434.07, - 713.51 - ], - "text": "projected downward from the breakdown point.", - "type": "text" - } - ] - }, - { - "page_num": 122, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p122-b0", - "global_id": 897, - "bbox": [ - 79.54, - 269.17, - 515.73, - 300.13 - ], - "text": "Figure 5.5b Example of a double bottom. A mirror image of the double top.\nVolume is more important on the upside breakout. Return moves back to the", - "type": "text" - }, - { - "block_id": "p122-b1", - "global_id": 898, - "bbox": [ - 168.32, - 302.3, - 426.94, - 316.7 - ], - "text": "breakout point are more common at bottoms.", - "type": "text" - }, - { - "block_id": "p122-b2", - "global_id": 899, - "bbox": [ - 78.36, - 607.65, - 516.91, - 622.12 - ], - "text": "Figure 5.5c Example of a double bottom. This stock bounced sharply off the", - "type": "text" - }, - { - "block_id": "p122-b3", - "global_id": 900, - "bbox": [ - 79.08, - 624.22, - 516.18, - 655.18 - ], - "text": "68 level twice over a span of three months. Note that the second bottom was\nalso an upside reversal day. The breaking of resistance at 80 completed the", - "type": "text" - }, - { - "block_id": "p122-b4", - "global_id": 901, - "bbox": [ - 275.85, - 657.34, - 319.42, - 671.74 - ], - "text": "bottom.", - "type": "text" - }, - { - "block_id": "p122-b5", - "global_id": 902, - "bbox": [ - 72.0, - 688.32, - 502.6, - 768.97 - ], - "text": "In an uptrend (as shown in Figure 5.5a), the market sets a new high at\npoint A, usually on increased volume, and then declines to point B on\ndeclining volume. So far, everything is proceeding as expected in a normal\nuptrend. The next rally to point C, however, is unable to penetrate the\nprevious peak at A on a closing basis and begins to fall back again. A", - "type": "text" - } - ] - }, - { - "page_num": 123, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p123-b0", - "global_id": 903, - "bbox": [ - 72.0, - 73.28, - 515.57, - 153.94 - ], - "text": "potential double top has been set up. I use the word “potential” because, as is\nthe case with all reversal patterns, the reversal is not complete until the\nprevious support point at B is violated on a closing basis. Until that happens,\nprices could be in just a sideways consolidation phase, preparing for a\nresumption of the original uptrend.", - "type": "text" - }, - { - "block_id": "p123-b1", - "global_id": 904, - "bbox": [ - 86.16, - 446.33, - 509.13, - 460.8 - ], - "text": "Figure 5.5d Example of a double top. Sometimes the second peak doesn’t", - "type": "text" - }, - { - "block_id": "p123-b2", - "global_id": 905, - "bbox": [ - 75.87, - 462.9, - 519.41, - 493.86 - ], - "text": "quite reach the first peak as in this example. This two month double top\nsignaled a major decline. The actual signal was the breaking of support near", - "type": "text" - }, - { - "block_id": "p123-b3", - "global_id": 906, - "bbox": [ - 260.67, - 496.02, - 334.6, - 510.42 - ], - "text": "46 (see box).", - "type": "text" - }, - { - "block_id": "p123-b4", - "global_id": 907, - "bbox": [ - 72.0, - 527.0, - 520.34, - 624.22 - ], - "text": "The ideal top has two prominent peaks at about the same price level.\nVolume tends to be heavier during the first peak and lighter on the second. A\ndecisive close under the middle trough at point B on heavier volume\ncompletes the pattern and signals a reversal of trend to the downside. A return\nmove to the breakout point is not unusual prior to resumption of the\ndowntrend.", - "type": "text" - }, - { - "block_id": "p123-b5", - "global_id": 908, - "bbox": [ - 72.0, - 647.9, - 261.31, - 658.7 - ], - "text": "Measuring Technique for the Double Top", - "type": "text" - }, - { - "block_id": "p123-b6", - "global_id": 909, - "bbox": [ - 72.0, - 666.71, - 513.95, - 747.37 - ], - "text": "The measuring technique for the double top is the height of the pattern\nprojected from the breakdown point (the point where the middle trough at\npoint B is broken). As an alternative, measure the height of the first downleg\n(points A to B) and project that length downward from the middle trough at\npoint B. Measurements at the bottom are the same, but in the other direction.", - "type": "text" - } - ] - }, - { - "page_num": 124, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p124-b0", - "global_id": 910, - "bbox": [ - 72.81, - 349.11, - 522.46, - 380.07 - ], - "text": "Figure 5.5e Price patterns show up regularly on the charts of major stock\naverages. On this chart, the Nasdaq Composite Index formed a double bottom", - "type": "text" - }, - { - "block_id": "p124-b1", - "global_id": 911, - "bbox": [ - 84.4, - 382.24, - 510.86, - 396.64 - ], - "text": "near the 1470 level before turning higher. The break of the down trendline", - "type": "text" - }, - { - "block_id": "p124-b2", - "global_id": 912, - "bbox": [ - 207.12, - 398.8, - 388.15, - 413.2 - ], - "text": "(see box) confirmed the upturn.", - "type": "text" - }, - { - "block_id": "p124-b3", - "global_id": 913, - "bbox": [ - 72.0, - 457.15, - 520.72, - 627.1 - ], - "text": "VARIATIONS FROM THE IDEAL PATTERN\nAs in most other areas of market analysis, real-life examples are usually some\nvariation of the ideal. For one thing, sometimes the two peaks are not at\nexactly the same price level. On occasion, the second peak will not quite\nreach the level of the first peak, which is not too problematical. What does\ncause some problems is when the second peak actually exceeds the first peak\nby a slight margin. What at first may appear to be a valid upside breakout and\nresumption of the uptrend may turn out to be part of the topping process. To\nhelp resolve this dilemma, some of the filtering criteria already mentioned\nmay come in handy.", - "type": "text" - }, - { - "block_id": "p124-b4", - "global_id": 914, - "bbox": [ - 72.0, - 650.78, - 521.94, - 766.09 - ], - "text": "Filters\nMost chartists require a close beyond a previous resistance peak instead of\njust an intraday penetration. Second, a price filter of some type might be used.\nOne such example is a percentage penetration criterion (such as 1% or 3%).\nThird, the two day penetration rule could be used as an example of a time\nfilter. In other words, prices would have to close beyond the top of the first\npeak for two consecutive days to signal a valid penetration. Another time", - "type": "text" - } - ] - }, - { - "page_num": 125, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p125-b0", - "global_id": 915, - "bbox": [ - 72.0, - 73.17, - 503.59, - 104.25 - ], - "text": "filter could be a Friday close beyond the previous peak. The volume on the\nupside breakout might also provide a clue to its reliability.", - "type": "text" - }, - { - "block_id": "p125-b1", - "global_id": 916, - "bbox": [ - 72.0, - 106.41, - 522.32, - 203.63 - ], - "text": "These filters are certainly not infallible, but do serve to reduce the\nnumber of false signals (or whipsaws) that often occur. Sometimes these\nfilters are helpful, and sometimes they’re not. The analyst must face the\nrealization that he or she is dealing with percentages and probabilities, and\nthat there will be times when bad signals occur. That’s simply a fact of trading\nlife.", - "type": "text" - }, - { - "block_id": "p125-b2", - "global_id": 917, - "bbox": [ - 72.0, - 205.8, - 514.76, - 269.89 - ], - "text": "It’s not that unusual for the final leg or wave of a bull market to set a\nnew high before reversing direction. In such a case, the final upside breakout\nwould become a “bull trap.” (See Figures 5.6a and b.) We’ll show you some\nindicators later on that may help you spot these false breakouts.", - "type": "text" - }, - { - "block_id": "p125-b3", - "global_id": 918, - "bbox": [ - 72.0, - 293.57, - 269.11, - 304.37 - ], - "text": "The Term “Double Top” Greatly Overused", - "type": "text" - }, - { - "block_id": "p125-b4", - "global_id": 919, - "bbox": [ - 72.0, - 312.38, - 523.23, - 426.17 - ], - "text": "The terms “double top and bottom” are greatly overused in the financial\nmarkets. Most potential double tops or bottoms wind up being something else.\nThe reason for this is that prices have a strong tendency to back off from a\nprevious peak or bounce off a previous low. These price changes are a natural\nreaction and do not in themselves constitute a reversal pattern. Remember\nthat, at a top, prices must actually violate the previous reaction low before the\ndouble top exists.", - "type": "text" - }, - { - "block_id": "p125-b5", - "global_id": 920, - "bbox": [ - 73.36, - 677.51, - 521.91, - 725.04 - ], - "text": "Figure 5.6a Example of a false breakout, usually called a bull trap.\nSometimes near the end of a major uptrend, prices will exceed a previous\npeak before failing. Chartists use various time and price filters to reduce such", - "type": "text" - }, - { - "block_id": "p125-b6", - "global_id": 921, - "bbox": [ - 90.83, - 727.2, - 504.44, - 741.6 - ], - "text": "whipsaws. This topping pattern would probably qualify as a double top.", - "type": "text" - } - ] - }, - { - "page_num": 126, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p126-b0", - "global_id": 922, - "bbox": [ - 73.7, - 346.95, - 521.58, - 361.41 - ], - "text": "Figure 5.6b Example of a false breakout. Notice that the upside breakout was", - "type": "text" - }, - { - "block_id": "p126-b1", - "global_id": 923, - "bbox": [ - 82.54, - 363.51, - 512.73, - 394.48 - ], - "text": "on light volume and the subsequent decline on heavy volume—a negative\nchart combination. Watching the volume helps avoid some false breakouts,", - "type": "text" - }, - { - "block_id": "p126-b2", - "global_id": 924, - "bbox": [ - 266.26, - 396.64, - 329.02, - 411.04 - ], - "text": "but not all.", - "type": "text" - }, - { - "block_id": "p126-b3", - "global_id": 925, - "bbox": [ - 72.0, - 427.61, - 517.57, - 591.09 - ], - "text": "Notice in Figure 5.7a that the price at point C backs off from the\nprevious peak at point A. This is perfectly normal action in an uptrend. Many\ntraders, however, will immediately label this pattern as a double top as soon\nas prices fail to clear the first peak on the first attempt. Figure 5.7b shows the\nsame situation in a downtrend. It is very difficult for the chartist to determine\nwhether the pullback from the previous peak or the bounce from the previous\nlow is just a temporary setback in the existing trend or the start of a double\ntop or bottom reversal pattern. Because the technical odds usually favor\ncontinuation of the present trend, it is usually wise to await completion of the\npattern before taking action.", - "type": "text" - } - ] - }, - { - "page_num": 127, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p127-b0", - "global_id": 926, - "bbox": [ - 91.94, - 252.6, - 503.34, - 267.07 - ], - "text": "Figure 5.7a Example of a normal pullback from a previous peak before", - "type": "text" - }, - { - "block_id": "p127-b1", - "global_id": 927, - "bbox": [ - 73.4, - 269.17, - 521.88, - 300.13 - ], - "text": "resumption of the uptrend. This is normal market action and not to be\nconfused with a double top. The double top only occurs when support at point", - "type": "text" - }, - { - "block_id": "p127-b2", - "global_id": 928, - "bbox": [ - 263.33, - 302.3, - 331.94, - 316.7 - ], - "text": "B is broken.", - "type": "text" - }, - { - "block_id": "p127-b3", - "global_id": 929, - "bbox": [ - 79.74, - 512.59, - 515.55, - 527.05 - ], - "text": "Figure 5.7b Example of a normal bounce off a previous low. This is normal", - "type": "text" - }, - { - "block_id": "p127-b4", - "global_id": 930, - "bbox": [ - 74.81, - 529.15, - 520.47, - 560.12 - ], - "text": "market action and not to be confused with a double bottom. Prices will\nnormally bounce off a previous low at least once, causing premature calls for", - "type": "text" - }, - { - "block_id": "p127-b5", - "global_id": 931, - "bbox": [ - 249.07, - 562.28, - 346.2, - 576.68 - ], - "text": "a double bottom.", - "type": "text" - }, - { - "block_id": "p127-b6", - "global_id": 932, - "bbox": [ - 72.0, - 600.36, - 282.18, - 611.16 - ], - "text": "Time Between Peaks or Troughs Is Important", - "type": "text" - }, - { - "block_id": "p127-b7", - "global_id": 933, - "bbox": [ - 72.0, - 619.18, - 522.29, - 766.09 - ], - "text": "Finally, the size of the pattern is always important. The longer the time period\nbetween the two peaks and the greater the height of the pattern, the greater the\npotential impending reversal. This is true of all chart patterns. In general,\nmost valid double tops or bottoms should have at least a month between the\ntwo peaks or troughs. Some will even be two or three months apart. (On\nlonger range monthly and weekly charts, these patterns can span several\nyears.) Most of the examples used in this discussion have described market\ntops. The reader should be aware by now that bottoming patterns are mirror\nimages of tops except for some of the general differences already touched", - "type": "text" - } - ] - }, - { - "page_num": 128, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p128-b0", - "global_id": 934, - "bbox": [ - 72.0, - 73.64, - 282.6, - 88.04 - ], - "text": "upon at the beginning of the chapter.", - "type": "text" - }, - { - "block_id": "p128-b1", - "global_id": 935, - "bbox": [ - 72.0, - 131.63, - 522.61, - 268.45 - ], - "text": "SAUCERS AND SPIKES\nAlthough not seen as frequently, reversal patterns sometimes take the shape of\nsaucers or rounding bottoms. The saucer bottom shows a very slow and very\ngradual turn from down to sideways to up. It is difficult to tell exactly when\nthe saucer has been completed or to measure how far prices will travel in the\nopposite direction. Saucer bottoms are usually spotted on weekly or monthly\ncharts that span several years. The longer they last, the more significant they\nbecome. (See Figure 5.8.)", - "type": "text" - }, - { - "block_id": "p128-b2", - "global_id": 936, - "bbox": [ - 72.0, - 270.61, - 522.31, - 417.52 - ], - "text": "Spikes are the hardest market turns to deal with because the spike (or V\npattern) happens very quickly with little or no transition period. They usually\ntake place in a market that has gotten so overextended in one direction, that a\nsudden piece of adverse news causes the market to reverse direction very\nabruptly. A daily or weekly reversal, on very heavy volume, is sometimes the\nonly warning they give us. That being the case, there’s not much more we can\nsay about them except that we hope you don’t run into too many of them.\nSome technical indicators we discuss in later chapters will help you determine\nwhen markets have gotten dangerously over-extended. (See Figure 5.9.)", - "type": "text" - }, - { - "block_id": "p128-b3", - "global_id": 937, - "bbox": [ - 80.19, - 709.92, - 515.07, - 724.38 - ], - "text": "Figure 5.8 This chart shows what a saucer (or rounding) bottom looks like.", - "type": "text" - }, - { - "block_id": "p128-b4", - "global_id": 938, - "bbox": [ - 83.85, - 726.48, - 511.42, - 740.88 - ], - "text": "They’re very slow and gradual, but usually mark major turns. This bottom", - "type": "text" - }, - { - "block_id": "p128-b5", - "global_id": 939, - "bbox": [ - 247.47, - 743.05, - 347.8, - 757.45 - ], - "text": "lasted four years.", - "type": "text" - } - ] - }, - { - "page_num": 129, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p129-b0", - "global_id": 940, - "bbox": [ - 72.5, - 347.67, - 522.77, - 362.13 - ], - "text": "Figure 5.9 Example of a v reversal pattern. These sudden reversals take place", - "type": "text" - }, - { - "block_id": "p129-b1", - "global_id": 941, - "bbox": [ - 75.61, - 364.23, - 519.66, - 378.63 - ], - "text": "with little or no warning. A sudden price drop on heavy volume is usually the", - "type": "text" - }, - { - "block_id": "p129-b2", - "global_id": 942, - "bbox": [ - 94.12, - 380.8, - 501.14, - 395.2 - ], - "text": "only telltale sign. Unfortunately, these sudden turns are hard to spot in", - "type": "text" - }, - { - "block_id": "p129-b3", - "global_id": 943, - "bbox": [ - 271.86, - 397.36, - 323.42, - 411.76 - ], - "text": "advance.", - "type": "text" - }, - { - "block_id": "p129-b4", - "global_id": 944, - "bbox": [ - 72.0, - 455.71, - 523.1, - 609.09 - ], - "text": "CONCLUSION\nWe’ve discussed the five most commonly used major reversal patterns—the\nhead and shoulders, double and triple tops and bottoms, the saucer, and the V,\nor spike. Of those, the most common are the head and shoulders, and double\ntops and bottoms. These patterns usually signal important trend reversals in\nprogress and are classified as major reversal patterns. There is another class of\npatterns, however, which are shorter term in nature and usually suggest trend\nconsolidations rather than reversals. They are aptly called continuation\npatterns. Let’s look at this other type of pattern in Chapter 6.", - "type": "text" - } - ] - }, - { - "page_num": 130, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p130-b0", - "global_id": 945, - "bbox": [ - 72.0, - 310.96, - 519.17, - 431.21 - ], - "text": "INTRODUCTION\nThe chart patterns covered in this chapter are called continuation patterns.\nThese patterns usually indicate that the sideways price action on the chart is\nnothing more than a pause in the prevailing trend, and that the next move will\nbe in the same direction as the trend that preceded the formation. This\ndistinguishes this group of patterns from those in the previous chapter, which\nusually indicate that a major trend reversal is in progress.", - "type": "text" - }, - { - "block_id": "p130-b1", - "global_id": 946, - "bbox": [ - 72.0, - 433.37, - 508.76, - 514.03 - ], - "text": "Another difference between reversal and continuation patterns is their\ntime duration. Reversal patterns usually take much longer to build and\nrepresent major trend changes. Continuation patterns, on the other hand, are\nusually shorter term in duration and are more accurately classified as near\nterm or intermediate patterns.", - "type": "text" - }, - { - "block_id": "p130-b2", - "global_id": 947, - "bbox": [ - 72.0, - 516.19, - 514.3, - 679.67 - ], - "text": "Notice the constant use of the term “usually.” The treatment of all chart\npatterns deals of necessity with general tendencies as opposed to rigid rules.\nThere are always exceptions. Even the grouping of price patterns into\ndifferent categories sometimes becomes tenuous. Triangles are usually\ncontinuation patterns, but sometimes act as reversal patterns. Although\ntriangles are usually considered intermediate patterns, they may occasionally\nappear on long term charts and take on major trend significance. A variation\nof the triangle—the inverted variety—usually signals a major market top.\nEven the head and shoulders pattern, the best known of the major reversal\npatterns, will on occasion be seen as a consolidation pattern.", - "type": "text" - }, - { - "block_id": "p130-b3", - "global_id": 948, - "bbox": [ - 72.0, - 681.83, - 504.3, - 745.93 - ], - "text": "Even with allowances for a certain amount of ambiguity and the\noccasional exception, chart patterns do generally fall into the above two\ncategories and, if properly interpreted, can help the chartist determine what\nthe market will probably do most of the time", - "type": "text" - } - ] - }, - { - "page_num": 131, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p131-b0", - "global_id": 949, - "bbox": [ - 72.0, - 74.02, - 519.79, - 194.27 - ], - "text": "TRIANGLES\nLet’s begin our treatment of continuation patterns with the triangle. There are\nthree types of triangles—symmetrical, ascending, and descending. (Some\nchartists include a fourth type of triangle known as an expanding triangle, or\nbroadening formation. This is treated as a separate pattern later.) Each type of\ntriangle has a slightly different shape and has different forecasting\nimplications.", - "type": "text" - }, - { - "block_id": "p131-b1", - "global_id": 950, - "bbox": [ - 72.0, - 196.43, - 509.3, - 293.65 - ], - "text": "Figures 6.1a-c show examples of what each triangle looks like. The\nsymmetrical triangle (see Figure 6.1a) shows two converging trendlines, the\nupper line descending and the lower line ascending. The vertical line at the\nleft, measuring the height of the pattern, is called the base. The point of\nintersection at the right, where the two lines meet, is called the apex. For\nobvious reasons, the symmetrical triangle is also called a coil.", - "type": "text" - }, - { - "block_id": "p131-b2", - "global_id": 951, - "bbox": [ - 72.0, - 295.82, - 501.95, - 359.91 - ], - "text": "The ascending triangle has a rising lower line with a flat or horizontal\nupper line (see Figure 6.1b). The descending triangle (Figure 6.1c), by\ncontrast, has the upper line declining with a flat or horizontal bottom line.\nLet’s see how each one is interpreted.", - "type": "text" - }, - { - "block_id": "p131-b3", - "global_id": 952, - "bbox": [ - 76.58, - 548.6, - 518.7, - 579.56 - ], - "text": "Figure 6.1a Example of a bullish symmetrical triangle. Notice the two\nconverging trendlines. A close outside either trendline completes the pattern.", - "type": "text" - }, - { - "block_id": "p131-b4", - "global_id": 953, - "bbox": [ - 82.71, - 581.73, - 512.56, - 596.13 - ], - "text": "The vertical line at the left is the base. The point at the right where the two", - "type": "text" - }, - { - "block_id": "p131-b5", - "global_id": 954, - "bbox": [ - 234.3, - 598.29, - 360.96, - 612.69 - ], - "text": "lines meet is the apex.", - "type": "text" - } - ] - }, - { - "page_num": 132, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p132-b0", - "global_id": 955, - "bbox": [ - 75.56, - 266.29, - 519.7, - 280.75 - ], - "text": "Figure 6.1b Example of an ascending triangle. Notice the flat upper line and", - "type": "text" - }, - { - "block_id": "p132-b1", - "global_id": 956, - "bbox": [ - 136.76, - 282.85, - 458.5, - 297.25 - ], - "text": "the rising lower line. This is generally a bullish pattern.", - "type": "text" - }, - { - "block_id": "p132-b2", - "global_id": 957, - "bbox": [ - 73.59, - 457.14, - 521.69, - 471.6 - ], - "text": "Figure 6.1c Example of a descending triangle. Notice the flat bottom line and", - "type": "text" - }, - { - "block_id": "p132-b3", - "global_id": 958, - "bbox": [ - 130.77, - 473.7, - 464.5, - 488.1 - ], - "text": "the declining upper line. This is usually a bearish pattern.", - "type": "text" - }, - { - "block_id": "p132-b4", - "global_id": 959, - "bbox": [ - 72.0, - 532.05, - 509.56, - 652.3 - ], - "text": "THE SYMMETRICAL TRIANGLE\nThe symmetrical triangle (or the coil) is usually a continuation pattern. It\nrepresents a pause in the existing trend after which the original trend is\nresumed. In the example in Figure 6.1a, the prior trend was up, so that the\npercentages favor resolution of the triangular consolidation on the upside. If\nthe trend had been down, then the symmetrical triangle would have bearish\nimplications.", - "type": "text" - }, - { - "block_id": "p132-b5", - "global_id": 960, - "bbox": [ - 72.0, - 654.47, - 507.83, - 768.25 - ], - "text": "The minimum requirement for a triangle is four reversal points.\nRemember that it always takes two points to draw a trendline. Therefore, in\norder to draw two converging trendlines, each line must be touched at least\ntwice. In Figure 6.1a, the triangle actually begins at point 1, which is where\nthe consolidation in the uptrend begins. Prices pull back to point 2 and then\nrally to point 3. Point 3, however, is lower than point 1. The upper trendline\ncan only be drawn once prices have declined from point 3.", - "type": "text" - } - ] - }, - { - "page_num": 133, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p133-b0", - "global_id": 961, - "bbox": [ - 72.0, - 73.28, - 517.57, - 153.94 - ], - "text": "Notice that point 4 is higher than point 2. Only when prices have rallied\nfrom point 4 can the lower upslanting line be drawn. It is at this point that the\nanalyst begins to suspect the he or she is dealing with the symmetrical\ntriangle. Now there are four reversal points (1, 2, 3, and 4) and two\nconverging trendlines.", - "type": "text" - }, - { - "block_id": "p133-b1", - "global_id": 962, - "bbox": [ - 72.0, - 156.1, - 510.76, - 187.07 - ], - "text": "While the minimum requirement is four reversal points, many triangles\nhave six reversal points as shown in Figure 6.1a.", - "type": "text" - }, - { - "block_id": "p133-b2", - "global_id": 963, - "bbox": [ - 72.0, - 203.64, - 516.31, - 267.73 - ], - "text": "This means that there are actually three peaks and three troughs that combine\nto form five waves within the triangle before the uptrend resumes. (When we\nget to the Elliott Wave Theory, we’ll have more to say about the five wave\ntendency within triangles.)", - "type": "text" - }, - { - "block_id": "p133-b3", - "global_id": 964, - "bbox": [ - 72.0, - 291.41, - 233.8, - 302.21 - ], - "text": "Time Limit for Triangle Resolution", - "type": "text" - }, - { - "block_id": "p133-b4", - "global_id": 965, - "bbox": [ - 72.0, - 310.22, - 517.93, - 473.7 - ], - "text": "There is a time limit for the resolution of the pattern, and that is the point\nwhere the two lines meet—at the apex. As a general rule, prices should break\nout in the direction of the prior trend somewhere between two-thirds to three-\nquarters of the horizontal width of the triangle. That is, the distance from the\nvertical base on the left of the pattern to the apex at the far right. Because the\ntwo lines must meet at some point, that time distance can be measured once\nthe two converging lines are drawn. An upside breakout is signaled by a\npenetration of the upper trendline. If prices remain within the triangle beyond\nthe three-quarters point, the triangle begins to lose its potency, and usually\nmeans that prices will continue to drift out to the apex and beyond", - "type": "text" - }, - { - "block_id": "p133-b5", - "global_id": 966, - "bbox": [ - 72.0, - 475.86, - 519.14, - 589.65 - ], - "text": "The triangle, therefore, provides an interesting combination of price and\ntime. The converging trendlines give the price boundaries of the pattern, and\nindicate at what point the pattern has been completed and the trend resumed\nby the penetration of the upper trendline (in the case of an uptrend). But these\ntrendlines also provide a time target by measuring the width of the pattern. If\nthe width, for example, were 20 weeks long, then the breakout should take\nplace sometime between the 13th and the 15th week. (See Figure 6.1d.)", - "type": "text" - }, - { - "block_id": "p133-b6", - "global_id": 967, - "bbox": [ - 72.0, - 591.81, - 522.72, - 738.72 - ], - "text": "The actual trend signal is given by a closing penetration of one of the\ntrendlines. Sometimes a return move will occur back to the penetrated\ntrendline after the breakout. In an uptrend, that line has become a support line.\nIn a downtrend, the lower line becomes a resistance line once it’s broken. The\napex also acts as an important support or resistance level after the breakout\noccurs. Various penetration criteria can be applied to the breakout, similar to\nthose covered in the previous two chapters. A minimum penetration criterion\nwould be a closing price outside the trendline and not just an intraday\npenetration.", - "type": "text" - } - ] - }, - { - "page_num": 134, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p134-b0", - "global_id": 968, - "bbox": [ - 79.94, - 347.67, - 515.34, - 378.63 - ], - "text": "Figure 6.1d Dell formed a bullish symmetrical triangle during the fourth\nquarter of 1997. Measured from left to right, the triangle width is 18 weeks.", - "type": "text" - }, - { - "block_id": "p134-b1", - "global_id": 969, - "bbox": [ - 88.04, - 380.8, - 507.24, - 395.2 - ], - "text": "Prices broke out on the 13th week (see circle), just beyond the two-thirds", - "type": "text" - }, - { - "block_id": "p134-b2", - "global_id": 970, - "bbox": [ - 281.05, - 397.36, - 314.23, - 411.76 - ], - "text": "point.", - "type": "text" - }, - { - "block_id": "p134-b3", - "global_id": 971, - "bbox": [ - 72.0, - 435.44, - 175.27, - 446.24 - ], - "text": "Importance of Volume", - "type": "text" - }, - { - "block_id": "p134-b4", - "global_id": 972, - "bbox": [ - 72.0, - 454.26, - 511.33, - 534.91 - ], - "text": "Volume should diminish as the price swings narrow within the triangle. This\ntendency for volume to contract is true of all consolidation patterns. But the\nvolume should pick up noticeably at the penetration of the trendline that\ncompletes the pattern. The return move should be on light volume with\nheavier activity again as the trend resumes.", - "type": "text" - }, - { - "block_id": "p134-b5", - "global_id": 973, - "bbox": [ - 72.0, - 537.08, - 519.02, - 601.17 - ], - "text": "Two other points should be mentioned about volume. As is the case with\nreversal patterns, volume is more important on the upside than on the\ndownside. An increase in volume is essential to the resumption of an uptrend\nin all consolidation patterns.", - "type": "text" - }, - { - "block_id": "p134-b6", - "global_id": 974, - "bbox": [ - 72.0, - 603.34, - 519.16, - 700.55 - ], - "text": "The second point about volume is that, even though trading activity\ndiminishes during formation of the pattern, a close inspection of the volume\nusually gives a clue as to whether the heavier volume is occurring during the\nupmoves or down-moves. In an uptrend, for example, there should be a slight\ntendency for volume to be heavier during the bounces and lighter on the price\ndips.", - "type": "text" - }, - { - "block_id": "p134-b7", - "global_id": 975, - "bbox": [ - 72.0, - 724.23, - 516.6, - 756.73 - ], - "text": "Measuring Technique\nTriangles have measuring techniques. In the case of the symmetrical triangle,", - "type": "text" - } - ] - }, - { - "page_num": 135, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p135-b0", - "global_id": 976, - "bbox": [ - 72.0, - 73.28, - 521.18, - 137.37 - ], - "text": "there are a couple of techniques generally used. The simplest technique is to\nmeasure the height of the vertical line at the widest part of the triangle (the\nbase) and measure that distance from the breakout point. Figure 6.2 shows the\ndistance projected from the breakout point, which is the technique I prefer.", - "type": "text" - }, - { - "block_id": "p135-b1", - "global_id": 977, - "bbox": [ - 72.0, - 139.54, - 519.11, - 220.2 - ], - "text": "The second method is to draw a trendline from the top of the base (at\npoint A) parallel to the lower trendline. This upper channel line then becomes\nthe upside target in an uptrend. It is possible to arrive at a rough time target\nfor prices to meet the upper channel line. Prices will sometimes hit the\nchannel line at the same time the two converging lines meet at the apex.", - "type": "text" - }, - { - "block_id": "p135-b2", - "global_id": 978, - "bbox": [ - 79.58, - 457.86, - 515.69, - 505.38 - ], - "text": "Figure 6.2 There are two ways to take a measurement from a symmetrical\ntriangle. One is to measure the height of the base (AB); project that vertical\ndistance from the breakout point at C. Another method is to draw a parallel", - "type": "text" - }, - { - "block_id": "p135-b3", - "global_id": 979, - "bbox": [ - 80.57, - 507.55, - 514.71, - 521.95 - ], - "text": "line upward from the top of the baseline (A) parallel to the lower line in the", - "type": "text" - }, - { - "block_id": "p135-b4", - "global_id": 980, - "bbox": [ - 273.05, - 524.11, - 322.21, - 538.51 - ], - "text": "triangle.", - "type": "text" - }, - { - "block_id": "p135-b5", - "global_id": 981, - "bbox": [ - 72.0, - 582.47, - 519.93, - 702.72 - ], - "text": "THE ASCENDING TRIANGLE\nThe ascending and descending triangles are variations of the symmetrical, but\nhave different forecasting implications. Figures 6.3a and b show examples of\nan ascending triangle. Notice that the upper trendline is flat, while the lower\nline is rising. This pattern indicates that buyers are more aggressive than\nsellers. It is considered a bullish pattern and is usually resolved with a\nbreakout to the upside.", - "type": "text" - }, - { - "block_id": "p135-b6", - "global_id": 982, - "bbox": [ - 72.0, - 704.88, - 519.7, - 768.97 - ], - "text": "Both the ascending and descending triangles differ from the symmetrical\nin a very important sense. No matter where in the trend structure the\nascending or descending triangles appear, they have very definite forecasting\nimplications. The ascending triangle is bullish and the descending triangle is", - "type": "text" - } - ] - }, - { - "page_num": 136, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p136-b0", - "global_id": 983, - "bbox": [ - 72.0, - 73.53, - 515.49, - 170.5 - ], - "text": "bearish. The symmetrical triangle, by contrast, is inherently a neutral pattern.\nThis does not mean, however, that the symmetrical triangle does not have\nforecasting value. On the contrary, because the symmetrical triangle is a\ncontinuation pattern, the analyst must simply look to see the direction of the\nprevious trend and then make the assumption that the previous trend will\ncontinue.", - "type": "text" - }, - { - "block_id": "p136-b1", - "global_id": 984, - "bbox": [ - 83.36, - 379.36, - 511.91, - 393.82 - ], - "text": "Figure 6.3a An ascending triangle. The pattern is completed on a decisive", - "type": "text" - }, - { - "block_id": "p136-b2", - "global_id": 985, - "bbox": [ - 74.1, - 395.92, - 521.17, - 443.45 - ], - "text": "close above the upper line. This breakout should see a sharp increase in\nvolume. That upper resistance line should act as support on subsequent dips\nafter the breakout. The minimum price objective is obtained by measuring the", - "type": "text" - }, - { - "block_id": "p136-b3", - "global_id": 986, - "bbox": [ - 90.02, - 445.61, - 505.26, - 460.01 - ], - "text": "height of the triangle (AB) and projecting that distance upward from the", - "type": "text" - }, - { - "block_id": "p136-b4", - "global_id": 987, - "bbox": [ - 239.95, - 462.18, - 355.33, - 476.58 - ], - "text": "breakout point at C.", - "type": "text" - } - ] - }, - { - "page_num": 137, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p137-b0", - "global_id": 988, - "bbox": [ - 79.61, - 73.28, - 515.65, - 104.24 - ], - "text": "Figure 6.3b The Dow Transports formed a bullish ascending triangle near\nthe end of 1997. Notice the flat upper line at 3400 and the rising lower line.", - "type": "text" - }, - { - "block_id": "p137-b1", - "global_id": 989, - "bbox": [ - 83.66, - 106.41, - 511.61, - 120.81 - ], - "text": "This is normally a bullish pattern no matter where it appears on the chart.", - "type": "text" - }, - { - "block_id": "p137-b2", - "global_id": 990, - "bbox": [ - 72.0, - 137.38, - 517.58, - 234.6 - ], - "text": "Let’s get back to the ascending triangle. As already stated, more often\nthan not, the ascending triangle is bullish. The bullish breakout is signaled by\na decisive closing above the flat upper trendline. As in the case of all valid\nupside breakouts, volume should see a noticeable increase on the breakout. A\nreturn move back to the support line (the flat upper line) is not unusual and\nshould take place on light volume.", - "type": "text" - }, - { - "block_id": "p137-b3", - "global_id": 991, - "bbox": [ - 72.0, - 258.28, - 171.99, - 269.08 - ], - "text": "Measuring Technique", - "type": "text" - }, - { - "block_id": "p137-b4", - "global_id": 992, - "bbox": [ - 72.0, - 277.09, - 519.09, - 341.19 - ], - "text": "The measuring technique for the ascending triangle is relatively simple.\nSimply measure the height of the pattern at its widest point and project that\nvertical distance from the breakout point. This is just another example of\nusing the volatility of a price pattern to determine a minimum price objective.", - "type": "text" - }, - { - "block_id": "p137-b5", - "global_id": 993, - "bbox": [ - 72.0, - 364.87, - 506.4, - 496.74 - ], - "text": "The Ascending Triangle as a Bottom\nWhile the ascending triangle most often appears in an uptrend and is\nconsidered a continuation pattern, it sometimes appears as a bottoming\npattern. It is not unusual toward the end of a downtrend to see an ascending\ntriangle develop. However, even in this situation, the interpretation of the\npattern is bullish. The breaking of the upper line signals completion of the\nbase and is considered a bullish signal. Both the ascending and descending\ntriangles are sometimes also referred to as right angle triangles.", - "type": "text" - }, - { - "block_id": "p137-b6", - "global_id": 994, - "bbox": [ - 72.0, - 540.7, - 496.4, - 677.51 - ], - "text": "THE DESCENDING TRIANGLE\nThe descending triangle is just a mirror image of the ascending, and is\ngenerally considered a bearish pattern. Notice in Figures 6.4a and b the\ndescending upper line and the flat lower line. This pattern indicates that\nsellers are more aggressive than buyers, and is usually resolved on the\ndownside. The downside signal is registered by a decisive close under the\nlower trendline, usually on increased volume. A return move sometimes\noccurs which should encounter resistance at the lower trendline.", - "type": "text" - }, - { - "block_id": "p137-b7", - "global_id": 995, - "bbox": [ - 72.0, - 679.67, - 519.14, - 727.2 - ], - "text": "The measuring technique is exactly the same as the ascending triangle in\nthe sense that the analyst must measure the height of the pattern at the base to\nthe left and then project that distance down from the breakdown point.", - "type": "text" - }, - { - "block_id": "p137-b8", - "global_id": 996, - "bbox": [ - 72.0, - 750.88, - 227.56, - 761.68 - ], - "text": "The Descending Triangle as a Top", - "type": "text" - } - ] - }, - { - "page_num": 138, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p138-b0", - "global_id": 997, - "bbox": [ - 72.0, - 73.28, - 522.4, - 153.94 - ], - "text": "While the descending triangle is a continuation pattern and usually is found\nwithin downtrends, it is not unusual on occasion for the descending triangle to\nbe found at market tops. This type of pattern is not that difficult to recognize\nwhen it does appear in the top setting. In that case, a close below the flat\nlower line would signal a major trend reversal to the downside.", - "type": "text" - }, - { - "block_id": "p138-b1", - "global_id": 998, - "bbox": [ - 73.25, - 375.03, - 522.03, - 406.0 - ], - "text": "Figure 6.4a A descending triangle. The bearish pattern is completed with a\ndecisive close under the lower flat line. The measuring technique is the height", - "type": "text" - }, - { - "block_id": "p138-b2", - "global_id": 999, - "bbox": [ - 110.2, - 408.16, - 485.07, - 422.56 - ], - "text": "of the triangle (AB) projected down from the breakout at point C.", - "type": "text" - }, - { - "block_id": "p138-b3", - "global_id": 1000, - "bbox": [ - 75.03, - 712.08, - 520.25, - 743.04 - ], - "text": "Figure 6.4b A bearish descending triangle formed in Du Pont during the\nautumn of 1997. The upper line is descending while the lower line is flat. The", - "type": "text" - }, - { - "block_id": "p138-b4", - "global_id": 1001, - "bbox": [ - 75.56, - 745.21, - 519.7, - 759.61 - ], - "text": "break of the lower line in early October resolved the pattern to the downside.", - "type": "text" - } - ] - }, - { - "page_num": 139, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p139-b0", - "global_id": 1002, - "bbox": [ - 72.0, - 73.19, - 165.09, - 83.99 - ], - "text": "The Volume Pattern", - "type": "text" - }, - { - "block_id": "p139-b1", - "global_id": 1003, - "bbox": [ - 72.0, - 92.01, - 518.8, - 222.36 - ], - "text": "The volume pattern in both the ascending and descending triangles is very\nsimilar in that the volume diminishes as the pattern works itself out and then\nincreases on the breakout. As in the case of the symmetrical triangle, during\nthe formation the chartist can detect subtle shifts in the volume pattern\ncoinciding with the swings in the price action. This means that in the\nascending pattern, the volume tends to be slightly heavier on bounces and\nlighter on dips. In the descending formation, volume should be heavier on the\ndownside and lighter during the bounces.", - "type": "text" - }, - { - "block_id": "p139-b2", - "global_id": 1004, - "bbox": [ - 72.0, - 246.04, - 517.92, - 377.91 - ], - "text": "The Time Factor in Triangles\nOne final factor to be considered on the subject of triangles is that of the time\ndimension. The triangle is considered an intermediate pattern, meaning that it\nusually takes longer than a month to form, but generally less than three\nmonths. A triangle that lasts less than a month is probably a different pattern,\nsuch as a pennant, which will be covered shortly. As mentioned earlier,\ntriangles sometimes appear on long term price charts, but their basic meaning\nis always the same.", - "type": "text" - }, - { - "block_id": "p139-b3", - "global_id": 1005, - "bbox": [ - 72.0, - 421.87, - 521.88, - 558.68 - ], - "text": "THE BROADENING FORMATION\nThis next price pattern is an unusual variation of the triangle and is relatively\nrare. It is actually an inverted triangle or a triangle turned backwards. All of\nthe triangular patterns examined so far show converging trendlines. The\nbroadening formation, as the name implies, is just the opposite. As the pattern\nin Figure 6.5 shows, the trendlines actually diverge in the broadening\nformation, creating a picture that looks like an expanding triangle. It is also\ncalled a megaphone top.", - "type": "text" - }, - { - "block_id": "p139-b4", - "global_id": 1006, - "bbox": [ - 72.0, - 560.84, - 522.0, - 691.19 - ], - "text": "The volume pattern also differs in this formation. In the other triangular\npatterns, volume tends to diminish as the price swings grow narrower. Just the\nopposite happens in the broadening formation. The volume tends to expand\nalong with the wider price swings. This situation represents a market that is\nout of control and unusually emotional. Because this pattern also represents\nan unusual amount of public participation, it most often occurs at major\nmarket tops. The expanding pattern, therefore, is usually a bearish formation.\nIt generally appears near the end of a major bull market.", - "type": "text" - } - ] - }, - { - "page_num": 140, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p140-b0", - "global_id": 1007, - "bbox": [ - 77.74, - 340.47, - 517.53, - 354.93 - ], - "text": "Figure 6.5 A broadening top. This type of expanding triangle usually occurs", - "type": "text" - }, - { - "block_id": "p140-b1", - "global_id": 1008, - "bbox": [ - 78.33, - 357.03, - 516.93, - 387.99 - ], - "text": "at major tops. It shows three successively higher peaks and two declining\ntroughs. The violation of the second trough completes the pattern. This is an", - "type": "text" - }, - { - "block_id": "p140-b2", - "global_id": 1009, - "bbox": [ - 101.54, - 390.16, - 493.72, - 404.56 - ], - "text": "unusually difficult pattern to trade and fortunately is relatively rare.", - "type": "text" - }, - { - "block_id": "p140-b3", - "global_id": 1010, - "bbox": [ - 72.0, - 448.51, - 521.94, - 535.63 - ], - "text": "FLAGS AND PENNANTS\nThe flag and pennant formations are quite common. They are usually treated\ntogether because they are very similar in appearance, tend to show up at about\nthe same place in an existing trend, and have the same volume and measuring\ncriteria.", - "type": "text" - }, - { - "block_id": "p140-b4", - "global_id": 1011, - "bbox": [ - 72.0, - 537.8, - 517.64, - 635.02 - ], - "text": "The flag and pennant represent brief pauses in a dynamic market move.\nIn fact, one of the requirements for both the flag and the pennant is that they\nbe preceded by a sharp and almost straight line move. They represent\nsituations where a steep advance or decline has gotten ahead of itself, and\nwhere the market pauses briefly to “catch its breath” before running off again\nin the same direction.", - "type": "text" - }, - { - "block_id": "p140-b5", - "global_id": 1012, - "bbox": [ - 72.0, - 637.18, - 520.12, - 734.4 - ], - "text": "Flags and pennants are among the most reliable of continuation patterns\nand only rarely produce a trend reversal. Figures 6.6a-b show what these two\npatterns look like. To begin with, notice the steep price advance preceding the\nformations on heavy volume. Notice also the dramatic drop off in activity as\nthe consolidation patterns form and then the sudden burst of activity on the\nupside breakout.", - "type": "text" - }, - { - "block_id": "p140-b6", - "global_id": 1013, - "bbox": [ - 72.0, - 758.08, - 236.8, - 768.88 - ], - "text": "Construction of Flags and Pennants", - "type": "text" - } - ] - }, - { - "page_num": 141, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p141-b0", - "global_id": 1014, - "bbox": [ - 72.0, - 73.28, - 523.09, - 137.37 - ], - "text": "The construction of the two patterns differs slightly. The flag resembles a\nparallelogram or rectangle marked by two parallel trendlines that tend to slope\nagainst the prevailing trend. In a downtrend, the flag would have a slight\nupward slope.", - "type": "text" - }, - { - "block_id": "p141-b1", - "global_id": 1015, - "bbox": [ - 76.19, - 409.6, - 519.09, - 440.57 - ], - "text": "Figure 6.6a Example of a bullish flag. The flag usually occurs after a sharp\nmove and represents a brief pause in the trend. The flag should slope against", - "type": "text" - }, - { - "block_id": "p141-b2", - "global_id": 1016, - "bbox": [ - 77.25, - 442.73, - 518.02, - 457.13 - ], - "text": "the trend. Volume should dry up during the formation and build again on the", - "type": "text" - }, - { - "block_id": "p141-b3", - "global_id": 1017, - "bbox": [ - 111.65, - 459.3, - 483.61, - 473.69 - ], - "text": "breakout. The flag usually occurs near the midpoint of the move.", - "type": "text" - }, - { - "block_id": "p141-b4", - "global_id": 1018, - "bbox": [ - 79.1, - 743.77, - 516.19, - 758.23 - ], - "text": "Figure 6.6b A bullish pennant. Resembles a small symmetrical triangle, but", - "type": "text" - } - ] - }, - { - "page_num": 142, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p142-b0", - "global_id": 1019, - "bbox": [ - 76.23, - 73.28, - 519.04, - 104.24 - ], - "text": "usually lasts no longer than three weeks. Volume should be light during its\nformation. The move after the pennant is completed should duplicate the size", - "type": "text" - }, - { - "block_id": "p142-b1", - "global_id": 1020, - "bbox": [ - 226.58, - 106.41, - 368.7, - 120.81 - ], - "text": "of the move preceding it.", - "type": "text" - }, - { - "block_id": "p142-b2", - "global_id": 1021, - "bbox": [ - 72.0, - 137.38, - 513.56, - 201.47 - ], - "text": "The pennant is identified by two converging trendlines and is more\nhorizontal. It very closely resembles a small symmetrical triangle. An\nimportant requirement is that volume should dry up noticeably while each of\nthe patterns is forming.", - "type": "text" - }, - { - "block_id": "p142-b3", - "global_id": 1022, - "bbox": [ - 72.0, - 203.64, - 521.98, - 333.98 - ], - "text": "Both patterns are relatively short term and should be completed within\none to three weeks. Pennants and flags in downtrends tend to take even less\ntime to develop, and often last no longer than one or two weeks. Both patterns\nare completed on the penetration of the upper trendline in an uptrend. The\nbreaking of the lower trendline would signal resumption of downtrends. The\nbreaking of those trendlines should take place on heavier volume. As usual,\nupside volume is more critically important than downside volume. (See\nFigures 6.7a-b.)", - "type": "text" - }, - { - "block_id": "p142-b4", - "global_id": 1023, - "bbox": [ - 72.0, - 357.66, - 181.96, - 368.46 - ], - "text": "Measuring Implications", - "type": "text" - }, - { - "block_id": "p142-b5", - "global_id": 1024, - "bbox": [ - 72.0, - 376.48, - 519.5, - 473.7 - ], - "text": "The measuring implications are similar for both patterns. Flags and pennants\nare said to “fly at half-mast” from a flagpole. The flagpole is the prior sharp\nadvance or decline. The term “half-mast” suggests that these minor\ncontinuation patterns tend to appear at about the halfway point of the move.\nIn general, the move after the trend has resumed will duplicate the flagpole or\nthe move just prior to the formation of the pattern.", - "type": "text" - } - ] - }, - { - "page_num": 143, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p143-b0", - "global_id": 1025, - "bbox": [ - 75.09, - 73.28, - 520.19, - 87.74 - ], - "text": "Figure 6.7a A bullish flag in International Paper. The flag looks like a down-", - "type": "text" - }, - { - "block_id": "p143-b1", - "global_id": 1026, - "bbox": [ - 88.27, - 89.84, - 507.0, - 104.24 - ], - "text": "sloping parallelogram. Notice that the flag occurred right at the halfway", - "type": "text" - }, - { - "block_id": "p143-b2", - "global_id": 1027, - "bbox": [ - 239.15, - 106.41, - 356.13, - 120.81 - ], - "text": "point of the uptrend.", - "type": "text" - }, - { - "block_id": "p143-b3", - "global_id": 1028, - "bbox": [ - 72.0, - 137.38, - 522.93, - 234.6 - ], - "text": "To be more precise, measure the distance of the preceding move from the\noriginal breakout point. That is to say, the point at which the original trend\nsignal was given, either by the penetration of a support or resistance level or\nan important trendline. That vertical distance of the preceding move is then\nmeasured from the breakout point of the flag or pennant—that is, the point at\nwhich the upper line is broken in an uptrend or the lower line in a downtrend.", - "type": "text" - }, - { - "block_id": "p143-b4", - "global_id": 1029, - "bbox": [ - 72.0, - 258.28, - 117.55, - 269.08 - ], - "text": "Summary", - "type": "text" - }, - { - "block_id": "p143-b5", - "global_id": 1030, - "bbox": [ - 72.0, - 277.09, - 417.64, - 291.49 - ], - "text": "Let’s summarize the more important points of both patterns.", - "type": "text" - }, - { - "block_id": "p143-b6", - "global_id": 1031, - "bbox": [ - 96.93, - 586.05, - 498.34, - 600.51 - ], - "text": "Figure 6.7b A couple of pennants are flying on this Caterpillar chart.", - "type": "text" - }, - { - "block_id": "p143-b7", - "global_id": 1032, - "bbox": [ - 72.32, - 602.61, - 522.96, - 633.57 - ], - "text": "Pennants are short term continuation patterns that look like small\nsymmetrical triangles. The pennant to the left continued the uptrend, while the", - "type": "text" - }, - { - "block_id": "p143-b8", - "global_id": 1033, - "bbox": [ - 178.6, - 635.74, - 416.68, - 650.14 - ], - "text": "one to the right continued the downtrend.", - "type": "text" - }, - { - "block_id": "p143-b9", - "global_id": 1034, - "bbox": [ - 82.08, - 666.71, - 495.22, - 763.93 - ], - "text": "1. They are both preceded by an almost straight line move (called a\nflagpole) on heavy volume.\n2. Prices then pause for about one to three weeks on very light volume.\n3. The trend resumes on a burst of trading activity.\n4. Both patterns occur at about the midpoint of the market move.\n5. The pennant resembles a small horizontal symmetrical triangle.", - "type": "text" - } - ] - }, - { - "page_num": 144, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p144-b0", - "global_id": 1035, - "bbox": [ - 82.08, - 73.28, - 468.77, - 137.37 - ], - "text": "6. The flag resembles a small parallelogram that slopes against the\nprevailing trend.\n7. Both patterns take less time to develop in downtrends.\n8. Both patterns are very common in the financial markets.", - "type": "text" - }, - { - "block_id": "p144-b1", - "global_id": 1036, - "bbox": [ - 72.0, - 181.33, - 515.28, - 301.58 - ], - "text": "THE WEDGE FORMATION\nThe wedge formation is similar to a symmetrical triangle both in terms of its\nshape and the amount of time it takes to form. Like the symmetrical triangle,\nit is identified by two converging trendlines that come together at an apex. In\nterms of the amount of time it takes to form, the wedge usually lasts more\nthan one month but not more than three months, putting it into the\nintermediate category.", - "type": "text" - }, - { - "block_id": "p144-b2", - "global_id": 1037, - "bbox": [ - 72.0, - 303.74, - 520.13, - 417.52 - ], - "text": "What distinguishes the wedge is its noticeable slant. The wedge pattern\nhas a noticeable slant either to the upside or the downside. As a rule, like the\nflag pattern, the wedge slants against the prevailing trend. Therefore, a falling\nwedge is considered bullish and a rising wedge is bearish. Notice in Figure\n6.8a that the bullish wedge slants downward between two converging\ntrendlines. In the downtrend in Figure 6.8b, the converging trendlines have an\nunmistakable upward slant.", - "type": "text" - }, - { - "block_id": "p144-b3", - "global_id": 1038, - "bbox": [ - 72.62, - 653.74, - 522.66, - 684.71 - ], - "text": "Figure 6.8a Example of a bullish falling wedge. The wedge pattern has two\nconverging trendlines, but slopes against the prevailing trend. A falling wedge", - "type": "text" - }, - { - "block_id": "p144-b4", - "global_id": 1039, - "bbox": [ - 247.08, - 686.87, - 348.2, - 701.27 - ], - "text": "is usually bullish.", - "type": "text" - } - ] - }, - { - "page_num": 145, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p145-b0", - "global_id": 1040, - "bbox": [ - 89.87, - 220.2, - 505.41, - 234.66 - ], - "text": "Figure 6.8b Example of a bearish wedge. A bearish wedge should slope", - "type": "text" - }, - { - "block_id": "p145-b1", - "global_id": 1041, - "bbox": [ - 177.12, - 236.76, - 418.16, - 251.16 - ], - "text": "upward against the prevailing downtrend.", - "type": "text" - }, - { - "block_id": "p145-b2", - "global_id": 1042, - "bbox": [ - 72.0, - 274.84, - 285.58, - 285.64 - ], - "text": "Wedges as Tops and Bottom Reversal Patterns", - "type": "text" - }, - { - "block_id": "p145-b3", - "global_id": 1043, - "bbox": [ - 72.0, - 293.65, - 516.33, - 424.01 - ], - "text": "Wedges show up most often within the existing trend and usually constitute\ncontinuation patterns. The wedge can appear at tops or bottoms and signal a\ntrend reversal. But that type of situation is much less common. Near the end\nof an uptrend, the chartist may observe a clearcut rising wedge. Because a\ncontinuation wedge in an uptrend should slope downward against the\nprevailing trend, the rising wedge is a clue to the chartist that this is a bearish\nand not a bullish pattern. At bottoms, a falling wedge would be a tip-off of a\npossible end of a bear trend.", - "type": "text" - }, - { - "block_id": "p145-b4", - "global_id": 1044, - "bbox": [ - 72.0, - 426.17, - 509.16, - 473.7 - ], - "text": "Whether the wedge appears in the middle or the end of a market move,\nthe market analyst should always be guided by the general maxim that a\nrising wedge is bearish and a falling wedge is bullish. (See Figure 6.8c.)", - "type": "text" - }, - { - "block_id": "p145-b5", - "global_id": 1045, - "bbox": [ - 72.0, - 516.93, - 522.3, - 587.49 - ], - "text": "THE RECTANGLE FORMATION\nThe rectangle formation often goes by other names, but is usually easy to spot\non a price chart. It represents a pause in the trend during which prices move\nsideways between two parallel horizontal lines. (See Figures 6.9a-c.)", - "type": "text" - }, - { - "block_id": "p145-b6", - "global_id": 1046, - "bbox": [ - 72.0, - 589.65, - 521.96, - 686.87 - ], - "text": "The rectangle is sometimes referred to as a trading range or a congestion\narea. In Dow Theory parlance, it is referred to as a line. Whatever it is called,\nit usually represents just a consolidation period in the existing trend, and is\nusually resolved in the direction of the market trend that preceded its\noccurrence. In terms of forecasting value, it can be viewed as being similar to\nthe symmetrical triangle but with flat instead of converging trendlines.", - "type": "text" - } - ] - }, - { - "page_num": 146, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p146-b0", - "global_id": 1047, - "bbox": [ - 77.06, - 347.67, - 518.2, - 395.2 - ], - "text": "Figure 6.8c Example of a bearish rising wedge. The two converging\ntrendlines have a definite upward slant. The wedge slants against the\nprevailing trend. Therefore, a rising wedge is bearish, and a falling wedge is", - "type": "text" - }, - { - "block_id": "p146-b1", - "global_id": 1048, - "bbox": [ - 276.25, - 397.36, - 319.02, - 411.76 - ], - "text": "bullish.", - "type": "text" - }, - { - "block_id": "p146-b2", - "global_id": 1049, - "bbox": [ - 73.88, - 657.34, - 521.4, - 671.81 - ], - "text": "Figure 6.9a Example of a bullish rectangle in an uptrend. This pattern is also", - "type": "text" - }, - { - "block_id": "p146-b3", - "global_id": 1050, - "bbox": [ - 87.98, - 673.91, - 507.29, - 688.31 - ], - "text": "called a trading range, and shows prices trading between two horizontal", - "type": "text" - }, - { - "block_id": "p146-b4", - "global_id": 1051, - "bbox": [ - 166.48, - 690.47, - 428.8, - 704.87 - ], - "text": "trendlines. It is also called a congestion area.", - "type": "text" - } - ] - }, - { - "page_num": 147, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p147-b0", - "global_id": 1052, - "bbox": [ - 82.66, - 254.04, - 512.6, - 285.01 - ], - "text": "Figure 6.9b Example of a bearish rectangle. While rectangles are usually\nconsidered continuation patterns, the trader must always be alert for signs", - "type": "text" - }, - { - "block_id": "p147-b1", - "global_id": 1053, - "bbox": [ - 115.64, - 287.17, - 479.63, - 301.57 - ], - "text": "that it may turn into a reversal pattern, such as a triple bottom.", - "type": "text" - }, - { - "block_id": "p147-b2", - "global_id": 1054, - "bbox": [ - 73.7, - 591.81, - 521.58, - 622.77 - ], - "text": "Figure 6.9c A bullish rectangle. Compaq’s uptrend was interrupted for four\nmonths while it traded sideways. The break above the upper line in early May", - "type": "text" - }, - { - "block_id": "p147-b3", - "global_id": 1055, - "bbox": [ - 93.01, - 624.94, - 502.26, - 639.34 - ], - "text": "completed the pattern and resumed the uptrend. Rectangles are usually", - "type": "text" - }, - { - "block_id": "p147-b4", - "global_id": 1056, - "bbox": [ - 234.08, - 641.5, - 361.19, - 655.9 - ], - "text": "continuation patterns.", - "type": "text" - }, - { - "block_id": "p147-b5", - "global_id": 1057, - "bbox": [ - 72.0, - 672.47, - 519.11, - 769.69 - ], - "text": "A decisive close outside either the upper or lower boundary signals\ncompletion of the rectangle and points the direction of the trend. The market\nanalyst must always be on the alert, however, that the rectangular\nconsolidation does not turn into a reversal pattern. In the uptrend shown in\nFigure 6.9a, for example, notice that the three peaks might initially be viewed\nas a possible triple top reversal pattern.", - "type": "text" - } - ] - }, - { - "page_num": 148, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p148-b0", - "global_id": 1058, - "bbox": [ - 72.0, - 73.19, - 250.47, - 83.99 - ], - "text": "The Importance of the Volume Pattern", - "type": "text" - }, - { - "block_id": "p148-b1", - "global_id": 1059, - "bbox": [ - 72.0, - 92.01, - 518.33, - 189.23 - ], - "text": "One important clue to watch for is the volume pattern. Because the price\nswings in both directions are fairly broad, the analyst should keep a close eye\non which moves have the heavier volume. If the rallies are on heavier and the\nsetbacks on lighter volume, then the formation is probably a continuation in\nthe uptrend. If the heavier volume is on the downside, then it can be\nconsidered a warning of a possible trend reversal in the works.", - "type": "text" - }, - { - "block_id": "p148-b2", - "global_id": 1060, - "bbox": [ - 72.0, - 212.91, - 522.7, - 411.04 - ], - "text": "Swings Within the Range Can Be Traded\nSome chartists trade the swings within such a pattern by buying dips near the\nbottom and selling rallies near the top of the range. This technique enables the\nshort term trader to take advantage of the well defined price boundaries, and\nprofit from an otherwise trendless market. Because the positions are being\ntaken at the extremes of the range, the risks are relatively small and well\ndefined. If the trading range remains intact, this countertrend trading approach\nworks quite well. When a breakout does occur, the trader not only exits the\nlast losing trade immediately, but can reverse the previous position by\ninitiating a new trade in the direction of the new trend. Oscillators are\nespecially useful in sideways trading markets, but less useful once the\nbreakout has occurred for reasons discussed in Chapter 10.", - "type": "text" - }, - { - "block_id": "p148-b3", - "global_id": 1061, - "bbox": [ - 72.0, - 413.21, - 523.13, - 510.43 - ], - "text": "Other traders assume the rectangle is a continuation pattern and take long\npositions near the lower end of the price band in an uptrend, or initiate short\npositions near the top of the range in downtrends. Others avoid such trendless\nmarkets altogether and await a clearcut breakout before committing their\nfunds. Most trend-following systems perform very poorly during these\nperiods of sideways and trendless market action.", - "type": "text" - }, - { - "block_id": "p148-b4", - "global_id": 1062, - "bbox": [ - 72.0, - 534.11, - 229.46, - 544.91 - ], - "text": "Other Similarities and Differences", - "type": "text" - }, - { - "block_id": "p148-b5", - "global_id": 1063, - "bbox": [ - 72.0, - 552.92, - 502.38, - 617.01 - ], - "text": "In terms of duration, the rectangle usually falls into the one to three month\ncategory, similar to triangles and wedges. The volume pattern differs from\nother continuation patterns in the sense that the broad price swings prevent\nthe usual dropoff in activity seen in other such patterns.", - "type": "text" - }, - { - "block_id": "p148-b6", - "global_id": 1064, - "bbox": [ - 72.0, - 619.18, - 521.15, - 732.96 - ], - "text": "The most common measuring technique applied to the rectangle is based\non the height of the price range. Measure the height of the trading range, from\ntop to bottom, and then project that vertical distance from the breakout point.\nThis method is similar to the other vertical measuring techniques already\nmentioned, and is based on the volatility of the market. When we cover the\ncount in point and figure charting, we’ll say more on the question of\nhorizontal price measurements.", - "type": "text" - }, - { - "block_id": "p148-b7", - "global_id": 1065, - "bbox": [ - 72.0, - 735.13, - 519.94, - 766.09 - ], - "text": "Everything mentioned so far concerning volume on breakouts and the\nprobability of return moves applies here as well. Because the upper and lower", - "type": "text" - } - ] - }, - { - "page_num": 149, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p149-b0", - "global_id": 1066, - "bbox": [ - 72.0, - 73.64, - 514.43, - 171.22 - ], - "text": "boundaries are horizontal and so well defined in the rectangle, support and\nresistance levels are more clearly evident. This means that, on upside\nbreakouts, the top of the former price band should now provide solid support\non any selloffs. After a downside breakout in downtrends, the bottom of the\ntrading range (the previous support area) should now provide a solid ceiling\nover the market on any rally attempts.", - "type": "text" - }, - { - "block_id": "p149-b1", - "global_id": 1067, - "bbox": [ - 72.0, - 214.45, - 516.42, - 400.96 - ], - "text": "THE MEASURED MOVE\nThe measured move, or the swing measurement as it is sometimes called,\ndescribes the phenomenon where a major market advance or decline is\ndivided into two equal and parallel moves, as shown in Figure 6.10a. For this\napproach to work, the market moves should be fairly orderly and well\ndefined. The measured move is really just a variation of some of the\ntechniques we’ve already touched on. We’ve seen that some of the\nconsolidation patterns, such as flags and pennants, usually occur at about the\nhalfway point of a market move. We’ve also mentioned the tendency of\nmarkets to retrace about a third to a half of a prior trend before resuming that\ntrend.", - "type": "text" - }, - { - "block_id": "p149-b2", - "global_id": 1068, - "bbox": [ - 74.3, - 673.19, - 520.98, - 704.15 - ], - "text": "Figure 6.10a Example of a measured move (or the swing measurement) in an\nuptrend. This theory holds that the second leg in the advance (CD) duplicates", - "type": "text" - }, - { - "block_id": "p149-b3", - "global_id": 1069, - "bbox": [ - 88.52, - 706.32, - 506.75, - 720.72 - ], - "text": "the size and slope of the first upleg (AB). The corrective wave (BC) often", - "type": "text" - }, - { - "block_id": "p149-b4", - "global_id": 1070, - "bbox": [ - 120.91, - 722.88, - 474.36, - 737.28 - ], - "text": "retraces a third to a half of AB before the uptrend is resumed.", - "type": "text" - } - ] - }, - { - "page_num": 150, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p150-b0", - "global_id": 1071, - "bbox": [ - 84.34, - 346.23, - 510.93, - 377.19 - ], - "text": "Figure 6.10b A measured move takes the prior upleg (AB) and adds that\nvalue to the bottom of the correction at C. On this chart, the prior uptrend", - "type": "text" - }, - { - "block_id": "p150-b1", - "global_id": 1072, - "bbox": [ - 88.03, - 379.36, - 507.26, - 393.75 - ], - "text": "(AB) was 20 points. Adding that to the lowpoint at C (62) yielded a price", - "type": "text" - }, - { - "block_id": "p150-b2", - "global_id": 1073, - "bbox": [ - 250.74, - 395.92, - 344.53, - 410.32 - ], - "text": "target to 82 (D).", - "type": "text" - }, - { - "block_id": "p150-b3", - "global_id": 1074, - "bbox": [ - 72.0, - 426.89, - 520.75, - 524.11 - ], - "text": "In the measured move, when the chartist sees a well-defined situation,\nsuch as in Figure 6.10a, with a rally from point A to point B followed by a\ncountertrend swing from point B to point C (which retraces a third to a half of\nwave AB), it is assumed that the next leg in the uptrend (CD) will come close\nto duplicating the first leg (AB). The height of wave (AB), therefore, is\nsimply measured upward from the bottom of the correction at point C.", - "type": "text" - }, - { - "block_id": "p150-b4", - "global_id": 1075, - "bbox": [ - 72.0, - 568.06, - 520.54, - 678.95 - ], - "text": "THE CONTINUATION HEAD AND SHOULDERS\nPATTERN\nIn the previous chapter, we treated the head and shoulders pattern at some\nlength and described it as the best known and most trustworthy of all reversal\npatterns. The head and shoulders pattern can sometimes appear as a\ncontinuation instead of a reversal pattern.", - "type": "text" - }, - { - "block_id": "p150-b5", - "global_id": 1076, - "bbox": [ - 72.0, - 681.11, - 522.63, - 761.77 - ], - "text": "In the continuation head and shoulders variety, prices trace out a pattern\nthat looks very similar to a sideways rectangular pattern except that the\nmiddle trough in an uptrend (see Figure 6.11a) tends to be lower than either of\nthe two shoulders. In a downtrend (see Figure 6.11b), the middle peak in the\nconsolidation exceeds the other two peaks. The result in both cases is a head", - "type": "text" - } - ] - }, - { - "page_num": 151, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p151-b0", - "global_id": 1077, - "bbox": [ - 72.0, - 73.53, - 512.83, - 104.25 - ], - "text": "and shoulders pattern turned upside down. Because it is turned upside down,\nthere is no chance of confusing it with the reversal pattern.", - "type": "text" - }, - { - "block_id": "p151-b1", - "global_id": 1078, - "bbox": [ - 77.94, - 367.11, - 517.34, - 381.58 - ], - "text": "Figure 6.11a Example of a bullish continuation head and shoulders pattern.", - "type": "text" - }, - { - "block_id": "p151-b2", - "global_id": 1079, - "bbox": [ - 75.53, - 586.77, - 519.74, - 601.23 - ], - "text": "Figure 6.11b Example of a bearish continuation head and shoulders pattern.", - "type": "text" - } - ] - }, - { - "page_num": 152, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p152-b0", - "global_id": 1080, - "bbox": [ - 74.2, - 347.67, - 521.07, - 378.63 - ], - "text": "Figure 6.11c General Motors formed a continuation head and shoulders\npattern during the first half of 1997. The pattern is very clear but shows up in", - "type": "text" - }, - { - "block_id": "p152-b1", - "global_id": 1081, - "bbox": [ - 79.93, - 380.8, - 515.34, - 395.2 - ], - "text": "an unusual place. The pattern was completed and the uptrend resumed with", - "type": "text" - }, - { - "block_id": "p152-b2", - "global_id": 1082, - "bbox": [ - 198.74, - 397.36, - 396.53, - 411.76 - ], - "text": "the close above the neckline at 60.", - "type": "text" - }, - { - "block_id": "p152-b3", - "global_id": 1083, - "bbox": [ - 72.0, - 455.71, - 523.14, - 625.66 - ], - "text": "CONFIRMATION AND DIVERGENCE\nThe principle of confirmation is one of the common themes running\nthroughout the entire subject of market analysis, and is used in conjunction\nwith its counterpart—divergence. We’ll introduce both concepts here and\nexplain their meaning, but we’ll return to them again and again throughout the\nbook because their impact is so important. We’re discussing confirmation\nhere in the context of chart patterns, but it applies to virtually every aspect of\ntechnical analysis. Confirmation refers to the comparison of all technical\nsignals and indicators to ensure that most of those indicators are pointing in\nthe same direction and are confirming one another.", - "type": "text" - }, - { - "block_id": "p152-b4", - "global_id": 1084, - "bbox": [ - 72.0, - 627.82, - 518.37, - 725.04 - ], - "text": "Divergence is the opposite of confirmation and refers to a situation\nwhere different technical indicators fail to confirm one another. While it is\nbeing used here in a negative sense, divergence is a valuable concept in\nmarket analysis, and one of the best early warning signals of impending trend\nreversals. We’ll discuss the principle of divergence at greater length in\nChapter 10, “Oscillators and Contrary Opinion.”", - "type": "text" - } - ] - }, - { - "page_num": 153, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p153-b0", - "global_id": 1085, - "bbox": [ - 72.0, - 74.02, - 518.71, - 177.7 - ], - "text": "CONCLUSION\nThis concludes our treatment of price patterns. We stated earlier that the three\npieces of raw data used by the technical analyst were price, volume, and open\ninterest. Most of what we’ve said so far has focused on price. Let’s take a\ncloser look now at volume and open interest and how they are incorporated\ninto the analytical process.", - "type": "text" - } - ] - }, - { - "page_num": 154, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p154-b0", - "global_id": 1086, - "bbox": [ - 72.0, - 337.6, - 518.7, - 507.55 - ], - "text": "INTRODUCTION\nMost technicians in the financial markets use a multidimensional approach to\nmarket analysis by tracking the movement of three sets of figures—price,\nvolume, and open interest. Volume analysis applies to all markets. Open\ninterest applies primarily to futures markets. Chapter 3 discussed the\nconstruction of the daily bar chart and showed how the three figures were\nplotted on that type of chart. It was stated then that even though volume and\nopen interest figures are available for each delivery month in futures markets,\nthe total figures are the ones generally used for forecasting purposes. Stock\nchartists simply plot total volume along with the accompanying price.", - "type": "text" - }, - { - "block_id": "p154-b1", - "global_id": 1087, - "bbox": [ - 72.0, - 509.71, - 509.62, - 573.8 - ], - "text": "Most of the discussion of charting theory to this point has concentrated\nmainly on price action with some mention of volume. In this chapter, we’ll\nround out the three dimensional approach by taking a closer look at the role\nplayed by volume and open interest in the forecasting process.", - "type": "text" - }, - { - "block_id": "p154-b2", - "global_id": 1088, - "bbox": [ - 72.0, - 617.75, - 515.82, - 728.64 - ], - "text": "VOLUME AND OPEN INTEREST AS\nSECONDARY INDICATORS\nLet’s begin by placing volume and open interest in their proper perspective.\nPrice is by far the most important. Volume and open interest are secondary in\nimportance and are used primarily as confirming indicators. Of those two,\nvolume is the more important.", - "type": "text" - }, - { - "block_id": "p154-b3", - "global_id": 1089, - "bbox": [ - 72.0, - 752.32, - 106.97, - 763.12 - ], - "text": "Volume", - "type": "text" - } - ] - }, - { - "page_num": 155, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p155-b0", - "global_id": 1090, - "bbox": [ - 72.0, - 73.28, - 522.34, - 137.37 - ], - "text": "Volume is the number of entities traded during the time period under study.\nBecause we’ll be dealing primarily with daily bar charts, our main concern is\nwith daily volume. That daily volume is plotted by a vertical bar at the bottom\nof the chart under the day’s price action. (See Figure 7.1.)", - "type": "text" - }, - { - "block_id": "p155-b1", - "global_id": 1091, - "bbox": [ - 73.51, - 425.45, - 521.77, - 456.41 - ], - "text": "Figure 7.1 Notice that the volume bars are noticeably larger as prices are\nrallying (see circles). That means that volume is confirming the price rise and", - "type": "text" - }, - { - "block_id": "p155-b2", - "global_id": 1092, - "bbox": [ - 269.66, - 458.58, - 325.62, - 472.97 - ], - "text": "is bullish.", - "type": "text" - }, - { - "block_id": "p155-b3", - "global_id": 1093, - "bbox": [ - 72.0, - 489.54, - 513.18, - 553.64 - ], - "text": "Volume can be plotted for weekly bar charts as well. In that case, total\nvolume for the week would simply be plotted under the bar representing that\nweek’s price action. Volume is usually not used, however, on monthly bar\ncharts.", - "type": "text" - }, - { - "block_id": "p155-b4", - "global_id": 1094, - "bbox": [ - 72.0, - 577.32, - 185.75, - 588.12 - ], - "text": "Open Interest in Futures", - "type": "text" - }, - { - "block_id": "p155-b5", - "global_id": 1095, - "bbox": [ - 72.0, - 596.13, - 520.67, - 743.05 - ], - "text": "The total number of outstanding or unliquidated contracts at the end of the\nday is open interest. In Figure 7.2, open interest is the solid line plotted on the\nchart under its corresponding price data for the day, but above the volume\nbars. Remember that official volume and open interest figures are reported a\nday late in the futures markets and are, therefore, plotted with a one day lag.\n(Only estimated volume figures are available for the last trading day.) That\nmeans that each day the chartist plots the high, low, and closing price bar for\nthe last day of trading, but plots the official volume and open interest figures\nfor the previous day.", - "type": "text" - }, - { - "block_id": "p155-b6", - "global_id": 1096, - "bbox": [ - 100.79, - 745.21, - 512.41, - 759.61 - ], - "text": "Open interest represents the total number of outstanding longs or shorts", - "type": "text" - } - ] - }, - { - "page_num": 156, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p156-b0", - "global_id": 1097, - "bbox": [ - 72.0, - 73.64, - 521.87, - 204.35 - ], - "text": "in the market, not the sum of both. Open interest is the number of contracts. A\ncontract must have both a buyer and a seller. Therefore, two market\nparticipants—a buyer and a seller—combine to create only one contract. The\nopen interest figure reported each day is followed by either a positive or\nnegative number showing the increase or decrease in the number of contracts\nfor that day. It is those changes in the open interest levels, either up or down,\nthat give the chartist clues as to the changing character of market participation\nand give open interest its forecasting value.", - "type": "text" - }, - { - "block_id": "p156-b1", - "global_id": 1098, - "bbox": [ - 72.0, - 205.79, - 513.48, - 253.32 - ], - "text": "How Changes in Open Interest Occur. In order to grasp the significance\nof how changes in the open interest numbers are interpreted, the reader must\nfirst understand how each trade produces a change in those numbers.", - "type": "text" - }, - { - "block_id": "p156-b2", - "global_id": 1099, - "bbox": [ - 72.0, - 255.49, - 505.16, - 303.02 - ], - "text": "Every time a trade is completed on the floor of the exchange, the open\ninterest is affected in one of three ways—it increases, decreases, or stays\nunchanged. Let’s see how those changes occur.", - "type": "text" - }, - { - "block_id": "p156-b3", - "global_id": 1100, - "bbox": [ - 72.0, - 442.02, - 516.07, - 588.93 - ], - "text": "In the first case, both the buyer and seller are initiating a new position\nand a new contract is established. In case 2, the buyer is initiating a new long\nposition, but the seller is merely liquidating an old long. One is entering and\nthe other exiting a trade. The result is a standoff and no change takes place in\nthe number of contracts. In case 3, the same thing happens except this time it\nis the seller who is initiating a new short and the buyer who is only covering\nan old short. Because one of the traders is entering and the other exiting a\ntrade, again no change is produced. In case 4, both traders are liquidating an\nold position and the open interest decreases accordingly.", - "type": "text" - }, - { - "block_id": "p156-b4", - "global_id": 1101, - "bbox": [ - 72.0, - 591.09, - 522.34, - 721.44 - ], - "text": "To sum up, if both participants in a trade are initiating a new position,\nthe open interest will increase. If both are liquidating an old position, the open\ninterest will decline. If, however, one is initiating a new trade while the other\nis liquidating an old trade, open interest will remain unchanged. By looking at\nthe net change in the total open interest at the end of the day, the chartist is\nable to determine whether money is flowing into or out of the market. This\ninformation enables the analyst to draw some conclusions about the strength\nor weakness of the current price trend.", - "type": "text" - }, - { - "block_id": "p156-b5", - "global_id": 1102, - "bbox": [ - 72.0, - 745.12, - 337.37, - 755.92 - ], - "text": "General Rules for Interpreting Volume and Open Interest", - "type": "text" - } - ] - }, - { - "page_num": 157, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p157-b0", - "global_id": 1103, - "bbox": [ - 72.0, - 73.28, - 522.81, - 170.5 - ], - "text": "The futures technician incorporates volume and open interest information into\nmarket analysis. The rules for the interpretation of volume and open interest\nare generally combined because they are so similar. There are, however, some\ndistinctions between the two that should be addressed. We’ll begin here with a\nstatement of the general rules for both. Having done that, we’ll then treat each\none separately before combining them again at the end.", - "type": "text" - }, - { - "block_id": "p157-b1", - "global_id": 1104, - "bbox": [ - 72.0, - 295.82, - 517.4, - 393.04 - ], - "text": "If volume and open interest are both increasing, then the current price\ntrend will probably continue in its present direction (either up or down). If,\nhowever, volume and open interest are declining, the action can be viewed as\na warning that the current price trend may be nearing an end. Having said\nthat, let’s now take a look at volume and open interest separately. (See Figure\n7.2.)", - "type": "text" - }, - { - "block_id": "p157-b2", - "global_id": 1105, - "bbox": [ - 77.41, - 681.83, - 517.87, - 696.3 - ], - "text": "Figure 7.2 A daily chart of crude oil futures shows volume and open interest", - "type": "text" - }, - { - "block_id": "p157-b3", - "global_id": 1106, - "bbox": [ - 88.54, - 698.4, - 506.72, - 712.79 - ], - "text": "(solid line). The open interest line is rising as prices are falling, which is", - "type": "text" - }, - { - "block_id": "p157-b4", - "global_id": 1107, - "bbox": [ - 274.25, - 714.96, - 321.02, - 729.36 - ], - "text": "bearish.", - "type": "text" - } - ] - }, - { - "page_num": 158, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p158-b0", - "global_id": 1108, - "bbox": [ - 72.0, - 74.02, - 520.49, - 218.03 - ], - "text": "INTERPRETATION OF VOLUME FOR ALL\nMARKETS\nThe level of volume measures the intensity or urgency behind the price move.\nHeavier volume reflects a higher degree of intensity or pressure. By\nmonitoring the level of volume along with price action, the technician is\nbetter able to gauge the buying or selling pressure behind market moves. This\ninformation can then be used to confirm price movement or warn that a price\nmove is not to be trusted. (See Figures 7.3 and 7.4.)", - "type": "text" - }, - { - "block_id": "p158-b1", - "global_id": 1109, - "bbox": [ - 72.0, - 220.2, - 523.12, - 284.29 - ], - "text": "To state the rule more concisely, volume should increase or expand in the\ndirection of the existing price trend. In an uptrend, volume should be heavier\nas the price moves higher, and should decrease or contract on price dips. As\nlong as this pattern continues, volume is said to be confirming the price trend.", - "type": "text" - }, - { - "block_id": "p158-b2", - "global_id": 1110, - "bbox": [ - 78.34, - 573.08, - 516.92, - 620.61 - ], - "text": "Figure 7.3 The upside price breakout by McDonalds through the November\n1997 peak was accompanied by a noticeable burst of trading activity. That’s\nbullish.", - "type": "text" - } - ] - }, - { - "page_num": 159, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p159-b0", - "global_id": 1111, - "bbox": [ - 76.53, - 348.39, - 518.74, - 379.35 - ], - "text": "Figure 7.4 The volume bars are following Intel’s price uptrend. Volume is\nheavier as prices are rising, and drops off as prices weaken. Notice the burst", - "type": "text" - }, - { - "block_id": "p159-b1", - "global_id": 1112, - "bbox": [ - 134.84, - 381.52, - 460.42, - 395.92 - ], - "text": "of trading activity during the last three days’ price jump.", - "type": "text" - }, - { - "block_id": "p159-b2", - "global_id": 1113, - "bbox": [ - 72.0, - 412.48, - 513.64, - 493.14 - ], - "text": "The chartist is also watching for signs of divergence (there’s that word\nagain). Divergence occurs if the penetration of a previous high by the price\ntrend takes place on declining volume. This action alerts the chartist to\ndiminishing buying pressure. If the volume also shows a tendency to pick up\non price dips, the analyst begins to worry that the uptrend is in trouble.", - "type": "text" - }, - { - "block_id": "p159-b3", - "global_id": 1114, - "bbox": [ - 72.0, - 516.82, - 264.84, - 527.62 - ], - "text": "Volume as Confirmation in Price Patterns", - "type": "text" - }, - { - "block_id": "p159-b4", - "global_id": 1115, - "bbox": [ - 72.0, - 535.64, - 523.25, - 699.11 - ], - "text": "During our treatment of price patterns in Chapters 5 and 6, volume was\nmentioned several times as an important confirming indicator. One of the first\nsigns of a head and shoulders top occurred when prices moved into new highs\nduring the formation of the head on light volume with heavier activity on the\nsubsequent decline to the neckline. The double and triple tops saw lighter\nvolume on each successive peak followed by heavier downside activity.\nContinuation patterns, like the triangle, should be accompanied by a gradual\ndrop off in volume. As a rule, the resolution of all price patterns (the breakout\npoint) should be accompanied by heavier trading activity if the signal given\nby that breakout is real. (See Figure 7.5.)", - "type": "text" - }, - { - "block_id": "p159-b5", - "global_id": 1116, - "bbox": [ - 72.0, - 701.28, - 515.17, - 765.37 - ], - "text": "In a downtrend, the volume should be heavier during down moves and\nlighter on bounces. As long as that pattern continues, the selling pressure is\ngreater than buying pressure and the downtrend should continue. It’s only\nwhen that pattern begins to change that the chartist starts looking for signs of", - "type": "text" - } - ] - }, - { - "page_num": 160, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p160-b0", - "global_id": 1117, - "bbox": [ - 72.0, - 73.64, - 126.35, - 88.04 - ], - "text": "a bottom.", - "type": "text" - }, - { - "block_id": "p160-b1", - "global_id": 1118, - "bbox": [ - 72.0, - 111.36, - 176.86, - 122.16 - ], - "text": "Volume Precedes Price", - "type": "text" - }, - { - "block_id": "p160-b2", - "global_id": 1119, - "bbox": [ - 72.0, - 130.18, - 514.75, - 260.53 - ], - "text": "By monitoring the price and volume together, we’re actually using two\ndifferent tools to measure the same thing—pressure. By the mere fact that\nprices are trending higher, we can see that there is more buying than selling\npressure. It stands to reason then that the greater volume should take place in\nthe same direction as the prevailing trend. Technicians believe that volume\nprecedes price, meaning that the loss of upside pressure in an uptrend or\ndownside pressure in a downtrend actually shows up in the volume figures\nbefore it is manifested in a reversal of the price trend.", - "type": "text" - }, - { - "block_id": "p160-b3", - "global_id": 1120, - "bbox": [ - 80.69, - 550.04, - 514.58, - 597.57 - ], - "text": "Figure 7.5 The first half of this chart shows a positive trend with heavier\nvolume on up days. The box at the top shows a sudden downturn on heavy\nvolume—a negative sign. Notice the increase in trading as the continuation", - "type": "text" - }, - { - "block_id": "p160-b4", - "global_id": 1121, - "bbox": [ - 196.38, - 599.73, - 398.9, - 614.13 - ], - "text": "triangle is broken on the downside.", - "type": "text" - }, - { - "block_id": "p160-b5", - "global_id": 1122, - "bbox": [ - 72.0, - 637.81, - 520.73, - 769.69 - ], - "text": "On Balance Volume\nTechnicians have experimented with many volume indicators to help quantify\nbuying or selling pressure. Trying to “eyeball” the vertical volume bars along\nthe bottom of the chart is not always precise enough to detect significant\nshifts in the volume flow. The simplest and best known of these volume\nindicators is on balance volume or OBV. Developed and popularized by\nJoseph Granville in his 1963 book, Granville’s New Key to Stock Market\nProfits, OBV actually produces a curving line on the price chart. This line can", - "type": "text" - } - ] - }, - { - "page_num": 161, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p161-b0", - "global_id": 1123, - "bbox": [ - 72.0, - 73.28, - 507.92, - 104.25 - ], - "text": "be used either to confirm the quality of the current price trend or warn of an\nimpending reversal by diverging from the price action.", - "type": "text" - }, - { - "block_id": "p161-b1", - "global_id": 1124, - "bbox": [ - 72.0, - 106.41, - 511.35, - 153.94 - ], - "text": "Figure 7.6 shows the price chart with the OBV line along the bottom of\nthe chart instead of the volume bars. Notice how much easier it is to follow\nthe volume trend with the OBV line.", - "type": "text" - }, - { - "block_id": "p161-b2", - "global_id": 1125, - "bbox": [ - 72.0, - 156.1, - 515.57, - 253.32 - ], - "text": "The construction of the OBV line is simplicity itself. The total volume\nfor each day is assigned a plus or minus value depending on whether prices\nclose higher or lower for that day. A higher close causes the volume for that\nday to be given a plus value, while a lower close counts for negative volume.\nA running cumulative total is then maintained by adding or subtracting each\nday’s volume based on the direction of the market close.", - "type": "text" - }, - { - "block_id": "p161-b3", - "global_id": 1126, - "bbox": [ - 72.0, - 255.49, - 519.69, - 319.58 - ], - "text": "It is the direction of the OBV line (its trend) that is important and not the\nactual numbers themselves. The actual OBV values will differ depending on\nhow far back you are charting. Let the computer handle the calculations.\nConcentrate on the direction of the OBV line.", - "type": "text" - }, - { - "block_id": "p161-b4", - "global_id": 1127, - "bbox": [ - 72.0, - 321.74, - 510.38, - 402.4 - ], - "text": "The on balance volume line should follow in the same direction as the\nprice trend. If prices show a series of higher peaks and troughs (an uptrend),\nthe OBV line should do the same. If prices are trending lower, so should the\nOBV line. It’s when the volume line fails to move in the same direction as\nprices that a divergence exists and warns of a possible trend reversal.", - "type": "text" - }, - { - "block_id": "p161-b5", - "global_id": 1128, - "bbox": [ - 73.97, - 693.35, - 521.31, - 707.82 - ], - "text": "Figure 7.6 The line along the bottom shows on balance volume (OBV) for the", - "type": "text" - }, - { - "block_id": "p161-b6", - "global_id": 1129, - "bbox": [ - 79.4, - 709.92, - 515.88, - 724.32 - ], - "text": "same Compaq chart. Notice how much easier it was to spot the downturn in", - "type": "text" - }, - { - "block_id": "p161-b7", - "global_id": 1130, - "bbox": [ - 256.06, - 726.48, - 339.2, - 740.88 - ], - "text": "October 1997.", - "type": "text" - } - ] - }, - { - "page_num": 162, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p162-b0", - "global_id": 1131, - "bbox": [ - 72.0, - 73.19, - 166.07, - 83.99 - ], - "text": "Alternatives to OBV", - "type": "text" - }, - { - "block_id": "p162-b1", - "global_id": 1132, - "bbox": [ - 72.0, - 92.0, - 521.96, - 238.92 - ], - "text": "The on balance volume line does its job reasonably well, but it has some\nshortcomings. For one thing, it assigns an entire day’s volume a plus or minus\nvalue. Suppose a market closes up on the day by some minimal amount such\nas one or two tics. Is it reasonable to assign all of that day’s activity a positive\nvalue? Or consider a situation where the market spends most of the day on the\nupside, but then closes slightly lower. Should all of that day’s volume be\ngiven a negative value? To resolve these questions, technicians have\nexperimented with many variations of OBV in an attempt to discover the true\nupside and downside volume.", - "type": "text" - }, - { - "block_id": "p162-b2", - "global_id": 1133, - "bbox": [ - 72.0, - 241.09, - 507.17, - 338.3 - ], - "text": "One variation is to give greater weight to those days where the trend is\nthe strongest. On an up day, for example, the volume is multiplied by the\namount of the price gain. This technique still assigns positive and negative\nvalues, but gives greater weight to those days with greater price movement\nand reduces the impact of those days where the actual price change is\nminimal.", - "type": "text" - }, - { - "block_id": "p162-b3", - "global_id": 1134, - "bbox": [ - 72.0, - 340.47, - 517.99, - 421.13 - ], - "text": "There are more sophisticated formulas that blend volume (and open\ninterest) with price action. James Sibbet’s Demand Index, for example,\ncombines price and volume into a leading market indicator. The Herrick\nPayoff Index uses open interest to measure money flow. (See Appendix A for\nan explanation of both indicators.)", - "type": "text" - }, - { - "block_id": "p162-b4", - "global_id": 1135, - "bbox": [ - 72.0, - 423.29, - 522.18, - 586.77 - ], - "text": "It should be noted that volume reporting in the stock market is much\nmore useful than in the futures markets. Stock trading volume is reported\nimmediately, while it is reported a day late for futures. Levels of upside and\ndownside volume are also available for stocks, but not in futures. The\navailability of volume data for stocks on each price change during the day has\nfacilitated an even more advanced indicator called Money Flow, developed by\nLaszlo Birinyi, Jr. This real-time version of OBV tracks the level of volume\non each price change in order to determine if money is flowing into or out of\na stock. This sophisticated calculation, however, requires a lot of computer\npower and isn’t readily available to most traders.", - "type": "text" - }, - { - "block_id": "p162-b5", - "global_id": 1136, - "bbox": [ - 72.0, - 588.93, - 523.16, - 702.72 - ], - "text": "These more sophisticated variations of OBV have basically the same\nintent—to determine whether the heavier volume is taking place on the upside\n(bullish) or the downside (bearish). Even with its simplicity, the OBV line still\ndoes a pretty good job of tracking the volume flow in a market—either in\nfutures or stocks. And OBV is readily available on most charting software.\nMost charting packages even allow you to plot the OBV line right over the\nprice data for even easier comparison. (See Figures 7.7 and 7.8.)", - "type": "text" - } - ] - }, - { - "page_num": 163, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p163-b0", - "global_id": 1137, - "bbox": [ - 75.65, - 348.39, - 519.61, - 362.85 - ], - "text": "Figure 7.7 An excellent example of how a bearish divergence between the on", - "type": "text" - }, - { - "block_id": "p163-b1", - "global_id": 1138, - "bbox": [ - 87.31, - 364.95, - 507.97, - 379.35 - ], - "text": "balance volume line (bottom) and the price of Intel correctly warned of a", - "type": "text" - }, - { - "block_id": "p163-b2", - "global_id": 1139, - "bbox": [ - 249.26, - 381.52, - 346.01, - 395.92 - ], - "text": "major downturn.", - "type": "text" - }, - { - "block_id": "p163-b3", - "global_id": 1140, - "bbox": [ - 72.0, - 419.6, - 243.18, - 430.4 - ], - "text": "Other Volume Limitations in Futures", - "type": "text" - }, - { - "block_id": "p163-b4", - "global_id": 1141, - "bbox": [ - 72.0, - 438.41, - 518.77, - 635.02 - ], - "text": "We’ve already mentioned the problem of the one day lag in reporting futures\nvolume. There is also the relatively awkward practice of using total volume\nnumbers to analyze individual contracts instead of each contract’s actual\nvolume. There are good reasons for using total volume. But how does one\ndeal with situations when some contracts close higher and others lower in the\nsame futures market on the same day? Limit days produce other problems.\nDays when markets are locked limit up usually produce very light volume.\nThis is a sign of strength as the numbers of buyers so overwhelm the sellers\nthat prices reach the maximum trading limit and cease trading. According to\nthe traditional rules of interpretation, light volume on a rally is bearish. The\nlight volume on limit days is a violation of that principle and can distort OBV\nnumbers.", - "type": "text" - } - ] - }, - { - "page_num": 164, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p164-b0", - "global_id": 1142, - "bbox": [ - 80.55, - 346.23, - 514.72, - 393.75 - ], - "text": "Figure 7.8 Overlaying the OBV (solid line) right over the price bars makes\nfor easier comparison between price and volume. This chart of McDonalds\nshows the OBV line leading the price higher and warning in advance of the", - "type": "text" - }, - { - "block_id": "p164-b1", - "global_id": 1143, - "bbox": [ - 249.13, - 395.92, - 346.13, - 410.32 - ], - "text": "bullish breakout.", - "type": "text" - }, - { - "block_id": "p164-b2", - "global_id": 1144, - "bbox": [ - 72.0, - 426.89, - 517.12, - 474.42 - ], - "text": "Even with these limitations, however, volume analysis can still be used\nin the futures markets, and the technical trader would be well advised to keep\na watchful eye on volume indications.", - "type": "text" - }, - { - "block_id": "p164-b3", - "global_id": 1145, - "bbox": [ - 72.0, - 518.37, - 479.86, - 596.13 - ], - "text": "INTERPRETATION OF OPEN INTEREST IN\nFUTURES\nThe rules for interpreting open interest changes are similar to those for\nvolume, but require additional explanation.", - "type": "text" - }, - { - "block_id": "p164-b4", - "global_id": 1146, - "bbox": [ - 100.79, - 612.7, - 520.99, - 660.22 - ], - "text": "1. With prices advancing in an uptrend and total open interest increasing,\nnew money is flowing into the market reflecting aggressive new\nbuying, and is considered bullish. (See Figure 7.9.)", - "type": "text" - } - ] - }, - { - "page_num": 165, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p165-b0", - "global_id": 1147, - "bbox": [ - 74.82, - 346.95, - 520.46, - 361.41 - ], - "text": "Figure 7.9 The uptrend in silver prices was confirmed by a similar rise in the", - "type": "text" - }, - { - "block_id": "p165-b1", - "global_id": 1148, - "bbox": [ - 85.07, - 363.51, - 510.21, - 377.91 - ], - "text": "open interest line. The boxes to the right show some normal liquidation of", - "type": "text" - }, - { - "block_id": "p165-b2", - "global_id": 1149, - "bbox": [ - 129.08, - 380.08, - 466.19, - 394.48 - ], - "text": "outstanding contracts as prices start to correct downward.", - "type": "text" - }, - { - "block_id": "p165-b3", - "global_id": 1150, - "bbox": [ - 100.79, - 411.04, - 522.95, - 673.91 - ], - "text": "2. If, however, prices are rising and open interest declines, the rally is\nbeing caused primarily by short covering (holders of losing short\npositions being forced to cover those positions). Money is leaving\nrather than entering the market. This action is considered bearish\nbecause the uptrend will probably run out of steam once the necessary\nshort covering has been completed. (See Figure 7.10.)\n3. With prices in a downtrend and open interest rising, the technician\nknows that new money is flowing into the market, reflecting aggressive\nnew short selling. This action increases the odds that the downtrend\nwill continue and is considered bearish. (See Figure 7.11.)\n4. If, however, total open interest is declining along with declining\nprices, the price decline is being caused by discouraged or losing\nlongs being forced to liquidate their positions. This action is believed\nto indicate a strengthening technical situation because the downtrend\nwill probably end once open interest has declined sufficiently to show\nthat most losing longs have completed their selling.", - "type": "text" - } - ] - }, - { - "page_num": 166, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p166-b0", - "global_id": 1151, - "bbox": [ - 81.48, - 347.67, - 513.79, - 362.13 - ], - "text": "Figure 7.10 An example of a weak price rebound in gold futures. The price", - "type": "text" - }, - { - "block_id": "p166-b1", - "global_id": 1152, - "bbox": [ - 83.7, - 364.23, - 511.57, - 378.63 - ], - "text": "rise is accompanied by falling open interest, while the price decline shows", - "type": "text" - }, - { - "block_id": "p166-b2", - "global_id": 1153, - "bbox": [ - 88.06, - 380.8, - 507.22, - 395.2 - ], - "text": "rising open interest. A strong trend would see open interest trending with", - "type": "text" - }, - { - "block_id": "p166-b3", - "global_id": 1154, - "bbox": [ - 239.49, - 397.36, - 355.79, - 411.76 - ], - "text": "price, not against it.", - "type": "text" - }, - { - "block_id": "p166-b4", - "global_id": 1155, - "bbox": [ - 100.79, - 428.33, - 299.78, - 442.73 - ], - "text": "Let’s summarize these four points:", - "type": "text" - }, - { - "block_id": "p166-b5", - "global_id": 1156, - "bbox": [ - 82.08, - 459.3, - 385.1, - 523.39 - ], - "text": "1. Rising open interest in an uptrend is bullish.\n2. Declining open interest in an uptrend is bearish.\n3. Rising open interest in a downtrend is bearish.\n4. Declining open interest in a downtrend is bullish.", - "type": "text" - } - ] - }, - { - "page_num": 167, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p167-b0", - "global_id": 1157, - "bbox": [ - 79.23, - 347.67, - 516.05, - 395.2 - ], - "text": "Figure 7.11 The downturn in copper during the summer of 1997 and the\nsubsequent price decline was accompanied by rising open interest. Rising\nopen interest during a price decline is bearish because it reflects aggressive", - "type": "text" - }, - { - "block_id": "p167-b1", - "global_id": 1158, - "bbox": [ - 260.07, - 397.36, - 335.21, - 411.76 - ], - "text": "short selling.", - "type": "text" - }, - { - "block_id": "p167-b2", - "global_id": 1159, - "bbox": [ - 72.0, - 435.44, - 309.89, - 446.24 - ], - "text": "Other Situations Where Open Interest Is Important", - "type": "text" - }, - { - "block_id": "p167-b3", - "global_id": 1160, - "bbox": [ - 72.0, - 454.26, - 487.94, - 485.22 - ], - "text": "In addition to the preceding tendencies, there are other market situations\nwhere a study of open interest can prove useful.", - "type": "text" - }, - { - "block_id": "p167-b4", - "global_id": 1161, - "bbox": [ - 72.0, - 487.39, - 521.02, - 534.91 - ], - "text": "1. Toward the end of major market moves, where open interest has been\nincreasing throughout the price trend, a leveling off or decline in open interest\nis often an early warning of a change in trend.", - "type": "text" - }, - { - "block_id": "p167-b5", - "global_id": 1162, - "bbox": [ - 72.0, - 537.07, - 521.86, - 700.55 - ], - "text": "2. A high open interest figure at market tops can be considered bearish if\nthe price drop is very sudden. This means that all of the new longs established\nnear the end of the uptrend now have losing positions. Their forced\nliquidation will keep prices under pressure until the open interest has declined\nsufficiently. As an example, let’s assume that an uptrend has been in effect for\nsome time. Over the past month, open interest has increased noticeably.\nRemember that every new open interest contract has one new long and one\nnew short. Suddenly, prices begin to drop sharply and fall below the lowest\nprice set over the past month. Every single new long established during that\nmonth now has a loss.", - "type": "text" - }, - { - "block_id": "p167-b6", - "global_id": 1163, - "bbox": [ - 72.0, - 702.72, - 513.15, - 766.81 - ], - "text": "The forced liquidation of those longs keeps prices under pressure until\nthey have all been liquidated. Worse still, their forced selling often begins to\nfeed on itself and, as prices are pushed even lower, causes additional margin\nselling by other longs and intensifies the new price decline. As a corollary to", - "type": "text" - } - ] - }, - { - "page_num": 168, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p168-b0", - "global_id": 1164, - "bbox": [ - 72.0, - 73.64, - 490.33, - 104.96 - ], - "text": "the preceding point, an unusually high open interest in a bull market is a\ndanger signal.", - "type": "text" - }, - { - "block_id": "p168-b1", - "global_id": 1165, - "bbox": [ - 72.0, - 106.41, - 515.0, - 220.2 - ], - "text": "3. If open interest builds up noticeably during a sideways consolidation\nor a horizontal trading range, the ensuing price move intensifies once the\nbreakout occurs. This only stands to reason. The market is in a period of\nindecision. No one is sure which direction the trend breakout will take. The\nincrease in open interest, however, tells us that a lot of traders are taking\npositions in anticipation of the breakout. Once that breakout does occur, a lot\nof traders are going to be caught on the wrong side of the market.", - "type": "text" - }, - { - "block_id": "p168-b2", - "global_id": 1166, - "bbox": [ - 72.0, - 222.36, - 522.77, - 402.4 - ], - "text": "Let’s assume we’ve had a three month trading range and that the open\ninterest has jumped by 10,000 contracts. This means that 10,000 new long\npositions and 10,000 new short positions have been taken. Prices then break\nout on the upside and new three month highs are established. Because prices\nare trading at the highest point in three months, every single short position (all\n10,000 of them) initiated during the previous three months now shows a loss.\nThe scramble to cover those losing shorts naturally causes additional upside\npressure on prices, producing even more panic. Prices remain strong until all\nor most of those 10,000 short positions have been offset by buying into the\nmarket strength. If the breakout had been to the downside, then it would have\nbeen the longs doing the scrambling.", - "type": "text" - }, - { - "block_id": "p168-b3", - "global_id": 1167, - "bbox": [ - 72.0, - 404.57, - 518.76, - 568.04 - ], - "text": "The early stage of any new trend immediately following a breakout is\nusually fueled by forced liquidation by those caught on the wrong side of the\nmarket. The more traders caught on the wrong side (manifested in the high\nopen interest), the more severe the response to a sudden adverse market\nmove. On a more positive note, the new trend is further aided by those on the\nright side of the market whose judgment has been vindicated, and who are\nnow using accumulated paper profits to finance additional positions. It can be\nseen why the greater the increase in open interest during a trading range (or\nany price formation for that matter), the greater the potential for the\nsubsequent price move.", - "type": "text" - }, - { - "block_id": "p168-b4", - "global_id": 1168, - "bbox": [ - 72.0, - 570.2, - 522.53, - 733.68 - ], - "text": "4. Increasing open interest at the completion of a price pattern is viewed\nas added confirmation of a reliable trend signal. The breaking of the neckline,\nfor example, of a head and shoulders bottom is more convincing if the\nbreakout occurs on increasing open interest along with the heavier volume.\nThe analyst has to be careful here. Because the impetus following the initial\ntrend signal is often caused by those on the wrong side of the market,\nsometimes the open interest dips slightly at the beginning of a new trend. This\ninitial dip in the open interest can mislead the unwary chart reader, and argues\nagainst focusing too much attention on the open interest changes over the\nvery short term.", - "type": "text" - } - ] - }, - { - "page_num": 169, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p169-b0", - "global_id": 1169, - "bbox": [ - 72.0, - 74.02, - 522.17, - 151.78 - ], - "text": "SUMMARY OF VOLUME AND OPEN INTEREST\nRULES\nLet’s summarize some of the more important elements of price, volume, and\nopen interest.", - "type": "text" - }, - { - "block_id": "p169-b1", - "global_id": 1170, - "bbox": [ - 74.88, - 168.35, - 522.74, - 480.9 - ], - "text": "1. Volume is used in all markets; open interest mainly in futures.\n2. Only the total volume and open interest are used for futures.\n3. Increasing volume (and open interest) indicate that the current price\ntrend will probably continue.\n4. Declining volume (and open interest) suggest that the price trend may be\nchanging.\n5. Volume precedes price. Changes in buying or selling pressure are often\ndetected in volume before price.\n6. On balance volume (OBV), or some variation thereof, can be used to\nmore accurately measure the direction of volume pressure.\n7. Within an uptrend, a sudden leveling off or decline in open interest often\nwarns of a change in trend. (This applies only to futures.)\n8. Very high open interest at market tops is dangerous and can intensify\ndownside pressure. (This applies only to futures.)\n9. A buildup in open interest during consolidation periods intensifies the\nensuing breakout. (This applies only to futures.)\n10. Increases in volume (and open interest) help confirm the resolution of\nprice patterns or any other significant chart developments that signal the\nbeginning of a new trend.", - "type": "text" - }, - { - "block_id": "p169-b2", - "global_id": 1171, - "bbox": [ - 72.0, - 524.85, - 519.15, - 694.79 - ], - "text": "BLOWOFFS AND SELLING CLIMAXES\nOne final situation not covered so far that deserves mention is the type of\ndramatic market action that often takes place at tops and bottoms—blowoffs\nand selling climaxes. Blowoffs occur at major market tops and selling\nclimaxes at bottoms. In futures, blowoffs are often accompanied by a drop in\nopen interest during the final rally. In the case of a blowoff at market tops,\nprices suddenly begin to rally sharply after a long advance, accompanied by a\nlarge jump in trading activity and then peak abruptly. (See Figure 7.12.) In a\nselling climax bottom, prices suddenly drop sharply on heavy trading activity\nand rebound as quickly. (Refer back to Figure 4.22c.)", - "type": "text" - }, - { - "block_id": "p169-b3", - "global_id": 1172, - "bbox": [ - 72.0, - 738.02, - 455.04, - 758.18 - ], - "text": "COMMITMENTS OF TRADERS REPORT", - "type": "text" - } - ] - }, - { - "page_num": 170, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p170-b0", - "global_id": 1173, - "bbox": [ - 72.0, - 73.28, - 520.73, - 236.76 - ], - "text": "Our treatment of open interest would not be complete without mentioning the\nCommitments of Traders (COT) Report, and how it is used by futures\ntechnicians as a forecasting tool. The report is released by the Commodity\nFutures Trading Commission (CFTC) twice a month—a mid-month report\nand one at month’s end. The report breaks down the open interest numbers\ninto three categories—large hedgers, large speculators, and small traders. The\nlarge hedgers, also called commercials, use the futures markets primarily for\nhedging purposes. Large speculators include the large commodity funds, who\nrely primarily on mechanical trend-following systems. The final category of\nsmall traders includes the general public, who trade in much smaller amounts.", - "type": "text" - }, - { - "block_id": "p170-b1", - "global_id": 1174, - "bbox": [ - 80.75, - 526.99, - 514.52, - 541.46 - ], - "text": "Figure 7.12 A couple of blowoff tops in coffee futures. In both cases, prices", - "type": "text" - }, - { - "block_id": "p170-b2", - "global_id": 1175, - "bbox": [ - 93.07, - 543.56, - 502.19, - 557.96 - ], - "text": "rallied sharply on heavy volume. The negative warnings came from the", - "type": "text" - }, - { - "block_id": "p170-b3", - "global_id": 1176, - "bbox": [ - 102.14, - 560.12, - 493.14, - 574.52 - ], - "text": "decline in open interest (solid line) during both rallies (see arrows).", - "type": "text" - }, - { - "block_id": "p170-b4", - "global_id": 1177, - "bbox": [ - 72.0, - 618.47, - 520.81, - 755.29 - ], - "text": "WATCH THE COMMERCIALS\nThe guiding principle in analyzing the Commitments Report is the belief that\nthe large commercial hedgers are usually right, while the traders are usually\nwrong. That being the case, the idea is to place yourself in the same positions\nas the hedgers and in the opposite positions of the two categories of traders.\nFor example, a bullish signal at a market bottom would occur when the\ncommercials are heavily net long while the large and small traders are heavily\nnet short. In a rising market, a warning signal of a possible top would take", - "type": "text" - } - ] - }, - { - "page_num": 171, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p171-b0", - "global_id": 1178, - "bbox": [ - 72.0, - 73.53, - 505.26, - 104.25 - ], - "text": "place when the large and small traders become heavily net long at the same\ntime that the commercials are becoming heavily net short.", - "type": "text" - }, - { - "block_id": "p171-b1", - "global_id": 1179, - "bbox": [ - 72.0, - 148.2, - 523.11, - 384.4 - ], - "text": "NET TRADER POSITIONS\nIt is possible to chart the trends of the three market groups, and to use those\ntrends to spot extremes in their positions. One way to do that is to study the\nnet trader positions published in Futures Charts (Published by Commodity\nTrend Service, PO Box 32309, Palm Beach Gardens, FL 33420). That\ncharting service plots three lines that show the net trader positions for all three\ngroups on a weekly price chart for each market going back four years. By\nproviding four years of data, historical comparisons are easily done. Nick Van\nNice, the publisher of that chart service, looks for situations where the\ncommercials are at one extreme, and the two categories of traders at the other,\nto find buying and selling opportunities (as shown in Figures 7.13 and 7.14).\nEven if you don’t use the COT Report as a primary input in your trading\ndecisions, it’s not a bad idea to keep an eye on what those three groups are\ndoing.", - "type": "text" - }, - { - "block_id": "p171-b2", - "global_id": 1180, - "bbox": [ - 72.0, - 427.63, - 522.75, - 581.01 - ], - "text": "OPEN INTEREST IN OPTIONS\nOur coverage of open interest has concentrated on the futures markets. Open\ninterest plays an important role in options trading as well. Open interest\nfigures are published each day for put and call options on futures markets,\nstock averages, industry indexes, and individual stocks. While open interest in\noptions may not be interpreted in exactly the same way as in futures, it tells us\nessentially the same thing—where the interest is and the liquidity. Some\noption traders compare call open interest (bulls) to put open interest (bears) in\norder to measure market sentiment. Others use option volume.", - "type": "text" - } - ] - }, - { - "page_num": 172, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p172-b0", - "global_id": 1181, - "bbox": [ - 80.1, - 347.67, - 515.19, - 395.2 - ], - "text": "Figure 7.13 This weekly chart of S&P 500 futures shows three buy signals\n(see arrows). The lines along the bottom show the commercials (solid line)\nheavily net long and the large speculators (dashed line) heavily net short at", - "type": "text" - }, - { - "block_id": "p172-b1", - "global_id": 1182, - "bbox": [ - 250.67, - 397.36, - 344.6, - 411.76 - ], - "text": "each buy signal.", - "type": "text" - }, - { - "block_id": "p172-b2", - "global_id": 1183, - "bbox": [ - 72.0, - 455.71, - 517.95, - 675.35 - ], - "text": "PUT/CALL RATIOS\nVolume figures for the options markets are used essentially the same way as\nin futures and stocks—that is, they tell us the degree of buying or selling\npressure in a given market. Volume figures in options are broken down into\ncall volume (bullish) and put volume (bearish). By monitoring the volume in\ncalls versus puts, we are able to determine the degree of bullishness or\nbearishness in a market. One of the primary uses of volume data in options\ntrading is the construction of put/call volume ratios. When options traders are\nbullish, call volume exceeds put volume and the put/call ratio falls. A bearish\nattitude is reflected in heavier put volume and a higher put/call ratio. The\nput/call ratio is usually viewed as a contrary indicator. A very high ratio\nsignals an oversold market. A very low ratio is a negative warning of an\noverbought market.", - "type": "text" - } - ] - }, - { - "page_num": 173, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p173-b0", - "global_id": 1184, - "bbox": [ - 81.66, - 346.95, - 513.6, - 377.91 - ], - "text": "Figure 7.14 This weekly chart of copper futures shows three sell signals\nmarked by the arrows. Each sell signal shows net long positions by the two", - "type": "text" - }, - { - "block_id": "p173-b1", - "global_id": 1185, - "bbox": [ - 83.27, - 380.08, - 512.0, - 394.48 - ], - "text": "categories of speculators and a net short position by the commercials. The", - "type": "text" - }, - { - "block_id": "p173-b2", - "global_id": 1186, - "bbox": [ - 228.02, - 396.64, - 367.24, - 411.04 - ], - "text": "commercials were right.", - "type": "text" - }, - { - "block_id": "p173-b3", - "global_id": 1187, - "bbox": [ - 72.0, - 454.99, - 515.16, - 582.45 - ], - "text": "COMBINE OPTION SENTIMENT WITH\nTECHNICALS\nOptions traders use open interest and volume put/call figures to determine\nextremes in bullish or bearish sentiment. These sentiment readings work best\nwhen combined with technical measures such as support, resistance, and the\ntrend of the underlying market. Since timing is so crucial in options, most\noption traders are technically oriented.", - "type": "text" - }, - { - "block_id": "p173-b4", - "global_id": 1188, - "bbox": [ - 72.0, - 625.68, - 520.53, - 762.49 - ], - "text": "CONCLUSION\nThat concludes our coverage of volume and open interest, at least for now.\nVolume analysis is used in all financial markets—futures, options, and stocks.\nOpen interest applies only to futures and options. But, since futures and\noptions are traded on so many stock market vehicles, some understanding of\nhow open interest works can be useful in all three financial arenas. In most of\nour discussions so far, we’ve concentrated on daily bar charts. The next step\nis to broaden our time horizon and to learn how to apply the tools we’ve", - "type": "text" - } - ] - }, - { - "page_num": 174, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p174-b0", - "global_id": 1189, - "bbox": [ - 72.0, - 73.06, - 499.57, - 104.25 - ], - "text": "learned to weekly and monthly charts in order to perform long range trend\nanalysis. We’ll accomplish that in the next chapter.", - "type": "text" - } - ] - }, - { - "page_num": 175, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p175-b0", - "global_id": 1190, - "bbox": [ - 72.0, - 310.24, - 516.31, - 430.49 - ], - "text": "INTRODUCTION\nOf all the charts utilized by the market technician for forecasting and trading\nthe financial markets, the daily bar chart is by far the most popular. The daily\nbar chart usually covers a period of only six to nine months. However,\nbecause most traders confine their interest to relatively short term market\naction, daily bar charts have gained wide acceptance as the primary working\ntool of the chartist.", - "type": "text" - }, - { - "block_id": "p175-b1", - "global_id": 1191, - "bbox": [ - 72.0, - 432.65, - 517.09, - 496.74 - ], - "text": "The average trader’s dependence on these daily charts, however, and the\npreoccupation with short term market behavior, cause many to overlook a\nvery useful and rewarding area of price charting—the use of weekly and\nmonthly charts for longer range trend analysis and forecasting.", - "type": "text" - }, - { - "block_id": "p175-b2", - "global_id": 1192, - "bbox": [ - 72.0, - 498.91, - 521.51, - 645.82 - ], - "text": "The daily bar chart covers a relatively short period of time in the life of\nany market. A thorough trend analysis of a market, however, should include\nsome consideration of how the daily market price is moving in relation to its\nlong range trend structure. To accomplish that task, longer range charts must\nbe employed. Whereas on the daily bar chart each bar represents one day’s\nprice action, on the weekly and monthly charts each price bar represents one\nweek’s and one month’s price action, respectively. The purpose of weekly and\nmonthly charts is to compress price action in such a way that the time horizon\ncan be greatly expanded and much longer time periods can be studied.", - "type": "text" - }, - { - "block_id": "p175-b3", - "global_id": 1193, - "bbox": [ - 72.0, - 689.77, - 493.79, - 767.53 - ], - "text": "THE IMPORTANCE OF LONGER RANGE\nPERSPECTIVE\nLong range price charts provide a perspective on the market trend that is\nimpossible to achieve with the use of daily charts alone. During our", - "type": "text" - } - ] - }, - { - "page_num": 176, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p176-b0", - "global_id": 1194, - "bbox": [ - 72.0, - 73.53, - 513.13, - 170.5 - ], - "text": "introduction to the technical philosophy in Chapter 1, it was pointed out that\none of the greatest advantages of chart analysis is the application of its\nprinciples to virtually any time dimension, including long range forecasting.\nWe also addressed the fallacy, espoused by some, that technical analysis\nshould be limited to short term “timing” with longer range forecasting left to\nthe fundamental analyst.", - "type": "text" - }, - { - "block_id": "p176-b1", - "global_id": 1195, - "bbox": [ - 72.0, - 172.67, - 510.79, - 269.88 - ], - "text": "The accompanying charts will demonstrate that the principles of\ntechnical analysis—including trend analysis, support and resistance levels,\ntrendlines, percentage retracements, and price patterns—lend themselves\nquite well to the analysis of long range price movements. Anyone who is not\nconsulting these longer range charts is missing an enormous amount of\nvaluable price information.", - "type": "text" - }, - { - "block_id": "p176-b2", - "global_id": 1196, - "bbox": [ - 72.0, - 313.84, - 521.85, - 474.42 - ], - "text": "CONSTRUCTION OF CONTINUATION CHARTS\nFOR FUTURES\nThe average futures contract has a trading life of about a year and a half\nbefore expiration. This limited life feature poses some obvious problems for\nthe technician interested in constructing a long range chart going back several\nyears. Stock market technicians don’t have this problem. Charts are readily\navailable for individual common stocks and the market averages from the\ninception of trading. How then does the futures technician construct longer\nrange charts for contracts that are constantly expiring?", - "type": "text" - }, - { - "block_id": "p176-b3", - "global_id": 1197, - "bbox": [ - 72.0, - 476.58, - 519.59, - 590.37 - ], - "text": "The answer is the continuation chart. Notice the emphasis on the word\n“continuation.” The technique most commonly employed is simply to link a\nnumber of contracts together to provide continuity. When one contract\nexpires, another one is used. In order to accomplish this, the simplest method,\nand the one used by most chart services, is to always use the price of the\nnearest expiring contract. When that nearest expiring contract stops trading,\nthe next in line becomes the nearest contract and is the one plotted.", - "type": "text" - }, - { - "block_id": "p176-b4", - "global_id": 1198, - "bbox": [ - 72.0, - 614.05, - 520.36, - 745.93 - ], - "text": "Other Ways to Construct Continuation Charts\nThe technique of linking prices of the nearest expiring contracts is relatively\nsimple and does solve the problem of providing price continuity. However,\nthere are some problems with that method. Sometimes the expiring contract\nmay be trading at a significant premium or discount to the next contract, and\nthe changeover to the new contract may cause a sudden price drop or jump on\nthe chart. Another potential distortion is the extreme volatility experienced by\nsome spot contracts just before expiration.", - "type": "text" - }, - { - "block_id": "p176-b5", - "global_id": 1199, - "bbox": [ - 100.79, - 748.09, - 464.04, - 762.49 - ], - "text": "Futures technicians have devised many ways to deal with these", - "type": "text" - } - ] - }, - { - "page_num": 177, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p177-b0", - "global_id": 1200, - "bbox": [ - 72.0, - 73.17, - 522.72, - 170.5 - ], - "text": "occasional distortions. Some will stop plotting the nearest contract a month or\ntwo before it expires to avoid the volatility in the spot month. Others will\navoid using the nearest contract altogether and will instead chart the second or\nthird contract. Another method is to chart the contract with the highest open\ninterest on the theory that that delivery month is the truest representation of\nmarket value.", - "type": "text" - }, - { - "block_id": "p177-b1", - "global_id": 1201, - "bbox": [ - 72.0, - 172.67, - 523.19, - 286.45 - ], - "text": "Continuation charts can also be constructed by linking specific calendar\nmonths. For example, a November soybean continuation chart would combine\nonly the historic data provided by each successive year’s November soybean\ncontract. (This technique of linking specific delivery months was favored by\nW.D. Gann.) Some chartists go even further by averaging the prices of several\ncontracts, or constructing indices that attempt to smooth the changeover by\nmaking adjustments in the price premium or discount.", - "type": "text" - }, - { - "block_id": "p177-b2", - "global_id": 1202, - "bbox": [ - 72.0, - 330.4, - 380.98, - 350.56 - ], - "text": "THE PERPETUAL CONTRACT™", - "type": "text" - }, - { - "block_id": "p177-b3", - "global_id": 1203, - "bbox": [ - 72.0, - 353.43, - 518.8, - 434.09 - ], - "text": "An innovative solution to the problem of price continuity was developed\nby Robert Pelletier, president of Commodity Systems, Inc., a commodity and\nstock data service (CSI. 200 W. Palmetto Park Road, Boca Raton, FL 33422),\ncalled the Perpetual Contract.™ (“Perpetual Contract™” is a registered\ntrademark of that firm.)", - "type": "text" - }, - { - "block_id": "p177-b4", - "global_id": 1204, - "bbox": [ - 72.0, - 436.25, - 513.57, - 550.04 - ], - "text": "The purpose of the Perpetual Contract™ is to provide years of futures\nprice history in one continuous time series. That is accomplished by\nconstructing a time series based on a constant forward time period. For\nexample, the series would determine a value three months or six months into\nthe future. The time period varies and can be chosen by the user. The\nPerpetual Contract™ is constructed by taking a weighted average of two\nfutures contracts that surround the time period desired.", - "type": "text" - }, - { - "block_id": "p177-b5", - "global_id": 1205, - "bbox": [ - 72.0, - 552.2, - 514.17, - 715.68 - ], - "text": "The value for the Perpetual Contract™ is not an actual price, but a\nweighted average of two other prices. The main advantage of the Perpetual\nContract™ is that it eliminates the need for using only the nearest expiring\ncontract and smoothes out the price series by eliminating the distortions that\ncan take place during the transition between delivery months. For chart\nanalysis purposes, the nearest-month continuation charts published by chart\nservices are more than adequate. A continuous price series, however, is more\nuseful for back-testing trading systems and indicators. A more complete\nexplanation of ways to construct continuous futures contracts is provided by\nGreg Morris in Appendix D.", - "type": "text" - } - ] - }, - { - "page_num": 178, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p178-b0", - "global_id": 1206, - "bbox": [ - 72.0, - 74.02, - 519.55, - 184.91 - ], - "text": "LONG TERM TRENDS DISPUTE\nRANDOMNESS\nThe most striking features of long range charts is that not only are trends very\nclearly defined, but that long range trends often last for years. Imagine\nmaking a forecast based on one of these long range trends, and not having to\nchange that forecast for several years!", - "type": "text" - }, - { - "block_id": "p178-b1", - "global_id": 1207, - "bbox": [ - 72.0, - 187.07, - 521.88, - 333.98 - ], - "text": "The persistence of long range trends raises another interesting question\nthat should be mentioned—the question of randomness. While technical\nanalysts do not subscribe to the theory that market action is random and\nunpredictable, it seems safe to observe that whatever randomness does exist\nin price action is probably a phenomenon of the very short term. The\npersistence of existing trends over long periods of time, in many cases for\nyears, is a compelling argument against the claims of Random Walk Theorists\nthat prices are serially independent and that past price action has no effect on\nfuture price action.", - "type": "text" - }, - { - "block_id": "p178-b2", - "global_id": 1208, - "bbox": [ - 72.0, - 377.93, - 518.81, - 488.82 - ], - "text": "PATTERNS ON CHARTS: WEEKLY AND\nMONTHLY REVERSALS\nPrice patterns appear on the long range charts, which are interpreted in the\nsame way as on the daily charts. Double tops and bottoms are very prominent\non these charts, as are head and shoulder reversals. Triangles, which are\nusually continuation patterns, are frequently seen.", - "type": "text" - }, - { - "block_id": "p178-b3", - "global_id": 1209, - "bbox": [ - 72.0, - 490.98, - 521.88, - 621.34 - ], - "text": "Another pattern that occurs quite frequently on these charts is the weekly\nand monthly reversal. For example, on the monthly chart, a new monthly high\nfollowed by a close below the previous month’s close often represents a\nsignificant turning point, especially if it occurs near a major support or\nresistance area. Weekly reversals are quite frequent on the weekly charts.\nThese patterns are the equivalent of the key reversal day on the daily charts,\nexcept that on the long range charts these reversals carry a great deal more\nsignificance.", - "type": "text" - }, - { - "block_id": "p178-b4", - "global_id": 1210, - "bbox": [ - 72.0, - 664.57, - 523.18, - 768.25 - ], - "text": "LONG TERM TO SHORT TERM CHARTS\nIt’s especially important to appreciate the order in which price charts should\nbe studied in performing a thorough trend analysis. The proper order to follow\nin chart analysis is to begin with the long range and gradually work to the\nnear term. The reason for this should become apparent as one works with the\ndifferent time dimensions. If the analyst begins with only the near term", - "type": "text" - } - ] - }, - { - "page_num": 179, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p179-b0", - "global_id": 1211, - "bbox": [ - 72.0, - 73.06, - 520.34, - 187.07 - ], - "text": "picture, he or she is forced to constantly revise conclusions as more price data\nis considered. A thorough analysis of a daily chart may have to be completely\nredone after looking at the long range charts. By starting with the big picture,\ngoing back as far as 20 years, all data to be considered are already included in\nthe chart and a proper perspective is achieved. Once the analyst knows where\nthe market is from a longer range perspective, he or she gradually “zeros in”\non the shorter term.", - "type": "text" - }, - { - "block_id": "p179-b1", - "global_id": 1212, - "bbox": [ - 72.0, - 189.23, - 518.75, - 319.58 - ], - "text": "The first chart to be considered is the 20 year monthly chart. The analyst\nlooks for the more obvious chart patterns, major trendlines, or the proximity\nof major support or resistance levels. He or she then consults the most recent\nfive years on the weekly chart, repeating the same process. Having done that,\nthe analyst narrows his or her focus to the last six to nine months of market\naction on the daily bar chart, thus going from the “macro” to the “micro”\napproach. If the trader wants to proceed further, intraday charts can then be\nconsulted for an even more microscopic study of recent action.", - "type": "text" - }, - { - "block_id": "p179-b2", - "global_id": 1213, - "bbox": [ - 72.0, - 363.53, - 520.16, - 490.98 - ], - "text": "WHY SHOULD LONG RANGE CHARTS BE\nADJUSTED FOR INFLATION?\nA question often raised concerning long term charts is whether or not historic\nprice levels seen on the charts should be adjusted for inflation. After all, the\nargument goes, do these long range peaks and troughs have any validity if not\nadjusted to reflect the changes in the value of the U.S. dollar? This is a point\nof some controversy among analysts.", - "type": "text" - }, - { - "block_id": "p179-b3", - "global_id": 1214, - "bbox": [ - 72.0, - 493.15, - 519.56, - 606.93 - ], - "text": "I do not believe that any adjustment is necessary on these long range\ncharts for a number of reasons. The main reason is my belief that the markets\nthemselves have already made the necessary adjustments. A currency\ndeclining in value causes commodities quoted in that currency to increase in\nvalue. The declining value of the dollar, therefore, would contribute to rising\ncommodity prices. A rising dollar would cause the price of most commodities\nto fall.", - "type": "text" - }, - { - "block_id": "p179-b4", - "global_id": 1215, - "bbox": [ - 72.0, - 609.1, - 521.5, - 756.01 - ], - "text": "The tremendous price gains in commodity markets during the 1970s and\ndeclining prices in the 1980s and 1990s are classic examples of inflation at\nwork. To have suggested during the 1970s that commodity price levels that\nhad doubled and tripled in price should then be adjusted to reflect rising\ninflation would make no sense at all. The rising commodity markets already\nwere a manifestation of that inflation. Declining commodity markets since the\n1980s reflect a long period of disinflation. Should we take the price of gold,\nwhich is now worth less than half of its value in 1980, and adjust it to reflect\nthe lower inflation rate? The market has already taken care of that.", - "type": "text" - } - ] - }, - { - "page_num": 180, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p180-b0", - "global_id": 1216, - "bbox": [ - 72.0, - 73.28, - 521.14, - 236.76 - ], - "text": "The final point in this debate goes to the heart of the technical theory,\nwhich states that price action discounts everything, even inflation. All\nfinancial markets adjust to periods of inflation and deflation and to changes in\ncurrency values. The real answer to whether long range charts should be\nadjusted for inflation lies in the charts themselves. Many markets fail at\nhistoric resistance levels set several years earlier and then bounce off support\nlevels not seen in several years. It’s also clear that falling inflation since the\nearly 1980s has helped support bull markets in bonds and stocks. It would\nseem that those markets have already made their own inflation adjustment.\n(See Figure 8.1.)", - "type": "text" - }, - { - "block_id": "p180-b1", - "global_id": 1217, - "bbox": [ - 80.01, - 526.99, - 515.26, - 557.96 - ], - "text": "Figure 8.1 The gold price peak in 1980 ushered in two decades of low\ninflation. Low inflation normally causes falling gold prices and rising stock", - "type": "text" - }, - { - "block_id": "p180-b2", - "global_id": 1218, - "bbox": [ - 88.52, - 560.12, - 506.75, - 574.52 - ], - "text": "prices as this chart shows. Why adjust the charts again for inflation? It’s", - "type": "text" - }, - { - "block_id": "p180-b3", - "global_id": 1219, - "bbox": [ - 242.95, - 576.68, - 352.33, - 591.08 - ], - "text": "already been done.", - "type": "text" - }, - { - "block_id": "p180-b4", - "global_id": 1220, - "bbox": [ - 72.0, - 635.04, - 516.3, - 762.49 - ], - "text": "LONG TERM CHARTS NOT INTENDED FOR\nTRADING PURPOSES\nLong term charts are not meant for trading purposes. A distinction has to be\nmade between market analysis for forecasting purposes and the timing of\nmarket commitments. Long term charts are useful in the analytical process to\nhelp determine the major trend and price objectives. They are not suitable,\nhowever, for the timing of entry and exit points and should not be used for", - "type": "text" - } - ] - }, - { - "page_num": 181, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p181-b0", - "global_id": 1221, - "bbox": [ - 72.0, - 73.53, - 517.18, - 104.25 - ], - "text": "that purpose. For that more sensitive task, daily and intraday charts should be\nutilized.", - "type": "text" - }, - { - "block_id": "p181-b1", - "global_id": 1222, - "bbox": [ - 72.0, - 148.2, - 519.17, - 334.7 - ], - "text": "EXAMPLES OF LONG TERM CHARTS\nThe following pages contain examples of long term weekly and monthly\ncharts (Figures 8.2–8.12). The drawings on the charts are limited to long term\nsupport and resistance levels, trendlines, percentage retracements, weekly\nreversals, and an occasional price pattern. Be aware, however, that anything\nthat can be done on a daily chart can also be done on a weekly or monthly.\nWe’ll show you later in the book how the application of various technical\nindicators to these long term charts is accomplished, and how signals on\nweekly charts become valuable filters for shorter term timing decisions.\nRemember also that semilog chart scaling becomes more valuable when\nstudying long range price trends.", - "type": "text" - }, - { - "block_id": "p181-b2", - "global_id": 1223, - "bbox": [ - 73.36, - 611.97, - 521.91, - 626.44 - ], - "text": "Figure 8.2 This chart of semiconductor stocks shows the valuable perspective", - "type": "text" - }, - { - "block_id": "p181-b3", - "global_id": 1224, - "bbox": [ - 79.55, - 628.54, - 515.73, - 659.5 - ], - "text": "of a weekly chart. The late 1997 price fall stopped right at the 62%\nretracement level and bounced off chart support formed the previous spring", - "type": "text" - }, - { - "block_id": "p181-b4", - "global_id": 1225, - "bbox": [ - 263.95, - 661.67, - 331.32, - 676.07 - ], - "text": "(see circle).", - "type": "text" - } - ] - }, - { - "page_num": 182, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p182-b0", - "global_id": 1226, - "bbox": [ - 87.31, - 330.38, - 507.97, - 361.35 - ], - "text": "Figure 8.3 The early 1998 bottom in General Motors began right at the\ntrendline drawn along the 1995-1996 lows. That’s why it’s a good idea to", - "type": "text" - }, - { - "block_id": "p182-b1", - "global_id": 1227, - "bbox": [ - 239.9, - 363.51, - 355.37, - 377.91 - ], - "text": "track weekly charts.", - "type": "text" - }, - { - "block_id": "p182-b2", - "global_id": 1228, - "bbox": [ - 77.41, - 653.74, - 517.87, - 668.21 - ], - "text": "Figure 8.4 This monthly chart shows the 1997 rally in Burlington Resources", - "type": "text" - }, - { - "block_id": "p182-b3", - "global_id": 1229, - "bbox": [ - 74.8, - 670.31, - 520.49, - 717.84 - ], - "text": "stopping right at the same level that stopped the 1989 and 1993 rallies. The\n1995 bottom was at the same level as the 1991 bottom. Who says charts don’t\nhave a memory?", - "type": "text" - } - ] - }, - { - "page_num": 183, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p183-b0", - "global_id": 1230, - "bbox": [ - 72.17, - 328.94, - 523.11, - 343.41 - ], - "text": "Figure 8.5 An investor in Inco Ltd. during the 1997 rally could have benefited", - "type": "text" - }, - { - "block_id": "p183-b1", - "global_id": 1231, - "bbox": [ - 77.51, - 345.51, - 517.75, - 359.91 - ], - "text": "from the knowledge that the 1989, 1991, and 1995 tops occurred right at 38.", - "type": "text" - }, - { - "block_id": "p183-b2", - "global_id": 1232, - "bbox": [ - 78.94, - 636.46, - 516.33, - 667.42 - ], - "text": "Figure 8.6 Do long term charts matter? The 1993 bottom in IBM was at the\nsame level as the bottom formed 20 years earlier in 1974. The break of an 8", - "type": "text" - }, - { - "block_id": "p183-b3", - "global_id": 1233, - "bbox": [ - 88.73, - 669.59, - 506.53, - 683.99 - ], - "text": "year down trendline (see box) in 1995 confirmed the new major uptrend.", - "type": "text" - } - ] - }, - { - "page_num": 184, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p184-b0", - "global_id": 1234, - "bbox": [ - 78.05, - 331.82, - 517.22, - 362.79 - ], - "text": "Figure 8.7 Helmerich & Payne finally broke out above 19 in 1996 after\nfailing in 1987, 1990, and 1993. The late 1996 pullback at 28 occurred near", - "type": "text" - }, - { - "block_id": "p184-b1", - "global_id": 1235, - "bbox": [ - 255.47, - 364.95, - 339.8, - 379.35 - ], - "text": "the 1980 peak.", - "type": "text" - }, - { - "block_id": "p184-b2", - "global_id": 1236, - "bbox": [ - 78.83, - 655.18, - 516.44, - 686.15 - ], - "text": "Figure 8.8 This monthly chart of Dow Jones shows a head and shoulders\nbottom forming for 10 years from 1988 to 1997. The right shoulder also has", - "type": "text" - }, - { - "block_id": "p184-b3", - "global_id": 1237, - "bbox": [ - 80.69, - 688.31, - 514.59, - 702.71 - ], - "text": "the shape of a bullish ascending triangle. The breakout over the neckline at", - "type": "text" - }, - { - "block_id": "p184-b4", - "global_id": 1238, - "bbox": [ - 224.9, - 704.88, - 370.37, - 719.28 - ], - "text": "42 completed the bottom.", - "type": "text" - } - ] - }, - { - "page_num": 185, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p185-b0", - "global_id": 1239, - "bbox": [ - 81.48, - 331.1, - 513.8, - 362.07 - ], - "text": "Figure 8.9 A bullish symmetrical triangle was easy to spot on the monthly\nchart of Southwest Airlines. But you probably wouldn’t have spotted it on a", - "type": "text" - }, - { - "block_id": "p185-b1", - "global_id": 1240, - "bbox": [ - 264.46, - 364.23, - 330.8, - 378.63 - ], - "text": "daily chart.", - "type": "text" - }, - { - "block_id": "p185-b2", - "global_id": 1241, - "bbox": [ - 85.62, - 656.62, - 509.66, - 671.09 - ], - "text": "Figure 8.10 The 1994 bottom in the Dow Utilities bounced off a trendline", - "type": "text" - }, - { - "block_id": "p185-b3", - "global_id": 1242, - "bbox": [ - 77.5, - 673.19, - 517.78, - 704.15 - ], - "text": "lasting 20 years. There are those who claim that past price action has no\nbearing on the future. If you still believe that, go back and look at these long", - "type": "text" - }, - { - "block_id": "p185-b4", - "global_id": 1243, - "bbox": [ - 244.67, - 706.32, - 350.59, - 720.72 - ], - "text": "term charts again.", - "type": "text" - } - ] - }, - { - "page_num": 186, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p186-b0", - "global_id": 1244, - "bbox": [ - 72.11, - 331.82, - 523.15, - 346.29 - ], - "text": "Figure 8.11 On this linear-scaled chart of the Japanese stock market, the long", - "type": "text" - }, - { - "block_id": "p186-b1", - "global_id": 1245, - "bbox": [ - 73.92, - 348.39, - 521.35, - 379.35 - ], - "text": "term up trendline (line 1) drawn under the 1982 and 1984 lows was broken in\nearly 1992 (see circle) near 22,000. That was two years after the actual peak.", - "type": "text" - }, - { - "block_id": "p186-b2", - "global_id": 1246, - "bbox": [ - 74.55, - 655.9, - 520.72, - 686.87 - ], - "text": "Figure 8.12 The same Japanese chart from Figure 8.11 using log scaling.\nLine 1 is the trendline from the previous figure. The steeper line 2 was broken", - "type": "text" - }, - { - "block_id": "p186-b3", - "global_id": 1247, - "bbox": [ - 90.58, - 689.03, - 504.69, - 703.43 - ], - "text": "in mid-1990 (see box) at 30,000. Up trendlines on log charts are broken", - "type": "text" - }, - { - "block_id": "p186-b4", - "global_id": 1248, - "bbox": [ - 203.36, - 705.6, - 391.9, - 720.0 - ], - "text": "sooner than linear up trendlines.", - "type": "text" - } - ] - }, - { - "page_num": 187, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p187-b0", - "global_id": 1249, - "bbox": [ - 72.0, - 310.24, - 505.91, - 397.36 - ], - "text": "INTRODUCTION\nThe moving average is one of the most versatile and widely used of all\ntechnical indicators. Because of the way it is constructed and the fact that it\ncan be so easily quantified and tested, it is the basis for many mechanical\ntrend-following systems in use today.", - "type": "text" - }, - { - "block_id": "p187-b1", - "global_id": 1250, - "bbox": [ - 72.0, - 399.52, - 522.72, - 513.31 - ], - "text": "Chart analysis is largely subjective and difficult to test. As a result, chart\nanalysis does not lend itself that well to computerization. Moving average\nrules, by contrast, can easily be programmed into a computer, which then\ngenerates specific buy and sell signals. While two technicians may disagree as\nto whether a given price pattern is a triangle or a wedge, or whether the\nvolume pattern favors the bull or bear side, moving average trend signals are\nprecise and not open to debate.", - "type": "text" - }, - { - "block_id": "p187-b2", - "global_id": 1251, - "bbox": [ - 72.0, - 515.47, - 520.88, - 678.95 - ], - "text": "Let’s begin by defining what a moving average is. As the second word\nimplies, it is an average of a certain body of data. For example, if a 10 day\naverage of closing prices is desired, the prices for the last 10 days are added\nup and the total is divided by 10. The term moving is used because only the\nlatest 10 days’ prices are used in the calculation. Therefore, the body of data\nto be averaged (the last 10 closing prices) moves forward with each new\ntrading day. The most common way to calculate the moving average is to\nwork from the total of the last 10 days’ closing prices. Each day the new close\nis added to the total and the close 11 days back is subtracted. The new total is\nthen divided by the number of days (10). (See Figure 9.1a.)", - "type": "text" - }, - { - "block_id": "p187-b3", - "global_id": 1252, - "bbox": [ - 72.0, - 681.11, - 516.81, - 761.77 - ], - "text": "The above example deals with a simple 10 day moving average of\nclosing prices. There are, however, other types of moving averages that are\nnot simple. There are also many questions as to the best way to employ the\nmoving average. For example, how many days should be averaged? Should a\nshort term or a long term average be used? Is there a best moving average for", - "type": "text" - } - ] - }, - { - "page_num": 188, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p188-b0", - "global_id": 1253, - "bbox": [ - 72.0, - 73.28, - 521.09, - 104.25 - ], - "text": "all markets or for each individual market? Is the closing price the best price to\naverage? Would it be better to use more than one average?", - "type": "text" - }, - { - "block_id": "p188-b1", - "global_id": 1254, - "bbox": [ - 73.28, - 393.76, - 521.99, - 408.22 - ], - "text": "Figure 9.1a A 10 day moving average applied to a daily bar chart of the S&P", - "type": "text" - }, - { - "block_id": "p188-b2", - "global_id": 1255, - "bbox": [ - 75.83, - 410.32, - 519.43, - 441.29 - ], - "text": "500. Prices crossed the average line several times (see arrows) before finally\nturning higher. Prices stayed above the average during the subsequent rally.", - "type": "text" - }, - { - "block_id": "p188-b3", - "global_id": 1256, - "bbox": [ - 76.46, - 443.46, - 518.81, - 474.42 - ], - "text": "Which type of average works better—a simple, linearly weighted or\nexponentially smoothed? Are there times when moving averages work better", - "type": "text" - }, - { - "block_id": "p188-b4", - "global_id": 1257, - "bbox": [ - 262.67, - 476.58, - 332.6, - 490.98 - ], - "text": "than others?", - "type": "text" - }, - { - "block_id": "p188-b5", - "global_id": 1258, - "bbox": [ - 72.0, - 507.55, - 521.6, - 555.08 - ], - "text": "There are many questions to be considered when using moving averages.\nWe’ll address many of these questions in this chapter and show examples of\nsome of the more common usages of the moving average.", - "type": "text" - }, - { - "block_id": "p188-b6", - "global_id": 1259, - "bbox": [ - 72.0, - 599.03, - 518.96, - 759.61 - ], - "text": "THE MOVING AVERAGE: A SMOOTHING\nDEVICE WITH A TIME LAG\nThe moving average is essentially a trend following device. Its purpose is to\nidentify or signal that a new trend has begun or that an old trend has ended or\nreversed. Its purpose is to track the progress of the trend. It might be viewed\nas a curving trendline. It does not, however, predict market action in the same\nsense that standard chart analysis attempts to do. The moving average is a\nfollower, not a leader. It never anticipates; it only reacts. The moving average\nfollows a market and tells us that a trend has begun, but only after the fact.", - "type": "text" - } - ] - }, - { - "page_num": 189, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p189-b0", - "global_id": 1260, - "bbox": [ - 72.0, - 73.28, - 516.76, - 236.76 - ], - "text": "The moving average is a smoothing device. By averaging the price data,\na smoother line is produced, making it much easier to view the underlying\ntrend. By its very nature, however, the moving average line also lags the\nmarket action. A shorter moving average, such as a 20 day average, would\nhug the price action more closely than a 200 day average. The time lag is\nreduced with the shorter averages, but can never be completely eliminated.\nShorter term averages are more sensitive to the price action, whereas longer\nrange averages are less sensitive. In certain types of markets, it is more\nadvantageous to use a shorter average and, at other times, a longer and less\nsensitive average proves more useful. (See Figure 9.1b.)", - "type": "text" - }, - { - "block_id": "p189-b1", - "global_id": 1261, - "bbox": [ - 72.0, - 260.44, - 185.36, - 271.24 - ], - "text": "Which Prices to Average", - "type": "text" - }, - { - "block_id": "p189-b2", - "global_id": 1262, - "bbox": [ - 72.0, - 279.25, - 513.04, - 376.47 - ], - "text": "We have been using the closing price in all of our examples so far. However,\nwhile the closing price is considered to be the most important price of the\ntrading day and the price most commonly used in moving average\nconstruction, the reader should be aware that some technicians prefer to use\nother prices. Some prefer to use a midpoint value, which is arrived at by\ndividing the day’s range by two.", - "type": "text" - }, - { - "block_id": "p189-b3", - "global_id": 1263, - "bbox": [ - 84.89, - 668.15, - 510.38, - 715.67 - ], - "text": "Figure 9.1b A comparison of a 20 day and a 200 day moving average.\nDuring the sideways period from August to January, prices crossed the\nshorter average several times. However, they remained above the 200 day", - "type": "text" - }, - { - "block_id": "p189-b4", - "global_id": 1264, - "bbox": [ - 189.65, - 717.84, - 405.62, - 732.24 - ], - "text": "average throughout the entire period.", - "type": "text" - }, - { - "block_id": "p189-b5", - "global_id": 1265, - "bbox": [ - 100.79, - 748.81, - 509.97, - 763.21 - ], - "text": "Others include the closing price in their calculation by adding the high,", - "type": "text" - } - ] - }, - { - "page_num": 190, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p190-b0", - "global_id": 1266, - "bbox": [ - 72.0, - 73.64, - 522.17, - 171.22 - ], - "text": "low, and closing prices together and dividing the sum by three. Still others\nprefer to construct price bands by averaging the high and low prices\nseparately. The result is two separate moving average lines that act as a sort of\nvolatility buffer or neutral zone. Despite these variations, the closing price is\nstill the price most commonly used for moving average analysis and is the\nprice that we’ll be focusing most of our attention on in this chapter.", - "type": "text" - }, - { - "block_id": "p190-b1", - "global_id": 1267, - "bbox": [ - 72.0, - 194.18, - 202.76, - 204.98 - ], - "text": "The Simple Moving Average", - "type": "text" - }, - { - "block_id": "p190-b2", - "global_id": 1268, - "bbox": [ - 72.0, - 212.99, - 521.56, - 359.91 - ], - "text": "The simple moving average, or the arithmetic mean, is the type used by most\ntechnical analysts. But there are some who question its usefulness on two\npoints. The first criticism is that only the period covered by the average (the\nlast 10 days, for example) is taken into account. The second criticism is that\nthe simple moving average gives equal weight to each day’s price. In a 10 day\naverage, the last day receives the same weight as the first day in the\ncalculation. Each day’s price is assigned a 10% weighting. In a 5 day average,\neach day would have an equal 20% weighting. Some analysts believe that a\nheavier weighting should be given to the more recent price action.", - "type": "text" - }, - { - "block_id": "p190-b3", - "global_id": 1269, - "bbox": [ - 72.0, - 383.59, - 517.54, - 532.03 - ], - "text": "The Linearly Weighted Moving Average\nIn an attempt to correct the weighting problem, some analysts employ a\nlinearly weighted moving average. In this calculation, the closing price of the\n10th day (in the case of a 10 day average) would be multiplied by 10, the\nninth day by nine, the eighth day by eight, and so on. The greater weight is\ntherefore given to the more recent closings. The total is then divided by the\nsum of the multipliers (55 in the case of the 10 day average: 10 + 9 + 8 +…+\n1). However, the linearly weighted average still does not address the problem\nof including only the price action covered by the length of the average itself.", - "type": "text" - }, - { - "block_id": "p190-b4", - "global_id": 1270, - "bbox": [ - 72.0, - 555.71, - 283.98, - 566.51 - ], - "text": "The Exponentially Smoothed Moving Average", - "type": "text" - }, - { - "block_id": "p190-b5", - "global_id": 1271, - "bbox": [ - 72.0, - 574.53, - 520.79, - 754.57 - ], - "text": "This type of average addresses both of the problems associated with the\nsimple moving average. First, the exponentially smoothed average assigns a\ngreater weight to the more recent data. Therefore, it is a weighted moving\naverage. But while it assigns lesser importance to past price data, it does\ninclude in its calculation all of the data in the life of the instrument. In\naddition, the user is able to adjust the weighting to give greater or lesser\nweight to the most recent day’s price. This is done by assigning a percentage\nvalue to the last day’s price, which is added to a percentage of the previous\nday’s value. The sum of both percentage values adds up to 100. For example,\nthe last day’s price could be assigned a value of 10% (.10), which is added to\nthe previous day’s value of 90% (.90). That gives the last day 10% of the total", - "type": "text" - } - ] - }, - { - "page_num": 191, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p191-b0", - "global_id": 1272, - "bbox": [ - 72.0, - 73.64, - 516.75, - 138.1 - ], - "text": "weighting. That would be the equivalent of a 20 day average. By giving the\nlast day’s price a smaller value of 5% (.05), lesser weight is given to the last\nday’s data and the average is less sensitive. That would be the equivalent of a\n40 day moving average. (See Figure 9.2.)", - "type": "text" - }, - { - "block_id": "p191-b1", - "global_id": 1273, - "bbox": [ - 89.42, - 427.61, - 505.85, - 442.07 - ], - "text": "Figure 9.2 The 40 day exponential moving average (dotted line) is more", - "type": "text" - }, - { - "block_id": "p191-b2", - "global_id": 1274, - "bbox": [ - 91.64, - 444.17, - 503.64, - 458.57 - ], - "text": "sensitive than the simple arithmetic 40 day moving average (solid line).", - "type": "text" - }, - { - "block_id": "p191-b3", - "global_id": 1275, - "bbox": [ - 72.0, - 475.14, - 511.77, - 555.8 - ], - "text": "The computer makes this all very easy for you. You just have to choose\nthe number of days you want in the moving average—10, 20, 40, etc. Then\nselect the type of average you want—simple, weighted, or exponentially\nsmoothed. You can also select as many averages as you want—one, two, or\nthree.", - "type": "text" - }, - { - "block_id": "p191-b4", - "global_id": 1276, - "bbox": [ - 72.0, - 599.75, - 522.76, - 753.13 - ], - "text": "The Use of One Moving Average\nThe simple moving average is the one most commonly used by technicians,\nand is the one that we’ll be concentrating on. Some traders use just one\nmoving average to generate trend signals. The moving average is plotted on\nthe bar chart in its appropriate trading day along with that day’s price action.\nWhen the closing price moves above the moving average, a buy signal is\ngenerated. A sell signal is given when prices move below the moving average.\nFor added confirmation, some technicians also like to see the moving average\nline itself turn in the direction of the price crossing. (See Figure 9.3.)", - "type": "text" - }, - { - "block_id": "p191-b5", - "global_id": 1277, - "bbox": [ - 100.79, - 755.29, - 495.18, - 769.69 - ], - "text": "If a very short term average is employed (a 5 or 10 day), the average", - "type": "text" - } - ] - }, - { - "page_num": 192, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p192-b0", - "global_id": 1278, - "bbox": [ - 72.0, - 73.53, - 521.15, - 153.94 - ], - "text": "tracks prices very closely and several crossings occur. This action can be\neither good or bad. The use of a very sensitive average produces more trades\n(with higher commission costs) and results in many false signals (whipsaws).\nIf the average is too sensitive, some of the short term random price movement\n(or “noise”) activates bad trend signals.", - "type": "text" - }, - { - "block_id": "p192-b1", - "global_id": 1279, - "bbox": [ - 77.74, - 443.45, - 517.53, - 474.41 - ], - "text": "Figure 9.3 Prices fell below the 50 day average during October (see left\ncircle). The sell signal is stronger when the moving average also turns down", - "type": "text" - }, - { - "block_id": "p192-b2", - "global_id": 1280, - "bbox": [ - 89.67, - 476.58, - 505.61, - 490.98 - ], - "text": "(see left arrow). The buy signal during January was confirmed when the", - "type": "text" - }, - { - "block_id": "p192-b3", - "global_id": 1281, - "bbox": [ - 216.51, - 493.14, - 378.77, - 507.54 - ], - "text": "average itself turned higher.", - "type": "text" - }, - { - "block_id": "p192-b4", - "global_id": 1282, - "bbox": [ - 72.0, - 524.12, - 514.86, - 621.34 - ], - "text": "While the shorter average generates more false signals, it has the\nadvantage of giving trend signals earlier in the move. It stands to reason that\nthe more sensitive the average, the earlier the signals will be. So there is a\ntradeoff at work here. The trick is to find the average that is sensitive enough\nto generate early signals, but insensitive enough to avoid most of the random\n“noise.” (See Figure 9.4.)", - "type": "text" - } - ] - }, - { - "page_num": 193, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p193-b0", - "global_id": 1283, - "bbox": [ - 74.74, - 344.07, - 520.53, - 375.03 - ], - "text": "Figure 9.4 A shorter average gives earlier signals. The longer average is\nslower, but more reliable. The 10 day turned up first at the bottom. But it also", - "type": "text" - }, - { - "block_id": "p193-b1", - "global_id": 1284, - "bbox": [ - 84.13, - 377.2, - 511.15, - 391.59 - ], - "text": "gave a premature buy signal during November and an untimely sell signal", - "type": "text" - }, - { - "block_id": "p193-b2", - "global_id": 1285, - "bbox": [ - 213.71, - 393.76, - 381.57, - 408.16 - ], - "text": "during February (see boxes).", - "type": "text" - }, - { - "block_id": "p193-b3", - "global_id": 1286, - "bbox": [ - 72.0, - 424.73, - 518.33, - 571.64 - ], - "text": "Let’s carry the above comparison a step further. While the longer\naverage performs better while the trend remains in motion, it “gives back” a\nlot more when the trend reverses. The very insensitivity of the longer average\n(the fact that it trailed the trend from a greater distance), which kept it from\ngetting tangled up in short term corrections during the trend, works against\nthe trader when the trend actually reverses. Therefore, we’ll add another\ncorollary here: The longer averages work better as long as the trend remains\nin force, but a shorter average is better when the trend is in the process of\nreversing.", - "type": "text" - }, - { - "block_id": "p193-b4", - "global_id": 1287, - "bbox": [ - 72.0, - 573.81, - 508.15, - 621.34 - ], - "text": "It becomes clearer, therefore, that the use of one moving average alone\nhas several disadvantages. It is usually more advantageous to employ two\nmoving averages.", - "type": "text" - }, - { - "block_id": "p193-b5", - "global_id": 1288, - "bbox": [ - 72.0, - 645.02, - 284.07, - 655.81 - ], - "text": "How to Use Two Averages to Generate Signals", - "type": "text" - }, - { - "block_id": "p193-b6", - "global_id": 1289, - "bbox": [ - 72.0, - 663.83, - 515.58, - 761.05 - ], - "text": "This technique is called the double crossover method. This means that a buy\nsignal is produced when the shorter average crosses above the longer. For\nexample, two popular combinations are the 5 and 20 day averages and the 10\nand 50 day averages. In the former, a buy signal occurs when the 5 day\naverage crosses above the 20, and a sell signal when the 5 day moves below\nthe 20. In the latter example, the 10 day crossing above the 50 signals an", - "type": "text" - } - ] - }, - { - "page_num": 194, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p194-b0", - "global_id": 1290, - "bbox": [ - 72.0, - 73.64, - 512.8, - 138.1 - ], - "text": "uptrend, and a downtrend takes place with the 10 slipping under the 50. This\ntechnique of using two averages together lags the market a bit more than the\nuse of a single average but produces fewer whipsaws. (See Figures 9.5 and\n9.6.)", - "type": "text" - }, - { - "block_id": "p194-b1", - "global_id": 1291, - "bbox": [ - 76.46, - 428.33, - 518.82, - 459.29 - ], - "text": "Figure 9.5 The double crossover method uses two moving averages. The 5\nand 20 day combination is popular with futures traders. The 5 day fell below", - "type": "text" - }, - { - "block_id": "p194-b2", - "global_id": 1292, - "bbox": [ - 85.01, - 461.46, - 510.25, - 475.86 - ], - "text": "the 20 day during October (see circle) and caught the entire downtrend in", - "type": "text" - }, - { - "block_id": "p194-b3", - "global_id": 1293, - "bbox": [ - 250.67, - 478.02, - 344.59, - 492.42 - ], - "text": "crude oil prices.", - "type": "text" - }, - { - "block_id": "p194-b4", - "global_id": 1294, - "bbox": [ - 72.0, - 516.1, - 346.52, - 526.9 - ], - "text": "The Use of Three Averages, or the Triple Crossover Method", - "type": "text" - }, - { - "block_id": "p194-b5", - "global_id": 1295, - "bbox": [ - 72.0, - 534.91, - 521.21, - 714.96 - ], - "text": "That brings us to the triple crossover method. The most widely used triple\ncrossover system is the popular 4-9-18-day moving average combination. The\n4-9-18 method is used mainly in futures trading. This concept was first\nmentioned by R.C. Allen in his 1972 book, How to Build a Fortune in\nCommodities and again later in a 1974 work by the same author, How to Use\nthe 4-Day, 9-Day and 18-Day Moving Averages to Earn Larger Profits from\nCommodities. The 4-9-18-day system is a variation on the 5, 10, and 20 day\nmoving average numbers, which are widely used in commodity circles. Many\ncommercial chart services publish the 4-9-18-day moving averages. (Many\ncharting software packages use the 4-9-18-day combination as their default\nvalues when plotting three averages.)", - "type": "text" - } - ] - }, - { - "page_num": 195, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p195-b0", - "global_id": 1296, - "bbox": [ - 75.14, - 347.67, - 520.14, - 362.13 - ], - "text": "Figure 9.6 Stock traders use 10 and 50 day moving averages. The 10 day fell", - "type": "text" - }, - { - "block_id": "p195-b1", - "global_id": 1297, - "bbox": [ - 87.54, - 364.23, - 507.73, - 395.2 - ], - "text": "below the 50 day in October (left circle), giving a timely sell signal. The\nbullish crossover in the other direction took place during January (lower", - "type": "text" - }, - { - "block_id": "p195-b2", - "global_id": 1298, - "bbox": [ - 277.33, - 397.36, - 317.94, - 411.76 - ], - "text": "circle).", - "type": "text" - }, - { - "block_id": "p195-b3", - "global_id": 1299, - "bbox": [ - 72.0, - 435.44, - 309.44, - 446.24 - ], - "text": "How to Use the 4-9-18-Day Moving Average System", - "type": "text" - }, - { - "block_id": "p195-b4", - "global_id": 1300, - "bbox": [ - 72.0, - 454.26, - 521.53, - 584.61 - ], - "text": "It’s already been explained that the shorter the moving average, the closer it\nfollows the price trend. It stands to reason then that the shortest of the three\naverages—the 4 day—will follow the trend most closely, followed by the 9\nday and then the 18. In an uptrend, therefore, the proper alignment would be\nfor the 4 day average to be above the 9 day, which is above the 18 day\naverage. In a downtrend, the order is reversed and the alignment is exactly the\nopposite. That is, the 4 day would be the lowest, followed by the 9 day and\nthen the 18 day average. (See Figures 9.7a-b.)", - "type": "text" - }, - { - "block_id": "p195-b5", - "global_id": 1301, - "bbox": [ - 72.0, - 586.77, - 519.06, - 717.12 - ], - "text": "A buying alert takes place in a downtrend when the 4 day crosses above\nboth the 9 and the 18. A confirmed buy signal occurs when the 9 day then\ncrosses above the 18. This places the 4 day over the 9 day which is over the\n18 day. Some intermingling may occur during corrections or consolidations,\nbut the general uptrend remains intact. Some traders may take profits during\nthe intermingling process and some may use it as a buying opportunity. There\nis obviously a lot of room for flexibility here in applying the rules, depending\non how aggressively one wants to trade.", - "type": "text" - } - ] - }, - { - "page_num": 196, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p196-b0", - "global_id": 1302, - "bbox": [ - 77.84, - 347.67, - 517.43, - 378.63 - ], - "text": "Figure 9.7a Futures traders like the 9 and 18 day moving average\ncombination. A sell signal was given in late October (first circle) when the 9", - "type": "text" - }, - { - "block_id": "p196-b1", - "global_id": 1303, - "bbox": [ - 82.55, - 380.8, - 512.73, - 395.2 - ], - "text": "day fell below the 18. A buy signal was given in early 1998 when the 9 day", - "type": "text" - }, - { - "block_id": "p196-b2", - "global_id": 1304, - "bbox": [ - 208.37, - 397.36, - 386.9, - 411.76 - ], - "text": "crossed back above the 18 day.", - "type": "text" - }, - { - "block_id": "p196-b3", - "global_id": 1305, - "bbox": [ - 72.0, - 428.33, - 517.61, - 525.55 - ], - "text": "When the uptrend reverses to the downside, the first thing that should\ntake place is that the shortest (and most sensitive) average—the 4 day—dips\nbelow the 9 day and the 18 day. This is only a selling alert. Some traders,\nhowever, might use that initial crossing as reason enough to begin liquidating\nlong positions. Then, if the next longer average—the 9 day—drops below the\n18 day, a confirmed sell short signal is given.", - "type": "text" - } - ] - }, - { - "page_num": 197, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p197-b0", - "global_id": 1306, - "bbox": [ - 80.73, - 346.95, - 514.55, - 377.91 - ], - "text": "Figure 9.7b The 4-9-18 day moving average combo is also popular with\nfutures traders. At a bottom, the 4 day (solid line) turns up first and crosses", - "type": "text" - }, - { - "block_id": "p197-b1", - "global_id": 1307, - "bbox": [ - 93.55, - 380.08, - 501.72, - 394.48 - ], - "text": "the other two lines. Then the 9 day crosses over the 18 day (see circle),", - "type": "text" - }, - { - "block_id": "p197-b2", - "global_id": 1308, - "bbox": [ - 241.87, - 396.64, - 353.4, - 411.04 - ], - "text": "signaling a bottom.", - "type": "text" - }, - { - "block_id": "p197-b3", - "global_id": 1309, - "bbox": [ - 72.0, - 454.99, - 522.73, - 658.06 - ], - "text": "MOVING AVERAGE ENVELOPES\nThe usefulness of a single moving average can be enhanced by surrounding it\nwith envelopes. Percentage envelopes can be used to help determine when a\nmarket has gotten overextended in either direction. In other words, they tell us\nwhen prices have strayed too far from their moving average line. In order to\ndo this, the envelopes are placed at fixed percentages above and below the\naverage. Shorter term traders, for example, often use 3% envelopes around a\nsimple 21 day moving average. When prices reach one of the envelopes (3%\nfrom the average), the short term trend is considered to be overextended. For\nlong range analysis, some possible combinations include 5% envelopes\naround a 10 week average or a 10% envelope around a 40 week average. (See\nFigures 9.8a-b.)", - "type": "text" - } - ] - }, - { - "page_num": 198, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p198-b0", - "global_id": 1310, - "bbox": [ - 85.61, - 330.38, - 509.67, - 344.85 - ], - "text": "Figure 9.8a 3% envelopes placed around a 21 day moving average of the", - "type": "text" - }, - { - "block_id": "p198-b1", - "global_id": 1311, - "bbox": [ - 86.43, - 346.95, - 508.84, - 361.35 - ], - "text": "Dow. Moves outside the envelopes suggest an overextended stock market.", - "type": "text" - }, - { - "block_id": "p198-b2", - "global_id": 1312, - "bbox": [ - 72.61, - 635.02, - 522.67, - 649.48 - ], - "text": "Figure 9.8b For longer range analysis, 5% envelopes can be placed around a", - "type": "text" - }, - { - "block_id": "p198-b3", - "global_id": 1313, - "bbox": [ - 97.44, - 651.58, - 497.84, - 682.55 - ], - "text": "10 week average. Moves outside the envelopes helped identify market\nextremes.", - "type": "text" - }, - { - "block_id": "p198-b4", - "global_id": 1314, - "bbox": [ - 72.0, - 726.5, - 487.02, - 763.93 - ], - "text": "BOLLINGER BANDS\nThis technique was developed by John Bollinger. Two trading bands are", - "type": "text" - } - ] - }, - { - "page_num": 199, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p199-b0", - "global_id": 1315, - "bbox": [ - 72.0, - 73.53, - 515.96, - 220.2 - ], - "text": "placed around a moving average similar to the envelope technique. Except\nthat Bollinger Bands are placed two standard deviations above and below the\nmoving average, which is usually 20 days. Standard deviation is a statistical\nconcept that describes how prices are dispersed around an average value.\nUsing two standard deviations ensures that 95% of the price data will fall\nbetween the two trading bands. As a rule, prices are considered to be\noverextended on the upside (overbought) when they touch the upper band.\nThey are considered overextended on the downside (oversold) when they\ntouch the lower band. (See Figures 9.9a-b.)", - "type": "text" - }, - { - "block_id": "p199-b1", - "global_id": 1316, - "bbox": [ - 72.0, - 508.99, - 523.28, - 523.45 - ], - "text": "Figure 9.9a Bollinger bands plotted around a 20 day moving average. During", - "type": "text" - }, - { - "block_id": "p199-b2", - "global_id": 1317, - "bbox": [ - 76.13, - 525.55, - 519.14, - 556.52 - ], - "text": "the sideways period from August to January, prices kept touching the outer\nbands. Once the uptrend resumed, prices traded between the upper band and", - "type": "text" - }, - { - "block_id": "p199-b3", - "global_id": 1318, - "bbox": [ - 251.47, - 558.68, - 343.8, - 573.08 - ], - "text": "20 day average.", - "type": "text" - } - ] - }, - { - "page_num": 200, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p200-b0", - "global_id": 1319, - "bbox": [ - 80.51, - 346.95, - 514.75, - 377.91 - ], - "text": "Figure 9.9b Bollinger bands work on weekly charts as well, by using a 20\nweek average as the middle line. Each touch of the lower band (see circles)", - "type": "text" - }, - { - "block_id": "p200-b1", - "global_id": 1320, - "bbox": [ - 114.36, - 380.08, - 480.9, - 394.48 - ], - "text": "signaled an important market bottom and a buying opportunity.", - "type": "text" - }, - { - "block_id": "p200-b2", - "global_id": 1321, - "bbox": [ - 72.0, - 438.43, - 518.88, - 575.24 - ], - "text": "USING BOLLINGER BANDS AS TARGETS\nThe simplest way to use Bollinger Bands is to use the upper and lower bands\nas price targets. In other words, if prices bounce off the lower band and cross\nabove the 20 day average, the upper band becomes the upper price target. A\ncrossing below the 20 day average would identify the lower band as the\ndownside target. In a strong uptrend, prices will usually fluctuate between the\nupper band and the 20 day average. In that case, a crossing below the 20 day\naverage warns of a trend reversal to the downside.", - "type": "text" - }, - { - "block_id": "p200-b3", - "global_id": 1322, - "bbox": [ - 72.0, - 618.47, - 509.42, - 755.29 - ], - "text": "BAND WIDTH MEASURES VOLATILITY\nBollinger Bands differ from envelopes in one major way. Whereas the\nenvelopes stay a constant percentage width apart, Bollinger Bands expand\nand contract based on the last 20 days’ volatility. During a period of rising\nprice volatility, the distance between the two bands will widen. Conversely,\nduring a period of low market volatility, the distance between the two bands\nwill contract. There is a tendency for the bands to alternate between\nexpansion and contraction. When the bands are unusually far apart, that is", - "type": "text" - } - ] - }, - { - "page_num": 201, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p201-b0", - "global_id": 1323, - "bbox": [ - 72.0, - 73.06, - 522.44, - 187.07 - ], - "text": "often a sign that the current trend may be ending. When the distance between\nthe two bands has narrowed too far, that is often a sign that a market may be\nabout to initiate a new trend. Bollinger Bands can also be applied to weekly\nand monthly price charts by using 20 weeks and 20 months instead of 20 days.\nBollinger Bands work best when combined with overbought/oversold\noscillators that are explained in the next chapter. (See Appendix A for\nadditional band techniques.)", - "type": "text" - }, - { - "block_id": "p201-b1", - "global_id": 1324, - "bbox": [ - 72.0, - 210.75, - 175.46, - 221.55 - ], - "text": "Centering the Average", - "type": "text" - }, - { - "block_id": "p201-b2", - "global_id": 1325, - "bbox": [ - 72.0, - 229.56, - 511.56, - 359.91 - ], - "text": "The more statistically correct way to plot a moving average is to center it.\nThat means to place it in the middle of the time period it covers. A 10 day\naverage, for example, would be placed five days back. A 20 day average\nwould be plotted 10 days back in time. Centering the average, however, has\nthe major flaw of producing much later trend change signals. Therefore,\nmoving averages are usually placed at the end of the time period covered\ninstead of the middle. The centering technique is used almost exclusively by\ncyclic analysts to isolate underlying market cycles.", - "type": "text" - }, - { - "block_id": "p201-b3", - "global_id": 1326, - "bbox": [ - 72.0, - 403.14, - 522.75, - 523.39 - ], - "text": "MOVING AVERAGES TIED TO CYCLES\nMany market analysts believe that time cycles play an important role in\nmarket movement. Because these time cycles are repetitive and can be\nmeasured, it is possible to determine the approximate times when market tops\nor bottoms will occur. Many different time cycles exist simultaneously, from a\nshort term 5 day cycle to Kondratieff’s long 54 year cycle. We’ll delve more\ninto this fascinating branch of technical analysis in Chapter 14.", - "type": "text" - }, - { - "block_id": "p201-b4", - "global_id": 1327, - "bbox": [ - 72.0, - 525.56, - 519.95, - 589.65 - ], - "text": "The subject of cycles is introduced here only to make the point that there\nseems to be a relationship between the underlying cycles that affect a certain\nmarket and the correct moving averages to use. In other words, the moving\naverages can be adjusted to fit the dominant cycles in each market.", - "type": "text" - }, - { - "block_id": "p201-b5", - "global_id": 1328, - "bbox": [ - 72.0, - 591.81, - 520.33, - 689.03 - ], - "text": "There appears to be a definite relationship between moving averages and\ncycles. For example, the monthly cycle is one of the best known cycles\noperating throughout the commodity markets. A month has 20-21 trading\ndays. Cycles tend to be related to their next longer and shorter cycles\nharmonically, or by a factor of two. That means that the next longer cycle is\ndouble the length of a cycle and the next shorter cycle is half its length.", - "type": "text" - }, - { - "block_id": "p201-b6", - "global_id": 1329, - "bbox": [ - 72.0, - 691.2, - 516.23, - 755.29 - ], - "text": "The monthly cycle, therefore, may explain the popularity of the 5, 10,\n20, and 40 day moving averages. The 20 day cycle measures the monthly\ncycle. The 40 day average is double the 20 day. The 10 day average is half of\n20 and the 5 day average is half again of 10.", - "type": "text" - } - ] - }, - { - "page_num": 202, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p202-b0", - "global_id": 1330, - "bbox": [ - 72.0, - 73.28, - 521.74, - 153.94 - ], - "text": "Many of the more commonly used moving averages (including the 4, 9,\nand 18 day averages, which are derivatives of 5, 10, and 20) can be explained\nby cyclic influences and the harmonic relationships of neighboring cycles.\nIncidentally, the 4 week cycle may also help explain the success of the 4 week\nrule, covered later in the chapter, and its shorter counterpart—the 2 week rule.", - "type": "text" - }, - { - "block_id": "p202-b1", - "global_id": 1331, - "bbox": [ - 72.0, - 197.89, - 518.37, - 375.03 - ], - "text": "FIBONACCI NUMBERS USED AS MOVING\nAVERAGES\nWe’ll cover the Fibonacci number series in the chapter on Elliott Wave\nTheory. However, I’d like to mention here that this mysterious series of\nnumbers—such as 13, 21, 34, 55, and so on—seem to lend themselves quite\nwell to moving average analysis. This is true not only of daily charts, but for\nweekly charts as well. The 21 day moving average is a Fibonacci number. On\nthe weekly charts, the 13 week average has proven valuable in both stocks\nand commodities. We’ll postpone a more in depth discussion of these\nnumbers until Chapter 13.", - "type": "text" - }, - { - "block_id": "p202-b2", - "global_id": 1332, - "bbox": [ - 72.0, - 418.26, - 510.38, - 562.28 - ], - "text": "MOVING AVERAGES APPLIED TO LONG\nTERM CHARTS\nThe reader should not overlook using this technique in longer range trend\nanalysis. Longer range moving averages, such as 10 or 13 weeks, in\nconjunction with the 30 or 40 week average, have long been used in stock\nmarket analysis, but haven’t been given as much attention in the futures\nmarkets. The 10 and 40 week moving averages can be used to help track the\nprimary trend on weekly charts for futures and stocks. (See Figure 9.10.)", - "type": "text" - } - ] - }, - { - "page_num": 203, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p203-b0", - "global_id": 1333, - "bbox": [ - 79.13, - 346.23, - 516.16, - 377.19 - ], - "text": "Figure 9.10 Moving averages are valuable on weekly charts. The 40 week\nmoving average should provide support during bull market corrections as it", - "type": "text" - }, - { - "block_id": "p203-b1", - "global_id": 1334, - "bbox": [ - 272.32, - 379.36, - 322.95, - 393.75 - ], - "text": "did here.", - "type": "text" - }, - { - "block_id": "p203-b2", - "global_id": 1335, - "bbox": [ - 72.0, - 417.44, - 273.9, - 428.24 - ], - "text": "Some Pros and Cons of the Moving Average", - "type": "text" - }, - { - "block_id": "p203-b3", - "global_id": 1336, - "bbox": [ - 72.0, - 436.25, - 520.38, - 533.47 - ], - "text": "One of the great advantages of using moving averages, and one of the reasons\nthey are so popular as trend-following systems, is that they embody some of\nthe oldest maxims of successful trading. They trade in the direction of the\ntrend. They let profits run and cut losses short. The moving average system\nforces the user to obey those rules by providing specific buy and sell signals\nbased on those principles.", - "type": "text" - }, - { - "block_id": "p203-b4", - "global_id": 1337, - "bbox": [ - 72.0, - 535.64, - 507.79, - 599.73 - ], - "text": "Because they are trend-following in nature, however, moving averages\nwork best when markets are in a trending period. They perform very poorly\nwhen markets get choppy and trade sideways for a period of time. And that\nmight be a third to a half of the time.", - "type": "text" - }, - { - "block_id": "p203-b5", - "global_id": 1338, - "bbox": [ - 72.0, - 601.89, - 521.92, - 748.81 - ], - "text": "The fact that they do not work that well for significant periods of time,\nhowever, is one very compelling reason why it is dangerous to rely too\nheavily on the moving average technique. In certain trending markets, the\nmoving average can’t be beat. Just switch the program to automatic. At other\ntimes, a nontrending method like the overbought–oversold oscillator is more\nappropriate. (In Chapter 15, we’ll show you an indicator called ADX that tells\nyou when a market is trending and when it is not, and whether the market\nclimate favors a trending moving average technique or a nontrending\noscillator approach.)", - "type": "text" - } - ] - }, - { - "page_num": 204, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p204-b0", - "global_id": 1339, - "bbox": [ - 72.0, - 73.19, - 218.93, - 83.99 - ], - "text": "Moving Averages As Oscillators", - "type": "text" - }, - { - "block_id": "p204-b1", - "global_id": 1340, - "bbox": [ - 72.0, - 92.01, - 517.97, - 222.36 - ], - "text": "One way to construct an oscillator is to compare the difference between two\nmoving averages. The use of two moving averages in the double crossover\nmethod, therefore, takes on greater significance and becomes an even more\nuseful technique. We’ll see how this is done in Chapter 10. One method\ncompares two exponentially smoothed averages. That method is called\nMoving Average Convergence/Divergence (MACD). It is used partially as an\noscillator. Therefore, we’ll postpone our explanation of that technique until\nwe deal with the entire subject of oscillators in Chapter 10.", - "type": "text" - }, - { - "block_id": "p204-b2", - "global_id": 1341, - "bbox": [ - 72.0, - 246.04, - 507.58, - 328.22 - ], - "text": "The Moving Average Applied to Other Technical Data\nThe moving average can be applied to virtually any technical data or\nindicator. It can be used on open interest and volume figures, including on\nbalance volume. The moving average can be used on various indicators and\nratios. It can be applied to oscillators as well.", - "type": "text" - }, - { - "block_id": "p204-b3", - "global_id": 1342, - "bbox": [ - 72.0, - 372.17, - 522.4, - 475.86 - ], - "text": "THE WEEKLY RULE\nThere are other alternatives to the moving average as a trend-following\ndevice. One of the best known and most successful of these techniques is\ncalled the weekly price channel or, simply, the weekly rule. This technique has\nmany of the benefits of the moving average, but is less time consuming and\nsimpler to use.", - "type": "text" - }, - { - "block_id": "p204-b4", - "global_id": 1343, - "bbox": [ - 72.0, - 478.02, - 510.74, - 624.94 - ], - "text": "With the improvements in computer technology over the past decade, a\nconsiderable amount of research has been done on the development of\ntechnical trading systems. These systems are mechanical in nature, meaning\nthat human emotion and judgment are eliminated. These systems have\nbecome increasingly sophisticated. At first, simple moving averages were\nutilized. Then, double and triple crossovers of the averages were added. The\naverages were then linearly weighted and exponentially smoothed. These\nsystems are primarily trend-following, which means their purpose is to\nidentify and then trade in the direction of an existing trend.", - "type": "text" - }, - { - "block_id": "p204-b5", - "global_id": 1344, - "bbox": [ - 72.0, - 627.1, - 517.57, - 707.76 - ], - "text": "With the increased fascination with fancier and more complex systems\nand indicators, however, there has been a tendency to overlook some of the\nsimpler techniques that continue to work quite well and have stood the test of\ntime. We’re going to discuss one of the simplest of these techniques—the\nweekly rule.", - "type": "text" - }, - { - "block_id": "p204-b6", - "global_id": 1345, - "bbox": [ - 72.0, - 709.92, - 523.13, - 757.45 - ], - "text": "In 1970, a booklet entitled the Trader’s Notebook was published by Dunn\n& Hargitt’s Financial Services in Lafayette, Indiana. The best known\ncommodity trading systems of the day were computer-tested and compared.", - "type": "text" - } - ] - }, - { - "page_num": 205, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p205-b0", - "global_id": 1346, - "bbox": [ - 72.0, - 73.53, - 521.91, - 187.07 - ], - "text": "The final conclusion of all that research was that the most successful of all the\nsystems tested was the 4 week rule, developed by Richard Donchian. Mr.\nDonchian has been recognized as a pioneer in the field of commodity trend\ntrading using mechanical systems. (In 1983, Managed Account Reports chose\nDonchian as the first recipient of the Most Valuable Performer Award for\noutstanding contributions to the field of futures money management, and\npresents The Donchian Award to other worthy recipients.)", - "type": "text" - }, - { - "block_id": "p205-b1", - "global_id": 1347, - "bbox": [ - 72.0, - 189.23, - 510.21, - 253.32 - ], - "text": "More recent work done by Louis Lukac, former research director at\nDunn & Hargitt and currently president of Wizard Trading (a Massachusetts\nCTA) supports the earlier conclusions that breakout (or channel) systems\nsimilar to the weekly rule continue to show superior results. (Lukac et al.)*", - "type": "text" - }, - { - "block_id": "p205-b2", - "global_id": 1348, - "bbox": [ - 72.0, - 255.49, - 523.15, - 402.4 - ], - "text": "Of the 12 systems tested from 1975-84, only 4 generated significant\nprofits. Of those 4, 2 were channel breakout systems and one was a dual\nmoving average crossover system. A later article by Lukac and Brorsen in The\nFinancial Review (November 1990) published the results of a more extensive\nstudy done on data from 1976–86 that compared 23 technical trading systems.\nOnce again, channel breakouts and moving average systems came out on top.\nLukac finally concluded that a channel breakout system was his personal\nchoice as the best starting point for all technical trading system testing and\ndevelopment.", - "type": "text" - }, - { - "block_id": "p205-b3", - "global_id": 1349, - "bbox": [ - 72.0, - 426.08, - 150.83, - 436.88 - ], - "text": "The 4 Week Rule", - "type": "text" - }, - { - "block_id": "p205-b4", - "global_id": 1350, - "bbox": [ - 72.0, - 444.9, - 377.28, - 459.29 - ], - "text": "The 4 week rule is used primarily for futures trading.", - "type": "text" - }, - { - "block_id": "p205-b5", - "global_id": 1351, - "bbox": [ - 100.79, - 461.46, - 423.67, - 475.86 - ], - "text": "The system based on the 4 week rule is simplicity itself:", - "type": "text" - }, - { - "block_id": "p205-b6", - "global_id": 1352, - "bbox": [ - 82.08, - 492.43, - 522.37, - 556.52 - ], - "text": "1. Cover short positions and buy long whenever the price exceeds the highs\nof the four preceding full calendar weeks.\n2. Liquidate long positions and sell short whenever the price falls below the\nlows of the four preceding full calendar weeks.", - "type": "text" - }, - { - "block_id": "p205-b7", - "global_id": 1353, - "bbox": [ - 72.0, - 573.09, - 518.39, - 670.31 - ], - "text": "The system, as it is presented here, is continuous in nature, which means\nthat the trader always has a position, either long or short. As a general rule,\ncontinuous systems have a basic weakness. They stay in the market and get\n“whipsawed” during trendless market periods. It’s already been stressed that\ntrend-following systems do not work well when markets are in these\nsideways, or trendless phases.", - "type": "text" - }, - { - "block_id": "p205-b8", - "global_id": 1354, - "bbox": [ - 72.0, - 672.47, - 522.4, - 769.69 - ], - "text": "The 4 week rule can be modified to make it noncontinuous. This can be\naccomplished by using a shorter time span—such as a one or two week rule—\nfor liquidation purposes. In other words, a four week “breakout” would be\nnecessary to initiate a new position, but a one or two week signal in the\nopposite direction would warrant liquidation of the position. The trader would\nthen remain out of the market until a new four week breakout is registered.", - "type": "text" - } - ] - }, - { - "page_num": 206, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p206-b0", - "global_id": 1355, - "bbox": [ - 72.0, - 73.28, - 515.89, - 203.63 - ], - "text": "The logic behind the system is based on sound technical principles. Its\nsignals are mechanical and clearcut. Because it is trend following, it virtually\nguarantees participation on the right side of every important trend. It is also\nstructured to follow the often quoted maxim of successful trading—“let\nprofits run, while cutting losses short.” Another feature, which should not be\noverlooked, is that this method tends to trade less frequently, so that\ncommissions are lower. Another plus is that the system can be implemented\nwith or without the aid of a computer.", - "type": "text" - }, - { - "block_id": "p206-b1", - "global_id": 1356, - "bbox": [ - 72.0, - 205.8, - 516.72, - 303.02 - ], - "text": "The main criticism of the weekly rule is the same one leveled against all\ntrend-following approaches, namely, that it does not catch tops or bottoms.\nBut what trend-following system does? The important point to keep in mind\nis that the four week rule performs at least as well as most other trend-\nfollowing systems and better than many, but has the added benefit of\nincredible simplicity.", - "type": "text" - }, - { - "block_id": "p206-b2", - "global_id": 1357, - "bbox": [ - 72.0, - 326.7, - 220.3, - 337.5 - ], - "text": "Adjustments to the 4 Week Rule", - "type": "text" - }, - { - "block_id": "p206-b3", - "global_id": 1358, - "bbox": [ - 72.0, - 345.51, - 519.94, - 492.42 - ], - "text": "Although we’re treating the four week rule in its original form, there are\nmany adjustments and refinements that can be employed. For one thing, the\nrule does not have to be used as a trading system. Weekly signals can be\nemployed simply as another technical indicator to identify breakouts and\ntrend reversals. Weekly breakouts can be used as a confirming filter for other\ntechniques, such as moving average crossovers. One or 2 week rules function\nas excellent filters. A moving average crossover signal could be confirmed by\na two week breakout in the same direction in order for a market position to be\ntaken.", - "type": "text" - }, - { - "block_id": "p206-b4", - "global_id": 1359, - "bbox": [ - 72.0, - 516.1, - 513.96, - 681.11 - ], - "text": "Shorten or Lengthen Time Periods for Sensitivity\nThe time period employed can be expanded or compressed in the interests of\nrisk management and sensitivity. For example, the time period could be\nshortened if it is desirable to make the system more sensitive. In a relatively\nhigh priced market, where prices are trending sharply higher, a shorter time\nspan could be chosen to make the system more sensitive. Suppose, for\nexample, that a long position is taken on a 4 week upside breakout with a\nprotective stop placed just below the low of the past 2 weeks. If the market\nhas rallied sharply and the trader wishes to trail the position with a closer\nprotective stop, a one week stopout point could be used.", - "type": "text" - }, - { - "block_id": "p206-b5", - "global_id": 1360, - "bbox": [ - 72.0, - 683.27, - 517.97, - 747.37 - ], - "text": "In a trading range situation, where a trend trader would just as soon stay\non the sidelines until an important trend signal is given, the time period could\nbe expanded to eight weeks. This would prevent taking positions on shorter\nterm and premature trend signals.", - "type": "text" - } - ] - }, - { - "page_num": 207, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p207-b0", - "global_id": 1361, - "bbox": [ - 72.0, - 73.19, - 218.65, - 83.99 - ], - "text": "The 4 Week Rule Tied to Cycles", - "type": "text" - }, - { - "block_id": "p207-b1", - "global_id": 1362, - "bbox": [ - 72.0, - 92.01, - 515.17, - 205.79 - ], - "text": "Earlier in the chapter reference was made to the importance of the monthly\ncycle in commodity markets. The 4 week, or 20 day, trading cycle is a\ndominant cycle that influences all markets. This may help explain why the 4\nweek time period has proven so successful. Notice that mention was made of\n1, 2, and 8 week rules. The principle of harmonics in cyclic analysis holds\nthat each cycle is related to its neighboring cycles (next longer and next\nshorter cycles) by 2.", - "type": "text" - }, - { - "block_id": "p207-b2", - "global_id": 1363, - "bbox": [ - 72.0, - 207.96, - 522.34, - 388.0 - ], - "text": "In the previous discussion of moving averages, it was pointed out how\nthe monthly cycle and harmonics explained the popularity of the 5, 10, 20,\nand 40 day moving averages. The same time periods hold true in the realm of\nweekly rules. Those daily numbers translated into weekly time periods are 1,\n2, 4, and 8 weeks. Therefore, adjustments to the 4 week rule seem to work\nbest when the beginning number (4) is divided or multiplied by 2. To shorten\nthe time span, go from 4 to 2 weeks. If an even shorter time span is desired,\ngo from 2 to 1. To lengthen, go from 4 to 8. Because this method combines\nprice and time, there’s no reason why the cyclic principle of harmonics should\nnot play an important role. The tactic of dividing a weekly parameter by 2 to\nshorten it, or doubling it to lengthen it, does have cycle logic behind it.", - "type": "text" - }, - { - "block_id": "p207-b3", - "global_id": 1364, - "bbox": [ - 72.0, - 390.16, - 518.77, - 520.51 - ], - "text": "The 4 week rule is a simple breakout system. The original system can be\nmodified by using a shorter time period—a 1 or 2 week rule—for liquidation\npurposes. If the user desires a more sensitive system, a 2 week period can be\nemployed for entry signals. Because this rule is meant to be simple, it is best\naddressed on that level. The 4 week rule is simple, but it works. (Charting\npackages allow you to plot price channels above and below current prices to\nspot channel breakouts. Price channels can be used on daily, weekly, or\nmonthly charts. See Figures 9.11 and 9.12.)", - "type": "text" - } - ] - }, - { - "page_num": 208, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p208-b0", - "global_id": 1365, - "bbox": [ - 72.22, - 346.23, - 523.05, - 360.69 - ], - "text": "Figure 9.11 A 20 day (4 week) price channel applied to Treasury Bond futures", - "type": "text" - }, - { - "block_id": "p208-b1", - "global_id": 1366, - "bbox": [ - 80.95, - 362.79, - 514.34, - 377.19 - ], - "text": "prices. A buy signal was given when prices closed above the upper channel", - "type": "text" - }, - { - "block_id": "p208-b2", - "global_id": 1367, - "bbox": [ - 85.79, - 379.36, - 509.48, - 393.75 - ], - "text": "(see circle). Prices have to close beneath the lower channel to reverse the", - "type": "text" - }, - { - "block_id": "p208-b3", - "global_id": 1368, - "bbox": [ - 278.25, - 395.92, - 317.02, - 410.32 - ], - "text": "signal.", - "type": "text" - }, - { - "block_id": "p208-b4", - "global_id": 1369, - "bbox": [ - 81.63, - 701.28, - 513.65, - 715.74 - ], - "text": "Figure 9.12 A 4 month price channel applied to the S&P 500 Index. Prices", - "type": "text" - }, - { - "block_id": "p208-b5", - "global_id": 1370, - "bbox": [ - 74.46, - 717.84, - 520.83, - 748.8 - ], - "text": "crossed the upper channel in early 1995 (see circle) to give a buy signal\nwhich remains in effect 3 years later. A close beneath the lower line is needed", - "type": "text" - }, - { - "block_id": "p208-b6", - "global_id": 1371, - "bbox": [ - 239.89, - 750.97, - 355.39, - 765.37 - ], - "text": "to give a sell signal.", - "type": "text" - } - ] - }, - { - "page_num": 209, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p209-b0", - "global_id": 1372, - "bbox": [ - 72.0, - 74.02, - 521.53, - 210.83 - ], - "text": "TO OPTIMIZE OR NOT\nThe first edition of this book included the results of extensive research\nproduced by Merrill Lynch, which published a series of studies on\ncomputerized trading techniques applied to the futures markets from 1978-82.\nExtensive testing of various moving average and channel breakout parameters\nwas performed to find the best possible combinations in each futures market.\nThe Merrill Lynch researchers produced a different set of optimized indicator\nvalues for each market.", - "type": "text" - }, - { - "block_id": "p209-b1", - "global_id": 1373, - "bbox": [ - 72.0, - 213.0, - 504.42, - 326.78 - ], - "text": "Most charting packages allow you to optimize systems and indicators.\nInstead of using the same moving average in all markets, for example, you\ncould ask the computer to find the moving average, or moving average\ncombinations, that have worked the best in the past for that market. That\ncould also be done for daily and weekly breakout systems and virtually all\ntechnical indicators included in this book. Optimization allows technical\nparameters to adapt to changing market conditions.", - "type": "text" - }, - { - "block_id": "p209-b2", - "global_id": 1374, - "bbox": [ - 72.0, - 328.95, - 519.7, - 442.73 - ], - "text": "Some argue that optimization helps their trading results and others that it\ndoesn’t. The heart of the debate centers on how the data is optimized.\nResearchers stress that the correct procedure is to use only part of the price\ndata to choose the best parameters, and another portion to actually test the\nresults. Testing the optimized parameters on “out of sample” price data helps\nensure that the final results will be closer to what one might experience from\nactual trading.", - "type": "text" - }, - { - "block_id": "p209-b3", - "global_id": 1375, - "bbox": [ - 72.0, - 444.9, - 523.01, - 591.81 - ], - "text": "The decision to optimize or not is a personal one. Most evidence,\nhowever, suggests that optimization is not the Holy Grail some think it to be. I\ngenerally advise traders following only a handful of markets to experiment\nwith optimization. Why should Treasury Bonds or the German mark have the\nexact same moving averages as corn or cotton? Stock market traders are a\ndifferent story. Having to follow thousands of stocks argues against\noptimizing. If you specialize in a handful of markets, try optimizing. If you’re\na generalist who follows a large number of markets, use the same technical\nparameters for all of them.", - "type": "text" - }, - { - "block_id": "p209-b4", - "global_id": 1376, - "bbox": [ - 72.0, - 635.76, - 519.58, - 756.01 - ], - "text": "SUMMARY\nWe’ve presented a lot of variations on the moving average approach. Let’s try\nto simplify things a bit. Most technicians use a combination of two moving\naverages. Those two averages are usually simple averages. Although\nexponential averages have become popular, there’s no real evidence to prove\nthat they work any better than the simple average. The most commonly used\ndaily moving average combinations in futures markets are 4 and 9, 9 and 18,", - "type": "text" - } - ] - }, - { - "page_num": 210, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p210-b0", - "global_id": 1377, - "bbox": [ - 72.0, - 73.53, - 512.03, - 187.07 - ], - "text": "5 and 20, and 10 and 40. Stock traders rely heavily on a 50 day (or 10 week)\nmoving average. For longer range stock market analysis, popular weekly\nmoving averages are 30 and 40 weeks (or 200 days). Bollinger Bands make\nuse of 20 day and 20 week moving averages. The 20 week average can be\nconverted to daily charts by utilizing a 100 day average, which is another\nuseful moving average. Channel breakout systems work extremely well in\ntrending markets and can be used on daily, weekly, and monthly charts.", - "type": "text" - }, - { - "block_id": "p210-b1", - "global_id": 1378, - "bbox": [ - 72.0, - 231.02, - 521.49, - 334.7 - ], - "text": "THE ADAPTIVE MOVING AVERAGE\nOne of the problems encountered with the moving average is choosing\nbetween a fast or a slow average. While one may work better in a trading\nrange market, the other may be preferable in a trending market. The answer to\nthe problem of choosing between the two may lie with an innovative\napproach called the “adaptive moving average.”", - "type": "text" - }, - { - "block_id": "p210-b2", - "global_id": 1379, - "bbox": [ - 72.0, - 336.87, - 520.04, - 450.65 - ], - "text": "Perry Kaufman presents this technique in his book Smarter Trading. The\nspeed of Kaufman’s “adaptive moving average” automatically adjusts to the\nlevel of noise (or volatility) in a market. The AMA moves more slowly when\nmarkets are trending sideways, but then moves more swiftly when the market\nis trending. That avoids the problem of using a faster moving average (and\ngetting whipsawed more frequently) during a trading range, and using a\nslower average that trails too far behind a market when it is trending.", - "type": "text" - }, - { - "block_id": "p210-b3", - "global_id": 1380, - "bbox": [ - 72.0, - 452.82, - 518.96, - 550.04 - ], - "text": "Kaufman does that by constructing an Efficiency Ratio that compares\nprice direction with the level of volatility. When the Efficiency Ratio is high,\nthere is more direction than volatility (favoring a faster average). When the\nratio is low, there’s more volatility than direction (favoring a slower average).\nBy incorporating the Efficiency Ratio, the AMA automatically adjusts to the\nspeed most suitable for the current market.", - "type": "text" - }, - { - "block_id": "p210-b4", - "global_id": 1381, - "bbox": [ - 72.0, - 593.27, - 523.11, - 713.52 - ], - "text": "ALTERNATIVES TO THE MOVING AVERAGE\nMoving averages don’t work all of the time. They do their best work when the\nmarket is in a trending phase. They’re not very helpful during trendless\nperiods when prices trade sideways. Fortunately, there’s another class of\nindicator that performs much better than the moving average during those\nfrustrating trading ranges. They’re called oscillators and we’ll explain them in\nthe next chapter.", - "type": "text" - } - ] - }, - { - "page_num": 211, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p211-b0", - "global_id": 1382, - "bbox": [ - 100.79, - 73.28, - 208.29, - 87.68 - ], - "text": "*See Bibliography", - "type": "text" - } - ] - }, - { - "page_num": 212, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p212-b0", - "global_id": 1383, - "bbox": [ - 72.0, - 339.77, - 522.68, - 476.58 - ], - "text": "INTRODUCTION\nIn this chapter, we’re going to talk about an alternative to trend-following\napproaches—the oscillator. The oscillator is extremely useful in nontrending\nmarkets where prices fluctuate in a horizontal price band, or trading range,\ncreating a market situation where most trend-following systems simply don’t\nwork that well. The oscillator provides the technical trader with a tool that can\nenable him or her to profit from these periodic sideways and trendless market\nenvironments.", - "type": "text" - }, - { - "block_id": "p212-b1", - "global_id": 1384, - "bbox": [ - 72.0, - 478.74, - 519.49, - 609.09 - ], - "text": "The value of the oscillator is not limited to horizontal trading ranges,\nhowever. Used in conjunction with price charts during trending phases, the\noscillator becomes an extremely valuable ally by alerting the trader to short\nterm market extremes, commonly referred to as overbought or oversold\nconditions. The oscillator can also warn that a trend is losing momentum\nbefore that situation becomes evident in the price action itself. Oscillators can\nsignal that a trend may be nearing completion by displaying certain\ndivergences.", - "type": "text" - }, - { - "block_id": "p212-b2", - "global_id": 1385, - "bbox": [ - 72.0, - 611.26, - 520.01, - 741.61 - ], - "text": "We’ll begin by explaining first what an oscillator is and the basis for its\nconstruction and interpretation. We’ll then discuss the meaning of momentum\nand its implications for market forecasting. Some of the more common\noscillator techniques will be presented from the very simple to the more\ncomplicated. The important question of divergence will be covered. We’ll\ntouch on the value of coordinating oscillator analysis with underlying market\ncycles. Finally, we’ll discuss how oscillators should be used as part of the\noverall technical analysis of a market.", - "type": "text" - } - ] - }, - { - "page_num": 213, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p213-b0", - "global_id": 1386, - "bbox": [ - 72.0, - 74.02, - 522.74, - 300.86 - ], - "text": "OSCILLATOR USAGE IN CONJUNCTION\nWITH TREND\nThe oscillator is only a secondary indicator in the sense that it must be\nsubordinated to basic trend analysis. As we go through the various types of\noscillators used by technicians, the importance of trading in the direction of\nthe overriding market trend will be constantly stressed. The reader should also\nbe aware that there are times when oscillators are more useful than at others.\nFor example, near the beginning of important moves, oscillator analysis isn’t\nthat helpful and can even be misleading. Toward the end of market moves,\nhowever, oscillators become extremely valuable. We’ll address these points as\nwe go along. Finally, no study of market extremes would be complete without\na discussion of Contrary Opinion. We’ll talk about the role of the contrarian\nphilosophy and how it can be incorporated into market analysis and trading.", - "type": "text" - }, - { - "block_id": "p213-b1", - "global_id": 1387, - "bbox": [ - 72.0, - 324.54, - 201.81, - 335.33 - ], - "text": "Interpretation of Oscillators", - "type": "text" - }, - { - "block_id": "p213-b2", - "global_id": 1388, - "bbox": [ - 72.0, - 343.35, - 518.39, - 506.83 - ], - "text": "While there are many different ways to construct momentum oscillators, the\nactual interpretation differs very little from one technique to another. Most\noscillators look very much alike. They are plotted along the bottom of the\nprice chart and resemble a flat horizontal band. The oscillator band is\nbasically flat while prices may be trading up, down, or sideways. However,\nthe peaks and troughs in the oscillator coincide with the peaks and troughs on\nthe price chart. Some oscillators have a midpoint value that divides the\nhorizontal range into two halves, an upper and a lower. Depending on the\nformula used, this midpoint line is usually a zero line. Some oscillators also\nhave upper and lower boundaries ranging from 0 to 100.", - "type": "text" - }, - { - "block_id": "p213-b3", - "global_id": 1389, - "bbox": [ - 72.0, - 530.51, - 519.17, - 678.95 - ], - "text": "General Rules for Interpretation\nAs a general rule, when the oscillator reaches an extreme value in either the\nupper or lower end of the band, this suggests that the current price move may\nhave gone too far too fast and is due for a correction or consolidation of some\ntype. As another general rule, the trader should be buying when the oscillator\nline is in the lower end of the band and selling in the upper end. The crossing\nof the midpoint line is often used to generate buy and sell signals. We’ll see\nhow these general rules are applied as we deal with the various types of\noscillators.", - "type": "text" - }, - { - "block_id": "p213-b4", - "global_id": 1390, - "bbox": [ - 72.0, - 702.63, - 302.0, - 713.43 - ], - "text": "The Three Most Important Uses for the Oscillator", - "type": "text" - }, - { - "block_id": "p213-b5", - "global_id": 1391, - "bbox": [ - 72.0, - 721.44, - 506.36, - 752.41 - ], - "text": "There are three situations when the oscillator is most useful. You’ll see that\nthese three situations are common to most types of oscillators that are used.", - "type": "text" - } - ] - }, - { - "page_num": 214, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p214-b0", - "global_id": 1392, - "bbox": [ - 82.08, - 73.28, - 511.14, - 220.2 - ], - "text": "1. The oscillator is most useful when its value reaches an extreme reading\nnear the upper or lower end of its boundaries. The market is said to be\noverbought when it is near the upper extreme and oversold when it is\nnear the lower extreme. This warns that the price trend is overextended\nand vulnerable.\n2. A divergence between the oscillator and the price action when the\noscillator is in an extreme position is usually an important warning.\n3. The crossing of the zero (or midpoint) line can give important trading\nsignals in the direction of the price trend.", - "type": "text" - }, - { - "block_id": "p214-b1", - "global_id": 1393, - "bbox": [ - 81.68, - 511.15, - 513.59, - 558.68 - ], - "text": "Figure 10.1a The 10 day momentum line fluctuates around a zero line.\nReadings too far above the zero line are overbought, while values too far\nbelow the line are oversold. Momentum should be used in conjunction with", - "type": "text" - }, - { - "block_id": "p214-b2", - "global_id": 1394, - "bbox": [ - 230.57, - 560.84, - 364.71, - 575.24 - ], - "text": "the trend of the market.", - "type": "text" - }, - { - "block_id": "p214-b3", - "global_id": 1395, - "bbox": [ - 72.0, - 619.19, - 521.15, - 756.01 - ], - "text": "MEASURING MOMENTUM\nThe concept of momentum is the most basic application of oscillator analysis.\nMomentum measures the velocity of price changes as opposed to the actual\nprice levels themselves. Market momentum is measured by continually taking\nprice differences for a fixed time interval. To construct a 10 day momentum\nline, simply subtract the closing price 10 days ago from the last closing price.\nThis positive or negative value is then plotted around a zero line. The formula\nfor momentum is:", - "type": "text" - } - ] - }, - { - "page_num": 215, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p215-b0", - "global_id": 1396, - "bbox": [ - 265.23, - 73.15, - 330.05, - 87.68 - ], - "text": "M=V – V x", - "type": "text" - }, - { - "block_id": "p215-b1", - "global_id": 1397, - "bbox": [ - 72.0, - 96.91, - 494.73, - 111.45 - ], - "text": "where V is the latest closing price and V x is the closing price x days ago.", - "type": "text" - }, - { - "block_id": "p215-b2", - "global_id": 1398, - "bbox": [ - 83.26, - 401.68, - 512.02, - 416.15 - ], - "text": "Figure 10.1b A comparison of 10 and 40 day momentum lines. The longer", - "type": "text" - }, - { - "block_id": "p215-b3", - "global_id": 1399, - "bbox": [ - 102.14, - 418.25, - 493.13, - 432.64 - ], - "text": "version is more helpful in catching major market turns (see circles).", - "type": "text" - }, - { - "block_id": "p215-b4", - "global_id": 1400, - "bbox": [ - 72.0, - 449.22, - 501.92, - 513.31 - ], - "text": "If the latest closing price is greater than that of 10 days ago (in other\nwords, prices have moved higher), then a positive value would be plotted\nabove the zero line. If the latest close is below the close 10 days earlier\n(prices have declined), then a negative value is plotted below the zero line.", - "type": "text" - }, - { - "block_id": "p215-b5", - "global_id": 1401, - "bbox": [ - 72.0, - 515.47, - 518.59, - 612.69 - ], - "text": "While the 10 day momentum is a commonly used time period for\nreasons discussed later, any time period can be employed. (See Figure 10.1a.)\nA shorter time period (such as 5 days) produces a more sensitive line with\nmore pronounced oscillations. A longer number of days (such as 40 days)\nresults in a much smoother line in which the oscillator swings are less\nvolatile. (See Figure 10.1b.)", - "type": "text" - }, - { - "block_id": "p215-b6", - "global_id": 1402, - "bbox": [ - 72.0, - 636.37, - 298.12, - 647.17 - ], - "text": "Momentum Measures Rates of Ascent or Descent", - "type": "text" - }, - { - "block_id": "p215-b7", - "global_id": 1403, - "bbox": [ - 72.0, - 655.19, - 519.93, - 768.97 - ], - "text": "Let’s talk a bit more about just what this momentum indicator is measuring.\nBy plotting price differences for a set period of time, the chartist is studying\nrates of ascent or descent. If prices are rising and the momentum line is above\nthe zero line and rising, this means the uptrend is accelerating. If the up-\nslanting momentum line begins to flatten out, this means that the new gains\nbeing achieved by the latest closes are the same as the gains 10 days earlier.\nWhile prices may still be advancing, the rate of ascent (or the velocity) has", - "type": "text" - } - ] - }, - { - "page_num": 216, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p216-b0", - "global_id": 1404, - "bbox": [ - 72.0, - 73.64, - 519.69, - 121.53 - ], - "text": "leveled off. When the momentum line begins to drop toward the zero line, the\nuptrend in prices is still in force, but at a decelerating rate. The uptrend is\nlosing momentum.", - "type": "text" - }, - { - "block_id": "p216-b1", - "global_id": 1405, - "bbox": [ - 72.0, - 122.98, - 507.61, - 220.2 - ], - "text": "When the momentum line moves below the zero line, the latest 10 day\nclose is now under the close of 10 days ago and a near term downtrend is in\neffect. (And, incidentally, the 10 day moving average also has begun to\ndecline.) As momentum continues to drop farther below the zero line, the\ndowntrend gains momentum. Only when the line begins to advance again\ndoes the analyst know that the downtrend is decelerating.", - "type": "text" - }, - { - "block_id": "p216-b2", - "global_id": 1406, - "bbox": [ - 72.0, - 222.36, - 521.88, - 352.71 - ], - "text": "It’s important to remember that momentum measures the differences\nbetween prices at two time intervals. In order for the line to advance, the price\ngains for the last day’s close must be greater than the gains of 10 days ago. If\nprices advance by only the same amount as 10 days ago, the momentum line\nwill be flat. If the last price gain is less than that of 10 days ago, the\nmomentum line begins to decline even though prices are still rising. This is\nhow the momentum line measures the acceleration or deceleration in the\ncurrent advance or decline in the price trend.", - "type": "text" - }, - { - "block_id": "p216-b3", - "global_id": 1407, - "bbox": [ - 72.0, - 376.39, - 277.54, - 387.19 - ], - "text": "The Momentum Line Leads the Price Action", - "type": "text" - }, - { - "block_id": "p216-b4", - "global_id": 1408, - "bbox": [ - 72.0, - 395.2, - 517.39, - 459.29 - ], - "text": "Because of the way it is constructed, the momentum line is always a step\nahead of the price movement. It leads the advance or decline in prices, then\nlevels off while the current price trend is still in effect. It then begins to move\nin the opposite direction as prices begin to level off.", - "type": "text" - }, - { - "block_id": "p216-b5", - "global_id": 1409, - "bbox": [ - 72.0, - 482.97, - 523.04, - 647.98 - ], - "text": "The Crossing of the Zero Line as a Trading Signal\nThe momentum chart has a zero line. Many technicians use the crossing of the\nzero line to generate buy and sell signals. A crossing above the zero line\nwould be a buy signal, and a crossing below the zero line, a sell signal. It\nshould be stressed here again, however, that basic trend analysis is still the\noverriding consideration. Oscillator analysis should not be used as an excuse\nto trade against the prevailing market trend. Buy positions should only be\ntaken on crossings above the zero line if the market trend is up. Short\npositions should be taken on crossings below the zero line only if the price\ntrend is down. (See Figures 10.2a and b.)", - "type": "text" - } - ] - }, - { - "page_num": 217, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p217-b0", - "global_id": 1410, - "bbox": [ - 76.03, - 345.51, - 519.25, - 376.47 - ], - "text": "Figure 10.2a The trendlines on the momentum chart are broken sooner than\nthose on the price chart. The value of the momentum indicator is that it turns", - "type": "text" - }, - { - "block_id": "p217-b1", - "global_id": 1411, - "bbox": [ - 126.78, - 378.64, - 468.49, - 393.03 - ], - "text": "sooner than the market itself, making it a leading indicator.", - "type": "text" - }, - { - "block_id": "p217-b2", - "global_id": 1412, - "bbox": [ - 81.87, - 683.27, - 513.39, - 714.23 - ], - "text": "Figure 10.2b Some traders regard a crossing above the zero line as a buy\nsignal and a crossing below the line as a sell signal (see circles). A moving", - "type": "text" - }, - { - "block_id": "p217-b3", - "global_id": 1413, - "bbox": [ - 89.88, - 716.4, - 505.38, - 730.8 - ], - "text": "average is helpful to confirm trend changes. The momentum line peaked", - "type": "text" - }, - { - "block_id": "p217-b4", - "global_id": 1414, - "bbox": [ - 212.84, - 732.96, - 382.43, - 747.36 - ], - "text": "before the price (see arrows).", - "type": "text" - } - ] - }, - { - "page_num": 218, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p218-b0", - "global_id": 1415, - "bbox": [ - 72.0, - 73.19, - 279.72, - 83.99 - ], - "text": "The Need for an Upper and Lower Boundary", - "type": "text" - }, - { - "block_id": "p218-b1", - "global_id": 1416, - "bbox": [ - 72.0, - 92.01, - 522.17, - 255.48 - ], - "text": "One problem with the momentum line, as it is described here, is the absence\nof a fixed upper and lower boundary. It was stated earlier that one of the\nmajor values of oscillator analysis is being able to determine when markets\nare in extreme areas. But, how high is too high and how low is too low on the\nmomentum line? The simplest way to solve this problem is by visual\ninspection. Check the back history of the momentum line on the chart and\ndraw horizontal lines along its upper and lower boundaries. These lines will\nhave to be adjusted periodically, especially after important trend changes have\noccurred. But it is the simplest and probably the most effective way of\nidentifying the outer extremities. (See Figures 10.3 and 10.4.)", - "type": "text" - }, - { - "block_id": "p218-b2", - "global_id": 1417, - "bbox": [ - 83.16, - 532.03, - 512.12, - 546.5 - ], - "text": "Figure 10.3 By visual inspection, the analyst can find the upper and lower", - "type": "text" - }, - { - "block_id": "p218-b3", - "global_id": 1418, - "bbox": [ - 91.06, - 548.6, - 504.21, - 563.0 - ], - "text": "momentum boundaries that are suitable for each market (see horizontal", - "type": "text" - }, - { - "block_id": "p218-b4", - "global_id": 1419, - "bbox": [ - 279.86, - 565.16, - 315.42, - 579.56 - ], - "text": "lines).", - "type": "text" - } - ] - }, - { - "page_num": 219, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p219-b0", - "global_id": 1420, - "bbox": [ - 72.0, - 331.1, - 523.27, - 378.63 - ], - "text": "Figure 10.4 A 13 week momentum line on a weekly chart of Treasury Bonds.\nThe arrows mark the turning points from momentum extremes. The momentum\nline changed direction before the price at each major turn (points 1, 2, and 3).", - "type": "text" - }, - { - "block_id": "p219-b1", - "global_id": 1421, - "bbox": [ - 72.0, - 422.59, - 520.96, - 509.71 - ], - "text": "MEASURING RATE OF CHANGE (ROC)\nTo measure the rate of change, a ratio is constructed of the most recent\nclosing price to a price a certain number of days in the past. To construct a 10\nday rate of change oscillator, the latest closing price is divided by the close 10\ndays ago. The formula is as follows:", - "type": "text" - }, - { - "block_id": "p219-b2", - "global_id": 1422, - "bbox": [ - 217.47, - 519.07, - 377.81, - 533.47 - ], - "text": "Rate of change=100 (V/Vx)", - "type": "text" - }, - { - "block_id": "p219-b3", - "global_id": 1423, - "bbox": [ - 72.0, - 542.84, - 446.96, - 557.24 - ], - "text": "where V is the latest close and Vx is the closing price x days ago.", - "type": "text" - }, - { - "block_id": "p219-b4", - "global_id": 1424, - "bbox": [ - 72.0, - 559.4, - 513.95, - 656.62 - ], - "text": "In this case, the 100 line becomes the midpoint line. If the latest price is\nhigher than the price 10 days ago (prices are rising), the resulting rate of\nchange value will be above 100. If the last close is below 10 days ago, the\nratio would be below 100. (Charting software sometimes uses variations of\nthe preceding formulas for momentum and rate of change. While the\nconstruction techniques may vary, the interpretation remains the same.)", - "type": "text" - }, - { - "block_id": "p219-b5", - "global_id": 1425, - "bbox": [ - 72.0, - 699.85, - 519.61, - 761.05 - ], - "text": "CONSTRUCTING AN OSCILLATOR USING\nTWO MOVING AVERAGES\nChapter 9 discussed two moving averages being used to generate buy and sell", - "type": "text" - } - ] - }, - { - "page_num": 220, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p220-b0", - "global_id": 1426, - "bbox": [ - 72.0, - 73.06, - 515.0, - 187.07 - ], - "text": "signals. The crossing of the shorter average above or below the longer\naverage registered buy and sell signals, respectively. It was mentioned at that\ntime that these dual moving average combinations could also be used to\nconstruct oscillator charts. This can be done by plotting the difference\nbetween the two averages as a histogram. These histogram bars appear as a\nplus or minus value around a centered zero line. This type of oscillator has\nthree uses:", - "type": "text" - }, - { - "block_id": "p220-b1", - "global_id": 1427, - "bbox": [ - 82.08, - 203.64, - 521.81, - 284.29 - ], - "text": "1. To help spot divergences.\n2. To help identify short term variations from the long term trend, when the\nshorter average moves too far above or below the longer average.\n3. To pinpoint the crossings of the two moving averages, which occur when\nthe oscillator crosses the zero line.", - "type": "text" - }, - { - "block_id": "p220-b2", - "global_id": 1428, - "bbox": [ - 72.0, - 300.86, - 517.02, - 381.52 - ], - "text": "The shorter average is divided by the longer. In both cases, however, the\nshorter average oscillates around the longer average, which is in effect the\nzero line. If the shorter average is above the longer, the oscillator would be\npositive. A negative reading would be present if the shorter average were\nunder the longer. (See Figures 10.5-10.7.)", - "type": "text" - }, - { - "block_id": "p220-b3", - "global_id": 1429, - "bbox": [ - 72.0, - 383.68, - 505.16, - 514.03 - ], - "text": "When the two moving average lines move too far apart, a market\nextreme is created calling for a pause in the trend. (See Figure 10.6.) Very\noften, the trend remains stalled until the shorter average line moves back to\nthe longer. When the shorter line approaches the longer, a critical point is\nreached. In an uptrend, for example, the shorter line dips back to the longer\naverage, but should bounce off it. This usually represents an ideal buying\narea. It’s much like the testing of an up trendline. If the shorter average\ncrosses below the longer average, however, a trend reversal is signaled.", - "type": "text" - } - ] - }, - { - "page_num": 221, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p221-b0", - "global_id": 1430, - "bbox": [ - 81.33, - 346.95, - 513.94, - 377.91 - ], - "text": "Figure 10.5 The histogram lines measure the difference between the two\nmoving averages. Crossing above and below the zero line give buy and sell", - "type": "text" - }, - { - "block_id": "p221-b1", - "global_id": 1431, - "bbox": [ - 81.94, - 380.08, - 513.33, - 394.48 - ], - "text": "signals (see arrows). Notice that the histogram turns well before the actual", - "type": "text" - }, - { - "block_id": "p221-b2", - "global_id": 1432, - "bbox": [ - 238.96, - 396.64, - 356.31, - 411.04 - ], - "text": "signals (see circles).", - "type": "text" - }, - { - "block_id": "p221-b3", - "global_id": 1433, - "bbox": [ - 74.15, - 702.72, - 521.12, - 717.18 - ], - "text": "Figure 10.6 A histogram measuring the difference between the 10 and 50 day", - "type": "text" - }, - { - "block_id": "p221-b4", - "global_id": 1434, - "bbox": [ - 75.71, - 719.28, - 519.55, - 750.24 - ], - "text": "averages. The histogram always turns well before the zero line crossover. In\nan uptrend, the histogram will find support at the zero line and turn up again", - "type": "text" - }, - { - "block_id": "p221-b5", - "global_id": 1435, - "bbox": [ - 258.19, - 752.41, - 337.08, - 766.81 - ], - "text": "(third arrow).", - "type": "text" - } - ] - }, - { - "page_num": 222, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p222-b0", - "global_id": 1436, - "bbox": [ - 72.0, - 73.28, - 520.33, - 170.5 - ], - "text": "In a downtrend, a rise in the shorter average to the longer usually\nrepresents an ideal selling area unless the longer line is crossed, in which case\na trend reversal signal would be registered. The relationships between the two\naverages can be used, therefore, not only as an excellent trend-following\nsystem, but also to help identify short term overbought and oversold\nconditions.", - "type": "text" - }, - { - "block_id": "p222-b1", - "global_id": 1437, - "bbox": [ - 73.95, - 462.18, - 521.34, - 509.7 - ], - "text": "Figure 10.7 A histogram plotting the difference between 2 weekly averages.\nThe histogram turned in the direction of the new price trend weeks before the\nactual zero line crossings on the histogram. Notice how easily the overbought", - "type": "text" - }, - { - "block_id": "p222-b2", - "global_id": 1438, - "bbox": [ - 214.58, - 511.87, - 380.7, - 526.27 - ], - "text": "and oversold levels are seen.", - "type": "text" - }, - { - "block_id": "p222-b3", - "global_id": 1439, - "bbox": [ - 72.0, - 570.22, - 522.52, - 723.6 - ], - "text": "COMMODITY CHANNEL INDEX\nIt is possible to normalize an oscillator by dividing the values by a constant\ndivisor. In the construction of his Commodity Channel Index (CCI), Donald\nR. Lambert compares the current price with a moving average over a selected\ntime span—usually 20 days. He then normalizes the oscillator values by using\na divisor based on mean deviation. As a result, the CCI fluctuates in a\nconstant range from +100 on the upside to -100 on the downside. Lambert\nrecommended long positions in those markets with values over +100. Markets\nwith CCI values below -100 were candidates for short sales.", - "type": "text" - }, - { - "block_id": "p222-b4", - "global_id": 1440, - "bbox": [ - 72.0, - 725.77, - 506.12, - 756.73 - ], - "text": "It seems, however, that most chartists use CCI simply as an\noverbought/oversold oscillator. Used in that fashion readings over +100 are", - "type": "text" - } - ] - }, - { - "page_num": 223, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p223-b0", - "global_id": 1441, - "bbox": [ - 72.0, - 73.53, - 520.3, - 153.94 - ], - "text": "considered overbought and under -100 are oversold. While the Commodity\nChannel Index was originally developed for commodities, it is also used for\ntrading stock index futures and options like the S&P 100 (OEX). Although 20\ndays is the common default value for CCI, the user can vary the number to\nadjust its sensitivity. (See Figures 10.8 and 10.9.)", - "type": "text" - }, - { - "block_id": "p223-b1", - "global_id": 1442, - "bbox": [ - 75.94, - 445.61, - 519.33, - 476.58 - ], - "text": "Figure 10.8 A 20 day Commodity Channel Index. The original intent of this\nindicator was to buy moves above +100 and sell moves below -100 as shown", - "type": "text" - }, - { - "block_id": "p223-b2", - "global_id": 1443, - "bbox": [ - 283.31, - 478.74, - 311.95, - 493.14 - ], - "text": "here.", - "type": "text" - } - ] - }, - { - "page_num": 224, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p224-b0", - "global_id": 1444, - "bbox": [ - 73.37, - 349.11, - 521.9, - 363.57 - ], - "text": "Figure 10.9 The Commodity Channel Index can be used for stock indexes like", - "type": "text" - }, - { - "block_id": "p224-b1", - "global_id": 1445, - "bbox": [ - 74.16, - 365.67, - 521.11, - 396.64 - ], - "text": "this one and can also be used like any other oscillator to measure market\nextremes. Notice that the CCI turns before prices at each top and bottom. The", - "type": "text" - }, - { - "block_id": "p224-b2", - "global_id": 1446, - "bbox": [ - 225.5, - 398.8, - 369.78, - 413.2 - ], - "text": "default length is 20 days.", - "type": "text" - }, - { - "block_id": "p224-b3", - "global_id": 1447, - "bbox": [ - 72.0, - 457.15, - 521.87, - 577.4 - ], - "text": "THE RELATIVE STRENGTH INDEX (RSI)\nThe RSI was developed by J. Welles Wilder, Jr. and presented in his 1978\nbook, New Concepts in Technical Trading Systems. We’re only going to cover\nthe main points here. A reading of the original work by Wilder himself is\nrecommended for a more in-depth treatment. Because this particular oscillator\nis so popular among traders, we’ll use it to demonstrate most of the principles\nof oscillator analysis.", - "type": "text" - }, - { - "block_id": "p224-b4", - "global_id": 1448, - "bbox": [ - 72.0, - 579.57, - 521.63, - 743.05 - ], - "text": "As Wilder points out, one of the two major problems in constructing a\nmomentum line (using price differences) is the erratic movement often caused\nby sharp changes in the values being dropped off. A sharp advance or a\ndecline 10 days ago (in the case of a 10 day momentum line) can cause\nsudden shifts in the momentum line even if the current prices show little\nchange. Some smoothing is therefore necessary to minimize these distortions.\nThe second problem is that there is the need for a constant range for\ncomparison purposes. The RSI formula not only provides the necessary\nsmoothing, but also solves the latter problem by creating a constant vertical\nrange of 0 to 100.", - "type": "text" - }, - { - "block_id": "p224-b5", - "global_id": 1449, - "bbox": [ - 100.79, - 745.21, - 482.22, - 759.61 - ], - "text": "The term “relative strength,” incidentally, is a misnomer and often", - "type": "text" - } - ] - }, - { - "page_num": 225, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p225-b0", - "global_id": 1450, - "bbox": [ - 72.0, - 73.53, - 517.78, - 253.32 - ], - "text": "causes confusion among those more familiar with that term as it is used in\nstock market analysis. Relative strength generally means a ratio line\ncomparing two different entities. A ratio of a stock or industry group to the\nS&P 500 Index is one way of gauging the relative strength of different stocks\nor industry groups against one objective benchmark. We’ll show you later in\nthe book how useful relative strength or ratio analysis can be. Wilder’s\nRelative Strength Index doesn’t really measure the relative strength between\ndifferent entities and, in that sense, the name is somewhat misleading. The\nRSI, however, does solve the problem of erratic movement and the need for a\nconstant upper and lower boundary. The actual formula is calculated as\nfollows:", - "type": "text" - }, - { - "block_id": "p225-b1", - "global_id": 1451, - "bbox": [ - 72.0, - 349.83, - 519.98, - 463.62 - ], - "text": "Fourteen days are used in the calculation; 14 weeks are used for weekly\ncharts. To find the average up value, add the total points gained on up days\nduring the 14 days and divide that total by 14. To find the average down\nvalue, add the total number of points lost during the down days and divide\nthat total by 14. Relative strength (RS) is then determined by dividing the up\naverage by the down average. That RS value is then inserted into the formula\nfor RSI. The number of days can be varied by simply changing the value of x.", - "type": "text" - }, - { - "block_id": "p225-b2", - "global_id": 1452, - "bbox": [ - 72.0, - 465.78, - 521.03, - 645.82 - ], - "text": "Wilder originally employed a 14 day period. The shorter the time period,\nthe more sensitive the oscillator becomes and the wider its amplitude. RSI\nworks best when its fluctuations reach the upper and lower extremes.\nTherefore, if the user is trading on a very short term basis and wants the\noscillator swings to be more pronounced, the time period can be shortened.\nThe time period is lengthened to make the oscillator smoother and narrower\nin amplitude. The amplitude in the 9 day oscillator is therefore greater than\nthe original 14 day. While 9 and 14 day spans are the most common values\nused, technicians experiment with other periods. Some use shorter lengths,\nsuch as 5 or 7 days, to increase the volatility of the RSI line. Others use 21 or\n28 days to smooth out the RSI signals. (See Figures 10.10 and 10.11.)", - "type": "text" - } - ] - }, - { - "page_num": 226, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p226-b0", - "global_id": 1453, - "bbox": [ - 80.72, - 348.39, - 514.56, - 395.92 - ], - "text": "Figure 10.10 The 14 day Relative Strength Index becomes overbought over\n70 and oversold below 30. This chart shows the S&P 100 being oversold in\nOctober and overbought during February.", - "type": "text" - }, - { - "block_id": "p226-b1", - "global_id": 1454, - "bbox": [ - 75.56, - 686.87, - 519.7, - 701.34 - ], - "text": "Figure 10.11 The amplitude of the RSI line can be widened by shortening the", - "type": "text" - }, - { - "block_id": "p226-b2", - "global_id": 1455, - "bbox": [ - 73.96, - 703.44, - 521.33, - 734.4 - ], - "text": "time period. Notice that the 7 day RSI reaches the outer extremes more\nfrequently than the 14 day RSI. That makes the 7 day RSI more useful to short", - "type": "text" - }, - { - "block_id": "p226-b3", - "global_id": 1456, - "bbox": [ - 260.06, - 736.56, - 335.21, - 750.96 - ], - "text": "term traders.", - "type": "text" - } - ] - }, - { - "page_num": 227, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p227-b0", - "global_id": 1457, - "bbox": [ - 72.0, - 73.19, - 149.4, - 83.99 - ], - "text": "Interpreting RSI", - "type": "text" - }, - { - "block_id": "p227-b1", - "global_id": 1458, - "bbox": [ - 72.0, - 92.01, - 513.95, - 172.66 - ], - "text": "RSI is plotted on a vertical scale of 0 to 100. Movements above 70 are\nconsidered overbought, while an oversold condition would be a move under\n30. Because of shifting that takes place in bull and bear markets, the 80 level\nusually becomes the overbought level in bull markets and the 20 level the\noversold level in bear markets.", - "type": "text" - }, - { - "block_id": "p227-b2", - "global_id": 1459, - "bbox": [ - 72.0, - 174.83, - 519.47, - 272.05 - ], - "text": "“Failure swings,” as Wilder calls them, occur when the RSI is above 70\nor under 30. A top failure swing occurs when a peak in the RSI (over 70) fails\nto exceed a previous peak in an uptrend, followed by a downside break of a\nprevious trough. A bottom failure swing occurs when the RSI is in a\ndowntrend (under 30), fails to set a new low, and then proceeds to exceed a\nprevious peak. (See Figures 10.12a-b.)", - "type": "text" - }, - { - "block_id": "p227-b3", - "global_id": 1460, - "bbox": [ - 76.81, - 547.88, - 518.45, - 562.34 - ], - "text": "Figure 10.12a A bottom failure swing in the RSI line. The second RSI trough", - "type": "text" - }, - { - "block_id": "p227-b4", - "global_id": 1461, - "bbox": [ - 72.83, - 564.44, - 522.44, - 595.41 - ], - "text": "(point 2) is higher than the first (point 1) while it is below 30 and prices are\nstill falling. The upside penetration of the RSI peak (point 3) signals a bottom.", - "type": "text" - } - ] - }, - { - "page_num": 228, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p228-b0", - "global_id": 1462, - "bbox": [ - 73.94, - 331.1, - 521.33, - 345.57 - ], - "text": "Figure 10.12b A top failure swing. The second peak (2) is lower than the first", - "type": "text" - }, - { - "block_id": "p228-b1", - "global_id": 1463, - "bbox": [ - 74.58, - 347.67, - 520.71, - 362.07 - ], - "text": "(1) while the RSI line is over 70 and prices are still rallying. The break by the", - "type": "text" - }, - { - "block_id": "p228-b2", - "global_id": 1464, - "bbox": [ - 130.64, - 364.23, - 464.63, - 378.63 - ], - "text": "RSI line below the middle trough (point 3) signals the top.", - "type": "text" - }, - { - "block_id": "p228-b3", - "global_id": 1465, - "bbox": [ - 72.0, - 395.2, - 518.81, - 459.29 - ], - "text": "Divergence between the RSI and the price line, when the RSI is above\n70 or below 30, is a serious warning that should be heeded. Wilder himself\nconsiders divergence “the single most indicative characteristic of the Relative\nStrength Index” [Wilder, p. 70].", - "type": "text" - }, - { - "block_id": "p228-b4", - "global_id": 1466, - "bbox": [ - 72.0, - 461.46, - 515.85, - 508.99 - ], - "text": "Trendline analysis can be employed to detect changes in the trend of the\nRSI. Moving averages can also be used for the same purpose. (See Figure\n10.13.)", - "type": "text" - } - ] - }, - { - "page_num": 229, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p229-b0", - "global_id": 1467, - "bbox": [ - 72.92, - 346.95, - 522.35, - 361.41 - ], - "text": "Figure 10.13 Trendlines work very effectively on the RSI line. The breaking of", - "type": "text" - }, - { - "block_id": "p229-b1", - "global_id": 1468, - "bbox": [ - 89.09, - 363.51, - 506.19, - 377.91 - ], - "text": "the two RSI trendlines gave timely buy and sell signals on this chart (see", - "type": "text" - }, - { - "block_id": "p229-b2", - "global_id": 1469, - "bbox": [ - 273.31, - 380.08, - 321.96, - 394.48 - ], - "text": "arrows).", - "type": "text" - }, - { - "block_id": "p229-b3", - "global_id": 1470, - "bbox": [ - 72.0, - 411.05, - 520.37, - 574.52 - ], - "text": "In my own personal experience with the RSI oscillator, its greatest value\nlies in failure swings or divergences that occur when the RSI is over 70 or\nunder 30. Let’s clarify another important point on the use of oscillators. Any\nstrong trend, either up or down, usually produces an extreme oscillator\nreading before too long. In such cases, claims that a market is overbought or\noversold are usually premature and can lead to an early exit from a profitable\ntrend. In strong uptrends, overbought markets can stay overbought for some\ntime. Just because the oscillator has moved into the upper region is not reason\nenough to liquidate a long position (or, even worse, short into the strong\nuptrend).", - "type": "text" - }, - { - "block_id": "p229-b4", - "global_id": 1471, - "bbox": [ - 72.0, - 576.69, - 512.49, - 707.04 - ], - "text": "The first move into the overbought or oversold region is usually just a\nwarning. The signal to pay close attention to is the second move by the\noscillator into the danger zone. If the second move fails to confirm the price\nmove into new highs or new lows (forming a double top or bottom on the\noscillator), a possible divergence exists. At that point, some defensive action\ncan be taken to protect existing positions. If the oscillator moves in the\nopposite direction, breaking a previous high or low, then a divergence or\nfailure swing is confirmed.", - "type": "text" - }, - { - "block_id": "p229-b5", - "global_id": 1472, - "bbox": [ - 72.0, - 709.2, - 493.21, - 756.73 - ], - "text": "The 50 level is the RSI midpoint value, and will often act as support\nduring pullbacks and resistance during bounces. Some traders treat RSI\ncrossings above and below the 50 level as buying and selling signals", - "type": "text" - } - ] - }, - { - "page_num": 230, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p230-b0", - "global_id": 1473, - "bbox": [ - 72.0, - 73.28, - 144.18, - 87.68 - ], - "text": "respectively.", - "type": "text" - }, - { - "block_id": "p230-b1", - "global_id": 1474, - "bbox": [ - 72.0, - 131.63, - 521.41, - 341.91 - ], - "text": "USING THE 70 AND 30 LINES TO GENERATE\nSIGNALS\nHorizontal lines appear on the oscillator chart at the 70 and 30 values. Traders\noften use those lines to generate buy and sell signals. We already know that a\nmove under 30 warns of an oversold condition. Suppose the trader thinks a\nmarket is about to bottom and is looking for a buying opportunity. He or she\nwatches the oscillator dip under 30. Some type of divergence or double\nbottom may develop in the oscillator in that oversold region. A crossing back\nabove the 30 line at that point is taken by many traders as a confirmation that\nthe trend in the oscillator has turned up. Accordingly, in an overbought\nmarket, a crossing back under the 70 line can often be used as a sell signal.\n(See Figure 10.14.)", - "type": "text" - }, - { - "block_id": "p230-b2", - "global_id": 1475, - "bbox": [ - 72.7, - 632.86, - 522.58, - 680.39 - ], - "text": "Figure 10.14 The RSI oscillator can be used on monthly charts. Notice the\ntwo major oversold buy signals in 1974 and 1994. The overbought peaks in\nthe RSI line did a pretty good job of pinpointing important tops in the utilities.", - "type": "text" - }, - { - "block_id": "p230-b3", - "global_id": 1476, - "bbox": [ - 72.0, - 723.62, - 484.5, - 761.05 - ], - "text": "STOCHASTICS (K%D)\nThe Stochastic oscillator was popularized by George Lane (president of", - "type": "text" - } - ] - }, - { - "page_num": 231, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p231-b0", - "global_id": 1477, - "bbox": [ - 72.0, - 73.06, - 520.15, - 170.5 - ], - "text": "Investment Educators, Inc., Watseka, IL). It is based on the observation that\nas prices increase, closing prices tend to be closer to the upper end of the\nprice range. Conversely, in downtrends, the closing price tends to be near the\nlower end of the range. Two lines are used in the Stochastic Process—the %K\nline and the %D line. The %D line is the more important and is the one that\nprovides the major signals.", - "type": "text" - }, - { - "block_id": "p231-b1", - "global_id": 1478, - "bbox": [ - 72.0, - 172.67, - 514.16, - 236.76 - ], - "text": "The intent is to determine where the most recent closing price is in\nrelation to the price range for a chosen time period. Fourteen is the most\ncommon period used for this oscillator. To determine the K line, which is the\nmore sensitive of the two, the formula is:", - "type": "text" - }, - { - "block_id": "p231-b2", - "global_id": 1479, - "bbox": [ - 197.47, - 246.13, - 397.8, - 260.53 - ], - "text": "%K=100 [(C - L14) / (H14 - L14)]", - "type": "text" - }, - { - "block_id": "p231-b3", - "global_id": 1480, - "bbox": [ - 72.0, - 269.89, - 515.61, - 317.42 - ], - "text": "where C is the latest close, L14 is the lowest low for the last 14 periods, and\nH14 is the highest high for the same 14 periods (14 periods can refer to days,\nweeks, or months).", - "type": "text" - }, - { - "block_id": "p231-b4", - "global_id": 1481, - "bbox": [ - 72.0, - 319.58, - 519.18, - 383.68 - ], - "text": "The formula simply measures, on a percentage basis of 0 to 100, where\nthe closing price is in relation to the total price range for a selected time\nperiod. A very high reading (over 80) would put the closing price near the top\nof the range, while a low reading (under 20) near the bottom of the range.", - "type": "text" - }, - { - "block_id": "p231-b5", - "global_id": 1482, - "bbox": [ - 72.0, - 385.84, - 519.19, - 449.93 - ], - "text": "The second line (%D) is a 3 period moving average of the %K line. This\nformula produces a version called fast stochastics. By taking another 3 period\naverage of %D, a smoother version called slow stochastics is computed. Most\ntraders use the slow stochastics because of its more reliable signals.*", - "type": "text" - }, - { - "block_id": "p231-b6", - "global_id": 1483, - "bbox": [ - 72.0, - 452.1, - 522.73, - 532.75 - ], - "text": "These formulas produce two lines that oscillate between a vertical scale\nfrom 0 to 100. The K line is a faster line, while the D line is a slower line. The\nmajor signal to watch for is a divergence between the D line and the price of\nthe underlying market when the D line is in an overbought or oversold area.\nThe upper and lower extremes are the 80 and 20 values. (See Figure 10.15.)", - "type": "text" - }, - { - "block_id": "p231-b7", - "global_id": 1484, - "bbox": [ - 72.0, - 534.92, - 522.79, - 615.57 - ], - "text": "A bearish divergence occurs when the D line is over 80 and forms two\ndeclining peaks while prices continue to move higher. A bullish divergence is\npresent when the D line is under 20 and forms two rising bottoms while prices\ncontinue to move lower. Assuming all of these factors are in place, the actual\nbuy or sell signal is triggered when the faster K line crosses the slower D line.", - "type": "text" - }, - { - "block_id": "p231-b8", - "global_id": 1485, - "bbox": [ - 72.0, - 617.74, - 521.1, - 714.96 - ], - "text": "There are other refinements in the use of Stochastics, but this\nexplanation covers the more essential points. Despite the higher level of\nsophistication, the basic oscillator interpretation remains the same. An alert or\nset-up is present when the %D line is in an extreme area and diverging from\nthe price action. The actual signal takes place when the D line is crossed by\nthe faster K line.", - "type": "text" - }, - { - "block_id": "p231-b9", - "global_id": 1486, - "bbox": [ - 72.0, - 717.12, - 518.85, - 764.65 - ], - "text": "The Stochastic oscillator can be used on weekly and monthly charts for\nlonger range perspective. It can also be used effectively on intraday charts for\nshorter term trading. (See Figure 10.16.)", - "type": "text" - } - ] - }, - { - "page_num": 232, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p232-b0", - "global_id": 1487, - "bbox": [ - 72.0, - 73.28, - 510.35, - 120.81 - ], - "text": "One way to combine daily and weekly stochastics is to use weekly\nsignals to determine market direction and daily signals for timing. It’s also a\ngood idea to combine stochastics with RSI. (See Figure 10.17.)", - "type": "text" - }, - { - "block_id": "p232-b1", - "global_id": 1488, - "bbox": [ - 73.76, - 396.64, - 521.5, - 427.6 - ], - "text": "Figure 10.15 The down arrows show two sell signals which occur when the\nfaster %K line crosses below the slower %D line from above the 80 level. The", - "type": "text" - }, - { - "block_id": "p232-b2", - "global_id": 1489, - "bbox": [ - 86.92, - 429.77, - 508.34, - 444.17 - ], - "text": "%K line crossing above the %D line below 20 is a buy signal (up arrow).", - "type": "text" - }, - { - "block_id": "p232-b3", - "global_id": 1490, - "bbox": [ - 81.0, - 717.84, - 514.28, - 732.3 - ], - "text": "Figure 10.16 Turns in the 14 week stochastics from above 80 and below 20", - "type": "text" - }, - { - "block_id": "p232-b4", - "global_id": 1491, - "bbox": [ - 81.99, - 734.4, - 513.28, - 765.37 - ], - "text": "did a nice job of anticipating major turns in the Treasury Bond market.\nStochastics charts can be constructed for 14 days, 14 weeks, or 14 months.", - "type": "text" - } - ] - }, - { - "page_num": 233, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p233-b0", - "global_id": 1492, - "bbox": [ - 74.24, - 346.23, - 521.05, - 377.19 - ], - "text": "Figure 10.17 A comparison of the 14 week RSI and stochastics. The RSI line\nis less volatile and reaches extremes less frequently than stochastics. The best", - "type": "text" - }, - { - "block_id": "p233-b1", - "global_id": 1493, - "bbox": [ - 79.86, - 379.36, - 515.41, - 393.75 - ], - "text": "signals occur when both oscillators are in overbought or oversold territory.", - "type": "text" - }, - { - "block_id": "p233-b2", - "global_id": 1494, - "bbox": [ - 72.0, - 437.71, - 521.74, - 607.65 - ], - "text": "LARRY WILLIAMS %R\nLarry Williams %R is based on a similar concept of measuring the latest close\nin relation to its price range over a given number of days. Today’s close is\nsubtracted from the price high of the range for a given number of days and\nthat difference is divided by the total range for the same period. The concepts\nalready discussed for oscillator interpretation are applied to %R as well, with\nthe main factors being the presence of divergences in overbought or oversold\nareas. (See Figure 10.18.) Since %R is subtracted from the high, it looks like\nan upside down stochastics. To correct that, charting packages plot an\ninverted version of %R.", - "type": "text" - } - ] - }, - { - "page_num": 234, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p234-b0", - "global_id": 1495, - "bbox": [ - 85.34, - 346.23, - 509.94, - 360.69 - ], - "text": "Figure 10.18 Larry Williams %R oscillator is used in the same fashion as", - "type": "text" - }, - { - "block_id": "p234-b1", - "global_id": 1496, - "bbox": [ - 86.48, - 362.79, - 508.79, - 377.19 - ], - "text": "other oscillators. Readings over 80 or under 20 identify market extremes.", - "type": "text" - }, - { - "block_id": "p234-b2", - "global_id": 1497, - "bbox": [ - 72.0, - 400.87, - 243.0, - 411.67 - ], - "text": "Choice of Time Period Tied to Cycles", - "type": "text" - }, - { - "block_id": "p234-b3", - "global_id": 1498, - "bbox": [ - 72.0, - 419.69, - 519.41, - 616.29 - ], - "text": "Oscillator lengths can be tied to underlying market cycles. A time period of\n1/2 the cycle length is used. Popular time inputs are 5, 10, and 20 days based\non calendar day periods of 14, 28, and 56 days. Wilder’s RSI uses 14 days,\nwhich is half of 28. In the previous chapter, we discussed some reasons why\nthe numbers 5, 10, and 20 keep cropping up in moving average and oscillator\nformulations, so we won’t repeat them here. Suffice it to mention here that 28\ncalendar days (20 trading days) represent an important dominant monthly\ntrading cycle and that the other numbers are related harmonically to that\nmonthly cycle. The popularity of the 10 day momentum and the 14 day RSI\nlengths are based largely on the 28 day trading cycle and measure 1/2 of the\nvalue of that dominant trading cycle. We’ll come back to the importance of\ncycles in Chapter 14.", - "type": "text" - }, - { - "block_id": "p234-b4", - "global_id": 1499, - "bbox": [ - 72.0, - 659.52, - 521.96, - 763.21 - ], - "text": "THE IMPORTANCE OF TREND\nIn this chapter, we’ve discussed the use of the oscillator in market analysis to\nhelp determine near term overbought and oversold conditions, and to alert\ntraders to possible divergences. We started with the momentum line. We\ndiscussed another way to measure rates of change (ROC) by using price ratios\ninstead of differences. We then showed how two moving averages could be", - "type": "text" - } - ] - }, - { - "page_num": 235, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p235-b0", - "global_id": 1500, - "bbox": [ - 72.0, - 73.17, - 508.01, - 120.81 - ], - "text": "compared to spot short term extremes and crossovers. Finally, we looked at\nRSI and Stochastics and considered how oscillators should be synchronized\nwith cycles.", - "type": "text" - }, - { - "block_id": "p235-b1", - "global_id": 1501, - "bbox": [ - 72.0, - 122.98, - 521.68, - 303.02 - ], - "text": "Divergence analysis provides us with the oscillator’s greatest value.\nHowever, the reader is cautioned against placing too much importance on\ndivergence analysis to the point where basic trend analysis is either ignored or\noverlooked. Most oscillator buy signals work best in uptrends and oscillator\nsell signals are most profitable in downtrends. The place to start your market\nanalysis is always by determining the general trend of the market. If the trend\nis up, then a buying strategy is called for. Oscillators can then be used to help\ntime market entry. Buy when the market is oversold in an uptrend. Sell short\nwhen the market is overbought in a downtrend. Or, buy when the momentum\noscillator crosses back above the zero line when the major trend is bullish and\nsell a crossing under the zero line in a bear market.", - "type": "text" - }, - { - "block_id": "p235-b2", - "global_id": 1502, - "bbox": [ - 72.0, - 305.18, - 522.33, - 402.4 - ], - "text": "The importance of trading in the direction of the major trend cannot be\noverstated. The danger in placing too much importance on oscillators by\nthemselves is the temptation to use divergence as an excuse to initiate trades\ncontrary to the general trend. This action generally proves a costly and painful\nexercise. The oscillator, as useful as it is, is just one tool among many others\nand must always be used as an aid, not a substitute, for basic trend analysis.", - "type": "text" - }, - { - "block_id": "p235-b3", - "global_id": 1503, - "bbox": [ - 72.0, - 446.35, - 522.39, - 682.55 - ], - "text": "WHEN OSCILLATORS ARE MOST USEFUL\nThere are times when oscillators are more useful than at others. During\nchoppy market periods, as prices move sideways for several weeks or months,\noscillators track the price movement very closely. The peaks and troughs on\nthe price chart coincide almost exactly with the peaks and troughs on the\noscillator. Because both price and oscillator are moving sideways, they look\nvery much alike. At some point, however, a price breakout occurs and a new\nuptrend or downtrend begins. By its very nature, the oscillator is already in an\nextreme position just as the breakout is taking place. If the breakout is to the\nupside, the oscillator is already overbought. An oversold reading usually\naccompanies a downside breakout. The trader is faced with a dilemma.\nShould he or she buy the bullish breakout in the face of an overbought\noscillator reading? Should the downside breakout be sold into an oversold\nmarket?", - "type": "text" - }, - { - "block_id": "p235-b4", - "global_id": 1504, - "bbox": [ - 72.0, - 684.72, - 506.34, - 765.37 - ], - "text": "In such cases, the oscillator is best ignored for the time being and the\nposition taken. The reason for this is that in the early stages of a new trend,\nfollowing an important breakout, oscillators often reach extremes very\nquickly and stay there for awhile. Basic trend analysis should be the main\nconsideration at such times, with oscillators given a lesser role. Later on, as", - "type": "text" - } - ] - }, - { - "page_num": 236, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p236-b0", - "global_id": 1505, - "bbox": [ - 72.0, - 73.53, - 519.19, - 203.63 - ], - "text": "the trend begins to mature, the oscillator should be given greater weight.\n(We’ll see in Chapter 13, that the fifth and final wave in Elliott Wave analysis\nis often confirmed by bearish oscillator divergences.) Many dynamic bull\nmoves have been missed by traders who saw the major trend signal, but\ndecided to wait for their oscillators to move into an oversold condition before\nbuying. To summarize, give less attention to the oscillator in the early stages\nof an important move, but pay close attention to its signals as the move\nreaches maturity.", - "type": "text" - }, - { - "block_id": "p236-b1", - "global_id": 1506, - "bbox": [ - 72.0, - 247.58, - 521.16, - 524.11 - ], - "text": "MOVING AVERAGE\nCONVERGENCE/DIVERGENCE (MACD)\nWe mentioned in the previous chapter an oscillator technique that uses 2\nexponential moving averages and here it is. The Moving Average\nConvergence/Divergence indicator, or simply MACD, was developed by\nGerald Appel. What makes this indicator so useful is that it combines some of\nthe oscillator principles we’ve already explained with a dual moving average\ncrossover approach. You’ll see only two lines on your computer screen\nalthough three lines are actually used in its calculation. The faster line (called\nthe MACD line) is the difference between two exponentially smoothed\nmoving averages of closing prices (usually the last 12 and 26 days or weeks).\nThe slower line (called the signal line) is usually a 9 period exponentially\nsmoothed average of the MACD line. Appel originally recommended one set\nof numbers for buy signals and another for sell signals. Most traders,\nhowever, utilize the default values of 12, 26, and 9 in all instances. That\nwould include daily and weekly values. (See Figure 10.19a.)", - "type": "text" - }, - { - "block_id": "p236-b2", - "global_id": 1507, - "bbox": [ - 72.0, - 526.28, - 520.79, - 706.32 - ], - "text": "The actual buy and sell signals are given when the two lines cross. A\ncrossing by the faster MACD line above the slower signal line is a buy signal.\nA crossing by the faster line below the slower is a sell signal. In that sense,\nMACD resembles a dual moving average crossover method. However, the\nMACD values also fluctuate above and below a zero line. That’s where it\nbegins to resemble an oscillator. An overbought condition is present when the\nlines are too far above the zero line. An oversold condition is present when\nthe lines are too far below the zero line. The best buy signals are given when\nprices are well below the zero line (oversold). Crossings above and below the\nzero line are another way to generate buy and sell signals respectively, similar\nto the momentum technique we discussed previously.", - "type": "text" - } - ] - }, - { - "page_num": 237, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p237-b0", - "global_id": 1508, - "bbox": [ - 79.5, - 345.51, - 515.77, - 359.97 - ], - "text": "Figure 10.19a The Moving Average Convergence Divergence system shows", - "type": "text" - }, - { - "block_id": "p237-b1", - "global_id": 1509, - "bbox": [ - 77.25, - 362.07, - 518.03, - 393.03 - ], - "text": "two lines. A signal is given when the faster MACD line crosses the slower\nsignal line. The arrows show five trading signals on this chart of the Nasdaq", - "type": "text" - }, - { - "block_id": "p237-b2", - "global_id": 1510, - "bbox": [ - 247.28, - 395.2, - 347.98, - 409.6 - ], - "text": "Composite Index.", - "type": "text" - }, - { - "block_id": "p237-b3", - "global_id": 1511, - "bbox": [ - 72.0, - 426.17, - 516.49, - 556.52 - ], - "text": "Divergences appear between the trend of the MACD lines and the price\nline. A negative, or bearish, divergence exists when the MACD lines are well\nabove the zero line (overbought) and start to weaken while prices continue to\ntrend higher. That is often a warning of a market top. A positive, or bullish,\ndivergence exists when the MACD lines are well below the zero line\n(oversold) and start to move up ahead of the price line. That is often an early\nsign of a market bottom. Simple trendlines can be drawn on the MACD lines\nto help identify important trend changes. (See Figure 10.19b.)", - "type": "text" - } - ] - }, - { - "page_num": 238, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p238-b0", - "global_id": 1512, - "bbox": [ - 81.88, - 344.79, - 513.39, - 375.75 - ], - "text": "Figure 10.19b The MACD lines fluctuate around a zero line, giving it the\nquality of an oscillator. The best buy signals occur below the zero line. The", - "type": "text" - }, - { - "block_id": "p238-b1", - "global_id": 1513, - "bbox": [ - 83.98, - 377.92, - 511.29, - 392.31 - ], - "text": "best sell signals come from above. Notice the negative divergence given in", - "type": "text" - }, - { - "block_id": "p238-b2", - "global_id": 1514, - "bbox": [ - 219.96, - 394.48, - 375.31, - 408.88 - ], - "text": "October (see down arrow).", - "type": "text" - }, - { - "block_id": "p238-b3", - "global_id": 1515, - "bbox": [ - 72.0, - 452.83, - 517.2, - 606.21 - ], - "text": "MACD HISTOGRAM\nWe showed you earlier in the chapter how a histogram could be constructed\nthat plots the difference between two moving average lines. Using that same\ntechnique, the two MACD lines can be turned into an MACD histogram. The\nhistogram consists of vertical bars that show the difference between the two\nMACD lines. The histogram has a zero line of its own. When the MACD\nlines are in positive alignment (faster line over the slower), the histogram is\nabove its zero line. Crossings by the histogram above and below its zero line\ncoincide with actual MACD crossover buy and sell signals.", - "type": "text" - }, - { - "block_id": "p238-b4", - "global_id": 1516, - "bbox": [ - 72.0, - 608.38, - 521.51, - 755.29 - ], - "text": "The real value of the histogram is spotting when the spread between the\ntwo lines is widening or narrowing. When the histogram is over its zero line\n(positive) but starts to fall toward the zero line, the uptrend is weakening.\nConversely, when the histogram is below its zero line (negative) and starts to\nmove upward toward the zero line, the downtrend is losing its momentum.\nAlthough no actual buy or sell signal is given until the histogram crosses its\nzero line, the histogram turns provide earlier warnings that the current trend is\nlosing momentum. Turns in the histogram back toward the zero line always\nprecede the actual crossover signals. Histogram turns are best used for", - "type": "text" - } - ] - }, - { - "page_num": 239, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p239-b0", - "global_id": 1517, - "bbox": [ - 72.0, - 73.53, - 512.81, - 120.81 - ], - "text": "spotting early exit signals from existing positions. It’s much more dangerous\nto use the histogram turns as an excuse to initiate new positions against the\nprevailing trend. (See Figure 10.20a.)", - "type": "text" - }, - { - "block_id": "p239-b1", - "global_id": 1518, - "bbox": [ - 85.23, - 413.2, - 510.04, - 427.67 - ], - "text": "Figure 10.20a The MACD histogram plots the difference between the two", - "type": "text" - }, - { - "block_id": "p239-b2", - "global_id": 1519, - "bbox": [ - 85.06, - 429.77, - 510.22, - 460.73 - ], - "text": "MACD lines. Signals are given on the zero line crossings. Notice that the\nhistogram turns earlier than the crossover signals, giving the trader some", - "type": "text" - }, - { - "block_id": "p239-b3", - "global_id": 1520, - "bbox": [ - 242.48, - 462.9, - 352.8, - 477.3 - ], - "text": "advanced warning.", - "type": "text" - }, - { - "block_id": "p239-b4", - "global_id": 1521, - "bbox": [ - 72.0, - 521.25, - 523.12, - 674.63 - ], - "text": "COMBINE WEEKLIES AND DAILIES\nAs with all technical indicators, signals on weekly charts are always more\nimportant than those on daily charts. The best way to combine them is to use\nweekly signals to determine market direction and the daily signals to fine-tune\nentry and exit points. A daily signal is followed only when it agrees with the\nweekly signal. Used in that fashion, the weekly signals become trend filters\nfor daily signals. That prevents using daily signals to trade against the\nprevailing trend. Two crossover systems in which this principle is especially\ntrue are MACD and Stochastics. (See Figure 10.20b.)", - "type": "text" - } - ] - }, - { - "page_num": 240, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p240-b0", - "global_id": 1522, - "bbox": [ - 86.16, - 346.23, - 509.12, - 360.69 - ], - "text": "Figure 10.20b The MACD histogram works well on weekly charts. At the", - "type": "text" - }, - { - "block_id": "p240-b1", - "global_id": 1523, - "bbox": [ - 86.25, - 362.79, - 509.03, - 393.75 - ], - "text": "middle peak, the histogram turned down 10 weeks before the sell signal\n(down arrow). At the two upturns, the histogram turned up 2 and 4 weeks", - "type": "text" - }, - { - "block_id": "p240-b2", - "global_id": 1524, - "bbox": [ - 197.03, - 395.92, - 398.23, - 410.32 - ], - "text": "before the buy signals (up arrows).", - "type": "text" - }, - { - "block_id": "p240-b3", - "global_id": 1525, - "bbox": [ - 72.0, - 454.27, - 522.42, - 647.98 - ], - "text": "THE PRINCIPLE OF CONTRARY OPINION IN\nFUTURES\nOscillator analysis is the study of market extremes. One of the most widely\nfollowed theories in measuring those market extremes is the principle of\nContrary Opinion. At the beginning of the book, two principal philosophies of\nmarket analysis were identified—fundamental and technical analysis.\nContrary Opinion, although it is generally listed under the category of\ntechnical analysis, is more aptly described as a form of psychological\nanalysis. Contrary Opinion adds the important third dimension to market\nanalysis—the psychological—by determining the degree of bullishness or\nbearishness among participants in the various financial markets.", - "type": "text" - }, - { - "block_id": "p240-b4", - "global_id": 1526, - "bbox": [ - 72.0, - 650.14, - 517.1, - 714.24 - ], - "text": "The principle of Contrary Opinion holds that when the vast majority of\npeople agree on anything, they are generally wrong. A true contrarian,\ntherefore, will first try to determine what the majority are doing and then will\nact in the opposite direction.", - "type": "text" - }, - { - "block_id": "p240-b5", - "global_id": 1527, - "bbox": [ - 72.0, - 716.4, - 522.6, - 763.93 - ], - "text": "Humphrey B. Neill, considered the dean of contrary thinking, described\nhis theories in a 1954 book entitled, The Art of Contrary Thinking. Ten years\nlater, in 1964, James H. Sibbet began to apply Neill’s principles to commodity", - "type": "text" - } - ] - }, - { - "page_num": 241, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p241-b0", - "global_id": 1528, - "bbox": [ - 72.0, - 73.53, - 521.93, - 236.76 - ], - "text": "futures trading by creating the Market Vane advisory service, which includes\nthe Bullish Consensus numbers (Market Vane, P.O. Box 90490, Pasadena, CA\n91109). Each week a poll of market letters is taken to determine the degree of\nbullishness or bearishness among commodity professionals. The purpose of\nthe poll is to quantify market sentiment into a set of numbers that can be\nanalyzed and used in the market forecasting process. The rationale behind this\napproach is that most futures traders are influenced to a great extent by\nmarket advisory services. By monitoring the views of the professional market\nletters, therefore, a reasonably accurate gauge of the attitudes of the trading\npublic can be obtained.", - "type": "text" - }, - { - "block_id": "p241-b1", - "global_id": 1529, - "bbox": [ - 72.0, - 238.92, - 509.49, - 319.58 - ], - "text": "Another service that provides an indication of market sentiment is the\n“Consensus Index of Bullish Market Opinion,” published by Consensus\nNational Commodity Futures Weekly (Consensus, Inc., 1735 McGee Street,\nKansas City, MO 64108). These numbers are published each Friday and use\n75% as an overbought and 25% as an oversold measurement.", - "type": "text" - }, - { - "block_id": "p241-b2", - "global_id": 1530, - "bbox": [ - 72.0, - 343.26, - 260.26, - 354.06 - ], - "text": "Interpreting Bullish Consensus Numbers", - "type": "text" - }, - { - "block_id": "p241-b3", - "global_id": 1531, - "bbox": [ - 72.0, - 362.08, - 515.95, - 442.73 - ], - "text": "Most traders seem to employ a fairly simple method of analyzing these\nweekly numbers. If the numbers are above 75%, the market is considered to\nbe overbought and means that a top may be near. A reading below 25% is\ninterpreted to warn of an oversold condition and the increased likelihood that\na market bottom is near.", - "type": "text" - }, - { - "block_id": "p241-b4", - "global_id": 1532, - "bbox": [ - 72.0, - 466.41, - 520.72, - 598.29 - ], - "text": "Contrary Opinion Measures Remaining Buying or Selling Power\nConsider the case of an individual speculator. Assume that speculator reads\nhis or her favorite newsletter and becomes convinced that a market is about to\nmove substantially higher. The more bullish the forecast, the more\naggressively that trader will approach the market. Once that individual\nspeculator’s funds are fully committed to that particular market, however, he\nor she is overbought—meaning there are no more funds to commit to the\nmarket.", - "type": "text" - }, - { - "block_id": "p241-b5", - "global_id": 1533, - "bbox": [ - 72.0, - 600.45, - 515.14, - 714.24 - ], - "text": "Expanding this situation to include all market participants, if 80-90% of\nmarket traders are bullish on a market, it is assumed that they have already\ntaken their market positions. Who is left to buy and push the market higher?\nThis then is one of the keys to understanding Contrary Opinion. If the\noverwhelming sentiment of market traders is on one side of the market, there\nsimply isn’t enough buying or selling pressure left to continue the present\ntrend.", - "type": "text" - }, - { - "block_id": "p241-b6", - "global_id": 1534, - "bbox": [ - 72.0, - 737.92, - 331.35, - 748.72 - ], - "text": "Contrary Opinion Measures Strong Versus Weak Hands", - "type": "text" - } - ] - }, - { - "page_num": 242, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p242-b0", - "global_id": 1535, - "bbox": [ - 72.0, - 73.28, - 522.38, - 170.5 - ], - "text": "A second feature of this philosophy is its ability to compare strong versus\nweak hands. Futures trading is a zero sum game. For every long there is also a\nshort. If 80% of the traders are on the long side of a market, then the\nremaining 20% (who are holding short positions) must be well financed\nenough to absorb the longs held by the other 80%. The shorts, therefore, must\nbe holding much larger positions than the longs (in this case, 4 to 1).", - "type": "text" - }, - { - "block_id": "p242-b1", - "global_id": 1536, - "bbox": [ - 72.0, - 172.67, - 514.18, - 236.76 - ], - "text": "This means further that the shorts must be well capitalized and are\nconsidered to be strong hands. The 80%, who are holding much smaller\npositions per trader, are considered to be weaker hands who will be forced to\nliquidate those longs on any sudden turn in prices.", - "type": "text" - }, - { - "block_id": "p242-b2", - "global_id": 1537, - "bbox": [ - 72.0, - 260.44, - 351.95, - 271.24 - ], - "text": "Some Additional Features of the Bullish Consensus Numbers", - "type": "text" - }, - { - "block_id": "p242-b3", - "global_id": 1538, - "bbox": [ - 72.0, - 279.25, - 518.4, - 359.91 - ], - "text": "Let’s consider a few additional points that should be kept in mind when using\nthese numbers. The norm or equilibrium point is at 55%. This allows for a\nbuilt-in bullish bias on the part of the general public. The upper extreme is\nconsidered to be 90% and the lower extreme, 20%. Here again, the numbers\nare shifted upward slightly to allow for the bullish bias.", - "type": "text" - }, - { - "block_id": "p242-b4", - "global_id": 1539, - "bbox": [ - 72.0, - 362.08, - 518.39, - 475.86 - ], - "text": "A contrarian position can usually be considered when the bullish\nconsensus numbers are above 90% or under 20%. Readings over 75% or\nunder 25% are also considered warning zones and suggest that a turn may be\nnear. However, it is generally advisable to await a change in the trend of the\nnumbers before taking action against the trend. A change in the direction of\nthe Bullish Consensus numbers, especially if it occurs from one of the danger\nzones, should be watched closely.", - "type": "text" - }, - { - "block_id": "p242-b5", - "global_id": 1540, - "bbox": [ - 72.0, - 499.54, - 517.58, - 631.42 - ], - "text": "The Importance of Open Interest (Futures)\nOpen interest also plays a role in the use of Bullish Consensus numbers. In\ngeneral, the higher the open interest figures are, the better the chance that the\ncontrarian positions will prove profitable. A contrarian position should not be\ntaken, however, while open interest is still increasing. A continued rise in\nopen interest numbers increases the odds that the present trend will continue.\nWait for the open interest numbers to begin to flatten out or to decline before\ntaking action.", - "type": "text" - }, - { - "block_id": "p242-b6", - "global_id": 1541, - "bbox": [ - 72.0, - 633.58, - 516.81, - 697.67 - ], - "text": "Study the Commitments of Traders Report to ensure that hedgers hold\nless than 50% of the open interest. Contrary Opinion works better when most\nof the open interest is held by speculators, who are considered to be weaker\nhands. It is not advisable to trade against large hedging interests.", - "type": "text" - }, - { - "block_id": "p242-b7", - "global_id": 1542, - "bbox": [ - 72.0, - 721.35, - 310.69, - 732.15 - ], - "text": "Watch the Market’s Reaction to Fundamental News", - "type": "text" - }, - { - "block_id": "p242-b8", - "global_id": 1543, - "bbox": [ - 72.0, - 740.17, - 515.01, - 754.57 - ], - "text": "Watch the market’s reaction to fundamental news very closely. The failure of", - "type": "text" - } - ] - }, - { - "page_num": 243, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p243-b0", - "global_id": 1544, - "bbox": [ - 72.0, - 73.64, - 516.34, - 171.22 - ], - "text": "prices to react to bullish news in an overbought area is a clear warning that a\nturn may be near. The first adverse news is usually enough to quickly push\nprices in the other direction. Correspondingly, the failure of prices in an\noversold area (under 25%) to react to bearish news can be taken as a warning\nthat all the bad news has been fully discounted in the current low price. Any\nbullish news will push prices higher.", - "type": "text" - }, - { - "block_id": "p243-b1", - "global_id": 1545, - "bbox": [ - 72.0, - 194.18, - 335.9, - 204.98 - ], - "text": "Combine Contrarian Opinion with Other Technical Tools", - "type": "text" - }, - { - "block_id": "p243-b2", - "global_id": 1546, - "bbox": [ - 72.0, - 213.0, - 519.18, - 343.35 - ], - "text": "As a general rule, trade in the same direction as the trend of the consensus\nnumbers until an extreme is reached, at which time the numbers should be\nmonitored for a sign of a change in trend. It goes without saying that standard\ntechnical analytical tools can and should also be employed to help identify\nmarket turns at these critical times. The breaking of support or resistance\nlevels, trendlines, or moving averages can be utilized to help confirm that the\ntrend is in fact turning. Divergences on oscillator charts are especially useful\nwhen the Bullish Consensus numbers are overbought or oversold.", - "type": "text" - }, - { - "block_id": "p243-b3", - "global_id": 1547, - "bbox": [ - 72.0, - 386.58, - 521.96, - 539.95 - ], - "text": "INVESTOR SENTIMENT READINGS\nEach weekend Barron’s includes in its Market Laboratory section a set of\nnumbers under the heading “Investor Sentiment Readings.” In that space, four\ndifferent investor polls are included to gauge the degree of bullishness and\nbearishness in the stock market. The figures are given for the latest week and\nthe period two and three weeks back for comparison purposes. Here’s a\nrandom sample of what the latest week’s figures might look like. Remember\nthat these numbers are contrary indicators. Too much bullishness is bad. Too\nmuch bearishness is good.", - "type": "text" - } - ] - }, - { - "page_num": 244, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p244-b0", - "global_id": 1548, - "bbox": [ - 72.0, - 444.19, - 516.78, - 597.57 - ], - "text": "INVESTORS INTELLIGENCE NUMBERS\nInvestors Intelligence (30 Church Street, New Rochelle, NY 10801) takes a\nweekly poll of investment advisors and produces three numbers—the percent\nof investment advisors that are bullish, those that are bearish, and those that\nare expecting a market correction. Bullish readings over 55% warn of too\nmuch optimism and are potentially negative for the market. Bullish readings\nbelow 35% reflect too much pessimism and are considered positive for the\nmarket. The correction figure represents advisers who are bullish but\nexpecting short term weakness.", - "type": "text" - }, - { - "block_id": "p244-b1", - "global_id": 1549, - "bbox": [ - 72.0, - 599.73, - 522.31, - 730.08 - ], - "text": "Investors Intelligence also publishes figures each week that measure the\nnumber of stocks that are above their 10 and 30 week moving averages.\nThose numbers can also be used in a contrary fashion. Readings above 70%\nsuggest an overbought stock market. Readings below 30% suggest an\noversold market. The 10 week readings are useful for measuring short to\nintermediate market turns. The 30 week numbers are more useful for\nmeasuring major market turns. The actual signal of a potential change in trend\ntakes place when the numbers rise back above 30 or fall back below 70.", - "type": "text" - } - ] - }, - { - "page_num": 245, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p245-b0", - "global_id": 1550, - "bbox": [ - 100.79, - 73.28, - 519.63, - 104.25 - ], - "text": "*The second smoothing produces 3 lines. Fast stochastics uses the first 2\nlines. Slow stochastics uses the last 2 lines.", - "type": "text" - } - ] - }, - { - "page_num": 246, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p246-b0", - "global_id": 1551, - "bbox": [ - 72.0, - 339.77, - 522.6, - 476.58 - ], - "text": "INTRODUCTION\nThe first charting technique used by stock market traders before the turn of\nthe century was point and figure charting. The actual name “point and figure”\nhas been attributed to Victor deVilliers in his 1933 classic, The Point and\nFigure Method of Anticipating Stock Price Movements. The technique has had\nvarious names over the years. In the 1880s and 1890s, it was known as the\n“book method.” This was the name Charles Dow gave it in a July 20, 1901\neditorial of The Wall Street Journal.", - "type": "text" - }, - { - "block_id": "p246-b1", - "global_id": 1552, - "bbox": [ - 72.0, - 478.74, - 520.83, - 559.4 - ], - "text": "Dow indicated that the book method had been used for about 15 years,\ngiving it a starting date of 1886. The name “figure charts” was used from the\n1920s until 1933 when “point and figure” became the accepted name for this\ntechnique of tracking market movement. R.D. Wyckoff also published several\nworks dealing with the point and figure method in the early 1930s.", - "type": "text" - }, - { - "block_id": "p246-b2", - "global_id": 1553, - "bbox": [ - 72.0, - 561.56, - 505.66, - 625.66 - ], - "text": "The Wall Street Journal started publishing daily high, low, and closing\nstock prices in 1896, which is the first reference to the more commonly\nknown bar chart. Therefore, it appears that the point and figure method\npredates bar charting by at least 10 years.", - "type": "text" - }, - { - "block_id": "p246-b3", - "global_id": 1554, - "bbox": [ - 72.0, - 627.82, - 500.5, - 691.91 - ], - "text": "We’re going to approach point and figure charting in two steps. We’ll\nlook at the original method that relies on intraday price moves. Then we’ll\nshow you a simpler version of point and figure charting that can be\nconstructed by using only the high and low prices for any market.", - "type": "text" - }, - { - "block_id": "p246-b4", - "global_id": 1555, - "bbox": [ - 72.0, - 735.86, - 494.8, - 756.02 - ], - "text": "THE POINT AND FIGURE VERSUS THE BAR", - "type": "text" - } - ] - }, - { - "page_num": 247, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p247-b0", - "global_id": 1556, - "bbox": [ - 72.0, - 74.27, - 483.7, - 128.01 - ], - "text": "CHART\nLet’s begin with some of the basic differences between point and figure\ncharting and bar charting and look at a couple of chart examples.", - "type": "text" - }, - { - "block_id": "p247-b1", - "global_id": 1557, - "bbox": [ - 72.0, - 130.17, - 515.01, - 310.22 - ], - "text": "The point and figure chart is a study of pure price movement. That is to\nsay, it does not take time into consideration while plotting the price action. A\nbar chart, by contrast, combines both price and time. Because of the way the\nbar chart is constructed, the vertical axis is the price scale and the horizontal\naxis, a time scale. On a daily chart, for example, each successive day’s price\naction moves one space or bar to the right. This happens even if prices saw\nlittle or no change for that day. Something must always be placed in the next\nspace. On the point and figure chart, only the price changes are recorded. If\nno price change occurs, the chart is left untouched. During active market\nperiods, a considerable amount of plotting may be required. During quiet\nmarket conditions, little or no plotting will be needed.", - "type": "text" - }, - { - "block_id": "p247-b2", - "global_id": 1558, - "bbox": [ - 72.0, - 312.38, - 514.75, - 508.99 - ], - "text": "An important difference is the treatment of volume. Bar charts record\nvolume bars under the day’s price action. Point and figure charts ignore\nvolume numbers, as a separate entity. This last phrase, “as a separate entity,”\nis an important one. Although the volume numbers are not recorded on the\npoint and figure chart, it does not necessarily follow that volume, or trading\nactivity, is totally lost. On the contrary, since intraday point and figure charts\nrecord all price change activity, the heavier or lighter volume is reflected in\nthe amount of price changes recorded on the chart. Because volume is one of\nthe more important ingredients in determining the potency of support and\nresistance levels, point and figure charts become especially useful in\ndetermining at which price levels most of the trading activity took place and,\nhence, where the important support and resistance numbers are.", - "type": "text" - }, - { - "block_id": "p247-b3", - "global_id": 1559, - "bbox": [ - 72.0, - 511.15, - 515.58, - 641.5 - ], - "text": "Figure 11.1 compares a bar chart and a point and figure chart covering\nthe same time span. In one sense, the charts look similar, but, in another\nsense, quite different. The general price and trend picture is captured on both\ncharts, but the method of recording prices is different. Notice in Figure 11.2\nthe alternating columns of x’s and o’s. The x columns represent rising prices,\nwhile the o columns show declining prices. Each time a column of x’s moves\none box above a previous column of x’s, an upside breakout occurs. (See\narrows in Figure 11.2.)", - "type": "text" - } - ] - }, - { - "page_num": 248, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p248-b0", - "global_id": 1560, - "bbox": [ - 80.27, - 356.31, - 515.01, - 387.27 - ], - "text": "Figure 11.1 A comparison of a daily bar chart for the S&P 500 Index (left)\nand a point and figure chart (right) for the same time period. The point and", - "type": "text" - }, - { - "block_id": "p248-b1", - "global_id": 1561, - "bbox": [ - 88.06, - 389.44, - 507.22, - 403.84 - ], - "text": "figure chart uses x columns for rising prices and o columns for declining", - "type": "text" - }, - { - "block_id": "p248-b2", - "global_id": 1562, - "bbox": [ - 278.25, - 406.0, - 317.01, - 420.4 - ], - "text": "prices.", - "type": "text" - }, - { - "block_id": "p248-b3", - "global_id": 1563, - "bbox": [ - 73.0, - 709.92, - 522.26, - 740.88 - ], - "text": "Figure 11.2 A buy signal is given when one x column rises above the top of a\nprevious x column (see up arrows). A sell signal is given when a column of o’s", - "type": "text" - }, - { - "block_id": "p248-b4", - "global_id": 1564, - "bbox": [ - 76.52, - 743.05, - 518.75, - 757.45 - ], - "text": "falls below a previous o column (see down arrows). Signals are more precise", - "type": "text" - } - ] - }, - { - "page_num": 249, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p249-b0", - "global_id": 1565, - "bbox": [ - 220.95, - 73.28, - 374.32, - 87.68 - ], - "text": "on point and figure charts.", - "type": "text" - }, - { - "block_id": "p249-b1", - "global_id": 1566, - "bbox": [ - 72.0, - 104.25, - 519.13, - 218.03 - ], - "text": "Correspondingly, when a column of o’s declines one box under a\nprevious column of o’s, a downside breakout occurs. Notice how much more\nprecise these breakouts are than those on the bar chart. These breakouts can,\nof course, be used as buy and sell signals. We’ll have more to say on buy and\nsell signals a bit later. But the charts demonstrate one of the advantages of the\npoint and figure chart, mainly the greater precision and ease in recognizing\ntrend signals.", - "type": "text" - }, - { - "block_id": "p249-b2", - "global_id": 1567, - "bbox": [ - 72.0, - 220.2, - 520.61, - 433.37 - ], - "text": "Figures 11.3 and 11.4 reveal another major advantage of the point and\nfigure chart: flexibility. While all three of the p&f charts cover the same price\naction, we can make them look very different to serve different purposes. One\nway to change the p&f chart is to vary the reversal criteria (let’s say from a 3\nbox reversal to a 5 box reversal). The larger the number of boxes required for\na reversal, the less sensitive the chart becomes. The second way to vary the\nchart is to change the box size. Figure 2 uses a box size of 5 points. Figure\n11.3 changes the box size from 5 points to 10 points. The number of columns\nhas been reduced from 44 in the 5×3 chart in Figure 11.2 to only 16 columns\nin Figure 11.3. By using the larger box size in Figure 11.3, fewer signals are\ngiven. That allows the investor to concentrate on the major trend of a market\nby avoiding all the short term sell signals that are eliminated from the less\nsensitive chart.", - "type": "text" - }, - { - "block_id": "p249-b3", - "global_id": 1568, - "bbox": [ - 79.86, - 695.51, - 515.4, - 726.48 - ], - "text": "Figure 11.3 Increasing the box size from 5 points to 10 makes the point and\nfigure chart less sensitive and fewer signals are given. This is more suitable", - "type": "text" - }, - { - "block_id": "p249-b4", - "global_id": 1569, - "bbox": [ - 228.28, - 728.64, - 366.98, - 743.04 - ], - "text": "for a long term investor.", - "type": "text" - } - ] - }, - { - "page_num": 250, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p250-b0", - "global_id": 1570, - "bbox": [ - 77.86, - 316.7, - 517.4, - 331.16 - ], - "text": "Figure 11.4 Reducing the box size to 3 points produces more signals. This is", - "type": "text" - }, - { - "block_id": "p250-b1", - "global_id": 1571, - "bbox": [ - 82.72, - 333.26, - 512.56, - 347.66 - ], - "text": "better for shorter term trading. The last rally from 920 to 1060 produced 6", - "type": "text" - }, - { - "block_id": "p250-b2", - "global_id": 1572, - "bbox": [ - 84.36, - 349.83, - 510.91, - 364.23 - ], - "text": "different buy signals. Protective sell stops can be placed under the highest", - "type": "text" - }, - { - "block_id": "p250-b3", - "global_id": 1573, - "bbox": [ - 223.22, - 366.39, - 372.04, - 380.79 - ], - "text": "column of o’s (see S1-S5).", - "type": "text" - }, - { - "block_id": "p250-b4", - "global_id": 1574, - "bbox": [ - 72.0, - 397.36, - 521.55, - 610.53 - ], - "text": "Figure 11.4 reduces the box size from 5 to 3. That increases the\nsensitivity of the chart. Why would anyone want to do that? Because it’s\nbetter for shorter term trading. Compare the last rally from 920 to 1060 in all\nthree charts. The 10×3 chart (Figure 11.3) shows the last column as a series of\nx’s with no o columns. The 5×3 chart (Figure 11.2) shows the last upleg in 5\ncolumns—3 x columns and 2 o columns. The 3×3 chart (Figure 11.4) breaks\nthe last upleg into 11 columns—6 x columns and 5 o columns. By increasing\nthe number of corrections during the uptrend (by increasing the number of o\ncolumns), more repeat buy signals are given either for later entry or for\nadding to winning positions. It also allows the trader to raise protective sell\nstops below the latest columns of o’s. The bottom line is that you can alter the\nlook of the point and figure chart to adjust its sensitivity to suit your own\nneeds.", - "type": "text" - }, - { - "block_id": "p250-b5", - "global_id": 1575, - "bbox": [ - 72.0, - 654.48, - 501.96, - 765.37 - ], - "text": "CONSTRUCTION OF THE INTRADAY POINT\nAND FIGURE CHART\nWe’ve already stated that the intraday chart was the original type used by\npoint and figure chartists. The technique was originally used to track stock\nmarket movement. The intent was to capture and record on paper each one\npoint move of the stocks under consideration. It was felt that accumulation", - "type": "text" - } - ] - }, - { - "page_num": 251, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p251-b0", - "global_id": 1576, - "bbox": [ - 72.0, - 73.53, - 512.72, - 187.07 - ], - "text": "(buying) and distribution (selling) could be better detected in this manner.\nOnly whole numbers were employed. Each box was given a value of one\npoint and each one point move in either direction was recorded. Fractions\nwere largely ignored. When the technique was later adopted to commodity\nmarkets, the value of the box had to be adjusted to fit each different\ncommodity market. Let’s construct an intraday chart using some actual price\ndata.", - "type": "text" - }, - { - "block_id": "p251-b1", - "global_id": 1577, - "bbox": [ - 72.0, - 189.23, - 521.18, - 236.76 - ], - "text": "The following numbers describe 9 actual days of trading in a Swiss franc\nfutures contract. The box size is 5 points. Therefore, every 5 point swing in\neither direction is plotted. We’ll start with a 1 box reversal chart.", - "type": "text" - }, - { - "block_id": "p251-b2", - "global_id": 1578, - "bbox": [ - 72.0, - 431.21, - 505.91, - 478.74 - ], - "text": "Figure 11.5a is what the previously listed numbers would look like on\nthe chart. Let’s begin on the left side of the chart. First the chart is scaled to\nreflect a 5 point increment for every box.", - "type": "text" - }, - { - "block_id": "p251-b3", - "global_id": 1579, - "bbox": [ - 64.8, - 495.31, - 510.26, - 509.71 - ], - "text": "Column 1: Put a dot at 4875. Because the next number—4880—is higher, fill", - "type": "text" - }, - { - "block_id": "p251-b4", - "global_id": 1580, - "bbox": [ - 64.8, - 511.87, - 506.47, - 542.84 - ], - "text": "in the next box up to 4880.\nColumn 2: The next number is 4860. Move 1 column to the right, go down 1", - "type": "text" - }, - { - "block_id": "p251-b5", - "global_id": 1581, - "bbox": [ - 64.8, - 545.0, - 506.46, - 575.96 - ], - "text": "box, and fill in all the o’s down to 4860.\nColumn 3: The next number is 4865. Move 1 column to the right, move up 1", - "type": "text" - }, - { - "block_id": "p251-b6", - "global_id": 1582, - "bbox": [ - 129.58, - 578.13, - 522.36, - 708.48 - ], - "text": "box and put an x at 4865. Stop here. So far you have only 1 x\nmarked in column 3 because prices have only moved up 1 box. On\na 1 box reversal chart, there must always be at least 2 boxes filled in\neach column. Notice that the next number is 4850, calling for o’s\ndown to that number. Do you go to the next column to record the\ncolumn of declining o’s? The answer is no because that would leave\nonly 1 mark, the x, in column 3. Therefore, in the column with the\nlone x (column 3) fill in o’s down to 4850.", - "type": "text" - } - ] - }, - { - "page_num": 252, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p252-b0", - "global_id": 1583, - "bbox": [ - 73.68, - 307.34, - 521.6, - 354.87 - ], - "text": "Figure 11.5a A 5×1 point and figure chart of a Deutsche mark contract is\nshown in the upper chart. The blackened boxes show the end of each day’s\ntrading. Figure 11.5b shows the same price data with a 3 box reversal. Notice", - "type": "text" - }, - { - "block_id": "p252-b1", - "global_id": 1584, - "bbox": [ - 141.68, - 357.03, - 453.6, - 371.43 - ], - "text": "the compression. Figure 11.5c shows a 5 box reversal.", - "type": "text" - }, - { - "block_id": "p252-b2", - "global_id": 1585, - "bbox": [ - 64.8, - 388.0, - 522.06, - 402.4 - ], - "text": "Column 4: The next number is 4860. Move to the next column, move 1 box up,", - "type": "text" - }, - { - "block_id": "p252-b3", - "global_id": 1586, - "bbox": [ - 64.8, - 404.57, - 504.85, - 435.53 - ], - "text": "and plot in the x’s up to 4860.\nColumn 5: The next number is 4855. Because this is a move down, go to the", - "type": "text" - }, - { - "block_id": "p252-b4", - "global_id": 1587, - "bbox": [ - 64.8, - 437.69, - 522.45, - 485.22 - ], - "text": "next column, move down a box, and fill the o at 4860. Notice on the\ntable that this is the last price of the day. Let’s do one more.\nColumn 6: The first number on 5/2 is 4870. So far, you only have one o in", - "type": "text" - }, - { - "block_id": "p252-b5", - "global_id": 1588, - "bbox": [ - 129.58, - 487.39, - 519.18, - 568.04 - ], - "text": "column 5. You must have at least 2 marks in each column.\nTherefore, fill in x’s (because prices are advancing) up to 4870. But\nnotice that the last price on the previous day is blacked out. This is\nto help keep track of time. By blacking in the last price each day,\nit’s much easier to keep track of the separate days’ trading.", - "type": "text" - }, - { - "block_id": "p252-b6", - "global_id": 1589, - "bbox": [ - 72.0, - 584.61, - 521.96, - 698.39 - ], - "text": "Feel free to continue through the remainder of the chart to sharpen your\nunderstanding of the plotting process. Notice that this chart has several\ncolumns where both x’s and o’s are present. This situation will only develop\non the 1 point reversal chart and is caused by the necessity of having at least 2\nboxes filled in each column. Some purists might argue with combining the x’s\nand o’s. Experience will show, however, that this method of plotting prices\nmakes it much easier to follow the order of the transactions.", - "type": "text" - }, - { - "block_id": "p252-b7", - "global_id": 1590, - "bbox": [ - 72.0, - 700.56, - 519.93, - 764.65 - ], - "text": "Figure 11.5b takes the same data from Figure 11.5a and transforms it\ninto a 3 box reversal chart. Notice that the chart is condensed and a lot of data\nis lost. Figure 11.5c shows a 5 box reversal. These are the 3 reversal criteria\nthat have traditionally been used—the 1, 3, and 5 box reversal. The 1 box", - "type": "text" - } - ] - }, - { - "page_num": 253, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p253-b0", - "global_id": 1591, - "bbox": [ - 72.0, - 73.28, - 514.77, - 187.07 - ], - "text": "reversal is generally used for very short term activity and the 3 box for the\nstudy of the intermediate trend. The 5 box reversal, because of its severe\ncondensation, is generally used for the study of long term trends. The correct\norder to use is the one shown here, that is, begin with the 1 point reversal\nchart. The 3 and 5 box reversals can then be constructed right off the first\nchart. For obvious reasons, a 1 point reversal chart could not possibly be\nconstructed from a 3 or 5 box reversal.", - "type": "text" - }, - { - "block_id": "p253-b1", - "global_id": 1592, - "bbox": [ - 72.0, - 513.33, - 514.41, - 683.27 - ], - "text": "THE HORIZONTAL COUNT\nOne principal advantage of the intraday 1 box reversal chart is the ability to\nobtain price objectives through use of the horizontal count. If you think back\nto our coverage of bar charts and price patterns, the question of price\nobjectives was discussed. However, virtually all methods of obtaining price\nobjectives off bar charts were based on what we call vertical measurements.\nThis meant measuring the height of a pattern (the volatility) and projecting\nthat distance upward or downward. For example, the head and shoulders\npattern measured the distance from the head to the neckline and swung that\nobjective from the break of that neckline.", - "type": "text" - }, - { - "block_id": "p253-b2", - "global_id": 1593, - "bbox": [ - 72.0, - 706.95, - 517.55, - 756.01 - ], - "text": "Point and Figure Charts Allow Horizontal Measurement\nThe principle of the horizontal count is based on the premise that there is a\ndirect relationship between the width of a congestion area and the subsequent", - "type": "text" - } - ] - }, - { - "page_num": 254, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p254-b0", - "global_id": 1594, - "bbox": [ - 72.0, - 73.17, - 514.76, - 153.94 - ], - "text": "move once a breakout occurs. If the congestion area represents a basing\npattern, some estimate can be made of the upside potential once the base is\ncompleted. Once the uptrend has begun, subsequent congestion areas can be\nused to obtain additional counts which can be utilized to confirm the original\ncounts from the base. (See Figure 11.6.)", - "type": "text" - }, - { - "block_id": "p254-b1", - "global_id": 1595, - "bbox": [ - 72.0, - 156.1, - 522.15, - 286.45 - ], - "text": "The intent is to measure the width of the pattern. Remember we’re\ntalking here of intraday 1 box reversal charts. The technique requires some\nmodifications for other types of charts that we’ll come back to later. Once a\ntopping or basing area has been identified, simply count the number of\ncolumns in that top or base. If there are 20 columns, for example, the upside\nor downside target would be 20 boxes from the measuring point. The key is to\ndetermine which line to measure from. Sometimes this is easy and, at other\ntimes, more difficult.", - "type": "text" - }, - { - "block_id": "p254-b2", - "global_id": 1596, - "bbox": [ - 72.0, - 288.62, - 518.79, - 402.4 - ], - "text": "Usually, the horizontal line to count across is near the middle of the\ncongestion area. A more precise rule is to use the line that has the least\nnumber of empty boxes in it. Or put the other way, the line with the most\nnumber of filled in x’s and o’s. Once you find the correct line to count across,\nit’s important that you include every column in your count, even the ones that\nare empty. Count the number of columns in the congestion area and then\nproject that number up or down from the line that was used for the count.", - "type": "text" - }, - { - "block_id": "p254-b3", - "global_id": 1597, - "bbox": [ - 97.19, - 613.41, - 498.09, - 627.88 - ], - "text": "Figure 11.6 By counting the number of columns across the horizontal", - "type": "text" - }, - { - "block_id": "p254-b4", - "global_id": 1598, - "bbox": [ - 104.68, - 629.98, - 490.59, - 644.38 - ], - "text": "congestion area, price objectives can be determined. The wider the", - "type": "text" - }, - { - "block_id": "p254-b5", - "global_id": 1599, - "bbox": [ - 176.49, - 646.54, - 418.79, - 660.94 - ], - "text": "congestion area, the greater the objective.", - "type": "text" - }, - { - "block_id": "p254-b6", - "global_id": 1600, - "bbox": [ - 72.0, - 704.9, - 508.25, - 758.89 - ], - "text": "PRICE PATTERNS\nPattern identification is also possible on point and figure charts. Figure 11.7\nshows the most common types.", - "type": "text" - } - ] - }, - { - "page_num": 255, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p255-b0", - "global_id": 1601, - "bbox": [ - 72.0, - 73.28, - 517.23, - 253.32 - ], - "text": "As you can see, they’re not much different from ones already discussed\non bar charting. Most of the patterns are variations on the double and triple\ntops and bottoms, head and shoulders, V’s and inverted V’s, and saucers. The\nterm “fulcrum” shows up quite a bit in the point and figure literature.\nEssentially, the fulcrum is a well defined congestion area, occurring after a\nsignificant advance or decline, that forms an accumulation base or a\ndistribution top. In a base, for example, the bottom of the area is subjected to\nrepeated tests, interrupted by intermittent rally attempts. Very often, the\nfulcrum takes on the appearance of a double or triple bottom. The basing\npattern is completed when a breakout (catapult) occurs over the top of the\ncongestion area.", - "type": "text" - }, - { - "block_id": "p255-b1", - "global_id": 1602, - "bbox": [ - 76.84, - 726.48, - 518.44, - 757.45 - ], - "text": "Figure 11.7 Reversal patterns. (Source: Alexander H. Wheelan, Study Helps\nin Point and Figure Technique [New York, NY: Morgan, Rogers and Roberts,", - "type": "text" - } - ] - }, - { - "page_num": 256, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p256-b0", - "global_id": 1603, - "bbox": [ - 94.57, - 73.28, - 500.69, - 87.68 - ], - "text": "Inc., 1954] p. 25.) Reprinted in 1990 by Traders Press, P.O. Box 6206,", - "type": "text" - }, - { - "block_id": "p256-b1", - "global_id": 1604, - "bbox": [ - 231.15, - 89.84, - 364.11, - 104.24 - ], - "text": "Greenville, SC 29606.]", - "type": "text" - }, - { - "block_id": "p256-b2", - "global_id": 1605, - "bbox": [ - 72.0, - 120.82, - 503.19, - 251.16 - ], - "text": "Those reversal patterns with the most pronounced horizontal ranges\nobviously lend themselves quite well to the taking of count measurements.\nThe V base, in contrast, because of the absence of a significant horizontal\nprice area, would not be amenable to the taking of a horizontal count. The\nblackened boxes in the chart examples in Figure 11.7 represent suggested\nbuying and selling points. Notice that those entry points generally coincide\nwith the retesting of support areas in a base or resistance areas in a top,\nbreakout points, and the breaking of trendlines.", - "type": "text" - }, - { - "block_id": "p256-b3", - "global_id": 1606, - "bbox": [ - 72.0, - 274.84, - 212.96, - 285.64 - ], - "text": "Trend Analysis and Trendlines", - "type": "text" - }, - { - "block_id": "p256-b4", - "global_id": 1607, - "bbox": [ - 72.0, - 293.66, - 511.95, - 390.88 - ], - "text": "The price patterns in Figure 11.7 show trendlines drawn as part of those\npatterns. Trendline analysis on intraday charts is the same as that applied to\nbar charts. Up trendlines are drawn under successive lows and down\ntrendlines are drawn over successive peaks. This is not true of the simplified\npoint and figure chart, which we’re going to study next. It utilizes 45 degree\nlines and plots them differently.", - "type": "text" - }, - { - "block_id": "p256-b5", - "global_id": 1608, - "bbox": [ - 72.0, - 434.11, - 522.44, - 594.69 - ], - "text": "3 BOX REVERSAL POINT AND FIGURE\nCHARTING\nIn 1947, a book on point and figure was written by A.W. Cohen entitled,\nStock Market Timing. The following year, when the Chartcraft Weekly Service\nwas started, the book’s name was changed to The Chartcraft Method of Point\n& Figure Trading. Several revised editions have been published since then to\ninclude commodities and options. In 1990, Michael Burke wrote The All New\nGuide to the Three-Point Reversal Method of Point & Figure Construction\nand Formations (Chartcraft, New Rochelle, NY).", - "type": "text" - }, - { - "block_id": "p256-b6", - "global_id": 1609, - "bbox": [ - 72.0, - 596.85, - 521.13, - 743.77 - ], - "text": "The original 1 box reversal method of plotting markets required intraday\nprices. The 3 box reversal was a condensation of the 1 box and was meant for\nintermediate trend analysis. Cohen reasoned that because so few 3 box\nreversals occurred in stocks during the day that it was not necessary to use\nintraday prices to construct the 3 box reversal chart. Hence the decision to use\nonly the high and low prices, which were readily available in most financial\nnewspapers. This modified technique, which is the basis of the Chartcraft\nservice, greatly simplified point and figure charting and made it accessible to\nthe average trader.", - "type": "text" - } - ] - }, - { - "page_num": 257, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p257-b0", - "global_id": 1610, - "bbox": [ - 72.0, - 74.02, - 522.74, - 218.03 - ], - "text": "CONSTRUCTION OF THE 3 POINT REVERSAL\nCHART\nThe construction of the chart is relatively simple. First, the chart must be\nscaled in the same way as the intraday chart. A value must be assigned to each\nbox. These tasks are performed for subscribers to the Chartcraft service\nbecause the charts are already constructed and the box values assigned. The\nchart shows a series of alternating columns with x’s representing rising prices\nand the o columns showing falling prices. (See Figure 11.8.)", - "type": "text" - }, - { - "block_id": "p257-b1", - "global_id": 1611, - "bbox": [ - 72.0, - 220.2, - 508.62, - 367.11 - ], - "text": "The actual plotting of the x’s and o’s requires only the high and low\nprices for the day. If the last column is an x column (showing rising prices),\nthen look at the high price for the day. If the daily high permits the filling in\nof 1 or more x’s, then fill in those boxes and stop. That’s all you do for that\nday. Remember that the entire value of the box must be filled. Fractions or\npartial filling of the box don’t count. Repeat the same process the next day,\nlooking only at the high price. As long as prices continue to rise, permitting\nthe plotting of at least one x, continue to fill in the boxes with x’s, ignoring\nthe low price.", - "type": "text" - }, - { - "block_id": "p257-b2", - "global_id": 1612, - "bbox": [ - 72.0, - 369.28, - 515.56, - 532.75 - ], - "text": "The day finally comes when the daily high price is not high enough to\nfill the next x box. At that point, look at the low price to determine if a 3 box\nreversal has occurred in the other direction. If so, move one column to the\nright, move down one box, and fill the next 3 boxes with o’s to signify a new\ndown column. Because you are now in a down column, the next day consult\nthe low price to see if that column of o’s can be continued. If one or more o’s\ncan be filled in, then do so. Only when the daily low does not permit the\nfilling in of any more o’s do you look at the daily high to see if a 3 box\nreversal has occurred to the upside. If so, move 1 column to the right and\nbegin a new x column.", - "type": "text" - } - ] - }, - { - "page_num": 258, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p258-b0", - "global_id": 1613, - "bbox": [ - 100.67, - 529.87, - 494.6, - 544.34 - ], - "text": "Figure 11.8 Source: Courtesy of Chartcraft, Inc., New Rochelle, NY.", - "type": "text" - }, - { - "block_id": "p258-b1", - "global_id": 1614, - "bbox": [ - 72.0, - 567.96, - 141.2, - 578.76 - ], - "text": "Chart Patterns", - "type": "text" - }, - { - "block_id": "p258-b2", - "global_id": 1615, - "bbox": [ - 72.0, - 586.77, - 503.12, - 617.73 - ], - "text": "Figure 11.9 shows 16 price patterns most common to this type of point and\nfigure chart—8 buy signals and 8 sell signals.", - "type": "text" - }, - { - "block_id": "p258-b3", - "global_id": 1616, - "bbox": [ - 72.0, - 619.9, - 522.41, - 766.81 - ], - "text": "Let’s take a look at the patterns. Since column 2, showing signals S-1\nthrough S-8, is just a mirror image of column 1, we’ll concentrate on the buy\nside. The first 2 signals, B-1 and B-2, are simple formations. All that is\nrequired for the simple bullish buy signal is 3 columns, with the second\ncolumn of x’s moving 1 box above the previous column of x’s. B-2 is similar\nto B-1 with one minor difference—there are now 4 columns, with the bottom\nof the second column of o’s higher than the first. B-1 shows a simple breakout\nthrough resistance. B-2 shows the same bullish breakout but with the added\nbullish feature of rising bottoms. B-2 is a slightly stronger pattern than B-1", - "type": "text" - } - ] - }, - { - "page_num": 259, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p259-b0", - "global_id": 1617, - "bbox": [ - 72.0, - 73.64, - 158.71, - 88.04 - ], - "text": "for that reason.", - "type": "text" - }, - { - "block_id": "p259-b1", - "global_id": 1618, - "bbox": [ - 72.0, - 89.84, - 521.95, - 418.96 - ], - "text": "The third pattern (B-3), breakout of a triple top, begins the complex\nformations. Notice that the simple bullish buy signal is a part of each complex\nformation. Also, as we move down the page, these formations become\nincreasingly stronger. The triple top breakout is stronger because there are 5\ncolumns involved and 2 columns of x’s have been penetrated. Remember that\nthe wider the base, the greater the upside potential. The next pattern (B-4),\nascending triple top, is stronger than B-3 because the tops and bottoms are\nboth ascending. The spread triple top (B-5) is even stronger because there are\n7 columns involved, and 3 columns of x’s are exceeded.\nThe upside breakout above a bullish triangle (B-6) combines two\nsignals. First, a simple buy signal must be present. Then the upper trendline\nmust be cleared. (We’ll cover the drawing of trendlines on these charts in the\nnext section). Signal B-7, upside breakout above a bullish resistance line, is\nself-explanatory. Again, two things must be present. A buy signal must have\nalready been given; and the upper channel line must be completely cleared.\nThe final pattern, the upside breakout above a bearish resistance line (B-8),\nalso requires two elements. A simple buy signal must be combined with a\nclearing of the down trendline. Of course, everything we’ve said regarding\npatterns B-1 through B-8 applies equally to patterns S-1 through S-8 except\nthat, in the latter case, prices are headed down instead of up.", - "type": "text" - } - ] - }, - { - "page_num": 260, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p260-b0", - "global_id": 1619, - "bbox": [ - 72.7, - 529.87, - 522.58, - 560.84 - ], - "text": "Figure 11.9 Source: K.C. Zieg, Jr., and P.J. Kaufman, Point and Figure\nCommodity Trading Techniques (New Rochelle, NY: Investors Intelligence) p.", - "type": "text" - }, - { - "block_id": "p260-b1", - "global_id": 1620, - "bbox": [ - 288.64, - 563.0, - 306.63, - 577.4 - ], - "text": "73.", - "type": "text" - }, - { - "block_id": "p260-b2", - "global_id": 1621, - "bbox": [ - 72.0, - 593.97, - 522.18, - 724.32 - ], - "text": "There is a difference between how these patterns are applied to\ncommodity markets as opposed to common stocks. In general, all 16 signals\ncan be used in stock market trading. However, because of the rapid movement\nso characteristic of the futures markets, the complex patterns are not as\ncommon in the commodity markets. Much greater emphasis is therefore\nplaced on the simple signals. Many futures traders utilize the simple signals\nalone. If the trader chooses to wait for the more complex and stronger\npatterns, many profitable trading opportunities will be missed.", - "type": "text" - } - ] - }, - { - "page_num": 261, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p261-b0", - "global_id": 1622, - "bbox": [ - 72.0, - 74.02, - 510.25, - 161.14 - ], - "text": "THE DRAWING OF TRENDLINES\nIn our discussion of intraday charts, it was pointed out that trendlines were\ndrawn in the conventional way. This is not the case on these 3 point reversal\ncharts. Trendlines on these charts are drawn at 45 degree angles. Also,\ntrendlines do not necessarily have to connect previous tops or bottoms.", - "type": "text" - }, - { - "block_id": "p261-b1", - "global_id": 1623, - "bbox": [ - 72.0, - 184.82, - 349.47, - 195.62 - ], - "text": "The Basic Bullish Support Line and Bearish Resistance Line", - "type": "text" - }, - { - "block_id": "p261-b2", - "global_id": 1624, - "bbox": [ - 72.0, - 203.64, - 521.56, - 350.55 - ], - "text": "These are your basic up and down trendlines. Because of the severe\ncondensation on these charts, it would be impractical to try to connect rally\ntops or reaction lows. The 45 degree line is, therefore, used. In an uptrend, the\nbullish support line is drawn at a 45 degree angle upward to the right from\nunder the lowest column of o’s. As long as prices remain above that line, the\nmajor trend is considered to be bullish. In a downtrend, the bearish resistance\nline is drawn at a 45 degree angle downward to the right from the top of the\nhighest column of x’s. As long as prices remain below that down trendline,\nthe trend is bearish. (See Figures 11.10-11.12.)", - "type": "text" - }, - { - "block_id": "p261-b3", - "global_id": 1625, - "bbox": [ - 72.0, - 352.71, - 519.19, - 466.5 - ], - "text": "At times, those lines may have to be adjusted. For example, sometimes a\ncorrection in an uptrend breaks below the rising support line after which the\nuptrend resumes. In such cases, a new support line must be drawn at a 45\ndegree angle from the bottom of that reaction low. Sometimes a trend is so\nstrong that the original up trendline is simply too far away from the price\naction. In that case, a tighter trendline should be drawn in an attempt to arrive\nat a “best fitting” support line.", - "type": "text" - } - ] - }, - { - "page_num": 262, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p262-b0", - "global_id": 1626, - "bbox": [ - 72.28, - 529.87, - 522.99, - 560.84 - ], - "text": "Figure 11.10 Examples of the Chartcraft three point reversal stock charts.\nNotice that the trendlines are drawn at 45 degree angles. (Source: Courtesy of", - "type": "text" - }, - { - "block_id": "p262-b1", - "global_id": 1627, - "bbox": [ - 207.99, - 563.0, - 387.29, - 577.4 - ], - "text": "Chartcraft, New Rochelle, NY.)", - "type": "text" - } - ] - }, - { - "page_num": 263, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p263-b0", - "global_id": 1628, - "bbox": [ - 74.02, - 529.87, - 521.26, - 544.34 - ], - "text": "Figure 11.11 Two more examples of the Chartcraft 3 point reversal method of", - "type": "text" - }, - { - "block_id": "p263-b1", - "global_id": 1629, - "bbox": [ - 77.46, - 546.44, - 517.83, - 560.84 - ], - "text": "point and figure charting. Trendlines on these charts are drawn at 45 degree", - "type": "text" - }, - { - "block_id": "p263-b2", - "global_id": 1630, - "bbox": [ - 124.12, - 563.0, - 471.16, - 577.4 - ], - "text": "angles. (Source: Courtesy of Chartcraft, New Rochelle, NY.)", - "type": "text" - } - ] - }, - { - "page_num": 264, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p264-b0", - "global_id": 1631, - "bbox": [ - 72.08, - 529.87, - 523.19, - 577.4 - ], - "text": "Figure 11.12 The box to the bottom left shows a horizontal target to 92 in\nBritish Telecomm PLC arrived at by tripling the base and adding to 50. To the\nright, a vertical target to 102 is arrived at by tripling the x column and adding", - "type": "text" - }, - { - "block_id": "p264-b1", - "global_id": 1632, - "bbox": [ - 128.31, - 579.57, - 466.96, - 593.96 - ], - "text": "to 63. (Source: Courtesy of Chartcraft, New Rochelle, NY.)", - "type": "text" - }, - { - "block_id": "p264-b2", - "global_id": 1633, - "bbox": [ - 72.0, - 637.92, - 513.64, - 758.17 - ], - "text": "MEASURING TECHNIQUES\nThree point reversal charts allow the use of two different measuring\ntechniques—the horizontal and the vertical. For the horizontal, count the\nnumber of columns in a bottom or topping pattern. That number of columns\nmust then be multiplied by the value of the reversal or the number of boxes\nneeded for a reversal. For example, let’s assign a $1.00 box value to a chart\nwith a 3 box reversal. We count the number of boxes across a base and come", - "type": "text" - } - ] - }, - { - "page_num": 265, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p265-b0", - "global_id": 1634, - "bbox": [ - 72.0, - 73.53, - 517.55, - 137.37 - ], - "text": "up with 10. Because we’re using a 3 box reversal, the value of that reversal is\n$3.00 (3x$1.00). Multiply the 10 columns across the base by $3 for a total of\n$30. That number is then added to the bottom of the basing pattern or\nsubtracted from the top of a topping pattern to arrive at the price objective.", - "type": "text" - }, - { - "block_id": "p265-b1", - "global_id": 1635, - "bbox": [ - 72.0, - 139.54, - 522.0, - 253.32 - ], - "text": "The vertical count is a bit simpler. Measure the number of boxes in the\nfirst column of the new trend. In an uptrend, measure the first up column of\nx’s. In a downtrend, measure the first down column of o’s. Multiply that value\nby 3 and add that total to the bottom or subtract it from the top of the column.\nWhat you’re doing in effect with a 3 box reversal chart is tripling the size of\nthe first leg. If a double top or bottom occurs on the chart, use the second\ncolumn of o’s or x’s for the vertical count. (See Figure 11.12.)", - "type": "text" - }, - { - "block_id": "p265-b2", - "global_id": 1636, - "bbox": [ - 72.0, - 297.27, - 521.55, - 351.27 - ], - "text": "TRADING TACTICS\nLet’s look at the various ways that these point and figure charts can be used to\ndetermine specific entry and exit points.", - "type": "text" - }, - { - "block_id": "p265-b3", - "global_id": 1637, - "bbox": [ - 82.08, - 367.84, - 518.83, - 547.88 - ], - "text": "1. A simple buy signal can be used for the covering of old shorts and/or the\ninitiation of new longs.\n2. A simple sell signal can be used for the liquidation of old longs and/or\nthe initiation of new shorts.\n3. The simple signal can be used only for liquidation purposes with a\ncomplex formation needed for a new commitment.\n4. The trendline can be used as a filter. Long positions are taken above the\ntrendline and short positions below the trendline.\n5. For stop protection, always risk below the last column of o’s in an\nuptrend and over the last column of x’s in a downtrend.\n6. The actual entry point can be varied as follows:", - "type": "text" - }, - { - "block_id": "p265-b4", - "global_id": 1638, - "bbox": [ - 110.87, - 564.45, - 491.28, - 595.41 - ], - "text": "a. Buy the actual breakout in an uptrend.\nb. Buy a 3 box reversal after the breakout occurs to obtain a lower", - "type": "text" - }, - { - "block_id": "p265-b5", - "global_id": 1639, - "bbox": [ - 110.87, - 597.57, - 513.24, - 628.54 - ], - "text": "entry point.\nc. Buy a 3 box reversal in the direction of the original breakout after a", - "type": "text" - }, - { - "block_id": "p265-b6", - "global_id": 1640, - "bbox": [ - 110.87, - 630.7, - 519.67, - 694.79 - ], - "text": "correction occurs. Not only does this require the added confirmation\nof a positive reversal in the right direction, but a closer stop point\ncan now be used under the latest column of o’s.\nd. Buy a second breakout in the same direction as the original breakout", - "type": "text" - }, - { - "block_id": "p265-b7", - "global_id": 1641, - "bbox": [ - 125.26, - 696.96, - 163.23, - 711.36 - ], - "text": "signal.", - "type": "text" - }, - { - "block_id": "p265-b8", - "global_id": 1642, - "bbox": [ - 72.0, - 727.93, - 508.89, - 758.89 - ], - "text": "As you can readily see from the list, there are many different ways that\nthe point and figure chart can be used. Once the basic technique is", - "type": "text" - } - ] - }, - { - "page_num": 266, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p266-b0", - "global_id": 1643, - "bbox": [ - 72.0, - 73.53, - 503.18, - 104.25 - ], - "text": "understood, there is almost unlimited flexibility as to how to best enter and\nexit a market using this approach.", - "type": "text" - }, - { - "block_id": "p266-b1", - "global_id": 1644, - "bbox": [ - 72.0, - 127.93, - 145.41, - 138.73 - ], - "text": "Adjusting Stops", - "type": "text" - }, - { - "block_id": "p266-b2", - "global_id": 1645, - "bbox": [ - 72.0, - 146.74, - 516.79, - 260.53 - ], - "text": "The actual buy or sell signal occurs on the first signal. However, as the move\ncontinues, several other signals appear on the chart. These repeat buy or sell\nsignals can be used for additional positions. Whether or not this is done, the\nprotective stop point can be raised to just below the latest o column in an\nuptrend and lowered to just over the latest x column in a downtrend. This use\nof a trailing stop allows the trader to stay with the position and protect\naccumulated profits at the same time.", - "type": "text" - }, - { - "block_id": "p266-b3", - "global_id": 1646, - "bbox": [ - 72.0, - 284.21, - 523.11, - 515.47 - ], - "text": "What to Do After a Prolonged Move\nIntermittent corrections against the trend allow the trader to adjust stops once\nthe trend has resumed. How is this accomplished, however, if no 3 box\nreversals occur during the trend? The trader is then faced with a long column\nof x’s in an uptrend or o’s in a downtrend. This type of market situation\ncreates what is called a pole, that is, a long column of x’s and o’s without a\ncorrection. The trader wants to stay with the trend but also wants some\ntechnique to protect profits. There is at least one way to accomplish this. After\nan uninterrupted move of 10 or more boxes, place a protective stop at the\npoint where a 3 box reversal would occur. If the position does get stopped out,\nreentry can be done on another 3 box reversal in the direction of the original\ntrend. In that case, an added advantage is the placement of the new stop under\nthe most recent column of o’s in an uptrend or over the latest column of x’s in\na downtrend.", - "type": "text" - }, - { - "block_id": "p266-b4", - "global_id": 1647, - "bbox": [ - 72.0, - 559.42, - 481.16, - 620.61 - ], - "text": "ADVANTAGES OF POINT AND FIGURE\nCHARTS\nLet’s briefly recap some of the advantages of point and figure charting.", - "type": "text" - }, - { - "block_id": "p266-b5", - "global_id": 1648, - "bbox": [ - 82.08, - 637.18, - 516.48, - 750.97 - ], - "text": "1. By varying the box and reversal sizes, these charts can be adapted to\nalmost any need. There are also many different ways these charts can be\nused for entry and exit points.\n2. Trading signals are more precise on point and figure charts than on bar\ncharts.\n3. By following these specific point and figure signals, better trading\ndiscipline can be achieved. (See Figures 11.13-11.18.)", - "type": "text" - } - ] - }, - { - "page_num": 267, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p267-b0", - "global_id": 1649, - "bbox": [ - 72.53, - 318.86, - 522.74, - 333.32 - ], - "text": "Figure 11.13 This chart of Treasury Bond futures prices covers more than two", - "type": "text" - }, - { - "block_id": "p267-b1", - "global_id": 1650, - "bbox": [ - 74.12, - 335.42, - 521.16, - 366.39 - ], - "text": "years. The arrows mark the buy and sell signals. Most of the signals captured\nthe market trend very well. Even when a bad signal is given, the chart quickly", - "type": "text" - }, - { - "block_id": "p267-b2", - "global_id": 1651, - "bbox": [ - 256.75, - 368.55, - 338.53, - 382.95 - ], - "text": "corrects itself.", - "type": "text" - }, - { - "block_id": "p267-b3", - "global_id": 1652, - "bbox": [ - 76.2, - 642.22, - 519.06, - 656.69 - ], - "text": "Figure 11.14 The early 1994 sell signal (first down arrow) lasted all the way", - "type": "text" - }, - { - "block_id": "p267-b4", - "global_id": 1653, - "bbox": [ - 78.74, - 658.79, - 516.55, - 689.75 - ], - "text": "through 1994. The buy signal at the start of 1995 (first up arrow) lasted for\ntwo years until 1997. A sell signal in mid-1997 turned into a buy at the start", - "type": "text" - }, - { - "block_id": "p267-b5", - "global_id": 1654, - "bbox": [ - 274.04, - 691.91, - 321.22, - 706.31 - ], - "text": "of 1998.", - "type": "text" - } - ] - }, - { - "page_num": 268, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p268-b0", - "global_id": 1655, - "bbox": [ - 77.4, - 318.86, - 517.87, - 333.32 - ], - "text": "Figure 11.15 This chart condenses the previous dollar chart by doubling the", - "type": "text" - }, - { - "block_id": "p268-b1", - "global_id": 1656, - "bbox": [ - 83.04, - 335.42, - 512.23, - 366.39 - ], - "text": "box size. Only two signals are given on this less sensitive version. The last\nsignal was a buy (see up arrow) in mid-1995 near 85, which has lasted for", - "type": "text" - }, - { - "block_id": "p268-b2", - "global_id": 1657, - "bbox": [ - 242.95, - 368.55, - 352.33, - 382.95 - ], - "text": "almost three years.", - "type": "text" - }, - { - "block_id": "p268-b3", - "global_id": 1658, - "bbox": [ - 76.0, - 642.22, - 519.27, - 656.69 - ], - "text": "Figure 11.16 This point and figure chart of gold gave a sell signal (see down", - "type": "text" - }, - { - "block_id": "p268-b4", - "global_id": 1659, - "bbox": [ - 81.85, - 658.79, - 513.42, - 673.18 - ], - "text": "arrow) near $380 during 1996. Gold prices fell another $100 over the next", - "type": "text" - }, - { - "block_id": "p268-b5", - "global_id": 1660, - "bbox": [ - 268.06, - 675.35, - 327.22, - 689.75 - ], - "text": "two years.", - "type": "text" - } - ] - }, - { - "page_num": 269, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p269-b0", - "global_id": 1661, - "bbox": [ - 72.01, - 318.14, - 523.26, - 332.6 - ], - "text": "Figure 11.17 The crude oil point and figure chart gave a sell signal (see down", - "type": "text" - }, - { - "block_id": "p269-b1", - "global_id": 1662, - "bbox": [ - 77.24, - 334.7, - 518.02, - 349.1 - ], - "text": "arrow) near $20 during October 1997 and caught the subsequent $6 tumble.", - "type": "text" - }, - { - "block_id": "p269-b2", - "global_id": 1663, - "bbox": [ - 93.61, - 351.27, - 501.67, - 365.67 - ], - "text": "Crude oil prices would have to rise above the last x column at 16.50 to", - "type": "text" - }, - { - "block_id": "p269-b3", - "global_id": 1664, - "bbox": [ - 232.02, - 367.83, - 363.25, - 382.23 - ], - "text": "reverse the downtrend.", - "type": "text" - }, - { - "block_id": "p269-b4", - "global_id": 1665, - "bbox": [ - 72.44, - 642.22, - 522.83, - 673.18 - ], - "text": "Figure 11.18 This point and figure chart of the Semiconductor Index gave\nfour signals over a period of two and a half years. The down arrows mark two", - "type": "text" - }, - { - "block_id": "p269-b5", - "global_id": 1666, - "bbox": [ - 85.78, - 675.35, - 509.49, - 689.75 - ], - "text": "timely sell signals in 1995 and 1997. The buy signal during 1996 (first up", - "type": "text" - }, - { - "block_id": "p269-b6", - "global_id": 1667, - "bbox": [ - 182.18, - 691.91, - 413.09, - 706.31 - ], - "text": "arrow) caught most of the ensuing rally.", - "type": "text" - } - ] - }, - { - "page_num": 270, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p270-b0", - "global_id": 1668, - "bbox": [ - 72.0, - 74.02, - 521.97, - 293.65 - ], - "text": "P&F TECHNICAL INDICATORS\nIn his 1995 book, Point & Figure Charting (John Wiley & Sons), Thomas J.\nDorsey espouses the Chartcraft method of 3 point reversal charting of stocks.\nHe also discusses point and figure application to commodity and options\ntrading. In addition to explaining how to construct and read the charts, Dorsey\nalso shows how the P&F technique can be applied to relative strength\nanalysis, sector analysis, and in the construction of an NYSE Bullish Percent\nIndex. He shows how p&f charts can be constructed for the NYSE advance\ndecline line, the NYSE High-Low Index, and the percentage of stocks over\ntheir 10 and 30 week averages. Dorsey credits Michael Burke, the publisher\nof Chartcraft, (Chartcraft, Inc., Investors Intelligence, 30 Church Street, New\nRochelle, N.Y. 10801) with the actual development of these innovative p&f\nindicators which are available in that chart service.", - "type": "text" - }, - { - "block_id": "p270-b1", - "global_id": 1669, - "bbox": [ - 72.0, - 337.6, - 520.78, - 474.42 - ], - "text": "COMPUTERIZED P&F CHARTING\nComputers have taken the drudgery out of point and figure charting. The days\nof laboriously constructing columns of x’s and o’s are gone. Most charting\nsoftware packages do the charting for you. In addition, you can vary the box\nand reversal sizes with a keystroke to adjust the chart for shorter or longer\nterm analysis. You can construct p&f charts from real-time (intraday) and end\nof day data, and you can apply them to any market you want. But you can do\na lot more with a computer.", - "type": "text" - }, - { - "block_id": "p270-b2", - "global_id": 1670, - "bbox": [ - 72.0, - 476.58, - 522.95, - 640.06 - ], - "text": "Kenneth Tower (CMT), technical analyst for UST Securities\nCorporation, (5 Vaughn Drive, CN5209, Princeton, N.J. 08543) uses a\nlogarithmic method of point and figure charting. A screening process that\nmeasures the volatility of a stock over the last 3 years determines the right\npercentage box size for each stock. Figures 11.19 and 11.20 show examples of\nTower’s logarithmic p&f charts applied to America Online and Intel. The box\nsize for AOL in Figure 11.19 is 3.6%. A 1 box reversal, therefore, would\nrequire a retracement of 3.6%. Since that happens to be a 2 box reversal chart,\nprices would have to retrace 7.2% to start a new column. Each box size for\nthe Intel chart shown in Figure 11.20 is worth 3.2%.", - "type": "text" - } - ] - }, - { - "page_num": 271, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p271-b0", - "global_id": 1671, - "bbox": [ - 76.54, - 287.17, - 518.72, - 318.14 - ], - "text": "Figure 11.19 A logarithmic point and figure chart of America Online. The\nreversal criteria is based on percentages. Each box is worth 3.6%. Since this", - "type": "text" - }, - { - "block_id": "p271-b1", - "global_id": 1672, - "bbox": [ - 75.2, - 320.3, - 520.07, - 351.26 - ], - "text": "is a two box reversal chart, a reversal is worth 7.2%. Notice the horizontal\nupside counts to 69.7 and 136.5 (see arcs). (Chart courtesy of UST Securities", - "type": "text" - }, - { - "block_id": "p271-b2", - "global_id": 1673, - "bbox": [ - 278.64, - 353.43, - 316.62, - 367.83 - ], - "text": "Corp.)", - "type": "text" - }, - { - "block_id": "p271-b3", - "global_id": 1674, - "bbox": [ - 73.07, - 586.05, - 522.2, - 633.57 - ], - "text": "Figure 11.20 A one box reversal point and figure chart of Intel using\npercentages. A reversal of 3.2% is needed to move into the next column.\nMeasuring horizontally from right to left along the base, upside counts can be", - "type": "text" - }, - { - "block_id": "p271-b4", - "global_id": 1675, - "bbox": [ - 86.39, - 635.74, - 508.87, - 650.14 - ], - "text": "made to 33 and then to 87.6 (see arcs). (Chart courtesy of UST Securities", - "type": "text" - }, - { - "block_id": "p271-b5", - "global_id": 1676, - "bbox": [ - 278.64, - 652.3, - 316.62, - 666.7 - ], - "text": "Corp.)", - "type": "text" - }, - { - "block_id": "p271-b6", - "global_id": 1677, - "bbox": [ - 72.0, - 683.27, - 517.53, - 763.93 - ], - "text": "The arcs you see on both charts are examples of using horizontal price\ncounts across a price base to arrive at short and long term price objectives.\nThe Intel chart, for example, shows a short term objective to 33, arrived at by\nmeasuring halfway across the price base (lower arc). The larger arc, which\nmeasures to 87.6, is arrived at by measuring across the entire price base and", - "type": "text" - } - ] - }, - { - "page_num": 272, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p272-b0", - "global_id": 1678, - "bbox": [ - 72.0, - 73.28, - 521.45, - 120.81 - ], - "text": "projecting that distance upward. If you look closely at Figures 11.19 and\n11.20, you’ll also see price dots trailing the price action. Those dots happen to\nbe moving averages.", - "type": "text" - }, - { - "block_id": "p272-b1", - "global_id": 1679, - "bbox": [ - 72.0, - 164.76, - 523.21, - 334.7 - ], - "text": "P&F MOVING AVERAGES\nMoving averages are usually applied to bar charts. But here they are on point\n& figure charts, courtesy of Ken Tower and UST Securities. Tower uses two\nmoving averages on his charts, a 10 column and a 20 column moving average.\nThe dots you see in Figures 11.19 and 11.20 are 10 column averages. These\nmoving averages are constructed by first finding an average price for each\ncolumn. That is done by simply adding up the prices in each column and\ndividing the total by the number of x’s or o’s in that column. The resulting\nnumbers are then averaged over 10 and 20 columns. The moving averages are\nused in the same way as on bar charts.", - "type": "text" - }, - { - "block_id": "p272-b2", - "global_id": 1680, - "bbox": [ - 72.0, - 336.87, - 523.1, - 500.35 - ], - "text": "Figure 11.21 shows two point and figure charts of the same stock with 10\ncolumn averages (dots) and 20 column averages (dashes). The bottom chart is\na 2.7% reversal logarithmic chart of Royal Dutch Petroleum going back to\n1992. Notice that the faster moving average stayed above the slower moving\naverage from 1993 to the 1997 during the four year uptrend. You can see the\ntwo moving averages coming together during the second half of 1997 in what\nturned out to be a consolidation year for that stock. To the far right, you can\nsee that Royal Dutch may be on the verge of resuming its major uptrend. A\ncloser look at that potential upside breakout is seen in the upper chart in\nFigure 11.21.", - "type": "text" - }, - { - "block_id": "p272-b3", - "global_id": 1681, - "bbox": [ - 72.0, - 502.51, - 523.11, - 665.99 - ], - "text": "The upper chart is a traditional one point reversal linear chart of the same\nstock. The time frame covered in the linear chart is much shorter than the long\nchart. But you get a closer look at the late 1997 and early 1998 price action\nand can see the short term upside breakout at the start of 1998. The stock still\nneeds to close through 60 to confirm a major bullish breakout. The moving\naverages haven’t been much help during the trading range (they never are),\nbut should begin to trend higher once again if the bullish breakout\nmaterializes. By adding moving averages to point and figure charts, Ken\nTower brings another valuable technical indicator to p&f charting. The use of\nlogarithmic charts also adds a modern wrinkle to this old charting method.", - "type": "text" - } - ] - }, - { - "page_num": 273, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p273-b0", - "global_id": 1682, - "bbox": [ - 81.21, - 529.87, - 514.06, - 544.34 - ], - "text": "Figure 11.21 Two point and figure versions of Royal Dutch Petroleum. The", - "type": "text" - }, - { - "block_id": "p273-b1", - "global_id": 1683, - "bbox": [ - 80.56, - 546.44, - 514.72, - 593.96 - ], - "text": "bottom chart is a log chart spanning several years. The upper chart is a\nlinear chart for one year. The dots and dashes represent 10 and 20 column\nmoving averages, respectively. (Prepared by UST Securities Corp. Updated", - "type": "text" - }, - { - "block_id": "p273-b2", - "global_id": 1684, - "bbox": [ - 223.2, - 596.13, - 372.07, - 610.53 - ], - "text": "through March 26, 1998.)", - "type": "text" - }, - { - "block_id": "p273-b3", - "global_id": 1685, - "bbox": [ - 72.0, - 654.48, - 506.09, - 758.17 - ], - "text": "CONCLUSION\nPoint and figure charting isn’t the oldest technique in the world. That credit\ngoes to the Japanese candlestick chart, which has been used in that country\nfor centuries. In the next chapter Greg Morris, author of two books on\ncandlesticks, will introduce that ancient technique that has gained new\npopularity in recent years among Western technical analysts.", - "type": "text" - } - ] - }, - { - "page_num": 274, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p274-b0", - "global_id": 1686, - "bbox": [ - 72.0, - 311.68, - 521.0, - 448.49 - ], - "text": "INTRODUCTION\nWhile the Japanese have used this charting and analysis technique for\ncenturies, only in recent years has it become popular in the West. The term,\ncandlesticks, actually refers to two different, but related subjects. First, and\npossibly the more popular, is the method of displaying stock and futures data\nfor chart analysis. Secondly, it is the art of identifying certain combinations of\ncandlesticks in defined and proven combinations. Fortunately, both\ntechniques can be used independently or in combination.", - "type": "text" - }, - { - "block_id": "p274-b1", - "global_id": 1687, - "bbox": [ - 72.0, - 492.44, - 512.48, - 629.26 - ], - "text": "CANDLESTICK CHARTING\nCharting market data in candlestick form uses the same data available for\nstandard bar charts; open, high, low, and close prices. While using the exact\nsame data, candlestick charts offer a much more visually appealing chart.\nInformation seems to jump off the page (computer screen). The information\ndisplayed is more easily interpreted and analyzed. The box below is a\ndepiction of of a single day of prices showing the difference between the bar\n(left) and the candlestick(s). (See Figure 12.1.)", - "type": "text" - } - ] - }, - { - "page_num": 275, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p275-b0", - "global_id": 1688, - "bbox": [ - 263.0, - 73.34, - 332.28, - 87.74 - ], - "text": "Figure 12.1", - "type": "text" - }, - { - "block_id": "p275-b1", - "global_id": 1689, - "bbox": [ - 72.0, - 104.25, - 523.03, - 350.55 - ], - "text": "You can see how the name “candlesticks” came about. They look\nsomewhat like a candle with a wick. The rectangle represents the difference\nbetween the open and close price for the day, and is called the body. Notice\nthat the body can be either black or white. A white body means that the close\nprice was greater (higher) than the open price. Actually, the body is not white,\nbut open (not filled), which makes it work better with computers. This is so\nthat it will print correctly when printing charts on a computer. This is one of\nthe adaptations that have occurred in the West; the Japanese use red for the\nopen body. The black body means that the close price was lower than the open\nprice. The open and close prices are given much significance in Japanese\ncandlesticks. The small lines above and below the body are referred to as\nwicks or hairs or shadows. Many different names for these lines appear in\nJapanese reference literature, which is odd since they represent the high and\nlow prices for the day and are normally not considered vital in the analysis by\nthe Japanese. (See Figure 12.2.)", - "type": "text" - }, - { - "block_id": "p275-b2", - "global_id": 1690, - "bbox": [ - 72.0, - 352.71, - 518.48, - 433.37 - ], - "text": "Figure 12.2 shows the same data in both the popular bar chart and in a\nJapanese candlestick format. You can quickly see that information not readily\navailable on the bar chart seems to jump from the page (screen) on the\ncandlestick chart. Initially, it takes some getting use to, but after a while you\nmay prefer it.", - "type": "text" - }, - { - "block_id": "p275-b3", - "global_id": 1691, - "bbox": [ - 263.0, - 727.99, - 332.28, - 742.39 - ], - "text": "Figure 12.2", - "type": "text" - } - ] - }, - { - "page_num": 276, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p276-b0", - "global_id": 1692, - "bbox": [ - 72.0, - 73.28, - 505.07, - 137.37 - ], - "text": "The different shapes for candlesticks have different meanings. The\nJapanese have defined different primary candlesticks, based upon the\nrelationship of open, high, low, and close prices. Understanding these basic\ncandlesticks is the beginning of candlestick analysis.", - "type": "text" - }, - { - "block_id": "p276-b1", - "global_id": 1693, - "bbox": [ - 72.0, - 181.33, - 518.65, - 301.58 - ], - "text": "BASIC CANDLESTICKS\nDifferent body/shadow combinations have different meanings. Days in which\nthe difference between the open and close prices is great are called Long\nDays. Likewise, days in which the difference between the open and close\nprice is small, are called Short Days. Remember, we are only talking about\nthe size of the body and no reference is made to the high and/or low prices.\n(See Figure 12.3.)", - "type": "text" - }, - { - "block_id": "p276-b2", - "global_id": 1694, - "bbox": [ - 72.0, - 303.74, - 517.9, - 367.83 - ], - "text": "Spinning Tops are days in which the candlesticks have small bodies with\nupper and lower shadows that are of greater length than that of the body. The\nbody color is relatively unimportant in spinning top candlesticks. These\ncandlesticks are considered as days of indecision. (See Figure 12.4.)", - "type": "text" - }, - { - "block_id": "p276-b3", - "global_id": 1695, - "bbox": [ - 263.0, - 609.88, - 332.28, - 624.28 - ], - "text": "Figure 12.3", - "type": "text" - } - ] - }, - { - "page_num": 277, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p277-b0", - "global_id": 1696, - "bbox": [ - 218.42, - 298.76, - 376.84, - 313.16 - ], - "text": "Figure 12.4 Spinning tops.", - "type": "text" - }, - { - "block_id": "p277-b1", - "global_id": 1697, - "bbox": [ - 72.0, - 329.67, - 511.57, - 410.32 - ], - "text": "When the open price and the close price are equal, they are called Doji\nlines. Doji candlesticks can have shadows of varying length. When referring\nto Doji candlesticks, there is some consideration as to whether the open and\nclose price must be exactly equal. This is a time when the prices must be\nalmost equal, especially when dealing with large price movements.", - "type": "text" - }, - { - "block_id": "p277-b2", - "global_id": 1698, - "bbox": [ - 72.0, - 412.49, - 517.88, - 526.27 - ], - "text": "There are different Doji candlesticks that are important. The Long-\nlegged Doji has long upper and lower shadows and reflects considerable\nindecision on the part of market participants. The Gravestone Doji has only a\nlong upper shadow and no lower shadow. The longer the upper shadow, the\nmore bearish the interpretation. The Dragonfly Doji is the opposite of the\nGravestone Doji, the lower shadow is long and there is no upper shadow. It is\nusually considered quite bullish. (See Figure 12.5.)", - "type": "text" - }, - { - "block_id": "p277-b3", - "global_id": 1699, - "bbox": [ - 209.65, - 648.7, - 385.61, - 663.17 - ], - "text": "Figure 12.5 Doji candlesticks.", - "type": "text" - }, - { - "block_id": "p277-b4", - "global_id": 1700, - "bbox": [ - 72.0, - 679.67, - 477.32, - 727.2 - ], - "text": "The single candlestick lines are essential to Japanese candlestick\nanalysis. You will find that all Japanese candle patterns are made from\ncombinations of these basic candlesticks.", - "type": "text" - } - ] - }, - { - "page_num": 278, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p278-b0", - "global_id": 1701, - "bbox": [ - 72.0, - 74.02, - 519.9, - 161.14 - ], - "text": "CANDLE PATTERN ANALYSIS\nA Japanese candle pattern is a psychological depiction of traders’ mentality at\nthe time. It vividly shows the actions of the traders as time unfolds in the\nmarket. The mere fact that humans react consistently during similar situations\nmakes candle pattern analysis work.", - "type": "text" - }, - { - "block_id": "p278-b1", - "global_id": 1702, - "bbox": [ - 72.0, - 163.31, - 520.28, - 343.35 - ], - "text": "A Japanese candle pattern can consist of a single candlestick line or be a\ncombination of multiple lines, normally never more than five. While most\ncandle patterns are used to determine reversal points in the market, there are a\nfew that are used to determine trend continuation. They are referred to as\nreversal and continuation patterns. Whenever a reversal pattern has bullish\nimplications, an inversely related pattern has bearish meaning. Similarly,\nwhenever a continuation pattern has bullish implications, an opposite pattern\ngives bearish meaning. When there is a pair of patterns that work in both\nbullish and bearish situations, they usually have the same name. In a few\ncases, however, the bullish pattern and its bearish counterpart have\ncompletely different names.", - "type": "text" - }, - { - "block_id": "p278-b2", - "global_id": 1703, - "bbox": [ - 72.0, - 367.03, - 153.79, - 377.83 - ], - "text": "Reversal Patterns", - "type": "text" - }, - { - "block_id": "p278-b3", - "global_id": 1704, - "bbox": [ - 72.0, - 385.84, - 522.47, - 499.62 - ], - "text": "A reversal candle pattern is a combination of Japanese candlesticks that\nnormally indicate a reversal of the trend. One serious consideration that must\nbe used to help identify patterns as being either bullish or bearish is the trend\nof the market preceding the pattern. You cannot have a bullish reversal pattern\nin an uptrend. You can have a series of candlesticks that resemble the bullish\npattern, but if the trend is up, it is not a bullish Japanese candle pattern.\nLikewise, you cannot have a bearish reversal candle pattern in a downtrend.", - "type": "text" - }, - { - "block_id": "p278-b4", - "global_id": 1705, - "bbox": [ - 72.0, - 501.79, - 523.12, - 615.57 - ], - "text": "This presents one of the age-old problems when analyzing markets:\nWhat is the trend? You must determine the trend, before you can utilize\nJapanese candle patterns effectively. While volumes have been written on the\nsubject of trend determination, the use of a moving average will work quite\nwell with Japanese candle patterns. Once the short term (ten periods or so)\ntrend has been determined, Japanese candle patterns will significantly assist in\nidentifying the reversal of that trend.", - "type": "text" - }, - { - "block_id": "p278-b5", - "global_id": 1706, - "bbox": [ - 72.0, - 617.74, - 501.54, - 698.39 - ], - "text": "Japanese literature consistently refers to approximately forty reversal\ncandle patterns. These vary from single candlestick lines to more complex\npatterns of up to five candlestick lines. There are many good references on\ncandlesticks, so only a few of the more popular patterns will be discussed\nhere.", - "type": "text" - }, - { - "block_id": "p278-b6", - "global_id": 1707, - "bbox": [ - 72.0, - 714.96, - 512.03, - 762.49 - ], - "text": "Dark Cloud Cover. This is a two day reversal pattern that only has bearish\nimplications. (See Figure 12.6.) This is also one of the times when the\npattern’s counterpart exists but has a different name (see Piercing Line). The", - "type": "text" - } - ] - }, - { - "page_num": 279, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p279-b0", - "global_id": 1708, - "bbox": [ - 72.0, - 73.64, - 505.83, - 204.35 - ], - "text": "first day of this pattern is a long white candlestick. This reflects the current\ntrend of the market and helps confirm the uptrend to traders. The next day\nopens above the high price of the previous day, again adding to the\nbullishness. However, trading for the rest of the day is lower with a close\nprice at least below the midpoint of the body of the first day. This is a\nsignificant blow to the bullish mentality and will force many to exit the\nmarket. Since the close price is below the open price on the second day, the\nbody is black. This is the dark cloud referred to in the name.", - "type": "text" - }, - { - "block_id": "p279-b1", - "global_id": 1709, - "bbox": [ - 72.0, - 220.2, - 516.77, - 333.98 - ], - "text": "Piercing Line. The opposite of the Dark Cloud Cover, the Piercing Line, has\nbullish implications. (See Figure 12.7.) The scenario is quite similar, but\nopposite. A downtrend is in place, the first candlestick is a long black day\nwhich solidifies traders’ confidence in the downtrend. The next day, prices\nopen at a new low and then trade higher all day and close above the midpoint\nof the first candlestick’s body. This offers a significant change to the\ndowntrend mentality and many will reverse or exit their positions.", - "type": "text" - }, - { - "block_id": "p279-b2", - "global_id": 1710, - "bbox": [ - 204.85, - 545.0, - 390.42, - 559.46 - ], - "text": "Figure 12.6 Dark cloud cover -.", - "type": "text" - }, - { - "block_id": "p279-b3", - "global_id": 1711, - "bbox": [ - 72.0, - 575.96, - 523.19, - 673.19 - ], - "text": "Evening Star and Morning Star. The Evening Star and its cousin, the Morning\nStar, are two powerful reversal candle patterns. These are both three day\npatterns that work exceptionally well. The scenario for understanding the\nchange in trader psychology for the Evening Star will be thoroughly discussed\nhere since the opposite can be said for the Morning Star. (See Figures 12.8\nand 12.9.)", - "type": "text" - } - ] - }, - { - "page_num": 280, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p280-b0", - "global_id": 1712, - "bbox": [ - 215.66, - 287.89, - 379.61, - 302.36 - ], - "text": "Figure 12.7 Piercing line +.", - "type": "text" - }, - { - "block_id": "p280-b1", - "global_id": 1713, - "bbox": [ - 218.64, - 539.96, - 376.63, - 554.42 - ], - "text": "Figure 12.8 Evening star -.", - "type": "text" - } - ] - }, - { - "page_num": 281, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p281-b0", - "global_id": 1714, - "bbox": [ - 214.56, - 294.37, - 380.7, - 308.84 - ], - "text": "Figure 12.9 Morning star +.", - "type": "text" - }, - { - "block_id": "p281-b1", - "global_id": 1715, - "bbox": [ - 72.0, - 325.35, - 522.75, - 488.82 - ], - "text": "The Evening Star is a bearish reversal candle pattern, as its name\nsuggests. The first day of this pattern is a long white candlestick which fully\nenforces the current uptrend. On the open of the second day, prices gap up\nabove the body of the first day. Trading on this second day is somewhat\nrestricted and the close price is near the open price while remaining above the\nbody of the first day. The body for the second day is small. This type of day\nfollowing a long day is referred to as a Star pattern. A Star is a small body day\nthat gaps away from a long body day. The third and last day of this pattern\nopens with a gap below the body of the star and closes lower with the close\nprice below the midpoint of the first day.", - "type": "text" - }, - { - "block_id": "p281-b2", - "global_id": 1716, - "bbox": [ - 72.0, - 490.99, - 523.26, - 621.34 - ], - "text": "The previous explanation was the perfect scenario. Many references will\naccept as valid, an Evening Star which does not meet each detail exactly. For\ninstance, the third day might not gap down or the close on the third day might\nnot be quite below the midpoint of the first day’s body. These details are\nsubjective when viewing a candlestick chart, but not when using a computer\nprogram to automatically identify the patterns. That is because computer\nprograms require explicit instructions to read the candle chart, and don’t allow\nfor subjective interpretation.", - "type": "text" - }, - { - "block_id": "p281-b3", - "global_id": 1717, - "bbox": [ - 72.0, - 645.02, - 174.76, - 655.81 - ], - "text": "Continuation Patterns", - "type": "text" - }, - { - "block_id": "p281-b4", - "global_id": 1718, - "bbox": [ - 72.0, - 663.83, - 520.79, - 761.05 - ], - "text": "Each trading day, a decision needs to be made, whether it is to exit a trade,\nenter a trade, or remain in a trade. A candle pattern that helps identify the fact\nthat the current trend is going to continue is more valuable than may first\nappear. It helps answer the question as to whether or not you should remain in\na trade. Japanese literature refers to 16 continuation candle patterns. One\ncontinuation pattern and its related opposite cousin are particularly good at", - "type": "text" - } - ] - }, - { - "page_num": 282, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p282-b0", - "global_id": 1719, - "bbox": [ - 72.0, - 73.64, - 512.36, - 187.07 - ], - "text": "trend continuation identification.\nRising and Falling Three Methods. The Rising Three Methods continuation\ncandle pattern is the bullish counterpart to this duo and will be the subject of\nthis scenario building. A bullish continuation pattern can only occur in an\nuptrend and a bearish continuation pattern can only occur in a downtrend.\nThis restates the required relationship to the trend that is so necessary in\ncandle pattern analysis. (See Figures 12.10 and 12.11.)", - "type": "text" - }, - { - "block_id": "p282-b1", - "global_id": 1720, - "bbox": [ - 185.86, - 380.8, - 409.4, - 395.26 - ], - "text": "Figure 12.10 Rising Three Methods +.", - "type": "text" - }, - { - "block_id": "p282-b2", - "global_id": 1721, - "bbox": [ - 185.93, - 588.93, - 409.34, - 603.39 - ], - "text": "Figure 12.11 Falling Three Methods -.", - "type": "text" - }, - { - "block_id": "p282-b3", - "global_id": 1722, - "bbox": [ - 72.0, - 619.9, - 522.76, - 766.81 - ], - "text": "The first day of the Rising Three Methods pattern is a long white day\nwhich fully supports the uptrending market. However, over the course of the\nnext three trading periods, small body days occur which, as a group, trend\ndownward. They all remain within the range of the first day’s long white body\nand at least two of these three small-bodied days have black bodies. This\nperiod of time when the market appears to have gone nowhere is considered\nby the Japanese as a “period of rest.” On the fifth day of this pattern, another\nlong white day develops which closes at a new high. Prices have finally\nbroken out of the short trading range and the uptrend will continue.", - "type": "text" - } - ] - }, - { - "page_num": 283, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p283-b0", - "global_id": 1723, - "bbox": [ - 72.0, - 73.28, - 522.7, - 236.76 - ], - "text": "A five day pattern such as the Rising Three Methods requires a lot of\ndetail in its definition. The above scenario is the perfect example of the Rising\nThree Methods pattern. Flexibility can be applied with some success and this\nonly comes with experience. For example, the three small reaction days could\nremain within the first day’s high-low range instead of the body’s range. The\nsmall reaction days do not always have to be predominantly black. And\nfinally, the concept of the “period of rest” could be expanded to include more\nthan three reaction days. Don’t ignore the Rising and Falling Three Methods\npattern; it can give you a feeling of comfort when worrying about protecting\nprofits in a trade.", - "type": "text" - }, - { - "block_id": "p283-b1", - "global_id": 1724, - "bbox": [ - 72.0, - 260.44, - 306.98, - 271.24 - ], - "text": "Using Computers for Candle Pattern Identification", - "type": "text" - }, - { - "block_id": "p283-b2", - "global_id": 1725, - "bbox": [ - 72.0, - 279.25, - 517.2, - 492.42 - ], - "text": "A personal computer with software designed to recognize candle patterns is a\ngreat way to remove emotion, especially during a trade. However, there are a\ncouple of things to keep in mind when viewing candlesticks on a computer\nscreen. A computer screen is made up of small light elements called pixels.\nThere are only so many pixels on your computer screen, with the amount\nbased upon the resolution of your video card/monitor combination. If you are\nviewing price data that has a large range of prices in a short period of time,\nyou may think that you are seeing many Doji days (open and close price are\nequal) when in fact, you are not. With a large range of prices on the screen,\neach pixel element will have a price range of its own. A computer software\nprogram that identifies patterns based on a mathematical relationship will\novercome this visual anomaly. Hopefully, the above explanation will keep\nyou from thinking that your software isn’t working.", - "type": "text" - }, - { - "block_id": "p283-b3", - "global_id": 1726, - "bbox": [ - 72.0, - 535.65, - 521.11, - 672.47 - ], - "text": "FILTERED CANDLE PATTERNS\nA revolutionary concept developed by Greg Morris in 1991, called candle\npattern filtering, provides a simple method to improve the overall reliability\nof candle patterns. While the short term trend of the market must be identified\nbefore a candle pattern can exist, determination of overbought and oversold\nmarkets using traditional technical analysis will enhance a candle pattern’s\npredictive ability. Concurrently, this technique helps eliminate bad or\npremature candle patterns.", - "type": "text" - }, - { - "block_id": "p283-b4", - "global_id": 1727, - "bbox": [ - 72.0, - 674.63, - 513.83, - 755.29 - ], - "text": "One must first grasp how a traditional technical indicator responds to\nprice data. In this example, Stochastics %D will be used. The stochastic\nindicator oscillates between 0 and 100, with 20 being oversold and 80 being\noverbought. The primary interpretation for this indicator is when %D rises\nabove 80 and then falls below 80, a sell signal has been generated. Similarly,", - "type": "text" - } - ] - }, - { - "page_num": 284, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p284-b0", - "global_id": 1728, - "bbox": [ - 72.0, - 73.17, - 504.05, - 104.25 - ], - "text": "when it drops below 20 and then rises above 20, a buy signal is given. (See\nChapter 10 for more on Stochastics.)", - "type": "text" - }, - { - "block_id": "p284-b1", - "global_id": 1729, - "bbox": [ - 72.0, - 106.41, - 521.95, - 187.07 - ], - "text": "Here is what we know about stochastics %D: When it enters the area\nabove 80 or below 20, it will eventually generate a signal. In other words, it is\njust a matter of time until a signal is given. The area above 80 and below 20 is\ncalled the presignal area and represents the area that %D must get to before it\ncan give a trading signal of its own. (See Figure 12.12.)", - "type": "text" - }, - { - "block_id": "p284-b2", - "global_id": 1730, - "bbox": [ - 259.4, - 474.48, - 335.87, - 488.88 - ], - "text": "Figure 12.12", - "type": "text" - }, - { - "block_id": "p284-b3", - "global_id": 1731, - "bbox": [ - 72.0, - 505.39, - 518.38, - 569.48 - ], - "text": "The filtered candle pattern concept uses this presignal area. Candle\npatterns are considered only when %D is in its presignal area. If a candle\npattern occurs when stochastics %D is at, say 65, the pattern is ignored. Also,\nonly reversal candle patterns are considered using this concept.", - "type": "text" - }, - { - "block_id": "p284-b4", - "global_id": 1732, - "bbox": [ - 72.0, - 571.65, - 521.49, - 652.3 - ], - "text": "Candle pattern filtering is not limited to using stochastics %D. Any\ntechnical oscillator that you might normally use for analysis can be used to\nfilter candle patterns. Wilder’s RSI, Lambert’s CCI, and Williams’ %R are a\nfew that will work equally as well. (These oscillators are explained in Chapter\n10.)", - "type": "text" - }, - { - "block_id": "p284-b5", - "global_id": 1733, - "bbox": [ - 72.0, - 696.25, - 518.37, - 766.81 - ], - "text": "CONCLUSION\nJapanese candlestick charting and candle pattern analysis are essential tools\nfor making market timing decisions. One should use Japanese candle patterns\nin the same manner as any other technical tool or technique; that is, to study", - "type": "text" - } - ] - }, - { - "page_num": 285, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p285-b0", - "global_id": 1734, - "bbox": [ - 72.0, - 73.53, - 522.47, - 153.94 - ], - "text": "the psychology of market participants. Once you become used to seeing your\nprice charts using candlesticks, you may not want to use bar charts again.\nJapanese candle patterns, used in conjunction with other technical indicators\nin the filtering concept, will almost always offer a trading signal prior to using\nother price-based indicators.", - "type": "text" - }, - { - "block_id": "p285-b1", - "global_id": 1735, - "bbox": [ - 217.71, - 184.06, - 377.56, - 200.61 - ], - "text": "CANDLE PATTERNS", - "type": "text" - }, - { - "block_id": "p285-b2", - "global_id": 1736, - "bbox": [ - 84.96, - 211.56, - 509.31, - 292.21 - ], - "text": "The candle patterns listed below comprise the library that is used to\nidentify candlestick signals. The number in parentheses at the end of each\nname represents the number of candles that are used to define that\nparticular pattern. The bullish and bearish patterns are divided into two\ngroups signifying either reversal or continuation patterns.", - "type": "text" - }, - { - "block_id": "p285-b3", - "global_id": 1737, - "bbox": [ - 87.11, - 303.8, - 451.82, - 765.37 - ], - "text": "Bullish Reversals\nBearish Reversals\nLong White Body (1)\nLong Black Body (1)\nHammer (1)\nHanging Man (1)\nInverted Hammer (1)\nShooting Star (1)\nBelt Hold (1)\nBelt Hold (1)\nEngulfing Pattern (2)\nEngulfing Pattern (2)\nHarami (2)\nHarami (2)\nHarami Cross (2)\nHarami Cross (2)\nPiercing Line (2)\nDark Cloud Cover (2)\nDoji Star (2)\nDoji Star (2)\nMeeting Lines (2)\nMeeting Lines (2)\nThree White Soldiers (3)\nThree Black Crows (3)\nMorning Star (3)\nEvening Star (3)\nMorning Doji Star (3)\nEvening Doji Star (3)\nAbandoned Baby (3)\nAbandoned Baby (3)\nTri-Star (3)\nTri-Star (3)\nBreakaway (5)\nBreakaway (5)\nThree Inside Up (3)\nThree Inside Down (3)\nThree Outside Up (3)\nThree Outside Down (3)\nKicking (2)\nKicking (2)\nUnique Three Rivers Bottom (3)\nLatter Top (5)\nThree Stars in the South (3)\nMatching High (2)\nConcealing Swallow (4)\nUpside Gap Two Crows (3)\nStick Sandwich (3)\nIdentical Three Crows (3)", - "type": "text" - } - ] - }, - { - "page_num": 286, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p286-b0", - "global_id": 1738, - "bbox": [ - 87.11, - 73.28, - 402.45, - 126.57 - ], - "text": "Homing Pigeon (2)\nDeliberation (3)\nLadder Bottom (5)\nAdvance Block (3)\nMatching Low (2)\nTwo Crows (3)", - "type": "text" - }, - { - "block_id": "p286-b1", - "global_id": 1739, - "bbox": [ - 87.11, - 138.16, - 490.38, - 308.06 - ], - "text": "Bullish Continuation\nBearish Continuation\nSeparating Lines (2)\nSeparating Lines (2)\nRising Three Methods (5)\nFalling Three Methods (5)\nUpside Tasuki Gap (3)\nDownside Tasuki Gap (3)\nSide by Side White Lines (3)\nSide by Side White Lines (3)\nThree Line Strike (4)\nThree Line Strike (4)\nUpside Gap Three Methods (3)\nDownside Gap Three Methods (3)\nOn Neck Line (2)\nOn Neck Line (2)\nIn Neck Line (2)\nIn Neck Line (2)", - "type": "text" - } - ] - }, - { - "page_num": 287, - "width": 595.28, - "height": 841.89, - "blocks": [] - }, - { - "page_num": 288, - "width": 595.28, - "height": 841.89, - "blocks": [] - }, - { - "page_num": 289, - "width": 595.28, - "height": 841.89, - "blocks": [] - }, - { - "page_num": 290, - "width": 595.28, - "height": 841.89, - "blocks": [] - }, - { - "page_num": 291, - "width": 595.28, - "height": 841.89, - "blocks": [] - }, - { - "page_num": 292, - "width": 595.28, - "height": 841.89, - "blocks": [] - }, - { - "page_num": 293, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p293-b0", - "global_id": 1740, - "bbox": [ - 100.79, - 754.57, - 406.5, - 768.97 - ], - "text": "*This chapter was contributed by Gregory L. Morris.", - "type": "text" - } - ] - }, - { - "page_num": 294, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p294-b0", - "global_id": 1741, - "bbox": [ - 72.0, - 310.24, - 520.84, - 413.92 - ], - "text": "HISTORICAL BACKGROUND\nIn 1938, a monograph entitled The Wave Principle was the first published\nreference to what has come to be known as the Elliott Wave Principle. The\nmonograph was published by Charles J. Collins and was based on the original\nwork presented to him by the founder of the Wave Principle, Ralph Nelson\n(R.N.) Elliott.", - "type": "text" - }, - { - "block_id": "p294-b1", - "global_id": 1742, - "bbox": [ - 72.0, - 416.09, - 522.25, - 513.31 - ], - "text": "Elliott was very much influenced by the Dow Theory, which has much in\ncommon with the Wave Principle. In a 1934 letter to Collins, Elliott\nmentioned that he had been a subscriber to Robert Rhea’s stock market\nservice and was familiar with Rhea’s book on Dow Theory. Elliott goes on to\nsay that the Wave Principle was “a much needed complement to the Dow\nTheory.”", - "type": "text" - }, - { - "block_id": "p294-b2", - "global_id": 1743, - "bbox": [ - 72.0, - 515.47, - 519.58, - 546.44 - ], - "text": "In 1946, just two years before his death, Elliott wrote his definitive work\non the Wave Principle, Nature’s Law—The Secret of the Universe.", - "type": "text" - }, - { - "block_id": "p294-b3", - "global_id": 1744, - "bbox": [ - 72.0, - 548.6, - 519.63, - 678.95 - ], - "text": "Elliott’s ideas might have faded from memory if A. Hamilton Bolton\nhadn’t decided in 1953 to publish the Elliott Wave Supplement to the Bank\nCredit Analyst, which he did annually for 14 years, until his death in 1967.\nA.J. Frost took over the Elliott Supplements and collaborated with Robert\nPrechter in 1978 on the Elliott Wave Principle. Most of the diagrams in this\nchapter are taken from Frost and Prechter’s book. Prechter went a step further\nand in 1980 published The Major Works of R.N. Elliott, making available the\noriginal Elliott writings that had long been out of print.", - "type": "text" - }, - { - "block_id": "p294-b4", - "global_id": 1745, - "bbox": [ - 72.0, - 722.9, - 456.24, - 766.83 - ], - "text": "BASIC TENETS OF THE ELLIOTT WAVE\nPRINCIPLE", - "type": "text" - } - ] - }, - { - "page_num": 295, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p295-b0", - "global_id": 1746, - "bbox": [ - 72.0, - 73.28, - 515.54, - 187.07 - ], - "text": "There are three important aspects of wave theory—pattern, ratio, and time—\nin that order of importance. Pattern refers to the wave patterns or formations\nthat comprise the most important element of the theory. Ratio analysis is\nuseful in determining retracement points and price objectives by measuring\nthe relationships between the different waves. Finally, time relationships also\nexist and can be used to confirm the wave patterns and ratios, but are\nconsidered by some Elliotticians to be less reliable in market forecasting.", - "type": "text" - }, - { - "block_id": "p295-b1", - "global_id": 1747, - "bbox": [ - 72.0, - 189.23, - 519.47, - 385.84 - ], - "text": "Elliott Wave Theory was originally applied to the major stock market\naverages, particularly the Dow Jones Industrial Average. In its most basic\nform, the theory says that the stock market follows a repetitive rhythm of a\nfive wave advance followed by a three wave decline. Figure 13.1 shows one\ncomplete cycle. If you count the waves, you will find that one complete cycle\nhas eight waves—five up and three down. In the advancing portion of the\ncycle, notice that each of the five waves are numbered. Waves 1, 3, and 5—\ncalled impulse waves—are rising waves, while waves 2 and 4 move against\nthe uptrend. Waves 2 and 4 are called corrective waves because they correct\nwaves 1 and 3. After the five wave numbered advance has been completed, a\nthree wave correction begins. The three corrective waves are identified by the\nletters a, b, c.", - "type": "text" - }, - { - "block_id": "p295-b2", - "global_id": 1748, - "bbox": [ - 72.0, - 388.0, - 523.22, - 485.22 - ], - "text": "Along with the constant form of the various waves, there is the important\nconsideration of degree. There are many different degrees of trend. Elliott, in\nfact, categorized nine different degrees of trend (or magnitude) ranging from a\nGrand Supercycle spanning two hundred years to a subminuette degree\ncovering only a few hours. The point to remember is that the basic eight wave\ncycle remains constant no matter what degree of trend is being studied.", - "type": "text" - } - ] - }, - { - "page_num": 296, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p296-b0", - "global_id": 1749, - "bbox": [ - 74.7, - 352.71, - 520.57, - 367.17 - ], - "text": "Figure 13.1 The Basic Pattern. (A.J. Frost and Robert Prechter, Elliott Wave", - "type": "text" - }, - { - "block_id": "p296-b1", - "global_id": 1750, - "bbox": [ - 76.15, - 369.27, - 519.14, - 383.68 - ], - "text": "Principle [Gainesville, GA: New Classics Library, 1978], p. 20. Copyright ©", - "type": "text" - }, - { - "block_id": "p296-b2", - "global_id": 1751, - "bbox": [ - 214.83, - 385.84, - 380.44, - 400.24 - ], - "text": "1978 by Frost and Prechter.)", - "type": "text" - }, - { - "block_id": "p296-b3", - "global_id": 1752, - "bbox": [ - 72.0, - 416.81, - 520.11, - 563.72 - ], - "text": "Each wave subdivides into waves of one lesser degree that, in turn, can\nalso be subdivided into waves of even lesser degree. It also follows then that\neach wave is itself part of the wave of the next higher degree. Figure 13.2\ndemonstrates these relationships. The largest two waves—1 and 2—can be\nsubdivided into eight lesser waves that, in turn, can be subdivided into 34\neven lesser waves. The two largest waves—1 and 2—are only the first two\nwaves in an even larger five wave advance. Wave 3 of that next higher degree\nis about to begin. The 34 waves in Figure 13.2 are subdivided further to the\nnext smaller degree in Figure 13.3, resulting in 144 waves.", - "type": "text" - } - ] - }, - { - "page_num": 297, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p297-b0", - "global_id": 1753, - "bbox": [ - 92.44, - 362.07, - 502.83, - 376.54 - ], - "text": "Figure 13.2 (Frost and Prechter, p. 21. Copyright © 1978 by Frost and", - "type": "text" - }, - { - "block_id": "p297-b1", - "global_id": 1754, - "bbox": [ - 269.33, - 378.64, - 325.94, - 393.03 - ], - "text": "Prechter.)", - "type": "text" - }, - { - "block_id": "p297-b2", - "global_id": 1755, - "bbox": [ - 72.0, - 409.61, - 522.69, - 655.9 - ], - "text": "The numbers shown so far 1,2,3,5,8,13,21,34,55,89,144—are not just\nrandom numbers. They are part of the Fibonacci number sequence, which\nforms the mathematical basis for the Elliott Wave Theory. We’ll come back to\nthem a little later. For now, look at Figures 13.1-13.3 and notice a very\nsignificant characteristic of the waves. Whether a given wave divides into five\nwaves or three waves is determined by the direction of the next larger wave.\nFor example, in Figure 13.2, waves (1), (3), and (5) subdivide into five waves\nbecause the next larger wave of which they are part—wave 1—is an\nadvancing wave. Because waves (2) and (4) are moving against the trend,\nthey subdivide into only three waves. Look more closely at corrective waves\n(a), (b), and (c), which comprise the larger corrective wave 2. Notice that the\ntwo declining waves—(a) and (c)—each break down into five waves. This is\nbecause they are moving in the same direction as the next larger wave 2.\nWave (b) by contrast only has three waves, because it is moving against the\nnext larger wave 2.", - "type": "text" - } - ] - }, - { - "page_num": 298, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p298-b0", - "global_id": 1756, - "bbox": [ - 92.44, - 342.63, - 502.83, - 357.09 - ], - "text": "Figure 13.3 (Frost and Prechter, p. 22. Copyright © 1978 by Frost and", - "type": "text" - }, - { - "block_id": "p298-b1", - "global_id": 1757, - "bbox": [ - 269.33, - 359.19, - 325.94, - 373.59 - ], - "text": "Prechter.)", - "type": "text" - }, - { - "block_id": "p298-b2", - "global_id": 1758, - "bbox": [ - 72.0, - 390.16, - 521.52, - 586.77 - ], - "text": "Being able to determine between threes and fives is obviously of\ntremendous importance in the application of this approach. That information\ntells the analyst what to expect next. A completed five wave move, for\nexample, usually means that only part of a larger wave has been completed\nand that there’s more to come (unless it’s a fifth of a fifth). One of the most\nimportant rules to remember is that a correction can never take place in five\nwaves. In a bull market, for example, if a five wave decline is seen, this\nmeans that it is probably only the first wave of a three wave (a-b-c) decline\nand that there’s more to come on the downside. In a bear market, a three wave\nadvance should be followed by resumption of the downtrend. A five wave\nrally would warn of a more substantial move to the upside and might possibly\neven be the first wave of a new bull trend.", - "type": "text" - }, - { - "block_id": "p298-b3", - "global_id": 1759, - "bbox": [ - 72.0, - 630.72, - 521.39, - 758.17 - ], - "text": "CONNECTION BETWEEN ELLIOTT WAVE\nAND DOW THEORY\nLet’s take a moment here to point out the obvious connection between\nElliott’s idea of five advancing waves and Dow’s three advancing phases of a\nbull market. It seems clear that Elliott’s idea of three up waves, with two\nintervening corrections, fits nicely with the Dow Theory. While Elliott was no\ndoubt influenced by Dow’s analysis, it also seems clear that Elliott believed", - "type": "text" - } - ] - }, - { - "page_num": 299, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p299-b0", - "global_id": 1760, - "bbox": [ - 72.0, - 73.53, - 522.75, - 153.94 - ], - "text": "he had gone well beyond Dow’s theory and had in fact improved on it. It’s\nalso interesting to note the influence of the sea on both men in the formulation\nof their theories. Dow compared the major, intermediate, and minor trends in\nthe market with the tides, waves, and ripples on the ocean. Elliott referred to\n“ebbs and flows” in his writing and named his theory the “wave” principle.", - "type": "text" - }, - { - "block_id": "p299-b1", - "global_id": 1761, - "bbox": [ - 72.0, - 197.89, - 522.77, - 334.7 - ], - "text": "CORRECTIVE WAVES\nSo far, we’ve talked mainly about the impulse waves in the direction of the\nmajor trend. Let’s turn our attention now to the corrective waves. In general,\ncorrective waves are less clearly defined and, as a result, tend to be more\ndifficult to identify and predict. One point that is clearly defined, however, is\nthat corrective waves can never take place in five waves. Corrective waves\nare threes, never fives (with the exception of triangles). We’re going to look at\nthree classifications of corrective waves—zig-zags, flats, and triangles.", - "type": "text" - }, - { - "block_id": "p299-b2", - "global_id": 1762, - "bbox": [ - 72.0, - 358.38, - 518.04, - 457.13 - ], - "text": "Zig-Zags\nA zig-zag is a three wave corrective pattern, against the major trend, which\nbreaks down into a 5-3-5 sequence. Figures 13.4 and 13.5 show a bull market\nzig-zag correction, while a bear market rally is shown in Figures 13.6 and\n13.7. Notice that the middle wave B falls short of the beginning of wave A\nand that wave C moves well beyond the end of wave A.", - "type": "text" - }, - { - "block_id": "p299-b3", - "global_id": 1763, - "bbox": [ - 72.0, - 459.3, - 523.25, - 523.39 - ], - "text": "A less common variation of the zig-zag is the double zigzag shown in\nFigure 13.8. This variation sometimes occurs in larger corrective patterns. It is\nin effect two different 5-3-5 zig-zag patterns connected by an intervening a-b-\nc pattern.", - "type": "text" - }, - { - "block_id": "p299-b4", - "global_id": 1764, - "bbox": [ - 99.87, - 731.52, - 495.4, - 745.99 - ], - "text": "Figure 13.4 Bull Market Zig-Zag (5-3-5). (Frost and Prechter, p. 36.", - "type": "text" - }, - { - "block_id": "p299-b5", - "global_id": 1765, - "bbox": [ - 176.59, - 748.09, - 418.68, - 762.49 - ], - "text": "Copyright © 1978 by Frost and Prechter.)", - "type": "text" - } - ] - }, - { - "page_num": 300, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p300-b0", - "global_id": 1766, - "bbox": [ - 99.87, - 265.57, - 495.4, - 280.03 - ], - "text": "Figure 13.5 Bull Market Zig-Zag (5-3-5). (Frost and Prechter, p. 36.", - "type": "text" - }, - { - "block_id": "p300-b1", - "global_id": 1767, - "bbox": [ - 176.59, - 282.13, - 418.68, - 296.53 - ], - "text": "Copyright © 1978 by Frost and Prechter.)", - "type": "text" - }, - { - "block_id": "p300-b2", - "global_id": 1768, - "bbox": [ - 98.46, - 507.55, - 496.8, - 522.01 - ], - "text": "Figure 13.6 Bear Market Zig-Zag (5-3 5). (Frost and Prechter, p. 36.", - "type": "text" - }, - { - "block_id": "p300-b3", - "global_id": 1769, - "bbox": [ - 176.59, - 524.11, - 418.68, - 538.51 - ], - "text": "Copyright © 1978 by Frost and Prechter.)", - "type": "text" - }, - { - "block_id": "p300-b4", - "global_id": 1770, - "bbox": [ - 99.67, - 749.53, - 495.6, - 763.99 - ], - "text": "Figure 13.7 Bear Market Zig-Zag (5-3-5). (Frost and Prechter, p. 36", - "type": "text" - } - ] - }, - { - "page_num": 301, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p301-b0", - "global_id": 1771, - "bbox": [ - 176.59, - 73.28, - 418.68, - 87.68 - ], - "text": "Copyright © 1978 by Frost and Prechter.)", - "type": "text" - }, - { - "block_id": "p301-b1", - "global_id": 1772, - "bbox": [ - 72.39, - 333.98, - 522.87, - 348.45 - ], - "text": "Figure 13.8 Double Zig-Zag. (Frost and Prechter, p. 37. Copyright © 1978 by", - "type": "text" - }, - { - "block_id": "p301-b2", - "global_id": 1773, - "bbox": [ - 239.62, - 350.55, - 355.66, - 364.95 - ], - "text": "Frost and Prechter.)", - "type": "text" - }, - { - "block_id": "p301-b3", - "global_id": 1774, - "bbox": [ - 72.0, - 388.63, - 94.77, - 399.43 - ], - "text": "Flats", - "type": "text" - }, - { - "block_id": "p301-b4", - "global_id": 1775, - "bbox": [ - 72.0, - 407.45, - 523.18, - 537.79 - ], - "text": "What distinguishes the flat correction from the zig-zag correction is that the\nflat follows a 3-3-5 pattern. Notice in Figures 13.10 and 13.12 that the A wave\nis a 3 instead of a 5. In general, the flat is more of a consolidation than a\ncorrection and is considered a sign of strength in a bull market. Figures 13.9-\n13.12 show examples of normal flats. In a bull market, for example, wave B\nrallies all the way to the top of wave A, showing greater market strength. The\nfinal wave C terminates at or just below the bottom of wave A in contrast to a\nzig-zag, which moves well under that point.", - "type": "text" - }, - { - "block_id": "p301-b5", - "global_id": 1776, - "bbox": [ - 72.0, - 539.96, - 523.08, - 604.05 - ], - "text": "There are two “irregular” variations of the normal flat correction. Figures\n13.13-13.16 show the first type of variation. Notice in the bull market\nexample (Figures 13.13 and 13.14) that the top of wave B exceeds the top of\nA and that wave C violates the bottom of A.", - "type": "text" - }, - { - "block_id": "p301-b6", - "global_id": 1777, - "bbox": [ - 72.0, - 606.22, - 517.99, - 670.31 - ], - "text": "Another variation occurs when wave B reaches the top of A, but wave C\nfails to reach the bottom of A. Naturally, this last pattern denotes greater\nmarket strength in a bull market. This variation is shown in Figures 13.17-\n13.20 for bull and bear markets.", - "type": "text" - } - ] - }, - { - "page_num": 302, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p302-b0", - "global_id": 1778, - "bbox": [ - 98.08, - 218.04, - 497.2, - 232.5 - ], - "text": "Figure 13.9 Bull Market Flat (3-3-5), Normal Correction. (Frost and", - "type": "text" - }, - { - "block_id": "p302-b1", - "global_id": 1779, - "bbox": [ - 130.89, - 234.6, - 464.38, - 249.0 - ], - "text": "Prechter, p. 38. Copyright © 1978 by Frost and Prechter.)", - "type": "text" - }, - { - "block_id": "p302-b2", - "global_id": 1780, - "bbox": [ - 94.48, - 409.6, - 500.79, - 424.07 - ], - "text": "Figure 13.10 Bull Market Flat (3-3-5), Normal Correction. (Frost and", - "type": "text" - }, - { - "block_id": "p302-b3", - "global_id": 1781, - "bbox": [ - 130.89, - 426.17, - 464.38, - 440.57 - ], - "text": "Prechter, p. 38. Copyright © 1978 by Frost and Prechter.)", - "type": "text" - }, - { - "block_id": "p302-b4", - "global_id": 1782, - "bbox": [ - 92.87, - 604.05, - 502.39, - 618.52 - ], - "text": "Figure 13.11 Bear Market Flat (3-3-5), Normal Correction. (Frost and", - "type": "text" - }, - { - "block_id": "p302-b5", - "global_id": 1783, - "bbox": [ - 130.89, - 620.62, - 464.38, - 635.01 - ], - "text": "Prechter, p. 38. Copyright © 1978 by Frost and Prechter.)", - "type": "text" - } - ] - }, - { - "page_num": 303, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p303-b0", - "global_id": 1784, - "bbox": [ - 92.48, - 220.92, - 502.8, - 235.38 - ], - "text": "Figure 13.12 Bear Market Flat (3-3-5), Normal Correction. (Frost and", - "type": "text" - }, - { - "block_id": "p303-b1", - "global_id": 1785, - "bbox": [ - 130.89, - 237.48, - 464.38, - 251.88 - ], - "text": "Prechter, p. 38. Copyright © 1978 by Frost and Prechter.)", - "type": "text" - }, - { - "block_id": "p303-b2", - "global_id": 1786, - "bbox": [ - 89.95, - 487.38, - 505.33, - 501.85 - ], - "text": "Figure 13.13 Bull Market Flat (3-3-5), Irregular Correction. (Frost and", - "type": "text" - }, - { - "block_id": "p303-b3", - "global_id": 1787, - "bbox": [ - 132.69, - 503.95, - 462.58, - 518.35 - ], - "text": "Prechter,p. 39. Copyright © 1978 by Frost and Prechter.)", - "type": "text" - }, - { - "block_id": "p303-b4", - "global_id": 1788, - "bbox": [ - 89.95, - 753.85, - 505.33, - 768.31 - ], - "text": "Figure 13.14 Bull Market Flat (3-3-5), Irregular Correction. (Frost and", - "type": "text" - } - ] - }, - { - "page_num": 304, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p304-b0", - "global_id": 1789, - "bbox": [ - 130.9, - 73.28, - 464.38, - 87.68 - ], - "text": "Prechter, p. 39. Copyright © 1918 by Frost and Prechter.)", - "type": "text" - }, - { - "block_id": "p304-b1", - "global_id": 1790, - "bbox": [ - 87.95, - 324.62, - 507.33, - 339.09 - ], - "text": "Figure 13.15 Bear Market Flat (3-3-5), Irregular Correction. (Frost and", - "type": "text" - }, - { - "block_id": "p304-b2", - "global_id": 1791, - "bbox": [ - 130.9, - 341.19, - 464.38, - 355.59 - ], - "text": "Prechter, p. 39. Copyright © 1978 by Frost and Prechter.)", - "type": "text" - }, - { - "block_id": "p304-b3", - "global_id": 1792, - "bbox": [ - 87.95, - 592.53, - 507.33, - 606.99 - ], - "text": "Figure 13.16 Bear Market Flat (3-3-5), Irregular Correction. (Frost and", - "type": "text" - }, - { - "block_id": "p304-b4", - "global_id": 1793, - "bbox": [ - 130.9, - 609.09, - 464.38, - 623.49 - ], - "text": "Prechter, p. 39. Copyright © 1978 by Frost and Prechter.)", - "type": "text" - } - ] - }, - { - "page_num": 305, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p305-b0", - "global_id": 1794, - "bbox": [ - 76.77, - 73.28, - 518.51, - 87.74 - ], - "text": "Figure 13.17 Bull Market Flat (3-3-5), Inverted Irregular Correction. (Frost", - "type": "text" - }, - { - "block_id": "p305-b1", - "global_id": 1795, - "bbox": [ - 118.3, - 89.84, - 476.98, - 104.24 - ], - "text": "and Prechter, p. 40. Copyright © 1978 by Frost and Prechter.)", - "type": "text" - }, - { - "block_id": "p305-b2", - "global_id": 1796, - "bbox": [ - 79.16, - 259.81, - 516.11, - 274.27 - ], - "text": "Figure 13.18 Bull Market flat (3-3-5), Inverted Irregular Correction. (Frost", - "type": "text" - }, - { - "block_id": "p305-b3", - "global_id": 1797, - "bbox": [ - 118.3, - 276.37, - 476.98, - 290.77 - ], - "text": "and Prechter, p. 40. Copyright © 1978 by Frost and Prechter.)", - "type": "text" - }, - { - "block_id": "p305-b4", - "global_id": 1798, - "bbox": [ - 76.57, - 443.45, - 518.71, - 457.92 - ], - "text": "Figure 13.19 Bear Market Flat (3-3-5), Inverted Irregular Correction (Frost", - "type": "text" - }, - { - "block_id": "p305-b5", - "global_id": 1799, - "bbox": [ - 118.3, - 460.02, - 476.98, - 474.41 - ], - "text": "and Prechter, p. 40. Copyright © 1978 by Frost and Prechter.)", - "type": "text" - }, - { - "block_id": "p305-b6", - "global_id": 1800, - "bbox": [ - 74.77, - 627.1, - 520.51, - 641.56 - ], - "text": "Figure 13.20 Bear Market Flat (3-3-5), Inverted Irregular Correction. (Frost", - "type": "text" - }, - { - "block_id": "p305-b7", - "global_id": 1801, - "bbox": [ - 118.3, - 643.66, - 476.98, - 658.06 - ], - "text": "and Prechter, p. 40. Copyright © 1978 by Frost and Prechter.)", - "type": "text" - }, - { - "block_id": "p305-b8", - "global_id": 1802, - "bbox": [ - 72.0, - 681.74, - 114.95, - 692.54 - ], - "text": "Triangles", - "type": "text" - }, - { - "block_id": "p305-b9", - "global_id": 1803, - "bbox": [ - 72.0, - 700.56, - 517.96, - 764.65 - ], - "text": "Triangles usually occur in the fourth wave and precede the final move in the\ndirection of the major trend. (They can also appear in the b wave of an a-b-c\ncorrection.) In an uptrend, therefore, it can be said that triangles are both\nbullish and bearish. They’re bullish in the sense that they indicate resumption", - "type": "text" - } - ] - }, - { - "page_num": 306, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p306-b0", - "global_id": 1804, - "bbox": [ - 72.0, - 73.64, - 516.7, - 104.97 - ], - "text": "of the uptrend. They’re bearish because they also indicate that after one more\nwave up, prices will probably peak. (See Figure 13.21.)", - "type": "text" - }, - { - "block_id": "p306-b1", - "global_id": 1805, - "bbox": [ - 74.42, - 577.4, - 520.86, - 591.87 - ], - "text": "Figure 13.21 Corrective Wave (Horizontal) Triangles. (Frost and Prechter, p.", - "type": "text" - }, - { - "block_id": "p306-b2", - "global_id": 1806, - "bbox": [ - 165.79, - 593.97, - 429.48, - 608.37 - ], - "text": "43. Copyright © 1978 by Frost and Prechter.)", - "type": "text" - }, - { - "block_id": "p306-b3", - "global_id": 1807, - "bbox": [ - 72.0, - 624.94, - 514.75, - 755.29 - ], - "text": "Elliott’s interpretation of the triangle parallels the classical use of the\npattern, but with his usual added precision. Remember from Chapter 6 that\nthe triangle is usually a continuation pattern, which is exactly what Elliott\nsaid. Elliott’s triangle is a sideways consolidation pattern that breaks down\ninto five waves, each wave in turn having three waves of its own. Elliott also\nclassifies four different kinds of triangles—ascending, descending,\nsymmetrical, and expanding—all of which were seen in Chapter 6. Figure\n13.21 shows the four varieties in both uptrends and downtrends.", - "type": "text" - } - ] - }, - { - "page_num": 307, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p307-b0", - "global_id": 1808, - "bbox": [ - 72.0, - 73.28, - 522.16, - 203.63 - ], - "text": "Because chart patterns in commodity futures contracts sometimes don’t\nform as fully as they do in the stock market, it is not unusual for triangles in\nthe futures markets to have only three waves instead of five. (Remember,\nhowever, that the minimum requirement for a triangle is still four points—two\nupper and two lower—to allow the drawing of two converging trendlines.)\nElliott Wave Theory also holds that the fifth and last wave within the triangle\nsometimes breaks its trendline, giving a false signal, before beginning its\n“thrust” in the original direction.", - "type": "text" - }, - { - "block_id": "p307-b1", - "global_id": 1809, - "bbox": [ - 72.0, - 205.8, - 519.89, - 319.58 - ], - "text": "Elliott’s measurement for the fifth and final wave after completion of the\ntriangle is essentially the same as in classical charting—that is, the market is\nexpected to move the distance that matches the widest part of the triangle (its\nheight). There is another point worth noting here concerning the timing of the\nfinal top or bottom. According to Prechter, the apex of the triangle (the point\nwhere the two converging trendlines meet) often marks the timing for the\ncompletion of the final fifth wave.", - "type": "text" - }, - { - "block_id": "p307-b2", - "global_id": 1810, - "bbox": [ - 72.0, - 363.53, - 522.35, - 550.04 - ], - "text": "THE RULE OF ALTERNATION\nIn its more general application, this rule or principle holds that the market\nusually doesn’t act the same way two times in a row. If a certain type of top or\nbottom occurred the last time around, it will probably not do so again this\ntime. The rule of alternation doesn’t tell us exactly what will happen, but tells\nus what probably won’t. In its more specific application, it is most generally\nused to tell us what type of corrective pattern to expect. Corrective patterns\ntend to alternate. In other words, if corrective wave 2 was a simple a-b-c\npattern, wave 4 will probably be a complex pattern, such as a triangle.\nConversely, if wave 2 is complex, wave 4 will probably be simple. Figure\n13.22 gives some examples.", - "type": "text" - } - ] - }, - { - "page_num": 308, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p308-b0", - "global_id": 1811, - "bbox": [ - 72.02, - 73.28, - 523.26, - 87.74 - ], - "text": "Figure 13.22 The Rule of Alternation. (Frost and Prechter, p. 50. Copyright ©", - "type": "text" - }, - { - "block_id": "p308-b1", - "global_id": 1812, - "bbox": [ - 214.83, - 89.84, - 380.44, - 104.24 - ], - "text": "1978 by Frost and Prechter.)", - "type": "text" - }, - { - "block_id": "p308-b2", - "global_id": 1813, - "bbox": [ - 72.0, - 148.2, - 517.19, - 301.58 - ], - "text": "CHANNELING\nAnother important aspect of wave theory is the use of price channels. You’ll\nrecall that we covered trend channeling in Chapter 4. Elliott used price\nchannels as a method of arriving at price objectives and also to help confirm\nthe completion of wave counts. Once an uptrend has been established, an\ninitial trend channel is constructed by drawing a basic up trendline along the\nbottoms of waves 1 and 2. A parallel channel line is then drawn over the top\nof wave 1 as shown in Figure 13.23. The entire uptrend will often stay within\nthose two boundaries.", - "type": "text" - }, - { - "block_id": "p308-b3", - "global_id": 1814, - "bbox": [ - 72.0, - 303.74, - 518.81, - 450.65 - ], - "text": "If wave 3 begins to accelerate to the point that it exceeds the upper\nchannel line, the lines have to be redrawn along the top of wave 1 and the\nbottom of wave 2 as shown in Figure 13.23. The final channel is drawn under\nthe two corrective waves—2 and 4—and usually above the top of wave 3 as\nshown in Figure 13.24. If wave 3 is unusually strong, or an extended wave,\nthe upper line may have to be drawn over the top of wave 1. The fifth wave\nshould come close to the upper channel line before terminating. For the\ndrawing of channel lines on long term trends, it’s recommended that semilog\ncharts be employed along with arithmetic charts.", - "type": "text" - }, - { - "block_id": "p308-b4", - "global_id": 1815, - "bbox": [ - 72.8, - 682.55, - 522.49, - 697.02 - ], - "text": "Figure 13.23 Old and New Channels. (Frost and Prechter, p. 62. Copyright ©", - "type": "text" - }, - { - "block_id": "p308-b5", - "global_id": 1816, - "bbox": [ - 214.83, - 699.12, - 380.44, - 713.51 - ], - "text": "1978 by Frost and Prechter.)", - "type": "text" - } - ] - }, - { - "page_num": 309, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p309-b0", - "global_id": 1817, - "bbox": [ - 73.2, - 347.67, - 522.08, - 362.13 - ], - "text": "Figure 13.24 Final Channel. (Frost and Prechter, p. 63. Copyright © 1978 by", - "type": "text" - }, - { - "block_id": "p309-b1", - "global_id": 1818, - "bbox": [ - 239.62, - 364.23, - 355.66, - 378.63 - ], - "text": "Frost and Prechter.)", - "type": "text" - }, - { - "block_id": "p309-b2", - "global_id": 1819, - "bbox": [ - 72.0, - 422.59, - 521.57, - 592.53 - ], - "text": "WAVE 4 AS A SUPPORT AREA\nIn concluding our discussion of wave formations and guidelines, one\nimportant point remains to be mentioned, and that is the significance of wave\n4 as a support area in subsequent bear markets. Once five up waves have been\ncompleted and a bear trend has begun, that bear market will usually not move\nbelow the previous fourth wave of one lesser degree; that is, the last fourth\nwave that was formed during the previous bull advance. There are exceptions\nto that rule, but usually the bottom of the fourth wave contains the bear\nmarket. This piece of information can prove very useful in arriving at a\nmaximum downside price objective.", - "type": "text" - }, - { - "block_id": "p309-b3", - "global_id": 1820, - "bbox": [ - 72.0, - 635.76, - 514.56, - 763.21 - ], - "text": "FIBONACCI NUMBERS AS THE BASIS OF THE\nWAVE PRINCIPLE\nElliott stated in Nature’s Law that the mathematical basis for his Wave\nPrinciple was a number sequence discovered by Leonardo Fibonacci in the\nthirteenth century. That number sequence has become identified with its\ndiscoverer and is commonly referred to as the Fibonacci numbers. The\nnumber sequence is 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, and so on to", - "type": "text" - } - ] - }, - { - "page_num": 310, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p310-b0", - "global_id": 1821, - "bbox": [ - 72.0, - 73.06, - 117.02, - 87.46 - ], - "text": "infinity.", - "type": "text" - }, - { - "block_id": "p310-b1", - "global_id": 1822, - "bbox": [ - 72.0, - 89.85, - 493.18, - 120.81 - ], - "text": "The sequence has a number of interesting properties, not the least of\nwhich is an almost constant relationship between the numbers.", - "type": "text" - }, - { - "block_id": "p310-b2", - "global_id": 1823, - "bbox": [ - 82.08, - 137.38, - 521.21, - 383.68 - ], - "text": "1. The sum of any two consecutive numbers equals the next higher number.\nFor example, 3 and 5 equals 8, 5 and 8 equals 13, and so on.\n2. The ratio of any number to its next higher number approaches .618, after\nthe first four numbers. For example, 1/1 is 1.00, 1/2 is .50, 2/3 is .67, 3/5\nis .60, 5/8 is .625, 8/13 is .615, 13/21 is .619, and so on. Notice how\nthese early ratio values fluctuate above and below .618 in narrowing\namplitude. Also, notice the values of 1.00, .50, .67. We’ll comment\nfurther on these values when we talk more about ratio analysis and\npercentage retracements.\n3. The ratio of any number to its next lower number is approximately\n1.618, or the inverse of .618. For example, 13/8 is 1.625, 21/13 is 1.615,\n34/21 is 1.619. The higher the numbers become, the closer they come to\nthe values of .618 and 1.618.\n4. The ratios of alternate numbers approach 2.618 or its inverse, .382. For\nexample, 13/34 is .382, 34/13 is 2.615.", - "type": "text" - }, - { - "block_id": "p310-b3", - "global_id": 1824, - "bbox": [ - 72.0, - 427.63, - 520.25, - 547.88 - ], - "text": "FIBONACCI RATIOS AND RETRACEMENTS\nIt was already stated that wave theory is comprised of three aspects—wave\nform, ratio, and time. We’ve already discussed wave form, which is the most\nimportant of the three. Let’s talk now about the application of the Fibonacci\nratios and retracements. These relationships can apply to both price and time,\nalthough the former is considered to be the more reliable. We’ll come back\nlater to the aspect of time.", - "type": "text" - }, - { - "block_id": "p310-b4", - "global_id": 1825, - "bbox": [ - 72.0, - 550.04, - 516.98, - 680.39 - ], - "text": "First of all, a glance back at Figures 13.1 and 13.3 shows that the basic\nwave form always breaks down into Fibonacci numbers. One complete cycle\ncomprises eight waves, five up and three down—all Fibonacci numbers. Two\nfurther subdivisions will produce 34 and 144 waves—also Fibonacci\nnumbers. The mathematical basis of the wave theory on the Fibonacci\nsequence, however, goes beyond just wave counting. There’s also the\nquestion of proportional relationships between the different waves. The\nfollowing are among the most commonly used Fibonacci ratios:", - "type": "text" - }, - { - "block_id": "p310-b5", - "global_id": 1826, - "bbox": [ - 82.08, - 696.96, - 522.02, - 761.05 - ], - "text": "1. One of the three impulse waves sometimes extends. The other two are\nequal in time and magnitude. If wave 5 extends, waves 1 and 3 should be\nabout equal. If wave 3 extends, waves 1 and 5 tend toward equality.\n2. A minimum target for the top of wave 3 can be obtained by multiplying", - "type": "text" - } - ] - }, - { - "page_num": 311, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p311-b0", - "global_id": 1827, - "bbox": [ - 82.08, - 73.53, - 522.01, - 352.71 - ], - "text": "the length of wave 1 by 1.618 and adding that total to the bottom of 2.\n3. The top of wave 5 can be approximated by multiplying wave 1 by 3.236\n(2×1.618) and adding that value to the top or bottom of wave 1 for\nmaximum and minimum targets.\n4. Where waves 1 and 3 are about equal, and wave 5 is expected to extend,\na price objective can be obtained by measuring the distance from the\nbottom of wave 1 to the top of wave 3, multiplying by 1.618, and adding\nthe result to the bottom of 4.\n5. For corrective waves, in a normal 5-3-5 zig-zag correction, wave c is\noften about equal to the length of wave a.\n6. Another way to measure the possible length of wave c is to multiply .618\nby the length of wave a and subtract that result from the bottom of wave\na.\n7. In the case of a flat 3-3-5 correction, where the b wave reaches or\nexceeds the top of wave a, wave c will be about 1.618 the length of a.\n8. In a symmetrical triangle, each successive wave is related to its previous\nwave by about .618.", - "type": "text" - }, - { - "block_id": "p311-b1", - "global_id": 1828, - "bbox": [ - 72.0, - 376.39, - 236.57, - 387.19 - ], - "text": "Fibonacci Percentage Retracements", - "type": "text" - }, - { - "block_id": "p311-b2", - "global_id": 1829, - "bbox": [ - 72.0, - 395.2, - 517.15, - 558.68 - ], - "text": "The preceding ratios help to determine price objectives in both impulse and\ncorrective waves. Another way to determine price objectives is by the use of\npercentage retracements. The most commonly used numbers in retracement\nanalysis are 61.8% (usually rounded off to 62%), 38%, and 50%. Remember\nfrom Chapter 4 that markets usually retrace previous moves by certain\npredictable percentages—the best known ones being 33%, 50%, and 67%.\nThe Fibonacci sequence refines those numbers a bit further. In a strong trend,\na minimum retracement is usually around 38%. In a weaker trend, the\nmaximum percentage retracement is usually 62%. (See Figures 13.25 and\n13.26.)", - "type": "text" - } - ] - }, - { - "page_num": 312, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p312-b0", - "global_id": 1830, - "bbox": [ - 73.9, - 318.86, - 521.38, - 333.32 - ], - "text": "Figure 13.25 The three horizontal lines show Fibonnaci retracement levels of", - "type": "text" - }, - { - "block_id": "p312-b1", - "global_id": 1831, - "bbox": [ - 74.52, - 335.42, - 520.75, - 366.39 - ], - "text": "38%, 50%, and 62% measured from the 1981 bottom to the 1993 peak in\nTreasury Bonds. The 1994 correction in bond prices stopped right at the 38%", - "type": "text" - }, - { - "block_id": "p312-b2", - "global_id": 1832, - "bbox": [ - 248.75, - 368.55, - 346.51, - 382.95 - ], - "text": "retracement line.", - "type": "text" - }, - { - "block_id": "p312-b3", - "global_id": 1833, - "bbox": [ - 82.06, - 643.66, - 513.2, - 691.19 - ], - "text": "Figure 13.26 The three Fibonacci percentage lines are measured from the\n1994 bottom in bond prices to the early 1996 top. Bond prices corrected to\nthe 62% line.", - "type": "text" - }, - { - "block_id": "p312-b4", - "global_id": 1834, - "bbox": [ - 72.0, - 707.76, - 521.19, - 755.29 - ], - "text": "It was pointed out earlier, that the Fibonacci ratios approach .618 only\nafter the first four numbers. The first three ratios are 1/1 (100%), 1/2 (50%),\nand 2/3 (66%). Many students of Elliott may be unaware that the famous 50%", - "type": "text" - } - ] - }, - { - "page_num": 313, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p313-b0", - "global_id": 1835, - "bbox": [ - 72.0, - 73.28, - 507.87, - 120.81 - ], - "text": "retracement is actually a Fibonacci ratio, as is the two-thirds retracement. A\ncomplete retracement (100%) of a previous bull or bear market also should\nmark an important support or resistance area.", - "type": "text" - }, - { - "block_id": "p313-b1", - "global_id": 1836, - "bbox": [ - 72.0, - 164.76, - 517.17, - 384.4 - ], - "text": "FIBONACCI TIME TARGETS\nWe haven’t said too much about the aspect of time in wave analysis.\nFibonacci time relationships exist. It’s just that they’re harder to predict and\nare considered by some Elliotticians to be the least important of the three\naspects of the theory. Fibonacci time targets are found by counting forward\nfrom significant tops and bottoms. On a daily chart, the analyst counts\nforward the number of trading days from an important turning point with the\nexpectation that future tops or bottoms will occur on Fibonacci days—that is,\non the 13th, 21st, 34th, 55th, or 89th trading day in the future. The same\ntechnique can be used on weekly, monthly, or even yearly charts. On the\nweekly chart, the analyst picks a significant top or bottom and looks for\nweekly time targets that fall on Fibonacci numbers. (See Figures 13.27 and\n13.28.)", - "type": "text" - }, - { - "block_id": "p313-b2", - "global_id": 1837, - "bbox": [ - 72.0, - 427.63, - 508.79, - 588.21 - ], - "text": "COMBINING ALL THREE ASPECTS OF WAVE\nTHEORY\nThe ideal situation occurs when wave form, ratio analysis, and time targets\ncome together. Suppose that a study of waves reveals that a fifth wave has\nbeen completed, that wave 5 has gone 1.618 times the distance from the\nbottom of wave 1 to the top of wave 3, and that the time from the beginning\nof the trend has been 13 weeks from a previous low and 34 weeks from a\nprevious top. Suppose further that the fifth wave has lasted 21 days. Odds\nwould be pretty good that an important top was near.", - "type": "text" - } - ] - }, - { - "page_num": 314, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p314-b0", - "global_id": 1838, - "bbox": [ - 76.5, - 318.86, - 518.79, - 349.82 - ], - "text": "Figure 13.27 Fibonacci time targets measured in months from the 1981\nbottom in Treasury Bonds. It may be coincidence, but the last four Fibonacci", - "type": "text" - }, - { - "block_id": "p314-b1", - "global_id": 1839, - "bbox": [ - 85.08, - 351.99, - 510.18, - 366.39 - ], - "text": "time targets (vertical bars) coincided with important turns in bond prices.", - "type": "text" - }, - { - "block_id": "p314-b2", - "global_id": 1840, - "bbox": [ - 75.62, - 626.38, - 519.64, - 690.47 - ], - "text": "Figure 13.28 Fibonacci time targets in months from the 1982 bottom in the\nDow. The last three vertical bars coincide with bear market years in stocks—\n1987, 1990, and 1994. The 1987 peak was 13 years from the 1982 bottom—a\nFibonacci number.", - "type": "text" - }, - { - "block_id": "p314-b3", - "global_id": 1841, - "bbox": [ - 72.0, - 707.04, - 519.27, - 754.57 - ], - "text": "A study of price charts in both stocks and futures markets reveals a\nnumber of Fibonacci time relationships. Part of the problem, however, is the\nvariety of possible relationships. Fibonacci time targets can be taken from top", - "type": "text" - } - ] - }, - { - "page_num": 315, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p315-b0", - "global_id": 1842, - "bbox": [ - 72.0, - 73.28, - 520.31, - 120.81 - ], - "text": "to top, top to bottom, bottom to bottom, and bottom to top. These\nrelationships can always be found after the fact. It’s not always clear which of\nthe possible relationships are relevant to the current trend.", - "type": "text" - }, - { - "block_id": "p315-b1", - "global_id": 1843, - "bbox": [ - 72.0, - 164.76, - 512.28, - 341.91 - ], - "text": "ELLIOTT WAVE APPLIED TO STOCKS\nVERSUS COMMODITIES\nThere are some differences in applying wave theory to stocks and\ncommodities. For example, wave 3 tends to extend in stocks and wave 5 in\ncommodities. The unbreakable rule that wave 4 can never overlap wave 1 in\nstocks is not as rigid in commodities. (Intraday penetrations can occur on\nfutures charts.) Sometimes charts of the cash market in commodities give a\nclearer Elliott pattern than the futures market. The use of continuation charts\nin commodity futures markets also produces distortions that may affect long\nterm Elliott patterns.", - "type": "text" - }, - { - "block_id": "p315-b2", - "global_id": 1844, - "bbox": [ - 72.0, - 344.07, - 514.38, - 490.98 - ], - "text": "Possibly the most significant difference between the two areas is that\nmajor bull markets in commodities can be “contained,” meaning that bull\nmarket highs do not always exceed previous bull market highs. It is possible\nin commodity markets for a completed five wave bull trend to fall short of a\nprevious bull market high. The major tops formed in many commodity\nmarkets in the 1980 to 1981 period failed to exceed major tops formed seven\nand eight years earlier. As a final comparison between the two areas, it\nappears that the best Elliott patterns in commodity markets arise from\nbreakouts from long term extended bases.", - "type": "text" - }, - { - "block_id": "p315-b3", - "global_id": 1845, - "bbox": [ - 72.0, - 493.15, - 514.5, - 606.93 - ], - "text": "It is important to keep in mind that wave theory was originally meant to\nbe applied to the stock market averages. It doesn’t work as well in individual\ncommon stocks. It’s quite possible that it doesn’t work that well in some of\nthe more thinly traded futures markets as well because mass psychology is\none of the important foundations on which the theory rests. Gold, as an\nillustration, is an excellent vehicle for wave analysis because of its wide\nfollowing.", - "type": "text" - }, - { - "block_id": "p315-b4", - "global_id": 1846, - "bbox": [ - 72.0, - 650.16, - 520.7, - 704.16 - ], - "text": "SUMMARY AND CONCLUSIONS\nLet’s briefly summarize the more important elements of wave theory and then\ntry to put it into proper perspective.", - "type": "text" - }, - { - "block_id": "p315-b5", - "global_id": 1847, - "bbox": [ - 82.08, - 720.72, - 513.18, - 768.25 - ], - "text": "1. A complete bull market cycle is made up of eight waves, five up waves\nfollowed by three down waves.\n2. A trend divides into five waves in the direction of the next longer trend.", - "type": "text" - } - ] - }, - { - "page_num": 316, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p316-b0", - "global_id": 1848, - "bbox": [ - 74.88, - 73.28, - 521.99, - 518.35 - ], - "text": "3. Corrections always take place in three waves.\n4. The two types of simple corrections are zig-zags (5-3-5) and flats (3-3-\n5).\n5. Triangles are usually fourth waves, and always precede the final wave.\nTriangles can also be B corrective waves.\n6. Waves can be expanded into longer waves and subdivided into shorter\nwaves.\n7. Sometimes one of the impulse waves extends. The other two should then\nbe equal in time and magnitude.\n8. The Fibonacci sequence is the mathematical basis of the Elliott Wave\nTheory.\n9. The number of waves follows the Fibonacci sequence.\n10. Fibonacci ratios and retracements are used to determine price objectives.\nThe most common retracements are 62%, 50%, and 38%.\n11. The rule of alternation warns not to expect the same thing twice in\nsuccession.\n12. Bear markets should not fall below the bottom of the previous fourth\nwave.\n13. Wave 4 should not overlap wave 1 (not as rigid in futures).\n14. The Elliott Wave Theory is comprised of wave forms, ratios, and time, in\nthat order of importance.\n15. The theory was originally applied to stock market averages and does not\nwork as well on individual stocks.\n16. The theory works best in those commodity markets with the largest\npublic following, such as gold.\n17. The principal difference in commodities is the existence of contained\nbull markets.", - "type": "text" - }, - { - "block_id": "p316-b1", - "global_id": 1849, - "bbox": [ - 72.0, - 534.92, - 520.73, - 648.7 - ], - "text": "The Elliott Wave Principle builds on the more classical approaches, such\nas Dow Theory and traditional chart patterns. Most of those price patterns can\nbe explained as part of the Elliott Wave structure. It builds on the concept of\n“swing objectives” by using Fibonacci ratio projections and percentage\nretracements. The Elliott Wave Principle takes all of these factors into\nconsideration, but goes beyond them by giving them more order and\nincreased predictability.", - "type": "text" - }, - { - "block_id": "p316-b2", - "global_id": 1850, - "bbox": [ - 72.0, - 672.38, - 407.85, - 683.18 - ], - "text": "Wave Theory Should Be Used in Conjunction with Other Technical Tools", - "type": "text" - }, - { - "block_id": "p316-b3", - "global_id": 1851, - "bbox": [ - 72.0, - 691.2, - 517.41, - 755.29 - ], - "text": "There are times when Elliott pictures are clear and other times when they are\nnot. Trying to force unclear market action into an Elliott format, and ignoring\nother technical tools in the process, is a misuse of the theory. The key is to\nview Elliott Wave Theory as a partial answer to the puzzle of market", - "type": "text" - } - ] - }, - { - "page_num": 317, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p317-b0", - "global_id": 1852, - "bbox": [ - 72.0, - 73.64, - 511.93, - 104.97 - ], - "text": "forecasting. Using it in conjunction with all of the other technical theories in\nthis book will increase its value and improve your chances for success.", - "type": "text" - }, - { - "block_id": "p317-b1", - "global_id": 1853, - "bbox": [ - 72.0, - 148.2, - 520.45, - 251.88 - ], - "text": "REFERENCE MATERIAL\nTwo of the best sources of information on Elliott Wave Theory and the\nFibonacci numbers are The Major Works of R.N. Elliott, (Prechter, Jr.) and the\nElliott Wave Principle (Frost and Prechter). All of the diagrams used in\nFigures 13.1-13.24 are from the Elliott Wave Principle and are reproduced in\nthis chapter through the courtesy of New Classics Library.", - "type": "text" - }, - { - "block_id": "p317-b2", - "global_id": 1854, - "bbox": [ - 72.0, - 254.04, - 507.24, - 301.58 - ], - "text": "A primer booklet on the Fibonacci numbers, Understanding Fibonacci\nNumbers by Edward D. Dobson, is available from Traders Press (P.O. Box\n6206, Greenville, S.C. 29606 (800-927-8222).", - "type": "text" - } - ] - }, - { - "page_num": 318, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p318-b0", - "global_id": 1855, - "bbox": [ - 72.0, - 310.96, - 521.19, - 514.03 - ], - "text": "INTRODUCTION\nOur main focus up to this point has been on price movement, and not too\nmuch has been said about the importance of time in solving the forecasting\npuzzle. The question of time has been present by implication throughout our\nentire coverage of technical analysis, but has generally been relegated to\nsecondary consideration. In this chapter, we’re going to view the problem of\nforecasting through the eyes of cyclic analysts who believe that time cycles\nhold the ultimate key to understanding why markets move up or down. In the\nprocess, we’re going to add the important dimension of time to our growing\nlist of analytical tools. Instead of just asking ourselves which way and how far\na market will go, we’ll start asking when it will arrive there or even when the\nmove will begin.", - "type": "text" - }, - { - "block_id": "p318-b1", - "global_id": 1856, - "bbox": [ - 72.0, - 516.19, - 523.16, - 696.23 - ], - "text": "Consider the standard daily bar chart. The vertical axis gives the price\nscale. But that’s only half of the relevant data. The horizontal scale gives the\ntime horizon. Therefore, the bar chart is really a time and price chart. Yet,\nmany traders concentrate solely on price data to the exclusion of time\nconsiderations. When we study chart patterns, we’re aware that there is a\nrelationship between the amount of time it takes for those patterns to form and\nthe potential for subsequent market moves. The longer a trendline or a support\nor resistance level remains in effect, the more valid it becomes. Moving\naverages require input as to the proper time period to use. Even oscillators\nrequire some decision as to how many days to measure. In the previous\nchapter, we considered the usefulness of Fibonacci time targets.", - "type": "text" - }, - { - "block_id": "p318-b2", - "global_id": 1857, - "bbox": [ - 72.0, - 698.4, - 513.69, - 762.49 - ], - "text": "It seems clear then that all phases of technical analysis depend to some\nextent on time considerations. Yet those considerations are not really applied\nin a consistent and dependable manner. That’s where time cycles come into\nplay. Instead of playing a secondary or supporting role in market movement,", - "type": "text" - } - ] - }, - { - "page_num": 319, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p319-b0", - "global_id": 1858, - "bbox": [ - 72.0, - 73.28, - 512.36, - 236.76 - ], - "text": "cyclic analysts hold that time cycles are the determining factor in bull and\nbear markets. Not only is time the dominant factor, but all other technical\ntools can be improved by incorporating cycles. Moving averages and\noscillators, for example, can be optimized by tying them to dominant cycles.\nTrendline analysis can be made more precise with cyclic analysis by\ndetermining which are valid trendlines and which are not. Price pattern\nanalysis can be enhanced if combined with cyclic peaks and troughs. By the\nuse of “time windows,” price movement can be filtered in such a way that\nextraneous action can be ignored and primary emphasis placed only on such\ntimes when important cycle tops and bottoms are due to occur.", - "type": "text" - }, - { - "block_id": "p319-b1", - "global_id": 1859, - "bbox": [ - 72.0, - 280.71, - 520.68, - 467.22 - ], - "text": "CYCLES\nThe most intriguing book I’ve ever read on the subject of cycles was written\nby Edward R. Dewey, one of the pioneers of cyclic analysis, with Og\nMandino entitled Cycles: The Mysterious Forces That Trigger Events.\nThousands of seemingly unrelated cycles were isolated spanning hundreds\nand, in some cases, thousands of years. Everything from the 9.6 year cycle in\nAtlantic salmon abundance to the 22.20 year cycle in international battles\nfrom 1415 to 1930 was tracked. An average cycle of sunspot activity since\n1527 was found to be 11.11 years. Several economic cycles, including the\n18.33 year cycle in real estate activity and a 9.2 year stock market cycle, were\npresented. (See Figures 14.1 and 14.2.)", - "type": "text" - }, - { - "block_id": "p319-b2", - "global_id": 1860, - "bbox": [ - 73.51, - 636.46, - 521.76, - 700.55 - ], - "text": "Figure 14.1 The 22.2 year cycle of incidence of sunspots. Drought often\nfollows two years after the sunspot minima which last occurred in the early\n1970s, and is due again in the mid 1990s. In the chart, the dotted line is the\n“ideal” cycle, and the solid line is the actual detrended data. (Courtesy of the", - "type": "text" - }, - { - "block_id": "p319-b3", - "global_id": 1861, - "bbox": [ - 158.95, - 702.72, - 436.31, - 717.12 - ], - "text": "Foundation for the Study of Cycles, Wayne, PA.)", - "type": "text" - } - ] - }, - { - "page_num": 320, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p320-b0", - "global_id": 1862, - "bbox": [ - 72.84, - 342.63, - 522.42, - 390.15 - ], - "text": "Figure 14.2 The 22.2 year cycle in international battles was due to top in\n1982. In the chart, the dotted line is the “ideal” cycle, and the solid line is the\nactual detrended data. (Courtesy of the Foundation for the Study of Cycles,", - "type": "text" - }, - { - "block_id": "p320-b1", - "global_id": 1863, - "bbox": [ - 265.46, - 392.32, - 329.81, - 406.72 - ], - "text": "Wayne, PA.", - "type": "text" - }, - { - "block_id": "p320-b2", - "global_id": 1864, - "bbox": [ - 72.0, - 423.29, - 516.97, - 520.51 - ], - "text": "Two startling conclusions are discussed by Dewey. First, that many of\nthe cycles of seemingly unrelated phenomena clustered around similar\nperiods. On p. 188 of his book, Dewey listed 37 different examples of the 9.6\nyear cycle, including caterpillar abundance in New Jersey, coyote abundance\nin Canada, wheat acreage in the U.S., and cotton prices in the U.S. Why\nshould such unrelated activities show the same cycles?", - "type": "text" - }, - { - "block_id": "p320-b3", - "global_id": 1865, - "bbox": [ - 72.0, - 522.68, - 518.51, - 636.46 - ], - "text": "The second discovery was that these similar cycles acted in synchrony,\nthat is, they turned at the same time. Figure 14.3 shows 12 different examples\nof the 18.2 year cycle including marriages, immigration, and stock prices in\nthe U.S. Dewey’s startling conclusion was that something “out there” in the\nuniverse must be causing these cycles; that there seemed to be a sort of pulse\nto the universe that accounted for the pervasive presence of these cycles\nthroughout so many areas of human existence.", - "type": "text" - } - ] - }, - { - "page_num": 321, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p321-b0", - "global_id": 1866, - "bbox": [ - 85.88, - 452.09, - 509.39, - 466.56 - ], - "text": "Figure 14.3 The 18.2 year cycles on parade. (Source: Dewey, Edward R.,", - "type": "text" - }, - { - "block_id": "p321-b1", - "global_id": 1867, - "bbox": [ - 92.95, - 468.66, - 502.32, - 483.06 - ], - "text": "Cycles: The Mysterious Forces That Trigger Events (New York: Manor", - "type": "text" - }, - { - "block_id": "p321-b2", - "global_id": 1868, - "bbox": [ - 257.86, - 485.22, - 337.41, - 499.62 - ], - "text": "Books, 1973.)", - "type": "text" - }, - { - "block_id": "p321-b3", - "global_id": 1869, - "bbox": [ - 72.0, - 516.19, - 516.53, - 629.98 - ], - "text": "In 1941, Dewey organized the Foundation for the Study of Cycles (900\nW. Valley Rd., Suite 502, Wayne, PA 19087). It is the oldest organization\nengaged in cycles research and the recognized leader in the field. The\nFoundation publishes Cycles magazine, which presents research in many\ndifferent areas including economics and business. It also publishes a monthly\nreport, Cycle Projections, which applies cyclical analysis to stocks,\ncommodities, real estate and the economy.", - "type": "text" - }, - { - "block_id": "p321-b4", - "global_id": 1870, - "bbox": [ - 72.0, - 653.66, - 173.27, - 664.46 - ], - "text": "Basic Cyclic Concepts", - "type": "text" - }, - { - "block_id": "p321-b5", - "global_id": 1871, - "bbox": [ - 72.0, - 672.47, - 523.18, - 753.13 - ], - "text": "In 1970, J.M. Hurst authored The Profit Magic of Stock Transaction Timing.\nAlthough it deals mainly with stock market cycles, this book represents one of\nthe best explanations of cycle theory available in print, and is highly\nrecommended reading. The following diagrams are derived from Hurst’s\noriginal work.", - "type": "text" - }, - { - "block_id": "p321-b6", - "global_id": 1872, - "bbox": [ - 100.79, - 755.29, - 467.21, - 769.69 - ], - "text": "First, let’s see what a cycle looks like and discuss its three main", - "type": "text" - } - ] - }, - { - "page_num": 322, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p322-b0", - "global_id": 1873, - "bbox": [ - 72.0, - 73.64, - 515.94, - 187.79 - ], - "text": "characteristics. Figure 14.4 shows two repetitions of a price cycle. The cycle\nbottoms are called troughs and the tops referred to as crests. Notice that the\ntwo waves shown here are measured from trough to trough. Cyclic analysts\nprefer to measure cycle lengths from low to low. Measurements can be taken\nbetween crests, but they are not considered to be as stable or reliable as those\ntaken between the troughs. Therefore, common practice is to measure the\nbeginning and end of a cyclic wave at a low point, as shown in this example.", - "type": "text" - }, - { - "block_id": "p322-b1", - "global_id": 1874, - "bbox": [ - 72.0, - 189.23, - 518.09, - 418.96 - ], - "text": "The three qualities of a cycle are amplitude, period, and phase.\nAmplitude measures the height of the wave as shown in Figure 14.5, and is\nexpressed in dollars, cents, or points. The period of a wave, as shown in\nFigure 14.6, is the time between troughs. In this example, the period is 20\ndays. The phase is a measure of the time location of a wave trough. In Figure\n14.7, the phase difference between two waves is shown. Because there are\nseveral different cycles occurring at the same time, phasing allows the cyclic\nanalyst to study the relationships between the different cycle lengths. Phasing\nis also used to identify the date of the last cycle low. If, for example, a 20 day\ncycle bottomed 10 days earlier, the date of the next cycle low can be\ndetermined. Once the amplitude, period, and phase of a cycle are known, the\ncycle can theoretically be extrapolated into the future. Assuming the cycle\nremains fairly constant, it can then be used to estimate future peaks and\ntroughs. That is the basis of the cyclic approach in its simplest form.", - "type": "text" - }, - { - "block_id": "p322-b2", - "global_id": 1875, - "bbox": [ - 83.64, - 750.97, - 511.63, - 765.43 - ], - "text": "Figure 14.4 Two cycles of a price wave. A simple, single price wave of the", - "type": "text" - } - ] - }, - { - "page_num": 323, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p323-b0", - "global_id": 1876, - "bbox": [ - 72.45, - 73.28, - 522.82, - 87.68 - ], - "text": "kind that combines to form stock and commodity price action. Only two cycles", - "type": "text" - }, - { - "block_id": "p323-b1", - "global_id": 1877, - "bbox": [ - 73.72, - 89.84, - 521.56, - 104.24 - ], - "text": "of this wave are shown, but the wave itself extends infinitely far to the left and", - "type": "text" - }, - { - "block_id": "p323-b2", - "global_id": 1878, - "bbox": [ - 75.99, - 106.41, - 519.28, - 120.81 - ], - "text": "to the right. Such waves repeat themselves cycle after cycle. As a result, once", - "type": "text" - }, - { - "block_id": "p323-b3", - "global_id": 1879, - "bbox": [ - 77.71, - 122.97, - 517.56, - 137.37 - ], - "text": "the wave is identified, its value can be determined at any past or future time.", - "type": "text" - }, - { - "block_id": "p323-b4", - "global_id": 1880, - "bbox": [ - 82.23, - 139.54, - 513.04, - 153.94 - ], - "text": "It is this characteristic of waves that provides a degree of predictability for", - "type": "text" - }, - { - "block_id": "p323-b5", - "global_id": 1881, - "bbox": [ - 241.89, - 156.1, - 353.37, - 170.5 - ], - "text": "equity price action.", - "type": "text" - }, - { - "block_id": "p323-b6", - "global_id": 1882, - "bbox": [ - 98.07, - 393.76, - 497.21, - 424.72 - ], - "text": "Figure 14.5 The amplitude of a wave. In this figure, the wave has an\namplitude of ten dollars (from minus five dollars to plus five dollars).", - "type": "text" - }, - { - "block_id": "p323-b7", - "global_id": 1883, - "bbox": [ - 116.44, - 426.89, - 478.82, - 441.29 - ], - "text": "Amplitude is always measured from wave trough to wave crest.", - "type": "text" - }, - { - "block_id": "p323-b8", - "global_id": 1884, - "bbox": [ - 76.8, - 650.14, - 518.46, - 664.61 - ], - "text": "Figure 14.6 The period of a wave. In this figure, the wave has a period of 20", - "type": "text" - }, - { - "block_id": "p323-b9", - "global_id": 1885, - "bbox": [ - 74.77, - 666.71, - 520.5, - 697.67 - ], - "text": "days, which is shown measured between two consecutive wave troughs. The\nperiod could just as well have been measured between wave crests. But in the", - "type": "text" - }, - { - "block_id": "p323-b10", - "global_id": 1886, - "bbox": [ - 79.62, - 699.84, - 515.65, - 714.23 - ], - "text": "case of price waves, the wave troughs are usually more clearly defined than", - "type": "text" - }, - { - "block_id": "p323-b11", - "global_id": 1887, - "bbox": [ - 80.95, - 716.4, - 514.33, - 730.8 - ], - "text": "the wave crests for reasons that will be discussed later. Consequently, price", - "type": "text" - }, - { - "block_id": "p323-b12", - "global_id": 1888, - "bbox": [ - 121.48, - 732.96, - 473.79, - 747.36 - ], - "text": "wave periods are most often measured from trough to trough.", - "type": "text" - } - ] - }, - { - "page_num": 324, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p324-b0", - "global_id": 1889, - "bbox": [ - 81.3, - 263.41, - 513.97, - 277.87 - ], - "text": "Figure 14.7 The phase difference between two waves. The phase difference", - "type": "text" - }, - { - "block_id": "p324-b1", - "global_id": 1890, - "bbox": [ - 81.81, - 279.97, - 513.47, - 310.93 - ], - "text": "between the two waves shown is 6 days. This phase difference is measured\nbetween the troughs of the two waves because, again, wave troughs are the", - "type": "text" - }, - { - "block_id": "p324-b2", - "global_id": 1891, - "bbox": [ - 123.2, - 313.1, - 472.06, - 327.5 - ], - "text": "most convenient points to identify in the case of price waves.", - "type": "text" - }, - { - "block_id": "p324-b3", - "global_id": 1892, - "bbox": [ - 72.0, - 351.18, - 149.58, - 361.98 - ], - "text": "Cyclic Principles", - "type": "text" - }, - { - "block_id": "p324-b4", - "global_id": 1893, - "bbox": [ - 72.0, - 370.0, - 505.87, - 417.52 - ], - "text": "Let’s take a look now at some of the principles that underlie the cyclic\nphilosophy. The four most important ones are the Principles of Summation,\nHarmonicity, Synchronicity, and Proportionality.", - "type": "text" - }, - { - "block_id": "p324-b5", - "global_id": 1894, - "bbox": [ - 72.0, - 419.69, - 516.75, - 632.86 - ], - "text": "The Principle of Summation holds that all price movement is the simple\naddition of all active cycles. Figure 14.8 demonstrates how the price pattern\non the top is formed by simply adding together the two different cycles at the\nbottom of the chart. Notice, in particular, the appearance of the double top in\ncomposite wave C. Cycle theory holds that all price patterns are formed by\nthe interaction of two or more different cycles. We’ll come back to this point\nagain. The Principle of Summation gives us an important insight into the\nrationale of cyclic forecasting. Let’s assume that all price action is just the\nsum of different cycle lengths. Assume further that each of those individual\ncycles could be isolated and measured. Assume also that each of those cycles\nwill continue to fluctuate into the future. Then by simply continuing each\ncycle into the future and summing them back together again, the future price\ntrend should be the result. Or, so the theory goes.", - "type": "text" - } - ] - }, - { - "page_num": 325, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p325-b0", - "global_id": 1895, - "bbox": [ - 74.08, - 460.02, - 521.2, - 474.48 - ], - "text": "Figure 14.8 The summation of two waves. The dotted lines show how, at each", - "type": "text" - }, - { - "block_id": "p325-b1", - "global_id": 1896, - "bbox": [ - 77.44, - 476.58, - 517.84, - 490.98 - ], - "text": "point in time, the value of wave A is added to the value of wave B to produce", - "type": "text" - }, - { - "block_id": "p325-b2", - "global_id": 1897, - "bbox": [ - 208.12, - 493.14, - 387.14, - 507.54 - ], - "text": "the value of composite wave C.", - "type": "text" - }, - { - "block_id": "p325-b3", - "global_id": 1898, - "bbox": [ - 72.0, - 524.12, - 521.52, - 637.9 - ], - "text": "The Principle of Harmonicity simply means that neighboring waves are\nusually related by a small, whole number. That number is usually two. For\nexample, if a 20 day cycle exists, the next shorter cycle will usually be half its\nlength, or 10 days. The next longer cycle would then be 40 days. If you’ll\nremember back to the discussion on the 4 week rule (Chapter 9), the principle\nof harmonics was invoked to explain the validity of using a shorter 2 week\nrule and a longer 8 weeks.", - "type": "text" - }, - { - "block_id": "p325-b4", - "global_id": 1899, - "bbox": [ - 72.0, - 640.06, - 521.56, - 770.41 - ], - "text": "The Principle of Synchronicity refers to the strong tendency for waves of\ndiffering lengths to bottom at about the same time. Figure 14.9 is meant to\nshow both harmonicity and synchronicity. Wave B at the bottom of the chart\nis half the length of wave A. Wave A includes two repetitions of the smaller\nwave B, showing harmonicity between the two waves. Notice also that when\nwave A bottoms, wave B tends to do the same, demonstrating synchronicity\nbetween the two. Synchronicity also means that similar cycle lengths of\ndifferent markets will tend to turn together.", - "type": "text" - } - ] - }, - { - "page_num": 326, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p326-b0", - "global_id": 1900, - "bbox": [ - 72.0, - 73.28, - 520.32, - 137.37 - ], - "text": "The Principle of Proportionality describes the relationship between cycle\nperiod and amplitude. Cycles with longer periods (lengths) should have\nproportionally wider amplitudes. The amplitude, or height, of a 40 day cycle,\nfor example, should be about double that of a 20 day cycle.", - "type": "text" - }, - { - "block_id": "p326-b1", - "global_id": 1901, - "bbox": [ - 72.0, - 161.05, - 270.85, - 171.85 - ], - "text": "The Principles of Variation and Nominality", - "type": "text" - }, - { - "block_id": "p326-b2", - "global_id": 1902, - "bbox": [ - 72.0, - 179.87, - 505.88, - 210.83 - ], - "text": "There are two other cyclic principles that describe cycle behavior in a more\ngeneral sense—The Principles of Variation and Nominality.", - "type": "text" - }, - { - "block_id": "p326-b3", - "global_id": 1903, - "bbox": [ - 72.0, - 213.0, - 505.18, - 293.65 - ], - "text": "The Principle of Variation, as the name implies, is a recognition of the\nfact that all of the other cyclic principles already mentioned—summation,\nharmonicity, synchronicity, and proportionality—are just strong tendencies\nand not hard and fast rules. Some “variation” can and usually does occur in\nthe real world.", - "type": "text" - }, - { - "block_id": "p326-b4", - "global_id": 1904, - "bbox": [ - 72.0, - 295.82, - 521.61, - 442.73 - ], - "text": "The Principle of Nominality is based on the premise that, despite the\ndifferences that exist in the various markets and allowing for some variation\nin the implementing of cyclic principles, there seems to be a nominal set of\nharmonically related cycles that affect all markets. And that nominal model of\ncycle lengths can be used as a starting point in the analysis of any market.\nFigure 14.10 shows a simplified version of that nominal model. The model\nbegins with an 18 year cycle and proceeds to each successively lower cycle\nhalf its length. The only exception is the relationship between 54 and 18\nmonths which is a third instead of a half.", - "type": "text" - }, - { - "block_id": "p326-b5", - "global_id": 1905, - "bbox": [ - 72.0, - 444.9, - 504.61, - 575.24 - ], - "text": "When we discuss the various cycle lengths in the individual markets,\nwe’ll see that this nominal model does account for most cyclic activity. For\nnow, look at the “Days” column. Notice 40, 20, 10, and 5 days. You’ll\nrecognize immediately that these numbers account for most of the popular\nmoving average lengths. Even the well known 4, 9, and 18 day moving\naverage technique is a variation of the 5, 10, and 20 day numbers. Many\noscillators use 5, 10, and 20 days. Weekly rule breakouts use the same\nnumbers translated into 2, 4, and 8 weeks.", - "type": "text" - } - ] - }, - { - "page_num": 327, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p327-b0", - "global_id": 1906, - "bbox": [ - 170.55, - 529.87, - 424.73, - 544.34 - ], - "text": "Figure 14.9 Harmonicity and synchronicity.", - "type": "text" - } - ] - }, - { - "page_num": 328, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p328-b0", - "global_id": 1907, - "bbox": [ - 170.08, - 73.28, - 425.19, - 87.74 - ], - "text": "Figure 14.10 The simplified nominal model.", - "type": "text" - }, - { - "block_id": "p328-b1", - "global_id": 1908, - "bbox": [ - 72.0, - 131.63, - 523.14, - 308.78 - ], - "text": "HOW CYCLIC CONCEPTS HELP EXPLAIN\nCHARTING TECHNIQUES\nChapter 3 in Hurst’s book explains in great detail how the standard charting\ntechniques—trendlines and channels, chart patterns, and moving averages—\ncan be better understood and used to greater advantage when coordinated with\ncyclic principles. Figure 14.11 helps explain the existence of trendlines and\nchannels. The flat cycle wave along the bottom becomes a rising price\nchannel when it is summed with a rising line representing the long term\nuptrend. Notice how much the horizontal cycle along the bottom of the chart\nresembles an oscillator.", - "type": "text" - }, - { - "block_id": "p328-b2", - "global_id": 1909, - "bbox": [ - 72.0, - 310.94, - 515.53, - 424.73 - ], - "text": "Figure 14.12 from the same chapter shows how a head and shoulders\ntopping pattern is formed by combining two cycle lengths with a rising line\nrepresenting the sum of all longer duration components. Hurst goes on to\nexplain double tops, triangles, flags, and pennants through the application of\ncycles. The “V” top or bottom, for example, occurs when an intermediate\ncycle turns at the exact same time as its next longer and next shorter duration\ncycles.", - "type": "text" - } - ] - }, - { - "page_num": 329, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p329-b0", - "global_id": 1910, - "bbox": [ - 79.82, - 529.87, - 515.45, - 544.34 - ], - "text": "Figure 14.11 Channel formation. (Source: Hurst, J.M., The Profit Magic of", - "type": "text" - }, - { - "block_id": "p329-b1", - "global_id": 1911, - "bbox": [ - 93.63, - 546.44, - 501.65, - 560.84 - ], - "text": "Stock Transaction Timing [Englewood Cliffs, N.J.: Prentice-Hall, Inc.,", - "type": "text" - }, - { - "block_id": "p329-b2", - "global_id": 1912, - "bbox": [ - 276.25, - 563.0, - 319.03, - 577.4 - ], - "text": "1970].)", - "type": "text" - } - ] - }, - { - "page_num": 330, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p330-b0", - "global_id": 1913, - "bbox": [ - 80.02, - 331.1, - 515.27, - 362.07 - ], - "text": "Figure 14.12a Adding another component. (Source: Hurst, J.M., The Profit\nMagic of Stock Transaction Timing [Englewood Cliffs, N.J.: Prentice-Hall,", - "type": "text" - }, - { - "block_id": "p330-b1", - "global_id": 1914, - "bbox": [ - 261.66, - 364.23, - 333.62, - 378.63 - ], - "text": "Inc., 1970].)", - "type": "text" - }, - { - "block_id": "p330-b2", - "global_id": 1915, - "bbox": [ - 79.04, - 639.34, - 516.24, - 670.31 - ], - "text": "Figure 14.12b The Summation principle applied. (Source: Hurst, J.M., The\nProfit Magic of Stock Transaction Timing [Englewood Cliffs, N.J.: Prentice", - "type": "text" - }, - { - "block_id": "p330-b3", - "global_id": 1916, - "bbox": [ - 241.68, - 672.47, - 353.6, - 686.87 - ], - "text": "Hall. Inc., 19701].)", - "type": "text" - }, - { - "block_id": "p330-b4", - "global_id": 1917, - "bbox": [ - 72.0, - 703.44, - 508.78, - 767.53 - ], - "text": "Hurst also addresses how moving averages can be made more useful if\ntheir lengths are synchronized with dominant cycle lengths. Students of\ntraditional charting techniques should gain additional insight into how these\npopular chart pictures form and maybe even why they work by reading", - "type": "text" - } - ] - }, - { - "page_num": 331, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p331-b0", - "global_id": 1918, - "bbox": [ - 72.0, - 73.28, - 382.44, - 87.68 - ], - "text": "Hurst’s chapter, entitled “Verify Your Chart Patterns.”", - "type": "text" - }, - { - "block_id": "p331-b1", - "global_id": 1919, - "bbox": [ - 72.0, - 131.63, - 522.14, - 351.27 - ], - "text": "DOMINANT CYCLES\nThere are many different cycles affecting the financial markets. The only ones\nof real value for forecasting purposes are the dominant cycles. Dominant\ncycles are those that consistently affect prices and that can be clearly\nidentified. Most futures markets have at least five dominant cycles. In an\nearlier chapter on the use of long term charts, it was stressed that all technical\nanalysis should begin with the long term picture, gradually working toward\nthe shorter term. That principle holds true in the study of cycles. The proper\nprocedure is to begin the analysis with a study of long term dominant cycles,\nwhich can span several years; then work toward the intermediate, which can\nbe several weeks to several months; finally, the very short term cycles, from\nseveral hours to several days, can be used for timing of entry and exit points\nand to help confirm the turning points of the longer cycles.", - "type": "text" - }, - { - "block_id": "p331-b2", - "global_id": 1920, - "bbox": [ - 77.69, - 751.69, - 517.58, - 766.15 - ], - "text": "Figure 14.13 (Source: The Power of Oscillator/Cycle Combinations by Walt", - "type": "text" - } - ] - }, - { - "page_num": 332, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p332-b0", - "global_id": 1921, - "bbox": [ - 269.73, - 73.53, - 325.54, - 87.93 - ], - "text": "Bressert.)", - "type": "text" - }, - { - "block_id": "p332-b1", - "global_id": 1922, - "bbox": [ - 72.0, - 111.36, - 178.65, - 122.16 - ], - "text": "Classification of Cycles", - "type": "text" - }, - { - "block_id": "p332-b2", - "global_id": 1923, - "bbox": [ - 72.0, - 130.17, - 507.75, - 227.4 - ], - "text": "The general categories are: long term cycles (2 or more years in length), the\nseasonal cycle (1 year), the primary or intermediate cycle (9 to 26 weeks),\nand the trading cycle (4 weeks). The trading cycle breaks down into two\nshorter alpha and beta cycles, which average 2 weeks each. (The labels\nPrimary, Trading, Alpha, and Beta are used by Walt Bressert to describe the\nvarious cycle lengths.) (See Figure 14.13.)", - "type": "text" - }, - { - "block_id": "p332-b3", - "global_id": 1924, - "bbox": [ - 72.0, - 251.08, - 523.05, - 532.03 - ], - "text": "The Kondratieff Wave\nThere are even longer range cycles at work. Perhaps the best known is the\napproximate 54 year Kondratieff cycle. This controversial long cycle of\neconomic activity, first discovered by a Russian economist in the 1920s by the\nname of Nikolai D. Kondratieff, appears to exert a major influence on\nvirtually all stock and commodity prices. In particular, a 54 year cycle has\nbeen identified in interest rates, copper, cotton, wheat, stocks, and wholesale\ncommodity prices. Kondratieff tracked his “long wave” from 1789 using such\nfactors as commodity prices, pig iron production, and wages of agricultural\nworkers in England. (See Figure 14.14.) The Kondratieff cycle has become a\npopular subject of discussion in recent years, primarily owing to the fact that\nits last top occurred in the 1920s, and its next top is long overdue. Kondratieff\nhimself paid a heavy price for his cyclic view of capitalistic economies. He is\nbelieved to have died in a Siberian labor camp. For more information, see The\nLong Wave Cycle (Kondratieff), translated by Guy Daniels. (Two other books\non the subject are The K Wave by David Knox Barker and The Great Cycle by\nDick Stoken.)", - "type": "text" - } - ] - }, - { - "page_num": 333, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p333-b0", - "global_id": 1925, - "bbox": [ - 79.08, - 305.18, - 516.18, - 319.64 - ], - "text": "Figure 14.14 Kondratieff’s long wave. For more information, see The Long", - "type": "text" - }, - { - "block_id": "p333-b1", - "global_id": 1926, - "bbox": [ - 82.88, - 321.74, - 512.4, - 336.14 - ], - "text": "Wave Cycle by Nikolai Kondratieff, translated by Guy Daniels (New York:", - "type": "text" - }, - { - "block_id": "p333-b2", - "global_id": 1927, - "bbox": [ - 81.0, - 338.31, - 514.28, - 369.27 - ], - "text": "Richardson and Snyder, 1984). That translation is the first ever from the\noriginal Russian text. (Copyright ©1984 by The New York Times Company.", - "type": "text" - }, - { - "block_id": "p333-b3", - "global_id": 1928, - "bbox": [ - 154.07, - 371.43, - 441.19, - 385.83 - ], - "text": "Reprinted by permission [May 27, 1984, p. F11.])", - "type": "text" - }, - { - "block_id": "p333-b4", - "global_id": 1929, - "bbox": [ - 72.0, - 429.79, - 517.12, - 583.17 - ], - "text": "COMBINING CYCLE LENGTHS\nAs a general rule, long term and seasonal cycles determine the major trend of\na market. Obviously, if a two year cycle has bottomed, it can be expected to\nadvance for at least a year, measured from its trough to its crest. Therefore,\nthe long term cycle exerts major influence on market direction. Markets also\nhave annual seasonal patterns, meaning that they tend to peak or trough at\ncertain times of the year. Grain markets, for example, usually hit their low\npoint around harvest time and rally from there. Seasonal moves usually last\nfor several months.", - "type": "text" - }, - { - "block_id": "p333-b5", - "global_id": 1930, - "bbox": [ - 72.0, - 585.33, - 516.81, - 715.68 - ], - "text": "For trading purposes, the weekly primary cycle is the most useful. The 3\nto 6 month primary cycle is the equivalent of the intermediate trend, and\ngenerally determines which side of a market to trade. The next shorter cycle,\nthe 4 week trading cycle, is used to establish entry and exit points in the\ndirection of the primary trend. If the primary trend is up, troughs in the\ntrading cycle are used for purchases. If the primary trend is down, crests in\nthe trading cycles should be sold short. The 10 day alpha and beta cycles can\nbe used for further fine tuning. (See Figure 14.13.)", - "type": "text" - } - ] - }, - { - "page_num": 334, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p334-b0", - "global_id": 1931, - "bbox": [ - 72.0, - 74.02, - 513.56, - 277.09 - ], - "text": "THE IMPORTANCE OF TREND\nThe concept of trading in the direction of the trend is stressed throughout the\nbody of technical analysis. In an earlier chapter, it was suggested that short\nterm dips should be used for purchases if the intermediate trend was up, and\nthat short term bulges be sold in downtrends. In the chapter on Elliott Wave\nTheory, it was pointed out that five wave moves only take place in the\ndirection of the next larger trend. Therefore, it is necessary when using any\nshort term trend for timing purposes to first determine the direction of the\nnext longer trend and then trade in the direction of that longer trend. That\nconcept holds true in cycles. The trend of each cycle is determined by the\ndirection of its next longer cycle. Or stated the other way, once the trend of a\nlonger cycle is established, the trend of the next shorter cycle is known.", - "type": "text" - }, - { - "block_id": "p334-b1", - "global_id": 1932, - "bbox": [ - 72.0, - 300.77, - 268.39, - 311.57 - ], - "text": "The 28 Day Trading Cycle in Commodities", - "type": "text" - }, - { - "block_id": "p334-b2", - "global_id": 1933, - "bbox": [ - 72.0, - 319.58, - 522.54, - 499.62 - ], - "text": "There is one important short term cycle that tends to influence most\ncommodity markets—the 28 day trading cycle. In other words, most markets\nhave a tendency to form a trading cycle low every 4 weeks. One possible\nexplanation for this strong cyclic tendency throughout all commodity markets\nis the lunar cycle. Burton Pugh studied the 28 day cycle in the wheat market\nin the 1930s (Science and Secrets of Wheat Trading, Lambert-Gann, Pomeroy,\nWA, 1978, orig., 1933) and concluded that the moon had some influence on\nmarket turning points. His theory was that wheat should be bought on a full\nmoon and sold on a new moon. Pugh acknowledged, however, that the lunar\neffects were mild and could be overridden by the effects of longer cycles or\nimportant news events.", - "type": "text" - }, - { - "block_id": "p334-b3", - "global_id": 1934, - "bbox": [ - 72.0, - 501.79, - 517.16, - 665.27 - ], - "text": "Whether or not the moon has anything to do with it, the average 28 day\ncycle does exist and explains many of the numbers used in the development\nof shorter term indicators and trading systems. First of all, the 28 day cycle is\nbased on calendar days. Translated into actual trading days, the number\nbecomes 20. We’ve already commented on how many popular moving\naverages, oscillators, and weekly rules are based on the number 20 and its\nharmonically related shorter cycles, 10 and 5. The 5, 10, and 20 day moving\naverages are widely used along with their derivatives, 4, 9, and 18. Many\ntraders use 10 and 40 day moving averages, with the number 40 being the\nnext harmonically related longer cycle at twice the length of 20.", - "type": "text" - }, - { - "block_id": "p334-b4", - "global_id": 1935, - "bbox": [ - 72.0, - 667.43, - 519.17, - 764.65 - ], - "text": "In Chapter 9, we discussed the profitability of the 4 week rule developed\nby Richard Donchian. Buy signals were generated when a market set new 4\nweek highs and a sell signal when a 4 week low was established. Knowledge\nof the existence of a 4 week trading cycle gives a better insight into the\nsignificance of that number and helps us to understand why the 4 week rule\nhas worked so well over the years. When a market exceeds the high of the", - "type": "text" - } - ] - }, - { - "page_num": 335, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p335-b0", - "global_id": 1936, - "bbox": [ - 72.0, - 73.64, - 502.36, - 104.97 - ], - "text": "previous 4 weeks, cycle logic tells us that, at the very least, the next longer\ncycle (the 8 week cycle) has bottomed and turned up.", - "type": "text" - }, - { - "block_id": "p335-b1", - "global_id": 1937, - "bbox": [ - 72.0, - 148.2, - 516.37, - 318.14 - ], - "text": "LEFT AND RIGHT TRANSLATION\nThe concept of translation may very well be the most useful aspect of cycle\nanalysis. Left and right translation refers to the shifting of the cycle peaks\neither to the left or the right of the ideal cycle midpoint. For example, a 20\nday trading cycle is measured from low to low. The ideal peak should occur\n10 days into the cycle, or at the halfway point. That would allow for a 10 day\nadvance followed by a 10 day decline. Ideal cycle peaks, however, rarely\noccur. Most variations in cycles occur at the peaks (or crests) and not at the\ntroughs. That’s why cycle troughs are considered more reliable and are used\nto measure cycle lengths.", - "type": "text" - }, - { - "block_id": "p335-b2", - "global_id": 1938, - "bbox": [ - 72.0, - 320.3, - 523.12, - 467.22 - ], - "text": "The cycle crests act differently depending on the trend of the next longer\ncycle. If the trend is up, the cycle crest shifts to the right of the ideal midpoint,\ncausing right translation. If the longer trend is down, the cycle crest shifts to\nthe left of the midpoint, causing left translation. Therefore, right translation is\nbullish and left translation is bearish. Stop to think about it. All we’re saying\nhere is that in a bull trend, prices will spend more time going up than down.\nIn a bear trend, prices spend more time going down than up. Isn’t that the\nbasic definition of a trend? Only, in this case, we’re talking about time instead\nof price. (See Figure 14.15.)", - "type": "text" - }, - { - "block_id": "p335-b3", - "global_id": 1939, - "bbox": [ - 72.0, - 510.45, - 520.08, - 630.7 - ], - "text": "HOW TO ISOLATE CYCLES\nIn order to study the various cycles affecting any given market, it is necessary\nto first isolate each dominant cycle. There are various ways of accomplishing\nthis task. The simplest is by visual inspection. By studying daily bar charts,\nfor example, it is possible to identify obvious tops and bottoms in a market.\nBy taking the average time periods between those cyclic tops and bottoms,\ncertain average lengths can be found.", - "type": "text" - }, - { - "block_id": "p335-b4", - "global_id": 1940, - "bbox": [ - 72.0, - 632.86, - 519.92, - 763.21 - ], - "text": "There are tools available to make that task a bit easier. One such tool is\nthe Ehrlich Cycle Finder, named after its inventor, Stan Ehrlich (ECF, 112\nVida Court, Novato, CA 94947 [415] 892-1183). The Cycle Finder is an\naccordion-like device that can be placed on the price chart for visual\ninspection. The distance between the points is always equidistant and can be\nexpanded or contracted to fit any cycle length. By plotting a distance between\nany two obvious cycle lows, it can be quickly determined if other cycle lows\nof the same length exist. An electronic version of that device, called the", - "type": "text" - } - ] - }, - { - "page_num": 336, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p336-b0", - "global_id": 1941, - "bbox": [ - 72.0, - 73.05, - 512.64, - 137.37 - ], - "text": "Ehrlich Cycle Forecaster, is now available as an analysis technique on\nOmega Research’s Trade Station and Super Charts (#Omega Research, 8700\nWest Flagler Street, Suite 250, Miami, FL 33174, [305] 551-9991,\nwww.omegaresearch.com). (See Figures 14.16-14.18.)", - "type": "text" - }, - { - "block_id": "p336-b1", - "global_id": 1942, - "bbox": [ - 77.95, - 610.53, - 517.33, - 625.0 - ], - "text": "Figure 14.15 Example of left and right translation. Figure A shows a simple", - "type": "text" - }, - { - "block_id": "p336-b2", - "global_id": 1943, - "bbox": [ - 72.29, - 627.1, - 522.97, - 674.62 - ], - "text": "cycle. Figure B shows the trend of the larger cycle. Figure C shows the\ncombined effect. When the longer trend is up, the midpeak shifts to the right.\nWhen the longer trend is down, the midpeak shifts to the left. Right translation", - "type": "text" - }, - { - "block_id": "p336-b3", - "global_id": 1944, - "bbox": [ - 77.3, - 676.79, - 517.97, - 691.19 - ], - "text": "is bullish, left translation is bearish. (Source: The Power of Oscillator/Cycle", - "type": "text" - }, - { - "block_id": "p336-b4", - "global_id": 1945, - "bbox": [ - 207.04, - 693.35, - 388.23, - 707.75 - ], - "text": "Combination by Walt Bressert.)", - "type": "text" - }, - { - "block_id": "p336-b5", - "global_id": 1946, - "bbox": [ - 72.0, - 724.33, - 510.01, - 755.29 - ], - "text": "Computers can help you find cycles by visual inspection. The user first\nputs a price chart on the screen. The next step is to pick a prominent bottom", - "type": "text" - } - ] - }, - { - "page_num": 337, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p337-b0", - "global_id": 1947, - "bbox": [ - 72.0, - 73.28, - 512.36, - 137.37 - ], - "text": "on the chart as a starting point. Once that is done, vertical lines (or arcs)\nappear every 10 days (the default value). The cycle periods can be\nlengthened, shortened, or moved left or right to find the right cycle fit on the\nchart. (See Figures 14.19 and 14.20.)", - "type": "text" - }, - { - "block_id": "p337-b1", - "global_id": 1948, - "bbox": [ - 77.76, - 457.14, - 517.52, - 488.1 - ], - "text": "Figure 14.16 The 4 year presidential cycle is clearly identified with the\nEhrlich Cycle Forecaster (see vertical lines). If the cycle is still working, the", - "type": "text" - }, - { - "block_id": "p337-b2", - "global_id": 1949, - "bbox": [ - 134.96, - 490.26, - 460.29, - 504.66 - ], - "text": "next major low would be expected to occur during 1998.", - "type": "text" - } - ] - }, - { - "page_num": 338, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p338-b0", - "global_id": 1950, - "bbox": [ - 72.66, - 73.28, - 522.62, - 120.81 - ], - "text": "Figure 14.17 The Ehrlich Cycle Forecaster has identified a 49 day trading\ncycle in S&P 500 futures prices (see vertical lines). The ECF estimates that\nthe next cycle low will be formed 49 days from the last cycle low, which would", - "type": "text" - }, - { - "block_id": "p338-b1", - "global_id": 1951, - "bbox": [ - 232.34, - 122.97, - 362.93, - 137.37 - ], - "text": "be on March 30, 1998.", - "type": "text" - }, - { - "block_id": "p338-b2", - "global_id": 1952, - "bbox": [ - 74.66, - 390.88, - 520.63, - 405.34 - ], - "text": "Figure 14.18 The ECF has uncovered a 133 day cycle in Boeing (see vertical", - "type": "text" - }, - { - "block_id": "p338-b3", - "global_id": 1953, - "bbox": [ - 85.83, - 407.44, - 509.44, - 438.41 - ], - "text": "lines). Since the last cycle low occurred during November, 1997, the ECF\nestimates that the next cycle low is due to occur 133 days later on June 3,", - "type": "text" - }, - { - "block_id": "p338-b4", - "global_id": 1954, - "bbox": [ - 281.44, - 440.57, - 313.83, - 454.97 - ], - "text": "1998.", - "type": "text" - }, - { - "block_id": "p338-b5", - "global_id": 1955, - "bbox": [ - 74.1, - 716.4, - 521.17, - 730.86 - ], - "text": "Figure 14.19a The bottoms in the cycle arcs coincide with important reaction", - "type": "text" - }, - { - "block_id": "p338-b6", - "global_id": 1956, - "bbox": [ - 72.27, - 732.96, - 523.01, - 763.93 - ], - "text": "lows in the Dow when spaced 40 weeks apart. That suggests a 40 week cycle\nin the Dow. The last two cycle troughs were in the spring of 1997 and the start", - "type": "text" - } - ] - }, - { - "page_num": 339, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p339-b0", - "global_id": 1957, - "bbox": [ - 236.34, - 73.28, - 358.93, - 87.68 - ], - "text": "of 1998 (see arrows).", - "type": "text" - }, - { - "block_id": "p339-b1", - "global_id": 1958, - "bbox": [ - 75.38, - 346.95, - 519.88, - 377.91 - ], - "text": "Figure 14.19b The daily cycle arcs reveal the presence of 50 day cycle\nbottoms in the Dow during the second half of 1997 and the start of 1998. The", - "type": "text" - }, - { - "block_id": "p339-b2", - "global_id": 1959, - "bbox": [ - 84.75, - 380.08, - 510.52, - 394.48 - ], - "text": "idea is to shift the arcs until their lows coincide with a number of reaction", - "type": "text" - }, - { - "block_id": "p339-b3", - "global_id": 1960, - "bbox": [ - 229.49, - 396.64, - 365.78, - 411.04 - ], - "text": "lows on the price chart.", - "type": "text" - }, - { - "block_id": "p339-b4", - "global_id": 1961, - "bbox": [ - 73.43, - 672.47, - 521.84, - 686.93 - ], - "text": "Figure 14.20a Beginning with the major bottom in 1981, the cycle finder arcs", - "type": "text" - }, - { - "block_id": "p339-b5", - "global_id": 1962, - "bbox": [ - 75.68, - 689.03, - 519.59, - 703.43 - ], - "text": "reveal that bonds have shown a tendency to form important bottoms every 75", - "type": "text" - }, - { - "block_id": "p339-b6", - "global_id": 1963, - "bbox": [ - 88.07, - 705.6, - 507.2, - 720.0 - ], - "text": "months (6.25 years). These numbers may shift with time, but still provide", - "type": "text" - }, - { - "block_id": "p339-b7", - "global_id": 1964, - "bbox": [ - 219.89, - 722.16, - 375.38, - 736.56 - ], - "text": "useful trading information.", - "type": "text" - } - ] - }, - { - "page_num": 340, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p340-b0", - "global_id": 1965, - "bbox": [ - 79.43, - 315.98, - 515.84, - 330.44 - ], - "text": "Figure 14.20b Applied to this daily chart, the cycle arcs showed a tendency", - "type": "text" - }, - { - "block_id": "p340-b1", - "global_id": 1966, - "bbox": [ - 84.0, - 332.54, - 511.28, - 346.94 - ], - "text": "for bond prices to bottom every 55 trading days during this time span (see", - "type": "text" - }, - { - "block_id": "p340-b2", - "global_id": 1967, - "bbox": [ - 273.31, - 349.11, - 321.96, - 363.51 - ], - "text": "arrows).", - "type": "text" - }, - { - "block_id": "p340-b3", - "global_id": 1968, - "bbox": [ - 72.0, - 407.46, - 519.59, - 577.4 - ], - "text": "SEASONAL CYCLES\nAll markets are affected to some extent by an annual seasonal cycle. The\nseasonal cycle refers to the tendency for markets to move in a given direction\nat certain times of the year. The most obvious seasonals involve the grain\nmarkets where seasonal lows usually occur around harvest time when supply\nis most plentiful. In soybeans, for example, most seasonal tops occur between\nApril and June with seasonal bottoms taking place between August and\nOctober. (See Figure 14.21.) One well known seasonal pattern is the\n“February Break” where grain and soybean prices usually drop from late\nDecember or early January into February.", - "type": "text" - } - ] - }, - { - "page_num": 341, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p341-b0", - "global_id": 1969, - "bbox": [ - 102.32, - 379.36, - 492.95, - 393.82 - ], - "text": "Figure 14.21 Soybeans usually peak in May and bottom in October.", - "type": "text" - }, - { - "block_id": "p341-b1", - "global_id": 1970, - "bbox": [ - 72.0, - 410.33, - 520.54, - 540.68 - ], - "text": "Although the reasons for seasonal tops and bottoms are more obvious in\nthe agricultural markets, virtually all markets experience seasonal patterns.\nCopper, for example, shows a strong seasonal uptrend from the\nJanuary/February period with a tendency to top in March or April. (See\nFigure 14.22.) Silver has a low in January with higher prices into March.\nGold shows a tendency to bottom in August. Petroleum products have a\ntendency to peak during October and usually don’t bottom until the end of the\nwinter. (See Figure 14.23.) Financial markets also have seasonal patterns.", - "type": "text" - } - ] - }, - { - "page_num": 342, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p342-b0", - "global_id": 1971, - "bbox": [ - 88.52, - 382.96, - 506.76, - 397.42 - ], - "text": "Figure 14.22 Copper usually bottoms during October and February, but", - "type": "text" - }, - { - "block_id": "p342-b1", - "global_id": 1972, - "bbox": [ - 195.52, - 399.52, - 399.75, - 413.92 - ], - "text": "peaks during the April-May period.", - "type": "text" - }, - { - "block_id": "p342-b2", - "global_id": 1973, - "bbox": [ - 92.71, - 743.05, - 502.56, - 757.51 - ], - "text": "Figure 14.23 Crude oil prices peak during October and turn up during", - "type": "text" - } - ] - }, - { - "page_num": 343, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p343-b0", - "global_id": 1974, - "bbox": [ - 276.91, - 73.28, - 318.35, - 87.68 - ], - "text": "March.", - "type": "text" - }, - { - "block_id": "p343-b1", - "global_id": 1975, - "bbox": [ - 72.0, - 104.25, - 522.57, - 218.03 - ], - "text": "The U.S. Dollar has a tendency to bottom during January. (See Figure\n14.24.) Treasury Bond prices usually hit important highs during January. Over\nthe entire year, Treasury Bond prices are usually weaker during the first half\nof the year and stronger during the second half. (See Figure 14.25.) The\nexamples of seasonal charts are provided by the Moore Research Center\n(Moore Research Center, 321 West 13th Avenue, Eugene, OR 97401, (800)\n927-7259), which specializes in seasonal analysis of futures markets.", - "type": "text" - }, - { - "block_id": "p343-b2", - "global_id": 1976, - "bbox": [ - 76.54, - 488.82, - 518.72, - 503.29 - ], - "text": "Figure 14.24 The peak in the German mark during January coincides with a", - "type": "text" - }, - { - "block_id": "p343-b3", - "global_id": 1977, - "bbox": [ - 84.4, - 505.39, - 510.86, - 519.79 - ], - "text": "lowpoint in the U.S. dollar that usually occurs at the start of the new year.", - "type": "text" - } - ] - }, - { - "page_num": 344, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p344-b0", - "global_id": 1978, - "bbox": [ - 80.66, - 325.34, - 514.62, - 339.81 - ], - "text": "Figure 14.25 Treasury Bonds prices usually peak around the new year, and", - "type": "text" - }, - { - "block_id": "p344-b1", - "global_id": 1979, - "bbox": [ - 88.47, - 341.91, - 506.79, - 356.31 - ], - "text": "then remain weak for most of the first half. The second half of the year is", - "type": "text" - }, - { - "block_id": "p344-b2", - "global_id": 1980, - "bbox": [ - 236.88, - 358.47, - 358.39, - 372.87 - ], - "text": "better for bond bulls.", - "type": "text" - }, - { - "block_id": "p344-b3", - "global_id": 1981, - "bbox": [ - 72.0, - 416.82, - 519.21, - 586.77 - ], - "text": "STOCK MARKET CYCLES\nDid you know that the strongest three month span for the stock market is\nNovember through January? February is then weaker, but is followed by a\nstrong March and April. After a soft June, the market turns strong during July\n(the start of the traditional summer rally). The weakest month of the year is\nSeptember. The strongest month is December (ending with the well known\nSanta Claus rally just after Christmas). That information, and a whole lot\nmore about stock market cycles, can be found in Yale Hirsch’s annual Stock\nTrader’s Almanac (The Hirsch Organization, 184 Central Avenue, Old\nTappen, NJ 07675).", - "type": "text" - }, - { - "block_id": "p344-b4", - "global_id": 1982, - "bbox": [ - 72.0, - 630.0, - 510.22, - 766.81 - ], - "text": "THE JANUARY BAROMETER\nAccording to Hirsch: “as January goes, so goes the year.” The well known\nJanuary Barometer holds that what the S&P 500 does during January will\ndetermine what kind of year the market as a whole will have. Another\nvariation on that theme is the belief that the direction of the S&P 500 during\nthe first 5 trading days of the year gives some hint of what’s ahead for the\nyear. The January Barometer shouldn’t be confused with the January Effect,\nwhich is the tendency for smaller stocks to outperform larger stocks during", - "type": "text" - } - ] - }, - { - "page_num": 345, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p345-b0", - "global_id": 1983, - "bbox": [ - 72.0, - 73.06, - 119.42, - 87.46 - ], - "text": "January.", - "type": "text" - }, - { - "block_id": "p345-b1", - "global_id": 1984, - "bbox": [ - 72.0, - 131.63, - 517.86, - 285.01 - ], - "text": "THE PRESIDENTIAL CYCLE\nAnother well known cycle that affects stock market behavior is the 4 year\ncycle, also called the Presidential Cycle, because it coincides with the elected\nterm of U.S. presidents. Each of the 4 years has a different historical return.\nThe election year (1) is normally strong. The postelection and midyears (2\nand 3) are normally weak. The preelection year (4) is normally strong.\nAccording to Hirsch’s Trader’s Almanac, election years since 1904 have seen\naverages gains of 224%; postelection years, gains of 72%; midterm years,\ngains of 63%; and preelection years, gains of 217%. (See Figure 14.16.)", - "type": "text" - }, - { - "block_id": "p345-b2", - "global_id": 1985, - "bbox": [ - 72.0, - 328.24, - 517.62, - 555.08 - ], - "text": "COMBINING CYCLES WITH OTHER\nTECHNICAL TOOLS\nTwo of the most promising areas of overlap between cycles and traditional\ntechnical indicators are in the use of moving averages and oscillators. It is\nbelieved that the usefulness of both indicators can be enhanced if the time\nperiods used are tied to each market’s dominant cycles. Let’s assume that a\nmarket has a dominant 20 day trading cycle. Normally, when constructing an\noscillator, it’s best to use half the length of the cycle. In this case, the\noscillator period would be 10 days. To trade a 40 day cycle, use a 20 day\noscillator. Walt Bressert discusses in his book, The Power of Oscillator/Cycle\nCombinations, how cycles can be used to adjust time spans for the\nCommodity Channel Index, the Relative Strength Index, Stochastics, and\nMoving Average Convergence Divergence (MACD).", - "type": "text" - }, - { - "block_id": "p345-b3", - "global_id": 1986, - "bbox": [ - 72.0, - 557.24, - 522.73, - 671.03 - ], - "text": "Moving averages can also be tied to cycles. You could use different\nmoving averages to track different cycle lengths. To generate a moving\naverage crossover system for a 40 day cycle, you could use a 40 day moving\naverage in conjunction with a 20 day average (one-half of the 40 day cycle) or\na 10 day average (one-quarter of the 40 day cycle). The main problem with\nthis approach is determining what the dominant cycles are at a particular point\nin time.", - "type": "text" - }, - { - "block_id": "p345-b4", - "global_id": 1987, - "bbox": [ - 72.0, - 714.98, - 518.86, - 768.97 - ], - "text": "MAXIMUM ENTROPY SPECTRAL ANALYSIS\nThe search for the right dominant cycles in any market is complicated by the\nbelief that cycle lengths aren’t static; in other words, they keep changing over", - "type": "text" - } - ] - }, - { - "page_num": 346, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p346-b0", - "global_id": 1988, - "bbox": [ - 72.0, - 73.31, - 522.35, - 319.58 - ], - "text": "time. What worked a month ago may not work a month from now. In his\nbook, MESA and Trading Market Cycles, John Ehlers uses a statistical\napproach called Maximum Entropy Spectral Analysis (MESA). Ehlers\nexplains that one of the main advantages of MESA is its high-resolution\nmeasurement of cycles with relatively small time periods, which is crucial for\nshorter term trading. Ehlers also explains how cycles can be used to optimize\nmoving average lengths and many of the oscillator-type indicators we’ve\nalready mentioned. Uncovering cycles allows for the dynamic adjusting of\ntechnical indicators to fit current market conditions. Ehlers also addresses the\nproblem of distinguishing between a market in a cycle mode versus one that is\nin a trend mode. When a market is in a trend mode, a trend-following\nindicator like a moving average is needed to implement trades. A cycle mode\nwould favor the use of oscillator-type indicators. Cycle measurement can help\ndetermine which mode the market is currently in, and which type of technical\nindicator is more appropriate to use for trading strategies.", - "type": "text" - }, - { - "block_id": "p346-b1", - "global_id": 1989, - "bbox": [ - 72.0, - 363.53, - 522.58, - 599.73 - ], - "text": "CYCLE READING AND SOFTWARE\nMost of the books referred to in this chapter on cycles can be obtained\nthrough mail order firms like Traders Press (see reference in previous chapter)\nor Traders’ Library, P.O. Box 2466, Ellicott City, MD 21041, [800] 272-\n2855). There’s also a lot more software to help you perform cycle analysis\nwith your computer. The Ehrlich Cycle Forecaster and Walt Bressert’s\nCycleTrader are both available as add-on options to run with charting\nsoftware provided by Omega Research. Bressert’s CycleTrader integrates the\nconcepts he describes in his book, The Power of Oscillator/Cycle\nCombinations. (Bressert Marketing Group, 100 East Walton, Suite 200,\nChicago, IL 60611 (312) 867-8701). More information on the MESA\ncomputer program can be gotten from John Ehlers (Box 1801, Goleta, CA\n93116 (805) 969-6478). For ongoing cycle research and analysis, don’t forget\nthe Foundation for the Study of Cycles.", - "type": "text" - } - ] - }, - { - "page_num": 347, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p347-b0", - "global_id": 1990, - "bbox": [ - 72.0, - 339.05, - 512.07, - 475.86 - ], - "text": "INTRODUCTION\nThe computer has played an increasingly important role in the field of\ntechnical analysis. In this chapter, we’ll see how the computer can make the\ntechnical trader’s task a good deal easier by providing quick and easy access\nto an arsenal of technical tools and studies that would have required an\nenormous amount of work just a few years earlier. This assumes, of course,\nthat the trader knows how to use these tools, which brings us to one of the\ndisadvantages of the computer.", - "type": "text" - }, - { - "block_id": "p347-b1", - "global_id": 1991, - "bbox": [ - 72.0, - 478.02, - 522.35, - 591.81 - ], - "text": "The trader not properly schooled in the concepts that underlie the various\nindicators, and who is not comfortable with how each indicator is interpreted,\nmay find him- or herself overwhelmed with the vast array of computer\nsoftware currently available. Even worse, the amount of impressive technical\ndata at one’s fingertips sometimes fosters a false sense of security and\ncompetence. Traders mistakenly assume that they are automatically better\nsimply because they have access to so much computer power.", - "type": "text" - }, - { - "block_id": "p347-b2", - "global_id": 1992, - "bbox": [ - 72.0, - 593.97, - 512.32, - 707.76 - ], - "text": "The theme emphasized in this discussion is that the computer is an\nextremely valuable tool in the hands of a technically oriented trader who has\nalready done his or her basic homework. When we review many of the\nroutines available in the computer, you’ll see that a fair number of the tools\nand indicators are quite basic and have already been covered in previous\nchapters. There are, of course, more sophisticated tools that require more\nadvanced charting software.", - "type": "text" - }, - { - "block_id": "p347-b3", - "global_id": 1993, - "bbox": [ - 72.0, - 709.92, - 514.73, - 757.45 - ], - "text": "Much of the work involved in technical analysis can be performed\nwithout the computer. Certain functions can be more easily performed with a\nsimple chart and ruler than with a computer printout. Some types of longer", - "type": "text" - } - ] - }, - { - "page_num": 348, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p348-b0", - "global_id": 1994, - "bbox": [ - 72.0, - 73.28, - 497.32, - 120.81 - ], - "text": "range analysis don’t require a computer. As useful as it is, the computer is\nonly a tool. It can make a good technical analyst even better. It won’t,\nhowever, turn a poor technician into a good one.", - "type": "text" - }, - { - "block_id": "p348-b1", - "global_id": 1995, - "bbox": [ - 72.0, - 144.49, - 157.8, - 155.29 - ], - "text": "Charting Software", - "type": "text" - }, - { - "block_id": "p348-b2", - "global_id": 1996, - "bbox": [ - 72.0, - 163.31, - 512.39, - 293.65 - ], - "text": "Several of the technical routines available in charting software have been\ncovered in previous chapters. We’ll review some of the tools and indicators\ncurrently available. We’ll then address some additional features such as the\nability to automate the various functions chosen by the user. In addition to\nproviding us with the various technical studies, the computer also enables us\nto test various studies for profitability, which may be the most valuable\nfeature of the program. Some software allows the user, with little or no\nprogramming background, to construct indicators and systems.", - "type": "text" - }, - { - "block_id": "p348-b3", - "global_id": 1997, - "bbox": [ - 72.0, - 317.33, - 513.99, - 449.21 - ], - "text": "Welles Wilder’s Directional Movement and Parabolic Systems\nWe’ll take a close look at a couple of Welles Wilder’s more popular systems,\nthe Directional Movement System and the Parabolic System. We’ll use those\ntwo systems in our discussion of the relative merits of relying on mechanical\ntrading systems. It will be demonstrated that mechanical trend following\nsystems only work well in certain types of market environments. It will also\nbe shown how a mechanical system can be incorporated into one’s market\nanalysis and used simply as a confirming technical indicator.", - "type": "text" - }, - { - "block_id": "p348-b4", - "global_id": 1998, - "bbox": [ - 72.0, - 472.89, - 196.6, - 483.69 - ], - "text": "Too Much of a Good Thing", - "type": "text" - }, - { - "block_id": "p348-b5", - "global_id": 1999, - "bbox": [ - 72.0, - 491.7, - 509.98, - 605.49 - ], - "text": "It may strike you that there are too many indicators from which to choose.\nInstead of simplifying our lives, has the computer only served to complicate\nthings by giving us so much more to look at? Charting packages offer 80\ndifferent studies that are available to the technician. How does one possibly\nreach any conclusions (and find the time to trade) with so much data to\ncontend with? We’ll say a few words about some work being done in that\ndirection.", - "type": "text" - }, - { - "block_id": "p348-b6", - "global_id": 2000, - "bbox": [ - 72.0, - 648.72, - 516.74, - 768.97 - ], - "text": "SOME COMPUTER NEEDS\nCharting software can be applied to virtually any financial market. Most\nsoftware is user-friendly, meaning that it can be easily implemented by\nchoosing from successive lists of available routines. The place to start is with\na charting software package that works for the computer you already own or\nare thinking of buying. Bear in mind that most charting software has been\nwritten for IBM-compatible computers.", - "type": "text" - } - ] - }, - { - "page_num": 349, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p349-b0", - "global_id": 2001, - "bbox": [ - 72.0, - 73.28, - 515.57, - 170.5 - ], - "text": "Charting packages do not provide daily market data. The user must\nobtain that data elsewhere. Data can be collected automatically from a data\nservice over telephone lines (requiring a phone modem). Charting packages\nprovide the names of various data vendors from which to choose. These data\nvendors provide all the software and instructions needed to set up and collect\nthe data files.", - "type": "text" - }, - { - "block_id": "p349-b1", - "global_id": 2002, - "bbox": [ - 72.0, - 172.67, - 522.79, - 369.27 - ], - "text": "When first starting out, the user must collect historical data going back\nfor at least several months to have something to work with. After that, data\nshould be collected daily. It is possible to analyze “on line” data during the\ntrading day by hooking up to a quote service. However, in our use of daily\ndata, we will be referring to end-of-day data, which is available after the\nmarkets close. The final piece of equipment you might want is a printer to\nobtain a copy of whatever appears on the terminal screen. CD-Rom capability\nis highly recommended since some software vendors provide you with several\nyears of historical data on a CD-Rom disk to get you started. There are some\ndata vendors that also provide charting capability, which simplifies your task\neven more. One such service is Telescan (5959 Corporate Drive, Suite 2000,\nHouston, TX 77036, (800) 324-8246, www.telescan.com).", - "type": "text" - }, - { - "block_id": "p349-b2", - "global_id": 2003, - "bbox": [ - 72.0, - 413.22, - 449.65, - 450.65 - ], - "text": "GROUPING TOOLS AND INDICATORS\nThe following list groups some of the chart and indicator options.", - "type": "text" - }, - { - "block_id": "p349-b3", - "global_id": 2004, - "bbox": [ - 100.79, - 467.22, - 512.52, - 680.39 - ], - "text": "Basic Charts: Bar, line, point and figure, and candlesticks\nChart Scales: Arithmetic and semilogarithmic\nBar Chart: Price, volume, and open interest (for futures)\nVolume: Bars, on balance, and Demand Index\nBasic Tools: Trendlines and channels, percentage retracements, moving\naverages, and oscillators\nMoving Averages: Reference envelopes, Bollinger Bands\nOscillators: Commodity Channel Index, momentum, rate of change,\nMACD, Stochastic, Williams %R, RSI\nCycles: Cycle Finder\nFibonacci Tools: Fan lines, arcs, time zones and retracements\nWilder: RSI, Commodity Selection Index, Directional Movement,\nParabolic, Swing Index, ADX line", - "type": "text" - }, - { - "block_id": "p349-b4", - "global_id": 2005, - "bbox": [ - 72.0, - 723.62, - 507.66, - 761.05 - ], - "text": "USING THE TOOLS AND INDICATORS\nHow does one cope with so much from which to choose? A suggestion is to", - "type": "text" - } - ] - }, - { - "page_num": 350, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p350-b0", - "global_id": 2006, - "bbox": [ - 72.0, - 73.06, - 514.34, - 203.63 - ], - "text": "first use the basic tools such as price, volume, trendlines, percentage\nretracements, moving averages, and oscillators. Notice the large number of\noscillators available. Pick one or two that you are most comfortable with and\ngo with them. Use such things as cycles and Fibonacci tools as secondary\ninputs unless you have a special interest in those areas. Cycles can help fine\ntune moving average and oscillator lengths, but require study and practice.\nFor mechanical trading systems, Wilder’s Parabolic and DMI are especially\nnoteworthy.", - "type": "text" - }, - { - "block_id": "p350-b1", - "global_id": 2007, - "bbox": [ - 72.0, - 247.58, - 515.56, - 391.6 - ], - "text": "WELLES WILDER’S PARABOLIC AND\nDIRECTIONAL MOVEMENT SYSTEMS\nWe’re going to spend some time on two studies that are especially useful.\nBoth studies were developed by J. Welles Wilder Jr. and discussed in his\nbook, New Concepts in Technical Trading Systems. Three of Wilder’s other\nstudies included on the computer menu—Commodity Selection Index,\nRelative Strength Index, and the Swing Index—are also included in the same\nbook.", - "type": "text" - }, - { - "block_id": "p350-b2", - "global_id": 2008, - "bbox": [ - 72.0, - 415.28, - 522.75, - 596.85 - ], - "text": "Parabolic System (SAR)\nWilder’s Parabolic system (SAR) is a time/price reversal system that is\nalways in the market. The letters “SAR” stand for “stop and reverse,”\nmeaning that the position is reversed when the protective stop is hit. It is a\ntrend-following system. It gets its name from the shape assumed by the\ntrailing stops that tend to curve like a parabola. (See Figures 15.1-15.4. Notice\nthat as prices trend higher, the rising dots below the price action (the stop and\nreverse points) tend to start out slower and then accelerate with the trend. In a\ndowntrend, the same thing happens but in the opposite direction (the dots are\nabove the price action). The SAR numbers are calculated and available to the\nuser for the following day.", - "type": "text" - }, - { - "block_id": "p350-b3", - "global_id": 2009, - "bbox": [ - 72.0, - 599.01, - 513.86, - 745.93 - ], - "text": "Wilder built an acceleration factor into the system. Each day the stop\nmoves in the direction of the new trend. At first, the movement of the stop is\nrelatively slow to allow the trend time to become established. As the\nacceleration factor increases, the SAR begins to move faster, eventually\ncatching up to the price action. If the trend falters, or fails to materialize, the\nresult is usually a stop and reverse signal. As the accompanying charts show,\nthe Parabolic system works extremely well in trending markets. Notice that\nwhile the trending portions were captured well, the system whipsawed\nconstantly during the sideways, nontrending periods.", - "type": "text" - } - ] - }, - { - "page_num": 351, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p351-b0", - "global_id": 2010, - "bbox": [ - 73.69, - 303.74, - 521.58, - 318.2 - ], - "text": "Figure 15.1 The Parabolic SARs look like dots on the chart. A buy signal was", - "type": "text" - }, - { - "block_id": "p351-b1", - "global_id": 2011, - "bbox": [ - 77.07, - 320.3, - 518.21, - 351.26 - ], - "text": "given when the upper SAR was hit (first arrow). Notice how the SARs\naccelerated upward during the rally and caught most of the uptrend. A small", - "type": "text" - }, - { - "block_id": "p351-b2", - "global_id": 2012, - "bbox": [ - 91.13, - 353.43, - 504.13, - 367.83 - ], - "text": "whipsaw occurred to the upper right, which was quickly corrected. This", - "type": "text" - }, - { - "block_id": "p351-b3", - "global_id": 2013, - "bbox": [ - 189.25, - 369.99, - 406.03, - 384.39 - ], - "text": "system works when a trend is present.", - "type": "text" - }, - { - "block_id": "p351-b4", - "global_id": 2014, - "bbox": [ - 74.72, - 630.7, - 520.54, - 645.16 - ], - "text": "Figure 15.2 A longer range version of the previous chart shows the good and", - "type": "text" - }, - { - "block_id": "p351-b5", - "global_id": 2015, - "bbox": [ - 74.55, - 647.26, - 520.73, - 678.23 - ], - "text": "bad aspects of Parabolics and any trend-following system. They work during\ntrending periods (to the left and right of the chart). But are useless during the", - "type": "text" - }, - { - "block_id": "p351-b6", - "global_id": 2016, - "bbox": [ - 125.09, - 680.39, - 470.17, - 694.79 - ], - "text": "type of trading range that occurred from August to January.", - "type": "text" - } - ] - }, - { - "page_num": 352, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p352-b0", - "global_id": 2017, - "bbox": [ - 77.95, - 305.9, - 517.33, - 320.36 - ], - "text": "Figure 15.3 Parabolics can be used on a monthly chart to track the primary", - "type": "text" - }, - { - "block_id": "p352-b1", - "global_id": 2018, - "bbox": [ - 90.2, - 322.46, - 505.07, - 353.42 - ], - "text": "trend. A sell signal in early 1994 was followed by a buy in late summer.\nExcept for one whipsaw during 1996, this system has stayed positive for", - "type": "text" - }, - { - "block_id": "p352-b2", - "global_id": 2019, - "bbox": [ - 245.47, - 355.59, - 349.8, - 369.99 - ], - "text": "almost four years.", - "type": "text" - }, - { - "block_id": "p352-b3", - "global_id": 2020, - "bbox": [ - 73.26, - 616.29, - 522.0, - 647.26 - ], - "text": "Figure 15.4 Parabolics applied to weekly chart of Dell Computer. After\nstaying positive through most of 1997, a sell signal was given during October.", - "type": "text" - }, - { - "block_id": "p352-b4", - "global_id": 2021, - "bbox": [ - 101.84, - 649.42, - 493.43, - 663.82 - ], - "text": "That sell signal was reversed and a buy signal given as 1997 ended.", - "type": "text" - }, - { - "block_id": "p352-b5", - "global_id": 2022, - "bbox": [ - 72.0, - 680.39, - 518.14, - 761.05 - ], - "text": "That demonstrates both the strength and weakness of most trend-\nfollowing systems. They work well during strong trending periods, which\nWilder himself estimates occur only about 30% of the time. If that estimate is\neven close to reality, then a trend-following system will not work for about\n70% of the time. How then does one deal with this problem?", - "type": "text" - } - ] - }, - { - "page_num": 353, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p353-b0", - "global_id": 2023, - "bbox": [ - 72.0, - 73.19, - 140.34, - 83.99 - ], - "text": "DMI and ADX", - "type": "text" - }, - { - "block_id": "p353-b1", - "global_id": 2024, - "bbox": [ - 72.0, - 92.01, - 511.97, - 189.23 - ], - "text": "One possible solution is to use some type of filter or a device to determine if\nthe market is in a trending mode. Wilder’s ADX line rates the directional\nmovement of the various markets on a scale of 0 to 100. A rising ADX line\nmeans the market is trending and a better candidate for a trend-following\nsystem. A falling ADX line indicates a nontrending environment, which\nwould not be suitable for a trend-following approach. (See Figure 15.5.)", - "type": "text" - }, - { - "block_id": "p353-b2", - "global_id": 2025, - "bbox": [ - 73.65, - 478.74, - 521.62, - 526.27 - ], - "text": "Figure 15.5 The ADX line measures the degree of directional movement. A\ndownturn from above 40 (left arrow) signaled the onset of a trading range.\nThe upturn from below 20 (right arrow) signaled the resumption of a trending", - "type": "text" - }, - { - "block_id": "p353-b3", - "global_id": 2026, - "bbox": [ - 279.05, - 528.43, - 316.23, - 542.83 - ], - "text": "phase.", - "type": "text" - }, - { - "block_id": "p353-b4", - "global_id": 2027, - "bbox": [ - 72.0, - 559.4, - 516.37, - 623.5 - ], - "text": "Because the ADX line is on a scale from 0 to 100, the trend trader could\nsimply trade those markets with the highest trend ratings. Nontrending\nsystems (oscillators, for example) could be utilized on markets with low\ndirectional movement.", - "type": "text" - }, - { - "block_id": "p353-b5", - "global_id": 2028, - "bbox": [ - 72.0, - 625.66, - 517.69, - 739.44 - ], - "text": "Directional Movement can be used either as a system on its own or as a\nfilter on the Parabolic or any other trend-following system. Two lines are\ngenerated in the DMI study, +DI and -DI. The first line measures positive\n(upward) movement and the second number, negative (downward)\nmovement). Figure 15.6 shows the two lines. The darker line is + DI and the\nlighter line -DI. A buy signal is given when the +DI line crosses over the - DI\nline and a sell signal when it crosses below the - DI line.", - "type": "text" - }, - { - "block_id": "p353-b6", - "global_id": 2029, - "bbox": [ - 100.79, - 741.61, - 500.43, - 756.01 - ], - "text": "Figure 15.6 also shows both the Parabolic and Directional Movement", - "type": "text" - } - ] - }, - { - "page_num": 354, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p354-b0", - "global_id": 2030, - "bbox": [ - 72.0, - 73.64, - 522.3, - 187.79 - ], - "text": "systems. The Parabolic is clearly a more sensitive system, meaning that more\nfrequent and earlier signals are given. However, by using the Directional\nMovement as a filter, several of the bad signals in the Parabolic could be\navoided by following only those signals in the same direction as the\nDirectional Movement lines. It appears then that the Parabolic and Directional\nMovement systems should be used together, with Directional Movement\nacting as a screen or filter on the more sensitive Parabolic.", - "type": "text" - }, - { - "block_id": "p354-b1", - "global_id": 2031, - "bbox": [ - 83.03, - 476.58, - 512.25, - 491.04 - ], - "text": "Figure 15.6 The Directional Movement lines along the bottom of the chart", - "type": "text" - }, - { - "block_id": "p354-b2", - "global_id": 2032, - "bbox": [ - 80.83, - 493.14, - 514.44, - 524.11 - ], - "text": "can be used as a filter on Parabolics (upper chart). When the +DI line is\nabove the -DI line (far left and far right of chart), all Parabolic sell signals", - "type": "text" - }, - { - "block_id": "p354-b3", - "global_id": 2033, - "bbox": [ - 87.07, - 526.27, - 508.21, - 540.67 - ], - "text": "can be ignored. That would have eliminated several whipsaws during the", - "type": "text" - }, - { - "block_id": "p354-b4", - "global_id": 2034, - "bbox": [ - 260.86, - 542.84, - 334.41, - 557.24 - ], - "text": "rally phases.", - "type": "text" - }, - { - "block_id": "p354-b5", - "global_id": 2035, - "bbox": [ - 72.0, - 573.81, - 511.15, - 671.03 - ], - "text": "The best time to use a trending system is when the ADX line is rising.\n(See Figures 15.7 and 15.8.) Be forewarned, however, that when the ADX\nline starts to drop from above the 40 level, that is an early sign that the trend\nis weakening. A rise back above the 20 level is often a sign of the start of a\nnew trend. (The ADX line is essentially a smoothed difference between the\n+DI and -DI lines.)", - "type": "text" - } - ] - }, - { - "page_num": 355, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p355-b0", - "global_id": 2036, - "bbox": [ - 78.8, - 344.79, - 516.47, - 375.75 - ], - "text": "Figure 15.7 The 14 week ADX line peaked in early 1996 from well over 40,\nand initiated an 18 month trading range in utilities. The ADX upturn during", - "type": "text" - }, - { - "block_id": "p355-b1", - "global_id": 2037, - "bbox": [ - 87.94, - 377.92, - 507.34, - 392.31 - ], - "text": "the summer of 1997 from below 20 signaled that utilities were starting to", - "type": "text" - }, - { - "block_id": "p355-b2", - "global_id": 2038, - "bbox": [ - 280.92, - 394.48, - 314.36, - 408.88 - ], - "text": "trend.", - "type": "text" - }, - { - "block_id": "p355-b3", - "global_id": 2039, - "bbox": [ - 73.88, - 700.56, - 521.4, - 764.65 - ], - "text": "Figure 15.8 An ADX line overlaid over a monthly chart of the AMEX Oil\nIndex (XOI). The ADX peaked above 40 in 1990, ending the oil stock rally.\nThe upturn in the ADX line from below 20 at the start of 1995 signaled the\nend of a 4 year trading range in oil stocks, and correctly spotted the start of a", - "type": "text" - } - ] - }, - { - "page_num": 356, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p356-b0", - "global_id": 2040, - "bbox": [ - 266.46, - 73.28, - 328.81, - 87.68 - ], - "text": "new upleg.", - "type": "text" - }, - { - "block_id": "p356-b1", - "global_id": 2041, - "bbox": [ - 72.0, - 131.63, - 455.77, - 151.79 - ], - "text": "PROS AND CONS OF SYSTEM TRADING", - "type": "text" - }, - { - "block_id": "p356-b2", - "global_id": 2042, - "bbox": [ - 72.0, - 176.18, - 233.51, - 186.98 - ], - "text": "Advantages of Mechanical Systems", - "type": "text" - }, - { - "block_id": "p356-b3", - "global_id": 2043, - "bbox": [ - 82.08, - 203.64, - 507.93, - 333.98 - ], - "text": "1. Human emotion is eliminated.\n2. Greater discipline is achieved.\n3. More consistency is possible.\n4. Trades are taken in the direction of the trend.\n5. Participation is virtually guaranteed in the direction of every important\ntrend.\n6. Profits are allowed to run.\n7. Losses are minimized.", - "type": "text" - }, - { - "block_id": "p356-b4", - "global_id": 2044, - "bbox": [ - 72.0, - 357.66, - 246.09, - 368.46 - ], - "text": "Disadvantages of Mechanical Systems", - "type": "text" - }, - { - "block_id": "p356-b5", - "global_id": 2045, - "bbox": [ - 82.08, - 385.12, - 509.04, - 482.34 - ], - "text": "1. Most mechanical systems are trend-following.\n2. Trend-following systems rely on major trends in order to be profitable.\n3. Trend-following systems are generally nonprofitable when markets are\nnot trending.\n4. There are long periods of time when markets are not trending and,\ntherefore, not suitable for a trending approach.", - "type": "text" - }, - { - "block_id": "p356-b6", - "global_id": 2046, - "bbox": [ - 72.0, - 498.91, - 519.95, - 629.26 - ], - "text": "The major problem is the failure of the system to recognize when the\nmarket is not trending and its inability to turn itself off. The measure of a\ngood system is not only its ability to make money in trending markets, but its\nability to preserve capital during nontrending periods. It is this inability of the\nsystem to monitor itself that is its greatest weakness. This is where some\noverriding filtering device, such as Welles Wilder’s Directional Movement\nsystem or the ADX line could prove especially useful by allowing the trader\nto determine which markets are most suitable for a trending system.", - "type": "text" - }, - { - "block_id": "p356-b7", - "global_id": 2047, - "bbox": [ - 72.0, - 631.42, - 522.72, - 761.77 - ], - "text": "Another drawback is that no allowance is generally made for anticipating\nmarket reversals. Trend-following systems ride with the trend until it turns.\nThey don’t recognize when a market has reached a long term support or\nresistance level, when oscillator divergences are being given, or when an\nElliott Wave fifth pattern is clearly visible. Most traders would get more\ndefensive at that point, and begin taking some profits. The system, however,\nwill stay with the position until well after the market has changed direction.\nTherefore, it’s up to the trader to determine how best to employ the system.", - "type": "text" - } - ] - }, - { - "page_num": 357, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p357-b0", - "global_id": 2048, - "bbox": [ - 72.0, - 73.53, - 518.33, - 137.37 - ], - "text": "That is to say, whether it should be followed blindly or whether it should be\nincorporated into a trading plan with other technical factors. That brings us to\nour next section on how a mechanical system can be used as just another\ntechnical input into the forecasting and trading process.", - "type": "text" - }, - { - "block_id": "p357-b1", - "global_id": 2049, - "bbox": [ - 72.0, - 161.05, - 281.14, - 171.85 - ], - "text": "Using System Signals as a Disciplining Device", - "type": "text" - }, - { - "block_id": "p357-b2", - "global_id": 2050, - "bbox": [ - 72.0, - 179.87, - 520.59, - 359.91 - ], - "text": "The system signals can be used simply as a mechanical confirmation along\nwith other technical factors. Even if the system is not being traded\nmechanically, and other technical factors are being employed, the signals\ncould be used as a disciplined way to keep the trader on the right side of the\nmajor trend. No short positions would be taken as long as the computer trend\nwas up. No longs would be taken in a computer downtrend. (This would be a\nsimple way for fundamentally oriented traders to use a technical device as a\nfilter or trigger on their own trading ideas.) Trend direction can be a matter of\njudgment. The computer signals relieve the trader of some degree of\nuncertainty. They can prevent him or her from falling into the trap of “top and\nbottom picking.”", - "type": "text" - }, - { - "block_id": "p357-b3", - "global_id": 2051, - "bbox": [ - 72.0, - 383.59, - 520.32, - 532.03 - ], - "text": "Using Signals as Alerts\nSystem signals can also be used as an excellent screening device to alert the\ntrader to recent trend changes. The trader can simply glance at the trend\nsignals and instantly has several trading candidates. The same information\ncould be found by studying all of the charts. The computer just makes that\ntask quicker, easier, and more authoritative. The ability of the computer to\nautomate system signals and then alert the trader when signals are triggered is\nan enormous asset, especially when the universe of financial markets has\ngrown so large.", - "type": "text" - }, - { - "block_id": "p357-b4", - "global_id": 2052, - "bbox": [ - 72.0, - 575.98, - 519.97, - 729.36 - ], - "text": "NEED EXPERT HELP?\nOne of the products offered by Omega Research called TradeStation offers a\nvariety of Expert Features (Omega Research, Miami, FL 33174, (305) 551-\n9991). You can call up its Expert Commentary, which interprets indicators for\nyou based on current market conditions. Omega’s Expert Analyst will\ndetermine which indicators should work best in the current market and\ninterpret them for you. In addition, it has two Expert Tools. The Trendlines\nAutomatic Indicator actually draws trendlines for you. The Candlestick\nPatterns Indicator reads the more common candlestick chart patterns.", - "type": "text" - } - ] - }, - { - "page_num": 358, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p358-b0", - "global_id": 2053, - "bbox": [ - 72.0, - 74.02, - 513.1, - 310.22 - ], - "text": "TEST SYSTEMS OR CREATE YOUR OWN\nOmega Research also includes a library of the most popular trading systems\nused by traders. You can test them, change them, or create your own if you\nwish. All of Omega’s charting tools, indicators, and trading systems are\nwritten in a relatively simple language called EasyLanguage. EasyLanguage\ntakes trading ideas that you have described in plain language and converts\nthem into the machine code needed to run the program. It’s hard to\noverestimate the value of being able to develop, test, optimize if you wish,\nand then automate your own trading ideas—without being a computer\nprogrammer. The computer will even generate the appropriate trading orders\nfor you and alert you via your alphanumeric pager that signals have been\ntriggered. (In Appendix C, we’ll use Omega Research’s EasyLanguage and\nTradeStation to show you how to go about creating a trading system of your\nown.)", - "type": "text" - }, - { - "block_id": "p358-b1", - "global_id": 2054, - "bbox": [ - 72.0, - 354.17, - 521.22, - 623.5 - ], - "text": "CONCLUSION\nThis chapter introduced a couple more of Welles Wilder’s systems to you—\nParabolics and Directional Movement (DMI). Parabolics can generate useful\ntrading signals, but probably shouldn’t be used alone. The two Dl lines can be\nused as a filter on Parabolics or any other sensitive trend-following trading\nsystem. The ADX line, which is part of the DMI system, provides one way to\ndetermine which type of market you’re dealing with—a trending or a trading\nmarket. A rising ADX line suggests a trend and favors moving averages. A\nfalling ADX line suggests a trading range and favors oscillators. We also used\nthe Parabolic examples to show the good and bad sides of most trend-\nfollowing systems. They work well when a trend is present. They’re useless\nduring a trading range. You have to be able to tell the difference. We also\ntouched on the merits of mechanical trading systems. These systems remove\nhuman emotion and can be very helpful in the right market climate. They can\nalso be used as technical alerts and used in conjunction with fundamental\nanalysis. (See Appendix C for more on system trading.)", - "type": "text" - }, - { - "block_id": "p358-b2", - "global_id": 2055, - "bbox": [ - 72.0, - 625.66, - 516.0, - 756.01 - ], - "text": "There’s no question that the computer has revolutionized financial\nmarket analysis and trading. While our interest is primarily in technical\nanalysis, software programs also allow you to blend fundamental analysis\nwith the technical. When the first edition of this book was published in 1986,\nit cost about $5,000 to outfit yourself with the necessary computer hardware\nto perform serious technical analysis. The leading software package of the\nday cost close to $2,000. How things have changed. You can now obtain\nincredibly powerful computers for less than $2,000. Most software packages", - "type": "text" - } - ] - }, - { - "page_num": 359, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p359-b0", - "global_id": 2056, - "bbox": [ - 72.0, - 73.53, - 522.41, - 104.25 - ], - "text": "can be had for less than $300. The better ones provide you with up to 20 years\nof historical price data on a CD-Rom disk at little or no additional cost.", - "type": "text" - }, - { - "block_id": "p359-b1", - "global_id": 2057, - "bbox": [ - 72.0, - 106.41, - 521.97, - 269.89 - ], - "text": "Another big benefit is the amount of educational help that you can obtain\nwith those software packages. The user manuals alone are the size of a book\nand include technical formulas and all kinds of useful explanations. The\nscreening and alert capabilities of today’s computer are especially helpful to\nthose monitoring global bond and stock markets and thousands of individual\ncommon stocks, not to mention mutual funds. In Chapter 17, we’ll talk about\nan even more sophisticated use of computer technology for developing neural\nnetworks. But the message to you is clear. If you are serious about investing\nor trading financial markets, get a computer and learn how to use it. You’ll be\nglad you did.", - "type": "text" - } - ] - }, - { - "page_num": 360, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p360-b0", - "global_id": 2058, - "bbox": [ - 72.0, - 340.49, - 520.33, - 444.17 - ], - "text": "INTRODUCTION\nThe previous chapters presented the major technical methods used to forecast\nand trade financial markets. In this chapter, we’ll round out the trading\nprocess by adding to the task of market forecasting the crucial elements of\ntrading tactics (or timing) and the often overlooked aspect of money\nmanagement. No trading program can be complete without all three elements.", - "type": "text" - }, - { - "block_id": "p360-b1", - "global_id": 2059, - "bbox": [ - 72.0, - 488.12, - 481.6, - 565.88 - ], - "text": "THE THREE ELEMENTS OF SUCCESSFUL\nTRADING\nAny successful trading program must take into account three important\nfactors: price forecasting, timing, and money management.", - "type": "text" - }, - { - "block_id": "p360-b2", - "global_id": 2060, - "bbox": [ - 82.08, - 582.45, - 522.35, - 762.49 - ], - "text": "1. Price forecasting indicates which way a market is expected to trend. It is\nthe crucial first step in the trading decision. The forecasting process\ndetermines whether the trader is bullish or bearish. It provides the\nanswer to the basic question of whether to enter the market from the long\nor short side. If the price forecast is wrong, nothing else that follows will\nwork.\n2. Trading tactics, or timing, determines specific entry and exit points.\nTiming is especially crucial in futures trading. Because of the low\nmargin requirements and the resulting high leverage, there isn’t much\nroom for error. It’s quite possible to be correct on the direction of the\nmarket, but still lose money on a trade if the timing is off. Timing is", - "type": "text" - } - ] - }, - { - "page_num": 361, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p361-b0", - "global_id": 2061, - "bbox": [ - 82.08, - 73.53, - 521.58, - 203.63 - ], - "text": "almost entirely technical in nature. Therefore, even if the trader is\nfundamentally oriented, technical tools must be employed at this point to\ndetermine specific entry and exit points.\n3. Money management covers the allocation of funds. It includes such areas\nas portfolio makeup, diversification, how much money to invest or risk\nin any one market, the use of stops, reward-to-risk ratios, what to do\nafter periods of success or adversity, and whether to trade conservatively\nor aggressively.", - "type": "text" - }, - { - "block_id": "p361-b1", - "global_id": 2062, - "bbox": [ - 72.0, - 220.2, - 515.64, - 333.98 - ], - "text": "The simplest way to summarize the three different elements is that price\nforecasting tells the trader what to do (buy or sell), timing helps decide when\nto do it, and money management determines how much to commit to the\ntrade. The subject of price forecasting has been covered in the previous\nchapters. We’ll deal with the other two aspects here. We’ll discuss money\nmanagement first because that subject should be taken into consideration\nwhen deciding on the appropriate trading tactics.", - "type": "text" - }, - { - "block_id": "p361-b2", - "global_id": 2063, - "bbox": [ - 72.0, - 377.93, - 522.1, - 564.44 - ], - "text": "MONEY MANAGEMENT\nAfter having spent many years in the research department of a major\nbrokerage firm, I made the inevitable switch to managing money. I quickly\ndiscovered the major difference between recommending trading strategies to\nothers and implementing them myself. What surprised me was that the most\ndifficult part of the transition had little to do with market strategies. The way I\nwent about analyzing the markets and determining entry and exit points didn’t\nchange much. What did change was my perception of the importance of\nmoney management. I was amazed at the impact such things as the size of the\naccount, the portfolio mix, and the amount of money committed to each trade\ncould have on the final results.", - "type": "text" - }, - { - "block_id": "p361-b3", - "global_id": 2064, - "bbox": [ - 72.0, - 566.61, - 497.59, - 630.7 - ], - "text": "Needless to say, I am a believer in the importance of money\nmanagement. The industry is full of advisors and advisory services telling\nclients what to buy or sell and when to do it. Very little is said about how\nmuch of one’s capital to commit to each trade.", - "type": "text" - }, - { - "block_id": "p361-b4", - "global_id": 2065, - "bbox": [ - 72.0, - 632.86, - 522.67, - 746.65 - ], - "text": "Some traders believe that money management is the most important\ningredient in a trading program, even more crucial than the trading approach\nitself. I’m not sure I’d go that far, but I don’t think it’s possible to survive for\nlong without it. Money management deals with the question of survival. It\ntells the trader how to handle his or her money. Any good trader should win in\nthe long run. Money management increases the odds that the trader will\nsurvive to reach the long run.", - "type": "text" - } - ] - }, - { - "page_num": 362, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p362-b0", - "global_id": 2066, - "bbox": [ - 72.0, - 73.19, - 286.53, - 83.99 - ], - "text": "Some General Money Management Guidelines", - "type": "text" - }, - { - "block_id": "p362-b1", - "global_id": 2067, - "bbox": [ - 72.0, - 92.01, - 520.36, - 172.66 - ], - "text": "Admittedly, the question of portfolio management can get very complicated,\nrequiring the use of advanced statistical measures. We’ll approach it here on a\nrelatively simple level. The following are some general guidelines that can be\nhelpful in allocating one’s funds and in determining the size of one’s trading\ncommitments. These guidelines refer primarily to futures trading.", - "type": "text" - }, - { - "block_id": "p362-b2", - "global_id": 2068, - "bbox": [ - 82.08, - 189.23, - 522.31, - 568.04 - ], - "text": "1. Total invested funds should be limited to 50% of total capital. The\nbalance is placed in Treasury Bills. This means that at any one time, no\nmore than half of the trader’s capital should be committed to the\nmarkets. The other half acts as a reserve during periods of adversity and\ndrawdown. If, for example, the size of the account is $100,000, only\n$50,000 would be available for trading purposes.\n2. Total commitment in any one market should be limited to 10-15% of total\nequity. Therefore, in a $100,000 account, only $10,000 to $15,000 would\nbe available for margin deposit in any one market. This should prevent\nthe trader from placing too much capital in any one trade.\n3. The total amount risked in any one market should be limited to 5% of\ntotal equity. This 5% refers to how much the trader is willing to lose if\nthe trade doesn’t work. This is an important consideration in deciding\nhow many contracts to trade and how far away a protective stop should\nbe placed. A $100,000 account, therefore, should not risk more than\n$5,000 on a single trade.\n4. Total margin in any market group should be limited to 20-25% of total\nequity. The purpose of this criteria is to protect against getting too\nheavily involved in any one market group. Markets within groups tend to\nmove together. Gold and silver are part of the precious metals group and\nusually trend in the same direction. Putting on full positions in each\nmarket in the same group would frustrate the principle of diversification.\nMarket commitments in the same group should be controlled.", - "type": "text" - }, - { - "block_id": "p362-b3", - "global_id": 2069, - "bbox": [ - 72.0, - 584.61, - 519.94, - 714.96 - ], - "text": "These guidelines are fairly standard in the futures industry, but can be\nmodified to the trader’s needs. Some traders are more aggressive than others\nand take bigger positions. Others are more conservative. The important\nconsideration is that some form of diversification be employed that allows for\npreservation of capital and some measure of protection during losing periods.\n(Although these guidelines relate to futures trading, the general principles of\nmoney management and asset allocation can be applied to all forms of\ninvesting.)", - "type": "text" - }, - { - "block_id": "p362-b4", - "global_id": 2070, - "bbox": [ - 72.0, - 738.64, - 242.37, - 749.44 - ], - "text": "Diversification Versus Concentration", - "type": "text" - } - ] - }, - { - "page_num": 363, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p363-b0", - "global_id": 2071, - "bbox": [ - 72.0, - 73.28, - 523.1, - 236.76 - ], - "text": "While diversification is one way to limit risk exposure, it can be overdone. If\na trader has trading commitments in too many markets at the same time, a few\nprofitable trades may be diluted by a larger number of losing trades. A\ntradeoff exists and the proper balance must be found. Some successful traders\nconcentrate their trading in a handful of markets. That’s fine as long as those\nmarkets are the ones that are trending at that time. The more negative\ncorrelation between the markets, the more diversification is achieved. Holding\nlong positions in four foreign currency markets at the same time would not be\na good example of diversification, since foreign currencies usually trend in\nthe same direction against the U.S. dollar.", - "type": "text" - }, - { - "block_id": "p363-b1", - "global_id": 2072, - "bbox": [ - 72.0, - 260.44, - 175.47, - 271.24 - ], - "text": "Using Protective Stops", - "type": "text" - }, - { - "block_id": "p363-b2", - "global_id": 2073, - "bbox": [ - 72.0, - 279.25, - 522.2, - 459.29 - ], - "text": "I strongly recommend the use of protective stops. Stop placement, however, is\nan art. The trader must combine technical factors on the price chart with\nmoney management considerations. We’ll show how this is done later in the\nchapter in the section on tactics. The trader must consider the volatility of the\nmarket. The more volatile the market is, the looser the stop that must be\nemployed. Here again, a tradeoff exists. The trader wants the protective stop\nto be close enough so that losing trades are as small as possible. Protective\nstops placed too close, however, may result in unwanted liquidation on short\nterm market swings (or “noise”). Protective stops placed too far away may\navoid the noise factor, but will result in larger losses. The trick is to find the\nright middle ground.", - "type": "text" - }, - { - "block_id": "p363-b3", - "global_id": 2074, - "bbox": [ - 72.0, - 502.53, - 523.15, - 622.78 - ], - "text": "REWARD TO RISK RATIOS\nThe best futures traders make money on only 40% of their trades. That’s right.\nMost trades wind up being losers. How then do traders make money if they’re\nwrong most of the time? Because futures contracts require so little margin,\neven a slight move in the wrong direction results in forced liquidation.\nTherefore, it may be necessary for a trader to probe a market several times\nbefore catching the move he or she is looking for.", - "type": "text" - }, - { - "block_id": "p363-b4", - "global_id": 2075, - "bbox": [ - 72.0, - 624.94, - 514.36, - 755.29 - ], - "text": "This brings us to the question of reward-to-risk ratios. Because most\ntrades are losers, the only way to come out ahead is to ensure that the dollar\namount of the winning trades is greater than that of the losing trades. To\naccomplish this, most traders use a reward-to-risk ratio. For each potential\ntrade, a profit objective is determined. That profit objective (the reward) is\nthen balanced against the potential loss if the trade goes wrong (the risk). A\ncommonly used yardstick is a 3 to 1 reward-to-risk ratio. The profit potential\nmust be at least three times the possible loss if a trade is to be considered.", - "type": "text" - } - ] - }, - { - "page_num": 364, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p364-b0", - "global_id": 2076, - "bbox": [ - 72.0, - 73.28, - 522.76, - 187.07 - ], - "text": "“Letting profits run and cutting losses short” is one of the oldest maxims\nof trading. Large profits in trading are achieved by staying with persistent\ntrends. Because only a relative handful of trades during the course of a year\nwill generate large profits, it’s necessary to maximize those few big winners.\nLetting profits run is the way that is done. The other side of the coin is to keep\nlosing trades as small as possible. You’d be surprised how many traders do\njust the opposite.", - "type": "text" - }, - { - "block_id": "p364-b1", - "global_id": 2077, - "bbox": [ - 72.0, - 231.02, - 519.58, - 391.6 - ], - "text": "TRADING MULTIPLE POSITIONS: TRENDING\nVERSUS TRADING UNITS\nLetting profits run isn’t as easy as it sounds. Picture a situation where a\nmarket starts to trend, producing large profits in a relatively short period of\ntime. Suddenly, the trend stalls, the oscillators show an overbought situation\nand there’s some resistance visible on the chart. What to do? You believe the\nmarket has much higher potential, but you’re worried about losing your paper\nprofits if the market should fail. Do you take profits or ride out a possible\ncorrection?", - "type": "text" - }, - { - "block_id": "p364-b2", - "global_id": 2078, - "bbox": [ - 72.0, - 393.76, - 511.11, - 474.42 - ], - "text": "One way to resolve that problem is to always trade in multiple units.\nThose units can be divided into trading and trending positions. The trending\nportion of the position is held for the long pull. Loose protective stops are\nemployed and the market is given plenty of room to consolidate or correct\nitself. These are the positions that produce the largest profits in the long run.", - "type": "text" - }, - { - "block_id": "p364-b3", - "global_id": 2079, - "bbox": [ - 72.0, - 476.58, - 521.48, - 590.37 - ], - "text": "The trading portion of the portfolio is earmarked for shorter term in-and-\nout trading. If the market reaches a first objective, is near resistance and\noverbought, some profits could be taken or a tight protective stop utilized.\nThe purpose is to lock up or protect profits. If the trend then resumes, any\nliquidated positions can be reinstated. It’s best to avoid trading only one unit\nat a time. The increased flexibility that is achieved from trading multiple units\nmakes a big difference in overall trading results.", - "type": "text" - }, - { - "block_id": "p364-b4", - "global_id": 2080, - "bbox": [ - 72.0, - 633.6, - 509.16, - 761.05 - ], - "text": "WHAT TO DO AFTER PERIODS OF SUCCESS\nAND ADVERSITY\nWhat does a trader do after a losing or a winning streak? Suppose your\ntrading equity is down by 50%. Do you change your style of trading? If\nyou’ve already lost half of your money, you now have to double what you\nhave remaining just to get back to where you were in the first place. Do you\nget more selective choosing trades, or keep doing the same things you were", - "type": "text" - } - ] - }, - { - "page_num": 365, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p365-b0", - "global_id": 2081, - "bbox": [ - 72.0, - 73.06, - 521.93, - 104.25 - ], - "text": "doing before? If you become more conservative, it will be that much harder to\nwin back your losses.", - "type": "text" - }, - { - "block_id": "p365-b1", - "global_id": 2082, - "bbox": [ - 72.0, - 106.41, - 517.57, - 220.2 - ], - "text": "A more pleasant dilemma occurs after a winning streak. What do you do\nwith your winnings? Suppose you’ve doubled your money. One alternative is\nto put your money to maximum use by doubling the size of your positions. If\nyou do that, however, what will happen during the inevitable losing period\nthat’s sure to follow? Instead of giving back 50% of your winnings, you’ll\nwind up giving it all back. So the answers to these two questions aren’t as\nsimple or obvious as they might first appear.", - "type": "text" - }, - { - "block_id": "p365-b2", - "global_id": 2083, - "bbox": [ - 72.0, - 222.36, - 516.76, - 352.71 - ], - "text": "Every trader’s track record is a series of peaks and troughs, much like a\nprice chart. The trend of the equity chart should be pointing upward if the\ntrader is making money on balance. The worst time to increase the size of\none’s commitments is after a winning streak. That’s much like buying into an\noverbought market in an uptrend. The wiser thing to do (which goes against\nbasic human nature) is to begin increasing one’s commitments after a dip in\nequity. This increases the odds that the heavier commitments will be made\nnear the equity troughs instead of the peaks.", - "type": "text" - }, - { - "block_id": "p365-b3", - "global_id": 2084, - "bbox": [ - 72.0, - 396.66, - 520.34, - 533.47 - ], - "text": "TRADING TACTICS\nUpon completion of the market analysis, the trader should know whether he\nor she wants to buy or sell the market. By this time, money management\nconsiderations should have dictated the level of involvement. The final step is\nthe actual purchase or sale. This can be the most difficult part of the process.\nThe final decision as to how and where to enter the market is based on a\ncombination of technical factors, money management parameters, and the\ntype of trading order to employ. Let’s consider them in that order.", - "type": "text" - }, - { - "block_id": "p365-b4", - "global_id": 2085, - "bbox": [ - 72.0, - 557.15, - 522.06, - 689.03 - ], - "text": "Using Technical Analysis in Timing\nThere’s nothing really new in applying the technical principles discussed in\nprevious chapters to the timing process. The only real difference is that timing\ncovers the very short term. The time frame that concerns us here is measured\nin days, hours, and minutes as opposed to weeks and months. But the\ntechnical tools employed remain the same. Rather than going through all of\nthe technical methods again, we’ll limit our discussion to some general\nconcepts.", - "type": "text" - }, - { - "block_id": "p365-b5", - "global_id": 2086, - "bbox": [ - 82.08, - 705.6, - 304.53, - 769.69 - ], - "text": "1. Tactics on breakouts\n2. The breaking of trendlines\n3. The use of support and resistance\n4. The use of percentage retracements", - "type": "text" - } - ] - }, - { - "page_num": 366, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p366-b0", - "global_id": 2087, - "bbox": [ - 82.08, - 73.28, - 191.51, - 87.68 - ], - "text": "5. The use of gaps", - "type": "text" - }, - { - "block_id": "p366-b1", - "global_id": 2088, - "bbox": [ - 72.0, - 111.36, - 293.24, - 122.16 - ], - "text": "Tactics on Breakouts: Anticipation or Reaction?", - "type": "text" - }, - { - "block_id": "p366-b2", - "global_id": 2089, - "bbox": [ - 72.0, - 130.18, - 514.83, - 343.35 - ], - "text": "The trader is forever faced with the dilemma of taking a position in\nanticipation of a breakout, taking a position on the breakout itself, or waiting\nfor the pullback or reaction after the breakout occurs. There are arguments in\nfavor of each approach or all three combined. If the trader is trading several\nunits, one unit can be taken in each instance. If the position is taken in\nanticipation of an upside breakout, the payoff is a better (lower) price if the\nanticipated breakout takes place. The odds of making a bad trade, however,\nare increased. Waiting for the actual breakout increases the odds of success,\nbut the penalty is a later (higher) entry price. Waiting for the pullback after\nthe breakout is a sensible compromise, providing the pullback occurs.\nUnfortunately, many dynamic markets (usually the most profitable ones)\ndon’t always give the patient trader a second chance. The risk involved in\nwaiting for the pullback is the increased chance of missing the market.", - "type": "text" - }, - { - "block_id": "p366-b3", - "global_id": 2090, - "bbox": [ - 72.0, - 345.51, - 517.99, - 409.6 - ], - "text": "This situation is an example of how trading multiple positions simplifies\nthe dilemma. The trader could take a small position in anticipation of the\nbreakout, buy some more on the breakout, and add a little more on the\ncorrective dip following the breakout.", - "type": "text" - }, - { - "block_id": "p366-b4", - "global_id": 2091, - "bbox": [ - 72.0, - 433.28, - 516.77, - 565.16 - ], - "text": "The Breaking of Trendlines\nThis is one of the most useful early entry or exit signals. If the trader is\nlooking to enter a new position on a technical sign of a trend change or a\nreason to exit an old position, the breaking of a tight trendline is often an\nexcellent action signal. Other technical factors must, of course, always be\nconsidered. Trendlines can also be used for entry points when they act as\nsupport or resistance. Buying against a major up trendline or selling against a\ndown trendline can be an effective timing strategy.", - "type": "text" - }, - { - "block_id": "p366-b5", - "global_id": 2092, - "bbox": [ - 72.0, - 588.84, - 210.14, - 599.64 - ], - "text": "Using Support and Resistance", - "type": "text" - }, - { - "block_id": "p366-b6", - "global_id": 2093, - "bbox": [ - 72.0, - 607.66, - 521.16, - 738.0 - ], - "text": "Support and resistance are the most effective chart tools to use for entry and\nexit points. The breaking of resistance can be a signal for a new long position.\nProtective stops can then be placed under the nearest support point. A closer\nprotective stop could be placed just below the actual breakout point, which\nshould now function as support. Rallies to resistance in a downtrend or\ndeclines to support in an uptrend can be used to initiate new positions or add\nto old profitable ones. For purposes of placing protective stops, support and\nresistance levels are most valuable.", - "type": "text" - } - ] - }, - { - "page_num": 367, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p367-b0", - "global_id": 2094, - "bbox": [ - 72.0, - 73.19, - 218.0, - 83.99 - ], - "text": "Using Percentage Retracements", - "type": "text" - }, - { - "block_id": "p367-b1", - "global_id": 2095, - "bbox": [ - 72.0, - 92.01, - 520.36, - 205.79 - ], - "text": "In an uptrend, pullbacks that retrace 40-60% of the prior advance can be\nutilized for new or additional long positions. Because we’re talking primarily\nabout timing, percentage retracements can be applied to very short term\naction. A 40% pullback after a bullish breakout, for example, might provide\nan excellent buying point. Bounces of 40-60% usually provide excellent\nshorting opportunities in downtrends. Percentage retracements can be used on\nintraday charts also.", - "type": "text" - }, - { - "block_id": "p367-b2", - "global_id": 2096, - "bbox": [ - 72.0, - 229.47, - 521.94, - 344.79 - ], - "text": "Using Price Gaps\nPrice gaps on bar charts can be used effectively in the timing of purchases or\nsales. After an upmove, for example, underlying gaps usually function as\nsupport levels. Buy a dip to the upper end of the gap or a dip into the gap\nitself. A protective stop can be placed below the gap. In a bear move, sell a\nrally to the lower end of the gap or into the gap itself. A protective stop can be\nkept over the gap.", - "type": "text" - }, - { - "block_id": "p367-b3", - "global_id": 2097, - "bbox": [ - 72.0, - 368.47, - 215.44, - 379.27 - ], - "text": "Combining Technical Concepts", - "type": "text" - }, - { - "block_id": "p367-b4", - "global_id": 2098, - "bbox": [ - 72.0, - 387.28, - 521.15, - 501.07 - ], - "text": "The most effective way to use these technical concepts is to combine them.\nRemember that when we’re discussing timing, the basic decision to buy or\nsell has already been made. All we’re doing here is fine tuning the entry or\nexit point. If a buy signal has been given, the trader wants to get the best price\npossible. Suppose prices dip into the 40-60% buying zone, show a prominent\nsupport level in that zone, and/or have a potential support gap. Suppose\nfurther that a significant up trendline is nearby.", - "type": "text" - }, - { - "block_id": "p367-b5", - "global_id": 2099, - "bbox": [ - 72.0, - 503.23, - 517.56, - 600.45 - ], - "text": "All of these factors used together would improve the timing of the trade.\nThe idea is to buy near support, but to exit quickly if that support is broken.\nViolation of a tight down trendline drawn above the highs of a downside\nreaction could also be used as a buying signal. During a bounce in a\ndowntrend, the breaking of a tight up trendline could be a shorting\nopportunity.", - "type": "text" - }, - { - "block_id": "p367-b6", - "global_id": 2100, - "bbox": [ - 72.0, - 643.68, - 519.16, - 754.57 - ], - "text": "COMBINING TECHNICAL FACTORS AND\nMONEY MANAGEMENT\nBesides using chart points, money management guidelines should play a role\nin how protective stops are set. Assuming an account size of $100,000, and\nusing the 10% criteria for maximum commitment, only $10,000 is available\nfor the trade. The maximum risk is 5%, or $5,000. Therefore, protective stops", - "type": "text" - } - ] - }, - { - "page_num": 368, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p368-b0", - "global_id": 2101, - "bbox": [ - 72.0, - 73.17, - 506.82, - 104.25 - ], - "text": "on the total position must be placed in such a way that no more than $5,000\nwould be lost if the trade doesn’t work.", - "type": "text" - }, - { - "block_id": "p368-b1", - "global_id": 2102, - "bbox": [ - 72.0, - 106.41, - 519.67, - 220.2 - ], - "text": "A closer protective stop would permit the taking of larger positions. A\nlooser stop would reduce the size of the position. Some traders use only\nmoney management factors in determining where to place a protective stop.\nIt’s critically important, however, that the protective stop be placed over a\nvalid resistance point for a short position or below a valid support point for a\nlong position. The use of intraday charts can be especially effective in finding\ncloser support or resistance levels that have some validity.", - "type": "text" - }, - { - "block_id": "p368-b2", - "global_id": 2103, - "bbox": [ - 72.0, - 264.15, - 522.39, - 334.7 - ], - "text": "TYPES OF TRADING ORDERS\nChoosing the right type of trading order is a necessary ingredient in the\ntactical process. We’ll concern ourselves only with some of the more common\ntypes of orders: market, limit, stop, stop limit, and market-if-touched (M.I.T.).", - "type": "text" - }, - { - "block_id": "p368-b3", - "global_id": 2104, - "bbox": [ - 82.08, - 351.27, - 521.13, - 763.21 - ], - "text": "1. The market order simply instructs your broker to buy or sell at the\ncurrent market price. This is usually preferable in fast market conditions\nor when the trader wants to ensure that a position is taken and to protect\nagainst missing a potentially dynamic market move.\n2. The limit order specifies a price that the trader is willing to pay or\naccept. A buy limit order is placed below the current market price and\nstates the highest price the trader is willing to pay for a purchase. A sell\nlimit order is placed over the current market price and is the lowest price\nthe seller is willing to accept. This type of resting order is used, for\nexample, after a bullish breakout when the buyer wants to buy a\ndownside reaction closer to support.\n3. A stop order can be used to establish a new position, limit a loss on an\nexisting position, or protect a profit. A stop order specifies a price at\nwhich an order is to be executed. A buy stop is placed over the market\nand a sell stop under the market (which is the opposite of the limit\norder). Once the stop price is hit, the order becomes a market order and\nis executed at the best price possible. On a long position, a sell stop is\nplaced below the market to limit a loss. After the market moves higher,\nthe stop can be raised to protect the profit (a trailing stop). A buy stop\ncould be placed above resistance to initiate a long position on a bullish\nbreakout. Since the stop order becomes a market order, the actual “fill”\nprice may be beyond the stop price, especially in a fast market.\n4. A stop limit order combines both a stop and a limit order. This type of\norder specifies both a stop price where the trade is activated and a limit\nprice. Once the stop is elected, the order becomes a limit order. This type", - "type": "text" - } - ] - }, - { - "page_num": 369, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p369-b0", - "global_id": 2105, - "bbox": [ - 82.08, - 73.53, - 521.27, - 269.89 - ], - "text": "of order is useful when the trader wants to buy or sell a breakout, but\nwants to control the price paid or received.\n5. The market-if-touched (M.I.T.) order is similar to a limit order, except\nthat it becomes a market order when the limit price is touched. An M.I.T.\norder to buy would be placed under the market like a limit order. When\nthe limit price is hit, the trade is made at the market. This type of trade\nhas one major advantage over the limit order. The buy limit order placed\nunder the market does not guarantee a fill even if the limit price is\ntouched. Prices may bounce sharply from the limit price, leaving the\norder unfilled. An M.I.T. order is most useful when the trader wants to\nbuy the dip, but doesn’t want to risk missing the market after the limit\nprice is hit.", - "type": "text" - }, - { - "block_id": "p369-b1", - "global_id": 2106, - "bbox": [ - 72.0, - 286.46, - 521.58, - 466.5 - ], - "text": "Each of these orders is appropriate at certain times. Each has its own\nstrong and weak points. Market orders guarantee a position, but may result in\n“chasing” the market. Limit orders provide more control and better prices, but\nrisk missing the market. Stop limit orders also risk missing the market if\nprices gap beyond the limit price. Stop prices are strongly recommended to\nlimit losses and protect profits. However, the use of a buy or sell stop to\ninitiate new positions may result in bad fills. The market-if-touched order is\nparticularly useful, but is not allowed on some exchanges. Familiarize\nyourself with the different types of orders and learn their strengths and\nweaknesses. Each of them has a place in your trading plan. Be sure to find out\nwhich types of orders are permitted on the various financial exchanges.", - "type": "text" - }, - { - "block_id": "p369-b2", - "global_id": 2107, - "bbox": [ - 72.0, - 510.45, - 521.89, - 637.9 - ], - "text": "FROM DAILY CHARTS TO INTRADAY PRICE\nCHARTS\nBecause timing deals with very short term market action, intraday price charts\nare especially useful. Intraday charts are indispensable for day trading\npurposes, although that’s not our focus here. We’re mainly interested in how\nintraday activity can be used to aid the trader in the timing of purchases and\nsales once the basic decision to enter or exit a market has been made.", - "type": "text" - }, - { - "block_id": "p369-b3", - "global_id": 2108, - "bbox": [ - 72.0, - 640.06, - 511.94, - 770.41 - ], - "text": "It bears repeating that the trading process must begin with a long range\nview and then gradually work toward the shorter term. Analysis begins with\nmonthly and weekly charts for long term perspective. Then the daily chart is\nconsulted, which is the basis for the actual trading decision. The intraday\nchart is the last one viewed for even greater precision. The long term chart\ngives a telescopic view of a market. The intraday chart allows more\nmicroscopic study. The technical principles already discussed are clearly\nvisible on these very sensitive charts. (See Figures 16.1-16.3.)", - "type": "text" - } - ] - }, - { - "page_num": 370, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p370-b0", - "global_id": 2109, - "bbox": [ - 73.68, - 318.14, - 521.6, - 349.1 - ], - "text": "Figure 16.1 A 5 minute bar chart of an S&P 500 futures contract showing a\nday and a half of trading. The last five stochastic signals (see arrows) worked", - "type": "text" - }, - { - "block_id": "p370-b1", - "global_id": 2110, - "bbox": [ - 84.53, - 351.27, - 510.75, - 365.67 - ], - "text": "pretty well. Intraday charts are used for very short term trading purposes.", - "type": "text" - }, - { - "block_id": "p370-b2", - "global_id": 2111, - "bbox": [ - 74.46, - 626.38, - 520.82, - 657.34 - ], - "text": "Figure 16.2 A 10 minute bar chart of a Treasury Bond futures contract\nshowing three days of trading. The last two stochastic signals show a sell just", - "type": "text" - }, - { - "block_id": "p370-b3", - "global_id": 2112, - "bbox": [ - 94.38, - 659.51, - 500.89, - 673.9 - ], - "text": "after 10:10 on the morning of 2/26 and then a buy signal the following", - "type": "text" - }, - { - "block_id": "p370-b4", - "global_id": 2113, - "bbox": [ - 207.76, - 676.07, - 387.5, - 690.47 - ], - "text": "morning around the same time.", - "type": "text" - } - ] - }, - { - "page_num": 371, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p371-b0", - "global_id": 2114, - "bbox": [ - 75.18, - 346.95, - 520.09, - 377.91 - ], - "text": "Figure 16.3 A one hour bar chart of a Deutschemark futures contract\nshowing ten trading days. Three stochastic signals are shown (see arrows). A", - "type": "text" - }, - { - "block_id": "p371-b1", - "global_id": 2115, - "bbox": [ - 86.97, - 380.08, - 508.3, - 394.48 - ], - "text": "buy signal on 2/17 turned to a sell on 2/24 and then another buy on 2/26.", - "type": "text" - }, - { - "block_id": "p371-b2", - "global_id": 2116, - "bbox": [ - 72.0, - 438.43, - 514.28, - 575.24 - ], - "text": "THE USE OF INTRADAY PIVOT POINTS\nIn order to achieve earlier entry with even tighter protective stops, some\ntraders try to anticipate where a market will close by the use of pivot points.\nThis technique combines seven key price levels with four time periods. The\nseven pivot points are the previous day’s high, low, and close and the current\nday’s open, high, low, and close. The four time periods are applied to the\ncurrent trading day. They are the open, 30 minutes after the open, midday\n(about 12:30 New York time), and 35 minutes before the close.", - "type": "text" - }, - { - "block_id": "p371-b3", - "global_id": 2117, - "bbox": [ - 72.0, - 577.41, - 521.44, - 757.45 - ], - "text": "These are average times and can be adjusted to the individual markets.\nThe idea is to use pivot points only as a timing device when the trader\nbelieves a market is topping or bottoming. Buy or sell signals are given as the\npivot points are broken during the day. The later in the day the signal is given,\nthe stronger it is. As an illustration of a buy signal, if the market opens above\nthe previous day’s close, but is below the previous day’s high, a buy stop is\nplaced above the previous day’s high. If the buy stop is elected, a protective\nsell stop is placed below the current day’s low. At 35 minutes before the\nclose, if no position has been taken, a buy stop is placed above the current\nday’s high, with a protective stop under today’s open. No action is generally\ntaken during the first 30 minutes of trading. As the day progresses, the pivot", - "type": "text" - } - ] - }, - { - "page_num": 372, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p372-b0", - "global_id": 2118, - "bbox": [ - 72.0, - 73.53, - 515.21, - 120.81 - ], - "text": "points are narrowed as are the protective stops. As a final requirement on a\nbuy signal, prices must close above both the previous day’s closing price and\ntoday’s opening price.", - "type": "text" - }, - { - "block_id": "p372-b1", - "global_id": 2119, - "bbox": [ - 72.0, - 164.76, - 497.34, - 242.52 - ], - "text": "SUMMARY OF MONEY MANAGEMENT AND\nTRADING GUIDELINES\nThe following list pulls together most of the more important elements of\nmoney management and trading.", - "type": "text" - }, - { - "block_id": "p372-b2", - "global_id": 2120, - "bbox": [ - 74.88, - 259.09, - 497.24, - 720.72 - ], - "text": "1. Trade in the direction of the intermediate trend.\n2. In uptrends, buy the dips; in downtrends, sell bounces.\n3. Let profits run, cut losses short.\n4. Use protective stops to limit losses.\n5. Don’t trade impulsively; have a plan.\n6. Plan your work and work your plan.\n7. Use money management principles.\n8. Diversify, but don’t overdo it.\n9. Employ at least a 3 to 1 reward-to-risk ratio.\n10. When pyramiding (adding positions), follow these guidelines. \na. Each successive layer should be smaller than before.\nb. Add only to winning positions.\nc. Never add to a losing position.\nd. Adjust protective stops to the breakeven point.\n11. Never meet a margin call; don’t throw good money after bad.\n12. Close out losing positions before the winning ones.\n13. Except for very short term trading, make decisions away from the\nmarket, preferably when the markets are closed.\n14. Work from the long term to the short term.\n15. Use intraday charts to fine-tune entry and exit.\n16. Master interday trading before trying intraday trading.\n17. Try to ignore conventional wisdom; don’t take anything said in the\nfinancial media too seriously.\n18. Learn to be comfortable being in the minority. If you’re right on the\nmarket, most people will disagree with you.\n19. Technical analysis is a skill that improves with experience and study.\nAlways be a student and keep learning.\n20. Keep it simple; more complicated isn’t always better.", - "type": "text" - } - ] - }, - { - "page_num": 373, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p373-b0", - "global_id": 2121, - "bbox": [ - 72.0, - 74.02, - 521.15, - 227.4 - ], - "text": "APPLICATION TO STOCKS\nThe trading tactics that we’ve covered in this chapter (and the analytical tools\nin preceding chapters) also apply to the stock market, with some minor\nadjustments. While futures traders focus on short to intermediate trends, stock\ninvestors are more concerned with intermediate to longer term trends. Stock\ntrading places less emphasis on the very short term and makes less use of\nintraday charts. But the general principles remain the same for analyzing and\ntrading markets—whether they’re in the futures pits of Chicago or on the\nfloor of the New York Stock Exchange.", - "type": "text" - }, - { - "block_id": "p373-b1", - "global_id": 2122, - "bbox": [ - 72.0, - 271.35, - 523.03, - 457.85 - ], - "text": "ASSET ALLOCATION\nThe money management guidelines presented in this chapter refer mainly to\nfutures trading. However, many of the principles included in that discussion\nrelate to the need for proper diversification in one’s investment portfolio and\ntouches on the subject of asset allocation. Asset allocation refers to how a\nperson’s portfolio is divided among stocks, bonds, and cash (usually in the\nform of a money market fund or Treasury Bills). It can also refer to how much\nof one’s portfolio should be allocated to foreign markets. Asset allocation also\nrefers to how one’s stockholdings are spread among the various market\nsectors and industry groups. And, more recently, it deals with how much of\none’s portfolio should be allocated to traditional commodity markets.", - "type": "text" - }, - { - "block_id": "p373-b2", - "global_id": 2123, - "bbox": [ - 72.0, - 501.09, - 522.75, - 687.59 - ], - "text": "MANAGED ACCOUNTS AND MUTUAL FUNDS\nManaged accounts have been available in the futures markets for several\nyears and have provided a vehicle for those wishing to put some money into\nfutures but lacked the expertise to do so themselves. Managed accounts have\nprovided a sort of mutual fund approach to futures. Even though managed\nfutures accounts invest in all futures markets—including currencies,\ncommodities, bonds, and stock index futures—they still provide some\nmeasure of diversification from bonds and stocks. Part of the diversification is\ndue to their practice of trading from both the long and the short side. Another\npart comes from the commodity portion itself. However, the ability to devote\nsome of one’s assets to commodities was made even easier during 1997.", - "type": "text" - }, - { - "block_id": "p373-b3", - "global_id": 2124, - "bbox": [ - 72.0, - 689.76, - 506.01, - 753.85 - ], - "text": "Oppenheimer Real Assets, launched in March 1997, is the first mutual\nfund devoted exclusively to commodity investing. By investing in\ncommodity-linked notes, the fund is able to fashion a commodity portfolio\nthat tracks the Goldman Sachs Commodity Index, which includes 22", - "type": "text" - } - ] - }, - { - "page_num": 374, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p374-b0", - "global_id": 2125, - "bbox": [ - 72.0, - 73.06, - 512.37, - 153.94 - ], - "text": "commodity markets. Since commodities often trend in opposite directions to\nbonds and stocks, they provide an excellent diversification vehicle. Proper\ndiversification requires spreading one’s assets among market groups or\nclasses that have a low correlation to each other—in other words, they don’t\nalways trend in the same direction. Commodities certainly fit that criteria.", - "type": "text" - }, - { - "block_id": "p374-b1", - "global_id": 2126, - "bbox": [ - 72.0, - 156.1, - 513.94, - 269.89 - ], - "text": "We point these things out for two reasons. One is to show that the areas\nof money management and asset allocation are very much intertwined. The\nsecond is to show that the markets themselves are very much intertwined. In\nthe next two chapters, you’ll see how closely linked the futures and stock\nmarkets really are, and why it’s important that stock investors keep informed\nof what’s going on in the futures markets. Chapter 17 will introduce you to\nintermarket technical analysis.", - "type": "text" - }, - { - "block_id": "p374-b2", - "global_id": 2127, - "bbox": [ - 72.0, - 313.84, - 522.59, - 483.78 - ], - "text": "MARKET PROFILE\nWe couldn’t leave the subject of intraday charts without introducing one of\nthe most innovative approaches to intraday trading called Market Profile. This\ntrading technique was developed by J. Peter Steidlmayer, a former floor trader\non the Chicago Board of Trade. Mr. Steidlmayer’s approach has gained an\nenthusiastic following over the past decade, especially in the futures markets.\nMarket Profile can, however, be applied to common stocks as well. It’s not an\neasy approach to grasp. But those traders that have done so give it very high\nmarks. Dennis Hynes, an expert in Market Profile trading, explains the\napproach in Appendix B.", - "type": "text" - } - ] - }, - { - "page_num": 375, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p375-b0", - "global_id": 2128, - "bbox": [ - 72.0, - 367.12, - 518.75, - 580.28 - ], - "text": "When the first edition of this book was published in 1986 the separation of\nthe commodity futures world from the more traditional world of stocks and\nbonds was already starting to break down. Twenty years ago, commodities\nreferred to such things as corn, soybeans, porkbellies, gold, and oil. These\nwere traditional commodities that could be grown, mined, or refined.\nDramatic changes took place from 1972 to 1982 with the introduction of\nfutures contracts on currencies, Treasury Bonds, and stock index futures. The\nterm “commodities” gave way to “futures” since bonds and stocks were\nhardly commodities. But they were futures contracts. Since then, the world of\nfutures trading has blended with that of traditional stocks and bonds to the\npoint that they can hardly be separated. As a result, the technical analysis\nmethods used to analyze the different financial markets have become more\nuniversally applied.", - "type": "text" - }, - { - "block_id": "p375-b1", - "global_id": 2129, - "bbox": [ - 72.0, - 582.45, - 509.01, - 712.8 - ], - "text": "On any given day, quotes are readily available for dollar futures, bond\nfutures, and stock index futures—and they often move in sync with one\nanother. The direction those three markets move is often affected by what\nhappens in the commodity pits. Program trading, which occurs when the\nprice of the S&P 500 futures contract is out of line with the S&P 500 cash\nindex, is a day-to-day reality. For those reasons, it seems clear that the more\nunderstanding you have about the world of futures trading, the more insight\nyou will gain into the entire financial marketplace.", - "type": "text" - }, - { - "block_id": "p375-b2", - "global_id": 2130, - "bbox": [ - 72.0, - 714.96, - 500.74, - 762.49 - ], - "text": "It has become clear that action in the futures markets can have an\nimportant influence on the stock market itself. Early warnings signs of\ninflation and interest rate trends are usually spotted in the futures pits first,", - "type": "text" - } - ] - }, - { - "page_num": 376, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p376-b0", - "global_id": 2131, - "bbox": [ - 72.0, - 73.28, - 522.43, - 220.2 - ], - "text": "which often determine the direction stock prices will take at any given time.\nTrends in the dollar tell us a lot about the strength or weakness of the\nAmerican economy, which also has a major impact on corporate earnings and\nthe valuation of stock prices. But the linkage goes even deeper than that. The\nstock market is divided into sectors and industry groups. Rotation into and out\nof those groups is often dictated by action in futures. With the tremendous\ngrowth in mutual funds, and sector funds in particular, the ability to capitalize\non sector rotation into winning groups and out of losing ones has become\nmuch simpler.", - "type": "text" - }, - { - "block_id": "p376-b1", - "global_id": 2132, - "bbox": [ - 72.0, - 222.36, - 521.23, - 303.02 - ], - "text": "In this chapter, we’ll deal with the broader subject of intermarket\nanalysis as it deals with the interplay between currencies, commodities,\nbonds, and stocks. Our primary message is how closely the four markets are\nlinked. We’ll show how to use the futures markets in the process of sector and\nindustry group rotation within the stock market itself.", - "type": "text" - }, - { - "block_id": "p376-b2", - "global_id": 2133, - "bbox": [ - 72.0, - 346.97, - 521.97, - 616.29 - ], - "text": "INTERMARKET ANALYSIS\nIn 1991, I wrote a book entitled Intermarket Technical Analysis. That book\ndescribed the interrelationships between the various financial markets, which\nare universally accepted today. The book provided a guide, or blueprint, to\nhelp explain the sequence that develops among the various markets and to\nshow how interdependent they really are. The basic premise of intermarket\nanalysis is that all financial markets are linked in some way. That includes\ninternational markets as well as domestic ones. Those relationships may shift\non occasion, but they are always present in one form or another. As a result, a\ncomplete understanding of what’s going on in one market—such as the stock\nmarket—isn’t possible without some understanding of what’s going on in\nother markets. Because the markets are now so intertwined, the technical\nanalyst has an enormous advantage. The technical tools described in this book\ncan be applied to all markets, which greatly facilitates the application of\nintermarket analysis. You’ll also see why the ability to follow the charts of so\nmany markets is a tremendous advantage in today’s complex marketplace.", - "type": "text" - }, - { - "block_id": "p376-b3", - "global_id": 2134, - "bbox": [ - 72.0, - 659.52, - 519.77, - 763.21 - ], - "text": "PROGRAM TRADING: THE ULTIMATE LINK\nNowhere is the close link between stocks and futures more obvious than in\nthe relationship between the S&P 500 cash index and the S&P 500 futures\ncontract. Normally, the futures contract trades at a premium to the cash index.\nThe size of that premium is determined by such things as the level of short\nterm interest rates, the yield on the S&P 500 index itself, and the number of", - "type": "text" - } - ] - }, - { - "page_num": 377, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p377-b0", - "global_id": 2135, - "bbox": [ - 72.0, - 73.06, - 523.56, - 385.84 - ], - "text": "days until the futures contract expires. The premium (or spread) between S&P\n500 futures over the cash index diminishes as the futures contract approaches\nexpiration. (See Figure 17.1.) Each day, institutions calculate what the actual\npremium should be—called fair value. That fair value remains constant\nthroughout the trading day, but changes gradually with each new day. When\nthe futures premium moves above its fair value to the cash index by some\npredetermined amount, an arbitrage trade is automatically activated—called\nprogram buying. When the futures are too high relative to the cash index,\nprogram traders sell the futures contract and buy a basket of stocks in the S&P\n500 to bring the two entities back into line. The result of program buying is\npositive for the stock market since it pushes the S&P 500 cash index higher.\nProgram selling is just the opposite and occurs when the premium of the\nfutures over the cash narrows too far below its fair value. In that case,\nprogram selling is activated which results in the buying of S&P 500 futures\nand selling of the basket of stocks. Program selling is negative for the market.\nMost traders understand this relationship between the two related markets.\nWhat they don’t always understand is that the sudden moves in the S&P 500\nfutures contract, which activate the program trading, are often caused by\nsudden moves in other futures markets—like bonds.", - "type": "text" - }, - { - "block_id": "p377-b1", - "global_id": 2136, - "bbox": [ - 78.6, - 675.35, - 516.67, - 689.81 - ], - "text": "Figure 17.1 S&P 500 futures normally trade at a premium to the cash index", - "type": "text" - }, - { - "block_id": "p377-b2", - "global_id": 2137, - "bbox": [ - 96.37, - 691.91, - 498.89, - 706.31 - ], - "text": "as shown in this chart. Notice that the premium narrows as the March", - "type": "text" - }, - { - "block_id": "p377-b3", - "global_id": 2138, - "bbox": [ - 222.7, - 708.48, - 372.57, - 722.88 - ], - "text": "contract nears expiration.", - "type": "text" - } - ] - }, - { - "page_num": 378, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p378-b0", - "global_id": 2139, - "bbox": [ - 72.0, - 74.02, - 521.81, - 359.91 - ], - "text": "THE LINK BETWEEN BONDS AND STOCKS\nThe stock market is influenced by the direction of interest rates. The direction\nof interest rates (or yield) can be monitored on a minute-to-minute basis by\ntracking the movements in the Treasury Bond futures contract. Bond prices\nmove in the opposite direction of interest rates or yields. Therefore, when\nbond prices are rising, yields are falling. That is normally considered positive\nfor stocks.* Falling bond prices, or rising yields, are considered negative for\nstocks. From a technician’s point of view, it is very easy to compare the charts\nof Treasury Bond futures with the charts of either the S&P 500 cash index or\nits related futures contract. You’ll see that they have generally trended in the\nsame direction. (See Figure 17.2.) On a short term basis, sudden changes in\ntrend in the S&P 500 futures contract are often influenced by sudden changes\nin the Treasury Bond futures contract. On a longer range basis, changes in the\ntrend of the Treasury Bond contract often warn of similar turns in the S&P\n500 cash index itself. In that sense, bond futures can be viewed as a leading\nindicator for the stock market. Bond futures, in turn, are usually influenced by\ntrends in the commodity markets.", - "type": "text" - }, - { - "block_id": "p378-b1", - "global_id": 2140, - "bbox": [ - 72.0, - 367.75, - 515.28, - 391.51 - ], - "text": "* In a deflationary environment, bonds and stocks usually decouple. Bond prices rise while stock\nprices fall.", - "type": "text" - }, - { - "block_id": "p378-b2", - "global_id": 2141, - "bbox": [ - 76.76, - 680.39, - 518.51, - 711.35 - ], - "text": "Figure 17.2 Rising bond prices are usually good for stock prices. The bond\nmarket bottoms in 1981, 1984, 1988, 1991, and 1995 led to major upturns in", - "type": "text" - }, - { - "block_id": "p378-b3", - "global_id": 2142, - "bbox": [ - 89.17, - 713.52, - 506.1, - 727.92 - ], - "text": "stocks. Bond peaks in 1987, 1990, and 1994 warned of bad stock market", - "type": "text" - }, - { - "block_id": "p378-b4", - "global_id": 2143, - "bbox": [ - 280.25, - 730.08, - 315.02, - 744.48 - ], - "text": "years.", - "type": "text" - } - ] - }, - { - "page_num": 379, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p379-b0", - "global_id": 2144, - "bbox": [ - 72.0, - 74.02, - 523.03, - 267.73 - ], - "text": "THE LINK BETWEEN BONDS AND\nCOMMODITIES\nTreasury Bond prices are influenced by expectations for inflation. Commodity\nprices are considered to be leading indicators of inflationary trends. As a\nresult, commodity prices usually trend in the opposite direction of bond\nprices. If you study the market’s history since the 1970s, you’ll see that\nsudden upturns in commodity markets (signaling higher price inflation) have\nusually been associated with corresponding declines in Treasury Bond prices.\nThe flip side of that relationship is that strong Treasury Bond gains have\nnormally corresponded with falling commodity prices. (See Figure 17.3).\nCommodity prices, in turn, are impacted by the direction of the U.S. dollar.", - "type": "text" - }, - { - "block_id": "p379-b1", - "global_id": 2145, - "bbox": [ - 80.69, - 555.8, - 514.57, - 586.76 - ], - "text": "Figure 17.3 Commodity prices and bond prices normally trend in opposite\ndirections as shown here. The bond bottoms in the spring of 1996 and 1997", - "type": "text" - }, - { - "block_id": "p379-b2", - "global_id": 2146, - "bbox": [ - 122.4, - 588.93, - 472.87, - 603.33 - ], - "text": "coincided with major peaks in commodity prices (see boxes).", - "type": "text" - }, - { - "block_id": "p379-b3", - "global_id": 2147, - "bbox": [ - 72.0, - 647.28, - 512.37, - 758.17 - ], - "text": "THE LINK BETWEEN COMMODITIES AND\nTHE DOLLAR\nA rising U.S. dollar normally has a depressing effect on most commodity\nprices. In other words, a rising dollar is normally considered to be\nnoninflationary. (See Figure 17.4.) One of the commodities most effected by\nthe dollar is the gold market. If you study their relationship over time, you’ll", - "type": "text" - } - ] - }, - { - "page_num": 380, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p380-b0", - "global_id": 2148, - "bbox": [ - 72.0, - 73.53, - 517.98, - 253.32 - ], - "text": "see that the prices of gold and the U.S. dollar usually trend in opposite\ndirections. (See Figure 17.5.) The gold market, in turn, usually acts as a\nleading indicator for other commodity markets. So, if you’re analyzing the\ngold market, it’s necessary to know what the dollar is doing. If you’re\nstudying the commodity price trend in general (using one of the better known\ncommodity price indexes), it’s necessary to know what the gold market is\ndoing. The fact of the matter is that all four markets are linked—the dollar\ninfluences commodities, which influence bonds, which influence stocks. To\nfully comprehend what’s happening in any one asset class, it’s necessary to\nknow what’s happening in the other three. Fortunately, that’s easily done by\nsimply looking at their respective price charts.", - "type": "text" - }, - { - "block_id": "p380-b1", - "global_id": 2149, - "bbox": [ - 81.54, - 542.12, - 513.73, - 556.58 - ], - "text": "Figure 17.4 A rising dollar normally has a depressing effect on commodity", - "type": "text" - }, - { - "block_id": "p380-b2", - "global_id": 2150, - "bbox": [ - 86.2, - 558.68, - 509.07, - 589.64 - ], - "text": "markets. In 1980, the dollar bottom coincided with a major peak in\ncommodities. The dollar bottom in 1995 contributed to a sharp decline in", - "type": "text" - }, - { - "block_id": "p380-b3", - "global_id": 2151, - "bbox": [ - 224.9, - 591.81, - 370.37, - 606.21 - ], - "text": "commodities a year later.", - "type": "text" - } - ] - }, - { - "page_num": 381, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p381-b0", - "global_id": 2152, - "bbox": [ - 79.47, - 346.95, - 515.8, - 377.91 - ], - "text": "Figure 17.5 The U.S. Dollar and gold prices usually trend in opposite\ndirections as shown in this example. Gold prices, in turn, usually lead other", - "type": "text" - }, - { - "block_id": "p381-b1", - "global_id": 2153, - "bbox": [ - 259.47, - 380.08, - 335.8, - 394.48 - ], - "text": "commodities.", - "type": "text" - }, - { - "block_id": "p381-b2", - "global_id": 2154, - "bbox": [ - 72.0, - 438.43, - 520.76, - 674.63 - ], - "text": "STOCK SECTORS AND INDUSTRY GROUPS\nAn understanding of these intermarket relationships also sheds light on the\ninteraction between the various stock market sectors and industry groups. The\nstock market is divided into market sectors which are then subdivided into\nindustry groups. These market categories are influenced by what’s happening\non the intermarket scene. For example, when bonds are strong and\ncommodities weak, interest rate-sensitive stock groups—such as the utilities,\nfinancial stocks, and consumer staples—usually do well relative to the rest of\nthe stock market. At the same time, inflation-sensitive stock groups—like\ngold, energy, and cyclical stocks—usually underperform. When commodity\nmarkets are strong relative to bonds, the opposite is the case. By monitoring\nthe relationship between Treasury Bond prices and commodity prices, you\ncan determine which sectors or industry groups will do better at any given\ntime.", - "type": "text" - }, - { - "block_id": "p381-b3", - "global_id": 2155, - "bbox": [ - 72.0, - 676.79, - 519.95, - 757.45 - ], - "text": "Since there is such a close relationship between stock market sectors and\ntheir related futures markets, they can be used in conjunction with each other.\nUtility stocks, for example, are closely linked to Treasury Bond prices. (See\nFigure 17.6.) Gold mining shares are closely linked to the price of gold.\nWhat’s more, the related stock groups often tend to lead their respective", - "type": "text" - } - ] - }, - { - "page_num": 382, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p382-b0", - "global_id": 2156, - "bbox": [ - 72.0, - 73.53, - 516.28, - 153.94 - ], - "text": "futures markets. As a result, utility stocks can be used as leading indicators\nfor Treasury Bonds. Gold mining shares can be used as leading indicators for\ngold prices. Another example of intermarket influence is the impact of the\ntrend of oil prices on energy and airline stocks. Rising oil prices help energy\nshares but hurt airlines. Falling oil prices have the opposite effect.", - "type": "text" - }, - { - "block_id": "p382-b1", - "global_id": 2157, - "bbox": [ - 88.22, - 442.01, - 507.05, - 456.48 - ], - "text": "Figure 17.6 There is usually very close linkage between bond prices and", - "type": "text" - }, - { - "block_id": "p382-b2", - "global_id": 2158, - "bbox": [ - 89.3, - 458.58, - 505.97, - 472.97 - ], - "text": "utilities. In addition, utilities often make their turns a little before bonds.", - "type": "text" - }, - { - "block_id": "p382-b3", - "global_id": 2159, - "bbox": [ - 72.0, - 516.93, - 520.72, - 670.31 - ], - "text": "THE DOLLAR AND LARGE CAPS\nAnother intermarket relationship involves how the dollar affects large and\nsmall cap stocks. Large multinational stocks can be negatively impacted by a\nvery strong dollar, which may make their products too expensive in foreign\nmarkets. By contrast, the more domestically oriented small cap stocks are less\naffected by dollar movements and may actually do better than larger stocks in\na strong dollar environment. As a result, a stronger dollar may favor smaller\nstocks (like those in the Russell 2000), while a weaker dollar may benefit the\nlarge multinationals (like those in the Dow Industrial Average.)", - "type": "text" - }, - { - "block_id": "p382-b4", - "global_id": 2160, - "bbox": [ - 72.0, - 713.54, - 474.48, - 757.46 - ], - "text": "INTERMARKET ANALYSIS AND MUTUAL\nFUNDS", - "type": "text" - } - ] - }, - { - "page_num": 383, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p383-b0", - "global_id": 2161, - "bbox": [ - 72.0, - 73.28, - 519.98, - 236.76 - ], - "text": "It should be obvious that some understanding of these intermarket\nrelationships can go a long way in mutual fund investing. The direction of the\nU.S. dollar, for example, might influence your commitment to small cap\nfunds versus large cap funds. It may also help determine how much money\nyou might want to commit to gold or natural resource funds. The availability\nof so many sector-oriented mutual funds actually complicates the decision of\nwhich ones to emphasize at any given time. That task is made a good deal\neasier by comparing the relative performance of the futures markets and the\nvarious stock market sectors and industry groups. That is easily accomplished\nby a simple charting approach called relative strength analysis.", - "type": "text" - }, - { - "block_id": "p383-b1", - "global_id": 2162, - "bbox": [ - 72.0, - 280.71, - 520.32, - 550.04 - ], - "text": "RELATIVE STRENGTH ANALYSIS\nThis is an extremely simple but effective charting tool. All you do is divide\none market entity by another—in other words, plot a ratio of two market\nprices. When the ratio line is rising, the numerator price is stronger than the\ndenominator. When the ratio line is declining, the denominator market is\nstronger. Consider some examples of what you can do with this simple\nindicator. Divide a commodity index (such as the CRB Futures Price Index)\nby Treasury Bond futures prices. (See Figure 17.7.) When the ratio line is\nrising, commodity prices are outperforming bonds. In that scenario, futures\ntraders would be buying commodity markets and selling bonds. At the same\ntime, stock traders would be buying inflation sensitive stocks and selling\ninterest-rate sensitive stocks. When the ratio line is falling, they would be\ndoing the opposite. That is, they would sell commodities and buy bonds. At\nthe same time, stock investors would be selling the golds, the oils, and the\ncyclicals, while buying the utilities, the financials, and consumer staples. (See\nFigure 17.8.)", - "type": "text" - } - ] - }, - { - "page_num": 384, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p384-b0", - "global_id": 2163, - "bbox": [ - 72.39, - 345.51, - 522.89, - 376.47 - ], - "text": "Figure 17.7 The CRB Index/Treasury Bond ratio tells us which asset class is\nstronger. 1994 favored commodities, while 1995 favored bonds. The ratio took", - "type": "text" - }, - { - "block_id": "p384-b1", - "global_id": 2164, - "bbox": [ - 100.56, - 378.64, - 494.72, - 393.03 - ], - "text": "a sharp downturn in mid-1997 owing to the Asian crisis and fears of", - "type": "text" - }, - { - "block_id": "p384-b2", - "global_id": 2165, - "bbox": [ - 270.27, - 395.2, - 325.01, - 409.6 - ], - "text": "deflation.", - "type": "text" - }, - { - "block_id": "p384-b3", - "global_id": 2166, - "bbox": [ - 79.13, - 699.12, - 516.14, - 713.58 - ], - "text": "Figure 17.8 During October 1997, the Asian crisis caused funds to flow out", - "type": "text" - }, - { - "block_id": "p384-b4", - "global_id": 2167, - "bbox": [ - 97.21, - 715.68, - 498.05, - 730.08 - ], - "text": "of cyclicals and into consumer staples, which coincided with a falling", - "type": "text" - }, - { - "block_id": "p384-b5", - "global_id": 2168, - "bbox": [ - 206.38, - 732.24, - 388.89, - 746.64 - ], - "text": "CRB/Bond ratio in Figure 17.7.", - "type": "text" - } - ] - }, - { - "page_num": 385, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p385-b0", - "global_id": 2169, - "bbox": [ - 72.0, - 74.02, - 521.95, - 393.04 - ], - "text": "RELATIVE STRENGTH AND SECTORS\nMany exchanges now trade index options on various stock market sectors.\nThe Chicago Board Options Exchange has the greatest selection and includes\nsuch diverse groups as automotive, computer software, environmental,\ngaming, real estate, healthcare, retail, and transportation. The American and\nPhiladelphia Stock Exchanges offer popular index options on banks, gold, oil,\npharmaceuticals, semiconductors, technology, and utilities. All of these index\noptions can be charted and analyzed like any other market. The best way to\nuse relative strength analysis on them is to divide their price by some industry\nbenchmark such as the S&P 500. You can then determine which are\noutperforming the overall market (a rising RS line) or underperforming (a\nfalling RS line). Employing some simple charting tools like trendlines and\nmoving averages on the relative strength lines themselves will help you spot\nimportant changes in their trend. (See Figure 17.9.) The general idea is to\nrotate your funds into those sectors of the market whose relative strength lines\nare just turning up, and to rotate out of those market groups whose relative\nstrength lines are just turning down. Those moves can be implemented either\nwith the index options themselves or through mutual funds that match the\nvarious market sectors and industry groups.", - "type": "text" - }, - { - "block_id": "p385-b1", - "global_id": 2170, - "bbox": [ - 77.61, - 681.83, - 517.65, - 712.79 - ], - "text": "Figure 17.9 A relative strength (ratio) comparison of the PSE High Tech\nIndex to the S&P 500. Simple trendline analysis helped spot the downturn in", - "type": "text" - }, - { - "block_id": "p385-b2", - "global_id": 2171, - "bbox": [ - 103.53, - 714.96, - 491.74, - 729.36 - ], - "text": "technology stocks during October 1997 and the upturn at year-end.", - "type": "text" - } - ] - }, - { - "page_num": 386, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p386-b0", - "global_id": 2172, - "bbox": [ - 72.0, - 74.02, - 522.8, - 284.29 - ], - "text": "RELATIVE STRENGTH AND INDIVIDUAL\nSTOCKS\nInvestors have two ways to go at that point. They can simply rotate their\nfunds out of one market group into another and stop there. Or, if they wish,\nthey can continue on to choose individual stocks within those groups. Relative\nstrength analysis plays a role here as well. Once the desired index has been\nchosen, the next step is to divide each of the individual stocks within the\nindex by the index itself. In that way, you can easily spot the individual stocks\nthat are showing the greatest relative strength. (See Figure 17.10.) You can\npurchase the stocks showing the strongest ratio lines, or you can buy a\ncheaper stock whose ratio line may just be turning up. The idea, however, is\nto avoid stocks whose relative strength (ratio) lines are still falling.", - "type": "text" - }, - { - "block_id": "p386-b1", - "global_id": 2173, - "bbox": [ - 74.44, - 572.36, - 520.83, - 603.33 - ], - "text": "Figure 17.10 A ratio analysis of Dell Computer versus the PSE High Tech\nIndex at the end of 1997 showed Dell to be one of the better stock picks in the", - "type": "text" - }, - { - "block_id": "p386-b2", - "global_id": 2174, - "bbox": [ - 265.27, - 605.49, - 330.0, - 619.89 - ], - "text": "tech sector.", - "type": "text" - }, - { - "block_id": "p386-b3", - "global_id": 2175, - "bbox": [ - 72.0, - 663.85, - 520.37, - 767.53 - ], - "text": "TOP-DOWN MARKET APPROACH\nWhat we’ve described here is a top down market approach. You begin by\nstudying the major market averages to determine the trend of the overall\nmarket. Then you select those market sectors or industry groups that are\nshowing the best relative strength. Then you select individual stocks within\nthose groups that are also showing the best relative strength. By incorporating", - "type": "text" - } - ] - }, - { - "page_num": 387, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p387-b0", - "global_id": 2176, - "bbox": [ - 72.0, - 73.53, - 521.13, - 220.2 - ], - "text": "intermarket principles into your decision making process, you can also\ndetermine whether the current market climate favors bonds, commodities, or\nstocks which can play a role in your asset allocation decisions. The same\nprinciples can also be applied to international investing by simply comparing\nthe relative strength of the various global stock markets. And, finally, all of\nthese technical tools described herein can be applied to charts of mutual funds\nas a final check on your analysis. All of this work is easily done with price\ncharts and a computer. Imagine trying to apply fundamental analysis to so\nmany markets at the same time.", - "type": "text" - }, - { - "block_id": "p387-b1", - "global_id": 2177, - "bbox": [ - 72.0, - 264.15, - 522.76, - 649.42 - ], - "text": "DEFLATION SCENARIO\nThe intermarket principles described herein are based on market trends since\n1970. The 1970s saw runaway inflation which favored commodity assets. The\ndecades of the 1980s and 1990s have been characterized by falling\ncommodities (disinflation) and strong bull markets in bonds and stocks.\nDuring the second half of 1997, a severe downturn in Asian currency and\nstock markets was especially damaging to markets like copper, gold, and oil.\nFor the first time in decades, some market observers expressed concern that a\nbeneficial disinflation (prices rising at a slower level) might turn into a\nharmful deflation (falling prices). To add to the concerns, producer prices fell\non an annual basis for the first time in more than a decade. As a result, the\nbond and stock markets began to decouple. For the first time in four years,\ninvestors were switching out of stocks and putting more money into bonds\nand rate-sensitive stock groups like utilities. The reason for that asset\nallocation adjustment is that deflation changes the intermarket scenario. The\ninverse relationship between bond prices and commodities is maintained.\nCommodities fall while bond prices rise. The difference is that the stock\nmarket can react negatively in that environment. We point this out because it’s\nbeen a long time since the financial markets had to deal with the problem of\nprice deflation. If and when deflation does occur, intermarket relationships\nwill still be present but in a different way. Disinflation is bad for\ncommodities, but good for bonds and stocks. Deflation is good for bonds and\nbad for commodities, but may also be bad for stocks.", - "type": "text" - }, - { - "block_id": "p387-b2", - "global_id": 2178, - "bbox": [ - 72.0, - 651.59, - 519.09, - 765.37 - ], - "text": "The deflationary trend that started in Asia in mid-1997 spread to Russia\nand Latin America by mid-1998 and began to hurt all global equity markets.\nA plunge in commodity prices had an especially damaging impact on\ncommodity exporters like Australia, Canada, Mexico, and Russia. The\ndeflationary impact of falling commodity and stock prices had a positive\nimpact on Treasury bond prices, which hit record highs. Market events of\n1998 were a dramatic example of the existence of global intermarket linkages", - "type": "text" - } - ] - }, - { - "page_num": 388, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p388-b0", - "global_id": 2179, - "bbox": [ - 72.0, - 73.53, - 521.99, - 87.93 - ], - "text": "and demonstrated how bonds and stocks can decouple in a deflationary world.", - "type": "text" - }, - { - "block_id": "p388-b1", - "global_id": 2180, - "bbox": [ - 72.0, - 131.63, - 523.13, - 334.7 - ], - "text": "INTERMARKET CORRELATION\nTwo markets that normally trend in the same direction, such as bonds and\nstocks, are positively correlated. Markets that trend in opposite directions, like\nbonds and commodities, are negatively correlated. Charting software allows\nyou to measure the degree of correlation between different markets. A high\npositive reading suggests a strong positive correlation. A high negative\nreading suggests a strong negative correlation. A reading near zero suggests\nlittle or no correlation between two markets. By measuring the degree of\ncorrelation, the trader is able to establish how much emphasis to place on a\nparticular intermarket relationship. More weight should be placed on those\nwith higher correlations, and less weight on those closer to zero. (See Figure\n17.11.)", - "type": "text" - }, - { - "block_id": "p388-b2", - "global_id": 2181, - "bbox": [ - 77.54, - 624.22, - 517.74, - 671.74 - ], - "text": "Figure 17.11 The line along the bottom shows the positive correlation\nbetween T-bond prices and the S&P500. During the second half of 1997, the\nAsian crisis caused an unusual decoupling. Investors bought bonds and sold", - "type": "text" - }, - { - "block_id": "p388-b3", - "global_id": 2182, - "bbox": [ - 278.25, - 673.91, - 317.01, - 688.31 - ], - "text": "stocks.", - "type": "text" - }, - { - "block_id": "p388-b4", - "global_id": 2183, - "bbox": [ - 72.0, - 704.88, - 519.98, - 768.97 - ], - "text": "In his book, Cybernetic Trading Strategies, Murray Ruggiero, Jr.\npresents creative work on the subject of intermarket correlations. He also\nshows how to use intermarket filters on trading systems. He demonstrates, for\nexample, how a moving-average crossover system in the bond market can be", - "type": "text" - } - ] - }, - { - "page_num": 389, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p389-b0", - "global_id": 2184, - "bbox": [ - 72.0, - 73.53, - 517.96, - 153.94 - ], - "text": "used as a filter for stock index trading. Ruggiero explores the application of\nstate-of-the-art artificial intelligence methods like chaos theory, fuzzy logic,\nand neural networks to the development of technical trading systems. He also\nexplores the application of neural networks to the field of intermarket\nanalysis.", - "type": "text" - }, - { - "block_id": "p389-b1", - "global_id": 2185, - "bbox": [ - 72.0, - 197.89, - 520.32, - 490.98 - ], - "text": "INTERMARKET NEURAL NETWORK\nSOFTWARE\nOne major problem with the study of intermarket relationships is that there\nare so many of them—and they’re all interacting at the same time. That’s\nwhere neural networks come into play. Neural networks provide a more\nquantitative framework for identifying and tracking the complex relationships\nthat exist among the financial markets. Louis Mendelsohn, president of\nMarket Technologies Corporation (25941 Apple Blossom Lane, Wesley\nChapel, FL 33544; e-mail address: 45141@ProfitTaker.com; website URL:\nwww.ProfitTaker.com/45141), was the first person to develop intermarket\nanalysis software in the financial industry during the 1980s. Mendelsohn is\nthe leading pioneer in the application of microcomputer software and neural\nnetworks to intermarket analysis. His VantagePoint software, first introduced\nin 1991, uses intermarket principles to trade interest rate markets, stock\nindexes, currency markets, and energy futures. VantagePoint uses neural\nnetwork technology to detect the hidden patterns and correlations that exist\nbetween related markets.", - "type": "text" - }, - { - "block_id": "p389-b2", - "global_id": 2186, - "bbox": [ - 72.0, - 534.21, - 519.57, - 753.85 - ], - "text": "CONCLUSION\nThis chapter summarizes the main points included in my book, Intermarket\nTechnical Analysis. It discusses the ripple effect that flows from the dollar to\ncommodities to bonds to stocks. Intermarket work also recognizes the\nexistence of global linkages. What happens in Asia, Europe, and Latin\nAmerica has an impact on U.S. markets and vice versa. Intermarket analysis\nsheds light on sector rotation within the stock market. Relative strength\nanalysis is helpful for seeking out asset classes, market sectors, or individual\nstocks that are likely to outperform the general market. In his book, Leading\nIndicators for the 1990s, Dr. Geoffrey Moore shows how the interaction\nbetween commodity prices, bond prices, and stock prices follows a sequential\npattern that tracks the business cycle. Dr. Moore substantiates the intermarket\nrotation within the three asset classes, and argues for their use in economic", - "type": "text" - } - ] - }, - { - "page_num": 390, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p390-b0", - "global_id": 2187, - "bbox": [ - 72.0, - 73.06, - 511.38, - 236.76 - ], - "text": "forecasting. In doing so, Dr. Moore elevates intermarket work and technical\nanalysis in general into the realm of economic forecasting. Finally, technical\nanalysis can be applied to mutual funds like any other market (with some\nminor modifications). That being the case, all of the techniques discussed in\nthis book can be applied right on the mutual fund charts themselves. Even\nbetter, the lower degree of volatility in mutual fund charts make them\nexcellent vehicles for chart analysis. My latest book, The Visual Investor,\ndeals more extensively with the subject of sector analysis and trading, and\nshows how mutual funds can be charted and then used to implement various\ntrading strategies. (See Figure 17.12.)", - "type": "text" - }, - { - "block_id": "p390-b1", - "global_id": 2188, - "bbox": [ - 77.49, - 527.71, - 517.78, - 558.68 - ], - "text": "Figure 17.12 Chart analysis can be done on mutual fund charts. You didn’t\nhave to be a chart expert to see that Asia was headed for trouble by tracking", - "type": "text" - }, - { - "block_id": "p390-b2", - "global_id": 2189, - "bbox": [ - 249.07, - 560.84, - 346.2, - 575.24 - ], - "text": "this mutual fund.", - "type": "text" - } - ] - }, - { - "page_num": 391, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p391-b0", - "global_id": 2190, - "bbox": [ - 72.0, - 310.24, - 520.37, - 563.0 - ], - "text": "MEASURING MARKET BREADTH\nIn the previous chapter, we described the top-down approach that is most\ncommonly employed in stock market analysis. With that approach, you begin\nyour analysis with a study of the health of the overall market. Then you work\ndown to market sectors and industry groups. The final step is the study of\nindividual stocks. Your goal is to pick the best stocks in the best groups in an\nenvironment when the stock market is technically healthy. The study of\nmarket sectors and individual stocks can be accomplished with the technical\ntools employed throughout this book—including chart patterns, volume\nanalysis, trendlines, moving averages, oscillators, etc. Those same indicators\ncan also be applied to the major market averages. But there’s another class of\nmarket indicators widely employed in stock market analysis whose purpose is\nto determine the health of the overall stock market by measuring market\nbreadth. The data used in their construction are advancing versus declining\nissues, new highs versus new lows, and up volume versus down volume.", - "type": "text" - }, - { - "block_id": "p391-b1", - "global_id": 2191, - "bbox": [ - 72.0, - 606.95, - 513.85, - 677.51 - ], - "text": "SAMPLE DATA\nIf you check the Stock Market Data Bank section of The Wall Street Journal\n(Section C, page 2) each day, you’ll find the following data for the previous\ntrading day. The numbers shown are based on an actual day’s trading results.", - "type": "text" - }, - { - "block_id": "p391-b2", - "global_id": 2192, - "bbox": [ - 176.36, - 696.23, - 418.19, - 765.37 - ], - "text": "Diaries\n \nNYSE\nMonday\nIssues Traded\n3,432\nAdvances\n1,327", - "type": "text" - } - ] - }, - { - "page_num": 392, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p392-b0", - "global_id": 2193, - "bbox": [ - 176.36, - 73.53, - 418.19, - 231.72 - ], - "text": "Declines\n1,559\nUnchanged\n546\nNew highs\n78\nNew lows\n43\nAdv vol (000)\n248,215\nDecl vol (000)\n279,557\nTotal vol (000)\n553,914\nClosing tick\n-135\nClosing Arms (trin)\n.96", - "type": "text" - }, - { - "block_id": "p392-b1", - "global_id": 2194, - "bbox": [ - 72.0, - 249.73, - 515.98, - 578.84 - ], - "text": "The above figures are derived from New York Stock Exchange (NYSE)\ndata. A similar breakdown is also shown for the NASDAQ and the American\nStock Exchange. We’ll concentrate on the NYSE in this discussion. It just so\nhappens that on that particular day the Dow Jones Industrial Average had\ngained 12.20 points. So the market was up as measured by the Dow.\nHowever, there were more declining stocks (1,559) than advancing stocks\n(1,327), suggesting that the broader market didn’t fare as well as the Dow.\nThere was also more declining volume than advancing volume. Those two\nsets of figures suggest that market breadth was actually negative for that\nparticular day—even though the Dow itself closed higher. The other figures\npresent a more mixed picture. The number of stocks hitting new 52 week\nhighs (78) was greater than those hitting new lows (43) suggesting a positive\nmarket environment. However, the closing tick (the number of stocks that\nclosed on an uptick versus a downtick) was a negative, -135. That meant that\n135 more stocks closed on a downtick than an uptick, a short term negative\nfactor. The negative closing tick, however, is offset by a closing Arms (Trin)\nreading of .96 which is mildly positive. We’ll explain why that is later in the\nchapter. All of these internal market readings have one intended purpose—to\ngive us a more accurate reading on the health of the overall market that isn’t\nalways reflected in the movement of the Dow itself.", - "type": "text" - }, - { - "block_id": "p392-b2", - "global_id": 2195, - "bbox": [ - 72.0, - 622.08, - 523.13, - 709.2 - ], - "text": "COMPARING MARKET AVERAGES\nAnother way to study the breadth of the market is to compare the performance\nof the stock averages themselves. Using the same day’s trading as an\nexample, the following data lists the relative performance of the major stock\naverages:", - "type": "text" - }, - { - "block_id": "p392-b3", - "global_id": 2196, - "bbox": [ - 176.36, - 727.93, - 418.2, - 760.33 - ], - "text": "Dow Industrials\n+12.20 (+.16%)\nS&P 500\n-.64 (-.07%)", - "type": "text" - } - ] - }, - { - "page_num": 393, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p393-b0", - "global_id": 2197, - "bbox": [ - 176.36, - 73.06, - 418.2, - 105.69 - ], - "text": "Nasdaq Composite\n-14.47 (-.92%)\nRussell 2000\n-3.80 (-.89%)", - "type": "text" - }, - { - "block_id": "p393-b1", - "global_id": 2198, - "bbox": [ - 72.0, - 123.7, - 522.81, - 353.43 - ], - "text": "The first thing that is clear is that the Dow Industrials was the only\nmarket average to gain on the day. On all the TV news programs that night,\ninvestors were told that the market (represented by the Dow) was up for the\nday. Yet all the other measures were actually down. Notice also that the\nbroader the average (the more stocks included) the worse it did. Compare the\npercentage changes. The 30 stock Dow gained .16%. The S&P 500 lost .07%.\nThe Nasdaq Composite, which includes more than 5,000 stocks, was the day’s\nworst performer and lost .92%. Almost as bad as the Nasdaq was the Russell\n2000 (-.89%), which is a measure of 2000 small cap stocks. The message in\nthis brief comparison is that even though the Dow gained on the day, the\noverall market lost ground as measured by the more broader based stock\naverages. We’ll revisit the idea of comparing market averages again. But first,\nlet’s show the different ways market technicians can analyze the market’s\nbreadth numbers.", - "type": "text" - }, - { - "block_id": "p393-b2", - "global_id": 2199, - "bbox": [ - 72.0, - 397.38, - 521.68, - 633.58 - ], - "text": "THE ADVANCE-DECLINE LINE\nThis is the best known of the breadth indicators. The construction of the\nadvance decline line is extremely simple. Each day’s trading on the New York\nStock Exchange produces a certain number of stocks that advanced, a number\nthat declined, and a number that remained unchanged. These figures are\nreported each day in The Wall Street Journal and Investor’s Business Daily,\nand are used to construct a daily advance-decline (AD) line. The most\ncommon way to calculate the AD line is to take the difference between the\nnumber of advancing issues and the number of declining issues. If there are\nmore advances than declines, the AD number for that day is positive. If there\nare more declines than advances, the AD line for that day is negative. That\npositive or negative daily number is then added to the cumulative AD line.\nThe AD line displays a trend of its own. The idea is to make sure the AD line\nand the market averages are trending in the same direction. (See Figure 18.1.)", - "type": "text" - } - ] - }, - { - "page_num": 394, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p394-b0", - "global_id": 2200, - "bbox": [ - 76.16, - 333.26, - 519.1, - 347.73 - ], - "text": "Figure 18.1 The NYSE advance-decline line versus the Dow Industrials. In a", - "type": "text" - }, - { - "block_id": "p394-b1", - "global_id": 2201, - "bbox": [ - 85.0, - 349.83, - 510.28, - 364.23 - ], - "text": "healthy market, both lines should be trending upward together as they are", - "type": "text" - }, - { - "block_id": "p394-b2", - "global_id": 2202, - "bbox": [ - 283.31, - 366.39, - 311.95, - 380.79 - ], - "text": "here.", - "type": "text" - }, - { - "block_id": "p394-b3", - "global_id": 2203, - "bbox": [ - 72.0, - 424.75, - 522.9, - 660.95 - ], - "text": "AD DIVERGENCE\nWhat does the advance-decline line measure? The advance-decline line tells\nus whether or not the broader universe of 3500 NYSE stocks is advancing in\nline with the most widely followed stock averages, which include only the 30\nDow Industrials or the 500 stocks in the S&P 500. To paraphrase a Wall Street\nmaxim: the advance-decline line tells us if the “troops” are keeping up with\nthe “generals.” As long as the AD line is advancing with the Dow Industrials,\nfor example, the breadth or health of the market is good. The danger appears\nwhen the AD line begins to diverge from the Dow. In other words, when you\nhave a situation where the Dow Industrials are hitting new highs while the\nbroader market (measured by the AD line) isn’t following, technicians begin\nto worry about “bad market breadth” or an AD divergence. Historically, the\nAD line peaks out well ahead of the market averages, which is why it’s\nwatched so closely.", - "type": "text" - }, - { - "block_id": "p394-b4", - "global_id": 2204, - "bbox": [ - 72.0, - 704.18, - 518.74, - 758.17 - ], - "text": "DAILY VERSUS WEEKLY AD LINES\nThe daily AD line, which we have described herein, is better used for short to\nintermediate comparisons with the major stock averages. It is less useful for", - "type": "text" - } - ] - }, - { - "page_num": 395, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p395-b0", - "global_id": 2205, - "bbox": [ - 72.0, - 73.06, - 519.67, - 203.63 - ], - "text": "comparisons going back several years. A weekly advance-decline line\nmeasures the number of advancing versus declining stocks for the entire\nweek. Those figures are published in Barron’s each weekend. A weekly\nadvance-decline line is considered more useful for trend comparisons\nspanning several years. While a negative divergence in the daily AD line may\nwarn of short to intermediate problems in the market, it’s necessary to also\nshow a similar divergence in the weekly AD line to confirm that a more\nserious problem is developing.", - "type": "text" - }, - { - "block_id": "p395-b1", - "global_id": 2206, - "bbox": [ - 72.0, - 247.58, - 522.73, - 516.91 - ], - "text": "VARIATIONS IN AD LINE\nSince the number of stocks traded on the NYSE has grown over the years,\nsome market analysts believe the method of subtracting the number of\ndeclining issues from the number of advancing issues gives greater weight to\nthe more recent data. To combat that problem, many technicians prefer to use\nan advance/decline ratio which divides the number of advancing issues by the\nnumber of declining issues. Some also believe that there’s value in including\nthe number of unchanged issues in the calculation. Whichever way the AD\nline is calculated, its use is always the same—that is, to measure the direction\nof the broader market and to ensure it’s moving in the same direction as the\nmore narrowly constructed, but popular market averages. Advance decline\nlines can also be constructed for the American Stock Exchange and the\nNasdaq Market. Market technicians like to construct overbought/oversold\noscillators on the AD lines to help measure short to intermediate term market\nextremes in the breadth figures themselves. One of the better known examples\nis the McClellan Oscillator.", - "type": "text" - }, - { - "block_id": "p395-b2", - "global_id": 2207, - "bbox": [ - 72.0, - 560.14, - 520.91, - 746.65 - ], - "text": "McCLELLAN OSCILLATOR\nDeveloped by Sherman McClellan, this oscillator is constructed by taking the\ndifference between two exponential moving averages of the daily NYSE\nadvance-decline figures. The McClellan Oscillator is the difference between\nthe 19 day (10% trend) and the 39 day (5% trend) exponential moving\naverages of the daily net advance decline figures. The oscillator fluctuates\naround a zero line with its upper and lower extremes ranging from +100 and\n-100. A McClellan Oscillator reading above +100 is a signal of an overbought\nstock market. A reading below -100 is considered an oversold stock market.\nCrossings above and below the zero line are also interpreted as short to\nintermediate term buying and selling signals respectively. (See Figure 18.2.)", - "type": "text" - } - ] - }, - { - "page_num": 396, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p396-b0", - "global_id": 2208, - "bbox": [ - 72.99, - 367.11, - 522.28, - 381.58 - ], - "text": "Figure 18.2 The McClellan oscillator shown as a histogram. Crossings above", - "type": "text" - }, - { - "block_id": "p396-b1", - "global_id": 2209, - "bbox": [ - 72.28, - 383.68, - 522.99, - 414.64 - ], - "text": "the zero line are positive signals. Readings above +100 are overbought, while\nreadings below -100 are oversold. Notice the extreme oversold reading during", - "type": "text" - }, - { - "block_id": "p396-b2", - "global_id": 2210, - "bbox": [ - 248.67, - 416.8, - 346.6, - 431.2 - ], - "text": "October of 1997.", - "type": "text" - }, - { - "block_id": "p396-b3", - "global_id": 2211, - "bbox": [ - 72.0, - 475.16, - 518.78, - 595.41 - ], - "text": "McCLELLAN SUMMATION INDEX\nThe Summation Index is simply a longer range version of the McClellan\nOscillator. The McClellan Summation Index is a cumulative sum of each\nday’s positive or negative readings in the McClellan Oscillator. Whereas the\nMcClellan Oscillator is used for short to intermediate trading purposes, the\nSummation Index provides a longer range view of market breadth and is used\nto spot major market turning points. (See Figure 18.3.)", - "type": "text" - } - ] - }, - { - "page_num": 397, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p397-b0", - "global_id": 2212, - "bbox": [ - 76.05, - 366.39, - 519.23, - 413.92 - ], - "text": "Figure 18.3 The McClellan Summation Index is simply a longer range\nversion of the McClellan Oscillator. The Summation Index is used for major\ntrend analysis. Crossings below zero are negative. The February 1998 signal", - "type": "text" - }, - { - "block_id": "p397-b1", - "global_id": 2213, - "bbox": [ - 260.47, - 416.08, - 334.81, - 430.48 - ], - "text": "was positive.", - "type": "text" - }, - { - "block_id": "p397-b2", - "global_id": 2214, - "bbox": [ - 72.0, - 474.44, - 522.34, - 743.77 - ], - "text": "NEW HIGHS VERSUS NEW LOWS\nIn addition to the number of advancing and declining stocks, the financial\npress also publishes the number of stocks hitting new 52 week highs or new\n52 week lows. Here again, these figures are available on a daily and weekly\nbasis. There are two ways to show these figures. One way is to plot the two\nlines separately. Since the daily values can sometimes be erratic, moving\naverages (usually 10 days) are plotted to present a smoother picture of the two\nlines. (See Figure 18.4.) In a strong market, the number of new highs should\nbe much greater than the number of new lows. When the number of new\nhighs start to decline, or the number of new lows start to expand, a caution\nsignal is given. A negative market signal is activated when the moving\naverage of new lows crosses above the moving average of new highs. It can\nalso be shown that whenever the new highs reach an extreme, the market has\na topping tendency. Similarly, whenever new lows reach an extreme, the\nmarket is near a bottom. Another way to use the new highs versus new lows\nnumbers is to plot the difference between the two lines.", - "type": "text" - } - ] - }, - { - "page_num": 398, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p398-b0", - "global_id": 2215, - "bbox": [ - 80.06, - 367.83, - 515.21, - 382.3 - ], - "text": "Figure 18.4 A 10 day average of new highs versus a 10 day average of new", - "type": "text" - }, - { - "block_id": "p398-b1", - "global_id": 2216, - "bbox": [ - 80.19, - 384.4, - 515.08, - 415.36 - ], - "text": "lows. A healthy market should see more stocks hitting new highs than new\nlows. During October 1997, the two lines almost crossed before reasserting", - "type": "text" - }, - { - "block_id": "p398-b2", - "global_id": 2217, - "bbox": [ - 230.3, - 417.53, - 364.98, - 431.92 - ], - "text": "their bullish alignment.", - "type": "text" - }, - { - "block_id": "p398-b3", - "global_id": 2218, - "bbox": [ - 72.0, - 475.88, - 522.86, - 695.51 - ], - "text": "NEW HIGH-NEW LOW INDEX\nThe advantage of a New High-New Low index is that it can be directly\ncompared to one of the major market averages. In that way, the high-low line\ncan be used just like an advance-decline line. (See Figure 18.5.) The trend of\nthe high-low line can be charted and it can be used to spot market\ndivergences. A new high in the Dow, for example, that is not matched by a\ncorresponding new high in the high-low line could be a sign of weakness in\nthe broader market. Trendline and moving-average analysis can be applied to\nthe line itself. But its major value is in either confirming or diverging from the\nmajor stock trends and giving early warning of potential trend changes in the\noverall market. Dr. Alexander Elder describes the New High-New Low index\nas “probably the best leading indicator of the stock market” Trading for a\nLiving, (Wiley).", - "type": "text" - } - ] - }, - { - "page_num": 399, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p399-b0", - "global_id": 2219, - "bbox": [ - 75.91, - 366.39, - 519.36, - 397.36 - ], - "text": "Figure 18.5 The New High-New Low Index versus the NYSE Composite\nIndex. This line plots the difference between the number of stocks hitting new", - "type": "text" - }, - { - "block_id": "p399-b1", - "global_id": 2220, - "bbox": [ - 83.99, - 399.52, - 511.29, - 413.92 - ], - "text": "highs and new lows. A rising line is positive. Notice the sharp drop during", - "type": "text" - }, - { - "block_id": "p399-b2", - "global_id": 2221, - "bbox": [ - 248.67, - 416.08, - 346.6, - 430.48 - ], - "text": "October of 1997.", - "type": "text" - }, - { - "block_id": "p399-b3", - "global_id": 2222, - "bbox": [ - 72.0, - 447.06, - 508.07, - 511.15 - ], - "text": "Elder suggests plotting the indicator as a histogram with a horizontal\nreference point at its zero line, making divergences easier to spot. He points\nout that crossings above and below the zero line also reflect bullish and\nbearish shifts in market psychology.", - "type": "text" - }, - { - "block_id": "p399-b4", - "global_id": 2223, - "bbox": [ - 72.0, - 555.1, - 519.16, - 758.17 - ], - "text": "UPSIDE VERSUS DOWNSIDE VOLUME\nThis is the third and final piece of data that is utilized to measure the breadth\nof the market. The New York Stock Exchange also provides the level of\nvolume in both the advancing and declining issues. That data is also available\nthe next day in the financial press. It is then possible to compare the upside\nvolume versus the downside volume to measure which is dominant at any\ngiven time. (See Figure 18.6.) The upside volume and downside volume can\nbe shown as two separate lines (just as we did with the new highs and new\nlows figures) or the difference can be shown as a single line. Either way, the\ninterpretation is always the same. When the upside volume is dominant, the\nmarket is strong. When downside volume is greater, the market is weak. It’s\npossible to combine the number of advancing and declining issues with", - "type": "text" - } - ] - }, - { - "page_num": 400, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p400-b0", - "global_id": 2224, - "bbox": [ - 72.0, - 73.53, - 476.81, - 104.25 - ], - "text": "advancing and declining volume. That’s what Richard Arms did in the\ncreation of the Arms Index.", - "type": "text" - }, - { - "block_id": "p400-b1", - "global_id": 2225, - "bbox": [ - 89.49, - 413.2, - 505.78, - 427.67 - ], - "text": "Figure 18.6 A 10 day average of stock market upside volume (dark line)", - "type": "text" - }, - { - "block_id": "p400-b2", - "global_id": 2226, - "bbox": [ - 90.25, - 429.77, - 505.02, - 444.17 - ], - "text": "versus downside volume. A strong market should have more upside than", - "type": "text" - }, - { - "block_id": "p400-b3", - "global_id": 2227, - "bbox": [ - 246.07, - 446.33, - 349.19, - 460.73 - ], - "text": "downside volume.", - "type": "text" - }, - { - "block_id": "p400-b4", - "global_id": 2228, - "bbox": [ - 72.0, - 504.69, - 523.19, - 724.32 - ], - "text": "THE ARMS INDEX\nThe Arms Index, named after its creator Richard Arms, is a ratio of a ratio.\nThe numerator is the ratio of the number of advancing issues divided by the\nnumber of declining issues. The denominator is the advancing volume divided\nby declining volume. The purpose of the Arms Index is to gauge whether\nthere’s more volume in rising or falling stocks. A reading below 1.0 indicates\nmore volume in rising stocks and is positive. A reading above 1.0 reflects\nmore volume in declining issues and is negative. On an intraday basis, a very\nhigh Arms Index reading is positive, while a very low reading is negative.\nThe Arms Index, therefore, is a contrary indicator that trends in the opposite\ndirection of the market. It can be used for intraday trading by tracking its\ndirection and for spotting signs of short term market extremes. (See Figure\n18.7.)", - "type": "text" - } - ] - }, - { - "page_num": 401, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p401-b0", - "global_id": 2229, - "bbox": [ - 72.0, - 74.02, - 515.1, - 227.4 - ], - "text": "TRIN VERSUS TICK\nThe Arms Index (TRIN) can be used in conjunction with the TICK indicator\nfor intraday trading. TICK measures the difference between the number of\nstocks trading on an uptick versus the number trading on a downtick. The\nTICK is a minute-by-minute version of the daily advance-decline line and is\nused for the same purpose. When combining the two during the day, a rising\nTICK indicator and a falling Arms Index (TRIN) are positive, while a falling\nTICK indicator and a rising Arms Index (TRIN) are negative. The Arms\nIndex, however, can also be used for longer range analysis.", - "type": "text" - }, - { - "block_id": "p401-b1", - "global_id": 2230, - "bbox": [ - 72.16, - 537.07, - 523.13, - 584.6 - ], - "text": "Figure 18.7 The Arms Index (also called TRIN) trends in the opposite\ndirection of the market. Exceptionally high spikes usually signal market\nbottoms. A 10-day moving average of the Arms Index is a popular way to view", - "type": "text" - }, - { - "block_id": "p401-b2", - "global_id": 2231, - "bbox": [ - 231.49, - 586.77, - 363.79, - 601.17 - ], - "text": "this contrary indicator.", - "type": "text" - }, - { - "block_id": "p401-b3", - "global_id": 2232, - "bbox": [ - 72.0, - 645.12, - 522.72, - 765.37 - ], - "text": "SMOOTHING THE ARMS INDEX\nWhile the Arms Index is quoted throughout the trading day and has some\nshort term forecasting value, most traders use a 10 day moving average of its\nvalues. According to Arms himself, a 10 day average of the Arms Index\nabove 1.20 is considered oversold, while a 10 day Arms value below .70 is\noverbought, although those numbers may shift depending on the overall trend\nof the market. Arms expresses a preference for Fibonacci numbers as well. He", - "type": "text" - } - ] - }, - { - "page_num": 402, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p402-b0", - "global_id": 2233, - "bbox": [ - 72.0, - 73.53, - 520.45, - 137.37 - ], - "text": "suggests using a 21 day Arms Index in addition to the 10 day version. He also\nutilizes 21 day and 55 day moving-average crossovers of the Arms Index to\ngenerate good intermediate term trades. For more in-depth treatment, read\nThe Arms Index (TRIN) by Richard W. Arms, Jr.", - "type": "text" - }, - { - "block_id": "p402-b1", - "global_id": 2234, - "bbox": [ - 72.0, - 181.33, - 520.9, - 334.7 - ], - "text": "OPEN ARMS\nIn calculating the 10 day Arms Index, each day’s closing value is determined\nusing the four inputs and that final value is smoothed with a 10 day moving\naverage. In the “Open” version of the Arms Index, each of the four\ncomponents in the formula is averaged separately over a period of 10 days.\nThe Open Arms Index is then calculated from those four different averages.\nMany analysts prefer the Open Arms version to the original version. Different\nmoving average lengths, like 21 and 55 days, can also be applied to the Open\nArms version. (See Figure 18.8.)", - "type": "text" - }, - { - "block_id": "p402-b2", - "global_id": 2235, - "bbox": [ - 74.55, - 642.22, - 520.73, - 673.18 - ], - "text": "Figure 18.8 The 10 day Open Arms Index gives a much smoother look to this\nindicator, but still trends in the opposite direction of the market. A crossing of", - "type": "text" - }, - { - "block_id": "p402-b3", - "global_id": 2236, - "bbox": [ - 100.19, - 675.35, - 495.07, - 689.75 - ], - "text": "its 10-day moving average (darker line) often signals turning points.", - "type": "text" - }, - { - "block_id": "p402-b4", - "global_id": 2237, - "bbox": [ - 72.0, - 732.98, - 328.91, - 753.14 - ], - "text": "EQUIVOLUME CHARTING", - "type": "text" - } - ] - }, - { - "page_num": 403, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p403-b0", - "global_id": 2238, - "bbox": [ - 72.0, - 73.28, - 522.01, - 253.32 - ], - "text": "Although Arms is best known for creating the Arms Index, he has also\npioneered other ways of combining price and volume analysis. In doing so, he\ncreated an entirely new form of charting called Equivolume. In the traditional\nbar chart, the day’s trading range is shown on the price bar with the volume\nbar plotted at the bottom of the chart. Since technical analysts combine price\nand volume analysis, they have to look at both parts of the chart at the same\ntime. On the Equivolume chart, each price bar is shown as a rectangle. The\nheight of the rectangle measures the day’s trading range. The width of the\nrectangle is determined by that day’s volume. Heavier volume days produce a\nwider rectangle. Lighter volume days are reflected in a narrower rectangle.\n(See Figure 18.9.)", - "type": "text" - }, - { - "block_id": "p403-b1", - "global_id": 2239, - "bbox": [ - 74.17, - 560.84, - 521.11, - 575.31 - ], - "text": "Figure 18.9 Equivolume charts combine price and volume. The width of each", - "type": "text" - }, - { - "block_id": "p403-b2", - "global_id": 2240, - "bbox": [ - 75.23, - 577.4, - 520.04, - 608.37 - ], - "text": "rectangle (daily bar) is determined by the volume. Wider rectangles show\nheavier volume. The rectangles started to widen during Intel’s last sell-off—a", - "type": "text" - }, - { - "block_id": "p403-b3", - "global_id": 2241, - "bbox": [ - 257.67, - 610.53, - 337.6, - 624.93 - ], - "text": "negative sign.", - "type": "text" - }, - { - "block_id": "p403-b4", - "global_id": 2242, - "bbox": [ - 72.0, - 641.5, - 522.74, - 755.29 - ], - "text": "As a rule, a bullish price breakout should always be accompanied by a\nburst of trading activity. On an Equivolume chart, therefore, a bullish price\nbreakout should be accompanied by a noticeably wider rectangle. Equivolume\ncharting combines price and volume analysis into one chart and makes for\nmuch easier comparisons between price and volume. In an uptrend, for\nexample, up days should see wider rectangles while down days should see\nnarrower rectangles. Equivolume charting can be applied to market averages", - "type": "text" - } - ] - }, - { - "page_num": 404, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p404-b0", - "global_id": 2243, - "bbox": [ - 72.0, - 73.28, - 508.76, - 120.81 - ], - "text": "as well as individual stocks and can be plotted for both daily and weekly\ncharts. For more information, consult Volume Cycles in the Stock Market by\nRichard Arms (Dow Jones-Irwin, 1983).", - "type": "text" - }, - { - "block_id": "p404-b1", - "global_id": 2244, - "bbox": [ - 72.0, - 164.76, - 521.93, - 417.52 - ], - "text": "CANDLEPOWER\nIn Chapter 12, Greg Morris explained candlestick charting. In a 1990 article\npublished in Technical Analysis of Stocks and Commodities magazine entitled\n“East Meets West: CandlePower Charting,” Morris proposed combining\ncandlestick charts with Arms’ Equivolume charting method. Morris’ version\nshows the candlestick chart in an Equivolume format. In other words, the\nwidth of the candlestick is determined by the volume. The greater the volume,\nthe wider the candlestick. Morris called the combination CandlePower\ncharting. Quoting from the article: “…the CandlePower chart offers similar if\nnot better information than Equivolume or candlestick charting and is as\nvisually appealing as either of them.” Morris’ CandlePower technique is\navailable on Metastock charting software (published by Equis International,\n3950 S. 700 East, Suite 100, Salt Lake City, UT 84107 [800] 882-3040,\nwww.equis.com). However its name has been changed to Candlevolume. (See\nFigure 18.10.)", - "type": "text" - }, - { - "block_id": "p404-b2", - "global_id": 2245, - "bbox": [ - 84.7, - 728.64, - 510.58, - 743.11 - ], - "text": "Figure 18.10 A CandlePower chart (also called Candlevolume) combines", - "type": "text" - }, - { - "block_id": "p404-b3", - "global_id": 2246, - "bbox": [ - 99.62, - 745.21, - 495.65, - 759.61 - ], - "text": "equivolume and candlesticks. The width of each candle (daily bar) is", - "type": "text" - } - ] - }, - { - "page_num": 405, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p405-b0", - "global_id": 2247, - "bbox": [ - 232.3, - 73.53, - 362.97, - 87.93 - ], - "text": "determined by volume.", - "type": "text" - }, - { - "block_id": "p405-b1", - "global_id": 2248, - "bbox": [ - 72.0, - 131.63, - 522.77, - 334.7 - ], - "text": "COMPARING MARKET AVERAGES\nAt the start of the chapter, we mentioned that another way to gauge market\nbreadth was to compare the different market averages themselves. We’re\ntalking here primarily about the Dow Industrials, the S&P 500, the New York\nStock Exchange Index, the Nasdaq Composite, and the Russell 2000. Each\nmeasures a slightly different portion of the market. The Dow and the S&P 500\ncapture the trends of a relatively small number of large capitalization stocks.\nThe NYSE Composite Index includes all stocks traded on the New York\nStock Exchange, and gives a slightly broader perspective. Breakouts in the\nDow Industrials should, as a rule, be confirmed by similar breakouts in both\nthe S&P 500 and the NYSE Composite Index if the breakout is to have\nstaying power.", - "type": "text" - }, - { - "block_id": "p405-b2", - "global_id": 2249, - "bbox": [ - 72.0, - 336.87, - 523.15, - 467.22 - ], - "text": "Most important divergences involve the Nasdaq and the Russell 2000.\nThe Nasdaq Composite has the largest number of stocks (5000). However,\nsince the Nasdaq is a capitalization-weighted index, it is usually dominated by\nthe one hundred largest technology stocks like Intel and Microsoft. Because\nof that, the Nasdaq is more often a measure of the direction of the technology\nsector. The Russell 2000 is a truer measure of the smaller stock universe. Both\nindexes, however, should be trending upward along with the Dow and the\nS&P 500 if the trend of the market is truly healthy.", - "type": "text" - }, - { - "block_id": "p405-b3", - "global_id": 2250, - "bbox": [ - 72.0, - 469.38, - 520.86, - 599.73 - ], - "text": "Relative strength (RS) analysis plays a useful role here. A ratio of the\nNasdaq to the S&P 500 tells us whether the technology stocks are leading or\nlagging. It’s usually better for the market if they’re leading and the ratio line\nis rising. (See Figure 18.11.) A comparison of the Russell 2000 and the S&P\n500 tells us whether the “troops” are following the “generals.” When the\nsmall stocks are showing poor relative strength, or are lagging too far behind\nthe large stocks, that’s often a warning that market breadth is weakening. (See\nFigure 18.12.)", - "type": "text" - } - ] - }, - { - "page_num": 406, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p406-b0", - "global_id": 2251, - "bbox": [ - 77.03, - 364.23, - 518.25, - 395.2 - ], - "text": "Figure 18.11 The Nasdaq/S&P 500 ratio tells us whether technology stocks\nare leading or lagging the market. It’s usually better for the market when the", - "type": "text" - }, - { - "block_id": "p406-b1", - "global_id": 2252, - "bbox": [ - 244.07, - 397.36, - 351.19, - 411.76 - ], - "text": "ratio line is rising.", - "type": "text" - }, - { - "block_id": "p406-b2", - "global_id": 2253, - "bbox": [ - 80.94, - 721.44, - 514.33, - 735.9 - ], - "text": "Figure 18.12 An overlay comparison of the small cap Russell 2000 and the", - "type": "text" - }, - { - "block_id": "p406-b3", - "global_id": 2254, - "bbox": [ - 98.79, - 738.0, - 496.48, - 752.4 - ], - "text": "large cap Dow. It’s usually better when both lines are rising together.", - "type": "text" - } - ] - }, - { - "page_num": 407, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p407-b0", - "global_id": 2255, - "bbox": [ - 72.0, - 74.02, - 522.05, - 293.65 - ], - "text": "CONCLUSION\nAnother example of comparing two market averages for signs of confirmation\nor divergence involves the Dow Theory. In Chapter 2, we discussed the\nimportance of the relationship between the Dow Industrials and the Dow\nTransports. A Dow Theory buy signal is present when both averages hit new\nhighs. When one diverges from the other, a caution signal is given. It can be\nseen then that the study of market breadth, and the related issues of\nconfirmation and divergence, can take many forms. The general rule to follow\nis that the greater the number of stock market averages that are trending in the\nsame direction, the greater the chances are for that trend continuing. In\naddition, be sure to check the advance-decline line, the new highs-new lows\nline, and the upside-downside volume lines to make sure that they’re also\ntrending in the same direction.", - "type": "text" - } - ] - }, - { - "page_num": 408, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p408-b0", - "global_id": 2256, - "bbox": [ - 72.0, - 339.03, - 522.11, - 452.81 - ], - "text": "As this book has demonstrated, technical analysis is a blend of many\napproaches. Each approach adds something to the analyst’s knowledge of the\nmarket. Technical analysis is much like putting together a giant jigsaw puzzle.\nEach technical tool holds a piece of the puzzle. My approach to market\nanalysis is to combine as many techniques as possible. Each works better in\ncertain market situations. The key is knowing which tools to emphasize in the\ncurrent situation. That comes with knowledge and experience.", - "type": "text" - }, - { - "block_id": "p408-b1", - "global_id": 2257, - "bbox": [ - 72.0, - 454.98, - 519.11, - 651.58 - ], - "text": "All of these approaches overlap to some extent and complement one\nanother. The day the user sees these interrelationships, and is able to view\ntechnical analysis as the sum of its parts, is the day that person deserves the\ntitle of technical analyst. The following checklist is provided to help the user\ntouch all the bases, at least in the early going. Later on, the checklist becomes\nsecond nature. The checklist is not all-inclusive, but does have most of the\nmore important factors to keep in mind. Sound market analysis seldom\nconsists of doing the obvious. The technician is constantly seeking clues to\nfuture market movement. The final clue that leans the trader in one direction\nor the other is often some minor factor that has gone largely unnoticed by\nothers. The more factors the analyst considers, the better the chances of\nfinding that right clue.", - "type": "text" - }, - { - "block_id": "p408-b2", - "global_id": 2258, - "bbox": [ - 72.0, - 695.53, - 317.75, - 715.69 - ], - "text": "TECHNICAL CHECKLIST", - "type": "text" - }, - { - "block_id": "p408-b3", - "global_id": 2259, - "bbox": [ - 82.08, - 732.97, - 397.27, - 763.93 - ], - "text": "1. What is the direction of the overall market?\n2. What is the direction of the various market sectors?", - "type": "text" - } - ] - }, - { - "page_num": 409, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p409-b0", - "global_id": 2260, - "bbox": [ - 74.88, - 73.28, - 503.31, - 418.96 - ], - "text": "3. What are the weekly and monthly charts showing?\n4. Are the major, intermediate, and minor trends up, down, or sideways?\n5. Where are the important support and resistance levels?\n6. Where are the important trendlines or channels?\n7. Are volume and open interest confirming the price action?\n8. Where are the 33%, 50%, and 66% retracements?\n9. Are there any price gaps and what type are they?\n10. Are there any major reversal patterns visible?\n11. Are there any continuation patterns visible?\n12. What are the price objectives from those patterns?\n13. Which way are the moving averages pointing?\n14. Are the oscillators overbought or oversold?\n15. Are any divergences apparent on the oscillators?\n16. Are contrary opinion numbers showing any extremes?\n17. What is the Elliot Wave pattern showing?\n18. Are there any obvious 3 or 5 wave patterns?\n19. What about Fibonacci retracements or projections?\n20. Are there any cycle tops or bottoms due?\n21. Is the market showing right or left translation?\n22. Which way is the computer trend moving: up, down, or sideways?\n23. What are the point and figure charts or candlesticks showing?", - "type": "text" - }, - { - "block_id": "p409-b1", - "global_id": 2261, - "bbox": [ - 72.0, - 435.53, - 510.79, - 466.5 - ], - "text": "After you’ve arrived at a bullish or bearish conclusion, ask yourself the\nfollowing questions.", - "type": "text" - }, - { - "block_id": "p409-b2", - "global_id": 2262, - "bbox": [ - 82.08, - 483.07, - 469.21, - 613.41 - ], - "text": "1. Which way will this market trend over the next several months?\n2. Am I going to buy or sell this market?\n3. How many units will I trade?\n4. How much am I prepared to risk if I’m wrong?\n5. What is my profit objective?\n6. Where will I enter the market?\n7. What type of order will I use?\n8. Where will I place my protective stop?", - "type": "text" - }, - { - "block_id": "p409-b3", - "global_id": 2263, - "bbox": [ - 72.0, - 629.98, - 519.57, - 760.33 - ], - "text": "Going through the checklist won’t guarantee the right conclusions. It’s\nonly meant to help you ask the right questions. Asking the right questions is\nthe surest way of finding the right answers. The keys to successful trading are\nknowledge, discipline, and patience. Assuming that you have the knowledge,\nthe best way to achieve discipline and patience is doing your homework and\nhaving a plan of action. The final step is putting that plan of action to work.\nEven that won’t guarantee success, but it will greatly increase the odds of\nwinning in the financial markets.", - "type": "text" - } - ] - }, - { - "page_num": 410, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p410-b0", - "global_id": 2264, - "bbox": [ - 72.0, - 74.02, - 521.35, - 300.86 - ], - "text": "HOW TO COORDINATE TECHNICAL AND\nFUNDAMENTAL ANALYSIS\nDespite the fact that technicians and fundamentalists are often at odds with\none another, there are ways they can work together for mutual benefit. Market\nanalysis can be approached from either direction. While I believe that\ntechnical factors do lead the known fundamentals, I also believe that any\nimportant market move must be caused by underlying fundamental factors.\nTherefore, it simply makes sense for a technician to have some awareness of\nthe fundamental condition of a market. If nothing else, the technician can\ninquire from his or her fundamental counterpart as to what would have to\nhappen fundamentally to justify a significant market move identified on a\nprice chart. In addition, seeing how the market reacts to fundamental news\ncan be used as an excellent technical indication.", - "type": "text" - }, - { - "block_id": "p410-b1", - "global_id": 2265, - "bbox": [ - 72.0, - 303.02, - 522.72, - 516.19 - ], - "text": "The fundamental analyst can use technical factors to confirm an analysis\nor as an alert that something important may be happening. The fundamentalist\ncan consult a price chart or use a computer trend-following system as a filter\nto prevent him or her from assuming a position opposite an existing trend.\nSome unusual action on a price chart can act as an alert for the fundamental\nanalyst and cause him or her to examine the fundamental situation a bit closer.\nDuring my years in the technical analysis department of a major brokerage\nfirm, I often approached our fundamental department to discuss some market\nmove that seemed imminent on the price charts. I often received responses\nlike “that can never happen” or “no way.” Very often, that same person was\nscrambling a couple of weeks later to find fundamental reasons to explain a\nsudden and “unexpected” market move. There’s obviously room for much\nmore coordination and cooperation in this area.", - "type": "text" - }, - { - "block_id": "p410-b2", - "global_id": 2266, - "bbox": [ - 72.0, - 560.14, - 513.97, - 713.52 - ], - "text": "CHARTERED MARKET TECHNICIAN (CMT)\nA lot of people use technical analysis and offer opinions on the technical\ncondition of the various markets. But are they really qualified to do so? How\nwould you know? After all, you wouldn’t go to a doctor who didn’t have a\nmedical degree on the wall. Nor would you consult a lawyer who hadn’t\npassed the bar exam. Your accountant is undoubtedly a CTA. If you asked a\nsecurity analyst for an assessment on a common stock, you would certainly\nmake sure that he or she was a Chartered Financial Analyst (CFA). Why\nwouldn’t you take the same precautions with a technical analyst?", - "type": "text" - }, - { - "block_id": "p410-b3", - "global_id": 2267, - "bbox": [ - 72.0, - 715.68, - 516.31, - 763.21 - ], - "text": "The Market Technicians Association (MTA) resolved this question by\ninstituting a Chartered Market Technician (CMT) program. The CMT\nprogram is a three step examination process that qualifies the analyst to carry", - "type": "text" - } - ] - }, - { - "page_num": 411, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p411-b0", - "global_id": 2268, - "bbox": [ - 72.0, - 73.53, - 514.54, - 120.81 - ], - "text": "the CMT letters after his or her name. Most professional technical analysts\nhave gone through the program. The next time someone offers you his or her\ntechnical opinion, ask to see the CMT.", - "type": "text" - }, - { - "block_id": "p411-b1", - "global_id": 2269, - "bbox": [ - 72.0, - 164.76, - 522.33, - 467.22 - ], - "text": "MARKET TECHNICIANS ASSOCIATION (MTA)\nThe Market Technicians Association (MTA) is the oldest and best known\ntechnical society in the world. It was founded in 1972 to encourage the\nexchange of technical ideas, educate the public and the investment\ncommunity, and establish a code of ethics and professional standards among\ntechnical analysts. (On March 11, 1998 the MTA celebrated the 25th birthday\nof its incorporation. The event was highlighted by a special presentation at the\nNew York monthly meeting by three of the organization’s founding members\n—Ralph Acampora, John Brooks, and John Greeley.) MTA membership\nincludes full-time technical analysts and other interested parties (called\naffiliates). Monthly meetings are held in New York (Market Technicians\nAssociation, Inc., One World Trade Center, Suite 4447, New York, NY 10048\n(212) 912-0995, e-mail: shelleymta@aol.com), and an annual seminar is held\neach May at various locations around the country. Members have access to\nthe MTA library and a computer bulletin board. A monthly newsletter and a\nperiodic MTA Journal are published. Some regional chapters have even been\nformed. MTA members also become colleagues of the International\nFederation of Technical Analysts (IFTA).", - "type": "text" - }, - { - "block_id": "p411-b2", - "global_id": 2270, - "bbox": [ - 72.0, - 510.45, - 516.35, - 720.72 - ], - "text": "THE GLOBAL REACH OF TECHNICAL\nANALYSIS\nDuring the fall of 1985, a meeting was held in Japan with technical\nrepresentatives of several different countries to draft a constitution for the\nInternational Federation of Technical Analysts (IFTA, Post Office Box 1347,\nNew York, NY 10009 USA). Since then, the organization has grown to\ninclude technical analysis organizations from more than twenty countries.\nOne of the nice things about being a member is that annual meetings are held\nin places like Australia, Japan, Paris, and Rome since a different national\norganization hosts each seminar. I’m proud to say that in 1992 I received the\nfirst award ever given at an IFTA conference for “outstanding contribution to\nglobal technical analysis.”", - "type": "text" - } - ] - }, - { - "page_num": 412, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p412-b0", - "global_id": 2271, - "bbox": [ - 72.0, - 74.02, - 522.08, - 343.35 - ], - "text": "TECHNICAL ANALYSIS BY ANY NAME\nAfter a century of use in this country (and 300 years in Japan), technical\nanalysis is more popular than ever. Of course, it’s not always called technical\nanalysis. In my book, The Visual Investor, I called it visual analysis. That was\nsimply an attempt to get people beyond the intimidating title of technical\nanalysis and to get them to examine this valuable approach more closely.\nWhatever you want to call it, technical analysis is practiced under many\nnames. A lot of financial organizations employ analysts whose job it is to\nnumber-crunch market prices to find stocks or stock groups that are expensive\n(overbought) or cheap (oversold). They’re called quantitative analysts, but the\nnumbers they crunch are often the same ones the technicians are crunching.\nThe financial press has written about a “new” class of trader called\n“momentum” players. These traders move funds out of stocks and stock\ngroups that are showing poor momentum and into those that are showing\ngood momentum. They use a technique called relative strength. Of course, we\nrecognize “momentum” and “relative strength” as technical terms.", - "type": "text" - }, - { - "block_id": "p412-b1", - "global_id": 2272, - "bbox": [ - 72.0, - 345.51, - 515.1, - 525.55 - ], - "text": "Then there are the brokerage firms’ “fundamental” upgrades and\ndowngrades. Have you noticed how often these “fundamental” changes take\nplace the day after a significant “chart” breakout or breakdown? Economists,\nwho certainly don’t consider themselves technical analysts, use charts all the\ntime to measure the direction of inflation, interest rates, and all sorts of\neconomic indicators. And they talk about the “trend” of those charts. Even\nfundamental tools like the price/earnings ratio have a technical side to them.\nAnytime you introduce price into the equation, you’re moving into the realm\nof technical analysis. Or when security analysts say the dividend yield of the\nstock market is too low, aren’t they saying prices are too high? Isn’t that the\nsame thing as saying a market is overbought?", - "type": "text" - }, - { - "block_id": "p412-b2", - "global_id": 2273, - "bbox": [ - 72.0, - 527.72, - 512.52, - 608.37 - ], - "text": "Finally, there are the academics who have reinvented technical analysis\nunder the new name of Behavioral Finance. For years, the academics\nespoused the Efficient Market Hypothesis to prove that technical analysis\nsimply didn’t work. No less an authority than the Federal Reserve Board has\nthrown some doubt on those ideas.", - "type": "text" - }, - { - "block_id": "p412-b3", - "global_id": 2274, - "bbox": [ - 72.0, - 652.32, - 516.75, - 756.01 - ], - "text": "FEDERAL RESERVE FINALLY APPROVES\nDuring August of 1995, the Federal Reserve Bank of New York published a\nStaff Report under the title: “Head and Shoulders: Not Just a Flaky Pattern.”\nThe report was intended to examine the validity of the head and shoulders\npattern in foreign exchange trading. (The first edition of this book was cited\nas one of the primary sources on technical analysis.) The opening sentence in", - "type": "text" - } - ] - }, - { - "page_num": 413, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p413-b0", - "global_id": 2275, - "bbox": [ - 72.0, - 73.53, - 201.47, - 87.93 - ], - "text": "the introduction reads:", - "type": "text" - }, - { - "block_id": "p413-b1", - "global_id": 2276, - "bbox": [ - 100.79, - 104.25, - 465.4, - 201.47 - ], - "text": "Technical analysis, the prediction of price movements based on\npast price movements, has been shown to generate statistically\nsignificant profits despite its incompatibility with most\neconomists’ notions of “efficient markets.” (Federal Reserve\nBank of New York, C.L. Osier and P.H. Kevin Chang, Staff\nReport No. 4, August 1995.)", - "type": "text" - }, - { - "block_id": "p413-b2", - "global_id": 2277, - "bbox": [ - 72.0, - 218.04, - 523.17, - 315.26 - ], - "text": "A more recent report, published in the fall of 1997 by the Federal\nReserve Bank of St. Louis, also addresses the use of technical analysis and the\nrelative merits of the Efficient Market Hypothesis. (Technical Analysis of the\nFutures Markets was again cited as a primary source of information on\ntechnical analysis.) Under the paragraph titled, “Rethinking the Efficient\nMarkets Hypothesis,” the author writes:", - "type": "text" - }, - { - "block_id": "p413-b3", - "global_id": 2278, - "bbox": [ - 100.79, - 331.83, - 457.64, - 462.18 - ], - "text": "The success of technical trading rules shown in the previous\nsection is typical of a number of later studies showing that the\nsimple efficient market hypothesis fails in important ways to\ndescribe how the foreign exchange market actually functions.\nWhile these results did not surprise market practitioners, they\nhave helped persuade economists to examine features of the\nmarket…that might explain the profitability of technical\nanalysis. (Neely)", - "type": "text" - }, - { - "block_id": "p413-b4", - "global_id": 2279, - "bbox": [ - 72.0, - 506.13, - 523.13, - 758.89 - ], - "text": "CONCLUSION\nIf imitation is the sincerest form of flattery, then market technicians should\nfeel very flattered. Technical analysis is practiced under many different\nnames, and often by those who may not realize they’re using it. But it is being\npracticed. Technical analysis has also evolved. The introduction of\nintermarket analysis, for example, has changed the focus away from “single\nmarket” analysis to a more interdependent view of the financial markets. The\nidea that all global markets are linked isn’t questioned much anymore either.\nThat’s why the universal language of technical analysis makes it especially\nuseful in a world where the financial markets, here and abroad, have become\nso intertwined. In a world where computer technology and lightning-fast\ncommunications require quick responses, the ability to read the market’s\nsignals is more crucial than ever. And reading market signals is what technical\nanalysis is all about. Charles Dow introduced technical analysis at the start of\nthe twentieth century. As the twentieth century draws to a close, Mr. Dow", - "type": "text" - } - ] - }, - { - "page_num": 414, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p414-b0", - "global_id": 2280, - "bbox": [ - 72.0, - 73.53, - 272.22, - 87.93 - ], - "text": "would be proud of what he started.", - "type": "text" - } - ] - }, - { - "page_num": 415, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p415-b0", - "global_id": 2281, - "bbox": [ - 72.0, - 133.73, - 255.89, - 162.52 - ], - "text": "APPENDICES", - "type": "text" - } - ] - }, - { - "page_num": 416, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p416-b0", - "global_id": 2282, - "bbox": [ - 72.0, - 133.73, - 484.33, - 197.09 - ], - "text": "Appendix A: Advanced Technical\nIndicators*", - "type": "text" - }, - { - "block_id": "p416-b1", - "global_id": 2283, - "bbox": [ - 72.0, - 264.85, - 512.78, - 328.94 - ], - "text": "This appendix introduces several more advanced technical methods that can\nbe used by themselves or with other technical studies. As with any technical\napproach, it is always recommended that investors do their own independent\ntesting and research before actually investing.", - "type": "text" - }, - { - "block_id": "p416-b2", - "global_id": 2284, - "bbox": [ - 72.0, - 372.89, - 522.88, - 542.84 - ], - "text": "DEMAND INDEX (DI)\nMost technicians will agree that volume analysis is an important ingredient in\ndetermining a market’s direction. The Demand Index (DI) is one of the early\nvolume indicators that was developed in the 1970s by James Sibbett. The\nformula is quite complex (see end of this appendix). The Demand Index is the\nratio of buying pressure to selling pressure. When the buying pressure is\ngreater than the selling pressure, the DI is above the zero line, which is\npositive. Greater selling pressure means the DI is below zero, which implies\nprices will move lower. Most traders also look for divergences between the DI\nand prices.", - "type": "text" - }, - { - "block_id": "p416-b3", - "global_id": 2285, - "bbox": [ - 72.0, - 545.0, - 520.65, - 758.17 - ], - "text": "Figure A.1 is a weekly chart of T-Bond futures from early 1994 until late\n1997. From April to November 1994, the DI was mostly below the zero line\nas bonds declined from 104 to the 96 area. While prices made lower lows\n(line A), the DI formed higher lows (line B). This is a classic positive, or\nbullish divergence, which suggested that bond prices were bottoming. The\ndivergence was confirmed when the DI moved above the zero line at point 1.\nThe DI reached its highest level for this rally in late May 1995 at point 2, and\nthen dropped for the next six weeks before crossing below the zero line at\npoint 3. It stayed negative for five weeks before it again turned positive. On\nthe next rally the DI formed a significantly lower high in late November at\npoint 4. While the DI was lower (line D), the bond contract was almost six\npoints higher (line C). This negative or bearish divergence warned of a price\npeak.", - "type": "text" - } - ] - }, - { - "page_num": 417, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p417-b0", - "global_id": 2286, - "bbox": [ - 74.77, - 351.27, - 520.51, - 365.73 - ], - "text": "Figure A.1 The Demand Index (DI), which incorporates price and volume, is", - "type": "text" - }, - { - "block_id": "p417-b1", - "global_id": 2287, - "bbox": [ - 80.66, - 367.83, - 514.61, - 382.23 - ], - "text": "shown here as a histogram. Values above zero are positive; below zero they", - "type": "text" - }, - { - "block_id": "p417-b2", - "global_id": 2288, - "bbox": [ - 91.95, - 384.4, - 503.31, - 398.8 - ], - "text": "are negative. Notice the bullish divergence in late 1994 and the bearish", - "type": "text" - }, - { - "block_id": "p417-b3", - "global_id": 2289, - "bbox": [ - 103.88, - 400.96, - 491.38, - 415.36 - ], - "text": "divergence in late 1995. (Courtesy MetaStock Equis International.)", - "type": "text" - }, - { - "block_id": "p417-b4", - "global_id": 2290, - "bbox": [ - 72.0, - 431.93, - 519.16, - 628.54 - ], - "text": "This indicator can also be used with stocks. The weekly chart of General\nMotors (Figure A.2) shows the DI plotted as a line rather than a histogram.\nThis allows for trendlines to more easily be drawn on the indicator. I have\npersonally found trendline analysis of indicators to be quite valuable.\nIndicator trendlines are often broken ahead of price trendlines. This was the\ncase in late 1995 as the downtrend in the DI (line A) was broken a week\nbefore the corresponding price downtrend (line B). As this chart indicates,\nbuying just one week earlier could have significantly improved the entry\nprice. The DI also warned of a price high in mid-April 1996. While GM was\nmaking a new price high (line C), the DI had formed lower highs (line D).\nThis warning signal came well ahead of the serious price decline in June and\nJuly.", - "type": "text" - } - ] - }, - { - "page_num": 418, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p418-b0", - "global_id": 2291, - "bbox": [ - 73.32, - 375.75, - 521.95, - 423.28 - ], - "text": "Figure A.2 The Demand Index (solid line) compared to a weekly chart of\nGM. Trendline breaks on the DI line often preceded trendline breaks on the\nprice chart. Notice the negative (bearish) divergence in April 1996. (Courtesy", - "type": "text" - }, - { - "block_id": "p418-b1", - "global_id": 2292, - "bbox": [ - 203.33, - 425.45, - 391.95, - 439.85 - ], - "text": "MetaStock, Equis International.)", - "type": "text" - }, - { - "block_id": "p418-b2", - "global_id": 2293, - "bbox": [ - 72.0, - 483.8, - 513.14, - 570.92 - ], - "text": "HERRICK PAYOFF INDEX (HPI)\nThis indicator was developed by the late John Herrick as a way of analyzing\ncommodity futures through changes in the open interest. As discussed in\nChapter 7, changes in the open interest can give traders important clues as to\nwhether a market trend is well supported or not.", - "type": "text" - }, - { - "block_id": "p418-b3", - "global_id": 2294, - "bbox": [ - 72.0, - 573.08, - 520.23, - 653.74 - ], - "text": "The Herrick Payoff Index uses price, volume, and open interest to\ndetermine money flow into or out of a given commodity. This helps the trader\nspot divergences between the price action and the open interest. This is often\nquite important as buying or selling panics can often be identified through\nanalysis of the open interest by the Herrick Payoff Index.", - "type": "text" - }, - { - "block_id": "p418-b4", - "global_id": 2295, - "bbox": [ - 72.0, - 655.91, - 519.59, - 720.0 - ], - "text": "The most basic interpretation of the HPI is whether it is above or below\nthe zero line. A positive value means that the HPI is projecting higher prices\nand that open interest is rising along with prices. Conversely, negative\nreadings suggest that funds are flowing out of the commodity being analyzed.", - "type": "text" - }, - { - "block_id": "p418-b5", - "global_id": 2296, - "bbox": [ - 72.0, - 722.16, - 522.47, - 769.69 - ], - "text": "One of the more volatile commodity markets is coffee, featured in Figure\nA.3. During March and April of 1997, the HPI had four crossings of the zero\nline with the last positive signal in early April (B) lasting until early June. The", - "type": "text" - } - ] - }, - { - "page_num": 419, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p419-b0", - "global_id": 2297, - "bbox": [ - 72.0, - 73.53, - 520.34, - 187.07 - ], - "text": "HPI dropped below zero in June, and even though prices were well below the\nhighs, coffee dropped another 70 cents. Once again the HPI turned positive in\nlate July very close to the lows. Over the next two months there were two\nshort term signals and then another longer term sell signal. This is\ncharacteristic of the HPI when used on the daily data as it will cross above\nand below the zero line several times before a longer lasting buy or sell signal\nis given.", - "type": "text" - }, - { - "block_id": "p419-b1", - "global_id": 2298, - "bbox": [ - 73.38, - 490.98, - 521.9, - 505.45 - ], - "text": "Figure A.3 The Herrick Payoff Index (HPI) shown as a histogram with coffee", - "type": "text" - }, - { - "block_id": "p419-b2", - "global_id": 2299, - "bbox": [ - 78.71, - 507.55, - 516.56, - 538.51 - ], - "text": "prices. HPI uses price, volume, and open interest in its calculation and is\nused in futures markets. Crossings above zero are buys (B); crossings below", - "type": "text" - }, - { - "block_id": "p419-b3", - "global_id": 2300, - "bbox": [ - 261.73, - 540.68, - 333.53, - 555.07 - ], - "text": "are sells (S).", - "type": "text" - }, - { - "block_id": "p419-b4", - "global_id": 2301, - "bbox": [ - 72.0, - 571.65, - 520.21, - 768.25 - ], - "text": "The HPI, like the Demand Index, is most effective when used on the\nweekly data, as fewer false signals are evident. Divergence analysis can also\nbe used to warn the trader of a change from positive to negative money flow.\nThere are several good examples on the weekly T-Bond futures charts (Figure\nA.4) that covers approximately six years of trading. The HPI stayed positive\nfrom late 1992 until late 1993. The HPI peaked in early 1993 and, when\nbonds were almost 10 points higher (line A), the HPI was forming a lower\nhigh (line B). This negative divergence warned bond traders of the decline in\nprices that took place in 1994. The HPI violated the zero line in late October\nof 1993, but then turned slightly positive in early 1994 before plunging back\nbelow the zero line. The HPI reached its lowest level in the first half of 1994\nand bottomed well ahead of prices. As prices were making lower lows (line", - "type": "text" - } - ] - }, - { - "page_num": 420, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p420-b0", - "global_id": 2302, - "bbox": [ - 72.0, - 73.28, - 520.48, - 203.63 - ], - "text": "C), the HPI was forming higher lows and therefore a positive divergence (line\nD). The HPI moved back into positive territory in December 1994 as bonds\nwere very close to their lows. A negative divergence was formed in late 1995\n(line F), after bonds had rallied over 25 points from the late 1994 lows. The\nzero line was crossed several times in 1996 and early 1997 before the HPI\nmoved firmly into positive territory. These two examples should illustrate\nwhy the HPI and its analysis of open interest can be helpful in analyzing a\ncommodity market’s direction.", - "type": "text" - }, - { - "block_id": "p420-b1", - "global_id": 2303, - "bbox": [ - 77.15, - 506.11, - 518.13, - 537.07 - ], - "text": "Figure A.4 A weekly version of Herrick Payoff Index with Treasury Bonds.\nNotice the bearish divergences in 1993 and 1995, and the bullish divergence", - "type": "text" - }, - { - "block_id": "p420-b2", - "global_id": 2304, - "bbox": [ - 274.04, - 539.24, - 321.22, - 553.63 - ], - "text": "in 1994.", - "type": "text" - }, - { - "block_id": "p420-b3", - "global_id": 2305, - "bbox": [ - 72.0, - 597.59, - 516.74, - 734.4 - ], - "text": "STARC BANDS AND KELTNER CHANNELS\nAs discussed in Chapter 9, banding techniques have been used for many\nyears. Two types that I prefer are based on the Average True Range. Despite\nthis common factor, these two types of bands are used in very different ways.\nAverage True Range is the average of true price ranges over x periods. True\nRange is the greatest distance from today’s high to low, yesterday’s close to\ntoday’s high, or yesterday’s close to today’s low. See Welles Wilder’s New\nConcepts in Technical Trading Systems.", - "type": "text" - }, - { - "block_id": "p420-b4", - "global_id": 2306, - "bbox": [ - 72.0, - 736.57, - 516.39, - 767.53 - ], - "text": "Manning Stoller, a well known expert in the commodity business,\ndeveloped the Stoller Average Range Channels or starc bands. In his formula", - "type": "text" - } - ] - }, - { - "page_num": 421, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p421-b0", - "global_id": 2307, - "bbox": [ - 72.0, - 73.53, - 522.47, - 187.07 - ], - "text": "the 15 period Average True Range is doubled and added to or subtracted from\na 6 period moving average (MA). The upper band is starc+; the lower is\nstarc-. Movement outside of these bands is uncommon and indicates an\nextreme situation. In this manner they can be used as trading filters. When\nprices are near or above the starc+ band, it is a high risk time to buy and a low\nrisk time to sell. Conversely, if prices are at or below the starc- band, then it is\na high risk selling zone and a more favorable point to buy.", - "type": "text" - }, - { - "block_id": "p421-b1", - "global_id": 2308, - "bbox": [ - 72.0, - 189.23, - 521.4, - 418.96 - ], - "text": "The weekly continuation chart of gold futures (Figure A.5) is plotted\nwith both the starc+ and starc- bands. In Feb. 1997 at point 1, gold prices\nslightly overshot the starc- band. Though the price action was weak, the stare\nbands indicated that this was not a good time to sell. By waiting, a better\nselling opportunity was likely to occur. Just three weeks later gold was $22\nhigher and at the starc+ band (point 2). Point 2 was a low risk selling\nopportunity. In July (point 3), gold prices dropped well below the starc-band,\nbut instead of declining further, prices moved sideways for the next 12 weeks.\nGold prices then started to move lower from November to December 1997\nand touched the starc- band three times (points 4). In all instances prices did\nstabilize or move higher for 1-2 weeks. These bands work well in all time\nframes even as short as 5 to 10 minute bar charts. Starc bands can help the\ntrader avoid chasing the market, which almost always results in a poor entry\nprice.", - "type": "text" - }, - { - "block_id": "p421-b2", - "global_id": 2309, - "bbox": [ - 81.48, - 717.84, - 513.79, - 732.3 - ], - "text": "Figure A.5 Starc bands plotted around a 6 week moving average of weekly", - "type": "text" - }, - { - "block_id": "p421-b3", - "global_id": 2310, - "bbox": [ - 81.0, - 734.4, - 514.28, - 765.37 - ], - "text": "gold prices. Points 1 and 3 show prices bouncing after dipping below the\nlower band. Point 2 shows prices falling after rising above the upper band.", - "type": "text" - } - ] - }, - { - "page_num": 422, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p422-b0", - "global_id": 2311, - "bbox": [ - 72.0, - 73.28, - 508.67, - 187.07 - ], - "text": "The Keltner channels were originally developed by Chester Keltner in\nhis 1960 book How to Make Money in Commodities. Linda Raschke, a very\nsuccessful commodity trader, has reintroduced them to technicians. In her\nmodification, the bands are also based on the average true range (ATR), but\nthe ATR is calculated over 10 periods. This ATR value is then doubled and\nadded to a 20 period exponential moving average for the plus band and\nsubtracted from it for the minus band.", - "type": "text" - }, - { - "block_id": "p422-b1", - "global_id": 2312, - "bbox": [ - 72.0, - 189.23, - 522.87, - 286.45 - ], - "text": "The recommended use of the Keltner channels is much different from the\nstarc bands. When prices close above the plus band, a positive signal is given\nas it indicates a breakout in upward volatility. Conversely, when prices close\nbelow the lower band, it is negative and indicates prices will move lower. In\nmany respects, this is just a graphical representation of a four week channel\nbreakout system discussed in Chapter 9.", - "type": "text" - }, - { - "block_id": "p422-b2", - "global_id": 2313, - "bbox": [ - 72.0, - 288.62, - 510.39, - 352.71 - ], - "text": "Figure A-6 is a daily chart of March 1998 copper futures. Prices closed\nbelow the minus band in late October 1997 at point 1. This indicated that\nprices should begin a new downtrend and copper prices dropped 16 cents in\nthe next two months.", - "type": "text" - }, - { - "block_id": "p422-b3", - "global_id": 2314, - "bbox": [ - 72.02, - 645.82, - 523.25, - 660.29 - ], - "text": "Figure A.6 Keltner Channels plotted around a 20 day exponentially smoothed", - "type": "text" - }, - { - "block_id": "p422-b4", - "global_id": 2315, - "bbox": [ - 84.02, - 662.39, - 511.24, - 676.79 - ], - "text": "average of daily copper prices. With this indicator, moves below the lower", - "type": "text" - }, - { - "block_id": "p422-b5", - "global_id": 2316, - "bbox": [ - 114.7, - 678.95, - 480.56, - 693.35 - ], - "text": "channel (such as point 1) are interpreted as a sign of weakness.", - "type": "text" - }, - { - "block_id": "p422-b6", - "global_id": 2317, - "bbox": [ - 72.0, - 709.92, - 513.28, - 757.45 - ], - "text": "There were many other closes below the minus band during this period.\nUntil prices close above the plus band, the negative signal will stay in effect.\nThe second chart is March 1998 coffee prices (Figure A.7) and illustrates a", - "type": "text" - } - ] - }, - { - "page_num": 423, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p423-b0", - "global_id": 2318, - "bbox": [ - 72.0, - 73.28, - 508.4, - 137.37 - ], - "text": "positive signal at point 1. After two consecutive closes above the plus band,\nprices then declined to the 20 period EMA. In a rising market the 20 period\nEMA should act as support. Several days after the EMA was touched (point\n2), coffee prices began a dramatic 30 cent rise in just a few weeks.", - "type": "text" - }, - { - "block_id": "p423-b1", - "global_id": 2319, - "bbox": [ - 77.54, - 516.19, - 517.73, - 547.15 - ], - "text": "Figure A.7 Keltner Channels with a daily coffee chart. Point 1 shows prices\nbreaking the upper channel which is a sign of strength. Notice that after that", - "type": "text" - }, - { - "block_id": "p423-b2", - "global_id": 2320, - "bbox": [ - 82.2, - 549.32, - 513.07, - 563.72 - ], - "text": "buy signal, prices found support at the 20 day exponential moving average", - "type": "text" - }, - { - "block_id": "p423-b3", - "global_id": 2321, - "bbox": [ - 229.5, - 565.88, - 365.77, - 580.28 - ], - "text": "(middle line) at point 2.", - "type": "text" - }, - { - "block_id": "p423-b4", - "global_id": 2322, - "bbox": [ - 72.0, - 596.85, - 517.57, - 660.95 - ], - "text": "Both of these techniques offer an alternative approach to either\npercentage envelopes or standard deviation bands (like Bollinger Bands).\nNeither is presented as a stand-alone trading system but should be considered\nas additional tools of the trade.", - "type": "text" - }, - { - "block_id": "p423-b5", - "global_id": 2323, - "bbox": [ - 72.0, - 704.9, - 522.74, - 758.89 - ], - "text": "FORMULA FOR DEMAND INDEX\nThe Demand Index (DI) calculates two values, Buying Pressure (BP) and\nSelling Pressure (SP), and then takes a ratio of the two. DI is BP/SP. There are", - "type": "text" - } - ] - }, - { - "page_num": 424, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p424-b0", - "global_id": 2324, - "bbox": [ - 72.0, - 73.53, - 402.48, - 87.93 - ], - "text": "some slight variations in the formula. Here’s one version:", - "type": "text" - }, - { - "block_id": "p424-b1", - "global_id": 2325, - "bbox": [ - 100.79, - 89.85, - 176.7, - 104.25 - ], - "text": "If prices rise:", - "type": "text" - }, - { - "block_id": "p424-b2", - "global_id": 2326, - "bbox": [ - 185.0, - 120.82, - 422.22, - 151.78 - ], - "text": "BP=V or Volume\nSP=V/P where P is the % change in price", - "type": "text" - }, - { - "block_id": "p424-b3", - "global_id": 2327, - "bbox": [ - 100.79, - 168.35, - 197.47, - 182.75 - ], - "text": "If prices decline:", - "type": "text" - }, - { - "block_id": "p424-b4", - "global_id": 2328, - "bbox": [ - 185.0, - 199.31, - 423.82, - 230.28 - ], - "text": "BP=V/P where P is the % change in price\nSP=V or Volume", - "type": "text" - }, - { - "block_id": "p424-b5", - "global_id": 2329, - "bbox": [ - 72.0, - 246.85, - 507.75, - 277.81 - ], - "text": "Because P is a decimal (less than 1), P is modified by multiplying it by\nthe constant K.", - "type": "text" - }, - { - "block_id": "p424-b6", - "global_id": 2330, - "bbox": [ - 185.0, - 294.38, - 268.1, - 325.34 - ], - "text": "P=P(K)\nK=(3 × C)/VA", - "type": "text" - }, - { - "block_id": "p424-b7", - "global_id": 2331, - "bbox": [ - 72.0, - 341.91, - 476.0, - 372.87 - ], - "text": "Where C is the closing price and VA (Volatility Average) is the 10 day\naverage of a two day price range (highest high – lowest low).", - "type": "text" - }, - { - "block_id": "p424-b8", - "global_id": 2332, - "bbox": [ - 185.0, - 389.44, - 338.85, - 403.84 - ], - "text": "If BP > SP then DI=SP/BP", - "type": "text" - }, - { - "block_id": "p424-b9", - "global_id": 2333, - "bbox": [ - 100.79, - 420.41, - 473.23, - 434.81 - ], - "text": "The Demand Index is included on the MetaStock charting menu.", - "type": "text" - }, - { - "block_id": "p424-b10", - "global_id": 2334, - "bbox": [ - 100.79, - 479.46, - 405.59, - 493.86 - ], - "text": "*This Appendix was prepared by Thomas E. Aspray.", - "type": "text" - } - ] - }, - { - "page_num": 425, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p425-b0", - "global_id": 2335, - "bbox": [ - 72.0, - 133.73, - 432.0, - 162.52 - ], - "text": "Appendix B: Market Profile*", - "type": "text" - }, - { - "block_id": "p425-b1", - "global_id": 2336, - "bbox": [ - 72.0, - 228.86, - 521.94, - 431.93 - ], - "text": "INTRODUCTION\nThe purpose of this writing is to illustrate what Market Profile is and to define\nits underlying principles. Before the early 1980s, the only technical tools\navailable were the bar chart and the point and figure chart. Since then Market\nProfile® 1 was introduced to expand the arsenal of technical tools. Market\nProfile is essentially a statistical approach to the analysis of price data. 2 For\nthose without a statistics background, a familiar example may be helpful.\nConsider a group of students taking an exam. Typically, some score very high\n(say 90 or higher), some score very low (say 60 or lower), but most scores\ntend to be clustered around the average score (say 75). A histogram can be\nused to depict the frequency distribution of these test scores in a “statistical\npicture” (Figure B.1).", - "type": "text" - }, - { - "block_id": "p425-b2", - "global_id": 2337, - "bbox": [ - 265.4, - 614.2, - 329.87, - 628.6 - ], - "text": "Figure B.1", - "type": "text" - }, - { - "block_id": "p425-b3", - "global_id": 2338, - "bbox": [ - 72.0, - 645.1, - 522.4, - 758.89 - ], - "text": "As can be seen, the most frequent score, or modal score, is 75 (6\nstudents) while the range of scores is defined by the lowest and highest scores\n(55 and 95). Note how the scores distribute evenly around the modal score.\nFor a perfectly symmetric distribution, the modal score will be equal to the\nmean, or average score. Next observe that the distribution is “bell-shaped,”\nthe telltale sign of a normal distribution. For a perfect normal distribution,\nspecific standard deviation intervals correlate to specific numbers of", - "type": "text" - } - ] - }, - { - "page_num": 426, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p426-b0", - "global_id": 2339, - "bbox": [ - 72.0, - 73.53, - 519.17, - 137.37 - ], - "text": "observations. For example, if the test scores are, in fact, perfectly normally\ndistributed, then 68.3% of these scores will fall within one (1) standard\ndeviation of the mean. While actual data is unlikely to form a perfect normal\ndistribution, it is often close enough that these relationships can be employed.", - "type": "text" - }, - { - "block_id": "p426-b1", - "global_id": 2340, - "bbox": [ - 72.0, - 139.54, - 521.14, - 220.2 - ], - "text": "Prices, like other physical measurements (e.g., school test grades,\npopulation heights, etc.), distribute around a mean price level as well. What is\nthe Market Profile graphic? Visualize it as simply, a frequency distribution of\nprices displayed as a price histogram turned on its side (see Figures B.2a and\nB.2b).", - "type": "text" - }, - { - "block_id": "p426-b2", - "global_id": 2341, - "bbox": [ - 225.82, - 380.8, - 369.44, - 395.26 - ], - "text": "Figure B.2a Traditional.", - "type": "text" - }, - { - "block_id": "p426-b3", - "global_id": 2342, - "bbox": [ - 204.45, - 555.8, - 390.82, - 570.26 - ], - "text": "Figure B.2b Flipped on its side.", - "type": "text" - }, - { - "block_id": "p426-b4", - "global_id": 2343, - "bbox": [ - 72.0, - 586.77, - 522.72, - 717.12 - ], - "text": "The centerpiece of the Market Profile graphic is the (bell-shaped) normal\ncurve used to display the evolving price distribution. Once the normal curve\nassumption is acknowledged, a modal or average price can be identified, a\nprice dispersion (standard derivation) can be computed and probability\nstatements can be made regarding the price distribution. For example,\nvirtually all values fall within three (3) standard deviations of the average\nwhile about 70% (68.3% to be exact) fall within one (1) standard deviation of\nthe average (see Figure B.3).", - "type": "text" - }, - { - "block_id": "p426-b5", - "global_id": 2344, - "bbox": [ - 72.0, - 719.28, - 508.28, - 766.81 - ], - "text": "Market Profile provides a picture of what’s happening here and now in\nthe marketplace. In its pursuit of promoting trade, the market is either in\nequilibrium or moving toward it. The profile’s natural tendency toward", - "type": "text" - } - ] - }, - { - "page_num": 427, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p427-b0", - "global_id": 2345, - "bbox": [ - 72.0, - 73.28, - 513.95, - 170.5 - ], - "text": "symmetry defines, in a simple way, the degree of balance (equilibrium) or\nimbalance (disequilibrium) that exists between buyers and sellers. As the\nmarket is dynamic, the profile graphic portrays equilibrium as periods of\nmarket balance—when price distributions are symmetric, and represents\ndisequilibrium as periods of market imbalance—when price distributions are\nnot symmetric or are skewed.", - "type": "text" - }, - { - "block_id": "p427-b1", - "global_id": 2346, - "bbox": [ - 92.96, - 333.26, - 502.32, - 347.73 - ], - "text": "Figure B.3 The profile graphic reveals that market activity is regularly", - "type": "text" - }, - { - "block_id": "p427-b2", - "global_id": 2347, - "bbox": [ - 236.89, - 349.83, - 358.39, - 364.23 - ], - "text": "normally distributed.", - "type": "text" - }, - { - "block_id": "p427-b3", - "global_id": 2348, - "bbox": [ - 72.0, - 380.8, - 508.78, - 461.46 - ], - "text": "Market Profile is not a trading system nor does it provide trade\nrecommendations. The aim of the profile graphic is to allow the user to\nwitness a market’s developing value on price reoccurrence over time. As\nsuch, Market Profile is a decision support tool requiring the user to exercise\npersonal judgment in the trading process.", - "type": "text" - }, - { - "block_id": "p427-b4", - "global_id": 2349, - "bbox": [ - 72.0, - 505.41, - 520.78, - 625.66 - ], - "text": "MARKET PROFILE GRAPHIC\nThe Market Profile format organizes price and time into a visual\nrepresentation of what happens over the course of a single session. It provides\na logical framework for observing market behavior in the present tense\ndisplaying price distributions over a period of time. The price range evolves\nboth vertically and horizontally throughout the session. How is a profile\ngraphic constructed?", - "type": "text" - }, - { - "block_id": "p427-b5", - "global_id": 2350, - "bbox": [ - 72.0, - 627.82, - 521.14, - 741.61 - ], - "text": "Consider a 4 period bar chart (see Figure B.3a). This traditional bar chart\ncan be converted to a profile graphic as follows: (1) assign a letter for each\nprice within each period’s price range, letter A for the 1 stperiod, B for the 2\nnd, and so on (see Figure B.3b) and then (2) collapse each price range to the\nleftmost or first column (see Figure B.3c). The completed profile graphic\nreflects prices on the left and period frequency of price occurrence on the\nright, represented by the letters A through D.", - "type": "text" - } - ] - }, - { - "page_num": 428, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p428-b0", - "global_id": 2351, - "bbox": [ - 261.8, - 251.23, - 333.47, - 265.63 - ], - "text": "Figure B.3a", - "type": "text" - }, - { - "block_id": "p428-b1", - "global_id": 2352, - "bbox": [ - 261.4, - 460.08, - 333.88, - 474.48 - ], - "text": "Figure B.3b", - "type": "text" - }, - { - "block_id": "p428-b2", - "global_id": 2353, - "bbox": [ - 72.0, - 490.98, - 522.68, - 654.46 - ], - "text": "Each letter represents a Time Price Opportunity or TPO to identify a\nspecific price at which the market traded during a specific time period (e.g., in\nB period prices traded between 163 and 166). These TPOs are the basic units\nof analysis for the day’s activity. In other words, each TPO is an opportunity\ncreated by the market at a certain time and certain price. Market Profile\ndistributions are constructed of TPOs. The Chicago Board of Trade (CBOT)\nassigns a letter to each half-hour trading period on a 24 hour basis; uppercase\nletters A through X represent the half-hour periods from midnight to noon\nwhile lowercase letters from a through x represent the half-hour periods from\nnoon to midnight. 3", - "type": "text" - }, - { - "block_id": "p428-b3", - "global_id": 2354, - "bbox": [ - 72.0, - 698.41, - 519.13, - 768.97 - ], - "text": "MARKET STRUCTURE\nWhen you visit a commodities trading pit on a busy day, you observe what is\nbest described as “controlled chaos.” Beneath the screaming and gesturing\nlocals and other traders, there is a describable process. Think of the market as", - "type": "text" - } - ] - }, - { - "page_num": 429, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p429-b0", - "global_id": 2355, - "bbox": [ - 72.0, - 73.53, - 492.85, - 120.81 - ], - "text": "a place where participants with differing price needs and time constraints\ncompete with each other to get business done. Emotions can run high as\nanxiety levels soar.", - "type": "text" - }, - { - "block_id": "p429-b1", - "global_id": 2356, - "bbox": [ - 72.0, - 122.98, - 522.75, - 286.45 - ], - "text": "The Market Profile concept was introduced by Mr. Steidlmayer in an\nattempt to help describe this process. As a CBOT floor trader (local) and\nstudent of market behavior, he observed recurring patterns of market activity,\nwhich ultimately lay the foundation for his understanding of the market. Since\nthe CBOT trading floor conducts trade in an auction-like manner, he defined\nMarket Profile principles in auction terms. For example, an off-the-floor\ntrader would describe an advancing market as one that is rallying or trading\nup, whereas Mr. Steidlmayer would instead say something like, “the market\ncontinues to auction up, advertising for sellers to appear in order to shut off\nbuying.”", - "type": "text" - }, - { - "block_id": "p429-b2", - "global_id": 2357, - "bbox": [ - 262.2, - 491.77, - 333.07, - 506.17 - ], - "text": "Figure B.3c", - "type": "text" - }, - { - "block_id": "p429-b3", - "global_id": 2358, - "bbox": [ - 72.0, - 522.68, - 517.46, - 669.59 - ], - "text": "To explain why a trading pit auction process works the way it does, he\ninvented some new terms unfamiliar to off-the-floor traders. He began with a\ndefinition of a market’s purpose, which is to facilitate trade. Next, he defined\nsome operational procedures, namely that the market operates in a dual\nauction mode as prices rotate around a fair or mean price area (i.e., similar to\nthe way school grades were distributed). Lastly, he defined the behavior\ncharacteristics of market participants, namely that traders with a short term\ntime frame seek a fair price, while traders with a longer term time frame seek\nan advantageous price.", - "type": "text" - }, - { - "block_id": "p429-b4", - "global_id": 2359, - "bbox": [ - 72.0, - 713.54, - 396.26, - 757.46 - ], - "text": "MARKET PROFILE ORGANIZING\nPRINCIPLES", - "type": "text" - } - ] - }, - { - "page_num": 430, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p430-b0", - "global_id": 2360, - "bbox": [ - 72.0, - 73.28, - 519.96, - 319.58 - ], - "text": "Auction Setting: The purpose of the marketplace is to facilitate or promote\ntrade. All market activity occurs within this auction setting. Initially, as price\nmoves higher, more buying comes in, as price moves lower, more selling\ncomes in. The market moves up to shut off buying (i.e., auctioning up until\nthe last buyer buys) and moves down to shut off selling (i.e., auctioning down\nuntil the last seller sells). The market actually operates through a dual auction\nprocess. When price moves up and more buying comes in, the up-move\nadvertises for an opposite response (i.e., selling) to stop the directional move.\nThe opposite is true when price moves down.\nContinuous Negotiation: When a market moves directionally it establishes\nprice parameters, an unfair high and an unfair low, and then trades between\nthem to establish a fair value area. All trade takes place through this\nnegotiating process and remains within these parameters until one side or the\nother side is eventually taken out (i.e., a new high or new low is formed). (see\nFigure B.4.)", - "type": "text" - }, - { - "block_id": "p430-b1", - "global_id": 2361, - "bbox": [ - 72.0, - 321.75, - 518.76, - 435.53 - ], - "text": "Market Balance and Imbalance: The market is either in equilibrium or\nworking toward equilibrium between buyers and sellers. To facilitate trade,\nthe market moves from a state of balance (equilibrium) to one of imbalance\n(disequilibrium) and back to balance again. This pattern of market behavior\noccurs in all times frames, from intraday session activity to single session\nactivity to aggregated or consolidated sessions activity which form the longer\nterm auction.", - "type": "text" - }, - { - "block_id": "p430-b2", - "global_id": 2362, - "bbox": [ - 72.0, - 437.69, - 516.16, - 717.12 - ], - "text": "Time Frames and Trader Behavior: The concept of different time\nframes was introduced to help explain the behavioral patterns of market\nparticipants. Market activity is divided into two timeframe categories, short\nterm and longer term. The short term activity is defined as day time frame\nactivity where traders are forced to trade today (e.g., locals, day traders and\noptions traders on expiration day fall into this category). With limited time to\nact, the short term trader is seeking a fair price. Short term buyers and sellers\ndo trade with each other at the same time and at the same price. Longer term\nactivity is defined by all other timeframe activity (e.g., commercials, swing\ntraders, and all other position traders fall into this category). Not forced to\ntrade today and with time as an ally, these traders can seek a more\nadvantageous price. In pursuit of their interests, longer term buyers seek\nlower prices while longer term sellers seek higher prices. As their price\nobjectives differ, longer term buyers and sellers generally do not trade with\neach other at the same price and at the same time. It is the behavioral\ninteraction between these two distinct timeframe types of activity that causes\nthe profile to develop as it does.", - "type": "text" - } - ] - }, - { - "page_num": 431, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p431-b0", - "global_id": 2363, - "bbox": [ - 265.4, - 375.1, - 329.87, - 389.5 - ], - "text": "Figure B.4", - "type": "text" - }, - { - "block_id": "p431-b1", - "global_id": 2364, - "bbox": [ - 72.0, - 406.07, - 520.24, - 635.74 - ], - "text": "The Short Term Trader and Longer Term Trader Play Different\nRoles: Short term and longer term traders play key, but different, roles in\nfacilitating trade. A market’s initial balance (i.e., a place where two-sided\ntrade can occur) is usually established in the first hour of trade by short term\nbuyers and sellers (day timeframe activity) in their pursuit of a fair price.\nMost of the day’s activity occurs in the fair price or value area. Prices above\nand below this developed fair value area offer opportunity and are\nadvantageous to longer term traders. With time on their side, longer term\ntraders can either accept or reject prices away from fair value. By entering the\nmarket with large enough volume, longer term buyers and sellers can upset\nthe initial balance, thereby extending the price range higher or lower. The\nlonger term trader is responsible for the way the day’s range develops and for\nthe duration of the longer term auction. In other words, the role of the longer\nterm trader is to move the market directionally.", - "type": "text" - }, - { - "block_id": "p431-b2", - "global_id": 2365, - "bbox": [ - 72.0, - 637.9, - 518.9, - 768.25 - ], - "text": "Price and Value: The distinction between price and value defines a\nmarket-generated opportunity. There are two kinds of prices: 1) those that are\naccepted—defined as a price area where the market trades over time and 2)\nthose that are rejected—defined as a price area where the market spends very\nlittle time. A rejected price is considered excessive in the market—defined as\nan unfair high or unfair low. Price and value are all but synonymous for short\nterm traders as they ordinarily trade in the fair value area. For longer term\ntraders, however, the concept that price equals value is often inaccurate. Price", - "type": "text" - } - ] - }, - { - "page_num": 432, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p432-b0", - "global_id": 2366, - "bbox": [ - 72.0, - 73.28, - 515.41, - 153.94 - ], - "text": "is observable and objective while value is perceived and subjective,\ndepending upon the particular needs of longer term traders. For example, a\nprice at the top of today’s range, while excessive or unfair for today, is cheap\nto the longer term trader who believes that prices next week will be much\nhigher (i.e., today’s price is below next week’s anticipated value).", - "type": "text" - }, - { - "block_id": "p432-b1", - "global_id": 2367, - "bbox": [ - 82.83, - 496.02, - 512.45, - 526.99 - ], - "text": "Figure B.5 By combining daily consecutive profile graphics (upper) into a\nlarger cumulative profile graphic (lower), an evolving picture of long term", - "type": "text" - }, - { - "block_id": "p432-b2", - "global_id": 2368, - "bbox": [ - 116.05, - 529.15, - 479.22, - 543.56 - ], - "text": "balance or imbalance emerges. (See explanation on page 489.)", - "type": "text" - }, - { - "block_id": "p432-b3", - "global_id": 2369, - "bbox": [ - 72.0, - 560.12, - 519.83, - 740.16 - ], - "text": "The longer term trader distinguishes between price and value by\naccepting or rejecting current prices away from his perception of fair value.\nRecall that rising prices advertise for sellers while falling prices advertise for\nbuyers. When the longer term trader responds to an advertised price, this\nbehavior is expected and is referred to as responsive. On the other hand, if the\nlonger term trader did the opposite (i.e., buy after prices rose or sell after\nprices declined), then this unexpected activity is referred to as initiating.\nClassifying longer term activity as responsive or initiating relative to\nyesterday’s or today’s evolving value area provides anecdotal evidence of\nlonger term trader confidence. The more confident the trader becomes, the\nmore likely he is to take initiating action.", - "type": "text" - } - ] - }, - { - "page_num": 433, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p433-b0", - "global_id": 2370, - "bbox": [ - 72.0, - 74.02, - 480.37, - 201.47 - ], - "text": "RANGE DEVELOPMENT AND PROFILE\nPATTERNS\nSince market activity is not arbitrary, it’s not surprising that over time\nrecognizable price patterns reveal themselves. A skillful trader able to\nanticipate such pattern development in its early stage may be able to\ncapitalize. Mr. Steidlmayer loosely identifies the following daily range\ndevelopment patterns:", - "type": "text" - }, - { - "block_id": "p433-b1", - "global_id": 2371, - "bbox": [ - 82.08, - 218.04, - 523.13, - 629.98 - ], - "text": "1. A normal day occurs when the longer term trader is relatively inactive.\nThe day’s range is established in the pioneer range (defined as the first\ncolumn of prices) during the session’s first half-hour period of trade. The\nshort term trader establishes the initial balance, the unfair high and low,\nand then prices rotate between these parameters for balance of the day\n(see Figure B.6: Panel #1—Orange Juice).\n2. A normal variation day occurs when the longer term trader is more\nactive and extends the range beyond the initial balance. In this instance,\nthe short term traders initial balance parameters do not hold and there is\nsome directional movement which extends the range and sets a new high\nor new low parameter. As a rule, the range extension beyond the initial\nbalance can be anywhere from a couple of ticks to double the initial\nbalance. This profile type is probably the most common (see Figure B.6:\nPanel #2—Dow Jones Industrial Average).\n3. A trend day occurs when the longer term trader extends the range\nsuccessively further. In this instance, the range is considerably more than\ndouble the initial balance with the longer term trader controlling\ndirection as the market continues its search for a fair price. Here the\nmarket moves in one direction and closes at or near the directional\nextreme (see Figure B.6: Panel #3—Japanese Yen).\n4. A neutral day occurs when the longer term trader extends the range after\nthe initial balance in one direction, then reverses and extends the range in\nthe opposite direction. Neutral days indicate trader uncertainty and occur\nwhen the market probes or tests for price trend continuation or change\n(see Figure B.6: Panel #4—Cattle).", - "type": "text" - } - ] - }, - { - "page_num": 434, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p434-b0", - "global_id": 2372, - "bbox": [ - 265.4, - 529.94, - 329.87, - 544.34 - ], - "text": "Figure B.6", - "type": "text" - }, - { - "block_id": "p434-b1", - "global_id": 2373, - "bbox": [ - 72.0, - 588.23, - 521.48, - 765.37 - ], - "text": "TRACKING LONGER TERM MARKET\nACTIVITY\nWith the exception of option sellers who profit when prices remain static, the\nprofit strategy of most traders requires directional price movement. The trader\nwins when he gets the direction right and loses when he is incorrect. Because\nthe longer term trader is responsible for determining the market’s directional\nmovement, we monitor this activity to help detect evidence of a price trend.\nAfter identifying and evaluating longer term trader activity, an educated\nconclusion regarding price direction can be reached. We begin the process by\nidentifying the longer term trader’s influence in today’s session and then", - "type": "text" - } - ] - }, - { - "page_num": 435, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p435-b0", - "global_id": 2374, - "bbox": [ - 72.0, - 73.53, - 386.09, - 87.93 - ], - "text": "considering how that influence extends into the future.", - "type": "text" - }, - { - "block_id": "p435-b1", - "global_id": 2375, - "bbox": [ - 100.79, - 104.25, - 523.21, - 433.37 - ], - "text": "Influence in day’s range development: The profile graphic helps\nidentify longer term trader behavior during daily range development. By\nmonitoring longer term activity throughout the range, particularly at the\nextremes, at range extension, and after value area completion, we can\ndetermine whether longer term buyers or sellers are more active and\nhence control market direction. Activity at the extremes provides the\nclearest indication of longer term trader influence, followed by range\nextension and then value area buying and selling. \n1. Extremes are formed when the longer term trader competes with the\nshort term trader for opportunities at a particular price level (which\nlater becomes either the session high or low). A minimum of two\nsingle prints is required to establish an extreme. The more eager the\nlonger term trader is in this price competition, the more the single\nprints and the longer the single print extreme. Anything less than two\nprints suggests that the longer term trader is not very interested in\ncompeting at that price. A local top or bottom is formed when only\none single print defines the top or bottom of the range. This condition\nimplies that the market offered a price opportunity which no one\nreally wanted (i.e., no evidence of competition [see Figure B.7:\nPanel #1—Intel Corporation].", - "type": "text" - } - ] - }, - { - "page_num": 436, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p436-b0", - "global_id": 2376, - "bbox": [ - 100.79, - 522.68, - 522.73, - 769.03 - ], - "text": "2. Range Extension occurs when the longer term trader enters the\nmarket with enough volume to tip the initial balance and extend the\nrange up or down. Range extension up indicates longer term buying\nwhile range extension down indicates longer term selling. However,\nthere are occasions when both the longer term buyer and seller are\nactive at a range extreme, but not at the same price and time (recall\nthat longer term buyers and sellers generally do not trade with each\nother). For example, if an extreme is formed after a range extension\nup, the market moves up first to shut off buying and then moves\ndown to shut off selling. This is an example of both longer term\nbuyers and sellers trading in the same price area but at different\ntimes. Both kinds of activity at the extremes are identified to evaluate\nthe impact of longer term buying and selling (see Figure B.7: Panel\n#2—Coffee).\n3. The Value Area is determined each trading session by price rotations", - "type": "text" - } - ] - }, - { - "page_num": 437, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p437-b0", - "global_id": 2377, - "bbox": [ - 122.38, - 73.28, - 518.29, - 418.96 - ], - "text": "around the modal price (i.e., the price with the highest TPO count or\nthe fairest price). The value area is computed by counting 70% of all\nTPOs surrounding the fairest price. In other words, the value area is\nan estimate of fair value which is approximated by one standard\ndeviation of the session’s trading volume (recall the student example\nearlier). When a longer term trader makes a trade in the value area,\nhe is buying low or selling high in relation to a longer term view, not\nin relation to today’s value. This behavior creates an imbalance in\ntoday’s value area. Longer term trader activity is measured by\ncounting TPOs. The following procedure can be used to determine\nwhich side contains the longer term imbalance, 1) a line is drawn\nthrough the fairest price, and 2) TPOs are counted on either side of\nthe fairest price until a single print is encountered. The imbalance is\nassigned to the side with the smaller number of TPOs because the\nlonger term trader activity represents the smaller percentage of total\ntrade in the value area. For example, if the TPO count was 22 above\nand 12 below the fairest price, that would indicate net TPO selling\nwith a mild bias toward lower prices (see Figure B.7: Panel #3—\nS&P 500 Index). Note that TPO buying and selling in the value area\nis not applicable on trend days, as the market is still in search of a\nfair value area.", - "type": "text" - }, - { - "block_id": "p437-b1", - "global_id": 2378, - "bbox": [ - 72.0, - 435.53, - 509.5, - 483.06 - ], - "text": "After identifying and evaluating longer term trader activity correctly in\ntoday’s profile graphic, the user can readily determine whether longer term\nbuyers or sellers were in control of the current trading session.", - "type": "text" - }, - { - "block_id": "p437-b2", - "global_id": 2379, - "bbox": [ - 100.79, - 499.63, - 522.24, - 762.49 - ], - "text": "Influence beyond today: The profile graphic also helps identify longer\nterm trader behavior beyond today’s range development. A key goal of\nthe trader is to determine whether the current market price trend will\ncontinue or is likely to change. A change in market direction is a reversal\nof the current price trend. The standard technical approach to trend\nassessment, without Market Profile, is to draw an appropriate trendline\nand monitor subsequent price action against it. Unless the trendline is\nviolated, the current price trend is expected to continue. Trendline\nanalysis is the most important of basic technical tools, particularly given\nits universal usage and applicability to different time intervals (i.e.,\nhourly, daily, weekly, monthly, etc.).\nMarket Profile, on the other hand, offers an alternative approach to\ntraditional trend analysis by evaluating market activity over different\ntime periods. In its simplest form, an evaluation of the profile graphic on\nconsecutive days can help define the start or continuation of the short\nterm price trend. For example, if today’s value area is higher than", - "type": "text" - } - ] - }, - { - "page_num": 438, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p438-b0", - "global_id": 2380, - "bbox": [ - 100.79, - 73.28, - 520.08, - 287.17 - ], - "text": "yesterday’s value area, then the current market price trend is up.\nMoreover, if tomorrow’s value area is higher than today’s, then the\ncurrent market uptrend has continued. By monitoring market activity in\nthis fashion, the trader is able to readily identify trend continuation or\nchange. Similarly by combining daily consecutive profile graphics into a\nlarger cumulative profile graphic, an evolving picture of longer term\nbalance or imbalance emerges. The profile graphic in Figure B.5 (Sugar)\non page 483 illustrate this point. A cursory review of the individual\nsessions ( 2⁄ 10— 2⁄ 13) in the upper panel suggest an uptrending market\nwithout a hint of reversal. When these four (4) consecutive sessions are\ncombined (lower panel), however, a cumulative balanced picture springs\nforth. Once balanced, a market moves to a state of imbalance which,\nmore often than not, begins after a final test at the fairest price.", - "type": "text" - }, - { - "block_id": "p438-b1", - "global_id": 2381, - "bbox": [ - 72.0, - 331.12, - 515.86, - 501.07 - ], - "text": "CONCLUSION\nThe Market Profile method can be used to analyze any price data series for\nwhich continuous transaction activity is available. This includes listed and\nunlisted equities, U.S. government notes and bonds (prices or yields),\ncommodity futures and options, where applicable. The profile graphic\npresents the movement of prices, per unit of time, in two dimensions—\nvertically (i.e., directionally) and horizontally (i.e., frequency of occurrence).\nWhen price action is viewed in this way, a picture of price discovery unfolds\nwhich is unavailable in the traditional one dimensional (vertical) bar chart.\nThe profile graphic offers unique advantages over the standard bar chart:", - "type": "text" - }, - { - "block_id": "p438-b2", - "global_id": 2382, - "bbox": [ - 100.79, - 517.63, - 514.96, - 747.37 - ], - "text": "The symmetry attribute of the profile graphic allows the trader to assess\nthe market’s state of balance (or imbalance) in any timeframe. When a\nmarket is symmetric, a condition of balance or equilibrium exists\nbetween buyers and sellers. A market imbalance implies price trend\ncontinuation, as the market works toward a new equilibrium. Market\nbalance, however, is fleeting and implies market change or a directional\nmove (either up or down) is likely to occur, a signal for traders to\nconsider employing trend following methodologies.\nEvery trend change occurs at a single moment in time, not conveniently\nat the end of the hour, day, week or month. The profile graphic can be\nused to more accurately identify that specific time where control\nchanged hands between buyers and sellers. By pinning down such\ncontrol shifts, the profile graphic allows the trader to identify key\nsupport and resistance levels.", - "type": "text" - } - ] - }, - { - "page_num": 439, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p439-b0", - "global_id": 2383, - "bbox": [ - 72.0, - 73.28, - 485.15, - 120.81 - ], - "text": "In short, the profile graphic provides a substantial amount of price\ninformation per unit of time, allowing the trader to identify patterns and\ndynamics which would not be readily apparent using other methods.", - "type": "text" - }, - { - "block_id": "p439-b1", - "global_id": 2384, - "bbox": [ - 100.79, - 165.47, - 392.95, - 179.87 - ], - "text": "*This appendix was prepared by Dennis C. Hynes.", - "type": "text" - }, - { - "block_id": "p439-b2", - "global_id": 2385, - "bbox": [ - 79.2, - 196.3, - 515.47, - 277.09 - ], - "text": "1The Market Profile® is a registered trademark of the Chicago Board of\nTrade (CBOT), hereafter referred to as Market Profile or the profile. The\nconcept was developed by J. Peter Steidlmayer, formerly of the CBOT. For\nfurther information on the subject, contact the CBOT or read Mr.\nSteidlmayer’s latest book: 141 WEST JACKSON—1996.", - "type": "text" - }, - { - "block_id": "p439-b3", - "global_id": 2386, - "bbox": [ - 79.2, - 293.52, - 508.96, - 341.19 - ], - "text": "2Originally introduced for commodity futures prices, the format can be\nused for any price data series where continuous transaction activity is\navailable.", - "type": "text" - }, - { - "block_id": "p439-b4", - "global_id": 2387, - "bbox": [ - 79.2, - 357.62, - 504.52, - 405.34 - ], - "text": "3Letter assignments can vary between vendors. For example, CQG\nassigns uppercase letters A through Z from 8:00 am CST while lowercase\nletters from a through z from 10:00 p.m. CST.", - "type": "text" - } - ] - }, - { - "page_num": 440, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p440-b0", - "global_id": 2388, - "bbox": [ - 72.0, - 133.73, - 444.62, - 197.09 - ], - "text": "Appendix C: The Essentials of\nBuilding a Trading System*", - "type": "text" - }, - { - "block_id": "p440-b1", - "global_id": 2389, - "bbox": [ - 72.0, - 264.85, - 518.24, - 345.51 - ], - "text": "Trading system development is part art, part science, and part common sense.\nOur goal is not to develop a system that achieves the highest returns using\nhistorical data, but to formulate a sound concept that has performed\nreasonably well in the past and can be expected to continue to perform\nreasonably well in the future.", - "type": "text" - }, - { - "block_id": "p440-b2", - "global_id": 2390, - "bbox": [ - 72.0, - 347.67, - 511.12, - 428.33 - ], - "text": "Ideally, we would prefer an approach that is 100% mechanical,\nincreasing the odds that past performance can be replicated in the future.\nMechanical means objective: if 10 people follow the same rules and achieve\nthe same results, those rules are said to be objective. It does not matter\nwhether a mechanical system is written on paper or entered into a computer.", - "type": "text" - }, - { - "block_id": "p440-b3", - "global_id": 2391, - "bbox": [ - 72.0, - 430.49, - 520.77, - 494.58 - ], - "text": "Here, however, we’ll assume that we are using a computer and will use\nthe terms “mechanical” and “computerized” interchangeably. This does not\nimply that a computer is mandatory for trading system development, although\nit certainly helps.", - "type": "text" - }, - { - "block_id": "p440-b4", - "global_id": 2392, - "bbox": [ - 100.79, - 496.75, - 419.77, - 511.15 - ], - "text": "The mechanical approach offers us three main benefits:", - "type": "text" - }, - { - "block_id": "p440-b5", - "global_id": 2393, - "bbox": [ - 100.79, - 527.72, - 520.37, - 757.45 - ], - "text": "We can back test ideas before trading them. A computer allows us to\ntest ideas on historical data rather than on hard earned cash. By helping\nus see how a system would have performed in the past, it allows us to\nmake better decisions when it really counts—in the present.\nWe can be more objective and less emotional. Most people have\ntrouble applying their objective analysis to actual trading situations.\nAnalysis (where we have no money at risk) is easy, trading (where we\nhave money at risk) is stressful. Therefore, why not let the computer pull\nthe trigger for us? It is free of human emotion and will do exactly what\nwe had instructed it to do at the time when we developed our system.\nWe can do more work, increasing our opportunities. A mechanical\napproach takes less time to apply than a subjective one, which allows us\nto cover more markets, trade more systems, and analyze more time\nframes each day. This is especially true for those of us who use a", - "type": "text" - } - ] - }, - { - "page_num": 441, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p441-b0", - "global_id": 2394, - "bbox": [ - 100.79, - 73.28, - 522.2, - 104.25 - ], - "text": "computer, since it can work faster and longer than we can, without losing\nits concentration.", - "type": "text" - }, - { - "block_id": "p441-b1", - "global_id": 2395, - "bbox": [ - 72.0, - 148.2, - 196.27, - 168.36 - ], - "text": "5 STEP PLAN", - "type": "text" - }, - { - "block_id": "p441-b2", - "global_id": 2396, - "bbox": [ - 82.08, - 185.63, - 298.86, - 266.29 - ], - "text": "1. Start with a concept\n2. Turn it into a set of objective rules\n3. Visually check it out on the charts\n4. Formally test it with a computer\n5. Evaluate the results", - "type": "text" - }, - { - "block_id": "p441-b3", - "global_id": 2397, - "bbox": [ - 72.0, - 309.52, - 516.32, - 446.33 - ], - "text": "STEP 1: START WITH A CONCEPT (AN IDEA)\nDevelop your own concepts of how markets work. You can begin by looking\nat as many charts as you can, trying to identify moving average crossovers,\noscillator configurations, price patterns or other pieces of objective evidence\nwhich precede major market moves. Also attempt to recognize clues that\nprovide advance warning on moves that are likely to fail. I studied chart after\nchart after chart in the hope of finding such answers. This “visual” approach\nhas worked for me, and I highly recommend it.", - "type": "text" - }, - { - "block_id": "p441-b4", - "global_id": 2398, - "bbox": [ - 72.0, - 448.5, - 517.24, - 545.72 - ], - "text": "In addition to studying price charts and reading books such as this one, I\nsuggest you read about trading systems and study what others have done.\nAlthough no one is going to reveal the “Holy Grail” to you, there is a great\ndeal of useful information out there. Most importantly, think for yourself. I\nhave found that the most profitable ideas are rarely original, but frequently\nour own.", - "type": "text" - }, - { - "block_id": "p441-b5", - "global_id": 2399, - "bbox": [ - 72.0, - 547.88, - 512.74, - 628.54 - ], - "text": "Most of the successful trading systems are trend following. Counter\ntrend systems should not be overlooked, however, because they bring a\ndegree of negative correlation to the table. This means that when one system\nis making money, the other is losing money, resulting in a smoother equity\ncurve for the two systems combined, than for either one alone.", - "type": "text" - }, - { - "block_id": "p441-b6", - "global_id": 2400, - "bbox": [ - 72.0, - 652.22, - 232.6, - 663.02 - ], - "text": "Principles of Good Concept Design", - "type": "text" - }, - { - "block_id": "p441-b7", - "global_id": 2401, - "bbox": [ - 72.0, - 671.03, - 520.27, - 768.25 - ], - "text": "Good concepts usually make good sense. If a concept seems to work, but\nmakes little sense, you may be sliding into the realm of coincidence, and the\nodds of this concept continuing to work in the future diminishes considerably.\nYour concepts must fit your personality in order to give you the discipline to\nfollow them even when they are losing money (i.e. during periods of\ndrawdown). Your concepts should be straightforward and objective, and if", - "type": "text" - } - ] - }, - { - "page_num": 442, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p442-b0", - "global_id": 2402, - "bbox": [ - 72.0, - 73.42, - 507.12, - 120.81 - ], - "text": "trend following, should trade with the major trend, let profits run and cut\nlosses short. Most importantly, your concepts must make money in the long\nrun (i.e. they must have a positive expectation).", - "type": "text" - }, - { - "block_id": "p442-b1", - "global_id": 2403, - "bbox": [ - 72.0, - 122.98, - 521.5, - 236.76 - ], - "text": "Designing entries is hard, but designing exits is harder and more\nimportant. Entry logic is fairly straightforward, but exits have to take various\ncontingencies into account, such as how fast to cut losses or what to do with\naccumulated profits. I prefer systems that do not reverse automatically—I like\nto exit a trade first, before putting on another trade in the opposite direction.\nWork hard to improve your exits, and your returns will improve relative to\nyour risk.", - "type": "text" - }, - { - "block_id": "p442-b2", - "global_id": 2404, - "bbox": [ - 72.0, - 238.92, - 508.73, - 319.58 - ], - "text": "Another suggestion—try to optimize as little as possible. Optimization\nusing historical data often leads one to expect unrealistic returns that cannot\nbe replicated in real trading. Try to use few parameters and apply the same\ntechnique across a number of different markets. This will improve your\nchances of long run success, by reducing the pitfalls of over optimization.", - "type": "text" - }, - { - "block_id": "p442-b3", - "global_id": 2405, - "bbox": [ - 100.79, - 321.75, - 384.07, - 336.14 - ], - "text": "The three main categories of trading systems are:", - "type": "text" - }, - { - "block_id": "p442-b4", - "global_id": 2406, - "bbox": [ - 100.79, - 352.71, - 522.62, - 433.43 - ], - "text": "Trend following. These systems trade in the direction of the major trend,\nbuying after the bottom and selling after the top. Moving averages and\nDonchian’s weekly rule are popular methodologies among money\nmanagers.\nCounter trend", - "type": "text" - }, - { - "block_id": "p442-b5", - "global_id": 2407, - "bbox": [ - 111.59, - 449.94, - 493.22, - 464.34 - ], - "text": "– Support/Resistance. Buy a decline into support; sell a rally into", - "type": "text" - }, - { - "block_id": "p442-b6", - "global_id": 2408, - "bbox": [ - 111.59, - 466.5, - 489.6, - 497.46 - ], - "text": "resistance.\n– Retracements. Here we buy pullbacks in a bull market and sell", - "type": "text" - }, - { - "block_id": "p442-b7", - "global_id": 2409, - "bbox": [ - 111.59, - 499.63, - 523.17, - 580.28 - ], - "text": "rallies in a bear market. For example, buy a 50% pullback of the last\nadvance, but only if the major trend remains up. The danger of such\nsystems is that you never know how far a retracement will go and it\nbecomes difficult to implement an acceptable exit technique.\n– Oscillators. The idea is to buy when the oscillator is oversold and to", - "type": "text" - }, - { - "block_id": "p442-b8", - "global_id": 2410, - "bbox": [ - 129.58, - 582.45, - 514.22, - 646.54 - ], - "text": "sell when it is overbought. If divergence between the price series\nand the oscillator is also present, a much stronger signal is given.\nHowever, it is usually best to wait for some sign of a price reversal\nbefore buying or selling.", - "type": "text" - }, - { - "block_id": "p442-b9", - "global_id": 2411, - "bbox": [ - 100.79, - 663.11, - 521.26, - 710.64 - ], - "text": "Pattern recognition (visual and statistical). Examples include the highly\nreliable head and shoulders formation (visual), and seasonal price\npatterns (statistical).", - "type": "text" - } - ] - }, - { - "page_num": 443, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p443-b0", - "global_id": 2412, - "bbox": [ - 72.0, - 74.02, - 516.84, - 184.91 - ], - "text": "STEP 2: TURN YOUR IDEA INTO A SET OF\nOBJECTIVE RULES\nThis is the most difficult step in our 5 step plan, much more difficult than\nmany of us would at first expect! To complete this step successfully, we must\nexpress our idea in such objective terms that 100 people following our rules\nwill all arrive at exactly the same conclusions.", - "type": "text" - }, - { - "block_id": "p443-b1", - "global_id": 2413, - "bbox": [ - 72.0, - 187.07, - 511.64, - 251.16 - ], - "text": "Determine what our system is supposed to do and how it will do it. It is\nwith this step that we produce the details needed to accomplish the\nprogramming task. We need to take the overall problem and break it down\ninto more and more detail until we finalize all the details.", - "type": "text" - }, - { - "block_id": "p443-b2", - "global_id": 2414, - "bbox": [ - 72.0, - 295.11, - 522.75, - 422.57 - ], - "text": "STEP 3: VISUALLY CHECK IT OUT ON THE\nCHARTS\nFollowing the explicit rules we just determined in Step 2, let us visually check\nthe trading signals that are produced on a price chart. This is an informal\nprocess, meant to achieve two results: first, we want to see whether our idea\nhas been stated properly; and second, before writing complicated computer\ncode, we want some proof that the idea is a potentially profitable one.", - "type": "text" - }, - { - "block_id": "p443-b3", - "global_id": 2415, - "bbox": [ - 72.0, - 465.8, - 523.2, - 609.81 - ], - "text": "STEP 4: FORMALLY TEST IT WITH A\nCOMPUTER\nNow its time to convert our logic into computer code. For my own work, I use\na program called TradeStation®, Omega Research, Inc. in Miami, FL.\nTradeStation is the most comprehensive technical analysis software package\navailable for formulating and testing trading systems. It brings together\neverything from the visualization of your idea, to assistance in trading your\nsystem in real time.", - "type": "text" - }, - { - "block_id": "p443-b4", - "global_id": 2416, - "bbox": [ - 72.0, - 611.98, - 521.14, - 692.63 - ], - "text": "Writing code in any computer language is no easy task and\nTradeStation’s EasyLanguage™ is no exception. The job with EasyLanguage,\nhowever, is greatly simplified because of the program’s user friendly editor\nand the inclusion of many built in functions and plenty of sample code. See\nFigure C.1.", - "type": "text" - }, - { - "block_id": "p443-b5", - "global_id": 2417, - "bbox": [ - 72.0, - 694.8, - 521.18, - 758.89 - ], - "text": "Once our program has been written, we then move into the testing phase.\nTo begin with, we must choose one or more data series to test. For stock\ntraders this is an easy task. Futures traders, however, are faced with contracts\nthat expire after a relatively short period of time. I like to do my initial testing", - "type": "text" - } - ] - }, - { - "page_num": 444, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p444-b0", - "global_id": 2418, - "bbox": [ - 72.0, - 73.06, - 511.04, - 120.81 - ], - "text": "using a continuous (spread adjusted) price series popularized by Jack\nSchwager. (Schwager on Futures: Technical Analysis, Wiley, 1996.) If those\nresults look promising, I then move on to actual contracts.", - "type": "text" - }, - { - "block_id": "p444-b1", - "global_id": 2419, - "bbox": [ - 72.0, - 122.98, - 523.16, - 286.45 - ], - "text": "Next, we must decide how much data to use when building our system. I\nuse the entire data series, without saving any for out-of-sample testing\n(building your system on part of the data and then testing it on the remaining\n“unseen” data). Many experts would disagree with this approach, but I believe\nit to be the best with my methodology that relies on good solid concepts,\nvirtually no optimization, and a testing procedure that covers a wide range of\nparameter sets and markets. I start with a methodology that I believe to be\nsound and then test it to either prove or disprove my theory. I have found that\nmost individuals do the reverse, they test a data series to arrive at a trading\nsystem.", - "type": "text" - }, - { - "block_id": "p444-b2", - "global_id": 2420, - "bbox": [ - 72.0, - 288.62, - 516.35, - 352.71 - ], - "text": "I do not account for transaction costs (slippage and commissions) when\ntesting systems, but instead factor them in at the end. I believe that this keeps\nthe evaluation process more pure and allows my results to remain useful\nshould certain assumptions change in the future.", - "type": "text" - }, - { - "block_id": "p444-b3", - "global_id": 2421, - "bbox": [ - 100.79, - 354.87, - 312.6, - 369.27 - ], - "text": "I require my systems to work across:", - "type": "text" - }, - { - "block_id": "p444-b4", - "global_id": 2422, - "bbox": [ - 100.79, - 385.84, - 520.91, - 449.93 - ], - "text": "Different sets of parameters. If I were considering using a 5/20 moving\naverage crossover system, then I would expect 6/18, 6/23, 4/21, and 5/19\nto also perform reasonably well. If not, I immediately become skeptical\nof the 5/20 results.", - "type": "text" - } - ] - }, - { - "page_num": 445, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p445-b0", - "global_id": 2423, - "bbox": [ - 101.34, - 529.87, - 522.72, - 544.34 - ], - "text": "Figure C.1 (EasyLanguage Code): This EasyLanguage code was written", - "type": "text" - }, - { - "block_id": "p445-b1", - "global_id": 2424, - "bbox": [ - 106.45, - 546.44, - 517.61, - 560.84 - ], - "text": "using TradeStation’s Power Editor™. It has the look—and power—of a", - "type": "text" - }, - { - "block_id": "p445-b2", - "global_id": 2425, - "bbox": [ - 118.49, - 563.0, - 505.57, - 577.4 - ], - "text": "full blown programming language. See Figures C.2 and C.3 for the", - "type": "text" - }, - { - "block_id": "p445-b3", - "global_id": 2426, - "bbox": [ - 123.91, - 579.57, - 500.14, - 593.96 - ], - "text": "results on this trend following system described by Martin Zweig.", - "type": "text" - }, - { - "block_id": "p445-b4", - "global_id": 2427, - "bbox": [ - 100.79, - 610.54, - 522.0, - 757.45 - ], - "text": "Different periods of time (e.g. 1990-95 and 1981-86). A system that\ntests well in the Japanese Yen over a recent five year period should also\ntest reasonably well over any other five year interval. This is another\narea where I appear to hold the minority point of view.\nMany different markets. A system that has worked well in crude oil\nshould also work well in heating oil and unleaded gasoline over the same\nperiod of time. If not, I will look for an explanation and will usually\ndiscard the system. I go even further than this, however, and test that\nsame system across my entire database of markets, expecting it to", - "type": "text" - } - ] - }, - { - "page_num": 446, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p446-b0", - "global_id": 2428, - "bbox": [ - 100.79, - 73.28, - 315.35, - 87.68 - ], - "text": "perform well in the majority of them.", - "type": "text" - }, - { - "block_id": "p446-b1", - "global_id": 2429, - "bbox": [ - 72.0, - 104.25, - 520.61, - 234.6 - ], - "text": "Once our testing is complete, let us visually inspect the computer\ngenerated trading signals on a price chart to ensure that the system does what\nwe intended it to do. TradeStation facilitates this process by placing buy and\nsell arrows directly on the chart for us! If the system does not do what it is\nsupposed to do, we need to make the necessary corrections to the code and\ntest it again. Keep in mind that very few ideas will test out profitably, usually\nless than 5%. And, for one reason or another, most of these “successful” ideas\nwill not even be tradable.", - "type": "text" - }, - { - "block_id": "p446-b2", - "global_id": 2430, - "bbox": [ - 72.0, - 278.55, - 519.96, - 415.36 - ], - "text": "STEP 5: EVALUATE RESULTS\nLet us try to understand the concept behind our trading system. Does it make\nsense or is it just a coincidence? Analyze the equity curve. Can we live\nthrough the drawdowns? Evaluate the system on a trade-by-trade basis. What\nhappens if a signal is a bad one? How quickly does the system exit from\nlosers? How long does it stay with the winners? Make sure we are completely\ncomfortable with the test results, otherwise we will not be able to trade this\nsystem in real time.", - "type": "text" - }, - { - "block_id": "p446-b3", - "global_id": 2431, - "bbox": [ - 100.79, - 417.53, - 376.74, - 431.93 - ], - "text": "Three key TradeStation statistics to analyze are:", - "type": "text" - }, - { - "block_id": "p446-b4", - "global_id": 2432, - "bbox": [ - 100.79, - 448.49, - 523.28, - 678.23 - ], - "text": "Profit factor. Equals Gross profit on winning trades/Gross loss on losing\ntrades. This statistic tells us how many dollars our system made for every\n$1 it lost, and is a measure of risk. Long term traders should aim for\nprofit factors of 2.00 or higher. Short term traders can accept slightly\nlower numbers.\nAvg trade (win & loss). This is our system’s mathematical expectation.\nIt should at least be high enough to cover transaction costs (slippage and\ncommissions); otherwise we will be losing money.\nMax intraday drawdown. This is the biggest drop, in dollar terms, from\nan equity peak to an equity trough. I prefer to do this calculation on a\npercentage basis. I also differentiate between drawdowns from a standing\nstart (where I am losing money from my own pocket) versus drawdowns\nfrom an equity peak (where I am giving back profits taken from the\nmarkets). I am usually more lenient with the latter.", - "type": "text" - }, - { - "block_id": "p446-b5", - "global_id": 2433, - "bbox": [ - 72.0, - 721.46, - 523.17, - 758.89 - ], - "text": "MONEY MANAGEMENT\nMoney management, while outside the scope of this appendix, is an extremely", - "type": "text" - } - ] - }, - { - "page_num": 447, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p447-b0", - "global_id": 2434, - "bbox": [ - 72.0, - 73.06, - 512.34, - 104.25 - ], - "text": "important topic. It is the key to profitable trading, every bit as important as a\ngood trading system.", - "type": "text" - }, - { - "block_id": "p447-b1", - "global_id": 2435, - "bbox": [ - 72.0, - 106.41, - 510.02, - 153.94 - ], - "text": "Money management techniques should be well thought out. Accept the\nfact that losses are part of the game. Control your downside and profits will\ntake care of themselves.", - "type": "text" - }, - { - "block_id": "p447-b2", - "global_id": 2436, - "bbox": [ - 72.0, - 156.1, - 515.12, - 220.2 - ], - "text": "In this area, practice diversification as much as possible. Diversification\nwill enable you to increase your returns while holding your risk constant, or\ndecrease your risk while holding your returns constant. Diversify among\nmarkets, systems, parameters, and time frames.", - "type": "text" - }, - { - "block_id": "p447-b3", - "global_id": 2437, - "bbox": [ - 72.0, - 264.15, - 520.47, - 367.83 - ], - "text": "CONCLUSION\nWe have discussed the basic philosophy of trading systems and why objective\nis better than subjective. We covered the three main benefits of a\ncomputerized approach and designed a 5 step plan for building a trading\nsystem. And last, but not least, we touched upon the importance of money\nmanagement and diversification.", - "type": "text" - }, - { - "block_id": "p447-b4", - "global_id": 2438, - "bbox": [ - 72.0, - 370.0, - 513.89, - 400.96 - ], - "text": "Trading systems can improve your performance and help to make you a\nsuccessful trader. The reasons for that are clear:", - "type": "text" - }, - { - "block_id": "p447-b5", - "global_id": 2439, - "bbox": [ - 100.79, - 417.53, - 517.17, - 481.62 - ], - "text": "they force you to do your homework before making a trade\nthey provide a disciplined framework, making it easier for you to follow\nthe rules\nthey enable you to increase your level of diversification", - "type": "text" - }, - { - "block_id": "p447-b6", - "global_id": 2440, - "bbox": [ - 72.0, - 498.19, - 503.29, - 562.28 - ], - "text": "With lots of hard work and dedication, anyone can build a successful\ntrading system. It is not easy, but it certainly is within reach. As with most\nthings in life, what you get out of this effort will be directly related to what\nyou put into it. (See Figures C.2 and C.3.)", - "type": "text" - } - ] - }, - { - "page_num": 448, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p448-b0", - "global_id": 2441, - "bbox": [ - 73.87, - 343.35, - 521.42, - 374.31 - ], - "text": "Figure C.2 (Price Chart): This trading system was designed to be applied to\na weekly chart of the Value Line Composite Index (VLCI), but also tested well", - "type": "text" - }, - { - "block_id": "p448-b1", - "global_id": 2442, - "bbox": [ - 86.01, - 376.47, - 509.26, - 390.87 - ], - "text": "on a daily chart of the VLCI and on both weekly and daily charts in other", - "type": "text" - }, - { - "block_id": "p448-b2", - "global_id": 2443, - "bbox": [ - 86.83, - 393.04, - 508.43, - 407.44 - ], - "text": "markets, votes of confidence in the underlying concept. This is the system", - "type": "text" - }, - { - "block_id": "p448-b3", - "global_id": 2444, - "bbox": [ - 227.36, - 409.6, - 367.91, - 424.0 - ], - "text": "described in Figure C.1.", - "type": "text" - }, - { - "block_id": "p448-b4", - "global_id": 2445, - "bbox": [ - 77.07, - 699.84, - 518.2, - 730.8 - ], - "text": "Figure C.3 (Performance Summary): Here is a 36 year Performance\nSummary of the system shown in Figures C.1 and C.2. Performance over the", - "type": "text" - }, - { - "block_id": "p448-b5", - "global_id": 2446, - "bbox": [ - 82.75, - 732.96, - 512.52, - 747.36 - ], - "text": "last 12 years has been consistent with the overall results. The Profit factor,", - "type": "text" - }, - { - "block_id": "p448-b6", - "global_id": 2447, - "bbox": [ - 93.87, - 749.53, - 501.41, - 763.93 - ], - "text": "Avg trade (win and loss) and Max intraday drawdown are all excellent", - "type": "text" - } - ] - }, - { - "page_num": 449, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p449-b0", - "global_id": 2448, - "bbox": [ - 100.79, - 94.17, - 406.51, - 108.57 - ], - "text": "*This appendix was prepared by Fred G. Schutzman.", - "type": "text" - } - ] - }, - { - "page_num": 450, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p450-b0", - "global_id": 2449, - "bbox": [ - 72.0, - 133.73, - 481.68, - 197.09 - ], - "text": "Appendix D: Continuous Futures\nContracts*", - "type": "text" - }, - { - "block_id": "p450-b1", - "global_id": 2450, - "bbox": [ - 72.0, - 264.85, - 514.54, - 378.63 - ], - "text": "With a clean database of “raw” commodity data, there are numerous types of\ncontracts that can be gleaned from the raw data, such as: Nearest Contracts,\nNext Contracts, Gann Contracts, and Continuous Contracts. Following, are\nideas for constructing these futures contracts derivatives. The symbols used\nare for illustration purposes only. These continuous contracts can be created\nthrough the Dial Data Service (56 Pine Street, New York, NY 10005, [212]\n422-1600.)", - "type": "text" - }, - { - "block_id": "p450-b2", - "global_id": 2451, - "bbox": [ - 72.0, - 422.59, - 505.54, - 493.14 - ], - "text": "NEAREST CONTRACT\nA nearest contract is primarily used by traders who just want a large file of\ncontinuous data made up of actual trading prices. They are content with the\ndata going to expiration and then rolling over automatically.", - "type": "text" - }, - { - "block_id": "p450-b3", - "global_id": 2452, - "bbox": [ - 72.0, - 495.31, - 521.16, - 609.09 - ], - "text": "It is quite probable that no one trades the nearest contract within 15 to 30\ndays of expiration. This is because the liquidity dries up very fast in the latter\ndays of a contract. The number of days before expiration that an individual\nrolls over to the next contract is a function of the commodity that is being\ntraded (the number of months till the next contract), and the individual’s\ntrading style. It is quite conceivable that the same individual will rollover at\ndifferent times for different commodities.", - "type": "text" - }, - { - "block_id": "p450-b4", - "global_id": 2453, - "bbox": [ - 72.0, - 611.26, - 523.16, - 658.78 - ], - "text": "When to rollover to the next contract will more than likely be based upon\nthe current contract’s volume. When it begins to erode, that is the time to roll\nforward.", - "type": "text" - }, - { - "block_id": "p450-b5", - "global_id": 2454, - "bbox": [ - 72.0, - 660.95, - 514.36, - 758.17 - ], - "text": "Therefore, one should have available a choice as to when to rollover his\nNearest Contract. Remember, Nearest Contracts are made up of actual data.\nHere are some examples: Portfolio Manager A is content to rollover at\nexpiration; so all he wants is the “standard” Nearest Contract with symbol\nTRNE00 (Treasury Bonds). Manager A is probably managing money and\nneeds equity calculations which he can derive from the data. Trader B feels", - "type": "text" - } - ] - }, - { - "page_num": 451, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p451-b0", - "global_id": 2455, - "bbox": [ - 72.0, - 73.53, - 516.38, - 170.5 - ], - "text": "that trading in the month of expiration is not liquid enough for him; so he\nwants his Nearest Contract to roll over 15 days prior to expiration—the\nsymbol could be TRNE15. Analyst C would like to evaluate different roll-\nover dates, so he might like to download multiple Nearest Contracts, such as:\nTRNE00, TRNE05, TRNE12, and TRNE21 (which roll-over 5, 12, and 21\ndays before expiration).", - "type": "text" - }, - { - "block_id": "p451-b1", - "global_id": 2456, - "bbox": [ - 72.0, - 172.67, - 511.2, - 220.2 - ], - "text": "Keep in mind that all of these contracts are Nearest Contracts and\ncontain actual contract data. The only difference is which actual contract the\ndata comes from.", - "type": "text" - }, - { - "block_id": "p451-b2", - "global_id": 2457, - "bbox": [ - 72.0, - 264.15, - 521.27, - 400.96 - ], - "text": "NEXT CONTRACT\nA Next Contract is a unique offspring of the Nearest Contract. It is exactly the\nsame as the Nearest Contract except that it is always the contract that follows\nthe Nearest Contract. In other words, if the Nearest Contract is using\nDecember data for T-Bonds (TR), then the Next Contract is using data from\nthe March T-Bond contract. When the December contract expires, the Nearest\nrolls to the March and the Next rolls to the June contract. This is defined as\nthe Next-1 contract.", - "type": "text" - }, - { - "block_id": "p451-b3", - "global_id": 2458, - "bbox": [ - 72.0, - 403.13, - 516.75, - 516.91 - ], - "text": "From this concept, another Next Contract is available, called a Next-2.\nHere, the data is always coming from the contract that is two contracts away\nfrom the Nearest Contract. Keeping with the above example, if the Nearest is\nusing data from the December contract, the Next-2 Contract is using data\nfrom the June contract. When the December contract expires, the Nearest\nbegins to use data from the March contract and the Next-2 Contract uses data\nfrom the September contract and so on.", - "type": "text" - }, - { - "block_id": "p451-b4", - "global_id": 2459, - "bbox": [ - 72.0, - 519.07, - 507.44, - 566.6 - ], - "text": "Ticker symbols for the Next contracts are: TRNXT1 and TRNXT2. Of\ncourse, the actual futures ticker will be used instead of the TR used in this\nexample.", - "type": "text" - }, - { - "block_id": "p451-b5", - "global_id": 2460, - "bbox": [ - 72.0, - 609.83, - 517.16, - 696.95 - ], - "text": "GANN CONTRACT\nGann Contracts refer to the use of a specific contract month and rolling over\nonly to the same contract in the next year. For example, July Wheat would be\nused until the July contract expires, then the Gann Contract would start using\ndata from the July Wheat contract of the next year.", - "type": "text" - }, - { - "block_id": "p451-b6", - "global_id": 2461, - "bbox": [ - 72.0, - 699.12, - 519.55, - 730.08 - ], - "text": "Examples of ticker symbols for Gann Contracts are: W07GN, GC04GN,\nJY12GN, etc. (representing July Wheat, April gold, December Japanese yen).", - "type": "text" - } - ] - }, - { - "page_num": 452, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p452-b0", - "global_id": 2462, - "bbox": [ - 72.0, - 74.02, - 517.58, - 177.7 - ], - "text": "CONTINUOUS CONTRACTS\nContinuous Contracts were developed to help analysts overcome the problem\nof liquidity dry up and premium (or discount) gaps in futures data. This\nbecomes a problem whenever an analyst is testing a trading model or system\nover many years of data. It allows for a continuous stream of data with\ncompensation being made for rollover jumps in price trends.", - "type": "text" - }, - { - "block_id": "p452-b1", - "global_id": 2463, - "bbox": [ - 72.0, - 221.66, - 518.41, - 332.54 - ], - "text": "CONSTANT FORWARD CONTINUOUS\nCONTRACTS\nA Constant Forward Continuous Contract looks a constant length of time into\nthe future. It uses more than one contract to do this. A common method is to\nuse the nearest two contracts and do a linear extrapolation of the data. (See\nFigure D.1.)", - "type": "text" - }, - { - "block_id": "p452-b2", - "global_id": 2464, - "bbox": [ - 122.98, - 641.5, - 472.3, - 655.97 - ], - "text": "Figure D.1 A visual representation of a continuous contract.", - "type": "text" - }, - { - "block_id": "p452-b3", - "global_id": 2465, - "bbox": [ - 72.0, - 672.47, - 509.48, - 769.69 - ], - "text": "One possibility is to give the futures trader (as with the Nearest\nContracts) the ability to construct his own Constant Forward Continuous\nContract. Three things are needed to do this: The commodity symbol, the\nnumber of contracts he wants used in the calculation, and the number of\nweeks into the futures he wants to look. For instance, if he wanted T-Bonds,\nusing 3 of the nearest contracts, and looking 14 weeks into the future, the", - "type": "text" - } - ] - }, - { - "page_num": 453, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p453-b0", - "global_id": 2466, - "bbox": [ - 72.0, - 73.53, - 508.02, - 120.81 - ], - "text": "symbol could be: TRCF314. TR is the symbol, CF is for Continuous\n(Forward Looking), 3 is the number of contracts used, and 14 is the number\nof weeks the price is projected.", - "type": "text" - }, - { - "block_id": "p453-b1", - "global_id": 2467, - "bbox": [ - 72.0, - 122.98, - 521.93, - 220.2 - ], - "text": "The mechanics of this are fairly simple. First, a fixed rollover date would\nneed to be set for each commodity. A good one to start with could be 10 days\nprior to expiration. What is important is that there is a rollover sometime prior\nto actual expiration. Second, the number of contracts used will never be less\nthan 2 and probably never greater than 4. The number of weeks used should\nprobably always be greater that 3 and could go up to 40 in some cases.", - "type": "text" - }, - { - "block_id": "p453-b2", - "global_id": 2468, - "bbox": [ - 72.0, - 222.36, - 496.44, - 253.32 - ], - "text": "Example: This is the method used by Commodity Systems, Inc. (See\nPerpetual Contract in Chapter 8.)", - "type": "text" - }, - { - "block_id": "p453-b3", - "global_id": 2469, - "bbox": [ - 72.0, - 255.49, - 522.32, - 518.35 - ], - "text": "T-Bonds will be used again, because they have a uniform expiration\ncycle of every 3 months. Let’s say a trader wants a Continuous Contract of T-\nBonds using the 2 nearest months and looking 12 weeks into the future\n(symbol=TRCF212). Today’s date is December 1. A graphical portrayal\nmakes this easier to understand (see Figure D.1). The vertical axis is price and\nthe horizontal axis is time. Today’s date is marked on the horizontal axis and\nthe expiration dates of the two nearest contracts (December and March), are\nalso marked. He wants to look 12 weeks into the future so a mark is made 12\nweeks from today which is about February 25. The close price of the\nDecember contract was 88.25 and the close of the March contract was 87.75\nThese points are then put above their expiration dates at the corresponding\nprices. Then a linear extrapolation is made by merely drawing a line between\nthe two points. The slope of this line will vary up and down depending upon\nthe outlook for long term interest rates (in this T-Bond example). In this\nparticular example the outlook is for higher rates because the March futures\nprice is lower than the December price.", - "type": "text" - }, - { - "block_id": "p453-b4", - "global_id": 2470, - "bbox": [ - 72.0, - 520.51, - 521.08, - 667.43 - ], - "text": "To find the value of the TRCF212 close price for today, find the point on\nthe horizontal axis that is 12 weeks from today (Feb 25th) and go up to the\nline drawn on the chart. Then from the line go to the right and that is the price\nof the close for this Constant Forward Continuous Contract (about 87.91).\nYou can also visually see from the chart that the March contract is carrying\nmore weight than the December contract because the point of interception is\ncloser to March. This method can be done on the Open, High, Low, and Close\nin the exact manner. Of course, a computer does it mathematically; this is just\na visual explanation of how a Perpetual Contract is constructed.", - "type": "text" - }, - { - "block_id": "p453-b5", - "global_id": 2471, - "bbox": [ - 100.79, - 712.08, - 366.55, - 726.48 - ], - "text": "*This appendix was prepared by Greg Morris.", - "type": "text" - } - ] - }, - { - "page_num": 454, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p454-b0", - "global_id": 2472, - "bbox": [ - 72.0, - 133.73, - 180.75, - 162.52 - ], - "text": "Glossary", - "type": "text" - }, - { - "block_id": "p454-b1", - "global_id": 2473, - "bbox": [ - 72.0, - 230.28, - 519.94, - 244.74 - ], - "text": "Advance-decline line: One of the most widely used indicators to measure the", - "type": "text" - }, - { - "block_id": "p454-b2", - "global_id": 2474, - "bbox": [ - 93.59, - 246.85, - 515.25, - 393.76 - ], - "text": "breadth of a stock market advance or decline. Each day (or week) the\nnumber of advancing issues is compared to the number of declining\nissues. If advances outnumber declines, the net total is added to the\nprevious cumulative total. If declines outnumber advances, the net\ndifference is subtracted from the previous cumulative total. The advance-\ndecline line is usually compared to a popular stock average, such as the\nDow Jones Industrial Average. They should trend in the same direction.\nWhen the advance-decline line begins to diverge from the stock average,\nan early indication is given of a possible trend reversal.", - "type": "text" - }, - { - "block_id": "p454-b3", - "global_id": 2475, - "bbox": [ - 72.0, - 410.33, - 519.15, - 424.79 - ], - "text": "Arms index: Developed by Richard Arms, this contrary indicator is a ratio of", - "type": "text" - }, - { - "block_id": "p454-b4", - "global_id": 2476, - "bbox": [ - 93.59, - 426.89, - 523.21, - 507.55 - ], - "text": "the average volume of declining stocks divided by the average volume of\nadvancing stocks. A reading below 1.0 indicates more volume in rising\nstocks. A reading above 1.0 reflects more volume in declining issues. A 10\nday average of the Arms index over 1.20 is oversold, while a 10 day\naverage below .70 is overbought.", - "type": "text" - }, - { - "block_id": "p454-b5", - "global_id": 2477, - "bbox": [ - 72.0, - 524.12, - 481.72, - 538.58 - ], - "text": "Ascending triangle: A sideways price pattern between two converging", - "type": "text" - }, - { - "block_id": "p454-b6", - "global_id": 2478, - "bbox": [ - 93.59, - 540.68, - 497.57, - 571.64 - ], - "text": "trendlines, in which the lower line is rising while the upper line is flat.\nThis is generally a bullish pattern. (See Triangles.)", - "type": "text" - }, - { - "block_id": "p454-b7", - "global_id": 2479, - "bbox": [ - 72.0, - 588.21, - 504.33, - 602.67 - ], - "text": "Bar chart: On a daily bar chart, each bar represents one day’s activity. The", - "type": "text" - }, - { - "block_id": "p454-b8", - "global_id": 2480, - "bbox": [ - 93.59, - 604.78, - 519.14, - 685.43 - ], - "text": "vertical bar is drawn from the day’s highest price to the day’s lowest price\n(the range). A tic to the left of the bar marks the opening price, while a tic\nto the right of the bar marks the closing price. Bar charts can be\nconstructed for any time period, including monthly, weekly, hourly, and\nminute periods.", - "type": "text" - }, - { - "block_id": "p454-b9", - "global_id": 2481, - "bbox": [ - 72.0, - 702.0, - 503.58, - 716.46 - ], - "text": "Bollinger bands: Developed by John Bollinger, this indicator plots trading", - "type": "text" - }, - { - "block_id": "p454-b10", - "global_id": 2482, - "bbox": [ - 93.59, - 718.56, - 519.93, - 766.09 - ], - "text": "bands two standard deviations above and below a 20 period moving\naverage. Prices will often meet resistance at the upper band and support at\nthe lower band.", - "type": "text" - } - ] - }, - { - "page_num": 455, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p455-b0", - "global_id": 2483, - "bbox": [ - 72.0, - 73.28, - 503.35, - 87.74 - ], - "text": "Breakaway gap: A price gap that forms on the completion of an important", - "type": "text" - }, - { - "block_id": "p455-b1", - "global_id": 2484, - "bbox": [ - 93.59, - 89.85, - 476.82, - 120.81 - ], - "text": "price pattern. A breakaway gap usually signals the beginning of an\nimportant price move. (See Gaps.)", - "type": "text" - }, - { - "block_id": "p455-b2", - "global_id": 2485, - "bbox": [ - 72.0, - 137.38, - 480.35, - 151.84 - ], - "text": "Channel line: Straight lines drawn parallel to the basic trendline. In an", - "type": "text" - }, - { - "block_id": "p455-b3", - "global_id": 2486, - "bbox": [ - 93.59, - 153.94, - 520.74, - 218.03 - ], - "text": "uptrend, the channel line slants up to the right and is drawn above rally\npeaks; in a downtrend, the channel line is drawn below price troughs and\nslants down to the right. Prices will often meet resistance at rising channel\nlines and support at falling channel lines.", - "type": "text" - }, - { - "block_id": "p455-b4", - "global_id": 2487, - "bbox": [ - 72.0, - 234.6, - 516.36, - 249.06 - ], - "text": "Confirmation: Having as many market factors as possible agreeing with one", - "type": "text" - }, - { - "block_id": "p455-b5", - "global_id": 2488, - "bbox": [ - 93.59, - 251.17, - 511.79, - 282.13 - ], - "text": "another. For example, if prices and volume are rising together, volume is\nconfirming the price action. The opposite of confirmation is divergence.", - "type": "text" - }, - { - "block_id": "p455-b6", - "global_id": 2489, - "bbox": [ - 72.0, - 298.7, - 516.76, - 313.16 - ], - "text": "Continuation patterns: Price formations that imply a pause or consolidation", - "type": "text" - }, - { - "block_id": "p455-b7", - "global_id": 2490, - "bbox": [ - 93.59, - 315.26, - 507.58, - 346.23 - ], - "text": "in the prevailing trend. The most common types are triangles, flags, and\npennants.", - "type": "text" - }, - { - "block_id": "p455-b8", - "global_id": 2491, - "bbox": [ - 72.0, - 362.8, - 488.11, - 377.26 - ], - "text": "Descending triangle: A sideways price pattern between two converging", - "type": "text" - }, - { - "block_id": "p455-b9", - "global_id": 2492, - "bbox": [ - 93.59, - 379.36, - 518.34, - 410.32 - ], - "text": "trendlines, in which the upper line is declining while the lower line is flat.\nThis is generally a bearish pattern. (See Triangles.)", - "type": "text" - }, - { - "block_id": "p455-b10", - "global_id": 2493, - "bbox": [ - 72.0, - 426.89, - 509.26, - 441.29 - ], - "text": "Divergence: A situation where two indicators are not confirming each other.", - "type": "text" - }, - { - "block_id": "p455-b11", - "global_id": 2494, - "bbox": [ - 93.59, - 443.46, - 516.34, - 490.98 - ], - "text": "For example, in oscillator analysis, prices trend higher while an oscillator\nstarts to drop. Divergence usually warns of a trend reversal. (See\nConfirmation.)", - "type": "text" - }, - { - "block_id": "p455-b12", - "global_id": 2495, - "bbox": [ - 72.0, - 507.55, - 515.55, - 522.01 - ], - "text": "Double top: This price pattern displays two prominent peaks. The reversal is", - "type": "text" - }, - { - "block_id": "p455-b13", - "global_id": 2496, - "bbox": [ - 93.59, - 524.12, - 483.64, - 555.08 - ], - "text": "complete when the middle trough is broken. The double bottom is a\nmirror image of the top.", - "type": "text" - }, - { - "block_id": "p455-b14", - "global_id": 2497, - "bbox": [ - 72.0, - 571.65, - 460.57, - 586.11 - ], - "text": "Down trendline: A straight line drawn down and to the right above", - "type": "text" - }, - { - "block_id": "p455-b15", - "global_id": 2498, - "bbox": [ - 93.59, - 588.21, - 517.99, - 619.17 - ], - "text": "successive rally peaks. A violation of the down trendline usually signals a\nreversal of the downtrend. (See Trendlines.)", - "type": "text" - }, - { - "block_id": "p455-b16", - "global_id": 2499, - "bbox": [ - 72.0, - 635.74, - 513.17, - 650.2 - ], - "text": "Dow Theory: One of the oldest and most highly regarded technical theories.", - "type": "text" - }, - { - "block_id": "p455-b17", - "global_id": 2500, - "bbox": [ - 93.59, - 652.31, - 499.59, - 699.83 - ], - "text": "A Dow Theory buy signal is given when the Dow Industrial and Dow\nTransportation Averages close above a prior rally peak. A sell signal is\ngiven when both averages close below a prior reaction low.", - "type": "text" - }, - { - "block_id": "p455-b18", - "global_id": 2501, - "bbox": [ - 72.0, - 716.4, - 480.02, - 730.86 - ], - "text": "Elliott wave analysis: An approach to market analysis that is based on", - "type": "text" - }, - { - "block_id": "p455-b19", - "global_id": 2502, - "bbox": [ - 93.59, - 732.97, - 497.16, - 763.93 - ], - "text": "repetitive wave patterns and the Fibonacci number sequence. An ideal\nElliott wave pattern shows a five wave advance followed by a 3-wave", - "type": "text" - } - ] - }, - { - "page_num": 456, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p456-b0", - "global_id": 2503, - "bbox": [ - 93.59, - 73.28, - 288.98, - 87.68 - ], - "text": "decline. (See Fibonacci numbers).", - "type": "text" - }, - { - "block_id": "p456-b1", - "global_id": 2504, - "bbox": [ - 72.0, - 104.25, - 492.37, - 118.71 - ], - "text": "Envelopes: Lines placed at fixed percentages above and below a moving", - "type": "text" - }, - { - "block_id": "p456-b2", - "global_id": 2505, - "bbox": [ - 93.59, - 120.82, - 522.7, - 151.78 - ], - "text": "average line. Envelopes help determine when a market has traveled too far\nfrom its moving average and is overextended.", - "type": "text" - }, - { - "block_id": "p456-b3", - "global_id": 2506, - "bbox": [ - 72.0, - 168.35, - 520.78, - 182.81 - ], - "text": "Exhaustion gap: A price gap that occurs at the end of an important trend, and", - "type": "text" - }, - { - "block_id": "p456-b4", - "global_id": 2507, - "bbox": [ - 93.59, - 184.91, - 342.56, - 199.31 - ], - "text": "signals that the trend is ending. (See Gaps.)", - "type": "text" - }, - { - "block_id": "p456-b5", - "global_id": 2508, - "bbox": [ - 72.0, - 215.88, - 490.44, - 230.34 - ], - "text": "Exponential smoothing: A moving average that uses all data points, but", - "type": "text" - }, - { - "block_id": "p456-b6", - "global_id": 2509, - "bbox": [ - 93.59, - 232.44, - 494.74, - 246.84 - ], - "text": "gives greater weight to more recent price data. (See Moving average.)", - "type": "text" - }, - { - "block_id": "p456-b7", - "global_id": 2510, - "bbox": [ - 72.0, - 263.41, - 504.02, - 277.87 - ], - "text": "Fibonacci numbers: The Fibonacci number sequence (1, 2, 3, 5, 8, 13, 21,", - "type": "text" - }, - { - "block_id": "p456-b8", - "global_id": 2511, - "bbox": [ - 93.59, - 279.97, - 521.24, - 393.76 - ], - "text": "34, 55, 89, 144…) is constructed by adding the first two numbers to arrive\nat the third. The ratio of any number to the next larger number is 62\npercent, which is a popular Fibonacci retracement number. The inverse of\n62 percent, which is 38 percent, is also used as a Fibonacci retracement\nnumber. The ratio of any number to the next smaller number is 1.62\npercent, which is used to arrive at Fibonacci price targets. (See Elliott\nwave analysis).", - "type": "text" - }, - { - "block_id": "p456-b9", - "global_id": 2512, - "bbox": [ - 72.0, - 410.33, - 499.54, - 424.79 - ], - "text": "Flag: A continuation price pattern, generally lasting less than three weeks,", - "type": "text" - }, - { - "block_id": "p456-b10", - "global_id": 2513, - "bbox": [ - 93.59, - 426.89, - 521.93, - 457.85 - ], - "text": "which resembles a parallelogram that slopes against the prevailing trend.\nThe flag represents a minor pause in a dynamic price trend. (See Pennant.)", - "type": "text" - }, - { - "block_id": "p456-b11", - "global_id": 2514, - "bbox": [ - 72.0, - 474.42, - 492.4, - 488.88 - ], - "text": "Fundamental analysis: The opposite of technical analysis. Fundamental", - "type": "text" - }, - { - "block_id": "p456-b12", - "global_id": 2515, - "bbox": [ - 93.59, - 490.99, - 510.03, - 521.95 - ], - "text": "analysis relies on economic supply and demand information, as opposed\nto market activity.", - "type": "text" - }, - { - "block_id": "p456-b13", - "global_id": 2516, - "bbox": [ - 72.0, - 538.52, - 515.93, - 552.98 - ], - "text": "Gaps: Gaps are spaces left on the bar chart where no trading has taken place.", - "type": "text" - }, - { - "block_id": "p456-b14", - "global_id": 2517, - "bbox": [ - 93.59, - 555.08, - 520.0, - 652.3 - ], - "text": "An up gap is formed when the lowest price on a trading day is higher than\nthe highest high of the previous day. A down gap is formed when the\nhighest price on a day is lower than the lowest price of the prior day. An\nup gap is usually a sign of market strength, while a down gap is a sign of\nmarket weakness. Three types of gaps are breakaway, runaway (also\ncalled measuring), and exhaustion gaps.", - "type": "text" - }, - { - "block_id": "p456-b15", - "global_id": 2518, - "bbox": [ - 72.0, - 668.87, - 503.99, - 683.33 - ], - "text": "Head and shoulders: The best known of the reversal patterns. At a market", - "type": "text" - }, - { - "block_id": "p456-b16", - "global_id": 2519, - "bbox": [ - 93.59, - 685.44, - 519.17, - 766.09 - ], - "text": "top, three prominent peaks are formed with the middle peak (or head)\nslightly higher than the two other peaks (shoulders). When the trendline\n(neckline) connecting the two intervening troughs is broken, the pattern is\ncomplete. A bottom pattern is a mirror image of a top and is called an\ninverse head and shoulders.", - "type": "text" - } - ] - }, - { - "page_num": 457, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p457-b0", - "global_id": 2520, - "bbox": [ - 72.0, - 73.28, - 519.54, - 87.74 - ], - "text": "Intermarket analysis: An additional aspect of market analysis that takes into", - "type": "text" - }, - { - "block_id": "p457-b1", - "global_id": 2521, - "bbox": [ - 93.59, - 89.85, - 515.55, - 153.94 - ], - "text": "consideration the price action of related market sectors. The four sectors\nare currencies, commodities, bonds, and stocks. International markets are\nalso included. This approach is based on the premise that all markets are\ninterrelated and impact on one another.", - "type": "text" - }, - { - "block_id": "p457-b2", - "global_id": 2522, - "bbox": [ - 72.0, - 170.51, - 507.34, - 184.97 - ], - "text": "Island reversal: A combination of an exhaustion gap in one direction and a", - "type": "text" - }, - { - "block_id": "p457-b3", - "global_id": 2523, - "bbox": [ - 93.59, - 187.07, - 521.75, - 267.73 - ], - "text": "breakaway gap in the other direction within a few days. Toward the end of\nan uptrend, for example, prices gap upward and then downward within a\nfew days. The result is usually two or three trading days standing alone\nwith gaps on either side. The island reversal usually signals a trend\nreversal. (See Gaps.)", - "type": "text" - }, - { - "block_id": "p457-b4", - "global_id": 2524, - "bbox": [ - 72.0, - 284.3, - 494.14, - 298.76 - ], - "text": "Key reversal day: In an uptrend, this one day pattern occurs when prices", - "type": "text" - }, - { - "block_id": "p457-b5", - "global_id": 2525, - "bbox": [ - 93.59, - 300.86, - 522.72, - 364.95 - ], - "text": "open in new highs, and then close below the previous day’s closing price.\nIn a downtrend, prices open lower and then close higher. The wider the\nprice range on the key reversal day and the heavier the volume, the greater\nthe odds that a reversal is taking place. (See Weekly Reversal.)", - "type": "text" - }, - { - "block_id": "p457-b6", - "global_id": 2526, - "bbox": [ - 72.0, - 381.52, - 499.53, - 395.98 - ], - "text": "Line charts: Price charts that connect the closing prices of a given market", - "type": "text" - }, - { - "block_id": "p457-b7", - "global_id": 2527, - "bbox": [ - 93.59, - 398.08, - 517.56, - 462.18 - ], - "text": "over a span of time. The result is a curving line on the chart. This type of\nchart is most useful with overlay or comparison charts that are commonly\nemployed in intermarket analysis. It is also used for visual trend analysis\nof open end mutual funds.", - "type": "text" - }, - { - "block_id": "p457-b8", - "global_id": 2528, - "bbox": [ - 72.0, - 478.74, - 482.93, - 493.2 - ], - "text": "MACD: Developed by Gerald Appel, the moving average convergence", - "type": "text" - }, - { - "block_id": "p457-b9", - "global_id": 2529, - "bbox": [ - 93.59, - 495.31, - 510.92, - 575.96 - ], - "text": "divergence system shows two lines. The first (MACD) line is the\ndifference between two exponential moving averages (usually 12 and 26\nperiods) of closing prices. The second (signal) line is usually a 9 period\nEMA of the first (MACD) line. Signals are given when the two lines\ncross.", - "type": "text" - }, - { - "block_id": "p457-b10", - "global_id": 2530, - "bbox": [ - 72.0, - 592.53, - 521.3, - 606.99 - ], - "text": "MACD histogram: A variation of the MACD system that plots the difference", - "type": "text" - }, - { - "block_id": "p457-b11", - "global_id": 2531, - "bbox": [ - 93.59, - 609.1, - 509.2, - 640.06 - ], - "text": "between the signal and MACD lines. Changes in the spread between the\ntwo lines can be spotted faster, leading to earlier trading signals.", - "type": "text" - }, - { - "block_id": "p457-b12", - "global_id": 2532, - "bbox": [ - 72.0, - 656.63, - 522.73, - 671.09 - ], - "text": "McClellan oscillator: Developed by Sherman McClellan, this oscillator is the", - "type": "text" - }, - { - "block_id": "p457-b13", - "global_id": 2533, - "bbox": [ - 93.59, - 673.19, - 518.74, - 753.85 - ], - "text": "difference between the 19 day (10% trend) and the 39 day (5% trend)\nexponentially smoothed averages of the daily net advance decline figures.\nCrossings above the zero line are positive and below zero are negative.\nReadings above +100 are overbought while readings below -100 are\noversold.", - "type": "text" - } - ] - }, - { - "page_num": 458, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p458-b0", - "global_id": 2534, - "bbox": [ - 72.0, - 73.28, - 487.98, - 87.74 - ], - "text": "McClellan summation index: A cumulative sum of all daily McClellan", - "type": "text" - }, - { - "block_id": "p458-b1", - "global_id": 2535, - "bbox": [ - 93.59, - 89.85, - 513.15, - 120.81 - ], - "text": "oscillator readings that provides longer range analysis of market breadth.\nUsed in the same way as an advance-decline line.", - "type": "text" - }, - { - "block_id": "p458-b2", - "global_id": 2536, - "bbox": [ - 72.0, - 137.38, - 522.38, - 151.84 - ], - "text": "Momentum: A technique used to construct an overbought-oversold oscillator.", - "type": "text" - }, - { - "block_id": "p458-b3", - "global_id": 2537, - "bbox": [ - 93.59, - 153.94, - 520.32, - 218.03 - ], - "text": "Momentum measures price differences over a selected span of time. To\nconstruct a 10 day momentum line, the closing price 10 days earlier is\nsubtracted from the latest price. The resulting positive or negative value is\nplotted above or below a zero line. (See Oscillators.)", - "type": "text" - }, - { - "block_id": "p458-b4", - "global_id": 2538, - "bbox": [ - 72.0, - 234.6, - 502.39, - 249.06 - ], - "text": "Moving average: A trend following indicator that works best in a trending", - "type": "text" - }, - { - "block_id": "p458-b5", - "global_id": 2539, - "bbox": [ - 93.59, - 251.17, - 520.34, - 398.08 - ], - "text": "environment. Moving averages smooth out price action but operate with a\ntime lag. A simple 10 day moving average of a stock, for example, adds\nup the last 10 days’ closing prices and divides the total by 10. That\nprocedure is repeated each day. Any number of moving averages can be\nemployed, with different time spans, to generate buy and sell signals.\nWhen only one average is employed, a buy signal is given when the price\ncloses above the average. When two averages are employed, a buy signal\nis given when the shorter average crosses above the longer average. There\nare three types: simple, weighted, and exponentially smoothed averages.", - "type": "text" - }, - { - "block_id": "p458-b6", - "global_id": 2540, - "bbox": [ - 72.0, - 414.65, - 487.78, - 429.11 - ], - "text": "On balance volume: Developed by Joseph Granville, OBV is a running", - "type": "text" - }, - { - "block_id": "p458-b7", - "global_id": 2541, - "bbox": [ - 93.59, - 431.21, - 518.54, - 478.74 - ], - "text": "cumulative total of upside and downside volume. Volume is added on up\ndays and subtracted on down days. The OBV line is plotted with the price\nline to see if the two lines are confirming each other. (See Volume.)", - "type": "text" - }, - { - "block_id": "p458-b8", - "global_id": 2542, - "bbox": [ - 72.0, - 495.31, - 480.51, - 509.77 - ], - "text": "Open interest: The number of options or futures contracts that are still", - "type": "text" - }, - { - "block_id": "p458-b9", - "global_id": 2543, - "bbox": [ - 93.59, - 511.87, - 503.06, - 575.96 - ], - "text": "unliquidated at the end of a trading day. A rise or fall in open interest\nshows that money is flowing into or out of a futures contract or option,\nrespectively. In futures markets, rising open interest is considered good\nfor the current trend. Open interest also measures liquidity.", - "type": "text" - }, - { - "block_id": "p458-b10", - "global_id": 2544, - "bbox": [ - 72.0, - 592.53, - 507.95, - 606.99 - ], - "text": "Oscillators: Indicators that determine when a market is in an overbought or", - "type": "text" - }, - { - "block_id": "p458-b11", - "global_id": 2545, - "bbox": [ - 93.59, - 609.1, - 522.35, - 673.19 - ], - "text": "oversold condition. When the oscillator reaches an upper extreme, the\nmarket is overbought. When the oscillator line reaches a lower extreme,\nthe market is oversold. (See Momentum, Rate of change, Relative strength\nindex, and Stochastics.)", - "type": "text" - }, - { - "block_id": "p458-b12", - "global_id": 2546, - "bbox": [ - 72.0, - 689.76, - 487.57, - 704.22 - ], - "text": "Overbought: A term usually used in reference to an oscillator. When an", - "type": "text" - }, - { - "block_id": "p458-b13", - "global_id": 2547, - "bbox": [ - 93.59, - 706.32, - 511.11, - 737.28 - ], - "text": "oscillator reaches an upper extreme, it is believed that a market has risen\ntoo far and is vulnerable to a selloff.", - "type": "text" - }, - { - "block_id": "p458-b14", - "global_id": 2548, - "bbox": [ - 72.0, - 753.85, - 469.18, - 768.31 - ], - "text": "Oversold: A term usually used in reference to an oscillator. When an", - "type": "text" - } - ] - }, - { - "page_num": 459, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p459-b0", - "global_id": 2549, - "bbox": [ - 93.59, - 73.28, - 523.1, - 104.25 - ], - "text": "oscillator reaches a lower extreme, it is believed that a market has dropped\ntoo far and is due for a bounce.", - "type": "text" - }, - { - "block_id": "p459-b1", - "global_id": 2550, - "bbox": [ - 72.0, - 120.82, - 521.09, - 135.28 - ], - "text": "Pennant: This continuation price pattern is similar to the flag, except that it is", - "type": "text" - }, - { - "block_id": "p459-b2", - "global_id": 2551, - "bbox": [ - 93.59, - 137.38, - 521.89, - 184.91 - ], - "text": "more horizontal and resembles a small symmetrical triangle. Like the flag,\nthe pennant usually lasts from one to three weeks and is typically\nfollowed by a resumption of the prior trend.", - "type": "text" - }, - { - "block_id": "p459-b3", - "global_id": 2552, - "bbox": [ - 72.0, - 201.48, - 510.1, - 215.94 - ], - "text": "Percent investment advisors bullish: This measure of stock market bullish", - "type": "text" - }, - { - "block_id": "p459-b4", - "global_id": 2553, - "bbox": [ - 93.59, - 218.04, - 522.49, - 265.57 - ], - "text": "sentiment is published weekly by Investor’s Intelligence of New Rochelle,\nNew York. When only 35% of professionals are bullish, the market is\nconsidered oversold. A reading of 55% is considered to be overbought.", - "type": "text" - }, - { - "block_id": "p459-b5", - "global_id": 2554, - "bbox": [ - 72.0, - 282.14, - 509.48, - 296.6 - ], - "text": "Price patterns: Patterns that appear on price charts and that have predictive", - "type": "text" - }, - { - "block_id": "p459-b6", - "global_id": 2555, - "bbox": [ - 93.59, - 298.7, - 473.98, - 313.1 - ], - "text": "value. Patterns are divided into reversal and continuation patterns.", - "type": "text" - }, - { - "block_id": "p459-b7", - "global_id": 2556, - "bbox": [ - 72.0, - 329.67, - 481.63, - 344.13 - ], - "text": "Rate of change: A technique used to construct an overbought-oversold", - "type": "text" - }, - { - "block_id": "p459-b8", - "global_id": 2557, - "bbox": [ - 93.59, - 346.23, - 517.56, - 410.32 - ], - "text": "oscillator. Rate of change employs a price ratio over a selected span of\ntime. To construct a 10 day rate of change oscillator, the last closing price\nis divided by the closing price 10 days earlier. The resulting value is\nplotted above or below a value of 100.", - "type": "text" - }, - { - "block_id": "p459-b9", - "global_id": 2558, - "bbox": [ - 72.0, - 426.89, - 503.54, - 441.35 - ], - "text": "Ratio analysis: The use of a ratio to compare the relative strength between", - "type": "text" - }, - { - "block_id": "p459-b10", - "global_id": 2559, - "bbox": [ - 93.59, - 443.46, - 511.16, - 557.24 - ], - "text": "two entities. An individual stock or industry group divided by the S&P\n500 index can determine whether that stock or industry group is\noutperforming or underperforming the stock market as a whole. Ratio\nanalysis can be used to compare any two entities. A rising ratio indicates\nthat the numerator in the ratio is outperforming the denominator. Trend\nanalysis can be applied to the ratio line itself to determine important\nturning points.", - "type": "text" - }, - { - "block_id": "p459-b11", - "global_id": 2560, - "bbox": [ - 72.0, - 573.81, - 496.16, - 588.27 - ], - "text": "Relative strength index (RSI): A popular oscillator developed by Welles", - "type": "text" - }, - { - "block_id": "p459-b12", - "global_id": 2561, - "bbox": [ - 93.59, - 590.37, - 519.74, - 687.59 - ], - "text": "Wilder, Jr. and described in his self published 1978 book, New Concepts\nin Technical Trading Systems. RSI is plotted on a vertical scale from 0 to\n100. Values above 70 are considered to be overbought and values below\n30, oversold. When prices are over 70 or below 30 and diverge from price\naction, a warning is given of a possible trend reversal. RSI usually\nemploys 9 or 14 time periods.", - "type": "text" - }, - { - "block_id": "p459-b13", - "global_id": 2562, - "bbox": [ - 72.0, - 704.16, - 491.21, - 718.62 - ], - "text": "Resistance: The opposite of support. Resistance is marked by a previous", - "type": "text" - }, - { - "block_id": "p459-b14", - "global_id": 2563, - "bbox": [ - 93.59, - 720.72, - 496.77, - 751.69 - ], - "text": "price peak and provides enough of a barrier above the market to halt a\nprice advance. (See Support.)", - "type": "text" - } - ] - }, - { - "page_num": 460, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p460-b0", - "global_id": 2564, - "bbox": [ - 72.0, - 73.28, - 477.51, - 87.74 - ], - "text": "Retracements: Prices normally retrace the prior trend by a percentage", - "type": "text" - }, - { - "block_id": "p460-b1", - "global_id": 2565, - "bbox": [ - 93.59, - 89.85, - 522.77, - 153.94 - ], - "text": "amount before resuming the original trend. The best known example is the\n50% retracement. Minimum and maximum retracements are normally one\nthird and two thirds, respectively. Elliott wave analysis uses Fibonacci\nretracements of 38% and 62%.", - "type": "text" - }, - { - "block_id": "p460-b2", - "global_id": 2566, - "bbox": [ - 72.0, - 170.51, - 513.89, - 184.97 - ], - "text": "Reversal patterns: Price patterns on a price chart that usually indicate that a", - "type": "text" - }, - { - "block_id": "p460-b3", - "global_id": 2567, - "bbox": [ - 93.59, - 187.07, - 514.33, - 218.03 - ], - "text": "trend reversal is taking place. The best known of the reversal patterns are\nthe head and shoulders and double and triple tops and bottoms.", - "type": "text" - }, - { - "block_id": "p460-b4", - "global_id": 2568, - "bbox": [ - 72.0, - 234.6, - 494.83, - 249.06 - ], - "text": "Runaway gap: A price gap that usually occurs around the midpoint of an", - "type": "text" - }, - { - "block_id": "p460-b5", - "global_id": 2569, - "bbox": [ - 93.59, - 251.17, - 514.35, - 282.13 - ], - "text": "important market trend. For that reason, it is also called a measuring gap.\n(See Gaps.)", - "type": "text" - }, - { - "block_id": "p460-b6", - "global_id": 2570, - "bbox": [ - 72.0, - 298.7, - 507.52, - 313.16 - ], - "text": "Sentiment indicators: Psychological indicators that attempt to measure the", - "type": "text" - }, - { - "block_id": "p460-b7", - "global_id": 2571, - "bbox": [ - 93.59, - 315.26, - 490.37, - 379.36 - ], - "text": "degree of bullishness or bearishness in a market. These are contrary\nindicators and are used in much the same fashion as overbought or\noversold oscillators. Their greatest value is when they reach upper or\nlower extremes.", - "type": "text" - }, - { - "block_id": "p460-b8", - "global_id": 2572, - "bbox": [ - 72.0, - 395.92, - 494.37, - 410.38 - ], - "text": "Simple average: A moving average that gives equal weight to each day’s", - "type": "text" - }, - { - "block_id": "p460-b9", - "global_id": 2573, - "bbox": [ - 93.59, - 412.48, - 458.85, - 426.89 - ], - "text": "price data. (See Exponential smoothing and Weighted average.)", - "type": "text" - }, - { - "block_id": "p460-b10", - "global_id": 2574, - "bbox": [ - 72.0, - 443.46, - 516.91, - 457.92 - ], - "text": "Stochastics: An overbought-oversold oscillator popularized by George Lane.", - "type": "text" - }, - { - "block_id": "p460-b11", - "global_id": 2575, - "bbox": [ - 93.59, - 460.02, - 523.21, - 573.8 - ], - "text": "A time period of 14 is usually employed in its construction. Stochastics\nuses two lines—%K and its 3 period moving average, %D. These two\nlines fluctuate in a vertical range between 0 and 100. Readings above 80\nare overbought, while readings below 20 are oversold. When the faster\n%K line crosses above the slower %D line and the lines are below 20, a\nbuy signal is given. When the %K crosses below the %D line and the lines\nare over 80, a sell signal is given.", - "type": "text" - }, - { - "block_id": "p460-b12", - "global_id": 2576, - "bbox": [ - 72.0, - 590.37, - 489.92, - 604.83 - ], - "text": "Support: A price, or price zone, beneath the current market price, where", - "type": "text" - }, - { - "block_id": "p460-b13", - "global_id": 2577, - "bbox": [ - 93.59, - 606.94, - 516.5, - 637.9 - ], - "text": "buying power is sufficient to halt a price decline. A previous reaction low\nusually forms a support level.", - "type": "text" - }, - { - "block_id": "p460-b14", - "global_id": 2578, - "bbox": [ - 72.0, - 654.47, - 496.08, - 668.93 - ], - "text": "Symmetrical triangle: A sideways price pattern between two converging", - "type": "text" - }, - { - "block_id": "p460-b15", - "global_id": 2579, - "bbox": [ - 93.59, - 671.03, - 521.94, - 751.69 - ], - "text": "trendlines in which the upper trendline is declining and lower trendline is\nrising. This pattern represents an even balance between buyers and sellers,\nalthough the prior trend is usually resumed. The breakout through either\ntrendline signals the direction of the price trend. (See Ascending and\nDescending triangles.)", - "type": "text" - } - ] - }, - { - "page_num": 461, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p461-b0", - "global_id": 2580, - "bbox": [ - 72.0, - 73.28, - 497.46, - 87.74 - ], - "text": "Technical analysis: The study of market action, usually with price charts,", - "type": "text" - }, - { - "block_id": "p461-b1", - "global_id": 2581, - "bbox": [ - 93.59, - 89.85, - 482.8, - 120.81 - ], - "text": "which includes volume and open interest patterns. Also called chart\nanalysis, market analysis and, more recently, visual analysis.", - "type": "text" - }, - { - "block_id": "p461-b2", - "global_id": 2582, - "bbox": [ - 72.0, - 137.38, - 510.25, - 151.84 - ], - "text": "Trend: Refers to the direction of prices. Rising peaks and troughs constitute", - "type": "text" - }, - { - "block_id": "p461-b3", - "global_id": 2583, - "bbox": [ - 93.59, - 153.94, - 507.9, - 218.03 - ], - "text": "an uptrend; falling peaks and troughs constitute a downtrend. A trading\nrange is characterized by horizontal peaks and troughs. Trends are\ngenerally classified into major (longer than a year), intermediate (one to\nsix months), or minor (less than a month).", - "type": "text" - }, - { - "block_id": "p461-b4", - "global_id": 2584, - "bbox": [ - 72.0, - 234.6, - 472.25, - 249.06 - ], - "text": "Trendlines: Straight lines drawn on a chart below reaction lows in an", - "type": "text" - }, - { - "block_id": "p461-b5", - "global_id": 2585, - "bbox": [ - 93.59, - 251.17, - 519.97, - 298.69 - ], - "text": "uptrend, or above rally peaks in a downtrend, that determine the steepness\nof the current trend. The breaking of a trendline usually signals a trend\nreversal.", - "type": "text" - }, - { - "block_id": "p461-b6", - "global_id": 2586, - "bbox": [ - 72.0, - 315.26, - 459.31, - 329.72 - ], - "text": "Triangles: Sideways price patterns in which prices fluctuate within", - "type": "text" - }, - { - "block_id": "p461-b7", - "global_id": 2587, - "bbox": [ - 93.59, - 331.83, - 503.67, - 362.79 - ], - "text": "converging trendlines. The three types of triangles are the symmetrical,\nthe ascending, and the descending.", - "type": "text" - }, - { - "block_id": "p461-b8", - "global_id": 2588, - "bbox": [ - 72.0, - 379.36, - 500.46, - 393.82 - ], - "text": "Triple top: A price pattern with three prominent peaks, similar to the head", - "type": "text" - }, - { - "block_id": "p461-b9", - "global_id": 2589, - "bbox": [ - 93.59, - 395.92, - 491.18, - 426.89 - ], - "text": "and shoulders top, except that all three peaks occur at about the same\nlevel. The triple bottom is a mirror image of the top.", - "type": "text" - }, - { - "block_id": "p461-b10", - "global_id": 2590, - "bbox": [ - 72.0, - 443.46, - 504.89, - 457.92 - ], - "text": "Up trendline: A straight line drawn upward and to the right below reaction", - "type": "text" - }, - { - "block_id": "p461-b11", - "global_id": 2591, - "bbox": [ - 93.59, - 460.02, - 520.67, - 524.11 - ], - "text": "lows. The longer the up trendline has been in effect and the more times it\nhas been tested, the more significant it becomes. Violation of the trendline\nusually signals that the uptrend may be changing direction. (See Down\ntrendline.)", - "type": "text" - }, - { - "block_id": "p461-b12", - "global_id": 2592, - "bbox": [ - 72.0, - 540.68, - 513.83, - 555.14 - ], - "text": "Visual analysis: A form of analysis that utilizes charts and market indicators", - "type": "text" - }, - { - "block_id": "p461-b13", - "global_id": 2593, - "bbox": [ - 93.59, - 557.24, - 267.78, - 571.64 - ], - "text": "to determine market direction.", - "type": "text" - }, - { - "block_id": "p461-b14", - "global_id": 2594, - "bbox": [ - 72.0, - 588.21, - 505.82, - 602.67 - ], - "text": "Volume: The level of trading activity in a stock, option, or futures contract.", - "type": "text" - }, - { - "block_id": "p461-b15", - "global_id": 2595, - "bbox": [ - 93.59, - 604.78, - 515.95, - 635.74 - ], - "text": "Expanding volume in the direction of the current price trend confirms the\nprice trend. (See On-balance volume.)", - "type": "text" - }, - { - "block_id": "p461-b16", - "global_id": 2596, - "bbox": [ - 72.0, - 652.31, - 493.72, - 666.77 - ], - "text": "Weekly reversal: An upside weekly reversal is present when prices open", - "type": "text" - }, - { - "block_id": "p461-b17", - "global_id": 2597, - "bbox": [ - 93.59, - 668.87, - 522.01, - 716.4 - ], - "text": "lower on Monday and then on Friday close above the previous week’s\nclose. A downside weekly reversal opens the week higher but closes down\nby Friday. (See Key reversal day.)", - "type": "text" - }, - { - "block_id": "p461-b18", - "global_id": 2598, - "bbox": [ - 72.0, - 732.97, - 493.19, - 747.43 - ], - "text": "Weighted average: A moving average that uses a selected time span, but", - "type": "text" - }, - { - "block_id": "p461-b19", - "global_id": 2599, - "bbox": [ - 93.59, - 749.53, - 495.53, - 763.93 - ], - "text": "gives greater weight to more recent price data. (See Moving average.)", - "type": "text" - } - ] - }, - { - "page_num": 462, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p462-b0", - "global_id": 2600, - "bbox": [ - 72.0, - 133.73, - 233.55, - 162.52 - ], - "text": "Bibliography", - "type": "text" - }, - { - "block_id": "p462-b1", - "global_id": 2601, - "bbox": [ - 72.0, - 230.28, - 449.58, - 244.68 - ], - "text": "Achelis, Steven B., Technical Analysis from A to Z, Probus, 1995.", - "type": "text" - }, - { - "block_id": "p462-b2", - "global_id": 2602, - "bbox": [ - 72.0, - 261.25, - 477.9, - 275.65 - ], - "text": "Allen, R.C., How to Build a Fortune in Commodities (Windsor Books,", - "type": "text" - }, - { - "block_id": "p462-b3", - "global_id": 2603, - "bbox": [ - 93.59, - 277.81, - 370.95, - 292.21 - ], - "text": "Brightwaters, NY) (Best Books, Chicago) 1972.", - "type": "text" - }, - { - "block_id": "p462-b4", - "global_id": 2604, - "bbox": [ - 72.0, - 308.78, - 505.65, - 323.18 - ], - "text": "Allen, R.C., How to Use the 4 Day, 9 Day, and 18 Day Moving Averages to", - "type": "text" - }, - { - "block_id": "p462-b5", - "global_id": 2605, - "bbox": [ - 93.59, - 325.34, - 405.51, - 339.75 - ], - "text": "Earn Large Profits in Commodities, Best Books 1974.", - "type": "text" - }, - { - "block_id": "p462-b6", - "global_id": 2606, - "bbox": [ - 72.0, - 356.31, - 465.13, - 370.71 - ], - "text": "Arms, Richard W., The Arms Index (TRIN), Dow Jones-Irwin, 1989.", - "type": "text" - }, - { - "block_id": "p462-b7", - "global_id": 2607, - "bbox": [ - 72.0, - 387.28, - 512.26, - 401.68 - ], - "text": "—–Volume Cycles in the Stock Market: Market Timing Through Equivolume", - "type": "text" - }, - { - "block_id": "p462-b8", - "global_id": 2608, - "bbox": [ - 93.59, - 403.84, - 304.66, - 418.24 - ], - "text": "—Charting, Dow Jones-Irwin, 1983.", - "type": "text" - }, - { - "block_id": "p462-b9", - "global_id": 2609, - "bbox": [ - 72.0, - 434.81, - 514.02, - 449.21 - ], - "text": "Bressert, Walter J., The Power of Oscillator/Cycle Combinations, Bressert &", - "type": "text" - }, - { - "block_id": "p462-b10", - "global_id": 2610, - "bbox": [ - 93.59, - 451.38, - 194.72, - 465.78 - ], - "text": "Associates, 1991.", - "type": "text" - }, - { - "block_id": "p462-b11", - "global_id": 2611, - "bbox": [ - 72.0, - 482.34, - 461.74, - 496.74 - ], - "text": "Burke, Michael L., Three-Point Reversal Method of Point & Figure", - "type": "text" - }, - { - "block_id": "p462-b12", - "global_id": 2612, - "bbox": [ - 93.59, - 498.91, - 369.77, - 513.31 - ], - "text": "Construction and Formations, Chartcraft, 1990.", - "type": "text" - }, - { - "block_id": "p462-b13", - "global_id": 2613, - "bbox": [ - 72.0, - 529.87, - 495.25, - 544.28 - ], - "text": "Colby, Robert W. and Thomas A. Meyers, The Encyclopedia of Technical", - "type": "text" - }, - { - "block_id": "p462-b14", - "global_id": 2614, - "bbox": [ - 93.59, - 546.44, - 344.2, - 560.84 - ], - "text": "Market Indicators, Dow Jones-Irwin, 1988.", - "type": "text" - }, - { - "block_id": "p462-b15", - "global_id": 2615, - "bbox": [ - 72.0, - 577.4, - 507.91, - 591.81 - ], - "text": "deVilliers, Victor, The Point and Figure Method of Anticipating Stock Price", - "type": "text" - }, - { - "block_id": "p462-b16", - "global_id": 2616, - "bbox": [ - 93.59, - 593.97, - 478.7, - 624.94 - ], - "text": "Movements (1933: available from Traders’ Library, P.O. Box 2466,\nEllicott City, MD 20141 [1-800-222-2855]).", - "type": "text" - }, - { - "block_id": "p462-b17", - "global_id": 2617, - "bbox": [ - 72.0, - 641.5, - 497.36, - 655.9 - ], - "text": "Dewey, Edward R. with Og Mandino, Cycles, the Mysterious Forces That", - "type": "text" - }, - { - "block_id": "p462-b18", - "global_id": 2618, - "bbox": [ - 93.59, - 658.07, - 304.25, - 672.47 - ], - "text": "Trigger Events, Manor Books, 1973.", - "type": "text" - }, - { - "block_id": "p462-b19", - "global_id": 2619, - "bbox": [ - 72.0, - 689.03, - 410.36, - 703.44 - ], - "text": "Dorsey, Thomas J., Point & Figure Charting, Wiley, 1995.", - "type": "text" - }, - { - "block_id": "p462-b20", - "global_id": 2620, - "bbox": [ - 72.0, - 720.0, - 505.38, - 734.4 - ], - "text": "Edwards, Robert D. and John Magee, Technical Analysis of Stock Trends, 5", - "type": "text" - }, - { - "block_id": "p462-b21", - "global_id": 2621, - "bbox": [ - 93.59, - 736.43, - 261.07, - 750.97 - ], - "text": "thEdition, John Magee, 1966.", - "type": "text" - } - ] - }, - { - "page_num": 463, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p463-b0", - "global_id": 2622, - "bbox": [ - 72.0, - 73.28, - 442.78, - 87.68 - ], - "text": "Ehlers, John F., MESA and Trading Market Cycles, Wiley, 1992.", - "type": "text" - }, - { - "block_id": "p463-b1", - "global_id": 2623, - "bbox": [ - 72.0, - 104.25, - 396.04, - 118.65 - ], - "text": "Elder, Alexander Dr., Trading for a Living, Wiley, 1993.", - "type": "text" - }, - { - "block_id": "p463-b2", - "global_id": 2624, - "bbox": [ - 72.0, - 135.21, - 309.27, - 149.62 - ], - "text": "—–Study Guide for Trading for a Living.", - "type": "text" - }, - { - "block_id": "p463-b3", - "global_id": 2625, - "bbox": [ - 72.0, - 166.18, - 512.22, - 180.59 - ], - "text": "Freund, John E. and Frank J. Williams, Modem Business Statistics, Prentice-", - "type": "text" - }, - { - "block_id": "p463-b4", - "global_id": 2626, - "bbox": [ - 93.59, - 182.75, - 121.95, - 197.15 - ], - "text": "Hall.", - "type": "text" - }, - { - "block_id": "p463-b5", - "global_id": 2627, - "bbox": [ - 72.0, - 213.71, - 507.64, - 228.12 - ], - "text": "Frost, Alfred J. and Robert R. Prechter, Elliott Wave Principle, Key to Stock", - "type": "text" - }, - { - "block_id": "p463-b6", - "global_id": 2628, - "bbox": [ - 93.59, - 230.28, - 347.88, - 244.68 - ], - "text": "Market Profits, New Classics Library, 1978.", - "type": "text" - }, - { - "block_id": "p463-b7", - "global_id": 2629, - "bbox": [ - 72.0, - 261.25, - 514.53, - 275.65 - ], - "text": "Gann, W.D., How to Make Profits in Commodities, revised edition, Lambert-", - "type": "text" - }, - { - "block_id": "p463-b8", - "global_id": 2630, - "bbox": [ - 93.59, - 277.81, - 366.19, - 292.21 - ], - "text": "Gann Publishing, orig. 1942, reprinted in 1976.", - "type": "text" - }, - { - "block_id": "p463-b9", - "global_id": 2631, - "bbox": [ - 72.0, - 308.78, - 521.94, - 323.18 - ], - "text": "Granville, Joseph, Granville’s New Key to Stock Market Profits, Prentice Hall,", - "type": "text" - }, - { - "block_id": "p463-b10", - "global_id": 2632, - "bbox": [ - 93.59, - 325.35, - 258.01, - 339.75 - ], - "text": "Englewood Cliffs, NJ, 1963.", - "type": "text" - }, - { - "block_id": "p463-b11", - "global_id": 2633, - "bbox": [ - 72.0, - 356.31, - 484.2, - 370.71 - ], - "text": "Hadady, R. Earl, Contrary Opinion: How to Use It for Profit in Trading", - "type": "text" - }, - { - "block_id": "p463-b12", - "global_id": 2634, - "bbox": [ - 93.59, - 372.87, - 374.03, - 387.28 - ], - "text": "Commodity Futures, Hadady Publications, 1983.", - "type": "text" - }, - { - "block_id": "p463-b13", - "global_id": 2635, - "bbox": [ - 72.0, - 403.84, - 463.9, - 418.24 - ], - "text": "Hamilton, William Peter, The Stock Market Barometer. Robert Rhea", - "type": "text" - }, - { - "block_id": "p463-b14", - "global_id": 2636, - "bbox": [ - 93.59, - 420.41, - 470.19, - 451.37 - ], - "text": "developed the theory even further in the Dow Theory (New York:\nBarron’s), published in 1932.", - "type": "text" - }, - { - "block_id": "p463-b15", - "global_id": 2637, - "bbox": [ - 72.0, - 467.94, - 495.49, - 482.34 - ], - "text": "Hurst, J.M., The Profit Magic of Stock Transaction Timing, Prentice-Hall,", - "type": "text" - }, - { - "block_id": "p463-b16", - "global_id": 2638, - "bbox": [ - 93.59, - 484.51, - 125.98, - 498.9 - ], - "text": "1970.", - "type": "text" - }, - { - "block_id": "p463-b17", - "global_id": 2639, - "bbox": [ - 72.0, - 515.47, - 390.8, - 529.87 - ], - "text": "Kaufman, Perry, Smarter Trading, McGraw-Hill, 1995.", - "type": "text" - }, - { - "block_id": "p463-b18", - "global_id": 2640, - "bbox": [ - 72.0, - 546.44, - 513.18, - 560.84 - ], - "text": "Kondratieff, Nikolai, translated by Guy Daniels, The Long Wave Cycle, New", - "type": "text" - }, - { - "block_id": "p463-b19", - "global_id": 2641, - "bbox": [ - 93.59, - 563.01, - 521.76, - 593.97 - ], - "text": "York: Richardson and Snyder, 1984. (Two other books on the subject are\nThe K Wave by David Knox Barker and The Great Cycle by Dick Stoken.)", - "type": "text" - }, - { - "block_id": "p463-b20", - "global_id": 2642, - "bbox": [ - 72.0, - 610.53, - 514.15, - 624.94 - ], - "text": "LeBeau, Charles and David W. Lucas, Technical Traders Guide to Computer", - "type": "text" - }, - { - "block_id": "p463-b21", - "global_id": 2643, - "bbox": [ - 93.59, - 627.1, - 431.58, - 641.5 - ], - "text": "Analysis of the Futures Market, Business One Irwin, 1992.", - "type": "text" - }, - { - "block_id": "p463-b22", - "global_id": 2644, - "bbox": [ - 72.0, - 658.07, - 497.93, - 672.47 - ], - "text": "Lukac, Louis, B. Wade Brorsen, and Scott Irwin, A Comparison of Twelve", - "type": "text" - }, - { - "block_id": "p463-b23", - "global_id": 2645, - "bbox": [ - 93.59, - 674.63, - 464.23, - 689.03 - ], - "text": "Technical Trading Systems, Traders Press, Greenville, SC, 1990.", - "type": "text" - }, - { - "block_id": "p463-b24", - "global_id": 2646, - "bbox": [ - 72.0, - 705.6, - 422.57, - 720.0 - ], - "text": "McMillan, Lawrence G., McMillan on Options, Wiley, 1996.", - "type": "text" - }, - { - "block_id": "p463-b25", - "global_id": 2647, - "bbox": [ - 72.0, - 736.56, - 493.81, - 750.97 - ], - "text": "Moore, Geoffrey H., Leading Indicators for the 1990s, Dow Jones-Irwin,", - "type": "text" - }, - { - "block_id": "p463-b26", - "global_id": 2648, - "bbox": [ - 93.59, - 753.13, - 125.98, - 767.53 - ], - "text": "1990.", - "type": "text" - } - ] - }, - { - "page_num": 464, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p464-b0", - "global_id": 2649, - "bbox": [ - 72.0, - 73.28, - 517.62, - 87.68 - ], - "text": "Morris, Gregory L., Candlestick Charting Explained, Dow Jones-Irwin, 1995", - "type": "text" - }, - { - "block_id": "p464-b1", - "global_id": 2650, - "bbox": [ - 93.59, - 89.85, - 369.34, - 104.25 - ], - "text": "(Originally published as CandlePower in 1992).", - "type": "text" - }, - { - "block_id": "p464-b2", - "global_id": 2651, - "bbox": [ - 72.0, - 120.81, - 431.55, - 135.21 - ], - "text": "Murphy, John J., Intermarket Technical Analysis, Wiley, 1991.", - "type": "text" - }, - { - "block_id": "p464-b3", - "global_id": 2652, - "bbox": [ - 72.0, - 151.78, - 452.6, - 166.18 - ], - "text": "—–The Visual Investor: How to Spot Market Trends, Wiley, 1996.", - "type": "text" - }, - { - "block_id": "p464-b4", - "global_id": 2653, - "bbox": [ - 72.0, - 182.75, - 519.41, - 197.15 - ], - "text": "Neely, Christopher, J., Technical Analysis in the Foreign Exchange Market: A", - "type": "text" - }, - { - "block_id": "p464-b5", - "global_id": 2654, - "bbox": [ - 93.59, - 199.31, - 442.87, - 230.28 - ], - "text": "Layman’s Guide, Federal Reserve Bank of St. Louis Review,\nSeptember/October 1997.", - "type": "text" - }, - { - "block_id": "p464-b6", - "global_id": 2655, - "bbox": [ - 72.0, - 246.84, - 480.03, - 261.25 - ], - "text": "Neill, Humphrey B., The Art of Contrary Thinking, Caldwell, OH: The", - "type": "text" - }, - { - "block_id": "p464-b7", - "global_id": 2656, - "bbox": [ - 93.59, - 263.41, - 223.09, - 277.81 - ], - "text": "Caxton Printers, 1954.", - "type": "text" - }, - { - "block_id": "p464-b8", - "global_id": 2657, - "bbox": [ - 72.0, - 294.37, - 490.04, - 308.78 - ], - "text": "Nelson, S.A., ABC of Stock Market Speculation, First published in 1903,", - "type": "text" - }, - { - "block_id": "p464-b9", - "global_id": 2658, - "bbox": [ - 93.59, - 310.94, - 348.19, - 325.34 - ], - "text": "Reprinted in 1978 by Frasier Publishing Co.", - "type": "text" - }, - { - "block_id": "p464-b10", - "global_id": 2659, - "bbox": [ - 72.0, - 341.91, - 494.98, - 356.31 - ], - "text": "Nison, Steve, Japanese Candlestick Charting Techniques, NY Institute of", - "type": "text" - }, - { - "block_id": "p464-b11", - "global_id": 2660, - "bbox": [ - 93.59, - 358.47, - 178.72, - 372.87 - ], - "text": "Finance, 1991.", - "type": "text" - }, - { - "block_id": "p464-b12", - "global_id": 2661, - "bbox": [ - 72.0, - 389.44, - 294.3, - 403.84 - ], - "text": "—–Beyond Candlesticks, Wiley, 1994.", - "type": "text" - }, - { - "block_id": "p464-b13", - "global_id": 2662, - "bbox": [ - 72.0, - 420.41, - 502.1, - 434.81 - ], - "text": "Prechter, Jr., Robert R., The Major Works of R. N. Elliott, Gainesville, GA:", - "type": "text" - }, - { - "block_id": "p464-b14", - "global_id": 2663, - "bbox": [ - 93.59, - 436.97, - 256.91, - 451.37 - ], - "text": "New Classics Library, 1980.", - "type": "text" - }, - { - "block_id": "p464-b15", - "global_id": 2664, - "bbox": [ - 72.0, - 467.94, - 513.44, - 482.34 - ], - "text": "Pring, Martin J., Technical Analysis Explained, Third Edition, McGraw-Hill,", - "type": "text" - }, - { - "block_id": "p464-b16", - "global_id": 2665, - "bbox": [ - 93.59, - 484.51, - 125.98, - 498.9 - ], - "text": "1991.", - "type": "text" - }, - { - "block_id": "p464-b17", - "global_id": 2666, - "bbox": [ - 72.0, - 515.47, - 517.59, - 529.87 - ], - "text": "—–Pring on Market Momentum, Intl. Institute for Economic Research, 1993.", - "type": "text" - }, - { - "block_id": "p464-b18", - "global_id": 2667, - "bbox": [ - 72.0, - 546.44, - 454.57, - 560.84 - ], - "text": "Ruggiero, Murray A., Cybernetic Trading Strategies, Wiley, 1997.", - "type": "text" - }, - { - "block_id": "p464-b19", - "global_id": 2668, - "bbox": [ - 72.0, - 577.4, - 500.1, - 591.81 - ], - "text": "Schwager, Jack D., Schwager on Futures Technical Analysis, Wiley, 1996.", - "type": "text" - }, - { - "block_id": "p464-b20", - "global_id": 2669, - "bbox": [ - 72.0, - 608.37, - 471.31, - 622.78 - ], - "text": "Steidlmayer, Peter J., 141 West Jackson, Steidlmayer Software, 1996.", - "type": "text" - }, - { - "block_id": "p464-b21", - "global_id": 2670, - "bbox": [ - 72.0, - 639.34, - 483.61, - 653.74 - ], - "text": "—–Steidlmayer on Markets, A New Approach to Trading, Wiley, 1989.", - "type": "text" - }, - { - "block_id": "p464-b22", - "global_id": 2671, - "bbox": [ - 72.0, - 670.31, - 499.37, - 684.71 - ], - "text": "Teweles, Richard J., Charles V. Harlow, Herbert L. Stone, The Commodity", - "type": "text" - }, - { - "block_id": "p464-b23", - "global_id": 2672, - "bbox": [ - 93.59, - 686.87, - 264.89, - 701.28 - ], - "text": "Futures Game, McGraw-Hill.", - "type": "text" - }, - { - "block_id": "p464-b24", - "global_id": 2673, - "bbox": [ - 72.0, - 717.84, - 487.32, - 732.24 - ], - "text": "Wheelan, Alexander, Study Helps in Point & Figure Technique, Morgan", - "type": "text" - }, - { - "block_id": "p464-b25", - "global_id": 2674, - "bbox": [ - 93.59, - 734.41, - 442.4, - 748.81 - ], - "text": "Rogers & Roberts, 1954, reprinted in 1990 by Traders Press.", - "type": "text" - } - ] - }, - { - "page_num": 465, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p465-b0", - "global_id": 2675, - "bbox": [ - 72.0, - 73.28, - 506.56, - 87.68 - ], - "text": "Wilder J. Welles, New Concepts in Technical Trading Systems, Greensboro,", - "type": "text" - }, - { - "block_id": "p465-b1", - "global_id": 2676, - "bbox": [ - 93.59, - 89.85, - 250.93, - 104.25 - ], - "text": "NC: Trend Research, 1978.", - "type": "text" - }, - { - "block_id": "p465-b2", - "global_id": 2677, - "bbox": [ - 72.0, - 120.81, - 490.73, - 135.21 - ], - "text": "Wilkinson, Chris, Technically Speaking: Tips and Strategies from 16 Top", - "type": "text" - }, - { - "block_id": "p465-b3", - "global_id": 2678, - "bbox": [ - 93.59, - 137.38, - 266.53, - 151.78 - ], - "text": "Analysts, Traders Press, 1997.", - "type": "text" - } - ] - }, - { - "page_num": 466, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p466-b0", - "global_id": 2679, - "bbox": [ - 72.0, - 133.73, - 304.05, - 162.52 - ], - "text": "Selected Resources", - "type": "text" - } - ] - }, - { - "page_num": 467, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p467-b0", - "global_id": 2680, - "bbox": [ - 72.0, - 135.23, - 350.76, - 155.39 - ], - "text": "FINANCIAL BOOK DEALERS", - "type": "text" - }, - { - "block_id": "p467-b1", - "global_id": 2681, - "bbox": [ - 72.0, - 165.47, - 519.3, - 179.87 - ], - "text": "Fraser Publishing Company, P.O. Box 494, Burlington, VT 05402, (800) 253-", - "type": "text" - }, - { - "block_id": "p467-b2", - "global_id": 2682, - "bbox": [ - 93.59, - 182.03, - 122.38, - 196.43 - ], - "text": "0900", - "type": "text" - }, - { - "block_id": "p467-b3", - "global_id": 2683, - "bbox": [ - 72.0, - 213.0, - 484.61, - 227.4 - ], - "text": "Traders Library, PO Box 2466, Ellicott City MD 21041 (800) 272-2855", - "type": "text" - }, - { - "block_id": "p467-b4", - "global_id": 2684, - "bbox": [ - 72.0, - 243.97, - 460.79, - 258.36 - ], - "text": "Traders Press, PO Box 6206, Greenville, SC 29606 (800) 927-8222", - "type": "text" - }, - { - "block_id": "p467-b5", - "global_id": 2685, - "bbox": [ - 93.59, - 260.53, - 262.88, - 274.93 - ], - "text": "TECHNICAL MAGAZINES", - "type": "text" - }, - { - "block_id": "p467-b6", - "global_id": 2686, - "bbox": [ - 72.0, - 291.5, - 495.43, - 305.9 - ], - "text": "Futures Magazine, 250 S. Wacker Drive, #1150, Chicago, IL 60606 (312)", - "type": "text" - }, - { - "block_id": "p467-b7", - "global_id": 2687, - "bbox": [ - 93.59, - 308.06, - 148.76, - 322.46 - ], - "text": "977-0999", - "type": "text" - }, - { - "block_id": "p467-b8", - "global_id": 2688, - "bbox": [ - 72.0, - 339.03, - 515.0, - 353.43 - ], - "text": "Technical Analysis of Stocks & Commodities, 4757 California Avenue S.W.,", - "type": "text" - }, - { - "block_id": "p467-b9", - "global_id": 2689, - "bbox": [ - 93.59, - 355.59, - 294.11, - 369.99 - ], - "text": "Seattle, WA 98116 (800) 832-4642", - "type": "text" - }, - { - "block_id": "p467-b10", - "global_id": 2690, - "bbox": [ - 72.0, - 413.94, - 311.02, - 434.1 - ], - "text": "TECHNICAL SOFTWARE", - "type": "text" - }, - { - "block_id": "p467-b11", - "global_id": 2691, - "bbox": [ - 72.0, - 444.18, - 508.66, - 458.57 - ], - "text": "Metastock, Equis International, 3950 S. 700 East, Suite 100, Salt Lake City,", - "type": "text" - }, - { - "block_id": "p467-b12", - "global_id": 2692, - "bbox": [ - 93.59, - 460.74, - 245.64, - 475.14 - ], - "text": "UT 84107 (800) 882-3040", - "type": "text" - }, - { - "block_id": "p467-b13", - "global_id": 2693, - "bbox": [ - 72.0, - 491.71, - 449.51, - 506.11 - ], - "text": "North Systems, Inc., CandlePower, S. Salem, OR (503) 364-3829", - "type": "text" - }, - { - "block_id": "p467-b14", - "global_id": 2694, - "bbox": [ - 72.0, - 522.68, - 500.24, - 537.07 - ], - "text": "SuperCharts and TradeStation, Omega Research, 8700 Flager Street, Suite", - "type": "text" - }, - { - "block_id": "p467-b15", - "global_id": 2695, - "bbox": [ - 93.59, - 539.24, - 277.73, - 553.64 - ], - "text": "250, Miami, FL (305) 551-9991", - "type": "text" - }, - { - "block_id": "p467-b16", - "global_id": 2696, - "bbox": [ - 72.0, - 596.87, - 221.44, - 617.03 - ], - "text": "MARKET DATA", - "type": "text" - }, - { - "block_id": "p467-b17", - "global_id": 2697, - "bbox": [ - 72.0, - 627.1, - 520.3, - 641.5 - ], - "text": "Dial Data, Track Data Corp., 56 Pine Street, New York, NY 10005 (800) 275-", - "type": "text" - }, - { - "block_id": "p467-b18", - "global_id": 2698, - "bbox": [ - 93.59, - 643.67, - 122.38, - 658.06 - ], - "text": "5544", - "type": "text" - }, - { - "block_id": "p467-b19", - "global_id": 2699, - "bbox": [ - 72.0, - 674.63, - 511.44, - 689.03 - ], - "text": "Telescan, 5959 Corporate Drive, Suite 2000, Houston, TX 77036 (800) 324-", - "type": "text" - }, - { - "block_id": "p467-b20", - "global_id": 2700, - "bbox": [ - 93.59, - 691.2, - 122.38, - 705.6 - ], - "text": "8246", - "type": "text" - }, - { - "block_id": "p467-b21", - "global_id": 2701, - "bbox": [ - 72.0, - 749.55, - 248.8, - 769.71 - ], - "text": "CHART SERVICES", - "type": "text" - } - ] - }, - { - "page_num": 468, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p468-b0", - "global_id": 2702, - "bbox": [ - 72.0, - 73.28, - 484.69, - 87.68 - ], - "text": "Chartcraft, 30 Church Street, New Rochelle, NY 10801 (914) 632-0422", - "type": "text" - }, - { - "block_id": "p468-b1", - "global_id": 2703, - "bbox": [ - 72.0, - 104.25, - 485.52, - 118.65 - ], - "text": "Futures Charts, Commodity Trend Service, PO Box 32309, Palm Beach", - "type": "text" - }, - { - "block_id": "p468-b2", - "global_id": 2704, - "bbox": [ - 93.59, - 120.82, - 298.12, - 135.21 - ], - "text": "Gardens, FL 33420 (800) 331-1069", - "type": "text" - }, - { - "block_id": "p468-b3", - "global_id": 2705, - "bbox": [ - 72.0, - 151.78, - 475.06, - 166.18 - ], - "text": "SRC Stock Charts, Securities Research Company, 101 Prescott Street,", - "type": "text" - }, - { - "block_id": "p468-b4", - "global_id": 2706, - "bbox": [ - 93.59, - 168.35, - 344.25, - 182.75 - ], - "text": "Wellesley Hills, MA 02181 (781) 235-0900", - "type": "text" - }, - { - "block_id": "p468-b5", - "global_id": 2707, - "bbox": [ - 72.0, - 199.31, - 473.24, - 213.71 - ], - "text": "The Business Picture, Gilman Research Corporation, PO Box, 20567,", - "type": "text" - }, - { - "block_id": "p468-b6", - "global_id": 2708, - "bbox": [ - 93.59, - 215.88, - 301.86, - 230.28 - ], - "text": "Oakland, CA 94620 (510) 655-3103", - "type": "text" - }, - { - "block_id": "p468-b7", - "global_id": 2709, - "bbox": [ - 72.0, - 274.23, - 369.98, - 294.39 - ], - "text": "TECHNICAL ORGANIZATIONS", - "type": "text" - }, - { - "block_id": "p468-b8", - "global_id": 2710, - "bbox": [ - 72.0, - 304.46, - 503.41, - 318.86 - ], - "text": "International Federation of Technical Analysts (IFTA), PO Box 1347, New", - "type": "text" - }, - { - "block_id": "p468-b9", - "global_id": 2711, - "bbox": [ - 93.59, - 321.02, - 188.77, - 335.42 - ], - "text": "York, NY 10009", - "type": "text" - }, - { - "block_id": "p468-b10", - "global_id": 2712, - "bbox": [ - 72.0, - 351.99, - 522.35, - 366.39 - ], - "text": "Market Technicians Association (MTA), One World Trade Center, Suite 4447,", - "type": "text" - }, - { - "block_id": "p468-b11", - "global_id": 2713, - "bbox": [ - 93.59, - 368.56, - 313.08, - 382.96 - ], - "text": "New York, NY 10048 (212) 912-0995", - "type": "text" - } - ] - }, - { - "page_num": 469, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p469-b0", - "global_id": 2714, - "bbox": [ - 72.0, - 133.73, - 164.75, - 162.52 - ], - "text": "INDEX", - "type": "text" - }, - { - "block_id": "p469-b1", - "global_id": 2715, - "bbox": [ - 72.0, - 230.28, - 511.18, - 294.37 - ], - "text": "The page numbers in this index refer to the printed version of this book. To\nfind the corresponding locations in the text of this digital version, please use\nthe “search” function on your e-reader. Note that not all terms may be\nsearchable.", - "type": "text" - }, - { - "block_id": "p469-b2", - "global_id": 2716, - "bbox": [ - 72.0, - 310.94, - 324.56, - 408.16 - ], - "text": "Abandoned Baby candle pattern, 312\nABC of Stock Speculation, The (Nelson), 24\nAcampora, Ralph, 457\nAdaptive moving average (AMA), 222\nAdvance Block candle pattern, 315\nAdvance-decline (AD) line, 436", - "type": "text" - }, - { - "block_id": "p469-b3", - "global_id": 2717, - "bbox": [ - 72.0, - 410.33, - 301.37, - 474.42 - ], - "text": "AD divergence, 437\ndaily vs. weekly AD lines, 437\nvariations in, 437-438\nAdvanced technical indicators, 463-473", - "type": "text" - }, - { - "block_id": "p469-b4", - "global_id": 2718, - "bbox": [ - 72.0, - 476.58, - 292.73, - 640.06 - ], - "text": "Demand Index (DI), 463-466, 473\nHerrick Payoff Index (HPI), 466-468\nKeltner channels, 470-472\nstarc bands, 469-470\nAllen, R.C., 204\nAlpha cycles, 359\nAnalysis vs. timing, 6-7\nAppel, Gerald, 252\nArithmetic scale, 39-40\nArms Index (TRIN), 444, 445", - "type": "text" - }, - { - "block_id": "p469-b5", - "global_id": 2719, - "bbox": [ - 72.0, - 642.22, - 322.63, - 756.01 - ], - "text": "Open Arms, 446\nsmoothing, 445-446\nTICK vs., 444\nArms, Richard, 444, 448\nArt charting, 11\nArt of Contrary Thinking, The (Neill), 258\nAscending triangle, 130, 131, 136-138, 331", - "type": "text" - } - ] - }, - { - "page_num": 470, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p470-b0", - "global_id": 2720, - "bbox": [ - 72.0, - 73.28, - 253.85, - 170.5 - ], - "text": "as bottoming pattern, 138\nbullish breakout, 136-137\nmeasuring technique, 137-138\nvolume pattern, 140\nAsset allocation, 409-410\nAverage, True Range, 469", - "type": "text" - }, - { - "block_id": "p470-b1", - "global_id": 2721, - "bbox": [ - 72.0, - 187.07, - 217.31, - 218.03 - ], - "text": "Barker, David Knox, 359\nBar charts, 35, 40-46", - "type": "text" - }, - { - "block_id": "p470-b2", - "global_id": 2722, - "bbox": [ - 72.0, - 220.2, - 339.36, - 350.55 - ], - "text": "compared to point and figure charts, 266-270\nfutures open interest, 35, 42-44\nvolume, 35, 41-42\nBehavioral Finance, use of term, 21, 459\nBelt Hold candle pattern, 310\nBeta cycles, 359\nBlowoffs, 175\nBollinger Bands, 209-211, 221", - "type": "text" - }, - { - "block_id": "p470-b3", - "global_id": 2723, - "bbox": [ - 72.0, - 352.71, - 196.45, - 383.68 - ], - "text": "using as targets, 210\nBollinger Bands", - "type": "text" - }, - { - "block_id": "p470-b4", - "global_id": 2724, - "bbox": [ - 72.0, - 385.84, - 290.61, - 615.57 - ], - "text": "and volatility, 211\nBollinger, John, 209\nBolton, A. Hamilton, 319\nBottom failure swings, 242-243\nBottom reversal day, 91, 92\nBreakaway candle pattern, 313\nBreakaway gaps, 94-95\nBreakouts, tactics on, 400-401\nBressert, Walt, 359, 374, 375\nBroadening formation, 130, 140-141\nBrooks, John, 457\nBullish speedline, constructing, 88-89\nBull trap, 122\nBuy-and-hold strategy:", - "type": "text" - }, - { - "block_id": "p470-b5", - "global_id": 2725, - "bbox": [ - 72.0, - 617.74, - 251.77, - 681.83 - ], - "text": "and futures, 7\nand Random Walk Theory, 16\nBuy limit order, 403-404\nBuy stop order, 404", - "type": "text" - }, - { - "block_id": "p470-b6", - "global_id": 2726, - "bbox": [ - 72.0, - 698.4, - 261.43, - 729.36 - ], - "text": "Call open interest, 177\nCandle pattern analysis, 301-306", - "type": "text" - }, - { - "block_id": "p470-b7", - "global_id": 2727, - "bbox": [ - 79.2, - 731.53, - 296.59, - 762.49 - ], - "text": "computerized, 306\ncontinuation candle patterns, 304-305", - "type": "text" - } - ] - }, - { - "page_num": 471, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p471-b0", - "global_id": 2728, - "bbox": [ - 72.0, - 73.28, - 329.0, - 120.81 - ], - "text": "reversal candle patterns, 301-304\nCandlePower charting, 448-449\nCandlestick charts, 37-39, 297-299, 309-317", - "type": "text" - }, - { - "block_id": "p471-b1", - "global_id": 2729, - "bbox": [ - 72.0, - 122.97, - 258.6, - 153.94 - ], - "text": "See also Japanese candlesticks\nChannel line (return line), 80-85", - "type": "text" - }, - { - "block_id": "p471-b2", - "global_id": 2730, - "bbox": [ - 72.0, - 156.1, - 235.45, - 187.07 - ], - "text": "measuring implications, 85\nChart construction, 35-47", - "type": "text" - }, - { - "block_id": "p471-b3", - "global_id": 2731, - "bbox": [ - 79.2, - 189.23, - 300.55, - 236.76 - ], - "text": "arithmetic vs. logarithmic scale, 39-40\ncandlestick charts, 37-39\nof daily bar charts, 36, 40-41", - "type": "text" - }, - { - "block_id": "p471-b4", - "global_id": 2732, - "bbox": [ - 72.0, - 238.92, - 454.78, - 418.96 - ], - "text": "futures open interest, 35, 42-44\nvolume, 35, 41-42\nintraday chart, 35\nline charts, 36-37\npoint and figure charts, 37, 38, 278-282\ntypes of charts available, 36-37\nweekly and monthly charts, 35, 45-46\nChart patterns, 185\nChartcraft Method of Point and Figure Trading, The (Cohen), 277\nChartered market technician (CMT), 456-457\nCharting, 9, 10-12", - "type": "text" - }, - { - "block_id": "p471-b5", - "global_id": 2733, - "bbox": [ - 72.0, - 421.13, - 356.02, - 568.04 - ], - "text": "purpose of, 3\nsubjectivity of, 11, 16\nCharting software, 378-379\nChartist, 10-12\nClosing prices, 30-31\nCohen, A.W., 277\nCoil, See Symmetrical triangle\nCollins, Charles J., 319\nCommitments of Traders (COT) Report, 175-176", - "type": "text" - }, - { - "block_id": "p471-b6", - "global_id": 2734, - "bbox": [ - 72.0, - 570.21, - 399.21, - 717.12 - ], - "text": "and large commercial hedgers, 176\nCommodities Futures Trading Commission (CFTC), 175\nCommodity Channel Index (CCI), 237-239, 374\nCommodity market analysis, 15\nCommodity markets, chart of, 10\nCommodity Research Bureau Futures, 15\nCommodity Systems, Inc., 184\nCommodity Trend Service, 177\nComplex head and shoulders patterns, 113-115", - "type": "text" - }, - { - "block_id": "p471-b7", - "global_id": 2735, - "bbox": [ - 72.0, - 719.28, - 144.2, - 750.25 - ], - "text": "tactics, 113\nComputers:", - "type": "text" - }, - { - "block_id": "p471-b8", - "global_id": 2736, - "bbox": [ - 79.2, - 752.41, - 234.65, - 766.81 - ], - "text": "charting software, 378-379", - "type": "text" - } - ] - }, - { - "page_num": 472, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p472-b0", - "global_id": 2737, - "bbox": [ - 79.2, - 73.28, - 488.57, - 153.94 - ], - "text": "Directional Movement System (Welles Wilder), 378, 380, 384-387, 390\nand ADX, 384-387\nParabolic System (Welles Wilder), 378, 380, 381-384, 390\nsystem trading pros/cons, 387-389\ntools/indicators, 380", - "type": "text" - }, - { - "block_id": "p472-b1", - "global_id": 2738, - "bbox": [ - 72.0, - 156.1, - 438.11, - 369.27 - ], - "text": "using, 380\nTradeStation (Omega Research), 389-390\nand trading systems, 377-391\nConcealing Baby Swallow candle pattern, 314\nConcentration, diversification vs., 396-397\nConfirmation, 155-156\nCongestion area, 147-150, 274\nConsensus National Commodity Futures Weekly, 258\nConstant Forward Contracts vs. Continuous Contracts, 508-510\nContinuation candle patterns, 304-305\nContinuation charts for futures, construction of, 182-183\nContinuation head and shoulders, 153-155\nContinuation patterns, 100-101, 129-156", - "type": "text" - }, - { - "block_id": "p472-b2", - "global_id": 2739, - "bbox": [ - 72.0, - 371.44, - 320.21, - 452.09 - ], - "text": "confirmation, 155-156\ncontinuation head and shoulders, 153-155\ndivergence, 155-156\ntriangles, 130-147 See also Triangles\nContinuous futures contracts, 505-510", - "type": "text" - }, - { - "block_id": "p472-b3", - "global_id": 2740, - "bbox": [ - 79.2, - 454.26, - 259.47, - 468.66 - ], - "text": "Continuous Contracts, 507-510", - "type": "text" - }, - { - "block_id": "p472-b4", - "global_id": 2741, - "bbox": [ - 72.0, - 470.82, - 331.0, - 568.04 - ], - "text": "Constant Forward Contracts vs., 508-510\nGann Contract, 507\nNearest Contract, 506\nNext Contract, 506-507\nContract details, futures markets, 12\nContrary Opinion, 226, 257-261", - "type": "text" - }, - { - "block_id": "p472-b5", - "global_id": 2742, - "bbox": [ - 72.0, - 570.21, - 361.78, - 683.99 - ], - "text": "combining with other technical tools, 261\ninterpreting bullish consensus numbers, 258, 260\nmarket’s reaction to fundamental news, 260-261\nopen interest (futures), importance of, 260\nand remaining buying/selling power, 259\nand strong vs. weak hands, 259\nCorrective waves, 320-323, 324-331", - "type": "text" - }, - { - "block_id": "p472-b6", - "global_id": 2743, - "bbox": [ - 72.0, - 686.16, - 272.23, - 766.81 - ], - "text": "flats, 326-329\ntriangles, 329-331\nzig-zags, 324-326\nCRB Futures Price Index, 423-424\nCrests, 348-351", - "type": "text" - } - ] - }, - { - "page_num": 473, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p473-b0", - "global_id": 2744, - "bbox": [ - 72.0, - 73.28, - 340.97, - 104.25 - ], - "text": "Cybernetic Trading Strategies (Ruggiero), 428\nCycles:", - "type": "text" - }, - { - "block_id": "p473-b1", - "global_id": 2745, - "bbox": [ - 72.0, - 106.41, - 507.07, - 153.94 - ], - "text": "and 4 week rule, 218-219\nand moving averages, 212\nCycles: The Mysterious Forces That Trigger Events (Dewey and Mandino),", - "type": "text" - }, - { - "block_id": "p473-b2", - "global_id": 2746, - "bbox": [ - 72.0, - 156.1, - 176.32, - 187.07 - ], - "text": "344\nCycle Trader, 375", - "type": "text" - }, - { - "block_id": "p473-b3", - "global_id": 2747, - "bbox": [ - 72.0, - 203.64, - 255.05, - 218.03 - ], - "text": "Daily bar charts, 36, 40-41, 181", - "type": "text" - }, - { - "block_id": "p473-b4", - "global_id": 2748, - "bbox": [ - 72.0, - 220.2, - 320.05, - 367.11 - ], - "text": "horizontal axis, 41-42\nopen interest, 35, 42-44\nvertical axis, 41-42\nvolume, 35, 41-42\nDark Cloud Cover candle pattern, 302, 311\nDay trading, 9\nDeliberation candle pattern, 314\nDemand Index (DI), 167, 463-466, 473\nDescending triangle, 130, 138-140, 331", - "type": "text" - }, - { - "block_id": "p473-b5", - "global_id": 2749, - "bbox": [ - 72.0, - 369.28, - 481.37, - 483.06 - ], - "text": "as a top, 138\nvolume pattern, 140\nDescriptive statistics, 18\ndeVilliers, Victor, 265\nDewey, Edward R., 344-348\nDial Data Service, 505\nDirectional Movement System (Welles Wilder), 378, 380, 384-387, 390", - "type": "text" - }, - { - "block_id": "p473-b6", - "global_id": 2750, - "bbox": [ - 72.0, - 485.23, - 376.49, - 665.27 - ], - "text": "and ADX, 384-387\nDivergence, 27, 155-156, 227\nDiversification vs. concentration, 396-397\nDobson, Edward D., 342\nDoji candlesticks, 300-301\nDoji Star candle pattern, 311, 312\nDominant cycles, 358-360\nDonchian, Richard, 215-216, 362\nDorsey, Thomas, 292\nDouble crossover method, 203-204\nDouble tops and bottoms, 57, 100, 117-121, 122-124", - "type": "text" - }, - { - "block_id": "p473-b7", - "global_id": 2751, - "bbox": [ - 72.0, - 667.43, - 401.51, - 764.65 - ], - "text": "measuring technique, 120-121\nDow, Charles, 23-24, 265, 460\nDow Jones & Company, 23\nDow Jones Industrial Average, 14, 33, 320, 422, 449-451\nDow Jones Transportation Average, 33\nDow Jones Utility Index, 33", - "type": "text" - } - ] - }, - { - "page_num": 474, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p474-b0", - "global_id": 2752, - "bbox": [ - 72.0, - 73.28, - 362.53, - 137.37 - ], - "text": "Downside Gap Three Methods candle pattern, 316\nDownside Tasuki Gap candle pattern, 316\nDowntrend, 50-52\nDow Theory, 23-33, 319, 452", - "type": "text" - }, - { - "block_id": "p474-b1", - "global_id": 2753, - "bbox": [ - 79.2, - 139.54, - 245.84, - 170.5 - ], - "text": "applied to futures trading, 32\nbasic tenets of, 24-30", - "type": "text" - }, - { - "block_id": "p474-b2", - "global_id": 2754, - "bbox": [ - 72.0, - 172.67, - 362.25, - 369.27 - ], - "text": "averages discount everything, 24-25\naverages must confirm each other, 27\nmajor trends have three phases, 26-27\nmarket has three trends, 25-26\ntrend is in effect until it signals reversal, 28-30\nvolume must confirm trend, 27\nclosing prices, 30-31\ncriticisms of, 31-32\nlines, 31\nstocks as economic indicators, 32\nDragonfly Doji, 301\nDunn & Hargitt’s Financial Services, 215", - "type": "text" - }, - { - "block_id": "p474-b3", - "global_id": 2755, - "bbox": [ - 72.0, - 385.84, - 423.81, - 565.88 - ], - "text": "Easy Language (Omega), 390, 498-500\nEconomic forecasting, 10\nEfficient market hypothesis, 19-21, 459\nEhlers, John, 374, 375\nEhrlich Cycle Finder, 363-365\nEhrlich Cycle Forecaster, 365, 366, 375\nEhrlich, Stan, 363\nElder, Alexander, 442\nElliott, R.N., 27, 319\nElliott Wave Supplement to the Bank Credit Analyst, 319-320\nElliott Wave Theory, 27, 76, 86, 319-342", - "type": "text" - }, - { - "block_id": "p474-b4", - "global_id": 2756, - "bbox": [ - 79.2, - 568.05, - 323.77, - 681.83 - ], - "text": "alternation, rule of, 331-332\napplied to stocks vs. commodities, 340\nbasic tenets of, 320-323\nchanneling, 332-334\ncombining all aspects of, 338-340\nconnection between Dow Theory and, 324\ncorrective waves, 320-323, 324-331", - "type": "text" - }, - { - "block_id": "p474-b5", - "global_id": 2757, - "bbox": [ - 79.2, - 684.0, - 264.09, - 764.65 - ], - "text": "flats, 326-329\ntriangles, 329-331\nzig-zags, 324-326\ndegrees of trend, 320-321\nElliott Wave Principle, 320, 342", - "type": "text" - } - ] - }, - { - "page_num": 475, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p475-b0", - "global_id": 2758, - "bbox": [ - 72.0, - 73.28, - 392.14, - 336.14 - ], - "text": "Fibonacci numbers, 212-213, 322-323, 334-335\nFibonacci ratios and retracements, 335-338\nFibonacci time targets, 338\nhistorical background, 319-320\nimpulse waves, 320\npattern, 320\nratio analysis, 320\ntime relationships, 320\nusing with other technical tools, 342\nwave 4 as support area, 334\nEngulfing candle pattern, 310\nEquivolume charting, 447-448\nEvening Star candle pattern, 303-304, 312\nExhaustion gaps, 96-97\nExponentially smoothed moving average, 197, 199-200\nExtremes, 486-487", - "type": "text" - }, - { - "block_id": "p475-b1", - "global_id": 2759, - "bbox": [ - 72.0, - 352.71, - 372.52, - 516.19 - ], - "text": "Failed head and shoulders pattern, 113-115\nFailure swing, 29-31, 242\nFair value, 415\nFalling Three Methods candle pattern, 304-305, 315\nFan principle, 74-76\nFibonacci fan lines, 90\nFibonacci numbers, 212-213, 322-323, 334-335\nFibonacci number sequence, 322-323\nFibonacci percentage retracements, 335-338\nFibonacci ratios, 86", - "type": "text" - }, - { - "block_id": "p475-b2", - "global_id": 2760, - "bbox": [ - 72.0, - 518.35, - 262.2, - 648.7 - ], - "text": "and retracements, 335-338\nFibonacci time targets, 338\n50% retracement, 85-87\nFiltered candle patterns, 306-307\nFilters, 71-72, 122\nFinancial futures, 8\nFlagpole, 143-144\nFlags, 141-145", - "type": "text" - }, - { - "block_id": "p475-b3", - "global_id": 2761, - "bbox": [ - 72.0, - 650.87, - 334.97, - 764.65 - ], - "text": "construction of, 142-143\nmeasuring implications, 143-144\nFlat corrections, 326-329\nFlow of funds analysis, 15\nForeign currencies, 8\nFoundation for the Study of Cycles, 348, 375\n4-9-18 day moving average combination, 204", - "type": "text" - } - ] - }, - { - "page_num": 476, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p476-b0", - "global_id": 2762, - "bbox": [ - 72.0, - 73.28, - 387.66, - 170.5 - ], - "text": "how to use, 205-207\n4 week rule, 212, 215-219, 362\nFrost, A.J., 320, 342\nFulcrum, use of term, 275\nFundamental forecasting, technical forecasting vs., 5-6\nFutures, 8", - "type": "text" - }, - { - "block_id": "p476-b1", - "global_id": 2763, - "bbox": [ - 72.0, - 172.67, - 220.0, - 286.45 - ], - "text": "blowoffs, 175\nlife span, 12-13\nmargin requirements, 13\npricing structure, 12\ntime frame, 14\nand timing, 14\nFutures Charts, 177", - "type": "text" - }, - { - "block_id": "p476-b2", - "global_id": 2764, - "bbox": [ - 72.0, - 303.02, - 356.53, - 483.06 - ], - "text": "Gann Contract, 507\nGann fan lines, 90\nGann, W.D., 87, 90, 183\nGaps, 76\nGoldman Sachs Commodity Index, 410\nGould, Edson, 87-88\nGranville, Joseph, 165\nGranville’s New Key to Stock Market Profits, 165\nGravestone Doji, 300\nGreat Cycle, The, (Stoken), 359\nGreeley, John, 457", - "type": "text" - }, - { - "block_id": "p476-b3", - "global_id": 2765, - "bbox": [ - 72.0, - 499.63, - 307.39, - 629.98 - ], - "text": "Hamilton, William Peter, 24\nHammer candle pattern, 310\nHanging Man candle pattern, 310\nHarami candle pattern, 310-311\nHarami Cross candle pattern, 311\nHarmonicity, principle of, 351, 352, 354\nHarmonic relationships, cycles, 212, 218\nHead and shoulders, 74, 76", - "type": "text" - }, - { - "block_id": "p476-b4", - "global_id": 2766, - "bbox": [ - 79.2, - 632.14, - 249.84, - 663.11 - ], - "text": "continuation pattern, 153-155\nreversal pattern:", - "type": "text" - }, - { - "block_id": "p476-b5", - "global_id": 2767, - "bbox": [ - 93.59, - 665.27, - 244.25, - 712.8 - ], - "text": "basic ingredients of, 106\nneckline, breaking of, 106\nprice objective, 108-110", - "type": "text" - }, - { - "block_id": "p476-b6", - "global_id": 2768, - "bbox": [ - 93.59, - 714.96, - 218.69, - 762.49 - ], - "text": "adjusting, 109-110\nfinding, 108-110\nreturn move, 106-107", - "type": "text" - } - ] - }, - { - "page_num": 477, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p477-b0", - "global_id": 2769, - "bbox": [ - 72.0, - 73.28, - 509.12, - 236.76 - ], - "text": "volume, 107-108\nHedging process, 8\nHerrick, John, 466\nHerrick Payoff Index (HPI), 167, 466-468\nHirsch, Yale, 373\nHistogram, 234-237, 476\nHoming Pigeon candle pattern, 315\nHorizontal count, 274-275\nHow to Build a Fortune in Commodities (Allen), 204\nHow to Use the 4-Day, 9-Day and 18-Day Moving Averages to Earn Larger", - "type": "text" - }, - { - "block_id": "p477-b1", - "global_id": 2770, - "bbox": [ - 72.0, - 238.92, - 308.74, - 269.89 - ], - "text": "Profits from Commodities (Allen), 204\nHurst, J.M., 348, 355-358", - "type": "text" - }, - { - "block_id": "p477-b2", - "global_id": 2771, - "bbox": [ - 72.0, - 286.46, - 314.12, - 383.68 - ], - "text": "Identical Three Crows candle pattern, 314\nImpulse waves, 320\nInductive statistics, 18\nIn Neck Line candle pattern, 317\nInterest rate markets, 8\nIntermarket analysis, 413-431", - "type": "text" - }, - { - "block_id": "p477-b3", - "global_id": 2772, - "bbox": [ - 79.2, - 385.84, - 117.59, - 400.24 - ], - "text": "bonds:", - "type": "text" - }, - { - "block_id": "p477-b4", - "global_id": 2773, - "bbox": [ - 79.2, - 402.41, - 351.35, - 565.88 - ], - "text": "link between commodities and, 418\nlink between stocks and, 416-417\ncommodities, link between dollar and, 419-420\ndeflation scenario, 427-428\ndollar and large caps, 422\nintermarket correlation, 428-429\nintermarket neural network software, 429-430\nand mutual funds, 422\nprogram trading, 414, 415-416\nrelative strength:", - "type": "text" - }, - { - "block_id": "p477-b5", - "global_id": 2774, - "bbox": [ - 72.0, - 568.05, - 441.06, - 764.65 - ], - "text": "and individual stocks, 426\nand sectors, 424-425\nrelative strength analysis, 422-426\nstock sectors and industry groups, 420-422\ntop-down market approach, 427\nIntermarket correlation, 428-429\nIntermarket neural network software, 429-430\nIntermarket Technical Analysis (Murphy), 414, 430\nIntermediate cycle, 359\nIntermediate trend, 25, 52-54\nInternal trendlines, 90\nInternational Federation of Technical Analysts (IFTA), 457, 458", - "type": "text" - } - ] - }, - { - "page_num": 478, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p478-b0", - "global_id": 2775, - "bbox": [ - 72.0, - 73.28, - 402.49, - 137.37 - ], - "text": "International stock markets, 8, 9\nIntraday pivot points, 407-408\nIntraday point and figure charts, construction of, 270-273\nIntraday price charts, 45, 405-408", - "type": "text" - }, - { - "block_id": "p478-b1", - "global_id": 2776, - "bbox": [ - 72.0, - 139.54, - 282.38, - 170.5 - ], - "text": "Market Profile, 411\nInverse head and shoulders, 110-112", - "type": "text" - }, - { - "block_id": "p478-b2", - "global_id": 2777, - "bbox": [ - 79.2, - 172.67, - 311.79, - 253.32 - ], - "text": "neckline, slope of, 111-112\nInverted Hammer candle pattern, 310\nInvestor Sentiment Readings, 261-262\nInvestors Intelligence numbers, 262-263\nIsland reversal pattern, 97", - "type": "text" - }, - { - "block_id": "p478-b3", - "global_id": 2778, - "bbox": [ - 72.0, - 269.89, - 293.02, - 300.86 - ], - "text": "January Barometer, 373\nJapanese candlesticks, 37-39, 297-317", - "type": "text" - }, - { - "block_id": "p478-b4", - "global_id": 2779, - "bbox": [ - 79.2, - 303.02, - 265.42, - 333.98 - ], - "text": "basic candlesticks, 299-301\ncandle pattern analysis, 301-306", - "type": "text" - }, - { - "block_id": "p478-b5", - "global_id": 2780, - "bbox": [ - 79.2, - 336.15, - 310.99, - 400.24 - ], - "text": "computerized, 306\ncontinuation candle patterns, 304-305\nreversal candle patterns, 301-304\ncandle patterns, 309-317", - "type": "text" - }, - { - "block_id": "p478-b6", - "global_id": 2781, - "bbox": [ - 72.0, - 402.41, - 249.83, - 516.19 - ], - "text": "filtered, 306-307\ncandlestick charting, 297-299\nDoji candlesticks, 300-301\nLong Days, 299\nShort Days, 299\nSpinning Tops, 299-300\nJones, Edward, 23", - "type": "text" - }, - { - "block_id": "p478-b7", - "global_id": 2782, - "bbox": [ - 72.0, - 532.75, - 231.84, - 629.98 - ], - "text": "K Wave, The (Barker), 359\nKaufman, Perry, 222\nKeltner channels, 470-472\nKey reversal day, 91\nKicking candle pattern, 313\nKondratieff Wave, 359-360", - "type": "text" - }, - { - "block_id": "p478-b8", - "global_id": 2783, - "bbox": [ - 72.0, - 646.55, - 363.4, - 760.33 - ], - "text": "Ladder Bottom candle pattern, 315\nLadder Top candle pattern, 315\nLambert, Donald R., 237, 307\nLane, George, 246\nLarry Williams %R, 249\nLeading Indicators for the 1990s (Moore), 10, 430\nLife span, futures contracts 12-13", - "type": "text" - } - ] - }, - { - "page_num": 479, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p479-b0", - "global_id": 2784, - "bbox": [ - 72.0, - 73.28, - 330.55, - 220.2 - ], - "text": "Limit days, 168\nLimit order, 403-404\nLinearly weighted moving average, 197, 199\nLine charts, 36-37\nLines, 31, 57, 147-148\nLogarithmic charts, 39-40\nLonger range technical forecasting, 9\nLong-legged Doji, 300\nLong-term charts, 181-194", - "type": "text" - }, - { - "block_id": "p479-b1", - "global_id": 2785, - "bbox": [ - 72.0, - 222.36, - 402.1, - 452.09 - ], - "text": "adjusting for inflation, 186-187\ncontinuation charts for futures, construction of, 182-183\nexamples of, 188-194\nlonger range perspective, importance of, 182\nlong term trends, persistence of, 184-185\nand moving averages, 214\npatterns on, 185\nPerpetual Contract, 184\nand trading, 188\nLong term cycles, 359\nLong term to short term charts, 185-186\nLong Wave Cycle (Kondratieff), 359\nLukac, Louis, 216\nLunar cycle, 362", - "type": "text" - }, - { - "block_id": "p479-b2", - "global_id": 2786, - "bbox": [ - 72.0, - 468.66, - 294.21, - 532.75 - ], - "text": "McClellan oscillator, 438-439\nMcClellan, Sherman, 438\nMcClellan Summation Index, 439-440\nMajor reversal patterns, 99-128", - "type": "text" - }, - { - "block_id": "p479-b3", - "global_id": 2787, - "bbox": [ - 79.2, - 534.92, - 303.73, - 582.45 - ], - "text": "double tops and bottoms, 100, 117-121\nfilters, 122\nhead and shoulders, 100, 103-107", - "type": "text" - }, - { - "block_id": "p479-b4", - "global_id": 2788, - "bbox": [ - 79.2, - 584.61, - 301.37, - 681.83 - ], - "text": "complex, 113-115\nas consolidation pattern, 115\nfailed, 113-115\ninverse, 110-112\nideal pattern, variations from, 121-125\nprice patterns, 100-103", - "type": "text" - }, - { - "block_id": "p479-b5", - "global_id": 2789, - "bbox": [ - 79.2, - 684.0, - 249.48, - 764.65 - ], - "text": "continuation, 100, 129-156\nmeasuring techniques, 101\nreversal, 99-128\nvolume, 100, 107-108\nsaucers/spikes, 100, 125-127", - "type": "text" - } - ] - }, - { - "page_num": 480, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p480-b0", - "global_id": 2790, - "bbox": [ - 72.0, - 73.28, - 376.88, - 269.89 - ], - "text": "triple tops and bottoms, 100, 115-117\nMajor trend, 52-54\nMajor Works of R.N. Elliott, The, 320, 342\nManaged accounts, 410-411\nMandino, Og, 344\nMargin requirements, stocks vs. futures, 13\nMarket averages, comparing, 435, 449-451\nMarket breadth, measuring, 433\nMarket-if-touched (M.I.T.) order, 404\nMarket order, 403, 404\nMarket price, as leading indicator of fundamentals, 6\nMarket Profile, 411, 475-491", - "type": "text" - }, - { - "block_id": "p480-b1", - "global_id": 2791, - "bbox": [ - 72.0, - 272.05, - 394.91, - 700.55 - ], - "text": "graphic, 476-479\ndefined, 476\nlonger term market activity, tracking, 486-490\nmarket structure, 479-480\norganizational principles, 480-483\nauction setting, 480\ncontinuous negotiation, 481\nmarket balance/imbalance, 481\nprice and value, 482-483\nshort term trader/long term trader roles, 482\ntime frames and trader behavior, 481-482\nrange development and profile patterns, 484-485\nMarket Technicians Association (MTA), 24, 457\nMarket Technologies Corporation, 429\nMatching High candle pattern, 314\nMatching Low candle pattern, 314\nMaximum Entropy Spectral Analysis (MESA), 374-375\nMaximum retracement parameter, 86\nMeasured move, 151-153\nMeasuring gaps, 95-96\nMeeting Line candle pattern, 311\nMendelsohn, Louis, 429-430\nMESA and Trading Market Cycles (Ehlers), 374\nMetastock charting software (Equis International), 448\nM.I.T. order, 404\nMomentum:", - "type": "text" - }, - { - "block_id": "p480-b2", - "global_id": 2792, - "bbox": [ - 79.2, - 702.72, - 297.78, - 766.81 - ], - "text": "ascent/descent rates, 230\ncrossing of zero line, 231-232\nmeasuring, 228-233\nmomentum line, and price action, 230", - "type": "text" - } - ] - }, - { - "page_num": 481, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p481-b0", - "global_id": 2793, - "bbox": [ - 72.0, - 73.28, - 315.09, - 104.25 - ], - "text": "upper/lower boundary, need for, 232-233\nMoney management, 393-411, 501", - "type": "text" - }, - { - "block_id": "p481-b1", - "global_id": 2794, - "bbox": [ - 72.0, - 106.41, - 487.27, - 402.4 - ], - "text": "asset allocation, 409-410\ncombining with technical factors, 403\ndiversification vs. concentration, 396-397\nguidelines for, 395-396\nmanaged accounts, 410-411\nmutual funds, 410-411\nreward-to-risk ratios, 397-398\ntrading multiple positions, 398-399\nMonthly charts, 35, 45-46, 181-182\nMonthly cycle, and moving averages, 212\nMonthly reversals, 93, 185\nMoore, Geoffrey, 430\nMorning Doji Star candle pattern, 312\nMorning Star candle pattern, 303, 312\nMorris, Greg, 184, 296, 297fn, 306, 448\nMoving Average Convergence/Divergence (MACD), 214, 252-255, 374\nMACD histogram, 255\nMoving average, 195-215", - "type": "text" - }, - { - "block_id": "p481-b2", - "global_id": 2795, - "bbox": [ - 79.2, - 404.57, - 288.61, - 468.66 - ], - "text": "adaptive (AMA), 222\nalternatives to, 223\napplied to long term charts, 213-215\nBollinger bands, 209-211, 221", - "type": "text" - }, - { - "block_id": "p481-b3", - "global_id": 2796, - "bbox": [ - 79.2, - 470.82, - 342.17, - 766.81 - ], - "text": "using as targets, 210\nand volatility, 211\ndefined, 195-196\ndouble crossover method, 203-204\nenvelopes, 207-208\nexponentially smoothed, 197, 199-200\nFibonacci numbers used as, 212-213\n4-9-18 day moving average combination, 204\nhow to use, 205-207\nlinearly weighted, 197, 199\noptimization, 220-221\nas oscillators, 214\nand point and figure charts, 294-295\npros/cons of, 214\nsimple, 197, 199\nas smoothing devices with time lag, 197-207\nand time cycles, 212\ntriple crossover method, 204", - "type": "text" - } - ] - }, - { - "page_num": 482, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p482-b0", - "global_id": 2797, - "bbox": [ - 72.0, - 73.28, - 282.23, - 187.07 - ], - "text": "using one, 201-203\nusing three, 204\nusing two, 203-204\nwhich prices to average, 197-198\nMoving average envelopes, 207-208\nMultiple positions, trading, 398-399\nMutual funds, 410-411", - "type": "text" - }, - { - "block_id": "p482-b1", - "global_id": 2798, - "bbox": [ - 79.2, - 189.23, - 248.63, - 203.63 - ], - "text": "and intermarket analysis, 422", - "type": "text" - }, - { - "block_id": "p482-b2", - "global_id": 2799, - "bbox": [ - 72.0, - 220.2, - 437.0, - 466.5 - ], - "text": "NASDAQ composite, 435, 449-451\nNature’s Law—The Secret of the Universe, 319, 334\nNearest Contract, 506\nNear term trend, 52-54\nNeill, Humphrey B., 258\nNelson, S.A., 24\nNeutral day, 484-486\nNew Concepts in Technical Trading Systems (Wilder), 239, 469\nNew High-New Low index, 440-442\nNew York Stock Exchange Index, 449-451\nNext Contract, 506-507\nNominality, principle of, 353-355\nNonfailure swing, 30-31\nNormal day, 484-486\nNormal variation day, 484-486", - "type": "text" - }, - { - "block_id": "p482-b3", - "global_id": 2800, - "bbox": [ - 72.0, - 483.07, - 295.78, - 563.72 - ], - "text": "On-balance volume (OBV), 165-167\nOne-third retracement, 85-87\nOn Neck Line candle pattern, 316, 317\nOpen Arms Index, 446\nOpen interest, 35, 42-44, 159-162", - "type": "text" - }, - { - "block_id": "p482-b4", - "global_id": 2801, - "bbox": [ - 79.2, - 565.89, - 259.46, - 613.41 - ], - "text": "defined, 159\nin futures, 42-44, 159-161\nhow changes occur in, 160-161", - "type": "text" - }, - { - "block_id": "p482-b5", - "global_id": 2802, - "bbox": [ - 72.0, - 615.58, - 262.46, - 762.49 - ], - "text": "interpreting:\nin futures, 169-174\ngeneral rules for, 161-162\nin options, 177\nput/call ratios, 178-179\nas secondary indicator, 159-162\nOppenheimer Real Assets, 410\nOptimization, 220-221, 496\nOptions, open interest in, 177", - "type": "text" - } - ] - }, - { - "page_num": 483, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p483-b0", - "global_id": 2803, - "bbox": [ - 72.0, - 73.28, - 321.0, - 120.81 - ], - "text": "Options hedging, 8\nOscillators, 223, 225-263\nCommodity Channel Index (CCI), 237-239", - "type": "text" - }, - { - "block_id": "p483-b1", - "global_id": 2804, - "bbox": [ - 72.0, - 122.98, - 370.57, - 153.94 - ], - "text": "constructing, using two moving averages, 234-237\nOscillators", - "type": "text" - }, - { - "block_id": "p483-b2", - "global_id": 2805, - "bbox": [ - 79.2, - 156.1, - 311.79, - 269.89 - ], - "text": "Contrary Opinion, 257-261\ninterpretation of, 226-227\nInvestor Sentiment Readings, 261-262\nInvestors Intelligence numbers, 262-263\nLarry Williams %R, 249\nmomentum, measuring, 228-233\nMoving Average", - "type": "text" - }, - { - "block_id": "p483-b3", - "global_id": 2806, - "bbox": [ - 79.2, - 272.05, - 379.62, - 418.96 - ], - "text": "Convergence/Divergence (MACD), 214, 252-255\nMACD histogram, 255\nmoving averages as, 214\nrate of change (ROC), measuring, 234\nRelative Strength Index (RSI), 239-245\ninterpreting, 242-245\n70 and 30 lines, using to generate signals, 245-246\nStochastic oscillator, 246-249\nand trend, 226-228", - "type": "text" - }, - { - "block_id": "p483-b4", - "global_id": 2807, - "bbox": [ - 72.0, - 421.13, - 232.27, - 501.79 - ], - "text": "importance of, 251\nusefulness of, 251-252\nuses for, 227\nSee also Contrary Opinion\nOutside day, 92", - "type": "text" - }, - { - "block_id": "p483-b5", - "global_id": 2808, - "bbox": [ - 72.0, - 518.35, - 409.59, - 582.45 - ], - "text": "Parabolic System (Welles Wilder), 378, 380, 381-384, 390\nPeaks, time between, 125\nPelletier, Robert, 184\nPennants, 141-145", - "type": "text" - }, - { - "block_id": "p483-b6", - "global_id": 2809, - "bbox": [ - 72.0, - 584.61, - 281.77, - 648.7 - ], - "text": "construction of, 142-143\nmeasuring implications, 143-144\nPercentage envelopes, 207-208\nPercentage retracements, 85-87, 402", - "type": "text" - }, - { - "block_id": "p483-b7", - "global_id": 2810, - "bbox": [ - 72.0, - 650.87, - 309.68, - 748.09 - ], - "text": "Fibonacci, 86, 336-338\nPerpetual Contract, 184\nPiercing Line candle pattern, 303, 311\nPioneer range, 484\nPoint and Figure Charting (Dorsey), 292\nPoint and figure charts, 37, 38, 265-296", - "type": "text" - }, - { - "block_id": "p483-b8", - "global_id": 2811, - "bbox": [ - 79.2, - 750.25, - 187.51, - 764.65 - ], - "text": "advantages of, 288", - "type": "text" - } - ] - }, - { - "page_num": 484, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p484-b0", - "global_id": 2812, - "bbox": [ - 72.0, - 73.28, - 518.92, - 269.89 - ], - "text": "bar charts compared to, 266-270\ncomputerized charting, 292-294\nhorizontal count, 274-275\nintraday, construction of, 270-273\nmoving averages, 294-295\nprice patterns, 275-277\ntechnical indicators, 292\n3 box reversal, 277-282\ntrading tactics, 286-288\ntrend analysis and trendlines, 277\nvertical count, 286\nPoint and Figure Method of Anticipating Stock Price Movements (deVilliers),", - "type": "text" - }, - { - "block_id": "p484-b1", - "global_id": 2813, - "bbox": [ - 72.0, - 272.05, - 425.28, - 418.96 - ], - "text": "265\nPower of Oscillator/Cycle Combinations (Bressert), 374, 375\nPrechter, Robert, 320, 331, 342\nPresidential Cycle, 373\nPrice action, and shifts in supply and demand, 2\nPrice channels, 219-220, 332-334\nPrice filters, 71-72, 122\nPrice forecasting, 393-394\nPrice gaps, 94-97, 402", - "type": "text" - }, - { - "block_id": "p484-b2", - "global_id": 2814, - "bbox": [ - 72.0, - 421.13, - 272.63, - 518.35 - ], - "text": "breakaway gaps, 94-95\nexhaustion gaps, 96-97\nisland reversal pattern, 97\nrunaway (measuring) gaps, 95-96\ntypes of, 94\nPrice patterns, 57, 100-103, 185", - "type": "text" - }, - { - "block_id": "p484-b3", - "global_id": 2815, - "bbox": [ - 79.2, - 520.51, - 288.62, - 601.17 - ], - "text": "continuation, 100-101, 129-156\nmeasuring techniques, 101\nand point and figure charts, 275-277\nreversal, 99-128\nvolume, 100", - "type": "text" - }, - { - "block_id": "p484-b4", - "global_id": 2816, - "bbox": [ - 72.0, - 603.34, - 384.81, - 766.81 - ], - "text": "as confirmation in, 162-164\nSee also Continuation patterns; Reversal patterns\nPricing structure, futures, 12\nPrimary cycle, 359\nPrimary trends, 25-26\nProfit Magic of Stock Transaction Timing (Hurst), 348\nProgram buying, 415\nProgram selling, 415-416\nProgram trading, 414, 415-416\nProportionality, principle of, 351, 353", - "type": "text" - } - ] - }, - { - "page_num": 485, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p485-b0", - "global_id": 2817, - "bbox": [ - 72.0, - 73.28, - 206.67, - 137.37 - ], - "text": "Protective stops, 397\nPugh, Burton, 362\nPut/call ratios, 178-179\nPut open interest, 177", - "type": "text" - }, - { - "block_id": "p485-b1", - "global_id": 2818, - "bbox": [ - 72.0, - 153.94, - 208.53, - 168.34 - ], - "text": "Quantitative analyst, 11", - "type": "text" - }, - { - "block_id": "p485-b2", - "global_id": 2819, - "bbox": [ - 72.0, - 184.91, - 239.37, - 199.31 - ], - "text": "Random Walk Theory, 19-21", - "type": "text" - }, - { - "block_id": "p485-b3", - "global_id": 2820, - "bbox": [ - 72.0, - 201.48, - 357.33, - 282.13 - ], - "text": "and buy-and-hold strategy, 16\nRange development and profile patterns, 484-485\nRange extension, 486-488\nRate of change (ROC), measuring, 234\nRectangle formation, 147-151", - "type": "text" - }, - { - "block_id": "p485-b4", - "global_id": 2821, - "bbox": [ - 72.0, - 284.3, - 330.18, - 381.52 - ], - "text": "similarities/differences, 151\nswings within range, trading, 150-151\nvolume pattern, 150\nRectangles, 31\nRelative strength analysis, 422-426, 450-451\nRelative Strength Index (RSI), 239-245, 374", - "type": "text" - }, - { - "block_id": "p485-b5", - "global_id": 2822, - "bbox": [ - 72.0, - 383.68, - 201.49, - 414.64 - ], - "text": "interpreting, 242-245\nReturn line, 80-85", - "type": "text" - }, - { - "block_id": "p485-b6", - "global_id": 2823, - "bbox": [ - 72.0, - 416.81, - 267.8, - 464.34 - ], - "text": "measuring implications, 82-85\nReversal days, 90-93\nReversal candle patterns, 301-304", - "type": "text" - }, - { - "block_id": "p485-b7", - "global_id": 2824, - "bbox": [ - 72.0, - 466.5, - 241.98, - 547.16 - ], - "text": "Dark Cloud Cover, 302, 311\nEvening Star, 303-304, 312\nMorning Star, 303, 312\nPiercing Line, 302-303, 311\nReversal patterns, 99-128", - "type": "text" - }, - { - "block_id": "p485-b8", - "global_id": 2825, - "bbox": [ - 72.0, - 549.32, - 303.73, - 762.49 - ], - "text": "double tops and bottoms, 100, 117-121\nfilters, 122\nhead and shoulders, 100, 103-107\ncomplex, 113-115\nas consolidation pattern, 115\nfailed, 113-115\ninverse, 110-112\nideal pattern, variations from, 121-125\nsaucers/spikes, 100, 125-127\ntriple tops and bottoms, 100, 115-117\nReward-to-risk ratios, 397-398\nRhea, Robert, 24, 319\nRight angle triangles, 138", - "type": "text" - } - ] - }, - { - "page_num": 486, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p486-b0", - "global_id": 2826, - "bbox": [ - 72.0, - 73.28, - 369.34, - 153.94 - ], - "text": "Rising Three Methods candle pattern, 304-305, 315\nRuggiero, Murray, Jr., 428\nRunaway gaps, 95-96\nRussell 2000, 422, 435, 449-451\nRussell, Richard, 24", - "type": "text" - }, - { - "block_id": "p486-b1", - "global_id": 2827, - "bbox": [ - 72.0, - 170.51, - 381.54, - 681.83 - ], - "text": "S…P 500, 14, 32, 415-416, 425, 449-451\nSaucers, 125-127\nSeasonal cycles, 359, 369-372\nSecondary trends, 25, 52-54\nSelf-fulfilling prophecy, and technical analysis, 15-18\nSelling climax, 91, 92, 93, 175\nSell limit order, 403-404\nSell stop order, 404\nSemilog chart scaling, 188\nSentiment indicators, 15\nSeparating Lines candle pattern, 315\n70 line, using to generate signals, 245-246\nShooting Star candle pattern, 310\nSide by Side White Lines candle pattern, 316\nSideways trend, 50-52\nSimple moving average, 197, 199\nSmarter Trading (Kaufman), 222\nSpeedlines, 87-89\nSpikes, 125-127\nSpinning Tops, 299-300\nStandard deviation, 209, 476\nStarc bands, 469-470\nStatistical analyst, 11\nSteidlmayer, J. Peter, 411, 475fn, 479-480\nStick Sandwich candle pattern, 314\nStochastic oscillator, 246-249, 374\nStock index futures, 8\nStock market analysis, 14-15\nStock Market Barometer (Rhea), 24\nStock market cycles, 373\nStock market indicators, 433-452", - "type": "text" - }, - { - "block_id": "p486-b2", - "global_id": 2828, - "bbox": [ - 79.2, - 684.0, - 260.59, - 698.39 - ], - "text": "advance-decline (AD) line, 436", - "type": "text" - }, - { - "block_id": "p486-b3", - "global_id": 2829, - "bbox": [ - 79.2, - 700.56, - 271.45, - 764.65 - ], - "text": "AD divergence, 437\ndaily vs. weekly AD lines, 437\nvariations in, 437-438\nArms Index (TRIN), 444, 445", - "type": "text" - } - ] - }, - { - "page_num": 487, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p487-b0", - "global_id": 2830, - "bbox": [ - 72.0, - 73.28, - 507.57, - 303.02 - ], - "text": "Open Arms, 446\nsmoothing, 445-446\nTICK vs., 444\nCandlePower charting, 448-449\nEquivolume charting, 447-448\nMcClellan oscillator, 438-439\nMcClellan Summation Index, 439-440\nmarket averages, comparing, 435, 449-451\nmarket breadth, measuring, 433\nNew High-New Low index, 440-442\nsample data, 434-435\nupside vs. downside volume, 443-444\nSee also Advanced technical indicators Stock Market Timing (Cohen), 277\nStocks, 8", - "type": "text" - }, - { - "block_id": "p487-b1", - "global_id": 2831, - "bbox": [ - 72.0, - 305.18, - 290.08, - 501.79 - ], - "text": "as economic indicators, 32\nlife span, 12-13\nmargin requirements, 13\npricing structure, 12\ntime frame, 14\nand timing, 14\nStock Trader’s Almanac (Hirsch), 373\nStoller, Manning, 469\nStop limit order, 404\nStop order, 404\nSummation, principle of, 351-352\nSupport and resistance, 55-65, 401", - "type": "text" - }, - { - "block_id": "p487-b2", - "global_id": 2832, - "bbox": [ - 72.0, - 503.95, - 305.79, - 617.73 - ], - "text": "psychology of, 59-61\nresistance, defined, 55-56\nreversal of roles, 56-59\nsupport, defined, 55\nand volume, 60\nSwing measurement, 151-153\nSymmetrical triangle, 130, 131-135, 331", - "type": "text" - }, - { - "block_id": "p487-b3", - "global_id": 2833, - "bbox": [ - 72.0, - 619.9, - 322.77, - 717.12 - ], - "text": "defined, 132\nmeasuring technique, 135\ntriangle resolution, time limit for, 133-134\nvolume, 134-135\nSymmetric distribution, 476\nSynchronicity, principle of, 351, 353, 354", - "type": "text" - }, - { - "block_id": "p487-b4", - "global_id": 2834, - "bbox": [ - 72.0, - 733.69, - 181.67, - 748.09 - ], - "text": "Technical analysis:", - "type": "text" - }, - { - "block_id": "p487-b5", - "global_id": 2835, - "bbox": [ - 79.2, - 750.25, - 268.23, - 764.65 - ], - "text": "applied to time dimensions, 9-10", - "type": "text" - } - ] - }, - { - "page_num": 488, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p488-b0", - "global_id": 2836, - "bbox": [ - 79.2, - 73.28, - 448.25, - 319.58 - ], - "text": "applied to trading mediums, 8\nchartered market technician (CMT), 456-457\ncoordinating with fundamental analysis, 455-456\ncriticisms of, 15-19\ndefined, 1\neconomic forecasting, 10\nFederal Reserve approval, 459-460\nflexibility/adaptability of, 7-8\nflow of funds analysis, 15\nglobal reach of, 458\nInternational Federation of Technical Analysts (IFTA), 457, 458\nMarket Technicians Association (MTA), 457\nnames for, 458-459, 460\nnumber three, importance of, 76\nphilosophy of, 1-22", - "type": "text" - }, - { - "block_id": "p488-b1", - "global_id": 2837, - "bbox": [ - 72.0, - 321.75, - 412.24, - 766.81 - ], - "text": "history repeats itself, 4-5\nmarket action discounts everything, 2-3\nprices move in trends, 3-4\nand self-fulfilling prophecy, 15-18\nsentiment indicators, 15\nin stocks and futures, comparison of, 12-14\ntechnical checklist, 454-455\nusing in timing, 400\nTechnical analysis of Stock trends (Edwards et al.), 33, 448\nTechnical analyst, 10-12\nTechnical forecasting, fundamental forecasting vs., 5-6\nTechnical tools, 15, 374\nTechnician, 10-12\nTelescan, 380\n30 line, using to generate signals, 245-246\n3% penetration criterion, 71\nThree Black Crows candle pattern, 312\n3 box reversal point and figure chart, 277-282\nchart patterns, 280-282\nconstruction of, 278-282\nmeasuring techniques, 286\ntrendlines, 282-286\nThree Inside Down candle pattern, 313\nThree Inside Up candle pattern, 313\nThree Line Strike candle pattern, 316\nThree Outside Down candle pattern, 313\nThree Outside Up candle pattern, 313", - "type": "text" - } - ] - }, - { - "page_num": 489, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p489-b0", - "global_id": 2838, - "bbox": [ - 72.0, - 73.28, - 324.54, - 120.81 - ], - "text": "Three Stars in the South candle pattern, 314\nThree White Soldiers candle pattern, 312\nTime cycles, 212, 343-375", - "type": "text" - }, - { - "block_id": "p489-b1", - "global_id": 2839, - "bbox": [ - 79.2, - 122.98, - 402.11, - 468.66 - ], - "text": "basic concepts, 348-351\nand charting techniques, 355-358\nclassification of, 359\ncombining cycle lengths, 361\ncombining cycles with other technical Tools, 374\ncrests, 348-351\ncyclic principles, 351-353\ndominant cycles, 358-360\nEhrlich Cycle Finder, 363-366\nand 4 week rule, 212, 215-216, 362\nisolating cycles, 363-368\nJanuary Barometer, 373\nKondratieff Wave, 359-360\nleft and right translation, 362-363\nMaximum Entropy Spectral Analysis (MESA), 374-375\nand moving averages, 212\nPresidential Cycle, 365, 373\nqualities of, 348-351\nseasonal cycles, 359, 369-372\nstock market cycles, 373\nand trend, 361-362", - "type": "text" - }, - { - "block_id": "p489-b2", - "global_id": 2840, - "bbox": [ - 72.0, - 470.82, - 378.18, - 568.04 - ], - "text": "troughs, 348-351\nTime dimensions, technical analysis applied To, 9-10\nTime filter, 71\nTime Price Opportunity (TPO), 479\nTime series analysis, 19\nTiming, 393-394", - "type": "text" - }, - { - "block_id": "p489-b3", - "global_id": 2841, - "bbox": [ - 72.0, - 570.21, - 367.21, - 717.12 - ], - "text": "analysis vs., 6-7\nusing technical analysis in, 400\nTop failure swing, 242-243\nTop reversal day, 91, 92\nTower, Kenneth, 292-294, 296\nTrader’s Library, 375\nTrader’s Notebook, 215\nTradeStation (Omega Research), 389-390, 497-500\nTrading:", - "type": "text" - }, - { - "block_id": "p489-b4", - "global_id": 2842, - "bbox": [ - 72.0, - 719.28, - 298.45, - 766.81 - ], - "text": "elements of, 393-394\nafter periods of success/adversity, 399\nTrading cycle, 359, 362", - "type": "text" - } - ] - }, - { - "page_num": 490, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p490-b0", - "global_id": 2843, - "bbox": [ - 72.0, - 73.28, - 357.6, - 170.5 - ], - "text": "Trading for a Living (Elder), 442\nTrading mediums, technical analysis applied to, 8\nTrading multiple positions, 398-399\nTrading orders, types of, 403-405\nTrading range, 51, 147-150\nTrading system:", - "type": "text" - }, - { - "block_id": "p490-b1", - "global_id": 2844, - "bbox": [ - 72.0, - 172.67, - 326.81, - 303.02 - ], - "text": "building, 493-503\nconcept design, 495-497\nevaluating results, 500-501\nmoney management, 501\nobjective rules, 497\ntesting code, 497-500\ntrading signals, checking on computer, 497\nTrading tactics, 393-394, 400-402", - "type": "text" - }, - { - "block_id": "p490-b2", - "global_id": 2845, - "bbox": [ - 72.0, - 305.18, - 304.19, - 369.27 - ], - "text": "applied to stocks, 409\nand point and figure charts, 286-288\ntiming, using technical analysis in, 400\nTrend, 49-98", - "type": "text" - }, - { - "block_id": "p490-b3", - "global_id": 2846, - "bbox": [ - 72.0, - 371.44, - 396.37, - 766.81 - ], - "text": "classifications of, 52-54\ndefinition of, 49\ndowntrend, 50-52\nfan principle, 74-76\nFibonacci fan lines, 90\nGann fan lines, 90\nintermediate trend, 52-54\ninternal trendlines, 90\nmajor trend, 52-54\nmonthly reversals, 93\nnear term trend, 52-54\npercentage retracements, 85-87\nprice gaps, 94-97\nreversal days, 90-92\nsideways trend, 50-52\nspeed resistance lines, 87-89\nsupport and resistance, 55-65\nand time cycles, 361-362\ntrading range, 51\ntrendlines, 65-74\nuptrend, 50-52\nweekly reversals, 93\nSee also Price gaps; Support and resistance; Trendlines\nTrend day, 484-486", - "type": "text" - } - ] - }, - { - "page_num": 491, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p491-b0", - "global_id": 2847, - "bbox": [ - 72.0, - 73.28, - 275.34, - 104.25 - ], - "text": "Trending vs. trading units, 398-399\nTrendlines, 65-74", - "type": "text" - }, - { - "block_id": "p491-b1", - "global_id": 2848, - "bbox": [ - 72.0, - 106.41, - 343.76, - 418.96 - ], - "text": "adjusting, 77-79\nbreaking of, 68, 71-72, 102\nchannel line (return line), 80-85\ndetermining significance of, 69\ndown trendline, 65-66\ndrawing, 67\nhow to use, 67-68\ninternal, 90\nmeasuring implications of, 72-74\nand price action, 69\nprice filters, 71-72\nrelative steepness of, 76-80\nand reversal of roles, 72-73\nsmall penetrations, how to handle, 70-71\ntentative vs. valid, 67\n3 box reversal point and figure chart, 282-286\nup trendline, 65-66\nTrend trading, 9\nTriangles, 76, 130-147", - "type": "text" - }, - { - "block_id": "p491-b2", - "global_id": 2849, - "bbox": [ - 72.0, - 421.13, - 288.24, - 634.3 - ], - "text": "ascending, 130, 131, 136-138, 331\nbroadening formation, 130, 140-144\ndescending, 130, 138-140, 331\nand Elliott Wave Theory, 329-331\nflags, 141-145\nmeasured move, 153\nminimum requirement for, 132\npennants, 141-145\nrectangle formation, 147-151\nsymmetrical, 130, 131-135, 331\ntime factor in, 140\nwedge formation, 146-147, 148\nTriangles", - "type": "text" - }, - { - "block_id": "p491-b3", - "global_id": 2850, - "bbox": [ - 72.0, - 636.46, - 495.42, - 667.43 - ], - "text": "See also Ascending triangle; Descending Triangle; Symmetrical triangle\nTriple crossover method, 204", - "type": "text" - }, - { - "block_id": "p491-b4", - "global_id": 2851, - "bbox": [ - 72.0, - 669.59, - 315.98, - 717.12 - ], - "text": "triple tops and bottoms, 76, 115-117, 164\nTri-Star candle pattern, 312, 313\nTroughs, 348-351", - "type": "text" - }, - { - "block_id": "p491-b5", - "global_id": 2852, - "bbox": [ - 72.0, - 719.28, - 252.02, - 766.81 - ], - "text": "time between, 125\n28 day trading cycle, 362\nTwo Crows candle pattern, 315", - "type": "text" - } - ] - }, - { - "page_num": 492, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p492-b0", - "global_id": 2853, - "bbox": [ - 72.0, - 73.28, - 247.2, - 120.81 - ], - "text": "2 day rule, 71-72\nTwo-thirds retracement, 85-87\n2 week rule, 212", - "type": "text" - }, - { - "block_id": "p492-b1", - "global_id": 2854, - "bbox": [ - 72.0, - 137.38, - 362.59, - 251.16 - ], - "text": "Understanding Fibonacci Numbers (Dobson), 342\nUnique Three River candle pattern, 314\nUpside Gap Three Methods candle pattern, 314\nUpside Gap Two Crows candle pattern, 314\nUpside Tasuki Gap candle pattern, 316\nUptrend, 50-52\nUST Securities, 292, 294", - "type": "text" - }, - { - "block_id": "p492-b2", - "global_id": 2855, - "bbox": [ - 72.0, - 267.73, - 275.7, - 381.52 - ], - "text": "Value Area, 487, 488-489\nVan Nice, Nick, 177\nVantage Point software, 430\nVariation, principle of, 353-355\nVisual Investor, The, 430, 458\nVolatility, and Bollinger bands, 211\nVolume:", - "type": "text" - }, - { - "block_id": "p492-b3", - "global_id": 2856, - "bbox": [ - 79.2, - 383.68, - 287.81, - 398.08 - ], - "text": "on-balance volume (OBV), 165-166", - "type": "text" - }, - { - "block_id": "p492-b4", - "global_id": 2857, - "bbox": [ - 79.2, - 400.24, - 366.15, - 514.03 - ], - "text": "alternatives to, 166-167\non bar charts, 41-42\nas confirmation in price patterns, 163-164\ndefined, 158\ndegree of penetration, 61-64\nhead and shoulders reversal pattern, 100, 107-108\ninterpreting:", - "type": "text" - }, - { - "block_id": "p492-b5", - "global_id": 2858, - "bbox": [ - 72.0, - 516.19, - 351.72, - 663.11 - ], - "text": "for all markets, 162-169\ngeneral rules for, 161-162\nand price, 163-165\nand price patterns, 100\nround numbers as, 64-65\nas secondary indicator, 158-162\nand support and resistance, 60\nVolumes Cycles in the Stock Market (Arms), 448\nV-pattern, 125-127", - "type": "text" - }, - { - "block_id": "p492-b6", - "global_id": 2859, - "bbox": [ - 72.0, - 679.67, - 365.16, - 760.33 - ], - "text": "Wall Street Journal, The, 23-24, 265-266, 434, 436\nWave Principle, The, 319\nWedge formation, 146-147, 148\nWeekly charts, 35, 45-46, 181-182\nWeekly price channel (weekly rule), 215-220", - "type": "text" - } - ] - }, - { - "page_num": 493, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p493-b0", - "global_id": 2860, - "bbox": [ - 72.0, - 73.28, - 220.72, - 104.25 - ], - "text": "Weekly reversals, 93, 185\nWeekly rule, 215-220", - "type": "text" - }, - { - "block_id": "p493-b1", - "global_id": 2861, - "bbox": [ - 72.0, - 106.41, - 368.71, - 203.63 - ], - "text": "4 week rule, 212, 219\nadjustments to, 217-218\nand cycles, 218-219\nWilder, J. Welles, 239, 307, 378, 380, 381-387, 469\nWizard Trading, 216\nWyckoff, R.D., 265", - "type": "text" - }, - { - "block_id": "p493-b2", - "global_id": 2862, - "bbox": [ - 72.0, - 220.2, - 177.51, - 234.6 - ], - "text": "Zig-zags, 324-326", - "type": "text" - } - ] - }, - { - "page_num": 494, - "width": 595.28, - "height": 841.89, - "blocks": [ - { - "block_id": "p494-b0", - "global_id": 2863, - "bbox": [ - 209.4, - 227.58, - 385.88, - 267.91 - ], - "text": "What’s next on\nyour reading list?", - "type": "text" - }, - { - "block_id": "p494-b1", - "global_id": 2864, - "bbox": [ - 229.5, - 288.07, - 365.78, - 302.48 - ], - "text": "Discover your next", - "type": "text" - }, - { - "block_id": "p494-b2", - "global_id": 2865, - "bbox": [ - 260.4, - 302.48, - 334.87, - 316.88 - ], - "text": "great read!", - "type": "text" - }, - { - "block_id": "p494-b3", - "global_id": 2866, - "bbox": [ - 117.31, - 348.39, - 477.96, - 359.19 - ], - "text": "Get personalized book picks and up-to-date news about this author.", - "type": "text" - }, - { - "block_id": "p494-b4", - "global_id": 2867, - "bbox": [ - 252.23, - 373.77, - 343.05, - 388.18 - ], - "text": "Sign up now.", - "type": "text" - } - ] - } - ] -} \ No newline at end of file diff --git a/trading/The New Trading for a Living/001_The New Trading for a Living.md b/trading/The New Trading for a Living/001_The New Trading for a Living.md deleted file mode 100644 index aec24b25e3bc026c33b85cfd707c172a4ad71046..0000000000000000000000000000000000000000 --- a/trading/The New Trading for a Living/001_The New Trading for a Living.md +++ /dev/null @@ -1,107 +0,0 @@ -## **The New Trading for a Living** - -*The Wiley Trading* series features books by traders who have survived the market's ever-changing environment and have prospered—some by reinventing systems, others by getting back to basics. Whether a novice trader, professional or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future. For more on this series, visit our website at [www.WileyTrading.com.](http://www.WileyTrading.com) - -Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers' professional and personal knowledge and understanding. - -## **The New Trading for a Living** - -Psychology • Discipline Trading Tools and Systems Risk Control • Trade Management - -**Dr. Alexander Elder** - -**[www.elder.com](http://www.elder.com) [www.spiketrade.com](http://www.spiketrade.com)** - -Cover design: Paul DiNovo - -Copyright © 2014 by by Dr. Alexander Elder. All rights reserved. - -Published by John Wiley & Sons, Inc., Hoboken, New Jersey. - -Published simultaneously in Canada. - -No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at [www.copyright.com.](http://www.copyright.com) Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at [http://www.wiley.com/go/permissions.](http://www.wiley.com/go/permissions) - -Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. - -For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. - -Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at [http://booksupport.wiley.com.](http://booksupport.wiley.com) For more information about Wiley products, visit [www.wiley.com.](http://www.wiley.com) - -#### *Library of Congress Cataloging-in-Publication Data:* - -ISBN 978-1-118-44392-7 (Hardcover) ISBN 978-1-118-96367-8 (ebk) ISBN 978-1-118-96368-5 (ebk) - -Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 - -### **To the memory of Lou Taylor—** - -a wise man, a savvy trader, and a true friend. - -| CONTENTS | | -|----------|--| -| | | - -| | Preface | xiii | -|-------|---------------------------------|------| -| | Introduction | 1 | -| | 1. Trading—The Last Frontier | 1 | -| | 2. Psychology Is the Key | 3 | -| | 3. The Odds against You | 5 | -| ONE | Individual Psychology | 9 | -| | 4. Why Trade? | 9 | -| | 5. Reality versus Fantasy | 10 | -| | 6. Self-Destructiveness | 16 | -| | 7. Trading Psychology | 19 | -| | 8. Trading Lessons from AA | 21 | -| | 9. Losers Anonymous | 23 | -| | 10. Winners and Losers | 27 | -| TWO | Mass Psychology | 31 | -| | 11. What Is Price? | 32 | -| | 12. What Is the Market? | 33 | -| | 13. The Trading Scene | 36 | -| | 14. The Market Crowd and You | 39 | -| | 15. Psychology of Trends | 43 | -| | 16. Managing versus Forecasting | 46 | -| THREE | Classical Chart Analysis | 49 | -| | 17. Charting | 50 | -| | 18. Support and Resistance | 55 | -| | | | - -| | 19. Trends and Trading Ranges | 60 | -|-------|--------------------------------------------|-----| -| | 20. Kangaroo Tails | 65 | -| FOUR | Computerized Technical Analysis | 69 | -| | 21. Computers in Trading | 69 | -| | 22. Moving Averages | 74 | -| | 23. Moving Average Convergence-Divergence: | | -| | MACD Lines and MACD-Histogram | 80 | -| | 24. The Directional System | 89 | -| | 25. Oscillators | 95 | -| | 26. Stochastic | 95 | -| | 27. Relative Strength Index | 99 | -| FIVE | Volume and Time | 103 | -| | 28. Volume | 103 | -| | 29. Volume-Based Indicators | 107 | -| | 30. Force Index | 112 | -| | 31. Open Interest | 117 | -| | 32. Time | 121 | -| | 33. Trading Timeframes | 126 | -| SIX | General Market Indicators | 133 | -| | 34. The New High–New Low Index | 133 | -| | 35. Stocks above 50-Day MA | 139 | -| | 36. Other Stock Market Indicators | 140 | -| | 37. Consensus and Commitment Indicators | 142 | -| SEVEN | Trading Systems | 149 | -| | 38. System Testing, Paper Trading, and the | | -| | Three Key Demands for Every Trade | 151 | -| | 39. Triple Screen Trading System | 154 | -| | 40. The Impulse System | 162 | -| | 41. Channel Trading Systems | 166 | -| EIGHT | Trading Vehicles | 173 | -| | 42. Stocks | 175 | -| | 43. ETFs | 176 | -| | 44. Options | 178 | -| | 45. CFDs | 186 | -| | 46. Futures | 187 | -| | 47. Forex | 194 | diff --git a/trading/The New Trading for a Living/002_CONTENTS.md b/trading/The New Trading for a Living/002_CONTENTS.md deleted file mode 100644 index a2b842b51f9c051120e803cb867f29c37e0457fc..0000000000000000000000000000000000000000 --- a/trading/The New Trading for a Living/002_CONTENTS.md +++ /dev/null @@ -1,25 +0,0 @@ -### CONTENTS **ix** - -| NINE | Risk Management | 197 | | | -|--------|-----------------------------------------------------------|-----|--|--| -| | 48. Emotions and Probabilities | 197 | | | -| | 49. The Two Main Rules of Risk Control | 202 | | | -| | 50. The Two Percent Rule | 203 | | | -| | 51. The Six Percent Rule | 208 | | | -| | 52. A Comeback from a Drawdown | 210 | | | -| TEN | Practical Details | 215 | | | -| | 53. How to Set Profit Targets: "Enough" Is the Power Word | 215 | | | -| | 54. How to Set Stops: Say No to Wishful Thinking | 219 | | | -| | 55. Is This an A-trade? | 225 | | | -| | 56. Scanning for Possible Trades | 230 | | | -| ELEVEN | Good Record-Keeping | | | | -| | 57. Your Daily Homework | 234 | | | -| | 58. Creating and Scoring Trade Plans | 238 | | | -| | 59. Trade Journal | 243 | | | -| | A Journey without an End: | | | | -| | How to Continue Learning | 249 | | | -| | Sources | 253 | | | -| | Acknowledgments | 257 | | | -| | About the Author | 259 | | | -| | Index | 261 | | | -| | | | | | diff --git a/trading/The New Trading for a Living/003_PREFACE.md b/trading/The New Trading for a Living/003_PREFACE.md deleted file mode 100644 index eb0ced604ff805fa0a4aacf45276d60d1c6e49da..0000000000000000000000000000000000000000 --- a/trading/The New Trading for a Living/003_PREFACE.md +++ /dev/null @@ -1,25 +0,0 @@ -### **PREFACE** - -*Trading for a Living* was published in 1993 and became an international best seller. It remains at the top of many reading lists, as friends recommend it to friends and trading firms give it to their new hires. All these years, I resisted revising my book because I trusted and liked its internal logic. I traded, traveled, wrote other books, and taught a few classes. Now, 21 years later, I agreed to update my most popular book so that you can benefit from the new technologies as well as the lessons I've learned. - -My late great friend Lou Taylor, to whom this book is dedicated, used to joke: "If I get half a percent smarter each year, I'll be a genius by the time I die." Revising my very first book felt like reliving my youth with the benefit of experience. - -In planning this update, I thought of a building complex in Vienna, Austria called the Gasometer. At its core are multistory storage tanks, erected by Austrian bricklayers in 1927. When modern technology made huge gas cylinders obsolete, architects converted them into modern apartments. They punched wide openings in brick walls, creating panoramic views, installed floors and elevators, and added glass-enclosed penthouses. I used to stay in one of them and wanted my new book to follow that model of blending old craftsmanship with new technology. - -Before you begin reading this book, ask yourself: what's the single most important step you can take to become a successful trader? - -Psychology is important. Since I was actively practicing psychiatry while writing the original *Trading for a Living*, its psychology part stood the test of time and I changed it very little in this new edition. - -Market analysis is very important—but remember that when we look at a chart, we deal with only five pieces of data—the open, the high, the low, the close and volume. Piling up masses of indicators and patterns on top of those five values only increases confusion. Less is often more. If you've read *Trading for a Living*, you'll see that I've reduced the number of technical chapters and moved some of them into a downloadable addendum. On the other hand, I added several new chapters that focus on new tools, notably the Impulse system. I also added a section on stops, profit targets and other practical details. - -Money management is extremely important because financial markets are hotbeds of risk. That was the weakest part of the original book, and I completely rewrote it. One of many tools you'll discover will be the Iron Triangle of risk control. - -Psychology, trading tactics, and money management are the three pillars of success, but there is the fourth factor that ties them together. That factor—which integrates all others—is record-keeping. - -Keeping good records will enable you to learn from your experiences. It'll help you break out of the vicious circle of small gains and big losses, running like a squirrel in a barrel, sweating and stressed but never getting anywhere. Keeping good records will make you your own teacher and a better trader. I'll show you several types of records you need to keep and will share several of my trade diaries. - -If you're a new reader, welcome to the journey. If you've already read *Trading for* a *Living*, I hope you'll find this new book two decades smarter than the first. - -> *Dr. Alexander Elder New York–Vermont, 2014* - -## **The New Trading for a Living** diff --git a/trading/The New Trading for a Living/004_Introduction.md b/trading/The New Trading for a Living/004_Introduction.md deleted file mode 100644 index 603e83481753dde7e9a91062245e7db9b5207e82..0000000000000000000000000000000000000000 --- a/trading/The New Trading for a Living/004_Introduction.md +++ /dev/null @@ -1,169 +0,0 @@ -# Introduction - -## ■ **1. Trading—The Last Frontier** - -You can be free. You can live and work anywhere in the world. You can be independent from routine and not answer to anybody. - -This is the life of a successful trader. - -Many aspire to it but few succeed. An amateur looks at a quote screen and sees millions of dollars sparkle in front of his face. He reaches for the money—and loses. He reaches again—and loses more. Traders lose because the game is hard, or out of ignorance, or from lack of discipline. If any of these ail you, I wrote this book for you. - -## **How I Began to Trade** - -In the summer of 1976, I drove from New York to California. I took along a few books on psychiatry (I was a first-year psychiatric resident), several histories, and put a paperback copy of Engel's *How to Buy Stocks* into the trunk of my old Dodge. Little did I know that a dog-eared paperback, borrowed from a lawyer friend, would in due time change the course of my life. That friend, incidentally, had a perfect reverse golden touch—any investment he touched went under water. But that's another story. - -I gulped down the Engel book in campgrounds across America, finishing it on a Pacific beach in La Jolla. I had known nothing about the stock market, and the idea of making money by thinking gripped me. - -I grew up in the Soviet Union in the days when it was, in the words of a former U.S. president, "an evil empire." I hated the Soviet system and wanted to get out, but emigration was forbidden. I entered college at 16, graduated medical school at 22, completed my residency, and then took a job as a ship's doctor. Now I could break free! I jumped the Soviet ship in Abidjan, Ivory Coast. - -I ran to the U.S. Embassy through the clogged dusty streets of an African port city, chased by my ex-crewmates. The embassy put me in a "safe house" and then on a plane to New York. I landed at Kennedy Airport in February 1974, arriving from Africa with \$25 in my pocket. I spoke some English, but did not know a soul in this country. - -I had no idea what stocks, bonds, futures, or options were and sometimes got a queasy feeling just from looking at the American dollar bills in my wallet. In the old country, a handful of them could buy you three years in Siberia. - -Reading *How to Buy Stocks* opened a whole new world for me. When I returned to New York, I bought my first stock—it was KinderCare. A very bad thing happened—I made money on my first trade and then the second one, leaving me with a delusion that making money in the markets was easy. It took me a couple of years to get rid of that notion. - -My professional career proceeded on a separate track. I completed a residency in psychiatry at a major university hospital, studied at the New York Psychoanalytic Institute, and served as book editor for the largest psychiatric newspaper in the United States. I still have my license, but my professional practice these days is at most an hour or two per month. I am busy trading, love traveling, and do some teaching. - -Learning to trade has been a long journey—with soaring highs and aching lows. In moving forward—or in circles—I repeatedly knocked my head against the wall and ran my trading account into the ground. Each time I returned to a hospital job, put a stake together, read, thought, did more testing, and then started trading again. - -My trading slowly improved, but the breakthrough came when I realized that the key to winning was inside my head and not inside a computer. Psychiatry gave me the insight into trading that I will share with you. - -## **Do You Really Want to Succeed?** - -For many years I had a friend whose wife was fat. She was an elegant dresser, and she had been on a diet for as long as I had known her. She said she wanted to lose weight and she didn't eat cake or potatoes in front of people—but when I came into her kitchen, I'd see her go at it with a big fork. She said she wanted to be slim, but remained fat. - -The short-term pleasure of eating was stronger for her than the delayed pleasure and health benefits of weight loss. My friend's wife reminded me of a great many traders who say they want to be successful but keep making impulsive trades—going for the short-term thrills of gambling in the markets. - -People deceive and play games with themselves. Lying to others is bad, but lying to yourself is hopeless. Bookstores are full of good books on dieting, but the world is still full of overweight people. - -This book will teach you how to analyze and trade the markets, control risks, and deal with your own mind. I can give you the knowledge. Only you can supply the motivation. - -And remember this: an athlete who wants to enjoy risky sports must follow safety rules. When you reduce risks, you gain an added sense of accomplishment and control. The same goes for trading. - -*You can succeed in trading only if you handle it as a serious intellectual pursuit. Emotional trading is lethal. To help ensure success, practice defensive money management. A good trader watches his capital as carefully as a professional scuba diver watches his air supply.* - -## ■ **2. Psychology Is the Key** - -Remember how you felt the last time you placed an order? Were you anxious to jump in or afraid of losing? Did you procrastinate before entering your order? When you closed out a trade, did you feel elated or humiliated? The feelings of thousands of traders merge into huge psychological tides that move the markets. - -## **Getting Off the Roller Coaster** - -The majority of traders spend most of their time looking for good trades. Once they enter a trade, they don't manage it but either squirm from pain or grin from pleasure. They ride an emotional roller coaster and miss the essential element of winning—the management of their emotions. Their inability to manage themselves leads to poor risk management and losses. - -If your mind is not in gear with the markets, or if you ignore changes in mass psychology of crowds, you have no chance of making money trading. All winning professionals know the enormous importance of psychology. Most losing amateurs ignore it. - -Friends and students who know that I am a psychiatrist often ask whether this helps me as a trader. Good psychiatry and good trading have one important principle in common. Both focus on reality, on seeing the world the way it is. To live a healthy life, you have to live with your eyes open. To be a good trader, you need to trade with your eyes open, recognize real trends and turns, and not waste time or energy on fantasies, regrets, and wishful thinking. - -## **A Man's Game?** - -Brokerage house records indicate that most traders are male. The files of my firm, Elder.com, confirm that approximately 85 to 90 percent of traders are male. The percentage of women traders among my clients, however, has more than doubled since the original edition of *Trading for a Living* was written twenty years ago. - -The English language being what it is, "he" flows better than "he or she" or jumping between the two pronouns. To make reading easier, I'll use the masculine pronoun throughout this book. Of course, no disrespect is intended to the many women traders. - -As a matter of fact, I find that the percentage of successful traders is higher among women. As a group, they tend to be more disciplined and less arrogant than men. - -## **How This Book Is Organized** - -The three pillars of successful trading are psychology, market analysis, and risk management. Good record-keeping ties them together. This book will help you learn the essentials of all these areas. - -Part One of this book will show you how to manage emotions in trading. I discovered this method while practicing psychiatry. It greatly improved my trading, and it can help you too. - -Part Two will focus on crowd psychology of the markets. Mass behavior is more primitive than that of individuals. If you understand how crowds behave, you'll be able to profit from their mood swings instead of being swept up in their emotional tides. - -Part Three will show how chart patterns reflect crowd behavior. Classical technical analysis is applied social psychology, like poll-taking. Support, resistance, breakouts, and other patterns reflect crowd behavior. - -Part Four will teach you modern methods of computerized technical analysis. Indicators provide a better insight into mass psychology than classical chart patterns. Trend-following indicators help identify market trends, while oscillators show when those trends are ready to reverse. - -Volume and open interest also reflect crowd behavior. Part Five will focus on them as well as on the passage of time in the markets. Crowds have short attention spans, and a trader who relates price changes to time gains a competitive advantage. - -Part Six will focus on the best tools for analyzing the stock market as a whole. They can be especially helpful for stock index futures and options traders. - -Part Seven will present several trading systems. We'll begin with the Triple Screen, which has become widely accepted, and then review the Impulse and Channel trading systems. - -Part Eight will discuss several classes of trading vehicles. It will outline pluses and minuses of equities, futures, options, and forex, while blowing away the promotional fog that clouds some of these markets. - -Part Nine will lead you into the all-important topic of money management. This essential aspect of successful trading is neglected by most amateurs. You can have a brilliant trading system, but if your risk management is poor, then a short string of losses will destroy your account. Armed with the Iron Triangle of risk control and other tools, you'll become a safer and more effective trader. - -Part Ten will delve into the nitty-gritty of trading—setting stops, profit targets, and scanning. These practical details will help you implement any system you like. - -Part Eleven will guide you through the principles and templates of good recordkeeping. The quality of your records is the single best predictor of your success. I'll offer you free downloads of the templates I like to use. - -Last but not least, this book has a separate Study Guide. It asks over 100 questions, each linked to a specific section of the book. All questions are designed to test your level of understanding and discover any blind spots. After you finish reading each section of this book, it'll make sense to turn to the Study Guide and answer questions relevant to that section. If test results turn out to be less than excellent, don't hurry, reread that section of the book, and retake the test. - -You are about to spend many hours with this book. When you find ideas that look important to you, test them in the only way that matters—on your own market data and in your own trading. You will make this knowledge your own only by questioning and testing it. - -## ■ **3. The Odds against You** - -Why do most traders lose and wash out of the markets? Emotional and mindless trading are big reasons, but there is another. Markets are actually set up so that most traders must lose money. The trading industry slowly kills traders with commissions and slippage. - -You pay commissions for entering and exiting trades. Slippage is the difference between the price at which you place your order and the price at which it gets filled. When you place a limit order, it is filled at your price or better, or not at all. When you feel eager to enter or exit and place a market order, it's often filled at a worse price than prevailed when you placed it. - -Most amateurs are unaware of the harm done by commissions and slippage, just as medieval peasants could not imagine that tiny invisible germs could kill them. If you ignore slippage and deal with a broker who charges high commissions, you're acting like a peasant who drinks from a communal pool during a cholera epidemic. - -The trading industry keeps draining huge amounts of money from the markets. Exchanges, regulators, brokers, and advisors live off the markets, while generations of traders keep washing out. Markets need a fresh supply of losers just as builders of the ancient pyramids needed a fresh supply of slaves. Losers bring money into the markets, which is necessary for the prosperity of the trading industry. - -## **A Minus-Sum Game** - -Winners in a zero-sum game make as much as losers lose. If you and I bet \$20 on the direction of the next 100-point move in the Dow, one of us will collect \$20 and the other will lose \$20. A single bet has a component of luck, but the more knowledgeable person will keep winning more often than losing over a period of time. - -People buy the industry's propaganda about trading being a zero-sum game, take the bait, and open accounts. They don't realize that trading is a *minus-*sum game. Winners receive less than what losers lose because the industry drains money from the markets. - -For example, roulette in a casino is a minus-sum game because the casino sweeps away between three and six percent of every bet. This makes roulette unwinnable in the long run. You and I can get into in a minus-sum game if we make the same \$20 bet on the next 100-point move in the Dow through brokers. When we settle, the loser will be out \$23, and the winner will collect only \$17, while two brokers will smile on their way to the bank. - -Commissions and slippage are to traders what death and taxes are to all of us. They take some fun out of life and ultimately bring it to an end. A trader must support his broker and the machinery of exchanges before he collects a dime. Being simply "better than average" is not good enough. You have to be head and shoulders above the crowd to win a minus-sum game. - -## **Commissions** - -Commissions have become much smaller in the past two decades. Twenty years ago, there were still brokers who charged one-way commissions of between half a percent and one percent of trade value. Buying a thousand shares of GE at \$20 a share, with a total value of \$20,000, would have set you back \$100 to \$200 on the way in—and again on the way out. Fortunately for traders, commission rates have plummeted. - -The extortionate rates haven't completely disappeared. While preparing this book for publication, I received an e-mail from a client in Greece with a small account whose broker—a major European bank—charged him a \$40 minimum on any trade. I told him of my broker whose minimum for a hundred shares is only \$1. - -Without proper care, even seemingly small numbers can raise a tall barrier to success. - -Look at a fairly active trader with a \$20,000 account, doing one roundtrip trade per day, four days a week. Paying \$10 one way, by the end of the week he'll spend \$80 in commissions: \$40 for entries and \$40 for exits. If he does that 50 weeks per year (if he lasts that long), by the end of the year he will have spent \$4,000 on commission. That would be 20% of his account! - -George Soros, a top money manager, delivers an average 29% annual return. He wouldn't be where he is if he paid 20% a year in commissions! Even a "small commission" can build up a major barrier to success! I've heard brokers chuckle as they gossiped about clients who beat their brains out just to stay even with the game. - -*Shop for the lowest possible commissions. Don't be shy about bargaining for lower rates. I've heard many brokers complain about a shortage of customers—but not many customers complain about the shortage of brokers. Tell your broker it is in his best interest to charge you low commissions because you will survive and remain a client for a long time. Design a trading system that will trade less often.* - -In my own trading, I maintain one major account with a broker who charges me \$7.99 for unlimited size trades and another with a broker who charges a penny a share, with a \$1 minimum. When I trade expensive stocks, where I buy fewer than 800 shares, I give that order to the penny-a-share broker; otherwise, I go with the \$7.99-per-trade broker. A beginning trader, making his first steps, should look for a penny-a-share broker. Then you can trade your 100 shares for a dollar. A futures trader can expect to pay just a couple of dollars for a roundtrip trade. - -## **Slippage** - -Slippage means having your orders filled at a different price than what you saw on the screen when you placed your order. It is like paying 50 cents for an apple in a grocery store even though the posted price is 49 cents. A penny is nothing—but if you're buying a thousand apples or a thousand shares with a penny slippage, it'll come to \$10 per order, probably greater than your commission. - -There are two main types of orders: market and limit. Your slippage depends on which of these types you use. - -A limit order says—'give me that apple at 49 cents.' It guarantees the price, but doesn't guarantee a fill. You'll pay no more than 49 cents, but you may end up without the apple that you wanted. - -A market order says—'give me that apple.' It guarantees a fill, but doesn't guarantee the price. If prices of apples are rising when you place your order, you may well pay more than you saw on the screen when you pushed the buy button. You may get hit by slippage. - -Slippage on market orders rises with market volatility. When the market begins to run, slippage goes through the roof. - -Do you have any idea how much slippage costs you? - -There is only one way to find out: write down the price at the time you placed a market order, compare it with your fill, and multiply the difference by the number of shares or contracts. Needless to say, you need a good record-keeping system, such as a spreadsheet with columns for each of the above numbers. We offer such a spreadsheet to traders as a public service at [www.elder.com.](http://www.elder.com) - -You'll be reading "record this" and "record that" throughout this book. Remember that good record-keeping is essential for your success. You have to keep an eye on your wins and an even sharper eye on your losses because you can learn much more from them. - -Here's a shocking number, which you can confirm by keeping good records: an average trader spends three times more on slippage than on commissions. - -Earlier we talked about commissions raising a barrier to success. The barrier from slippage is three times higher. This is why, no matter how tempting a trade, you need to avoid buying "at the market." - -You want to be in control and trade only at prices that suit you. There are thousands of stocks and dozens of futures contracts. If you miss a trade due to a limit order, there'll be countless other opportunities. Do not overpay! I almost always use limit orders and resort to market orders only when placing stops. When a stop level gets hit, it becomes a market order. When a trade is flaming out, it's not the time to economize. Get in slow but get out fast. - -*To reduce slippage, trade liquid, high-volume markets and avoid thinly traded stocks, where slippage tends to be higher. Go long or short when the market is quiet, and use limit orders to buy or sell at specified prices. Keep a record of prices at the time you placed your order. Demand your broker fight the floor for a better fill when necessary.* - -## **Bid-Ask Spreads** - -Whenever the market is open, there are always two prices for any trading vehicle—a bid and an ask. A bid is what people are offering to pay for that security at that moment; an ask is what sellers are demanding in order to sell it. A bid is always lower, an ask higher, and the spread between them keeps changing. - -Bid-ask spreads vary between different markets and even in the same market at different times. Bid-ask spreads are higher in thinly traded vehicles, as the pros who dominate such markets demand high fees from those who want to join their party. The bid-ask spreads are likely to be razor-thin, perhaps only one tick on a quiet day in an actively traded stock, future or option. They grow wider as prices accelerate on the way up or down and may become huge—dozens of ticks—after a severe drop or a very sharp rally. - -Market orders get filled at the bad side of bid-ask spreads. A market order buys at the ask (high) and sells at the bid (low). Little wonder that many professional traders make a good living from filling market orders. Don't feed the wolves—use limit orders whenever possible! - -## **The Barriers to Success** - -Slippage and commissions make trading similar to swimming in a piranha-infested river. Other expenses also drain traders' money. The cost of computers and data, fees for advisory services and books—including the one you are reading now—all come out of your trading funds. - -*Look for a broker with the cheapest commissions and watch him like a hawk. Design a trading system that gives signals relatively infrequently and allows you to enter markets during quiet times. Use limit orders almost exclusively*—*except when placing stops. Be careful on what tools you spend money: there are no magic solutions. Success cannot be bought, only earned.* diff --git a/trading/The New Trading for a Living/005_PART 1 Individual Psychology.md b/trading/The New Trading for a Living/005_PART 1 Individual Psychology.md deleted file mode 100644 index 52252a75aabc6ca51f79c9b87641e48830904f46..0000000000000000000000000000000000000000 --- a/trading/The New Trading for a Living/005_PART 1 Individual Psychology.md +++ /dev/null @@ -1,461 +0,0 @@ -# Individual Psychology - -## ■ **4. Why Trade?** - -Trading appears deceptively easy. A beginner may cautiously enter the market, win a few times, and start feeling brilliant and invincible. That's when he starts taking wild risks and ends up with bad losses. - -People trade for many reasons—some rational and many irrational. Trading offers an opportunity to make a lot of money in a hurry. Money symbolizes freedom to many people, even though they often don't know what to do with it. - -If you know how to trade, you can make your own hours, live and work anywhere you please, and never answer to a boss. Trading is a fascinating game: chess, poker, and a video game rolled into one. Trading attracts people who love challenges. - -It attracts risk-takers and repels those who avoid risk. An average person gets up in the morning, goes to work, has a lunch break, returns home, has a beer and dinner, watches TV, and goes to sleep. If he makes a few extra dollars, he puts them into a savings account. A trader keeps odd hours and puts his capital at risk. Many traders are loners who abandon the certainties of the routine and take a leap into the unknown. - -## **Self-Fulfillment** - -Many people have an innate drive to achieve their personal best, to develop their abilities to the fullest. This drive, along with the pleasure of the game and the lure of money, propels traders to challenge the markets. - -Good traders tend to be hardworking and shrewd people, open to new ideas. The goal of a good trader, paradoxically, is not to make money. His goal is to trade well. If he trades right, money follows almost as an afterthought. Successful traders keep honing their skills as they try to reach their personal best. - -A professional trader from Texas invited me to his office and said: "If you sit across the table from me while I day-trade, you won't be able to tell whether I am \$2,000 ahead or \$2,000 behind on that day." He has risen to a level where winning does not elate him and losing does not deflate him. He is so focused on trading right and improving his skills that money no longer influences his emotions. - -The trouble with self-fulfillment is that many people have self-destructive streaks. Accident-prone drivers keep destroying their cars, and self-destructive traders keep destroying their accounts. Markets offer vast opportunities for self-sabotage, as well as for self-fulfillment. Acting out your internal conflicts in the marketplace is a very expensive proposition. - -Traders who are not at peace with themselves often try to fulfill their contradictory wishes in the markets. If you don't know where you are going, you'll wind up somewhere you never wanted to be. - -## ■ **5. Reality versus Fantasy** - -If a friend with little farming experience told you that he planned to feed himself with food grown on a quarter-acre (1,000 square meters) plot, you'd expect him to go hungry. One can squeeze only so much from a small piece of land. There is, however, a field in which grown-ups let their fantasies fly—in trading. - -A former employee told me that he planned to support himself trading a \$6,000 account. When I tried to show him the futility of his plan, he quickly changed the topic. He was a bright analyst, but refused to see that his "intensive farming" plan was suicidal. In his desperate effort to succeed, he'd have to take on large positions—and the slightest wiggle of the market will quickly put him out of business. - -A successful trader is a realist. He knows his abilities and limitations. He sees what's happening in the markets and knows how to react. He analyzes the markets without cutting corners, observes himself, and makes realistic plans. A professional trader cannot afford illusions. - -Once an amateur takes a few hits and gets a few margin calls, he swings from cocky to fearful and starts developing strange ideas about the markets. Losers buy, sell, or avoid trades due to their fantastic ideas. They act like children who are afraid to pass a cemetery or look under their bed at night because they are afraid of ghosts. The unstructured environment of the market makes it easy to develop fantasies. - -Most people who grow up in Western civilization have several similar fantasies. They are so widespread that when I studied at the New York Psychoanalytic Institute, there was a course called "Universal Fantasies." For example, many people have a fantasy in childhood that they were adopted. This fantasy seems to explain the unfriendly and impersonal world. It consoles a child but prevents him from being aware of a reality he'd rather not see—that his parents aren't that good. Our fantasies influence our behavior, even if we aren't consciously aware of them. - -In talking to hundreds of traders, I keep hearing several universal fantasies. They distort reality and stand in the way of trading success. A successful trader must identify his fantasies and get rid of them. - -## **The Brain Myth** - -Losers who suffer from the "brain myth" will tell you, "I lost because I didn't know trading secrets." Many have a fantasy that successful traders have some secret knowledge. That fantasy helps support a lively market in advisory services and ready-made trading systems. - -A demoralized trader may whip out his credit card to buy access to "trading secrets." He may send money to a charlatan for a \$3,000 "can't miss," backtested, computerized trading system. When that system self-destructs, he'll pull out his almost-maxed-out credit card again for a "scientific manual" that explains how he can stop losing and begin winning by contemplating the moon, the stars, or even Uranus. - -At an investment club we used to have in New York, I often ran into a famous financial astrologer. He often asked for free admission because he couldn't afford to pay a modest fee for the meeting and a meal. His main source of income remains collecting money for astrological trading predictions from hopeful amateurs. - -Losers don't realize that trading is intellectually fairly simple. It is nowhere near as demanding as taking out an appendix, building a bridge, or trying a case in court. Good traders are shrewd, but few are intellectuals. Many have never been to college, and some have dropped out of high school. - -Intelligent and hardworking people who have succeeded in their careers often feel drawn to trading. - -Why do they fail so often? What separates winners from losers isn't intelligence or secrets, and certainly not education. - -## **The Undercapitalization Myth** - -Many losers think that they would trade successfully if they had a bigger account. - -People destroy their accounts either by a string of losses or a single abysmally bad trade. Often, after the loser is sold out, unable to meet a margin call, the market reverses and moves in the direction he expected. He starts fuming: had he survived another week, he would have made a fortune instead of losing! - -Such people look at market reversals that come too late and think that those turns confirm their methods. They may go back to work and earn, save, or borrow enough money to open another small account. History repeats itself: The loser gets wiped out, the market reverses and "proves" him right, but only too late—he's been sold out again. That's when the fantasy is born: "If only I had a bigger account, I could have stayed in the market longer and won." - -Some losers raise money from relatives and friends by showing them a paper track record. It seems to prove that they would have won big, if only they had had more money to work with. But even if they raise more money, they lose that, too—as if the market were laughing at them! - -A loser is not undercapitalized—his mind is underdeveloped. A loser can destroy a big account almost as quickly as a small one. An acquaintance of mine once blew out over 200 million dollars in a day. His broker sold him out—and then the market turned. He sued the broker and said to me: "If only I had a bigger account…." Apparently an account with \$200 million wasn't big enough. - -A loser's true problem is not account size but overtrading and sloppy money management. He takes risks that are too big for his account size, however small or big. No matter how good his system may be, a streak of bad trades is sure to put him out of business. - -Amateurs neither expect to lose nor are prepared to manage losing trades. Calling themselves undercapitalized is a cop-out that helps them avoid two painful truths: their lack of a realistic money management plan and lack of discipline. - -A trader who wants to survive and prosper must control losses. You do that by risking only a tiny fraction of your equity on any single trade (see Section Nine, "Risk Management"). Learn from cheap mistakes in a small account. - -The one advantage of a large trading account is that the price of equipment and services represents a smaller percentage of your money. The owner of a milliondollar fund who spends \$5,000 on classes is only ½ percent behind the game. The same expenditure would represent a deadly 25 percent of equity for a trader with a \$20,000 account. - -## **The Autopilot Myth** - -Traders who believe in the autopilot myth think that the pursuit of wealth can be automated. Some people try to develop an automatic trading system, while others buy systems from vendors. Men who have spent years honing their skills as lawyers, doctors, or businessmen plunk down thousands of dollars for canned competence. Most are driven by greed, laziness, and mathematical illiteracy. - -Systems used to be written on sheets of paper, but now they get downloaded on a computer. Some are primitive; others are elaborate, with built-in optimization and even money management rules. Many traders spend thousands of dollars searching for magic that will turn a few pages of computer code into an endless stream of money. People who pay for automatic trading systems are like medieval knights who paid alchemists for the secret of turning base metals into gold. - -Complex human activities do not lend themselves to automation. Computerized learning systems have not replaced teachers, and programs for doing taxes haven't created unemployment among accountants. Most human activities call for an exercise of judgment; machines and systems can help but not replace humans. - -Had there been a successful automatic trading system, its purchaser could move to Tahiti and spend the rest of his life at leisure, supported by a stream of checks from his broker. So far, the only people who've made money from trading systems are their sellers. They form a small but colorful cottage industry. If their systems worked, why would they sell them? They could move to Tahiti themselves and cash checks from their brokers! Meanwhile, every system seller has a line. Some say they like programming better than trading. Others claim that they sell their systems only to raise capital or even out of love for humanity. - -Markets are always changing and defeating automatic trading systems. Yesterday's rigid rules will work less well today and will probably stop working tomorrow. A competent trader can adjust his methods when he detects trouble. An automatic system is less adaptable and self-destructs. - -Airlines pay high salaries to pilots despite having autopilots. They do it because humans can handle unforeseen events. When a roof blows off an airliner over the Pacific or when a passenger jet loses both engines to a flock of geese over Manhattan, only a human can handle such crises. These emergencies have been reported in the press, and in each of them, experienced pilots managed to land their airliners by improvising solutions. No autopilot can do that. Betting your money on an automatic system is like betting your life on an autopilot. The first unexpected event will make your account crash and burn. - -There are good trading systems out there, but they have to be monitored and adjusted using individual judgment. You have to stay on the ball—you cannot abdicate responsibility for your success to a mechanical system. - -Traders with autopilot fantasies try to repeat what they felt as infants. Their mothers used to fulfill their needs for food, warmth, and comfort. Now they try to recreate the experience of passively lying on their backs and having profits flow to them like an endless stream of free, warm milk. The market is not your mother. It consists of tough men and women who look for ways to take money from you rather than pouring warm milk into your mouth. - -## **The Cult of Personality** - -Most people pay lip service to their wish for freedom and independence, but when they come under pressure, they change their tune and start looking for "strong leadership." Traders in distress often seek directions from assorted gurus. - -When I was growing up in the former Soviet Union, children were taught that Stalin was our great leader. Later we found out what a monster he was, but while he was alive, most people enjoyed following the leader. He freed them from the need to think for themselves. - -"Little Stalins" were installed in every area of society—in economics, biology, architecture, and so on. When I came to the United States and began to trade, I was amazed to see how many traders were looking for a guru—their own "little Stalin." The fantasy that someone else can make you rich is always with us. - -There are three types of gurus in the financial markets: market cycle gurus, magic method gurus, and dead gurus. Cycle gurus call important market turns. Method gurus promote new highways to riches. Still others have escaped criticism and invited cult following through the simple mechanism of departing this world. - -#### **Market Cycle Gurus** - -For many decades, the U.S. stock market has generally followed a four-year cycle. The broad stock market has normally spent 2.5 or 3 years going up and 1 or 1.5 years going down. A new market cycle guru emerges in almost every major stock cycle, once every 4 years. A guru's fame tends to last for 2 to 3 years. The reigning period of each guru coincides with a major bull market in the United States. - -A market cycle guru forecasts rallies and declines. Each correct forecast increases his fame and prompts even more people to buy or sell when he issues his pronouncements. A market cycle guru has a pet theory about the market. That theory—cycles, volume, Elliott Wave, whatever—is usually developed several years prior to reaching stardom. At first, the market refuses to follow an aspiring guru's pet theory. Then the market changes and for several years comes in gear with the guru's calls. That is when the guru's star rises high above the marketplace. - -Compare this to what happens to fashion models as public tastes change. One year, blondes are popular, another year, redheads. Suddenly, last year's blonde star is no longer wanted for the front cover of a major magazine. Everybody wants a dark model, or a woman with a birthmark on her face. A model doesn't change—public tastes do. - -Gurus always come from the fringes of market analysis. They are never establishment analysts. Institutional employees play it safe—afraid to stick their necks out and almost never achieve spectacular results. A market cycle guru is an outsider with a unique theory. - -A guru remains famous for as long as the market behaves according to his the– ory—usually for less than the duration of one 4-year market cycle. At some point, the market changes and starts marching to a different tune. A guru continues to use old methods that worked so well in the past and loses his following. When the guru's forecasts stop working, public admiration turns to hatred. It's impossible for a discredited market cycle guru to return to stardom. - -All market cycle gurus have several traits in common. They become active in the forecasting business several years prior to reaching stardom. Each has a unique theory, a few followers, and some credibility, conferred by sheer survival in the advisory business. The fact that each guru's theory did not work for a number of years is ignored by his followers. When the theory becomes correct, the mass media take notice. When a theory stops working, mass adulation turns to hatred. - -When you recognize that a successful new guru is emerging, it may be profitable to jump on his bandwagon. It's even more important to recognize when a guru has reached his peak. All gurus crash—and by definition, they crash from the height of their fame. When a guru becomes accepted by the mass media, it's a good sign that he has reached his crest. The mainstream media is wary of outsiders. When several mass magazines devote space to a hot market guru, you know that his end is near. Mass psychology being what it is, new gurus will continue to emerge. - -#### **Magic Method Gurus** - -While cycle gurus are creatures of the stock market, "method gurus" are more prominent in the derivatives markets. A "method guru" erupts on the financial scene after discovering a new analytic or trading method. - -Traders always look for an edge, an advantage over fellow traders. Like knights shopping for swords, they are willing to pay handsomely for their trading tools. No price is too high if it lets them tap into a money pipeline. - -A magic method guru sells a new set of keys to market profits—speedlines, cycles, Market Profile, etc. It may have an edge in the beginning, but as soon as enough people become familiar with a new method and test it in the markets, it inevitably deteriorates and starts losing popularity. Markets are forever grinding down each method's edge, and what worked yesterday is less likely to work today and highly unlikely a year from now. - -Oddly enough, even in this era of global communications, reputations change slowly. A guru whose image has been destroyed in his own country can make money peddling his theory overseas. That point has been made to me by a guru who compared his continued popularity in Asia to what happens to faded American singers and movie stars. They are unable to attract an audience in the United States, but they can still make a living singing abroad. - -#### **Dead Gurus** - -The third type of a market guru is a dead guru. His books are reissued, his market courses are scrutinized by new generations of eager traders, and the legend of the dear-departed analyst's prowess and personal wealth grows posthumously. The dead guru is no longer among us and cannot capitalize on his fame. Other promoters profit from his reputation and expired copyrights. One dear-departed guru is R. N. Elliott, but the best example of such a legend is W. D. Gann. - -Various opportunists sell "Gann courses" and "Gann software." They claim that Gann was one of the best traders who ever lived, that he left a \$50 million estate, and so on. I interviewed W. D. Gann's son, an analyst for a Boston bank. He told me that his famous father could not support his family by trading but earned his living by writing and selling instructional courses. He could not afford a secretary and made his son work for him. When W. D. Gann died in the 1950s, his estate, including his house, was valued at slightly over \$100,000. The legend of W. D. Gann, the giant of trading, is perpetuated by those who sell courses and other paraphernalia to gullible customers. - -#### **The Followers of Gurus** - -A guru has to produce original research for several years, then get lucky when the market turns his way. While some gurus are dead, those who are alive range from serious academic types to great showmen. To read about scandals surrounding many gurus, try *Winner Takes All* by William R. Gallacher. - -When we pay a guru, we expect to get back more than we spend. We act like a man who bets a few dollars against a three-card Monte dealer on a street corner. He hopes to win more than he put down on an overturned crate. Only the ignorant or greedy take the bait. - -Some people turn to gurus in search of a strong leader. They look for a parent-like omniscient provider. As a friend once said, "They walk with their umbilical cords in hand, looking for a place to plug them in." A smart promoter provides such a receptacle, for a fee. - -*The public wants gurus, and new gurus will come. As an intelligent trader, you must realize that in the long run, no guru is going to make you rich. You have to work on that yourself.* - -Occasionally, when I give a talk or appear on TV, someone introduces me as a "famous guru." I shudder at those words and interrupt such introductions. A guru is someone claiming to lead the crowds across the desert for a donation. No such pitches here! - -I always begin by explaining that there are no magic methods, that the field of trading is as huge and diverse as that of medicine, where one needs to choose one specialty and work hard to become good at it. I chose my path a long time ago, and what I do in front of a class is simply think out loud, sharing my modes of research and decision making. - -## **Trade with Your Eyes Open** - -Wishful thinking is stronger than dollars. Recent research has proven that people have a prodigious ability to lie to themselves and avoid seeing the truth. - -Duke University professor Dan Ariely describes a clever experiment. A group of people are given an intelligence test, but half of them are "accidentally" shown a response sheet, allowing them to look up correct answers before recording their own. Needless to say, they score above the rest. Next, everybody is asked to predict their grades on the next IQ test, in which there will be absolutely no cheat sheets—and those who predict correctly will get paid. Surprisingly, the half of the group that scored higher with cheat sheets predicted higher results for the next test. The cheaters wanted to believe they were very smart, even though their incorrect predictions of success would cost them money. - -A successful trader cannot afford wishful thinking—he must be a realist. There are no cheat sheets in the markets—you can see the truth in your trade diaries and equity curves. - -To win in the markets, we need to master three essential components of trading: sound psychology, a logical trading system, and an effective risk management plan. These are like three legs of a stool—remove one and the stool will fall. It is a typical beginner mistake to focus exclusively on indicators and trading systems. - -*You have to analyze your feelings as you trade to make sure that your decisions are sound. Your trades must be based on clearly defined rules. You have to structure your money management so that no string of losses can kick you out of the game.* - -## ■ **6. Self-Destructiveness** - -Trading is a very hard game. A trader who wants to win and remain successful in the long run has to be extremely serious about his craft. He cannot afford to be naive or to trade because of some hidden psychological agenda. - -Unfortunately, trading often appeals to impulsive people, gamblers, and those who feel that the world owes them a living. If you trade for the excitement, you'll inevitably take trades with bad odds and accept needless risks. The markets are unforgiving, and emotional trading always results in losses. - -## **Gambling** - -Gambling means betting on games of chance or skill. It exists in all societies, and most people have gambled at some point in their lives. - -Freud believed that gambling was universally attractive because it was a substitute for masturbation. The repetitive and exciting activity of the hands, the irresistible urge, the resolutions to stop, the intoxicating quality of pleasure, and the feelings of guilt link gambling and masturbation. - -Dr. Ralph Greenson, a prominent California psychoanalyst, has divided gamblers into three groups: the normal person who gambles for diversion and who can stop when he wishes; the professional gambler, who selects gambling as his means of earning a livelihood; and the neurotic gambler, who gambles because he is driven by unconscious needs and is unable to stop. - -A neurotic gambler either feels lucky or wants to test his luck. Winning gives him a sense of power. He feels pleased, like a baby feeding at a breast. In the end, a neurotic gambler always loses because he tries to recreate that omnipotent feeling of bliss instead of concentrating on a realistic long-term game plan. - -Dr. Sheila Blume, director of the compulsive gambling program at South Oaks Hospital in New York, called gambling "an addiction without a drug." Most gamblers are men who gamble for the action. Women tend to gamble as a means of escape. Losers usually hide their losses and try to look and act like winners, but are plagued by self-doubt. - -Trading stocks, futures, and options gives a gambler a high, while looking more respectable than betting on the ponies. Gambling in the financial markets has a greater aura of sophistication than playing numbers with a bookie. - -Gamblers feel happy when trades go in their favor. They feel terribly low when they lose. They differ from successful professionals who focus on long-term plans and don't get particularly upset or excited over any single trade. - -*The key sign of gambling is the inability to resist the urge to bet. If you feel that you are trading too much and the results are poor, stop trading for a month. This will give you a chance to re-evaluate your trading. If the urge to trade is so strong that you cannot stay away from the action for a month, then it is time to visit your local chapter of Gamblers Anonymous or start using the principles of Alcoholics Anonymous, outlined later in this chapter.* - -## **Self-Sabotage** - -After practicing psychiatry for decades, I became convinced that most failures in life are due to self-sabotage. We fail in our professional, personal, and business affairs not because of bad luck or incompetence, but to fulfill an unconscious wish to fail. - -A brilliant friend of mine had a lifelong history of demolishing his success. As a young man, he was a successful pharmacist but lost his business; became a broker and rose near the top of his firm but was sued; turned to trading but busted out while disentangling himself from previous disasters. He blamed all his failures on envious bosses, incompetent regulators, and an unsupportive wife. - -Finally, he hit bottom. He had no job and no money. He borrowed a quote terminal from another busted-out trader and raised capital from a few people who had heard that he had traded well in the past. He started making money for his pool, and as the word spread, more people invested. My friend was on a roll. At that point, he went on a speaking tour of Asia but continued to trade from the road. He took a side trip into a country famous for its brothels, leaving a very large open position in bond futures, with no protective stop. By the time he returned to civilization, the market had staged a major move and his pool was wiped out. Did he try to figure out his problem? To learn? No—he blamed his broker! Afterwards I helped him get an attractive job at a major data company, but there he began to bite the hands that fed him and was fired. In the end, this brilliant man was going door to door, selling aluminum siding—while others made money using his techniques. - -When traders get in trouble, they tend to blame others, bad luck, or anything else. It hurts to look within yourself for the cause of your failure. - -A prominent trader came to me for a consultation. His equity was being demolished by a rally in the U.S. dollar, in which he was heavily short. He had grown up fighting an abusive and arrogant father. He had made a name for himself by betting large positions on reversals of established trends. This trader kept adding to his short position because he could not admit that the market, which represented his father, was bigger and stronger than he was. - -These are just two examples of how people act out their self-destructive tendencies. We sabotage ourselves by acting like impulsive children rather than intelligent adults. We cling to our self-defeating patterns. They can be treated—failure is a curable disease. - -*The mental baggage from childhood can prevent you from succeeding in the markets. You have to identify your weaknesses and work to change. Keep a trading diary—write down your reasons for entering and exiting every trade. Look for repetitive patterns of success and failure.* - -## **The Demolition Derby** - -All society members make small allowances to protect one another from the consequences of their mistakes. When you drive, you try to avoid hitting other cars, and they try to avoid hitting you. If someone cuts in front of you on a highway, you may curse, but you will slow down. If someone swings open the door of a parked car, you swerve. You avoid collisions because they are costly for both parties. - -Almost all professions provide safety nets for their members. Your bosses, colleagues, and clients will warn you when you behave badly or self-destructively. There is no such safety net in trading, which makes it more dangerous than most human endeavors. The markets offer endless opportunities to self-destruct. - -Buying at the high point of the day is like swinging your car door open into the traffic. When your order to buy reaches the floor, traders rush to sell to you—to tear off your door along with your arm. Other traders want you to fail because when you lose they get your money. - -Markets operate without normal human helpfulness. Every trader gets hit by others. Every trader tries to hit others. The trading highway is littered with wrecks. Trading is the most dangerous human endeavor, short of war. - -## **Controlling Self-Destructiveness** - -Most people go through life making the same mistakes decade after decade. Some structure their lives to succeed in one area, while acting out their internal conflicts in another. - -*You need to be aware of your tendency to sabotage yourself. Stop blaming your losses on bad luck or on others, and take responsibility for your results. Start keeping a diary—a record of all your trades, with reasons for entering and exiting them. Look for repetitive patterns of success and failure. Those who don't learn from the past are condemned to repeat it.* - -A trader needs a psychological safety net the way a mountain climber needs his survival gear. I found the principles of Alcoholics Anonymous, outlined below, to be of great help at an early stage of trader development. Strict money management rules also provide a safety net, while the diary helps you learn from your mistakes as well as successes. - -## ■ **7. Trading Psychology** - -Your success or failure as a trader depends on your emotions. You may have a brilliant trading system, but if you feel arrogant, frightened, or upset, your account is sure to suffer. If you become aware of fear, greed, or a gambler's high, close your trades. - -In trading, you compete against the sharpest minds in the world. Commissions and slippage slant the field against you. Now, on top of that, if you allow your emotions to interfere with your trading, the battle is lost. My friend and partner in SpikeTrade.com Kerry Lovvorn is fond of repeating: "It is hard enough to know what the market is going to do; if you don't know what you are going to do, the game is lost." - -Having a good trading system is not enough. Many traders with good systems wash out because psychologically they are not prepared to win. - -## **Bending the Rules** - -Markets offer enormous temptations, like walking through a gold vault or through a harem. They provoke great surges of greed and even greater waves of fear of losing what we've got. Those feelings cloud our perceptions of market reality. - -Most amateurs feel like geniuses after a short winning streak. It is exciting to believe that you are so good that all your trades are sure to be winners. That's when traders start deviating from their rules and damage their accounts. - -Traders gain some knowledge, win, their emotions kick in, and they self-destruct. Most traders promptly give their "killings" back to the markets, which are full of rags to riches to rags stories. The hallmark of a successful trader is the ability to accumulate equity. - -You need to make trading as objective as possible. Be sure to follow money management rules. Keep a spreadsheet listing all your trades, including commissions and slippage. Keep a diary of all your trades with "before and after" charts. At the early stages of your trading career, you may have to devote as much energy to analyzing yourself as analyzing the markets. - -When I was learning to trade, I read every book on trading psychology I could find. Many writers offered sensible advice. Some stressed discipline: "You cannot let the markets sway you. Don't make decisions during trading hours. Plan a trade, and trade a plan." Others stressed flexibility: "Don't enter the market with any preconceived notions. Change your plans when markets change." Some experts suggested isolation—no business news, no *Wall Street Journal*, no listening to other traders, just you and the market. Others advised being open-minded, keeping in touch with other traders, and soaking up fresh ideas. Each piece of advice seemed to make sense, but they contradicted one another. - -I kept reading, trading, and focusing on system development. I also continued to practice psychiatry. I never thought the two fields were connected—until I had a sudden insight. The idea that changed how I trade came from psychiatry. - -## **The Insight That Changed My Trading** - -Like most psychiatrists, I always had some patients with alcohol problems. I also served as a consultant to a major drug rehabilitation program. It didn't take me long to realize that alcoholics and addicts were more likely to recover in self-help groups than in classical psychiatric settings. - -Psychotherapy, medications, and expensive hospitals and clinics can sober up a drunk but seldom succeed in helping him remain sober. Most addicts quickly relapse. They have a much better chance to recover if they become active in Alcoholics Anonymous (AA) and similar self-help groups. - -Once I realized that AA members were more likely to stay sober and rebuild their lives, I became a big fan of Alcoholics Anonymous. I began sending patients with drinking problems to AA and related groups, such as ACOA (Adult Children of Alcoholics). If an alcoholic came to me for treatment, I insisted that he also go to AA because otherwise he'd be wasting both our time and his money. - -One night I stopped by a friend's office on the way to a party. We had two hours before it began, and my friend, who was a recovering alcoholic, said: "Do you want to take in a movie or go to an AA meeting?" I had sent many patients to AA but had never been to a meeting, since I have never had a drinking problem. I jumped at a chance to attend an AA meeting—it was a new experience. - -The meeting was held at a local YMCA. A dozen men and a few women sat on folding chairs in a plain room. The meeting lasted an hour. I was amazed by what I heard—these people seemed to talk about my trading! - -They talked about alcohol, but as long as I substituted the word "loss" for "alcohol," most of what they said applied to me! My account equity was swinging up and down in those days. I left that meeting knowing that I had to handle my losses the way AA handles alcoholism. - -## ■ **8. Trading Lessons from AA** - -Almost any drunk can stay sober for a few days—until the urge to drink drives him back to the bottle. He cannot resist as long as he continues to think and feel like an alcoholic. Sobriety begins inside a person's mind. - -Alcoholics Anonymous (AA) has a system for changing the way people think and feel about drinking. AA members use a 12-step program for changing their minds. These 12 steps, described in the book *Twelve Steps and Twelve Traditions*, refer to 12 stages of personal growth. Recovering alcoholics attend meetings where they share their experiences with other recovering alcoholics, supporting each other in their sobriety. Any member can get a sponsor—another AA member whom he can call for support when he feels the urge to drink. - -AA was founded in the 1930s by two alcoholics—a doctor and a traveling salesman who began meeting to help each other stay sober. They developed a system that worked so well, others began to join them. AA has only one goal—to help its members stay sober. It doesn't ask for money, takes no political positions, and runs no promotional campaigns. AA keeps growing thanks only to word of mouth and owes its success only to its effectiveness. - -The 12-step program of AA is so effective that people with other problems now use it. There are 12-step groups for children of alcoholics, gamblers, and others. I've become convinced that traders can stop losing money if they apply the key principles of Alcoholics Anonymous to their trading. - -## **Denial** - -A social drinker enjoys a cocktail, a glass of wine, or a beer but stops when he feels he's had enough. An alcoholic's chemistry is different. Once an alcoholic takes a drink, he feels an urge to continue until he passes out or his money runs out. - -A drunk may say that he needs to cut down on drinking, but can't admit that it's out of control. Try telling an alcoholic relative, friend, or employee that his drinking is out of control and damaging his life, and you'll run into a wall of denial. - -An alcoholic may say: "My boss fired me 'cause I was hung over and came in late. My wife took the kids and left 'cause she had no sense to begin with. My landlord is trying to kick me out of the apartment 'cause I'm a little behind on the rent. I'm gonna have to cut down on my drinking, and everything will be all right." - -This man has lost his family and his job. He is about to lose the roof over his head. His life is spinning out of control—but he keeps saying that he can cut down on his drinking. This is denial! - -Alcoholics deny their problems while their lives are falling apart. As long as an alcoholic believes that he can "control his drinking," he is headed downhill. Nothing will ever change, even if he gets a new job, a new wife, and a new landlord. - -Alcoholics deny that alcohol controls their lives. When they talk of reducing drinking, they talk about managing the unmanageable. They are like a driver whose car spins out of control on a mountain road. When the car careens down a cliff, it is too late to promise to drive carefully. An alcoholic's life careens out of control, while he denies he's an alcoholic. - -*There is a stark parallel between an alcoholic and a trader whose account is being demolished by losses. As he keeps changing his trading tactics, he acts like an alcoholic who tries to solve his problem by switching from hard liquor to beer. A loser denies that he's lost control over his trading life.* - -## **Rock Bottom** - -A drunk can begin his journey to recovery only after he admits that he is an alcoholic. He must see that alcohol controls his life and not the other way around. Most drunks cannot accept this painful truth. They can face it only after they hit rock bottom. - -Some alcoholics hit rock bottom when they develop a life-threatening illness. Others hit it after being rejected by their family or losing a job. An alcoholic needs to sink to a point so low, so deep down in the gutter, so unbearably painful that it finally penetrates his denial. - -The pain of hitting rock bottom makes an alcoholic see how deep he has sunk. He sees a simple stark choice—either turn his life around or die. Only then is an alcoholic ready to begin his journey to recovery. - -*Profits give traders an emotional high and a feeling of power. They try to get high again, put on reckless trades, and give back their profits. Most traders cannot stand the pain of severe losses. They die as traders after hitting rock bottom and wash out of the markets. The few survivors realize that the main trouble is not with their methods—it is with their thinking. They can change and become successful traders.* - -## **The First Step** - -An alcoholic who wants to recover has to go through twelve steps—twelve stages of personal growth. He needs to change how he thinks and feels, how he relates to himself and others. - -The first step of AA is the hardest: to admit that one is powerless over alcohol. An alcoholic must recognize that his life has become unmanageable, that alcohol is stronger than he is. Most cannot take that step, drop out, and go on to destroy their lives. - -If alcohol is stronger than you, then you can never touch it again, not even a sip, for as long as you live. You have to give up drinking forever. Most drunks do not want to give up that pleasure. They destroy their lives rather than take the first step of AA. Only the pain of hitting rock bottom can motivate them to take that first step. - -## **One Day at a Time** - -You may have seen bumper stickers that say, "One day at a time" or "Easy does it." Those are AA slogans, and people who drive those cars are probably recovering alcoholics. - -Planning for life without alcohol can seem overwhelming. That's why AA encourages its members to live sober one day at a time. - -The goal of every AA member is to stay sober today and go to bed sober tonight. Gradually, days become weeks, then months, then years. AA meetings and other activities help each recovering alcoholic stay sober, one day at a time. - -Recovering alcoholics receive—and give others—invaluable support and fellowship at these meetings. They are held at all hours, all over the world. Traders have much to learn from those meetings. - -## **An AA Meeting** - -One of the best things that a trader can do is go to an AA meeting. I especially recommend it to any trader on a losing streak. Call Alcoholics Anonymous and ask about the next "open meeting" or "beginners' meeting" in your area. - -A meeting lasts about an hour. You can sit in the back of the room and listen carefully. There is no pressure to speak, and nobody asks for your last name. - -Each meeting begins with a long-term member getting up and speaking about his or her personal struggle for recovery from alcoholism. Several other members share their experiences. There is a collection to cover expenses—give a dollar if you like. All you have to do is listen carefully, and every time you hear the word "alcohol," substitute the word "loss" for it. You will feel as if the people in the meeting are talking about your trading! - -## ■ **9. Losers Anonymous** - -A social drinker enjoys an occasional drink, but an alcoholic craves alcohol. He denies that alcohol controls and destroys his life—until he reaches a personal crisis. It may be a life-threatening illness, unemployment, abandonment by the family, or another unbearably painful event. AA calls it "hitting rock bottom." - -The pain of hitting rock bottom punctures an alcoholic's denial. He sees a stark choice—to drown or to come up for air. His first step to recovery is to admit that he is powerless over alcohol. A recovering alcoholic can never drink again. - -Loss is to a loser what alcohol is to an alcoholic. A small loss is like a single drink. A big loss is like a bender. A series of losses is like an alcoholic binge. A loser keeps switching between different markets, gurus, and trading systems. His equity shrinks while he is trying to recreate the pleasurable sensation of winning. - -Losing traders think and act like alcoholics, except that their speech is not slurred. The two groups are so similar that you can predict what a loser will do by using alcoholics as a model. - -Alcoholism is a curable disease—and so is losing. Losers can change by using the principles of Alcoholics Anonymous. - -## **The Urge to Trade** - -Successful traders treat drawdowns the way social drinkers treat alcohol. They have a little and stop. If they take several losses in a row, they take that as a signal that something isn't working: perhaps their system isn't in gear with the current market environment. It's time for a break and a fresh look at the markets. Losers, on the other hand, cannot stop—they keep trading because they are addicted to the excitement of the game and keep hoping for a big win. - -A prominent trading advisor who has since busted out wrote that to him the pleasure of trading was higher than that of sex or flying jet aircraft. Just as alcoholics proceed from social drinking to drunkenness, losers take bigger and bigger risks. They cross the hugely important line: the one between taking a business risk and gambling. Many losers don't even know that line exists. - -Losers feel the urge to trade, just as alcoholics feel the urge to drink. They make impulsive trades, go on trading binges, and try to trade their way out of a hole. - -Losers bleed money from their accounts. Most of them bust out, but some turn to managing other people's money after losing their own; still others sell advisory services, like burned-out drunks who wash glasses in a bar. - -Most losers hide their losses from themselves and from everyone else. They keep no records and throw away brokerage statements. A loser is like an alcoholic who doesn't want to know how many ounces of liquor he drank. - -## **Into the Hole** - -A loser trades in a fog and doesn't know why he keeps losing. If he knew, he would have done something about it and become a winner. A loser tries to manage his trading the way an alcoholic tries to manage his drinking. - -Losers' desperate hopes for magic solutions help advisors sell their services to the public. They switch to new trading systems, buy more software, and look for tips from new gurus. - -As losses mount and equity shrinks, a loser grows desperate and converts outright positions into spreads, doubles up on losing positions, reverses and trades in the opposite direction, and so on. All of that does him no more good than switching from hard liquor to wine can help an alcoholic. - -A losing trader careens out of control, trying to manage the unmanageable. Alcoholics die prematurely, and most traders bust out of the markets and never come back. New trading methods, hot tips, and improved software will not help a person who cannot handle himself. - -A loser keeps getting high from trading while his equity shrinks. Trying to tell him that he is a loser is like trying to take a bottle away from a drunk. A loser has to hit rock bottom before he can begin to recover. You have to change how you think in order to stop losing and begin your recovery as a trader. - -## **Trader's Rock Bottom** - -Hitting rock bottom feels horrible. It is painful and humiliating. You hit it when you lose money you cannot afford to lose. You hit it when you gamble away your savings. You hit it after you tell your friends how smart you are and later have to ask them for a loan. You hit rock bottom when the market comes roaring at you and yells: "You fool!" - -Some people hit rock bottom after only a few weeks of trading. Others keep adding money to their accounts to postpone the day of reckoning. It hurts to see a loser in the mirror. We spend our lifetime building up self-esteem. Most of us have a high opinion of ourselves. Your first impulse may be to hide, but remember, you are not alone. Almost every trader has been there. - -Many traders who hit rock bottom slink away from the market and never look back. Many who trade today will be gone in a year, if not sooner. They'll hit rock bottom, crumble, and leave. They'll try to forget trading like a bad dream. - -Some will lick their wounds and wait until the pain fades away and then return, having learned little. They'll be fearful, and their fear will further impair their trading. - -Fortunately, some traders will recoil from rock bottom to begin the process of change and growth. For these individuals, the pain of hitting rock bottom will break the vicious cycle of getting high from winning and then losing everything and crashing. *When you admit that your personal problem causes you to lose, you can begin building a new trading life. You can start developing the discipline of a winner.* - -## **Trader's First Step** - -Just as an alcoholic needs to admit that he can't control his drinking, a trader needs to admit that he cannot control his losses. The first step of an AA member is to say: "I am an alcoholic, I am powerless over alcohol." As a trader, you have to take your first step and say: "I am a loser, I am powerless over losses." - -Recovering alcoholics struggle to stay sober, one day at a time. A trader can recover, using the principles of AA. Now you have to struggle to trade without losses, one day at a time. - -You may say that's impossible. What if you buy, and the market immediately declines? What if you sell short, and it turns out to be the bottom tick, and the market immediately rallies? Even the best traders lose money on some trades. - -The answer is to draw a line between a businessman's risk and a loss. As traders, we always take businessman's risks, but we may never take a loss greater than this predetermined risk. - -For example, a storekeeper takes a risk every time he stocks new merchandise. If it doesn't sell, he'll lose money. An intelligent businessman takes only risks that will not put him out of business, even if he makes several mistakes in a row. Stocking two crates of merchandise may be a sensible business risk, but stocking a full trailer is probably a gamble. - -As a trader, you are in the business of trading. You need to define your businessman's risk—the maximum amount of money you'll risk on any single trade. There is no standard dollar amount, just as there is no standard business. An acceptable businessman's risk depends, first of all, on the size of your trading account. It also depends on your trading method and pain tolerance. - -The concept of a businessman's risk will change the way you manage your money (see Section 9, "Risk Management"). The absolute maximum a trader may risk on any trade is two percent of his account equity. For example, if you have \$30,000 in your account, you may not risk more than \$600 per trade, and if you have \$10,000, you may not risk more than \$200. If your account is small, limit yourself to trading fewer shares, less expensive futures, or mini-contracts. If you see an attractive trade, but a logical stop would have to be placed where more than 2 percent of equity would be at risk—pass on that trade. You may risk less, but you may never risk more. You must avoid risking more than 2 percent on a trade the way a recovering alcoholic avoids bars. - -A trader who blames high commissions on a broker and slippage on a floor trader gives up control of his trading life. Try to reduce both, but take responsibility for them. If you lose even a dollar more than your businessman's risk, including commissions and slippage, you are a loser. - -Do you keep good trading records? Poor record-keeping is a sure sign of a gambler. Good businessmen keep good records. Your trading records must show the date and price of every entry and exit, slippage, commissions, stops, all adjustments of stops, reasons for entering, objectives for exiting, maximum paper profit, maximum paper loss after a stop was hit, and any other data necessary to review and fully understand your trade later in the future. - -If you bail out of a trade within your businessman's risk, it is normal business. There is no bargaining, no waiting for another tick, no hoping for a change. Losing a dollar more than your established businessman's risk is like getting drunk, getting into a brawl, getting sick to your stomach on your way home, and waking up in a gutter. You would never want that to happen. - -## **A Meeting for One** - -When you go to an AA meeting, you'll see people who have not had a drink in years stand up and say: "Hello, my name is so-and-so, and I am an alcoholic." Why do they call themselves alcoholics after years of sobriety? Because if they think they have beaten alcoholism, they will start drinking again. If a person stops thinking he is an alcoholic, he is free to take a drink, then another, and will probably end up in the gutter again. A person who wants to stay sober must remember that he is an alcoholic for the rest of his life. - -Traders would benefit from our own self-help organization—I'd call it Losers Anonymous. Why not Traders Anonymous? Because a harsh name helps focus attention on our self-destructive tendencies. After all, Alcoholics Anonymous doesn't call itself Drinkers Anonymous. As long as you call yourself a loser, you'll focus on avoiding losses. - -Several traders have argued against what they thought was the "negative thinking" of Losers Anonymous. A retired woman from Texas, a highly successful trader, described her approach. She is very religious, prays every morning, and then drives to an office where she actively trades. Whenever the market starts moving against her, she cuts her losses very fast because it would not please the Lord for her to lose His money. I thought that our methods were similar. The goal is to cut losses due to some objective, external rule. - -Trading within a businessman's risk is like living without alcohol. A trader has to admit that he is a loser, just as a drunk has to admit that he is an alcoholic. Then he can begin his journey to recovery. - -This is why every morning before trading I suggest saying: "Good morning, my name is so-and-so, and I am a loser. I have it in me to do serious financial damage to my account." This is like an AA meeting—it keeps your mind focused on the first principles. Even if you take thousands of dollars out of the market today, tomorrow you say: "Good morning, my name is so-and-so and I am a loser." - -A friend of mine joked: "When I sit in front of my quote screen in the morning, I say, 'My name is John, and I'm gonna rip your throat out.'" His thinking generates tension. "Losers Anonymous" thinking generates serenity. A trader who feels serene and relaxed can focus on looking for the best and safest trades. When a sober man and a drunk enter a race, you know who is more likely to win. A drunk may win once in a while, but the sober man is the one to bet on. You want to be the sober man in that race. - -## ■ **10. Winners and Losers** - -We come to trading from different walks of life and bring along our mental baggage. Many of us find that when we act in the market the way we do in our everyday life, we lose money. Most of all, your success or failure depends on your ability to use intellect rather than act emotionally. A trader who feels overjoyed when he wins and depressed when he loses is at the mercy of market moves and cannot accumulate equity. - -To be a winner in the market you must act coolly and responsibly. The pain of losing drives people to look for magic methods. At the same time, they discard much of what is useful in their professional or business backgrounds. - -## **Like an Ocean** - -The market is like an ocean—it moves up and down regardless of what you wish. You may feel joy when you buy a stock and it explodes in a rally. You may feel drenched with fear when you go short but the market rises, melting your equity with every uptick. Those feelings have nothing to do with the market—they exist only inside of you. - -The market doesn't know you exist. You can do nothing to influence it. The ocean doesn't care about your welfare, but it has no wish to hurt you either. You can only control your behavior. - -A sailor cannot control the ocean, but he can control himself. He can study currents and weather patterns, learn good sailing techniques, and gain experience. He can learn when to sail and when to stay in the harbor. A successful sailor uses his intelligence. - -An ocean can be useful—you can fish in it and use its surface to get to other islands. An ocean can be dangerous—you can drown in it. The more rational your approach, the more likely you are to get what you want. On the other hand, when you act out your emotions, you cannot focus on the reality of the ocean. - -A trader has to study trends and reversals in the market the way a sailor studies the ocean. He must trade on a small scale while learning to handle his account. You can never control the market, but you can learn to control yourself. - -After a string of profitable trades, a beginner may feel he can walk on water. He starts taking wild risks and blows up his account. On the other hand, an amateur who takes several losses in a row often feels so demoralized that he cannot place an order even when his system gives him a signal to buy or sell. If trading makes you feel elated or frightened, you cannot fully use your intellect. When joy sweeps you off your feet, you will make irrational trades and lose. When fear grips you, you'll miss profitable trades. - -A sailor whose boat is being battered by ocean winds battens his sails—reduces sail area. The first remedy for a trader battered by the market is to reduce the size of his trades. Trade small while you're learning or when feeling stressed. - -A professional trader uses his head and stays calm. Only amateurs become excited or depressed. Emotional trading is a luxury that nobody can afford. - -## **Emotional Trading** - -Most people crave excitement and entertainment. Singers, actors, and professional athletes command much higher incomes than such mundane workmen as physicians, pilots, or college professors. People love to have their nerves tickled—they buy lottery tickets, fly to Las Vegas, and slow down to gawk at road accidents. - -Emotional trading can be very addictive. Even those who drop money in the markets receive a fantastic entertainment value. - -The market is a spectator sport and a participant sport rolled into one. Imagine going to a major-league ball game in which you are not confined to the bleachers. Pay a few hundred dollars and be allowed to run onto the field and join the game. If you hit the ball right, you'll get paid like a professional. - -You would probably think twice before running onto the field the first few times. This cautious attitude is responsible for the well-known "beginner's luck." Once a beginner hits the ball right a few times and collects his pay, he is likely to get the idea that he is as good as the pros or even better and could make a good living from the game. Greedy amateurs start running onto the field too often, even when there are no good playing opportunities. Before they know what hit them, a short string of losses destroys their accounts. - -The market is among the most entertaining places on the face of the Earth, but emotional decisions are lethal. If you ever go to a racetrack, turn around, and watch the humans instead of horses. Gamblers stomp their feet, jump up and down, and yell at horses and jockeys. Thousands of people act out their emotions. Winners embrace, and losers tear up their tickets in disgust. The joy, the pain, and the intensity of wishful thinking are caricatures of what happens in the markets. A cool handicapper who makes his living at the track does not get excited, yell, or bet the bulk of his roll on a single race, or even in a single day.1 - -Casinos love drunks. They pour gamblers free drinks to make them more emotional and gamble more. Casinos also throw out calm and intelligent card-counters. There is less free liquor on Wall Street than in a casino, but at least here, they do not throw you out for being a good trader. - -## **In Charge of Your Life** - -When a monkey hurts its foot on a tree stump, he flies into a rage and kicks the piece of wood. You laugh at a monkey, but do you laugh at yourself when you act like him? If the market drops while you are long, you may double up on your losing trade or else flip and go short, trying to get even. This is acting emotionally instead of using your intellect. What's the difference between a trader trying to get back at the market and a monkey kicking a tree stump? Acting out of anger, fear, or elation destroys the chance of success. You have to analyze your behavior instead of acting out your feelings. - -We get angry at the market; we become afraid of it and develop silly superstitions. All the while, the market keeps cycling through its rallies and declines like an ocean going through its storms and calm periods. Mark Douglas writes in *The Disciplined Trader* that in the market, "There is no beginning, middle, or end—only what you create in your own mind. Rarely do any of us grow up learning to operate in an arena that allows for complete freedom of creative expression, with no external structure to restrict it in any way." - -We try to cajole or manipulate the market, acting like the ancient emperor Xerxes, who ordered his soldiers to horsewhip the sea for sinking his fleet. Most of us aren't aware of how manipulative we are, how we bargain and act out our feelings. Most of us consider ourselves the center of the universe and expect every person or group to be either good or bad to us. This does not work in the market, which is completely impersonal. - -Leston Havens, a Harvard University psychiatrist, wrote: "Cannibalism and slavery are probably the oldest manifestations of human predation and submission. Although both are now discouraged, their continued existence in psychological forms demonstrates that civilization has achieved great success in moving from the concrete and physical to the abstract and psychological, while persisting in the same purposes." Parents threaten their children, bullies hit them, and teachers try to bend their will in school. Little wonder that most of us grow up either hiding in a shell or learning how to manipulate others in self-defense. Acting independently doesn't feel natural to us—but that is the only way to succeed in the market. - -1 I carry in my wallet a free lifetime pass to New York's Belmont racetrack that belonged to my late great friend Lou Taylor. It looks like an employee card, but on the "position" line it says—winner. He won many handicapping championships and continued to take money from the racetrack until a few months before he died. - -Douglas warns, "If the market's behavior seems mysterious to you, it's because your own behavior is mysterious and unmanageable. You can't really determine what the market is likely to do next when you don't even know what you'll do next." Ultimately, "the one thing you can control is yourself. As a trader, you have the power either to give yourself money or to give your money to other traders." He adds, "The traders who can make money consistently...approach trading from the perspective of a mental discipline." - -All of us have our own demons to exorcise on the journey to becoming successful traders. Here are several rules that worked for me as I grew from a wild amateur into an erratic semiprofessional and finally into a calm professional trader. You may change this list to suit your personality. - -- 1. Decide that you are in the market for the long haul—that is, you want to be a trader even 20 years from now. -- 2. Learn as much as you can. Read and listen to experts, but keep a degree of healthy skepticism about everything. Ask questions, and do not accept experts at their word. -- 3. Do not get greedy and rush to trade—take your time to learn. The markets will be there, offering more good opportunities in the months and years ahead. -- 4. Develop a method for analyzing the market—that is, "If A happens, then B is likely to happen." Markets have many dimensions—use several analytic methods to confirm trades. Test everything on historical data and then in the markets, using real money. Markets keep changing—you need different tools for trading bull and bear markets and transitional periods as well as a method for telling the difference (see the sections on technical analysis). -- 5. Develop a money management plan. Your first goal must be long-term survival; your second goal, a steady growth of capital; and your third goal, making high profits. Most traders put the third goal first and are unaware that goals 1 and 2 exist (see Section 9, "Risk Management"). -- 6. Be aware that a trader is the weakest link in any trading system. Go to a meeting of Alcoholics Anonymous to learn how to avoid losses or develop your own method for cutting out impulsive trades. -- 7. Winners think, feel, and act differently than losers. You must look within yourself, strip away your illusions, and change your old ways of being, thinking, and acting. Change is hard, but if you want to be a professional trader, you have to work on changing and developing your personality. - -In order to succeed, you need drive, knowledge, and discipline. Money is important, but less so than any of those qualities. If you have enough drive to work through this book, you'll acquire much knowledge, and then we'll close the circle by returning to the topic of discipline in the final chapters. diff --git a/trading/The New Trading for a Living/006_PART 2 Mass Psychology.md b/trading/The New Trading for a Living/006_PART 2 Mass Psychology.md deleted file mode 100644 index 394fbe256a6f6407530623c121cdc5f47fd39593..0000000000000000000000000000000000000000 --- a/trading/The New Trading for a Living/006_PART 2 Mass Psychology.md +++ /dev/null @@ -1,351 +0,0 @@ -# Mass Psychology - -Wall Street is named after a wall that kept farm animals from wandering away from the settlement at the southern tip of Manhattan. The farming legacy lives on in the language of traders. Four animals are mentioned especially often on Wall Street: bulls and bears, hogs and sheep. Traders say: "Bulls make money, bears make money, but hogs get slaughtered." - -A bull fights by striking up with his horns. A bull is a buyer—a person who bets on a rally and profits from a rise in prices. A bear fights by striking down with his paws. A bear is a seller—a person who bets on a decline and profits from a fall in prices.1 - -Hogs are greedy. Some of them buy or sell positions that are too large for their accounts and get slaughtered by a small adverse move. Other hogs overstay their positions—they keep waiting for profits even after the trend reverses. Sheep are passive and fearful followers of trends, tips, and gurus. They sometimes put on a bull's horns or a bearskin and try to swagger. You can recognize them by their pitiful bleating when the market becomes volatile. - -Whenever the market is open, bulls are buying, bears are selling, hogs and sheep get trampled underfoot, and the undecided traders wait on the sidelines. Quote screens around the world show a steady stream of the latest prices for any trading vehicle. Thousands of eyes are focused on each price as people make trading decisions. - -1 There is plenty of room in the market for both, and occasionally even at the same time. It always amuses me in SpikeTrade when two elite traders pick the same stock—one long and the other short. Often by the end of the week both are profitable, proving that how you manage your trade is more important than what stock and direction you pick. - -## ■ **11. What Is Price?** - -Traders can be divided into three groups: buyers, sellers, and undecided. Buyers want to pay as little as possible, and sellers want to charge as much as possible. Their permanent conflict is reflected in bid-ask spreads, discussed in the Introduction. "Ask" is what a seller asks for his merchandise. "Bid" is what a buyer offers for that merchandise. - -A buyer has a choice: to wait until prices come down or pay what the sellers demand. A seller has a similar choice: wait until prices rise or accept a lower offer for his merchandise. - -A trade occurs when there is a momentary meeting of two minds: an eager bull agrees to a seller's terms and pays up, or an eager bear agrees to a buyer's terms and sells a little cheaper. - -The presence of undecided traders puts pressure on bulls and bears. Buyers and sellers move fast because they know that they're surrounded by a crowd of undecided traders who may step in and snatch away their deal at any moment. - -The buyer knows that if he thinks too long, another trader can step in and buy ahead of him. A seller knows that if he tries to hold out for a higher price, another trader may step in and sell at a lower price. The crowd of undecided traders makes buyers and sellers more willing to deal with their opponents. A trade occurs when there is a meeting of two minds. - -## **A Consensus of Value** - -Each tick on your quote screen represents a deal between a buyer and a seller. - -Buyers are buying because they expect prices to rise. Sellers are selling because they expect prices to fall. Buyers and sellers are surrounded by crowds of undecided traders who put pressure on them because they may become buyers or sellers themselves. - -Buying by bulls pushes markets up, selling by bears pushes them down, and undecided traders make everything happen faster by creating a sense of urgency among buyers and sellers. - -Traders come to the markets from all over the world: in person, via computers, or through their brokers. Everybody has a chance to buy and to sell. *Each price is a momentary consensus of value of all market participants, expressed in action.* Prices are created by masses of traders—buyers, sellers, and undecided people. The patterns of prices and volume reflect mass psychology of the markets. - -## **Behavior Patterns** - -Huge crowds trade on stock, commodity, and option exchanges. Big money and little money, smart money and dumb money, institutional money and private money, long-term investors and short-term traders, all meet at the exchange. *Each price represents a momentary consensus of value between buyers, sellers, and undecided* *traders at the moment of transaction. There is a crowd of traders behind every pattern on the screen*. - -Crowd consensus changes from moment to moment. Sometimes it gets established in a very low-key environment, and at other times the environment turns wild. Prices move in small increments during quiet times. When a crowd becomes either spooked or elated, prices begin to jump. Imagine bidding for a life preserver aboard a sinking ship—that's how prices leap when masses of traders become emotional about a trend. An astute trader aims to enter the market during quiet times and take profits during wild times. That, of course, is the total opposite of how amateurs act: they jump in or out when prices begin to run, but grow bored and not interested when prices are sleepy. - -Chart patterns reflect swings of mass psychology in the financial markets. Each trading session is a battle between bulls, who make money when prices rise, and bears, who profit when they fall. The goal of a serious technical analyst is to discover the balance of power between bulls and bears and bet on the winning group. If bulls are much stronger, you should buy and hold. If bears are much stronger, you should sell and sell short. If both camps are about equal in strength, a wise trader stands aside. He lets bulls and bears fight with each other, and enters a trade only when he is reasonably sure which side is likely to win. - -Prices and volume, along with the indicators that track them, reflect crowd behavior. Technical analysis is similar to poll taking. Both combine science and art: They are partly scientific because we use statistical methods and computers; they are partly artistic because we use personal judgment and experience to interpret our findings. - -## ■ **12. What Is the Market?** - -What's the reality behind market quotes, numbers, and graphs? When you check prices in your newspaper, follow ticks on your screen, or plot an indicator on a chart, what exactly are you looking at? What *is* this market that you want to analyze and trade? - -Amateurs act as if the market is a giant happening, a ball game in which they can join the professionals and make money. Traders from a scientific or engineering background often treat the market as a physical event and apply the principles of signal processing, noise reduction, etc. By contrast, all professional traders know full well that the market is a huge mass of people. - -Every trader tries to take money from others by outguessing them on the probable direction of the market. The members of the market crowd live on different continents, but are brought together by modern telecommunications in the pursuit of profit at each other's expense. *The market is a huge crowd of people. Each member of the crowd tries to take money from others by outsmarting them.* The market is a uniquely harsh environment because everyone is against you, and you are against everyone. - -Not only is the market harsh, you have to pay whenever you enter and exit. You have to jump over the barriers of commissions and slippage before you can collect a dime. The moment you place an order, you owe your broker a commission—you're behind the game the moment you enter. Market makers try to hit you with slippage when your order arrives for execution. They try to take another bite out of your account when you exit. *In trading, you compete against some of the brightest minds in the world, while fending off the piranhas of commissions and slippage.* - -## **Worldwide Crowds** - -In the old days, markets were small, and many participants knew one another. The New York Stock Exchange was formed in 1792 as a club of two dozen brokers. On sunny days, they used to gather under a cottonwood tree, and on rainy days, they moved to Fraunces Tavern. As soon as those brokers organized the New York Stock Exchange, they stuck the public with fixed commissions, which lasted for the next 180 years. - -These days, the few remaining floor traders are on the way out. Most of us are linked to the market electronically. Still, as we watch the same quotes on our screens and read the same articles in the financial media, we become members of the market crowd—even if we live thousands of miles away from one another. Thanks to modern telecommunications, the world is becoming smaller, while the markets are growing. The euphoria of London flows to New York, and the gloom of Tokyo infects Frankfurt. - -When you analyze the market, you are looking at crowd behavior. Crowds behave alike in different cultures on different continents. Social psychologists have uncovered several laws that govern crowd behavior, and a trader needs to understand them in order to see how the market crowd influences him. - -## **Groups, Not Individuals** - -Most people feel a strong urge to join the crowd and "act like everybody else." This primitive urge clouds your judgment when you put on a trade. A successful trader must think independently. He needs to be strong enough to analyze the market alone and carry out his trading decisions. - -Crowds are powerful enough to create trends. The crowd may not be too bright, but it is stronger than any of us. Never buck a trend. If a trend is up, you should only buy or stand aside. Never sell short just because "the prices are too high"—never argue with the crowd. You do not have to run with the crowd—but you shouldn't run against it. - -Respect the strength of the crowd—but don't fear it. Crowds are powerful, but primitive, their behavior simple and repetitive. A trader who thinks for himself can take money from crowd members. - -## **The Source of Money** - -Do you ever stop to wonder where your expected profits will come from? Is there money in the markets because of higher company earnings, or lower interest rates, or a good soybean crop? *The only reason there is money in the markets is that other traders put it there. The money you want to make belongs to other people who have no intention of giving it to you*. - -Trading means trying to take money from other people, while they are trying to take yours—that's why it is such a hard business. Winning is especially difficult because brokers and floor traders take money from winners and losers alike. - -Tim Slater compared trading to a medieval battle. A man used to go on a battlefield with his sword and try to kill his opponent, who was trying to kill him. The winner took the loser's weapons, his chattels, and his wife, and sold his children into slavery. Now we go to the exchanges instead of an open field. When you take money away from a man, it is not that different from drawing his blood. He may lose his house, his chattels, and his wife, and his children will suffer. - -An optimistic friend of mine once snickered that there are plenty of poorly prepared people on the battlefield: "Ninety to ninety-five percent of the brokers don't know the first thing about research. They don't know what they're doing. We have the knowledge, and some poor people who do not have it are just giving their money away to charity." This theory sounds good, but he soon found out that it was wrong—there is no easy money in the market. - -Sure enough, there are plenty of dumb sheep waiting to be fleeced or slaughtered. The sheep are easy—but if you want a piece of their meat, you've got to fight some very dangerous competitors. There are mean professionals: American gunslingers, English knights, German landsknechts, Japanese samurai, and other warriors, all going after the same hapless sheep. Trading means battling crowds of hostile people, while paying for the privilege of entering the battle and leaving it, whether alive, wounded, or dead. - -## **Inside Information** - -There is at least one group of people who get information before us. Records show that corporate insiders as a group consistently make profits in the stock market. And those are legitimate trades, reported by insiders to the Securities and Exchange Commission. They represent the tip of the iceberg—but there is a great deal of illegitimate insider trading. - -People who trade on inside information are stealing our money. The insider trials have landed some of the more notorious insiders in prison. Convictions for insider trading continue at a steady pace, especially after bull markets collapse. After the 2008 debacle, a group of executives from the Galleon fund, led by its CEO, have been sentenced to lengthy jail terms, while a former board member of several leading U.S. corporations got two years behind bars, and recently a money manager from SAC Capital was convicted. - -People convicted during the insider trials were caught because they became greedy and careless. The tip of the iceberg has been shaved down, but its bulk continues to float, ready to hit any account that comes in contact with it. - -Trying to reduce insider trading is like trying to get rid of rats on a farm. Pesticides keep them under control, but do not root them out. A retired chief executive of a publicly traded firm explained to me that a smart man does not trade on inside information but gives it to his golfing buddies at a country club. Later they give him inside information on their companies, and both profit without being detected. The insider network is safe as long as its members follow the same code of conduct and don't get too greedy. Insider trading is legal in the futures markets, and until recently it was legal for congressmen, senators, and their staff. - -Charts reflect all trades by all market participants—including insiders. They leave their footprints on the charts just like everyone else—and it is our job as technical analysts to follow them to the bank. Technical analysis can help you detect insider buying and selling. - -## ■ **13. The Trading Scene** - -Humans have traded since the dawn of history—it was safer to trade with your neighbors than raid them. As society developed, money became the medium of exchange. Stock and commodity markets are among the hallmarks of an advanced society. One of the key economic developments in Eastern Europe following the collapse of communism was the establishment of stock and commodity exchanges. - -Today, stock, futures, and options markets span the globe. It took Marco Polo, a medieval Italian merchant, 15 years to get from Italy to China and back. Now, when a European trader wants to buy gold in Hong Kong, he can get his order filled in seconds. There are hundreds of stock and futures exchanges around the world. All exchanges must meet three criteria, first developed in the agoras of ancient Greece and the medieval fairs of Western Europe: an established location, rules for grading merchandise, and defined contract terms. - -## **Individual Traders** - -Private traders usually come to the market after a successful career in business or in the professions. An average private futures trader in the United States is a 50-yearold, married, college-educated man. The two largest occupational groups among futures traders are farmers and engineers. - -Most people trade for partly rational and partly irrational reasons. Rational reasons include the desire to earn a large return on capital. Irrational reasons include gambling and a search for excitement. Most traders are not aware of their irrational motives. - -Learning to trade takes time, money, and work. Few individuals rise to the level of professionals who can support themselves by trading. Professionals are extremely serious about what they do. They satisfy their irrational goals outside the markets, while amateurs act them out in the marketplace. - -The major economic role of a trader is to support his broker—to help him pay his mortgage bills and keep his children in private schools. In addition, the role of a speculator is to help companies raise capital in the stock market and to assume price risk in the commodities markets, allowing producers to focus on production. These lofty economic goals are far from a speculator's mind when he places his orders to buy or sell. - -## **Institutional Traders** - -Institutions are responsible for a huge volume of trading, and their deep pockets give them several advantages. They pay low institutional commissions. They can afford to hire the best researchers and traders. A friend of mine who headed a trading desk at a bank based some of his decisions on a service provided by a group of former CIA officers. He got some of his best ideas from their reports, while the substantial annual fee was small potatoes for his firm compared to its huge trading volume. Most private traders do not have such opportunities. - -Some large firms have intelligence networks that enable them to act before the public. One day, when oil futures rallied in response to a fire on a platform in the North Sea, I called a friend at an oil firm. The market was frantic, but he was happy, having bought oil futures half an hour before they exploded. He got a telex from an agent in the area of the fire before the reports appeared on the newswire. Timely information is priceless, but only a large company can afford an intelligence network. - -An acquaintance who traded successfully for a Wall Street investment bank felt lost when he quit to trade for himself. He discovered that a real-time quote system in his Park Avenue apartment didn't give him news as fast as the squawk box on the trading floor of his old firm. Brokers from around the country used to call him with the latest ideas because they wanted his orders. "When you trade from your house, you are never the first to hear the news," he says. - -The firms that deal in both futures and cash markets have two advantages. They have true inside information, and they are exempt from speculative position limits that exist in many futures markets. I went to visit an acquaintance at a multinational oil company; after passing through security barriers tighter than at an airport, I walked down a glass corridor that overlooked rooms where clusters of men huddled around monitors trading oil products. When I asked my host whether his traders were hedging or speculating, he looked me straight in the eye and said, "Yes." I asked again and received the same answer. Companies crisscross the thin line between hedging and speculating, using inside information. - -In addition to the informational advantage, employees of trading firms have a psychological one—they can be more relaxed because their own money isn't at risk. When young people tell me of their interest in trading, I tell them to get a job with a trading firm and learn on someone else's dime. Firms almost never hire traders past their mid-twenties. - -How can an individual coming later to the game compete against institutions and win? - -The Achilles heel of most institutions is that they *have* to trade, while an individual trader is free to trade or stay out of the market when he wants. Banks have to be active in the bond market and grain producers have to be active in the grain market at almost any price. An individual trader is free to wait for the best opportunities. - -**38** MASS PSYCHOLOGY - -Most private traders fritter away this fantastic advantage by overtrading. An individual who wants to succeed against the giants must develop patience and eliminate greed. *Remember, your goal is to trade well, not to trade often.* - -Successful institutional traders receive raises and bonuses. Even a high bonus can feel puny to someone who earns millions of dollars for his firm. Successful institutional traders often talk of quitting and going to trade for themselves. Very few of them manage to make this transition. - -Most traders who leave institutions get caught up in the emotions of fear, greed, elation, and panic when they start risking their own money. They seldom do well trading for their own accounts—another sign that psychology is at the root of trading success or failure. Few institutional traders realize to what a large extent they owe their success to their trading managers, who control their risk levels. Going out on your own means becoming your own manager—we'll return to this in a later chapter, when we focus on how to organize your trading. - -## **The Sword Makers** - -Just as medieval knights shopped for the sharpest swords, modern traders shop for the best trading tools. The growing access to good software and declining commission rates are creating a more level playing field. A computer allows you to speed up your research and follow more leads. It helps you analyze more markets in greater depth. We'll return to computers and software in Chapter 21, "Computers in Trading," but here it is in brief. - -There are three types of trading software: toolboxes, black boxes, and gray boxes. A **toolbox** allows you to display data, draw charts, plot indicators, change their parameters, and test your trading systems. Toolboxes for options traders include option valuation models. Adapting a good toolbox to your needs can be as easy as adjusting the seat of your car. - -In 1977, I bought the first ever toolbox for computerized technical analysis. It cost \$1,900 plus monthly data fees. Today, inexpensive, and even free, software places powerful tools at everyone's fingertips. I illustrated most of the concepts in this book using Stockcharts.com because I wanted my new book to be useful to as many traders as possible. - -Stockcharts.com evens out the playing field for traders. It is clear, intuitive, and rich in features. Its basic version is free, although I used its inexpensive "members' version" for higher quality charting. I still remember how hard it was in the beginning and want to show you how much analytic power you can have for free or at a very minimal cost. - -What goes on inside a **black box** is secret. You feed it data, and it tells you what and when to buy and sell. It is like magic—a way to make money without thinking. Black boxes are usually sold with excellent historical track records. This is only natural because they were created to fit old data. Markets keep changing, and black boxes keep blowing up, but new generations of losers keep buying them. If you're in the market for a black box, remember that there is a guy in Brooklyn who has a bridge for sale. - -**Gray boxes** straddle the fence between toolboxes and black boxes. These packages are usually put out by prominent market personalities. They disclose the general logic of their system and allow you to adjust some of their parameters. - -## **Advisors** - -Some newsletters provide useful ideas and point readers in the direction of trading opportunities. A few offer educational value. Most sell an illusion of being an insider. Newsletters are good entertainment. Your subscription rents you a pen pal who sends often amusing and interesting letters and never asks you to write back, except for a check at renewal time. Freedom of the press in the United States allows even a convicted felon to go online and start sending out a financial advisory letter. Quite a few of them do. - -The "track records" of various newsletters are largely an exercise in futility because hardly anybody takes every trade suggested by a newsletter. Services that rate newsletters are for-profit affairs run by small businessmen whose wellbeing depends on the well-being of the advisory industry. Rating services may occasionally tut-tut an advisor, but they dedicate most of their energy to loud cheerleading. - -I used to write an advisory newsletter decades ago: worked hard, delivered straight talk, and received good ratings. I saw from the inside a tremendous potential for fudging results. This is a well-kept secret of the advisory industry. - -After looking at my letters, a prominent advisor told me that I should spend less time on research and more on marketing. The first principle of letter writing is: "If you have to make forecasts, make a lot of them." Whenever a forecast turns out right, double the volume of promotional mail. - -## ■ **14. The Market Crowd and You** - -Markets are loosely organized crowds whose members bet that prices will rise or fall. Since each price represents crowd consensus at the moment of transaction, traders are betting on the future opinion and mood of the crowd. The crowd keeps swinging from hope to fear and from indifference to optimism or pessimism. Most people don't follow their own trading plans because they get swept up in the crowd's feelings and actions. - -As bulls and bears battle in the market, the value of your open positions soars or sinks, depending on the actions of total strangers. You can't control the markets. You can only set your position size and decide whether and when to enter or exit your trades. - -Most traders feel jittery entering a trade. Their judgment becomes clouded after they join the crowd. Caught up in crowd emotions, many traders deviate from their plans and lose money. - -**40** MASS PSYCHOLOGY - -## **Experts on Crowds** - -Charles Mackay, a Scottish barrister, wrote his classic book, *Extraordinary Popular Delusions and the Madness of Crowds*, in 1841. He described several mass manias, including the Tulip Mania in Holland in 1634 and the South Seas investment bubble in England in 1720. - -The tulip craze began as a bull market in tulip bulbs. The long bull market convinced the prosperous Dutch that tulips would continue to appreciate. Many abandoned their businesses to grow tulips, trade them, or become tulip brokers. Banks accepted tulips as collateral and speculators profited. Finally, that mania collapsed in waves of panic selling, leaving people destitute and the nation shocked. Mackay sighed, "Men go mad in crowds, and they come back to their senses slowly and one by one." - -In 1897, Gustave LeBon, a French philosopher and politician, wrote *The Crowd.* A trader who reads it today can see his reflection in a century-old mirror. - -LeBon wrote that when people gather in a crowd, "Whoever be the individuals that compose it, however like or unlike be their mode of life, their occupations, their character, or their intelligence, the fact that they have been transformed into a crowd puts them in possession of a sort of collective mind which makes them feel, think, and act in a manner quite different from that in which each individual of them would feel, think, and act were he in a state of isolation." - -People change when they join crowds. They become more credulous and impulsive, anxiously search for a leader, and react to emotions instead of using their intellect. An individual who becomes involved in a group becomes less capable of thinking for himself. - -*Group members may catch a few trends, but they get killed when trends reverse. Successful traders are independent thinkers.* - -## **Why Join?** - -People have been joining crowds for safety since the dawn of time. If a Stone Age hunter encountered a saber-toothed tiger, he had a very slim chance of coming out alive, but if hunters went as a group, most were likely to survive. Loners got killed and left fewer offspring. Since group members were more likely to survive, the tendency to join groups appears to have been bred into our genes. - -Our society glorifies free will, but we carry many primitive impulses beneath the thin veneer of civilization. We want to join groups for safety and be led by strong leaders. The greater the uncertainty, the stronger our wish to join and to follow. - -No saber-toothed tigers roam the canyons of Wall Street, but your financial survival is at risk. The value of your position rises and falls because of buying and selling by total strangers. Your fear swells up because you can't control prices. This uncertainty makes most traders look for a leader who will tell them what to do. - -You may have rationally decided to go long or short, but the moment you put on a trade, the crowd starts sucking you in. You start losing your independence when you watch prices like a hawk and become elated when they go your way or depressed if they go against you. You are in trouble when you impulsively add to losing positions or reverse them. You lose your independence when you start trusting gurus more than yourself and don't follow your own trading plan. When you notice this happening, try to come back to your senses. If you can't regain your composure, exit your trades and go flat. - -## **Crowd Mentality** - -When people join crowds, their thinking becomes primitive and they become more prone to act on impulse. Crowds swing from fear to glee, from panic to euphoria. A scientist can be cool and rational in his lab but make harebrained trades after being swept up in the mass hysteria of the market. A group can suck you in, whether you trade from a crowded brokerage office or a remote mountaintop. When you let others influence your trading decisions, your chance of success goes up in smoke. - -Group loyalty was essential for a prehistoric hunter's survival. Joining a union can help even an incompetent performer keep his job. The market is different: joining a group tends to hurt you. - -Many traders are puzzled why markets reverse immediately after they dump their losing position. This happens because crowd members are gripped by the same fear and everybody dumps at the same time. Once the selling fit has ended, the market has nowhere to go but up. Optimism returns to the marketplace, and the crowd forgets fear, grows greedy, and goes on a new buying binge. - -The crowd is bigger and stronger than you. No matter how smart you are, you cannot argue with the crowd. You have only one choice—to join the crowd or to act independently. - -Crowds are primitive, and your trading strategies should be simple. You don't have to be a rocket scientist to design a winning trading method. If the trade goes against you—cut your losses and run. Never argue with the crowd—simply use your judgment to decide when to join and when to leave. - -*Your human nature leads you to give up your independence under stress. When you put on a trade, you feel the desire to imitate others, overlooking objective signals. This is why you need to write down and follow your trading system and money management rules. They represent your rational individual decisions, made before you entered a trade.* - -## **Who Leads?** - -An inexperienced trader may feel intense joy when prices move in his favor. He may feel angry, depressed, and fearful when prices move against him, anxiously waiting to see what the market will do to him next. Traders become crowd members when they feel stressed or threatened. Battered by emotions, they lose their independence and begin imitating other group members, especially the group leader. - -When children feel frightened, they want their parents and other grown-ups to tell them what to do. They transfer that attitude to teachers, doctors, ministers, bosses, and assorted experts. Traders turn to gurus, trading system vendors, newspaper columnists, and other market leaders. But, as Tony Plummer brilliantly pointed out in his book, *Forecasting Financial Markets*, the main leader of the market is price. - -**42** MASS PSYCHOLOGY - -*Price is the leader of the market crowd*. Traders all over the world follow the upticks and downticks. Price seems to say to traders, "Follow me, and I'll show you the way to riches." Most traders consider themselves independent. Few of us realize how strongly we focus on the behavior of our group leader. - -A trend that flows in your favor symbolizes a strong and generous parent calling you to share a meal. A trend that goes against you feels like dealing with an angry and punishing parent. Being gripped by such feelings, it's easy to overlook objective signals that tell you to stay or to exit a trade. You may feel happy or frightened, bargain or beg forgiveness—while avoiding the rational act of accepting reality and getting out of a losing trade. - -## **Independence** - -You need to base your trades on a carefully prepared plan instead of jumping in response to price changes. A proper plan is a written one. You need to know exactly under what conditions you will enter and exit a trade. Don't make decisions on the spur of the moment, when you are vulnerable to being sucked in by the crowd. - -You can succeed as a trader only when you think and act as an individual. The weakest part of any trading system is the trader himself. Traders fail when they trade without a plan or deviate from their plans. Plans are created by reasoning individuals. Impulsive trades are made by sweaty group members. - -*You have to observe yourself and notice changes in your mental state as you trade. Write down your reasons for entering a trade and the rules for getting out of it, including money management rules. You may not change your plan while you have an open position.* - -Sirens were sea creatures of Greek myths who sang so beautifully that sailors jumped overboard and swam to them, only to be killed. When Odysseus wanted to hear the Sirens' songs, he ordered his men to seal their ears with beeswax but to tie him to the mast. Odysseus heard the Sirens' song but survived because he couldn't jump overboard. You ensure your survival as a trader when on a clear day you tie yourself to the mast of a trading plan and money management rules. - -## **A Positive Group** - -You don't have to be a hermit—steering clear of the crowd's impulsivity doesn't mean you have to trade in total solitude. While some of us prefer doing it that way, intelligent and productive groups can exist. Their key feature has to be independent decision making. - -This concept is clearly explained in a book, *The Wisdom of Crowds,* by a financial journalist James Surowiecki. He acknowledges that members of most groups constantly influence one another, creating waves of shared feelings and actions. A smart group is different: all members make independent decisions without knowing what others are doing. Instead of impacting each other and creating emotional waves, members of an intelligent group benefit from combining their knowledge and expertise. The function of a group leader is to maintain this structure and to bring individual decisions up for a vote. - -In 2004, a year prior to reading *The Wisdom of Crowds*, I organized a group of traders along those lines. I continue to manage it with my friend Kerry Lovvorn—the SpikeTrade group. - -We run a trading competition, with each round lasting one week. After the market closes on Friday, the stock picks section of the website becomes closed to viewing by members until 3 p.m. on Sunday. During that time, any group member may submit one favorite pick for the week ahead—without knowing what other group members are doing. The picks section of the website re-opens on Sunday afternoon, allowing all members to see all picks. The race begins on Monday and ends on Friday, with prizes to winners. - -Throughout the week members exchange comments and answer questions. The site is built to encourage communication—except for weekends, when everyone must work independently. The results of leading group members, posted on the site, have been spectacular. - -The key point is that all decisions about stock selection and direction must be made in solitude, without seeing what the leaders or other members are doing. The sharing begins after all votes are in. This combination of independent decision making with sharing brings forth "the wisdom of crowds," tapping the collective wisdom of the group and its leaders. - -## ■ **15. Psychology of Trends** - -Each price represents a momentary consensus of value among market participants. Each tick reflects the latest vote on the value of a trading vehicle. Any trader can "put in his two cents worth" by giving an order to buy or sell, or by refusing to trade at the current level. - -Each price bar or candle reflects a battle between bulls and bears. When buyers feel strongly bullish, they buy more eagerly and push markets up. When sellers feel strongly bearish, they sell more actively and push markets down. - -Charts are a window into mass psychology. When you analyze charts, you analyze the behavior of trading masses. Technical indicators help make this analysis more objective. - -*Technical analysis is for-profit social psychology.* - -## **Strong Feelings** - -Ask a trader why prices went up, and you'll probably get a stock answer—more buyers than sellers. This isn't true. The number of shares or futures contracts bought and sold in any market is always equal. - -If you want to buy 100 shares of Google, someone has to sell them to you. If you want to sell 200 shares of Amazon, someone has to buy them from you. This is why the number of shares bought and sold is equal in the stock market. Furthermore, the number of long and short positions in the futures markets is always equal. Prices move up or down not because of different numbers but because of changes in the intensity of greed and fear among buyers and sellers. - -When the trend is up, bulls feel optimistic and don't mind paying up. They buy high because they expect prices to rise even higher. Bears feel afraid in an uptrend, and they agree to sell only at a higher price. When greedy and optimistic bulls meet fearful and defensive bears, the market rallies. The stronger their feelings, the sharper the rally. The rally ends only when bulls start losing their enthusiasm. - -When prices slide, bears feel optimistic and don't quibble about selling short at lower prices. Bulls are fearful and agree to buy only at a discount. While bears feel like winners, they continue to sell at lower prices, and the downtrend continues. It ends when bears start feeling cautious and refuse to sell at lower prices. - -## **Rallies and Declines** - -Few traders are purely rational human beings. There is a great deal of emotion in the markets. Most participants act on the principle of "monkey see, monkey do." The waves of fear and greed sweep up bulls and bears. - -The sharpness of any rally depends on how traders feel. If buyers feel just a little stronger than sellers, the market rises slowly. When they feel much stronger than sellers, the market rises fast. It is the job of a technical analyst to find when buyers are strong and when they start running out of steam. - -Short sellers feel trapped by rising markets, as their profits melt and turn into losses. When short sellers rush to cover, a rally can become parabolic. Fear is a much stronger emotion than greed.2 Rallies driven by short covering are especially sharp, although they do not last very long. - -Markets fall because of fear among bulls and greed among bears. Normally bears prefer to sell short on rallies, but if they expect to make a lot of money on a decline, they don't mind shorting on the way down. Fearful buyers agree to buy only below the market. As long as short sellers are willing to meet those demands and sell at a bid, the decline will continue. - -As bulls' profits melt and turn into losses, they panic and sell at almost any price. They are so eager to get out that they hit the bids under the market. Markets can drop fast when hit by panic selling. - -## **Price Shocks** - -Loyalty to the leader is the glue that holds groups together. Group members expect leaders to inspire and reward them when they are good but punish them when they are bad. Some leaders are very authoritarian, others quite democratic and informal, but every group has a leader—a leaderless group can't exist. Price functions as the leader of the market crowd. - -2 Fear is three times stronger than greed, according to research cited by Prof. Daniel Kahneman, a Nobel Prize winning behavioral economist, whose findings we'll return to again in this book. - -*Winners feel rewarded when price moves in their favor, and losers feel punished when it moves against them. Crowd members remain blissfully unaware that by focusing on price they create their own leader. Traders who feel mesmerized by prices create their own idols.* - -When the trend is up, bulls feel rewarded by a bountiful parent. The longer an uptrend lasts, the more confident they feel. When a child's behavior is rewarded, he continues to do what he did. When bulls make money, they add to long positions. While new bulls enter the market, bears feel they are being punished for selling short. Many of them cover shorts, go long, and join the bulls. - -Buying by happy bulls and covering by fearful bears pushes uptrends higher. Buyers feel rewarded, while sellers feel punished. Both feel emotionally involved, but few traders realize that they are creating the uptrend and setting up their own leader. - -Eventually a price shock occurs—a major sale hits the market, and there aren't enough buyers to absorb it. The uptrend takes a dive. Bulls feel mistreated, like children whose father slapped them during a meal, but bears feel encouraged. - -A price shock plants the seeds of an uptrend's reversal. Even if the market recovers and reaches a new high, bulls feel more skittish and bears become bolder. This lack of cohesion in the dominant group and growing optimism among its opponents makes the uptrend ready to reverse. Several technical indicators identify tops by tracing a pattern called bearish divergence (see Section 4). It occurs when prices reach a new high but the indicator reaches a lower high than it did on the previous rally. Bearish divergences mark the ends of uptrends and some of the best shorting opportunities. - -When the trend is down, bears feel like good children, praised and rewarded for being smart. They feel increasingly confident, add to short positions, and the downtrend continues. New bears come into the market. People admire winners, and the financial media keeps interviewing bears during bear markets. - -Bulls lose money in downtrends, making them feel bad. They start dumping their positions, and some of them switch sides to join bears. Their selling pushes markets lower. - -After a while, bears grow confident and bulls feel demoralized. Suddenly, a price shock occurs. A cluster of buy orders soaks up all available sell orders and lifts the market. Now bears feel like children whose father has lashed out at them in the midst of a happy meal. - -A price shock plants the seeds of a downtrend's eventual reversal because bears become more fearful and bulls grow bolder. When a child begins to doubt that Santa Claus exists, he'll seldom believe in Santa again. Even if bears recover and prices fall to a new low, several technical indicators will help identify their weakness by tracing a pattern called a bullish divergence. It occurs when prices fall to a new low but an indicator traces a shallower bottom than during the previous decline. Bullish divergences identify some of the best buying opportunities. - -## **Social Psychology** - -Free will makes individual behavior hard to predict. Group behavior is more primitive and easier to track. When you analyze markets, you analyze group behavior. You need to identify the direction in which groups are running and their changes of speed. - -Groups suck us in and cloud our judgment. The problem for most analysts is that they get caught in the emotional pull of the groups they try to analyze. - -The longer a rally continues, the more analysts get caught up in mass bullishness, ignore danger signs, and miss the eventual reversal. The longer a decline goes on, the more analysts get caught up in bearish gloom and ignore bullish signs. This is why it helps to have a written plan for analyzing markets. We have to decide in advance what indicators we will watch, how we will interpret them, and how we'll act. - -Professionals use several tools for tracking the intensity of the crowd's feelings. They watch the crowd's ability to break through recent support and resistance levels. Floor traders used to listen to the changes in pitch and volume of the roar on the exchange floor. With floor trading rapidly receding into history, you'll need special tools for analyzing crowd behavior. Fortunately, your charts and indicators reflect mass psychology in action. *A technical analyst is an applied social psychologist, usually armed with a computer*. - -## ■ **16. Managing versus Forecasting** - -I once ran into a very fat surgeon at a seminar. He told me that he had lost a quarter of a million dollars in three years trading stocks and options. When I asked him how he made his trading decisions, he sheepishly pointed to his ample gut. He gambled on hunches and used his professional income to support his habit. There are two alternatives to "gut feel": One is fundamental analysis; the other is technical analysis. - -Fundamental analysts study the actions of the Federal Reserve, follow earnings reports, examine crop reports, and so on. Major bull and bear markets reflect fundamental changes in supply and demand. Still, even if you know those factors, you can lose money trading if you are out of touch with intermediate- and short-term trends, which depend on the crowd's emotions. - -Technical analysts believe that prices reflect everything known about the market, including fundamental factors. Each price represents the consensus of value of all market participants—large commercial interests and small speculators, fundamental researchers and technicians, insiders and gamblers. - -Technical analysis is a study of mass psychology. It is partly a science and partly an art. Technicians use many scientific methods, including mathematical concepts of game theory, probabilities, and so on. They use computers to track indicators. - -Technical analysis is also an art. The bars or candles on our charts coalesce into patterns and formations. The movement of prices and indicators produces a sense of flow and rhythm, a feeling of tension and beauty that helps us sense what is happening and how to trade. - -Individual behavior is complex, diverse, and difficult to predict. Group behavior is primitive. Technicians study the behavior patterns of market crowds. They trade when they recognize patterns that preceded previous market moves. - -## **Poll-Taking** - -Politicians want to know their chances of being elected or re-elected. They make promises to voters and have poll-takers measure a crowd's response. Technical analysis is similar to political poll-taking, as both aim to read the intentions of masses. Poll-takers do it to help their clients win elections, while technicians do it for financial gain. - -Poll-takers use scientific methods: statistics, sampling procedures, and so on. They also need a flair for interviewing and phrasing questions; they have to be plugged into the emotional undercurrents of their party. Poll-taking is a combination of science and art. If a poll-taker says he is a scientist, ask him why every major political polltaker in the United States is affiliated with either the Democratic or Republican party. True science knows no party. - -A market technician must rise above party affiliation. Be neither a bull nor a bear, but only seek the truth. A biased bull looks at a chart and says, "Where can I buy?" A biased bear looks at the same chart and tries to find where he can go short. A topflight analyst is free of bullish or bearish biases. - -There is a trick to help you detect your bias. If you want to buy, turn your chart upside down and see whether it looks like a sell. If it still looks like a buy after you flip it, then you have to work on getting a bullish bias out of your system. If both charts look like a sell, then you have to work on purging a bearish bias. - -## **A Crystal Ball** - -Many traders believe that their aim is to forecast future prices. The amateurs in most fields ask for forecasts, while professionals simply manage information and make decisions based on probabilities. Take medicine, for example. A patient is brought to an emergency room with a knife wound—and the anxious family members have only two questions: "will he survive?" and "when can he go home?" They ask the doctor for a forecast. - -But the doctor isn't forecasting—he is managing problems as they emerge. His first job is to prevent the patient from dying from shock, and so he gives him painkillers and starts an intravenous drip to replace lost blood. Then he sutures damaged organs. After that, he has to watch against infection. He monitors the trend of the patient's health and takes measures to prevent complications. He is managing—not forecasting. When a family begs for a forecast, he may give it to them, but its practical value is low. - -To make money trading, you don't need to forecast the future. You have to extract information from the market and find out whether bulls or bears are in control. You need to measure the strength of the dominant market group and decide how likely the current trend is to continue. You need to practice conservative money management aimed at long-term survival and profit accumulation. You must observe how your mind works and avoid slipping into greed or fear. A trader who does all of this will succeed ahead of any forecaster. - -**48** MASS PSYCHOLOGY - -## **Read the Market, Manage Yourself** - -A tremendous volume of information pours out of the markets during trading hours. Changing prices reflect the battles of bulls and bears. Your job is to analyze this information and bet on the dominant market group. - -Whenever I hear a dramatic forecast, my first thought is "a marketing gimmick." Advisors issue them to attract attention in order to raise money or sell services. Good calls attract paying customers, while bad calls are quickly forgotten. My phone rang while I was writing the first draft of this chapter. A famous guru, down on his luck, told me that he had identified a "once-in-a-lifetime buying opportunity" in corn. He asked me to raise money for him and promised to multiply it a hundredfold in six months! I do not know how many fools he hooked, but dramatic forecasts have always been good for fleecing the public. Most people do not change. While working on this update 21 years later, I read in *The Wall Street Journal* that this same "guru" was recently punished for professional misconduct by the National Futures Association. - -Use common sense in analyzing markets. When some new development puzzles you, compare it to life outside the markets. For example, indicators may give you buy signals in two markets. Should you buy the one that declined a lot before the buy signal or the one that declined a little? Compare this to what happens to a man after a fall. If he falls down a few steps, he may dust himself off and run up again. But if he falls out of a second-story window, he's not going to run anytime soon; he needs time to recover. - -*Successful trading stands on three pillars. You need to analyze the balance of power between bulls and bears. You need to practice good money management. You need personal discipline to follow your trading plan and avoid getting high or depressed in the markets.* diff --git a/trading/The New Trading for a Living/007_PART 3 Classical Chart Analysis.md b/trading/The New Trading for a Living/007_PART 3 Classical Chart Analysis.md deleted file mode 100644 index 8b5923fa1e5a5fa5f628dd18b0332597e6cce915..0000000000000000000000000000000000000000 --- a/trading/The New Trading for a Living/007_PART 3 Classical Chart Analysis.md +++ /dev/null @@ -1,345 +0,0 @@ -# Classical Chart Analysis - -When I bought my first stock, classical charting was the only game in town. I use quad-ruled paper and a sharp pencil to update my charts by hand. A few years later, pocket calculators became available, and I added simple moving averages. Later, a TI programmable calculator made it possible to insert tiny magnetic strips into its slit to perform more complex calculations, such as exponential moving averages and the Directional system. - -Finally, an Apple personal computer appeared on the scene; you could use its joystick to move a cursor to draw trendlines. In contrast, today's traders have access to immense analytic power at a very low cost. - -While the key concepts of classical charting remain valid, many of its tools have been eclipsed by much more powerful computerized methods. The best quality of computerized technical analysis is its objectivity. A moving average or any other indicator is either rising or falling, and there can be no argument about its direction. You may puzzle over how to interpret its signals, but the signals themselves are clear as day. - -Classical charting, on the other hand, is quite subjective, and invites wishful thinking and self-deception. You can draw a trendline across the extreme prices or across the edges of congestion zones, which will change its angle as well as its message. If you're in a mood to buy, you can draw your trendline a little steeper. If you feel like shorting and squint at a chart, you'll "recognize" a head-and-shoulders top. None of those patterns are objective. Because of their subjectivity, I've grown increasingly skeptical of claims regarding classical formations, such as pennants, head-andshoulders, etc. - -After having looked at hundreds of thousands of charts, I've concluded that the market doesn't know diagonals. It remembers price levels, which is why horizontal support and resistance lines make sense, but diagonal trendlines are subjective and open to self-deception. - -In my own trading, I use only a small number of chart patterns that are objective enough to trust. I pay attention to support and resistance zones, based on horizontal price levels. The relationship between the opening and closing prices and between the high and the low points of a price bar or a candle are also objective. I recognize "fingers," also called "kangaroo tails"— very long bars that protrude from a tight weave of prices. We'll explore these and a few other patterns in this section. - -## ■ **17. Charting** - -Chartists study market data to identify price patterns and profit from them. Most chartists work with bar or candlestick graphs that show open, high, low, and closing prices and volume. Futures traders also watch open interest. Point-and-figure chartists track only price changes and ignore time, volume, and open interest. - -Classical charting requires only a pencil and paper. It appeals to visually oriented people. Those who plot data by hand can develop a physical feel for prices. One of the costs of switching to computerized charting is losing some of that feel. - -The biggest problem with classical charting is wishful thinking. Traders seem to identify bullish or bearish patterns, depending on whether they're in a mood to buy or sell. - -Early in the twentieth century, Herman Rorschach, a Swiss psychiatrist, designed a test for exploring a person's mind. He dropped ink on 10 sheets of paper and folded each in half, creating symmetrical inkblots. Most people who peer at these sheets describe what they see: parts of the anatomy, animals, buildings, and so on. In reality, there are only inkblots! Each person sees what's on his mind. Most traders use charts as a giant Rorschach test. They project their hopes, fears, and fantasies onto the charts. - -## **Brief History** - -The first chartists in the United States appeared at the turn of the twentieth century. They included Charles Dow (1851–1902), the author of a famous stock market theory, and William Hamilton, who succeeded Dow as the editor of *The Wall Street Journal*. Dow's famous maxim was "The averages discount everything," by which he meant that the Industrial and Rail Averages reflected all knowledge about the economy. - -Dow never wrote a book, only his *Wall Street Journal* editorials. Hamilton took over the job after Dow died and laid out the principles of Dow theory in his book, *The Stock Market Barometer*. He wrote a famous "The Turn of the Tide" editorial following the 1929 crash. Robert Rhea, a newsletter publisher, brought the theory to its pinnacle in his 1932 book, *The Dow Theory*. - -The decade of the 1930s was the Golden Age of charting. Many innovators found themselves with time on their hands after the crash of 1929. Schabacker, Rhea, Elliott, Wyckoff, Gann, and others published their books during that decade. They went in two distinct directions. Some, such as Wyckoff and Schabacker, saw charts as a graphic record of supply and demand. Others, such as Elliott and Gann, searched for a perfect order in the markets—a fascinating but ultimately futile undertaking (see Chapter 5). - -In 1948, Edwards (a son-in-law of Schabacker) and Magee published *Technical Analysis of Stock Trends*, in which they popularized such concepts as triangles, rectangles, head-and-shoulders, and other chart formations, as well as support, resistance, and trendlines. Other chartists applied these concepts to commodities. - -Markets have changed a great deal since the days of Edwards and Magee. In the 1940s, the daily volume of an active stock on the New York Stock Exchange was only several hundred shares, while now it is measured in millions. The balance of power in the stock market has shifted in favor of bulls. Early chartists wrote that stock market tops were sharp and fast, while bottoms took a long time to develop. That was true in their deflationary era, but the opposite has been true since the 1950s. Now bottoms tend to form quickly, while tops tend to take longer. - -## **The Meaning of a Bar Chart** - -Chart patterns reflect the sum of buying and selling, greed and fear among investors and traders. Many charts in this book are daily, with each bar representing one trading day, but the rules for understanding weekly, daily, or intraday charts are remarkably similar. - -Remember this key principle: "*Each price is a momentary consensus of value of all market participants expressed in action.*" Based on it, each price bar provides several important pieces of information about the tug-of-war between bulls and bears (Figure 17.1). - -The **opening price** of a daily bar tends to reflect the amateurs' opinion of value. They read morning papers, find out what happened the day before, perhaps ask for a wife's approval to buy or sell, and place their orders before driving to work. Amateurs are especially active early in the day and early in the week. - -Traders who researched the relationship between opening and closing prices found that opening prices most often occur near the high or the low of the daily bar. Buying or selling by amateurs early in the day creates an emotional extreme from which prices tend to recoil later in the day. - -In bull markets, prices often make their low for the week on Monday or Tuesday, when amateurs take profits from the previous week, then rally to a new high on Thursday or Friday. In bear markets, the high for the week is often set on Monday or Tuesday, with a new low toward the end of the week. - -The **closing prices** of daily and weekly bars tend to reflect the actions of professional traders. They watch the markets throughout the day, respond to changes, and tend to dominate the last hour of trading. Many of them take profits at that time to avoid carrying trades overnight. - -**FIGURE 17.1** TSLA daily. *(Chart by Stockcharts.com)* - -#### The Meaning of a Bar Chart - -Opening prices are set by amateurs, whose orders accumulate overnight and hit the market in the morning. Closing prices are largely set by market professionals who trade throughout the day. You can see a reflection of their conflict in how often opening and closing prices occur at the opposite ends of price bars. - -The high of each bar marks the maximum power of bulls during that bar. The low of each bar marks the maximum power of bears during that bar. Slippage tends to be less when you enter or exit positions during short bars. - -Professionals as a group usually trade against the amateurs. They tend to buy lower openings, sell short higher openings, and unwind their positions as the day goes on. Traders need to pay attention to the relationship between opening and closing prices. *If prices closed higher than they opened, then market professionals were probably more bullish than amateurs. If prices closed lower than they opened, then market professionals were probably more bearish than amateurs*. It pays to trade with the professionals and against the amateurs. Candlestick charting is based, to a large extent, on the relationship between the opening and closing prices of each bar. If the close is higher, the candle is white, but if it is lower, the candle is black. - -The **high of each bar** represents the maximum power of bulls during that bar. Bulls make money when prices go up. Their buying pushes prices higher, and every uptick adds to their profits. Finally, bulls reach a point where they cannot lift prices not even by one more tick.1 The high of a daily bar represents the maximum power of bulls during the day, while the high of a weekly bar marks the maximum power of bulls during the week. - -*The highest point of a bar represents the maximum power of bulls during that bar.* - -1 A tick is the smallest price change allowed for any given trading vehicle. It may be one cent or even one hundredth of a cent (depending on the stock), a quarter point for S&P e-minis, 10 cents for gold futures, etc. - -The **low of each bar** represents the maximum power of bears during that bar. Bears make money when prices decline. They keep selling short, their selling pushes prices lower, and every downtick adds to their profits. At some point they run out of either capital or enthusiasm, and prices stop falling. The low of a daily bar marks the maximum power of bears during that day, and the low of a weekly bar identifies the maximum power of bears during that week. - -*The low of each bar shows the maximum power of bears during that bar.* - -The **closing price of each bar** reveals the outcome of the battle between bulls and bears during that bar. If prices close near the high of the daily bar, it shows that bulls won the day's battle. If prices close near the low of the day, it shows that bears won the day. Closing prices on the daily charts of futures are especially important because your account equity is "marked to market" each night. - -The **distance between the high and the low** of any bar reflects the intensity of conflict between bulls and bears. An average bar marks a relatively cool market. A bar that's only half as tall as average reveals a sleepy, disinterested market. A bar that's two times taller than average shows a boiling market where bulls and bears battle all over the field. - -Slippage (see the Introduction) tends to be less in quiet markets. It pays to enter trades during short or normal bars. Tall bars are good for taking profits. Trying to enter a position when the market is running is like jumping onto a moving train. It would be safer to wait for the next one. - -## **Japanese Candlesticks** - -Japanese rice traders began using candlestick charts some two centuries before the first chartists appeared in America. Instead of bars, their charts had rows of candles with wicks at both ends. The body of each candle represents the distance between the opening and closing prices. If the closing price is higher than the opening, the body is white, but if the closing price is lower, the body is black. - -The tip of the upper wick represents the high of the day, while the bottom of the lower wick represents the low of the day. The Japanese consider highs and lows relatively unimportant, according to Steve Nison, author of *Japanese Candlestick Charting Techniques*. They focus on the relationship between opening and closing prices and on patterns that include several candles. - -The main advantage of a candlestick chart is its focus on the struggle between amateurs who control openings and professionals who control closings. Unfortunately, many candlestick chartists neglect Western tools, such as volume and technical indicators. - -Candlesticks have become quite popular worldwide, and some traders ask me why I continue to use bar charts. I am familiar with candlesticks, but I've learned to trade using bar charts, and I believe that using open-high-low-close bars plus technical indicators gives me more information. - -Your choice of a bar or a candlestick chart is a matter of personal preference. All concepts expressed in this book can be used with candlestick as well as bar charts. - -## **Efficient Markets, Random Walk, Chaos Theory, and "Nature's Law"** - -Efficient Market theory is an academic notion that nobody can outperform the market because any price at any given moment incorporates all available information. Warren Buffett, one of the most successful investors of the century, commented: "I think it's fascinating how the ruling orthodoxy can cause a lot of people to think the earth is flat. Investing in a market where people believe in efficiency is like playing bridge with someone who's been told it doesn't do any good to look at the cards." - -The logical flaw of Efficient Market theory is that it equates knowledge with action. People may have knowledge, but the emotional pull of the crowd often leads them to trade irrationally. A good analyst can detect repetitive patterns of crowd behavior on his charts and exploit them. - -Random Walk theorists claim that market prices change at random. Sure, there is a fair bit of randomness or "noise" in the markets, just as there is randomness in any crowd. Still, an intelligent observer can identify repetitive behavior patterns of a crowd and make sensible bets on their continuation or reversal. - -People have memories; they remember past prices, and their memories influence their decisions to buy or sell. Memories help create support under the market and resistance above it. Random Walkers deny that memories influence our behavior. - -As Milton Friedman pointed out, prices carry information about the availability of supply and the intensity of demand. Market participants use that information when deciding to buy or sell. For example, consumers buy more merchandise when it is on sale and less when prices are high. Financial traders are just as capable of logical behavior as homemakers. When prices are low, bargain hunters step in. A shortage can lead to a buying panic, but high prices choke off demand. - -Chaos Theory has achieved prominence in the recent decades. Markets are largely chaotic, and the only time you can have an edge is during orderly periods. - -In my view, markets are chaotic much of the time, but out of that chaos, islands of order and structure keep emerging and disappearing. The essence of market analysis is recognizing the emergence of orderly patterns and having enough courage and conviction to trade them. - -If you trade during chaotic periods, the only ones to benefit will be your broker, who'll collect his commission, and a professional day-trader, who'll scalp you. The key point to keep in mind is that once in a while a pattern emerges from chaos. Your system should recognize this transition, and that's when you should put on a trade! Earlier we spoke about the one great advantage of a private trader over professionals—he may wait for a good trade instead of having to be active each day. The chaos theory confirms that message. - -The chaos theory also teaches us that orderly structures that emerge from chaos are fractal. The sea coast appears equally jagged whether you look down on it from space or an airplane, from a standing position or on your knees through a magnifying glass. Market patterns are fractal as well. If I show you a set of charts of the same market, having removed time markings, you will not be able to tell whether it is monthly, weekly, daily, or a 5-minute chart. Later in this book (Chapter 39), we'll return to this theme, and you'll see why it is so important to analyze markets in more than one timeframe. We'll have to make sure that buy or sell messages in both timeframes confirm each other, because if they don't it means that the market is too chaotic and we should stand aside. - -Nature's Law is the rallying cry of a clutch of mystics who claim there is a perfect order in the markets (which they'll reveal to you for a price). They say that markets move like clockwork in response to immutable natural laws. R. N. Elliott even titled his last book *Nature's Law*. - -The "perfect order" crowd gravitates to astrology, numerology, conspiracy theory, and other superstitions. Next time someone talks to you about natural order in the markets, ask him about astrology. He'll probably jump at the chance to come out of the closet and talk about the stars. - -The believers in perfect order in the markets claim that tops and bottoms can be predicted far into the future. Amateurs love forecasts, and mysticism is a great marketing gimmick. It helps sell courses, trading systems, and newsletters. - -Mystics, Random Walk academics, and Efficient Market theorists have one trait in common. They are equally divorced from the reality of the markets. - -## ■ **18. Support and Resistance** - -A ball hits the floor and bounces. Toss it up, and it'll drop after hitting the ceiling. Support and resistance are like a floor and a ceiling, with prices sandwiched between them. Understanding support and resistance is essential for understanding price trends. Rating their strength helps you decide whether the trend is likely to punch through or to reverse. - -**Support** is a price level where buying is strong enough to interrupt or reverse a downtrend. When a downtrend hits support, it bounces like a diver who hits the bottom and pushes away from it. Support is represented on a chart by a horizontal line connecting two or more bottoms (Figure 18.1). - -**Resistance** is a price level where selling is strong enough to interrupt or reverse an uptrend. When an uptrend hits resistance, it acts like a man who hits his head on a branch while climbing a tree—he stops and may even tumble down. Resistance is represented on a chart by a horizontal line connecting two or more tops. - -It is better to draw support and resistance lines across the edges of congestion areas where the bulk of the bars stopped rather than across extreme prices. Those congestion zones show where masses of traders have changed their minds, while the extreme points reflect only panic among the weakest traders. - -Minor support or resistance causes trends to pause, while major support or resistance causes them to reverse. Traders buy at support and sell at resistance, making their effectiveness a self-fulfilling prophecy. - -**FIGURE 18.1** NFLX weekly. *(Chart by Stockcharts.com)* - -#### Support and Resistance - -Draw horizontal lines across the upper and lower edges of congestion areas. The bottom line marks the level of support at which buyers overcome sellers. The upper line identifies resistance, where sellers overpower buyers. Support and resistance areas often switch roles. Note how after a decisive upside breakout in area 1 prices hit resistance, but when they broke above that level it turned into a zone of support (marked 2). The strength of these barriers increases each time prices touch them and bounce away. - -Beware of false breakouts from support and resistance. They are marked by letter "F" on this chart. Amateurs tend to follow breakouts, while professionals tend to fade (trade against) them. At the right edge of the chart NFLX is rallying from support at the level where its previous rally ran into resistance. - -How do we identify trends? Not by **trendlines**. My favorite tools are exponential moving averages that we'll review in the next section. Trendlines are wildly subjective—they are among the most self-deceptive tools. Trend identification is an area in which computerized analysis is miles ahead of classical charting. - -## **Memories, Pain, and Regret** - -Our memories of previous market turns prompt us to buy and sell at certain levels. Buying and selling by crowds create support and resistance. *Support and resistance exist because people have memories.* - -If traders remember that prices have recently stopped falling and turned up from a certain level, they are likely to buy when prices approach that level again. If traders remember that an uptrend has recently reversed after rising to a certain peak, they tend to sell and go short when prices approach that level again. - -For example, all major rallies in the stock market from 1966 until 1982 ended whenever the Dow Jones Industrial Average rallied into the area between 950 and 1050. That resistance zone was so strong that traders named it "a graveyard in the sky." Once the bulls rammed the market through that level, it became a major support area. In recent years, we saw a similar occurrence in gold, whose chart is shown here (Figure 18.2). It hit the level of \$1,000/oz four times, dropping after each - -#### **FIGURE 18.2** Gold weekly. (*Chart by Stockcharts.com)* - -#### Resistance Turns into Support - -Notice how gold hit its overhead resistance at the \$1,000/oz. level five times. Usually, reversals occur on the first, second or third hit. When a market hits the same level for the fourth time, it shows that it really wants to go that way. Gold broke above \$1,000/oz. on its fifth attempt. - -Afterwards, gold made two attempts to pull down to its old resistance level, in areas marked 6 and 7. Its inability to decline to that level showed that bears were weak, marking the start of a major bull market in gold. - -attempt. After the price of gold broke above that level on its fifth attempt, the level of \$1,000/oz turned into a massive support level. - -Support and resistance exist because masses of traders feel pain and regret. Traders who hold losing positions feel intense pain. Losers are determined to get out as soon as the market gives them another chance. Traders who missed an opportunity to buy or sell short feel regret and also wait for the market to give them a second chance. Feelings of pain and regret are mild in trading ranges when swings are relatively small and losers do not get hurt too badly. Breakouts from those ranges create much more intense pain and regret. - -When the market stays flat for a while, traders get used to buying near the lower edge of its range and selling or even shorting near the upper edge. When an uptrend begins, bears who sold short feel a great deal of pain. At the same time bulls feel an intense regret that they didn't buy more. Both are determined to buy if the market declines to the breakout point and gives them a second chance to cover shorts or to get long. The pain of bears and regret of bulls makes them eager to buy, creating **support** during reactions in an uptrend. - -When prices break down from a trading range, bulls who bought are in pain: they feel trapped and wait for a rally to get out even. Bears, on the other hand, regret that they haven't shorted more: they wait for a rally as a second chance to sell short. Bulls' pain and bears' regret create **resistance**—a ceiling above the market in downtrends. The strength of support and resistance depends on the strength of feelings among masses of traders. - -## **Strength of Support and Resistance** - -The longer prices stay in a congestion zone, the stronger the emotional commitment of bulls and bears to that area. A congestion area hit by several trends is like a battlefield with craters from explosions: its defenders have plenty of cover and are likely to slow down any attacking force. When prices approach that zone from above, it serves as support. When prices rally into it from below, it acts as resistance. A congestion area can reverse those roles, serving as either support or resistance. - -The strength of those zones depends on three factors: their length, height, and the volume of trading that has taken place in them. You can visualize these factors as the length, the width, and the depth of a congestion zone. - -*The longer a support or resistance area—its length of time or the number of hits it took the stronger it is*. Support and resistance, like good wine, become better with age. A 2-week trading range provides only minimal support or resistance, a 2-month range gives people time to become used to it and creates intermediate support or resistance, while a 2-year range becomes accepted as a standard of value and offers major support or resistance. - -As support and resistance levels grow very old, they gradually become weaker. Losers keep washing out of the markets, replaced by newcomers who don't have the same emotional commitment to very old price levels. People who lost money only recently remember full well what happened to them. They are probably still in the market, feeling pain and regret, trying to get even. People who made bad decisions several years ago may well be out of that market, and their memories matter less. - -The strength of support and resistance increases each time that area is hit. When traders see that prices have reversed at a certain level, they tend to bet on a reversal the next time prices reach that level. - -*The taller the support and resistance zone, the stronger it is*. A tall congestion zone is like a tall fence around a property. If a congestion zone's height equals one percent of current market value, it provides only minor support or resistance. If it's three percent tall, it provides intermediate support or resistance, and a congestion zone that's seven percent tall or higher can grind down a major trend. - -*The greater the volume of trading in a support and resistance zone, the stronger it is*. High volume shows active involvement by traders—a sign of strong emotional commitment. Low volume shows that traders have little interest in transacting at that level—a sign of weak support or resistance. - -You can measure the strength of support and resistance in dollars if you multiply the number of days a stock spent in its congestion zone by its average daily volume and price. Of course, when making such comparisons, we should measure support and resistance zones for the same stock. You can't compare apples with oranges or AAPL with some \$10 stock that trades a million shares on a good day. - -## **Trading Rules** - -1. Whenever the trend you're riding approaches support or resistance, tighten your protective stop. - -A **protective stop** is an order to sell below the market when you are long or to cover shorts above the market when you are short. A stop protects you from getting badly hurt by a reversal. - -A trend reveals its health by how it acts when it hits support or resistance. If it's strong enough to penetrate that zone, your tight stop will not be triggered. If a trend bounces away from support or resistance, it reveals its weakness. In that case, your tight stop will salvage a good chunk of profits. - -2. Support and resistance are more important on long-term charts than on shortterm charts. - -A good trader monitors his market using several timeframes, but assigns more weight to the longer ones. Weekly charts are more important than dailies. If the weekly trend is strong, it is less alarming that the daily trend is hitting resistance. When a weekly trend approaches major support or resistance, you should be more inclined to exit. - -3. Support and resistance levels point to trading opportunities. - -The bottom of a congestion area identifies the bottom line of support. As prices decline towards it, be alert to buying opportunities. One of the best patterns in technical analysis is a **false breakout**. If prices dip below support and then rally back into the support zone, they show that bears have lost their chance. A price bar closing within a congestion zone after a false downside breakout marks a buying opportunity; set a protective stop in the vicinity of the bottom of the recent false downside breakout. - -Similarly, a true upside breakout should not be followed by a pullback into the range, just as a rocket is not supposed to sink back to its launching pad. A false upside breakout gives a signal to sell short as a price bar returns into the congestion zone. When shorting, place a protective stop near the top of the false breakout (Figure 18.3). - -On Placing Stops Experienced traders tend to avoid placing them at round numbers. If I buy a stock near \$52 and want to protect my position in the area of 51, I'll put a stop a few cents below \$51. If I go long at 33.70 in a day-trade and want to protect my position in the area of \$33.50, I'll put that stop a few cents below \$33.50. Because of a natural human tendency to use round numbers, clusters of stops accumulate there. I prefer to place my stops at the far ends of such clusters. - -## **True and False Breakouts** - -Markets spend more time in trading ranges than in trends. Most breakouts from trading ranges are false breakouts. They suck in trend-followers just before prices return into their ranges. False breakouts hurt amateurs, but professional traders love them. - -Professionals expect prices to fluctuate most of the time, without going anywhere far. They wait until an upside breakout stops reaching new highs or a downside breakout stops making new lows. Then they pounce—fade the breakout (trade against it) - -**FIGURE 18.3** EGO and the Euro daily. *(Chart by Stockcharts.com)* - -### False Breakouts - -On the left, a chart of Eldorado Gold Corp. (EGO) shows a false downside breakout during gold bears' final attempt to push gold stocks lower in December 2013. Prices opened sharply below support, having gapped down from the previous day's close. From there, a rally began. Notice a pullback to the support line a week later, marked by a green arrowhead. Such pullbacks don't always occur, but when they do, they offer an excellent opportunity to hop aboard a new trend. - -On the right, a chart of the Euro (represented here by \$XEU) shows how an uptrend culminated in a false upside breakout. Prices gapped above the line of resistance, triggering stops and shaking out weak shorts, and that's when the downtrend began. There was no second chance pullback in this market. - -and place a protective stop near the latest extreme point. It's a tight stop, and their monetary risk is low, with a big profit potential from prices returning towards the middle of the congestion zone. The risk/reward ratio is so good that professionals can afford to be wrong half the time and still come out ahead of the game. - -The best time to buy an upside breakout on a daily chart is when your analysis of the **weekly** chart suggests that a new uptrend is developing. True breakouts are confirmed by heavy **volume**, while false breakouts tend to have light volume. True breakouts are confirmed when technical **indicators** reach new extremes in the direction of the new trend, while false breakouts are often marked by divergences between prices and indicators, which we'll discuss later in the book. - -## ■ **19. Trends and Trading Ranges** - -A **trend** exists when prices keep rising or falling over a period of time. In a perfect **uptrend**, each rally reaches a higher high than the preceding rally, while each decline stops at a higher level than the preceding decline. In a perfect **downtrend**, each decline falls to a lower low than the preceding decline and each rally tops out at a lower level than the preceding rally. In a **trading range**, most rallies stop at about the same high level, and declines peter out at about the same low level. Perfect patterns, of course, aren't that common in financial markets, and multiple deviations make life harder for analysts and traders (Figure 19.1). - -Even a quick look at most charts reveals that markets spend most of the time in trading ranges. Trends and trading ranges call for different tactics. When you go long in an uptrend or sell short in a downtrend, you have to give that trend the benefit of the doubt and use a wider stop, so as not to be shaken out easily. In a trading range, on the other hand, you have to use tight stops, be nimble and close out positions at the slightest sign of a reversal. - -Another difference in trading tactics between trends and ranges is the handling of strength and weakness. You have to follow strength during trends—buy in uptrends and short in downtrends. When prices are in a trading range, you aim to do the opposite—buy weakness and sell strength. - -**FIGURE 19.1** FB daily, 22-day EMA. (*Chart by Stockcharts.com)* - -#### Trend and the Trading Range - -A pattern of higher tops and higher bottoms defines uptrends, while a pattern of lower bottoms and lower tops defines downtrends. In the middle of this chart of Facebook, Inc. (FB), you see a downtrend defined by three lower lows, marked 1, 3, and 5, and two lower highs, marked 2 and 4. Notice the downtrend of a slow 22-day exponential moving average (which we'll review in Chapter 22) confirming the price downtrend. Its upturn signaled an upside reversal, confirmed by new price peaks 6 and 8. - -We've looked at false breakouts in the previous chapter, and you can see them again in action here. False breakouts occur when prices cross their support or resistance lines, spend one or two days beyond that line, and then return, marking a failed move in the direction of the breakout; afterwards prices tend to turn in the opposite direction. Here, a false downside breakout, followed by the upturn of a moving average gave a strong buy signal. - -We see a mirror image of this pattern after the top 8. There are two false upside breakouts, and after the second one, the moving average turns down, giving a sell signal. At the right edge of the chart, prices are pulling back up to their declining moving average. Such patterns tend to create good opportunities for selling short. - -## **Mass Psychology** - -When the trend is up, bulls are more eager than bears, and their buying forces prices higher. If bears manage to push prices down, bulls return to bargain hunt. They stop the decline, and force prices to rise again. A downtrend occurs when bears are more aggressive and their selling pushes markets down. Whenever a flurry of buying lifts prices, bears sell short into that rally, stop it, and send prices to new lows. - -When bulls and bears are about equal in strength, prices stay in a trading range. When bulls manage to push prices up, bears sell short into that rally and prices fall. As they decline, bargain hunters step in and buy. Then, as bears cover shorts, their buying helps fuel a rally. This cycle can go on for a long time. - -A trading range is like a fight between two equally strong street gangs. They push one another back and forth, but neither can control the city block. A trend is like a fight in which a stronger gang chases the weaker gang down the street. Every once in a while the weaker gang stops and puts up a fight but then turns and runs again. - -Crowds spend most of their time aimlessly milling around, which is why markets spend more time in trading ranges than in trends. A crowd has to become agitated and surge to create a trend. Crowds do not stay excited for long—they go back to aimlessness. Professionals tend to give the benefit of the doubt to trading ranges. - -## **The Hard Right Edge** - -Trends and ranges are easy to see in the middle of a chart, but as you get close to its right edge, the picture becomes increasingly foggy. The past is fixed and clear, but the future is fluid and uncertain. Trends are easy to recognize on old charts, but, unfortunately, our brokers don't allow us to trade in the past—we have to make trading decisions at the hard right edge. - -By the time a trend becomes perfectly clear, a good chunk of it is already gone. Nobody will ring a bell when a trend dissolves into a trading range. - -Many chart patterns and indicator signals contradict one another at the right edge of the chart. You have to base your decisions on probabilities in an atmosphere of uncertainty. - -Most people feel very uncomfortable dealing with uncertainty. When their trade doesn't go the way their analysis suggested, they hang onto losing positions, waiting for the market to turn and make them whole. Trying to be right is an unaffordable luxury in the markets. Professional traders get out of losing trades fast. When the market deviates from your analysis, you have to cut losses without fuss. - -## **Methods and Techniques** - -Keep in mind that there is no single magic method to clearly and reliably identify all trends and trading ranges. It pays to combine several analytic tools. None of them is perfect, but when they confirm each another, a correct message is much more likely. When they contradict one another, it's better to pass up a trade. - -**FIGURE 19.2** UNP daily, 22-day EMA, Directional system, M*ACD-Histog*ram. *(Chart by Stockcharts.com)* - -#### Trend Identification - -The single most important identifier of any trend is the pattern of its highs and lows. Look, for example, at this daily chart of Union Pacific Corp (UNP). Once it broke out of its trading range, its highs, marked by horizontal green lines, kept reaching higher and higher. Similarly, its reaction lows, marked by red horizontal lines, kept bottoming out at higher and higher levels. Trying to draw a trendline would be a very subjective exercise because the bottoms of UNP did not line up in a straight line. - -The 22-day exponential moving average (EMA), represented by a red line superimposed on prices, confirms the uptrend by its steady rise. Notice excellent buying opportunities, signaled by quick price dips to their moving average (we'll return to this pattern in Chapter 22). - -The Directional system (described in Chapter 24) signaled the start of a new trend when the Average Directional Index (ADX) fell below 20 and then rallied above that level and penetrated above the lower Directional Line (marked by a vertical green arrow). MACD-Histogram (described in Chapter 23) identified a very powerful trend when it rallied to its highest peak in several months (marked by a diagonal green arrow). Near the right edge of the chart the trend is up, while prices are slightly below their recent high. A pullback to the EMA is likely to create a fresh buying opportunity. - -- 1. Analyze the pattern of highs and lows. When rallies keep reaching higher levels and declines keep stopping at higher levels, they identify an uptrend. The pattern of lower lows and lower highs identifies a downtrend, and the pattern of irregular highs and lows points to a trading range (Figure 19.1). -- 2. Plot a 20- to 30-bar exponential moving average (see Chapter 22). The direction of its slope identifies the trend. If a moving average has not reached a new high or low in a month, then the market is probably in a trading range. - -- 3. When an oscillator, such as MACD-Histogram (see Chapter 23) rises to a new peak, it identifies a powerful trend and suggests that the latest market top is likely to be retested or exceeded. -- 4. Several market indicators, such the Directional system (see Chapter 24), help identify trends. The Directional system is especially good at catching early stages of new trends (Figure 19.2). - -## **Trade or Wait** - -Having identified an uptrend, you need to decide whether to buy immediately or wait for a dip. If you buy fast, you'll get in gear with the trend, but on the minus side, your stops are likely to be farther away, increasing your risk. - -If you wait for a dip, your risk will be smaller, but you'll have four groups of competitors: longs who want to add to their positions, shorts who want to get out even, traders who never bought (such as yourself), and traders who sold too early but are eager to buy again. The waiting areas for pullbacks are notoriously crowded! Furthermore, a deep pullback may signal the beginning of a reversal rather than a buying opportunity. The same reasoning applies to shorting in downtrends. - -If the market is in a trading range and you're waiting for a breakout, you'll have to decide whether to buy in anticipation of a breakout, during a breakout, or on a pullback after a valid breakout. If you aren't sure, consider entering in several steps: buy a third of the planned position in anticipation, a third on a breakout, and a third on a pullback. - -Whatever method you use, remember to apply the key risk management rule: the distance from your entry to the protective stop, multiplied by position size can never be more than 2 percent of your account equity (see Chapter 50). No matter how attractive a trade, pass it up if it would require putting more than 2% of your account at risk. - -Finding good entry points is extremely important in trading ranges. You have to be very precise and nimble because the profit potential is limited. A trend is more forgiving of a sloppy entry, as long as you trade in the right direction. Old traders chuckle: "Don't confuse brains with a bull market." - -Specific risk management tactics are different for trends and trading ranges. When trend trading, it pays to put on smaller positions with wider stops. You'll be less likely to get shaken out by any counter-trend moves, while still controlling risk. You may put on bigger positions in trading ranges but with tighter stops. - -## **Conflicting Timeframes** - -Markets move in several timeframes at the same time (see Chapter 32). They move simultaneously, and sometimes in the opposite directions on 10-minute, hourly, daily, weekly and monthly charts. The market may look like a buy in one timeframe but a sell in another. Even indicator signals in different timeframes of the same stock may contradict one another. Which will you follow? - -Most traders ignore the fact that markets move in different directions at the same time in different timeframes. They pick one timeframe, such as daily or hourly, and look for trades there. That's when trends from other timeframes sneak up on them and wreak havoc with their plans. - -Those conflicts between signals in different timeframes of the same market are one of the great puzzles in market analysis. What looks like a trend on a daily chart may show up as a blip on a flat weekly chart. What looks like a flat trading range on a daily chart shows rich uptrends and downtrends on an hourly chart, and so on. - -The sensible course of action is this: before examining a trend on your favorite chart, step back to explore the charts in a timeframe one order of magnitude greater than your favorite. This search for a greater perspective is one of the key principles of the Triple Screen trading system, which we'll discuss in a later chapter. - -When professionals are in doubt, they look at the big picture, while amateurs tend to focus on the short-term charts. Taking a longer view works better —and is a lot less nerve-wracking. - -## ■ **20. Kangaroo Tails** - -Just when you think a runaway trend will keep on going—pop!—a three-bar pattern forms a kangaroo tail that flags a reversal. A kangaroo tail2 consists of a single, very tall bar, flanked by two regular bars, that protrudes from a tight weave of prices. Upward-pointing kangaroo tails flash sell signals at market tops, while downwardpointing kangaroo tails occur at market bottoms (Figure 20.1). - -While daily charts are shown in the illustration, you can find kangaroo tails on the charts of all timeframes. The longer the timeframe, the more meaningful its signal: a kangaroo tail on a weekly chart is likely to lead to a more significant move than a tail on a 5-minute chart. - -Kangaroo tails, also called "fingers," are on my short list of reliable chart formations. They leap at you from the charts and are easy to recognize. If you doubt whether a kangaroo tail is present, assume it is not. Real kangaroo tails are unmistakable. They occur in the broad market indexes as well as individual stocks, futures, and other trading vehicles. - -Markets constantly fluctuate, seeking levels that generate the highest volume of trade. If a rally attracts no orders, the market will reverse and look for orders at lower levels. If volume dries up during a decline, the market is likely to rally, seeking orders at higher prices. - -Kangaroo tails reflect failed bull or bear raids. - -A kangaroo tail pointing up reflects a failed attempt by the bulls to lift the market. They're like a group of soldiers that take a hill from the enemy, only to discover that the main force has failed to follow. Now they escape and run downhill for their lives. Having failed to hold the hill, the army is likely to move away from it. - -2 I am grateful to Margarita Volkova, my translator in Moscow, who came up with this name for the pattern. - -**FIGURE 20.1** BIIB and FDO daily. *(Chart by Stockcharts.com)* - -#### Kangaroo Tails - -Biogen Idec, Inc (BIIB) was rising in a steady uptrend when it developed an upward kangaroo tail. The stock opened slightly below its previous close but then traced a very tall bar, triple the average height. It reached a record new high but then slid, closing near its opening price. The next day's bar was of average height—it completed the kangaroo pattern and the trend reversed down. - -The stock of Family Dollar Stores, Inc. (FDO) was falling when its decline sharply accelerated, producing a downward pointing bar several times the average bar height for this stock. Notice that both opening and closing prices for that bar were well within the previous day's range. That downward stab marked the end of the downtrend; the next bar was of average height and after that the trend reversed up. - -A kangaroo tail that points down reflects a failed bear raid. Bears aggressively sold the market, pushing it lower—but low prices did not attract volume and bears retreated back into the range. What do you think the market is likely to do next, after it failed to continue moving down? Since it found no orders below, it's likely to turn up and rally. - -When markets recoil from kangaroo tails, they offer trading opportunities. It was J. Peter Steidlmayer who pointed out years ago that a bar that looks like a finger sticking out of a tight chart pattern provides a valuable reference point for short-term traders. A kangaroo tail shows that a certain price has been rejected by the market. It usually leads to a swing in the opposite direction. As soon as you recognize a tail, trade against it (Figure 20.2). - -An experienced trader can recognize a kangaroo tail during its third bar, before it closes. For example, you may see a range that held for several days on a daily chart, but then on Monday the stock explodes in a very tall bar. If on Tuesday it opens near the base of the Monday's bar base and refuses to rally, consider selling short before the market closes on Tuesday. If the market has been in a trading range for a week and then traces a tall bar down on Wednesday, get ready on Thursday: if prices trade in a narrow range near the top of the Wednesday bar, go long before the market closes on Thursday. - -**FIGURE 20.2** IGT Daily. *(Chart by Stockcharts.com)* - -#### Trading Kangaroo Tails. - -Kangaroo tails mark the final splash of bullishness or bearishness, depending on their direction. Here the kangaroo tail (marked with a red arrow) helped identify the end of an uptrend in the stock of International Game Technology (IGT). Notice the bar is more than double the usual height and is bracketed by shorter bars. If entering a short trade during the third bar, place your stop about half-way up the tail. Putting a stop at the tip of the tail would mean accepting too much risk. - -Notice a tail pointing down, marked by a green arrow. It stopped the downtrend and augured in a week-long rally. - -Remember that trading against the tails is a short-term tactic; on the daily charts, these signals fizzle out after a few days. Evaluate kangaroo tails against the background of the current market. For example, when running a long-term bullish campaign in a stock, be alert to kangaroo tails. A tail pointing up may well suggest profit taking on existing positions, while a tail pointing down identifies a good spot to add to long positions. - -Using stops is essential for survival and success in the markets. Putting a stop at the end of a tail would make your stop too wide, risking too much capital. When trading against the tail, place your protective stop about halfway through the tail. If the market starts "chewing its tail," it is time to get out. - -**PART 4** diff --git a/trading/The New Trading for a Living/008_PART 4 Computerized Technical Analysis.md b/trading/The New Trading for a Living/008_PART 4 Computerized Technical Analysis.md deleted file mode 100644 index 4aaf1c68185b620b8257519715a7f18c1a339fa2..0000000000000000000000000000000000000000 --- a/trading/The New Trading for a Living/008_PART 4 Computerized Technical Analysis.md +++ /dev/null @@ -1,687 +0,0 @@ -## Computerized Technical Analysis - -Computers were a novelty at the time I wrote *Trading for a Living*. My first computer for technical analysis was an Apple 2E desktop with a boxy modem and two floppy drives. Each held a 300 KB diskette: one for the analytic program (Computrac, the first program for technical analysis) and the other for market data. When the first hard drives came out, I had a choice of buying a 2-, 5- or 10-MB (not gigabyte!) drive. Ten megabytes seemed too huge for anyone to ever need, so I sprang for a 5-MB hard drive. How technology has changed! - -A trader without a computer is like a man traveling on a bicycle. His legs grow strong and he sees a lot of scenery, but his progress is slow. When you travel on business and want to get to the point fast, you get a car. - -Today, very few people trade without computers. Our machines help track and analyze more markets in greater depth. They liberate us from the routine updating of charts, freeing up time for thinking. Computers allow us to use more complex indicators and spot more opportunities. Trading is an information game. A computer helps you process more information. On the minus side, with computers we lose a physical feel for price moves that comes from pencil and paper charting. - -## ■ **21. Computers in Trading** - -Computerized technical analysis is more objective than classical charting. You can argue whether support or resistance is present—but there can be no argument about an indicator's direction. Of course, you still need to decide what to do after you identify an indicator's message. - -## **Toolboxes** - -When working with wood or metal, you can go to a hardware store and buy a set of tools that can help you work smartly and efficiently. A technical analysis toolbox provides a set of electronic tools for processing market data. - -When you decide to get into computerized technical analysis, begin by drawing a list of tasks you want your computer to perform. This will take some serious thinking, but it's much better than getting a package first and scratching your head later, trying to figure out what it might do for you. Decide what markets you want to track, what types of charts to view and what indicators to use. - -A toolbox draws weekly, daily, and intraday charts; it splits the screen into several windowpanes for plotting prices and indicators. A good toolbox includes many popular indicators, such as moving averages, channels, MACD, Stochastic, Relative Strength Index, along with dozens if not hundreds of others. It allows you to modify all indicators and even construct your own. - -A good toolbox allows you to compare any two markets and analyze their spreads. If you trade options, your toolbox must include an options valuation model. Advanced packages allow you to backtest trading systems. - -Another feature of a good toolbox is its ability to scan stocks. For example, you may want to find all stocks among the Nasdaq 100 whose exponential moving averages are rising, but whose prices are no more than 1% above their EMAs. Can your software scan for that? Can it add fundamental parameters to your search, such as rising earnings? Think what you want to find and then ask software vendors whether their products can do it for you. - -There are good toolboxes at all price levels. A beginner making his first steps may sign up with an online service that offers a basic set of computerized tools for free; you can upgrade to a paid level later. Most charts in this book are drawn using just such a service, StockCharts.com, because I want you to see how much you can do while spending very little. Some traders find that sufficient, while many of us buy programs that reside on our computers, allowing greater customization. With prices of software in a steady decline, you don't have to worry too much. Buy something simple and inexpensive and upgrade later—it's a date, not a marriage. - -Once you've decided what package to use, you may want to hire somebody who already uses it to help you set it up on your machine. This can save a great deal of time and energy for inexperienced users. - -A growing number of brokerage firms offer free analytic software to their clients; the price is right, but they tend to have two serious limitations. First, for legal reasons, they make their software very hard to modify and second, it only works online. Traders often ask how to add my indicators to their brokerage software, and the usual answer is—you can't. - -Most brokerage house programs enable you to place and change your orders using the same analytic software. This can be quite handy and useful for day traders, but less important for longer-term traders. Be sure to disable a common feature that shows your equity gains or losses in real time. Watching dollars jump up or down at every tick is stressful and distracting. As the song goes, "…never count your money while you're sitting at the table—there'll be time enough for counting when the dealing's done." Focus on prices and indicators instead of watching dollars and thinking what you can buy with them. - -Technical analysis software is constantly changing and evolving; a book is not the right place for software recommendations. My firm Elder.com maintains a brief Software Guide, which we periodically update and e-mail to any trader who asks for it, as a public service. - -As mentioned earlier in this book, most programs for technical analysis fall into one of three groups: toolboxes, black boxes, and gray boxes. Toolboxes are for serious traders, black boxes are for people who believe in Santa Claus, and gray boxes are in between. When considering a new software package, be sure to know which group it belongs to. - -## **Black Boxes and Gray Boxes** - -Black box software is pure magic: it tells you what and when to buy and sell without telling you why. You download the data and push a button. Lights blink, gears click, and a message lights up, telling you what to do. Magic! - -Black boxes always come with impressive track records that show profitable past performance. Every black box eventually self-destructs because markets keep changing. Even systems with built-in optimization don't survive because we don't know what kind of optimization will be needed in the future. There is no substitute for human judgment. The only way to make money from a black box is to sell one. Most black boxes are sold by hustlers to gullible or insecure traders. - -Each black box is guaranteed to fail, even if sold by an honest developer. Complex human activities, such as trading, cannot be automated. Machines can help but not replace humans. - -Trading with a black box means using a slice of someone else's intelligence, as it existed at some point in the past. Markets change, and experts change their minds, but a black box keeps churning out its buy and sell signals. It would have been funny if it wasn't so expensive for losers. - -A gray box generates trading signals based on proprietary formulas. Unlike a black box, it discloses its general principles and allows you to adjust its parameters to some degree. The closer a gray box is to a toolbox, the better it is. - -## **Computers** - -While online programs can run on any computer, most stand-alone programs are written for the Windows environment. Some traders run them on Macs, using emulation software. There are even programs for tablets, such as iPads. - -Technical analysis software tends to be not very demanding of processing power, but still, it makes sense to get the most modern machine so that it remains useful for years. - -Many day traders like to use multiple screens for a multidimensional view of the markets and the ability to watch several trading vehicles at once. Since I like to travel, I carry a small external screen that helps me monitor markets and trade from the road. It's the size of my laptop but much thinner and attaches to it with a USB cable, without a power cord. - -## **Market Data** - -Swing and position traders enter and exit trades within days or weeks, while day traders enter and exit within a few hours if not minutes. End-of-day data is sufficient for position traders, but day traders need real-time data. - -When you download the daily data for research, it pays to cover two bull-andbear-market cycles, or about 10 years. Whenever I approach a stock, I like to look back at 12 years of trading history to see whether it is cheap or expensive relative to its 12-year range. - -Whenever you approach a trade, you must know your edge—what will help you make money. The ability to recognize patterns is a part of my edge, but if a stock's history is too short, there are no reliable patterns to identify. That's why I avoid trading very young stocks, those with less than a year's history. - -When collecting and analyzing data, don't chase too many markets at once. Focus on quality and depth rather than quantity. Begin by following the key market indexes, such as the Dow, the NASDAQ, and the S&P. Many professional traders focus on a relatively small number of stocks. They get to know them well and become familiar with their behavior patterns. - -You could start out by focusing on a dozen stocks. Many professionals limit themselves to fewer than 100 stocks, which they review every weekend and mark their opinions in a fresh column of their spreadsheet. They may select fewer than 10 stocks from that pool that look promising for the week ahead and focus on them. Build your watch list gradually from the popular stocks of the year; add a few stocks from the most promising industries and some stocks you've traded before. Building a watch list is like gardening: you can't get a beautiful garden in a single season, but you can get there over several seasons. - -Try to stick to the data in your own time zone. When I teach overseas, traders often ask whether I trade in their country. I remind them that whenever you put on a trade, you're trying to take money out of some other trader's pocket, while others are trying to pick yours. This game is hard enough when you're awake, but it is risky to trade in a different time zone, allowing locals to pick your pockets while you sleep. This is why I largely limit my trading to the U.S. markets. Many overseas traders complain that they find their domestic markets too thin and ask whether it would make sense for them to trade in the huge and liquid U.S. market. The answer depends on how different their time zone is from the U.S. market's time zone. For example, the U.S. markets are easy to trade from Europe where they open at 3:30 p.m. local time and close at 10 p.m. It is much harder to do from Asia or Australia, but it can work if you take a longer view and aim to catch longer-term trends. - -Beginning traders should steer clear of day-trading. It demands instant decision making, and if you stop to think, you're dead. Learn to trade in a slower environment. Become a competent position or swing trader before you consider day-trading. If you compare swing trading and day-trading, it is like playing the same video game at level one or level nine. You run the same mazes and dodge the same monsters, but the pace of the game is so fast at level nine that your reactions must be automatic. Learn to analyze markets at level one—become a swing trader before attempting to day-trade. We'll return to this topic in Chapter 33, "Trading Timeframes." - -A good place to get started is swing trading, i.e., holding positions for several days. Select popular stocks that have good swings on a good volume. Start out by following just a handful. Some swing traders who hold positions for only a few days use real-time data for timing entries and exits, while others manage quite well with end-of-day data. - -## **Three Major Groups of Indicators** - -Indicators help identify trends and reversals. They are more objective than chart patterns and provide insight into the balance of power between bulls and bears. - -A great challenge is that various indicators may contradict one another. Some of them work best in trending markets, others in flat markets. Some are good at catching turning points, while others are better at riding trends. That's why it pays to select a small number of indicators from various groups and learn to combine them. - -Many beginners look for a "silver bullet"—a single magic indicator, but markets are too complex to be handled with a single tool. Others try to poll a multitude of indicators and average their signals. The results of such a "poll" will be heavily skewed by the indicators you select. - -Most indicators are based on the same five pieces of data: open, high, low, close, and volume. Prices are primary; indicators are derived from them. Using ten, twenty, or fifty indicators will not deepen your analysis because they share the same base. - -We can divide indicators into three groups: trend-following indicators, oscillators, and miscellaneous. Trend-following indicators work best when markets are moving, but the quality of their signals sharply deteriorates when the markets go flat. Oscillators catch turning points in flat markets but give premature and dangerous signals when the markets begin to trend. Miscellaneous indicators provide insights into mass psychology. Before using any indicator, be sure to understand what it measures and how it works. Only then can you have confidence in its signals. - -Trend-following indicators include moving averages, MACD Lines (moving average convergence-divergence), the Directional System, On-Balance Volume, Accumulation/Distribution, and others. Trend-following indicators are coincident or lagging indicators—they turn after trends reverse. - -Oscillators help identify turning points. They include MACD-Histogram, Force Index, Stochastic, Rate of Change, Momentum, the Relative Strength Index, Elder-ray, Williams %R, and others. Oscillators are leading or coincident indicators that often turn ahead of prices. - -Miscellaneous indicators provide insights into the intensity of bullish or bearish camps. They include the New High–New Low Index, the Put-Call Ratio, Bullish Consensus, Commitments of Traders, and others. They can be leading or coincident indicators. - -It pays to combine several indicators from different groups so that their negative features cancel each other out, while their positive features remain undisturbed. This is the aim of the Triple Screen trading system (see Chapter 39). - -As we begin to explore indicators, a few words of caution. Sometimes their signals are very clear, while at other times they are quite vague. I've learned long ago to enter trades only when indicator signals "grab me by the face." If I find myself squinting at a chart while trying to understand its signals, I flip the page and move to the next stock. - -If you look at a familiar indicator but can't understand its message, it is most likely because the stock you're trying to analyze is in a chaotic stage (see Chapter 17). If indicator signals aren't clear, don't start massaging them or piling on more indicators, but simply leave that stock alone for the time being and look for another one. One of the great luxuries of private traders is that no one pushes us to trade—we can wait for the best and clearest signals. - -As you read about the signals of different indicators, remember that you cannot base trading decisions on a single indicator. We need to select several indicators we understand and trust and combine them into a trading system. In the following chapters, we'll be exploring indicators, while later in the book we'll see how to build your own system from them. - -## ■ **22. Moving Averages** - -Wall Street old-timers say that moving averages were brought to the financial markets after World War II. Antiaircraft gunners used moving averages to site guns on enemy planes and after the war, applied this method to moving prices. The two early experts on moving averages were Richard Donchian and J. M. Hurst—neither apparently a gunner. Donchian was a Merrill Lynch employee who developed trading methods based on moving average crossovers. Hurst was an engineer who applied moving averages to stocks in his classic book, *The Profit Magic of Stock Transaction Timing*. - -A moving average (MA) reflects the average value of data in its time window. A 5-day MA shows the average price for the past 5 days, a 20-day MA for the past 20 days, and so on. Connecting each day's MA value gives you a moving average line. - -Simple MA = -$$ -\frac{P_1 + P_2 + \dots + P_N}{N} -$$ - -where *P* is the price being averaged - -*N* is the number of days in the moving average (selected by the trader) - -The level of a moving average reflects values that are being averaged and depends on the width of the MA window. Suppose you want to calculate a 3-day simple moving average of a stock. If it closes at 19, 21, and 20 on three consecutive days, then a 3-day simple MA of closing prices is 20 (19 + 21+ 20, divided by 3). Suppose that on the fourth day the stock closes at 22. It makes its 3-day MA rise to 21—the average of the last three days (21 + 20 + 22), divided by 3. - -There are three main types of moving averages: simple, exponential, and weighted. Simple MAs used to be popular because they were easy to calculate in precomputer days, and both Donchian and Hurst used them. Simple MAs, however, have a fatal flaw—they change twice in response to each price. - -## **Twice as Much Bark** - -First, a simple MA changes when a new piece of data comes in. That's good—we want our MA to reflect the latest prices. The bad thing is that MA changes again when an old price is dropped off at the end of its window. When a high price is dropped, a simple MA ticks down. When a low price is dropped, a simple MA rises. Those changes have nothing to do with the current reality of the market. - -Imagine that a stock hovers between 80 and 90, and its 10-day simple MA stands at 85 but includes one day when the stock reached 105. When that high number is dropped at the end of the 10-day window, the MA will dive, as if in a downtrend. That meaningless dive has nothing to do with the current trend. - -When an old piece of data gets dropped off, a simple moving average jumps. This problem is worse with short MAs but not so bad with long MAs. If you use a 10-day MA, those drop-offs can really shake it because each day constitutes 10% of the total value. On the other hand, if you use a 200-day MA, where each day is responsible for only 0.5%, dropping off a day isn't going to influence it a lot. - -Still, a simple MA is like a guard dog that barks twice—once when someone approaches the house, and once again when someone walks away from it. After a while, you don't know when to believe that dog. This is why a modern computerized trader is better off using exponential moving averages, which we'll discuss later in this chapter. - -## **Market Psychology** - -Each price is a snapshot of the current consensus of value among all market participants (see Chapter 11). Still, a single price doesn't tell you whether the crowd is becoming more bullish or bearish, just as you can't tell from a single photo whether a person is an optimist or a pessimist. If, on the other hand, you take a daily photo of a person for ten days, bring them to a lab, and order a composite picture, it'll reveal that person's typical features. You can monitor trends in that person's mood by updating that composite photo each day. - -A moving average is a composite photograph of the market—it combines prices for several days. The market consists of huge crowds, and the MA slope identifies the direction of mass inertia. **A moving average represents an average consensus of value for the period of time in its window.** - -The most important message of a moving average is the direction of its slope. When it rises, it shows that the crowd is becoming more optimistic—bullish. When it falls, it shows that the crowd is becoming more pessimistic—bearish. When prices rise above a moving average, the crowd is more bullish than before. When prices fall below a moving average, the crowd is more bearish than before. - -## **Exponential Moving Averages** - -An exponential moving average (EMA) is a better trend-following tool because it gives greater weight to the latest data and responds to changes faster than a simple MA. At the same time, an EMA doesn't jump in response to dropping old data. This guard dog has better ears, and it barks only when someone approaches the house. - -$$ -EMA = P_{\text{tod}} \cdot K + EMA_{\text{yest}} \cdot (1 - K) -$$ -\nwhere - -\n -$$ -K = \frac{2}{N+1} -$$ -\n -$$ -N = \text{the number of days in the EMA (chosen by the trader)} -$$ -\n -$$ -P_{\text{tod}} = \text{today's price} -$$ -\n -$$ -EMA_{\text{yest}} = \text{the EMA of yesterday} -$$ - -Technical analysis software allows you to select EMA length. An EMA has two major advantages over a simple MA. First, it assigns greater weight to the last trading day. The latest mood of the crowd is more important. In a 10-day EMA, the last closing price is responsible for 18 percent of EMA value, while in a simple MA all days are equal. Second, EMA does not drop old data the way a simple MA does. Old data slowly fades away, like a mood of the past lingering in a composite photo. - -## **Choosing the Length of a Moving Average** - -It pays to monitor your EMA slope because a rising line reflects bullishness and a declining one bearishness. A relatively narrow window makes an EMA more sensitive to price changes. It catches new trends sooner, but leads to more whipsaws. A whipsaw is a rapid reversal of a trading signal. An EMA with a wider time window produces fewer whipsaws but misses turning points by a wider margin. - -You can take several approaches to deciding how long to make your moving average or any other indicator. It would be nice to tie EMA length to a price cycle if you can find it. A moving average should be half the length of the dominant market cycle. If you find a 22-day cycle, use an 11-day moving average. If the cycle is 34 days long, then use a 17-day moving average. Trouble is, cycles keep changing and disappearing. - -There is no single magic "best" number for the EMA window. Good indicators are robust—not too sensitive to small changes in their parameters. When trying to catch longer trends, use a longer moving average. You need a bigger fishing rod to catch a bigger fish. A 200-day moving average works for long-term stock investors who want to ride major trends. - -Most traders can use an EMA between 10 and 30 days. A moving average should not be shorter than 8 days to avoid defeating its purpose as a trend-following tool. Among the numbers I like are 22 because there are approximately 22 trading days in a month and 26—half of the number of trading weeks in a year. - -Creating individualized parameters for every trading vehicle is practical only if you track a tiny handful of stocks or futures. Once their number reaches double digits, individualized parameters create confusion. It is better to have a yardstick that's one yard long and use the same parameters for all your moving averages in the same timeframe. Don't change indicator parameters while looking for trades. Fiddling with parameters to obtain signals you'd like to see robs your indicators of their most valuable feature—their objectivity. It is better to set your parameters and live with them. - -## **Trading Rules** - -Beginning traders try to forecast the future. Professionals don't forecast; they measure the relative power of bulls and bears, monitor the trend, and manage their positions. - -Moving averages help us trade in the direction of the trend. The single most important message of a moving average comes from the direction of its slope (Figure 22.1). It reflects the market's inertia. When an EMA rises, it is best to trade the market from the long side, and when it falls, it pays to trade from the short side. - -- 1. When an EMA rises, trade that market from the long side. Buy when prices dip near the moving average. Once you are long, place a protective stop below the latest minor low, and move it to the break-even point as soon as prices close higher. -- 2. When the EMA falls, trade that market from the short side. Sell short when prices rally toward the EMA and place a protective stop above the latest minor high. Lower your stop to breakeven as prices drop. -- 3. When the EMA goes flat and only wiggles a little, it identifies an aimless, trendless market. Do not trade using a trend-following method. - -**FIGURE 22.1** DIS daily 22-day EMA. *(Chart by Stockcharts.com)* - -#### An Exponential Moving Average (EMA) - -The direction of the slope of a moving average helps identify trends of trading vehicles, such as the Walt Disney Company (DIS). - -Old traders used to follow fast and slow MA crossovers. The favorite approach of Donchian, one of the originators of trading with moving averages, was to use crossovers of 4-, 9-, and 18-day MAs. Trading signals were given when all three MAs turned in the same direction. His method, like other mechanical trading methods, only worked during strongly trending markets. - -Trying to filter out whipsaws with mechanical rules is self-defeating—filters reduce profits as much as losses. An example of a filter is a rule that requires prices to close on the other side of MA not once, but twice, or to penetrate MA by a certain margin. Mechanical filters reduce losses, but they also diminish the best feature of a moving average—its ability to lock onto a trend at an early stage. - -A trader must accept that an EMA, like any other trading tool, has good and bad sides. Moving averages help you identify and follow trends, but they lead to whipsaws in trading ranges. We will look for an answer to this dilemma in the chapter on the Triple Screen trading system. - -## **More on Moving Averages** - -Moving averages often serve as **support and resistance**. A rising MA tends to serve as a floor below prices, and a falling MA serves as a ceiling above them. That's why it pays to buy near a rising MA, and sell short near a falling MA. - -Moving averages can be applied to **indicators** as well as prices. For example, some traders use a 5-day moving average of volume. When volume falls below its 5-day MA, it shows reduced public interest in the minor trend and indicates that it is likely to reverse. When volume overshoots its MA, it shows strong public interest and confirms the price trend. We'll be using moving averages of an indicator when we work with Force Index (Chapter 30) - -The proper way to plot a simple moving average is to **lag** it behind prices by half its length. For example, a 10-day simple MA properly belongs in the middle of a 10-day period and it should be plotted underneath the 5th or 6th day. An exponential moving average is more heavily weighted toward the latest data, and a 10-day EMA should be lagged by two or three days. Most software packages allow you to lag a moving average. - -Moving averages can be based not only on closing prices but also on the **mean between the high and the low**, which can be useful for day traders. - -An exponential moving average assigns greater weight to the latest day of trading, but a **weighted moving average** (WMA) allows you to assign any weight to any day, depending on what you deem important. WMAs are so complicated that traders are better off using EMAs. - -## **Dual EMAs** - -Whenever I analyze charts, I like to use not one but two exponential moving averages. The longer EMA shows a longer-term consensus of value. The shorter-term EMA shows a shorter-term consensus of value. - -I keep the ratio between them at approximately two to one. For example, I may use a 26-week and a 13-week EMA on a weekly chart, or a 22-day and an 11-day EMA on a daily chart. Please understand there is no magic set of numbers. You should feel free to play with these values, selecting a set that will be unique to you. Just keep in mind to keep the difference between the two EMAs near 2:1. It might be simpler and more efficient to use the same set of values (for example 26/13 or 22/11) in all timeframes: weekly, daily, and even intraday. - -Since the shorter EMA represents the short-term consensus of value and the longer-term EMA the long-term consensus, I believe that value "lives" between these two lines. **I call the space between the two EMAs the value zone.** - -## **Moving Averages and Channels** - -A channel consists of two lines drawn parallel to a moving average. Oddly enough, the distance between the upper and the lower channel lines is sometimes described as "height" and at other times as "width" of the channel, even though both refer to the same measurement. - -A well-drawn channel should contain approximately 95% of all prices that occurred during the past 100 bars. Longer-term markets have wider channels because prices can cover greater distances in 100 weeks than in 100 days. Volatile markets have wider (or taller) channels than quiet, sleepy markets. - -Channels are very useful for trading and performance tracking. We'll review the first in Chapter 41 (Channel Trading Systems) and the second in Chapter 59 (Trade Journal—Measuring Your Performance.) - -## **Prices, Values, and the Value Zone** - -One of the key concepts in market analysis—the concept that all of us intuitively understand but almost never spell out—is that prices are different from values. We buy stocks when we feel that their current prices are below their true value and expect prices to rise. We sell and sell short when we think that stocks are priced above their real value and are likely to come down. - -We buy undervalued stocks and sell overvalued shares—but how to define value? Fundamental analysts do it by studying balance sheets and annual reports, but those sources aren't nearly as objective as they seem. Companies often massage their financial data. Fundamental analysts don't have a monopoly on the concept of value. Technical analysts can define values by tracking the spread between a fast and a slow EMA. One of these EMAs reflects a short-term and the other a long-term consensus of value. *Value lives in the zone between the two moving averages* (Figure 22.2)*.* - -Very important: it's impossible to trade successfully with just a single indicator or even a pair of moving averages. Markets are too complex to extract money from them with a single tool. We need to build a trading system using several indicators as well as analyze markets in more than one timeframe. Keep this in mind as we review - -**FIGURE 22.2** DIS daily, 26- and 13-day EMAs. *(Chart by Stockcharts.com)* - -#### EMAs and the Value Zone - -A short-term MA identifies a short-term consensus of value, while a long-term MA reflects a long-term consensus of value. Value "lives" in the zone between the two moving averages. Select the parameters for this pair so that the long-term average is approximately twice the length of the short-term EMA. Looking at a chart, you can immediately tell which EMA is longer or shorter—the fast one hugs prices more closely, while the slow one moves more slowly. The slow EMA helps identify the trend, while the fast MA sets the boundary of the value zone. - -When looking to buy a stock, it pays to do it in the value zone, rather than overpay and buy above value. Similarly, when shorting, it pays to wait for a rally into the value zone to establish a short position rather than sell short when prices collapse. - -During the uptrend shown on this chart, you can see pullbacks to value, offering attractive buying opportunities in areas marked 1, 2, 3, and 4. The downward reversal of the slow EMA marks the end of the uptrend. At the right edge of the chart, the trend is down, while a pullback to value in area 5 offers a shorting opportunity. - -various indicators—they are the building blocks of trading systems, which we'll review later in the book. - -Keeping this in mind will help you become a more rational trader. Once you know how to define value, you can aim to buy at or below value and sell above value. We'll return to look for trading opportunities in overvalued and undervalued markets when we examine price channels or envelopes in Chapter 41 on the Channel Trading System. - -## ■ **23. Moving Average Convergence-Divergence: MACD Lines and MACD-Histogram** - -Moving averages help identify trends and their reversals. A more advanced indicator was constructed by Gerald Appel, an analyst and money manager in New York. Moving Average Convergence-Divergence, or MACD for short, consists of not one, but three exponential moving averages. It appears on the charts as two lines whose crossovers give trading signals. - -## **How to Create MACD** - -The original MACD indicator consists of two lines: a solid line (called the MACD line) and a dashed line (called the Signal line). The MACD line is made up of two exponential moving averages (EMAs). It responds to changes in prices relatively quickly. The Signal line smooths the MACD line with another EMA. It responds to changes in prices more slowly. In Appel's original system, buy and sell signals were given when the fast MACD line crossed above or below the slow Signal line. - -The MACD indicator is included in most programs for technical analysis. To create MACD by hand: - -- 1. Calculate a 12-day EMA of closing prices. -- 2. Calculate a 26-day EMA of closing prices. -- 3. Subtract the 26-day EMA from the 12-day EMA, and plot their difference as a solid line. This is the fast MACD line. -- 4. Calculate a 9-day EMA of the fast line, and plot the result as a dashed line. This is the slow Signal line. - -## **Market Psychology** - -Each price reflects the consensus of value among the mass of market participants at the moment of the trade. A moving average represents an average consensus of value for a selected period of time—it is a composite photo of mass consensus. A longer moving average tracks longer-term consensus, and a shorter moving average tracks shorter-term consensus. - -Crossovers of the MACD and Signal lines identify shifts in the balance of power of bulls and bears. The fast MACD line reflects mass consensus over a shorter time period. The slow Signal line reflects mass consensus over a longer period. When the fast MACD line rises above the slow Signal line, it shows that bulls dominate the market, and it is better to trade from the long side. When the fast line falls below the slow line, it shows that bears dominate the market and it pays to trade from the short side. - -## **Trading Rules for MACD Lines** - -Crossovers of the MACD and Signal lines identify changes of market tides. Trading in the direction of a crossover means going with the flow of the market. This system generates fewer trades and whipsaws than mechanical systems based on a single moving average. - -- 1. When the fast MACD line crosses above the slow Signal line, it gives a buy signal. Go long, and place a protective stop below the latest minor low. -- 2. When the fast line crosses below the slow line, it gives a sell signal. Go short, and place a protective stop above the latest minor high (Figure 23.1). - -Bottoms A, B, and C of ABX could be seen as an inverted head-and-shoulders bottom. Still, our technical indicators deliver much more objective messages than classical chart patterns. - -## **More on MACD Lines** - -Sophisticated traders tend to personalize their MACD Lines by using other moving averages than the standard 12-, 26-, and 9-bar EMAs. Beware of optimizing MACD too often. If you fiddle with MACD long enough, you can make it give you any signal you'd like. - -**FIGURE 23.1** ABX weekly, 26- and 13-week EMAs, 12-26-9 MACD Lines. *(Chart by Stockcharts.com)* - -#### MACD Lines - -Barrick Gold Corporation (ABX), which has the largest market capitalization of all U.S. listed gold companies, was dragged down in 2012 and 2013 by the bear market in gold. Notice the sell signal, marked by a red vertical arrow, when the fast line crossed below the slow line. That signal reversed more than a year later, when the fast line crossed above the slow line, marked with a green vertical arrow. - -Notice several additional patterns on this chart. When ABX fell to a record low, marked B, MACD Lines refused to confirm: they didn't fall to a new low but traced out a double bottom. That new low B turned out to be a false downside breakout, a bullish sign. Bears' last attempt to drive ABX lower, in area C, wasn't confirmed by MACD Lines, which maintained a steady uptrend. At the right edge of the chart, MACD Lines have reached a new high for the upmove, indicating strength. Both EMAs are rising, confirming the bullish trend. - -A "q**uick-and-dirty**" way to plot MACD can be used by traders whose software doesn't include this indicator. Some packages allow you to draw only two EMAs. In that case, you can use crossovers between two EMAs, such as 12-day and 26-day EMAs as a proxy for MACD and Signal lines. - -## **MACD-Histogram** - -MACD-Histogram offers a deeper insight into the balance of power between bulls and bears than the original MACD Lines. It shows not only whether bulls or bears are in control but also whether they are growing stronger or weaker. It is one of the best tools available to market technicians. - -MACD-Histogram = MACD line − Signal line - -MACD-Histogram measures the difference between the MACD line and the Signal line. It plots that difference as a histogram—a series of vertical bars. That distance may appear puny, but a computer rescales it to fill the screen (Figure 23.2). - -**FIGURE 23.2** DJIA daily, 26- and 13-day EMAs, 12-26-9 MACD Lines. *(Chart by Stockcharts.com)* - -#### MACD-Histogram - -When MACD Lines cross over, MACD-Histogram, which is derived from them, crosses above or below its zero line. You can see buy and sell signals of MACD lines, marked by green and red arrows. These signals are often delayed, but MACD-Histogram gives its own fine signals. We'll return to them later in this chapter, but at this point let's look at just one. - -Compare the Dow bottoms D and F. The second bottom was slightly lower (it turned out to be a false downside breakout), but the corresponding bottom of MACD-Histogram was more shallow than the first, warning that bears were weaker than before and an upside reversal was likely to occur. - -If the fast line is above the slow line, MACD-Histogram is positive and plotted above the zero line. If the fast line is below the slow line, MACD-Histogram is negative and plotted below the zero line. When the two lines touch, MACD-Histogram equals zero. - -When the spread between the MACD and Signal lines increases, MACD-Histogram becomes taller or deeper, depending on its direction. When the two lines draw closer, MACD-Histogram becomes shorter. - -The slope of MACD-Histogram is defined by the relationship between any two neighboring bars. If the last bar is higher (like the height of letters m–M), the slope of MACD-Histogram is up. If the last bar is lower (like the depth of letters P–p), then the slope of MACD-Histogram is down. - -## **Market Psychology** - -MACD-Histogram reveals the difference between long-term and short-term consensus of value. The fast MACD line reflects market consensus over a shorter period. The slow Signal line reflects market consensus over a longer period. MACD-Histogram tracks the difference between them. - -The slope of MACD-Histogram identifies the dominant market group. A rising MACD-Histogram shows that bulls are becoming stronger. A falling MACD-Histogram shows that bears are becoming stronger. - -When the fast MACD line rallies ahead of the slow Signal line, MACD-Histogram rises. It shows that bulls are becoming stronger than they have been—it is a good time to trade from the long side. When the fast MACD line drops faster than the slow line, MACD-Histogram falls. It shows that bears are becoming stronger—it's a good time to trade from the short side. - -When the slope of MACD-Histogram moves in the same direction as prices, the trend is safe. When the slope of MACD-Histogram moves in a direction opposite to that of prices, the health of the trend is in question. - -The slope of MACD-Histogram is more important than its position above or below the centerline. It is best to trade in the direction of the slope of MACD-Histogram because it shows whether bulls or bears dominate the market. The best buy signals occur when MACD-Histogram is below its centerline but its slope turns up, showing that bears have become exhausted. The best sell signals are given when MACD-Histogram is above its centerline but its slope turns down, showing that bulls have become exhausted. - -## **Trading Rules** - -MACD-Histogram gives two types of trading signals. One is common, occurring at every price bar. The other is rare but extremely strong. It may occur only a few times a year on the daily chart of a stock. It's even more rare on the weekly charts, but more frequent on the intraday charts. - -The common signal is given by the slope of MACD-Histogram. When the current bar is higher than the preceding bar, the slope is up. It shows that bulls are in control and it's time to buy. When the current bar is lower than the preceding bar, the slope is down. It shows that bears are in control and it's time to be short. When prices go one way but MACD-Histogram moves the other way, it shows that the dominant crowd is losing its enthusiasm and the trend is weaker than it appears. - -- 1. Buy when MACD-Histogram stops falling and ticks up. Place a protective stop below the latest minor low. -- 2. Sell short when MACD-Histogram stops rising and ticks down. Place a protective stop above the latest minor high. - -MACD-Histogram ticks up and down on the daily charts so often that it's not practical to buy and sell every time it turns. The changes of slope of MACD-Histograms are much more meaningful on the weekly charts, which is why it is included in the Triple Screen trading system (see Chapter 39). A combination of an exponential moving average and MACD-Histogram helps create the Impulse system, described in Chapter 40. - -## **When to Expect a New Peak or Valley** - -A record peak for the past three months of daily MACD-Histogram shows that bulls are very strong and prices are likely to rise even higher. A record new low for MACD-Histogram for the past three months shows that bears are very strong and lower prices are likely ahead. - -When MACD-Histogram reaches a new high during a rally, the uptrend is healthy and you can expect the next rally to retest or exceed its previous peak. If MACD-Histogram falls to a new low during a downtrend, it shows that bears are strong and prices are likely to retest or exceed their latest low. - -MACD-Histogram works like headlights on a car—it gives you a glimpse of the road ahead. Not all the way home, mind you, but enough to drive safely at a reasonable speed. - -## **More on MACD-Histogram** - -MACD-Histogram works in all timeframes: weekly, daily, and intraday. Signals in longer timeframes lead to greater price moves. For example, the signals of weekly MACD-Histogram lead to greater price changes than the daily or intraday MACD. This principle applies to all technical indicators. - -When you use MACD Lines and MACD-Histogram on the weekly charts, you don't have to wait until Friday to find your signals. A trend can turn in the middle of the week—the market does not watch the calendar. It makes sense to perform weekly studies each day. I set my software to plot weekly charts in the traditional manner, from Monday through Friday, but with a twist: the latest weekly bar reflects trading for the current week, starting on Monday. After the market closes on Monday, my latest 'weekly bar' is identical to Monday's daily bar. The weekly bar on Tuesday reflects two trading days, and so on. Because of this, on Monday I take the new weekly bar at a heavy discount, but by Thursday I start trusting it a great deal more. - -## **Divergences** - -Divergences are among the most powerful signals in technical analysis. In this subchapter, we'll focus on MACD-Histogram, but this concept applies to most indicators. - -Divergences between MACD-Histogram and prices are infrequent, but they give some of the most powerful signals. They often mark major turning points. They don't occur at every important top or bottom, but when you see one, you know that a big reversal is probably at hand. - -Bullish divergences occur towards the ends of downtrends—they identify market bottoms. A classical bullish divergence occurs when prices and the oscillator both fall to a new low, rally, with the oscillator rising above its zero line, then both fall again. This time, prices drop to a lower low, but an oscillator traces a higher bottom than during its previous decline. Such bullish divergences often precede sharp rallies (Figure 23.3). - -**FIGURE 23.3** DJIA weekly, 26- and 13-day EMAs, 12-26-9 MACD Lines and MACD-Histogram. *(Chart by TC2000 from the book* Two Roads Diverged: Trading Divergences*)* - -#### A Bullish Divergence - -Here you see a divergence that signaled the 2007–2009 bear market bottom, giving a strong buy signal right near the lows. In area A, the Dow appeared in a free fall, as Lehman Brothers went bust and waves of selling hit the market. The record low A of MACD-H indicated that bears were extremely strong and that the price bottom A was likely to be retested or exceeded. In area B, MACD-H rallied above its centerline, "breaking the back of the bear." Notice that the brief rally reached the "value zone" between the two moving averages. This is a fairly common target for bear market rallies. In area C, the Dow slid to a new bear market low, but MACD-H traced a much more shallow low. Its uptick completed a bullish divergence, giving a strong buy signal. - -I'm showing you this weekly chart of DJIA and its MACD-Histogram as a perfect example of a divergence. It deserves to be pinned to a wall near your trading desk. You won't always get such a perfect picture, but the closer you get to it, the more reliable it'll be. - -Notice that the **breaking of the centerline** between two indicator bottoms is an absolute must for a true divergence. MACD-Histogram has to cross above that line before skidding to its second bottom. If there is no crossover, there is no divergence. - -Another key point: MACD-H gives a **buy signal when it ticks up from the second bottom**. It does not have to cross above the centerline for the second time. The buy signal occurs when MACD-H, still below zero, simply stops declining and traces out a bar that is less negative than its preceding bar. - -This divergence of MACD-Histogram in Figure 23.3 was reinforced when MACD Lines traced a bullish pattern between the bottoms A and C, with the second bottom more shallow than the first. Such patterns of MACD Lines are quite rare. They indicate that the coming uptrend is likely to be especially strong, even though we cannot call them divergences because this indicator has no zero line. The rally that began in 2009 lasted almost a year before its first meaningful correction. - -Also, we can't call the pattern of lower indicator tops after the bottom C a divergence. The lower tops reflect a gradual weakening of the uptrend with the passage of time. In order to count as a divergence, MACD-Histogram has to cross and recross its zero line. - -Bearish divergences occur in uptrends—they identify market tops. A classical bearish divergence occurs when prices reach a new high and then pull back, with an oscillator dropping below its zero line. Prices stabilize and rally to a higher high, but an oscillator reaches a lower peak than it did on a previous rally. Such bearish divergences usually lead to sharp breaks. - -A bearish divergence shows that bulls are running out of steam, prices are rising out of inertia, and bears are ready to take control. Valid divergences are clearly visible—they seem to jump at you from the charts. If you need a ruler to tell whether there is a divergence, assume there is none (Figure 23.4). - -The previous chart featured a striking bullish divergence at the 2009 stock market bottom. Now, for a similarly striking illustration of a massive bearish divergence, let's roll back the clock and examine the 2007 bull market top. - -Notice that the **breaking of the centerline** between the two indicator tops is an absolute must for a true divergence. MACD-Histogram has to drop below its zero line before rising to the second top. - -Another key point: MACD-H gives a **sell signal when it ticks down from the second top**. We don't need to wait for it to cross below the centerline again. The sell signal occurs when MACD-H, still above zero, simply stops rising and traces out a bar shorter than the preceding bar. - -The message of a bearish divergence in Figure 23.4 was reinforced by MACD Lines, which traced a bearish pattern between the tops X and Z. The second top of - -**FIGURE 23.4** DJIA weekly, 26- and 13-day EMAs, 12-26-9 MACD Lines and MACD-Histogram. *(Chart by TC2000 from the book* Two Roads Diverged: Trading Divergences*)* - -#### A Bearish Divergence - -In area X, the Dow rallied to a new bull market high and MACD-Histogram rallied with it, rising above its previous peak and showing that bulls were extremely strong. This indicated that the price peak X was likely to be retested or exceeded. Note that the top X of MACD-H, despite its complex form, was not a divergence because the valley in its middle never sank below zero. - -In area Y, MACD-H fell below its centerline, "breaking the back of the bull." Notice that prices punched below the value zone between the two moving averages. This is a fairly common target for bull market breaks. Notice also a kangaroo tail at the bottom Y. In area Z, the Dow rallied to a new bull market high, but the rally of MACD-H was feeble, reflecting the bulls' weakness. Its downtick from peak Z completed a bearish divergence, giving a strong sell signal and auguring in the nastiest bear market in a generation. - -MACD Lines was more shallow than the first, confirming the bearish divergence of MACD-H. Such patterns of MACD Lines tell us that the coming downtrend is likely to be especially severe. - -"Missing right shoulder" divergences in which the second peak fails to cross the zero line are quite rare, but produce very strong trading signals. An experienced trader can look for them, but they are definitely not for beginners. They are described and illustrated in the e-book *Two Roads Diverged: Trading Divergence*s. - -Kerry Lovvorn performed extensive research to find that the most tradable divergences occur when the distance between the two peaks or the two bottoms of MACD-H is between 20 and 40 bars—and the closer to 20, the better. In other words, the two tops or two bottoms cannot be too far apart. 20 bars translate into 20 weeks on a weekly chart, 20 days on a daily chart, and so on. Kerry also found that the best signals come from divergences in which the second top or bottom is no more than half the height or the depth of the first. - -Triple Bullish or Bearish Divergences consist of three price bottoms and three oscillator bottoms or three price tops and three oscillator tops. They are even stronger than regular divergences. In order for a triple divergence to occur, a regular bullish or bearish divergence first has to abort. That's another good reason to practice tight money management! If you lose only a little on a whipsaw, you will preserve both the money and psychological strength to re-enter a trade. The third top or bottom has to be more shallow than the first but not necessarily the second. - -## **The Hound of the Baskervilles** - -This signal occurs when a reliable chart or indicator pattern doesn't lead to the action you expected and prices move in the opposite direction. A divergence may indicate that an uptrend is over, but if prices continue to rise, they give the Hound of the Baskervilles signal. - -This signal is named after the story by Sir Arthur Conan Doyle in which Sherlock Holmes was called to investigate a murder at a country estate. He found the essential clue when he realized that the family dog didn't bark while the murder was being committed. That meant the dog knew the criminal and the murder was an inside job. The *signal was given by the lack of expected action*—by the lack of barking! - -When the market refuses to bark in response to a perfectly good signal, it gives you the Hound of the Baskervilles signal. This shows that something is fundamentally changing below the surface. Then it is time to get in gear with the new powerful trend. - -I am not a fan of "stop-and-reverse" orders, but make an exception for the Hound of the Baskervilles. On those rare occasions when a bearish divergence aborts, I may go long. In the rare instances when a bullish divergence aborts, I look to go short. - -## ■ **24. The Directional System** - -The Directional system is a trend-following method developed by J. Welles Wilder, Jr., in the mid-1970s and modified by several analysts. It identifies trends and shows when a trend is moving fast enough to make it worth following. It helps traders to profit by taking chunks out of the middle of important trends. - -## **How to Construct the Directional System** - -*Directional Movement* is defined as the portion of today's range that is outside of the previous day's range. The Directional system checks whether today's range extends above or below the previous day's range and averages that data over a period of time. These complex calculations are best performed on a computer. The Directional system is included in most programs for technical analysis. - -Directional movement is the largest part of today's range that is outside of yesterday's range. - -- 1. If today's range extends above yesterday's range, Directional Movement is positive (+DM). -- 2. If today's range extends below yesterday's range, Directional Movement is negative (−DM). -- 3. If today's range is inside of yesterday's range or extends above and below it by equal amounts, there is no Directional Movement (DM = 0). If today's range extends both above and below yesterday's range, DM is positive or negative, pending on which part of the "outside range" is larger. -- 4. On a limit-up day, +DM equals the distance from today's close to yesterday's high. On a limit-down day, −DM equals the distance from today's close to yesterday's low. -- 1. Identify "**Directional Movement**" (DM) by comparing today's high-low range with yesterday's high-low range. Directional Movement is the largest part of today's range outside of yesterday's range. There are four types of DM (Figure 24.1). DM is always a positive number (+DM and −DM refer simply to movement above or below yesterday's range). -- 2. Identify the "**True Range**" (TR) of the market you analyze. TR is always a positive number, the largest of the following three: - - a. The distance from today's high to today's low - - b. The distance from today's high to yesterday's close - - c. The distance from today's low to yesterday's close -- 3. Calculate daily **Directional Indicators** (+DI and −DI). They allow you to compare different markets by expressing their directional movement as a percentage of each market's true range. Each DI is a positive number: +DI equals - -zero on a day with no directional movement up; −DI equals zero on a day with no directional movement down. - -$$ -+ DI = \frac{+ DM}{TR} \qquad - DI = \frac{- DM}{TR} -$$ - -4. Calculate **smoothed Directional Lines** (+DI13 and −DI13). Smooth +DI and −DI are created with moving averages. Most software packages allow you to pick any period for smoothing, such as a 13-day moving average. You get two indicator lines: smoothed Positive and Negative Directional lines, +DI13 and −DI13. Both numbers are positive. They are usually plotted in different colors. - -**The relationship between Positive and Negative lines identifies trends**. When +DI13 is on top, it shows that the trend is up, and when −DI13 is on top, it shows that the trend is down. The crossovers of +DI13 and −DI13 give buy and sell signals. - -- 5. Calculate the **Average Directional Indicator** (ADX). This unique component of the Directional system shows when a trend is worth following. ADX measures the spread between Directional Lines +DI13 and −DI13. It is calculated in two steps: - - a. Calculate the daily **Directional Indicator** DX: - -$$ -DX = \frac{+DI_{13} - -DI_{13}}{+DI_{13} + -DI_{13}} \cdot 100 -$$ - -For example, if +DI13 = 34 and −DI13 = 18, then, - -$$ -DX = \frac{34 - 18}{34 + 18} \cdot 100 = 30.77, rounded off to 31 -$$ - -b. Calculate the Average Directional Indicator ADX by smoothing DX with a moving average, such as a 13-day EMA. - -During a persistent trend, the spread between two smoothed Directional lines increases, and ADX rises. ADX declines when a trend reverses or when a market enters a trading range. It pays to use trend-following methods only when ADX is rising. - -## **Crowd Behavior** - -The Directional system tracks changes in mass bullishness and bearishness by measuring the capacity of bulls and bears to move prices outside of the previous day's range. If today's high is above yesterday's high, it shows that the market crowd is more bullish. If today's low is below yesterday's low, it shows that the market crowd is more bearish. - -The relative positions of Directional lines identify trends. When the Positive Directional line is above the Negative Directional line, it shows that bullish traders dominate the market. When the Negative Directional line rises above the Positive Directional line, it shows that bearish traders are stronger. It pays to trade with the upper Directional line. - -The Average Directional Indicator (ADX) rises when the spread between Directional lines increases. This shows that market leaders, for example bulls in a rising market, are becoming stronger, the losers weaker, and the trend is likely to continue. - -ADX declines when the spread between Directional lines narrows down. This shows that the dominant market group is losing its strength, while the underdogs are gaining. It suggests that the market is in turmoil, and it's better not to use trendfollowing methods. - -**FIGURE 24.2** ANV daily, 22-day EMA, Directional System (13). *(Chart by Stockcharts.com)* - -#### Directional System - -Swings between strength and weakness are a typical market feature. Strong stock groups grow weak while the weak ones become strong, and then they swap roles again. Gold and silver stocks were the two weakest stock industry groups in 2013, but they began bottoming out in December. Allied Nevada Gold Corp. (ANV) was one of several stocks I began buying at that time. - -The low at point A was \$3.07, at point B the stock dipped to \$3.01 and recoiled, leaving behind a false downside breakout, and at point C it retested support by declining to \$3.08—and from there it was off to the races, with its EMA turning up. The Directional system gave its buy signal during the bar marked with a vertical green arrow: the green bullish Directional line was above the red bearish line, while the ADX penetrated above the red line. - -You may find a similar shorting signal in the lettered area, but a discretionary trader doesn't trade every signal he sees: shorting a stock near \$3 that has already declined from \$45 would mean chasing a very old trend. Near the right edge you see a pullback to value, offering a good opportunity to add to the long position. - -## **Trading Rules** - -- 1. Trade only from the long side when the positive Directional line is above the negative one. Trade only from the short side when the negative Directional line is above the positive one. The best time to trade is when the ADX is rising, showing that the dominant group is getting stronger. -- 2. When ADX declines, it shows that the market is becoming less directional. There are likely to be many whipsaws. When ADX points down, it is better not to use a trend-following method. -- 3. When ADX falls below both Directional lines, it identifies a flat, sleepy market. Do not use a trend-following system but get ready to trade, because major trends emerge from such lulls. -- 4. The single best signal of the Directional system comes after ADX falls below both Directional lines. The longer it stays there, the stronger the base for the next move. When ADX rallies from below both Directional lines, it shows that the market is waking up from a lull. When ADX rises by four steps (i.e., from 9 to 13) from its lowest point below both Directional lines, it "rings a bell" on a new trend (Figure 24.2). It shows that a new bull market or bear market is being born, depending on what Directional line is on top. - - 5. When ADX rallies above both Directional lines, it identifies an overheated market. When ADX turns down from above both Directional lines, it shows that the major trend has stumbled. It is a good time to take profits on a directional trade. If you trade large positions, you definitely want to take partial profits. - -Market indicators give hard signals and soft signals. For example, when a moving average changes direction, it is a hard signal. A downturn of ADX is a soft signal. Once you see ADX turn down, you ought to be very, very careful about adding to positions. You should start taking profits, reducing positions, and looking to get out. - -## **Average True Range—Help from Volatility** - -Average True Range (ATR) is an indicator that averages True Ranges (described in "How to Construct the Directional System" above) over a selected period of time, such as 13 days. Since volatility is a key factor in trading, you can track it by plotting a set of ATR lines above and below a moving average. They will help you visualize current volatility and you can use that for decision making. - -Kerry Lovvorn likes to plot three sets of lines around a moving average: at one, two, and three ATRs above and below an EMA. These can be used for setting up entry points and stops, as well as profit targets (Figure 24.3). - -Entries In the chapter on moving averages, we saw that it was a good idea to buy below value—below the EMA. But how far below? Normal pullbacks tend to bottom out near the minus one ATR. - -Stops You want your stop to be at least one ATR away from your entry. Anything less than that would place your stop within the zone of normal market noise, - -**FIGURE 24.3** LULU daily, 21 EMA, volume with 8 EMA, ATR channels. *(Chart by TradeStation)* - -#### ATR Channels - -This diary of a trade, Lululemon Athletica Inc. (LULU), was posted by Kerry in SpikeTrade .com, where we post diaries of our trades. It shows using ATR channels for profit-taking. - -LULU gapped down on a wide range bar on September 18 after an earnings announcement. There was no downside follow-through, and as the stock rallied, Kerry drew a horizontal line at the midpoint of its tall bar A, which tends to serve as short-term support. - -As LULU pulled back, its daily ranges narrowed, and volume dried up in area B. Kerry bought LULU at \$72.02 on Monday, September 30, during bar C, as it recovered from a false downside breakout. He took profits on 1/3 of his position at \$73.70 later that day, as LULU came within a few cents of plus 1 ATR. On Thursday, during bar D, LULU hit its plus 2 ATR at \$76.63, and Kerry exited another 1/3 of his position. He took the remaining 1/3 near the mid-range of bar D. - -making it likely to be hit by a random short-term move. Placing your stop further away makes it more likely that only a real reversal can hit your stop. - -Targets After you buy a stock, depending on how bullish it appears to you, you can place an order to take profits at +1, +2, or even +3 ATRs. Kerry likes to get out of his winning positions in several steps, placing orders for taking profits for one third at 1 ATR, another third at 2 ATR, and the rest at 3 ATR. - -It is highly unusual for any market to trade outside of three ATRs—three times average true range—for a long time. Those tend to be the extreme moves. Whenever you see a market trade outside of its three ATRs, either up or down, it is reasonable to expect a pullback. - -ATR channels work not only with prices. We can also use them to bracket technical indicators to help identify the extreme levels where trends are likely to reverse. I use ATR channels on the weekly charts of Force Index. - -## ■ **25. Oscillators** - -While trend-following indicators, such as MACD Lines or Directional system, help identify trends, oscillators help catch turning points. Whenever masses of traders become gripped by greed or fear, they surge but after a while their intensity fizzles out. Oscillators measure the speed of any surge and show when its momentum is starting to break. - -Oscillators identify emotional extremes of market crowds. They allow you to find unsustainable levels of optimism and pessimism. Professionals tend to fade those extremes. They bet against deviations and for a return to normalcy. When the market rises and the crowd gets up on its hind legs and roars from greed, professionals get ready to sell short. They get ready to buy when the market falls and the crowd howls in fear. Oscillators help us time those trades. - -## **Overbought and Oversold** - -Overbought means a market is too high and ready to turn down. An oscillator becomes **overbought** when it reaches a high level associated with tops in the past. Oversold means a market is too low and ready to turn up. An oscillator becomes **oversold** when it reaches a low level associated with bottoms in the past. - -Be sure to remember that those aren't absolute levels. An oscillator can stay overbought for weeks when a new strong uptrend begins, giving premature sell signals. It can stay oversold for weeks in a steep downtrend, giving premature buy signals. Knowing when to use oscillators and when to rely on trend-following indicators is a hallmark of a mature analyst (see Chapter 39). - -We can mark overbought and oversold oscillator levels by horizontal reference lines. Place those lines so that they cut across only the highest peaks and the lowest valleys of that oscillator for the past six months. The proper way to draw those lines is to place them so that an oscillator spends only about 5 percent of its time beyond each line. Readjust these lines once every three months. - -When an oscillator rises or falls beyond its reference line, it helps identify an unsustainable extreme, likely to precede a top or a bottom. Oscillators work spectacularly well in trading ranges, but they give premature and dangerous signals when a new trend erupts from a range. - -We've already reviewed one important oscillator—MACD-Histogram. We looked at it "ahead of schedule" because it's derived from a trend-following indicator, MACD Lines. We'll now explore very popular oscillators: Stochastic and Relative Strength Index (RSI). - -## ■ **26. Stochastic** - -Stochastic is an oscillator popularized by the late George Lane. It's now included in many software programs and widely used by computerized traders. Stochastic tracks the relationship of each closing price to the recent high-low range. It consists of two lines: a fast line called %K and a slow line called %D. - -1. The first step in calculating Stochastic is to obtain "raw Stochastic" or %K: - -$$ -\%K = \frac{C_{\text{tod}} - L_n}{H_n - L_n} \cdot 100 -$$ - -where *C*tod = today's close. - -*Ln* = the lowest point for the selected number of days. - -*Hn* = the highest point for the selected number of days. - -*n* = the number of days for Stochastic, selected by the trader. - -The standard width of Stochastic's time window is 5 days, although some traders use higher values. A narrow window helps catch more turning points, but a wider window helps identify more important turning points. - -2. The second step is to obtain %D. It is done by smoothing %K—usually over a three-day period. It can be done in several ways, such as: - -$$ -\%D = \frac{3 \text{-day sum of } (C_{\text{tod}} - L_n)}{3 \text{-day sum of } (H_n - L_n)} \cdot 100 -$$ - -There are two ways to plot Stochastic—Fast and Slow. **Fast Stochastic** consists of two lines—%K and %D—plotted on the same chart. It's very sensitive but leads to many whipsaws. Many traders prefer to use **Slow Stochastic**, adding an extra layer of smoothing. The %D of Fast Stochastic becomes the %K of Slow Stochastic and is smoothed by repeating step 2 to obtain %D of Slow Stochastic. Slow Stochastic does a better job of filtering out market noise and leads to fewer whipsaws (Figure 26.1). - -Stochastic is designed to fluctuate between 0 and 100. Reference lines are usually drawn at 20 percent and 80 percent levels to mark overbought and oversold areas. - -## **Crowd Psychology** - -Each price is the consensus of value of all market participants at the moment of transaction. Daily closing prices are important because the settlement of trading accounts depends on them. The high of any period marks the maximum power of bulls during that time. The low of that period shows the maximum power of bears during that time. - -Stochastic measures the capacity of bulls or bears to close the market near the upper or lower edge of the recent range. When prices rally, markets tend to close near the high. If bulls can lift prices during the day but can't close them near the top, Stochastic turns down. It shows that bulls are weaker than they appear and gives a sell signal. - -Daily closes tend to occur near the lows in downtrends. When a bar closes near its high, it shows that bears can only push prices down during the day but cannot hold them down. An upturn of Stochastic shows that bears are weaker than they appear and flashes a buy signal. - -**FIGURE 26.1** CVX daily, 26-day EMA. 5-day Slow Stochastic. *(Chart by Stockcharts.com)* - -#### Stochastic - -This chart of Chevron Corporation (CVX) illustrates both helpful and dangerous aspects of Stochastic. As long as the stock stays in a sideways trading range, which is where it was for most of the time covered by this chart, Stochastic keeps nailing down short-term tops and bottoms. Stochastic gives buy signals, marked here with vertical green arrows, when it rises above its lower reference line. It gives sell signals, marked by vertical red arrows, by sinking below its upper reference line. Those signals are reinforced by broad, down-sloping Stochastic tops, marked by diagonal black arrows. - -A careful reader will find several instances of false breakouts in Figure 26.1 that reinforce Stochastic signals. Using Stochastic signals during a trading range is like going to a cash machine. That machine stops working and eats your card after a trend erupts from the trading range. A sharp downtrend near the right edge overrides the Stochastic buy signal. - -A trader may rely on Stochastic in a trading range, but should use protective stops because the last trade in a range always creates a loss when a trend begins. We'll focus on stop placement in chapter 54. - -## **Trading Rules** - -Stochastic shows when bulls or bears become stronger or weaker. This information helps decide whether bulls or bears are likely to win the current fight. It pays to trade with winners and against losers. - -Stochastic gives three types of trading signals, listed here in the order of importance: divergences, the level of Stochastic lines, and their direction. - -#### **Divergences** - -The most powerful buy and sell signals of Stochastic are given by divergences between this indicator and prices. - -- 1. A bullish divergence occurs when prices fall to a new low, but Stochastic traces a higher bottom than during its previous decline. It shows that bears are losing strength and prices are falling out of inertia. As soon as Stochastic turns up from its second bottom, it gives a strong buy signal: go long and place a protective stop below the latest low in the market. The best buy signals occur when the first bottom is below the lower reference line and the second above it. -- 2. A bearish divergence occurs when prices rally to a new high, but Stochastic traces a lower top than during its previous rally. It shows that bulls are becoming weaker and prices are rising out of inertia. As soon as Stochastic turns down from the second top, it gives a sell signal: go short and place a protective stop above the latest price peak. The best sell signals occur when the first top is above the upper reference line and the second below. - -#### **Overbought and Oversold** - -When Stochastic rallies above its upper reference line, it shows that the market is overbought. It means that a stock or even the entire market is unusually high and ready to turn down. When Stochastic falls below its lower reference line, it shows that a stock or even the entire market is oversold: too low and ready to turn up. - -These signals work fine during trading ranges but not when a market develops a trend. In uptrends, Stochastic quickly becomes overbought and keeps giving sell signals while the market rallies. In downtrends, it quickly becomes oversold and keeps giving premature buy signals. It pays to combine Stochastic with a long-term trend-following indicator (see Chapter 39). The Triple Screen trading system allows traders to take buy signals from daily Stochastic only when the weekly trend is up. When the weekly trend is down, it allows traders to take only sell signals from daily Stochastic. - -- 1. When you identify an uptrend on a weekly chart, wait for daily Stochastic lines to decline below their lower reference line. Then, without waiting for their crossover or an upturn, place a buy order above the high of the latest price bar. Once you are long, place a protective stop below the low of the trade day or the previous day, whichever is lower. -- The shape of Stochastic's bottom often indicates whether a rally is likely to be strong or weak. If the bottom is narrow and shallow, it shows that bears are weak and the rally is likely to be strong. If it is deep and wide, it shows that bears are strong and the rally is likely to be weak. It is better to take only strong buy signals. -- 2. When you identify a downtrend on a weekly chart, wait for daily Stochastic lines to rally above their upper reference line. Then, without waiting for their crossover or a downturn, place an order to sell short below the low of the latest price bar. By the time Stochastic lines cross over, the market is often in a free fall. Once you are short, place a protective stop above the high of the trade day or the previous day, whichever is higher. - -The shape of Stochastic's top often indicates whether a decline is likely to be steep or sluggish. A narrow top of Stochastic shows that bulls are weak and a severe decline is likely. A Stochastic top that is high and wide shows that bulls are strong—it is safer to pass up that sell signal. - -3. Do not buy when Stochastic is overbought, and don't sell short when it is oversold. This rule filters out most bad trades. - -#### **Line Direction** - -When both Stochastic lines are headed in the same direction, they confirm the shortterm trend. When prices rise and both Stochastic lines rise, the uptrend is likely to continue. When prices slide and both Stochastic lines fall, the short-term downtrend is likely to continue. - -## **More on Stochastic** - -You can use Stochastic in any timeframe, including weekly, daily, or intraday. **Weekly** Stochastic usually changes its direction one week prior to weekly MACD-Histogram. If weekly Stochastic turns, it warns you that MACD-Histogram is likely to turn the next week—time to tighten stops on existing positions or start taking profits. - -Choosing the **width of the Stochastic window** is important. Shorter-term oscillators are more sensitive. Longer-term oscillators turn only at important tops and bottoms. If you use Stochastic as a stand-alone oscillator, a longer Stochastic is preferable. If you use Stochastic as part of a trading system, combined with trendfollowing indicators, then a shorter Stochastic is preferable. - -## ■ **27. Relative Strength Index** - -Relative Strength Index (RSI) is an oscillator developed by J. Welles Wilder, Jr. It measures any trading vehicle's strength by monitoring changes in its closing prices. It's a leading or a coincident indicator—never a laggard. - -$$ -RSI = 100 - \frac{100}{1 + RS} -$$ - -RS = Average of net UP closing changes for selected period of days Average of net DOWN closing changes for the same number of days - -RSI fluctuates between 0 and 100. When it reaches a peak and turns down, it identifies a top. When it falls and then turns up, it identifies a bottom. The pattern of RSI peaks and valleys doesn't change in response to the width of its time window. Trading signals become more visible with shorter RSI, such as 7 or 9 days. (Figure 27.1) - -Overbought and oversold RSI levels vary from market to market and even from year to year in the same market. There are no magical levels for all tops and - -**FIGURE 27.1** CVX daily, 13-day RSI. *(Chart by Stockcharts.com)* - -#### Relative Strength Index (RSI) - -Here we apply a 13-day RSI to the chart of Chevron Corporation (CVX) that we already examined in Figure 26.1, in the chapter on Stochastic. Both RSI and Stochastic work well in trading ranges, but give premature and dangerous signals when prices begin to trend. - -RSI, based exclusively on closing prices, is less noisy than Stochastic. It calls for rallies when it rises above its lower reference line, marked here by vertical green arrows. It signals declines by sinking below its upper reference line, marked here by vertical red arrows. Comparing both charts, you see that the RSI signals emerge earlier. - -A very powerful sell signal is given by a bearish divergence of RSI, marked here by a diagonal solid arrow and a dashed red arrow. The stock rallied to a new high, while RSI couldn't reach its upper reference line, pointing to that rally's hidden weakness. - -The sharp break near the right edge pushes prices lower despite the RSI buy signal. To avoid getting hurt, we must use protective stops because the last trade in a range can easily create a loss when a new trend begins. - -bottoms. Oversold and overbought signals are like hot and cold readings on a window thermometer. The same temperature levels mean different things in summer or winter. Horizontal reference lines must cut across the highest peaks and the lowest valleys of RSI. They are often drawn at 30% and 70%. Some traders use 40% and 80% levels in bull markets or 20% and 60% in bear markets. Use the 5 percent rule: draw each line at a level beyond which RSI has spent less than 5 percent of its time in the past 4 to 6 months. Adjust reference lines once every three months. - -## **Mass Psychology** - -Each price represents the consensus of value of all market participants at the moment of transaction. The closing price reflects the most important consensus of the day because the settlement of traders' accounts depends on it. When the market closes higher, bulls make money and bears lose. When the market closes lower, bears make money and bulls lose. - -Traders pay more attention to closing prices than to any other prices of the day. In the futures markets, money is transferred from losers' to winners' accounts at the end of each trading day. RSI shows whether bulls or bears are stronger at closing time—the crucial money-counting time in the market. - -## **Trading Rules** - -RSI gives three types of trading signals. They are, in order of importance, divergences, chart patterns, and the level of RSI. - -### **Bullish and Bearish Divergences** - -Divergences between RSI and prices tend to occur at important tops and bottoms. They show when the trend is weak and ready to reverse. - -- 1. Bullish divergences give buy signals. They occur when prices fall to a new low but RSI makes a higher bottom than during its previous decline. Buy as soon as RSI turns up from its second bottom, and place a protective stop below the latest minor price low. Buy signals are especially strong if the first RSI bottom is below its lower reference line and the second bottom is above that line. -- 2. Bearish divergences give sell signals. They occur when prices rally to a new peak but RSI makes a lower top than during its previous rally. Sell short as soon as RSI turns down from its second top, and place a protective stop above the latest minor high. Sell signals are especially strong if the first RSI top is above its upper reference line and the second top is below it. - -### **Charting Patterns** - -RSI often breaks through support or resistance a few days ahead of prices, providing hints of likely trend changes. RSI trendlines are usually broken one or two days before price trend changes. - -- 1. When RSI breaks above its downtrend line, place an order to buy above the latest price peak to catch an upside breakout. -- 2. When RSI breaks below its uptrend line, place an order to sell short below the latest price low to catch a downside breakout. - -### **RSI Levels** - -When RSI rises above its upper reference line, it shows that bulls are strong but the market is overbought and entering its sell zone. When RSI declines below its lower reference line, it shows that bears are strong but the market is oversold and entering its buy zone. - -It pays to buy using overbought signals of daily RSI only when the weekly trend is up. It pays to sell short using sell signals of daily RSI only when the weekly trend is down (see Chapter 39). - -- 1. Buy when RSI declines below its lower reference line and then rallies above it. -- 2. Sell short when RSI rises above its upper reference line and then crosses below it. - -When we analyze markets, we deal with only a few numbers—the opening, high, low, and closing prices for each bar, plus volume, and also open interest for derivatives, such as futures and options. A typical beginner error is "shopping for indicators." A trader may feel bullish about the stock market, but then he notices that the moving averages of the Dow and the S&P are still declining. Their bearish message doesn't sit well with him; he starts scrolling through his software menu and finds several oscillators, such as Stochastic or RSI. Sure enough, they look oversold, which is normal in a downtrend. The eager beginner takes those oversold readings as a signal to buy. The downtrend continues, he loses money—and then complains that technical analysis didn't work. - -It is much better to use only a small number of indicators with a strict hierarchy for their analysis, including multiple timeframes. We'll return to this essential topic in the chapter on the Triple Screen trading system. diff --git a/trading/The New Trading for a Living/009_PART 5 Volume and Time.md b/trading/The New Trading for a Living/009_PART 5 Volume and Time.md deleted file mode 100644 index ec92155c3412177af14c3ebca4afe12071c44cdd..0000000000000000000000000000000000000000 --- a/trading/The New Trading for a Living/009_PART 5 Volume and Time.md +++ /dev/null @@ -1,577 +0,0 @@ -# Volume and Time - -Many traders focus exclusively on price quotes, but while those are extremely important, there's more to the market than price. Volume of transactions provides a valuable additional dimension. Joseph Granville, a pioneer of volume studies, was fond of saying "Volume is the steam that makes the choo-choo go." - -Another hugely important factor of market analysis is time. Markets live and move in different timeframes at the same time. No matter how carefully you analyze the daily chart, its trend can be upended by a move that erupts from another timeframe. - -In this section we'll focus on volume and volume-based indicators. We'll also look into tying all market decisions to their timeframes. - -## ■ **28. Volume** - -Volume reflects the activity of traders and investors. Each unit of volume represents actions of two individuals: one sells a share or a contract and another buys that share or a contract. Daily volume is the number of shares or contracts traded in one day (Figure 28.1). - -Traders usually plot volume as a histogram—vertical bars whose height reflects each day's volume. They usually draw it underneath prices. Changes in volume show how bulls and bears react to price swings and provide clues to whether trends are likely to continue or to reverse. - -Some traders ignore volume. They think that prices already reflect all information known to the market. They say, "You get paid on price and not on volume." - -**FIGURE 28.1** BID daily, 22-day EMA, volume. *(Chart by Stockcharts.com)* - -#### Volume - -Sotheby's Holdings Inc. (BID) is the world's biggest publicly traded auction house. It provides a window into what the world's big money is doing in terms of their conspicuous consumption. This company's business was buoyed in 2013 by the influx of new money from Asia, but the stock hit its head on the ceiling during that year's last quarter. - -In areas A and B, volume increased during the rally, confirming the uptrend and calling for higher prices ahead. In areas C and D, volume flashed warning signs for the bulls—it shrank during each rally attempt. Notice false upside breakouts in those areas and an atypical form of a kangaroo tail in area C. Rising volume near the right edge confirms the power of bears. - -Professionals, on the other hand, know that analyzing volume can help them understand markets deeper and trade better. - -Volume depends on the size of the trading crowd and the activity levels of buyers and sellers. If you compare volumes of two markets, you'll see which is more active or liquid. You are likely to receive better fills and suffer less slippage in liquid markets than in thin, low-volume markets. - -There are three ways to measure volume: - -- 1. The actual number of shares or contracts traded. For example, the New York Stock Exchange reports volume this way. This is the most objective way of measuring volume. -- 2. The number of trades that took place. Some international exchanges report volume this way. This method is less objective because it doesn't distinguish between a 100-share trade and a 5000-share trade. -- 3. Tick volume is the number of price changes during a selected period of time, such as 10 minutes or an hour. It is called tick volume because most changes equal 1 tick. Some exchanges don't report intraday volume, forcing day traders to use tick volume as a proxy for real volume. - -A note to forex traders: since that market is decentralized and reports no volume, you can use the volume of currency futures as its proxy. Futures of all major currencies, measured against the U.S. dollar, are traded in Chicago and on the electronic exchanges. We can assume that their volume trends are reasonably similar to those in the forex markets, since both respond to the same market forces. - -**Crowd Psychology** - -Volume reflects the degree of financial and emotional involvement, as well as pain, among market participants. A trade begins with a financial commitment by two persons. The decision to buy or sell may be rational, but the act of buying or selling creates an emotional commitment in most people. Buyers and sellers crave to be right. They scream at the market, pray, or use lucky talismans. The level of volume reflects the degree of emotional involvement among traders. - -Each tick takes money away from losers and gives it to winners. When prices rise, longs make money and shorts lose. When prices fall, shorts gain and longs lose. Winners feel happy and elated, while losers feel depressed and angry. Whenever prices move, about half of the traders are hurting. When prices rise, bears are in pain, and when prices fall, bulls suffer. The greater the volume, the more pain in the market. - -Traders react to losses like frogs to hot water. If you throw a frog into a hot pail, it'll jump in response to sudden pain, but if you put a frog into cool water and heat it slowly, you can boil it alive. If a sudden price change hits traders, they jump from pain and liquidate losing positions. On the other hand, losers can be very patient if their losses increase gradually. - -You can lose a great deal of money in a sleepy stock or a future, such as corn, where a one-cent move costs only \$50 per contract. If corn goes against you just a few cents a day, that pain is easy to tolerate. If you hang on, those pennies can add up to thousands of dollars in losses. Sharp moves, on the other hand, make losing traders cut their losses in a panic. Once weak hands get shaken out, leaving behind a volume spike, the market is ready to reverse. Trends can persist for a long time on moderate volume but can expire after a burst of volume. - -Who buys from a trader who is selling his losing long position? It may be a short seller who wants to cover and take profits. It may be a bargain hunter who steps in because prices are "too low." A bottom-picker takes over the position of a loser who washed out—he either catches the bottom or becomes the next loser. - -Who sells to a trader who buys to cover his losing short position? It may be a savvy investor who takes profits on his long position. It also may be a top-picker who sells short because he thinks that prices are "too high." He assumes the position of a loser who covered his shorts, and only the future will tell whether he is right or wrong. - -When shorts give up during a rally, they buy to cover and push the market higher. Prices rise, flush out even more shorts, and the rally feeds on itself. When longs give up during a decline, they sell, pushing the market lower. Falling prices flush out even more longs, and the decline feeds on itself. Losers who give up on their trades propel trends. A trend that moves on steady volume is likely to persist. It shows that new losers are replacing those who washed out. - -When volume falls, it shows that the supply of losers is running low and a trend is ready to reverse. It happens after enough losers catch on to how wrong they are. Old losers keep bailing out, but fewer new ones come in. Falling volume is a sign that the trend is about to reverse. - -A burst of extremely high volume also gives a signal that a trend is nearing its end. It shows that masses of losers are bailing out. You can probably recall holding a losing trade longer than you should have. Once the pain became intolerable and you got out, the trend reversed and the market went the way you expected, only without you. This happens time and again because most humans react to stress similarly and bail out at roughly the same time. Professionals don't hang on while the market beats them up. They quickly close out losing trades and reverse or wait on the sidelines, ready to re-enter. - -Volume spikes are more likely to signal an imminent reversal of a downtrend than an uptrend. Volume spikes in downtrends reflect explosions of fear. Fear is a powerful but short-term emotion—people run fast, dump shares, and then the trend is likely to reverse. Volume spikes in uptrends are driven by greed, which is a slowermoving, happy emotion. There may be a slight pause in an uptrend after a volume spike, but then the trend is quite likely to resume. - -Volume usually stays relatively low in trading ranges because there is relatively little pain. People feel comfortable with small price changes, and flat markets can drag on a long time. A breakout is often marked by a dramatic increase in volume because losers run for the exits. A breakout on low volume shows little emotional commitment to a new trend. It indicates that prices are likely to return into their trading range. - -Rising volume during a rally shows that more buyers and short sellers are pouring in. Buyers are eager to buy even if they have to pay up, and shorts are eager to sell to them. Rising volume shows that losers who leave are being replaced by a new crop of losers. - -When volume shrinks during a rally, it shows that bulls are becoming less eager, while bears are no longer running for cover. The intelligent bears have left long ago, followed by weak bears who could not take the pain. Falling volume shows that fuel is being removed from the uptrend and it's ready to reverse. - -When volume dries up during a decline, it shows that bears are less eager to sell short, while bulls are no longer running for the exits. The intelligent bulls have sold long ago, and the weak bulls have been shaken out. Falling volume shows that the remaining bulls have greater pain tolerance. Perhaps they have deeper pockets or bought later in the decline, or both. Falling volume identifies an area in which a downtrend is likely to reverse. - -This reasoning applies to all timeframes. As a rule of thumb, if today's volume is higher than yesterday's, then today's trend is likely to continue. - -## **Trading Pointers** - -The terms "high volume" and "low volume" are relative. What's low for Amazon may be very high for a less popular stock, while what's low for gold is high for platinum, and so on. We compare volumes of different stocks, futures, or options only when selecting higher-volume trading vehicles. Most of the time, we compare current trading volume of a stock to its average volume. As a rule of thumb, "high volume" for any given market is at least 25 percent above its average for the past two weeks, while "low volume" is at least 25 percent below average. - -- 1. High volume confirms trends. If prices rise to a new peak and volume reaches a new high, then prices are likely to retest or exceed that peak. -- 2. If the market falls to a new low and the volume reaches a new high, that bottom is likely to be retested or exceeded. A very high volume "climax bottom" is almost always retested on low volume, offering an excellent buying opportunity. -- 3. If volume shrinks while a trend continues, that trend is ripe for a reversal. When a market rises to a new peak on lower volume than its previous peak, look to take profits on a long position and/or for a shorting opportunity. This technique does not work as well in downtrends because a decline can persist on low volume. There is a saying on Wall Street: "It takes buying to put prices up, but they can fall of their own weight." -- 4. Watch volume during reactions against the trend. When an uptrend is punctuated by a decline, volume often picks up in a flurry of profit taking. When that dip continues but volume shrinks, it shows that bulls are no longer running or that selling pressure is spent. When volume dries up, it shows that the reaction is nearing its end and the uptrend is ready to resume. This identifies a good buying opportunity. Major downtrends are often punctuated by rallies that begin on heavy volume. Once weak bears have been flushed out, volume shrinks and gives a signal to sell short. - -## ■ **29. Volume-Based Indicators** - -Several indicators help clarify volume's trading signals. For example, a 5-day EMA of volume can identify volume's trends. A rising EMA of volume affirms the current price trend, while a declining one points to the price trend's weakness. - -This and other volume-based indicators provide more precise timing signals than volume bars. They include On-Balance Volume and Accumulation/Distribution, described below. Force Index combines price and volume data to help identify areas where prices are likely to reverse. - -## **On-Balance Volume** - -**On-Balance Volume** (OBV) is an indicator designed by Joseph Granville and described in his book, *New Strategy of Daily Stock Market Timing*. Granville used OBV as a leading indicator of the stock market, but other analysts applied it to futures. - -OBV is a running total of volume. Each day's volume is added or subtracted, depending on whether prices close higher or lower than on the previous day. When a stock closes higher, it shows that bulls won the day's battle; that day's volume is added to OBV. When a stock closes lower, it shows that bears won the day, and that day's volume is subtracted from OBV. If prices close unchanged, OBV stays unchanged. On-Balance Volume often rises or falls before prices, acting as a leading indicator. - -## **Crowd Psychology** - -Prices represent the consensus of value, but volume represents the emotions of market participants. It reflects the intensity of traders' financial and emotional commitments, as well as pain among losers, which is what OBV helps to track. - -A new high of OBV shows that bulls are powerful, bears are hurting, and prices are likely to rise. A new low of OBV shows that bears are powerful, bulls are hurting, and prices are likely to fall. When the pattern of OBV deviates from the pattern of prices, it shows that mass emotions aren't in gear with mass consensus. A crowd is more likely to follow its gut than its mind, and that's why changes in volume often precede price changes. - -## **Trading Signals** - -The patterns of OBV tops and bottoms are much more important than the absolute levels, which depend on the starting date of your calculations. It is safer to trade in the direction of a trend that is confirmed by OBV (Figure 29.1). - -- 1. When OBV reaches a new high, it confirms the power of bulls, indicates that prices are likely to continue to rise, and gives a buy signal. When OBV falls below its previous low, it confirms the power of bears, calls for lower prices ahead, and gives a signal to sell short. -- 2. OBV gives its strongest buy and sell signals when it diverges from prices. If prices rally, sell off, and then rise to a new high, but OBV rallies to a lower high, it creates a bearish divergence and gives a sell signal. If prices decline, rebound, and then fall to a new low, but OBV falls to a more shallow bottom, it traces a bullish divergence and gives a buy signal. Long-term divergences are more important than the short-term ones. Divergences that develop over the course of several weeks give stronger signals than those created over a few days. -- 3. When prices are in a trading range and OBV breaks out to a new high, it gives a buy signal. When prices are in a trading range and OBV breaks down and falls to a new low, it gives a signal to sell short. - -## **More on OBV** - -One of the reasons for Granville's success in stock market timing was that he combined OBV with two other indicators—the **Net Field Trend indicator** and the **Climax indicator**. Granville calculated OBV for each stock in the Dow Jones Industrial Average and rated its OBV pattern as rising, falling, or neutral. He called - -**FIGURE 29.1** MCD daily, 22-day EMA, On-Balance volume (OBV). *(Chart by Stockcharts.com)* - -#### On-Balance Volume - -McDonald's Corp. (MCD) is a stable, slow-moving stock. You can see a fairly tight trading range, marked with dashed lines (two lines at the lows, one tight and the other loose). Notice the tendency of MCD towards false breakouts (bottoms A and C and tops B and D). Notice a kangaroo tail in area A. - -At the right edge of the chart, the stock market is in a free-fall, but while MCD trades near its recent lows, its OBV indicator is trading near the highs. It points to strength and suggests buying rather than selling. - -that a Net Field Trend of a stock: It could be +1, −1, or 0. Climax indicator was a sum of the Net Field Trends of all 30 Dow stocks. - -When the stock market rallied and the Climax indicator reached a new high, it confirmed strength and gave a buy signal. If the stock market rallied but the Climax indicator made a lower top, it gave a sell signal. - -You can look at the Dow Jones Industrial Average as a team of 30 horses pulling the market wagon. The Climax indicator shows how many horses are pulling uphill, downhill, or standing still. If 24 out of 30 horses pull up, 1 down and 5 are resting, then the market wagon is likely to move up. If 9 horses pull up, 7 pull down, and 14 are resting, that wagon may soon roll downhill. - -Remarkably, Granville did his calculations by hand1 . Now, of course, OBV, the Net Field Trend indicator, and the Climax indicator can be easily programmed. It would be - -1 I visited Granville in 2005 in Kansas City. Not only did he do all his calculations by hand, he avoided going online, as he was suspicious of pervasive snooping—and that was years before the disclosures of government spying. He disconnected his computer from the Internet until it was time to send out his newsletter. Granville monitored intraday prices by tuning his TV into CNBC with the sound turned off and a towel draped over the upper portion of the screen, so that all he could see was the tape, running along the bottom of his screen. - -worthwhile to apply them to a database that includes all stocks of the S&P 500 index. This method may produce good signals for trading the S&P 500 futures and options. - -## **Accumulation/Distribution** - -This indicator was developed by Larry Williams and described in his 1973 book, *How I Made One Million Dollars*. It was designed as a leading indicator for stocks, but several analysts applied it to futures. The unique feature of Accumulation/Distribution (A/D) is that it tracks the relationship between opening and closing prices, in addition to volume. Its concept is similar to that of Japanese candlesticks, which at the time Williams wrote his book weren't known to Western traders. - -Accumulation/Distribution is more finely calibrated than OBV because it credits bulls or bears with only a fraction of each day's volume, proportionate to the degree of their win for the day. - -$$ -A/D = \frac{Close - Open}{High - Low} \cdot Volume -$$ - -If prices close higher than they opened, then bulls won the day, and A/D is positive. If prices close lower than they opened, then the bears won, and A/D is negative. If prices close where they opened, then nobody won, and A/D is zero. A running total of each day's A/D creates a cumulative A/D indicator. - -For example, if today's high-low spread was five points but the distance from the open to the close was two points, then only 2/5 of today's volume is credited to the winning camp. Just as with OBV, the pattern of A/D highs and lows is important, while its absolute level simply depends on the starting date. - -When the market rises, most people focus on new highs, but if prices open higher and close lower, then A/D, which tracks their relationship, turns down. It warns that the uptrend is weaker than it appears. If, on the other hand, A/D ticks up while prices are down, it shows that bulls are gaining strength. - -## **Crowd Behavior** - -Opening prices reflect pressures that have built up while the market was closed. Openings tend to be dominated by amateurs who read their news in the evening and trade in the morning. - -Professional traders are active throughout the day. They often trade against the amateurs. As the day goes on, waves of buying and selling by amateurs as well as slow-moving institutions gradually subside. Professionals tend to dominate the markets at closing time. Closing prices are especially important because the settlement of trading accounts depends on them. - -A/D tracks the outcomes of daily battles between amateurs and professionals. It ticks up when prices close higher than they opened—when professionals are more bullish than amateurs. It ticks down when prices close lower than they opened when professionals are more bearish than amateurs. It pays to bet with the professionals and against the amateurs. - -## **Trading Rules** - -When the market opens low and closes high, it moves from weakness to strength. That's when A/D rises and signals that market professionals are more bullish than amateurs, and the upmove is likely to continue. When A/D falls, it shows that market professionals are more bearish than amateurs. When the market weakens during the day, it's likely to reach a lower low in the days to come. - -The best trading signals are given by divergences between A/D and prices. - -- 1. If prices rally to a new high but A/D reaches a lower peak, it gives a signal to sell short. This bearish divergence shows that market professionals are selling into the rally. -- 2. A bullish divergence occurs when prices fall to a new low but A/D bottoms out at a higher low than during its previous decline. It shows that market professionals are using the decline for buying, and a rally is coming (Figure 29.2). - -**FIGURE 29.2** GOOG daily, Accumulation/Distribution Index. *(Chart by Stockcharts.com)* - -#### Accumulation/Distribution - -"Coming events cast their shadows before" is an old proverb with a lot of meaning for technical analysts. Google Inc. (GOOG) was trending lower for months, but the uptrend of the Accumulation/Distribution Index (A/D) showed that big money was buying. The stock has fallen lower at point B than at A, but the A/D Index traced out a much higher bottom. Just as important, it broke out to a new high (marked with a vertical green arrow) before prices gapped up following a surprisingly good earnings announcement. Somebody knew what was coming, and their massive buying was identified by the A/D accumulation pattern and its upside breakout. Technical analysis helps even out the imbalance of knowledge between outsiders and insiders. - -## **More on Accumulation/Distribution** - -When you go long or short, following a divergence between A/D and price, remember that even market professionals can go wrong. Use stops and protect yourself by following the **Hound of the Baskervilles** rule (see Chapter 23). - -There are important parallels between A/D and Japanese candlestick charts, since both focus on the differences between opening and closing prices. A/D goes further than candlesticks by taking volume into account. - -## ■ **30. Force Index** - -Force Index is an oscillator developed by this author. It combines volume with prices to discover the force of bulls or bears behind every rally or decline. Force Index can be applied to any price bar for which we have volume data: weekly, daily, or intraday. It brings together three essential pieces of information—the direction of price change, its extent, and the volume during that change. It provides a practical way of using volume for making trading decisions.2 - -Force Index can be used in its raw form, but its signals stand out much more clearly if we smooth it with a moving average. Using a short EMA of Force Index helps pinpoint entry and exit points. Using a longer EMA helps confirm trends and recognize important reversals. - -## **How to Construct Force Index** - -The force of every move is defined by three factors: direction, distance, and volume. - -- 1. If prices close higher than the close of the previous bar, the force is positive. If prices close lower than the close of the previous bar, the force is negative. -- 2. The greater the change in price, the greater the force. -- 3. The bigger the volume, the greater the force. - -$$ -Force Index = Volume_{today} \cdot (Close_{today} - Close_{yesterday}) -$$ - -A raw Force Index can be plotted as a histogram, with a horizontal centerline at a zero level. If the market closes higher, Force Index is positive and rises above the centerline. If the market closes lower, Force Index is negative and extends below the centerline. If the market closes unchanged, Force Index is zero. - -The histogram of a raw Force Index is very jagged. This indicator gives much better trading signals after being smoothed with a moving average (see Chapter 22). - -2 Remember, we're talking about the force of market crowds, not the formula in physics. - -A 2-day EMA of Force Index provides a minimal degree of smoothing. It is useful for finding entry points into the markets. It pays to buy when the 2-day EMA is negative and sell when it's positive, as long as you trade in the direction of the trend. - -A 13-day EMA of Force Index tracks longer-term changes in the force of bulls and bears. When the 13-day EMA crosses above the centerline, it shows that bulls are in control and suggests trading from the long side. When the 13-day EMA turns negative, it shows that bears are in control and suggests trading from the short side. Divergences between a 13-day EMA of Force Index and prices identify important turning points. - -## **Trading Psychology** - -When the market closes higher, it shows that bulls won the day's battle, and when it closes lower, it shows that bears carried the day. The distance between today's and yesterday's closing prices reflects the margin of victory by bulls or bears. The greater this distance, the larger the victory achieved. - -Volume reflects the degree of emotional commitment by market participants (see Chapter 28). High-volume rallies and declines have more inertia and are more likely to continue. Prices moving at high volume are like an avalanche that gathers speed as it rolls. Low volume, on the other hand, shows that the supply of losers is thin, and a trend is probably nearing an end. - -Prices reflect what market participants think, while volume reflects the strength of their feelings. Force Index combines price and volume—it shows whether the head and the heart of the market are in gear with each other. - -When Force Index rallies to a new high, it shows that the force of bulls is high and the uptrend is likely to continue. When Force Index falls to a new low, it shows that the force of bears is intense and the downtrend is likely to persist. If the change in prices is not confirmed by volume, Force Index flattens and warns that a trend is about to reverse. It also flattens and warns of a nearing reversal if high volume generates only a small price move. - -## **Trading Rules** - -#### **Short-Term Force Index** - -A 2-day EMA of Force Index is a highly sensitive indicator of the short-term force of bulls and bears. When it swings above its centerline, it shows that bulls are stronger, and when it falls below the centerline, it shows that bears are stronger. - -Since the 2-day EMA of Force Index is a sensitive tool, we can use it to fine-tune signals of other indicators. When a trend-following indicator identifies an uptrend, the declines of the 2-day EMA of Force Index below zero pinpoint the best buying points: buying pullbacks during a long-term rally (Figure 30.1). When a trendfollowing tool identifies a downtrend, rallies of a 2-day EMA of Force Index mark the best shorting areas. - -1. Buy when a 2-day EMA of Force Index turns negative during uptrends. - -Even a fast and furious uptrend has occasional pullbacks. If you delay buying until the 2-day EMA of Force Index turns negative, you'll buy closer to a shortterm bottom. Most people chase rallies and then get hit by drawdowns they find hard to tolerate. Force Index helps find buying opportunities with lower risks. - -When a 2-day EMA of Force Index turns negative during an uptrend, place a buy order above the high price of that day. When the uptrend resumes and prices rally, you'll be stopped in on the long side. If prices continue to decline, your - -**FIGURE 30.1** ADBE daily, 26-day EMA, 2-day Force Index. *(Chart by Stockcharts.com)* - -#### Short-Term Force Index - -Later in this book we'll return to the all-important topic of using multiple timeframes to make trading decisions. For example, you may make your strategic decision—to be a bull or a bear—on a weekly chart and then make your tactical decisions on where to buy or sell short using a daily chart. - -In the case of Adobe Systems, Inc. (ADBE), there is a steady uptrend on the weekly chart, confirmed by its rising EMA (not shown). When the weekly trend is up, a 2-day Force Index on the daily chart provides an ongoing series of signals that identify buy points. Instead of chasing strength and buying high, it's better to buy during short-term pullbacks, when a wave goes against the tide. Those waves are marked by the 2-day Force Index dropping below zero. Once the 2-day Force Index goes negative, it makes sense to start placing buy orders above the latest bar's high. This will ensure you'll be stopped into a long trade as soon as the downwave loses it power. - -order will not be executed. Keep lowering your buy order to near the high of the latest bar. Once your buy stop is triggered, place a protective stop below the latest minor low. This tight stop is seldom touched in a strong uptrend, but it'll get you out early if the trend is weak. - -2. Sell short when a 2-day EMA of Force Index turns positive in a downtrend. - -When trend-following indicators identify a downtrend, wait until the 2-day EMA of Force Index turns positive. It reflects a quick splash of bullishness—a shorting opportunity. Place an order to sell short below the low of the latest price bar. - -If the 2-day EMA of Force Index continues to rally after you place your sell order, raise your order the next day to near the previous bar's low. Once prices slide and you enter a short trade, place a protective stop above the latest minor peak. Move your stop down to a break-even level as early as possible. - -Additionally, a 2-day EMA of Force Index helps decide when to pyramid positions. You can add to longs in uptrends each time Force Index turns negative; you can add to shorts in downtrends whenever Force Index turns positive. - -Force Index even provides a glimpse into the future. When a 2-day EMA of Force Index falls to its lowest low in a month, it shows that bears are strong and prices are likely to fall even lower. When a 2-day EMA of Force Index rallies to its highest level in a month, it shows that bulls are strong and prices are likely to rise even higher. - -A 2-day EMA of Force Index helps decide when to close out a position. It does it by identifying short-term splashes of mass bullishness or bearishness. A short-term trader who bought when this indicator was negative can sell when it turns positive. A short-term trader who went short when this indicator was positive can cover when it turns negative. A longer-term trader should get out of his position only if a trend changes (as identified by the slope of a 13-day EMA of price) or if there is a divergence between the 2-day EMA of Force Index and the trend. - -- 3. Bullish divergences between the 2-day EMA of Force Index and price give strong buy signals. A bullish divergence occurs when prices fall to a new low while Force Index makes a more shallow low. -- 4. Bearish divergences between the 2-day EMA of Force Index and price give strong sell signals. A bearish divergence occurs when prices rally to a new high while Force Index traces a lower second top. -- 5. Whenever the 2-day EMA of Force Index spikes down to five times or more its usual depth and then recoils from that low, expect prices to rally in the coming days. - -Markets fluctuate between overbought and oversold, and when they recoil from a down spike, we can expect a rally. Note that this signal doesn't work well in uptrends—markets recoil from down spikes but not from up spikes. Spikes that point down reflect intense fear, which doesn't persist for very long. Spikes that point up reflect excessive enthusiasm and greed, which can persist for quite a long time. - -A 2-day EMA of Force Index fits well into the Triple Screen trading system (see Chapter 39). Its ability to find short-term buying and selling points is especially useful when you combine Force Index with a longer-term trend-following indicator. - -#### **Intermediate-Term Force Index** - -A 13-day EMA of Force Index identifies longer-term changes in the balance of power between bulls and bears. When it rises above zero, the bulls are stronger, and when - -**FIGURE 30.2** SSYS daily, 26-day EMA, 13-day Force Index. *(Chart by Stockcharts.com)* - -### Long-Term Force Index - -Stratasys, Inc. (SSYS) is one of the two leading companies in the rapidly emerging additive manufacturing (AM) market. In the two years since I wrote the world's first popular e-book on investing in this technology, AM stocks have become investors' favorites. A technical pattern has emerged, with rallies driven by amateurs piling in and sharp declines as they panic and bail out. The 13-day Force Index does a good job of catching those waves. - -When the 13-day Force Index crosses above its zero line (marked by vertical green arrows), it shows that buying volume is coming in. That's where a longer-term trader buys and holds. When the 13-day Force declines below its zero line and stays there, it shows that bears predominate. - -Near the right edge of the screen, we see a record low of Force Index, but then bears begin to weaken, as Force Index starts inching towards zero. Keep your powder dry as you wait for an accumulation pattern to emerge and be confirmed by Force Index crossing above zero. This see-saw movement of stocks passing from strong hands into weak ones near the tops and back again near the lows goes on forever. Force Index can help you position yourself with the right group. - -it falls below zero, the bears are in charge. Its divergences from prices identify intermediate and even major turning points (Figure 30.2). Its spikes, especially near the bottoms, mark approaching trend reversals. - -The raw Force Index identifies the winning team in the battle between bulls and bears in any price bar, be it weekly, daily, or intraday. We get much clearer signals by smoothing the raw Force Index with a moving average. - -1. When a 13-day EMA of Force Index is above the centerline, bulls are in control of the market. When it is below the centerline, bears are in charge. - -When a rally begins, prices often jump on heavy volume. When a 13-day EMA of Force Index reaches a new high, it confirms the uptrend. As an uptrend grows older, prices tend to rise more slowly, and volume becomes thinner. That's when a 13-day EMA of Force Index starts tracing lower tops. When it drops below its zero line, it signals that the back of the bull has been broken. - -2. A new peak of the 13-day EMA of Force Index shows that bulls are very strong and a rally is likely to continue. A bearish divergence between a 13-day EMA of Force Index and price gives a strong signal to sell short. If prices reach a new high but this indicator traces a lower peak, it warns that bulls are losing power and bears are ready to take control. - -Note that for a divergence to be legitimate, this indicator must make a new peak, then fall below its zero line, and then rise above that line again, but tracing a lower peak, which creates a divergence. If there is no crossover, then there is no legitimate divergence. - -3. A new low in the 13-day EMA of Force Index shows that a downtrend is likely to continue. If prices fall to a new low but this indicator rallies above zero and then falls again, but to a more shallow low, it completes a bullish divergence. It reveals that bears are losing power and gives a buy signal. - -When a downtrend begins, prices usually drop on heavy volume. When a 13-day EMA of Force Index falls to a new low, it confirms the decline. As the downtrend grows old, prices fall more slowly or volume dries up—that's when a reversal is in the cards. - -Adding an envelope to the chart of Force Index can help you detect its extreme deviations from the norm, which tend to lead to price trend reversals. This method for catching deviations and potential reversals works well with weekly charts, but not with the daily and intraday charts. This is truly a longer-term tool. - -## ■ **31. Open Interest** - -**Open interest** is the number of contracts held by buyers or owed by short sellers in any derivative market, such as futures or options. If you are unfamiliar with futures or options, skip this chapter and return to it after you have read Chapters 44 on options and 46 on futures. - -Stock market shares are traded for as long as the company that listed them stays in business as an independent unit. Most shares are held as long positions, with only a small percentage of shorts. In futures and options, on the other hand, the total size of long and short positions is always identical, due to the fact that they are contracts for future delivery. When someone wants to buy a contract, someone else has to sell it to them, i.e., go short. If you want to buy a call option for 100 shares of Google, another trader has to sell you that option; in order for you to be long, someone else has to be short. **Open interest equals the total long or the total short positions**. - -Futures and options contracts are designed to last for only a set period of time. A futures or options buyer who wants to accept delivery and a seller who wants to deliver have to wait until the first delivery day. This waiting period ensures that the numbers of contracts held long and short are always equal. In any case, very few futures and options traders plan to deliver or accept delivery. Most traders close out their positions early, settling in cash long before the first notice day. We'll return to the topic of futures and options in Part Eight of this book on trading vehicles. - -Open interest rises when new positions are being created and falls when positions are being closed. For example, if open interest in April COMEX gold futures is 20,000 contracts, it means that bulls are long and bears short 20,000 contracts. If open interest rises to 20,200, it means that the net of 200 new contracts have been created: both bought and sold short. - -Open interest falls when a bull who is long sells to a bear who is short but wants to cover his short position. As both of them get out, open interest falls by the size of their trade, since one or more contracts disappear from that market. - -If a new bull buys from an old bull that is getting out of his long position, open interest remains unchanged. Nor does the open interest change when a new bear sells to an old bear who wants to buy to cover his short position. In summary, open interest rises when "fresh blood" enters that market and falls as current bulls and bears start leaving that market, as illustrated in the table below: - -| Buyer | Seller | Open Interest | -|-----------------------------|--------------------|---------------| -| New buyer | New seller | Increases | -| New buyer | Former buyer sells | Unchanged | -| Former seller buys to cover | New seller | Unchanged | -| Former seller buys to cover | Former buyer sells | Decreases | - -Technicians usually plot open interest as a line below price bars (Figure 31.1). Open interest in any market varies from season to season because of massive hedging by industrial users and producers at different stages of the annual production cycle. Open interest gives important messages when it deviates from its seasonal norm. - -## **Crowd Psychology** - -It takes one bull and one bear to create a futures or options contract. A bull who believes that prices will rise buys a contract. A bear who thinks that prices are going to drop goes short by selling a contract for future delivery. With a trade between a - -**FIGURE 31.1** TYH14 daily, 13-day EMA, open interest. *(Chart by TradeStation)* - -#### Open Interest - -Open interest (OI) reflects the number of all short or long positions in any futures or options market. Since the two are equal in the derivatives markets, OI reflects the degree of conviction among bulls and bears. - -Rising OI shows that the conflict between bulls and bears is becoming more intense and confirms the exiting trend. Falling OI, on the other hand, shows that losers are leaving the market, while the winners are cashing in—it signals that the trend is nearing its end. - -Near the left edge of this chart of March 2014 Treasury Notes futures (TYH14), the trend is down, but the declining OI warns bears not to overstay the downtrend. OI bottomed out in area A, T-Notes in area B, and in area C, both were in clear uptrends, with rising OI calling for higher prices ahead. OI topped out in area D, and while prices continue to rise in area E, the new downtrend of OI serves up a warning to the bulls near the right edge of the chart. - -Not all charts of open interest look as smooth and clear as this one. Serious traders don't expect to find a magic tool of a single indicator—they use several indicators and act only when their messages confirm one another. - -new bull and a new bear, open interest rises by the number of contracts they traded. A single trade is unlikely to move any market, but when thousands of traders make similar trades, they propel or reverse market trends. - -Open interest reflects the intensity of conflict between bulls and bears. It depends on their willingness to maintain long and short positions. When bulls and bears don't expect the market to move in their favor, they close out their positions, reducing open interest. - -There are two people on the opposite sides of every trade, and one of them will be hurt when prices change. In a rally, bears will get hurt, and in a decline, bulls will suffer. As long as the losers hold on, hoping and hanging on to their positions, open interest doesn't change. - -A rise in open interest shows that a crowd of confident bulls is facing down a crowd of equally confident bears. It points to a growing disagreement between the two camps. One group is sure to lose, but as long as potential losers keep pouring in, the trend will continue. These ideas have been clearly put forth in L. Dee Belveal's classic book, *Charting Commodity Market Price Behavior*. - -It takes conviction among both bulls and bears to maintain a trend. Rising open interest shows that both camps keep adding to their positions. If they strongly disagree about the future course of prices, then the supply of losers is growing, and the current trend is likely to persist. An increase in open interest gives a green light to the existing trend. - -If open interest rises during an uptrend, it shows that longs are buying while bears are shorting because they believe that the market is overvalued. They are likely to run for cover when the uptrend squeezes them harder—and their buying will propel prices higher. - -If open interest rises during a downtrend, it shows that shorts are aggressively selling, while bottom pickers are buying. Those bargain hunters are likely to bail out when falling prices hurt them, and their selling will push prices even lower. - -When a bull is convinced that prices are going higher and decides to buy, but a bear is afraid to sell short, that bull can buy only from another bull who bought earlier and now wants to cash out. Their trade creates no new contract, and open interest stays unchanged. When open interest goes flat during a rally, it shows that the supply of losers has stopped growing. - -When a bear is convinced that prices are going lower and wants to sell short, but a bull is afraid to buy from him, that bear can sell only to another bear who shorted earlier and now wants to cover, take profits and leave. Their trade creates no new contract, and open interest does not change. When open interest stays flat during a decline, it shows that the supply of bottom pickers isn't growing. Whenever open interest flattens out, it flashes a yellow light—a warning that the trend is aging and the best gains are probably behind. - -When a bull decides to get out of his long position, a bear decides to cover his short position, and the two trade with one another, a contract disappears, and open interest shrinks. Falling open interest shows that losers are bailing out, while winners are taking profits. When the disagreement between bulls and bears decreases, the trend is ripe for a reversal. Falling open interest shows that winners are cashing in and losers are giving up hope. It signals that the trend is approaching its end. - -## **Trading Rules** - -1. When open interest rises during a rally, it confirms the uptrend and gives a green light to add to long positions. It shows that more short sellers are coming into the market. When they bail out, their short covering is likely to push the rally higher. - -When open interest rises as prices fall, it shows that bottom pickers are active in the market. It gives a green light to shorting because those bargain hunters are likely to push prices lower when they throw in the towel. - -If open interest rises when prices are in a trading range, it's a bearish sign. Commercial hedgers are much more likely to sell short than speculators. A sharp increase in open interest while prices are flat shows that savvy hedgers are probably shorting the market. You want to avoid trading against those who likely have better information than you. - -2. If open interest falls while prices are in a trading range, it identifies short covering by major commercial interests and gives a buy signal. When commercials start covering shorts, they show that they expect the market to rise. - -When open interest falls during a rally, it shows that winners and losers alike are becoming cautious. Longs are taking profits, and shorts are covering. Markets discount the future, and a trend that is accepted by the majority is ready to reverse. If open interest falls during a rally, consider selling and getting out. - -When open interest falls during a decline, it shows that shorts are covering and buyers are taking losses and bailing out. If open interest falls while prices slide, take profits on short positions. - -3. When open interest goes flat during a rally, it shows that the uptrend is getting old and the best gains have already been made. This gives you a signal to tighten stops on long positions and avoid new buying. When open interest goes flat during a decline, it warns you that the downtrend is mature and it is best to tighten stops on short positions. Flat open interest in a trading range does not contribute any new information. - -## **More on Open Interest** - -The higher the open interest, the more active the market, and the less **slippage** you risk when getting in and out of positions. Short-term traders should focus on the contracts with the highest open interest. In the futures markets, the highest open interest tends to be in the front months. As the first notice day approaches and open interest of the front month begins to drop, while open interest in the next month begins to rise, it signals to roll over your position into the next month. - -## ■ **32. Time** - -Most people conduct their lives as if they will live forever — repeating the same mistakes, not learning from the past, and hardly ever planning for the future. Freud showed that the unconscious mind doesn't have the notion of time. Our deep-seated wishes remain largely unchanged throughout our lives. - -When people join crowds, their behavior becomes even more primitive and impulsive. Individuals may be ruled by the calendar and the clock, but crowds pay no attention to time. They act out their emotions as if they had all the time in the world. - -Most traders focus only on changing prices but pay little attention to time. That's just another sign of being caught up in mass mentality. - -The awareness of time is a sign of civilization. A thinking person is aware of time, while someone who is acting impulsively is not. A market analyst who pays attention to time becomes aware of a dimension hidden from the market crowd. - -## **Cycles** - -Long-term price cycles are a fact of economic life. For example, the U.S. stock market tends to run in approximately four-year cycles. They exist because the ruling party inflates the economy going into the presidential election every four years. The party that wins the election deflates the economy when voters can't take revenge at the polls. Flooding the economy with liquidity lifts the stock market, while draining liquidity pushes it down3 . - -Major cycles in agricultural commodities are due to weather and fundamental production factors, coupled with the mass psychology of producers. For example, when livestock prices rise, farmers breed more animals. When those animals reach the market, prices fall and producers cut back. When the supply is absorbed, scarcity pushes prices up, breeders go to work again, and the bull/bear cycle repeats. This cycle is shorter in hogs than in cattle because pigs breed faster than cows. - -Long-term cycles can help traders identify market tides. Instead, many traders get themselves in trouble by trying to use short-term cycles to predict minor turning points. - -Price peaks and valleys often seem to flow in an orderly manner. Traders measure distances between neighboring peaks, and project them into the future to forecast the next top. Then they measure distances between bottoms and extend them into the future to forecast the next low. Cycles put bread and butter on the tables of analysts who sell forecasts. Few of them realize that what appears like a cycle on the charts is often a figment of the imagination. If you analyze price data using a mathematically rigorous program, such as John Ehlers's MESA (Maximum Entropy Spectral Analysis), you'll find that approximately 80 percent of what looks like cycles is simply market noise. A human mind looks for order—and even an illusion of order is good enough for many people. - -If you look at any river from the air, it appears to have cycles, swinging right and left. Every river meanders in its valley because water flows faster in its middle than near the shores, creating turbulences that force the river to turn. Looking for short-term market cycles with a ruler and a pencil is like searching for water with a divining rod. Profits from an occasional success are erased by many losses due to unsound methods. - -## **Indicator Seasons** - -A farmer sows in spring, harvests in late summer, and in the fall, lays in supplies for the winter. There is a time to sow and a time to reap, a time to bet on a warm trend and a time to get ready for a frost. We can apply the concept of seasons to financial markets. Taking a farmer's approach, a trader should look to buy in spring, sell in summer, go short in the fall, and cover in winter. - -Martin Pring developed the model of seasons for prices, but this concept works even better with technical indicators. Their seasons help recognize the current stage - -3 Thiscycle was grossly distorted by the Fed's "quantitative easing" following the 2008 debacle, but it's likely to return, once we crawl out of the Great Recession. - -of the market cycle. This simple but effective model helps you buy when prices are low and sell short when they are high, setting you apart from the market crowd. - -We can define the seasons of many indicators by two factors: their slope as well as their position above or below the centerline. For example, let's apply the concept of indicator seasons to MACD-Histogram (see Chapter 23). We define the slope of MACD-Histogram as the relationship between two neighboring bars. When MACD-Histogram rises below its centerline, it is spring; when it rises above its centerline, it is summer; when it falls above its centerline, it is autumn; and when it falls below its centerline, it is winter. Spring is the best season for going long, and autumn is the best season for selling short (Figure 32.1). - -| Indicator Slope | Position Relative to Centerline | Season | Preferred Action | -|-----------------|---------------------------------|--------|------------------| -| Rising | Below | Spring | Go long | -| Rising | Above | Summer | Start selling | -| Falling | Above | Fall | Go short | -| Falling | Below | Winter | Start covering | - -When MACD-Histogram is below its centerline but its slope is rising, it is spring in the market. The weather is cool but turning warmer. Most traders expect the winter to return and are afraid to buy. Emotionally, it is hard to buy because the memories of a downtrend are still fresh. In fact, spring is the best time for buying, with the highest profit potential, while risks are relatively small because we can place a protective stop slightly below the market. - -When MACD-Histogram rises above its centerline, it's summer in the market and by now most traders recognize the uptrend. It's emotionally easy to buy in summer because bulls have plenty of company. In fact, profit potential in summer is lower than in spring, while the risks are higher because stops have to be farther away from the market due to heightened volatility. - -When MACD-Histogram is above its centerline but its slope turns down, it's autumn in the market. Few traders recognize that change and keep buying, expecting summer to return. Emotionally, it's hard to sell short in autumn—it requires you to stand apart from the crowd. In fact, autumn is the best time for selling short. - -When MACD-Histogram falls below its centerline, it's winter in the market. By then, most traders recognize the downtrend. It is emotionally easy to sell short in winter, joining many vocal bears. In fact, the risk/reward ratio is rapidly shifting against bears, as potential rewards are becoming smaller and risks higher because stops have to be placed relatively far away from prices. - -Just as a farmer must pay attention to the vagaries of weather, a trader needs to stay alert. An autumn on the farm can be interrupted by an Indian summer, and a market can stage a strong rally in the autumn. A sudden freeze can hit the fields in spring, and the market can drop early in a bull move. A trader needs to use several indicators and techniques to avoid getting whipsawed. - -The concept of indicator seasons focuses a trader's attention on the passage of time. It helps you plan for the season ahead instead of mindlessly following other people. - -**FIGURE 32.1** VRTX daily, MACD-Histogram 12-26-9. *(Chart by Stockcharts.com)* - -#### Indicator Seasons - -We can apply the concept of seasons to most indicators and timeframes, including intraday. This can be done with a multitude of trading vehicles, even though this example focuses on the daily MACD-Histogram of Vertex Pharmaceuticals, Inc. (VRTX), a stock in the Nasdaq 100. - -- Autumn—The indicator is above the centerline but falling. This is the best season for establishing shorts. -- Winter—The indicator drops below its centerline. Use weakness to take profits on short positions. -- Spring—The indicator turns up from below its centerline. It is the best time to establish longs. -- Summer—The indicator rises above its centerline. As the weather gets hot, use strength to take profits on long positions. - -MACD-Histogram looks very smooth in this example, but be prepared for brief fluctuations, both above and below the centerline. Spring can be interrupted by a frost, there can be a warm spell in winter, etc. - -## **Market Time** - -We measure time using calendars and watches, but seldom stop to think that our own perceptions of time are far from universal. We keep track of time in human terms, while huge areas of life move on vastly different timelines. - -For example, we think that the ground under our feet is stable, while in fact continents move constantly. They traverse only a few inches per year, but this is enough to radically change the face of the globe over millions of years. Within shorter timeframes, weather patterns change over centuries. Ice ages and warming periods alternate with one another. - -At the other end of the scale, there are physical particles that survive only a tiny fraction of a second. There are insects that are born, mature, procreate, and die within a single day. - -Turning to trading, let's keep in mind that time flows at a different speed in the market than it does for us as individuals. The market, composed of huge masses of human beings, moves at a much slower speed. The patterns you recognize on your charts may have predictive value—but the turns they anticipate are likely to occur much later than you expect. - -The relative slowness of crowds can bedevil even experienced traders. Time and again we find ourselves entering trades too early. Beginners are typically late. By the time they recognize a trend or a reversal, that move had been underway for so long that they miss most, if not all of it. Newbies tend to chase old trends, but the more experienced analysts and traders tend to run into an opposite problem. We recognize approaching reversals and emerging new trends from far away—and jump in too soon. We often buy before the market finishes tracing a bottom or sell short well before it completes a top. By getting in too early we can end up losing money in trends that are too slow to turn. - -What should we do? First of all, you need to become aware that the market time is much slower than your own. Second, consider not putting on a trade when you notice an early reversal signal. A better signal may well emerge later, especially at market tops, which take longer to form than bottoms. - -It pays not to be greedy and trade a smaller size. A smaller position is easier to hold while a reversal is taking its sweet time. Be sure to use multiple timeframes for market analysis: this is the essence of Triple Screen, the system we'll review in a future chapter. - -## **The Factor of Five** - -Most beginners casually pick a timeframe that looks good to them—it can be a daily or a 10-minute chart, or any other—and ignore others. Few are aware of the fact that the market lives in multiple timeframes. It moves simultaneously on monthly, weekly, daily, and intraday charts—often in opposite directions. - -The trend may be up on the daily charts but down on the weeklies, and vice versa. Which of them will you follow? And what will you do about the intraday charts, which may well contradict either the weeklies or the dailies? Most traders ignore all timeframes except for their own—until a sudden move from outside of their timeframe hits their account. - -Keep in mind that neighboring timeframes are linked by the factor of approximately 5. If you start with a monthly chart and proceed to the weekly, you'll notice that there are 4.5 weeks to a month. As you switch from a weekly to a daily chart, you know that there are 5 trading days to a week. Turning to intraday analysis, you may look at an hourly chart—and there are approximately 5–6 hours to a trading day. Day traders can proceed even further and look at 10-minute charts, followed by 2-minute charts. Each is related to its neighboring timeframes by approximately the factor of five. - -The proper way to analyze any market is to review at least two neighboring timeframes. You must always start with the longer timeframe for a strategic view and then switch to the shorter timeframe for tactical timing. If you like using daily charts, you must first examine weekly charts, and if you want to day-trade using 10-minute charts, you first need to analyze hourly charts. This is one of the key principles of the Triple Screen trading system (see Chapter 39). - -## ■ **33. Trading Timeframes** - -How long do you plan to hold your next trade? Do you think it'll be a year, a week, or an hour? A serious trader plans the expected duration of every trade. Various timeframes offer different opportunities and carry different risks. We can roughly divide all trades into three groups: - -1. **Long-term trading or investing**—The expected duration of a position is measured in months, sometimes years. - -Advantages: requires little day-to-day attention and may lead to spectacular gains. Disadvantage: drawdowns can be intolerably severe. - -2. **Swing trading**—The expected duration of a trade is measured in days, sometimes weeks. - -Advantages: a wealth of trading opportunities, fairly tight risk control. - -Disadvantage: will miss major trends. - -3. **Day-trading**—The expected duration of a trade is measured in minutes, rarely hours. - -Advantages: great many opportunities, no overnight risk. - -Disadvantages: demands instant reflexes; transaction costs become a factor. - -If you decide to operate in more than one timeframe, consider making those trades in different accounts. This will allow you to evaluate your performance in each timeframe rather than lump together apples and oranges. - -## **Investing** - -The decision to invest or trade for the long term is almost always based on some fundamental idea. You may recognize a new technological trend or an exciting product that can greatly increase the value of a company. Investing demands a firm conviction and a great supply of patience if you are to hold that position through the inevitable pullbacks and periods of flat prices. These tough challenges make successful investing extremely hard. - -Major trends that are easily seen on long-term charts appear uncertain and foggy in real time, especially when a stock enters a drawdown. When your investment drops 50% or more, wiping out the bulk of paper profits—a common development for long-term positions—few of us have enough conviction and fortitude to continue to hold. Let me illustrate this using an example of Apple Inc. (AAPL), a darling of several bull markets (Figure 33.1). - -AAPL survived its near-death experience in 2003, when its battered stock was rumored to be a takeover candidate, and grew to become the highest-capitalized, publicly traded company in the world, before collapsing from that top in 2012. Its uptrend looks grand in retrospect, but ask yourself, honestly, would you have been able to hold though multiple drawdowns, some of them exceeding 50%. Remember that such drawdowns often mark the ends of uptrends. - -A sensible way to deal with the challenge of investing is to implement your fundamental idea with the help of technical trading tools. When you decide to buy, check out technical signals to ensure you're getting a relative bargain rather than paying full price. If your investment soars, use technical tools to identify overvalued zones; take your profits there and be ready to repurchase during the inevitable pullbacks. This plan demands a high degree of attention, focus, and perseverance. Figure 33.2 is an example that was taken from my trading diary. - -**FIGURE 33.1** AAPL weekly. *(Chart by Stockcharts.com)* - -#### Investing - -The tremendous challenges of holding an investment, even a market leader like Apple Inc. (AAPL), can be seen on this 10-year chart: - -- 1. 2003—AAPL collapses below \$10. Company's survival in question. Would you buy? -- 2. 2006—AAPL rallies to \$86, then sinks to \$51. If you had a thousand shares, would you hold? Would you sell when it got back above \$80 and appeared to stall? -- 3. 2008—AAPL rallies to \$202, drops to \$115. If you had a thousand shares, showing an \$87,000 drawdown, would you hold or sell? -- 4. 2009—AAPL recovers to \$192, sinks to \$78, below its previous low. Your drawdown is over 50%. Are you holding or cashing out? - -**FIGURE 33.2** F monthly, 26- and 13-months EMA with the Impulse system, Autoenvelope, MACD Lines and MACD-Histogram (12-26-9), and Force Index 13-months EMA with ATR channels. *(Chart by Tradestation)* - -#### Technical Analysis with Fundamentals - -- 1. 2007—Ford was on the ropes when the new CEO arrived—the man who earlier spearheaded saving Boeing. In the heady atmosphere of a bull market, Ford seemed to have a shot at recapturing its \$30 high. I saw a false downside breakout coupled with a bullish divergence and bought. I then grimly held through the bear market. -- 2. 2011—Ford spiked above its monthly channel, which was narrower at that time, tracing a kangaroo tail, while monthly MACD weakened. I took profits. -- 3. 2011—as monthly prices stabilized in their value zone, I repurchased my position. - -Fundamental analysis can help you find a stock that may be worth buying. Use technical analysis to time your entries and exits. Be prepared to buy and sell more than once during a major uptrend. - -## **Swing Trading** - -While major trends and trading ranges can last for years, all are punctuated by short-term upswings and downswings. Those moves create multiple trading opportunities, which we can exploit. Many charting examples in this book feature swing trades. - -I especially recommend swing trading for beginning and intermediate traders. The more trades you make, the more you learn, provided you manage risk and keep good records. Swing trading teaches you faster than long-term investing, whose lessons take years to complete. Swing trading gives you time to think, unlike day-trading, which demands instant reactions. Day-trading is too fast for beginners. - -Short-term swings can be substantial enough to generate meaningful profits, without the gut-wrenching drawdowns of position trades. Swing trades don't require watching the screen all day. In SpikeTrade.com, where hundreds of traders compete, most trades last a few days. Some members carry their trades for weeks and even months, while others hop in and out within hours—but the holding period for most members is measured in days. Swing trading hits the sweet spot among time horizons. - -I piggyback one or more of the Spiketrade group's picks almost every week. The chart of HES in Figure 33.3 comes from my diary of one of those trades. - -My profit in the HES trade was \$1.92 per share. You can calibrate the amount of risk you accept and the size of potential profit by deciding how many shares to trade. We'll address this essential question in chapter 50, in the section on the Iron Triangle of risk control. - -**FIGURE 33.3** HES daily, 26- and 13-day EMA with 4% envelope, MACD Lines and MACD-Histogram (12-26-9), the Impulse system, and 2-day Force Index. *(Chart by Stockcharts.com)* - -#### A Swing Trade - -Professional traders are just as comfortable selling short as buying. The signals are similar but the action quicker—stocks fall twice as fast as they rise. - -This chart shows where I shorted the stock of Hess Corporation (HES) as it was tracing a short-term double top, with bearish divergences in all indicators. I covered and took profits, as prices appeared to stall just below the value zone between the two EMAs, while the indicators became oversold. - -One of the best learning techniques involves returning to your closed-out trades two months later and replotting their charts. Trading signals that looked foggy when you saw them at the right edge of the screen become clear when you see them in the middle of your chart. Now, with the passage of time, you can easily see what worked and what mistakes you may have made. Creating these follow-up charts teaches you what to repeat and what to avoid in the future. Updating the charts of closed trades turns you into your own instructor. - -The chart and text in Figure 33.4 come from SpikeTrade.com. Each week the Spiker who won that week's competition posts a diary of his trade. Different people use different indicators and parameters. - -Peter's trade gained almost 11% in three days. Of course, we can't allow ourselves to get intoxicated by such numbers. A beginner looks at them, multiplies them - -#### A Swing Trade near the Bottom - -This trade was submitted by Peter D., a long-term Spiker from the Netherlands. His post was headlined "Fishing near the Lows." - -"Weekly conditions: Indicators don't show much movement. MACD very shallow but positive and RSI slowly improving. Daily: MACD was about to confirm a positive divergence, and so was RSI. Prices dove last week but stopped near support. - -"I set the initial entry at \$3.02, in line with recent lows. It was hit on Monday morning, which turned out to be one cent above the low for the day and the week. Price closed near the high of the day and continued surging on Tuesday and Wednesday. My target was hit on Wednesday, on the way up. The rest of the day saw some pulling back, but price kept in range to close the week on a relatively high note." - -by the number of weeks in a year, and goes crazy throwing his money at the markets. Such spectacular gains are inevitably interspersed with losses. A professional trader carefully manages his money, quickly cuts losing trades and protects his capital to allow his equity to grow. - -If investing is like hunting the big game, swing trading is like rabbit hunting. If your livelihood depends on hunting, shooting rabbits is a much more reliable way of putting meals on the table. Carefully entering and exiting swing trades, while cautiously managing money, is a realistic way of surviving and prospering in the markets. - -## **Day-Trading** - -Day-trading means entering and exiting trades within a single market session. Rapid buying and selling in front of a flashing screen demands the highest levels of concentration and discipline. Paradoxically, it attracts the most impulsive and gamblingprone people. - -Day-trading appears deceptively easy. Brokerage firms hide customer statistics from the public, but in 2000, state regulators in Massachusetts subpoenaed brokerage house records, which showed that after six months only 16% of day-traders made money. - -Whatever gaps you may have in your knowledge or discipline, day-trading will find them fast and hit you hard in your weak spots. In swing trading, you have the luxury of being able to stop and think, but not in day-trading. - -The person who is learning to trade is much better off using end-of-day charts. After you grow into a consistently profitable swing trader, you may wish to explore day-trading. You'll use your already developed skills and will only need to adjust to a faster game. A market newbie who stumbles into day-trading is a gift to the pros. - -Make sure to write down your action plan for day-trading: what will prompt you to enter or exit, to hold or cut. Be prepared to invest plenty of time: day-trading chews up long hours in front of multiple screens. - -Another difficulty of day-trading is that you shoot at much smaller targets. This is reflected in the height of price channels. Elsewhere in this book, you'll read that a good measure of a trader's performance is the percentage of the channel or an envelope he captures in a trade. Taking 30% or more of a channel's height earns you an A grade, while capturing 10% of that channel earns you a C (see Chapter 55). Let's apply these ratings to several stocks that are popular with day traders. The exact figures will change by the time you read this book, but today I get the following numbers for channel heights on the daily and 5-minute charts: - -| | Daily Channel | "A" Trader | "C" Trader | 5-Min Channel | "A" Trader | "C" Trader | -|------|---------------|------------|------------|---------------|------------|------------| -| AAPL | 55 | 16.5 | 5.5 | 2.5 | 0.75 | 0.25 | -| AMZN | 27 | 8.1 | 2.7 | 2.2 | 0.66 | 0.22 | -| MON | 7 | 2.1 | 0.7 | 0.6 | 0.18 | 0.06 | - -A swing trader who uses daily charts can do very well in these active stocks. He can really clean up if he is an A level trader, but even if he is a C trader, taking only **132** VOLUME AND TIME - -10% out of a channel, he can stay comfortably ahead of the game while learning to trade. On the other hand, a person who day-trades the very same stocks must be a straight A trader in order to survive. Anything less and his account will be ground up by slippage, commissions, and expenses. - -If, after developing a successful track record as a swing trader, you decide to daytrade, you'll be able to use most of the tools and techniques you've already learned. You'll find an example of using Triple Screen in day-trading in Chapter 39. - -When a friend who is an Olympic rowing coach taught me to row, he focused on developing the correct stroke. A competent rower always moves his oars exactly the same way, whether it's a leisurely weekend row or the final stretch of a race. What changes are power and speed. The same with day-trading: the technique is the same, but the speed is different. If you learn to swing trade, you can apply your technique to day-trading. And then you can go in reverse, and apply day-trading techniques to swing-trade entries and exits. - -Day-trading can be a profitable pursuit, but keep in mind that it's a highly demanding professional game and most definitely not a casual activity for beginners. diff --git a/trading/The New Trading for a Living/010_PART 6 General Market Indicators.md b/trading/The New Trading for a Living/010_PART 6 General Market Indicators.md deleted file mode 100644 index 43fb3f3f32b50d2aba3901d46534391aae041e98..0000000000000000000000000000000000000000 --- a/trading/The New Trading for a Living/010_PART 6 General Market Indicators.md +++ /dev/null @@ -1,269 +0,0 @@ -## General Market Indicators - -You can use technical indicators reviewed in previous chapters to analyze any trading vehicle: a stock, a future, an index, etc. Such tools as moving averages, MACD, Force index, and others, can provide signals for any ticker in any timeframe. Now we turn to a different group of tools: general market indicators, which analyze the entire market rather than any specific stock. They are worth following because general market trends are responsible for as much as half the movement in individual stocks. - -While there are dozens of general market indicators, this is not an encyclopedic review—I'll simply share the tools that help me trade. You may use the same or different tools—select those that appeal to you and test them on your market data. We can trust only those indicators that we have tested. - -## ■ **34. The New High–New Low Index** - -Stocks that reach their highest level in a year on any given day are the leaders in strength. Stocks that fall to their lowest point for that year on the same day are the leaders in weakness. The New High–New Low Index (NH-NL) tracks the behavior of market leaders by subtracting the number of New Lows from the New Highs. In my experience, NH-NL is the best leading indicator of the stock market.1 - -1 In 2012, I wrote an e-book with Kerry Lovvorn on the New High–New Low Index. We publish nightly updates on its signals on SpikeTrade.com. - -## **How to Construct NH-NL** - -The New High–New Low Index is easy to calculate, using information that appears in many online sources and in major newspapers. - -NH-NL = New Highs − New Lows - -Most data services in the United States report the daily numbers of New Highs and New Lows, but it is shocking how loosely they define their data. Some are too narrow and track only the NYSE stocks, ignoring other exchanges. Others are too broad and track everything, including interest rate ETFs. My favorite source of reliable data is [www.barchart.com.](http://www.barchart.com) I take their data, subtract New Lows from New Highs, and plot the result underneath the daily chart of the S&P 500. - -The task of constructing NH-NL is harder for traders outside the United States, in countries where such data isn't reported. There you'll need to do a bit of programming. First, run a daily scan of the database of all stocks in your country to find those that have reached the highest high and the lowest low for the year during the day. Once you have those two lists, take the above formula and apply it to the numbers you found. - -On the days when there are more new highs than new lows, NH-NL is positive and plotted above the centerline. On the days when there are more new lows than new highs, NH-NL is negative and plotted below the centerline. If the numbers of new highs and new lows are equal, NH-NL is zero. We normally plot the New High– New Low Index as a line, with a horizontal reference line at a zero level. - -While I plot NH-NL underneath the S&P 500, keep in mind that it has a much broader reach than the S&P—NH-NL includes data from the NYSE, AMEX, and NASDAQ, excluding only ETFs, unit investment trusts, closed-end funds, warrant stocks, and preferred securities. The chart of the S&P 500 is there simply for a comparison. - -## **Crowd Psychology** - -A stock appears on the list of new highs when it's the strongest it's been in a year. It means that a herd of eager bulls is chasing its shares. A stock appears on the list of new lows when it's the weakest it's been in a year, showing that a crowd of aggressive bears is selling its shares. - -The New High–New Low Index compares the numbers of the strongest and the weakest stocks on the exchange. It reveals the balance of power between the leaders in strength and the leaders in weakness. - -You can visualize all stocks on the New York Stock Exchange, the NASDAQ, or any other exchange as soldiers in a regiment. The new highs and new lows are their officers. The new highs are the officers who lead an attack uphill. The new lows are the officers who are deserting and running downhill. - -The quality of leadership is a key factor in any conflict. When I was in officer training, they kept telling us that there are no bad soldiers, only bad officers. The New High–New Low Index shows whether more officers are leading an attack uphill or deserting downhill. Where the officers lead, soldiers follow. The broad indexes, such as the S&P 500, tend to follow the trend of NH-NL (Figure 34.1). - -When NH-NL rises above its centerline, it shows that the bullish leadership is dominant. When NH-NL falls below its centerline, it shows that bearish leadership is in charge. If the market rallies to a new high and NH-NL climbs to a new peak, it shows that bullish leadership is growing and the uptrend is likely to continue. If the market rallies but NH-NL shrinks, it shows that the leadership is becoming weak and the uptrend is in danger. A regiment whose officers are starting to desert is likely to retreat. - -A new low in NH-NL shows that the downtrend is well led and likely to persist. If officers are running faster than the men, the regiment is likely to be routed. If stocks fall but NH-NL turns up, it shows that officers are no longer running. When officers regain their morale, the whole regiment is likely to rally. - -## **Trading Rules for NH-NL** - -Traders need to pay attention to three aspects of NH-NL: the level of NH-NL above or below its centerline, the trend of NH-NL, and divergences between the patterns of NH-NL and prices. - -**FIGURE 34.1** S&P 500 daily, 26- and 13-day EMAs, Autoenvelope, NH-NL daily. *(Chart by TradeStation)* - -#### NH-NL—Daily Chart, Yearly Look-Back - -This chart tracks daily NH-NL during a mostly bullish year in the stock market. Still, every bullish trend gets interrupted by pullbacks. Bearish deterioration patterns of NH-NL, marked here by diagonal red arrows, warn you of coming declines. These signals emerge because officers start shifting towards the rear before the soldiers retreat. - -Declines end and rallies begin when NH-NL rallies from negative into positive territory, marked here by purple circles. Those signals work especially well when the S&P is oversold, i.e., near its lower channel line. As always, trading messages are especially strong when independent signals confirm each other. - -#### **NH-NL Zero Line** - -The position of NH-NL in relation to its centerline shows whether bulls or bears are in control. When NH-NL is above its centerline, it shows that more market leaders are bullish than bearish and it is better to trade from the long side. When NH-NL is below its centerline, it shows that bearish leadership is stronger, and it's better to trade from the short side. NH-NL can stay above its centerline for months at a time in bull markets and below its centerline for months in bear markets. - -If NH-NL stays negative for several months but then rallies above its centerline, it signals that a bull move is likely to begin. It is time to look for buying opportunities, using oscillators for precise timing. If NH-NL stays positive for several months but then falls below its centerline, it shows that a bear move is likely to begin. It is time to look for shorting opportunities using oscillators for precise timing. - -#### **NH-NL Trends** - -When the market rallies and NH-NL rises, it confirms uptrends. When NH-NL declines together with the market, it confirms downtrends. - -- 1. A rise in NH-NL shows that it's safe to hold long positions and add to them. If NH-NL declines while the broad market stays flat or rallies, it is time to take profits on long trades. When NH-NL falls below zero, it shows that bearish leadership is strong and it's safe to hold short positions and even add to them. If the market continues to fall but NH-NL rises, it shows that the downtrend is not well led—it's time to cover shorts. -- 2. If NH-NL rises on a flat day, it flashes a bullish message and gives a buy signal. It shows that officers are going over the top while the soldiers are still crouching in their foxholes. When NH-NL falls on a flat day, it gives a signal to sell short. It shows that officers are deserting while the troops are still holding their positions. Soldiers aren't stupid—if their officers start running away, they will not stay and fight. - -### **NH-NL Divergences** - -If the latest market peak is confirmed by a new high of NH-NL, that rally is likely to continue, even if punctuated by a decline. When a new market low is accompanied by a new low in NH-NL, it shows that bears are well led and the downtrend is likely to persist. On the other hand, divergences between the patterns of NH-NL and broad market indexes show that leaders are deserting and the trends are likely to reverse. - -1. If NH-NL traces a lower peak while the market rallies to a new high, it creates a bearish divergence. It shows that bullish leadership is weakening even though the broad market is higher. Bearish divergences often mark the ends of uptrends, but pay attention to the height of the second peak. If it is only slightly above zero, in the low hundreds, then a big reversal is probably at hand and it's time to go short. If, on other hand, the latest peak is in the high hundreds, it shows that the upside leadership is strong enough to prevent the market from collapsing. - -2. If the market declines to a new low, but NH-NL traces a shallower bottom than its previous decline, it creates a bullish divergence. It shows that bearish leadership is shrinking. If the latest low of NH-NL is shallow, in the low hundreds, it shows that the bearish leadership is exhausted and a major upside reversal is near. If the latest low sinks deep, then bears still have some strength, and the downtrend may pause but not reverse. Keep in mind that bullish divergences at stock market bottoms tend to develop faster than bearish divergences at market tops: buy fast and sell slowly. - -## **NH-NL in Multiple Timeframes and Look-Back Periods** - -Markets move simultaneously in different timeframes. My original work on the NH-NL focused on the daily charts with a one-year look-back period—counting stocks that have reached a new high or a new low for their latest 52-week range. I have since added several dimensions for a deeper understanding of this key indicator. - -#### **Weekly NH-NL** - -The weekly NH-NL helps confirm major stock market trends and identify major reversals. I build it from the daily data of barchart.com, mentioned above, by running a five-day moving total. I plot the result underneath a weekly chart of the S&P 500. - -The weekly NH-NL gives its most important signals when it reaches extreme levels and also by divergences. To understand its logic, keep in mind how the weekly NH-NL is constructed. For example, if the weekly NH-NL rises to a +1,500 level, it means that in each of the past five trading days there were on average 300 more New Highs than New Lows. It takes a period of sustainable bullishness or bearishness to push the weekly NH-NL to an extreme. - -These are the most important signals of weekly NH-NL: - -- When it drops below minus 4,000 and then rallies above that level, it delivers major buy signals. -- When the weekly NH-NL rises above plus 2,500, it confirms bull markets. -- When the tops or bottoms of weekly NH-NL diverge from price patterns, they signal important reversals. - -A drop below −4,000 reflects an unsustainable market panic. To fall that low, the market has to deliver an average of 800 more daily New Lows than New Highs for five days in a row. Such massive panic is not going to last. When the weekly NH-NL rises above −4,000, it flashes a buy signal I call a Spike. It's so powerful and effective in both bull and bear markets that I named our SpikeTrade group after it. This signal misfired only once in several decades, as you'll see on the chart in Figure 34.2. - -**FIGURE 34.2** S&P 500 weekly, 26-week EMA, NH-NL weekly. Green line at +2,500, purple line at −4,000. *(Chart by TradeStation)* - -#### NH-NL—Weekly Chart - -When the weekly NH-NL falls below −4,000 and then rises above that level, it nails important bottoms, marked here with vertical green arrows. This chart covers 11 years—the signal works in bull and bear markets. There was only one exception—in October and November 2008, during the worst bear market of a century (marked by a purple oval). Let this serve as a reminder that no market signal works 100% of the time, making risk management essential for survival and success. - -Red diagonal arrows mark major bearish divergences. Weekly NH-NL touching the +2,500 level confirms bull markets and calls for higher prices ahead, even if interrupted by a correction. - -When the weekly NH-NL rises to the +2,500 level, it confirms bull markets. This indicator never rises this high during bear market rallies. When you see it above that level, you know you're in a bull market, with higher prices likely ahead. - -#### **The 65-day and 20-day NH-NL** - -One of the great innovations in the New High–New Low analysis in recent years was the addition of two new look-back windows: a 20-day and a 65-day. While the regular daily NH-NL compares each day's high and low to the high-low range for the preceding year, a 20-day NH-NL compares it only to the preceding month and a 65-day NH-NL to the preceding quarter. These shorter-term views of the NH-NL are useful for short-term timing. - -These two new time windows deliver more sensitive signals than the standard year-long NH-NL. The logic is simple: before a stock reaches a new high for the year, it must first make a new high for the month and then for the quarter. If a stock has been in a downtrend, it may take a long time to recover and reach a new yearly high, but it can reach monthly and quarterly highs much sooner. - -In addition to the usual signals, such as trends and divergences, a very sharp shortterm buy signal occurs when the 20-day NH-NL drops below minus 500 and then rallies above that level. It shows that the market has touched and rejected a shortterm bearish extreme, and afterwards it usually launches a short-term rally. We call this a "Spike bounce" signal (see Chapter 54). - -Tracking market leaders with the help of NH-NL helps improve timing. There are two ways to utilize the New High–New Low signals. First, since individual stocks largely depend on broad market trends, we can use NH-NL signals to decide when to buy or sell our stocks. Furthermore, we can use NH-NL signals to trade vehicles that track the broad market, such as the S&P e-mini futures. - -## ■ **35. Stocks above 50-Day MA** - -This broad stock market indicator is based on the key concepts regarding prices and moving averages (Figure 35.1). Each price represents a momentary consensus of value among market participants, while a moving average represents an average consensus of value during its time window. This means that when a stock trades above its MA, the current consensus of value is above average—bullish. When a stock trades below its MA, the current consensus of value is below average—bearish. - -When the market is trending higher, the percentage of stocks above their moving averages keeps growing. In a broad downtrend, the number of stocks above their MAs keeps shrinking. - -**FIGURE 35.1** S&P 500 weekly and 26-week MA; Stocks above 50 MA with reference lines at 75% and 25%. *(Chart by TradeStation)* - -#### Stocks above 50-Day MA - -When the "stocks above their 50-day MA" indicator reaches an extreme—above 75% or below 25% and then moves away from that level, it shows that the intermediate-term trend has reached a likely turning point. A reversal of this indicator flashes a signal for the entire market: buy when it turns up and sell when it turns down. In the latter part of 2013, as the market started going up with almost no pullbacks, buy signals from upside reversals began to occur at levels higher than 25%. These signals don't mark every reversal—no indicator does—but when it flashes its signal, we had better pay attention. - -This indicator tracks all stocks traded on the New York Stock Exchange, American Exchange, and NASDAQ and calculates how many of them trade above their moving averages. It plots that percentage as a line that fluctuates between 0% and 100%. We can use the pattern of this line to confirm market trends and anticipate reversals. - -The indicator for tracking the number of stocks above their 50-day MAs is included in many software packages. I like to view it on a weekly chart, where it helps catch intermediate reversals—market turns that augur in trends that last anywhere from several weeks to several months. You don't need to look at this indicator daily, but it can be an important part of weekend homework. - -In theory, the highest possible reading of this indicator would be 100%, if all stocks rallied above their MAs. Its lowest possible reading of 0% would occur if all stocks were to fall below their MAs. In practice, only exceptional market moves swing it near the 90% or 10% extremes. Normally, this indicator tends to top out near 75% and bottom out near 25%. I draw two reference lines on its chart at 75% and 25% and start looking for the market turn as this indicator approaches those levels. - -The percentage of stocks above their 50-day MA gives its trading signals not by reaching any certain levels but rather by reversing near those levels. It signals the completion of a top by rising to or above the upper reference line and then sinking below that line. It signals that a bottom has been formed when it falls below or even near the lower reference line and then turns up. - -Notice that the tops of this indicator tend to be broad, while its bottoms are sharper. Tops are formed by greed, which is a happier, longer-lasting emotion. Bottoms are formed by fear—a more intense and shorter-lived emotion. - -While some of this indicator's signals are right on time in catching reversals, others mark only temporary pauses in major trends. Let this serve as a reminder never to rely on a single indicator for trading decisions. Use multiple tools: when they confirm each other's signals, they reinforce one another. - -## ■ **36. Other Stock Market Indicators** - -Only a handful of general market indicators have stood the harsh test of time. Many that used to be popular in previous decades have been swept away by the flood of new trading vehicles. The New High–New Low Index and Stocks Above 50-day MA, reviewed above, continue to work because of their clear logic. Several other indicators are listed below. Whatever tools you choose, be sure to understand how they work and what exactly they measure. Select a few and track them on a regular basis, until you come to trust their signals. - -## **Advance/Decline** - -The Advance/Decline line (the A/D line) tracks the degree of mass participation in rallies and declines. Each day it adds up the number of stocks that closed higher and subtracts the number of stocks that closed lower. - -While the Dow Jones Industrials track the behavior of the generals and the New High–New Low Index focuses on the officers, the A/D line shows whether soldiers are following their leaders. A rally is more likely to persist when the A/D line rises to a new high, while a decline is likely to deepen if A/D falls to a new low in step with the Dow. - -The A/D line is based on the day's closing prices for each stock at any exchange: take the number of advancing stocks, subtract the number of declining stocks, and ignore unchanged stocks. The result will be positive or negative, depending on whether more stocks advanced or declined during the day. For example, if 4,000 stocks were traded, 2,600 advanced, 900 declined, and 500 were unchanged, then Advance/Decline equals +1,700 (2,600−900). Add each day's Advance/Decline figures to the previous day's total to create a cumulative A/D line (Figure 36.1). - -#### Advance/Decline Line - -The turns of this indicator usually coincide with price turns, but occasionally precede them. This ability to give early warnings makes A/D line worth following. In area A, prices are scratching the bottom and make a new low, while the uptrend of the A/D line calls for a rally. In area B, the opposite occurs—prices press higher, while a downturn of the A/D line calls for a decline. In area C, prices continue to decline, while the A/D line turns up and calls for a rally. Those warnings don't occur at every turning point. - -Traders should watch for new peaks and valleys in the A/D line rather than its absolute levels, which depend on its starting date. If a new high in the stock market is accompanied by a new high of the A/D line, it shows that the rally has broad support and is likely to continue. Broadly based rallies and declines have greater staying power. If the stock market reaches a new peak, but the A/D line reaches a lower peak than during the previous rally, it shows that fewer stocks are participating, and the rally may be near its end. When the market falls to a new low but the A/D line traces a shallower bottom than during the previous decline, it shows that the decline is narrowing down and the bear move is nearing an end. These signals tend to precede reversals by weeks if not months. - -The **Most Active Stocks indicator** (MAS) is an Advance/Decline line of the 15 most active stocks on the New York Stock Exchange. It used to be listed daily in many newspapers. Stocks appeared on this list when they caught the public's eye. MAS was a big money indicator—it showed whether big money was bullish or bearish. When the trend of MAS diverged from the price trends, the market was especially likely to reverse. - -Hardly anyone today uses an indicator called **TRIN**, which was important enough to have its own chapter in the original *Trading for a Living*. Very few people track another formerly popular indicator called **TICK**. Old stock market books are full of fascinating indicators, but you have to be very careful using them today. Changes in the market over the years have killed many indicators. - -Indicators based on the volume of **low-priced stocks** lost their usefulness when the average volume of the U.S. stock market soared and the Dow rose tenfold. The **Member Short Sale Ratio** and the **Specialist Short Sale Ratio** stopped working after options became popular. Member and specialist short sales are now tied up in the intermarket arbitrage. **Odd-lot** statistics lost value when conservative odd-lotters bought mutual funds. The **Odd-lot Short Sale Ratio** stopped working when gamblers discovered puts. - -## ■ **37. Consensus and Commitment Indicators** - -Most private traders keep their opinions to themselves, but financial journalists, letter writers, and bloggers spew them forth like open hydrants. Some writers may be very bright, but the financial press as a whole has a poor record of market timing. Financial journalists and letter writers tend to overstay trends and miss turning points. When these groups become intensely bullish or bearish, it pays to trade against them. - -It's "monkey see, monkey do" in the publishing business, where a journalist's or an advisor's job may be endangered by expressing an opinion that differs too sharply from his group. Standing alone feels scary, and most of us like to huddle. When financial journalists and letter writers reach a high degree of bullish or bearish consensus, it's a sign that the trend has been going on for so long that a reversal is near. - -Consensus indicators, also called contrary opinion indicators, are not suitable for precision timing, but they draw attention to the fact that a trend is near its exhaustion level. When you see that message, switch to technical indicators for more precise timing of a trend reversal. - -A trend can continue as long as bulls and bears remain in conflict. A high degree of consensus precedes reversals. When the crowd becomes highly bullish, get ready to sell, and when it becomes strongly bearish, get ready to buy. This is the contrary opinion theory, whose foundations were laid by Charles Mackay, a Scottish barrister. His classic book, *Extraordinary Popular Delusions and the Madness of Crowds* (1841) describes the infamous Dutch Tulip Mania and the South Seas Bubble in England. Humphrey B. Neill in the United States applied the theory of contrary opinion to stocks and other financial markets. In his book, *The Art of Contrary Thinking*, he made it clear why the majority must be wrong at the market's turning points: prices are established by crowds, and by the time the majority turns bullish, there aren't enough new buyers to support a bull market. - -Abraham W. Cohen, an old New York lawyer whom I met in the early 1980s, came up with the idea of polling market advisors and using their responses as a proxy for the entire body of traders. Cohen was a skeptic who spent many years on Wall Street and saw that advisors as a group performed no better than the market crowd. In 1963, he established a service called *Investors Intelligence* for tracking letter writers. When the majority of them became bearish, Cohen identified a buying opportunity. Selling opportunities were marked by strong bullishness among letter writers. Another writer, James H. Sibbet, applied this theory to commodities, setting up an advisory service called *Market Vane*. - -## **Tracking Advisory Opinion** - -Letter writers follow trends out of fear of losing subscribers by missing major moves. In addition, bullishness helps sell subscriptions, while bearish comments turn off subscribers. Even in a bear market, we rarely see more bears than bulls among advisors for more than a few weeks at a time. - -The longer a trend continues, the louder the letter writers proclaim it. They are most bullish at market tops and most bearish at market bottoms. When the mass of letter writers turns strongly bullish or bearish, it's a good idea to look for trades in the opposite direction. - -Some advisors are very skilled at doubletalk. The man who speaks from both sides of his mouth can claim that he was right regardless of what the market did, but editors of tracking services have plenty of experience pinning down such lizards. - -When the original *Trading for a Living* came out, only two services tracked advisory opinions: *Investors Intelligence* and *Market Vane*. In recent years, there has been an explosion of interest in behavioral economics, and today many services track advisors. My favorite resource is SentimenTrader.com, whose slogan is "Make emotion work for you instead of against you." Jason Goepfert, its publisher, does a solid job of tracking mass market sentiment. - -## **Signals from the Press** - -To understand any group of people, you must know what its members crave and what they fear. Financial journalists want to appear serious, intelligent, and informed; they are afraid of appearing ignorant or flaky. That's why it's normal for them to straddle the fence and present several sides of every issue. A journalist is safe as long as he writes something like "monetary policy is about to push the market up, unless unforeseen factors push it down." - -Internal contradiction is the normal state of affairs in financial journalism2 . Most financial editors are even more cowardly than their writers. They print contradictory articles and call this "presenting a balanced picture." - -For example, an issue of a major business magazine had an article headlined "The Winds of Inflation Are Blowing a Little Harder" on page 19. Another article on page 32 of the same issue was headlined "Why the Inflation Scare Is Just That." It takes a powerful and lasting trend to lure journalists and editors down from their fences. This happens only when a tide of optimism or pessimism sweeps up the market near the end of a major trend. When journalists start expressing strongly bullish or bearish views, the trend is ripe for a reversal. - -This is why the front covers of major business magazines serve as contrarian indicators. When a leading business magazine puts a bull on its cover, it's usually a good time to take profits on long positions, and when a bear graces the front cover, a bottom cannot be too far away. - -## **Signals from Advertisers** - -A group of three or more ads touting the same "opportunity" in a major newspaper or magazine warns of an imminent top. This is because only a well-established uptrend can break through the inertia of several brokerage firms. By the time all of them recognize a trend, come up with trading recommendations, produce ads, and place them in a newspaper, that trend is very old indeed. - -The ads on the commodities page of *The Wall Street Journal* appeal to the bullish appetites of the least-informed traders. Those ads almost never recommend selling; it is hard to get amateurs excited about going short. You'll never see an ad for an investment when its price is low. When three or more ads on the same day tout gold or silver, it is time to look at technical indicators for shorting signals. - -2 And not only journalism: in 2013 three academicians shared a Nobel Prize in economics. The work of one of them showed that the market was efficient and couldn't be timed; the work of another showed that the market was irrational and could be timed. Take your pick and wait for next year's prize. - -**FIGURE 37.1** Monthly total dollar value of OTC stocks. *(Courtesy SentimenTrader.com)* - -Money pours into penny stocks when the market is up, dries up when it is down. This is reflected in the monthly reports of penny stock volume at the NASDAQ. After markets have hit new highs and the news is good, volume often spikes up for these "lottery ticket" stocks. When the stock market hits the skids, their volume dries up. - -A more malignant breed of promoters appeared on the scene in the past decade: thanks to the Internet, "pump and dump" operators have migrated online. The scammers touting penny stocks know that they need to wait for an uptrend to hook their victims. Whenever a higher than usual number of promo pitches starts showing up in my spam filter, the top can't be too far away (Figure 37.1). - -## **Commitments of Futures Traders** - -Government agencies and exchanges collect data on buying and selling by various groups of traders and publish summary reports of their positions. It pays to trade with the groups that have a track record of success and against those with track records of persistent failure. - -For example, the Commodity Futures Trading Commission (CFTC) reports long and short positions of hedgers and big speculators. Hedgers—the commercial producers and consumers of commodities—are the most successful market participants. The Securities and Exchange Commission (SEC) reports purchases and sales by corporate insiders. Officers of publicly traded companies know when to buy or sell their shares. - -Positions of large futures traders, including hedge funds, are reported to the CFTC when their sizes reach the so-called **reporting levels**. At the time of this writing, if you are long or short 250 contracts of corn or 200 contracts of gold, the CFTC classifies you as a big speculator. Brokers report those positions to the CFTC, which compiles the data and releases summaries on Fridays. - -The CFTC also sets up the maximum number of contracts a speculator is allowed to hold in any given market— these are called **position limits.** Those limits are set to prevent very large speculators from accumulating positions that are big enough to bully the markets. - -The CFTC divides all market participants into three groups: commercials, large speculators, and small speculators. **Commercials**, also known as **hedgers**, are firms or individuals who deal in actual commodities in the normal course of their business. In theory, they trade futures to hedge business risks. For example, a bank trades interest rate futures to hedge its loan portfolio, while a food processing company trades wheat futures to offset the risks of buying grain. Hedgers post smaller margins and are exempt from speculative position limits. - -**Large speculators** are those whose positions have reached reporting levels. The CFTC reports buying and selling by commercials and large speculators. To find the positions of **small traders**, you need to take the open interest and subtract from it the holdings of the first two groups. - -The divisions between hedgers, big speculators, and small speculators are somewhat artificial. Smart small traders grow into big traders, dumb big traders become small traders, and many hedgers speculate. Some market participants play games that distort the CFTC reports. For example, an acquaintance who owns a brokerage firm sometimes registers his wealthy speculator clients as hedgers, claiming they trade stock index and bond futures to hedge their stock and bond portfolios. - -The commercials can legally speculate in the futures markets using inside information. Some of them are big enough to play futures markets against cash markets. For example, an oil firm may buy crude oil futures, divert several tankers, and hold them offshore in order to tighten supplies and push up futures prices. They can take profits on long positions, go short, and then deliver several tankers at once to refiners in order to push crude futures down a bit and cover shorts. Such manipulation is illegal, and most firms hotly deny that it takes place. - -As a group, commercials have the best track record in the futures markets. They have inside information and are well-capitalized. It pays to follow them because they are successful in the long run. Big speculators used to be successful wealthy individuals who took careful risks with their own money. That has changed, and today most big traders are commodity funds. These trend-following behemoths do poorly as a group. The masses of small traders are the proverbial "wrong-way Corrigans" of the markets. - -It is not enough to know whether a certain group is short or long. Commercials often short futures because many of them own physical commodities. Small traders are usually long, reflecting their perennial optimism. To draw valid conclusions from the CFTC reports, you need to compare current positions to their historical norms. - -## **Legal Insider Trading** - -Officers and investors who hold more than 5 percent of the shares in a publicly traded company must report their buying and selling to the Securities and Exchange Commission. The SEC tabulates insider purchases and sales, and releases this data to the public. - -Corporate insiders have a long record of buying stocks when they're cheap and selling them high. Insider buying emerges after severe market drops, and insider selling accelerates when the market rallies and becomes overpriced. - -Buying or selling by a single insider matters little: an executive may sell shares to meet major personal expenses or he may buy them to exercise stock options. Analysts who researched legal insider trading found that insider buying or selling was meaningful only if more than three executives or large stockholders bought or sold within a month. These actions reveal that something very positive or negative is about to happen. A stock is likely to rise if three insiders buy in one month and to fall if three insiders sell within a month. - -Clusters of insider buying tend to have a better predictive value than clusters of selling. That's because insiders are willing to sell a stock for many reasons (diversification, buying a second home, sending a kid to college) but they are willing to buy for one main reason—they expect their company's stock to go up. - -## **Short Interest** - -While the numbers of futures and options contracts held long and short is equal by definition, in the stock market there is always a huge disparity between the two camps. Most people, including professional fund managers, buy stocks, but very few sell them short. - -Among the data reported by exchanges is the number of shares being held short for any stock. Since the absolute numbers vary a great deal, it pays to put them into a perspective by comparing the number of shares held short to that stock's float (the total number of publicly owned shares available for trading). This number, "**Short Percent of Float**," tends to run about one or two percent. Another useful way to look at short interest is by comparing it to the average daily volume. By doing this, we ask a hypothetical question: if all shorts decided to cover, while all other buyers stood aside and daily volume remained unchanged, how many days would it take for them to cover and bring short interest down to zero? This "**Days to Cover**" number normally oscillates between one and two days. - -When planning to buy or short a stock, it pays to check its Short Percent of Float and Days to Cover. If those are high, they show that the bearish side is overcrowded. - -| Apple Incorporated | \$534.97 | Green Mountain Coffee Roasters | \$119.74 | -|--------------------------------------|------------|---------------------------------------|------------| -| AAPL | $-1.00$ | GMCR | 0.34 | -| Daily Short Sale Volume | view | Daily Short Sale Volume | view | -| Short Interest (Shares Short) | 16.538.900 | Short Interest (Shares Short) | 32.931.300 | -| Days To Cover (Short Interest Ratio) | 0.9 | Days To Cover (Short Interest Ratio) | 15.1 | -| Short Percent of Float | 1.86 % | Short Percent of Float | 25.76 % | -| | | | | - -**FIGURE 37.2** AAPL and GMCR shorting data. *(Source: Shortsqueeze.com)* - -### Short Interest and Days to Cover - -Compare short interest data for two popular stocks on the day I'm editing this chapter. "Short Percent of Float" is 1.86% for Apple, Inc. (AAPL), but nearly 26% for Green Mountain Coffee Roasters, Inc. (GMCR). "Days to Cover" are 0.9 for AAPL but over 15 for GMCR. These numbers reflect much more aggressive shorting of GMCR. Not to forget, each and every one of those shorts at some point will need to buy in order to cover his short position. - -Perhaps savvy shorts know something very bad about GMCR, but what if its stock rallies even a little? Many bears will run for cover, and as they scramble to cover shorts, the stock may soar. Whatever its long-term prospects, it could be sent flying in the near term. - -A rally may scare those bears into panicky covering, and send the stock sharply higher. That would be good for bulls but bad for bears. - -Fear is a stronger emotion than greed. Bulls may look for bargains but try not to overpay, while squeezed bears, facing unlimited losses, will pay any price to cover. That's why short-covering rallies tend to be especially sharp. - -Whenever you look for a stock to buy, check its Short Percent of Float and Days to Cover. The usual, normal readings don't provide any great information, but the deviations from the norm often deliver useful insights (Figure 37.2). - -High shorting numbers mark any stock as a dangerous short. By extension, if your indicators suggest buying a stock, its high short interest becomes an additional positive factor—there is more fuel for a rally. It makes sense for swing traders to include the data on shorting when selecting which of several stocks to buy or sell short. I always review these numbers when working up a potential trade. diff --git a/trading/The New Trading for a Living/011_PART 7 Trading Systems.md b/trading/The New Trading for a Living/011_PART 7 Trading Systems.md deleted file mode 100644 index 797e25c083a2d4dd2ebf988d9075729f83c79e52..0000000000000000000000000000000000000000 --- a/trading/The New Trading for a Living/011_PART 7 Trading Systems.md +++ /dev/null @@ -1,442 +0,0 @@ -# Trading Systems - -A system is a set of rules for finding, entering, and exiting trades. Every serious trader has one or more systems. Compare this to a surgeon who has systems for performing operations. He doesn't waste time and energy deciding whether to order anesthesia, where to make the cut, or how to find the sick organ. He follows a well-established routine, which leaves him free to think about strategic issues, finesse his technique, or deal with any complications. - -Some people use strictly defined systems that leave very little room for personal judgment—we call them mechanical traders. Others use systems that leave plenty of room for personal decisions—we call them discretionary traders. There is a very thoughtful discussion on matching one's personality type to various trading styles in Richard Weissman's book *Mechanical Trading Systems*. Whatever approach you take, the key advantage of any system is that you design it when the markets are closed and you feel calm. A system becomes your anchor of rational behavior amidst the turbulence of the market. - -It goes without saying that a proper system is written down. This needs to be done because it's easy to forget some essential steps when stressed by live markets. Dr. Atul Gawande in his remarkable book *The Checklist Manifesto* makes a convincing case for using checklists to raise performance levels in a large variety of demanding endeavors, from surgery and construction to trading. - -A mechanical trader develops a set of rules, back-tests them on historical data, and then puts his system on autopilot. Going forward, his software starts flashing orders for entries, target, and stops, and a mechanical trader is supposed to place them exactly as shown. Whether he'll stick to his plan or attempt to tweak or override those signals is another story, but that's how the system is supposed to work. - -An amateur feels relieved that a mechanical system, either his own or purchased from a vendor, will relieve him from the stress of decision making. Unfortunately, market conditions keep changing, and mechanical systems eventually get out of gear and start losing money. The market is not a mechanical entity that follows the laws of physics. It is a huge crowd of people acting in accordance with imperfect laws of mass psychology. Mechanical methods can help, but trading decisions must take psychology into account. - -A professional trader with a mechanical system continues to monitor its performance like a hawk. He knows the difference between a normal drawdown and a period when a system goes out of gear and has to be shelved. A professional trader can afford to use a mechanical system precisely because he is capable of discretionary trading! A mechanical system is an action plan, but some degree of judgment is always required, even with the best and most reliable plans. - -A discretionary trader approaches each day in the markets afresh. He tends to examine more factors than a mechanical trader, weigh them differently at different times, and be more attuned to changes in current market behavior. A good discretionary system, while giving you plenty of freedom, includes several inviolate rules, especially in the area of risk management. - -Both approaches have pluses and minuses. On the plus side, mechanical trading can be less emotionally tense. You build your system, turn it on, and go about your life without watching every tick. On the minus side, these living and breathing markets have a sneaky way of changing their tunes and behaving differently from how they did when you built your system. - -The main plus of discretionary trading is the openness to fresh opportunities. Its biggest minus is that people's judgment tends to slip under stress, when they become excited by greed or frightened by sharp moves. - -In my experience, mechanical traders tend to deliver more steady results, but the most successful traders use discretionary methods. Your choice is likely to depend on your temperament. That's how we make some of our most important decisions in life where to live, what career to pursue, whom to marry. Our key choices stem from the innermost core of our personalities rather than rational thought. In trading, cooler and more obsessional people tend to gravitate toward mechanical trading, while the more swashbuckling types turn to discretionary trading. - -Paradoxically, at the high end of performance, these two approaches begin to converge. Advanced traders combine mechanical and discretionary methods. For example, a friend who is a died-in-the-wool mechanical trader uses three systems in his hedge fund but keeps rebalancing capital allocated to each of them. He shifts millions of dollars from System A to System B or C, and back again. In other words, his discretionary decisions augment his systematic trading. I am a discretionary trader, but follow several strict rules that prohibit me from buying above the upper channel line, shorting below the lower channel line, or putting on trades against the Impulse system (described below). These mechanical rules reduce the number of bad discretionary trades. - -Much of this book deals with discretionary trading, but you can use the tools described in it for mechanical trading. I wrote this book to help both types of traders. - -## ■ **38. System Testing, Paper Trading, and the Three Key Demands for Every Trade** - -Before trading real money with a system, you need to test it, whether you developed it yourself or bought it from a vendor. This can be done in one of two ways. One is backtesting: apply your system's rules to a stretch of historical data, usually several years' worth. The other is forward-testing: trade small positions with real money. Serious traders begin with **backtesting**, and if its results look good, switch to **forward-testing**; if that works well, they gradually increase position size. - -Looking at printouts of historical results is a nice start, but don't let good numbers lull you into a false sense of security. The profit-loss ratio, the longest winning and losing streaks, the maximum drawdown, and other parameters may appear objective, but past results don't guarantee the system will hold up in the real world of trading. - -You may see a very nice printout, but what if, once you begin to trade real money, that system delivers five losses in a row? Nothing in your paper testing will have prepared you for that, but it happens all the time. You grit your teeth and put on another trade. Another loss. Your drawdown is deepening, and then the system flashes a new signal. Will you put on the next trade? Suddenly, an impressive printout looks like a very thin reed on which to hang the future of your account. - -There is a cottage industry of programmers who back-test systems for a fee. Some traders, too suspicious to disclose their "sure-fire methods," spend months learning to use testing software. In the end, only one kind of backtesting prepares you to trade—manual testing. It is slow, time-consuming, and cannot be automated, but it's the only method that comes close to modeling real decision making. It consists of going through historical data one day at a time, scrupulously writing down your trading signals for the day ahead, and then clicking one bar forward and recording new signals and trades for the next day. - -Begin by downloading daily price and volume data for your trading vehicle for a minimum of two years (for futures you may use continuous contracts). Open a chart and, without looking, swing immediately to its very beginning. Open your spreadsheet, write down your system's rules at the top of the page, and create columns for dates, prices, and signals. Open two windows in your analytic program—one for your weekly chart and its indicators, the other for the daily chart. The two most important keyboard keys for testing are and because they let you switch between windows and programs. - -As you click forward, one day at a time, trends and trading ranges will slowly unfold and challenge you. At that point, you'll be doing much more than testing a set of rules. Moving ahead one day at a time will test and improve your decision-making skills. This **one-bar-at-a-time testing** is vastly superior to what you can get from backtesting software. - -How will you deal with gap openings, when the market leaps above your buy level or drops below your stop at the opening bell? What about limit moves in futures? Clicking forward one day at a time and writing down your signals and decisions will get you as close to real trading as you can without risking cash. It'll keep you focused on the raw right edge of the market. You'll never get that from a neat printout of a system test. Manual testing will improve your ability not only to understand the markets but to make decisions. - -If one-bar-at-a-time testing shows positive results, start trading small positions with real money. These days, with brokerage commissions as low as \$1 for buying or selling 100 shares, you can test your indicators and systems while risking tiny amounts. Be sure to keep good records, and if your real-money results continue positive, start increasing the size of your trades. Do it in steps, all the way up to your normal trade size. - -## **Paper Trading** - -Paper trading means recording your buy and sell decisions and tracking them like real trades, but with no money at risk. Beginners may start out paper trading, but most people turn to it after getting beat up by the markets. Some even alternate between real and paper trades and can't understand why they seem to make money on paper but lose whenever they put on a real trade. There are three reasons. - -First, people are less emotional with paper trades, and good decisions are easier to make with no money at risk. Second, in paper trades, you always get perfect fills, unlike real trading. Third and most important, good trades often look murky when you consider them. The easy-looking ones are more likely to lead to problems. A nervous beginner jumps into obvious-looking trades and loses money, but paper trades the more challenging ones. It goes without saying that hopping between real and paper trades is sheer nonsense. You either do the one or the other. - -Psychology plays a huge role in how your trades turn out, and that's where paper trading fails to deliver. Pretend-trading with no money at risk is like sailing on a pond—it does little to prepare you for real sailing on a stormy sea. - -There is only one good reason to paper trade—to test your discipline as well as your system. - -If you can download your data at the end of each day, do your homework, write down your orders for the day ahead, watch the opening and record your entries, then track your market each day, adjusting your profit targets and stops—if you can do all of this for several months in a row, recording your actions, without skipping a day—then you have the discipline to trade real money. An impulsive person who trades for entertainment will not be able to paper trade that way because it requires real work. - -You may open an account with one of several websites set up for paper trading. Enter your orders, check whether they have been triggered, and write down those "fills." Enter all paper trades in your spreadsheet and your trading diary. If you have the willpower to repeat this process daily for several months, then you have the discipline for successful real trading. - -Still, there is no substitute for trading real money because even small amounts rev up emotions more than any paper trade. You'll learn much more from even small real trades than from months of paper trading. - -In recent years, I've had a front row seat watching traders progress from paper trading to profitable real-money trading. In SpikeTrade.com, we reduce fees for members who contribute picks, creating an incentive to do homework. The discipline of submitting a weekly trade plan with entry, target, and stop gets people into the habit of being organized and focused. As their picks improve, they start earning performance bonuses in our weekly competition. At that point, I may receive an e-mail saying that while they're doing well in the competition, their private trading lags behind. I tell them they're on the right track and to continue what they're doing. Sure enough, several months later their new skills migrate into real trading. Now they may write that their private trading is better than their performance in the competition. Sure—I reply—it's because you pay more attention to real-money trades! - -Speaking of trade setups, it's essential to write down all relevant numbers before you enter a trade. You're more objective before you put any money at risk; once in a trade, you'll be tempted to give it "more room to run." That's how losers turn small drawdowns into disasters. I once consulted a man who refused to take a \$200 loss until it ran into a \$98,000 wipeout. - -We'll focus on risk and money management in a later chapter when I discuss the concept of "The Iron Triangle of risk control." At this point, I only want to make clear that risk management is the essential part of serious trading. Forget the days when you would look at the ceiling and say, "I'll trade 500 shares," "I'll trade a thousand shares," or any other arbitrary number. Later in this book, you'll learn a simple formula for sizing your trades, based on your account and risk tolerance. - -At the time of this writing, I have three strategies that I trade. My favorite is a false breakout with a divergence. My second choice is a pullback to value during a powerful trend—that's the strategy of the trade shown on the screen (Figure 38.1). Last, I occasionally "fade an extreme"—bet on a reversal of an overstretched trend. Each of these strategies has its rules, but the key point is this—I'll only take a trade that fits one of them. No chasing of random cars for this old dog! - -## **Three Key Demands for Every Trade** - -There are three essential angles that must be considered for every planned trade. We'll briefly review them here and then elaborate in the chapters on specific trading - -#### **FIGURE 38.1** Three key demands for every planned trade.*(Source: SpikeTrade.com)* - -This is a screenshot of a trade plan I drew several days prior to writing this chapter (you can see how I implemented it in Chapter 55). Notice several essential features that belong in every trade plan: - -- A. Trade setup—write down the three key numbers for every trade: your entry, target, and stop. Before entering the market you need to decide how much you'll pay, how much you'll risk, and how much you expect to gain. The ratio of potential reward to risk should normally be better than two to one. The only time to deviate from this rule is when technical signals are especially strong. Of course, don't fudge your target to turn a borderline trade into an acceptable one. Your target needs to be realistic. -- B. Risk management—decide in advance how many dollars you're prepared to risk on this trade. Divide that amount by your risk per share—the distance from your entry to your stop. This will give you the number of shares you may trade. -- C. Last but not least, every single trade must be based on a specific system or strategy. "It looks good to me" isn't a system! It's easy to become excited after hearing a stock tip or seeing a runaway trend, but the days of chasing stocks like a pup chases cars are over. If you want to trade for a living, you need to define your trade plans, strategies, or systems—call them what you like—and enter only those trades that fit their criteria. - -systems and risk management. The discipline of these three demands is essential for anyone serious about trading. - -## ■ **39. Triple Screen Trading System** - -I developed this system and first presented it to the public in an April 1986 article in *Futures* magazine. I've been using it for trading since 1985, and it stood the test of time. I continue to tweak it, adding or changing minor features, but its basic principle remains unchanged: making trading decisions using a sequence of timeframes and indicators. - -Triple Screen applies three tests or screens to every trade. Many trades that seem attractive at first are rejected by one or another screen. The trades that pass the Triple Screen test are much more likely to succeed. - -The Triple Screen combines trend-following indicators on long-term charts with counter-trend oscillators on the intermediate charts. It uses special entry techniques for buying or selling short as well as tight money management rules. The Triple Screen is more than a trading system: it is a method, a style of trading. - -## **Trend-Following Indicators and Oscillators** - -Beginners often look for a magic bullet—a single indicator for making money. If they get lucky for a while, they feel as if they discovered the royal road to riches. When the magic dies, amateurs give back their profits with interest and look for another magic tool. The markets are too complex to be analyzed with a single indicator. - -Different indicators give contradictory signals in the same market. Trend-following indicators rise during uptrends and give buy signals, while oscillators become overbought and give sell signals. Trend-following indicators turn down in downtrends and give signals to sell short but oscillators become oversold and give buy signals. - -Trend-following indicators are profitable when markets are moving but lead to whipsaws in trading ranges. Oscillators are profitable in trading ranges, but give premature and dangerous signals when the markets begin to trend. Traders say: "The trend is your friend," and "Let your profits run." They also say: "Buy low, sell high." But why sell if the trend is up? And how high is high? - -Some traders try to average out the signals of trend-following indicators and oscillators, but those votes are easy to rig. Just as Republicans and Democrats in the United States keep redrawing electoral districts to create "safe" seats, traders keep selecting indicators that deliver the votes they want to see. If you use more trend-following tools, the vote will go one way, and if you use more oscillators, it'll go the other way. A trader can always find a group of indicators telling him what he wants to hear. - -The Triple Screen trading system is designed to filter out the disadvantages of trend-following indicators and oscillators, while preserving their strengths. - -## **Choosing Timeframes—the Factor of Five** - -Another major dilemma is that the trend of any trading vehicle can be both up and down at the same time, depending on what charts you use. A daily chart may show an uptrend, while a weekly chart shows a downtrend, and vice versa. We need a system to handle conflicting signals in different timeframes. - -Charles Dow, the author of the venerable Dow Theory, stated at the turn of the twentieth century that the stock market had three trends. The long-term trend lasted several years, the intermediate several months, and anything shorter than that was a minor trend. Robert Rhea, the great market technician of the 1930s, compared these three trends to a tide, a wave, and a ripple. He recommended trading in the direction of the tide, taking advantage of the waves, and ignoring the ripples. - -Times have changed, and the markets have become more volatile. Computers are cheap, or even free; live data have created better opportunities to capitalize on faster moves. We need a more flexible definition of timeframes. The Triple Screen trading system is based on the observation that every timeframe relates to the larger and shorter ones by approximately a factor of five (see Chapter 32). - -Begin by asking yourself, what's your favorite timeframe. Do you prefer working with the daily, 10-minute, or any other charts? Whatever timeframe is your favorite, the Triple Screen calls that the **intermediate** timeframe. The **long-term** timeframe is one order of magnitude longer. The **short-term** timeframe is one order of magnitude shorter. Once you select your intermediate timeframe, you may not look at it until you examine the longer-term timeframe and make your strategic decision there. For example, if you want to carry a trade for several days or weeks, then your intermediate timeframe is likely to be defined by the daily charts. Weekly charts are one order of magnitude longer, and they'll determine the long-term timeframe for you. Hourly charts are one order of magnitude shorter, and they'll determine the short-term timeframe. - -Day traders who hold their positions for less than an hour can use the same principle. For them, a 5-minute chart may define the intermediate timeframe, a 25-minute chart the long-term timeframe, and a 2-minute chart the short-term timeframe. - -Triple Screen demands that you examine the long-term chart first. It allows you to trade only in the direction of the tide—the trend on the long-term chart. It uses the waves that go against the tide for entering positions. For example, when the weekly trend is up, daily declines create buying opportunities. When the weekly trend is down, daily rallies provide shorting opportunities. - -## **First Screen—Market Tide** - -Triple Screen begins by analyzing the long-term chart, one order of magnitude greater than the one you plan to trade. Most traders pay attention only to the daily charts, with everybody watching the same few months of data. If you begin by analyzing weekly charts, your perspective will be five times greater than that of your competitors. Begin by selecting your favorite timeframe and call it Intermediate. Do not even glance at your intermediate chart because it'll prejudice you. Go immediately to the timeframe one order of magnitude longer—your long-term chart. That's where you'll make your strategic decision to be a bull or a bear. After that, return to the intermediate timeframe and start making tactical decisions, such as where to enter and where to place a stop. - -If you make the mistake of looking at the daily chart first, you'll be prejudiced by its patterns. First, make an unbiased decision on a long-term weekly chart before even glancing at the daily. - -The original version of Triple Screen used the slope of weekly MACD-Histogram as its weekly trend-following indicator (Figure 39.1). It was very sensitive and gave many buy and sell signals. Later I switched to using the slope of a weekly exponential moving average as my main trend-following tool on long-term charts. After I invented the Impulse system (described in the following chapter), I began to use it for - -**FIGURE 39.1** Gold weekly, with 26- and 13-EMAs and MACD-Histogram (12-26-9). *(Chart by Stockcharts.com)* - -#### Using Weekly MACD-Histogram as the First Screen of Triple Screen - -Triple Screen requires us to examine weekly charts before even looking at the dailies. The slope of MACD-Histogram is defined by the relationship between its two latest bars. - -This indicator flashes a buy signal when its slope turns up and a sell signal when its slope turns down. The best buy signals occur when MACD-Histogram turns up from below its centerline. The best sell signals are given when its slope turns down from above its centerline (see Indicator Seasons in Chapter 32). - -When the slope of MACD-Histogram turns up (arrows A, C, and E), it allows us to trade only from the long side or stand aside. When that slope turns down (arrows B and D), it allows us to trade only from the short side or stand aside. - -Note that the buy signals at A and E are of better quality than at C—because the signal C occurred above the centerline. It is better to buy in spring than in summer. At the right edge of the chart, the uptrend is very strong because the signal E came from a bullish divergence: a double bottom of prices (A and E) was accompanied by a much shallower second bottom of the indicator. - -the first screen of Triple Screen. The Impulse system combines the best features of the previous two methods. It is not quite as jumpy as MACD-Histogram but is faster to react than the slope of an EMA. - -As you'll read in the next chapter, the Impulse system colors every bar green when it's bullish, red when bearish, and blue when neutral. The Impulse system doesn't tell you what to do. It's a censorship system that signals what you're prohibited from doing. When the Impulse system is red, it prohibits you from buying. When it is green, it prohibits you from shorting. Glancing at a weekly chart when you want to buy, you have to wait until it stops being red. Glancing at a weekly chart when you want to sell short, you have to make sure it isn't green. The blue Impulse permits you to trade either way. - -Some traders use other indicators to identify major trends. Steve Notis wrote an article in *Futures* magazine showing how he used the Directional System as the first screen of Triple Screen. The principle is the same. You can use most trend-following indicators, as long as you analyze the trend on the weekly charts first and then look for trades on the daily charts only in that direction. - -Screen One Summary: Identify the weekly trend using a trend-following indicator and trade only in its direction. - -A trader has three choices: buy, sell, or stand aside. The first screen of the Triple Screen trading system takes away one of those options. It acts as a censor who permits you only to buy or stand aside during major uptrends. It allows you only to sell short or stand aside during major downtrends. You have to swim with the tide or stay out of the water. - -## **Second Screen—Market Wave** - -The second screen of Triple Screen identifies the wave that goes against the tide. When the weekly trend is up, daily declines point to buying opportunities. When the weekly trend is down, daily rallies point to shorting opportunities. - -The second screen applies oscillators, described in a previous section, to the daily charts in order to identify deviations from the weekly trend. Oscillators give buy signals when markets decline and sell signals when they rise. The second screen of the Triple Screen allows you to take only those signals on the daily charts that put you in gear with the weekly trend. - -Screen Two: Apply an oscillator to a daily chart. Use daily declines during weekly uptrends to find buying opportunities and daily rallies during weekly downtrends to find shorting opportunities. I like using Force Index, described in chapter 30, for the second screen, but other oscillators, such as RSI, Elder-ray, or Stochastic also perform well. - -When the weekly trend is up, Triple Screen takes only buy signals from daily oscillators but doesn't short their sell signals. The 2-day EMA of Force Index gives buy signals when it falls below its zero line, as long as it doesn't fall to a new multi-week low. When the weekly trend is down, Force Index gives shorting signals when it rallies above its centerline, as long as it doesn't rise to a new multi-week high (Figure 39.2). - -Other oscillators, such as Stochastic and RSI (see Chapters 26 and 27), give trading signals when they enter their buy or sell zones. For example, when weekly MACD-Histogram rises but daily Stochastic falls below 30, it identifies an oversold area, a buying opportunity. When the weekly MACD-Histogram declines but daily Stochastic rises above 70, it identifies an overbought area, a shorting opportunity. - -## **Third Screen—Entry Technique** - -The Third Screen is your entry technique, and here you have quite a bit of latitude. You can go to an even shorter time-frame, especially if you have live data, or you can use the same intermediate timeframe. - -In the original *Trading for a Living* I recommended looking for a ripple in the direction of the market tide: buying a breakout above the previous day's high for entering longs or shorting a breakdown below the previous day's low for entering shorts. - -**FIGURE 39.2** Gold daily, with 26- and 13-EMAs and 2-day Force Index. . *(Chart by Stockcharts.com)* - -#### Daily Force Index—the Second Screen of Triple Screen - -The 2-day EMA of Force index is one of several oscillators that can work for the second screen of the Triple Screen trading system. Force Index marks buying opportunities when it falls below its centerline. It marks selling opportunities when it rises above its centerline. When the weekly trend is up (marked here with a green horizontal bar), take only buy signals from the daily oscillator for entering long positions. When the weekly trend is down (marked by a red horizontal bar), take only sell signals for entering short positions. - -Notice a bullish divergence, accompanied by a false downside breakout before the start of the uptrend (marked with a diagonal green arrow). At the right edge of the screen, Gold is flying, along with most gold stocks. I'm actively buying them—but not Gold ETFs. A Traders' Camp graduate from Australia wrote the other day: "I bought XAU ETF but it is being left far behind by NCM, our biggest Gold Miner. Is that the normal scenario for ETFs?" Yes, Sir! - -The downside of that approach was that the stops were quite wide. Buying a breakout above the previous day's high and placing a stop below that day's low could mean a wide stop after a wide-range day, either putting a lot of money at risk or reducing position size. At other times, when the pre-breakout day was very narrow, placing the stop right below its low would expose that trade to the risk of being stopped out by market noise. - -The breakout technique is still valid, but I seldom use it. With the wide availability of intraday data, I like to switch to 25-minute and 5-minute charts and use daytrading techniques for entering my swing trades. If you don't have access to live data and need to place an order in the morning, before leaving for the day, I recommend an alternative approach which I call "an average EMA penetration." - -Almost every rally is penetrated by occasional pullbacks, and you want to measure how deeply those pullbacks drop below your fast EMA. Look at the daily chart for the past four to six weeks, and if it is in an uptrend, measure how deeply prices penetrate below their EMA during normal pullbacks (Figure 39.3). - -**FIGURE 39.3** Gold daily, with 26- and 13-EMAs. *(Chart by Stockcharts.com)* - -#### An Average Downside Penetration—the Third Screen of Triple Screen - -Here we zoom in on the chart from Figure 39.2. We can sharpen Triple Screen buy signals by not waiting for the 2-day Force rally back above zero. We can use its declines below zero as alerts and then place our buy orders below value, using an average downside penetration. - -- Calculate an average penetration -- Subtract yesterday's EMA level from today's and add this number to today's EMA: this will tell you where your EMA is likely to be tomorrow. -- Subtract your average penetration from your estimated EMA level for tomorrow and place your buy order there. You'll be fishing to buy at a bargain level, during a pullback—instead of paying a premium for buying a breakout. - -In the example in Figure 39.3, prices dipped below their fast EMA (colored red) on four occasions. An average downside penetration was \$9.60. At the right edge of the screen, the 13-day EMA stands at \$1,266. Deducting the recent average downside penetration from that number suggests that if today sees a spell of panic selling, we should place our buy order approximately \$9 below the latest level of EMA. We can perform this calculation on a daily basis, until we finally get an opportunity to buy low. This is a much more peaceful approach than chasing runaway prices. - -These rules are for buying during an uptrend. Reverse them for selling short in downtrends. Keep in mind though that downtrends tend to move twice as fast as uptrends. - -| Weekly Trend | Daily Trend | Action | Order | -|--------------|-------------|-------------|----------------------------------------| -| Up | Up | Stand aside | None | -| Up | Down | Go long | EMA penetration or an upside breakout | -| Down | Down | Stand aside | None | -| Down | Up | Go short | EMA penetration or a downside breakout | - -## **Triple Screen Summary** - -When the weekly trend is up and a daily oscillator declines, place a buy order below the fast EMA on the daily chart, at a level of an average downside penetration. Alternatively, place a buy order one tick above the high of the previous day. If prices rally, you will be stopped in long automatically when the rally takes out the previous day's high. If prices continue to decline, your buy-stop will not be touched. Lower your buy order the next day to the level one tick above the latest price bar. Keep lowering your buy-stop each day until stopped in or until the weekly indicator reverses and cancels its buy signal. - -When the weekly trend is down, wait for a rally in a daily oscillator and place an order to sell short above the fast EMA on the daily chart, at a level of an average upside penetration. Alternatively, place an order to sell short one tick below the latest bar's low. As soon as the market turns down, you will be stopped in on the short side. If the rally continues, keep raising your sell order daily. The aim of a trailing sell-stop technique is to catch an intraday downside breakout from a daily uptrend in the direction of a weekly downtrend. - -## **Triple Screen in Day-Trading** - -If you day-trade, you may select a 5-minute chart as your intermediate timeframe. Again, do not look at it, but go to a 25- or a 30-minute chart first, which will be your long-term chart. Make a strategic decision to be a bull or a bear on that longerterm chart, and then return to your intermediate chart to look for an entry and stop (Figure 39.4). - -**FIGURE 39.4** On the left: AMZN 30-min chart with a 13-bar EMA and 12-26-9 MACD-Histogram. On the right: AMZN 5-min chart with a 13-bar EMA, 0.6% channel, and 2-bar Force Index. *(Charts by Stockcharts.com)* - -#### Triple Screen in Day-Trading - -The shares of Amazon.com, Inc. (AMZN) are a popular trading vehicle, thanks to their volatility and liquidity. The principles of Triple Screen are the same here as on the longer-term charts. Here, a longer-term chart whose every bar represents 30 minutes of trading defines the long-term trend. With it rising, we turn to a short-term chart, whose every bar represents 5 minutes of trading. When its 2-bar Force Index dips below zero, it marks a wave that goes against the tide—an opportunity to buy at a lower price. A channel that contains approximately 95% of all prices helps set profit targets. - -A neat combination of timeframes for day-trading stocks is a set of 39- and 8-minute charts. The U.S. stock market is open from 9:30 a.m. to 4 p.m.—six and a half hours or 390 minutes. Using a 39-minute chart as your long-term screen neatly divides each day into 10 bars. Make your strategic decision there, and then drop down to a chart that's 5 times faster—an 8-minute chart—for tactical decisions on entries and exits. - -Don't mash together too many timeframes. If you're swing-trading, you can briefly use an intraday chart to time your entry, but then return to the daily charts. If you keep watching intraday charts, chances are they'll shake you out of the trade prematurely. If you day-trade, then the weekly chart is not really relevant, but you may take a quick look at the daily chart. The rule is this: select your favorite (intermediate) chart, pair it with a long-term chart that is 5 times longer, and go to work. - -## **Stops and Profit Targets** - -Proper money management is essential for successful trading. A disciplined trader takes his profits at targets, cuts losses short, and outperforms those who keep hoping and hanging on to bad trades. Before you enter a trade, write down three numbers: the entry, the target, and the stop. Placing a trade without defining these three numbers is gambling. - -Triple Screen calls for setting profit targets using long-term charts and stops on the charts of your intermediate timeframe. If you use weekly and daily charts, set profit targets on the weeklies but stops on the dailies. When buying a dip on a daily chart, the value zone on a weekly chart presents a good target. When day-trading and using a 25-minute and a 5-minute pair, set the profit target on a 25-minute chart and the stop on a 5-minute chart. This helps you aim at the greater results, while holding down the risk. - -The Triple Screen trading system calls for placing fairly tight stops. Since it has you trading in the direction of the market tide, it doesn't give much room to losing trades. Get on with the tide—or get out. We'll return to this topic in Chapter 54, "How to Set Stops." - -## ■ **40. The Impulse System** - -The idea for the Impulse system came to me in the mid-1990s. I woke up in the middle of the night in a faraway hotel and sat up bolt upright in bed with the thought that I could describe any market move in any timeframe, using only two criteria: inertia and power. By combining them, I could find stocks and futures with both bullish inertia and bullish power and trade them long. I could also find stocks and futures with both bearish inertia and power and sell them short. - -A good measure of the **inertia** of any trading vehicle is the slope of its fast EMA. A rising EMA reflects bullish inertia, while a falling EMA reflects bearish inertia. The **power** of any trend is reflected in the slope of MACD-Histogram. If its latest bar is higher than the previous bar (like the height of the letters m–M) or less deep than the previous bar (like the depth of the letters y–v), then the slope of MACD-Histogram is rising, and the power is pushing up. If the latest bar of MACD-Histogram is lower than the previous one (like the depth of the letters v–y or the height of the letters M–m), then the slope is declining, and the power is pushing down. When we use MACD-Histogram to define power, it doesn't matter whether it's above or below zero: what matters is the relationship of the last two bars of MACD-Histogram. - -It is relatively simple to program most software packages to color price bars or candles using the Impulse system. If both indicators are rising, the bar is green bullish. If both are falling, the bar is red—bearish. When the two indicators move against one another, that bar is blue—neutral (Figure 40.1). - -At first, I anticipated making this system automatic—buy green, short red, and cash checks on all colors. Backtesting the Impulse system threw cold water on that idea. The automatic system caught every single trend, but it got whipsawed during trading ranges, where it kept flipping between green and red. - -I set the Impulse system aside, but kept thinking about it. A few years later it dawned on me: this wasn't an automatic trading system—it was a censorship system! It didn't tell me what to do—it told me what not to do. If either weekly or daily bar was red—no buying allowed. If either weekly or daily bar was green—no shorting permitted. - -Ever since that discovery, I've been using the Impulse system for all my trades. I presented it to the public in my 2002 book *Come into My Trading Room*, which *Barron's* named a book of the year. The Impulse system is becoming increasingly popular worldwide, and its terminology has entered the language of trading. - -| The Impulse System | | | | | | | -|---------------------------|-----------|---------------|-----|----------------|--------------------|-----------| -| EMA | | MACD-H | | Impulse | Yes | No | -| 7 | $\ddot{}$ | | = | | Buy, stand aside | Short | -| | $\ddot{}$ | | $=$ | | Short, stand aside | Long | -| Τ | $\ddot{}$ | | $=$ | | Long or short | | -| | $\ddot{}$ | | $=$ | | Long or short | | - -#### **FIGURE 40.1** The colors of the Impulse system. - -- EMA rising & MACD-Histogram rising (especially below zero) = Impulse is green, bullish. Shorting prohibited, buying or standing aside permitted. -- EMA falling & MACD-Histogram falling (especially above zero) = Impulse is red, bearish. Buying prohibited, shorting or standing aside permitted. -- EMA rising & MACD-Histogram falling = Impulse is blue, neutral. Nothing is prohibited. -- EMA falling & MACD-Histogram rising = Impulse is blue, neutral. Nothing is prohibited. - -And that's how I've been using the Impulse system ever since (Figure 40.2). It keeps me out of trouble. I may develop my trading plans based on any number of ideas, signals, or indicators—and then the Impulse system forces me to wait until it no longer prohibits an entry in the planned direction. In addition, the Impulse system helps me recognize when a trend starts weakening and suggests an exit. - -## **Entries** - -Green and red bars of the Impulse system show when both inertia and power are pointing in the same direction. At a green bar, bulls are in charge and the uptrend is accelerating. At a red bar, bears are dominant and the downtrend is in full swing. A fast EMA and MACD-Histogram may stay in gear with each other for only a few bars, but that's when the market travels fast—the impulse is on! - -Before you start applying the Impulse system to your favorite market, remember the Triple Screen's insistence on analyzing markets in more than one timeframe. Select your favorite timeframe and call it intermediate. Multiply it by five to define your long-term timeframe. If your favorite chart is daily, analyze the weekly chart first and make a strategic decision to be a bull or a bear. Use the Impulse system to decide when you're permitted to enter long or short positions. - -- If you're a short-term momentum trader, you can buy as soon as both timeframes turn green and take profits as soon as one of them fades to blue. -- When trying to catch market turns, the best trading signals are given not by green or red but by the loss of green or red colors. - -If a stock is falling, but your analysis indicates that a bottom is near, monitor the Impulse system on weekly and daily charts. If even one of them shows red, the downtrend is still in force and buying is not permitted. When both timeframes stop being red, they allow you to buy. - -If you think that a stock is forming a top and is about to turn down, examine the Impulse system on both weekly and daily charts. If even one of them is green, it's a sign that the uptrend is still alive, and no shorting is permitted. When the green disappears from both timeframes, you may start shorting. - -The shorter a timeframe, the more sensitive its signals: the Impulse on a daily chart almost always changes colors ahead of the weekly. When day-trading, the 5-minute chart changes colors ahead of a 25-minute chart. If my studies show that the market is bottoming and getting ready to turn up, I wait until the daily chart stops being red and turns blue or even green; then I start watching the weekly chart, which is still red. As soon as it turns from red to blue, it allows me to buy. This technique saves me from buying too soon, while the market is still declining. - -I use the same approach to shorting. When I think that a top is forming and the daily Impulse stops being green and turns blue or even red, I closely monitor the weekly chart. As soon as it loses its green color, it permits me to go short. Waiting - -**FIGURE 40.2** SSYS weekly with 13- and 26-week EMAs, 12-26-9 MACD-Histogram and the Impulse system. *(Chart by Stockcharts.com)* - -### The Impulse System - -The Impulse system can sharpen any method of finding trades, whether technical or fundamental. Let's review an example, using the stock of Stratasys, Inc. (SSYS)—one of the two leading stocks in the additive manufacturing industry. In 2012, I published the world's first popular e-book on additive manufacturing in which I called for a boom in its stocks. Vertical green arrows mark bars immediately following red bars. Red prohibits you from buying. The best time to buy is immediately following red's disappearance. You can see how those green arrows pick one intermediate bottom after another, including the buy signal at the right edge of the chart. Having an objective method gives you the confidence to buy as soon as a decline screeches to a halt. - -The Impulse system also suggests good areas for profit taking. Slanted red arrows point to blue bars that occur after a series of green bars far away from value. They indicate that bulls are choking up—a good time to cash out and wait for the next buying opportunity. - -for both timeframes to lose the color that is contrary to my plan helps ensure that I trade in gear with the market and not against it. - -Remember, the Impulse system is a censorship system. It doesn't tell you what to do—but it clearly tells you what you're not allowed to do. You're not supposed to go against the censor. - -Many programs for technical analysis include a feature called "conditional formatting." It allows you color price bars or candles depending on the slope of the EMA and MACD-Histogram. A brilliant programmer in Chicago named John Bruns used this feature when he included the Impulse system in tool kits we call elder-disks1 . - -1 These are available for various trading programs, listed at elder.com. - -If you use a platform that doesn't permit conditional formatting, you can still use the Impulse system. Simply observe the slopes of the EMA and MACD-Histogram: their combination will tell you what should be the color of the latest bar. - -If you know how to program, you can add more features to the Impulse system. You can test different EMA lengths or MACD settings, looking for those that work best in your market. A day trader can program sound alarms to monitor color changes in several markets without being glued to the screen. - -## **Exits** - -If you're a short-term momentum trader, close out your trade as soon as the color of the Impulse system stops supporting the direction of your trade, even in one of the two timeframes. Usually, the daily MACD-Histogram turns ahead of the weekly. When it ticks down during an uptrend, it shows that the upside momentum is weakening. When the buy signal disappears, take profits without waiting for a sell signal. - -Reverse this procedure in downtrends. Cover shorts as soon as the Impulse system stops being red, even in one of the two timeframes. The most dynamic part of the decline is over, and your momentum trade has fulfilled its goal. - -The Impulse system encourages you to enter cautiously but exit fast. This is the professional approach to trading. Beginners tend to do the opposite; jump into trades and then take forever to exit, hoping for the market to turn their way. - -A swing trader may stay in a trade, even if one of the timeframes turns blue. What he should never do is stay in a trade against the color. If you're long, and one of the timeframes turns red, it is time to sell and go back to the sidelines. If you're short, and the Impulse system turns green, it signals to cover your short position. - -The Impulse system helps identify islands of order in the ocean of market chaos by showing when the crowd, usually so aimless and disorganized, becomes emotional and starts to run. You enter when a trend pattern emerges and exit when it starts to sink back into chaos. - -## ■ **41. Channel Trading Systems** - -Market prices tend to flow in channels, like rivers in their valleys. When a river touches the right edge of its valley, it turns left. When it touches the left rim of its valley, it turns right. When prices rally, they often seem to stop at an invisible ceiling. Their declines seem to stop at invisible floors. Channels help us anticipate where those support and resistance levels are likely to be encountered. - -Support is where buyers buy with greater intensity than sellers sell. Resistance is where sellers sell with greater intensity than buyers buy (see Chapter 18). Channels show where to expect support and resistance in the future. - -Channels help identify buying and selling opportunities and avoid bad trades. The original research into trading channels was conducted by J. M. Hurst and described in his 1970 book, *The Profit Magic of Stock Transaction Timing.* - -The late great mathematician Benoit Mandelbrot was hired by the Egyptian government to create a mathematical model of cotton prices—the main agricultural export of that country. After extensive study, the scientist made this finding: "prices oscillate above and below value." It may sound simple, but in fact it's profound. If we accept this mathematical finding and if we have the means to define value and measure an average oscillation, we'll have a trading system. We'll need to buy below value and take profits at value or sell short above value and cover at value. - -We have already agreed that value is in the zone between a short and a long moving averages. We can use channels to find normal and abnormal oscillations. - -## **Two Ways to Construct a Channel** - -We may construct a channel by plotting two lines parallel to a moving average: one above and another below. We may also vary the distance between the channel lines depending on that market's volatility (standard deviation channels). - -A symmetrical channel, centered around a moving average, is useful for trading stocks and futures. A standard deviation channel (sometimes called Bollinger bands) is good for those who trade options. - -Channels mark the boundaries between normal and abnormal price action. It is normal for prices to stay inside a well-drawn channel, and only unusual events push them outside. The market is undervalued below its lower channel line and overvalued above its upper channel line. - -## **Symmetrical Channels** - -Earlier we've discussed using a set of two moving averages for trading (see Chapter 22). With such a pair, use the slower one as the backbone of your channel. For example, if you use 13-day and 26-day EMAs, draw your channel lines parallel to the 26-day EMA. - -The width of a channel depends on the coefficient selected by the trader. This coefficient is usually expressed as a percentage of the EMA level. - -Upper Channel Line = EMA + Channel Coefficient • EMA - -Lower Channel Line = EMA − Channel Coefficient • EMA - -When setting a channel for any market, start with 3% or 5% of the EMA and keep adjusting those values until a channel contains approximately 95 percent of all price data for the past 100 bars, about five months on a daily chart. This is similar to trying on a shirt: you look for the one that fits not too loose or too tight, with only your wrists and neck sticking out. Only the extreme prices will protrude outside of a well-drawn channel. - -Volatile markets require wider channels, while quiet markets require more narrow channels. Cheaper stocks tend to have higher coefficients than expensive ones. Long-term charts require wider channels. As a rule of thumb, weekly channel coefficients are twice as large as daily ones. - -I used to plot channels by hand until my programmer wrote an add-on for several software packages called an Autoenvelope. It automatically plots correct channels for any trading vehicle in any timeframe (Figure 41.1). It's included on elder-disks for several popular programs. - -## **Mass Psychology** - -An exponential moving average reflects the average consensus of value in its time window. When prices are near their moving average, the market is fairly valued. When they decline near the lower channel line, the market is undervalued. When prices rise to the upper channel line, the market is overvalued. Channels help find buying opportunities when the market is cheap and shorting opportunities when the market is dear. When prices fall below their moving average, bargain hunters step in. Their buying as well as short covering by bears stops declines and lifts prices. When prices rise above value, sellers see an opportunity to take profits on long positions or go short. Their selling caps the rise. - -When the market sinks to the bottom of a depression, its mood is about to improve. Once it rises to the height of its mania, it's about to start calming down. A channel marks normal limits of mass optimism and pessimism. The upper channel - -**FIGURE 41.1** Euro futures, with 26- and 13-day EMAs, the Impulse system, and Autoenvelope. *(Chart by Tradestation)* - -#### Channels: Autoenvelope - -This chart shows several recent months of trading in the March 2014 Euro currency futures (ESH14). Futures are much more transparent and true than the murky forex deals. Whenever I trade currencies, I use currency futures. - -Warren Buffet refers to the stock market as a manic-depressive fellow, and his description applies to non-equity markets. Here you see the Euro swinging above and below value. When it rises above the upper channel line, it shows that the market has become manic (marked with a letter M), and when it falls below the lower channel line, it is depressed (marked with a letter D). - -Buffett observes that the trouble with most people is that they become infected by the mood of Mr. Market—they want to buy when he is manic and sell when he's depressed. Plotting a channel helps you diagnose the market's mania and depression and avoid becoming infected by either. One of my strict rules is never to buy above the upper channel line or sell short below the lower channel line. I may miss a runaway trend because of this restriction, but my safety is greatly increased. At the right edge of the screen, the Euro is rising very near its upper channel line—it looks like a manic episode is about to develop. - -line shows where bulls run out of steam, while the lower channel line shows where bears become exhausted. - -At the upper channel line, bears have their backs against the wall as they fight off the bulls. At the lower channel line, bulls have their backs against the wall and fight off the bears. We all fight harder when our backs are against the wall, and that's why channels tend to hold. - -If a rally shoots out of a channel and prices close above it, it shows that the uptrend is exceptionally strong. When a rally fails to reach the upper channel line, it is a bearish sign, as it shows that bulls are becoming weaker. The reverse applies to downtrends. - -My friend Kerry Lovvorn finessed this idea by plotting not one but three sets of channels around a moving average. The width of his channels is driven by Average True Ranges (see Chapter 24). His three channels are set at one, two, and three ATRs away from the moving average. Normal moves tend to stay within 1-ATR channels, while only extreme moves go outside of 3-ATRs, indicating a reversal is near (Figure 41.2). - -Channels help us remain objective, while other traders get swept up in mass bullishness or bearishness. When prices rally to the upper channel line, you see that mass bullishness is being overdone, and it's time to think about selling. When prices drop - -**FIGURE 41.2** RSOL daily with 21-day EMA and 1-, 2-, and 3-ATR channels, MACD-Histogram 12-26-9, and the Impulse system. *(Chart by Tradestation)* - -#### Multiple ATR Channels - -This chart of Real Goods Solar, Inc. (RSOL) reflects several months of action: - -- Area A—Warning. Prices stab outside +3 ATRs—the uptrend has reached an extreme. -- Area B—Sell. Prices couldn't hold above +2 ATRs—take profits on long positions. -- Area C—Alert. Decline stopped at −2 ATRs—a sign of bottoming. -- Area D—Alert confirmed. Prices holding above −2 ATRs—bottom is being built. -- Area E—Buy. False downside breakout reaches −3 ATRs and rejects that low. -- Area F—Warning. Prices stab outside of +3 ATRs—watch whether +2 ATRs will hold. -- Area G—Warning. Prices stab outside of +3 ATRs—watch whether +2 ATRs will hold. -- Area H—Another warning. Prices stab outside of +3 ATRs—watch whether +2 ATRs will hold. - -Area I—Sell. Prices couldn't hold above +2 ATRs—take profits on long positions. - -near the lower channel line and everyone turns bearish, you know that it's time to think about buying instead of selling. - -## **Trading Rules** - -Amateurs like to bet on long shots—they tend to buy upside breakouts and short (if they ever sell short) downside breakouts. When an amateur sees a breakout, he expects riches from a major new trend. - -Professionals, on the other hand, tend to trade against deviations and for a return to normalcy. The pros know that most breakouts are exhaustion moves that are soon aborted. That's why they like to fade breakouts—trade against them, selling short as soon as an upside breakout stalls and buying when a downside breakout starts returning into the range. - -Breakouts can produce spectacular gains when a major new trend blows out of a channel, but in the long run it pays to trade with the pros. Most breakouts fail and are followed by reversals, which is why channel lines mark attractive zones for entering trades against breakouts, with profit targets in the value zone. - -You can use moving-average channels as a stand-alone trading method or combine it with other techniques. Gerald Appel, a prominent market researcher and money manager in New York, recommended these rules for trading with channels: - -- 1. Draw a moving average and build a channel around it. When a channel is relatively flat, the market is almost always a good buy near the bottom of its trading channel and a good sell near the top. -- 2. When the trend turns up and a channel rises sharply, an upside penetration of the upper channel line shows very strong bullish momentum. It indicates that you will probably have one more chance to sell in the area of the highs that are being made. It is normal for the market to return to its moving average after an upside penetration, offering an excellent buying opportunity. Sell your long position when the market returns to the top of the channel. - -This also works in reverse during sharp downtrends. A breakout below the lower channel line indicates that a pullback to the moving average is likely to occur, offering another opportunity to sell short. When prices return to the lower channel line, it is time to cover shorts. - -The best trading signals are given by a combination of channels and other technical indicators (Figure 41.3). Indicators give some of their strongest signals when they diverge from prices. A method for combining channels and divergences was described to me by the late Manning Stoller. - -- 1. A sell signal is given when prices reach the upper channel line while an indicator, such as MACD-Histogram, traces a bearish divergence. It shows that bulls are becoming weak when prices are overextended. -- 2. A buy signal is given when prices reach the lower channel line while an indicator traces a bullish divergence. It shows that bears are becoming weak when prices are already low. - -We must analyze markets in multiple timeframes. Look for buys on the daily charts when prices are rising on the weeklies. Look for shorting opportunities on the dailies when prices are sinking on the weekly charts. - -3. Go long near the moving average when the channel is rising, and take profits at the upper channel line. Go short near the MA when the channel is falling, and take profits at the lower channel line. - -When a channel rises, it pays to trade only from the long side, buying in the value zone which lies between the fast and slow moving averages, and then selling at the upper channel line. When a channel declines, it pays to short in the value zone and cover at the lower channel line. - -**FIGURE 41.3** SIX daily with 26- and 13-day EMAs, 6% channel, MACD-Histogram 12-26-9, and the Impulse system. *(Chart by Stockcharts.com)* - -### Combining Channels and MACD Signals - -This chart reflects several months of action in Six Flags Entertainment Corporation (SIX). - -- Area A—while prices have reached the lower channel line, a new record low of MACD-Histogram suggests that this low will be retested or exceeded. -- Area B—channel line rejected, rally is likely ahead. -- Area C—prices reached their upper channel line and recoiled—reversal is likely. -- Area D—buy. Prices have reached the lower channel line, while MACD-Histogram has traced out a bullish divergence between bottoms A and D, with a break at C. -- Area E—while prices have reached their upper channel line, a new record high of MACD-Histogram suggests that this high is likely to be retested or exceeded. -- Area F—pullback to value completed; MACD-Histogram breaks below zero, creating a setup for a possible bearish divergence. Still may buy to ride back to the prior high. Area G—sell and sell short. Prices have reached the upper channel line, while MACD-Histogram has traced out a bearish divergence between tops E and G, with a break at F. - -## **Standard Deviation Channels (Bollinger Bands)** - -The unique feature of these channels is that their width changes in response to market volatility. Their trading rules differ from those of regular channels. - -- 1. Calculate a 21-day EMA. -- 2. Subtract the 21-day EMA from each closing price to obtain all the deviations from the average. -- 3. Square each of the deviations and get their sum to obtain the total squared deviation. -- 4. Divide the total squared deviation by the EMA length to obtain the average squared deviation. -- 5. Take the square root of the average squared deviation to obtain the standard deviation. - -These steps, outlined by Bollinger, have been included in many software packages. A band becomes wider when volatility increases but it narrows down when volatility decreases. A narrow band identifies a sleepy, quiet market. Major market moves tend to erupt from flat bases. Bollinger bands help identify transitions from quiet to active markets. - -These bands are useful for options traders because option prices are largely driven by swings in volatility. Narrow Bollinger bands help you buy when volatility is low and options are relatively cheap. Wide bands help you decide to write options when volatility is high and options are expensive. - -When we return to options in the following chapters, you'll read that buying options is a losers' game. Professional traders write options. Wide Bollinger Bands can signal when to be more active with your writes. If you trade stocks or futures rather than options, it's better to use regular channels as profit targets; trading is hard enough without trying to shoot at a moving target, such as a Bollinger Band. diff --git a/trading/The New Trading for a Living/012_PART 8 Trading Vehicles.md b/trading/The New Trading for a Living/012_PART 8 Trading Vehicles.md deleted file mode 100644 index 6e79c8b3198618f453cd42ce758e82f75aa5e411..0000000000000000000000000000000000000000 --- a/trading/The New Trading for a Living/012_PART 8 Trading Vehicles.md +++ /dev/null @@ -1,402 +0,0 @@ -# Trading Vehicles - -All trading vehicles are divided into several classes. Their charts may look similar on a computer screen, but don't let their looks deceive you. Each group has its pluses and minuses. They offer different profit opportunities and carry different risks. Choosing what to trade is among your most important market decisions. - -We'll review the following major groups to help you make a conscious decision on which to focus: - -- Stocks -- ETFs -- Options -- CFDs -- Futures -- Forex - -Whichever group you select, make sure your trading vehicle meets two essential criteria: liquidity and volatility. - -Liquidity refers to the average daily volume, compared with other vehicles in its group. The higher it is, the easier it'll be for you to get in and out of your trades. You may build a profitable position in an illiquid stock, only to lose at the exit due to especially bad slippage. - -I learned this lesson decades ago, after building a 6,000-share position in a fairly inactive stock. When it began to sag, I decided to sell, and that's when I discovered that its average daily volume was only 9,000 shares. There were so few people trading it that my own sales began to depress its price. Taking several days to trade out of my 6,000-share lot felt like taking a fat cow through a very narrow gate and leaving large strips of its hide on gate posts. Now I focus on U.S. stocks that trade over a million shares a day. That's where I can slip in and out of my trades unnoticed and unmolested. With a large number of traders, there are plenty of orders to buy and sell, and my slippage, when it occurs, is small. - -Volatility is the extent of average short-term movement of a trading vehicle. The higher the volatility of a trading instrument, the more opportunities it presents. Popular stocks tend to swing a lot. On the other hand, stocks of many utility companies that are quite liquid are very hard to trade because of low volatility—they tend to stay in narrow ranges. - -There are several ways to measure volatility, but a good practical tool is "beta." It compares any vehicle's volatility to its benchmark, such as a broad index. If a stock's beta is 1, it means that its volatility is equal to that of the S&P 500. A beta of 2 means that if the S&P rises 5%, the stock is likely to rally 10%, but it is also likely to drop 10% if the S&P falls by 5%. A beta of 0.5 means that the stock is likely to rise or fall by half of the percentage of the S&P. It would be better for a beginner to focus on low beta vehicles. You can find betas for most stocks on all key financial websites, starting with Yahoo Finance. Betas are like trail markers on ski slopes: green for beginners, blue for intermediate skiers, and black diamonds for experts. - -Time Zones Globalization has lured many people to trade far away from home. I meet traders in Australia who trade U.S. stocks, and talk with traders in the United States who wrestle with European indexes. Still, you should think twice before trading far away from your own time zone. Your data screen is connected to the world, but your physical self is rooted in the area where you live. If you trade while sleepy, you put yourself at a disadvantage. If your head is on the pillow while your trade is open on the other side of the globe, you make it easier for your competitors to pick your pockets. - -Some time zones are easier to trade than others. For example, it is comfortable to trade the U.S. markets from Western Europe, where the New York Stock Exchange opens at 3:30 pm and closes at 10 pm. It is very hard to trade U.S. markets from Asia, where the time difference is likely to be 12 hours. There are always exceptions to a rule, and you may enjoy trading at night—but if you feel tired and sleepy, don't push yourself but find a local market. - -Long or Short There's more to trading than buying and waiting for prices to rise. Markets are two-way streets: they go down as well as up. Beginners only buy, but experienced traders are comfortable with selling short. - -In a nutshell, to make money shorting you identify a vehicle that you expect to drop, borrow it from your broker (giving him a deposit), and sell it. After it declines, you buy it back at a cheaper price, return the borrowed shares to your broker, and get your deposit back. Your profit is the difference between the higher selling and lower buying prices. This is the same as in buying, only the process is reversed: sell first, buy later. Of course, shorting is too complex a topic to cover in two paragraphs, which is why I refer you to my latest book (prior to this one): *The New Sell & Sell Short: How to Take Profits, Cut Losses, and Benefit from Price Declines* (John Wiley & Sons, 2011). - -## ■ **42. Stocks** - -A stock is a certificate of ownership of a business. If you buy 100 shares of a company that had issued 100 million shares, you'll own one-millionth of that firm. If other people want to own that business, they'll have to bid for your shares. - -When masses of people start liking the prospects of a business, their orders for its shares will push up the stock price. If they don't like the outlook of that business, they'll start selling their shares, depressing prices. Public companies try to make their shares more attractive in order to push up share prices because it helps them raise more equity or issue debt. Top executives' bonuses are often tied to stock prices. - -Fundamental values, especially earnings, drive prices in the long run, but, as John Maynard Keynes, the famous economist and a canny stock picker once retorted— "In the long run we're all dead." Markets are full of cats and dogs, stocks of companies with feeble or nonexistent earnings that at some point fly through the roof, defying gravity. Stocks of new sexy industries can levitate on expectations of future earnings rather than any real profits. Stocks of solidly profitable, well-run companies may drift sideways or down if the crowd isn't excited about their outlook. - -Warren Buffett is fond of saying that buying a stock makes you a partner of a manic-depressive fellow he calls Mr. Market. Each day, Mr. Market runs up to you and offers to buy you out or sell his shares to you. Most of the time, you should ignore him because he's crazy, but occasionally Mr. Market becomes so depressed that he offers you his shares for a song—and that's when you should buy. At other times, he becomes so manic that he offers an insane price for your shares—and that's when you should sell. - -Buffett's idea is brilliant in its simplicity, but hard to implement. Mr. Market's mood is so contagious that it sweeps most of us off our feet. People want to sell when Mr. Market is depressed and buy when he is manic. To be a successful trader, you must stand apart from the crowd. You need to define objective criteria that will help you decide how high is too high and how low is too low. Buffett makes his decisions on the basis of fundamental analysis and a fantastic gut feel. Traders can use the tools of technical analysis described in this book. - -What stocks will you trade? There are more than 20,000 of them in the United States, and even more abroad. Beginners tend to spread themselves too thin. Afraid to miss an opportunity, they buy scanning software. A person who doesn't have a clear idea of how to trade a single stock will not be helped by tracking thousands. He'll be much better off focusing on a handful of stocks and following them every day. - -We'll return to the question of stock selection in Part 10 "Practical Details." In brief, it's a good idea to limit your pool of trading candidates. That group can be small or large, depending on your skills and available time. A Greek friend of mine calls his watch list of 200 stocks his harem. He's owned every one of them in the past; he reviews them on weekends, selecting fewer than ten that he may take for a spin in the coming week. - -I have two "pools" in which I fish for trading ideas. On weekends, I run the 500 component stocks of the S&P 500 through my divergence scanner and zoom in on stocks flagged by that scan, selecting a handful that I'll consider trading during the coming week. Second, I review Spike picks on weekends, figuring that among a dozen top traders submitting their favorite picks, there is bound to be at least one that I'll want to piggyback. The number of stocks I closely monitor during the week is always in single digits. This is just my style; I have friends who monitor several dozen stocks at any given time. Only you can tell what number is right for you, but you should track only as many as you can focus on. - -## ■ **43. ETFs** - -An exchange-traded fund (ETF) is an investment vehicle that trades like a stock. Different ETFs hold different types of assets, such as stocks, commodities, or bonds, and they usually trade close to their net asset values. There are ETFs designed to track indexes, sectors, countries, commodities, bonds, futures, and forex. The leveraged ETFs are designed to move double or triple the distance of the underlying index. There are also inverse ETFs and leveraged inverse ETFs that trade opposite to their underlying assets: when an index falls, its inverse ETF rises and vice versa. The number of ETFs has reached thousands in recent years. - -With so many choices, what's there not to like about ETFs? Actually, quite a lot. - -The industry keeps quiet about the fact that there are two ETF markets. The primary market is reserved for "authorized participants"—large broker-dealers who have agreements with the ETF distributors to buy or sell large blocks, consisting of tens of thousands of ETF shares. These middlemen buy at wholesale and then sell to you at retail. You, as a private trader, always sit in the back of the bus—in the secondary market. - -An active trader friend who reviewed this chapter added: "I believe that 'authorized participants' can also obtain ETF shares to short in large lots. My broker always tells me there are none available, not even of broadly held ETFs, which I can't imagine they don't have lots of in inventory. When I ask them about this, they stonewall. I wonder how such a shorting transaction by an authorized participant is accounted for. I wonder if it somehow ends up as paired transactions (both an up-volume purchase and a down-volume sale, cancelling each other out). If so, the added selling pressure would be hidden from view." - -Administrative expenses incurred by ETFs dampen investors' returns. According to a study by Morgan Stanley, ETFs missed their 2009 targets by an average of 1.25%, which was double the size of their "miss" in 2008. Those percentages are your "haircuts" for the privilege of trading ETFs rather than individual stocks. The more exotic the index tracked by an ETF, the greater your "haircut." - -Some ETFs lose value so fast that their issuers repeatedly perform reverse splits in order to raise prices back into double digits. With the passage of time, those ETFs sink back into single digits, and then their issuers perform another reverse split to make their ETFs appeal to new suckers. - -A friend of mine lost over a million dollars last year: he anticipated a market decline and bought an ETF of a volatility index (volatility rises when markets fall). Sure enough, the market dropped 10% and volatility spiked—but his ETF went down instead of up (Figure 43.1). - -Many ETFs "track" their underlying indexes in a shabby manner. After giving commodity ETFs a try, I wouldn't touch them with a ten-foot pole, having experienced several days during which the underlying commodity went up, while my commodity ETFs went down. I stopped trading country ETFs after running into several situations in which a country index would rise to a new high, while my ETF would stay well below the breakout level (Figure 43.2). - -The leveraged ETFs are more "futures-laden" than non-leveraged ETFs and have much greater rollover losses each month. The disadvantages that retail investors suffer are magnified in the leveraged ETFs. They may track their underlying vehicles - -**FIGURE 43.1** \$VIX, the volatility index, and VXX, a volatility ETF, weekly. *(Charts by Stockcharts.com)* - -#### Tracking Volatility: Reality and Fantasy - -Can you believe that these two charts, covering the same period of time, are supposed to track the same thing? - -Volatility is a hugely important factor in market movements. Just as prices oscillate between uptrends and downtrends, they oscillate between periods of low and high volatility. This is why many analysts and traders pay close attention to \$VIX—the volatility index. The chart on the left shows that during the past two years \$VIX oscillated between the low teens and mid-twenties (it briefly rallied above \$80 during the 2008 bear market). Traders have a saying: "when VIX is high, it's safe to buy; when VIX is low, go slow." - -Since \$VIX fluctuations appear fairly orderly, some traders attempt to trade it using several ETFs, such as VXX, shown on the right. During the same time, VXX has steadily declined, losing 90% of its value. How's that for tracking volatility? - -**FIGURE 43.2** Natural Gas Spot and UNG, a natural gas ETF, monthly. *(Charts by Stockcharts.com)* - -#### Natural Gas Market: Reality and Fantasy - -The chart on the left shows prices of the natural gas spot market: it topped out near \$13.5 in 2008 and began a bear market that ended with a double bottom. A false downside breakout near \$2 in 2012 helped identify a buying opportunity. A futures chart (not shown) looks very similar to the spot chart—but take a look at UNG, the natural gas ETF on the right. As it slid interminably from above \$500 to below \$20, I lost count of the number of friends and clients who complained of losing money trying to pick its bottom. - -more or less correctly during a single trading session, but deviate widely with the passage of time. - -The only ETFs that trade more or less decently are broadly based ones, such as SPY and QQQ. Overall, ETFs attract many unsophisticated retail clients, but the pervasive haircuts and poor tracking of the underlying securities slant the field against them. Remember an important principle: TANSTAFL—"there ain't no such thing as a free lunch." When it comes to ETFs: buyer beware. - -## ■ **44. Options** - -An option is a derivative instrument—a bet that another security, such as a stock, an index, or a future will reach a certain price by a certain date. A **call** gives its holder a right, but not an obligation, to buy a certain quantity of a specified security at a specified price at a specified time. It is a bet on a price increase. A **put** is a right, but not an obligation, to sell a certain quantity of a specified security at a specified price at a specified time. It is a bet on a price drop. There are two parties in every options trade: a buyer and a seller, also called a writer. Buyers buy options, while writers create options and sell them to buyers. - -The key point to keep in mind is that option buyers as a group lose money over time, despite occasional lucky trades. At the other end of the table, options writers as a group make steady money despite occasional losses. - -Writers create options out of thin air to meet demand from option buyers. One of my students, a market-maker on the floor of the American Stock Exchange, said to me: "Options are a hope business. You can buy hope or sell hope. I am a professional— I sell hope. I come to the floor in the morning and find what the public hopes for. Then I price that hope and sell it to them." - -Each option has an exercise price (also called strike price). If a stock fails to reach that price before the exercise date, the option expires worthless and the buyer loses what he paid, while the writer keeps his loot, whose polite name is premium. - -- An option is **at-the-money** when the current price of the underlying security equals the exercise price. -- A call is **out-of-the-money** when the current price of the underlying security is below the exercise price. A put is out-of-the-money when the current price of the underlying is above the exercise price. The farther out-of-the-money, the cheaper the option. -- A call is **in-the-money** when the current price of the underlying security is above the exercise price. A put is in-the-money when the current price of the underlying is below the exercise price. - -An option can be at-the-money, out-of-the-money, or in-the-money at different times in its life, as the price of the underlying security fluctuates. The price of every option has two components—an intrinsic value and a time value. - -- An option's **intrinsic value** rises above zero only when it's in-the-money. If the exercise price of a call is \$80 and the underlying security rises to \$83, the intrinsic value of your call will be \$3. If the security is at or below \$80, the intrinsic value of that call is zero. -- The other component of an option's price is **time value**. If the stock trades at \$74 and people pay \$2 for an \$80 call, the entire \$2 represents time value. If the stock rises to \$83, and the price of the call jumps to \$4, \$3 of that is intrinsic value (\$83 – \$80), while \$1 is time value (the hope that this stock will rise even higher during the remaining life of that option). - -Option prices depend on several factors: - -- The farther out-of-the-money the exercise price, the cheaper the option—the underlying security must travel a longer distance to make the option worth anything before it expires. -- The closer the expiration day, the cheaper the option—it has less time to fulfill the hope. The speed with which an option loses value is called "time decay," which doesn't occur in a straight line but becomes steeper as the expiration nears. -- The less volatile the underlying security, the cheaper the option, because it has a smaller chance of making a large move. -- Minor factors influencing option prices include the current level of interest rates and the dividend rate of the underlying stock. - -Different factors that impact option pricing may clash and partly cancel each other out. For example, if a market drops sharply, reducing the value of calls, the increased volatility will lift option values, and the calls may lose less than expected. There are several mathematical models, such as Black-Scholes, widely described in options literature, that are used to determine what is called a fair value of any option. - -## **Buying Options** - -The simplest and easiest approach to options is to buy them. That's exactly what beginners do, and unless they learn quickly and change, their accounts are doomed. - -This is the standard line of brokerage house propaganda: "Options offer leverage—an ability to control large positions with a small outlay of cash. The entire risk of an option is limited to the price you pay for it. Options allow traders to make money fast when they're right, but if the market reverses, you can walk away and owe nothing!" They fail to mention that in order to profit from buying an option you must be right in three ways. You must choose the right stock, predict the extent of its move, and forecast how fast it'll get there. If you're wrong on even one of these three choices, you'll lose money. - -Ever tried tossing a ball through three rings at an amusement park? This triple complexity makes buying options a losing game. - -A stock, an index, or a future can do one of three things: rise, fall, or stay flat. When you buy a call, you can profit only if the market rises; you lose if it goes down or stays flat. You can lose even if it rises, but not fast enough. When you buy a put, you win only if the market falls fast enough. An option buyer makes money only if the market goes his way at a good enough speed, but loses if it moves his way slowly, stays flat, or goes against him. - -An option buyer has one chance out of three to win—but the odds are two out of three in favor of an option writer. No wonder the pros write options. A pro sells a call, and if a stock drops, stays flat, or even rises slowly, that call will expire worthless, and he'll keep the premium. He sells poor buyers hope—and as that hope turns out to be worthless, he keeps their money. - -Options attract hordes of small traders who can't afford to buy stocks. To get a bigger bang for their buck, they buy calls as if those were substitutes for stocks. This doesn't work because options move differently from stocks. Gullible amateurs buy empty hopes, which the pros are delighted to sell to them. - -Beginners, gamblers, and undercapitalized traders make up the majority of option buyers. Just think of all the money those hapless folks lose in their eagerness to get rich quick. Who gets all that money? Some of it goes for brokerage commissions, but the bulk flows into the pockets of option writers. Well-capitalized professionals write options rather than buy them. Option writing is a capital-intensive business: you need hundreds of thousands of dollars at a minimum to do it right, and most successful writers operate with millions. Writing options is a serious game for knowledgeable, disciplined, and well-capitalized traders. If your account is too small for option writing, wait until it grows bigger. - -Markets are like pumps that suck money out of pockets of the poorly informed majority and into the wallets of a savvy minority. Smart traders in any market look for situations in which the majority does something one way, while a small, moneyed minority does the opposite. Options are a great example of this rule. - -## **Writing Options** - -There are two main types of option writing. Covered writers buy a stock and write options against it. Naked writers write calls and puts on stocks they don't own. - -**Covered writers** own underlying securities. For example, a fund may hold a large position in IBM stock and sell calls against it. If the stock doesn't rise to the exercise price during the life of those calls, the options will expire worthless. The covered writer will add his premium to the fund and write a new call with a new expiration date. If IBM does rise to the exercise price and "gets called," they'll deliver their stock at its strike price, collect the money, and use the freed-up capital to buy another stock and write calls against it. - -Large funds tend to use computerized models for buying stocks and writing covered calls. Covered writing is a mathematically demanding, capital-intensive business. Most serious players spread their costs, including staff and equipment, across a large capital base. A small trader doesn't have much of an edge in this expensive enterprise. Covered writing was very profitable in the early years of exchange-traded options. By now the field is very crowded, and the returns have become thinner. - -**Naked writers** sell options without owning their underlying securities; they back up their writes with cash in their accounts. A naked writer collects his premium when he opens a trade, but his risk is unlimited if that position goes against him. If you own a stock, sell a covered call, and that stock rises to its exercise price and gets called, you have something to deliver. If you sell a naked call and the stock rises to or above its exercise price, you'll have to pay. Imagine selling calls on a stock that becomes a takeover play and opens \$50 higher the next morning—you still have to deliver. - -This combination of limited rewards with unlimited risks scares most traders away from naked writing—but as usual, there's a gap between perception and reality. A far-out-of-the-money option with a short time to the expiration is very likely to expire worthless, meaning the writer will profit. The risk/reward ratio in naked writing is better than it looks, and there are techniques for reducing the impact of a rare adverse move. - -Savvy naked writers tend to sell out-of-the-money calls and puts whose underlying stocks or futures are unlikely to reach their strike prices during the remaining life of an option. They sell not just hopes but distant hopes. Good writers track volatility to find how far a stock is likely to move and then sell options outside of that range. This game goes into high gear during the week or two prior to option expiration, when the floor mints money out of thin air, selling naked puts and calls that have almost no chance of reaching their exercise price. - -Cautious writers close their positions without waiting for the expiration dates. If you write a call at 90 cents and it goes down to 10 cents, it makes sense to buy it **182** TRADING VEHICLES - -back and unwind your position. You've already earned the bulk of potential profit, so why expose yourself to continued risk? It's cheaper to pay another commission, book your profits, and look for another writing opportunity. - -Becoming a naked writer requires iron discipline. The size of your writes and the number of positions must be strictly determined by your money management rules. If you sell a naked call and the stock rallies above its exercise price, it exposes you to the risk of ruin. You must decide in advance at what level you will cut and run, taking a relatively small loss. A naked seller cannot afford to sit and hope when a stock moves against him. - -## **Writer's Choice** - -Time is the enemy of options buyers. Every buyer has lived through this sad sequence: they buy a call, the stock rises, but their option fades to zero, and they lose money. Buyers lose when the underlying security takes longer than expected to get to the level at which they can collect on their bet. Most options become worthless by their expiration date. - -What if we reverse this process and write rather than buy options? The first time you write an option, and do it correctly, you'll experience the delicious sensation of time working in your favor. The option that you wrote loses some of its time value each day, making the premium you've collected safer. When the market goes nowhere, you still make money, as time value keeps evaporating, making it more likely that you'll keep the premium. - -If living well is the best revenge, then taking a factor that kills most options buyers—time—and making it work for you is a gratifying experience. - -Since each option represents a hope, it's better to sell empty hopes which are unlikely to be fulfilled. Take three steps before writing a call or a put: - -1. Analyze the security against which you want to write options. - -Use Triple Screen to decide whether a stock, future, or an index is trending or non-trending. Use weekly and daily charts, trend-following indicators, and oscillators to identify trends, detect reversals, and set up price targets. Avoid writing when earnings are about to be announced—do not hold open positions during those potentially stormy days. - -2. Select the type of option to write. - -If your analysis is bearish, consider writing calls, but if bullish, consider writing puts. When the trend is up, sell the hope that it will turn down, and when it's down, sell the hope it'll turn up. Do not write options when markets are flat and premiums low—a breakout from a trading range can hurt you. - -3. Estimate how far, with a generous safety margin, the stock would have to run in order to change its trend. Write an option beyond that level. - -Write an option with a strike price the market is unlikely to reach before the option expiration. An objective tool that shows the degree of safety of your planned position is an indicator called Delta, which we'll discuss below. - -Time Decay Options lose value with each passing day, but their rate of decay isn't steady. Options drop faster as the expiration date draws closer. Like a boulder rolling downhill, time decay becomes vertical at the final cliff. - -Time decay is bad for option buyers, but very good for option writers. You collect your premium the day you sell a call. The deeper it falls below the price at which you wrote it, the safer your premium. Time decay is a friend of the option writer but an enemy of the option buyer. - -With that in mind, the sweet spot for an option writer is approximately two to three months from option expiration. That's when time decay starts gathering speed. It accelerates in the last few weeks of the option's life. When you write options close to the expiration, you benefit from faster time decay. You can get more money for options with longer lives, but don't be greedy. The goal of a writer is not to make a killing on any single trade but to grind out steady income. - -Delta is a tool that shows the probability of the underlying security reaching your option's exercise price by its expiration date. It's one of several options tools, collectively called the "Greeks" (each is named after a letter of the Greek alphabet). You can find Delta for any stock, index, or ETF on many financial websites, especially those of brokerages that offer options services. - -A cautious option writer should aim to sell calls or puts whose Delta isn't much above 0.10, meaning there is only a 10% chance of the exercise price getting hit before the expiration date. Remember, as an option writer you don't want the underlying security to reach that price: you want to sell empty hopes. If 10% risk seems high, keep in mind that Delta is derived without any reference to market analysis. If your decision is based on good technical analysis, your risk will be lower than what Delta indicates. - -The temptation to sell naked options closer to the money and get fatter premiums is dangerous. The Delta is likely to be high, meaning that a slight counter-trend move can push your position underwater. If you're going to write options, treat it like writing accident insurance policies. To make steady profits and sleep well at night, sell your auto insurance policies to ladies who only drive to supermarkets rather than to motorcycle daredevils. - -## **Limiting Risk** - -A big options trader shared with me his technique of "slicing the bid-ask spread." He puts in a low bid or a high ask and then starts giving up a penny at a time until somebody bites. For example, he recently saw an option he wanted to write (i.e., sell). The bid was \$1.18 and the ask \$1.30, but he had no intention of selling at \$1.18 and paying that huge spread. Instead, he put in his order to sell a large number of contracts at \$1.29, a penny cheaper than the ask. No response. A few minutes later he lowered his ask to \$1.28—and suddenly a buyer materialized, snapped up his contracts, and then the bid-ask spread went back to \$1.18/\$1.30. My client finds there are large traders watching from the sidelines, not showing their hand, but willing to trade within the spread. He gets them to bite by giving up a penny at a time. - -Option writers can get hurt in one of three ways. Some overtrade, creating positions that are too large for their accounts. Assuming too much risk makes them nervous and unable to hold positions through any wiggles. Option writers also get hurt when they fail to run fast enough when an option moves against them. Finally, option writers can get blown out if they don't have a reserve against a major adverse move. The longer you trade, the greater the risk of a catastrophic event. - -A writer can grow careless selling naked options and pocketing profits. A smug feeling of self-satisfaction can blind him to reality. You must protect all trades, including naked options. Several suggestions: - -■ Set your profit-taking zone—consider buying back your naked options. - -The option you write is a wasting asset. When the underlying security moves far from the exercise price but there is still time left to the expiration, the price of the option you sold may fall near its rock bottom and lose value in tiny dribs and drabs. The loser who bought that option still has a bit of a chance that the market may reverse in his favor. He continues to hold that option like a lottery ticket and once in a rare while his ticket may win. - -As a writer, why hold an open position that has already given you most of its potential profit? You have little to gain, while remaining exposed to risk. After the option you sold loses half of its value, consider buying it back to close your profitable trade. By the time an option loses 80% of its value, you should be out of that trade. - -■ Use a mental stop-loss on the option you sold. - -It is better to use mental stops here because many pros go fishing for stops of thinly traded options. Using mental stops requires iron discipline—another reason why option writing isn't a beginners' game. - -Set your mental stops both on the underlying security and the option itself. For example, you may sell a naked April 80 call on a stock trading at 70 and place your mental stop at 75. Get out of your naked option position before it gets into the money. Also, set a stop on your option: if it doubles in price, buy it back to cut the loss. If you sold an option for \$1.50, buy it back if it rises to \$3. It may hurt, but it'll be nowhere near the "unlimited loss" that makes people afraid to write options. - -■ Open an insurance account. - -You may write a put and the market crashes the next day, or you write a call and suddenly there is a takeover. You hope this never happens—but trade long enough and eventually everything will happen! That's why you need insurance. Nobody will write it for you, so you'll have to self-insure. - -Open a money market account, and every time you close out a profitable naked writing position, throw 10 percent of your profit into that account. Do not use it for trading—let your insurance account grow with each new profit, ready to cover a catastrophic loss or to be taken out in cash when you stop writing options. In a recent consultation with a professional option writer, I recommended that he send 10% of his profit above a certain threshold to the bank that holds the mortgage on his country house, using that prepayment as his insurance fund. - -## **Can Option Buying Be Intelligent?** - -Professionals may buy puts on a rare occasion when they expect a severe drop. When a long-term uptrend begins to turn, it can create massive turbulence near the top, similar to an ocean liner changing its course. When volatility goes through the roof, even well-heeled traders have trouble setting stops on shorts. Buying puts allows you to sidestep this problem. - -Prices tend to fall twice as fast as they rise. Greed, the dominant emotion of uptrends, is a happy and lasting feeling. Fear, the dominant emotion of downtrends, is sharper and more violent. Professionals are more likely to buy puts because of shorter exposure to time decay. Uptrends are better traded with stocks or futures. - -A trader who expects a downswing must decide what put to buy. The best choice is counterintuitive and quite different from what most people get. - -- Estimate how low you expect a stock to collapse. A put is worth buying only if you expect a crash. -- Avoid puts with more than two months of life. Buying puts makes sense only when you expect a waterfall decline. If you anticipate a drawn-out downtrend, better sell short the underlying security. -- Look for cheap puts whose price reflects no hope. Move your finger down the column: the lower the strike, the cheaper the put. At first, each time you drop to the next strike price, a put is 25% or even 35% cheaper than at the previous level. Eventually you come to the strike level at which you would save only a tiny fraction of a put's price. This shows that all hope has been squeezed out of that put, and it is priced like a cheap lottery ticket. That's the one you want! - -Buying a very cheap, far-out-of-the-money put is counterintuitive. It is so far out of the money and has so little life left in it that it's likely to expire worthless. You can't place a stop on it, and if you're wrong, the entire premium will go up in smoke. Why not buy a put closer to the money? - -The only time to buy a put is when you're shooting for an exceptional gain from a major reversal. In an ordinary downtrend it's better to short stocks. With cheap farout-of-the-money puts you aim for a tenfold gain or better. Returns like these allow you to be wrong on a string of such trades, yet come out ahead in the end. Catching one major reversal will make up for several losses and leave you very profitable. - -Why don't more people use this tactic? First, it requires a great deal of patience, as opportunities are very infrequent. The entertainment value is very low. Most people can't stomach the idea of being wrong three, four, or five times in a row, even if they are likely to make money in the end. That's why so few traders play this game. - -I wrote this chapter to sharpen your focus on some of the key options ideas. If interested in options, study Lawrence MacMillan's book *Options as a Strategic Investment*. **186** TRADING VEHICLES - -## ■ **45. CFDs** - -A **contract for difference** (CFD) is a bet on the future value of a currency, an index, or a stock. If you buy a CFD and the price of the underlying vehicle rises, you'll collect the difference from the company that sold you the contract, but if it falls, you'll pay the difference. CFDs are derivatives that allow speculators to bet on rallies or declines. They are similar to spread betting, which is legal in the United Kingdom and Ireland, but not in the United States. - -At the time of this writing, CFDs are available in Australia, Canada, France, Germany, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Poland, Portugal, Singapore, South Africa, Spain, Sweden, Switzerland, and the United Kingdom. They are prohibited in the United States, due to restrictions by the Securities and Exchange Commission. - -CFDs were invented in the early 1990s by Brian Keelan and Jon Wood, both of UBS Warburg in London. Institutional traders began using them to hedge stock exposure and to avoid taxes. In the late 1990s, several firms began marketing CFDs to retail traders, touting their leverage and the exemption from UK taxes. Several provider firms expanded their offerings from the London Stock Exchange to global stocks, commodities, bonds, and currencies. Index CFDs, based on the major global indexes such as Dow Jones, S&P 500, FTSE, and DAX, quickly became the most popular vehicles of the group. - -CFDs are contracts between individual traders and providers, who may offer different deal terms. Each CFD is created by opening a trade with a provider, based on some underlying instrument. Be prepared to pay large bid-ask spreads, commissions, and overnight financing. Trades are mostly short-term, although positions can be taken overnight. Financing charges and profits or losses are credited or debited daily. CFDs are traded on margin. - -Among the pluses of CFDs are the tiny minimum sizes of those contracts, making them accessible to small traders. The absence of the expiration dates means there is no time decay. While financing is charged on long positions, it is paid out on short positions. - -There are several serious misgivings about the CFDs. Commissions tend to be high relative to contract sizes. Bid-ask spreads are controlled by CFD issuers, who also control prices of contracts, which may deviate from prices of the underlying securities. In other words, a retail customer plays against a professional team that can move the goal posts during the game. - -A client from New Zealand wrote: "Regarding CFDs and spread betting, it is worth understanding that with CFDs you are not just trying to beat the market but the casino too. CFD providers can set whatever prices they like for an instrument, as it is their instrument. The fact that sometimes it emulates what happens in the stock market does not mean it is the same as trading in the stock market." - -CFDs are heavily marketed to new and inexperienced traders, extolling their potential gains, while glossing over risks. The Australian financial regulator ASIC considers trading CFDs riskier than gambling on horses or in casinos. CFDs are banned in the United States where regulators haven't forgotten the bucket shops that flourished at the turn of the twentieth century. - -The stance of the SEC in this matter reminds me of another federal agency, the Food and Drug Administration, which kept Thalidomide, a drug for pregnant women, out of the United States. As a result, after the full scale of its horrible side effects became known, the U.S. population was spared an epidemic of deformed babies that was caused by that drug in Europe. - -## ■ **46. Futures** - -A future is a contract for delivery of a specific quantity of a commodity by a certain date at an agreed-upon price. Futures contracts differ from options by being binding on both the buyer and the seller. In options, the buyer has the right but not an obligation to take delivery. If you buy a call or a put, you can walk away if you like, but in futures, you have no such luxury. If the market goes against you, you have to get out of your trade at a loss or add to your margin. Futures are stricter than options, but their responses to market volatility are much smoother, making them easier to trade. Another advantage of futures is that there are only a few dozen of them, making them easier to track. Futures are not nearly as correlated with each other as stocks. While stocks tend to move as a group, many futures move in unrelated trends, offering more trading choices. - -Commodities are the irreducible building blocks of the economy. Wheat is a commodity, while bread isn't because it includes multiple components. Old-timers used to joke that a commodity was something that hurt when you dropped it on your foot gold, sugar, wheat, a barrel full of crude oil. In recent decades, many financial instruments began to trade like commodities—stock indexes, bonds, and currencies. Futures include financial instruments along with traditional commodities. - -The person who buys a stock becomes a part owner of a company, but when you buy a futures contract, you don't own anything. You enter into a binding contract for a future purchase of merchandise, be it a carload of wheat or a sheaf of Treasury bonds. The person who sells you that contract assumes the obligation to deliver. The money you pay for a stock goes to the seller, but in futures your margin money stays at the clearinghouse as a security, to ensure you'll accept delivery when your contract comes due. That's why they used to call margins "honest money." While in stocks you pay interest for margin borrowing, in futures you can collect interest on your margin funds. - -Each futures contract has a definite size and a settlement date. Most traders close out their contracts early, settling profits and losses in cash. Still, the existence of a delivery date forces people to act, providing a reality check. A person may sit on a losing stock for years, deluding himself that it's only a paper loss. In futures, reality, in the form of the settlement date, always intrudes on a daydreamer. - -Most futures have daily limits beyond which prices are not allowed to go. Limits are designed to interrupt hysterical moves and give people time to rethink their positions. A string of limit days can be very stressful when a losing trader is stuck and unable to get out while his account is being ground down. The globalization of the futures markets has created many emergency exits, allowing you to unwind a trade elsewhere. Just like when boarding a plane, a careful trader learns to identify those emergency exits before he needs them. - -In stocks, most people buy and very few sell short. In futures, just like in options, the size of long and short positions is always equal because if someone buys a contract for future delivery, someone else has to sell it to him, i.e., go short. If you want to trade futures, it pays to be comfortable shorting. - -The survival rate for new futures traders is low—nine out of ten newcomers are said to bust out in the first few months. It is important to understand that the danger is not in futures but in a gross lack of risk-management skills among beginners. Futures offer some of the best profit opportunities to serious traders but are deadly for amateurs. You must develop excellent money-management skills (described in Chapters 49–51) before venturing into futures. - -## **Futures and Cash Trades** - -To compare a futures trade with a cash trade, let's assume the following: it is February, gold is trading at \$1,500 an ounce, and your analysis indicates that it's likely to rise to \$1,575 within weeks. With \$150,000, you can buy a 100-oz gold bar from a dealer and store it in a safe. If your analysis is correct, in a few weeks your gold will be worth \$157,500. You can sell it and take \$7,500 profit, or 5% before commissions—nice. Now let's see what happens if you trade futures based on the same analysis. - -Since it is February, April is the next delivery month for gold. One futures contract covers 100 oz of gold, with a value of \$150,000. The margin to trade this contract is only \$7,500. In other words, you can control \$150,000 worth of gold with a \$7,500 deposit. If your analysis is correct and gold rallies \$75 per ounce, you'll make roughly the same profit as when you bought 100 oz of gold for cash; only now your return will be 100% on your investment instead of 5%, since your margin is only \$7,500. - -Many people, after seeing such numbers, feel a surge of greed and buy multiple contracts. A trader with \$150,000 in his account has enough margin for 20 contracts. If he can double his money on a single contract, he can double it on 20. If he repeats it two or three times, he'll quickly become a millionaire. - -Wonderful—but there is a catch. - -Markets seldom move in a straight line. Your analysis may well be correct, and gold may rise from \$1,500 to \$1,575 within a few weeks, but it's perfectly possible that it may dip to \$1,450 along the way. That \$50 dip would create a \$5,000 paper loss if you bought 100 oz of gold for cash—unpleasant but not a tragedy. For a futures trader who bought multiple contracts, each on a \$7,500 margin, that \$50 decline would mean a wipeout. His broker would call demanding more margin, and if he has no reserves, the broker will sell him out at a loss. - -Inexperienced traders keep buying too many contracts and keep getting kicked out by the first wiggle of their market. Their analysis may be correct—gold may rise to its target price—but the beginner is doomed because he commits too much of his equity and has very thin reserves. Futures don't kill traders—poor money management kills futures traders. - -Futures can be very attractive for traders with strong money-management skills. High rates of return demand ice-cold discipline. A beginner is better off with slowermoving stocks. Once you've matured as a trader, you can take a closer look at futures. Also, read some introductory books. *Winning in the Futures Market* by George Angell is a good primer, to be followed by *The Futures Game* by Teweles and Jones. - -## **Hedging** - -Futures markets serve an important economic function: they permit commercial producers and consumers to hedge commodity price risks, giving them a competitive advantage. At the same time, futures offer speculators a gambling palace with more choices than any casino. - -Hedging means opening a futures position opposite to one's position in the actual commodity. For example, a major candy manufacturer knows months in advance how much sugar the firm is going to need. He buys a corresponding number of sugar futures in New York or London when prices are good enough for the firm. They'll be needing trainloads of sugar several months from now, but meanwhile they hold sugar futures, which they plan to sell when they buy their cargoes. - -If sugar prices go up and they have to pay more for the raw commodity, they will offset that loss by making roughly the same profit on their futures position. If sugar prices fall, they'll lose money on their futures contracts but make it up in savings on the raw materials. Their unhedged competitors are taking chances. If sugar prices fall, they'll buy on the cheap and reap a windfall, but if prices rise, they'll be hung out to dry. Hedged consumers can concentrate on running their core businesses, insulated from future price swings. Airlines know years in advance how much jet fuel they'll need, and buying oil futures protects them from price spikes that often occur in this volatile market. - -Producers of commodities also benefit from hedging. An agribusiness can presell its wheat, coffee, or cotton when prices are high enough to assure profits. They sell short enough futures contracts to cover the size of their prospective crop. From that point on, they have no price risk. If prices go down, they'll make up their losses on cash commodity by profits on short futures trades. If prices go up, they'll lose money on their short futures positions but make it back selling the actual commodity at higher prices. - -Hedging removes price risk from planning to buy or to deliver a cash commodity. It allows commercial interests to concentrate on their core businesses, offer stable consumer pricing, and obtain a long-term competitive advantage. - -Hedgers give up a chance of a windfall but insulate themselves from price risks. Survivors value stability. That why the Exxons, the Coca-Colas, and the Nabiscos of the world are among the major players in commodity markets. Hedgers are the ultimate insiders, and a good hedging department not only buys price insurance, but also serves as a profit center. - -Hedgers transfer price risks to speculators who enter the markets, lured by the glitter of potential profits. It's ironic that hedgers, who have inside information, are not fully confident about prices, while crowds of cheerful outsiders plunk down money to bet on futures. - -The two largest groups of speculators are farmers and engineers. Farmers produce commodities, while engineers love to apply scientific methods to the futures game. Many farmers enter futures markets as hedgers but catch the bug and start speculating. It never ceases to amaze me how many farmers end up trading stock index futures. As long as they trade corn, cattle, or soybeans, their feel for the fundamentals gives them an edge over city slickers. But what's their edge in the S&P500? - -## **Supply, Demand, and Seasonality** - -Major bull and bear markets in futures are driven by supply or demand. Supplydriven markets tend to be fast and furious, while demand-driven markets tend to be quiet and slow. Why? Think of any commodity, say coffee, which grows in Africa and South America. - -Changes in demand come slowly, thanks to the conservatism of human nature. The demand for coffee can increase only if drinking becomes more popular, with an espresso machine in every bar. The demand can fall off if coffee drinking becomes less popular, due to a deteriorating economy or in response to a health fad. Demanddriven markets move at a leisurely pace. - -Now imagine that a major coffee growing area is hit by a hurricane or a freeze. Suddenly the world supply of coffee is rumored to be reduced by 10% and prices shoot up, cutting off marginal consumers. Imagine a new OPEC policy sharply curtailing crude oil supply or a general strike in a leading copper-mining country. When a commodity's supply is reduced or even rumored to be reduced, its price climbs, reallocating tight supplies to those best able to afford them. - -Grain prices often spike during spring and summer planting and growing seasons, as dry spells, floods, and pests threaten supplies. Traders say that a farmer loses his crop three times before harvesting it. Once the harvest is in and the supply is known, demand becomes the driving force. Demand-driven markets have narrower channels, with smaller profit targets, and lower risks. As seasons change, channels have to be redrawn, and trading tactics adjusted. A new trader may wonder why his tools stopped working. A smart trader gets out a new set of tools for the season and puts old ones in storage until next year—just as he swaps regular and snow tires on his car. - -A futures trader must know the key supply and demand factors of the market he's trading. For example, he must keep an eye on the weather during the critical growing and harvesting months in agricultural commodities. Trend traders in the futures markets tend to look for supply-driven markets, while swing traders can do just as well in demand-driven markets. - -Most commodities fluctuate through the seasons. Freezing spells in the United States are bullish for heating oil futures. Orange juice futures used to have wild runups during the frost season in Florida, but have become much more sedate due to the increase of orange production in Brazil in the Southern hemisphere. Seasonal trades take advantage of such swings, but you have to be careful because those cycles are seldom identical. Be sure to put your seasonal trades through the filter of technical analysis. - -## **Floors and Ceilings** - -Commodities, unlike stocks, rarely trade below certain price floors or above price ceilings. The floor depends on the cost of production. When the price of a commodity, be it gold or sugar, falls below that level, miners stop digging and farmers stop planting. Some third-world governments, desperate for dollars and trying to avoid social unrest, may subsidize production, paying locals in a worthless local currency and dumping their product on the world market. Still, if enough producers close up and quit, the supply will shrink, and prices will have to rise to draw in new suppliers. If you look at a 20-year chart of most commodities, you'll see that the same price areas have served as a floor year after year. - -The ceiling depends on the cost of substitution. If the price of a commodity rises, major industrial consumers will start switching away from it. If soybean meal, a major animal feed, becomes too expensive, the demand will switch to fishmeal, and if sugar becomes too costly, the demand will switch to corn sweeteners. - -Why don't more people trade against those levels? Why don't they buy near the floor and short near the ceiling, profiting from what is similar to shooting fish in a barrel? First of all, neither the floor nor the ceiling is set in stone, and markets may briefly violate them. Even more importantly, the human nature works against those trades. Most speculators don't have the courage to short a market that's boiling near record highs or go long a market after it has crashed. - -## **Contango, Inversion, and Spreads** - -All futures markets offer several contracts for different delivery months. For example, you can buy or sell wheat for delivery in September or December of this year, March of next year, and so on. Normally, the nearby months are cheaper than the remote ones, and that relationship is called a contango market. - -Higher prices for more remote deliveries reflect the "cost of carry"—financing, storing, and insuring a commodity. The differences between delivery months are called premiums, and hedgers closely watch them. When supply tightens or demand increases, people start paying up for the nearby months, and the premium for the faraway months begins to shrink. Sometimes the front months become more expensive than faraway months—the market becomes inverted! There is a real shortage out there, and people are paying extra to get their stuff sooner. This so-called "inversion" is one of the strongest signs of a bull market in a commodity. - -When you look for inversions, keep in mind that there is one market in which inversion is the norm. Interest rate futures are always inverted because those who hold cash positions keep collecting interest instead of paying finance and storage charges. - -Professionals don't wait for inversions—they monitor the narrowing or widening of premiums. A good speculator can rattle off the latest prices, but a floor trader will quote you the latest premiums. A savvy trader knows by heart the normal spreads between different delivery months. - -Hedgers tend to dominate the short side of the markets, most speculators are perpetual bulls, but floor traders love to trade spreads. Spreading means buying one delivery month and selling another in the same market. It also means going long one market while shorting a related one. - -If the price of corn, a major animal feed, starts to rise faster than the price of wheat, at some point ranchers will start using wheat rather than corn. They'll reduce their purchases of corn, while buying more wheat, pushing their spread back towards the norm. Spread traders bet against deviations and for a return to normalcy. In this situation, a spreader will short corn and buy wheat, instead of taking a directional trade in either market. - -Spread trading is safer than directional trading and has lower margin requirements. Amateurs do not understand spreads and have little interest in these reliable but slow-moving trades. There is not a single book on spreads I can recommend, a sign of how well professionals have sown up this area of knowledge and kept the outsiders out. This is one of a handful of niches in the markets where professionals are earning high incomes without the benefit of a single good how-to book. - -## **Commitments of Traders** - -Brokers report their clients' positions to the Commodity Futures Trading Commission (CFTC), which strips away personal data and releases summaries to the public. Their Commitments of Traders (COT) reports are among the best sources of information on what the smart money is doing in the futures markets. - -COT reports reveal positions of three groups—hedgers, big traders, and small traders. Hedgers identify themselves to brokers because that entitles them to several advantages, such as lower margin deposits. Big traders are those who hold the number of contracts above the "reporting requirements," set by the government. Whoever is not a hedger or a big trader is a small trader. - -In the old days, big traders used to be the smart money. Today, the markets are bigger, the reporting requirements much higher, and big traders are likely to be commodity funds, most of them not smarter than run of the mill traders. The hedgers are today's smart money, but understanding their positions isn't as easy as it seems. - -For example, a COT report may show that in a certain market, hedgers hold 70% of shorts. A beginner who thinks this is bearish may be completely off the mark if he doesn't know that normally hedgers hold 90% of shorts in that market, making the 70% stance wildly bullish. Savvy COT analysts compare current positions to historical norms and look for situations where hedgers, or the smart money, and small traders, many of whom are gamblers, are dead set against each other. If you find that in a certain market the smart money is overwhelmingly on one side, while the small specs are mobbing the other, it is time to use technical analysis to look for entries on the side of hedgers. - -## **Margins and Risk Control** - -Futures' low margin requirements make them more rewarding than stocks but also much more dangerous. When buying stocks in the United States, you must put up at least half of their cash value with the broker giving you a margin loan for the rest. If you have \$40,000 in your account, you may buy \$80,000 worth of stocks, and no more. This margin limit was implemented after the Crash of 1929 when it became clear that low margins led to excessive speculation, which contributed to the viciousness of declines. Prior to 1929, speculators could buy stocks on a 10% margin, which worked great in bull markets but forced them to liquidate when prices slid, pushing the market lower during bear markets. - -Margins of only three to five percent are common in the futures markets, allowing traders to make huge bets with little money. With \$40,000 in your account, you may control about a million dollars' worth of merchandise, be it pork bellies or stock index futures. - -For example, if gold trades at \$1,500/oz and you buy a 100-oz contract on a \$7,500 margin and catch a \$75 price move, you'll gain 100%. A beginner looks at these numbers and exclaims, "where have I been all my life?" He thinks he's found a royal road to riches. But there is a catch. Before that market rises \$75, it may dip \$50. That meaningless blip will trigger a margin call and force a small speculator's account to go bust—despite his correct forecast. - -Easy margins attract adrenaline junkies who quickly go up in smoke. Futures are very tradable—but only if you follow strict money management rules and don't go crazy with easy margins. Professionals put on small initial positions and pyramid them if a trade moves in their favor. They keep adding new contracts while moving stops beyond breakeven. - -When you become interested in futures, it's a good idea to make your first steps in those markets where you know something about the fundamentals. If you are a cattle rancher, a house builder, or a loan officer, then cattle, lumber, or interest rate futures would be logical starting points. If you have no particular interests, make your first steps in relatively inexpensive markets. In the United States, corn, sugar, and, in a slow year, copper can be good markets for beginners. They are liquid, volatile, and not too expensive. - -We'll return to the futures markets in Part 9, "Risk Management." There you'll find which contracts you may or may not trade, depending on their price and volatility as well as your account size. - -Futures traders with small accounts sometimes trade mini-contracts. For example, a regular contract of gold represents 100 oz of the yellow metal, but a minicontract covers only 20 oz. Mini-contracts trade during the same hours as regular contracts and closely track their prices. Their commissions are similar to those for regular contracts, taking a proportionately bigger bite from each trade. Their slippage tends to be bigger due to lower volumes. The exceptions are stock index futures, where mini contracts have higher volumes than regular ones. - -## ■ **47. Forex** - -The currency market is the largest asset class in the world by trading volume, with a turnover of over \$4 trillion per day. Currencies trade around the clock—from 20:15 GMT on Sunday to 22 GMT on Friday, stopping only on weekends. While some currency trades serve the hedging needs of importers and exporters, most transactions are speculative. - -The United States is the only country in the world where most people don't think much about currencies. The moment an American sets foot abroad, he realizes that everyone, from executives to taxi drivers, watches the exchange rates. When people outside the United States get their hands on a bit of trading capital, often their first idea is to trade forex. - -The forex market has no central location. Institutions deal in the interbank market, trading with each other using online platforms, such as Bloomberg or Reuters. Unless you can trade \$10 million of spot forex at a pop, you'll be trading retail, going through a broker. - -Most beginners open accounts at forex shops where they immediately run into a fatal flaw—your broker is your enemy. When you trade stocks, futures, or options, your broker is your agent: he executes your trades for a fee, and that's the end of it. Not so in most forex (as well as CFD) houses, where your broker is likely to take the opposite side of every trade. You and the forex house are now against each other: if you lose, your broker will profit, and if you win, he'll lose. Since the house holds most of the cards, it has many ways to achieve the desired result. - -Most forex houses "bucket" customer orders—accept them without executing any trades. They charge spreads, commissions, interest, etc. for non-existent trades. I received the clearest explanation of their game from a chatty head dealer at a major European forex house (which is now expanding worldwide, with branches in the United States—I see their billboards in New York). - -That forex house accepts any trade in any currency pair, whether long or short, but always shifts the bid-ask spread to put itself at an advantage from the get-go. Those so-called "trades" never go anywhere—they're only kept as electronic entries in the firm's books. The forex house charges interest if its customers take their phantom "positions" overnight, even though there is never any position, since the house simply holds the opposite side of each trade. The only time the firm goes to the legitimate market is when multiple client orders cluster on the same side of the same currency pair in excess of a million dollars—that's when the house hedges its own exposure in the real market. - -When you trade stocks, options, or futures, your broker buys or sells on your behalf, earning a commission for this service, and doesn't care whether you win or lose. This is great, because he has no incentive to push you into losing. On the other hand, a forex house that buckets your orders wants you to lose, so that it can win. In addition to shifting bid-ask spreads and charging interest on non-existent positions, it may even charge a daily "resettlement fee"—the full bid-ask spread for every day you hold a trade. - -Forex shops help ensure their clients' demise by offering homicidal leverage. I've seen them offer leverage of 100:1 and even 400:1. A newcomer who scrapes together a \$1,000 stake can suddenly control a position worth a hundred thousand dollars. This means that the slightest price wiggle against him is guaranteed to wipe out his equity. That's why those shops confidently keep clients' money in-house, never transmitting their trades to the real market—why share the loot with anyone else? They are so certain of their clients' demise that many compensate employees with a percentage of the client deposits that they bring in—funds deposited with a forex house are as good as theirs. - -"The market has long been plagued by swindlers preying on the gullible," according to *The New York Times*. "The average individual foreign-exchange-trading victim loses about \$15,000, according to CFTC records," writes *The Wall Street Journal*. Currency trading "has become the fraud du jour," according to Michael Dunn of the U.S. Commodity Futures Trading Commission. - -In August 2008, the CFTC set up a special task force to deal with growing foreign exchange fraud. In January 2010, the CFTC identified a "number of improper practices" in the retail foreign exchange market, "among them solicitation fraud, a lack of transparency in the pricing and execution of transactions, unresponsiveness to customer complaints, and the targeting of unsophisticated, elderly, low net worth and other vulnerable individuals." It proposed new rules limiting leverage to 10 to 1. - -Frauds may include churning customer accounts, selling useless software, improperly managing "managed accounts," false advertising, and Ponzi schemes. All the while, promoters claim that trading foreign exchange is a road to profits. - -The real forex market is a zero sum game, in which well-capitalized professional traders, many of whom work for banks, devote full-time attention to trading. An inexperienced retail trader has a significant information disadvantage. The retail trader always pays the bid-ask spread, which lowers his odds of winning. Retail forex traders are almost always undercapitalized and subject to the problem of "gambler's ruin." Even in a fair game between two players, the one with the lower amount of capital has a higher probability of going bust in the long run. - -Having observed forex shops for decades, I was amused to see what my best student did when he became interested in forex. This multimillionaire stock trader decided to check out forex houses by opening large accounts and then waiting for the night, when forex trading was at its thinnest. That's when he placed his orders, always of a very unusual and atypical size, and watched the tape. There were only two houses that showed his orders on tape—the rest, apparently, got bucketed. - -I enjoy trading currencies, but wouldn't go near a forex house. Instead, I trade electronic currency futures. That's what I recommend to anyone interested in trading foreign exchange. Futures brokers work for you, not against you; futures spreads are more narrow, commissions more reasonable, and no interest is charged for the privilege of holding a position. There are contracts for most major currency pairs and even mini-contracts for euro/dollar and yen/dollar. - -One of the real challenges of currencies is that they move around the clock. You may enter a trade, analyze it in the evening, and decide to take profits the following day. When you wake up, there are no profits to be taken. The turning point you saw coming has already come and gone, only not in the United States, but in Asia or Europe. Someone had picked your pocket while you slept! - -Major financial institutions deal with this problem by using the system of "passing the book." A bank may open a position in Tokyo, manage it intraday, and then transfer it to its London branch before closing for the night. London continues to manage that and other positions, and in the evening passes the book to New York, which manages it until it passes it back to Tokyo. Currencies follow the sun, and small traders can't keep up with it. If you trade currencies, you either need to take a very long-term view and ignore daily fluctuations, or else day-trade and avoid overnight positions. diff --git a/trading/The New Trading for a Living/013_PART 9 Risk Management.md b/trading/The New Trading for a Living/013_PART 9 Risk Management.md deleted file mode 100644 index a3c016f8c66a8bdb36be3b2399b1b929a5b4ca8b..0000000000000000000000000000000000000000 --- a/trading/The New Trading for a Living/013_PART 9 Risk Management.md +++ /dev/null @@ -1,297 +0,0 @@ -# Risk Management - -A good trading system delivers greater profits than losses over a period of time, but even the most carefully designed system doesn't guarantee success in every trade. No system can assure you of never having a losing trade or even a series of losing trades. - -A system is a plan, but as Helmuth von Moltke, a nineteenth-century German field marshal, wrote: "No plan survives contact with the enemy." The U.S. boxer Mike Tyson, quoted by *The Economist*, put it more bluntly: "Everyone has a plan 'til they get punched in the mouth." This is why risk control must be an essential part of every trading system. - -The inability to manage losses is one of the worst pitfalls in trading. Beginners freeze like deer in the headlights when a deepening loss starts wiping out profits of many good trades. It's a general human tendency to take profits quickly but wait for losing trades to come back to even. By the time the despairing amateur gives up hope and closes his trade with a terrible loss, his account is badly and sometimes irreparably damaged. - -To be a successful trader, you need to learn risk management rules and firmly implement them. - -## ■ **48. Emotions and Probabilities** - -Money stirs up powerful feelings. The emotional storms, raised by making or losing money, hit our trading. - -A beginner rushing to place an order may feel giddy with the excitement. He will soon find out that the market offers a painfully expensive form of entertainment. Early in my career, I heard from a professional trader that "successful trading should be a little bit boring." He spent long hours each day doing homework, sifting through market data, calculating risks, and maintaining records. Those time-consuming tasks weren't exciting—but his success was built on such grunt work. Beginners and gamblers get a full load of entertainment, but pay for it with losses. - -Another emotional mistake is counting money in open trades. Newbies dream about what they can buy with open profits or freeze from the shock of comparing open losses to their paychecks. Thinking about money interferes with decision making. Professionals focus on managing trades; they count money only after those trades are closed. - -A trader who counts profits in an open trade is like a lawyer who, in the middle of a trial, starts dreaming of what he'll buy with his fee. That trial is still going on, his opponents are building a case against his client, and counting money will not help him win—quite the contrary, it'll distract him and cause him to lose. An amateur who becomes upset counting losses in an open trade is like a surgeon who throws a tray of instruments after the patient on the table starts bleeding—his frustration will not improve the outcome of the case. - -Professional traders don't count money in open trades. They do it at the end of an accounting period, such as a month. - -If you were to ask me about an open trade, I could answer that it's a bit ahead, a lot ahead, or a bit behind (a lot behind is unlikely because of my stops). If you were to press me for a number, I might tell you how many ticks I'm ahead or behind, but I'll never translate those ticks into dollars. It took me years to train myself to break the destructive habit of counting money in open trades. I can count ticks, but my mind stops before converting them into dollars. It's like being on a diet—there is plenty of food around, but you don't touch it. - -Focus on managing your trade, and the money will follow almost as an afterthought. Another key point: a professional doesn't get worked up about his wins or losses in a single trade. There is a great deal of randomness in the markets. We can do everything right—and still end up with a losing trade, just like a surgeon can do everything right and still lose a patient. That's why a trader should care only about having a method with a positive expectation and work on being profitable at the end of his accounting period. - -The goal of a successful professional in any field is to reach his personal best—to become the best doctor, the best lawyer, or the best trader. Handle each trade like a surgical procedure—seriously, soberly, without sloppiness or shortcuts. Concentrate on trading right. When you work this way, money will come later. - -## **Why Johnny Can't Sell** - -Your survival and success depend on your willingness to cut losses while they're relatively small. - -When a trade starts going against a beginner, he hangs on, hoping for a reversal in his favor. When he gets a margin call, he scrambles to send more money to the broker, as if the initial loss hadn't been bad enough. Why should a losing trade turn in his favor? There's no logical reason, only wishful thinking. - -Stubbornly holding a losing trade only deepens the wound. Losses have a way of snowballing until what initially seemed like a bad loss starts looking like a bargain because the current drawdown is so much worse. Finally, a desperate loser bites the bullet and closes out a trade, taking a severe loss. - -Right after he exits, the market reverses and comes roaring back. - -The trader is ready to smash his head against a wall—had he hung on, he would have made money. Such reversals happen time and again because most losers respond to the same stimuli. People have similar emotions, regardless of their nationality or education. A frightened trader with sweaty palms and a pounding heart feels and acts the same way, whether he grew up in New York or Hong Kong and whether he had 2 or 20 years of schooling. - -The intellectual demands of trading are modest, but its emotional demands are immense. Many years ago, a highly educated but very emotional trader showed me how to trade divergences near channel walls. I fine-tuned his method, added risk management rules, and continue to make money with it to this day. The man who taught me had busted out because of his lack of discipline and ended up going door to door, selling aluminum siding. Emotional trading and impulsivity are not good for success. - -Roy Shapiro, a New York psychologist from whose article the title of this subchapter is borrowed, writes: "With great hope, in the private place where we make our trading decisions, our current idea is made ready.... one difficulty in selling is the attachment experienced toward the position. After all, once something is ours, we naturally tend to become attached to it.... This attachment to the things we buy has been called the "endowment effect" by psychologists and economists and we all recognize it in our financial transactions as well as in our inability to part with that old sports jacket hanging in the closet. The speculator is the parent of the idea.... the position takes on meaning as a personal extension of self, almost as one's child might.... Another reason that Johnny does not sell, even when the position may be losing ground, is because he wants to dream.... For many, at the moment of purchase, critical judgment weakens and hope ascends to govern the decision process." - -Dreaming in the markets is a luxury we can't afford. - -Dr. Shapiro describes a test that shows how people conduct business involving a chance. First, a group of people are given a choice: a 75 percent chance to win \$1000 with a 25 percent chance of getting nothing—or a sure \$700. Four out of five subjects take the second choice, even after it is explained to them that the first choice leads to a \$750 gain over time. The majority makes the emotional decision and settles for a smaller gain. - -Another test is given: People have to choose between a sure loss of \$700 or a 75 percent chance of losing \$1000 and a 25 percent chance of losing nothing. Three out of four take the second choice, condemning themselves to lose \$50 more than they have to. In trying to avoid risk, they maximize losses! - -**200** RISK MANAGEMENT - -Emotional traders crave certain gains and turn down profitable wagers that involve uncertainty. They go into risky gambles to postpone taking losses. It is human nature to take profits quickly and losses slowly. The irrational behavior increases when people feel under pressure. According to Dr. Shapiro, at the racetrack, "bets on long shots increase in the last two races of the day." - -Prof. Daniel Kahneman writes in his book *Thinking, Fast and Slow*: "The sure loss is very aversive, and this drives you to take the risk … Considerable loss aversion exists even when the amount at risk is minuscule relative to your wealth … losses loom larger than corresponding gains." He adds: "Animals, including people, fight harder to prevent losses than to achieve gains" and spells it out: "People who face very bad options take desperate gambles, accepting a high probability of making things worse in exchange for a small hope of avoiding a large loss. Risk taking of this kind often turns manageable failures into disasters." Why do we act this way? Prof. Kahneman explains: "Except for the very poor, for whom income coincides with survival, the main motivators of money-seeking are not necessarily economic. Money is a proxy for points on a scale of self-regard and achievement." These rewards and punishments, promises and threats, are all in our heads. - -Emotional trading destroys losers. A review of trading records usually shows that the worst damage was done by a few large losses or a long string of losses, while trying to trade one's way out of a hole. The discipline of good money management would have kept us out of that hole in the first place. - -## **Probability and Innumeracy** - -Innumeracy—the inability to count or understand the basic notions of probability is a fatal weakness for traders. The counting skills aren't hard, can be picked up from many basic books, and then sharpened with some practice. - -The lively book *Innumeracy* by John Allen Paulos is an excellent primer on the concepts of probability. Paulos describes being told by a seemingly intelligent person at a cocktail party: "If the chance of rain is 50 percent on Saturday and 50 percent on Sunday, then it is 100 percent certain it will be a rainy weekend." Someone who understands so little about probability is sure to lose money trading. You owe it to yourself to develop a grasp of the basic mathematical and logical concepts involved in trading. - -There are very few ironclad certainties in market analysis, which is largely based on probabilities. "If the signals A and B are present, then the outcome C will occur" is not the kind of logic that holds up in the markets. - -Ralph Vince begins his important book *Portfolio Management Formulas* with this delightful paragraph: "Toss a coin in the air. For an instant you experience one of the most fascinating paradoxes of nature—the random process. While the coin is in the air there is no way to tell for certain whether it will land heads or tails. Yet over many tosses, the outcome can be reasonably predicted." - -Mathematical expectation is an important concept for traders. Each trade has either a positive expectation, also called the player's edge, or a negative expectation, also called the house advantage, depending on who has better odds in a game. If you and I flip a coin, neither of us has an edge—each has a 50 percent chance of winning. If you play the same game in a casino that takes five percent from every pot, you'll win only 95 cents for every dollar you lose. This "house advantage" will create a negative mathematical expectation. No system for money management can beat a negative expectation over a period of time. - -## **A Positive Expectation** - -A skilled card-counter has an edge against a casino, unless they detect him and throw him out. Casinos love drunken gamblers but hate card counters. An edge lets you win more often than lose over a period of time. Without an edge, you might as well give money to charity. In trading, the edge comes from systems that deliver greater profits than losses, after slippage and commissions, over a period of time. Acting on hunches leads to losses. - -The best trading systems are simple and robust. They have very few elements. The more complex the systems, the higher the risk that some of its components will break. - -Traders love to optimize systems, making them fit past data. The trouble is, your broker won't let you trade in the past. Markets change, and indicator parameters that would have nailed the trends last month are unlikely to nail them a month from now. Instead of optimizing your system, try to de-optimize it. A robust system holds up well to market changes and beats a heavily optimized system in real trading. - -Finally, once you develop a good system, stop messing with it. If you like to tinker, design another system. As Robert Prechter put it: "Most traders take a good system and destroy it by trying to make it into a perfect system." - -Once you have a trading system that works, it's time to set the rules for money management. You can win only if you have a positive mathematical expectation from a sensible trading system. Money management will help you exploit a good system, but cannot rescue a bad one. - -## **Businessman's Risk or Loss** - -We analyze markets in order to identify trends. Be careful not to become overconfident when anticipating future prices. The future is fundamentally unknowable. When we buy, expecting a rally, it is entirely possible that an unforeseen event may flip the market and send it down. Your actions in response to surprises will define you as a trader. - -A pro manages his trades, accepting what's called a "businessman's risk." This means that the amount he risks exposes him to only a minor equity drop. A loss, on the other hand, may threaten an account's health and even survival. We must draw a clear line between a businessman's risk and a loss. That border is defined by the fraction of the account a trader puts at risk in a trade. - -If you follow the risk management rules described below, you'll accept only a normal businessman's risk. Violating a well-defined red line will expose you to dangerous losses. - -"This time is different," says an undisciplined trader. "I'll give this trade a little extra room." The market seduces traders into breaking their rules. Will you follow yours? - -Once, I chaired a panel at a gathering of money managers at which one of the presenters had nearly a billion dollars in his fund. A middle-aged man, he got into this business in his 20s, while working for a naval consulting firm after graduate school. Bored with his day job, he designed a trading system but couldn't trade it because it required a minimum of \$200,000, which he didn't have in those days. "I had to go to other people," he said, "and ask them for money. Once I explained to them what I was going to do and they gave me money, I had to stick to my system. It would have been unconscionable to deviate from the system I told them I would follow. My poverty worked for me." Poverty and integrity. - -## ■ **49. The Two Main Rules of Risk Control** - -If trading is a high-wire act, then safety demands stringing a net underneath that wire. If we slip, the net will save us from getting smashed against the floor. The only thing better than a safety net is two safety nets: if one doesn't catch us as we fall, the other will. - -Even the best planned trades can go awry because of randomness in the markets. Even the best analyses and the clearest trade setups can't prevent accidents. What you can control is risk. You do it by managing the size of your trades and the placement of stops. This is how you keep the inevitable losses small, not allowing them to cripple your account, so that you can win in the long run. - -Ugly losses stick out like sore thumbs from most account records. Every performance review shows that a single terrible loss or a short string of bad losses did most of the damage to an account. Had a trader cut his losses sooner, his bottom line would have been much higher. Traders dream of profits but freeze when a losing trade hits them. If you follow risk management rules, you'll quickly get out of harm's way instead of waiting and praying for the market to turn. - -Markets can snuff out an account with a single horrible loss that effectively takes a person out of the game, like a shark bite. Markets can also kill with a series of bites, none of them lethal but combined they strip an account to the bone, like a pack of piranhas. The two pillars of money management are the 2% and 6% Rules. The 2% Rule will save your account from shark bites and the 6% Rule from piranhas. - -## **The Two Worst Mistakes** - -There are two quick ways to ruin an account: not use stops and put on trades that are too large for that account's size. - -Trading without stops exposes you to unlimited losses. In the following chapters, we'll discuss the principles and rules of risk control, but they will work only if you use stops. - -There are several methods for setting stops, and we'll discuss them in Chapter 54. We want to place our stops neither too far nor too close. At this point, just keep in mind that you must use stops. You have to know your maximum level of risk—it's as simple as that. If you don't know your maximum level of risk, you're flying blind. - -The other fatal error is overtrading—putting on trades whose size is too large for your account. This is like putting a huge sail on a small boat—a strong gust of wind will flip the boat over instead of making it go faster. - -People put on trades that are too large for their accounts out of ignorance, greed, or a combination of both. There is a simple mathematical rule that gives you the maximum size for every trade, as you are about to see. - -## ■ **50. The Two Percent Rule** - -One disastrous loss can do to an account what a shark does to a hapless swimmer. A poor beginner who loses a quarter of his equity in a single trade is like a swimmer who just lost an arm or a leg to a shark and is bleeding into the water. He'd have to generate a 33% return on the remaining capital simply to come back to even. The chances of him being able to do that are slim to none. - -The typical victim of a "shark bite" loses more money. He loses confidence and becomes fearful of pulling the trigger. The way to avoid "shark bite" losses is by following the 2% Rule. It will limit your losses to a manageable size—to a normal businessman's risk. - -### **The 2% Rule prohibits you from risking more than 2% of your account equity on any single trade.** - -For example, if you have \$50,000 in your account, the 2% Rule limits your maximum risk on any trade to \$1,000. This is not the size of your trade—it's the amount you put at risk, based on the distance from your entry to your stop. - -Let's say you decide to buy a stock for \$40 and put a stop at \$38, just below support. This means you'll be risking \$2 per share. Dividing your total permitted risk of \$1,000 by your \$2 risk per share tells you that you may trade no more than 500 shares. You are perfectly welcome to trade fewer shares—you don't have to go the max every time. If you feel very bullish about that stock and want to trade the maximum permitted size, that number of shares will be limited to 500. - -Good market analysis alone will not make you a winner. The ability to find good trades will not guarantee success. Markets are full of good analysts who destroy their accounts. You can profit from your research only if you protect yourself from sharks. - -I've seen traders make 20, 30, and once even 50 profitable trades in a row, and still end up losing money. When you're on a winning streak, it's easy to feel you've figured out the game. Then a disastrous loss wipes out all profits and tears into your equity. You need the shark repellent of good money management. - -A good trading system will give you an edge in the long run, but in the short run there is a great deal of randomness in the markets. The outcome of any single trade is close to a toss-up. A professional trader expects to be profitable by the end of the month or the quarter, but ask him whether he'll make money on his next trade and he'll honestly say he doesn't know. That's why he uses stops: to prevent negative trades from damaging his account. - -Technical analysis can help you decide where to place a stop, which will limit your loss per share. Money management rules will help you protect your account as a whole. The single most important rule is to limit your exposure on any trade to no more than 2% of your account. - -This rule applies only to money in your trading account. It doesn't include your savings, equity in your house, retirement account, or Christmas club. Your trading capital is the money you've dedicated to trading. This is your true risk capital—the equity in your trading enterprise. If you have separate trading accounts for stocks, futures, and options, apply the 2% Rule to each account separately. - -I've noticed a curious difference in how people react when they first hear about the 2% Rule. Newbies with small accounts often object that this number is too low. Someone asked me whether the 2% Rule could be increased when he was feeling especially confident about a trade, and I answered that it would be like adding extra length to the cord for bungee jumping because you like the view from the bridge. - -Professionals, on the other hand, often say that 2% is too high and they try to risk less. You wouldn't want to lose 2% of a million dollars on a single trade in one day. A hedge fund manager who consulted with me said that his project for the next six months was to increase his trading size. He never risked more than 0.5% of equity on a trade—and was going to teach himself to risk 1%. Good traders tend to stay well below the 2% limit. Whenever amateurs and professionals are on the opposite sides of an argument, you know which side to choose. Try to risk less than 2%—it is simply the maximum level. - -Measure your account equity on the first day of each month. If you start the month with \$100,000 in your account, the 2% Rule allows you to risk a maximum of \$2,000 per trade. If you have a good month and your equity rises to \$105,000, then your 2% limit for the next month will be—what? Quick! Remember, good traders can count! If you have \$105,000 in your account, the 2% Rule allows you to risk \$2,100 and trade a slightly bigger size. If, on the other hand, you had a bad month and your equity fell to \$95,000, the 2% Rule will set your maximum permitted risk at \$1,900 per trade for the following month. The 2% Rule links the size of your trades to your performance as well as account size. - -## **The Iron Triangle of Risk Control** - -How many shares will you buy or sell short in your next trade? Beginners often choose an arbitrary number, such as a thousand or 200 shares. They may buy more if they've made money in their latest trade or less if they've lost money. - -In fact, trade size should be based on a formula instead of vague gut feel. Use the 2% Rule to make rational decisions on the maximum number of shares you may buy or sell short in any trade. I named this process "The Iron Triangle of risk control" (Figure 50.1). - -For example, when I volunteered to teach a yearlong course "Money and Trading" in a local high school and wanted to make the experience real for the kids, I opened a \$40,000 account. I told my students that if, at the end of the school year, we made money, I'd give half the profit to their school and distribute the rest among class - -**FIGURE 50.1** The Iron Triangle of risk control. - -Construct the Iron Triangle in three steps: - -- A. Your maximum dollar risk for the trade you're planning (never more than 2% of your account). -- B. The distance, in dollars, from your planned entry to your stop—your maximum risk per share. -- C. Divide "A" by "B" to find the maximum number of shares you may trade. You aren't obligated to trade this many shares, but you may not trade more than this number. - -participants. I also told them that their maximum risk per trade was one percent. A kid would stand up in class and make a case for buying Nokia at \$16, with a stop at \$14.50. "How many shares may we trade?"—I'd ask. With the maximum risk of \$400 per trade and \$1.50 risk per share, the kids would be allowed to buy 250 shares, with some leeway for commissions. - -If you have a tiny account, you may end up trading the maximum permitted number of shares each time. As your account grows bigger, you may want to vary the size of your trades: say a third of the maximum for regular trades, two thirds for extra strong trades, and the full amount for exceptional trades. Whatever you do, the Iron Triangle of risk control will set the maximum number of shares you may trade. - -## **The 2% Rule in the Futures Markets** - -A trader recently asked me how he could apply the Iron Triangle of risk control to trading e-mini futures in his \$50,000 account. I replied: - -- A. If you are trading a \$50k account, the 2% Rule would limit your risk on any trade to \$1,000. Let's say you want to be conservative and risk only 1% of that account, or \$500. That will be the first side of "the Iron Triangle of risk Control." -- B. Suppose you look at your favorite e-minis and want to sell a contract short at 1810, with a profit target at 1790 and a stop at 1816. You'll be risking 6 points, and since one point in e-minis is worth \$50, your total risk will be \$300 (plus commissions and possible slippage). That will be the second side of your Iron Triangle of risk control. -- C. Close the triangle by dividing "a" by "b" to find the maximum size you may trade. If your maximum risk is \$500, then one contract, but if \$1,000, then three. - -Please meet two futures traders, Mr. Hare and Mr. Turtle, each with a \$50,000 account. The agile Mr. Hare sees that the average daily range in gold is about \$30, worth \$3,000 per day for a single contract. The daily range in corn is about 10 cents, worth \$500 per day for a single contract. He thinks that if he can catch just half of a day's range, he'll make \$1,500 per contract in gold, while the same level of skill will bring him only \$250 in corn. Mr. Hare logs into his brokerage account and buys two contracts of gold. - -The cautious Mr. Turtle has a different arithmetic. He begins by using the 2% Rule to cap his maximum risk per trade at \$1,000. He sees that it would be impossible to place a meaningful stop while trading gold which can move \$3,000 a day. To buy gold in his account would be like grabbing a very large tiger by a very short tail. If, on the other hand, he trades corn, he'll have good staying power. That tiger is smaller and has a longer tail, which he can wrap around his wrist. Mr. Turtle buys a contract of corn. Who do you think is more likely to win in the long run, Mr. Hare or Mr. Turtle? - -Futures markets are more deadly than stocks not because of any special complexity. Sure, they have some specific angles, but those aren't too hard to learn. Futures kill traders by seducing them with paper-thin margins. They offer enormous leverage –ability to trade large positions on a 5% margin. This works wonders when the market moves in your favor, but it slices your wallet when the market turns against you. - -You can succeed in futures only with sensible risk control, using the 2% Rule. - -- A. Calculate 2% of your account value—this will be the maximum acceptable risk level for any trade. If you have \$50,000 in your futures account, the most you can risk is \$1,000. -- B. Examine the charts of the market that interests you and write down your planned entry, target, and stop. Remember: a trade without these three numbers is not a trade but a gamble. Express the value of the move from your entry to your stop in dollars. -- C. Divide A by B, and if the result turns out to be less than one, no trade is permitted—it means you cannot afford to trade even one contract. - -Let's review two market examples, featuring similar chart patterns (Figure 50.2). Let's assume you have a \$50,000 account, which permits you to risk the maximum of \$1,000 per trade. - -You can trade futures reasonably safely only with strict money management. The leverage of futures can work for you—as long as you stay away from those contracts that can kill your account. - -A professional futures trader surprised me early in my career when he told me he spent a third of his time on risk management. Beginners jump into trades without giving them much thought. Intermediate-level traders focus on market analysis. Professionals dedicate a massive proportion of their time to risk control—and take money away from beginners and amateurs. - -**FIGURE 50.2** Daily charts with 13- and 26-day EMAs and Autoenvelopes. The Impulse system and MACD-Histogram 12-26-9. *(Charts by Tradestation)* - -#### The 2% Rule in Futures—Silver and Wheat - -Suppose you want to buy silver at the right edge of this chart. Prices have traced a double bottom with a false downside breakout. MACD-Histogram has traced a bullish divergence. The Impulse system has turned blue, permitting buying. The nearby futures contract trades at \$21.415 a few minutes before the close. - -You decide that if you buy, your profit target will be near \$23, halfway from the EMA to the upper channel line. Your stop will be at \$20.60, the level of the latest low. You'll be risking \$0.815/oz trying to make about \$1.585/oz—a 2:1 reward/risk ratio, an acceptable number. - -Are you allowed to take this trade? Absolutely not! That \$0.815/oz risk per contract translates into \$4,075 total risk, since one contract covers of 5,000 ounces of silver. Remember, your maximum permitted risk is \$1,000. If you're eager to take this trade, you may buy a single mini-contract. It covers only 1,000 ounces of silver, meaning you'll risk \$815. Best wishes for that sensible trade. - -Now, suppose you're interested in buying wheat at the right edge of this chart. Its technical picture looks similar: a double bottom with a bullish divergence of MACD-Lines and MACD-Histogram. The Impulse system has turned blue, permitting buying. Shortly before the close, prices are near 658 cents. - -You decide that if you enter there, your target will be near 680 cents, near the upper channel line. Your stop will go to 652 cents, the level of a recent low. You'll be risking 10 cents/bu, trying to make about 22 cents/bu—a reward/risk ratio of 2:1, similar to that of silver. - -Are you allowed to take this trade? Yes! That 10 cent risk per contract translates into \$500 total risk, since the contract covers 5,000 bushels of wheat. Remember, your maximum permitted risk is \$1,000. If you're very bullish, you may even buy two contracts. - -You must keep in mind that when trading futures the technical pictures of different markets may look similar, but you must base your decisions to trade or not to trade on money management rules. - -If you cannot afford to trade a certain market, you can still download its data, do your homework, and paper trade it as if you were doing it with real money. This will prepare you for the day when your account grows big enough or the market grows quiet enough for you to put on a trade. - -## ■ **51. The Six Percent Rule** - -A piranha is a tropical river fish not much bigger than a man's hand, but with a mean set of teeth. What makes it so dangerous is that it attacks in packs. If a dog, a donkey, or a person stumbles into a tropical stream, a pack of piranhas can attack with such a mass of bites that the victim collapses. A bull can walk into a river, be attacked by a pack of piranhas, and a few minutes later only its bones will be left in the water. A trader, who keeps sharks at bay with the 2% Rule, still needs protection from piranhas. The 6% Rule will save you from being nibbled to death. - -Most of us, when we find ourselves in trouble, start pushing harder. Losing traders often take on bigger positions, trying to trade their way out of a hole. A better response to a losing streak is to step aside and take time off to think. The 6% Rule sets a limit on the maximum monthly drawdown in any account. If you reach it, you stop trading for the rest of the month. The 6% Rule forces you to get out of the water before piranhas get you. - -### **The 6% Rule prohibits you from opening any new trades for the rest of the month when the sum of your losses for the current month and the risks in open trades reach 6% of your account equity.** - -We all go through periods when we are in tune with the markets, taking one profit after another. When everything we touch turns to gold, that's the time to trade actively. - -There are other times when everything we touch turns into a completely different substance. We go through periods when our systems go out of sync with the market, delivering one loss after another. It's important to recognize such dark periods and not push yourself but rather step back. A professional on a losing streak is likely to take a break, continue to monitor the market, and wait to get in gear with it again. Amateurs are more likely to keep pushing until their accounts become crippled. The 6% Rule will make you pause while your account is still largely intact. - -## **The Concept of Available Risk** - -Before you put on a trade, ask yourself: what would happen if all your trades suddenly turned against you? If you used the 2% Rule to set stops and trade sizes, the 6% Rule will limit the maximum total loss that your account may suffer. - -- 1. Add up all your losses taken this month. -- 2. Add up your risks on all currently open trades. The dollar risk of any open position is the distance from your entry to the current stop, multiplied by the trade size. Suppose you've bought 200 shares for \$50, with a stop at \$48.50, risking \$1.50 per share. In that case, your open risk is \$300. If that trade starts going your way and you move your stop to breakeven, your open risk will become zero. -- 3. Add the two lines above (losses for the month plus risks on open trades). If their sum comes to 6% of what your account equity was at the beginning of the month, you may not put on another trade until the end of the month or until the open trades move in your favor, allowing you to raise your stops. - -The 6% Rule changes the usual question—"do I have enough money for this trade?"—to a much more relevant one—"do I have enough risk available for this trade?" That limit—risking no more than 6% of your account equity in any given month—keeps your total risk under control, ensuring long-term survival. Your total available risk for the month is 6% of your account equity, and the first question to ask yourself when considering a new trade is "Considering all my open and closed trades for this month, do I have enough available risk for this trade?" - -You know how much money, if any, you've lost during the current month. It's easy to calculate how much money you have at risk in your open trades. If your previous losses for this month plus your risk on existing trades expose you to a total risk of 6% of your account equity, you may not put on another trade. - -If the 6% Rule doesn't allow you to put on a new trade, continue to track the stocks you're interested in. If you see a trade you really want to take, but don't have available risk, consider closing out one of your open trades to free up some risk. - -If you are near the 6% limit but see a very attractive trade you wouldn't want to miss, you have two options. You can take profits on one of your open trades to free up available risk. Alternatively, you may tighten some of your protective stops, reducing your open risk. Just be sure that in your eagerness to trade you do not make your stops too tight (see Chapter 54). - -Let's review an example, assuming, for the sake of simplicity, that a trader will risk 2% of his account equity on any given trade. - -- 1. At the end of the month, a trader has \$50,000 in his account, with no open positions. He writes down his maximum risk levels for the month ahead—2% or \$1,000 per trade and 6% or \$3,000 for the account as a whole. -- 2. Several days later he sees a very attractive stock A, figures out where to put his stop, and buys a position that puts \$1,000, or 2% of his equity, at risk. -- 3. A few days later he sees a stock B, and puts on a similar trade, risking another \$1,000. -- 4. By the end of the week he sees a stock C, and buys it, risking another \$1,000. -- 5. The next week he sees a stock D, more attractive than any of the three above. May he buy it? No, he may not, because his account is already exposed to 6% risk. He has three open trades, risking 2% on each, which means he may lose 6% if the market turns against him. The 6% Rule prohibits him from taking any more risks at this time. -- 6. A few days later, the stock A rallies and the trader moves his stop above breakeven. Stock D, which he wasn't allowed to trade just a few days ago, still looks very attractive. May he buy it now? Yes, he may, because his current risk is only 4% of his account. He is risking 2% in stock B and another 2% in stock C, but nothing in stock A, because its stop is above breakeven. The trader buys stock D, risking another \$1,000 or 2%. - -- 7. Later in the week, the trader sees stock E, which looks very bullish. May he buy it? Not according to the 6% Rule because his account is already exposed to a combined risk of 6% in stocks B, C, and D (there is no longer a risk in stock A). He may not buy stock E. -- 8. A few days later, stock B hits its stop. Stock E still looks attractive. May he buy it? No, since he already lost 2% on stock B and has a 4% exposure to risk in stocks C and D. Adding another position at this time would expose him to more than 6% risk per month. - -Three open trades isn't a lot of diversification. If you wish to make more trades, set your risk per trade at less than 2%. For example, if you risk only 1% of your account equity on any trade, you may open up to six positions before maxing out at the 6% limit. In trading a large account, I use the 6% Rule but tighten the 2% Rule to well under 1%. - -The 6% Rule allows you to increase your trading size when you're on a winning streak but makes you stop trading early in a losing streak. When markets move in your favor, you can move your stops to breakeven and have more available risk for new trades. On the other hand, if your positions start going against you and hitting stops, you'll quickly stop trading and save the bulk of your account for a fresh start next month. - -The 2% Rule and the 6% Rule provide guidelines for pyramiding—adding to winning positions. If you buy a stock and it climbs high enough to raise your stop above breakeven, then you may buy more of the same stock, as long as the risk on the new position is no more than 2% of your account equity and your total account risk is less than 6%. Handle each addition as a separate trade. - -Many traders go through emotional swings, feeling elated at the highs and gloomy at the lows. Those mood swings will not help you trade, just the opposite. It is better to invest your energy in risk control. The 2% and the 6% Rules will convert your good intentions into the reality of safer trading. - -## ■ **52. A Comeback from a Drawdown** - -When the level of risk goes up, our ability to perform goes down. Beginners make money on small trades, start feeling confident, and jack up trade size. That's when they start losing. The increased level of risk on bigger positions makes them stiffer and less nimble, and that's all it takes to fall behind. - -I saw a great example of that while running a psychological training group for a day-trading firm in New York. That firm taught its traders a proprietary stock trading system and let them trade the firm's capital on a profit-sharing basis. Their two top traders were making up to a million dollars a month; others made much smaller profits but quite a few lost money. The firm's owner asked me to come and help losing traders. - -They were shocked to hear that a psychiatrist was coming and loudly protested they "weren't crazy." The owner provided the motivation by telling his worst performers they had to participate—or else leave the firm. After six weeks, the results were such that we had a waiting list for the second group. - -Since the company taught traders its own system, we focused on psychology and risk control. In one of our first meetings, a trader complained that he had lost money each day for the past 13 days. His manager, who sat in on our meetings, confirmed that the fellow was using the firm's system but couldn't make any money. I began by saying that I'd take off my hat for anyone who lost 13 days in a row and had the emotional strength to come in and trade the next morning. I asked the man how many shares he traded, since the firm set a maximum for each trader. He was permitted to buy or sell up to 700 shares at a clip, but voluntarily reduced it to 500. - -I told him to drop his size down to 100 shares until he had a week with more winning days than losing and was profitable overall. Once he cleared that hurdle for two weeks in a row, he could go up to trading 200 shares at a clip. Then, after another 2-week profitable period, he could go up to 300 shares, and so on. He was allowed a 100 share increment after two weeks of profitable trading, but if he had a single losing week, he'd have to drop back to the previous level. In other words, he had to start small, increase the size slowly, but drop it fast in case of trouble. - -The trader loudly objected that 100 shares weren't enough to make money. I told him to stop kidding himself, since by trading 500 shares he wasn't making any money either, and he reluctantly agreed. When we met a week later he reported that he had four profitable days and was profitable overall. He made very little money because of the 100 share size, but he was ahead of the game. He continued to make money during the next week and then stepped up to 200 shares. After another profitable week he asked, "Doc, do you think this could be psychological?" The group roared. - -Why would a man lose while trading 500 shares, but make money trading 100 or 200? - -I took a \$10 bill out of my pocket and asked whether anyone in our group would like to earn it by climbing on top of our long and narrow conference table and walking from one end to the other. Several hands went up. Wait, I said, I have a better offer. I'll give \$1,000 cash to anyone who comes with me up to the roof of our 10-story office building and uses a board as wide as this table to walk to the roof of another 10-story building across the boulevard. No volunteers. - -I started egging on the group—the board will be sturdy, we'll do it on a windless day, I'll pay \$1,000 cash on the spot. The physical challenge would be the same as walking on the conference table, but the reward so much greater. Still no takers. Why? Because if you lose your balance on the table, you'll jump down a couple of feet and land on the carpet. If you lose your balance between two rooftops, you'd be splattered on the asphalt. - -The higher levels of risk impair our ability to perform. You need to train yourself to accept risks slowly and in well-defined steps. Depending on how actively you trade, those steps can be measured in weeks or months, but the principle remains the same—you need to be profitable during two units of time to go up a step in your risk size. If you lose money during one unit of time, drop down a step in your risk size. This is especially useful for people who want to return to trading after a bad drawdown. You need to gradually work your way back into trading, without an upsurge of fear. - -Most beginners are in a hurry to make a killing, but guess who gets killed. Unscrupulous brokers promote overtrading (putting on trades that are too big for your account) to generate commissions. Some stockbrokers outside the United States offer a "shoulder" of 10:1, allowing you to buy \$10,000 worth of stock for every \$1,000 you deposit with the firm. Some forex houses offer a deadly "shoulder" of 100:1 and even 400:1. - -Putting on a trade is like diving for treasure. There is gold on the ocean floor, but as you scoop it up, remember to glance at your air gauge. The ocean floor is littered with the remains of divers who saw great opportunities but ran out of air. A professional diver always thinks about his air supply. If he doesn't get any gold today, he'll go for it tomorrow. He needs to survive and dive again. Beginners kill themselves by running out of air. The lure of free gold is too strong. Free gold! It reminds me of a Russian saying—the only free thing is this world is cheese in a mousetrap. - -Successful traders survive and prosper thanks to their discipline. The 2% Rule will keep you safe from the sharks, while the 6% Rule will save you from the piranhas. If you follow these rules and have a reasonable trading system, you'll be miles ahead of your competitors. - -## **A Trading Manager** - -It used to puzzle me why institutional traders as a group performed so much better than private traders. An average private trader in the United States is a 50-year-old married, college-educated man, often a business owner or a professional. You would think this thoughtful, computer-literate, book-reading individual would run circles around some loud 23-year-old who used to play ball in college and hasn't read a book since his junior year. In reality, institutional traders as a group outperform private traders year after year. Is it because of their fast reflexes? Not really, because young private traders perform no better than older ones. Nor do institutional traders win because of training, which is skimpy in most firms. - -A curious fact: when successful institutional traders go out on their own, most of them lose money. They may lease the same gear, trade the same system, and stay in touch with their contacts, but still fail. After a few months, most cowboys are back in head-hunters' offices, looking for a trading job. How come they could make money for the firms but not for themselves? - -When an institutional trader quits his firm, he leaves behind his manager, the person in charge of discipline and risk control. That manager sets the maximum risk per trade. It is similar to what a private trader can do with the 2% Rule. Firms operate from huge capital bases and their risk limits are much higher in dollar terms but tiny in percentage terms. A trader who violates his risk limit is fired. A private trader can break the 2% Rule and nobody will know, but an institutional manager watches his traders like a hawk. A private trader can throw confirmation slips in a shoebox, but a trading manager quickly gets rid of impulsive people. He enforces discipline that saves institutional traders from disastrous losses, which destroy many private accounts. - -In addition to setting a risk limit per trade, a manager sets the maximum allowed monthly drawdown for each trader. When an employee sinks to that level, his trading privileges are suspended for the rest of the month. A trading manager breaks his traders' losing streaks by forcing them to stop trading if they reach their monthly loss limit. Imagine being in a room with co-workers who actively trade, while you sharpen pencils and get asked to run out for sandwiches. Traders do all in their power to avoid being in that spot. This social pressure creates a serious incentive not to lose. - -People who leave institutions know how to trade, but their discipline is often external, not internal. They quickly lose money without their managers. Private traders have no managers. This is why you need to become your own manager. The 2% Rule will save you from disastrous losses, while the 6% Rule will save you from a series of losses. The 6% Rule will force you to do something most people cannot do until it's too late—break a losing streak. diff --git a/trading/The New Trading for a Living/014_PART 10 Practical Details.md b/trading/The New Trading for a Living/014_PART 10 Practical Details.md deleted file mode 100644 index c25cd49791720c36f688f8382d3711160f9ddd04..0000000000000000000000000000000000000000 --- a/trading/The New Trading for a Living/014_PART 10 Practical Details.md +++ /dev/null @@ -1,317 +0,0 @@ -# Practical Details - -Will you be buying stocks that break out to new highs? Shorting double tops? Buying pullbacks? Looking for trend reversals? Those approaches differ from each other, and you can make or lose money with each of them. You need to select a method that makes sense to you and feels emotionally comfortable. Choose what appeals to you, what matches your abilities and temperament. There is no such thing as generic trading, any more than there is a generic sport. - -To find good trades, you need to define the pattern you want to trade. Prior to using any scan, you need to have a crystal-clear picture of what it should look for. Develop your system, and test it with a series of small trades to make sure you have the discipline to follow your signals. You have to feel certain that you'll trade the pattern you've identified when you see it. - -Different styles of trading call for different entry techniques, different methods of setting stops and profit targets, and very different scans. Still, there are several key principles that apply to all systems. - -## ■ **53. How to Set Profit Targets: "Enough" Is the Power Word** - -Setting profit targets for your trades is like asking about pay and benefits when applying for a job. You may end up earning more or less than expected, but you need to have an idea of what to expect. - -**FIGURE 53.1** VRSN with 13- and 26-day EMAs, the Impulse system, and a 4% envelope. MACD 12-26-9. *(Chart by Stockcharts.com)* - -#### Swing Trade: Taking Profits in the Value Zone - -This record of shorting VeriSign Inc. (VRSN) comes from my trade journal. It was one of several stocks that developed a setup for my "false breakout with a divergence" strategy. The last three days on this chart are marked a, b, and c. On day "a" VRSN broke out and closed above resistance, marked by a horizontal dashed line, while MACD-Histogram couldn't even rise above zero. The next day, marked "b," VRSN opened below the orange line, showing that the previous day was a false upside breakout (some would call it an upthrust). As soon as MACD-Histogram ticked down, creating a bearish divergence, the pattern was completed, and I immediately went short. - -VRSN kept sinking all day and closed lower. The next day, marked "c," it tried to form a base, and since the daily price was already in the value zone, I decided that it was enough and covered my shorts. Taking an 82 cent profit on 3,000 shares brought in \$2,460 before commissions. I could have made more by holding longer, but in swing trading, fast quarters are better than slow dollars. Taking profits in the value zone reduces the level of uncertainty and cuts the time your trade remains at risk. - -Write down your entry level, profit target, and stop for every planned trade in order to compare your risk and reward. Your potential reward should be at least twice as big as your risk. It seldom pays to risk a dollar to make a dollar—you might as well bet on color at a roulette table. Having a realistic profit target and a firm stop will help you make a go/no-go decision for any trade. - -Early in my trading career I didn't think of profit targets. If anybody asked me about them, I'd answer that I didn't want to limit my profit potential. Today, I would laugh at such an answer. A beginner without a clear target price will feel increasingly happy as his stock goes up and more despondent as it grinds down. His emotions will prime him to act at the worst possible times: continue to hold and add to his longs at the top and sell out in disgust near the bottom. - -**FIGURE 53.2** EGO 25- and 5-minute charts with 13- and 26-bar EMAs, the Impulse system, and Autoenvelope. MACD 12-26-9. *(Chart by TradeStation)* - -#### Taking Profits of a Day-Trade near the Upper Channel Line - -This record of buying Eldorado Gold Corp. (EGO) comes from my trade journal. It illustrates using Triple Screen for day-trading and profit-taking. The strategic decision to buy EGO was taken on a 25-minute chart in area A, where the moving average turned up and the Impulse system changed to green (notice that on the previous day there was a false downside breakout—it indicated that this stock didn't want to go down and may be setting up to rally). - -My trading strategy here was "pullback to value," which I executed on a 5-minute chart, as prices gapped up at the open but then pulled back into the value zone (area B). I went long at \$9.51; my initial target was \$9.75, near the upper channel line on the 25-minute chart, with a stop at \$9.37, for a nearly 2:1 reward/risk ratio. Since this was a day-trade, I had it on my screen all day long. - -At first, with the uptrend being so strong, I considered taking it overnight, but then bearish divergences began to develop in area C, and I placed an order to sell at \$9.75. That turned out to be the high of the day, and my order wasn't filled. As prices turned down from their bearish divergence on a 5-minute chart, I scrambled to lower my sell order to \$9.70. It was filled, and I was out with a profit before the close. Taking a 19-cent profit on 2,000 shares brought in \$380 within a few hours. - -When calculating a trade's profit potential, we run into a paradox. The longer your expected holding period, the bigger the profit potential. A stock can rally much more in a month than in a week. On the other hand, the longer your holding period, the higher the level of uncertainty. Technical analysis can be quite reliable for shorter-term moves, but many unpleasant surprises will occur in the longer run. - -In an earlier chapter on choosing the time horizon for trades, we examined our three main options. The holding period for position trades or investments is measured in months, sometimes years. We may hold a swing trade for a few days, sometimes weeks. The expected duration of a day-trade is measured in minutes, rarely hours. Moving averages and channels help set profit targets for swing trades. They also work for day-trades; only there you need to pay more attention to oscillators and exit at the first sign of a divergence against your trade. Profit targets in position trading are usually set at previous support and resistance levels. - -**FIGURE 53.3** IGOI with 13- and 26-day EMAs, the Impulse system, and a 4% envelope. MACD 12-26-9. *(Chart by Stockcharts.com)* - -#### Setting a Profit Target for a Long-Term Trade at the Resistance Level - -At the right edge of the weekly chart, iGo, Inc. (IGOI) is trading slightly above \$3, with a rising EMA confirming a new uptrend. Its previous major top was above \$60 (notice a kangaroo tail), two recent intermediate rallies had fizzled out, the most recent one near \$15, and the previous one near \$22 (all marked with purple dashed lines). If this is the start of a new bullish trend, it would be reasonable to set the first profit target near \$15, the next near \$22. - -The three targets mentioned above—moving averages, channels, and support/ resistance levels—are fairly modest. They don't have you shooting for the moon, but are realistic. Keep in mind that "enough" is a power word—in life as well as trading. It puts you in control, and by getting "enough" in one trade after another, you'll achieve excellent results over time. - -How to define "enough"? I believe that moving averages and envelopes, along with recent support and resistance levels can show us what would be "enough" for any given trade. Let me illustrate this with several examples: one a swing trade, another a day-trade, and the third a long-term investment. - -VRSN was a fairly common example of a modest swing trade: entering near one of the channel lines and taking profits in the value zone between the two moving averages (Figure 53.1). This isn't elephant hunting; this is rabbit hunting, a much more reliable activity. - -The EGO day-trade in Figure 53.2 illustrates buying a pullback into the value zone during an uptrend, with a profit target at the upper channel line. I used an oscillator to speed up my exit when the market wouldn't let me exit at the initial target. "Fallen angels" is the name of a scan I use to look for possible investment candidates. It marks stocks that have fallen over 90% from their peaks, stopped declining, bottomed out, and slowly began to rise. A stock that had lost 90% of its value has every right to die, but if it chooses to live, it's likely to rally. - -The best time to look for "fallen angels" is when a bear market starts showing signs of bottoming. That's when you find many candidates that survived bear attacks and are starting to get up from the floor. This example shows an old bull market darling IGOI that got badly mauled but stopped declining and began to rise. The weekly chart in Figure 53.3 shows two prior attempts to return to the multiyear peak area. Each of those rallies retraced just about half of the previous bear market. - -Is this going to be an easy trade? Far from it. First of all, the latest bottom was near \$2, and if you place your stop there, your risk per share will be quite high, and you'll have to reduce trade size. Also, the expected rally may take anywhere from a few months to several years to get going. Are you prepared to wait that long, with your capital tied up? Last but not least, the volume of this stock is low. It will rise if prices rally, but if the rally fizzles out, selling will not be easy. Taking all these factors into account, you can see how hard it is to buy for the long haul. - -## ■ **54. How to Set Stops: Say No to Wishful Thinking** - -A trade without a stop is a gamble. If you're after thrills, better go to a real casino. Take a trip to Macao, Las Vegas, or Atlantic City, where a gambling house will serve you free drinks and may even comp you a room while you're having fun. Gamblers who lose money on Wall Street receive no freebies. - -Stops are a must for long-term survival and success, but most of us feel a great emotional reluctance to use them. The market reinforces our bad habits by training us not to use stops. We all have been through this unpleasant experience: you buy a stock and set a stop that gets hit and you exit with a loss—only to see your stock reverse and rally just as you originally expected. Had you held that stock without a stop, you would've profited instead of losing. Getting repeatedly whipsawed like that makes you feel disgusted with stops. - -After several such events, you start trading without stops, and it works beautifully for a while. There are no more whipsaws. When a trade doesn't work well, you get out of it without a stop—you have enough discipline. This happy ride ends after a large trade starts going bad. You keep waiting for it to rally a bit and give you a better exit, but it keeps sinking. As the days go by, it inflicts more and more damage on your account—you're being chewed up by a shark. Soon enough your survival is in danger, and your confidence is shattered. - -While you trade without stops, the sharks circling the perimeter of every account grow bigger and meaner. If you trade without stops, a shark bite is only a question of time. Yes, stops are a pain—but using them is a lesser evil than trading without them. This reminds me of what Winston Churchill said about democracy: "It is the worst form of government except all the others that have been tried." - -What should we do? I suggest accepting the irritation and the pain of stops but focusing on making them more logical and less unpleasant. - -In my previous book *The New Sell and Sell Short*, I dedicated a long chapter to the intricacies of placing various types of stops. Rather than repeat myself here, I'll offer you a quick summary. - -## **Place Stops outside the Zone of "Market Noise"** - -Put a stop too close and it'll get whacked by some meaningless intraday swing. Put it too far, and you'll have very skimpy protection. - -To borrow an engineering concept, all market moves have two components: signal and noise. The signal is the trend of your stock. When the trend is up, we can define noise as that part of each day's range that protrudes below the previous day's low. When the trend is down, we can define noise as that part of each day's range that protrudes above the previous day's high. - -**SafeZone stops** are described in detail in *Come into My Trading Room*. They measure market noise and place stops at a multiple of noise level away from the market. In brief, use the slope of a 22-day EMA to define the trend. If the trend is up, mark all downside penetrations of the EMA during the look-back period (10 to 20 days), add their depths, and divide the sum by the number of penetrations. This gives you the Average Downside Penetration for the selected look-back period. It reflects the average level of noise in the current uptrend. You want to place your stops farther away from the market than the average level of noise. That's why you need to multiply an average downside penetration by a factor of two or greater. Placing your stop any closer would be self-defeating. - -When the trend, as defined by the EMA slope, is down, we calculate SafeZone on the basis of upside penetrations of the previous bars' highs. We count each upside penetrations during a selected time window and average that data to find the Average Upside Penetration. We multiply it by a coefficient, starting with 3, and add that to the high of each bar. Shorting near the highs requires wider stops than buying near quiet, sold-out bottoms. - -Like all systems and indicators in this book, SafeZone is not a mechanical gadget to replace independent thought. You have to establish the look-back period, the window of time during which SafeZone is calculated. You also need to fine-tune the coefficient by which you multiply the average penetration, so that your stop goes outside the normal noise level. - -Even when not using SafeZone, you may wish to follow its principle of calculating an average penetration against the trend that you are aiming to trade—and putting your stop well outside the zone of market noise. - -## **Don't Place Your Stops at Obvious Levels** - -A recent low that sticks out like a sore thumb from a tight weave of prices draws traders to place stops slightly below that level. The trouble is most people place their stops there, creating a target-rich environment for the running of stops. The market has an uncanny habit of quickly sinking back to those obvious lows and triggering stops before reversing and launching a new rally. Without trying to assign blame for raiding stops, let me suggest several solutions. - -It pays to place your stops at non-obvious levels—either closer to the market or deeper below an obvious low. A closer stop will cut your dollar risk but increase the risk of a whipsaw. A deeper stop will help you sidestep some false breakouts, but if it gets hit you'll lose more. - -Take your pick. For short-term swing trading, it generally pays to place your stops tighter, while for long-term position trades, you'd be better off with wider stops. Remember "the Iron Triangle of risk control"—a wider stop demands a smaller trade size. - -One method I like is **Nic's stop**, named after my Australian friend Nic Grove. He invented this method of placing a stop not near the lowest low, but at the second lowest (more shallow) low. The logic is simple—if the market is sliding to its second lowest low, it is almost certain to continue falling and hit the key low, where the bulk of stops cluster. Using Nic's stop, I get out with a smaller loss and lower slippage than would occur when the markets drop to more visible lows. - -The same logic works when shorting—place your Nic's stop not "a tick above the highest high" but at the level of the second highest high. Let's review some recent examples of both longs and shorts in Figure 54.1. - -You may want to explore several different systems for placing stops, such as Parabolic, SafeZone, and Volatility stops, described in the books mentioned above. You can get fancy or you can stay plain, but keep in mind the most important principles: first, use stops; and second, don't place them at obvious levels, easily visible to anyone looking at that chart. Make your stops a little tighter or wider than average stay away from the crowd because you don't want to be an average trader. - -For the same reason, avoid placing stops at round numbers. If you buy at \$80, don't place a stop at \$78 but at \$77.94. If you enter a day-trade at \$25.60, don't place a stop at \$25.25—move it to \$25.22 or even \$22.19. Round numbers attract crowds—put your stop a little farther away. Let the crowd take the first hit, and perhaps your own stop will remain untouched. - -Another method, popularized by Kerry Lovvorn, is to use **Average True Range (ATR) stops** (see Chapter 24 for the explanation of the ATR). When you enter during a price bar, place your stop at least one ATR away from the extreme of that bar. A two ATR stop is even safer. You can use it as a trailing stop, moving it at every bar. The principle is the same—place your stop outside the zone of market noise. (Figure 54.2) - -One of the advantages of using trailing stops is that they gradually reduce the amount of money at risk. Earlier we discussed the concept of "available risk" (Chapter 51). As a trade followed by a trailing stop moves in your favor, it gradually frees up available risk, allowing you to make new trades. - -Even if you don't use SafeZone or ATR stops, be sure to place stops at some distance from recent prices. You don't want to be like one of those fearful traders who jam their stops so close to current prices that the slightest meaningless fluctuation is certain to hit them. - -**FIGURE 54.1** Daily charts with 13-day EMA, the Impulse system, and MACD-Histogram 12-26-9. *(Charts by Stockcharts.com)* - -#### Nic's Stops—Long KO and Short ISRG - -On the chart of The Coca-Cola Company (KO), we see a false downside breakout with a bullish divergence. The Impulse system has turned from red to blue, permitting buying. If we go long, where should we place our stop? - -Bar A—the low was \$37.10 - -Bar B—the low was \$37.05 - -Bar C—the low was \$36.89 (a false downside breakout, exceeded the low A by 21 cents). - -Bar D—the low was \$37.14 - -The crowd will have set its stops below 36.89, but Nic's stop will go to \$37.04—a cent below the second lowest recent low, the bottom of bar B. - -On the chart of Intuitive Surgical, Inc. (ISRG), we see a false upside breakout with a bearish divergence. The Impulse system has turned from green to blue, permitting shorting. If we go short, where should we place our stop? - -Bar A—previous peak reached \$447.50 - -Bar B—the high was \$444.99 - -Bar C—the high was \$447.75 (a false upside breakout, exceeded previous peak by 25 cents). - -Bar D—the high was \$442.03 - -The crowd will have its stops above \$447.75, but Nic's stop will go to \$445.05—a few cents above the second highest recent high, the top of bar B. - -The concept of signal and noise can help you not only place intelligent stops but also find good entries into trades. If you see a stock in a strong trend but don't like to chase prices, drop down one timeframe. For example, if the weekly trend is up, switch to the daily chart, and you'll probably see that once every few weeks, it has a pullback below the value zone. Measure the depths of several recent penetrations below the slow EMA to calculate an average penetration (see Figure 39.3). Place a - -**FIGURE 54.2** S&P 500 and a 20-day New High–New Low Index. *(Chart by TradeStation, programming by Kerry Lovvorn)* - -### A 2-ATR Trailing Stop following a Spike Bounce signal - -A Spike Bounce signal (described in Chapter 34) occurs when the 20-day New High—New Low Index drops below minus 500, indicating a bearish imbalance, and then rallies above that level, showing that bulls are coming back. Spike Bounce signals are marked by vertical green arrows. Here S&P bars get colored green while the Spike Bounce signal is, in effect, purple after it disappears. The red line trails two ATRs below the highs of the bars of the S&P 500. - -The Spike Bounce gives buy signals for the entire market, and this chart trails each buy signal with a 2-ATR close-only stop (intraday crossovers don't count—the market has to close below the stop to activate it). Notice the very productive signals A, B, and C. The buy signal E is still in effect at the time of this writing. The signal D resulted in a loss—there are no universally profitable signals. - -buy order for the day ahead at that distance below the EMA and keep adjusting it every day. You will use a splash of noisy behavior to get a good entry into a trendfollowing trade. - -## **Don't Let a Winning Trade Turn into a Loss** - -Never let an open trade that shows a decent paper profit turn into a loss! Before you put on a trade, start planning at what level you'll begin protecting your profits. For example, if your profit target for that trade is about \$1,000, you may decide that a profit of \$300 will need to be protected. Once your open profit rises to \$300, you'll move your protective stop to a breakeven level. I call that move "cuffing the trade." - -Soon after moving your stop to breakeven, you'll need to focus on protecting a portion of your growing paper profit. Decide in advance what percentage you'll protect. - -For example, you may decide that once the breakeven stop is in place, you'll protect a third of your open profit. If the open profit on the trade described above rises to \$600, you'll move up your stop, so that the \$200 profit is protected. - -These levels aren't set in stone. You may choose different percentages, depending on your level of confidence in a trade and risk tolerance. - -As a trade moves in your favor, your remaining potential gain begins to shrink, while your risk—the distance to the stop—keeps increasing. To trade is to manage risk. As the reward-to-risk ratio for your winning trades slowly deteriorates, you need to begin reducing your risk. Protecting a portion of your paper profits will keep your reward-to-risk ratio on a more even keel. - -## **Move Your Stop Only in the Direction of Your Trade** - -You buy a stock and, being a disciplined trader, put a stop underneath. That stock rises, generating nice paper profits, but then it stalls. Next, it sinks a little, then a bit more, and then goes negative, inching towards your stop. As you study the chart, its bottom formation looks good, with a bullish divergence capable of supporting a strong rally. What will you do next? - -First of all, learn from your mistake of not having moved up your stop. That stop should have been raised to breakeven a while ago. Failing that, your options have narrowed: take a small loss right away and be ready to reposition later—or continue to hold. Trouble is you feel tempted to go for the third and utterly unplanned choice to lower your stop, giving your losing trade "more room." - -Don't do it! - -Giving a trade "more room" is wishful thinking, pure and simple. It doesn't belong in the toolkit of a serious trader. - -Giving "more room" to a losing trade is like telling your kid you'll take away his car keys if he misbehaves, but then not following through. That's how you teach him that rules don't matter and encourage even worse behavior. Standing firm brings better long-term results. - -The logical thing to do when a trade starts acting badly is to accept a small loss. Continue to monitor that stock and be ready to buy it again if it bottoms out. Persistence pays, commissions are cheap, and professional traders often take several quick stabs at a trade before it starts running in their favor. - -## **Catastrophic Stops: A Professional's Life Jacket** - -Soon after moving to a house near a lake I bought a kayak, and immediately went shopping for a life jacket. All I had to do to be legal was to have a jacket in the kayak—any cheap piece of junk would suffice. Still, I spent good money on a quality jacket that felt snug and didn't interfere with rowing when I wore it. - -All I planned to do with that kayak was to paddle peacefully on a lake, not anywhere near white water or currents. I never expected to actually need that jacket. Did I waste my money buying it? Well, if ever some motor boat clips me, then wearing a high-quality jacket can make the difference between life and death. - -It's the same with stops. They're a nuisance and often cost you money. Still, there will be a day when a stop will save your account from a life-threatening collision. Keep in mind that a bad accident is much more likely in the market than on a lake. That's why it's essential to use stops. - -A "hard stop" is an order you give to your broker. A "soft stop" is an order you keep in your head, ready to place it when needed. Beginners and intermediate traders must use hard stops. A professional trader, sitting in front of a live screen all day, may use a soft stop if he has the discipline to exit when his system tells him to do it. - -Still, accidents happen. A professional trader friend described how he fought against a market reversal. His soft stop was set at a \$2,000 loss level, but by the time he threw in the towel and got out, his loss grew to \$40,000—the worst of his trading career. This is why, even if you don't use hard stops on a regular basis, you should at the very least use a "catastrophic stop" for every trade. - -For any A-trade, whether long or short, draw a line on your chart where you absolutely do not expect that stock to go. Place your hard stop at that level and make it GTC: "good 'til cancelled." That will be your catastrophic stop. Now you can play with the luxury of soft stops. Paddle your kayak hard, knowing that you're wearing a reliable life jacket. - -Had my friend whose \$2,000 drawdown metastasized into a \$40,000 loss used a hard "catastrophic" stop, he would have taken only a relatively small loss, sidestepped a disaster, and avoided the financial and psychological hurt of a shark bite. - -## **Stops and Overnight Gaps: Only for the Pros** - -What will you do if your stock gets hit by a major piece of bad news after the market closes for the day? Looking at pre-opening quotes the next morning, you realize that it'll open sharply lower, deep below your stop, promising massive slippage. - -This is a rare occurrence, but it does happen. - -If you're a new or intermediate trader, there isn't much you can do—just grit your teeth and take your loss. Only coldly disciplined pros have an additional option: day-trade your way out of that stock. Pull your stop, and after the stock begins trading, handle it as if it was a day-trade you bought at the first tick of that morning. - -Opening gaps are often followed by bounces, giving nimble traders an opportunity to get out at a smaller loss. This doesn't always happen—which is why most traders should never use this technique. You may actually deepen your loss instead of reducing it. - -Be sure to get out before the close. Your damaged stock may bounce today, but tomorrow more sellers are likely to come in and drive it lower. Don't let a bounce lull you into a false hope of a reversal. - -## ■ **55. Is This an A-Trade?** - -Your performance in any field will improve if you take tests. Getting graded on them will help you recognize your strengths and weaknesses. Now you can work on reinforcing what's good and correcting what's not. - -Whenever you complete a trade, the market gives you three grades. It grades the quality of your entry and exit, and most importantly, it delivers your overall trade grade. - -If you're a swing trader and use a combination of weekly and daily charts, look for your grades on the dailies. Your **buy grade** is based on the location of your entry, relative to the high and low of the daily bar during which you bought. - -$$ -Buy\,\,grade = \frac{(high-buy\,\,point)}{(high-low)} -$$ - -The closer to the bar's low and the farther away from the bar's high you buy, the better your buy grade. Suppose the high of the day was \$20, the low \$19, and you managed to buy at \$19.25. Entering those numbers into the formula gives you a buy grade of 75%. If your buy grade is 100%, it means you bought at the bottom tick of the day. That's brilliant, but don't count on it happening. If your buy grade is 0%, it means you bought the top tick of the day. This is terrible and should serve as a reminder not to chase runaway prices. I calculate my buy grade for every trade and consider anything above 50% a very good result, meaning I bought in the lower half of the daily bar. - -The following is the formula for your **sell grade** - -$$ -Sell grade = \frac{(sell point - low)}{(high - low)} -$$ - -The closer to the bar's high and the farther away from the low of the bar you sell, the better your sell grade. Suppose the high of the day was \$20, the low \$19, and you managed to sell at \$19.70. Entering those numbers into the formula gives you a sell grade of 70%. If your sell grade is 100%, it means you sold at the top tick of the day. If your sell grade is 0%, it means you sold at the bottom tick of the day. This terrible grade should serve as a reminder to sell earlier instead of panicking. I calculate my sell grade for every trade and consider anything above 50% a very good result, meaning I sold in the upper half of the daily bar. - -When evaluating any trade, most people assume that the amount of money they make or lose in that trade reflects its quality. Money is important for plotting the equity curve, but it's a poor measure of a single trade. It makes more sense to rate the quality of every trade by comparing what you've got to what was realistically available. I find my **trade grade** by comparing points gained or lost in a trade to the height of the daily chart's channel measured on the day of the entry. - -$$ -Trade\ grade = \frac{(sell-buy)}{(channel\ high-channel\ low)} -$$ - -A well-drawn channel contains between 90% and 95% of prices for the past 100 bars (see Chapter 22). You may use any number of channels—parallel to the EMA, Autoenvelope, Keltner, or ATR channels—as long as you're being consistent. A channel contains normal price moves, with only the extreme highs and lows protruding outside it. The distance between the upper and the lower channel lines on the day you enter a trade represents a realistic maximum of what's available to a swing trader in that market. Shooting for a maximum, though, is a very dangerous game. I consider any trade that gains 30% or more of its channel height an A-trade.1 (Figure 55.1) - -1 This term comes from the U.S. school grading system: A is excellent, B good, C mediocre, and D poor. - -**FIGURE 55.1** ADSK daily with 13- and 26-day EMAs and a 7% envelope. Impulse system with MACD-Histogram 12-26-9. *(Chart by Stockcharts.com)* - -#### Buy, Sell, and Trade Grades - -This chart comes from my diary of a trade in Autodesk, Inc. (ADSK) while working on this book (you saw my plan for this trade in Figure 38.1). I was piggybacking one of the Spike picks, and my strategy here was "pullback to value." ADSK had recently staged a deeper than average pullback—notice a false downside breakout marked by a red arrow, followed by a successful retest, marked with a green arrow. - -Day A—Feb. 10, 2014, Monday: high \$52.49, low \$51.75, upper channel line \$53.87, lower \$47.61 (we'll need channel values to calculate the trade grade on exit). Bought at \$51.77. Buy grade = (52.49 − 51.77) / (52.49 − 51.75) = 97%. - -Days B and C—Tuesday and Wednesday): rally continues, start moving up stop. - -Day D—Thursday: high \$54.49, low \$53.39. Sold at \$53.78. Sell grade = (53.78 − 53.39) / (54.49 − 53.39) = 35%. Trade grade = (sell − buy) divided by channel height = (53.78 – 51.77) / (53.87 − 47.61) = 32%. - -My buy grade in this trade was unusually high, the sell grade below average, but the overall trade grade was very good. Busy with the book, I traded only 200 shares, so my profit, after commissions, was less than \$400. Had I graded my trades by profits, this one would be easy to overlook, but catching 32% of channel earned me an A. - -A comment by Kerry Lovvorn at the 2012 annual reunion of SpikeTrade grabbed my attention: he challenged all participants to define what he called 'an A-trade'—a setup that signals the likelihood of an excellent trade. "You have to define this pattern for yourself," he said. "If you don't know what's your 'A-trade,' you have no business being in the market." - -I knew full well what my A-trades were—a divergence coupled with a false breakout or a pullback to value. Still, if I saw no A-trades on my screen, I'd go for B-trades, and on a really slow day, reach for a C-trade. - -**FIGURE 55.2** The Strategy box in the Trade Journal. *(Source: SpikeTrade.com)* - -Whenever you plan a trade, be sure to specify what system you'll use. Ask yourself whether this planned trade looks like an "A-trade" according to your system. - -I use the words "system" and "strategy" interchangeably—both mean a trade plan. As you can see from this snapshot of my trade journal's Strategy box, taken in September 2013, I currently trade three systems. My main one is a "false breakout with a divergence." I also occasionally trade pullbacks to value—buying pullbacks during uptrends and shorting rallies in downtrends. On rare occasions, I trade against the extremes, buying severely beaten down stocks or shorting stocks whose wild rallies are stalling. - -Returning home from that reunion, I attached a plastic strip to one of my trading screens with the question: "Is this an A-trade?" Ever since then, I have it in front of me whenever I place an order. The results came quickly: as the number of non-A-trades sharply declined, my equity curve began to rise at a steeper angle. - -You need to have a clear idea of what would be a perfect setup for you, "an A-trade." Perfect doesn't guarantee profits—there are no guarantees in the market—but it means a setup with a strong positive expectation. It also means something you've traded before with which you are comfortable. Once you know what it is, you can start looking for stocks that exhibit that pattern. - -One of the few advantages of a private trader over an institutional one is that we can trade or not trade when we like. We have the luxury of being free to wait for excellent setups. Unfortunately, most of us, in our eagerness to trade, throw away this amazing advantage. - -I've added the question "Is this an A-trade?" to my Tradebill, a trade management form we'll discuss in the next chapter. Whenever I see a potential trade, I ask myself this question. If the answer is "yes," I start calculating risk management, position sizing, and planning my entry. If the answer is "no," I turn the page and go looking for another pick. (Figure 55.2) - -No matter how grand an idea or a stock tip, I will not trade it unless it fits into one of my three strategies. Ideas come and go, fly or flop—but strategies stay and grow better with age, as you learn how they perform under various market conditions. - -Gradually, you may develop new strategies and drop others. You can see that the ones I use are numbered 1, 4, and 7. The rest of the numbers were strategies I stopped using. - -Your system can be very mechanical or quite general, with just a few key principles, like my Triple Screen. Either way, you must know what your "A-trade" looks like before you plan your next trade. - -I'll walk you through one of my strategies, but remember that you don't have to copy it (Figure 55.3). The way we trade is as personal as handwriting. Define a strategy that feels comfortable to you, test it, and then find a chart that perfectly represents it. Print that chart and post it on a wall near your trading desk. Now you can search for trades that look the way that chart looked on the day you entered that trade. - -**FIGURE 55.3** SLB daily with 13- and 26-day EMAs and a 6% envelope. Impulse system with MACD-Histogram 12-26-9. *(Chart by Stockcharts.com)* - -#### False Downside Breakout with a Bullish Divergence - -This chart, from my Trade Journal, shows a near-perfect example of a swing trade strategy that I abbreviate as "01 FB + BD"—a false breakout with a bullish or bearish divergence. Schlumberger, Ltd. (SLB) was in a well-established downtrend, and when it reached a new low at A, it looked like just another bottom during a long and painful slide. I look at the entire circled area of MACD-Histogram as a single bottom because it never crossed above the zero line. In area B, the picture became more interesting: MACD-Histogram rallied above its centerline, "breaking the back of the bear." The weekly Impulse system (not shown), which had been red until then, turned blue, removing its prohibition of buying. In area C, SLB cracked to a new low, but MACD declined to a much more shallow low, setting up for a bullish divergence. - -Look carefully at the first blue bar after several red bars in area C. That's where MACD-Histogram ticked up, completing a bullish divergence. In addition, that bar rallied and closed above the downside breakout level, marked by a purple dashed line: it marked previous bars as a false downside breakout. - -I bought during that bar (marked by a vertical green arrow), without waiting for it to close, going long 2,000 shares at \$60.80, with a stop at \$59.12. Four days later, as prices began approaching the upper channel line as well as the level of the previous top I started taking profits. I sold 1,000 shares at \$66.55 and the rest on the following day at \$67 (both marked by red arrows). I booked nearly \$6 per share, for a total of \$11,950 before commissions in five trading days. The system delivered a beautiful trade. - -This is the chart I have in mind when looking for stocks and futures to trade. I want to find those that have completed their bottom A and top B and are declining into what could become bottom C. In the background, the Impulse system on the weekly chart cannot be red because that would prohibit buying. - -In the next section, on trade planning, you'll see how to use a form I named Tradebill to make trading decisions more objective. Every trade has several parameters, and it's easy to overlook some of them in the heat of action. Just as a pilot goes through a preflight checklist, a trader needs to check his list before deciding to place an order. - -## ■ **56. Scanning for Possible Trades** - -There are thousands of stocks out there, and in the days and weeks ahead, some will rise, others fall, and some will fluctuate. Each stock will make money for traders whose systems are in gear with it—and lose money for the rest. Developing a trading system or a strategy must come before scanning. If you don't have a clearly defined strategy, what will you scan for?! - -Begin by developing a system that you trust. Once you have it, looking for trading candidates will become quite logical and straightforward. Looking at your list of candidates, the first question about any pick will be "Is this an A-trade?" In other words, is this pick close to your ideal pattern? If the answer is "yes," you may start working up a trade. - -Scanning means reviewing a group of trading vehicles and zooming in on trading candidates. Your scanning can be visual or computerized: you may flip through multiple charts, taking a quick glance at each, or else have your computer run through that list and flag stocks whose patterns appeal to you. To repeat, defining a pattern you trust must be your first step, scanning a more distant second. - -Be sure to have realistic expectations for scanning. No scan can find you the needle in a haystack—the one and only gem to trade. What a good scan does is bring up a group of candidates on which to focus your attention. You can make that group bigger or smaller by loosening or tightening scan parameters. A scan is a time saver that delivers potential candidates; it is not a piece a magic to free you from the necessity of working up your picks. - -Begin by describing what stocks you want to find. For example, if you're a trendfollower, but don't like chasing stocks, you may design a scan to find stocks whose moving average is rising but the latest price is only a small percentage above that average. You can write a scan yourself or hire someone to do it for you—there are programmers who offer this service. - -The raw list of stocks to be scanned can be as small as a few dozen or as large as the S&P 500, or even Russell 2,000. I like looking for trading candidates on weekends, and depending on how much time I have, take one of the two approaches—one lazy and the other hardworking. The lazy way, when my time is limited, is to review Spikers' picks for the week ahead. Spikers are the elite members of SpikeTrade.com, and I figure that among a dozen picks by super-smart traders who compete for the best pick of the week there ought to be a stock or two for me to piggyback. I examine those picks, while adding my market opinion to the mix. Depending on my outlook for the week ahead, I focus primarily on long or short candidates. - -The hard-working way consists of dropping all 500 components of the S&P 500 into my software and running a scan for potential MACD divergences. I've seen many divergence scans, but never a reliable one—they all delivered too many false positives and missed many good divergences. Then I realized that a divergence was "an analog pattern"—clearly visible to a naked eye but hard to pick with digital processing. I turned to John Bruns, who built me a semiautomatic MACD divergence scanner. Instead of looking for divergences, it scans for patterns that precede divergences and delivers the list of candidates to watch in the days ahead. (Figure 56.1) - -Running my MACD divergence semiautomatic scan over the weekly and daily charts of all 500 components of the S&P 500 takes only a minute, but the real work begins when I review the lists of bullish and bearish candidates delivered by this scan. First, I compare the sizes of bullish and bearish lists. For example, for several weeks prior to writing this chapter, my scan for bullish divergences among the components of the S&P 500 produced four to five candidates, while the scan for potential bearish divergences returned between 70 and 80 stocks. This great imbalance indicated that - -**FIGURE 56.1** WFM daily with 13- and 26-day EMAs. Impulse system with MACD-Histogram 12-26-9. Red dots—potential or actual bearish divergences. Green dots—potential or actual bullish divergences. *(Chart by TradeStation, scanner by John Bruns/elder.com)* - -#### MACD-Histogram Semiautomatic Divergence Scanner - -We've reviewed MACD Histogram and its divergences in Chapter 23 and returned to this pattern repeatedly throughout this book. Instead of looking for completed divergences, this semiautomatic scan finds stocks that have completed parts A and B of a potential divergence. As part C (the second top or bottom) begins to emerge, this scan starts putting red dots above or green dots below the bar to alert one to the possibility of a divergence. - -This chart of Whole Foods Market, Inc. (WFM) shows that a scanner isn't an automatic trade finder. It is a watchdog that alerts you to the possibility that this market is ready to trade—long or short. Having received such a signal, a trader needs to work up that stock to establish the level at which the divergence would be completed and write down entry, target, and stop levels. - -the market was perched at the edge of a cliff and I needed to find some shorts for the coming downturn. I prune my weekly list of trading candidates down to five or six picks that show the most attractive patterns and the best reward to risk ratios. These are the stocks that I'll aim to trade during the week. I have friends who can juggle twenty stocks at once—this can be done, but not by me, and every serious trader must know his limitations. - -Another "hardworking way" of finding trade candidates involves scanning stock industry groups. For example, if I think that gold is approaching an important bottom, I'll pull up the list of all 52 gold stocks and 14 silver stocks that are listed at this time and look for buying candidates. While doing that, I'll keep in mind my SLB chart shown in Figure 55.3—I want to find stocks whose patterns look close to my ideal. - -If you're going to scan a large number of stocks, it pays to add some **negative rules**. For example, you may want to omit stocks whose average daily volume is below half a million or even a million shares. Their charts tend to be more ragged and their slippage worse than in more actively traded stocks. You may want to exclude expensive stocks from your scans for buying candidates and cheap stocks from your scans for shorting candidates. Choosing at what levels to place your price filters is a matter of personal choice. This is why scanning is best left for experienced traders. Learn to fish with just a few lines in the water before casting a broad net. diff --git a/trading/The New Trading for a Living/015_PART 11 Good Record-Keeping.md b/trading/The New Trading for a Living/015_PART 11 Good Record-Keeping.md deleted file mode 100644 index 9775a849dcd368f669d8c981d11be930dbaad997..0000000000000000000000000000000000000000 --- a/trading/The New Trading for a Living/015_PART 11 Good Record-Keeping.md +++ /dev/null @@ -1,332 +0,0 @@ -# Good Record-Keeping - -" There is no free lunch. As with so many other things, either you're going to pay up front or you're going to pay on the back end for being disorganized, and unfortunately, when you pay on the way out it's always more expensive…" writes Andrew J. Mellon in *Unstuff Your Life.* - -The market is perversely inconsistent in dishing out rewards and punishments. There is always a chance that a poorly planned trade may bring profits, while a wellplanned and carefully executed trade may end in a loss. This random reinforcement subverts our discipline and encourages sloppy trading. - -Good record-keeping is the best tool for developing and maintaining discipline. It ties together psychology, market analysis, and risk management. Whenever I teach a class, I say: "Show me a trader with good records, and I'll show you a good trader." - -Writing down your trade plans will ensure that you don't miss any essential market factors. Good record-keeping will save you from stumbling into impulsive trades. Trading discipline is similar to weight control, which is very hard for most people. If you don't know what you weigh today and whether the curve of your weight is rising or falling, how can you control it? Losing weight begins with standing naked on a scale in the morning and writing down your weight for that day. - -We all make mistakes, but if you keep reviewing your records and reflecting on past mistakes, you'll be unlikely to repeat them. Good record-keeping will turn you into your own teacher and do wonders for your account equity. - -A quick read of a chapter will not make you a disciplined trader. You'll have to invest hours in doing homework and accept the pain of having your stops hit. The work comes first, the rewards later. As your account grows, you'll experience a wonderful feeling of accomplishment. - -Let's review the three key components of record-keeping: - -- 1. Discipline begins with doing your homework (I'll offer you a homework spreadsheet). -- 2. Discipline is reinforced by writing down your trade plans (I'll offer you PDF files for working up long and short candidates). -- 3. Discipline culminates in executing those plans and completing trade records (I'll offer you a link to an online Trade Journal). - -Please feel free to personalize all of these documents. The markets are huge and diverse, and there is no "one size fits all" system of analysis, trading, and recordkeeping. The basic principles are in this book, but the way you implement them can be your own. - -## ■ **57. Your Daily Homework** - -When you wake up in the morning and know that you need to be at the office in an hour, you don't spend time planning every little step. You follow an established routine: get out of bed, wash, get dressed, have breakfast, get in a car, etc. This routine puts you in the groove for the day ahead, leaving your mind free for strategic thinking. By the time you arrive at the office, you're ready to face the day. - -It pays to have a morning routine for the market: a sequence of steps for touching base with the key factors that may dominate today's trading. This routine should put you in gear with the market before the opening bell, making you alert and ready to act. - -I use a spreadsheet for my pre-open routine. The person who gave me this idea was Max Larsen, a money manager in Ohio. I've changed Max's spreadsheet: my current version is numbered 3.7, reflecting two major revisions and a handful of lesser ones. It is based on how I view the markets, while its imbedded links help me reach various websites for the information I want. - -My homework spreadsheet (Figure 57.1) is a work in progress, as I keep adding and deleting lines. If you start using it, I'm sure that you'll modify it to suit your preferences. My firm, Elder.com, offers my latest spreadsheet, complete with its psychological self-test as a public service—simply write to [info@elder.com an](mailto:info@elder.com)d ask for it. - -After filling out this spreadsheet, I turn to my open trades. I review their stops and profit targets, making any adjustments for the coming day if necessary. Then, if I'm planning to trade today, I review my short list of candidates, focusing on planned entries, targets, and stops. Now I am in gear with the market, ready to place orders. I do this homework even if I know that I will not be able to trade during the day, for example when traveling. This discipline is just like washing and dressing in the morning, even on the days when you don't plan to go to the office. - -| 1 | Elder homework | wed | -|----------------|----------------------------------------------------|----------------------| -| $\overline{2}$ | v37 | 2/19/14 | -| 3 | Check Far East Markets | $up.2 - 1.1%$ | -| 4 | Check Europe Markets | down.5% | -| 5. | Econ calendar Briefing.com | Starts, permits down | -| 6 | Marketwatch | Crash of 2014 | -| $\overline{I}$ | Euro | 1.375 $g/g$ | -| 8 | Yen | 98.1 g/g | -| 9 | Oil | 102 g/g | -| 10 | Gold | 1317 g/b | -| 11 | Bonds @us | $133,23 \text{ g/b}$ | -| 12 | Baltic Dry Index | 1.146 | -| 13 | NH-NL | 1208 / 365 | -| 14 | VIX | 13.9 r/b | -| 15 | S&P500 cash | 1841 g/g | -| 16 | D value | at upchannel | -| 17 | D-13 FI | pos | -| 18 | Expectation of S&P candle | down | -| 19 | Mode: Active, Conservative, Defensive or day-trade | def | - -#### **FIGURE 57.1** Daily homework spreadsheet. *(Source: elder.com)* - -I begin by looking at the overseas markets, then major news, key currencies and commodities, and the key stock market indicators. With practice, the entire process can be handled in about 15 minutes. Let's explore it, line by line. - -- 1. Check Far East Markets—This link takes me to the relevant page on Finance.Yahoo .com. I write down overnight percentage changes for Australia and China. Each person's memory works differently, and mine serves me best when I write things down. -- 2. Check Europe markets—Here I write down percentage changes for the German DAX and the UK FTSE. Markets follow the sun, and you get a feel for how a wave generated in the United States travels to Asia and then to Europe, before returning to our shores. -- 3. Economic Calendar—This link takes me to the page at Briefing.com that lists fundamental reports scheduled to be released each day. It shows the previous number for each release and the consensus forecast. When an important report, such as Unemployment or Capacity Utilization, either beats or misses its estimates, you can expect market fireworks. -- 4. Marketwatch—This is a website for the masses, and I look at it to see what they are being fed this morning. Occasionally it suggests contrary opinion trades. -- 5. Euro—I write down the current price of the most active futures contract, followed by the initials for the Impulse system—green, blue, or red—first for the weekly, then for the daily. This is the format I use for all other markets mentioned below. I look at the Euro futures charts for two reasons. First, there are stretches of time when this currency dances either in gear with or against the U.S. stock market. The other reason is that sometimes Euro futures offer nice day-trading opportunities. -- 6. Yen—The second of the two reasons outlined above applies here more than the first. -- 7. Oil—This is the lifeblood of the economy, and oil futures rise and fall with its ups and downs. Oil futures can be traded. -- 8. Gold—A sensitive indicator of fear and inflationary expectations as well as a popular trading vehicle. - -- 9. Bonds—Rising or falling interest rates are among major drivers of stock market trends. -- 10. Baltic Dry Index—A sensitive leading indicator of world economy. BDI represents the cost of shipping dry goods, for example textiles from Vietnam to Europe or lumber from Alaska to Japan. BDI is very volatile, and the absence of any trading vehicles based on it helps BDI reflect true economic activity. It is extra useful if you trade shipping industry stocks. -- 11. NH-NL—I consider the New High–New Low Index the best leading indicator of the stock market and like to write down the latest weekly and daily figures every morning as a refresher. -- 12. VIX—The volatility index, also called "the fear index." There is a saying: "When VIX is high, it's safe to buy; when VIX is low, go slow." A footnote: beware VIX ETFs, notorious for trading out of sync with the VIX index. -- 13. S&P 500—I write down yesterday's closing price for the index and add the Impulse system initials for its weekly and daily charts. -- 14. Daily value—I switch to the daily chart of the S&P and note whether its latest bar closed above, at, or below value and also its relation to the channel lines. It helps me see whether the market is overbought or oversold. -- 15. Force Index—I note whether its 13-day EMA is above or below its centerline (bullish or bearish), as well as any divergences. -- 16. Expectation of the S&P candle—I test the accuracy of my market expectations by writing down whether I expect the market to close above or below today's opening price. If no opinion, I leave this field blank. The next day I color this box green or red, depending on whether my expectations turned out to be correct. -- 17. On the last line of my homework spreadsheet, I summarize it by stating how I'll trade today: actively, conservatively, defensively (closing trades only), day-trade, or no trades at all. - -## **Are You Ready to Trade Today?** - -There are times when you feel in gear with the market, but at other times you're out of touch. Your mood, health, and time pressures influence your ability to trade. For example, imagine trading while suffering from a toothache. You can't fully concentrate on the market and should be calling your dentist, not your broker. - -This is why each morning, I take a 30-second psychological self-test for an objective rating of my readiness to trade. The first person I saw use a self-test was Bob Bleczinski, a former Spiker. He may have posted his test online because in 2011, I saw SpikeTrade member Erin Bruce present her self-test at that year's reunion. The questions she asked herself were completely different, but the format looked like Bob's. - -I modified Erin's self-test to fit my personality and take it every day before the market opens. Any self-test must be short and specific. Mine has only five questions, and each of them can have only one of three answers: yes, no, or so-so. We'll discuss the logic of designing such tests in the following chapter. If you start using this test, you'll probably modify it to fit your personality and ask the questions that are most important to you (Figure 57.2). - -A zero rating on some of the questions also warns me not to trade. If I haven't done my trade planning or if my schedule is very booked up, this would be a bad day to trade—better stand aside or place only exit orders. - -You, your mind, your mood, and your personality are the essential components of trading. This is why a quick self-test helps you see whether you should be trading today. - -| Physical - unwell 0 | OK health, energy, sleep 1 | Brimming 2 | | -|---------------------|-------------------------------|-------------------|--| -| Losses for day 0 | Prior day mixed or no trade 1 | win for the day 2 | | -| Not prepared 0 | Middling prepared 1 | Very prepared 2 | | -| Bad mood 0 | Mood middling: 1 | Great mood 2 | | -| Very busy 0 | Plate normally busy 1 | Plate sparse 2 | | -| 1-2-3-4 NO trade | 5-6 AND 9-10 Caution | 7-8 Good | | - -**FIGURE 57.2** "Am I ready to trade?" self-test. *(Source: elder.com)* - -I take this test immediately following completion of my homework. Let's review it line by line: - -- 1. How do I feel physically? - - A. Feeling ill = 0 - - B. Feeling average = 1 - - C. Feeling excellent = 2 -- 2. How did I trade yesterday? - - A. Lost money = 0 - - B. Both made and lost money or didn't trade = 1 - - C. Made money = 2 -- 3. Have I done my trade planning this morning? - - A. Not prepared = 0 - - B. Middling = 1 - - C. Well prepared = 2 -- 4. How is my mood? - - A. Poor = 0 - - B. Average = 1 - - C. Great = 2 -- 5. How busy is my schedule today? - - A. Very busy = 0 - - B. Normally busy = 1 - - C. Pretty open = 2 - -The spreadsheet adds up scores for all five questions and uses Excel's conditional formatting to color the summary cell. If my score is four or lower, this cell turns red. With so many negatives, it signals me not to trade today. The score of five or six flashes a yellow light—trade very cautiously. The score of seven or eight gives me a green light, but if the score rises to nine or ten, the light turns yellow again—with everything so perfect, any change is bound to be for the worse. Don't let recent success go to your head. - -## ■ **58. Creating and Scoring Trade Plans** - -A plan for any trade must specify what strategy you'll use. It must prompt you to check the dates of earnings and dividends or contract rollovers, in order to save you from being blindsided by predictable news. It must spell out your planned entry, target, and stop as well as your trade size. - -Writing down a trade plan makes it real. Once you enter a trade and your equity starts fluctuating, you may feel stressed and forget to perform certain tasks. The plan you write prior to entering a trade becomes your island of sanity and stability in the middle of a storm; it helps ensure that you don't overlook anything essential. - -A really good plan will include a scale for measuring its quality. This objective rating, which we'll discuss below, takes less than a minute, but it encourages you to implement only those plans that have a higher likelihood of success. It prompts you to drop marginal plans and not chase borderline trade ideas. - -While all my records are in electronic format, I like having my trade plans on paper. I use preprinted forms that I named Tradebills, similar to waybills that come with the packages we order online. When a company sends you a product, it comes with a waybill that shows the name of the product, its quantity, your address, the mode of delivery, rules for returns, and other essential facts. My trades are accompanied by tradebills from the planning stage to the closing day. - -I have two separate tradebills for each trading system, one for buying and another for shorting. Here we'll review a tradebill for one of my favorite strategies. You can use it as a starting point for developing your own tradebill. - -Whenever a potential trade catches my eye, I decide which system it fits and then pick up the appropriate blank tradebill. Right there, if a seemingly attractive trade fits no trading system, then there is no trade. Having decided on a system, I write down the date and the ticker symbol, and then score that potential trade, as shown below. If the score is high enough, I proceed to complete my trade plan; otherwise, I toss that sheet of paper into a wastebasket and go looking for other trades. - -Wherever I go, I carry my tradebills for open trades. If I'm at my desk, they are next to my keyboard. If I go out during the day and bring my laptop, I put those tradebills between the keyboard and the screen, so they'll be the first thing to see when I open up my laptop. - -Having written down my trade plans for years, I gradually developed a method for scoring them before making a go/no-go decision. My habit of scoring plans was reinforced when I read *Thinking, Fast and Slow* by Prof. Daniel Kahneman. This book on decision making by a behavioral economist and a Nobel Prize winner underscored the value of simple scoring systems—they make our decisions more rational and less impulsive. - -## **Scoring Your Trade Plans (a Trade Apgar)** - -Among the examples in Prof. Kahneman's book was his description of the work of Dr. Virginia Apgar (1909–1974), a pediatric anesthesiologist at Columbia University. She is widely credited with saving countless lives. Doctors and nurses worldwide use the Apgar scale for deciding which newborns require immediate medical care. - -Most babies are born normal; some have complications, while others are at risk of dying. Prior to Dr. Apgar, doctors and nurses used clinical judgment to tell those groups apart, and their mistakes contributed to infant mortality. Dr. Apgar's scoring system made their decisions objective. - -The Apgar score summarizes answers to five simple questions. Each newborn is rated on its pulse, breathing, muscle tone, response to a pinch, and skin color. A good response to any question earns two points, poor zero, or one for an in-between. The test is generally done at one and five minutes after birth. Total scores of seven and above are considered normal, 4 to 6 fairly low, and less than 4 critically low. Babies with a good score are safe to put into general care, while those with low Apgar scores require immediate medical attention. The entire decision-making process, focusing on whom to treat aggressively, is quick and objective. Dr. Apgar's simple scoring system has improved infant survival rates around the world. - -After reading Prof. Kahneman's book, I renamed my scoring system the "trade Apgar." It helps me decide which of my trade ideas are strong and healthy or sickly and weak. Of course, as a trader, my actions are completely opposite to those of a pediatrician. A doctor focuses on the sickest kids, to help them survive. As a trader, I focus on the healthiest ideas and trash the rest. - -Before I show you my Trade Apgar, a word of caution: the scoring method you're about to see is designed for one system—my "false breakout with a divergence" strategy. All other systems will require a different test. Use my Trade Apgar as a starting point for developing a test for your own system. - -For example, I recently gave the file of my Trade Apgar to a professional option writer who consulted with me. He loved the idea of a written test, which reduced impulsivity, one of his key problems. Within a few weeks, he showed me his own Trade Apgar, which greatly differed from mine. He replaced one of my indicators with his favorite RSI and Stochastic and added questions directly relevant only to option writing. I was happy to see that he was trading more profitably. - -A Trade Apgar demands clear answers to five questions that go the heart of a trading strategy. As you develop a Trade Apgar for your own strategy, I suggest keeping the number of questions down to five and rating your answers on a zero/one/two point scale. Simplicity makes this test more objective, practical, and quick. - -While looking at a potential trade, I take a blank tradebill from a stack and circle my answers to its five questions. A circle in the red column earns a zero, in the yellow column one point, and in the green column two points. I write down each number in the score box and add up the five lines. Also, if I circle the red column, I may write in the box next to it at what price the answer will change to a more favorable yellow or green. That will raise the plan's score, allowing me to enter a trade at that level. Figure 58.1 shows a Trade Apgar for going long; Figure 58.2 shows a Trade Apgar for shorting. - -It takes less than a minute to generate a Trade Apgar for any stock. I want to trade only healthy ideas whose score is 7 or higher, and not a single line rated zero. If the - -| | zero | one | two | score level | | -|-----------------------|------|---------------------------|--------------------------------------------|-------------|--| -| Weekly Imp red | | green | blue (after red) | | | -| Daily Imp | red | green | blue (after red) | | | -| Daily price | | above value in value zone | below value | | | -| False bkout none | | in place | near | | | -| Perfection | | | neither time one timeframe both timeframes | | | -| | | | | | | - -**FIGURE 58.1** Trade Apgar for going long, using a strategy of "false breakout with a divergence." *(Source: elder.com)* - -Rate your answers to five questions on a scale from zero to two: - -1. Weekly Impulse (described in this book)—zero for Red, one for Green, two for Blue on the weekly chart. - -Red Impulse prohibits buying, Green is OK but could be too late, while Blue (after red) shows that bears are losing power, which is a good time to buy. - -- 2. Daily Impulse—same questions and ratings on the daily chart. -- 3. Daily price—zero if the latest price is above value, one if it's in the value zone, two if below value on the daily chart. - -Prices above value may be too late to buy, in the value zone OK, below value could be a bargain. - -- 4. False breakout—zero if none, one if it already happened, two if on the verge of happening. -- 5. Perfection—zero if neither timeframe, one if only one, two points if both look perfect. - -I always analyze markets in two timeframes; one of them must show a perfect pattern for any strategy in order for me to enter a trade. Very rarely both timeframes are perfect—it is fine for one to be perfect and for the other to be merely good. If neither timeframe looks perfect, it can't be an A trade—drop this stock and move on to another one. - -score is 7 or higher, I go on to complete my trade plan. I establish my entry, target, and stop, decide what size to trade, etc. - -Trade Apgars provide objective ratings for potential trades. With thousands of trading vehicles available to us, there is no need to waste energy on poor candidates. Use a Trade Apgar to help you zoom in on the best prospects. - -## **Using a Tradebill** - -Once you become interested in a stock and a Trade Apgar confirms your idea for a trade, completing a tradebill will help you focus on the key aspects of that trade. - -Let's review a tradebill for long positions (Figure 58.3). - -I designed my Tradebills in PowerPoint, fitting two to a page. I always keep some blanks handy, but don't preprint too many because I keep tweaking these forms. - -My tradebill for short trades is the same, except for a different Trade Apgar, as shown in Figure 58.2. When you start developing your own tradebills, you may want - -| | zero | one | two | score level | | -|-------------------------|-------|---------------------------|---------------------------------------------|-------------|--| -| Weekly Imp green | | red | blue (after green) | | | -| Daily Imp | green | red | blue (after green) | | | -| Daily price | | below value in value zone | above value | | | -| False bkout | none | in place | pos w/bear divg | | | -| Perfection | | | neither time lone timeframe both timeframes | | | -| | | | | | | - -**FIGURE 58.2** Trade Apgar for shorting, using strategy of "divergence with a false breakout." This is a mirror image of Trade Apgar for buying, using the same strategy. - -#### Part 1: Trade identification. - -- The green stripe marks it as a long trade. -- A thumbnail picture of a bullish divergence with a false breakout is a reminder of the strategy. -- The first box is for the ticker symbol. -- The next box is for the next earnings date. You can look it up at several free websites, such as [www.Briefing.com,](http://www.Briefing.com) [www.earnings.com,](http://www.earnings.com) or [www.Finviz.com.](http://www.Finviz.com) Most traders avoid holding stocks whose earnings are about to be reported. A nasty earnings surprise can do serious damage to your position. Writing down that date forces you to focus on avoiding trouble. -- The next box is the dividend date, if any. I usually look it up at [http://finance.yahoo.com.](http://finance.yahoo.com) Dividends create tax consequences for longs, while shorts have to pay dividends, so they definitely want to avoid holding on that day. -- The last box is for the date of my plan. - -#### Part 2: Trade Apgar - -- My Trade Apgar was described above. Remember that each strategy demands its own Apgar. You're perfectly welcome to replace my questions with those that are relevant to your own system. For example, you may ask whether Stochastic is in the overbought zone (zero), oversold (one), or oversold with a bullish divergence (two). -- After you sum up the numbers for the Trade Apgar, answer this key question in writing: Is this an A-trade? If the total score is below 7, drop this stock and look for another trade. - -#### Part 3: Market, entry, target, stop, and risk control - -- The five boxes along the left edge require me to answer questions about the general state of the market. Is the Spike Bounce signal in effect? Is the indicator that traces stocks above their MAs bullish or bearish? What is the short interest in this stock and how many days to cover? All of these studies have been described in this book. The last box is for a few words of a summary. -- Three boxes linked by arrows are at the heart of my decision-making process. They demand three essential numbers for every trade: the entry, the target, and the stop. -- Dollar risk—How many dollars are you willing to risk on this trade? This number can never exceed two percent of your account equity. I usually keep it considerably below that threshold. -- Size—How many shares or futures contracts will you buy, based on the permitted dollar risk and the distance from the entry to the stop. This is explained in detail in "The Iron Triangle of risk control" in Chapter 50. - -#### Part 4: After the entry - -- The A target is 30% of the daily channel height added to the entry price. -- The soft stop is what you may keep in mind, while the hard or catastrophic stop is the actual order. It may not be any lower than the stop listed in Section 3. -- Put in the price level at which you'll move your stop to breakeven. -- Check the boxes on the right as you perform these essential steps: place a stop, create a diary entry, and place a profit-taking order. - -#### Part 5: The copyright line - -■ This line shows when this tradebill was updated. As a reader of this book, you're welcome to write to info@[elder.com an](mailto:info@elder.com)d request the latest version, which we send to traders as a public service. - -to copy sections 1, 3, and 4, but develop your own section 2—the Trade Apgar for your own system or strategy. - -## ■ **59. Trade Journal** - -Memory is the cornerstone of civilized life. It allows us to learn from our successes and even more from our failures. Keeping a diary of your trades will help you grow and become a better trader. - -Keeping detailed trade records feels burdensome—but that's what serious traders do. Many people asked me after I published a book of interviews with traders (*Entries & Exits*, 2006), what all of them had in common. They lived in different countries, traded different markets, and used different methods—but all kept excellent records. - -The best example came from the woman whose interview was in the first chapter of that book. While finishing the manuscript, I realized that our interview had been incomplete and I needed to ask additional questions about her trades. A year later, on another visit to California where she lived, I asked to meet again. I assumed she'd show me some recent trades, but she went to a filing cabinet and pulled out a folder with all her trades for the week of my previous visit. We completed our interview by reviewing her charts from a year ago as if those trades were made yesterday. A bull market was in full swing, she was doing great, but still worked to improve her performance. Her detailed diary was her selfimprovement tool. - -Let your diary entries serve as your "extra-cranial memory," a tool for building the structure of success. - -For years, I struggled with developing a record-keeping system that would be easy to update and analyze. In the beginning, I kept the diary of my trades in a paper journal, gluing in chart printouts and marking them up—I still keep one of those antiques next to my trading desk. Later I kept my diary in Word, and then in Outlook. Finally, in 2012, Kerry Lovvorn and I created a web-based Trade Journal1 . - -This Trade Journal is a joy to keep, and both Kerry and I use it for all our trade diaries. Our Trade Journal is available to all, and its use is free (up to a limit). The journals are online, password protected, and absolutely private—although SpikeTrade members have an option of sharing their trade journals for selected trades. - -1 We relied on capable programming by Helena Trent and used several ideas suggested by Jeff Parker. - -| | A | -|---|---| -| | | -| | | -| | | -| | B | -| | | -| | | -| | | -| | | -| | | -| | D | -| | | -| | | -| C | | -| | | -| | | -| | | -| | | -| E | | -| | | -| | | -| | | - -**FIGURE 59.1** Trade Journal (a partial view). *(Source: Spiketrade.com)* - -- Section A—The Trade Journal asks why I decided to trade this stock. I usually leave this box blank because I like to write such comments on the charts, using SnagIt software. In the case of ADSK, I attached a combination chart, featuring weekly, daily, and 25-minute charts. -- Section B—Documenting entry and exit dates and prices; accounting for slippage and seeing buy, sell, and trade grades. -- Section C—Reasons for exit with an attached combination chart showing both entry and exit. -- Section D—The list of exit tactics is longer than that of trade strategies. I may exit because my trade hit its target, or its stop, or is reaching the value zone or the envelope. I may exit if a trade is going nowhere or starting to turn. There are also two negative exits: couldn't stand the pain or recognizing a junk trade after I entered. -- Section E—Post-trade analysis. I like to return to every trade two months after the exit and review it with the benefit of hindsight. I create a follow-up chart, mark my entry and exit with arrows, and then write a comment on how my trade looks after the passage of time. This is the best way of learning what I did right or wrong. - -Our Trade Journal is shown in Figure 59.1. Even if you prefer to build your own, look at it to see what must be included in your own record-keeping system. - -The Trade Journal is designed to make your record-keeping simple and logical, helping you plan, document, and learn from your trades. We have already reviewed several sections of the Trade Journal. Figure 38.1 showed its three sections—Setup, Risk, and Parameters. Figure 55.2 showed the strategy box in the Trade Journal. - -Most of us quickly forget past trades, but the Trade Journal prompts you to return to them. The trades you entered and exited at the hard right edge of the chart are now in the middle of that chart, where you can re-examine your decisions and learn how to improve them. - -## **Three Benefits** - -Keeping a trade journal delivers three major benefits. One is immediate—a greater sense of order. The second comes a month or two later, when you start reviewing your closed trades. Finally, after you accumulate dozens of records, you'll have several ways to analyze them and learn from your equity curves. - -A Sense of Order and Structure comes from documenting the plan, the entry, and the exit for each trade. Where exactly will you enter, what is your target, where will you place your stop? Defining and writing down those numbers will steer you towards disciplined trading. You'll become less likely to slip into an impulsive buy, overstay a profitable trade, or let a loss snowball without a stop. Filling out risk management numbers will give you a handle on trade sizing. Documenting exits will make you face your trade grades. - -**FIGURE 59.2** DISCA daily with 13- and 26-day EMAs and a 6% channel. Impulse system with MACD-Histogram 12-26-9. *(Chart by Stockcharts.com)* - -#### Follow-Up Analysis (Shorting a Top) - -My strategy for shorting Discovery Communications, Inc. (DISCA) was "fading an extreme;" my exit tactic "started turning." Entry and exit are marked by arrows. A review two months later confirmed that both decisions were correct. Lesson: the next time I see this pattern, jump aboard. - -Reviewing Every Trade a month or two after your exit is one of the best learning experiences you can have. Trading signals that may have appeared vague and uncertain at the right edge of a chart become crystal clear when you view them in the middle of your screen. Returning to your past trades and adding an "after the trade" chart makes you reevaluate your decisions. Now you can clearly see what you did right or wrong. Your journal will be teaching you priceless lessons. - -I make my strategic decisions on the weekly charts, tactical on the dailies. Since my daily charts are formatted to show five to six months of data, once a month I spend a few hours reviewing trades that I closed two months ago. For example, at the end of March or in the beginning of April, I'll review all trades that I closed out in January. I'll pull up their current charts, mark my entries and exits with arrows, and write a comment on every trade. Let me share two examples with you (Figures 59.2 and 59.3). - -Such reviews teach you what's right with your trading, and what needs to be changed. Soon after I started doing my "two months later" reviews, I became aware of two problems with my exits. I noticed that my stops were a bit tight and that helped me figure out that by slightly increasing the amount of risk, I could substantially reduce the number of whipsaws and come out ahead. I also noticed that while my short- - -**FIGURE 59.3** MCP daily with 13- and 26-day EMAs and a 16% channel. Impulse system with MACD-Histogram 12-26-9. *(Chart by Stockcharts.com)* - -#### Follow-Up Analysis (Buying a Pullback) - -My strategy for buying Molycorp, Inc. (MCP) was "pullback to value"—I thought that a new uptrend had begun. The following day, I was no longer so sure and sold for a small profit. A review two months later showed that I missed the resumption of the bear trend; my decision to cut and run with a small profit was correct, but I overlooked a major trade. Lesson: continue to monitor closed-out trades for a week or so and be prepared to re-enter or to reverse. - -term swing trades tended to be good, I often missed bigger trends that emerged from those short-term moves. I used that knowledge to adjust my methods going forward. - -Reviewing Your Equity Curve is essential because only a rising curve certifies you as a successful trader. If your equity curve is in a downtrend, your system may be at fault, or your risk management poor, or your discipline lacking—whatever it is, you must track it down and solve that problem. - -Still, a combined equity curve for all your trades and accounts is a pretty crude tool. The Trade Journal allows you to zoom in and trace your equity curves for specific markets, strategies, and exit tactics. For example, I can run separate equity curves for longs and shorts, for different strategies and exits, and even for sources of my trade ideas. Believe me: once you see an equity curve for exits marked "Couldn't stand the pain," you'll never trade without stops! diff --git a/trading/The New Trading for a Living/016_CONCLUSION A Journey without an End - How to Continue Learning.md b/trading/The New Trading for a Living/016_CONCLUSION A Journey without an End - How to Continue Learning.md deleted file mode 100644 index 95976e19934567c1de5d92edddc74062b0fca6ee..0000000000000000000000000000000000000000 --- a/trading/The New Trading for a Living/016_CONCLUSION A Journey without an End - How to Continue Learning.md +++ /dev/null @@ -1,41 +0,0 @@ -## A Journey without an End: How to Continue Learning - -As we near the end of this book, I compliment you on your persistence and commitment. We have worked through the essential trading topics: psychology, tactics, risk management, and record-keeping. Still, becoming a successful trader will take more than reading a single book. - -How long do you think it might take? - -You may have seen this huge number—10,000. According to some authors, that's the number of hours it takes to become an expert in major pursuits, such as professions or sports. If that is true and you spend 40 hours per week, 50 weeks a year, it'll take five years to become a pro. If you can invest only 20 hours per week, it'll take ten years. That's a scary thought. - -If you, like so many people, came to trading after a successful career in another field, be it engineering, farming, or business, you may well have invested that many hours in it. Do you really want to spend another 10,000 hours on a new project at this stage of your life? - -Before you shudder at this prospect, let me share a very different number with you—20 hours. It comes from a book, *The First 20 Hours: How to Learn Anything... Fast!* Its author, Josh Kaufman, makes a sensible point that while becoming a worldclass expert will take years, you can achieve a basic level of competence in most fields in a much shorter time. - -"The early hours of practicing something new are always the most frustrating. That's why it's difficult to learn how to speak a new language, play an instrument, hit a golf ball, or shoot great photos. It's so much easier to watch TV or surf the web*...*" he writes. To learn a new skill, you need to find the experts and get their materials, create an action plan, and make an absolute commitment to studying and practicing without any distractions. - -By completing just 20 hours of focused, deliberate practice, you can go from near zero to performing reasonably well in many fields. Kaufman describes how he took 20 hours to learn several new skills, including windsurfing and programming a website. Even if you take up a more complex activity, such as flying, 20 hours will get you through the ground school and the first few lessons with an instructor. This won't make you a pilot, but 50 hours of flight time should earn you a private pilot's license. - -The number of hours for mastering basic trading skills is even higher, but much closer to flying than to 10,000 hours. - -The intellectual demands of trading aren't high. After all, we deal with only five numbers—open, high, low, and closing prices, plus volume. The main difficulty comes from our emotions. Trading stirs up powerful feelings, the strongest of which are greed and fear. - -New traders focus on money, dream about what their profits will buy, and throw caution to the wind. They buy as many shares as they can afford and double up on margin. Filled with joyful anticipation, they write down no trade plans. When a trade turns against them, their emotions swing from greed to fear. That's when they freeze, while the market grinds down their accounts. - -Technically, trading isn't very hard. Psychologically, it's the hardest game on the planet. - -To reduce the stress of trading, keep in mind several essential points. Your trading life depends on following these rules: - -- Trade small sizes while learning. -- Do not count money while in a trade. -- Use risk management rules, primarily the 2% Rule. -- Write down your plans, especially these three numbers: entry, stop, and target. -- Keep a trading diary and review it at least once a month. - -Most traders are terribly isolated and never get to see how others practice their craft. This isolation contributes to impulsive trading. A private trader who violates every rule in the book and makes gross errors remains invisible to others. Nobody will warn him to stay out of trouble or praise him for a good trade. - -In the old days, our brokers knew what we were doing, but now we place orders online. The only human who may contact you about your trades is the margin clerk at a brokerage firm. Getting a call or an e-mail from him is never good news. I hope that you never meet a margin call, sending good money after bad. - -To break out of your isolation, to see what good traders are doing, and to be rewarded for your performance, I suggest you look into SpikeTrade.com—a website I run with my friend Kerry Lovvorn. That's where traders share ideas and advice, engage in a friendly competition, and comment on each other's trades. Time and again we see people come in at a fairly basic level, start submitting picks on a voluntary basis, earn performance bonuses, and rise to become serious traders. - -I wish you success. Trading is one of the hardest pursuits on Earth, but it's an endlessly fascinating adventure that can be very rewarding. I've been on this journey for decades, and still look forward to every Monday, when markets reopen. While trading has made me free, I still catch myself making occasional mistakes and have to concentrate on my discipline. I reserve the right to be smarter tomorrow than I am today. It is a great journey, and I look forward to sharing it with you. - -> *Dr. Alexander Elder New York–Vermont, 2014* diff --git a/trading/The New Trading for a Living/017_Sources.md b/trading/The New Trading for a Living/017_Sources.md deleted file mode 100644 index f0214e95c830cd8d829cada8b64d9dfe0b51e295..0000000000000000000000000000000000000000 --- a/trading/The New Trading for a Living/017_Sources.md +++ /dev/null @@ -1,82 +0,0 @@ -# Sources - -- Angell, George. *Winning in the Futures Market* (1979) (Chicago: Probus Publishing, 1990). -- Appel, Gerald. *Day-Trading with Gerald Appel* (video) (New York: Financial Trading Seminars, Inc., 1989). -- Ariely, Dan. *The Honest Truth about Dishonesty* (New York: HarperCollins, 2013). -- Belveal, L. Dee. *Charting Commodity Market Price Behavior* (1969) (Homewood, IL: Dow Jones Irwin, 1989). -- Bruce, Erin. SpikeTrade Reunion presentation, 2011. -- Cameron, Peter. Personal communication, 2012. -- Davis, L. J. "Buffett Takes Stock," *The New York Times*, April 1, 1990. -- Douglas, Mark. *The Disciplined Trader* (New York: New York Institute of Finance, 1990). -- Edwards, Robert D., and John Magee. *Technical Analysis of Stock Trends* (1948) (New York: New York Institute of Finance, 1992). -- Ehlers, John. *MESA and Trading Market Cycles* (Hoboken, NJ: John Wiley & Sons, 1992). -- Elder, Alexander, *Come into My Trading Room* (Hoboken, NJ: John Wiley & Sons, 2003). - -- ———, *Directional System* (video) (New York: Financial Trading Seminars, Inc., 1988). -- ———, *Entries & Exits* (Hoboken, NJ: John Wiley & Sons, 2006). -- ———, *Force Index* (video) (New York: Elder.com, Inc., 2010). -- ———. *MACD & MACD-Histogram* (video) (New York: Financial Trading Seminars, Inc., 1988). -- ———, "Market Gurus," *Futures and Options World*, London, September 1990. -- ——— & Kerry Lovvorn, *The New High–New Low Inde*x (Alabama: SpikeTrade, 2012). -- ———, *The New Sell & Sell Short: How to Take Profits, Cut Losses, and Benefit from Price Declines* (Hoboken, NJ: John Wiley & Sons, 2011). - -———, *Technical Analysis in Just 52 Minutes* (video) (New York: Financial Trading Seminars, Inc., 1992). - -- ———, "Triple Screen Trading System," *Futures Magazine*, April 1986. -- ———, *Triple Screen Trading System* (video) (New York: Financial Trading Seminars, Inc., 1989). -- ———, *Two Roads Diverged: Trading Divergences* (New York: Elder.com, 2012). -- Elliott, Ralph Nelson, *Nature's Law* (1946) (Gainesville, GA: New Classics Library, 1980). -- Engel, Louis, *How to Buy Stocks* (1953) (New York: Bantam Books, 1977). -- Freud, Sigmund, *Group Psychology and the Analysis of the Ego* (1921) (London: Hogarth Press, 1974). -- Friedman, Milton, *Essays in Positive Economics* (Chicago: The University of Chicago Press, 1953). -- Frost, A. J., and R. R. Prechter, Jr., *Elliott Wave Principle* (Gainesville, GA: New Classics Library, 1978). -- Gajowiy, Nils, Personal communication, 2012. -- Gallacher, William, *Winner Takes All—A Privateer's Guide to Commodity Trading* (Toronto: Midway Publications, 1983). -- Gann, W. D., *How to Make Profits in Commodities* (Chicago: W. D. Gann Holdings, 1951). -- Gawande, Atul, *The Checklist Manifesto: How to Get Things Right* (New York: Henry Holt and Company, 2011) - -- Gleick, James, *Chaos: Making a New Science* (New York: Viking/Penguin, 1987). -- Goepfert, Jason, SentimenTrader.com -- Granville, Joseph, *New Strategy of Daily Stock Market Timing for Maximum Profit* (Englewood Cliffs, NJ: Prentice Hall, 1976). -- Greenson, Ralph R., "On Gambling" (1947), in *Explorations in Psychoanalysis* (New York: International Universities Press, 1978). -- Grove, Nic, Personal communication, 2004. -- Gunter, Jock, Personal communication, 2013. -- Havens, Leston, *Making Contact* (Cambridge, MA: Harvard University Press, 1986). -- Hurst, J. M., *The Profit Magic of Stock Transaction Timing* (Englewood Cliffs, NJ: Prentice-Hall, 1970). - -Investopedia.com. - -- Kahneman, Daniel, *Thinking, Fast and Slow* (New York: Farrar, Straus and Giroux, 2011). -- Kaufman, Josh, *The First 20 Hours: How to Learn Anything ... Fast!* (New York: Portfolio/Penguin, 2013). -- Kaufman, Perry, *Trading Systems and Methods* (Hoboken, NJ: John Wiley & Sons, 2013) -- Larsen, Max, SpikeTrade Reunion presentation, 2007. -- LeBon, Gustave, *The Crowd* (1897) (Atlanta, GA: Cherokee Publishing, 1982). -- Lefevre, Edwin, *Reminiscences of a Stock Operator* (1923) (Greenville, SC: Traders Press, 1985). -- Mackay, Charles, *Extraordinary Popular Delusions and the Madness of Crowds* (1841) (New York: Crown Publishers, 1980). -- McMillan, Lawrence G., *Options as a Strategic Investment* (Englewood Cliffs, NJ: Prentice Hall, 2012). -- Mellon, Andrew J., *Unstuff Your Life* (New York: Avery/Penguin, 2010). -- Murphy, John J., *Technical Analysis of the Financial Markets* (New York: New York Institute of Finance, 1999). -- Neill, Humphrey B., *The Art of Contrary Thinking* (1954) (Caldwell, ID: Caxton Printers, 1985). - -- Nison, Steve, *Japanese Candlestick Charting Techniques* (New York: New York Institute of Finance, 1991). -- Notis, Steve, "How to Gain an Edge with a Filtered Approach," *Futures Magazine*, September 1989. -- Paulos, John Allen, *Innumeracy. Mathematical Illiteracy and Its Consequences* (New York, Vintage Press, 1988). -- Plummer, Tony, *Forecasting Financial Markets* (London: Kogan Page, 1989). -- Pring, Martin J., *Technical Analysis Explained*, 5th ed. (New York: McGraw-Hill, 2013). -- Rhea, Robert, *The Dow Theory* (New York: Barron's, 1932). -- Shapiro, Roy, *Why Johnny Can't Sell Losers: Psychological Roots*, unpublished article, 1991. -- Steidlmayer, J., Peter, and Kevin Koy, *Markets & Market Logic* (Chicago: Porcupine Press, 1986). -- Surowiecki, James, *The Wisdom of Crowds* (Anchor, 2005). -- Stoller, Manning, Personal communication, 1988. -- Teweles, Richard J., and Frank J. Jones, *The Futures Game*, 2nd ed. (New York: McGraw-Hill, 1987). -- *Twelve Steps and Twelve Traditions* (New York: Alcoholics Anonymous World Services, 1952). -- Vince, Ralph, *Portfolio Management Formulas* (Hoboken, NJ: John Wiley & Sons, 1990). -- Weissman, Richard L., *Mechanical Trading Systems: Pairing Trader Psychology with Technical Analysis* (Hoboken, NJ: John Wiley & Sons, 2004). - -Wikipedia.com. - -- Wilder, J. Welles, Jr., *New Concepts in Technical Trading Systems* (Greensboro, SC: Trend Research, 1976). -- Williams, Larry, *How I Made One Million Dollars* (Carmel Valley, CA: Conceptual Management, 1973). -- ———, *The Secret of Selecting Stocks* (Carmel Valley, CA: Conceptual Management, 1972). - -Yannidis, Nikos, Personal communication, 2011. diff --git a/trading/The New Trading for a Living/018_Acknowledgments.md b/trading/The New Trading for a Living/018_Acknowledgments.md deleted file mode 100644 index 465dcd4b7e30f60c2d394d0ce91541114ba60df8..0000000000000000000000000000000000000000 --- a/trading/The New Trading for a Living/018_Acknowledgments.md +++ /dev/null @@ -1,17 +0,0 @@ -# Acknowledgments - -Nobody's born smart. We accomplish what we do we after learning from others and being helped by them. Then, if we do a good job, we may be able to build upon what we learned, advance a few steps, and share our knowledge with those who may follow us. - -This book is dedicated to Lou Taylor, probably the most remarkable person I met in my life. He was a brilliant, fearless, and a completely "out of the envelope" man, the amazing story of whose life (he died in 2000) deserves its own book. - -*The New Trading for a Living* reflects how I think, feel, and act in the markets. I am tempted to thank by name all those who helped me become who I am today, and perhaps kick at a few who would have loved to see me fail. If I give in to this temptation it'll become an autobiography instead of a brief acknowledgment. So let me mention only those who directly and substantially helped me during the past 18 months while I was working on this book. - -Kerry Lovvorn began as my student but became a partner and a friend. While my background is in psychiatry, his is in steel. As he became more attuned to psychological issues, I became more structured and data oriented. It's a great partnership, and running SpikeTrade together is today at the center of my intellectual life. - -Jeff Parker, an old friend, carefully read and critiqued this book as well as its Study Guide—a tough but friendly critic. Chip Anderson of StockCharts.com not only helped me master his software but converted my personal charts into the format suitable for the book. My agent Ted Bonanno took care of business, while Nancy Dimitry and Gabriella Kadar of D&P Editorial Services did a yeoman's job of converting my files into a physical book. It was a pleasure working with John Wiley & Sons again, and I greatly appreciate what Paul diNovo, their creative director, did for the visual style of this book. Carol Keegan Kayne continues to check all my books, including this one, for clarity and precision. - -In conclusion, a big thanks to two groups: SpikeTraders who keep me on my toes with their questions and Traders' Camps graduates who sharpened my teaching skills. - -Thank you and see you! - -*Dr. Alexander Elder New York–Vermont 2014* diff --git a/trading/The New Trading for a Living/019_About the Author.md b/trading/The New Trading for a Living/019_About the Author.md deleted file mode 100644 index db7adde65d6f51a8a7db6410b55238a36168db88..0000000000000000000000000000000000000000 --- a/trading/The New Trading for a Living/019_About the Author.md +++ /dev/null @@ -1,9 +0,0 @@ -# About the Author - -Alexander Elder, MD, is a professional trader and a teacher of traders. He is the author of several best-sellers, considered modern classics among traders. He also wrote books about Russia and New Zealand. - -Dr. Elder was born in Leningrad and grew up in Estonia, where he entered medical school at the age of 16. At 23, while working as a ship's doctor, he jumped a Soviet ship in Africa and received political asylum in the United States. He worked as a psychiatrist in New York City and taught at Columbia University. His experience as a psychiatrist provided him with unique insight into the psychology of trading. - -Dr. Elder is an active trader, but he continues to teach and is a sought-after speaker at conferences in the United States and abroad. Dr. Elder is the originator of Traders' Camps—week-long classes for traders. He is the founder of SpikeTrade group, a community of traders whose members share their best stock picks each week in competition for prizes. - -Websites: [www.elder.com](http://www.elder.com) [www.spiketrade.com](http://www.spiketrade.com) Email: [info@elder.com](mailto:info@elder.com) diff --git a/trading/The New Trading for a Living/020_INDEX.md b/trading/The New Trading for a Living/020_INDEX.md deleted file mode 100644 index e471df0dd4f2bafd51917a3f91f2f36f00e3df84..0000000000000000000000000000000000000000 --- a/trading/The New Trading for a Living/020_INDEX.md +++ /dev/null @@ -1 +0,0 @@ -### **INDEX** diff --git a/trading/The New Trading for a Living/021_EULA.md b/trading/The New Trading for a Living/021_EULA.md deleted file mode 100644 index 026f578a9b8a17d7ad88b5e3e9944e290dc9fe80..0000000000000000000000000000000000000000 --- a/trading/The New Trading for a Living/021_EULA.md +++ /dev/null @@ -1,201 +0,0 @@ -## **A** - -Account equity, 204 reviewing equity curve, 247 6% Rule for, 208–210 2% Rule for, 203–207 Accumulation/Distribution (A/D), 110–112 and crowd behavior, 110 trading rules, 111 Advance/Decline (A/D) line, 140–142 Advertisers, signals from, 144–145 Advisors, 39 Advisory opinion, 143–144 ADX (Average Directional Indicator), 91, 92 Alcoholics Anonymous (AA) 20-21 applied to trading, 20–21, 23–27 first step, 25–26 going into the hole, 24 "meeting for one," 26–27 rock bottom, 24–25 urge to trade, 23–24 to control self-destructiveness, 19 denial, 21–22 first step, 22 for gamblers, 17 - -Alcoholics Anonymous (AA) principles (*Cont*.): lessons from, 21–23 meetings, 23 one day at a time, 22–23 rock bottom, 22 Apgar, Virginia, 238–239 Apgar score: for newborns, 239 Trade Apgars, 238–243 Appel, Gerald, 80, 170 Apple Inc., 127 Ariely, Dan, 16 *Art of Contrary Thinking, The* (Humphrey B. Neill), 143 ASIC, 186 Ask, 8, 32. *See also* Bid-ask spreads ATR (Average True Range) stops, 221 ATR (Average True Range), 93–94, 169 A-trades, 225–230 Attachment to positions, 199 At-the-money options, 179 Autoenvelope, 168 Autopilot myth, 12–13 Available risk, 208–210, 221 Average Directional Indicator (ADX), 91, 92 - -Average Downside Penetration, 220 Average True Range (ATR), 93–94, 169 Average True Range (ATR) stops, 221 - -## **B** - -Backtesting systems, 151–152 Bar charts, 50 closing prices on, 50, 53 distance between highs and lows on, 53 highs on, 52, 53 lows on, 53 meaning of, 51–53 opening prices on, 50 Bears (traders), 31–33, 39, 43–45 balance of power between bulls and: A/D, 110 closing prices, 96 divergences, 87, 98, 101 Force Index, 113, 115, 116 MACD-Histogram, 84 MACD Line, 81 miscellaneous indicators, 74 and NH-NL zero line, 136 On-Balance Volume, 108 open interest, 119–120 volume, 104 and channel lines, 169 conflict between bulls and, 119–120 emotional commitment of, 58 and kangaroo tails, 66 maximum power of, 53 and open interest, 118, 119 pain and regret of, 57 trend behavior of, 62 and volume of trading, 105–107 Bearish divergences, 87–89, 98 between A/D and prices, 111 between Force Index and price, 115, 116 NH-NL indicating, 136–137 RSI signals of, 100, 101 - -Bear markets: of 2007-2009, 86–87 advisors in, 143 price highs and lows in, 51 "Beginner's luck," 28 Belveal, L. Dee, 119–120 Bending rules, 19–20 Betas, 174 Bias, detecting, 47 Bid, 8, 32 Bid-ask spreads, 8 with CFDs, 186 with forex trades, 194, 195 "slicing the bid-ask spread" technique, 183 Big traders, 192. *See also* Institutional traders Black boxes, 38, 71 Bleczinski, Bob, 236 Blume, Sheila, 17 Bollinger bands, 167, 172 Bottoms. *See also specific indicators* "climax," 107 and divergences, 87, 89 since the 1950s, 51 in trends, 71 in triple divergences, 89 Bottom-pickers, 105, 120 Bounces, 226 Brain myth, 11 Breakeven, moving stops to, 223 Breakouts: amateurs' vs. pros' interpretations of, 170 and buying decisions, 63 false, 56, 59–60, 97 downside, 61, 229 reinforcing Stochastic signals, 97 from support and resistance, 56 upside, 61 pain and regret created by, 57 in Triple Screen system, 159 true, 59–60 - -Breakouts (*Cont*.): upside, 59 and volume, 106 Brokers: commissions of, 6–8 in forex trading, 194, 195 free analytic software from, 70 money taken by, 35 of stocks, options, or futures, 194, 195 supported by private traders, 36 Bruce, Erin, 236 Bruns, John, 165, 231 "Bucketing" orders, 194, 195 Buffett, Warren, 54, 168, 175 Bulls (traders), 31–33, 39, 43–45 balance of power between bears and: A/D, 110 closing prices, 96 divergences, 87, 98, 101 Force Index, 113, 115, 116 MACD-Histogram, 84 MACD Lines, 81 miscellaneous indicators, 74 and NH-NL zero line, 136 On-Balance Volume, 108 open interest, 119–120 volume, 104 and channel lines, 169 conflict between bears and, 119–120 emotional commitment of, 58 and kangaroo tails, 65 maximum power of, 52 and open interest, 118, 119 pain and regret of, 57 trend behavior of, 62 and volume of trading, 105–107 Bullish consensus, 74 Bullish divergences, 86–87, 89, 98 between A/D and prices, 111 false downside breakouts with, 229 between Force Index and price, 115, 116 - -Bullish divergences (*Cont*.): NH-NL indicating, 137 RSI signals of, 101 Bull markets: of 2007, 87–88 in commodities, 192 price highs and lows in, 51 and weekly NH-NL, 137, 138 Businessman's risk, 25–26, 201–202 Buyers, 32 expectations of, 32 and open interest, 118–120 of options, 178 Buying. *See also specific trading vehicles* "at the market," 7 emotional commitment in, 105 indicators for, *see specific indicators* by insiders, 147 and trading ranges, 63 during trends, 63–64 value zone in, 80 Buy orders: Force Index indicator for, 114, 115 and Stochastic signals, 98 in Triple Screen system, 160–161 Buy-stops, 161 - -## **C** - -Call options, 178, 180–183 Candlestick charting, 52, 53, 112 Candlestick graphs, 50. *See also* Japanese candlesticks Cash trades, futures compared to, 188–189 Catastrophic stops, 224–225 Ceilings, for commodities, 191 CFDs (contracts for difference), 186–187 CFTC, *see* Commodity Futures Trading Commission Channels, 166–167 in A-trades, 226 Average True Range, 94, 169 combining divergences and, 170–171 Channels (*Cont*.): constructing, 167 in day-trading, 131 defined, 79 and moving averages, 79 in setting profit targets, 217, 218 symmetrical, 167–168 Channel trading systems, 166–172 constructing channels, 167 and mass psychology, 168–170 standard deviation (Bollinger bands), 172 symmetrical, 167–168 trading rules, 170–171 Chaos theory, 54–55 Chart analysis, 49–67 bar charts, 51–53 chaos theory, 54–55 detecting bias in, 47 diagonals in, 50 Efficient Market theory, 54 history of charting, 50–51 and insider trading, 36 Japanese candlesticks, 53 kangaroo tails, 65–67 "nature's law," 55 Random Walk, 54 subjectiveness in, 49 support and resistance, 55–60 causes of, 56–57 strength of, 58 trading rules and, 58–59 true and false breakouts, 59–60 trends and trading ranges, 60–65 and conflicting timeframes of markets, 64–65 deciding to trade or wait, 63–64 hard right edge, 62 identifying, 63–64 and mass psychology, 62 as window into mass psychology, 43 *Charting Commodity Market Price Behavior* (L. Dee Belveal), 119–120 - -Chart patterns: defined, 51 at right edge of charts, 62 RSI trendlines, 101 subjective interpretation of, 49 swings of mass psychology shown in, 33 Checklists, 149 *Checklist Manifesto, The* (Atul Gawande), 149 Childhood, mental baggage from, 18 Churchill, Winston, 219 Classical chart analysis, *see* Chart analysis "Climax bottoms," 107 Climax indicator, 108–110 Closing prices: Advance/Decline line, 140–142 on candlestick charts, 53 of daily and weekly bars, 51 of daily charts, 53 as most important consensus of value, 100–101 relationship of opening prices and, 52, 110 for settlement of trading accounts, 96, 110 Cohen, Abraham W., 143 *Come into My Trading Room* (Alexander Elder), 163, 220 Commercials (hedgers), 146, 147 Commissions, 5–7, 33–34, 37, 186 Commitment indicators, *see* Consensus and commitment indicators Commitments of Traders (COT) indicator, 74, 192–193 Commodities. *See also* Futures agricultural, 122, 189 bull markets in, 192 cost of carry for, 191 floors and ceilings for, 191 Commodity Futures Trading Commission (CFTC), 145, 146, 192, 195 - -Computers in trading, 69–71 *See also* Technical analysis hardware, 71–72 toolboxes, 70–71 Conditional formatting, 165–166 Conflicting timeframes, 64–65 Congestion zones, 55, 58, 59 Consensus and commitment indicators, 142–148 futures traders' commitments, 145–147, 192–193 legal insider trading, 147 short interest, 147–148 signals from advertisers, 144–145 signals from press, 144 tracking advisory opinion, 143–144 Consensus of value: on MACD-Histogram, 84 moving averages as, 75, 81 price as, 32–33, 100–101 and trades above/below EMA, 139 Contango market, 191 Continuing to learn, 249–251 Contracts for difference (CFDs), 186–187 Contrary opinion indicators, 143 Contrary opinion theory, 143 Cost of carry, 191 COT (Commitments of Traders) indicator, 74, 192–193 Covered writers (options), 181 Crash of 1929, 193 Crossovers: of MACD and Signal lines, 81–84 moving-average, 78 Crowds: lack of time sense in, 121 leaders of, 41 markets as, 33, 39–43 and crowd mentality, 41–42 experts on, 40 independent thinking vs., 42 reasons for joining crowds, 40 - -Crowds (*Cont*.): and wisdom of crowds, 42–43 relative slowness of, 125 respecting strength of, 34 worldwide, 34 *Crowd, The* (Gustave LeBon), 40 Crowd behavior. 110 *See also* Accumulation/Distribution; Mass psychology creating downtrends, 45 creating uptrends, 44–45 and Efficient Market theory, 54 and opening prices, 110 reflected in price, 32–33 reflected in volume, 33 tracked by Directional system, 91–92 Crowd mentality, 41–42 "Cuffing the trade," 223 Cult of personality, 13–16 Currencies: CFDs on, 186–187 electronic currency futures, 196 forex trading, 194–196 Currency market, 194 Cycles, 122 - -## **D** - -Daily charts, 51–53, 59, 60. *See also* Timeframes; *individual indicators* Daily Directional Indicator, 91 Daily homework, 234–236 Daily volume, 103, 104 Days to Cover, 147–148 Day-trading, 126, 131–132 computers for, 71 to handle overnight gaps, 226 and learning to trade, 72–73 market data for, 72 profit taking in, 217 profit targets in, 217, 218 timeframes in, 125, 156, 162 Triple Screen system in, 161–162 Dead gurus, 15 Declines. *See also individual indicators* contracts for difference on, 186 in downtrends, 60–61 open interest in, 121 psychology of, 44 in trading ranges, 61 in uptrends, 60 volume during, 106, 107 Delta, 183 Denial (AA principle), 21–22 Derivatives markets, magic method gurus in, 14–15 Diagonal trendlines, 50 Directional Indicators (+DI, −DI), 90–91 Directional Movement (DM), 89, 90 Directional system, 89–94 Average True Range indicator, 93–94 constructing, 89–91 crowd behavior tracked by, 91–92 identifying trends with, 64 trading rules, 93 in Triple Screen trading, 157 Discipline, 213, 233–234 *Disciplined Trader, The* (Mark Douglas), 29, 30 Discretionary traders, 149–151 Divergences, 86–89 between A/D and prices, 111 bearish, *see* Bearish divergences bullish, *see* Bullish divergences combining channels and,170–171 Force Index indication of, 115, 116 Hound of the Baskervilles signal, 89 NH-NL, 136–137 as OBV signal, 108 as Stochastic signal, 97–98 triple bullish or bearish, 89 DM (Directional Movement), 89, 90 - -Documentation, *see* Record-keeping Donchian, Richard, 74, 75, 78 Douglas, Mark, 29, 30 Dow, Charles, 50, 155 Dow Jones Industrial Average, 72 MACD-Histogram of, 86–87 OBV for stocks in, 108, 109 Downside penetration, 220 Downtrends, 61 bullish divergences during, 86–87 channel trading during, 170 crowd behavior creating, 45 Force Index indication of, 113, 115, 116 identifying, 63 Impulse system in, 166 mass psychology of, 62 NH-NL, 136 noise in, 220 open interest during, 120, 121 oversold oscillators in, 95 pain and regret in, 57 perfect, 60–61 and Stochastic signals, 98, 99 stocks above MAs in, 139 at support level, 55 Triple Screen indicators for selling short in, 160, 161 volume during, 107 volume spikes in, 106 Dow Theory, 50, 155 *Dow Theory, The* (Robert Rhea), 50 Doyle, Sir Arthur Conan, 89 Drawdowns: comebacks from, 210–213 maximum allowed for, 213 6% Rule for, 208–210 - -## **E** - -Edge(s): defined, 72 and follow-up charts, 130 with trends and trading ranges, 62 - -### INDEX **267** - -Efficient Market theory, 54 Ehlers, John, 122 Elder.com, 3, 71 Electronic currency futures, 196 Elliott, R. N., 15, 51, 55 EMAs, *see* Exponential moving averages E-mini futures, 205–206 Emotions: of crowds, 40–41 and irrational thinking, 28, 44 managing, *see* Individual psychology and profit targets, 216 in trading, 19, 197–200 and trends, 43–44 Emotional trading, 28–29, 197–200 businessman's risk, 201–202 and counting money in open trades, 198 and not being able to sell, 198–200 End-of-day charts, 131 Engel, Louis, 1, 2 Entering trades: and Average True Range, 93 and bar charts, 53 commissions for, 5 and crowd emotions, 39 in day-trading, 131 in Impulse trading system, 164–166 planning for, 216 trade plan for, 42 and trends or trading ranges, 63 in Triple Screen system, 158–160 using signal and noise in, 222, 223 using technical analysis for, 128 Equity curve, reviewing, 247 Exchange rates, 194 Exchange-traded funds (ETFs),176–178 Exercise price (options), 179 Exiting trades: commissions for, 5 in day-trading, 131 - -Exiting trades (Cont.): Force Index indicator for, 115 in futures and options, 118 in Impulse trading system, 166 and open interest, 118 options, 184 trade plan for, 42 using technical analysis for, 128 Expectations: of buyers and sellers, 32 mathematical, 200–201 for scanning, 230 Expenses of trading, 5, 8 commissions, 6–7 slippage, 7–8 Exponential moving averages (EMAs), 75–80 and channel trading systems, 168 dual, 78–79 with Force Index, 112–115 identifying trends with, 63 in Impulse system, 165, 166 lagging, 78 length of, 76–77, 80 of MACD line, 81 and SafeZone stops, 220 trading rules, 77–78 in Triple Screen system, 159–161 and value zone, 80 of volume, 107 Exponential moving average charts, 63, 64 *Extraordinary Popular Delusions and the Madness of Crowds* (Charles Mackay), 39–40, 143 - -## **F** - -Factor of five, 125–126, 155–156 "Fallen angels" scan, 218–219 False breakouts, 59–60 downside, 61, 229 reinforcing Stochastic signals, 97 - -False breakouts (*Cont*.): from support and resistance, 56 upside, 61 "False breakout with a divergence" strategy, 239 Fantasies: autopilot myth, 12–13 brain myth, 11 cult of personality, 13–16 reality vs., 10–11 undercapitalization myth, 11–12 wishful thinking, 16 Far-out-of-the-money options, 181, 185 Fast Stochastic, 96 Fear, 40, 41, 44, 106, 148, 185 Filters, 78 Financial instrument futures, 187–188 Financial journalists, 142–144 Financing charges (CFDs), 186 Fingers (kangaroo tails), 65–67 *First 20 Hours, The* (Josh Kaufman), 249, 250 First step (AA principle), 22, 25–26 Floors, for commodities, 191 Floor traders, 34, 35, 46, 192 Followers of gurus, 15–16 Follow-up analysis: buying a pullback, 246 shorting a top, 245–247 Force Index, 112–117 constructing, 112–113 intermediate-term, 116–117 short-term, 113–116 and trading psychology, 113 trading rules, 113–117 in Triple Screen system, 158, 159 Forecasting: dramatic, 48 and Force Index, 115 managing trades vs., 47 by market cycle gurus, 14 *Forecasting Financial Markets* (Tony Plummer), 41 - -Forex, 104, 194–196 Forward-testing systems, 151, 152 Fractal patterns, 54–55 Fraud, in forex trading, 195 Freud, Sigmund, 17, 121 Friedman, Milton, 54 Fundamental analysis, 46 for finding stocks, 128 technical analysis with, 127–128 Fundamental analysts, concept of value for, 79 Futures, 187–194 closing prices on daily charts, 53 commitments of traders, 145–147, 192–193 compared to cash trades, 188–189 contango, 191 currency, 196 floors and ceilings, 191 hedging, 189–190 insider trading in, 36 inversions, 191 margins and risk control with, 193–194 options vs., 187 seasonality with, 191 spreads, 192 supply and demand factors with, 190–191 time period for, 118 2% Rule for, 205–207 volume trends for, 105 Futures traders: commitments of, as indicator, 145–147 survival rate for, 188 - -## **G** - -Gallacher, William R., 15 Galleon fund, 35 Gamblers Anonymous, 17 "Gambler's ruin," 195 - -Gambling, 17, 219 Gann, W. D., 15, 51 Gawande, Atul, 149 Gender: and reasons for gambling, 17 of traders, 3–4 General market indicators, 133–148 Advance/Decline line, 140–142 of consensus and commitment, 142–148 futures traders' commitments, 145–147 legal insider trading, 147 short interest, 147–148 signals from advertisers, 144–145 signals from press, 144 tracking advisory opinion, 143–144 Most Active Stocks indicator, 142 New High–New Low Index, 133–139 constructing, 134 and crowd psychology, 134–135 in multiple timeframes and lookback periods, 137–139 65-day and 20-day, 138–139 trading rules, 135–137 weekly, 137–138 stocks above 50-day MA, 139–140 Goepfert, Jason, 144 Gold: resistance zone for, 56–57 trading in futures vs. cash, 188–189 "Good 'til cancelled" (GTC) orders, 225 Granville, Joseph, 103, 107–109 Gray box software, 38, 71 Greed, 44, 106, 148, 185 Greeks (indicators in options analysis), 183 Greenson, Ralph, 17 Group behavior, 45–46. *See also* Crowd behavior Group loyalty, 41, 44 Grove, Nic, 221 GTC (good 'til cancelled) orders, 225 - -Gurus, 13–16 dead, 15 followers of, 15–16 magic method, 14–15 market cycle, 13–14 - -## **H** - -Hamilton, William, 50 Hard stops, 225 Havens, Leston, 29 Hedgers, 146 COT reports, 192–193 reports on positions of, 145–146 Hedging: futures, 189–190 line between speculating and, 37 "High" volume, 106–107 History of charting, 50–51 Homework, daily, 234–236 Hound of the Baskervilles signal, 89, 112 Hourly charts, 156 House advantage, 200, 201 *How I Made One Million Dollars* (Larry Williams), 110 *How to Buy Stocks* (Louis Engel), 1, 2 Hurst, J. M., 74, 75, 166 - -## **I** - -Impulse trading system, 156, 157, 162–166 entries in, 164–166 exits in, 166 Independent thinking, crowd mentality vs., 41, 42 Index CFDs, 186–187 Indicators. *See also individual indicators and types of indicators* applying moving averages to, 78 basic data used for, 73 changing parameters of, 77 clarity of signals from, 74 contradictory, 73 identifying trends with, 63 - -Indicators (*Cont*.): at right edge of charts, 62 seasons of, 122–124 "shopping for," 102 in Triple Screen trading system, 155 at true and false breakouts, 60 Indicator seasons, 122–124 Individual psychology, 9–30 and Alcoholics Anonymous principles, 20–27 applied to trading, 20–21, 23–27 denial, 21–22 first step, 22, 25–26 lessons from, 21–23 meetings, 23 one day at a time, 22–23 rock bottom, 22, 24–25 autopilot myth, 12–13 and bending rules, 19–20 brain myth, 11 emotions in trading, 19 following gurus, 13–16 reality vs. fantasy, 10–11 autopilot myth, 12–13 brain myth, 11 cult of personality, 13–16 undercapitalization myth, 11–12 wishful thinking, 16 reasons for trading, 9–10 rational and irrational, 9 self-fulfillment, 9–10 rule-bending, 19–20 self-destructiveness, 16–19 controlling, 19 gambling, 17 and lack of normal human helpfulness in markets, 18–19 self-sabotage, 17–18 undercapitalization myth, 11–12 winners and losers, 27–30 emotional trading, 28–29 - -Individual psychology (*Cont*.): and self-control vs. controlling markets, 27–28 taking charge of your life, 29–30 wishful thinking, 16 Individual traders, 36–37 competing against institutional traders, 37–38 former institutional traders as, 212 isolation of, 250 one advantage over institutional traders, 228 Inertia, of trading vehicles, 162, 163 Innumeracy, 200–201 *Innumeracy* (John Allen Paulos), 200 Inside information, 35–36 Insider trading: in futures markets, 36 illegitimate, 35–36 legal, as indicator, 147 Institutional commissions, 37 Institutional traders, 37–38 advantages for, 37 CFDs used by, 186 trade managers of, 212–213 Insurance account, for options writing, 184–185 Intelligence networks, of institutional traders, 37 Interbank market, 194 Interest rate futures, 192 Intermediate-term Force Index, 116–117 Intermediate timeframe, 155–156 International exchanges, volume reported by, 104 In-the-money options, 179 Intraday charts, 51. *See also* Timeframes; *individual indicators* Intrinsic value (options), 179 Inverse ETFs, 176 Inversions (futures), 191 Investing (long-term trading), 126–128 *Investors Intelligence,* 143 - -Iron Triangle of risk control, the, 204–205, 221 Isolation in trading, 250 - -## **J** - -Japanese candlesticks, 53, 112 *Japanese Candlestick Charting Techniques* (Steve Nison), 53 - -## **K** - -Kahneman, Daniel, 200, 238 Kangaroo tails (fingers), 65–67 Kaufman, Josh, 249, 250 Keelan, Brian, 186 Key demands for trades, 153–154 Keynes, John Maynard, 175 - -## **L** - -Lag, of moving averages, 78 Lane, George, 95 Large speculators, 146 Larsen, Max, 234 Leaders: of crowds, 41 and fear of uncertainty, 40 gurus, 13–16 dead, 15 followers of, 15–16 magic method, 14–15 market cycle, 13–14 loyalty to, 44 Learning trading skills, 249–251 LeBon, Gustave, 40 Letter writers (financial), 142–143 Leverage, in forex, 195 Leveraged ETFs, 177, 178 Leveraged inverse ETFs, 176 Life, taking charge of, 29–30 Limits, on futures, 187–188 Limit orders, 7–8 Liquidity, 122, 173–174 Long-term price cycles, 122 Long-term timeframe, 155, 156 - -Long-term trading (investing), 118, 126–128 Look-back windows (New High–New Low Index), 138–139 Losers: AA principles for, 23–27 denial by, 21–22 emotional responses of, 199 and emotional trading, 28–29 fantasies of, 10–16 autopilot myth, 12–13 brain myth, 11 cult of personality, 13–16 undercapitalization myth, 11–12 pain and regret felt by, 57 and self-control vs. controlling markets, 27–28 self-destructive, 16–19 and volume of trading, 105, 106 wishful thinking by, 16 Losers Anonymous, 26–27 Losses: in account as a whole, 204 businessman's risks vs., 25 on CFDs, 186 cutting, 198–200 of former institutional traders, 212 inability to manage, 197 on options, 180, 182 per share, limiting, 204 psychological effect of, 211–212 6% Rule to limit, 208–210 2% Rule to limit, 203–207 Loss aversion, 200 Lovvorn, Kerry, 19, 42, 88–89, 93, 169, 221, 227, 243, 250 Low-priced stocks, indictors based on volume of, 142 "Low" volume, 106–107 - -## **M** - -MAs, *see* Moving averages MACD, *see* Moving Average Convergence-Divergence MACD-Histogram, 83–89 combined with channels, 170, 171 divergences, 86–89 in Impulse system, 165, 166 and market psychology, 84 peaks and valleys, 85 seasons of, 123 semiautomatic divergence scanner, 231 slope of, 84, 85 time windows of, 85 trading rules, 84–85 in Triple Screen system, 156–158 MACD Lines, 81–83 crossover of Signal lines and MACD line, 81–84 in divergences, 87–88 and market psychology, 81 trading rules, 81–82 Mackay, Charles, 39–40, 143 MacMillan, Lawrence, 185 Magic method gurus, 14–15 Managing trades, 46–48 forecasting vs., 47 and poll-taking, 47 by reading markets and managing yourself, 47–48 Mandelbrot, Benoit, 167 Margins, 193–194 Margin calls, 193, 250 Market(s): attempts to manipulate, 29 and automatic trading systems, 13 comparing volumes of, 104 contango, 191 as crowds, 39–43. *See also* Mass psychology crowd mentality, 41–42 experts on, 40 independent thinking vs., 42 of individuals, 33, 34 leaders of crowds, 41 - -Market(s) (*Cont*.): reasons for joining crowds, 40 wisdom of crowds, 42–43 ETFs, 176 groups vs. individuals in, 34 harshness of, 33–34 inability to control, 27–28 inside information in, 35–36 overbought and oversold, 95, 98, 115 randomness in, 198, 203 reading, 47–48 seasons of, 122–124 size of, 34 source of money in, 34–35 spikes in, 115–116 as sport, 28 theories of, 54–55 timeframes of, 125 analysis using multiple timeframes, 55 conflicting, 64–65 trading ranges vs. trends in, 59 worldwide crowds, 34 Market cycle gurus, 13–14 Market data: in computerized technical analysis, 72–73 in moving averages, 75 Market indexes, in technical analysis,72 Market makers, 34 Market noise: perceived cycles as, 122 and placement of stops, 222, 223 setting stops outside zone of, 220 Market orders, 7 bid-ask spreads for, 8 slippage on, 7 Market panics, 137 Market participants, groups of, 146 Market tide screen (Triple Screen system), 156–158 Market time, 124–125 *Market Vane,* 143 - -Market wave screen (Triple Screen trading system), 158, 159 MAS (Most Active Stocks) indicator, 142 Mass manias, 39–40 Mass psychology, 31–48 and emergence of gurus, 14 managing trades, 46–48 forecasting vs., 47 and poll-taking, 47 by reading markets and managing yourself, 47–48 the market, 33–36 groups vs. individuals in, 34 inside information in, 35–36 source of money in, 34–35 worldwide crowds, 34 and markets as crowds, 39–43 crowd mentality, 41–42 experts on, 40 independent thinking vs., 42 leaders of crowds, 41 reasons for joining crowds, 40 wisdom of crowds, 42–43 price, 32–33 as consensus of value, 32–33 crowd behavior reflected in, 32–33 trading scene participants, 36–39 advisors, 39 individual traders, 36–37 institutional traders, 37–38 sword makers, 38 trend psychology, 43–46 emotions in, 43–44 price shocks, 44–45 rallies and declines, 44 social psychology, 45–46 Mathematical expectation, 200–201 Maximum Entropy Spectral Analysis (MESA), 122 Mean between high and low, moving averages based on, 78 Measuring volume, 104–105 - -Mechanical traders, 149–150 *Mechanical Trading Systems* (Richard Weissman), 149 Meetings, AA, 23 Mellon, Andrew J., 233 Member Short Sale Ratio, 142 Memory(-ies): and support or resistance levels, 56–57 in trade diary, 243 Mental stops, 184 MESA (Maximum Entropy Spectral Analysis), 122 Mind, as component of trading, 237. *See also* Thinking Mini-contracts (futures), 193–194 Minus-sum game, trading as, 5–6 Miscellaneous indicators, 74. *See also* New High–New Low Index (NH-NL) "Missing right shoulder" divergences, 88 Moltke, Helmuth von, 197 Money: making, 47 motives for seeking, 200 in open trades, 198 source of, 34–35 Money management. *See also* Risk management businessman's risk, 25–26, 201–202 commissions, 6–7 conservative, 47 and emotions, 197–200 businessman's risk, 201–202 and counting money in open trades, 198 not being able to sell, 198–200 expenses of trading, 5–8 following rules of, 20 with futures, 193 and negative mathematical expectation, 201 rules as safety net in, 19 slippage, 7–8 - -Mood, as component of trading, 237 Most Active Stocks indicator (MAS), 142 Moving averages (MAs), 74–80 choosing length of, 76–78 dual EMAs, 78–79 exponential, 75–80. *See also* Exponential moving averages (EMAs) with Force Index, 112 and market psychology, 75–76 in setting profit targets, 217, 218 simple, 75 as support and resistance, 78 time windows of, 74, 75 weighted, 75 Moving Average Convergence-Divergence (MACD), 80–89 creating, 81 MACD-Histogram, 83–89 divergences, 86–89 and market psychology, 84 peaks and valleys, 85 semiautomatic divergence scanner, 231 trading rules, 84–85 MACD Lines, 81–83 and market psychology, 81 trading rules, 81–82 and market psychology, 81 "quick-and-dirty" plotting of, 83 scanner for, 231 Mr. Market, 175 Mysticism, 55 - -## **N** - -Naked writers (options), 181–182 NASDAQ, 72, 140 Nature's law, 55 *"Nature's Law"* (R. N. Elliott), 55 Negative Directional line, 91–92 Negative mathematical expectation, 200–201 - -Negative rules, in scanning for stocks, 232 Neill, Humphrey B., 143 Net Field Trend indicator, 108–110 Neurotic gamblers, 17 New High–New Low Index (NH-NL), 133–139 constructing, 134 and crowd psychology, 134–135 in multiple timeframes and look-back periods, 137–139 65-day and 20-day, 138–139 trading rules, 135–137 weekly, 137–138 *New Sell and Sell Short, The* (Alexander Elder), 175, 220 Newsletters, 38–39, 142–144 *New Strategy of Daily Stock Market Timing* (Joseph Granville), 107 New York Stock Exchange, 34 daily volume in 1940s, 51 stocks above 50-day MA for, 140 volume reported by, 104 Western European hours for, 174 *New York Times, The* 195 NH-NL, *see* New High–New Low Index Nic's stop, 221, 222 Nison, Steve, 53 Noise, market, *see* Market noise Notis, Steve, 157 - -## **O** - -OBV, *see* On-Balance Volume Odds against traders, 5–8 bid-ask spread, 8 commissions, 6–7 with ETFs, 176 expenses, 5, 8 slippage, 7–8 and trading as minus-sum game, 5–6 Odd-lot Short Sale Ratio, 142 Odd-lot statistics, 142 Odysseus, 42 On-Balance Volume (OBV), 107–110 and crowd psychology, 108 trading signals, 108 One-bar-at-a-time testing, 152 One day at a time (AA principle), 22–23 Opening gaps, 226 Opening prices: on candlestick charts, 53 and crowd behavior, 110 of daily bars, 51 relationship of closing prices and, 52, 110 Open interest, 117–121 and crowd psychology, 118–120 defined, 117 trading rules, 120–121 Open trades: changing trade plan during, 42 counting money in, 198 money at risk in, 208–210 Options, 178–185 buying, 180–181, 185 futures vs., 187 limiting risk with, 183–185 price of, 179–180 time decay with, 183 writing, 180–185 *Options as a Strategic Investment* (Lawrence MacMillan), 185 Oscillators, 73 in bearish divergences, 87 in bullish divergences, 86 Force Index, 112–117 constructing, 112–113 intermediate-term, 116–117 short-term, 113–116 and trading psychology, 113 trading rules, 113–117 - -Oscillators (*Cont*.): identifying trends with, 63 MACD-Histogram, 83–89 divergences, 86–89 and market psychology, 84 peaks and valleys, 85 slope of, 84, 85 time windows of, 85 trading rules, 84–85 and mass psychology, 95 Relative Strength Index, 99–102 and mass psychology, 100–101 trading rules, 101–102 Stochastic, 95–99 and crowd psychology, 96–97 trading rules, 97–99 in Triple Screen trading system, 155, 158 Out-of-the-money options, 179, 181 Overbought: oscillator levels, 95 RSI levels, 99–201 as Stochastic signal, 98, 99 Overnight gaps, 225 Oversold: oscillator levels, 95 RSI levels, 99–101 as Stochastic signal, 98, 99 - -## **P** - -Pain: and support or resistance, 57–58 volume as measure of, 105 Paper trading, 152–153 Parabolic stops, 221 "Passing the book," 196 Patterns. *See also* Chart patterns for A-trades, 225–230 defining, 215 emerging from chaos, 54 fractal, 54–55 and Hound of the Baskervilles signal, 89 - -Patterns (*Cont*.): for scanning, 230–232 and trading young stocks, 72 Paulos, John Allen, 200 Penny stocks, 145 %D line, 95, 96 %K line, 95, 96 "Perfect order" in markets, 55 Personality: as component of trading, 237 matching trading styles to, 149, 150 Piranha bite losses, 208 Player's edge, 200 Plummer, Tony, 41 Point-and-figure chartists, 50 Poll-taking, 47 *Portfolio Management Formulas* (Ralph Vince), 200 Position limits, 146 Position trading: day-trading vs., 73 market data for, 72 profit targets in, 217 stops in, 221 Positive Directional line, 91, 92 Positive mathematical expectation, 201 Power: of bears vs. bulls: A/D, 110 closing prices, 96 divergences, 87, 98, 101 Force Index, 113, 115, 116 MACD-Histogram, 84 MACD Line, 81 miscellaneous indicators, 74 and NH-NL zero line, 136 On-Balance Volume, 108 open interest, 119–120 volume, 104 profits and feeling of, 22 of trends, 162, 163 - -Premiums: futures, 191–192 options, 179 Press, signals from, 144 Prechter, Robert, 201 Price(s), 32–33. *See also* Closing prices; Opening prices on bar charts, 51–52 as consensus of value, 32–33, 100–101 crowd behavior reflected in, 32–33 divergences from, 86–89 in Force Index, 112–117 indicators derived from, 73 as leader of market crowd, 41, 44 long-term cycles in, 122 memories of, 56–57 of options, 179–180 in Random Walk theory, 54 short-term cycles in, 122 slippage, 7–8 support and resistance levels, 55 and understanding of volume, 103, 104 value vs., 79–80 Price risk, hedging and, 189–190 Price shocks, 44–45 Pring, Martin, 122 Private traders, *see* Individual traders Probabilities, 198–202 businessman's risk, 201–202 choices based on emotions vs., 199–200 innumeracy, 200–201 positive expectation, 201 Profit(s): calculating potential for, 217 on CFDs, 186 "enough," 218 feeling of power from, 22 in open trades, 198 - -### INDEX **277** - -Profit(s) (*Cont*.): protection levels for, 223–224. *See also* Stops source of, 34–35 *Profit Magic of Stock Transaction Timing, The* (J. M. Hurst), 74, 166 Profit taking: in day-trading, 217 in swing trading, 216 and tall bars, 53 Profit-taking zone, for options, 184 Profit targets: and Average True Range, 94 in day-trading, 131 setting, 215–219 in Triple Screen system, 162 Protective stops, 58–60. *See also* Stops defined, 59 with EMAs, 77 with kangaroo tails, 67 to reduce open risk, 209 with RSI, 100 and Stochastic signals, 98 Psychological readiness for trading, 19, 236–237 Psychology: of trading, 3–4. *See also* Mass psychology; Individual psychology and focus on reality, 3 and paper trading, 152 of trends, 43–46 emotions in, 43–44 price shocks, 44–45 rallies and declines, 44 and social psychology, 45–46 Put-Call Ratio, 74 Put options, 178–183, 185 Pyramiding: Force Index indication for, 115 guidelines for, 210 - -## **Q** - -Quality of trades, 225–230 - -## **R** - -Rallies. *See also individual indicators* from 1966 to 1982, 56 and channel lines, 169 contracts for difference on, 186 in downtrends, 60–61 open interest in, 121 psychology of, 44 short-covering, 148 in trading ranges, 61 in uptrends, 60 volume during, 106 Random Walk theory, 54 Readiness for trading, 236–237 Reading markets, 47–48 Reality: fantasy vs., 10–11 wishful thinking vs., 16 Reasons for trading, 9–10 Record-keeping, 26, 233–247 daily homework, 234–236 and psychological readiness for trading, 236–237 Trade Journal, 243–247 trade plans, 233, 238–243 creating, 238 scoring, 238–240 using Tradebills, 240–243 Regret, support or resistance and, 57–58 Relative Strength Index (RSI), 99–102 and mass psychology, 100–101 trading rules, 101–102 Reporting levels, 146 Resettlement fees, 195 Resistance. *See also* Support and resistance defined, 55, 166 pain and regret, 57 - -Reversals, 61 betting on, 54, 58 consensus preceding, 143 Force Index indication of, 113, 116 journalists' writings signaling, 144 kangaroo tails, 65–67 losers' responses to, 199 NH-NL indicating, 136–137 and open interest, 120 and price shocks, 56 protection from, 59. *See also* Protective stops pullbacks signaling, 63 and stocks above 50-day MA, 140 timing of trades and, 125 and value zone, 80 and volume of trading, 107 Reverse splits (ETFs), 177 Reviews: of equity curve, 247 of trades, 246–247 Reward-to-risk ratio, 224 Rhea, Robert, 50, 155 Risk management, 154, 197–213 comebacks from drawdowns, 210–213 and emotions, 197–200 businessman's risk, 201–202 and counting money in open trades, 198 not being able to sell, 198–200 essential nature of, 153 with futures, 193–194 main rules of, 202–210 6% Rule, 208–210 2% Rule, 203–207 with options, 181, 183–185 probabilities in, 198–202 and self-management, 3 stops for protecting winning trades, 223–224 - -Risk management (*Cont*.): by trading managers, 38, 212–213 for trends and trading ranges, 63 worst mistakes in, 202–203 Rock bottom (AA principle), 22, 24–25 Rorschach, Herman, 50 RSI, *see* Relative Strength Index Rule-bending, 19–20 - -## **S** - -SAC Capital, 35 SafeZone stops, 220, 221 Scanning for trades, 230–232 defined, 230 defining patterns before, 215 "fallen angels," 218–219 negative rules in, 232 stocks, 175 using toolboxes, 70 Seasonality, with futures, 191 Securities and Exchange Commission (SEC), 146, 147, 186, 187 Self-control, 27–28, 30, 47–48 Self-deception, 49 Self-destructiveness, 10, 16–19 controlling, 19 gambling, 17 and lack of normal human helpfulness in markets, 18–19 self-sabotage, 17–19 Self-fulfillment, 9–10 Self-help groups, 20. *See also* Alcoholics Anonymous (AA) principles Self-sabotage, 10, 17–19 Self-test, of readiness for trading, 236–237 Sellers, 32 expectations of, 32 and open interest, 118–120 of options, 178–179 Selling. *See also specific trading vehicles* based on fear, 41 emotional commitment in, 105 - -Selling (*Cont*.): indicators for, 87, *see specific indicators* by insiders, 147 not being able to sell, 198–200 Sell orders: Force Index indicator for, 115 and Stochastic signals, 98 SentimenTrader.com, 144 Shapiro, Roy, 199, 200 "Shark bite" losses, 203, 219 "Shopping for indicators," 102 Short interest, 147–148 Short Percent of Float, 147–148 Short sellers, rallies/declines and, 44 Short selling: Force Index indicator for, 115 making money with, 174–175 Stochastic signals for, 98 stops with, 221 Triple Screen indicators for, 160, 161 value zone in, 80 *Shortsqueeze.com, 148* Short-term Force Index, 113–116 Short-term price cycles, 122 Short-term timeframe, 155, 156 Short-term trading, 118, 121, 174–175 "Shoulders," 212 Sibbet, James H., 143 Signal(s). *See also* Indicators confidence in, 73 in market moves, 220, 222, 223 Signal line (MACD), 81 crossover of MACD line and, 81–83 difference between MACD line and, 83 and MACD-Histogram, 83, 84 Simple moving averages, 75 6% Rule, 208–210, 213 and concept of available risk, 208–210 as guideline for pyramiding, 210 - -65-day New High–New Low Index, 138–139 Size of trades, 203 Iron Triangle of risk control for, 204–206 risk associated with, 210–212 2% Rule for, 203–207 Skills, learning, 249–251 Slater, Tim, 35 "Slicing the bid-ask spread" technique, 183 Slippage, 5–8, 33–34 and open interest, 121 overnight gaps, 225 in quiet markets, 53 Slow Stochastic, 96 Small traders, 146, 147 CFDs for, 186 COT reports, 192 of options, 180 Smoothed Directional Lines (+DI13, −DI13), 91 Social psychology, 43, 45–46 *Stock Market Barometer, The* (William Hamilton), 50 Soft stops, 225 Soros, George, 6 Source of money, in markets, 3 4–35 S&P 500 index, 72 applying OBV to, 110 and beta, 174 in scanning for trades, 230–232 Specialist Short Sale Ratio, 142 Speculative trading, in currencies, 194 Speculators, 36–37, 145 farmers and engineers as, 190 institutional investors as, 37 position limits of, 146 Spikes, 137 Spike bounce signal, 139 Spikers, 230 - -**280** INDEX - -SpikeTrade.com, 42–43, 130, 137, 153, 230, 250–251 Spreads: bid-ask, 8 with CFDs, 186 with forex trades, 194, 195 "slicing the bid-ask spread" technique, 183 futures, 192 Spreadsheet, for pre-open routine, 234–236 Spread trading, 192 Standard deviation channels (Bollinger bands), 167, 172 Steidlmayer, J. Peter, 66 Stochastic oscillator, 95–99 and crowd psychology, 96–97 time window of, 96, 99 trading rules, 97–99 in Triple Screen trading system, 158 Stocks, 175–176 liquidity of, 173–174 margins with, 193 options vs., 180 prices of, 175 scanning for, 230–232 selecting, 175–176 short interest, 147–148 volatility of, 174 Stocks above 50-day MA indicator, 139–140 StockCharts.com, 70 Stoller, Manning, 170 Stops, 219–225. *See also* Protective stops and Average True Range, 93 avoiding obvious levels for, 220–223 catastrophic, 224–225 mental, 184 moving in direction of trade, 224 - -Stops (*Cont*.): outside zone of "market noise," 220 and overnight gaps, 225 placing, 59 planning, 216 protective, 58–60, 67 to protect winning trades, 223–224 purpose of, 203–204 trading without, 202 in trends vs. in trading ranges, 61 in Triple Screen system, 162 "Stop-and-reverse" orders, 89 Stress of trading, reducing, 250 Strike price (options), 179 Success: accumulating equity as hallmark of, 20 barriers to, 5–8 desire for, 2–3 and emotional trading, 19, 28–29 qualities for, 30 realism for, 10 and self-control vs. controlling markets, 27–28 through taking charge of your life, 29–30 Supply and demand factors: with futures, 190–191 reflected in price, 54 Support: defined, 55, 166 from pain and regret, 57 Support and resistance, 55–60 causes of, 56–57 channels identifying, 166–167 moving averages as, 78 and profit targets, 218–219 strength of, 58 trading rules and, 58–59 true and false breakouts, 59–60 Surges, speed and momentum of, 95 - -### INDEX **281** - -Surowiecki, James, 42 Swing trading, 126, 128–131 for beginner traders, 73 grading trades in, 226 with Impulse system, 166 market data for, 72 profit taking in, 216 profit targets in, 217, 218 stops in, 221 timeframes in, 162 Symmetrical channels, 167–168 - -## **T** - -Taking charge of your life, 29–30 TANSTAFL principle, 178 Taylor, Lou, 29n.1 Technical analysis, 46, 69–102 and channels, 79 computer hardware, 71–72 Directional system, 89–94 Average True Range indicator, 92–94 constructing, 89–91 crowd behavior tracked by, 91–92 trading rules, 93 as for-profit social psychology, 43 with fundamentals, 127–128 groups of indicators, 73–74 miscellaneous indicators, 74 oscillators, 73 trend-following indicators, 73 and insider trading, 36 market data, 72–73 miscellaneous indicators, 74 Moving Average Convergence-Divergence, 80–89 creating, 81 MACD-Histogram, 83–89 MACD Lines, 81–83 and market psychology, 81 moving averages, 74–80 - -Technical analysis (*Cont*.): choosing length of, 76–78 dual EMAs, 78–79 exponential, 75–80 and market psychology, 75–76 simple, 75 as support and resistance, 78 weighted, 75 objectivity of, 49 oscillators, 73, 95 MACD-Histogram, 83–89 overbought and oversold, 95 Relative Strength Index, 99–102 Stochastic, 95–99 as poll-taking, 47 prices, values, and value zone, 79–80 for timing entries and exits, 128 toolboxes for, 70–71 trend-following indicators, 73 Directional system, 89–94 MACD Lines, 81–83 *Technical Analysis of Stock Trends* (Edwards and Magee), 51 Technical analysts: concept of value, 79 goals of, 33 identification of rallies and declines by, 44 as social psychology, 46 Temperament, 150 Testing: of readiness for trading, 236–237 of trading systems, 151–152 Thinking. *See also* Fantasies changing, 22 and crowd mentality, 41–42 emotions and, 28, 44 independent, 40, 42 and Losers Anonymous concept, 26–27 wishful, 16, 49, 50, 219, 224 - -*Thinking, Fast and Slow* (Daniel Kahneman), 200, 238 TICK, 142 Ticks, 52n.1 Tick volume, 104 Time, 103, 121–126 cycles, 122 factor of five, 125–126 indicator seasons, 122–124 market time, 124–125 Time decay (options), 183 Timeframes: and factor of five, 125–126 and kangaroo tails, 65 of markets, 125 analysis using multiple timeframes, 55 conflicting, 64–65 of New High–New Low Index, 137–139 seasons in, 124 in trading, 126–132 day-trading, 131–132, 162 with Impulse system, 165 long-term (investing), 126–128 options, 182–183 swing trading, 128–131, 162 in Triple Screen trading system, 155–156 Time value (options), 179 Time zones: and market data analysis, 72 trading in, 174 Toolboxes, 38, 70–71 Tops. *See also specific indicators* and divergences, 87–89 reversal signals at, 125 since the 1950s, 51 in trends, 71 TR (True Range), 90 Trade Apgars, 238–243 Tradebills, 228, 238, 240–243 - -Trade Journal, 243–247. *See also* Trading diaries Trade plans, 42, 233, 238–243 creating, 238 scoring, 238–240 using Tradebills, 240–243 Traders. *See also* Individual psychology; Mass psychology discretionary, 150–151 gender of, 3–4 individual, 36–37 competing against institutional traders, 37–38 former institutional traders as, 212 isolation of, 250 one advantage over institutional traders, 228 performance of institutional traders vs., 212 institutional, 37–38 advantages for, 37 performance of individual traders vs., 212 trade managers of, 212–213 mechanical, 149–150 odds against, 5–8 bid-ask spread, 8 commissions, 6–7 expenses, 5, 8 slippage, 7–8 trading as a minus-sum game, 5–6 reasons for trading, 9–10 Trade setup, 154 Trading, 1–8. *See also specific topics* bid-ask spreads in, 8 commissions in, 6–7 expenses of, 5, 8 and gender of traders, 3–4 identifying A-trades, 225–230 learning skills for, 249–250 as a minus-sum game, 5–6 odds against traders in, 5–8 - -Trading (*Cont*.): bid-ask spread, 8 commissions, 6–7 expenses, 5, 8 slippage, 7–8 psychological readiness for, 236–237 psychology of, 3–4. *See also* Mass psychology; Individual psychology reasons for, 9–10 reducing stress of, 250–251 scanning for trades, 230–232 setting profit targets, 215–219 setting stops, 219–225 avoiding obvious levels for, 220–223 catastrophic, 224–225 moving in direction of a trade, 224 outside zone of "market noise," 220 and overnight gaps, 225 to protect winning trades, 223–224 in Triple Screen trading system, 162 slippage in, 7–8 succeeding in, 2–3 as trying to take money from other people, 35 Trading accounts, 204 Trading diaries, 20 to avoid self-destructiveness, 18, 19 Trade Journal, 243–247 Trading managers, 38, 212–213 Trading ranges, 60–65 and conflicting timeframes of markets, 64–65 deciding to trade or wait, 63–64 at hard right edge, 63-64 identifying, 63–64 mass psychology of, 62 - -Trading ranges (*Cont*.): as OBV signal, 108 open interest in, 120–121 oscillators in, 95 pain and regret in, 57 and Stochastic signals, 98 time spent in trends vs., 59 Trading rules. *See also* Risk management; *specific topics and indicators* bending, 19–20 for discretionary traders, 150 for mechanical traders, 149–150 Trading scene participants, 36–39 advisors, 39 individual traders, 36–37 institutional traders, 37–38 Trading skills, learning, 249–251 Trading software, 38 Trading systems/strategies, 149–172 for A-trades, 228–229 and autopilot fantasy, 12–13 Channel system, 166–172 constructing, 167 and mass psychology, 168–170 standard deviation (Bollinger bands), 172 symmetrical, 167–168 trading rules, 170–171 defined, 149 developed prior to scanning for trades, 230 discretionary traders, 150–151 frequency of signals from, 8 Impulse system, 162–166 entries in, 164–166 exits in, 166 key demands for trades, 153–154 to limit commissions, 6 for mechanical traders, 149–150 optimizing, 201 paper trading, 152–153 - -Trading systems/strategies (*Cont*.): and psychological readiness to win, 19 simplicity of, 201 testing systems, 151–152 tradebills for, 238 Triple Screen, 154–162 choosing timeframes, 155–156 in day-trading, 161–162 entry technique screen, 158–160 market tide screen, 156–158 market wave screen, 158, 159 stops and profit targets in, 162 trend-following indicators and oscillators, 155 Trading timeframes, 126–132 day-trading, 131–132 long-term (investing), 126–128 swing trading, 128–131 Trading vehicles, 173–196. *See also individual vehicles* contracts for difference, 186–187 exchange-traded funds, 176–178 forex, 194–196 futures, 187–194 and commitments of traders, 192–193 compared to cash trades, 188–189 contango, 191 floors and ceilings, 191 hedging, 189–190 inversions, 191 margins and risk control with, 193–194 seasonality with, 191 spreads, 192 supply and demand factors with, 190–191 liquidity of, 173–174 long vs. short, 174–175 options, 178–185 buying, 180–181 limiting risk with, 183–185 - -Trading vehicles (*Cont*.): price of, 179–180 writing, 181–183 scanning for, 230–232 stocks, 175–176 and time zones, 174 volatility of, 174 Trailing stops, 221, 223 Trends, 60–65. *See also* Downtrends; Uptrends advisors' following of, 143 and conflicting timeframes of markets, 64–65 created by crowds, 34 deciding to trade or wait, 64 defined, 60 effect of support or resistance on, 55 and factor of five, 125–126, 155–156 in futures markets, 190–191 at hard right edge, 62 health of, 59 identifying, 56, 62–63 on long-term charts, 126–127 moving averages indicating, 78 NH-NL, 136 and objective signals for trades, 41 and oscillator levels, 95 psychology of, 43–46 emotions in, 43–44 and mass psychology, 62 price shocks, 44–45 rallies and declines, 44 and social psychology, 45–46 and Stochastic signals, 98, 99 time spent in trading ranges vs., 59 timing of trades and, 125 and volume of trading, 105–107 - -### INDEX **285** - -Trend-following indicators, 73 Directional system, 89–94 MACD Lines, 81–83 in Triple Screen trading system, 155 Trendlines: diagonal, 50 subjectivity of, 56 TRIN, 142 Triple bullish or bearish divergences, 89 Triple Screen trading system, 154–162 choosing timeframes, 155–156 in day-trading, 161–162 entry technique screen, 158–160 Force Index in, 116 market tide screen, 156–158 market wave screen, 158, 159 objective of, 74 Stochastic signals in, 98 stops and profit targets in, 162 trend-following indicators and oscillators, 155 True breakouts, 59–60 True Range (TR), 90 Tulip Mania, 39–40 12-step programs, 21 *Twelve Steps and Twelve Traditions* (AA), 21 20-day New High–New Low Index, 138–139 2% Rule, 26, 64, 203–207 in futures markets, 205–207 as a guideline for pyramiding, 210 for institutional traders, 212–213 and Iron Triangle of risk control, 204–205 *Two Roads Diverged: Trading Divergences* (Alexander Elder), 88 Tyson, Mike, 197 - -## **U** - -Uncertainty, 62, 217 Undecided traders, 32 Undercapitalization myth, 11–12 U.S. stock market: price cycles in, 122 trends in, 155 *Unstuff Your Life* (Andrew J. Mellon), 233 Upside penetration, 220 Uptrends, 61 bearish divergences during, 87–89 channel trading during, 170 crowd behavior creating, 44–45 Force Index indication of, 113–116 identifying, 63 Impulse system in, 166 mass psychology of, 62 NH-NL, 136 open interest during, 120, 121 overbought oscillators in, 95 pain and regret in, 57 perfect, 60 at resistance level, 55 signals in, 220 and Stochastic signals, 98, 99 stocks above MAs in, 139 Triple Screen indicators for buying in, 160 and volume of trading, 107 volume spikes in, 106 Urge to trade, 23–24 - -## **V** - -Value(s): consensus of: on MACD-Histogram, 84 moving averages as, 75, 81 price as, 32–33, 100–101 and trades above/below EMA, 139 of options, 180 prices vs., 79–80 Value zone, 79–80, 167, 216 Vince, Ralph, 200 - -Volatility, 174 ATR lines showing, 93 and channel width, 167 measuring, 174 Volatility index, 177 Volatility stops, 221 Volume, 103–121 crowd behavior reflected in, 33 and crowd psychology, 105–107 "high" and "low," 106–107 and liquidity, 173–174 measuring, 104–105 moving average of, 78 of penny stocks, 145 in support and resistance zones,58 and true vs. false breakouts, 60 volume-based indicators, 107–121 Accumulation/Distribution, 110–112 Force Index, 112–117 On-Balance Volume, 107–110 open interest, 117–121 Volume-based indicators, 107–121 Accumulation/Distribution (A/D), 110–112 and crowd behavior, 110 trading rules, 111 Force Index, 112–117 constructing, 112–113 intermediate-term, 116–117 short-term, 113–116 and trading psychology, 113 trading rules, 113–117 On-Balance Volume, 107–110 and crowd psychology, 108 trading signals, 108 open interest, 117–121 and crowd psychology, 118–120 trading rules, 120–121 - -## **W** - -Wall Street, 31 *Wall Street Journal, The,* 50, 144, 195 Watch list, building, 72 Weekly charts, 51–53, 59, 60. *See also* Timeframes; *individual indicators* Weekly New High–New Low Index, 137–138 Weekly Stochastic, 99 Weighted moving averages (WMAs), 75, 78 Weissman, Richard, 149 Whipsaws, 81, 219, 221 Wilder, J. Welles, Jr., 89, 99 Williams, Larry, 110 *Winner Take All* (William R. Gallacher), 15 Winning, 27–30. *See also* Success bending the rules after, 19–20 desire for, 2–3 difficulty of, 35 and emotional trading, 28–29 essential components for, 16 and self-control vs. controlling markets, 27–28 by taking charge of your life, 29–30 and volume of trading, 105, 106 Wisdom of crowds, 42–43 *Wisdom of Crowds, The* (James Surowiecki), 42 Wishful thinking, 16 with classical charting, 49–50 giving trades "more room" as, 224 and stops, 219 Worldwide crowds, 34 Writing options, 178–185 - -## **Y** - -Yahoo Finance, 174 - -## **Z** - -Zero-sum game: forex market as, 195 trading as, 5 - -## **WILEY END USER LICENSE AGREEMENT** - -Go t[o www.wiley.com/go/eula t](http://www.wiley.com/go/eula)o access Wiley's ebook EULA. \ No newline at end of file diff --git a/trading/The New Trading for a Living/archive/The New Trading for a Living.md b/trading/The New Trading for a Living/archive/The New Trading for a Living.md deleted file mode 100644 index 147908ca362caa6c5bef337661e86c6e0a9cbb88..0000000000000000000000000000000000000000 --- a/trading/The New Trading for a Living/archive/The New Trading for a Living.md +++ /dev/null @@ -1,5177 +0,0 @@ -## **The New Trading for a Living** - -*The Wiley Trading* series features books by traders who have survived the market's ever-changing environment and have prospered—some by reinventing systems, others by getting back to basics. Whether a novice trader, professional or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future. For more on this series, visit our website at [www.WileyTrading.com.](http://www.WileyTrading.com) - -Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers' professional and personal knowledge and understanding. - -## **The New Trading for a Living** - -Psychology • Discipline Trading Tools and Systems Risk Control • Trade Management - -**Dr. Alexander Elder** - -**[www.elder.com](http://www.elder.com) [www.spiketrade.com](http://www.spiketrade.com)** - -Cover design: Paul DiNovo - -Copyright © 2014 by by Dr. Alexander Elder. All rights reserved. - -Published by John Wiley & Sons, Inc., Hoboken, New Jersey. - -Published simultaneously in Canada. - -No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at [www.copyright.com.](http://www.copyright.com) Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at [http://www.wiley.com/go/permissions.](http://www.wiley.com/go/permissions) - -Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. - -For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. - -Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at [http://booksupport.wiley.com.](http://booksupport.wiley.com) For more information about Wiley products, visit [www.wiley.com.](http://www.wiley.com) - -#### *Library of Congress Cataloging-in-Publication Data:* - -ISBN 978-1-118-44392-7 (Hardcover) ISBN 978-1-118-96367-8 (ebk) ISBN 978-1-118-96368-5 (ebk) - -Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 - -### **To the memory of Lou Taylor—** - -a wise man, a savvy trader, and a true friend. - -| CONTENTS | | -|----------|--| -| | | - -| | Preface | xiii | -|-------|---------------------------------|------| -| | Introduction | 1 | -| | 1. Trading—The Last Frontier | 1 | -| | 2. Psychology Is the Key | 3 | -| | 3. The Odds against You | 5 | -| ONE | Individual Psychology | 9 | -| | 4. Why Trade? | 9 | -| | 5. Reality versus Fantasy | 10 | -| | 6. Self-Destructiveness | 16 | -| | 7. Trading Psychology | 19 | -| | 8. Trading Lessons from AA | 21 | -| | 9. Losers Anonymous | 23 | -| | 10. Winners and Losers | 27 | -| TWO | Mass Psychology | 31 | -| | 11. What Is Price? | 32 | -| | 12. What Is the Market? | 33 | -| | 13. The Trading Scene | 36 | -| | 14. The Market Crowd and You | 39 | -| | 15. Psychology of Trends | 43 | -| | 16. Managing versus Forecasting | 46 | -| THREE | Classical Chart Analysis | 49 | -| | 17. Charting | 50 | -| | 18. Support and Resistance | 55 | -| | | | - -| | 19. Trends and Trading Ranges | 60 | -|-------|--------------------------------------------|-----| -| | 20. Kangaroo Tails | 65 | -| FOUR | Computerized Technical Analysis | 69 | -| | 21. Computers in Trading | 69 | -| | 22. Moving Averages | 74 | -| | 23. Moving Average Convergence-Divergence: | | -| | MACD Lines and MACD-Histogram | 80 | -| | 24. The Directional System | 89 | -| | 25. Oscillators | 95 | -| | 26. Stochastic | 95 | -| | 27. Relative Strength Index | 99 | -| FIVE | Volume and Time | 103 | -| | 28. Volume | 103 | -| | 29. Volume-Based Indicators | 107 | -| | 30. Force Index | 112 | -| | 31. Open Interest | 117 | -| | 32. Time | 121 | -| | 33. Trading Timeframes | 126 | -| SIX | General Market Indicators | 133 | -| | 34. The New High–New Low Index | 133 | -| | 35. Stocks above 50-Day MA | 139 | -| | 36. Other Stock Market Indicators | 140 | -| | 37. Consensus and Commitment Indicators | 142 | -| SEVEN | Trading Systems | 149 | -| | 38. System Testing, Paper Trading, and the | | -| | Three Key Demands for Every Trade | 151 | -| | 39. Triple Screen Trading System | 154 | -| | 40. The Impulse System | 162 | -| | 41. Channel Trading Systems | 166 | -| EIGHT | Trading Vehicles | 173 | -| | 42. Stocks | 175 | -| | 43. ETFs | 176 | -| | 44. Options | 178 | -| | 45. CFDs | 186 | -| | 46. Futures | 187 | -| | 47. Forex | 194 | - -### CONTENTS **ix** - -| NINE | Risk Management | 197 | | | -|--------|-----------------------------------------------------------|-----|--|--| -| | 48. Emotions and Probabilities | 197 | | | -| | 49. The Two Main Rules of Risk Control | 202 | | | -| | 50. The Two Percent Rule | 203 | | | -| | 51. The Six Percent Rule | 208 | | | -| | 52. A Comeback from a Drawdown | 210 | | | -| TEN | Practical Details | 215 | | | -| | 53. How to Set Profit Targets: "Enough" Is the Power Word | 215 | | | -| | 54. How to Set Stops: Say No to Wishful Thinking | 219 | | | -| | 55. Is This an A-trade? | 225 | | | -| | 56. Scanning for Possible Trades | 230 | | | -| ELEVEN | Good Record-Keeping | | | | -| | 57. Your Daily Homework | 234 | | | -| | 58. Creating and Scoring Trade Plans | 238 | | | -| | 59. Trade Journal | 243 | | | -| | A Journey without an End: | | | | -| | How to Continue Learning | 249 | | | -| | Sources | 253 | | | -| | Acknowledgments | 257 | | | -| | About the Author | 259 | | | -| | Index | 261 | | | -| | | | | | - -### **PREFACE** - -*Trading for a Living* was published in 1993 and became an international best seller. It remains at the top of many reading lists, as friends recommend it to friends and trading firms give it to their new hires. All these years, I resisted revising my book because I trusted and liked its internal logic. I traded, traveled, wrote other books, and taught a few classes. Now, 21 years later, I agreed to update my most popular book so that you can benefit from the new technologies as well as the lessons I've learned. - -My late great friend Lou Taylor, to whom this book is dedicated, used to joke: "If I get half a percent smarter each year, I'll be a genius by the time I die." Revising my very first book felt like reliving my youth with the benefit of experience. - -In planning this update, I thought of a building complex in Vienna, Austria called the Gasometer. At its core are multistory storage tanks, erected by Austrian bricklayers in 1927. When modern technology made huge gas cylinders obsolete, architects converted them into modern apartments. They punched wide openings in brick walls, creating panoramic views, installed floors and elevators, and added glass-enclosed penthouses. I used to stay in one of them and wanted my new book to follow that model of blending old craftsmanship with new technology. - -Before you begin reading this book, ask yourself: what's the single most important step you can take to become a successful trader? - -Psychology is important. Since I was actively practicing psychiatry while writing the original *Trading for a Living*, its psychology part stood the test of time and I changed it very little in this new edition. - -Market analysis is very important—but remember that when we look at a chart, we deal with only five pieces of data—the open, the high, the low, the close and volume. Piling up masses of indicators and patterns on top of those five values only increases confusion. Less is often more. If you've read *Trading for a Living*, you'll see that I've reduced the number of technical chapters and moved some of them into a downloadable addendum. On the other hand, I added several new chapters that focus on new tools, notably the Impulse system. I also added a section on stops, profit targets and other practical details. - -Money management is extremely important because financial markets are hotbeds of risk. That was the weakest part of the original book, and I completely rewrote it. One of many tools you'll discover will be the Iron Triangle of risk control. - -Psychology, trading tactics, and money management are the three pillars of success, but there is the fourth factor that ties them together. That factor—which integrates all others—is record-keeping. - -Keeping good records will enable you to learn from your experiences. It'll help you break out of the vicious circle of small gains and big losses, running like a squirrel in a barrel, sweating and stressed but never getting anywhere. Keeping good records will make you your own teacher and a better trader. I'll show you several types of records you need to keep and will share several of my trade diaries. - -If you're a new reader, welcome to the journey. If you've already read *Trading for* a *Living*, I hope you'll find this new book two decades smarter than the first. - -> *Dr. Alexander Elder New York–Vermont, 2014* - -## **The New Trading for a Living** - -# Introduction - -## ■ **1. Trading—The Last Frontier** - -You can be free. You can live and work anywhere in the world. You can be independent from routine and not answer to anybody. - -This is the life of a successful trader. - -Many aspire to it but few succeed. An amateur looks at a quote screen and sees millions of dollars sparkle in front of his face. He reaches for the money—and loses. He reaches again—and loses more. Traders lose because the game is hard, or out of ignorance, or from lack of discipline. If any of these ail you, I wrote this book for you. - -## **How I Began to Trade** - -In the summer of 1976, I drove from New York to California. I took along a few books on psychiatry (I was a first-year psychiatric resident), several histories, and put a paperback copy of Engel's *How to Buy Stocks* into the trunk of my old Dodge. Little did I know that a dog-eared paperback, borrowed from a lawyer friend, would in due time change the course of my life. That friend, incidentally, had a perfect reverse golden touch—any investment he touched went under water. But that's another story. - -I gulped down the Engel book in campgrounds across America, finishing it on a Pacific beach in La Jolla. I had known nothing about the stock market, and the idea of making money by thinking gripped me. - -I grew up in the Soviet Union in the days when it was, in the words of a former U.S. president, "an evil empire." I hated the Soviet system and wanted to get out, but emigration was forbidden. I entered college at 16, graduated medical school at 22, completed my residency, and then took a job as a ship's doctor. Now I could break free! I jumped the Soviet ship in Abidjan, Ivory Coast. - -I ran to the U.S. Embassy through the clogged dusty streets of an African port city, chased by my ex-crewmates. The embassy put me in a "safe house" and then on a plane to New York. I landed at Kennedy Airport in February 1974, arriving from Africa with \$25 in my pocket. I spoke some English, but did not know a soul in this country. - -I had no idea what stocks, bonds, futures, or options were and sometimes got a queasy feeling just from looking at the American dollar bills in my wallet. In the old country, a handful of them could buy you three years in Siberia. - -Reading *How to Buy Stocks* opened a whole new world for me. When I returned to New York, I bought my first stock—it was KinderCare. A very bad thing happened—I made money on my first trade and then the second one, leaving me with a delusion that making money in the markets was easy. It took me a couple of years to get rid of that notion. - -My professional career proceeded on a separate track. I completed a residency in psychiatry at a major university hospital, studied at the New York Psychoanalytic Institute, and served as book editor for the largest psychiatric newspaper in the United States. I still have my license, but my professional practice these days is at most an hour or two per month. I am busy trading, love traveling, and do some teaching. - -Learning to trade has been a long journey—with soaring highs and aching lows. In moving forward—or in circles—I repeatedly knocked my head against the wall and ran my trading account into the ground. Each time I returned to a hospital job, put a stake together, read, thought, did more testing, and then started trading again. - -My trading slowly improved, but the breakthrough came when I realized that the key to winning was inside my head and not inside a computer. Psychiatry gave me the insight into trading that I will share with you. - -## **Do You Really Want to Succeed?** - -For many years I had a friend whose wife was fat. She was an elegant dresser, and she had been on a diet for as long as I had known her. She said she wanted to lose weight and she didn't eat cake or potatoes in front of people—but when I came into her kitchen, I'd see her go at it with a big fork. She said she wanted to be slim, but remained fat. - -The short-term pleasure of eating was stronger for her than the delayed pleasure and health benefits of weight loss. My friend's wife reminded me of a great many traders who say they want to be successful but keep making impulsive trades—going for the short-term thrills of gambling in the markets. - -People deceive and play games with themselves. Lying to others is bad, but lying to yourself is hopeless. Bookstores are full of good books on dieting, but the world is still full of overweight people. - -This book will teach you how to analyze and trade the markets, control risks, and deal with your own mind. I can give you the knowledge. Only you can supply the motivation. - -And remember this: an athlete who wants to enjoy risky sports must follow safety rules. When you reduce risks, you gain an added sense of accomplishment and control. The same goes for trading. - -*You can succeed in trading only if you handle it as a serious intellectual pursuit. Emotional trading is lethal. To help ensure success, practice defensive money management. A good trader watches his capital as carefully as a professional scuba diver watches his air supply.* - -## ■ **2. Psychology Is the Key** - -Remember how you felt the last time you placed an order? Were you anxious to jump in or afraid of losing? Did you procrastinate before entering your order? When you closed out a trade, did you feel elated or humiliated? The feelings of thousands of traders merge into huge psychological tides that move the markets. - -## **Getting Off the Roller Coaster** - -The majority of traders spend most of their time looking for good trades. Once they enter a trade, they don't manage it but either squirm from pain or grin from pleasure. They ride an emotional roller coaster and miss the essential element of winning—the management of their emotions. Their inability to manage themselves leads to poor risk management and losses. - -If your mind is not in gear with the markets, or if you ignore changes in mass psychology of crowds, you have no chance of making money trading. All winning professionals know the enormous importance of psychology. Most losing amateurs ignore it. - -Friends and students who know that I am a psychiatrist often ask whether this helps me as a trader. Good psychiatry and good trading have one important principle in common. Both focus on reality, on seeing the world the way it is. To live a healthy life, you have to live with your eyes open. To be a good trader, you need to trade with your eyes open, recognize real trends and turns, and not waste time or energy on fantasies, regrets, and wishful thinking. - -## **A Man's Game?** - -Brokerage house records indicate that most traders are male. The files of my firm, Elder.com, confirm that approximately 85 to 90 percent of traders are male. The percentage of women traders among my clients, however, has more than doubled since the original edition of *Trading for a Living* was written twenty years ago. - -The English language being what it is, "he" flows better than "he or she" or jumping between the two pronouns. To make reading easier, I'll use the masculine pronoun throughout this book. Of course, no disrespect is intended to the many women traders. - -As a matter of fact, I find that the percentage of successful traders is higher among women. As a group, they tend to be more disciplined and less arrogant than men. - -## **How This Book Is Organized** - -The three pillars of successful trading are psychology, market analysis, and risk management. Good record-keeping ties them together. This book will help you learn the essentials of all these areas. - -Part One of this book will show you how to manage emotions in trading. I discovered this method while practicing psychiatry. It greatly improved my trading, and it can help you too. - -Part Two will focus on crowd psychology of the markets. Mass behavior is more primitive than that of individuals. If you understand how crowds behave, you'll be able to profit from their mood swings instead of being swept up in their emotional tides. - -Part Three will show how chart patterns reflect crowd behavior. Classical technical analysis is applied social psychology, like poll-taking. Support, resistance, breakouts, and other patterns reflect crowd behavior. - -Part Four will teach you modern methods of computerized technical analysis. Indicators provide a better insight into mass psychology than classical chart patterns. Trend-following indicators help identify market trends, while oscillators show when those trends are ready to reverse. - -Volume and open interest also reflect crowd behavior. Part Five will focus on them as well as on the passage of time in the markets. Crowds have short attention spans, and a trader who relates price changes to time gains a competitive advantage. - -Part Six will focus on the best tools for analyzing the stock market as a whole. They can be especially helpful for stock index futures and options traders. - -Part Seven will present several trading systems. We'll begin with the Triple Screen, which has become widely accepted, and then review the Impulse and Channel trading systems. - -Part Eight will discuss several classes of trading vehicles. It will outline pluses and minuses of equities, futures, options, and forex, while blowing away the promotional fog that clouds some of these markets. - -Part Nine will lead you into the all-important topic of money management. This essential aspect of successful trading is neglected by most amateurs. You can have a brilliant trading system, but if your risk management is poor, then a short string of losses will destroy your account. Armed with the Iron Triangle of risk control and other tools, you'll become a safer and more effective trader. - -Part Ten will delve into the nitty-gritty of trading—setting stops, profit targets, and scanning. These practical details will help you implement any system you like. - -Part Eleven will guide you through the principles and templates of good recordkeeping. The quality of your records is the single best predictor of your success. I'll offer you free downloads of the templates I like to use. - -Last but not least, this book has a separate Study Guide. It asks over 100 questions, each linked to a specific section of the book. All questions are designed to test your level of understanding and discover any blind spots. After you finish reading each section of this book, it'll make sense to turn to the Study Guide and answer questions relevant to that section. If test results turn out to be less than excellent, don't hurry, reread that section of the book, and retake the test. - -You are about to spend many hours with this book. When you find ideas that look important to you, test them in the only way that matters—on your own market data and in your own trading. You will make this knowledge your own only by questioning and testing it. - -## ■ **3. The Odds against You** - -Why do most traders lose and wash out of the markets? Emotional and mindless trading are big reasons, but there is another. Markets are actually set up so that most traders must lose money. The trading industry slowly kills traders with commissions and slippage. - -You pay commissions for entering and exiting trades. Slippage is the difference between the price at which you place your order and the price at which it gets filled. When you place a limit order, it is filled at your price or better, or not at all. When you feel eager to enter or exit and place a market order, it's often filled at a worse price than prevailed when you placed it. - -Most amateurs are unaware of the harm done by commissions and slippage, just as medieval peasants could not imagine that tiny invisible germs could kill them. If you ignore slippage and deal with a broker who charges high commissions, you're acting like a peasant who drinks from a communal pool during a cholera epidemic. - -The trading industry keeps draining huge amounts of money from the markets. Exchanges, regulators, brokers, and advisors live off the markets, while generations of traders keep washing out. Markets need a fresh supply of losers just as builders of the ancient pyramids needed a fresh supply of slaves. Losers bring money into the markets, which is necessary for the prosperity of the trading industry. - -## **A Minus-Sum Game** - -Winners in a zero-sum game make as much as losers lose. If you and I bet \$20 on the direction of the next 100-point move in the Dow, one of us will collect \$20 and the other will lose \$20. A single bet has a component of luck, but the more knowledgeable person will keep winning more often than losing over a period of time. - -People buy the industry's propaganda about trading being a zero-sum game, take the bait, and open accounts. They don't realize that trading is a *minus-*sum game. Winners receive less than what losers lose because the industry drains money from the markets. - -For example, roulette in a casino is a minus-sum game because the casino sweeps away between three and six percent of every bet. This makes roulette unwinnable in the long run. You and I can get into in a minus-sum game if we make the same \$20 bet on the next 100-point move in the Dow through brokers. When we settle, the loser will be out \$23, and the winner will collect only \$17, while two brokers will smile on their way to the bank. - -Commissions and slippage are to traders what death and taxes are to all of us. They take some fun out of life and ultimately bring it to an end. A trader must support his broker and the machinery of exchanges before he collects a dime. Being simply "better than average" is not good enough. You have to be head and shoulders above the crowd to win a minus-sum game. - -## **Commissions** - -Commissions have become much smaller in the past two decades. Twenty years ago, there were still brokers who charged one-way commissions of between half a percent and one percent of trade value. Buying a thousand shares of GE at \$20 a share, with a total value of \$20,000, would have set you back \$100 to \$200 on the way in—and again on the way out. Fortunately for traders, commission rates have plummeted. - -The extortionate rates haven't completely disappeared. While preparing this book for publication, I received an e-mail from a client in Greece with a small account whose broker—a major European bank—charged him a \$40 minimum on any trade. I told him of my broker whose minimum for a hundred shares is only \$1. - -Without proper care, even seemingly small numbers can raise a tall barrier to success. - -Look at a fairly active trader with a \$20,000 account, doing one roundtrip trade per day, four days a week. Paying \$10 one way, by the end of the week he'll spend \$80 in commissions: \$40 for entries and \$40 for exits. If he does that 50 weeks per year (if he lasts that long), by the end of the year he will have spent \$4,000 on commission. That would be 20% of his account! - -George Soros, a top money manager, delivers an average 29% annual return. He wouldn't be where he is if he paid 20% a year in commissions! Even a "small commission" can build up a major barrier to success! I've heard brokers chuckle as they gossiped about clients who beat their brains out just to stay even with the game. - -*Shop for the lowest possible commissions. Don't be shy about bargaining for lower rates. I've heard many brokers complain about a shortage of customers—but not many customers complain about the shortage of brokers. Tell your broker it is in his best interest to charge you low commissions because you will survive and remain a client for a long time. Design a trading system that will trade less often.* - -In my own trading, I maintain one major account with a broker who charges me \$7.99 for unlimited size trades and another with a broker who charges a penny a share, with a \$1 minimum. When I trade expensive stocks, where I buy fewer than 800 shares, I give that order to the penny-a-share broker; otherwise, I go with the \$7.99-per-trade broker. A beginning trader, making his first steps, should look for a penny-a-share broker. Then you can trade your 100 shares for a dollar. A futures trader can expect to pay just a couple of dollars for a roundtrip trade. - -## **Slippage** - -Slippage means having your orders filled at a different price than what you saw on the screen when you placed your order. It is like paying 50 cents for an apple in a grocery store even though the posted price is 49 cents. A penny is nothing—but if you're buying a thousand apples or a thousand shares with a penny slippage, it'll come to \$10 per order, probably greater than your commission. - -There are two main types of orders: market and limit. Your slippage depends on which of these types you use. - -A limit order says—'give me that apple at 49 cents.' It guarantees the price, but doesn't guarantee a fill. You'll pay no more than 49 cents, but you may end up without the apple that you wanted. - -A market order says—'give me that apple.' It guarantees a fill, but doesn't guarantee the price. If prices of apples are rising when you place your order, you may well pay more than you saw on the screen when you pushed the buy button. You may get hit by slippage. - -Slippage on market orders rises with market volatility. When the market begins to run, slippage goes through the roof. - -Do you have any idea how much slippage costs you? - -There is only one way to find out: write down the price at the time you placed a market order, compare it with your fill, and multiply the difference by the number of shares or contracts. Needless to say, you need a good record-keeping system, such as a spreadsheet with columns for each of the above numbers. We offer such a spreadsheet to traders as a public service at [www.elder.com.](http://www.elder.com) - -You'll be reading "record this" and "record that" throughout this book. Remember that good record-keeping is essential for your success. You have to keep an eye on your wins and an even sharper eye on your losses because you can learn much more from them. - -Here's a shocking number, which you can confirm by keeping good records: an average trader spends three times more on slippage than on commissions. - -Earlier we talked about commissions raising a barrier to success. The barrier from slippage is three times higher. This is why, no matter how tempting a trade, you need to avoid buying "at the market." - -You want to be in control and trade only at prices that suit you. There are thousands of stocks and dozens of futures contracts. If you miss a trade due to a limit order, there'll be countless other opportunities. Do not overpay! I almost always use limit orders and resort to market orders only when placing stops. When a stop level gets hit, it becomes a market order. When a trade is flaming out, it's not the time to economize. Get in slow but get out fast. - -*To reduce slippage, trade liquid, high-volume markets and avoid thinly traded stocks, where slippage tends to be higher. Go long or short when the market is quiet, and use limit orders to buy or sell at specified prices. Keep a record of prices at the time you placed your order. Demand your broker fight the floor for a better fill when necessary.* - -## **Bid-Ask Spreads** - -Whenever the market is open, there are always two prices for any trading vehicle—a bid and an ask. A bid is what people are offering to pay for that security at that moment; an ask is what sellers are demanding in order to sell it. A bid is always lower, an ask higher, and the spread between them keeps changing. - -Bid-ask spreads vary between different markets and even in the same market at different times. Bid-ask spreads are higher in thinly traded vehicles, as the pros who dominate such markets demand high fees from those who want to join their party. The bid-ask spreads are likely to be razor-thin, perhaps only one tick on a quiet day in an actively traded stock, future or option. They grow wider as prices accelerate on the way up or down and may become huge—dozens of ticks—after a severe drop or a very sharp rally. - -Market orders get filled at the bad side of bid-ask spreads. A market order buys at the ask (high) and sells at the bid (low). Little wonder that many professional traders make a good living from filling market orders. Don't feed the wolves—use limit orders whenever possible! - -## **The Barriers to Success** - -Slippage and commissions make trading similar to swimming in a piranha-infested river. Other expenses also drain traders' money. The cost of computers and data, fees for advisory services and books—including the one you are reading now—all come out of your trading funds. - -*Look for a broker with the cheapest commissions and watch him like a hawk. Design a trading system that gives signals relatively infrequently and allows you to enter markets during quiet times. Use limit orders almost exclusively*—*except when placing stops. Be careful on what tools you spend money: there are no magic solutions. Success cannot be bought, only earned.* - -# Individual Psychology - -## ■ **4. Why Trade?** - -Trading appears deceptively easy. A beginner may cautiously enter the market, win a few times, and start feeling brilliant and invincible. That's when he starts taking wild risks and ends up with bad losses. - -People trade for many reasons—some rational and many irrational. Trading offers an opportunity to make a lot of money in a hurry. Money symbolizes freedom to many people, even though they often don't know what to do with it. - -If you know how to trade, you can make your own hours, live and work anywhere you please, and never answer to a boss. Trading is a fascinating game: chess, poker, and a video game rolled into one. Trading attracts people who love challenges. - -It attracts risk-takers and repels those who avoid risk. An average person gets up in the morning, goes to work, has a lunch break, returns home, has a beer and dinner, watches TV, and goes to sleep. If he makes a few extra dollars, he puts them into a savings account. A trader keeps odd hours and puts his capital at risk. Many traders are loners who abandon the certainties of the routine and take a leap into the unknown. - -## **Self-Fulfillment** - -Many people have an innate drive to achieve their personal best, to develop their abilities to the fullest. This drive, along with the pleasure of the game and the lure of money, propels traders to challenge the markets. - -Good traders tend to be hardworking and shrewd people, open to new ideas. The goal of a good trader, paradoxically, is not to make money. His goal is to trade well. If he trades right, money follows almost as an afterthought. Successful traders keep honing their skills as they try to reach their personal best. - -A professional trader from Texas invited me to his office and said: "If you sit across the table from me while I day-trade, you won't be able to tell whether I am \$2,000 ahead or \$2,000 behind on that day." He has risen to a level where winning does not elate him and losing does not deflate him. He is so focused on trading right and improving his skills that money no longer influences his emotions. - -The trouble with self-fulfillment is that many people have self-destructive streaks. Accident-prone drivers keep destroying their cars, and self-destructive traders keep destroying their accounts. Markets offer vast opportunities for self-sabotage, as well as for self-fulfillment. Acting out your internal conflicts in the marketplace is a very expensive proposition. - -Traders who are not at peace with themselves often try to fulfill their contradictory wishes in the markets. If you don't know where you are going, you'll wind up somewhere you never wanted to be. - -## ■ **5. Reality versus Fantasy** - -If a friend with little farming experience told you that he planned to feed himself with food grown on a quarter-acre (1,000 square meters) plot, you'd expect him to go hungry. One can squeeze only so much from a small piece of land. There is, however, a field in which grown-ups let their fantasies fly—in trading. - -A former employee told me that he planned to support himself trading a \$6,000 account. When I tried to show him the futility of his plan, he quickly changed the topic. He was a bright analyst, but refused to see that his "intensive farming" plan was suicidal. In his desperate effort to succeed, he'd have to take on large positions—and the slightest wiggle of the market will quickly put him out of business. - -A successful trader is a realist. He knows his abilities and limitations. He sees what's happening in the markets and knows how to react. He analyzes the markets without cutting corners, observes himself, and makes realistic plans. A professional trader cannot afford illusions. - -Once an amateur takes a few hits and gets a few margin calls, he swings from cocky to fearful and starts developing strange ideas about the markets. Losers buy, sell, or avoid trades due to their fantastic ideas. They act like children who are afraid to pass a cemetery or look under their bed at night because they are afraid of ghosts. The unstructured environment of the market makes it easy to develop fantasies. - -Most people who grow up in Western civilization have several similar fantasies. They are so widespread that when I studied at the New York Psychoanalytic Institute, there was a course called "Universal Fantasies." For example, many people have a fantasy in childhood that they were adopted. This fantasy seems to explain the unfriendly and impersonal world. It consoles a child but prevents him from being aware of a reality he'd rather not see—that his parents aren't that good. Our fantasies influence our behavior, even if we aren't consciously aware of them. - -In talking to hundreds of traders, I keep hearing several universal fantasies. They distort reality and stand in the way of trading success. A successful trader must identify his fantasies and get rid of them. - -## **The Brain Myth** - -Losers who suffer from the "brain myth" will tell you, "I lost because I didn't know trading secrets." Many have a fantasy that successful traders have some secret knowledge. That fantasy helps support a lively market in advisory services and ready-made trading systems. - -A demoralized trader may whip out his credit card to buy access to "trading secrets." He may send money to a charlatan for a \$3,000 "can't miss," backtested, computerized trading system. When that system self-destructs, he'll pull out his almost-maxed-out credit card again for a "scientific manual" that explains how he can stop losing and begin winning by contemplating the moon, the stars, or even Uranus. - -At an investment club we used to have in New York, I often ran into a famous financial astrologer. He often asked for free admission because he couldn't afford to pay a modest fee for the meeting and a meal. His main source of income remains collecting money for astrological trading predictions from hopeful amateurs. - -Losers don't realize that trading is intellectually fairly simple. It is nowhere near as demanding as taking out an appendix, building a bridge, or trying a case in court. Good traders are shrewd, but few are intellectuals. Many have never been to college, and some have dropped out of high school. - -Intelligent and hardworking people who have succeeded in their careers often feel drawn to trading. - -Why do they fail so often? What separates winners from losers isn't intelligence or secrets, and certainly not education. - -## **The Undercapitalization Myth** - -Many losers think that they would trade successfully if they had a bigger account. - -People destroy their accounts either by a string of losses or a single abysmally bad trade. Often, after the loser is sold out, unable to meet a margin call, the market reverses and moves in the direction he expected. He starts fuming: had he survived another week, he would have made a fortune instead of losing! - -Such people look at market reversals that come too late and think that those turns confirm their methods. They may go back to work and earn, save, or borrow enough money to open another small account. History repeats itself: The loser gets wiped out, the market reverses and "proves" him right, but only too late—he's been sold out again. That's when the fantasy is born: "If only I had a bigger account, I could have stayed in the market longer and won." - -Some losers raise money from relatives and friends by showing them a paper track record. It seems to prove that they would have won big, if only they had had more money to work with. But even if they raise more money, they lose that, too—as if the market were laughing at them! - -A loser is not undercapitalized—his mind is underdeveloped. A loser can destroy a big account almost as quickly as a small one. An acquaintance of mine once blew out over 200 million dollars in a day. His broker sold him out—and then the market turned. He sued the broker and said to me: "If only I had a bigger account…." Apparently an account with \$200 million wasn't big enough. - -A loser's true problem is not account size but overtrading and sloppy money management. He takes risks that are too big for his account size, however small or big. No matter how good his system may be, a streak of bad trades is sure to put him out of business. - -Amateurs neither expect to lose nor are prepared to manage losing trades. Calling themselves undercapitalized is a cop-out that helps them avoid two painful truths: their lack of a realistic money management plan and lack of discipline. - -A trader who wants to survive and prosper must control losses. You do that by risking only a tiny fraction of your equity on any single trade (see Section Nine, "Risk Management"). Learn from cheap mistakes in a small account. - -The one advantage of a large trading account is that the price of equipment and services represents a smaller percentage of your money. The owner of a milliondollar fund who spends \$5,000 on classes is only ½ percent behind the game. The same expenditure would represent a deadly 25 percent of equity for a trader with a \$20,000 account. - -## **The Autopilot Myth** - -Traders who believe in the autopilot myth think that the pursuit of wealth can be automated. Some people try to develop an automatic trading system, while others buy systems from vendors. Men who have spent years honing their skills as lawyers, doctors, or businessmen plunk down thousands of dollars for canned competence. Most are driven by greed, laziness, and mathematical illiteracy. - -Systems used to be written on sheets of paper, but now they get downloaded on a computer. Some are primitive; others are elaborate, with built-in optimization and even money management rules. Many traders spend thousands of dollars searching for magic that will turn a few pages of computer code into an endless stream of money. People who pay for automatic trading systems are like medieval knights who paid alchemists for the secret of turning base metals into gold. - -Complex human activities do not lend themselves to automation. Computerized learning systems have not replaced teachers, and programs for doing taxes haven't created unemployment among accountants. Most human activities call for an exercise of judgment; machines and systems can help but not replace humans. - -Had there been a successful automatic trading system, its purchaser could move to Tahiti and spend the rest of his life at leisure, supported by a stream of checks from his broker. So far, the only people who've made money from trading systems are their sellers. They form a small but colorful cottage industry. If their systems worked, why would they sell them? They could move to Tahiti themselves and cash checks from their brokers! Meanwhile, every system seller has a line. Some say they like programming better than trading. Others claim that they sell their systems only to raise capital or even out of love for humanity. - -Markets are always changing and defeating automatic trading systems. Yesterday's rigid rules will work less well today and will probably stop working tomorrow. A competent trader can adjust his methods when he detects trouble. An automatic system is less adaptable and self-destructs. - -Airlines pay high salaries to pilots despite having autopilots. They do it because humans can handle unforeseen events. When a roof blows off an airliner over the Pacific or when a passenger jet loses both engines to a flock of geese over Manhattan, only a human can handle such crises. These emergencies have been reported in the press, and in each of them, experienced pilots managed to land their airliners by improvising solutions. No autopilot can do that. Betting your money on an automatic system is like betting your life on an autopilot. The first unexpected event will make your account crash and burn. - -There are good trading systems out there, but they have to be monitored and adjusted using individual judgment. You have to stay on the ball—you cannot abdicate responsibility for your success to a mechanical system. - -Traders with autopilot fantasies try to repeat what they felt as infants. Their mothers used to fulfill their needs for food, warmth, and comfort. Now they try to recreate the experience of passively lying on their backs and having profits flow to them like an endless stream of free, warm milk. The market is not your mother. It consists of tough men and women who look for ways to take money from you rather than pouring warm milk into your mouth. - -## **The Cult of Personality** - -Most people pay lip service to their wish for freedom and independence, but when they come under pressure, they change their tune and start looking for "strong leadership." Traders in distress often seek directions from assorted gurus. - -When I was growing up in the former Soviet Union, children were taught that Stalin was our great leader. Later we found out what a monster he was, but while he was alive, most people enjoyed following the leader. He freed them from the need to think for themselves. - -"Little Stalins" were installed in every area of society—in economics, biology, architecture, and so on. When I came to the United States and began to trade, I was amazed to see how many traders were looking for a guru—their own "little Stalin." The fantasy that someone else can make you rich is always with us. - -There are three types of gurus in the financial markets: market cycle gurus, magic method gurus, and dead gurus. Cycle gurus call important market turns. Method gurus promote new highways to riches. Still others have escaped criticism and invited cult following through the simple mechanism of departing this world. - -#### **Market Cycle Gurus** - -For many decades, the U.S. stock market has generally followed a four-year cycle. The broad stock market has normally spent 2.5 or 3 years going up and 1 or 1.5 years going down. A new market cycle guru emerges in almost every major stock cycle, once every 4 years. A guru's fame tends to last for 2 to 3 years. The reigning period of each guru coincides with a major bull market in the United States. - -A market cycle guru forecasts rallies and declines. Each correct forecast increases his fame and prompts even more people to buy or sell when he issues his pronouncements. A market cycle guru has a pet theory about the market. That theory—cycles, volume, Elliott Wave, whatever—is usually developed several years prior to reaching stardom. At first, the market refuses to follow an aspiring guru's pet theory. Then the market changes and for several years comes in gear with the guru's calls. That is when the guru's star rises high above the marketplace. - -Compare this to what happens to fashion models as public tastes change. One year, blondes are popular, another year, redheads. Suddenly, last year's blonde star is no longer wanted for the front cover of a major magazine. Everybody wants a dark model, or a woman with a birthmark on her face. A model doesn't change—public tastes do. - -Gurus always come from the fringes of market analysis. They are never establishment analysts. Institutional employees play it safe—afraid to stick their necks out and almost never achieve spectacular results. A market cycle guru is an outsider with a unique theory. - -A guru remains famous for as long as the market behaves according to his the– ory—usually for less than the duration of one 4-year market cycle. At some point, the market changes and starts marching to a different tune. A guru continues to use old methods that worked so well in the past and loses his following. When the guru's forecasts stop working, public admiration turns to hatred. It's impossible for a discredited market cycle guru to return to stardom. - -All market cycle gurus have several traits in common. They become active in the forecasting business several years prior to reaching stardom. Each has a unique theory, a few followers, and some credibility, conferred by sheer survival in the advisory business. The fact that each guru's theory did not work for a number of years is ignored by his followers. When the theory becomes correct, the mass media take notice. When a theory stops working, mass adulation turns to hatred. - -When you recognize that a successful new guru is emerging, it may be profitable to jump on his bandwagon. It's even more important to recognize when a guru has reached his peak. All gurus crash—and by definition, they crash from the height of their fame. When a guru becomes accepted by the mass media, it's a good sign that he has reached his crest. The mainstream media is wary of outsiders. When several mass magazines devote space to a hot market guru, you know that his end is near. Mass psychology being what it is, new gurus will continue to emerge. - -#### **Magic Method Gurus** - -While cycle gurus are creatures of the stock market, "method gurus" are more prominent in the derivatives markets. A "method guru" erupts on the financial scene after discovering a new analytic or trading method. - -Traders always look for an edge, an advantage over fellow traders. Like knights shopping for swords, they are willing to pay handsomely for their trading tools. No price is too high if it lets them tap into a money pipeline. - -A magic method guru sells a new set of keys to market profits—speedlines, cycles, Market Profile, etc. It may have an edge in the beginning, but as soon as enough people become familiar with a new method and test it in the markets, it inevitably deteriorates and starts losing popularity. Markets are forever grinding down each method's edge, and what worked yesterday is less likely to work today and highly unlikely a year from now. - -Oddly enough, even in this era of global communications, reputations change slowly. A guru whose image has been destroyed in his own country can make money peddling his theory overseas. That point has been made to me by a guru who compared his continued popularity in Asia to what happens to faded American singers and movie stars. They are unable to attract an audience in the United States, but they can still make a living singing abroad. - -#### **Dead Gurus** - -The third type of a market guru is a dead guru. His books are reissued, his market courses are scrutinized by new generations of eager traders, and the legend of the dear-departed analyst's prowess and personal wealth grows posthumously. The dead guru is no longer among us and cannot capitalize on his fame. Other promoters profit from his reputation and expired copyrights. One dear-departed guru is R. N. Elliott, but the best example of such a legend is W. D. Gann. - -Various opportunists sell "Gann courses" and "Gann software." They claim that Gann was one of the best traders who ever lived, that he left a \$50 million estate, and so on. I interviewed W. D. Gann's son, an analyst for a Boston bank. He told me that his famous father could not support his family by trading but earned his living by writing and selling instructional courses. He could not afford a secretary and made his son work for him. When W. D. Gann died in the 1950s, his estate, including his house, was valued at slightly over \$100,000. The legend of W. D. Gann, the giant of trading, is perpetuated by those who sell courses and other paraphernalia to gullible customers. - -#### **The Followers of Gurus** - -A guru has to produce original research for several years, then get lucky when the market turns his way. While some gurus are dead, those who are alive range from serious academic types to great showmen. To read about scandals surrounding many gurus, try *Winner Takes All* by William R. Gallacher. - -When we pay a guru, we expect to get back more than we spend. We act like a man who bets a few dollars against a three-card Monte dealer on a street corner. He hopes to win more than he put down on an overturned crate. Only the ignorant or greedy take the bait. - -Some people turn to gurus in search of a strong leader. They look for a parent-like omniscient provider. As a friend once said, "They walk with their umbilical cords in hand, looking for a place to plug them in." A smart promoter provides such a receptacle, for a fee. - -*The public wants gurus, and new gurus will come. As an intelligent trader, you must realize that in the long run, no guru is going to make you rich. You have to work on that yourself.* - -Occasionally, when I give a talk or appear on TV, someone introduces me as a "famous guru." I shudder at those words and interrupt such introductions. A guru is someone claiming to lead the crowds across the desert for a donation. No such pitches here! - -I always begin by explaining that there are no magic methods, that the field of trading is as huge and diverse as that of medicine, where one needs to choose one specialty and work hard to become good at it. I chose my path a long time ago, and what I do in front of a class is simply think out loud, sharing my modes of research and decision making. - -## **Trade with Your Eyes Open** - -Wishful thinking is stronger than dollars. Recent research has proven that people have a prodigious ability to lie to themselves and avoid seeing the truth. - -Duke University professor Dan Ariely describes a clever experiment. A group of people are given an intelligence test, but half of them are "accidentally" shown a response sheet, allowing them to look up correct answers before recording their own. Needless to say, they score above the rest. Next, everybody is asked to predict their grades on the next IQ test, in which there will be absolutely no cheat sheets—and those who predict correctly will get paid. Surprisingly, the half of the group that scored higher with cheat sheets predicted higher results for the next test. The cheaters wanted to believe they were very smart, even though their incorrect predictions of success would cost them money. - -A successful trader cannot afford wishful thinking—he must be a realist. There are no cheat sheets in the markets—you can see the truth in your trade diaries and equity curves. - -To win in the markets, we need to master three essential components of trading: sound psychology, a logical trading system, and an effective risk management plan. These are like three legs of a stool—remove one and the stool will fall. It is a typical beginner mistake to focus exclusively on indicators and trading systems. - -*You have to analyze your feelings as you trade to make sure that your decisions are sound. Your trades must be based on clearly defined rules. You have to structure your money management so that no string of losses can kick you out of the game.* - -## ■ **6. Self-Destructiveness** - -Trading is a very hard game. A trader who wants to win and remain successful in the long run has to be extremely serious about his craft. He cannot afford to be naive or to trade because of some hidden psychological agenda. - -Unfortunately, trading often appeals to impulsive people, gamblers, and those who feel that the world owes them a living. If you trade for the excitement, you'll inevitably take trades with bad odds and accept needless risks. The markets are unforgiving, and emotional trading always results in losses. - -## **Gambling** - -Gambling means betting on games of chance or skill. It exists in all societies, and most people have gambled at some point in their lives. - -Freud believed that gambling was universally attractive because it was a substitute for masturbation. The repetitive and exciting activity of the hands, the irresistible urge, the resolutions to stop, the intoxicating quality of pleasure, and the feelings of guilt link gambling and masturbation. - -Dr. Ralph Greenson, a prominent California psychoanalyst, has divided gamblers into three groups: the normal person who gambles for diversion and who can stop when he wishes; the professional gambler, who selects gambling as his means of earning a livelihood; and the neurotic gambler, who gambles because he is driven by unconscious needs and is unable to stop. - -A neurotic gambler either feels lucky or wants to test his luck. Winning gives him a sense of power. He feels pleased, like a baby feeding at a breast. In the end, a neurotic gambler always loses because he tries to recreate that omnipotent feeling of bliss instead of concentrating on a realistic long-term game plan. - -Dr. Sheila Blume, director of the compulsive gambling program at South Oaks Hospital in New York, called gambling "an addiction without a drug." Most gamblers are men who gamble for the action. Women tend to gamble as a means of escape. Losers usually hide their losses and try to look and act like winners, but are plagued by self-doubt. - -Trading stocks, futures, and options gives a gambler a high, while looking more respectable than betting on the ponies. Gambling in the financial markets has a greater aura of sophistication than playing numbers with a bookie. - -Gamblers feel happy when trades go in their favor. They feel terribly low when they lose. They differ from successful professionals who focus on long-term plans and don't get particularly upset or excited over any single trade. - -*The key sign of gambling is the inability to resist the urge to bet. If you feel that you are trading too much and the results are poor, stop trading for a month. This will give you a chance to re-evaluate your trading. If the urge to trade is so strong that you cannot stay away from the action for a month, then it is time to visit your local chapter of Gamblers Anonymous or start using the principles of Alcoholics Anonymous, outlined later in this chapter.* - -## **Self-Sabotage** - -After practicing psychiatry for decades, I became convinced that most failures in life are due to self-sabotage. We fail in our professional, personal, and business affairs not because of bad luck or incompetence, but to fulfill an unconscious wish to fail. - -A brilliant friend of mine had a lifelong history of demolishing his success. As a young man, he was a successful pharmacist but lost his business; became a broker and rose near the top of his firm but was sued; turned to trading but busted out while disentangling himself from previous disasters. He blamed all his failures on envious bosses, incompetent regulators, and an unsupportive wife. - -Finally, he hit bottom. He had no job and no money. He borrowed a quote terminal from another busted-out trader and raised capital from a few people who had heard that he had traded well in the past. He started making money for his pool, and as the word spread, more people invested. My friend was on a roll. At that point, he went on a speaking tour of Asia but continued to trade from the road. He took a side trip into a country famous for its brothels, leaving a very large open position in bond futures, with no protective stop. By the time he returned to civilization, the market had staged a major move and his pool was wiped out. Did he try to figure out his problem? To learn? No—he blamed his broker! Afterwards I helped him get an attractive job at a major data company, but there he began to bite the hands that fed him and was fired. In the end, this brilliant man was going door to door, selling aluminum siding—while others made money using his techniques. - -When traders get in trouble, they tend to blame others, bad luck, or anything else. It hurts to look within yourself for the cause of your failure. - -A prominent trader came to me for a consultation. His equity was being demolished by a rally in the U.S. dollar, in which he was heavily short. He had grown up fighting an abusive and arrogant father. He had made a name for himself by betting large positions on reversals of established trends. This trader kept adding to his short position because he could not admit that the market, which represented his father, was bigger and stronger than he was. - -These are just two examples of how people act out their self-destructive tendencies. We sabotage ourselves by acting like impulsive children rather than intelligent adults. We cling to our self-defeating patterns. They can be treated—failure is a curable disease. - -*The mental baggage from childhood can prevent you from succeeding in the markets. You have to identify your weaknesses and work to change. Keep a trading diary—write down your reasons for entering and exiting every trade. Look for repetitive patterns of success and failure.* - -## **The Demolition Derby** - -All society members make small allowances to protect one another from the consequences of their mistakes. When you drive, you try to avoid hitting other cars, and they try to avoid hitting you. If someone cuts in front of you on a highway, you may curse, but you will slow down. If someone swings open the door of a parked car, you swerve. You avoid collisions because they are costly for both parties. - -Almost all professions provide safety nets for their members. Your bosses, colleagues, and clients will warn you when you behave badly or self-destructively. There is no such safety net in trading, which makes it more dangerous than most human endeavors. The markets offer endless opportunities to self-destruct. - -Buying at the high point of the day is like swinging your car door open into the traffic. When your order to buy reaches the floor, traders rush to sell to you—to tear off your door along with your arm. Other traders want you to fail because when you lose they get your money. - -Markets operate without normal human helpfulness. Every trader gets hit by others. Every trader tries to hit others. The trading highway is littered with wrecks. Trading is the most dangerous human endeavor, short of war. - -## **Controlling Self-Destructiveness** - -Most people go through life making the same mistakes decade after decade. Some structure their lives to succeed in one area, while acting out their internal conflicts in another. - -*You need to be aware of your tendency to sabotage yourself. Stop blaming your losses on bad luck or on others, and take responsibility for your results. Start keeping a diary—a record of all your trades, with reasons for entering and exiting them. Look for repetitive patterns of success and failure. Those who don't learn from the past are condemned to repeat it.* - -A trader needs a psychological safety net the way a mountain climber needs his survival gear. I found the principles of Alcoholics Anonymous, outlined below, to be of great help at an early stage of trader development. Strict money management rules also provide a safety net, while the diary helps you learn from your mistakes as well as successes. - -## ■ **7. Trading Psychology** - -Your success or failure as a trader depends on your emotions. You may have a brilliant trading system, but if you feel arrogant, frightened, or upset, your account is sure to suffer. If you become aware of fear, greed, or a gambler's high, close your trades. - -In trading, you compete against the sharpest minds in the world. Commissions and slippage slant the field against you. Now, on top of that, if you allow your emotions to interfere with your trading, the battle is lost. My friend and partner in SpikeTrade.com Kerry Lovvorn is fond of repeating: "It is hard enough to know what the market is going to do; if you don't know what you are going to do, the game is lost." - -Having a good trading system is not enough. Many traders with good systems wash out because psychologically they are not prepared to win. - -## **Bending the Rules** - -Markets offer enormous temptations, like walking through a gold vault or through a harem. They provoke great surges of greed and even greater waves of fear of losing what we've got. Those feelings cloud our perceptions of market reality. - -Most amateurs feel like geniuses after a short winning streak. It is exciting to believe that you are so good that all your trades are sure to be winners. That's when traders start deviating from their rules and damage their accounts. - -Traders gain some knowledge, win, their emotions kick in, and they self-destruct. Most traders promptly give their "killings" back to the markets, which are full of rags to riches to rags stories. The hallmark of a successful trader is the ability to accumulate equity. - -You need to make trading as objective as possible. Be sure to follow money management rules. Keep a spreadsheet listing all your trades, including commissions and slippage. Keep a diary of all your trades with "before and after" charts. At the early stages of your trading career, you may have to devote as much energy to analyzing yourself as analyzing the markets. - -When I was learning to trade, I read every book on trading psychology I could find. Many writers offered sensible advice. Some stressed discipline: "You cannot let the markets sway you. Don't make decisions during trading hours. Plan a trade, and trade a plan." Others stressed flexibility: "Don't enter the market with any preconceived notions. Change your plans when markets change." Some experts suggested isolation—no business news, no *Wall Street Journal*, no listening to other traders, just you and the market. Others advised being open-minded, keeping in touch with other traders, and soaking up fresh ideas. Each piece of advice seemed to make sense, but they contradicted one another. - -I kept reading, trading, and focusing on system development. I also continued to practice psychiatry. I never thought the two fields were connected—until I had a sudden insight. The idea that changed how I trade came from psychiatry. - -## **The Insight That Changed My Trading** - -Like most psychiatrists, I always had some patients with alcohol problems. I also served as a consultant to a major drug rehabilitation program. It didn't take me long to realize that alcoholics and addicts were more likely to recover in self-help groups than in classical psychiatric settings. - -Psychotherapy, medications, and expensive hospitals and clinics can sober up a drunk but seldom succeed in helping him remain sober. Most addicts quickly relapse. They have a much better chance to recover if they become active in Alcoholics Anonymous (AA) and similar self-help groups. - -Once I realized that AA members were more likely to stay sober and rebuild their lives, I became a big fan of Alcoholics Anonymous. I began sending patients with drinking problems to AA and related groups, such as ACOA (Adult Children of Alcoholics). If an alcoholic came to me for treatment, I insisted that he also go to AA because otherwise he'd be wasting both our time and his money. - -One night I stopped by a friend's office on the way to a party. We had two hours before it began, and my friend, who was a recovering alcoholic, said: "Do you want to take in a movie or go to an AA meeting?" I had sent many patients to AA but had never been to a meeting, since I have never had a drinking problem. I jumped at a chance to attend an AA meeting—it was a new experience. - -The meeting was held at a local YMCA. A dozen men and a few women sat on folding chairs in a plain room. The meeting lasted an hour. I was amazed by what I heard—these people seemed to talk about my trading! - -They talked about alcohol, but as long as I substituted the word "loss" for "alcohol," most of what they said applied to me! My account equity was swinging up and down in those days. I left that meeting knowing that I had to handle my losses the way AA handles alcoholism. - -## ■ **8. Trading Lessons from AA** - -Almost any drunk can stay sober for a few days—until the urge to drink drives him back to the bottle. He cannot resist as long as he continues to think and feel like an alcoholic. Sobriety begins inside a person's mind. - -Alcoholics Anonymous (AA) has a system for changing the way people think and feel about drinking. AA members use a 12-step program for changing their minds. These 12 steps, described in the book *Twelve Steps and Twelve Traditions*, refer to 12 stages of personal growth. Recovering alcoholics attend meetings where they share their experiences with other recovering alcoholics, supporting each other in their sobriety. Any member can get a sponsor—another AA member whom he can call for support when he feels the urge to drink. - -AA was founded in the 1930s by two alcoholics—a doctor and a traveling salesman who began meeting to help each other stay sober. They developed a system that worked so well, others began to join them. AA has only one goal—to help its members stay sober. It doesn't ask for money, takes no political positions, and runs no promotional campaigns. AA keeps growing thanks only to word of mouth and owes its success only to its effectiveness. - -The 12-step program of AA is so effective that people with other problems now use it. There are 12-step groups for children of alcoholics, gamblers, and others. I've become convinced that traders can stop losing money if they apply the key principles of Alcoholics Anonymous to their trading. - -## **Denial** - -A social drinker enjoys a cocktail, a glass of wine, or a beer but stops when he feels he's had enough. An alcoholic's chemistry is different. Once an alcoholic takes a drink, he feels an urge to continue until he passes out or his money runs out. - -A drunk may say that he needs to cut down on drinking, but can't admit that it's out of control. Try telling an alcoholic relative, friend, or employee that his drinking is out of control and damaging his life, and you'll run into a wall of denial. - -An alcoholic may say: "My boss fired me 'cause I was hung over and came in late. My wife took the kids and left 'cause she had no sense to begin with. My landlord is trying to kick me out of the apartment 'cause I'm a little behind on the rent. I'm gonna have to cut down on my drinking, and everything will be all right." - -This man has lost his family and his job. He is about to lose the roof over his head. His life is spinning out of control—but he keeps saying that he can cut down on his drinking. This is denial! - -Alcoholics deny their problems while their lives are falling apart. As long as an alcoholic believes that he can "control his drinking," he is headed downhill. Nothing will ever change, even if he gets a new job, a new wife, and a new landlord. - -Alcoholics deny that alcohol controls their lives. When they talk of reducing drinking, they talk about managing the unmanageable. They are like a driver whose car spins out of control on a mountain road. When the car careens down a cliff, it is too late to promise to drive carefully. An alcoholic's life careens out of control, while he denies he's an alcoholic. - -*There is a stark parallel between an alcoholic and a trader whose account is being demolished by losses. As he keeps changing his trading tactics, he acts like an alcoholic who tries to solve his problem by switching from hard liquor to beer. A loser denies that he's lost control over his trading life.* - -## **Rock Bottom** - -A drunk can begin his journey to recovery only after he admits that he is an alcoholic. He must see that alcohol controls his life and not the other way around. Most drunks cannot accept this painful truth. They can face it only after they hit rock bottom. - -Some alcoholics hit rock bottom when they develop a life-threatening illness. Others hit it after being rejected by their family or losing a job. An alcoholic needs to sink to a point so low, so deep down in the gutter, so unbearably painful that it finally penetrates his denial. - -The pain of hitting rock bottom makes an alcoholic see how deep he has sunk. He sees a simple stark choice—either turn his life around or die. Only then is an alcoholic ready to begin his journey to recovery. - -*Profits give traders an emotional high and a feeling of power. They try to get high again, put on reckless trades, and give back their profits. Most traders cannot stand the pain of severe losses. They die as traders after hitting rock bottom and wash out of the markets. The few survivors realize that the main trouble is not with their methods—it is with their thinking. They can change and become successful traders.* - -## **The First Step** - -An alcoholic who wants to recover has to go through twelve steps—twelve stages of personal growth. He needs to change how he thinks and feels, how he relates to himself and others. - -The first step of AA is the hardest: to admit that one is powerless over alcohol. An alcoholic must recognize that his life has become unmanageable, that alcohol is stronger than he is. Most cannot take that step, drop out, and go on to destroy their lives. - -If alcohol is stronger than you, then you can never touch it again, not even a sip, for as long as you live. You have to give up drinking forever. Most drunks do not want to give up that pleasure. They destroy their lives rather than take the first step of AA. Only the pain of hitting rock bottom can motivate them to take that first step. - -## **One Day at a Time** - -You may have seen bumper stickers that say, "One day at a time" or "Easy does it." Those are AA slogans, and people who drive those cars are probably recovering alcoholics. - -Planning for life without alcohol can seem overwhelming. That's why AA encourages its members to live sober one day at a time. - -The goal of every AA member is to stay sober today and go to bed sober tonight. Gradually, days become weeks, then months, then years. AA meetings and other activities help each recovering alcoholic stay sober, one day at a time. - -Recovering alcoholics receive—and give others—invaluable support and fellowship at these meetings. They are held at all hours, all over the world. Traders have much to learn from those meetings. - -## **An AA Meeting** - -One of the best things that a trader can do is go to an AA meeting. I especially recommend it to any trader on a losing streak. Call Alcoholics Anonymous and ask about the next "open meeting" or "beginners' meeting" in your area. - -A meeting lasts about an hour. You can sit in the back of the room and listen carefully. There is no pressure to speak, and nobody asks for your last name. - -Each meeting begins with a long-term member getting up and speaking about his or her personal struggle for recovery from alcoholism. Several other members share their experiences. There is a collection to cover expenses—give a dollar if you like. All you have to do is listen carefully, and every time you hear the word "alcohol," substitute the word "loss" for it. You will feel as if the people in the meeting are talking about your trading! - -## ■ **9. Losers Anonymous** - -A social drinker enjoys an occasional drink, but an alcoholic craves alcohol. He denies that alcohol controls and destroys his life—until he reaches a personal crisis. It may be a life-threatening illness, unemployment, abandonment by the family, or another unbearably painful event. AA calls it "hitting rock bottom." - -The pain of hitting rock bottom punctures an alcoholic's denial. He sees a stark choice—to drown or to come up for air. His first step to recovery is to admit that he is powerless over alcohol. A recovering alcoholic can never drink again. - -Loss is to a loser what alcohol is to an alcoholic. A small loss is like a single drink. A big loss is like a bender. A series of losses is like an alcoholic binge. A loser keeps switching between different markets, gurus, and trading systems. His equity shrinks while he is trying to recreate the pleasurable sensation of winning. - -Losing traders think and act like alcoholics, except that their speech is not slurred. The two groups are so similar that you can predict what a loser will do by using alcoholics as a model. - -Alcoholism is a curable disease—and so is losing. Losers can change by using the principles of Alcoholics Anonymous. - -## **The Urge to Trade** - -Successful traders treat drawdowns the way social drinkers treat alcohol. They have a little and stop. If they take several losses in a row, they take that as a signal that something isn't working: perhaps their system isn't in gear with the current market environment. It's time for a break and a fresh look at the markets. Losers, on the other hand, cannot stop—they keep trading because they are addicted to the excitement of the game and keep hoping for a big win. - -A prominent trading advisor who has since busted out wrote that to him the pleasure of trading was higher than that of sex or flying jet aircraft. Just as alcoholics proceed from social drinking to drunkenness, losers take bigger and bigger risks. They cross the hugely important line: the one between taking a business risk and gambling. Many losers don't even know that line exists. - -Losers feel the urge to trade, just as alcoholics feel the urge to drink. They make impulsive trades, go on trading binges, and try to trade their way out of a hole. - -Losers bleed money from their accounts. Most of them bust out, but some turn to managing other people's money after losing their own; still others sell advisory services, like burned-out drunks who wash glasses in a bar. - -Most losers hide their losses from themselves and from everyone else. They keep no records and throw away brokerage statements. A loser is like an alcoholic who doesn't want to know how many ounces of liquor he drank. - -## **Into the Hole** - -A loser trades in a fog and doesn't know why he keeps losing. If he knew, he would have done something about it and become a winner. A loser tries to manage his trading the way an alcoholic tries to manage his drinking. - -Losers' desperate hopes for magic solutions help advisors sell their services to the public. They switch to new trading systems, buy more software, and look for tips from new gurus. - -As losses mount and equity shrinks, a loser grows desperate and converts outright positions into spreads, doubles up on losing positions, reverses and trades in the opposite direction, and so on. All of that does him no more good than switching from hard liquor to wine can help an alcoholic. - -A losing trader careens out of control, trying to manage the unmanageable. Alcoholics die prematurely, and most traders bust out of the markets and never come back. New trading methods, hot tips, and improved software will not help a person who cannot handle himself. - -A loser keeps getting high from trading while his equity shrinks. Trying to tell him that he is a loser is like trying to take a bottle away from a drunk. A loser has to hit rock bottom before he can begin to recover. You have to change how you think in order to stop losing and begin your recovery as a trader. - -## **Trader's Rock Bottom** - -Hitting rock bottom feels horrible. It is painful and humiliating. You hit it when you lose money you cannot afford to lose. You hit it when you gamble away your savings. You hit it after you tell your friends how smart you are and later have to ask them for a loan. You hit rock bottom when the market comes roaring at you and yells: "You fool!" - -Some people hit rock bottom after only a few weeks of trading. Others keep adding money to their accounts to postpone the day of reckoning. It hurts to see a loser in the mirror. We spend our lifetime building up self-esteem. Most of us have a high opinion of ourselves. Your first impulse may be to hide, but remember, you are not alone. Almost every trader has been there. - -Many traders who hit rock bottom slink away from the market and never look back. Many who trade today will be gone in a year, if not sooner. They'll hit rock bottom, crumble, and leave. They'll try to forget trading like a bad dream. - -Some will lick their wounds and wait until the pain fades away and then return, having learned little. They'll be fearful, and their fear will further impair their trading. - -Fortunately, some traders will recoil from rock bottom to begin the process of change and growth. For these individuals, the pain of hitting rock bottom will break the vicious cycle of getting high from winning and then losing everything and crashing. *When you admit that your personal problem causes you to lose, you can begin building a new trading life. You can start developing the discipline of a winner.* - -## **Trader's First Step** - -Just as an alcoholic needs to admit that he can't control his drinking, a trader needs to admit that he cannot control his losses. The first step of an AA member is to say: "I am an alcoholic, I am powerless over alcohol." As a trader, you have to take your first step and say: "I am a loser, I am powerless over losses." - -Recovering alcoholics struggle to stay sober, one day at a time. A trader can recover, using the principles of AA. Now you have to struggle to trade without losses, one day at a time. - -You may say that's impossible. What if you buy, and the market immediately declines? What if you sell short, and it turns out to be the bottom tick, and the market immediately rallies? Even the best traders lose money on some trades. - -The answer is to draw a line between a businessman's risk and a loss. As traders, we always take businessman's risks, but we may never take a loss greater than this predetermined risk. - -For example, a storekeeper takes a risk every time he stocks new merchandise. If it doesn't sell, he'll lose money. An intelligent businessman takes only risks that will not put him out of business, even if he makes several mistakes in a row. Stocking two crates of merchandise may be a sensible business risk, but stocking a full trailer is probably a gamble. - -As a trader, you are in the business of trading. You need to define your businessman's risk—the maximum amount of money you'll risk on any single trade. There is no standard dollar amount, just as there is no standard business. An acceptable businessman's risk depends, first of all, on the size of your trading account. It also depends on your trading method and pain tolerance. - -The concept of a businessman's risk will change the way you manage your money (see Section 9, "Risk Management"). The absolute maximum a trader may risk on any trade is two percent of his account equity. For example, if you have \$30,000 in your account, you may not risk more than \$600 per trade, and if you have \$10,000, you may not risk more than \$200. If your account is small, limit yourself to trading fewer shares, less expensive futures, or mini-contracts. If you see an attractive trade, but a logical stop would have to be placed where more than 2 percent of equity would be at risk—pass on that trade. You may risk less, but you may never risk more. You must avoid risking more than 2 percent on a trade the way a recovering alcoholic avoids bars. - -A trader who blames high commissions on a broker and slippage on a floor trader gives up control of his trading life. Try to reduce both, but take responsibility for them. If you lose even a dollar more than your businessman's risk, including commissions and slippage, you are a loser. - -Do you keep good trading records? Poor record-keeping is a sure sign of a gambler. Good businessmen keep good records. Your trading records must show the date and price of every entry and exit, slippage, commissions, stops, all adjustments of stops, reasons for entering, objectives for exiting, maximum paper profit, maximum paper loss after a stop was hit, and any other data necessary to review and fully understand your trade later in the future. - -If you bail out of a trade within your businessman's risk, it is normal business. There is no bargaining, no waiting for another tick, no hoping for a change. Losing a dollar more than your established businessman's risk is like getting drunk, getting into a brawl, getting sick to your stomach on your way home, and waking up in a gutter. You would never want that to happen. - -## **A Meeting for One** - -When you go to an AA meeting, you'll see people who have not had a drink in years stand up and say: "Hello, my name is so-and-so, and I am an alcoholic." Why do they call themselves alcoholics after years of sobriety? Because if they think they have beaten alcoholism, they will start drinking again. If a person stops thinking he is an alcoholic, he is free to take a drink, then another, and will probably end up in the gutter again. A person who wants to stay sober must remember that he is an alcoholic for the rest of his life. - -Traders would benefit from our own self-help organization—I'd call it Losers Anonymous. Why not Traders Anonymous? Because a harsh name helps focus attention on our self-destructive tendencies. After all, Alcoholics Anonymous doesn't call itself Drinkers Anonymous. As long as you call yourself a loser, you'll focus on avoiding losses. - -Several traders have argued against what they thought was the "negative thinking" of Losers Anonymous. A retired woman from Texas, a highly successful trader, described her approach. She is very religious, prays every morning, and then drives to an office where she actively trades. Whenever the market starts moving against her, she cuts her losses very fast because it would not please the Lord for her to lose His money. I thought that our methods were similar. The goal is to cut losses due to some objective, external rule. - -Trading within a businessman's risk is like living without alcohol. A trader has to admit that he is a loser, just as a drunk has to admit that he is an alcoholic. Then he can begin his journey to recovery. - -This is why every morning before trading I suggest saying: "Good morning, my name is so-and-so, and I am a loser. I have it in me to do serious financial damage to my account." This is like an AA meeting—it keeps your mind focused on the first principles. Even if you take thousands of dollars out of the market today, tomorrow you say: "Good morning, my name is so-and-so and I am a loser." - -A friend of mine joked: "When I sit in front of my quote screen in the morning, I say, 'My name is John, and I'm gonna rip your throat out.'" His thinking generates tension. "Losers Anonymous" thinking generates serenity. A trader who feels serene and relaxed can focus on looking for the best and safest trades. When a sober man and a drunk enter a race, you know who is more likely to win. A drunk may win once in a while, but the sober man is the one to bet on. You want to be the sober man in that race. - -## ■ **10. Winners and Losers** - -We come to trading from different walks of life and bring along our mental baggage. Many of us find that when we act in the market the way we do in our everyday life, we lose money. Most of all, your success or failure depends on your ability to use intellect rather than act emotionally. A trader who feels overjoyed when he wins and depressed when he loses is at the mercy of market moves and cannot accumulate equity. - -To be a winner in the market you must act coolly and responsibly. The pain of losing drives people to look for magic methods. At the same time, they discard much of what is useful in their professional or business backgrounds. - -## **Like an Ocean** - -The market is like an ocean—it moves up and down regardless of what you wish. You may feel joy when you buy a stock and it explodes in a rally. You may feel drenched with fear when you go short but the market rises, melting your equity with every uptick. Those feelings have nothing to do with the market—they exist only inside of you. - -The market doesn't know you exist. You can do nothing to influence it. The ocean doesn't care about your welfare, but it has no wish to hurt you either. You can only control your behavior. - -A sailor cannot control the ocean, but he can control himself. He can study currents and weather patterns, learn good sailing techniques, and gain experience. He can learn when to sail and when to stay in the harbor. A successful sailor uses his intelligence. - -An ocean can be useful—you can fish in it and use its surface to get to other islands. An ocean can be dangerous—you can drown in it. The more rational your approach, the more likely you are to get what you want. On the other hand, when you act out your emotions, you cannot focus on the reality of the ocean. - -A trader has to study trends and reversals in the market the way a sailor studies the ocean. He must trade on a small scale while learning to handle his account. You can never control the market, but you can learn to control yourself. - -After a string of profitable trades, a beginner may feel he can walk on water. He starts taking wild risks and blows up his account. On the other hand, an amateur who takes several losses in a row often feels so demoralized that he cannot place an order even when his system gives him a signal to buy or sell. If trading makes you feel elated or frightened, you cannot fully use your intellect. When joy sweeps you off your feet, you will make irrational trades and lose. When fear grips you, you'll miss profitable trades. - -A sailor whose boat is being battered by ocean winds battens his sails—reduces sail area. The first remedy for a trader battered by the market is to reduce the size of his trades. Trade small while you're learning or when feeling stressed. - -A professional trader uses his head and stays calm. Only amateurs become excited or depressed. Emotional trading is a luxury that nobody can afford. - -## **Emotional Trading** - -Most people crave excitement and entertainment. Singers, actors, and professional athletes command much higher incomes than such mundane workmen as physicians, pilots, or college professors. People love to have their nerves tickled—they buy lottery tickets, fly to Las Vegas, and slow down to gawk at road accidents. - -Emotional trading can be very addictive. Even those who drop money in the markets receive a fantastic entertainment value. - -The market is a spectator sport and a participant sport rolled into one. Imagine going to a major-league ball game in which you are not confined to the bleachers. Pay a few hundred dollars and be allowed to run onto the field and join the game. If you hit the ball right, you'll get paid like a professional. - -You would probably think twice before running onto the field the first few times. This cautious attitude is responsible for the well-known "beginner's luck." Once a beginner hits the ball right a few times and collects his pay, he is likely to get the idea that he is as good as the pros or even better and could make a good living from the game. Greedy amateurs start running onto the field too often, even when there are no good playing opportunities. Before they know what hit them, a short string of losses destroys their accounts. - -The market is among the most entertaining places on the face of the Earth, but emotional decisions are lethal. If you ever go to a racetrack, turn around, and watch the humans instead of horses. Gamblers stomp their feet, jump up and down, and yell at horses and jockeys. Thousands of people act out their emotions. Winners embrace, and losers tear up their tickets in disgust. The joy, the pain, and the intensity of wishful thinking are caricatures of what happens in the markets. A cool handicapper who makes his living at the track does not get excited, yell, or bet the bulk of his roll on a single race, or even in a single day.1 - -Casinos love drunks. They pour gamblers free drinks to make them more emotional and gamble more. Casinos also throw out calm and intelligent card-counters. There is less free liquor on Wall Street than in a casino, but at least here, they do not throw you out for being a good trader. - -## **In Charge of Your Life** - -When a monkey hurts its foot on a tree stump, he flies into a rage and kicks the piece of wood. You laugh at a monkey, but do you laugh at yourself when you act like him? If the market drops while you are long, you may double up on your losing trade or else flip and go short, trying to get even. This is acting emotionally instead of using your intellect. What's the difference between a trader trying to get back at the market and a monkey kicking a tree stump? Acting out of anger, fear, or elation destroys the chance of success. You have to analyze your behavior instead of acting out your feelings. - -We get angry at the market; we become afraid of it and develop silly superstitions. All the while, the market keeps cycling through its rallies and declines like an ocean going through its storms and calm periods. Mark Douglas writes in *The Disciplined Trader* that in the market, "There is no beginning, middle, or end—only what you create in your own mind. Rarely do any of us grow up learning to operate in an arena that allows for complete freedom of creative expression, with no external structure to restrict it in any way." - -We try to cajole or manipulate the market, acting like the ancient emperor Xerxes, who ordered his soldiers to horsewhip the sea for sinking his fleet. Most of us aren't aware of how manipulative we are, how we bargain and act out our feelings. Most of us consider ourselves the center of the universe and expect every person or group to be either good or bad to us. This does not work in the market, which is completely impersonal. - -Leston Havens, a Harvard University psychiatrist, wrote: "Cannibalism and slavery are probably the oldest manifestations of human predation and submission. Although both are now discouraged, their continued existence in psychological forms demonstrates that civilization has achieved great success in moving from the concrete and physical to the abstract and psychological, while persisting in the same purposes." Parents threaten their children, bullies hit them, and teachers try to bend their will in school. Little wonder that most of us grow up either hiding in a shell or learning how to manipulate others in self-defense. Acting independently doesn't feel natural to us—but that is the only way to succeed in the market. - -1 I carry in my wallet a free lifetime pass to New York's Belmont racetrack that belonged to my late great friend Lou Taylor. It looks like an employee card, but on the "position" line it says—winner. He won many handicapping championships and continued to take money from the racetrack until a few months before he died. - -Douglas warns, "If the market's behavior seems mysterious to you, it's because your own behavior is mysterious and unmanageable. You can't really determine what the market is likely to do next when you don't even know what you'll do next." Ultimately, "the one thing you can control is yourself. As a trader, you have the power either to give yourself money or to give your money to other traders." He adds, "The traders who can make money consistently...approach trading from the perspective of a mental discipline." - -All of us have our own demons to exorcise on the journey to becoming successful traders. Here are several rules that worked for me as I grew from a wild amateur into an erratic semiprofessional and finally into a calm professional trader. You may change this list to suit your personality. - -- 1. Decide that you are in the market for the long haul—that is, you want to be a trader even 20 years from now. -- 2. Learn as much as you can. Read and listen to experts, but keep a degree of healthy skepticism about everything. Ask questions, and do not accept experts at their word. -- 3. Do not get greedy and rush to trade—take your time to learn. The markets will be there, offering more good opportunities in the months and years ahead. -- 4. Develop a method for analyzing the market—that is, "If A happens, then B is likely to happen." Markets have many dimensions—use several analytic methods to confirm trades. Test everything on historical data and then in the markets, using real money. Markets keep changing—you need different tools for trading bull and bear markets and transitional periods as well as a method for telling the difference (see the sections on technical analysis). -- 5. Develop a money management plan. Your first goal must be long-term survival; your second goal, a steady growth of capital; and your third goal, making high profits. Most traders put the third goal first and are unaware that goals 1 and 2 exist (see Section 9, "Risk Management"). -- 6. Be aware that a trader is the weakest link in any trading system. Go to a meeting of Alcoholics Anonymous to learn how to avoid losses or develop your own method for cutting out impulsive trades. -- 7. Winners think, feel, and act differently than losers. You must look within yourself, strip away your illusions, and change your old ways of being, thinking, and acting. Change is hard, but if you want to be a professional trader, you have to work on changing and developing your personality. - -In order to succeed, you need drive, knowledge, and discipline. Money is important, but less so than any of those qualities. If you have enough drive to work through this book, you'll acquire much knowledge, and then we'll close the circle by returning to the topic of discipline in the final chapters. - -# Mass Psychology - -Wall Street is named after a wall that kept farm animals from wandering away from the settlement at the southern tip of Manhattan. The farming legacy lives on in the language of traders. Four animals are mentioned especially often on Wall Street: bulls and bears, hogs and sheep. Traders say: "Bulls make money, bears make money, but hogs get slaughtered." - -A bull fights by striking up with his horns. A bull is a buyer—a person who bets on a rally and profits from a rise in prices. A bear fights by striking down with his paws. A bear is a seller—a person who bets on a decline and profits from a fall in prices.1 - -Hogs are greedy. Some of them buy or sell positions that are too large for their accounts and get slaughtered by a small adverse move. Other hogs overstay their positions—they keep waiting for profits even after the trend reverses. Sheep are passive and fearful followers of trends, tips, and gurus. They sometimes put on a bull's horns or a bearskin and try to swagger. You can recognize them by their pitiful bleating when the market becomes volatile. - -Whenever the market is open, bulls are buying, bears are selling, hogs and sheep get trampled underfoot, and the undecided traders wait on the sidelines. Quote screens around the world show a steady stream of the latest prices for any trading vehicle. Thousands of eyes are focused on each price as people make trading decisions. - -1 There is plenty of room in the market for both, and occasionally even at the same time. It always amuses me in SpikeTrade when two elite traders pick the same stock—one long and the other short. Often by the end of the week both are profitable, proving that how you manage your trade is more important than what stock and direction you pick. - -## ■ **11. What Is Price?** - -Traders can be divided into three groups: buyers, sellers, and undecided. Buyers want to pay as little as possible, and sellers want to charge as much as possible. Their permanent conflict is reflected in bid-ask spreads, discussed in the Introduction. "Ask" is what a seller asks for his merchandise. "Bid" is what a buyer offers for that merchandise. - -A buyer has a choice: to wait until prices come down or pay what the sellers demand. A seller has a similar choice: wait until prices rise or accept a lower offer for his merchandise. - -A trade occurs when there is a momentary meeting of two minds: an eager bull agrees to a seller's terms and pays up, or an eager bear agrees to a buyer's terms and sells a little cheaper. - -The presence of undecided traders puts pressure on bulls and bears. Buyers and sellers move fast because they know that they're surrounded by a crowd of undecided traders who may step in and snatch away their deal at any moment. - -The buyer knows that if he thinks too long, another trader can step in and buy ahead of him. A seller knows that if he tries to hold out for a higher price, another trader may step in and sell at a lower price. The crowd of undecided traders makes buyers and sellers more willing to deal with their opponents. A trade occurs when there is a meeting of two minds. - -## **A Consensus of Value** - -Each tick on your quote screen represents a deal between a buyer and a seller. - -Buyers are buying because they expect prices to rise. Sellers are selling because they expect prices to fall. Buyers and sellers are surrounded by crowds of undecided traders who put pressure on them because they may become buyers or sellers themselves. - -Buying by bulls pushes markets up, selling by bears pushes them down, and undecided traders make everything happen faster by creating a sense of urgency among buyers and sellers. - -Traders come to the markets from all over the world: in person, via computers, or through their brokers. Everybody has a chance to buy and to sell. *Each price is a momentary consensus of value of all market participants, expressed in action.* Prices are created by masses of traders—buyers, sellers, and undecided people. The patterns of prices and volume reflect mass psychology of the markets. - -## **Behavior Patterns** - -Huge crowds trade on stock, commodity, and option exchanges. Big money and little money, smart money and dumb money, institutional money and private money, long-term investors and short-term traders, all meet at the exchange. *Each price represents a momentary consensus of value between buyers, sellers, and undecided* *traders at the moment of transaction. There is a crowd of traders behind every pattern on the screen*. - -Crowd consensus changes from moment to moment. Sometimes it gets established in a very low-key environment, and at other times the environment turns wild. Prices move in small increments during quiet times. When a crowd becomes either spooked or elated, prices begin to jump. Imagine bidding for a life preserver aboard a sinking ship—that's how prices leap when masses of traders become emotional about a trend. An astute trader aims to enter the market during quiet times and take profits during wild times. That, of course, is the total opposite of how amateurs act: they jump in or out when prices begin to run, but grow bored and not interested when prices are sleepy. - -Chart patterns reflect swings of mass psychology in the financial markets. Each trading session is a battle between bulls, who make money when prices rise, and bears, who profit when they fall. The goal of a serious technical analyst is to discover the balance of power between bulls and bears and bet on the winning group. If bulls are much stronger, you should buy and hold. If bears are much stronger, you should sell and sell short. If both camps are about equal in strength, a wise trader stands aside. He lets bulls and bears fight with each other, and enters a trade only when he is reasonably sure which side is likely to win. - -Prices and volume, along with the indicators that track them, reflect crowd behavior. Technical analysis is similar to poll taking. Both combine science and art: They are partly scientific because we use statistical methods and computers; they are partly artistic because we use personal judgment and experience to interpret our findings. - -## ■ **12. What Is the Market?** - -What's the reality behind market quotes, numbers, and graphs? When you check prices in your newspaper, follow ticks on your screen, or plot an indicator on a chart, what exactly are you looking at? What *is* this market that you want to analyze and trade? - -Amateurs act as if the market is a giant happening, a ball game in which they can join the professionals and make money. Traders from a scientific or engineering background often treat the market as a physical event and apply the principles of signal processing, noise reduction, etc. By contrast, all professional traders know full well that the market is a huge mass of people. - -Every trader tries to take money from others by outguessing them on the probable direction of the market. The members of the market crowd live on different continents, but are brought together by modern telecommunications in the pursuit of profit at each other's expense. *The market is a huge crowd of people. Each member of the crowd tries to take money from others by outsmarting them.* The market is a uniquely harsh environment because everyone is against you, and you are against everyone. - -Not only is the market harsh, you have to pay whenever you enter and exit. You have to jump over the barriers of commissions and slippage before you can collect a dime. The moment you place an order, you owe your broker a commission—you're behind the game the moment you enter. Market makers try to hit you with slippage when your order arrives for execution. They try to take another bite out of your account when you exit. *In trading, you compete against some of the brightest minds in the world, while fending off the piranhas of commissions and slippage.* - -## **Worldwide Crowds** - -In the old days, markets were small, and many participants knew one another. The New York Stock Exchange was formed in 1792 as a club of two dozen brokers. On sunny days, they used to gather under a cottonwood tree, and on rainy days, they moved to Fraunces Tavern. As soon as those brokers organized the New York Stock Exchange, they stuck the public with fixed commissions, which lasted for the next 180 years. - -These days, the few remaining floor traders are on the way out. Most of us are linked to the market electronically. Still, as we watch the same quotes on our screens and read the same articles in the financial media, we become members of the market crowd—even if we live thousands of miles away from one another. Thanks to modern telecommunications, the world is becoming smaller, while the markets are growing. The euphoria of London flows to New York, and the gloom of Tokyo infects Frankfurt. - -When you analyze the market, you are looking at crowd behavior. Crowds behave alike in different cultures on different continents. Social psychologists have uncovered several laws that govern crowd behavior, and a trader needs to understand them in order to see how the market crowd influences him. - -## **Groups, Not Individuals** - -Most people feel a strong urge to join the crowd and "act like everybody else." This primitive urge clouds your judgment when you put on a trade. A successful trader must think independently. He needs to be strong enough to analyze the market alone and carry out his trading decisions. - -Crowds are powerful enough to create trends. The crowd may not be too bright, but it is stronger than any of us. Never buck a trend. If a trend is up, you should only buy or stand aside. Never sell short just because "the prices are too high"—never argue with the crowd. You do not have to run with the crowd—but you shouldn't run against it. - -Respect the strength of the crowd—but don't fear it. Crowds are powerful, but primitive, their behavior simple and repetitive. A trader who thinks for himself can take money from crowd members. - -## **The Source of Money** - -Do you ever stop to wonder where your expected profits will come from? Is there money in the markets because of higher company earnings, or lower interest rates, or a good soybean crop? *The only reason there is money in the markets is that other traders put it there. The money you want to make belongs to other people who have no intention of giving it to you*. - -Trading means trying to take money from other people, while they are trying to take yours—that's why it is such a hard business. Winning is especially difficult because brokers and floor traders take money from winners and losers alike. - -Tim Slater compared trading to a medieval battle. A man used to go on a battlefield with his sword and try to kill his opponent, who was trying to kill him. The winner took the loser's weapons, his chattels, and his wife, and sold his children into slavery. Now we go to the exchanges instead of an open field. When you take money away from a man, it is not that different from drawing his blood. He may lose his house, his chattels, and his wife, and his children will suffer. - -An optimistic friend of mine once snickered that there are plenty of poorly prepared people on the battlefield: "Ninety to ninety-five percent of the brokers don't know the first thing about research. They don't know what they're doing. We have the knowledge, and some poor people who do not have it are just giving their money away to charity." This theory sounds good, but he soon found out that it was wrong—there is no easy money in the market. - -Sure enough, there are plenty of dumb sheep waiting to be fleeced or slaughtered. The sheep are easy—but if you want a piece of their meat, you've got to fight some very dangerous competitors. There are mean professionals: American gunslingers, English knights, German landsknechts, Japanese samurai, and other warriors, all going after the same hapless sheep. Trading means battling crowds of hostile people, while paying for the privilege of entering the battle and leaving it, whether alive, wounded, or dead. - -## **Inside Information** - -There is at least one group of people who get information before us. Records show that corporate insiders as a group consistently make profits in the stock market. And those are legitimate trades, reported by insiders to the Securities and Exchange Commission. They represent the tip of the iceberg—but there is a great deal of illegitimate insider trading. - -People who trade on inside information are stealing our money. The insider trials have landed some of the more notorious insiders in prison. Convictions for insider trading continue at a steady pace, especially after bull markets collapse. After the 2008 debacle, a group of executives from the Galleon fund, led by its CEO, have been sentenced to lengthy jail terms, while a former board member of several leading U.S. corporations got two years behind bars, and recently a money manager from SAC Capital was convicted. - -People convicted during the insider trials were caught because they became greedy and careless. The tip of the iceberg has been shaved down, but its bulk continues to float, ready to hit any account that comes in contact with it. - -Trying to reduce insider trading is like trying to get rid of rats on a farm. Pesticides keep them under control, but do not root them out. A retired chief executive of a publicly traded firm explained to me that a smart man does not trade on inside information but gives it to his golfing buddies at a country club. Later they give him inside information on their companies, and both profit without being detected. The insider network is safe as long as its members follow the same code of conduct and don't get too greedy. Insider trading is legal in the futures markets, and until recently it was legal for congressmen, senators, and their staff. - -Charts reflect all trades by all market participants—including insiders. They leave their footprints on the charts just like everyone else—and it is our job as technical analysts to follow them to the bank. Technical analysis can help you detect insider buying and selling. - -## ■ **13. The Trading Scene** - -Humans have traded since the dawn of history—it was safer to trade with your neighbors than raid them. As society developed, money became the medium of exchange. Stock and commodity markets are among the hallmarks of an advanced society. One of the key economic developments in Eastern Europe following the collapse of communism was the establishment of stock and commodity exchanges. - -Today, stock, futures, and options markets span the globe. It took Marco Polo, a medieval Italian merchant, 15 years to get from Italy to China and back. Now, when a European trader wants to buy gold in Hong Kong, he can get his order filled in seconds. There are hundreds of stock and futures exchanges around the world. All exchanges must meet three criteria, first developed in the agoras of ancient Greece and the medieval fairs of Western Europe: an established location, rules for grading merchandise, and defined contract terms. - -## **Individual Traders** - -Private traders usually come to the market after a successful career in business or in the professions. An average private futures trader in the United States is a 50-yearold, married, college-educated man. The two largest occupational groups among futures traders are farmers and engineers. - -Most people trade for partly rational and partly irrational reasons. Rational reasons include the desire to earn a large return on capital. Irrational reasons include gambling and a search for excitement. Most traders are not aware of their irrational motives. - -Learning to trade takes time, money, and work. Few individuals rise to the level of professionals who can support themselves by trading. Professionals are extremely serious about what they do. They satisfy their irrational goals outside the markets, while amateurs act them out in the marketplace. - -The major economic role of a trader is to support his broker—to help him pay his mortgage bills and keep his children in private schools. In addition, the role of a speculator is to help companies raise capital in the stock market and to assume price risk in the commodities markets, allowing producers to focus on production. These lofty economic goals are far from a speculator's mind when he places his orders to buy or sell. - -## **Institutional Traders** - -Institutions are responsible for a huge volume of trading, and their deep pockets give them several advantages. They pay low institutional commissions. They can afford to hire the best researchers and traders. A friend of mine who headed a trading desk at a bank based some of his decisions on a service provided by a group of former CIA officers. He got some of his best ideas from their reports, while the substantial annual fee was small potatoes for his firm compared to its huge trading volume. Most private traders do not have such opportunities. - -Some large firms have intelligence networks that enable them to act before the public. One day, when oil futures rallied in response to a fire on a platform in the North Sea, I called a friend at an oil firm. The market was frantic, but he was happy, having bought oil futures half an hour before they exploded. He got a telex from an agent in the area of the fire before the reports appeared on the newswire. Timely information is priceless, but only a large company can afford an intelligence network. - -An acquaintance who traded successfully for a Wall Street investment bank felt lost when he quit to trade for himself. He discovered that a real-time quote system in his Park Avenue apartment didn't give him news as fast as the squawk box on the trading floor of his old firm. Brokers from around the country used to call him with the latest ideas because they wanted his orders. "When you trade from your house, you are never the first to hear the news," he says. - -The firms that deal in both futures and cash markets have two advantages. They have true inside information, and they are exempt from speculative position limits that exist in many futures markets. I went to visit an acquaintance at a multinational oil company; after passing through security barriers tighter than at an airport, I walked down a glass corridor that overlooked rooms where clusters of men huddled around monitors trading oil products. When I asked my host whether his traders were hedging or speculating, he looked me straight in the eye and said, "Yes." I asked again and received the same answer. Companies crisscross the thin line between hedging and speculating, using inside information. - -In addition to the informational advantage, employees of trading firms have a psychological one—they can be more relaxed because their own money isn't at risk. When young people tell me of their interest in trading, I tell them to get a job with a trading firm and learn on someone else's dime. Firms almost never hire traders past their mid-twenties. - -How can an individual coming later to the game compete against institutions and win? - -The Achilles heel of most institutions is that they *have* to trade, while an individual trader is free to trade or stay out of the market when he wants. Banks have to be active in the bond market and grain producers have to be active in the grain market at almost any price. An individual trader is free to wait for the best opportunities. - -**38** MASS PSYCHOLOGY - -Most private traders fritter away this fantastic advantage by overtrading. An individual who wants to succeed against the giants must develop patience and eliminate greed. *Remember, your goal is to trade well, not to trade often.* - -Successful institutional traders receive raises and bonuses. Even a high bonus can feel puny to someone who earns millions of dollars for his firm. Successful institutional traders often talk of quitting and going to trade for themselves. Very few of them manage to make this transition. - -Most traders who leave institutions get caught up in the emotions of fear, greed, elation, and panic when they start risking their own money. They seldom do well trading for their own accounts—another sign that psychology is at the root of trading success or failure. Few institutional traders realize to what a large extent they owe their success to their trading managers, who control their risk levels. Going out on your own means becoming your own manager—we'll return to this in a later chapter, when we focus on how to organize your trading. - -## **The Sword Makers** - -Just as medieval knights shopped for the sharpest swords, modern traders shop for the best trading tools. The growing access to good software and declining commission rates are creating a more level playing field. A computer allows you to speed up your research and follow more leads. It helps you analyze more markets in greater depth. We'll return to computers and software in Chapter 21, "Computers in Trading," but here it is in brief. - -There are three types of trading software: toolboxes, black boxes, and gray boxes. A **toolbox** allows you to display data, draw charts, plot indicators, change their parameters, and test your trading systems. Toolboxes for options traders include option valuation models. Adapting a good toolbox to your needs can be as easy as adjusting the seat of your car. - -In 1977, I bought the first ever toolbox for computerized technical analysis. It cost \$1,900 plus monthly data fees. Today, inexpensive, and even free, software places powerful tools at everyone's fingertips. I illustrated most of the concepts in this book using Stockcharts.com because I wanted my new book to be useful to as many traders as possible. - -Stockcharts.com evens out the playing field for traders. It is clear, intuitive, and rich in features. Its basic version is free, although I used its inexpensive "members' version" for higher quality charting. I still remember how hard it was in the beginning and want to show you how much analytic power you can have for free or at a very minimal cost. - -What goes on inside a **black box** is secret. You feed it data, and it tells you what and when to buy and sell. It is like magic—a way to make money without thinking. Black boxes are usually sold with excellent historical track records. This is only natural because they were created to fit old data. Markets keep changing, and black boxes keep blowing up, but new generations of losers keep buying them. If you're in the market for a black box, remember that there is a guy in Brooklyn who has a bridge for sale. - -**Gray boxes** straddle the fence between toolboxes and black boxes. These packages are usually put out by prominent market personalities. They disclose the general logic of their system and allow you to adjust some of their parameters. - -## **Advisors** - -Some newsletters provide useful ideas and point readers in the direction of trading opportunities. A few offer educational value. Most sell an illusion of being an insider. Newsletters are good entertainment. Your subscription rents you a pen pal who sends often amusing and interesting letters and never asks you to write back, except for a check at renewal time. Freedom of the press in the United States allows even a convicted felon to go online and start sending out a financial advisory letter. Quite a few of them do. - -The "track records" of various newsletters are largely an exercise in futility because hardly anybody takes every trade suggested by a newsletter. Services that rate newsletters are for-profit affairs run by small businessmen whose wellbeing depends on the well-being of the advisory industry. Rating services may occasionally tut-tut an advisor, but they dedicate most of their energy to loud cheerleading. - -I used to write an advisory newsletter decades ago: worked hard, delivered straight talk, and received good ratings. I saw from the inside a tremendous potential for fudging results. This is a well-kept secret of the advisory industry. - -After looking at my letters, a prominent advisor told me that I should spend less time on research and more on marketing. The first principle of letter writing is: "If you have to make forecasts, make a lot of them." Whenever a forecast turns out right, double the volume of promotional mail. - -## ■ **14. The Market Crowd and You** - -Markets are loosely organized crowds whose members bet that prices will rise or fall. Since each price represents crowd consensus at the moment of transaction, traders are betting on the future opinion and mood of the crowd. The crowd keeps swinging from hope to fear and from indifference to optimism or pessimism. Most people don't follow their own trading plans because they get swept up in the crowd's feelings and actions. - -As bulls and bears battle in the market, the value of your open positions soars or sinks, depending on the actions of total strangers. You can't control the markets. You can only set your position size and decide whether and when to enter or exit your trades. - -Most traders feel jittery entering a trade. Their judgment becomes clouded after they join the crowd. Caught up in crowd emotions, many traders deviate from their plans and lose money. - -**40** MASS PSYCHOLOGY - -## **Experts on Crowds** - -Charles Mackay, a Scottish barrister, wrote his classic book, *Extraordinary Popular Delusions and the Madness of Crowds*, in 1841. He described several mass manias, including the Tulip Mania in Holland in 1634 and the South Seas investment bubble in England in 1720. - -The tulip craze began as a bull market in tulip bulbs. The long bull market convinced the prosperous Dutch that tulips would continue to appreciate. Many abandoned their businesses to grow tulips, trade them, or become tulip brokers. Banks accepted tulips as collateral and speculators profited. Finally, that mania collapsed in waves of panic selling, leaving people destitute and the nation shocked. Mackay sighed, "Men go mad in crowds, and they come back to their senses slowly and one by one." - -In 1897, Gustave LeBon, a French philosopher and politician, wrote *The Crowd.* A trader who reads it today can see his reflection in a century-old mirror. - -LeBon wrote that when people gather in a crowd, "Whoever be the individuals that compose it, however like or unlike be their mode of life, their occupations, their character, or their intelligence, the fact that they have been transformed into a crowd puts them in possession of a sort of collective mind which makes them feel, think, and act in a manner quite different from that in which each individual of them would feel, think, and act were he in a state of isolation." - -People change when they join crowds. They become more credulous and impulsive, anxiously search for a leader, and react to emotions instead of using their intellect. An individual who becomes involved in a group becomes less capable of thinking for himself. - -*Group members may catch a few trends, but they get killed when trends reverse. Successful traders are independent thinkers.* - -## **Why Join?** - -People have been joining crowds for safety since the dawn of time. If a Stone Age hunter encountered a saber-toothed tiger, he had a very slim chance of coming out alive, but if hunters went as a group, most were likely to survive. Loners got killed and left fewer offspring. Since group members were more likely to survive, the tendency to join groups appears to have been bred into our genes. - -Our society glorifies free will, but we carry many primitive impulses beneath the thin veneer of civilization. We want to join groups for safety and be led by strong leaders. The greater the uncertainty, the stronger our wish to join and to follow. - -No saber-toothed tigers roam the canyons of Wall Street, but your financial survival is at risk. The value of your position rises and falls because of buying and selling by total strangers. Your fear swells up because you can't control prices. This uncertainty makes most traders look for a leader who will tell them what to do. - -You may have rationally decided to go long or short, but the moment you put on a trade, the crowd starts sucking you in. You start losing your independence when you watch prices like a hawk and become elated when they go your way or depressed if they go against you. You are in trouble when you impulsively add to losing positions or reverse them. You lose your independence when you start trusting gurus more than yourself and don't follow your own trading plan. When you notice this happening, try to come back to your senses. If you can't regain your composure, exit your trades and go flat. - -## **Crowd Mentality** - -When people join crowds, their thinking becomes primitive and they become more prone to act on impulse. Crowds swing from fear to glee, from panic to euphoria. A scientist can be cool and rational in his lab but make harebrained trades after being swept up in the mass hysteria of the market. A group can suck you in, whether you trade from a crowded brokerage office or a remote mountaintop. When you let others influence your trading decisions, your chance of success goes up in smoke. - -Group loyalty was essential for a prehistoric hunter's survival. Joining a union can help even an incompetent performer keep his job. The market is different: joining a group tends to hurt you. - -Many traders are puzzled why markets reverse immediately after they dump their losing position. This happens because crowd members are gripped by the same fear and everybody dumps at the same time. Once the selling fit has ended, the market has nowhere to go but up. Optimism returns to the marketplace, and the crowd forgets fear, grows greedy, and goes on a new buying binge. - -The crowd is bigger and stronger than you. No matter how smart you are, you cannot argue with the crowd. You have only one choice—to join the crowd or to act independently. - -Crowds are primitive, and your trading strategies should be simple. You don't have to be a rocket scientist to design a winning trading method. If the trade goes against you—cut your losses and run. Never argue with the crowd—simply use your judgment to decide when to join and when to leave. - -*Your human nature leads you to give up your independence under stress. When you put on a trade, you feel the desire to imitate others, overlooking objective signals. This is why you need to write down and follow your trading system and money management rules. They represent your rational individual decisions, made before you entered a trade.* - -## **Who Leads?** - -An inexperienced trader may feel intense joy when prices move in his favor. He may feel angry, depressed, and fearful when prices move against him, anxiously waiting to see what the market will do to him next. Traders become crowd members when they feel stressed or threatened. Battered by emotions, they lose their independence and begin imitating other group members, especially the group leader. - -When children feel frightened, they want their parents and other grown-ups to tell them what to do. They transfer that attitude to teachers, doctors, ministers, bosses, and assorted experts. Traders turn to gurus, trading system vendors, newspaper columnists, and other market leaders. But, as Tony Plummer brilliantly pointed out in his book, *Forecasting Financial Markets*, the main leader of the market is price. - -**42** MASS PSYCHOLOGY - -*Price is the leader of the market crowd*. Traders all over the world follow the upticks and downticks. Price seems to say to traders, "Follow me, and I'll show you the way to riches." Most traders consider themselves independent. Few of us realize how strongly we focus on the behavior of our group leader. - -A trend that flows in your favor symbolizes a strong and generous parent calling you to share a meal. A trend that goes against you feels like dealing with an angry and punishing parent. Being gripped by such feelings, it's easy to overlook objective signals that tell you to stay or to exit a trade. You may feel happy or frightened, bargain or beg forgiveness—while avoiding the rational act of accepting reality and getting out of a losing trade. - -## **Independence** - -You need to base your trades on a carefully prepared plan instead of jumping in response to price changes. A proper plan is a written one. You need to know exactly under what conditions you will enter and exit a trade. Don't make decisions on the spur of the moment, when you are vulnerable to being sucked in by the crowd. - -You can succeed as a trader only when you think and act as an individual. The weakest part of any trading system is the trader himself. Traders fail when they trade without a plan or deviate from their plans. Plans are created by reasoning individuals. Impulsive trades are made by sweaty group members. - -*You have to observe yourself and notice changes in your mental state as you trade. Write down your reasons for entering a trade and the rules for getting out of it, including money management rules. You may not change your plan while you have an open position.* - -Sirens were sea creatures of Greek myths who sang so beautifully that sailors jumped overboard and swam to them, only to be killed. When Odysseus wanted to hear the Sirens' songs, he ordered his men to seal their ears with beeswax but to tie him to the mast. Odysseus heard the Sirens' song but survived because he couldn't jump overboard. You ensure your survival as a trader when on a clear day you tie yourself to the mast of a trading plan and money management rules. - -## **A Positive Group** - -You don't have to be a hermit—steering clear of the crowd's impulsivity doesn't mean you have to trade in total solitude. While some of us prefer doing it that way, intelligent and productive groups can exist. Their key feature has to be independent decision making. - -This concept is clearly explained in a book, *The Wisdom of Crowds,* by a financial journalist James Surowiecki. He acknowledges that members of most groups constantly influence one another, creating waves of shared feelings and actions. A smart group is different: all members make independent decisions without knowing what others are doing. Instead of impacting each other and creating emotional waves, members of an intelligent group benefit from combining their knowledge and expertise. The function of a group leader is to maintain this structure and to bring individual decisions up for a vote. - -In 2004, a year prior to reading *The Wisdom of Crowds*, I organized a group of traders along those lines. I continue to manage it with my friend Kerry Lovvorn—the SpikeTrade group. - -We run a trading competition, with each round lasting one week. After the market closes on Friday, the stock picks section of the website becomes closed to viewing by members until 3 p.m. on Sunday. During that time, any group member may submit one favorite pick for the week ahead—without knowing what other group members are doing. The picks section of the website re-opens on Sunday afternoon, allowing all members to see all picks. The race begins on Monday and ends on Friday, with prizes to winners. - -Throughout the week members exchange comments and answer questions. The site is built to encourage communication—except for weekends, when everyone must work independently. The results of leading group members, posted on the site, have been spectacular. - -The key point is that all decisions about stock selection and direction must be made in solitude, without seeing what the leaders or other members are doing. The sharing begins after all votes are in. This combination of independent decision making with sharing brings forth "the wisdom of crowds," tapping the collective wisdom of the group and its leaders. - -## ■ **15. Psychology of Trends** - -Each price represents a momentary consensus of value among market participants. Each tick reflects the latest vote on the value of a trading vehicle. Any trader can "put in his two cents worth" by giving an order to buy or sell, or by refusing to trade at the current level. - -Each price bar or candle reflects a battle between bulls and bears. When buyers feel strongly bullish, they buy more eagerly and push markets up. When sellers feel strongly bearish, they sell more actively and push markets down. - -Charts are a window into mass psychology. When you analyze charts, you analyze the behavior of trading masses. Technical indicators help make this analysis more objective. - -*Technical analysis is for-profit social psychology.* - -## **Strong Feelings** - -Ask a trader why prices went up, and you'll probably get a stock answer—more buyers than sellers. This isn't true. The number of shares or futures contracts bought and sold in any market is always equal. - -If you want to buy 100 shares of Google, someone has to sell them to you. If you want to sell 200 shares of Amazon, someone has to buy them from you. This is why the number of shares bought and sold is equal in the stock market. Furthermore, the number of long and short positions in the futures markets is always equal. Prices move up or down not because of different numbers but because of changes in the intensity of greed and fear among buyers and sellers. - -When the trend is up, bulls feel optimistic and don't mind paying up. They buy high because they expect prices to rise even higher. Bears feel afraid in an uptrend, and they agree to sell only at a higher price. When greedy and optimistic bulls meet fearful and defensive bears, the market rallies. The stronger their feelings, the sharper the rally. The rally ends only when bulls start losing their enthusiasm. - -When prices slide, bears feel optimistic and don't quibble about selling short at lower prices. Bulls are fearful and agree to buy only at a discount. While bears feel like winners, they continue to sell at lower prices, and the downtrend continues. It ends when bears start feeling cautious and refuse to sell at lower prices. - -## **Rallies and Declines** - -Few traders are purely rational human beings. There is a great deal of emotion in the markets. Most participants act on the principle of "monkey see, monkey do." The waves of fear and greed sweep up bulls and bears. - -The sharpness of any rally depends on how traders feel. If buyers feel just a little stronger than sellers, the market rises slowly. When they feel much stronger than sellers, the market rises fast. It is the job of a technical analyst to find when buyers are strong and when they start running out of steam. - -Short sellers feel trapped by rising markets, as their profits melt and turn into losses. When short sellers rush to cover, a rally can become parabolic. Fear is a much stronger emotion than greed.2 Rallies driven by short covering are especially sharp, although they do not last very long. - -Markets fall because of fear among bulls and greed among bears. Normally bears prefer to sell short on rallies, but if they expect to make a lot of money on a decline, they don't mind shorting on the way down. Fearful buyers agree to buy only below the market. As long as short sellers are willing to meet those demands and sell at a bid, the decline will continue. - -As bulls' profits melt and turn into losses, they panic and sell at almost any price. They are so eager to get out that they hit the bids under the market. Markets can drop fast when hit by panic selling. - -## **Price Shocks** - -Loyalty to the leader is the glue that holds groups together. Group members expect leaders to inspire and reward them when they are good but punish them when they are bad. Some leaders are very authoritarian, others quite democratic and informal, but every group has a leader—a leaderless group can't exist. Price functions as the leader of the market crowd. - -2 Fear is three times stronger than greed, according to research cited by Prof. Daniel Kahneman, a Nobel Prize winning behavioral economist, whose findings we'll return to again in this book. - -*Winners feel rewarded when price moves in their favor, and losers feel punished when it moves against them. Crowd members remain blissfully unaware that by focusing on price they create their own leader. Traders who feel mesmerized by prices create their own idols.* - -When the trend is up, bulls feel rewarded by a bountiful parent. The longer an uptrend lasts, the more confident they feel. When a child's behavior is rewarded, he continues to do what he did. When bulls make money, they add to long positions. While new bulls enter the market, bears feel they are being punished for selling short. Many of them cover shorts, go long, and join the bulls. - -Buying by happy bulls and covering by fearful bears pushes uptrends higher. Buyers feel rewarded, while sellers feel punished. Both feel emotionally involved, but few traders realize that they are creating the uptrend and setting up their own leader. - -Eventually a price shock occurs—a major sale hits the market, and there aren't enough buyers to absorb it. The uptrend takes a dive. Bulls feel mistreated, like children whose father slapped them during a meal, but bears feel encouraged. - -A price shock plants the seeds of an uptrend's reversal. Even if the market recovers and reaches a new high, bulls feel more skittish and bears become bolder. This lack of cohesion in the dominant group and growing optimism among its opponents makes the uptrend ready to reverse. Several technical indicators identify tops by tracing a pattern called bearish divergence (see Section 4). It occurs when prices reach a new high but the indicator reaches a lower high than it did on the previous rally. Bearish divergences mark the ends of uptrends and some of the best shorting opportunities. - -When the trend is down, bears feel like good children, praised and rewarded for being smart. They feel increasingly confident, add to short positions, and the downtrend continues. New bears come into the market. People admire winners, and the financial media keeps interviewing bears during bear markets. - -Bulls lose money in downtrends, making them feel bad. They start dumping their positions, and some of them switch sides to join bears. Their selling pushes markets lower. - -After a while, bears grow confident and bulls feel demoralized. Suddenly, a price shock occurs. A cluster of buy orders soaks up all available sell orders and lifts the market. Now bears feel like children whose father has lashed out at them in the midst of a happy meal. - -A price shock plants the seeds of a downtrend's eventual reversal because bears become more fearful and bulls grow bolder. When a child begins to doubt that Santa Claus exists, he'll seldom believe in Santa again. Even if bears recover and prices fall to a new low, several technical indicators will help identify their weakness by tracing a pattern called a bullish divergence. It occurs when prices fall to a new low but an indicator traces a shallower bottom than during the previous decline. Bullish divergences identify some of the best buying opportunities. - -## **Social Psychology** - -Free will makes individual behavior hard to predict. Group behavior is more primitive and easier to track. When you analyze markets, you analyze group behavior. You need to identify the direction in which groups are running and their changes of speed. - -Groups suck us in and cloud our judgment. The problem for most analysts is that they get caught in the emotional pull of the groups they try to analyze. - -The longer a rally continues, the more analysts get caught up in mass bullishness, ignore danger signs, and miss the eventual reversal. The longer a decline goes on, the more analysts get caught up in bearish gloom and ignore bullish signs. This is why it helps to have a written plan for analyzing markets. We have to decide in advance what indicators we will watch, how we will interpret them, and how we'll act. - -Professionals use several tools for tracking the intensity of the crowd's feelings. They watch the crowd's ability to break through recent support and resistance levels. Floor traders used to listen to the changes in pitch and volume of the roar on the exchange floor. With floor trading rapidly receding into history, you'll need special tools for analyzing crowd behavior. Fortunately, your charts and indicators reflect mass psychology in action. *A technical analyst is an applied social psychologist, usually armed with a computer*. - -## ■ **16. Managing versus Forecasting** - -I once ran into a very fat surgeon at a seminar. He told me that he had lost a quarter of a million dollars in three years trading stocks and options. When I asked him how he made his trading decisions, he sheepishly pointed to his ample gut. He gambled on hunches and used his professional income to support his habit. There are two alternatives to "gut feel": One is fundamental analysis; the other is technical analysis. - -Fundamental analysts study the actions of the Federal Reserve, follow earnings reports, examine crop reports, and so on. Major bull and bear markets reflect fundamental changes in supply and demand. Still, even if you know those factors, you can lose money trading if you are out of touch with intermediate- and short-term trends, which depend on the crowd's emotions. - -Technical analysts believe that prices reflect everything known about the market, including fundamental factors. Each price represents the consensus of value of all market participants—large commercial interests and small speculators, fundamental researchers and technicians, insiders and gamblers. - -Technical analysis is a study of mass psychology. It is partly a science and partly an art. Technicians use many scientific methods, including mathematical concepts of game theory, probabilities, and so on. They use computers to track indicators. - -Technical analysis is also an art. The bars or candles on our charts coalesce into patterns and formations. The movement of prices and indicators produces a sense of flow and rhythm, a feeling of tension and beauty that helps us sense what is happening and how to trade. - -Individual behavior is complex, diverse, and difficult to predict. Group behavior is primitive. Technicians study the behavior patterns of market crowds. They trade when they recognize patterns that preceded previous market moves. - -## **Poll-Taking** - -Politicians want to know their chances of being elected or re-elected. They make promises to voters and have poll-takers measure a crowd's response. Technical analysis is similar to political poll-taking, as both aim to read the intentions of masses. Poll-takers do it to help their clients win elections, while technicians do it for financial gain. - -Poll-takers use scientific methods: statistics, sampling procedures, and so on. They also need a flair for interviewing and phrasing questions; they have to be plugged into the emotional undercurrents of their party. Poll-taking is a combination of science and art. If a poll-taker says he is a scientist, ask him why every major political polltaker in the United States is affiliated with either the Democratic or Republican party. True science knows no party. - -A market technician must rise above party affiliation. Be neither a bull nor a bear, but only seek the truth. A biased bull looks at a chart and says, "Where can I buy?" A biased bear looks at the same chart and tries to find where he can go short. A topflight analyst is free of bullish or bearish biases. - -There is a trick to help you detect your bias. If you want to buy, turn your chart upside down and see whether it looks like a sell. If it still looks like a buy after you flip it, then you have to work on getting a bullish bias out of your system. If both charts look like a sell, then you have to work on purging a bearish bias. - -## **A Crystal Ball** - -Many traders believe that their aim is to forecast future prices. The amateurs in most fields ask for forecasts, while professionals simply manage information and make decisions based on probabilities. Take medicine, for example. A patient is brought to an emergency room with a knife wound—and the anxious family members have only two questions: "will he survive?" and "when can he go home?" They ask the doctor for a forecast. - -But the doctor isn't forecasting—he is managing problems as they emerge. His first job is to prevent the patient from dying from shock, and so he gives him painkillers and starts an intravenous drip to replace lost blood. Then he sutures damaged organs. After that, he has to watch against infection. He monitors the trend of the patient's health and takes measures to prevent complications. He is managing—not forecasting. When a family begs for a forecast, he may give it to them, but its practical value is low. - -To make money trading, you don't need to forecast the future. You have to extract information from the market and find out whether bulls or bears are in control. You need to measure the strength of the dominant market group and decide how likely the current trend is to continue. You need to practice conservative money management aimed at long-term survival and profit accumulation. You must observe how your mind works and avoid slipping into greed or fear. A trader who does all of this will succeed ahead of any forecaster. - -**48** MASS PSYCHOLOGY - -## **Read the Market, Manage Yourself** - -A tremendous volume of information pours out of the markets during trading hours. Changing prices reflect the battles of bulls and bears. Your job is to analyze this information and bet on the dominant market group. - -Whenever I hear a dramatic forecast, my first thought is "a marketing gimmick." Advisors issue them to attract attention in order to raise money or sell services. Good calls attract paying customers, while bad calls are quickly forgotten. My phone rang while I was writing the first draft of this chapter. A famous guru, down on his luck, told me that he had identified a "once-in-a-lifetime buying opportunity" in corn. He asked me to raise money for him and promised to multiply it a hundredfold in six months! I do not know how many fools he hooked, but dramatic forecasts have always been good for fleecing the public. Most people do not change. While working on this update 21 years later, I read in *The Wall Street Journal* that this same "guru" was recently punished for professional misconduct by the National Futures Association. - -Use common sense in analyzing markets. When some new development puzzles you, compare it to life outside the markets. For example, indicators may give you buy signals in two markets. Should you buy the one that declined a lot before the buy signal or the one that declined a little? Compare this to what happens to a man after a fall. If he falls down a few steps, he may dust himself off and run up again. But if he falls out of a second-story window, he's not going to run anytime soon; he needs time to recover. - -*Successful trading stands on three pillars. You need to analyze the balance of power between bulls and bears. You need to practice good money management. You need personal discipline to follow your trading plan and avoid getting high or depressed in the markets.* - -# Classical Chart Analysis - -When I bought my first stock, classical charting was the only game in town. I use quad-ruled paper and a sharp pencil to update my charts by hand. A few years later, pocket calculators became available, and I added simple moving averages. Later, a TI programmable calculator made it possible to insert tiny magnetic strips into its slit to perform more complex calculations, such as exponential moving averages and the Directional system. - -Finally, an Apple personal computer appeared on the scene; you could use its joystick to move a cursor to draw trendlines. In contrast, today's traders have access to immense analytic power at a very low cost. - -While the key concepts of classical charting remain valid, many of its tools have been eclipsed by much more powerful computerized methods. The best quality of computerized technical analysis is its objectivity. A moving average or any other indicator is either rising or falling, and there can be no argument about its direction. You may puzzle over how to interpret its signals, but the signals themselves are clear as day. - -Classical charting, on the other hand, is quite subjective, and invites wishful thinking and self-deception. You can draw a trendline across the extreme prices or across the edges of congestion zones, which will change its angle as well as its message. If you're in a mood to buy, you can draw your trendline a little steeper. If you feel like shorting and squint at a chart, you'll "recognize" a head-and-shoulders top. None of those patterns are objective. Because of their subjectivity, I've grown increasingly skeptical of claims regarding classical formations, such as pennants, head-andshoulders, etc. - -After having looked at hundreds of thousands of charts, I've concluded that the market doesn't know diagonals. It remembers price levels, which is why horizontal support and resistance lines make sense, but diagonal trendlines are subjective and open to self-deception. - -In my own trading, I use only a small number of chart patterns that are objective enough to trust. I pay attention to support and resistance zones, based on horizontal price levels. The relationship between the opening and closing prices and between the high and the low points of a price bar or a candle are also objective. I recognize "fingers," also called "kangaroo tails"— very long bars that protrude from a tight weave of prices. We'll explore these and a few other patterns in this section. - -## ■ **17. Charting** - -Chartists study market data to identify price patterns and profit from them. Most chartists work with bar or candlestick graphs that show open, high, low, and closing prices and volume. Futures traders also watch open interest. Point-and-figure chartists track only price changes and ignore time, volume, and open interest. - -Classical charting requires only a pencil and paper. It appeals to visually oriented people. Those who plot data by hand can develop a physical feel for prices. One of the costs of switching to computerized charting is losing some of that feel. - -The biggest problem with classical charting is wishful thinking. Traders seem to identify bullish or bearish patterns, depending on whether they're in a mood to buy or sell. - -Early in the twentieth century, Herman Rorschach, a Swiss psychiatrist, designed a test for exploring a person's mind. He dropped ink on 10 sheets of paper and folded each in half, creating symmetrical inkblots. Most people who peer at these sheets describe what they see: parts of the anatomy, animals, buildings, and so on. In reality, there are only inkblots! Each person sees what's on his mind. Most traders use charts as a giant Rorschach test. They project their hopes, fears, and fantasies onto the charts. - -## **Brief History** - -The first chartists in the United States appeared at the turn of the twentieth century. They included Charles Dow (1851–1902), the author of a famous stock market theory, and William Hamilton, who succeeded Dow as the editor of *The Wall Street Journal*. Dow's famous maxim was "The averages discount everything," by which he meant that the Industrial and Rail Averages reflected all knowledge about the economy. - -Dow never wrote a book, only his *Wall Street Journal* editorials. Hamilton took over the job after Dow died and laid out the principles of Dow theory in his book, *The Stock Market Barometer*. He wrote a famous "The Turn of the Tide" editorial following the 1929 crash. Robert Rhea, a newsletter publisher, brought the theory to its pinnacle in his 1932 book, *The Dow Theory*. - -The decade of the 1930s was the Golden Age of charting. Many innovators found themselves with time on their hands after the crash of 1929. Schabacker, Rhea, Elliott, Wyckoff, Gann, and others published their books during that decade. They went in two distinct directions. Some, such as Wyckoff and Schabacker, saw charts as a graphic record of supply and demand. Others, such as Elliott and Gann, searched for a perfect order in the markets—a fascinating but ultimately futile undertaking (see Chapter 5). - -In 1948, Edwards (a son-in-law of Schabacker) and Magee published *Technical Analysis of Stock Trends*, in which they popularized such concepts as triangles, rectangles, head-and-shoulders, and other chart formations, as well as support, resistance, and trendlines. Other chartists applied these concepts to commodities. - -Markets have changed a great deal since the days of Edwards and Magee. In the 1940s, the daily volume of an active stock on the New York Stock Exchange was only several hundred shares, while now it is measured in millions. The balance of power in the stock market has shifted in favor of bulls. Early chartists wrote that stock market tops were sharp and fast, while bottoms took a long time to develop. That was true in their deflationary era, but the opposite has been true since the 1950s. Now bottoms tend to form quickly, while tops tend to take longer. - -## **The Meaning of a Bar Chart** - -Chart patterns reflect the sum of buying and selling, greed and fear among investors and traders. Many charts in this book are daily, with each bar representing one trading day, but the rules for understanding weekly, daily, or intraday charts are remarkably similar. - -Remember this key principle: "*Each price is a momentary consensus of value of all market participants expressed in action.*" Based on it, each price bar provides several important pieces of information about the tug-of-war between bulls and bears (Figure 17.1). - -The **opening price** of a daily bar tends to reflect the amateurs' opinion of value. They read morning papers, find out what happened the day before, perhaps ask for a wife's approval to buy or sell, and place their orders before driving to work. Amateurs are especially active early in the day and early in the week. - -Traders who researched the relationship between opening and closing prices found that opening prices most often occur near the high or the low of the daily bar. Buying or selling by amateurs early in the day creates an emotional extreme from which prices tend to recoil later in the day. - -In bull markets, prices often make their low for the week on Monday or Tuesday, when amateurs take profits from the previous week, then rally to a new high on Thursday or Friday. In bear markets, the high for the week is often set on Monday or Tuesday, with a new low toward the end of the week. - -The **closing prices** of daily and weekly bars tend to reflect the actions of professional traders. They watch the markets throughout the day, respond to changes, and tend to dominate the last hour of trading. Many of them take profits at that time to avoid carrying trades overnight. - -**FIGURE 17.1** TSLA daily. *(Chart by Stockcharts.com)* - -#### The Meaning of a Bar Chart - -Opening prices are set by amateurs, whose orders accumulate overnight and hit the market in the morning. Closing prices are largely set by market professionals who trade throughout the day. You can see a reflection of their conflict in how often opening and closing prices occur at the opposite ends of price bars. - -The high of each bar marks the maximum power of bulls during that bar. The low of each bar marks the maximum power of bears during that bar. Slippage tends to be less when you enter or exit positions during short bars. - -Professionals as a group usually trade against the amateurs. They tend to buy lower openings, sell short higher openings, and unwind their positions as the day goes on. Traders need to pay attention to the relationship between opening and closing prices. *If prices closed higher than they opened, then market professionals were probably more bullish than amateurs. If prices closed lower than they opened, then market professionals were probably more bearish than amateurs*. It pays to trade with the professionals and against the amateurs. Candlestick charting is based, to a large extent, on the relationship between the opening and closing prices of each bar. If the close is higher, the candle is white, but if it is lower, the candle is black. - -The **high of each bar** represents the maximum power of bulls during that bar. Bulls make money when prices go up. Their buying pushes prices higher, and every uptick adds to their profits. Finally, bulls reach a point where they cannot lift prices not even by one more tick.1 The high of a daily bar represents the maximum power of bulls during the day, while the high of a weekly bar marks the maximum power of bulls during the week. - -*The highest point of a bar represents the maximum power of bulls during that bar.* - -1 A tick is the smallest price change allowed for any given trading vehicle. It may be one cent or even one hundredth of a cent (depending on the stock), a quarter point for S&P e-minis, 10 cents for gold futures, etc. - -The **low of each bar** represents the maximum power of bears during that bar. Bears make money when prices decline. They keep selling short, their selling pushes prices lower, and every downtick adds to their profits. At some point they run out of either capital or enthusiasm, and prices stop falling. The low of a daily bar marks the maximum power of bears during that day, and the low of a weekly bar identifies the maximum power of bears during that week. - -*The low of each bar shows the maximum power of bears during that bar.* - -The **closing price of each bar** reveals the outcome of the battle between bulls and bears during that bar. If prices close near the high of the daily bar, it shows that bulls won the day's battle. If prices close near the low of the day, it shows that bears won the day. Closing prices on the daily charts of futures are especially important because your account equity is "marked to market" each night. - -The **distance between the high and the low** of any bar reflects the intensity of conflict between bulls and bears. An average bar marks a relatively cool market. A bar that's only half as tall as average reveals a sleepy, disinterested market. A bar that's two times taller than average shows a boiling market where bulls and bears battle all over the field. - -Slippage (see the Introduction) tends to be less in quiet markets. It pays to enter trades during short or normal bars. Tall bars are good for taking profits. Trying to enter a position when the market is running is like jumping onto a moving train. It would be safer to wait for the next one. - -## **Japanese Candlesticks** - -Japanese rice traders began using candlestick charts some two centuries before the first chartists appeared in America. Instead of bars, their charts had rows of candles with wicks at both ends. The body of each candle represents the distance between the opening and closing prices. If the closing price is higher than the opening, the body is white, but if the closing price is lower, the body is black. - -The tip of the upper wick represents the high of the day, while the bottom of the lower wick represents the low of the day. The Japanese consider highs and lows relatively unimportant, according to Steve Nison, author of *Japanese Candlestick Charting Techniques*. They focus on the relationship between opening and closing prices and on patterns that include several candles. - -The main advantage of a candlestick chart is its focus on the struggle between amateurs who control openings and professionals who control closings. Unfortunately, many candlestick chartists neglect Western tools, such as volume and technical indicators. - -Candlesticks have become quite popular worldwide, and some traders ask me why I continue to use bar charts. I am familiar with candlesticks, but I've learned to trade using bar charts, and I believe that using open-high-low-close bars plus technical indicators gives me more information. - -Your choice of a bar or a candlestick chart is a matter of personal preference. All concepts expressed in this book can be used with candlestick as well as bar charts. - -## **Efficient Markets, Random Walk, Chaos Theory, and "Nature's Law"** - -Efficient Market theory is an academic notion that nobody can outperform the market because any price at any given moment incorporates all available information. Warren Buffett, one of the most successful investors of the century, commented: "I think it's fascinating how the ruling orthodoxy can cause a lot of people to think the earth is flat. Investing in a market where people believe in efficiency is like playing bridge with someone who's been told it doesn't do any good to look at the cards." - -The logical flaw of Efficient Market theory is that it equates knowledge with action. People may have knowledge, but the emotional pull of the crowd often leads them to trade irrationally. A good analyst can detect repetitive patterns of crowd behavior on his charts and exploit them. - -Random Walk theorists claim that market prices change at random. Sure, there is a fair bit of randomness or "noise" in the markets, just as there is randomness in any crowd. Still, an intelligent observer can identify repetitive behavior patterns of a crowd and make sensible bets on their continuation or reversal. - -People have memories; they remember past prices, and their memories influence their decisions to buy or sell. Memories help create support under the market and resistance above it. Random Walkers deny that memories influence our behavior. - -As Milton Friedman pointed out, prices carry information about the availability of supply and the intensity of demand. Market participants use that information when deciding to buy or sell. For example, consumers buy more merchandise when it is on sale and less when prices are high. Financial traders are just as capable of logical behavior as homemakers. When prices are low, bargain hunters step in. A shortage can lead to a buying panic, but high prices choke off demand. - -Chaos Theory has achieved prominence in the recent decades. Markets are largely chaotic, and the only time you can have an edge is during orderly periods. - -In my view, markets are chaotic much of the time, but out of that chaos, islands of order and structure keep emerging and disappearing. The essence of market analysis is recognizing the emergence of orderly patterns and having enough courage and conviction to trade them. - -If you trade during chaotic periods, the only ones to benefit will be your broker, who'll collect his commission, and a professional day-trader, who'll scalp you. The key point to keep in mind is that once in a while a pattern emerges from chaos. Your system should recognize this transition, and that's when you should put on a trade! Earlier we spoke about the one great advantage of a private trader over professionals—he may wait for a good trade instead of having to be active each day. The chaos theory confirms that message. - -The chaos theory also teaches us that orderly structures that emerge from chaos are fractal. The sea coast appears equally jagged whether you look down on it from space or an airplane, from a standing position or on your knees through a magnifying glass. Market patterns are fractal as well. If I show you a set of charts of the same market, having removed time markings, you will not be able to tell whether it is monthly, weekly, daily, or a 5-minute chart. Later in this book (Chapter 39), we'll return to this theme, and you'll see why it is so important to analyze markets in more than one timeframe. We'll have to make sure that buy or sell messages in both timeframes confirm each other, because if they don't it means that the market is too chaotic and we should stand aside. - -Nature's Law is the rallying cry of a clutch of mystics who claim there is a perfect order in the markets (which they'll reveal to you for a price). They say that markets move like clockwork in response to immutable natural laws. R. N. Elliott even titled his last book *Nature's Law*. - -The "perfect order" crowd gravitates to astrology, numerology, conspiracy theory, and other superstitions. Next time someone talks to you about natural order in the markets, ask him about astrology. He'll probably jump at the chance to come out of the closet and talk about the stars. - -The believers in perfect order in the markets claim that tops and bottoms can be predicted far into the future. Amateurs love forecasts, and mysticism is a great marketing gimmick. It helps sell courses, trading systems, and newsletters. - -Mystics, Random Walk academics, and Efficient Market theorists have one trait in common. They are equally divorced from the reality of the markets. - -## ■ **18. Support and Resistance** - -A ball hits the floor and bounces. Toss it up, and it'll drop after hitting the ceiling. Support and resistance are like a floor and a ceiling, with prices sandwiched between them. Understanding support and resistance is essential for understanding price trends. Rating their strength helps you decide whether the trend is likely to punch through or to reverse. - -**Support** is a price level where buying is strong enough to interrupt or reverse a downtrend. When a downtrend hits support, it bounces like a diver who hits the bottom and pushes away from it. Support is represented on a chart by a horizontal line connecting two or more bottoms (Figure 18.1). - -**Resistance** is a price level where selling is strong enough to interrupt or reverse an uptrend. When an uptrend hits resistance, it acts like a man who hits his head on a branch while climbing a tree—he stops and may even tumble down. Resistance is represented on a chart by a horizontal line connecting two or more tops. - -It is better to draw support and resistance lines across the edges of congestion areas where the bulk of the bars stopped rather than across extreme prices. Those congestion zones show where masses of traders have changed their minds, while the extreme points reflect only panic among the weakest traders. - -Minor support or resistance causes trends to pause, while major support or resistance causes them to reverse. Traders buy at support and sell at resistance, making their effectiveness a self-fulfilling prophecy. - -**FIGURE 18.1** NFLX weekly. *(Chart by Stockcharts.com)* - -#### Support and Resistance - -Draw horizontal lines across the upper and lower edges of congestion areas. The bottom line marks the level of support at which buyers overcome sellers. The upper line identifies resistance, where sellers overpower buyers. Support and resistance areas often switch roles. Note how after a decisive upside breakout in area 1 prices hit resistance, but when they broke above that level it turned into a zone of support (marked 2). The strength of these barriers increases each time prices touch them and bounce away. - -Beware of false breakouts from support and resistance. They are marked by letter "F" on this chart. Amateurs tend to follow breakouts, while professionals tend to fade (trade against) them. At the right edge of the chart NFLX is rallying from support at the level where its previous rally ran into resistance. - -How do we identify trends? Not by **trendlines**. My favorite tools are exponential moving averages that we'll review in the next section. Trendlines are wildly subjective—they are among the most self-deceptive tools. Trend identification is an area in which computerized analysis is miles ahead of classical charting. - -## **Memories, Pain, and Regret** - -Our memories of previous market turns prompt us to buy and sell at certain levels. Buying and selling by crowds create support and resistance. *Support and resistance exist because people have memories.* - -If traders remember that prices have recently stopped falling and turned up from a certain level, they are likely to buy when prices approach that level again. If traders remember that an uptrend has recently reversed after rising to a certain peak, they tend to sell and go short when prices approach that level again. - -For example, all major rallies in the stock market from 1966 until 1982 ended whenever the Dow Jones Industrial Average rallied into the area between 950 and 1050. That resistance zone was so strong that traders named it "a graveyard in the sky." Once the bulls rammed the market through that level, it became a major support area. In recent years, we saw a similar occurrence in gold, whose chart is shown here (Figure 18.2). It hit the level of \$1,000/oz four times, dropping after each - -#### **FIGURE 18.2** Gold weekly. (*Chart by Stockcharts.com)* - -#### Resistance Turns into Support - -Notice how gold hit its overhead resistance at the \$1,000/oz. level five times. Usually, reversals occur on the first, second or third hit. When a market hits the same level for the fourth time, it shows that it really wants to go that way. Gold broke above \$1,000/oz. on its fifth attempt. - -Afterwards, gold made two attempts to pull down to its old resistance level, in areas marked 6 and 7. Its inability to decline to that level showed that bears were weak, marking the start of a major bull market in gold. - -attempt. After the price of gold broke above that level on its fifth attempt, the level of \$1,000/oz turned into a massive support level. - -Support and resistance exist because masses of traders feel pain and regret. Traders who hold losing positions feel intense pain. Losers are determined to get out as soon as the market gives them another chance. Traders who missed an opportunity to buy or sell short feel regret and also wait for the market to give them a second chance. Feelings of pain and regret are mild in trading ranges when swings are relatively small and losers do not get hurt too badly. Breakouts from those ranges create much more intense pain and regret. - -When the market stays flat for a while, traders get used to buying near the lower edge of its range and selling or even shorting near the upper edge. When an uptrend begins, bears who sold short feel a great deal of pain. At the same time bulls feel an intense regret that they didn't buy more. Both are determined to buy if the market declines to the breakout point and gives them a second chance to cover shorts or to get long. The pain of bears and regret of bulls makes them eager to buy, creating **support** during reactions in an uptrend. - -When prices break down from a trading range, bulls who bought are in pain: they feel trapped and wait for a rally to get out even. Bears, on the other hand, regret that they haven't shorted more: they wait for a rally as a second chance to sell short. Bulls' pain and bears' regret create **resistance**—a ceiling above the market in downtrends. The strength of support and resistance depends on the strength of feelings among masses of traders. - -## **Strength of Support and Resistance** - -The longer prices stay in a congestion zone, the stronger the emotional commitment of bulls and bears to that area. A congestion area hit by several trends is like a battlefield with craters from explosions: its defenders have plenty of cover and are likely to slow down any attacking force. When prices approach that zone from above, it serves as support. When prices rally into it from below, it acts as resistance. A congestion area can reverse those roles, serving as either support or resistance. - -The strength of those zones depends on three factors: their length, height, and the volume of trading that has taken place in them. You can visualize these factors as the length, the width, and the depth of a congestion zone. - -*The longer a support or resistance area—its length of time or the number of hits it took the stronger it is*. Support and resistance, like good wine, become better with age. A 2-week trading range provides only minimal support or resistance, a 2-month range gives people time to become used to it and creates intermediate support or resistance, while a 2-year range becomes accepted as a standard of value and offers major support or resistance. - -As support and resistance levels grow very old, they gradually become weaker. Losers keep washing out of the markets, replaced by newcomers who don't have the same emotional commitment to very old price levels. People who lost money only recently remember full well what happened to them. They are probably still in the market, feeling pain and regret, trying to get even. People who made bad decisions several years ago may well be out of that market, and their memories matter less. - -The strength of support and resistance increases each time that area is hit. When traders see that prices have reversed at a certain level, they tend to bet on a reversal the next time prices reach that level. - -*The taller the support and resistance zone, the stronger it is*. A tall congestion zone is like a tall fence around a property. If a congestion zone's height equals one percent of current market value, it provides only minor support or resistance. If it's three percent tall, it provides intermediate support or resistance, and a congestion zone that's seven percent tall or higher can grind down a major trend. - -*The greater the volume of trading in a support and resistance zone, the stronger it is*. High volume shows active involvement by traders—a sign of strong emotional commitment. Low volume shows that traders have little interest in transacting at that level—a sign of weak support or resistance. - -You can measure the strength of support and resistance in dollars if you multiply the number of days a stock spent in its congestion zone by its average daily volume and price. Of course, when making such comparisons, we should measure support and resistance zones for the same stock. You can't compare apples with oranges or AAPL with some \$10 stock that trades a million shares on a good day. - -## **Trading Rules** - -1. Whenever the trend you're riding approaches support or resistance, tighten your protective stop. - -A **protective stop** is an order to sell below the market when you are long or to cover shorts above the market when you are short. A stop protects you from getting badly hurt by a reversal. - -A trend reveals its health by how it acts when it hits support or resistance. If it's strong enough to penetrate that zone, your tight stop will not be triggered. If a trend bounces away from support or resistance, it reveals its weakness. In that case, your tight stop will salvage a good chunk of profits. - -2. Support and resistance are more important on long-term charts than on shortterm charts. - -A good trader monitors his market using several timeframes, but assigns more weight to the longer ones. Weekly charts are more important than dailies. If the weekly trend is strong, it is less alarming that the daily trend is hitting resistance. When a weekly trend approaches major support or resistance, you should be more inclined to exit. - -3. Support and resistance levels point to trading opportunities. - -The bottom of a congestion area identifies the bottom line of support. As prices decline towards it, be alert to buying opportunities. One of the best patterns in technical analysis is a **false breakout**. If prices dip below support and then rally back into the support zone, they show that bears have lost their chance. A price bar closing within a congestion zone after a false downside breakout marks a buying opportunity; set a protective stop in the vicinity of the bottom of the recent false downside breakout. - -Similarly, a true upside breakout should not be followed by a pullback into the range, just as a rocket is not supposed to sink back to its launching pad. A false upside breakout gives a signal to sell short as a price bar returns into the congestion zone. When shorting, place a protective stop near the top of the false breakout (Figure 18.3). - -On Placing Stops Experienced traders tend to avoid placing them at round numbers. If I buy a stock near \$52 and want to protect my position in the area of 51, I'll put a stop a few cents below \$51. If I go long at 33.70 in a day-trade and want to protect my position in the area of \$33.50, I'll put that stop a few cents below \$33.50. Because of a natural human tendency to use round numbers, clusters of stops accumulate there. I prefer to place my stops at the far ends of such clusters. - -## **True and False Breakouts** - -Markets spend more time in trading ranges than in trends. Most breakouts from trading ranges are false breakouts. They suck in trend-followers just before prices return into their ranges. False breakouts hurt amateurs, but professional traders love them. - -Professionals expect prices to fluctuate most of the time, without going anywhere far. They wait until an upside breakout stops reaching new highs or a downside breakout stops making new lows. Then they pounce—fade the breakout (trade against it) - -**FIGURE 18.3** EGO and the Euro daily. *(Chart by Stockcharts.com)* - -### False Breakouts - -On the left, a chart of Eldorado Gold Corp. (EGO) shows a false downside breakout during gold bears' final attempt to push gold stocks lower in December 2013. Prices opened sharply below support, having gapped down from the previous day's close. From there, a rally began. Notice a pullback to the support line a week later, marked by a green arrowhead. Such pullbacks don't always occur, but when they do, they offer an excellent opportunity to hop aboard a new trend. - -On the right, a chart of the Euro (represented here by \$XEU) shows how an uptrend culminated in a false upside breakout. Prices gapped above the line of resistance, triggering stops and shaking out weak shorts, and that's when the downtrend began. There was no second chance pullback in this market. - -and place a protective stop near the latest extreme point. It's a tight stop, and their monetary risk is low, with a big profit potential from prices returning towards the middle of the congestion zone. The risk/reward ratio is so good that professionals can afford to be wrong half the time and still come out ahead of the game. - -The best time to buy an upside breakout on a daily chart is when your analysis of the **weekly** chart suggests that a new uptrend is developing. True breakouts are confirmed by heavy **volume**, while false breakouts tend to have light volume. True breakouts are confirmed when technical **indicators** reach new extremes in the direction of the new trend, while false breakouts are often marked by divergences between prices and indicators, which we'll discuss later in the book. - -## ■ **19. Trends and Trading Ranges** - -A **trend** exists when prices keep rising or falling over a period of time. In a perfect **uptrend**, each rally reaches a higher high than the preceding rally, while each decline stops at a higher level than the preceding decline. In a perfect **downtrend**, each decline falls to a lower low than the preceding decline and each rally tops out at a lower level than the preceding rally. In a **trading range**, most rallies stop at about the same high level, and declines peter out at about the same low level. Perfect patterns, of course, aren't that common in financial markets, and multiple deviations make life harder for analysts and traders (Figure 19.1). - -Even a quick look at most charts reveals that markets spend most of the time in trading ranges. Trends and trading ranges call for different tactics. When you go long in an uptrend or sell short in a downtrend, you have to give that trend the benefit of the doubt and use a wider stop, so as not to be shaken out easily. In a trading range, on the other hand, you have to use tight stops, be nimble and close out positions at the slightest sign of a reversal. - -Another difference in trading tactics between trends and ranges is the handling of strength and weakness. You have to follow strength during trends—buy in uptrends and short in downtrends. When prices are in a trading range, you aim to do the opposite—buy weakness and sell strength. - -**FIGURE 19.1** FB daily, 22-day EMA. (*Chart by Stockcharts.com)* - -#### Trend and the Trading Range - -A pattern of higher tops and higher bottoms defines uptrends, while a pattern of lower bottoms and lower tops defines downtrends. In the middle of this chart of Facebook, Inc. (FB), you see a downtrend defined by three lower lows, marked 1, 3, and 5, and two lower highs, marked 2 and 4. Notice the downtrend of a slow 22-day exponential moving average (which we'll review in Chapter 22) confirming the price downtrend. Its upturn signaled an upside reversal, confirmed by new price peaks 6 and 8. - -We've looked at false breakouts in the previous chapter, and you can see them again in action here. False breakouts occur when prices cross their support or resistance lines, spend one or two days beyond that line, and then return, marking a failed move in the direction of the breakout; afterwards prices tend to turn in the opposite direction. Here, a false downside breakout, followed by the upturn of a moving average gave a strong buy signal. - -We see a mirror image of this pattern after the top 8. There are two false upside breakouts, and after the second one, the moving average turns down, giving a sell signal. At the right edge of the chart, prices are pulling back up to their declining moving average. Such patterns tend to create good opportunities for selling short. - -## **Mass Psychology** - -When the trend is up, bulls are more eager than bears, and their buying forces prices higher. If bears manage to push prices down, bulls return to bargain hunt. They stop the decline, and force prices to rise again. A downtrend occurs when bears are more aggressive and their selling pushes markets down. Whenever a flurry of buying lifts prices, bears sell short into that rally, stop it, and send prices to new lows. - -When bulls and bears are about equal in strength, prices stay in a trading range. When bulls manage to push prices up, bears sell short into that rally and prices fall. As they decline, bargain hunters step in and buy. Then, as bears cover shorts, their buying helps fuel a rally. This cycle can go on for a long time. - -A trading range is like a fight between two equally strong street gangs. They push one another back and forth, but neither can control the city block. A trend is like a fight in which a stronger gang chases the weaker gang down the street. Every once in a while the weaker gang stops and puts up a fight but then turns and runs again. - -Crowds spend most of their time aimlessly milling around, which is why markets spend more time in trading ranges than in trends. A crowd has to become agitated and surge to create a trend. Crowds do not stay excited for long—they go back to aimlessness. Professionals tend to give the benefit of the doubt to trading ranges. - -## **The Hard Right Edge** - -Trends and ranges are easy to see in the middle of a chart, but as you get close to its right edge, the picture becomes increasingly foggy. The past is fixed and clear, but the future is fluid and uncertain. Trends are easy to recognize on old charts, but, unfortunately, our brokers don't allow us to trade in the past—we have to make trading decisions at the hard right edge. - -By the time a trend becomes perfectly clear, a good chunk of it is already gone. Nobody will ring a bell when a trend dissolves into a trading range. - -Many chart patterns and indicator signals contradict one another at the right edge of the chart. You have to base your decisions on probabilities in an atmosphere of uncertainty. - -Most people feel very uncomfortable dealing with uncertainty. When their trade doesn't go the way their analysis suggested, they hang onto losing positions, waiting for the market to turn and make them whole. Trying to be right is an unaffordable luxury in the markets. Professional traders get out of losing trades fast. When the market deviates from your analysis, you have to cut losses without fuss. - -## **Methods and Techniques** - -Keep in mind that there is no single magic method to clearly and reliably identify all trends and trading ranges. It pays to combine several analytic tools. None of them is perfect, but when they confirm each another, a correct message is much more likely. When they contradict one another, it's better to pass up a trade. - -**FIGURE 19.2** UNP daily, 22-day EMA, Directional system, M*ACD-Histog*ram. *(Chart by Stockcharts.com)* - -#### Trend Identification - -The single most important identifier of any trend is the pattern of its highs and lows. Look, for example, at this daily chart of Union Pacific Corp (UNP). Once it broke out of its trading range, its highs, marked by horizontal green lines, kept reaching higher and higher. Similarly, its reaction lows, marked by red horizontal lines, kept bottoming out at higher and higher levels. Trying to draw a trendline would be a very subjective exercise because the bottoms of UNP did not line up in a straight line. - -The 22-day exponential moving average (EMA), represented by a red line superimposed on prices, confirms the uptrend by its steady rise. Notice excellent buying opportunities, signaled by quick price dips to their moving average (we'll return to this pattern in Chapter 22). - -The Directional system (described in Chapter 24) signaled the start of a new trend when the Average Directional Index (ADX) fell below 20 and then rallied above that level and penetrated above the lower Directional Line (marked by a vertical green arrow). MACD-Histogram (described in Chapter 23) identified a very powerful trend when it rallied to its highest peak in several months (marked by a diagonal green arrow). Near the right edge of the chart the trend is up, while prices are slightly below their recent high. A pullback to the EMA is likely to create a fresh buying opportunity. - -- 1. Analyze the pattern of highs and lows. When rallies keep reaching higher levels and declines keep stopping at higher levels, they identify an uptrend. The pattern of lower lows and lower highs identifies a downtrend, and the pattern of irregular highs and lows points to a trading range (Figure 19.1). -- 2. Plot a 20- to 30-bar exponential moving average (see Chapter 22). The direction of its slope identifies the trend. If a moving average has not reached a new high or low in a month, then the market is probably in a trading range. - -- 3. When an oscillator, such as MACD-Histogram (see Chapter 23) rises to a new peak, it identifies a powerful trend and suggests that the latest market top is likely to be retested or exceeded. -- 4. Several market indicators, such the Directional system (see Chapter 24), help identify trends. The Directional system is especially good at catching early stages of new trends (Figure 19.2). - -## **Trade or Wait** - -Having identified an uptrend, you need to decide whether to buy immediately or wait for a dip. If you buy fast, you'll get in gear with the trend, but on the minus side, your stops are likely to be farther away, increasing your risk. - -If you wait for a dip, your risk will be smaller, but you'll have four groups of competitors: longs who want to add to their positions, shorts who want to get out even, traders who never bought (such as yourself), and traders who sold too early but are eager to buy again. The waiting areas for pullbacks are notoriously crowded! Furthermore, a deep pullback may signal the beginning of a reversal rather than a buying opportunity. The same reasoning applies to shorting in downtrends. - -If the market is in a trading range and you're waiting for a breakout, you'll have to decide whether to buy in anticipation of a breakout, during a breakout, or on a pullback after a valid breakout. If you aren't sure, consider entering in several steps: buy a third of the planned position in anticipation, a third on a breakout, and a third on a pullback. - -Whatever method you use, remember to apply the key risk management rule: the distance from your entry to the protective stop, multiplied by position size can never be more than 2 percent of your account equity (see Chapter 50). No matter how attractive a trade, pass it up if it would require putting more than 2% of your account at risk. - -Finding good entry points is extremely important in trading ranges. You have to be very precise and nimble because the profit potential is limited. A trend is more forgiving of a sloppy entry, as long as you trade in the right direction. Old traders chuckle: "Don't confuse brains with a bull market." - -Specific risk management tactics are different for trends and trading ranges. When trend trading, it pays to put on smaller positions with wider stops. You'll be less likely to get shaken out by any counter-trend moves, while still controlling risk. You may put on bigger positions in trading ranges but with tighter stops. - -## **Conflicting Timeframes** - -Markets move in several timeframes at the same time (see Chapter 32). They move simultaneously, and sometimes in the opposite directions on 10-minute, hourly, daily, weekly and monthly charts. The market may look like a buy in one timeframe but a sell in another. Even indicator signals in different timeframes of the same stock may contradict one another. Which will you follow? - -Most traders ignore the fact that markets move in different directions at the same time in different timeframes. They pick one timeframe, such as daily or hourly, and look for trades there. That's when trends from other timeframes sneak up on them and wreak havoc with their plans. - -Those conflicts between signals in different timeframes of the same market are one of the great puzzles in market analysis. What looks like a trend on a daily chart may show up as a blip on a flat weekly chart. What looks like a flat trading range on a daily chart shows rich uptrends and downtrends on an hourly chart, and so on. - -The sensible course of action is this: before examining a trend on your favorite chart, step back to explore the charts in a timeframe one order of magnitude greater than your favorite. This search for a greater perspective is one of the key principles of the Triple Screen trading system, which we'll discuss in a later chapter. - -When professionals are in doubt, they look at the big picture, while amateurs tend to focus on the short-term charts. Taking a longer view works better —and is a lot less nerve-wracking. - -## ■ **20. Kangaroo Tails** - -Just when you think a runaway trend will keep on going—pop!—a three-bar pattern forms a kangaroo tail that flags a reversal. A kangaroo tail2 consists of a single, very tall bar, flanked by two regular bars, that protrudes from a tight weave of prices. Upward-pointing kangaroo tails flash sell signals at market tops, while downwardpointing kangaroo tails occur at market bottoms (Figure 20.1). - -While daily charts are shown in the illustration, you can find kangaroo tails on the charts of all timeframes. The longer the timeframe, the more meaningful its signal: a kangaroo tail on a weekly chart is likely to lead to a more significant move than a tail on a 5-minute chart. - -Kangaroo tails, also called "fingers," are on my short list of reliable chart formations. They leap at you from the charts and are easy to recognize. If you doubt whether a kangaroo tail is present, assume it is not. Real kangaroo tails are unmistakable. They occur in the broad market indexes as well as individual stocks, futures, and other trading vehicles. - -Markets constantly fluctuate, seeking levels that generate the highest volume of trade. If a rally attracts no orders, the market will reverse and look for orders at lower levels. If volume dries up during a decline, the market is likely to rally, seeking orders at higher prices. - -Kangaroo tails reflect failed bull or bear raids. - -A kangaroo tail pointing up reflects a failed attempt by the bulls to lift the market. They're like a group of soldiers that take a hill from the enemy, only to discover that the main force has failed to follow. Now they escape and run downhill for their lives. Having failed to hold the hill, the army is likely to move away from it. - -2 I am grateful to Margarita Volkova, my translator in Moscow, who came up with this name for the pattern. - -**FIGURE 20.1** BIIB and FDO daily. *(Chart by Stockcharts.com)* - -#### Kangaroo Tails - -Biogen Idec, Inc (BIIB) was rising in a steady uptrend when it developed an upward kangaroo tail. The stock opened slightly below its previous close but then traced a very tall bar, triple the average height. It reached a record new high but then slid, closing near its opening price. The next day's bar was of average height—it completed the kangaroo pattern and the trend reversed down. - -The stock of Family Dollar Stores, Inc. (FDO) was falling when its decline sharply accelerated, producing a downward pointing bar several times the average bar height for this stock. Notice that both opening and closing prices for that bar were well within the previous day's range. That downward stab marked the end of the downtrend; the next bar was of average height and after that the trend reversed up. - -A kangaroo tail that points down reflects a failed bear raid. Bears aggressively sold the market, pushing it lower—but low prices did not attract volume and bears retreated back into the range. What do you think the market is likely to do next, after it failed to continue moving down? Since it found no orders below, it's likely to turn up and rally. - -When markets recoil from kangaroo tails, they offer trading opportunities. It was J. Peter Steidlmayer who pointed out years ago that a bar that looks like a finger sticking out of a tight chart pattern provides a valuable reference point for short-term traders. A kangaroo tail shows that a certain price has been rejected by the market. It usually leads to a swing in the opposite direction. As soon as you recognize a tail, trade against it (Figure 20.2). - -An experienced trader can recognize a kangaroo tail during its third bar, before it closes. For example, you may see a range that held for several days on a daily chart, but then on Monday the stock explodes in a very tall bar. If on Tuesday it opens near the base of the Monday's bar base and refuses to rally, consider selling short before the market closes on Tuesday. If the market has been in a trading range for a week and then traces a tall bar down on Wednesday, get ready on Thursday: if prices trade in a narrow range near the top of the Wednesday bar, go long before the market closes on Thursday. - -**FIGURE 20.2** IGT Daily. *(Chart by Stockcharts.com)* - -#### Trading Kangaroo Tails. - -Kangaroo tails mark the final splash of bullishness or bearishness, depending on their direction. Here the kangaroo tail (marked with a red arrow) helped identify the end of an uptrend in the stock of International Game Technology (IGT). Notice the bar is more than double the usual height and is bracketed by shorter bars. If entering a short trade during the third bar, place your stop about half-way up the tail. Putting a stop at the tip of the tail would mean accepting too much risk. - -Notice a tail pointing down, marked by a green arrow. It stopped the downtrend and augured in a week-long rally. - -Remember that trading against the tails is a short-term tactic; on the daily charts, these signals fizzle out after a few days. Evaluate kangaroo tails against the background of the current market. For example, when running a long-term bullish campaign in a stock, be alert to kangaroo tails. A tail pointing up may well suggest profit taking on existing positions, while a tail pointing down identifies a good spot to add to long positions. - -Using stops is essential for survival and success in the markets. Putting a stop at the end of a tail would make your stop too wide, risking too much capital. When trading against the tail, place your protective stop about halfway through the tail. If the market starts "chewing its tail," it is time to get out. - -**PART 4** - -## Computerized Technical Analysis - -Computers were a novelty at the time I wrote *Trading for a Living*. My first computer for technical analysis was an Apple 2E desktop with a boxy modem and two floppy drives. Each held a 300 KB diskette: one for the analytic program (Computrac, the first program for technical analysis) and the other for market data. When the first hard drives came out, I had a choice of buying a 2-, 5- or 10-MB (not gigabyte!) drive. Ten megabytes seemed too huge for anyone to ever need, so I sprang for a 5-MB hard drive. How technology has changed! - -A trader without a computer is like a man traveling on a bicycle. His legs grow strong and he sees a lot of scenery, but his progress is slow. When you travel on business and want to get to the point fast, you get a car. - -Today, very few people trade without computers. Our machines help track and analyze more markets in greater depth. They liberate us from the routine updating of charts, freeing up time for thinking. Computers allow us to use more complex indicators and spot more opportunities. Trading is an information game. A computer helps you process more information. On the minus side, with computers we lose a physical feel for price moves that comes from pencil and paper charting. - -## ■ **21. Computers in Trading** - -Computerized technical analysis is more objective than classical charting. You can argue whether support or resistance is present—but there can be no argument about an indicator's direction. Of course, you still need to decide what to do after you identify an indicator's message. - -## **Toolboxes** - -When working with wood or metal, you can go to a hardware store and buy a set of tools that can help you work smartly and efficiently. A technical analysis toolbox provides a set of electronic tools for processing market data. - -When you decide to get into computerized technical analysis, begin by drawing a list of tasks you want your computer to perform. This will take some serious thinking, but it's much better than getting a package first and scratching your head later, trying to figure out what it might do for you. Decide what markets you want to track, what types of charts to view and what indicators to use. - -A toolbox draws weekly, daily, and intraday charts; it splits the screen into several windowpanes for plotting prices and indicators. A good toolbox includes many popular indicators, such as moving averages, channels, MACD, Stochastic, Relative Strength Index, along with dozens if not hundreds of others. It allows you to modify all indicators and even construct your own. - -A good toolbox allows you to compare any two markets and analyze their spreads. If you trade options, your toolbox must include an options valuation model. Advanced packages allow you to backtest trading systems. - -Another feature of a good toolbox is its ability to scan stocks. For example, you may want to find all stocks among the Nasdaq 100 whose exponential moving averages are rising, but whose prices are no more than 1% above their EMAs. Can your software scan for that? Can it add fundamental parameters to your search, such as rising earnings? Think what you want to find and then ask software vendors whether their products can do it for you. - -There are good toolboxes at all price levels. A beginner making his first steps may sign up with an online service that offers a basic set of computerized tools for free; you can upgrade to a paid level later. Most charts in this book are drawn using just such a service, StockCharts.com, because I want you to see how much you can do while spending very little. Some traders find that sufficient, while many of us buy programs that reside on our computers, allowing greater customization. With prices of software in a steady decline, you don't have to worry too much. Buy something simple and inexpensive and upgrade later—it's a date, not a marriage. - -Once you've decided what package to use, you may want to hire somebody who already uses it to help you set it up on your machine. This can save a great deal of time and energy for inexperienced users. - -A growing number of brokerage firms offer free analytic software to their clients; the price is right, but they tend to have two serious limitations. First, for legal reasons, they make their software very hard to modify and second, it only works online. Traders often ask how to add my indicators to their brokerage software, and the usual answer is—you can't. - -Most brokerage house programs enable you to place and change your orders using the same analytic software. This can be quite handy and useful for day traders, but less important for longer-term traders. Be sure to disable a common feature that shows your equity gains or losses in real time. Watching dollars jump up or down at every tick is stressful and distracting. As the song goes, "…never count your money while you're sitting at the table—there'll be time enough for counting when the dealing's done." Focus on prices and indicators instead of watching dollars and thinking what you can buy with them. - -Technical analysis software is constantly changing and evolving; a book is not the right place for software recommendations. My firm Elder.com maintains a brief Software Guide, which we periodically update and e-mail to any trader who asks for it, as a public service. - -As mentioned earlier in this book, most programs for technical analysis fall into one of three groups: toolboxes, black boxes, and gray boxes. Toolboxes are for serious traders, black boxes are for people who believe in Santa Claus, and gray boxes are in between. When considering a new software package, be sure to know which group it belongs to. - -## **Black Boxes and Gray Boxes** - -Black box software is pure magic: it tells you what and when to buy and sell without telling you why. You download the data and push a button. Lights blink, gears click, and a message lights up, telling you what to do. Magic! - -Black boxes always come with impressive track records that show profitable past performance. Every black box eventually self-destructs because markets keep changing. Even systems with built-in optimization don't survive because we don't know what kind of optimization will be needed in the future. There is no substitute for human judgment. The only way to make money from a black box is to sell one. Most black boxes are sold by hustlers to gullible or insecure traders. - -Each black box is guaranteed to fail, even if sold by an honest developer. Complex human activities, such as trading, cannot be automated. Machines can help but not replace humans. - -Trading with a black box means using a slice of someone else's intelligence, as it existed at some point in the past. Markets change, and experts change their minds, but a black box keeps churning out its buy and sell signals. It would have been funny if it wasn't so expensive for losers. - -A gray box generates trading signals based on proprietary formulas. Unlike a black box, it discloses its general principles and allows you to adjust its parameters to some degree. The closer a gray box is to a toolbox, the better it is. - -## **Computers** - -While online programs can run on any computer, most stand-alone programs are written for the Windows environment. Some traders run them on Macs, using emulation software. There are even programs for tablets, such as iPads. - -Technical analysis software tends to be not very demanding of processing power, but still, it makes sense to get the most modern machine so that it remains useful for years. - -Many day traders like to use multiple screens for a multidimensional view of the markets and the ability to watch several trading vehicles at once. Since I like to travel, I carry a small external screen that helps me monitor markets and trade from the road. It's the size of my laptop but much thinner and attaches to it with a USB cable, without a power cord. - -## **Market Data** - -Swing and position traders enter and exit trades within days or weeks, while day traders enter and exit within a few hours if not minutes. End-of-day data is sufficient for position traders, but day traders need real-time data. - -When you download the daily data for research, it pays to cover two bull-andbear-market cycles, or about 10 years. Whenever I approach a stock, I like to look back at 12 years of trading history to see whether it is cheap or expensive relative to its 12-year range. - -Whenever you approach a trade, you must know your edge—what will help you make money. The ability to recognize patterns is a part of my edge, but if a stock's history is too short, there are no reliable patterns to identify. That's why I avoid trading very young stocks, those with less than a year's history. - -When collecting and analyzing data, don't chase too many markets at once. Focus on quality and depth rather than quantity. Begin by following the key market indexes, such as the Dow, the NASDAQ, and the S&P. Many professional traders focus on a relatively small number of stocks. They get to know them well and become familiar with their behavior patterns. - -You could start out by focusing on a dozen stocks. Many professionals limit themselves to fewer than 100 stocks, which they review every weekend and mark their opinions in a fresh column of their spreadsheet. They may select fewer than 10 stocks from that pool that look promising for the week ahead and focus on them. Build your watch list gradually from the popular stocks of the year; add a few stocks from the most promising industries and some stocks you've traded before. Building a watch list is like gardening: you can't get a beautiful garden in a single season, but you can get there over several seasons. - -Try to stick to the data in your own time zone. When I teach overseas, traders often ask whether I trade in their country. I remind them that whenever you put on a trade, you're trying to take money out of some other trader's pocket, while others are trying to pick yours. This game is hard enough when you're awake, but it is risky to trade in a different time zone, allowing locals to pick your pockets while you sleep. This is why I largely limit my trading to the U.S. markets. Many overseas traders complain that they find their domestic markets too thin and ask whether it would make sense for them to trade in the huge and liquid U.S. market. The answer depends on how different their time zone is from the U.S. market's time zone. For example, the U.S. markets are easy to trade from Europe where they open at 3:30 p.m. local time and close at 10 p.m. It is much harder to do from Asia or Australia, but it can work if you take a longer view and aim to catch longer-term trends. - -Beginning traders should steer clear of day-trading. It demands instant decision making, and if you stop to think, you're dead. Learn to trade in a slower environment. Become a competent position or swing trader before you consider day-trading. If you compare swing trading and day-trading, it is like playing the same video game at level one or level nine. You run the same mazes and dodge the same monsters, but the pace of the game is so fast at level nine that your reactions must be automatic. Learn to analyze markets at level one—become a swing trader before attempting to day-trade. We'll return to this topic in Chapter 33, "Trading Timeframes." - -A good place to get started is swing trading, i.e., holding positions for several days. Select popular stocks that have good swings on a good volume. Start out by following just a handful. Some swing traders who hold positions for only a few days use real-time data for timing entries and exits, while others manage quite well with end-of-day data. - -## **Three Major Groups of Indicators** - -Indicators help identify trends and reversals. They are more objective than chart patterns and provide insight into the balance of power between bulls and bears. - -A great challenge is that various indicators may contradict one another. Some of them work best in trending markets, others in flat markets. Some are good at catching turning points, while others are better at riding trends. That's why it pays to select a small number of indicators from various groups and learn to combine them. - -Many beginners look for a "silver bullet"—a single magic indicator, but markets are too complex to be handled with a single tool. Others try to poll a multitude of indicators and average their signals. The results of such a "poll" will be heavily skewed by the indicators you select. - -Most indicators are based on the same five pieces of data: open, high, low, close, and volume. Prices are primary; indicators are derived from them. Using ten, twenty, or fifty indicators will not deepen your analysis because they share the same base. - -We can divide indicators into three groups: trend-following indicators, oscillators, and miscellaneous. Trend-following indicators work best when markets are moving, but the quality of their signals sharply deteriorates when the markets go flat. Oscillators catch turning points in flat markets but give premature and dangerous signals when the markets begin to trend. Miscellaneous indicators provide insights into mass psychology. Before using any indicator, be sure to understand what it measures and how it works. Only then can you have confidence in its signals. - -Trend-following indicators include moving averages, MACD Lines (moving average convergence-divergence), the Directional System, On-Balance Volume, Accumulation/Distribution, and others. Trend-following indicators are coincident or lagging indicators—they turn after trends reverse. - -Oscillators help identify turning points. They include MACD-Histogram, Force Index, Stochastic, Rate of Change, Momentum, the Relative Strength Index, Elder-ray, Williams %R, and others. Oscillators are leading or coincident indicators that often turn ahead of prices. - -Miscellaneous indicators provide insights into the intensity of bullish or bearish camps. They include the New High–New Low Index, the Put-Call Ratio, Bullish Consensus, Commitments of Traders, and others. They can be leading or coincident indicators. - -It pays to combine several indicators from different groups so that their negative features cancel each other out, while their positive features remain undisturbed. This is the aim of the Triple Screen trading system (see Chapter 39). - -As we begin to explore indicators, a few words of caution. Sometimes their signals are very clear, while at other times they are quite vague. I've learned long ago to enter trades only when indicator signals "grab me by the face." If I find myself squinting at a chart while trying to understand its signals, I flip the page and move to the next stock. - -If you look at a familiar indicator but can't understand its message, it is most likely because the stock you're trying to analyze is in a chaotic stage (see Chapter 17). If indicator signals aren't clear, don't start massaging them or piling on more indicators, but simply leave that stock alone for the time being and look for another one. One of the great luxuries of private traders is that no one pushes us to trade—we can wait for the best and clearest signals. - -As you read about the signals of different indicators, remember that you cannot base trading decisions on a single indicator. We need to select several indicators we understand and trust and combine them into a trading system. In the following chapters, we'll be exploring indicators, while later in the book we'll see how to build your own system from them. - -## ■ **22. Moving Averages** - -Wall Street old-timers say that moving averages were brought to the financial markets after World War II. Antiaircraft gunners used moving averages to site guns on enemy planes and after the war, applied this method to moving prices. The two early experts on moving averages were Richard Donchian and J. M. Hurst—neither apparently a gunner. Donchian was a Merrill Lynch employee who developed trading methods based on moving average crossovers. Hurst was an engineer who applied moving averages to stocks in his classic book, *The Profit Magic of Stock Transaction Timing*. - -A moving average (MA) reflects the average value of data in its time window. A 5-day MA shows the average price for the past 5 days, a 20-day MA for the past 20 days, and so on. Connecting each day's MA value gives you a moving average line. - -Simple MA = -$$ -\frac{P_1 + P_2 + \dots + P_N}{N} -$$ - -where *P* is the price being averaged - -*N* is the number of days in the moving average (selected by the trader) - -The level of a moving average reflects values that are being averaged and depends on the width of the MA window. Suppose you want to calculate a 3-day simple moving average of a stock. If it closes at 19, 21, and 20 on three consecutive days, then a 3-day simple MA of closing prices is 20 (19 + 21+ 20, divided by 3). Suppose that on the fourth day the stock closes at 22. It makes its 3-day MA rise to 21—the average of the last three days (21 + 20 + 22), divided by 3. - -There are three main types of moving averages: simple, exponential, and weighted. Simple MAs used to be popular because they were easy to calculate in precomputer days, and both Donchian and Hurst used them. Simple MAs, however, have a fatal flaw—they change twice in response to each price. - -## **Twice as Much Bark** - -First, a simple MA changes when a new piece of data comes in. That's good—we want our MA to reflect the latest prices. The bad thing is that MA changes again when an old price is dropped off at the end of its window. When a high price is dropped, a simple MA ticks down. When a low price is dropped, a simple MA rises. Those changes have nothing to do with the current reality of the market. - -Imagine that a stock hovers between 80 and 90, and its 10-day simple MA stands at 85 but includes one day when the stock reached 105. When that high number is dropped at the end of the 10-day window, the MA will dive, as if in a downtrend. That meaningless dive has nothing to do with the current trend. - -When an old piece of data gets dropped off, a simple moving average jumps. This problem is worse with short MAs but not so bad with long MAs. If you use a 10-day MA, those drop-offs can really shake it because each day constitutes 10% of the total value. On the other hand, if you use a 200-day MA, where each day is responsible for only 0.5%, dropping off a day isn't going to influence it a lot. - -Still, a simple MA is like a guard dog that barks twice—once when someone approaches the house, and once again when someone walks away from it. After a while, you don't know when to believe that dog. This is why a modern computerized trader is better off using exponential moving averages, which we'll discuss later in this chapter. - -## **Market Psychology** - -Each price is a snapshot of the current consensus of value among all market participants (see Chapter 11). Still, a single price doesn't tell you whether the crowd is becoming more bullish or bearish, just as you can't tell from a single photo whether a person is an optimist or a pessimist. If, on the other hand, you take a daily photo of a person for ten days, bring them to a lab, and order a composite picture, it'll reveal that person's typical features. You can monitor trends in that person's mood by updating that composite photo each day. - -A moving average is a composite photograph of the market—it combines prices for several days. The market consists of huge crowds, and the MA slope identifies the direction of mass inertia. **A moving average represents an average consensus of value for the period of time in its window.** - -The most important message of a moving average is the direction of its slope. When it rises, it shows that the crowd is becoming more optimistic—bullish. When it falls, it shows that the crowd is becoming more pessimistic—bearish. When prices rise above a moving average, the crowd is more bullish than before. When prices fall below a moving average, the crowd is more bearish than before. - -## **Exponential Moving Averages** - -An exponential moving average (EMA) is a better trend-following tool because it gives greater weight to the latest data and responds to changes faster than a simple MA. At the same time, an EMA doesn't jump in response to dropping old data. This guard dog has better ears, and it barks only when someone approaches the house. - -$$ -EMA = P_{\text{tod}} \cdot K + EMA_{\text{yest}} \cdot (1 - K) -$$ -\nwhere - -\n -$$ -K = \frac{2}{N+1} -$$ -\n -$$ -N = \text{the number of days in the EMA (chosen by the trader)} -$$ -\n -$$ -P_{\text{tod}} = \text{today's price} -$$ -\n -$$ -EMA_{\text{yest}} = \text{the EMA of yesterday} -$$ - -Technical analysis software allows you to select EMA length. An EMA has two major advantages over a simple MA. First, it assigns greater weight to the last trading day. The latest mood of the crowd is more important. In a 10-day EMA, the last closing price is responsible for 18 percent of EMA value, while in a simple MA all days are equal. Second, EMA does not drop old data the way a simple MA does. Old data slowly fades away, like a mood of the past lingering in a composite photo. - -## **Choosing the Length of a Moving Average** - -It pays to monitor your EMA slope because a rising line reflects bullishness and a declining one bearishness. A relatively narrow window makes an EMA more sensitive to price changes. It catches new trends sooner, but leads to more whipsaws. A whipsaw is a rapid reversal of a trading signal. An EMA with a wider time window produces fewer whipsaws but misses turning points by a wider margin. - -You can take several approaches to deciding how long to make your moving average or any other indicator. It would be nice to tie EMA length to a price cycle if you can find it. A moving average should be half the length of the dominant market cycle. If you find a 22-day cycle, use an 11-day moving average. If the cycle is 34 days long, then use a 17-day moving average. Trouble is, cycles keep changing and disappearing. - -There is no single magic "best" number for the EMA window. Good indicators are robust—not too sensitive to small changes in their parameters. When trying to catch longer trends, use a longer moving average. You need a bigger fishing rod to catch a bigger fish. A 200-day moving average works for long-term stock investors who want to ride major trends. - -Most traders can use an EMA between 10 and 30 days. A moving average should not be shorter than 8 days to avoid defeating its purpose as a trend-following tool. Among the numbers I like are 22 because there are approximately 22 trading days in a month and 26—half of the number of trading weeks in a year. - -Creating individualized parameters for every trading vehicle is practical only if you track a tiny handful of stocks or futures. Once their number reaches double digits, individualized parameters create confusion. It is better to have a yardstick that's one yard long and use the same parameters for all your moving averages in the same timeframe. Don't change indicator parameters while looking for trades. Fiddling with parameters to obtain signals you'd like to see robs your indicators of their most valuable feature—their objectivity. It is better to set your parameters and live with them. - -## **Trading Rules** - -Beginning traders try to forecast the future. Professionals don't forecast; they measure the relative power of bulls and bears, monitor the trend, and manage their positions. - -Moving averages help us trade in the direction of the trend. The single most important message of a moving average comes from the direction of its slope (Figure 22.1). It reflects the market's inertia. When an EMA rises, it is best to trade the market from the long side, and when it falls, it pays to trade from the short side. - -- 1. When an EMA rises, trade that market from the long side. Buy when prices dip near the moving average. Once you are long, place a protective stop below the latest minor low, and move it to the break-even point as soon as prices close higher. -- 2. When the EMA falls, trade that market from the short side. Sell short when prices rally toward the EMA and place a protective stop above the latest minor high. Lower your stop to breakeven as prices drop. -- 3. When the EMA goes flat and only wiggles a little, it identifies an aimless, trendless market. Do not trade using a trend-following method. - -**FIGURE 22.1** DIS daily 22-day EMA. *(Chart by Stockcharts.com)* - -#### An Exponential Moving Average (EMA) - -The direction of the slope of a moving average helps identify trends of trading vehicles, such as the Walt Disney Company (DIS). - -Old traders used to follow fast and slow MA crossovers. The favorite approach of Donchian, one of the originators of trading with moving averages, was to use crossovers of 4-, 9-, and 18-day MAs. Trading signals were given when all three MAs turned in the same direction. His method, like other mechanical trading methods, only worked during strongly trending markets. - -Trying to filter out whipsaws with mechanical rules is self-defeating—filters reduce profits as much as losses. An example of a filter is a rule that requires prices to close on the other side of MA not once, but twice, or to penetrate MA by a certain margin. Mechanical filters reduce losses, but they also diminish the best feature of a moving average—its ability to lock onto a trend at an early stage. - -A trader must accept that an EMA, like any other trading tool, has good and bad sides. Moving averages help you identify and follow trends, but they lead to whipsaws in trading ranges. We will look for an answer to this dilemma in the chapter on the Triple Screen trading system. - -## **More on Moving Averages** - -Moving averages often serve as **support and resistance**. A rising MA tends to serve as a floor below prices, and a falling MA serves as a ceiling above them. That's why it pays to buy near a rising MA, and sell short near a falling MA. - -Moving averages can be applied to **indicators** as well as prices. For example, some traders use a 5-day moving average of volume. When volume falls below its 5-day MA, it shows reduced public interest in the minor trend and indicates that it is likely to reverse. When volume overshoots its MA, it shows strong public interest and confirms the price trend. We'll be using moving averages of an indicator when we work with Force Index (Chapter 30) - -The proper way to plot a simple moving average is to **lag** it behind prices by half its length. For example, a 10-day simple MA properly belongs in the middle of a 10-day period and it should be plotted underneath the 5th or 6th day. An exponential moving average is more heavily weighted toward the latest data, and a 10-day EMA should be lagged by two or three days. Most software packages allow you to lag a moving average. - -Moving averages can be based not only on closing prices but also on the **mean between the high and the low**, which can be useful for day traders. - -An exponential moving average assigns greater weight to the latest day of trading, but a **weighted moving average** (WMA) allows you to assign any weight to any day, depending on what you deem important. WMAs are so complicated that traders are better off using EMAs. - -## **Dual EMAs** - -Whenever I analyze charts, I like to use not one but two exponential moving averages. The longer EMA shows a longer-term consensus of value. The shorter-term EMA shows a shorter-term consensus of value. - -I keep the ratio between them at approximately two to one. For example, I may use a 26-week and a 13-week EMA on a weekly chart, or a 22-day and an 11-day EMA on a daily chart. Please understand there is no magic set of numbers. You should feel free to play with these values, selecting a set that will be unique to you. Just keep in mind to keep the difference between the two EMAs near 2:1. It might be simpler and more efficient to use the same set of values (for example 26/13 or 22/11) in all timeframes: weekly, daily, and even intraday. - -Since the shorter EMA represents the short-term consensus of value and the longer-term EMA the long-term consensus, I believe that value "lives" between these two lines. **I call the space between the two EMAs the value zone.** - -## **Moving Averages and Channels** - -A channel consists of two lines drawn parallel to a moving average. Oddly enough, the distance between the upper and the lower channel lines is sometimes described as "height" and at other times as "width" of the channel, even though both refer to the same measurement. - -A well-drawn channel should contain approximately 95% of all prices that occurred during the past 100 bars. Longer-term markets have wider channels because prices can cover greater distances in 100 weeks than in 100 days. Volatile markets have wider (or taller) channels than quiet, sleepy markets. - -Channels are very useful for trading and performance tracking. We'll review the first in Chapter 41 (Channel Trading Systems) and the second in Chapter 59 (Trade Journal—Measuring Your Performance.) - -## **Prices, Values, and the Value Zone** - -One of the key concepts in market analysis—the concept that all of us intuitively understand but almost never spell out—is that prices are different from values. We buy stocks when we feel that their current prices are below their true value and expect prices to rise. We sell and sell short when we think that stocks are priced above their real value and are likely to come down. - -We buy undervalued stocks and sell overvalued shares—but how to define value? Fundamental analysts do it by studying balance sheets and annual reports, but those sources aren't nearly as objective as they seem. Companies often massage their financial data. Fundamental analysts don't have a monopoly on the concept of value. Technical analysts can define values by tracking the spread between a fast and a slow EMA. One of these EMAs reflects a short-term and the other a long-term consensus of value. *Value lives in the zone between the two moving averages* (Figure 22.2)*.* - -Very important: it's impossible to trade successfully with just a single indicator or even a pair of moving averages. Markets are too complex to extract money from them with a single tool. We need to build a trading system using several indicators as well as analyze markets in more than one timeframe. Keep this in mind as we review - -**FIGURE 22.2** DIS daily, 26- and 13-day EMAs. *(Chart by Stockcharts.com)* - -#### EMAs and the Value Zone - -A short-term MA identifies a short-term consensus of value, while a long-term MA reflects a long-term consensus of value. Value "lives" in the zone between the two moving averages. Select the parameters for this pair so that the long-term average is approximately twice the length of the short-term EMA. Looking at a chart, you can immediately tell which EMA is longer or shorter—the fast one hugs prices more closely, while the slow one moves more slowly. The slow EMA helps identify the trend, while the fast MA sets the boundary of the value zone. - -When looking to buy a stock, it pays to do it in the value zone, rather than overpay and buy above value. Similarly, when shorting, it pays to wait for a rally into the value zone to establish a short position rather than sell short when prices collapse. - -During the uptrend shown on this chart, you can see pullbacks to value, offering attractive buying opportunities in areas marked 1, 2, 3, and 4. The downward reversal of the slow EMA marks the end of the uptrend. At the right edge of the chart, the trend is down, while a pullback to value in area 5 offers a shorting opportunity. - -various indicators—they are the building blocks of trading systems, which we'll review later in the book. - -Keeping this in mind will help you become a more rational trader. Once you know how to define value, you can aim to buy at or below value and sell above value. We'll return to look for trading opportunities in overvalued and undervalued markets when we examine price channels or envelopes in Chapter 41 on the Channel Trading System. - -## ■ **23. Moving Average Convergence-Divergence: MACD Lines and MACD-Histogram** - -Moving averages help identify trends and their reversals. A more advanced indicator was constructed by Gerald Appel, an analyst and money manager in New York. Moving Average Convergence-Divergence, or MACD for short, consists of not one, but three exponential moving averages. It appears on the charts as two lines whose crossovers give trading signals. - -## **How to Create MACD** - -The original MACD indicator consists of two lines: a solid line (called the MACD line) and a dashed line (called the Signal line). The MACD line is made up of two exponential moving averages (EMAs). It responds to changes in prices relatively quickly. The Signal line smooths the MACD line with another EMA. It responds to changes in prices more slowly. In Appel's original system, buy and sell signals were given when the fast MACD line crossed above or below the slow Signal line. - -The MACD indicator is included in most programs for technical analysis. To create MACD by hand: - -- 1. Calculate a 12-day EMA of closing prices. -- 2. Calculate a 26-day EMA of closing prices. -- 3. Subtract the 26-day EMA from the 12-day EMA, and plot their difference as a solid line. This is the fast MACD line. -- 4. Calculate a 9-day EMA of the fast line, and plot the result as a dashed line. This is the slow Signal line. - -## **Market Psychology** - -Each price reflects the consensus of value among the mass of market participants at the moment of the trade. A moving average represents an average consensus of value for a selected period of time—it is a composite photo of mass consensus. A longer moving average tracks longer-term consensus, and a shorter moving average tracks shorter-term consensus. - -Crossovers of the MACD and Signal lines identify shifts in the balance of power of bulls and bears. The fast MACD line reflects mass consensus over a shorter time period. The slow Signal line reflects mass consensus over a longer period. When the fast MACD line rises above the slow Signal line, it shows that bulls dominate the market, and it is better to trade from the long side. When the fast line falls below the slow line, it shows that bears dominate the market and it pays to trade from the short side. - -## **Trading Rules for MACD Lines** - -Crossovers of the MACD and Signal lines identify changes of market tides. Trading in the direction of a crossover means going with the flow of the market. This system generates fewer trades and whipsaws than mechanical systems based on a single moving average. - -- 1. When the fast MACD line crosses above the slow Signal line, it gives a buy signal. Go long, and place a protective stop below the latest minor low. -- 2. When the fast line crosses below the slow line, it gives a sell signal. Go short, and place a protective stop above the latest minor high (Figure 23.1). - -Bottoms A, B, and C of ABX could be seen as an inverted head-and-shoulders bottom. Still, our technical indicators deliver much more objective messages than classical chart patterns. - -## **More on MACD Lines** - -Sophisticated traders tend to personalize their MACD Lines by using other moving averages than the standard 12-, 26-, and 9-bar EMAs. Beware of optimizing MACD too often. If you fiddle with MACD long enough, you can make it give you any signal you'd like. - -**FIGURE 23.1** ABX weekly, 26- and 13-week EMAs, 12-26-9 MACD Lines. *(Chart by Stockcharts.com)* - -#### MACD Lines - -Barrick Gold Corporation (ABX), which has the largest market capitalization of all U.S. listed gold companies, was dragged down in 2012 and 2013 by the bear market in gold. Notice the sell signal, marked by a red vertical arrow, when the fast line crossed below the slow line. That signal reversed more than a year later, when the fast line crossed above the slow line, marked with a green vertical arrow. - -Notice several additional patterns on this chart. When ABX fell to a record low, marked B, MACD Lines refused to confirm: they didn't fall to a new low but traced out a double bottom. That new low B turned out to be a false downside breakout, a bullish sign. Bears' last attempt to drive ABX lower, in area C, wasn't confirmed by MACD Lines, which maintained a steady uptrend. At the right edge of the chart, MACD Lines have reached a new high for the upmove, indicating strength. Both EMAs are rising, confirming the bullish trend. - -A "q**uick-and-dirty**" way to plot MACD can be used by traders whose software doesn't include this indicator. Some packages allow you to draw only two EMAs. In that case, you can use crossovers between two EMAs, such as 12-day and 26-day EMAs as a proxy for MACD and Signal lines. - -## **MACD-Histogram** - -MACD-Histogram offers a deeper insight into the balance of power between bulls and bears than the original MACD Lines. It shows not only whether bulls or bears are in control but also whether they are growing stronger or weaker. It is one of the best tools available to market technicians. - -MACD-Histogram = MACD line − Signal line - -MACD-Histogram measures the difference between the MACD line and the Signal line. It plots that difference as a histogram—a series of vertical bars. That distance may appear puny, but a computer rescales it to fill the screen (Figure 23.2). - -**FIGURE 23.2** DJIA daily, 26- and 13-day EMAs, 12-26-9 MACD Lines. *(Chart by Stockcharts.com)* - -#### MACD-Histogram - -When MACD Lines cross over, MACD-Histogram, which is derived from them, crosses above or below its zero line. You can see buy and sell signals of MACD lines, marked by green and red arrows. These signals are often delayed, but MACD-Histogram gives its own fine signals. We'll return to them later in this chapter, but at this point let's look at just one. - -Compare the Dow bottoms D and F. The second bottom was slightly lower (it turned out to be a false downside breakout), but the corresponding bottom of MACD-Histogram was more shallow than the first, warning that bears were weaker than before and an upside reversal was likely to occur. - -If the fast line is above the slow line, MACD-Histogram is positive and plotted above the zero line. If the fast line is below the slow line, MACD-Histogram is negative and plotted below the zero line. When the two lines touch, MACD-Histogram equals zero. - -When the spread between the MACD and Signal lines increases, MACD-Histogram becomes taller or deeper, depending on its direction. When the two lines draw closer, MACD-Histogram becomes shorter. - -The slope of MACD-Histogram is defined by the relationship between any two neighboring bars. If the last bar is higher (like the height of letters m–M), the slope of MACD-Histogram is up. If the last bar is lower (like the depth of letters P–p), then the slope of MACD-Histogram is down. - -## **Market Psychology** - -MACD-Histogram reveals the difference between long-term and short-term consensus of value. The fast MACD line reflects market consensus over a shorter period. The slow Signal line reflects market consensus over a longer period. MACD-Histogram tracks the difference between them. - -The slope of MACD-Histogram identifies the dominant market group. A rising MACD-Histogram shows that bulls are becoming stronger. A falling MACD-Histogram shows that bears are becoming stronger. - -When the fast MACD line rallies ahead of the slow Signal line, MACD-Histogram rises. It shows that bulls are becoming stronger than they have been—it is a good time to trade from the long side. When the fast MACD line drops faster than the slow line, MACD-Histogram falls. It shows that bears are becoming stronger—it's a good time to trade from the short side. - -When the slope of MACD-Histogram moves in the same direction as prices, the trend is safe. When the slope of MACD-Histogram moves in a direction opposite to that of prices, the health of the trend is in question. - -The slope of MACD-Histogram is more important than its position above or below the centerline. It is best to trade in the direction of the slope of MACD-Histogram because it shows whether bulls or bears dominate the market. The best buy signals occur when MACD-Histogram is below its centerline but its slope turns up, showing that bears have become exhausted. The best sell signals are given when MACD-Histogram is above its centerline but its slope turns down, showing that bulls have become exhausted. - -## **Trading Rules** - -MACD-Histogram gives two types of trading signals. One is common, occurring at every price bar. The other is rare but extremely strong. It may occur only a few times a year on the daily chart of a stock. It's even more rare on the weekly charts, but more frequent on the intraday charts. - -The common signal is given by the slope of MACD-Histogram. When the current bar is higher than the preceding bar, the slope is up. It shows that bulls are in control and it's time to buy. When the current bar is lower than the preceding bar, the slope is down. It shows that bears are in control and it's time to be short. When prices go one way but MACD-Histogram moves the other way, it shows that the dominant crowd is losing its enthusiasm and the trend is weaker than it appears. - -- 1. Buy when MACD-Histogram stops falling and ticks up. Place a protective stop below the latest minor low. -- 2. Sell short when MACD-Histogram stops rising and ticks down. Place a protective stop above the latest minor high. - -MACD-Histogram ticks up and down on the daily charts so often that it's not practical to buy and sell every time it turns. The changes of slope of MACD-Histograms are much more meaningful on the weekly charts, which is why it is included in the Triple Screen trading system (see Chapter 39). A combination of an exponential moving average and MACD-Histogram helps create the Impulse system, described in Chapter 40. - -## **When to Expect a New Peak or Valley** - -A record peak for the past three months of daily MACD-Histogram shows that bulls are very strong and prices are likely to rise even higher. A record new low for MACD-Histogram for the past three months shows that bears are very strong and lower prices are likely ahead. - -When MACD-Histogram reaches a new high during a rally, the uptrend is healthy and you can expect the next rally to retest or exceed its previous peak. If MACD-Histogram falls to a new low during a downtrend, it shows that bears are strong and prices are likely to retest or exceed their latest low. - -MACD-Histogram works like headlights on a car—it gives you a glimpse of the road ahead. Not all the way home, mind you, but enough to drive safely at a reasonable speed. - -## **More on MACD-Histogram** - -MACD-Histogram works in all timeframes: weekly, daily, and intraday. Signals in longer timeframes lead to greater price moves. For example, the signals of weekly MACD-Histogram lead to greater price changes than the daily or intraday MACD. This principle applies to all technical indicators. - -When you use MACD Lines and MACD-Histogram on the weekly charts, you don't have to wait until Friday to find your signals. A trend can turn in the middle of the week—the market does not watch the calendar. It makes sense to perform weekly studies each day. I set my software to plot weekly charts in the traditional manner, from Monday through Friday, but with a twist: the latest weekly bar reflects trading for the current week, starting on Monday. After the market closes on Monday, my latest 'weekly bar' is identical to Monday's daily bar. The weekly bar on Tuesday reflects two trading days, and so on. Because of this, on Monday I take the new weekly bar at a heavy discount, but by Thursday I start trusting it a great deal more. - -## **Divergences** - -Divergences are among the most powerful signals in technical analysis. In this subchapter, we'll focus on MACD-Histogram, but this concept applies to most indicators. - -Divergences between MACD-Histogram and prices are infrequent, but they give some of the most powerful signals. They often mark major turning points. They don't occur at every important top or bottom, but when you see one, you know that a big reversal is probably at hand. - -Bullish divergences occur towards the ends of downtrends—they identify market bottoms. A classical bullish divergence occurs when prices and the oscillator both fall to a new low, rally, with the oscillator rising above its zero line, then both fall again. This time, prices drop to a lower low, but an oscillator traces a higher bottom than during its previous decline. Such bullish divergences often precede sharp rallies (Figure 23.3). - -**FIGURE 23.3** DJIA weekly, 26- and 13-day EMAs, 12-26-9 MACD Lines and MACD-Histogram. *(Chart by TC2000 from the book* Two Roads Diverged: Trading Divergences*)* - -#### A Bullish Divergence - -Here you see a divergence that signaled the 2007–2009 bear market bottom, giving a strong buy signal right near the lows. In area A, the Dow appeared in a free fall, as Lehman Brothers went bust and waves of selling hit the market. The record low A of MACD-H indicated that bears were extremely strong and that the price bottom A was likely to be retested or exceeded. In area B, MACD-H rallied above its centerline, "breaking the back of the bear." Notice that the brief rally reached the "value zone" between the two moving averages. This is a fairly common target for bear market rallies. In area C, the Dow slid to a new bear market low, but MACD-H traced a much more shallow low. Its uptick completed a bullish divergence, giving a strong buy signal. - -I'm showing you this weekly chart of DJIA and its MACD-Histogram as a perfect example of a divergence. It deserves to be pinned to a wall near your trading desk. You won't always get such a perfect picture, but the closer you get to it, the more reliable it'll be. - -Notice that the **breaking of the centerline** between two indicator bottoms is an absolute must for a true divergence. MACD-Histogram has to cross above that line before skidding to its second bottom. If there is no crossover, there is no divergence. - -Another key point: MACD-H gives a **buy signal when it ticks up from the second bottom**. It does not have to cross above the centerline for the second time. The buy signal occurs when MACD-H, still below zero, simply stops declining and traces out a bar that is less negative than its preceding bar. - -This divergence of MACD-Histogram in Figure 23.3 was reinforced when MACD Lines traced a bullish pattern between the bottoms A and C, with the second bottom more shallow than the first. Such patterns of MACD Lines are quite rare. They indicate that the coming uptrend is likely to be especially strong, even though we cannot call them divergences because this indicator has no zero line. The rally that began in 2009 lasted almost a year before its first meaningful correction. - -Also, we can't call the pattern of lower indicator tops after the bottom C a divergence. The lower tops reflect a gradual weakening of the uptrend with the passage of time. In order to count as a divergence, MACD-Histogram has to cross and recross its zero line. - -Bearish divergences occur in uptrends—they identify market tops. A classical bearish divergence occurs when prices reach a new high and then pull back, with an oscillator dropping below its zero line. Prices stabilize and rally to a higher high, but an oscillator reaches a lower peak than it did on a previous rally. Such bearish divergences usually lead to sharp breaks. - -A bearish divergence shows that bulls are running out of steam, prices are rising out of inertia, and bears are ready to take control. Valid divergences are clearly visible—they seem to jump at you from the charts. If you need a ruler to tell whether there is a divergence, assume there is none (Figure 23.4). - -The previous chart featured a striking bullish divergence at the 2009 stock market bottom. Now, for a similarly striking illustration of a massive bearish divergence, let's roll back the clock and examine the 2007 bull market top. - -Notice that the **breaking of the centerline** between the two indicator tops is an absolute must for a true divergence. MACD-Histogram has to drop below its zero line before rising to the second top. - -Another key point: MACD-H gives a **sell signal when it ticks down from the second top**. We don't need to wait for it to cross below the centerline again. The sell signal occurs when MACD-H, still above zero, simply stops rising and traces out a bar shorter than the preceding bar. - -The message of a bearish divergence in Figure 23.4 was reinforced by MACD Lines, which traced a bearish pattern between the tops X and Z. The second top of - -**FIGURE 23.4** DJIA weekly, 26- and 13-day EMAs, 12-26-9 MACD Lines and MACD-Histogram. *(Chart by TC2000 from the book* Two Roads Diverged: Trading Divergences*)* - -#### A Bearish Divergence - -In area X, the Dow rallied to a new bull market high and MACD-Histogram rallied with it, rising above its previous peak and showing that bulls were extremely strong. This indicated that the price peak X was likely to be retested or exceeded. Note that the top X of MACD-H, despite its complex form, was not a divergence because the valley in its middle never sank below zero. - -In area Y, MACD-H fell below its centerline, "breaking the back of the bull." Notice that prices punched below the value zone between the two moving averages. This is a fairly common target for bull market breaks. Notice also a kangaroo tail at the bottom Y. In area Z, the Dow rallied to a new bull market high, but the rally of MACD-H was feeble, reflecting the bulls' weakness. Its downtick from peak Z completed a bearish divergence, giving a strong sell signal and auguring in the nastiest bear market in a generation. - -MACD Lines was more shallow than the first, confirming the bearish divergence of MACD-H. Such patterns of MACD Lines tell us that the coming downtrend is likely to be especially severe. - -"Missing right shoulder" divergences in which the second peak fails to cross the zero line are quite rare, but produce very strong trading signals. An experienced trader can look for them, but they are definitely not for beginners. They are described and illustrated in the e-book *Two Roads Diverged: Trading Divergence*s. - -Kerry Lovvorn performed extensive research to find that the most tradable divergences occur when the distance between the two peaks or the two bottoms of MACD-H is between 20 and 40 bars—and the closer to 20, the better. In other words, the two tops or two bottoms cannot be too far apart. 20 bars translate into 20 weeks on a weekly chart, 20 days on a daily chart, and so on. Kerry also found that the best signals come from divergences in which the second top or bottom is no more than half the height or the depth of the first. - -Triple Bullish or Bearish Divergences consist of three price bottoms and three oscillator bottoms or three price tops and three oscillator tops. They are even stronger than regular divergences. In order for a triple divergence to occur, a regular bullish or bearish divergence first has to abort. That's another good reason to practice tight money management! If you lose only a little on a whipsaw, you will preserve both the money and psychological strength to re-enter a trade. The third top or bottom has to be more shallow than the first but not necessarily the second. - -## **The Hound of the Baskervilles** - -This signal occurs when a reliable chart or indicator pattern doesn't lead to the action you expected and prices move in the opposite direction. A divergence may indicate that an uptrend is over, but if prices continue to rise, they give the Hound of the Baskervilles signal. - -This signal is named after the story by Sir Arthur Conan Doyle in which Sherlock Holmes was called to investigate a murder at a country estate. He found the essential clue when he realized that the family dog didn't bark while the murder was being committed. That meant the dog knew the criminal and the murder was an inside job. The *signal was given by the lack of expected action*—by the lack of barking! - -When the market refuses to bark in response to a perfectly good signal, it gives you the Hound of the Baskervilles signal. This shows that something is fundamentally changing below the surface. Then it is time to get in gear with the new powerful trend. - -I am not a fan of "stop-and-reverse" orders, but make an exception for the Hound of the Baskervilles. On those rare occasions when a bearish divergence aborts, I may go long. In the rare instances when a bullish divergence aborts, I look to go short. - -## ■ **24. The Directional System** - -The Directional system is a trend-following method developed by J. Welles Wilder, Jr., in the mid-1970s and modified by several analysts. It identifies trends and shows when a trend is moving fast enough to make it worth following. It helps traders to profit by taking chunks out of the middle of important trends. - -## **How to Construct the Directional System** - -*Directional Movement* is defined as the portion of today's range that is outside of the previous day's range. The Directional system checks whether today's range extends above or below the previous day's range and averages that data over a period of time. These complex calculations are best performed on a computer. The Directional system is included in most programs for technical analysis. - -Directional movement is the largest part of today's range that is outside of yesterday's range. - -- 1. If today's range extends above yesterday's range, Directional Movement is positive (+DM). -- 2. If today's range extends below yesterday's range, Directional Movement is negative (−DM). -- 3. If today's range is inside of yesterday's range or extends above and below it by equal amounts, there is no Directional Movement (DM = 0). If today's range extends both above and below yesterday's range, DM is positive or negative, pending on which part of the "outside range" is larger. -- 4. On a limit-up day, +DM equals the distance from today's close to yesterday's high. On a limit-down day, −DM equals the distance from today's close to yesterday's low. -- 1. Identify "**Directional Movement**" (DM) by comparing today's high-low range with yesterday's high-low range. Directional Movement is the largest part of today's range outside of yesterday's range. There are four types of DM (Figure 24.1). DM is always a positive number (+DM and −DM refer simply to movement above or below yesterday's range). -- 2. Identify the "**True Range**" (TR) of the market you analyze. TR is always a positive number, the largest of the following three: - - a. The distance from today's high to today's low - - b. The distance from today's high to yesterday's close - - c. The distance from today's low to yesterday's close -- 3. Calculate daily **Directional Indicators** (+DI and −DI). They allow you to compare different markets by expressing their directional movement as a percentage of each market's true range. Each DI is a positive number: +DI equals - -zero on a day with no directional movement up; −DI equals zero on a day with no directional movement down. - -$$ -+ DI = \frac{+ DM}{TR} \qquad - DI = \frac{- DM}{TR} -$$ - -4. Calculate **smoothed Directional Lines** (+DI13 and −DI13). Smooth +DI and −DI are created with moving averages. Most software packages allow you to pick any period for smoothing, such as a 13-day moving average. You get two indicator lines: smoothed Positive and Negative Directional lines, +DI13 and −DI13. Both numbers are positive. They are usually plotted in different colors. - -**The relationship between Positive and Negative lines identifies trends**. When +DI13 is on top, it shows that the trend is up, and when −DI13 is on top, it shows that the trend is down. The crossovers of +DI13 and −DI13 give buy and sell signals. - -- 5. Calculate the **Average Directional Indicator** (ADX). This unique component of the Directional system shows when a trend is worth following. ADX measures the spread between Directional Lines +DI13 and −DI13. It is calculated in two steps: - - a. Calculate the daily **Directional Indicator** DX: - -$$ -DX = \frac{+DI_{13} - -DI_{13}}{+DI_{13} + -DI_{13}} \cdot 100 -$$ - -For example, if +DI13 = 34 and −DI13 = 18, then, - -$$ -DX = \frac{34 - 18}{34 + 18} \cdot 100 = 30.77, rounded off to 31 -$$ - -b. Calculate the Average Directional Indicator ADX by smoothing DX with a moving average, such as a 13-day EMA. - -During a persistent trend, the spread between two smoothed Directional lines increases, and ADX rises. ADX declines when a trend reverses or when a market enters a trading range. It pays to use trend-following methods only when ADX is rising. - -## **Crowd Behavior** - -The Directional system tracks changes in mass bullishness and bearishness by measuring the capacity of bulls and bears to move prices outside of the previous day's range. If today's high is above yesterday's high, it shows that the market crowd is more bullish. If today's low is below yesterday's low, it shows that the market crowd is more bearish. - -The relative positions of Directional lines identify trends. When the Positive Directional line is above the Negative Directional line, it shows that bullish traders dominate the market. When the Negative Directional line rises above the Positive Directional line, it shows that bearish traders are stronger. It pays to trade with the upper Directional line. - -The Average Directional Indicator (ADX) rises when the spread between Directional lines increases. This shows that market leaders, for example bulls in a rising market, are becoming stronger, the losers weaker, and the trend is likely to continue. - -ADX declines when the spread between Directional lines narrows down. This shows that the dominant market group is losing its strength, while the underdogs are gaining. It suggests that the market is in turmoil, and it's better not to use trendfollowing methods. - -**FIGURE 24.2** ANV daily, 22-day EMA, Directional System (13). *(Chart by Stockcharts.com)* - -#### Directional System - -Swings between strength and weakness are a typical market feature. Strong stock groups grow weak while the weak ones become strong, and then they swap roles again. Gold and silver stocks were the two weakest stock industry groups in 2013, but they began bottoming out in December. Allied Nevada Gold Corp. (ANV) was one of several stocks I began buying at that time. - -The low at point A was \$3.07, at point B the stock dipped to \$3.01 and recoiled, leaving behind a false downside breakout, and at point C it retested support by declining to \$3.08—and from there it was off to the races, with its EMA turning up. The Directional system gave its buy signal during the bar marked with a vertical green arrow: the green bullish Directional line was above the red bearish line, while the ADX penetrated above the red line. - -You may find a similar shorting signal in the lettered area, but a discretionary trader doesn't trade every signal he sees: shorting a stock near \$3 that has already declined from \$45 would mean chasing a very old trend. Near the right edge you see a pullback to value, offering a good opportunity to add to the long position. - -## **Trading Rules** - -- 1. Trade only from the long side when the positive Directional line is above the negative one. Trade only from the short side when the negative Directional line is above the positive one. The best time to trade is when the ADX is rising, showing that the dominant group is getting stronger. -- 2. When ADX declines, it shows that the market is becoming less directional. There are likely to be many whipsaws. When ADX points down, it is better not to use a trend-following method. -- 3. When ADX falls below both Directional lines, it identifies a flat, sleepy market. Do not use a trend-following system but get ready to trade, because major trends emerge from such lulls. -- 4. The single best signal of the Directional system comes after ADX falls below both Directional lines. The longer it stays there, the stronger the base for the next move. When ADX rallies from below both Directional lines, it shows that the market is waking up from a lull. When ADX rises by four steps (i.e., from 9 to 13) from its lowest point below both Directional lines, it "rings a bell" on a new trend (Figure 24.2). It shows that a new bull market or bear market is being born, depending on what Directional line is on top. - - 5. When ADX rallies above both Directional lines, it identifies an overheated market. When ADX turns down from above both Directional lines, it shows that the major trend has stumbled. It is a good time to take profits on a directional trade. If you trade large positions, you definitely want to take partial profits. - -Market indicators give hard signals and soft signals. For example, when a moving average changes direction, it is a hard signal. A downturn of ADX is a soft signal. Once you see ADX turn down, you ought to be very, very careful about adding to positions. You should start taking profits, reducing positions, and looking to get out. - -## **Average True Range—Help from Volatility** - -Average True Range (ATR) is an indicator that averages True Ranges (described in "How to Construct the Directional System" above) over a selected period of time, such as 13 days. Since volatility is a key factor in trading, you can track it by plotting a set of ATR lines above and below a moving average. They will help you visualize current volatility and you can use that for decision making. - -Kerry Lovvorn likes to plot three sets of lines around a moving average: at one, two, and three ATRs above and below an EMA. These can be used for setting up entry points and stops, as well as profit targets (Figure 24.3). - -Entries In the chapter on moving averages, we saw that it was a good idea to buy below value—below the EMA. But how far below? Normal pullbacks tend to bottom out near the minus one ATR. - -Stops You want your stop to be at least one ATR away from your entry. Anything less than that would place your stop within the zone of normal market noise, - -**FIGURE 24.3** LULU daily, 21 EMA, volume with 8 EMA, ATR channels. *(Chart by TradeStation)* - -#### ATR Channels - -This diary of a trade, Lululemon Athletica Inc. (LULU), was posted by Kerry in SpikeTrade .com, where we post diaries of our trades. It shows using ATR channels for profit-taking. - -LULU gapped down on a wide range bar on September 18 after an earnings announcement. There was no downside follow-through, and as the stock rallied, Kerry drew a horizontal line at the midpoint of its tall bar A, which tends to serve as short-term support. - -As LULU pulled back, its daily ranges narrowed, and volume dried up in area B. Kerry bought LULU at \$72.02 on Monday, September 30, during bar C, as it recovered from a false downside breakout. He took profits on 1/3 of his position at \$73.70 later that day, as LULU came within a few cents of plus 1 ATR. On Thursday, during bar D, LULU hit its plus 2 ATR at \$76.63, and Kerry exited another 1/3 of his position. He took the remaining 1/3 near the mid-range of bar D. - -making it likely to be hit by a random short-term move. Placing your stop further away makes it more likely that only a real reversal can hit your stop. - -Targets After you buy a stock, depending on how bullish it appears to you, you can place an order to take profits at +1, +2, or even +3 ATRs. Kerry likes to get out of his winning positions in several steps, placing orders for taking profits for one third at 1 ATR, another third at 2 ATR, and the rest at 3 ATR. - -It is highly unusual for any market to trade outside of three ATRs—three times average true range—for a long time. Those tend to be the extreme moves. Whenever you see a market trade outside of its three ATRs, either up or down, it is reasonable to expect a pullback. - -ATR channels work not only with prices. We can also use them to bracket technical indicators to help identify the extreme levels where trends are likely to reverse. I use ATR channels on the weekly charts of Force Index. - -## ■ **25. Oscillators** - -While trend-following indicators, such as MACD Lines or Directional system, help identify trends, oscillators help catch turning points. Whenever masses of traders become gripped by greed or fear, they surge but after a while their intensity fizzles out. Oscillators measure the speed of any surge and show when its momentum is starting to break. - -Oscillators identify emotional extremes of market crowds. They allow you to find unsustainable levels of optimism and pessimism. Professionals tend to fade those extremes. They bet against deviations and for a return to normalcy. When the market rises and the crowd gets up on its hind legs and roars from greed, professionals get ready to sell short. They get ready to buy when the market falls and the crowd howls in fear. Oscillators help us time those trades. - -## **Overbought and Oversold** - -Overbought means a market is too high and ready to turn down. An oscillator becomes **overbought** when it reaches a high level associated with tops in the past. Oversold means a market is too low and ready to turn up. An oscillator becomes **oversold** when it reaches a low level associated with bottoms in the past. - -Be sure to remember that those aren't absolute levels. An oscillator can stay overbought for weeks when a new strong uptrend begins, giving premature sell signals. It can stay oversold for weeks in a steep downtrend, giving premature buy signals. Knowing when to use oscillators and when to rely on trend-following indicators is a hallmark of a mature analyst (see Chapter 39). - -We can mark overbought and oversold oscillator levels by horizontal reference lines. Place those lines so that they cut across only the highest peaks and the lowest valleys of that oscillator for the past six months. The proper way to draw those lines is to place them so that an oscillator spends only about 5 percent of its time beyond each line. Readjust these lines once every three months. - -When an oscillator rises or falls beyond its reference line, it helps identify an unsustainable extreme, likely to precede a top or a bottom. Oscillators work spectacularly well in trading ranges, but they give premature and dangerous signals when a new trend erupts from a range. - -We've already reviewed one important oscillator—MACD-Histogram. We looked at it "ahead of schedule" because it's derived from a trend-following indicator, MACD Lines. We'll now explore very popular oscillators: Stochastic and Relative Strength Index (RSI). - -## ■ **26. Stochastic** - -Stochastic is an oscillator popularized by the late George Lane. It's now included in many software programs and widely used by computerized traders. Stochastic tracks the relationship of each closing price to the recent high-low range. It consists of two lines: a fast line called %K and a slow line called %D. - -1. The first step in calculating Stochastic is to obtain "raw Stochastic" or %K: - -$$ -\%K = \frac{C_{\text{tod}} - L_n}{H_n - L_n} \cdot 100 -$$ - -where *C*tod = today's close. - -*Ln* = the lowest point for the selected number of days. - -*Hn* = the highest point for the selected number of days. - -*n* = the number of days for Stochastic, selected by the trader. - -The standard width of Stochastic's time window is 5 days, although some traders use higher values. A narrow window helps catch more turning points, but a wider window helps identify more important turning points. - -2. The second step is to obtain %D. It is done by smoothing %K—usually over a three-day period. It can be done in several ways, such as: - -$$ -\%D = \frac{3 \text{-day sum of } (C_{\text{tod}} - L_n)}{3 \text{-day sum of } (H_n - L_n)} \cdot 100 -$$ - -There are two ways to plot Stochastic—Fast and Slow. **Fast Stochastic** consists of two lines—%K and %D—plotted on the same chart. It's very sensitive but leads to many whipsaws. Many traders prefer to use **Slow Stochastic**, adding an extra layer of smoothing. The %D of Fast Stochastic becomes the %K of Slow Stochastic and is smoothed by repeating step 2 to obtain %D of Slow Stochastic. Slow Stochastic does a better job of filtering out market noise and leads to fewer whipsaws (Figure 26.1). - -Stochastic is designed to fluctuate between 0 and 100. Reference lines are usually drawn at 20 percent and 80 percent levels to mark overbought and oversold areas. - -## **Crowd Psychology** - -Each price is the consensus of value of all market participants at the moment of transaction. Daily closing prices are important because the settlement of trading accounts depends on them. The high of any period marks the maximum power of bulls during that time. The low of that period shows the maximum power of bears during that time. - -Stochastic measures the capacity of bulls or bears to close the market near the upper or lower edge of the recent range. When prices rally, markets tend to close near the high. If bulls can lift prices during the day but can't close them near the top, Stochastic turns down. It shows that bulls are weaker than they appear and gives a sell signal. - -Daily closes tend to occur near the lows in downtrends. When a bar closes near its high, it shows that bears can only push prices down during the day but cannot hold them down. An upturn of Stochastic shows that bears are weaker than they appear and flashes a buy signal. - -**FIGURE 26.1** CVX daily, 26-day EMA. 5-day Slow Stochastic. *(Chart by Stockcharts.com)* - -#### Stochastic - -This chart of Chevron Corporation (CVX) illustrates both helpful and dangerous aspects of Stochastic. As long as the stock stays in a sideways trading range, which is where it was for most of the time covered by this chart, Stochastic keeps nailing down short-term tops and bottoms. Stochastic gives buy signals, marked here with vertical green arrows, when it rises above its lower reference line. It gives sell signals, marked by vertical red arrows, by sinking below its upper reference line. Those signals are reinforced by broad, down-sloping Stochastic tops, marked by diagonal black arrows. - -A careful reader will find several instances of false breakouts in Figure 26.1 that reinforce Stochastic signals. Using Stochastic signals during a trading range is like going to a cash machine. That machine stops working and eats your card after a trend erupts from the trading range. A sharp downtrend near the right edge overrides the Stochastic buy signal. - -A trader may rely on Stochastic in a trading range, but should use protective stops because the last trade in a range always creates a loss when a trend begins. We'll focus on stop placement in chapter 54. - -## **Trading Rules** - -Stochastic shows when bulls or bears become stronger or weaker. This information helps decide whether bulls or bears are likely to win the current fight. It pays to trade with winners and against losers. - -Stochastic gives three types of trading signals, listed here in the order of importance: divergences, the level of Stochastic lines, and their direction. - -#### **Divergences** - -The most powerful buy and sell signals of Stochastic are given by divergences between this indicator and prices. - -- 1. A bullish divergence occurs when prices fall to a new low, but Stochastic traces a higher bottom than during its previous decline. It shows that bears are losing strength and prices are falling out of inertia. As soon as Stochastic turns up from its second bottom, it gives a strong buy signal: go long and place a protective stop below the latest low in the market. The best buy signals occur when the first bottom is below the lower reference line and the second above it. -- 2. A bearish divergence occurs when prices rally to a new high, but Stochastic traces a lower top than during its previous rally. It shows that bulls are becoming weaker and prices are rising out of inertia. As soon as Stochastic turns down from the second top, it gives a sell signal: go short and place a protective stop above the latest price peak. The best sell signals occur when the first top is above the upper reference line and the second below. - -#### **Overbought and Oversold** - -When Stochastic rallies above its upper reference line, it shows that the market is overbought. It means that a stock or even the entire market is unusually high and ready to turn down. When Stochastic falls below its lower reference line, it shows that a stock or even the entire market is oversold: too low and ready to turn up. - -These signals work fine during trading ranges but not when a market develops a trend. In uptrends, Stochastic quickly becomes overbought and keeps giving sell signals while the market rallies. In downtrends, it quickly becomes oversold and keeps giving premature buy signals. It pays to combine Stochastic with a long-term trend-following indicator (see Chapter 39). The Triple Screen trading system allows traders to take buy signals from daily Stochastic only when the weekly trend is up. When the weekly trend is down, it allows traders to take only sell signals from daily Stochastic. - -- 1. When you identify an uptrend on a weekly chart, wait for daily Stochastic lines to decline below their lower reference line. Then, without waiting for their crossover or an upturn, place a buy order above the high of the latest price bar. Once you are long, place a protective stop below the low of the trade day or the previous day, whichever is lower. -- The shape of Stochastic's bottom often indicates whether a rally is likely to be strong or weak. If the bottom is narrow and shallow, it shows that bears are weak and the rally is likely to be strong. If it is deep and wide, it shows that bears are strong and the rally is likely to be weak. It is better to take only strong buy signals. -- 2. When you identify a downtrend on a weekly chart, wait for daily Stochastic lines to rally above their upper reference line. Then, without waiting for their crossover or a downturn, place an order to sell short below the low of the latest price bar. By the time Stochastic lines cross over, the market is often in a free fall. Once you are short, place a protective stop above the high of the trade day or the previous day, whichever is higher. - -The shape of Stochastic's top often indicates whether a decline is likely to be steep or sluggish. A narrow top of Stochastic shows that bulls are weak and a severe decline is likely. A Stochastic top that is high and wide shows that bulls are strong—it is safer to pass up that sell signal. - -3. Do not buy when Stochastic is overbought, and don't sell short when it is oversold. This rule filters out most bad trades. - -#### **Line Direction** - -When both Stochastic lines are headed in the same direction, they confirm the shortterm trend. When prices rise and both Stochastic lines rise, the uptrend is likely to continue. When prices slide and both Stochastic lines fall, the short-term downtrend is likely to continue. - -## **More on Stochastic** - -You can use Stochastic in any timeframe, including weekly, daily, or intraday. **Weekly** Stochastic usually changes its direction one week prior to weekly MACD-Histogram. If weekly Stochastic turns, it warns you that MACD-Histogram is likely to turn the next week—time to tighten stops on existing positions or start taking profits. - -Choosing the **width of the Stochastic window** is important. Shorter-term oscillators are more sensitive. Longer-term oscillators turn only at important tops and bottoms. If you use Stochastic as a stand-alone oscillator, a longer Stochastic is preferable. If you use Stochastic as part of a trading system, combined with trendfollowing indicators, then a shorter Stochastic is preferable. - -## ■ **27. Relative Strength Index** - -Relative Strength Index (RSI) is an oscillator developed by J. Welles Wilder, Jr. It measures any trading vehicle's strength by monitoring changes in its closing prices. It's a leading or a coincident indicator—never a laggard. - -$$ -RSI = 100 - \frac{100}{1 + RS} -$$ - -RS = Average of net UP closing changes for selected period of days Average of net DOWN closing changes for the same number of days - -RSI fluctuates between 0 and 100. When it reaches a peak and turns down, it identifies a top. When it falls and then turns up, it identifies a bottom. The pattern of RSI peaks and valleys doesn't change in response to the width of its time window. Trading signals become more visible with shorter RSI, such as 7 or 9 days. (Figure 27.1) - -Overbought and oversold RSI levels vary from market to market and even from year to year in the same market. There are no magical levels for all tops and - -**FIGURE 27.1** CVX daily, 13-day RSI. *(Chart by Stockcharts.com)* - -#### Relative Strength Index (RSI) - -Here we apply a 13-day RSI to the chart of Chevron Corporation (CVX) that we already examined in Figure 26.1, in the chapter on Stochastic. Both RSI and Stochastic work well in trading ranges, but give premature and dangerous signals when prices begin to trend. - -RSI, based exclusively on closing prices, is less noisy than Stochastic. It calls for rallies when it rises above its lower reference line, marked here by vertical green arrows. It signals declines by sinking below its upper reference line, marked here by vertical red arrows. Comparing both charts, you see that the RSI signals emerge earlier. - -A very powerful sell signal is given by a bearish divergence of RSI, marked here by a diagonal solid arrow and a dashed red arrow. The stock rallied to a new high, while RSI couldn't reach its upper reference line, pointing to that rally's hidden weakness. - -The sharp break near the right edge pushes prices lower despite the RSI buy signal. To avoid getting hurt, we must use protective stops because the last trade in a range can easily create a loss when a new trend begins. - -bottoms. Oversold and overbought signals are like hot and cold readings on a window thermometer. The same temperature levels mean different things in summer or winter. Horizontal reference lines must cut across the highest peaks and the lowest valleys of RSI. They are often drawn at 30% and 70%. Some traders use 40% and 80% levels in bull markets or 20% and 60% in bear markets. Use the 5 percent rule: draw each line at a level beyond which RSI has spent less than 5 percent of its time in the past 4 to 6 months. Adjust reference lines once every three months. - -## **Mass Psychology** - -Each price represents the consensus of value of all market participants at the moment of transaction. The closing price reflects the most important consensus of the day because the settlement of traders' accounts depends on it. When the market closes higher, bulls make money and bears lose. When the market closes lower, bears make money and bulls lose. - -Traders pay more attention to closing prices than to any other prices of the day. In the futures markets, money is transferred from losers' to winners' accounts at the end of each trading day. RSI shows whether bulls or bears are stronger at closing time—the crucial money-counting time in the market. - -## **Trading Rules** - -RSI gives three types of trading signals. They are, in order of importance, divergences, chart patterns, and the level of RSI. - -### **Bullish and Bearish Divergences** - -Divergences between RSI and prices tend to occur at important tops and bottoms. They show when the trend is weak and ready to reverse. - -- 1. Bullish divergences give buy signals. They occur when prices fall to a new low but RSI makes a higher bottom than during its previous decline. Buy as soon as RSI turns up from its second bottom, and place a protective stop below the latest minor price low. Buy signals are especially strong if the first RSI bottom is below its lower reference line and the second bottom is above that line. -- 2. Bearish divergences give sell signals. They occur when prices rally to a new peak but RSI makes a lower top than during its previous rally. Sell short as soon as RSI turns down from its second top, and place a protective stop above the latest minor high. Sell signals are especially strong if the first RSI top is above its upper reference line and the second top is below it. - -### **Charting Patterns** - -RSI often breaks through support or resistance a few days ahead of prices, providing hints of likely trend changes. RSI trendlines are usually broken one or two days before price trend changes. - -- 1. When RSI breaks above its downtrend line, place an order to buy above the latest price peak to catch an upside breakout. -- 2. When RSI breaks below its uptrend line, place an order to sell short below the latest price low to catch a downside breakout. - -### **RSI Levels** - -When RSI rises above its upper reference line, it shows that bulls are strong but the market is overbought and entering its sell zone. When RSI declines below its lower reference line, it shows that bears are strong but the market is oversold and entering its buy zone. - -It pays to buy using overbought signals of daily RSI only when the weekly trend is up. It pays to sell short using sell signals of daily RSI only when the weekly trend is down (see Chapter 39). - -- 1. Buy when RSI declines below its lower reference line and then rallies above it. -- 2. Sell short when RSI rises above its upper reference line and then crosses below it. - -When we analyze markets, we deal with only a few numbers—the opening, high, low, and closing prices for each bar, plus volume, and also open interest for derivatives, such as futures and options. A typical beginner error is "shopping for indicators." A trader may feel bullish about the stock market, but then he notices that the moving averages of the Dow and the S&P are still declining. Their bearish message doesn't sit well with him; he starts scrolling through his software menu and finds several oscillators, such as Stochastic or RSI. Sure enough, they look oversold, which is normal in a downtrend. The eager beginner takes those oversold readings as a signal to buy. The downtrend continues, he loses money—and then complains that technical analysis didn't work. - -It is much better to use only a small number of indicators with a strict hierarchy for their analysis, including multiple timeframes. We'll return to this essential topic in the chapter on the Triple Screen trading system. - -# Volume and Time - -Many traders focus exclusively on price quotes, but while those are extremely important, there's more to the market than price. Volume of transactions provides a valuable additional dimension. Joseph Granville, a pioneer of volume studies, was fond of saying "Volume is the steam that makes the choo-choo go." - -Another hugely important factor of market analysis is time. Markets live and move in different timeframes at the same time. No matter how carefully you analyze the daily chart, its trend can be upended by a move that erupts from another timeframe. - -In this section we'll focus on volume and volume-based indicators. We'll also look into tying all market decisions to their timeframes. - -## ■ **28. Volume** - -Volume reflects the activity of traders and investors. Each unit of volume represents actions of two individuals: one sells a share or a contract and another buys that share or a contract. Daily volume is the number of shares or contracts traded in one day (Figure 28.1). - -Traders usually plot volume as a histogram—vertical bars whose height reflects each day's volume. They usually draw it underneath prices. Changes in volume show how bulls and bears react to price swings and provide clues to whether trends are likely to continue or to reverse. - -Some traders ignore volume. They think that prices already reflect all information known to the market. They say, "You get paid on price and not on volume." - -**FIGURE 28.1** BID daily, 22-day EMA, volume. *(Chart by Stockcharts.com)* - -#### Volume - -Sotheby's Holdings Inc. (BID) is the world's biggest publicly traded auction house. It provides a window into what the world's big money is doing in terms of their conspicuous consumption. This company's business was buoyed in 2013 by the influx of new money from Asia, but the stock hit its head on the ceiling during that year's last quarter. - -In areas A and B, volume increased during the rally, confirming the uptrend and calling for higher prices ahead. In areas C and D, volume flashed warning signs for the bulls—it shrank during each rally attempt. Notice false upside breakouts in those areas and an atypical form of a kangaroo tail in area C. Rising volume near the right edge confirms the power of bears. - -Professionals, on the other hand, know that analyzing volume can help them understand markets deeper and trade better. - -Volume depends on the size of the trading crowd and the activity levels of buyers and sellers. If you compare volumes of two markets, you'll see which is more active or liquid. You are likely to receive better fills and suffer less slippage in liquid markets than in thin, low-volume markets. - -There are three ways to measure volume: - -- 1. The actual number of shares or contracts traded. For example, the New York Stock Exchange reports volume this way. This is the most objective way of measuring volume. -- 2. The number of trades that took place. Some international exchanges report volume this way. This method is less objective because it doesn't distinguish between a 100-share trade and a 5000-share trade. -- 3. Tick volume is the number of price changes during a selected period of time, such as 10 minutes or an hour. It is called tick volume because most changes equal 1 tick. Some exchanges don't report intraday volume, forcing day traders to use tick volume as a proxy for real volume. - -A note to forex traders: since that market is decentralized and reports no volume, you can use the volume of currency futures as its proxy. Futures of all major currencies, measured against the U.S. dollar, are traded in Chicago and on the electronic exchanges. We can assume that their volume trends are reasonably similar to those in the forex markets, since both respond to the same market forces. - -**Crowd Psychology** - -Volume reflects the degree of financial and emotional involvement, as well as pain, among market participants. A trade begins with a financial commitment by two persons. The decision to buy or sell may be rational, but the act of buying or selling creates an emotional commitment in most people. Buyers and sellers crave to be right. They scream at the market, pray, or use lucky talismans. The level of volume reflects the degree of emotional involvement among traders. - -Each tick takes money away from losers and gives it to winners. When prices rise, longs make money and shorts lose. When prices fall, shorts gain and longs lose. Winners feel happy and elated, while losers feel depressed and angry. Whenever prices move, about half of the traders are hurting. When prices rise, bears are in pain, and when prices fall, bulls suffer. The greater the volume, the more pain in the market. - -Traders react to losses like frogs to hot water. If you throw a frog into a hot pail, it'll jump in response to sudden pain, but if you put a frog into cool water and heat it slowly, you can boil it alive. If a sudden price change hits traders, they jump from pain and liquidate losing positions. On the other hand, losers can be very patient if their losses increase gradually. - -You can lose a great deal of money in a sleepy stock or a future, such as corn, where a one-cent move costs only \$50 per contract. If corn goes against you just a few cents a day, that pain is easy to tolerate. If you hang on, those pennies can add up to thousands of dollars in losses. Sharp moves, on the other hand, make losing traders cut their losses in a panic. Once weak hands get shaken out, leaving behind a volume spike, the market is ready to reverse. Trends can persist for a long time on moderate volume but can expire after a burst of volume. - -Who buys from a trader who is selling his losing long position? It may be a short seller who wants to cover and take profits. It may be a bargain hunter who steps in because prices are "too low." A bottom-picker takes over the position of a loser who washed out—he either catches the bottom or becomes the next loser. - -Who sells to a trader who buys to cover his losing short position? It may be a savvy investor who takes profits on his long position. It also may be a top-picker who sells short because he thinks that prices are "too high." He assumes the position of a loser who covered his shorts, and only the future will tell whether he is right or wrong. - -When shorts give up during a rally, they buy to cover and push the market higher. Prices rise, flush out even more shorts, and the rally feeds on itself. When longs give up during a decline, they sell, pushing the market lower. Falling prices flush out even more longs, and the decline feeds on itself. Losers who give up on their trades propel trends. A trend that moves on steady volume is likely to persist. It shows that new losers are replacing those who washed out. - -When volume falls, it shows that the supply of losers is running low and a trend is ready to reverse. It happens after enough losers catch on to how wrong they are. Old losers keep bailing out, but fewer new ones come in. Falling volume is a sign that the trend is about to reverse. - -A burst of extremely high volume also gives a signal that a trend is nearing its end. It shows that masses of losers are bailing out. You can probably recall holding a losing trade longer than you should have. Once the pain became intolerable and you got out, the trend reversed and the market went the way you expected, only without you. This happens time and again because most humans react to stress similarly and bail out at roughly the same time. Professionals don't hang on while the market beats them up. They quickly close out losing trades and reverse or wait on the sidelines, ready to re-enter. - -Volume spikes are more likely to signal an imminent reversal of a downtrend than an uptrend. Volume spikes in downtrends reflect explosions of fear. Fear is a powerful but short-term emotion—people run fast, dump shares, and then the trend is likely to reverse. Volume spikes in uptrends are driven by greed, which is a slowermoving, happy emotion. There may be a slight pause in an uptrend after a volume spike, but then the trend is quite likely to resume. - -Volume usually stays relatively low in trading ranges because there is relatively little pain. People feel comfortable with small price changes, and flat markets can drag on a long time. A breakout is often marked by a dramatic increase in volume because losers run for the exits. A breakout on low volume shows little emotional commitment to a new trend. It indicates that prices are likely to return into their trading range. - -Rising volume during a rally shows that more buyers and short sellers are pouring in. Buyers are eager to buy even if they have to pay up, and shorts are eager to sell to them. Rising volume shows that losers who leave are being replaced by a new crop of losers. - -When volume shrinks during a rally, it shows that bulls are becoming less eager, while bears are no longer running for cover. The intelligent bears have left long ago, followed by weak bears who could not take the pain. Falling volume shows that fuel is being removed from the uptrend and it's ready to reverse. - -When volume dries up during a decline, it shows that bears are less eager to sell short, while bulls are no longer running for the exits. The intelligent bulls have sold long ago, and the weak bulls have been shaken out. Falling volume shows that the remaining bulls have greater pain tolerance. Perhaps they have deeper pockets or bought later in the decline, or both. Falling volume identifies an area in which a downtrend is likely to reverse. - -This reasoning applies to all timeframes. As a rule of thumb, if today's volume is higher than yesterday's, then today's trend is likely to continue. - -## **Trading Pointers** - -The terms "high volume" and "low volume" are relative. What's low for Amazon may be very high for a less popular stock, while what's low for gold is high for platinum, and so on. We compare volumes of different stocks, futures, or options only when selecting higher-volume trading vehicles. Most of the time, we compare current trading volume of a stock to its average volume. As a rule of thumb, "high volume" for any given market is at least 25 percent above its average for the past two weeks, while "low volume" is at least 25 percent below average. - -- 1. High volume confirms trends. If prices rise to a new peak and volume reaches a new high, then prices are likely to retest or exceed that peak. -- 2. If the market falls to a new low and the volume reaches a new high, that bottom is likely to be retested or exceeded. A very high volume "climax bottom" is almost always retested on low volume, offering an excellent buying opportunity. -- 3. If volume shrinks while a trend continues, that trend is ripe for a reversal. When a market rises to a new peak on lower volume than its previous peak, look to take profits on a long position and/or for a shorting opportunity. This technique does not work as well in downtrends because a decline can persist on low volume. There is a saying on Wall Street: "It takes buying to put prices up, but they can fall of their own weight." -- 4. Watch volume during reactions against the trend. When an uptrend is punctuated by a decline, volume often picks up in a flurry of profit taking. When that dip continues but volume shrinks, it shows that bulls are no longer running or that selling pressure is spent. When volume dries up, it shows that the reaction is nearing its end and the uptrend is ready to resume. This identifies a good buying opportunity. Major downtrends are often punctuated by rallies that begin on heavy volume. Once weak bears have been flushed out, volume shrinks and gives a signal to sell short. - -## ■ **29. Volume-Based Indicators** - -Several indicators help clarify volume's trading signals. For example, a 5-day EMA of volume can identify volume's trends. A rising EMA of volume affirms the current price trend, while a declining one points to the price trend's weakness. - -This and other volume-based indicators provide more precise timing signals than volume bars. They include On-Balance Volume and Accumulation/Distribution, described below. Force Index combines price and volume data to help identify areas where prices are likely to reverse. - -## **On-Balance Volume** - -**On-Balance Volume** (OBV) is an indicator designed by Joseph Granville and described in his book, *New Strategy of Daily Stock Market Timing*. Granville used OBV as a leading indicator of the stock market, but other analysts applied it to futures. - -OBV is a running total of volume. Each day's volume is added or subtracted, depending on whether prices close higher or lower than on the previous day. When a stock closes higher, it shows that bulls won the day's battle; that day's volume is added to OBV. When a stock closes lower, it shows that bears won the day, and that day's volume is subtracted from OBV. If prices close unchanged, OBV stays unchanged. On-Balance Volume often rises or falls before prices, acting as a leading indicator. - -## **Crowd Psychology** - -Prices represent the consensus of value, but volume represents the emotions of market participants. It reflects the intensity of traders' financial and emotional commitments, as well as pain among losers, which is what OBV helps to track. - -A new high of OBV shows that bulls are powerful, bears are hurting, and prices are likely to rise. A new low of OBV shows that bears are powerful, bulls are hurting, and prices are likely to fall. When the pattern of OBV deviates from the pattern of prices, it shows that mass emotions aren't in gear with mass consensus. A crowd is more likely to follow its gut than its mind, and that's why changes in volume often precede price changes. - -## **Trading Signals** - -The patterns of OBV tops and bottoms are much more important than the absolute levels, which depend on the starting date of your calculations. It is safer to trade in the direction of a trend that is confirmed by OBV (Figure 29.1). - -- 1. When OBV reaches a new high, it confirms the power of bulls, indicates that prices are likely to continue to rise, and gives a buy signal. When OBV falls below its previous low, it confirms the power of bears, calls for lower prices ahead, and gives a signal to sell short. -- 2. OBV gives its strongest buy and sell signals when it diverges from prices. If prices rally, sell off, and then rise to a new high, but OBV rallies to a lower high, it creates a bearish divergence and gives a sell signal. If prices decline, rebound, and then fall to a new low, but OBV falls to a more shallow bottom, it traces a bullish divergence and gives a buy signal. Long-term divergences are more important than the short-term ones. Divergences that develop over the course of several weeks give stronger signals than those created over a few days. -- 3. When prices are in a trading range and OBV breaks out to a new high, it gives a buy signal. When prices are in a trading range and OBV breaks down and falls to a new low, it gives a signal to sell short. - -## **More on OBV** - -One of the reasons for Granville's success in stock market timing was that he combined OBV with two other indicators—the **Net Field Trend indicator** and the **Climax indicator**. Granville calculated OBV for each stock in the Dow Jones Industrial Average and rated its OBV pattern as rising, falling, or neutral. He called - -**FIGURE 29.1** MCD daily, 22-day EMA, On-Balance volume (OBV). *(Chart by Stockcharts.com)* - -#### On-Balance Volume - -McDonald's Corp. (MCD) is a stable, slow-moving stock. You can see a fairly tight trading range, marked with dashed lines (two lines at the lows, one tight and the other loose). Notice the tendency of MCD towards false breakouts (bottoms A and C and tops B and D). Notice a kangaroo tail in area A. - -At the right edge of the chart, the stock market is in a free-fall, but while MCD trades near its recent lows, its OBV indicator is trading near the highs. It points to strength and suggests buying rather than selling. - -that a Net Field Trend of a stock: It could be +1, −1, or 0. Climax indicator was a sum of the Net Field Trends of all 30 Dow stocks. - -When the stock market rallied and the Climax indicator reached a new high, it confirmed strength and gave a buy signal. If the stock market rallied but the Climax indicator made a lower top, it gave a sell signal. - -You can look at the Dow Jones Industrial Average as a team of 30 horses pulling the market wagon. The Climax indicator shows how many horses are pulling uphill, downhill, or standing still. If 24 out of 30 horses pull up, 1 down and 5 are resting, then the market wagon is likely to move up. If 9 horses pull up, 7 pull down, and 14 are resting, that wagon may soon roll downhill. - -Remarkably, Granville did his calculations by hand1 . Now, of course, OBV, the Net Field Trend indicator, and the Climax indicator can be easily programmed. It would be - -1 I visited Granville in 2005 in Kansas City. Not only did he do all his calculations by hand, he avoided going online, as he was suspicious of pervasive snooping—and that was years before the disclosures of government spying. He disconnected his computer from the Internet until it was time to send out his newsletter. Granville monitored intraday prices by tuning his TV into CNBC with the sound turned off and a towel draped over the upper portion of the screen, so that all he could see was the tape, running along the bottom of his screen. - -worthwhile to apply them to a database that includes all stocks of the S&P 500 index. This method may produce good signals for trading the S&P 500 futures and options. - -## **Accumulation/Distribution** - -This indicator was developed by Larry Williams and described in his 1973 book, *How I Made One Million Dollars*. It was designed as a leading indicator for stocks, but several analysts applied it to futures. The unique feature of Accumulation/Distribution (A/D) is that it tracks the relationship between opening and closing prices, in addition to volume. Its concept is similar to that of Japanese candlesticks, which at the time Williams wrote his book weren't known to Western traders. - -Accumulation/Distribution is more finely calibrated than OBV because it credits bulls or bears with only a fraction of each day's volume, proportionate to the degree of their win for the day. - -$$ -A/D = \frac{Close - Open}{High - Low} \cdot Volume -$$ - -If prices close higher than they opened, then bulls won the day, and A/D is positive. If prices close lower than they opened, then the bears won, and A/D is negative. If prices close where they opened, then nobody won, and A/D is zero. A running total of each day's A/D creates a cumulative A/D indicator. - -For example, if today's high-low spread was five points but the distance from the open to the close was two points, then only 2/5 of today's volume is credited to the winning camp. Just as with OBV, the pattern of A/D highs and lows is important, while its absolute level simply depends on the starting date. - -When the market rises, most people focus on new highs, but if prices open higher and close lower, then A/D, which tracks their relationship, turns down. It warns that the uptrend is weaker than it appears. If, on the other hand, A/D ticks up while prices are down, it shows that bulls are gaining strength. - -## **Crowd Behavior** - -Opening prices reflect pressures that have built up while the market was closed. Openings tend to be dominated by amateurs who read their news in the evening and trade in the morning. - -Professional traders are active throughout the day. They often trade against the amateurs. As the day goes on, waves of buying and selling by amateurs as well as slow-moving institutions gradually subside. Professionals tend to dominate the markets at closing time. Closing prices are especially important because the settlement of trading accounts depends on them. - -A/D tracks the outcomes of daily battles between amateurs and professionals. It ticks up when prices close higher than they opened—when professionals are more bullish than amateurs. It ticks down when prices close lower than they opened when professionals are more bearish than amateurs. It pays to bet with the professionals and against the amateurs. - -## **Trading Rules** - -When the market opens low and closes high, it moves from weakness to strength. That's when A/D rises and signals that market professionals are more bullish than amateurs, and the upmove is likely to continue. When A/D falls, it shows that market professionals are more bearish than amateurs. When the market weakens during the day, it's likely to reach a lower low in the days to come. - -The best trading signals are given by divergences between A/D and prices. - -- 1. If prices rally to a new high but A/D reaches a lower peak, it gives a signal to sell short. This bearish divergence shows that market professionals are selling into the rally. -- 2. A bullish divergence occurs when prices fall to a new low but A/D bottoms out at a higher low than during its previous decline. It shows that market professionals are using the decline for buying, and a rally is coming (Figure 29.2). - -**FIGURE 29.2** GOOG daily, Accumulation/Distribution Index. *(Chart by Stockcharts.com)* - -#### Accumulation/Distribution - -"Coming events cast their shadows before" is an old proverb with a lot of meaning for technical analysts. Google Inc. (GOOG) was trending lower for months, but the uptrend of the Accumulation/Distribution Index (A/D) showed that big money was buying. The stock has fallen lower at point B than at A, but the A/D Index traced out a much higher bottom. Just as important, it broke out to a new high (marked with a vertical green arrow) before prices gapped up following a surprisingly good earnings announcement. Somebody knew what was coming, and their massive buying was identified by the A/D accumulation pattern and its upside breakout. Technical analysis helps even out the imbalance of knowledge between outsiders and insiders. - -## **More on Accumulation/Distribution** - -When you go long or short, following a divergence between A/D and price, remember that even market professionals can go wrong. Use stops and protect yourself by following the **Hound of the Baskervilles** rule (see Chapter 23). - -There are important parallels between A/D and Japanese candlestick charts, since both focus on the differences between opening and closing prices. A/D goes further than candlesticks by taking volume into account. - -## ■ **30. Force Index** - -Force Index is an oscillator developed by this author. It combines volume with prices to discover the force of bulls or bears behind every rally or decline. Force Index can be applied to any price bar for which we have volume data: weekly, daily, or intraday. It brings together three essential pieces of information—the direction of price change, its extent, and the volume during that change. It provides a practical way of using volume for making trading decisions.2 - -Force Index can be used in its raw form, but its signals stand out much more clearly if we smooth it with a moving average. Using a short EMA of Force Index helps pinpoint entry and exit points. Using a longer EMA helps confirm trends and recognize important reversals. - -## **How to Construct Force Index** - -The force of every move is defined by three factors: direction, distance, and volume. - -- 1. If prices close higher than the close of the previous bar, the force is positive. If prices close lower than the close of the previous bar, the force is negative. -- 2. The greater the change in price, the greater the force. -- 3. The bigger the volume, the greater the force. - -$$ -Force Index = Volume_{today} \cdot (Close_{today} - Close_{yesterday}) -$$ - -A raw Force Index can be plotted as a histogram, with a horizontal centerline at a zero level. If the market closes higher, Force Index is positive and rises above the centerline. If the market closes lower, Force Index is negative and extends below the centerline. If the market closes unchanged, Force Index is zero. - -The histogram of a raw Force Index is very jagged. This indicator gives much better trading signals after being smoothed with a moving average (see Chapter 22). - -2 Remember, we're talking about the force of market crowds, not the formula in physics. - -A 2-day EMA of Force Index provides a minimal degree of smoothing. It is useful for finding entry points into the markets. It pays to buy when the 2-day EMA is negative and sell when it's positive, as long as you trade in the direction of the trend. - -A 13-day EMA of Force Index tracks longer-term changes in the force of bulls and bears. When the 13-day EMA crosses above the centerline, it shows that bulls are in control and suggests trading from the long side. When the 13-day EMA turns negative, it shows that bears are in control and suggests trading from the short side. Divergences between a 13-day EMA of Force Index and prices identify important turning points. - -## **Trading Psychology** - -When the market closes higher, it shows that bulls won the day's battle, and when it closes lower, it shows that bears carried the day. The distance between today's and yesterday's closing prices reflects the margin of victory by bulls or bears. The greater this distance, the larger the victory achieved. - -Volume reflects the degree of emotional commitment by market participants (see Chapter 28). High-volume rallies and declines have more inertia and are more likely to continue. Prices moving at high volume are like an avalanche that gathers speed as it rolls. Low volume, on the other hand, shows that the supply of losers is thin, and a trend is probably nearing an end. - -Prices reflect what market participants think, while volume reflects the strength of their feelings. Force Index combines price and volume—it shows whether the head and the heart of the market are in gear with each other. - -When Force Index rallies to a new high, it shows that the force of bulls is high and the uptrend is likely to continue. When Force Index falls to a new low, it shows that the force of bears is intense and the downtrend is likely to persist. If the change in prices is not confirmed by volume, Force Index flattens and warns that a trend is about to reverse. It also flattens and warns of a nearing reversal if high volume generates only a small price move. - -## **Trading Rules** - -#### **Short-Term Force Index** - -A 2-day EMA of Force Index is a highly sensitive indicator of the short-term force of bulls and bears. When it swings above its centerline, it shows that bulls are stronger, and when it falls below the centerline, it shows that bears are stronger. - -Since the 2-day EMA of Force Index is a sensitive tool, we can use it to fine-tune signals of other indicators. When a trend-following indicator identifies an uptrend, the declines of the 2-day EMA of Force Index below zero pinpoint the best buying points: buying pullbacks during a long-term rally (Figure 30.1). When a trendfollowing tool identifies a downtrend, rallies of a 2-day EMA of Force Index mark the best shorting areas. - -1. Buy when a 2-day EMA of Force Index turns negative during uptrends. - -Even a fast and furious uptrend has occasional pullbacks. If you delay buying until the 2-day EMA of Force Index turns negative, you'll buy closer to a shortterm bottom. Most people chase rallies and then get hit by drawdowns they find hard to tolerate. Force Index helps find buying opportunities with lower risks. - -When a 2-day EMA of Force Index turns negative during an uptrend, place a buy order above the high price of that day. When the uptrend resumes and prices rally, you'll be stopped in on the long side. If prices continue to decline, your - -**FIGURE 30.1** ADBE daily, 26-day EMA, 2-day Force Index. *(Chart by Stockcharts.com)* - -#### Short-Term Force Index - -Later in this book we'll return to the all-important topic of using multiple timeframes to make trading decisions. For example, you may make your strategic decision—to be a bull or a bear—on a weekly chart and then make your tactical decisions on where to buy or sell short using a daily chart. - -In the case of Adobe Systems, Inc. (ADBE), there is a steady uptrend on the weekly chart, confirmed by its rising EMA (not shown). When the weekly trend is up, a 2-day Force Index on the daily chart provides an ongoing series of signals that identify buy points. Instead of chasing strength and buying high, it's better to buy during short-term pullbacks, when a wave goes against the tide. Those waves are marked by the 2-day Force Index dropping below zero. Once the 2-day Force Index goes negative, it makes sense to start placing buy orders above the latest bar's high. This will ensure you'll be stopped into a long trade as soon as the downwave loses it power. - -order will not be executed. Keep lowering your buy order to near the high of the latest bar. Once your buy stop is triggered, place a protective stop below the latest minor low. This tight stop is seldom touched in a strong uptrend, but it'll get you out early if the trend is weak. - -2. Sell short when a 2-day EMA of Force Index turns positive in a downtrend. - -When trend-following indicators identify a downtrend, wait until the 2-day EMA of Force Index turns positive. It reflects a quick splash of bullishness—a shorting opportunity. Place an order to sell short below the low of the latest price bar. - -If the 2-day EMA of Force Index continues to rally after you place your sell order, raise your order the next day to near the previous bar's low. Once prices slide and you enter a short trade, place a protective stop above the latest minor peak. Move your stop down to a break-even level as early as possible. - -Additionally, a 2-day EMA of Force Index helps decide when to pyramid positions. You can add to longs in uptrends each time Force Index turns negative; you can add to shorts in downtrends whenever Force Index turns positive. - -Force Index even provides a glimpse into the future. When a 2-day EMA of Force Index falls to its lowest low in a month, it shows that bears are strong and prices are likely to fall even lower. When a 2-day EMA of Force Index rallies to its highest level in a month, it shows that bulls are strong and prices are likely to rise even higher. - -A 2-day EMA of Force Index helps decide when to close out a position. It does it by identifying short-term splashes of mass bullishness or bearishness. A short-term trader who bought when this indicator was negative can sell when it turns positive. A short-term trader who went short when this indicator was positive can cover when it turns negative. A longer-term trader should get out of his position only if a trend changes (as identified by the slope of a 13-day EMA of price) or if there is a divergence between the 2-day EMA of Force Index and the trend. - -- 3. Bullish divergences between the 2-day EMA of Force Index and price give strong buy signals. A bullish divergence occurs when prices fall to a new low while Force Index makes a more shallow low. -- 4. Bearish divergences between the 2-day EMA of Force Index and price give strong sell signals. A bearish divergence occurs when prices rally to a new high while Force Index traces a lower second top. -- 5. Whenever the 2-day EMA of Force Index spikes down to five times or more its usual depth and then recoils from that low, expect prices to rally in the coming days. - -Markets fluctuate between overbought and oversold, and when they recoil from a down spike, we can expect a rally. Note that this signal doesn't work well in uptrends—markets recoil from down spikes but not from up spikes. Spikes that point down reflect intense fear, which doesn't persist for very long. Spikes that point up reflect excessive enthusiasm and greed, which can persist for quite a long time. - -A 2-day EMA of Force Index fits well into the Triple Screen trading system (see Chapter 39). Its ability to find short-term buying and selling points is especially useful when you combine Force Index with a longer-term trend-following indicator. - -#### **Intermediate-Term Force Index** - -A 13-day EMA of Force Index identifies longer-term changes in the balance of power between bulls and bears. When it rises above zero, the bulls are stronger, and when - -**FIGURE 30.2** SSYS daily, 26-day EMA, 13-day Force Index. *(Chart by Stockcharts.com)* - -### Long-Term Force Index - -Stratasys, Inc. (SSYS) is one of the two leading companies in the rapidly emerging additive manufacturing (AM) market. In the two years since I wrote the world's first popular e-book on investing in this technology, AM stocks have become investors' favorites. A technical pattern has emerged, with rallies driven by amateurs piling in and sharp declines as they panic and bail out. The 13-day Force Index does a good job of catching those waves. - -When the 13-day Force Index crosses above its zero line (marked by vertical green arrows), it shows that buying volume is coming in. That's where a longer-term trader buys and holds. When the 13-day Force declines below its zero line and stays there, it shows that bears predominate. - -Near the right edge of the screen, we see a record low of Force Index, but then bears begin to weaken, as Force Index starts inching towards zero. Keep your powder dry as you wait for an accumulation pattern to emerge and be confirmed by Force Index crossing above zero. This see-saw movement of stocks passing from strong hands into weak ones near the tops and back again near the lows goes on forever. Force Index can help you position yourself with the right group. - -it falls below zero, the bears are in charge. Its divergences from prices identify intermediate and even major turning points (Figure 30.2). Its spikes, especially near the bottoms, mark approaching trend reversals. - -The raw Force Index identifies the winning team in the battle between bulls and bears in any price bar, be it weekly, daily, or intraday. We get much clearer signals by smoothing the raw Force Index with a moving average. - -1. When a 13-day EMA of Force Index is above the centerline, bulls are in control of the market. When it is below the centerline, bears are in charge. - -When a rally begins, prices often jump on heavy volume. When a 13-day EMA of Force Index reaches a new high, it confirms the uptrend. As an uptrend grows older, prices tend to rise more slowly, and volume becomes thinner. That's when a 13-day EMA of Force Index starts tracing lower tops. When it drops below its zero line, it signals that the back of the bull has been broken. - -2. A new peak of the 13-day EMA of Force Index shows that bulls are very strong and a rally is likely to continue. A bearish divergence between a 13-day EMA of Force Index and price gives a strong signal to sell short. If prices reach a new high but this indicator traces a lower peak, it warns that bulls are losing power and bears are ready to take control. - -Note that for a divergence to be legitimate, this indicator must make a new peak, then fall below its zero line, and then rise above that line again, but tracing a lower peak, which creates a divergence. If there is no crossover, then there is no legitimate divergence. - -3. A new low in the 13-day EMA of Force Index shows that a downtrend is likely to continue. If prices fall to a new low but this indicator rallies above zero and then falls again, but to a more shallow low, it completes a bullish divergence. It reveals that bears are losing power and gives a buy signal. - -When a downtrend begins, prices usually drop on heavy volume. When a 13-day EMA of Force Index falls to a new low, it confirms the decline. As the downtrend grows old, prices fall more slowly or volume dries up—that's when a reversal is in the cards. - -Adding an envelope to the chart of Force Index can help you detect its extreme deviations from the norm, which tend to lead to price trend reversals. This method for catching deviations and potential reversals works well with weekly charts, but not with the daily and intraday charts. This is truly a longer-term tool. - -## ■ **31. Open Interest** - -**Open interest** is the number of contracts held by buyers or owed by short sellers in any derivative market, such as futures or options. If you are unfamiliar with futures or options, skip this chapter and return to it after you have read Chapters 44 on options and 46 on futures. - -Stock market shares are traded for as long as the company that listed them stays in business as an independent unit. Most shares are held as long positions, with only a small percentage of shorts. In futures and options, on the other hand, the total size of long and short positions is always identical, due to the fact that they are contracts for future delivery. When someone wants to buy a contract, someone else has to sell it to them, i.e., go short. If you want to buy a call option for 100 shares of Google, another trader has to sell you that option; in order for you to be long, someone else has to be short. **Open interest equals the total long or the total short positions**. - -Futures and options contracts are designed to last for only a set period of time. A futures or options buyer who wants to accept delivery and a seller who wants to deliver have to wait until the first delivery day. This waiting period ensures that the numbers of contracts held long and short are always equal. In any case, very few futures and options traders plan to deliver or accept delivery. Most traders close out their positions early, settling in cash long before the first notice day. We'll return to the topic of futures and options in Part Eight of this book on trading vehicles. - -Open interest rises when new positions are being created and falls when positions are being closed. For example, if open interest in April COMEX gold futures is 20,000 contracts, it means that bulls are long and bears short 20,000 contracts. If open interest rises to 20,200, it means that the net of 200 new contracts have been created: both bought and sold short. - -Open interest falls when a bull who is long sells to a bear who is short but wants to cover his short position. As both of them get out, open interest falls by the size of their trade, since one or more contracts disappear from that market. - -If a new bull buys from an old bull that is getting out of his long position, open interest remains unchanged. Nor does the open interest change when a new bear sells to an old bear who wants to buy to cover his short position. In summary, open interest rises when "fresh blood" enters that market and falls as current bulls and bears start leaving that market, as illustrated in the table below: - -| Buyer | Seller | Open Interest | -|-----------------------------|--------------------|---------------| -| New buyer | New seller | Increases | -| New buyer | Former buyer sells | Unchanged | -| Former seller buys to cover | New seller | Unchanged | -| Former seller buys to cover | Former buyer sells | Decreases | - -Technicians usually plot open interest as a line below price bars (Figure 31.1). Open interest in any market varies from season to season because of massive hedging by industrial users and producers at different stages of the annual production cycle. Open interest gives important messages when it deviates from its seasonal norm. - -## **Crowd Psychology** - -It takes one bull and one bear to create a futures or options contract. A bull who believes that prices will rise buys a contract. A bear who thinks that prices are going to drop goes short by selling a contract for future delivery. With a trade between a - -**FIGURE 31.1** TYH14 daily, 13-day EMA, open interest. *(Chart by TradeStation)* - -#### Open Interest - -Open interest (OI) reflects the number of all short or long positions in any futures or options market. Since the two are equal in the derivatives markets, OI reflects the degree of conviction among bulls and bears. - -Rising OI shows that the conflict between bulls and bears is becoming more intense and confirms the exiting trend. Falling OI, on the other hand, shows that losers are leaving the market, while the winners are cashing in—it signals that the trend is nearing its end. - -Near the left edge of this chart of March 2014 Treasury Notes futures (TYH14), the trend is down, but the declining OI warns bears not to overstay the downtrend. OI bottomed out in area A, T-Notes in area B, and in area C, both were in clear uptrends, with rising OI calling for higher prices ahead. OI topped out in area D, and while prices continue to rise in area E, the new downtrend of OI serves up a warning to the bulls near the right edge of the chart. - -Not all charts of open interest look as smooth and clear as this one. Serious traders don't expect to find a magic tool of a single indicator—they use several indicators and act only when their messages confirm one another. - -new bull and a new bear, open interest rises by the number of contracts they traded. A single trade is unlikely to move any market, but when thousands of traders make similar trades, they propel or reverse market trends. - -Open interest reflects the intensity of conflict between bulls and bears. It depends on their willingness to maintain long and short positions. When bulls and bears don't expect the market to move in their favor, they close out their positions, reducing open interest. - -There are two people on the opposite sides of every trade, and one of them will be hurt when prices change. In a rally, bears will get hurt, and in a decline, bulls will suffer. As long as the losers hold on, hoping and hanging on to their positions, open interest doesn't change. - -A rise in open interest shows that a crowd of confident bulls is facing down a crowd of equally confident bears. It points to a growing disagreement between the two camps. One group is sure to lose, but as long as potential losers keep pouring in, the trend will continue. These ideas have been clearly put forth in L. Dee Belveal's classic book, *Charting Commodity Market Price Behavior*. - -It takes conviction among both bulls and bears to maintain a trend. Rising open interest shows that both camps keep adding to their positions. If they strongly disagree about the future course of prices, then the supply of losers is growing, and the current trend is likely to persist. An increase in open interest gives a green light to the existing trend. - -If open interest rises during an uptrend, it shows that longs are buying while bears are shorting because they believe that the market is overvalued. They are likely to run for cover when the uptrend squeezes them harder—and their buying will propel prices higher. - -If open interest rises during a downtrend, it shows that shorts are aggressively selling, while bottom pickers are buying. Those bargain hunters are likely to bail out when falling prices hurt them, and their selling will push prices even lower. - -When a bull is convinced that prices are going higher and decides to buy, but a bear is afraid to sell short, that bull can buy only from another bull who bought earlier and now wants to cash out. Their trade creates no new contract, and open interest stays unchanged. When open interest goes flat during a rally, it shows that the supply of losers has stopped growing. - -When a bear is convinced that prices are going lower and wants to sell short, but a bull is afraid to buy from him, that bear can sell only to another bear who shorted earlier and now wants to cover, take profits and leave. Their trade creates no new contract, and open interest does not change. When open interest stays flat during a decline, it shows that the supply of bottom pickers isn't growing. Whenever open interest flattens out, it flashes a yellow light—a warning that the trend is aging and the best gains are probably behind. - -When a bull decides to get out of his long position, a bear decides to cover his short position, and the two trade with one another, a contract disappears, and open interest shrinks. Falling open interest shows that losers are bailing out, while winners are taking profits. When the disagreement between bulls and bears decreases, the trend is ripe for a reversal. Falling open interest shows that winners are cashing in and losers are giving up hope. It signals that the trend is approaching its end. - -## **Trading Rules** - -1. When open interest rises during a rally, it confirms the uptrend and gives a green light to add to long positions. It shows that more short sellers are coming into the market. When they bail out, their short covering is likely to push the rally higher. - -When open interest rises as prices fall, it shows that bottom pickers are active in the market. It gives a green light to shorting because those bargain hunters are likely to push prices lower when they throw in the towel. - -If open interest rises when prices are in a trading range, it's a bearish sign. Commercial hedgers are much more likely to sell short than speculators. A sharp increase in open interest while prices are flat shows that savvy hedgers are probably shorting the market. You want to avoid trading against those who likely have better information than you. - -2. If open interest falls while prices are in a trading range, it identifies short covering by major commercial interests and gives a buy signal. When commercials start covering shorts, they show that they expect the market to rise. - -When open interest falls during a rally, it shows that winners and losers alike are becoming cautious. Longs are taking profits, and shorts are covering. Markets discount the future, and a trend that is accepted by the majority is ready to reverse. If open interest falls during a rally, consider selling and getting out. - -When open interest falls during a decline, it shows that shorts are covering and buyers are taking losses and bailing out. If open interest falls while prices slide, take profits on short positions. - -3. When open interest goes flat during a rally, it shows that the uptrend is getting old and the best gains have already been made. This gives you a signal to tighten stops on long positions and avoid new buying. When open interest goes flat during a decline, it warns you that the downtrend is mature and it is best to tighten stops on short positions. Flat open interest in a trading range does not contribute any new information. - -## **More on Open Interest** - -The higher the open interest, the more active the market, and the less **slippage** you risk when getting in and out of positions. Short-term traders should focus on the contracts with the highest open interest. In the futures markets, the highest open interest tends to be in the front months. As the first notice day approaches and open interest of the front month begins to drop, while open interest in the next month begins to rise, it signals to roll over your position into the next month. - -## ■ **32. Time** - -Most people conduct their lives as if they will live forever — repeating the same mistakes, not learning from the past, and hardly ever planning for the future. Freud showed that the unconscious mind doesn't have the notion of time. Our deep-seated wishes remain largely unchanged throughout our lives. - -When people join crowds, their behavior becomes even more primitive and impulsive. Individuals may be ruled by the calendar and the clock, but crowds pay no attention to time. They act out their emotions as if they had all the time in the world. - -Most traders focus only on changing prices but pay little attention to time. That's just another sign of being caught up in mass mentality. - -The awareness of time is a sign of civilization. A thinking person is aware of time, while someone who is acting impulsively is not. A market analyst who pays attention to time becomes aware of a dimension hidden from the market crowd. - -## **Cycles** - -Long-term price cycles are a fact of economic life. For example, the U.S. stock market tends to run in approximately four-year cycles. They exist because the ruling party inflates the economy going into the presidential election every four years. The party that wins the election deflates the economy when voters can't take revenge at the polls. Flooding the economy with liquidity lifts the stock market, while draining liquidity pushes it down3 . - -Major cycles in agricultural commodities are due to weather and fundamental production factors, coupled with the mass psychology of producers. For example, when livestock prices rise, farmers breed more animals. When those animals reach the market, prices fall and producers cut back. When the supply is absorbed, scarcity pushes prices up, breeders go to work again, and the bull/bear cycle repeats. This cycle is shorter in hogs than in cattle because pigs breed faster than cows. - -Long-term cycles can help traders identify market tides. Instead, many traders get themselves in trouble by trying to use short-term cycles to predict minor turning points. - -Price peaks and valleys often seem to flow in an orderly manner. Traders measure distances between neighboring peaks, and project them into the future to forecast the next top. Then they measure distances between bottoms and extend them into the future to forecast the next low. Cycles put bread and butter on the tables of analysts who sell forecasts. Few of them realize that what appears like a cycle on the charts is often a figment of the imagination. If you analyze price data using a mathematically rigorous program, such as John Ehlers's MESA (Maximum Entropy Spectral Analysis), you'll find that approximately 80 percent of what looks like cycles is simply market noise. A human mind looks for order—and even an illusion of order is good enough for many people. - -If you look at any river from the air, it appears to have cycles, swinging right and left. Every river meanders in its valley because water flows faster in its middle than near the shores, creating turbulences that force the river to turn. Looking for short-term market cycles with a ruler and a pencil is like searching for water with a divining rod. Profits from an occasional success are erased by many losses due to unsound methods. - -## **Indicator Seasons** - -A farmer sows in spring, harvests in late summer, and in the fall, lays in supplies for the winter. There is a time to sow and a time to reap, a time to bet on a warm trend and a time to get ready for a frost. We can apply the concept of seasons to financial markets. Taking a farmer's approach, a trader should look to buy in spring, sell in summer, go short in the fall, and cover in winter. - -Martin Pring developed the model of seasons for prices, but this concept works even better with technical indicators. Their seasons help recognize the current stage - -3 Thiscycle was grossly distorted by the Fed's "quantitative easing" following the 2008 debacle, but it's likely to return, once we crawl out of the Great Recession. - -of the market cycle. This simple but effective model helps you buy when prices are low and sell short when they are high, setting you apart from the market crowd. - -We can define the seasons of many indicators by two factors: their slope as well as their position above or below the centerline. For example, let's apply the concept of indicator seasons to MACD-Histogram (see Chapter 23). We define the slope of MACD-Histogram as the relationship between two neighboring bars. When MACD-Histogram rises below its centerline, it is spring; when it rises above its centerline, it is summer; when it falls above its centerline, it is autumn; and when it falls below its centerline, it is winter. Spring is the best season for going long, and autumn is the best season for selling short (Figure 32.1). - -| Indicator Slope | Position Relative to Centerline | Season | Preferred Action | -|-----------------|---------------------------------|--------|------------------| -| Rising | Below | Spring | Go long | -| Rising | Above | Summer | Start selling | -| Falling | Above | Fall | Go short | -| Falling | Below | Winter | Start covering | - -When MACD-Histogram is below its centerline but its slope is rising, it is spring in the market. The weather is cool but turning warmer. Most traders expect the winter to return and are afraid to buy. Emotionally, it is hard to buy because the memories of a downtrend are still fresh. In fact, spring is the best time for buying, with the highest profit potential, while risks are relatively small because we can place a protective stop slightly below the market. - -When MACD-Histogram rises above its centerline, it's summer in the market and by now most traders recognize the uptrend. It's emotionally easy to buy in summer because bulls have plenty of company. In fact, profit potential in summer is lower than in spring, while the risks are higher because stops have to be farther away from the market due to heightened volatility. - -When MACD-Histogram is above its centerline but its slope turns down, it's autumn in the market. Few traders recognize that change and keep buying, expecting summer to return. Emotionally, it's hard to sell short in autumn—it requires you to stand apart from the crowd. In fact, autumn is the best time for selling short. - -When MACD-Histogram falls below its centerline, it's winter in the market. By then, most traders recognize the downtrend. It is emotionally easy to sell short in winter, joining many vocal bears. In fact, the risk/reward ratio is rapidly shifting against bears, as potential rewards are becoming smaller and risks higher because stops have to be placed relatively far away from prices. - -Just as a farmer must pay attention to the vagaries of weather, a trader needs to stay alert. An autumn on the farm can be interrupted by an Indian summer, and a market can stage a strong rally in the autumn. A sudden freeze can hit the fields in spring, and the market can drop early in a bull move. A trader needs to use several indicators and techniques to avoid getting whipsawed. - -The concept of indicator seasons focuses a trader's attention on the passage of time. It helps you plan for the season ahead instead of mindlessly following other people. - -**FIGURE 32.1** VRTX daily, MACD-Histogram 12-26-9. *(Chart by Stockcharts.com)* - -#### Indicator Seasons - -We can apply the concept of seasons to most indicators and timeframes, including intraday. This can be done with a multitude of trading vehicles, even though this example focuses on the daily MACD-Histogram of Vertex Pharmaceuticals, Inc. (VRTX), a stock in the Nasdaq 100. - -- Autumn—The indicator is above the centerline but falling. This is the best season for establishing shorts. -- Winter—The indicator drops below its centerline. Use weakness to take profits on short positions. -- Spring—The indicator turns up from below its centerline. It is the best time to establish longs. -- Summer—The indicator rises above its centerline. As the weather gets hot, use strength to take profits on long positions. - -MACD-Histogram looks very smooth in this example, but be prepared for brief fluctuations, both above and below the centerline. Spring can be interrupted by a frost, there can be a warm spell in winter, etc. - -## **Market Time** - -We measure time using calendars and watches, but seldom stop to think that our own perceptions of time are far from universal. We keep track of time in human terms, while huge areas of life move on vastly different timelines. - -For example, we think that the ground under our feet is stable, while in fact continents move constantly. They traverse only a few inches per year, but this is enough to radically change the face of the globe over millions of years. Within shorter timeframes, weather patterns change over centuries. Ice ages and warming periods alternate with one another. - -At the other end of the scale, there are physical particles that survive only a tiny fraction of a second. There are insects that are born, mature, procreate, and die within a single day. - -Turning to trading, let's keep in mind that time flows at a different speed in the market than it does for us as individuals. The market, composed of huge masses of human beings, moves at a much slower speed. The patterns you recognize on your charts may have predictive value—but the turns they anticipate are likely to occur much later than you expect. - -The relative slowness of crowds can bedevil even experienced traders. Time and again we find ourselves entering trades too early. Beginners are typically late. By the time they recognize a trend or a reversal, that move had been underway for so long that they miss most, if not all of it. Newbies tend to chase old trends, but the more experienced analysts and traders tend to run into an opposite problem. We recognize approaching reversals and emerging new trends from far away—and jump in too soon. We often buy before the market finishes tracing a bottom or sell short well before it completes a top. By getting in too early we can end up losing money in trends that are too slow to turn. - -What should we do? First of all, you need to become aware that the market time is much slower than your own. Second, consider not putting on a trade when you notice an early reversal signal. A better signal may well emerge later, especially at market tops, which take longer to form than bottoms. - -It pays not to be greedy and trade a smaller size. A smaller position is easier to hold while a reversal is taking its sweet time. Be sure to use multiple timeframes for market analysis: this is the essence of Triple Screen, the system we'll review in a future chapter. - -## **The Factor of Five** - -Most beginners casually pick a timeframe that looks good to them—it can be a daily or a 10-minute chart, or any other—and ignore others. Few are aware of the fact that the market lives in multiple timeframes. It moves simultaneously on monthly, weekly, daily, and intraday charts—often in opposite directions. - -The trend may be up on the daily charts but down on the weeklies, and vice versa. Which of them will you follow? And what will you do about the intraday charts, which may well contradict either the weeklies or the dailies? Most traders ignore all timeframes except for their own—until a sudden move from outside of their timeframe hits their account. - -Keep in mind that neighboring timeframes are linked by the factor of approximately 5. If you start with a monthly chart and proceed to the weekly, you'll notice that there are 4.5 weeks to a month. As you switch from a weekly to a daily chart, you know that there are 5 trading days to a week. Turning to intraday analysis, you may look at an hourly chart—and there are approximately 5–6 hours to a trading day. Day traders can proceed even further and look at 10-minute charts, followed by 2-minute charts. Each is related to its neighboring timeframes by approximately the factor of five. - -The proper way to analyze any market is to review at least two neighboring timeframes. You must always start with the longer timeframe for a strategic view and then switch to the shorter timeframe for tactical timing. If you like using daily charts, you must first examine weekly charts, and if you want to day-trade using 10-minute charts, you first need to analyze hourly charts. This is one of the key principles of the Triple Screen trading system (see Chapter 39). - -## ■ **33. Trading Timeframes** - -How long do you plan to hold your next trade? Do you think it'll be a year, a week, or an hour? A serious trader plans the expected duration of every trade. Various timeframes offer different opportunities and carry different risks. We can roughly divide all trades into three groups: - -1. **Long-term trading or investing**—The expected duration of a position is measured in months, sometimes years. - -Advantages: requires little day-to-day attention and may lead to spectacular gains. Disadvantage: drawdowns can be intolerably severe. - -2. **Swing trading**—The expected duration of a trade is measured in days, sometimes weeks. - -Advantages: a wealth of trading opportunities, fairly tight risk control. - -Disadvantage: will miss major trends. - -3. **Day-trading**—The expected duration of a trade is measured in minutes, rarely hours. - -Advantages: great many opportunities, no overnight risk. - -Disadvantages: demands instant reflexes; transaction costs become a factor. - -If you decide to operate in more than one timeframe, consider making those trades in different accounts. This will allow you to evaluate your performance in each timeframe rather than lump together apples and oranges. - -## **Investing** - -The decision to invest or trade for the long term is almost always based on some fundamental idea. You may recognize a new technological trend or an exciting product that can greatly increase the value of a company. Investing demands a firm conviction and a great supply of patience if you are to hold that position through the inevitable pullbacks and periods of flat prices. These tough challenges make successful investing extremely hard. - -Major trends that are easily seen on long-term charts appear uncertain and foggy in real time, especially when a stock enters a drawdown. When your investment drops 50% or more, wiping out the bulk of paper profits—a common development for long-term positions—few of us have enough conviction and fortitude to continue to hold. Let me illustrate this using an example of Apple Inc. (AAPL), a darling of several bull markets (Figure 33.1). - -AAPL survived its near-death experience in 2003, when its battered stock was rumored to be a takeover candidate, and grew to become the highest-capitalized, publicly traded company in the world, before collapsing from that top in 2012. Its uptrend looks grand in retrospect, but ask yourself, honestly, would you have been able to hold though multiple drawdowns, some of them exceeding 50%. Remember that such drawdowns often mark the ends of uptrends. - -A sensible way to deal with the challenge of investing is to implement your fundamental idea with the help of technical trading tools. When you decide to buy, check out technical signals to ensure you're getting a relative bargain rather than paying full price. If your investment soars, use technical tools to identify overvalued zones; take your profits there and be ready to repurchase during the inevitable pullbacks. This plan demands a high degree of attention, focus, and perseverance. Figure 33.2 is an example that was taken from my trading diary. - -**FIGURE 33.1** AAPL weekly. *(Chart by Stockcharts.com)* - -#### Investing - -The tremendous challenges of holding an investment, even a market leader like Apple Inc. (AAPL), can be seen on this 10-year chart: - -- 1. 2003—AAPL collapses below \$10. Company's survival in question. Would you buy? -- 2. 2006—AAPL rallies to \$86, then sinks to \$51. If you had a thousand shares, would you hold? Would you sell when it got back above \$80 and appeared to stall? -- 3. 2008—AAPL rallies to \$202, drops to \$115. If you had a thousand shares, showing an \$87,000 drawdown, would you hold or sell? -- 4. 2009—AAPL recovers to \$192, sinks to \$78, below its previous low. Your drawdown is over 50%. Are you holding or cashing out? - -**FIGURE 33.2** F monthly, 26- and 13-months EMA with the Impulse system, Autoenvelope, MACD Lines and MACD-Histogram (12-26-9), and Force Index 13-months EMA with ATR channels. *(Chart by Tradestation)* - -#### Technical Analysis with Fundamentals - -- 1. 2007—Ford was on the ropes when the new CEO arrived—the man who earlier spearheaded saving Boeing. In the heady atmosphere of a bull market, Ford seemed to have a shot at recapturing its \$30 high. I saw a false downside breakout coupled with a bullish divergence and bought. I then grimly held through the bear market. -- 2. 2011—Ford spiked above its monthly channel, which was narrower at that time, tracing a kangaroo tail, while monthly MACD weakened. I took profits. -- 3. 2011—as monthly prices stabilized in their value zone, I repurchased my position. - -Fundamental analysis can help you find a stock that may be worth buying. Use technical analysis to time your entries and exits. Be prepared to buy and sell more than once during a major uptrend. - -## **Swing Trading** - -While major trends and trading ranges can last for years, all are punctuated by short-term upswings and downswings. Those moves create multiple trading opportunities, which we can exploit. Many charting examples in this book feature swing trades. - -I especially recommend swing trading for beginning and intermediate traders. The more trades you make, the more you learn, provided you manage risk and keep good records. Swing trading teaches you faster than long-term investing, whose lessons take years to complete. Swing trading gives you time to think, unlike day-trading, which demands instant reactions. Day-trading is too fast for beginners. - -Short-term swings can be substantial enough to generate meaningful profits, without the gut-wrenching drawdowns of position trades. Swing trades don't require watching the screen all day. In SpikeTrade.com, where hundreds of traders compete, most trades last a few days. Some members carry their trades for weeks and even months, while others hop in and out within hours—but the holding period for most members is measured in days. Swing trading hits the sweet spot among time horizons. - -I piggyback one or more of the Spiketrade group's picks almost every week. The chart of HES in Figure 33.3 comes from my diary of one of those trades. - -My profit in the HES trade was \$1.92 per share. You can calibrate the amount of risk you accept and the size of potential profit by deciding how many shares to trade. We'll address this essential question in chapter 50, in the section on the Iron Triangle of risk control. - -**FIGURE 33.3** HES daily, 26- and 13-day EMA with 4% envelope, MACD Lines and MACD-Histogram (12-26-9), the Impulse system, and 2-day Force Index. *(Chart by Stockcharts.com)* - -#### A Swing Trade - -Professional traders are just as comfortable selling short as buying. The signals are similar but the action quicker—stocks fall twice as fast as they rise. - -This chart shows where I shorted the stock of Hess Corporation (HES) as it was tracing a short-term double top, with bearish divergences in all indicators. I covered and took profits, as prices appeared to stall just below the value zone between the two EMAs, while the indicators became oversold. - -One of the best learning techniques involves returning to your closed-out trades two months later and replotting their charts. Trading signals that looked foggy when you saw them at the right edge of the screen become clear when you see them in the middle of your chart. Now, with the passage of time, you can easily see what worked and what mistakes you may have made. Creating these follow-up charts teaches you what to repeat and what to avoid in the future. Updating the charts of closed trades turns you into your own instructor. - -The chart and text in Figure 33.4 come from SpikeTrade.com. Each week the Spiker who won that week's competition posts a diary of his trade. Different people use different indicators and parameters. - -Peter's trade gained almost 11% in three days. Of course, we can't allow ourselves to get intoxicated by such numbers. A beginner looks at them, multiplies them - -#### A Swing Trade near the Bottom - -This trade was submitted by Peter D., a long-term Spiker from the Netherlands. His post was headlined "Fishing near the Lows." - -"Weekly conditions: Indicators don't show much movement. MACD very shallow but positive and RSI slowly improving. Daily: MACD was about to confirm a positive divergence, and so was RSI. Prices dove last week but stopped near support. - -"I set the initial entry at \$3.02, in line with recent lows. It was hit on Monday morning, which turned out to be one cent above the low for the day and the week. Price closed near the high of the day and continued surging on Tuesday and Wednesday. My target was hit on Wednesday, on the way up. The rest of the day saw some pulling back, but price kept in range to close the week on a relatively high note." - -by the number of weeks in a year, and goes crazy throwing his money at the markets. Such spectacular gains are inevitably interspersed with losses. A professional trader carefully manages his money, quickly cuts losing trades and protects his capital to allow his equity to grow. - -If investing is like hunting the big game, swing trading is like rabbit hunting. If your livelihood depends on hunting, shooting rabbits is a much more reliable way of putting meals on the table. Carefully entering and exiting swing trades, while cautiously managing money, is a realistic way of surviving and prospering in the markets. - -## **Day-Trading** - -Day-trading means entering and exiting trades within a single market session. Rapid buying and selling in front of a flashing screen demands the highest levels of concentration and discipline. Paradoxically, it attracts the most impulsive and gamblingprone people. - -Day-trading appears deceptively easy. Brokerage firms hide customer statistics from the public, but in 2000, state regulators in Massachusetts subpoenaed brokerage house records, which showed that after six months only 16% of day-traders made money. - -Whatever gaps you may have in your knowledge or discipline, day-trading will find them fast and hit you hard in your weak spots. In swing trading, you have the luxury of being able to stop and think, but not in day-trading. - -The person who is learning to trade is much better off using end-of-day charts. After you grow into a consistently profitable swing trader, you may wish to explore day-trading. You'll use your already developed skills and will only need to adjust to a faster game. A market newbie who stumbles into day-trading is a gift to the pros. - -Make sure to write down your action plan for day-trading: what will prompt you to enter or exit, to hold or cut. Be prepared to invest plenty of time: day-trading chews up long hours in front of multiple screens. - -Another difficulty of day-trading is that you shoot at much smaller targets. This is reflected in the height of price channels. Elsewhere in this book, you'll read that a good measure of a trader's performance is the percentage of the channel or an envelope he captures in a trade. Taking 30% or more of a channel's height earns you an A grade, while capturing 10% of that channel earns you a C (see Chapter 55). Let's apply these ratings to several stocks that are popular with day traders. The exact figures will change by the time you read this book, but today I get the following numbers for channel heights on the daily and 5-minute charts: - -| | Daily Channel | "A" Trader | "C" Trader | 5-Min Channel | "A" Trader | "C" Trader | -|------|---------------|------------|------------|---------------|------------|------------| -| AAPL | 55 | 16.5 | 5.5 | 2.5 | 0.75 | 0.25 | -| AMZN | 27 | 8.1 | 2.7 | 2.2 | 0.66 | 0.22 | -| MON | 7 | 2.1 | 0.7 | 0.6 | 0.18 | 0.06 | - -A swing trader who uses daily charts can do very well in these active stocks. He can really clean up if he is an A level trader, but even if he is a C trader, taking only **132** VOLUME AND TIME - -10% out of a channel, he can stay comfortably ahead of the game while learning to trade. On the other hand, a person who day-trades the very same stocks must be a straight A trader in order to survive. Anything less and his account will be ground up by slippage, commissions, and expenses. - -If, after developing a successful track record as a swing trader, you decide to daytrade, you'll be able to use most of the tools and techniques you've already learned. You'll find an example of using Triple Screen in day-trading in Chapter 39. - -When a friend who is an Olympic rowing coach taught me to row, he focused on developing the correct stroke. A competent rower always moves his oars exactly the same way, whether it's a leisurely weekend row or the final stretch of a race. What changes are power and speed. The same with day-trading: the technique is the same, but the speed is different. If you learn to swing trade, you can apply your technique to day-trading. And then you can go in reverse, and apply day-trading techniques to swing-trade entries and exits. - -Day-trading can be a profitable pursuit, but keep in mind that it's a highly demanding professional game and most definitely not a casual activity for beginners. - -## General Market Indicators - -You can use technical indicators reviewed in previous chapters to analyze any trading vehicle: a stock, a future, an index, etc. Such tools as moving averages, MACD, Force index, and others, can provide signals for any ticker in any timeframe. Now we turn to a different group of tools: general market indicators, which analyze the entire market rather than any specific stock. They are worth following because general market trends are responsible for as much as half the movement in individual stocks. - -While there are dozens of general market indicators, this is not an encyclopedic review—I'll simply share the tools that help me trade. You may use the same or different tools—select those that appeal to you and test them on your market data. We can trust only those indicators that we have tested. - -## ■ **34. The New High–New Low Index** - -Stocks that reach their highest level in a year on any given day are the leaders in strength. Stocks that fall to their lowest point for that year on the same day are the leaders in weakness. The New High–New Low Index (NH-NL) tracks the behavior of market leaders by subtracting the number of New Lows from the New Highs. In my experience, NH-NL is the best leading indicator of the stock market.1 - -1 In 2012, I wrote an e-book with Kerry Lovvorn on the New High–New Low Index. We publish nightly updates on its signals on SpikeTrade.com. - -## **How to Construct NH-NL** - -The New High–New Low Index is easy to calculate, using information that appears in many online sources and in major newspapers. - -NH-NL = New Highs − New Lows - -Most data services in the United States report the daily numbers of New Highs and New Lows, but it is shocking how loosely they define their data. Some are too narrow and track only the NYSE stocks, ignoring other exchanges. Others are too broad and track everything, including interest rate ETFs. My favorite source of reliable data is [www.barchart.com.](http://www.barchart.com) I take their data, subtract New Lows from New Highs, and plot the result underneath the daily chart of the S&P 500. - -The task of constructing NH-NL is harder for traders outside the United States, in countries where such data isn't reported. There you'll need to do a bit of programming. First, run a daily scan of the database of all stocks in your country to find those that have reached the highest high and the lowest low for the year during the day. Once you have those two lists, take the above formula and apply it to the numbers you found. - -On the days when there are more new highs than new lows, NH-NL is positive and plotted above the centerline. On the days when there are more new lows than new highs, NH-NL is negative and plotted below the centerline. If the numbers of new highs and new lows are equal, NH-NL is zero. We normally plot the New High– New Low Index as a line, with a horizontal reference line at a zero level. - -While I plot NH-NL underneath the S&P 500, keep in mind that it has a much broader reach than the S&P—NH-NL includes data from the NYSE, AMEX, and NASDAQ, excluding only ETFs, unit investment trusts, closed-end funds, warrant stocks, and preferred securities. The chart of the S&P 500 is there simply for a comparison. - -## **Crowd Psychology** - -A stock appears on the list of new highs when it's the strongest it's been in a year. It means that a herd of eager bulls is chasing its shares. A stock appears on the list of new lows when it's the weakest it's been in a year, showing that a crowd of aggressive bears is selling its shares. - -The New High–New Low Index compares the numbers of the strongest and the weakest stocks on the exchange. It reveals the balance of power between the leaders in strength and the leaders in weakness. - -You can visualize all stocks on the New York Stock Exchange, the NASDAQ, or any other exchange as soldiers in a regiment. The new highs and new lows are their officers. The new highs are the officers who lead an attack uphill. The new lows are the officers who are deserting and running downhill. - -The quality of leadership is a key factor in any conflict. When I was in officer training, they kept telling us that there are no bad soldiers, only bad officers. The New High–New Low Index shows whether more officers are leading an attack uphill or deserting downhill. Where the officers lead, soldiers follow. The broad indexes, such as the S&P 500, tend to follow the trend of NH-NL (Figure 34.1). - -When NH-NL rises above its centerline, it shows that the bullish leadership is dominant. When NH-NL falls below its centerline, it shows that bearish leadership is in charge. If the market rallies to a new high and NH-NL climbs to a new peak, it shows that bullish leadership is growing and the uptrend is likely to continue. If the market rallies but NH-NL shrinks, it shows that the leadership is becoming weak and the uptrend is in danger. A regiment whose officers are starting to desert is likely to retreat. - -A new low in NH-NL shows that the downtrend is well led and likely to persist. If officers are running faster than the men, the regiment is likely to be routed. If stocks fall but NH-NL turns up, it shows that officers are no longer running. When officers regain their morale, the whole regiment is likely to rally. - -## **Trading Rules for NH-NL** - -Traders need to pay attention to three aspects of NH-NL: the level of NH-NL above or below its centerline, the trend of NH-NL, and divergences between the patterns of NH-NL and prices. - -**FIGURE 34.1** S&P 500 daily, 26- and 13-day EMAs, Autoenvelope, NH-NL daily. *(Chart by TradeStation)* - -#### NH-NL—Daily Chart, Yearly Look-Back - -This chart tracks daily NH-NL during a mostly bullish year in the stock market. Still, every bullish trend gets interrupted by pullbacks. Bearish deterioration patterns of NH-NL, marked here by diagonal red arrows, warn you of coming declines. These signals emerge because officers start shifting towards the rear before the soldiers retreat. - -Declines end and rallies begin when NH-NL rallies from negative into positive territory, marked here by purple circles. Those signals work especially well when the S&P is oversold, i.e., near its lower channel line. As always, trading messages are especially strong when independent signals confirm each other. - -#### **NH-NL Zero Line** - -The position of NH-NL in relation to its centerline shows whether bulls or bears are in control. When NH-NL is above its centerline, it shows that more market leaders are bullish than bearish and it is better to trade from the long side. When NH-NL is below its centerline, it shows that bearish leadership is stronger, and it's better to trade from the short side. NH-NL can stay above its centerline for months at a time in bull markets and below its centerline for months in bear markets. - -If NH-NL stays negative for several months but then rallies above its centerline, it signals that a bull move is likely to begin. It is time to look for buying opportunities, using oscillators for precise timing. If NH-NL stays positive for several months but then falls below its centerline, it shows that a bear move is likely to begin. It is time to look for shorting opportunities using oscillators for precise timing. - -#### **NH-NL Trends** - -When the market rallies and NH-NL rises, it confirms uptrends. When NH-NL declines together with the market, it confirms downtrends. - -- 1. A rise in NH-NL shows that it's safe to hold long positions and add to them. If NH-NL declines while the broad market stays flat or rallies, it is time to take profits on long trades. When NH-NL falls below zero, it shows that bearish leadership is strong and it's safe to hold short positions and even add to them. If the market continues to fall but NH-NL rises, it shows that the downtrend is not well led—it's time to cover shorts. -- 2. If NH-NL rises on a flat day, it flashes a bullish message and gives a buy signal. It shows that officers are going over the top while the soldiers are still crouching in their foxholes. When NH-NL falls on a flat day, it gives a signal to sell short. It shows that officers are deserting while the troops are still holding their positions. Soldiers aren't stupid—if their officers start running away, they will not stay and fight. - -### **NH-NL Divergences** - -If the latest market peak is confirmed by a new high of NH-NL, that rally is likely to continue, even if punctuated by a decline. When a new market low is accompanied by a new low in NH-NL, it shows that bears are well led and the downtrend is likely to persist. On the other hand, divergences between the patterns of NH-NL and broad market indexes show that leaders are deserting and the trends are likely to reverse. - -1. If NH-NL traces a lower peak while the market rallies to a new high, it creates a bearish divergence. It shows that bullish leadership is weakening even though the broad market is higher. Bearish divergences often mark the ends of uptrends, but pay attention to the height of the second peak. If it is only slightly above zero, in the low hundreds, then a big reversal is probably at hand and it's time to go short. If, on other hand, the latest peak is in the high hundreds, it shows that the upside leadership is strong enough to prevent the market from collapsing. - -2. If the market declines to a new low, but NH-NL traces a shallower bottom than its previous decline, it creates a bullish divergence. It shows that bearish leadership is shrinking. If the latest low of NH-NL is shallow, in the low hundreds, it shows that the bearish leadership is exhausted and a major upside reversal is near. If the latest low sinks deep, then bears still have some strength, and the downtrend may pause but not reverse. Keep in mind that bullish divergences at stock market bottoms tend to develop faster than bearish divergences at market tops: buy fast and sell slowly. - -## **NH-NL in Multiple Timeframes and Look-Back Periods** - -Markets move simultaneously in different timeframes. My original work on the NH-NL focused on the daily charts with a one-year look-back period—counting stocks that have reached a new high or a new low for their latest 52-week range. I have since added several dimensions for a deeper understanding of this key indicator. - -#### **Weekly NH-NL** - -The weekly NH-NL helps confirm major stock market trends and identify major reversals. I build it from the daily data of barchart.com, mentioned above, by running a five-day moving total. I plot the result underneath a weekly chart of the S&P 500. - -The weekly NH-NL gives its most important signals when it reaches extreme levels and also by divergences. To understand its logic, keep in mind how the weekly NH-NL is constructed. For example, if the weekly NH-NL rises to a +1,500 level, it means that in each of the past five trading days there were on average 300 more New Highs than New Lows. It takes a period of sustainable bullishness or bearishness to push the weekly NH-NL to an extreme. - -These are the most important signals of weekly NH-NL: - -- When it drops below minus 4,000 and then rallies above that level, it delivers major buy signals. -- When the weekly NH-NL rises above plus 2,500, it confirms bull markets. -- When the tops or bottoms of weekly NH-NL diverge from price patterns, they signal important reversals. - -A drop below −4,000 reflects an unsustainable market panic. To fall that low, the market has to deliver an average of 800 more daily New Lows than New Highs for five days in a row. Such massive panic is not going to last. When the weekly NH-NL rises above −4,000, it flashes a buy signal I call a Spike. It's so powerful and effective in both bull and bear markets that I named our SpikeTrade group after it. This signal misfired only once in several decades, as you'll see on the chart in Figure 34.2. - -**FIGURE 34.2** S&P 500 weekly, 26-week EMA, NH-NL weekly. Green line at +2,500, purple line at −4,000. *(Chart by TradeStation)* - -#### NH-NL—Weekly Chart - -When the weekly NH-NL falls below −4,000 and then rises above that level, it nails important bottoms, marked here with vertical green arrows. This chart covers 11 years—the signal works in bull and bear markets. There was only one exception—in October and November 2008, during the worst bear market of a century (marked by a purple oval). Let this serve as a reminder that no market signal works 100% of the time, making risk management essential for survival and success. - -Red diagonal arrows mark major bearish divergences. Weekly NH-NL touching the +2,500 level confirms bull markets and calls for higher prices ahead, even if interrupted by a correction. - -When the weekly NH-NL rises to the +2,500 level, it confirms bull markets. This indicator never rises this high during bear market rallies. When you see it above that level, you know you're in a bull market, with higher prices likely ahead. - -#### **The 65-day and 20-day NH-NL** - -One of the great innovations in the New High–New Low analysis in recent years was the addition of two new look-back windows: a 20-day and a 65-day. While the regular daily NH-NL compares each day's high and low to the high-low range for the preceding year, a 20-day NH-NL compares it only to the preceding month and a 65-day NH-NL to the preceding quarter. These shorter-term views of the NH-NL are useful for short-term timing. - -These two new time windows deliver more sensitive signals than the standard year-long NH-NL. The logic is simple: before a stock reaches a new high for the year, it must first make a new high for the month and then for the quarter. If a stock has been in a downtrend, it may take a long time to recover and reach a new yearly high, but it can reach monthly and quarterly highs much sooner. - -In addition to the usual signals, such as trends and divergences, a very sharp shortterm buy signal occurs when the 20-day NH-NL drops below minus 500 and then rallies above that level. It shows that the market has touched and rejected a shortterm bearish extreme, and afterwards it usually launches a short-term rally. We call this a "Spike bounce" signal (see Chapter 54). - -Tracking market leaders with the help of NH-NL helps improve timing. There are two ways to utilize the New High–New Low signals. First, since individual stocks largely depend on broad market trends, we can use NH-NL signals to decide when to buy or sell our stocks. Furthermore, we can use NH-NL signals to trade vehicles that track the broad market, such as the S&P e-mini futures. - -## ■ **35. Stocks above 50-Day MA** - -This broad stock market indicator is based on the key concepts regarding prices and moving averages (Figure 35.1). Each price represents a momentary consensus of value among market participants, while a moving average represents an average consensus of value during its time window. This means that when a stock trades above its MA, the current consensus of value is above average—bullish. When a stock trades below its MA, the current consensus of value is below average—bearish. - -When the market is trending higher, the percentage of stocks above their moving averages keeps growing. In a broad downtrend, the number of stocks above their MAs keeps shrinking. - -**FIGURE 35.1** S&P 500 weekly and 26-week MA; Stocks above 50 MA with reference lines at 75% and 25%. *(Chart by TradeStation)* - -#### Stocks above 50-Day MA - -When the "stocks above their 50-day MA" indicator reaches an extreme—above 75% or below 25% and then moves away from that level, it shows that the intermediate-term trend has reached a likely turning point. A reversal of this indicator flashes a signal for the entire market: buy when it turns up and sell when it turns down. In the latter part of 2013, as the market started going up with almost no pullbacks, buy signals from upside reversals began to occur at levels higher than 25%. These signals don't mark every reversal—no indicator does—but when it flashes its signal, we had better pay attention. - -This indicator tracks all stocks traded on the New York Stock Exchange, American Exchange, and NASDAQ and calculates how many of them trade above their moving averages. It plots that percentage as a line that fluctuates between 0% and 100%. We can use the pattern of this line to confirm market trends and anticipate reversals. - -The indicator for tracking the number of stocks above their 50-day MAs is included in many software packages. I like to view it on a weekly chart, where it helps catch intermediate reversals—market turns that augur in trends that last anywhere from several weeks to several months. You don't need to look at this indicator daily, but it can be an important part of weekend homework. - -In theory, the highest possible reading of this indicator would be 100%, if all stocks rallied above their MAs. Its lowest possible reading of 0% would occur if all stocks were to fall below their MAs. In practice, only exceptional market moves swing it near the 90% or 10% extremes. Normally, this indicator tends to top out near 75% and bottom out near 25%. I draw two reference lines on its chart at 75% and 25% and start looking for the market turn as this indicator approaches those levels. - -The percentage of stocks above their 50-day MA gives its trading signals not by reaching any certain levels but rather by reversing near those levels. It signals the completion of a top by rising to or above the upper reference line and then sinking below that line. It signals that a bottom has been formed when it falls below or even near the lower reference line and then turns up. - -Notice that the tops of this indicator tend to be broad, while its bottoms are sharper. Tops are formed by greed, which is a happier, longer-lasting emotion. Bottoms are formed by fear—a more intense and shorter-lived emotion. - -While some of this indicator's signals are right on time in catching reversals, others mark only temporary pauses in major trends. Let this serve as a reminder never to rely on a single indicator for trading decisions. Use multiple tools: when they confirm each other's signals, they reinforce one another. - -## ■ **36. Other Stock Market Indicators** - -Only a handful of general market indicators have stood the harsh test of time. Many that used to be popular in previous decades have been swept away by the flood of new trading vehicles. The New High–New Low Index and Stocks Above 50-day MA, reviewed above, continue to work because of their clear logic. Several other indicators are listed below. Whatever tools you choose, be sure to understand how they work and what exactly they measure. Select a few and track them on a regular basis, until you come to trust their signals. - -## **Advance/Decline** - -The Advance/Decline line (the A/D line) tracks the degree of mass participation in rallies and declines. Each day it adds up the number of stocks that closed higher and subtracts the number of stocks that closed lower. - -While the Dow Jones Industrials track the behavior of the generals and the New High–New Low Index focuses on the officers, the A/D line shows whether soldiers are following their leaders. A rally is more likely to persist when the A/D line rises to a new high, while a decline is likely to deepen if A/D falls to a new low in step with the Dow. - -The A/D line is based on the day's closing prices for each stock at any exchange: take the number of advancing stocks, subtract the number of declining stocks, and ignore unchanged stocks. The result will be positive or negative, depending on whether more stocks advanced or declined during the day. For example, if 4,000 stocks were traded, 2,600 advanced, 900 declined, and 500 were unchanged, then Advance/Decline equals +1,700 (2,600−900). Add each day's Advance/Decline figures to the previous day's total to create a cumulative A/D line (Figure 36.1). - -#### Advance/Decline Line - -The turns of this indicator usually coincide with price turns, but occasionally precede them. This ability to give early warnings makes A/D line worth following. In area A, prices are scratching the bottom and make a new low, while the uptrend of the A/D line calls for a rally. In area B, the opposite occurs—prices press higher, while a downturn of the A/D line calls for a decline. In area C, prices continue to decline, while the A/D line turns up and calls for a rally. Those warnings don't occur at every turning point. - -Traders should watch for new peaks and valleys in the A/D line rather than its absolute levels, which depend on its starting date. If a new high in the stock market is accompanied by a new high of the A/D line, it shows that the rally has broad support and is likely to continue. Broadly based rallies and declines have greater staying power. If the stock market reaches a new peak, but the A/D line reaches a lower peak than during the previous rally, it shows that fewer stocks are participating, and the rally may be near its end. When the market falls to a new low but the A/D line traces a shallower bottom than during the previous decline, it shows that the decline is narrowing down and the bear move is nearing an end. These signals tend to precede reversals by weeks if not months. - -The **Most Active Stocks indicator** (MAS) is an Advance/Decline line of the 15 most active stocks on the New York Stock Exchange. It used to be listed daily in many newspapers. Stocks appeared on this list when they caught the public's eye. MAS was a big money indicator—it showed whether big money was bullish or bearish. When the trend of MAS diverged from the price trends, the market was especially likely to reverse. - -Hardly anyone today uses an indicator called **TRIN**, which was important enough to have its own chapter in the original *Trading for a Living*. Very few people track another formerly popular indicator called **TICK**. Old stock market books are full of fascinating indicators, but you have to be very careful using them today. Changes in the market over the years have killed many indicators. - -Indicators based on the volume of **low-priced stocks** lost their usefulness when the average volume of the U.S. stock market soared and the Dow rose tenfold. The **Member Short Sale Ratio** and the **Specialist Short Sale Ratio** stopped working after options became popular. Member and specialist short sales are now tied up in the intermarket arbitrage. **Odd-lot** statistics lost value when conservative odd-lotters bought mutual funds. The **Odd-lot Short Sale Ratio** stopped working when gamblers discovered puts. - -## ■ **37. Consensus and Commitment Indicators** - -Most private traders keep their opinions to themselves, but financial journalists, letter writers, and bloggers spew them forth like open hydrants. Some writers may be very bright, but the financial press as a whole has a poor record of market timing. Financial journalists and letter writers tend to overstay trends and miss turning points. When these groups become intensely bullish or bearish, it pays to trade against them. - -It's "monkey see, monkey do" in the publishing business, where a journalist's or an advisor's job may be endangered by expressing an opinion that differs too sharply from his group. Standing alone feels scary, and most of us like to huddle. When financial journalists and letter writers reach a high degree of bullish or bearish consensus, it's a sign that the trend has been going on for so long that a reversal is near. - -Consensus indicators, also called contrary opinion indicators, are not suitable for precision timing, but they draw attention to the fact that a trend is near its exhaustion level. When you see that message, switch to technical indicators for more precise timing of a trend reversal. - -A trend can continue as long as bulls and bears remain in conflict. A high degree of consensus precedes reversals. When the crowd becomes highly bullish, get ready to sell, and when it becomes strongly bearish, get ready to buy. This is the contrary opinion theory, whose foundations were laid by Charles Mackay, a Scottish barrister. His classic book, *Extraordinary Popular Delusions and the Madness of Crowds* (1841) describes the infamous Dutch Tulip Mania and the South Seas Bubble in England. Humphrey B. Neill in the United States applied the theory of contrary opinion to stocks and other financial markets. In his book, *The Art of Contrary Thinking*, he made it clear why the majority must be wrong at the market's turning points: prices are established by crowds, and by the time the majority turns bullish, there aren't enough new buyers to support a bull market. - -Abraham W. Cohen, an old New York lawyer whom I met in the early 1980s, came up with the idea of polling market advisors and using their responses as a proxy for the entire body of traders. Cohen was a skeptic who spent many years on Wall Street and saw that advisors as a group performed no better than the market crowd. In 1963, he established a service called *Investors Intelligence* for tracking letter writers. When the majority of them became bearish, Cohen identified a buying opportunity. Selling opportunities were marked by strong bullishness among letter writers. Another writer, James H. Sibbet, applied this theory to commodities, setting up an advisory service called *Market Vane*. - -## **Tracking Advisory Opinion** - -Letter writers follow trends out of fear of losing subscribers by missing major moves. In addition, bullishness helps sell subscriptions, while bearish comments turn off subscribers. Even in a bear market, we rarely see more bears than bulls among advisors for more than a few weeks at a time. - -The longer a trend continues, the louder the letter writers proclaim it. They are most bullish at market tops and most bearish at market bottoms. When the mass of letter writers turns strongly bullish or bearish, it's a good idea to look for trades in the opposite direction. - -Some advisors are very skilled at doubletalk. The man who speaks from both sides of his mouth can claim that he was right regardless of what the market did, but editors of tracking services have plenty of experience pinning down such lizards. - -When the original *Trading for a Living* came out, only two services tracked advisory opinions: *Investors Intelligence* and *Market Vane*. In recent years, there has been an explosion of interest in behavioral economics, and today many services track advisors. My favorite resource is SentimenTrader.com, whose slogan is "Make emotion work for you instead of against you." Jason Goepfert, its publisher, does a solid job of tracking mass market sentiment. - -## **Signals from the Press** - -To understand any group of people, you must know what its members crave and what they fear. Financial journalists want to appear serious, intelligent, and informed; they are afraid of appearing ignorant or flaky. That's why it's normal for them to straddle the fence and present several sides of every issue. A journalist is safe as long as he writes something like "monetary policy is about to push the market up, unless unforeseen factors push it down." - -Internal contradiction is the normal state of affairs in financial journalism2 . Most financial editors are even more cowardly than their writers. They print contradictory articles and call this "presenting a balanced picture." - -For example, an issue of a major business magazine had an article headlined "The Winds of Inflation Are Blowing a Little Harder" on page 19. Another article on page 32 of the same issue was headlined "Why the Inflation Scare Is Just That." It takes a powerful and lasting trend to lure journalists and editors down from their fences. This happens only when a tide of optimism or pessimism sweeps up the market near the end of a major trend. When journalists start expressing strongly bullish or bearish views, the trend is ripe for a reversal. - -This is why the front covers of major business magazines serve as contrarian indicators. When a leading business magazine puts a bull on its cover, it's usually a good time to take profits on long positions, and when a bear graces the front cover, a bottom cannot be too far away. - -## **Signals from Advertisers** - -A group of three or more ads touting the same "opportunity" in a major newspaper or magazine warns of an imminent top. This is because only a well-established uptrend can break through the inertia of several brokerage firms. By the time all of them recognize a trend, come up with trading recommendations, produce ads, and place them in a newspaper, that trend is very old indeed. - -The ads on the commodities page of *The Wall Street Journal* appeal to the bullish appetites of the least-informed traders. Those ads almost never recommend selling; it is hard to get amateurs excited about going short. You'll never see an ad for an investment when its price is low. When three or more ads on the same day tout gold or silver, it is time to look at technical indicators for shorting signals. - -2 And not only journalism: in 2013 three academicians shared a Nobel Prize in economics. The work of one of them showed that the market was efficient and couldn't be timed; the work of another showed that the market was irrational and could be timed. Take your pick and wait for next year's prize. - -**FIGURE 37.1** Monthly total dollar value of OTC stocks. *(Courtesy SentimenTrader.com)* - -Money pours into penny stocks when the market is up, dries up when it is down. This is reflected in the monthly reports of penny stock volume at the NASDAQ. After markets have hit new highs and the news is good, volume often spikes up for these "lottery ticket" stocks. When the stock market hits the skids, their volume dries up. - -A more malignant breed of promoters appeared on the scene in the past decade: thanks to the Internet, "pump and dump" operators have migrated online. The scammers touting penny stocks know that they need to wait for an uptrend to hook their victims. Whenever a higher than usual number of promo pitches starts showing up in my spam filter, the top can't be too far away (Figure 37.1). - -## **Commitments of Futures Traders** - -Government agencies and exchanges collect data on buying and selling by various groups of traders and publish summary reports of their positions. It pays to trade with the groups that have a track record of success and against those with track records of persistent failure. - -For example, the Commodity Futures Trading Commission (CFTC) reports long and short positions of hedgers and big speculators. Hedgers—the commercial producers and consumers of commodities—are the most successful market participants. The Securities and Exchange Commission (SEC) reports purchases and sales by corporate insiders. Officers of publicly traded companies know when to buy or sell their shares. - -Positions of large futures traders, including hedge funds, are reported to the CFTC when their sizes reach the so-called **reporting levels**. At the time of this writing, if you are long or short 250 contracts of corn or 200 contracts of gold, the CFTC classifies you as a big speculator. Brokers report those positions to the CFTC, which compiles the data and releases summaries on Fridays. - -The CFTC also sets up the maximum number of contracts a speculator is allowed to hold in any given market— these are called **position limits.** Those limits are set to prevent very large speculators from accumulating positions that are big enough to bully the markets. - -The CFTC divides all market participants into three groups: commercials, large speculators, and small speculators. **Commercials**, also known as **hedgers**, are firms or individuals who deal in actual commodities in the normal course of their business. In theory, they trade futures to hedge business risks. For example, a bank trades interest rate futures to hedge its loan portfolio, while a food processing company trades wheat futures to offset the risks of buying grain. Hedgers post smaller margins and are exempt from speculative position limits. - -**Large speculators** are those whose positions have reached reporting levels. The CFTC reports buying and selling by commercials and large speculators. To find the positions of **small traders**, you need to take the open interest and subtract from it the holdings of the first two groups. - -The divisions between hedgers, big speculators, and small speculators are somewhat artificial. Smart small traders grow into big traders, dumb big traders become small traders, and many hedgers speculate. Some market participants play games that distort the CFTC reports. For example, an acquaintance who owns a brokerage firm sometimes registers his wealthy speculator clients as hedgers, claiming they trade stock index and bond futures to hedge their stock and bond portfolios. - -The commercials can legally speculate in the futures markets using inside information. Some of them are big enough to play futures markets against cash markets. For example, an oil firm may buy crude oil futures, divert several tankers, and hold them offshore in order to tighten supplies and push up futures prices. They can take profits on long positions, go short, and then deliver several tankers at once to refiners in order to push crude futures down a bit and cover shorts. Such manipulation is illegal, and most firms hotly deny that it takes place. - -As a group, commercials have the best track record in the futures markets. They have inside information and are well-capitalized. It pays to follow them because they are successful in the long run. Big speculators used to be successful wealthy individuals who took careful risks with their own money. That has changed, and today most big traders are commodity funds. These trend-following behemoths do poorly as a group. The masses of small traders are the proverbial "wrong-way Corrigans" of the markets. - -It is not enough to know whether a certain group is short or long. Commercials often short futures because many of them own physical commodities. Small traders are usually long, reflecting their perennial optimism. To draw valid conclusions from the CFTC reports, you need to compare current positions to their historical norms. - -## **Legal Insider Trading** - -Officers and investors who hold more than 5 percent of the shares in a publicly traded company must report their buying and selling to the Securities and Exchange Commission. The SEC tabulates insider purchases and sales, and releases this data to the public. - -Corporate insiders have a long record of buying stocks when they're cheap and selling them high. Insider buying emerges after severe market drops, and insider selling accelerates when the market rallies and becomes overpriced. - -Buying or selling by a single insider matters little: an executive may sell shares to meet major personal expenses or he may buy them to exercise stock options. Analysts who researched legal insider trading found that insider buying or selling was meaningful only if more than three executives or large stockholders bought or sold within a month. These actions reveal that something very positive or negative is about to happen. A stock is likely to rise if three insiders buy in one month and to fall if three insiders sell within a month. - -Clusters of insider buying tend to have a better predictive value than clusters of selling. That's because insiders are willing to sell a stock for many reasons (diversification, buying a second home, sending a kid to college) but they are willing to buy for one main reason—they expect their company's stock to go up. - -## **Short Interest** - -While the numbers of futures and options contracts held long and short is equal by definition, in the stock market there is always a huge disparity between the two camps. Most people, including professional fund managers, buy stocks, but very few sell them short. - -Among the data reported by exchanges is the number of shares being held short for any stock. Since the absolute numbers vary a great deal, it pays to put them into a perspective by comparing the number of shares held short to that stock's float (the total number of publicly owned shares available for trading). This number, "**Short Percent of Float**," tends to run about one or two percent. Another useful way to look at short interest is by comparing it to the average daily volume. By doing this, we ask a hypothetical question: if all shorts decided to cover, while all other buyers stood aside and daily volume remained unchanged, how many days would it take for them to cover and bring short interest down to zero? This "**Days to Cover**" number normally oscillates between one and two days. - -When planning to buy or short a stock, it pays to check its Short Percent of Float and Days to Cover. If those are high, they show that the bearish side is overcrowded. - -| Apple Incorporated | \$534.97 | Green Mountain Coffee Roasters | \$119.74 | -|--------------------------------------|------------|---------------------------------------|------------| -| AAPL | $-1.00$ | GMCR | 0.34 | -| Daily Short Sale Volume | view | Daily Short Sale Volume | view | -| Short Interest (Shares Short) | 16.538.900 | Short Interest (Shares Short) | 32.931.300 | -| Days To Cover (Short Interest Ratio) | 0.9 | Days To Cover (Short Interest Ratio) | 15.1 | -| Short Percent of Float | 1.86 % | Short Percent of Float | 25.76 % | -| | | | | - -**FIGURE 37.2** AAPL and GMCR shorting data. *(Source: Shortsqueeze.com)* - -### Short Interest and Days to Cover - -Compare short interest data for two popular stocks on the day I'm editing this chapter. "Short Percent of Float" is 1.86% for Apple, Inc. (AAPL), but nearly 26% for Green Mountain Coffee Roasters, Inc. (GMCR). "Days to Cover" are 0.9 for AAPL but over 15 for GMCR. These numbers reflect much more aggressive shorting of GMCR. Not to forget, each and every one of those shorts at some point will need to buy in order to cover his short position. - -Perhaps savvy shorts know something very bad about GMCR, but what if its stock rallies even a little? Many bears will run for cover, and as they scramble to cover shorts, the stock may soar. Whatever its long-term prospects, it could be sent flying in the near term. - -A rally may scare those bears into panicky covering, and send the stock sharply higher. That would be good for bulls but bad for bears. - -Fear is a stronger emotion than greed. Bulls may look for bargains but try not to overpay, while squeezed bears, facing unlimited losses, will pay any price to cover. That's why short-covering rallies tend to be especially sharp. - -Whenever you look for a stock to buy, check its Short Percent of Float and Days to Cover. The usual, normal readings don't provide any great information, but the deviations from the norm often deliver useful insights (Figure 37.2). - -High shorting numbers mark any stock as a dangerous short. By extension, if your indicators suggest buying a stock, its high short interest becomes an additional positive factor—there is more fuel for a rally. It makes sense for swing traders to include the data on shorting when selecting which of several stocks to buy or sell short. I always review these numbers when working up a potential trade. - -# Trading Systems - -A system is a set of rules for finding, entering, and exiting trades. Every serious trader has one or more systems. Compare this to a surgeon who has systems for performing operations. He doesn't waste time and energy deciding whether to order anesthesia, where to make the cut, or how to find the sick organ. He follows a well-established routine, which leaves him free to think about strategic issues, finesse his technique, or deal with any complications. - -Some people use strictly defined systems that leave very little room for personal judgment—we call them mechanical traders. Others use systems that leave plenty of room for personal decisions—we call them discretionary traders. There is a very thoughtful discussion on matching one's personality type to various trading styles in Richard Weissman's book *Mechanical Trading Systems*. Whatever approach you take, the key advantage of any system is that you design it when the markets are closed and you feel calm. A system becomes your anchor of rational behavior amidst the turbulence of the market. - -It goes without saying that a proper system is written down. This needs to be done because it's easy to forget some essential steps when stressed by live markets. Dr. Atul Gawande in his remarkable book *The Checklist Manifesto* makes a convincing case for using checklists to raise performance levels in a large variety of demanding endeavors, from surgery and construction to trading. - -A mechanical trader develops a set of rules, back-tests them on historical data, and then puts his system on autopilot. Going forward, his software starts flashing orders for entries, target, and stops, and a mechanical trader is supposed to place them exactly as shown. Whether he'll stick to his plan or attempt to tweak or override those signals is another story, but that's how the system is supposed to work. - -An amateur feels relieved that a mechanical system, either his own or purchased from a vendor, will relieve him from the stress of decision making. Unfortunately, market conditions keep changing, and mechanical systems eventually get out of gear and start losing money. The market is not a mechanical entity that follows the laws of physics. It is a huge crowd of people acting in accordance with imperfect laws of mass psychology. Mechanical methods can help, but trading decisions must take psychology into account. - -A professional trader with a mechanical system continues to monitor its performance like a hawk. He knows the difference between a normal drawdown and a period when a system goes out of gear and has to be shelved. A professional trader can afford to use a mechanical system precisely because he is capable of discretionary trading! A mechanical system is an action plan, but some degree of judgment is always required, even with the best and most reliable plans. - -A discretionary trader approaches each day in the markets afresh. He tends to examine more factors than a mechanical trader, weigh them differently at different times, and be more attuned to changes in current market behavior. A good discretionary system, while giving you plenty of freedom, includes several inviolate rules, especially in the area of risk management. - -Both approaches have pluses and minuses. On the plus side, mechanical trading can be less emotionally tense. You build your system, turn it on, and go about your life without watching every tick. On the minus side, these living and breathing markets have a sneaky way of changing their tunes and behaving differently from how they did when you built your system. - -The main plus of discretionary trading is the openness to fresh opportunities. Its biggest minus is that people's judgment tends to slip under stress, when they become excited by greed or frightened by sharp moves. - -In my experience, mechanical traders tend to deliver more steady results, but the most successful traders use discretionary methods. Your choice is likely to depend on your temperament. That's how we make some of our most important decisions in life where to live, what career to pursue, whom to marry. Our key choices stem from the innermost core of our personalities rather than rational thought. In trading, cooler and more obsessional people tend to gravitate toward mechanical trading, while the more swashbuckling types turn to discretionary trading. - -Paradoxically, at the high end of performance, these two approaches begin to converge. Advanced traders combine mechanical and discretionary methods. For example, a friend who is a died-in-the-wool mechanical trader uses three systems in his hedge fund but keeps rebalancing capital allocated to each of them. He shifts millions of dollars from System A to System B or C, and back again. In other words, his discretionary decisions augment his systematic trading. I am a discretionary trader, but follow several strict rules that prohibit me from buying above the upper channel line, shorting below the lower channel line, or putting on trades against the Impulse system (described below). These mechanical rules reduce the number of bad discretionary trades. - -Much of this book deals with discretionary trading, but you can use the tools described in it for mechanical trading. I wrote this book to help both types of traders. - -## ■ **38. System Testing, Paper Trading, and the Three Key Demands for Every Trade** - -Before trading real money with a system, you need to test it, whether you developed it yourself or bought it from a vendor. This can be done in one of two ways. One is backtesting: apply your system's rules to a stretch of historical data, usually several years' worth. The other is forward-testing: trade small positions with real money. Serious traders begin with **backtesting**, and if its results look good, switch to **forward-testing**; if that works well, they gradually increase position size. - -Looking at printouts of historical results is a nice start, but don't let good numbers lull you into a false sense of security. The profit-loss ratio, the longest winning and losing streaks, the maximum drawdown, and other parameters may appear objective, but past results don't guarantee the system will hold up in the real world of trading. - -You may see a very nice printout, but what if, once you begin to trade real money, that system delivers five losses in a row? Nothing in your paper testing will have prepared you for that, but it happens all the time. You grit your teeth and put on another trade. Another loss. Your drawdown is deepening, and then the system flashes a new signal. Will you put on the next trade? Suddenly, an impressive printout looks like a very thin reed on which to hang the future of your account. - -There is a cottage industry of programmers who back-test systems for a fee. Some traders, too suspicious to disclose their "sure-fire methods," spend months learning to use testing software. In the end, only one kind of backtesting prepares you to trade—manual testing. It is slow, time-consuming, and cannot be automated, but it's the only method that comes close to modeling real decision making. It consists of going through historical data one day at a time, scrupulously writing down your trading signals for the day ahead, and then clicking one bar forward and recording new signals and trades for the next day. - -Begin by downloading daily price and volume data for your trading vehicle for a minimum of two years (for futures you may use continuous contracts). Open a chart and, without looking, swing immediately to its very beginning. Open your spreadsheet, write down your system's rules at the top of the page, and create columns for dates, prices, and signals. Open two windows in your analytic program—one for your weekly chart and its indicators, the other for the daily chart. The two most important keyboard keys for testing are and because they let you switch between windows and programs. - -As you click forward, one day at a time, trends and trading ranges will slowly unfold and challenge you. At that point, you'll be doing much more than testing a set of rules. Moving ahead one day at a time will test and improve your decision-making skills. This **one-bar-at-a-time testing** is vastly superior to what you can get from backtesting software. - -How will you deal with gap openings, when the market leaps above your buy level or drops below your stop at the opening bell? What about limit moves in futures? Clicking forward one day at a time and writing down your signals and decisions will get you as close to real trading as you can without risking cash. It'll keep you focused on the raw right edge of the market. You'll never get that from a neat printout of a system test. Manual testing will improve your ability not only to understand the markets but to make decisions. - -If one-bar-at-a-time testing shows positive results, start trading small positions with real money. These days, with brokerage commissions as low as \$1 for buying or selling 100 shares, you can test your indicators and systems while risking tiny amounts. Be sure to keep good records, and if your real-money results continue positive, start increasing the size of your trades. Do it in steps, all the way up to your normal trade size. - -## **Paper Trading** - -Paper trading means recording your buy and sell decisions and tracking them like real trades, but with no money at risk. Beginners may start out paper trading, but most people turn to it after getting beat up by the markets. Some even alternate between real and paper trades and can't understand why they seem to make money on paper but lose whenever they put on a real trade. There are three reasons. - -First, people are less emotional with paper trades, and good decisions are easier to make with no money at risk. Second, in paper trades, you always get perfect fills, unlike real trading. Third and most important, good trades often look murky when you consider them. The easy-looking ones are more likely to lead to problems. A nervous beginner jumps into obvious-looking trades and loses money, but paper trades the more challenging ones. It goes without saying that hopping between real and paper trades is sheer nonsense. You either do the one or the other. - -Psychology plays a huge role in how your trades turn out, and that's where paper trading fails to deliver. Pretend-trading with no money at risk is like sailing on a pond—it does little to prepare you for real sailing on a stormy sea. - -There is only one good reason to paper trade—to test your discipline as well as your system. - -If you can download your data at the end of each day, do your homework, write down your orders for the day ahead, watch the opening and record your entries, then track your market each day, adjusting your profit targets and stops—if you can do all of this for several months in a row, recording your actions, without skipping a day—then you have the discipline to trade real money. An impulsive person who trades for entertainment will not be able to paper trade that way because it requires real work. - -You may open an account with one of several websites set up for paper trading. Enter your orders, check whether they have been triggered, and write down those "fills." Enter all paper trades in your spreadsheet and your trading diary. If you have the willpower to repeat this process daily for several months, then you have the discipline for successful real trading. - -Still, there is no substitute for trading real money because even small amounts rev up emotions more than any paper trade. You'll learn much more from even small real trades than from months of paper trading. - -In recent years, I've had a front row seat watching traders progress from paper trading to profitable real-money trading. In SpikeTrade.com, we reduce fees for members who contribute picks, creating an incentive to do homework. The discipline of submitting a weekly trade plan with entry, target, and stop gets people into the habit of being organized and focused. As their picks improve, they start earning performance bonuses in our weekly competition. At that point, I may receive an e-mail saying that while they're doing well in the competition, their private trading lags behind. I tell them they're on the right track and to continue what they're doing. Sure enough, several months later their new skills migrate into real trading. Now they may write that their private trading is better than their performance in the competition. Sure—I reply—it's because you pay more attention to real-money trades! - -Speaking of trade setups, it's essential to write down all relevant numbers before you enter a trade. You're more objective before you put any money at risk; once in a trade, you'll be tempted to give it "more room to run." That's how losers turn small drawdowns into disasters. I once consulted a man who refused to take a \$200 loss until it ran into a \$98,000 wipeout. - -We'll focus on risk and money management in a later chapter when I discuss the concept of "The Iron Triangle of risk control." At this point, I only want to make clear that risk management is the essential part of serious trading. Forget the days when you would look at the ceiling and say, "I'll trade 500 shares," "I'll trade a thousand shares," or any other arbitrary number. Later in this book, you'll learn a simple formula for sizing your trades, based on your account and risk tolerance. - -At the time of this writing, I have three strategies that I trade. My favorite is a false breakout with a divergence. My second choice is a pullback to value during a powerful trend—that's the strategy of the trade shown on the screen (Figure 38.1). Last, I occasionally "fade an extreme"—bet on a reversal of an overstretched trend. Each of these strategies has its rules, but the key point is this—I'll only take a trade that fits one of them. No chasing of random cars for this old dog! - -## **Three Key Demands for Every Trade** - -There are three essential angles that must be considered for every planned trade. We'll briefly review them here and then elaborate in the chapters on specific trading - -#### **FIGURE 38.1** Three key demands for every planned trade.*(Source: SpikeTrade.com)* - -This is a screenshot of a trade plan I drew several days prior to writing this chapter (you can see how I implemented it in Chapter 55). Notice several essential features that belong in every trade plan: - -- A. Trade setup—write down the three key numbers for every trade: your entry, target, and stop. Before entering the market you need to decide how much you'll pay, how much you'll risk, and how much you expect to gain. The ratio of potential reward to risk should normally be better than two to one. The only time to deviate from this rule is when technical signals are especially strong. Of course, don't fudge your target to turn a borderline trade into an acceptable one. Your target needs to be realistic. -- B. Risk management—decide in advance how many dollars you're prepared to risk on this trade. Divide that amount by your risk per share—the distance from your entry to your stop. This will give you the number of shares you may trade. -- C. Last but not least, every single trade must be based on a specific system or strategy. "It looks good to me" isn't a system! It's easy to become excited after hearing a stock tip or seeing a runaway trend, but the days of chasing stocks like a pup chases cars are over. If you want to trade for a living, you need to define your trade plans, strategies, or systems—call them what you like—and enter only those trades that fit their criteria. - -systems and risk management. The discipline of these three demands is essential for anyone serious about trading. - -## ■ **39. Triple Screen Trading System** - -I developed this system and first presented it to the public in an April 1986 article in *Futures* magazine. I've been using it for trading since 1985, and it stood the test of time. I continue to tweak it, adding or changing minor features, but its basic principle remains unchanged: making trading decisions using a sequence of timeframes and indicators. - -Triple Screen applies three tests or screens to every trade. Many trades that seem attractive at first are rejected by one or another screen. The trades that pass the Triple Screen test are much more likely to succeed. - -The Triple Screen combines trend-following indicators on long-term charts with counter-trend oscillators on the intermediate charts. It uses special entry techniques for buying or selling short as well as tight money management rules. The Triple Screen is more than a trading system: it is a method, a style of trading. - -## **Trend-Following Indicators and Oscillators** - -Beginners often look for a magic bullet—a single indicator for making money. If they get lucky for a while, they feel as if they discovered the royal road to riches. When the magic dies, amateurs give back their profits with interest and look for another magic tool. The markets are too complex to be analyzed with a single indicator. - -Different indicators give contradictory signals in the same market. Trend-following indicators rise during uptrends and give buy signals, while oscillators become overbought and give sell signals. Trend-following indicators turn down in downtrends and give signals to sell short but oscillators become oversold and give buy signals. - -Trend-following indicators are profitable when markets are moving but lead to whipsaws in trading ranges. Oscillators are profitable in trading ranges, but give premature and dangerous signals when the markets begin to trend. Traders say: "The trend is your friend," and "Let your profits run." They also say: "Buy low, sell high." But why sell if the trend is up? And how high is high? - -Some traders try to average out the signals of trend-following indicators and oscillators, but those votes are easy to rig. Just as Republicans and Democrats in the United States keep redrawing electoral districts to create "safe" seats, traders keep selecting indicators that deliver the votes they want to see. If you use more trend-following tools, the vote will go one way, and if you use more oscillators, it'll go the other way. A trader can always find a group of indicators telling him what he wants to hear. - -The Triple Screen trading system is designed to filter out the disadvantages of trend-following indicators and oscillators, while preserving their strengths. - -## **Choosing Timeframes—the Factor of Five** - -Another major dilemma is that the trend of any trading vehicle can be both up and down at the same time, depending on what charts you use. A daily chart may show an uptrend, while a weekly chart shows a downtrend, and vice versa. We need a system to handle conflicting signals in different timeframes. - -Charles Dow, the author of the venerable Dow Theory, stated at the turn of the twentieth century that the stock market had three trends. The long-term trend lasted several years, the intermediate several months, and anything shorter than that was a minor trend. Robert Rhea, the great market technician of the 1930s, compared these three trends to a tide, a wave, and a ripple. He recommended trading in the direction of the tide, taking advantage of the waves, and ignoring the ripples. - -Times have changed, and the markets have become more volatile. Computers are cheap, or even free; live data have created better opportunities to capitalize on faster moves. We need a more flexible definition of timeframes. The Triple Screen trading system is based on the observation that every timeframe relates to the larger and shorter ones by approximately a factor of five (see Chapter 32). - -Begin by asking yourself, what's your favorite timeframe. Do you prefer working with the daily, 10-minute, or any other charts? Whatever timeframe is your favorite, the Triple Screen calls that the **intermediate** timeframe. The **long-term** timeframe is one order of magnitude longer. The **short-term** timeframe is one order of magnitude shorter. Once you select your intermediate timeframe, you may not look at it until you examine the longer-term timeframe and make your strategic decision there. For example, if you want to carry a trade for several days or weeks, then your intermediate timeframe is likely to be defined by the daily charts. Weekly charts are one order of magnitude longer, and they'll determine the long-term timeframe for you. Hourly charts are one order of magnitude shorter, and they'll determine the short-term timeframe. - -Day traders who hold their positions for less than an hour can use the same principle. For them, a 5-minute chart may define the intermediate timeframe, a 25-minute chart the long-term timeframe, and a 2-minute chart the short-term timeframe. - -Triple Screen demands that you examine the long-term chart first. It allows you to trade only in the direction of the tide—the trend on the long-term chart. It uses the waves that go against the tide for entering positions. For example, when the weekly trend is up, daily declines create buying opportunities. When the weekly trend is down, daily rallies provide shorting opportunities. - -## **First Screen—Market Tide** - -Triple Screen begins by analyzing the long-term chart, one order of magnitude greater than the one you plan to trade. Most traders pay attention only to the daily charts, with everybody watching the same few months of data. If you begin by analyzing weekly charts, your perspective will be five times greater than that of your competitors. Begin by selecting your favorite timeframe and call it Intermediate. Do not even glance at your intermediate chart because it'll prejudice you. Go immediately to the timeframe one order of magnitude longer—your long-term chart. That's where you'll make your strategic decision to be a bull or a bear. After that, return to the intermediate timeframe and start making tactical decisions, such as where to enter and where to place a stop. - -If you make the mistake of looking at the daily chart first, you'll be prejudiced by its patterns. First, make an unbiased decision on a long-term weekly chart before even glancing at the daily. - -The original version of Triple Screen used the slope of weekly MACD-Histogram as its weekly trend-following indicator (Figure 39.1). It was very sensitive and gave many buy and sell signals. Later I switched to using the slope of a weekly exponential moving average as my main trend-following tool on long-term charts. After I invented the Impulse system (described in the following chapter), I began to use it for - -**FIGURE 39.1** Gold weekly, with 26- and 13-EMAs and MACD-Histogram (12-26-9). *(Chart by Stockcharts.com)* - -#### Using Weekly MACD-Histogram as the First Screen of Triple Screen - -Triple Screen requires us to examine weekly charts before even looking at the dailies. The slope of MACD-Histogram is defined by the relationship between its two latest bars. - -This indicator flashes a buy signal when its slope turns up and a sell signal when its slope turns down. The best buy signals occur when MACD-Histogram turns up from below its centerline. The best sell signals are given when its slope turns down from above its centerline (see Indicator Seasons in Chapter 32). - -When the slope of MACD-Histogram turns up (arrows A, C, and E), it allows us to trade only from the long side or stand aside. When that slope turns down (arrows B and D), it allows us to trade only from the short side or stand aside. - -Note that the buy signals at A and E are of better quality than at C—because the signal C occurred above the centerline. It is better to buy in spring than in summer. At the right edge of the chart, the uptrend is very strong because the signal E came from a bullish divergence: a double bottom of prices (A and E) was accompanied by a much shallower second bottom of the indicator. - -the first screen of Triple Screen. The Impulse system combines the best features of the previous two methods. It is not quite as jumpy as MACD-Histogram but is faster to react than the slope of an EMA. - -As you'll read in the next chapter, the Impulse system colors every bar green when it's bullish, red when bearish, and blue when neutral. The Impulse system doesn't tell you what to do. It's a censorship system that signals what you're prohibited from doing. When the Impulse system is red, it prohibits you from buying. When it is green, it prohibits you from shorting. Glancing at a weekly chart when you want to buy, you have to wait until it stops being red. Glancing at a weekly chart when you want to sell short, you have to make sure it isn't green. The blue Impulse permits you to trade either way. - -Some traders use other indicators to identify major trends. Steve Notis wrote an article in *Futures* magazine showing how he used the Directional System as the first screen of Triple Screen. The principle is the same. You can use most trend-following indicators, as long as you analyze the trend on the weekly charts first and then look for trades on the daily charts only in that direction. - -Screen One Summary: Identify the weekly trend using a trend-following indicator and trade only in its direction. - -A trader has three choices: buy, sell, or stand aside. The first screen of the Triple Screen trading system takes away one of those options. It acts as a censor who permits you only to buy or stand aside during major uptrends. It allows you only to sell short or stand aside during major downtrends. You have to swim with the tide or stay out of the water. - -## **Second Screen—Market Wave** - -The second screen of Triple Screen identifies the wave that goes against the tide. When the weekly trend is up, daily declines point to buying opportunities. When the weekly trend is down, daily rallies point to shorting opportunities. - -The second screen applies oscillators, described in a previous section, to the daily charts in order to identify deviations from the weekly trend. Oscillators give buy signals when markets decline and sell signals when they rise. The second screen of the Triple Screen allows you to take only those signals on the daily charts that put you in gear with the weekly trend. - -Screen Two: Apply an oscillator to a daily chart. Use daily declines during weekly uptrends to find buying opportunities and daily rallies during weekly downtrends to find shorting opportunities. I like using Force Index, described in chapter 30, for the second screen, but other oscillators, such as RSI, Elder-ray, or Stochastic also perform well. - -When the weekly trend is up, Triple Screen takes only buy signals from daily oscillators but doesn't short their sell signals. The 2-day EMA of Force Index gives buy signals when it falls below its zero line, as long as it doesn't fall to a new multi-week low. When the weekly trend is down, Force Index gives shorting signals when it rallies above its centerline, as long as it doesn't rise to a new multi-week high (Figure 39.2). - -Other oscillators, such as Stochastic and RSI (see Chapters 26 and 27), give trading signals when they enter their buy or sell zones. For example, when weekly MACD-Histogram rises but daily Stochastic falls below 30, it identifies an oversold area, a buying opportunity. When the weekly MACD-Histogram declines but daily Stochastic rises above 70, it identifies an overbought area, a shorting opportunity. - -## **Third Screen—Entry Technique** - -The Third Screen is your entry technique, and here you have quite a bit of latitude. You can go to an even shorter time-frame, especially if you have live data, or you can use the same intermediate timeframe. - -In the original *Trading for a Living* I recommended looking for a ripple in the direction of the market tide: buying a breakout above the previous day's high for entering longs or shorting a breakdown below the previous day's low for entering shorts. - -**FIGURE 39.2** Gold daily, with 26- and 13-EMAs and 2-day Force Index. . *(Chart by Stockcharts.com)* - -#### Daily Force Index—the Second Screen of Triple Screen - -The 2-day EMA of Force index is one of several oscillators that can work for the second screen of the Triple Screen trading system. Force Index marks buying opportunities when it falls below its centerline. It marks selling opportunities when it rises above its centerline. When the weekly trend is up (marked here with a green horizontal bar), take only buy signals from the daily oscillator for entering long positions. When the weekly trend is down (marked by a red horizontal bar), take only sell signals for entering short positions. - -Notice a bullish divergence, accompanied by a false downside breakout before the start of the uptrend (marked with a diagonal green arrow). At the right edge of the screen, Gold is flying, along with most gold stocks. I'm actively buying them—but not Gold ETFs. A Traders' Camp graduate from Australia wrote the other day: "I bought XAU ETF but it is being left far behind by NCM, our biggest Gold Miner. Is that the normal scenario for ETFs?" Yes, Sir! - -The downside of that approach was that the stops were quite wide. Buying a breakout above the previous day's high and placing a stop below that day's low could mean a wide stop after a wide-range day, either putting a lot of money at risk or reducing position size. At other times, when the pre-breakout day was very narrow, placing the stop right below its low would expose that trade to the risk of being stopped out by market noise. - -The breakout technique is still valid, but I seldom use it. With the wide availability of intraday data, I like to switch to 25-minute and 5-minute charts and use daytrading techniques for entering my swing trades. If you don't have access to live data and need to place an order in the morning, before leaving for the day, I recommend an alternative approach which I call "an average EMA penetration." - -Almost every rally is penetrated by occasional pullbacks, and you want to measure how deeply those pullbacks drop below your fast EMA. Look at the daily chart for the past four to six weeks, and if it is in an uptrend, measure how deeply prices penetrate below their EMA during normal pullbacks (Figure 39.3). - -**FIGURE 39.3** Gold daily, with 26- and 13-EMAs. *(Chart by Stockcharts.com)* - -#### An Average Downside Penetration—the Third Screen of Triple Screen - -Here we zoom in on the chart from Figure 39.2. We can sharpen Triple Screen buy signals by not waiting for the 2-day Force rally back above zero. We can use its declines below zero as alerts and then place our buy orders below value, using an average downside penetration. - -- Calculate an average penetration -- Subtract yesterday's EMA level from today's and add this number to today's EMA: this will tell you where your EMA is likely to be tomorrow. -- Subtract your average penetration from your estimated EMA level for tomorrow and place your buy order there. You'll be fishing to buy at a bargain level, during a pullback—instead of paying a premium for buying a breakout. - -In the example in Figure 39.3, prices dipped below their fast EMA (colored red) on four occasions. An average downside penetration was \$9.60. At the right edge of the screen, the 13-day EMA stands at \$1,266. Deducting the recent average downside penetration from that number suggests that if today sees a spell of panic selling, we should place our buy order approximately \$9 below the latest level of EMA. We can perform this calculation on a daily basis, until we finally get an opportunity to buy low. This is a much more peaceful approach than chasing runaway prices. - -These rules are for buying during an uptrend. Reverse them for selling short in downtrends. Keep in mind though that downtrends tend to move twice as fast as uptrends. - -| Weekly Trend | Daily Trend | Action | Order | -|--------------|-------------|-------------|----------------------------------------| -| Up | Up | Stand aside | None | -| Up | Down | Go long | EMA penetration or an upside breakout | -| Down | Down | Stand aside | None | -| Down | Up | Go short | EMA penetration or a downside breakout | - -## **Triple Screen Summary** - -When the weekly trend is up and a daily oscillator declines, place a buy order below the fast EMA on the daily chart, at a level of an average downside penetration. Alternatively, place a buy order one tick above the high of the previous day. If prices rally, you will be stopped in long automatically when the rally takes out the previous day's high. If prices continue to decline, your buy-stop will not be touched. Lower your buy order the next day to the level one tick above the latest price bar. Keep lowering your buy-stop each day until stopped in or until the weekly indicator reverses and cancels its buy signal. - -When the weekly trend is down, wait for a rally in a daily oscillator and place an order to sell short above the fast EMA on the daily chart, at a level of an average upside penetration. Alternatively, place an order to sell short one tick below the latest bar's low. As soon as the market turns down, you will be stopped in on the short side. If the rally continues, keep raising your sell order daily. The aim of a trailing sell-stop technique is to catch an intraday downside breakout from a daily uptrend in the direction of a weekly downtrend. - -## **Triple Screen in Day-Trading** - -If you day-trade, you may select a 5-minute chart as your intermediate timeframe. Again, do not look at it, but go to a 25- or a 30-minute chart first, which will be your long-term chart. Make a strategic decision to be a bull or a bear on that longerterm chart, and then return to your intermediate chart to look for an entry and stop (Figure 39.4). - -**FIGURE 39.4** On the left: AMZN 30-min chart with a 13-bar EMA and 12-26-9 MACD-Histogram. On the right: AMZN 5-min chart with a 13-bar EMA, 0.6% channel, and 2-bar Force Index. *(Charts by Stockcharts.com)* - -#### Triple Screen in Day-Trading - -The shares of Amazon.com, Inc. (AMZN) are a popular trading vehicle, thanks to their volatility and liquidity. The principles of Triple Screen are the same here as on the longer-term charts. Here, a longer-term chart whose every bar represents 30 minutes of trading defines the long-term trend. With it rising, we turn to a short-term chart, whose every bar represents 5 minutes of trading. When its 2-bar Force Index dips below zero, it marks a wave that goes against the tide—an opportunity to buy at a lower price. A channel that contains approximately 95% of all prices helps set profit targets. - -A neat combination of timeframes for day-trading stocks is a set of 39- and 8-minute charts. The U.S. stock market is open from 9:30 a.m. to 4 p.m.—six and a half hours or 390 minutes. Using a 39-minute chart as your long-term screen neatly divides each day into 10 bars. Make your strategic decision there, and then drop down to a chart that's 5 times faster—an 8-minute chart—for tactical decisions on entries and exits. - -Don't mash together too many timeframes. If you're swing-trading, you can briefly use an intraday chart to time your entry, but then return to the daily charts. If you keep watching intraday charts, chances are they'll shake you out of the trade prematurely. If you day-trade, then the weekly chart is not really relevant, but you may take a quick look at the daily chart. The rule is this: select your favorite (intermediate) chart, pair it with a long-term chart that is 5 times longer, and go to work. - -## **Stops and Profit Targets** - -Proper money management is essential for successful trading. A disciplined trader takes his profits at targets, cuts losses short, and outperforms those who keep hoping and hanging on to bad trades. Before you enter a trade, write down three numbers: the entry, the target, and the stop. Placing a trade without defining these three numbers is gambling. - -Triple Screen calls for setting profit targets using long-term charts and stops on the charts of your intermediate timeframe. If you use weekly and daily charts, set profit targets on the weeklies but stops on the dailies. When buying a dip on a daily chart, the value zone on a weekly chart presents a good target. When day-trading and using a 25-minute and a 5-minute pair, set the profit target on a 25-minute chart and the stop on a 5-minute chart. This helps you aim at the greater results, while holding down the risk. - -The Triple Screen trading system calls for placing fairly tight stops. Since it has you trading in the direction of the market tide, it doesn't give much room to losing trades. Get on with the tide—or get out. We'll return to this topic in Chapter 54, "How to Set Stops." - -## ■ **40. The Impulse System** - -The idea for the Impulse system came to me in the mid-1990s. I woke up in the middle of the night in a faraway hotel and sat up bolt upright in bed with the thought that I could describe any market move in any timeframe, using only two criteria: inertia and power. By combining them, I could find stocks and futures with both bullish inertia and bullish power and trade them long. I could also find stocks and futures with both bearish inertia and power and sell them short. - -A good measure of the **inertia** of any trading vehicle is the slope of its fast EMA. A rising EMA reflects bullish inertia, while a falling EMA reflects bearish inertia. The **power** of any trend is reflected in the slope of MACD-Histogram. If its latest bar is higher than the previous bar (like the height of the letters m–M) or less deep than the previous bar (like the depth of the letters y–v), then the slope of MACD-Histogram is rising, and the power is pushing up. If the latest bar of MACD-Histogram is lower than the previous one (like the depth of the letters v–y or the height of the letters M–m), then the slope is declining, and the power is pushing down. When we use MACD-Histogram to define power, it doesn't matter whether it's above or below zero: what matters is the relationship of the last two bars of MACD-Histogram. - -It is relatively simple to program most software packages to color price bars or candles using the Impulse system. If both indicators are rising, the bar is green bullish. If both are falling, the bar is red—bearish. When the two indicators move against one another, that bar is blue—neutral (Figure 40.1). - -At first, I anticipated making this system automatic—buy green, short red, and cash checks on all colors. Backtesting the Impulse system threw cold water on that idea. The automatic system caught every single trend, but it got whipsawed during trading ranges, where it kept flipping between green and red. - -I set the Impulse system aside, but kept thinking about it. A few years later it dawned on me: this wasn't an automatic trading system—it was a censorship system! It didn't tell me what to do—it told me what not to do. If either weekly or daily bar was red—no buying allowed. If either weekly or daily bar was green—no shorting permitted. - -Ever since that discovery, I've been using the Impulse system for all my trades. I presented it to the public in my 2002 book *Come into My Trading Room*, which *Barron's* named a book of the year. The Impulse system is becoming increasingly popular worldwide, and its terminology has entered the language of trading. - -| The Impulse System | | | | | | | -|---------------------------|-----------|---------------|-----|----------------|--------------------|-----------| -| EMA | | MACD-H | | Impulse | Yes | No | -| 7 | $\ddot{}$ | | = | | Buy, stand aside | Short | -| | $\ddot{}$ | | $=$ | | Short, stand aside | Long | -| Τ | $\ddot{}$ | | $=$ | | Long or short | | -| | $\ddot{}$ | | $=$ | | Long or short | | - -#### **FIGURE 40.1** The colors of the Impulse system. - -- EMA rising & MACD-Histogram rising (especially below zero) = Impulse is green, bullish. Shorting prohibited, buying or standing aside permitted. -- EMA falling & MACD-Histogram falling (especially above zero) = Impulse is red, bearish. Buying prohibited, shorting or standing aside permitted. -- EMA rising & MACD-Histogram falling = Impulse is blue, neutral. Nothing is prohibited. -- EMA falling & MACD-Histogram rising = Impulse is blue, neutral. Nothing is prohibited. - -And that's how I've been using the Impulse system ever since (Figure 40.2). It keeps me out of trouble. I may develop my trading plans based on any number of ideas, signals, or indicators—and then the Impulse system forces me to wait until it no longer prohibits an entry in the planned direction. In addition, the Impulse system helps me recognize when a trend starts weakening and suggests an exit. - -## **Entries** - -Green and red bars of the Impulse system show when both inertia and power are pointing in the same direction. At a green bar, bulls are in charge and the uptrend is accelerating. At a red bar, bears are dominant and the downtrend is in full swing. A fast EMA and MACD-Histogram may stay in gear with each other for only a few bars, but that's when the market travels fast—the impulse is on! - -Before you start applying the Impulse system to your favorite market, remember the Triple Screen's insistence on analyzing markets in more than one timeframe. Select your favorite timeframe and call it intermediate. Multiply it by five to define your long-term timeframe. If your favorite chart is daily, analyze the weekly chart first and make a strategic decision to be a bull or a bear. Use the Impulse system to decide when you're permitted to enter long or short positions. - -- If you're a short-term momentum trader, you can buy as soon as both timeframes turn green and take profits as soon as one of them fades to blue. -- When trying to catch market turns, the best trading signals are given not by green or red but by the loss of green or red colors. - -If a stock is falling, but your analysis indicates that a bottom is near, monitor the Impulse system on weekly and daily charts. If even one of them shows red, the downtrend is still in force and buying is not permitted. When both timeframes stop being red, they allow you to buy. - -If you think that a stock is forming a top and is about to turn down, examine the Impulse system on both weekly and daily charts. If even one of them is green, it's a sign that the uptrend is still alive, and no shorting is permitted. When the green disappears from both timeframes, you may start shorting. - -The shorter a timeframe, the more sensitive its signals: the Impulse on a daily chart almost always changes colors ahead of the weekly. When day-trading, the 5-minute chart changes colors ahead of a 25-minute chart. If my studies show that the market is bottoming and getting ready to turn up, I wait until the daily chart stops being red and turns blue or even green; then I start watching the weekly chart, which is still red. As soon as it turns from red to blue, it allows me to buy. This technique saves me from buying too soon, while the market is still declining. - -I use the same approach to shorting. When I think that a top is forming and the daily Impulse stops being green and turns blue or even red, I closely monitor the weekly chart. As soon as it loses its green color, it permits me to go short. Waiting - -**FIGURE 40.2** SSYS weekly with 13- and 26-week EMAs, 12-26-9 MACD-Histogram and the Impulse system. *(Chart by Stockcharts.com)* - -### The Impulse System - -The Impulse system can sharpen any method of finding trades, whether technical or fundamental. Let's review an example, using the stock of Stratasys, Inc. (SSYS)—one of the two leading stocks in the additive manufacturing industry. In 2012, I published the world's first popular e-book on additive manufacturing in which I called for a boom in its stocks. Vertical green arrows mark bars immediately following red bars. Red prohibits you from buying. The best time to buy is immediately following red's disappearance. You can see how those green arrows pick one intermediate bottom after another, including the buy signal at the right edge of the chart. Having an objective method gives you the confidence to buy as soon as a decline screeches to a halt. - -The Impulse system also suggests good areas for profit taking. Slanted red arrows point to blue bars that occur after a series of green bars far away from value. They indicate that bulls are choking up—a good time to cash out and wait for the next buying opportunity. - -for both timeframes to lose the color that is contrary to my plan helps ensure that I trade in gear with the market and not against it. - -Remember, the Impulse system is a censorship system. It doesn't tell you what to do—but it clearly tells you what you're not allowed to do. You're not supposed to go against the censor. - -Many programs for technical analysis include a feature called "conditional formatting." It allows you color price bars or candles depending on the slope of the EMA and MACD-Histogram. A brilliant programmer in Chicago named John Bruns used this feature when he included the Impulse system in tool kits we call elder-disks1 . - -1 These are available for various trading programs, listed at elder.com. - -If you use a platform that doesn't permit conditional formatting, you can still use the Impulse system. Simply observe the slopes of the EMA and MACD-Histogram: their combination will tell you what should be the color of the latest bar. - -If you know how to program, you can add more features to the Impulse system. You can test different EMA lengths or MACD settings, looking for those that work best in your market. A day trader can program sound alarms to monitor color changes in several markets without being glued to the screen. - -## **Exits** - -If you're a short-term momentum trader, close out your trade as soon as the color of the Impulse system stops supporting the direction of your trade, even in one of the two timeframes. Usually, the daily MACD-Histogram turns ahead of the weekly. When it ticks down during an uptrend, it shows that the upside momentum is weakening. When the buy signal disappears, take profits without waiting for a sell signal. - -Reverse this procedure in downtrends. Cover shorts as soon as the Impulse system stops being red, even in one of the two timeframes. The most dynamic part of the decline is over, and your momentum trade has fulfilled its goal. - -The Impulse system encourages you to enter cautiously but exit fast. This is the professional approach to trading. Beginners tend to do the opposite; jump into trades and then take forever to exit, hoping for the market to turn their way. - -A swing trader may stay in a trade, even if one of the timeframes turns blue. What he should never do is stay in a trade against the color. If you're long, and one of the timeframes turns red, it is time to sell and go back to the sidelines. If you're short, and the Impulse system turns green, it signals to cover your short position. - -The Impulse system helps identify islands of order in the ocean of market chaos by showing when the crowd, usually so aimless and disorganized, becomes emotional and starts to run. You enter when a trend pattern emerges and exit when it starts to sink back into chaos. - -## ■ **41. Channel Trading Systems** - -Market prices tend to flow in channels, like rivers in their valleys. When a river touches the right edge of its valley, it turns left. When it touches the left rim of its valley, it turns right. When prices rally, they often seem to stop at an invisible ceiling. Their declines seem to stop at invisible floors. Channels help us anticipate where those support and resistance levels are likely to be encountered. - -Support is where buyers buy with greater intensity than sellers sell. Resistance is where sellers sell with greater intensity than buyers buy (see Chapter 18). Channels show where to expect support and resistance in the future. - -Channels help identify buying and selling opportunities and avoid bad trades. The original research into trading channels was conducted by J. M. Hurst and described in his 1970 book, *The Profit Magic of Stock Transaction Timing.* - -The late great mathematician Benoit Mandelbrot was hired by the Egyptian government to create a mathematical model of cotton prices—the main agricultural export of that country. After extensive study, the scientist made this finding: "prices oscillate above and below value." It may sound simple, but in fact it's profound. If we accept this mathematical finding and if we have the means to define value and measure an average oscillation, we'll have a trading system. We'll need to buy below value and take profits at value or sell short above value and cover at value. - -We have already agreed that value is in the zone between a short and a long moving averages. We can use channels to find normal and abnormal oscillations. - -## **Two Ways to Construct a Channel** - -We may construct a channel by plotting two lines parallel to a moving average: one above and another below. We may also vary the distance between the channel lines depending on that market's volatility (standard deviation channels). - -A symmetrical channel, centered around a moving average, is useful for trading stocks and futures. A standard deviation channel (sometimes called Bollinger bands) is good for those who trade options. - -Channels mark the boundaries between normal and abnormal price action. It is normal for prices to stay inside a well-drawn channel, and only unusual events push them outside. The market is undervalued below its lower channel line and overvalued above its upper channel line. - -## **Symmetrical Channels** - -Earlier we've discussed using a set of two moving averages for trading (see Chapter 22). With such a pair, use the slower one as the backbone of your channel. For example, if you use 13-day and 26-day EMAs, draw your channel lines parallel to the 26-day EMA. - -The width of a channel depends on the coefficient selected by the trader. This coefficient is usually expressed as a percentage of the EMA level. - -Upper Channel Line = EMA + Channel Coefficient • EMA - -Lower Channel Line = EMA − Channel Coefficient • EMA - -When setting a channel for any market, start with 3% or 5% of the EMA and keep adjusting those values until a channel contains approximately 95 percent of all price data for the past 100 bars, about five months on a daily chart. This is similar to trying on a shirt: you look for the one that fits not too loose or too tight, with only your wrists and neck sticking out. Only the extreme prices will protrude outside of a well-drawn channel. - -Volatile markets require wider channels, while quiet markets require more narrow channels. Cheaper stocks tend to have higher coefficients than expensive ones. Long-term charts require wider channels. As a rule of thumb, weekly channel coefficients are twice as large as daily ones. - -I used to plot channels by hand until my programmer wrote an add-on for several software packages called an Autoenvelope. It automatically plots correct channels for any trading vehicle in any timeframe (Figure 41.1). It's included on elder-disks for several popular programs. - -## **Mass Psychology** - -An exponential moving average reflects the average consensus of value in its time window. When prices are near their moving average, the market is fairly valued. When they decline near the lower channel line, the market is undervalued. When prices rise to the upper channel line, the market is overvalued. Channels help find buying opportunities when the market is cheap and shorting opportunities when the market is dear. When prices fall below their moving average, bargain hunters step in. Their buying as well as short covering by bears stops declines and lifts prices. When prices rise above value, sellers see an opportunity to take profits on long positions or go short. Their selling caps the rise. - -When the market sinks to the bottom of a depression, its mood is about to improve. Once it rises to the height of its mania, it's about to start calming down. A channel marks normal limits of mass optimism and pessimism. The upper channel - -**FIGURE 41.1** Euro futures, with 26- and 13-day EMAs, the Impulse system, and Autoenvelope. *(Chart by Tradestation)* - -#### Channels: Autoenvelope - -This chart shows several recent months of trading in the March 2014 Euro currency futures (ESH14). Futures are much more transparent and true than the murky forex deals. Whenever I trade currencies, I use currency futures. - -Warren Buffet refers to the stock market as a manic-depressive fellow, and his description applies to non-equity markets. Here you see the Euro swinging above and below value. When it rises above the upper channel line, it shows that the market has become manic (marked with a letter M), and when it falls below the lower channel line, it is depressed (marked with a letter D). - -Buffett observes that the trouble with most people is that they become infected by the mood of Mr. Market—they want to buy when he is manic and sell when he's depressed. Plotting a channel helps you diagnose the market's mania and depression and avoid becoming infected by either. One of my strict rules is never to buy above the upper channel line or sell short below the lower channel line. I may miss a runaway trend because of this restriction, but my safety is greatly increased. At the right edge of the screen, the Euro is rising very near its upper channel line—it looks like a manic episode is about to develop. - -line shows where bulls run out of steam, while the lower channel line shows where bears become exhausted. - -At the upper channel line, bears have their backs against the wall as they fight off the bulls. At the lower channel line, bulls have their backs against the wall and fight off the bears. We all fight harder when our backs are against the wall, and that's why channels tend to hold. - -If a rally shoots out of a channel and prices close above it, it shows that the uptrend is exceptionally strong. When a rally fails to reach the upper channel line, it is a bearish sign, as it shows that bulls are becoming weaker. The reverse applies to downtrends. - -My friend Kerry Lovvorn finessed this idea by plotting not one but three sets of channels around a moving average. The width of his channels is driven by Average True Ranges (see Chapter 24). His three channels are set at one, two, and three ATRs away from the moving average. Normal moves tend to stay within 1-ATR channels, while only extreme moves go outside of 3-ATRs, indicating a reversal is near (Figure 41.2). - -Channels help us remain objective, while other traders get swept up in mass bullishness or bearishness. When prices rally to the upper channel line, you see that mass bullishness is being overdone, and it's time to think about selling. When prices drop - -**FIGURE 41.2** RSOL daily with 21-day EMA and 1-, 2-, and 3-ATR channels, MACD-Histogram 12-26-9, and the Impulse system. *(Chart by Tradestation)* - -#### Multiple ATR Channels - -This chart of Real Goods Solar, Inc. (RSOL) reflects several months of action: - -- Area A—Warning. Prices stab outside +3 ATRs—the uptrend has reached an extreme. -- Area B—Sell. Prices couldn't hold above +2 ATRs—take profits on long positions. -- Area C—Alert. Decline stopped at −2 ATRs—a sign of bottoming. -- Area D—Alert confirmed. Prices holding above −2 ATRs—bottom is being built. -- Area E—Buy. False downside breakout reaches −3 ATRs and rejects that low. -- Area F—Warning. Prices stab outside of +3 ATRs—watch whether +2 ATRs will hold. -- Area G—Warning. Prices stab outside of +3 ATRs—watch whether +2 ATRs will hold. -- Area H—Another warning. Prices stab outside of +3 ATRs—watch whether +2 ATRs will hold. - -Area I—Sell. Prices couldn't hold above +2 ATRs—take profits on long positions. - -near the lower channel line and everyone turns bearish, you know that it's time to think about buying instead of selling. - -## **Trading Rules** - -Amateurs like to bet on long shots—they tend to buy upside breakouts and short (if they ever sell short) downside breakouts. When an amateur sees a breakout, he expects riches from a major new trend. - -Professionals, on the other hand, tend to trade against deviations and for a return to normalcy. The pros know that most breakouts are exhaustion moves that are soon aborted. That's why they like to fade breakouts—trade against them, selling short as soon as an upside breakout stalls and buying when a downside breakout starts returning into the range. - -Breakouts can produce spectacular gains when a major new trend blows out of a channel, but in the long run it pays to trade with the pros. Most breakouts fail and are followed by reversals, which is why channel lines mark attractive zones for entering trades against breakouts, with profit targets in the value zone. - -You can use moving-average channels as a stand-alone trading method or combine it with other techniques. Gerald Appel, a prominent market researcher and money manager in New York, recommended these rules for trading with channels: - -- 1. Draw a moving average and build a channel around it. When a channel is relatively flat, the market is almost always a good buy near the bottom of its trading channel and a good sell near the top. -- 2. When the trend turns up and a channel rises sharply, an upside penetration of the upper channel line shows very strong bullish momentum. It indicates that you will probably have one more chance to sell in the area of the highs that are being made. It is normal for the market to return to its moving average after an upside penetration, offering an excellent buying opportunity. Sell your long position when the market returns to the top of the channel. - -This also works in reverse during sharp downtrends. A breakout below the lower channel line indicates that a pullback to the moving average is likely to occur, offering another opportunity to sell short. When prices return to the lower channel line, it is time to cover shorts. - -The best trading signals are given by a combination of channels and other technical indicators (Figure 41.3). Indicators give some of their strongest signals when they diverge from prices. A method for combining channels and divergences was described to me by the late Manning Stoller. - -- 1. A sell signal is given when prices reach the upper channel line while an indicator, such as MACD-Histogram, traces a bearish divergence. It shows that bulls are becoming weak when prices are overextended. -- 2. A buy signal is given when prices reach the lower channel line while an indicator traces a bullish divergence. It shows that bears are becoming weak when prices are already low. - -We must analyze markets in multiple timeframes. Look for buys on the daily charts when prices are rising on the weeklies. Look for shorting opportunities on the dailies when prices are sinking on the weekly charts. - -3. Go long near the moving average when the channel is rising, and take profits at the upper channel line. Go short near the MA when the channel is falling, and take profits at the lower channel line. - -When a channel rises, it pays to trade only from the long side, buying in the value zone which lies between the fast and slow moving averages, and then selling at the upper channel line. When a channel declines, it pays to short in the value zone and cover at the lower channel line. - -**FIGURE 41.3** SIX daily with 26- and 13-day EMAs, 6% channel, MACD-Histogram 12-26-9, and the Impulse system. *(Chart by Stockcharts.com)* - -### Combining Channels and MACD Signals - -This chart reflects several months of action in Six Flags Entertainment Corporation (SIX). - -- Area A—while prices have reached the lower channel line, a new record low of MACD-Histogram suggests that this low will be retested or exceeded. -- Area B—channel line rejected, rally is likely ahead. -- Area C—prices reached their upper channel line and recoiled—reversal is likely. -- Area D—buy. Prices have reached the lower channel line, while MACD-Histogram has traced out a bullish divergence between bottoms A and D, with a break at C. -- Area E—while prices have reached their upper channel line, a new record high of MACD-Histogram suggests that this high is likely to be retested or exceeded. -- Area F—pullback to value completed; MACD-Histogram breaks below zero, creating a setup for a possible bearish divergence. Still may buy to ride back to the prior high. Area G—sell and sell short. Prices have reached the upper channel line, while MACD-Histogram has traced out a bearish divergence between tops E and G, with a break at F. - -## **Standard Deviation Channels (Bollinger Bands)** - -The unique feature of these channels is that their width changes in response to market volatility. Their trading rules differ from those of regular channels. - -- 1. Calculate a 21-day EMA. -- 2. Subtract the 21-day EMA from each closing price to obtain all the deviations from the average. -- 3. Square each of the deviations and get their sum to obtain the total squared deviation. -- 4. Divide the total squared deviation by the EMA length to obtain the average squared deviation. -- 5. Take the square root of the average squared deviation to obtain the standard deviation. - -These steps, outlined by Bollinger, have been included in many software packages. A band becomes wider when volatility increases but it narrows down when volatility decreases. A narrow band identifies a sleepy, quiet market. Major market moves tend to erupt from flat bases. Bollinger bands help identify transitions from quiet to active markets. - -These bands are useful for options traders because option prices are largely driven by swings in volatility. Narrow Bollinger bands help you buy when volatility is low and options are relatively cheap. Wide bands help you decide to write options when volatility is high and options are expensive. - -When we return to options in the following chapters, you'll read that buying options is a losers' game. Professional traders write options. Wide Bollinger Bands can signal when to be more active with your writes. If you trade stocks or futures rather than options, it's better to use regular channels as profit targets; trading is hard enough without trying to shoot at a moving target, such as a Bollinger Band. - -# Trading Vehicles - -All trading vehicles are divided into several classes. Their charts may look similar on a computer screen, but don't let their looks deceive you. Each group has its pluses and minuses. They offer different profit opportunities and carry different risks. Choosing what to trade is among your most important market decisions. - -We'll review the following major groups to help you make a conscious decision on which to focus: - -- Stocks -- ETFs -- Options -- CFDs -- Futures -- Forex - -Whichever group you select, make sure your trading vehicle meets two essential criteria: liquidity and volatility. - -Liquidity refers to the average daily volume, compared with other vehicles in its group. The higher it is, the easier it'll be for you to get in and out of your trades. You may build a profitable position in an illiquid stock, only to lose at the exit due to especially bad slippage. - -I learned this lesson decades ago, after building a 6,000-share position in a fairly inactive stock. When it began to sag, I decided to sell, and that's when I discovered that its average daily volume was only 9,000 shares. There were so few people trading it that my own sales began to depress its price. Taking several days to trade out of my 6,000-share lot felt like taking a fat cow through a very narrow gate and leaving large strips of its hide on gate posts. Now I focus on U.S. stocks that trade over a million shares a day. That's where I can slip in and out of my trades unnoticed and unmolested. With a large number of traders, there are plenty of orders to buy and sell, and my slippage, when it occurs, is small. - -Volatility is the extent of average short-term movement of a trading vehicle. The higher the volatility of a trading instrument, the more opportunities it presents. Popular stocks tend to swing a lot. On the other hand, stocks of many utility companies that are quite liquid are very hard to trade because of low volatility—they tend to stay in narrow ranges. - -There are several ways to measure volatility, but a good practical tool is "beta." It compares any vehicle's volatility to its benchmark, such as a broad index. If a stock's beta is 1, it means that its volatility is equal to that of the S&P 500. A beta of 2 means that if the S&P rises 5%, the stock is likely to rally 10%, but it is also likely to drop 10% if the S&P falls by 5%. A beta of 0.5 means that the stock is likely to rise or fall by half of the percentage of the S&P. It would be better for a beginner to focus on low beta vehicles. You can find betas for most stocks on all key financial websites, starting with Yahoo Finance. Betas are like trail markers on ski slopes: green for beginners, blue for intermediate skiers, and black diamonds for experts. - -Time Zones Globalization has lured many people to trade far away from home. I meet traders in Australia who trade U.S. stocks, and talk with traders in the United States who wrestle with European indexes. Still, you should think twice before trading far away from your own time zone. Your data screen is connected to the world, but your physical self is rooted in the area where you live. If you trade while sleepy, you put yourself at a disadvantage. If your head is on the pillow while your trade is open on the other side of the globe, you make it easier for your competitors to pick your pockets. - -Some time zones are easier to trade than others. For example, it is comfortable to trade the U.S. markets from Western Europe, where the New York Stock Exchange opens at 3:30 pm and closes at 10 pm. It is very hard to trade U.S. markets from Asia, where the time difference is likely to be 12 hours. There are always exceptions to a rule, and you may enjoy trading at night—but if you feel tired and sleepy, don't push yourself but find a local market. - -Long or Short There's more to trading than buying and waiting for prices to rise. Markets are two-way streets: they go down as well as up. Beginners only buy, but experienced traders are comfortable with selling short. - -In a nutshell, to make money shorting you identify a vehicle that you expect to drop, borrow it from your broker (giving him a deposit), and sell it. After it declines, you buy it back at a cheaper price, return the borrowed shares to your broker, and get your deposit back. Your profit is the difference between the higher selling and lower buying prices. This is the same as in buying, only the process is reversed: sell first, buy later. Of course, shorting is too complex a topic to cover in two paragraphs, which is why I refer you to my latest book (prior to this one): *The New Sell & Sell Short: How to Take Profits, Cut Losses, and Benefit from Price Declines* (John Wiley & Sons, 2011). - -## ■ **42. Stocks** - -A stock is a certificate of ownership of a business. If you buy 100 shares of a company that had issued 100 million shares, you'll own one-millionth of that firm. If other people want to own that business, they'll have to bid for your shares. - -When masses of people start liking the prospects of a business, their orders for its shares will push up the stock price. If they don't like the outlook of that business, they'll start selling their shares, depressing prices. Public companies try to make their shares more attractive in order to push up share prices because it helps them raise more equity or issue debt. Top executives' bonuses are often tied to stock prices. - -Fundamental values, especially earnings, drive prices in the long run, but, as John Maynard Keynes, the famous economist and a canny stock picker once retorted— "In the long run we're all dead." Markets are full of cats and dogs, stocks of companies with feeble or nonexistent earnings that at some point fly through the roof, defying gravity. Stocks of new sexy industries can levitate on expectations of future earnings rather than any real profits. Stocks of solidly profitable, well-run companies may drift sideways or down if the crowd isn't excited about their outlook. - -Warren Buffett is fond of saying that buying a stock makes you a partner of a manic-depressive fellow he calls Mr. Market. Each day, Mr. Market runs up to you and offers to buy you out or sell his shares to you. Most of the time, you should ignore him because he's crazy, but occasionally Mr. Market becomes so depressed that he offers you his shares for a song—and that's when you should buy. At other times, he becomes so manic that he offers an insane price for your shares—and that's when you should sell. - -Buffett's idea is brilliant in its simplicity, but hard to implement. Mr. Market's mood is so contagious that it sweeps most of us off our feet. People want to sell when Mr. Market is depressed and buy when he is manic. To be a successful trader, you must stand apart from the crowd. You need to define objective criteria that will help you decide how high is too high and how low is too low. Buffett makes his decisions on the basis of fundamental analysis and a fantastic gut feel. Traders can use the tools of technical analysis described in this book. - -What stocks will you trade? There are more than 20,000 of them in the United States, and even more abroad. Beginners tend to spread themselves too thin. Afraid to miss an opportunity, they buy scanning software. A person who doesn't have a clear idea of how to trade a single stock will not be helped by tracking thousands. He'll be much better off focusing on a handful of stocks and following them every day. - -We'll return to the question of stock selection in Part 10 "Practical Details." In brief, it's a good idea to limit your pool of trading candidates. That group can be small or large, depending on your skills and available time. A Greek friend of mine calls his watch list of 200 stocks his harem. He's owned every one of them in the past; he reviews them on weekends, selecting fewer than ten that he may take for a spin in the coming week. - -I have two "pools" in which I fish for trading ideas. On weekends, I run the 500 component stocks of the S&P 500 through my divergence scanner and zoom in on stocks flagged by that scan, selecting a handful that I'll consider trading during the coming week. Second, I review Spike picks on weekends, figuring that among a dozen top traders submitting their favorite picks, there is bound to be at least one that I'll want to piggyback. The number of stocks I closely monitor during the week is always in single digits. This is just my style; I have friends who monitor several dozen stocks at any given time. Only you can tell what number is right for you, but you should track only as many as you can focus on. - -## ■ **43. ETFs** - -An exchange-traded fund (ETF) is an investment vehicle that trades like a stock. Different ETFs hold different types of assets, such as stocks, commodities, or bonds, and they usually trade close to their net asset values. There are ETFs designed to track indexes, sectors, countries, commodities, bonds, futures, and forex. The leveraged ETFs are designed to move double or triple the distance of the underlying index. There are also inverse ETFs and leveraged inverse ETFs that trade opposite to their underlying assets: when an index falls, its inverse ETF rises and vice versa. The number of ETFs has reached thousands in recent years. - -With so many choices, what's there not to like about ETFs? Actually, quite a lot. - -The industry keeps quiet about the fact that there are two ETF markets. The primary market is reserved for "authorized participants"—large broker-dealers who have agreements with the ETF distributors to buy or sell large blocks, consisting of tens of thousands of ETF shares. These middlemen buy at wholesale and then sell to you at retail. You, as a private trader, always sit in the back of the bus—in the secondary market. - -An active trader friend who reviewed this chapter added: "I believe that 'authorized participants' can also obtain ETF shares to short in large lots. My broker always tells me there are none available, not even of broadly held ETFs, which I can't imagine they don't have lots of in inventory. When I ask them about this, they stonewall. I wonder how such a shorting transaction by an authorized participant is accounted for. I wonder if it somehow ends up as paired transactions (both an up-volume purchase and a down-volume sale, cancelling each other out). If so, the added selling pressure would be hidden from view." - -Administrative expenses incurred by ETFs dampen investors' returns. According to a study by Morgan Stanley, ETFs missed their 2009 targets by an average of 1.25%, which was double the size of their "miss" in 2008. Those percentages are your "haircuts" for the privilege of trading ETFs rather than individual stocks. The more exotic the index tracked by an ETF, the greater your "haircut." - -Some ETFs lose value so fast that their issuers repeatedly perform reverse splits in order to raise prices back into double digits. With the passage of time, those ETFs sink back into single digits, and then their issuers perform another reverse split to make their ETFs appeal to new suckers. - -A friend of mine lost over a million dollars last year: he anticipated a market decline and bought an ETF of a volatility index (volatility rises when markets fall). Sure enough, the market dropped 10% and volatility spiked—but his ETF went down instead of up (Figure 43.1). - -Many ETFs "track" their underlying indexes in a shabby manner. After giving commodity ETFs a try, I wouldn't touch them with a ten-foot pole, having experienced several days during which the underlying commodity went up, while my commodity ETFs went down. I stopped trading country ETFs after running into several situations in which a country index would rise to a new high, while my ETF would stay well below the breakout level (Figure 43.2). - -The leveraged ETFs are more "futures-laden" than non-leveraged ETFs and have much greater rollover losses each month. The disadvantages that retail investors suffer are magnified in the leveraged ETFs. They may track their underlying vehicles - -**FIGURE 43.1** \$VIX, the volatility index, and VXX, a volatility ETF, weekly. *(Charts by Stockcharts.com)* - -#### Tracking Volatility: Reality and Fantasy - -Can you believe that these two charts, covering the same period of time, are supposed to track the same thing? - -Volatility is a hugely important factor in market movements. Just as prices oscillate between uptrends and downtrends, they oscillate between periods of low and high volatility. This is why many analysts and traders pay close attention to \$VIX—the volatility index. The chart on the left shows that during the past two years \$VIX oscillated between the low teens and mid-twenties (it briefly rallied above \$80 during the 2008 bear market). Traders have a saying: "when VIX is high, it's safe to buy; when VIX is low, go slow." - -Since \$VIX fluctuations appear fairly orderly, some traders attempt to trade it using several ETFs, such as VXX, shown on the right. During the same time, VXX has steadily declined, losing 90% of its value. How's that for tracking volatility? - -**FIGURE 43.2** Natural Gas Spot and UNG, a natural gas ETF, monthly. *(Charts by Stockcharts.com)* - -#### Natural Gas Market: Reality and Fantasy - -The chart on the left shows prices of the natural gas spot market: it topped out near \$13.5 in 2008 and began a bear market that ended with a double bottom. A false downside breakout near \$2 in 2012 helped identify a buying opportunity. A futures chart (not shown) looks very similar to the spot chart—but take a look at UNG, the natural gas ETF on the right. As it slid interminably from above \$500 to below \$20, I lost count of the number of friends and clients who complained of losing money trying to pick its bottom. - -more or less correctly during a single trading session, but deviate widely with the passage of time. - -The only ETFs that trade more or less decently are broadly based ones, such as SPY and QQQ. Overall, ETFs attract many unsophisticated retail clients, but the pervasive haircuts and poor tracking of the underlying securities slant the field against them. Remember an important principle: TANSTAFL—"there ain't no such thing as a free lunch." When it comes to ETFs: buyer beware. - -## ■ **44. Options** - -An option is a derivative instrument—a bet that another security, such as a stock, an index, or a future will reach a certain price by a certain date. A **call** gives its holder a right, but not an obligation, to buy a certain quantity of a specified security at a specified price at a specified time. It is a bet on a price increase. A **put** is a right, but not an obligation, to sell a certain quantity of a specified security at a specified price at a specified time. It is a bet on a price drop. There are two parties in every options trade: a buyer and a seller, also called a writer. Buyers buy options, while writers create options and sell them to buyers. - -The key point to keep in mind is that option buyers as a group lose money over time, despite occasional lucky trades. At the other end of the table, options writers as a group make steady money despite occasional losses. - -Writers create options out of thin air to meet demand from option buyers. One of my students, a market-maker on the floor of the American Stock Exchange, said to me: "Options are a hope business. You can buy hope or sell hope. I am a professional— I sell hope. I come to the floor in the morning and find what the public hopes for. Then I price that hope and sell it to them." - -Each option has an exercise price (also called strike price). If a stock fails to reach that price before the exercise date, the option expires worthless and the buyer loses what he paid, while the writer keeps his loot, whose polite name is premium. - -- An option is **at-the-money** when the current price of the underlying security equals the exercise price. -- A call is **out-of-the-money** when the current price of the underlying security is below the exercise price. A put is out-of-the-money when the current price of the underlying is above the exercise price. The farther out-of-the-money, the cheaper the option. -- A call is **in-the-money** when the current price of the underlying security is above the exercise price. A put is in-the-money when the current price of the underlying is below the exercise price. - -An option can be at-the-money, out-of-the-money, or in-the-money at different times in its life, as the price of the underlying security fluctuates. The price of every option has two components—an intrinsic value and a time value. - -- An option's **intrinsic value** rises above zero only when it's in-the-money. If the exercise price of a call is \$80 and the underlying security rises to \$83, the intrinsic value of your call will be \$3. If the security is at or below \$80, the intrinsic value of that call is zero. -- The other component of an option's price is **time value**. If the stock trades at \$74 and people pay \$2 for an \$80 call, the entire \$2 represents time value. If the stock rises to \$83, and the price of the call jumps to \$4, \$3 of that is intrinsic value (\$83 – \$80), while \$1 is time value (the hope that this stock will rise even higher during the remaining life of that option). - -Option prices depend on several factors: - -- The farther out-of-the-money the exercise price, the cheaper the option—the underlying security must travel a longer distance to make the option worth anything before it expires. -- The closer the expiration day, the cheaper the option—it has less time to fulfill the hope. The speed with which an option loses value is called "time decay," which doesn't occur in a straight line but becomes steeper as the expiration nears. -- The less volatile the underlying security, the cheaper the option, because it has a smaller chance of making a large move. -- Minor factors influencing option prices include the current level of interest rates and the dividend rate of the underlying stock. - -Different factors that impact option pricing may clash and partly cancel each other out. For example, if a market drops sharply, reducing the value of calls, the increased volatility will lift option values, and the calls may lose less than expected. There are several mathematical models, such as Black-Scholes, widely described in options literature, that are used to determine what is called a fair value of any option. - -## **Buying Options** - -The simplest and easiest approach to options is to buy them. That's exactly what beginners do, and unless they learn quickly and change, their accounts are doomed. - -This is the standard line of brokerage house propaganda: "Options offer leverage—an ability to control large positions with a small outlay of cash. The entire risk of an option is limited to the price you pay for it. Options allow traders to make money fast when they're right, but if the market reverses, you can walk away and owe nothing!" They fail to mention that in order to profit from buying an option you must be right in three ways. You must choose the right stock, predict the extent of its move, and forecast how fast it'll get there. If you're wrong on even one of these three choices, you'll lose money. - -Ever tried tossing a ball through three rings at an amusement park? This triple complexity makes buying options a losing game. - -A stock, an index, or a future can do one of three things: rise, fall, or stay flat. When you buy a call, you can profit only if the market rises; you lose if it goes down or stays flat. You can lose even if it rises, but not fast enough. When you buy a put, you win only if the market falls fast enough. An option buyer makes money only if the market goes his way at a good enough speed, but loses if it moves his way slowly, stays flat, or goes against him. - -An option buyer has one chance out of three to win—but the odds are two out of three in favor of an option writer. No wonder the pros write options. A pro sells a call, and if a stock drops, stays flat, or even rises slowly, that call will expire worthless, and he'll keep the premium. He sells poor buyers hope—and as that hope turns out to be worthless, he keeps their money. - -Options attract hordes of small traders who can't afford to buy stocks. To get a bigger bang for their buck, they buy calls as if those were substitutes for stocks. This doesn't work because options move differently from stocks. Gullible amateurs buy empty hopes, which the pros are delighted to sell to them. - -Beginners, gamblers, and undercapitalized traders make up the majority of option buyers. Just think of all the money those hapless folks lose in their eagerness to get rich quick. Who gets all that money? Some of it goes for brokerage commissions, but the bulk flows into the pockets of option writers. Well-capitalized professionals write options rather than buy them. Option writing is a capital-intensive business: you need hundreds of thousands of dollars at a minimum to do it right, and most successful writers operate with millions. Writing options is a serious game for knowledgeable, disciplined, and well-capitalized traders. If your account is too small for option writing, wait until it grows bigger. - -Markets are like pumps that suck money out of pockets of the poorly informed majority and into the wallets of a savvy minority. Smart traders in any market look for situations in which the majority does something one way, while a small, moneyed minority does the opposite. Options are a great example of this rule. - -## **Writing Options** - -There are two main types of option writing. Covered writers buy a stock and write options against it. Naked writers write calls and puts on stocks they don't own. - -**Covered writers** own underlying securities. For example, a fund may hold a large position in IBM stock and sell calls against it. If the stock doesn't rise to the exercise price during the life of those calls, the options will expire worthless. The covered writer will add his premium to the fund and write a new call with a new expiration date. If IBM does rise to the exercise price and "gets called," they'll deliver their stock at its strike price, collect the money, and use the freed-up capital to buy another stock and write calls against it. - -Large funds tend to use computerized models for buying stocks and writing covered calls. Covered writing is a mathematically demanding, capital-intensive business. Most serious players spread their costs, including staff and equipment, across a large capital base. A small trader doesn't have much of an edge in this expensive enterprise. Covered writing was very profitable in the early years of exchange-traded options. By now the field is very crowded, and the returns have become thinner. - -**Naked writers** sell options without owning their underlying securities; they back up their writes with cash in their accounts. A naked writer collects his premium when he opens a trade, but his risk is unlimited if that position goes against him. If you own a stock, sell a covered call, and that stock rises to its exercise price and gets called, you have something to deliver. If you sell a naked call and the stock rises to or above its exercise price, you'll have to pay. Imagine selling calls on a stock that becomes a takeover play and opens \$50 higher the next morning—you still have to deliver. - -This combination of limited rewards with unlimited risks scares most traders away from naked writing—but as usual, there's a gap between perception and reality. A far-out-of-the-money option with a short time to the expiration is very likely to expire worthless, meaning the writer will profit. The risk/reward ratio in naked writing is better than it looks, and there are techniques for reducing the impact of a rare adverse move. - -Savvy naked writers tend to sell out-of-the-money calls and puts whose underlying stocks or futures are unlikely to reach their strike prices during the remaining life of an option. They sell not just hopes but distant hopes. Good writers track volatility to find how far a stock is likely to move and then sell options outside of that range. This game goes into high gear during the week or two prior to option expiration, when the floor mints money out of thin air, selling naked puts and calls that have almost no chance of reaching their exercise price. - -Cautious writers close their positions without waiting for the expiration dates. If you write a call at 90 cents and it goes down to 10 cents, it makes sense to buy it **182** TRADING VEHICLES - -back and unwind your position. You've already earned the bulk of potential profit, so why expose yourself to continued risk? It's cheaper to pay another commission, book your profits, and look for another writing opportunity. - -Becoming a naked writer requires iron discipline. The size of your writes and the number of positions must be strictly determined by your money management rules. If you sell a naked call and the stock rallies above its exercise price, it exposes you to the risk of ruin. You must decide in advance at what level you will cut and run, taking a relatively small loss. A naked seller cannot afford to sit and hope when a stock moves against him. - -## **Writer's Choice** - -Time is the enemy of options buyers. Every buyer has lived through this sad sequence: they buy a call, the stock rises, but their option fades to zero, and they lose money. Buyers lose when the underlying security takes longer than expected to get to the level at which they can collect on their bet. Most options become worthless by their expiration date. - -What if we reverse this process and write rather than buy options? The first time you write an option, and do it correctly, you'll experience the delicious sensation of time working in your favor. The option that you wrote loses some of its time value each day, making the premium you've collected safer. When the market goes nowhere, you still make money, as time value keeps evaporating, making it more likely that you'll keep the premium. - -If living well is the best revenge, then taking a factor that kills most options buyers—time—and making it work for you is a gratifying experience. - -Since each option represents a hope, it's better to sell empty hopes which are unlikely to be fulfilled. Take three steps before writing a call or a put: - -1. Analyze the security against which you want to write options. - -Use Triple Screen to decide whether a stock, future, or an index is trending or non-trending. Use weekly and daily charts, trend-following indicators, and oscillators to identify trends, detect reversals, and set up price targets. Avoid writing when earnings are about to be announced—do not hold open positions during those potentially stormy days. - -2. Select the type of option to write. - -If your analysis is bearish, consider writing calls, but if bullish, consider writing puts. When the trend is up, sell the hope that it will turn down, and when it's down, sell the hope it'll turn up. Do not write options when markets are flat and premiums low—a breakout from a trading range can hurt you. - -3. Estimate how far, with a generous safety margin, the stock would have to run in order to change its trend. Write an option beyond that level. - -Write an option with a strike price the market is unlikely to reach before the option expiration. An objective tool that shows the degree of safety of your planned position is an indicator called Delta, which we'll discuss below. - -Time Decay Options lose value with each passing day, but their rate of decay isn't steady. Options drop faster as the expiration date draws closer. Like a boulder rolling downhill, time decay becomes vertical at the final cliff. - -Time decay is bad for option buyers, but very good for option writers. You collect your premium the day you sell a call. The deeper it falls below the price at which you wrote it, the safer your premium. Time decay is a friend of the option writer but an enemy of the option buyer. - -With that in mind, the sweet spot for an option writer is approximately two to three months from option expiration. That's when time decay starts gathering speed. It accelerates in the last few weeks of the option's life. When you write options close to the expiration, you benefit from faster time decay. You can get more money for options with longer lives, but don't be greedy. The goal of a writer is not to make a killing on any single trade but to grind out steady income. - -Delta is a tool that shows the probability of the underlying security reaching your option's exercise price by its expiration date. It's one of several options tools, collectively called the "Greeks" (each is named after a letter of the Greek alphabet). You can find Delta for any stock, index, or ETF on many financial websites, especially those of brokerages that offer options services. - -A cautious option writer should aim to sell calls or puts whose Delta isn't much above 0.10, meaning there is only a 10% chance of the exercise price getting hit before the expiration date. Remember, as an option writer you don't want the underlying security to reach that price: you want to sell empty hopes. If 10% risk seems high, keep in mind that Delta is derived without any reference to market analysis. If your decision is based on good technical analysis, your risk will be lower than what Delta indicates. - -The temptation to sell naked options closer to the money and get fatter premiums is dangerous. The Delta is likely to be high, meaning that a slight counter-trend move can push your position underwater. If you're going to write options, treat it like writing accident insurance policies. To make steady profits and sleep well at night, sell your auto insurance policies to ladies who only drive to supermarkets rather than to motorcycle daredevils. - -## **Limiting Risk** - -A big options trader shared with me his technique of "slicing the bid-ask spread." He puts in a low bid or a high ask and then starts giving up a penny at a time until somebody bites. For example, he recently saw an option he wanted to write (i.e., sell). The bid was \$1.18 and the ask \$1.30, but he had no intention of selling at \$1.18 and paying that huge spread. Instead, he put in his order to sell a large number of contracts at \$1.29, a penny cheaper than the ask. No response. A few minutes later he lowered his ask to \$1.28—and suddenly a buyer materialized, snapped up his contracts, and then the bid-ask spread went back to \$1.18/\$1.30. My client finds there are large traders watching from the sidelines, not showing their hand, but willing to trade within the spread. He gets them to bite by giving up a penny at a time. - -Option writers can get hurt in one of three ways. Some overtrade, creating positions that are too large for their accounts. Assuming too much risk makes them nervous and unable to hold positions through any wiggles. Option writers also get hurt when they fail to run fast enough when an option moves against them. Finally, option writers can get blown out if they don't have a reserve against a major adverse move. The longer you trade, the greater the risk of a catastrophic event. - -A writer can grow careless selling naked options and pocketing profits. A smug feeling of self-satisfaction can blind him to reality. You must protect all trades, including naked options. Several suggestions: - -■ Set your profit-taking zone—consider buying back your naked options. - -The option you write is a wasting asset. When the underlying security moves far from the exercise price but there is still time left to the expiration, the price of the option you sold may fall near its rock bottom and lose value in tiny dribs and drabs. The loser who bought that option still has a bit of a chance that the market may reverse in his favor. He continues to hold that option like a lottery ticket and once in a rare while his ticket may win. - -As a writer, why hold an open position that has already given you most of its potential profit? You have little to gain, while remaining exposed to risk. After the option you sold loses half of its value, consider buying it back to close your profitable trade. By the time an option loses 80% of its value, you should be out of that trade. - -■ Use a mental stop-loss on the option you sold. - -It is better to use mental stops here because many pros go fishing for stops of thinly traded options. Using mental stops requires iron discipline—another reason why option writing isn't a beginners' game. - -Set your mental stops both on the underlying security and the option itself. For example, you may sell a naked April 80 call on a stock trading at 70 and place your mental stop at 75. Get out of your naked option position before it gets into the money. Also, set a stop on your option: if it doubles in price, buy it back to cut the loss. If you sold an option for \$1.50, buy it back if it rises to \$3. It may hurt, but it'll be nowhere near the "unlimited loss" that makes people afraid to write options. - -■ Open an insurance account. - -You may write a put and the market crashes the next day, or you write a call and suddenly there is a takeover. You hope this never happens—but trade long enough and eventually everything will happen! That's why you need insurance. Nobody will write it for you, so you'll have to self-insure. - -Open a money market account, and every time you close out a profitable naked writing position, throw 10 percent of your profit into that account. Do not use it for trading—let your insurance account grow with each new profit, ready to cover a catastrophic loss or to be taken out in cash when you stop writing options. In a recent consultation with a professional option writer, I recommended that he send 10% of his profit above a certain threshold to the bank that holds the mortgage on his country house, using that prepayment as his insurance fund. - -## **Can Option Buying Be Intelligent?** - -Professionals may buy puts on a rare occasion when they expect a severe drop. When a long-term uptrend begins to turn, it can create massive turbulence near the top, similar to an ocean liner changing its course. When volatility goes through the roof, even well-heeled traders have trouble setting stops on shorts. Buying puts allows you to sidestep this problem. - -Prices tend to fall twice as fast as they rise. Greed, the dominant emotion of uptrends, is a happy and lasting feeling. Fear, the dominant emotion of downtrends, is sharper and more violent. Professionals are more likely to buy puts because of shorter exposure to time decay. Uptrends are better traded with stocks or futures. - -A trader who expects a downswing must decide what put to buy. The best choice is counterintuitive and quite different from what most people get. - -- Estimate how low you expect a stock to collapse. A put is worth buying only if you expect a crash. -- Avoid puts with more than two months of life. Buying puts makes sense only when you expect a waterfall decline. If you anticipate a drawn-out downtrend, better sell short the underlying security. -- Look for cheap puts whose price reflects no hope. Move your finger down the column: the lower the strike, the cheaper the put. At first, each time you drop to the next strike price, a put is 25% or even 35% cheaper than at the previous level. Eventually you come to the strike level at which you would save only a tiny fraction of a put's price. This shows that all hope has been squeezed out of that put, and it is priced like a cheap lottery ticket. That's the one you want! - -Buying a very cheap, far-out-of-the-money put is counterintuitive. It is so far out of the money and has so little life left in it that it's likely to expire worthless. You can't place a stop on it, and if you're wrong, the entire premium will go up in smoke. Why not buy a put closer to the money? - -The only time to buy a put is when you're shooting for an exceptional gain from a major reversal. In an ordinary downtrend it's better to short stocks. With cheap farout-of-the-money puts you aim for a tenfold gain or better. Returns like these allow you to be wrong on a string of such trades, yet come out ahead in the end. Catching one major reversal will make up for several losses and leave you very profitable. - -Why don't more people use this tactic? First, it requires a great deal of patience, as opportunities are very infrequent. The entertainment value is very low. Most people can't stomach the idea of being wrong three, four, or five times in a row, even if they are likely to make money in the end. That's why so few traders play this game. - -I wrote this chapter to sharpen your focus on some of the key options ideas. If interested in options, study Lawrence MacMillan's book *Options as a Strategic Investment*. **186** TRADING VEHICLES - -## ■ **45. CFDs** - -A **contract for difference** (CFD) is a bet on the future value of a currency, an index, or a stock. If you buy a CFD and the price of the underlying vehicle rises, you'll collect the difference from the company that sold you the contract, but if it falls, you'll pay the difference. CFDs are derivatives that allow speculators to bet on rallies or declines. They are similar to spread betting, which is legal in the United Kingdom and Ireland, but not in the United States. - -At the time of this writing, CFDs are available in Australia, Canada, France, Germany, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Poland, Portugal, Singapore, South Africa, Spain, Sweden, Switzerland, and the United Kingdom. They are prohibited in the United States, due to restrictions by the Securities and Exchange Commission. - -CFDs were invented in the early 1990s by Brian Keelan and Jon Wood, both of UBS Warburg in London. Institutional traders began using them to hedge stock exposure and to avoid taxes. In the late 1990s, several firms began marketing CFDs to retail traders, touting their leverage and the exemption from UK taxes. Several provider firms expanded their offerings from the London Stock Exchange to global stocks, commodities, bonds, and currencies. Index CFDs, based on the major global indexes such as Dow Jones, S&P 500, FTSE, and DAX, quickly became the most popular vehicles of the group. - -CFDs are contracts between individual traders and providers, who may offer different deal terms. Each CFD is created by opening a trade with a provider, based on some underlying instrument. Be prepared to pay large bid-ask spreads, commissions, and overnight financing. Trades are mostly short-term, although positions can be taken overnight. Financing charges and profits or losses are credited or debited daily. CFDs are traded on margin. - -Among the pluses of CFDs are the tiny minimum sizes of those contracts, making them accessible to small traders. The absence of the expiration dates means there is no time decay. While financing is charged on long positions, it is paid out on short positions. - -There are several serious misgivings about the CFDs. Commissions tend to be high relative to contract sizes. Bid-ask spreads are controlled by CFD issuers, who also control prices of contracts, which may deviate from prices of the underlying securities. In other words, a retail customer plays against a professional team that can move the goal posts during the game. - -A client from New Zealand wrote: "Regarding CFDs and spread betting, it is worth understanding that with CFDs you are not just trying to beat the market but the casino too. CFD providers can set whatever prices they like for an instrument, as it is their instrument. The fact that sometimes it emulates what happens in the stock market does not mean it is the same as trading in the stock market." - -CFDs are heavily marketed to new and inexperienced traders, extolling their potential gains, while glossing over risks. The Australian financial regulator ASIC considers trading CFDs riskier than gambling on horses or in casinos. CFDs are banned in the United States where regulators haven't forgotten the bucket shops that flourished at the turn of the twentieth century. - -The stance of the SEC in this matter reminds me of another federal agency, the Food and Drug Administration, which kept Thalidomide, a drug for pregnant women, out of the United States. As a result, after the full scale of its horrible side effects became known, the U.S. population was spared an epidemic of deformed babies that was caused by that drug in Europe. - -## ■ **46. Futures** - -A future is a contract for delivery of a specific quantity of a commodity by a certain date at an agreed-upon price. Futures contracts differ from options by being binding on both the buyer and the seller. In options, the buyer has the right but not an obligation to take delivery. If you buy a call or a put, you can walk away if you like, but in futures, you have no such luxury. If the market goes against you, you have to get out of your trade at a loss or add to your margin. Futures are stricter than options, but their responses to market volatility are much smoother, making them easier to trade. Another advantage of futures is that there are only a few dozen of them, making them easier to track. Futures are not nearly as correlated with each other as stocks. While stocks tend to move as a group, many futures move in unrelated trends, offering more trading choices. - -Commodities are the irreducible building blocks of the economy. Wheat is a commodity, while bread isn't because it includes multiple components. Old-timers used to joke that a commodity was something that hurt when you dropped it on your foot gold, sugar, wheat, a barrel full of crude oil. In recent decades, many financial instruments began to trade like commodities—stock indexes, bonds, and currencies. Futures include financial instruments along with traditional commodities. - -The person who buys a stock becomes a part owner of a company, but when you buy a futures contract, you don't own anything. You enter into a binding contract for a future purchase of merchandise, be it a carload of wheat or a sheaf of Treasury bonds. The person who sells you that contract assumes the obligation to deliver. The money you pay for a stock goes to the seller, but in futures your margin money stays at the clearinghouse as a security, to ensure you'll accept delivery when your contract comes due. That's why they used to call margins "honest money." While in stocks you pay interest for margin borrowing, in futures you can collect interest on your margin funds. - -Each futures contract has a definite size and a settlement date. Most traders close out their contracts early, settling profits and losses in cash. Still, the existence of a delivery date forces people to act, providing a reality check. A person may sit on a losing stock for years, deluding himself that it's only a paper loss. In futures, reality, in the form of the settlement date, always intrudes on a daydreamer. - -Most futures have daily limits beyond which prices are not allowed to go. Limits are designed to interrupt hysterical moves and give people time to rethink their positions. A string of limit days can be very stressful when a losing trader is stuck and unable to get out while his account is being ground down. The globalization of the futures markets has created many emergency exits, allowing you to unwind a trade elsewhere. Just like when boarding a plane, a careful trader learns to identify those emergency exits before he needs them. - -In stocks, most people buy and very few sell short. In futures, just like in options, the size of long and short positions is always equal because if someone buys a contract for future delivery, someone else has to sell it to him, i.e., go short. If you want to trade futures, it pays to be comfortable shorting. - -The survival rate for new futures traders is low—nine out of ten newcomers are said to bust out in the first few months. It is important to understand that the danger is not in futures but in a gross lack of risk-management skills among beginners. Futures offer some of the best profit opportunities to serious traders but are deadly for amateurs. You must develop excellent money-management skills (described in Chapters 49–51) before venturing into futures. - -## **Futures and Cash Trades** - -To compare a futures trade with a cash trade, let's assume the following: it is February, gold is trading at \$1,500 an ounce, and your analysis indicates that it's likely to rise to \$1,575 within weeks. With \$150,000, you can buy a 100-oz gold bar from a dealer and store it in a safe. If your analysis is correct, in a few weeks your gold will be worth \$157,500. You can sell it and take \$7,500 profit, or 5% before commissions—nice. Now let's see what happens if you trade futures based on the same analysis. - -Since it is February, April is the next delivery month for gold. One futures contract covers 100 oz of gold, with a value of \$150,000. The margin to trade this contract is only \$7,500. In other words, you can control \$150,000 worth of gold with a \$7,500 deposit. If your analysis is correct and gold rallies \$75 per ounce, you'll make roughly the same profit as when you bought 100 oz of gold for cash; only now your return will be 100% on your investment instead of 5%, since your margin is only \$7,500. - -Many people, after seeing such numbers, feel a surge of greed and buy multiple contracts. A trader with \$150,000 in his account has enough margin for 20 contracts. If he can double his money on a single contract, he can double it on 20. If he repeats it two or three times, he'll quickly become a millionaire. - -Wonderful—but there is a catch. - -Markets seldom move in a straight line. Your analysis may well be correct, and gold may rise from \$1,500 to \$1,575 within a few weeks, but it's perfectly possible that it may dip to \$1,450 along the way. That \$50 dip would create a \$5,000 paper loss if you bought 100 oz of gold for cash—unpleasant but not a tragedy. For a futures trader who bought multiple contracts, each on a \$7,500 margin, that \$50 decline would mean a wipeout. His broker would call demanding more margin, and if he has no reserves, the broker will sell him out at a loss. - -Inexperienced traders keep buying too many contracts and keep getting kicked out by the first wiggle of their market. Their analysis may be correct—gold may rise to its target price—but the beginner is doomed because he commits too much of his equity and has very thin reserves. Futures don't kill traders—poor money management kills futures traders. - -Futures can be very attractive for traders with strong money-management skills. High rates of return demand ice-cold discipline. A beginner is better off with slowermoving stocks. Once you've matured as a trader, you can take a closer look at futures. Also, read some introductory books. *Winning in the Futures Market* by George Angell is a good primer, to be followed by *The Futures Game* by Teweles and Jones. - -## **Hedging** - -Futures markets serve an important economic function: they permit commercial producers and consumers to hedge commodity price risks, giving them a competitive advantage. At the same time, futures offer speculators a gambling palace with more choices than any casino. - -Hedging means opening a futures position opposite to one's position in the actual commodity. For example, a major candy manufacturer knows months in advance how much sugar the firm is going to need. He buys a corresponding number of sugar futures in New York or London when prices are good enough for the firm. They'll be needing trainloads of sugar several months from now, but meanwhile they hold sugar futures, which they plan to sell when they buy their cargoes. - -If sugar prices go up and they have to pay more for the raw commodity, they will offset that loss by making roughly the same profit on their futures position. If sugar prices fall, they'll lose money on their futures contracts but make it up in savings on the raw materials. Their unhedged competitors are taking chances. If sugar prices fall, they'll buy on the cheap and reap a windfall, but if prices rise, they'll be hung out to dry. Hedged consumers can concentrate on running their core businesses, insulated from future price swings. Airlines know years in advance how much jet fuel they'll need, and buying oil futures protects them from price spikes that often occur in this volatile market. - -Producers of commodities also benefit from hedging. An agribusiness can presell its wheat, coffee, or cotton when prices are high enough to assure profits. They sell short enough futures contracts to cover the size of their prospective crop. From that point on, they have no price risk. If prices go down, they'll make up their losses on cash commodity by profits on short futures trades. If prices go up, they'll lose money on their short futures positions but make it back selling the actual commodity at higher prices. - -Hedging removes price risk from planning to buy or to deliver a cash commodity. It allows commercial interests to concentrate on their core businesses, offer stable consumer pricing, and obtain a long-term competitive advantage. - -Hedgers give up a chance of a windfall but insulate themselves from price risks. Survivors value stability. That why the Exxons, the Coca-Colas, and the Nabiscos of the world are among the major players in commodity markets. Hedgers are the ultimate insiders, and a good hedging department not only buys price insurance, but also serves as a profit center. - -Hedgers transfer price risks to speculators who enter the markets, lured by the glitter of potential profits. It's ironic that hedgers, who have inside information, are not fully confident about prices, while crowds of cheerful outsiders plunk down money to bet on futures. - -The two largest groups of speculators are farmers and engineers. Farmers produce commodities, while engineers love to apply scientific methods to the futures game. Many farmers enter futures markets as hedgers but catch the bug and start speculating. It never ceases to amaze me how many farmers end up trading stock index futures. As long as they trade corn, cattle, or soybeans, their feel for the fundamentals gives them an edge over city slickers. But what's their edge in the S&P500? - -## **Supply, Demand, and Seasonality** - -Major bull and bear markets in futures are driven by supply or demand. Supplydriven markets tend to be fast and furious, while demand-driven markets tend to be quiet and slow. Why? Think of any commodity, say coffee, which grows in Africa and South America. - -Changes in demand come slowly, thanks to the conservatism of human nature. The demand for coffee can increase only if drinking becomes more popular, with an espresso machine in every bar. The demand can fall off if coffee drinking becomes less popular, due to a deteriorating economy or in response to a health fad. Demanddriven markets move at a leisurely pace. - -Now imagine that a major coffee growing area is hit by a hurricane or a freeze. Suddenly the world supply of coffee is rumored to be reduced by 10% and prices shoot up, cutting off marginal consumers. Imagine a new OPEC policy sharply curtailing crude oil supply or a general strike in a leading copper-mining country. When a commodity's supply is reduced or even rumored to be reduced, its price climbs, reallocating tight supplies to those best able to afford them. - -Grain prices often spike during spring and summer planting and growing seasons, as dry spells, floods, and pests threaten supplies. Traders say that a farmer loses his crop three times before harvesting it. Once the harvest is in and the supply is known, demand becomes the driving force. Demand-driven markets have narrower channels, with smaller profit targets, and lower risks. As seasons change, channels have to be redrawn, and trading tactics adjusted. A new trader may wonder why his tools stopped working. A smart trader gets out a new set of tools for the season and puts old ones in storage until next year—just as he swaps regular and snow tires on his car. - -A futures trader must know the key supply and demand factors of the market he's trading. For example, he must keep an eye on the weather during the critical growing and harvesting months in agricultural commodities. Trend traders in the futures markets tend to look for supply-driven markets, while swing traders can do just as well in demand-driven markets. - -Most commodities fluctuate through the seasons. Freezing spells in the United States are bullish for heating oil futures. Orange juice futures used to have wild runups during the frost season in Florida, but have become much more sedate due to the increase of orange production in Brazil in the Southern hemisphere. Seasonal trades take advantage of such swings, but you have to be careful because those cycles are seldom identical. Be sure to put your seasonal trades through the filter of technical analysis. - -## **Floors and Ceilings** - -Commodities, unlike stocks, rarely trade below certain price floors or above price ceilings. The floor depends on the cost of production. When the price of a commodity, be it gold or sugar, falls below that level, miners stop digging and farmers stop planting. Some third-world governments, desperate for dollars and trying to avoid social unrest, may subsidize production, paying locals in a worthless local currency and dumping their product on the world market. Still, if enough producers close up and quit, the supply will shrink, and prices will have to rise to draw in new suppliers. If you look at a 20-year chart of most commodities, you'll see that the same price areas have served as a floor year after year. - -The ceiling depends on the cost of substitution. If the price of a commodity rises, major industrial consumers will start switching away from it. If soybean meal, a major animal feed, becomes too expensive, the demand will switch to fishmeal, and if sugar becomes too costly, the demand will switch to corn sweeteners. - -Why don't more people trade against those levels? Why don't they buy near the floor and short near the ceiling, profiting from what is similar to shooting fish in a barrel? First of all, neither the floor nor the ceiling is set in stone, and markets may briefly violate them. Even more importantly, the human nature works against those trades. Most speculators don't have the courage to short a market that's boiling near record highs or go long a market after it has crashed. - -## **Contango, Inversion, and Spreads** - -All futures markets offer several contracts for different delivery months. For example, you can buy or sell wheat for delivery in September or December of this year, March of next year, and so on. Normally, the nearby months are cheaper than the remote ones, and that relationship is called a contango market. - -Higher prices for more remote deliveries reflect the "cost of carry"—financing, storing, and insuring a commodity. The differences between delivery months are called premiums, and hedgers closely watch them. When supply tightens or demand increases, people start paying up for the nearby months, and the premium for the faraway months begins to shrink. Sometimes the front months become more expensive than faraway months—the market becomes inverted! There is a real shortage out there, and people are paying extra to get their stuff sooner. This so-called "inversion" is one of the strongest signs of a bull market in a commodity. - -When you look for inversions, keep in mind that there is one market in which inversion is the norm. Interest rate futures are always inverted because those who hold cash positions keep collecting interest instead of paying finance and storage charges. - -Professionals don't wait for inversions—they monitor the narrowing or widening of premiums. A good speculator can rattle off the latest prices, but a floor trader will quote you the latest premiums. A savvy trader knows by heart the normal spreads between different delivery months. - -Hedgers tend to dominate the short side of the markets, most speculators are perpetual bulls, but floor traders love to trade spreads. Spreading means buying one delivery month and selling another in the same market. It also means going long one market while shorting a related one. - -If the price of corn, a major animal feed, starts to rise faster than the price of wheat, at some point ranchers will start using wheat rather than corn. They'll reduce their purchases of corn, while buying more wheat, pushing their spread back towards the norm. Spread traders bet against deviations and for a return to normalcy. In this situation, a spreader will short corn and buy wheat, instead of taking a directional trade in either market. - -Spread trading is safer than directional trading and has lower margin requirements. Amateurs do not understand spreads and have little interest in these reliable but slow-moving trades. There is not a single book on spreads I can recommend, a sign of how well professionals have sown up this area of knowledge and kept the outsiders out. This is one of a handful of niches in the markets where professionals are earning high incomes without the benefit of a single good how-to book. - -## **Commitments of Traders** - -Brokers report their clients' positions to the Commodity Futures Trading Commission (CFTC), which strips away personal data and releases summaries to the public. Their Commitments of Traders (COT) reports are among the best sources of information on what the smart money is doing in the futures markets. - -COT reports reveal positions of three groups—hedgers, big traders, and small traders. Hedgers identify themselves to brokers because that entitles them to several advantages, such as lower margin deposits. Big traders are those who hold the number of contracts above the "reporting requirements," set by the government. Whoever is not a hedger or a big trader is a small trader. - -In the old days, big traders used to be the smart money. Today, the markets are bigger, the reporting requirements much higher, and big traders are likely to be commodity funds, most of them not smarter than run of the mill traders. The hedgers are today's smart money, but understanding their positions isn't as easy as it seems. - -For example, a COT report may show that in a certain market, hedgers hold 70% of shorts. A beginner who thinks this is bearish may be completely off the mark if he doesn't know that normally hedgers hold 90% of shorts in that market, making the 70% stance wildly bullish. Savvy COT analysts compare current positions to historical norms and look for situations where hedgers, or the smart money, and small traders, many of whom are gamblers, are dead set against each other. If you find that in a certain market the smart money is overwhelmingly on one side, while the small specs are mobbing the other, it is time to use technical analysis to look for entries on the side of hedgers. - -## **Margins and Risk Control** - -Futures' low margin requirements make them more rewarding than stocks but also much more dangerous. When buying stocks in the United States, you must put up at least half of their cash value with the broker giving you a margin loan for the rest. If you have \$40,000 in your account, you may buy \$80,000 worth of stocks, and no more. This margin limit was implemented after the Crash of 1929 when it became clear that low margins led to excessive speculation, which contributed to the viciousness of declines. Prior to 1929, speculators could buy stocks on a 10% margin, which worked great in bull markets but forced them to liquidate when prices slid, pushing the market lower during bear markets. - -Margins of only three to five percent are common in the futures markets, allowing traders to make huge bets with little money. With \$40,000 in your account, you may control about a million dollars' worth of merchandise, be it pork bellies or stock index futures. - -For example, if gold trades at \$1,500/oz and you buy a 100-oz contract on a \$7,500 margin and catch a \$75 price move, you'll gain 100%. A beginner looks at these numbers and exclaims, "where have I been all my life?" He thinks he's found a royal road to riches. But there is a catch. Before that market rises \$75, it may dip \$50. That meaningless blip will trigger a margin call and force a small speculator's account to go bust—despite his correct forecast. - -Easy margins attract adrenaline junkies who quickly go up in smoke. Futures are very tradable—but only if you follow strict money management rules and don't go crazy with easy margins. Professionals put on small initial positions and pyramid them if a trade moves in their favor. They keep adding new contracts while moving stops beyond breakeven. - -When you become interested in futures, it's a good idea to make your first steps in those markets where you know something about the fundamentals. If you are a cattle rancher, a house builder, or a loan officer, then cattle, lumber, or interest rate futures would be logical starting points. If you have no particular interests, make your first steps in relatively inexpensive markets. In the United States, corn, sugar, and, in a slow year, copper can be good markets for beginners. They are liquid, volatile, and not too expensive. - -We'll return to the futures markets in Part 9, "Risk Management." There you'll find which contracts you may or may not trade, depending on their price and volatility as well as your account size. - -Futures traders with small accounts sometimes trade mini-contracts. For example, a regular contract of gold represents 100 oz of the yellow metal, but a minicontract covers only 20 oz. Mini-contracts trade during the same hours as regular contracts and closely track their prices. Their commissions are similar to those for regular contracts, taking a proportionately bigger bite from each trade. Their slippage tends to be bigger due to lower volumes. The exceptions are stock index futures, where mini contracts have higher volumes than regular ones. - -## ■ **47. Forex** - -The currency market is the largest asset class in the world by trading volume, with a turnover of over \$4 trillion per day. Currencies trade around the clock—from 20:15 GMT on Sunday to 22 GMT on Friday, stopping only on weekends. While some currency trades serve the hedging needs of importers and exporters, most transactions are speculative. - -The United States is the only country in the world where most people don't think much about currencies. The moment an American sets foot abroad, he realizes that everyone, from executives to taxi drivers, watches the exchange rates. When people outside the United States get their hands on a bit of trading capital, often their first idea is to trade forex. - -The forex market has no central location. Institutions deal in the interbank market, trading with each other using online platforms, such as Bloomberg or Reuters. Unless you can trade \$10 million of spot forex at a pop, you'll be trading retail, going through a broker. - -Most beginners open accounts at forex shops where they immediately run into a fatal flaw—your broker is your enemy. When you trade stocks, futures, or options, your broker is your agent: he executes your trades for a fee, and that's the end of it. Not so in most forex (as well as CFD) houses, where your broker is likely to take the opposite side of every trade. You and the forex house are now against each other: if you lose, your broker will profit, and if you win, he'll lose. Since the house holds most of the cards, it has many ways to achieve the desired result. - -Most forex houses "bucket" customer orders—accept them without executing any trades. They charge spreads, commissions, interest, etc. for non-existent trades. I received the clearest explanation of their game from a chatty head dealer at a major European forex house (which is now expanding worldwide, with branches in the United States—I see their billboards in New York). - -That forex house accepts any trade in any currency pair, whether long or short, but always shifts the bid-ask spread to put itself at an advantage from the get-go. Those so-called "trades" never go anywhere—they're only kept as electronic entries in the firm's books. The forex house charges interest if its customers take their phantom "positions" overnight, even though there is never any position, since the house simply holds the opposite side of each trade. The only time the firm goes to the legitimate market is when multiple client orders cluster on the same side of the same currency pair in excess of a million dollars—that's when the house hedges its own exposure in the real market. - -When you trade stocks, options, or futures, your broker buys or sells on your behalf, earning a commission for this service, and doesn't care whether you win or lose. This is great, because he has no incentive to push you into losing. On the other hand, a forex house that buckets your orders wants you to lose, so that it can win. In addition to shifting bid-ask spreads and charging interest on non-existent positions, it may even charge a daily "resettlement fee"—the full bid-ask spread for every day you hold a trade. - -Forex shops help ensure their clients' demise by offering homicidal leverage. I've seen them offer leverage of 100:1 and even 400:1. A newcomer who scrapes together a \$1,000 stake can suddenly control a position worth a hundred thousand dollars. This means that the slightest price wiggle against him is guaranteed to wipe out his equity. That's why those shops confidently keep clients' money in-house, never transmitting their trades to the real market—why share the loot with anyone else? They are so certain of their clients' demise that many compensate employees with a percentage of the client deposits that they bring in—funds deposited with a forex house are as good as theirs. - -"The market has long been plagued by swindlers preying on the gullible," according to *The New York Times*. "The average individual foreign-exchange-trading victim loses about \$15,000, according to CFTC records," writes *The Wall Street Journal*. Currency trading "has become the fraud du jour," according to Michael Dunn of the U.S. Commodity Futures Trading Commission. - -In August 2008, the CFTC set up a special task force to deal with growing foreign exchange fraud. In January 2010, the CFTC identified a "number of improper practices" in the retail foreign exchange market, "among them solicitation fraud, a lack of transparency in the pricing and execution of transactions, unresponsiveness to customer complaints, and the targeting of unsophisticated, elderly, low net worth and other vulnerable individuals." It proposed new rules limiting leverage to 10 to 1. - -Frauds may include churning customer accounts, selling useless software, improperly managing "managed accounts," false advertising, and Ponzi schemes. All the while, promoters claim that trading foreign exchange is a road to profits. - -The real forex market is a zero sum game, in which well-capitalized professional traders, many of whom work for banks, devote full-time attention to trading. An inexperienced retail trader has a significant information disadvantage. The retail trader always pays the bid-ask spread, which lowers his odds of winning. Retail forex traders are almost always undercapitalized and subject to the problem of "gambler's ruin." Even in a fair game between two players, the one with the lower amount of capital has a higher probability of going bust in the long run. - -Having observed forex shops for decades, I was amused to see what my best student did when he became interested in forex. This multimillionaire stock trader decided to check out forex houses by opening large accounts and then waiting for the night, when forex trading was at its thinnest. That's when he placed his orders, always of a very unusual and atypical size, and watched the tape. There were only two houses that showed his orders on tape—the rest, apparently, got bucketed. - -I enjoy trading currencies, but wouldn't go near a forex house. Instead, I trade electronic currency futures. That's what I recommend to anyone interested in trading foreign exchange. Futures brokers work for you, not against you; futures spreads are more narrow, commissions more reasonable, and no interest is charged for the privilege of holding a position. There are contracts for most major currency pairs and even mini-contracts for euro/dollar and yen/dollar. - -One of the real challenges of currencies is that they move around the clock. You may enter a trade, analyze it in the evening, and decide to take profits the following day. When you wake up, there are no profits to be taken. The turning point you saw coming has already come and gone, only not in the United States, but in Asia or Europe. Someone had picked your pocket while you slept! - -Major financial institutions deal with this problem by using the system of "passing the book." A bank may open a position in Tokyo, manage it intraday, and then transfer it to its London branch before closing for the night. London continues to manage that and other positions, and in the evening passes the book to New York, which manages it until it passes it back to Tokyo. Currencies follow the sun, and small traders can't keep up with it. If you trade currencies, you either need to take a very long-term view and ignore daily fluctuations, or else day-trade and avoid overnight positions. - -# Risk Management - -A good trading system delivers greater profits than losses over a period of time, but even the most carefully designed system doesn't guarantee success in every trade. No system can assure you of never having a losing trade or even a series of losing trades. - -A system is a plan, but as Helmuth von Moltke, a nineteenth-century German field marshal, wrote: "No plan survives contact with the enemy." The U.S. boxer Mike Tyson, quoted by *The Economist*, put it more bluntly: "Everyone has a plan 'til they get punched in the mouth." This is why risk control must be an essential part of every trading system. - -The inability to manage losses is one of the worst pitfalls in trading. Beginners freeze like deer in the headlights when a deepening loss starts wiping out profits of many good trades. It's a general human tendency to take profits quickly but wait for losing trades to come back to even. By the time the despairing amateur gives up hope and closes his trade with a terrible loss, his account is badly and sometimes irreparably damaged. - -To be a successful trader, you need to learn risk management rules and firmly implement them. - -## ■ **48. Emotions and Probabilities** - -Money stirs up powerful feelings. The emotional storms, raised by making or losing money, hit our trading. - -A beginner rushing to place an order may feel giddy with the excitement. He will soon find out that the market offers a painfully expensive form of entertainment. Early in my career, I heard from a professional trader that "successful trading should be a little bit boring." He spent long hours each day doing homework, sifting through market data, calculating risks, and maintaining records. Those time-consuming tasks weren't exciting—but his success was built on such grunt work. Beginners and gamblers get a full load of entertainment, but pay for it with losses. - -Another emotional mistake is counting money in open trades. Newbies dream about what they can buy with open profits or freeze from the shock of comparing open losses to their paychecks. Thinking about money interferes with decision making. Professionals focus on managing trades; they count money only after those trades are closed. - -A trader who counts profits in an open trade is like a lawyer who, in the middle of a trial, starts dreaming of what he'll buy with his fee. That trial is still going on, his opponents are building a case against his client, and counting money will not help him win—quite the contrary, it'll distract him and cause him to lose. An amateur who becomes upset counting losses in an open trade is like a surgeon who throws a tray of instruments after the patient on the table starts bleeding—his frustration will not improve the outcome of the case. - -Professional traders don't count money in open trades. They do it at the end of an accounting period, such as a month. - -If you were to ask me about an open trade, I could answer that it's a bit ahead, a lot ahead, or a bit behind (a lot behind is unlikely because of my stops). If you were to press me for a number, I might tell you how many ticks I'm ahead or behind, but I'll never translate those ticks into dollars. It took me years to train myself to break the destructive habit of counting money in open trades. I can count ticks, but my mind stops before converting them into dollars. It's like being on a diet—there is plenty of food around, but you don't touch it. - -Focus on managing your trade, and the money will follow almost as an afterthought. Another key point: a professional doesn't get worked up about his wins or losses in a single trade. There is a great deal of randomness in the markets. We can do everything right—and still end up with a losing trade, just like a surgeon can do everything right and still lose a patient. That's why a trader should care only about having a method with a positive expectation and work on being profitable at the end of his accounting period. - -The goal of a successful professional in any field is to reach his personal best—to become the best doctor, the best lawyer, or the best trader. Handle each trade like a surgical procedure—seriously, soberly, without sloppiness or shortcuts. Concentrate on trading right. When you work this way, money will come later. - -## **Why Johnny Can't Sell** - -Your survival and success depend on your willingness to cut losses while they're relatively small. - -When a trade starts going against a beginner, he hangs on, hoping for a reversal in his favor. When he gets a margin call, he scrambles to send more money to the broker, as if the initial loss hadn't been bad enough. Why should a losing trade turn in his favor? There's no logical reason, only wishful thinking. - -Stubbornly holding a losing trade only deepens the wound. Losses have a way of snowballing until what initially seemed like a bad loss starts looking like a bargain because the current drawdown is so much worse. Finally, a desperate loser bites the bullet and closes out a trade, taking a severe loss. - -Right after he exits, the market reverses and comes roaring back. - -The trader is ready to smash his head against a wall—had he hung on, he would have made money. Such reversals happen time and again because most losers respond to the same stimuli. People have similar emotions, regardless of their nationality or education. A frightened trader with sweaty palms and a pounding heart feels and acts the same way, whether he grew up in New York or Hong Kong and whether he had 2 or 20 years of schooling. - -The intellectual demands of trading are modest, but its emotional demands are immense. Many years ago, a highly educated but very emotional trader showed me how to trade divergences near channel walls. I fine-tuned his method, added risk management rules, and continue to make money with it to this day. The man who taught me had busted out because of his lack of discipline and ended up going door to door, selling aluminum siding. Emotional trading and impulsivity are not good for success. - -Roy Shapiro, a New York psychologist from whose article the title of this subchapter is borrowed, writes: "With great hope, in the private place where we make our trading decisions, our current idea is made ready.... one difficulty in selling is the attachment experienced toward the position. After all, once something is ours, we naturally tend to become attached to it.... This attachment to the things we buy has been called the "endowment effect" by psychologists and economists and we all recognize it in our financial transactions as well as in our inability to part with that old sports jacket hanging in the closet. The speculator is the parent of the idea.... the position takes on meaning as a personal extension of self, almost as one's child might.... Another reason that Johnny does not sell, even when the position may be losing ground, is because he wants to dream.... For many, at the moment of purchase, critical judgment weakens and hope ascends to govern the decision process." - -Dreaming in the markets is a luxury we can't afford. - -Dr. Shapiro describes a test that shows how people conduct business involving a chance. First, a group of people are given a choice: a 75 percent chance to win \$1000 with a 25 percent chance of getting nothing—or a sure \$700. Four out of five subjects take the second choice, even after it is explained to them that the first choice leads to a \$750 gain over time. The majority makes the emotional decision and settles for a smaller gain. - -Another test is given: People have to choose between a sure loss of \$700 or a 75 percent chance of losing \$1000 and a 25 percent chance of losing nothing. Three out of four take the second choice, condemning themselves to lose \$50 more than they have to. In trying to avoid risk, they maximize losses! - -**200** RISK MANAGEMENT - -Emotional traders crave certain gains and turn down profitable wagers that involve uncertainty. They go into risky gambles to postpone taking losses. It is human nature to take profits quickly and losses slowly. The irrational behavior increases when people feel under pressure. According to Dr. Shapiro, at the racetrack, "bets on long shots increase in the last two races of the day." - -Prof. Daniel Kahneman writes in his book *Thinking, Fast and Slow*: "The sure loss is very aversive, and this drives you to take the risk … Considerable loss aversion exists even when the amount at risk is minuscule relative to your wealth … losses loom larger than corresponding gains." He adds: "Animals, including people, fight harder to prevent losses than to achieve gains" and spells it out: "People who face very bad options take desperate gambles, accepting a high probability of making things worse in exchange for a small hope of avoiding a large loss. Risk taking of this kind often turns manageable failures into disasters." Why do we act this way? Prof. Kahneman explains: "Except for the very poor, for whom income coincides with survival, the main motivators of money-seeking are not necessarily economic. Money is a proxy for points on a scale of self-regard and achievement." These rewards and punishments, promises and threats, are all in our heads. - -Emotional trading destroys losers. A review of trading records usually shows that the worst damage was done by a few large losses or a long string of losses, while trying to trade one's way out of a hole. The discipline of good money management would have kept us out of that hole in the first place. - -## **Probability and Innumeracy** - -Innumeracy—the inability to count or understand the basic notions of probability is a fatal weakness for traders. The counting skills aren't hard, can be picked up from many basic books, and then sharpened with some practice. - -The lively book *Innumeracy* by John Allen Paulos is an excellent primer on the concepts of probability. Paulos describes being told by a seemingly intelligent person at a cocktail party: "If the chance of rain is 50 percent on Saturday and 50 percent on Sunday, then it is 100 percent certain it will be a rainy weekend." Someone who understands so little about probability is sure to lose money trading. You owe it to yourself to develop a grasp of the basic mathematical and logical concepts involved in trading. - -There are very few ironclad certainties in market analysis, which is largely based on probabilities. "If the signals A and B are present, then the outcome C will occur" is not the kind of logic that holds up in the markets. - -Ralph Vince begins his important book *Portfolio Management Formulas* with this delightful paragraph: "Toss a coin in the air. For an instant you experience one of the most fascinating paradoxes of nature—the random process. While the coin is in the air there is no way to tell for certain whether it will land heads or tails. Yet over many tosses, the outcome can be reasonably predicted." - -Mathematical expectation is an important concept for traders. Each trade has either a positive expectation, also called the player's edge, or a negative expectation, also called the house advantage, depending on who has better odds in a game. If you and I flip a coin, neither of us has an edge—each has a 50 percent chance of winning. If you play the same game in a casino that takes five percent from every pot, you'll win only 95 cents for every dollar you lose. This "house advantage" will create a negative mathematical expectation. No system for money management can beat a negative expectation over a period of time. - -## **A Positive Expectation** - -A skilled card-counter has an edge against a casino, unless they detect him and throw him out. Casinos love drunken gamblers but hate card counters. An edge lets you win more often than lose over a period of time. Without an edge, you might as well give money to charity. In trading, the edge comes from systems that deliver greater profits than losses, after slippage and commissions, over a period of time. Acting on hunches leads to losses. - -The best trading systems are simple and robust. They have very few elements. The more complex the systems, the higher the risk that some of its components will break. - -Traders love to optimize systems, making them fit past data. The trouble is, your broker won't let you trade in the past. Markets change, and indicator parameters that would have nailed the trends last month are unlikely to nail them a month from now. Instead of optimizing your system, try to de-optimize it. A robust system holds up well to market changes and beats a heavily optimized system in real trading. - -Finally, once you develop a good system, stop messing with it. If you like to tinker, design another system. As Robert Prechter put it: "Most traders take a good system and destroy it by trying to make it into a perfect system." - -Once you have a trading system that works, it's time to set the rules for money management. You can win only if you have a positive mathematical expectation from a sensible trading system. Money management will help you exploit a good system, but cannot rescue a bad one. - -## **Businessman's Risk or Loss** - -We analyze markets in order to identify trends. Be careful not to become overconfident when anticipating future prices. The future is fundamentally unknowable. When we buy, expecting a rally, it is entirely possible that an unforeseen event may flip the market and send it down. Your actions in response to surprises will define you as a trader. - -A pro manages his trades, accepting what's called a "businessman's risk." This means that the amount he risks exposes him to only a minor equity drop. A loss, on the other hand, may threaten an account's health and even survival. We must draw a clear line between a businessman's risk and a loss. That border is defined by the fraction of the account a trader puts at risk in a trade. - -If you follow the risk management rules described below, you'll accept only a normal businessman's risk. Violating a well-defined red line will expose you to dangerous losses. - -"This time is different," says an undisciplined trader. "I'll give this trade a little extra room." The market seduces traders into breaking their rules. Will you follow yours? - -Once, I chaired a panel at a gathering of money managers at which one of the presenters had nearly a billion dollars in his fund. A middle-aged man, he got into this business in his 20s, while working for a naval consulting firm after graduate school. Bored with his day job, he designed a trading system but couldn't trade it because it required a minimum of \$200,000, which he didn't have in those days. "I had to go to other people," he said, "and ask them for money. Once I explained to them what I was going to do and they gave me money, I had to stick to my system. It would have been unconscionable to deviate from the system I told them I would follow. My poverty worked for me." Poverty and integrity. - -## ■ **49. The Two Main Rules of Risk Control** - -If trading is a high-wire act, then safety demands stringing a net underneath that wire. If we slip, the net will save us from getting smashed against the floor. The only thing better than a safety net is two safety nets: if one doesn't catch us as we fall, the other will. - -Even the best planned trades can go awry because of randomness in the markets. Even the best analyses and the clearest trade setups can't prevent accidents. What you can control is risk. You do it by managing the size of your trades and the placement of stops. This is how you keep the inevitable losses small, not allowing them to cripple your account, so that you can win in the long run. - -Ugly losses stick out like sore thumbs from most account records. Every performance review shows that a single terrible loss or a short string of bad losses did most of the damage to an account. Had a trader cut his losses sooner, his bottom line would have been much higher. Traders dream of profits but freeze when a losing trade hits them. If you follow risk management rules, you'll quickly get out of harm's way instead of waiting and praying for the market to turn. - -Markets can snuff out an account with a single horrible loss that effectively takes a person out of the game, like a shark bite. Markets can also kill with a series of bites, none of them lethal but combined they strip an account to the bone, like a pack of piranhas. The two pillars of money management are the 2% and 6% Rules. The 2% Rule will save your account from shark bites and the 6% Rule from piranhas. - -## **The Two Worst Mistakes** - -There are two quick ways to ruin an account: not use stops and put on trades that are too large for that account's size. - -Trading without stops exposes you to unlimited losses. In the following chapters, we'll discuss the principles and rules of risk control, but they will work only if you use stops. - -There are several methods for setting stops, and we'll discuss them in Chapter 54. We want to place our stops neither too far nor too close. At this point, just keep in mind that you must use stops. You have to know your maximum level of risk—it's as simple as that. If you don't know your maximum level of risk, you're flying blind. - -The other fatal error is overtrading—putting on trades whose size is too large for your account. This is like putting a huge sail on a small boat—a strong gust of wind will flip the boat over instead of making it go faster. - -People put on trades that are too large for their accounts out of ignorance, greed, or a combination of both. There is a simple mathematical rule that gives you the maximum size for every trade, as you are about to see. - -## ■ **50. The Two Percent Rule** - -One disastrous loss can do to an account what a shark does to a hapless swimmer. A poor beginner who loses a quarter of his equity in a single trade is like a swimmer who just lost an arm or a leg to a shark and is bleeding into the water. He'd have to generate a 33% return on the remaining capital simply to come back to even. The chances of him being able to do that are slim to none. - -The typical victim of a "shark bite" loses more money. He loses confidence and becomes fearful of pulling the trigger. The way to avoid "shark bite" losses is by following the 2% Rule. It will limit your losses to a manageable size—to a normal businessman's risk. - -### **The 2% Rule prohibits you from risking more than 2% of your account equity on any single trade.** - -For example, if you have \$50,000 in your account, the 2% Rule limits your maximum risk on any trade to \$1,000. This is not the size of your trade—it's the amount you put at risk, based on the distance from your entry to your stop. - -Let's say you decide to buy a stock for \$40 and put a stop at \$38, just below support. This means you'll be risking \$2 per share. Dividing your total permitted risk of \$1,000 by your \$2 risk per share tells you that you may trade no more than 500 shares. You are perfectly welcome to trade fewer shares—you don't have to go the max every time. If you feel very bullish about that stock and want to trade the maximum permitted size, that number of shares will be limited to 500. - -Good market analysis alone will not make you a winner. The ability to find good trades will not guarantee success. Markets are full of good analysts who destroy their accounts. You can profit from your research only if you protect yourself from sharks. - -I've seen traders make 20, 30, and once even 50 profitable trades in a row, and still end up losing money. When you're on a winning streak, it's easy to feel you've figured out the game. Then a disastrous loss wipes out all profits and tears into your equity. You need the shark repellent of good money management. - -A good trading system will give you an edge in the long run, but in the short run there is a great deal of randomness in the markets. The outcome of any single trade is close to a toss-up. A professional trader expects to be profitable by the end of the month or the quarter, but ask him whether he'll make money on his next trade and he'll honestly say he doesn't know. That's why he uses stops: to prevent negative trades from damaging his account. - -Technical analysis can help you decide where to place a stop, which will limit your loss per share. Money management rules will help you protect your account as a whole. The single most important rule is to limit your exposure on any trade to no more than 2% of your account. - -This rule applies only to money in your trading account. It doesn't include your savings, equity in your house, retirement account, or Christmas club. Your trading capital is the money you've dedicated to trading. This is your true risk capital—the equity in your trading enterprise. If you have separate trading accounts for stocks, futures, and options, apply the 2% Rule to each account separately. - -I've noticed a curious difference in how people react when they first hear about the 2% Rule. Newbies with small accounts often object that this number is too low. Someone asked me whether the 2% Rule could be increased when he was feeling especially confident about a trade, and I answered that it would be like adding extra length to the cord for bungee jumping because you like the view from the bridge. - -Professionals, on the other hand, often say that 2% is too high and they try to risk less. You wouldn't want to lose 2% of a million dollars on a single trade in one day. A hedge fund manager who consulted with me said that his project for the next six months was to increase his trading size. He never risked more than 0.5% of equity on a trade—and was going to teach himself to risk 1%. Good traders tend to stay well below the 2% limit. Whenever amateurs and professionals are on the opposite sides of an argument, you know which side to choose. Try to risk less than 2%—it is simply the maximum level. - -Measure your account equity on the first day of each month. If you start the month with \$100,000 in your account, the 2% Rule allows you to risk a maximum of \$2,000 per trade. If you have a good month and your equity rises to \$105,000, then your 2% limit for the next month will be—what? Quick! Remember, good traders can count! If you have \$105,000 in your account, the 2% Rule allows you to risk \$2,100 and trade a slightly bigger size. If, on the other hand, you had a bad month and your equity fell to \$95,000, the 2% Rule will set your maximum permitted risk at \$1,900 per trade for the following month. The 2% Rule links the size of your trades to your performance as well as account size. - -## **The Iron Triangle of Risk Control** - -How many shares will you buy or sell short in your next trade? Beginners often choose an arbitrary number, such as a thousand or 200 shares. They may buy more if they've made money in their latest trade or less if they've lost money. - -In fact, trade size should be based on a formula instead of vague gut feel. Use the 2% Rule to make rational decisions on the maximum number of shares you may buy or sell short in any trade. I named this process "The Iron Triangle of risk control" (Figure 50.1). - -For example, when I volunteered to teach a yearlong course "Money and Trading" in a local high school and wanted to make the experience real for the kids, I opened a \$40,000 account. I told my students that if, at the end of the school year, we made money, I'd give half the profit to their school and distribute the rest among class - -**FIGURE 50.1** The Iron Triangle of risk control. - -Construct the Iron Triangle in three steps: - -- A. Your maximum dollar risk for the trade you're planning (never more than 2% of your account). -- B. The distance, in dollars, from your planned entry to your stop—your maximum risk per share. -- C. Divide "A" by "B" to find the maximum number of shares you may trade. You aren't obligated to trade this many shares, but you may not trade more than this number. - -participants. I also told them that their maximum risk per trade was one percent. A kid would stand up in class and make a case for buying Nokia at \$16, with a stop at \$14.50. "How many shares may we trade?"—I'd ask. With the maximum risk of \$400 per trade and \$1.50 risk per share, the kids would be allowed to buy 250 shares, with some leeway for commissions. - -If you have a tiny account, you may end up trading the maximum permitted number of shares each time. As your account grows bigger, you may want to vary the size of your trades: say a third of the maximum for regular trades, two thirds for extra strong trades, and the full amount for exceptional trades. Whatever you do, the Iron Triangle of risk control will set the maximum number of shares you may trade. - -## **The 2% Rule in the Futures Markets** - -A trader recently asked me how he could apply the Iron Triangle of risk control to trading e-mini futures in his \$50,000 account. I replied: - -- A. If you are trading a \$50k account, the 2% Rule would limit your risk on any trade to \$1,000. Let's say you want to be conservative and risk only 1% of that account, or \$500. That will be the first side of "the Iron Triangle of risk Control." -- B. Suppose you look at your favorite e-minis and want to sell a contract short at 1810, with a profit target at 1790 and a stop at 1816. You'll be risking 6 points, and since one point in e-minis is worth \$50, your total risk will be \$300 (plus commissions and possible slippage). That will be the second side of your Iron Triangle of risk control. -- C. Close the triangle by dividing "a" by "b" to find the maximum size you may trade. If your maximum risk is \$500, then one contract, but if \$1,000, then three. - -Please meet two futures traders, Mr. Hare and Mr. Turtle, each with a \$50,000 account. The agile Mr. Hare sees that the average daily range in gold is about \$30, worth \$3,000 per day for a single contract. The daily range in corn is about 10 cents, worth \$500 per day for a single contract. He thinks that if he can catch just half of a day's range, he'll make \$1,500 per contract in gold, while the same level of skill will bring him only \$250 in corn. Mr. Hare logs into his brokerage account and buys two contracts of gold. - -The cautious Mr. Turtle has a different arithmetic. He begins by using the 2% Rule to cap his maximum risk per trade at \$1,000. He sees that it would be impossible to place a meaningful stop while trading gold which can move \$3,000 a day. To buy gold in his account would be like grabbing a very large tiger by a very short tail. If, on the other hand, he trades corn, he'll have good staying power. That tiger is smaller and has a longer tail, which he can wrap around his wrist. Mr. Turtle buys a contract of corn. Who do you think is more likely to win in the long run, Mr. Hare or Mr. Turtle? - -Futures markets are more deadly than stocks not because of any special complexity. Sure, they have some specific angles, but those aren't too hard to learn. Futures kill traders by seducing them with paper-thin margins. They offer enormous leverage –ability to trade large positions on a 5% margin. This works wonders when the market moves in your favor, but it slices your wallet when the market turns against you. - -You can succeed in futures only with sensible risk control, using the 2% Rule. - -- A. Calculate 2% of your account value—this will be the maximum acceptable risk level for any trade. If you have \$50,000 in your futures account, the most you can risk is \$1,000. -- B. Examine the charts of the market that interests you and write down your planned entry, target, and stop. Remember: a trade without these three numbers is not a trade but a gamble. Express the value of the move from your entry to your stop in dollars. -- C. Divide A by B, and if the result turns out to be less than one, no trade is permitted—it means you cannot afford to trade even one contract. - -Let's review two market examples, featuring similar chart patterns (Figure 50.2). Let's assume you have a \$50,000 account, which permits you to risk the maximum of \$1,000 per trade. - -You can trade futures reasonably safely only with strict money management. The leverage of futures can work for you—as long as you stay away from those contracts that can kill your account. - -A professional futures trader surprised me early in my career when he told me he spent a third of his time on risk management. Beginners jump into trades without giving them much thought. Intermediate-level traders focus on market analysis. Professionals dedicate a massive proportion of their time to risk control—and take money away from beginners and amateurs. - -**FIGURE 50.2** Daily charts with 13- and 26-day EMAs and Autoenvelopes. The Impulse system and MACD-Histogram 12-26-9. *(Charts by Tradestation)* - -#### The 2% Rule in Futures—Silver and Wheat - -Suppose you want to buy silver at the right edge of this chart. Prices have traced a double bottom with a false downside breakout. MACD-Histogram has traced a bullish divergence. The Impulse system has turned blue, permitting buying. The nearby futures contract trades at \$21.415 a few minutes before the close. - -You decide that if you buy, your profit target will be near \$23, halfway from the EMA to the upper channel line. Your stop will be at \$20.60, the level of the latest low. You'll be risking \$0.815/oz trying to make about \$1.585/oz—a 2:1 reward/risk ratio, an acceptable number. - -Are you allowed to take this trade? Absolutely not! That \$0.815/oz risk per contract translates into \$4,075 total risk, since one contract covers of 5,000 ounces of silver. Remember, your maximum permitted risk is \$1,000. If you're eager to take this trade, you may buy a single mini-contract. It covers only 1,000 ounces of silver, meaning you'll risk \$815. Best wishes for that sensible trade. - -Now, suppose you're interested in buying wheat at the right edge of this chart. Its technical picture looks similar: a double bottom with a bullish divergence of MACD-Lines and MACD-Histogram. The Impulse system has turned blue, permitting buying. Shortly before the close, prices are near 658 cents. - -You decide that if you enter there, your target will be near 680 cents, near the upper channel line. Your stop will go to 652 cents, the level of a recent low. You'll be risking 10 cents/bu, trying to make about 22 cents/bu—a reward/risk ratio of 2:1, similar to that of silver. - -Are you allowed to take this trade? Yes! That 10 cent risk per contract translates into \$500 total risk, since the contract covers 5,000 bushels of wheat. Remember, your maximum permitted risk is \$1,000. If you're very bullish, you may even buy two contracts. - -You must keep in mind that when trading futures the technical pictures of different markets may look similar, but you must base your decisions to trade or not to trade on money management rules. - -If you cannot afford to trade a certain market, you can still download its data, do your homework, and paper trade it as if you were doing it with real money. This will prepare you for the day when your account grows big enough or the market grows quiet enough for you to put on a trade. - -## ■ **51. The Six Percent Rule** - -A piranha is a tropical river fish not much bigger than a man's hand, but with a mean set of teeth. What makes it so dangerous is that it attacks in packs. If a dog, a donkey, or a person stumbles into a tropical stream, a pack of piranhas can attack with such a mass of bites that the victim collapses. A bull can walk into a river, be attacked by a pack of piranhas, and a few minutes later only its bones will be left in the water. A trader, who keeps sharks at bay with the 2% Rule, still needs protection from piranhas. The 6% Rule will save you from being nibbled to death. - -Most of us, when we find ourselves in trouble, start pushing harder. Losing traders often take on bigger positions, trying to trade their way out of a hole. A better response to a losing streak is to step aside and take time off to think. The 6% Rule sets a limit on the maximum monthly drawdown in any account. If you reach it, you stop trading for the rest of the month. The 6% Rule forces you to get out of the water before piranhas get you. - -### **The 6% Rule prohibits you from opening any new trades for the rest of the month when the sum of your losses for the current month and the risks in open trades reach 6% of your account equity.** - -We all go through periods when we are in tune with the markets, taking one profit after another. When everything we touch turns to gold, that's the time to trade actively. - -There are other times when everything we touch turns into a completely different substance. We go through periods when our systems go out of sync with the market, delivering one loss after another. It's important to recognize such dark periods and not push yourself but rather step back. A professional on a losing streak is likely to take a break, continue to monitor the market, and wait to get in gear with it again. Amateurs are more likely to keep pushing until their accounts become crippled. The 6% Rule will make you pause while your account is still largely intact. - -## **The Concept of Available Risk** - -Before you put on a trade, ask yourself: what would happen if all your trades suddenly turned against you? If you used the 2% Rule to set stops and trade sizes, the 6% Rule will limit the maximum total loss that your account may suffer. - -- 1. Add up all your losses taken this month. -- 2. Add up your risks on all currently open trades. The dollar risk of any open position is the distance from your entry to the current stop, multiplied by the trade size. Suppose you've bought 200 shares for \$50, with a stop at \$48.50, risking \$1.50 per share. In that case, your open risk is \$300. If that trade starts going your way and you move your stop to breakeven, your open risk will become zero. -- 3. Add the two lines above (losses for the month plus risks on open trades). If their sum comes to 6% of what your account equity was at the beginning of the month, you may not put on another trade until the end of the month or until the open trades move in your favor, allowing you to raise your stops. - -The 6% Rule changes the usual question—"do I have enough money for this trade?"—to a much more relevant one—"do I have enough risk available for this trade?" That limit—risking no more than 6% of your account equity in any given month—keeps your total risk under control, ensuring long-term survival. Your total available risk for the month is 6% of your account equity, and the first question to ask yourself when considering a new trade is "Considering all my open and closed trades for this month, do I have enough available risk for this trade?" - -You know how much money, if any, you've lost during the current month. It's easy to calculate how much money you have at risk in your open trades. If your previous losses for this month plus your risk on existing trades expose you to a total risk of 6% of your account equity, you may not put on another trade. - -If the 6% Rule doesn't allow you to put on a new trade, continue to track the stocks you're interested in. If you see a trade you really want to take, but don't have available risk, consider closing out one of your open trades to free up some risk. - -If you are near the 6% limit but see a very attractive trade you wouldn't want to miss, you have two options. You can take profits on one of your open trades to free up available risk. Alternatively, you may tighten some of your protective stops, reducing your open risk. Just be sure that in your eagerness to trade you do not make your stops too tight (see Chapter 54). - -Let's review an example, assuming, for the sake of simplicity, that a trader will risk 2% of his account equity on any given trade. - -- 1. At the end of the month, a trader has \$50,000 in his account, with no open positions. He writes down his maximum risk levels for the month ahead—2% or \$1,000 per trade and 6% or \$3,000 for the account as a whole. -- 2. Several days later he sees a very attractive stock A, figures out where to put his stop, and buys a position that puts \$1,000, or 2% of his equity, at risk. -- 3. A few days later he sees a stock B, and puts on a similar trade, risking another \$1,000. -- 4. By the end of the week he sees a stock C, and buys it, risking another \$1,000. -- 5. The next week he sees a stock D, more attractive than any of the three above. May he buy it? No, he may not, because his account is already exposed to 6% risk. He has three open trades, risking 2% on each, which means he may lose 6% if the market turns against him. The 6% Rule prohibits him from taking any more risks at this time. -- 6. A few days later, the stock A rallies and the trader moves his stop above breakeven. Stock D, which he wasn't allowed to trade just a few days ago, still looks very attractive. May he buy it now? Yes, he may, because his current risk is only 4% of his account. He is risking 2% in stock B and another 2% in stock C, but nothing in stock A, because its stop is above breakeven. The trader buys stock D, risking another \$1,000 or 2%. - -- 7. Later in the week, the trader sees stock E, which looks very bullish. May he buy it? Not according to the 6% Rule because his account is already exposed to a combined risk of 6% in stocks B, C, and D (there is no longer a risk in stock A). He may not buy stock E. -- 8. A few days later, stock B hits its stop. Stock E still looks attractive. May he buy it? No, since he already lost 2% on stock B and has a 4% exposure to risk in stocks C and D. Adding another position at this time would expose him to more than 6% risk per month. - -Three open trades isn't a lot of diversification. If you wish to make more trades, set your risk per trade at less than 2%. For example, if you risk only 1% of your account equity on any trade, you may open up to six positions before maxing out at the 6% limit. In trading a large account, I use the 6% Rule but tighten the 2% Rule to well under 1%. - -The 6% Rule allows you to increase your trading size when you're on a winning streak but makes you stop trading early in a losing streak. When markets move in your favor, you can move your stops to breakeven and have more available risk for new trades. On the other hand, if your positions start going against you and hitting stops, you'll quickly stop trading and save the bulk of your account for a fresh start next month. - -The 2% Rule and the 6% Rule provide guidelines for pyramiding—adding to winning positions. If you buy a stock and it climbs high enough to raise your stop above breakeven, then you may buy more of the same stock, as long as the risk on the new position is no more than 2% of your account equity and your total account risk is less than 6%. Handle each addition as a separate trade. - -Many traders go through emotional swings, feeling elated at the highs and gloomy at the lows. Those mood swings will not help you trade, just the opposite. It is better to invest your energy in risk control. The 2% and the 6% Rules will convert your good intentions into the reality of safer trading. - -## ■ **52. A Comeback from a Drawdown** - -When the level of risk goes up, our ability to perform goes down. Beginners make money on small trades, start feeling confident, and jack up trade size. That's when they start losing. The increased level of risk on bigger positions makes them stiffer and less nimble, and that's all it takes to fall behind. - -I saw a great example of that while running a psychological training group for a day-trading firm in New York. That firm taught its traders a proprietary stock trading system and let them trade the firm's capital on a profit-sharing basis. Their two top traders were making up to a million dollars a month; others made much smaller profits but quite a few lost money. The firm's owner asked me to come and help losing traders. - -They were shocked to hear that a psychiatrist was coming and loudly protested they "weren't crazy." The owner provided the motivation by telling his worst performers they had to participate—or else leave the firm. After six weeks, the results were such that we had a waiting list for the second group. - -Since the company taught traders its own system, we focused on psychology and risk control. In one of our first meetings, a trader complained that he had lost money each day for the past 13 days. His manager, who sat in on our meetings, confirmed that the fellow was using the firm's system but couldn't make any money. I began by saying that I'd take off my hat for anyone who lost 13 days in a row and had the emotional strength to come in and trade the next morning. I asked the man how many shares he traded, since the firm set a maximum for each trader. He was permitted to buy or sell up to 700 shares at a clip, but voluntarily reduced it to 500. - -I told him to drop his size down to 100 shares until he had a week with more winning days than losing and was profitable overall. Once he cleared that hurdle for two weeks in a row, he could go up to trading 200 shares at a clip. Then, after another 2-week profitable period, he could go up to 300 shares, and so on. He was allowed a 100 share increment after two weeks of profitable trading, but if he had a single losing week, he'd have to drop back to the previous level. In other words, he had to start small, increase the size slowly, but drop it fast in case of trouble. - -The trader loudly objected that 100 shares weren't enough to make money. I told him to stop kidding himself, since by trading 500 shares he wasn't making any money either, and he reluctantly agreed. When we met a week later he reported that he had four profitable days and was profitable overall. He made very little money because of the 100 share size, but he was ahead of the game. He continued to make money during the next week and then stepped up to 200 shares. After another profitable week he asked, "Doc, do you think this could be psychological?" The group roared. - -Why would a man lose while trading 500 shares, but make money trading 100 or 200? - -I took a \$10 bill out of my pocket and asked whether anyone in our group would like to earn it by climbing on top of our long and narrow conference table and walking from one end to the other. Several hands went up. Wait, I said, I have a better offer. I'll give \$1,000 cash to anyone who comes with me up to the roof of our 10-story office building and uses a board as wide as this table to walk to the roof of another 10-story building across the boulevard. No volunteers. - -I started egging on the group—the board will be sturdy, we'll do it on a windless day, I'll pay \$1,000 cash on the spot. The physical challenge would be the same as walking on the conference table, but the reward so much greater. Still no takers. Why? Because if you lose your balance on the table, you'll jump down a couple of feet and land on the carpet. If you lose your balance between two rooftops, you'd be splattered on the asphalt. - -The higher levels of risk impair our ability to perform. You need to train yourself to accept risks slowly and in well-defined steps. Depending on how actively you trade, those steps can be measured in weeks or months, but the principle remains the same—you need to be profitable during two units of time to go up a step in your risk size. If you lose money during one unit of time, drop down a step in your risk size. This is especially useful for people who want to return to trading after a bad drawdown. You need to gradually work your way back into trading, without an upsurge of fear. - -Most beginners are in a hurry to make a killing, but guess who gets killed. Unscrupulous brokers promote overtrading (putting on trades that are too big for your account) to generate commissions. Some stockbrokers outside the United States offer a "shoulder" of 10:1, allowing you to buy \$10,000 worth of stock for every \$1,000 you deposit with the firm. Some forex houses offer a deadly "shoulder" of 100:1 and even 400:1. - -Putting on a trade is like diving for treasure. There is gold on the ocean floor, but as you scoop it up, remember to glance at your air gauge. The ocean floor is littered with the remains of divers who saw great opportunities but ran out of air. A professional diver always thinks about his air supply. If he doesn't get any gold today, he'll go for it tomorrow. He needs to survive and dive again. Beginners kill themselves by running out of air. The lure of free gold is too strong. Free gold! It reminds me of a Russian saying—the only free thing is this world is cheese in a mousetrap. - -Successful traders survive and prosper thanks to their discipline. The 2% Rule will keep you safe from the sharks, while the 6% Rule will save you from the piranhas. If you follow these rules and have a reasonable trading system, you'll be miles ahead of your competitors. - -## **A Trading Manager** - -It used to puzzle me why institutional traders as a group performed so much better than private traders. An average private trader in the United States is a 50-year-old married, college-educated man, often a business owner or a professional. You would think this thoughtful, computer-literate, book-reading individual would run circles around some loud 23-year-old who used to play ball in college and hasn't read a book since his junior year. In reality, institutional traders as a group outperform private traders year after year. Is it because of their fast reflexes? Not really, because young private traders perform no better than older ones. Nor do institutional traders win because of training, which is skimpy in most firms. - -A curious fact: when successful institutional traders go out on their own, most of them lose money. They may lease the same gear, trade the same system, and stay in touch with their contacts, but still fail. After a few months, most cowboys are back in head-hunters' offices, looking for a trading job. How come they could make money for the firms but not for themselves? - -When an institutional trader quits his firm, he leaves behind his manager, the person in charge of discipline and risk control. That manager sets the maximum risk per trade. It is similar to what a private trader can do with the 2% Rule. Firms operate from huge capital bases and their risk limits are much higher in dollar terms but tiny in percentage terms. A trader who violates his risk limit is fired. A private trader can break the 2% Rule and nobody will know, but an institutional manager watches his traders like a hawk. A private trader can throw confirmation slips in a shoebox, but a trading manager quickly gets rid of impulsive people. He enforces discipline that saves institutional traders from disastrous losses, which destroy many private accounts. - -In addition to setting a risk limit per trade, a manager sets the maximum allowed monthly drawdown for each trader. When an employee sinks to that level, his trading privileges are suspended for the rest of the month. A trading manager breaks his traders' losing streaks by forcing them to stop trading if they reach their monthly loss limit. Imagine being in a room with co-workers who actively trade, while you sharpen pencils and get asked to run out for sandwiches. Traders do all in their power to avoid being in that spot. This social pressure creates a serious incentive not to lose. - -People who leave institutions know how to trade, but their discipline is often external, not internal. They quickly lose money without their managers. Private traders have no managers. This is why you need to become your own manager. The 2% Rule will save you from disastrous losses, while the 6% Rule will save you from a series of losses. The 6% Rule will force you to do something most people cannot do until it's too late—break a losing streak. - -# Practical Details - -Will you be buying stocks that break out to new highs? Shorting double tops? Buying pullbacks? Looking for trend reversals? Those approaches differ from each other, and you can make or lose money with each of them. You need to select a method that makes sense to you and feels emotionally comfortable. Choose what appeals to you, what matches your abilities and temperament. There is no such thing as generic trading, any more than there is a generic sport. - -To find good trades, you need to define the pattern you want to trade. Prior to using any scan, you need to have a crystal-clear picture of what it should look for. Develop your system, and test it with a series of small trades to make sure you have the discipline to follow your signals. You have to feel certain that you'll trade the pattern you've identified when you see it. - -Different styles of trading call for different entry techniques, different methods of setting stops and profit targets, and very different scans. Still, there are several key principles that apply to all systems. - -## ■ **53. How to Set Profit Targets: "Enough" Is the Power Word** - -Setting profit targets for your trades is like asking about pay and benefits when applying for a job. You may end up earning more or less than expected, but you need to have an idea of what to expect. - -**FIGURE 53.1** VRSN with 13- and 26-day EMAs, the Impulse system, and a 4% envelope. MACD 12-26-9. *(Chart by Stockcharts.com)* - -#### Swing Trade: Taking Profits in the Value Zone - -This record of shorting VeriSign Inc. (VRSN) comes from my trade journal. It was one of several stocks that developed a setup for my "false breakout with a divergence" strategy. The last three days on this chart are marked a, b, and c. On day "a" VRSN broke out and closed above resistance, marked by a horizontal dashed line, while MACD-Histogram couldn't even rise above zero. The next day, marked "b," VRSN opened below the orange line, showing that the previous day was a false upside breakout (some would call it an upthrust). As soon as MACD-Histogram ticked down, creating a bearish divergence, the pattern was completed, and I immediately went short. - -VRSN kept sinking all day and closed lower. The next day, marked "c," it tried to form a base, and since the daily price was already in the value zone, I decided that it was enough and covered my shorts. Taking an 82 cent profit on 3,000 shares brought in \$2,460 before commissions. I could have made more by holding longer, but in swing trading, fast quarters are better than slow dollars. Taking profits in the value zone reduces the level of uncertainty and cuts the time your trade remains at risk. - -Write down your entry level, profit target, and stop for every planned trade in order to compare your risk and reward. Your potential reward should be at least twice as big as your risk. It seldom pays to risk a dollar to make a dollar—you might as well bet on color at a roulette table. Having a realistic profit target and a firm stop will help you make a go/no-go decision for any trade. - -Early in my trading career I didn't think of profit targets. If anybody asked me about them, I'd answer that I didn't want to limit my profit potential. Today, I would laugh at such an answer. A beginner without a clear target price will feel increasingly happy as his stock goes up and more despondent as it grinds down. His emotions will prime him to act at the worst possible times: continue to hold and add to his longs at the top and sell out in disgust near the bottom. - -**FIGURE 53.2** EGO 25- and 5-minute charts with 13- and 26-bar EMAs, the Impulse system, and Autoenvelope. MACD 12-26-9. *(Chart by TradeStation)* - -#### Taking Profits of a Day-Trade near the Upper Channel Line - -This record of buying Eldorado Gold Corp. (EGO) comes from my trade journal. It illustrates using Triple Screen for day-trading and profit-taking. The strategic decision to buy EGO was taken on a 25-minute chart in area A, where the moving average turned up and the Impulse system changed to green (notice that on the previous day there was a false downside breakout—it indicated that this stock didn't want to go down and may be setting up to rally). - -My trading strategy here was "pullback to value," which I executed on a 5-minute chart, as prices gapped up at the open but then pulled back into the value zone (area B). I went long at \$9.51; my initial target was \$9.75, near the upper channel line on the 25-minute chart, with a stop at \$9.37, for a nearly 2:1 reward/risk ratio. Since this was a day-trade, I had it on my screen all day long. - -At first, with the uptrend being so strong, I considered taking it overnight, but then bearish divergences began to develop in area C, and I placed an order to sell at \$9.75. That turned out to be the high of the day, and my order wasn't filled. As prices turned down from their bearish divergence on a 5-minute chart, I scrambled to lower my sell order to \$9.70. It was filled, and I was out with a profit before the close. Taking a 19-cent profit on 2,000 shares brought in \$380 within a few hours. - -When calculating a trade's profit potential, we run into a paradox. The longer your expected holding period, the bigger the profit potential. A stock can rally much more in a month than in a week. On the other hand, the longer your holding period, the higher the level of uncertainty. Technical analysis can be quite reliable for shorter-term moves, but many unpleasant surprises will occur in the longer run. - -In an earlier chapter on choosing the time horizon for trades, we examined our three main options. The holding period for position trades or investments is measured in months, sometimes years. We may hold a swing trade for a few days, sometimes weeks. The expected duration of a day-trade is measured in minutes, rarely hours. Moving averages and channels help set profit targets for swing trades. They also work for day-trades; only there you need to pay more attention to oscillators and exit at the first sign of a divergence against your trade. Profit targets in position trading are usually set at previous support and resistance levels. - -**FIGURE 53.3** IGOI with 13- and 26-day EMAs, the Impulse system, and a 4% envelope. MACD 12-26-9. *(Chart by Stockcharts.com)* - -#### Setting a Profit Target for a Long-Term Trade at the Resistance Level - -At the right edge of the weekly chart, iGo, Inc. (IGOI) is trading slightly above \$3, with a rising EMA confirming a new uptrend. Its previous major top was above \$60 (notice a kangaroo tail), two recent intermediate rallies had fizzled out, the most recent one near \$15, and the previous one near \$22 (all marked with purple dashed lines). If this is the start of a new bullish trend, it would be reasonable to set the first profit target near \$15, the next near \$22. - -The three targets mentioned above—moving averages, channels, and support/ resistance levels—are fairly modest. They don't have you shooting for the moon, but are realistic. Keep in mind that "enough" is a power word—in life as well as trading. It puts you in control, and by getting "enough" in one trade after another, you'll achieve excellent results over time. - -How to define "enough"? I believe that moving averages and envelopes, along with recent support and resistance levels can show us what would be "enough" for any given trade. Let me illustrate this with several examples: one a swing trade, another a day-trade, and the third a long-term investment. - -VRSN was a fairly common example of a modest swing trade: entering near one of the channel lines and taking profits in the value zone between the two moving averages (Figure 53.1). This isn't elephant hunting; this is rabbit hunting, a much more reliable activity. - -The EGO day-trade in Figure 53.2 illustrates buying a pullback into the value zone during an uptrend, with a profit target at the upper channel line. I used an oscillator to speed up my exit when the market wouldn't let me exit at the initial target. "Fallen angels" is the name of a scan I use to look for possible investment candidates. It marks stocks that have fallen over 90% from their peaks, stopped declining, bottomed out, and slowly began to rise. A stock that had lost 90% of its value has every right to die, but if it chooses to live, it's likely to rally. - -The best time to look for "fallen angels" is when a bear market starts showing signs of bottoming. That's when you find many candidates that survived bear attacks and are starting to get up from the floor. This example shows an old bull market darling IGOI that got badly mauled but stopped declining and began to rise. The weekly chart in Figure 53.3 shows two prior attempts to return to the multiyear peak area. Each of those rallies retraced just about half of the previous bear market. - -Is this going to be an easy trade? Far from it. First of all, the latest bottom was near \$2, and if you place your stop there, your risk per share will be quite high, and you'll have to reduce trade size. Also, the expected rally may take anywhere from a few months to several years to get going. Are you prepared to wait that long, with your capital tied up? Last but not least, the volume of this stock is low. It will rise if prices rally, but if the rally fizzles out, selling will not be easy. Taking all these factors into account, you can see how hard it is to buy for the long haul. - -## ■ **54. How to Set Stops: Say No to Wishful Thinking** - -A trade without a stop is a gamble. If you're after thrills, better go to a real casino. Take a trip to Macao, Las Vegas, or Atlantic City, where a gambling house will serve you free drinks and may even comp you a room while you're having fun. Gamblers who lose money on Wall Street receive no freebies. - -Stops are a must for long-term survival and success, but most of us feel a great emotional reluctance to use them. The market reinforces our bad habits by training us not to use stops. We all have been through this unpleasant experience: you buy a stock and set a stop that gets hit and you exit with a loss—only to see your stock reverse and rally just as you originally expected. Had you held that stock without a stop, you would've profited instead of losing. Getting repeatedly whipsawed like that makes you feel disgusted with stops. - -After several such events, you start trading without stops, and it works beautifully for a while. There are no more whipsaws. When a trade doesn't work well, you get out of it without a stop—you have enough discipline. This happy ride ends after a large trade starts going bad. You keep waiting for it to rally a bit and give you a better exit, but it keeps sinking. As the days go by, it inflicts more and more damage on your account—you're being chewed up by a shark. Soon enough your survival is in danger, and your confidence is shattered. - -While you trade without stops, the sharks circling the perimeter of every account grow bigger and meaner. If you trade without stops, a shark bite is only a question of time. Yes, stops are a pain—but using them is a lesser evil than trading without them. This reminds me of what Winston Churchill said about democracy: "It is the worst form of government except all the others that have been tried." - -What should we do? I suggest accepting the irritation and the pain of stops but focusing on making them more logical and less unpleasant. - -In my previous book *The New Sell and Sell Short*, I dedicated a long chapter to the intricacies of placing various types of stops. Rather than repeat myself here, I'll offer you a quick summary. - -## **Place Stops outside the Zone of "Market Noise"** - -Put a stop too close and it'll get whacked by some meaningless intraday swing. Put it too far, and you'll have very skimpy protection. - -To borrow an engineering concept, all market moves have two components: signal and noise. The signal is the trend of your stock. When the trend is up, we can define noise as that part of each day's range that protrudes below the previous day's low. When the trend is down, we can define noise as that part of each day's range that protrudes above the previous day's high. - -**SafeZone stops** are described in detail in *Come into My Trading Room*. They measure market noise and place stops at a multiple of noise level away from the market. In brief, use the slope of a 22-day EMA to define the trend. If the trend is up, mark all downside penetrations of the EMA during the look-back period (10 to 20 days), add their depths, and divide the sum by the number of penetrations. This gives you the Average Downside Penetration for the selected look-back period. It reflects the average level of noise in the current uptrend. You want to place your stops farther away from the market than the average level of noise. That's why you need to multiply an average downside penetration by a factor of two or greater. Placing your stop any closer would be self-defeating. - -When the trend, as defined by the EMA slope, is down, we calculate SafeZone on the basis of upside penetrations of the previous bars' highs. We count each upside penetrations during a selected time window and average that data to find the Average Upside Penetration. We multiply it by a coefficient, starting with 3, and add that to the high of each bar. Shorting near the highs requires wider stops than buying near quiet, sold-out bottoms. - -Like all systems and indicators in this book, SafeZone is not a mechanical gadget to replace independent thought. You have to establish the look-back period, the window of time during which SafeZone is calculated. You also need to fine-tune the coefficient by which you multiply the average penetration, so that your stop goes outside the normal noise level. - -Even when not using SafeZone, you may wish to follow its principle of calculating an average penetration against the trend that you are aiming to trade—and putting your stop well outside the zone of market noise. - -## **Don't Place Your Stops at Obvious Levels** - -A recent low that sticks out like a sore thumb from a tight weave of prices draws traders to place stops slightly below that level. The trouble is most people place their stops there, creating a target-rich environment for the running of stops. The market has an uncanny habit of quickly sinking back to those obvious lows and triggering stops before reversing and launching a new rally. Without trying to assign blame for raiding stops, let me suggest several solutions. - -It pays to place your stops at non-obvious levels—either closer to the market or deeper below an obvious low. A closer stop will cut your dollar risk but increase the risk of a whipsaw. A deeper stop will help you sidestep some false breakouts, but if it gets hit you'll lose more. - -Take your pick. For short-term swing trading, it generally pays to place your stops tighter, while for long-term position trades, you'd be better off with wider stops. Remember "the Iron Triangle of risk control"—a wider stop demands a smaller trade size. - -One method I like is **Nic's stop**, named after my Australian friend Nic Grove. He invented this method of placing a stop not near the lowest low, but at the second lowest (more shallow) low. The logic is simple—if the market is sliding to its second lowest low, it is almost certain to continue falling and hit the key low, where the bulk of stops cluster. Using Nic's stop, I get out with a smaller loss and lower slippage than would occur when the markets drop to more visible lows. - -The same logic works when shorting—place your Nic's stop not "a tick above the highest high" but at the level of the second highest high. Let's review some recent examples of both longs and shorts in Figure 54.1. - -You may want to explore several different systems for placing stops, such as Parabolic, SafeZone, and Volatility stops, described in the books mentioned above. You can get fancy or you can stay plain, but keep in mind the most important principles: first, use stops; and second, don't place them at obvious levels, easily visible to anyone looking at that chart. Make your stops a little tighter or wider than average stay away from the crowd because you don't want to be an average trader. - -For the same reason, avoid placing stops at round numbers. If you buy at \$80, don't place a stop at \$78 but at \$77.94. If you enter a day-trade at \$25.60, don't place a stop at \$25.25—move it to \$25.22 or even \$22.19. Round numbers attract crowds—put your stop a little farther away. Let the crowd take the first hit, and perhaps your own stop will remain untouched. - -Another method, popularized by Kerry Lovvorn, is to use **Average True Range (ATR) stops** (see Chapter 24 for the explanation of the ATR). When you enter during a price bar, place your stop at least one ATR away from the extreme of that bar. A two ATR stop is even safer. You can use it as a trailing stop, moving it at every bar. The principle is the same—place your stop outside the zone of market noise. (Figure 54.2) - -One of the advantages of using trailing stops is that they gradually reduce the amount of money at risk. Earlier we discussed the concept of "available risk" (Chapter 51). As a trade followed by a trailing stop moves in your favor, it gradually frees up available risk, allowing you to make new trades. - -Even if you don't use SafeZone or ATR stops, be sure to place stops at some distance from recent prices. You don't want to be like one of those fearful traders who jam their stops so close to current prices that the slightest meaningless fluctuation is certain to hit them. - -**FIGURE 54.1** Daily charts with 13-day EMA, the Impulse system, and MACD-Histogram 12-26-9. *(Charts by Stockcharts.com)* - -#### Nic's Stops—Long KO and Short ISRG - -On the chart of The Coca-Cola Company (KO), we see a false downside breakout with a bullish divergence. The Impulse system has turned from red to blue, permitting buying. If we go long, where should we place our stop? - -Bar A—the low was \$37.10 - -Bar B—the low was \$37.05 - -Bar C—the low was \$36.89 (a false downside breakout, exceeded the low A by 21 cents). - -Bar D—the low was \$37.14 - -The crowd will have set its stops below 36.89, but Nic's stop will go to \$37.04—a cent below the second lowest recent low, the bottom of bar B. - -On the chart of Intuitive Surgical, Inc. (ISRG), we see a false upside breakout with a bearish divergence. The Impulse system has turned from green to blue, permitting shorting. If we go short, where should we place our stop? - -Bar A—previous peak reached \$447.50 - -Bar B—the high was \$444.99 - -Bar C—the high was \$447.75 (a false upside breakout, exceeded previous peak by 25 cents). - -Bar D—the high was \$442.03 - -The crowd will have its stops above \$447.75, but Nic's stop will go to \$445.05—a few cents above the second highest recent high, the top of bar B. - -The concept of signal and noise can help you not only place intelligent stops but also find good entries into trades. If you see a stock in a strong trend but don't like to chase prices, drop down one timeframe. For example, if the weekly trend is up, switch to the daily chart, and you'll probably see that once every few weeks, it has a pullback below the value zone. Measure the depths of several recent penetrations below the slow EMA to calculate an average penetration (see Figure 39.3). Place a - -**FIGURE 54.2** S&P 500 and a 20-day New High–New Low Index. *(Chart by TradeStation, programming by Kerry Lovvorn)* - -### A 2-ATR Trailing Stop following a Spike Bounce signal - -A Spike Bounce signal (described in Chapter 34) occurs when the 20-day New High—New Low Index drops below minus 500, indicating a bearish imbalance, and then rallies above that level, showing that bulls are coming back. Spike Bounce signals are marked by vertical green arrows. Here S&P bars get colored green while the Spike Bounce signal is, in effect, purple after it disappears. The red line trails two ATRs below the highs of the bars of the S&P 500. - -The Spike Bounce gives buy signals for the entire market, and this chart trails each buy signal with a 2-ATR close-only stop (intraday crossovers don't count—the market has to close below the stop to activate it). Notice the very productive signals A, B, and C. The buy signal E is still in effect at the time of this writing. The signal D resulted in a loss—there are no universally profitable signals. - -buy order for the day ahead at that distance below the EMA and keep adjusting it every day. You will use a splash of noisy behavior to get a good entry into a trendfollowing trade. - -## **Don't Let a Winning Trade Turn into a Loss** - -Never let an open trade that shows a decent paper profit turn into a loss! Before you put on a trade, start planning at what level you'll begin protecting your profits. For example, if your profit target for that trade is about \$1,000, you may decide that a profit of \$300 will need to be protected. Once your open profit rises to \$300, you'll move your protective stop to a breakeven level. I call that move "cuffing the trade." - -Soon after moving your stop to breakeven, you'll need to focus on protecting a portion of your growing paper profit. Decide in advance what percentage you'll protect. - -For example, you may decide that once the breakeven stop is in place, you'll protect a third of your open profit. If the open profit on the trade described above rises to \$600, you'll move up your stop, so that the \$200 profit is protected. - -These levels aren't set in stone. You may choose different percentages, depending on your level of confidence in a trade and risk tolerance. - -As a trade moves in your favor, your remaining potential gain begins to shrink, while your risk—the distance to the stop—keeps increasing. To trade is to manage risk. As the reward-to-risk ratio for your winning trades slowly deteriorates, you need to begin reducing your risk. Protecting a portion of your paper profits will keep your reward-to-risk ratio on a more even keel. - -## **Move Your Stop Only in the Direction of Your Trade** - -You buy a stock and, being a disciplined trader, put a stop underneath. That stock rises, generating nice paper profits, but then it stalls. Next, it sinks a little, then a bit more, and then goes negative, inching towards your stop. As you study the chart, its bottom formation looks good, with a bullish divergence capable of supporting a strong rally. What will you do next? - -First of all, learn from your mistake of not having moved up your stop. That stop should have been raised to breakeven a while ago. Failing that, your options have narrowed: take a small loss right away and be ready to reposition later—or continue to hold. Trouble is you feel tempted to go for the third and utterly unplanned choice to lower your stop, giving your losing trade "more room." - -Don't do it! - -Giving a trade "more room" is wishful thinking, pure and simple. It doesn't belong in the toolkit of a serious trader. - -Giving "more room" to a losing trade is like telling your kid you'll take away his car keys if he misbehaves, but then not following through. That's how you teach him that rules don't matter and encourage even worse behavior. Standing firm brings better long-term results. - -The logical thing to do when a trade starts acting badly is to accept a small loss. Continue to monitor that stock and be ready to buy it again if it bottoms out. Persistence pays, commissions are cheap, and professional traders often take several quick stabs at a trade before it starts running in their favor. - -## **Catastrophic Stops: A Professional's Life Jacket** - -Soon after moving to a house near a lake I bought a kayak, and immediately went shopping for a life jacket. All I had to do to be legal was to have a jacket in the kayak—any cheap piece of junk would suffice. Still, I spent good money on a quality jacket that felt snug and didn't interfere with rowing when I wore it. - -All I planned to do with that kayak was to paddle peacefully on a lake, not anywhere near white water or currents. I never expected to actually need that jacket. Did I waste my money buying it? Well, if ever some motor boat clips me, then wearing a high-quality jacket can make the difference between life and death. - -It's the same with stops. They're a nuisance and often cost you money. Still, there will be a day when a stop will save your account from a life-threatening collision. Keep in mind that a bad accident is much more likely in the market than on a lake. That's why it's essential to use stops. - -A "hard stop" is an order you give to your broker. A "soft stop" is an order you keep in your head, ready to place it when needed. Beginners and intermediate traders must use hard stops. A professional trader, sitting in front of a live screen all day, may use a soft stop if he has the discipline to exit when his system tells him to do it. - -Still, accidents happen. A professional trader friend described how he fought against a market reversal. His soft stop was set at a \$2,000 loss level, but by the time he threw in the towel and got out, his loss grew to \$40,000—the worst of his trading career. This is why, even if you don't use hard stops on a regular basis, you should at the very least use a "catastrophic stop" for every trade. - -For any A-trade, whether long or short, draw a line on your chart where you absolutely do not expect that stock to go. Place your hard stop at that level and make it GTC: "good 'til cancelled." That will be your catastrophic stop. Now you can play with the luxury of soft stops. Paddle your kayak hard, knowing that you're wearing a reliable life jacket. - -Had my friend whose \$2,000 drawdown metastasized into a \$40,000 loss used a hard "catastrophic" stop, he would have taken only a relatively small loss, sidestepped a disaster, and avoided the financial and psychological hurt of a shark bite. - -## **Stops and Overnight Gaps: Only for the Pros** - -What will you do if your stock gets hit by a major piece of bad news after the market closes for the day? Looking at pre-opening quotes the next morning, you realize that it'll open sharply lower, deep below your stop, promising massive slippage. - -This is a rare occurrence, but it does happen. - -If you're a new or intermediate trader, there isn't much you can do—just grit your teeth and take your loss. Only coldly disciplined pros have an additional option: day-trade your way out of that stock. Pull your stop, and after the stock begins trading, handle it as if it was a day-trade you bought at the first tick of that morning. - -Opening gaps are often followed by bounces, giving nimble traders an opportunity to get out at a smaller loss. This doesn't always happen—which is why most traders should never use this technique. You may actually deepen your loss instead of reducing it. - -Be sure to get out before the close. Your damaged stock may bounce today, but tomorrow more sellers are likely to come in and drive it lower. Don't let a bounce lull you into a false hope of a reversal. - -## ■ **55. Is This an A-Trade?** - -Your performance in any field will improve if you take tests. Getting graded on them will help you recognize your strengths and weaknesses. Now you can work on reinforcing what's good and correcting what's not. - -Whenever you complete a trade, the market gives you three grades. It grades the quality of your entry and exit, and most importantly, it delivers your overall trade grade. - -If you're a swing trader and use a combination of weekly and daily charts, look for your grades on the dailies. Your **buy grade** is based on the location of your entry, relative to the high and low of the daily bar during which you bought. - -$$ -Buy\,\,grade = \frac{(high-buy\,\,point)}{(high-low)} -$$ - -The closer to the bar's low and the farther away from the bar's high you buy, the better your buy grade. Suppose the high of the day was \$20, the low \$19, and you managed to buy at \$19.25. Entering those numbers into the formula gives you a buy grade of 75%. If your buy grade is 100%, it means you bought at the bottom tick of the day. That's brilliant, but don't count on it happening. If your buy grade is 0%, it means you bought the top tick of the day. This is terrible and should serve as a reminder not to chase runaway prices. I calculate my buy grade for every trade and consider anything above 50% a very good result, meaning I bought in the lower half of the daily bar. - -The following is the formula for your **sell grade** - -$$ -Sell grade = \frac{(sell point - low)}{(high - low)} -$$ - -The closer to the bar's high and the farther away from the low of the bar you sell, the better your sell grade. Suppose the high of the day was \$20, the low \$19, and you managed to sell at \$19.70. Entering those numbers into the formula gives you a sell grade of 70%. If your sell grade is 100%, it means you sold at the top tick of the day. If your sell grade is 0%, it means you sold at the bottom tick of the day. This terrible grade should serve as a reminder to sell earlier instead of panicking. I calculate my sell grade for every trade and consider anything above 50% a very good result, meaning I sold in the upper half of the daily bar. - -When evaluating any trade, most people assume that the amount of money they make or lose in that trade reflects its quality. Money is important for plotting the equity curve, but it's a poor measure of a single trade. It makes more sense to rate the quality of every trade by comparing what you've got to what was realistically available. I find my **trade grade** by comparing points gained or lost in a trade to the height of the daily chart's channel measured on the day of the entry. - -$$ -Trade\ grade = \frac{(sell-buy)}{(channel\ high-channel\ low)} -$$ - -A well-drawn channel contains between 90% and 95% of prices for the past 100 bars (see Chapter 22). You may use any number of channels—parallel to the EMA, Autoenvelope, Keltner, or ATR channels—as long as you're being consistent. A channel contains normal price moves, with only the extreme highs and lows protruding outside it. The distance between the upper and the lower channel lines on the day you enter a trade represents a realistic maximum of what's available to a swing trader in that market. Shooting for a maximum, though, is a very dangerous game. I consider any trade that gains 30% or more of its channel height an A-trade.1 (Figure 55.1) - -1 This term comes from the U.S. school grading system: A is excellent, B good, C mediocre, and D poor. - -**FIGURE 55.1** ADSK daily with 13- and 26-day EMAs and a 7% envelope. Impulse system with MACD-Histogram 12-26-9. *(Chart by Stockcharts.com)* - -#### Buy, Sell, and Trade Grades - -This chart comes from my diary of a trade in Autodesk, Inc. (ADSK) while working on this book (you saw my plan for this trade in Figure 38.1). I was piggybacking one of the Spike picks, and my strategy here was "pullback to value." ADSK had recently staged a deeper than average pullback—notice a false downside breakout marked by a red arrow, followed by a successful retest, marked with a green arrow. - -Day A—Feb. 10, 2014, Monday: high \$52.49, low \$51.75, upper channel line \$53.87, lower \$47.61 (we'll need channel values to calculate the trade grade on exit). Bought at \$51.77. Buy grade = (52.49 − 51.77) / (52.49 − 51.75) = 97%. - -Days B and C—Tuesday and Wednesday): rally continues, start moving up stop. - -Day D—Thursday: high \$54.49, low \$53.39. Sold at \$53.78. Sell grade = (53.78 − 53.39) / (54.49 − 53.39) = 35%. Trade grade = (sell − buy) divided by channel height = (53.78 – 51.77) / (53.87 − 47.61) = 32%. - -My buy grade in this trade was unusually high, the sell grade below average, but the overall trade grade was very good. Busy with the book, I traded only 200 shares, so my profit, after commissions, was less than \$400. Had I graded my trades by profits, this one would be easy to overlook, but catching 32% of channel earned me an A. - -A comment by Kerry Lovvorn at the 2012 annual reunion of SpikeTrade grabbed my attention: he challenged all participants to define what he called 'an A-trade'—a setup that signals the likelihood of an excellent trade. "You have to define this pattern for yourself," he said. "If you don't know what's your 'A-trade,' you have no business being in the market." - -I knew full well what my A-trades were—a divergence coupled with a false breakout or a pullback to value. Still, if I saw no A-trades on my screen, I'd go for B-trades, and on a really slow day, reach for a C-trade. - -**FIGURE 55.2** The Strategy box in the Trade Journal. *(Source: SpikeTrade.com)* - -Whenever you plan a trade, be sure to specify what system you'll use. Ask yourself whether this planned trade looks like an "A-trade" according to your system. - -I use the words "system" and "strategy" interchangeably—both mean a trade plan. As you can see from this snapshot of my trade journal's Strategy box, taken in September 2013, I currently trade three systems. My main one is a "false breakout with a divergence." I also occasionally trade pullbacks to value—buying pullbacks during uptrends and shorting rallies in downtrends. On rare occasions, I trade against the extremes, buying severely beaten down stocks or shorting stocks whose wild rallies are stalling. - -Returning home from that reunion, I attached a plastic strip to one of my trading screens with the question: "Is this an A-trade?" Ever since then, I have it in front of me whenever I place an order. The results came quickly: as the number of non-A-trades sharply declined, my equity curve began to rise at a steeper angle. - -You need to have a clear idea of what would be a perfect setup for you, "an A-trade." Perfect doesn't guarantee profits—there are no guarantees in the market—but it means a setup with a strong positive expectation. It also means something you've traded before with which you are comfortable. Once you know what it is, you can start looking for stocks that exhibit that pattern. - -One of the few advantages of a private trader over an institutional one is that we can trade or not trade when we like. We have the luxury of being free to wait for excellent setups. Unfortunately, most of us, in our eagerness to trade, throw away this amazing advantage. - -I've added the question "Is this an A-trade?" to my Tradebill, a trade management form we'll discuss in the next chapter. Whenever I see a potential trade, I ask myself this question. If the answer is "yes," I start calculating risk management, position sizing, and planning my entry. If the answer is "no," I turn the page and go looking for another pick. (Figure 55.2) - -No matter how grand an idea or a stock tip, I will not trade it unless it fits into one of my three strategies. Ideas come and go, fly or flop—but strategies stay and grow better with age, as you learn how they perform under various market conditions. - -Gradually, you may develop new strategies and drop others. You can see that the ones I use are numbered 1, 4, and 7. The rest of the numbers were strategies I stopped using. - -Your system can be very mechanical or quite general, with just a few key principles, like my Triple Screen. Either way, you must know what your "A-trade" looks like before you plan your next trade. - -I'll walk you through one of my strategies, but remember that you don't have to copy it (Figure 55.3). The way we trade is as personal as handwriting. Define a strategy that feels comfortable to you, test it, and then find a chart that perfectly represents it. Print that chart and post it on a wall near your trading desk. Now you can search for trades that look the way that chart looked on the day you entered that trade. - -**FIGURE 55.3** SLB daily with 13- and 26-day EMAs and a 6% envelope. Impulse system with MACD-Histogram 12-26-9. *(Chart by Stockcharts.com)* - -#### False Downside Breakout with a Bullish Divergence - -This chart, from my Trade Journal, shows a near-perfect example of a swing trade strategy that I abbreviate as "01 FB + BD"—a false breakout with a bullish or bearish divergence. Schlumberger, Ltd. (SLB) was in a well-established downtrend, and when it reached a new low at A, it looked like just another bottom during a long and painful slide. I look at the entire circled area of MACD-Histogram as a single bottom because it never crossed above the zero line. In area B, the picture became more interesting: MACD-Histogram rallied above its centerline, "breaking the back of the bear." The weekly Impulse system (not shown), which had been red until then, turned blue, removing its prohibition of buying. In area C, SLB cracked to a new low, but MACD declined to a much more shallow low, setting up for a bullish divergence. - -Look carefully at the first blue bar after several red bars in area C. That's where MACD-Histogram ticked up, completing a bullish divergence. In addition, that bar rallied and closed above the downside breakout level, marked by a purple dashed line: it marked previous bars as a false downside breakout. - -I bought during that bar (marked by a vertical green arrow), without waiting for it to close, going long 2,000 shares at \$60.80, with a stop at \$59.12. Four days later, as prices began approaching the upper channel line as well as the level of the previous top I started taking profits. I sold 1,000 shares at \$66.55 and the rest on the following day at \$67 (both marked by red arrows). I booked nearly \$6 per share, for a total of \$11,950 before commissions in five trading days. The system delivered a beautiful trade. - -This is the chart I have in mind when looking for stocks and futures to trade. I want to find those that have completed their bottom A and top B and are declining into what could become bottom C. In the background, the Impulse system on the weekly chart cannot be red because that would prohibit buying. - -In the next section, on trade planning, you'll see how to use a form I named Tradebill to make trading decisions more objective. Every trade has several parameters, and it's easy to overlook some of them in the heat of action. Just as a pilot goes through a preflight checklist, a trader needs to check his list before deciding to place an order. - -## ■ **56. Scanning for Possible Trades** - -There are thousands of stocks out there, and in the days and weeks ahead, some will rise, others fall, and some will fluctuate. Each stock will make money for traders whose systems are in gear with it—and lose money for the rest. Developing a trading system or a strategy must come before scanning. If you don't have a clearly defined strategy, what will you scan for?! - -Begin by developing a system that you trust. Once you have it, looking for trading candidates will become quite logical and straightforward. Looking at your list of candidates, the first question about any pick will be "Is this an A-trade?" In other words, is this pick close to your ideal pattern? If the answer is "yes," you may start working up a trade. - -Scanning means reviewing a group of trading vehicles and zooming in on trading candidates. Your scanning can be visual or computerized: you may flip through multiple charts, taking a quick glance at each, or else have your computer run through that list and flag stocks whose patterns appeal to you. To repeat, defining a pattern you trust must be your first step, scanning a more distant second. - -Be sure to have realistic expectations for scanning. No scan can find you the needle in a haystack—the one and only gem to trade. What a good scan does is bring up a group of candidates on which to focus your attention. You can make that group bigger or smaller by loosening or tightening scan parameters. A scan is a time saver that delivers potential candidates; it is not a piece a magic to free you from the necessity of working up your picks. - -Begin by describing what stocks you want to find. For example, if you're a trendfollower, but don't like chasing stocks, you may design a scan to find stocks whose moving average is rising but the latest price is only a small percentage above that average. You can write a scan yourself or hire someone to do it for you—there are programmers who offer this service. - -The raw list of stocks to be scanned can be as small as a few dozen or as large as the S&P 500, or even Russell 2,000. I like looking for trading candidates on weekends, and depending on how much time I have, take one of the two approaches—one lazy and the other hardworking. The lazy way, when my time is limited, is to review Spikers' picks for the week ahead. Spikers are the elite members of SpikeTrade.com, and I figure that among a dozen picks by super-smart traders who compete for the best pick of the week there ought to be a stock or two for me to piggyback. I examine those picks, while adding my market opinion to the mix. Depending on my outlook for the week ahead, I focus primarily on long or short candidates. - -The hard-working way consists of dropping all 500 components of the S&P 500 into my software and running a scan for potential MACD divergences. I've seen many divergence scans, but never a reliable one—they all delivered too many false positives and missed many good divergences. Then I realized that a divergence was "an analog pattern"—clearly visible to a naked eye but hard to pick with digital processing. I turned to John Bruns, who built me a semiautomatic MACD divergence scanner. Instead of looking for divergences, it scans for patterns that precede divergences and delivers the list of candidates to watch in the days ahead. (Figure 56.1) - -Running my MACD divergence semiautomatic scan over the weekly and daily charts of all 500 components of the S&P 500 takes only a minute, but the real work begins when I review the lists of bullish and bearish candidates delivered by this scan. First, I compare the sizes of bullish and bearish lists. For example, for several weeks prior to writing this chapter, my scan for bullish divergences among the components of the S&P 500 produced four to five candidates, while the scan for potential bearish divergences returned between 70 and 80 stocks. This great imbalance indicated that - -**FIGURE 56.1** WFM daily with 13- and 26-day EMAs. Impulse system with MACD-Histogram 12-26-9. Red dots—potential or actual bearish divergences. Green dots—potential or actual bullish divergences. *(Chart by TradeStation, scanner by John Bruns/elder.com)* - -#### MACD-Histogram Semiautomatic Divergence Scanner - -We've reviewed MACD Histogram and its divergences in Chapter 23 and returned to this pattern repeatedly throughout this book. Instead of looking for completed divergences, this semiautomatic scan finds stocks that have completed parts A and B of a potential divergence. As part C (the second top or bottom) begins to emerge, this scan starts putting red dots above or green dots below the bar to alert one to the possibility of a divergence. - -This chart of Whole Foods Market, Inc. (WFM) shows that a scanner isn't an automatic trade finder. It is a watchdog that alerts you to the possibility that this market is ready to trade—long or short. Having received such a signal, a trader needs to work up that stock to establish the level at which the divergence would be completed and write down entry, target, and stop levels. - -the market was perched at the edge of a cliff and I needed to find some shorts for the coming downturn. I prune my weekly list of trading candidates down to five or six picks that show the most attractive patterns and the best reward to risk ratios. These are the stocks that I'll aim to trade during the week. I have friends who can juggle twenty stocks at once—this can be done, but not by me, and every serious trader must know his limitations. - -Another "hardworking way" of finding trade candidates involves scanning stock industry groups. For example, if I think that gold is approaching an important bottom, I'll pull up the list of all 52 gold stocks and 14 silver stocks that are listed at this time and look for buying candidates. While doing that, I'll keep in mind my SLB chart shown in Figure 55.3—I want to find stocks whose patterns look close to my ideal. - -If you're going to scan a large number of stocks, it pays to add some **negative rules**. For example, you may want to omit stocks whose average daily volume is below half a million or even a million shares. Their charts tend to be more ragged and their slippage worse than in more actively traded stocks. You may want to exclude expensive stocks from your scans for buying candidates and cheap stocks from your scans for shorting candidates. Choosing at what levels to place your price filters is a matter of personal choice. This is why scanning is best left for experienced traders. Learn to fish with just a few lines in the water before casting a broad net. - -# Good Record-Keeping - -" There is no free lunch. As with so many other things, either you're going to pay up front or you're going to pay on the back end for being disorganized, and unfortunately, when you pay on the way out it's always more expensive…" writes Andrew J. Mellon in *Unstuff Your Life.* - -The market is perversely inconsistent in dishing out rewards and punishments. There is always a chance that a poorly planned trade may bring profits, while a wellplanned and carefully executed trade may end in a loss. This random reinforcement subverts our discipline and encourages sloppy trading. - -Good record-keeping is the best tool for developing and maintaining discipline. It ties together psychology, market analysis, and risk management. Whenever I teach a class, I say: "Show me a trader with good records, and I'll show you a good trader." - -Writing down your trade plans will ensure that you don't miss any essential market factors. Good record-keeping will save you from stumbling into impulsive trades. Trading discipline is similar to weight control, which is very hard for most people. If you don't know what you weigh today and whether the curve of your weight is rising or falling, how can you control it? Losing weight begins with standing naked on a scale in the morning and writing down your weight for that day. - -We all make mistakes, but if you keep reviewing your records and reflecting on past mistakes, you'll be unlikely to repeat them. Good record-keeping will turn you into your own teacher and do wonders for your account equity. - -A quick read of a chapter will not make you a disciplined trader. You'll have to invest hours in doing homework and accept the pain of having your stops hit. The work comes first, the rewards later. As your account grows, you'll experience a wonderful feeling of accomplishment. - -Let's review the three key components of record-keeping: - -- 1. Discipline begins with doing your homework (I'll offer you a homework spreadsheet). -- 2. Discipline is reinforced by writing down your trade plans (I'll offer you PDF files for working up long and short candidates). -- 3. Discipline culminates in executing those plans and completing trade records (I'll offer you a link to an online Trade Journal). - -Please feel free to personalize all of these documents. The markets are huge and diverse, and there is no "one size fits all" system of analysis, trading, and recordkeeping. The basic principles are in this book, but the way you implement them can be your own. - -## ■ **57. Your Daily Homework** - -When you wake up in the morning and know that you need to be at the office in an hour, you don't spend time planning every little step. You follow an established routine: get out of bed, wash, get dressed, have breakfast, get in a car, etc. This routine puts you in the groove for the day ahead, leaving your mind free for strategic thinking. By the time you arrive at the office, you're ready to face the day. - -It pays to have a morning routine for the market: a sequence of steps for touching base with the key factors that may dominate today's trading. This routine should put you in gear with the market before the opening bell, making you alert and ready to act. - -I use a spreadsheet for my pre-open routine. The person who gave me this idea was Max Larsen, a money manager in Ohio. I've changed Max's spreadsheet: my current version is numbered 3.7, reflecting two major revisions and a handful of lesser ones. It is based on how I view the markets, while its imbedded links help me reach various websites for the information I want. - -My homework spreadsheet (Figure 57.1) is a work in progress, as I keep adding and deleting lines. If you start using it, I'm sure that you'll modify it to suit your preferences. My firm, Elder.com, offers my latest spreadsheet, complete with its psychological self-test as a public service—simply write to [info@elder.com an](mailto:info@elder.com)d ask for it. - -After filling out this spreadsheet, I turn to my open trades. I review their stops and profit targets, making any adjustments for the coming day if necessary. Then, if I'm planning to trade today, I review my short list of candidates, focusing on planned entries, targets, and stops. Now I am in gear with the market, ready to place orders. I do this homework even if I know that I will not be able to trade during the day, for example when traveling. This discipline is just like washing and dressing in the morning, even on the days when you don't plan to go to the office. - -| 1 | Elder homework | wed | -|----------------|----------------------------------------------------|----------------------| -| $\overline{2}$ | v37 | 2/19/14 | -| 3 | Check Far East Markets | $up.2 - 1.1%$ | -| 4 | Check Europe Markets | down.5% | -| 5. | Econ calendar Briefing.com | Starts, permits down | -| 6 | Marketwatch | Crash of 2014 | -| $\overline{I}$ | Euro | 1.375 $g/g$ | -| 8 | Yen | 98.1 g/g | -| 9 | Oil | 102 g/g | -| 10 | Gold | 1317 g/b | -| 11 | Bonds @us | $133,23 \text{ g/b}$ | -| 12 | Baltic Dry Index | 1.146 | -| 13 | NH-NL | 1208 / 365 | -| 14 | VIX | 13.9 r/b | -| 15 | S&P500 cash | 1841 g/g | -| 16 | D value | at upchannel | -| 17 | D-13 FI | pos | -| 18 | Expectation of S&P candle | down | -| 19 | Mode: Active, Conservative, Defensive or day-trade | def | - -#### **FIGURE 57.1** Daily homework spreadsheet. *(Source: elder.com)* - -I begin by looking at the overseas markets, then major news, key currencies and commodities, and the key stock market indicators. With practice, the entire process can be handled in about 15 minutes. Let's explore it, line by line. - -- 1. Check Far East Markets—This link takes me to the relevant page on Finance.Yahoo .com. I write down overnight percentage changes for Australia and China. Each person's memory works differently, and mine serves me best when I write things down. -- 2. Check Europe markets—Here I write down percentage changes for the German DAX and the UK FTSE. Markets follow the sun, and you get a feel for how a wave generated in the United States travels to Asia and then to Europe, before returning to our shores. -- 3. Economic Calendar—This link takes me to the page at Briefing.com that lists fundamental reports scheduled to be released each day. It shows the previous number for each release and the consensus forecast. When an important report, such as Unemployment or Capacity Utilization, either beats or misses its estimates, you can expect market fireworks. -- 4. Marketwatch—This is a website for the masses, and I look at it to see what they are being fed this morning. Occasionally it suggests contrary opinion trades. -- 5. Euro—I write down the current price of the most active futures contract, followed by the initials for the Impulse system—green, blue, or red—first for the weekly, then for the daily. This is the format I use for all other markets mentioned below. I look at the Euro futures charts for two reasons. First, there are stretches of time when this currency dances either in gear with or against the U.S. stock market. The other reason is that sometimes Euro futures offer nice day-trading opportunities. -- 6. Yen—The second of the two reasons outlined above applies here more than the first. -- 7. Oil—This is the lifeblood of the economy, and oil futures rise and fall with its ups and downs. Oil futures can be traded. -- 8. Gold—A sensitive indicator of fear and inflationary expectations as well as a popular trading vehicle. - -- 9. Bonds—Rising or falling interest rates are among major drivers of stock market trends. -- 10. Baltic Dry Index—A sensitive leading indicator of world economy. BDI represents the cost of shipping dry goods, for example textiles from Vietnam to Europe or lumber from Alaska to Japan. BDI is very volatile, and the absence of any trading vehicles based on it helps BDI reflect true economic activity. It is extra useful if you trade shipping industry stocks. -- 11. NH-NL—I consider the New High–New Low Index the best leading indicator of the stock market and like to write down the latest weekly and daily figures every morning as a refresher. -- 12. VIX—The volatility index, also called "the fear index." There is a saying: "When VIX is high, it's safe to buy; when VIX is low, go slow." A footnote: beware VIX ETFs, notorious for trading out of sync with the VIX index. -- 13. S&P 500—I write down yesterday's closing price for the index and add the Impulse system initials for its weekly and daily charts. -- 14. Daily value—I switch to the daily chart of the S&P and note whether its latest bar closed above, at, or below value and also its relation to the channel lines. It helps me see whether the market is overbought or oversold. -- 15. Force Index—I note whether its 13-day EMA is above or below its centerline (bullish or bearish), as well as any divergences. -- 16. Expectation of the S&P candle—I test the accuracy of my market expectations by writing down whether I expect the market to close above or below today's opening price. If no opinion, I leave this field blank. The next day I color this box green or red, depending on whether my expectations turned out to be correct. -- 17. On the last line of my homework spreadsheet, I summarize it by stating how I'll trade today: actively, conservatively, defensively (closing trades only), day-trade, or no trades at all. - -## **Are You Ready to Trade Today?** - -There are times when you feel in gear with the market, but at other times you're out of touch. Your mood, health, and time pressures influence your ability to trade. For example, imagine trading while suffering from a toothache. You can't fully concentrate on the market and should be calling your dentist, not your broker. - -This is why each morning, I take a 30-second psychological self-test for an objective rating of my readiness to trade. The first person I saw use a self-test was Bob Bleczinski, a former Spiker. He may have posted his test online because in 2011, I saw SpikeTrade member Erin Bruce present her self-test at that year's reunion. The questions she asked herself were completely different, but the format looked like Bob's. - -I modified Erin's self-test to fit my personality and take it every day before the market opens. Any self-test must be short and specific. Mine has only five questions, and each of them can have only one of three answers: yes, no, or so-so. We'll discuss the logic of designing such tests in the following chapter. If you start using this test, you'll probably modify it to fit your personality and ask the questions that are most important to you (Figure 57.2). - -A zero rating on some of the questions also warns me not to trade. If I haven't done my trade planning or if my schedule is very booked up, this would be a bad day to trade—better stand aside or place only exit orders. - -You, your mind, your mood, and your personality are the essential components of trading. This is why a quick self-test helps you see whether you should be trading today. - -| Physical - unwell 0 | OK health, energy, sleep 1 | Brimming 2 | | -|---------------------|-------------------------------|-------------------|--| -| Losses for day 0 | Prior day mixed or no trade 1 | win for the day 2 | | -| Not prepared 0 | Middling prepared 1 | Very prepared 2 | | -| Bad mood 0 | Mood middling: 1 | Great mood 2 | | -| Very busy 0 | Plate normally busy 1 | Plate sparse 2 | | -| 1-2-3-4 NO trade | 5-6 AND 9-10 Caution | 7-8 Good | | - -**FIGURE 57.2** "Am I ready to trade?" self-test. *(Source: elder.com)* - -I take this test immediately following completion of my homework. Let's review it line by line: - -- 1. How do I feel physically? - - A. Feeling ill = 0 - - B. Feeling average = 1 - - C. Feeling excellent = 2 -- 2. How did I trade yesterday? - - A. Lost money = 0 - - B. Both made and lost money or didn't trade = 1 - - C. Made money = 2 -- 3. Have I done my trade planning this morning? - - A. Not prepared = 0 - - B. Middling = 1 - - C. Well prepared = 2 -- 4. How is my mood? - - A. Poor = 0 - - B. Average = 1 - - C. Great = 2 -- 5. How busy is my schedule today? - - A. Very busy = 0 - - B. Normally busy = 1 - - C. Pretty open = 2 - -The spreadsheet adds up scores for all five questions and uses Excel's conditional formatting to color the summary cell. If my score is four or lower, this cell turns red. With so many negatives, it signals me not to trade today. The score of five or six flashes a yellow light—trade very cautiously. The score of seven or eight gives me a green light, but if the score rises to nine or ten, the light turns yellow again—with everything so perfect, any change is bound to be for the worse. Don't let recent success go to your head. - -## ■ **58. Creating and Scoring Trade Plans** - -A plan for any trade must specify what strategy you'll use. It must prompt you to check the dates of earnings and dividends or contract rollovers, in order to save you from being blindsided by predictable news. It must spell out your planned entry, target, and stop as well as your trade size. - -Writing down a trade plan makes it real. Once you enter a trade and your equity starts fluctuating, you may feel stressed and forget to perform certain tasks. The plan you write prior to entering a trade becomes your island of sanity and stability in the middle of a storm; it helps ensure that you don't overlook anything essential. - -A really good plan will include a scale for measuring its quality. This objective rating, which we'll discuss below, takes less than a minute, but it encourages you to implement only those plans that have a higher likelihood of success. It prompts you to drop marginal plans and not chase borderline trade ideas. - -While all my records are in electronic format, I like having my trade plans on paper. I use preprinted forms that I named Tradebills, similar to waybills that come with the packages we order online. When a company sends you a product, it comes with a waybill that shows the name of the product, its quantity, your address, the mode of delivery, rules for returns, and other essential facts. My trades are accompanied by tradebills from the planning stage to the closing day. - -I have two separate tradebills for each trading system, one for buying and another for shorting. Here we'll review a tradebill for one of my favorite strategies. You can use it as a starting point for developing your own tradebill. - -Whenever a potential trade catches my eye, I decide which system it fits and then pick up the appropriate blank tradebill. Right there, if a seemingly attractive trade fits no trading system, then there is no trade. Having decided on a system, I write down the date and the ticker symbol, and then score that potential trade, as shown below. If the score is high enough, I proceed to complete my trade plan; otherwise, I toss that sheet of paper into a wastebasket and go looking for other trades. - -Wherever I go, I carry my tradebills for open trades. If I'm at my desk, they are next to my keyboard. If I go out during the day and bring my laptop, I put those tradebills between the keyboard and the screen, so they'll be the first thing to see when I open up my laptop. - -Having written down my trade plans for years, I gradually developed a method for scoring them before making a go/no-go decision. My habit of scoring plans was reinforced when I read *Thinking, Fast and Slow* by Prof. Daniel Kahneman. This book on decision making by a behavioral economist and a Nobel Prize winner underscored the value of simple scoring systems—they make our decisions more rational and less impulsive. - -## **Scoring Your Trade Plans (a Trade Apgar)** - -Among the examples in Prof. Kahneman's book was his description of the work of Dr. Virginia Apgar (1909–1974), a pediatric anesthesiologist at Columbia University. She is widely credited with saving countless lives. Doctors and nurses worldwide use the Apgar scale for deciding which newborns require immediate medical care. - -Most babies are born normal; some have complications, while others are at risk of dying. Prior to Dr. Apgar, doctors and nurses used clinical judgment to tell those groups apart, and their mistakes contributed to infant mortality. Dr. Apgar's scoring system made their decisions objective. - -The Apgar score summarizes answers to five simple questions. Each newborn is rated on its pulse, breathing, muscle tone, response to a pinch, and skin color. A good response to any question earns two points, poor zero, or one for an in-between. The test is generally done at one and five minutes after birth. Total scores of seven and above are considered normal, 4 to 6 fairly low, and less than 4 critically low. Babies with a good score are safe to put into general care, while those with low Apgar scores require immediate medical attention. The entire decision-making process, focusing on whom to treat aggressively, is quick and objective. Dr. Apgar's simple scoring system has improved infant survival rates around the world. - -After reading Prof. Kahneman's book, I renamed my scoring system the "trade Apgar." It helps me decide which of my trade ideas are strong and healthy or sickly and weak. Of course, as a trader, my actions are completely opposite to those of a pediatrician. A doctor focuses on the sickest kids, to help them survive. As a trader, I focus on the healthiest ideas and trash the rest. - -Before I show you my Trade Apgar, a word of caution: the scoring method you're about to see is designed for one system—my "false breakout with a divergence" strategy. All other systems will require a different test. Use my Trade Apgar as a starting point for developing a test for your own system. - -For example, I recently gave the file of my Trade Apgar to a professional option writer who consulted with me. He loved the idea of a written test, which reduced impulsivity, one of his key problems. Within a few weeks, he showed me his own Trade Apgar, which greatly differed from mine. He replaced one of my indicators with his favorite RSI and Stochastic and added questions directly relevant only to option writing. I was happy to see that he was trading more profitably. - -A Trade Apgar demands clear answers to five questions that go the heart of a trading strategy. As you develop a Trade Apgar for your own strategy, I suggest keeping the number of questions down to five and rating your answers on a zero/one/two point scale. Simplicity makes this test more objective, practical, and quick. - -While looking at a potential trade, I take a blank tradebill from a stack and circle my answers to its five questions. A circle in the red column earns a zero, in the yellow column one point, and in the green column two points. I write down each number in the score box and add up the five lines. Also, if I circle the red column, I may write in the box next to it at what price the answer will change to a more favorable yellow or green. That will raise the plan's score, allowing me to enter a trade at that level. Figure 58.1 shows a Trade Apgar for going long; Figure 58.2 shows a Trade Apgar for shorting. - -It takes less than a minute to generate a Trade Apgar for any stock. I want to trade only healthy ideas whose score is 7 or higher, and not a single line rated zero. If the - -| | zero | one | two | score level | | -|-----------------------|------|---------------------------|--------------------------------------------|-------------|--| -| Weekly Imp red | | green | blue (after red) | | | -| Daily Imp | red | green | blue (after red) | | | -| Daily price | | above value in value zone | below value | | | -| False bkout none | | in place | near | | | -| Perfection | | | neither time one timeframe both timeframes | | | -| | | | | | | - -**FIGURE 58.1** Trade Apgar for going long, using a strategy of "false breakout with a divergence." *(Source: elder.com)* - -Rate your answers to five questions on a scale from zero to two: - -1. Weekly Impulse (described in this book)—zero for Red, one for Green, two for Blue on the weekly chart. - -Red Impulse prohibits buying, Green is OK but could be too late, while Blue (after red) shows that bears are losing power, which is a good time to buy. - -- 2. Daily Impulse—same questions and ratings on the daily chart. -- 3. Daily price—zero if the latest price is above value, one if it's in the value zone, two if below value on the daily chart. - -Prices above value may be too late to buy, in the value zone OK, below value could be a bargain. - -- 4. False breakout—zero if none, one if it already happened, two if on the verge of happening. -- 5. Perfection—zero if neither timeframe, one if only one, two points if both look perfect. - -I always analyze markets in two timeframes; one of them must show a perfect pattern for any strategy in order for me to enter a trade. Very rarely both timeframes are perfect—it is fine for one to be perfect and for the other to be merely good. If neither timeframe looks perfect, it can't be an A trade—drop this stock and move on to another one. - -score is 7 or higher, I go on to complete my trade plan. I establish my entry, target, and stop, decide what size to trade, etc. - -Trade Apgars provide objective ratings for potential trades. With thousands of trading vehicles available to us, there is no need to waste energy on poor candidates. Use a Trade Apgar to help you zoom in on the best prospects. - -## **Using a Tradebill** - -Once you become interested in a stock and a Trade Apgar confirms your idea for a trade, completing a tradebill will help you focus on the key aspects of that trade. - -Let's review a tradebill for long positions (Figure 58.3). - -I designed my Tradebills in PowerPoint, fitting two to a page. I always keep some blanks handy, but don't preprint too many because I keep tweaking these forms. - -My tradebill for short trades is the same, except for a different Trade Apgar, as shown in Figure 58.2. When you start developing your own tradebills, you may want - -| | zero | one | two | score level | | -|-------------------------|-------|---------------------------|---------------------------------------------|-------------|--| -| Weekly Imp green | | red | blue (after green) | | | -| Daily Imp | green | red | blue (after green) | | | -| Daily price | | below value in value zone | above value | | | -| False bkout | none | in place | pos w/bear divg | | | -| Perfection | | | neither time lone timeframe both timeframes | | | -| | | | | | | - -**FIGURE 58.2** Trade Apgar for shorting, using strategy of "divergence with a false breakout." This is a mirror image of Trade Apgar for buying, using the same strategy. - -#### Part 1: Trade identification. - -- The green stripe marks it as a long trade. -- A thumbnail picture of a bullish divergence with a false breakout is a reminder of the strategy. -- The first box is for the ticker symbol. -- The next box is for the next earnings date. You can look it up at several free websites, such as [www.Briefing.com,](http://www.Briefing.com) [www.earnings.com,](http://www.earnings.com) or [www.Finviz.com.](http://www.Finviz.com) Most traders avoid holding stocks whose earnings are about to be reported. A nasty earnings surprise can do serious damage to your position. Writing down that date forces you to focus on avoiding trouble. -- The next box is the dividend date, if any. I usually look it up at [http://finance.yahoo.com.](http://finance.yahoo.com) Dividends create tax consequences for longs, while shorts have to pay dividends, so they definitely want to avoid holding on that day. -- The last box is for the date of my plan. - -#### Part 2: Trade Apgar - -- My Trade Apgar was described above. Remember that each strategy demands its own Apgar. You're perfectly welcome to replace my questions with those that are relevant to your own system. For example, you may ask whether Stochastic is in the overbought zone (zero), oversold (one), or oversold with a bullish divergence (two). -- After you sum up the numbers for the Trade Apgar, answer this key question in writing: Is this an A-trade? If the total score is below 7, drop this stock and look for another trade. - -#### Part 3: Market, entry, target, stop, and risk control - -- The five boxes along the left edge require me to answer questions about the general state of the market. Is the Spike Bounce signal in effect? Is the indicator that traces stocks above their MAs bullish or bearish? What is the short interest in this stock and how many days to cover? All of these studies have been described in this book. The last box is for a few words of a summary. -- Three boxes linked by arrows are at the heart of my decision-making process. They demand three essential numbers for every trade: the entry, the target, and the stop. -- Dollar risk—How many dollars are you willing to risk on this trade? This number can never exceed two percent of your account equity. I usually keep it considerably below that threshold. -- Size—How many shares or futures contracts will you buy, based on the permitted dollar risk and the distance from the entry to the stop. This is explained in detail in "The Iron Triangle of risk control" in Chapter 50. - -#### Part 4: After the entry - -- The A target is 30% of the daily channel height added to the entry price. -- The soft stop is what you may keep in mind, while the hard or catastrophic stop is the actual order. It may not be any lower than the stop listed in Section 3. -- Put in the price level at which you'll move your stop to breakeven. -- Check the boxes on the right as you perform these essential steps: place a stop, create a diary entry, and place a profit-taking order. - -#### Part 5: The copyright line - -■ This line shows when this tradebill was updated. As a reader of this book, you're welcome to write to info@[elder.com an](mailto:info@elder.com)d request the latest version, which we send to traders as a public service. - -to copy sections 1, 3, and 4, but develop your own section 2—the Trade Apgar for your own system or strategy. - -## ■ **59. Trade Journal** - -Memory is the cornerstone of civilized life. It allows us to learn from our successes and even more from our failures. Keeping a diary of your trades will help you grow and become a better trader. - -Keeping detailed trade records feels burdensome—but that's what serious traders do. Many people asked me after I published a book of interviews with traders (*Entries & Exits*, 2006), what all of them had in common. They lived in different countries, traded different markets, and used different methods—but all kept excellent records. - -The best example came from the woman whose interview was in the first chapter of that book. While finishing the manuscript, I realized that our interview had been incomplete and I needed to ask additional questions about her trades. A year later, on another visit to California where she lived, I asked to meet again. I assumed she'd show me some recent trades, but she went to a filing cabinet and pulled out a folder with all her trades for the week of my previous visit. We completed our interview by reviewing her charts from a year ago as if those trades were made yesterday. A bull market was in full swing, she was doing great, but still worked to improve her performance. Her detailed diary was her selfimprovement tool. - -Let your diary entries serve as your "extra-cranial memory," a tool for building the structure of success. - -For years, I struggled with developing a record-keeping system that would be easy to update and analyze. In the beginning, I kept the diary of my trades in a paper journal, gluing in chart printouts and marking them up—I still keep one of those antiques next to my trading desk. Later I kept my diary in Word, and then in Outlook. Finally, in 2012, Kerry Lovvorn and I created a web-based Trade Journal1 . - -This Trade Journal is a joy to keep, and both Kerry and I use it for all our trade diaries. Our Trade Journal is available to all, and its use is free (up to a limit). The journals are online, password protected, and absolutely private—although SpikeTrade members have an option of sharing their trade journals for selected trades. - -1 We relied on capable programming by Helena Trent and used several ideas suggested by Jeff Parker. - -| | A | -|---|---| -| | | -| | | -| | | -| | B | -| | | -| | | -| | | -| | | -| | | -| | D | -| | | -| | | -| C | | -| | | -| | | -| | | -| | | -| E | | -| | | -| | | -| | | - -**FIGURE 59.1** Trade Journal (a partial view). *(Source: Spiketrade.com)* - -- Section A—The Trade Journal asks why I decided to trade this stock. I usually leave this box blank because I like to write such comments on the charts, using SnagIt software. In the case of ADSK, I attached a combination chart, featuring weekly, daily, and 25-minute charts. -- Section B—Documenting entry and exit dates and prices; accounting for slippage and seeing buy, sell, and trade grades. -- Section C—Reasons for exit with an attached combination chart showing both entry and exit. -- Section D—The list of exit tactics is longer than that of trade strategies. I may exit because my trade hit its target, or its stop, or is reaching the value zone or the envelope. I may exit if a trade is going nowhere or starting to turn. There are also two negative exits: couldn't stand the pain or recognizing a junk trade after I entered. -- Section E—Post-trade analysis. I like to return to every trade two months after the exit and review it with the benefit of hindsight. I create a follow-up chart, mark my entry and exit with arrows, and then write a comment on how my trade looks after the passage of time. This is the best way of learning what I did right or wrong. - -Our Trade Journal is shown in Figure 59.1. Even if you prefer to build your own, look at it to see what must be included in your own record-keeping system. - -The Trade Journal is designed to make your record-keeping simple and logical, helping you plan, document, and learn from your trades. We have already reviewed several sections of the Trade Journal. Figure 38.1 showed its three sections—Setup, Risk, and Parameters. Figure 55.2 showed the strategy box in the Trade Journal. - -Most of us quickly forget past trades, but the Trade Journal prompts you to return to them. The trades you entered and exited at the hard right edge of the chart are now in the middle of that chart, where you can re-examine your decisions and learn how to improve them. - -## **Three Benefits** - -Keeping a trade journal delivers three major benefits. One is immediate—a greater sense of order. The second comes a month or two later, when you start reviewing your closed trades. Finally, after you accumulate dozens of records, you'll have several ways to analyze them and learn from your equity curves. - -A Sense of Order and Structure comes from documenting the plan, the entry, and the exit for each trade. Where exactly will you enter, what is your target, where will you place your stop? Defining and writing down those numbers will steer you towards disciplined trading. You'll become less likely to slip into an impulsive buy, overstay a profitable trade, or let a loss snowball without a stop. Filling out risk management numbers will give you a handle on trade sizing. Documenting exits will make you face your trade grades. - -**FIGURE 59.2** DISCA daily with 13- and 26-day EMAs and a 6% channel. Impulse system with MACD-Histogram 12-26-9. *(Chart by Stockcharts.com)* - -#### Follow-Up Analysis (Shorting a Top) - -My strategy for shorting Discovery Communications, Inc. (DISCA) was "fading an extreme;" my exit tactic "started turning." Entry and exit are marked by arrows. A review two months later confirmed that both decisions were correct. Lesson: the next time I see this pattern, jump aboard. - -Reviewing Every Trade a month or two after your exit is one of the best learning experiences you can have. Trading signals that may have appeared vague and uncertain at the right edge of a chart become crystal clear when you view them in the middle of your screen. Returning to your past trades and adding an "after the trade" chart makes you reevaluate your decisions. Now you can clearly see what you did right or wrong. Your journal will be teaching you priceless lessons. - -I make my strategic decisions on the weekly charts, tactical on the dailies. Since my daily charts are formatted to show five to six months of data, once a month I spend a few hours reviewing trades that I closed two months ago. For example, at the end of March or in the beginning of April, I'll review all trades that I closed out in January. I'll pull up their current charts, mark my entries and exits with arrows, and write a comment on every trade. Let me share two examples with you (Figures 59.2 and 59.3). - -Such reviews teach you what's right with your trading, and what needs to be changed. Soon after I started doing my "two months later" reviews, I became aware of two problems with my exits. I noticed that my stops were a bit tight and that helped me figure out that by slightly increasing the amount of risk, I could substantially reduce the number of whipsaws and come out ahead. I also noticed that while my short- - -**FIGURE 59.3** MCP daily with 13- and 26-day EMAs and a 16% channel. Impulse system with MACD-Histogram 12-26-9. *(Chart by Stockcharts.com)* - -#### Follow-Up Analysis (Buying a Pullback) - -My strategy for buying Molycorp, Inc. (MCP) was "pullback to value"—I thought that a new uptrend had begun. The following day, I was no longer so sure and sold for a small profit. A review two months later showed that I missed the resumption of the bear trend; my decision to cut and run with a small profit was correct, but I overlooked a major trade. Lesson: continue to monitor closed-out trades for a week or so and be prepared to re-enter or to reverse. - -term swing trades tended to be good, I often missed bigger trends that emerged from those short-term moves. I used that knowledge to adjust my methods going forward. - -Reviewing Your Equity Curve is essential because only a rising curve certifies you as a successful trader. If your equity curve is in a downtrend, your system may be at fault, or your risk management poor, or your discipline lacking—whatever it is, you must track it down and solve that problem. - -Still, a combined equity curve for all your trades and accounts is a pretty crude tool. The Trade Journal allows you to zoom in and trace your equity curves for specific markets, strategies, and exit tactics. For example, I can run separate equity curves for longs and shorts, for different strategies and exits, and even for sources of my trade ideas. Believe me: once you see an equity curve for exits marked "Couldn't stand the pain," you'll never trade without stops! - -## A Journey without an End: How to Continue Learning - -As we near the end of this book, I compliment you on your persistence and commitment. We have worked through the essential trading topics: psychology, tactics, risk management, and record-keeping. Still, becoming a successful trader will take more than reading a single book. - -How long do you think it might take? - -You may have seen this huge number—10,000. According to some authors, that's the number of hours it takes to become an expert in major pursuits, such as professions or sports. If that is true and you spend 40 hours per week, 50 weeks a year, it'll take five years to become a pro. If you can invest only 20 hours per week, it'll take ten years. That's a scary thought. - -If you, like so many people, came to trading after a successful career in another field, be it engineering, farming, or business, you may well have invested that many hours in it. Do you really want to spend another 10,000 hours on a new project at this stage of your life? - -Before you shudder at this prospect, let me share a very different number with you—20 hours. It comes from a book, *The First 20 Hours: How to Learn Anything... Fast!* Its author, Josh Kaufman, makes a sensible point that while becoming a worldclass expert will take years, you can achieve a basic level of competence in most fields in a much shorter time. - -"The early hours of practicing something new are always the most frustrating. That's why it's difficult to learn how to speak a new language, play an instrument, hit a golf ball, or shoot great photos. It's so much easier to watch TV or surf the web*...*" he writes. To learn a new skill, you need to find the experts and get their materials, create an action plan, and make an absolute commitment to studying and practicing without any distractions. - -By completing just 20 hours of focused, deliberate practice, you can go from near zero to performing reasonably well in many fields. Kaufman describes how he took 20 hours to learn several new skills, including windsurfing and programming a website. Even if you take up a more complex activity, such as flying, 20 hours will get you through the ground school and the first few lessons with an instructor. This won't make you a pilot, but 50 hours of flight time should earn you a private pilot's license. - -The number of hours for mastering basic trading skills is even higher, but much closer to flying than to 10,000 hours. - -The intellectual demands of trading aren't high. After all, we deal with only five numbers—open, high, low, and closing prices, plus volume. The main difficulty comes from our emotions. Trading stirs up powerful feelings, the strongest of which are greed and fear. - -New traders focus on money, dream about what their profits will buy, and throw caution to the wind. They buy as many shares as they can afford and double up on margin. Filled with joyful anticipation, they write down no trade plans. When a trade turns against them, their emotions swing from greed to fear. That's when they freeze, while the market grinds down their accounts. - -Technically, trading isn't very hard. Psychologically, it's the hardest game on the planet. - -To reduce the stress of trading, keep in mind several essential points. Your trading life depends on following these rules: - -- Trade small sizes while learning. -- Do not count money while in a trade. -- Use risk management rules, primarily the 2% Rule. -- Write down your plans, especially these three numbers: entry, stop, and target. -- Keep a trading diary and review it at least once a month. - -Most traders are terribly isolated and never get to see how others practice their craft. This isolation contributes to impulsive trading. A private trader who violates every rule in the book and makes gross errors remains invisible to others. Nobody will warn him to stay out of trouble or praise him for a good trade. - -In the old days, our brokers knew what we were doing, but now we place orders online. The only human who may contact you about your trades is the margin clerk at a brokerage firm. Getting a call or an e-mail from him is never good news. I hope that you never meet a margin call, sending good money after bad. - -To break out of your isolation, to see what good traders are doing, and to be rewarded for your performance, I suggest you look into SpikeTrade.com—a website I run with my friend Kerry Lovvorn. That's where traders share ideas and advice, engage in a friendly competition, and comment on each other's trades. Time and again we see people come in at a fairly basic level, start submitting picks on a voluntary basis, earn performance bonuses, and rise to become serious traders. - -I wish you success. Trading is one of the hardest pursuits on Earth, but it's an endlessly fascinating adventure that can be very rewarding. I've been on this journey for decades, and still look forward to every Monday, when markets reopen. While trading has made me free, I still catch myself making occasional mistakes and have to concentrate on my discipline. I reserve the right to be smarter tomorrow than I am today. It is a great journey, and I look forward to sharing it with you. - -> *Dr. Alexander Elder New York–Vermont, 2014* - -# Sources - -- Angell, George. *Winning in the Futures Market* (1979) (Chicago: Probus Publishing, 1990). -- Appel, Gerald. *Day-Trading with Gerald Appel* (video) (New York: Financial Trading Seminars, Inc., 1989). -- Ariely, Dan. *The Honest Truth about Dishonesty* (New York: HarperCollins, 2013). -- Belveal, L. Dee. *Charting Commodity Market Price Behavior* (1969) (Homewood, IL: Dow Jones Irwin, 1989). -- Bruce, Erin. SpikeTrade Reunion presentation, 2011. -- Cameron, Peter. Personal communication, 2012. -- Davis, L. J. "Buffett Takes Stock," *The New York Times*, April 1, 1990. -- Douglas, Mark. *The Disciplined Trader* (New York: New York Institute of Finance, 1990). -- Edwards, Robert D., and John Magee. *Technical Analysis of Stock Trends* (1948) (New York: New York Institute of Finance, 1992). -- Ehlers, John. *MESA and Trading Market Cycles* (Hoboken, NJ: John Wiley & Sons, 1992). -- Elder, Alexander, *Come into My Trading Room* (Hoboken, NJ: John Wiley & Sons, 2003). - -- ———, *Directional System* (video) (New York: Financial Trading Seminars, Inc., 1988). -- ———, *Entries & Exits* (Hoboken, NJ: John Wiley & Sons, 2006). -- ———, *Force Index* (video) (New York: Elder.com, Inc., 2010). -- ———. *MACD & MACD-Histogram* (video) (New York: Financial Trading Seminars, Inc., 1988). -- ———, "Market Gurus," *Futures and Options World*, London, September 1990. -- ——— & Kerry Lovvorn, *The New High–New Low Inde*x (Alabama: SpikeTrade, 2012). -- ———, *The New Sell & Sell Short: How to Take Profits, Cut Losses, and Benefit from Price Declines* (Hoboken, NJ: John Wiley & Sons, 2011). - -———, *Technical Analysis in Just 52 Minutes* (video) (New York: Financial Trading Seminars, Inc., 1992). - -- ———, "Triple Screen Trading System," *Futures Magazine*, April 1986. -- ———, *Triple Screen Trading System* (video) (New York: Financial Trading Seminars, Inc., 1989). -- ———, *Two Roads Diverged: Trading Divergences* (New York: Elder.com, 2012). -- Elliott, Ralph Nelson, *Nature's Law* (1946) (Gainesville, GA: New Classics Library, 1980). -- Engel, Louis, *How to Buy Stocks* (1953) (New York: Bantam Books, 1977). -- Freud, Sigmund, *Group Psychology and the Analysis of the Ego* (1921) (London: Hogarth Press, 1974). -- Friedman, Milton, *Essays in Positive Economics* (Chicago: The University of Chicago Press, 1953). -- Frost, A. J., and R. R. Prechter, Jr., *Elliott Wave Principle* (Gainesville, GA: New Classics Library, 1978). -- Gajowiy, Nils, Personal communication, 2012. -- Gallacher, William, *Winner Takes All—A Privateer's Guide to Commodity Trading* (Toronto: Midway Publications, 1983). -- Gann, W. D., *How to Make Profits in Commodities* (Chicago: W. D. Gann Holdings, 1951). -- Gawande, Atul, *The Checklist Manifesto: How to Get Things Right* (New York: Henry Holt and Company, 2011) - -- Gleick, James, *Chaos: Making a New Science* (New York: Viking/Penguin, 1987). -- Goepfert, Jason, SentimenTrader.com -- Granville, Joseph, *New Strategy of Daily Stock Market Timing for Maximum Profit* (Englewood Cliffs, NJ: Prentice Hall, 1976). -- Greenson, Ralph R., "On Gambling" (1947), in *Explorations in Psychoanalysis* (New York: International Universities Press, 1978). -- Grove, Nic, Personal communication, 2004. -- Gunter, Jock, Personal communication, 2013. -- Havens, Leston, *Making Contact* (Cambridge, MA: Harvard University Press, 1986). -- Hurst, J. M., *The Profit Magic of Stock Transaction Timing* (Englewood Cliffs, NJ: Prentice-Hall, 1970). - -Investopedia.com. - -- Kahneman, Daniel, *Thinking, Fast and Slow* (New York: Farrar, Straus and Giroux, 2011). -- Kaufman, Josh, *The First 20 Hours: How to Learn Anything ... Fast!* (New York: Portfolio/Penguin, 2013). -- Kaufman, Perry, *Trading Systems and Methods* (Hoboken, NJ: John Wiley & Sons, 2013) -- Larsen, Max, SpikeTrade Reunion presentation, 2007. -- LeBon, Gustave, *The Crowd* (1897) (Atlanta, GA: Cherokee Publishing, 1982). -- Lefevre, Edwin, *Reminiscences of a Stock Operator* (1923) (Greenville, SC: Traders Press, 1985). -- Mackay, Charles, *Extraordinary Popular Delusions and the Madness of Crowds* (1841) (New York: Crown Publishers, 1980). -- McMillan, Lawrence G., *Options as a Strategic Investment* (Englewood Cliffs, NJ: Prentice Hall, 2012). -- Mellon, Andrew J., *Unstuff Your Life* (New York: Avery/Penguin, 2010). -- Murphy, John J., *Technical Analysis of the Financial Markets* (New York: New York Institute of Finance, 1999). -- Neill, Humphrey B., *The Art of Contrary Thinking* (1954) (Caldwell, ID: Caxton Printers, 1985). - -- Nison, Steve, *Japanese Candlestick Charting Techniques* (New York: New York Institute of Finance, 1991). -- Notis, Steve, "How to Gain an Edge with a Filtered Approach," *Futures Magazine*, September 1989. -- Paulos, John Allen, *Innumeracy. Mathematical Illiteracy and Its Consequences* (New York, Vintage Press, 1988). -- Plummer, Tony, *Forecasting Financial Markets* (London: Kogan Page, 1989). -- Pring, Martin J., *Technical Analysis Explained*, 5th ed. (New York: McGraw-Hill, 2013). -- Rhea, Robert, *The Dow Theory* (New York: Barron's, 1932). -- Shapiro, Roy, *Why Johnny Can't Sell Losers: Psychological Roots*, unpublished article, 1991. -- Steidlmayer, J., Peter, and Kevin Koy, *Markets & Market Logic* (Chicago: Porcupine Press, 1986). -- Surowiecki, James, *The Wisdom of Crowds* (Anchor, 2005). -- Stoller, Manning, Personal communication, 1988. -- Teweles, Richard J., and Frank J. Jones, *The Futures Game*, 2nd ed. (New York: McGraw-Hill, 1987). -- *Twelve Steps and Twelve Traditions* (New York: Alcoholics Anonymous World Services, 1952). -- Vince, Ralph, *Portfolio Management Formulas* (Hoboken, NJ: John Wiley & Sons, 1990). -- Weissman, Richard L., *Mechanical Trading Systems: Pairing Trader Psychology with Technical Analysis* (Hoboken, NJ: John Wiley & Sons, 2004). - -Wikipedia.com. - -- Wilder, J. Welles, Jr., *New Concepts in Technical Trading Systems* (Greensboro, SC: Trend Research, 1976). -- Williams, Larry, *How I Made One Million Dollars* (Carmel Valley, CA: Conceptual Management, 1973). -- ———, *The Secret of Selecting Stocks* (Carmel Valley, CA: Conceptual Management, 1972). - -Yannidis, Nikos, Personal communication, 2011. - -# Acknowledgments - -Nobody's born smart. We accomplish what we do we after learning from others and being helped by them. Then, if we do a good job, we may be able to build upon what we learned, advance a few steps, and share our knowledge with those who may follow us. - -This book is dedicated to Lou Taylor, probably the most remarkable person I met in my life. He was a brilliant, fearless, and a completely "out of the envelope" man, the amazing story of whose life (he died in 2000) deserves its own book. - -*The New Trading for a Living* reflects how I think, feel, and act in the markets. I am tempted to thank by name all those who helped me become who I am today, and perhaps kick at a few who would have loved to see me fail. If I give in to this temptation it'll become an autobiography instead of a brief acknowledgment. So let me mention only those who directly and substantially helped me during the past 18 months while I was working on this book. - -Kerry Lovvorn began as my student but became a partner and a friend. While my background is in psychiatry, his is in steel. As he became more attuned to psychological issues, I became more structured and data oriented. It's a great partnership, and running SpikeTrade together is today at the center of my intellectual life. - -Jeff Parker, an old friend, carefully read and critiqued this book as well as its Study Guide—a tough but friendly critic. Chip Anderson of StockCharts.com not only helped me master his software but converted my personal charts into the format suitable for the book. My agent Ted Bonanno took care of business, while Nancy Dimitry and Gabriella Kadar of D&P Editorial Services did a yeoman's job of converting my files into a physical book. It was a pleasure working with John Wiley & Sons again, and I greatly appreciate what Paul diNovo, their creative director, did for the visual style of this book. Carol Keegan Kayne continues to check all my books, including this one, for clarity and precision. - -In conclusion, a big thanks to two groups: SpikeTraders who keep me on my toes with their questions and Traders' Camps graduates who sharpened my teaching skills. - -Thank you and see you! - -*Dr. Alexander Elder New York–Vermont 2014* - -# About the Author - -Alexander Elder, MD, is a professional trader and a teacher of traders. He is the author of several best-sellers, considered modern classics among traders. He also wrote books about Russia and New Zealand. - -Dr. Elder was born in Leningrad and grew up in Estonia, where he entered medical school at the age of 16. At 23, while working as a ship's doctor, he jumped a Soviet ship in Africa and received political asylum in the United States. He worked as a psychiatrist in New York City and taught at Columbia University. His experience as a psychiatrist provided him with unique insight into the psychology of trading. - -Dr. Elder is an active trader, but he continues to teach and is a sought-after speaker at conferences in the United States and abroad. Dr. Elder is the originator of Traders' Camps—week-long classes for traders. He is the founder of SpikeTrade group, a community of traders whose members share their best stock picks each week in competition for prizes. - -Websites: [www.elder.com](http://www.elder.com) [www.spiketrade.com](http://www.spiketrade.com) Email: [info@elder.com](mailto:info@elder.com) - -### **INDEX** - -## **A** - -Account equity, 204 reviewing equity curve, 247 6% Rule for, 208–210 2% Rule for, 203–207 Accumulation/Distribution (A/D), 110–112 and crowd behavior, 110 trading rules, 111 Advance/Decline (A/D) line, 140–142 Advertisers, signals from, 144–145 Advisors, 39 Advisory opinion, 143–144 ADX (Average Directional Indicator), 91, 92 Alcoholics Anonymous (AA) 20-21 applied to trading, 20–21, 23–27 first step, 25–26 going into the hole, 24 "meeting for one," 26–27 rock bottom, 24–25 urge to trade, 23–24 to control self-destructiveness, 19 denial, 21–22 first step, 22 for gamblers, 17 - -Alcoholics Anonymous (AA) principles (*Cont*.): lessons from, 21–23 meetings, 23 one day at a time, 22–23 rock bottom, 22 Apgar, Virginia, 238–239 Apgar score: for newborns, 239 Trade Apgars, 238–243 Appel, Gerald, 80, 170 Apple Inc., 127 Ariely, Dan, 16 *Art of Contrary Thinking, The* (Humphrey B. Neill), 143 ASIC, 186 Ask, 8, 32. *See also* Bid-ask spreads ATR (Average True Range) stops, 221 ATR (Average True Range), 93–94, 169 A-trades, 225–230 Attachment to positions, 199 At-the-money options, 179 Autoenvelope, 168 Autopilot myth, 12–13 Available risk, 208–210, 221 Average Directional Indicator (ADX), 91, 92 - -Average Downside Penetration, 220 Average True Range (ATR), 93–94, 169 Average True Range (ATR) stops, 221 - -## **B** - -Backtesting systems, 151–152 Bar charts, 50 closing prices on, 50, 53 distance between highs and lows on, 53 highs on, 52, 53 lows on, 53 meaning of, 51–53 opening prices on, 50 Bears (traders), 31–33, 39, 43–45 balance of power between bulls and: A/D, 110 closing prices, 96 divergences, 87, 98, 101 Force Index, 113, 115, 116 MACD-Histogram, 84 MACD Line, 81 miscellaneous indicators, 74 and NH-NL zero line, 136 On-Balance Volume, 108 open interest, 119–120 volume, 104 and channel lines, 169 conflict between bulls and, 119–120 emotional commitment of, 58 and kangaroo tails, 66 maximum power of, 53 and open interest, 118, 119 pain and regret of, 57 trend behavior of, 62 and volume of trading, 105–107 Bearish divergences, 87–89, 98 between A/D and prices, 111 between Force Index and price, 115, 116 NH-NL indicating, 136–137 RSI signals of, 100, 101 - -Bear markets: of 2007-2009, 86–87 advisors in, 143 price highs and lows in, 51 "Beginner's luck," 28 Belveal, L. Dee, 119–120 Bending rules, 19–20 Betas, 174 Bias, detecting, 47 Bid, 8, 32 Bid-ask spreads, 8 with CFDs, 186 with forex trades, 194, 195 "slicing the bid-ask spread" technique, 183 Big traders, 192. *See also* Institutional traders Black boxes, 38, 71 Bleczinski, Bob, 236 Blume, Sheila, 17 Bollinger bands, 167, 172 Bottoms. *See also specific indicators* "climax," 107 and divergences, 87, 89 since the 1950s, 51 in trends, 71 in triple divergences, 89 Bottom-pickers, 105, 120 Bounces, 226 Brain myth, 11 Breakeven, moving stops to, 223 Breakouts: amateurs' vs. pros' interpretations of, 170 and buying decisions, 63 false, 56, 59–60, 97 downside, 61, 229 reinforcing Stochastic signals, 97 from support and resistance, 56 upside, 61 pain and regret created by, 57 in Triple Screen system, 159 true, 59–60 - -Breakouts (*Cont*.): upside, 59 and volume, 106 Brokers: commissions of, 6–8 in forex trading, 194, 195 free analytic software from, 70 money taken by, 35 of stocks, options, or futures, 194, 195 supported by private traders, 36 Bruce, Erin, 236 Bruns, John, 165, 231 "Bucketing" orders, 194, 195 Buffett, Warren, 54, 168, 175 Bulls (traders), 31–33, 39, 43–45 balance of power between bears and: A/D, 110 closing prices, 96 divergences, 87, 98, 101 Force Index, 113, 115, 116 MACD-Histogram, 84 MACD Lines, 81 miscellaneous indicators, 74 and NH-NL zero line, 136 On-Balance Volume, 108 open interest, 119–120 volume, 104 and channel lines, 169 conflict between bears and, 119–120 emotional commitment of, 58 and kangaroo tails, 65 maximum power of, 52 and open interest, 118, 119 pain and regret of, 57 trend behavior of, 62 and volume of trading, 105–107 Bullish consensus, 74 Bullish divergences, 86–87, 89, 98 between A/D and prices, 111 false downside breakouts with, 229 between Force Index and price, 115, 116 - -Bullish divergences (*Cont*.): NH-NL indicating, 137 RSI signals of, 101 Bull markets: of 2007, 87–88 in commodities, 192 price highs and lows in, 51 and weekly NH-NL, 137, 138 Businessman's risk, 25–26, 201–202 Buyers, 32 expectations of, 32 and open interest, 118–120 of options, 178 Buying. *See also specific trading vehicles* "at the market," 7 emotional commitment in, 105 indicators for, *see specific indicators* by insiders, 147 and trading ranges, 63 during trends, 63–64 value zone in, 80 Buy orders: Force Index indicator for, 114, 115 and Stochastic signals, 98 in Triple Screen system, 160–161 Buy-stops, 161 - -## **C** - -Call options, 178, 180–183 Candlestick charting, 52, 53, 112 Candlestick graphs, 50. *See also* Japanese candlesticks Cash trades, futures compared to, 188–189 Catastrophic stops, 224–225 Ceilings, for commodities, 191 CFDs (contracts for difference), 186–187 CFTC, *see* Commodity Futures Trading Commission Channels, 166–167 in A-trades, 226 Average True Range, 94, 169 combining divergences and, 170–171 Channels (*Cont*.): constructing, 167 in day-trading, 131 defined, 79 and moving averages, 79 in setting profit targets, 217, 218 symmetrical, 167–168 Channel trading systems, 166–172 constructing channels, 167 and mass psychology, 168–170 standard deviation (Bollinger bands), 172 symmetrical, 167–168 trading rules, 170–171 Chaos theory, 54–55 Chart analysis, 49–67 bar charts, 51–53 chaos theory, 54–55 detecting bias in, 47 diagonals in, 50 Efficient Market theory, 54 history of charting, 50–51 and insider trading, 36 Japanese candlesticks, 53 kangaroo tails, 65–67 "nature's law," 55 Random Walk, 54 subjectiveness in, 49 support and resistance, 55–60 causes of, 56–57 strength of, 58 trading rules and, 58–59 true and false breakouts, 59–60 trends and trading ranges, 60–65 and conflicting timeframes of markets, 64–65 deciding to trade or wait, 63–64 hard right edge, 62 identifying, 63–64 and mass psychology, 62 as window into mass psychology, 43 *Charting Commodity Market Price Behavior* (L. Dee Belveal), 119–120 - -Chart patterns: defined, 51 at right edge of charts, 62 RSI trendlines, 101 subjective interpretation of, 49 swings of mass psychology shown in, 33 Checklists, 149 *Checklist Manifesto, The* (Atul Gawande), 149 Childhood, mental baggage from, 18 Churchill, Winston, 219 Classical chart analysis, *see* Chart analysis "Climax bottoms," 107 Climax indicator, 108–110 Closing prices: Advance/Decline line, 140–142 on candlestick charts, 53 of daily and weekly bars, 51 of daily charts, 53 as most important consensus of value, 100–101 relationship of opening prices and, 52, 110 for settlement of trading accounts, 96, 110 Cohen, Abraham W., 143 *Come into My Trading Room* (Alexander Elder), 163, 220 Commercials (hedgers), 146, 147 Commissions, 5–7, 33–34, 37, 186 Commitment indicators, *see* Consensus and commitment indicators Commitments of Traders (COT) indicator, 74, 192–193 Commodities. *See also* Futures agricultural, 122, 189 bull markets in, 192 cost of carry for, 191 floors and ceilings for, 191 Commodity Futures Trading Commission (CFTC), 145, 146, 192, 195 - -Computers in trading, 69–71 *See also* Technical analysis hardware, 71–72 toolboxes, 70–71 Conditional formatting, 165–166 Conflicting timeframes, 64–65 Congestion zones, 55, 58, 59 Consensus and commitment indicators, 142–148 futures traders' commitments, 145–147, 192–193 legal insider trading, 147 short interest, 147–148 signals from advertisers, 144–145 signals from press, 144 tracking advisory opinion, 143–144 Consensus of value: on MACD-Histogram, 84 moving averages as, 75, 81 price as, 32–33, 100–101 and trades above/below EMA, 139 Contango market, 191 Continuing to learn, 249–251 Contracts for difference (CFDs), 186–187 Contrary opinion indicators, 143 Contrary opinion theory, 143 Cost of carry, 191 COT (Commitments of Traders) indicator, 74, 192–193 Covered writers (options), 181 Crash of 1929, 193 Crossovers: of MACD and Signal lines, 81–84 moving-average, 78 Crowds: lack of time sense in, 121 leaders of, 41 markets as, 33, 39–43 and crowd mentality, 41–42 experts on, 40 independent thinking vs., 42 reasons for joining crowds, 40 - -Crowds (*Cont*.): and wisdom of crowds, 42–43 relative slowness of, 125 respecting strength of, 34 worldwide, 34 *Crowd, The* (Gustave LeBon), 40 Crowd behavior. 110 *See also* Accumulation/Distribution; Mass psychology creating downtrends, 45 creating uptrends, 44–45 and Efficient Market theory, 54 and opening prices, 110 reflected in price, 32–33 reflected in volume, 33 tracked by Directional system, 91–92 Crowd mentality, 41–42 "Cuffing the trade," 223 Cult of personality, 13–16 Currencies: CFDs on, 186–187 electronic currency futures, 196 forex trading, 194–196 Currency market, 194 Cycles, 122 - -## **D** - -Daily charts, 51–53, 59, 60. *See also* Timeframes; *individual indicators* Daily Directional Indicator, 91 Daily homework, 234–236 Daily volume, 103, 104 Days to Cover, 147–148 Day-trading, 126, 131–132 computers for, 71 to handle overnight gaps, 226 and learning to trade, 72–73 market data for, 72 profit taking in, 217 profit targets in, 217, 218 timeframes in, 125, 156, 162 Triple Screen system in, 161–162 Dead gurus, 15 Declines. *See also individual indicators* contracts for difference on, 186 in downtrends, 60–61 open interest in, 121 psychology of, 44 in trading ranges, 61 in uptrends, 60 volume during, 106, 107 Delta, 183 Denial (AA principle), 21–22 Derivatives markets, magic method gurus in, 14–15 Diagonal trendlines, 50 Directional Indicators (+DI, −DI), 90–91 Directional Movement (DM), 89, 90 Directional system, 89–94 Average True Range indicator, 93–94 constructing, 89–91 crowd behavior tracked by, 91–92 identifying trends with, 64 trading rules, 93 in Triple Screen trading, 157 Discipline, 213, 233–234 *Disciplined Trader, The* (Mark Douglas), 29, 30 Discretionary traders, 149–151 Divergences, 86–89 between A/D and prices, 111 bearish, *see* Bearish divergences bullish, *see* Bullish divergences combining channels and,170–171 Force Index indication of, 115, 116 Hound of the Baskervilles signal, 89 NH-NL, 136–137 as OBV signal, 108 as Stochastic signal, 97–98 triple bullish or bearish, 89 DM (Directional Movement), 89, 90 - -Documentation, *see* Record-keeping Donchian, Richard, 74, 75, 78 Douglas, Mark, 29, 30 Dow, Charles, 50, 155 Dow Jones Industrial Average, 72 MACD-Histogram of, 86–87 OBV for stocks in, 108, 109 Downside penetration, 220 Downtrends, 61 bullish divergences during, 86–87 channel trading during, 170 crowd behavior creating, 45 Force Index indication of, 113, 115, 116 identifying, 63 Impulse system in, 166 mass psychology of, 62 NH-NL, 136 noise in, 220 open interest during, 120, 121 oversold oscillators in, 95 pain and regret in, 57 perfect, 60–61 and Stochastic signals, 98, 99 stocks above MAs in, 139 at support level, 55 Triple Screen indicators for selling short in, 160, 161 volume during, 107 volume spikes in, 106 Dow Theory, 50, 155 *Dow Theory, The* (Robert Rhea), 50 Doyle, Sir Arthur Conan, 89 Drawdowns: comebacks from, 210–213 maximum allowed for, 213 6% Rule for, 208–210 - -## **E** - -Edge(s): defined, 72 and follow-up charts, 130 with trends and trading ranges, 62 - -### INDEX **267** - -Efficient Market theory, 54 Ehlers, John, 122 Elder.com, 3, 71 Electronic currency futures, 196 Elliott, R. N., 15, 51, 55 EMAs, *see* Exponential moving averages E-mini futures, 205–206 Emotions: of crowds, 40–41 and irrational thinking, 28, 44 managing, *see* Individual psychology and profit targets, 216 in trading, 19, 197–200 and trends, 43–44 Emotional trading, 28–29, 197–200 businessman's risk, 201–202 and counting money in open trades, 198 and not being able to sell, 198–200 End-of-day charts, 131 Engel, Louis, 1, 2 Entering trades: and Average True Range, 93 and bar charts, 53 commissions for, 5 and crowd emotions, 39 in day-trading, 131 in Impulse trading system, 164–166 planning for, 216 trade plan for, 42 and trends or trading ranges, 63 in Triple Screen system, 158–160 using signal and noise in, 222, 223 using technical analysis for, 128 Equity curve, reviewing, 247 Exchange rates, 194 Exchange-traded funds (ETFs),176–178 Exercise price (options), 179 Exiting trades: commissions for, 5 in day-trading, 131 - -Exiting trades (Cont.): Force Index indicator for, 115 in futures and options, 118 in Impulse trading system, 166 and open interest, 118 options, 184 trade plan for, 42 using technical analysis for, 128 Expectations: of buyers and sellers, 32 mathematical, 200–201 for scanning, 230 Expenses of trading, 5, 8 commissions, 6–7 slippage, 7–8 Exponential moving averages (EMAs), 75–80 and channel trading systems, 168 dual, 78–79 with Force Index, 112–115 identifying trends with, 63 in Impulse system, 165, 166 lagging, 78 length of, 76–77, 80 of MACD line, 81 and SafeZone stops, 220 trading rules, 77–78 in Triple Screen system, 159–161 and value zone, 80 of volume, 107 Exponential moving average charts, 63, 64 *Extraordinary Popular Delusions and the Madness of Crowds* (Charles Mackay), 39–40, 143 - -## **F** - -Factor of five, 125–126, 155–156 "Fallen angels" scan, 218–219 False breakouts, 59–60 downside, 61, 229 reinforcing Stochastic signals, 97 - -False breakouts (*Cont*.): from support and resistance, 56 upside, 61 "False breakout with a divergence" strategy, 239 Fantasies: autopilot myth, 12–13 brain myth, 11 cult of personality, 13–16 reality vs., 10–11 undercapitalization myth, 11–12 wishful thinking, 16 Far-out-of-the-money options, 181, 185 Fast Stochastic, 96 Fear, 40, 41, 44, 106, 148, 185 Filters, 78 Financial instrument futures, 187–188 Financial journalists, 142–144 Financing charges (CFDs), 186 Fingers (kangaroo tails), 65–67 *First 20 Hours, The* (Josh Kaufman), 249, 250 First step (AA principle), 22, 25–26 Floors, for commodities, 191 Floor traders, 34, 35, 46, 192 Followers of gurus, 15–16 Follow-up analysis: buying a pullback, 246 shorting a top, 245–247 Force Index, 112–117 constructing, 112–113 intermediate-term, 116–117 short-term, 113–116 and trading psychology, 113 trading rules, 113–117 in Triple Screen system, 158, 159 Forecasting: dramatic, 48 and Force Index, 115 managing trades vs., 47 by market cycle gurus, 14 *Forecasting Financial Markets* (Tony Plummer), 41 - -Forex, 104, 194–196 Forward-testing systems, 151, 152 Fractal patterns, 54–55 Fraud, in forex trading, 195 Freud, Sigmund, 17, 121 Friedman, Milton, 54 Fundamental analysis, 46 for finding stocks, 128 technical analysis with, 127–128 Fundamental analysts, concept of value for, 79 Futures, 187–194 closing prices on daily charts, 53 commitments of traders, 145–147, 192–193 compared to cash trades, 188–189 contango, 191 currency, 196 floors and ceilings, 191 hedging, 189–190 insider trading in, 36 inversions, 191 margins and risk control with, 193–194 options vs., 187 seasonality with, 191 spreads, 192 supply and demand factors with, 190–191 time period for, 118 2% Rule for, 205–207 volume trends for, 105 Futures traders: commitments of, as indicator, 145–147 survival rate for, 188 - -## **G** - -Gallacher, William R., 15 Galleon fund, 35 Gamblers Anonymous, 17 "Gambler's ruin," 195 - -Gambling, 17, 219 Gann, W. D., 15, 51 Gawande, Atul, 149 Gender: and reasons for gambling, 17 of traders, 3–4 General market indicators, 133–148 Advance/Decline line, 140–142 of consensus and commitment, 142–148 futures traders' commitments, 145–147 legal insider trading, 147 short interest, 147–148 signals from advertisers, 144–145 signals from press, 144 tracking advisory opinion, 143–144 Most Active Stocks indicator, 142 New High–New Low Index, 133–139 constructing, 134 and crowd psychology, 134–135 in multiple timeframes and lookback periods, 137–139 65-day and 20-day, 138–139 trading rules, 135–137 weekly, 137–138 stocks above 50-day MA, 139–140 Goepfert, Jason, 144 Gold: resistance zone for, 56–57 trading in futures vs. cash, 188–189 "Good 'til cancelled" (GTC) orders, 225 Granville, Joseph, 103, 107–109 Gray box software, 38, 71 Greed, 44, 106, 148, 185 Greeks (indicators in options analysis), 183 Greenson, Ralph, 17 Group behavior, 45–46. *See also* Crowd behavior Group loyalty, 41, 44 Grove, Nic, 221 GTC (good 'til cancelled) orders, 225 - -Gurus, 13–16 dead, 15 followers of, 15–16 magic method, 14–15 market cycle, 13–14 - -## **H** - -Hamilton, William, 50 Hard stops, 225 Havens, Leston, 29 Hedgers, 146 COT reports, 192–193 reports on positions of, 145–146 Hedging: futures, 189–190 line between speculating and, 37 "High" volume, 106–107 History of charting, 50–51 Homework, daily, 234–236 Hound of the Baskervilles signal, 89, 112 Hourly charts, 156 House advantage, 200, 201 *How I Made One Million Dollars* (Larry Williams), 110 *How to Buy Stocks* (Louis Engel), 1, 2 Hurst, J. M., 74, 75, 166 - -## **I** - -Impulse trading system, 156, 157, 162–166 entries in, 164–166 exits in, 166 Independent thinking, crowd mentality vs., 41, 42 Index CFDs, 186–187 Indicators. *See also individual indicators and types of indicators* applying moving averages to, 78 basic data used for, 73 changing parameters of, 77 clarity of signals from, 74 contradictory, 73 identifying trends with, 63 - -Indicators (*Cont*.): at right edge of charts, 62 seasons of, 122–124 "shopping for," 102 in Triple Screen trading system, 155 at true and false breakouts, 60 Indicator seasons, 122–124 Individual psychology, 9–30 and Alcoholics Anonymous principles, 20–27 applied to trading, 20–21, 23–27 denial, 21–22 first step, 22, 25–26 lessons from, 21–23 meetings, 23 one day at a time, 22–23 rock bottom, 22, 24–25 autopilot myth, 12–13 and bending rules, 19–20 brain myth, 11 emotions in trading, 19 following gurus, 13–16 reality vs. fantasy, 10–11 autopilot myth, 12–13 brain myth, 11 cult of personality, 13–16 undercapitalization myth, 11–12 wishful thinking, 16 reasons for trading, 9–10 rational and irrational, 9 self-fulfillment, 9–10 rule-bending, 19–20 self-destructiveness, 16–19 controlling, 19 gambling, 17 and lack of normal human helpfulness in markets, 18–19 self-sabotage, 17–18 undercapitalization myth, 11–12 winners and losers, 27–30 emotional trading, 28–29 - -Individual psychology (*Cont*.): and self-control vs. controlling markets, 27–28 taking charge of your life, 29–30 wishful thinking, 16 Individual traders, 36–37 competing against institutional traders, 37–38 former institutional traders as, 212 isolation of, 250 one advantage over institutional traders, 228 Inertia, of trading vehicles, 162, 163 Innumeracy, 200–201 *Innumeracy* (John Allen Paulos), 200 Inside information, 35–36 Insider trading: in futures markets, 36 illegitimate, 35–36 legal, as indicator, 147 Institutional commissions, 37 Institutional traders, 37–38 advantages for, 37 CFDs used by, 186 trade managers of, 212–213 Insurance account, for options writing, 184–185 Intelligence networks, of institutional traders, 37 Interbank market, 194 Interest rate futures, 192 Intermediate-term Force Index, 116–117 Intermediate timeframe, 155–156 International exchanges, volume reported by, 104 In-the-money options, 179 Intraday charts, 51. *See also* Timeframes; *individual indicators* Intrinsic value (options), 179 Inverse ETFs, 176 Inversions (futures), 191 Investing (long-term trading), 126–128 *Investors Intelligence,* 143 - -Iron Triangle of risk control, the, 204–205, 221 Isolation in trading, 250 - -## **J** - -Japanese candlesticks, 53, 112 *Japanese Candlestick Charting Techniques* (Steve Nison), 53 - -## **K** - -Kahneman, Daniel, 200, 238 Kangaroo tails (fingers), 65–67 Kaufman, Josh, 249, 250 Keelan, Brian, 186 Key demands for trades, 153–154 Keynes, John Maynard, 175 - -## **L** - -Lag, of moving averages, 78 Lane, George, 95 Large speculators, 146 Larsen, Max, 234 Leaders: of crowds, 41 and fear of uncertainty, 40 gurus, 13–16 dead, 15 followers of, 15–16 magic method, 14–15 market cycle, 13–14 loyalty to, 44 Learning trading skills, 249–251 LeBon, Gustave, 40 Letter writers (financial), 142–143 Leverage, in forex, 195 Leveraged ETFs, 177, 178 Leveraged inverse ETFs, 176 Life, taking charge of, 29–30 Limits, on futures, 187–188 Limit orders, 7–8 Liquidity, 122, 173–174 Long-term price cycles, 122 Long-term timeframe, 155, 156 - -Long-term trading (investing), 118, 126–128 Look-back windows (New High–New Low Index), 138–139 Losers: AA principles for, 23–27 denial by, 21–22 emotional responses of, 199 and emotional trading, 28–29 fantasies of, 10–16 autopilot myth, 12–13 brain myth, 11 cult of personality, 13–16 undercapitalization myth, 11–12 pain and regret felt by, 57 and self-control vs. controlling markets, 27–28 self-destructive, 16–19 and volume of trading, 105, 106 wishful thinking by, 16 Losers Anonymous, 26–27 Losses: in account as a whole, 204 businessman's risks vs., 25 on CFDs, 186 cutting, 198–200 of former institutional traders, 212 inability to manage, 197 on options, 180, 182 per share, limiting, 204 psychological effect of, 211–212 6% Rule to limit, 208–210 2% Rule to limit, 203–207 Loss aversion, 200 Lovvorn, Kerry, 19, 42, 88–89, 93, 169, 221, 227, 243, 250 Low-priced stocks, indictors based on volume of, 142 "Low" volume, 106–107 - -## **M** - -MAs, *see* Moving averages MACD, *see* Moving Average Convergence-Divergence MACD-Histogram, 83–89 combined with channels, 170, 171 divergences, 86–89 in Impulse system, 165, 166 and market psychology, 84 peaks and valleys, 85 seasons of, 123 semiautomatic divergence scanner, 231 slope of, 84, 85 time windows of, 85 trading rules, 84–85 in Triple Screen system, 156–158 MACD Lines, 81–83 crossover of Signal lines and MACD line, 81–84 in divergences, 87–88 and market psychology, 81 trading rules, 81–82 Mackay, Charles, 39–40, 143 MacMillan, Lawrence, 185 Magic method gurus, 14–15 Managing trades, 46–48 forecasting vs., 47 and poll-taking, 47 by reading markets and managing yourself, 47–48 Mandelbrot, Benoit, 167 Margins, 193–194 Margin calls, 193, 250 Market(s): attempts to manipulate, 29 and automatic trading systems, 13 comparing volumes of, 104 contango, 191 as crowds, 39–43. *See also* Mass psychology crowd mentality, 41–42 experts on, 40 independent thinking vs., 42 of individuals, 33, 34 leaders of crowds, 41 - -Market(s) (*Cont*.): reasons for joining crowds, 40 wisdom of crowds, 42–43 ETFs, 176 groups vs. individuals in, 34 harshness of, 33–34 inability to control, 27–28 inside information in, 35–36 overbought and oversold, 95, 98, 115 randomness in, 198, 203 reading, 47–48 seasons of, 122–124 size of, 34 source of money in, 34–35 spikes in, 115–116 as sport, 28 theories of, 54–55 timeframes of, 125 analysis using multiple timeframes, 55 conflicting, 64–65 trading ranges vs. trends in, 59 worldwide crowds, 34 Market cycle gurus, 13–14 Market data: in computerized technical analysis, 72–73 in moving averages, 75 Market indexes, in technical analysis,72 Market makers, 34 Market noise: perceived cycles as, 122 and placement of stops, 222, 223 setting stops outside zone of, 220 Market orders, 7 bid-ask spreads for, 8 slippage on, 7 Market panics, 137 Market participants, groups of, 146 Market tide screen (Triple Screen system), 156–158 Market time, 124–125 *Market Vane,* 143 - -Market wave screen (Triple Screen trading system), 158, 159 MAS (Most Active Stocks) indicator, 142 Mass manias, 39–40 Mass psychology, 31–48 and emergence of gurus, 14 managing trades, 46–48 forecasting vs., 47 and poll-taking, 47 by reading markets and managing yourself, 47–48 the market, 33–36 groups vs. individuals in, 34 inside information in, 35–36 source of money in, 34–35 worldwide crowds, 34 and markets as crowds, 39–43 crowd mentality, 41–42 experts on, 40 independent thinking vs., 42 leaders of crowds, 41 reasons for joining crowds, 40 wisdom of crowds, 42–43 price, 32–33 as consensus of value, 32–33 crowd behavior reflected in, 32–33 trading scene participants, 36–39 advisors, 39 individual traders, 36–37 institutional traders, 37–38 sword makers, 38 trend psychology, 43–46 emotions in, 43–44 price shocks, 44–45 rallies and declines, 44 social psychology, 45–46 Mathematical expectation, 200–201 Maximum Entropy Spectral Analysis (MESA), 122 Mean between high and low, moving averages based on, 78 Measuring volume, 104–105 - -Mechanical traders, 149–150 *Mechanical Trading Systems* (Richard Weissman), 149 Meetings, AA, 23 Mellon, Andrew J., 233 Member Short Sale Ratio, 142 Memory(-ies): and support or resistance levels, 56–57 in trade diary, 243 Mental stops, 184 MESA (Maximum Entropy Spectral Analysis), 122 Mind, as component of trading, 237. *See also* Thinking Mini-contracts (futures), 193–194 Minus-sum game, trading as, 5–6 Miscellaneous indicators, 74. *See also* New High–New Low Index (NH-NL) "Missing right shoulder" divergences, 88 Moltke, Helmuth von, 197 Money: making, 47 motives for seeking, 200 in open trades, 198 source of, 34–35 Money management. *See also* Risk management businessman's risk, 25–26, 201–202 commissions, 6–7 conservative, 47 and emotions, 197–200 businessman's risk, 201–202 and counting money in open trades, 198 not being able to sell, 198–200 expenses of trading, 5–8 following rules of, 20 with futures, 193 and negative mathematical expectation, 201 rules as safety net in, 19 slippage, 7–8 - -Mood, as component of trading, 237 Most Active Stocks indicator (MAS), 142 Moving averages (MAs), 74–80 choosing length of, 76–78 dual EMAs, 78–79 exponential, 75–80. *See also* Exponential moving averages (EMAs) with Force Index, 112 and market psychology, 75–76 in setting profit targets, 217, 218 simple, 75 as support and resistance, 78 time windows of, 74, 75 weighted, 75 Moving Average Convergence-Divergence (MACD), 80–89 creating, 81 MACD-Histogram, 83–89 divergences, 86–89 and market psychology, 84 peaks and valleys, 85 semiautomatic divergence scanner, 231 trading rules, 84–85 MACD Lines, 81–83 and market psychology, 81 trading rules, 81–82 and market psychology, 81 "quick-and-dirty" plotting of, 83 scanner for, 231 Mr. Market, 175 Mysticism, 55 - -## **N** - -Naked writers (options), 181–182 NASDAQ, 72, 140 Nature's law, 55 *"Nature's Law"* (R. N. Elliott), 55 Negative Directional line, 91–92 Negative mathematical expectation, 200–201 - -Negative rules, in scanning for stocks, 232 Neill, Humphrey B., 143 Net Field Trend indicator, 108–110 Neurotic gamblers, 17 New High–New Low Index (NH-NL), 133–139 constructing, 134 and crowd psychology, 134–135 in multiple timeframes and look-back periods, 137–139 65-day and 20-day, 138–139 trading rules, 135–137 weekly, 137–138 *New Sell and Sell Short, The* (Alexander Elder), 175, 220 Newsletters, 38–39, 142–144 *New Strategy of Daily Stock Market Timing* (Joseph Granville), 107 New York Stock Exchange, 34 daily volume in 1940s, 51 stocks above 50-day MA for, 140 volume reported by, 104 Western European hours for, 174 *New York Times, The* 195 NH-NL, *see* New High–New Low Index Nic's stop, 221, 222 Nison, Steve, 53 Noise, market, *see* Market noise Notis, Steve, 157 - -## **O** - -OBV, *see* On-Balance Volume Odds against traders, 5–8 bid-ask spread, 8 commissions, 6–7 with ETFs, 176 expenses, 5, 8 slippage, 7–8 and trading as minus-sum game, 5–6 Odd-lot Short Sale Ratio, 142 Odd-lot statistics, 142 Odysseus, 42 On-Balance Volume (OBV), 107–110 and crowd psychology, 108 trading signals, 108 One-bar-at-a-time testing, 152 One day at a time (AA principle), 22–23 Opening gaps, 226 Opening prices: on candlestick charts, 53 and crowd behavior, 110 of daily bars, 51 relationship of closing prices and, 52, 110 Open interest, 117–121 and crowd psychology, 118–120 defined, 117 trading rules, 120–121 Open trades: changing trade plan during, 42 counting money in, 198 money at risk in, 208–210 Options, 178–185 buying, 180–181, 185 futures vs., 187 limiting risk with, 183–185 price of, 179–180 time decay with, 183 writing, 180–185 *Options as a Strategic Investment* (Lawrence MacMillan), 185 Oscillators, 73 in bearish divergences, 87 in bullish divergences, 86 Force Index, 112–117 constructing, 112–113 intermediate-term, 116–117 short-term, 113–116 and trading psychology, 113 trading rules, 113–117 - -Oscillators (*Cont*.): identifying trends with, 63 MACD-Histogram, 83–89 divergences, 86–89 and market psychology, 84 peaks and valleys, 85 slope of, 84, 85 time windows of, 85 trading rules, 84–85 and mass psychology, 95 Relative Strength Index, 99–102 and mass psychology, 100–101 trading rules, 101–102 Stochastic, 95–99 and crowd psychology, 96–97 trading rules, 97–99 in Triple Screen trading system, 155, 158 Out-of-the-money options, 179, 181 Overbought: oscillator levels, 95 RSI levels, 99–201 as Stochastic signal, 98, 99 Overnight gaps, 225 Oversold: oscillator levels, 95 RSI levels, 99–101 as Stochastic signal, 98, 99 - -## **P** - -Pain: and support or resistance, 57–58 volume as measure of, 105 Paper trading, 152–153 Parabolic stops, 221 "Passing the book," 196 Patterns. *See also* Chart patterns for A-trades, 225–230 defining, 215 emerging from chaos, 54 fractal, 54–55 and Hound of the Baskervilles signal, 89 - -Patterns (*Cont*.): for scanning, 230–232 and trading young stocks, 72 Paulos, John Allen, 200 Penny stocks, 145 %D line, 95, 96 %K line, 95, 96 "Perfect order" in markets, 55 Personality: as component of trading, 237 matching trading styles to, 149, 150 Piranha bite losses, 208 Player's edge, 200 Plummer, Tony, 41 Point-and-figure chartists, 50 Poll-taking, 47 *Portfolio Management Formulas* (Ralph Vince), 200 Position limits, 146 Position trading: day-trading vs., 73 market data for, 72 profit targets in, 217 stops in, 221 Positive Directional line, 91, 92 Positive mathematical expectation, 201 Power: of bears vs. bulls: A/D, 110 closing prices, 96 divergences, 87, 98, 101 Force Index, 113, 115, 116 MACD-Histogram, 84 MACD Line, 81 miscellaneous indicators, 74 and NH-NL zero line, 136 On-Balance Volume, 108 open interest, 119–120 volume, 104 profits and feeling of, 22 of trends, 162, 163 - -Premiums: futures, 191–192 options, 179 Press, signals from, 144 Prechter, Robert, 201 Price(s), 32–33. *See also* Closing prices; Opening prices on bar charts, 51–52 as consensus of value, 32–33, 100–101 crowd behavior reflected in, 32–33 divergences from, 86–89 in Force Index, 112–117 indicators derived from, 73 as leader of market crowd, 41, 44 long-term cycles in, 122 memories of, 56–57 of options, 179–180 in Random Walk theory, 54 short-term cycles in, 122 slippage, 7–8 support and resistance levels, 55 and understanding of volume, 103, 104 value vs., 79–80 Price risk, hedging and, 189–190 Price shocks, 44–45 Pring, Martin, 122 Private traders, *see* Individual traders Probabilities, 198–202 businessman's risk, 201–202 choices based on emotions vs., 199–200 innumeracy, 200–201 positive expectation, 201 Profit(s): calculating potential for, 217 on CFDs, 186 "enough," 218 feeling of power from, 22 in open trades, 198 - -### INDEX **277** - -Profit(s) (*Cont*.): protection levels for, 223–224. *See also* Stops source of, 34–35 *Profit Magic of Stock Transaction Timing, The* (J. M. Hurst), 74, 166 Profit taking: in day-trading, 217 in swing trading, 216 and tall bars, 53 Profit-taking zone, for options, 184 Profit targets: and Average True Range, 94 in day-trading, 131 setting, 215–219 in Triple Screen system, 162 Protective stops, 58–60. *See also* Stops defined, 59 with EMAs, 77 with kangaroo tails, 67 to reduce open risk, 209 with RSI, 100 and Stochastic signals, 98 Psychological readiness for trading, 19, 236–237 Psychology: of trading, 3–4. *See also* Mass psychology; Individual psychology and focus on reality, 3 and paper trading, 152 of trends, 43–46 emotions in, 43–44 price shocks, 44–45 rallies and declines, 44 and social psychology, 45–46 Put-Call Ratio, 74 Put options, 178–183, 185 Pyramiding: Force Index indication for, 115 guidelines for, 210 - -## **Q** - -Quality of trades, 225–230 - -## **R** - -Rallies. *See also individual indicators* from 1966 to 1982, 56 and channel lines, 169 contracts for difference on, 186 in downtrends, 60–61 open interest in, 121 psychology of, 44 short-covering, 148 in trading ranges, 61 in uptrends, 60 volume during, 106 Random Walk theory, 54 Readiness for trading, 236–237 Reading markets, 47–48 Reality: fantasy vs., 10–11 wishful thinking vs., 16 Reasons for trading, 9–10 Record-keeping, 26, 233–247 daily homework, 234–236 and psychological readiness for trading, 236–237 Trade Journal, 243–247 trade plans, 233, 238–243 creating, 238 scoring, 238–240 using Tradebills, 240–243 Regret, support or resistance and, 57–58 Relative Strength Index (RSI), 99–102 and mass psychology, 100–101 trading rules, 101–102 Reporting levels, 146 Resettlement fees, 195 Resistance. *See also* Support and resistance defined, 55, 166 pain and regret, 57 - -Reversals, 61 betting on, 54, 58 consensus preceding, 143 Force Index indication of, 113, 116 journalists' writings signaling, 144 kangaroo tails, 65–67 losers' responses to, 199 NH-NL indicating, 136–137 and open interest, 120 and price shocks, 56 protection from, 59. *See also* Protective stops pullbacks signaling, 63 and stocks above 50-day MA, 140 timing of trades and, 125 and value zone, 80 and volume of trading, 107 Reverse splits (ETFs), 177 Reviews: of equity curve, 247 of trades, 246–247 Reward-to-risk ratio, 224 Rhea, Robert, 50, 155 Risk management, 154, 197–213 comebacks from drawdowns, 210–213 and emotions, 197–200 businessman's risk, 201–202 and counting money in open trades, 198 not being able to sell, 198–200 essential nature of, 153 with futures, 193–194 main rules of, 202–210 6% Rule, 208–210 2% Rule, 203–207 with options, 181, 183–185 probabilities in, 198–202 and self-management, 3 stops for protecting winning trades, 223–224 - -Risk management (*Cont*.): by trading managers, 38, 212–213 for trends and trading ranges, 63 worst mistakes in, 202–203 Rock bottom (AA principle), 22, 24–25 Rorschach, Herman, 50 RSI, *see* Relative Strength Index Rule-bending, 19–20 - -## **S** - -SAC Capital, 35 SafeZone stops, 220, 221 Scanning for trades, 230–232 defined, 230 defining patterns before, 215 "fallen angels," 218–219 negative rules in, 232 stocks, 175 using toolboxes, 70 Seasonality, with futures, 191 Securities and Exchange Commission (SEC), 146, 147, 186, 187 Self-control, 27–28, 30, 47–48 Self-deception, 49 Self-destructiveness, 10, 16–19 controlling, 19 gambling, 17 and lack of normal human helpfulness in markets, 18–19 self-sabotage, 17–19 Self-fulfillment, 9–10 Self-help groups, 20. *See also* Alcoholics Anonymous (AA) principles Self-sabotage, 10, 17–19 Self-test, of readiness for trading, 236–237 Sellers, 32 expectations of, 32 and open interest, 118–120 of options, 178–179 Selling. *See also specific trading vehicles* based on fear, 41 emotional commitment in, 105 - -Selling (*Cont*.): indicators for, 87, *see specific indicators* by insiders, 147 not being able to sell, 198–200 Sell orders: Force Index indicator for, 115 and Stochastic signals, 98 SentimenTrader.com, 144 Shapiro, Roy, 199, 200 "Shark bite" losses, 203, 219 "Shopping for indicators," 102 Short interest, 147–148 Short Percent of Float, 147–148 Short sellers, rallies/declines and, 44 Short selling: Force Index indicator for, 115 making money with, 174–175 Stochastic signals for, 98 stops with, 221 Triple Screen indicators for, 160, 161 value zone in, 80 *Shortsqueeze.com, 148* Short-term Force Index, 113–116 Short-term price cycles, 122 Short-term timeframe, 155, 156 Short-term trading, 118, 121, 174–175 "Shoulders," 212 Sibbet, James H., 143 Signal(s). *See also* Indicators confidence in, 73 in market moves, 220, 222, 223 Signal line (MACD), 81 crossover of MACD line and, 81–83 difference between MACD line and, 83 and MACD-Histogram, 83, 84 Simple moving averages, 75 6% Rule, 208–210, 213 and concept of available risk, 208–210 as guideline for pyramiding, 210 - -65-day New High–New Low Index, 138–139 Size of trades, 203 Iron Triangle of risk control for, 204–206 risk associated with, 210–212 2% Rule for, 203–207 Skills, learning, 249–251 Slater, Tim, 35 "Slicing the bid-ask spread" technique, 183 Slippage, 5–8, 33–34 and open interest, 121 overnight gaps, 225 in quiet markets, 53 Slow Stochastic, 96 Small traders, 146, 147 CFDs for, 186 COT reports, 192 of options, 180 Smoothed Directional Lines (+DI13, −DI13), 91 Social psychology, 43, 45–46 *Stock Market Barometer, The* (William Hamilton), 50 Soft stops, 225 Soros, George, 6 Source of money, in markets, 3 4–35 S&P 500 index, 72 applying OBV to, 110 and beta, 174 in scanning for trades, 230–232 Specialist Short Sale Ratio, 142 Speculative trading, in currencies, 194 Speculators, 36–37, 145 farmers and engineers as, 190 institutional investors as, 37 position limits of, 146 Spikes, 137 Spike bounce signal, 139 Spikers, 230 - -**280** INDEX - -SpikeTrade.com, 42–43, 130, 137, 153, 230, 250–251 Spreads: bid-ask, 8 with CFDs, 186 with forex trades, 194, 195 "slicing the bid-ask spread" technique, 183 futures, 192 Spreadsheet, for pre-open routine, 234–236 Spread trading, 192 Standard deviation channels (Bollinger bands), 167, 172 Steidlmayer, J. Peter, 66 Stochastic oscillator, 95–99 and crowd psychology, 96–97 time window of, 96, 99 trading rules, 97–99 in Triple Screen trading system, 158 Stocks, 175–176 liquidity of, 173–174 margins with, 193 options vs., 180 prices of, 175 scanning for, 230–232 selecting, 175–176 short interest, 147–148 volatility of, 174 Stocks above 50-day MA indicator, 139–140 StockCharts.com, 70 Stoller, Manning, 170 Stops, 219–225. *See also* Protective stops and Average True Range, 93 avoiding obvious levels for, 220–223 catastrophic, 224–225 mental, 184 moving in direction of trade, 224 - -Stops (*Cont*.): outside zone of "market noise," 220 and overnight gaps, 225 placing, 59 planning, 216 protective, 58–60, 67 to protect winning trades, 223–224 purpose of, 203–204 trading without, 202 in trends vs. in trading ranges, 61 in Triple Screen system, 162 "Stop-and-reverse" orders, 89 Stress of trading, reducing, 250 Strike price (options), 179 Success: accumulating equity as hallmark of, 20 barriers to, 5–8 desire for, 2–3 and emotional trading, 19, 28–29 qualities for, 30 realism for, 10 and self-control vs. controlling markets, 27–28 through taking charge of your life, 29–30 Supply and demand factors: with futures, 190–191 reflected in price, 54 Support: defined, 55, 166 from pain and regret, 57 Support and resistance, 55–60 causes of, 56–57 channels identifying, 166–167 moving averages as, 78 and profit targets, 218–219 strength of, 58 trading rules and, 58–59 true and false breakouts, 59–60 Surges, speed and momentum of, 95 - -### INDEX **281** - -Surowiecki, James, 42 Swing trading, 126, 128–131 for beginner traders, 73 grading trades in, 226 with Impulse system, 166 market data for, 72 profit taking in, 216 profit targets in, 217, 218 stops in, 221 timeframes in, 162 Symmetrical channels, 167–168 - -## **T** - -Taking charge of your life, 29–30 TANSTAFL principle, 178 Taylor, Lou, 29n.1 Technical analysis, 46, 69–102 and channels, 79 computer hardware, 71–72 Directional system, 89–94 Average True Range indicator, 92–94 constructing, 89–91 crowd behavior tracked by, 91–92 trading rules, 93 as for-profit social psychology, 43 with fundamentals, 127–128 groups of indicators, 73–74 miscellaneous indicators, 74 oscillators, 73 trend-following indicators, 73 and insider trading, 36 market data, 72–73 miscellaneous indicators, 74 Moving Average Convergence-Divergence, 80–89 creating, 81 MACD-Histogram, 83–89 MACD Lines, 81–83 and market psychology, 81 moving averages, 74–80 - -Technical analysis (*Cont*.): choosing length of, 76–78 dual EMAs, 78–79 exponential, 75–80 and market psychology, 75–76 simple, 75 as support and resistance, 78 weighted, 75 objectivity of, 49 oscillators, 73, 95 MACD-Histogram, 83–89 overbought and oversold, 95 Relative Strength Index, 99–102 Stochastic, 95–99 as poll-taking, 47 prices, values, and value zone, 79–80 for timing entries and exits, 128 toolboxes for, 70–71 trend-following indicators, 73 Directional system, 89–94 MACD Lines, 81–83 *Technical Analysis of Stock Trends* (Edwards and Magee), 51 Technical analysts: concept of value, 79 goals of, 33 identification of rallies and declines by, 44 as social psychology, 46 Temperament, 150 Testing: of readiness for trading, 236–237 of trading systems, 151–152 Thinking. *See also* Fantasies changing, 22 and crowd mentality, 41–42 emotions and, 28, 44 independent, 40, 42 and Losers Anonymous concept, 26–27 wishful, 16, 49, 50, 219, 224 - -*Thinking, Fast and Slow* (Daniel Kahneman), 200, 238 TICK, 142 Ticks, 52n.1 Tick volume, 104 Time, 103, 121–126 cycles, 122 factor of five, 125–126 indicator seasons, 122–124 market time, 124–125 Time decay (options), 183 Timeframes: and factor of five, 125–126 and kangaroo tails, 65 of markets, 125 analysis using multiple timeframes, 55 conflicting, 64–65 of New High–New Low Index, 137–139 seasons in, 124 in trading, 126–132 day-trading, 131–132, 162 with Impulse system, 165 long-term (investing), 126–128 options, 182–183 swing trading, 128–131, 162 in Triple Screen trading system, 155–156 Time value (options), 179 Time zones: and market data analysis, 72 trading in, 174 Toolboxes, 38, 70–71 Tops. *See also specific indicators* and divergences, 87–89 reversal signals at, 125 since the 1950s, 51 in trends, 71 TR (True Range), 90 Trade Apgars, 238–243 Tradebills, 228, 238, 240–243 - -Trade Journal, 243–247. *See also* Trading diaries Trade plans, 42, 233, 238–243 creating, 238 scoring, 238–240 using Tradebills, 240–243 Traders. *See also* Individual psychology; Mass psychology discretionary, 150–151 gender of, 3–4 individual, 36–37 competing against institutional traders, 37–38 former institutional traders as, 212 isolation of, 250 one advantage over institutional traders, 228 performance of institutional traders vs., 212 institutional, 37–38 advantages for, 37 performance of individual traders vs., 212 trade managers of, 212–213 mechanical, 149–150 odds against, 5–8 bid-ask spread, 8 commissions, 6–7 expenses, 5, 8 slippage, 7–8 trading as a minus-sum game, 5–6 reasons for trading, 9–10 Trade setup, 154 Trading, 1–8. *See also specific topics* bid-ask spreads in, 8 commissions in, 6–7 expenses of, 5, 8 and gender of traders, 3–4 identifying A-trades, 225–230 learning skills for, 249–250 as a minus-sum game, 5–6 odds against traders in, 5–8 - -Trading (*Cont*.): bid-ask spread, 8 commissions, 6–7 expenses, 5, 8 slippage, 7–8 psychological readiness for, 236–237 psychology of, 3–4. *See also* Mass psychology; Individual psychology reasons for, 9–10 reducing stress of, 250–251 scanning for trades, 230–232 setting profit targets, 215–219 setting stops, 219–225 avoiding obvious levels for, 220–223 catastrophic, 224–225 moving in direction of a trade, 224 outside zone of "market noise," 220 and overnight gaps, 225 to protect winning trades, 223–224 in Triple Screen trading system, 162 slippage in, 7–8 succeeding in, 2–3 as trying to take money from other people, 35 Trading accounts, 204 Trading diaries, 20 to avoid self-destructiveness, 18, 19 Trade Journal, 243–247 Trading managers, 38, 212–213 Trading ranges, 60–65 and conflicting timeframes of markets, 64–65 deciding to trade or wait, 63–64 at hard right edge, 63-64 identifying, 63–64 mass psychology of, 62 - -Trading ranges (*Cont*.): as OBV signal, 108 open interest in, 120–121 oscillators in, 95 pain and regret in, 57 and Stochastic signals, 98 time spent in trends vs., 59 Trading rules. *See also* Risk management; *specific topics and indicators* bending, 19–20 for discretionary traders, 150 for mechanical traders, 149–150 Trading scene participants, 36–39 advisors, 39 individual traders, 36–37 institutional traders, 37–38 Trading skills, learning, 249–251 Trading software, 38 Trading systems/strategies, 149–172 for A-trades, 228–229 and autopilot fantasy, 12–13 Channel system, 166–172 constructing, 167 and mass psychology, 168–170 standard deviation (Bollinger bands), 172 symmetrical, 167–168 trading rules, 170–171 defined, 149 developed prior to scanning for trades, 230 discretionary traders, 150–151 frequency of signals from, 8 Impulse system, 162–166 entries in, 164–166 exits in, 166 key demands for trades, 153–154 to limit commissions, 6 for mechanical traders, 149–150 optimizing, 201 paper trading, 152–153 - -Trading systems/strategies (*Cont*.): and psychological readiness to win, 19 simplicity of, 201 testing systems, 151–152 tradebills for, 238 Triple Screen, 154–162 choosing timeframes, 155–156 in day-trading, 161–162 entry technique screen, 158–160 market tide screen, 156–158 market wave screen, 158, 159 stops and profit targets in, 162 trend-following indicators and oscillators, 155 Trading timeframes, 126–132 day-trading, 131–132 long-term (investing), 126–128 swing trading, 128–131 Trading vehicles, 173–196. *See also individual vehicles* contracts for difference, 186–187 exchange-traded funds, 176–178 forex, 194–196 futures, 187–194 and commitments of traders, 192–193 compared to cash trades, 188–189 contango, 191 floors and ceilings, 191 hedging, 189–190 inversions, 191 margins and risk control with, 193–194 seasonality with, 191 spreads, 192 supply and demand factors with, 190–191 liquidity of, 173–174 long vs. short, 174–175 options, 178–185 buying, 180–181 limiting risk with, 183–185 - -Trading vehicles (*Cont*.): price of, 179–180 writing, 181–183 scanning for, 230–232 stocks, 175–176 and time zones, 174 volatility of, 174 Trailing stops, 221, 223 Trends, 60–65. *See also* Downtrends; Uptrends advisors' following of, 143 and conflicting timeframes of markets, 64–65 created by crowds, 34 deciding to trade or wait, 64 defined, 60 effect of support or resistance on, 55 and factor of five, 125–126, 155–156 in futures markets, 190–191 at hard right edge, 62 health of, 59 identifying, 56, 62–63 on long-term charts, 126–127 moving averages indicating, 78 NH-NL, 136 and objective signals for trades, 41 and oscillator levels, 95 psychology of, 43–46 emotions in, 43–44 and mass psychology, 62 price shocks, 44–45 rallies and declines, 44 and social psychology, 45–46 and Stochastic signals, 98, 99 time spent in trading ranges vs., 59 timing of trades and, 125 and volume of trading, 105–107 - -### INDEX **285** - -Trend-following indicators, 73 Directional system, 89–94 MACD Lines, 81–83 in Triple Screen trading system, 155 Trendlines: diagonal, 50 subjectivity of, 56 TRIN, 142 Triple bullish or bearish divergences, 89 Triple Screen trading system, 154–162 choosing timeframes, 155–156 in day-trading, 161–162 entry technique screen, 158–160 Force Index in, 116 market tide screen, 156–158 market wave screen, 158, 159 objective of, 74 Stochastic signals in, 98 stops and profit targets in, 162 trend-following indicators and oscillators, 155 True breakouts, 59–60 True Range (TR), 90 Tulip Mania, 39–40 12-step programs, 21 *Twelve Steps and Twelve Traditions* (AA), 21 20-day New High–New Low Index, 138–139 2% Rule, 26, 64, 203–207 in futures markets, 205–207 as a guideline for pyramiding, 210 for institutional traders, 212–213 and Iron Triangle of risk control, 204–205 *Two Roads Diverged: Trading Divergences* (Alexander Elder), 88 Tyson, Mike, 197 - -## **U** - -Uncertainty, 62, 217 Undecided traders, 32 Undercapitalization myth, 11–12 U.S. stock market: price cycles in, 122 trends in, 155 *Unstuff Your Life* (Andrew J. Mellon), 233 Upside penetration, 220 Uptrends, 61 bearish divergences during, 87–89 channel trading during, 170 crowd behavior creating, 44–45 Force Index indication of, 113–116 identifying, 63 Impulse system in, 166 mass psychology of, 62 NH-NL, 136 open interest during, 120, 121 overbought oscillators in, 95 pain and regret in, 57 perfect, 60 at resistance level, 55 signals in, 220 and Stochastic signals, 98, 99 stocks above MAs in, 139 Triple Screen indicators for buying in, 160 and volume of trading, 107 volume spikes in, 106 Urge to trade, 23–24 - -## **V** - -Value(s): consensus of: on MACD-Histogram, 84 moving averages as, 75, 81 price as, 32–33, 100–101 and trades above/below EMA, 139 of options, 180 prices vs., 79–80 Value zone, 79–80, 167, 216 Vince, Ralph, 200 - -Volatility, 174 ATR lines showing, 93 and channel width, 167 measuring, 174 Volatility index, 177 Volatility stops, 221 Volume, 103–121 crowd behavior reflected in, 33 and crowd psychology, 105–107 "high" and "low," 106–107 and liquidity, 173–174 measuring, 104–105 moving average of, 78 of penny stocks, 145 in support and resistance zones,58 and true vs. false breakouts, 60 volume-based indicators, 107–121 Accumulation/Distribution, 110–112 Force Index, 112–117 On-Balance Volume, 107–110 open interest, 117–121 Volume-based indicators, 107–121 Accumulation/Distribution (A/D), 110–112 and crowd behavior, 110 trading rules, 111 Force Index, 112–117 constructing, 112–113 intermediate-term, 116–117 short-term, 113–116 and trading psychology, 113 trading rules, 113–117 On-Balance Volume, 107–110 and crowd psychology, 108 trading signals, 108 open interest, 117–121 and crowd psychology, 118–120 trading rules, 120–121 - -## **W** - -Wall Street, 31 *Wall Street Journal, The,* 50, 144, 195 Watch list, building, 72 Weekly charts, 51–53, 59, 60. *See also* Timeframes; *individual indicators* Weekly New High–New Low Index, 137–138 Weekly Stochastic, 99 Weighted moving averages (WMAs), 75, 78 Weissman, Richard, 149 Whipsaws, 81, 219, 221 Wilder, J. Welles, Jr., 89, 99 Williams, Larry, 110 *Winner Take All* (William R. Gallacher), 15 Winning, 27–30. *See also* Success bending the rules after, 19–20 desire for, 2–3 difficulty of, 35 and emotional trading, 28–29 essential components for, 16 and self-control vs. controlling markets, 27–28 by taking charge of your life, 29–30 and volume of trading, 105, 106 Wisdom of crowds, 42–43 *Wisdom of Crowds, The* (James Surowiecki), 42 Wishful thinking, 16 with classical charting, 49–50 giving trades "more room" as, 224 and stops, 219 Worldwide crowds, 34 Writing options, 178–185 - -## **Y** - -Yahoo Finance, 174 - -## **Z** - -Zero-sum game: forex market as, 195 trading as, 5 - -## **WILEY END USER LICENSE AGREEMENT** - -Go t[o www.wiley.com/go/eula t](http://www.wiley.com/go/eula)o access Wiley's ebook EULA. \ No newline at end of file diff --git a/trading/The New Trading for a Living/catalog_entry.json b/trading/The New Trading for a Living/catalog_entry.json deleted file mode 100644 index a24c0c21cffd6a670eb360b9bd000245497c469a..0000000000000000000000000000000000000000 --- a/trading/The New Trading for a Living/catalog_entry.json +++ /dev/null @@ -1,1361 +0,0 @@ -{ - "doc_id": "the_new_trading_for_a_living", - "file_name": "The New Trading for a Living.pdf", - "title": "The New Trading for a Living", - "author": "Alexander Elder", - "subject": "", - "keywords": "", - "creator": "Adobe InDesign CC 2014 (Macintosh)", - "producer": "Adobe PDF Library 11.0", - "category": "trading", - "tags": [ - "the_new_trading_for_a_living" - ], - "publication_year": "2014", - "total_pages": 303, - "md_url": "processed_docs/the_new_trading_for_a_living/The New Trading for a Living.md", - "layout_url": "processed_docs/the_new_trading_for_a_living/the_new_trading_for_a_living.layout.json", - "pdf_url": "The New Trading for a Living.pdf", - "toc": [ - { - "level": 1, - "title": "The New Trading for a Living", - "page": 3 - }, - { - "level": 1, - "title": "CONTENTS", - "page": 9 - }, - { - "level": 1, - "title": "PREFACE\n", - "page": 13 - }, - { - "level": 1, - "title": "Introduction", - "page": 17 - }, - { - "level": 2, - "title": "1. Trading—The Last Frontier\n", - "page": 17 - }, - { - "level": 3, - "title": "How I Began to Trade", - "page": 17 - }, - { - "level": 3, - "title": "Do You Really Want to Succeed?\n", - "page": 18 - }, - { - "level": 2, - "title": "2. Psychology Is the Key", - "page": 19 - }, - { - "level": 3, - "title": "Getting Off the Roller Coaster", - "page": 19 - }, - { - "level": 3, - "title": "A Man’s Game?", - "page": 19 - }, - { - "level": 3, - "title": "How This Book Is Organized", - "page": 20 - }, - { - "level": 2, - "title": "3. The Odds against You", - "page": 21 - }, - { - "level": 3, - "title": "A Minus-Sum Game", - "page": 21 - }, - { - "level": 3, - "title": "Commissions", - "page": 22 - }, - { - "level": 3, - "title": "Slippage", - "page": 23 - }, - { - "level": 3, - "title": "Bid-Ask Spreads", - "page": 24 - }, - { - "level": 3, - "title": "The Barriers to Success", - "page": 24 - }, - { - "level": 1, - "title": "PART 1 Individual Psychology", - "page": 25 - }, - { - "level": 2, - "title": "4. Why Trade?", - "page": 25 - }, - { - "level": 3, - "title": "Self-Fulfillment", - "page": 25 - }, - { - "level": 2, - "title": "5. Reality versus Fantasy", - "page": 26 - }, - { - "level": 3, - "title": "The Brain Myth", - "page": 27 - }, - { - "level": 3, - "title": "The Undercapitalization Myth", - "page": 27 - }, - { - "level": 3, - "title": "The Autopilot Myth", - "page": 28 - }, - { - "level": 3, - "title": "The Cult of Personality", - "page": 29 - }, - { - "level": 3, - "title": "Trade with Your Eyes Open", - "page": 32 - }, - { - "level": 2, - "title": "6. Self-Destructiveness", - "page": 32 - }, - { - "level": 3, - "title": "Gambling", - "page": 33 - }, - { - "level": 3, - "title": "Self-Sabotage", - "page": 33 - }, - { - "level": 3, - "title": "The Demolition Derby", - "page": 34 - }, - { - "level": 3, - "title": "Controlling Self-Destructiveness", - "page": 35 - }, - { - "level": 2, - "title": "7. Trading Psychology", - "page": 35 - }, - { - "level": 3, - "title": "Bending the Rules", - "page": 35 - }, - { - "level": 3, - "title": "The Insight That Changed My Trading", - "page": 36 - }, - { - "level": 2, - "title": "8. Trading Lessons from AA", - "page": 37 - }, - { - "level": 3, - "title": "Denial", - "page": 37 - }, - { - "level": 3, - "title": "Rock Bottom", - "page": 38 - }, - { - "level": 3, - "title": "The First Step", - "page": 38 - }, - { - "level": 3, - "title": "One Day at a Time", - "page": 38 - }, - { - "level": 3, - "title": "An AA Meeting", - "page": 39 - }, - { - "level": 2, - "title": "9. Losers Anonymous", - "page": 39 - }, - { - "level": 3, - "title": "The Urge to Trade", - "page": 39 - }, - { - "level": 3, - "title": "Into the Hole", - "page": 40 - }, - { - "level": 3, - "title": "Trader’s Rock Bottom", - "page": 40 - }, - { - "level": 3, - "title": "Trader’s First Step", - "page": 41 - }, - { - "level": 3, - "title": "A Meeting for One", - "page": 42 - }, - { - "level": 2, - "title": "10. Winners and Losers", - "page": 43 - }, - { - "level": 3, - "title": "Like an Ocean", - "page": 43 - }, - { - "level": 3, - "title": "Emotional Trading", - "page": 44 - }, - { - "level": 3, - "title": "In Charge of Your Life", - "page": 45 - }, - { - "level": 1, - "title": "PART 2 Mass Psychology", - "page": 47 - }, - { - "level": 2, - "title": "11. What Is Price?", - "page": 48 - }, - { - "level": 3, - "title": "A Consensus of Value", - "page": 48 - }, - { - "level": 3, - "title": "Behavior Patterns", - "page": 48 - }, - { - "level": 2, - "title": "12. What Is the Market?", - "page": 49 - }, - { - "level": 3, - "title": "Worldwide Crowds", - "page": 50 - }, - { - "level": 3, - "title": "Groups, Not Individuals", - "page": 50 - }, - { - "level": 3, - "title": "The Source of Money", - "page": 50 - }, - { - "level": 3, - "title": "Inside Information", - "page": 51 - }, - { - "level": 2, - "title": "13. The Trading Scene", - "page": 52 - }, - { - "level": 3, - "title": "Individual Traders", - "page": 52 - }, - { - "level": 3, - "title": "Institutional Traders", - "page": 53 - }, - { - "level": 3, - "title": "The Sword Makers", - "page": 54 - }, - { - "level": 3, - "title": "Advisors", - "page": 55 - }, - { - "level": 2, - "title": "14. The Market Crowd and You", - "page": 55 - }, - { - "level": 3, - "title": "Experts on Crowds", - "page": 56 - }, - { - "level": 3, - "title": "Why Join?", - "page": 56 - }, - { - "level": 3, - "title": "Crowd Mentality", - "page": 57 - }, - { - "level": 3, - "title": "Who Leads?", - "page": 57 - }, - { - "level": 3, - "title": "Independence", - "page": 58 - }, - { - "level": 3, - "title": "A Positive Group", - "page": 58 - }, - { - "level": 2, - "title": "15. Psychology of Trends", - "page": 59 - }, - { - "level": 3, - "title": "Strong Feelings", - "page": 59 - }, - { - "level": 3, - "title": "Rallies and Declines", - "page": 60 - }, - { - "level": 3, - "title": "Price Shocks", - "page": 60 - }, - { - "level": 3, - "title": "Social Psychology", - "page": 61 - }, - { - "level": 2, - "title": "16. Managing versus Forecasting", - "page": 62 - }, - { - "level": 3, - "title": "Poll-Taking", - "page": 63 - }, - { - "level": 3, - "title": "A Crystal Ball", - "page": 63 - }, - { - "level": 3, - "title": "Read the Market, Manage Yourself", - "page": 64 - }, - { - "level": 1, - "title": "PART 3 Classical Chart Analysis", - "page": 65 - }, - { - "level": 2, - "title": "17. Charting", - "page": 66 - }, - { - "level": 3, - "title": "Brief History", - "page": 66 - }, - { - "level": 3, - "title": "The Meaning of a Bar Chart", - "page": 67 - }, - { - "level": 3, - "title": "Japanese Candlesticks", - "page": 69 - }, - { - "level": 3, - "title": "Efficient Markets, Random Walk, Chaos Theory, and “Nature’s Law”", - "page": 70 - }, - { - "level": 2, - "title": "18. Support and Resistance", - "page": 71 - }, - { - "level": 3, - "title": "Memories, Pain, and Regret", - "page": 72 - }, - { - "level": 3, - "title": "Strength of Support and Resistance", - "page": 74 - }, - { - "level": 3, - "title": "Trading Rules", - "page": 74 - }, - { - "level": 3, - "title": "True and False Breakouts", - "page": 75 - }, - { - "level": 2, - "title": "19. Trends and Trading Ranges", - "page": 76 - }, - { - "level": 3, - "title": "Mass Psychology", - "page": 78 - }, - { - "level": 3, - "title": "The Hard Right Edge", - "page": 78 - }, - { - "level": 3, - "title": "Methods and Techniques", - "page": 78 - }, - { - "level": 3, - "title": "Trade or Wait", - "page": 80 - }, - { - "level": 3, - "title": "Conflicting Timeframes", - "page": 80 - }, - { - "level": 2, - "title": "20. Kangaroo Tails", - "page": 81 - }, - { - "level": 1, - "title": "PART 4 Computerized Technical Analysis", - "page": 85 - }, - { - "level": 2, - "title": "21. Computers in Trading", - "page": 85 - }, - { - "level": 3, - "title": "Toolboxes", - "page": 86 - }, - { - "level": 3, - "title": "Black Boxes and Gray Boxes", - "page": 87 - }, - { - "level": 3, - "title": "Computers", - "page": 87 - }, - { - "level": 3, - "title": "Market Data", - "page": 88 - }, - { - "level": 3, - "title": "Three Major Groups of Indicators", - "page": 89 - }, - { - "level": 2, - "title": "22. Moving Averages", - "page": 90 - }, - { - "level": 3, - "title": "Twice as Much Bark", - "page": 91 - }, - { - "level": 3, - "title": "Market Psychology", - "page": 91 - }, - { - "level": 3, - "title": "Exponential Moving Averages", - "page": 92 - }, - { - "level": 3, - "title": "Choosing the Length of a Moving Average", - "page": 92 - }, - { - "level": 3, - "title": "Trading Rules", - "page": 93 - }, - { - "level": 3, - "title": "More on Moving Averages", - "page": 94 - }, - { - "level": 3, - "title": "Dual EMAs", - "page": 94 - }, - { - "level": 3, - "title": "Moving Averages and Channels", - "page": 95 - }, - { - "level": 3, - "title": "Prices, Values, and the Value Zone", - "page": 95 - }, - { - "level": 2, - "title": "23. Moving Average Convergence-Divergence: MACD Lines and MACD-Histogram", - "page": 96 - }, - { - "level": 3, - "title": "How to Create MACD", - "page": 97 - }, - { - "level": 3, - "title": "Market Psychology", - "page": 97 - }, - { - "level": 3, - "title": "Trading Rules for MACD Lines", - "page": 97 - }, - { - "level": 3, - "title": "More on MACD Lines", - "page": 98 - }, - { - "level": 3, - "title": "MACD-Histogram", - "page": 99 - }, - { - "level": 3, - "title": "Market Psychology", - "page": 100 - }, - { - "level": 3, - "title": "Trading Rules", - "page": 100 - }, - { - "level": 3, - "title": "When to Expect a New Peak or Valley", - "page": 101 - }, - { - "level": 3, - "title": "More on MACD-Histogram", - "page": 101 - }, - { - "level": 3, - "title": "Divergences", - "page": 102 - }, - { - "level": 3, - "title": "The Hound of the Baskervilles", - "page": 105 - }, - { - "level": 2, - "title": "24. The Directional System", - "page": 105 - }, - { - "level": 3, - "title": "How to Construct the Directional System", - "page": 105 - }, - { - "level": 3, - "title": "Crowd Behavior", - "page": 107 - }, - { - "level": 3, - "title": "Trading Rules", - "page": 109 - }, - { - "level": 3, - "title": "Average True Range—Help from Volatility", - "page": 109 - }, - { - "level": 2, - "title": "25. Oscillators", - "page": 111 - }, - { - "level": 3, - "title": "Overbought and Oversold", - "page": 111 - }, - { - "level": 2, - "title": "26. Stochastic", - "page": 111 - }, - { - "level": 3, - "title": "Crowd Psychology", - "page": 112 - }, - { - "level": 3, - "title": "Trading Rules", - "page": 113 - }, - { - "level": 3, - "title": "More on Stochastic", - "page": 115 - }, - { - "level": 2, - "title": "27. Relative Strength Index", - "page": 115 - }, - { - "level": 3, - "title": "Mass Psychology", - "page": 116 - }, - { - "level": 3, - "title": "Trading Rules", - "page": 117 - }, - { - "level": 1, - "title": "PART 5 Volume and Time", - "page": 119 - }, - { - "level": 2, - "title": "28. Volume", - "page": 119 - }, - { - "level": 3, - "title": "Crowd Psychology", - "page": 121 - }, - { - "level": 3, - "title": "Trading Pointers", - "page": 122 - }, - { - "level": 2, - "title": "29. Volume-Based Indicators", - "page": 123 - }, - { - "level": 3, - "title": "On-Balance Volume", - "page": 123 - }, - { - "level": 3, - "title": "Crowd Psychology", - "page": 124 - }, - { - "level": 3, - "title": "Trading Signals", - "page": 124 - }, - { - "level": 3, - "title": "More on OBV", - "page": 124 - }, - { - "level": 3, - "title": "Accumulation/Distribution", - "page": 126 - }, - { - "level": 3, - "title": "Crowd Behavior", - "page": 126 - }, - { - "level": 3, - "title": "Trading Rules", - "page": 127 - }, - { - "level": 3, - "title": "More on Accumulation/Distribution", - "page": 128 - }, - { - "level": 2, - "title": "30. Force Index", - "page": 128 - }, - { - "level": 3, - "title": "How to Construct Force Index", - "page": 128 - }, - { - "level": 3, - "title": "Trading Psychology", - "page": 129 - }, - { - "level": 3, - "title": "Trading Rules", - "page": 129 - }, - { - "level": 2, - "title": "31. Open Interest", - "page": 133 - }, - { - "level": 3, - "title": "Crowd Psychology", - "page": 134 - }, - { - "level": 3, - "title": "Trading Rules", - "page": 136 - }, - { - "level": 3, - "title": "More on Open Interest", - "page": 137 - }, - { - "level": 2, - "title": "32. Time", - "page": 137 - }, - { - "level": 3, - "title": "Cycles", - "page": 138 - }, - { - "level": 3, - "title": "Indicator Seasons", - "page": 138 - }, - { - "level": 3, - "title": "Market Time", - "page": 140 - }, - { - "level": 3, - "title": "The Factor of Five", - "page": 141 - }, - { - "level": 2, - "title": "33. Trading Timeframes", - "page": 142 - }, - { - "level": 3, - "title": "Investing", - "page": 142 - }, - { - "level": 3, - "title": "Swing Trading", - "page": 144 - }, - { - "level": 3, - "title": "Day-Trading", - "page": 147 - }, - { - "level": 1, - "title": "PART 6 General Market Indicators", - "page": 149 - }, - { - "level": 2, - "title": "34. The New High–New Low Index", - "page": 149 - }, - { - "level": 3, - "title": "How to Construct NH-NL", - "page": 150 - }, - { - "level": 3, - "title": "Crowd Psychology", - "page": 150 - }, - { - "level": 3, - "title": "Trading Rules for NH-NL", - "page": 151 - }, - { - "level": 3, - "title": "NH-NL in Multiple Timeframes and Look-Back Periods", - "page": 153 - }, - { - "level": 2, - "title": "35. Stocks above 50-Day MA", - "page": 155 - }, - { - "level": 2, - "title": "36. Other Stock Market Indicators", - "page": 156 - }, - { - "level": 3, - "title": "Advance/Decline", - "page": 156 - }, - { - "level": 2, - "title": "37. Consensus and Commitment Indicators", - "page": 158 - }, - { - "level": 3, - "title": "Tracking Advisory Opinion", - "page": 159 - }, - { - "level": 3, - "title": "Signals from the Press", - "page": 160 - }, - { - "level": 3, - "title": "Signals from Advertisers", - "page": 160 - }, - { - "level": 3, - "title": "Commitments of Futures Traders", - "page": 161 - }, - { - "level": 3, - "title": "Legal Insider Trading", - "page": 163 - }, - { - "level": 3, - "title": "Short Interest", - "page": 163 - }, - { - "level": 1, - "title": "PART 7 Trading Systems", - "page": 165 - }, - { - "level": 2, - "title": "38. System Testing, Paper Trading, and the Three Key Demands for Every Trade", - "page": 167 - }, - { - "level": 3, - "title": "Paper Trading", - "page": 168 - }, - { - "level": 3, - "title": "Three Key Demands for Every Trade", - "page": 169 - }, - { - "level": 2, - "title": "39. Triple Screen Trading System", - "page": 170 - }, - { - "level": 3, - "title": "Trend-Following Indicators and Oscillators", - "page": 171 - }, - { - "level": 3, - "title": "Choosing Timeframes—the Factor of Five", - "page": 171 - }, - { - "level": 3, - "title": "First Screen—Market Tide", - "page": 172 - }, - { - "level": 3, - "title": "Second Screen—Market Wave", - "page": 174 - }, - { - "level": 3, - "title": "Third Screen—Entry Technique", - "page": 174 - }, - { - "level": 3, - "title": "Triple Screen Summary", - "page": 176 - }, - { - "level": 3, - "title": "Triple Screen in Day-Trading", - "page": 177 - }, - { - "level": 3, - "title": "Stops and Profit Targets", - "page": 178 - }, - { - "level": 2, - "title": "40. The Impulse System", - "page": 178 - }, - { - "level": 3, - "title": "Entries", - "page": 180 - }, - { - "level": 3, - "title": "Exits", - "page": 182 - }, - { - "level": 2, - "title": "41. Channel Trading Systems", - "page": 182 - }, - { - "level": 3, - "title": "Two Ways to Construct a Channel", - "page": 183 - }, - { - "level": 3, - "title": "Symmetrical Channels", - "page": 183 - }, - { - "level": 3, - "title": "Mass Psychology", - "page": 184 - }, - { - "level": 3, - "title": "Trading Rules", - "page": 186 - }, - { - "level": 3, - "title": "Standard Deviation Channels (Bollinger Bands)", - "page": 188 - }, - { - "level": 1, - "title": "PART 8 Trading Vehicles", - "page": 189 - }, - { - "level": 2, - "title": "42. Stocks", - "page": 191 - }, - { - "level": 2, - "title": "43. ETFs", - "page": 192 - }, - { - "level": 2, - "title": "44. Options", - "page": 194 - }, - { - "level": 3, - "title": "Buying Options", - "page": 196 - }, - { - "level": 3, - "title": "Writing Options", - "page": 197 - }, - { - "level": 3, - "title": "Writer’s Choice", - "page": 198 - }, - { - "level": 3, - "title": "Limiting Risk", - "page": 199 - }, - { - "level": 3, - "title": "Can Option Buying Be Intelligent?", - "page": 201 - }, - { - "level": 2, - "title": "45. CFDs", - "page": 202 - }, - { - "level": 2, - "title": "46. Futures", - "page": 203 - }, - { - "level": 3, - "title": "Futures and Cash Trades", - "page": 204 - }, - { - "level": 3, - "title": "Hedging", - "page": 205 - }, - { - "level": 3, - "title": "Supply, Demand, and Seasonality", - "page": 206 - }, - { - "level": 3, - "title": "Floors and Ceilings", - "page": 207 - }, - { - "level": 3, - "title": "Contango, Inversion, and Spreads", - "page": 207 - }, - { - "level": 3, - "title": "Commitments of Traders", - "page": 208 - }, - { - "level": 3, - "title": "Margins and Risk Control", - "page": 209 - }, - { - "level": 2, - "title": "47. Forex", - "page": 210 - }, - { - "level": 1, - "title": "PART 9 Risk Management", - "page": 213 - }, - { - "level": 2, - "title": "48. Emotions and Probabilities", - "page": 213 - }, - { - "level": 3, - "title": "Why Johnny Can’t Sell", - "page": 214 - }, - { - "level": 3, - "title": "Probability and Innumeracy", - "page": 216 - }, - { - "level": 3, - "title": "A Positive Expectation", - "page": 217 - }, - { - "level": 3, - "title": "Businessman’s Risk or Loss", - "page": 217 - }, - { - "level": 2, - "title": "49. The Two Main Rules of Risk Control", - "page": 218 - }, - { - "level": 3, - "title": "The Two Worst Mistakes", - "page": 218 - }, - { - "level": 2, - "title": "50. The Two Percent Rule", - "page": 219 - }, - { - "level": 3, - "title": "The Iron Triangle of Risk Control", - "page": 220 - }, - { - "level": 3, - "title": "The 2% Rule in the Futures Markets", - "page": 221 - }, - { - "level": 2, - "title": "51. The Six Percent Rule", - "page": 224 - }, - { - "level": 3, - "title": "The Concept of Available Risk", - "page": 224 - }, - { - "level": 2, - "title": "52. A Comeback from a Drawdown", - "page": 226 - }, - { - "level": 3, - "title": "A Trading Manager", - "page": 228 - }, - { - "level": 1, - "title": "PART 10 Practical Details", - "page": 231 - }, - { - "level": 2, - "title": "53. How to Set Profit Targets: “Enough” Is the Power Word", - "page": 231 - }, - { - "level": 2, - "title": "54. How to Set Stops: Say No to Wishful Thinking", - "page": 235 - }, - { - "level": 3, - "title": "Place Stops outside the Zone of “Market Noise”", - "page": 236 - }, - { - "level": 3, - "title": "Don’t Place Your Stops at Obvious Levels", - "page": 236 - }, - { - "level": 3, - "title": "Don’t Let a Winning Trade Turn into a Loss", - "page": 239 - }, - { - "level": 3, - "title": "Move Your Stop Only in the Direction of Your Trade", - "page": 240 - }, - { - "level": 3, - "title": "Catastrophic Stops: A Professional’s Life Jacket", - "page": 240 - }, - { - "level": 3, - "title": "Stops and Overnight Gaps: Only for the Pros", - "page": 241 - }, - { - "level": 2, - "title": "55. Is This an A-Trade?", - "page": 241 - }, - { - "level": 2, - "title": "56. Scanning for Possible Trades", - "page": 246 - }, - { - "level": 1, - "title": "PART 11 Good Record-Keeping", - "page": 249 - }, - { - "level": 2, - "title": "57. Your Daily Homework", - "page": 250 - }, - { - "level": 3, - "title": "Are You Ready to Trade Today?", - "page": 252 - }, - { - "level": 2, - "title": "58. Creating and Scoring Trade Plans", - "page": 254 - }, - { - "level": 3, - "title": "Scoring Your Trade Plans (a Trade Apgar)", - "page": 254 - }, - { - "level": 3, - "title": "Using a Tradebill", - "page": 256 - }, - { - "level": 2, - "title": "59. Trade Journal", - "page": 259 - }, - { - "level": 3, - "title": "Three Benefits", - "page": 261 - }, - { - "level": 1, - "title": "CONCLUSION A Journey without an End: How to Continue Learning", - "page": 265 - }, - { - "level": 1, - "title": "Sources", - "page": 269 - }, - { - "level": 1, - "title": "Acknowledgments", - "page": 273 - }, - { - "level": 1, - "title": "About the Author", - "page": 275 - }, - { - "level": 1, - "title": "INDEX", - "page": 277 - }, - { - "level": 1, - "title": "EULA", - "page": 303 - } - ] -} \ No newline at end of file diff --git a/trading/The New Trading for a Living/llm.txt b/trading/The New Trading for a Living/llm.txt deleted file mode 100644 index e9b8f7d02b6fd07a65559e1fde32b1041127a6da..0000000000000000000000000000000000000000 --- a/trading/The New Trading for a Living/llm.txt +++ /dev/null @@ -1,190 +0,0 @@ -# Book Title: The New Trading for a Living -> Author: Alexander Elder | Category: trading | Pages: 303 | Year: 2014 - -## Overview & Metadata -- Document ID: the_new_trading_for_a_living -- Category: trading -- Tags: the_new_trading_for_a_living -- Primary Markdown HF Raw URL: https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/The New Trading for a Living/the_new_trading_for_a_living.md -- Original PDF HF Download: https://huggingface.co/datasets/learner20011/CloverTexts-Data/resolve/main/trading/The New Trading for a Living/the_new_trading_for_a_living.pdf -- Layout Coordinates JSON: https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/The New Trading for a Living/the_new_trading_for_a_living.layout.json -- Book LLM Text URL: https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/The New Trading for a Living/llm.txt -- Online Web Reader: /book?id=the_new_trading_for_a_living - -## Table of Contents -- The New Trading for a Living - Page 3 -- CONTENTS - Page 9 -- PREFACE - - Page 13 -- Introduction - Page 17 - - 1. Trading—The Last Frontier - - Page 17 - - How I Began to Trade - Page 17 - - Do You Really Want to Succeed? - - Page 18 - - 2. Psychology Is the Key - Page 19 - - Getting Off the Roller Coaster - Page 19 - - A Man’s Game? - Page 19 - - How This Book Is Organized - Page 20 - - 3. The Odds against You - Page 21 - - A Minus-Sum Game - Page 21 - - Commissions - Page 22 - - Slippage - Page 23 - - Bid-Ask Spreads - Page 24 - - The Barriers to Success - Page 24 -- PART 1 Individual Psychology - Page 25 - - 4. Why Trade? - Page 25 - - Self-Fulfillment - Page 25 - - 5. Reality versus Fantasy - Page 26 - - The Brain Myth - Page 27 - - The Undercapitalization Myth - Page 27 - - The Autopilot Myth - Page 28 - - The Cult of Personality - Page 29 - - Trade with Your Eyes Open - Page 32 - - 6. Self-Destructiveness - Page 32 - - Gambling - Page 33 - - Self-Sabotage - Page 33 - - The Demolition Derby - Page 34 - - Controlling Self-Destructiveness - Page 35 - - 7. Trading Psychology - Page 35 - - Bending the Rules - Page 35 - - The Insight That Changed My Trading - Page 36 - - 8. Trading Lessons from AA - Page 37 - - Denial - Page 37 - - Rock Bottom - Page 38 - - The First Step - Page 38 - - One Day at a Time - Page 38 - - An AA Meeting - Page 39 - - 9. Losers Anonymous - Page 39 - - The Urge to Trade - Page 39 - - Into the Hole - Page 40 - - Trader’s Rock Bottom - Page 40 - - Trader’s First Step - Page 41 - - A Meeting for One - Page 42 - - 10. Winners and Losers - Page 43 - - Like an Ocean - Page 43 - - Emotional Trading - Page 44 - - In Charge of Your Life - Page 45 -- PART 2 Mass Psychology - Page 47 - - 11. What Is Price? - Page 48 - - A Consensus of Value - Page 48 - - Behavior Patterns - Page 48 - - 12. What Is the Market? - Page 49 - - Worldwide Crowds - Page 50 - - Groups, Not Individuals - Page 50 - - The Source of Money - Page 50 - - Inside Information - Page 51 - - 13. The Trading Scene - Page 52 - - Individual Traders - Page 52 - - Institutional Traders - Page 53 - - The Sword Makers - Page 54 - - Advisors - Page 55 - - 14. The Market Crowd and You - Page 55 - - Experts on Crowds - Page 56 - - Why Join? - Page 56 - - Crowd Mentality - Page 57 - - Who Leads? - Page 57 - - Independence - Page 58 - - A Positive Group - Page 58 - - 15. Psychology of Trends - Page 59 - - Strong Feelings - Page 59 - - Rallies and Declines - Page 60 - - Price Shocks - Page 60 - - Social Psychology - Page 61 - - 16. Managing versus Forecasting - Page 62 - - Poll-Taking - Page 63 - - A Crystal Ball - Page 63 - - Read the Market, Manage Yourself - Page 64 -- PART 3 Classical Chart Analysis - Page 65 - - 17. Charting - Page 66 - - Brief History - Page 66 - - The Meaning of a Bar Chart - Page 67 - - Japanese Candlesticks - Page 69 - - Efficient Markets, Random Walk, Chaos Theory, and “Nature’s Law” - Page 70 - - 18. Support and Resistance - Page 71 - - Memories, Pain, and Regret - Page 72 - - Strength of Support and Resistance - Page 74 - - Trading Rules - Page 74 - - True and False Breakouts - Page 75 - - 19. Trends and Trading Ranges - Page 76 - - Mass Psychology - Page 78 - - The Hard Right Edge - Page 78 - - Methods and Techniques - Page 78 - - Trade or Wait - Page 80 - - Conflicting Timeframes - Page 80 - - 20. Kangaroo Tails - Page 81 -- PART 4 Computerized Technical Analysis - Page 85 - - 21. Computers in Trading - Page 85 - - Toolboxes - Page 86 - - Black Boxes and Gray Boxes - Page 87 - - Computers - Page 87 - - Market Data - Page 88 - - Three Major Groups of Indicators - Page 89 - - 22. Moving Averages - Page 90 - - Twice as Much Bark - Page 91 - - Market Psychology - Page 91 - - Exponential Moving Averages - Page 92 - - Choosing the Length of a Moving Average - Page 92 - - Trading Rules - Page 93 - - More on Moving Averages - Page 94 - - Dual EMAs - Page 94 - - Moving Averages and Channels - Page 95 - - Prices, Values, and the Value Zone - Page 95 - - 23. Moving Average Convergence-Divergence: MACD Lines and MACD-Histogram - Page 96 - - How to Create MACD - Page 97 - - Market Psychology - Page 97 - - Trading Rules for MACD Lines - Page 97 - - More on MACD Lines - Page 98 - - MACD-Histogram - Page 99 - - Market Psychology - Page 100 - - Trading Rules - Page 100 - - When to Expect a New Peak or Valley - Page 101 - - More on MACD-Histogram - Page 101 - - Divergences - Page 102 - - The Hound of the Baskervilles - Page 105 - - 24. The Directional System - Page 105 - - How to Construct the Directional System - Page 105 - - Crowd Behavior - Page 107 - - Trading Rules - Page 109 - - Average True Range—Help from Volatility - Page 109 - - 25. Oscillators - Page 111 - - Overbought and Oversold - Page 111 - - 26. Stochastic - Page 111 - - Crowd Psychology - Page 112 - - Trading Rules - Page 113 - - More on Stochastic - Page 115 - - 27. Relative Strength Index - Page 115 - - Mass Psychology - Page 116 - - Trading Rules - Page 117 -- PART 5 Volume and Time - Page 119 - - 28. Volume - Page 119 - - Crowd Psychology - Page 121 - - Trading Pointers - Page 122 - - 29. Volume-Based Indicators - Page 123 - - On-Balance Volume - Page 123 - - Crowd Psychology - Page 124 - - Trading Signals - Page 124 - - More on OBV - Page 124 - -## Available Raw Markdown Chunks (Direct Hugging Face Raw URLs - 0 Bot Protection) -- [001_The New Trading for a Living.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/The%20New%20Trading%20for%20a%20Living/001_The%20New%20Trading%20for%20a%20Living.md) — The New Trading for a Living -- [002_CONTENTS.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/The%20New%20Trading%20for%20a%20Living/002_CONTENTS.md) — CONTENTS ix -- [003_PREFACE.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/The%20New%20Trading%20for%20a%20Living/003_PREFACE.md) — PREFACE -- [004_Introduction.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/The%20New%20Trading%20for%20a%20Living/004_Introduction.md) — Introduction -- [005_PART 1 Individual Psychology.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/The%20New%20Trading%20for%20a%20Living/005_PART%201%20Individual%20Psychology.md) — Individual Psychology -- [006_PART 2 Mass Psychology.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/The%20New%20Trading%20for%20a%20Living/006_PART%202%20Mass%20Psychology.md) — Mass Psychology -- [007_PART 3 Classical Chart Analysis.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/The%20New%20Trading%20for%20a%20Living/007_PART%203%20Classical%20Chart%20Analysis.md) — Classical Chart Analysis -- [008_PART 4 Computerized Technical Analysis.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/The%20New%20Trading%20for%20a%20Living/008_PART%204%20Computerized%20Technical%20Analysis.md) — Computerized Technical Analysis -- [009_PART 5 Volume and Time.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/The%20New%20Trading%20for%20a%20Living/009_PART%205%20Volume%20and%20Time.md) — Volume and Time -- [010_PART 6 General Market Indicators.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/The%20New%20Trading%20for%20a%20Living/010_PART%206%20General%20Market%20Indicators.md) — General Market Indicators -- [011_PART 7 Trading Systems.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/The%20New%20Trading%20for%20a%20Living/011_PART%207%20Trading%20Systems.md) — Trading Systems -- [012_PART 8 Trading Vehicles.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/The%20New%20Trading%20for%20a%20Living/012_PART%208%20Trading%20Vehicles.md) — Trading Vehicles -- [013_PART 9 Risk Management.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/The%20New%20Trading%20for%20a%20Living/013_PART%209%20Risk%20Management.md) — Risk Management -- [014_PART 10 Practical Details.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/The%20New%20Trading%20for%20a%20Living/014_PART%2010%20Practical%20Details.md) — Practical Details -- [015_PART 11 Good Record-Keeping.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/The%20New%20Trading%20for%20a%20Living/015_PART%2011%20Good%20Record-Keeping.md) — Good Record-Keeping -- [016_CONCLUSION A Journey without an End - How to Continue Learning.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/The%20New%20Trading%20for%20a%20Living/016_CONCLUSION%20A%20Journey%20without%20an%20End%20-%20How%20to%20Continue%20Learning.md) — A Journey without an End: How to Continue Learning -- [017_Sources.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/The%20New%20Trading%20for%20a%20Living/017_Sources.md) — Sources -- [018_Acknowledgments.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/The%20New%20Trading%20for%20a%20Living/018_Acknowledgments.md) — Acknowledgments -- [019_About the Author.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/The%20New%20Trading%20for%20a%20Living/019_About%20the%20Author.md) — About the Author -- [020_INDEX.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/The%20New%20Trading%20for%20a%20Living/020_INDEX.md) — INDEX -- [021_EULA.md](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/The%20New%20Trading%20for%20a%20Living/021_EULA.md) — A \ No newline at end of file diff --git a/trading/The New Trading for a Living/the_new_trading_for_a_living.layout.json b/trading/The New Trading for a Living/the_new_trading_for_a_living.layout.json deleted file mode 100644 index d2cca27e66c41ecee1c084d87bfea79971665a3e..0000000000000000000000000000000000000000 --- a/trading/The New Trading for a Living/the_new_trading_for_a_living.layout.json +++ /dev/null @@ -1,45596 +0,0 @@ -{ - "doc_id": "the_new_trading_for_a_living", - "file_name": "The New Trading for a Living.pdf", - "title": "The New Trading for a Living", - "author": "Alexander Elder", - "total_pages": 303, - "pages": [ - { - "page_num": 1, - "width": 504.0, - "height": 720.0, - "blocks": [] - }, - { - "page_num": 2, - "width": 504.0, - "height": 720.0, - "blocks": [] - }, - { - "page_num": 3, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p3-b0", - "global_id": 1, - "bbox": [ - 123.9, - 181.76, - 380.11, - 241.89 - ], - "text": "The New \nTrading for a Living", - "type": "text" - } - ] - }, - { - "page_num": 4, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p4-b0", - "global_id": 2, - "bbox": [ - 90.0, - 223.43, - 416.76, - 316.36 - ], - "text": "The Wiley Trading series features books by traders who have survived the mar-\nket’s ever-changing environment and have prospered—some by reinventing \nsystems, others by getting back to basics. Whether a novice trader, professional \nor somewhere in-between, these books will provide the advice and strategies \nneeded to prosper today and well into the future. For more on this series, visit our \nwebsite at www.WileyTrading.com.", - "type": "text" - }, - { - "block_id": "p4-b1", - "global_id": 3, - "bbox": [ - 90.07, - 319.78, - 416.73, - 396.38 - ], - "text": "Founded in 1807, John Wiley & Sons is the oldest independent publishing \ncompany in the United States. With offices in North America, Europe, Australia \nand Asia, Wiley is globally committed to developing and marketing print and \nelectronic products and services for our customers’ professional and personal \nknowledge and understanding.", - "type": "text" - } - ] - }, - { - "page_num": 5, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p5-b0", - "global_id": 4, - "bbox": [ - 111.7, - 210.36, - 404.0, - 345.08 - ], - "text": "The New \nTrading for a \nLiving", - "type": "text" - }, - { - "block_id": "p5-b1", - "global_id": 5, - "bbox": [ - 131.87, - 362.27, - 372.21, - 419.34 - ], - "text": "Psychology • Discipline \nTrading Tools and Systems \nRisk Control • Trade Management", - "type": "text" - }, - { - "block_id": "p5-b2", - "global_id": 6, - "bbox": [ - 151.3, - 454.62, - 358.16, - 481.72 - ], - "text": "Dr. Alexander Elder", - "type": "text" - }, - { - "block_id": "p5-b3", - "global_id": 7, - "bbox": [ - 143.55, - 483.42, - 360.51, - 568.12 - ], - "text": "www.elder.com \nwww.spiketrade.com", - "type": "text" - } - ] - }, - { - "page_num": 6, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p6-b0", - "global_id": 8, - "bbox": [ - 72.0, - 225.75, - 160.04, - 235.73 - ], - "text": "Cover design: Paul DiNovo", - "type": "text" - }, - { - "block_id": "p6-b1", - "global_id": 9, - "bbox": [ - 72.0, - 247.74, - 284.35, - 257.72 - ], - "text": "Copyright © 2014 by by Dr. Alexander Elder. All rights reserved.", - "type": "text" - }, - { - "block_id": "p6-b2", - "global_id": 10, - "bbox": [ - 72.0, - 269.74, - 268.98, - 279.72 - ], - "text": "Published by John Wiley & Sons, Inc., Hoboken, New Jersey.", - "type": "text" - }, - { - "block_id": "p6-b3", - "global_id": 11, - "bbox": [ - 72.0, - 291.73, - 189.82, - 301.71 - ], - "text": "Published simultaneously in Canada.", - "type": "text" - }, - { - "block_id": "p6-b4", - "global_id": 12, - "bbox": [ - 72.0, - 313.73, - 426.04, - 400.7 - ], - "text": "No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or \nby any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted \nunder Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permis-\nsion of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright \nClearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, \nor on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the \nPermissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, \nfax (201) 748-6008, or online at http://www.wiley.com/go/permissions.", - "type": "text" - }, - { - "block_id": "p6-b5", - "global_id": 13, - "bbox": [ - 72.0, - 412.71, - 429.93, - 488.68 - ], - "text": "Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in \npreparing this book, they make no representations or warranties with respect to the accuracy or completeness \nof the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a \nparticular purpose. No warranty may be created or extended by sales representatives or written sales materi-\nals. The advice and strategies contained herein may not be suitable for your situation. You should consult with \na professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any \nother commercial damages, including but not limited to special, incidental, consequential, or other damages.", - "type": "text" - }, - { - "block_id": "p6-b6", - "global_id": 14, - "bbox": [ - 72.0, - 500.7, - 410.56, - 532.67 - ], - "text": "For general information on our other products and services or for technical support, please contact our \nCustomer Care Department within the United States at (800) 762-2974, outside the United States at \n(317) 572-3993 or fax (317) 572-4002.", - "type": "text" - }, - { - "block_id": "p6-b7", - "global_id": 15, - "bbox": [ - 72.0, - 544.69, - 432.38, - 587.66 - ], - "text": "Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included \nwith standard print versions of this book may not be included in e-books or in print-on-demand. If this book \nrefers to media such as a CD or DVD that is not included in the version you purchased, you may download this \nmaterial at http://booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com.", - "type": "text" - }, - { - "block_id": "p6-b8", - "global_id": 16, - "bbox": [ - 72.0, - 599.63, - 257.59, - 609.87 - ], - "text": "Library of Congress Cataloging-in-Publication Data:", - "type": "text" - }, - { - "block_id": "p6-b9", - "global_id": 17, - "bbox": [ - 72.0, - 621.67, - 197.37, - 653.65 - ], - "text": "ISBN 978-1-118-44392-7 (Hardcover)\nISBN 978-1-118-96367-8 (ebk)\nISBN 978-1-118-96368-5 (ebk)", - "type": "text" - }, - { - "block_id": "p6-b10", - "global_id": 18, - "bbox": [ - 72.0, - 665.67, - 199.53, - 686.64 - ], - "text": "Printed in the United States of America\n10 9 8 7 6 5 4 3 2 1", - "type": "text" - } - ] - }, - { - "page_num": 7, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p7-b0", - "global_id": 19, - "bbox": [ - 72.0, - 237.32, - 300.16, - 269.04 - ], - "text": "To the memory of Lou Taylor—\n a wise man, a savvy trader, and a true friend.", - "type": "text" - } - ] - }, - { - "page_num": 8, - "width": 504.0, - "height": 720.0, - "blocks": [] - }, - { - "page_num": 9, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p9-b0", - "global_id": 20, - "bbox": [ - 215.0, - 143.86, - 288.94, - 157.41 - ], - "text": "C O N T E N T S", - "type": "text" - }, - { - "block_id": "p9-b1", - "global_id": 21, - "bbox": [ - 72.0, - 672.7, - 432.05, - 686.25 - ], - "text": "vii", - "type": "text" - }, - { - "block_id": "p9-b2", - "global_id": 22, - "bbox": [ - 215.04, - 143.86, - 288.98, - 157.41 - ], - "text": "C O N T E N T S", - "type": "text" - }, - { - "block_id": "p9-b3", - "global_id": 23, - "bbox": [ - 144.0, - 263.93, - 432.04, - 276.13 - ], - "text": "Preface\nxiii", - "type": "text" - }, - { - "block_id": "p9-b4", - "global_id": 24, - "bbox": [ - 72.0, - 293.86, - 431.98, - 307.41 - ], - "text": "Introduction\n1", - "type": "text" - }, - { - "block_id": "p9-b5", - "global_id": 25, - "bbox": [ - 144.0, - 314.83, - 431.96, - 355.04 - ], - "text": "1. Trading—The Last Frontier\n1\n  2. Psychology Is the Key\n3\n  3. The Odds against You\n5", - "type": "text" - }, - { - "block_id": "p9-b6", - "global_id": 26, - "bbox": [ - 72.0, - 367.86, - 431.98, - 381.41 - ], - "text": "ONE\t\nIndividual Psychology\n9", - "type": "text" - }, - { - "block_id": "p9-b7", - "global_id": 27, - "bbox": [ - 144.0, - 388.83, - 432.05, - 485.05 - ], - "text": "4. Why Trade?\n9\n  5. Reality versus Fantasy\n10\n  6. Self-Destructiveness\n16\n  7. Trading Psychology\n19\n  8. Trading Lessons from AA\n21\n  9. Losers Anonymous\n23\n10. Winners and Losers\n27", - "type": "text" - }, - { - "block_id": "p9-b8", - "global_id": 28, - "bbox": [ - 72.0, - 497.96, - 431.95, - 511.51 - ], - "text": "TWO\t\nMass Psychology\n31", - "type": "text" - }, - { - "block_id": "p9-b9", - "global_id": 29, - "bbox": [ - 144.0, - 518.93, - 432.05, - 601.15 - ], - "text": "11. What Is Price?\n32\n12. What Is the Market?\n33\n13. The Trading Scene\n36\n14. The Market Crowd and You\n39\n15. Psychology of Trends\n43\n16. Managing versus Forecasting\n46", - "type": "text" - }, - { - "block_id": "p9-b10", - "global_id": 30, - "bbox": [ - 72.0, - 613.96, - 431.95, - 627.51 - ], - "text": "THREE\t\nClassical Chart Analysis\n49", - "type": "text" - }, - { - "block_id": "p9-b11", - "global_id": 31, - "bbox": [ - 144.0, - 634.93, - 432.05, - 661.14 - ], - "text": "17. Charting\n50\n18. Support and Resistance\n55", - "type": "text" - } - ] - }, - { - "page_num": 10, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p10-b0", - "global_id": 32, - "bbox": [ - 72.0, - 33.66, - 432.05, - 47.21 - ], - "text": "viii\t\nCONTENTS", - "type": "text" - }, - { - "block_id": "p10-b1", - "global_id": 33, - "bbox": [ - 144.0, - 58.03, - 432.05, - 84.24 - ], - "text": "19. Trends and Trading Ranges\n60\n20. Kangaroo Tails\n65", - "type": "text" - }, - { - "block_id": "p10-b2", - "global_id": 34, - "bbox": [ - 72.0, - 97.16, - 431.95, - 110.71 - ], - "text": "FOUR\t\nComputerized Technical Analysis\n69", - "type": "text" - }, - { - "block_id": "p10-b3", - "global_id": 35, - "bbox": [ - 144.0, - 118.13, - 432.05, - 228.35 - ], - "text": "21. Computers in Trading\n69\n22. Moving Averages\n74\n23. Moving Average Convergence-Divergence: \nMACD Lines and MACD-Histogram\n80\n24. The Directional System\n89\n25. Oscillators\n95\n26. Stochastic\n95\n27. Relative Strength Index\n99", - "type": "text" - }, - { - "block_id": "p10-b4", - "global_id": 36, - "bbox": [ - 72.0, - 241.16, - 432.05, - 254.71 - ], - "text": "FIVE\t\nVolume and Time\n103", - "type": "text" - }, - { - "block_id": "p10-b5", - "global_id": 37, - "bbox": [ - 144.0, - 262.13, - 432.02, - 344.35 - ], - "text": "28. Volume\n103\n29. Volume-Based Indicators\n107\n30. Force Index\n112\n31. Open Interest\n117\n32. Time\n121\n33. Trading Timeframes\n126", - "type": "text" - }, - { - "block_id": "p10-b6", - "global_id": 38, - "bbox": [ - 72.0, - 357.26, - 432.05, - 370.81 - ], - "text": "SIX\t\nGeneral Market Indicators\n133", - "type": "text" - }, - { - "block_id": "p10-b7", - "global_id": 39, - "bbox": [ - 144.0, - 378.23, - 432.02, - 432.44 - ], - "text": "34. The New High–New Low Index\n133\n35. Stocks above 50-Day MA\n139\n36. Other Stock Market Indicators\n140\n37. Consensus and Commitment Indicators\n142", - "type": "text" - }, - { - "block_id": "p10-b8", - "global_id": 40, - "bbox": [ - 72.0, - 445.26, - 432.05, - 458.81 - ], - "text": "SEVEN\t\nTrading Systems\n149", - "type": "text" - }, - { - "block_id": "p10-b9", - "global_id": 41, - "bbox": [ - 144.0, - 466.23, - 432.02, - 534.45 - ], - "text": "38. System Testing, Paper Trading, and the \nThree Key Demands for Every Trade\n151\n39. Triple Screen Trading System\n154\n40. The Impulse System\n162\n41. Channel Trading Systems\n166", - "type": "text" - }, - { - "block_id": "p10-b10", - "global_id": 42, - "bbox": [ - 72.0, - 547.36, - 432.05, - 560.91 - ], - "text": "EIGHT\t\nTrading Vehicles\n173", - "type": "text" - }, - { - "block_id": "p10-b11", - "global_id": 43, - "bbox": [ - 144.0, - 568.33, - 432.02, - 650.55 - ], - "text": "42. Stocks\n175\n43. ETFs\n176\n44. Options\n178\n45. CFDs\n186\n46. Futures\n187\n47. Forex\n194", - "type": "text" - } - ] - }, - { - "page_num": 11, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p11-b0", - "global_id": 44, - "bbox": [ - 72.0, - 33.66, - 431.89, - 47.21 - ], - "text": "CONTENTS\t\nix", - "type": "text" - }, - { - "block_id": "p11-b1", - "global_id": 45, - "bbox": [ - 71.95, - 57.66, - 431.89, - 71.21 - ], - "text": "NINE\t\nRisk Management\n197", - "type": "text" - }, - { - "block_id": "p11-b2", - "global_id": 46, - "bbox": [ - 144.0, - 78.63, - 432.02, - 146.85 - ], - "text": "48. Emotions and Probabilities\n197\n49. The Two Main Rules of Risk Control\n202\n50. The Two Percent Rule\n203\n51. The Six Percent Rule\n208\n52. A Comeback from a Drawdown\n210", - "type": "text" - }, - { - "block_id": "p11-b3", - "global_id": 47, - "bbox": [ - 72.0, - 159.76, - 432.05, - 173.31 - ], - "text": "TEN\t\nPractical Details\n215", - "type": "text" - }, - { - "block_id": "p11-b4", - "global_id": 48, - "bbox": [ - 144.0, - 180.73, - 432.02, - 234.94 - ], - "text": "53. How to Set Profit Targets: “Enough” Is the Power Word\n215\n54. How to Set Stops: Say No to Wishful Thinking\n219\n55. Is This an A-trade?\n225\n56. Scanning for Possible Trades\n230", - "type": "text" - }, - { - "block_id": "p11-b5", - "global_id": 49, - "bbox": [ - 72.0, - 247.76, - 432.05, - 261.31 - ], - "text": "ELEVEN\t\nGood Record-Keeping\n233", - "type": "text" - }, - { - "block_id": "p11-b6", - "global_id": 50, - "bbox": [ - 144.0, - 268.73, - 432.02, - 308.94 - ], - "text": "57. Your Daily Homework\n234\n58. Creating and Scoring Trade Plans\n238\n59. Trade Journal\n243", - "type": "text" - }, - { - "block_id": "p11-b7", - "global_id": 51, - "bbox": [ - 72.0, - 321.86, - 432.05, - 349.81 - ], - "text": "A Journey without an End: \nHow to Continue Learning\n249", - "type": "text" - }, - { - "block_id": "p11-b8", - "global_id": 52, - "bbox": [ - 144.0, - 362.93, - 432.02, - 417.14 - ], - "text": "Sources\n253\nAcknowledgments\n257\nAbout the Author\n259\nIndex\n261", - "type": "text" - } - ] - }, - { - "page_num": 12, - "width": 504.0, - "height": 720.0, - "blocks": [] - }, - { - "page_num": 13, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p13-b0", - "global_id": 53, - "bbox": [ - 221.5, - 143.86, - 282.45, - 157.41 - ], - "text": "P R E FA C E", - "type": "text" - }, - { - "block_id": "p13-b1", - "global_id": 54, - "bbox": [ - 72.0, - 672.7, - 432.05, - 686.25 - ], - "text": "xi", - "type": "text" - }, - { - "block_id": "p13-b2", - "global_id": 55, - "bbox": [ - 68.4, - 262.07, - 86.64, - 301.76 - ], - "text": "T", - "type": "text" - }, - { - "block_id": "p13-b3", - "global_id": 56, - "bbox": [ - 72.04, - 267.63, - 434.77, - 364.96 - ], - "text": "rading for a Living was published in 1993 and became an international best seller. \nIt remains at the top of many reading lists, as friends recommend it to friends and \ntrading firms give it to their new hires. All these years, I resisted revising my book \nbecause I trusted and liked its internal logic. I traded, traveled, wrote other books, \nand taught a few classes. Now, 21 years later, I agreed to update my most popular \nbook so that you can benefit from the new technologies as well as the lessons I’ve \nlearned.", - "type": "text" - }, - { - "block_id": "p13-b4", - "global_id": 57, - "bbox": [ - 72.04, - 365.66, - 434.77, - 406.97 - ], - "text": "My late great friend Lou Taylor, to whom this book is dedicated, used to joke: “If \nI get half a percent smarter each year, I’ll be a genius by the time I die.” Revising my \nvery first book felt like reliving my youth with the benefit of experience.", - "type": "text" - }, - { - "block_id": "p13-b5", - "global_id": 58, - "bbox": [ - 72.04, - 407.67, - 434.8, - 505.0 - ], - "text": "In planning this update, I thought of a building complex in Vienna, Austria \ncalled the Gasometer. At its core are multistory storage tanks, erected by Austrian \nbricklayers in 1927. When modern technology made huge gas cylinders obsolete, \narchitects converted them into modern apartments. They punched wide openings \nin brick walls, creating panoramic views, installed floors and elevators, and added \nglass-enclosed penthouses. I used to stay in one of them and wanted my new book to \nfollow that model of blending old craftsmanship with new technology.", - "type": "text" - }, - { - "block_id": "p13-b6", - "global_id": 59, - "bbox": [ - 72.04, - 505.7, - 434.76, - 533.01 - ], - "text": "Before you begin reading this book, ask yourself: what’s the single most important \nstep you can take to become a successful trader?", - "type": "text" - }, - { - "block_id": "p13-b7", - "global_id": 60, - "bbox": [ - 72.04, - 533.7, - 434.69, - 575.02 - ], - "text": "Psychology is important. Since I was actively practicing psychiatry while writ-\ning the original Trading for a Living, its psychology part stood the test of time and I \nchanged it very little in this new edition.", - "type": "text" - }, - { - "block_id": "p13-b8", - "global_id": 61, - "bbox": [ - 72.04, - 575.72, - 434.76, - 659.04 - ], - "text": "Market analysis is very important—but remember that when we look at a chart, \nwe deal with only five pieces of data—the open, the high, the low, the close and \nvolume. Piling up masses of indicators and patterns on top of those five values only \nincreases confusion. Less is often more. If you’ve read Trading for a Living, you’ll see \nthat I’ve reduced the number of technical chapters and moved some of them into \na downloadable addendum. On the other hand, I added several new chapters that", - "type": "text" - } - ] - }, - { - "page_num": 14, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p14-b0", - "global_id": 62, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "xii\t\nPREFACE", - "type": "text" - }, - { - "block_id": "p14-b1", - "global_id": 63, - "bbox": [ - 72.0, - 57.83, - 434.71, - 85.14 - ], - "text": "focus on new tools, notably the Impulse system. I also added a section on stops, \nprofit targets and other practical details.", - "type": "text" - }, - { - "block_id": "p14-b2", - "global_id": 64, - "bbox": [ - 72.0, - 85.84, - 434.75, - 141.16 - ], - "text": "Money management is extremely important because financial markets are hot-\nbeds of risk. That was the weakest part of the original book, and I completely \nrewrote it. One of many tools you’ll discover will be the Iron Triangle of risk \ncontrol.", - "type": "text" - }, - { - "block_id": "p14-b3", - "global_id": 65, - "bbox": [ - 72.0, - 141.85, - 434.75, - 183.17 - ], - "text": "Psychology, trading tactics, and money management are the three pillars of \nsuccess, but there is the fourth factor that ties them together. That factor—which \nintegrates all others—is record-keeping.", - "type": "text" - }, - { - "block_id": "p14-b4", - "global_id": 66, - "bbox": [ - 72.0, - 183.86, - 434.75, - 253.19 - ], - "text": "Keeping good records will enable you to learn from your experiences. It’ll help \nyou break out of the vicious circle of small gains and big losses, running like a squir-\nrel in a barrel, sweating and stressed but never getting anywhere. Keeping good \nrecords will make you your own teacher and a better trader. I’ll show you several \ntypes of records you need to keep and will share several of my trade diaries.", - "type": "text" - }, - { - "block_id": "p14-b5", - "global_id": 67, - "bbox": [ - 72.0, - 253.88, - 434.65, - 281.2 - ], - "text": "If you’re a new reader, welcome to the journey. If you’ve already read Trading for a \nLiving, I hope you’ll find this new book two decades smarter than the first.", - "type": "text" - }, - { - "block_id": "p14-b6", - "global_id": 68, - "bbox": [ - 334.45, - 288.12, - 432.02, - 314.92 - ], - "text": "Dr. ⁜Alexander Elder\nNew York–Vermont, 2014", - "type": "text" - } - ] - }, - { - "page_num": 15, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p15-b0", - "global_id": 69, - "bbox": [ - 123.9, - 181.76, - 380.11, - 241.89 - ], - "text": "The New \nTrading for a Living", - "type": "text" - } - ] - }, - { - "page_num": 16, - "width": 504.0, - "height": 720.0, - "blocks": [] - }, - { - "page_num": 17, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p17-b0", - "global_id": 70, - "bbox": [ - 72.0, - 118.61, - 289.92, - 171.84 - ], - "text": "Introduction", - "type": "text" - }, - { - "block_id": "p17-b1", - "global_id": 71, - "bbox": [ - 72.1, - 673.7, - 432.08, - 687.25 - ], - "text": "1", - "type": "text" - }, - { - "block_id": "p17-b2", - "global_id": 72, - "bbox": [ - 73.55, - 335.56, - 319.67, - 354.2 - ], - "text": "■\n■1. Trading—The Last Frontier", - "type": "text" - }, - { - "block_id": "p17-b3", - "global_id": 73, - "bbox": [ - 72.0, - 364.53, - 431.93, - 391.84 - ], - "text": "You can be free. You can live and work anywhere in the world. You can be indepen-\ndent from routine and not answer to anybody.", - "type": "text" - }, - { - "block_id": "p17-b4", - "global_id": 74, - "bbox": [ - 72.0, - 392.54, - 434.7, - 461.86 - ], - "text": "This is the life of a successful trader.\nMany aspire to it but few succeed. An amateur looks at a quote screen and sees \nmillions of dollars sparkle in front of his face. He reaches for the money—and loses. \nHe reaches again—and loses more. Traders lose because the game is hard, or out of \nignorance, or from lack of discipline. If any of these ail you, I wrote this book for you.", - "type": "text" - }, - { - "block_id": "p17-b5", - "global_id": 75, - "bbox": [ - 72.0, - 481.9, - 205.32, - 498.84 - ], - "text": "How I Began to Trade", - "type": "text" - }, - { - "block_id": "p17-b6", - "global_id": 76, - "bbox": [ - 72.0, - 504.53, - 434.74, - 587.86 - ], - "text": "In the summer of 1976, I drove from New York to California. I took along a few books \non psychiatry (I was a first-year psychiatric resident), several histories, and put a pa-\nperback copy of Engel’s How to Buy Stocks into the trunk of my old Dodge. Little did I \nknow that a dog-eared paperback, borrowed from a lawyer friend, would in due time \nchange the course of my life. That friend, incidentally, had a perfect reverse golden \ntouch—any investment he touched went under water. But that’s another story.", - "type": "text" - }, - { - "block_id": "p17-b7", - "global_id": 77, - "bbox": [ - 72.0, - 588.55, - 434.75, - 629.87 - ], - "text": "I gulped down the Engel book in campgrounds across America, finishing it on a \nPacific beach in La Jolla. I had known nothing about the stock market, and the idea \nof making money by thinking gripped me.", - "type": "text" - }, - { - "block_id": "p17-b8", - "global_id": 78, - "bbox": [ - 72.0, - 630.56, - 434.74, - 657.88 - ], - "text": "I grew up in the Soviet Union in the days when it was, in the words of a former \nU.S. president, “an evil empire.” I hated the Soviet system and wanted to get out, but", - "type": "text" - } - ] - }, - { - "page_num": 18, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p18-b0", - "global_id": 79, - "bbox": [ - 72.0, - 33.66, - 432.03, - 47.21 - ], - "text": "2\t\nINTRODUCTION", - "type": "text" - }, - { - "block_id": "p18-b1", - "global_id": 80, - "bbox": [ - 72.0, - 57.83, - 434.68, - 99.14 - ], - "text": "emigration was forbidden. I entered college at 16, graduated medical school at 22, \ncompleted my residency, and then took a job as a ship’s doctor. Now I could break \nfree! I jumped the Soviet ship in Abidjan, Ivory Coast.", - "type": "text" - }, - { - "block_id": "p18-b2", - "global_id": 81, - "bbox": [ - 72.0, - 99.84, - 434.75, - 169.16 - ], - "text": "I ran to the U.S. Embassy through the clogged dusty streets of an African port \ncity, chased by my ex-crewmates. The embassy put me in a “safe house” and then on \na plane to New York. I landed at Kennedy Airport in February 1974, arriving from \nAfrica with $25 in my pocket. I spoke some English, but did not know a soul in this \ncountry.", - "type": "text" - }, - { - "block_id": "p18-b3", - "global_id": 82, - "bbox": [ - 72.0, - 169.86, - 434.7, - 211.18 - ], - "text": "I had no idea what stocks, bonds, futures, or options were and sometimes got a \nqueasy feeling just from looking at the American dollar bills in my wallet. In the old \ncountry, a handful of them could buy you three years in Siberia.", - "type": "text" - }, - { - "block_id": "p18-b4", - "global_id": 83, - "bbox": [ - 72.0, - 211.87, - 434.76, - 281.2 - ], - "text": "Reading How to Buy Stocks opened a whole new world for me. When I returned \nto New York, I bought my first stock—it was KinderCare. A very bad thing hap-\npened—I made money on my first trade and then the second one, leaving me with \na delusion that making money in the markets was easy. It took me a couple of years \nto get rid of that notion.", - "type": "text" - }, - { - "block_id": "p18-b5", - "global_id": 84, - "bbox": [ - 72.0, - 281.89, - 434.76, - 351.22 - ], - "text": "My professional career proceeded on a separate track. I completed a residency in \npsychiatry at a major university hospital, studied at the New York Psychoanalytic In-\nstitute, and served as book editor for the largest psychiatric newspaper in the United \nStates. I still have my license, but my professional practice these days is at most an hour \nor two per month. I am busy trading, love traveling, and do some teaching.", - "type": "text" - }, - { - "block_id": "p18-b6", - "global_id": 85, - "bbox": [ - 72.0, - 351.91, - 434.71, - 407.23 - ], - "text": "Learning to trade has been a long journey—with soaring highs and aching lows. \nIn moving forward—or in circles—I repeatedly knocked my head against the wall \nand ran my trading account into the ground. Each time I returned to a hospital job, \nput a stake together, read, thought, did more testing, and then started trading again.", - "type": "text" - }, - { - "block_id": "p18-b7", - "global_id": 86, - "bbox": [ - 72.0, - 407.93, - 434.69, - 449.24 - ], - "text": "My trading slowly improved, but the breakthrough came when I realized that the \nkey to winning was inside my head and not inside a computer. Psychiatry gave me \nthe insight into trading that I will share with you.", - "type": "text" - }, - { - "block_id": "p18-b8", - "global_id": 87, - "bbox": [ - 72.0, - 469.2, - 267.17, - 486.14 - ], - "text": "Do You Really Want to Succeed?", - "type": "text" - }, - { - "block_id": "p18-b9", - "global_id": 88, - "bbox": [ - 72.0, - 491.83, - 434.77, - 561.15 - ], - "text": "For many years I had a friend whose wife was fat. She was an elegant dresser, and \nshe had been on a diet for as long as I had known her. She said she wanted to lose \nweight and she didn’t eat cake or potatoes in front of people—but when I came into \nher kitchen, I’d see her go at it with a big fork. She said she wanted to be slim, but \nremained fat.", - "type": "text" - }, - { - "block_id": "p18-b10", - "global_id": 89, - "bbox": [ - 72.0, - 561.85, - 434.74, - 617.17 - ], - "text": "The short-term pleasure of eating was stronger for her than the delayed pleasure \nand health benefits of weight loss. My friend’s wife reminded me of a great many \ntraders who say they want to be successful but keep making impulsive trades—going \nfor the short-term thrills of gambling in the markets.", - "type": "text" - }, - { - "block_id": "p18-b11", - "global_id": 90, - "bbox": [ - 72.0, - 617.86, - 434.75, - 659.18 - ], - "text": "People deceive and play games with themselves. Lying to others is bad, but lying \nto yourself is hopeless. Bookstores are full of good books on dieting, but the world \nis still full of overweight people.", - "type": "text" - } - ] - }, - { - "page_num": 19, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p19-b0", - "global_id": 91, - "bbox": [ - 72.0, - 33.66, - 432.0, - 47.21 - ], - "text": "2. PSYCHOLOGY IS THE KEY\t\n3", - "type": "text" - }, - { - "block_id": "p19-b1", - "global_id": 92, - "bbox": [ - 72.02, - 57.83, - 434.76, - 99.14 - ], - "text": "This book will teach you how to analyze and trade the markets, control risks, and \ndeal with your own mind. I can give you the knowledge. Only you can supply the \nmotivation.", - "type": "text" - }, - { - "block_id": "p19-b2", - "global_id": 93, - "bbox": [ - 72.02, - 99.84, - 434.78, - 141.16 - ], - "text": "And remember this: an athlete who wants to enjoy risky sports must follow safety \nrules. When you reduce risks, you gain an added sense of accomplishment and con-\ntrol. The same goes for trading.", - "type": "text" - }, - { - "block_id": "p19-b3", - "global_id": 94, - "bbox": [ - 72.02, - 142.1, - 434.76, - 182.9 - ], - "text": "You can succeed in trading only if you handle it as a serious intellectual pursuit. Emotional \ntrading is lethal. To help ensure success, practice defensive money management. A good trader \nwatches his capital as carefully as a professional scuba diver watches his air supply.", - "type": "text" - }, - { - "block_id": "p19-b4", - "global_id": 95, - "bbox": [ - 73.55, - 214.86, - 277.88, - 233.5 - ], - "text": "■\n■2. Psychology Is the Key", - "type": "text" - }, - { - "block_id": "p19-b5", - "global_id": 96, - "bbox": [ - 72.0, - 245.83, - 434.75, - 301.15 - ], - "text": "Remember how you felt the last time you placed an order? Were you anxious to \njump in or afraid of losing? Did you procrastinate before entering your order? When \nyou closed out a trade, did you feel elated or humiliated? The feelings of thousands \nof traders merge into huge psychological tides that move the markets.", - "type": "text" - }, - { - "block_id": "p19-b6", - "global_id": 97, - "bbox": [ - 72.0, - 324.2, - 257.78, - 341.14 - ], - "text": "Getting Off the Roller Coaster", - "type": "text" - }, - { - "block_id": "p19-b7", - "global_id": 98, - "bbox": [ - 72.0, - 347.83, - 434.75, - 417.15 - ], - "text": "The majority of traders spend most of their time looking for good trades. Once \nthey enter a trade, they don’t manage it but either squirm from pain or grin from \npleasure. They ride an emotional roller coaster and miss the essential element of \nwinning—the management of their emotions. Their inability to manage themselves \nleads to poor risk management and losses.", - "type": "text" - }, - { - "block_id": "p19-b8", - "global_id": 99, - "bbox": [ - 72.0, - 417.85, - 434.72, - 473.17 - ], - "text": "If your mind is not in gear with the markets, or if you ignore changes in mass \npsychology of crowds, you have no chance of making money trading. All winning \nprofessionals know the enormous importance of psychology. Most losing amateurs \nignore it.", - "type": "text" - }, - { - "block_id": "p19-b9", - "global_id": 100, - "bbox": [ - 72.0, - 473.86, - 434.68, - 557.19 - ], - "text": "Friends and students who know that I am a psychiatrist often ask whether this \nhelps me as a trader. Good psychiatry and good trading have one important principle \nin common. Both focus on reality, on seeing the world the way it is. To live a healthy \nlife, you have to live with your eyes open. To be a good trader, you need to trade with \nyour eyes open, recognize real trends and turns, and not waste time or energy on \nfantasies, regrets, and wishful thinking.", - "type": "text" - }, - { - "block_id": "p19-b10", - "global_id": 101, - "bbox": [ - 72.0, - 580.2, - 165.45, - 597.14 - ], - "text": "A Man’s Game?", - "type": "text" - }, - { - "block_id": "p19-b11", - "global_id": 102, - "bbox": [ - 72.0, - 603.83, - 434.71, - 659.15 - ], - "text": "Brokerage house records indicate that most traders are male. The files of my firm, \nElder.com, confirm that approximately 85 to 90 percent of traders are male. The \npercentage of women traders among my clients, however, has more than doubled \nsince the original edition of Trading for a Living was written twenty years ago.", - "type": "text" - } - ] - }, - { - "page_num": 20, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p20-b0", - "global_id": 103, - "bbox": [ - 72.0, - 33.66, - 432.03, - 47.21 - ], - "text": "4\t\nINTRODUCTION", - "type": "text" - }, - { - "block_id": "p20-b1", - "global_id": 104, - "bbox": [ - 72.0, - 57.83, - 432.05, - 113.15 - ], - "text": "The English language being what it is, “he” flows better than “he or she” or jump-\ning between the two pronouns. To make reading easier, I’ll use the masculine pro-\nnoun throughout this book. Of course, no disrespect is intended to the many wom-\nen traders.", - "type": "text" - }, - { - "block_id": "p20-b2", - "global_id": 105, - "bbox": [ - 72.0, - 113.84, - 434.62, - 141.16 - ], - "text": "As a matter of fact, I find that the percentage of successful traders is higher among \nwomen. As a group, they tend to be more disciplined and less arrogant than men.", - "type": "text" - }, - { - "block_id": "p20-b3", - "global_id": 106, - "bbox": [ - 72.0, - 161.2, - 248.94, - 178.13 - ], - "text": "How This Book Is Organized", - "type": "text" - }, - { - "block_id": "p20-b4", - "global_id": 107, - "bbox": [ - 72.0, - 183.83, - 434.72, - 225.14 - ], - "text": "The three pillars of successful trading are psychology, market analysis, and risk man-\nagement. Good record-keeping ties them together. This book will help you learn the \nessentials of all these areas.", - "type": "text" - }, - { - "block_id": "p20-b5", - "global_id": 108, - "bbox": [ - 72.0, - 225.84, - 434.74, - 267.16 - ], - "text": "Part One of this book will show you how to manage emotions in trading. I discov-\nered this method while practicing psychiatry. It greatly improved my trading, and it \ncan help you too.", - "type": "text" - }, - { - "block_id": "p20-b6", - "global_id": 109, - "bbox": [ - 72.0, - 267.85, - 434.71, - 323.17 - ], - "text": "Part Two will focus on crowd psychology of the markets. Mass behavior is more \nprimitive than that of individuals. If you understand how crowds behave, you’ll be \nable to profit from their mood swings instead of being swept up in their emotional \ntides.", - "type": "text" - }, - { - "block_id": "p20-b7", - "global_id": 110, - "bbox": [ - 72.0, - 323.87, - 432.02, - 365.18 - ], - "text": "Part Three will show how chart patterns reflect crowd behavior. Classical techni-\ncal analysis is applied social psychology, like poll-taking. Support, resistance, break-\nouts, and other patterns reflect crowd behavior.", - "type": "text" - }, - { - "block_id": "p20-b8", - "global_id": 111, - "bbox": [ - 72.0, - 365.88, - 434.74, - 421.2 - ], - "text": "Part Four will teach you modern methods of computerized technical analysis. \nIndicators provide a better insight into mass psychology than classical chart patterns. \nTrend-following indicators help identify market trends, while oscillators show when \nthose trends are ready to reverse.", - "type": "text" - }, - { - "block_id": "p20-b9", - "global_id": 112, - "bbox": [ - 72.0, - 421.9, - 434.76, - 463.21 - ], - "text": "Volume and open interest also reflect crowd behavior. Part Five will focus on \nthem as well as on the passage of time in the markets. Crowds have short attention \nspans, and a trader who relates price changes to time gains a competitive advantage.", - "type": "text" - }, - { - "block_id": "p20-b10", - "global_id": 113, - "bbox": [ - 72.0, - 463.91, - 434.62, - 491.22 - ], - "text": "Part Six will focus on the best tools for analyzing the stock market as a whole. \nThey can be especially helpful for stock index futures and options traders.", - "type": "text" - }, - { - "block_id": "p20-b11", - "global_id": 114, - "bbox": [ - 72.0, - 491.92, - 434.74, - 533.23 - ], - "text": "Part Seven will present several trading systems. We’ll begin with the Triple Screen, \nwhich has become widely accepted, and then review the Impulse and Channel trad-\ning systems.", - "type": "text" - }, - { - "block_id": "p20-b12", - "global_id": 115, - "bbox": [ - 72.0, - 533.93, - 434.72, - 575.24 - ], - "text": "Part Eight will discuss several classes of trading vehicles. It will outline pluses and \nminuses of equities, futures, options, and forex, while blowing away the promotional \nfog that clouds some of these markets.", - "type": "text" - }, - { - "block_id": "p20-b13", - "global_id": 116, - "bbox": [ - 72.0, - 575.94, - 434.74, - 645.26 - ], - "text": "Part Nine will lead you into the all-important topic of money management. This \nessential aspect of successful trading is neglected by most amateurs. You can have a \nbrilliant trading system, but if your risk management is poor, then a short string of \nlosses will destroy your account. Armed with the Iron Triangle of risk control and \nother tools, you’ll become a safer and more effective trader.", - "type": "text" - }, - { - "block_id": "p20-b14", - "global_id": 117, - "bbox": [ - 72.0, - 645.96, - 434.71, - 673.27 - ], - "text": "Part Ten will delve into the nitty-gritty of trading—setting stops, profit targets, \nand scanning. These practical details will help you implement any system you like.", - "type": "text" - } - ] - }, - { - "page_num": 21, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p21-b0", - "global_id": 118, - "bbox": [ - 72.0, - 33.66, - 432.0, - 47.21 - ], - "text": "3. THE ODDS AGAINST YOU\t\n5", - "type": "text" - }, - { - "block_id": "p21-b1", - "global_id": 119, - "bbox": [ - 72.02, - 57.83, - 434.7, - 99.14 - ], - "text": "Part Eleven will guide you through the principles and templates of good record-\nkeeping. The quality of your records is the single best predictor of your success. I’ll \noffer you free downloads of the templates I like to use.", - "type": "text" - }, - { - "block_id": "p21-b2", - "global_id": 120, - "bbox": [ - 72.02, - 99.84, - 434.78, - 183.17 - ], - "text": "Last but not least, this book has a separate Study Guide. It asks over 100 questions, \neach linked to a specific section of the book. All questions are designed to test your \nlevel of understanding and discover any blind spots. After you finish reading each sec-\ntion of this book, it’ll make sense to turn to the Study Guide and answer questions \nrelevant to that section. If test results turn out to be less than excellent, don’t hurry, \nreread that section of the book, and retake the test.", - "type": "text" - }, - { - "block_id": "p21-b3", - "global_id": 121, - "bbox": [ - 72.02, - 183.86, - 434.79, - 239.18 - ], - "text": "You are about to spend many hours with this book. When you find ideas that \nlook important to you, test them in the only way that matters—on your own mar-\nket data and in your own trading. You will make this knowledge your own only by \nquestioning and testing it.", - "type": "text" - }, - { - "block_id": "p21-b4", - "global_id": 122, - "bbox": [ - 73.55, - 266.86, - 275.81, - 285.5 - ], - "text": "■\n■3. The Odds against You", - "type": "text" - }, - { - "block_id": "p21-b5", - "global_id": 123, - "bbox": [ - 72.0, - 295.83, - 434.74, - 351.15 - ], - "text": "Why do most traders lose and wash out of the markets? Emotional and mindless \ntrading are big reasons, but there is another. Markets are actually set up so that most \ntraders must lose money. The trading industry slowly kills traders with commissions \nand slippage.", - "type": "text" - }, - { - "block_id": "p21-b6", - "global_id": 124, - "bbox": [ - 72.0, - 351.84, - 434.72, - 421.17 - ], - "text": "You pay commissions for entering and exiting trades. Slippage is the difference \nbetween the price at which you place your order and the price at which it gets filled. \nWhen you place a limit order, it is filled at your price or better, or not at all. When \nyou feel eager to enter or exit and place a market order, it’s often filled at a worse \nprice than prevailed when you placed it.", - "type": "text" - }, - { - "block_id": "p21-b7", - "global_id": 125, - "bbox": [ - 72.0, - 421.86, - 434.74, - 477.18 - ], - "text": "Most amateurs are unaware of the harm done by commissions and slippage, just \nas medieval peasants could not imagine that tiny invisible germs could kill them. If \nyou ignore slippage and deal with a broker who charges high commissions, you’re \nacting like a peasant who drinks from a communal pool during a cholera epidemic.", - "type": "text" - }, - { - "block_id": "p21-b8", - "global_id": 126, - "bbox": [ - 72.0, - 477.88, - 434.74, - 547.2 - ], - "text": "The trading industry keeps draining huge amounts of money from the markets. \nExchanges, regulators, brokers, and advisors live off the markets, while generations \nof traders keep washing out. Markets need a fresh supply of losers just as builders \nof the ancient pyramids needed a fresh supply of slaves. Losers bring money into the \nmarkets, which is necessary for the prosperity of the trading industry.", - "type": "text" - }, - { - "block_id": "p21-b9", - "global_id": 127, - "bbox": [ - 72.0, - 567.2, - 195.38, - 584.14 - ], - "text": "A Minus-Sum Game", - "type": "text" - }, - { - "block_id": "p21-b10", - "global_id": 128, - "bbox": [ - 72.0, - 589.83, - 434.71, - 645.15 - ], - "text": "Winners in a zero-sum game make as much as losers lose. If you and I bet $20 on \nthe direction of the next 100-point move in the Dow, one of us will collect $20 and \nthe other will lose $20. A single bet has a component of luck, but the more knowl-\nedgeable person will keep winning more often than losing over a period of time.", - "type": "text" - }, - { - "block_id": "p21-b11", - "global_id": 129, - "bbox": [ - 72.0, - 645.84, - 434.71, - 673.16 - ], - "text": "People buy the industry’s propaganda about trading being a zero-sum game, take \nthe bait, and open accounts. They don’t realize that trading is a minus-sum game.", - "type": "text" - } - ] - }, - { - "page_num": 22, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p22-b0", - "global_id": 130, - "bbox": [ - 72.0, - 33.66, - 432.03, - 47.21 - ], - "text": "6\t\nINTRODUCTION", - "type": "text" - }, - { - "block_id": "p22-b1", - "global_id": 131, - "bbox": [ - 72.0, - 57.83, - 434.68, - 85.14 - ], - "text": "Winners receive less than what losers lose because the industry drains money from \nthe markets.", - "type": "text" - }, - { - "block_id": "p22-b2", - "global_id": 132, - "bbox": [ - 72.0, - 85.84, - 434.69, - 169.16 - ], - "text": "For example, roulette in a casino is a minus-sum game because the casino sweeps \naway between three and six percent of every bet. This makes roulette unwinnable in \nthe long run. You and I can get into in a minus-sum game if we make the same $20 \nbet on the next 100-point move in the Dow through brokers. When we settle, the \nloser will be out $23, and the winner will collect only $17, while two brokers will \nsmile on their way to the bank.", - "type": "text" - }, - { - "block_id": "p22-b3", - "global_id": 133, - "bbox": [ - 72.0, - 169.86, - 434.74, - 239.18 - ], - "text": "Commissions and slippage are to traders what death and taxes are to all of us. \nThey take some fun out of life and ultimately bring it to an end. A trader must sup-\nport his broker and the machinery of exchanges before he collects a dime. Being \nsimply “better than average” is not good enough. You have to be head and shoulders \nabove the crowd to win a minus-sum game.", - "type": "text" - }, - { - "block_id": "p22-b4", - "global_id": 134, - "bbox": [ - 72.0, - 259.2, - 153.67, - 276.14 - ], - "text": "Commissions", - "type": "text" - }, - { - "block_id": "p22-b5", - "global_id": 135, - "bbox": [ - 72.0, - 281.83, - 434.72, - 351.15 - ], - "text": "Commissions have become much smaller in the past two decades. Twenty years ago, \nthere were still brokers who charged one-way commissions of between half a percent \nand one percent of trade value. Buying a thousand shares of GE at $20 a share, with \na total value of $20,000, would have set you back $100 to $200 on the way in—and \nagain on the way out. Fortunately for traders, commission rates have plummeted.", - "type": "text" - }, - { - "block_id": "p22-b6", - "global_id": 136, - "bbox": [ - 72.0, - 351.85, - 434.71, - 407.17 - ], - "text": "The extortionate rates haven’t completely disappeared. While preparing this \nbook for publication, I received an e-mail from a client in Greece with a small ac-\ncount whose broker—a major European bank—charged him a $40 minimum on \nany trade. I told him of my broker whose minimum for a hundred shares is only $1.", - "type": "text" - }, - { - "block_id": "p22-b7", - "global_id": 137, - "bbox": [ - 72.0, - 407.86, - 434.66, - 435.18 - ], - "text": "Without proper care, even seemingly small numbers can raise a tall barrier to \nsuccess.", - "type": "text" - }, - { - "block_id": "p22-b8", - "global_id": 138, - "bbox": [ - 72.0, - 435.87, - 434.74, - 505.2 - ], - "text": "Look at a fairly active trader with a $20,000 account, doing one roundtrip trade \nper day, four days a week. Paying $10 one way, by the end of the week he’ll spend \n$80 in commissions: $40 for entries and $40 for exits. If he does that 50 weeks per \nyear (if he lasts that long), by the end of the year he will have spent $4,000 on com-\nmission. That would be 20% of his account!", - "type": "text" - }, - { - "block_id": "p22-b9", - "global_id": 139, - "bbox": [ - 72.0, - 505.89, - 434.75, - 561.21 - ], - "text": "George Soros, a top money manager, delivers an average 29% annual return. He \nwouldn’t be where he is if he paid 20% a year in commissions! Even a “small com-\nmission” can build up a major barrier to success! I’ve heard brokers chuckle as they \ngossiped about clients who beat their brains out just to stay even with the game.", - "type": "text" - }, - { - "block_id": "p22-b10", - "global_id": 140, - "bbox": [ - 72.0, - 562.16, - 434.69, - 630.97 - ], - "text": "Shop for the lowest possible commissions. Don’t be shy about bargaining for lower rates. \nI’ve heard many brokers complain about a shortage of customers—but not many customers \ncomplain about the shortage of brokers. Tell your broker it is in his best interest to charge you \nlow commissions because you will survive and remain a client for a long time. Design a trading \nsystem that will trade less often.", - "type": "text" - }, - { - "block_id": "p22-b11", - "global_id": 141, - "bbox": [ - 72.0, - 631.93, - 434.75, - 673.24 - ], - "text": "In my own trading, I maintain one major account with a broker who charges me \n$7.99 for unlimited size trades and another with a broker who charges a penny a \nshare, with a $1 minimum. When I trade expensive stocks, where I buy fewer than", - "type": "text" - } - ] - }, - { - "page_num": 23, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p23-b0", - "global_id": 142, - "bbox": [ - 72.0, - 33.66, - 432.0, - 47.21 - ], - "text": "3. THE ODDS AGAINST YOU\t\n7", - "type": "text" - }, - { - "block_id": "p23-b1", - "global_id": 143, - "bbox": [ - 72.02, - 57.83, - 434.73, - 113.15 - ], - "text": "800 shares, I give that order to the penny-a-share broker; otherwise, I go with the \n$7.99-per-trade broker. A beginning trader, making his first steps, should look for \na penny-a-share broker. Then you can trade your 100 shares for a dollar. A futures \ntrader can expect to pay just a couple of dollars for a roundtrip trade.", - "type": "text" - }, - { - "block_id": "p23-b2", - "global_id": 144, - "bbox": [ - 72.0, - 133.2, - 125.33, - 150.13 - ], - "text": "Slippage", - "type": "text" - }, - { - "block_id": "p23-b3", - "global_id": 145, - "bbox": [ - 72.0, - 155.83, - 434.77, - 225.15 - ], - "text": "Slippage means having your orders filled at a different price than what you saw on the \nscreen when you placed your order. It is like paying 50 cents for an apple in a grocery \nstore even though the posted price is 49 cents. A penny is nothing—but if you’re \nbuying a thousand apples or a thousand shares with a penny slippage, it’ll come to \n$10 per order, probably greater than your commission.", - "type": "text" - }, - { - "block_id": "p23-b4", - "global_id": 146, - "bbox": [ - 72.0, - 225.85, - 434.69, - 253.16 - ], - "text": "There are two main types of orders: market and limit. Your slippage depends on \nwhich of these types you use.", - "type": "text" - }, - { - "block_id": "p23-b5", - "global_id": 147, - "bbox": [ - 72.0, - 253.86, - 434.69, - 295.17 - ], - "text": "A limit order says—‘give me that apple at 49 cents.’ It guarantees the price, but \ndoesn’t guarantee a fill. You’ll pay no more than 49 cents, but you may end up with-\nout the apple that you wanted.", - "type": "text" - }, - { - "block_id": "p23-b6", - "global_id": 148, - "bbox": [ - 72.0, - 295.87, - 434.74, - 351.19 - ], - "text": "A market order says—‘give me that apple.’ It guarantees a fill, but doesn’t guaran-\ntee the price. If prices of apples are rising when you place your order, you may well \npay more than you saw on the screen when you pushed the buy button. You may get \nhit by slippage.", - "type": "text" - }, - { - "block_id": "p23-b7", - "global_id": 149, - "bbox": [ - 72.0, - 351.88, - 434.69, - 379.2 - ], - "text": "Slippage on market orders rises with market volatility. When the market begins to \nrun, slippage goes through the roof.", - "type": "text" - }, - { - "block_id": "p23-b8", - "global_id": 150, - "bbox": [ - 72.0, - 379.89, - 434.74, - 463.22 - ], - "text": "Do you have any idea how much slippage costs you?\nThere is only one way to find out: write down the price at the time you placed a \nmarket order, compare it with your fill, and multiply the difference by the number of \nshares or contracts. Needless to say, you need a good record-keeping system, such as \na spreadsheet with columns for each of the above numbers. We offer such a spread-\nsheet to traders as a public service at www.elder.com.", - "type": "text" - }, - { - "block_id": "p23-b9", - "global_id": 151, - "bbox": [ - 72.0, - 463.92, - 434.7, - 519.24 - ], - "text": "You’ll be reading “record this” and “record that” throughout this book. Remember \nthat good record-keeping is essential for your success. You have to keep an eye on \nyour wins and an even sharper eye on your losses because you can learn much more \nfrom them.", - "type": "text" - }, - { - "block_id": "p23-b10", - "global_id": 152, - "bbox": [ - 72.0, - 519.93, - 434.71, - 547.24 - ], - "text": "Here’s a shocking number, which you can confirm by keeping good records: an \naverage trader spends three times more on slippage than on commissions.", - "type": "text" - }, - { - "block_id": "p23-b11", - "global_id": 153, - "bbox": [ - 72.0, - 547.94, - 434.7, - 589.26 - ], - "text": "Earlier we talked about commissions raising a barrier to success. The barrier from \nslippage is three times higher. This is why, no matter how tempting a trade, you need \nto avoid buying “at the market.”", - "type": "text" - }, - { - "block_id": "p23-b12", - "global_id": 154, - "bbox": [ - 72.0, - 589.95, - 434.76, - 673.28 - ], - "text": "You want to be in control and trade only at prices that suit you. There are thou-\nsands of stocks and dozens of futures contracts. If you miss a trade due to a limit \norder, there’ll be countless other opportunities. Do not overpay! I almost always use \nlimit orders and resort to market orders only when placing stops. When a stop level \ngets hit, it becomes a market order. When a trade is flaming out, it’s not the time to \neconomize. Get in slow but get out fast.", - "type": "text" - } - ] - }, - { - "page_num": 24, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p24-b0", - "global_id": 155, - "bbox": [ - 72.0, - 33.66, - 432.03, - 47.21 - ], - "text": "8\t\nINTRODUCTION", - "type": "text" - }, - { - "block_id": "p24-b1", - "global_id": 156, - "bbox": [ - 72.0, - 58.08, - 434.71, - 112.88 - ], - "text": "To reduce slippage, trade liquid, high-volume markets and avoid thinly traded stocks, where \nslippage tends to be higher. Go long or short when the market is quiet, and use limit orders to \nbuy or sell at specified prices. Keep a record of prices at the time you placed your order. Demand \nyour broker fight the floor for a better fill when necessary.", - "type": "text" - }, - { - "block_id": "p24-b2", - "global_id": 157, - "bbox": [ - 72.0, - 133.2, - 174.41, - 150.13 - ], - "text": "Bid-Ask Spreads", - "type": "text" - }, - { - "block_id": "p24-b3", - "global_id": 158, - "bbox": [ - 72.0, - 155.83, - 434.66, - 211.15 - ], - "text": "Whenever the market is open, there are always two prices for any trading vehicle—a \nbid and an ask. A bid is what people are offering to pay for that security at that mo-\nment; an ask is what sellers are demanding in order to sell it. A bid is always lower, \nan ask higher, and the spread between them keeps changing.", - "type": "text" - }, - { - "block_id": "p24-b4", - "global_id": 159, - "bbox": [ - 72.0, - 211.84, - 434.76, - 309.18 - ], - "text": "Bid-ask spreads vary between different markets and even in the same market at \ndifferent times. Bid-ask spreads are higher in thinly traded vehicles, as the pros who \ndominate such markets demand high fees from those who want to join their party. \nThe bid-ask spreads are likely to be razor-thin, perhaps only one tick on a quiet day \nin an actively traded stock, future or option. They grow wider as prices accelerate \non the way up or down and may become huge—dozens of ticks—after a severe drop \nor a very sharp rally.", - "type": "text" - }, - { - "block_id": "p24-b5", - "global_id": 160, - "bbox": [ - 72.0, - 309.87, - 434.72, - 365.19 - ], - "text": "Market orders get filled at the bad side of bid-ask spreads. A market order buys at \nthe ask (high) and sells at the bid (low). Little wonder that many professional trad-\ners make a good living from filling market orders. Don’t feed the wolves—use limit \norders whenever possible!", - "type": "text" - }, - { - "block_id": "p24-b6", - "global_id": 161, - "bbox": [ - 72.0, - 385.2, - 215.56, - 402.14 - ], - "text": "The Barriers to Success", - "type": "text" - }, - { - "block_id": "p24-b7", - "global_id": 162, - "bbox": [ - 72.0, - 407.83, - 434.71, - 463.15 - ], - "text": "Slippage and commissions make trading similar to swimming in a piranha-infested \nriver. Other expenses also drain traders’ money. The cost of computers and data, \nfees for advisory services and books—including the one you are reading now—all \ncome out of your trading funds.", - "type": "text" - }, - { - "block_id": "p24-b8", - "global_id": 163, - "bbox": [ - 72.0, - 464.1, - 434.76, - 518.9 - ], - "text": "Look for a broker with the cheapest commissions and watch him like a hawk. Design a trad-\ning system that gives signals relatively infrequently and allows you to enter markets during \nquiet times. Use limit orders almost exclusively—except when placing stops. Be careful on what \ntools you spend money: there are no magic solutions. Success cannot be bought, only earned.", - "type": "text" - } - ] - }, - { - "page_num": 25, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p25-b0", - "global_id": 164, - "bbox": [ - 72.0, - 118.61, - 430.08, - 171.84 - ], - "text": "Individual Psychology", - "type": "text" - }, - { - "block_id": "p25-b1", - "global_id": 165, - "bbox": [ - 72.1, - 673.7, - 432.08, - 687.25 - ], - "text": "9", - "type": "text" - }, - { - "block_id": "p25-b2", - "global_id": 166, - "bbox": [ - 348.2, - 59.86, - 395.91, - 73.41 - ], - "text": "PA R T 1", - "type": "text" - }, - { - "block_id": "p25-b3", - "global_id": 167, - "bbox": [ - 73.55, - 335.56, - 198.72, - 354.2 - ], - "text": "■\n■4. Why Trade?", - "type": "text" - }, - { - "block_id": "p25-b4", - "global_id": 168, - "bbox": [ - 72.0, - 364.53, - 434.74, - 405.84 - ], - "text": "Trading appears deceptively easy. A beginner may cautiously enter the market, win a \nfew times, and start feeling brilliant and invincible. That’s when he starts taking wild \nrisks and ends up with bad losses.", - "type": "text" - }, - { - "block_id": "p25-b5", - "global_id": 169, - "bbox": [ - 72.0, - 406.54, - 434.72, - 447.86 - ], - "text": "People trade for many reasons—some rational and many irrational. Trading offers \nan opportunity to make a lot of money in a hurry. Money symbolizes freedom to \nmany people, even though they often don’t know what to do with it.", - "type": "text" - }, - { - "block_id": "p25-b6", - "global_id": 170, - "bbox": [ - 72.0, - 448.55, - 434.72, - 489.87 - ], - "text": "If you know how to trade, you can make your own hours, live and work anywhere \nyou please, and never answer to a boss. Trading is a fascinating game: chess, poker, \nand a video game rolled into one. Trading attracts people who love challenges.", - "type": "text" - }, - { - "block_id": "p25-b7", - "global_id": 171, - "bbox": [ - 72.0, - 490.56, - 434.75, - 559.89 - ], - "text": "It attracts risk-takers and repels those who avoid risk. An average person gets up in \nthe morning, goes to work, has a lunch break, returns home, has a beer and dinner, \nwatches TV, and goes to sleep. If he makes a few extra dollars, he puts them into a sav-\nings account. A trader keeps odd hours and puts his capital at risk. Many traders are \nloners who abandon the certainties of the routine and take a leap into the unknown.", - "type": "text" - }, - { - "block_id": "p25-b8", - "global_id": 172, - "bbox": [ - 72.0, - 576.9, - 167.92, - 593.84 - ], - "text": "Self-Fulfillment", - "type": "text" - }, - { - "block_id": "p25-b9", - "global_id": 173, - "bbox": [ - 72.0, - 599.53, - 434.72, - 640.84 - ], - "text": "Many people have an innate drive to achieve their personal best, to develop their \nabilities to the fullest. This drive, along with the pleasure of the game and the lure of \nmoney, propels traders to challenge the markets.", - "type": "text" - }, - { - "block_id": "p25-b10", - "global_id": 174, - "bbox": [ - 72.0, - 641.54, - 434.66, - 668.85 - ], - "text": "Good traders tend to be hardworking and shrewd people, open to new ideas. The \ngoal of a good trader, paradoxically, is not to make money. His goal is to trade well.", - "type": "text" - }, - { - "block_id": "p25-b11", - "global_id": 175, - "bbox": [ - 348.1, - 59.86, - 395.81, - 73.41 - ], - "text": "PA R T 1", - "type": "text" - } - ] - }, - { - "page_num": 26, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p26-b0", - "global_id": 176, - "bbox": [ - 72.0, - 33.66, - 432.04, - 47.21 - ], - "text": "10\t\nINDIVIDUAL PSYCHOLOGY", - "type": "text" - }, - { - "block_id": "p26-b1", - "global_id": 177, - "bbox": [ - 72.0, - 57.83, - 434.75, - 85.14 - ], - "text": "If he trades right, money follows almost as an afterthought. Successful traders keep \nhoning their skills as they try to reach their personal best.", - "type": "text" - }, - { - "block_id": "p26-b2", - "global_id": 178, - "bbox": [ - 72.0, - 85.84, - 434.77, - 155.16 - ], - "text": "A professional trader from Texas invited me to his office and said: “If you sit across \nthe table from me while I day-trade, you won’t be able to tell whether I am $2,000 \nahead or $2,000 behind on that day.” He has risen to a level where winning does not \nelate him and losing does not deflate him. He is so focused on trading right and im-\nproving his skills that money no longer influences his emotions.", - "type": "text" - }, - { - "block_id": "p26-b3", - "global_id": 179, - "bbox": [ - 72.0, - 155.86, - 434.75, - 225.18 - ], - "text": "The trouble with self-fulfillment is that many people have self-destructive streaks. \nAccident-prone drivers keep destroying their cars, and self-destructive traders keep \ndestroying their accounts. Markets offer vast opportunities for self-sabotage, as well \nas for self-fulfillment. Acting out your internal conflicts in the marketplace is a very \nexpensive proposition.", - "type": "text" - }, - { - "block_id": "p26-b4", - "global_id": 180, - "bbox": [ - 72.0, - 225.88, - 434.69, - 267.19 - ], - "text": "Traders who are not at peace with themselves often try to fulfill their contradic-\ntory wishes in the markets. If you don’t know where you are going, you’ll wind up \nsomewhere you never wanted to be.", - "type": "text" - }, - { - "block_id": "p26-b5", - "global_id": 181, - "bbox": [ - 73.55, - 293.86, - 285.91, - 312.5 - ], - "text": "■\n■5. Reality versus Fantasy", - "type": "text" - }, - { - "block_id": "p26-b6", - "global_id": 182, - "bbox": [ - 72.0, - 322.83, - 434.71, - 378.15 - ], - "text": "If a friend with little farming experience told you that he planned to feed himself \nwith food grown on a quarter-acre (1,000 square meters) plot, you’d expect him to \ngo hungry. One can squeeze only so much from a small piece of land. There is, how-\never, a field in which grown-ups let their fantasies fly—in trading.", - "type": "text" - }, - { - "block_id": "p26-b7", - "global_id": 183, - "bbox": [ - 72.0, - 378.84, - 434.75, - 448.17 - ], - "text": "A former employee told me that he planned to support himself trading a $6,000 \naccount. When I tried to show him the futility of his plan, he quickly changed the \ntopic. He was a bright analyst, but refused to see that his “intensive farming” plan was \nsuicidal. In his desperate effort to succeed, he’d have to take on large positions—and \nthe slightest wiggle of the market will quickly put him out of business.", - "type": "text" - }, - { - "block_id": "p26-b8", - "global_id": 184, - "bbox": [ - 72.0, - 448.86, - 434.76, - 504.18 - ], - "text": "A successful trader is a realist. He knows his abilities and limitations. He sees \nwhat’s happening in the markets and knows how to react. He analyzes the markets \nwithout cutting corners, observes himself, and makes realistic plans. A professional \ntrader cannot afford illusions.", - "type": "text" - }, - { - "block_id": "p26-b9", - "global_id": 185, - "bbox": [ - 72.0, - 504.88, - 434.76, - 588.21 - ], - "text": "Once an amateur takes a few hits and gets a few margin calls, he swings from \ncocky to fearful and starts developing strange ideas about the markets. Losers buy, \nsell, or avoid trades due to their fantastic ideas. They act like children who are \nafraid to pass a cemetery or look under their bed at night because they are afraid \nof ghosts. The unstructured environment of the market makes it easy to develop \nfantasies.", - "type": "text" - }, - { - "block_id": "p26-b10", - "global_id": 186, - "bbox": [ - 72.0, - 588.9, - 434.75, - 686.24 - ], - "text": "Most people who grow up in Western civilization have several similar fantasies. \nThey are so widespread that when I studied at the New York Psychoanalytic Institute, \nthere was a course called “Universal Fantasies.” For example, many people have a \nfantasy in childhood that they were adopted. This fantasy seems to explain the un-\nfriendly and impersonal world. It consoles a child but prevents him from being aware \nof a reality he’d rather not see—that his parents aren’t that good. Our fantasies influ-\nence our behavior, even if we aren’t consciously aware of them.", - "type": "text" - } - ] - }, - { - "page_num": 27, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p27-b0", - "global_id": 187, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "5. REALITY VERSUS FANTASY\t\n11", - "type": "text" - }, - { - "block_id": "p27-b1", - "global_id": 188, - "bbox": [ - 72.04, - 57.83, - 434.73, - 99.14 - ], - "text": "In talking to hundreds of traders, I keep hearing several universal fantasies. They \ndistort reality and stand in the way of trading success. A successful trader must iden-\ntify his fantasies and get rid of them.", - "type": "text" - }, - { - "block_id": "p27-b2", - "global_id": 189, - "bbox": [ - 72.0, - 125.2, - 170.43, - 142.13 - ], - "text": "The Brain Myth", - "type": "text" - }, - { - "block_id": "p27-b3", - "global_id": 190, - "bbox": [ - 72.0, - 147.83, - 434.76, - 203.15 - ], - "text": "Losers who suffer from the “brain myth” will tell you, “I lost because I didn’t know \ntrading secrets.” Many have a fantasy that successful traders have some secret knowl-\nedge. That fantasy helps support a lively market in advisory services and ready-made \ntrading systems.", - "type": "text" - }, - { - "block_id": "p27-b4", - "global_id": 191, - "bbox": [ - 72.0, - 203.84, - 434.76, - 287.17 - ], - "text": "A demoralized trader may whip out his credit card to buy access to “trading \nsecrets.” He may send money to a charlatan for a $3,000 “can’t miss,” backtested, \ncomputerized trading system. When that system self-destructs, he’ll pull out his \nalmost-maxed-out credit card again for a “scientific manual” that explains how he \ncan stop losing and begin winning by contemplating the moon, the stars, or even \nUranus.", - "type": "text" - }, - { - "block_id": "p27-b5", - "global_id": 192, - "bbox": [ - 72.0, - 287.87, - 434.7, - 343.19 - ], - "text": "At an investment club we used to have in New York, I often ran into a famous \nfinancial astrologer. He often asked for free admission because he couldn’t afford to \npay a modest fee for the meeting and a meal. His main source of income remains \ncollecting money for astrological trading predictions from hopeful amateurs.", - "type": "text" - }, - { - "block_id": "p27-b6", - "global_id": 193, - "bbox": [ - 72.0, - 343.88, - 434.75, - 399.2 - ], - "text": "Losers don’t realize that trading is intellectually fairly simple. It is nowhere near \nas demanding as taking out an appendix, building a bridge, or trying a case in court. \nGood traders are shrewd, but few are intellectuals. Many have never been to college, \nand some have dropped out of high school.", - "type": "text" - }, - { - "block_id": "p27-b7", - "global_id": 194, - "bbox": [ - 72.0, - 399.9, - 434.74, - 427.21 - ], - "text": "Intelligent and hardworking people who have succeeded in their careers often feel \ndrawn to trading.", - "type": "text" - }, - { - "block_id": "p27-b8", - "global_id": 195, - "bbox": [ - 72.0, - 427.91, - 434.68, - 455.22 - ], - "text": "Why do they fail so often? What separates winners from losers isn’t intelligence \nor secrets, and certainly not education.", - "type": "text" - }, - { - "block_id": "p27-b9", - "global_id": 196, - "bbox": [ - 72.0, - 481.2, - 261.42, - 498.14 - ], - "text": "The Undercapitalization Myth", - "type": "text" - }, - { - "block_id": "p27-b10", - "global_id": 197, - "bbox": [ - 72.0, - 503.83, - 420.79, - 517.14 - ], - "text": "Many losers think that they would trade successfully if they had a bigger account.", - "type": "text" - }, - { - "block_id": "p27-b11", - "global_id": 198, - "bbox": [ - 72.0, - 517.83, - 434.71, - 573.15 - ], - "text": "People destroy their accounts either by a string of losses or a single abysmally bad \ntrade. Often, after the loser is sold out, unable to meet a margin call, the market \nreverses and moves in the direction he expected. He starts fuming: had he survived \nanother week, he would have made a fortune instead of losing!", - "type": "text" - }, - { - "block_id": "p27-b12", - "global_id": 199, - "bbox": [ - 72.0, - 573.85, - 434.75, - 657.18 - ], - "text": "Such people look at market reversals that come too late and think that those turns \nconfirm their methods. They may go back to work and earn, save, or borrow enough \nmoney to open another small account. History repeats itself: The loser gets wiped \nout, the market reverses and “proves” him right, but only too late—he’s been sold \nout again. That’s when the fantasy is born: “If only I had a bigger account, I could have \nstayed in the market longer and won.”", - "type": "text" - }, - { - "block_id": "p27-b13", - "global_id": 200, - "bbox": [ - 72.0, - 657.87, - 434.71, - 685.18 - ], - "text": "Some losers raise money from relatives and friends by showing them a paper track \nrecord. It seems to prove that they would have won big, if only they had had more", - "type": "text" - } - ] - }, - { - "page_num": 28, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p28-b0", - "global_id": 201, - "bbox": [ - 72.0, - 33.66, - 432.04, - 47.21 - ], - "text": "12\t\nINDIVIDUAL PSYCHOLOGY", - "type": "text" - }, - { - "block_id": "p28-b1", - "global_id": 202, - "bbox": [ - 72.0, - 57.83, - 434.7, - 85.14 - ], - "text": "money to work with. But even if they raise more money, they lose that, too—as if \nthe market were laughing at them!", - "type": "text" - }, - { - "block_id": "p28-b2", - "global_id": 203, - "bbox": [ - 72.0, - 85.84, - 434.72, - 155.16 - ], - "text": "A loser is not undercapitalized—his mind is underdeveloped. A loser can destroy \na big account almost as quickly as a small one. An acquaintance of mine once blew \nout over 200 million dollars in a day. His broker sold him out—and then the market \nturned. He sued the broker and said to me: “If only I had a bigger account….” Ap-\nparently an account with $200 million wasn’t big enough.", - "type": "text" - }, - { - "block_id": "p28-b3", - "global_id": 204, - "bbox": [ - 72.0, - 155.86, - 432.54, - 197.17 - ], - "text": "A loser’s true problem is not account size but overtrading and sloppy money manage-\nment. He takes risks that are too big for his account size, however small or big. No mat-\nter how good his system may be, a streak of bad trades is sure to put him out of business.", - "type": "text" - }, - { - "block_id": "p28-b4", - "global_id": 205, - "bbox": [ - 72.0, - 197.87, - 434.75, - 239.18 - ], - "text": "Amateurs neither expect to lose nor are prepared to manage losing trades. Calling \nthemselves undercapitalized is a cop-out that helps them avoid two painful truths: \ntheir lack of a realistic money management plan and lack of discipline.", - "type": "text" - }, - { - "block_id": "p28-b5", - "global_id": 206, - "bbox": [ - 72.0, - 239.88, - 434.69, - 281.2 - ], - "text": "A trader who wants to survive and prosper must control losses. You do that by \nrisking only a tiny fraction of your equity on any single trade (see Section Nine, “Risk \nManagement”). Learn from cheap mistakes in a small account.", - "type": "text" - }, - { - "block_id": "p28-b6", - "global_id": 207, - "bbox": [ - 72.0, - 281.89, - 434.72, - 351.22 - ], - "text": "The one advantage of a large trading account is that the price of equipment and \nservices represents a smaller percentage of your money. The owner of a million-\ndollar fund who spends $5,000 on classes is only ½ percent behind the game. The \nsame expenditure would represent a deadly 25 percent of equity for a trader with a \n$20,000 account.", - "type": "text" - }, - { - "block_id": "p28-b7", - "global_id": 208, - "bbox": [ - 72.0, - 371.2, - 196.6, - 388.14 - ], - "text": "The Autopilot Myth", - "type": "text" - }, - { - "block_id": "p28-b8", - "global_id": 209, - "bbox": [ - 72.0, - 393.83, - 434.72, - 463.15 - ], - "text": "Traders who believe in the autopilot myth think that the pursuit of wealth can be \nautomated. Some people try to develop an automatic trading system, while others \nbuy systems from vendors. Men who have spent years honing their skills as lawyers, \ndoctors, or businessmen plunk down thousands of dollars for canned competence. \nMost are driven by greed, laziness, and mathematical illiteracy.", - "type": "text" - }, - { - "block_id": "p28-b9", - "global_id": 210, - "bbox": [ - 72.0, - 463.85, - 434.69, - 547.18 - ], - "text": "Systems used to be written on sheets of paper, but now they get downloaded on \na computer. Some are primitive; others are elaborate, with built-in optimization and \neven money management rules. Many traders spend thousands of dollars searching \nfor magic that will turn a few pages of computer code into an endless stream of \nmoney. People who pay for automatic trading systems are like medieval knights who \npaid alchemists for the secret of turning base metals into gold.", - "type": "text" - }, - { - "block_id": "p28-b10", - "global_id": 211, - "bbox": [ - 72.0, - 547.87, - 434.74, - 603.19 - ], - "text": "Complex human activities do not lend themselves to automation. Computerized \nlearning systems have not replaced teachers, and programs for doing taxes haven’t \ncreated unemployment among accountants. Most human activities call for an exer-\ncise of judgment; machines and systems can help but not replace humans.", - "type": "text" - }, - { - "block_id": "p28-b11", - "global_id": 212, - "bbox": [ - 72.0, - 603.89, - 434.78, - 687.22 - ], - "text": "Had there been a successful automatic trading system, its purchaser could move \nto Tahiti and spend the rest of his life at leisure, supported by a stream of checks from \nhis broker. So far, the only people who’ve made money from trading systems are their \nsellers. They form a small but colorful cottage industry. If their systems worked, \nwhy would they sell them? They could move to Tahiti themselves and cash checks \nfrom their brokers! Meanwhile, every system seller has a line. Some say they like", - "type": "text" - } - ] - }, - { - "page_num": 29, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p29-b0", - "global_id": 213, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "5. REALITY VERSUS FANTASY\t\n13", - "type": "text" - }, - { - "block_id": "p29-b1", - "global_id": 214, - "bbox": [ - 72.04, - 57.83, - 434.73, - 85.14 - ], - "text": "programming better than trading. Others claim that they sell their systems only to \nraise capital or even out of love for humanity.", - "type": "text" - }, - { - "block_id": "p29-b2", - "global_id": 215, - "bbox": [ - 72.04, - 85.84, - 434.76, - 141.16 - ], - "text": "Markets are always changing and defeating automatic trading systems. Yesterday’s \nrigid rules will work less well today and will probably stop working tomorrow. A \ncompetent trader can adjust his methods when he detects trouble. An automatic \nsystem is less adaptable and self-destructs.", - "type": "text" - }, - { - "block_id": "p29-b3", - "global_id": 216, - "bbox": [ - 72.04, - 141.85, - 434.79, - 253.19 - ], - "text": "Airlines pay high salaries to pilots despite having autopilots. They do it because \nhumans can handle unforeseen events. When a roof blows off an airliner over the \nPacific or when a passenger jet loses both engines to a flock of geese over Manhat-\ntan, only a human can handle such crises. These emergencies have been reported in \nthe press, and in each of them, experienced pilots managed to land their airliners by \nimprovising solutions. No autopilot can do that. Betting your money on an automatic \nsystem is like betting your life on an autopilot. The first unexpected event will make \nyour account crash and burn.", - "type": "text" - }, - { - "block_id": "p29-b4", - "global_id": 217, - "bbox": [ - 72.04, - 253.88, - 434.73, - 295.2 - ], - "text": "There are good trading systems out there, but they have to be monitored and ad-\njusted using individual judgment. You have to stay on the ball—you cannot abdicate \nresponsibility for your success to a mechanical system.", - "type": "text" - }, - { - "block_id": "p29-b5", - "global_id": 218, - "bbox": [ - 72.04, - 295.9, - 434.8, - 379.22 - ], - "text": "Traders with autopilot fantasies try to repeat what they felt as infants. Their \nmothers used to fulfill their needs for food, warmth, and comfort. Now they try to \nrecreate the experience of passively lying on their backs and having profits flow to \nthem like an endless stream of free, warm milk. The market is not your mother. It \nconsists of tough men and women who look for ways to take money from you rather \nthan pouring warm milk into your mouth.", - "type": "text" - }, - { - "block_id": "p29-b6", - "global_id": 219, - "bbox": [ - 72.0, - 399.2, - 213.93, - 416.14 - ], - "text": "The Cult of Personality", - "type": "text" - }, - { - "block_id": "p29-b7", - "global_id": 220, - "bbox": [ - 72.0, - 421.83, - 434.64, - 463.14 - ], - "text": "Most people pay lip service to their wish for freedom and independence, but when \nthey come under pressure, they change their tune and start looking for “strong lead-\nership.”  Traders in distress often seek directions from assorted gurus.", - "type": "text" - }, - { - "block_id": "p29-b8", - "global_id": 221, - "bbox": [ - 72.0, - 463.84, - 434.72, - 519.16 - ], - "text": "When I was growing up in the former Soviet Union, children were taught that \nStalin was our great leader. Later we found out what a monster he was, but while he \nwas alive, most people enjoyed following the leader. He freed them from the need \nto think for themselves.", - "type": "text" - }, - { - "block_id": "p29-b9", - "global_id": 222, - "bbox": [ - 72.0, - 519.86, - 434.74, - 575.18 - ], - "text": "“Little Stalins” were installed in every area of society—in economics, biology, \narchitecture, and so on. When I came to the United States and began to trade, I was \namazed to see how many traders were looking for a guru—their own “little Stalin.” \nThe fantasy that someone else can make you rich is always with us.", - "type": "text" - }, - { - "block_id": "p29-b10", - "global_id": 223, - "bbox": [ - 72.0, - 575.87, - 434.72, - 631.19 - ], - "text": "There are three types of gurus in the financial markets: market cycle gurus, magic \nmethod gurus, and dead gurus. Cycle gurus call important market turns. Method \ngurus promote new highways to riches. Still others have escaped criticism and in-\nvited cult following through the simple mechanism of departing this world.", - "type": "text" - }, - { - "block_id": "p29-b11", - "global_id": 224, - "bbox": [ - 72.0, - 641.43, - 178.95, - 654.25 - ], - "text": "Market Cycle Gurus", - "type": "text" - }, - { - "block_id": "p29-b12", - "global_id": 225, - "bbox": [ - 72.0, - 659.87, - 434.69, - 687.18 - ], - "text": "For many decades, the U.S. stock market has generally followed a four-year cycle. \nThe broad stock market has normally spent 2.5 or 3 years going up and 1 or 1.5 years", - "type": "text" - } - ] - }, - { - "page_num": 30, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p30-b0", - "global_id": 226, - "bbox": [ - 72.0, - 33.66, - 432.04, - 47.21 - ], - "text": "14\t\nINDIVIDUAL PSYCHOLOGY", - "type": "text" - }, - { - "block_id": "p30-b1", - "global_id": 227, - "bbox": [ - 72.0, - 57.83, - 434.68, - 99.14 - ], - "text": "going down. A new market cycle guru emerges in almost every major stock cycle, \nonce every 4 years. A guru’s fame tends to last for 2 to 3 years. The reigning period \nof each guru coincides with a major bull market in the United States.", - "type": "text" - }, - { - "block_id": "p30-b2", - "global_id": 228, - "bbox": [ - 72.0, - 99.84, - 434.75, - 197.17 - ], - "text": "A market cycle guru forecasts rallies and declines. Each correct forecast increases \nhis fame and prompts even more people to buy or sell when he issues his pronounce-\nments. A market cycle guru has a pet theory about the market. That theory—cycles, \nvolume, Elliott Wave, whatever—is usually developed several years prior to reaching \nstardom. At first, the market refuses to follow an aspiring guru’s pet theory. Then \nthe market changes and for several years comes in gear with the guru’s calls. That is \nwhen the guru’s star rises high above the marketplace.", - "type": "text" - }, - { - "block_id": "p30-b3", - "global_id": 229, - "bbox": [ - 72.0, - 197.87, - 434.76, - 253.19 - ], - "text": "Compare this to what happens to fashion models as public tastes change. One year, \nblondes are popular, another year, redheads. Suddenly, last year’s blonde star is no lon-\nger wanted for the front cover of a major magazine. Everybody wants a dark model, \nor a woman with a birthmark on her face. A model doesn’t change—public tastes do.", - "type": "text" - }, - { - "block_id": "p30-b4", - "global_id": 230, - "bbox": [ - 72.0, - 253.88, - 434.65, - 309.2 - ], - "text": "Gurus always come from the fringes of market analysis. They are never establish-\nment analysts. Institutional employees play it safe—afraid to stick their necks out—\nand almost never achieve spectacular results. A market cycle guru is an outsider with \na unique theory.", - "type": "text" - }, - { - "block_id": "p30-b5", - "global_id": 231, - "bbox": [ - 72.0, - 309.9, - 434.76, - 393.23 - ], - "text": "A guru remains famous for as long as the market behaves according to his the–\nory—usually for less than the duration of one 4-year market cycle. At some point, \nthe market changes and starts marching to a different tune. A guru continues to use \nold methods that worked so well in the past and loses his following. When the guru’s \nforecasts stop working, public admiration turns to hatred. It’s impossible for a dis-\ncredited market cycle guru to return to stardom.", - "type": "text" - }, - { - "block_id": "p30-b6", - "global_id": 232, - "bbox": [ - 72.0, - 393.92, - 434.74, - 477.25 - ], - "text": "All market cycle gurus have several traits in common. They become active in \nthe forecasting business several years prior to reaching stardom. Each has a unique \ntheory, a few followers, and some credibility, conferred by sheer survival in the ad-\nvisory business. The fact that each guru’s theory did not work for a number of years \nis ignored by his followers. When the theory becomes correct, the mass media take \nnotice. When a theory stops working, mass adulation turns to hatred.", - "type": "text" - }, - { - "block_id": "p30-b7", - "global_id": 233, - "bbox": [ - 72.0, - 477.95, - 434.72, - 575.28 - ], - "text": "When you recognize that a successful new guru is emerging, it may be profitable \nto jump on his bandwagon. It’s even more important to recognize when a guru has \nreached his peak. All gurus crash—and by definition, they crash from the height of \ntheir fame. When a guru becomes accepted by the mass media, it’s a good sign that \nhe has reached his crest. The mainstream media is wary of outsiders. When several \nmass magazines devote space to a hot market guru, you know that his end is near. \nMass psychology being what it is, new gurus will continue to emerge.", - "type": "text" - }, - { - "block_id": "p30-b8", - "global_id": 234, - "bbox": [ - 72.0, - 585.43, - 434.75, - 645.14 - ], - "text": "Magic Method Gurus\nWhile cycle gurus are creatures of the stock market, “method gurus” are more \nprominent in the derivatives markets. A “method guru” erupts on the financial scene \nafter discovering a new analytic or trading method.", - "type": "text" - }, - { - "block_id": "p30-b9", - "global_id": 235, - "bbox": [ - 72.0, - 645.84, - 434.66, - 687.16 - ], - "text": "Traders always look for an edge, an advantage over fellow traders. Like knights \nshopping for swords, they are willing to pay handsomely for their trading tools. No \nprice is too high if it lets them tap into a money pipeline.", - "type": "text" - } - ] - }, - { - "page_num": 31, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p31-b0", - "global_id": 236, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "5. REALITY VERSUS FANTASY\t\n15", - "type": "text" - }, - { - "block_id": "p31-b1", - "global_id": 237, - "bbox": [ - 72.04, - 57.83, - 434.74, - 141.16 - ], - "text": "A magic method guru sells a new set of keys to market profits—speedlines, cy-\ncles, Market Profile, etc. It may have an edge in the beginning, but as soon as enough \npeople become familiar with a new method and test it in the markets, it inevitably \ndeteriorates and starts losing popularity. Markets are forever grinding down each \nmethod’s edge, and what worked yesterday is less likely to work today and highly \nunlikely a year from now.", - "type": "text" - }, - { - "block_id": "p31-b2", - "global_id": 238, - "bbox": [ - 72.04, - 141.85, - 434.75, - 225.18 - ], - "text": "Oddly enough, even in this era of global communications, reputations change \nslowly. A guru whose image has been destroyed in his own country can make money \npeddling his theory overseas. That point has been made to me by a guru who com-\npared his continued popularity in Asia to what happens to faded American singers \nand movie stars. They are unable to attract an audience in the United States, but they \ncan still make a living singing abroad.", - "type": "text" - }, - { - "block_id": "p31-b3", - "global_id": 239, - "bbox": [ - 72.0, - 235.43, - 434.76, - 337.16 - ], - "text": "Dead Gurus\nThe third type of a market guru is a dead guru. His books are reissued, his market \ncourses are scrutinized by new generations of eager traders, and the legend of the \ndear-departed analyst’s prowess and personal wealth grows posthumously. The dead \nguru is no longer among us and cannot capitalize on his fame. Other promoters profit \nfrom his reputation and expired copyrights. One dear-departed guru is R. N. Elliott, \nbut the best example of such a legend is W. D. Gann.", - "type": "text" - }, - { - "block_id": "p31-b4", - "global_id": 240, - "bbox": [ - 72.0, - 337.85, - 434.75, - 463.19 - ], - "text": "Various opportunists sell “Gann courses” and “Gann software.” They claim that \nGann was one of the best traders who ever lived, that he left a $50 million estate, \nand so on. I interviewed W. D. Gann’s son, an analyst for a Boston bank. He told me \nthat his famous father could not support his family by trading but earned his living by \nwriting and selling instructional courses. He could not afford a secretary and made \nhis son work for him. When W. D. Gann died in the 1950s, his estate, including his \nhouse, was valued at slightly over $100,000. The legend of W. D. Gann, the giant of \ntrading, is perpetuated by those who sell courses and other paraphernalia to gullible \ncustomers.", - "type": "text" - }, - { - "block_id": "p31-b5", - "global_id": 241, - "bbox": [ - 72.0, - 473.43, - 434.74, - 547.15 - ], - "text": "The Followers of Gurus\nA guru has to produce original research for several years, then get lucky when the \nmarket turns his way. While some gurus are dead, those who are alive range from \nserious academic types to great showmen. To read about scandals surrounding many \ngurus, try Winner Takes All by William R. Gallacher.", - "type": "text" - }, - { - "block_id": "p31-b6", - "global_id": 242, - "bbox": [ - 72.0, - 547.84, - 434.7, - 603.16 - ], - "text": "When we pay a guru, we expect to get back more than we spend. We act like a \nman who bets a few dollars against a three-card Monte dealer on a street corner. He \nhopes to win more than he put down on an overturned crate. Only the ignorant or \ngreedy take the bait.", - "type": "text" - }, - { - "block_id": "p31-b7", - "global_id": 243, - "bbox": [ - 72.0, - 603.86, - 434.65, - 659.18 - ], - "text": "Some people turn to gurus in search of a strong leader. They look for a parent-like \nomniscient provider. As a friend once said, “They walk with their umbilical cords in \nhand, looking for a place to plug them in.” A smart promoter provides such a recep-\ntacle, for a fee.", - "type": "text" - }, - { - "block_id": "p31-b8", - "global_id": 244, - "bbox": [ - 72.0, - 660.13, - 434.75, - 686.92 - ], - "text": "The public wants gurus, and new gurus will come. As an intelligent trader, you must realize \nthat in the long run, no guru is going to make you rich.  You have to work on that yourself.", - "type": "text" - } - ] - }, - { - "page_num": 32, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p32-b0", - "global_id": 245, - "bbox": [ - 72.0, - 33.66, - 432.04, - 47.21 - ], - "text": "16\t\nINDIVIDUAL PSYCHOLOGY", - "type": "text" - }, - { - "block_id": "p32-b1", - "global_id": 246, - "bbox": [ - 72.0, - 57.83, - 434.7, - 113.15 - ], - "text": "Occasionally, when I give a talk or appear on TV, someone introduces me as a \n“famous guru.” I shudder at those words and interrupt such introductions. A guru \nis someone claiming to lead the crowds across the desert for a donation. No such \npitches here!", - "type": "text" - }, - { - "block_id": "p32-b2", - "global_id": 247, - "bbox": [ - 72.0, - 113.84, - 434.77, - 183.17 - ], - "text": "I always begin by explaining that there are no magic methods, that the field of \ntrading is as huge and diverse as that of medicine, where one needs to choose one \nspecialty and work hard to become good at it. I chose my path a long time ago, and \nwhat I do in front of a class is simply think out loud, sharing my modes of research \nand decision making.", - "type": "text" - }, - { - "block_id": "p32-b3", - "global_id": 248, - "bbox": [ - 72.0, - 203.2, - 237.48, - 220.13 - ], - "text": "Trade with Your Eyes Open", - "type": "text" - }, - { - "block_id": "p32-b4", - "global_id": 249, - "bbox": [ - 72.0, - 225.83, - 434.74, - 253.14 - ], - "text": "Wishful thinking is stronger than dollars. Recent research has proven that people \nhave a prodigious ability to lie to themselves and avoid seeing the truth.", - "type": "text" - }, - { - "block_id": "p32-b5", - "global_id": 250, - "bbox": [ - 72.0, - 253.84, - 434.76, - 379.18 - ], - "text": "Duke University professor Dan Ariely describes a clever experiment. A group of \npeople are given an intelligence test, but half of them are “accidentally” shown a re-\nsponse sheet, allowing them to look up correct answers before recording their own. \nNeedless to say, they score above the rest. Next, everybody is asked to predict their \ngrades on the next IQ test, in which there will be absolutely no cheat sheets—and \nthose who predict correctly will get paid. Surprisingly, the half of the group that \nscored higher with cheat sheets predicted higher results for the next test. The cheat-\ners wanted to believe they were very smart, even though their incorrect predictions \nof success would cost them money.", - "type": "text" - }, - { - "block_id": "p32-b6", - "global_id": 251, - "bbox": [ - 72.0, - 379.87, - 434.7, - 421.19 - ], - "text": "A successful trader cannot afford wishful thinking—he must be a realist. There \nare no cheat sheets in the markets—you can see the truth in your trade diaries and \nequity curves.", - "type": "text" - }, - { - "block_id": "p32-b7", - "global_id": 252, - "bbox": [ - 72.0, - 421.88, - 434.72, - 477.2 - ], - "text": "To win in the markets, we need to master three essential components of trading: \nsound psychology, a logical trading system, and an effective risk management plan. \nThese are like three legs of a stool—remove one and the stool will fall. It is a typical \nbeginner mistake to focus exclusively on indicators and trading systems.", - "type": "text" - }, - { - "block_id": "p32-b8", - "global_id": 253, - "bbox": [ - 72.0, - 478.15, - 434.66, - 518.92 - ], - "text": "You have to analyze your feelings as you trade to make sure that your decisions are sound. \nYour trades must be based on clearly defined rules.  You have to structure your money manage-\nment so that no string of losses can kick you out of the game.", - "type": "text" - }, - { - "block_id": "p32-b9", - "global_id": 254, - "bbox": [ - 73.55, - 546.86, - 268.13, - 565.5 - ], - "text": "■\n■6. Self-Destructiveness", - "type": "text" - }, - { - "block_id": "p32-b10", - "global_id": 255, - "bbox": [ - 72.0, - 575.83, - 434.71, - 617.14 - ], - "text": "Trading is a very hard game. A trader who wants to win and remain successful in the \nlong run has to be extremely serious about his craft. He cannot afford to be naive or \nto trade because of some hidden psychological agenda.", - "type": "text" - }, - { - "block_id": "p32-b11", - "global_id": 256, - "bbox": [ - 72.0, - 617.84, - 434.7, - 673.16 - ], - "text": "Unfortunately, trading often appeals to impulsive people, gamblers, and those \nwho feel that the world owes them a living. If you trade for the excitement, you’ll \ninevitably take trades with bad odds and accept needless risks. The markets are un-\nforgiving, and emotional trading always results in losses.", - "type": "text" - } - ] - }, - { - "page_num": 33, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p33-b0", - "global_id": 257, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "6. SELF-DESTRUCTIVENESS\t\n17", - "type": "text" - }, - { - "block_id": "p33-b1", - "global_id": 258, - "bbox": [ - 72.0, - 57.1, - 132.76, - 74.04 - ], - "text": "Gambling", - "type": "text" - }, - { - "block_id": "p33-b2", - "global_id": 259, - "bbox": [ - 72.0, - 80.73, - 434.75, - 108.04 - ], - "text": "Gambling means betting on games of chance or skill. It exists in all societies, and \nmost people have gambled at some point in their lives.", - "type": "text" - }, - { - "block_id": "p33-b3", - "global_id": 260, - "bbox": [ - 72.0, - 108.74, - 434.75, - 164.06 - ], - "text": "Freud believed that gambling was universally attractive because it was a substitute \nfor masturbation. The repetitive and exciting activity of the hands, the irresistible \nurge, the resolutions to stop, the intoxicating quality of pleasure, and the feelings of \nguilt link gambling and masturbation.", - "type": "text" - }, - { - "block_id": "p33-b4", - "global_id": 261, - "bbox": [ - 72.0, - 164.75, - 434.74, - 234.08 - ], - "text": "Dr. Ralph Greenson, a prominent California psychoanalyst, has divided gamblers \ninto three groups: the normal person who gambles for diversion and who can stop \nwhen he wishes; the professional gambler, who selects gambling as his means of \nearning a livelihood; and the neurotic gambler, who gambles because he is driven by \nunconscious needs and is unable to stop.", - "type": "text" - }, - { - "block_id": "p33-b5", - "global_id": 262, - "bbox": [ - 72.0, - 234.77, - 434.78, - 290.09 - ], - "text": "A neurotic gambler either feels lucky or wants to test his luck. Winning gives \nhim a sense of power. He feels pleased, like a baby feeding at a breast. In the end, a \nneurotic gambler always loses because he tries to recreate that omnipotent feeling of \nbliss instead of concentrating on a realistic long-term game plan.", - "type": "text" - }, - { - "block_id": "p33-b6", - "global_id": 263, - "bbox": [ - 72.0, - 290.79, - 434.75, - 360.11 - ], - "text": "Dr. Sheila Blume, director of the compulsive gambling program at South Oaks \nHospital in New York, called gambling “an addiction without a drug.” Most gamblers \nare men who gamble for the action. Women tend to gamble as a means of escape. \nLosers usually hide their losses and try to look and act like winners, but are plagued \nby self-doubt.", - "type": "text" - }, - { - "block_id": "p33-b7", - "global_id": 264, - "bbox": [ - 72.0, - 360.81, - 434.7, - 402.12 - ], - "text": "Trading stocks, futures, and options gives a gambler a high, while looking more \nrespectable than betting on the ponies. Gambling in the financial markets has a greater \naura of sophistication than playing numbers with a bookie.", - "type": "text" - }, - { - "block_id": "p33-b8", - "global_id": 265, - "bbox": [ - 72.0, - 402.82, - 434.72, - 444.14 - ], - "text": "Gamblers feel happy when trades go in their favor. They feel terribly low when \nthey lose. They differ from successful professionals who focus on long-term plans \nand don’t get particularly upset or excited over any single trade.", - "type": "text" - }, - { - "block_id": "p33-b9", - "global_id": 266, - "bbox": [ - 72.0, - 445.08, - 434.77, - 513.89 - ], - "text": "The key sign of gambling is the inability to resist the urge to bet. If you feel that you are \ntrading too much and the results are poor, stop trading for a month. This will give you a chance \nto re-evaluate your trading. If the urge to trade is so strong that you cannot stay away from the \naction for a month, then it is time to visit your local chapter of Gamblers Anonymous or start \nusing the principles of Alcoholics Anonymous, outlined later in this chapter.", - "type": "text" - }, - { - "block_id": "p33-b10", - "global_id": 267, - "bbox": [ - 72.0, - 538.1, - 155.29, - 555.04 - ], - "text": "Self-Sabotage", - "type": "text" - }, - { - "block_id": "p33-b11", - "global_id": 268, - "bbox": [ - 72.0, - 561.73, - 434.71, - 603.04 - ], - "text": "After practicing psychiatry for decades, I became convinced that most failures in life \nare due to self-sabotage. We fail in our professional, personal, and business affairs \nnot because of bad luck or incompetence, but to fulfill an unconscious wish to fail.", - "type": "text" - }, - { - "block_id": "p33-b12", - "global_id": 269, - "bbox": [ - 72.0, - 603.74, - 434.74, - 673.06 - ], - "text": "A brilliant friend of mine had a lifelong history of demolishing his success. As a \nyoung man, he was a successful pharmacist but lost his business; became a broker and \nrose near the top of his firm but was sued; turned to trading but busted out while \ndisentangling himself from previous disasters. He blamed all his failures on envious \nbosses, incompetent regulators, and an unsupportive wife.", - "type": "text" - } - ] - }, - { - "page_num": 34, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p34-b0", - "global_id": 270, - "bbox": [ - 72.0, - 33.66, - 432.04, - 47.21 - ], - "text": "18\t\nINDIVIDUAL PSYCHOLOGY", - "type": "text" - }, - { - "block_id": "p34-b1", - "global_id": 271, - "bbox": [ - 72.0, - 57.83, - 434.77, - 239.18 - ], - "text": "Finally, he hit bottom. He had no job and no money. He borrowed a quote ter-\nminal from another busted-out trader and raised capital from a few people who \nhad heard that he had traded well in the past. He started making money for his \npool, and as the word spread, more people invested. My friend was on a roll. At \nthat point, he went on a speaking tour of Asia but continued to trade from the \nroad. He took a side trip into a country famous for its brothels, leaving a very large \nopen position in bond futures, with no protective stop. By the time he returned \nto civilization, the market had staged a major move and his pool was wiped out. \nDid he try to figure out his problem? To learn? No—he blamed his broker! After-\nwards I helped him get an attractive job at a major data company, but there he be-\ngan to bite the hands that fed him and was fired. In the end, this brilliant man was \ngoing door to door, selling aluminum siding—while others made money using his \ntechniques.", - "type": "text" - }, - { - "block_id": "p34-b2", - "global_id": 272, - "bbox": [ - 72.0, - 239.88, - 434.69, - 267.19 - ], - "text": "When traders get in trouble, they tend to blame others, bad luck, or anything \nelse. It hurts to look within yourself for the cause of your failure.", - "type": "text" - }, - { - "block_id": "p34-b3", - "global_id": 273, - "bbox": [ - 72.0, - 267.89, - 434.71, - 351.22 - ], - "text": "A prominent trader came to me for a consultation. His equity was being demol-\nished by a rally in the U.S. dollar, in which he was heavily short. He had grown up \nfighting an abusive and arrogant father. He had made a name for himself by betting \nlarge positions on reversals of established trends. This trader kept adding to his short \nposition because he could not admit that the market, which represented his father, \nwas bigger and stronger than he was.", - "type": "text" - }, - { - "block_id": "p34-b4", - "global_id": 274, - "bbox": [ - 72.0, - 351.91, - 434.75, - 407.23 - ], - "text": "These are just two examples of how people act out their self-destructive tenden-\ncies. We sabotage ourselves by acting like impulsive children rather than intelligent \nadults. We cling to our self-defeating patterns. They can be treated—failure is a cur-\nable disease.", - "type": "text" - }, - { - "block_id": "p34-b5", - "global_id": 275, - "bbox": [ - 72.0, - 408.18, - 434.75, - 462.98 - ], - "text": "The mental baggage from childhood can prevent you from succeeding in the markets. \nYou have to identify your weaknesses and work to change. Keep a trading diary—write down \nyour reasons for entering and exiting every trade. Look for repetitive patterns of success \nand failure.", - "type": "text" - }, - { - "block_id": "p34-b6", - "global_id": 276, - "bbox": [ - 72.0, - 483.2, - 212.07, - 500.14 - ], - "text": "The Demolition Derby", - "type": "text" - }, - { - "block_id": "p34-b7", - "global_id": 277, - "bbox": [ - 72.0, - 505.83, - 434.72, - 575.15 - ], - "text": "All society members make small allowances to protect one another from the conse-\nquences of their mistakes. When you drive, you try to avoid hitting other cars, and \nthey try to avoid hitting you. If someone cuts in front of you on a highway, you may \ncurse, but you will slow down. If someone swings open the door of a parked car, you \nswerve. You avoid collisions because they are costly for both parties.", - "type": "text" - }, - { - "block_id": "p34-b8", - "global_id": 278, - "bbox": [ - 72.0, - 575.85, - 434.66, - 631.17 - ], - "text": "Almost all professions provide safety nets for their members. Your bosses, col-\nleagues, and clients will warn you when you behave badly or self-destructively. There \nis no such safety net in trading, which makes it more dangerous than most human \nendeavors. The markets offer endless opportunities to self-destruct.", - "type": "text" - }, - { - "block_id": "p34-b9", - "global_id": 279, - "bbox": [ - 72.0, - 631.86, - 434.74, - 687.18 - ], - "text": "Buying at the high point of the day is like swinging your car door open into the \ntraffic. When your order to buy reaches the floor, traders rush to sell to you—to tear \noff your door along with your arm. Other traders want you to fail because when you \nlose they get your money.", - "type": "text" - } - ] - }, - { - "page_num": 35, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p35-b0", - "global_id": 280, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "7. TRADING PSYCHOLOGY\t\n19", - "type": "text" - }, - { - "block_id": "p35-b1", - "global_id": 281, - "bbox": [ - 72.04, - 57.83, - 434.78, - 99.14 - ], - "text": "Markets operate without normal human helpfulness. Every trader gets hit by \nothers. Every trader tries to hit others. The trading highway is littered with wrecks. \nTrading is the most dangerous human endeavor, short of war.", - "type": "text" - }, - { - "block_id": "p35-b2", - "global_id": 282, - "bbox": [ - 72.0, - 119.2, - 273.98, - 136.13 - ], - "text": "Controlling Self-Destructiveness", - "type": "text" - }, - { - "block_id": "p35-b3", - "global_id": 283, - "bbox": [ - 72.0, - 141.83, - 434.74, - 183.14 - ], - "text": "Most people go through life making the same mistakes decade after decade. Some \nstructure their lives to succeed in one area, while acting out their internal conflicts \nin another.", - "type": "text" - }, - { - "block_id": "p35-b4", - "global_id": 284, - "bbox": [ - 72.0, - 184.09, - 434.75, - 238.9 - ], - "text": "You need to be aware of your tendency to sabotage yourself. Stop blaming your losses on bad \nluck or on others, and take responsibility for your results. Start keeping a diary—a record of all \nyour trades, with reasons for entering and exiting them. Look for repetitive patterns of success \nand failure. Those who don’t learn from the past are condemned to repeat it.", - "type": "text" - }, - { - "block_id": "p35-b5", - "global_id": 285, - "bbox": [ - 72.0, - 239.86, - 434.75, - 309.18 - ], - "text": "A trader needs a psychological safety net the way a mountain climber needs his \nsurvival gear. I found the principles of Alcoholics Anonymous, outlined below, to \nbe of great help at an early stage of trader development. Strict money management \nrules also provide a safety net, while the diary helps you learn from your mistakes as \nwell as successes.", - "type": "text" - }, - { - "block_id": "p35-b6", - "global_id": 286, - "bbox": [ - 73.55, - 336.86, - 260.98, - 355.5 - ], - "text": "■\n■7. Trading Psychology", - "type": "text" - }, - { - "block_id": "p35-b7", - "global_id": 287, - "bbox": [ - 72.0, - 365.83, - 434.75, - 407.14 - ], - "text": "Your success or failure as a trader depends on your emotions. You may have a brilliant \ntrading system, but if you feel arrogant, frightened, or upset, your account is sure \nto suffer. If you become aware of fear, greed, or a gambler’s high, close your trades.", - "type": "text" - }, - { - "block_id": "p35-b8", - "global_id": 288, - "bbox": [ - 72.0, - 407.84, - 434.77, - 477.16 - ], - "text": "In trading, you compete against the sharpest minds in the world. Commissions \nand slippage slant the field against you. Now, on top of that, if you allow your emo-\ntions to interfere with your trading, the battle is lost. My friend and partner in \nSpikeTrade.com Kerry Lovvorn is fond of repeating: “It is hard enough to know what \nthe market is going to do; if you don’t know what you are going to do, the game is lost.”", - "type": "text" - }, - { - "block_id": "p35-b9", - "global_id": 289, - "bbox": [ - 72.0, - 477.86, - 434.68, - 505.17 - ], - "text": "Having a good trading system is not enough. Many traders with good systems \nwash out because psychologically they are not prepared to win.", - "type": "text" - }, - { - "block_id": "p35-b10", - "global_id": 290, - "bbox": [ - 72.0, - 525.2, - 185.94, - 542.14 - ], - "text": "Bending the Rules", - "type": "text" - }, - { - "block_id": "p35-b11", - "global_id": 291, - "bbox": [ - 72.0, - 547.83, - 434.66, - 589.14 - ], - "text": "Markets offer enormous temptations, like walking through a gold vault or through a \nharem. They provoke great surges of greed and even greater waves of fear of losing \nwhat we’ve got. Those feelings cloud our perceptions of market reality.", - "type": "text" - }, - { - "block_id": "p35-b12", - "global_id": 292, - "bbox": [ - 72.0, - 589.84, - 434.75, - 631.16 - ], - "text": "Most amateurs feel like geniuses after a short winning streak. It is exciting to \nbelieve that you are so good that all your trades are sure to be winners. That’s when \ntraders start deviating from their rules and damage their accounts.", - "type": "text" - }, - { - "block_id": "p35-b13", - "global_id": 293, - "bbox": [ - 72.0, - 631.85, - 434.69, - 687.17 - ], - "text": "Traders gain some knowledge, win, their emotions kick in, and they self-destruct. \nMost traders promptly give their “killings” back to the markets, which are full of \nrags to riches to rags stories. The hallmark of a successful trader is the ability to ac-\ncumulate equity.", - "type": "text" - } - ] - }, - { - "page_num": 36, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p36-b0", - "global_id": 294, - "bbox": [ - 72.0, - 33.66, - 432.04, - 47.21 - ], - "text": "20\t\nINDIVIDUAL PSYCHOLOGY", - "type": "text" - }, - { - "block_id": "p36-b1", - "global_id": 295, - "bbox": [ - 72.0, - 57.83, - 434.64, - 127.15 - ], - "text": "You need to make trading as objective as possible. Be sure to follow money man-\nagement rules. Keep a spreadsheet listing all your trades, including commissions and \nslippage. Keep a diary of all your trades with “before and after” charts. At the early \nstages of your trading career, you may have to devote as much energy to analyzing \nyourself as analyzing the markets.", - "type": "text" - }, - { - "block_id": "p36-b2", - "global_id": 296, - "bbox": [ - 72.0, - 127.85, - 434.75, - 253.19 - ], - "text": "When I was learning to trade, I read every book on trading psychology I could \nfind. Many writers offered sensible advice. Some stressed discipline: “You cannot let \nthe markets sway you. Don’t make decisions during trading hours. Plan a trade, and \ntrade a plan.” Others stressed flexibility: “Don’t enter the market with any precon-\nceived notions. Change your plans when markets change.” Some experts suggested \nisolation—no business news, no Wall Street Journal, no listening to other traders, just \nyou and the market. Others advised being open-minded, keeping in touch with other \ntraders, and soaking up fresh ideas. Each piece of advice seemed to make sense, but \nthey contradicted one another.", - "type": "text" - }, - { - "block_id": "p36-b3", - "global_id": 297, - "bbox": [ - 72.0, - 253.88, - 434.74, - 295.2 - ], - "text": "I kept reading, trading, and focusing on system development. I also continued to \npractice psychiatry. I never thought the two fields were connected—until I had a \nsudden insight. The idea that changed how I trade came from psychiatry.", - "type": "text" - }, - { - "block_id": "p36-b4", - "global_id": 298, - "bbox": [ - 72.0, - 315.2, - 304.53, - 332.14 - ], - "text": "The Insight That Changed My Trading", - "type": "text" - }, - { - "block_id": "p36-b5", - "global_id": 299, - "bbox": [ - 72.0, - 337.83, - 434.71, - 393.15 - ], - "text": "Like most psychiatrists, I always had some patients with alcohol problems. I also \nserved as a consultant to a major drug rehabilitation program. It didn’t take me long \nto realize that alcoholics and addicts were more likely to recover in self-help groups \nthan in classical psychiatric settings.", - "type": "text" - }, - { - "block_id": "p36-b6", - "global_id": 300, - "bbox": [ - 72.0, - 393.84, - 434.76, - 449.16 - ], - "text": "Psychotherapy, medications, and expensive hospitals and clinics can sober up a \ndrunk but seldom succeed in helping him remain sober. Most addicts quickly re-\nlapse. They have a much better chance to recover if they become active in Alcoholics \nAnonymous (AA) and similar self-help groups.", - "type": "text" - }, - { - "block_id": "p36-b7", - "global_id": 301, - "bbox": [ - 72.0, - 449.86, - 434.76, - 519.18 - ], - "text": "Once I realized that AA members were more likely to stay sober and rebuild \ntheir lives, I became a big fan of Alcoholics Anonymous. I began sending patients \nwith drinking problems to AA and related groups, such as ACOA (Adult Children of \nAlcoholics). If an alcoholic came to me for treatment, I insisted that he also go to AA \nbecause otherwise he’d be wasting both our time and his money.", - "type": "text" - }, - { - "block_id": "p36-b8", - "global_id": 302, - "bbox": [ - 72.0, - 519.88, - 434.76, - 589.2 - ], - "text": "One night I stopped by a friend’s office on the way to a party. We had two hours \nbefore it began, and my friend, who was a recovering alcoholic, said: “Do you want \nto take in a movie or go to an AA meeting?” I had sent many patients to AA but had \nnever been to a meeting, since I have never had a drinking problem. I jumped at a \nchance to attend an AA meeting—it was a new experience.", - "type": "text" - }, - { - "block_id": "p36-b9", - "global_id": 303, - "bbox": [ - 72.0, - 589.9, - 434.7, - 631.22 - ], - "text": "The meeting was held at a local YMCA. A dozen men and a few women sat on \nfolding chairs in a plain room. The meeting lasted an hour. I was amazed by what I \nheard—these people seemed to talk about my trading!", - "type": "text" - }, - { - "block_id": "p36-b10", - "global_id": 304, - "bbox": [ - 72.0, - 631.91, - 434.65, - 687.23 - ], - "text": "They talked about alcohol, but as long as I substituted the word “loss” for “alco-\nhol,” most of what they said applied to me! My account equity was swinging up and \ndown in those days. I left that meeting knowing that I had to handle my losses the \nway AA handles alcoholism.", - "type": "text" - } - ] - }, - { - "page_num": 37, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p37-b0", - "global_id": 305, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "8. TRADING LESSONS FROM AA\t\n21", - "type": "text" - }, - { - "block_id": "p37-b1", - "global_id": 306, - "bbox": [ - 73.55, - 55.86, - 305.48, - 74.5 - ], - "text": "■\n■8. Trading Lessons from AA", - "type": "text" - }, - { - "block_id": "p37-b2", - "global_id": 307, - "bbox": [ - 72.0, - 84.83, - 434.7, - 126.14 - ], - "text": "Almost any drunk can stay sober for a few days—until the urge to drink drives him \nback to the bottle. He cannot resist as long as he continues to think and feel like an \nalcoholic. Sobriety begins inside a person’s mind.", - "type": "text" - }, - { - "block_id": "p37-b3", - "global_id": 308, - "bbox": [ - 72.0, - 126.84, - 434.75, - 224.17 - ], - "text": "Alcoholics Anonymous (AA) has a system for changing the way people think and \nfeel about drinking. AA members use a 12-step program for changing their minds. \nThese 12 steps, described in the book Twelve Steps and Twelve Traditions, refer to 12 \nstages of personal growth. Recovering alcoholics attend meetings where they share \ntheir experiences with other recovering alcoholics, supporting each other in their \nsobriety. Any member can get a sponsor—another AA member whom he can call for \nsupport when he feels the urge to drink.", - "type": "text" - }, - { - "block_id": "p37-b4", - "global_id": 309, - "bbox": [ - 72.0, - 224.87, - 434.75, - 308.2 - ], - "text": "AA was founded in the 1930s by two alcoholics—a doctor and a traveling sales-\nman who began meeting to help each other stay sober. They developed a system that \nworked so well, others began to join them. AA has only one goal—to help its mem-\nbers stay sober. It doesn’t ask for money, takes no political positions, and runs no \npromotional campaigns. AA keeps growing thanks only to word of mouth and owes \nits success only to its effectiveness.", - "type": "text" - }, - { - "block_id": "p37-b5", - "global_id": 310, - "bbox": [ - 72.0, - 308.89, - 434.66, - 364.21 - ], - "text": "The 12-step program of AA is so effective that people with other problems now \nuse it. There are 12-step groups for children of alcoholics, gamblers, and others. I’ve \nbecome convinced that traders can stop losing money if they apply the key principles \nof Alcoholics Anonymous to their trading.", - "type": "text" - }, - { - "block_id": "p37-b6", - "global_id": 311, - "bbox": [ - 72.0, - 385.2, - 113.14, - 402.14 - ], - "text": "Denial", - "type": "text" - }, - { - "block_id": "p37-b7", - "global_id": 312, - "bbox": [ - 72.0, - 407.83, - 434.7, - 449.14 - ], - "text": "A social drinker enjoys a cocktail, a glass of wine, or a beer but stops when he feels \nhe’s had enough. An alcoholic’s chemistry is different. Once an alcoholic takes a \ndrink, he feels an urge to continue until he passes out or his money runs out.", - "type": "text" - }, - { - "block_id": "p37-b8", - "global_id": 313, - "bbox": [ - 72.0, - 449.84, - 434.76, - 491.16 - ], - "text": "A drunk may say that he needs to cut down on drinking, but can’t admit that it’s \nout of control. Try telling an alcoholic relative, friend, or employee that his drinking \nis out of control and damaging his life, and you’ll run into a wall of denial.", - "type": "text" - }, - { - "block_id": "p37-b9", - "global_id": 314, - "bbox": [ - 72.0, - 491.85, - 434.74, - 561.18 - ], - "text": "An alcoholic may say: “My boss fired me ’cause I was hung over and came in \nlate. My wife took the kids and left ’cause she had no sense to begin with. My \nlandlord is trying to kick me out of the apartment ’cause I’m a little behind \non the rent. I’m gonna have to cut down on my drinking, and everything will \nbe all right.”", - "type": "text" - }, - { - "block_id": "p37-b10", - "global_id": 315, - "bbox": [ - 72.0, - 561.87, - 434.72, - 603.19 - ], - "text": "This man has lost his family and his job. He is about to lose the roof over his head. \nHis life is spinning out of control—but he keeps saying that he can cut down on his \ndrinking. This is denial!", - "type": "text" - }, - { - "block_id": "p37-b11", - "global_id": 316, - "bbox": [ - 72.0, - 603.88, - 434.74, - 645.2 - ], - "text": "Alcoholics deny their problems while their lives are falling apart. As long as an \nalcoholic believes that he can “control his drinking,” he is headed downhill. Nothing \nwill ever change, even if he gets a new job, a new wife, and a new landlord.", - "type": "text" - }, - { - "block_id": "p37-b12", - "global_id": 317, - "bbox": [ - 72.0, - 645.9, - 434.76, - 687.21 - ], - "text": "Alcoholics deny that alcohol controls their lives. When they talk of reducing \ndrinking, they talk about managing the unmanageable. They are like a driver whose \ncar spins out of control on a mountain road. When the car careens down a cliff, it is", - "type": "text" - } - ] - }, - { - "page_num": 38, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p38-b0", - "global_id": 318, - "bbox": [ - 72.0, - 33.66, - 432.04, - 47.21 - ], - "text": "22\t\nINDIVIDUAL PSYCHOLOGY", - "type": "text" - }, - { - "block_id": "p38-b1", - "global_id": 319, - "bbox": [ - 72.0, - 57.83, - 434.7, - 85.14 - ], - "text": "too late to promise to drive carefully. An alcoholic’s life careens out of control, while \nhe denies he’s an alcoholic.", - "type": "text" - }, - { - "block_id": "p38-b2", - "global_id": 320, - "bbox": [ - 72.0, - 86.09, - 434.63, - 140.89 - ], - "text": "There is a stark parallel between an alcoholic and a trader whose account is being demol-\nished by losses. As he keeps changing his trading tactics, he acts like an alcoholic who tries to \nsolve his problem by switching from hard liquor to beer. A loser denies that he’s lost control over \nhis trading life.", - "type": "text" - }, - { - "block_id": "p38-b3", - "global_id": 321, - "bbox": [ - 72.0, - 161.2, - 155.16, - 178.13 - ], - "text": "Rock Bottom", - "type": "text" - }, - { - "block_id": "p38-b4", - "global_id": 322, - "bbox": [ - 72.0, - 183.83, - 434.72, - 225.14 - ], - "text": "A drunk can begin his journey to recovery only after he admits that he is an alcoholic. \nHe must see that alcohol controls his life and not the other way around. Most drunks \ncannot accept this painful truth. They can face it only after they hit rock bottom.", - "type": "text" - }, - { - "block_id": "p38-b5", - "global_id": 323, - "bbox": [ - 72.0, - 225.84, - 434.71, - 281.16 - ], - "text": "Some alcoholics hit rock bottom when they develop a life-threatening illness. \nOthers hit it after being rejected by their family or losing a job. An alcoholic needs to \nsink to a point so low, so deep down in the gutter, so unbearably painful that it finally \npenetrates his denial.", - "type": "text" - }, - { - "block_id": "p38-b6", - "global_id": 324, - "bbox": [ - 72.0, - 281.86, - 434.66, - 323.17 - ], - "text": "The pain of hitting rock bottom makes an alcoholic see how deep he has sunk. He \nsees a simple stark choice—either turn his life around or die. Only then is an alco-\nholic ready to begin his journey to recovery.", - "type": "text" - }, - { - "block_id": "p38-b7", - "global_id": 325, - "bbox": [ - 72.0, - 324.12, - 434.75, - 392.93 - ], - "text": "Profits give traders an emotional high and a feeling of power. They try to get high again, put \non reckless trades, and give back their profits. Most traders cannot stand the pain of severe losses. \nThey die as traders after hitting rock bottom and wash out of the markets. The few survivors \nrealize that the main trouble is not with their methods—it is with their thinking. They can \nchange and become successful traders.", - "type": "text" - }, - { - "block_id": "p38-b8", - "global_id": 326, - "bbox": [ - 72.0, - 413.2, - 156.82, - 430.14 - ], - "text": "The First Step", - "type": "text" - }, - { - "block_id": "p38-b9", - "global_id": 327, - "bbox": [ - 72.0, - 435.83, - 434.72, - 477.14 - ], - "text": "An alcoholic who wants to recover has to go through twelve steps—twelve stages \nof personal growth. He needs to change how he thinks and feels, how he relates to \nhimself and others.", - "type": "text" - }, - { - "block_id": "p38-b10", - "global_id": 328, - "bbox": [ - 72.0, - 477.84, - 434.76, - 533.16 - ], - "text": "The first step of AA is the hardest: to admit that one is powerless over alcohol. \nAn alcoholic must recognize that his life has become unmanageable, that alcohol \nis stronger than he is. Most cannot take that step, drop out, and go on to destroy \ntheir lives.", - "type": "text" - }, - { - "block_id": "p38-b11", - "global_id": 329, - "bbox": [ - 72.0, - 533.86, - 434.76, - 589.18 - ], - "text": "If alcohol is stronger than you, then you can never touch it again, not even a sip, \nfor as long as you live. You have to give up drinking forever. Most drunks do not want \nto give up that pleasure. They destroy their lives rather than take the first step of AA. \nOnly the pain of hitting rock bottom can motivate them to take that first step.", - "type": "text" - }, - { - "block_id": "p38-b12", - "global_id": 330, - "bbox": [ - 72.0, - 609.2, - 182.84, - 626.14 - ], - "text": "One Day at a Time", - "type": "text" - }, - { - "block_id": "p38-b13", - "global_id": 331, - "bbox": [ - 72.0, - 631.83, - 434.68, - 659.14 - ], - "text": "You may have seen bumper stickers that say, “One day at a time” or “Easy does it.”  Those \nare AA slogans, and people who drive those cars are probably recovering alcoholics.", - "type": "text" - }, - { - "block_id": "p38-b14", - "global_id": 332, - "bbox": [ - 72.0, - 659.84, - 432.04, - 687.15 - ], - "text": "Planning for life without alcohol can seem overwhelming. That’s why AA encour-\nages its members to live sober one day at a time.", - "type": "text" - } - ] - }, - { - "page_num": 39, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p39-b0", - "global_id": 333, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "9. LOSERS ANONYMOUS\t\n23", - "type": "text" - }, - { - "block_id": "p39-b1", - "global_id": 334, - "bbox": [ - 72.04, - 57.83, - 434.69, - 99.14 - ], - "text": "The goal of every AA member is to stay sober today and go to bed sober tonight. \nGradually, days become weeks, then months, then years. AA meetings and other \nactivities help each recovering alcoholic stay sober, one day at a time.", - "type": "text" - }, - { - "block_id": "p39-b2", - "global_id": 335, - "bbox": [ - 72.04, - 99.84, - 434.7, - 141.16 - ], - "text": "Recovering alcoholics receive—and give others—invaluable support and fellow-\nship at these meetings. They are held at all hours, all over the world. Traders have \nmuch to learn from those meetings.", - "type": "text" - }, - { - "block_id": "p39-b3", - "global_id": 336, - "bbox": [ - 72.0, - 161.2, - 168.1, - 178.13 - ], - "text": "An AA Meeting", - "type": "text" - }, - { - "block_id": "p39-b4", - "global_id": 337, - "bbox": [ - 72.0, - 183.83, - 434.7, - 225.14 - ], - "text": "One of the best things that a trader can do is go to an AA meeting. I especially recom-\nmend it to any trader on a losing streak. Call Alcoholics Anonymous and ask about \nthe next “open meeting” or “beginners’ meeting” in your area.", - "type": "text" - }, - { - "block_id": "p39-b5", - "global_id": 338, - "bbox": [ - 72.0, - 225.84, - 432.02, - 253.15 - ], - "text": "A meeting lasts about an hour. You can sit in the back of the room and listen care-\nfully. There is no pressure to speak, and nobody asks for your last name.", - "type": "text" - }, - { - "block_id": "p39-b6", - "global_id": 339, - "bbox": [ - 72.0, - 253.85, - 434.75, - 337.18 - ], - "text": "Each meeting begins with a long-term member getting up and speaking about his \nor her personal struggle for recovery from alcoholism. Several other members share \ntheir experiences. There is a collection to cover expenses—give a dollar if you like. \nAll you have to do is listen carefully, and every time you hear the word “alcohol,” \nsubstitute the word “loss” for it. You will feel as if the people in the meeting are talk-\ning about your trading!", - "type": "text" - }, - { - "block_id": "p39-b7", - "global_id": 340, - "bbox": [ - 73.55, - 364.86, - 255.7, - 383.5 - ], - "text": "■\n■9. Losers Anonymous", - "type": "text" - }, - { - "block_id": "p39-b8", - "global_id": 341, - "bbox": [ - 72.0, - 393.83, - 434.75, - 449.15 - ], - "text": "A social drinker enjoys an occasional drink, but an alcoholic craves alcohol. He de-\nnies that alcohol controls and destroys his life—until he reaches a personal crisis. \nIt may be a life-threatening illness, unemployment, abandonment by the family, or \nanother unbearably painful event. AA calls it “hitting rock bottom.”", - "type": "text" - }, - { - "block_id": "p39-b9", - "global_id": 342, - "bbox": [ - 72.0, - 449.84, - 434.77, - 491.16 - ], - "text": "The pain of hitting rock bottom punctures an alcoholic’s denial. He sees a stark \nchoice—to drown or to come up for air. His first step to recovery is to admit that he \nis powerless over alcohol. A recovering alcoholic can never drink again.", - "type": "text" - }, - { - "block_id": "p39-b10", - "global_id": 343, - "bbox": [ - 72.0, - 491.86, - 434.75, - 547.18 - ], - "text": "Loss is to a loser what alcohol is to an alcoholic. A small loss is like a single drink. \nA big loss is like a bender. A series of losses is like an alcoholic binge. A loser keeps \nswitching between different markets, gurus, and trading systems. His equity shrinks \nwhile he is trying to recreate the pleasurable sensation of winning.", - "type": "text" - }, - { - "block_id": "p39-b11", - "global_id": 344, - "bbox": [ - 72.0, - 547.87, - 434.76, - 589.19 - ], - "text": "Losing traders think and act like alcoholics, except that their speech is not slurred. \nThe two groups are so similar that you can predict what a loser will do by using \nalcoholics as a model.", - "type": "text" - }, - { - "block_id": "p39-b12", - "global_id": 345, - "bbox": [ - 72.0, - 589.88, - 434.7, - 617.2 - ], - "text": "Alcoholism is a curable disease—and so is losing. Losers can change by using the \nprinciples of Alcoholics Anonymous.", - "type": "text" - }, - { - "block_id": "p39-b13", - "global_id": 346, - "bbox": [ - 72.0, - 637.2, - 182.54, - 654.14 - ], - "text": "The Urge to Trade", - "type": "text" - }, - { - "block_id": "p39-b14", - "global_id": 347, - "bbox": [ - 72.0, - 659.87, - 434.74, - 687.18 - ], - "text": "Successful traders treat drawdowns the way social drinkers treat alcohol. They have \na little and stop. If they take several losses in a row, they take that as a signal that", - "type": "text" - } - ] - }, - { - "page_num": 40, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p40-b0", - "global_id": 348, - "bbox": [ - 72.0, - 33.66, - 432.04, - 47.21 - ], - "text": "24\t\nINDIVIDUAL PSYCHOLOGY", - "type": "text" - }, - { - "block_id": "p40-b1", - "global_id": 349, - "bbox": [ - 72.0, - 57.83, - 434.7, - 113.15 - ], - "text": "something isn’t working: perhaps their system isn’t in gear with the current market \nenvironment. It’s time for a break and a fresh look at the markets. Losers, on the \nother hand, cannot stop—they keep trading because they are addicted to the excite-\nment of the game and keep hoping for a big win.", - "type": "text" - }, - { - "block_id": "p40-b2", - "global_id": 350, - "bbox": [ - 72.0, - 113.84, - 434.75, - 183.17 - ], - "text": "A prominent trading advisor who has since busted out wrote that to him the \npleasure of trading was higher than that of sex or flying jet aircraft. Just as alcoholics \nproceed from social drinking to drunkenness, losers take bigger and bigger risks. \nThey cross the hugely important line: the one between taking a business risk and \ngambling. Many losers don’t even know that line exists.", - "type": "text" - }, - { - "block_id": "p40-b3", - "global_id": 351, - "bbox": [ - 72.0, - 183.86, - 434.63, - 211.18 - ], - "text": "Losers feel the urge to trade, just as alcoholics feel the urge to drink. They make \nimpulsive trades, go on trading binges, and try to trade their way out of a hole.", - "type": "text" - }, - { - "block_id": "p40-b4", - "global_id": 352, - "bbox": [ - 72.0, - 211.87, - 434.75, - 253.19 - ], - "text": "Losers bleed money from their accounts. Most of them bust out, but some turn \nto managing other people’s money after losing their own; still others sell advisory \nservices, like burned-out drunks who wash glasses in a bar.", - "type": "text" - }, - { - "block_id": "p40-b5", - "global_id": 353, - "bbox": [ - 72.0, - 253.88, - 434.69, - 295.2 - ], - "text": "Most losers hide their losses from themselves and from everyone else. They keep \nno records and throw away brokerage statements. A loser is like an alcoholic who \ndoesn’t want to know how many ounces of liquor he drank.", - "type": "text" - }, - { - "block_id": "p40-b6", - "global_id": 354, - "bbox": [ - 72.0, - 315.2, - 155.91, - 332.14 - ], - "text": "Into the Hole", - "type": "text" - }, - { - "block_id": "p40-b7", - "global_id": 355, - "bbox": [ - 72.0, - 337.83, - 434.75, - 379.14 - ], - "text": "A loser trades in a fog and doesn’t know why he keeps losing. If he knew, he would \nhave done something about it and become a winner. A loser tries to manage his trad-\ning the way an alcoholic tries to manage his drinking.", - "type": "text" - }, - { - "block_id": "p40-b8", - "global_id": 356, - "bbox": [ - 72.0, - 379.84, - 434.71, - 421.16 - ], - "text": "Losers’ desperate hopes for magic solutions help advisors sell their services to the \npublic. They switch to new trading systems, buy more software, and look for tips \nfrom new gurus.", - "type": "text" - }, - { - "block_id": "p40-b9", - "global_id": 357, - "bbox": [ - 72.0, - 421.85, - 434.74, - 477.17 - ], - "text": "As losses mount and equity shrinks, a loser grows desperate and converts outright \npositions into spreads, doubles up on losing positions, reverses and trades in the op-\nposite direction, and so on. All of that does him no more good than switching from \nhard liquor to wine can help an alcoholic.", - "type": "text" - }, - { - "block_id": "p40-b10", - "global_id": 358, - "bbox": [ - 72.0, - 477.87, - 434.66, - 533.19 - ], - "text": "A losing trader careens out of control, trying to manage the unmanageable. Al-\ncoholics die prematurely, and most traders bust out of the markets and never come \nback. New trading methods, hot tips, and improved software will not help a person \nwho cannot handle himself.", - "type": "text" - }, - { - "block_id": "p40-b11", - "global_id": 359, - "bbox": [ - 72.0, - 533.88, - 434.71, - 589.2 - ], - "text": "A loser keeps getting high from trading while his equity shrinks. Trying to tell him \nthat he is a loser is like trying to take a bottle away from a drunk. A loser has to hit \nrock bottom before he can begin to recover. You have to change how you think in \norder to stop losing and begin your recovery as a trader.", - "type": "text" - }, - { - "block_id": "p40-b12", - "global_id": 360, - "bbox": [ - 72.0, - 609.2, - 207.28, - 626.14 - ], - "text": "Trader’s Rock Bottom", - "type": "text" - }, - { - "block_id": "p40-b13", - "global_id": 361, - "bbox": [ - 72.0, - 632.83, - 434.75, - 660.14 - ], - "text": "Hitting rock bottom feels horrible. It is painful and humiliating. You hit it when you \nlose money you cannot afford to lose. You hit it when you gamble away your savings.", - "type": "text" - } - ] - }, - { - "page_num": 41, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p41-b0", - "global_id": 362, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "9. LOSERS ANONYMOUS\t\n25", - "type": "text" - }, - { - "block_id": "p41-b1", - "global_id": 363, - "bbox": [ - 72.04, - 57.83, - 434.72, - 85.14 - ], - "text": "You hit it after you tell your friends how smart you are and later have to ask them for a \nloan. You hit rock bottom when the market comes roaring at you and yells: “You fool!”", - "type": "text" - }, - { - "block_id": "p41-b2", - "global_id": 364, - "bbox": [ - 72.04, - 85.84, - 434.74, - 155.16 - ], - "text": "Some people hit rock bottom after only a few weeks of trading. Others keep add-\ning money to their accounts to postpone the day of reckoning. It hurts to see a loser \nin the mirror. We spend our lifetime building up self-esteem. Most of us have a high \nopinion of ourselves. Your first impulse may be to hide, but remember, you are not \nalone. Almost every trader has been there.", - "type": "text" - }, - { - "block_id": "p41-b3", - "global_id": 365, - "bbox": [ - 72.04, - 155.86, - 434.8, - 197.17 - ], - "text": "Many traders who hit rock bottom slink away from the market and never look \nback. Many who trade today will be gone in a year, if not sooner. They’ll hit rock \nbottom, crumble, and leave. They’ll try to forget trading like a bad dream.", - "type": "text" - }, - { - "block_id": "p41-b4", - "global_id": 366, - "bbox": [ - 72.04, - 197.87, - 434.73, - 225.18 - ], - "text": "Some will lick their wounds and wait until the pain fades away and then return, \nhaving learned little. They’ll be fearful, and their fear will further impair their trading.", - "type": "text" - }, - { - "block_id": "p41-b5", - "global_id": 367, - "bbox": [ - 72.04, - 225.88, - 434.8, - 294.94 - ], - "text": "Fortunately, some traders will recoil from rock bottom to begin the process of \nchange and growth. For these individuals, the pain of hitting rock bottom will break \nthe vicious cycle of getting high from winning and then losing everything and crash-\ning. When you admit that your personal problem causes you to lose, you can begin building a \nnew trading life.  You can start developing the discipline of a winner.", - "type": "text" - }, - { - "block_id": "p41-b6", - "global_id": 368, - "bbox": [ - 72.0, - 315.2, - 182.25, - 332.14 - ], - "text": "Trader’s First Step", - "type": "text" - }, - { - "block_id": "p41-b7", - "global_id": 369, - "bbox": [ - 72.0, - 337.83, - 434.7, - 393.15 - ], - "text": "Just as an alcoholic needs to admit that he can’t control his drinking, a trader needs \nto admit that he cannot control his losses. The first step of an AA member is to say: “I \nam an alcoholic, I am powerless over alcohol.” As a trader, you have to take your first \nstep and say: “I am a loser, I am powerless over losses.”", - "type": "text" - }, - { - "block_id": "p41-b8", - "global_id": 370, - "bbox": [ - 72.0, - 393.84, - 434.65, - 435.16 - ], - "text": "Recovering alcoholics struggle to stay sober, one day at a time. A trader can re-\ncover, using the principles of AA. Now you have to struggle to trade without losses, \none day at a time.", - "type": "text" - }, - { - "block_id": "p41-b9", - "global_id": 371, - "bbox": [ - 72.0, - 435.86, - 434.62, - 477.17 - ], - "text": "You may say that’s impossible. What if you buy, and the market immediately de-\nclines? What if you sell short, and it turns out to be the bottom tick, and the market \nimmediately rallies? Even the best traders lose money on some trades.", - "type": "text" - }, - { - "block_id": "p41-b10", - "global_id": 372, - "bbox": [ - 72.0, - 477.87, - 434.76, - 519.18 - ], - "text": "The answer is to draw a line between a businessman’s risk and a loss. As traders, \nwe always take businessman’s risks, but we may never take a loss greater than this \npredetermined risk.", - "type": "text" - }, - { - "block_id": "p41-b11", - "global_id": 373, - "bbox": [ - 72.0, - 519.88, - 434.75, - 589.2 - ], - "text": "For example, a storekeeper takes a risk every time he stocks new merchandise. \nIf it doesn’t sell, he’ll lose money. An intelligent businessman takes only risks that \nwill not put him out of business, even if he makes several mistakes in a row. Stocking \ntwo crates of merchandise may be a sensible business risk, but stocking a full trailer \nis probably a gamble.", - "type": "text" - }, - { - "block_id": "p41-b12", - "global_id": 374, - "bbox": [ - 72.0, - 589.9, - 434.74, - 659.22 - ], - "text": "As a trader, you are in the business of trading. You need to define your business-\nman’s risk—the maximum amount of money you’ll risk on any single trade. There \nis no standard dollar amount, just as there is no standard business. An acceptable \nbusinessman’s risk depends, first of all, on the size of your trading account. It also \ndepends on your trading method and pain tolerance.", - "type": "text" - } - ] - }, - { - "page_num": 42, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p42-b0", - "global_id": 375, - "bbox": [ - 72.0, - 33.66, - 432.04, - 47.21 - ], - "text": "26\t\nINDIVIDUAL PSYCHOLOGY", - "type": "text" - }, - { - "block_id": "p42-b1", - "global_id": 376, - "bbox": [ - 72.0, - 57.83, - 434.76, - 183.17 - ], - "text": "The concept of a businessman’s risk will change the way you manage your money \n(see Section 9, “Risk Management”). The absolute maximum a trader may risk on any \ntrade is two percent of his account equity. For example, if you have $30,000 in your \naccount, you may not risk more than $600 per trade, and if you have $10,000, you \nmay not risk more than $200. If your account is small, limit yourself to trading fewer \nshares, less expensive futures, or mini-contracts. If you see an attractive trade, but a \nlogical stop would have to be placed where more than 2 percent of equity would be \nat risk—pass on that trade. You may risk less, but you may never risk more. You must \navoid risking more than 2 percent on a trade the way a recovering alcoholic avoids bars.", - "type": "text" - }, - { - "block_id": "p42-b2", - "global_id": 377, - "bbox": [ - 72.0, - 183.86, - 434.65, - 239.18 - ], - "text": "A trader who blames high commissions on a broker and slippage on a floor trader \ngives up control of his trading life. Try to reduce both, but take responsibility for \nthem. If you lose even a dollar more than your businessman’s risk, including com-\nmissions and slippage, you are a loser.", - "type": "text" - }, - { - "block_id": "p42-b3", - "global_id": 378, - "bbox": [ - 72.0, - 239.88, - 434.7, - 323.21 - ], - "text": "Do you keep good trading records? Poor record-keeping is a sure sign of a gam-\nbler. Good businessmen keep good records. Your trading records must show the date \nand price of every entry and exit, slippage, commissions, stops, all adjustments of \nstops, reasons for entering, objectives for exiting, maximum paper profit, maximum \npaper loss after a stop was hit, and any other data necessary to review and fully un-\nderstand your trade later in the future.", - "type": "text" - }, - { - "block_id": "p42-b4", - "global_id": 379, - "bbox": [ - 72.0, - 323.9, - 434.76, - 393.23 - ], - "text": "If you bail out of a trade within your businessman’s risk, it is normal business. \nThere is no bargaining, no waiting for another tick, no hoping for a change. Losing \na dollar more than your established businessman’s risk is like getting drunk, getting \ninto a brawl, getting sick to your stomach on your way home, and waking up in a \ngutter. You would never want that to happen.", - "type": "text" - }, - { - "block_id": "p42-b5", - "global_id": 380, - "bbox": [ - 72.0, - 413.2, - 188.2, - 430.14 - ], - "text": "A Meeting for One", - "type": "text" - }, - { - "block_id": "p42-b6", - "global_id": 381, - "bbox": [ - 72.0, - 435.83, - 434.75, - 533.16 - ], - "text": "When you go to an AA meeting, you’ll see people who have not had a drink in years \nstand up and say: “Hello, my name is so-and-so, and I am an alcoholic.” Why do they \ncall themselves alcoholics after years of sobriety? Because if they think they have \nbeaten alcoholism, they will start drinking again. If a person stops thinking he is an \nalcoholic, he is free to take a drink, then another, and will probably end up in the gut-\nter again. A person who wants to stay sober must remember that he is an alcoholic \nfor the rest of his life.", - "type": "text" - }, - { - "block_id": "p42-b7", - "global_id": 382, - "bbox": [ - 72.0, - 533.86, - 434.71, - 603.18 - ], - "text": "Traders would benefit from our own self-help organization—I’d call it Losers \nAnonymous. Why not Traders Anonymous? Because a harsh name helps focus atten-\ntion on our self-destructive tendencies. After all, Alcoholics Anonymous doesn’t call \nitself Drinkers Anonymous. As long as you call yourself a loser, you’ll focus on avoid-\ning losses.", - "type": "text" - }, - { - "block_id": "p42-b8", - "global_id": 383, - "bbox": [ - 72.0, - 603.88, - 434.75, - 673.2 - ], - "text": "Several traders have argued against what they thought was the “negative thinking” \nof Losers Anonymous. A retired woman from Texas, a highly successful trader, de-\nscribed her approach. She is very religious, prays every morning, and then drives to \nan office where she actively trades. Whenever the market starts moving against her, \nshe cuts her losses very fast because it would not please the Lord for her to lose His", - "type": "text" - } - ] - }, - { - "page_num": 43, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p43-b0", - "global_id": 384, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "10. WINNERS AND LOSERS\t\n27", - "type": "text" - }, - { - "block_id": "p43-b1", - "global_id": 385, - "bbox": [ - 72.04, - 57.83, - 434.66, - 85.14 - ], - "text": "money. I thought that our methods were similar. The goal is to cut losses due to some \nobjective, external rule.", - "type": "text" - }, - { - "block_id": "p43-b2", - "global_id": 386, - "bbox": [ - 72.04, - 85.84, - 434.74, - 127.15 - ], - "text": "Trading within a businessman’s risk is like living without alcohol. A trader has to \nadmit that he is a loser, just as a drunk has to admit that he is an alcoholic. Then he \ncan begin his journey to recovery.", - "type": "text" - }, - { - "block_id": "p43-b3", - "global_id": 387, - "bbox": [ - 72.03, - 127.85, - 434.76, - 197.18 - ], - "text": "This is why every morning before trading I suggest saying: “Good morning, my \nname is so-and-so, and I am a loser. I have it in me to do serious financial damage to \nmy account.”  This is like an AA meeting—it keeps your mind focused on the first \nprinciples. Even if you take thousands of dollars out of the market today, tomorrow \nyou say: “Good morning, my name is so-and-so and I am a loser.”", - "type": "text" - }, - { - "block_id": "p43-b4", - "global_id": 388, - "bbox": [ - 72.03, - 197.88, - 434.8, - 295.21 - ], - "text": "A friend of mine joked: “When I sit in front of my quote screen in the morning, \nI say, ‘My name is John, and I’m gonna rip your throat out.’” His thinking generates \ntension. “Losers Anonymous” thinking generates serenity. A trader who feels serene \nand relaxed can focus on looking for the best and safest trades. When a sober man \nand a drunk enter a race, you know who is more likely to win. A drunk may win \nonce in a while, but the sober man is the one to bet on. You want to be the sober \nman in that race.", - "type": "text" - }, - { - "block_id": "p43-b5", - "global_id": 389, - "bbox": [ - 73.55, - 322.86, - 270.52, - 341.5 - ], - "text": "■\n■10. Winners and Losers", - "type": "text" - }, - { - "block_id": "p43-b6", - "global_id": 390, - "bbox": [ - 72.0, - 351.83, - 434.72, - 421.15 - ], - "text": "We come to trading from different walks of life and bring along our mental baggage. \nMany of us find that when we act in the market the way we do in our everyday life, we \nlose money. Most of all, your success or failure depends on your ability to use intel-\nlect rather than act emotionally. A trader who feels overjoyed when he wins and de- \npressed when he loses is at the mercy of market moves and cannot accumulate equity.", - "type": "text" - }, - { - "block_id": "p43-b7", - "global_id": 391, - "bbox": [ - 72.0, - 421.85, - 434.71, - 463.16 - ], - "text": "To be a winner in the market you must act coolly and responsibly. The pain of losing \ndrives people to look for magic methods. At the same time, they discard much of what \nis useful in their professional or business backgrounds.", - "type": "text" - }, - { - "block_id": "p43-b8", - "global_id": 392, - "bbox": [ - 72.0, - 483.2, - 159.64, - 500.14 - ], - "text": "Like an Ocean", - "type": "text" - }, - { - "block_id": "p43-b9", - "global_id": 393, - "bbox": [ - 72.0, - 505.83, - 434.77, - 575.15 - ], - "text": "The market is like an ocean—it moves up and down regardless of what you wish. \nYou may feel joy when you buy a stock and it explodes in a rally. You may feel \ndrenched with fear when you go short but the market rises, melting your equity \nwith every uptick. Those feelings have nothing to do with the market—they exist \nonly inside of you.", - "type": "text" - }, - { - "block_id": "p43-b10", - "global_id": 394, - "bbox": [ - 72.0, - 575.85, - 434.64, - 617.16 - ], - "text": "The market doesn’t know you exist. You can do nothing to influence it. The ocean \ndoesn’t care about your welfare, but it has no wish to hurt you either. You can only \ncontrol your behavior.", - "type": "text" - }, - { - "block_id": "p43-b11", - "global_id": 395, - "bbox": [ - 72.0, - 617.86, - 434.69, - 673.18 - ], - "text": "A sailor cannot control the ocean, but he can control himself. He can study cur-\nrents and weather patterns, learn good sailing techniques, and gain experience. \nHe can learn when to sail and when to stay in the harbor. A successful sailor uses \nhis intelligence.", - "type": "text" - } - ] - }, - { - "page_num": 44, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p44-b0", - "global_id": 396, - "bbox": [ - 72.0, - 33.66, - 432.04, - 47.21 - ], - "text": "28\t\nINDIVIDUAL PSYCHOLOGY", - "type": "text" - }, - { - "block_id": "p44-b1", - "global_id": 397, - "bbox": [ - 72.0, - 57.83, - 434.75, - 113.15 - ], - "text": "An ocean can be useful—you can fish in it and use its surface to get to other \nislands. An ocean can be dangerous—you can drown in it. The more rational your \napproach, the more likely you are to get what you want. On the other hand, when \nyou act out your emotions, you cannot focus on the reality of the ocean.", - "type": "text" - }, - { - "block_id": "p44-b2", - "global_id": 398, - "bbox": [ - 72.0, - 113.84, - 434.7, - 155.16 - ], - "text": "A trader has to study trends and reversals in the market the way a sailor studies the \nocean. He must trade on a small scale while learning to handle his account. You can \nnever control the market, but you can learn to control yourself.", - "type": "text" - }, - { - "block_id": "p44-b3", - "global_id": 399, - "bbox": [ - 72.0, - 155.86, - 434.75, - 253.19 - ], - "text": "After a string of profitable trades, a beginner may feel he can walk on water. He \nstarts taking wild risks and blows up his account. On the other hand, an amateur \nwho takes several losses in a row often feels so demoralized that he cannot place an \norder even when his system gives him a signal to buy or sell. If trading makes you \nfeel elated or frightened, you cannot fully use your intellect. When joy sweeps \nyou off your feet, you will make irrational trades and lose. When fear grips you, \nyou’ll miss profitable trades.", - "type": "text" - }, - { - "block_id": "p44-b4", - "global_id": 400, - "bbox": [ - 72.0, - 253.88, - 434.69, - 295.2 - ], - "text": "A sailor whose boat is being battered by ocean winds battens his sails—reduces \nsail area. The first remedy for a trader battered by the market is to reduce the size of \nhis trades. Trade small while you’re learning or when feeling stressed.", - "type": "text" - }, - { - "block_id": "p44-b5", - "global_id": 401, - "bbox": [ - 72.0, - 295.9, - 434.64, - 323.21 - ], - "text": "A professional trader uses his head and stays calm. Only amateurs become excited \nor depressed. Emotional trading is a luxury that nobody can afford.", - "type": "text" - }, - { - "block_id": "p44-b6", - "global_id": 402, - "bbox": [ - 72.0, - 343.2, - 185.62, - 360.14 - ], - "text": "Emotional Trading", - "type": "text" - }, - { - "block_id": "p44-b7", - "global_id": 403, - "bbox": [ - 72.0, - 365.83, - 434.74, - 421.15 - ], - "text": "Most people crave excitement and entertainment. Singers, actors, and professional \nathletes command much higher incomes than such mundane workmen as physicians, \npilots, or college professors. People love to have their nerves tickled—they buy lot-\ntery tickets, fly to Las Vegas, and slow down to gawk at road accidents.", - "type": "text" - }, - { - "block_id": "p44-b8", - "global_id": 404, - "bbox": [ - 72.0, - 421.84, - 432.0, - 449.16 - ], - "text": "Emotional trading can be very addictive. Even those who drop money in the mar-\nkets receive a fantastic entertainment value.", - "type": "text" - }, - { - "block_id": "p44-b9", - "global_id": 405, - "bbox": [ - 72.0, - 449.85, - 434.69, - 505.17 - ], - "text": "The market is a spectator sport and a participant sport rolled into one. Imagine \ngoing to a major-league ball game in which you are not confined to the bleachers. \nPay a few hundred dollars and be allowed to run onto the field and join the game. If \nyou hit the ball right, you’ll get paid like a professional.", - "type": "text" - }, - { - "block_id": "p44-b10", - "global_id": 406, - "bbox": [ - 72.0, - 505.87, - 434.75, - 603.2 - ], - "text": "You would probably think twice before running onto the field the first few times. \nThis cautious attitude is responsible for the well-known “beginner’s luck.” Once a \nbeginner hits the ball right a few times and collects his pay, he is likely to get the idea \nthat he is as good as the pros or even better and could make a good living from the \ngame. Greedy amateurs start running onto the field too often, even when there are \nno good playing opportunities. Before they know what hit them, a short string of \nlosses destroys their accounts.", - "type": "text" - }, - { - "block_id": "p44-b11", - "global_id": 407, - "bbox": [ - 72.0, - 603.9, - 434.76, - 687.22 - ], - "text": "The market is among the most entertaining places on the face of the Earth, but \nemotional decisions are lethal. If you ever go to a racetrack, turn around, and watch \nthe humans instead of horses. Gamblers stomp their feet, jump up and down, and \nyell at horses and jockeys. Thousands of people act out their emotions. Winners em-\nbrace, and losers tear up their tickets in disgust. The joy, the pain, and the intensity of \nwishful thinking are caricatures of what happens in the markets. A cool handicapper", - "type": "text" - } - ] - }, - { - "page_num": 45, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p45-b0", - "global_id": 408, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "10. WINNERS AND LOSERS\t\n29", - "type": "text" - }, - { - "block_id": "p45-b1", - "global_id": 409, - "bbox": [ - 72.04, - 57.83, - 434.72, - 85.14 - ], - "text": "who makes his living at the track does not get excited, yell, or bet the bulk of his roll \non a single race, or even in a single day.1", - "type": "text" - }, - { - "block_id": "p45-b2", - "global_id": 410, - "bbox": [ - 72.0, - 85.83, - 434.77, - 141.15 - ], - "text": "Casinos love drunks. They pour gamblers free drinks to make them more emo-\ntional and gamble more. Casinos also throw out calm and intelligent card-counters. \nThere is less free liquor on Wall Street than in a casino, but at least here, they do not \nthrow you out for being a good trader.", - "type": "text" - }, - { - "block_id": "p45-b3", - "global_id": 411, - "bbox": [ - 72.0, - 161.2, - 208.33, - 178.13 - ], - "text": "In Charge of Your Life", - "type": "text" - }, - { - "block_id": "p45-b4", - "global_id": 412, - "bbox": [ - 72.0, - 183.83, - 434.76, - 295.16 - ], - "text": "When a monkey hurts its foot on a tree stump, he flies into a rage and kicks the \npiece of wood. You laugh at a monkey, but do you laugh at yourself when you act \nlike him? If the market drops while you are long, you may double up on your losing \ntrade or else flip and go short, trying to get even. This is acting emotionally instead \nof using your intellect. What’s the difference between a trader trying to get back at \nthe market and a monkey kicking a tree stump? Acting out of anger, fear, or elation \ndestroys the chance of success. You have to analyze your behavior instead of acting \nout your feelings.", - "type": "text" - }, - { - "block_id": "p45-b5", - "global_id": 413, - "bbox": [ - 72.0, - 295.86, - 434.77, - 393.19 - ], - "text": "We get angry at the market; we become afraid of it and develop silly superstitions. \nAll the while, the market keeps cycling through its rallies and declines like an ocean \ngoing through its storms and calm periods. Mark Douglas writes in The Disciplined \nTrader that in the market, “There is no beginning, middle, or end—only what you \ncreate in your own mind. Rarely do any of us grow up learning to operate in an arena \nthat allows for complete freedom of creative expression, with no external structure \nto restrict it in any way.”", - "type": "text" - }, - { - "block_id": "p45-b6", - "global_id": 414, - "bbox": [ - 72.0, - 393.89, - 434.76, - 477.22 - ], - "text": "We try to cajole or manipulate the market, acting like the ancient emperor Xerxes, \nwho ordered his soldiers to horsewhip the sea for sinking his fleet. Most of us aren’t \naware of how manipulative we are, how we bargain and act out our feelings. Most of \nus consider ourselves the center of the universe and expect every person or group to \nbe either good or bad to us. This does not work in the market, which is completely \nimpersonal.", - "type": "text" - }, - { - "block_id": "p45-b7", - "global_id": 415, - "bbox": [ - 72.0, - 477.91, - 434.74, - 603.25 - ], - "text": "Leston Havens, a Harvard University psychiatrist, wrote: “Cannibalism and slavery \nare probably the oldest manifestations of human predation and submission. Although \nboth are now discouraged, their continued existence in psychological forms demon-\nstrates that civilization has achieved great success in moving from the concrete and \nphysical to the abstract and psychological, while persisting in the same purposes.” \nParents threaten their children, bullies hit them, and teachers try to bend their will \nin school. Little wonder that most of us grow up either hiding in a shell or learning \nhow to manipulate others in self-defense. Acting independently doesn’t feel natural \nto us—but that is the only way to succeed in the market.", - "type": "text" - }, - { - "block_id": "p45-b8", - "global_id": 416, - "bbox": [ - 72.0, - 639.7, - 429.91, - 686.83 - ], - "text": "1 I carry in my wallet a free lifetime pass to New York’s Belmont racetrack that belonged to my late \ngreat friend Lou Taylor. It looks like an employee card, but on the “position” line it says—winner. \nHe won many handicapping championships and continued to take money from the racetrack until a \nfew months before he died.", - "type": "text" - } - ] - }, - { - "page_num": 46, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p46-b0", - "global_id": 417, - "bbox": [ - 72.0, - 33.66, - 432.04, - 47.21 - ], - "text": "30\t\nINDIVIDUAL PSYCHOLOGY", - "type": "text" - }, - { - "block_id": "p46-b1", - "global_id": 418, - "bbox": [ - 72.0, - 57.83, - 434.7, - 155.16 - ], - "text": "Douglas warns, “If the market’s behavior seems mysterious to you, it’s because \nyour own behavior is mysterious and unmanageable. You can’t really determine what \nthe market is likely to do next when you don’t even know what you’ll do next.” \nUltimately, “the one thing you can control is yourself. As a trader, you have the power \neither to give yourself money or to give your money to other traders.” He adds, “The \ntraders who can make money consistently...approach trading from the perspective \nof a mental discipline.”", - "type": "text" - }, - { - "block_id": "p46-b2", - "global_id": 419, - "bbox": [ - 72.0, - 155.86, - 434.76, - 211.18 - ], - "text": "All of us have our own demons to exorcise on the journey to becoming successful \ntraders. Here are several rules that worked for me as I grew from a wild amateur \ninto an erratic semiprofessional and finally into a calm professional trader. You may \nchange this list to suit your personality.", - "type": "text" - }, - { - "block_id": "p46-b3", - "global_id": 420, - "bbox": [ - 76.0, - 225.83, - 434.62, - 253.14 - ], - "text": "1.\tDecide that you are in the market for the long haul—that is, you want to be a \ntrader even 20 years from now.", - "type": "text" - }, - { - "block_id": "p46-b4", - "global_id": 421, - "bbox": [ - 75.98, - 260.83, - 434.75, - 302.18 - ], - "text": "2.\tLearn as much as you can. Read and listen to experts, but keep a degree of \nhealthy skepticism about everything. Ask questions, and do not accept experts \nat their word.", - "type": "text" - }, - { - "block_id": "p46-b5", - "global_id": 422, - "bbox": [ - 75.97, - 309.83, - 434.64, - 337.14 - ], - "text": "3.\tDo not get greedy and rush to trade—take your time to learn. The markets will \nbe there, offering more good opportunities in the months and years ahead.", - "type": "text" - }, - { - "block_id": "p46-b6", - "global_id": 423, - "bbox": [ - 75.96, - 344.83, - 434.7, - 428.2 - ], - "text": "4.\tDevelop a method for analyzing the market—that is, “If A happens, then B is \nlikely to happen.” Markets have many dimensions—use several analytic methods \nto confirm trades. Test everything on historical data and then in the markets, \nusing real money. Markets keep changing—you need different tools for trading \nbull and bear markets and transitional periods as well as a method for telling the \ndifference (see the sections on technical analysis).", - "type": "text" - }, - { - "block_id": "p46-b7", - "global_id": 424, - "bbox": [ - 75.95, - 435.89, - 434.68, - 491.27 - ], - "text": "5.\tDevelop a money management plan. Your first goal must be long-term survival; \nyour second goal, a steady growth of capital; and your third goal, making high \nprofits. Most traders put the third goal first and are unaware that goals 1 and \n2 exist (see Section 9, “Risk Management”).", - "type": "text" - }, - { - "block_id": "p46-b8", - "global_id": 425, - "bbox": [ - 75.94, - 498.95, - 434.68, - 540.26 - ], - "text": "6.\tBe aware that a trader is the weakest link in any trading system. Go to a meet-\ning of Alcoholics Anonymous to learn how to avoid losses or develop your own \nmethod for cutting out impulsive trades.", - "type": "text" - }, - { - "block_id": "p46-b9", - "global_id": 426, - "bbox": [ - 75.92, - 547.91, - 434.64, - 603.23 - ], - "text": "7.\tWinners think, feel, and act differently than losers. You must look within your-\nself, strip away your illusions, and change your old ways of being, thinking, and \nacting. Change is hard, but if you want to be a professional trader, you have to \nwork on changing and developing your personality.", - "type": "text" - }, - { - "block_id": "p46-b10", - "global_id": 427, - "bbox": [ - 71.92, - 617.92, - 434.57, - 673.24 - ], - "text": "In order to succeed, you need drive, knowledge, and discipline. Money is impor-\ntant, but less so than any of those qualities. If you have enough drive to work through \nthis book, you’ll acquire much knowledge, and then we’ll close the circle by return-\ning to the topic of discipline in the final chapters.", - "type": "text" - } - ] - }, - { - "page_num": 47, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p47-b0", - "global_id": 428, - "bbox": [ - 72.0, - 118.61, - 362.4, - 171.84 - ], - "text": "Mass Psychology", - "type": "text" - }, - { - "block_id": "p47-b1", - "global_id": 429, - "bbox": [ - 72.1, - 673.7, - 432.05, - 687.25 - ], - "text": "31", - "type": "text" - }, - { - "block_id": "p47-b2", - "global_id": 430, - "bbox": [ - 348.1, - 59.86, - 395.91, - 73.41 - ], - "text": "PA R T 2\nPA R T 2", - "type": "text" - }, - { - "block_id": "p47-b3", - "global_id": 431, - "bbox": [ - 71.3, - 331.94, - 104.71, - 372.34 - ], - "text": "W", - "type": "text" - }, - { - "block_id": "p47-b4", - "global_id": 432, - "bbox": [ - 72.02, - 337.63, - 434.78, - 406.95 - ], - "text": "all Street is named after a wall that kept farm animals from wandering away \nfrom the settlement at the southern tip of Manhattan. The farming legacy \nlives on in the language of traders. Four animals are mentioned especially often on \nWall Street: bulls and bears, hogs and sheep. Traders say: “Bulls make money, bears \nmake money, but hogs get slaughtered.”", - "type": "text" - }, - { - "block_id": "p47-b5", - "global_id": 433, - "bbox": [ - 72.02, - 407.65, - 434.8, - 448.96 - ], - "text": "A bull fights by striking up with his horns. A bull is a buyer—a person who bets on \na rally and profits from a rise in prices. A bear fights by striking down with his paws. \nA bear is a seller—a person who bets on a decline and profits from a fall in prices.1", - "type": "text" - }, - { - "block_id": "p47-b6", - "global_id": 434, - "bbox": [ - 72.0, - 449.63, - 434.69, - 532.96 - ], - "text": "Hogs are greedy. Some of them buy or sell positions that are too large for their \naccounts and get slaughtered by a small adverse move. Other hogs overstay their po-\nsitions—they keep waiting for profits even after the trend reverses. Sheep are passive \nand fearful followers of trends, tips, and gurus. They sometimes put on a bull’s horns \nor a bearskin and try to swagger. You can recognize them by their pitiful bleating \nwhen the market becomes volatile.", - "type": "text" - }, - { - "block_id": "p47-b7", - "global_id": 435, - "bbox": [ - 72.0, - 533.65, - 434.71, - 588.97 - ], - "text": "Whenever the market is open, bulls are buying, bears are selling, hogs and sheep \nget trampled underfoot, and the undecided traders wait on the sidelines. Quote \nscreens around the world show a steady stream of the latest prices for any trading ve-\nhicle. Thousands of eyes are focused on each price as people make trading decisions.", - "type": "text" - }, - { - "block_id": "p47-b8", - "global_id": 436, - "bbox": [ - 72.0, - 624.2, - 434.46, - 671.33 - ], - "text": "1There is plenty of room in the market for both, and occasionally even at the same time. It always \namuses me in SpikeTrade when two elite traders pick the same stock—one long and the other short. \nOften by the end of the week both are profitable, proving that how you manage your trade is more \nimportant than what stock and direction you pick.", - "type": "text" - } - ] - }, - { - "page_num": 48, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p48-b0", - "global_id": 437, - "bbox": [ - 72.0, - 33.66, - 431.98, - 47.21 - ], - "text": "32\t\nMASS PSYCHOLOGY", - "type": "text" - }, - { - "block_id": "p48-b1", - "global_id": 438, - "bbox": [ - 73.55, - 55.86, - 227.17, - 74.5 - ], - "text": "■\n■11. What Is Price?", - "type": "text" - }, - { - "block_id": "p48-b2", - "global_id": 439, - "bbox": [ - 72.0, - 84.83, - 434.77, - 154.15 - ], - "text": "Traders can be divided into three groups: buyers, sellers, and undecided. Buyers \nwant to pay as little as possible, and sellers want to charge as much as possible. \nTheir permanent conflict is reflected in bid-ask spreads, discussed in the Introduc-\ntion. “Ask” is what a seller asks for his merchandise. “Bid” is what a buyer offers for \nthat merchandise.", - "type": "text" - }, - { - "block_id": "p48-b3", - "global_id": 440, - "bbox": [ - 72.0, - 154.85, - 434.76, - 196.16 - ], - "text": "A buyer has a choice: to wait until prices come down or pay what the sellers \ndemand. A seller has a similar choice: wait until prices rise or accept a lower offer \nfor his merchandise.", - "type": "text" - }, - { - "block_id": "p48-b4", - "global_id": 441, - "bbox": [ - 72.0, - 196.86, - 434.65, - 238.18 - ], - "text": "A trade occurs when there is a momentary meeting of two minds: an eager bull \nagrees to a seller’s terms and pays up, or an eager bear agrees to a buyer’s terms and \nsells a little cheaper.", - "type": "text" - }, - { - "block_id": "p48-b5", - "global_id": 442, - "bbox": [ - 72.0, - 238.87, - 434.65, - 280.19 - ], - "text": "The presence of undecided traders puts pressure on bulls and bears. Buyers and \nsellers move fast because they know that they’re surrounded by a crowd of unde-\ncided traders who may step in and snatch away their deal at any moment.", - "type": "text" - }, - { - "block_id": "p48-b6", - "global_id": 443, - "bbox": [ - 72.0, - 280.88, - 434.74, - 350.21 - ], - "text": "The buyer knows that if he thinks too long, another trader can step in and buy \nahead of him. A seller knows that if he tries to hold out for a higher price, another \ntrader may step in and sell at a lower price. The crowd of undecided traders makes \nbuyers and sellers more willing to deal with their opponents. A trade occurs when \nthere is a meeting of two minds.", - "type": "text" - }, - { - "block_id": "p48-b7", - "global_id": 444, - "bbox": [ - 72.0, - 370.7, - 202.49, - 387.64 - ], - "text": "A Consensus of  Value", - "type": "text" - }, - { - "block_id": "p48-b8", - "global_id": 445, - "bbox": [ - 72.0, - 393.33, - 407.83, - 406.64 - ], - "text": "Each tick on your quote screen represents a deal between a buyer and a seller.", - "type": "text" - }, - { - "block_id": "p48-b9", - "global_id": 446, - "bbox": [ - 72.0, - 407.33, - 434.76, - 462.65 - ], - "text": "Buyers are buying because they expect prices to rise. Sellers are selling because \nthey expect prices to fall. Buyers and sellers are surrounded by crowds of unde-\ncided traders who put pressure on them because they may become buyers or sellers \nthemselves.", - "type": "text" - }, - { - "block_id": "p48-b10", - "global_id": 447, - "bbox": [ - 72.0, - 463.35, - 434.76, - 504.66 - ], - "text": "Buying by bulls pushes markets up, selling by bears pushes them down, and unde-\ncided traders make everything happen faster by creating a sense of urgency among \nbuyers and sellers.", - "type": "text" - }, - { - "block_id": "p48-b11", - "global_id": 448, - "bbox": [ - 72.0, - 505.36, - 434.69, - 574.68 - ], - "text": "Traders come to the markets from all over the world: in person, via computers, \nor through their brokers. Everybody has a chance to buy and to sell. Each price is a \nmomentary consensus of value of all market participants, expressed in action. Prices are cre-\nated by masses of traders—buyers, sellers, and undecided people. The patterns of \nprices and volume reflect mass psychology of the markets.", - "type": "text" - }, - { - "block_id": "p48-b12", - "global_id": 449, - "bbox": [ - 72.0, - 595.2, - 182.41, - 612.14 - ], - "text": "Behavior Patterns", - "type": "text" - }, - { - "block_id": "p48-b13", - "global_id": 450, - "bbox": [ - 72.0, - 617.83, - 434.74, - 672.88 - ], - "text": "Huge crowds trade on stock, commodity, and option exchanges. Big money and \nlittle money, smart money and dumb money, institutional money and private mon-\ney, long-term investors and short-term traders, all meet at the exchange. Each \nprice represents a momentary consensus of value between buyers, sellers, and undecided", - "type": "text" - } - ] - }, - { - "page_num": 49, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p49-b0", - "global_id": 451, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "12. WHAT IS THE MARKET?\t\n33", - "type": "text" - }, - { - "block_id": "p49-b1", - "global_id": 452, - "bbox": [ - 72.04, - 58.08, - 434.69, - 85.14 - ], - "text": "traders at the moment of transaction. There is a crowd of traders behind every pattern on the \nscreen.", - "type": "text" - }, - { - "block_id": "p49-b2", - "global_id": 453, - "bbox": [ - 72.04, - 85.84, - 434.78, - 211.18 - ], - "text": "Crowd consensus changes from moment to moment. Sometimes it gets estab-\nlished in a very low-key environment, and at other times the environment turns \nwild. Prices move in small increments during quiet times. When a crowd becomes \neither spooked or elated, prices begin to jump. Imagine bidding for a life preserver \naboard a sinking ship—that’s how prices leap when masses of traders become emo-\ntional about a trend. An astute trader aims to enter the market during quiet times \nand take profits during wild times. That, of course, is the total opposite of how ama-\nteurs act: they jump in or out when prices begin to run, but grow bored and not \ninterested when prices are sleepy.", - "type": "text" - }, - { - "block_id": "p49-b3", - "global_id": 454, - "bbox": [ - 72.04, - 211.87, - 434.79, - 323.21 - ], - "text": "Chart patterns reflect swings of mass psychology in the financial markets. Each \ntrading session is a battle between bulls, who make money when prices rise, and \nbears, who profit when they fall. The goal of a serious technical analyst is to discover \nthe balance of power between bulls and bears and bet on the winning group. If bulls \nare much stronger, you should buy and hold. If bears are much stronger, you should \nsell and sell short. If both camps are about equal in strength, a wise trader stands \naside. He lets bulls and bears fight with each other, and enters a trade only when he \nis reasonably sure which side is likely to win.", - "type": "text" - }, - { - "block_id": "p49-b4", - "global_id": 455, - "bbox": [ - 72.04, - 323.9, - 434.74, - 379.22 - ], - "text": "Prices and volume, along with the indicators that track them, reflect crowd be-\nhavior. Technical analysis is similar to poll taking. Both combine science and art: They \nare partly scientific because we use statistical methods and computers; they are partly \nartistic because we use personal judgment and experience to interpret our findings.", - "type": "text" - }, - { - "block_id": "p49-b5", - "global_id": 456, - "bbox": [ - 73.55, - 406.86, - 272.53, - 425.5 - ], - "text": "■\n■12. What Is the Market?", - "type": "text" - }, - { - "block_id": "p49-b6", - "global_id": 457, - "bbox": [ - 72.0, - 435.83, - 434.74, - 491.15 - ], - "text": "What’s the reality behind market quotes, numbers, and graphs? When you check \nprices in your newspaper, follow ticks on your screen, or plot an indicator on a \nchart, what exactly are you looking at? What is this market that you want to analyze \nand trade?", - "type": "text" - }, - { - "block_id": "p49-b7", - "global_id": 458, - "bbox": [ - 72.0, - 491.84, - 434.75, - 561.17 - ], - "text": "Amateurs act as if the market is a giant happening, a ball game in which they \ncan join the professionals and make money. Traders from a scientific or engineering \nbackground often treat the market as a physical event and apply the principles of \nsignal processing, noise reduction, etc. By contrast, all professional traders know full \nwell that the market is a huge mass of people.", - "type": "text" - }, - { - "block_id": "p49-b8", - "global_id": 459, - "bbox": [ - 72.0, - 561.86, - 434.76, - 645.19 - ], - "text": "Every trader tries to take money from others by outguessing them on the prob-\nable direction of the market. The members of the market crowd live on different \ncontinents, but are brought together by modern telecommunications in the pursuit \nof profit at each other’s expense. The market is a huge crowd of people. Each member of the \ncrowd tries to take money from others by outsmarting them. The market is a uniquely harsh \nenvironment because everyone is against you, and you are against everyone.", - "type": "text" - }, - { - "block_id": "p49-b9", - "global_id": 460, - "bbox": [ - 72.0, - 645.89, - 434.72, - 673.2 - ], - "text": "Not only is the market harsh, you have to pay whenever you enter and exit. You \nhave to jump over the barriers of commissions and slippage before you can collect a", - "type": "text" - } - ] - }, - { - "page_num": 50, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p50-b0", - "global_id": 461, - "bbox": [ - 72.0, - 33.66, - 431.98, - 47.21 - ], - "text": "34\t\nMASS PSYCHOLOGY", - "type": "text" - }, - { - "block_id": "p50-b1", - "global_id": 462, - "bbox": [ - 72.0, - 57.83, - 434.7, - 126.89 - ], - "text": "dime. The moment you place an order, you owe your broker a commission—you’re \nbehind the game the moment you enter. Market makers try to hit you with slippage \nwhen your order arrives for execution. They try to take another bite out of your \naccount when you exit. In trading, you compete against some of the brightest minds in the \nworld, while fending off the piranhas of commissions and slippage.", - "type": "text" - }, - { - "block_id": "p50-b2", - "global_id": 463, - "bbox": [ - 72.0, - 147.2, - 192.23, - 164.13 - ], - "text": "Worldwide Crowds", - "type": "text" - }, - { - "block_id": "p50-b3", - "global_id": 464, - "bbox": [ - 72.0, - 169.83, - 434.76, - 351.18 - ], - "text": "In the old days, markets were small, and many participants knew one another. The \nNew York Stock Exchange was formed in 1792 as a club of two dozen brokers. On \nsunny days, they used to gather under a cottonwood tree, and on rainy days, they \nmoved to Fraunces Tavern. As soon as those brokers organized the New York Stock \nExchange, they stuck the public with fixed commissions, which lasted for the next \n180 years.\nThese days, the few remaining floor traders are on the way out. Most of us \nare linked to the market electronically. Still, as we watch the same quotes on our \nscreens and read the same articles in the financial media, we become members \nof the market crowd—even if we live thousands of miles away from one another. \nThanks to modern telecommunications, the world is becoming smaller, while the \nmarkets are growing. The euphoria of London flows to New York, and the gloom of \nTokyo infects Frankfurt.", - "type": "text" - }, - { - "block_id": "p50-b4", - "global_id": 465, - "bbox": [ - 72.0, - 351.88, - 434.75, - 407.2 - ], - "text": "When you analyze the market, you are looking at crowd behavior. Crowds behave \nalike in different cultures on different continents. Social psychologists have uncov-\nered several laws that govern crowd behavior, and a trader needs to understand them \nin order to see how the market crowd influences him.", - "type": "text" - }, - { - "block_id": "p50-b5", - "global_id": 466, - "bbox": [ - 72.0, - 427.2, - 221.1, - 444.14 - ], - "text": "Groups, Not Individuals", - "type": "text" - }, - { - "block_id": "p50-b6", - "global_id": 467, - "bbox": [ - 72.0, - 449.83, - 434.74, - 505.15 - ], - "text": "Most people feel a strong urge to join the crowd and “act like everybody else.”  This \nprimitive urge clouds your judgment when you put on a trade. A successful trader \nmust think independently. He needs to be strong enough to analyze the market alone \nand carry out his trading decisions.", - "type": "text" - }, - { - "block_id": "p50-b7", - "global_id": 468, - "bbox": [ - 72.0, - 505.84, - 434.77, - 575.17 - ], - "text": "Crowds are powerful enough to create trends. The crowd may not be too bright, \nbut it is stronger than any of us. Never buck a trend. If a trend is up, you should only \nbuy or stand aside. Never sell short just because “the prices are too high”—never \nargue with the crowd. You do not have to run with the crowd—but you shouldn’t \nrun against it.", - "type": "text" - }, - { - "block_id": "p50-b8", - "global_id": 469, - "bbox": [ - 72.0, - 575.86, - 434.75, - 617.18 - ], - "text": "Respect the strength of the crowd—but don’t fear it. Crowds are powerful, but \nprimitive, their behavior simple and repetitive. A trader who thinks for himself can \ntake money from crowd members.", - "type": "text" - }, - { - "block_id": "p50-b9", - "global_id": 470, - "bbox": [ - 72.0, - 637.2, - 204.25, - 654.14 - ], - "text": "The Source of Money", - "type": "text" - }, - { - "block_id": "p50-b10", - "global_id": 471, - "bbox": [ - 72.0, - 659.87, - 434.74, - 687.18 - ], - "text": "Do you ever stop to wonder where your expected profits will come from? Is there \nmoney in the markets because of higher company earnings, or lower interest rates,", - "type": "text" - } - ] - }, - { - "page_num": 51, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p51-b0", - "global_id": 472, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "12. WHAT IS THE MARKET?\t\n35", - "type": "text" - }, - { - "block_id": "p51-b1", - "global_id": 473, - "bbox": [ - 72.04, - 57.83, - 434.72, - 99.14 - ], - "text": "or a good soybean crop? The only reason there is money in the markets is that other traders \nput it there. The money you want to make belongs to other people who have no intention of \ngiving it to you.", - "type": "text" - }, - { - "block_id": "p51-b2", - "global_id": 474, - "bbox": [ - 72.04, - 99.84, - 434.76, - 141.16 - ], - "text": "Trading means trying to take money from other people, while they are trying to \ntake yours—that’s why it is such a hard business. Winning is especially difficult be-\ncause brokers and floor traders take money from winners and losers alike.", - "type": "text" - }, - { - "block_id": "p51-b3", - "global_id": 475, - "bbox": [ - 72.04, - 141.85, - 434.78, - 225.18 - ], - "text": "Tim Slater compared trading to a medieval battle. A man used to go on a battle-\nfield with his sword and try to kill his opponent, who was trying to kill him. The \nwinner took the loser’s weapons, his chattels, and his wife, and sold his children into \nslavery. Now we go to the exchanges instead of an open field. When you take money \naway from a man, it is not that different from drawing his blood. He may lose his \nhouse, his chattels, and his wife, and his children will suffer.", - "type": "text" - }, - { - "block_id": "p51-b4", - "global_id": 476, - "bbox": [ - 71.98, - 225.88, - 434.75, - 309.18 - ], - "text": "An optimistic friend of mine once snickered that there are plenty of poorly pre-\npared people on the battlefield: “Ninety to ninety-five percent of the brokers don’t \nknow the first thing about research. They don’t know what they’re doing. We have \nthe knowledge, and some poor people who do not have it are just giving their mon-\ney away to charity.”  This theory sounds good, but he soon found out that it was \nwrong—there is no easy money in the market.", - "type": "text" - }, - { - "block_id": "p51-b5", - "global_id": 477, - "bbox": [ - 71.98, - 309.88, - 434.73, - 407.21 - ], - "text": "Sure enough, there are plenty of dumb sheep waiting to be fleeced or slaughtered. \nThe sheep are easy—but if you want a piece of their meat, you’ve got to fight some \nvery dangerous competitors. There are mean professionals: American gunslingers, \nEnglish knights, German landsknechts, Japanese samurai, and other warriors, all \ngoing after the same hapless sheep. Trading means battling crowds of hostile people, \nwhile paying for the privilege of entering the battle and leaving it, whether alive, \nwounded, or dead.", - "type": "text" - }, - { - "block_id": "p51-b6", - "global_id": 478, - "bbox": [ - 72.0, - 427.2, - 190.38, - 444.14 - ], - "text": "Inside Information", - "type": "text" - }, - { - "block_id": "p51-b7", - "global_id": 479, - "bbox": [ - 72.0, - 449.83, - 434.76, - 519.15 - ], - "text": "There is at least one group of people who get information before us. Records show \nthat corporate insiders as a group consistently make profits in the stock market. And \nthose are legitimate trades, reported by insiders to the Securities and Exchange Com-\nmission. They represent the tip of the iceberg—but there is a great deal of illegitimate \ninsider trading.", - "type": "text" - }, - { - "block_id": "p51-b8", - "global_id": 480, - "bbox": [ - 72.0, - 519.85, - 434.75, - 617.18 - ], - "text": "People who trade on inside information are stealing our money. The insider trials \nhave landed some of the more notorious insiders in prison. Convictions for insider \ntrading continue at a steady pace, especially after bull markets collapse. After the \n2008 debacle, a group of executives from the Galleon fund, led by its CEO, have \nbeen sentenced to lengthy jail terms, while a former board member of several lead-\ning U.S. corporations got two years behind bars, and recently a money manager from \nSAC Capital was convicted.", - "type": "text" - }, - { - "block_id": "p51-b9", - "global_id": 481, - "bbox": [ - 72.0, - 617.88, - 434.66, - 659.19 - ], - "text": "People convicted during the insider trials were caught because they became \ngreedy and careless. The tip of the iceberg has been shaved down, but its bulk contin-\nues to float, ready to hit any account that comes in contact with it.", - "type": "text" - }, - { - "block_id": "p51-b10", - "global_id": 482, - "bbox": [ - 72.0, - 659.89, - 434.65, - 687.2 - ], - "text": "Trying to reduce insider trading is like trying to get rid of rats on a farm. Pesti-\ncides keep them under control, but do not root them out. A retired chief executive", - "type": "text" - } - ] - }, - { - "page_num": 52, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p52-b0", - "global_id": 483, - "bbox": [ - 72.0, - 33.66, - 431.98, - 47.21 - ], - "text": "36\t\nMASS PSYCHOLOGY", - "type": "text" - }, - { - "block_id": "p52-b1", - "global_id": 484, - "bbox": [ - 72.0, - 57.83, - 434.76, - 141.16 - ], - "text": "of a publicly traded firm explained to me that a smart man does not trade on inside \ninformation but gives it to his golfing buddies at a country club. Later they give him \ninside information on their companies, and both profit without being detected. The \ninsider network is safe as long as its members follow the same code of conduct and \ndon’t get too greedy. Insider trading is legal in the futures markets, and until recently \nit was legal for congressmen, senators, and their staff.", - "type": "text" - }, - { - "block_id": "p52-b2", - "global_id": 485, - "bbox": [ - 72.0, - 141.85, - 434.69, - 197.17 - ], - "text": "Charts reflect all trades by all market participants—including insiders. They leave \ntheir footprints on the charts just like everyone else—and it is our job as technical \nanalysts to follow them to the bank. Technical analysis can help you detect insider \nbuying and selling.", - "type": "text" - }, - { - "block_id": "p52-b3", - "global_id": 486, - "bbox": [ - 73.55, - 224.86, - 261.03, - 243.5 - ], - "text": "■\n■13. The Trading Scene", - "type": "text" - }, - { - "block_id": "p52-b4", - "global_id": 487, - "bbox": [ - 72.0, - 253.83, - 434.72, - 323.15 - ], - "text": "Humans have traded since the dawn of history—it was safer to trade with your \nneighbors than raid them. As society developed, money became the medium of \nexchange. Stock and commodity markets are among the hallmarks of an advanced \nsociety. One of the key economic developments in Eastern Europe following the \ncollapse of communism was the establishment of stock and commodity exchanges.", - "type": "text" - }, - { - "block_id": "p52-b5", - "global_id": 488, - "bbox": [ - 72.0, - 323.85, - 434.76, - 421.18 - ], - "text": "Today, stock, futures, and options markets span the globe. It took Marco Polo, a \nmedieval Italian merchant, 15 years to get from Italy to China and back. Now, when \na European trader wants to buy gold in Hong Kong, he can get his order filled in \nseconds. There are hundreds of stock and futures exchanges around the world. All \nexchanges must meet three criteria, first developed in the agoras of ancient Greece \nand the medieval fairs of Western Europe: an established location, rules for grading \nmerchandise, and defined contract terms.", - "type": "text" - }, - { - "block_id": "p52-b6", - "global_id": 489, - "bbox": [ - 72.0, - 441.2, - 185.42, - 458.14 - ], - "text": "Individual Traders", - "type": "text" - }, - { - "block_id": "p52-b7", - "global_id": 490, - "bbox": [ - 72.0, - 463.83, - 434.7, - 519.15 - ], - "text": "Private traders usually come to the market after a successful career in business or in \nthe professions. An average private futures trader in the United States is a 50-year-\nold, married, college-educated man. The two largest occupational groups among \nfutures traders are farmers and engineers.", - "type": "text" - }, - { - "block_id": "p52-b8", - "global_id": 491, - "bbox": [ - 72.0, - 519.84, - 434.74, - 561.16 - ], - "text": "Most people trade for partly rational and partly irrational reasons. Rational reasons \ninclude the desire to earn a large return on capital. Irrational reasons include gambling \nand a search for excitement. Most traders are not aware of their irrational motives.", - "type": "text" - }, - { - "block_id": "p52-b9", - "global_id": 492, - "bbox": [ - 72.0, - 561.86, - 434.7, - 617.18 - ], - "text": "Learning to trade takes time, money, and work. Few individuals rise to the level \nof professionals who can support themselves by trading. Professionals are extremely \nserious about what they do. They satisfy their irrational goals outside the markets, \nwhile amateurs act them out in the marketplace.", - "type": "text" - }, - { - "block_id": "p52-b10", - "global_id": 493, - "bbox": [ - 72.0, - 617.87, - 434.75, - 673.19 - ], - "text": "The major economic role of a trader is to support his broker—to help him pay \nhis mortgage bills and keep his children in private schools. In addition, the role of a \nspeculator is to help companies raise capital in the stock market and to assume price \nrisk in the commodities markets, allowing producers to focus on production. These", - "type": "text" - } - ] - }, - { - "page_num": 53, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p53-b0", - "global_id": 494, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "13. THE TRADING SCENE\t\n37", - "type": "text" - }, - { - "block_id": "p53-b1", - "global_id": 495, - "bbox": [ - 72.04, - 57.83, - 434.74, - 85.14 - ], - "text": "lofty economic goals are far from a speculator’s mind when he places his orders to \nbuy or sell.", - "type": "text" - }, - { - "block_id": "p53-b2", - "global_id": 496, - "bbox": [ - 72.0, - 105.2, - 198.03, - 122.14 - ], - "text": "Institutional Traders", - "type": "text" - }, - { - "block_id": "p53-b3", - "global_id": 497, - "bbox": [ - 72.0, - 127.83, - 434.75, - 225.16 - ], - "text": "Institutions are responsible for a huge volume of trading, and their deep pockets give \nthem several advantages. They pay low institutional commissions. They can afford to \nhire the best researchers and traders. A friend of mine who headed a trading desk at \na bank based some of his decisions on a service provided by a group of former CIA \nofficers. He got some of his best ideas from their reports, while the substantial an-\nnual fee was small potatoes for his firm compared to its huge trading volume. Most \nprivate traders do not have such opportunities.", - "type": "text" - }, - { - "block_id": "p53-b4", - "global_id": 498, - "bbox": [ - 72.0, - 225.86, - 434.77, - 309.18 - ], - "text": "Some large firms have intelligence networks that enable them to act before the pub-\nlic. One day, when oil futures rallied in response to a fire on a platform in the North \nSea, I called a friend at an oil firm. The market was frantic, but he was happy, having \nbought oil futures half an hour before they exploded. He got a telex from an agent in \nthe area of the fire before the reports appeared on the newswire. Timely information is \npriceless, but only a large company can afford an intelligence network.", - "type": "text" - }, - { - "block_id": "p53-b5", - "global_id": 499, - "bbox": [ - 72.0, - 309.88, - 434.75, - 393.21 - ], - "text": "An acquaintance who traded successfully for a Wall Street investment bank felt \nlost when he quit to trade for himself. He discovered that a real-time quote system \nin his Park Avenue apartment didn’t give him news as fast as the squawk box on the \ntrading floor of his old firm. Brokers from around the country used to call him with \nthe latest ideas because they wanted his orders. “When you trade from your house, \nyou are never the first to hear the news,” he says.", - "type": "text" - }, - { - "block_id": "p53-b6", - "global_id": 500, - "bbox": [ - 72.0, - 393.9, - 434.75, - 519.24 - ], - "text": "The firms that deal in both futures and cash markets have two advantages. They \nhave true inside information, and they are exempt from speculative position limits \nthat exist in many futures markets. I went to visit an acquaintance at a multinational \noil company; after passing through security barriers tighter than at an airport, I \nwalked down a glass corridor that overlooked rooms where clusters of men huddled \naround monitors trading oil products. When I asked my host whether his traders \nwere hedging or speculating, he looked me straight in the eye and said, “Yes.” I asked \nagain and received the same answer. Companies crisscross the thin line between \nhedging and speculating, using inside information.", - "type": "text" - }, - { - "block_id": "p53-b7", - "global_id": 501, - "bbox": [ - 72.0, - 519.94, - 434.75, - 589.26 - ], - "text": "In addition to the informational advantage, employees of trading firms have a \npsychological one—they can be more relaxed because their own money isn’t at risk. \nWhen young people tell me of their interest in trading, I tell them to get a job with a \ntrading firm and learn on someone else’s dime. Firms almost never hire traders past \ntheir mid-twenties.", - "type": "text" - }, - { - "block_id": "p53-b8", - "global_id": 502, - "bbox": [ - 72.0, - 589.96, - 434.65, - 617.27 - ], - "text": "How can an individual coming later to the game compete against institutions \nand win?", - "type": "text" - }, - { - "block_id": "p53-b9", - "global_id": 503, - "bbox": [ - 72.0, - 617.97, - 434.77, - 673.29 - ], - "text": "The Achilles heel of most institutions is that they have to trade, while an individual \ntrader is free to trade or stay out of the market when he wants. Banks have to be \nactive in the bond market and grain producers have to be active in the grain market \nat almost any price. An individual trader is free to wait for the best opportunities.", - "type": "text" - } - ] - }, - { - "page_num": 54, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p54-b0", - "global_id": 504, - "bbox": [ - 72.0, - 33.66, - 431.98, - 47.21 - ], - "text": "38\t\nMASS PSYCHOLOGY", - "type": "text" - }, - { - "block_id": "p54-b1", - "global_id": 505, - "bbox": [ - 72.0, - 57.83, - 434.71, - 99.14 - ], - "text": "Most private traders fritter away this fantastic advantage by overtrading. An indi-\nvidual who wants to succeed against the giants must develop patience and eliminate \ngreed. Remember, your goal is to trade well, not to trade often.", - "type": "text" - }, - { - "block_id": "p54-b2", - "global_id": 506, - "bbox": [ - 72.0, - 99.84, - 434.68, - 155.16 - ], - "text": "Successful institutional traders receive raises and bonuses. Even a high bonus can \nfeel puny to someone who earns millions of dollars for his firm. Successful institu-\ntional traders often talk of quitting and going to trade for themselves. Very few of \nthem manage to make this transition.", - "type": "text" - }, - { - "block_id": "p54-b3", - "global_id": 507, - "bbox": [ - 72.0, - 155.86, - 434.72, - 253.19 - ], - "text": "Most traders who leave institutions get caught up in the emotions of fear, greed, \nelation, and panic when they start risking their own money. They seldom do well \ntrading for their own accounts—another sign that psychology is at the root of trad-\ning success or failure. Few institutional traders realize to what a large extent they \nowe their success to their trading managers, who control their risk levels. Going out \non your own means becoming your own manager—we’ll return to this in a later \nchapter, when we focus on how to organize your trading.", - "type": "text" - }, - { - "block_id": "p54-b4", - "global_id": 508, - "bbox": [ - 72.0, - 273.2, - 188.42, - 290.14 - ], - "text": "The Sword Makers", - "type": "text" - }, - { - "block_id": "p54-b5", - "global_id": 509, - "bbox": [ - 72.0, - 295.83, - 434.66, - 379.16 - ], - "text": "Just as medieval knights shopped for the sharpest swords, modern traders shop for \nthe best trading tools. The growing access to good software and declining commis-\nsion rates are creating a more level playing field. A computer allows you to speed up \nyour research and follow more leads. It helps you analyze more markets in greater \ndepth. We’ll return to computers and software in Chapter 21, “Computers in Trad-\ning,” ⁜but here it is in brief.", - "type": "text" - }, - { - "block_id": "p54-b6", - "global_id": 510, - "bbox": [ - 72.0, - 379.85, - 434.75, - 449.18 - ], - "text": "There are three types of trading software: toolboxes, black boxes, and gray boxes. \nA toolbox allows you to display data, draw charts, plot indicators, change their \nparameters, and test your trading systems. Toolboxes for options traders include \noption valuation models. Adapting a good toolbox to your needs can be as easy as \nadjusting the seat of your car.", - "type": "text" - }, - { - "block_id": "p54-b7", - "global_id": 511, - "bbox": [ - 72.0, - 449.87, - 434.76, - 519.2 - ], - "text": "In 1977, I bought the first ever toolbox for computerized technical analysis. It \ncost $1,900 plus monthly data fees. Today, inexpensive, and even free, software plac-\nes powerful tools at everyone’s fingertips. I illustrated most of the concepts in this \nbook using Stockcharts.com because I wanted my new book to be useful to as many \ntraders as possible.", - "type": "text" - }, - { - "block_id": "p54-b8", - "global_id": 512, - "bbox": [ - 72.0, - 519.89, - 434.76, - 575.21 - ], - "text": "Stockcharts.com evens out the playing field for traders. It is clear, intuitive, and rich \nin features. Its basic version is free, although I used its inexpensive “members’ version” \nfor higher quality charting. I still remember how hard it was in the beginning and want \nto show you how much analytic power you can have for free or at a very minimal cost.", - "type": "text" - }, - { - "block_id": "p54-b9", - "global_id": 513, - "bbox": [ - 72.0, - 575.74, - 434.74, - 673.24 - ], - "text": "What goes on inside a black box is secret. You feed it data, and it tells you what \nand when to buy and sell. It is like magic—a way to make money without think-\ning. Black boxes are usually sold with excellent historical track records. This is only \nnatural because they were created to fit old data. Markets keep changing, and black \nboxes keep blowing up, but new generations of losers keep buying them. If you’re \nin the market for a black box, remember that there is a guy in Brooklyn who has a \nbridge for sale.", - "type": "text" - } - ] - }, - { - "page_num": 55, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p55-b0", - "global_id": 514, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "14. THE MARKET CROWN AND YOU\t\n39", - "type": "text" - }, - { - "block_id": "p55-b1", - "global_id": 515, - "bbox": [ - 72.04, - 57.66, - 434.79, - 99.14 - ], - "text": "Gray boxes straddle the fence between toolboxes and black boxes. These pack-\nages are usually put out by prominent market personalities. They disclose the general \nlogic of their system and allow you to adjust some of their parameters.", - "type": "text" - }, - { - "block_id": "p55-b2", - "global_id": 516, - "bbox": [ - 72.0, - 122.2, - 126.52, - 139.13 - ], - "text": "Advisors", - "type": "text" - }, - { - "block_id": "p55-b3", - "global_id": 517, - "bbox": [ - 72.0, - 145.83, - 434.74, - 243.16 - ], - "text": "Some newsletters provide useful ideas and point readers in the direction of trad-\ning opportunities. A few offer educational value. Most sell an illusion of being an \ninsider. Newsletters are good entertainment. Your subscription rents you a pen pal \nwho sends often amusing and interesting letters and never asks you to write back, \nexcept for a check at renewal time. Freedom of the press in the United States allows \neven a convicted felon to go online and start sending out a financial advisory letter. \nQuite a few of them do.", - "type": "text" - }, - { - "block_id": "p55-b4", - "global_id": 518, - "bbox": [ - 72.0, - 243.86, - 434.75, - 327.18 - ], - "text": "The “track records” of various newsletters are largely an exercise in futility \nbecause hardly anybody takes every trade suggested by a newsletter. Services \nthat rate newsletters are for-profit affairs run by small businessmen whose well-\nbeing depends on the well-being of the advisory industry. Rating services may \noccasionally tut-tut an advisor, but they dedicate most of their energy to loud \ncheerleading.", - "type": "text" - }, - { - "block_id": "p55-b5", - "global_id": 519, - "bbox": [ - 72.0, - 327.88, - 434.72, - 369.2 - ], - "text": "I used to write an advisory newsletter decades ago: worked hard, delivered \nstraight talk, and received good ratings. I saw from the inside a tremendous potential \nfor fudging results. This is a well-kept secret of the advisory industry.", - "type": "text" - }, - { - "block_id": "p55-b6", - "global_id": 520, - "bbox": [ - 72.0, - 369.89, - 434.75, - 425.26 - ], - "text": "After looking at my letters, a prominent advisor told me that I should spend less \ntime on research and more on marketing. The first principle of letter writing is: \n“If you have to make forecasts, make a lot of them.”  Whenever a forecast turns out \nright, double the volume of promotional mail.", - "type": "text" - }, - { - "block_id": "p55-b7", - "global_id": 521, - "bbox": [ - 73.55, - 458.86, - 328.28, - 477.5 - ], - "text": "■\n■14. The Market Crowd and You", - "type": "text" - }, - { - "block_id": "p55-b8", - "global_id": 522, - "bbox": [ - 72.0, - 490.83, - 434.75, - 574.16 - ], - "text": "Markets are loosely organized crowds whose members bet that prices will rise or \nfall. Since each price represents crowd consensus at the moment of transaction, trad-\ners are betting on the future opinion and mood of the crowd. The crowd keeps \nswinging from hope to fear and from indifference to optimism or pessimism. Most \npeople don’t follow their own trading plans because they get swept up in the crowd’s \nfeelings and actions.", - "type": "text" - }, - { - "block_id": "p55-b9", - "global_id": 523, - "bbox": [ - 72.0, - 574.85, - 434.68, - 630.17 - ], - "text": "As bulls and bears battle in the market, the value of your open positions soars \nor sinks, depending on the actions of total strangers. You can’t control the markets. \nYou can only set your position size and decide whether and when to enter or exit \nyour trades.", - "type": "text" - }, - { - "block_id": "p55-b10", - "global_id": 524, - "bbox": [ - 72.0, - 630.87, - 434.71, - 672.18 - ], - "text": "Most traders feel jittery entering a trade. Their judgment becomes clouded after \nthey join the crowd. Caught up in crowd emotions, many traders deviate from their \nplans and lose money.", - "type": "text" - } - ] - }, - { - "page_num": 56, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p56-b0", - "global_id": 525, - "bbox": [ - 72.0, - 33.66, - 431.98, - 47.21 - ], - "text": "40\t\nMASS PSYCHOLOGY", - "type": "text" - }, - { - "block_id": "p56-b1", - "global_id": 526, - "bbox": [ - 72.0, - 57.1, - 190.2, - 74.04 - ], - "text": "Experts on Crowds", - "type": "text" - }, - { - "block_id": "p56-b2", - "global_id": 527, - "bbox": [ - 72.0, - 81.23, - 434.68, - 136.55 - ], - "text": "Charles Mackay, a Scottish barrister, wrote his classic book, Extraordinary Popular \nDelusions and the Madness of Crowds, in 1841. He described several mass manias, in-\ncluding the Tulip Mania in Holland in 1634 and the South Seas investment bubble in \nEngland in 1720.", - "type": "text" - }, - { - "block_id": "p56-b3", - "global_id": 528, - "bbox": [ - 72.0, - 137.24, - 434.75, - 220.57 - ], - "text": "The tulip craze began as a bull market in tulip bulbs. The long bull market convinced \nthe prosperous Dutch that tulips would continue to appreciate. Many abandoned their \nbusinesses to grow tulips, trade them, or become tulip brokers. Banks accepted tulips \nas collateral and speculators profited. Finally, that mania collapsed in waves of panic \nselling, leaving people destitute and the nation shocked. Mackay sighed, “Men go mad \nin crowds, and they come back to their senses slowly and one by one.”", - "type": "text" - }, - { - "block_id": "p56-b4", - "global_id": 529, - "bbox": [ - 72.0, - 221.27, - 434.66, - 248.58 - ], - "text": "In 1897, Gustave LeBon, a French philosopher and politician, wrote The Crowd. A \ntrader who reads it today can see his reflection in a century-old mirror.", - "type": "text" - }, - { - "block_id": "p56-b5", - "global_id": 530, - "bbox": [ - 72.0, - 249.28, - 434.72, - 332.6 - ], - "text": "LeBon wrote that when people gather in a crowd, “Whoever be the individuals \nthat compose it, however like or unlike be their mode of life, their occupations, their \ncharacter, or their intelligence, the fact that they have been transformed into a crowd \nputs them in possession of a sort of collective mind which makes them feel, think, \nand act in a manner quite different from that in which each individual of them would \nfeel, think, and act were he in a state of isolation.”", - "type": "text" - }, - { - "block_id": "p56-b6", - "global_id": 531, - "bbox": [ - 72.0, - 333.3, - 432.06, - 388.62 - ], - "text": "People change when they join crowds. They become more credulous and impul-\nsive, anxiously search for a leader, and react to emotions instead of using their intel-\nlect. An individual who becomes involved in a group becomes less capable of think-\ning for himself.", - "type": "text" - }, - { - "block_id": "p56-b7", - "global_id": 532, - "bbox": [ - 72.0, - 389.57, - 434.68, - 416.36 - ], - "text": "Group members may catch a few trends, but they get killed when trends reverse. Successful \ntraders are independent thinkers.", - "type": "text" - }, - { - "block_id": "p56-b8", - "global_id": 533, - "bbox": [ - 72.0, - 439.6, - 135.19, - 456.54 - ], - "text": "Why Join?", - "type": "text" - }, - { - "block_id": "p56-b9", - "global_id": 534, - "bbox": [ - 72.0, - 463.73, - 434.77, - 533.05 - ], - "text": "People have been joining crowds for safety since the dawn of time. If a Stone Age \nhunter encountered a saber-toothed tiger, he had a very slim chance of coming out \nalive, but if hunters went as a group, most were likely to survive. Loners got killed \nand left fewer offspring. Since group members were more likely to survive, the ten-\ndency to join groups appears to have been bred into our genes.", - "type": "text" - }, - { - "block_id": "p56-b10", - "global_id": 535, - "bbox": [ - 72.0, - 533.75, - 434.72, - 575.06 - ], - "text": "Our society glorifies free will, but we carry many primitive impulses beneath the \nthin veneer of civilization. We want to join groups for safety and be led by strong \nleaders. The greater the uncertainty, the stronger our wish to join and to follow.", - "type": "text" - }, - { - "block_id": "p56-b11", - "global_id": 536, - "bbox": [ - 72.0, - 575.76, - 434.72, - 631.08 - ], - "text": "No saber-toothed tigers roam the canyons of Wall Street, but your financial sur-\nvival is at risk. The value of your position rises and falls because of buying and selling \nby total strangers. Your fear swells up because you can’t control prices. This uncer-\ntainty makes most traders look for a leader who will tell them what to do.", - "type": "text" - }, - { - "block_id": "p56-b12", - "global_id": 537, - "bbox": [ - 72.0, - 631.78, - 434.75, - 687.1 - ], - "text": "You may have rationally decided to go long or short, but the moment you put on a \ntrade, the crowd starts sucking you in. You start losing your independence when you \nwatch prices like a hawk and become elated when they go your way or depressed if \nthey go against you. You are in trouble when you impulsively add to losing positions", - "type": "text" - } - ] - }, - { - "page_num": 57, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p57-b0", - "global_id": 538, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "14. THE MARKET CROWN AND YOU\t\n41", - "type": "text" - }, - { - "block_id": "p57-b1", - "global_id": 539, - "bbox": [ - 72.04, - 57.83, - 434.74, - 113.15 - ], - "text": "or reverse them. You lose your independence when you start trusting gurus more \nthan yourself and don’t follow your own trading plan. When you notice this happen-\ning, try to come back to your senses. If you can’t regain your composure, exit your \ntrades and go flat.", - "type": "text" - }, - { - "block_id": "p57-b2", - "global_id": 540, - "bbox": [ - 72.0, - 133.2, - 178.78, - 150.13 - ], - "text": "Crowd Mentality", - "type": "text" - }, - { - "block_id": "p57-b3", - "global_id": 541, - "bbox": [ - 72.0, - 155.83, - 434.76, - 239.16 - ], - "text": "When people join crowds, their thinking becomes primitive and they become more \nprone to act on impulse. Crowds swing from fear to glee, from panic to euphoria. \nA scientist can be cool and rational in his lab but make harebrained trades after \nbeing swept up in the mass hysteria of the market. A group can suck you in, whether \nyou trade from a crowded brokerage office or a remote mountaintop. When you let \nothers influence your trading decisions, your chance of success goes up in smoke.", - "type": "text" - }, - { - "block_id": "p57-b4", - "global_id": 542, - "bbox": [ - 72.0, - 239.85, - 434.7, - 281.17 - ], - "text": "Group loyalty was essential for a prehistoric hunter’s survival. Joining a union can \nhelp even an incompetent performer keep his job. The market is different: joining a \ngroup tends to hurt you.", - "type": "text" - }, - { - "block_id": "p57-b5", - "global_id": 543, - "bbox": [ - 72.0, - 281.86, - 434.68, - 351.19 - ], - "text": "Many traders are puzzled why markets reverse immediately after they dump their \nlosing position. This happens because crowd members are gripped by the same fear—\nand everybody dumps at the same time. Once the selling fit has ended, the market has \nnowhere to go but up. Optimism returns to the marketplace, and the crowd forgets \nfear, grows greedy, and goes on a new buying binge.", - "type": "text" - }, - { - "block_id": "p57-b6", - "global_id": 544, - "bbox": [ - 72.0, - 351.88, - 434.76, - 393.2 - ], - "text": "The crowd is bigger and stronger than you. No matter how smart you are, you \ncannot argue with the crowd. You have only one choice—to join the crowd or to act \nindependently.", - "type": "text" - }, - { - "block_id": "p57-b7", - "global_id": 545, - "bbox": [ - 72.0, - 393.9, - 434.69, - 449.22 - ], - "text": "Crowds are primitive, and your trading strategies should be simple. You don’t \nhave to be a rocket scientist to design a winning trading method. If the trade goes \nagainst you—cut your losses and run. Never argue with the crowd—simply use your \njudgment to decide when to join and when to leave.", - "type": "text" - }, - { - "block_id": "p57-b8", - "global_id": 546, - "bbox": [ - 72.0, - 450.16, - 434.75, - 505.0 - ], - "text": "Your human nature leads you to give up your independence under stress.  When you put on a \ntrade, you feel the desire to imitate others, overlooking objective signals. This is why you need to \nwrite down and follow your trading system and money management rules. They represent your \nrational individual decisions, made before you entered a trade.", - "type": "text" - }, - { - "block_id": "p57-b9", - "global_id": 547, - "bbox": [ - 72.0, - 525.2, - 145.61, - 542.14 - ], - "text": "Who Leads?", - "type": "text" - }, - { - "block_id": "p57-b10", - "global_id": 548, - "bbox": [ - 72.0, - 547.83, - 434.72, - 617.15 - ], - "text": "An inexperienced trader may feel intense joy when prices move in his favor. He may \nfeel angry, depressed, and fearful when prices move against him, anxiously waiting \nto see what the market will do to him next. Traders become crowd members when \nthey feel stressed or threatened. Battered by emotions, they lose their independence \nand begin imitating other group members, especially the group leader.", - "type": "text" - }, - { - "block_id": "p57-b11", - "global_id": 549, - "bbox": [ - 72.0, - 617.85, - 434.72, - 687.17 - ], - "text": "When children feel frightened, they want their parents and other grown-ups to \ntell them what to do. They transfer that attitude to teachers, doctors, ministers, boss-\nes, and assorted experts. Traders turn to gurus, trading system vendors, newspaper \ncolumnists, and other market leaders. But, as Tony Plummer brilliantly pointed out \nin his book, Forecasting Financial Markets, the main leader of the market is price.", - "type": "text" - } - ] - }, - { - "page_num": 58, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p58-b0", - "global_id": 550, - "bbox": [ - 72.0, - 33.66, - 431.98, - 47.21 - ], - "text": "42\t\nMASS PSYCHOLOGY", - "type": "text" - }, - { - "block_id": "p58-b1", - "global_id": 551, - "bbox": [ - 72.0, - 57.83, - 434.75, - 113.15 - ], - "text": "Price is the leader of the market crowd. Traders all over the world follow the upticks \nand downticks. Price seems to say to traders, “Follow me, and I’ll show you the way \nto riches.” Most traders consider themselves independent. Few of us realize how \nstrongly we focus on the behavior of our group leader.", - "type": "text" - }, - { - "block_id": "p58-b2", - "global_id": 552, - "bbox": [ - 72.0, - 113.84, - 434.75, - 197.17 - ], - "text": "A trend that flows in your favor symbolizes a strong and generous parent calling \nyou to share a meal. A trend that goes against you feels like dealing with an angry and \npunishing parent. Being gripped by such feelings, it’s easy to overlook objective sig-\nnals that tell you to stay or to exit a trade. You may feel happy or frightened, bargain \nor beg forgiveness—while avoiding the rational act of accepting reality and getting \nout of a losing trade.", - "type": "text" - }, - { - "block_id": "p58-b3", - "global_id": 553, - "bbox": [ - 72.0, - 217.2, - 162.12, - 234.13 - ], - "text": "Independence", - "type": "text" - }, - { - "block_id": "p58-b4", - "global_id": 554, - "bbox": [ - 72.0, - 239.83, - 434.76, - 295.15 - ], - "text": "You need to base your trades on a carefully prepared plan instead of jumping in re-\nsponse to price changes. A proper plan is a written one. You need to know exactly \nunder what conditions you will enter and exit a trade. Don’t make decisions on the \nspur of the moment, when you are vulnerable to being sucked in by the crowd.", - "type": "text" - }, - { - "block_id": "p58-b5", - "global_id": 555, - "bbox": [ - 72.0, - 295.84, - 434.75, - 351.16 - ], - "text": "You can succeed as a trader only when you think and act as an individual. The \nweakest part of any trading system is the trader himself. Traders fail when they trade \nwithout a plan or deviate from their plans. Plans are created by reasoning individuals. \nImpulsive trades are made by sweaty group members.", - "type": "text" - }, - { - "block_id": "p58-b6", - "global_id": 556, - "bbox": [ - 72.0, - 352.11, - 434.74, - 392.91 - ], - "text": "You have to observe yourself and notice changes in your mental state as you trade.  Write \ndown your reasons for entering a trade and the rules for getting out of it, including money \nmanagement rules.  You may not change your plan while you have an open position.", - "type": "text" - }, - { - "block_id": "p58-b7", - "global_id": 557, - "bbox": [ - 72.0, - 393.87, - 434.71, - 477.2 - ], - "text": "Sirens were sea creatures of Greek myths who sang so beautifully that sailors \njumped overboard and swam to them, only to be killed. When Odysseus wanted to \nhear the Sirens’ songs, he ordered his men to seal their ears with beeswax but to tie \nhim to the mast. Odysseus heard the Sirens’ song but survived because he couldn’t \njump overboard. You ensure your survival as a trader when on a clear day you tie \nyourself to the mast of a trading plan and money management rules.", - "type": "text" - }, - { - "block_id": "p58-b8", - "global_id": 558, - "bbox": [ - 72.0, - 497.2, - 176.83, - 514.14 - ], - "text": "A Positive Group", - "type": "text" - }, - { - "block_id": "p58-b9", - "global_id": 559, - "bbox": [ - 72.0, - 519.83, - 434.72, - 575.15 - ], - "text": "You don’t have to be a hermit—steering clear of the crowd’s impulsivity doesn’t \nmean you have to trade in total solitude. While some of us prefer doing it that way, \nintelligent and productive groups can exist. Their key feature has to be independent \ndecision making.", - "type": "text" - }, - { - "block_id": "p58-b10", - "global_id": 560, - "bbox": [ - 72.0, - 575.84, - 434.72, - 687.18 - ], - "text": "This concept is clearly explained in a book, The Wisdom of Crowds, by a financial \njournalist James Surowiecki. He acknowledges that members of most groups con-\nstantly influence one another, creating waves of shared feelings and actions. A smart \ngroup is different: all members make independent decisions without knowing what \nothers are doing. Instead of impacting each other and creating emotional waves, \nmembers of an intelligent group benefit from combining their knowledge and ex-\npertise. The function of a group leader is to maintain this structure and to bring \nindividual decisions up for a vote.", - "type": "text" - } - ] - }, - { - "page_num": 59, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p59-b0", - "global_id": 561, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "15. PSYCHOLOGY OF TRENDS\t\n43", - "type": "text" - }, - { - "block_id": "p59-b1", - "global_id": 562, - "bbox": [ - 72.04, - 57.83, - 434.68, - 99.14 - ], - "text": "In 2004, a year prior to reading The Wisdom of Crowds, I organized a group of trad-\ners along those lines. I continue to manage it with my friend Kerry Lovvorn—the \nSpikeTrade group.", - "type": "text" - }, - { - "block_id": "p59-b2", - "global_id": 563, - "bbox": [ - 72.04, - 99.84, - 434.8, - 197.17 - ], - "text": "We run a trading competition, with each round lasting one week. After the mar-\nket closes on Friday, the stock picks section of the website becomes closed to view-\ning by members until 3 p.m. on Sunday. During that time, any group member may \nsubmit one favorite pick for the week ahead—without knowing what other group \nmembers are doing. The picks section of the website re-opens on Sunday afternoon, \nallowing all members to see all picks. The race begins on Monday and ends on Friday, \nwith prizes to winners.", - "type": "text" - }, - { - "block_id": "p59-b3", - "global_id": 564, - "bbox": [ - 72.04, - 197.87, - 434.78, - 253.19 - ], - "text": "Throughout the week members exchange comments and answer questions. The \nsite is built to encourage communication—except for weekends, when everyone \nmust work independently. The results of leading group members, posted on the site, \nhave been spectacular.", - "type": "text" - }, - { - "block_id": "p59-b4", - "global_id": 565, - "bbox": [ - 72.04, - 253.88, - 434.76, - 323.21 - ], - "text": "The key point is that all decisions about stock selection and direction must be \nmade in solitude, without seeing what the leaders or other members are doing. The \nsharing begins after all votes are in. This combination of independent decision mak-\ning with sharing brings forth “the wisdom of crowds,” tapping the collective wisdom \nof the group and its leaders.", - "type": "text" - }, - { - "block_id": "p59-b5", - "global_id": 566, - "bbox": [ - 73.55, - 355.86, - 282.34, - 374.5 - ], - "text": "■\n■15. Psychology of Trends", - "type": "text" - }, - { - "block_id": "p59-b6", - "global_id": 567, - "bbox": [ - 72.0, - 386.83, - 434.76, - 442.15 - ], - "text": "Each price represents a momentary consensus of value among market participants. \nEach tick reflects the latest vote on the value of a trading vehicle. Any trader can “put \nin his two cents worth” by giving an order to buy or sell, or by refusing to trade at \nthe current level.", - "type": "text" - }, - { - "block_id": "p59-b7", - "global_id": 568, - "bbox": [ - 72.0, - 442.84, - 434.69, - 484.16 - ], - "text": "Each price bar or candle reflects a battle between bulls and bears. When buyers \nfeel strongly bullish, they buy more eagerly and push markets up. When sellers feel \nstrongly bearish, they sell more actively and push markets down.", - "type": "text" - }, - { - "block_id": "p59-b8", - "global_id": 569, - "bbox": [ - 72.0, - 484.86, - 434.66, - 526.17 - ], - "text": "Charts are a window into mass psychology. When you analyze charts, you analyze \nthe behavior of trading masses. Technical indicators help make this analysis more \nobjective.", - "type": "text" - }, - { - "block_id": "p59-b9", - "global_id": 570, - "bbox": [ - 84.0, - 527.12, - 270.17, - 539.91 - ], - "text": "Technical analysis is for-profit social psychology.", - "type": "text" - }, - { - "block_id": "p59-b10", - "global_id": 571, - "bbox": [ - 72.0, - 566.2, - 167.2, - 583.14 - ], - "text": "Strong Feelings", - "type": "text" - }, - { - "block_id": "p59-b11", - "global_id": 572, - "bbox": [ - 72.0, - 589.83, - 434.63, - 631.14 - ], - "text": "Ask a trader why prices went up, and you’ll probably get a stock answer—more buy-\ners than sellers. This isn’t true. The number of shares or futures contracts bought and \nsold in any market is always equal.", - "type": "text" - }, - { - "block_id": "p59-b12", - "global_id": 573, - "bbox": [ - 72.0, - 631.84, - 434.76, - 687.16 - ], - "text": "If you want to buy 100 shares of Google, someone has to sell them to you. If you \nwant to sell 200 shares of Amazon, someone has to buy them from you. This is why \nthe number of shares bought and sold is equal in the stock market. Furthermore, \nthe number of long and short positions in the futures markets is always equal. Prices", - "type": "text" - } - ] - }, - { - "page_num": 60, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p60-b0", - "global_id": 574, - "bbox": [ - 72.0, - 33.66, - 431.98, - 47.21 - ], - "text": "44\t\nMASS PSYCHOLOGY", - "type": "text" - }, - { - "block_id": "p60-b1", - "global_id": 575, - "bbox": [ - 72.0, - 57.83, - 434.66, - 85.14 - ], - "text": "move up or down not because of different numbers but because of changes in the \nintensity of greed and fear among buyers and sellers.", - "type": "text" - }, - { - "block_id": "p60-b2", - "global_id": 576, - "bbox": [ - 72.0, - 85.84, - 434.75, - 155.16 - ], - "text": "When the trend is up, bulls feel optimistic and don’t mind paying up. They buy \nhigh because they expect prices to rise even higher. Bears feel afraid in an uptrend, \nand they agree to sell only at a higher price. When greedy and optimistic bulls meet \nfearful and defensive bears, the market rallies. The stronger their feelings, the sharper \nthe rally. The rally ends only when bulls start losing their enthusiasm.", - "type": "text" - }, - { - "block_id": "p60-b3", - "global_id": 577, - "bbox": [ - 72.0, - 155.86, - 434.65, - 211.18 - ], - "text": "When prices slide, bears feel optimistic and don’t quibble about selling short at \nlower prices. Bulls are fearful and agree to buy only at a discount. While bears feel \nlike winners, they continue to sell at lower prices, and the downtrend continues. It \nends when bears start feeling cautious and refuse to sell at lower prices.", - "type": "text" - }, - { - "block_id": "p60-b4", - "global_id": 578, - "bbox": [ - 72.0, - 231.2, - 196.74, - 248.13 - ], - "text": "Rallies and Declines", - "type": "text" - }, - { - "block_id": "p60-b5", - "global_id": 579, - "bbox": [ - 72.0, - 253.83, - 434.71, - 295.14 - ], - "text": "Few traders are purely rational human beings. There is a great deal of emotion in the \nmarkets. Most participants act on the principle of  “monkey see, monkey do.”  The \nwaves of fear and greed sweep up bulls and bears.", - "type": "text" - }, - { - "block_id": "p60-b6", - "global_id": 580, - "bbox": [ - 72.0, - 295.84, - 434.74, - 351.16 - ], - "text": "The sharpness of any rally depends on how traders feel. If buyers feel just a little \nstronger than sellers, the market rises slowly. When they feel much stronger than \nsellers, the market rises fast. It is the job of a technical analyst to find when buyers \nare strong and when they start running out of steam.", - "type": "text" - }, - { - "block_id": "p60-b7", - "global_id": 581, - "bbox": [ - 72.0, - 351.86, - 434.72, - 407.14 - ], - "text": "Short sellers feel trapped by rising markets, as their profits melt and turn into \nlosses. When short sellers rush to cover, a rally can become parabolic. Fear is a much \nstronger emotion than greed.2 Rallies driven by short covering are especially sharp, \nalthough they do not last very long.", - "type": "text" - }, - { - "block_id": "p60-b8", - "global_id": 582, - "bbox": [ - 72.0, - 407.84, - 434.71, - 477.16 - ], - "text": "Markets fall because of fear among bulls and greed among bears. Normally bears \nprefer to sell short on rallies, but if they expect to make a lot of money on a decline, \nthey don’t mind shorting on the way down. Fearful buyers agree to buy only below \nthe market. As long as short sellers are willing to meet those demands and sell at a \nbid, the decline will continue.", - "type": "text" - }, - { - "block_id": "p60-b9", - "global_id": 583, - "bbox": [ - 72.0, - 477.86, - 434.69, - 519.17 - ], - "text": "As bulls’ profits melt and turn into losses, they panic and sell at almost any price. \nThey are so eager to get out that they hit the bids under the market. Markets can \ndrop fast when hit by panic selling.", - "type": "text" - }, - { - "block_id": "p60-b10", - "global_id": 584, - "bbox": [ - 72.0, - 539.2, - 151.09, - 556.14 - ], - "text": "Price Shocks", - "type": "text" - }, - { - "block_id": "p60-b11", - "global_id": 585, - "bbox": [ - 72.0, - 561.83, - 434.76, - 631.15 - ], - "text": "Loyalty to the leader is the glue that holds groups together. Group members expect \nleaders to inspire and reward them when they are good but punish them when they \nare bad. Some leaders are very authoritarian, others quite democratic and informal, \nbut every group has a leader—a leaderless group can’t exist. Price functions as the \nleader of the market crowd.", - "type": "text" - }, - { - "block_id": "p60-b12", - "global_id": 586, - "bbox": [ - 72.0, - 663.22, - 434.23, - 686.31 - ], - "text": "2Fear is three times stronger than greed, according to research cited by Prof. Daniel Kahneman, a \nNobel Prize winning behavioral economist, whose findings we’ll return to again in this book.", - "type": "text" - } - ] - }, - { - "page_num": 61, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p61-b0", - "global_id": 587, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "15. PSYCHOLOGY OF TRENDS\t\n45", - "type": "text" - }, - { - "block_id": "p61-b1", - "global_id": 588, - "bbox": [ - 72.04, - 58.08, - 434.78, - 98.88 - ], - "text": "Winners feel rewarded when price moves in their favor, and losers feel punished when it moves \nagainst them. Crowd members remain blissfully unaware that by focusing on price they create \ntheir own leader. Traders who feel mesmerized by prices create their own idols.", - "type": "text" - }, - { - "block_id": "p61-b2", - "global_id": 589, - "bbox": [ - 72.04, - 99.84, - 434.79, - 169.16 - ], - "text": "When the trend is up, bulls feel rewarded by a bountiful parent. The longer an \nuptrend lasts, the more confident they feel. When a child’s behavior is rewarded, he \ncontinues to do what he did. When bulls make money, they add to long positions. \nWhile new bulls enter the market, bears feel they are being punished for selling \nshort. Many of them cover shorts, go long, and join the bulls.", - "type": "text" - }, - { - "block_id": "p61-b3", - "global_id": 590, - "bbox": [ - 72.04, - 169.86, - 434.75, - 211.18 - ], - "text": "Buying by happy bulls and covering by fearful bears pushes uptrends higher. \nBuyers feel rewarded, while sellers feel punished. Both feel emotionally involved, but \nfew traders realize that they are creating the uptrend and setting up their own leader.", - "type": "text" - }, - { - "block_id": "p61-b4", - "global_id": 591, - "bbox": [ - 72.04, - 211.87, - 434.74, - 253.19 - ], - "text": "Eventually a price shock occurs—a major sale hits the market, and there aren’t \nenough buyers to absorb it. The uptrend takes a dive. Bulls feel mistreated, like chil-\ndren whose father slapped them during a meal, but bears feel encouraged.", - "type": "text" - }, - { - "block_id": "p61-b5", - "global_id": 592, - "bbox": [ - 72.04, - 253.88, - 434.8, - 365.22 - ], - "text": "A price shock plants the seeds of an uptrend’s reversal. Even if the market recov-\ners and reaches a new high, bulls feel more skittish and bears become bolder. This \nlack of cohesion in the dominant group and growing optimism among its opponents \nmakes the uptrend ready to reverse. Several technical indicators identify tops by \ntracing a pattern called bearish divergence (see Section 4). It occurs when prices \nreach a new high but the indicator reaches a lower high than it did on the previous \nrally. Bearish divergences mark the ends of uptrends and some of the best shorting \nopportunities.", - "type": "text" - }, - { - "block_id": "p61-b6", - "global_id": 593, - "bbox": [ - 72.04, - 365.92, - 434.69, - 421.24 - ], - "text": "When the trend is down, bears feel like good children, praised and rewarded for \nbeing smart. They feel increasingly confident, add to short positions, and the down-\ntrend continues. New bears come into the market. People admire winners, and the \nfinancial media keeps interviewing bears during bear markets.", - "type": "text" - }, - { - "block_id": "p61-b7", - "global_id": 594, - "bbox": [ - 72.04, - 421.93, - 434.78, - 463.25 - ], - "text": "Bulls lose money in downtrends, making them feel bad. They start dumping \ntheir positions, and some of them switch sides to join bears. Their selling pushes \nmarkets lower.", - "type": "text" - }, - { - "block_id": "p61-b8", - "global_id": 595, - "bbox": [ - 72.04, - 463.94, - 434.79, - 519.26 - ], - "text": "After a while, bears grow confident and bulls feel demoralized. Suddenly, a price \nshock occurs. A cluster of buy orders soaks up all available sell orders and lifts the \nmarket. Now bears feel like children whose father has lashed out at them in the midst \nof a happy meal.", - "type": "text" - }, - { - "block_id": "p61-b9", - "global_id": 596, - "bbox": [ - 72.04, - 519.96, - 434.8, - 617.29 - ], - "text": "A price shock plants the seeds of a downtrend’s eventual reversal because bears \nbecome more fearful and bulls grow bolder. When a child begins to doubt that Santa \nClaus exists, he’ll seldom believe in Santa again. Even if bears recover and prices fall \nto a new low, several technical indicators will help identify their weakness by tracing \na pattern called a bullish divergence. It occurs when prices fall to a new low but an \nindicator traces a shallower bottom than during the previous decline. Bullish diver-\ngences identify some of the best buying opportunities.", - "type": "text" - }, - { - "block_id": "p61-b10", - "global_id": 597, - "bbox": [ - 72.0, - 637.2, - 183.01, - 654.14 - ], - "text": "Social Psychology", - "type": "text" - }, - { - "block_id": "p61-b11", - "global_id": 598, - "bbox": [ - 72.0, - 659.87, - 434.66, - 687.18 - ], - "text": "Free will makes individual behavior hard to predict. Group behavior is more primi-\ntive and easier to track. When you analyze markets, you analyze group behavior.", - "type": "text" - } - ] - }, - { - "page_num": 62, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p62-b0", - "global_id": 599, - "bbox": [ - 72.0, - 33.66, - 431.98, - 47.21 - ], - "text": "46\t\nMASS PSYCHOLOGY", - "type": "text" - }, - { - "block_id": "p62-b1", - "global_id": 600, - "bbox": [ - 72.0, - 57.83, - 434.75, - 85.14 - ], - "text": "You need to identify the direction in which groups are running and their changes \nof speed.", - "type": "text" - }, - { - "block_id": "p62-b2", - "global_id": 601, - "bbox": [ - 72.0, - 85.84, - 434.66, - 113.15 - ], - "text": "Groups suck us in and cloud our judgment. The problem for most analysts is that \nthey get caught in the emotional pull of the groups they try to analyze.", - "type": "text" - }, - { - "block_id": "p62-b3", - "global_id": 602, - "bbox": [ - 72.0, - 113.84, - 434.76, - 183.17 - ], - "text": "The longer a rally continues, the more analysts get caught up in mass bullishness, \nignore danger signs, and miss the eventual reversal. The longer a decline goes on, the \nmore analysts get caught up in bearish gloom and ignore bullish signs. This is why it \nhelps to have a written plan for analyzing markets. We have to decide in advance what \nindicators we will watch, how we will interpret them, and how we’ll act.", - "type": "text" - }, - { - "block_id": "p62-b4", - "global_id": 603, - "bbox": [ - 72.0, - 183.86, - 434.75, - 281.2 - ], - "text": "Professionals use several tools for tracking the intensity of the crowd’s feelings. \nThey watch the crowd’s ability to break through recent support and resistance levels. \nFloor traders used to listen to the changes in pitch and volume of the roar on the \nexchange floor. With floor trading rapidly receding into history, you’ll need special \ntools for analyzing crowd behavior. Fortunately, your charts and indicators reflect \nmass psychology in action. A technical analyst is an applied social psychologist, usually \narmed with a computer.", - "type": "text" - }, - { - "block_id": "p62-b5", - "global_id": 604, - "bbox": [ - 73.55, - 308.86, - 347.28, - 327.5 - ], - "text": "■\n■16. Managing versus Forecasting", - "type": "text" - }, - { - "block_id": "p62-b6", - "global_id": 605, - "bbox": [ - 72.0, - 337.83, - 434.77, - 407.15 - ], - "text": "I once ran into a very fat surgeon at a seminar. He told me that he had lost a quarter \nof a million dollars in three years trading stocks and options. When I asked him how \nhe made his trading decisions, he sheepishly pointed to his ample gut. He gambled \non hunches and used his professional income to support his habit. There are two al-\nternatives to “gut feel”: One is fundamental analysis; the other is technical analysis.", - "type": "text" - }, - { - "block_id": "p62-b7", - "global_id": 606, - "bbox": [ - 72.0, - 407.85, - 434.71, - 477.17 - ], - "text": "Fundamental analysts study the actions of the Federal Reserve, follow earnings \nreports, examine crop reports, and so on. Major bull and bear markets reflect fun-\ndamental changes in supply and demand. Still, even if you know those factors, you \ncan lose money trading if you are out of touch with intermediate- and short-term \ntrends, which depend on the crowd’s emotions.", - "type": "text" - }, - { - "block_id": "p62-b8", - "global_id": 607, - "bbox": [ - 72.0, - 477.87, - 434.75, - 533.19 - ], - "text": "Technical analysts believe that prices reflect everything known about the market, \nincluding fundamental factors. Each price represents the consensus of value of all \nmarket participants—large commercial interests and small speculators, fundamen-\ntal researchers and technicians, insiders and gamblers.", - "type": "text" - }, - { - "block_id": "p62-b9", - "global_id": 608, - "bbox": [ - 72.0, - 533.88, - 434.72, - 575.2 - ], - "text": "Technical analysis is a study of mass psychology. It is partly a science and partly \nan art. Technicians use many scientific methods, including mathematical concepts of \ngame theory, probabilities, and so on. They use computers to track indicators.", - "type": "text" - }, - { - "block_id": "p62-b10", - "global_id": 609, - "bbox": [ - 72.0, - 575.9, - 434.71, - 631.22 - ], - "text": "Technical analysis is also an art. The bars or candles on our charts coalesce into \npatterns and formations. The movement of prices and indicators produces a sense of \nflow and rhythm, a feeling of tension and beauty that helps us sense what is happen-\ning and how to trade.", - "type": "text" - }, - { - "block_id": "p62-b11", - "global_id": 610, - "bbox": [ - 72.0, - 631.91, - 434.7, - 673.23 - ], - "text": "Individual behavior is complex, diverse, and difficult to predict. Group behavior \nis primitive. Technicians study the behavior patterns of market crowds. They trade \nwhen they recognize patterns that preceded previous market moves.", - "type": "text" - } - ] - }, - { - "page_num": 63, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p63-b0", - "global_id": 611, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "16. MANAGING VERSUS FORECASTING\t\n47", - "type": "text" - }, - { - "block_id": "p63-b1", - "global_id": 612, - "bbox": [ - 72.0, - 57.1, - 143.58, - 74.04 - ], - "text": "Poll-Taking", - "type": "text" - }, - { - "block_id": "p63-b2", - "global_id": 613, - "bbox": [ - 72.0, - 80.73, - 434.7, - 150.05 - ], - "text": "Politicians want to know their chances of being elected or re-elected. They make \npromises to voters and have poll-takers measure a crowd’s response. Technical anal-\nysis is similar to political poll-taking, as both aim to read the intentions of masses. \nPoll-takers do it to help their clients win elections, while technicians do it for \nfinancial gain.", - "type": "text" - }, - { - "block_id": "p63-b3", - "global_id": 614, - "bbox": [ - 72.0, - 150.75, - 434.76, - 234.08 - ], - "text": "Poll-takers use scientific methods: statistics, sampling procedures, and so on. They \nalso need a flair for interviewing and phrasing questions; they have to be plugged into \nthe emotional undercurrents of their party. Poll-taking is a combination of science \nand art. If a poll-taker says he is a scientist, ask him why every major political poll-\ntaker in the United States is affiliated with either the Democratic or Republican \nparty. True science knows no party.", - "type": "text" - }, - { - "block_id": "p63-b4", - "global_id": 615, - "bbox": [ - 72.0, - 234.77, - 434.75, - 290.09 - ], - "text": "A market technician must rise above party affiliation. Be neither a bull nor a bear, \nbut only seek the truth. A biased bull looks at a chart and says, “Where can I buy?” A \nbiased bear looks at the same chart and tries to find where he can go short. A top-\nflight analyst is free of bullish or bearish biases.", - "type": "text" - }, - { - "block_id": "p63-b5", - "global_id": 616, - "bbox": [ - 72.0, - 290.79, - 434.72, - 346.11 - ], - "text": "There is a trick to help you detect your bias. If you want to buy, turn your chart \nupside down and see whether it looks like a sell. If it still looks like a buy after you \nflip it, then you have to work on getting a bullish bias out of your system. If both \ncharts look like a sell, then you have to work on purging a bearish bias.", - "type": "text" - }, - { - "block_id": "p63-b6", - "global_id": 617, - "bbox": [ - 72.0, - 369.1, - 156.66, - 386.04 - ], - "text": "A Crystal Ball", - "type": "text" - }, - { - "block_id": "p63-b7", - "global_id": 618, - "bbox": [ - 72.0, - 392.73, - 434.76, - 476.06 - ], - "text": "Many traders believe that their aim is to forecast future prices. The amateurs in most \nfields ask for forecasts, while professionals simply manage information and make \ndecisions based on probabilities. Take medicine, for example. A patient is brought \nto an emergency room with a knife wound—and the anxious family members have \nonly two questions: “will he survive?” and “when can he go home?”  They ask the doc-\ntor for a forecast.", - "type": "text" - }, - { - "block_id": "p63-b8", - "global_id": 619, - "bbox": [ - 72.0, - 476.75, - 434.77, - 574.08 - ], - "text": "But the doctor isn’t forecasting—he is managing problems as they emerge. His \nfirst job is to prevent the patient from dying from shock, and so he gives him pain-\nkillers and starts an intravenous drip to replace lost blood. Then he sutures dam-\naged organs. After that, he has to watch against infection. He monitors the trend \nof the patient’s health and takes measures to prevent complications. He is manag-\ning—not forecasting. When a family begs for a forecast, he may give it to them, but \nits practical value is low.", - "type": "text" - }, - { - "block_id": "p63-b9", - "global_id": 620, - "bbox": [ - 72.0, - 574.78, - 434.76, - 672.11 - ], - "text": "To make money trading, you don’t need to forecast the future. You have to extract \ninformation from the market and find out whether bulls or bears are in control. You \nneed to measure the strength of the dominant market group and decide how likely \nthe current trend is to continue. You need to practice conservative money manage-\nment aimed at long-term survival and profit accumulation. You must observe how \nyour mind works and avoid slipping into greed or fear. A trader who does all of this \nwill succeed ahead of any forecaster.", - "type": "text" - } - ] - }, - { - "page_num": 64, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p64-b0", - "global_id": 621, - "bbox": [ - 72.0, - 33.66, - 431.98, - 47.21 - ], - "text": "48\t\nMASS PSYCHOLOGY", - "type": "text" - }, - { - "block_id": "p64-b1", - "global_id": 622, - "bbox": [ - 72.0, - 57.1, - 284.51, - 74.04 - ], - "text": "Read the Market, Manage Yourself", - "type": "text" - }, - { - "block_id": "p64-b2", - "global_id": 623, - "bbox": [ - 72.0, - 79.73, - 434.69, - 121.04 - ], - "text": "A tremendous volume of information pours out of the markets during trading hours. \nChanging prices reflect the battles of bulls and bears. Your job is to analyze this infor-\nmation and bet on the dominant market group.", - "type": "text" - }, - { - "block_id": "p64-b3", - "global_id": 624, - "bbox": [ - 72.0, - 121.74, - 434.74, - 275.09 - ], - "text": "Whenever I hear a dramatic forecast, my first thought is “a marketing gimmick.” \nAdvisors issue them to attract attention in order to raise money or sell services. \nGood calls attract paying customers, while bad calls are quickly forgotten. My \nphone rang while I was writing the first draft of this chapter. A famous guru, down \non his luck, told me that he had identified a “once-in-a-lifetime buying opportunity” \nin corn. He asked me to raise money for him and promised to multiply it a hundred-\nfold in six months! I do not know how many fools he hooked, but dramatic forecasts \nhave always been good for fleecing the public. Most people do not change. While \nworking on this update 21 years later, I read in The Wall Street Journal that this same \n“guru” was recently punished for professional misconduct by the National Futures \nAssociation.", - "type": "text" - }, - { - "block_id": "p64-b4", - "global_id": 625, - "bbox": [ - 72.0, - 275.78, - 434.76, - 373.12 - ], - "text": "Use common sense in analyzing markets. When some new development puzzles \nyou, compare it to life outside the markets. For example, indicators may give you \nbuy signals in two markets. Should you buy the one that declined a lot before the buy \nsignal or the one that declined a little? Compare this to what happens to a man after \na fall. If he falls down a few steps, he may dust himself off and run up again. But if \nhe falls out of a second-story window, he’s not going to run anytime soon; he needs \ntime to recover.", - "type": "text" - }, - { - "block_id": "p64-b5", - "global_id": 626, - "bbox": [ - 72.0, - 374.06, - 434.7, - 414.82 - ], - "text": "Successful trading stands on three pillars.  You need to analyze the balance of power between \nbulls and bears.  You need to practice good money management.  You need personal discipline to \nfollow your trading plan and avoid getting high or depressed in the markets.", - "type": "text" - } - ] - }, - { - "page_num": 65, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p65-b0", - "global_id": 627, - "bbox": [ - 72.0, - 118.61, - 432.1, - 171.84 - ], - "text": "Classical Chart Analysis", - "type": "text" - }, - { - "block_id": "p65-b1", - "global_id": 628, - "bbox": [ - 72.1, - 673.7, - 432.05, - 687.25 - ], - "text": "49", - "type": "text" - }, - { - "block_id": "p65-b2", - "global_id": 629, - "bbox": [ - 348.1, - 59.86, - 395.91, - 73.41 - ], - "text": "PA R T 3\nPA R T 3", - "type": "text" - }, - { - "block_id": "p65-b3", - "global_id": 630, - "bbox": [ - 71.3, - 331.94, - 104.71, - 372.34 - ], - "text": "W", - "type": "text" - }, - { - "block_id": "p65-b4", - "global_id": 631, - "bbox": [ - 72.02, - 337.63, - 434.74, - 420.96 - ], - "text": "hen I bought my first stock, classical charting was the only game in town. \nI use quad-ruled paper and a sharp pencil to update my charts by hand. A few \nyears later, pocket calculators became available, and I added simple moving averages. \nLater, a TI programmable calculator made it possible to insert tiny magnetic strips \ninto its slit to perform more complex calculations, such as exponential moving aver-\nages and the Directional system.", - "type": "text" - }, - { - "block_id": "p65-b5", - "global_id": 632, - "bbox": [ - 72.02, - 421.65, - 434.71, - 462.97 - ], - "text": "Finally, an Apple personal computer appeared on the scene; you could use its joy-\nstick to move a cursor to draw trendlines. In contrast, today’s traders have access to \nimmense analytic power at a very low cost.", - "type": "text" - }, - { - "block_id": "p65-b6", - "global_id": 633, - "bbox": [ - 72.02, - 463.66, - 434.78, - 546.99 - ], - "text": "While the key concepts of classical charting remain valid, many of its tools have \nbeen eclipsed by much more powerful computerized methods. The best quality of \ncomputerized technical analysis is its objectivity. A moving average or any other in-\ndicator is either rising or falling, and there can be no argument about its direction. \nYou may puzzle over how to interpret its signals, but the signals themselves are clear \nas day.", - "type": "text" - }, - { - "block_id": "p65-b7", - "global_id": 634, - "bbox": [ - 72.02, - 547.69, - 434.7, - 659.02 - ], - "text": "Classical charting, on the other hand, is quite subjective, and invites wishful think-\ning and self-deception. You can draw a trendline across the extreme prices or across \nthe edges of congestion zones, which will change its angle as well as its message. If \nyou’re in a mood to buy, you can draw your trendline a little steeper. If you feel like \nshorting and squint at a chart, you’ll “recognize” a head-and-shoulders top. None \nof those patterns are objective. Because of their subjectivity, I’ve grown increas-\ningly skeptical of claims regarding classical formations, such as pennants, head-and-\nshoulders, etc.", - "type": "text" - } - ] - }, - { - "page_num": 66, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p66-b0", - "global_id": 635, - "bbox": [ - 72.0, - 33.66, - 431.98, - 47.21 - ], - "text": "50\t\nCLASSICAL CHART ANALYSIS", - "type": "text" - }, - { - "block_id": "p66-b1", - "global_id": 636, - "bbox": [ - 72.0, - 57.83, - 434.72, - 113.15 - ], - "text": "After having looked at hundreds of thousands of charts, I’ve concluded that the \nmarket doesn’t know diagonals. It remembers price levels, which is why horizontal \nsupport and resistance lines make sense, but diagonal trendlines are subjective and \nopen to self-deception.", - "type": "text" - }, - { - "block_id": "p66-b2", - "global_id": 637, - "bbox": [ - 72.0, - 113.84, - 434.75, - 197.17 - ], - "text": "In my own trading, I use only a small number of chart patterns that are objective \nenough to trust. I pay attention to support and resistance zones, based on horizontal \nprice levels. The relationship between the opening and closing prices and between \nthe high and the low points of a price bar or a candle are also objective. I recognize \n“fingers,” also called “kangaroo tails”— very long bars that protrude from a tight \nweave of prices. We’ll explore these and a few other patterns in this section.", - "type": "text" - }, - { - "block_id": "p66-b3", - "global_id": 638, - "bbox": [ - 73.55, - 224.86, - 184.53, - 243.5 - ], - "text": "■\n■17. Charting", - "type": "text" - }, - { - "block_id": "p66-b4", - "global_id": 639, - "bbox": [ - 72.0, - 253.83, - 434.74, - 309.15 - ], - "text": "Chartists study market data to identify price patterns and profit from them. Most \nchartists work with bar or candlestick graphs that show open, high, low, and closing \nprices and volume. Futures traders also watch open interest. Point-and-figure char-\ntists track only price changes and ignore time, volume, and open interest.", - "type": "text" - }, - { - "block_id": "p66-b5", - "global_id": 640, - "bbox": [ - 72.0, - 309.84, - 434.71, - 351.16 - ], - "text": "Classical charting requires only a pencil and paper. It appeals to visually oriented \npeople. Those who plot data by hand can develop a physical feel for prices. One of \nthe costs of switching to computerized charting is losing some of that feel.", - "type": "text" - }, - { - "block_id": "p66-b6", - "global_id": 641, - "bbox": [ - 72.0, - 351.86, - 434.74, - 393.17 - ], - "text": "The biggest problem with classical charting is wishful thinking. Traders seem \nto identify bullish or bearish patterns, depending on whether they’re in a mood to \nbuy or sell.", - "type": "text" - }, - { - "block_id": "p66-b7", - "global_id": 642, - "bbox": [ - 72.0, - 393.87, - 434.77, - 491.2 - ], - "text": "Early in the twentieth century, Herman Rorschach, a Swiss psychiatrist, designed \na test for exploring a person’s mind. He dropped ink on 10 sheets of paper and \nfolded each in half, creating symmetrical inkblots. Most people who peer at these \nsheets describe what they see: parts of the anatomy, animals, buildings, and so on. In \nreality, there are only inkblots! Each person sees what’s on his mind. Most traders \nuse charts as a giant Rorschach test. They project their hopes, fears, and fantasies \nonto the charts.", - "type": "text" - }, - { - "block_id": "p66-b8", - "global_id": 643, - "bbox": [ - 72.0, - 511.2, - 153.9, - 528.14 - ], - "text": "Brief History", - "type": "text" - }, - { - "block_id": "p66-b9", - "global_id": 644, - "bbox": [ - 72.0, - 533.83, - 434.75, - 603.15 - ], - "text": "The first chartists in the United States appeared at the turn of the twentieth century. \nThey included Charles Dow (1851–1902), the author of a famous stock market theory, \nand William Hamilton, who succeeded Dow as the editor of The Wall Street Journal. \nDow’s famous maxim was “The averages discount everything,” by which he meant \nthat the Industrial and Rail Averages reflected all knowledge about the economy.", - "type": "text" - }, - { - "block_id": "p66-b10", - "global_id": 645, - "bbox": [ - 72.0, - 603.85, - 434.74, - 673.17 - ], - "text": "Dow never wrote a book, only his Wall Street Journal editorials. Hamilton took \nover the job after Dow died and laid out the principles of Dow theory in his book, \nThe Stock Market Barometer. He wrote a famous “The Turn of the Tide” editorial fol-\nlowing the 1929 crash. Robert Rhea, a newsletter publisher, brought the theory to \nits pinnacle in his 1932 book, The Dow Theory.", - "type": "text" - } - ] - }, - { - "page_num": 67, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p67-b0", - "global_id": 646, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "17. CHARTING\t\n51", - "type": "text" - }, - { - "block_id": "p67-b1", - "global_id": 647, - "bbox": [ - 72.04, - 57.83, - 434.76, - 155.16 - ], - "text": "The decade of the 1930s was the Golden Age of charting. Many innovators \nfound themselves with time on their hands after the crash of 1929. Schabacker, Rhea, \nElliott, Wyckoff, Gann, and others published their books during that decade. They \nwent in two distinct directions. Some, such as Wyckoff and Schabacker, saw charts as \na graphic record of supply and demand. Others, such as Elliott and Gann, searched \nfor a perfect order in the markets—a fascinating but ultimately futile undertaking \n(see Chapter 5).", - "type": "text" - }, - { - "block_id": "p67-b2", - "global_id": 648, - "bbox": [ - 72.04, - 155.86, - 434.78, - 211.18 - ], - "text": "In 1948, Edwards (a son-in-law of Schabacker) and Magee published Technical \nAnalysis of Stock Trends, in which they popularized such concepts as triangles, rectan-\ngles, head-and-shoulders, and other chart formations, as well as support, resistance, \nand trendlines. Other chartists applied these concepts to commodities.", - "type": "text" - }, - { - "block_id": "p67-b3", - "global_id": 649, - "bbox": [ - 72.04, - 211.87, - 434.79, - 309.2 - ], - "text": "Markets have changed a great deal since the days of Edwards and Magee. In the \n1940s, the daily volume of an active stock on the New York Stock Exchange was only \nseveral hundred shares, while now it is measured in millions. The balance of power in \nthe stock market has shifted in favor of bulls. Early chartists wrote that stock market \ntops were sharp and fast, while bottoms took a long time to develop. That was true in \ntheir deflationary era, but the opposite has been true since the 1950s. Now bottoms \ntend to form quickly, while tops tend to take longer.", - "type": "text" - }, - { - "block_id": "p67-b4", - "global_id": 650, - "bbox": [ - 72.0, - 329.2, - 243.66, - 346.14 - ], - "text": "The Meaning of a Bar Chart", - "type": "text" - }, - { - "block_id": "p67-b5", - "global_id": 651, - "bbox": [ - 72.0, - 351.83, - 434.71, - 407.15 - ], - "text": "Chart patterns reflect the sum of buying and selling, greed and fear among investors \nand traders. Many charts in this book are daily, with each bar representing one trad-\ning day, but the rules for understanding weekly, daily, or intraday charts are remark-\nably similar.", - "type": "text" - }, - { - "block_id": "p67-b6", - "global_id": 652, - "bbox": [ - 72.0, - 407.84, - 434.77, - 449.16 - ], - "text": "Remember this key principle: “Each price is a momentary consensus of value of all market \nparticipants expressed in action.” Based on it, each price bar provides several important \npieces of information about the tug-of-war between bulls and bears (Figure 17.1).", - "type": "text" - }, - { - "block_id": "p67-b7", - "global_id": 653, - "bbox": [ - 72.0, - 449.69, - 434.74, - 505.18 - ], - "text": "The opening price of a daily bar tends to reflect the amateurs’ opinion of value. \nThey read morning papers, find out what happened the day before, perhaps ask for \na wife’s approval to buy or sell, and place their orders before driving to work. Ama-\nteurs are especially active early in the day and early in the week.", - "type": "text" - }, - { - "block_id": "p67-b8", - "global_id": 654, - "bbox": [ - 72.0, - 505.87, - 434.76, - 561.19 - ], - "text": "Traders who researched the relationship between opening and closing prices \nfound that opening prices most often occur near the high or the low of the daily bar. \nBuying or selling by amateurs early in the day creates an emotional extreme from \nwhich prices tend to recoil later in the day.", - "type": "text" - }, - { - "block_id": "p67-b9", - "global_id": 655, - "bbox": [ - 72.0, - 561.89, - 434.71, - 617.21 - ], - "text": "In bull markets, prices often make their low for the week on Monday or Tuesday, \nwhen amateurs take profits from the previous week, then rally to a new high on \nThursday or Friday. In bear markets, the high for the week is often set on Monday or \nTuesday, with a new low toward the end of the week.", - "type": "text" - }, - { - "block_id": "p67-b10", - "global_id": 656, - "bbox": [ - 72.0, - 617.74, - 434.66, - 673.22 - ], - "text": "The closing prices of daily and weekly bars tend to reflect the actions of profes-\nsional traders. They watch the markets throughout the day, respond to changes, and \ntend to dominate the last hour of trading. Many of them take profits at that time to \navoid carrying trades overnight.", - "type": "text" - } - ] - }, - { - "page_num": 68, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p68-b0", - "global_id": 657, - "bbox": [ - 72.0, - 33.66, - 431.98, - 47.21 - ], - "text": "52\t\nCLASSICAL CHART ANALYSIS", - "type": "text" - }, - { - "block_id": "p68-b1", - "global_id": 658, - "bbox": [ - 72.0, - 377.83, - 434.75, - 503.17 - ], - "text": "Professionals as a group usually trade against the amateurs. They tend to buy low-\ner openings, sell short higher openings, and unwind their positions as the day goes \non. Traders need to pay attention to the relationship between opening and closing \nprices. If prices closed higher than they opened, then market professionals were probably more \nbullish than amateurs. If prices closed lower than they opened, then market professionals were \nprobably more bearish than amateurs. It pays to trade with the professionals and against \nthe amateurs. Candlestick charting is based, to a large extent, on the relationship \nbetween the opening and closing prices of each bar. If the close is higher, the candle \nis white, but if it is lower, the candle is black.", - "type": "text" - }, - { - "block_id": "p68-b2", - "global_id": 659, - "bbox": [ - 72.0, - 503.7, - 434.76, - 587.14 - ], - "text": "The high of each bar represents the maximum power of bulls during that bar. \nBulls make money when prices go up. Their buying pushes prices higher, and every \nuptick adds to their profits. Finally, bulls reach a point where they cannot lift prices—\nnot even by one more tick.1 The high of a daily bar represents the maximum power \nof bulls during the day, while the high of a weekly bar marks the maximum power of \nbulls during the week.", - "type": "text" - }, - { - "block_id": "p68-b3", - "global_id": 660, - "bbox": [ - 84.0, - 588.09, - 398.47, - 600.88 - ], - "text": "The highest point of a bar represents the maximum power of bulls during that bar.", - "type": "text" - }, - { - "block_id": "p68-b4", - "global_id": 661, - "bbox": [ - 72.0, - 226.18, - 248.44, - 236.23 - ], - "text": "FIGURE 17.1  TSLA daily. (Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p68-b5", - "global_id": 662, - "bbox": [ - 72.0, - 242.03, - 211.8, - 254.93 - ], - "text": "The Meaning of a Bar Chart", - "type": "text" - }, - { - "block_id": "p68-b6", - "global_id": 663, - "bbox": [ - 72.0, - 258.93, - 434.12, - 305.42 - ], - "text": "Opening prices are set by amateurs, whose orders accumulate overnight and hit the \nmarket in the morning. Closing prices are largely set by market professionals who trade \nthroughout the day. You can see a reflection of their conflict in how often opening and clos-\ning prices occur at the opposite ends of price bars.", - "type": "text" - }, - { - "block_id": "p68-b7", - "global_id": 664, - "bbox": [ - 72.0, - 306.92, - 434.11, - 341.41 - ], - "text": "The high of each bar marks the maximum power of bulls during that bar. The low of \neach bar marks the maximum power of bears during that bar. Slippage tends to be less \nwhen you enter or exit positions during short bars.", - "type": "text" - }, - { - "block_id": "p68-b8", - "global_id": 665, - "bbox": [ - 72.0, - 637.2, - 432.88, - 672.33 - ], - "text": "1A tick is the smallest price change allowed for any given trading vehicle. It may be one cent or even \none hundredth of a cent (depending on the stock), a quarter point for S&P e-minis, 10 cents for \ngold futures, etc.", - "type": "text" - } - ] - }, - { - "page_num": 69, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p69-b0", - "global_id": 666, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "17. CHARTING\t\n53", - "type": "text" - }, - { - "block_id": "p69-b1", - "global_id": 667, - "bbox": [ - 72.04, - 57.66, - 434.79, - 141.16 - ], - "text": "The low of each bar represents the maximum power of bears during that bar. \nBears make money when prices decline. They keep selling short, their selling pushes \nprices lower, and every downtick adds to their profits. At some point they run out of \neither capital or enthusiasm, and prices stop falling. The low of a daily bar marks the \nmaximum power of bears during that day, and the low of a weekly bar identifies \nthe maximum power of bears during that week.", - "type": "text" - }, - { - "block_id": "p69-b2", - "global_id": 668, - "bbox": [ - 72.04, - 142.1, - 434.79, - 225.18 - ], - "text": "The low of each bar shows the maximum power of bears during that bar.\nThe closing price of each bar reveals the outcome of the battle between bulls \nand bears during that bar. If prices close near the high of the daily bar, it shows that \nbulls won the day’s battle. If prices close near the low of the day, it shows that bears \nwon the day. Closing prices on the daily charts of futures are especially important \nbecause your account equity is “marked to market” each night.", - "type": "text" - }, - { - "block_id": "p69-b3", - "global_id": 669, - "bbox": [ - 72.04, - 225.71, - 434.79, - 295.2 - ], - "text": "The distance between the high and the low of any bar reflects the intensity \nof conflict between bulls and bears. An average bar marks a relatively cool market. A \nbar that’s only half as tall as average reveals a sleepy, disinterested market. A bar that’s \ntwo times taller than average shows a boiling market where bulls and bears battle all \nover the field.", - "type": "text" - }, - { - "block_id": "p69-b4", - "global_id": 670, - "bbox": [ - 72.04, - 295.9, - 434.79, - 351.22 - ], - "text": "Slippage (see the Introduction) tends to be less in quiet markets. It pays to enter \ntrades during short or normal bars. Tall bars are good for taking profits. Trying to \nenter a position when the market is running is like jumping onto a moving train. It \nwould be safer to wait for the next one.", - "type": "text" - }, - { - "block_id": "p69-b5", - "global_id": 671, - "bbox": [ - 72.0, - 371.2, - 208.63, - 388.14 - ], - "text": "Japanese Candlesticks", - "type": "text" - }, - { - "block_id": "p69-b6", - "global_id": 672, - "bbox": [ - 72.0, - 393.83, - 434.75, - 463.15 - ], - "text": "Japanese rice traders began using candlestick charts some two centuries before the \nfirst chartists appeared in America. Instead of bars, their charts had rows of candles \nwith wicks at both ends. The body of each candle represents the distance between \nthe opening and closing prices. If the closing price is higher than the opening, the \nbody is white, but if the closing price is lower, the body is black.", - "type": "text" - }, - { - "block_id": "p69-b7", - "global_id": 673, - "bbox": [ - 72.0, - 463.85, - 434.72, - 533.17 - ], - "text": "The tip of the upper wick represents the high of the day, while the bottom of the \nlower wick represents the low of the day. The Japanese consider highs and lows rela-\ntively unimportant, according to Steve Nison, author of Japanese Candlestick Charting \nTechniques. They focus on the relationship between opening and closing prices and on \npatterns that include several candles.", - "type": "text" - }, - { - "block_id": "p69-b8", - "global_id": 674, - "bbox": [ - 72.0, - 533.87, - 434.69, - 589.19 - ], - "text": "The main advantage of a candlestick chart is its focus on the struggle between \namateurs who control openings and professionals who control closings. Unfortu-\nnately, many candlestick chartists neglect Western tools, such as volume and techni-\ncal indicators.", - "type": "text" - }, - { - "block_id": "p69-b9", - "global_id": 675, - "bbox": [ - 72.0, - 589.88, - 434.75, - 645.2 - ], - "text": "Candlesticks have become quite popular worldwide, and some traders ask me \nwhy I continue to use bar charts. I am familiar with candlesticks, but I’ve learned to \ntrade using bar charts, and I believe that using open-high-low-close bars plus techni-\ncal indicators gives me more information.", - "type": "text" - }, - { - "block_id": "p69-b10", - "global_id": 676, - "bbox": [ - 72.0, - 645.9, - 434.68, - 673.21 - ], - "text": "Your choice of a bar or a candlestick chart is a matter of personal preference. All \nconcepts expressed in this book can be used with candlestick as well as bar charts.", - "type": "text" - } - ] - }, - { - "page_num": 70, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p70-b0", - "global_id": 677, - "bbox": [ - 72.0, - 33.66, - 431.98, - 47.21 - ], - "text": "54\t\nCLASSICAL CHART ANALYSIS", - "type": "text" - }, - { - "block_id": "p70-b1", - "global_id": 678, - "bbox": [ - 72.0, - 57.1, - 364.88, - 89.04 - ], - "text": "Efficient Markets, Random Walk, Chaos Theory, \nand “Nature’s Law”", - "type": "text" - }, - { - "block_id": "p70-b2", - "global_id": 679, - "bbox": [ - 72.0, - 93.73, - 434.74, - 177.06 - ], - "text": "Efficient Market theory is an academic notion that nobody can outperform the mar-\nket because any price at any given moment incorporates all available information. \nWarren Buffett, one of the most successful investors of the century, commented: \n“I think it’s fascinating how the ruling orthodoxy can cause a lot of people to think \nthe earth is flat. Investing in a market where people believe in efficiency is like play-\ning bridge with someone who’s been told it doesn’t do any good to look at the cards.”", - "type": "text" - }, - { - "block_id": "p70-b3", - "global_id": 680, - "bbox": [ - 72.0, - 177.75, - 434.68, - 233.07 - ], - "text": "The logical flaw of Efficient Market theory is that it equates knowledge with ac-\ntion. People may have knowledge, but the emotional pull of the crowd often leads \nthem to trade irrationally. A good analyst can detect repetitive patterns of crowd \nbehavior on his charts and exploit them.", - "type": "text" - }, - { - "block_id": "p70-b4", - "global_id": 681, - "bbox": [ - 71.96, - 243.73, - 434.67, - 299.05 - ], - "text": "Random Walk theorists claim that market prices change at random. Sure, there is \na fair bit of randomness or “noise” in the markets, just as there is randomness in any \ncrowd. Still, an intelligent observer can identify repetitive behavior patterns of \na crowd and make sensible bets on their continuation or reversal.", - "type": "text" - }, - { - "block_id": "p70-b5", - "global_id": 682, - "bbox": [ - 71.96, - 299.74, - 434.64, - 341.06 - ], - "text": "People have memories; they remember past prices, and their memories influence \ntheir decisions to buy or sell. Memories help create support under the market and \nresistance above it. Random Walkers deny that memories influence our behavior.", - "type": "text" - }, - { - "block_id": "p70-b6", - "global_id": 683, - "bbox": [ - 71.96, - 341.76, - 434.71, - 425.08 - ], - "text": "As Milton Friedman pointed out, prices carry information about the availability \nof supply and the intensity of demand. Market participants use that information \nwhen deciding to buy or sell. For example, consumers buy more merchandise when \nit is on sale and less when prices are high. Financial traders are just as capable of logi-\ncal behavior as homemakers. When prices are low, bargain hunters step in. A short-\nage can lead to a buying panic, but high prices choke off demand.", - "type": "text" - }, - { - "block_id": "p70-b7", - "global_id": 684, - "bbox": [ - 71.97, - 435.73, - 434.7, - 463.04 - ], - "text": "Chaos Theory has achieved prominence in the recent decades. Markets are largely \nchaotic, and the only time you can have an edge is during orderly periods.", - "type": "text" - }, - { - "block_id": "p70-b8", - "global_id": 685, - "bbox": [ - 71.97, - 463.74, - 434.72, - 519.06 - ], - "text": "In my view, markets are chaotic much of the time, but out of that chaos, islands of \norder and structure keep emerging and disappearing. The essence of market analysis \nis recognizing the emergence of orderly patterns and having enough courage and \nconviction to trade them.", - "type": "text" - }, - { - "block_id": "p70-b9", - "global_id": 686, - "bbox": [ - 71.97, - 519.75, - 434.73, - 617.08 - ], - "text": "If you trade during chaotic periods, the only ones to benefit will be your broker, \nwho’ll collect his commission, and a professional day-trader, who’ll scalp you. The \nkey point to keep in mind is that once in a while a pattern emerges from chaos. Your \nsystem should recognize this transition, and that’s when you should put on a trade! \nEarlier we spoke about the one great advantage of a private trader over profession-\nals—he may wait for a good trade instead of having to be active each day. The chaos \ntheory confirms that message.", - "type": "text" - }, - { - "block_id": "p70-b10", - "global_id": 687, - "bbox": [ - 71.97, - 617.78, - 434.72, - 673.1 - ], - "text": "The chaos theory also teaches us that orderly structures that emerge from chaos \nare fractal. The sea coast appears equally jagged whether you look down on it from \nspace or an airplane, from a standing position or on your knees through a magnify-\ning glass. Market patterns are fractal as well. If I show you a set of charts of the same", - "type": "text" - } - ] - }, - { - "page_num": 71, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p71-b0", - "global_id": 688, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "18. SUPPORT AND RESISTANCE\t\n55", - "type": "text" - }, - { - "block_id": "p71-b1", - "global_id": 689, - "bbox": [ - 72.04, - 57.83, - 434.76, - 141.16 - ], - "text": "market, having removed time markings, you will not be able to tell whether it is \nmonthly, weekly, daily, or a 5-minute chart. Later in this book (Chapter 39), we’ll \nreturn to this theme, and you’ll see why it is so important to analyze markets in \nmore than one timeframe. We’ll have to make sure that buy or sell messages in both \ntimeframes confirm each other, because if they don’t it means that the market is too \nchaotic and we should stand aside.", - "type": "text" - }, - { - "block_id": "p71-b2", - "global_id": 690, - "bbox": [ - 71.98, - 155.83, - 434.68, - 211.15 - ], - "text": "Nature’s Law is the rallying cry of a clutch of mystics who claim there is a perfect \norder in the markets (which they’ll reveal to you for a price). They say that markets \nmove like clockwork in response to immutable natural laws. R. N. Elliott even titled \nhis last book Nature’s Law.", - "type": "text" - }, - { - "block_id": "p71-b3", - "global_id": 691, - "bbox": [ - 71.98, - 211.84, - 434.69, - 267.16 - ], - "text": "The “perfect order” crowd gravitates to astrology, numerology, conspiracy theory, \nand other superstitions. Next time someone talks to you about natural order in the \nmarkets, ask him about astrology. He’ll probably jump at the chance to come out of \nthe closet and talk about the stars.", - "type": "text" - }, - { - "block_id": "p71-b4", - "global_id": 692, - "bbox": [ - 71.98, - 267.86, - 434.64, - 309.18 - ], - "text": "The believers in perfect order in the markets claim that tops and bottoms can be \npredicted far into the future. Amateurs love forecasts, and mysticism is a great mar-\nketing gimmick. It helps sell courses, trading systems, and newsletters.", - "type": "text" - }, - { - "block_id": "p71-b5", - "global_id": 693, - "bbox": [ - 71.98, - 309.87, - 434.63, - 337.18 - ], - "text": "Mystics, Random Walk academics, and Efficient Market theorists have one trait in \ncommon. They are equally divorced from the reality of the markets.", - "type": "text" - }, - { - "block_id": "p71-b6", - "global_id": 694, - "bbox": [ - 73.55, - 366.86, - 299.27, - 385.5 - ], - "text": "■\n■18. Support and Resistance", - "type": "text" - }, - { - "block_id": "p71-b7", - "global_id": 695, - "bbox": [ - 72.0, - 395.83, - 434.72, - 465.15 - ], - "text": "A ball hits the floor and bounces. Toss it up, and it’ll drop after hitting the ceiling. \nSupport and resistance are like a floor and a ceiling, with prices sandwiched between \nthem. Understanding support and resistance is essential for understanding price \ntrends. Rating their strength helps you decide whether the trend is likely to punch \nthrough or to reverse.", - "type": "text" - }, - { - "block_id": "p71-b8", - "global_id": 696, - "bbox": [ - 72.0, - 465.68, - 434.71, - 521.17 - ], - "text": "Support is a price level where buying is strong enough to interrupt or reverse \na downtrend. When a downtrend hits support, it bounces like a diver who hits the \nbottom and pushes away from it. Support is represented on a chart by a horizontal \nline connecting two or more bottoms (Figure 18.1).", - "type": "text" - }, - { - "block_id": "p71-b9", - "global_id": 697, - "bbox": [ - 72.0, - 521.7, - 434.75, - 577.18 - ], - "text": "Resistance is a price level where selling is strong enough to interrupt or reverse \nan uptrend. When an uptrend hits resistance, it acts like a man who hits his head on \na branch while climbing a tree—he stops and may even tumble down. Resistance is \nrepresented on a chart by a horizontal line connecting two or more tops.", - "type": "text" - }, - { - "block_id": "p71-b10", - "global_id": 698, - "bbox": [ - 72.0, - 577.88, - 434.74, - 633.2 - ], - "text": "It is better to draw support and resistance lines across the edges of congestion \nareas where the bulk of the bars stopped rather than across extreme prices. Those \ncongestion zones show where masses of traders have changed their minds, while the \nextreme points reflect only panic among the weakest traders.", - "type": "text" - }, - { - "block_id": "p71-b11", - "global_id": 699, - "bbox": [ - 72.0, - 633.9, - 434.72, - 675.21 - ], - "text": "Minor support or resistance causes trends to pause, while major support or resis-\ntance causes them to reverse. Traders buy at support and sell at resistance, making \ntheir effectiveness a self-fulfilling prophecy.", - "type": "text" - } - ] - }, - { - "page_num": 72, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p72-b0", - "global_id": 700, - "bbox": [ - 72.0, - 33.66, - 431.98, - 47.21 - ], - "text": "56\t\nCLASSICAL CHART ANALYSIS", - "type": "text" - }, - { - "block_id": "p72-b1", - "global_id": 701, - "bbox": [ - 72.0, - 407.06, - 434.75, - 462.55 - ], - "text": "How do we identify trends? Not by trendlines. My favorite tools are expo-\nnential moving averages that we’ll review in the next section. Trendlines are wildly \nsubjective—they are among the most self-deceptive tools. Trend identification is an \narea in which computerized analysis is miles ahead of classical charting.", - "type": "text" - }, - { - "block_id": "p72-b2", - "global_id": 702, - "bbox": [ - 72.0, - 482.6, - 243.51, - 499.54 - ], - "text": "Memories, Pain, and Regret", - "type": "text" - }, - { - "block_id": "p72-b3", - "global_id": 703, - "bbox": [ - 72.0, - 505.23, - 434.68, - 546.28 - ], - "text": "Our memories of previous market turns prompt us to buy and sell at certain levels. \nBuying and selling by crowds create support and resistance. Support and resistance exist \nbecause people have memories.", - "type": "text" - }, - { - "block_id": "p72-b4", - "global_id": 704, - "bbox": [ - 72.0, - 547.24, - 434.76, - 602.56 - ], - "text": "If traders remember that prices have recently stopped falling and turned up from \na certain level, they are likely to buy when prices approach that level again. If traders \nremember that an uptrend has recently reversed after rising to a certain peak, they \ntend to sell and go short when prices approach that level again.", - "type": "text" - }, - { - "block_id": "p72-b5", - "global_id": 705, - "bbox": [ - 72.0, - 603.26, - 434.7, - 686.58 - ], - "text": "For example, all major rallies in the stock market from 1966 until 1982 ended \nwhenever the Dow Jones Industrial Average rallied into the area between 950 and \n1050. That resistance zone was so strong that traders named it “a graveyard in the \nsky.” Once the bulls rammed the market through that level, it became a major sup-\nport area. In recent years, we saw a similar occurrence in gold, whose chart is shown \nhere (Figure 18.2). It hit the level of $1,000/oz four times, dropping after each", - "type": "text" - }, - { - "block_id": "p72-b6", - "global_id": 706, - "bbox": [ - 72.0, - 224.18, - 255.38, - 234.23 - ], - "text": "FIGURE 18.1  NFLX weekly. (Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p72-b7", - "global_id": 707, - "bbox": [ - 72.0, - 240.03, - 194.46, - 252.93 - ], - "text": "Support and Resistance", - "type": "text" - }, - { - "block_id": "p72-b8", - "global_id": 708, - "bbox": [ - 72.0, - 256.93, - 434.14, - 327.41 - ], - "text": "Draw horizontal lines across the upper and lower edges of congestion areas. The bottom \nline marks the level of support at which buyers overcome sellers. The upper line identifies \nresistance, where sellers overpower buyers. Support and resistance areas often switch \nroles. Note how after a decisive upside breakout in area 1 prices hit resistance, but when \nthey broke above that level it turned into a zone of support (marked 2). The strength of \nthese barriers increases each time prices touch them and bounce away.", - "type": "text" - }, - { - "block_id": "p72-b9", - "global_id": 709, - "bbox": [ - 72.0, - 328.91, - 434.15, - 375.4 - ], - "text": "Beware of false breakouts from support and resistance. They are marked by letter “F” \non this chart. Amateurs tend to follow breakouts, while professionals tend to fade (trade \nagainst) them. At the right edge of the chart NFLX is rallying from support at the level where \nits previous rally ran into resistance.", - "type": "text" - } - ] - }, - { - "page_num": 73, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p73-b0", - "global_id": 710, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "18. SUPPORT AND RESISTANCE\t\n57", - "type": "text" - }, - { - "block_id": "p73-b1", - "global_id": 711, - "bbox": [ - 72.04, - 379.31, - 434.67, - 406.62 - ], - "text": "attempt. After the price of gold broke above that level on its fifth attempt, the level \nof $1,000/oz turned into a massive support level.", - "type": "text" - }, - { - "block_id": "p73-b2", - "global_id": 712, - "bbox": [ - 72.04, - 407.32, - 434.79, - 504.65 - ], - "text": "Support and resistance exist because masses of traders feel pain and regret. Trad-\ners who hold losing positions feel intense pain. Losers are determined to get out as \nsoon as the market gives them another chance. Traders who missed an opportunity \nto buy or sell short feel regret and also wait for the market to give them a second \nchance. Feelings of pain and regret are mild in trading ranges when swings are rela-\ntively small and losers do not get hurt too badly. Breakouts from those ranges create \nmuch more intense pain and regret.", - "type": "text" - }, - { - "block_id": "p73-b3", - "global_id": 713, - "bbox": [ - 72.04, - 505.34, - 434.78, - 602.75 - ], - "text": "When the market stays flat for a while, traders get used to buying near the lower \nedge of its range and selling or even shorting near the upper edge. When an uptrend \nbegins, bears who sold short feel a great deal of pain. At the same time bulls feel an \nintense regret that they didn’t buy more. Both are determined to buy if the market \ndeclines to the breakout point and gives them a second chance to cover shorts or \nto get long. The pain of bears and regret of bulls makes them eager to buy, creating \nsupport during reactions in an uptrend.", - "type": "text" - }, - { - "block_id": "p73-b4", - "global_id": 714, - "bbox": [ - 72.04, - 603.37, - 434.74, - 686.7 - ], - "text": "When prices break down from a trading range, bulls who bought are in pain: \nthey feel trapped and wait for a rally to get out even. Bears, on the other hand, re-\ngret that they haven’t shorted more: they wait for a rally as a second chance to sell \nshort. Bulls’ pain and bears’ regret create resistance—a ceiling above the market \nin downtrends. The strength of support and resistance depends on the strength of \nfeelings among masses of traders.", - "type": "text" - }, - { - "block_id": "p73-b5", - "global_id": 715, - "bbox": [ - 72.0, - 226.38, - 252.01, - 236.43 - ], - "text": "FIGURE 18.2  Gold weekly. (Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p73-b6", - "global_id": 716, - "bbox": [ - 72.0, - 242.23, - 225.44, - 255.13 - ], - "text": "Resistance Turns into Support", - "type": "text" - }, - { - "block_id": "p73-b7", - "global_id": 717, - "bbox": [ - 72.0, - 259.13, - 434.11, - 305.62 - ], - "text": "Notice how gold hit its overhead resistance at the $1,000/oz. level five times. Usually, \nreversals occur on the first, second or third hit. When a market hits the same level for the \nfourth time, it shows that it really wants to go that way. Gold broke above $1,000/oz. on \nits fifth attempt.", - "type": "text" - }, - { - "block_id": "p73-b8", - "global_id": 718, - "bbox": [ - 72.0, - 307.12, - 434.08, - 341.61 - ], - "text": "Afterwards, gold made two attempts to pull down to its old resistance level, in areas \nmarked 6 and 7. Its inability to decline to that level showed that bears were weak, marking \nthe start of a major bull market in gold.", - "type": "text" - } - ] - }, - { - "page_num": 74, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p74-b0", - "global_id": 719, - "bbox": [ - 72.0, - 33.66, - 431.98, - 47.21 - ], - "text": "58\t\nCLASSICAL CHART ANALYSIS", - "type": "text" - }, - { - "block_id": "p74-b1", - "global_id": 720, - "bbox": [ - 72.0, - 57.1, - 291.3, - 74.04 - ], - "text": "Strength of Support and Resistance", - "type": "text" - }, - { - "block_id": "p74-b2", - "global_id": 721, - "bbox": [ - 72.0, - 79.73, - 434.71, - 163.06 - ], - "text": "The longer prices stay in a congestion zone, the stronger the emotional commitment \nof bulls and bears to that area. A congestion area hit by several trends is like a battle-\nfield with craters from explosions: its defenders have plenty of cover and are likely to \nslow down any attacking force. When prices approach that zone from above, it serves \nas support. When prices rally into it from below, it acts as resistance. A congestion \narea can reverse those roles, serving as either support or resistance.", - "type": "text" - }, - { - "block_id": "p74-b3", - "global_id": 722, - "bbox": [ - 72.0, - 163.75, - 434.75, - 205.07 - ], - "text": "The strength of those zones depends on three factors: their length, height, and \nthe volume of trading that has taken place in them. You can visualize these factors \nas the length, the width, and the depth of a congestion zone.", - "type": "text" - }, - { - "block_id": "p74-b4", - "global_id": 723, - "bbox": [ - 72.0, - 206.02, - 434.76, - 289.09 - ], - "text": "The longer a support or resistance area—its length of time or the number of hits it took—\nthe stronger it is. Support and resistance, like good wine, become better with age. A \n2-week trading range provides only minimal support or resistance, a 2-month range \ngives people time to become used to it and creates intermediate support or resis-\ntance, while a 2-year range becomes accepted as a standard of value and offers major \nsupport or resistance.", - "type": "text" - }, - { - "block_id": "p74-b5", - "global_id": 724, - "bbox": [ - 72.0, - 289.79, - 434.71, - 373.12 - ], - "text": "As support and resistance levels grow very old, they gradually become weaker. \nLosers keep washing out of the markets, replaced by newcomers who don’t have the \nsame emotional commitment to very old price levels. People who lost money only \nrecently remember full well what happened to them. They are probably still in the \nmarket, feeling pain and regret, trying to get even. People who made bad decisions \nseveral years ago may well be out of that market, and their memories matter less.", - "type": "text" - }, - { - "block_id": "p74-b6", - "global_id": 725, - "bbox": [ - 72.0, - 373.81, - 434.74, - 415.13 - ], - "text": "The strength of support and resistance increases each time that area is hit. When \ntraders see that prices have reversed at a certain level, they tend to bet on a reversal \nthe next time prices reach that level.", - "type": "text" - }, - { - "block_id": "p74-b7", - "global_id": 726, - "bbox": [ - 72.0, - 415.82, - 434.74, - 485.15 - ], - "text": "The taller the support and resistance zone, the stronger it is. A tall congestion zone is \nlike a tall fence around a property. If a congestion zone’s height equals one percent \nof current market value, it provides only minor support or resistance. If it’s three \npercent tall, it provides intermediate support or resistance, and a congestion zone \nthat’s seven percent tall or higher can grind down a major trend.", - "type": "text" - }, - { - "block_id": "p74-b8", - "global_id": 727, - "bbox": [ - 72.0, - 485.84, - 434.7, - 541.16 - ], - "text": "The greater the volume of trading in a support and resistance zone, the stronger it is. \nHigh volume shows active involvement by traders—a sign of strong emotional com-\nmitment. Low volume shows that traders have little interest in transacting at that \nlevel—a sign of weak support or resistance.", - "type": "text" - }, - { - "block_id": "p74-b9", - "global_id": 728, - "bbox": [ - 72.0, - 541.86, - 434.74, - 611.18 - ], - "text": "You can measure the strength of support and resistance in dollars if you multiply \nthe number of days a stock spent in its congestion zone by its average daily volume \nand price. Of course, when making such comparisons, we should measure support \nand resistance zones for the same stock. You can’t compare apples with oranges or \nAAPL with some $10 stock that trades a million shares on a good day.", - "type": "text" - }, - { - "block_id": "p74-b10", - "global_id": 729, - "bbox": [ - 72.0, - 632.1, - 158.03, - 649.04 - ], - "text": "Trading Rules", - "type": "text" - }, - { - "block_id": "p74-b11", - "global_id": 730, - "bbox": [ - 76.0, - 654.73, - 434.66, - 682.04 - ], - "text": "1.\tWhenever the trend you’re riding approaches support or resistance, tighten \nyour protective stop.", - "type": "text" - } - ] - }, - { - "page_num": 75, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p75-b0", - "global_id": 731, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "18. SUPPORT AND RESISTANCE\t\n59", - "type": "text" - }, - { - "block_id": "p75-b1", - "global_id": 732, - "bbox": [ - 88.0, - 57.66, - 434.75, - 99.14 - ], - "text": "A protective stop is an order to sell below the market when you are long or \nto cover shorts above the market when you are short. A stop protects you from \ngetting badly hurt by a reversal.", - "type": "text" - }, - { - "block_id": "p75-b2", - "global_id": 733, - "bbox": [ - 88.0, - 102.84, - 434.72, - 158.16 - ], - "text": "A trend reveals its health by how it acts when it hits support or resistance. If \nit’s strong enough to penetrate that zone, your tight stop will not be triggered. \nIf a trend bounces away from support or resistance, it reveals its weakness. In that \ncase, your tight stop will salvage a good chunk of profits.", - "type": "text" - }, - { - "block_id": "p75-b3", - "global_id": 734, - "bbox": [ - 76.0, - 164.86, - 434.72, - 265.2 - ], - "text": "2.\tSupport and resistance are more important on long-term charts than on short-\nterm charts.\nA good trader monitors his market using several timeframes, but assigns more \nweight to the longer ones. Weekly charts are more important than dailies. If the \nweekly trend is strong, it is less alarming that the daily trend is hitting resistance. \nWhen a weekly trend approaches major support or resistance, you should be \nmore inclined to exit.", - "type": "text" - }, - { - "block_id": "p75-b4", - "global_id": 735, - "bbox": [ - 75.95, - 271.9, - 434.72, - 386.24 - ], - "text": "3.\tSupport and resistance levels point to trading opportunities.\nThe bottom of a congestion area identifies the bottom line of support. As prices \ndecline towards it, be alert to buying opportunities. One of the best patterns \nin technical analysis is a false breakout. If prices dip below support and then \nrally back into the support zone, they show that bears have lost their chance. A \nprice bar closing within a congestion zone after a false downside breakout marks \na buying opportunity; set a protective stop in the vicinity of the bottom of the \nrecent false downside breakout.", - "type": "text" - }, - { - "block_id": "p75-b5", - "global_id": 736, - "bbox": [ - 87.96, - 389.94, - 434.72, - 459.26 - ], - "text": "Similarly, a true upside breakout should not be followed by a pullback into \nthe range, just as a rocket is not supposed to sink back to its launching pad. A \nfalse upside breakout gives a signal to sell short as a price bar returns into the \ncongestion zone. When shorting, place a protective stop near the top of the false \nbreakout (Figure 18.3).", - "type": "text" - }, - { - "block_id": "p75-b6", - "global_id": 737, - "bbox": [ - 72.0, - 473.83, - 434.76, - 557.16 - ], - "text": "On Placing Stops  Experienced traders tend to avoid placing them at round num-\nbers. If I buy a stock near $52 and want to protect my position in the area of 51, \nI’ll put a stop a few cents below $51. If I go long at 33.70 in a day-trade and want \nto protect my position in the area of $33.50, I’ll put that stop a few cents below \n$33.50. Because of a natural human tendency to use round numbers, clusters of \nstops accumulate there. I prefer to place my stops at the far ends of such clusters.", - "type": "text" - }, - { - "block_id": "p75-b7", - "global_id": 738, - "bbox": [ - 72.0, - 577.2, - 227.3, - 594.14 - ], - "text": "True and False Breakouts", - "type": "text" - }, - { - "block_id": "p75-b8", - "global_id": 739, - "bbox": [ - 72.0, - 599.83, - 434.65, - 641.14 - ], - "text": "Markets spend more time in trading ranges than in trends. Most breakouts from trad-\ning ranges are false breakouts. They suck in trend-followers just before prices return \ninto their ranges. False breakouts hurt amateurs, but professional traders love them.", - "type": "text" - }, - { - "block_id": "p75-b9", - "global_id": 740, - "bbox": [ - 72.0, - 641.84, - 434.75, - 683.16 - ], - "text": "Professionals expect prices to fluctuate most of the time, without going anywhere \nfar. They wait until an upside breakout stops reaching new highs or a downside break-\nout stops making new lows. Then they pounce—fade the breakout (trade against it)", - "type": "text" - } - ] - }, - { - "page_num": 76, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p76-b0", - "global_id": 741, - "bbox": [ - 72.0, - 33.66, - 431.98, - 47.21 - ], - "text": "60\t\nCLASSICAL CHART ANALYSIS", - "type": "text" - }, - { - "block_id": "p76-b1", - "global_id": 742, - "bbox": [ - 72.0, - 422.23, - 434.71, - 477.55 - ], - "text": "and place a protective stop near the latest extreme point. It’s a tight stop, and their \nmonetary risk is low, with a big profit potential from prices returning towards the \nmiddle of the congestion zone. The risk/reward ratio is so good that professionals \ncan afford to be wrong half the time and still come out ahead of the game.", - "type": "text" - }, - { - "block_id": "p76-b2", - "global_id": 743, - "bbox": [ - 72.0, - 478.24, - 434.75, - 561.57 - ], - "text": "The best time to buy an upside breakout on a daily chart is when your analysis \nof the weekly chart suggests that a new uptrend is developing. True breakouts are \nconfirmed by heavy volume, while false breakouts tend to have light volume. True \nbreakouts are confirmed when technical indicators reach new extremes in the \ndirection of the new trend, while false breakouts are often marked by divergences \nbetween prices and indicators, which we’ll discuss later in the book.", - "type": "text" - }, - { - "block_id": "p76-b3", - "global_id": 744, - "bbox": [ - 73.55, - 589.26, - 331.28, - 607.9 - ], - "text": "■\n■19. Trends and Trading Ranges", - "type": "text" - }, - { - "block_id": "p76-b4", - "global_id": 745, - "bbox": [ - 72.0, - 618.06, - 434.7, - 673.55 - ], - "text": "A trend exists when prices keep rising or falling over a period of time. In a perfect \nuptrend, each rally reaches a higher high than the preceding rally, while each de-\ncline stops at a higher level than the preceding decline. In a perfect downtrend, \neach decline falls to a lower low than the preceding decline and each rally tops out", - "type": "text" - }, - { - "block_id": "p76-b5", - "global_id": 746, - "bbox": [ - 72.4, - 234.38, - 288.87, - 244.43 - ], - "text": "FIGURE 18.3  EGO and the Euro daily. (Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p76-b6", - "global_id": 747, - "bbox": [ - 72.4, - 250.23, - 154.34, - 263.13 - ], - "text": "False Breakouts", - "type": "text" - }, - { - "block_id": "p76-b7", - "global_id": 748, - "bbox": [ - 72.4, - 267.13, - 434.5, - 337.61 - ], - "text": "On the left, a chart of Eldorado Gold Corp. (EGO) shows a false downside breakout dur-\ning gold bears’ final attempt to push gold stocks lower in December 2013. Prices opened \nsharply below support, having gapped down from the previous day’s close. From there, \na rally began. Notice a pullback to the support line a week later, marked by a green ar-\nrowhead. Such pullbacks don’t always occur, but when they do, they offer an excellent \nopportunity to hop aboard a new trend.", - "type": "text" - }, - { - "block_id": "p76-b8", - "global_id": 749, - "bbox": [ - 72.4, - 339.11, - 434.49, - 385.6 - ], - "text": "On the right, a chart of the Euro (represented here by $XEU) shows how an uptrend \nculminated in a false upside breakout. Prices gapped above the line of resistance, trigger-\ning stops and shaking out weak shorts, and that’s when the downtrend began. There was \nno second chance pullback in this market.", - "type": "text" - } - ] - }, - { - "page_num": 77, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p77-b0", - "global_id": 750, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "19. TRENDS AND TRADING RANGES\t\n61", - "type": "text" - }, - { - "block_id": "p77-b1", - "global_id": 751, - "bbox": [ - 72.04, - 57.66, - 434.74, - 113.15 - ], - "text": "at a lower level than the preceding rally. In a trading range, most rallies stop at \nabout the same high level, and declines peter out at about the same low level. Perfect \npatterns, of course, aren’t that common in financial markets, and multiple deviations \nmake life harder for analysts and traders (Figure 19.1).", - "type": "text" - }, - { - "block_id": "p77-b2", - "global_id": 752, - "bbox": [ - 72.04, - 113.84, - 434.8, - 197.17 - ], - "text": "Even a quick look at most charts reveals that markets spend most of the time in \ntrading ranges. Trends and trading ranges call for different tactics. When you go long \nin an uptrend or sell short in a downtrend, you have to give that trend the benefit of \nthe doubt and use a wider stop, so as not to be shaken out easily. In a trading range, \non the other hand, you have to use tight stops, be nimble and close out positions at \nthe slightest sign of a reversal.", - "type": "text" - }, - { - "block_id": "p77-b3", - "global_id": 753, - "bbox": [ - 72.04, - 197.87, - 434.78, - 253.19 - ], - "text": "Another difference in trading tactics between trends and ranges is the handling of \nstrength and weakness. You have to follow strength during trends—buy in uptrends \nand short in downtrends. When prices are in a trading range, you aim to do the op-\nposite—buy weakness and sell strength.", - "type": "text" - }, - { - "block_id": "p77-b4", - "global_id": 754, - "bbox": [ - 72.2, - 460.38, - 282.24, - 470.43 - ], - "text": "FIGURE 19.1  FB daily, 22-day EMA. (Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p77-b5", - "global_id": 755, - "bbox": [ - 72.2, - 476.23, - 218.53, - 489.13 - ], - "text": "Trend and the Trading Range", - "type": "text" - }, - { - "block_id": "p77-b6", - "global_id": 756, - "bbox": [ - 72.2, - 493.13, - 434.35, - 563.61 - ], - "text": "A pattern of higher tops and higher bottoms defines uptrends, while a pattern of lower \nbottoms and lower tops defines downtrends. In the middle of this chart of Facebook, Inc. \n(FB), you see a downtrend defined by three lower lows, marked 1, 3, and 5, and two lower \nhighs, marked 2 and 4. Notice the downtrend of a slow 22-day exponential moving average \n(which we’ll review in Chapter 22) confirming the price downtrend. Its upturn signaled an \nupside reversal, confirmed by new price peaks 6 and 8.", - "type": "text" - }, - { - "block_id": "p77-b7", - "global_id": 757, - "bbox": [ - 72.2, - 565.11, - 434.34, - 623.6 - ], - "text": "We’ve looked at false breakouts in the previous chapter, and you can see them again \nin action here. False breakouts occur when prices cross their support or resistance lines, \nspend one or two days beyond that line, and then return, marking a failed move in the direc-\ntion of the breakout; afterwards prices tend to turn in the opposite direction. Here, a false \ndownside breakout, followed by the upturn of a moving average gave a strong buy signal.", - "type": "text" - }, - { - "block_id": "p77-b8", - "global_id": 758, - "bbox": [ - 72.2, - 625.1, - 434.35, - 671.58 - ], - "text": "We see a mirror image of this pattern after the top 8. There are two false upside break-\nouts, and after the second one, the moving average turns down, giving a sell signal. At the \nright edge of the chart, prices are pulling back up to their declining moving average. Such \npatterns tend to create good opportunities for selling short.", - "type": "text" - } - ] - }, - { - "page_num": 78, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p78-b0", - "global_id": 759, - "bbox": [ - 72.0, - 33.66, - 431.98, - 47.21 - ], - "text": "62\t\nCLASSICAL CHART ANALYSIS", - "type": "text" - }, - { - "block_id": "p78-b1", - "global_id": 760, - "bbox": [ - 72.0, - 57.1, - 177.06, - 74.04 - ], - "text": "Mass Psychology", - "type": "text" - }, - { - "block_id": "p78-b2", - "global_id": 761, - "bbox": [ - 72.0, - 79.73, - 434.75, - 149.05 - ], - "text": "When the trend is up, bulls are more eager than bears, and their buying forces prices \nhigher. If bears manage to push prices down, bulls return to bargain hunt. They stop \nthe decline, and force prices to rise again. A downtrend occurs when bears are more \naggressive and their selling pushes markets down. Whenever a flurry of buying lifts \nprices, bears sell short into that rally, stop it, and send prices to new lows.", - "type": "text" - }, - { - "block_id": "p78-b3", - "global_id": 762, - "bbox": [ - 72.0, - 149.75, - 434.71, - 205.07 - ], - "text": "When bulls and bears are about equal in strength, prices stay in a trading range. \nWhen bulls manage to push prices up, bears sell short into that rally and prices fall. \nAs they decline, bargain hunters step in and buy. Then, as bears cover shorts, their \nbuying helps fuel a rally. This cycle can go on for a long time.", - "type": "text" - }, - { - "block_id": "p78-b4", - "global_id": 763, - "bbox": [ - 72.0, - 205.76, - 434.75, - 275.09 - ], - "text": "A trading range is like a fight between two equally strong street gangs. They \npush one another back and forth, but neither can control the city block. A trend \nis like a fight in which a stronger gang chases the weaker gang down the street. \nEvery once in a while the weaker gang stops and puts up a fight but then turns and \nruns again.", - "type": "text" - }, - { - "block_id": "p78-b5", - "global_id": 764, - "bbox": [ - 72.0, - 275.78, - 434.76, - 331.1 - ], - "text": "Crowds spend most of their time aimlessly milling around, which is why markets \nspend more time in trading ranges than in trends. A crowd has to become agitated \nand surge to create a trend. Crowds do not stay excited for long—they go back to \naimlessness. Professionals tend to give the benefit of the doubt to trading ranges.", - "type": "text" - }, - { - "block_id": "p78-b6", - "global_id": 765, - "bbox": [ - 72.0, - 353.6, - 202.88, - 370.54 - ], - "text": "The Hard Right Edge", - "type": "text" - }, - { - "block_id": "p78-b7", - "global_id": 766, - "bbox": [ - 72.0, - 376.23, - 434.76, - 445.55 - ], - "text": "Trends and ranges are easy to see in the middle of a chart, but as you get close to its \nright edge, the picture becomes increasingly foggy. The past is fixed and clear, but the \nfuture is fluid and uncertain. Trends are easy to recognize on old charts, but, unfor-\ntunately, our brokers don’t allow us to trade in the past—we have to make trading \ndecisions at the hard right edge.", - "type": "text" - }, - { - "block_id": "p78-b8", - "global_id": 767, - "bbox": [ - 72.0, - 446.25, - 434.72, - 473.56 - ], - "text": "By the time a trend becomes perfectly clear, a good chunk of it is already gone. \nNobody will ring a bell when a trend dissolves into a trading range.", - "type": "text" - }, - { - "block_id": "p78-b9", - "global_id": 768, - "bbox": [ - 72.0, - 474.26, - 434.71, - 515.57 - ], - "text": "Many chart patterns and indicator signals contradict one another at the right edge \nof the chart. You have to base your decisions on probabilities in an atmosphere of \nuncertainty.", - "type": "text" - }, - { - "block_id": "p78-b10", - "global_id": 769, - "bbox": [ - 72.0, - 516.27, - 434.77, - 585.59 - ], - "text": "Most people feel very uncomfortable dealing with uncertainty. When their trade \ndoesn’t go the way their analysis suggested, they hang onto losing positions, waiting \nfor the market to turn and make them whole. Trying to be right is an unaffordable \nluxury in the markets. Professional traders get out of losing trades fast. When the \nmarket deviates from your analysis, you have to cut losses without fuss.", - "type": "text" - }, - { - "block_id": "p78-b11", - "global_id": 770, - "bbox": [ - 72.0, - 608.1, - 226.2, - 625.04 - ], - "text": "Methods and Techniques", - "type": "text" - }, - { - "block_id": "p78-b12", - "global_id": 771, - "bbox": [ - 72.0, - 630.73, - 434.72, - 686.05 - ], - "text": "Keep in mind that there is no single magic method to clearly and reliably identify all \ntrends and trading ranges. It pays to combine several analytic tools. None of them is \nperfect, but when they confirm each another, a correct message is much more likely. \nWhen they contradict one another, it’s better to pass up a trade.", - "type": "text" - } - ] - }, - { - "page_num": 79, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p79-b0", - "global_id": 772, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "19. TRENDS AND TRADING RANGES\t\n63", - "type": "text" - }, - { - "block_id": "p79-b1", - "global_id": 773, - "bbox": [ - 76.0, - 584.99, - 434.68, - 640.31 - ], - "text": "1.\tAnalyze the pattern of highs and lows. When rallies keep reaching higher levels \nand declines keep stopping at higher levels, they identify an uptrend. The pattern \nof lower lows and lower highs identifies a downtrend, and the pattern of irregu-\nlar highs and lows points to a trading range (Figure 19.1).", - "type": "text" - }, - { - "block_id": "p79-b2", - "global_id": 774, - "bbox": [ - 75.95, - 646.0, - 434.66, - 687.38 - ], - "text": "2.\tPlot a 20- to 30-bar exponential moving average (see Chapter 22). The direction \nof its slope identifies the trend. If a moving average has not reached a new high \nor low in a month, then the market is probably in a trading range.", - "type": "text" - }, - { - "block_id": "p79-b3", - "global_id": 775, - "bbox": [ - 72.2, - 336.38, - 413.81, - 346.43 - ], - "text": "FIGURE 19.2  UNP daily, 22-day EMA, Directional system, MACD-Histogram. (Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p79-b4", - "global_id": 776, - "bbox": [ - 72.2, - 352.23, - 172.67, - 365.13 - ], - "text": "Trend Identification", - "type": "text" - }, - { - "block_id": "p79-b5", - "global_id": 777, - "bbox": [ - 72.2, - 369.13, - 434.32, - 439.61 - ], - "text": "The single most important identifier of any trend is the pattern of its highs and lows. Look, \nfor example, at this daily chart of Union Pacific Corp (UNP). Once it broke out of its trading \nrange, its highs, marked by horizontal green lines, kept reaching higher and higher. Simi-\nlarly, its reaction lows, marked by red horizontal lines, kept bottoming out at higher and \nhigher levels. Trying to draw a trendline would be a very subjective exercise because the \nbottoms of UNP did not line up in a straight line.", - "type": "text" - }, - { - "block_id": "p79-b6", - "global_id": 778, - "bbox": [ - 72.2, - 441.11, - 434.3, - 475.6 - ], - "text": "The 22-day exponential moving average (EMA), represented by a red line superimposed \non prices, confirms the uptrend by its steady rise. Notice excellent buying opportunities, sig-\nnaled by quick price dips to their moving average (we’ll return to this pattern in Chapter 22).", - "type": "text" - }, - { - "block_id": "p79-b7", - "global_id": 779, - "bbox": [ - 72.2, - 477.11, - 434.33, - 559.58 - ], - "text": "The Directional system (described in Chapter 24) signaled the start of a new trend when \nthe Average Directional Index (ADX) fell below 20 and then rallied above that level and \npenetrated above the lower Directional Line (marked by a vertical green arrow). MACD-\nHistogram (described in Chapter 23) identified a very powerful trend when it rallied to its \nhighest peak in several months (marked by a diagonal green arrow). Near the right edge of \nthe chart the trend is up, while prices are slightly below their recent high. A pullback to the \nEMA is likely to create a fresh buying opportunity.", - "type": "text" - } - ] - }, - { - "page_num": 80, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p80-b0", - "global_id": 780, - "bbox": [ - 72.0, - 33.66, - 431.98, - 47.21 - ], - "text": "64\t\nCLASSICAL CHART ANALYSIS", - "type": "text" - }, - { - "block_id": "p80-b1", - "global_id": 781, - "bbox": [ - 76.0, - 57.83, - 434.75, - 99.14 - ], - "text": "3.\tWhen an oscillator, such as MACD-Histogram (see Chapter 23) rises to a new \npeak, it identifies a powerful trend and suggests that the latest market top is likely \nto be retested or exceeded.", - "type": "text" - }, - { - "block_id": "p80-b2", - "global_id": 782, - "bbox": [ - 75.99, - 106.84, - 434.69, - 148.15 - ], - "text": "4.\tSeveral market indicators, such the Directional system (see Chapter 24), help \nidentify trends. The Directional system is especially good at catching early stages \nof new trends (Figure 19.2).", - "type": "text" - }, - { - "block_id": "p80-b3", - "global_id": 783, - "bbox": [ - 72.0, - 171.2, - 153.95, - 188.13 - ], - "text": "Trade or Wait", - "type": "text" - }, - { - "block_id": "p80-b4", - "global_id": 784, - "bbox": [ - 72.0, - 193.83, - 434.65, - 235.14 - ], - "text": "Having identified an uptrend, you need to decide whether to buy immediately or \nwait for a dip. If you buy fast, you’ll get in gear with the trend, but on the minus side, \nyour stops are likely to be farther away, increasing your risk.", - "type": "text" - }, - { - "block_id": "p80-b5", - "global_id": 785, - "bbox": [ - 72.0, - 235.84, - 434.74, - 319.17 - ], - "text": "If you wait for a dip, your risk will be smaller, but you’ll have four groups of \ncompetitors: longs who want to add to their positions, shorts who want to get out \neven, traders who never bought (such as yourself), and traders who sold too early \nbut are eager to buy again. The waiting areas for pullbacks are notoriously crowded! \nFurthermore, a deep pullback may signal the beginning of a reversal rather than a \nbuying opportunity. The same reasoning applies to shorting in downtrends.", - "type": "text" - }, - { - "block_id": "p80-b6", - "global_id": 786, - "bbox": [ - 72.0, - 319.86, - 434.69, - 389.19 - ], - "text": "If the market is in a trading range and you’re waiting for a breakout, you’ll have \nto decide whether to buy in anticipation of a breakout, during a breakout, or on a \npullback after a valid breakout. If you aren’t sure, consider entering in several steps: \nbuy a third of the planned position in anticipation, a third on a breakout, and a third \non a pullback.", - "type": "text" - }, - { - "block_id": "p80-b7", - "global_id": 787, - "bbox": [ - 72.0, - 389.88, - 434.7, - 459.21 - ], - "text": "Whatever method you use, remember to apply the key risk management rule: \nthe distance from your entry to the protective stop, multiplied by position size can \nnever be more than 2 percent of your account equity (see Chapter 50). No matter \nhow attractive a trade, pass it up if it would require putting more than 2% of your \naccount at risk.", - "type": "text" - }, - { - "block_id": "p80-b8", - "global_id": 788, - "bbox": [ - 72.0, - 459.9, - 434.76, - 515.22 - ], - "text": "Finding good entry points is extremely important in trading ranges. You have to \nbe very precise and nimble because the profit potential is limited. A trend is more \nforgiving of a sloppy entry, as long as you trade in the right direction. Old traders \nchuckle: “Don’t confuse brains with a bull market.”", - "type": "text" - }, - { - "block_id": "p80-b9", - "global_id": 789, - "bbox": [ - 72.0, - 515.92, - 434.71, - 571.24 - ], - "text": "Specific risk management tactics are different for trends and trading ranges. When \ntrend trading, it pays to put on smaller positions with wider stops. You’ll be less \nlikely to get shaken out by any counter-trend moves, while still controlling risk. You \nmay put on bigger positions in trading ranges but with tighter stops.", - "type": "text" - }, - { - "block_id": "p80-b10", - "global_id": 790, - "bbox": [ - 72.0, - 594.2, - 215.95, - 611.14 - ], - "text": "Conflicting Timeframes", - "type": "text" - }, - { - "block_id": "p80-b11", - "global_id": 791, - "bbox": [ - 72.0, - 616.83, - 434.76, - 686.15 - ], - "text": "Markets move in several timeframes at the same time (see Chapter 32). They move \nsimultaneously, and sometimes in the opposite directions on 10-minute, hourly, dai-\nly, weekly and monthly charts. The market may look like a buy in one timeframe but \na sell in another. Even indicator signals in different timeframes of the same stock may \ncontradict one another. Which will you follow?", - "type": "text" - } - ] - }, - { - "page_num": 81, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p81-b0", - "global_id": 792, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "20. KANGAROO TAILS\t\n65", - "type": "text" - }, - { - "block_id": "p81-b1", - "global_id": 793, - "bbox": [ - 72.04, - 57.83, - 434.8, - 113.15 - ], - "text": "Most traders ignore the fact that markets move in different directions at the same \ntime in different timeframes. They pick one timeframe, such as daily or hourly, and \nlook for trades there. That’s when trends from other timeframes sneak up on them \nand wreak havoc with their plans.", - "type": "text" - }, - { - "block_id": "p81-b2", - "global_id": 794, - "bbox": [ - 72.04, - 113.84, - 434.8, - 169.16 - ], - "text": "Those conflicts between signals in different timeframes of the same market are \none of the great puzzles in market analysis. What looks like a trend on a daily chart \nmay show up as a blip on a flat weekly chart. What looks like a flat trading range on a \ndaily chart shows rich uptrends and downtrends on an hourly chart, and so on.", - "type": "text" - }, - { - "block_id": "p81-b3", - "global_id": 795, - "bbox": [ - 72.04, - 169.86, - 434.74, - 225.18 - ], - "text": "The sensible course of action is this: before examining a trend on your favorite \nchart, step back to explore the charts in a timeframe one order of magnitude greater \nthan your favorite. This search for a greater perspective is one of the key principles \nof the Triple Screen trading system, which we’ll discuss in a later chapter.", - "type": "text" - }, - { - "block_id": "p81-b4", - "global_id": 796, - "bbox": [ - 72.04, - 225.88, - 434.79, - 267.19 - ], - "text": "When professionals are in doubt, they look at the big picture, while amateurs tend \nto focus on the short-term charts. Taking a longer view works better —and is a lot \nless nerve-wracking.", - "type": "text" - }, - { - "block_id": "p81-b5", - "global_id": 797, - "bbox": [ - 73.55, - 294.86, - 231.38, - 313.5 - ], - "text": "■\n■20. Kangaroo Tails", - "type": "text" - }, - { - "block_id": "p81-b6", - "global_id": 798, - "bbox": [ - 72.0, - 323.83, - 434.79, - 393.15 - ], - "text": "Just when you think a runaway trend will keep on going—pop!—a three-bar pat-\ntern forms a kangaroo tail that flags a reversal. A kangaroo tail2 consists of a single, \nvery tall bar, flanked by two regular bars, that protrudes from a tight weave of prices. \nUpward-pointing kangaroo tails flash sell signals at market tops, while downward-\npointing kangaroo tails occur at market bottoms (Figure 20.1).", - "type": "text" - }, - { - "block_id": "p81-b7", - "global_id": 799, - "bbox": [ - 72.04, - 393.84, - 434.75, - 449.16 - ], - "text": "While daily charts are shown in the illustration, you can find kangaroo tails on the \ncharts of all timeframes. The longer the timeframe, the more meaningful its signal: \na kangaroo tail on a weekly chart is likely to lead to a more significant move than a \ntail on a 5-minute chart.", - "type": "text" - }, - { - "block_id": "p81-b8", - "global_id": 800, - "bbox": [ - 72.04, - 449.86, - 434.72, - 519.18 - ], - "text": "Kangaroo tails, also called “fingers,” are on my short list of reliable chart for-\nmations. They leap at you from the charts and are easy to recognize. If you doubt \nwhether a kangaroo tail is present, assume it is not. Real kangaroo tails are unmistak-\nable. They occur in the broad market indexes as well as individual stocks, futures, \nand other trading vehicles.", - "type": "text" - }, - { - "block_id": "p81-b9", - "global_id": 801, - "bbox": [ - 72.04, - 519.88, - 434.78, - 575.2 - ], - "text": "Markets constantly fluctuate, seeking levels that generate the highest volume of \ntrade. If a rally attracts no orders, the market will reverse and look for orders at \nlower levels. If volume dries up during a decline, the market is likely to rally, seeking \norders at higher prices.", - "type": "text" - }, - { - "block_id": "p81-b10", - "global_id": 802, - "bbox": [ - 72.04, - 575.9, - 434.76, - 645.22 - ], - "text": "Kangaroo tails reflect failed bull or bear raids.\nA kangaroo tail pointing up reflects a failed attempt by the bulls to lift the market. \nThey’re like a group of soldiers that take a hill from the enemy, only to discover that \nthe main force has failed to follow. Now they escape and run downhill for their lives. \nHaving failed to hold the hill, the army is likely to move away from it.", - "type": "text" - }, - { - "block_id": "p81-b11", - "global_id": 803, - "bbox": [ - 72.0, - 663.26, - 426.41, - 686.35 - ], - "text": "2I am grateful to Margarita Volkova, my translator in Moscow, who came up with this name for the \npattern.", - "type": "text" - } - ] - }, - { - "page_num": 82, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p82-b0", - "global_id": 804, - "bbox": [ - 72.0, - 33.66, - 431.98, - 47.21 - ], - "text": "66\t\nCLASSICAL CHART ANALYSIS", - "type": "text" - }, - { - "block_id": "p82-b1", - "global_id": 805, - "bbox": [ - 72.0, - 421.43, - 434.77, - 490.75 - ], - "text": "A kangaroo tail that points down reflects a failed bear raid. Bears aggressively sold \nthe market, pushing it lower—but low prices did not attract volume and bears re-\ntreated back into the range. What do you think the market is likely to do next, after \nit failed to continue moving down? Since it found no orders below, it’s likely to turn \nup and rally.", - "type": "text" - }, - { - "block_id": "p82-b2", - "global_id": 806, - "bbox": [ - 72.0, - 491.45, - 434.75, - 574.78 - ], - "text": "When markets recoil from kangaroo tails, they offer trading opportunities. It was \nJ. Peter Steidlmayer who pointed out years ago that a bar that looks like a finger stick-\ning out of a tight chart pattern provides a valuable reference point for short-term \ntraders. A kangaroo tail shows that a certain price has been rejected by the market. \nIt usually leads to a swing in the opposite direction. As soon as you recognize a tail, \ntrade against it (Figure 20.2).", - "type": "text" - }, - { - "block_id": "p82-b3", - "global_id": 807, - "bbox": [ - 72.0, - 575.47, - 434.77, - 686.81 - ], - "text": "An experienced trader can recognize a kangaroo tail during its third bar, before it \ncloses. For example, you may see a range that held for several days on a daily chart, \nbut then on Monday the stock explodes in a very tall bar. If on Tuesday it opens near \nthe base of the Monday’s bar base and refuses to rally, consider selling short before \nthe market closes on Tuesday. If the market has been in a trading range for a week and \nthen traces a tall bar down on Wednesday, get ready on Thursday: if prices trade in \na narrow range near the top of the Wednesday bar, go long before the market closes \non Thursday.", - "type": "text" - }, - { - "block_id": "p82-b4", - "global_id": 808, - "bbox": [ - 72.0, - 234.18, - 275.9, - 244.23 - ], - "text": "FIGURE 20.1  BIIB and FDO daily. (Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p82-b5", - "global_id": 809, - "bbox": [ - 72.0, - 250.03, - 146.93, - 262.93 - ], - "text": "Kangaroo Tails", - "type": "text" - }, - { - "block_id": "p82-b6", - "global_id": 810, - "bbox": [ - 72.0, - 266.93, - 434.11, - 325.41 - ], - "text": "Biogen Idec, Inc (BIIB) was rising in a steady uptrend when it developed an upward kan-\ngaroo tail. The stock opened slightly below its previous close but then traced a very tall \nbar, triple the average height. It reached a record new high but then slid, closing near its \nopening price. The next day’s bar was of average height—it completed the kangaroo pat-\ntern and the trend reversed down.", - "type": "text" - }, - { - "block_id": "p82-b7", - "global_id": 811, - "bbox": [ - 72.0, - 326.92, - 434.11, - 385.4 - ], - "text": "The stock of Family Dollar Stores, Inc. (FDO) was falling when its decline sharply ac-\ncelerated, producing a downward pointing bar several times the average bar height for this \nstock. Notice that both opening and closing prices for that bar were well within the previ-\nous day’s range. That downward stab marked the end of the downtrend; the next bar was \nof average height and after that the trend reversed up.", - "type": "text" - } - ] - }, - { - "page_num": 83, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p83-b0", - "global_id": 812, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "20. KANGAROO TAILS\t\n67", - "type": "text" - }, - { - "block_id": "p83-b1", - "global_id": 813, - "bbox": [ - 72.04, - 396.23, - 434.78, - 479.56 - ], - "text": "Remember that trading against the tails is a short-term tactic; on the daily charts, \nthese signals fizzle out after a few days. Evaluate kangaroo tails against the back-\nground of the current market. For example, when running a long-term bullish cam-\npaign in a stock, be alert to kangaroo tails. A tail pointing up may well suggest profit \ntaking on existing positions, while a tail pointing down identifies a good spot to add \nto long positions.", - "type": "text" - }, - { - "block_id": "p83-b2", - "global_id": 814, - "bbox": [ - 72.04, - 480.25, - 434.8, - 535.57 - ], - "text": "Using stops is essential for survival and success in the markets. Putting a stop at \nthe end of a tail would make your stop too wide, risking too much capital. When \ntrading against the tail, place your protective stop about halfway through the tail. If \nthe market starts “chewing its tail,” it is time to get out.", - "type": "text" - }, - { - "block_id": "p83-b3", - "global_id": 815, - "bbox": [ - 72.0, - 228.38, - 242.94, - 238.43 - ], - "text": "FIGURE 20.2  IGT Daily. (Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p83-b4", - "global_id": 816, - "bbox": [ - 72.0, - 244.23, - 190.76, - 257.13 - ], - "text": "Trading Kangaroo Tails.", - "type": "text" - }, - { - "block_id": "p83-b5", - "global_id": 817, - "bbox": [ - 72.0, - 261.13, - 434.15, - 331.61 - ], - "text": "Kangaroo tails mark the final splash of bullishness or bearishness, depending on their \ndirection. Here the kangaroo tail (marked with a red arrow) helped identify the end of an \nuptrend in the stock of International Game Technology (IGT). Notice the bar is more than \ndouble the usual height and is bracketed by shorter bars. If entering a short trade during \nthe third bar, place your stop about half-way up the tail. Putting a stop at the tip of the tail \nwould mean accepting too much risk.", - "type": "text" - }, - { - "block_id": "p83-b6", - "global_id": 818, - "bbox": [ - 72.0, - 333.11, - 434.11, - 355.61 - ], - "text": "Notice a tail pointing down, marked by a green arrow. It stopped the downtrend and \naugured in a week-long rally.", - "type": "text" - } - ] - }, - { - "page_num": 84, - "width": 504.0, - "height": 720.0, - "blocks": [] - }, - { - "page_num": 85, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p85-b0", - "global_id": 819, - "bbox": [ - 72.0, - 118.61, - 380.06, - 213.84 - ], - "text": "Computerized \nTechnical Analysis", - "type": "text" - }, - { - "block_id": "p85-b1", - "global_id": 820, - "bbox": [ - 72.1, - 673.7, - 432.05, - 687.25 - ], - "text": "69", - "type": "text" - }, - { - "block_id": "p85-b2", - "global_id": 821, - "bbox": [ - 348.1, - 59.86, - 395.91, - 73.41 - ], - "text": "PA R T 4\nPA R T 4", - "type": "text" - }, - { - "block_id": "p85-b3", - "global_id": 822, - "bbox": [ - 69.8, - 331.94, - 92.2, - 372.34 - ], - "text": "C", - "type": "text" - }, - { - "block_id": "p85-b4", - "global_id": 823, - "bbox": [ - 72.02, - 337.63, - 434.75, - 434.96 - ], - "text": "omputers were a novelty at the time I wrote Trading for a Living. My first com-\nputer for technical analysis was an Apple 2E desktop with a boxy modem and \ntwo floppy drives. Each held a 300 KB diskette: one for the analytic program (Com-\nputrac, the first program for technical analysis) and the other for market data. When \nthe first hard drives came out, I had a choice of buying a 2-, 5- or 10-MB (not giga-\nbyte!) drive. Ten megabytes seemed too huge for anyone to ever need, so I sprang for \na 5-MB hard drive. How technology has changed!", - "type": "text" - }, - { - "block_id": "p85-b5", - "global_id": 824, - "bbox": [ - 72.02, - 435.66, - 434.73, - 476.97 - ], - "text": "A trader without a computer is like a man traveling on a bicycle. His legs grow \nstrong and he sees a lot of scenery, but his progress is slow. When you travel on busi-\nness and want to get to the point fast, you get a car.", - "type": "text" - }, - { - "block_id": "p85-b6", - "global_id": 825, - "bbox": [ - 72.02, - 477.67, - 434.75, - 561.0 - ], - "text": "Today, very few people trade without computers. Our machines help track and \nanalyze more markets in greater depth. They liberate us from the routine updating \nof charts, freeing up time for thinking. Computers allow us to use more complex \nindicators and spot more opportunities. Trading is an information game. A computer \nhelps you process more information. On the minus side, with computers we lose a \nphysical feel for price moves that comes from pencil and paper charting.", - "type": "text" - }, - { - "block_id": "p85-b7", - "global_id": 826, - "bbox": [ - 73.55, - 588.66, - 286.79, - 607.3 - ], - "text": "■\n■21. Computers in Trading", - "type": "text" - }, - { - "block_id": "p85-b8", - "global_id": 827, - "bbox": [ - 72.0, - 617.63, - 434.74, - 672.95 - ], - "text": "Computerized technical analysis is more objective than classical charting. You can \nargue whether support or resistance is present—but there can be no argument about \nan indicator’s direction. Of course, you still need to decide what to do after you \nidentify an indicator’s message.", - "type": "text" - } - ] - }, - { - "page_num": 86, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p86-b0", - "global_id": 828, - "bbox": [ - 72.0, - 33.66, - 432.02, - 47.21 - ], - "text": "70\t\nCOMPUTERIZED TECHNICAL ANALYSIS", - "type": "text" - }, - { - "block_id": "p86-b1", - "global_id": 829, - "bbox": [ - 72.0, - 57.1, - 135.13, - 74.04 - ], - "text": "Toolboxes", - "type": "text" - }, - { - "block_id": "p86-b2", - "global_id": 830, - "bbox": [ - 72.0, - 80.73, - 434.74, - 122.04 - ], - "text": "When working with wood or metal, you can go to a hardware store and buy a set \nof tools that can help you work smartly and efficiently. A technical analysis toolbox \nprovides a set of electronic tools for processing market data.", - "type": "text" - }, - { - "block_id": "p86-b3", - "global_id": 831, - "bbox": [ - 72.0, - 122.74, - 434.75, - 192.06 - ], - "text": "When you decide to get into computerized technical analysis, begin by drawing a \nlist of tasks you want your computer to perform. This will take some serious think-\ning, but it’s much better than getting a package first and scratching your head later, \ntrying to figure out what it might do for you. Decide what markets you want to \ntrack, what types of charts to view and what indicators to use.", - "type": "text" - }, - { - "block_id": "p86-b4", - "global_id": 832, - "bbox": [ - 72.0, - 192.76, - 434.76, - 262.08 - ], - "text": "A toolbox draws weekly, daily, and intraday charts; it splits the screen into sev-\neral windowpanes for plotting prices and indicators. A good toolbox includes many \npopular indicators, such as moving averages, channels, MACD, Stochastic, Relative \nStrength Index, along with dozens if not hundreds of others. It allows you to modify \nall indicators and even construct your own.", - "type": "text" - }, - { - "block_id": "p86-b5", - "global_id": 833, - "bbox": [ - 72.0, - 262.78, - 434.71, - 304.1 - ], - "text": "A good toolbox allows you to compare any two markets and analyze their spreads. \nIf you trade options, your toolbox must include an options valuation model. Ad-\nvanced packages allow you to backtest trading systems.", - "type": "text" - }, - { - "block_id": "p86-b6", - "global_id": 834, - "bbox": [ - 72.0, - 304.79, - 434.76, - 388.12 - ], - "text": "Another feature of a good toolbox is its ability to scan stocks. For example, you \nmay want to find all stocks among the Nasdaq 100 whose exponential moving aver-\nages are rising, but whose prices are no more than 1% above their EMAs. Can your \nsoftware scan for that? Can it add fundamental parameters to your search, such as \nrising earnings? Think what you want to find and then ask software vendors whether \ntheir products can do it for you.", - "type": "text" - }, - { - "block_id": "p86-b7", - "global_id": 835, - "bbox": [ - 72.0, - 388.82, - 434.76, - 500.15 - ], - "text": "There are good toolboxes at all price levels. A beginner making his first steps may \nsign up with an online service that offers a basic set of computerized tools for free; \nyou can upgrade to a paid level later. Most charts in this book are drawn using just \nsuch a service, StockCharts.com, because I want you to see how much you can do \nwhile spending very little. Some traders find that sufficient, while many of us buy \nprograms that reside on our computers, allowing greater customization. With prices \nof software in a steady decline, you don’t have to worry too much. Buy something \nsimple and inexpensive and upgrade later—it’s a date, not a marriage.", - "type": "text" - }, - { - "block_id": "p86-b8", - "global_id": 836, - "bbox": [ - 72.0, - 500.85, - 434.74, - 542.16 - ], - "text": "Once you’ve decided what package to use, you may want to hire somebody who \nalready uses it to help you set it up on your machine. This can save a great deal of \ntime and energy for inexperienced users.", - "type": "text" - }, - { - "block_id": "p86-b9", - "global_id": 837, - "bbox": [ - 72.0, - 542.86, - 434.76, - 612.18 - ], - "text": "A growing number of brokerage firms offer free analytic software to their clients; \nthe price is right, but they tend to have two serious limitations. First, for legal rea-\nsons, they make their software very hard to modify and second, it only works online. \nTraders often ask how to add my indicators to their brokerage software, and the \nusual answer is—you can’t.", - "type": "text" - }, - { - "block_id": "p86-b10", - "global_id": 838, - "bbox": [ - 72.0, - 612.88, - 434.76, - 682.2 - ], - "text": "Most brokerage house programs enable you to place and change your orders us-\ning the same analytic software. This can be quite handy and useful for day traders, \nbut less important for longer-term traders. Be sure to disable a common feature that \nshows your equity gains or losses in real time. Watching dollars jump up or down at \nevery tick is stressful and distracting. As the song goes, “…never count your money", - "type": "text" - } - ] - }, - { - "page_num": 87, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p87-b0", - "global_id": 839, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "21. COMPUTERS IN TRADING\t\n71", - "type": "text" - }, - { - "block_id": "p87-b1", - "global_id": 840, - "bbox": [ - 72.04, - 57.83, - 434.74, - 99.14 - ], - "text": "while you’re sitting at the table—there’ll be time enough for counting when the \ndealing’s done.” Focus on prices and indicators instead of watching dollars and think-\ning what you can buy with them.", - "type": "text" - }, - { - "block_id": "p87-b2", - "global_id": 841, - "bbox": [ - 72.04, - 99.84, - 434.79, - 155.16 - ], - "text": "Technical analysis software is constantly changing and evolving; a book is not the \nright place for software recommendations. My firm Elder.com maintains a brief \nSoftware Guide, which we periodically update and e-mail to any trader who asks for \nit, as a public service.", - "type": "text" - }, - { - "block_id": "p87-b3", - "global_id": 842, - "bbox": [ - 72.04, - 155.86, - 434.75, - 225.18 - ], - "text": "As mentioned earlier in this book, most programs for technical analysis fall into \none of three groups: toolboxes, black boxes, and gray boxes. Toolboxes are for seri-\nous traders, black boxes are for people who believe in Santa Claus, and gray boxes \nare in between. When considering a new software package, be sure to know which \ngroup it belongs to.", - "type": "text" - }, - { - "block_id": "p87-b4", - "global_id": 843, - "bbox": [ - 72.0, - 241.2, - 246.5, - 258.14 - ], - "text": "Black Boxes and Gray Boxes", - "type": "text" - }, - { - "block_id": "p87-b5", - "global_id": 844, - "bbox": [ - 72.0, - 262.33, - 434.73, - 303.64 - ], - "text": "Black box software is pure magic: it tells you what and when to buy and sell without \ntelling you why. You download the data and push a button. Lights blink, gears click, \nand a message lights up, telling you what to do. Magic!", - "type": "text" - }, - { - "block_id": "p87-b6", - "global_id": 845, - "bbox": [ - 72.05, - 304.34, - 434.8, - 387.67 - ], - "text": "Black boxes always come with impressive track records that show profitable past \nperformance. Every black box eventually self-destructs because markets keep chang-\ning. Even systems with built-in optimization don’t survive because we don’t know \nwhat kind of optimization will be needed in the future. There is no substitute for \nhuman judgment. The only way to make money from a black box is to sell one. Most \nblack boxes are sold by hustlers to gullible or insecure traders.", - "type": "text" - }, - { - "block_id": "p87-b7", - "global_id": 846, - "bbox": [ - 72.05, - 388.36, - 434.74, - 429.68 - ], - "text": "Each black box is guaranteed to fail, even if sold by an honest developer. Complex \nhuman activities, such as trading, cannot be automated. Machines can help but not \nreplace humans.", - "type": "text" - }, - { - "block_id": "p87-b8", - "global_id": 847, - "bbox": [ - 72.05, - 430.38, - 434.79, - 485.7 - ], - "text": "Trading with a black box means using a slice of someone else’s intelligence, as it \nexisted at some point in the past. Markets change, and experts change their minds, \nbut a black box keeps churning out its buy and sell signals. It would have been funny \nif it wasn’t so expensive for losers.", - "type": "text" - }, - { - "block_id": "p87-b9", - "global_id": 848, - "bbox": [ - 72.0, - 492.33, - 434.65, - 533.64 - ], - "text": "A gray box generates trading signals based on proprietary formulas. Unlike a black \nbox, it discloses its general principles and allows you to adjust its parameters to some \ndegree. The closer a gray box is to a toolbox, the better it is.", - "type": "text" - }, - { - "block_id": "p87-b10", - "global_id": 849, - "bbox": [ - 72.0, - 549.7, - 141.13, - 566.64 - ], - "text": "Computers", - "type": "text" - }, - { - "block_id": "p87-b11", - "global_id": 850, - "bbox": [ - 72.0, - 570.83, - 434.74, - 612.14 - ], - "text": "While online programs can run on any computer, most stand-alone programs are \nwritten for the Windows environment. Some traders run them on Macs, using emu-\nlation software. There are even programs for tablets, such as iPads.", - "type": "text" - }, - { - "block_id": "p87-b12", - "global_id": 851, - "bbox": [ - 72.0, - 612.84, - 434.77, - 654.16 - ], - "text": "Technical analysis software tends to be not very demanding of processing power, \nbut still, it makes sense to get the most modern machine so that it remains useful \nfor years.", - "type": "text" - }, - { - "block_id": "p87-b13", - "global_id": 852, - "bbox": [ - 72.0, - 654.85, - 434.72, - 682.16 - ], - "text": "Many day traders like to use multiple screens for a multidimensional view of the \nmarkets and the ability to watch several trading vehicles at once. Since I like to travel,", - "type": "text" - } - ] - }, - { - "page_num": 88, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p88-b0", - "global_id": 853, - "bbox": [ - 72.0, - 33.66, - 432.02, - 47.21 - ], - "text": "72\t\nCOMPUTERIZED TECHNICAL ANALYSIS", - "type": "text" - }, - { - "block_id": "p88-b1", - "global_id": 854, - "bbox": [ - 72.0, - 57.83, - 434.74, - 99.14 - ], - "text": "I carry a small external screen that helps me monitor markets and trade from the \nroad. It’s the size of my laptop but much thinner and attaches to it with a USB cable, \nwithout a power cord.", - "type": "text" - }, - { - "block_id": "p88-b2", - "global_id": 855, - "bbox": [ - 72.0, - 119.2, - 150.3, - 136.13 - ], - "text": "Market Data", - "type": "text" - }, - { - "block_id": "p88-b3", - "global_id": 856, - "bbox": [ - 72.0, - 141.83, - 434.77, - 183.14 - ], - "text": "Swing and position traders enter and exit trades within days or weeks, while day \ntraders enter and exit within a few hours if not minutes. End-of-day data is sufficient \nfor position traders, but day traders need real-time data.", - "type": "text" - }, - { - "block_id": "p88-b4", - "global_id": 857, - "bbox": [ - 72.0, - 183.84, - 434.72, - 239.16 - ], - "text": "When you download the daily data for research, it pays to cover two bull-and-\nbear-market cycles, or about 10 years. Whenever I approach a stock, I like to look \nback at 12 years of trading history to see whether it is cheap or expensive relative to \nits 12-year range.", - "type": "text" - }, - { - "block_id": "p88-b5", - "global_id": 858, - "bbox": [ - 72.0, - 239.86, - 434.65, - 295.18 - ], - "text": "Whenever you approach a trade, you must know your edge—what will help you \nmake money. The ability to recognize patterns is a part of my edge, but if a stock’s \nhistory is too short, there are no reliable patterns to identify. That’s why I avoid trad-\ning very young stocks, those with less than a year’s history.", - "type": "text" - }, - { - "block_id": "p88-b6", - "global_id": 859, - "bbox": [ - 72.0, - 295.87, - 434.71, - 365.2 - ], - "text": "When collecting and analyzing data, don’t chase too many markets at once. Focus \non quality and depth rather than quantity. Begin by following the key market indexes, \nsuch as the Dow, the NASDAQ, and the S&P. Many professional traders focus on a \nrelatively small number of stocks. They get to know them well and become familiar \nwith their behavior patterns.", - "type": "text" - }, - { - "block_id": "p88-b7", - "global_id": 860, - "bbox": [ - 72.0, - 365.89, - 434.76, - 477.23 - ], - "text": "You could start out by focusing on a dozen stocks. Many professionals limit them-\nselves to fewer than 100 stocks, which they review every weekend and mark their \nopinions in a fresh column of their spreadsheet. They may select fewer than 10 stocks \nfrom that pool that look promising for the week ahead and focus on them. Build your \nwatch list gradually from the popular stocks of the year; add a few stocks from the \nmost promising industries and some stocks you’ve traded before. Building a watch \nlist is like gardening: you can’t get a beautiful garden in a single season, but you can \nget there over several seasons.", - "type": "text" - }, - { - "block_id": "p88-b8", - "global_id": 861, - "bbox": [ - 72.0, - 477.92, - 434.76, - 645.28 - ], - "text": "Try to stick to the data in your own time zone. When I teach overseas, traders often \nask whether I trade in their country. I remind them that whenever you put on a trade, \nyou’re trying to take money out of some other trader’s pocket, while others are trying \nto pick yours. This game is hard enough when you’re awake, but it is risky to trade in \na different time zone, allowing locals to pick your pockets while you sleep. This is why \nI largely limit my trading to the U.S. markets. Many overseas traders complain that \nthey find their domestic markets too thin and ask whether it would make sense for \nthem to trade in the huge and liquid U.S. market. The answer depends on how dif-\nferent their time zone is from the U.S. market’s time zone. For example, the U.S. \nmarkets are easy to trade from Europe where they open at 3:30 p.m. local time and \nclose at 10 p.m. It is much harder to do from Asia or Australia, but it can work if you \ntake a longer view and aim to catch longer-term trends.", - "type": "text" - }, - { - "block_id": "p88-b9", - "global_id": 862, - "bbox": [ - 72.0, - 645.97, - 434.68, - 673.28 - ], - "text": "Beginning traders should steer clear of day-trading. It demands instant decision \nmaking, and if you stop to think, you’re dead. Learn to trade in a slower environment.", - "type": "text" - } - ] - }, - { - "page_num": 89, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p89-b0", - "global_id": 863, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "21. COMPUTERS IN TRADING\t\n73", - "type": "text" - }, - { - "block_id": "p89-b1", - "global_id": 864, - "bbox": [ - 72.04, - 57.83, - 434.79, - 141.16 - ], - "text": "Become a competent position or swing trader before you consider day-trading. If you \ncompare swing trading and day-trading, it is like playing the same video game at level \none or level nine. You run the same mazes and dodge the same monsters, but the pace \nof the game is so fast at level nine that your reactions must be automatic. Learn to \nanalyze markets at level one—become a swing trader before attempting to day-trade. \nWe’ll return to this topic in Chapter 33, \"Trading Timeframes.\"", - "type": "text" - }, - { - "block_id": "p89-b2", - "global_id": 865, - "bbox": [ - 72.04, - 141.85, - 434.79, - 211.18 - ], - "text": "A good place to get started is swing trading, i.e., holding positions for several \ndays. Select popular stocks that have good swings on a good volume. Start out by \nfollowing just a handful. Some swing traders who hold positions for only a few days \nuse real-time data for timing entries and exits, while others manage quite well with \nend-of-day data.", - "type": "text" - }, - { - "block_id": "p89-b3", - "global_id": 866, - "bbox": [ - 72.0, - 231.2, - 282.18, - 248.13 - ], - "text": "Three Major Groups of Indicators", - "type": "text" - }, - { - "block_id": "p89-b4", - "global_id": 867, - "bbox": [ - 72.0, - 253.83, - 431.94, - 281.14 - ], - "text": "Indicators help identify trends and reversals. They are more objective than chart pat-\nterns and provide insight into the balance of power between bulls and bears.", - "type": "text" - }, - { - "block_id": "p89-b5", - "global_id": 868, - "bbox": [ - 72.0, - 281.84, - 434.74, - 351.16 - ], - "text": "A great challenge is that various indicators may contradict one another. Some \nof them work best in trending markets, others in flat markets. Some are good \nat catching turning points, while others are better at riding trends. That’s why it \npays to select a small number of indicators from various groups and learn to com-\nbine them.", - "type": "text" - }, - { - "block_id": "p89-b6", - "global_id": 869, - "bbox": [ - 72.0, - 351.86, - 434.66, - 407.18 - ], - "text": "Many beginners look for a “silver bullet”—a single magic indicator, but markets \nare too complex to be handled with a single tool. Others try to poll a multitude of \nindicators and average their signals. The results of such a “poll” will be heavily skewed \nby the indicators you select.", - "type": "text" - }, - { - "block_id": "p89-b7", - "global_id": 870, - "bbox": [ - 72.0, - 407.87, - 434.72, - 449.19 - ], - "text": "Most indicators are based on the same five pieces of data: open, high, low, close, \nand volume. Prices are primary; indicators are derived from them. Using ten, twenty, \nor fifty indicators will not deepen your analysis because they share the same base.", - "type": "text" - }, - { - "block_id": "p89-b8", - "global_id": 871, - "bbox": [ - 72.0, - 449.88, - 434.72, - 547.22 - ], - "text": "We can divide indicators into three groups: trend-following indicators, oscilla-\ntors, and miscellaneous. Trend-following indicators work best when markets are \nmoving, but the quality of their signals sharply deteriorates when the markets go flat. \nOscillators catch turning points in flat markets but give premature and dangerous \nsignals when the markets begin to trend. Miscellaneous indicators provide insights \ninto mass psychology. Before using any indicator, be sure to understand what it mea-\nsures and how it works. Only then can you have confidence in its signals.", - "type": "text" - }, - { - "block_id": "p89-b9", - "global_id": 872, - "bbox": [ - 71.98, - 554.63, - 434.67, - 609.95 - ], - "text": "Trend-following indicators include moving averages, MACD Lines (moving av-\nerage convergence-divergence), the Directional System, On-Balance Volume, \nAccumulation/Distribution, and others. Trend-following indicators are coincident \nor lagging indicators—they turn after trends reverse.", - "type": "text" - }, - { - "block_id": "p89-b10", - "global_id": 873, - "bbox": [ - 72.0, - 617.43, - 434.74, - 672.75 - ], - "text": "Oscillators help identify turning points. They include MACD-Histogram, Force \nIndex, Stochastic, Rate of Change, Momentum, the Relative Strength Index, \nElder-ray, Williams %R, and others. Oscillators are leading or coincident indicators \nthat often turn ahead of prices.", - "type": "text" - } - ] - }, - { - "page_num": 90, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p90-b0", - "global_id": 874, - "bbox": [ - 72.0, - 33.66, - 432.02, - 47.21 - ], - "text": "74\t\nCOMPUTERIZED TECHNICAL ANALYSIS", - "type": "text" - }, - { - "block_id": "p90-b1", - "global_id": 875, - "bbox": [ - 72.0, - 57.83, - 434.74, - 113.15 - ], - "text": "Miscellaneous indicators provide insights into the intensity of bullish or bearish \ncamps. They include the New High–New Low Index, the Put-Call Ratio, Bullish \nConsensus, Commitments of Traders, and others. They can be leading or coincident \nindicators.", - "type": "text" - }, - { - "block_id": "p90-b2", - "global_id": 876, - "bbox": [ - 72.04, - 113.84, - 434.78, - 155.16 - ], - "text": "It pays to combine several indicators from different groups so that their negative \nfeatures cancel each other out, while their positive features remain undisturbed. This \nis the aim of the Triple Screen trading system (see Chapter 39).", - "type": "text" - }, - { - "block_id": "p90-b3", - "global_id": 877, - "bbox": [ - 72.04, - 155.86, - 434.76, - 225.18 - ], - "text": "As we begin to explore indicators, a few words of caution. Sometimes their sig-\nnals are very clear, while at other times they are quite vague. I’ve learned long ago \nto enter trades only when indicator signals “grab me by the face.” If I find myself \nsquinting at a chart while trying to understand its signals, I flip the page and move \nto the next stock.", - "type": "text" - }, - { - "block_id": "p90-b4", - "global_id": 878, - "bbox": [ - 72.04, - 225.88, - 434.81, - 309.2 - ], - "text": "If you look at a familiar indicator but can’t understand its message, it is most likely \nbecause the stock you’re trying to analyze is in a chaotic stage (see Chapter 17). If \nindicator signals aren’t clear, don’t start massaging them or piling on more indica-\ntors, but simply leave that stock alone for the time being and look for another one. \nOne of the great luxuries of private traders is that no one pushes us to trade—we \ncan wait for the best and clearest signals.", - "type": "text" - }, - { - "block_id": "p90-b5", - "global_id": 879, - "bbox": [ - 72.04, - 309.9, - 434.78, - 379.22 - ], - "text": "As you read about the signals of different indicators, remember that you cannot \nbase trading decisions on a single indicator. We need to select several indicators we \nunderstand and trust and combine them into a trading system. In the following chap-\nters, we’ll be exploring indicators, while later in the book we’ll see how to build \nyour own system from them.", - "type": "text" - }, - { - "block_id": "p90-b6", - "global_id": 880, - "bbox": [ - 73.55, - 400.86, - 252.15, - 419.5 - ], - "text": "■\n■22. Moving Averages", - "type": "text" - }, - { - "block_id": "p90-b7", - "global_id": 881, - "bbox": [ - 72.0, - 429.83, - 434.74, - 527.16 - ], - "text": "Wall Street old-timers say that moving averages were brought to the financial markets \nafter World War II. Antiaircraft gunners used moving averages to site guns on enemy \nplanes and after the war, applied this method to moving prices. The two early experts \non moving averages were Richard Donchian and J. M. Hurst—neither apparently a \ngunner. Donchian was a Merrill Lynch employee who developed trading methods \nbased on moving average crossovers. Hurst was an engineer who applied moving aver-\nages to stocks in his classic book, The Profit Magic of Stock Transaction Timing.", - "type": "text" - }, - { - "block_id": "p90-b8", - "global_id": 882, - "bbox": [ - 72.0, - 527.86, - 434.64, - 569.17 - ], - "text": "A moving average (MA) reflects the average value of data in its time window. \nA 5-day MA shows the average price for the past 5 days, a 20-day MA for the past \n20 days, and so on. Connecting each day’s MA value gives you a moving average line.", - "type": "text" - }, - { - "block_id": "p90-b9", - "global_id": 883, - "bbox": [ - 241.4, - 582.57, - 315.12, - 598.83 - ], - "text": "P1 + P2 + … + PN", - "type": "text" - }, - { - "block_id": "p90-b10", - "global_id": 884, - "bbox": [ - 179.39, - 589.38, - 280.43, - 609.82 - ], - "text": "N\nSimple MA =", - "type": "text" - }, - { - "block_id": "p90-b11", - "global_id": 885, - "bbox": [ - 84.0, - 620.83, - 424.91, - 648.14 - ], - "text": "where\t P is the price being averaged\n\t\nN is the number of days in the moving average (selected by the trader)", - "type": "text" - }, - { - "block_id": "p90-b12", - "global_id": 886, - "bbox": [ - 72.0, - 659.83, - 434.75, - 687.14 - ], - "text": "The level of a moving average reflects values that are being averaged and depends \non the width of the MA window. Suppose you want to calculate a 3-day simple", - "type": "text" - } - ] - }, - { - "page_num": 91, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p91-b0", - "global_id": 887, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "22. MOVING AVERAGES\t\n75", - "type": "text" - }, - { - "block_id": "p91-b1", - "global_id": 888, - "bbox": [ - 72.04, - 57.83, - 434.82, - 113.15 - ], - "text": "moving average of a stock. If it closes at 19, 21, and 20 on three consecutive days, \nthen a 3-day simple MA of closing prices is 20 (19 + 21 + 20, divided by 3). Suppose \nthat on the fourth day the stock closes at 22. It makes its 3-day MA rise to 21—the \naverage of the last three days (21 + 20 + 22), divided by 3.", - "type": "text" - }, - { - "block_id": "p91-b2", - "global_id": 889, - "bbox": [ - 72.08, - 113.84, - 434.78, - 169.16 - ], - "text": "There are three main types of moving averages: simple, exponential, and weighted. \nSimple MAs used to be popular because they were easy to calculate in precomputer \ndays, and both Donchian and Hurst used them. Simple MAs, however, have a fatal \nflaw—they change twice in response to each price.", - "type": "text" - }, - { - "block_id": "p91-b3", - "global_id": 890, - "bbox": [ - 72.0, - 189.2, - 196.56, - 206.13 - ], - "text": "Twice as Much Bark", - "type": "text" - }, - { - "block_id": "p91-b4", - "global_id": 891, - "bbox": [ - 72.0, - 211.83, - 434.76, - 281.15 - ], - "text": "First, a simple MA changes when a new piece of data comes in. That’s good—we \nwant our MA to reflect the latest prices. The bad thing is that MA changes again \nwhen an old price is dropped off at the end of its window. When a high price is \ndropped, a simple MA ticks down. When a low price is dropped, a simple MA rises. \nThose changes have nothing to do with the current reality of the market.", - "type": "text" - }, - { - "block_id": "p91-b5", - "global_id": 892, - "bbox": [ - 72.0, - 281.85, - 434.74, - 337.17 - ], - "text": "Imagine that a stock hovers between 80 and 90, and its 10-day simple MA stands \nat 85 but includes one day when the stock reached 105. When that high number is \ndropped at the end of the 10-day window, the MA will dive, as if in a downtrend. \nThat meaningless dive has nothing to do with the current trend.", - "type": "text" - }, - { - "block_id": "p91-b6", - "global_id": 893, - "bbox": [ - 72.0, - 337.86, - 434.75, - 407.19 - ], - "text": "When an old piece of data gets dropped off, a simple moving average jumps. This \nproblem is worse with short MAs but not so bad with long MAs. If you use a 10-day \nMA, those drop-offs can really shake it because each day constitutes 10% of the total \nvalue. On the other hand, if you use a 200-day MA, where each day is responsible for \nonly 0.5%, dropping off a day isn’t going to influence it a lot.", - "type": "text" - }, - { - "block_id": "p91-b7", - "global_id": 894, - "bbox": [ - 72.0, - 407.88, - 434.74, - 463.2 - ], - "text": "Still, a simple MA is like a guard dog that barks twice—once when someone ap-\nproaches the house, and once again when someone walks away from it. After a while, \nyou don’t know when to believe that dog. This is why a modern computerized trader is \nbetter off using exponential moving averages, which we’ll discuss later in this chapter.", - "type": "text" - }, - { - "block_id": "p91-b8", - "global_id": 895, - "bbox": [ - 72.0, - 483.2, - 192.24, - 500.14 - ], - "text": "Market Psychology", - "type": "text" - }, - { - "block_id": "p91-b9", - "global_id": 896, - "bbox": [ - 72.0, - 505.83, - 434.78, - 603.16 - ], - "text": "Each price is a snapshot of the current consensus of value among all market partici-\npants (see Chapter 11). Still, a single price doesn’t tell you whether the crowd is \nbecoming more bullish or bearish, just as you can’t tell from a single photo whether \na person is an optimist or a pessimist. If, on the other hand, you take a daily photo of \na person for ten days, bring them to a lab, and order a composite picture, it’ll reveal \nthat person’s typical features. You can monitor trends in that person’s mood by up-\ndating that composite photo each day.", - "type": "text" - }, - { - "block_id": "p91-b10", - "global_id": 897, - "bbox": [ - 72.0, - 603.86, - 434.74, - 659.25 - ], - "text": "A moving average is a composite photograph of the market—it combines prices \nfor several days. The market consists of huge crowds, and the MA slope identifies \nthe direction of mass inertia. A moving average represents an average con-\nsensus of value for the period of time in its window.", - "type": "text" - }, - { - "block_id": "p91-b11", - "global_id": 898, - "bbox": [ - 72.0, - 659.87, - 434.66, - 687.18 - ], - "text": "The most important message of a moving average is the direction of its slope. \nWhen it rises, it shows that the crowd is becoming more optimistic—bullish. When", - "type": "text" - } - ] - }, - { - "page_num": 92, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p92-b0", - "global_id": 899, - "bbox": [ - 72.0, - 33.66, - 432.02, - 47.21 - ], - "text": "76\t\nCOMPUTERIZED TECHNICAL ANALYSIS", - "type": "text" - }, - { - "block_id": "p92-b1", - "global_id": 900, - "bbox": [ - 72.0, - 57.83, - 434.75, - 99.14 - ], - "text": "it falls, it shows that the crowd is becoming more pessimistic—bearish. When prices \nrise above a moving average, the crowd is more bullish than before. When prices fall \nbelow a moving average, the crowd is more bearish than before.", - "type": "text" - }, - { - "block_id": "p92-b2", - "global_id": 901, - "bbox": [ - 72.0, - 119.2, - 257.33, - 136.13 - ], - "text": "Exponential Moving Averages", - "type": "text" - }, - { - "block_id": "p92-b3", - "global_id": 902, - "bbox": [ - 72.0, - 141.83, - 434.69, - 197.15 - ], - "text": "An exponential moving average (EMA) is a better trend-following tool because it \ngives greater weight to the latest data and responds to changes faster than a simple \nMA. At the same time, an EMA doesn’t jump in response to dropping old data. This \nguard dog has better ears, and it barks only when someone approaches the house.", - "type": "text" - }, - { - "block_id": "p92-b4", - "global_id": 903, - "bbox": [ - 83.93, - 204.88, - 328.05, - 244.64 - ], - "text": "EMA = Ptod • K + EMAyest • (1 − K)\nwhere", - "type": "text" - }, - { - "block_id": "p92-b5", - "global_id": 904, - "bbox": [ - 125.99, - 218.53, - 170.23, - 243.02 - ], - "text": "2\nN + 1\nK =", - "type": "text" - }, - { - "block_id": "p92-b6", - "global_id": 905, - "bbox": [ - 72.0, - 242.88, - 381.16, - 287.36 - ], - "text": "N\t= the number of days in the EMA (chosen by the trader).\n\t\nPtod\t= today’s price.\n\t\nEMAyest\t= the EMA of yesterday.", - "type": "text" - }, - { - "block_id": "p92-b7", - "global_id": 906, - "bbox": [ - 72.0, - 296.82, - 434.75, - 380.15 - ], - "text": "Technical analysis software allows you to select EMA length. An EMA has two \nmajor advantages over a simple MA. First, it assigns greater weight to the last trading \nday. The latest mood of the crowd is more important. In a 10-day EMA, the last clos-\ning price is responsible for 18 percent of EMA value, while in a simple MA all days \nare equal. Second, EMA does not drop old data the way a simple MA does. Old data \nslowly fades away, like a mood of the past lingering in a composite photo.", - "type": "text" - }, - { - "block_id": "p92-b8", - "global_id": 907, - "bbox": [ - 72.0, - 400.2, - 330.78, - 417.14 - ], - "text": "Choosing the Length of a Moving Average", - "type": "text" - }, - { - "block_id": "p92-b9", - "global_id": 908, - "bbox": [ - 72.0, - 422.83, - 434.69, - 492.15 - ], - "text": "It pays to monitor your EMA slope because a rising line reflects bullishness and a \ndeclining one bearishness. A relatively narrow window makes an EMA more sensi-\ntive to price changes. It catches new trends sooner, but leads to more whipsaws. A \nwhipsaw is a rapid reversal of a trading signal. An EMA with a wider time window \nproduces fewer whipsaws but misses turning points by a wider margin.", - "type": "text" - }, - { - "block_id": "p92-b10", - "global_id": 909, - "bbox": [ - 72.0, - 492.85, - 434.77, - 562.17 - ], - "text": "You can take several approaches to deciding how long to make your moving aver-\nage or any other indicator. It would be nice to tie EMA length to a price cycle if you \ncan find it. A moving average should be half the length of the dominant market cycle. \nIf you find a 22-day cycle, use an 11-day moving average. If the cycle is 34 days long, \nthen use a 17-day moving average. Trouble is, cycles keep changing and disappearing.", - "type": "text" - }, - { - "block_id": "p92-b11", - "global_id": 910, - "bbox": [ - 72.0, - 562.87, - 434.75, - 632.19 - ], - "text": "There is no single magic “best” number for the EMA window. Good indicators \nare robust—not too sensitive to small changes in their parameters. When trying to \ncatch longer trends, use a longer moving average. You need a bigger fishing rod \nto catch a bigger fish. A 200-day moving average works for long-term stock investors \nwho want to ride major trends.", - "type": "text" - }, - { - "block_id": "p92-b12", - "global_id": 911, - "bbox": [ - 72.0, - 632.89, - 434.74, - 688.21 - ], - "text": "Most traders can use an EMA between 10 and 30 days. A moving average should \nnot be shorter than 8 days to avoid defeating its purpose as a trend-following tool. \nAmong the numbers I like are 22 because there are approximately 22 trading days in \na month and 26—half of the number of trading weeks in a year.", - "type": "text" - } - ] - }, - { - "page_num": 93, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p93-b0", - "global_id": 912, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "22. MOVING AVERAGES\t\n77", - "type": "text" - }, - { - "block_id": "p93-b1", - "global_id": 913, - "bbox": [ - 72.04, - 57.83, - 434.79, - 113.15 - ], - "text": "Creating individualized parameters for every trading vehicle is practical only if you \ntrack a tiny handful of stocks or futures. Once their number reaches double digits, in-\ndividualized parameters create confusion. It is better to have a yardstick that’s one yard \nlong and use the same parameters for all your moving averages in the same timeframe.", - "type": "text" - }, - { - "block_id": "p93-b2", - "global_id": 914, - "bbox": [ - 72.04, - 113.84, - 434.73, - 155.16 - ], - "text": "Don’t change indicator parameters while looking for trades. Fiddling with param-\neters to obtain signals you’d like to see robs your indicators of their most valuable \nfeature—their objectivity. It is better to set your parameters and live with them.", - "type": "text" - }, - { - "block_id": "p93-b3", - "global_id": 915, - "bbox": [ - 72.0, - 175.2, - 158.03, - 192.13 - ], - "text": "Trading Rules", - "type": "text" - }, - { - "block_id": "p93-b4", - "global_id": 916, - "bbox": [ - 72.0, - 197.83, - 434.7, - 225.14 - ], - "text": "Beginning traders try to forecast the future. Professionals don’t forecast; they measure \nthe relative power of bulls and bears, monitor the trend, and manage their positions.", - "type": "text" - }, - { - "block_id": "p93-b5", - "global_id": 917, - "bbox": [ - 72.0, - 225.84, - 434.69, - 281.16 - ], - "text": "Moving averages help us trade in the direction of the trend. The single most im-\nportant message of a moving average comes from the direction of its slope (Figure \n22.1). It reflects the market’s inertia. When an EMA rises, it is best to trade the mar-\nket from the long side, and when it falls, it pays to trade from the short side.", - "type": "text" - }, - { - "block_id": "p93-b6", - "global_id": 918, - "bbox": [ - 76.0, - 295.84, - 434.65, - 351.16 - ], - "text": "1.\tWhen an EMA rises, trade that market from the long side. Buy when prices \ndip near the moving average. Once you are long, place a protective stop be-\nlow the latest minor low, and move it to the break-even point as soon as prices \nclose higher.", - "type": "text" - }, - { - "block_id": "p93-b7", - "global_id": 919, - "bbox": [ - 75.95, - 358.86, - 434.64, - 400.18 - ], - "text": "2.\tWhen the EMA falls, trade that market from the short side. Sell short when \nprices rally toward the EMA and place a protective stop above the latest minor \nhigh. Lower your stop to breakeven as prices drop.", - "type": "text" - }, - { - "block_id": "p93-b8", - "global_id": 920, - "bbox": [ - 75.97, - 407.83, - 432.02, - 435.14 - ], - "text": "3.\tWhen the EMA goes flat and only wiggles a little, it identifies an aimless, trend-\nless market. Do not trade using a trend-following method.", - "type": "text" - }, - { - "block_id": "p93-b9", - "global_id": 921, - "bbox": [ - 72.0, - 630.98, - 283.58, - 641.03 - ], - "text": "FIGURE 22.1  DIS daily 22-day EMA. (Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p93-b10", - "global_id": 922, - "bbox": [ - 72.0, - 646.83, - 267.04, - 659.73 - ], - "text": "An Exponential Moving Average (EMA)", - "type": "text" - }, - { - "block_id": "p93-b11", - "global_id": 923, - "bbox": [ - 72.0, - 663.68, - 434.53, - 686.17 - ], - "text": "The direction of the slope of a moving average helps identify trends of trading vehicles, \nsuch as the Walt Disney Company (DIS).", - "type": "text" - } - ] - }, - { - "page_num": 94, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p94-b0", - "global_id": 924, - "bbox": [ - 72.0, - 33.66, - 432.02, - 47.21 - ], - "text": "78\t\nCOMPUTERIZED TECHNICAL ANALYSIS", - "type": "text" - }, - { - "block_id": "p94-b1", - "global_id": 925, - "bbox": [ - 72.0, - 57.83, - 434.71, - 127.15 - ], - "text": "Old traders used to follow fast and slow MA crossovers. The favorite approach \nof Donchian, one of the originators of trading with moving averages, was to use \ncrossovers of 4-, 9-, and 18-day MAs. Trading signals were given when all three MAs \nturned in the same direction. His method, like other mechanical trading methods, \nonly worked during strongly trending markets.", - "type": "text" - }, - { - "block_id": "p94-b2", - "global_id": 926, - "bbox": [ - 72.0, - 127.85, - 434.69, - 197.17 - ], - "text": "Trying to filter out whipsaws with mechanical rules is self-defeating—filters re-\nduce profits as much as losses. An example of a filter is a rule that requires prices to \nclose on the other side of MA not once, but twice, or to penetrate MA by a certain \nmargin. Mechanical filters reduce losses, but they also diminish the best feature of a \nmoving average—its ability to lock onto a trend at an early stage.", - "type": "text" - }, - { - "block_id": "p94-b3", - "global_id": 927, - "bbox": [ - 72.0, - 197.87, - 434.77, - 253.19 - ], - "text": "A trader must accept that an EMA, like any other trading tool, has good and bad \nsides. Moving averages help you identify and follow trends, but they lead to whip-\nsaws in trading ranges. We will look for an answer to this dilemma in the chapter on \nthe Triple Screen trading system.", - "type": "text" - }, - { - "block_id": "p94-b4", - "global_id": 928, - "bbox": [ - 72.0, - 273.2, - 235.35, - 290.14 - ], - "text": "More on Moving Averages", - "type": "text" - }, - { - "block_id": "p94-b5", - "global_id": 929, - "bbox": [ - 72.0, - 295.66, - 434.63, - 337.14 - ], - "text": "Moving averages often serve as support and resistance. A rising MA tends to \nserve as a floor below prices, and a falling MA serves as a ceiling above them. That’s \nwhy it pays to buy near a rising MA, and sell short near a falling MA.", - "type": "text" - }, - { - "block_id": "p94-b6", - "global_id": 930, - "bbox": [ - 72.0, - 337.67, - 434.75, - 421.17 - ], - "text": "Moving averages can be applied to indicators as well as prices. For example, \nsome traders use a 5-day moving average of volume. When volume falls below its \n5-day MA, it shows reduced public interest in the minor trend and indicates that it \nis likely to reverse. When volume overshoots its MA, it shows strong public interest \nand confirms the price trend. We’ll be using moving averages of an indicator when \nwe work with Force Index (Chapter 30)", - "type": "text" - }, - { - "block_id": "p94-b7", - "global_id": 931, - "bbox": [ - 72.0, - 421.7, - 434.74, - 505.19 - ], - "text": "The proper way to plot a simple moving average is to lag it behind prices by half \nits length. For example, a 10-day simple MA properly belongs in the middle of a \n10-day period and it should be plotted underneath the 5th or 6th day. An exponential \nmoving average is more heavily weighted toward the latest data, and a 10-day EMA \nshould be lagged by two or three days. Most software packages allow you to lag a \nmoving average.", - "type": "text" - }, - { - "block_id": "p94-b8", - "global_id": 932, - "bbox": [ - 72.0, - 505.72, - 434.69, - 533.27 - ], - "text": "Moving averages can be based not only on closing prices but also on the mean \nbetween the high and the low, which can be useful for day traders.", - "type": "text" - }, - { - "block_id": "p94-b9", - "global_id": 933, - "bbox": [ - 72.0, - 533.9, - 434.75, - 589.22 - ], - "text": "An exponential moving average assigns greater weight to the latest day of trading, \nbut a weighted moving average (WMA) allows you to assign any weight to any \nday, depending on what you deem important. WMAs are so complicated that traders \nare better off using EMAs.", - "type": "text" - }, - { - "block_id": "p94-b10", - "global_id": 934, - "bbox": [ - 72.0, - 609.2, - 141.38, - 626.14 - ], - "text": "Dual EMAs", - "type": "text" - }, - { - "block_id": "p94-b11", - "global_id": 935, - "bbox": [ - 72.0, - 631.83, - 434.72, - 673.14 - ], - "text": "Whenever I analyze charts, I like to use not one but two exponential moving aver-\nages. The longer EMA shows a longer-term consensus of value. The shorter-term \nEMA shows a shorter-term consensus of value.", - "type": "text" - } - ] - }, - { - "page_num": 95, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p95-b0", - "global_id": 936, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "22. MOVING AVERAGES\t\n79", - "type": "text" - }, - { - "block_id": "p95-b1", - "global_id": 937, - "bbox": [ - 72.04, - 57.83, - 434.81, - 155.16 - ], - "text": "I keep the ratio between them at approximately two to one. For example, I may \nuse a 26-week and a 13-week EMA on a weekly chart, or a 22-day and an 11-day \nEMA on a daily chart. Please understand there is no magic set of numbers. You should \nfeel free to play with these values, selecting a set that will be unique to you. Just keep \nin mind to keep the difference between the two EMAs near 2:1. It might be simpler \nand more efficient to use the same set of values (for example 26/13 or 22/11) in all \ntimeframes: weekly, daily, and even intraday.", - "type": "text" - }, - { - "block_id": "p95-b2", - "global_id": 938, - "bbox": [ - 72.04, - 155.86, - 434.75, - 197.24 - ], - "text": "Since the shorter EMA represents the short-term consensus of value and the \nlonger-term EMA the long-term consensus, I believe that value “lives” between \nthese two lines. I call the space between the two EMAs the value zone.", - "type": "text" - }, - { - "block_id": "p95-b3", - "global_id": 939, - "bbox": [ - 72.0, - 217.2, - 265.41, - 234.13 - ], - "text": "Moving Averages and Channels", - "type": "text" - }, - { - "block_id": "p95-b4", - "global_id": 940, - "bbox": [ - 72.0, - 239.83, - 434.71, - 295.15 - ], - "text": "A channel consists of two lines drawn parallel to a moving average. Oddly enough, \nthe distance between the upper and the lower channel lines is sometimes described \nas “height” and at other times as “width” of the channel, even though both refer to the \nsame measurement.", - "type": "text" - }, - { - "block_id": "p95-b5", - "global_id": 941, - "bbox": [ - 72.0, - 295.84, - 434.69, - 351.16 - ], - "text": "A well-drawn channel should contain approximately 95% of all prices that oc-\ncurred during the past 100 bars. Longer-term markets have wider channels because \nprices can cover greater distances in 100 weeks than in 100 days. Volatile markets \nhave wider (or taller) channels than quiet, sleepy markets.", - "type": "text" - }, - { - "block_id": "p95-b6", - "global_id": 942, - "bbox": [ - 72.0, - 351.86, - 434.74, - 393.18 - ], - "text": "Channels are very useful for trading and performance tracking. We’ll review the \nfirst in Chapter 41 (Channel Trading Systems) and the second in Chapter 59 (Trade \nJournal—Measuring Your Performance.)", - "type": "text" - }, - { - "block_id": "p95-b7", - "global_id": 943, - "bbox": [ - 72.0, - 413.2, - 276.84, - 430.14 - ], - "text": "Prices, Values, and the Value Zone", - "type": "text" - }, - { - "block_id": "p95-b8", - "global_id": 944, - "bbox": [ - 72.0, - 435.83, - 434.76, - 505.15 - ], - "text": "One of the key concepts in market analysis—the concept that all of us intuitively un-\nderstand but almost never spell out—is that prices are different from values. We buy \nstocks when we feel that their current prices are below their true value and expect \nprices to rise. We sell and sell short when we think that stocks are priced above their \nreal value and are likely to come down.", - "type": "text" - }, - { - "block_id": "p95-b9", - "global_id": 945, - "bbox": [ - 72.0, - 505.85, - 434.76, - 617.18 - ], - "text": "We buy undervalued stocks and sell overvalued shares—but how to define value?\nFundamental analysts do it by studying balance sheets and annual reports, but \nthose sources aren’t nearly as objective as they seem. Companies often massage \ntheir financial data. Fundamental analysts don’t have a monopoly on the concept \nof value. Technical analysts can define values by tracking the spread between a \nfast and a slow EMA. One of these EMAs reflects a short-term and the other \na long-term consensus of value. Value lives in the zone between the two moving averages \n(Figure 22.2).", - "type": "text" - }, - { - "block_id": "p95-b10", - "global_id": 946, - "bbox": [ - 72.0, - 617.88, - 434.76, - 673.2 - ], - "text": "Very important: it’s impossible to trade successfully with just a single indicator \nor even a pair of moving averages. Markets are too complex to extract money from \nthem with a single tool. We need to build a trading system using several indicators as \nwell as analyze markets in more than one timeframe. Keep this in mind as we review", - "type": "text" - } - ] - }, - { - "page_num": 96, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p96-b0", - "global_id": 947, - "bbox": [ - 72.0, - 33.66, - 432.02, - 47.21 - ], - "text": "80\t\nCOMPUTERIZED TECHNICAL ANALYSIS", - "type": "text" - }, - { - "block_id": "p96-b1", - "global_id": 948, - "bbox": [ - 71.6, - 458.83, - 434.25, - 486.14 - ], - "text": "various indicators—they are the building blocks of trading systems, which we’ll \nreview later in the book.", - "type": "text" - }, - { - "block_id": "p96-b2", - "global_id": 949, - "bbox": [ - 71.6, - 486.84, - 434.32, - 556.16 - ], - "text": "Keeping this in mind will help you become a more rational trader. Once you \nknow how to define value, you can aim to buy at or below value and sell above value. \nWe’ll return to look for trading opportunities in overvalued and undervalued mar-\nkets when we examine price channels or envelopes in Chapter 41 on the Channel \nTrading System.", - "type": "text" - }, - { - "block_id": "p96-b3", - "global_id": 950, - "bbox": [ - 73.15, - 583.86, - 346.31, - 602.5 - ], - "text": "■\n■23. Moving Average Convergence-", - "type": "text" - }, - { - "block_id": "p96-b4", - "global_id": 951, - "bbox": [ - 88.1, - 599.86, - 323.41, - 634.5 - ], - "text": "Divergence: MACD Lines and \nMACD-Histogram", - "type": "text" - }, - { - "block_id": "p96-b5", - "global_id": 952, - "bbox": [ - 71.6, - 644.83, - 434.23, - 672.14 - ], - "text": "Moving averages help identify trends and their reversals. A more advanced indica-\ntor was constructed by Gerald Appel, an analyst and money manager in New York.", - "type": "text" - }, - { - "block_id": "p96-b6", - "global_id": 953, - "bbox": [ - 72.0, - 234.38, - 314.22, - 244.43 - ], - "text": "FIGURE 22.2  DIS daily, 26- and 13-day EMAs. (Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p96-b7", - "global_id": 954, - "bbox": [ - 72.0, - 250.23, - 202.43, - 263.13 - ], - "text": "EMAs and the Value Zone", - "type": "text" - }, - { - "block_id": "p96-b8", - "global_id": 955, - "bbox": [ - 72.0, - 267.13, - 434.57, - 385.6 - ], - "text": "A short-term MA identifies a short-term consensus of value, while a long-term MA reflects \na long-term consensus of value. Value “lives” in the zone between the two moving aver-\nages. Select the parameters for this pair so that the long-term average is approximately \ntwice the length of the short-term EMA. Looking at a chart, you can immediately tell which \nEMA is longer or shorter—the fast one hugs prices more closely, while the slow one moves \nmore slowly. The slow EMA helps identify the trend, while the fast MA sets the boundary \nof the value zone.\nWhen looking to buy a stock, it pays to do it in the value zone, rather than overpay and \nbuy above value. Similarly, when shorting, it pays to wait for a rally into the value zone to \nestablish a short position rather than sell short when prices collapse.", - "type": "text" - }, - { - "block_id": "p96-b9", - "global_id": 956, - "bbox": [ - 72.0, - 387.1, - 434.53, - 433.59 - ], - "text": "During the uptrend shown on this chart, you can see pullbacks to value, offering attrac-\ntive buying opportunities in areas marked 1, 2, 3, and 4. The downward reversal of the slow \nEMA marks the end of the uptrend. At the right edge of the chart, the trend is down, while \na pullback to value in area 5 offers a shorting opportunity.", - "type": "text" - } - ] - }, - { - "page_num": 97, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p97-b0", - "global_id": 957, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "23. MOVING AVERAGE CONVERGENCE-DIVERGENCE\t\n81", - "type": "text" - }, - { - "block_id": "p97-b1", - "global_id": 958, - "bbox": [ - 72.04, - 57.83, - 434.78, - 99.14 - ], - "text": "Moving Average Convergence-Divergence, or MACD for short, consists of not one, \nbut three exponential moving averages. It appears on the charts as two lines whose \ncrossovers give trading signals.", - "type": "text" - }, - { - "block_id": "p97-b2", - "global_id": 959, - "bbox": [ - 72.0, - 119.2, - 208.01, - 136.13 - ], - "text": "How to Create MACD", - "type": "text" - }, - { - "block_id": "p97-b3", - "global_id": 960, - "bbox": [ - 72.0, - 141.83, - 434.76, - 225.16 - ], - "text": "The original MACD indicator consists of two lines: a solid line (called the MACD \nline) and a dashed line (called the Signal line). The MACD line is made up of two \nexponential moving averages (EMAs). It responds to changes in prices relatively \nquickly. The Signal line smooths the MACD line with another EMA. It responds to \nchanges in prices more slowly. In Appel’s original system, buy and sell signals were \ngiven when the fast MACD line crossed above or below the slow Signal line.", - "type": "text" - }, - { - "block_id": "p97-b4", - "global_id": 961, - "bbox": [ - 72.0, - 225.85, - 432.0, - 253.16 - ], - "text": "The MACD indicator is included in most programs for technical analysis. To cre-\nate MACD by hand:", - "type": "text" - }, - { - "block_id": "p97-b5", - "global_id": 962, - "bbox": [ - 76.0, - 267.83, - 269.29, - 281.16 - ], - "text": "1.\tCalculate a 12-day EMA of closing prices.", - "type": "text" - }, - { - "block_id": "p97-b6", - "global_id": 963, - "bbox": [ - 76.0, - 286.82, - 269.29, - 300.22 - ], - "text": "2.\tCalculate a 26-day EMA of closing prices.", - "type": "text" - }, - { - "block_id": "p97-b7", - "global_id": 964, - "bbox": [ - 76.0, - 305.87, - 434.66, - 333.18 - ], - "text": "3.\tSubtract the 26-day EMA from the 12-day EMA, and plot their difference as a \nsolid line. This is the fast MACD line.", - "type": "text" - }, - { - "block_id": "p97-b8", - "global_id": 965, - "bbox": [ - 75.98, - 338.87, - 434.6, - 366.18 - ], - "text": "4.\tCalculate a 9-day EMA of the fast line, and plot the result as a dashed line. This \nis the slow Signal line.", - "type": "text" - }, - { - "block_id": "p97-b9", - "global_id": 966, - "bbox": [ - 72.0, - 384.2, - 192.24, - 401.14 - ], - "text": "Market Psychology", - "type": "text" - }, - { - "block_id": "p97-b10", - "global_id": 967, - "bbox": [ - 72.0, - 406.83, - 434.7, - 476.15 - ], - "text": "Each price reflects the consensus of value among the mass of market participants at \nthe moment of the trade. A moving average represents an average consensus of value \nfor a selected period of time—it is a composite photo of mass consensus. A longer \nmoving average tracks longer-term consensus, and a shorter moving average tracks \nshorter-term consensus.", - "type": "text" - }, - { - "block_id": "p97-b11", - "global_id": 968, - "bbox": [ - 72.0, - 476.85, - 434.7, - 574.18 - ], - "text": "Crossovers of the MACD and Signal lines identify shifts in the balance of power \nof bulls and bears. The fast MACD line reflects mass consensus over a shorter time \nperiod. The slow Signal line reflects mass consensus over a longer period. When \nthe fast MACD line rises above the slow Signal line, it shows that bulls dominate the \nmarket, and it is better to trade from the long side. When the fast line falls below \nthe slow line, it shows that bears dominate the market and it pays to trade from the \nshort side.", - "type": "text" - }, - { - "block_id": "p97-b12", - "global_id": 969, - "bbox": [ - 72.0, - 594.2, - 261.03, - 611.14 - ], - "text": "Trading Rules for MACD Lines", - "type": "text" - }, - { - "block_id": "p97-b13", - "global_id": 970, - "bbox": [ - 72.0, - 616.83, - 434.74, - 672.15 - ], - "text": "Crossovers of the MACD and Signal lines identify changes of market tides. Trading \nin the direction of a crossover means going with the flow of the market. This sys-\ntem generates fewer trades and whipsaws than mechanical systems based on a single \nmoving average.", - "type": "text" - } - ] - }, - { - "page_num": 98, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p98-b0", - "global_id": 971, - "bbox": [ - 72.0, - 33.66, - 432.02, - 47.21 - ], - "text": "82\t\nCOMPUTERIZED TECHNICAL ANALYSIS", - "type": "text" - }, - { - "block_id": "p98-b1", - "global_id": 972, - "bbox": [ - 76.0, - 57.83, - 434.67, - 85.14 - ], - "text": "1.\tWhen the fast MACD line crosses above the slow Signal line, it gives a buy signal. \nGo long, and place a protective stop below the latest minor low.", - "type": "text" - }, - { - "block_id": "p98-b2", - "global_id": 973, - "bbox": [ - 75.99, - 90.83, - 434.7, - 118.14 - ], - "text": "2.\tWhen the fast line crosses below the slow line, it gives a sell signal. Go short, and \nplace a protective stop above the latest minor high (Figure 23.1).", - "type": "text" - }, - { - "block_id": "p98-b3", - "global_id": 974, - "bbox": [ - 71.98, - 132.83, - 434.74, - 174.14 - ], - "text": "Bottoms A, B, and C of ABX could be seen as an inverted head-and-shoulders \nbottom. Still, our technical indicators deliver much more objective messages than \nclassical chart patterns.", - "type": "text" - }, - { - "block_id": "p98-b4", - "global_id": 975, - "bbox": [ - 72.0, - 194.2, - 207.21, - 211.13 - ], - "text": "More on MACD Lines", - "type": "text" - }, - { - "block_id": "p98-b5", - "global_id": 976, - "bbox": [ - 72.0, - 216.83, - 434.75, - 272.15 - ], - "text": "Sophisticated traders tend to personalize their MACD Lines by using other moving \naverages than the standard 12-, 26-, and 9-bar EMAs. Beware of optimizing MACD \ntoo often. If you fiddle with MACD long enough, you can make it give you any signal \nyou'd like.", - "type": "text" - }, - { - "block_id": "p98-b6", - "global_id": 977, - "bbox": [ - 72.0, - 521.98, - 406.27, - 532.03 - ], - "text": "FIGURE 23.1  ABX weekly, 26- and 13-week EMAs, 12-26-9 MACD Lines. (Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p98-b7", - "global_id": 978, - "bbox": [ - 72.0, - 537.83, - 135.16, - 550.73 - ], - "text": "MACD Lines", - "type": "text" - }, - { - "block_id": "p98-b8", - "global_id": 979, - "bbox": [ - 72.0, - 554.73, - 434.53, - 613.21 - ], - "text": "Barrick Gold Corporation (ABX), which has the largest market capitalization of all U.S. \nlisted gold companies, was dragged down in 2012 and 2013 by the bear market in gold. \nNotice the sell signal, marked by a red vertical arrow, when the fast line crossed below the \nslow line. That signal reversed more than a year later, when the fast line crossed above the \nslow line, marked with a green vertical arrow.", - "type": "text" - }, - { - "block_id": "p98-b9", - "global_id": 980, - "bbox": [ - 72.0, - 614.72, - 434.52, - 685.2 - ], - "text": "Notice several additional patterns on this chart. When ABX fell to a record low, marked \nB, MACD Lines refused to confirm: they didn’t fall to a new low but traced out a double bot-\ntom. That new low B turned out to be a false downside breakout, a bullish sign. Bears’ last \nattempt to drive ABX lower, in area C, wasn’t confirmed by MACD Lines, which maintained \na steady uptrend. At the right edge of the chart, MACD Lines have reached a new high for \nthe upmove, indicating strength. Both EMAs are rising, confirming the bullish trend.", - "type": "text" - } - ] - }, - { - "page_num": 99, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p99-b0", - "global_id": 981, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "23. MOVING AVERAGE CONVERGENCE-DIVERGENCE \t\n83", - "type": "text" - }, - { - "block_id": "p99-b1", - "global_id": 982, - "bbox": [ - 72.04, - 57.66, - 434.74, - 113.15 - ], - "text": "A “quick-and-dirty” way to plot MACD can be used by traders whose software \ndoesn’t include this indicator. Some packages allow you to draw only two EMAs. \nIn that case, you can use crossovers between two EMAs, such as 12-day and 26-day \nEMAs as a proxy for MACD and Signal lines.", - "type": "text" - }, - { - "block_id": "p99-b2", - "global_id": 983, - "bbox": [ - 72.0, - 133.2, - 186.4, - 150.13 - ], - "text": "MACD-Histogram", - "type": "text" - }, - { - "block_id": "p99-b3", - "global_id": 984, - "bbox": [ - 72.0, - 155.83, - 434.72, - 211.15 - ], - "text": "MACD-Histogram offers a deeper insight into the balance of power between bulls \nand bears than the original MACD Lines. It shows not only whether bulls or bears \nare in control but also whether they are growing stronger or weaker. It is one of the \nbest tools available to market technicians.", - "type": "text" - }, - { - "block_id": "p99-b4", - "global_id": 985, - "bbox": [ - 151.16, - 225.84, - 352.85, - 239.14 - ], - "text": "MACD-Histogram = MACD line − Signal line", - "type": "text" - }, - { - "block_id": "p99-b5", - "global_id": 986, - "bbox": [ - 72.0, - 253.83, - 432.04, - 295.15 - ], - "text": "MACD-Histogram measures the difference between the MACD line and the Sig-\nnal line. It plots that difference as a histogram—a series of vertical bars. That dis-\ntance may appear puny, but a computer rescales it to fill the screen (Figure 23.2).", - "type": "text" - }, - { - "block_id": "p99-b6", - "global_id": 987, - "bbox": [ - 83.8, - 474.28, - 88.71, - 482.26 - ], - "text": "A", - "type": "text" - }, - { - "block_id": "p99-b7", - "global_id": 988, - "bbox": [ - 124.4, - 503.68, - 128.7, - 511.66 - ], - "text": "B", - "type": "text" - }, - { - "block_id": "p99-b8", - "global_id": 989, - "bbox": [ - 131.1, - 485.48, - 135.64, - 493.46 - ], - "text": "C", - "type": "text" - }, - { - "block_id": "p99-b9", - "global_id": 990, - "bbox": [ - 160.7, - 509.88, - 165.73, - 517.86 - ], - "text": "D", - "type": "text" - }, - { - "block_id": "p99-b10", - "global_id": 991, - "bbox": [ - 224.7, - 468.78, - 228.88, - 476.76 - ], - "text": "E", - "type": "text" - }, - { - "block_id": "p99-b11", - "global_id": 992, - "bbox": [ - 269.1, - 511.88, - 273.03, - 519.86 - ], - "text": "F", - "type": "text" - }, - { - "block_id": "p99-b12", - "global_id": 993, - "bbox": [ - 295.9, - 476.18, - 301.06, - 484.16 - ], - "text": "G", - "type": "text" - }, - { - "block_id": "p99-b13", - "global_id": 994, - "bbox": [ - 376.7, - 505.38, - 381.73, - 513.36 - ], - "text": "H", - "type": "text" - }, - { - "block_id": "p99-b14", - "global_id": 995, - "bbox": [ - 72.0, - 546.78, - 393.84, - 556.83 - ], - "text": "FIGURE 23.2  DJIA daily, 26- and 13-day EMAs, 12-26-9 MACD Lines. (Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p99-b15", - "global_id": 996, - "bbox": [ - 72.0, - 562.63, - 161.85, - 575.53 - ], - "text": "MACD-Histogram", - "type": "text" - }, - { - "block_id": "p99-b16", - "global_id": 997, - "bbox": [ - 72.0, - 579.53, - 434.56, - 638.01 - ], - "text": "When MACD Lines cross over, MACD-Histogram, which is derived from them, crosses \nabove or below its zero line. You can see buy and sell signals of MACD lines, marked by \ngreen and red arrows. These signals are often delayed, but MACD-Histogram gives its \nown fine signals. We’ll return to them later in this chapter, but at this point let’s look at \njust one.", - "type": "text" - }, - { - "block_id": "p99-b17", - "global_id": 998, - "bbox": [ - 72.0, - 639.52, - 434.49, - 686.0 - ], - "text": "Compare the Dow bottoms D and F. The second bottom was slightly lower (it turned \nout to be a false downside breakout), but the corresponding bottom of MACD-Histogram \nwas more shallow than the first, warning that bears were weaker than before and an upside \nreversal was likely to occur.", - "type": "text" - } - ] - }, - { - "page_num": 100, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p100-b0", - "global_id": 999, - "bbox": [ - 72.0, - 33.66, - 432.02, - 47.21 - ], - "text": "84\t\nCOMPUTERIZED TECHNICAL ANALYSIS", - "type": "text" - }, - { - "block_id": "p100-b1", - "global_id": 1000, - "bbox": [ - 72.0, - 57.83, - 434.76, - 113.15 - ], - "text": "If the fast line is above the slow line, MACD-Histogram is positive and plotted \nabove the zero line. If the fast line is below the slow line, MACD-Histogram is nega-\ntive and plotted below the zero line. When the two lines touch, MACD-Histogram \nequals zero.", - "type": "text" - }, - { - "block_id": "p100-b2", - "global_id": 1001, - "bbox": [ - 72.0, - 113.84, - 434.76, - 155.16 - ], - "text": "When the spread between the MACD and Signal lines increases, MACD- \nHistogram becomes taller or deeper, depending on its direction. When the two lines \ndraw closer, MACD-Histogram becomes shorter.", - "type": "text" - }, - { - "block_id": "p100-b3", - "global_id": 1002, - "bbox": [ - 72.0, - 155.86, - 434.76, - 211.18 - ], - "text": "The slope of MACD-Histogram is defined by the relationship between any two \nneighboring bars. If the last bar is higher (like the height of letters m–M), the slope \nof MACD-Histogram is up. If the last bar is lower (like the depth of letters P–p), \nthen the slope of MACD-Histogram is down.", - "type": "text" - }, - { - "block_id": "p100-b4", - "global_id": 1003, - "bbox": [ - 72.0, - 231.2, - 192.24, - 248.13 - ], - "text": "Market Psychology", - "type": "text" - }, - { - "block_id": "p100-b5", - "global_id": 1004, - "bbox": [ - 72.0, - 253.83, - 434.7, - 309.15 - ], - "text": "MACD-Histogram reveals the difference between long-term and short-term consen-\nsus of value. The fast MACD line reflects market consensus over a shorter period. The \nslow Signal line reflects market consensus over a longer period. MACD-Histogram \ntracks the difference between them.", - "type": "text" - }, - { - "block_id": "p100-b6", - "global_id": 1005, - "bbox": [ - 72.0, - 309.84, - 434.68, - 351.16 - ], - "text": "The slope of MACD-Histogram identifies the dominant market group. A ris-\ning MACD-Histogram shows that bulls are becoming stronger. A falling MACD- \nHistogram shows that bears are becoming stronger.", - "type": "text" - }, - { - "block_id": "p100-b7", - "global_id": 1006, - "bbox": [ - 72.0, - 351.86, - 434.71, - 421.18 - ], - "text": "When the fast MACD line rallies ahead of the slow Signal line, MACD-Histogram \nrises. It shows that bulls are becoming stronger than they have been—it is a good \ntime to trade from the long side. When the fast MACD line drops faster than the \nslow line, MACD-Histogram falls. It shows that bears are becoming stronger—it’s a \ngood time to trade from the short side.", - "type": "text" - }, - { - "block_id": "p100-b8", - "global_id": 1007, - "bbox": [ - 72.0, - 421.88, - 434.75, - 463.19 - ], - "text": "When the slope of MACD-Histogram moves in the same direction as prices, the \ntrend is safe. When the slope of MACD-Histogram moves in a direction opposite to \nthat of prices, the health of the trend is in question.", - "type": "text" - }, - { - "block_id": "p100-b9", - "global_id": 1008, - "bbox": [ - 72.0, - 463.89, - 434.74, - 561.22 - ], - "text": "The slope of MACD-Histogram is more important than its position above or \nbelow the centerline. It is best to trade in the direction of the slope of MACD-\nHistogram because it shows whether bulls or bears dominate the market. The best \nbuy signals occur when MACD-Histogram is below its centerline but its slope turns \nup, showing that bears have become exhausted. The best sell signals are given when \nMACD-Histogram is above its centerline but its slope turns down, showing that \nbulls have become exhausted.", - "type": "text" - }, - { - "block_id": "p100-b10", - "global_id": 1009, - "bbox": [ - 72.0, - 581.2, - 158.03, - 598.14 - ], - "text": "Trading Rules", - "type": "text" - }, - { - "block_id": "p100-b11", - "global_id": 1010, - "bbox": [ - 72.0, - 603.83, - 434.71, - 659.15 - ], - "text": "MACD-Histogram gives two types of trading signals. One is common, occurring at \nevery price bar. The other is rare but extremely strong. It may occur only a few times \na year on the daily chart of a stock. It’s even more rare on the weekly charts, but \nmore frequent on the intraday charts.", - "type": "text" - }, - { - "block_id": "p100-b12", - "global_id": 1011, - "bbox": [ - 72.0, - 659.84, - 434.69, - 687.16 - ], - "text": "The common signal is given by the slope of MACD-Histogram. When the current \nbar is higher than the preceding bar, the slope is up. It shows that bulls are in control", - "type": "text" - } - ] - }, - { - "page_num": 101, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p101-b0", - "global_id": 1012, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "23. MOVING AVERAGE CONVERGENCE-DIVERGENCE\t\n85", - "type": "text" - }, - { - "block_id": "p101-b1", - "global_id": 1013, - "bbox": [ - 72.04, - 57.83, - 434.81, - 113.15 - ], - "text": "and it’s time to buy. When the current bar is lower than the preceding bar, the slope \nis down. It shows that bears are in control and it’s time to be short. When prices go \none way but MACD-Histogram moves the other way, it shows that the dominant \ncrowd is losing its enthusiasm and the trend is weaker than it appears.", - "type": "text" - }, - { - "block_id": "p101-b2", - "global_id": 1014, - "bbox": [ - 75.95, - 122.84, - 434.6, - 181.62 - ], - "text": "1.\tBuy when MACD-Histogram stops falling and ticks up. Place a protective stop \nbelow the latest minor low.\n2.\tSell short when MACD-Histogram stops rising and ticks down. Place a protec-\ntive stop above the latest minor high.", - "type": "text" - }, - { - "block_id": "p101-b3", - "global_id": 1015, - "bbox": [ - 71.96, - 191.32, - 434.7, - 274.64 - ], - "text": "MACD-Histogram ticks up and down on the daily charts so often that it’s not \npractical to buy and sell every time it turns. The changes of slope of MACD- \nHistograms are much more meaningful on the weekly charts, which is why it is \nincluded in the Triple Screen trading system (see Chapter 39). A combination of an \nexponential moving average and MACD-Histogram helps create the Impulse system, \ndescribed in Chapter 40.", - "type": "text" - }, - { - "block_id": "p101-b4", - "global_id": 1016, - "bbox": [ - 72.0, - 291.2, - 300.38, - 308.14 - ], - "text": "When to Expect a New Peak or Valley", - "type": "text" - }, - { - "block_id": "p101-b5", - "global_id": 1017, - "bbox": [ - 72.0, - 313.83, - 434.74, - 369.15 - ], - "text": "A record peak for the past three months of daily MACD-Histogram shows that \nbulls are very strong and prices are likely to rise even higher. A record new low for \nMACD-Histogram for the past three months shows that bears are very strong and \nlower prices are likely ahead.", - "type": "text" - }, - { - "block_id": "p101-b6", - "global_id": 1018, - "bbox": [ - 72.0, - 369.84, - 434.75, - 425.16 - ], - "text": "When MACD-Histogram reaches a new high during a rally, the uptrend is healthy \nand you can expect the next rally to retest or exceed its previous peak. If MACD-\nHistogram falls to a new low during a downtrend, it shows that bears are strong and \nprices are likely to retest or exceed their latest low.", - "type": "text" - }, - { - "block_id": "p101-b7", - "global_id": 1019, - "bbox": [ - 72.0, - 425.86, - 434.72, - 467.18 - ], - "text": "MACD-Histogram works like headlights on a car—it gives you a glimpse of the \nroad ahead. Not all the way home, mind you, but enough to drive safely at a reason-\nable speed.", - "type": "text" - }, - { - "block_id": "p101-b8", - "global_id": 1020, - "bbox": [ - 72.0, - 483.7, - 243.37, - 500.64 - ], - "text": "More on MACD-Histogram", - "type": "text" - }, - { - "block_id": "p101-b9", - "global_id": 1021, - "bbox": [ - 72.0, - 506.33, - 434.75, - 561.65 - ], - "text": "MACD-Histogram works in all timeframes: weekly, daily, and intraday. Signals in \nlonger timeframes lead to greater price moves. For example, the signals of weekly \nMACD-Histogram lead to greater price changes than the daily or intraday MACD. \nThis principle applies to all technical indicators.", - "type": "text" - }, - { - "block_id": "p101-b10", - "global_id": 1022, - "bbox": [ - 72.0, - 562.34, - 434.77, - 687.68 - ], - "text": "When you use MACD Lines and MACD-Histogram on the weekly charts, you \ndon’t have to wait until Friday to find your signals. A trend can turn in the middle of \nthe week—the market does not watch the calendar. It makes sense to perform weekly \nstudies each day. I set my software to plot weekly charts in the traditional manner, \nfrom Monday through Friday, but with a twist: the latest weekly bar reflects trading \nfor the current week, starting on Monday. After the market closes on Monday, my \nlatest ‘weekly bar’ is identical to Monday’s daily bar. The weekly bar on Tuesday \nreflects two trading days, and so on. Because of this, on Monday I take the new weekly \nbar at a heavy discount, but by Thursday I start trusting it a great deal more.", - "type": "text" - } - ] - }, - { - "page_num": 102, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p102-b0", - "global_id": 1023, - "bbox": [ - 72.0, - 33.66, - 432.02, - 47.21 - ], - "text": "86\t\nCOMPUTERIZED TECHNICAL ANALYSIS", - "type": "text" - }, - { - "block_id": "p102-b1", - "global_id": 1024, - "bbox": [ - 72.0, - 57.1, - 148.44, - 74.04 - ], - "text": "Divergences", - "type": "text" - }, - { - "block_id": "p102-b2", - "global_id": 1025, - "bbox": [ - 72.0, - 78.73, - 432.5, - 106.04 - ], - "text": "Divergences are among the most powerful signals in technical analysis. In this sub-\nchapter, we’ll focus on MACD-Histogram, but this concept applies to most indicators.", - "type": "text" - }, - { - "block_id": "p102-b3", - "global_id": 1026, - "bbox": [ - 72.0, - 106.74, - 434.69, - 162.06 - ], - "text": "Divergences between MACD-Histogram and prices are infrequent, but they give \nsome of the most powerful signals. They often mark major turning points. They don’t \noccur at every important top or bottom, but when you see one, you know that a big \nreversal is probably at hand.", - "type": "text" - }, - { - "block_id": "p102-b4", - "global_id": 1027, - "bbox": [ - 71.96, - 176.73, - 434.71, - 260.06 - ], - "text": "Bullish divergences occur towards the ends of downtrends—they identify market \nbottoms. A classical bullish divergence occurs when prices and the oscillator both \nfall to a new low, rally, with the oscillator rising above its zero line, then both fall \nagain. This time, prices drop to a lower low, but an oscillator traces a higher bottom \nthan during its previous decline. Such bullish divergences often precede sharp rallies \n(Figure 23.3).", - "type": "text" - }, - { - "block_id": "p102-b5", - "global_id": 1028, - "bbox": [ - 253.1, - 489.02, - 258.6, - 497.96 - ], - "text": "A", - "type": "text" - }, - { - "block_id": "p102-b6", - "global_id": 1029, - "bbox": [ - 303.1, - 464.82, - 308.19, - 473.76 - ], - "text": "C", - "type": "text" - }, - { - "block_id": "p102-b7", - "global_id": 1030, - "bbox": [ - 282.2, - 434.82, - 287.01, - 443.76 - ], - "text": "B", - "type": "text" - }, - { - "block_id": "p102-b8", - "global_id": 1031, - "bbox": [ - 71.96, - 521.58, - 429.44, - 542.62 - ], - "text": "FIGURE 23.3  DJIA weekly, 26- and 13-day EMAs, 12-26-9 MACD Lines and MACD-Histogram. (Chart by \nTC2000 from the book Two Roads Diverged: Trading Divergences)", - "type": "text" - }, - { - "block_id": "p102-b9", - "global_id": 1032, - "bbox": [ - 72.0, - 548.43, - 176.96, - 561.33 - ], - "text": "A Bullish Divergence", - "type": "text" - }, - { - "block_id": "p102-b10", - "global_id": 1033, - "bbox": [ - 72.0, - 565.33, - 434.55, - 671.8 - ], - "text": "Here you see a divergence that signaled the 2007–2009 bear market bottom, giving a strong \nbuy signal right near the lows. In area A, the Dow appeared in a free fall, as Lehman \nBrothers went bust and waves of selling hit the market. The record low A of MACD-H \nindicated that bears were extremely strong and that the price bottom A was likely to be \nretested or exceeded. In area B, MACD-H rallied above its centerline, “breaking the back \nof the bear.” Notice that the brief rally reached the “value zone” between the two moving \naverages. This is a fairly common target for bear market rallies. In area C, the Dow slid to a \nnew bear market low, but MACD-H traced a much more shallow low. Its uptick completed \na bullish divergence, giving a strong buy signal.", - "type": "text" - } - ] - }, - { - "page_num": 103, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p103-b0", - "global_id": 1034, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "23. MOVING AVERAGE CONVERGENCE-DIVERGENCE\t\n87", - "type": "text" - }, - { - "block_id": "p103-b1", - "global_id": 1035, - "bbox": [ - 72.04, - 57.83, - 434.69, - 113.15 - ], - "text": "I’m showing you this weekly chart of DJIA and its MACD-Histogram as a perfect \nexample of a divergence. It deserves to be pinned to a wall near your trading desk. \nYou won’t always get such a perfect picture, but the closer you get to it, the more \nreliable it’ll be.", - "type": "text" - }, - { - "block_id": "p103-b2", - "global_id": 1036, - "bbox": [ - 72.04, - 113.68, - 434.81, - 169.16 - ], - "text": "Notice that the breaking of the centerline between two indicator bottoms \nis an absolute must for a true divergence. MACD-Histogram has to cross above \nthat line before skidding to its second bottom. If there is no crossover, there is no \ndivergence.", - "type": "text" - }, - { - "block_id": "p103-b3", - "global_id": 1037, - "bbox": [ - 72.04, - 169.69, - 434.75, - 225.18 - ], - "text": "Another key point: MACD-H gives a buy signal when it ticks up from the \nsecond bottom. It does not have to cross above the centerline for the second time. \nThe buy signal occurs when MACD-H, still below zero, simply stops declining and \ntraces out a bar that is less negative than its preceding bar.", - "type": "text" - }, - { - "block_id": "p103-b4", - "global_id": 1038, - "bbox": [ - 72.04, - 225.88, - 434.79, - 365.22 - ], - "text": "This divergence of MACD-Histogram in Figure 23.3 was reinforced when MACD \nLines traced a bullish pattern between the bottoms A and C, with the second bottom \nmore shallow than the first. Such patterns of MACD Lines are quite rare. They indi-\ncate that the coming uptrend is likely to be especially strong, even though we cannot \ncall them divergences because this indicator has no zero line. The rally that began in \n2009 lasted almost a year before its first meaningful correction.\nAlso, we can’t call the pattern of lower indicator tops after the bottom C a diver-\ngence. The lower tops reflect a gradual weakening of the uptrend with the passage of \ntime. In order to count as a divergence, MACD-Histogram has to cross and recross \nits zero line.", - "type": "text" - }, - { - "block_id": "p103-b5", - "global_id": 1039, - "bbox": [ - 72.0, - 379.83, - 434.74, - 449.15 - ], - "text": "Bearish divergences occur in uptrends—they identify market tops. A classical \nbearish divergence occurs when prices reach a new high and then pull back, with \nan oscillator dropping below its zero line. Prices stabilize and rally to a higher high, \nbut an oscillator reaches a lower peak than it did on a previous rally. Such bearish \ndivergences usually lead to sharp breaks.", - "type": "text" - }, - { - "block_id": "p103-b6", - "global_id": 1040, - "bbox": [ - 72.02, - 449.85, - 434.72, - 505.17 - ], - "text": "A bearish divergence shows that bulls are running out of steam, prices are rising \nout of inertia, and bears are ready to take control. Valid divergences are clearly \nvisible—they seem to jump at you from the charts. If you need a ruler to tell wheth-\ner there is a divergence, assume there is none (Figure 23.4).", - "type": "text" - }, - { - "block_id": "p103-b7", - "global_id": 1041, - "bbox": [ - 72.02, - 505.86, - 434.7, - 547.18 - ], - "text": "The previous chart featured a striking bullish divergence at the 2009 stock market \nbottom. Now, for a similarly striking illustration of a massive bearish divergence, \nlet’s roll back the clock and examine the 2007 bull market top.", - "type": "text" - }, - { - "block_id": "p103-b8", - "global_id": 1042, - "bbox": [ - 72.02, - 547.71, - 434.75, - 589.19 - ], - "text": "Notice that the breaking of the centerline between the two indicator tops is \nan absolute must for a true divergence. MACD-Histogram has to drop below its zero \nline before rising to the second top.", - "type": "text" - }, - { - "block_id": "p103-b9", - "global_id": 1043, - "bbox": [ - 72.02, - 589.72, - 434.79, - 645.21 - ], - "text": "Another key point: MACD-H gives a sell signal when it ticks down from \nthe second top. We don’t need to wait for it to cross below the centerline again. \nThe sell signal occurs when MACD-H, still above zero, simply stops rising and traces \nout a bar shorter than the preceding bar.", - "type": "text" - }, - { - "block_id": "p103-b10", - "global_id": 1044, - "bbox": [ - 72.02, - 645.9, - 434.78, - 673.22 - ], - "text": "The message of a bearish divergence in Figure 23.4 was reinforced by MACD \nLines, which traced a bearish pattern between the tops X and Z. The second top of", - "type": "text" - } - ] - }, - { - "page_num": 104, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p104-b0", - "global_id": 1045, - "bbox": [ - 72.0, - 33.66, - 432.02, - 47.21 - ], - "text": "88\t\nCOMPUTERIZED TECHNICAL ANALYSIS", - "type": "text" - }, - { - "block_id": "p104-b1", - "global_id": 1046, - "bbox": [ - 72.0, - 505.63, - 434.72, - 546.94 - ], - "text": "MACD Lines was more shallow than the first, confirming the bearish divergence \nof MACD-H. Such patterns of MACD Lines tell us that the coming downtrend is \nlikely to be especially severe.", - "type": "text" - }, - { - "block_id": "p104-b2", - "global_id": 1047, - "bbox": [ - 72.0, - 547.64, - 434.68, - 602.96 - ], - "text": "“Missing right shoulder” divergences in which the second peak fails to cross the \nzero line are quite rare, but produce very strong trading signals. An experienced \ntrader can look for them, but they are definitely not for beginners. They are de-\nscribed and illustrated in the e-book Two Roads Diverged: Trading Divergences.", - "type": "text" - }, - { - "block_id": "p104-b3", - "global_id": 1048, - "bbox": [ - 72.0, - 603.66, - 434.77, - 672.98 - ], - "text": "Kerry Lovvorn performed extensive research to find that the most tradable \ndivergences occur when the distance between the two peaks or the two bottoms \nof MACD-H is between 20 and 40 bars—and the closer to 20, the better. In other \nwords, the two tops or two bottoms cannot be too far apart. 20 bars translate into \n20 weeks on a weekly chart, 20 days on a daily chart, and so on. Kerry also found", - "type": "text" - }, - { - "block_id": "p104-b4", - "global_id": 1049, - "bbox": [ - 255.3, - 196.42, - 260.66, - 205.36 - ], - "text": "X", - "type": "text" - }, - { - "block_id": "p104-b5", - "global_id": 1050, - "bbox": [ - 306.1, - 205.62, - 310.78, - 214.56 - ], - "text": "Z", - "type": "text" - }, - { - "block_id": "p104-b6", - "global_id": 1051, - "bbox": [ - 287.3, - 243.82, - 292.11, - 252.76 - ], - "text": "Y", - "type": "text" - }, - { - "block_id": "p104-b7", - "global_id": 1052, - "bbox": [ - 71.96, - 276.58, - 429.8, - 297.62 - ], - "text": "FIGURE 23.4  DJIA weekly, 26- and 13-day EMAs, 12-26-9 MACD Lines and MACD-Histogram. (Chart by \nTC2000 from the book Two Roads Diverged: Trading Divergences)", - "type": "text" - }, - { - "block_id": "p104-b8", - "global_id": 1053, - "bbox": [ - 72.0, - 303.43, - 181.45, - 316.33 - ], - "text": "A Bearish Divergence", - "type": "text" - }, - { - "block_id": "p104-b9", - "global_id": 1054, - "bbox": [ - 72.0, - 320.33, - 434.53, - 378.81 - ], - "text": "In area X, the Dow rallied to a new bull market high and MACD-Histogram rallied with it, \nrising above its previous peak and showing that bulls were extremely strong. This indicated \nthat the price peak X was likely to be retested or exceeded. Note that the top X of MACD-\nH, despite its complex form, was not a divergence because the valley in its middle never \nsank below zero.", - "type": "text" - }, - { - "block_id": "p104-b10", - "global_id": 1055, - "bbox": [ - 72.0, - 380.32, - 434.56, - 450.8 - ], - "text": "In area Y, MACD-H fell below its centerline, “breaking the back of the bull.” Notice that \nprices punched below the value zone between the two moving averages. This is a fairly \ncommon target for bull market breaks. Notice also a kangaroo tail at the bottom Y. In area Z, \nthe Dow rallied to a new bull market high, but the rally of MACD-H was feeble, reflecting the \nbulls’ weakness. Its downtick from peak Z completed a bearish divergence, giving a strong \nsell signal and auguring in the nastiest bear market in a generation.", - "type": "text" - } - ] - }, - { - "page_num": 105, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p105-b0", - "global_id": 1056, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "24. THE DIRECTIONAL SYSTEM\t\n89", - "type": "text" - }, - { - "block_id": "p105-b1", - "global_id": 1057, - "bbox": [ - 72.04, - 57.83, - 434.72, - 85.14 - ], - "text": "that the best signals come from divergences in which the second top or bottom is no \nmore than half the height or the depth of the first.", - "type": "text" - }, - { - "block_id": "p105-b2", - "global_id": 1058, - "bbox": [ - 71.98, - 99.83, - 434.74, - 197.16 - ], - "text": "Triple Bullish or Bearish Divergences consist of three price bottoms and three \noscillator bottoms or three price tops and three oscillator tops. They are even stron-\nger than regular divergences. In order for a triple divergence to occur, a regular \nbullish or bearish divergence first has to abort. That’s another good reason to prac-\ntice tight money management! If you lose only a little on a whipsaw, you will pre-\nserve both the money and psychological strength to re-enter a trade. The third top or \nbottom has to be more shallow than the first but not necessarily the second.", - "type": "text" - }, - { - "block_id": "p105-b3", - "global_id": 1059, - "bbox": [ - 72.0, - 217.2, - 260.24, - 234.13 - ], - "text": "The Hound of the Baskervilles", - "type": "text" - }, - { - "block_id": "p105-b4", - "global_id": 1060, - "bbox": [ - 72.0, - 239.83, - 434.69, - 295.15 - ], - "text": "This signal occurs when a reliable chart or indicator pattern doesn’t lead to the \naction you expected and prices move in the opposite direction. A divergence may \nindicate that an uptrend is over, but if prices continue to rise, they give the Hound \nof the Baskervilles signal.", - "type": "text" - }, - { - "block_id": "p105-b5", - "global_id": 1061, - "bbox": [ - 72.0, - 295.84, - 434.76, - 365.17 - ], - "text": "This signal is named after the story by Sir Arthur Conan Doyle in which Sherlock \nHolmes was called to investigate a murder at a country estate. He found the essential \nclue when he realized that the family dog didn’t bark while the murder was being \ncommitted. That meant the dog knew the criminal and the murder was an inside job. \nThe signal was given by the lack of expected action—by the lack of barking!", - "type": "text" - }, - { - "block_id": "p105-b6", - "global_id": 1062, - "bbox": [ - 72.0, - 365.86, - 434.76, - 407.18 - ], - "text": "When the market refuses to bark in response to a perfectly good signal, it gives \nyou the Hound of the Baskervilles signal. This shows that something is fundamentally \nchanging below the surface. Then it is time to get in gear with the new powerful trend.", - "type": "text" - }, - { - "block_id": "p105-b7", - "global_id": 1063, - "bbox": [ - 72.0, - 407.83, - 434.76, - 449.14 - ], - "text": "I am not a fan of  “stop-and-reverse” orders, but make an exception for the Hound \nof the Baskervilles. On those rare occasions when a bearish divergence aborts, I may \ngo long. In the rare instances when a bullish divergence aborts, I look to go short.", - "type": "text" - }, - { - "block_id": "p105-b8", - "global_id": 1064, - "bbox": [ - 73.55, - 476.86, - 298.36, - 495.5 - ], - "text": "■\n■24. The Directional System", - "type": "text" - }, - { - "block_id": "p105-b9", - "global_id": 1065, - "bbox": [ - 72.0, - 505.83, - 434.75, - 561.15 - ], - "text": "The Directional system is a trend-following method developed by J. Welles Wilder, \nJr., in the mid-1970s and modified by several analysts. It identifies trends and shows \nwhen a trend is moving fast enough to make it worth following. It helps traders to \nprofit by taking chunks out of the middle of important trends.", - "type": "text" - }, - { - "block_id": "p105-b10", - "global_id": 1066, - "bbox": [ - 72.0, - 581.2, - 328.05, - 598.14 - ], - "text": "How to Construct the Directional System", - "type": "text" - }, - { - "block_id": "p105-b11", - "global_id": 1067, - "bbox": [ - 72.0, - 603.83, - 434.76, - 673.15 - ], - "text": "Directional Movement is defined as the portion of today’s range that is outside of the \nprevious day’s range. The Directional system checks whether today’s range extends \nabove or below the previous day’s range and averages that data over a period of time. \nThese complex calculations are best performed on a computer. The Directional \nsystem is included in most programs for technical analysis.", - "type": "text" - } - ] - }, - { - "page_num": 106, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p106-b0", - "global_id": 1068, - "bbox": [ - 72.0, - 33.66, - 432.02, - 47.21 - ], - "text": "90\t\nCOMPUTERIZED TECHNICAL ANALYSIS", - "type": "text" - }, - { - "block_id": "p106-b1", - "global_id": 1069, - "bbox": [ - 76.0, - 477.06, - 434.67, - 546.55 - ], - "text": "1.\tIdentify “Directional Movement” (DM) by comparing today’s high-low range \nwith yesterday’s high-low range. Directional Movement is the largest part of \ntoday’s range outside of yesterday’s range. There are four types of DM (Figure \n24.1). DM is always a positive number (+DM and −DM refer simply to move-\nment above or below yesterday’s range).", - "type": "text" - }, - { - "block_id": "p106-b2", - "global_id": 1070, - "bbox": [ - 76.02, - 554.08, - 431.97, - 623.62 - ], - "text": "2.\tIdentify the “True Range” (TR) of the market you analyze. TR is always a posi-\ntive number, the largest of the following three:\na.\t The distance from today’s high to today’s low\nb.\t The distance from today’s high to yesterday’s close\nc.\t The distance from today’s low to yesterday’s close", - "type": "text" - }, - { - "block_id": "p106-b3", - "global_id": 1071, - "bbox": [ - 75.98, - 628.86, - 434.75, - 672.62 - ], - "text": "3.\tCalculate daily Directional Indicators (+DI and −DI). They allow you to \ncompare different markets by expressing their directional movement as a per-\ncentage of each market’s true range. Each DI is a positive number: +DI equals", - "type": "text" - }, - { - "block_id": "p106-b4", - "global_id": 1072, - "bbox": [ - 126.9, - 91.65, - 201.52, - 103.2 - ], - "text": "A\nB", - "type": "text" - }, - { - "block_id": "p106-b5", - "global_id": 1073, - "bbox": [ - 131.43, - 68.76, - 225.77, - 80.4 - ], - "text": "DIRECTIONAL MOVEMENT", - "type": "text" - }, - { - "block_id": "p106-b6", - "global_id": 1074, - "bbox": [ - 148.9, - 112.05, - 174.48, - 123.6 - ], - "text": "+ DM", - "type": "text" - }, - { - "block_id": "p106-b7", - "global_id": 1075, - "bbox": [ - 217.74, - 161.94, - 241.73, - 173.49 - ], - "text": "– DM", - "type": "text" - }, - { - "block_id": "p106-b8", - "global_id": 1076, - "bbox": [ - 348.4, - 214.44, - 372.39, - 225.98 - ], - "text": "– DM", - "type": "text" - }, - { - "block_id": "p106-b9", - "global_id": 1077, - "bbox": [ - 281.97, - 179.24, - 307.55, - 190.79 - ], - "text": "+ DM", - "type": "text" - }, - { - "block_id": "p106-b10", - "global_id": 1078, - "bbox": [ - 351.93, - 81.03, - 377.51, - 92.58 - ], - "text": "+ DM", - "type": "text" - }, - { - "block_id": "p106-b11", - "global_id": 1079, - "bbox": [ - 285.72, - 134.37, - 314.14, - 145.92 - ], - "text": "DM=0", - "type": "text" - }, - { - "block_id": "p106-b12", - "global_id": 1080, - "bbox": [ - 285.72, - 79.13, - 314.14, - 90.68 - ], - "text": "DM=0", - "type": "text" - }, - { - "block_id": "p106-b13", - "global_id": 1081, - "bbox": [ - 261.11, - 59.08, - 338.01, - 70.63 - ], - "text": "C\nD", - "type": "text" - }, - { - "block_id": "p106-b14", - "global_id": 1082, - "bbox": [ - 72.0, - 258.18, - 205.41, - 268.23 - ], - "text": "FIGURE 24.1  Directional Movement.", - "type": "text" - }, - { - "block_id": "p106-b15", - "global_id": 1083, - "bbox": [ - 71.96, - 274.93, - 431.95, - 285.43 - ], - "text": "Directional movement is the largest part of today’s range that is outside of yesterday’s range.", - "type": "text" - }, - { - "block_id": "p106-b16", - "global_id": 1084, - "bbox": [ - 73.96, - 296.93, - 434.48, - 320.13 - ], - "text": "1.\t If today’s range extends above yesterday’s range, Directional Movement is positive \n(+DM).", - "type": "text" - }, - { - "block_id": "p106-b17", - "global_id": 1085, - "bbox": [ - 73.96, - 325.93, - 434.46, - 349.13 - ], - "text": "2.\t If today’s range extends below yesterday’s range, Directional Movement is negative \n(−DM).", - "type": "text" - }, - { - "block_id": "p106-b18", - "global_id": 1086, - "bbox": [ - 73.96, - 354.92, - 434.46, - 401.43 - ], - "text": "3.\t If today’s range is inside of yesterday’s range or extends above and below it by equal \namounts, there is no Directional Movement (DM = 0). If today’s range extends both \nabove and below yesterday’s range, DM is positive or negative, pending on which part \nof the “outside range” is larger.", - "type": "text" - }, - { - "block_id": "p106-b19", - "global_id": 1087, - "bbox": [ - 73.96, - 407.43, - 434.45, - 431.15 - ], - "text": "4.\t On a limit-up day, +DM equals the distance from today’s close to yesterday’s high. On \na limit-down day, −DM equals the distance from today’s close to yesterday’s low.", - "type": "text" - } - ] - }, - { - "page_num": 107, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p107-b0", - "global_id": 1088, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "24. THE DIRECTIONAL SYSTEM\t\n91", - "type": "text" - }, - { - "block_id": "p107-b1", - "global_id": 1089, - "bbox": [ - 90.04, - 56.8, - 434.67, - 86.56 - ], - "text": "zero on a day with no directional movement up; −DI equals zero on a day with \nno directional movement down.", - "type": "text" - }, - { - "block_id": "p107-b2", - "global_id": 1090, - "bbox": [ - 209.5, - 92.38, - 236.36, - 108.14 - ], - "text": "+ DM", - "type": "text" - }, - { - "block_id": "p107-b3", - "global_id": 1091, - "bbox": [ - 176.29, - 92.38, - 326.56, - 118.74 - ], - "text": "TR\n+ DI =\n− DM", - "type": "text" - }, - { - "block_id": "p107-b4", - "global_id": 1092, - "bbox": [ - 265.29, - 97.08, - 320.08, - 118.74 - ], - "text": "TR\n− DI =", - "type": "text" - }, - { - "block_id": "p107-b5", - "global_id": 1093, - "bbox": [ - 76.0, - 127.88, - 434.74, - 259.64 - ], - "text": "4.\tCalculate smoothed Directional Lines (+DI13 and −DI13). Smooth +DI and \n−DI are created with moving averages. Most software packages allow you to \npick any period for smoothing, such as a 13-day moving average. You get two \nindicator lines: smoothed Positive and Negative Directional lines, +DI13 and \n−DI13. Both numbers are positive. They are usually plotted in different colors.\nThe relationship between Positive and Negative lines identifies \ntrends. When +DI13 is on top, it shows that the trend is up, and when −DI13 is \non top, it shows that the trend is down. The crossovers of +DI13 and −DI13 give \nbuy and sell signals.", - "type": "text" - }, - { - "block_id": "p107-b6", - "global_id": 1094, - "bbox": [ - 76.0, - 267.16, - 434.74, - 336.72 - ], - "text": "5.\tCalculate the Average Directional Indicator (ADX). This unique compo-\nnent of the Directional system shows when a trend is worth following. ADX \nmeasures the spread between Directional Lines +DI13 and −DI13. It is calculated \nin two steps:\na.\t Calculate the daily Directional Indicator DX:", - "type": "text" - }, - { - "block_id": "p107-b7", - "global_id": 1095, - "bbox": [ - 184.69, - 341.88, - 319.3, - 371.66 - ], - "text": "+ DI13 − − DI13\n+ DI13 + − DI13\n DX =\n•100", - "type": "text" - }, - { - "block_id": "p107-b8", - "global_id": 1096, - "bbox": [ - 100.0, - 376.88, - 314.04, - 393.36 - ], - "text": "For example, if +DI13 = 34 and −DI13 = 18, then,", - "type": "text" - }, - { - "block_id": "p107-b9", - "global_id": 1097, - "bbox": [ - 144.19, - 398.91, - 359.96, - 426.37 - ], - "text": "34 − 18\n34 + 18\n DX =\n•100 = 30.77, rounded off to 31", - "type": "text" - }, - { - "block_id": "p107-b10", - "global_id": 1098, - "bbox": [ - 90.0, - 437.33, - 434.69, - 450.64 - ], - "text": "b.\tCalculate the Average Directional Indicator ADX by smoothing DX with a", - "type": "text" - }, - { - "block_id": "p107-b11", - "global_id": 1099, - "bbox": [ - 102.0, - 451.33, - 272.14, - 464.64 - ], - "text": "moving average, such as a 13-day EMA.", - "type": "text" - }, - { - "block_id": "p107-b12", - "global_id": 1100, - "bbox": [ - 72.0, - 477.34, - 434.7, - 518.65 - ], - "text": "During a persistent trend, the spread between two smoothed Directional lines \nincreases, and ADX rises. ADX declines when a trend reverses or when a market en-\nters a trading range. It pays to use trend-following methods only when ADX is rising.", - "type": "text" - }, - { - "block_id": "p107-b13", - "global_id": 1101, - "bbox": [ - 72.0, - 538.7, - 173.57, - 555.64 - ], - "text": "Crowd Behavior", - "type": "text" - }, - { - "block_id": "p107-b14", - "global_id": 1102, - "bbox": [ - 72.0, - 561.33, - 434.72, - 630.65 - ], - "text": "The Directional system tracks changes in mass bullishness and bearishness by mea-\nsuring the capacity of bulls and bears to move prices outside of the previous day’s \nrange. If today’s high is above yesterday’s high, it shows that the market crowd is \nmore bullish. If today’s low is below yesterday’s low, it shows that the market crowd \nis more bearish.", - "type": "text" - }, - { - "block_id": "p107-b15", - "global_id": 1103, - "bbox": [ - 72.0, - 631.35, - 434.72, - 672.66 - ], - "text": "The relative positions of Directional lines identify trends. When the Positive \nDirectional line is above the Negative Directional line, it shows that bullish traders \ndominate the market. When the Negative Directional line rises above the Positive", - "type": "text" - } - ] - }, - { - "page_num": 108, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p108-b0", - "global_id": 1104, - "bbox": [ - 72.0, - 33.66, - 432.02, - 47.21 - ], - "text": "92\t\nCOMPUTERIZED TECHNICAL ANALYSIS", - "type": "text" - }, - { - "block_id": "p108-b1", - "global_id": 1105, - "bbox": [ - 72.0, - 57.83, - 434.68, - 85.14 - ], - "text": "Directional line, it shows that bearish traders are stronger. It pays to trade with the \nupper Directional line.", - "type": "text" - }, - { - "block_id": "p108-b2", - "global_id": 1106, - "bbox": [ - 72.0, - 85.84, - 434.68, - 127.15 - ], - "text": "The Average Directional Indicator (ADX) rises when the spread between Direc-\ntional lines increases. This shows that market leaders, for example bulls in a rising \nmarket, are becoming stronger, the losers weaker, and the trend is likely to continue.", - "type": "text" - }, - { - "block_id": "p108-b3", - "global_id": 1107, - "bbox": [ - 72.0, - 127.85, - 434.72, - 183.17 - ], - "text": "ADX declines when the spread between Directional lines narrows down. This \nshows that the dominant market group is losing its strength, while the underdogs \nare gaining. It suggests that the market is in turmoil, and it’s better not to use trend-\nfollowing methods.", - "type": "text" - }, - { - "block_id": "p108-b4", - "global_id": 1108, - "bbox": [ - 291.8, - 386.03, - 328.6, - 397.25 - ], - "text": "A\nB\nC", - "type": "text" - }, - { - "block_id": "p108-b5", - "global_id": 1109, - "bbox": [ - 72.0, - 460.38, - 371.41, - 470.43 - ], - "text": "FIGURE 24.2  ANV daily, 22-day EMA, Directional System (13). (Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p108-b6", - "global_id": 1110, - "bbox": [ - 72.0, - 476.23, - 167.37, - 489.13 - ], - "text": "Directional System", - "type": "text" - }, - { - "block_id": "p108-b7", - "global_id": 1111, - "bbox": [ - 72.0, - 493.13, - 434.48, - 551.61 - ], - "text": "Swings between strength and weakness are a typical market feature. Strong stock groups \ngrow weak while the weak ones become strong, and then they swap roles again. Gold and \nsilver stocks were the two weakest stock industry groups in 2013, but they began bottom-\ning out in December. Allied Nevada Gold Corp. (ANV) was one of several stocks I began \nbuying at that time.", - "type": "text" - }, - { - "block_id": "p108-b8", - "global_id": 1112, - "bbox": [ - 72.0, - 553.12, - 434.53, - 623.6 - ], - "text": "The low at point A was $3.07, at point B the stock dipped to $3.01 and recoiled, leav-\ning behind a false downside breakout, and at point C it retested support by declining to \n$3.08—and from there it was off to the races, with its EMA turning up. The Directional \nsystem gave its buy signal during the bar marked with a vertical green arrow: the green \nbullish Directional line was above the red bearish line, while the ADX penetrated above \nthe red line.", - "type": "text" - }, - { - "block_id": "p108-b9", - "global_id": 1113, - "bbox": [ - 72.0, - 625.1, - 434.53, - 671.58 - ], - "text": "You may find a similar shorting signal in the lettered area, but a discretionary trader \ndoesn’t trade every signal he sees: shorting a stock near $3 that has already declined from \n$45 would mean chasing a very old trend. Near the right edge you see a pullback to value, \noffering a good opportunity to add to the long position.", - "type": "text" - } - ] - }, - { - "page_num": 109, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p109-b0", - "global_id": 1114, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "24. THE DIRECTIONAL SYSTEM\t\n93", - "type": "text" - }, - { - "block_id": "p109-b1", - "global_id": 1115, - "bbox": [ - 72.0, - 57.1, - 158.03, - 74.04 - ], - "text": "Trading Rules", - "type": "text" - }, - { - "block_id": "p109-b2", - "global_id": 1116, - "bbox": [ - 75.95, - 78.23, - 434.69, - 446.6 - ], - "text": "1.\tTrade only from the long side when the positive Directional line is above the \nnegative one. Trade only from the short side when the negative Directional line \nis above the positive one. The best time to trade is when the ADX is rising, show-\ning that the dominant group is getting stronger.\n2.\tWhen ADX declines, it shows that the market is becoming less directional. There \nare likely to be many whipsaws. When ADX points down, it is better not to use \na trend-following method.\n3.\tWhen ADX falls below both Directional lines, it identifies a flat, sleepy mar-\nket. Do not use a trend-following system but get ready to trade, because major \ntrends emerge from such lulls.\n4.\tThe single best signal of the Directional system comes after ADX falls below \nboth Directional lines. The longer it stays there, the stronger the base for the \nnext move. When ADX rallies from below both Directional lines, it shows that \nthe market is waking up from a lull. When ADX rises by four steps (i.e., from \n9 to 13) from its lowest point below both Directional lines, it “rings a bell” on a \nnew trend (Figure 24.2). It shows that a new bull market or bear market is being \nborn, depending on what Directional line is on top.\n5.\tWhen ADX rallies above both Directional lines, it identifies an overheated mar-\nket. When ADX turns down from above both Directional lines, it shows that the \nmajor trend has stumbled. It is a good time to take profits on a directional trade. \nIf you trade large positions, you definitely want to take partial profits.\nMarket indicators give hard signals and soft signals. For example, when a moving \naverage changes direction, it is a hard signal. A downturn of ADX is a soft signal. \nOnce you see ADX turn down, you ought to be very, very careful about adding to \npositions. You should start taking profits, reducing positions, and looking to get out.", - "type": "text" - }, - { - "block_id": "p109-b3", - "global_id": 1117, - "bbox": [ - 72.0, - 462.1, - 331.2, - 479.04 - ], - "text": "Average True Range—Help from Volatility", - "type": "text" - }, - { - "block_id": "p109-b4", - "global_id": 1118, - "bbox": [ - 72.0, - 483.23, - 434.71, - 552.55 - ], - "text": "Average True Range (ATR) is an indicator that averages True Ranges (described in \n\"How to Construct the Directional System\" above) over a selected period of time, \nsuch as 13 days. Since volatility is a key factor in trading, you can track it by plotting \na set of ATR lines above and below a moving average. They will help you visualize \ncurrent volatility and you can use that for decision making.", - "type": "text" - }, - { - "block_id": "p109-b5", - "global_id": 1119, - "bbox": [ - 72.0, - 553.25, - 434.74, - 594.56 - ], - "text": "Kerry Lovvorn likes to plot three sets of lines around a moving average: at one, \ntwo, and three ATRs above and below an EMA. These can be used for setting up \nentry points and stops, as well as profit targets (Figure 24.3).", - "type": "text" - }, - { - "block_id": "p109-b6", - "global_id": 1120, - "bbox": [ - 71.99, - 599.23, - 434.75, - 640.54 - ], - "text": "Entries  In the chapter on moving averages, we saw that it was a good idea to buy \nbelow value—below the EMA. But how far below? Normal pullbacks tend to bot-\ntom out near the minus one ATR.", - "type": "text" - }, - { - "block_id": "p109-b7", - "global_id": 1121, - "bbox": [ - 72.0, - 645.23, - 434.76, - 672.54 - ], - "text": "Stops  You want your stop to be at least one ATR away from your entry. Any-\nthing less than that would place your stop within the zone of normal market noise,", - "type": "text" - } - ] - }, - { - "page_num": 110, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p110-b0", - "global_id": 1122, - "bbox": [ - 72.0, - 33.66, - 432.02, - 47.21 - ], - "text": "94\t\nCOMPUTERIZED TECHNICAL ANALYSIS", - "type": "text" - }, - { - "block_id": "p110-b1", - "global_id": 1123, - "bbox": [ - 72.0, - 500.03, - 434.69, - 527.34 - ], - "text": "making it likely to be hit by a random short-term move. Placing your stop further \naway makes it more likely that only a real reversal can hit your stop.", - "type": "text" - }, - { - "block_id": "p110-b2", - "global_id": 1124, - "bbox": [ - 72.0, - 534.03, - 434.74, - 589.35 - ], - "text": "Targets  After you buy a stock, depending on how bullish it appears to you, you can \nplace an order to take profits at +1, +2, or even +3 ATRs. Kerry likes to get out of \nhis winning positions in several steps, placing orders for taking profits for one third \nat 1 ATR, another third at 2 ATR, and the rest at 3 ATR.", - "type": "text" - }, - { - "block_id": "p110-b3", - "global_id": 1125, - "bbox": [ - 72.0, - 590.04, - 434.68, - 645.36 - ], - "text": "It is highly unusual for any market to trade outside of three ATRs—three times av-\nerage true range—for a long time. Those tend to be the extreme moves. Whenever \nyou see a market trade outside of its three ATRs, either up or down, it is reasonable \nto expect a pullback.", - "type": "text" - }, - { - "block_id": "p110-b4", - "global_id": 1126, - "bbox": [ - 72.0, - 646.06, - 434.63, - 687.38 - ], - "text": "ATR channels work not only with prices. We can also use them to bracket techni-\ncal indicators to help identify the extreme levels where trends are likely to reverse. \nI use ATR channels on the weekly charts of Force Index.", - "type": "text" - }, - { - "block_id": "p110-b5", - "global_id": 1127, - "bbox": [ - 115.1, - 93.7, - 124.08, - 102.29 - ], - "text": "+3", - "type": "text" - }, - { - "block_id": "p110-b6", - "global_id": 1128, - "bbox": [ - 115.2, - 127.3, - 124.18, - 135.88 - ], - "text": "+1", - "type": "text" - }, - { - "block_id": "p110-b7", - "global_id": 1129, - "bbox": [ - 115.1, - 112.0, - 124.08, - 120.58 - ], - "text": "+2", - "type": "text" - }, - { - "block_id": "p110-b8", - "global_id": 1130, - "bbox": [ - 109.1, - 192.7, - 116.9, - 201.29 - ], - "text": "–3", - "type": "text" - }, - { - "block_id": "p110-b9", - "global_id": 1131, - "bbox": [ - 109.2, - 176.2, - 117.0, - 184.79 - ], - "text": "–2", - "type": "text" - }, - { - "block_id": "p110-b10", - "global_id": 1132, - "bbox": [ - 119.0, - 162.8, - 126.8, - 171.38 - ], - "text": "–1", - "type": "text" - }, - { - "block_id": "p110-b11", - "global_id": 1133, - "bbox": [ - 287.1, - 94.2, - 292.39, - 102.79 - ], - "text": "A", - "type": "text" - }, - { - "block_id": "p110-b12", - "global_id": 1134, - "bbox": [ - 331.2, - 136.8, - 336.09, - 145.38 - ], - "text": "C", - "type": "text" - }, - { - "block_id": "p110-b13", - "global_id": 1135, - "bbox": [ - 308.2, - 232.2, - 312.83, - 240.79 - ], - "text": "B", - "type": "text" - }, - { - "block_id": "p110-b14", - "global_id": 1136, - "bbox": [ - 330.3, - 64.4, - 335.72, - 72.99 - ], - "text": "AD", - "type": "text" - }, - { - "block_id": "p110-b15", - "global_id": 1137, - "bbox": [ - 72.0, - 294.38, - 388.2, - 304.43 - ], - "text": "FIGURE 24.3  LULU daily, 21 EMA, volume with 8 EMA, ATR channels. (Chart by TradeStation)", - "type": "text" - }, - { - "block_id": "p110-b16", - "global_id": 1138, - "bbox": [ - 72.0, - 310.23, - 143.13, - 323.13 - ], - "text": "ATR Channels", - "type": "text" - }, - { - "block_id": "p110-b17", - "global_id": 1139, - "bbox": [ - 72.0, - 327.13, - 434.51, - 349.62 - ], - "text": "This diary of a trade, Lululemon Athletica Inc. (LULU), was posted by Kerry in SpikeTrade \n.com, where we post diaries of our trades. It shows using ATR channels for profit-taking.", - "type": "text" - }, - { - "block_id": "p110-b18", - "global_id": 1140, - "bbox": [ - 72.0, - 351.13, - 434.48, - 397.61 - ], - "text": "LULU gapped down on a wide range bar on September 18 after an earnings an-\nnouncement. There was no downside follow-through, and as the stock rallied, Kerry \ndrew a horizontal line at the midpoint of its tall bar A, which tends to serve as short-term \nsupport.", - "type": "text" - }, - { - "block_id": "p110-b19", - "global_id": 1141, - "bbox": [ - 72.0, - 399.11, - 434.51, - 469.59 - ], - "text": "As LULU pulled back, its daily ranges narrowed, and volume dried up in area B. Kerry \nbought LULU at $72.02 on Monday, September 30, during bar C, as it recovered from a \nfalse downside breakout. He took profits on 1/3 of his position at $73.70 later that day, as \nLULU came within a few cents of plus 1 ATR. On Thursday, during bar D, LULU hit its plus \n2 ATR at $76.63, and Kerry exited another 1/3 of his position. He took the remaining 1/3 \nnear the mid-range of bar D.", - "type": "text" - } - ] - }, - { - "page_num": 111, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p111-b0", - "global_id": 1142, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "26. STOCHASTIC\t\n95", - "type": "text" - }, - { - "block_id": "p111-b1", - "global_id": 1143, - "bbox": [ - 73.55, - 55.86, - 198.74, - 74.5 - ], - "text": "■\n■25. Oscillators", - "type": "text" - }, - { - "block_id": "p111-b2", - "global_id": 1144, - "bbox": [ - 72.0, - 82.83, - 434.74, - 152.15 - ], - "text": "While trend-following indicators, such as MACD Lines or Directional system, help \nidentify trends, oscillators help catch turning points. Whenever masses of traders \nbecome gripped by greed or fear, they surge but after a while their intensity fizzles \nout. Oscillators measure the speed of any surge and show when its momentum is \nstarting to break.", - "type": "text" - }, - { - "block_id": "p111-b3", - "global_id": 1145, - "bbox": [ - 72.0, - 152.85, - 434.74, - 236.18 - ], - "text": "Oscillators identify emotional extremes of market crowds. They allow you to find \nunsustainable levels of optimism and pessimism. Professionals tend to fade those ex-\ntremes. They bet against deviations and for a return to normalcy. When the market \nrises and the crowd gets up on its hind legs and roars from greed, professionals get \nready to sell short. They get ready to buy when the market falls and the crowd howls \nin fear. Oscillators help us time those trades.", - "type": "text" - }, - { - "block_id": "p111-b4", - "global_id": 1146, - "bbox": [ - 72.0, - 253.2, - 234.42, - 270.14 - ], - "text": "Overbought and Oversold", - "type": "text" - }, - { - "block_id": "p111-b5", - "global_id": 1147, - "bbox": [ - 72.0, - 274.83, - 434.74, - 330.22 - ], - "text": "Overbought means a market is too high and ready to turn down. An oscillator be-\ncomes overbought when it reaches a high level associated with tops in the past. \nOversold means a market is too low and ready to turn up. An oscillator becomes \noversold when it reaches a low level associated with bottoms in the past.", - "type": "text" - }, - { - "block_id": "p111-b6", - "global_id": 1148, - "bbox": [ - 72.0, - 330.84, - 434.71, - 400.17 - ], - "text": "Be sure to remember that those aren’t absolute levels. An oscillator can stay over-\nbought for weeks when a new strong uptrend begins, giving premature sell signals. \nIt can stay oversold for weeks in a steep downtrend, giving premature buy signals. \nKnowing when to use oscillators and when to rely on trend-following indicators is a \nhallmark of a mature analyst (see Chapter 39).", - "type": "text" - }, - { - "block_id": "p111-b7", - "global_id": 1149, - "bbox": [ - 72.0, - 400.86, - 434.69, - 470.19 - ], - "text": "We can mark overbought and oversold oscillator levels by horizontal reference \nlines. Place those lines so that they cut across only the highest peaks and the lowest \nvalleys of that oscillator for the past six months. The proper way to draw those lines \nis to place them so that an oscillator spends only about 5 percent of its time beyond \neach line. Readjust these lines once every three months.", - "type": "text" - }, - { - "block_id": "p111-b8", - "global_id": 1150, - "bbox": [ - 72.0, - 470.88, - 434.69, - 526.2 - ], - "text": "When an oscillator rises or falls beyond its reference line, it helps identify an \nunsustainable extreme, likely to precede a top or a bottom. Oscillators work spec-\ntacularly well in trading ranges, but they give premature and dangerous signals when \na new trend erupts from a range.", - "type": "text" - }, - { - "block_id": "p111-b9", - "global_id": 1151, - "bbox": [ - 72.0, - 526.9, - 434.72, - 582.22 - ], - "text": "We’ve already reviewed one important oscillator—MACD-Histogram. We \nlooked at it “ahead of schedule” because it’s derived from a trend-following indicator, \nMACD Lines. We’ll now explore very popular oscillators: Stochastic and Relative \nStrength Index (RSI).", - "type": "text" - }, - { - "block_id": "p111-b10", - "global_id": 1152, - "bbox": [ - 73.55, - 605.86, - 194.32, - 624.5 - ], - "text": "■\n■26. Stochastic", - "type": "text" - }, - { - "block_id": "p111-b11", - "global_id": 1153, - "bbox": [ - 72.0, - 632.83, - 434.74, - 688.15 - ], - "text": "Stochastic is an oscillator popularized by the late George Lane. It’s now included in \nmany software programs and widely used by computerized traders. Stochastic tracks \nthe relationship of each closing price to the recent high-low range. It consists of two \nlines: a fast line called %K and a slow line called %D.", - "type": "text" - } - ] - }, - { - "page_num": 112, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p112-b0", - "global_id": 1154, - "bbox": [ - 72.0, - 33.66, - 432.02, - 47.21 - ], - "text": "96\t\nCOMPUTERIZED TECHNICAL ANALYSIS", - "type": "text" - }, - { - "block_id": "p112-b1", - "global_id": 1155, - "bbox": [ - 76.0, - 57.83, - 408.08, - 71.14 - ], - "text": "1.\tThe first step in calculating Stochastic is to obtain “raw Stochastic” or %K:", - "type": "text" - }, - { - "block_id": "p112-b2", - "global_id": 1156, - "bbox": [ - 204.59, - 81.28, - 273.65, - 103.69 - ], - "text": "%K = Ctod − Ln", - "type": "text" - }, - { - "block_id": "p112-b3", - "global_id": 1157, - "bbox": [ - 240.3, - 88.63, - 299.4, - 111.44 - ], - "text": "Hn − Ln •100", - "type": "text" - }, - { - "block_id": "p112-b4", - "global_id": 1158, - "bbox": [ - 84.0, - 122.38, - 397.64, - 180.14 - ], - "text": "where\t\nCtod\t= today’s close.\n\t\nLn\t= the lowest point for the selected number of days.\n\t\nHn\t= the highest point for the selected number of days.\n\t\nn\t= the number of days for Stochastic, selected by the trader.", - "type": "text" - }, - { - "block_id": "p112-b5", - "global_id": 1159, - "bbox": [ - 88.0, - 191.83, - 434.67, - 233.14 - ], - "text": "The standard width of Stochastic’s time window is 5 days, although some trad-\ners use higher values. A narrow window helps catch more turning points, but a \nwider window helps identify more important turning points.", - "type": "text" - }, - { - "block_id": "p112-b6", - "global_id": 1160, - "bbox": [ - 76.0, - 240.84, - 434.73, - 268.15 - ], - "text": "2.\tThe second step is to obtain %D. It is done by smoothing %K—usually over \na three-day period. It can be done in several ways, such as:", - "type": "text" - }, - { - "block_id": "p112-b7", - "global_id": 1161, - "bbox": [ - 172.99, - 280.38, - 331.03, - 311.44 - ], - "text": "%D = 3-day sum of (Ctod − Ln) •100\n3-day sum of (Hn − Ln)", - "type": "text" - }, - { - "block_id": "p112-b8", - "global_id": 1162, - "bbox": [ - 72.0, - 323.74, - 434.75, - 421.24 - ], - "text": "There are two ways to plot Stochastic—Fast and Slow. Fast Stochastic consists \nof two lines—%K and %D—plotted on the same chart. It’s very sensitive but leads \nto many whipsaws. Many traders prefer to use Slow Stochastic, adding an extra \nlayer of smoothing. The %D of Fast Stochastic becomes the %K of Slow Stochastic \nand is smoothed by repeating step 2 to obtain %D of Slow Stochastic. Slow Sto-\nchastic does a better job of filtering out market noise and leads to fewer whipsaws \n(Figure 26.1).", - "type": "text" - }, - { - "block_id": "p112-b9", - "global_id": 1163, - "bbox": [ - 72.0, - 421.93, - 434.75, - 449.24 - ], - "text": "Stochastic is designed to fluctuate between 0 and 100. Reference lines are usually \ndrawn at 20 percent and 80 percent levels to mark overbought and oversold areas.", - "type": "text" - }, - { - "block_id": "p112-b10", - "global_id": 1164, - "bbox": [ - 72.0, - 469.2, - 188.49, - 486.14 - ], - "text": "Crowd Psychology", - "type": "text" - }, - { - "block_id": "p112-b11", - "global_id": 1165, - "bbox": [ - 72.0, - 491.83, - 434.75, - 561.15 - ], - "text": "Each price is the consensus of value of all market participants at the moment of \ntransaction. Daily closing prices are important because the settlement of trading \naccounts depends on them. The high of any period marks the maximum power of \nbulls during that time. The low of that period shows the maximum power of bears \nduring that time.", - "type": "text" - }, - { - "block_id": "p112-b12", - "global_id": 1166, - "bbox": [ - 72.0, - 561.85, - 434.77, - 617.17 - ], - "text": "Stochastic measures the capacity of bulls or bears to close the market near the upper \nor lower edge of the recent range. When prices rally, markets tend to close near the \nhigh. If bulls can lift prices during the day but can’t close them near the top, Stochastic \nturns down. It shows that bulls are weaker than they appear and gives a sell signal.", - "type": "text" - }, - { - "block_id": "p112-b13", - "global_id": 1167, - "bbox": [ - 72.0, - 617.86, - 434.74, - 673.18 - ], - "text": "Daily closes tend to occur near the lows in downtrends. When a bar closes near its \nhigh, it shows that bears can only push prices down during the day but cannot hold \nthem down. An upturn of Stochastic shows that bears are weaker than they appear \nand flashes a buy signal.", - "type": "text" - } - ] - }, - { - "page_num": 113, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p113-b0", - "global_id": 1168, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "26. STOCHASTIC\t\n97", - "type": "text" - }, - { - "block_id": "p113-b1", - "global_id": 1169, - "bbox": [ - 72.0, - 522.3, - 158.03, - 539.23 - ], - "text": "Trading Rules", - "type": "text" - }, - { - "block_id": "p113-b2", - "global_id": 1170, - "bbox": [ - 72.0, - 544.93, - 434.77, - 586.24 - ], - "text": "Stochastic shows when bulls or bears become stronger or weaker. This information \nhelps decide whether bulls or bears are likely to win the current fight. It pays to trade \nwith winners and against losers.", - "type": "text" - }, - { - "block_id": "p113-b3", - "global_id": 1171, - "bbox": [ - 72.0, - 586.94, - 432.0, - 614.25 - ], - "text": "Stochastic gives three types of trading signals, listed here in the order of impor-\ntance: divergences, the level of Stochastic lines, and their direction.", - "type": "text" - }, - { - "block_id": "p113-b4", - "global_id": 1172, - "bbox": [ - 72.0, - 627.53, - 432.06, - 673.24 - ], - "text": "Divergences\nThe most powerful buy and sell signals of Stochastic are given by divergences be-\ntween this indicator and prices.", - "type": "text" - }, - { - "block_id": "p113-b5", - "global_id": 1173, - "bbox": [ - 72.0, - 286.38, - 363.42, - 296.43 - ], - "text": "FIGURE 26.1  CVX daily, 26-day EMA. 5-day Slow Stochastic. (Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p113-b6", - "global_id": 1174, - "bbox": [ - 72.0, - 302.23, - 126.0, - 315.13 - ], - "text": "Stochastic", - "type": "text" - }, - { - "block_id": "p113-b7", - "global_id": 1175, - "bbox": [ - 72.0, - 319.13, - 434.54, - 401.61 - ], - "text": "This chart of Chevron Corporation (CVX) illustrates both helpful and dangerous aspects of \nStochastic. As long as the stock stays in a sideways trading range, which is where it was \nfor most of the time covered by this chart, Stochastic keeps nailing down short-term tops \nand bottoms. Stochastic gives buy signals, marked here with vertical green arrows, when \nit rises above its lower reference line. It gives sell signals, marked by vertical red arrows, by \nsinking below its upper reference line. Those signals are reinforced by broad, down-sloping \nStochastic tops, marked by diagonal black arrows.", - "type": "text" - }, - { - "block_id": "p113-b8", - "global_id": 1176, - "bbox": [ - 72.0, - 403.11, - 434.49, - 461.59 - ], - "text": "A careful reader will find several instances of false breakouts in Figure 26.1 that rein-\nforce Stochastic signals. Using Stochastic signals during a trading range is like going to a \ncash machine. That machine stops working and eats your card after a trend erupts from \nthe trading range. A sharp downtrend near the right edge overrides the Stochastic buy \nsignal.", - "type": "text" - }, - { - "block_id": "p113-b9", - "global_id": 1177, - "bbox": [ - 72.0, - 463.1, - 434.43, - 497.58 - ], - "text": "A trader may rely on Stochastic in a trading range, but should use protective stops be-\ncause the last trade in a range always creates a loss when a trend begins. We’ll focus on \nstop placement in chapter 54.", - "type": "text" - } - ] - }, - { - "page_num": 114, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p114-b0", - "global_id": 1178, - "bbox": [ - 72.0, - 33.66, - 432.02, - 47.21 - ], - "text": "98\t\nCOMPUTERIZED TECHNICAL ANALYSIS", - "type": "text" - }, - { - "block_id": "p114-b1", - "global_id": 1179, - "bbox": [ - 76.0, - 57.83, - 434.75, - 141.16 - ], - "text": "1.\tA bullish divergence occurs when prices fall to a new low, but Stochastic traces \na higher bottom than during its previous decline. It shows that bears are losing \nstrength and prices are falling out of inertia. As soon as Stochastic turns up from \nits second bottom, it gives a strong buy signal: go long and place a protective \nstop below the latest low in the market. The best buy signals occur when the first \nbottom is below the lower reference line and the second above it.", - "type": "text" - }, - { - "block_id": "p114-b2", - "global_id": 1180, - "bbox": [ - 75.99, - 151.85, - 434.74, - 235.18 - ], - "text": "2.\tA bearish divergence occurs when prices rally to a new high, but Stochastic \ntraces a lower top than during its previous rally. It shows that bulls are becom-\ning weaker and prices are rising out of inertia. As soon as Stochastic turns down \nfrom the second top, it gives a sell signal: go short and place a protective stop \nabove the latest price peak. The best sell signals occur when the first top is above \nthe upper reference line and the second below.", - "type": "text" - }, - { - "block_id": "p114-b3", - "global_id": 1181, - "bbox": [ - 72.0, - 248.43, - 434.76, - 322.15 - ], - "text": "Overbought and Oversold\nWhen Stochastic rallies above its upper reference line, it shows that the market is \noverbought. It means that a stock or even the entire market is unusually high and \nready to turn down. When Stochastic falls below its lower reference line, it shows \nthat a stock or even the entire market is oversold: too low and ready to turn up.", - "type": "text" - }, - { - "block_id": "p114-b4", - "global_id": 1182, - "bbox": [ - 72.0, - 322.84, - 434.76, - 434.18 - ], - "text": "These signals work fine during trading ranges but not when a market develops \na trend. In uptrends, Stochastic quickly becomes overbought and keeps giving sell \nsignals while the market rallies. In downtrends, it quickly becomes oversold and \nkeeps giving premature buy signals. It pays to combine Stochastic with a long-term \ntrend-following indicator (see Chapter 39). The Triple Screen trading system allows \ntraders to take buy signals from daily Stochastic only when the weekly trend is \nup. When the weekly trend is down, it allows traders to take only sell signals from \ndaily Stochastic.", - "type": "text" - }, - { - "block_id": "p114-b5", - "global_id": 1183, - "bbox": [ - 76.0, - 448.87, - 434.76, - 578.2 - ], - "text": "1.\tWhen you identify an uptrend on a weekly chart, wait for daily Stochastic lines \nto decline below their lower reference line. Then, without waiting for their \ncrossover or an upturn, place a buy order above the high of the latest price bar. \nOnce you are long, place a protective stop below the low of the trade day or the \nprevious day, whichever is lower.\nThe shape of Stochastic’s bottom often indicates whether a rally is likely to be \nstrong or weak. If the bottom is narrow and shallow, it shows that bears are weak \nand the rally is likely to be strong. If it is deep and wide, it shows that bears are \nstrong and the rally is likely to be weak. It is better to take only strong buy signals.", - "type": "text" - }, - { - "block_id": "p114-b6", - "global_id": 1184, - "bbox": [ - 75.98, - 588.9, - 434.68, - 672.24 - ], - "text": "2.\tWhen you identify a downtrend on a weekly chart, wait for daily Stochastic \nlines to rally above their upper reference line. Then, without waiting for their \ncrossover or a downturn, place an order to sell short below the low of the latest \nprice bar. By the time Stochastic lines cross over, the market is often in a free \nfall. Once you are short, place a protective stop above the high of the trade day \nor the previous day, whichever is higher.", - "type": "text" - } - ] - }, - { - "page_num": 115, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p115-b0", - "global_id": 1185, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "27. RELATIVE STRENGTH INDEX\t\n99", - "type": "text" - }, - { - "block_id": "p115-b1", - "global_id": 1186, - "bbox": [ - 88.0, - 57.83, - 434.74, - 113.15 - ], - "text": "The shape of Stochastic’s top often indicates whether a decline is likely to be \nsteep or sluggish. A narrow top of Stochastic shows that bulls are weak and a \nsevere decline is likely. A Stochastic top that is high and wide shows that bulls are \nstrong—it is safer to pass up that sell signal.", - "type": "text" - }, - { - "block_id": "p115-b2", - "global_id": 1187, - "bbox": [ - 76.0, - 123.84, - 431.93, - 151.15 - ], - "text": "3.\tDo not buy when Stochastic is overbought, and don’t sell short when it is over-\nsold. This rule filters out most bad trades.", - "type": "text" - }, - { - "block_id": "p115-b3", - "global_id": 1188, - "bbox": [ - 72.0, - 161.43, - 434.75, - 235.15 - ], - "text": "Line Direction\nWhen both Stochastic lines are headed in the same direction, they confirm the short-\nterm trend. When prices rise and both Stochastic lines rise, the uptrend is likely to \ncontinue. When prices slide and both Stochastic lines fall, the short-term downtrend \nis likely to continue.", - "type": "text" - }, - { - "block_id": "p115-b4", - "global_id": 1189, - "bbox": [ - 72.0, - 255.2, - 192.18, - 272.14 - ], - "text": "More on Stochastic", - "type": "text" - }, - { - "block_id": "p115-b5", - "global_id": 1190, - "bbox": [ - 72.0, - 277.66, - 434.72, - 333.15 - ], - "text": "You can use Stochastic in any timeframe, including weekly, daily, or intraday. Weekly \nStochastic usually changes its direction one week prior to weekly MACD-Histogram. \nIf weekly Stochastic turns, it warns you that MACD-Histogram is likely to turn the \nnext week—time to tighten stops on existing positions or start taking profits.", - "type": "text" - }, - { - "block_id": "p115-b6", - "global_id": 1191, - "bbox": [ - 72.0, - 333.68, - 434.74, - 403.17 - ], - "text": "Choosing the width of the Stochastic window is important. Shorter-term \noscillators are more sensitive. Longer-term oscillators turn only at important tops \nand bottoms. If you use Stochastic as a stand-alone oscillator, a longer Stochastic is \npreferable. If you use Stochastic as part of a trading system, combined with trend-\nfollowing indicators, then a shorter Stochastic is preferable.", - "type": "text" - }, - { - "block_id": "p115-b7", - "global_id": 1192, - "bbox": [ - 73.55, - 430.86, - 302.84, - 449.5 - ], - "text": "■\n■27. Relative Strength Index", - "type": "text" - }, - { - "block_id": "p115-b8", - "global_id": 1193, - "bbox": [ - 72.0, - 459.83, - 434.7, - 501.14 - ], - "text": "Relative Strength Index (RSI) is an oscillator developed by J. Welles Wilder, Jr. It \nmeasures any trading vehicle’s strength by monitoring changes in its closing prices. \nIt’s a leading or a coincident indicator—never a laggard.", - "type": "text" - }, - { - "block_id": "p115-b9", - "global_id": 1194, - "bbox": [ - 207.69, - 513.63, - 296.32, - 538.74 - ], - "text": "RSI = 100 −\n100\n1 + RS", - "type": "text" - }, - { - "block_id": "p115-b10", - "global_id": 1195, - "bbox": [ - 90.59, - 547.23, - 413.48, - 575.97 - ], - "text": "RS = \nAverage of net UP closing changes for selected period of days\nAverage of net DOWN closing changes for the same number of days", - "type": "text" - }, - { - "block_id": "p115-b11", - "global_id": 1196, - "bbox": [ - 72.08, - 589.82, - 434.84, - 645.14 - ], - "text": "RSI fluctuates between 0 and 100. When it reaches a peak and turns down, it iden-\ntifies a top. When it falls and then turns up, it identifies a bottom. The pattern of RSI \npeaks and valleys doesn’t change in response to the width of its time window. Trad-\ning signals become more visible with shorter RSI, such as 7 or 9 days. (Figure 27.1)", - "type": "text" - }, - { - "block_id": "p115-b12", - "global_id": 1197, - "bbox": [ - 72.08, - 645.84, - 434.78, - 673.15 - ], - "text": "Overbought and oversold RSI levels vary from market to market and even \nfrom year to year in the same market. There are no magical levels for all tops and", - "type": "text" - } - ] - }, - { - "page_num": 116, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p116-b0", - "global_id": 1198, - "bbox": [ - 72.0, - 33.66, - 432.0, - 47.21 - ], - "text": "100\t\nCOMPUTERIZED TECHNICAL ANALYSIS", - "type": "text" - }, - { - "block_id": "p116-b1", - "global_id": 1199, - "bbox": [ - 72.0, - 505.63, - 434.75, - 532.94 - ], - "text": "bottoms. Oversold and overbought signals are like hot and cold readings on a window \nthermometer. The same temperature levels mean different things in summer or winter.", - "type": "text" - }, - { - "block_id": "p116-b2", - "global_id": 1200, - "bbox": [ - 72.0, - 533.64, - 434.76, - 602.96 - ], - "text": "Horizontal reference lines must cut across the highest peaks and the lowest valleys \nof RSI. They are often drawn at 30% and 70%. Some traders use 40% and 80% levels \nin bull markets or 20% and 60% in bear markets. Use the 5 percent rule: draw each \nline at a level beyond which RSI has spent less than 5 percent of its time in the past 4 \nto 6 months. Adjust reference lines once every three months.", - "type": "text" - }, - { - "block_id": "p116-b3", - "global_id": 1201, - "bbox": [ - 72.0, - 623.0, - 177.06, - 639.93 - ], - "text": "Mass Psychology", - "type": "text" - }, - { - "block_id": "p116-b4", - "global_id": 1202, - "bbox": [ - 72.0, - 645.63, - 434.69, - 672.94 - ], - "text": "Each price represents the consensus of value of all market participants at the mo-\nment of transaction. The closing price reflects the most important consensus of the", - "type": "text" - }, - { - "block_id": "p116-b5", - "global_id": 1203, - "bbox": [ - 72.0, - 283.38, - 283.83, - 293.43 - ], - "text": "FIGURE 27.1  CVX daily, 13-day RSI. (Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p116-b6", - "global_id": 1204, - "bbox": [ - 72.0, - 299.23, - 217.5, - 312.13 - ], - "text": "Relative Strength Index (RSI)", - "type": "text" - }, - { - "block_id": "p116-b7", - "global_id": 1205, - "bbox": [ - 72.0, - 316.13, - 434.46, - 350.62 - ], - "text": "Here we apply a 13-day RSI to the chart of Chevron Corporation (CVX) that we already \nexamined in Figure 26.1, in the chapter on Stochastic. Both RSI and Stochastic work well \nin trading ranges, but give premature and dangerous signals when prices begin to trend.", - "type": "text" - }, - { - "block_id": "p116-b8", - "global_id": 1206, - "bbox": [ - 72.0, - 352.12, - 434.5, - 398.61 - ], - "text": "RSI, based exclusively on closing prices, is less noisy than Stochastic. It calls for rallies \nwhen it rises above its lower reference line, marked here by vertical green arrows. It signals \ndeclines by sinking below its upper reference line, marked here by vertical red arrows. \nComparing both charts, you see that the RSI signals emerge earlier.", - "type": "text" - }, - { - "block_id": "p116-b9", - "global_id": 1207, - "bbox": [ - 72.0, - 400.11, - 434.54, - 434.6 - ], - "text": "A very powerful sell signal is given by a bearish divergence of RSI, marked here by a \ndiagonal solid arrow and a dashed red arrow. The stock rallied to a new high, while RSI \ncouldn’t reach its upper reference line, pointing to that rally’s hidden weakness.", - "type": "text" - }, - { - "block_id": "p116-b10", - "global_id": 1208, - "bbox": [ - 72.0, - 436.1, - 434.45, - 470.59 - ], - "text": "The sharp break near the right edge pushes prices lower despite the RSI buy signal. \nTo avoid getting hurt, we must use protective stops because the last trade in a range can \neasily create a loss when a new trend begins.", - "type": "text" - } - ] - }, - { - "page_num": 117, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p117-b0", - "global_id": 1209, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "27. RELATIVE STRENGTH INDEX\t\n101", - "type": "text" - }, - { - "block_id": "p117-b1", - "global_id": 1210, - "bbox": [ - 71.94, - 57.83, - 434.7, - 99.14 - ], - "text": "day because the settlement of traders’ accounts depends on it. When the market \ncloses higher, bulls make money and bears lose. When the market closes lower, bears \nmake money and bulls lose.", - "type": "text" - }, - { - "block_id": "p117-b2", - "global_id": 1211, - "bbox": [ - 71.94, - 99.84, - 434.7, - 155.16 - ], - "text": "Traders pay more attention to closing prices than to any other prices of the day. \nIn the futures markets, money is transferred from losers’ to winners’ accounts at \nthe end of each trading day. RSI shows whether bulls or bears are stronger at closing \ntime—the crucial money-counting time in the market.", - "type": "text" - }, - { - "block_id": "p117-b3", - "global_id": 1212, - "bbox": [ - 72.0, - 175.2, - 158.03, - 192.13 - ], - "text": "Trading Rules", - "type": "text" - }, - { - "block_id": "p117-b4", - "global_id": 1213, - "bbox": [ - 72.0, - 197.83, - 432.0, - 225.14 - ], - "text": "RSI gives three types of trading signals. They are, in order of importance, diver-\ngences, chart patterns, and the level of RSI.", - "type": "text" - }, - { - "block_id": "p117-b5", - "global_id": 1214, - "bbox": [ - 72.0, - 235.43, - 434.65, - 281.14 - ], - "text": "Bullish and Bearish Divergences\nDivergences between RSI and prices tend to occur at important tops and bottoms. \nThey show when the trend is weak and ready to reverse.", - "type": "text" - }, - { - "block_id": "p117-b6", - "global_id": 1215, - "bbox": [ - 76.0, - 293.84, - 434.74, - 363.16 - ], - "text": "1.\tBullish divergences give buy signals. They occur when prices fall to a new low \nbut RSI makes a higher bottom than during its previous decline. Buy as soon as \nRSI turns up from its second bottom, and place a protective stop below the lat-\nest minor price low. Buy signals are especially strong if the first RSI bottom is \nbelow its lower reference line and the second bottom is above that line.", - "type": "text" - }, - { - "block_id": "p117-b7", - "global_id": 1216, - "bbox": [ - 75.98, - 368.85, - 434.74, - 438.17 - ], - "text": "2.\tBearish divergences give sell signals. They occur when prices rally to a new peak \nbut RSI makes a lower top than during its previous rally. Sell short as soon as \nRSI turns down from its second top, and place a protective stop above the latest \nminor high. Sell signals are especially strong if the first RSI top is above its upper \nreference line and the second top is below it.", - "type": "text" - }, - { - "block_id": "p117-b8", - "global_id": 1217, - "bbox": [ - 72.0, - 448.43, - 434.74, - 508.14 - ], - "text": "Charting Patterns\nRSI often breaks through support or resistance a few days ahead of prices, provid-\ning hints of likely trend changes. RSI trendlines are usually broken one or two days \nbefore price trend changes.", - "type": "text" - }, - { - "block_id": "p117-b9", - "global_id": 1218, - "bbox": [ - 76.0, - 522.83, - 434.72, - 550.14 - ], - "text": "1.\tWhen RSI breaks above its downtrend line, place an order to buy above the latest \nprice peak to catch an upside breakout.", - "type": "text" - }, - { - "block_id": "p117-b10", - "global_id": 1219, - "bbox": [ - 75.98, - 555.83, - 434.72, - 583.14 - ], - "text": "2.\tWhen RSI breaks below its uptrend line, place an order to sell short below the \nlatest price low to catch a downside breakout.", - "type": "text" - }, - { - "block_id": "p117-b11", - "global_id": 1220, - "bbox": [ - 72.0, - 597.43, - 128.85, - 610.25 - ], - "text": "RSI Levels", - "type": "text" - }, - { - "block_id": "p117-b12", - "global_id": 1221, - "bbox": [ - 72.0, - 617.83, - 434.76, - 673.15 - ], - "text": "When RSI rises above its upper reference line, it shows that bulls are strong but the \nmarket is overbought and entering its sell zone. When RSI declines below its lower \nreference line, it shows that bears are strong but the market is oversold and entering \nits buy zone.", - "type": "text" - } - ] - }, - { - "page_num": 118, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p118-b0", - "global_id": 1222, - "bbox": [ - 72.0, - 33.66, - 432.0, - 47.21 - ], - "text": "102\t\nCOMPUTERIZED TECHNICAL ANALYSIS", - "type": "text" - }, - { - "block_id": "p118-b1", - "global_id": 1223, - "bbox": [ - 72.0, - 57.83, - 434.74, - 99.14 - ], - "text": "It pays to buy using overbought signals of daily RSI only when the weekly trend \nis up. It pays to sell short using sell signals of daily RSI only when the weekly trend is \ndown (see Chapter 39).", - "type": "text" - }, - { - "block_id": "p118-b2", - "global_id": 1224, - "bbox": [ - 76.0, - 113.83, - 426.37, - 127.14 - ], - "text": "1.\tBuy when RSI declines below its lower reference line and then rallies above it.", - "type": "text" - }, - { - "block_id": "p118-b3", - "global_id": 1225, - "bbox": [ - 76.0, - 134.83, - 432.47, - 148.14 - ], - "text": "2.\t Sell short when RSI rises above its upper reference line and then crosses below it.", - "type": "text" - }, - { - "block_id": "p118-b4", - "global_id": 1226, - "bbox": [ - 71.99, - 162.83, - 434.74, - 302.16 - ], - "text": "When we analyze markets, we deal with only a few numbers—the opening, high, \nlow, and closing prices for each bar, plus volume, and also open interest for deriva-\ntives, such as futures and options. A typical beginner error is “shopping for indica-\ntors.” ⁜A trader may feel bullish about the stock market, but then he notices that the \nmoving averages of the Dow and the S&P are still declining. Their bearish message \ndoesn’t sit well with him; he starts scrolling through his software menu and finds sev-\neral oscillators, such as Stochastic or RSI. Sure enough, they look oversold, which is \nnormal in a downtrend. The eager beginner takes those oversold readings as a signal \nto buy. The downtrend continues, he loses money—and then complains that techni-\ncal analysis didn’t work.", - "type": "text" - }, - { - "block_id": "p118-b5", - "global_id": 1227, - "bbox": [ - 71.99, - 302.86, - 434.66, - 344.17 - ], - "text": "It is much better to use only a small number of indicators with a strict hierarchy \nfor their analysis, including multiple timeframes. We’ll return to this essential topic \nin the chapter on the Triple Screen trading system.", - "type": "text" - } - ] - }, - { - "page_num": 119, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p119-b0", - "global_id": 1228, - "bbox": [ - 72.0, - 118.61, - 374.06, - 171.84 - ], - "text": "Volume and Time", - "type": "text" - }, - { - "block_id": "p119-b1", - "global_id": 1229, - "bbox": [ - 72.1, - 673.7, - 432.15, - 687.25 - ], - "text": "103", - "type": "text" - }, - { - "block_id": "p119-b2", - "global_id": 1230, - "bbox": [ - 348.1, - 59.86, - 395.91, - 73.41 - ], - "text": "PA R T 5\nPA R T 5", - "type": "text" - }, - { - "block_id": "p119-b3", - "global_id": 1231, - "bbox": [ - 71.1, - 331.94, - 99.19, - 372.34 - ], - "text": "M", - "type": "text" - }, - { - "block_id": "p119-b4", - "global_id": 1232, - "bbox": [ - 72.02, - 337.63, - 434.74, - 392.95 - ], - "text": "any traders focus exclusively on price quotes, but while those are extremely \nimportant, there’s more to the market than price. Volume of transactions pro-\nvides a valuable additional dimension. Joseph Granville, a pioneer of volume studies, \nwas fond of saying “Volume is the steam that makes the choo-choo go.”", - "type": "text" - }, - { - "block_id": "p119-b5", - "global_id": 1233, - "bbox": [ - 72.02, - 393.64, - 434.76, - 434.96 - ], - "text": "Another hugely important factor of market analysis is time. Markets live and move \nin different timeframes at the same time. No matter how carefully you analyze the \ndaily chart, its trend can be upended by a move that erupts from another timeframe.", - "type": "text" - }, - { - "block_id": "p119-b6", - "global_id": 1234, - "bbox": [ - 72.02, - 435.66, - 434.74, - 462.97 - ], - "text": "In this section we’ll focus on volume and volume-based indicators. We’ll also look \ninto tying all market decisions to their timeframes.", - "type": "text" - }, - { - "block_id": "p119-b7", - "global_id": 1235, - "bbox": [ - 73.55, - 490.66, - 174.77, - 509.3 - ], - "text": "■\n■28. Volume", - "type": "text" - }, - { - "block_id": "p119-b8", - "global_id": 1236, - "bbox": [ - 72.0, - 519.63, - 434.74, - 574.95 - ], - "text": "Volume reflects the activity of traders and investors. Each unit of volume represents \nactions of two individuals: one sells a share or a contract and another buys that share \nor a contract. Daily volume is the number of shares or contracts traded in one day \n(Figure 28.1).", - "type": "text" - }, - { - "block_id": "p119-b9", - "global_id": 1237, - "bbox": [ - 72.0, - 575.64, - 434.76, - 630.96 - ], - "text": "Traders usually plot volume as a histogram—vertical bars whose height reflects \neach day’s volume. They usually draw it underneath prices. Changes in volume show \nhow bulls and bears react to price swings and provide clues to whether trends are \nlikely to continue or to reverse.", - "type": "text" - }, - { - "block_id": "p119-b10", - "global_id": 1238, - "bbox": [ - 72.0, - 631.66, - 434.71, - 658.97 - ], - "text": "Some traders ignore volume. They think that prices already reflect all informa-\ntion known to the market. They say, “You get paid on price and not on volume.”", - "type": "text" - } - ] - }, - { - "page_num": 120, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p120-b0", - "global_id": 1239, - "bbox": [ - 72.0, - 33.66, - 432.04, - 47.21 - ], - "text": "104\t\nVOLUME AND TIME", - "type": "text" - }, - { - "block_id": "p120-b1", - "global_id": 1240, - "bbox": [ - 72.0, - 433.63, - 431.98, - 460.94 - ], - "text": "Professionals, on the other hand, know that analyzing volume can help them under-\nstand markets deeper and trade better.", - "type": "text" - }, - { - "block_id": "p120-b2", - "global_id": 1241, - "bbox": [ - 72.0, - 461.64, - 434.74, - 516.96 - ], - "text": "Volume depends on the size of the trading crowd and the activity levels of buyers \nand sellers. If you compare volumes of two markets, you’ll see which is more active \nor liquid. You are likely to receive better fills and suffer less slippage in liquid markets \nthan in thin, low-volume markets.", - "type": "text" - }, - { - "block_id": "p120-b3", - "global_id": 1242, - "bbox": [ - 84.0, - 517.65, - 262.99, - 530.96 - ], - "text": "There are three ways to measure volume:", - "type": "text" - }, - { - "block_id": "p120-b4", - "global_id": 1243, - "bbox": [ - 75.97, - 541.65, - 434.7, - 686.95 - ], - "text": "1.\tThe actual number of shares or contracts traded. For example, the New York \nStock Exchange reports volume this way. This is the most objective way of mea-\nsuring volume.\n2.\tThe number of trades that took place. Some international exchanges report vol-\nume this way. This method is less objective because it doesn’t distinguish be-\ntween a 100-share trade and a 5000-share trade.\n3.\tTick volume is the number of price changes during a selected period of time, \nsuch as 10 minutes or an hour. It is called tick volume because most changes \nequal 1 tick. Some exchanges don’t report intraday volume, forcing day traders \nto use tick volume as a proxy for real volume.", - "type": "text" - }, - { - "block_id": "p120-b5", - "global_id": 1244, - "bbox": [ - 104.4, - 212.22, - 190.8, - 228.0 - ], - "text": "A\nB", - "type": "text" - }, - { - "block_id": "p120-b6", - "global_id": 1245, - "bbox": [ - 254.6, - 223.22, - 261.64, - 235.0 - ], - "text": "C", - "type": "text" - }, - { - "block_id": "p120-b7", - "global_id": 1246, - "bbox": [ - 349.85, - 234.07, - 357.26, - 245.85 - ], - "text": "D", - "type": "text" - }, - { - "block_id": "p120-b8", - "global_id": 1247, - "bbox": [ - 407.31, - 212.03, - 413.24, - 223.81 - ], - "text": "E", - "type": "text" - }, - { - "block_id": "p120-b9", - "global_id": 1248, - "bbox": [ - 72.2, - 279.18, - 314.2, - 289.23 - ], - "text": "FIGURE 28.1  BID daily, 22-day EMA, volume. (Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p120-b10", - "global_id": 1249, - "bbox": [ - 72.2, - 295.03, - 109.49, - 307.93 - ], - "text": "Volume", - "type": "text" - }, - { - "block_id": "p120-b11", - "global_id": 1250, - "bbox": [ - 72.2, - 311.93, - 434.28, - 358.42 - ], - "text": "Sotheby’s Holdings Inc. (BID) is the world’s biggest publicly traded auction house. It pro-\nvides a window into what the world’s big money is doing in terms of their conspicuous \nconsumption. This company’s business was buoyed in 2013 by the influx of new money \nfrom Asia, but the stock hit its head on the ceiling during that year’s last quarter.", - "type": "text" - }, - { - "block_id": "p120-b12", - "global_id": 1251, - "bbox": [ - 72.2, - 359.92, - 434.33, - 418.4 - ], - "text": "In areas A and B, volume increased during the rally, confirming the uptrend and calling \nfor higher prices ahead. In areas C and D, volume flashed warning signs for the bulls—it \nshrank during each rally attempt. Notice false upside breakouts in those areas and an \natypical form of a kangaroo tail in area C. Rising volume near the right edge confirms the \npower of bears.", - "type": "text" - } - ] - }, - { - "page_num": 121, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p121-b0", - "global_id": 1252, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "28. VOLUME \t\n105", - "type": "text" - }, - { - "block_id": "p121-b1", - "global_id": 1253, - "bbox": [ - 71.94, - 57.83, - 434.63, - 127.15 - ], - "text": "A note to forex traders: since that market is decentralized and reports no volume, \nyou can use the volume of currency futures as its proxy. Futures of all major curren-\ncies, measured against the U.S. dollar, are traded in Chicago and on the electronic \nexchanges. We can assume that their volume trends are reasonably similar to those in \nthe forex markets, since both respond to the same market forces.", - "type": "text" - }, - { - "block_id": "p121-b2", - "global_id": 1254, - "bbox": [ - 72.0, - 147.2, - 188.49, - 164.13 - ], - "text": "Crowd Psychology", - "type": "text" - }, - { - "block_id": "p121-b3", - "global_id": 1255, - "bbox": [ - 72.0, - 169.83, - 434.68, - 253.16 - ], - "text": "Volume reflects the degree of financial and emotional involvement, as well as pain, \namong market participants. A trade begins with a financial commitment by two per-\nsons. The decision to buy or sell may be rational, but the act of buying or selling cre-\nates an emotional commitment in most people. Buyers and sellers crave to be right. \nThey scream at the market, pray, or use lucky talismans. The level of volume reflects \nthe degree of emotional involvement among traders.", - "type": "text" - }, - { - "block_id": "p121-b4", - "global_id": 1256, - "bbox": [ - 72.0, - 253.85, - 434.75, - 337.18 - ], - "text": "Each tick takes money away from losers and gives it to winners. When prices \nrise, longs make money and shorts lose. When prices fall, shorts gain and longs \nlose. Winners feel happy and elated, while losers feel depressed and angry. When-\never prices move, about half of the traders are hurting. When prices rise, bears are \nin pain, and when prices fall, bulls suffer. The greater the volume, the more pain in \nthe market.", - "type": "text" - }, - { - "block_id": "p121-b5", - "global_id": 1257, - "bbox": [ - 72.0, - 337.88, - 434.7, - 407.2 - ], - "text": "Traders react to losses like frogs to hot water. If you throw a frog into a hot pail, \nit’ll jump in response to sudden pain, but if you put a frog into cool water and heat \nit slowly, you can boil it alive. If a sudden price change hits traders, they jump from \npain and liquidate losing positions. On the other hand, losers can be very patient if \ntheir losses increase gradually.", - "type": "text" - }, - { - "block_id": "p121-b6", - "global_id": 1258, - "bbox": [ - 72.0, - 407.9, - 434.72, - 505.23 - ], - "text": "You can lose a great deal of money in a sleepy stock or a future, such as corn, \nwhere a one-cent move costs only $50 per contract. If corn goes against you just a \nfew cents a day, that pain is easy to tolerate. If you hang on, those pennies can add \nup to thousands of dollars in losses. Sharp moves, on the other hand, make losing \ntraders cut their losses in a panic. Once weak hands get shaken out, leaving behind \na volume spike, the market is ready to reverse. Trends can persist for a long time on \nmoderate volume but can expire after a burst of volume.", - "type": "text" - }, - { - "block_id": "p121-b7", - "global_id": 1259, - "bbox": [ - 72.0, - 505.92, - 434.77, - 561.24 - ], - "text": "Who buys from a trader who is selling his losing long position? It may be a short \nseller who wants to cover and take profits. It may be a bargain hunter who steps in \nbecause prices are “too low.” A bottom-picker takes over the position of a loser who \nwashed out—he either catches the bottom or becomes the next loser.", - "type": "text" - }, - { - "block_id": "p121-b8", - "global_id": 1260, - "bbox": [ - 72.0, - 561.94, - 434.77, - 631.26 - ], - "text": "Who sells to a trader who buys to cover his losing short position? It may be a \nsavvy investor who takes profits on his long position. It also may be a top-picker \nwho sells short because he thinks that prices are “too high.” He assumes the position \nof a loser who covered his shorts, and only the future will tell whether he is right \nor wrong.", - "type": "text" - }, - { - "block_id": "p121-b9", - "global_id": 1261, - "bbox": [ - 72.0, - 631.96, - 434.72, - 687.28 - ], - "text": "When shorts give up during a rally, they buy to cover and push the market higher. \nPrices rise, flush out even more shorts, and the rally feeds on itself. When longs give \nup during a decline, they sell, pushing the market lower. Falling prices flush out even \nmore longs, and the decline feeds on itself. Losers who give up on their trades propel", - "type": "text" - } - ] - }, - { - "page_num": 122, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p122-b0", - "global_id": 1262, - "bbox": [ - 72.0, - 33.66, - 432.04, - 47.21 - ], - "text": "106\t\nVOLUME AND TIME", - "type": "text" - }, - { - "block_id": "p122-b1", - "global_id": 1263, - "bbox": [ - 72.0, - 57.83, - 434.68, - 85.14 - ], - "text": "trends. A trend that moves on steady volume is likely to persist. It shows that new \nlosers are replacing those who washed out.", - "type": "text" - }, - { - "block_id": "p122-b2", - "global_id": 1264, - "bbox": [ - 72.0, - 85.84, - 434.69, - 141.16 - ], - "text": "When volume falls, it shows that the supply of losers is running low and a trend is \nready to reverse. It happens after enough losers catch on to how wrong they are. Old \nlosers keep bailing out, but fewer new ones come in. Falling volume is a sign that the \ntrend is about to reverse.", - "type": "text" - }, - { - "block_id": "p122-b3", - "global_id": 1265, - "bbox": [ - 72.0, - 141.85, - 434.75, - 253.19 - ], - "text": "A burst of extremely high volume also gives a signal that a trend is nearing its \nend. It shows that masses of losers are bailing out. You can probably recall holding a \nlosing trade longer than you should have. Once the pain became intolerable and you \ngot out, the trend reversed and the market went the way you expected, only without \nyou. This happens time and again because most humans react to stress similarly and \nbail out at roughly the same time. Professionals don’t hang on while the market beats \nthem up. They quickly close out losing trades and reverse or wait on the sidelines, \nready to re-enter.", - "type": "text" - }, - { - "block_id": "p122-b4", - "global_id": 1266, - "bbox": [ - 72.0, - 253.88, - 434.71, - 337.21 - ], - "text": "Volume spikes are more likely to signal an imminent reversal of a downtrend than \nan uptrend. Volume spikes in downtrends reflect explosions of fear. Fear is a power-\nful but short-term emotion—people run fast, dump shares, and then the trend is \nlikely to reverse. Volume spikes in uptrends are driven by greed, which is a slower-\nmoving, happy emotion. There may be a slight pause in an uptrend after a volume \nspike, but then the trend is quite likely to resume.", - "type": "text" - }, - { - "block_id": "p122-b5", - "global_id": 1267, - "bbox": [ - 72.0, - 337.91, - 434.75, - 407.23 - ], - "text": "Volume usually stays relatively low in trading ranges because there is relatively little \npain. People feel comfortable with small price changes, and flat markets can drag on a \nlong time. A breakout is often marked by a dramatic increase in volume because losers \nrun for the exits. A breakout on low volume shows little emotional commitment to a \nnew trend. It indicates that prices are likely to return into their trading range.", - "type": "text" - }, - { - "block_id": "p122-b6", - "global_id": 1268, - "bbox": [ - 72.0, - 407.93, - 434.76, - 463.25 - ], - "text": "Rising volume during a rally shows that more buyers and short sellers are pouring \nin. Buyers are eager to buy even if they have to pay up, and shorts are eager to sell to \nthem. Rising volume shows that losers who leave are being replaced by a new crop \nof losers.", - "type": "text" - }, - { - "block_id": "p122-b7", - "global_id": 1269, - "bbox": [ - 72.0, - 463.94, - 434.7, - 519.26 - ], - "text": "When volume shrinks during a rally, it shows that bulls are becoming less eager, \nwhile bears are no longer running for cover. The intelligent bears have left long ago, \nfollowed by weak bears who could not take the pain. Falling volume shows that fuel \nis being removed from the uptrend and it’s ready to reverse.", - "type": "text" - }, - { - "block_id": "p122-b8", - "global_id": 1270, - "bbox": [ - 72.0, - 519.96, - 434.65, - 603.29 - ], - "text": "When volume dries up during a decline, it shows that bears are less eager to \nsell short, while bulls are no longer running for the exits. The intelligent bulls have \nsold long ago, and the weak bulls have been shaken out. Falling volume shows that \nthe remaining bulls have greater pain tolerance. Perhaps they have deeper pockets \nor bought later in the decline, or both. Falling volume identifies an area in which a \ndowntrend is likely to reverse.", - "type": "text" - }, - { - "block_id": "p122-b9", - "global_id": 1271, - "bbox": [ - 72.0, - 603.98, - 434.7, - 631.3 - ], - "text": "This reasoning applies to all timeframes. As a rule of thumb, if today’s volume is \nhigher than yesterday’s, then today’s trend is likely to continue.", - "type": "text" - }, - { - "block_id": "p122-b10", - "global_id": 1272, - "bbox": [ - 72.0, - 642.2, - 174.79, - 659.14 - ], - "text": "Trading Pointers", - "type": "text" - }, - { - "block_id": "p122-b11", - "global_id": 1273, - "bbox": [ - 72.0, - 662.87, - 434.71, - 690.18 - ], - "text": "The terms “high volume” and “low volume” are relative. What’s low for Amazon may \nbe very high for a less popular stock, while what’s low for gold is high for platinum,", - "type": "text" - } - ] - }, - { - "page_num": 123, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p123-b0", - "global_id": 1274, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "29. VOLUME-BASED INDICATORS\t\n107", - "type": "text" - }, - { - "block_id": "p123-b1", - "global_id": 1275, - "bbox": [ - 71.94, - 57.83, - 434.7, - 127.15 - ], - "text": "and so on. We compare volumes of different stocks, futures, or options only when \nselecting higher-volume trading vehicles. Most of the time, we compare current \ntrading volume of a stock to its average volume. As a rule of thumb, “high volume” \nfor any given market is at least 25 percent above its average for the past two weeks, \nwhile “low volume” is at least 25 percent below average.", - "type": "text" - }, - { - "block_id": "p123-b2", - "global_id": 1276, - "bbox": [ - 75.94, - 139.85, - 434.68, - 167.16 - ], - "text": "1.\tHigh volume confirms trends. If prices rise to a new peak and volume reaches a \nnew high, then prices are likely to retest or exceed that peak.", - "type": "text" - }, - { - "block_id": "p123-b3", - "global_id": 1277, - "bbox": [ - 75.97, - 172.85, - 434.65, - 214.22 - ], - "text": "2.\tIf the market falls to a new low and the volume reaches a new high, that bottom \nis likely to be retested or exceeded. A very high volume “climax bottom” is al-\nmost always retested on low volume, offering an excellent buying opportunity.", - "type": "text" - }, - { - "block_id": "p123-b4", - "global_id": 1278, - "bbox": [ - 75.97, - 219.83, - 434.74, - 303.16 - ], - "text": "3.\t If volume shrinks while a trend continues, that trend is ripe for a reversal. When \na market rises to a new peak on lower volume than its previous peak, look to \ntake profits on a long position and/or for a shorting opportunity. This technique \ndoes not work as well in downtrends because a decline can persist on low vol-\nume. There is a saying on Wall Street: “It takes buying to put prices up, but they \ncan fall of their own weight.”", - "type": "text" - }, - { - "block_id": "p123-b5", - "global_id": 1279, - "bbox": [ - 75.97, - 308.84, - 434.72, - 420.2 - ], - "text": "4.\t Watch volume during reactions against the trend. When an uptrend is punctu-\nated by a decline, volume often picks up in a flurry of profit taking. When that \ndip continues but volume shrinks, it shows that bulls are no longer running or \nthat selling pressure is spent. When volume dries up, it shows that the reaction \nis nearing its end and the uptrend is ready to resume. This identifies a good buy-\ning opportunity. Major downtrends are often punctuated by rallies that begin on \nheavy volume. Once weak bears have been flushed out, volume shrinks and gives \na signal to sell short.", - "type": "text" - }, - { - "block_id": "p123-b6", - "global_id": 1280, - "bbox": [ - 73.55, - 450.86, - 309.91, - 469.5 - ], - "text": "■\n■29. Volume-Based Indicators", - "type": "text" - }, - { - "block_id": "p123-b7", - "global_id": 1281, - "bbox": [ - 72.0, - 480.83, - 434.74, - 522.14 - ], - "text": "Several indicators help clarify volume’s trading signals. For example, a 5-day EMA \nof volume can identify volume’s trends. A rising EMA of volume affirms the current \nprice trend, while a declining one points to the price trend’s weakness.", - "type": "text" - }, - { - "block_id": "p123-b8", - "global_id": 1282, - "bbox": [ - 72.0, - 522.84, - 434.74, - 578.16 - ], - "text": "This and other volume-based indicators provide more precise timing signals than \nvolume bars. They include On-Balance Volume and Accumulation/Distribution, de-\nscribed below. Force Index combines price and volume data to help identify areas \nwhere prices are likely to reverse.", - "type": "text" - }, - { - "block_id": "p123-b9", - "global_id": 1283, - "bbox": [ - 72.0, - 598.2, - 193.03, - 615.14 - ], - "text": "On-Balance Volume", - "type": "text" - }, - { - "block_id": "p123-b10", - "global_id": 1284, - "bbox": [ - 72.0, - 620.66, - 434.65, - 662.14 - ], - "text": "On-Balance Volume (OBV) is an indicator designed by Joseph Granville and de-\nscribed in his book, New Strategy of Daily Stock Market Timing. Granville used OBV as a \nleading indicator of the stock market, but other analysts applied it to futures.", - "type": "text" - }, - { - "block_id": "p123-b11", - "global_id": 1285, - "bbox": [ - 72.0, - 662.84, - 434.76, - 690.15 - ], - "text": "OBV is a running total of volume. Each day’s volume is added or subtracted, de-\npending on whether prices close higher or lower than on the previous day. When a", - "type": "text" - } - ] - }, - { - "page_num": 124, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p124-b0", - "global_id": 1286, - "bbox": [ - 72.0, - 33.66, - 432.04, - 47.21 - ], - "text": "108\t\nVOLUME AND TIME", - "type": "text" - }, - { - "block_id": "p124-b1", - "global_id": 1287, - "bbox": [ - 72.0, - 57.83, - 434.7, - 113.15 - ], - "text": "stock closes higher, it shows that bulls won the day’s battle; that day’s volume is add-\ned to OBV. When a stock closes lower, it shows that bears won the day, and that day’s \nvolume is subtracted from OBV. If prices close unchanged, OBV stays unchanged. \nOn-Balance Volume often rises or falls before prices, acting as a leading indicator.", - "type": "text" - }, - { - "block_id": "p124-b2", - "global_id": 1288, - "bbox": [ - 72.0, - 134.2, - 188.49, - 151.13 - ], - "text": "Crowd Psychology", - "type": "text" - }, - { - "block_id": "p124-b3", - "global_id": 1289, - "bbox": [ - 72.0, - 156.83, - 432.01, - 198.14 - ], - "text": "Prices represent the consensus of value, but volume represents the emotions of mar-\nket participants. It reflects the intensity of traders’ financial and emotional commit-\nments, as well as pain among losers, which is what OBV helps to track.", - "type": "text" - }, - { - "block_id": "p124-b4", - "global_id": 1290, - "bbox": [ - 72.0, - 198.84, - 434.75, - 282.17 - ], - "text": "A new high of OBV shows that bulls are powerful, bears are hurting, and prices \nare likely to rise. A new low of OBV shows that bears are powerful, bulls are hurting, \nand prices are likely to fall. When the pattern of OBV deviates from the pattern of \nprices, it shows that mass emotions aren’t in gear with mass consensus. A crowd is \nmore likely to follow its gut than its mind, and that’s why changes in volume often \nprecede price changes.", - "type": "text" - }, - { - "block_id": "p124-b5", - "global_id": 1291, - "bbox": [ - 72.0, - 303.2, - 166.62, - 320.14 - ], - "text": "Trading Signals", - "type": "text" - }, - { - "block_id": "p124-b6", - "global_id": 1292, - "bbox": [ - 72.0, - 325.83, - 434.74, - 367.14 - ], - "text": "The patterns of OBV tops and bottoms are much more important than the absolute \nlevels, which depend on the starting date of your calculations. It is safer to trade in \nthe direction of a trend that is confirmed by OBV (Figure 29.1).", - "type": "text" - }, - { - "block_id": "p124-b7", - "global_id": 1293, - "bbox": [ - 76.0, - 381.83, - 434.71, - 437.15 - ], - "text": "1.\tWhen OBV reaches a new high, it confirms the power of bulls, indicates that \nprices are likely to continue to rise, and gives a buy signal. When OBV falls be-\nlow its previous low, it confirms the power of bears, calls for lower prices ahead, \nand gives a signal to sell short.", - "type": "text" - }, - { - "block_id": "p124-b8", - "global_id": 1294, - "bbox": [ - 75.98, - 442.84, - 434.72, - 540.17 - ], - "text": "2.\tOBV gives its strongest buy and sell signals when it diverges from prices. If \nprices rally, sell off, and then rise to a new high, but OBV rallies to a lower high, \nit creates a bearish divergence and gives a sell signal. If prices decline, rebound, \nand then fall to a new low, but OBV falls to a more shallow bottom, it traces a \nbullish divergence and gives a buy signal. Long-term divergences are more im-\nportant than the short-term ones. Divergences that develop over the course of \nseveral weeks give stronger signals than those created over a few days.", - "type": "text" - }, - { - "block_id": "p124-b9", - "global_id": 1295, - "bbox": [ - 75.97, - 545.86, - 434.7, - 587.22 - ], - "text": "3.\tWhen prices are in a trading range and OBV breaks out to a new high, it gives a \nbuy signal. When prices are in a trading range and OBV breaks down and falls to \na new low, it gives a signal to sell short.", - "type": "text" - }, - { - "block_id": "p124-b10", - "global_id": 1296, - "bbox": [ - 72.0, - 608.2, - 157.9, - 625.14 - ], - "text": "More on OBV", - "type": "text" - }, - { - "block_id": "p124-b11", - "global_id": 1297, - "bbox": [ - 72.0, - 630.83, - 434.71, - 686.15 - ], - "text": "One of the reasons for Granville’s success in stock market timing was that he com-\nbined OBV with two other indicators—the Net Field Trend indicator and the \nClimax indicator. Granville calculated OBV for each stock in the Dow Jones \nIndustrial Average and rated its OBV pattern as rising, falling, or neutral. He called", - "type": "text" - } - ] - }, - { - "page_num": 125, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p125-b0", - "global_id": 1298, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "29. VOLUME-BASED INDICATORS \t\n109", - "type": "text" - }, - { - "block_id": "p125-b1", - "global_id": 1299, - "bbox": [ - 71.82, - 417.66, - 434.46, - 447.42 - ], - "text": "that a Net Field Trend of a stock: It could be +1, −1, or 0. Climax indicator was a \nsum of the Net Field Trends of all 30 Dow stocks.", - "type": "text" - }, - { - "block_id": "p125-b2", - "global_id": 1300, - "bbox": [ - 71.82, - 448.12, - 434.56, - 489.43 - ], - "text": "When the stock market rallied and the Climax indicator reached a new high, it \nconfirmed strength and gave a buy signal. If the stock market rallied but the Climax \nindicator made a lower top, it gave a sell signal.", - "type": "text" - }, - { - "block_id": "p125-b3", - "global_id": 1301, - "bbox": [ - 71.82, - 490.13, - 434.57, - 559.45 - ], - "text": "You can look at the Dow Jones Industrial Average as a team of 30 horses pulling \nthe market wagon. The Climax indicator shows how many horses are pulling uphill, \ndownhill, or standing still. If 24 out of 30 horses pull up, 1 down and 5 are resting, \nthen the market wagon is likely to move up. If 9 horses pull up, 7 pull down, and 14 \nare resting, that wagon may soon roll downhill.", - "type": "text" - }, - { - "block_id": "p125-b4", - "global_id": 1302, - "bbox": [ - 71.78, - 560.13, - 434.48, - 587.44 - ], - "text": "Remarkably, Granville did his calculations by hand1. Now, of course, OBV, the Net \nField Trend indicator, and the Climax indicator can be easily programmed. It would be", - "type": "text" - }, - { - "block_id": "p125-b5", - "global_id": 1303, - "bbox": [ - 167.1, - 65.9, - 276.84, - 73.73 - ], - "text": "B\nD", - "type": "text" - }, - { - "block_id": "p125-b6", - "global_id": 1304, - "bbox": [ - 118.1, - 196.9, - 412.9, - 209.73 - ], - "text": "A\nC\nE", - "type": "text" - }, - { - "block_id": "p125-b7", - "global_id": 1305, - "bbox": [ - 82.0, - 171.5, - 99.66, - 179.75 - ], - "text": "Close", - "type": "text" - }, - { - "block_id": "p125-b8", - "global_id": 1306, - "bbox": [ - 81.7, - 187.8, - 107.93, - 196.05 - ], - "text": "Extreme", - "type": "text" - }, - { - "block_id": "p125-b9", - "global_id": 1307, - "bbox": [ - 72.2, - 280.18, - 384.16, - 290.23 - ], - "text": "FIGURE 29.1  MCD daily, 22-day EMA, On-Balance volume (OBV). (Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p125-b10", - "global_id": 1308, - "bbox": [ - 72.2, - 296.03, - 172.67, - 308.93 - ], - "text": "On-Balance Volume", - "type": "text" - }, - { - "block_id": "p125-b11", - "global_id": 1309, - "bbox": [ - 72.2, - 312.93, - 434.3, - 359.42 - ], - "text": "McDonald’s Corp. (MCD) is a stable, slow-moving stock. You can see a fairly tight trading \nrange, marked with dashed lines (two lines at the lows, one tight and the other loose). Notice \nthe tendency of MCD towards false breakouts (bottoms A and C and tops B and D). \nNotice a kangaroo tail in area A.", - "type": "text" - }, - { - "block_id": "p125-b12", - "global_id": 1310, - "bbox": [ - 72.2, - 360.92, - 434.32, - 395.41 - ], - "text": "At the right edge of the chart, the stock market is in a free-fall, but while MCD trades \nnear its recent lows, its OBV indicator is trading near the highs. It points to strength and \nsuggests buying rather than selling.", - "type": "text" - }, - { - "block_id": "p125-b13", - "global_id": 1311, - "bbox": [ - 72.0, - 615.2, - 433.03, - 686.33 - ], - "text": "1I visited Granville in 2005 in Kansas City. Not only did he do all his calculations by hand, he \navoided going online, as he was suspicious of pervasive snooping—and that was years before the \ndisclosures of government spying. He disconnected his computer from the Internet until it was time \nto send out his newsletter. Granville monitored intraday prices by tuning his TV into CNBC with \nthe sound turned off and a towel draped over the upper portion of the screen, so that all he could \nsee was the tape, running along the bottom of his screen.", - "type": "text" - } - ] - }, - { - "page_num": 126, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p126-b0", - "global_id": 1312, - "bbox": [ - 72.0, - 33.66, - 432.04, - 47.21 - ], - "text": "110\t\nVOLUME AND TIME", - "type": "text" - }, - { - "block_id": "p126-b1", - "global_id": 1313, - "bbox": [ - 72.0, - 57.83, - 434.74, - 85.14 - ], - "text": "worthwhile to apply them to a database that includes all stocks of the S&P 500 index. \nThis method may produce good signals for trading the S&P 500 futures and options.", - "type": "text" - }, - { - "block_id": "p126-b2", - "global_id": 1314, - "bbox": [ - 72.0, - 102.2, - 245.69, - 119.14 - ], - "text": "Accumulation/Distribution", - "type": "text" - }, - { - "block_id": "p126-b3", - "global_id": 1315, - "bbox": [ - 72.0, - 124.83, - 434.72, - 208.16 - ], - "text": "This indicator was developed by Larry Williams and described in his 1973 book, \nHow I Made One Million Dollars. It was designed as a leading indicator for stocks, but \nseveral analysts applied it to futures. The unique feature of Accumulation/Distribu-\ntion (A/D) is that it tracks the relationship between opening and closing prices, in \naddition to volume. Its concept is similar to that of Japanese candlesticks, which at \nthe time Williams wrote his book weren’t known to Western traders.", - "type": "text" - }, - { - "block_id": "p126-b4", - "global_id": 1316, - "bbox": [ - 72.0, - 208.85, - 434.77, - 250.17 - ], - "text": "Accumulation/Distribution is more finely calibrated than OBV because it credits \nbulls or bears with only a fraction of each day’s volume, proportionate to the degree \nof their win for the day.", - "type": "text" - }, - { - "block_id": "p126-b5", - "global_id": 1317, - "bbox": [ - 179.4, - 245.57, - 277.36, - 269.37 - ], - "text": "A/D = Close − Open", - "type": "text" - }, - { - "block_id": "p126-b6", - "global_id": 1318, - "bbox": [ - 220.29, - 254.66, - 320.99, - 275.27 - ], - "text": "High − Low • Volume", - "type": "text" - }, - { - "block_id": "p126-b7", - "global_id": 1319, - "bbox": [ - 72.0, - 284.83, - 434.72, - 340.15 - ], - "text": "If prices close higher than they opened, then bulls won the day, and A/D is posi-\ntive. If prices close lower than they opened, then the bears won, and A/D is negative. \nIf prices close where they opened, then nobody won, and A/D is zero. A running \ntotal of each day’s A/D creates a cumulative A/D indicator.", - "type": "text" - }, - { - "block_id": "p126-b8", - "global_id": 1320, - "bbox": [ - 72.0, - 340.84, - 434.77, - 396.16 - ], - "text": "For example, if today’s high-low spread was five points but the distance from the \nopen to the close was two points, then only 2/5 of today’s volume is credited to the \nwinning camp. Just as with OBV, the pattern of A/D highs and lows is important, \nwhile its absolute level simply depends on the starting date.", - "type": "text" - }, - { - "block_id": "p126-b9", - "global_id": 1321, - "bbox": [ - 72.0, - 396.86, - 434.69, - 452.18 - ], - "text": "When the market rises, most people focus on new highs, but if prices open higher \nand close lower, then A/D, which tracks their relationship, turns down. It warns \nthat the uptrend is weaker than it appears. If, on the other hand, A/D ticks up while \nprices are down, it shows that bulls are gaining strength.", - "type": "text" - }, - { - "block_id": "p126-b10", - "global_id": 1322, - "bbox": [ - 72.0, - 469.2, - 173.57, - 486.14 - ], - "text": "Crowd Behavior", - "type": "text" - }, - { - "block_id": "p126-b11", - "global_id": 1323, - "bbox": [ - 72.0, - 491.83, - 434.72, - 533.14 - ], - "text": "Opening prices reflect pressures that have built up while the market was closed. \nOpenings tend to be dominated by amateurs who read their news in the evening and \ntrade in the morning.", - "type": "text" - }, - { - "block_id": "p126-b12", - "global_id": 1324, - "bbox": [ - 72.0, - 533.84, - 434.75, - 603.16 - ], - "text": "Professional traders are active throughout the day. They often trade against the \namateurs. As the day goes on, waves of buying and selling by amateurs as well as \nslow-moving institutions gradually subside. Professionals tend to dominate the mar-\nkets at closing time. Closing prices are especially important because the settlement \nof trading accounts depends on them.", - "type": "text" - }, - { - "block_id": "p126-b13", - "global_id": 1325, - "bbox": [ - 72.0, - 603.86, - 434.74, - 673.18 - ], - "text": "A/D tracks the outcomes of daily battles between amateurs and professionals. It \nticks up when prices close higher than they opened—when professionals are more \nbullish than amateurs. It ticks down when prices close lower than they opened—\nwhen professionals are more bearish than amateurs. It pays to bet with the profes-\nsionals and against the amateurs.", - "type": "text" - } - ] - }, - { - "page_num": 127, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p127-b0", - "global_id": 1326, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "29. VOLUME-BASED INDICATORS \t\n111", - "type": "text" - }, - { - "block_id": "p127-b1", - "global_id": 1327, - "bbox": [ - 72.0, - 57.1, - 158.03, - 74.04 - ], - "text": "Trading Rules", - "type": "text" - }, - { - "block_id": "p127-b2", - "global_id": 1328, - "bbox": [ - 72.0, - 79.73, - 434.71, - 149.05 - ], - "text": "When the market opens low and closes high, it moves from weakness to strength. \nThat’s when A/D rises and signals that market professionals are more bullish than \namateurs, and the upmove is likely to continue. When A/D falls, it shows that mar-\nket professionals are more bearish than amateurs. When the market weakens during \nthe day, it’s likely to reach a lower low in the days to come.", - "type": "text" - }, - { - "block_id": "p127-b3", - "global_id": 1329, - "bbox": [ - 84.0, - 149.75, - 405.32, - 163.06 - ], - "text": "The best trading signals are given by divergences between A/D and prices.", - "type": "text" - }, - { - "block_id": "p127-b4", - "global_id": 1330, - "bbox": [ - 76.0, - 178.75, - 434.68, - 220.07 - ], - "text": "1.\tIf prices rally to a new high but A/D reaches a lower peak, it gives a signal to sell \nshort. This bearish divergence shows that market professionals are selling into \nthe rally.", - "type": "text" - }, - { - "block_id": "p127-b5", - "global_id": 1331, - "bbox": [ - 75.98, - 227.76, - 434.63, - 269.12 - ], - "text": "2.\tA bullish divergence occurs when prices fall to a new low but A/D bottoms out \nat a higher low than during its previous decline. It shows that market profession-\nals are using the decline for buying, and a rally is coming (Figure 29.2).", - "type": "text" - }, - { - "block_id": "p127-b6", - "global_id": 1332, - "bbox": [ - 240.7, - 461.5, - 347.45, - 471.0 - ], - "text": "A\nB", - "type": "text" - }, - { - "block_id": "p127-b7", - "global_id": 1333, - "bbox": [ - 72.4, - 532.38, - 366.62, - 542.43 - ], - "text": "FIGURE 29.2  GOOG daily, Accumulation/Distribution Index. (Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p127-b8", - "global_id": 1334, - "bbox": [ - 72.4, - 548.23, - 206.56, - 561.13 - ], - "text": "Accumulation/Distribution", - "type": "text" - }, - { - "block_id": "p127-b9", - "global_id": 1335, - "bbox": [ - 72.4, - 565.13, - 434.56, - 671.6 - ], - "text": "“Coming events cast their shadows before” is an old proverb with a lot of meaning for tech-\nnical analysts. Google Inc. (GOOG) was trending lower for months, but the uptrend of the \nAccumulation/Distribution Index (A/D) showed that big money was buying. The stock has \nfallen lower at point B than at A, but the A/D Index traced out a much higher bottom. Just \nas important, it broke out to a new high (marked with a vertical green arrow) before prices \ngapped up following a surprisingly good earnings announcement. Somebody knew what \nwas coming, and their massive buying was identified by the A/D accumulation pattern and \nits upside breakout. Technical analysis helps even out the imbalance of knowledge between \noutsiders and insiders.", - "type": "text" - } - ] - }, - { - "page_num": 128, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p128-b0", - "global_id": 1336, - "bbox": [ - 72.0, - 33.66, - 432.04, - 47.21 - ], - "text": "112\t\nVOLUME AND TIME", - "type": "text" - }, - { - "block_id": "p128-b1", - "global_id": 1337, - "bbox": [ - 71.6, - 57.1, - 301.66, - 74.04 - ], - "text": "More on Accumulation/Distribution", - "type": "text" - }, - { - "block_id": "p128-b2", - "global_id": 1338, - "bbox": [ - 71.6, - 79.73, - 434.35, - 121.12 - ], - "text": "When you go long or short, following a divergence between A/D and price, remem-\nber that even market professionals can go wrong. Use stops and protect yourself by \nfollowing the Hound of the Baskervilles rule (see Chapter 23).", - "type": "text" - }, - { - "block_id": "p128-b3", - "global_id": 1339, - "bbox": [ - 71.6, - 121.74, - 434.25, - 163.06 - ], - "text": "There are important parallels between A/D and Japanese candlestick charts, since \nboth focus on the differences between opening and closing prices. A/D goes further \nthan candlesticks by taking volume into account.", - "type": "text" - }, - { - "block_id": "p128-b4", - "global_id": 1340, - "bbox": [ - 73.15, - 193.76, - 208.16, - 212.4 - ], - "text": "■\n■30. Force Index", - "type": "text" - }, - { - "block_id": "p128-b5", - "global_id": 1341, - "bbox": [ - 71.6, - 222.73, - 434.36, - 306.06 - ], - "text": "Force Index is an oscillator developed by this author. It combines volume with prices \nto discover the force of bulls or bears behind every rally or decline. Force Index can \nbe applied to any price bar for which we have volume data: weekly, daily, or intra-\nday. It brings together three essential pieces of information—the direction of price \nchange, its extent, and the volume during that change. It provides a practical way of \nusing volume for making trading decisions.2", - "type": "text" - }, - { - "block_id": "p128-b6", - "global_id": 1342, - "bbox": [ - 71.6, - 306.73, - 434.26, - 362.05 - ], - "text": "Force Index can be used in its raw form, but its signals stand out much more \nclearly if we smooth it with a moving average. Using a short EMA of Force Index \nhelps pinpoint entry and exit points. Using a longer EMA helps confirm trends and \nrecognize important reversals.", - "type": "text" - }, - { - "block_id": "p128-b7", - "global_id": 1343, - "bbox": [ - 71.6, - 378.1, - 261.83, - 395.04 - ], - "text": "How to Construct Force Index", - "type": "text" - }, - { - "block_id": "p128-b8", - "global_id": 1344, - "bbox": [ - 71.6, - 399.73, - 432.14, - 413.04 - ], - "text": "The force of every move is defined by three factors: direction, distance, and volume.", - "type": "text" - }, - { - "block_id": "p128-b9", - "global_id": 1345, - "bbox": [ - 75.58, - 420.73, - 434.32, - 481.04 - ], - "text": "1.\tIf prices close higher than the close of the previous bar, the force is positive. If \nprices close lower than the close of the previous bar, the force is negative.\n2.\tThe greater the change in price, the greater the force.\n3.\tThe bigger the volume, the greater the force.", - "type": "text" - }, - { - "block_id": "p128-b10", - "global_id": 1346, - "bbox": [ - 139.64, - 488.28, - 363.56, - 505.54 - ], - "text": "Force Index = Volumetoday • (Closetoday − Closeyesterday)", - "type": "text" - }, - { - "block_id": "p128-b11", - "global_id": 1347, - "bbox": [ - 71.56, - 518.72, - 434.31, - 574.04 - ], - "text": "A raw Force Index can be plotted as a histogram, with a horizontal centerline at \na zero level. If the market closes higher, Force Index is positive and rises above the \ncenterline. If the market closes lower, Force Index is negative and extends below \nthe centerline. If the market closes unchanged, Force Index is zero.", - "type": "text" - }, - { - "block_id": "p128-b12", - "global_id": 1348, - "bbox": [ - 71.56, - 574.74, - 434.27, - 602.05 - ], - "text": "The histogram of a raw Force Index is very jagged. This indicator gives much \nbetter trading signals after being smoothed with a moving average (see Chapter 22).", - "type": "text" - }, - { - "block_id": "p128-b13", - "global_id": 1349, - "bbox": [ - 72.0, - 645.8, - 388.62, - 656.93 - ], - "text": "2Remember, we’re talking about the force of market crowds, not the formula in physics.", - "type": "text" - } - ] - }, - { - "page_num": 129, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p129-b0", - "global_id": 1350, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "30. FORCE INDEX\t\n113", - "type": "text" - }, - { - "block_id": "p129-b1", - "global_id": 1351, - "bbox": [ - 71.94, - 57.83, - 434.71, - 113.15 - ], - "text": "A 2-day EMA of Force Index provides a minimal degree of smoothing. It is \nuseful for finding entry points into the markets. It pays to buy when the 2-day \nEMA is negative and sell when it’s positive, as long as you trade in the direction of \nthe trend.", - "type": "text" - }, - { - "block_id": "p129-b2", - "global_id": 1352, - "bbox": [ - 71.94, - 113.84, - 434.69, - 197.17 - ], - "text": "A 13-day EMA of Force Index tracks longer-term changes in the force of bulls \nand bears. When the 13-day EMA crosses above the centerline, it shows that bulls \nare in control and suggests trading from the long side. When the 13-day EMA turns \nnegative, it shows that bears are in control and suggests trading from the short side. \nDivergences between a 13-day EMA of Force Index and prices identify important \nturning points.", - "type": "text" - }, - { - "block_id": "p129-b3", - "global_id": 1353, - "bbox": [ - 72.0, - 223.2, - 194.47, - 240.13 - ], - "text": "Trading Psychology", - "type": "text" - }, - { - "block_id": "p129-b4", - "global_id": 1354, - "bbox": [ - 72.0, - 245.83, - 434.72, - 301.15 - ], - "text": "When the market closes higher, it shows that bulls won the day’s battle, and when \nit closes lower, it shows that bears carried the day. The distance between today’s and \nyesterday’s closing prices reflects the margin of victory by bulls or bears. The greater \nthis distance, the larger the victory achieved.", - "type": "text" - }, - { - "block_id": "p129-b5", - "global_id": 1355, - "bbox": [ - 72.0, - 301.84, - 434.76, - 371.17 - ], - "text": "Volume reflects the degree of emotional commitment by market participants (see \nChapter 28). High-volume rallies and declines have more inertia and are more likely \nto continue. Prices moving at high volume are like an avalanche that gathers speed as \nit rolls. Low volume, on the other hand, shows that the supply of losers is thin, and a \ntrend is probably nearing an end.", - "type": "text" - }, - { - "block_id": "p129-b6", - "global_id": 1356, - "bbox": [ - 72.0, - 371.86, - 434.75, - 413.18 - ], - "text": "Prices reflect what market participants think, while volume reflects the strength \nof their feelings. Force Index combines price and volume—it shows whether the \nhead and the heart of the market are in gear with each other.", - "type": "text" - }, - { - "block_id": "p129-b7", - "global_id": 1357, - "bbox": [ - 72.0, - 413.88, - 434.77, - 497.2 - ], - "text": "When Force Index rallies to a new high, it shows that the force of bulls is high \nand the uptrend is likely to continue. When Force Index falls to a new low, it shows \nthat the force of bears is intense and the downtrend is likely to persist. If the change \nin prices is not confirmed by volume, Force Index flattens and warns that a trend is \nabout to reverse. It also flattens and warns of a nearing reversal if high volume gener-\nates only a small price move.", - "type": "text" - }, - { - "block_id": "p129-b8", - "global_id": 1358, - "bbox": [ - 72.0, - 523.2, - 158.03, - 540.14 - ], - "text": "Trading Rules", - "type": "text" - }, - { - "block_id": "p129-b9", - "global_id": 1359, - "bbox": [ - 72.0, - 554.43, - 199.56, - 567.25 - ], - "text": "Short-Term Force Index", - "type": "text" - }, - { - "block_id": "p129-b10", - "global_id": 1360, - "bbox": [ - 72.0, - 574.83, - 434.64, - 616.14 - ], - "text": "A 2-day EMA of Force Index is a highly sensitive indicator of the short-term force of \nbulls and bears. When it swings above its centerline, it shows that bulls are stronger, \nand when it falls below the centerline, it shows that bears are stronger.", - "type": "text" - }, - { - "block_id": "p129-b11", - "global_id": 1361, - "bbox": [ - 72.0, - 616.84, - 434.68, - 658.16 - ], - "text": "Since the 2-day EMA of Force Index is a sensitive tool, we can use it to fine-tune \nsignals of other indicators. When a trend-following indicator identifies an uptrend, \nthe declines of the 2-day EMA of Force Index below zero pinpoint the best buying", - "type": "text" - } - ] - }, - { - "page_num": 130, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p130-b0", - "global_id": 1362, - "bbox": [ - 72.0, - 33.66, - 432.04, - 47.21 - ], - "text": "114\t\nVOLUME AND TIME", - "type": "text" - }, - { - "block_id": "p130-b1", - "global_id": 1363, - "bbox": [ - 72.0, - 57.83, - 434.7, - 99.14 - ], - "text": "points: buying pullbacks during a long-term rally (Figure 30.1). When a trend- \nfollowing tool identifies a downtrend, rallies of a 2-day EMA of Force Index mark \nthe best shorting areas.", - "type": "text" - }, - { - "block_id": "p130-b2", - "global_id": 1364, - "bbox": [ - 76.0, - 113.83, - 434.72, - 187.15 - ], - "text": "1.\tBuy when a 2-day EMA of Force Index turns negative during uptrends.\nEven a fast and furious uptrend has occasional pullbacks. If you delay buying \nuntil the 2-day EMA of Force Index turns negative, you’ll buy closer to a short-\nterm bottom. Most people chase rallies and then get hit by drawdowns they find \nhard to tolerate. Force Index helps find buying opportunities with lower risks.", - "type": "text" - }, - { - "block_id": "p130-b3", - "global_id": 1365, - "bbox": [ - 88.0, - 191.84, - 434.71, - 233.16 - ], - "text": "When a 2-day EMA of Force Index turns negative during an uptrend, place a \nbuy order above the high price of that day. When the uptrend resumes and prices \nrally, you’ll be stopped in on the long side. If prices continue to decline, your", - "type": "text" - }, - { - "block_id": "p130-b4", - "global_id": 1366, - "bbox": [ - 110.2, - 460.78, - 379.14, - 470.4 - ], - "text": "weekly trend is up\nweekly trend is up\nweekly trend is up", - "type": "text" - }, - { - "block_id": "p130-b5", - "global_id": 1367, - "bbox": [ - 72.36, - 496.18, - 356.45, - 506.23 - ], - "text": "FIGURE 30.1  ADBE daily, 26-day EMA, 2-day Force Index. (Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p130-b6", - "global_id": 1368, - "bbox": [ - 72.4, - 512.03, - 195.28, - 524.93 - ], - "text": "Short-Term Force Index", - "type": "text" - }, - { - "block_id": "p130-b7", - "global_id": 1369, - "bbox": [ - 72.4, - 528.93, - 434.53, - 575.42 - ], - "text": "Later in this book we’ll return to the all-important topic of using multiple timeframes to \nmake trading decisions. For example, you may make your strategic decision—to be a bull \nor a bear—on a weekly chart and then make your tactical decisions on where to buy or sell \nshort using a daily chart.", - "type": "text" - }, - { - "block_id": "p130-b8", - "global_id": 1370, - "bbox": [ - 72.4, - 576.92, - 434.54, - 671.39 - ], - "text": "In the case of Adobe Systems, Inc. (ADBE), there is a steady uptrend on the weekly \nchart, confirmed by its rising EMA (not shown). When the weekly trend is up, a 2-day Force \nIndex on the daily chart provides an ongoing series of signals that identify buy points. \nInstead of chasing strength and buying high, it’s better to buy during short-term pullbacks, \nwhen a wave goes against the tide. Those waves are marked by the 2-day Force Index \ndropping below zero. Once the 2-day Force Index goes negative, it makes sense to start \nplacing buy orders above the latest bar’s high. This will ensure you’ll be stopped into a long \ntrade as soon as the downwave loses it power.", - "type": "text" - } - ] - }, - { - "page_num": 131, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p131-b0", - "global_id": 1371, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "30. FORCE INDEX\t\n115", - "type": "text" - }, - { - "block_id": "p131-b1", - "global_id": 1372, - "bbox": [ - 88.02, - 57.83, - 434.77, - 113.15 - ], - "text": "order will not be executed. Keep lowering your buy order to near the high of \nthe latest bar. Once your buy stop is triggered, place a protective stop below the \nlatest minor low. This tight stop is seldom touched in a strong uptrend, but it’ll \nget you out early if the trend is weak.", - "type": "text" - }, - { - "block_id": "p131-b2", - "global_id": 1373, - "bbox": [ - 76.02, - 119.84, - 434.72, - 192.17 - ], - "text": "2.\tSell short when a 2-day EMA of Force Index turns positive in a downtrend.\nWhen trend-following indicators identify a downtrend, wait until the 2-day \nEMA of Force Index turns positive. It reflects a quick splash of bullishness—a \nshorting opportunity. Place an order to sell short below the low of the latest \nprice bar.", - "type": "text" - }, - { - "block_id": "p131-b3", - "global_id": 1374, - "bbox": [ - 87.98, - 195.86, - 434.74, - 251.18 - ], - "text": "If the 2-day EMA of Force Index continues to rally after you place your sell \norder, raise your order the next day to near the previous bar’s low. Once prices \nslide and you enter a short trade, place a protective stop above the latest minor \npeak. Move your stop down to a break-even level as early as possible.", - "type": "text" - }, - { - "block_id": "p131-b4", - "global_id": 1375, - "bbox": [ - 87.98, - 254.88, - 434.6, - 296.2 - ], - "text": "Additionally, a 2-day EMA of Force Index helps decide when to pyramid posi-\ntions. You can add to longs in uptrends each time Force Index turns negative; you \ncan add to shorts in downtrends whenever Force Index turns positive.", - "type": "text" - }, - { - "block_id": "p131-b5", - "global_id": 1376, - "bbox": [ - 87.98, - 299.89, - 434.66, - 369.22 - ], - "text": "Force Index even provides a glimpse into the future. When a 2-day EMA of \nForce Index falls to its lowest low in a month, it shows that bears are strong and \nprices are likely to fall even lower. When a 2-day EMA of Force Index rallies to \nits highest level in a month, it shows that bulls are strong and prices are likely \nto rise even higher.", - "type": "text" - }, - { - "block_id": "p131-b6", - "global_id": 1377, - "bbox": [ - 87.98, - 372.91, - 434.75, - 484.25 - ], - "text": "A 2-day EMA of Force Index helps decide when to close out a position. It \ndoes it by identifying short-term splashes of mass bullishness or bearishness. A \nshort-term trader who bought when this indicator was negative can sell when \nit turns positive. A short-term trader who went short when this indicator was \npositive can cover when it turns negative. A longer-term trader should get out of \nhis position only if a trend changes (as identified by the slope of a 13-day EMA \nof price) or if there is a divergence between the 2-day EMA of Force Index and \nthe trend.", - "type": "text" - }, - { - "block_id": "p131-b7", - "global_id": 1378, - "bbox": [ - 75.98, - 490.91, - 434.65, - 532.22 - ], - "text": "3.\tBullish divergences between the 2-day EMA of Force Index and price give strong \nbuy signals. A bullish divergence occurs when prices fall to a new low while \nForce Index makes a more shallow low.", - "type": "text" - }, - { - "block_id": "p131-b8", - "global_id": 1379, - "bbox": [ - 75.97, - 538.91, - 434.71, - 580.22 - ], - "text": "4.\tBearish divergences between the 2-day EMA of Force Index and price give strong \nsell signals. A bearish divergence occurs when prices rally to a new high while \nForce Index traces a lower second top.", - "type": "text" - }, - { - "block_id": "p131-b9", - "global_id": 1380, - "bbox": [ - 75.97, - 586.91, - 434.74, - 673.24 - ], - "text": "5.\tWhenever the 2-day EMA of Force Index spikes down to five times or more its \nusual depth and then recoils from that low, expect prices to rally in the coming \ndays.\nMarkets fluctuate between overbought and oversold, and when they recoil from \na down spike, we can expect a rally. Note that this signal doesn’t work well in \nuptrends—markets recoil from down spikes but not from up spikes. Spikes that", - "type": "text" - } - ] - }, - { - "page_num": 132, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p132-b0", - "global_id": 1381, - "bbox": [ - 72.0, - 33.66, - 432.04, - 47.21 - ], - "text": "116\t\nVOLUME AND TIME", - "type": "text" - }, - { - "block_id": "p132-b1", - "global_id": 1382, - "bbox": [ - 88.0, - 57.83, - 434.73, - 99.14 - ], - "text": "point down reflect intense fear, which doesn’t persist for very long. Spikes \nthat point up reflect excessive enthusiasm and greed, which can persist for quite \na long time.", - "type": "text" - }, - { - "block_id": "p132-b2", - "global_id": 1383, - "bbox": [ - 88.0, - 103.84, - 434.72, - 159.16 - ], - "text": "A 2-day EMA of Force Index fits well into the Triple Screen trading system \n(see Chapter 39). Its ability to find short-term buying and selling points is espe-\ncially useful when you combine Force Index with a longer-term trend-following \nindicator.", - "type": "text" - }, - { - "block_id": "p132-b3", - "global_id": 1384, - "bbox": [ - 72.0, - 169.43, - 434.76, - 215.14 - ], - "text": "Intermediate-Term Force Index\nA 13-day EMA of Force Index identifies longer-term changes in the balance of power \nbetween bulls and bears. When it rises above zero, the bulls are stronger, and when", - "type": "text" - }, - { - "block_id": "p132-b4", - "global_id": 1385, - "bbox": [ - 71.4, - 461.78, - 355.01, - 471.83 - ], - "text": "FIGURE 30.2  SSYS daily, 26-day EMA, 13-day Force Index. (Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p132-b5", - "global_id": 1386, - "bbox": [ - 71.4, - 477.63, - 189.4, - 490.53 - ], - "text": "Long-Term Force Index", - "type": "text" - }, - { - "block_id": "p132-b6", - "global_id": 1387, - "bbox": [ - 71.4, - 494.53, - 433.55, - 565.01 - ], - "text": "Stratasys, Inc. (SSYS) is one of the two leading companies in the rapidly emerging ad-\nditive manufacturing (AM) market. In the two years since I wrote the world’s first popular \ne-book on investing in this technology, AM stocks have become investors’ favorites. A \ntechnical pattern has emerged, with rallies driven by amateurs piling in and sharp declines \nas they panic and bail out. The 13-day Force Index does a good job of catching those \nwaves.", - "type": "text" - }, - { - "block_id": "p132-b7", - "global_id": 1388, - "bbox": [ - 71.34, - 566.51, - 433.53, - 613.0 - ], - "text": "When the 13-day Force Index crosses above its zero line (marked by vertical green \narrows), it shows that buying volume is coming in. That’s where a longer-term trader buys \nand holds. When the 13-day Force declines below its zero line and stays there, it shows \nthat bears predominate.", - "type": "text" - }, - { - "block_id": "p132-b8", - "global_id": 1389, - "bbox": [ - 71.34, - 614.5, - 433.5, - 684.98 - ], - "text": "Near the right edge of the screen, we see a record low of Force Index, but then bears \nbegin to weaken, as Force Index starts inching towards zero. Keep your powder dry as \nyou wait for an accumulation pattern to emerge and be confirmed by Force Index crossing \nabove zero. This see-saw movement of stocks passing from strong hands into weak ones \nnear the tops and back again near the lows goes on forever. Force Index can help you posi-\ntion yourself with the right group.", - "type": "text" - } - ] - }, - { - "page_num": 133, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p133-b0", - "global_id": 1390, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "31. OPEN INTEREST\t\n117", - "type": "text" - }, - { - "block_id": "p133-b1", - "global_id": 1391, - "bbox": [ - 71.94, - 57.83, - 434.64, - 99.14 - ], - "text": "it falls below zero, the bears are in charge. Its divergences from prices identify inter-\nmediate and even major turning points (Figure 30.2). Its spikes, especially near the \nbottoms, mark approaching trend reversals.", - "type": "text" - }, - { - "block_id": "p133-b2", - "global_id": 1392, - "bbox": [ - 71.94, - 99.84, - 434.68, - 141.16 - ], - "text": "The raw Force Index identifies the winning team in the battle between bulls and \nbears in any price bar, be it weekly, daily, or intraday. We get much clearer signals by \nsmoothing the raw Force Index with a moving average.", - "type": "text" - }, - { - "block_id": "p133-b3", - "global_id": 1393, - "bbox": [ - 75.94, - 156.83, - 434.72, - 258.16 - ], - "text": "1.\tWhen a 13-day EMA of Force Index is above the centerline, bulls are in control \nof the market. When it is below the centerline, bears are in charge. \nWhen a rally begins, prices often jump on heavy volume. When a 13-day EMA \nof Force Index reaches a new high, it confirms the uptrend. As an uptrend grows \nolder, prices tend to rise more slowly, and volume becomes thinner. That’s when \na 13-day EMA of Force Index starts tracing lower tops. When it drops below its \nzero line, it signals that the back of the bull has been broken.", - "type": "text" - }, - { - "block_id": "p133-b4", - "global_id": 1394, - "bbox": [ - 75.97, - 265.34, - 434.71, - 394.76 - ], - "text": "2.\tA new peak of the 13-day EMA of Force Index shows that bulls are very strong \nand a rally is likely to continue. A bearish divergence between a 13-day EMA of \nForce Index and price gives a strong signal to sell short. If prices reach a new \nhigh but this indicator traces a lower peak, it warns that bulls are losing power \nand bears are ready to take control.\nNote that for a divergence to be legitimate, this indicator must make a new peak, \nthen fall below its zero line, and then rise above that line again, but tracing a \nlower peak, which creates a divergence. If there is no crossover, then there is no \nlegitimate divergence.", - "type": "text" - }, - { - "block_id": "p133-b5", - "global_id": 1395, - "bbox": [ - 75.97, - 401.87, - 434.74, - 517.2 - ], - "text": "3.\t A new low in the 13-day EMA of Force Index shows that a downtrend is likely \nto continue. If prices fall to a new low but this indicator rallies above zero and \nthen falls again, but to a more shallow low, it completes a bullish divergence. It \nreveals that bears are losing power and gives a buy signal.\nWhen a downtrend begins, prices usually drop on heavy volume. When a 13-day \nEMA of Force Index falls to a new low, it confirms the decline. As the downtrend \ngrows old, prices fall more slowly or volume dries up—that’s when a reversal is \nin the cards.", - "type": "text" - }, - { - "block_id": "p133-b6", - "global_id": 1396, - "bbox": [ - 87.97, - 521.89, - 434.72, - 577.21 - ], - "text": "Adding an envelope to the chart of Force Index can help you detect its ex-\ntreme deviations from the norm, which tend to lead to price trend reversals. This \nmethod for catching deviations and potential reversals works well with weekly \ncharts, but not with the daily and intraday charts. This is truly a longer-term tool.", - "type": "text" - }, - { - "block_id": "p133-b7", - "global_id": 1397, - "bbox": [ - 73.55, - 602.86, - 223.68, - 621.5 - ], - "text": "■\n■31. Open Interest", - "type": "text" - }, - { - "block_id": "p133-b8", - "global_id": 1398, - "bbox": [ - 72.0, - 631.66, - 434.75, - 687.15 - ], - "text": "Open interest is the number of contracts held by buyers or owed by short sellers in \nany derivative market, such as futures or options. If you are unfamiliar with futures \nor options, skip this chapter and return to it after you have read Chapters 44 on \noptions and 46 on futures.", - "type": "text" - } - ] - }, - { - "page_num": 134, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p134-b0", - "global_id": 1399, - "bbox": [ - 72.0, - 33.66, - 432.04, - 47.21 - ], - "text": "118\t\nVOLUME AND TIME", - "type": "text" - }, - { - "block_id": "p134-b1", - "global_id": 1400, - "bbox": [ - 72.0, - 57.83, - 434.76, - 169.24 - ], - "text": "Stock market shares are traded for as long as the company that listed them stays in \nbusiness as an independent unit. Most shares are held as long positions, with only a \nsmall percentage of shorts. In futures and options, on the other hand, the total size of \nlong and short positions is always identical, due to the fact that they are contracts for \nfuture delivery. When someone wants to buy a contract, someone else has to sell it to \nthem, i.e., go short. If you want to buy a call option for 100 shares of Google, another \ntrader has to sell you that option; in order for you to be long, someone else has to \nbe short. Open interest equals the total long or the total short positions.", - "type": "text" - }, - { - "block_id": "p134-b2", - "global_id": 1401, - "bbox": [ - 72.0, - 169.86, - 434.74, - 267.19 - ], - "text": "Futures and options contracts are designed to last for only a set period of time. \nA futures or options buyer who wants to accept delivery and a seller who wants to \ndeliver have to wait until the first delivery day. This waiting period ensures that the \nnumbers of contracts held long and short are always equal. In any case, very few \nfutures and options traders plan to deliver or accept delivery. Most traders close out \ntheir positions early, settling in cash long before the first notice day. We’ll return to \nthe topic of futures and options in Part Eight of this book on trading vehicles.", - "type": "text" - }, - { - "block_id": "p134-b3", - "global_id": 1402, - "bbox": [ - 72.0, - 267.89, - 434.69, - 337.21 - ], - "text": "Open interest rises when new positions are being created and falls when posi-\ntions are being closed. For example, if open interest in April COMEX gold futures \nis 20,000 contracts, it means that bulls are long and bears short 20,000 contracts. If \nopen interest rises to 20,200, it means that the net of 200 new contracts have been \ncreated: both bought and sold short.", - "type": "text" - }, - { - "block_id": "p134-b4", - "global_id": 1403, - "bbox": [ - 72.0, - 337.91, - 434.68, - 379.22 - ], - "text": "Open interest falls when a bull who is long sells to a bear who is short but wants \nto cover his short position. As both of them get out, open interest falls by the size of \ntheir trade, since one or more contracts disappear from that market.", - "type": "text" - }, - { - "block_id": "p134-b5", - "global_id": 1404, - "bbox": [ - 72.0, - 379.92, - 434.77, - 449.24 - ], - "text": "If a new bull buys from an old bull that is getting out of his long position, open \ninterest remains unchanged. Nor does the open interest change when a new bear \nsells to an old bear who wants to buy to cover his short position. In summary, open \ninterest rises when “fresh blood” enters that market and falls as current bulls and \nbears start leaving that market, as illustrated in the table below:", - "type": "text" - }, - { - "block_id": "p134-b6", - "global_id": 1405, - "bbox": [ - 88.5, - 462.2, - 388.06, - 530.47 - ], - "text": "Buyer\nSeller\nOpen Interest\nNew buyer\nNew seller\nIncreases\nNew buyer\nFormer buyer sells\nUnchanged\nFormer seller buys to cover\nNew seller\nUnchanged\nFormer seller buys to cover\nFormer buyer sells\nDecreases", - "type": "text" - }, - { - "block_id": "p134-b7", - "global_id": 1406, - "bbox": [ - 72.0, - 546.83, - 434.75, - 602.15 - ], - "text": "Technicians usually plot open interest as a line below price bars (Figure 31.1). \nOpen interest in any market varies from season to season because of massive hedging \nby industrial users and producers at different stages of the annual production cycle. \nOpen interest gives important messages when it deviates from its seasonal norm.", - "type": "text" - }, - { - "block_id": "p134-b8", - "global_id": 1407, - "bbox": [ - 72.0, - 622.2, - 188.49, - 639.14 - ], - "text": "Crowd Psychology", - "type": "text" - }, - { - "block_id": "p134-b9", - "global_id": 1408, - "bbox": [ - 72.0, - 644.83, - 434.72, - 686.14 - ], - "text": "It takes one bull and one bear to create a futures or options contract. A bull who \nbelieves that prices will rise buys a contract. A bear who thinks that prices are going \nto drop goes short by selling a contract for future delivery. With a trade between a", - "type": "text" - } - ] - }, - { - "page_num": 135, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p135-b0", - "global_id": 1409, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "31. OPEN INTEREST\t\n119", - "type": "text" - }, - { - "block_id": "p135-b1", - "global_id": 1410, - "bbox": [ - 71.94, - 504.83, - 434.7, - 546.14 - ], - "text": "new bull and a new bear, open interest rises by the number of contracts they traded. \nA single trade is unlikely to move any market, but when thousands of traders make \nsimilar trades, they propel or reverse market trends.", - "type": "text" - }, - { - "block_id": "p135-b2", - "global_id": 1411, - "bbox": [ - 71.94, - 546.84, - 434.68, - 602.16 - ], - "text": "Open interest reflects the intensity of conflict between bulls and bears. It depends \non their willingness to maintain long and short positions. When bulls and bears don’t \nexpect the market to move in their favor, they close out their positions, reducing \nopen interest.", - "type": "text" - }, - { - "block_id": "p135-b3", - "global_id": 1412, - "bbox": [ - 71.94, - 602.86, - 434.71, - 658.18 - ], - "text": "There are two people on the opposite sides of every trade, and one of them will \nbe hurt when prices change. In a rally, bears will get hurt, and in a decline, bulls will \nsuffer. As long as the losers hold on, hoping and hanging on to their positions, open \ninterest doesn’t change.", - "type": "text" - }, - { - "block_id": "p135-b4", - "global_id": 1413, - "bbox": [ - 71.94, - 658.87, - 434.69, - 686.18 - ], - "text": "A rise in open interest shows that a crowd of confident bulls is facing down a \ncrowd of equally confident bears. It points to a growing disagreement between the", - "type": "text" - }, - { - "block_id": "p135-b5", - "global_id": 1414, - "bbox": [ - 161.9, - 200.71, - 376.6, - 214.53 - ], - "text": "A\nB\nC\nD\nE", - "type": "text" - }, - { - "block_id": "p135-b6", - "global_id": 1415, - "bbox": [ - 72.4, - 266.58, - 334.2, - 276.63 - ], - "text": "FIGURE 31.1  TYH14 daily, 13-day EMA, open interest. (Chart by TradeStation)", - "type": "text" - }, - { - "block_id": "p135-b7", - "global_id": 1416, - "bbox": [ - 72.4, - 282.43, - 141.28, - 295.33 - ], - "text": "Open Interest", - "type": "text" - }, - { - "block_id": "p135-b8", - "global_id": 1417, - "bbox": [ - 72.4, - 299.33, - 434.55, - 333.82 - ], - "text": "Open interest (OI) reflects the number of all short or long positions in any futures or op-\ntions market. Since the two are equal in the derivatives markets, OI reflects the degree of \nconviction among bulls and bears.", - "type": "text" - }, - { - "block_id": "p135-b9", - "global_id": 1418, - "bbox": [ - 72.4, - 335.32, - 434.53, - 369.81 - ], - "text": "Rising OI shows that the conflict between bulls and bears is becoming more intense \nand confirms the exiting trend. Falling OI, on the other hand, shows that losers are leaving \nthe market, while the winners are cashing in—it signals that the trend is nearing its end.", - "type": "text" - }, - { - "block_id": "p135-b10", - "global_id": 1419, - "bbox": [ - 72.4, - 371.31, - 434.57, - 429.8 - ], - "text": "Near the left edge of this chart of March 2014 Treasury Notes futures (TYH14), the trend \nis down, but the declining OI warns bears not to overstay the downtrend. OI bottomed out \nin area A, T-Notes in area B, and in area C, both were in clear uptrends, with rising OI calling \nfor higher prices ahead. OI topped out in area D, and while prices continue to rise in area E, \nthe new downtrend of OI serves up a warning to the bulls near the right edge of the chart.", - "type": "text" - }, - { - "block_id": "p135-b11", - "global_id": 1420, - "bbox": [ - 72.4, - 431.3, - 434.49, - 465.79 - ], - "text": "Not all charts of open interest look as smooth and clear as this one. Serious traders \ndon’t expect to find a magic tool of a single indicator—they use several indicators and act \nonly when their messages confirm one another.", - "type": "text" - } - ] - }, - { - "page_num": 136, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p136-b0", - "global_id": 1421, - "bbox": [ - 72.0, - 33.66, - 432.04, - 47.21 - ], - "text": "120\t\nVOLUME AND TIME", - "type": "text" - }, - { - "block_id": "p136-b1", - "global_id": 1422, - "bbox": [ - 72.0, - 57.83, - 434.69, - 99.14 - ], - "text": "two camps. One group is sure to lose, but as long as potential losers keep pouring in, \nthe trend will continue. These ideas have been clearly put forth in L. Dee Belveal’s \nclassic book, Charting Commodity Market Price Behavior.", - "type": "text" - }, - { - "block_id": "p136-b2", - "global_id": 1423, - "bbox": [ - 72.0, - 99.84, - 434.76, - 169.16 - ], - "text": "It takes conviction among both bulls and bears to maintain a trend. Rising open \ninterest shows that both camps keep adding to their positions. If they strongly dis-\nagree about the future course of prices, then the supply of losers is growing, and the \ncurrent trend is likely to persist. An increase in open interest gives a green light to \nthe existing trend.", - "type": "text" - }, - { - "block_id": "p136-b3", - "global_id": 1424, - "bbox": [ - 72.0, - 169.86, - 434.7, - 225.18 - ], - "text": "If open interest rises during an uptrend, it shows that longs are buying while bears \nare shorting because they believe that the market is overvalued. They are likely to \nrun for cover when the uptrend squeezes them harder—and their buying will propel \nprices higher.", - "type": "text" - }, - { - "block_id": "p136-b4", - "global_id": 1425, - "bbox": [ - 72.0, - 225.88, - 434.75, - 267.19 - ], - "text": "If open interest rises during a downtrend, it shows that shorts are aggressively \nselling, while bottom pickers are buying. Those bargain hunters are likely to bail out \nwhen falling prices hurt them, and their selling will push prices even lower.", - "type": "text" - }, - { - "block_id": "p136-b5", - "global_id": 1426, - "bbox": [ - 72.0, - 267.89, - 434.76, - 337.21 - ], - "text": "When a bull is convinced that prices are going higher and decides to buy, but \na bear is afraid to sell short, that bull can buy only from another bull who bought \nearlier and now wants to cash out. Their trade creates no new contract, and open \ninterest stays unchanged. When open interest goes flat during a rally, it shows that \nthe supply of losers has stopped growing.", - "type": "text" - }, - { - "block_id": "p136-b6", - "global_id": 1427, - "bbox": [ - 72.0, - 337.91, - 434.75, - 435.24 - ], - "text": "When a bear is convinced that prices are going lower and wants to sell short, but \na bull is afraid to buy from him, that bear can sell only to another bear who shorted \nearlier and now wants to cover, take profits and leave. Their trade creates no new \ncontract, and open interest does not change. When open interest stays flat during a \ndecline, it shows that the supply of bottom pickers isn’t growing. Whenever open \ninterest flattens out, it flashes a yellow light—a warning that the trend is aging and \nthe best gains are probably behind.", - "type": "text" - }, - { - "block_id": "p136-b7", - "global_id": 1428, - "bbox": [ - 72.0, - 435.94, - 434.74, - 519.26 - ], - "text": "When a bull decides to get out of his long position, a bear decides to cover his \nshort position, and the two trade with one another, a contract disappears, and open \ninterest shrinks. Falling open interest shows that losers are bailing out, while win-\nners are taking profits. When the disagreement between bulls and bears decreases, \nthe trend is ripe for a reversal. Falling open interest shows that winners are cashing \nin and losers are giving up hope. It signals that the trend is approaching its end.", - "type": "text" - }, - { - "block_id": "p136-b8", - "global_id": 1429, - "bbox": [ - 72.0, - 544.2, - 158.03, - 561.14 - ], - "text": "Trading Rules", - "type": "text" - }, - { - "block_id": "p136-b9", - "global_id": 1430, - "bbox": [ - 76.0, - 567.83, - 434.76, - 655.15 - ], - "text": "1.\t When open interest rises during a rally, it confirms the uptrend and gives a green \nlight to add to long positions. It shows that more short sellers are coming into the \nmarket. When they bail out, their short covering is likely to push the rally higher.\nWhen open interest rises as prices fall, it shows that bottom pickers are active in \nthe market. It gives a green light to shorting because those bargain hunters are \nlikely to push prices lower when they throw in the towel.", - "type": "text" - }, - { - "block_id": "p136-b10", - "global_id": 1431, - "bbox": [ - 87.99, - 659.84, - 434.68, - 687.16 - ], - "text": "If open interest rises when prices are in a trading range, it’s a bearish sign. \nCommercial hedgers are much more likely to sell short than speculators. A sharp", - "type": "text" - } - ] - }, - { - "page_num": 137, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p137-b0", - "global_id": 1432, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "32. TIME\t\n121", - "type": "text" - }, - { - "block_id": "p137-b1", - "global_id": 1433, - "bbox": [ - 88.02, - 57.83, - 434.72, - 99.14 - ], - "text": "increase in open interest while prices are flat shows that savvy hedgers are prob-\nably shorting the market. You want to avoid trading against those who likely have \nbetter information than you.", - "type": "text" - }, - { - "block_id": "p137-b2", - "global_id": 1434, - "bbox": [ - 76.02, - 108.84, - 434.69, - 210.17 - ], - "text": "2.\tIf open interest falls while prices are in a trading range, it identifies short cover-\ning by major commercial interests and gives a buy signal. When commercials \nstart covering shorts, they show that they expect the market to rise.\nWhen open interest falls during a rally, it shows that winners and losers alike are \nbecoming cautious. Longs are taking profits, and shorts are covering. Markets \ndiscount the future, and a trend that is accepted by the majority is ready to re-\nverse. If open interest falls during a rally, consider selling and getting out.", - "type": "text" - }, - { - "block_id": "p137-b3", - "global_id": 1435, - "bbox": [ - 87.97, - 213.86, - 434.69, - 255.18 - ], - "text": "When open interest falls during a decline, it shows that shorts are covering \nand buyers are taking losses and bailing out. If open interest falls while prices \nslide, take profits on short positions.", - "type": "text" - }, - { - "block_id": "p137-b4", - "global_id": 1436, - "bbox": [ - 75.97, - 262.87, - 434.72, - 346.24 - ], - "text": "3.\tWhen open interest goes flat during a rally, it shows that the uptrend is getting \nold and the best gains have already been made. This gives you a signal to tighten \nstops on long positions and avoid new buying. When open interest goes flat dur-\ning a decline, it warns you that the downtrend is mature and it is best to tighten \nstops on short positions. Flat open interest in a trading range does not contribute \nany new information.", - "type": "text" - }, - { - "block_id": "p137-b5", - "global_id": 1437, - "bbox": [ - 72.0, - 362.2, - 215.28, - 379.14 - ], - "text": "More on Open Interest", - "type": "text" - }, - { - "block_id": "p137-b6", - "global_id": 1438, - "bbox": [ - 72.0, - 384.66, - 434.76, - 468.16 - ], - "text": "The higher the open interest, the more active the market, and the less slippage you \nrisk when getting in and out of positions. Short-term traders should focus on the \ncontracts with the highest open interest. In the futures markets, the highest open \ninterest tends to be in the front months. As the first notice day approaches and \nopen interest of the front month begins to drop, while open interest in the next \nmonth begins to rise, it signals to roll over your position into the next month.", - "type": "text" - }, - { - "block_id": "p137-b7", - "global_id": 1439, - "bbox": [ - 73.55, - 490.86, - 154.6, - 509.5 - ], - "text": "■\n■32. Time", - "type": "text" - }, - { - "block_id": "p137-b8", - "global_id": 1440, - "bbox": [ - 72.0, - 519.83, - 434.76, - 575.15 - ], - "text": "Most people conduct their lives as if they will live forever — repeating the same \nmistakes, not learning from the past, and hardly ever planning for the future. Freud \nshowed that the unconscious mind doesn’t have the notion of time. Our deep-seated \nwishes remain largely unchanged throughout our lives.", - "type": "text" - }, - { - "block_id": "p137-b9", - "global_id": 1441, - "bbox": [ - 72.0, - 575.84, - 434.7, - 617.16 - ], - "text": "When people join crowds, their behavior becomes even more primitive and im-\npulsive. Individuals may be ruled by the calendar and the clock, but crowds pay no \nattention to time. They act out their emotions as if they had all the time in the world.", - "type": "text" - }, - { - "block_id": "p137-b10", - "global_id": 1442, - "bbox": [ - 72.0, - 617.86, - 434.65, - 645.17 - ], - "text": "Most traders focus only on changing prices but pay little attention to time. That’s \njust another sign of being caught up in mass mentality.", - "type": "text" - }, - { - "block_id": "p137-b11", - "global_id": 1443, - "bbox": [ - 72.0, - 645.86, - 434.68, - 687.18 - ], - "text": "The awareness of time is a sign of civilization. A thinking person is aware of time, \nwhile someone who is acting impulsively is not. A market analyst who pays attention \nto time becomes aware of a dimension hidden from the market crowd.", - "type": "text" - } - ] - }, - { - "page_num": 138, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p138-b0", - "global_id": 1444, - "bbox": [ - 72.0, - 33.66, - 432.04, - 47.21 - ], - "text": "122\t\nVOLUME AND TIME", - "type": "text" - }, - { - "block_id": "p138-b1", - "global_id": 1445, - "bbox": [ - 72.0, - 57.1, - 111.9, - 74.04 - ], - "text": "Cycles", - "type": "text" - }, - { - "block_id": "p138-b2", - "global_id": 1446, - "bbox": [ - 72.0, - 79.73, - 434.74, - 163.06 - ], - "text": "Long-term price cycles are a fact of economic life. For example, the U.S. stock \nmarket tends to run in approximately four-year cycles. They exist because the ruling \nparty inflates the economy going into the presidential election every four years. \nThe party that wins the election deflates the economy when voters can’t take re-\nvenge at the polls. Flooding the economy with liquidity lifts the stock market, while \ndraining liquidity pushes it down3.", - "type": "text" - }, - { - "block_id": "p138-b3", - "global_id": 1447, - "bbox": [ - 72.02, - 163.73, - 434.76, - 247.06 - ], - "text": "Major cycles in agricultural commodities are due to weather and fundamental \nproduction factors, coupled with the mass psychology of producers. For example, \nwhen livestock prices rise, farmers breed more animals. When those animals reach \nthe market, prices fall and producers cut back. When the supply is absorbed, scarcity \npushes prices up, breeders go to work again, and the bull/bear cycle repeats. This \ncycle is shorter in hogs than in cattle because pigs breed faster than cows.", - "type": "text" - }, - { - "block_id": "p138-b4", - "global_id": 1448, - "bbox": [ - 72.02, - 247.76, - 434.76, - 289.07 - ], - "text": "Long-term cycles can help traders identify market tides. Instead, many traders \nget themselves in trouble by trying to use short-term cycles to predict minor turn-\ning points.", - "type": "text" - }, - { - "block_id": "p138-b5", - "global_id": 1449, - "bbox": [ - 72.02, - 289.77, - 434.78, - 429.11 - ], - "text": "Price peaks and valleys often seem to flow in an orderly manner. Traders measure \ndistances between neighboring peaks, and project them into the future to forecast \nthe next top. Then they measure distances between bottoms and extend them into the \nfuture to forecast the next low. Cycles put bread and butter on the tables of analysts \nwho sell forecasts. Few of them realize that what appears like a cycle on the charts is \noften a figment of the imagination. If you analyze price data using a mathematically \nrigorous program, such as John Ehlers’s MESA (Maximum Entropy Spectral Analy-\nsis), you’ll find that approximately 80 percent of what looks like cycles is simply \nmarket noise. A human mind looks for order—and even an illusion of order is good \nenough for many people.", - "type": "text" - }, - { - "block_id": "p138-b6", - "global_id": 1450, - "bbox": [ - 72.02, - 429.81, - 434.72, - 499.13 - ], - "text": "If you look at any river from the air, it appears to have cycles, swinging right and left. \nEvery river meanders in its valley because water flows faster in its middle than near \nthe shores, creating turbulences that force the river to turn. Looking for short-term \nmarket cycles with a ruler and a pencil is like searching for water with a divining rod. \nProfits from an occasional success are erased by many losses due to unsound methods.", - "type": "text" - }, - { - "block_id": "p138-b7", - "global_id": 1451, - "bbox": [ - 72.0, - 519.1, - 181.3, - 536.04 - ], - "text": "Indicator Seasons", - "type": "text" - }, - { - "block_id": "p138-b8", - "global_id": 1452, - "bbox": [ - 72.0, - 541.73, - 434.75, - 611.05 - ], - "text": "A farmer sows in spring, harvests in late summer, and in the fall, lays in supplies for \nthe winter. There is a time to sow and a time to reap, a time to bet on a warm trend \nand a time to get ready for a frost. We can apply the concept of seasons to financial \nmarkets. Taking a farmer’s approach, a trader should look to buy in spring, sell in \nsummer, go short in the fall, and cover in winter.", - "type": "text" - }, - { - "block_id": "p138-b9", - "global_id": 1453, - "bbox": [ - 72.0, - 611.75, - 434.7, - 639.06 - ], - "text": "Martin Pring developed the model of seasons for prices, but this concept works \neven better with technical indicators. Their seasons help recognize the current stage", - "type": "text" - }, - { - "block_id": "p138-b10", - "global_id": 1454, - "bbox": [ - 71.99, - 662.62, - 424.86, - 685.71 - ], - "text": "3This cycle was grossly distorted by the Fed’s “quantitative easing” following the 2008 debacle, but \nit’s likely to return, once we crawl out of the Great Recession.", - "type": "text" - } - ] - }, - { - "page_num": 139, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p139-b0", - "global_id": 1455, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "32. TIME\t\n123", - "type": "text" - }, - { - "block_id": "p139-b1", - "global_id": 1456, - "bbox": [ - 71.94, - 57.83, - 434.57, - 85.14 - ], - "text": "of the market cycle. This simple but effective model helps you buy when prices are \nlow and sell short when they are high, setting you apart from the market crowd.", - "type": "text" - }, - { - "block_id": "p139-b2", - "global_id": 1457, - "bbox": [ - 71.94, - 85.84, - 434.68, - 197.17 - ], - "text": "We can define the seasons of many indicators by two factors: their slope as well \nas their position above or below the centerline. For example, let’s apply the concept \nof indicator seasons to MACD-Histogram (see Chapter 23). We define the slope of \nMACD-Histogram as the relationship between two neighboring bars. When MACD-\nHistogram rises below its centerline, it is spring; when it rises above its centerline, \nit is summer; when it falls above its centerline, it is autumn; and when it falls below \nits centerline, it is winter. Spring is the best season for going long, and autumn is the \nbest season for selling short (Figure 32.1).", - "type": "text" - }, - { - "block_id": "p139-b3", - "global_id": 1458, - "bbox": [ - 82.5, - 216.1, - 409.97, - 284.37 - ], - "text": "Indicator Slope\nPosition Relative to Centerline\nSeason\nPreferred Action\nRising\nBelow\nSpring\nGo long\nRising\nAbove\nSummer\nStart selling\nFalling\nAbove\nFall\nGo short\nFalling\nBelow\nWinter\nStart covering", - "type": "text" - }, - { - "block_id": "p139-b4", - "global_id": 1459, - "bbox": [ - 72.0, - 308.83, - 434.74, - 392.16 - ], - "text": "When MACD-Histogram is below its centerline but its slope is rising, it is spring \nin the market. The weather is cool but turning warmer. Most traders expect the \nwinter to return and are afraid to buy. Emotionally, it is hard to buy because the \nmemories of a downtrend are still fresh. In fact, spring is the best time for buying, \nwith the highest profit potential, while risks are relatively small because we can place \na protective stop slightly below the market.", - "type": "text" - }, - { - "block_id": "p139-b5", - "global_id": 1460, - "bbox": [ - 72.0, - 392.85, - 434.69, - 462.18 - ], - "text": "When MACD-Histogram rises above its centerline, it’s summer in the market—\nand by now most traders recognize the uptrend. It’s emotionally easy to buy in sum-\nmer because bulls have plenty of company. In fact, profit potential in summer is \nlower than in spring, while the risks are higher because stops have to be farther away \nfrom the market due to heightened volatility.", - "type": "text" - }, - { - "block_id": "p139-b6", - "global_id": 1461, - "bbox": [ - 72.0, - 462.87, - 434.75, - 518.19 - ], - "text": "When MACD-Histogram is above its centerline but its slope turns down, it’s au-\ntumn in the market. Few traders recognize that change and keep buying, expecting \nsummer to return. Emotionally, it’s hard to sell short in autumn—it requires you to \nstand apart from the crowd. In fact, autumn is the best time for selling short.", - "type": "text" - }, - { - "block_id": "p139-b7", - "global_id": 1462, - "bbox": [ - 72.0, - 518.89, - 434.74, - 588.21 - ], - "text": "When MACD-Histogram falls below its centerline, it’s winter in the market. By \nthen, most traders recognize the downtrend. It is emotionally easy to sell short in \nwinter, joining many vocal bears. In fact, the risk/reward ratio is rapidly shifting \nagainst bears, as potential rewards are becoming smaller and risks higher because \nstops have to be placed relatively far away from prices.", - "type": "text" - }, - { - "block_id": "p139-b8", - "global_id": 1463, - "bbox": [ - 72.0, - 588.91, - 434.7, - 658.23 - ], - "text": "Just as a farmer must pay attention to the vagaries of weather, a trader needs to \nstay alert. An autumn on the farm can be interrupted by an Indian summer, and a \nmarket can stage a strong rally in the autumn. A sudden freeze can hit the fields in \nspring, and the market can drop early in a bull move. A trader needs to use several \nindicators and techniques to avoid getting whipsawed.", - "type": "text" - }, - { - "block_id": "p139-b9", - "global_id": 1464, - "bbox": [ - 72.0, - 658.93, - 434.69, - 686.24 - ], - "text": "The concept of indicator seasons focuses a trader’s attention on the passage of time. \nIt helps you plan for the season ahead instead of mindlessly following other people.", - "type": "text" - } - ] - }, - { - "page_num": 140, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p140-b0", - "global_id": 1465, - "bbox": [ - 72.0, - 33.66, - 432.04, - 47.21 - ], - "text": "124\t\nVOLUME AND TIME", - "type": "text" - }, - { - "block_id": "p140-b1", - "global_id": 1466, - "bbox": [ - 72.0, - 553.5, - 150.85, - 570.43 - ], - "text": "Market Time", - "type": "text" - }, - { - "block_id": "p140-b2", - "global_id": 1467, - "bbox": [ - 72.0, - 576.13, - 434.68, - 617.44 - ], - "text": "We measure time using calendars and watches, but seldom stop to think that our \nown perceptions of time are far from universal. We keep track of time in human \nterms, while huge areas of life move on vastly different timelines.", - "type": "text" - }, - { - "block_id": "p140-b3", - "global_id": 1468, - "bbox": [ - 72.0, - 618.14, - 434.66, - 687.46 - ], - "text": "For example, we think that the ground under our feet is stable, while in fact con-\ntinents move constantly. They traverse only a few inches per year, but this is enough \nto radically change the face of the globe over millions of years. Within shorter time-\nframes, weather patterns change over centuries. Ice ages and warming periods alter-\nnate with one another.", - "type": "text" - }, - { - "block_id": "p140-b4", - "global_id": 1469, - "bbox": [ - 132.7, - 245.55, - 224.31, - 254.58 - ], - "text": "Winter\nSpring", - "type": "text" - }, - { - "block_id": "p140-b5", - "global_id": 1470, - "bbox": [ - 225.27, - 205.14, - 325.81, - 214.16 - ], - "text": "Summer\nAutumn", - "type": "text" - }, - { - "block_id": "p140-b6", - "global_id": 1471, - "bbox": [ - 119.1, - 165.08, - 132.44, - 174.7 - ], - "text": "Sell", - "type": "text" - }, - { - "block_id": "p140-b7", - "global_id": 1472, - "bbox": [ - 179.66, - 211.08, - 193.88, - 220.7 - ], - "text": "Buy", - "type": "text" - }, - { - "block_id": "p140-b8", - "global_id": 1473, - "bbox": [ - 274.06, - 166.08, - 408.6, - 177.7 - ], - "text": "Sell\nSell", - "type": "text" - }, - { - "block_id": "p140-b9", - "global_id": 1474, - "bbox": [ - 348.32, - 201.08, - 362.54, - 210.7 - ], - "text": "Buy", - "type": "text" - }, - { - "block_id": "p140-b10", - "global_id": 1475, - "bbox": [ - 72.24, - 278.58, - 341.87, - 288.63 - ], - "text": "FIGURE 32.1  VRTX daily, MACD-Histogram 12-26-9. (Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p140-b11", - "global_id": 1476, - "bbox": [ - 72.2, - 294.43, - 163.91, - 307.33 - ], - "text": "Indicator Seasons", - "type": "text" - }, - { - "block_id": "p140-b12", - "global_id": 1477, - "bbox": [ - 72.2, - 311.33, - 434.34, - 357.82 - ], - "text": "We can apply the concept of seasons to most indicators and timeframes, including in-\ntraday. This can be done with a multitude of trading vehicles, even though this example \nfocuses on the daily MACD-Histogram of Vertex Pharmaceuticals, Inc. (VRTX), a stock in \nthe Nasdaq 100.", - "type": "text" - }, - { - "block_id": "p140-b13", - "global_id": 1478, - "bbox": [ - 88.2, - 365.32, - 434.32, - 375.82 - ], - "text": "Autumn—The indicator is above the centerline but falling. This is the best season for", - "type": "text" - }, - { - "block_id": "p140-b14", - "global_id": 1479, - "bbox": [ - 100.2, - 377.32, - 178.21, - 387.81 - ], - "text": "establishing shorts.", - "type": "text" - }, - { - "block_id": "p140-b15", - "global_id": 1480, - "bbox": [ - 88.2, - 393.32, - 434.31, - 403.82 - ], - "text": "Winter—The indicator drops below its centerline. Use weakness to take profits on", - "type": "text" - }, - { - "block_id": "p140-b16", - "global_id": 1481, - "bbox": [ - 100.2, - 405.32, - 162.21, - 415.81 - ], - "text": "short positions.", - "type": "text" - }, - { - "block_id": "p140-b17", - "global_id": 1482, - "bbox": [ - 88.2, - 421.32, - 434.28, - 431.82 - ], - "text": "Spring—The indicator turns up from below its centerline. It is the best time to establish", - "type": "text" - }, - { - "block_id": "p140-b18", - "global_id": 1483, - "bbox": [ - 100.2, - 433.32, - 124.53, - 443.81 - ], - "text": "longs.", - "type": "text" - }, - { - "block_id": "p140-b19", - "global_id": 1484, - "bbox": [ - 88.2, - 449.32, - 434.32, - 459.81 - ], - "text": "Summer—The indicator rises above its centerline. As the weather gets hot, use", - "type": "text" - }, - { - "block_id": "p140-b20", - "global_id": 1485, - "bbox": [ - 100.2, - 461.32, - 265.24, - 471.81 - ], - "text": "strength to take profits on long positions.", - "type": "text" - }, - { - "block_id": "p140-b21", - "global_id": 1486, - "bbox": [ - 72.2, - 479.32, - 434.26, - 513.81 - ], - "text": "MACD-Histogram looks very smooth in this example, but be prepared for brief fluctua-\ntions, both above and below the centerline. Spring can be interrupted by a frost, there can \nbe a warm spell in winter, etc.", - "type": "text" - } - ] - }, - { - "page_num": 141, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p141-b0", - "global_id": 1487, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "32. TIME\t\n125", - "type": "text" - }, - { - "block_id": "p141-b1", - "global_id": 1488, - "bbox": [ - 71.94, - 57.83, - 434.7, - 99.14 - ], - "text": "At the other end of the scale, there are physical particles that survive only a tiny \nfraction of a second. There are insects that are born, mature, procreate, and die \nwithin a single day.", - "type": "text" - }, - { - "block_id": "p141-b2", - "global_id": 1489, - "bbox": [ - 71.94, - 99.84, - 434.69, - 169.16 - ], - "text": "Turning to trading, let’s keep in mind that time flows at a different speed in the \nmarket than it does for us as individuals. The market, composed of huge masses of \nhuman beings, moves at a much slower speed. The patterns you recognize on your \ncharts may have predictive value—but the turns they anticipate are likely to occur \nmuch later than you expect.", - "type": "text" - }, - { - "block_id": "p141-b3", - "global_id": 1490, - "bbox": [ - 71.94, - 169.86, - 434.7, - 295.2 - ], - "text": "The relative slowness of crowds can bedevil even experienced traders. Time and \nagain we find ourselves entering trades too early. Beginners are typically late. By \nthe time they recognize a trend or a reversal, that move had been underway for so \nlong that they miss most, if not all of it. Newbies tend to chase old trends, but the \nmore experienced analysts and traders tend to run into an opposite problem. We \nrecognize approaching reversals and emerging new trends from far away—and jump \nin too soon. We often buy before the market finishes tracing a bottom or sell short \nwell before it completes a top. By getting in too early we can end up losing money in \ntrends that are too slow to turn.", - "type": "text" - }, - { - "block_id": "p141-b4", - "global_id": 1491, - "bbox": [ - 71.94, - 295.9, - 434.7, - 351.22 - ], - "text": "What should we do? First of all, you need to become aware that the market time \nis much slower than your own. Second, consider not putting on a trade when you \nnotice an early reversal signal. A better signal may well emerge later, especially at \nmarket tops, which take longer to form than bottoms.", - "type": "text" - }, - { - "block_id": "p141-b5", - "global_id": 1492, - "bbox": [ - 71.94, - 351.91, - 434.59, - 407.23 - ], - "text": "It pays not to be greedy and trade a smaller size. A smaller position is easier to \nhold while a reversal is taking its sweet time. Be sure to use multiple timeframes \nfor market analysis: this is the essence of Triple Screen, the system we’ll review in a \nfuture chapter.", - "type": "text" - }, - { - "block_id": "p141-b6", - "global_id": 1493, - "bbox": [ - 72.0, - 427.2, - 182.37, - 444.14 - ], - "text": "The Factor of Five", - "type": "text" - }, - { - "block_id": "p141-b7", - "global_id": 1494, - "bbox": [ - 72.0, - 449.83, - 434.71, - 505.15 - ], - "text": "Most beginners casually pick a timeframe that looks good to them—it can be a daily \nor a 10-minute chart, or any other—and ignore others. Few are aware of the fact \nthat the market lives in multiple timeframes. It moves simultaneously on monthly, \nweekly, daily, and intraday charts—often in opposite directions.", - "type": "text" - }, - { - "block_id": "p141-b8", - "global_id": 1495, - "bbox": [ - 72.0, - 505.84, - 434.71, - 575.17 - ], - "text": "The trend may be up on the daily charts but down on the weeklies, and vice versa. \nWhich of them will you follow? And what will you do about the intraday charts, \nwhich may well contradict either the weeklies or the dailies? Most traders ignore all \ntimeframes except for their own—until a sudden move from outside of their time-\nframe hits their account.", - "type": "text" - }, - { - "block_id": "p141-b9", - "global_id": 1496, - "bbox": [ - 72.0, - 575.86, - 434.74, - 687.2 - ], - "text": "Keep in mind that neighboring timeframes are linked by the factor of approxi-\nmately 5. If you start with a monthly chart and proceed to the weekly, you’ll notice \nthat there are 4.5 weeks to a month. As you switch from a weekly to a daily chart, \nyou know that there are 5 trading days to a week. Turning to intraday analysis, you \nmay look at an hourly chart—and there are approximately 5–6 hours to a trading \nday. Day traders can proceed even further and look at 10-minute charts, followed \nby 2-minute charts. Each is related to its neighboring timeframes by approximately \nthe factor of five.", - "type": "text" - } - ] - }, - { - "page_num": 142, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p142-b0", - "global_id": 1497, - "bbox": [ - 72.0, - 33.66, - 432.04, - 47.21 - ], - "text": "126\t\nVOLUME AND TIME", - "type": "text" - }, - { - "block_id": "p142-b1", - "global_id": 1498, - "bbox": [ - 72.0, - 57.83, - 434.75, - 141.16 - ], - "text": "The proper way to analyze any market is to review at least two neighboring time-\nframes. You must always start with the longer timeframe for a strategic view and \nthen switch to the shorter timeframe for tactical timing. If you like using daily charts, \nyou must first examine weekly charts, and if you want to day-trade using 10-minute \ncharts, you first need to analyze hourly charts. This is one of the key principles of the \nTriple Screen trading system (see Chapter 39).", - "type": "text" - }, - { - "block_id": "p142-b2", - "global_id": 1499, - "bbox": [ - 73.55, - 168.86, - 274.63, - 187.5 - ], - "text": "■\n■33. Trading Timeframes", - "type": "text" - }, - { - "block_id": "p142-b3", - "global_id": 1500, - "bbox": [ - 72.0, - 197.83, - 434.71, - 253.15 - ], - "text": "How long do you plan to hold your next trade? Do you think it’ll be a year, a week, \nor an hour? A serious trader plans the expected duration of every trade. Various \ntimeframes offer different opportunities and carry different risks. We can roughly \ndivide all trades into three groups:", - "type": "text" - }, - { - "block_id": "p142-b4", - "global_id": 1501, - "bbox": [ - 76.0, - 265.17, - 434.66, - 326.66 - ], - "text": "1.\tLong-term trading or investing—The expected duration of a position is \nmeasured in months, sometimes years.\nAdvantages: requires little day-to-day attention and may lead to spectacular gains.\nDisadvantage: drawdowns can be intolerably severe.", - "type": "text" - }, - { - "block_id": "p142-b5", - "global_id": 1502, - "bbox": [ - 75.98, - 334.22, - 431.94, - 395.71 - ], - "text": "2.\tSwing trading—The expected duration of a trade is measured in days, some-\ntimes weeks.\nAdvantages: a wealth of trading opportunities, fairly tight risk control.\nDisadvantage: will miss major trends.", - "type": "text" - }, - { - "block_id": "p142-b6", - "global_id": 1503, - "bbox": [ - 75.97, - 403.22, - 434.63, - 464.71 - ], - "text": "3.\tDay-trading—The expected duration of a trade is measured in minutes, rarely \nhours.\nAdvantages: great many opportunities, no overnight risk.\nDisadvantages: demands instant reflexes; transaction costs become a factor.", - "type": "text" - }, - { - "block_id": "p142-b7", - "global_id": 1504, - "bbox": [ - 71.96, - 476.9, - 434.71, - 518.22 - ], - "text": "If you decide to operate in more than one timeframe, consider making those \ntrades in different accounts. This will allow you to evaluate your performance in each \ntimeframe rather than lump together apples and oranges.", - "type": "text" - }, - { - "block_id": "p142-b8", - "global_id": 1505, - "bbox": [ - 72.0, - 538.2, - 129.54, - 555.14 - ], - "text": "Investing", - "type": "text" - }, - { - "block_id": "p142-b9", - "global_id": 1506, - "bbox": [ - 72.0, - 560.83, - 434.71, - 644.16 - ], - "text": "The decision to invest or trade for the long term is almost always based on some fun-\ndamental idea. You may recognize a new technological trend or an exciting product \nthat can greatly increase the value of a company. Investing demands a firm conviction \nand a great supply of patience if you are to hold that position through the inevitable \npullbacks and periods of flat prices. These tough challenges make successful investing \nextremely hard.", - "type": "text" - }, - { - "block_id": "p142-b10", - "global_id": 1507, - "bbox": [ - 72.0, - 644.85, - 434.76, - 672.16 - ], - "text": "Major trends that are easily seen on long-term charts appear uncertain and foggy \nin real time, especially when a stock enters a drawdown. When your investment", - "type": "text" - } - ] - }, - { - "page_num": 143, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p143-b0", - "global_id": 1508, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "33. TRADING TIMEFRAMES\t\n127", - "type": "text" - }, - { - "block_id": "p143-b1", - "global_id": 1509, - "bbox": [ - 71.94, - 57.83, - 434.6, - 113.15 - ], - "text": "drops 50% or more, wiping out the bulk of paper profits—a common development \nfor long-term positions—few of us have enough conviction and fortitude to con-\ntinue to hold. Let me illustrate this using an example of Apple Inc. (AAPL), a darling \nof several bull markets (Figure 33.1).", - "type": "text" - }, - { - "block_id": "p143-b2", - "global_id": 1510, - "bbox": [ - 71.94, - 113.84, - 434.68, - 197.17 - ], - "text": "AAPL survived its near-death experience in 2003, when its battered stock was \nrumored to be a takeover candidate, and grew to become the highest-capitalized, \npublicly traded company in the world, before collapsing from that top in 2012. Its \nuptrend looks grand in retrospect, but ask yourself, honestly, would you have been \nable to hold though multiple drawdowns, some of them exceeding 50%. Remember \nthat such drawdowns often mark the ends of uptrends.", - "type": "text" - }, - { - "block_id": "p143-b3", - "global_id": 1511, - "bbox": [ - 71.94, - 197.87, - 434.65, - 295.2 - ], - "text": "A sensible way to deal with the challenge of investing is to implement your funda-\nmental idea with the help of technical trading tools. When you decide to buy, check \nout technical signals to ensure you’re getting a relative bargain rather than paying full \nprice. If your investment soars, use technical tools to identify overvalued zones; take \nyour profits there and be ready to repurchase during the inevitable pullbacks. This \nplan demands a high degree of attention, focus, and perseverance. Figure 33.2 is an \nexample that was taken from my trading diary.", - "type": "text" - }, - { - "block_id": "p143-b4", - "global_id": 1512, - "bbox": [ - 89.7, - 439.28, - 94.9, - 449.13 - ], - "text": "1", - "type": "text" - }, - { - "block_id": "p143-b5", - "global_id": 1513, - "bbox": [ - 180.1, - 465.78, - 246.94, - 476.8 - ], - "text": "2\n3\n4", - "type": "text" - }, - { - "block_id": "p143-b6", - "global_id": 1514, - "bbox": [ - 72.04, - 498.12, - 254.91, - 508.23 - ], - "text": "FIGURE 33.1  AAPL weekly. (Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p143-b7", - "global_id": 1515, - "bbox": [ - 72.0, - 514.03, - 121.11, - 526.93 - ], - "text": "Investing", - "type": "text" - }, - { - "block_id": "p143-b8", - "global_id": 1516, - "bbox": [ - 72.0, - 530.93, - 434.05, - 553.42 - ], - "text": "The tremendous challenges of holding an investment, even a market leader like Apple Inc. \n(AAPL), can be seen on this 10-year chart:", - "type": "text" - }, - { - "block_id": "p143-b9", - "global_id": 1517, - "bbox": [ - 74.0, - 566.93, - 423.91, - 577.43 - ], - "text": "1.\t 2003—AAPL collapses below $10. Company’s survival in question. Would you buy?", - "type": "text" - }, - { - "block_id": "p143-b10", - "global_id": 1518, - "bbox": [ - 74.0, - 585.93, - 434.07, - 608.42 - ], - "text": "2.\t 2006—AAPL rallies to $86, then sinks to $51. If you had a thousand shares, would you \nhold? Would you sell when it got back above $80 and appeared to stall?", - "type": "text" - }, - { - "block_id": "p143-b11", - "global_id": 1519, - "bbox": [ - 74.0, - 616.93, - 434.15, - 639.42 - ], - "text": "3.\t 2008—AAPL rallies to $202, drops to $115. If you had a thousand shares, showing an \n$87,000 drawdown, would you hold or sell?", - "type": "text" - }, - { - "block_id": "p143-b12", - "global_id": 1520, - "bbox": [ - 74.0, - 647.92, - 434.12, - 670.42 - ], - "text": "4.\t 2009—AAPL recovers to $192, sinks to $78, below its previous low. Your drawdown is \nover 50%. Are you holding or cashing out?", - "type": "text" - } - ] - }, - { - "page_num": 144, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p144-b0", - "global_id": 1521, - "bbox": [ - 72.0, - 33.66, - 432.04, - 47.21 - ], - "text": "128\t\nVOLUME AND TIME", - "type": "text" - }, - { - "block_id": "p144-b1", - "global_id": 1522, - "bbox": [ - 72.0, - 462.43, - 434.7, - 503.74 - ], - "text": "Fundamental analysis can help you find a stock that may be worth buying. Use \ntechnical analysis to time your entries and exits. Be prepared to buy and sell more \nthan once during a major uptrend.", - "type": "text" - }, - { - "block_id": "p144-b2", - "global_id": 1523, - "bbox": [ - 72.0, - 523.8, - 159.79, - 540.73 - ], - "text": "Swing Trading", - "type": "text" - }, - { - "block_id": "p144-b3", - "global_id": 1524, - "bbox": [ - 72.0, - 546.43, - 434.7, - 601.75 - ], - "text": "While major trends and trading ranges can last for years, all are punctuated by \nshort-term upswings and downswings. Those moves create multiple trading op-\nportunities, which we can exploit. Many charting examples in this book feature \nswing trades.", - "type": "text" - }, - { - "block_id": "p144-b4", - "global_id": 1525, - "bbox": [ - 72.0, - 602.44, - 434.71, - 671.77 - ], - "text": "I especially recommend swing trading for beginning and intermediate traders. The \nmore trades you make, the more you learn, provided you manage risk and keep good \nrecords. Swing trading teaches you faster than long-term investing, whose lessons \ntake years to complete. Swing trading gives you time to think, unlike day-trading, \nwhich demands instant reactions. Day-trading is too fast for beginners.", - "type": "text" - }, - { - "block_id": "p144-b5", - "global_id": 1526, - "bbox": [ - 226.7, - 136.63, - 356.64, - 152.65 - ], - "text": "1\n3", - "type": "text" - }, - { - "block_id": "p144-b6", - "global_id": 1527, - "bbox": [ - 351.1, - 91.03, - 355.24, - 99.45 - ], - "text": "2", - "type": "text" - }, - { - "block_id": "p144-b7", - "global_id": 1528, - "bbox": [ - 72.36, - 269.58, - 410.67, - 301.42 - ], - "text": "FIGURE 33.2  F monthly, 26- and 13-months EMA with the Impulse system, Autoenvelope, MACD \nLines and MACD-Histogram (12-26-9), and Force Index 13-months EMA with ATR channels. (Chart by \nTradestation)", - "type": "text" - }, - { - "block_id": "p144-b8", - "global_id": 1529, - "bbox": [ - 72.4, - 307.43, - 264.78, - 320.33 - ], - "text": "Technical Analysis with Fundamentals", - "type": "text" - }, - { - "block_id": "p144-b9", - "global_id": 1530, - "bbox": [ - 74.4, - 328.33, - 434.55, - 374.82 - ], - "text": "1.\t 2007—Ford was on the ropes when the new CEO arrived—the man who earlier spear-\nheaded saving Boeing. In the heady atmosphere of a bull market, Ford seemed to have \na shot at recapturing its $30 high. I saw a false downside breakout coupled with a bull-\nish divergence and bought. I then grimly held through the bear market.", - "type": "text" - }, - { - "block_id": "p144-b10", - "global_id": 1531, - "bbox": [ - 74.4, - 383.32, - 431.98, - 405.81 - ], - "text": "2.\t 2011—Ford spiked above its monthly channel, which was narrower at that time, trac-\ning a kangaroo tail, while monthly MACD weakened. I took profits.", - "type": "text" - }, - { - "block_id": "p144-b11", - "global_id": 1532, - "bbox": [ - 74.4, - 414.32, - 415.81, - 424.81 - ], - "text": "3.\t 2011—as monthly prices stabilized in their value zone, I repurchased my position.", - "type": "text" - } - ] - }, - { - "page_num": 145, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p145-b0", - "global_id": 1533, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "33. TRADING TIMEFRAMES\t\n129", - "type": "text" - }, - { - "block_id": "p145-b1", - "global_id": 1534, - "bbox": [ - 71.94, - 57.83, - 434.7, - 155.16 - ], - "text": "Short-term swings can be substantial enough to generate meaningful profits, \nwithout the gut-wrenching drawdowns of position trades. Swing trades don’t re-\nquire watching the screen all day. In SpikeTrade.com, where hundreds of traders \ncompete, most trades last a few days. Some members carry their trades for weeks \nand even months, while others hop in and out within hours—but the holding period \nfor most members is measured in days. Swing trading hits the sweet spot among time \nhorizons.", - "type": "text" - }, - { - "block_id": "p145-b2", - "global_id": 1535, - "bbox": [ - 71.94, - 155.86, - 434.58, - 183.17 - ], - "text": "I piggyback one or more of the Spiketrade group’s picks almost every week. The \nchart of HES in Figure 33.3 comes from my diary of one of those trades.", - "type": "text" - }, - { - "block_id": "p145-b3", - "global_id": 1536, - "bbox": [ - 71.94, - 183.86, - 434.7, - 239.18 - ], - "text": "My profit in the HES trade was $1.92 per share. You can calibrate the amount of \nrisk you accept and the size of potential profit by deciding how many shares to trade. \nWe’ll address this essential question in chapter 50, in the section on the Iron Triangle \nof risk control.", - "type": "text" - }, - { - "block_id": "p145-b4", - "global_id": 1537, - "bbox": [ - 384.2, - 281.63, - 415.34, - 288.7 - ], - "text": "Short 75.22", - "type": "text" - }, - { - "block_id": "p145-b5", - "global_id": 1538, - "bbox": [ - 385.6, - 335.83, - 418.41, - 342.9 - ], - "text": "Cover 73.32", - "type": "text" - }, - { - "block_id": "p145-b6", - "global_id": 1539, - "bbox": [ - 72.16, - 556.38, - 419.27, - 577.42 - ], - "text": "FIGURE 33.3  HES daily, 26- and 13-day EMA with 4% envelope, MACD Lines and MACD-Histogram \n(12-26-9), the Impulse system, and 2-day Force Index. (Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p145-b7", - "global_id": 1540, - "bbox": [ - 72.2, - 583.23, - 145.16, - 596.13 - ], - "text": "A Swing Trade", - "type": "text" - }, - { - "block_id": "p145-b8", - "global_id": 1541, - "bbox": [ - 72.2, - 600.13, - 434.34, - 622.62 - ], - "text": "Professional traders are just as comfortable selling short as buying. The signals are similar \nbut the action quicker—stocks fall twice as fast as they rise.", - "type": "text" - }, - { - "block_id": "p145-b9", - "global_id": 1542, - "bbox": [ - 72.2, - 624.13, - 434.34, - 670.61 - ], - "text": "This chart shows where I shorted the stock of Hess Corporation (HES) as it was trac-\ning a short-term double top, with bearish divergences in all indicators. I covered and took \nprofits, as prices appeared to stall just below the value zone between the two EMAs, while \nthe indicators became oversold.", - "type": "text" - } - ] - }, - { - "page_num": 146, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p146-b0", - "global_id": 1543, - "bbox": [ - 72.0, - 33.66, - 432.04, - 47.21 - ], - "text": "130\t\nVOLUME AND TIME", - "type": "text" - }, - { - "block_id": "p146-b1", - "global_id": 1544, - "bbox": [ - 72.0, - 57.83, - 434.75, - 155.16 - ], - "text": "One of the best learning techniques involves returning to your closed-out trades \ntwo months later and replotting their charts. Trading signals that looked foggy when \nyou saw them at the right edge of the screen become clear when you see them in the \nmiddle of your chart. Now, with the passage of time, you can easily see what worked \nand what mistakes you may have made. Creating these follow-up charts teaches you \nwhat to repeat and what to avoid in the future. Updating the charts of closed trades \nturns you into your own instructor.", - "type": "text" - }, - { - "block_id": "p146-b2", - "global_id": 1545, - "bbox": [ - 72.0, - 155.86, - 434.68, - 197.17 - ], - "text": "The chart and text in Figure 33.4 come from SpikeTrade.com. Each week the \nSpiker who won that week’s competition posts a diary of his trade. Different people \nuse different indicators and parameters.", - "type": "text" - }, - { - "block_id": "p146-b3", - "global_id": 1546, - "bbox": [ - 72.0, - 197.87, - 434.72, - 225.18 - ], - "text": "Peter’s trade gained almost 11% in three days. Of course, we can’t allow our-\nselves to get intoxicated by such numbers. A beginner looks at them, multiplies them", - "type": "text" - }, - { - "block_id": "p146-b4", - "global_id": 1547, - "bbox": [ - 378.5, - 437.83, - 405.19, - 444.9 - ], - "text": "Buy $3.02", - "type": "text" - }, - { - "block_id": "p146-b5", - "global_id": 1548, - "bbox": [ - 381.1, - 301.53, - 407.33, - 308.6 - ], - "text": "Sell $3.35", - "type": "text" - }, - { - "block_id": "p146-b6", - "global_id": 1549, - "bbox": [ - 72.36, - 522.88, - 423.75, - 543.92 - ], - "text": "FIGURE 33.4  TRQ daily, 22- and 12-day EMA with 11% envelope, MACD Lines and MACD-Histogram \n(12-26-9), and 20-day RSI. (Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p146-b7", - "global_id": 1550, - "bbox": [ - 72.4, - 549.73, - 230.73, - 562.63 - ], - "text": "A Swing Trade near the Bottom", - "type": "text" - }, - { - "block_id": "p146-b8", - "global_id": 1551, - "bbox": [ - 72.4, - 566.63, - 434.44, - 589.12 - ], - "text": "This trade was submitted by Peter D., a long-term Spiker from the Netherlands. His post \nwas headlined “Fishing near the Lows.”", - "type": "text" - }, - { - "block_id": "p146-b9", - "global_id": 1552, - "bbox": [ - 72.4, - 590.63, - 434.5, - 625.11 - ], - "text": "“Weekly conditions: Indicators don’t show much movement. MACD very shallow but \npositive and RSI slowly improving. Daily: MACD was about to confirm a positive diver-\ngence, and so was RSI. Prices dove last week but stopped near support.", - "type": "text" - }, - { - "block_id": "p146-b10", - "global_id": 1553, - "bbox": [ - 72.4, - 626.62, - 434.53, - 685.1 - ], - "text": "“I set the initial entry at $3.02, in line with recent lows. It was hit on Monday morning, \nwhich turned out to be one cent above the low for the day and the week. Price closed near \nthe high of the day and continued surging on Tuesday and Wednesday. My target was hit \non Wednesday, on the way up. The rest of the day saw some pulling back, but price kept \nin range to close the week on a relatively high note.”", - "type": "text" - } - ] - }, - { - "page_num": 147, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p147-b0", - "global_id": 1554, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "33. TRADING TIMEFRAMES\t\n131", - "type": "text" - }, - { - "block_id": "p147-b1", - "global_id": 1555, - "bbox": [ - 71.94, - 57.83, - 434.69, - 113.15 - ], - "text": "by the number of weeks in a year, and goes crazy throwing his money at the markets. \nSuch spectacular gains are inevitably interspersed with losses. A professional trader \ncarefully manages his money, quickly cuts losing trades and protects his capital to \nallow his equity to grow.", - "type": "text" - }, - { - "block_id": "p147-b2", - "global_id": 1556, - "bbox": [ - 71.94, - 113.84, - 434.7, - 169.16 - ], - "text": "If investing is like hunting the big game, swing trading is like rabbit hunting. If your \nlivelihood depends on hunting, shooting rabbits is a much more reliable way of put-\nting meals on the table. Carefully entering and exiting swing trades, while cautiously \nmanaging money, is a realistic way of surviving and prospering in the markets.", - "type": "text" - }, - { - "block_id": "p147-b3", - "global_id": 1557, - "bbox": [ - 72.0, - 189.2, - 149.88, - 206.13 - ], - "text": "Day-Trading", - "type": "text" - }, - { - "block_id": "p147-b4", - "global_id": 1558, - "bbox": [ - 72.0, - 211.83, - 434.66, - 267.15 - ], - "text": "Day-trading means entering and exiting trades within a single market session. Rapid \nbuying and selling in front of a flashing screen demands the highest levels of concen-\ntration and discipline. Paradoxically, it attracts the most impulsive and gambling-\nprone people.", - "type": "text" - }, - { - "block_id": "p147-b5", - "global_id": 1559, - "bbox": [ - 72.0, - 267.84, - 434.7, - 323.16 - ], - "text": "Day-trading appears deceptively easy. Brokerage firms hide customer statistics \nfrom the public, but in 2000, state regulators in Massachusetts subpoenaed broker-\nage house records, which showed that after six months only 16% of day-traders \nmade money.", - "type": "text" - }, - { - "block_id": "p147-b6", - "global_id": 1560, - "bbox": [ - 72.0, - 323.86, - 434.71, - 365.18 - ], - "text": "Whatever gaps you may have in your knowledge or discipline, day-trading will find \nthem fast and hit you hard in your weak spots. In swing trading, you have the luxury \nof being able to stop and think, but not in day-trading.", - "type": "text" - }, - { - "block_id": "p147-b7", - "global_id": 1561, - "bbox": [ - 72.0, - 365.87, - 434.74, - 421.19 - ], - "text": "The person who is learning to trade is much better off using end-of-day charts. \nAfter you grow into a consistently profitable swing trader, you may wish to explore \nday-trading. You’ll use your already developed skills and will only need to adjust to \na faster game. A market newbie who stumbles into day-trading is a gift to the pros.", - "type": "text" - }, - { - "block_id": "p147-b8", - "global_id": 1562, - "bbox": [ - 72.0, - 421.89, - 434.68, - 463.2 - ], - "text": "Make sure to write down your action plan for day-trading: what will prompt you \nto enter or exit, to hold or cut. Be prepared to invest plenty of time: day-trading \nchews up long hours in front of multiple screens.", - "type": "text" - }, - { - "block_id": "p147-b9", - "global_id": 1563, - "bbox": [ - 72.0, - 463.9, - 434.76, - 575.24 - ], - "text": "Another difficulty of day-trading is that you shoot at much smaller targets. This is \nreflected in the height of price channels. Elsewhere in this book, you’ll read that a \ngood measure of a trader’s performance is the percentage of the channel or an enve-\nlope he captures in a trade. Taking 30% or more of a channel’s height earns you an \nA grade, while capturing 10% of that channel earns you a C (see Chapter 55). Let’s \napply these ratings to several stocks that are popular with day traders. The exact \nfigures will change by the time you read this book, but today I get the following \nnumbers for channel heights on the daily and 5-minute charts:", - "type": "text" - }, - { - "block_id": "p147-b10", - "global_id": 1564, - "bbox": [ - 76.5, - 590.1, - 427.01, - 645.13 - ], - "text": "Daily Channel\n“A” Trader\n“C” Trader\n5-Min Channel\n“A” Trader\n“C” Trader\nAAPL\n55\n16.5\n5.5\n2.5\n0.75\n0.25\nAMZN\n27\n8.1\n2.7\n2.2\n0.66\n0.22\nMON\n7\n2.1\n0.7\n0.6\n0.18\n0.06", - "type": "text" - }, - { - "block_id": "p147-b11", - "global_id": 1565, - "bbox": [ - 72.0, - 659.87, - 434.7, - 687.18 - ], - "text": "A swing trader who uses daily charts can do very well in these active stocks. He \ncan really clean up if he is an A level trader, but even if he is a C trader, taking only", - "type": "text" - } - ] - }, - { - "page_num": 148, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p148-b0", - "global_id": 1566, - "bbox": [ - 72.0, - 33.66, - 432.04, - 47.21 - ], - "text": "132\t\nVOLUME AND TIME", - "type": "text" - }, - { - "block_id": "p148-b1", - "global_id": 1567, - "bbox": [ - 72.0, - 57.83, - 434.75, - 113.15 - ], - "text": "10% out of a channel, he can stay comfortably ahead of the game while learning to \ntrade. On the other hand, a person who day-trades the very same stocks must be a \nstraight A trader in order to survive. Anything less and his account will be ground up \nby slippage, commissions, and expenses.", - "type": "text" - }, - { - "block_id": "p148-b2", - "global_id": 1568, - "bbox": [ - 72.0, - 113.84, - 434.64, - 155.16 - ], - "text": "If, after developing a successful track record as a swing trader, you decide to day-\ntrade, you’ll be able to use most of the tools and techniques you’ve already learned. \nYou’ll find an example of using Triple Screen in day-trading in Chapter 39.", - "type": "text" - }, - { - "block_id": "p148-b3", - "global_id": 1569, - "bbox": [ - 72.0, - 155.86, - 434.7, - 253.19 - ], - "text": "When a friend who is an Olympic rowing coach taught me to row, he focused on \ndeveloping the correct stroke. A competent rower always moves his oars exactly the \nsame way, whether it’s a leisurely weekend row or the final stretch of a race. What \nchanges are power and speed. The same with day-trading: the technique is the same, \nbut the speed is different. If you learn to swing trade, you can apply your technique \nto day-trading. And then you can go in reverse, and apply day-trading techniques to \nswing-trade entries and exits.", - "type": "text" - }, - { - "block_id": "p148-b4", - "global_id": 1570, - "bbox": [ - 72.0, - 253.88, - 431.96, - 281.2 - ], - "text": "Day-trading can be a profitable pursuit, but keep in mind that it’s a highly de-\nmanding professional game and most definitely not a casual activity for beginners.", - "type": "text" - } - ] - }, - { - "page_num": 149, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p149-b0", - "global_id": 1571, - "bbox": [ - 72.0, - 118.61, - 356.45, - 213.84 - ], - "text": "General Market \nIndicators", - "type": "text" - }, - { - "block_id": "p149-b1", - "global_id": 1572, - "bbox": [ - 72.1, - 673.7, - 432.15, - 687.25 - ], - "text": "133", - "type": "text" - }, - { - "block_id": "p149-b2", - "global_id": 1573, - "bbox": [ - 348.1, - 59.86, - 395.91, - 73.41 - ], - "text": "PA R T 4\nPA R T 6", - "type": "text" - }, - { - "block_id": "p149-b3", - "global_id": 1574, - "bbox": [ - 71.3, - 331.94, - 91.81, - 372.34 - ], - "text": "Y", - "type": "text" - }, - { - "block_id": "p149-b4", - "global_id": 1575, - "bbox": [ - 72.05, - 337.63, - 434.81, - 434.96 - ], - "text": "ou can use technical indicators reviewed in previous chapters to analyze any \ntrading vehicle: a stock, a future, an index, etc. Such tools as moving averages, \nMACD, Force index, and others, can provide signals for any ticker in any timeframe. \nNow we turn to a different group of tools: general market indicators, which analyze \nthe entire market rather than any specific stock. They are worth following because \ngeneral market trends are responsible for as much as half the movement in individual \nstocks.", - "type": "text" - }, - { - "block_id": "p149-b5", - "global_id": 1576, - "bbox": [ - 72.05, - 435.66, - 434.79, - 490.98 - ], - "text": "While there are dozens of general market indicators, this is not an encyclopedic \nreview—I’ll simply share the tools that help me trade. You may use the same or dif-\nferent tools—select those that appeal to you and test them on your market data. We \ncan trust only those indicators that we have tested.", - "type": "text" - }, - { - "block_id": "p149-b6", - "global_id": 1577, - "bbox": [ - 73.55, - 518.66, - 357.06, - 537.3 - ], - "text": "■\n■34. The New High–New Low Index", - "type": "text" - }, - { - "block_id": "p149-b7", - "global_id": 1578, - "bbox": [ - 72.0, - 547.63, - 434.76, - 616.95 - ], - "text": "Stocks that reach their highest level in a year on any given day are the leaders in \nstrength. Stocks that fall to their lowest point for that year on the same day are the \nleaders in weakness. The New High–New Low Index (NH-NL) tracks the behavior \nof market leaders by subtracting the number of New Lows from the New Highs. In \nmy experience, NH-NL is the best leading indicator of the stock market.1", - "type": "text" - }, - { - "block_id": "p149-b8", - "global_id": 1579, - "bbox": [ - 72.0, - 640.0, - 419.44, - 663.13 - ], - "text": "1In 2012, I wrote an e-book with Kerry Lovvorn on the New High–New Low Index. We publish \nnightly updates on its signals on SpikeTrade.com.", - "type": "text" - } - ] - }, - { - "page_num": 150, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p150-b0", - "global_id": 1580, - "bbox": [ - 72.0, - 33.66, - 432.01, - 47.21 - ], - "text": "134\t\nGENERAL MARKET INDICATORS", - "type": "text" - }, - { - "block_id": "p150-b1", - "global_id": 1581, - "bbox": [ - 72.0, - 57.1, - 231.15, - 74.04 - ], - "text": "How to Construct NH-NL", - "type": "text" - }, - { - "block_id": "p150-b2", - "global_id": 1582, - "bbox": [ - 72.0, - 79.73, - 434.66, - 107.04 - ], - "text": "The New High–New Low Index is easy to calculate, using information that appears \nin many online sources and in major newspapers.", - "type": "text" - }, - { - "block_id": "p150-b3", - "global_id": 1583, - "bbox": [ - 175.9, - 110.28, - 328.1, - 126.04 - ], - "text": "NH-NL = New Highs − New Lows", - "type": "text" - }, - { - "block_id": "p150-b4", - "global_id": 1584, - "bbox": [ - 72.0, - 131.72, - 434.75, - 215.05 - ], - "text": "Most data services in the United States report the daily numbers of New Highs \nand New Lows, but it is shocking how loosely they define their data. Some are too \nnarrow and track only the NYSE stocks, ignoring other exchanges. Others are \ntoo broad and track everything, including interest rate ETFs. My favorite source of \nreliable data is www.barchart.com. I take their data, subtract New Lows from New \nHighs, and plot the result underneath the daily chart of the S&P 500.", - "type": "text" - }, - { - "block_id": "p150-b5", - "global_id": 1585, - "bbox": [ - 72.0, - 215.75, - 434.77, - 299.08 - ], - "text": "The task of constructing NH-NL is harder for traders outside the United States, in \ncountries where such data isn’t reported. There you’ll need to do a bit of program-\nming. First, run a daily scan of the database of all stocks in your country to find those \nthat have reached the highest high and the lowest low for the year during the day. \nOnce you have those two lists, take the above formula and apply it to the numbers \nyou found.", - "type": "text" - }, - { - "block_id": "p150-b6", - "global_id": 1586, - "bbox": [ - 72.0, - 299.77, - 434.72, - 369.1 - ], - "text": "On the days when there are more new highs than new lows, NH-NL is positive \nand plotted above the centerline. On the days when there are more new lows than \nnew highs, NH-NL is negative and plotted below the centerline. If the numbers of \nnew highs and new lows are equal, NH-NL is zero. We normally plot the New High–\nNew Low Index as a line, with a horizontal reference line at a zero level.", - "type": "text" - }, - { - "block_id": "p150-b7", - "global_id": 1587, - "bbox": [ - 72.0, - 369.79, - 434.77, - 439.12 - ], - "text": "While I plot NH-NL underneath the S&P 500, keep in mind that it has a much \nbroader reach than the S&P—NH-NL includes data from the NYSE, AMEX, and \nNASDAQ, excluding only ETFs, unit investment trusts, closed-end funds, war-\nrant stocks, and preferred securities. The chart of the S&P 500 is there simply for \na comparison.", - "type": "text" - }, - { - "block_id": "p150-b8", - "global_id": 1588, - "bbox": [ - 72.0, - 456.1, - 188.49, - 473.04 - ], - "text": "Crowd Psychology", - "type": "text" - }, - { - "block_id": "p150-b9", - "global_id": 1589, - "bbox": [ - 72.0, - 478.73, - 434.78, - 534.05 - ], - "text": "A stock appears on the list of new highs when it’s the strongest it’s been in a year. It \nmeans that a herd of eager bulls is chasing its shares. A stock appears on the list of \nnew lows when it’s the weakest it’s been in a year, showing that a crowd of aggressive \nbears is selling its shares.", - "type": "text" - }, - { - "block_id": "p150-b10", - "global_id": 1590, - "bbox": [ - 72.0, - 534.74, - 434.71, - 576.06 - ], - "text": "The New High–New Low Index compares the numbers of the strongest and the \nweakest stocks on the exchange. It reveals the balance of power between the leaders \nin strength and the leaders in weakness.", - "type": "text" - }, - { - "block_id": "p150-b11", - "global_id": 1591, - "bbox": [ - 72.0, - 576.76, - 434.7, - 632.08 - ], - "text": "You can visualize all stocks on the New York Stock Exchange, the NASDAQ, or \nany other exchange as soldiers in a regiment. The new highs and new lows are their \nofficers. The new highs are the officers who lead an attack uphill. The new lows are \nthe officers who are deserting and running downhill.", - "type": "text" - }, - { - "block_id": "p150-b12", - "global_id": 1592, - "bbox": [ - 72.0, - 632.77, - 434.75, - 674.09 - ], - "text": "The quality of leadership is a key factor in any conflict. When I was in officer train-\ning, they kept telling us that there are no bad soldiers, only bad officers. The New \nHigh–New Low Index shows whether more officers are leading an attack uphill or", - "type": "text" - } - ] - }, - { - "page_num": 151, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p151-b0", - "global_id": 1593, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "34. THE NEW HIGH–NEW LOW INDEX\t\n135", - "type": "text" - }, - { - "block_id": "p151-b1", - "global_id": 1594, - "bbox": [ - 71.94, - 57.83, - 434.68, - 85.14 - ], - "text": "deserting downhill. Where the officers lead, soldiers follow. The broad indexes, such \nas the S&P 500, tend to follow the trend of NH-NL (Figure 34.1).", - "type": "text" - }, - { - "block_id": "p151-b2", - "global_id": 1595, - "bbox": [ - 71.94, - 85.84, - 434.72, - 183.17 - ], - "text": "When NH-NL rises above its centerline, it shows that the bullish leadership is \ndominant. When NH-NL falls below its centerline, it shows that bearish leadership \nis in charge. If the market rallies to a new high and NH-NL climbs to a new peak, it \nshows that bullish leadership is growing and the uptrend is likely to continue. If the \nmarket rallies but NH-NL shrinks, it shows that the leadership is becoming weak and \nthe uptrend is in danger. A regiment whose officers are starting to desert is likely to \nretreat.", - "type": "text" - }, - { - "block_id": "p151-b3", - "global_id": 1596, - "bbox": [ - 71.94, - 183.86, - 434.71, - 239.18 - ], - "text": "A new low in NH-NL shows that the downtrend is well led and likely to persist. If \nofficers are running faster than the men, the regiment is likely to be routed. If stocks \nfall but NH-NL turns up, it shows that officers are no longer running. When officers \nregain their morale, the whole regiment is likely to rally.", - "type": "text" - }, - { - "block_id": "p151-b4", - "global_id": 1597, - "bbox": [ - 72.0, - 259.2, - 226.89, - 276.14 - ], - "text": "Trading Rules for NH-NL", - "type": "text" - }, - { - "block_id": "p151-b5", - "global_id": 1598, - "bbox": [ - 72.0, - 281.83, - 434.75, - 323.14 - ], - "text": "Traders need to pay attention to three aspects of NH-NL: the level of NH-NL above \nor below its centerline, the trend of NH-NL, and divergences between the patterns \nof NH-NL and prices.", - "type": "text" - }, - { - "block_id": "p151-b6", - "global_id": 1599, - "bbox": [ - 72.0, - 544.58, - 414.36, - 554.63 - ], - "text": "FIGURE 34.1  S&P 500 daily, 26- and 13-day EMAs, Autoenvelope, NH-NL daily. (Chart by TradeStation)", - "type": "text" - }, - { - "block_id": "p151-b7", - "global_id": 1600, - "bbox": [ - 72.0, - 560.43, - 268.64, - 573.33 - ], - "text": "NH-NL—Daily Chart, Yearly Look-Back", - "type": "text" - }, - { - "block_id": "p151-b8", - "global_id": 1601, - "bbox": [ - 72.0, - 577.33, - 434.12, - 623.82 - ], - "text": "This chart tracks daily NH-NL during a mostly bullish year in the stock market. Still, ev-\nery bullish trend gets interrupted by pullbacks. Bearish deterioration patterns of NH-NL, \nmarked here by diagonal red arrows, warn you of coming declines. These signals emerge \nbecause officers start shifting towards the rear before the soldiers retreat.", - "type": "text" - }, - { - "block_id": "p151-b9", - "global_id": 1602, - "bbox": [ - 72.0, - 625.32, - 434.12, - 671.8 - ], - "text": "Declines end and rallies begin when NH-NL rallies from negative into positive territory, \nmarked here by purple circles. Those signals work especially well when the S&P is over-\nsold, i.e., near its lower channel line. As always, trading messages are especially strong \nwhen independent signals confirm each other.", - "type": "text" - } - ] - }, - { - "page_num": 152, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p152-b0", - "global_id": 1603, - "bbox": [ - 72.0, - 33.66, - 432.01, - 47.21 - ], - "text": "136\t\nGENERAL MARKET INDICATORS", - "type": "text" - }, - { - "block_id": "p152-b1", - "global_id": 1604, - "bbox": [ - 72.0, - 57.14, - 434.74, - 158.86 - ], - "text": "NH-NL Zero Line\nThe position of NH-NL in relation to its centerline shows whether bulls or bears are \nin control. When NH-NL is above its centerline, it shows that more market leaders \nare bullish than bearish and it is better to trade from the long side. When NH-NL \nis below its centerline, it shows that bearish leadership is stronger, and it’s better to \ntrade from the short side. NH-NL can stay above its centerline for months at a time \nin bull markets and below its centerline for months in bear markets.", - "type": "text" - }, - { - "block_id": "p152-b2", - "global_id": 1605, - "bbox": [ - 72.0, - 159.55, - 434.74, - 228.88 - ], - "text": "If NH-NL stays negative for several months but then rallies above its centerline, it \nsignals that a bull move is likely to begin. It is time to look for buying opportunities, \nusing oscillators for precise timing. If NH-NL stays positive for several months but \nthen falls below its centerline, it shows that a bear move is likely to begin. It is time \nto look for shorting opportunities using oscillators for precise timing.", - "type": "text" - }, - { - "block_id": "p152-b3", - "global_id": 1606, - "bbox": [ - 72.0, - 252.64, - 432.01, - 298.34 - ], - "text": "NH-NL Trends\nWhen the market rallies and NH-NL rises, it confirms uptrends. When NH-NL de-\nclines together with the market, it confirms downtrends.", - "type": "text" - }, - { - "block_id": "p152-b4", - "global_id": 1607, - "bbox": [ - 76.0, - 313.03, - 434.76, - 396.36 - ], - "text": "1.\tA rise in NH-NL shows that it’s safe to hold long positions and add to them. If \nNH-NL declines while the broad market stays flat or rallies, it is time to take \nprofits on long trades. When NH-NL falls below zero, it shows that bearish lead-\nership is strong and it’s safe to hold short positions and even add to them. If the \nmarket continues to fall but NH-NL rises, it shows that the downtrend is not \nwell led—it’s time to cover shorts.", - "type": "text" - }, - { - "block_id": "p152-b5", - "global_id": 1608, - "bbox": [ - 75.98, - 407.05, - 434.71, - 490.44 - ], - "text": "2.\tIf NH-NL rises on a flat day, it flashes a bullish message and gives a buy signal. It \nshows that officers are going over the top while the soldiers are still crouching \nin their foxholes. When NH-NL falls on a flat day, it gives a signal to sell short. \nIt shows that officers are deserting while the troops are still holding their posi-\ntions. Soldiers aren’t stupid—if their officers start running away, they will not \nstay and fight.", - "type": "text" - }, - { - "block_id": "p152-b6", - "global_id": 1609, - "bbox": [ - 72.0, - 514.14, - 434.78, - 601.85 - ], - "text": "NH-NL Divergences\nIf the latest market peak is confirmed by a new high of NH-NL, that rally is likely to \ncontinue, even if punctuated by a decline. When a new market low is accompanied by \na new low in NH-NL, it shows that bears are well led and the downtrend is likely to \npersist. On the other hand, divergences between the patterns of NH-NL and broad \nmarket indexes show that leaders are deserting and the trends are likely to reverse.", - "type": "text" - }, - { - "block_id": "p152-b7", - "global_id": 1610, - "bbox": [ - 76.0, - 616.54, - 434.72, - 685.86 - ], - "text": "1.\tIf NH-NL traces a lower peak while the market rallies to a new high, it creates \na bearish divergence. It shows that bullish leadership is weakening even though \nthe broad market is higher. Bearish divergences often mark the ends of uptrends, \nbut pay attention to the height of the second peak. If it is only slightly above zero, \nin the low hundreds, then a big reversal is probably at hand and it’s time to go", - "type": "text" - } - ] - }, - { - "page_num": 153, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p153-b0", - "global_id": 1611, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "34. THE NEW HIGH–NEW LOW INDEX\t\n137", - "type": "text" - }, - { - "block_id": "p153-b1", - "global_id": 1612, - "bbox": [ - 89.94, - 57.83, - 434.56, - 85.14 - ], - "text": "short. If, on other hand, the latest peak is in the high hundreds, it shows that the \nupside leadership is strong enough to prevent the market from collapsing.", - "type": "text" - }, - { - "block_id": "p153-b2", - "global_id": 1613, - "bbox": [ - 75.94, - 92.83, - 434.71, - 204.17 - ], - "text": "2.\tIf the market declines to a new low, but NH-NL traces a shallower bottom than \nits previous decline, it creates a bullish divergence. It shows that bearish lead-\nership is shrinking. If the latest low of NH-NL is shallow, in the low hundreds, \nit shows that the bearish leadership is exhausted and a major upside reversal is \nnear. If the latest low sinks deep, then bears still have some strength, and the \ndowntrend may pause but not reverse. Keep in mind that bullish divergences at \nstock market bottoms tend to develop faster than bearish divergences at market \ntops: buy fast and sell slowly.", - "type": "text" - }, - { - "block_id": "p153-b3", - "global_id": 1614, - "bbox": [ - 72.0, - 227.2, - 296.92, - 259.14 - ], - "text": "NH-NL in Multiple Timeframes and \nLook-Back Periods", - "type": "text" - }, - { - "block_id": "p153-b4", - "global_id": 1615, - "bbox": [ - 72.0, - 264.83, - 434.66, - 320.15 - ], - "text": "Markets move simultaneously in different timeframes. My original work on the NH-\nNL focused on the daily charts with a one-year look-back period—counting stocks \nthat have reached a new high or a new low for their latest 52-week range. I have since \nadded several dimensions for a deeper understanding of this key indicator.", - "type": "text" - }, - { - "block_id": "p153-b5", - "global_id": 1616, - "bbox": [ - 72.0, - 338.43, - 434.72, - 412.15 - ], - "text": "Weekly NH-NL\nThe weekly NH-NL helps confirm major stock market trends and identify major \nreversals. I build it from the daily data of barchart.com, mentioned above, by run-\nning a five-day moving total. I plot the result underneath a weekly chart of the \nS&P 500.", - "type": "text" - }, - { - "block_id": "p153-b6", - "global_id": 1617, - "bbox": [ - 72.0, - 412.84, - 434.76, - 496.17 - ], - "text": "The weekly NH-NL gives its most important signals when it reaches extreme \nlevels and also by divergences. To understand its logic, keep in mind how the weekly \nNH-NL is constructed. For example, if the weekly NH-NL rises to a +1,500 level, it \nmeans that in each of the past five trading days there were on average 300 more New \nHighs than New Lows. It takes a period of sustainable bullishness or bearishness to \npush the weekly NH-NL to an extreme.", - "type": "text" - }, - { - "block_id": "p153-b7", - "global_id": 1618, - "bbox": [ - 84.0, - 496.87, - 327.32, - 510.18 - ], - "text": "These are the most important signals of weekly NH-NL:", - "type": "text" - }, - { - "block_id": "p153-b8", - "global_id": 1619, - "bbox": [ - 72.03, - 517.43, - 434.81, - 530.74 - ], - "text": "■\n■When it drops below minus 4,000 and then rallies above that level, it delivers", - "type": "text" - }, - { - "block_id": "p153-b9", - "global_id": 1620, - "bbox": [ - 83.8, - 531.43, - 161.62, - 544.74 - ], - "text": "major buy signals.", - "type": "text" - }, - { - "block_id": "p153-b10", - "global_id": 1621, - "bbox": [ - 72.03, - 549.93, - 406.28, - 563.24 - ], - "text": "■\n■When the weekly NH-NL rises above plus 2,500, it confirms bull markets.", - "type": "text" - }, - { - "block_id": "p153-b11", - "global_id": 1622, - "bbox": [ - 72.03, - 568.43, - 434.7, - 581.74 - ], - "text": "■\n■When the tops or bottoms of weekly NH-NL diverge from price patterns, they", - "type": "text" - }, - { - "block_id": "p153-b12", - "global_id": 1623, - "bbox": [ - 83.8, - 582.43, - 198.0, - 595.74 - ], - "text": "signal important reversals.", - "type": "text" - }, - { - "block_id": "p153-b13", - "global_id": 1624, - "bbox": [ - 72.05, - 600.48, - 434.79, - 686.26 - ], - "text": "A drop below −4,000 reflects an unsustainable market panic. To fall that low, the \nmarket has to deliver an average of 800 more daily New Lows than New Highs for \nfive days in a row. Such massive panic is not going to last. When the weekly NH-NL \nrises above −4,000, it flashes a buy signal I call a Spike. It’s so powerful and effective \nin both bull and bear markets that I named our SpikeTrade group after it. This signal \nmisfired only once in several decades, as you’ll see on the chart in Figure 34.2.", - "type": "text" - } - ] - }, - { - "page_num": 154, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p154-b0", - "global_id": 1625, - "bbox": [ - 72.0, - 33.66, - 432.01, - 47.21 - ], - "text": "138\t\nGENERAL MARKET INDICATORS", - "type": "text" - }, - { - "block_id": "p154-b1", - "global_id": 1626, - "bbox": [ - 72.0, - 432.88, - 434.76, - 476.64 - ], - "text": "When the weekly NH-NL rises to the +2,500 level, it confirms bull markets. This \nindicator never rises this high during bear market rallies. When you see it above that \nlevel, you know you’re in a bull market, with higher prices likely ahead.", - "type": "text" - }, - { - "block_id": "p154-b2", - "global_id": 1627, - "bbox": [ - 72.0, - 486.93, - 434.75, - 588.66 - ], - "text": "The 65-day and 20-day NH-NL\nOne of the great innovations in the New High–New Low analysis in recent years \nwas the addition of two new look-back windows: a 20-day and a 65-day. While the \nregular daily NH-NL compares each day’s high and low to the high-low range for \nthe preceding year, a 20-day NH-NL compares it only to the preceding month and \na 65-day NH-NL to the preceding quarter. These shorter-term views of the NH-NL \nare useful for short-term timing.", - "type": "text" - }, - { - "block_id": "p154-b3", - "global_id": 1628, - "bbox": [ - 72.0, - 589.35, - 434.76, - 658.68 - ], - "text": "These two new time windows deliver more sensitive signals than the standard \nyear-long NH-NL. The logic is simple: before a stock reaches a new high for the year, \nit must first make a new high for the month and then for the quarter. If a stock has \nbeen in a downtrend, it may take a long time to recover and reach a new yearly high, \nbut it can reach monthly and quarterly highs much sooner.", - "type": "text" - }, - { - "block_id": "p154-b4", - "global_id": 1629, - "bbox": [ - 72.0, - 659.37, - 434.71, - 686.68 - ], - "text": "In addition to the usual signals, such as trends and divergences, a very sharp short-\nterm buy signal occurs when the 20-day NH-NL drops below minus 500 and then", - "type": "text" - }, - { - "block_id": "p154-b5", - "global_id": 1630, - "bbox": [ - 72.36, - 247.81, - 408.51, - 270.62 - ], - "text": "FIGURE 34.2  S&P 500 weekly, 26-week EMA, NH-NL weekly. Green line at +2,500, purple line at \n−4,000. (Chart by TradeStation)", - "type": "text" - }, - { - "block_id": "p154-b6", - "global_id": 1631, - "bbox": [ - 72.4, - 276.43, - 185.47, - 289.33 - ], - "text": "NH-NL—Weekly Chart", - "type": "text" - }, - { - "block_id": "p154-b7", - "global_id": 1632, - "bbox": [ - 72.35, - 292.81, - 434.5, - 363.81 - ], - "text": "When the weekly NH-NL falls below −4,000 and then rises above that level, it nails im-\nportant bottoms, marked here with vertical green arrows. This chart covers 11 years—the \nsignal works in bull and bear markets. There was only one exception—in October and \nNovember 2008, during the worst bear market of a century (marked by a purple oval). Let \nthis serve as a reminder that no market signal works 100% of the time, making risk man-\nagement essential for survival and success.", - "type": "text" - }, - { - "block_id": "p154-b8", - "global_id": 1633, - "bbox": [ - 72.35, - 365.31, - 434.49, - 399.8 - ], - "text": "Red diagonal arrows mark major bearish divergences. Weekly NH-NL touching the \n+2,500 level confirms bull markets and calls for higher prices ahead, even if interrupted by \na correction.", - "type": "text" - } - ] - }, - { - "page_num": 155, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p155-b0", - "global_id": 1634, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "35. STOCKS ABOVE 50-DAY MA\t\n139", - "type": "text" - }, - { - "block_id": "p155-b1", - "global_id": 1635, - "bbox": [ - 71.94, - 57.83, - 434.69, - 99.14 - ], - "text": "rallies above that level. It shows that the market has touched and rejected a short-\nterm bearish extreme, and afterwards it usually launches a short-term rally. We call \nthis a “Spike bounce” signal (see Chapter 54).", - "type": "text" - }, - { - "block_id": "p155-b2", - "global_id": 1636, - "bbox": [ - 71.94, - 99.84, - 434.68, - 169.16 - ], - "text": "Tracking market leaders with the help of NH-NL helps improve timing. There are \ntwo ways to utilize the New High–New Low signals. First, since individual stocks \nlargely depend on broad market trends, we can use NH-NL signals to decide when \nto buy or sell our stocks. Furthermore, we can use NH-NL signals to trade vehicles \nthat track the broad market, such as the S&P e-mini futures.", - "type": "text" - }, - { - "block_id": "p155-b3", - "global_id": 1637, - "bbox": [ - 73.55, - 196.86, - 307.28, - 215.5 - ], - "text": "■\n■35. Stocks above 50-Day MA", - "type": "text" - }, - { - "block_id": "p155-b4", - "global_id": 1638, - "bbox": [ - 72.0, - 225.83, - 434.77, - 309.16 - ], - "text": "This broad stock market indicator is based on the key concepts regarding prices and \nmoving averages (Figure 35.1). Each price represents a momentary consensus of value \namong market participants, while a moving average represents an average consensus \nof value during its time window. This means that when a stock trades above its MA, \nthe current consensus of value is above average—bullish. When a stock trades below \nits MA, the current consensus of value is below average—bearish.", - "type": "text" - }, - { - "block_id": "p155-b5", - "global_id": 1639, - "bbox": [ - 72.0, - 309.85, - 434.74, - 351.17 - ], - "text": "When the market is trending higher, the percentage of stocks above their moving \naverages keeps growing. In a broad downtrend, the number of stocks above their \nMAs keeps shrinking.", - "type": "text" - }, - { - "block_id": "p155-b6", - "global_id": 1640, - "bbox": [ - 72.36, - 558.38, - 417.19, - 579.42 - ], - "text": "FIGURE 35.1  S&P 500 weekly and 26-week MA; Stocks above 50 MA with reference lines at 75% and \n25%. (Chart by TradeStation)", - "type": "text" - }, - { - "block_id": "p155-b7", - "global_id": 1641, - "bbox": [ - 72.4, - 585.23, - 201.2, - 598.13 - ], - "text": "Stocks above 50-Day MA", - "type": "text" - }, - { - "block_id": "p155-b8", - "global_id": 1642, - "bbox": [ - 72.4, - 602.13, - 434.54, - 684.61 - ], - "text": "When the “stocks above their 50-day MA” indicator reaches an extreme—above 75% or \nbelow 25% and then moves away from that level, it shows that the intermediate-term trend \nhas reached a likely turning point. A reversal of this indicator flashes a signal for the entire \nmarket: buy when it turns up and sell when it turns down. In the latter part of 2013, as the \nmarket started going up with almost no pullbacks, buy signals from upside reversals began \nto occur at levels higher than 25%. These signals don’t mark every reversal—no indicator \ndoes—but when it flashes its signal, we had better pay attention.", - "type": "text" - } - ] - }, - { - "page_num": 156, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p156-b0", - "global_id": 1643, - "bbox": [ - 72.0, - 33.66, - 432.01, - 47.21 - ], - "text": "140\t\nGENERAL MARKET INDICATORS", - "type": "text" - }, - { - "block_id": "p156-b1", - "global_id": 1644, - "bbox": [ - 72.0, - 57.83, - 434.72, - 113.15 - ], - "text": "This indicator tracks all stocks traded on the New York Stock Exchange, American \nExchange, and NASDAQ and calculates how many of them trade above their moving \naverages. It plots that percentage as a line that fluctuates between 0% and 100%. We \ncan use the pattern of this line to confirm market trends and anticipate reversals.", - "type": "text" - }, - { - "block_id": "p156-b2", - "global_id": 1645, - "bbox": [ - 72.0, - 113.84, - 434.74, - 183.17 - ], - "text": "The indicator for tracking the number of stocks above their 50-day MAs is in-\ncluded in many software packages. I like to view it on a weekly chart, where it helps \ncatch intermediate reversals—market turns that augur in trends that last anywhere \nfrom several weeks to several months. You don’t need to look at this indicator daily, \nbut it can be an important part of weekend homework.", - "type": "text" - }, - { - "block_id": "p156-b3", - "global_id": 1646, - "bbox": [ - 72.0, - 183.86, - 434.7, - 267.19 - ], - "text": "In theory, the highest possible reading of this indicator would be 100%, if all stocks \nrallied above their MAs. Its lowest possible reading of 0% would occur if all stocks \nwere to fall below their MAs. In practice, only exceptional market moves swing it \nnear the 90% or 10% extremes. Normally, this indicator tends to top out near 75% \nand bottom out near 25%. I draw two reference lines on its chart at 75% and 25% and \nstart looking for the market turn as this indicator approaches those levels.", - "type": "text" - }, - { - "block_id": "p156-b4", - "global_id": 1647, - "bbox": [ - 72.0, - 267.89, - 434.72, - 337.21 - ], - "text": "The percentage of stocks above their 50-day MA gives its trading signals not by \nreaching any certain levels but rather by reversing near those levels. It signals the \ncompletion of a top by rising to or above the upper reference line and then sinking \nbelow that line. It signals that a bottom has been formed when it falls below or even \nnear the lower reference line and then turns up.", - "type": "text" - }, - { - "block_id": "p156-b5", - "global_id": 1648, - "bbox": [ - 72.0, - 337.91, - 434.71, - 379.22 - ], - "text": "Notice that the tops of this indicator tend to be broad, while its bottoms are \nsharper. Tops are formed by greed, which is a happier, longer-lasting emotion. Bot-\ntoms are formed by fear—a more intense and shorter-lived emotion.", - "type": "text" - }, - { - "block_id": "p156-b6", - "global_id": 1649, - "bbox": [ - 72.0, - 379.92, - 434.76, - 435.24 - ], - "text": "While some of this indicator’s signals are right on time in catching reversals, \nothers mark only temporary pauses in major trends. Let this serve as a reminder \nnever to rely on a single indicator for trading decisions. Use multiple tools: when \nthey confirm each other’s signals, they reinforce one another.", - "type": "text" - }, - { - "block_id": "p156-b7", - "global_id": 1650, - "bbox": [ - 73.55, - 462.86, - 350.82, - 481.5 - ], - "text": "■\n■36. Other Stock Market Indicators", - "type": "text" - }, - { - "block_id": "p156-b8", - "global_id": 1651, - "bbox": [ - 72.0, - 491.83, - 434.74, - 589.16 - ], - "text": "Only a handful of general market indicators have stood the harsh test of time. Many \nthat used to be popular in previous decades have been swept away by the flood of \nnew trading vehicles. The New High–New Low Index and Stocks Above 50-day MA, \nreviewed above, continue to work because of their clear logic. Several other indica-\ntors are listed below. Whatever tools you choose, be sure to understand how they \nwork and what exactly they measure. Select a few and track them on a regular basis, \nuntil you come to trust their signals.", - "type": "text" - }, - { - "block_id": "p156-b9", - "global_id": 1652, - "bbox": [ - 72.0, - 609.2, - 181.99, - 626.14 - ], - "text": "Advance/Decline", - "type": "text" - }, - { - "block_id": "p156-b10", - "global_id": 1653, - "bbox": [ - 72.0, - 631.83, - 434.75, - 673.14 - ], - "text": "The Advance/Decline line (the A/D line) tracks the degree of mass participation in \nrallies and declines. Each day it adds up the number of stocks that closed higher and \nsubtracts the number of stocks that closed lower.", - "type": "text" - } - ] - }, - { - "page_num": 157, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p157-b0", - "global_id": 1654, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "36. OTHER STOCK MARKET INDICATORS\t\n141", - "type": "text" - }, - { - "block_id": "p157-b1", - "global_id": 1655, - "bbox": [ - 71.94, - 57.83, - 434.65, - 127.15 - ], - "text": "While the Dow Jones Industrials track the behavior of the generals and the New \nHigh–New Low Index focuses on the officers, the A/D line shows whether soldiers \nare following their leaders. A rally is more likely to persist when the A/D line rises \nto a new high, while a decline is likely to deepen if A/D falls to a new low in step \nwith the Dow.", - "type": "text" - }, - { - "block_id": "p157-b2", - "global_id": 1656, - "bbox": [ - 71.93, - 127.85, - 434.66, - 225.18 - ], - "text": "The A/D line is based on the day’s closing prices for each stock at any exchange: \ntake the number of advancing stocks, subtract the number of declining stocks, and \nignore unchanged stocks. The result will be positive or negative, depending on \nwhether more stocks advanced or declined during the day. For example, if 4,000 \nstocks were traded, 2,600 advanced, 900 declined, and 500 were unchanged, then \nAdvance/Decline equals +1,700 (2,600−900). Add each day’s Advance/Decline fig-\nures to the previous day’s total to create a cumulative A/D line (Figure 36.1).", - "type": "text" - }, - { - "block_id": "p157-b3", - "global_id": 1657, - "bbox": [ - 106.4, - 401.41, - 111.22, - 409.23 - ], - "text": "A", - "type": "text" - }, - { - "block_id": "p157-b4", - "global_id": 1658, - "bbox": [ - 293.8, - 378.21, - 298.01, - 386.02 - ], - "text": "B", - "type": "text" - }, - { - "block_id": "p157-b5", - "global_id": 1659, - "bbox": [ - 335.6, - 443.11, - 340.05, - 450.92 - ], - "text": "C", - "type": "text" - }, - { - "block_id": "p157-b6", - "global_id": 1660, - "bbox": [ - 72.4, - 567.78, - 355.32, - 577.83 - ], - "text": "FIGURE 36.1  S&P 500 daily and the Advance/Decline line. (Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p157-b7", - "global_id": 1661, - "bbox": [ - 72.4, - 583.63, - 183.06, - 596.53 - ], - "text": "Advance/Decline Line", - "type": "text" - }, - { - "block_id": "p157-b8", - "global_id": 1662, - "bbox": [ - 72.4, - 600.53, - 434.55, - 671.01 - ], - "text": "The turns of this indicator usually coincide with price turns, but occasionally precede them. \nThis ability to give early warnings makes A/D line worth following. In area A, prices are \nscratching the bottom and make a new low, while the uptrend of the A/D line calls for a \nrally. In area B, the opposite occurs—prices press higher, while a downturn of the A/D line \ncalls for a decline. In area C, prices continue to decline, while the A/D line turns up and \ncalls for a rally. Those warnings don’t occur at every turning point.", - "type": "text" - } - ] - }, - { - "page_num": 158, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p158-b0", - "global_id": 1663, - "bbox": [ - 72.0, - 33.66, - 432.01, - 47.21 - ], - "text": "142\t\nGENERAL MARKET INDICATORS", - "type": "text" - }, - { - "block_id": "p158-b1", - "global_id": 1664, - "bbox": [ - 72.0, - 57.83, - 434.76, - 197.17 - ], - "text": "Traders should watch for new peaks and valleys in the A/D line rather than its \nabsolute levels, which depend on its starting date. If a new high in the stock market \nis accompanied by a new high of the A/D line, it shows that the rally has broad sup-\nport and is likely to continue. Broadly based rallies and declines have greater staying \npower. If the stock market reaches a new peak, but the A/D line reaches a lower peak \nthan during the previous rally, it shows that fewer stocks are participating, and the \nrally may be near its end. When the market falls to a new low but the A/D line traces \na shallower bottom than during the previous decline, it shows that the decline is \nnarrowing down and the bear move is nearing an end. These signals tend to precede \nreversals by weeks if not months.", - "type": "text" - }, - { - "block_id": "p158-b2", - "global_id": 1665, - "bbox": [ - 72.0, - 211.69, - 434.71, - 295.19 - ], - "text": "The Most Active Stocks indicator (MAS) is an Advance/Decline line of the \n15 most active stocks on the New York Stock Exchange. It used to be listed daily in \nmany newspapers. Stocks appeared on this list when they caught the public’s eye. \nMAS was a big money indicator—it showed whether big money was bullish or bear-\nish. When the trend of MAS diverged from the price trends, the market was espe-\ncially likely to reverse.", - "type": "text" - }, - { - "block_id": "p158-b3", - "global_id": 1666, - "bbox": [ - 72.0, - 309.71, - 434.75, - 379.2 - ], - "text": "Hardly anyone today uses an indicator called TRIN, which was important enough \nto have its own chapter in the original Trading for a Living. Very few people track an-\nother formerly popular indicator called TICK. Old stock market books are full of \nfascinating indicators, but you have to be very careful using them today. Changes in \nthe market over the years have killed many indicators.", - "type": "text" - }, - { - "block_id": "p158-b4", - "global_id": 1667, - "bbox": [ - 72.0, - 393.72, - 434.68, - 491.22 - ], - "text": "Indicators based on the volume of low-priced stocks lost their usefulness when \nthe average volume of the U.S. stock market soared and the Dow rose tenfold. The \nMember Short Sale Ratio and the Specialist Short Sale Ratio stopped work-\ning after options became popular. Member and specialist short sales are now tied \nup in the intermarket arbitrage. Odd-lot statistics lost value when conservative \nodd-lotters bought mutual funds. The Odd-lot Short Sale Ratio stopped working \nwhen gamblers discovered puts.", - "type": "text" - }, - { - "block_id": "p158-b5", - "global_id": 1668, - "bbox": [ - 73.55, - 516.86, - 350.0, - 535.5 - ], - "text": "■\n■37. Consensus and Commitment", - "type": "text" - }, - { - "block_id": "p158-b6", - "global_id": 1669, - "bbox": [ - 88.5, - 532.86, - 167.62, - 551.5 - ], - "text": "Indicators", - "type": "text" - }, - { - "block_id": "p158-b7", - "global_id": 1670, - "bbox": [ - 72.0, - 563.83, - 434.68, - 605.14 - ], - "text": "Most private traders keep their opinions to themselves, but financial journalists, let-\nter writers, and bloggers spew them forth like open hydrants. Some writers may be \nvery bright, but the financial press as a whole has a poor record of market timing.", - "type": "text" - }, - { - "block_id": "p158-b8", - "global_id": 1671, - "bbox": [ - 72.0, - 605.84, - 434.76, - 647.16 - ], - "text": "Financial journalists and letter writers tend to overstay trends and miss turn-\ning points. When these groups become intensely bullish or bearish, it pays to trade \nagainst them.", - "type": "text" - }, - { - "block_id": "p158-b9", - "global_id": 1672, - "bbox": [ - 72.0, - 647.85, - 434.74, - 675.16 - ], - "text": "It’s “monkey see, monkey do” in the publishing business, where a journalist’s or \nan advisor’s job may be endangered by expressing an opinion that differs too sharply", - "type": "text" - } - ] - }, - { - "page_num": 159, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p159-b0", - "global_id": 1673, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "37. CONSENSUS AND COMMITMENT INDICATORS\t\n143", - "type": "text" - }, - { - "block_id": "p159-b1", - "global_id": 1674, - "bbox": [ - 71.94, - 57.83, - 434.7, - 99.14 - ], - "text": "from his group. Standing alone feels scary, and most of us like to huddle. When finan-\ncial journalists and letter writers reach a high degree of bullish or bearish consensus, \nit’s a sign that the trend has been going on for so long that a reversal is near.", - "type": "text" - }, - { - "block_id": "p159-b2", - "global_id": 1675, - "bbox": [ - 71.94, - 99.84, - 434.64, - 155.16 - ], - "text": "Consensus indicators, also called contrary opinion indicators, are not suitable for \nprecision timing, but they draw attention to the fact that a trend is near its exhaus-\ntion level. When you see that message, switch to technical indicators for more pre-\ncise timing of a trend reversal.", - "type": "text" - }, - { - "block_id": "p159-b3", - "global_id": 1676, - "bbox": [ - 71.94, - 155.86, - 434.77, - 309.2 - ], - "text": "A trend can continue as long as bulls and bears remain in conflict. A high degree \nof consensus precedes reversals. When the crowd becomes highly bullish, get ready \nto sell, and when it becomes strongly bearish, get ready to buy. This is the contrary \nopinion theory, whose foundations were laid by Charles Mackay, a Scottish barris-\nter. His classic book, Extraordinary Popular Delusions and the Madness of Crowds (1841) \ndescribes the infamous Dutch Tulip Mania and the South Seas Bubble in England. \nHumphrey B. Neill in the United States applied the theory of contrary opinion to \nstocks and other financial markets. In his book, The Art of Contrary Thinking, he made \nit clear why the majority must be wrong at the market’s turning points: prices are es-\ntablished by crowds, and by the time the majority turns bullish, there aren’t enough \nnew buyers to support a bull market.", - "type": "text" - }, - { - "block_id": "p159-b4", - "global_id": 1677, - "bbox": [ - 72.02, - 309.9, - 434.78, - 435.24 - ], - "text": "Abraham W. Cohen, an old New York lawyer whom I met in the early 1980s, came \nup with the idea of polling market advisors and using their responses as a proxy for \nthe entire body of traders. Cohen was a skeptic who spent many years on Wall Street \nand saw that advisors as a group performed no better than the market crowd. In \n1963, he established a service called Investors Intelligence for tracking letter writers. \nWhen the majority of them became bearish, Cohen identified a buying opportu-\nnity. Selling opportunities were marked by strong bullishness among letter writers. \nAnother writer, James H. Sibbet, applied this theory to commodities, setting up an \nadvisory service called Market Vane.", - "type": "text" - }, - { - "block_id": "p159-b5", - "global_id": 1678, - "bbox": [ - 72.0, - 458.2, - 241.62, - 475.14 - ], - "text": "Tracking Advisory Opinion", - "type": "text" - }, - { - "block_id": "p159-b6", - "global_id": 1679, - "bbox": [ - 72.0, - 480.83, - 434.69, - 536.15 - ], - "text": "Letter writers follow trends out of fear of losing subscribers by missing major moves. \nIn addition, bullishness helps sell subscriptions, while bearish comments turn off \nsubscribers. Even in a bear market, we rarely see more bears than bulls among advi-\nsors for more than a few weeks at a time.", - "type": "text" - }, - { - "block_id": "p159-b7", - "global_id": 1680, - "bbox": [ - 72.0, - 536.84, - 434.76, - 592.16 - ], - "text": "The longer a trend continues, the louder the letter writers proclaim it. They are \nmost bullish at market tops and most bearish at market bottoms. When the mass of \nletter writers turns strongly bullish or bearish, it’s a good idea to look for trades in \nthe opposite direction.", - "type": "text" - }, - { - "block_id": "p159-b8", - "global_id": 1681, - "bbox": [ - 72.0, - 592.86, - 434.74, - 634.18 - ], - "text": "Some advisors are very skilled at doubletalk. The man who speaks from both sides \nof his mouth can claim that he was right regardless of what the market did, but edi-\ntors of tracking services have plenty of experience pinning down such lizards.", - "type": "text" - }, - { - "block_id": "p159-b9", - "global_id": 1682, - "bbox": [ - 72.0, - 634.87, - 434.74, - 676.19 - ], - "text": "When the original Trading for a Living came out, only two services tracked advi-\nsory opinions: Investors Intelligence and Market Vane. In recent years, there has been an \nexplosion of interest in behavioral economics, and today many services track", - "type": "text" - } - ] - }, - { - "page_num": 160, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p160-b0", - "global_id": 1683, - "bbox": [ - 72.0, - 33.66, - 432.01, - 47.21 - ], - "text": "144\t\nGENERAL MARKET INDICATORS", - "type": "text" - }, - { - "block_id": "p160-b1", - "global_id": 1684, - "bbox": [ - 72.0, - 57.83, - 434.69, - 99.14 - ], - "text": "advisors. My favorite resource is SentimenTrader.com, whose slogan is “Make emo-\ntion work for you instead of against you.” Jason Goepfert, its publisher, does a solid \njob of tracking mass market sentiment.", - "type": "text" - }, - { - "block_id": "p160-b2", - "global_id": 1685, - "bbox": [ - 72.0, - 119.2, - 206.84, - 136.13 - ], - "text": "Signals from the Press", - "type": "text" - }, - { - "block_id": "p160-b3", - "global_id": 1686, - "bbox": [ - 72.0, - 141.83, - 434.7, - 225.16 - ], - "text": "To understand any group of people, you must know what its members crave and what \nthey fear. Financial journalists want to appear serious, intelligent, and informed; \nthey are afraid of appearing ignorant or flaky. That’s why it’s normal for them to \nstraddle the fence and present several sides of every issue. A journalist is safe as long \nas he writes something like “monetary policy is about to push the market up, unless \nunforeseen factors push it down.”", - "type": "text" - }, - { - "block_id": "p160-b4", - "global_id": 1687, - "bbox": [ - 71.96, - 225.83, - 434.68, - 267.14 - ], - "text": "Internal contradiction is the normal state of affairs in financial journalism2. Most \nfinancial editors are even more cowardly than their writers. They print contradictory \narticles and call this “presenting a balanced picture.”", - "type": "text" - }, - { - "block_id": "p160-b5", - "global_id": 1688, - "bbox": [ - 71.96, - 267.84, - 434.7, - 365.17 - ], - "text": "For example, an issue of a major business magazine had an article headlined “The \nWinds of Inflation Are Blowing a Little Harder” on page 19. Another article on page \n32 of the same issue was headlined “Why the Inflation Scare Is Just That.” It takes a \npowerful and lasting trend to lure journalists and editors down from their fences. \nThis happens only when a tide of optimism or pessimism sweeps up the market near \nthe end of a major trend. When journalists start expressing strongly bullish or bearish \nviews, the trend is ripe for a reversal.", - "type": "text" - }, - { - "block_id": "p160-b6", - "global_id": 1689, - "bbox": [ - 71.96, - 365.87, - 434.72, - 421.19 - ], - "text": "This is why the front covers of major business magazines serve as contrarian indi-\ncators. When a leading business magazine puts a bull on its cover, it’s usually a good \ntime to take profits on long positions, and when a bear graces the front cover, a bot-\ntom cannot be too far away.", - "type": "text" - }, - { - "block_id": "p160-b7", - "global_id": 1690, - "bbox": [ - 72.0, - 441.2, - 222.7, - 458.14 - ], - "text": "Signals from Advertisers", - "type": "text" - }, - { - "block_id": "p160-b8", - "global_id": 1691, - "bbox": [ - 72.0, - 463.83, - 434.75, - 533.15 - ], - "text": "A group of three or more ads touting the same “opportunity” in a major newspaper \nor magazine warns of an imminent top. This is because only a well-established up-\ntrend can break through the inertia of several brokerage firms. By the time all of \nthem recognize a trend, come up with trading recommendations, produce ads, and \nplace them in a newspaper, that trend is very old indeed.", - "type": "text" - }, - { - "block_id": "p160-b9", - "global_id": 1692, - "bbox": [ - 72.0, - 533.85, - 434.74, - 603.17 - ], - "text": "The ads on the commodities page of The Wall Street Journal appeal to the bullish \nappetites of the least-informed traders. Those ads almost never recommend selling; \nit is hard to get amateurs excited about going short. You’ll never see an ad for an \ninvestment when its price is low. When three or more ads on the same day tout gold \nor silver, it is time to look at technical indicators for shorting signals.", - "type": "text" - }, - { - "block_id": "p160-b10", - "global_id": 1693, - "bbox": [ - 72.0, - 636.74, - 434.29, - 671.83 - ], - "text": "2And not only journalism: in 2013 three academicians shared a Nobel Prize in economics. The work of \none of them showed that the market was efficient and couldn’t be timed; the work of another showed \nthat the market was irrational and could be timed. Take your pick and wait for next year’s prize.", - "type": "text" - } - ] - }, - { - "page_num": 161, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p161-b0", - "global_id": 1694, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "37. CONSENSUS AND COMMITMENT INDICATORS\t\n145", - "type": "text" - }, - { - "block_id": "p161-b1", - "global_id": 1695, - "bbox": [ - 71.94, - 477.47, - 434.68, - 546.79 - ], - "text": "A more malignant breed of promoters appeared on the scene in the past decade: \nthanks to the Internet, “pump and dump” operators have migrated online. The scam-\nmers touting penny stocks know that they need to wait for an uptrend to hook their \nvictims. Whenever a higher than usual number of promo pitches starts showing up \nin my spam filter, the top can’t be too far away (Figure 37.1).", - "type": "text" - }, - { - "block_id": "p161-b2", - "global_id": 1696, - "bbox": [ - 72.0, - 566.8, - 273.29, - 583.73 - ], - "text": "Commitments of Futures Traders", - "type": "text" - }, - { - "block_id": "p161-b3", - "global_id": 1697, - "bbox": [ - 72.0, - 589.43, - 434.76, - 644.75 - ], - "text": "Government agencies and exchanges collect data on buying and selling by various \ngroups of traders and publish summary reports of their positions. It pays to trade \nwith the groups that have a track record of success and against those with track re-\ncords of persistent failure.", - "type": "text" - }, - { - "block_id": "p161-b4", - "global_id": 1698, - "bbox": [ - 72.0, - 645.44, - 434.68, - 672.76 - ], - "text": "For example, the Commodity Futures Trading Commission (CFTC) reports \nlong and short positions of hedgers and big speculators. Hedgers—the commercial", - "type": "text" - }, - { - "block_id": "p161-b5", - "global_id": 1699, - "bbox": [ - 72.4, - 373.38, - 356.54, - 383.43 - ], - "text": "FIGURE 37.1  Monthly total dollar value of OTC stocks. (Courtesy SentimenTrader.com)", - "type": "text" - }, - { - "block_id": "p161-b6", - "global_id": 1700, - "bbox": [ - 72.36, - 390.13, - 434.46, - 436.62 - ], - "text": "Money pours into penny stocks when the market is up, dries up when it is down. This is \nreflected in the monthly reports of penny stock volume at the NASDAQ. After markets \nhave hit new highs and the news is good, volume often spikes up for these “lottery ticket” \nstocks. When the stock market hits the skids, their volume dries up.", - "type": "text" - } - ] - }, - { - "page_num": 162, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p162-b0", - "global_id": 1701, - "bbox": [ - 72.0, - 33.66, - 432.01, - 47.21 - ], - "text": "146\t\nGENERAL MARKET INDICATORS", - "type": "text" - }, - { - "block_id": "p162-b1", - "global_id": 1702, - "bbox": [ - 72.0, - 57.83, - 434.69, - 113.15 - ], - "text": "producers and consumers of commodities—are the most successful market partici-\npants. The Securities and Exchange Commission (SEC) reports purchases and sales \nby corporate insiders. Officers of publicly traded companies know when to buy or \nsell their shares.", - "type": "text" - }, - { - "block_id": "p162-b2", - "global_id": 1703, - "bbox": [ - 72.0, - 113.84, - 434.72, - 183.17 - ], - "text": "Positions of large futures traders, including hedge funds, are reported to the CFTC \nwhen their sizes reach the so-called reporting levels. At the time of this writing, \nif you are long or short 250 contracts of corn or 200 contracts of gold, the CFTC \nclassifies you as a big speculator. Brokers report those positions to the CFTC, which \ncompiles the data and releases summaries on Fridays.", - "type": "text" - }, - { - "block_id": "p162-b3", - "global_id": 1704, - "bbox": [ - 72.0, - 183.86, - 434.71, - 239.18 - ], - "text": "The CFTC also sets up the maximum number of contracts a speculator is allowed \nto hold in any given market— these are called position limits. Those limits are set \nto prevent very large speculators from accumulating positions that are big enough to \nbully the markets.", - "type": "text" - }, - { - "block_id": "p162-b4", - "global_id": 1705, - "bbox": [ - 72.0, - 239.88, - 434.76, - 337.21 - ], - "text": "The CFTC divides all market participants into three groups: commercials, large \nspeculators, and small speculators. Commercials, also known as hedgers, are \nfirms or individuals who deal in actual commodities in the normal course of their \nbusiness. In theory, they trade futures to hedge business risks. For example, a bank \ntrades interest rate futures to hedge its loan portfolio, while a food processing com-\npany trades wheat futures to offset the risks of buying grain. Hedgers post smaller \nmargins and are exempt from speculative position limits.", - "type": "text" - }, - { - "block_id": "p162-b5", - "global_id": 1706, - "bbox": [ - 72.0, - 337.74, - 434.75, - 393.23 - ], - "text": "Large speculators are those whose positions have reached reporting levels. The \nCFTC reports buying and selling by commercials and large speculators. To find the \npositions of small traders, you need to take the open interest and subtract from it \nthe holdings of the first two groups.", - "type": "text" - }, - { - "block_id": "p162-b6", - "global_id": 1707, - "bbox": [ - 72.0, - 393.92, - 434.75, - 491.26 - ], - "text": "The divisions between hedgers, big speculators, and small speculators are \nsomewhat artificial. Smart small traders grow into big traders, dumb big traders \nbecome small traders, and many hedgers speculate. Some market participants play \ngames that distort the CFTC reports. For example, an acquaintance who owns \na brokerage firm sometimes registers his wealthy speculator clients as hedgers, \nclaiming they trade stock index and bond futures to hedge their stock and bond \nportfolios.", - "type": "text" - }, - { - "block_id": "p162-b7", - "global_id": 1708, - "bbox": [ - 72.0, - 491.95, - 434.69, - 589.28 - ], - "text": "The commercials can legally speculate in the futures markets using inside infor-\nmation. Some of them are big enough to play futures markets against cash markets. \nFor example, an oil firm may buy crude oil futures, divert several tankers, and hold \nthem offshore in order to tighten supplies and push up futures prices. They can take \nprofits on long positions, go short, and then deliver several tankers at once to refin-\ners in order to push crude futures down a bit and cover shorts. Such manipulation is \nillegal, and most firms hotly deny that it takes place.", - "type": "text" - }, - { - "block_id": "p162-b8", - "global_id": 1709, - "bbox": [ - 72.0, - 589.98, - 434.75, - 687.31 - ], - "text": "As a group, commercials have the best track record in the futures markets. They \nhave inside information and are well-capitalized. It pays to follow them because they \nare successful in the long run. Big speculators used to be successful wealthy individu-\nals who took careful risks with their own money. That has changed, and today most \nbig traders are commodity funds. These trend-following behemoths do poorly as \na group. The masses of small traders are the proverbial “wrong-way Corrigans” of \nthe markets.", - "type": "text" - } - ] - }, - { - "page_num": 163, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p163-b0", - "global_id": 1710, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "37. CONSENSUS AND COMMITMENT INDICATORS\t\n147", - "type": "text" - }, - { - "block_id": "p163-b1", - "global_id": 1711, - "bbox": [ - 71.94, - 57.83, - 434.68, - 113.15 - ], - "text": "It is not enough to know whether a certain group is short or long. Commercials \noften short futures because many of them own physical commodities. Small traders \nare usually long, reflecting their perennial optimism. To draw valid conclusions from \nthe CFTC reports, you need to compare current positions to their historical norms.", - "type": "text" - }, - { - "block_id": "p163-b2", - "global_id": 1712, - "bbox": [ - 72.0, - 139.2, - 202.3, - 156.13 - ], - "text": "Legal Insider Trading", - "type": "text" - }, - { - "block_id": "p163-b3", - "global_id": 1713, - "bbox": [ - 72.0, - 162.83, - 434.74, - 218.15 - ], - "text": "Officers and investors who hold more than 5 percent of the shares in a publicly \ntraded company must report their buying and selling to the Securities and Exchange \nCommission. The SEC tabulates insider purchases and sales, and releases this data to \nthe public.", - "type": "text" - }, - { - "block_id": "p163-b4", - "global_id": 1714, - "bbox": [ - 72.0, - 218.84, - 434.71, - 260.16 - ], - "text": "Corporate insiders have a long record of buying stocks when they’re cheap and \nselling them high. Insider buying emerges after severe market drops, and insider sell-\ning accelerates when the market rallies and becomes overpriced.", - "type": "text" - }, - { - "block_id": "p163-b5", - "global_id": 1715, - "bbox": [ - 72.0, - 260.86, - 434.75, - 358.19 - ], - "text": "Buying or selling by a single insider matters little: an executive may sell shares \nto meet major personal expenses or he may buy them to exercise stock options. \nAnalysts who researched legal insider trading found that insider buying or selling \nwas meaningful only if more than three executives or large stockholders bought or \nsold within a month. These actions reveal that something very positive or negative is \nabout to happen. A stock is likely to rise if three insiders buy in one month and to fall \nif three insiders sell within a month.", - "type": "text" - }, - { - "block_id": "p163-b6", - "global_id": 1716, - "bbox": [ - 72.0, - 358.88, - 434.76, - 414.2 - ], - "text": "Clusters of insider buying tend to have a better predictive value than clusters of \nselling. That’s because insiders are willing to sell a stock for many reasons (diversifi-\ncation, buying a second home, sending a kid to college) but they are willing to buy \nfor one main reason—they expect their company’s stock to go up.", - "type": "text" - }, - { - "block_id": "p163-b7", - "global_id": 1717, - "bbox": [ - 72.0, - 440.2, - 158.52, - 457.14 - ], - "text": "Short Interest", - "type": "text" - }, - { - "block_id": "p163-b8", - "global_id": 1718, - "bbox": [ - 72.0, - 463.83, - 434.74, - 519.15 - ], - "text": "While the numbers of futures and options contracts held long and short is equal \nby definition, in the stock market there is always a huge disparity between the two \ncamps. Most people, including professional fund managers, buy stocks, but very few \nsell them short.", - "type": "text" - }, - { - "block_id": "p163-b9", - "global_id": 1719, - "bbox": [ - 72.0, - 519.84, - 434.75, - 659.19 - ], - "text": "Among the data reported by exchanges is the number of shares being held short \nfor any stock. Since the absolute numbers vary a great deal, it pays to put them into \na perspective by comparing the number of shares held short to that stock’s float (the \ntotal number of publicly owned shares available for trading). This number, “Short \nPercent of Float,” tends to run about one or two percent. Another useful way to \nlook at short interest is by comparing it to the average daily volume. By doing this, \nwe ask a hypothetical question: if all shorts decided to cover, while all other buyers \nstood aside and daily volume remained unchanged, how many days would it take for \nthem to cover and bring short interest down to zero? This “Days to Cover” number \nnormally oscillates between one and two days.", - "type": "text" - }, - { - "block_id": "p163-b10", - "global_id": 1720, - "bbox": [ - 72.0, - 659.88, - 434.66, - 687.2 - ], - "text": "When planning to buy or short a stock, it pays to check its Short Percent of Float \nand Days to Cover. If those are high, they show that the bearish side is overcrowded.", - "type": "text" - } - ] - }, - { - "page_num": 164, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p164-b0", - "global_id": 1721, - "bbox": [ - 72.0, - 33.66, - 432.01, - 47.21 - ], - "text": "148\t\nGENERAL MARKET INDICATORS", - "type": "text" - }, - { - "block_id": "p164-b1", - "global_id": 1722, - "bbox": [ - 72.0, - 301.43, - 434.76, - 328.74 - ], - "text": "A rally may scare those bears into panicky covering, and send the stock sharply higher. \nThat would be good for bulls but bad for bears.", - "type": "text" - }, - { - "block_id": "p164-b2", - "global_id": 1723, - "bbox": [ - 72.0, - 329.44, - 434.7, - 370.75 - ], - "text": "Fear is a stronger emotion than greed. Bulls may look for bargains but try not to \noverpay, while squeezed bears, facing unlimited losses, will pay any price to cover. \nThat’s why short-covering rallies tend to be especially sharp.", - "type": "text" - }, - { - "block_id": "p164-b3", - "global_id": 1724, - "bbox": [ - 72.0, - 371.45, - 434.71, - 412.76 - ], - "text": "Whenever you look for a stock to buy, check its Short Percent of Float and Days \nto Cover. The usual, normal readings don’t provide any great information, but the \ndeviations from the norm often deliver useful insights (Figure 37.2).", - "type": "text" - }, - { - "block_id": "p164-b4", - "global_id": 1725, - "bbox": [ - 72.0, - 413.46, - 434.7, - 482.78 - ], - "text": "High shorting numbers mark any stock as a dangerous short. By extension, if your \nindicators suggest buying a stock, its high short interest becomes an additional posi-\ntive factor—there is more fuel for a rally. It makes sense for swing traders to include \nthe data on shorting when selecting which of several stocks to buy or sell short. \nI always review these numbers when working up a potential trade.", - "type": "text" - }, - { - "block_id": "p164-b5", - "global_id": 1726, - "bbox": [ - 72.4, - 139.38, - 314.47, - 149.43 - ], - "text": "FIGURE 37.2  AAPL and GMCR shorting data. (Source: Shortsqueeze.com)", - "type": "text" - }, - { - "block_id": "p164-b6", - "global_id": 1727, - "bbox": [ - 72.4, - 155.23, - 238.48, - 168.13 - ], - "text": "Short Interest and Days to Cover", - "type": "text" - }, - { - "block_id": "p164-b7", - "global_id": 1728, - "bbox": [ - 72.4, - 178.13, - 434.55, - 236.61 - ], - "text": "Compare short interest data for two popular stocks on the day I’m editing this chapter. \n“Short Percent of Float” is 1.86% for Apple, Inc. (AAPL), but nearly 26% for Green Moun-\ntain Coffee Roasters, Inc. (GMCR). “Days to Cover” are 0.9 for AAPL but over 15 for GMCR. \nThese numbers reflect much more aggressive shorting of GMCR. Not to forget, each and \nevery one of those shorts at some point will need to buy in order to cover his short position.", - "type": "text" - }, - { - "block_id": "p164-b8", - "global_id": 1729, - "bbox": [ - 72.4, - 238.12, - 434.46, - 272.61 - ], - "text": "Perhaps savvy shorts know something very bad about GMCR, but what if its stock ral-\nlies even a little? Many bears will run for cover, and as they scramble to cover shorts, the \nstock may soar. Whatever its long-term prospects, it could be sent flying in the near term.", - "type": "text" - } - ] - }, - { - "page_num": 165, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p165-b0", - "global_id": 1730, - "bbox": [ - 72.0, - 118.61, - 353.57, - 171.84 - ], - "text": "Trading Systems", - "type": "text" - }, - { - "block_id": "p165-b1", - "global_id": 1731, - "bbox": [ - 72.1, - 673.7, - 432.15, - 687.25 - ], - "text": "149", - "type": "text" - }, - { - "block_id": "p165-b2", - "global_id": 1732, - "bbox": [ - 348.1, - 59.86, - 395.91, - 73.41 - ], - "text": "PA R T 7\nPA R T 7", - "type": "text" - }, - { - "block_id": "p165-b3", - "global_id": 1733, - "bbox": [ - 71.2, - 331.94, - 101.04, - 372.34 - ], - "text": "A", - "type": "text" - }, - { - "block_id": "p165-b4", - "global_id": 1734, - "bbox": [ - 71.97, - 337.63, - 434.7, - 420.96 - ], - "text": "system is a set of rules for finding, entering, and exiting trades. Every serious \ntrader has one or more systems. Compare this to a surgeon who has systems \nfor performing operations. He doesn’t waste time and energy deciding whether to \norder anesthesia, where to make the cut, or how to find the sick organ. He follows a \nwell-established routine, which leaves him free to think about strategic issues, finesse \nhis technique, or deal with any complications.", - "type": "text" - }, - { - "block_id": "p165-b5", - "global_id": 1735, - "bbox": [ - 71.97, - 421.65, - 434.67, - 532.99 - ], - "text": "Some people use strictly defined systems that leave very little room for personal \njudgment—we call them mechanical traders. Others use systems that leave plenty \nof room for personal decisions—we call them discretionary traders. There is a very \nthoughtful discussion on matching one’s personality type to various trading styles in \nRichard Weissman’s book Mechanical Trading Systems. Whatever approach you take, \nthe key advantage of any system is that you design it when the markets are closed \nand you feel calm. A system becomes your anchor of rational behavior amidst the \nturbulence of the market.", - "type": "text" - }, - { - "block_id": "p165-b6", - "global_id": 1736, - "bbox": [ - 71.97, - 533.68, - 434.73, - 603.01 - ], - "text": "It goes without saying that a proper system is written down. This needs to be \ndone because it’s easy to forget some essential steps when stressed by live markets. \nDr. Atul Gawande in his remarkable book The Checklist Manifesto makes a convincing \ncase for using checklists to raise performance levels in a large variety of demanding \nendeavors, from surgery and construction to trading.", - "type": "text" - }, - { - "block_id": "p165-b7", - "global_id": 1737, - "bbox": [ - 71.98, - 617.63, - 434.66, - 658.94 - ], - "text": "A mechanical trader develops a set of rules, back-tests them on historical data, \nand then puts his system on autopilot. Going forward, his software starts flashing \norders for entries, target, and stops, and a mechanical trader is supposed to", - "type": "text" - } - ] - }, - { - "page_num": 166, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p166-b0", - "global_id": 1738, - "bbox": [ - 72.0, - 33.66, - 432.05, - 47.21 - ], - "text": "150\t\nTRADING SYSTEMS", - "type": "text" - }, - { - "block_id": "p166-b1", - "global_id": 1739, - "bbox": [ - 72.0, - 57.83, - 434.76, - 99.14 - ], - "text": "place them exactly as shown. Whether he’ll stick to his plan or attempt to tweak \nor override those signals is another story, but that’s how the system is supposed \nto work.", - "type": "text" - }, - { - "block_id": "p166-b2", - "global_id": 1740, - "bbox": [ - 72.0, - 99.84, - 434.75, - 197.17 - ], - "text": "An amateur feels relieved that a mechanical system, either his own or purchased \nfrom a vendor, will relieve him from the stress of decision making. Unfortunately, \nmarket conditions keep changing, and mechanical systems eventually get out of gear \nand start losing money. The market is not a mechanical entity that follows the laws \nof physics. It is a huge crowd of people acting in accordance with imperfect laws of \nmass psychology. Mechanical methods can help, but trading decisions must take psy-\nchology into account.", - "type": "text" - }, - { - "block_id": "p166-b3", - "global_id": 1741, - "bbox": [ - 72.0, - 197.87, - 434.76, - 281.2 - ], - "text": "A professional trader with a mechanical system continues to monitor its perfor-\nmance like a hawk. He knows the difference between a normal drawdown and a \nperiod when a system goes out of gear and has to be shelved. A professional trader \ncan afford to use a mechanical system precisely because he is capable of discretion-\nary trading! A mechanical system is an action plan, but some degree of judgment is \nalways required, even with the best and most reliable plans.", - "type": "text" - }, - { - "block_id": "p166-b4", - "global_id": 1742, - "bbox": [ - 72.0, - 295.83, - 434.76, - 365.15 - ], - "text": "A discretionary trader approaches each day in the markets afresh. He tends to \nexamine more factors than a mechanical trader, weigh them differently at different \ntimes, and be more attuned to changes in current market behavior. A good discre-\ntionary system, while giving you plenty of freedom, includes several inviolate rules, \nespecially in the area of risk management.", - "type": "text" - }, - { - "block_id": "p166-b5", - "global_id": 1743, - "bbox": [ - 72.05, - 365.85, - 434.8, - 435.17 - ], - "text": "Both approaches have pluses and minuses. On the plus side, mechanical trading \ncan be less emotionally tense. You build your system, turn it on, and go about your \nlife without watching every tick. On the minus side, these living and breathing mar-\nkets have a sneaky way of changing their tunes and behaving differently from how \nthey did when you built your system.", - "type": "text" - }, - { - "block_id": "p166-b6", - "global_id": 1744, - "bbox": [ - 72.05, - 435.87, - 434.75, - 477.18 - ], - "text": "The main plus of discretionary trading is the openness to fresh opportunities. Its \nbiggest minus is that people’s judgment tends to slip under stress, when they become \nexcited by greed or frightened by sharp moves.", - "type": "text" - }, - { - "block_id": "p166-b7", - "global_id": 1745, - "bbox": [ - 72.05, - 477.88, - 434.76, - 575.21 - ], - "text": "In my experience, mechanical traders tend to deliver more steady results, but the \nmost successful traders use discretionary methods. Your choice is likely to depend on \nyour temperament. That’s how we make some of our most important decisions in life— \nwhere to live, what career to pursue, whom to marry. Our key choices stem from the \ninnermost core of our personalities rather than rational thought. In trading, cooler \nand more obsessional people tend to gravitate toward mechanical trading, while the \nmore swashbuckling types turn to discretionary trading.", - "type": "text" - }, - { - "block_id": "p166-b8", - "global_id": 1746, - "bbox": [ - 72.05, - 575.91, - 434.8, - 673.24 - ], - "text": "Paradoxically, at the high end of performance, these two approaches begin to \nconverge. Advanced traders combine mechanical and discretionary methods. For ex-\nample, a friend who is a died-in-the-wool mechanical trader uses three systems in \nhis hedge fund but keeps rebalancing capital allocated to each of them. He shifts mil-\nlions of dollars from System A to System B or C, and back again. In other words, his \ndiscretionary decisions augment his systematic trading. I am a discretionary trader, \nbut follow several strict rules that prohibit me from buying above the upper channel", - "type": "text" - } - ] - }, - { - "page_num": 167, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p167-b0", - "global_id": 1747, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "38. SYSTEM TESTING, PAPER TRADING, AND THE THREE KEY DEMANDS FOR EVERY TRADE\t\n151", - "type": "text" - }, - { - "block_id": "p167-b1", - "global_id": 1748, - "bbox": [ - 71.94, - 57.83, - 434.63, - 99.14 - ], - "text": "line, shorting below the lower channel line, or putting on trades against the Impulse \nsystem (described below). These mechanical rules reduce the number of bad discre-\ntionary trades.", - "type": "text" - }, - { - "block_id": "p167-b2", - "global_id": 1749, - "bbox": [ - 71.94, - 99.84, - 434.69, - 141.16 - ], - "text": "Much of this book deals with discretionary trading, but you can use the tools \ndescribed in it for mechanical trading. I wrote this book to help both types of \ntraders.", - "type": "text" - }, - { - "block_id": "p167-b3", - "global_id": 1750, - "bbox": [ - 73.55, - 167.86, - 403.01, - 186.5 - ], - "text": "■\n■38. System Testing, Paper Trading, and", - "type": "text" - }, - { - "block_id": "p167-b4", - "global_id": 1751, - "bbox": [ - 88.5, - 183.86, - 402.39, - 202.5 - ], - "text": "the Three Key Demands for Every Trade", - "type": "text" - }, - { - "block_id": "p167-b5", - "global_id": 1752, - "bbox": [ - 72.0, - 211.83, - 434.74, - 295.23 - ], - "text": "Before trading real money with a system, you need to test it, whether you developed \nit yourself or bought it from a vendor. This can be done in one of two ways. One is \nbacktesting: apply your system’s rules to a stretch of historical data, usually several \nyears’ worth. The other is forward-testing: trade small positions with real money. \nSerious traders begin with backtesting, and if its results look good, switch to for-\nward-testing; if that works well, they gradually increase position size.", - "type": "text" - }, - { - "block_id": "p167-b6", - "global_id": 1753, - "bbox": [ - 72.0, - 295.85, - 434.75, - 365.18 - ], - "text": "Looking at printouts of historical results is a nice start, but don’t let good num-\nbers lull you into a false sense of security. The profit-loss ratio, the longest winning \nand losing streaks, the maximum drawdown, and other parameters may appear \nobjective, but past results don’t guarantee the system will hold up in the real world \nof trading.", - "type": "text" - }, - { - "block_id": "p167-b7", - "global_id": 1754, - "bbox": [ - 72.0, - 365.87, - 434.76, - 449.2 - ], - "text": "You may see a very nice printout, but what if, once you begin to trade real money, \nthat system delivers five losses in a row? Nothing in your paper testing will have pre-\npared you for that, but it happens all the time. You grit your teeth and put on another \ntrade. Another loss. Your drawdown is deepening, and then the system flashes a new \nsignal. Will you put on the next trade? Suddenly, an impressive printout looks like a \nvery thin reed on which to hang the future of your account.", - "type": "text" - }, - { - "block_id": "p167-b8", - "global_id": 1755, - "bbox": [ - 72.0, - 449.9, - 434.71, - 561.23 - ], - "text": "There is a cottage industry of programmers who back-test systems for a fee. Some \ntraders, too suspicious to disclose their “sure-fire methods,” spend months learning \nto use testing software. In the end, only one kind of backtesting prepares you to \ntrade—manual testing. It is slow, time-consuming, and cannot be automated, but \nit’s the only method that comes close to modeling real decision making. It consists \nof going through historical data one day at a time, scrupulously writing down your \ntrading signals for the day ahead, and then clicking one bar forward and recording \nnew signals and trades for the next day.", - "type": "text" - }, - { - "block_id": "p167-b9", - "global_id": 1756, - "bbox": [ - 72.0, - 561.93, - 434.69, - 673.26 - ], - "text": "Begin by downloading daily price and volume data for your trading vehicle for a \nminimum of two years (for futures you may use continuous contracts). Open a chart \nand, without looking, swing immediately to its very beginning. Open your spread-\nsheet, write down your system’s rules at the top of the page, and create columns for \ndates, prices, and signals. Open two windows in your analytic program—one for \nyour weekly chart and its indicators, the other for the daily chart. The two most im-\nportant keyboard keys for testing are and because they let you switch \nbetween windows and programs.", - "type": "text" - } - ] - }, - { - "page_num": 168, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p168-b0", - "global_id": 1757, - "bbox": [ - 72.0, - 33.66, - 432.05, - 47.21 - ], - "text": "152\t\nTRADING SYSTEMS", - "type": "text" - }, - { - "block_id": "p168-b1", - "global_id": 1758, - "bbox": [ - 72.0, - 57.83, - 434.7, - 127.15 - ], - "text": "As you click forward, one day at a time, trends and trading ranges will slowly \nunfold and challenge you. At that point, you’ll be doing much more than testing a set \nof rules. Moving ahead one day at a time will test and improve your decision-making \nskills. This one-bar-at-a-time testing is vastly superior to what you can get from \nbacktesting software.", - "type": "text" - }, - { - "block_id": "p168-b2", - "global_id": 1759, - "bbox": [ - 72.0, - 127.85, - 434.76, - 225.18 - ], - "text": "How will you deal with gap openings, when the market leaps above your buy level \nor drops below your stop at the opening bell? What about limit moves in futures? \nClicking forward one day at a time and writing down your signals and decisions will \nget you as close to real trading as you can without risking cash. It’ll keep you focused \non the raw right edge of the market. You’ll never get that from a neat printout of \na system test. Manual testing will improve your ability not only to understand the \nmarkets but to make decisions.", - "type": "text" - }, - { - "block_id": "p168-b3", - "global_id": 1760, - "bbox": [ - 72.0, - 225.88, - 434.72, - 309.2 - ], - "text": "If one-bar-at-a-time testing shows positive results, start trading small positions \nwith real money. These days, with brokerage commissions as low as $1 for buying \nor selling 100 shares, you can test your indicators and systems while risking tiny \namounts. Be sure to keep good records, and if your real-money results continue \npositive, start increasing the size of your trades. Do it in steps, all the way up to your \nnormal trade size.", - "type": "text" - }, - { - "block_id": "p168-b4", - "global_id": 1761, - "bbox": [ - 72.0, - 329.2, - 157.17, - 346.14 - ], - "text": "Paper Trading", - "type": "text" - }, - { - "block_id": "p168-b5", - "global_id": 1762, - "bbox": [ - 72.0, - 351.83, - 434.69, - 421.15 - ], - "text": "Paper trading means recording your buy and sell decisions and tracking them like \nreal trades, but with no money at risk. Beginners may start out paper trading, but \nmost people turn to it after getting beat up by the markets. Some even alternate be-\ntween real and paper trades and can’t understand why they seem to make money on \npaper but lose whenever they put on a real trade. There are three reasons.", - "type": "text" - }, - { - "block_id": "p168-b6", - "global_id": 1763, - "bbox": [ - 72.0, - 421.85, - 434.72, - 533.18 - ], - "text": "First, people are less emotional with paper trades, and good decisions are \neasier to make with no money at risk. Second, in paper trades, you always get \nperfect fills, unlike real trading. Third and most important, good trades often \nlook murky when you consider them. The easy-looking ones are more likely to \nlead to problems. A nervous beginner jumps into obvious-looking trades and los-\nes money, but paper trades the more challenging ones. It goes without saying that \nhopping between real and paper trades is sheer nonsense. You either do the one or \nthe other.", - "type": "text" - }, - { - "block_id": "p168-b7", - "global_id": 1764, - "bbox": [ - 72.0, - 533.88, - 434.69, - 575.2 - ], - "text": "Psychology plays a huge role in how your trades turn out, and that’s where paper \ntrading fails to deliver. Pretend-trading with no money at risk is like sailing on a \npond—it does little to prepare you for real sailing on a stormy sea.", - "type": "text" - }, - { - "block_id": "p168-b8", - "global_id": 1765, - "bbox": [ - 72.0, - 575.89, - 434.66, - 603.2 - ], - "text": "There is only one good reason to paper trade—to test your discipline as well as \nyour system.", - "type": "text" - }, - { - "block_id": "p168-b9", - "global_id": 1766, - "bbox": [ - 72.0, - 603.9, - 434.7, - 673.22 - ], - "text": "If you can download your data at the end of each day, do your homework, write \ndown your orders for the day ahead, watch the opening and record your entries, \nthen track your market each day, adjusting your profit targets and stops—if you can \ndo all of this for several months in a row, recording your actions, without skipping \na day—then you have the discipline to trade real money. An impulsive person who", - "type": "text" - } - ] - }, - { - "page_num": 169, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p169-b0", - "global_id": 1767, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "38. SYSTEM TESTING, PAPER TRADING, AND THE THREE KEY DEMANDS FOR EVERY TRADE\t\n153", - "type": "text" - }, - { - "block_id": "p169-b1", - "global_id": 1768, - "bbox": [ - 71.94, - 57.83, - 434.7, - 85.14 - ], - "text": "trades for entertainment will not be able to paper trade that way because it requires \nreal work.", - "type": "text" - }, - { - "block_id": "p169-b2", - "global_id": 1769, - "bbox": [ - 71.94, - 85.84, - 434.62, - 155.16 - ], - "text": "You may open an account with one of several websites set up for paper trading. \nEnter your orders, check whether they have been triggered, and write down those \n“fills.” Enter all paper trades in your spreadsheet and your trading diary. If you have \nthe willpower to repeat this process daily for several months, then you have the dis-\ncipline for successful real trading.", - "type": "text" - }, - { - "block_id": "p169-b3", - "global_id": 1770, - "bbox": [ - 71.94, - 155.86, - 434.58, - 197.17 - ], - "text": "Still, there is no substitute for trading real money because even small amounts rev \nup emotions more than any paper trade. You’ll learn much more from even small \nreal trades than from months of paper trading.", - "type": "text" - }, - { - "block_id": "p169-b4", - "global_id": 1771, - "bbox": [ - 71.94, - 197.87, - 434.7, - 365.22 - ], - "text": "In recent years, I’ve had a front row seat watching traders progress from paper \ntrading to profitable real-money trading. In SpikeTrade.com, we reduce fees for \nmembers who contribute picks, creating an incentive to do homework. The dis-\ncipline of submitting a weekly trade plan with entry, target, and stop gets people \ninto the habit of being organized and focused. As their picks improve, they start \nearning performance bonuses in our weekly competition. At that point, I may re-\nceive an e-mail saying that while they’re doing well in the competition, their private \ntrading lags behind. I tell them they’re on the right track and to continue what \nthey’re doing. Sure enough, several months later their new skills migrate into real \ntrading. Now they may write that their private trading is better than their perfor-\nmance in the competition. Sure—I reply—it’s because you pay more attention to \nreal-money trades!", - "type": "text" - }, - { - "block_id": "p169-b5", - "global_id": 1772, - "bbox": [ - 71.94, - 365.92, - 434.69, - 435.24 - ], - "text": "Speaking of trade setups, it’s essential to write down all relevant numbers before \nyou enter a trade. You’re more objective before you put any money at risk; once in a \ntrade, you’ll be tempted to give it “more room to run.” That’s how losers turn small \ndrawdowns into disasters. I once consulted a man who refused to take a $200 loss \nuntil it ran into a $98,000 wipeout.", - "type": "text" - }, - { - "block_id": "p169-b6", - "global_id": 1773, - "bbox": [ - 71.94, - 435.94, - 434.75, - 519.31 - ], - "text": "We’ll focus on risk and money management in a later chapter when I discuss the \nconcept of  “The Iron Triangle of risk control.” At this point, I only want to make \nclear that risk management is the essential part of serious trading. Forget the days \nwhen you would look at the ceiling and say, “I’ll trade 500 shares,” “I’ll trade a thou-\nsand shares,” or any other arbitrary number. Later in this book, you’ll learn a simple \nformula for sizing your trades, based on your account and risk tolerance.", - "type": "text" - }, - { - "block_id": "p169-b7", - "global_id": 1774, - "bbox": [ - 72.05, - 520.01, - 434.82, - 603.34 - ], - "text": "At the time of this writing, I have three strategies that I trade. My favorite is a false \nbreakout with a divergence. My second choice is a pullback to value during a power-\nful trend—that’s the strategy of the trade shown on the screen (Figure 38.1). Last, I \noccasionally “fade an extreme”—bet on a reversal of an overstretched trend. Each of \nthese strategies has its rules, but the key point is this—I’ll only take a trade that fits \none of them. No chasing of random cars for this old dog!", - "type": "text" - }, - { - "block_id": "p169-b8", - "global_id": 1775, - "bbox": [ - 72.0, - 623.2, - 293.24, - 640.14 - ], - "text": "Three Key Demands for Every Trade", - "type": "text" - }, - { - "block_id": "p169-b9", - "global_id": 1776, - "bbox": [ - 72.0, - 645.83, - 434.75, - 673.14 - ], - "text": "There are three essential angles that must be considered for every planned trade. \nWe’ll briefly review them here and then elaborate in the chapters on specific trading", - "type": "text" - } - ] - }, - { - "page_num": 170, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p170-b0", - "global_id": 1777, - "bbox": [ - 72.0, - 33.66, - 432.05, - 47.21 - ], - "text": "154\t\nTRADING SYSTEMS", - "type": "text" - }, - { - "block_id": "p170-b1", - "global_id": 1778, - "bbox": [ - 71.8, - 519.83, - 434.44, - 547.14 - ], - "text": "systems and risk management. The discipline of these three demands is essential for \nanyone serious about trading.", - "type": "text" - }, - { - "block_id": "p170-b2", - "global_id": 1779, - "bbox": [ - 73.35, - 574.86, - 347.07, - 593.5 - ], - "text": "■\n■39. Triple Screen Trading System", - "type": "text" - }, - { - "block_id": "p170-b3", - "global_id": 1780, - "bbox": [ - 71.8, - 603.83, - 434.45, - 673.15 - ], - "text": "I developed this system and first presented it to the public in an April 1986 article \nin Futures magazine. I’ve been using it for trading since 1985, and it stood the test of \ntime. I continue to tweak it, adding or changing minor features, but its basic prin-\nciple remains unchanged: making trading decisions using a sequence of timeframes \nand indicators.", - "type": "text" - }, - { - "block_id": "p170-b4", - "global_id": 1781, - "bbox": [ - 109.9, - 127.31, - 117.9, - 140.3 - ], - "text": "A\nA", - "type": "text" - }, - { - "block_id": "p170-b5", - "global_id": 1782, - "bbox": [ - 202.94, - 154.17, - 263.02, - 165.42 - ], - "text": "B\nC", - "type": "text" - }, - { - "block_id": "p170-b6", - "global_id": 1783, - "bbox": [ - 71.8, - 220.38, - 343.86, - 230.43 - ], - "text": "FIGURE 38.1  Three key demands for every planned trade.(Source: SpikeTrade.com)", - "type": "text" - }, - { - "block_id": "p170-b7", - "global_id": 1784, - "bbox": [ - 71.76, - 237.13, - 433.9, - 271.62 - ], - "text": "This is a screenshot of a trade plan I drew several days prior to writing this chapter (you \ncan see how I implemented it in Chapter 55). Notice several essential features that belong \nin every trade plan:", - "type": "text" - }, - { - "block_id": "p170-b8", - "global_id": 1785, - "bbox": [ - 73.76, - 285.13, - 433.85, - 295.69 - ], - "text": "A.\t Trade setup—write down the three key numbers for every trade: your entry, target,", - "type": "text" - }, - { - "block_id": "p170-b9", - "global_id": 1786, - "bbox": [ - 87.76, - 297.13, - 433.9, - 367.61 - ], - "text": "and stop. Before entering the market you need to decide how much you’ll pay, how \nmuch you’ll risk, and how much you expect to gain. The ratio of potential reward \nto risk should normally be better than two to one. The only time to deviate from \nthis rule is when technical signals are especially strong. Of course, don’t fudge your \ntarget to turn a borderline trade into an acceptable one. Your target needs to be \nrealistic.", - "type": "text" - }, - { - "block_id": "p170-b10", - "global_id": 1787, - "bbox": [ - 73.76, - 376.09, - 433.89, - 386.6 - ], - "text": "B.\t Risk management—decide in advance how many dollars you’re prepared to risk on", - "type": "text" - }, - { - "block_id": "p170-b11", - "global_id": 1788, - "bbox": [ - 87.76, - 388.09, - 433.89, - 410.64 - ], - "text": "this trade. Divide that amount by your risk per share—the distance from your entry to \nyour stop. This will give you the number of shares you may trade.", - "type": "text" - }, - { - "block_id": "p170-b12", - "global_id": 1789, - "bbox": [ - 73.76, - 419.09, - 433.86, - 429.67 - ], - "text": "C.\t Last but not least, every single trade must be based on a specific system or strategy.", - "type": "text" - }, - { - "block_id": "p170-b13", - "global_id": 1790, - "bbox": [ - 87.76, - 431.11, - 433.88, - 489.59 - ], - "text": "“It looks good to me” isn’t a system! It’s easy to become excited after hearing a stock \ntip or seeing a runaway trend, but the days of chasing stocks like a pup chases cars \nare over. If you want to trade for a living, you need to define your trade plans, strate-\ngies, or systems—call them what you like—and enter only those trades that fit their \ncriteria.", - "type": "text" - } - ] - }, - { - "page_num": 171, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p171-b0", - "global_id": 1791, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "39. TRIPLE SCREEN TRADING SYSTEM\t\n155", - "type": "text" - }, - { - "block_id": "p171-b1", - "global_id": 1792, - "bbox": [ - 71.94, - 57.83, - 434.6, - 99.14 - ], - "text": "Triple Screen applies three tests or screens to every trade. Many trades that seem \nattractive at first are rejected by one or another screen. The trades that pass the Triple \nScreen test are much more likely to succeed.", - "type": "text" - }, - { - "block_id": "p171-b2", - "global_id": 1793, - "bbox": [ - 71.94, - 99.84, - 434.7, - 155.16 - ], - "text": "The Triple Screen combines trend-following indicators on long-term charts with \ncounter-trend oscillators on the intermediate charts. It uses special entry techniques \nfor buying or selling short as well as tight money management rules. The Triple \nScreen is more than a trading system: it is a method, a style of trading.", - "type": "text" - }, - { - "block_id": "p171-b3", - "global_id": 1794, - "bbox": [ - 72.0, - 175.2, - 340.22, - 192.13 - ], - "text": "Trend-Following Indicators and Oscillators", - "type": "text" - }, - { - "block_id": "p171-b4", - "global_id": 1795, - "bbox": [ - 72.0, - 197.83, - 434.71, - 253.15 - ], - "text": "Beginners often look for a magic bullet—a single indicator for making money. If \nthey get lucky for a while, they feel as if they discovered the royal road to riches. \nWhen the magic dies, amateurs give back their profits with interest and look for an-\nother magic tool. The markets are too complex to be analyzed with a single indicator.", - "type": "text" - }, - { - "block_id": "p171-b5", - "global_id": 1796, - "bbox": [ - 72.0, - 253.84, - 434.72, - 309.16 - ], - "text": "Different indicators give contradictory signals in the same market. Trend-following \nindicators rise during uptrends and give buy signals, while oscillators become over-\nbought and give sell signals. Trend-following indicators turn down in downtrends and \ngive signals to sell short but oscillators become oversold and give buy signals.", - "type": "text" - }, - { - "block_id": "p171-b6", - "global_id": 1797, - "bbox": [ - 72.0, - 309.86, - 434.74, - 379.18 - ], - "text": "Trend-following indicators are profitable when markets are moving but lead to \nwhipsaws in trading ranges. Oscillators are profitable in trading ranges, but give \npremature and dangerous signals when the markets begin to trend. Traders say: “The \ntrend is your friend,” and “Let your profits run.” They also say: “Buy low, sell high.” \nBut why sell if the trend is up? And how high is high?", - "type": "text" - }, - { - "block_id": "p171-b7", - "global_id": 1798, - "bbox": [ - 72.0, - 379.88, - 434.71, - 463.21 - ], - "text": "Some traders try to average out the signals of trend-following indicators and oscil-\nlators, but those votes are easy to rig. Just as Republicans and Democrats in the United \nStates keep redrawing electoral districts to create “safe” seats, traders keep selecting \nindicators that deliver the votes they want to see. If you use more trend-following \ntools, the vote will go one way, and if you use more oscillators, it’ll go the other way. \nA trader can always find a group of indicators telling him what he wants to hear.", - "type": "text" - }, - { - "block_id": "p171-b8", - "global_id": 1799, - "bbox": [ - 72.0, - 463.9, - 434.74, - 491.22 - ], - "text": "The Triple Screen trading system is designed to filter out the disadvantages of \ntrend-following indicators and oscillators, while preserving their strengths.", - "type": "text" - }, - { - "block_id": "p171-b9", - "global_id": 1800, - "bbox": [ - 72.0, - 511.2, - 326.63, - 528.14 - ], - "text": "Choosing Timeframes—the Factor of Five", - "type": "text" - }, - { - "block_id": "p171-b10", - "global_id": 1801, - "bbox": [ - 72.0, - 533.83, - 434.75, - 589.15 - ], - "text": "Another major dilemma is that the trend of any trading vehicle can be both up and \ndown at the same time, depending on what charts you use. A daily chart may show an \nuptrend, while a weekly chart shows a downtrend, and vice versa. We need a system \nto handle conflicting signals in different timeframes.", - "type": "text" - }, - { - "block_id": "p171-b11", - "global_id": 1802, - "bbox": [ - 72.0, - 589.84, - 434.74, - 673.17 - ], - "text": "Charles Dow, the author of the venerable Dow Theory, stated at the turn of the \ntwentieth century that the stock market had three trends. The long-term trend lasted \nseveral years, the intermediate several months, and anything shorter than that was \na minor trend. Robert Rhea, the great market technician of the 1930s, compared \nthese three trends to a tide, a wave, and a ripple. He recommended trading in the \ndirection of the tide, taking advantage of the waves, and ignoring the ripples.", - "type": "text" - } - ] - }, - { - "page_num": 172, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p172-b0", - "global_id": 1803, - "bbox": [ - 72.0, - 33.66, - 432.05, - 47.21 - ], - "text": "156\t\nTRADING SYSTEMS", - "type": "text" - }, - { - "block_id": "p172-b1", - "global_id": 1804, - "bbox": [ - 72.0, - 57.83, - 434.71, - 127.15 - ], - "text": "Times have changed, and the markets have become more volatile. Computers are \ncheap, or even free; live data have created better opportunities to capitalize on faster \nmoves. We need a more flexible definition of timeframes. The Triple Screen trading \nsystem is based on the observation that every timeframe relates to the larger and \nshorter ones by approximately a factor of five (see Chapter 32).", - "type": "text" - }, - { - "block_id": "p172-b2", - "global_id": 1805, - "bbox": [ - 72.0, - 127.85, - 434.74, - 211.18 - ], - "text": "Begin by asking yourself, what’s your favorite timeframe. Do you prefer working \nwith the daily, 10-minute, or any other charts? Whatever timeframe is your favorite, \nthe Triple Screen calls that the intermediate timeframe. The long-term timeframe \nis one order of magnitude longer. The short-term timeframe is one order of mag-\nnitude shorter. Once you select your intermediate timeframe, you may not look at it \nuntil you examine the longer-term timeframe and make your strategic decision there.", - "type": "text" - }, - { - "block_id": "p172-b3", - "global_id": 1806, - "bbox": [ - 72.0, - 211.87, - 434.7, - 281.2 - ], - "text": "For example, if you want to carry a trade for several days or weeks, then your \nintermediate timeframe is likely to be defined by the daily charts. Weekly charts are \none order of magnitude longer, and they’ll determine the long-term timeframe for \nyou. Hourly charts are one order of magnitude shorter, and they’ll determine the \nshort-term timeframe.", - "type": "text" - }, - { - "block_id": "p172-b4", - "global_id": 1807, - "bbox": [ - 72.0, - 281.89, - 434.65, - 323.21 - ], - "text": "Day traders who hold their positions for less than an hour can use the same prin-\nciple. For them, a 5-minute chart may define the intermediate timeframe, a 25-minute \nchart the long-term timeframe, and a 2-minute chart the short-term timeframe.", - "type": "text" - }, - { - "block_id": "p172-b5", - "global_id": 1808, - "bbox": [ - 72.0, - 323.9, - 434.76, - 393.23 - ], - "text": "Triple Screen demands that you examine the long-term chart first. It allows you \nto trade only in the direction of the tide—the trend on the long-term chart. It uses \nthe waves that go against the tide for entering positions. For example, when the \nweekly trend is up, daily declines create buying opportunities. When the weekly \ntrend is down, daily rallies provide shorting opportunities.", - "type": "text" - }, - { - "block_id": "p172-b6", - "global_id": 1809, - "bbox": [ - 72.0, - 413.2, - 234.8, - 430.14 - ], - "text": "First Screen—Market Tide", - "type": "text" - }, - { - "block_id": "p172-b7", - "global_id": 1810, - "bbox": [ - 72.0, - 435.83, - 434.75, - 491.15 - ], - "text": "Triple Screen begins by analyzing the long-term chart, one order of magnitude greater \nthan the one you plan to trade. Most traders pay attention only to the daily charts, with \neverybody watching the same few months of data. If you begin by analyzing weekly \ncharts, your perspective will be five times greater than that of your competitors.", - "type": "text" - }, - { - "block_id": "p172-b8", - "global_id": 1811, - "bbox": [ - 72.0, - 491.84, - 434.74, - 575.17 - ], - "text": "Begin by selecting your favorite timeframe and call it Intermediate. Do not even \nglance at your intermediate chart because it’ll prejudice you. Go immediately to \nthe timeframe one order of magnitude longer—your long-term chart. That’s where \nyou’ll make your strategic decision to be a bull or a bear. After that, return to the \nintermediate timeframe and start making tactical decisions, such as where to enter \nand where to place a stop.", - "type": "text" - }, - { - "block_id": "p172-b9", - "global_id": 1812, - "bbox": [ - 72.0, - 575.87, - 434.76, - 617.18 - ], - "text": "If you make the mistake of looking at the daily chart first, you’ll be prejudiced by \nits patterns. First, make an unbiased decision on a long-term weekly chart before \neven glancing at the daily.", - "type": "text" - }, - { - "block_id": "p172-b10", - "global_id": 1813, - "bbox": [ - 72.0, - 617.88, - 434.76, - 687.2 - ], - "text": "The original version of Triple Screen used the slope of weekly MACD-Histogram \nas its weekly trend-following indicator (Figure 39.1). It was very sensitive and gave \nmany buy and sell signals. Later I switched to using the slope of a weekly exponential \nmoving average as my main trend-following tool on long-term charts. After I in-\nvented the Impulse system (described in the following chapter), I began to use it for", - "type": "text" - } - ] - }, - { - "page_num": 173, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p173-b0", - "global_id": 1814, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "39. TRIPLE SCREEN TRADING SYSTEM \t\n157", - "type": "text" - }, - { - "block_id": "p173-b1", - "global_id": 1815, - "bbox": [ - 71.94, - 506.63, - 434.65, - 547.94 - ], - "text": "the first screen of Triple Screen. The Impulse system combines the best features of \nthe previous two methods. It is not quite as jumpy as MACD-Histogram but is faster \nto react than the slope of an EMA.", - "type": "text" - }, - { - "block_id": "p173-b2", - "global_id": 1816, - "bbox": [ - 71.94, - 548.64, - 434.7, - 645.97 - ], - "text": "As you’ll read in the next chapter, the Impulse system colors every bar green when \nit’s bullish, red when bearish, and blue when neutral. The Impulse system doesn’t tell \nyou what to do. It’s a censorship system that signals what you’re prohibited from doing. \nWhen the Impulse system is red, it prohibits you from buying. When it is green, it pro-\nhibits you from shorting. Glancing at a weekly chart when you want to buy, you have \nto wait until it stops being red. Glancing at a weekly chart when you want to sell short, \nyou have to make sure it isn’t green. The blue Impulse permits you to trade either way.", - "type": "text" - }, - { - "block_id": "p173-b3", - "global_id": 1817, - "bbox": [ - 71.94, - 646.67, - 434.68, - 687.98 - ], - "text": "Some traders use other indicators to identify major trends. Steve Notis wrote an \narticle in Futures magazine showing how he used the Directional System as the first \nscreen of Triple Screen. The principle is the same. You can use most trend-following", - "type": "text" - }, - { - "block_id": "p173-b4", - "global_id": 1818, - "bbox": [ - 349.8, - 236.31, - 353.97, - 244.12 - ], - "text": "E", - "type": "text" - }, - { - "block_id": "p173-b5", - "global_id": 1819, - "bbox": [ - 267.0, - 185.01, - 272.02, - 192.83 - ], - "text": "D", - "type": "text" - }, - { - "block_id": "p173-b6", - "global_id": 1820, - "bbox": [ - 118.8, - 211.91, - 123.7, - 219.72 - ], - "text": "A", - "type": "text" - }, - { - "block_id": "p173-b7", - "global_id": 1821, - "bbox": [ - 202.1, - 183.51, - 206.39, - 191.33 - ], - "text": "B", - "type": "text" - }, - { - "block_id": "p173-b8", - "global_id": 1822, - "bbox": [ - 247.9, - 198.51, - 252.43, - 206.33 - ], - "text": "C", - "type": "text" - }, - { - "block_id": "p173-b9", - "global_id": 1823, - "bbox": [ - 71.96, - 280.18, - 364.15, - 301.03 - ], - "text": "FIGURE 39.1  Gold weekly, with 26- and 13-EMAs and MACD-Histogram (12-26-9). \n(Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p173-b10", - "global_id": 1824, - "bbox": [ - 72.0, - 307.03, - 413.97, - 319.93 - ], - "text": "Using Weekly MACD-Histogram as the First Screen of Triple Screen", - "type": "text" - }, - { - "block_id": "p173-b11", - "global_id": 1825, - "bbox": [ - 72.0, - 323.93, - 434.12, - 346.42 - ], - "text": "Triple Screen requires us to examine weekly charts before even looking at the dailies. The \nslope of MACD-Histogram is defined by the relationship between its two latest bars.", - "type": "text" - }, - { - "block_id": "p173-b12", - "global_id": 1826, - "bbox": [ - 72.0, - 347.93, - 434.07, - 394.41 - ], - "text": "This indicator flashes a buy signal when its slope turns up and a sell signal when its \nslope turns down. The best buy signals occur when MACD-Histogram turns up from be-\nlow its centerline. The best sell signals are given when its slope turns down from above its \ncenterline (see Indicator Seasons in Chapter 32).", - "type": "text" - }, - { - "block_id": "p173-b13", - "global_id": 1827, - "bbox": [ - 72.0, - 395.91, - 434.12, - 430.4 - ], - "text": "When the slope of MACD-Histogram turns up (arrows A, C, and E), it allows us to trade \nonly from the long side or stand aside. When that slope turns down (arrows B and D), it \nallows us to trade only from the short side or stand aside.", - "type": "text" - }, - { - "block_id": "p173-b14", - "global_id": 1828, - "bbox": [ - 72.0, - 431.91, - 434.13, - 490.39 - ], - "text": "Note that the buy signals at A and E are of better quality than at C—because the signal \nC occurred above the centerline. It is better to buy in spring than in summer. At the right \nedge of the chart, the uptrend is very strong because the signal E came from a bullish \ndivergence: a double bottom of prices (A and E) was accompanied by a much shallower \nsecond bottom of the indicator.", - "type": "text" - } - ] - }, - { - "page_num": 174, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p174-b0", - "global_id": 1829, - "bbox": [ - 72.0, - 33.66, - 432.05, - 47.21 - ], - "text": "158\t\nTRADING SYSTEMS", - "type": "text" - }, - { - "block_id": "p174-b1", - "global_id": 1830, - "bbox": [ - 72.0, - 57.83, - 434.63, - 85.14 - ], - "text": "indicators, as long as you analyze the trend on the weekly charts first and then look \nfor trades on the daily charts only in that direction.", - "type": "text" - }, - { - "block_id": "p174-b2", - "global_id": 1831, - "bbox": [ - 71.98, - 95.83, - 434.7, - 123.14 - ], - "text": "Screen One Summary: Identify the weekly trend using a trend-following indicator \nand trade only in its direction.", - "type": "text" - }, - { - "block_id": "p174-b3", - "global_id": 1832, - "bbox": [ - 71.98, - 123.84, - 434.72, - 193.16 - ], - "text": "A trader has three choices: buy, sell, or stand aside. The first screen of the Triple \nScreen trading system takes away one of those options. It acts as a censor who per-\nmits you only to buy or stand aside during major uptrends. It allows you only to \nsell short or stand aside during major downtrends. You have to swim with the tide \nor stay out of the water.", - "type": "text" - }, - { - "block_id": "p174-b4", - "global_id": 1833, - "bbox": [ - 72.0, - 210.2, - 256.77, - 227.13 - ], - "text": "Second Screen—Market Wave", - "type": "text" - }, - { - "block_id": "p174-b5", - "global_id": 1834, - "bbox": [ - 72.0, - 232.83, - 434.75, - 274.14 - ], - "text": "The second screen of Triple Screen identifies the wave that goes against the tide. \nWhen the weekly trend is up, daily declines point to buying opportunities. When the \nweekly trend is down, daily rallies point to shorting opportunities.", - "type": "text" - }, - { - "block_id": "p174-b6", - "global_id": 1835, - "bbox": [ - 72.0, - 274.84, - 434.7, - 344.16 - ], - "text": "The second screen applies oscillators, described in a previous section, to the daily \ncharts in order to identify deviations from the weekly trend. Oscillators give buy \nsignals when markets decline and sell signals when they rise. The second screen of \nthe Triple Screen allows you to take only those signals on the daily charts that put you \nin gear with the weekly trend.", - "type": "text" - }, - { - "block_id": "p174-b7", - "global_id": 1836, - "bbox": [ - 71.99, - 354.83, - 434.74, - 424.15 - ], - "text": "Screen Two: Apply an oscillator to a daily chart. Use daily declines during weekly \nuptrends to find buying opportunities and daily rallies during weekly downtrends \nto find shorting opportunities. I like using Force Index, described in chapter 30, for \nthe second screen, but other oscillators, such as RSI, Elder-ray, or Stochastic also \nperform well.", - "type": "text" - }, - { - "block_id": "p174-b8", - "global_id": 1837, - "bbox": [ - 71.99, - 424.85, - 434.65, - 494.17 - ], - "text": "When the weekly trend is up, Triple Screen takes only buy signals from daily oscil-\nlators but doesn’t short their sell signals. The 2-day EMA of Force Index gives buy \nsignals when it falls below its zero line, as long as it doesn’t fall to a new multi-week \nlow. When the weekly trend is down, Force Index gives shorting signals when it rallies \nabove its centerline, as long as it doesn’t rise to a new multi-week high (Figure 39.2).", - "type": "text" - }, - { - "block_id": "p174-b9", - "global_id": 1838, - "bbox": [ - 71.99, - 494.87, - 434.71, - 564.19 - ], - "text": "Other oscillators, such as Stochastic and RSI (see Chapters 26 and 27), give \ntrading signals when they enter their buy or sell zones. For example, when weekly \nMACD-Histogram rises but daily Stochastic falls below 30, it identifies an oversold \narea, a buying opportunity. When the weekly MACD-Histogram declines but daily \nStochastic rises above 70, it identifies an overbought area, a shorting opportunity.", - "type": "text" - }, - { - "block_id": "p174-b10", - "global_id": 1839, - "bbox": [ - 72.0, - 581.2, - 268.1, - 598.14 - ], - "text": "Third Screen—Entry Technique", - "type": "text" - }, - { - "block_id": "p174-b11", - "global_id": 1840, - "bbox": [ - 72.0, - 603.83, - 434.7, - 645.14 - ], - "text": "The Third Screen is your entry technique, and here you have quite a bit of latitude. \nYou can go to an even shorter time-frame, especially if you have live data, or you can \nuse the same intermediate timeframe.", - "type": "text" - }, - { - "block_id": "p174-b12", - "global_id": 1841, - "bbox": [ - 72.0, - 645.84, - 434.66, - 687.16 - ], - "text": "In the original Trading for a Living I recommended looking for a ripple in the direc-\ntion of the market tide: buying a breakout above the previous day’s high for entering \nlongs or shorting a breakdown below the previous day’s low for entering shorts.", - "type": "text" - } - ] - }, - { - "page_num": 175, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p175-b0", - "global_id": 1842, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "39. TRIPLE SCREEN TRADING SYSTEM\t\n159", - "type": "text" - }, - { - "block_id": "p175-b1", - "global_id": 1843, - "bbox": [ - 71.58, - 477.59, - 434.32, - 560.92 - ], - "text": "The downside of that approach was that the stops were quite wide. Buying a \nbreakout above the previous day’s high and placing a stop below that day’s low could \nmean a wide stop after a wide-range day, either putting a lot of money at risk or \nreducing position size. At other times, when the pre-breakout day was very narrow, \nplacing the stop right below its low would expose that trade to the risk of being \nstopped out by market noise.", - "type": "text" - }, - { - "block_id": "p175-b2", - "global_id": 1844, - "bbox": [ - 71.58, - 561.61, - 434.27, - 630.94 - ], - "text": "The breakout technique is still valid, but I seldom use it. With the wide availabil-\nity of intraday data, I like to switch to 25-minute and 5-minute charts and use day-\ntrading techniques for entering my swing trades. If you don’t have access to live data \nand need to place an order in the morning, before leaving for the day, I recommend \nan alternative approach which I call “an average EMA penetration.”", - "type": "text" - }, - { - "block_id": "p175-b3", - "global_id": 1845, - "bbox": [ - 71.58, - 631.63, - 434.33, - 686.95 - ], - "text": "Almost every rally is penetrated by occasional pullbacks, and you want to mea-\nsure how deeply those pullbacks drop below your fast EMA. Look at the daily chart \nfor the past four to six weeks, and if it is in an uptrend, measure how deeply prices \npenetrate below their EMA during normal pullbacks (Figure 39.3).", - "type": "text" - }, - { - "block_id": "p175-b4", - "global_id": 1846, - "bbox": [ - 72.0, - 278.18, - 400.66, - 288.23 - ], - "text": "FIGURE 39.2  Gold daily, with 26- and 13-EMAs and 2-day Force Index. . (Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p175-b5", - "global_id": 1847, - "bbox": [ - 72.0, - 294.03, - 353.05, - 306.93 - ], - "text": "Daily Force Index—the Second Screen of Triple Screen", - "type": "text" - }, - { - "block_id": "p175-b6", - "global_id": 1848, - "bbox": [ - 72.0, - 310.93, - 434.14, - 381.41 - ], - "text": "The 2-day EMA of Force index is one of several oscillators that can work for the second \nscreen of the Triple Screen trading system. Force Index marks buying opportunities when \nit falls below its centerline. It marks selling opportunities when it rises above its centerline. \nWhen the weekly trend is up (marked here with a green horizontal bar), take only buy sig-\nnals from the daily oscillator for entering long positions. When the weekly trend is down \n(marked by a red horizontal bar), take only sell signals for entering short positions.", - "type": "text" - }, - { - "block_id": "p175-b7", - "global_id": 1849, - "bbox": [ - 72.0, - 382.91, - 434.14, - 453.39 - ], - "text": "Notice a bullish divergence, accompanied by a false downside breakout before the \nstart of the uptrend (marked with a diagonal green arrow). At the right edge of the screen, \nGold is flying, along with most gold stocks. I’m actively buying them—but not Gold ETFs. \nA Traders’ Camp graduate from Australia wrote the other day: “I bought XAU ETF but it \nis being left far behind by NCM, our biggest Gold Miner. Is that the normal scenario for \nETFs?” Yes, Sir!", - "type": "text" - } - ] - }, - { - "page_num": 176, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p176-b0", - "global_id": 1850, - "bbox": [ - 72.0, - 33.66, - 432.05, - 47.21 - ], - "text": "160\t\nTRADING SYSTEMS", - "type": "text" - }, - { - "block_id": "p176-b1", - "global_id": 1851, - "bbox": [ - 72.03, - 308.83, - 223.96, - 322.14 - ], - "text": "■\n■Calculate an average penetration", - "type": "text" - }, - { - "block_id": "p176-b2", - "global_id": 1852, - "bbox": [ - 72.03, - 325.83, - 434.69, - 339.14 - ], - "text": "■\n■Subtract yesterday’s EMA level from today’s and add this number to today’s EMA:", - "type": "text" - }, - { - "block_id": "p176-b3", - "global_id": 1853, - "bbox": [ - 83.8, - 339.83, - 340.36, - 353.14 - ], - "text": "this will tell you where your EMA is likely to be tomorrow.", - "type": "text" - }, - { - "block_id": "p176-b4", - "global_id": 1854, - "bbox": [ - 72.03, - 356.83, - 434.78, - 370.14 - ], - "text": "■\n■Subtract your average penetration from your estimated EMA level for tomorrow", - "type": "text" - }, - { - "block_id": "p176-b5", - "global_id": 1855, - "bbox": [ - 83.8, - 370.83, - 434.76, - 398.14 - ], - "text": "and place your buy order there. You’ll be fishing to buy at a bargain level, during a \npullback—instead of paying a premium for buying a breakout.", - "type": "text" - }, - { - "block_id": "p176-b6", - "global_id": 1856, - "bbox": [ - 72.05, - 403.83, - 434.78, - 501.16 - ], - "text": "In the example in Figure 39.3, prices dipped below their fast EMA (colored red) \non four occasions. An average downside penetration was $9.60. At the right edge of \nthe screen, the 13-day EMA stands at $1,266. Deducting the recent average down-\nside penetration from that number suggests that if today sees a spell of panic selling, \nwe should place our buy order approximately $9 below the latest level of EMA. We \ncan perform this calculation on a daily basis, until we finally get an opportunity to \nbuy low. This is a much more peaceful approach than chasing runaway prices.", - "type": "text" - }, - { - "block_id": "p176-b7", - "global_id": 1857, - "bbox": [ - 72.05, - 501.86, - 434.76, - 543.18 - ], - "text": "These rules are for buying during an uptrend. Reverse them for selling short \nin downtrends. Keep in mind though that downtrends tend to move twice as fast \nas uptrends.", - "type": "text" - }, - { - "block_id": "p176-b8", - "global_id": 1858, - "bbox": [ - 72.0, - 552.2, - 216.42, - 569.14 - ], - "text": "Triple Screen Summary", - "type": "text" - }, - { - "block_id": "p176-b9", - "global_id": 1859, - "bbox": [ - 76.5, - 575.7, - 427.94, - 644.07 - ], - "text": "Weekly Trend\nDaily Trend\nAction\nOrder\nUp\nUp\nStand aside\nNone\nUp\nDown\nGo long\nEMA penetration or an upside breakout\nDown\nDown\nStand aside\nNone\nDown\nUp\nGo short\nEMA penetration or a downside breakout", - "type": "text" - }, - { - "block_id": "p176-b10", - "global_id": 1860, - "bbox": [ - 72.0, - 658.87, - 434.7, - 686.18 - ], - "text": "When the weekly trend is up and a daily oscillator declines, place a buy order \nbelow the fast EMA on the daily chart, at a level of an average downside penetra-", - "type": "text" - }, - { - "block_id": "p176-b11", - "global_id": 1861, - "bbox": [ - 188.4, - 169.29, - 194.62, - 179.4 - ], - "text": "A", - "type": "text" - }, - { - "block_id": "p176-b12", - "global_id": 1862, - "bbox": [ - 205.8, - 161.29, - 211.24, - 171.4 - ], - "text": "B", - "type": "text" - }, - { - "block_id": "p176-b13", - "global_id": 1863, - "bbox": [ - 288.7, - 146.79, - 335.68, - 156.9 - ], - "text": "C\nD", - "type": "text" - }, - { - "block_id": "p176-b14", - "global_id": 1864, - "bbox": [ - 353.93, - 140.9, - 403.72, - 163.15 - ], - "text": "Downside\npenetrations\nbelow fast EMA", - "type": "text" - }, - { - "block_id": "p176-b15", - "global_id": 1865, - "bbox": [ - 362.26, - 164.31, - 399.24, - 193.55 - ], - "text": "A = $9.40 \nB = $5.90 \nC = $11.30 \nD = $11.70", - "type": "text" - }, - { - "block_id": "p176-b16", - "global_id": 1866, - "bbox": [ - 72.0, - 225.78, - 322.22, - 235.83 - ], - "text": "FIGURE 39.3  Gold daily, with 26- and 13-EMAs. (Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p176-b17", - "global_id": 1867, - "bbox": [ - 72.0, - 241.63, - 422.34, - 254.53 - ], - "text": "An Average Downside Penetration—the Third Screen of Triple Screen", - "type": "text" - }, - { - "block_id": "p176-b18", - "global_id": 1868, - "bbox": [ - 72.0, - 258.53, - 434.1, - 293.02 - ], - "text": "Here we zoom in on the chart from Figure 39.2. We can sharpen Triple Screen buy signals by \nnot waiting for the 2-day Force rally back above zero. We can use its declines below zero as \nalerts and then place our buy orders below value, using an average downside penetration.", - "type": "text" - } - ] - }, - { - "page_num": 177, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p177-b0", - "global_id": 1869, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "39. TRIPLE SCREEN TRADING SYSTEM\t\n161", - "type": "text" - }, - { - "block_id": "p177-b1", - "global_id": 1870, - "bbox": [ - 71.94, - 57.83, - 434.7, - 141.16 - ], - "text": "tion. Alternatively, place a buy order one tick above the high of the previous day. If \nprices rally, you will be stopped in long automatically when the rally takes out the \nprevious day’s high. If prices continue to decline, your buy-stop will not be touched. \nLower your buy order the next day to the level one tick above the latest price bar. \nKeep lowering your buy-stop each day until stopped in or until the weekly indicator \nreverses and cancels its buy signal.", - "type": "text" - }, - { - "block_id": "p177-b2", - "global_id": 1871, - "bbox": [ - 71.94, - 141.85, - 434.65, - 239.18 - ], - "text": "When the weekly trend is down, wait for a rally in a daily oscillator and place \nan order to sell short above the fast EMA on the daily chart, at a level of an average \nupside penetration. Alternatively, place an order to sell short one tick below the lat-\nest bar’s low. As soon as the market turns down, you will be stopped in on the short \nside. If the rally continues, keep raising your sell order daily. The aim of a trailing \nsell-stop technique is to catch an intraday downside breakout from a daily uptrend in \nthe direction of a weekly downtrend.", - "type": "text" - }, - { - "block_id": "p177-b3", - "global_id": 1872, - "bbox": [ - 72.0, - 259.2, - 250.82, - 276.14 - ], - "text": "Triple Screen in Day-Trading", - "type": "text" - }, - { - "block_id": "p177-b4", - "global_id": 1873, - "bbox": [ - 72.0, - 281.83, - 434.74, - 351.15 - ], - "text": "If you day-trade, you may select a 5-minute chart as your intermediate timeframe. \nAgain, do not look at it, but go to a 25- or a 30-minute chart first, which will be \nyour long-term chart. Make a strategic decision to be a bull or a bear on that longer-\nterm chart, and then return to your intermediate chart to look for an entry and stop \n(Figure 39.4).", - "type": "text" - }, - { - "block_id": "p177-b5", - "global_id": 1874, - "bbox": [ - 101.9, - 381.21, - 123.85, - 396.67 - ], - "text": "AMZN\n30-min", - "type": "text" - }, - { - "block_id": "p177-b6", - "global_id": 1875, - "bbox": [ - 105.4, - 471.65, - 183.28, - 483.06 - ], - "text": "Wed\nThu", - "type": "text" - }, - { - "block_id": "p177-b7", - "global_id": 1876, - "bbox": [ - 71.96, - 547.98, - 411.83, - 579.83 - ], - "text": "FIGURE 39.4  On the left: AMZN 30-min chart with a 13-bar EMA and 12-26-9 MACD-Histogram. \nOn the right: AMZN 5-min chart with a 13-bar EMA, 0.6% channel, and 2-bar Force Index. \n(Charts by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p177-b8", - "global_id": 1877, - "bbox": [ - 72.0, - 585.83, - 217.94, - 598.73 - ], - "text": "Triple Screen in Day-Trading", - "type": "text" - }, - { - "block_id": "p177-b9", - "global_id": 1878, - "bbox": [ - 72.0, - 602.73, - 434.13, - 685.21 - ], - "text": "The shares of Amazon.com, Inc. (AMZN) are a popular trading vehicle, thanks to their vola-\ntility and liquidity. The principles of Triple Screen are the same here as on the longer-term \ncharts. Here, a longer-term chart whose every bar represents 30 minutes of trading defines \nthe long-term trend. With it rising, we turn to a short-term chart, whose every bar repre-\nsents 5 minutes of trading. When its 2-bar Force Index dips below zero, it marks a wave \nthat goes against the tide—an opportunity to buy at a lower price. A channel that contains \napproximately 95% of all prices helps set profit targets.", - "type": "text" - }, - { - "block_id": "p177-b10", - "global_id": 1879, - "bbox": [ - 259.6, - 387.43, - 280.26, - 402.62 - ], - "text": "AMZN\n5-min", - "type": "text" - }, - { - "block_id": "p177-b11", - "global_id": 1880, - "bbox": [ - 263.76, - 513.9, - 275.52, - 522.12 - ], - "text": "Thu", - "type": "text" - } - ] - }, - { - "page_num": 178, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p178-b0", - "global_id": 1881, - "bbox": [ - 72.0, - 33.66, - 432.05, - 47.21 - ], - "text": "162\t\nTRADING SYSTEMS", - "type": "text" - }, - { - "block_id": "p178-b1", - "global_id": 1882, - "bbox": [ - 72.0, - 57.83, - 434.76, - 127.15 - ], - "text": "A neat combination of timeframes for day-trading stocks is a set of 39- and 8-minute \ncharts. The U.S. stock market is open from 9:30 a.m. to 4 p.m.—six and a half hours \nor 390 minutes. Using a 39-minute chart as your long-term screen neatly divides each \nday into 10 bars. Make your strategic decision there, and then drop down to a chart \nthat’s 5 times faster—an 8-minute chart—for tactical decisions on entries and exits.", - "type": "text" - }, - { - "block_id": "p178-b2", - "global_id": 1883, - "bbox": [ - 72.0, - 127.85, - 434.75, - 211.18 - ], - "text": "Don’t mash together too many timeframes. If you’re swing-trading, you can briefly \nuse an intraday chart to time your entry, but then return to the daily charts. If you \nkeep watching intraday charts, chances are they’ll shake you out of the trade prema-\nturely. If you day-trade, then the weekly chart is not really relevant, but you may take \na quick look at the daily chart. The rule is this: select your favorite (intermediate) \nchart, pair it with a long-term chart that is 5 times longer, and go to work.", - "type": "text" - }, - { - "block_id": "p178-b3", - "global_id": 1884, - "bbox": [ - 72.0, - 233.2, - 216.48, - 250.13 - ], - "text": "Stops and Profit Targets", - "type": "text" - }, - { - "block_id": "p178-b4", - "global_id": 1885, - "bbox": [ - 72.0, - 255.83, - 434.71, - 325.15 - ], - "text": "Proper money management is essential for successful trading. A disciplined trader \ntakes his profits at targets, cuts losses short, and outperforms those who keep hoping \nand hanging on to bad trades. Before you enter a trade, write down three numbers: \nthe entry, the target, and the stop. Placing a trade without defining these three num-\nbers is gambling.", - "type": "text" - }, - { - "block_id": "p178-b5", - "global_id": 1886, - "bbox": [ - 72.0, - 325.85, - 434.76, - 423.18 - ], - "text": "Triple Screen calls for setting profit targets using long-term charts and stops on \nthe charts of your intermediate timeframe. If you use weekly and daily charts, set \nprofit targets on the weeklies but stops on the dailies. When buying a dip on a daily \nchart, the value zone on a weekly chart presents a good target. When day-trading \nand using a 25-minute and a 5-minute pair, set the profit target on a 25-minute chart \nand the stop on a 5-minute chart. This helps you aim at the greater results, while \nholding down the risk.", - "type": "text" - }, - { - "block_id": "p178-b6", - "global_id": 1887, - "bbox": [ - 72.0, - 423.88, - 434.76, - 479.2 - ], - "text": "The Triple Screen trading system calls for placing fairly tight stops. Since it has you \ntrading in the direction of the market tide, it doesn’t give much room to losing trades. \nGet on with the tide—or get out. We’ll return to this topic in Chapter 54, “How to \nSet Stops.”", - "type": "text" - }, - { - "block_id": "p178-b7", - "global_id": 1888, - "bbox": [ - 73.55, - 504.86, - 274.32, - 523.5 - ], - "text": "■\n■40. The Impulse System", - "type": "text" - }, - { - "block_id": "p178-b8", - "global_id": 1889, - "bbox": [ - 72.0, - 532.83, - 434.75, - 616.16 - ], - "text": "The idea for the Impulse system came to me in the mid-1990s. I woke up in the \nmiddle of the night in a faraway hotel and sat up bolt upright in bed with the thought \nthat I could describe any market move in any timeframe, using only two criteria: \ninertia and power. By combining them, I could find stocks and futures with both \nbullish inertia and bullish power and trade them long. I could also find stocks and \nfutures with both bearish inertia and power and sell them short.", - "type": "text" - }, - { - "block_id": "p178-b9", - "global_id": 1890, - "bbox": [ - 72.0, - 616.68, - 434.77, - 686.18 - ], - "text": "A good measure of the inertia of any trading vehicle is the slope of its fast EMA. \nA rising EMA reflects bullish inertia, while a falling EMA reflects bearish inertia. The \npower of any trend is reflected in the slope of MACD-Histogram. If its latest bar is \nhigher than the previous bar (like the height of the letters m–M) or less deep than the \nprevious bar (like the depth of the letters y–v), then the slope of MACD-Histogram", - "type": "text" - } - ] - }, - { - "page_num": 179, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p179-b0", - "global_id": 1891, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "40. THE IMPULSE SYSTEM\t\n163", - "type": "text" - }, - { - "block_id": "p179-b1", - "global_id": 1892, - "bbox": [ - 71.94, - 57.83, - 434.7, - 127.15 - ], - "text": "is rising, and the power is pushing up. If the latest bar of MACD-Histogram is lower \nthan the previous one (like the depth of the letters v–y or the height of the letters \nM–m), then the slope is declining, and the power is pushing down. When we use \nMACD-Histogram to define power, it doesn’t matter whether it’s above or below \nzero: what matters is the relationship of the last two bars of MACD-Histogram.", - "type": "text" - }, - { - "block_id": "p179-b2", - "global_id": 1893, - "bbox": [ - 71.94, - 127.85, - 434.7, - 183.17 - ], - "text": "It is relatively simple to program most software packages to color price bars or \ncandles using the Impulse system. If both indicators are rising, the bar is green—\nbullish. If both are falling, the bar is red—bearish. When the two indicators move \nagainst one another, that bar is blue—neutral (Figure 40.1).", - "type": "text" - }, - { - "block_id": "p179-b3", - "global_id": 1894, - "bbox": [ - 71.94, - 183.86, - 434.69, - 239.18 - ], - "text": "At first, I anticipated making this system automatic—buy green, short red, and \ncash checks on all colors. Backtesting the Impulse system threw cold water on that \nidea. The automatic system caught every single trend, but it got whipsawed during \ntrading ranges, where it kept flipping between green and red.", - "type": "text" - }, - { - "block_id": "p179-b4", - "global_id": 1895, - "bbox": [ - 71.94, - 239.88, - 434.63, - 309.2 - ], - "text": "I set the Impulse system aside, but kept thinking about it. A few years later it \ndawned on me: this wasn’t an automatic trading system—it was a censorship sys-\ntem! It didn’t tell me what to do—it told me what not to do. If either weekly or \ndaily bar was red—no buying allowed. If either weekly or daily bar was green—no \nshorting permitted.", - "type": "text" - }, - { - "block_id": "p179-b5", - "global_id": 1896, - "bbox": [ - 71.94, - 309.9, - 434.59, - 365.22 - ], - "text": "Ever since that discovery, I’ve been using the Impulse system for all my trades. \nI presented it to the public in my 2002 book Come into My Trading Room, which \nBarron’s named a book of the year. The Impulse system is becoming increasingly popu-\nlar worldwide, and its terminology has entered the language of trading.", - "type": "text" - }, - { - "block_id": "p179-b6", - "global_id": 1897, - "bbox": [ - 72.0, - 584.58, - 239.19, - 594.63 - ], - "text": "FIGURE 40.1  The colors of the Impulse system.", - "type": "text" - }, - { - "block_id": "p179-b7", - "global_id": 1898, - "bbox": [ - 72.03, - 601.41, - 431.61, - 624.42 - ], - "text": "■\n■\nEMA rising & MACD-Histogram rising (especially below zero) = Impulse is green, bullish.\nShorting prohibited, buying or standing aside permitted.", - "type": "text" - }, - { - "block_id": "p179-b8", - "global_id": 1899, - "bbox": [ - 72.03, - 629.41, - 431.63, - 652.42 - ], - "text": "■\n■\nEMA falling & MACD-Histogram falling (especially above zero) = Impulse is red, bearish.\nBuying prohibited, shorting or standing aside permitted.", - "type": "text" - }, - { - "block_id": "p179-b9", - "global_id": 1900, - "bbox": [ - 72.03, - 657.36, - 429.81, - 669.09 - ], - "text": "■\n■\nEMA rising & MACD-Histogram falling = Impulse is blue, neutral. Nothing is prohibited.", - "type": "text" - }, - { - "block_id": "p179-b10", - "global_id": 1901, - "bbox": [ - 72.03, - 673.36, - 429.81, - 685.09 - ], - "text": "■\n■\nEMA falling & MACD-Histogram rising = Impulse is blue, neutral. Nothing is prohibited.", - "type": "text" - } - ] - }, - { - "page_num": 180, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p180-b0", - "global_id": 1902, - "bbox": [ - 72.0, - 33.66, - 432.05, - 47.21 - ], - "text": "164\t\nTRADING SYSTEMS", - "type": "text" - }, - { - "block_id": "p180-b1", - "global_id": 1903, - "bbox": [ - 71.8, - 57.83, - 434.55, - 141.16 - ], - "text": "And that’s how I’ve been using the Impulse system ever since (Figure 40.2). \nIt keeps me out of trouble. I may develop my trading plans based on any number \nof ideas, signals, or indicators—and then the Impulse system forces me to wait \nuntil it no longer prohibits an entry in the planned direction. In addition, the \nImpulse system helps me recognize when a trend starts weakening and suggests \nan exit.", - "type": "text" - }, - { - "block_id": "p180-b2", - "global_id": 1904, - "bbox": [ - 71.8, - 158.2, - 434.55, - 248.15 - ], - "text": "Entries\nGreen and red bars of the Impulse system show when both inertia and power are \npointing in the same direction. At a green bar, bulls are in charge and the uptrend \nis accelerating. At a red bar, bears are dominant and the downtrend is in full swing. \nA fast EMA and MACD-Histogram may stay in gear with each other for only a few \nbars, but that’s when the market travels fast—the impulse is on!", - "type": "text" - }, - { - "block_id": "p180-b3", - "global_id": 1905, - "bbox": [ - 71.8, - 248.85, - 434.56, - 332.18 - ], - "text": "Before you start applying the Impulse system to your favorite market, remember \nthe Triple Screen’s insistence on analyzing markets in more than one timeframe. \nSelect your favorite timeframe and call it intermediate. Multiply it by five to define \nyour long-term timeframe. If your favorite chart is daily, analyze the weekly chart \nfirst and make a strategic decision to be a bull or a bear. Use the Impulse system to \ndecide when you’re permitted to enter long or short positions.", - "type": "text" - }, - { - "block_id": "p180-b4", - "global_id": 1906, - "bbox": [ - 71.83, - 346.83, - 434.55, - 360.14 - ], - "text": "■\n■If you’re a short-term momentum trader, you can buy as soon as both timeframes", - "type": "text" - }, - { - "block_id": "p180-b5", - "global_id": 1907, - "bbox": [ - 83.6, - 360.83, - 358.66, - 374.14 - ], - "text": "turn green and take profits as soon as one of them fades to blue.", - "type": "text" - }, - { - "block_id": "p180-b6", - "global_id": 1908, - "bbox": [ - 71.83, - 380.83, - 434.49, - 394.14 - ], - "text": "■\n■When trying to catch market turns, the best trading signals are given not by green", - "type": "text" - }, - { - "block_id": "p180-b7", - "global_id": 1909, - "bbox": [ - 83.6, - 394.83, - 275.5, - 408.14 - ], - "text": "or red but by the loss of green or red colors.", - "type": "text" - }, - { - "block_id": "p180-b8", - "global_id": 1910, - "bbox": [ - 71.85, - 422.83, - 434.6, - 478.15 - ], - "text": "If a stock is falling, but your analysis indicates that a bottom is near, monitor the \nImpulse system on weekly and daily charts. If even one of them shows red, the down-\ntrend is still in force and buying is not permitted. When both timeframes stop being \nred, they allow you to buy.", - "type": "text" - }, - { - "block_id": "p180-b9", - "global_id": 1911, - "bbox": [ - 71.85, - 478.84, - 434.54, - 534.16 - ], - "text": "If you think that a stock is forming a top and is about to turn down, examine the \nImpulse system on both weekly and daily charts. If even one of them is green, it’s \na sign that the uptrend is still alive, and no shorting is permitted. When the green \ndisappears from both timeframes, you may start shorting.", - "type": "text" - }, - { - "block_id": "p180-b10", - "global_id": 1912, - "bbox": [ - 71.85, - 534.86, - 434.6, - 632.19 - ], - "text": "The shorter a timeframe, the more sensitive its signals: the Impulse on a daily chart \nalmost always changes colors ahead of the weekly. When day-trading, the 5-minute \nchart changes colors ahead of a 25-minute chart. If my studies show that the market \nis bottoming and getting ready to turn up, I wait until the daily chart stops being red \nand turns blue or even green; then I start watching the weekly chart, which is still \nred. As soon as it turns from red to blue, it allows me to buy. This technique saves me \nfrom buying too soon, while the market is still declining.", - "type": "text" - }, - { - "block_id": "p180-b11", - "global_id": 1913, - "bbox": [ - 71.85, - 632.89, - 434.58, - 674.2 - ], - "text": "I use the same approach to shorting. When I think that a top is forming and the \ndaily Impulse stops being green and turns blue or even red, I closely monitor the \nweekly chart. As soon as it loses its green color, it permits me to go short. Waiting", - "type": "text" - } - ] - }, - { - "page_num": 181, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p181-b0", - "global_id": 1914, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "40. THE IMPULSE SYSTEM\t\n165", - "type": "text" - }, - { - "block_id": "p181-b1", - "global_id": 1915, - "bbox": [ - 71.94, - 509.03, - 434.7, - 536.34 - ], - "text": "for both timeframes to lose the color that is contrary to my plan helps ensure that I \ntrade in gear with the market and not against it.", - "type": "text" - }, - { - "block_id": "p181-b2", - "global_id": 1916, - "bbox": [ - 71.94, - 537.04, - 434.69, - 578.35 - ], - "text": "Remember, the Impulse system is a censorship system. It doesn’t tell you what \nto do—but it clearly tells you what you’re not allowed to do. You’re not supposed to \ngo against the censor.", - "type": "text" - }, - { - "block_id": "p181-b3", - "global_id": 1917, - "bbox": [ - 71.94, - 579.05, - 434.72, - 634.37 - ], - "text": "Many programs for technical analysis include a feature called “conditional format-\nting.” It allows you color price bars or candles depending on the slope of the EMA \nand MACD-Histogram. A brilliant programmer in Chicago named John Bruns used \nthis feature when he included the Impulse system in tool kits we call elder-disks1.", - "type": "text" - }, - { - "block_id": "p181-b4", - "global_id": 1918, - "bbox": [ - 72.0, - 661.02, - 320.29, - 672.11 - ], - "text": "1These are available for various trading programs, listed at elder.com.", - "type": "text" - }, - { - "block_id": "p181-b5", - "global_id": 1919, - "bbox": [ - 71.96, - 296.58, - 388.02, - 317.62 - ], - "text": "FIGURE 40.2  SSYS weekly with 13- and 26-week EMAs, 12-26-9 MACD-Histogram and the \nImpulse system. (Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p181-b6", - "global_id": 1920, - "bbox": [ - 72.0, - 323.43, - 175.1, - 336.33 - ], - "text": "The Impulse System", - "type": "text" - }, - { - "block_id": "p181-b7", - "global_id": 1921, - "bbox": [ - 72.0, - 340.33, - 434.06, - 386.82 - ], - "text": "The Impulse system can sharpen any method of finding trades, whether technical or fun-\ndamental. Let’s review an example, using the stock of Stratasys, Inc. (SSYS)—one of the \ntwo leading stocks in the additive manufacturing industry. In 2012, I published the world’s \nfirst popular e-book on additive manufacturing in which I called for a boom in its stocks.", - "type": "text" - }, - { - "block_id": "p181-b8", - "global_id": 1922, - "bbox": [ - 72.0, - 388.32, - 434.13, - 446.8 - ], - "text": "Vertical green arrows mark bars immediately following red bars. Red prohibits you from \nbuying. The best time to buy is immediately following red’s disappearance. You can see \nhow those green arrows pick one intermediate bottom after another, including the buy \nsignal at the right edge of the chart. Having an objective method gives you the confidence \nto buy as soon as a decline screeches to a halt.", - "type": "text" - }, - { - "block_id": "p181-b9", - "global_id": 1923, - "bbox": [ - 72.0, - 448.31, - 434.13, - 482.79 - ], - "text": "The Impulse system also suggests good areas for profit taking. Slanted red arrows point \nto blue bars that occur after a series of green bars far away from value. They indicate that \nbulls are choking up—a good time to cash out and wait for the next buying opportunity.", - "type": "text" - } - ] - }, - { - "page_num": 182, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p182-b0", - "global_id": 1924, - "bbox": [ - 72.0, - 33.66, - 432.05, - 47.21 - ], - "text": "166\t\nTRADING SYSTEMS", - "type": "text" - }, - { - "block_id": "p182-b1", - "global_id": 1925, - "bbox": [ - 72.0, - 57.83, - 434.71, - 99.14 - ], - "text": "If you use a platform that doesn’t permit conditional formatting, you can still use the \nImpulse system. Simply observe the slopes of the EMA and MACD-Histogram: their \ncombination will tell you what should be the color of the latest bar.", - "type": "text" - }, - { - "block_id": "p182-b2", - "global_id": 1926, - "bbox": [ - 72.0, - 99.84, - 434.71, - 155.16 - ], - "text": "If you know how to program, you can add more features to the Impulse system. \nYou can test different EMA lengths or MACD settings, looking for those that work \nbest in your market. A day trader can program sound alarms to monitor color changes \nin several markets without being glued to the screen.", - "type": "text" - }, - { - "block_id": "p182-b3", - "global_id": 1927, - "bbox": [ - 72.0, - 175.2, - 102.34, - 192.13 - ], - "text": "Exits", - "type": "text" - }, - { - "block_id": "p182-b4", - "global_id": 1928, - "bbox": [ - 72.0, - 197.83, - 434.74, - 281.16 - ], - "text": "If you’re a short-term momentum trader, close out your trade as soon as the col-\nor of the Impulse system stops supporting the direction of your trade, even in \none of the two timeframes. Usually, the daily MACD-Histogram turns ahead of the \nweekly. When it ticks down during an uptrend, it shows that the upside momen-\ntum is weakening. When the buy signal disappears, take profits without waiting for a \nsell signal.", - "type": "text" - }, - { - "block_id": "p182-b5", - "global_id": 1929, - "bbox": [ - 72.0, - 281.85, - 434.62, - 323.17 - ], - "text": "Reverse this procedure in downtrends. Cover shorts as soon as the Impulse sys-\ntem stops being red, even in one of the two timeframes. The most dynamic part of \nthe decline is over, and your momentum trade has fulfilled its goal.", - "type": "text" - }, - { - "block_id": "p182-b6", - "global_id": 1930, - "bbox": [ - 72.0, - 323.86, - 434.7, - 365.18 - ], - "text": "The Impulse system encourages you to enter cautiously but exit fast. This is the \nprofessional approach to trading. Beginners tend to do the opposite; jump into trades \nand then take forever to exit, hoping for the market to turn their way.", - "type": "text" - }, - { - "block_id": "p182-b7", - "global_id": 1931, - "bbox": [ - 72.0, - 365.88, - 434.76, - 421.2 - ], - "text": "A swing trader may stay in a trade, even if one of the timeframes turns blue. What \nhe should never do is stay in a trade against the color. If you’re long, and one of the \ntimeframes turns red, it is time to sell and go back to the sidelines. If you’re short, \nand the Impulse system turns green, it signals to cover your short position.", - "type": "text" - }, - { - "block_id": "p182-b8", - "global_id": 1932, - "bbox": [ - 72.0, - 421.89, - 434.76, - 477.21 - ], - "text": "The Impulse system helps identify islands of order in the ocean of market chaos by \nshowing when the crowd, usually so aimless and disorganized, becomes emotional \nand starts to run. You enter when a trend pattern emerges and exit when it starts to \nsink back into chaos.", - "type": "text" - }, - { - "block_id": "p182-b9", - "global_id": 1933, - "bbox": [ - 73.55, - 504.86, - 317.06, - 523.5 - ], - "text": "■\n■41. Channel Trading Systems", - "type": "text" - }, - { - "block_id": "p182-b10", - "global_id": 1934, - "bbox": [ - 72.0, - 533.83, - 434.75, - 603.15 - ], - "text": "Market prices tend to flow in channels, like rivers in their valleys. When a river \ntouches the right edge of its valley, it turns left. When it touches the left rim of its \nvalley, it turns right. When prices rally, they often seem to stop at an invisible ceil-\ning. Their declines seem to stop at invisible floors. Channels help us anticipate where \nthose support and resistance levels are likely to be encountered.", - "type": "text" - }, - { - "block_id": "p182-b11", - "global_id": 1935, - "bbox": [ - 72.0, - 603.85, - 434.72, - 645.16 - ], - "text": "Support is where buyers buy with greater intensity than sellers sell. Resistance is \nwhere sellers sell with greater intensity than buyers buy (see Chapter 18). Channels \nshow where to expect support and resistance in the future.", - "type": "text" - }, - { - "block_id": "p182-b12", - "global_id": 1936, - "bbox": [ - 72.0, - 645.86, - 434.68, - 687.18 - ], - "text": "Channels help identify buying and selling opportunities and avoid bad trades. The \noriginal research into trading channels was conducted by J. M. Hurst and described \nin his 1970 book, The Profit Magic of Stock Transaction Timing.", - "type": "text" - } - ] - }, - { - "page_num": 183, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p183-b0", - "global_id": 1937, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "41. CHANNEL TRADING SYSTEMS\t\n167", - "type": "text" - }, - { - "block_id": "p183-b1", - "global_id": 1938, - "bbox": [ - 71.94, - 57.83, - 434.66, - 155.16 - ], - "text": "The late great mathematician Benoit Mandelbrot was hired by the Egyptian gov-\nernment to create a mathematical model of cotton prices—the main agricultural \nexport of that country. After extensive study, the scientist made this finding: “prices \noscillate above and below value.” It may sound simple, but in fact it’s profound. If \nwe accept this mathematical finding and if we have the means to define value and \nmeasure an average oscillation, we’ll have a trading system. We’ll need to buy below \nvalue and take profits at value or sell short above value and cover at value.", - "type": "text" - }, - { - "block_id": "p183-b2", - "global_id": 1939, - "bbox": [ - 71.94, - 155.86, - 432.01, - 183.17 - ], - "text": "We have already agreed that value is in the zone between a short and a long mov-\ning averages. We can use channels to find normal and abnormal oscillations.", - "type": "text" - }, - { - "block_id": "p183-b3", - "global_id": 1940, - "bbox": [ - 72.0, - 203.2, - 276.5, - 220.13 - ], - "text": "Two Ways to Construct a Channel", - "type": "text" - }, - { - "block_id": "p183-b4", - "global_id": 1941, - "bbox": [ - 72.0, - 225.83, - 434.71, - 267.14 - ], - "text": "We may construct a channel by plotting two lines parallel to a moving average: one \nabove and another below. We may also vary the distance between the channel lines \ndepending on that market’s volatility (standard deviation channels).", - "type": "text" - }, - { - "block_id": "p183-b5", - "global_id": 1942, - "bbox": [ - 72.0, - 267.84, - 434.74, - 309.16 - ], - "text": "A symmetrical channel, centered around a moving average, is useful for trading \nstocks and futures. A standard deviation channel (sometimes called Bollinger bands) \nis good for those who trade options.", - "type": "text" - }, - { - "block_id": "p183-b6", - "global_id": 1943, - "bbox": [ - 72.0, - 309.85, - 434.7, - 365.17 - ], - "text": "Channels mark the boundaries between normal and abnormal price action. It is \nnormal for prices to stay inside a well-drawn channel, and only unusual events push \nthem outside. The market is undervalued below its lower channel line and overval-\nued above its upper channel line.", - "type": "text" - }, - { - "block_id": "p183-b7", - "global_id": 1944, - "bbox": [ - 72.0, - 385.2, - 210.52, - 402.14 - ], - "text": "Symmetrical Channels", - "type": "text" - }, - { - "block_id": "p183-b8", - "global_id": 1945, - "bbox": [ - 72.0, - 407.83, - 434.68, - 491.16 - ], - "text": "Earlier we’ve discussed using a set of two moving averages for trading (see Chapter \n22). With such a pair, use the slower one as the backbone of your channel. For ex-\nample, if you use 13-day and 26-day EMAs, draw your channel lines parallel to the \n26-day EMA.\nThe width of a channel depends on the coefficient selected by the trader. This \ncoefficient is usually expressed as a percentage of the EMA level.", - "type": "text" - }, - { - "block_id": "p183-b9", - "global_id": 1946, - "bbox": [ - 125.54, - 501.4, - 378.5, - 536.16 - ], - "text": "Upper Channel Line = EMA + Channel Coefficient • EMA\nLower Channel Line = EMA − Channel Coefficient • EMA", - "type": "text" - }, - { - "block_id": "p183-b10", - "global_id": 1947, - "bbox": [ - 72.02, - 547.86, - 434.77, - 631.18 - ], - "text": "When setting a channel for any market, start with 3% or 5% of the EMA and \nkeep adjusting those values until a channel contains approximately 95 percent of all \nprice data for the past 100 bars, about five months on a daily chart. This is similar to \ntrying on a shirt: you look for the one that fits not too loose or too tight, with only \nyour wrists and neck sticking out. Only the extreme prices will protrude outside of \na well-drawn channel.", - "type": "text" - }, - { - "block_id": "p183-b11", - "global_id": 1948, - "bbox": [ - 72.02, - 631.88, - 434.76, - 687.2 - ], - "text": "Volatile markets require wider channels, while quiet markets require more nar-\nrow channels. Cheaper stocks tend to have higher coefficients than expensive ones. \nLong-term charts require wider channels. As a rule of thumb, weekly channel coef-\nficients are twice as large as daily ones.", - "type": "text" - } - ] - }, - { - "page_num": 184, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p184-b0", - "global_id": 1949, - "bbox": [ - 72.0, - 33.66, - 432.05, - 47.21 - ], - "text": "168\t\nTRADING SYSTEMS", - "type": "text" - }, - { - "block_id": "p184-b1", - "global_id": 1950, - "bbox": [ - 72.0, - 57.83, - 434.74, - 113.15 - ], - "text": "I used to plot channels by hand until my programmer wrote an add-on for several \nsoftware packages called an Autoenvelope. It automatically plots correct channels \nfor any trading vehicle in any timeframe (Figure 41.1). It’s included on elder-disks \nfor several popular programs.", - "type": "text" - }, - { - "block_id": "p184-b2", - "global_id": 1951, - "bbox": [ - 72.0, - 128.2, - 434.77, - 218.15 - ], - "text": "Mass Psychology\nAn exponential moving average reflects the average consensus of value in its time \nwindow. When prices are near their moving average, the market is fairly valued. When \nthey decline near the lower channel line, the market is undervalued. When prices rise \nto the upper channel line, the market is overvalued. Channels help find buying oppor-\ntunities when the market is cheap and shorting opportunities when the market is dear.", - "type": "text" - }, - { - "block_id": "p184-b3", - "global_id": 1952, - "bbox": [ - 72.0, - 218.85, - 434.76, - 274.17 - ], - "text": "When prices fall below their moving average, bargain hunters step in. Their buy-\ning as well as short covering by bears stops declines and lifts prices. When prices rise \nabove value, sellers see an opportunity to take profits on long positions or go short. \nTheir selling caps the rise.", - "type": "text" - }, - { - "block_id": "p184-b4", - "global_id": 1953, - "bbox": [ - 72.0, - 274.86, - 434.7, - 316.18 - ], - "text": "When the market sinks to the bottom of a depression, its mood is about to im-\nprove. Once it rises to the height of its mania, it’s about to start calming down. A \nchannel marks normal limits of mass optimism and pessimism. The upper channel", - "type": "text" - }, - { - "block_id": "p184-b5", - "global_id": 1954, - "bbox": [ - 105.5, - 341.81, - 229.64, - 349.62 - ], - "text": "M\nM", - "type": "text" - }, - { - "block_id": "p184-b6", - "global_id": 1955, - "bbox": [ - 261.3, - 334.11, - 267.44, - 341.92 - ], - "text": "M", - "type": "text" - }, - { - "block_id": "p184-b7", - "global_id": 1956, - "bbox": [ - 140.0, - 427.21, - 144.93, - 435.02 - ], - "text": "D", - "type": "text" - }, - { - "block_id": "p184-b8", - "global_id": 1957, - "bbox": [ - 357.8, - 418.41, - 362.73, - 426.23 - ], - "text": "D", - "type": "text" - }, - { - "block_id": "p184-b9", - "global_id": 1958, - "bbox": [ - 71.96, - 462.98, - 423.18, - 483.83 - ], - "text": "FIGURE 41.1  Euro futures, with 26- and 13-day EMAs, the Impulse system, and Autoenvelope. (Chart by \nTradestation)", - "type": "text" - }, - { - "block_id": "p184-b10", - "global_id": 1959, - "bbox": [ - 72.0, - 489.83, - 195.69, - 502.73 - ], - "text": "Channels: Autoenvelope", - "type": "text" - }, - { - "block_id": "p184-b11", - "global_id": 1960, - "bbox": [ - 72.0, - 506.73, - 434.06, - 541.22 - ], - "text": "This chart shows several recent months of trading in the March 2014 Euro currency futures \n(ESH14). Futures are much more transparent and true than the murky forex deals. When-\never I trade currencies, I use currency futures.", - "type": "text" - }, - { - "block_id": "p184-b12", - "global_id": 1961, - "bbox": [ - 72.0, - 542.72, - 434.14, - 601.2 - ], - "text": "Warren Buffet refers to the stock market as a manic-depressive fellow, and his descrip-\ntion applies to non-equity markets. Here you see the Euro swinging above and below \nvalue. When it rises above the upper channel line, it shows that the market has become \nmanic (marked with a letter M), and when it falls below the lower channel line, it is de-\npressed (marked with a letter D).", - "type": "text" - }, - { - "block_id": "p184-b13", - "global_id": 1962, - "bbox": [ - 72.0, - 602.71, - 434.15, - 685.18 - ], - "text": "Buffett observes that the trouble with most people is that they become infected by the \nmood of Mr. Market—they want to buy when he is manic and sell when he’s depressed. \nPlotting a channel helps you diagnose the market’s mania and depression and avoid be-\ncoming infected by either. One of my strict rules is never to buy above the upper channel \nline or sell short below the lower channel line. I may miss a runaway trend because of this \nrestriction, but my safety is greatly increased. At the right edge of the screen, the Euro is \nrising very near its upper channel line—it looks like a manic episode is about to develop.", - "type": "text" - } - ] - }, - { - "page_num": 185, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p185-b0", - "global_id": 1963, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "41. CHANNEL TRADING SYSTEMS\t\n169", - "type": "text" - }, - { - "block_id": "p185-b1", - "global_id": 1964, - "bbox": [ - 71.94, - 57.83, - 434.65, - 85.14 - ], - "text": "line shows where bulls run out of steam, while the lower channel line shows where \nbears become exhausted.", - "type": "text" - }, - { - "block_id": "p185-b2", - "global_id": 1965, - "bbox": [ - 71.94, - 85.84, - 434.64, - 141.16 - ], - "text": "At the upper channel line, bears have their backs against the wall as they fight off \nthe bulls. At the lower channel line, bulls have their backs against the wall and fight \noff the bears. We all fight harder when our backs are against the wall, and that’s why \nchannels tend to hold.", - "type": "text" - }, - { - "block_id": "p185-b3", - "global_id": 1966, - "bbox": [ - 71.94, - 141.85, - 434.7, - 183.17 - ], - "text": "If a rally shoots out of a channel and prices close above it, it shows that the uptrend \nis exceptionally strong. When a rally fails to reach the upper channel line, it is a bearish \nsign, as it shows that bulls are becoming weaker. The reverse applies to downtrends.", - "type": "text" - }, - { - "block_id": "p185-b4", - "global_id": 1967, - "bbox": [ - 71.94, - 183.86, - 434.68, - 253.19 - ], - "text": "My friend Kerry Lovvorn finessed this idea by plotting not one but three sets of \nchannels around a moving average. The width of his channels is driven by Average True \nRanges (see Chapter 24). His three channels are set at one, two, and three ATRs away \nfrom the moving average. Normal moves tend to stay within 1-ATR channels, while \nonly extreme moves go outside of 3-ATRs, indicating a reversal is near (Figure 41.2).", - "type": "text" - }, - { - "block_id": "p185-b5", - "global_id": 1968, - "bbox": [ - 71.94, - 253.88, - 434.63, - 295.2 - ], - "text": "Channels help us remain objective, while other traders get swept up in mass bull-\nishness or bearishness. When prices rally to the upper channel line, you see that mass \nbullishness is being overdone, and it’s time to think about selling. When prices drop", - "type": "text" - }, - { - "block_id": "p185-b6", - "global_id": 1969, - "bbox": [ - 99.4, - 328.81, - 127.41, - 338.52 - ], - "text": "A\nB", - "type": "text" - }, - { - "block_id": "p185-b7", - "global_id": 1970, - "bbox": [ - 196.0, - 419.71, - 270.1, - 432.23 - ], - "text": "C\nD\nE", - "type": "text" - }, - { - "block_id": "p185-b8", - "global_id": 1971, - "bbox": [ - 321.7, - 343.01, - 325.55, - 350.83 - ], - "text": "F", - "type": "text" - }, - { - "block_id": "p185-b9", - "global_id": 1972, - "bbox": [ - 334.2, - 329.81, - 339.26, - 337.62 - ], - "text": "G", - "type": "text" - }, - { - "block_id": "p185-b10", - "global_id": 1973, - "bbox": [ - 166.3, - 320.41, - 377.42, - 328.62 - ], - "text": "H\nI\n+3", - "type": "text" - }, - { - "block_id": "p185-b11", - "global_id": 1974, - "bbox": [ - 166.3, - 334.41, - 174.48, - 342.23 - ], - "text": "+2", - "type": "text" - }, - { - "block_id": "p185-b12", - "global_id": 1975, - "bbox": [ - 166.3, - 350.41, - 174.48, - 358.23 - ], - "text": "+1", - "type": "text" - }, - { - "block_id": "p185-b13", - "global_id": 1976, - "bbox": [ - 166.9, - 382.41, - 174.0, - 390.23 - ], - "text": "–1", - "type": "text" - }, - { - "block_id": "p185-b14", - "global_id": 1977, - "bbox": [ - 166.9, - 398.41, - 174.0, - 406.23 - ], - "text": "–2", - "type": "text" - }, - { - "block_id": "p185-b15", - "global_id": 1978, - "bbox": [ - 166.9, - 414.41, - 174.0, - 422.23 - ], - "text": "–3", - "type": "text" - }, - { - "block_id": "p185-b16", - "global_id": 1979, - "bbox": [ - 72.36, - 504.78, - 427.02, - 525.83 - ], - "text": "FIGURE 41.2  RSOL daily with 21-day EMA and 1-, 2-, and 3-ATR channels, MACD-Histogram 12-26-9, \nand the Impulse system. (Chart by Tradestation)", - "type": "text" - }, - { - "block_id": "p185-b17", - "global_id": 1980, - "bbox": [ - 72.4, - 531.63, - 187.13, - 544.53 - ], - "text": "Multiple ATR Channels", - "type": "text" - }, - { - "block_id": "p185-b18", - "global_id": 1981, - "bbox": [ - 72.4, - 548.53, - 380.94, - 559.03 - ], - "text": "This chart of Real Goods Solar, Inc. (RSOL) reflects several months of action:", - "type": "text" - }, - { - "block_id": "p185-b19", - "global_id": 1982, - "bbox": [ - 88.4, - 566.53, - 434.5, - 661.72 - ], - "text": "Area A—Warning. Prices stab outside +3 ATRs—the uptrend has reached an extreme.\nArea B—Sell. Prices couldn’t hold above +2 ATRs—take profits on long positions.\nArea C—Alert. Decline stopped at −2 ATRs—a sign of bottoming.\nArea D—Alert confirmed. Prices holding above −2 ATRs—bottom is being built.\nArea E—Buy. False downside breakout reaches −3 ATRs and rejects that low.\nArea F—Warning. Prices stab outside of +3 ATRs—watch whether +2 ATRs will hold.\nArea G—Warning. Prices stab outside of +3 ATRs—watch whether +2 ATRs will hold.\nArea H—Another warning. Prices stab outside of +3 ATRs—watch whether +2 ATRs", - "type": "text" - }, - { - "block_id": "p185-b20", - "global_id": 1983, - "bbox": [ - 88.38, - 662.51, - 411.69, - 685.71 - ], - "text": "will hold.\nArea I—Sell. Prices couldn’t hold above +2 ATRs—take profits on long positions.", - "type": "text" - } - ] - }, - { - "page_num": 186, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p186-b0", - "global_id": 1984, - "bbox": [ - 72.0, - 33.66, - 432.05, - 47.21 - ], - "text": "170\t\nTRADING SYSTEMS", - "type": "text" - }, - { - "block_id": "p186-b1", - "global_id": 1985, - "bbox": [ - 72.0, - 57.83, - 434.64, - 85.14 - ], - "text": "near the lower channel line and everyone turns bearish, you know that it’s time to \nthink about buying instead of selling.", - "type": "text" - }, - { - "block_id": "p186-b2", - "global_id": 1986, - "bbox": [ - 72.0, - 102.2, - 158.03, - 119.14 - ], - "text": "Trading Rules", - "type": "text" - }, - { - "block_id": "p186-b3", - "global_id": 1987, - "bbox": [ - 72.0, - 124.83, - 434.72, - 166.14 - ], - "text": "Amateurs like to bet on long shots—they tend to buy upside breakouts and short \n(if they ever sell short) downside breakouts. When an amateur sees a breakout, he \nexpects riches from a major new trend.", - "type": "text" - }, - { - "block_id": "p186-b4", - "global_id": 1988, - "bbox": [ - 72.0, - 166.84, - 434.76, - 236.16 - ], - "text": "Professionals, on the other hand, tend to trade against deviations and for a return \nto normalcy. The pros know that most breakouts are exhaustion moves that are soon \naborted. That’s why they like to fade breakouts—trade against them, selling short \nas soon as an upside breakout stalls and buying when a downside breakout starts \nreturning into the range.", - "type": "text" - }, - { - "block_id": "p186-b5", - "global_id": 1989, - "bbox": [ - 72.0, - 236.86, - 434.72, - 292.18 - ], - "text": "Breakouts can produce spectacular gains when a major new trend blows out of a \nchannel, but in the long run it pays to trade with the pros. Most breakouts fail and are \nfollowed by reversals, which is why channel lines mark attractive zones for entering \ntrades against breakouts, with profit targets in the value zone.", - "type": "text" - }, - { - "block_id": "p186-b6", - "global_id": 1990, - "bbox": [ - 72.0, - 292.88, - 434.69, - 334.19 - ], - "text": "You can use moving-average channels as a stand-alone trading method or combine \nit with other techniques. Gerald Appel, a prominent market researcher and money \nmanager in New York, recommended these rules for trading with channels:", - "type": "text" - }, - { - "block_id": "p186-b7", - "global_id": 1991, - "bbox": [ - 75.98, - 342.87, - 434.7, - 472.16 - ], - "text": "1.\tDraw a moving average and build a channel around it. When a channel is rela-\ntively flat, the market is almost always a good buy near the bottom of its trading \nchannel and a good sell near the top.\n2.\tWhen the trend turns up and a channel rises sharply, an upside penetration of the \nupper channel line shows very strong bullish momentum. It indicates that you \nwill probably have one more chance to sell in the area of the highs that are being \nmade. It is normal for the market to return to its moving average after an upside \npenetration, offering an excellent buying opportunity. Sell your long position \nwhen the market returns to the top of the channel.", - "type": "text" - }, - { - "block_id": "p186-b8", - "global_id": 1992, - "bbox": [ - 71.98, - 480.84, - 434.74, - 536.16 - ], - "text": "This also works in reverse during sharp downtrends. A breakout below the lower \nchannel line indicates that a pullback to the moving average is likely to occur, offer-\ning another opportunity to sell short. When prices return to the lower channel line, \nit is time to cover shorts.", - "type": "text" - }, - { - "block_id": "p186-b9", - "global_id": 1993, - "bbox": [ - 71.98, - 536.86, - 434.7, - 592.18 - ], - "text": "The best trading signals are given by a combination of channels and other techni-\ncal indicators (Figure 41.3). Indicators give some of their strongest signals when \nthey diverge from prices. A method for combining channels and divergences was \ndescribed to me by the late Manning Stoller.", - "type": "text" - }, - { - "block_id": "p186-b10", - "global_id": 1994, - "bbox": [ - 75.96, - 600.87, - 434.68, - 688.26 - ], - "text": "1.\tA sell signal is given when prices reach the upper channel line while an indicator, \nsuch as MACD-Histogram, traces a bearish divergence. It shows that bulls are \nbecoming weak when prices are overextended.\n2.\tA buy signal is given when prices reach the lower channel line while an indicator \ntraces a bullish divergence. It shows that bears are becoming weak when prices \nare already low.", - "type": "text" - } - ] - }, - { - "page_num": 187, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p187-b0", - "global_id": 1995, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "41. CHANNEL TRADING SYSTEMS\t\n171", - "type": "text" - }, - { - "block_id": "p187-b1", - "global_id": 1996, - "bbox": [ - 88.02, - 57.83, - 434.71, - 99.14 - ], - "text": "We must analyze markets in multiple timeframes. Look for buys on the daily \ncharts when prices are rising on the weeklies. Look for shorting opportunities \non the dailies when prices are sinking on the weekly charts.", - "type": "text" - }, - { - "block_id": "p187-b2", - "global_id": 1997, - "bbox": [ - 76.02, - 106.84, - 434.68, - 148.15 - ], - "text": "3.\tGo long near the moving average when the channel is rising, and take profits at \nthe upper channel line. Go short near the MA when the channel is falling, and \ntake profits at the lower channel line.", - "type": "text" - }, - { - "block_id": "p187-b3", - "global_id": 1998, - "bbox": [ - 87.97, - 156.84, - 434.68, - 212.16 - ], - "text": "When a channel rises, it pays to trade only from the long side, buying in the value \nzone which lies between the fast and slow moving averages, and then selling at \nthe upper channel line. When a channel declines, it pays to short in the value \nzone and cover at the lower channel line.", - "type": "text" - }, - { - "block_id": "p187-b4", - "global_id": 1999, - "bbox": [ - 175.6, - 379.91, - 241.25, - 387.73 - ], - "text": "A\nB\nC", - "type": "text" - }, - { - "block_id": "p187-b5", - "global_id": 2000, - "bbox": [ - 274.6, - 397.91, - 279.53, - 405.73 - ], - "text": "D", - "type": "text" - }, - { - "block_id": "p187-b6", - "global_id": 2001, - "bbox": [ - 311.0, - 379.91, - 360.56, - 387.73 - ], - "text": "E\nF\nG", - "type": "text" - }, - { - "block_id": "p187-b7", - "global_id": 2002, - "bbox": [ - 72.36, - 469.58, - 412.88, - 490.62 - ], - "text": "FIGURE 41.3  SIX daily with 26- and 13-day EMAs, 6% channel, MACD-Histogram 12-26-9, and the \nImpulse system. (Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p187-b8", - "global_id": 2003, - "bbox": [ - 72.4, - 496.43, - 276.56, - 509.33 - ], - "text": "Combining Channels and MACD Signals", - "type": "text" - }, - { - "block_id": "p187-b9", - "global_id": 2004, - "bbox": [ - 72.4, - 513.33, - 426.27, - 523.83 - ], - "text": "This chart reflects several months of action in Six Flags Entertainment Corporation (SIX).", - "type": "text" - }, - { - "block_id": "p187-b10", - "global_id": 2005, - "bbox": [ - 88.4, - 531.33, - 432.01, - 541.83 - ], - "text": "Area A—while prices have reached the lower channel line, a new record low of MACD-", - "type": "text" - }, - { - "block_id": "p187-b11", - "global_id": 2006, - "bbox": [ - 88.4, - 543.33, - 434.53, - 589.81 - ], - "text": "Histogram suggests that this low will be retested or exceeded.\nArea B—channel line rejected, rally is likely ahead.\nArea C—prices reached their upper channel line and recoiled—reversal is likely.\nArea D—buy. Prices have reached the lower channel line, while MACD-Histogram has", - "type": "text" - }, - { - "block_id": "p187-b12", - "global_id": 2007, - "bbox": [ - 88.4, - 591.32, - 434.45, - 613.81 - ], - "text": "traced out a bullish divergence between bottoms A and D, with a break at C.\nArea E—while prices have reached their upper channel line, a new record high of", - "type": "text" - }, - { - "block_id": "p187-b13", - "global_id": 2008, - "bbox": [ - 88.4, - 615.31, - 434.5, - 637.8 - ], - "text": "MACD-Histogram suggests that this high is likely to be retested or exceeded.\nArea F—pullback to value completed; MACD-Histogram breaks below zero, creating a", - "type": "text" - }, - { - "block_id": "p187-b14", - "global_id": 2009, - "bbox": [ - 88.4, - 639.3, - 432.02, - 661.8 - ], - "text": "setup for a possible bearish divergence. Still may buy to ride back to the prior high.\nArea G—sell and sell short. Prices have reached the upper channel line, while MACD-", - "type": "text" - }, - { - "block_id": "p187-b15", - "global_id": 2010, - "bbox": [ - 100.4, - 663.3, - 434.47, - 685.79 - ], - "text": "Histogram has traced out a bearish divergence between tops E and G, with a break \nat F.", - "type": "text" - } - ] - }, - { - "page_num": 188, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p188-b0", - "global_id": 2011, - "bbox": [ - 72.0, - 33.66, - 432.05, - 47.21 - ], - "text": "172\t\nTRADING SYSTEMS", - "type": "text" - }, - { - "block_id": "p188-b1", - "global_id": 2012, - "bbox": [ - 72.0, - 57.1, - 366.38, - 74.04 - ], - "text": "Standard Deviation Channels (Bollinger Bands)", - "type": "text" - }, - { - "block_id": "p188-b2", - "global_id": 2013, - "bbox": [ - 72.0, - 79.73, - 432.06, - 107.04 - ], - "text": "The unique feature of these channels is that their width changes in response to mar-\nket volatility. Their trading rules differ from those of regular channels.", - "type": "text" - }, - { - "block_id": "p188-b3", - "global_id": 2014, - "bbox": [ - 75.94, - 121.73, - 434.71, - 263.04 - ], - "text": "1.\tCalculate a 21-day EMA.\n2.\tSubtract the 21-day EMA from each closing price to obtain all the deviations \nfrom the average.\n3.\tSquare each of the deviations and get their sum to obtain the total squared \ndeviation.\n4.\tDivide the total squared deviation by the EMA length to obtain the average \nsquared deviation.\n5.\tTake the square root of the average squared deviation to obtain the standard \ndeviation.", - "type": "text" - }, - { - "block_id": "p188-b4", - "global_id": 2015, - "bbox": [ - 71.95, - 277.73, - 434.7, - 347.05 - ], - "text": "These steps, outlined by Bollinger, have been included in many software packages. \nA band becomes wider when volatility increases but it narrows down when volatil-\nity decreases. A narrow band identifies a sleepy, quiet market. Major market moves \ntend to erupt from flat bases. Bollinger bands help identify transitions from quiet to \nactive markets.", - "type": "text" - }, - { - "block_id": "p188-b5", - "global_id": 2016, - "bbox": [ - 71.95, - 347.75, - 434.71, - 403.07 - ], - "text": "These bands are useful for options traders because option prices are largely driven \nby swings in volatility. Narrow Bollinger bands help you buy when volatility is low \nand options are relatively cheap. Wide bands help you decide to write options when \nvolatility is high and options are expensive.", - "type": "text" - }, - { - "block_id": "p188-b6", - "global_id": 2017, - "bbox": [ - 71.95, - 403.76, - 434.69, - 473.09 - ], - "text": "When we return to options in the following chapters, you’ll read that buying \noptions is a losers’ game. Professional traders write options. Wide Bollinger Bands \ncan signal when to be more active with your writes. If you trade stocks or futures \nrather than options, it’s better to use regular channels as profit targets; trading is \nhard enough without trying to shoot at a moving target, such as a Bollinger Band.", - "type": "text" - } - ] - }, - { - "page_num": 189, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p189-b0", - "global_id": 2018, - "bbox": [ - 72.0, - 118.61, - 348.72, - 171.84 - ], - "text": "Trading Vehicles", - "type": "text" - }, - { - "block_id": "p189-b1", - "global_id": 2019, - "bbox": [ - 72.1, - 673.7, - 432.15, - 687.25 - ], - "text": "173", - "type": "text" - }, - { - "block_id": "p189-b2", - "global_id": 2020, - "bbox": [ - 348.1, - 59.86, - 395.91, - 73.41 - ], - "text": "PA R T 8\nPA R T 8", - "type": "text" - }, - { - "block_id": "p189-b3", - "global_id": 2021, - "bbox": [ - 71.2, - 331.94, - 92.84, - 372.34 - ], - "text": "A", - "type": "text" - }, - { - "block_id": "p189-b4", - "global_id": 2022, - "bbox": [ - 71.97, - 337.63, - 434.72, - 392.95 - ], - "text": "ll trading vehicles are divided into several classes. Their charts may look similar \non a computer screen, but don’t let their looks deceive you. Each group has \nits pluses and minuses. They offer different profit opportunities and carry different \nrisks. Choosing what to trade is among your most important market decisions.", - "type": "text" - }, - { - "block_id": "p189-b5", - "global_id": 2023, - "bbox": [ - 71.97, - 393.64, - 434.72, - 420.96 - ], - "text": "We’ll review the following major groups to help you make a conscious decision \non which to focus:", - "type": "text" - }, - { - "block_id": "p189-b6", - "global_id": 2024, - "bbox": [ - 72.03, - 428.63, - 111.68, - 441.94 - ], - "text": "■\n■Stocks", - "type": "text" - }, - { - "block_id": "p189-b7", - "global_id": 2025, - "bbox": [ - 72.03, - 446.13, - 105.93, - 459.44 - ], - "text": "■\n■ETFs", - "type": "text" - }, - { - "block_id": "p189-b8", - "global_id": 2026, - "bbox": [ - 72.03, - 463.63, - 119.04, - 476.94 - ], - "text": "■\n■Options", - "type": "text" - }, - { - "block_id": "p189-b9", - "global_id": 2027, - "bbox": [ - 72.03, - 481.13, - 108.44, - 494.44 - ], - "text": "■\n■CFDs", - "type": "text" - }, - { - "block_id": "p189-b10", - "global_id": 2028, - "bbox": [ - 72.03, - 498.63, - 116.43, - 511.94 - ], - "text": "■\n■Futures", - "type": "text" - }, - { - "block_id": "p189-b11", - "global_id": 2029, - "bbox": [ - 72.03, - 516.13, - 108.81, - 529.44 - ], - "text": "■\n■Forex", - "type": "text" - }, - { - "block_id": "p189-b12", - "global_id": 2030, - "bbox": [ - 72.05, - 537.13, - 434.72, - 564.44 - ], - "text": "Whichever group you select, make sure your trading vehicle meets two essential \ncriteria: liquidity and volatility.", - "type": "text" - }, - { - "block_id": "p189-b13", - "global_id": 2031, - "bbox": [ - 72.0, - 579.13, - 434.79, - 634.45 - ], - "text": "Liquidity refers to the average daily volume, compared with other vehicles in its \ngroup. The higher it is, the easier it’ll be for you to get in and out of your trades. \nYou may build a profitable position in an illiquid stock, only to lose at the exit due to \nespecially bad slippage.", - "type": "text" - }, - { - "block_id": "p189-b14", - "global_id": 2032, - "bbox": [ - 72.02, - 635.14, - 434.68, - 662.46 - ], - "text": "I learned this lesson decades ago, after building a 6,000-share position in a fairly \ninactive stock. When it began to sag, I decided to sell, and that’s when I discovered", - "type": "text" - } - ] - }, - { - "page_num": 190, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p190-b0", - "global_id": 2033, - "bbox": [ - 72.0, - 33.66, - 432.05, - 47.21 - ], - "text": "174\t\nTRADING VEHICLES", - "type": "text" - }, - { - "block_id": "p190-b1", - "global_id": 2034, - "bbox": [ - 72.0, - 57.83, - 434.76, - 155.16 - ], - "text": "that its average daily volume was only 9,000 shares. There were so few people trad-\ning it that my own sales began to depress its price. Taking several days to trade out \nof my 6,000-share lot felt like taking a fat cow through a very narrow gate and \nleaving large strips of its hide on gate posts. Now I focus on U.S. stocks that trade \nover a million shares a day. That’s where I can slip in and out of my trades unno-\nticed and unmolested. With a large number of traders, there are plenty of orders to \nbuy and sell, and my slippage, when it occurs, is small.", - "type": "text" - }, - { - "block_id": "p190-b2", - "global_id": 2035, - "bbox": [ - 72.0, - 169.83, - 434.76, - 239.15 - ], - "text": "Volatility is the extent of average short-term movement of a trading vehicle. The \nhigher the volatility of a trading instrument, the more opportunities it presents. \nPopular stocks tend to swing a lot. On the other hand, stocks of many utility compa-\nnies that are quite liquid are very hard to trade because of low volatility—they tend \nto stay in narrow ranges.", - "type": "text" - }, - { - "block_id": "p190-b3", - "global_id": 2036, - "bbox": [ - 72.04, - 239.85, - 434.8, - 365.19 - ], - "text": "There are several ways to measure volatility, but a good practical tool is “beta.” It \ncompares any vehicle’s volatility to its benchmark, such as a broad index. If a stock’s \nbeta is 1, it means that its volatility is equal to that of the S&P 500. A beta of 2 means \nthat if the S&P rises 5%, the stock is likely to rally 10%, but it is also likely to drop \n10% if the S&P falls by 5%. A beta of 0.5 means that the stock is likely to rise or fall \nby half of the percentage of the S&P. It would be better for a beginner to focus on low \nbeta vehicles. You can find betas for most stocks on all key financial websites, starting \nwith Yahoo Finance. Betas are like trail markers on ski slopes: green for beginners, \nblue for intermediate skiers, and black diamonds for experts.", - "type": "text" - }, - { - "block_id": "p190-b4", - "global_id": 2037, - "bbox": [ - 71.97, - 379.83, - 434.73, - 491.16 - ], - "text": "Time Zones  Globalization has lured many people to trade far away from home. I \nmeet traders in Australia who trade U.S. stocks, and talk with traders in the United \nStates who wrestle with European indexes. Still, you should think twice before trad-\ning far away from your own time zone. Your data screen is connected to the world, \nbut your physical self is rooted in the area where you live. If you trade while sleepy, \nyou put yourself at a disadvantage. If your head is on the pillow while your trade is \nopen on the other side of the globe, you make it easier for your competitors to pick \nyour pockets.", - "type": "text" - }, - { - "block_id": "p190-b5", - "global_id": 2038, - "bbox": [ - 71.97, - 491.86, - 434.72, - 575.19 - ], - "text": "Some time zones are easier to trade than others. For example, it is comfortable to \ntrade the U.S. markets from Western Europe, where the New York Stock Exchange \nopens at 3:30 pm and closes at 10 pm. It is very hard to trade U.S. markets from Asia, \nwhere the time difference is likely to be 12 hours. There are always exceptions to a \nrule, and you may enjoy trading at night—but if you feel tired and sleepy, don’t push \nyourself but find a local market.", - "type": "text" - }, - { - "block_id": "p190-b6", - "global_id": 2039, - "bbox": [ - 72.0, - 589.66, - 434.75, - 631.14 - ], - "text": "Long or Short  There’s more to trading than buying and waiting for prices to rise. \nMarkets are two-way streets: they go down as well as up. Beginners only buy, but \nexperienced traders are comfortable with selling short.", - "type": "text" - }, - { - "block_id": "p190-b7", - "global_id": 2040, - "bbox": [ - 72.01, - 631.84, - 434.76, - 687.16 - ], - "text": "In a nutshell, to make money shorting you identify a vehicle that you expect to \ndrop, borrow it from your broker (giving him a deposit), and sell it. After it declines, \nyou buy it back at a cheaper price, return the borrowed shares to your broker, and \nget your deposit back. Your profit is the difference between the higher selling and", - "type": "text" - } - ] - }, - { - "page_num": 191, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p191-b0", - "global_id": 2041, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "42. STOCKS\t\n175", - "type": "text" - }, - { - "block_id": "p191-b1", - "global_id": 2042, - "bbox": [ - 71.94, - 57.83, - 434.68, - 113.15 - ], - "text": "lower buying prices. This is the same as in buying, only the process is reversed: sell \nfirst, buy later. Of course, shorting is too complex a topic to cover in two paragraphs, \nwhich is why I refer you to my latest book (prior to this one): The New Sell & Sell Short: \nHow to Take Profits, Cut Losses, and Benefit from Price Declines (John Wiley & Sons, 2011).", - "type": "text" - }, - { - "block_id": "p191-b2", - "global_id": 2043, - "bbox": [ - 73.55, - 140.86, - 165.89, - 159.5 - ], - "text": "■\n■42. Stocks", - "type": "text" - }, - { - "block_id": "p191-b3", - "global_id": 2044, - "bbox": [ - 72.0, - 169.83, - 434.66, - 211.14 - ], - "text": "A stock is a certificate of ownership of a business. If you buy 100 shares of a company \nthat had issued 100 million shares, you’ll own one-millionth of that firm. If other \npeople want to own that business, they’ll have to bid for your shares.", - "type": "text" - }, - { - "block_id": "p191-b4", - "global_id": 2045, - "bbox": [ - 72.0, - 211.84, - 434.74, - 281.16 - ], - "text": "When masses of people start liking the prospects of a business, their orders for \nits shares will push up the stock price. If they don’t like the outlook of that business, \nthey’ll start selling their shares, depressing prices. Public companies try to make their \nshares more attractive in order to push up share prices because it helps them raise \nmore equity or issue debt. Top executives’ bonuses are often tied to stock prices.", - "type": "text" - }, - { - "block_id": "p191-b5", - "global_id": 2046, - "bbox": [ - 72.0, - 281.86, - 434.72, - 379.19 - ], - "text": "Fundamental values, especially earnings, drive prices in the long run, but, as John \nMaynard Keynes, the famous economist and a canny stock picker once retorted—\n“In the long run we’re all dead.” Markets are full of cats and dogs, stocks of com-\npanies with feeble or nonexistent earnings that at some point fly through the roof, \ndefying gravity. Stocks of new sexy industries can levitate on expectations of future \nearnings rather than any real profits. Stocks of solidly profitable, well-run companies \nmay drift sideways or down if the crowd isn’t excited about their outlook.", - "type": "text" - }, - { - "block_id": "p191-b6", - "global_id": 2047, - "bbox": [ - 72.0, - 379.89, - 434.76, - 477.22 - ], - "text": "Warren Buffett is fond of saying that buying a stock makes you a partner of a \nmanic-depressive fellow he calls Mr. Market. Each day, Mr. Market runs up to you \nand offers to buy you out or sell his shares to you. Most of the time, you should \nignore him because he’s crazy, but occasionally Mr. Market becomes so depressed \nthat he offers you his shares for a song—and that’s when you should buy. At other \ntimes, he becomes so manic that he offers an insane price for your shares—and that’s \nwhen you should sell.", - "type": "text" - }, - { - "block_id": "p191-b7", - "global_id": 2048, - "bbox": [ - 72.0, - 477.92, - 434.77, - 575.25 - ], - "text": "Buffett’s idea is brilliant in its simplicity, but hard to implement. Mr. Market’s \nmood is so contagious that it sweeps most of us off our feet. People want to sell when \nMr. Market is depressed and buy when he is manic. To be a successful trader, you \nmust stand apart from the crowd. You need to define objective criteria that will help \nyou decide how high is too high and how low is too low. Buffett makes his decisions \non the basis of fundamental analysis and a fantastic gut feel. Traders can use the tools \nof technical analysis described in this book.", - "type": "text" - }, - { - "block_id": "p191-b8", - "global_id": 2049, - "bbox": [ - 72.0, - 575.94, - 434.76, - 645.27 - ], - "text": "What stocks will you trade? There are more than 20,000 of them in the United \nStates, and even more abroad. Beginners tend to spread themselves too thin. Afraid to \nmiss an opportunity, they buy scanning software. A person who doesn’t have a clear \nidea of how to trade a single stock will not be helped by tracking thousands. He’ll be \nmuch better off focusing on a handful of stocks and following them every day.", - "type": "text" - }, - { - "block_id": "p191-b9", - "global_id": 2050, - "bbox": [ - 72.0, - 645.96, - 434.77, - 687.28 - ], - "text": "We’ll return to the question of stock selection in Part 10 “Practical Details.” In \nbrief, it’s a good idea to limit your pool of trading candidates. That group can be \nsmall or large, depending on your skills and available time. A Greek friend of mine", - "type": "text" - } - ] - }, - { - "page_num": 192, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p192-b0", - "global_id": 2051, - "bbox": [ - 72.0, - 33.66, - 432.05, - 47.21 - ], - "text": "176\t\nTRADING VEHICLES", - "type": "text" - }, - { - "block_id": "p192-b1", - "global_id": 2052, - "bbox": [ - 72.0, - 57.83, - 434.76, - 99.14 - ], - "text": "calls his watch list of 200 stocks his harem. He’s owned every one of them in the \npast; he reviews them on weekends, selecting fewer than ten that he may take for a \nspin in the coming week.", - "type": "text" - }, - { - "block_id": "p192-b2", - "global_id": 2053, - "bbox": [ - 72.0, - 99.84, - 434.76, - 225.18 - ], - "text": "I have two “pools” in which I fish for trading ideas. On weekends, I run the 500 \ncomponent stocks of the S&P 500 through my divergence scanner and zoom in on \nstocks flagged by that scan, selecting a handful that I’ll consider trading during the \ncoming week. Second, I review Spike picks on weekends, figuring that among a \ndozen top traders submitting their favorite picks, there is bound to be at least one \nthat I’ll want to piggyback. The number of stocks I closely monitor during the week \nis always in single digits. This is just my style; I have friends who monitor several \ndozen stocks at any given time. Only you can tell what number is right for you, but \nyou should track only as many as you can focus on.", - "type": "text" - }, - { - "block_id": "p192-b3", - "global_id": 2054, - "bbox": [ - 73.55, - 252.86, - 155.19, - 271.5 - ], - "text": "■\n■43. ETFs", - "type": "text" - }, - { - "block_id": "p192-b4", - "global_id": 2055, - "bbox": [ - 72.0, - 281.83, - 434.76, - 393.16 - ], - "text": "An exchange-traded fund (ETF) is an investment vehicle that trades like a stock. \nDifferent ETFs hold different types of assets, such as stocks, commodities, or bonds, \nand they usually trade close to their net asset values. There are ETFs designed to \ntrack indexes, sectors, countries, commodities, bonds, futures, and forex. The lev-\neraged ETFs are designed to move double or triple the distance of the underlying \nindex. There are also inverse ETFs and leveraged inverse ETFs that trade opposite to \ntheir underlying assets: when an index falls, its inverse ETF rises and vice versa. The \nnumber of ETFs has reached thousands in recent years.", - "type": "text" - }, - { - "block_id": "p192-b5", - "global_id": 2056, - "bbox": [ - 72.0, - 393.86, - 434.75, - 491.19 - ], - "text": "With so many choices, what’s there not to like about ETFs? Actually, quite a lot.\nThe industry keeps quiet about the fact that there are two ETF markets. The pri-\nmary market is reserved for “authorized participants”—large broker-dealers who \nhave agreements with the ETF distributors to buy or sell large blocks, consisting of \ntens of thousands of ETF shares. These middlemen buy at wholesale and then sell to \nyou at retail. You, as a private trader, always sit in the back of the bus—in the second-\nary market.", - "type": "text" - }, - { - "block_id": "p192-b6", - "global_id": 2057, - "bbox": [ - 72.0, - 491.89, - 434.75, - 603.22 - ], - "text": "An active trader friend who reviewed this chapter added: “I believe that ‘autho-\nrized participants’ can also obtain ETF shares to short in large lots. My broker always \ntells me there are none available, not even of broadly held ETFs, which I can’t imag-\nine they don’t have lots of in inventory. When I ask them about this, they stonewall. \nI wonder how such a shorting transaction by an authorized participant is accounted \nfor. I wonder if it somehow ends up as paired transactions (both an up-volume pur-\nchase and a down-volume sale, cancelling each other out). If so, the added selling \npressure would be hidden from view.”", - "type": "text" - }, - { - "block_id": "p192-b7", - "global_id": 2058, - "bbox": [ - 72.0, - 603.92, - 434.7, - 673.24 - ], - "text": "Administrative expenses incurred by ETFs dampen investors’ returns. Accord-\ning to a study by Morgan Stanley, ETFs missed their 2009 targets by an average of \n1.25%, which was double the size of their “miss” in 2008. Those percentages are \nyour “haircuts” for the privilege of trading ETFs rather than individual stocks. The \nmore exotic the index tracked by an ETF, the greater your “haircut.”", - "type": "text" - } - ] - }, - { - "page_num": 193, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p193-b0", - "global_id": 2059, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "43. ETFS\t\n177", - "type": "text" - }, - { - "block_id": "p193-b1", - "global_id": 2060, - "bbox": [ - 71.94, - 57.83, - 434.7, - 113.15 - ], - "text": "Some ETFs lose value so fast that their issuers repeatedly perform reverse splits \nin order to raise prices back into double digits. With the passage of time, those ETFs \nsink back into single digits, and then their issuers perform another reverse split to \nmake their ETFs appeal to new suckers.", - "type": "text" - }, - { - "block_id": "p193-b2", - "global_id": 2061, - "bbox": [ - 71.94, - 113.84, - 434.7, - 169.16 - ], - "text": "A friend of mine lost over a million dollars last year: he anticipated a market de-\ncline and bought an ETF of a volatility index (volatility rises when markets fall). Sure \nenough, the market dropped 10% and volatility spiked—but his ETF went down \ninstead of up (Figure 43.1).", - "type": "text" - }, - { - "block_id": "p193-b3", - "global_id": 2062, - "bbox": [ - 71.94, - 169.86, - 434.6, - 253.19 - ], - "text": "Many ETFs “track” their underlying indexes in a shabby manner. After giving com-\nmodity ETFs a try, I wouldn’t touch them with a ten-foot pole, having experienced \nseveral days during which the underlying commodity went up, while my commodity \nETFs went down. I stopped trading country ETFs after running into several situa-\ntions in which a country index would rise to a new high, while my ETF would stay \nwell below the breakout level (Figure 43.2).", - "type": "text" - }, - { - "block_id": "p193-b4", - "global_id": 2063, - "bbox": [ - 71.94, - 253.88, - 434.63, - 295.2 - ], - "text": "The leveraged ETFs are more “futures-laden” than non-leveraged ETFs and have \nmuch greater rollover losses each month. The disadvantages that retail investors suf-\nfer are magnified in the leveraged ETFs. They may track their underlying vehicles", - "type": "text" - }, - { - "block_id": "p193-b5", - "global_id": 2064, - "bbox": [ - 218.9, - 333.21, - 233.5, - 341.57 - ], - "text": "$VIX", - "type": "text" - }, - { - "block_id": "p193-b6", - "global_id": 2065, - "bbox": [ - 72.0, - 507.58, - 408.06, - 517.63 - ], - "text": "FIGURE 43.1  $VIX, the volatility index, and VXX, a volatility ETF, weekly. (Charts by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p193-b7", - "global_id": 2066, - "bbox": [ - 72.0, - 523.43, - 269.7, - 536.33 - ], - "text": "Tracking Volatility: Reality and Fantasy", - "type": "text" - }, - { - "block_id": "p193-b8", - "global_id": 2067, - "bbox": [ - 72.0, - 540.33, - 434.08, - 562.82 - ], - "text": "Can you believe that these two charts, covering the same period of time, are supposed to \ntrack the same thing?", - "type": "text" - }, - { - "block_id": "p193-b9", - "global_id": 2068, - "bbox": [ - 72.0, - 564.33, - 434.12, - 634.8 - ], - "text": "Volatility is a hugely important factor in market movements. Just as prices oscillate \nbetween uptrends and downtrends, they oscillate between periods of low and high volatil-\nity. This is why many analysts and traders pay close attention to $VIX—the volatility index. \nThe chart on the left shows that during the past two years $VIX oscillated between the low \nteens and mid-twenties (it briefly rallied above $80 during the 2008 bear market). Traders \nhave a saying: “when VIX is high, it’s safe to buy; when VIX is low, go slow.”", - "type": "text" - }, - { - "block_id": "p193-b10", - "global_id": 2069, - "bbox": [ - 72.0, - 636.31, - 434.14, - 670.8 - ], - "text": "Since $VIX fluctuations appear fairly orderly, some traders attempt to trade it using \nseveral ETFs, such as VXX, shown on the right. During the same time, VXX has steadily \ndeclined, losing 90% of its value. How’s that for tracking volatility?", - "type": "text" - }, - { - "block_id": "p193-b11", - "global_id": 2070, - "bbox": [ - 399.0, - 333.33, - 412.04, - 341.54 - ], - "text": "VXX", - "type": "text" - } - ] - }, - { - "page_num": 194, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p194-b0", - "global_id": 2071, - "bbox": [ - 72.0, - 33.66, - 432.05, - 47.21 - ], - "text": "178\t\nTRADING VEHICLES", - "type": "text" - }, - { - "block_id": "p194-b1", - "global_id": 2072, - "bbox": [ - 72.0, - 365.03, - 434.64, - 392.34 - ], - "text": "more or less correctly during a single trading session, but deviate widely with the \npassage of time.", - "type": "text" - }, - { - "block_id": "p194-b2", - "global_id": 2073, - "bbox": [ - 72.0, - 393.04, - 434.74, - 462.36 - ], - "text": "The only ETFs that trade more or less decently are broadly based ones, such \nas SPY and QQQ. Overall, ETFs attract many unsophisticated retail clients, but \nthe pervasive haircuts and poor tracking of the underlying securities slant the field \nagainst them. Remember an important principle: TANSTAFL—“there ain’t no such \nthing as a free lunch.”  When it comes to ETFs: buyer beware.", - "type": "text" - }, - { - "block_id": "p194-b3", - "global_id": 2074, - "bbox": [ - 73.55, - 490.06, - 176.55, - 508.7 - ], - "text": "■\n■44. Options", - "type": "text" - }, - { - "block_id": "p194-b4", - "global_id": 2075, - "bbox": [ - 72.0, - 519.03, - 434.75, - 630.36 - ], - "text": "An option is a derivative instrument—a bet that another security, such as a stock, an \nindex, or a future will reach a certain price by a certain date. A call gives its holder \na right, but not an obligation, to buy a certain quantity of a specified security at a \nspecified price at a specified time. It is a bet on a price increase. A put is a right, but \nnot an obligation, to sell a certain quantity of a specified security at a specified price \nat a specified time. It is a bet on a price drop. There are two parties in every options \ntrade: a buyer and a seller, also called a writer. Buyers buy options, while writers \ncreate options and sell them to buyers.", - "type": "text" - }, - { - "block_id": "p194-b5", - "global_id": 2076, - "bbox": [ - 72.0, - 631.06, - 434.76, - 672.38 - ], - "text": "The key point to keep in mind is that option buyers as a group lose money over \ntime, despite occasional lucky trades. At the other end of the table, options writers \nas a group make steady money despite occasional losses.", - "type": "text" - }, - { - "block_id": "p194-b6", - "global_id": 2077, - "bbox": [ - 72.0, - 238.18, - 391.29, - 248.23 - ], - "text": "FIGURE 43.2  Natural Gas Spot and UNG, a natural gas ETF, monthly. (Charts by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p194-b7", - "global_id": 2078, - "bbox": [ - 72.0, - 254.03, - 276.6, - 266.93 - ], - "text": "Natural Gas Market: Reality and Fantasy", - "type": "text" - }, - { - "block_id": "p194-b8", - "global_id": 2079, - "bbox": [ - 72.0, - 270.93, - 434.15, - 341.41 - ], - "text": "The chart on the left shows prices of the natural gas spot market: it topped out near $13.5 \nin 2008 and began a bear market that ended with a double bottom. A false downside break-\nout near $2 in 2012 helped identify a buying opportunity. A futures chart (not shown) looks \nvery similar to the spot chart—but take a look at UNG, the natural gas ETF on the right. As \nit slid interminably from above $500 to below $20, I lost count of the number of friends and \nclients who complained of losing money trying to pick its bottom.", - "type": "text" - }, - { - "block_id": "p194-b9", - "global_id": 2080, - "bbox": [ - 196.7, - 63.31, - 414.76, - 72.14 - ], - "text": "Natural Gas\nUNG", - "type": "text" - } - ] - }, - { - "page_num": 195, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p195-b0", - "global_id": 2081, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "44. OPTIONS\t\n179", - "type": "text" - }, - { - "block_id": "p195-b1", - "global_id": 2082, - "bbox": [ - 71.94, - 57.83, - 434.66, - 127.15 - ], - "text": "Writers create options out of thin air to meet demand from option buyers. One \nof my students, a market-maker on the floor of the American Stock Exchange, said to \nme: “Options are a hope business. You can buy hope or sell hope. I am a professional—\nI sell hope. I come to the floor in the morning and find what the public hopes for. Then \nI price that hope and sell it to them.”", - "type": "text" - }, - { - "block_id": "p195-b2", - "global_id": 2083, - "bbox": [ - 71.94, - 127.85, - 434.64, - 169.16 - ], - "text": "Each option has an exercise price (also called strike price). If a stock fails to reach \nthat price before the exercise date, the option expires worthless and the buyer loses \nwhat he paid, while the writer keeps his loot, whose polite name is premium.", - "type": "text" - }, - { - "block_id": "p195-b3", - "global_id": 2084, - "bbox": [ - 72.03, - 176.66, - 434.79, - 190.21 - ], - "text": "■\n■An option is at-the-money when the current price of the underlying security", - "type": "text" - }, - { - "block_id": "p195-b4", - "global_id": 2085, - "bbox": [ - 83.8, - 190.83, - 192.84, - 204.14 - ], - "text": "equals the exercise price.", - "type": "text" - }, - { - "block_id": "p195-b5", - "global_id": 2086, - "bbox": [ - 72.03, - 208.16, - 434.78, - 221.71 - ], - "text": "■\n■A call is out-of-the-money when the current price of the underlying security", - "type": "text" - }, - { - "block_id": "p195-b6", - "global_id": 2087, - "bbox": [ - 83.8, - 222.33, - 434.8, - 263.65 - ], - "text": "is below the exercise price. A put is out-of-the-money when the current price \nof the underlying is above the exercise price. The farther out-of-the-money, the \ncheaper the option.", - "type": "text" - }, - { - "block_id": "p195-b7", - "global_id": 2088, - "bbox": [ - 72.03, - 267.66, - 434.8, - 281.21 - ], - "text": "■\n■A call is in-the-money when the current price of the underlying security is", - "type": "text" - }, - { - "block_id": "p195-b8", - "global_id": 2089, - "bbox": [ - 83.8, - 281.83, - 434.72, - 309.14 - ], - "text": "above the exercise price. A put is in-the-money when the current price of the \nunderlying is below the exercise price.", - "type": "text" - }, - { - "block_id": "p195-b9", - "global_id": 2090, - "bbox": [ - 72.05, - 316.84, - 434.76, - 358.15 - ], - "text": "An option can be at-the-money, out-of-the-money, or in-the-money at different \ntimes in its life, as the price of the underlying security fluctuates. The price of every \noption has two components—an intrinsic value and a time value.", - "type": "text" - }, - { - "block_id": "p195-b10", - "global_id": 2091, - "bbox": [ - 72.03, - 365.66, - 434.73, - 379.21 - ], - "text": "■\n■An option’s intrinsic value rises above zero only when it’s in-the-money. If the", - "type": "text" - }, - { - "block_id": "p195-b11", - "global_id": 2092, - "bbox": [ - 83.8, - 379.83, - 434.8, - 421.15 - ], - "text": "exercise price of a call is $80 and the underlying security rises to $83, the intrinsic \nvalue of your call will be $3. If the security is at or below $80, the intrinsic value \nof that call is zero.", - "type": "text" - }, - { - "block_id": "p195-b12", - "global_id": 2093, - "bbox": [ - 72.03, - 425.16, - 434.73, - 438.71 - ], - "text": "■\n■The other component of an option’s price is time value. If the stock trades at", - "type": "text" - }, - { - "block_id": "p195-b13", - "global_id": 2094, - "bbox": [ - 83.8, - 439.33, - 434.8, - 494.65 - ], - "text": "$74 and people pay $2 for an $80 call, the entire $2 represents time value. If the \nstock rises to $83, and the price of the call jumps to $4, $3 of that is intrinsic value \n($83 – $80), while $1 is time value (the hope that this stock will rise even higher \nduring the remaining life of that option).", - "type": "text" - }, - { - "block_id": "p195-b14", - "global_id": 2095, - "bbox": [ - 84.05, - 502.34, - 259.78, - 515.65 - ], - "text": "Option prices depend on several factors:", - "type": "text" - }, - { - "block_id": "p195-b15", - "global_id": 2096, - "bbox": [ - 72.03, - 523.33, - 434.78, - 536.64 - ], - "text": "■\n■The farther out-of-the-money the exercise price, the cheaper the option—the", - "type": "text" - }, - { - "block_id": "p195-b16", - "global_id": 2097, - "bbox": [ - 83.8, - 537.33, - 432.0, - 564.64 - ], - "text": "underlying security must travel a longer distance to make the option worth any-\nthing before it expires.", - "type": "text" - }, - { - "block_id": "p195-b17", - "global_id": 2098, - "bbox": [ - 72.03, - 568.83, - 434.75, - 582.14 - ], - "text": "■\n■The closer the expiration day, the cheaper the option—it has less time to fulfill", - "type": "text" - }, - { - "block_id": "p195-b18", - "global_id": 2099, - "bbox": [ - 83.8, - 582.83, - 434.73, - 610.14 - ], - "text": "the hope. The speed with which an option loses value is called “time decay,” which \ndoesn’t occur in a straight line but becomes steeper as the expiration nears.", - "type": "text" - }, - { - "block_id": "p195-b19", - "global_id": 2100, - "bbox": [ - 72.03, - 614.33, - 434.73, - 627.64 - ], - "text": "■\n■The less volatile the underlying security, the cheaper the option, because it has a", - "type": "text" - }, - { - "block_id": "p195-b20", - "global_id": 2101, - "bbox": [ - 83.8, - 628.33, - 253.44, - 641.64 - ], - "text": "smaller chance of making a large move.", - "type": "text" - }, - { - "block_id": "p195-b21", - "global_id": 2102, - "bbox": [ - 72.03, - 645.83, - 434.72, - 659.14 - ], - "text": "■\n■Minor factors influencing option prices include the current level of interest rates", - "type": "text" - }, - { - "block_id": "p195-b22", - "global_id": 2103, - "bbox": [ - 83.8, - 659.83, - 280.83, - 673.14 - ], - "text": "and the dividend rate of the underlying stock.", - "type": "text" - } - ] - }, - { - "page_num": 196, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p196-b0", - "global_id": 2104, - "bbox": [ - 72.0, - 33.66, - 432.05, - 47.21 - ], - "text": "180\t\nTRADING VEHICLES", - "type": "text" - }, - { - "block_id": "p196-b1", - "global_id": 2105, - "bbox": [ - 72.0, - 57.83, - 434.72, - 127.15 - ], - "text": "Different factors that impact option pricing may clash and partly cancel each \nother out. For example, if a market drops sharply, reducing the value of calls, the \nincreased volatility will lift option values, and the calls may lose less than expected. \nThere are several mathematical models, such as Black-Scholes, widely described in \noptions literature, that are used to determine what is called a fair value of any option.", - "type": "text" - }, - { - "block_id": "p196-b2", - "global_id": 2106, - "bbox": [ - 72.0, - 147.2, - 170.04, - 164.13 - ], - "text": "Buying Options", - "type": "text" - }, - { - "block_id": "p196-b3", - "global_id": 2107, - "bbox": [ - 72.0, - 169.83, - 434.71, - 197.14 - ], - "text": "The simplest and easiest approach to options is to buy them. That’s exactly what \nbeginners do, and unless they learn quickly and change, their accounts are doomed.", - "type": "text" - }, - { - "block_id": "p196-b4", - "global_id": 2108, - "bbox": [ - 72.0, - 197.84, - 434.76, - 309.17 - ], - "text": "This is the standard line of brokerage house propaganda: “Options offer lever-\nage—an ability to control large positions with a small outlay of cash. The entire risk \nof an option is limited to the price you pay for it. Options allow traders to make \nmoney fast when they’re right, but if the market reverses, you can walk away and \nowe nothing!”  They fail to mention that in order to profit from buying an option you \nmust be right in three ways. You must choose the right stock, predict the extent of \nits move, and forecast how fast it’ll get there. If you’re wrong on even one of these \nthree choices, you’ll lose money.", - "type": "text" - }, - { - "block_id": "p196-b5", - "global_id": 2109, - "bbox": [ - 72.0, - 309.87, - 434.76, - 337.18 - ], - "text": "Ever tried tossing a ball through three rings at an amusement park? This triple \ncomplexity makes buying options a losing game.", - "type": "text" - }, - { - "block_id": "p196-b6", - "global_id": 2110, - "bbox": [ - 72.0, - 337.88, - 434.75, - 421.2 - ], - "text": "A stock, an index, or a future can do one of three things: rise, fall, or stay flat. \nWhen you buy a call, you can profit only if the market rises; you lose if it goes down \nor stays flat. You can lose even if it rises, but not fast enough. When you buy a put, \nyou win only if the market falls fast enough. An option buyer makes money only if \nthe market goes his way at a good enough speed, but loses if it moves his way slowly, \nstays flat, or goes against him.", - "type": "text" - }, - { - "block_id": "p196-b7", - "global_id": 2111, - "bbox": [ - 72.0, - 421.9, - 434.77, - 491.22 - ], - "text": "An option buyer has one chance out of three to win—but the odds are two out of \nthree in favor of an option writer. No wonder the pros write options. A pro sells a \ncall, and if a stock drops, stays flat, or even rises slowly, that call will expire worth-\nless, and he’ll keep the premium. He sells poor buyers hope—and as that hope turns \nout to be worthless, he keeps their money.", - "type": "text" - }, - { - "block_id": "p196-b8", - "global_id": 2112, - "bbox": [ - 72.0, - 491.92, - 434.76, - 547.24 - ], - "text": "Options attract hordes of small traders who can’t afford to buy stocks. To get a \nbigger bang for their buck, they buy calls as if those were substitutes for stocks. This \ndoesn’t work because options move differently from stocks. Gullible amateurs buy \nempty hopes, which the pros are delighted to sell to them.", - "type": "text" - }, - { - "block_id": "p196-b9", - "global_id": 2113, - "bbox": [ - 72.0, - 547.94, - 434.74, - 673.28 - ], - "text": "Beginners, gamblers, and undercapitalized traders make up the majority of option \nbuyers. Just think of all the money those hapless folks lose in their eagerness to get \nrich quick. Who gets all that money? Some of it goes for brokerage commissions, \nbut the bulk flows into the pockets of option writers. Well-capitalized professionals \nwrite options rather than buy them. Option writing is a capital-intensive business: \nyou need hundreds of thousands of dollars at a minimum to do it right, and most suc-\ncessful writers operate with millions. Writing options is a serious game for knowl-\nedgeable, disciplined, and well-capitalized traders. If your account is too small for \noption writing, wait until it grows bigger.", - "type": "text" - } - ] - }, - { - "page_num": 197, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p197-b0", - "global_id": 2114, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "44. OPTIONS\t\n181", - "type": "text" - }, - { - "block_id": "p197-b1", - "global_id": 2115, - "bbox": [ - 71.94, - 57.83, - 434.69, - 113.15 - ], - "text": "Markets are like pumps that suck money out of pockets of the poorly informed \nmajority and into the wallets of a savvy minority. Smart traders in any market look \nfor situations in which the majority does something one way, while a small, moneyed \nminority does the opposite. Options are a great example of this rule.", - "type": "text" - }, - { - "block_id": "p197-b2", - "global_id": 2116, - "bbox": [ - 72.0, - 133.2, - 174.55, - 150.13 - ], - "text": "Writing Options", - "type": "text" - }, - { - "block_id": "p197-b3", - "global_id": 2117, - "bbox": [ - 72.0, - 155.83, - 434.7, - 183.14 - ], - "text": "There are two main types of option writing. Covered writers buy a stock and write \noptions against it. Naked writers write calls and puts on stocks they don’t own.", - "type": "text" - }, - { - "block_id": "p197-b4", - "global_id": 2118, - "bbox": [ - 72.0, - 183.67, - 434.74, - 281.17 - ], - "text": "Covered writers own underlying securities. For example, a fund may hold a \nlarge position in IBM stock and sell calls against it. If the stock doesn’t rise to the \nexercise price during the life of those calls, the options will expire worthless. The \ncovered writer will add his premium to the fund and write a new call with a new \nexpiration date. If IBM does rise to the exercise price and “gets called,” they’ll deliver \ntheir stock at its strike price, collect the money, and use the freed-up capital to buy \nanother stock and write calls against it.", - "type": "text" - }, - { - "block_id": "p197-b5", - "global_id": 2119, - "bbox": [ - 72.0, - 281.86, - 434.74, - 365.19 - ], - "text": "Large funds tend to use computerized models for buying stocks and writing cov-\nered calls. Covered writing is a mathematically demanding, capital-intensive busi-\nness. Most serious players spread their costs, including staff and equipment, across \na large capital base. A small trader doesn’t have much of an edge in this expensive \nenterprise. Covered writing was very profitable in the early years of exchange-traded \noptions. By now the field is very crowded, and the returns have become thinner.", - "type": "text" - }, - { - "block_id": "p197-b6", - "global_id": 2120, - "bbox": [ - 72.0, - 365.72, - 434.74, - 463.22 - ], - "text": "Naked writers sell options without owning their underlying securities; they back \nup their writes with cash in their accounts. A naked writer collects his premium when \nhe opens a trade, but his risk is unlimited if that position goes against him. If you own \na stock, sell a covered call, and that stock rises to its exercise price and gets called, \nyou have something to deliver. If you sell a naked call and the stock rises to or above \nits exercise price, you’ll have to pay. Imagine selling calls on a stock that becomes a \ntakeover play and opens $50 higher the next morning—you still have to deliver.", - "type": "text" - }, - { - "block_id": "p197-b7", - "global_id": 2121, - "bbox": [ - 72.0, - 463.92, - 434.71, - 547.24 - ], - "text": "This combination of limited rewards with unlimited risks scares most traders \naway from naked writing—but as usual, there’s a gap between perception and real-\nity. A far-out-of-the-money option with a short time to the expiration is very likely \nto expire worthless, meaning the writer will profit. The risk/reward ratio in naked \nwriting is better than it looks, and there are techniques for reducing the impact of a \nrare adverse move.", - "type": "text" - }, - { - "block_id": "p197-b8", - "global_id": 2122, - "bbox": [ - 72.0, - 547.94, - 434.77, - 645.27 - ], - "text": "Savvy naked writers tend to sell out-of-the-money calls and puts whose underly-\ning stocks or futures are unlikely to reach their strike prices during the remaining life \nof an option. They sell not just hopes but distant hopes. Good writers track volatility \nto find how far a stock is likely to move and then sell options outside of that range. \nThis game goes into high gear during the week or two prior to option expiration, \nwhen the floor mints money out of thin air, selling naked puts and calls that have \nalmost no chance of reaching their exercise price.", - "type": "text" - }, - { - "block_id": "p197-b9", - "global_id": 2123, - "bbox": [ - 72.0, - 645.97, - 434.75, - 673.28 - ], - "text": "Cautious writers close their positions without waiting for the expiration dates. \nIf you write a call at 90 cents and it goes down to 10 cents, it makes sense to buy it", - "type": "text" - } - ] - }, - { - "page_num": 198, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p198-b0", - "global_id": 2124, - "bbox": [ - 72.0, - 33.66, - 432.05, - 47.21 - ], - "text": "182\t\nTRADING VEHICLES", - "type": "text" - }, - { - "block_id": "p198-b1", - "global_id": 2125, - "bbox": [ - 72.0, - 57.83, - 434.74, - 99.14 - ], - "text": "back and unwind your position. You’ve already earned the bulk of potential profit, \nso why expose yourself to continued risk? It’s cheaper to pay another commission, \nbook your profits, and look for another writing opportunity.", - "type": "text" - }, - { - "block_id": "p198-b2", - "global_id": 2126, - "bbox": [ - 72.0, - 99.84, - 434.77, - 183.17 - ], - "text": "Becoming a naked writer requires iron discipline. The size of your writes and the \nnumber of positions must be strictly determined by your money management rules. \nIf you sell a naked call and the stock rallies above its exercise price, it exposes you to \nthe risk of ruin. You must decide in advance at what level you will cut and run, tak-\ning a relatively small loss. A naked seller cannot afford to sit and hope when a stock \nmoves against him.", - "type": "text" - }, - { - "block_id": "p198-b3", - "global_id": 2127, - "bbox": [ - 72.0, - 199.2, - 168.66, - 216.13 - ], - "text": "Writer’s Choice", - "type": "text" - }, - { - "block_id": "p198-b4", - "global_id": 2128, - "bbox": [ - 72.0, - 221.83, - 434.75, - 291.15 - ], - "text": "Time is the enemy of options buyers. Every buyer has lived through this sad se-\nquence: they buy a call, the stock rises, but their option fades to zero, and they lose \nmoney. Buyers lose when the underlying security takes longer than expected to get \nto the level at which they can collect on their bet. Most options become worthless \nby their expiration date.", - "type": "text" - }, - { - "block_id": "p198-b5", - "global_id": 2129, - "bbox": [ - 72.0, - 291.85, - 434.74, - 375.18 - ], - "text": "What if we reverse this process and write rather than buy options? The first time \nyou write an option, and do it correctly, you’ll experience the delicious sensation of \ntime working in your favor. The option that you wrote loses some of its time value \neach day, making the premium you’ve collected safer. When the market goes no-\nwhere, you still make money, as time value keeps evaporating, making it more likely \nthat you’ll keep the premium.", - "type": "text" - }, - { - "block_id": "p198-b6", - "global_id": 2130, - "bbox": [ - 72.0, - 375.87, - 434.68, - 403.18 - ], - "text": "If living well is the best revenge, then taking a factor that kills most options \nbuyers—time—and making it work for you is a gratifying experience.", - "type": "text" - }, - { - "block_id": "p198-b7", - "global_id": 2131, - "bbox": [ - 72.0, - 403.88, - 434.66, - 431.19 - ], - "text": "Since each option represents a hope, it’s better to sell empty hopes which are \nunlikely to be fulfilled. Take three steps before writing a call or a put:", - "type": "text" - }, - { - "block_id": "p198-b8", - "global_id": 2132, - "bbox": [ - 76.0, - 443.83, - 434.69, - 530.16 - ], - "text": "1.\tAnalyze the security against which you want to write options.\nUse Triple Screen to decide whether a stock, future, or an index is trending or \nnon-trending. Use weekly and daily charts, trend-following indicators, and oscil-\nlators to identify trends, detect reversals, and set up price targets. Avoid writing \nwhen earnings are about to be announced—do not hold open positions during \nthose potentially stormy days.", - "type": "text" - }, - { - "block_id": "p198-b9", - "global_id": 2133, - "bbox": [ - 76.0, - 536.85, - 434.68, - 609.27 - ], - "text": "2.\tSelect the type of option to write.\nIf your analysis is bearish, consider writing calls, but if bullish, consider writing \nputs. When the trend is up, sell the hope that it will turn down, and when it’s \ndown, sell the hope it’ll turn up. Do not write options when markets are flat and \npremiums low—a breakout from a trading range can hurt you.", - "type": "text" - }, - { - "block_id": "p198-b10", - "global_id": 2134, - "bbox": [ - 76.0, - 615.91, - 434.7, - 688.23 - ], - "text": "3.\tEstimate how far, with a generous safety margin, the stock would have to run in \norder to change its trend. Write an option beyond that level.\nWrite an option with a strike price the market is unlikely to reach before the \noption expiration. An objective tool that shows the degree of safety of your \nplanned position is an indicator called Delta, which we’ll discuss below.", - "type": "text" - } - ] - }, - { - "page_num": 199, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p199-b0", - "global_id": 2135, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "44. OPTIONS\t\n183", - "type": "text" - }, - { - "block_id": "p199-b1", - "global_id": 2136, - "bbox": [ - 72.0, - 57.83, - 434.72, - 99.14 - ], - "text": "Time Decay  Options lose value with each passing day, but their rate of decay isn’t \nsteady. Options drop faster as the expiration date draws closer. Like a boulder rolling \ndownhill, time decay becomes vertical at the final cliff.", - "type": "text" - }, - { - "block_id": "p199-b2", - "global_id": 2137, - "bbox": [ - 72.0, - 99.84, - 434.72, - 155.16 - ], - "text": "Time decay is bad for option buyers, but very good for option writers. You collect \nyour premium the day you sell a call. The deeper it falls below the price at which you \nwrote it, the safer your premium. Time decay is a friend of the option writer but an \nenemy of the option buyer.", - "type": "text" - }, - { - "block_id": "p199-b3", - "global_id": 2138, - "bbox": [ - 72.0, - 155.86, - 434.76, - 239.18 - ], - "text": "With that in mind, the sweet spot for an option writer is approximately two to \nthree months from option expiration. That’s when time decay starts gathering speed. \nIt accelerates in the last few weeks of the option’s life. When you write options close \nto the expiration, you benefit from faster time decay. You can get more money for \noptions with longer lives, but don’t be greedy. The goal of a writer is not to make a \nkilling on any single trade but to grind out steady income.", - "type": "text" - }, - { - "block_id": "p199-b4", - "global_id": 2139, - "bbox": [ - 71.97, - 251.83, - 434.72, - 321.15 - ], - "text": "Delta is a tool that shows the probability of the underlying security reaching your \noption’s exercise price by its expiration date. It’s one of several options tools, col-\nlectively called the “Greeks” (each is named after a letter of the Greek alphabet). You \ncan find Delta for any stock, index, or ETF on many financial websites, especially \nthose of brokerages that offer options services.", - "type": "text" - }, - { - "block_id": "p199-b5", - "global_id": 2140, - "bbox": [ - 71.97, - 321.85, - 434.63, - 419.18 - ], - "text": "A cautious option writer should aim to sell calls or puts whose Delta isn’t much \nabove 0.10, meaning there is only a 10% chance of the exercise price getting hit be-\nfore the expiration date. Remember, as an option writer you don’t want the under-\nlying security to reach that price: you want to sell empty hopes. If 10% risk seems \nhigh, keep in mind that Delta is derived without any reference to market analysis. If \nyour decision is based on good technical analysis, your risk will be lower than what \nDelta indicates.", - "type": "text" - }, - { - "block_id": "p199-b6", - "global_id": 2141, - "bbox": [ - 71.97, - 419.88, - 434.73, - 503.2 - ], - "text": "The temptation to sell naked options closer to the money and get fatter premiums \nis dangerous. The Delta is likely to be high, meaning that a slight counter-trend move \ncan push your position underwater. If you’re going to write options, treat it like \nwriting accident insurance policies. To make steady profits and sleep well at night, \nsell your auto insurance policies to ladies who only drive to supermarkets rather than \nto motorcycle daredevils.", - "type": "text" - }, - { - "block_id": "p199-b7", - "global_id": 2142, - "bbox": [ - 72.0, - 525.2, - 155.79, - 542.14 - ], - "text": "Limiting Risk", - "type": "text" - }, - { - "block_id": "p199-b8", - "global_id": 2143, - "bbox": [ - 72.0, - 547.83, - 434.75, - 687.17 - ], - "text": "A big options trader shared with me his technique of  “slicing the bid-ask spread.” \nHe puts in a low bid or a high ask and then starts giving up a penny at a time until \nsomebody bites. For example, he recently saw an option he wanted to write (i.e., \nsell). The bid was $1.18 and the ask $1.30, but he had no intention of selling at $1.18 \nand paying that huge spread. Instead, he put in his order to sell a large number of \ncontracts at $1.29, a penny cheaper than the ask. No response. A few minutes later \nhe lowered his ask to $1.28—and suddenly a buyer materialized, snapped up his \ncontracts, and then the bid-ask spread went back to $1.18/$1.30. My client finds \nthere are large traders watching from the sidelines, not showing their hand, but will-\ning to trade within the spread. He gets them to bite by giving up a penny at a time.", - "type": "text" - } - ] - }, - { - "page_num": 200, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p200-b0", - "global_id": 2144, - "bbox": [ - 72.0, - 33.66, - 432.05, - 47.21 - ], - "text": "184\t\nTRADING VEHICLES", - "type": "text" - }, - { - "block_id": "p200-b1", - "global_id": 2145, - "bbox": [ - 72.0, - 57.83, - 434.68, - 141.16 - ], - "text": "Option writers can get hurt in one of three ways. Some overtrade, creating posi-\ntions that are too large for their accounts. Assuming too much risk makes them ner-\nvous and unable to hold positions through any wiggles. Option writers also get hurt \nwhen they fail to run fast enough when an option moves against them. Finally, option \nwriters can get blown out if they don’t have a reserve against a major adverse move. \nThe longer you trade, the greater the risk of a catastrophic event.", - "type": "text" - }, - { - "block_id": "p200-b2", - "global_id": 2146, - "bbox": [ - 72.0, - 141.85, - 434.64, - 183.17 - ], - "text": "A writer can grow careless selling naked options and pocketing profits. A smug \nfeeling of self-satisfaction can blind him to reality. You must protect all trades, includ-\ning naked options. Several suggestions:", - "type": "text" - }, - { - "block_id": "p200-b3", - "global_id": 2147, - "bbox": [ - 72.03, - 190.83, - 391.12, - 204.14 - ], - "text": "■\n■Set your profit-taking zone—consider buying back your naked options.", - "type": "text" - }, - { - "block_id": "p200-b4", - "global_id": 2148, - "bbox": [ - 84.05, - 208.32, - 434.8, - 291.65 - ], - "text": "The option you write is a wasting asset. When the underlying security moves far \nfrom the exercise price but there is still time left to the expiration, the price of \nthe option you sold may fall near its rock bottom and lose value in tiny dribs and \ndrabs. The loser who bought that option still has a bit of a chance that the market \nmay reverse in his favor. He continues to hold that option like a lottery ticket—\nand once in a rare while his ticket may win.", - "type": "text" - }, - { - "block_id": "p200-b5", - "global_id": 2149, - "bbox": [ - 84.05, - 295.84, - 434.75, - 351.16 - ], - "text": "As a writer, why hold an open position that has already given you most of its po-\ntential profit? You have little to gain, while remaining exposed to risk. After the op-\ntion you sold loses half of its value, consider buying it back to close your profitable \ntrade. By the time an option loses 80% of its value, you should be out of that trade.", - "type": "text" - }, - { - "block_id": "p200-b6", - "global_id": 2150, - "bbox": [ - 72.03, - 358.83, - 283.88, - 372.14 - ], - "text": "■\n■Use a mental stop-loss on the option you sold.", - "type": "text" - }, - { - "block_id": "p200-b7", - "global_id": 2151, - "bbox": [ - 84.05, - 376.32, - 434.74, - 417.64 - ], - "text": "It is better to use mental stops here because many pros go fishing for stops of \nthinly traded options. Using mental stops requires iron discipline—another rea-\nson why option writing isn’t a beginners’ game.", - "type": "text" - }, - { - "block_id": "p200-b8", - "global_id": 2152, - "bbox": [ - 84.05, - 421.83, - 434.81, - 519.16 - ], - "text": "Set your mental stops both on the underlying security and the option itself. \nFor example, you may sell a naked April 80 call on a stock trading at 70 and place \nyour mental stop at 75. Get out of your naked option position before it gets into \nthe money. Also, set a stop on your option: if it doubles in price, buy it back to \ncut the loss. If you sold an option for $1.50, buy it back if it rises to $3. It may \nhurt, but it’ll be nowhere near the “unlimited loss” that makes people afraid to \nwrite options.", - "type": "text" - }, - { - "block_id": "p200-b9", - "global_id": 2153, - "bbox": [ - 72.03, - 526.83, - 204.5, - 540.14 - ], - "text": "■\n■Open an insurance account.", - "type": "text" - }, - { - "block_id": "p200-b10", - "global_id": 2154, - "bbox": [ - 84.05, - 544.32, - 434.79, - 599.64 - ], - "text": "You may write a put and the market crashes the next day, or you write a call and \nsuddenly there is a takeover. You hope this never happens—but trade long enough \nand eventually everything will happen! That’s why you need insurance. Nobody \nwill write it for you, so you’ll have to self-insure.", - "type": "text" - }, - { - "block_id": "p200-b11", - "global_id": 2155, - "bbox": [ - 84.05, - 603.83, - 434.81, - 673.16 - ], - "text": "Open a money market account, and every time you close out a profitable naked \nwriting position, throw 10 percent of your profit into that account. Do not use \nit for trading—let your insurance account grow with each new profit, ready to \ncover a catastrophic loss or to be taken out in cash when you stop writing options. \nIn a recent consultation with a professional option writer, I recommended that he", - "type": "text" - } - ] - }, - { - "page_num": 201, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p201-b0", - "global_id": 2156, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "44. OPTIONS\t\n185", - "type": "text" - }, - { - "block_id": "p201-b1", - "global_id": 2157, - "bbox": [ - 83.94, - 57.83, - 431.94, - 85.14 - ], - "text": "send 10% of his profit above a certain threshold to the bank that holds the mort-\ngage on his country house, using that prepayment as his insurance fund.", - "type": "text" - }, - { - "block_id": "p201-b2", - "global_id": 2158, - "bbox": [ - 72.0, - 105.2, - 285.66, - 122.14 - ], - "text": "Can Option Buying Be Intelligent?", - "type": "text" - }, - { - "block_id": "p201-b3", - "global_id": 2159, - "bbox": [ - 72.0, - 127.83, - 434.75, - 197.15 - ], - "text": "Professionals may buy puts on a rare occasion when they expect a severe drop. When \na long-term uptrend begins to turn, it can create massive turbulence near the top, \nsimilar to an ocean liner changing its course. When volatility goes through the roof, \neven well-heeled traders have trouble setting stops on shorts. Buying puts allows you \nto sidestep this problem.", - "type": "text" - }, - { - "block_id": "p201-b4", - "global_id": 2160, - "bbox": [ - 72.0, - 197.85, - 434.74, - 253.17 - ], - "text": "Prices tend to fall twice as fast as they rise. Greed, the dominant emotion of up-\ntrends, is a happy and lasting feeling. Fear, the dominant emotion of downtrends, is \nsharper and more violent. Professionals are more likely to buy puts because of shorter \nexposure to time decay. Uptrends are better traded with stocks or futures.", - "type": "text" - }, - { - "block_id": "p201-b5", - "global_id": 2161, - "bbox": [ - 72.0, - 253.86, - 434.72, - 281.18 - ], - "text": "A trader who expects a downswing must decide what put to buy. The best choice \nis counterintuitive and quite different from what most people get.", - "type": "text" - }, - { - "block_id": "p201-b6", - "global_id": 2162, - "bbox": [ - 72.03, - 291.83, - 434.81, - 305.14 - ], - "text": "■\n■Estimate how low you expect a stock to collapse. A put is worth buying only if", - "type": "text" - }, - { - "block_id": "p201-b7", - "global_id": 2163, - "bbox": [ - 83.8, - 305.83, - 166.6, - 319.14 - ], - "text": "you expect a crash.", - "type": "text" - }, - { - "block_id": "p201-b8", - "global_id": 2164, - "bbox": [ - 72.03, - 323.83, - 434.72, - 337.14 - ], - "text": "■\n■Avoid puts with more than two months of life. Buying puts makes sense only", - "type": "text" - }, - { - "block_id": "p201-b9", - "global_id": 2165, - "bbox": [ - 83.8, - 337.83, - 434.73, - 365.14 - ], - "text": "when you expect a waterfall decline. If you anticipate a drawn-out downtrend, \nbetter sell short the underlying security.", - "type": "text" - }, - { - "block_id": "p201-b10", - "global_id": 2166, - "bbox": [ - 72.03, - 369.83, - 434.74, - 383.14 - ], - "text": "■\n■Look for cheap puts whose price reflects no hope. Move your finger down the", - "type": "text" - }, - { - "block_id": "p201-b11", - "global_id": 2167, - "bbox": [ - 83.8, - 383.83, - 434.81, - 453.16 - ], - "text": "column: the lower the strike, the cheaper the put. At first, each time you drop to \nthe next strike price, a put is 25% or even 35% cheaper than at the previous level. \nEventually you come to the strike level at which you would save only a tiny frac-\ntion of a put’s price. This shows that all hope has been squeezed out of that put, \nand it is priced like a cheap lottery ticket. That’s the one you want!", - "type": "text" - }, - { - "block_id": "p201-b12", - "global_id": 2168, - "bbox": [ - 72.05, - 463.85, - 434.8, - 519.17 - ], - "text": "Buying a very cheap, far-out-of-the-money put is counterintuitive. It is so far out \nof the money and has so little life left in it that it’s likely to expire worthless. You \ncan’t place a stop on it, and if you’re wrong, the entire premium will go up in smoke. \nWhy not buy a put closer to the money?", - "type": "text" - }, - { - "block_id": "p201-b13", - "global_id": 2169, - "bbox": [ - 72.05, - 519.86, - 434.74, - 589.19 - ], - "text": "The only time to buy a put is when you’re shooting for an exceptional gain from a \nmajor reversal. In an ordinary downtrend it’s better to short stocks. With cheap far-\nout-of-the-money puts you aim for a tenfold gain or better. Returns like these allow \nyou to be wrong on a string of such trades, yet come out ahead in the end. Catching \none major reversal will make up for several losses and leave you very profitable.", - "type": "text" - }, - { - "block_id": "p201-b14", - "global_id": 2170, - "bbox": [ - 72.05, - 589.88, - 434.76, - 645.2 - ], - "text": "Why don’t more people use this tactic? First, it requires a great deal of patience, \nas opportunities are very infrequent. The entertainment value is very low. Most peo-\nple can’t stomach the idea of being wrong three, four, or five times in a row, even if \nthey are likely to make money in the end. That’s why so few traders play this game.", - "type": "text" - }, - { - "block_id": "p201-b15", - "global_id": 2171, - "bbox": [ - 72.05, - 645.9, - 432.56, - 673.21 - ], - "text": "I wrote this chapter to sharpen your focus on some of the key options ideas. If in-\nterested in options, study Lawrence MacMillan’s book Options as a Strategic Investment.", - "type": "text" - } - ] - }, - { - "page_num": 202, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p202-b0", - "global_id": 2172, - "bbox": [ - 72.0, - 33.66, - 432.05, - 47.21 - ], - "text": "186\t\nTRADING VEHICLES", - "type": "text" - }, - { - "block_id": "p202-b1", - "global_id": 2173, - "bbox": [ - 73.55, - 55.86, - 157.86, - 74.5 - ], - "text": "■\n■45. CFDs", - "type": "text" - }, - { - "block_id": "p202-b2", - "global_id": 2174, - "bbox": [ - 72.0, - 84.66, - 434.76, - 168.16 - ], - "text": "A contract for difference (CFD) is a bet on the future value of a currency, an \nindex, or a stock. If you buy a CFD and the price of the underlying vehicle rises, \nyou’ll collect the difference from the company that sold you the contract, but if it \nfalls, you’ll pay the difference. CFDs are derivatives that allow speculators to bet on \nrallies or declines. They are similar to spread betting, which is legal in the United \nKingdom and Ireland, but not in the United States.", - "type": "text" - }, - { - "block_id": "p202-b3", - "global_id": 2175, - "bbox": [ - 72.0, - 168.85, - 434.74, - 238.18 - ], - "text": "At the time of this writing, CFDs are available in Australia, Canada, France, Ger-\nmany, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Po-\nland, Portugal, Singapore, South Africa, Spain, Sweden, Switzerland, and the United \nKingdom. They are prohibited in the United States, due to restrictions by the Securi-\nties and Exchange Commission.", - "type": "text" - }, - { - "block_id": "p202-b4", - "global_id": 2176, - "bbox": [ - 72.0, - 238.87, - 434.74, - 350.21 - ], - "text": "CFDs were invented in the early 1990s by Brian Keelan and Jon Wood, both of \nUBS Warburg in London. Institutional traders began using them to hedge stock ex-\nposure and to avoid taxes. In the late 1990s, several firms began marketing CFDs to \nretail traders, touting their leverage and the exemption from UK taxes. Several pro-\nvider firms expanded their offerings from the London Stock Exchange to global \nstocks, commodities, bonds, and currencies. Index CFDs, based on the major global \nindexes such as Dow Jones, S&P 500, FTSE, and DAX, quickly became the most \npopular vehicles of the group.", - "type": "text" - }, - { - "block_id": "p202-b5", - "global_id": 2177, - "bbox": [ - 72.0, - 350.9, - 434.75, - 434.23 - ], - "text": "CFDs are contracts between individual traders and providers, who may offer dif-\nferent deal terms. Each CFD is created by opening a trade with a provider, based on \nsome underlying instrument. Be prepared to pay large bid-ask spreads, commissions, \nand overnight financing. Trades are mostly short-term, although positions can be \ntaken overnight. Financing charges and profits or losses are credited or debited daily. \nCFDs are traded on margin.", - "type": "text" - }, - { - "block_id": "p202-b6", - "global_id": 2178, - "bbox": [ - 72.0, - 434.93, - 434.69, - 490.25 - ], - "text": "Among the pluses of CFDs are the tiny minimum sizes of those contracts, mak-\ning them accessible to small traders. The absence of the expiration dates means \nthere is no time decay. While financing is charged on long positions, it is paid out \non short positions.", - "type": "text" - }, - { - "block_id": "p202-b7", - "global_id": 2179, - "bbox": [ - 72.0, - 490.94, - 434.74, - 560.27 - ], - "text": "There are several serious misgivings about the CFDs. Commissions tend to be \nhigh relative to contract sizes. Bid-ask spreads are controlled by CFD issuers, who \nalso control prices of contracts, which may deviate from prices of the underlying \nsecurities. In other words, a retail customer plays against a professional team that can \nmove the goal posts during the game.", - "type": "text" - }, - { - "block_id": "p202-b8", - "global_id": 2180, - "bbox": [ - 72.0, - 560.96, - 434.76, - 630.29 - ], - "text": "A client from New Zealand wrote: “Regarding CFDs and spread betting, it is \nworth understanding that with CFDs you are not just trying to beat the market but \nthe casino too. CFD providers can set whatever prices they like for an instrument, as \nit is their instrument. The fact that sometimes it emulates what happens in the stock \nmarket does not mean it is the same as trading in the stock market.”", - "type": "text" - }, - { - "block_id": "p202-b9", - "global_id": 2181, - "bbox": [ - 72.0, - 630.98, - 434.76, - 672.3 - ], - "text": "CFDs are heavily marketed to new and inexperienced traders, extolling their po-\ntential gains, while glossing over risks. The Australian financial regulator ASIC con-\nsiders trading CFDs riskier than gambling on horses or in casinos. CFDs are banned", - "type": "text" - } - ] - }, - { - "page_num": 203, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p203-b0", - "global_id": 2182, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "46. FUTURES\t\n187", - "type": "text" - }, - { - "block_id": "p203-b1", - "global_id": 2183, - "bbox": [ - 71.94, - 57.83, - 431.98, - 85.14 - ], - "text": "in the United States where regulators haven’t forgotten the bucket shops that flour-\nished at the turn of the twentieth century.", - "type": "text" - }, - { - "block_id": "p203-b2", - "global_id": 2184, - "bbox": [ - 71.94, - 85.84, - 434.69, - 155.16 - ], - "text": "The stance of the SEC in this matter reminds me of another federal agency, the \nFood and Drug Administration, which kept Thalidomide, a drug for pregnant women, \nout of the United States. As a result, after the full scale of its horrible side effects \nbecame known, the U.S. population was spared an epidemic of deformed babies that \nwas caused by that drug in Europe.", - "type": "text" - }, - { - "block_id": "p203-b3", - "global_id": 2185, - "bbox": [ - 73.55, - 182.86, - 175.64, - 201.5 - ], - "text": "■\n■46. Futures", - "type": "text" - }, - { - "block_id": "p203-b4", - "global_id": 2186, - "bbox": [ - 72.0, - 211.83, - 434.75, - 365.18 - ], - "text": "A future is a contract for delivery of a specific quantity of a commodity by a certain \ndate at an agreed-upon price. Futures contracts differ from options by being binding \non both the buyer and the seller. In options, the buyer has the right but not an obliga-\ntion to take delivery. If you buy a call or a put, you can walk away if you like, but in \nfutures, you have no such luxury. If the market goes against you, you have to get out \nof your trade at a loss or add to your margin. Futures are stricter than options, but \ntheir responses to market volatility are much smoother, making them easier to trade. \nAnother advantage of futures is that there are only a few dozen of them, making \nthem easier to track. Futures are not nearly as correlated with each other as stocks. \nWhile stocks tend to move as a group, many futures move in unrelated trends, offer-\ning more trading choices.", - "type": "text" - }, - { - "block_id": "p203-b5", - "global_id": 2187, - "bbox": [ - 72.0, - 365.87, - 434.75, - 449.2 - ], - "text": "Commodities are the irreducible building blocks of the economy. Wheat is a com-\nmodity, while bread isn’t because it includes multiple components. Old-timers used to \njoke that a commodity was something that hurt when you dropped it on your foot—\ngold, sugar, wheat, a barrel full of crude oil. In recent decades, many financial in-\nstruments began to trade like commodities—stock indexes, bonds, and currencies. \nFutures include financial instruments along with traditional commodities.", - "type": "text" - }, - { - "block_id": "p203-b6", - "global_id": 2188, - "bbox": [ - 72.0, - 449.9, - 434.77, - 575.22 - ], - "text": "The person who buys a stock becomes a part owner of a company, but when you \nbuy a futures contract, you don’t own anything. You enter into a binding contract \nfor a future purchase of merchandise, be it a carload of wheat or a sheaf of Treasury \nbonds. The person who sells you that contract assumes the obligation to deliver. \nThe money you pay for a stock goes to the seller, but in futures your margin money \nstays at the clearinghouse as a security, to ensure you’ll accept delivery when your \ncontract comes due. That’s why they used to call margins “honest money.”  While in \nstocks you pay interest for margin borrowing, in futures you can collect interest on \nyour margin funds.", - "type": "text" - }, - { - "block_id": "p203-b7", - "global_id": 2189, - "bbox": [ - 72.0, - 575.92, - 434.65, - 645.24 - ], - "text": "Each futures contract has a definite size and a settlement date. Most traders close \nout their contracts early, settling profits and losses in cash. Still, the existence of a de-\nlivery date forces people to act, providing a reality check. A person may sit on a losing \nstock for years, deluding himself that it’s only a paper loss. In futures, reality, in the \nform of the settlement date, always intrudes on a daydreamer.", - "type": "text" - }, - { - "block_id": "p203-b8", - "global_id": 2190, - "bbox": [ - 72.0, - 645.94, - 434.75, - 673.25 - ], - "text": "Most futures have daily limits beyond which prices are not allowed to go. Limits \nare designed to interrupt hysterical moves and give people time to rethink their", - "type": "text" - } - ] - }, - { - "page_num": 204, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p204-b0", - "global_id": 2191, - "bbox": [ - 72.0, - 33.66, - 432.05, - 47.21 - ], - "text": "188\t\nTRADING VEHICLES", - "type": "text" - }, - { - "block_id": "p204-b1", - "global_id": 2192, - "bbox": [ - 72.0, - 57.83, - 434.71, - 127.15 - ], - "text": "positions. A string of limit days can be very stressful when a losing trader is stuck and \nunable to get out while his account is being ground down. The globalization of the \nfutures markets has created many emergency exits, allowing you to unwind a trade \nelsewhere. Just like when boarding a plane, a careful trader learns to identify those \nemergency exits before he needs them.", - "type": "text" - }, - { - "block_id": "p204-b2", - "global_id": 2193, - "bbox": [ - 72.0, - 127.85, - 434.76, - 183.17 - ], - "text": "In stocks, most people buy and very few sell short. In futures, just like in options, \nthe size of long and short positions is always equal because if someone buys a con-\ntract for future delivery, someone else has to sell it to him, i.e., go short. If you want \nto trade futures, it pays to be comfortable shorting.", - "type": "text" - }, - { - "block_id": "p204-b3", - "global_id": 2194, - "bbox": [ - 72.0, - 183.86, - 434.75, - 267.19 - ], - "text": "The survival rate for new futures traders is low—nine out of ten newcomers are \nsaid to bust out in the first few months. It is important to understand that the dan-\nger is not in futures but in a gross lack of risk-management skills among beginners. \nFutures offer some of the best profit opportunities to serious traders but are deadly \nfor amateurs. You must develop excellent money-management skills (described in \nChapters 49–51) before venturing into futures.", - "type": "text" - }, - { - "block_id": "p204-b4", - "global_id": 2195, - "bbox": [ - 72.0, - 287.2, - 220.1, - 304.14 - ], - "text": "Futures and Cash Trades", - "type": "text" - }, - { - "block_id": "p204-b5", - "global_id": 2196, - "bbox": [ - 72.0, - 309.83, - 434.76, - 407.16 - ], - "text": "To compare a futures trade with a cash trade, let’s assume the following: it is Febru-\nary, gold is trading at $1,500 an ounce, and your analysis indicates that it’s likely to \nrise to $1,575 within weeks. With $150,000, you can buy a 100-oz gold bar from \na dealer and store it in a safe. If your analysis is correct, in a few weeks your gold \nwill be worth $157,500. You can sell it and take $7,500 profit, or 5% before com-\nmissions—nice. Now let’s see what happens if you trade futures based on the same \nanalysis.", - "type": "text" - }, - { - "block_id": "p204-b6", - "global_id": 2197, - "bbox": [ - 72.0, - 407.86, - 434.72, - 505.19 - ], - "text": "Since it is February, April is the next delivery month for gold. One futures con-\ntract covers 100 oz of gold, with a value of $150,000. The margin to trade this \ncontract is only $7,500. In other words, you can control $150,000 worth of gold \nwith a $7,500 deposit. If your analysis is correct and gold rallies $75 per ounce, \nyou’ll make roughly the same profit as when you bought 100 oz of gold for cash; \nonly now your return will be 100% on your investment instead of 5%, since your \nmargin is only $7,500.", - "type": "text" - }, - { - "block_id": "p204-b7", - "global_id": 2198, - "bbox": [ - 72.0, - 505.88, - 434.75, - 561.2 - ], - "text": "Many people, after seeing such numbers, feel a surge of greed and buy multiple \ncontracts. A trader with $150,000 in his account has enough margin for 20 con-\ntracts. If he can double his money on a single contract, he can double it on 20. If he \nrepeats it two or three times, he’ll quickly become a millionaire.", - "type": "text" - }, - { - "block_id": "p204-b8", - "global_id": 2199, - "bbox": [ - 72.0, - 561.9, - 434.77, - 673.24 - ], - "text": "Wonderful—but there is a catch.\nMarkets seldom move in a straight line. Your analysis may well be correct, and \ngold may rise from $1,500 to $1,575 within a few weeks, but it’s perfectly pos-\nsible that it may dip to $1,450 along the way. That $50 dip would create a $5,000 \npaper loss if you bought 100 oz of gold for cash—unpleasant but not a tragedy. For \na futures trader who bought multiple contracts, each on a $7,500 margin, that $50 \ndecline would mean a wipeout. His broker would call demanding more margin, and \nif he has no reserves, the broker will sell him out at a loss.", - "type": "text" - } - ] - }, - { - "page_num": 205, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p205-b0", - "global_id": 2200, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "46. FUTURES\t\n189", - "type": "text" - }, - { - "block_id": "p205-b1", - "global_id": 2201, - "bbox": [ - 71.94, - 57.83, - 434.6, - 127.15 - ], - "text": "Inexperienced traders keep buying too many contracts and keep getting kicked \nout by the first wiggle of their market. Their analysis may be correct—gold may rise \nto its target price—but the beginner is doomed because he commits too much of his \nequity and has very thin reserves. Futures don’t kill traders—poor money manage-\nment kills futures traders.", - "type": "text" - }, - { - "block_id": "p205-b2", - "global_id": 2202, - "bbox": [ - 71.94, - 127.85, - 434.64, - 197.17 - ], - "text": "Futures can be very attractive for traders with strong money-management skills. \nHigh rates of return demand ice-cold discipline. A beginner is better off with slower-\nmoving stocks. Once you’ve matured as a trader, you can take a closer look at fu-\ntures. Also, read some introductory books. Winning in the Futures Market by George \nAngell is a good primer, to be followed by The Futures Game by Teweles and Jones.", - "type": "text" - }, - { - "block_id": "p205-b3", - "global_id": 2203, - "bbox": [ - 72.0, - 217.2, - 126.72, - 234.13 - ], - "text": "Hedging", - "type": "text" - }, - { - "block_id": "p205-b4", - "global_id": 2204, - "bbox": [ - 72.0, - 239.83, - 434.68, - 295.15 - ], - "text": "Futures markets serve an important economic function: they permit commercial \nproducers and consumers to hedge commodity price risks, giving them a competi-\ntive advantage. At the same time, futures offer speculators a gambling palace with \nmore choices than any casino.", - "type": "text" - }, - { - "block_id": "p205-b5", - "global_id": 2205, - "bbox": [ - 72.0, - 295.84, - 434.75, - 379.17 - ], - "text": "Hedging means opening a futures position opposite to one’s position in the actual \ncommodity. For example, a major candy manufacturer knows months in advance \nhow much sugar the firm is going to need. He buys a corresponding number of sugar \nfutures in New York or London when prices are good enough for the firm. They’ll be \nneeding trainloads of sugar several months from now, but meanwhile they hold sugar \nfutures, which they plan to sell when they buy their cargoes.", - "type": "text" - }, - { - "block_id": "p205-b6", - "global_id": 2206, - "bbox": [ - 72.0, - 379.87, - 434.72, - 505.21 - ], - "text": "If sugar prices go up and they have to pay more for the raw commodity, they will \noffset that loss by making roughly the same profit on their futures position. If sugar \nprices fall, they’ll lose money on their futures contracts but make it up in savings on \nthe raw materials. Their unhedged competitors are taking chances. If sugar prices \nfall, they’ll buy on the cheap and reap a windfall, but if prices rise, they’ll be hung \nout to dry. Hedged consumers can concentrate on running their core businesses, \ninsulated from future price swings. Airlines know years in advance how much jet fuel \nthey’ll need, and buying oil futures protects them from price spikes that often occur \nin this volatile market.", - "type": "text" - }, - { - "block_id": "p205-b7", - "global_id": 2207, - "bbox": [ - 72.0, - 505.9, - 434.72, - 603.24 - ], - "text": "Producers of commodities also benefit from hedging. An agribusiness can presell \nits wheat, coffee, or cotton when prices are high enough to assure profits. They sell \nshort enough futures contracts to cover the size of their prospective crop. From that \npoint on, they have no price risk. If prices go down, they’ll make up their losses on \ncash commodity by profits on short futures trades. If prices go up, they’ll lose money \non their short futures positions but make it back selling the actual commodity at \nhigher prices.", - "type": "text" - }, - { - "block_id": "p205-b8", - "global_id": 2208, - "bbox": [ - 72.0, - 603.93, - 434.72, - 645.25 - ], - "text": "Hedging removes price risk from planning to buy or to deliver a cash commodity. \nIt allows commercial interests to concentrate on their core businesses, offer stable \nconsumer pricing, and obtain a long-term competitive advantage.", - "type": "text" - }, - { - "block_id": "p205-b9", - "global_id": 2209, - "bbox": [ - 72.0, - 645.94, - 434.69, - 673.26 - ], - "text": "Hedgers give up a chance of a windfall but insulate themselves from price risks. \nSurvivors value stability. That why the Exxons, the Coca-Colas, and the Nabiscos", - "type": "text" - } - ] - }, - { - "page_num": 206, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p206-b0", - "global_id": 2210, - "bbox": [ - 72.0, - 33.66, - 432.05, - 47.21 - ], - "text": "190\t\nTRADING VEHICLES", - "type": "text" - }, - { - "block_id": "p206-b1", - "global_id": 2211, - "bbox": [ - 72.0, - 57.83, - 434.74, - 99.14 - ], - "text": "of the world are among the major players in commodity markets. Hedgers are the \nultimate insiders, and a good hedging department not only buys price insurance, but \nalso serves as a profit center.", - "type": "text" - }, - { - "block_id": "p206-b2", - "global_id": 2212, - "bbox": [ - 72.0, - 99.84, - 434.75, - 155.16 - ], - "text": "Hedgers transfer price risks to speculators who enter the markets, lured by the \nglitter of potential profits. It’s ironic that hedgers, who have inside information, are \nnot fully confident about prices, while crowds of cheerful outsiders plunk down \nmoney to bet on futures.", - "type": "text" - }, - { - "block_id": "p206-b3", - "global_id": 2213, - "bbox": [ - 72.0, - 155.86, - 434.75, - 253.19 - ], - "text": "The two largest groups of speculators are farmers and engineers. Farmers \nproduce commodities, while engineers love to apply scientific methods to the \nfutures game. Many farmers enter futures markets as hedgers but catch the bug \nand start speculating. It never ceases to amaze me how many farmers end up trad-\ning stock index futures. As long as they trade corn, cattle, or soybeans, their feel \nfor the fundamentals gives them an edge over city slickers. But what’s their edge \nin the S&P500?", - "type": "text" - }, - { - "block_id": "p206-b4", - "global_id": 2214, - "bbox": [ - 72.0, - 273.2, - 275.9, - 290.14 - ], - "text": "Supply, Demand, and Seasonality", - "type": "text" - }, - { - "block_id": "p206-b5", - "global_id": 2215, - "bbox": [ - 72.0, - 295.83, - 434.7, - 351.15 - ], - "text": "Major bull and bear markets in futures are driven by supply or demand. Supply-\ndriven markets tend to be fast and furious, while demand-driven markets tend to be \nquiet and slow. Why? Think of any commodity, say coffee, which grows in Africa and \nSouth America.", - "type": "text" - }, - { - "block_id": "p206-b6", - "global_id": 2216, - "bbox": [ - 72.0, - 351.84, - 434.76, - 421.17 - ], - "text": "Changes in demand come slowly, thanks to the conservatism of human nature. \nThe demand for coffee can increase only if drinking becomes more popular, with an \nespresso machine in every bar. The demand can fall off if coffee drinking becomes \nless popular, due to a deteriorating economy or in response to a health fad. Demand-\ndriven markets move at a leisurely pace.", - "type": "text" - }, - { - "block_id": "p206-b7", - "global_id": 2217, - "bbox": [ - 72.0, - 421.86, - 434.71, - 505.19 - ], - "text": "Now imagine that a major coffee growing area is hit by a hurricane or a freeze. \nSuddenly the world supply of coffee is rumored to be reduced by 10% and prices \nshoot up, cutting off marginal consumers. Imagine a new OPEC policy sharply cur-\ntailing crude oil supply or a general strike in a leading copper-mining country. When \na commodity’s supply is reduced or even rumored to be reduced, its price climbs, \nreallocating tight supplies to those best able to afford them.", - "type": "text" - }, - { - "block_id": "p206-b8", - "global_id": 2218, - "bbox": [ - 72.0, - 505.89, - 434.75, - 631.23 - ], - "text": "Grain prices often spike during spring and summer planting and growing seasons, \nas dry spells, floods, and pests threaten supplies. Traders say that a farmer loses his \ncrop three times before harvesting it. Once the harvest is in and the supply is known, \ndemand becomes the driving force. Demand-driven markets have narrower chan-\nnels, with smaller profit targets, and lower risks. As seasons change, channels have \nto be redrawn, and trading tactics adjusted. A new trader may wonder why his tools \nstopped working. A smart trader gets out a new set of tools for the season and puts \nold ones in storage until next year—just as he swaps regular and snow tires on his \ncar.", - "type": "text" - }, - { - "block_id": "p206-b9", - "global_id": 2219, - "bbox": [ - 72.0, - 631.92, - 434.72, - 673.24 - ], - "text": "A futures trader must know the key supply and demand factors of the market he’s \ntrading. For example, he must keep an eye on the weather during the critical grow-\ning and harvesting months in agricultural commodities. Trend traders in the futures", - "type": "text" - } - ] - }, - { - "page_num": 207, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p207-b0", - "global_id": 2220, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "46. FUTURES\t\n191", - "type": "text" - }, - { - "block_id": "p207-b1", - "global_id": 2221, - "bbox": [ - 71.94, - 57.83, - 434.7, - 85.14 - ], - "text": "markets tend to look for supply-driven markets, while swing traders can do just as \nwell in demand-driven markets.", - "type": "text" - }, - { - "block_id": "p207-b2", - "global_id": 2222, - "bbox": [ - 71.94, - 85.84, - 434.65, - 183.17 - ], - "text": "Most commodities fluctuate through the seasons. Freezing spells in the United \nStates are bullish for heating oil futures. Orange juice futures used to have wild run-\nups during the frost season in Florida, but have become much more sedate due to the \nincrease of orange production in Brazil in the Southern hemisphere. Seasonal trades \ntake advantage of such swings, but you have to be careful because those cycles are \nseldom identical. Be sure to put your seasonal trades through the filter of technical \nanalysis.", - "type": "text" - }, - { - "block_id": "p207-b3", - "global_id": 2223, - "bbox": [ - 72.0, - 203.2, - 190.47, - 220.13 - ], - "text": "Floors and Ceilings", - "type": "text" - }, - { - "block_id": "p207-b4", - "global_id": 2224, - "bbox": [ - 72.0, - 225.83, - 434.75, - 351.17 - ], - "text": "Commodities, unlike stocks, rarely trade below certain price floors or above price \nceilings. The floor depends on the cost of production. When the price of a commod-\nity, be it gold or sugar, falls below that level, miners stop digging and farmers stop \nplanting. Some third-world governments, desperate for dollars and trying to avoid \nsocial unrest, may subsidize production, paying locals in a worthless local currency \nand dumping their product on the world market. Still, if enough producers close up \nand quit, the supply will shrink, and prices will have to rise to draw in new suppliers. \nIf you look at a 20-year chart of most commodities, you’ll see that the same price \nareas have served as a floor year after year.", - "type": "text" - }, - { - "block_id": "p207-b5", - "global_id": 2225, - "bbox": [ - 72.0, - 351.86, - 434.69, - 407.18 - ], - "text": "The ceiling depends on the cost of substitution. If the price of a commodity rises, \nmajor industrial consumers will start switching away from it. If soybean meal, a ma-\njor animal feed, becomes too expensive, the demand will switch to fishmeal, and if \nsugar becomes too costly, the demand will switch to corn sweeteners.", - "type": "text" - }, - { - "block_id": "p207-b6", - "global_id": 2226, - "bbox": [ - 72.0, - 407.88, - 434.72, - 491.21 - ], - "text": "Why don’t more people trade against those levels? Why don’t they buy near the \nfloor and short near the ceiling, profiting from what is similar to shooting fish in a \nbarrel? First of all, neither the floor nor the ceiling is set in stone, and markets may \nbriefly violate them. Even more importantly, the human nature works against those \ntrades. Most speculators don’t have the courage to short a market that’s boiling near \nrecord highs or go long a market after it has crashed.", - "type": "text" - }, - { - "block_id": "p207-b7", - "global_id": 2227, - "bbox": [ - 72.0, - 511.2, - 279.57, - 528.14 - ], - "text": "Contango, Inversion, and Spreads", - "type": "text" - }, - { - "block_id": "p207-b8", - "global_id": 2228, - "bbox": [ - 72.0, - 533.83, - 434.75, - 589.15 - ], - "text": "All futures markets offer several contracts for different delivery months. For ex-\nample, you can buy or sell wheat for delivery in September or December of this year, \nMarch of next year, and so on. Normally, the nearby months are cheaper than the \nremote ones, and that relationship is called a contango market.", - "type": "text" - }, - { - "block_id": "p207-b9", - "global_id": 2229, - "bbox": [ - 72.0, - 589.84, - 434.72, - 673.17 - ], - "text": "Higher prices for more remote deliveries reflect the “cost of carry”—financing, \nstoring, and insuring a commodity. The differences between delivery months are \ncalled premiums, and hedgers closely watch them. When supply tightens or demand \nincreases, people start paying up for the nearby months, and the premium for the \nfaraway months begins to shrink. Sometimes the front months become more expen-\nsive than faraway months—the market becomes inverted! There is a real shortage", - "type": "text" - } - ] - }, - { - "page_num": 208, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p208-b0", - "global_id": 2230, - "bbox": [ - 72.0, - 33.66, - 432.05, - 47.21 - ], - "text": "192\t\nTRADING VEHICLES", - "type": "text" - }, - { - "block_id": "p208-b1", - "global_id": 2231, - "bbox": [ - 72.0, - 57.83, - 431.96, - 85.14 - ], - "text": "out there, and people are paying extra to get their stuff sooner. This so-called “inver-\nsion” is one of the strongest signs of a bull market in a commodity.", - "type": "text" - }, - { - "block_id": "p208-b2", - "global_id": 2232, - "bbox": [ - 72.0, - 85.84, - 434.71, - 127.15 - ], - "text": "When you look for inversions, keep in mind that there is one market in which in-\nversion is the norm. Interest rate futures are always inverted because those who hold \ncash positions keep collecting interest instead of paying finance and storage charges.", - "type": "text" - }, - { - "block_id": "p208-b3", - "global_id": 2233, - "bbox": [ - 72.0, - 127.85, - 434.72, - 183.17 - ], - "text": "Professionals don’t wait for inversions—they monitor the narrowing or widening \nof premiums. A good speculator can rattle off the latest prices, but a floor trader will \nquote you the latest premiums. A savvy trader knows by heart the normal spreads \nbetween different delivery months.", - "type": "text" - }, - { - "block_id": "p208-b4", - "global_id": 2234, - "bbox": [ - 72.0, - 183.86, - 434.71, - 239.18 - ], - "text": "Hedgers tend to dominate the short side of the markets, most speculators are \nperpetual bulls, but floor traders love to trade spreads. Spreading means buying one \ndelivery month and selling another in the same market. It also means going long one \nmarket while shorting a related one.", - "type": "text" - }, - { - "block_id": "p208-b5", - "global_id": 2235, - "bbox": [ - 72.0, - 239.88, - 434.72, - 323.21 - ], - "text": "If the price of corn, a major animal feed, starts to rise faster than the price of \nwheat, at some point ranchers will start using wheat rather than corn. They’ll reduce \ntheir purchases of corn, while buying more wheat, pushing their spread back to-\nwards the norm. Spread traders bet against deviations and for a return to normalcy. \nIn this situation, a spreader will short corn and buy wheat, instead of taking a direc-\ntional trade in either market.", - "type": "text" - }, - { - "block_id": "p208-b6", - "global_id": 2236, - "bbox": [ - 72.0, - 323.9, - 434.76, - 407.23 - ], - "text": "Spread trading is safer than directional trading and has lower margin require-\nments. Amateurs do not understand spreads and have little interest in these reliable \nbut slow-moving trades. There is not a single book on spreads I can recommend, a \nsign of how well professionals have sown up this area of knowledge and kept the out-\nsiders out. This is one of a handful of niches in the markets where professionals are \nearning high incomes without the benefit of a single good how-to book.", - "type": "text" - }, - { - "block_id": "p208-b7", - "global_id": 2237, - "bbox": [ - 72.0, - 427.2, - 223.27, - 444.14 - ], - "text": "Commitments of Traders", - "type": "text" - }, - { - "block_id": "p208-b8", - "global_id": 2238, - "bbox": [ - 72.0, - 449.83, - 434.75, - 505.15 - ], - "text": "Brokers report their clients’ positions to the Commodity Futures Trading Commis-\nsion (CFTC), which strips away personal data and releases summaries to the public. \nTheir Commitments of Traders (COT) reports are among the best sources of infor-\nmation on what the smart money is doing in the futures markets.", - "type": "text" - }, - { - "block_id": "p208-b9", - "global_id": 2239, - "bbox": [ - 72.0, - 505.84, - 434.75, - 575.17 - ], - "text": "COT reports reveal positions of three groups—hedgers, big traders, and small \ntraders. Hedgers identify themselves to brokers because that entitles them to sev-\neral advantages, such as lower margin deposits. Big traders are those who hold the \nnumber of contracts above the “reporting requirements,” set by the government. \nWhoever is not a hedger or a big trader is a small trader.", - "type": "text" - }, - { - "block_id": "p208-b10", - "global_id": 2240, - "bbox": [ - 72.0, - 575.86, - 434.7, - 631.18 - ], - "text": "In the old days, big traders used to be the smart money. Today, the markets are \nbigger, the reporting requirements much higher, and big traders are likely to be com-\nmodity funds, most of them not smarter than run of the mill traders. The hedgers \nare today’s smart money, but understanding their positions isn’t as easy as it seems.", - "type": "text" - }, - { - "block_id": "p208-b11", - "global_id": 2241, - "bbox": [ - 72.0, - 631.88, - 434.76, - 687.2 - ], - "text": "For example, a COT report may show that in a certain market, hedgers hold 70% \nof shorts. A beginner who thinks this is bearish may be completely off the mark if \nhe doesn’t know that normally hedgers hold 90% of shorts in that market, making \nthe 70% stance wildly bullish. Savvy COT analysts compare current positions to", - "type": "text" - } - ] - }, - { - "page_num": 209, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p209-b0", - "global_id": 2242, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "46. FUTURES\t\n193", - "type": "text" - }, - { - "block_id": "p209-b1", - "global_id": 2243, - "bbox": [ - 71.94, - 57.83, - 434.65, - 127.15 - ], - "text": "historical norms and look for situations where hedgers, or the smart money, and \nsmall traders, many of whom are gamblers, are dead set against each other. If you \nfind that in a certain market the smart money is overwhelmingly on one side, while \nthe small specs are mobbing the other, it is time to use technical analysis to look for \nentries on the side of hedgers.", - "type": "text" - }, - { - "block_id": "p209-b2", - "global_id": 2244, - "bbox": [ - 72.0, - 147.2, - 233.09, - 164.13 - ], - "text": "Margins and Risk Control", - "type": "text" - }, - { - "block_id": "p209-b3", - "global_id": 2245, - "bbox": [ - 72.0, - 169.83, - 434.76, - 295.17 - ], - "text": "Futures’ low margin requirements make them more rewarding than stocks but also \nmuch more dangerous. When buying stocks in the United States, you must put up \nat least half of their cash value with the broker giving you a margin loan for the rest. \nIf you have $40,000 in your account, you may buy $80,000 worth of stocks, and no \nmore. This margin limit was implemented after the Crash of 1929 when it became \nclear that low margins led to excessive speculation, which contributed to the vi-\nciousness of declines. Prior to 1929, speculators could buy stocks on a 10% margin, \nwhich worked great in bull markets but forced them to liquidate when prices slid, \npushing the market lower during bear markets.", - "type": "text" - }, - { - "block_id": "p209-b4", - "global_id": 2246, - "bbox": [ - 72.0, - 295.86, - 434.76, - 351.18 - ], - "text": "Margins of only three to five percent are common in the futures markets, allowing \ntraders to make huge bets with little money. With $40,000 in your account, you may \ncontrol about a million dollars’ worth of merchandise, be it pork bellies or stock \nindex futures.", - "type": "text" - }, - { - "block_id": "p209-b5", - "global_id": 2247, - "bbox": [ - 72.0, - 351.88, - 434.75, - 435.21 - ], - "text": "For example, if gold trades at $1,500/oz and you buy a 100-oz contract on a \n$7,500 margin and catch a $75 price move, you’ll gain 100%. A beginner looks at \nthese numbers and exclaims, “where have I been all my life?” He thinks he’s found \na royal road to riches. But there is a catch. Before that market rises $75, it may dip \n$50. That meaningless blip will trigger a margin call and force a small speculator’s \naccount to go bust—despite his correct forecast.", - "type": "text" - }, - { - "block_id": "p209-b6", - "global_id": 2248, - "bbox": [ - 72.0, - 435.9, - 434.76, - 505.23 - ], - "text": "Easy margins attract adrenaline junkies who quickly go up in smoke. Futures are \nvery tradable—but only if you follow strict money management rules and don’t go \ncrazy with easy margins. Professionals put on small initial positions and pyramid \nthem if a trade moves in their favor. They keep adding new contracts while moving \nstops beyond breakeven.", - "type": "text" - }, - { - "block_id": "p209-b7", - "global_id": 2249, - "bbox": [ - 72.0, - 505.92, - 434.76, - 603.26 - ], - "text": "When you become interested in futures, it’s a good idea to make your first steps in \nthose markets where you know something about the fundamentals. If you are a cattle \nrancher, a house builder, or a loan officer, then cattle, lumber, or interest rate futures \nwould be logical starting points. If you have no particular interests, make your first \nsteps in relatively inexpensive markets. In the United States, corn, sugar, and, in a \nslow year, copper can be good markets for beginners. They are liquid, volatile, and \nnot too expensive.", - "type": "text" - }, - { - "block_id": "p209-b8", - "global_id": 2250, - "bbox": [ - 72.0, - 603.95, - 434.68, - 645.27 - ], - "text": "We’ll return to the futures markets in Part 9, “Risk Management.” There you’ll \nfind which contracts you may or may not trade, depending on their price and volatil-\nity as well as your account size.", - "type": "text" - }, - { - "block_id": "p209-b9", - "global_id": 2251, - "bbox": [ - 72.0, - 645.96, - 432.01, - 687.28 - ], - "text": "Futures traders with small accounts sometimes trade mini-contracts. For exam-\nple, a regular contract of gold represents 100 oz of the yellow metal, but a mini-\ncontract covers only 20 oz. Mini-contracts trade during the same hours as regu-", - "type": "text" - } - ] - }, - { - "page_num": 210, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p210-b0", - "global_id": 2252, - "bbox": [ - 72.0, - 33.66, - 432.05, - 47.21 - ], - "text": "194\t\nTRADING VEHICLES", - "type": "text" - }, - { - "block_id": "p210-b1", - "global_id": 2253, - "bbox": [ - 72.0, - 57.83, - 434.74, - 113.15 - ], - "text": "lar contracts and closely track their prices. Their commissions are similar to those \nfor regular contracts, taking a proportionately bigger bite from each trade. Their \nslippage tends to be bigger due to lower volumes. The exceptions are stock index \nfutures, where mini contracts have higher volumes than regular ones.", - "type": "text" - }, - { - "block_id": "p210-b2", - "global_id": 2254, - "bbox": [ - 73.55, - 140.86, - 160.55, - 159.5 - ], - "text": "■\n■47. Forex", - "type": "text" - }, - { - "block_id": "p210-b3", - "global_id": 2255, - "bbox": [ - 72.0, - 169.83, - 434.66, - 239.15 - ], - "text": "The currency market is the largest asset class in the world by trading volume, with a \nturnover of over $4 trillion per day. Currencies trade around the clock—from 20:15 \nGMT on Sunday to 22 GMT on Friday, stopping only on weekends. While some cur-\nrency trades serve the hedging needs of importers and exporters, most transactions \nare speculative.", - "type": "text" - }, - { - "block_id": "p210-b4", - "global_id": 2256, - "bbox": [ - 72.0, - 239.85, - 434.74, - 309.17 - ], - "text": "The United States is the only country in the world where most people don’t think \nmuch about currencies. The moment an American sets foot abroad, he realizes that \neveryone, from executives to taxi drivers, watches the exchange rates. When people \noutside the United States get their hands on a bit of trading capital, often their first \nidea is to trade forex.", - "type": "text" - }, - { - "block_id": "p210-b5", - "global_id": 2257, - "bbox": [ - 72.0, - 309.87, - 434.68, - 365.19 - ], - "text": "The forex market has no central location. Institutions deal in the interbank mar-\nket, trading with each other using online platforms, such as Bloomberg or Reuters. \nUnless you can trade $10 million of spot forex at a pop, you’ll be trading retail, going \nthrough a broker.", - "type": "text" - }, - { - "block_id": "p210-b6", - "global_id": 2258, - "bbox": [ - 72.0, - 365.88, - 434.72, - 463.22 - ], - "text": "Most beginners open accounts at forex shops where they immediately run into a \nfatal flaw—your broker is your enemy. When you trade stocks, futures, or options, \nyour broker is your agent: he executes your trades for a fee, and that’s the end of it. \nNot so in most forex (as well as CFD) houses, where your broker is likely to take \nthe opposite side of every trade. You and the forex house are now against each other: \nif you lose, your broker will profit, and if you win, he’ll lose. Since the house holds \nmost of the cards, it has many ways to achieve the desired result.", - "type": "text" - }, - { - "block_id": "p210-b7", - "global_id": 2259, - "bbox": [ - 72.0, - 463.91, - 434.72, - 533.24 - ], - "text": "Most forex houses “bucket” customer orders—accept them without executing \nany trades. They charge spreads, commissions, interest, etc. for non-existent trades. \nI received the clearest explanation of their game from a chatty head dealer at a major \nEuropean forex house (which is now expanding worldwide, with branches in the \nUnited States—I see their billboards in New York).", - "type": "text" - }, - { - "block_id": "p210-b8", - "global_id": 2260, - "bbox": [ - 72.0, - 533.93, - 434.75, - 659.27 - ], - "text": "That forex house accepts any trade in any currency pair, whether long or short, \nbut always shifts the bid-ask spread to put itself at an advantage from the get-go. \nThose so-called “trades” never go anywhere—they’re only kept as electronic entries \nin the firm’s books. The forex house charges interest if its customers take their phan-\ntom “positions” overnight, even though there is never any position, since the house \nsimply holds the opposite side of each trade. The only time the firm goes to the le-\ngitimate market is when multiple client orders cluster on the same side of the same \ncurrency pair in excess of a million dollars—that’s when the house hedges its own \nexposure in the real market.", - "type": "text" - } - ] - }, - { - "page_num": 211, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p211-b0", - "global_id": 2261, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "47. FOREX\t\n195", - "type": "text" - }, - { - "block_id": "p211-b1", - "global_id": 2262, - "bbox": [ - 71.94, - 57.83, - 434.69, - 155.16 - ], - "text": "When you trade stocks, options, or futures, your broker buys or sells on your \nbehalf, earning a commission for this service, and doesn’t care whether you win or \nlose. This is great, because he has no incentive to push you into losing. On the other \nhand, a forex house that buckets your orders wants you to lose, so that it can win. In \naddition to shifting bid-ask spreads and charging interest on non-existent positions, \nit may even charge a daily “resettlement fee”—the full bid-ask spread for every day \nyou hold a trade.", - "type": "text" - }, - { - "block_id": "p211-b2", - "global_id": 2263, - "bbox": [ - 71.94, - 155.86, - 434.69, - 281.2 - ], - "text": "Forex shops help ensure their clients’ demise by offering homicidal leverage. I’ve \nseen them offer leverage of 100:1 and even 400:1. A newcomer who scrapes to-\ngether a $1,000 stake can suddenly control a position worth a hundred thousand dol-\nlars. This means that the slightest price wiggle against him is guaranteed to wipe out \nhis equity. That’s why those shops confidently keep clients’ money in-house, never \ntransmitting their trades to the real market—why share the loot with anyone else? \nThey are so certain of their clients’ demise that many compensate employees with \na percentage of the client deposits that they bring in—funds deposited with a forex \nhouse are as good as theirs.", - "type": "text" - }, - { - "block_id": "p211-b3", - "global_id": 2264, - "bbox": [ - 71.94, - 281.89, - 434.64, - 351.22 - ], - "text": "“The market has long been plagued by swindlers preying on the gullible,” accord-\ning to The New York Times. “The average individual foreign-exchange-trading victim \nloses about $15,000, according to CFTC records,” writes The Wall Street Journal. Cur-\nrency trading “has become the fraud du jour,” according to Michael Dunn of the U.S. \nCommodity Futures Trading Commission.", - "type": "text" - }, - { - "block_id": "p211-b4", - "global_id": 2265, - "bbox": [ - 71.94, - 351.91, - 434.63, - 435.24 - ], - "text": "In August 2008, the CFTC set up a special task force to deal with growing for-\neign exchange fraud. In January 2010, the CFTC identified a “number of improper \npractices” in the retail foreign exchange market, “among them solicitation fraud, a \nlack of transparency in the pricing and execution of transactions, unresponsiveness \nto customer complaints, and the targeting of unsophisticated, elderly, low net worth \nand other vulnerable individuals.” It proposed new rules limiting leverage to 10 to 1.", - "type": "text" - }, - { - "block_id": "p211-b5", - "global_id": 2266, - "bbox": [ - 71.94, - 435.94, - 434.6, - 477.25 - ], - "text": "Frauds may include churning customer accounts, selling useless software, im-\nproperly managing “managed accounts,” false advertising, and Ponzi schemes. All the \nwhile, promoters claim that trading foreign exchange is a road to profits.", - "type": "text" - }, - { - "block_id": "p211-b6", - "global_id": 2267, - "bbox": [ - 71.94, - 477.95, - 434.69, - 575.28 - ], - "text": "The real forex market is a zero sum game, in which well-capitalized professional \ntraders, many of whom work for banks, devote full-time attention to trading. An \ninexperienced retail trader has a significant information disadvantage. The retail \ntrader always pays the bid-ask spread, which lowers his odds of winning. Retail \nforex traders are almost always undercapitalized and subject to the problem of \n“gambler’s ruin.” Even in a fair game between two players, the one with the lower \namount of capital has a higher probability of going bust in the long run.", - "type": "text" - }, - { - "block_id": "p211-b7", - "global_id": 2268, - "bbox": [ - 71.94, - 575.98, - 434.69, - 659.3 - ], - "text": "Having observed forex shops for decades, I was amused to see what my best stu-\ndent did when he became interested in forex. This multimillionaire stock trader \ndecided to check out forex houses by opening large accounts and then waiting for \nthe night, when forex trading was at its thinnest. That’s when he placed his orders, \nalways of a very unusual and atypical size, and watched the tape. There were only two \nhouses that showed his orders on tape—the rest, apparently, got bucketed.", - "type": "text" - } - ] - }, - { - "page_num": 212, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p212-b0", - "global_id": 2269, - "bbox": [ - 72.0, - 33.66, - 432.05, - 47.21 - ], - "text": "196\t\nTRADING VEHICLES", - "type": "text" - }, - { - "block_id": "p212-b1", - "global_id": 2270, - "bbox": [ - 72.0, - 57.83, - 434.75, - 141.16 - ], - "text": "I enjoy trading currencies, but wouldn’t go near a forex house. Instead, I trade \nelectronic currency futures. That’s what I recommend to anyone interested in trad-\ning foreign exchange. Futures brokers work for you, not against you; futures spreads \nare more narrow, commissions more reasonable, and no interest is charged for the \nprivilege of holding a position. There are contracts for most major currency pairs \nand even mini-contracts for euro/dollar and yen/dollar.", - "type": "text" - }, - { - "block_id": "p212-b2", - "global_id": 2271, - "bbox": [ - 72.0, - 141.85, - 434.77, - 211.18 - ], - "text": "One of the real challenges of currencies is that they move around the clock. You \nmay enter a trade, analyze it in the evening, and decide to take profits the follow-\ning day. When you wake up, there are no profits to be taken. The turning point you \nsaw coming has already come and gone, only not in the United States, but in Asia or \nEurope. Someone had picked your pocket while you slept!", - "type": "text" - }, - { - "block_id": "p212-b3", - "global_id": 2272, - "bbox": [ - 72.0, - 211.87, - 434.76, - 309.24 - ], - "text": "Major financial institutions deal with this problem by using the system of  “passing \nthe book.” A bank may open a position in Tokyo, manage it intraday, and then transfer \nit to its London branch before closing for the night. London continues to manage that \nand other positions, and in the evening passes the book to New York, which manages \nit until it passes it back to Tokyo. Currencies follow the sun, and small traders can’t \nkeep up with it. If you trade currencies, you either need to take a very long-term \nview and ignore daily fluctuations, or else day-trade and avoid overnight positions.", - "type": "text" - } - ] - }, - { - "page_num": 213, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p213-b0", - "global_id": 2273, - "bbox": [ - 72.0, - 118.61, - 381.89, - 171.84 - ], - "text": "Risk Management", - "type": "text" - }, - { - "block_id": "p213-b1", - "global_id": 2274, - "bbox": [ - 72.1, - 673.7, - 432.15, - 687.25 - ], - "text": "197", - "type": "text" - }, - { - "block_id": "p213-b2", - "global_id": 2275, - "bbox": [ - 348.1, - 59.86, - 395.91, - 73.41 - ], - "text": "PA R T 9\nPA R T 9", - "type": "text" - }, - { - "block_id": "p213-b3", - "global_id": 2276, - "bbox": [ - 71.2, - 331.94, - 101.04, - 372.34 - ], - "text": "A", - "type": "text" - }, - { - "block_id": "p213-b4", - "global_id": 2277, - "bbox": [ - 71.97, - 337.63, - 434.74, - 392.95 - ], - "text": "good trading system delivers greater profits than losses over a period of time, \nbut even the most carefully designed system doesn’t guarantee success in every \ntrade. No system can assure you of never having a losing trade or even a series of \nlosing trades.", - "type": "text" - }, - { - "block_id": "p213-b5", - "global_id": 2278, - "bbox": [ - 71.97, - 393.64, - 434.7, - 462.97 - ], - "text": "A system is a plan, but as Helmuth von Moltke, a nineteenth-century German \nfield marshal, wrote: “No plan survives contact with the enemy.” The U.S. boxer \nMike Tyson, quoted by The Economist, put it more bluntly: “Everyone has a plan ’til \nthey get punched in the mouth.”  This is why risk control must be an essential part of \nevery trading system.", - "type": "text" - }, - { - "block_id": "p213-b6", - "global_id": 2279, - "bbox": [ - 72.02, - 463.66, - 434.75, - 546.99 - ], - "text": "The inability to manage losses is one of the worst pitfalls in trading. Beginners \nfreeze like deer in the headlights when a deepening loss starts wiping out profits \nof many good trades. It’s a general human tendency to take profits quickly but wait \nfor losing trades to come back to even. By the time the despairing amateur gives up \nhope and closes his trade with a terrible loss, his account is badly and sometimes ir-\nreparably damaged.", - "type": "text" - }, - { - "block_id": "p213-b7", - "global_id": 2280, - "bbox": [ - 72.02, - 547.69, - 434.74, - 575.0 - ], - "text": "To be a successful trader, you need to learn risk management rules and firmly \nimplement them.", - "type": "text" - }, - { - "block_id": "p213-b8", - "global_id": 2281, - "bbox": [ - 73.55, - 602.66, - 326.82, - 621.3 - ], - "text": "■\n■48. Emotions and Probabilities", - "type": "text" - }, - { - "block_id": "p213-b9", - "global_id": 2282, - "bbox": [ - 72.0, - 631.63, - 434.74, - 658.94 - ], - "text": "Money stirs up powerful feelings. The emotional storms, raised by making or losing \nmoney, hit our trading.", - "type": "text" - } - ] - }, - { - "page_num": 214, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p214-b0", - "global_id": 2283, - "bbox": [ - 72.0, - 33.66, - 432.05, - 47.21 - ], - "text": "198\t\nRISK MANAGEMENT", - "type": "text" - }, - { - "block_id": "p214-b1", - "global_id": 2284, - "bbox": [ - 72.0, - 57.83, - 434.75, - 155.16 - ], - "text": "A beginner rushing to place an order may feel giddy with the excitement. He will \nsoon find out that the market offers a painfully expensive form of entertainment. \nEarly in my career, I heard from a professional trader that “successful trading should \nbe a little bit boring.” He spent long hours each day doing homework, sifting through \nmarket data, calculating risks, and maintaining records. Those time-consuming tasks \nweren’t exciting—but his success was built on such grunt work. Beginners and gam-\nblers get a full load of entertainment, but pay for it with losses.", - "type": "text" - }, - { - "block_id": "p214-b2", - "global_id": 2285, - "bbox": [ - 72.0, - 155.86, - 434.72, - 225.18 - ], - "text": "Another emotional mistake is counting money in open trades. Newbies dream \nabout what they can buy with open profits or freeze from the shock of compar-\ning open losses to their paychecks. Thinking about money interferes with decision \nmaking. Professionals focus on managing trades; they count money only after those \ntrades are closed.", - "type": "text" - }, - { - "block_id": "p214-b3", - "global_id": 2286, - "bbox": [ - 72.0, - 225.88, - 434.72, - 323.21 - ], - "text": "A trader who counts profits in an open trade is like a lawyer who, in the middle \nof a trial, starts dreaming of what he’ll buy with his fee. That trial is still going on, \nhis opponents are building a case against his client, and counting money will not help \nhim win—quite the contrary, it’ll distract him and cause him to lose. An amateur \nwho becomes upset counting losses in an open trade is like a surgeon who throws a \ntray of instruments after the patient on the table starts bleeding—his frustration will \nnot improve the outcome of the case.", - "type": "text" - }, - { - "block_id": "p214-b4", - "global_id": 2287, - "bbox": [ - 72.0, - 323.9, - 434.72, - 351.22 - ], - "text": "Professional traders don’t count money in open trades. They do it at the end of an \naccounting period, such as a month.", - "type": "text" - }, - { - "block_id": "p214-b5", - "global_id": 2288, - "bbox": [ - 72.0, - 351.91, - 434.77, - 449.24 - ], - "text": "If you were to ask me about an open trade, I could answer that it’s a bit ahead, a lot \nahead, or a bit behind (a lot behind is unlikely because of my stops). If you were to \npress me for a number, I might tell you how many ticks I’m ahead or behind, but I’ll \nnever translate those ticks into dollars. It took me years to train myself to break the \ndestructive habit of counting money in open trades. I can count ticks, but my mind \nstops before converting them into dollars. It’s like being on a diet—there is plenty \nof food around, but you don’t touch it.", - "type": "text" - }, - { - "block_id": "p214-b6", - "global_id": 2289, - "bbox": [ - 72.0, - 449.94, - 434.72, - 547.27 - ], - "text": "Focus on managing your trade, and the money will follow almost as an afterthought.\nAnother key point: a professional doesn’t get worked up about his wins or losses \nin a single trade. There is a great deal of randomness in the markets. We can do \neverything right—and still end up with a losing trade, just like a surgeon can do \neverything right and still lose a patient. That’s why a trader should care only about \nhaving a method with a positive expectation and work on being profitable at the end \nof his accounting period.", - "type": "text" - }, - { - "block_id": "p214-b7", - "global_id": 2290, - "bbox": [ - 72.0, - 547.97, - 434.71, - 603.29 - ], - "text": "The goal of a successful professional in any field is to reach his personal best—to \nbecome the best doctor, the best lawyer, or the best trader. Handle each trade like \na surgical procedure—seriously, soberly, without sloppiness or shortcuts. Concen-\ntrate on trading right. When you work this way, money will come later.", - "type": "text" - }, - { - "block_id": "p214-b8", - "global_id": 2291, - "bbox": [ - 72.0, - 623.2, - 210.04, - 640.14 - ], - "text": "Why Johnny Can’t Sell", - "type": "text" - }, - { - "block_id": "p214-b9", - "global_id": 2292, - "bbox": [ - 72.0, - 645.83, - 434.74, - 673.14 - ], - "text": "Your survival and success depend on your willingness to cut losses while they’re \nrelatively small.", - "type": "text" - } - ] - }, - { - "page_num": 215, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p215-b0", - "global_id": 2293, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "48. EMOTIONS AND PROBABILITIES\t\n199", - "type": "text" - }, - { - "block_id": "p215-b1", - "global_id": 2294, - "bbox": [ - 71.94, - 57.83, - 434.64, - 113.15 - ], - "text": "When a trade starts going against a beginner, he hangs on, hoping for a reversal \nin his favor. When he gets a margin call, he scrambles to send more money to the \nbroker, as if the initial loss hadn’t been bad enough. Why should a losing trade turn \nin his favor? There’s no logical reason, only wishful thinking.", - "type": "text" - }, - { - "block_id": "p215-b2", - "global_id": 2295, - "bbox": [ - 71.94, - 113.84, - 434.69, - 169.16 - ], - "text": "Stubbornly holding a losing trade only deepens the wound. Losses have a way of \nsnowballing until what initially seemed like a bad loss starts looking like a bargain \nbecause the current drawdown is so much worse. Finally, a desperate loser bites the \nbullet and closes out a trade, taking a severe loss.", - "type": "text" - }, - { - "block_id": "p215-b3", - "global_id": 2296, - "bbox": [ - 71.94, - 169.86, - 434.68, - 267.19 - ], - "text": "Right after he exits, the market reverses and comes roaring back.\nThe trader is ready to smash his head against a wall—had he hung on, he would \nhave made money. Such reversals happen time and again because most losers re-\nspond to the same stimuli. People have similar emotions, regardless of their national-\nity or education. A frightened trader with sweaty palms and a pounding heart feels \nand acts the same way, whether he grew up in New York or Hong Kong and whether \nhe had 2 or 20 years of schooling.", - "type": "text" - }, - { - "block_id": "p215-b4", - "global_id": 2297, - "bbox": [ - 71.94, - 267.89, - 434.64, - 351.22 - ], - "text": "The intellectual demands of trading are modest, but its emotional demands are im-\nmense. Many years ago, a highly educated but very emotional trader showed me how \nto trade divergences near channel walls. I fine-tuned his method, added risk manage-\nment rules, and continue to make money with it to this day. The man who taught \nme had busted out because of his lack of discipline and ended up going door to door, \nselling aluminum siding. Emotional trading and impulsivity are not good for success.", - "type": "text" - }, - { - "block_id": "p215-b5", - "global_id": 2298, - "bbox": [ - 71.94, - 351.91, - 434.7, - 519.26 - ], - "text": "Roy Shapiro, a New York psychologist from whose article the title of this sub-\nchapter is borrowed, writes: “With great hope, in the private place where we make \nour trading decisions, our current idea is made ready.... one difficulty in selling is \nthe attachment experienced toward the position. After all, once something is ours, \nwe naturally tend to become attached to it.... This attachment to the things we buy \nhas been called the “endowment effect” by psychologists and economists and we all \nrecognize it in our financial transactions as well as in our inability to part with that \nold sports jacket hanging in the closet. The speculator is the parent of the idea.... \nthe position takes on meaning as a personal extension of self, almost as one’s child \nmight.... Another reason that Johnny does not sell, even when the position may be \nlosing ground, is because he wants to dream.... For many, at the moment of pur-\nchase, critical judgment weakens and hope ascends to govern the decision process.”", - "type": "text" - }, - { - "block_id": "p215-b6", - "global_id": 2299, - "bbox": [ - 71.94, - 519.96, - 434.69, - 617.29 - ], - "text": "Dreaming in the markets is a luxury we can’t afford.\nDr. Shapiro describes a test that shows how people conduct business involving \na chance. First, a group of people are given a choice: a 75 percent chance to win \n$1000 with a 25 percent chance of getting nothing—or a sure $700. Four out of \nfive subjects take the second choice, even after it is explained to them that the first \nchoice leads to a $750 gain over time. The majority makes the emotional decision \nand settles for a smaller gain.", - "type": "text" - }, - { - "block_id": "p215-b7", - "global_id": 2300, - "bbox": [ - 71.94, - 617.99, - 434.68, - 673.31 - ], - "text": "Another test is given: People have to choose between a sure loss of $700 or a 75 \npercent chance of losing $1000 and a 25 percent chance of losing nothing. Three out \nof four take the second choice, condemning themselves to lose $50 more than they \nhave to. In trying to avoid risk, they maximize losses!", - "type": "text" - } - ] - }, - { - "page_num": 216, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p216-b0", - "global_id": 2301, - "bbox": [ - 72.0, - 33.66, - 432.05, - 47.21 - ], - "text": "200\t\nRISK MANAGEMENT", - "type": "text" - }, - { - "block_id": "p216-b1", - "global_id": 2302, - "bbox": [ - 72.0, - 57.83, - 434.74, - 127.15 - ], - "text": "Emotional traders crave certain gains and turn down profitable wagers that in-\nvolve uncertainty. They go into risky gambles to postpone taking losses. It is human \nnature to take profits quickly and losses slowly. The irrational behavior increases \nwhen people feel under pressure. According to Dr. Shapiro, at the racetrack, “bets \non long shots increase in the last two races of the day.”", - "type": "text" - }, - { - "block_id": "p216-b2", - "global_id": 2303, - "bbox": [ - 72.0, - 127.85, - 434.76, - 295.14 - ], - "text": "Prof. Daniel Kahneman writes in his book Thinking, Fast and Slow: “The sure loss is \nvery aversive, and this drives you to take the risk … Considerable loss aversion exists \neven when the amount at risk is minuscule relative to your wealth … losses loom \nlarger than corresponding gains.” He adds: “Animals, including people, fight harder \nto prevent losses than to achieve gains” and spells it out: “People who face very bad \noptions take desperate gambles, accepting a high probability of making things worse \nin exchange for a small hope of avoiding a large loss. Risk taking of this kind often \nturns manageable failures into disasters.”  Why do we act this way? Prof. Kahneman \nexplains: “Except for the very poor, for whom income coincides with survival, the \nmain motivators of money-seeking are not necessarily economic. Money is a proxy \nfor points on a scale of self-regard and achievement.”  These rewards and punish-\nments, promises and threats, are all in our heads.", - "type": "text" - }, - { - "block_id": "p216-b3", - "global_id": 2304, - "bbox": [ - 72.0, - 295.84, - 434.76, - 351.16 - ], - "text": "Emotional trading destroys losers. A review of trading records usually shows that \nthe worst damage was done by a few large losses or a long string of losses, while \ntrying to trade one’s way out of a hole. The discipline of good money management \nwould have kept us out of that hole in the first place.", - "type": "text" - }, - { - "block_id": "p216-b4", - "global_id": 2305, - "bbox": [ - 72.0, - 371.2, - 247.64, - 388.14 - ], - "text": "Probability and Innumeracy", - "type": "text" - }, - { - "block_id": "p216-b5", - "global_id": 2306, - "bbox": [ - 72.0, - 393.83, - 434.68, - 435.14 - ], - "text": "Innumeracy—the inability to count or understand the basic notions of probability—\nis a fatal weakness for traders. The counting skills aren’t hard, can be picked up from \nmany basic books, and then sharpened with some practice.", - "type": "text" - }, - { - "block_id": "p216-b6", - "global_id": 2307, - "bbox": [ - 72.0, - 435.84, - 434.68, - 519.17 - ], - "text": "The lively book Innumeracy by John Allen Paulos is an excellent primer on the con-\ncepts of probability. Paulos describes being told by a seemingly intelligent person at a \ncocktail party: “If the chance of rain is 50 percent on Saturday and 50 percent on Sun-\nday, then it is 100 percent certain it will be a rainy weekend.” Someone who under-\nstands so little about probability is sure to lose money trading. You owe it to yourself \nto develop a grasp of the basic mathematical and logical concepts involved in trading.", - "type": "text" - }, - { - "block_id": "p216-b7", - "global_id": 2308, - "bbox": [ - 72.0, - 519.86, - 434.74, - 561.18 - ], - "text": "There are very few ironclad certainties in market analysis, which is largely based \non probabilities. “If the signals A and B are present, then the outcome C will occur” \nis not the kind of logic that holds up in the markets.", - "type": "text" - }, - { - "block_id": "p216-b8", - "global_id": 2309, - "bbox": [ - 72.0, - 561.88, - 434.74, - 631.2 - ], - "text": "Ralph Vince begins his important book Portfolio Management Formulas with this de-\nlightful paragraph: “Toss a coin in the air. For an instant you experience one of the \nmost fascinating paradoxes of nature—the random process. While the coin is in \nthe air there is no way to tell for certain whether it will land heads or tails. Yet over \nmany tosses, the outcome can be reasonably predicted.”", - "type": "text" - }, - { - "block_id": "p216-b9", - "global_id": 2310, - "bbox": [ - 72.0, - 631.9, - 434.78, - 687.22 - ], - "text": "Mathematical expectation is an important concept for traders. Each trade has \neither a positive expectation, also called the player’s edge, or a negative expectation, \nalso called the house advantage, depending on who has better odds in a game. If you \nand I flip a coin, neither of us has an edge—each has a 50 percent chance of winning. If", - "type": "text" - } - ] - }, - { - "page_num": 217, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p217-b0", - "global_id": 2311, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "48. EMOTIONS AND PROBABILITIES\t\n201", - "type": "text" - }, - { - "block_id": "p217-b1", - "global_id": 2312, - "bbox": [ - 71.94, - 57.83, - 434.68, - 113.15 - ], - "text": "you play the same game in a casino that takes five percent from every pot, you’ll win \nonly 95 cents for every dollar you lose. This “house advantage” will create a negative \nmathematical expectation. No system for money management can beat a negative \nexpectation over a period of time.", - "type": "text" - }, - { - "block_id": "p217-b2", - "global_id": 2313, - "bbox": [ - 72.0, - 133.2, - 211.26, - 150.13 - ], - "text": "A Positive Expectation", - "type": "text" - }, - { - "block_id": "p217-b3", - "global_id": 2314, - "bbox": [ - 72.0, - 155.83, - 434.74, - 239.16 - ], - "text": "A skilled card-counter has an edge against a casino, unless they detect him and throw \nhim out. Casinos love drunken gamblers but hate card counters. An edge lets you \nwin more often than lose over a period of time. Without an edge, you might as well \ngive money to charity. In trading, the edge comes from systems that deliver greater \nprofits than losses, after slippage and commissions, over a period of time. Acting on \nhunches leads to losses.", - "type": "text" - }, - { - "block_id": "p217-b4", - "global_id": 2315, - "bbox": [ - 72.0, - 239.85, - 434.65, - 267.16 - ], - "text": "The best trading systems are simple and robust. They have very few elements. The \nmore complex the systems, the higher the risk that some of its components will break.", - "type": "text" - }, - { - "block_id": "p217-b5", - "global_id": 2316, - "bbox": [ - 72.0, - 267.86, - 434.76, - 337.18 - ], - "text": "Traders love to optimize systems, making them fit past data. The trouble is, your \nbroker won’t let you trade in the past. Markets change, and indicator parameters that \nwould have nailed the trends last month are unlikely to nail them a month from now. \nInstead of optimizing your system, try to de-optimize it. A robust system holds up \nwell to market changes and beats a heavily optimized system in real trading.", - "type": "text" - }, - { - "block_id": "p217-b6", - "global_id": 2317, - "bbox": [ - 72.0, - 337.88, - 434.76, - 379.2 - ], - "text": "Finally, once you develop a good system, stop messing with it. If you like to tinker, \ndesign another system. As Robert Prechter put it: “Most traders take a good system \nand destroy it by trying to make it into a perfect system.”", - "type": "text" - }, - { - "block_id": "p217-b7", - "global_id": 2318, - "bbox": [ - 72.0, - 379.89, - 434.74, - 435.21 - ], - "text": "Once you have a trading system that works, it’s time to set the rules for money \nmanagement. You can win only if you have a positive mathematical expectation from \na sensible trading system. Money management will help you exploit a good system, \nbut cannot rescue a bad one.", - "type": "text" - }, - { - "block_id": "p217-b8", - "global_id": 2319, - "bbox": [ - 72.0, - 455.2, - 236.94, - 472.14 - ], - "text": "Businessman’s Risk or Loss", - "type": "text" - }, - { - "block_id": "p217-b9", - "global_id": 2320, - "bbox": [ - 72.0, - 477.83, - 434.74, - 547.15 - ], - "text": "We analyze markets in order to identify trends. Be careful not to become over-\nconfident when anticipating future prices. The future is fundamentally unknowable. \nWhen we buy, expecting a rally, it is entirely possible that an unforeseen event may \nflip the market and send it down. Your actions in response to surprises will define \nyou as a trader.", - "type": "text" - }, - { - "block_id": "p217-b10", - "global_id": 2321, - "bbox": [ - 72.0, - 547.85, - 434.76, - 617.17 - ], - "text": "A pro manages his trades, accepting what’s called a “businessman’s risk.” This \nmeans that the amount he risks exposes him to only a minor equity drop. A loss, on \nthe other hand, may threaten an account’s health and even survival. We must draw a \nclear line between a businessman’s risk and a loss. That border is defined by the frac-\ntion of the account a trader puts at risk in a trade.", - "type": "text" - }, - { - "block_id": "p217-b11", - "global_id": 2322, - "bbox": [ - 72.0, - 617.87, - 434.71, - 659.18 - ], - "text": "If you follow the risk management rules described below, you’ll accept only a \nnormal businessman’s risk. Violating a well-defined red line will expose you to dan-\ngerous losses.", - "type": "text" - }, - { - "block_id": "p217-b12", - "global_id": 2323, - "bbox": [ - 72.0, - 659.88, - 434.74, - 687.22 - ], - "text": "“This time is different,” says an undisciplined trader. “I’ll give this trade a little extra \nroom.”  The market seduces traders into breaking their rules. Will you follow yours?", - "type": "text" - } - ] - }, - { - "page_num": 218, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p218-b0", - "global_id": 2324, - "bbox": [ - 72.0, - 33.66, - 432.05, - 47.21 - ], - "text": "202\t\nRISK MANAGEMENT", - "type": "text" - }, - { - "block_id": "p218-b1", - "global_id": 2325, - "bbox": [ - 72.0, - 57.83, - 434.75, - 183.17 - ], - "text": "Once, I chaired a panel at a gathering of money managers at which one of the pre-\nsenters had nearly a billion dollars in his fund. A middle-aged man, he got into this \nbusiness in his 20s, while working for a naval consulting firm after graduate school. \nBored with his day job, he designed a trading system but couldn’t trade it because it \nrequired a minimum of $200,000, which he didn’t have in those days. “I had to go \nto other people,” he said, “and ask them for money. Once I explained to them what \nI was going to do and they gave me money, I had to stick to my system. It would \nhave been unconscionable to deviate from the system I told them I would follow. My \npoverty worked for me.” Poverty and integrity.", - "type": "text" - }, - { - "block_id": "p218-b2", - "global_id": 2326, - "bbox": [ - 73.55, - 210.86, - 395.84, - 229.5 - ], - "text": "■\n■49. The Two Main Rules of Risk Control", - "type": "text" - }, - { - "block_id": "p218-b3", - "global_id": 2327, - "bbox": [ - 72.0, - 239.83, - 434.64, - 281.14 - ], - "text": "If trading is a high-wire act, then safety demands stringing a net underneath that wire. If \nwe slip, the net will save us from getting smashed against the floor. The only thing bet-\nter than a safety net is two safety nets: if one doesn’t catch us as we fall, the other will.", - "type": "text" - }, - { - "block_id": "p218-b4", - "global_id": 2328, - "bbox": [ - 72.0, - 281.84, - 434.74, - 351.16 - ], - "text": "Even the best planned trades can go awry because of randomness in the markets. \nEven the best analyses and the clearest trade setups can’t prevent accidents. What \nyou can control is risk. You do it by managing the size of your trades and the place-\nment of stops. This is how you keep the inevitable losses small, not allowing them to \ncripple your account, so that you can win in the long run.", - "type": "text" - }, - { - "block_id": "p218-b5", - "global_id": 2329, - "bbox": [ - 72.0, - 351.86, - 434.76, - 435.19 - ], - "text": "Ugly losses stick out like sore thumbs from most account records. Every per-\nformance review shows that a single terrible loss or a short string of bad losses did \nmost of the damage to an account. Had a trader cut his losses sooner, his bottom \nline would have been much higher. Traders dream of profits but freeze when a los-\ning trade hits them. If you follow risk management rules, you’ll quickly get out of \nharm’s way instead of waiting and praying for the market to turn.", - "type": "text" - }, - { - "block_id": "p218-b6", - "global_id": 2330, - "bbox": [ - 72.0, - 435.88, - 434.7, - 505.21 - ], - "text": "Markets can snuff out an account with a single horrible loss that effectively takes a \nperson out of the game, like a shark bite. Markets can also kill with a series of bites, \nnone of them lethal but combined they strip an account to the bone, like a pack of \npiranhas. The two pillars of money management are the 2% and 6% Rules. The 2% \nRule will save your account from shark bites and the 6% Rule from piranhas.", - "type": "text" - }, - { - "block_id": "p218-b7", - "global_id": 2331, - "bbox": [ - 72.0, - 525.2, - 218.34, - 542.14 - ], - "text": "The Two Worst Mistakes", - "type": "text" - }, - { - "block_id": "p218-b8", - "global_id": 2332, - "bbox": [ - 72.0, - 547.83, - 434.7, - 575.14 - ], - "text": "There are two quick ways to ruin an account: not use stops and put on trades that are \ntoo large for that account’s size.", - "type": "text" - }, - { - "block_id": "p218-b9", - "global_id": 2333, - "bbox": [ - 72.0, - 575.84, - 434.7, - 617.15 - ], - "text": "Trading without stops exposes you to unlimited losses. In the following chapters, \nwe’ll discuss the principles and rules of risk control, but they will work only if you \nuse stops.", - "type": "text" - }, - { - "block_id": "p218-b10", - "global_id": 2334, - "bbox": [ - 72.0, - 617.85, - 434.77, - 687.17 - ], - "text": "There are several methods for setting stops, and we’ll discuss them in Chapter \n54. We want to place our stops neither too far nor too close. At this point, just \nkeep in mind that you must use stops. You have to know your maximum level of \nrisk—it’s as simple as that. If you don’t know your maximum level of risk, you’re \nflying blind.", - "type": "text" - } - ] - }, - { - "page_num": 219, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p219-b0", - "global_id": 2335, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "50. THE TWO PERCENT RULE\t\n203", - "type": "text" - }, - { - "block_id": "p219-b1", - "global_id": 2336, - "bbox": [ - 71.94, - 57.83, - 434.66, - 99.14 - ], - "text": "The other fatal error is overtrading—putting on trades whose size is too large for \nyour account. This is like putting a huge sail on a small boat—a strong gust of wind \nwill flip the boat over instead of making it go faster.", - "type": "text" - }, - { - "block_id": "p219-b2", - "global_id": 2337, - "bbox": [ - 71.94, - 99.84, - 434.7, - 141.16 - ], - "text": "People put on trades that are too large for their accounts out of ignorance, greed, \nor a combination of both. There is a simple mathematical rule that gives you the \nmaximum size for every trade, as you are about to see.", - "type": "text" - }, - { - "block_id": "p219-b3", - "global_id": 2338, - "bbox": [ - 73.55, - 168.86, - 286.48, - 187.5 - ], - "text": "■\n■50. The Two Percent Rule", - "type": "text" - }, - { - "block_id": "p219-b4", - "global_id": 2339, - "bbox": [ - 72.0, - 197.83, - 434.75, - 267.15 - ], - "text": "One disastrous loss can do to an account what a shark does to a hapless swimmer. A \npoor beginner who loses a quarter of his equity in a single trade is like a swimmer \nwho just lost an arm or a leg to a shark and is bleeding into the water. He’d have to \ngenerate a 33% return on the remaining capital simply to come back to even. The \nchances of him being able to do that are slim to none.", - "type": "text" - }, - { - "block_id": "p219-b5", - "global_id": 2340, - "bbox": [ - 72.0, - 267.85, - 434.75, - 323.17 - ], - "text": "The typical victim of a “shark bite” loses more money. He loses confidence and \nbecomes fearful of pulling the trigger. The way to avoid “shark bite” losses is by fol-\nlowing the 2% Rule. It will limit your losses to a manageable size—to a normal \nbusinessman’s risk.", - "type": "text" - }, - { - "block_id": "p219-b6", - "global_id": 2341, - "bbox": [ - 72.0, - 337.69, - 434.72, - 365.24 - ], - "text": "The 2% Rule prohibits you from risking more than 2% of your account \nequity on any single trade.", - "type": "text" - }, - { - "block_id": "p219-b7", - "global_id": 2342, - "bbox": [ - 72.0, - 379.86, - 434.65, - 421.17 - ], - "text": "For example, if you have $50,000 in your account, the 2% Rule limits your maxi-\nmum risk on any trade to $1,000. This is not the size of your trade—it’s the amount \nyou put at risk, based on the distance from your entry to your stop.", - "type": "text" - }, - { - "block_id": "p219-b8", - "global_id": 2343, - "bbox": [ - 72.0, - 421.87, - 434.74, - 505.2 - ], - "text": "Let’s say you decide to buy a stock for $40 and put a stop at $38, just below \nsupport. This means you’ll be risking $2 per share. Dividing your total permitted \nrisk of $1,000 by your $2 risk per share tells you that you may trade no more than \n500 shares. You are perfectly welcome to trade fewer shares—you don’t have to \ngo the max every time. If you feel very bullish about that stock and want to trade \nthe maximum permitted size, that number of shares will be limited to 500.", - "type": "text" - }, - { - "block_id": "p219-b9", - "global_id": 2344, - "bbox": [ - 72.0, - 505.89, - 434.72, - 547.21 - ], - "text": "Good market analysis alone will not make you a winner. The ability to find good \ntrades will not guarantee success. Markets are full of good analysts who destroy their \naccounts. You can profit from your research only if you protect yourself from sharks.", - "type": "text" - }, - { - "block_id": "p219-b10", - "global_id": 2345, - "bbox": [ - 72.0, - 547.9, - 434.77, - 603.22 - ], - "text": "I’ve seen traders make 20, 30, and once even 50 profitable trades in a row, and \nstill end up losing money. When you’re on a winning streak, it’s easy to feel you’ve \nfigured out the game. Then a disastrous loss wipes out all profits and tears into your \nequity. You need the shark repellent of good money management.", - "type": "text" - }, - { - "block_id": "p219-b11", - "global_id": 2346, - "bbox": [ - 72.0, - 603.92, - 434.77, - 687.25 - ], - "text": "A good trading system will give you an edge in the long run, but in the short run \nthere is a great deal of randomness in the markets. The outcome of any single trade \nis close to a toss-up. A professional trader expects to be profitable by the end of the \nmonth or the quarter, but ask him whether he’ll make money on his next trade and \nhe’ll honestly say he doesn’t know. That’s why he uses stops: to prevent negative \ntrades from damaging his account.", - "type": "text" - } - ] - }, - { - "page_num": 220, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p220-b0", - "global_id": 2347, - "bbox": [ - 72.0, - 33.66, - 432.05, - 47.21 - ], - "text": "204\t\nRISK MANAGEMENT", - "type": "text" - }, - { - "block_id": "p220-b1", - "global_id": 2348, - "bbox": [ - 72.0, - 57.83, - 434.75, - 113.15 - ], - "text": "Technical analysis can help you decide where to place a stop, which will limit \nyour loss per share. Money management rules will help you protect your account as \na whole. The single most important rule is to limit your exposure on any trade to no \nmore than 2% of your account.", - "type": "text" - }, - { - "block_id": "p220-b2", - "global_id": 2349, - "bbox": [ - 72.0, - 113.84, - 434.76, - 183.17 - ], - "text": "This rule applies only to money in your trading account. It doesn’t include your \nsavings, equity in your house, retirement account, or Christmas club. Your trading \ncapital is the money you’ve dedicated to trading. This is your true risk capital—the \nequity in your trading enterprise. If you have separate trading accounts for stocks, \nfutures, and options, apply the 2% Rule to each account separately.", - "type": "text" - }, - { - "block_id": "p220-b3", - "global_id": 2350, - "bbox": [ - 72.0, - 183.86, - 434.69, - 253.19 - ], - "text": "I’ve noticed a curious difference in how people react when they first hear about \nthe 2% Rule. Newbies with small accounts often object that this number is too low. \nSomeone asked me whether the 2% Rule could be increased when he was feeling \nespecially confident about a trade, and I answered that it would be like adding extra \nlength to the cord for bungee jumping because you like the view from the bridge.", - "type": "text" - }, - { - "block_id": "p220-b4", - "global_id": 2351, - "bbox": [ - 72.0, - 253.88, - 434.78, - 365.22 - ], - "text": "Professionals, on the other hand, often say that 2% is too high and they try to risk \nless. You wouldn’t want to lose 2% of a million dollars on a single trade in one day. \nA hedge fund manager who consulted with me said that his project for the next six \nmonths was to increase his trading size. He never risked more than 0.5% of equity \non a trade—and was going to teach himself to risk 1%. Good traders tend to stay \nwell below the 2% limit. Whenever amateurs and professionals are on the opposite \nsides of an argument, you know which side to choose. Try to risk less than 2%—it is \nsimply the maximum level.", - "type": "text" - }, - { - "block_id": "p220-b5", - "global_id": 2352, - "bbox": [ - 72.0, - 365.92, - 434.75, - 491.26 - ], - "text": "Measure your account equity on the first day of each month. If you start the \nmonth with $100,000 in your account, the 2% Rule allows you to risk a maximum \nof $2,000 per trade. If you have a good month and your equity rises to $105,000, \nthen your 2% limit for the next month will be—what? Quick! Remember, good \ntraders can count! If you have $105,000 in your account, the 2% Rule allows you \nto risk $2,100 and trade a slightly bigger size. If, on the other hand, you had a bad \nmonth and your equity fell to $95,000, the 2% Rule will set your maximum permit-\nted risk at $1,900 per trade for the following month. The 2% Rule links the size of \nyour trades to your performance as well as account size.", - "type": "text" - }, - { - "block_id": "p220-b6", - "global_id": 2353, - "bbox": [ - 72.0, - 511.2, - 277.26, - 528.14 - ], - "text": "The Iron Triangle of Risk Control", - "type": "text" - }, - { - "block_id": "p220-b7", - "global_id": 2354, - "bbox": [ - 72.0, - 533.83, - 434.72, - 575.14 - ], - "text": "How many shares will you buy or sell short in your next trade? Beginners often \nchoose an arbitrary number, such as a thousand or 200 shares. They may buy more if \nthey’ve made money in their latest trade or less if they’ve lost money.", - "type": "text" - }, - { - "block_id": "p220-b8", - "global_id": 2355, - "bbox": [ - 72.0, - 575.84, - 434.74, - 631.16 - ], - "text": "In fact, trade size should be based on a formula instead of vague gut feel. Use the \n2% Rule to make rational decisions on the maximum number of shares you may buy \nor sell short in any trade. I named this process “The Iron Triangle of risk control” \n(Figure 50.1).", - "type": "text" - }, - { - "block_id": "p220-b9", - "global_id": 2356, - "bbox": [ - 72.0, - 631.86, - 434.75, - 687.18 - ], - "text": "For example, when I volunteered to teach a yearlong course “Money and Trading” \nin a local high school and wanted to make the experience real for the kids, I opened \na $40,000 account. I told my students that if, at the end of the school year, we made \nmoney, I’d give half the profit to their school and distribute the rest among class", - "type": "text" - } - ] - }, - { - "page_num": 221, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p221-b0", - "global_id": 2357, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "50. THE TWO PERCENT RULE\t\n205", - "type": "text" - }, - { - "block_id": "p221-b1", - "global_id": 2358, - "bbox": [ - 71.94, - 314.99, - 434.69, - 384.31 - ], - "text": "participants. I also told them that their maximum risk per trade was one percent. A \nkid would stand up in class and make a case for buying Nokia at $16, with a stop at \n$14.50. “How many shares may we trade?”—I’d ask. With the maximum risk of $400 \nper trade and $1.50 risk per share, the kids would be allowed to buy 250 shares, with \nsome leeway for commissions.", - "type": "text" - }, - { - "block_id": "p221-b2", - "global_id": 2359, - "bbox": [ - 71.94, - 385.01, - 434.68, - 454.33 - ], - "text": "If you have a tiny account, you may end up trading the maximum permitted num-\nber of shares each time. As your account grows bigger, you may want to vary the size \nof your trades: say a third of the maximum for regular trades, two thirds for extra \nstrong trades, and the full amount for exceptional trades. Whatever you do, the Iron \nTriangle of risk control will set the maximum number of shares you may trade.", - "type": "text" - }, - { - "block_id": "p221-b3", - "global_id": 2360, - "bbox": [ - 72.0, - 474.4, - 293.34, - 491.34 - ], - "text": "The 2% Rule in the Futures Markets", - "type": "text" - }, - { - "block_id": "p221-b4", - "global_id": 2361, - "bbox": [ - 72.0, - 497.03, - 434.7, - 524.34 - ], - "text": "A trader recently asked me how he could apply the Iron Triangle of risk control to \ntrading e-mini futures in his $50,000 account. I replied:", - "type": "text" - }, - { - "block_id": "p221-b5", - "global_id": 2362, - "bbox": [ - 76.0, - 537.04, - 434.74, - 550.34 - ], - "text": "A.\tIf you are trading a $50k account, the 2% Rule would limit your risk on any", - "type": "text" - }, - { - "block_id": "p221-b6", - "global_id": 2363, - "bbox": [ - 89.99, - 551.04, - 434.76, - 578.35 - ], - "text": "trade to $1,000. Let’s say you want to be conservative and risk only 1% of that \naccount, or $500. That will be the first side of  “the Iron Triangle of risk Control.”", - "type": "text" - }, - { - "block_id": "p221-b7", - "global_id": 2364, - "bbox": [ - 75.96, - 584.04, - 434.66, - 597.35 - ], - "text": "B.\tSuppose you look at your favorite e-minis and want to sell a contract short at", - "type": "text" - }, - { - "block_id": "p221-b8", - "global_id": 2365, - "bbox": [ - 89.99, - 598.04, - 434.74, - 653.36 - ], - "text": "1810, with a profit target at 1790 and a stop at 1816. You’ll be risking 6 points, \nand since one point in e-minis is worth $50, your total risk will be $300 (plus \ncommissions and possible slippage). That will be the second side of your Iron \nTriangle of risk control.", - "type": "text" - }, - { - "block_id": "p221-b9", - "global_id": 2366, - "bbox": [ - 75.98, - 659.03, - 434.7, - 672.36 - ], - "text": "C.\tClose the triangle by dividing “a” by “b” to find the maximum size you may trade.", - "type": "text" - }, - { - "block_id": "p221-b10", - "global_id": 2367, - "bbox": [ - 89.98, - 673.03, - 415.58, - 686.34 - ], - "text": "If your maximum risk is $500, then one contract, but if $1,000, then three.", - "type": "text" - }, - { - "block_id": "p221-b11", - "global_id": 2368, - "bbox": [ - 209.5, - 90.27, - 278.45, - 102.3 - ], - "text": "A\nB", - "type": "text" - }, - { - "block_id": "p221-b12", - "global_id": 2369, - "bbox": [ - 240.9, - 135.17, - 247.75, - 147.2 - ], - "text": "C", - "type": "text" - }, - { - "block_id": "p221-b13", - "global_id": 2370, - "bbox": [ - 72.4, - 162.58, - 236.56, - 172.63 - ], - "text": "FIGURE 50.1  The Iron Triangle of risk control.", - "type": "text" - }, - { - "block_id": "p221-b14", - "global_id": 2371, - "bbox": [ - 72.36, - 179.33, - 238.07, - 189.83 - ], - "text": "Construct the Iron Triangle in three steps:", - "type": "text" - }, - { - "block_id": "p221-b15", - "global_id": 2372, - "bbox": [ - 74.36, - 201.33, - 434.44, - 211.82 - ], - "text": "A.\t Your maximum dollar risk for the trade you’re planning (never more than 2% of your", - "type": "text" - }, - { - "block_id": "p221-b16", - "global_id": 2373, - "bbox": [ - 88.36, - 213.33, - 125.7, - 223.82 - ], - "text": "account).", - "type": "text" - }, - { - "block_id": "p221-b17", - "global_id": 2374, - "bbox": [ - 74.36, - 230.33, - 434.5, - 240.82 - ], - "text": "B.\t The distance, in dollars, from your planned entry to your stop—your maximum risk per", - "type": "text" - }, - { - "block_id": "p221-b18", - "global_id": 2375, - "bbox": [ - 88.36, - 242.32, - 112.87, - 252.82 - ], - "text": "share.", - "type": "text" - }, - { - "block_id": "p221-b19", - "global_id": 2376, - "bbox": [ - 74.36, - 259.32, - 434.48, - 269.84 - ], - "text": "C.\tDivide “A” by “B” to find the maximum number of shares you may trade. You aren’t", - "type": "text" - }, - { - "block_id": "p221-b20", - "global_id": 2377, - "bbox": [ - 86.36, - 271.34, - 416.83, - 281.83 - ], - "text": "obligated to trade this many shares, but you may not trade more than this number.", - "type": "text" - } - ] - }, - { - "page_num": 222, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p222-b0", - "global_id": 2378, - "bbox": [ - 72.0, - 33.66, - 432.05, - 47.21 - ], - "text": "206\t\nRISK MANAGEMENT", - "type": "text" - }, - { - "block_id": "p222-b1", - "global_id": 2379, - "bbox": [ - 72.0, - 57.83, - 434.76, - 155.16 - ], - "text": "Please meet two futures traders, Mr. Hare and Mr. Turtle, each with a $50,000 \naccount. The agile Mr. Hare sees that the average daily range in gold is about \n$30, worth $3,000 per day for a single contract. The daily range in corn is about 10 \ncents, worth $500 per day for a single contract. He thinks that if he can catch just \nhalf of a day’s range, he’ll make $1,500 per contract in gold, while the same level of \nskill will bring him only $250 in corn. Mr. Hare logs into his brokerage account and \nbuys two contracts of gold.", - "type": "text" - }, - { - "block_id": "p222-b2", - "global_id": 2380, - "bbox": [ - 72.0, - 155.86, - 434.76, - 267.19 - ], - "text": "The cautious Mr. Turtle has a different arithmetic. He begins by using the 2% \nRule to cap his maximum risk per trade at $1,000. He sees that it would be impos-\nsible to place a meaningful stop while trading gold which can move $3,000 a day. \nTo buy gold in his account would be like grabbing a very large tiger by a very short \ntail. If, on the other hand, he trades corn, he’ll have good staying power. That tiger \nis smaller and has a longer tail, which he can wrap around his wrist. Mr. Turtle buys \na contract of corn. Who do you think is more likely to win in the long run, Mr. Hare \nor Mr. Turtle?", - "type": "text" - }, - { - "block_id": "p222-b3", - "global_id": 2381, - "bbox": [ - 72.0, - 267.89, - 434.75, - 351.22 - ], - "text": "Futures markets are more deadly than stocks not because of any special com-\nplexity. Sure, they have some specific angles, but those aren’t too hard to learn. \nFutures kill traders by seducing them with paper-thin margins. They offer enor-\nmous leverage –ability to trade large positions on a 5% margin. This works wonders \nwhen the market moves in your favor, but it slices your wallet when the market \nturns against you.", - "type": "text" - }, - { - "block_id": "p222-b4", - "global_id": 2382, - "bbox": [ - 84.0, - 351.91, - 418.9, - 365.22 - ], - "text": "You can succeed in futures only with sensible risk control, using the 2% Rule.", - "type": "text" - }, - { - "block_id": "p222-b5", - "global_id": 2383, - "bbox": [ - 76.0, - 379.91, - 434.72, - 393.22 - ], - "text": "A.\tCalculate 2% of your account value—this will be the maximum acceptable risk", - "type": "text" - }, - { - "block_id": "p222-b6", - "global_id": 2384, - "bbox": [ - 89.99, - 393.91, - 434.71, - 421.22 - ], - "text": "level for any trade. If you have $50,000 in your futures account, the most you \ncan risk is $1,000.", - "type": "text" - }, - { - "block_id": "p222-b7", - "global_id": 2385, - "bbox": [ - 75.98, - 428.87, - 434.63, - 442.22 - ], - "text": "B.\tExamine the charts of the market that interests you and write down your planned", - "type": "text" - }, - { - "block_id": "p222-b8", - "global_id": 2386, - "bbox": [ - 89.98, - 442.87, - 434.7, - 484.19 - ], - "text": "entry, target, and stop. Remember: a trade without these three numbers is not a \ntrade but a gamble. Express the value of the move from your entry to your stop \nin dollars.", - "type": "text" - }, - { - "block_id": "p222-b9", - "global_id": 2387, - "bbox": [ - 75.97, - 491.87, - 431.87, - 505.19 - ], - "text": "C.\tDivide A by B, and if the result turns out to be less than one, no trade is permit-", - "type": "text" - }, - { - "block_id": "p222-b10", - "global_id": 2388, - "bbox": [ - 89.96, - 505.87, - 350.03, - 519.18 - ], - "text": "ted—it means you cannot afford to trade even one contract.", - "type": "text" - }, - { - "block_id": "p222-b11", - "global_id": 2389, - "bbox": [ - 71.96, - 533.87, - 434.68, - 575.18 - ], - "text": "Let’s review two market examples, featuring similar chart patterns (Figure 50.2). \nLet’s assume you have a $50,000 account, which permits you to risk the maximum \nof $1,000 per trade.", - "type": "text" - }, - { - "block_id": "p222-b12", - "global_id": 2390, - "bbox": [ - 71.96, - 575.88, - 434.7, - 617.2 - ], - "text": "You can trade futures reasonably safely only with strict money management. The \nleverage of futures can work for you—as long as you stay away from those contracts \nthat can kill your account.", - "type": "text" - }, - { - "block_id": "p222-b13", - "global_id": 2391, - "bbox": [ - 71.96, - 617.89, - 434.68, - 687.22 - ], - "text": "A professional futures trader surprised me early in my career when he told me \nhe spent a third of his time on risk management. Beginners jump into trades with-\nout giving them much thought. Intermediate-level traders focus on market analysis. \nProfessionals dedicate a massive proportion of their time to risk control—and take \nmoney away from beginners and amateurs.", - "type": "text" - } - ] - }, - { - "page_num": 223, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p223-b0", - "global_id": 2392, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "51. THE TWO PERCENT RULE\t\n207", - "type": "text" - }, - { - "block_id": "p223-b1", - "global_id": 2393, - "bbox": [ - 71.94, - 631.31, - 434.68, - 686.63 - ], - "text": "If you cannot afford to trade a certain market, you can still download its data, do \nyour homework, and paper trade it as if you were doing it with real money. This will \nprepare you for the day when your account grows big enough or the market grows \nquiet enough for you to put on a trade.", - "type": "text" - }, - { - "block_id": "p223-b2", - "global_id": 2394, - "bbox": [ - 184.3, - 61.58, - 283.2, - 71.2 - ], - "text": "Silver\nWheat", - "type": "text" - }, - { - "block_id": "p223-b3", - "global_id": 2395, - "bbox": [ - 130.8, - 241.51, - 135.62, - 249.33 - ], - "text": "A", - "type": "text" - }, - { - "block_id": "p223-b4", - "global_id": 2396, - "bbox": [ - 193.7, - 203.81, - 197.91, - 211.62 - ], - "text": "B", - "type": "text" - }, - { - "block_id": "p223-b5", - "global_id": 2397, - "bbox": [ - 211.0, - 235.91, - 215.45, - 243.72 - ], - "text": "C", - "type": "text" - }, - { - "block_id": "p223-b6", - "global_id": 2398, - "bbox": [ - 379.6, - 191.21, - 383.81, - 199.03 - ], - "text": "B", - "type": "text" - }, - { - "block_id": "p223-b7", - "global_id": 2399, - "bbox": [ - 408.9, - 219.91, - 413.35, - 227.72 - ], - "text": "C", - "type": "text" - }, - { - "block_id": "p223-b8", - "global_id": 2400, - "bbox": [ - 351.7, - 230.01, - 356.52, - 237.83 - ], - "text": "A", - "type": "text" - }, - { - "block_id": "p223-b9", - "global_id": 2401, - "bbox": [ - 72.36, - 274.98, - 429.37, - 296.02 - ], - "text": "FIGURE 50.2  Daily charts with 13- and 26-day EMAs and Autoenvelopes. The Impulse system and MACD-\nHistogram 12-26-9. (Charts by Tradestation)", - "type": "text" - }, - { - "block_id": "p223-b10", - "global_id": 2402, - "bbox": [ - 72.4, - 301.83, - 287.79, - 314.73 - ], - "text": "The 2% Rule in Futures—Silver and Wheat", - "type": "text" - }, - { - "block_id": "p223-b11", - "global_id": 2403, - "bbox": [ - 72.4, - 318.73, - 434.54, - 365.22 - ], - "text": "Suppose you want to buy silver at the right edge of this chart. Prices have traced a double \nbottom with a false downside breakout. MACD-Histogram has traced a bullish divergence. \nThe Impulse system has turned blue, permitting buying. The nearby futures contract trades \nat $21.415 a few minutes before the close.", - "type": "text" - }, - { - "block_id": "p223-b12", - "global_id": 2404, - "bbox": [ - 72.4, - 366.72, - 434.52, - 401.21 - ], - "text": "You decide that if you buy, your profit target will be near $23, halfway from the EMA to the \nupper channel line. Your stop will be at $20.60, the level of the latest low. You’ll be risking \n$0.815/oz trying to make about $1.585/oz—a 2:1 reward/risk ratio, an acceptable number.", - "type": "text" - }, - { - "block_id": "p223-b13", - "global_id": 2405, - "bbox": [ - 72.4, - 402.71, - 434.52, - 461.19 - ], - "text": "Are you allowed to take this trade? Absolutely not! That $0.815/oz risk per contract \ntranslates into $4,075 total risk, since one contract covers of 5,000 ounces of silver. Re-\nmember, your maximum permitted risk is $1,000. If you’re eager to take this trade, you may \nbuy a single mini-contract. It covers only 1,000 ounces of silver, meaning you’ll risk $815. \nBest wishes for that sensible trade.", - "type": "text" - }, - { - "block_id": "p223-b14", - "global_id": 2406, - "bbox": [ - 72.4, - 462.7, - 434.52, - 509.18 - ], - "text": "Now, suppose you’re interested in buying wheat at the right edge of this chart. Its tech-\nnical picture looks similar: a double bottom with a bullish divergence of MACD-Lines and \nMACD-Histogram. The Impulse system has turned blue, permitting buying. Shortly before \nthe close, prices are near 658 cents.", - "type": "text" - }, - { - "block_id": "p223-b15", - "global_id": 2407, - "bbox": [ - 72.4, - 510.68, - 434.54, - 545.17 - ], - "text": "You decide that if you enter there, your target will be near 680 cents, near the upper chan-\nnel line. Your stop will go to 652 cents, the level of a recent low. You’ll be risking 10 cents/bu, \ntrying to make about 22 cents/bu—a reward/risk ratio of 2:1, similar to that of silver.", - "type": "text" - }, - { - "block_id": "p223-b16", - "global_id": 2408, - "bbox": [ - 72.4, - 546.68, - 434.53, - 581.16 - ], - "text": "Are you allowed to take this trade? Yes! That 10 cent risk per contract translates into \n$500 total risk, since the contract covers 5,000 bushels of wheat. Remember, your maxi-\nmum permitted risk is $1,000. If you’re very bullish, you may even buy two contracts.", - "type": "text" - }, - { - "block_id": "p223-b17", - "global_id": 2409, - "bbox": [ - 72.34, - 582.67, - 434.37, - 617.15 - ], - "text": "You must keep in mind that when trading futures the technical pictures of different mar-\nkets may look similar, but you must base your decisions to trade or not to trade on money \nmanagement rules.", - "type": "text" - } - ] - }, - { - "page_num": 224, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p224-b0", - "global_id": 2410, - "bbox": [ - 72.0, - 33.66, - 432.05, - 47.21 - ], - "text": "208\t\nRISK MANAGEMENT", - "type": "text" - }, - { - "block_id": "p224-b1", - "global_id": 2411, - "bbox": [ - 73.55, - 55.86, - 278.8, - 74.5 - ], - "text": "■\n■51. The Six Percent Rule", - "type": "text" - }, - { - "block_id": "p224-b2", - "global_id": 2412, - "bbox": [ - 72.0, - 82.83, - 434.77, - 180.16 - ], - "text": "A piranha is a tropical river fish not much bigger than a man’s hand, but with a mean \nset of teeth. What makes it so dangerous is that it attacks in packs. If a dog, a donkey, \nor a person stumbles into a tropical stream, a pack of piranhas can attack with such \na mass of bites that the victim collapses. A bull can walk into a river, be attacked by a \npack of piranhas, and a few minutes later only its bones will be left in the water. \nA trader, who keeps sharks at bay with the 2% Rule, still needs protection from pi-\nranhas. The 6% Rule will save you from being nibbled to death.", - "type": "text" - }, - { - "block_id": "p224-b3", - "global_id": 2413, - "bbox": [ - 72.0, - 180.86, - 434.77, - 264.18 - ], - "text": "Most of us, when we find ourselves in trouble, start pushing harder. Losing trad-\ners often take on bigger positions, trying to trade their way out of a hole. A better \nresponse to a losing streak is to step aside and take time off to think. The 6% Rule \nsets a limit on the maximum monthly drawdown in any account. If you reach it, you \nstop trading for the rest of the month. The 6% Rule forces you to get out of the wa-\nter before piranhas get you.", - "type": "text" - }, - { - "block_id": "p224-b4", - "global_id": 2414, - "bbox": [ - 72.0, - 275.7, - 434.75, - 317.26 - ], - "text": "The 6% Rule prohibits you from opening any new trades for the rest of \nthe month when the sum of your losses for the current month and the \nrisks in open trades reach 6% of your account equity.", - "type": "text" - }, - { - "block_id": "p224-b5", - "global_id": 2415, - "bbox": [ - 72.0, - 328.88, - 434.69, - 356.19 - ], - "text": "We all go through periods when we are in tune with the markets, taking one profit \nafter another. When everything we touch turns to gold, that’s the time to trade actively.", - "type": "text" - }, - { - "block_id": "p224-b6", - "global_id": 2416, - "bbox": [ - 72.0, - 356.88, - 434.76, - 454.22 - ], - "text": "There are other times when everything we touch turns into a completely different \nsubstance. We go through periods when our systems go out of sync with the market, \ndelivering one loss after another. It’s important to recognize such dark periods and \nnot push yourself but rather step back. A professional on a losing streak is likely to \ntake a break, continue to monitor the market, and wait to get in gear with it again. \nAmateurs are more likely to keep pushing until their accounts become crippled. The \n6% Rule will make you pause while your account is still largely intact.", - "type": "text" - }, - { - "block_id": "p224-b7", - "global_id": 2417, - "bbox": [ - 72.0, - 470.2, - 257.34, - 487.14 - ], - "text": "The Concept of Available Risk", - "type": "text" - }, - { - "block_id": "p224-b8", - "global_id": 2418, - "bbox": [ - 72.0, - 491.83, - 434.71, - 533.14 - ], - "text": "Before you put on a trade, ask yourself: what would happen if all your trades sud-\ndenly turned against you? If you used the 2% Rule to set stops and trade sizes, the \n6% Rule will limit the maximum total loss that your account may suffer.", - "type": "text" - }, - { - "block_id": "p224-b9", - "global_id": 2419, - "bbox": [ - 75.98, - 541.83, - 434.72, - 687.19 - ], - "text": "1.\tAdd up all your losses taken this month.\n2.\t Add up your risks on all currently open trades. The dollar risk of any open posi-\ntion is the distance from your entry to the current stop, multiplied by the trade \nsize. Suppose you’ve bought 200 shares for $50, with a stop at $48.50, risking \n$1.50 per share. In that case, your open risk is $300. If that trade starts going \nyour way and you move your stop to breakeven, your open risk will become zero.\n3.\tAdd the two lines above (losses for the month plus risks on open trades). If \ntheir sum comes to 6% of what your account equity was at the beginning of the \nmonth, you may not put on another trade until the end of the month or until the \nopen trades move in your favor, allowing you to raise your stops.", - "type": "text" - } - ] - }, - { - "page_num": 225, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p225-b0", - "global_id": 2420, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "51. THE SIX PERCENT RULE\t\n209", - "type": "text" - }, - { - "block_id": "p225-b1", - "global_id": 2421, - "bbox": [ - 71.94, - 57.83, - 434.8, - 169.16 - ], - "text": "The 6% Rule changes the usual question—“do I have enough money for this \ntrade?”—to a much more relevant one—“do I have enough risk available for \nthis trade?”  That limit—risking no more than 6% of your account equity in any \ngiven month—keeps your total risk under control, ensuring long-term survival. \nYour total available risk for the month is 6% of your account equity, and the \nfirst question to ask yourself when considering a new trade is “Considering all \nmy open and closed trades for this month, do I have enough available risk for \nthis trade?”", - "type": "text" - }, - { - "block_id": "p225-b2", - "global_id": 2422, - "bbox": [ - 72.06, - 169.86, - 434.8, - 225.18 - ], - "text": "You know how much money, if any, you’ve lost during the current month. It’s \neasy to calculate how much money you have at risk in your open trades. If your pre-\nvious losses for this month plus your risk on existing trades expose you to a total \nrisk of 6% of your account equity, you may not put on another trade.", - "type": "text" - }, - { - "block_id": "p225-b3", - "global_id": 2423, - "bbox": [ - 72.06, - 225.88, - 434.81, - 281.2 - ], - "text": "If the 6% Rule doesn’t allow you to put on a new trade, continue to track \nthe stocks you’re interested in. If you see a trade you really want to take, but \ndon’t have available risk, consider closing out one of your open trades to free up \nsome risk.", - "type": "text" - }, - { - "block_id": "p225-b4", - "global_id": 2424, - "bbox": [ - 72.06, - 281.89, - 434.82, - 351.22 - ], - "text": "If you are near the 6% limit but see a very attractive trade you wouldn’t want to \nmiss, you have two options. You can take profits on one of your open trades to free up \navailable risk. Alternatively, you may tighten some of your protective stops, reducing \nyour open risk. Just be sure that in your eagerness to trade you do not make your \nstops too tight (see Chapter 54).", - "type": "text" - }, - { - "block_id": "p225-b5", - "global_id": 2425, - "bbox": [ - 72.06, - 351.91, - 434.74, - 379.22 - ], - "text": "Let’s review an example, assuming, for the sake of simplicity, that a trader will \nrisk 2% of his account equity on any given trade.", - "type": "text" - }, - { - "block_id": "p225-b6", - "global_id": 2426, - "bbox": [ - 76.06, - 391.91, - 434.65, - 433.22 - ], - "text": "1.\tAt the end of the month, a trader has $50,000 in his account, with no open posi-\ntions. He writes down his maximum risk levels for the month ahead—2% or \n$1,000 per trade and 6% or $3,000 for the account as a whole.", - "type": "text" - }, - { - "block_id": "p225-b7", - "global_id": 2427, - "bbox": [ - 75.97, - 439.91, - 434.62, - 467.22 - ], - "text": "2.\tSeveral days later he sees a very attractive stock A, figures out where to put his \nstop, and buys a position that puts $1,000, or 2% of his equity, at risk.", - "type": "text" - }, - { - "block_id": "p225-b8", - "global_id": 2428, - "bbox": [ - 75.97, - 473.92, - 434.64, - 501.3 - ], - "text": "3.\t A few days later he sees a stock B, and puts on a similar trade, risking another \n$1,000.", - "type": "text" - }, - { - "block_id": "p225-b9", - "global_id": 2429, - "bbox": [ - 75.97, - 507.95, - 423.47, - 521.3 - ], - "text": "4.\t By the end of the week he sees a stock C, and buys it, risking another $1,000.", - "type": "text" - }, - { - "block_id": "p225-b10", - "global_id": 2430, - "bbox": [ - 75.98, - 527.95, - 434.72, - 597.31 - ], - "text": "5.\t The next week he sees a stock D, more attractive than any of the three above. \nMay he buy it? No, he may not, because his account is already exposed to 6% \nrisk. He has three open trades, risking 2% on each, which means he may lose \n6% if the market turns against him. The 6% Rule prohibits him from taking any \nmore risks at this time.", - "type": "text" - }, - { - "block_id": "p225-b11", - "global_id": 2431, - "bbox": [ - 75.97, - 603.95, - 434.7, - 687.28 - ], - "text": "6.\t A few days later, the stock A rallies and the trader moves his stop above break-\neven. Stock D, which he wasn’t allowed to trade just a few days ago, still looks \nvery attractive. May he buy it now? Yes, he may, because his current risk is only \n4% of his account. He is risking 2% in stock B and another 2% in stock C, but \nnothing in stock A, because its stop is above breakeven. The trader buys stock D, \nrisking another $1,000 or 2%.", - "type": "text" - } - ] - }, - { - "page_num": 226, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p226-b0", - "global_id": 2432, - "bbox": [ - 72.0, - 33.66, - 432.05, - 47.21 - ], - "text": "210\t\nRISK MANAGEMENT", - "type": "text" - }, - { - "block_id": "p226-b1", - "global_id": 2433, - "bbox": [ - 76.0, - 57.83, - 434.72, - 113.15 - ], - "text": "7.\tLater in the week, the trader sees stock E, which looks very bullish. May he buy \nit? Not according to the 6% Rule because his account is already exposed to a \ncombined risk of 6% in stocks B, C, and D (there is no longer a risk in stock A). \nHe may not buy stock E.", - "type": "text" - }, - { - "block_id": "p226-b2", - "global_id": 2434, - "bbox": [ - 75.99, - 121.84, - 434.73, - 177.16 - ], - "text": "8.\tA few days later, stock B hits its stop. Stock E still looks attractive. May he buy it? \nNo, since he already lost 2% on stock B and has a 4% exposure to risk in stocks \nC and D. Adding another position at this time would expose him to more than \n6% risk per month.", - "type": "text" - }, - { - "block_id": "p226-b3", - "global_id": 2435, - "bbox": [ - 71.98, - 193.85, - 434.73, - 263.17 - ], - "text": "Three open trades isn’t a lot of diversification. If you wish to make more trades, \nset your risk per trade at less than 2%. For example, if you risk only 1% of your \naccount equity on any trade, you may open up to six positions before maxing out at \nthe 6% limit. In trading a large account, I use the 6% Rule but tighten the 2% Rule \nto well under 1%.", - "type": "text" - }, - { - "block_id": "p226-b4", - "global_id": 2436, - "bbox": [ - 71.98, - 263.87, - 434.7, - 347.2 - ], - "text": "The 6% Rule allows you to increase your trading size when you’re on a winning \nstreak but makes you stop trading early in a losing streak. When markets move in \nyour favor, you can move your stops to breakeven and have more available risk for \nnew trades. On the other hand, if your positions start going against you and hitting \nstops, you’ll quickly stop trading and save the bulk of your account for a fresh start \nnext month.", - "type": "text" - }, - { - "block_id": "p226-b5", - "global_id": 2437, - "bbox": [ - 71.98, - 347.89, - 434.7, - 417.22 - ], - "text": "The 2% Rule and the 6% Rule provide guidelines for pyramiding—adding to \nwinning positions. If you buy a stock and it climbs high enough to raise your stop \nabove breakeven, then you may buy more of the same stock, as long as the risk on \nthe new position is no more than 2% of your account equity and your total account \nrisk is less than 6%. Handle each addition as a separate trade.", - "type": "text" - }, - { - "block_id": "p226-b6", - "global_id": 2438, - "bbox": [ - 71.98, - 417.91, - 434.7, - 473.23 - ], - "text": "Many traders go through emotional swings, feeling elated at the highs and gloomy \nat the lows. Those mood swings will not help you trade, just the opposite. It is better \nto invest your energy in risk control. The 2% and the 6% Rules will convert your \ngood intentions into the reality of safer trading.", - "type": "text" - }, - { - "block_id": "p226-b7", - "global_id": 2439, - "bbox": [ - 73.55, - 504.86, - 358.85, - 523.5 - ], - "text": "■\n■52. A Comeback from a Drawdown", - "type": "text" - }, - { - "block_id": "p226-b8", - "global_id": 2440, - "bbox": [ - 72.0, - 533.83, - 434.76, - 589.15 - ], - "text": "When the level of risk goes up, our ability to perform goes down. Beginners make \nmoney on small trades, start feeling confident, and jack up trade size. That’s when \nthey start losing. The increased level of risk on bigger positions makes them stiffer \nand less nimble, and that’s all it takes to fall behind.", - "type": "text" - }, - { - "block_id": "p226-b9", - "global_id": 2441, - "bbox": [ - 72.0, - 589.84, - 434.72, - 673.17 - ], - "text": "I saw a great example of that while running a psychological training group for a \nday-trading firm in New York. That firm taught its traders a proprietary stock trad-\ning system and let them trade the firm’s capital on a profit-sharing basis. Their two \ntop traders were making up to a million dollars a month; others made much smaller \nprofits but quite a few lost money. The firm’s owner asked me to come and help los-\ning traders.", - "type": "text" - } - ] - }, - { - "page_num": 227, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p227-b0", - "global_id": 2442, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "52. A COMEBACK FROM A DRAWDOWN\t\n211", - "type": "text" - }, - { - "block_id": "p227-b1", - "global_id": 2443, - "bbox": [ - 71.94, - 57.83, - 434.59, - 113.15 - ], - "text": "They were shocked to hear that a psychiatrist was coming and loudly protested \nthey “weren’t crazy.” The owner provided the motivation by telling his worst per-\nformers they had to participate—or else leave the firm. After six weeks, the results \nwere such that we had a waiting list for the second group.", - "type": "text" - }, - { - "block_id": "p227-b2", - "global_id": 2444, - "bbox": [ - 71.94, - 113.84, - 434.7, - 225.18 - ], - "text": "Since the company taught traders its own system, we focused on psychology and \nrisk control. In one of our first meetings, a trader complained that he had lost money \neach day for the past 13 days. His manager, who sat in on our meetings, confirmed \nthat the fellow was using the firm’s system but couldn’t make any money. I began by \nsaying that I’d take off my hat for anyone who lost 13 days in a row and had the emo-\ntional strength to come in and trade the next morning. I asked the man how many \nshares he traded, since the firm set a maximum for each trader. He was permitted to \nbuy or sell up to 700 shares at a clip, but voluntarily reduced it to 500.", - "type": "text" - }, - { - "block_id": "p227-b3", - "global_id": 2445, - "bbox": [ - 71.94, - 225.88, - 434.7, - 323.21 - ], - "text": "I told him to drop his size down to 100 shares until he had a week with more win-\nning days than losing and was profitable overall. Once he cleared that hurdle for two \nweeks in a row, he could go up to trading 200 shares at a clip. Then, after another \n2-week profitable period, he could go up to 300 shares, and so on. He was allowed \na 100 share increment after two weeks of profitable trading, but if he had a single \nlosing week, he’d have to drop back to the previous level. In other words, he had to \nstart small, increase the size slowly, but drop it fast in case of trouble.", - "type": "text" - }, - { - "block_id": "p227-b4", - "global_id": 2446, - "bbox": [ - 71.94, - 323.9, - 434.6, - 421.3 - ], - "text": "The trader loudly objected that 100 shares weren’t enough to make money. I told \nhim to stop kidding himself, since by trading 500 shares he wasn’t making any money \neither, and he reluctantly agreed. When we met a week later he reported that he had \nfour profitable days and was profitable overall. He made very little money because \nof the 100 share size, but he was ahead of the game. He continued to make money \nduring the next week and then stepped up to 200 shares. After another profitable \nweek he asked, “Doc, do you think this could be psychological?”  The group roared.", - "type": "text" - }, - { - "block_id": "p227-b5", - "global_id": 2447, - "bbox": [ - 72.01, - 421.99, - 434.69, - 449.3 - ], - "text": "Why would a man lose while trading 500 shares, but make money trading 100 \nor 200?", - "type": "text" - }, - { - "block_id": "p227-b6", - "global_id": 2448, - "bbox": [ - 72.01, - 450.0, - 434.75, - 533.33 - ], - "text": "I took a $10 bill out of my pocket and asked whether anyone in our group would \nlike to earn it by climbing on top of our long and narrow conference table and \nwalking from one end to the other. Several hands went up. Wait, I said, I have a bet-\nter offer. I’ll give $1,000 cash to anyone who comes with me up to the roof of our \n10-story office building and uses a board as wide as this table to walk to the roof of \nanother 10-story building across the boulevard. No volunteers.", - "type": "text" - }, - { - "block_id": "p227-b7", - "global_id": 2449, - "bbox": [ - 72.01, - 534.02, - 434.77, - 617.35 - ], - "text": "I started egging on the group—the board will be sturdy, we’ll do it on a wind-\nless day, I’ll pay $1,000 cash on the spot. The physical challenge would be the same \nas walking on the conference table, but the reward so much greater. Still no takers. \nWhy? Because if you lose your balance on the table, you’ll jump down a couple of \nfeet and land on the carpet. If you lose your balance between two rooftops, you’d be \nsplattered on the asphalt.", - "type": "text" - }, - { - "block_id": "p227-b8", - "global_id": 2450, - "bbox": [ - 72.01, - 618.05, - 434.75, - 673.37 - ], - "text": "The higher levels of risk impair our ability to perform. You need to train yourself \nto accept risks slowly and in well-defined steps. Depending on how actively you \ntrade, those steps can be measured in weeks or months, but the principle remains \nthe same—you need to be profitable during two units of time to go up a step in", - "type": "text" - } - ] - }, - { - "page_num": 228, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p228-b0", - "global_id": 2451, - "bbox": [ - 72.0, - 33.66, - 432.05, - 47.21 - ], - "text": "212\t\nRISK MANAGEMENT", - "type": "text" - }, - { - "block_id": "p228-b1", - "global_id": 2452, - "bbox": [ - 72.0, - 57.83, - 434.75, - 113.15 - ], - "text": "your risk size. If you lose money during one unit of time, drop down a step in your \nrisk size. This is especially useful for people who want to return to trading after a \nbad drawdown. You need to gradually work your way back into trading, without an \nupsurge of fear.", - "type": "text" - }, - { - "block_id": "p228-b2", - "global_id": 2453, - "bbox": [ - 72.0, - 113.84, - 434.77, - 295.2 - ], - "text": "Most beginners are in a hurry to make a killing, but guess who gets killed. Un-\nscrupulous brokers promote overtrading (putting on trades that are too big for your \naccount) to generate commissions. Some stockbrokers outside the United States \noffer a “shoulder” of 10:1, allowing you to buy $10,000 worth of stock for every \n$1,000 you deposit with the firm. Some forex houses offer a deadly “shoulder” of \n100:1 and even 400:1.\nPutting on a trade is like diving for treasure. There is gold on the ocean floor, but \nas you scoop it up, remember to glance at your air gauge. The ocean floor is littered \nwith the remains of divers who saw great opportunities but ran out of air. A profes-\nsional diver always thinks about his air supply. If he doesn’t get any gold today, he’ll \ngo for it tomorrow. He needs to survive and dive again. Beginners kill themselves by \nrunning out of air. The lure of free gold is too strong. Free gold! It reminds me of a \nRussian saying—the only free thing is this world is cheese in a mousetrap.", - "type": "text" - }, - { - "block_id": "p228-b3", - "global_id": 2454, - "bbox": [ - 72.0, - 295.9, - 434.76, - 351.22 - ], - "text": "Successful traders survive and prosper thanks to their discipline. The 2% Rule will \nkeep you safe from the sharks, while the 6% Rule will save you from the piranhas. \nIf you follow these rules and have a reasonable trading system, you’ll be miles ahead \nof your competitors.", - "type": "text" - }, - { - "block_id": "p228-b4", - "global_id": 2455, - "bbox": [ - 72.0, - 371.2, - 190.38, - 388.14 - ], - "text": "A Trading Manager", - "type": "text" - }, - { - "block_id": "p228-b5", - "global_id": 2456, - "bbox": [ - 72.0, - 393.83, - 434.74, - 519.17 - ], - "text": "It used to puzzle me why institutional traders as a group performed so much better \nthan private traders. An average private trader in the United States is a 50-year-old \nmarried, college-educated man, often a business owner or a professional. You would \nthink this thoughtful, computer-literate, book-reading individual would run circles \naround some loud 23-year-old who used to play ball in college and hasn’t read a book \nsince his junior year. In reality, institutional traders as a group outperform private \ntraders year after year. Is it because of their fast reflexes? Not really, because young \nprivate traders perform no better than older ones. Nor do institutional traders win \nbecause of training, which is skimpy in most firms.", - "type": "text" - }, - { - "block_id": "p228-b6", - "global_id": 2457, - "bbox": [ - 72.0, - 519.86, - 434.72, - 589.19 - ], - "text": "A curious fact: when successful institutional traders go out on their own, most of \nthem lose money. They may lease the same gear, trade the same system, and stay in \ntouch with their contacts, but still fail. After a few months, most cowboys are back \nin head-hunters’ offices, looking for a trading job. How come they could make \nmoney for the firms but not for themselves?", - "type": "text" - }, - { - "block_id": "p228-b7", - "global_id": 2458, - "bbox": [ - 72.0, - 589.88, - 434.75, - 673.21 - ], - "text": "When an institutional trader quits his firm, he leaves behind his manager, the \nperson in charge of discipline and risk control. That manager sets the maximum \nrisk per trade. It is similar to what a private trader can do with the 2% Rule. Firms \noperate from huge capital bases and their risk limits are much higher in dollar terms \nbut tiny in percentage terms. A trader who violates his risk limit is fired. A private \ntrader can break the 2% Rule and nobody will know, but an institutional manager", - "type": "text" - } - ] - }, - { - "page_num": 229, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p229-b0", - "global_id": 2459, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "52. A COMEBACK FROM A DRAWDOWN\t\n213", - "type": "text" - }, - { - "block_id": "p229-b1", - "global_id": 2460, - "bbox": [ - 71.94, - 57.83, - 434.69, - 113.15 - ], - "text": "watches his traders like a hawk. A private trader can throw confirmation slips in a \nshoebox, but a trading manager quickly gets rid of impulsive people. He enforces \ndiscipline that saves institutional traders from disastrous losses, which destroy many \nprivate accounts.", - "type": "text" - }, - { - "block_id": "p229-b2", - "global_id": 2461, - "bbox": [ - 71.94, - 113.84, - 434.7, - 211.18 - ], - "text": "In addition to setting a risk limit per trade, a manager sets the maximum allowed \nmonthly drawdown for each trader. When an employee sinks to that level, his trad-\ning privileges are suspended for the rest of the month. A trading manager breaks his \ntraders’ losing streaks by forcing them to stop trading if they reach their monthly \nloss limit. Imagine being in a room with co-workers who actively trade, while you \nsharpen pencils and get asked to run out for sandwiches. Traders do all in their power \nto avoid being in that spot. This social pressure creates a serious incentive not to lose.", - "type": "text" - }, - { - "block_id": "p229-b3", - "global_id": 2462, - "bbox": [ - 71.94, - 211.87, - 434.7, - 295.2 - ], - "text": "People who leave institutions know how to trade, but their discipline is often ex-\nternal, not internal. They quickly lose money without their managers. Private trad-\ners have no managers. This is why you need to become your own manager. The 2% \nRule will save you from disastrous losses, while the 6% Rule will save you from a \nseries of losses. The 6% Rule will force you to do something most people cannot do \nuntil it’s too late—break a losing streak.", - "type": "text" - } - ] - }, - { - "page_num": 230, - "width": 504.0, - "height": 720.0, - "blocks": [] - }, - { - "page_num": 231, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p231-b0", - "global_id": 2463, - "bbox": [ - 72.0, - 118.61, - 352.42, - 171.84 - ], - "text": "Practical Details", - "type": "text" - }, - { - "block_id": "p231-b1", - "global_id": 2464, - "bbox": [ - 72.1, - 673.7, - 432.15, - 687.25 - ], - "text": "215", - "type": "text" - }, - { - "block_id": "p231-b2", - "global_id": 2465, - "bbox": [ - 344.2, - 59.86, - 399.91, - 73.41 - ], - "text": "PA R T 1 0\nPA R T 1 0", - "type": "text" - }, - { - "block_id": "p231-b3", - "global_id": 2466, - "bbox": [ - 71.3, - 331.94, - 104.71, - 372.34 - ], - "text": "W", - "type": "text" - }, - { - "block_id": "p231-b4", - "global_id": 2467, - "bbox": [ - 72.02, - 337.63, - 434.76, - 420.96 - ], - "text": "ill you be buying stocks that break out to new highs? Shorting double tops? \nBuying pullbacks? Looking for trend reversals? Those approaches differ from \neach other, and you can make or lose money with each of them. You need to select \na method that makes sense to you and feels emotionally comfortable. Choose what \nappeals to you, what matches your abilities and temperament. There is no such thing \nas generic trading, any more than there is a generic sport.", - "type": "text" - }, - { - "block_id": "p231-b5", - "global_id": 2468, - "bbox": [ - 72.02, - 421.65, - 434.8, - 490.98 - ], - "text": "To find good trades, you need to define the pattern you want to trade. Prior to \nusing any scan, you need to have a crystal-clear picture of what it should look for. \nDevelop your system, and test it with a series of small trades to make sure you have \nthe discipline to follow your signals. You have to feel certain that you’ll trade the pat-\ntern you’ve identified when you see it.", - "type": "text" - }, - { - "block_id": "p231-b6", - "global_id": 2469, - "bbox": [ - 72.02, - 491.67, - 434.72, - 532.99 - ], - "text": "Different styles of trading call for different entry techniques, different methods of \nsetting stops and profit targets, and very different scans. Still, there are several key \nprinciples that apply to all systems.", - "type": "text" - }, - { - "block_id": "p231-b7", - "global_id": 2470, - "bbox": [ - 73.55, - 560.66, - 322.98, - 579.3 - ], - "text": "■\n■53. How to Set Profit Targets:", - "type": "text" - }, - { - "block_id": "p231-b8", - "global_id": 2471, - "bbox": [ - 88.5, - 576.66, - 314.04, - 595.3 - ], - "text": "“Enough” Is the Power Word", - "type": "text" - }, - { - "block_id": "p231-b9", - "global_id": 2472, - "bbox": [ - 72.0, - 605.63, - 434.66, - 646.94 - ], - "text": "Setting profit targets for your trades is like asking about pay and benefits when \napplying for a job. You may end up earning more or less than expected, but you need \nto have an idea of what to expect.", - "type": "text" - } - ] - }, - { - "page_num": 232, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p232-b0", - "global_id": 2473, - "bbox": [ - 72.0, - 33.66, - 432.03, - 47.21 - ], - "text": "216\t\nPRACTICAL DETAILS", - "type": "text" - }, - { - "block_id": "p232-b1", - "global_id": 2474, - "bbox": [ - 72.0, - 518.83, - 434.76, - 588.15 - ], - "text": "Write down your entry level, profit target, and stop for every planned trade in \norder to compare your risk and reward. Your potential reward should be at least \ntwice as big as your risk. It seldom pays to risk a dollar to make a dollar—you might \nas well bet on color at a roulette table. Having a realistic profit target and a firm stop \nwill help you make a go/no-go decision for any trade.", - "type": "text" - }, - { - "block_id": "p232-b2", - "global_id": 2475, - "bbox": [ - 72.0, - 588.85, - 434.75, - 672.18 - ], - "text": "Early in my trading career I didn’t think of profit targets. If anybody asked me \nabout them, I’d answer that I didn’t want to limit my profit potential. Today, I would \nlaugh at such an answer. A beginner without a clear target price will feel increasingly \nhappy as his stock goes up and more despondent as it grinds down. His emotions will \nprime him to act at the worst possible times: continue to hold and add to his longs at \nthe top and sell out in disgust near the bottom.", - "type": "text" - }, - { - "block_id": "p232-b3", - "global_id": 2476, - "bbox": [ - 401.4, - 99.71, - 412.71, - 107.53 - ], - "text": "abc", - "type": "text" - }, - { - "block_id": "p232-b4", - "global_id": 2477, - "bbox": [ - 72.36, - 279.38, - 430.47, - 300.23 - ], - "text": "FIGURE 53.1  VRSN with 13- and 26-day EMAs, the Impulse system, and a 4% envelope. MACD 12-26-9. \n(Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p232-b5", - "global_id": 2478, - "bbox": [ - 72.4, - 306.23, - 300.58, - 319.13 - ], - "text": "Swing Trade: Taking Profits in the Value Zone", - "type": "text" - }, - { - "block_id": "p232-b6", - "global_id": 2479, - "bbox": [ - 72.4, - 323.13, - 434.56, - 417.61 - ], - "text": "This record of shorting VeriSign Inc. (VRSN) comes from my trade journal. It was one of \nseveral stocks that developed a setup for my “false breakout with a divergence” strategy. \nThe last three days on this chart are marked a, b, and c. On day “a” VRSN broke out \nand closed above resistance, marked by a horizontal dashed line, while MACD-Histogram \ncouldn’t even rise above zero. The next day, marked “b,” VRSN opened below the orange \nline, showing that the previous day was a false upside breakout (some would call it an \nupthrust). As soon as MACD-Histogram ticked down, creating a bearish divergence, the \npattern was completed, and I immediately went short.", - "type": "text" - }, - { - "block_id": "p232-b7", - "global_id": 2480, - "bbox": [ - 72.4, - 419.11, - 434.53, - 489.59 - ], - "text": "VRSN kept sinking all day and closed lower. The next day, marked “c,” it tried to form a \nbase, and since the daily price was already in the value zone, I decided that it was enough \nand covered my shorts. Taking an 82 cent profit on 3,000 shares brought in $2,460 before \ncommissions. I could have made more by holding longer, but in swing trading, fast quarters \nare better than slow dollars. Taking profits in the value zone reduces the level of uncertainty \nand cuts the time your trade remains at risk.", - "type": "text" - } - ] - }, - { - "page_num": 233, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p233-b0", - "global_id": 2481, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "53. HOW TO SET PROFIT TARGETS\t\n217", - "type": "text" - }, - { - "block_id": "p233-b1", - "global_id": 2482, - "bbox": [ - 71.94, - 490.79, - 434.69, - 560.11 - ], - "text": "When calculating a trade’s profit potential, we run into a paradox. The longer \nyour expected holding period, the bigger the profit potential. A stock can rally much \nmore in a month than in a week. On the other hand, the longer your holding pe-\nriod, the higher the level of uncertainty. Technical analysis can be quite reliable for \nshorter-term moves, but many unpleasant surprises will occur in the longer run.", - "type": "text" - }, - { - "block_id": "p233-b2", - "global_id": 2483, - "bbox": [ - 71.94, - 560.81, - 434.7, - 616.13 - ], - "text": "In an earlier chapter on choosing the time horizon for trades, we examined our \nthree main options. The holding period for position trades or investments is measured \nin months, sometimes years. We may hold a swing trade for a few days, sometimes \nweeks. The expected duration of a day-trade is measured in minutes, rarely hours.", - "type": "text" - }, - { - "block_id": "p233-b3", - "global_id": 2484, - "bbox": [ - 71.94, - 616.82, - 434.62, - 672.14 - ], - "text": "Moving averages and channels help set profit targets for swing trades. They also \nwork for day-trades; only there you need to pay more attention to oscillators and \nexit at the first sign of a divergence against your trade. Profit targets in position trad-\ning are usually set at previous support and resistance levels.", - "type": "text" - }, - { - "block_id": "p233-b4", - "global_id": 2485, - "bbox": [ - 155.5, - 165.11, - 159.35, - 172.92 - ], - "text": "F", - "type": "text" - }, - { - "block_id": "p233-b5", - "global_id": 2486, - "bbox": [ - 141.9, - 122.11, - 146.72, - 129.92 - ], - "text": "A", - "type": "text" - }, - { - "block_id": "p233-b6", - "global_id": 2487, - "bbox": [ - 218.4, - 138.21, - 222.61, - 146.03 - ], - "text": "B", - "type": "text" - }, - { - "block_id": "p233-b7", - "global_id": 2488, - "bbox": [ - 348.6, - 171.51, - 353.05, - 179.33 - ], - "text": "C", - "type": "text" - }, - { - "block_id": "p233-b8", - "global_id": 2489, - "bbox": [ - 355.1, - 89.11, - 360.03, - 96.92 - ], - "text": "D", - "type": "text" - }, - { - "block_id": "p233-b9", - "global_id": 2490, - "bbox": [ - 80.3, - 67.7, - 240.0, - 75.95 - ], - "text": "EGO, 25 min\nEGO, 5 min", - "type": "text" - }, - { - "block_id": "p233-b10", - "global_id": 2491, - "bbox": [ - 71.96, - 222.78, - 401.55, - 243.82 - ], - "text": "FIGURE 53.2  EGO 25- and 5-minute charts with 13- and 26-bar EMAs, the Impulse system, and \nAutoenvelope. MACD 12-26-9. (Chart by TradeStation)", - "type": "text" - }, - { - "block_id": "p233-b11", - "global_id": 2492, - "bbox": [ - 72.0, - 249.63, - 367.01, - 262.53 - ], - "text": "Taking Profits of a Day-Trade near the Upper Channel Line", - "type": "text" - }, - { - "block_id": "p233-b12", - "global_id": 2493, - "bbox": [ - 72.0, - 266.53, - 434.11, - 325.01 - ], - "text": "This record of buying Eldorado Gold Corp. (EGO) comes from my trade journal. It illustrates \nusing Triple Screen for day-trading and profit-taking. The strategic decision to buy EGO \nwas taken on a 25-minute chart in area A, where the moving average turned up and the Im-\npulse system changed to green (notice that on the previous day there was a false downside \nbreakout—it indicated that this stock didn’t want to go down and may be setting up to rally).", - "type": "text" - }, - { - "block_id": "p233-b13", - "global_id": 2494, - "bbox": [ - 72.0, - 326.52, - 434.16, - 385.0 - ], - "text": "My trading strategy here was “pullback to value,” which I executed on a 5-minute chart, \nas prices gapped up at the open but then pulled back into the value zone (area B). I went \nlong at $9.51; my initial target was $9.75, near the upper channel line on the 25-minute \nchart, with a stop at $9.37, for a nearly 2:1 reward/risk ratio. Since this was a day-trade, \nI had it on my screen all day long.", - "type": "text" - }, - { - "block_id": "p233-b14", - "global_id": 2495, - "bbox": [ - 71.96, - 386.5, - 434.11, - 456.98 - ], - "text": "At first, with the uptrend being so strong, I considered taking it overnight, but then bear-\nish divergences began to develop in area C, and I placed an order to sell at $9.75. That \nturned out to be the high of the day, and my order wasn’t filled. As prices turned down from \ntheir bearish divergence on a 5-minute chart, I scrambled to lower my sell order to $9.70. \nIt was filled, and I was out with a profit before the close. Taking a 19-cent profit on 2,000 \nshares brought in $380 within a few hours.", - "type": "text" - } - ] - }, - { - "page_num": 234, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p234-b0", - "global_id": 2496, - "bbox": [ - 72.0, - 33.66, - 432.03, - 47.21 - ], - "text": "218\t\nPRACTICAL DETAILS", - "type": "text" - }, - { - "block_id": "p234-b1", - "global_id": 2497, - "bbox": [ - 72.0, - 434.83, - 434.68, - 504.15 - ], - "text": "The three targets mentioned above—moving averages, channels, and support/\nresistance levels—are fairly modest. They don’t have you shooting for the moon, but \nare realistic. Keep in mind that “enough” is a power word—in life as well as trad-\ning. It puts you in control, and by getting “enough” in one trade after another, you’ll \nachieve excellent results over time.", - "type": "text" - }, - { - "block_id": "p234-b2", - "global_id": 2498, - "bbox": [ - 72.0, - 504.85, - 434.66, - 560.17 - ], - "text": "How to define “enough”? I believe that moving averages and envelopes, along with \nrecent support and resistance levels can show us what would be “enough” for any \ngiven trade. Let me illustrate this with several examples: one a swing trade, another \na day-trade, and the third a long-term investment.", - "type": "text" - }, - { - "block_id": "p234-b3", - "global_id": 2499, - "bbox": [ - 72.0, - 560.86, - 434.75, - 616.18 - ], - "text": "VRSN was a fairly common example of a modest swing trade: entering near one \nof the channel lines and taking profits in the value zone between the two moving \naverages (Figure 53.1). This isn’t elephant hunting; this is rabbit hunting, a much \nmore reliable activity.", - "type": "text" - }, - { - "block_id": "p234-b4", - "global_id": 2500, - "bbox": [ - 72.0, - 616.88, - 434.7, - 658.2 - ], - "text": "The EGO day-trade in Figure 53.2 illustrates buying a pullback into the value \nzone during an uptrend, with a profit target at the upper channel line. I used an oscil-\nlator to speed up my exit when the market wouldn’t let me exit at the initial target.", - "type": "text" - }, - { - "block_id": "p234-b5", - "global_id": 2501, - "bbox": [ - 72.0, - 658.89, - 434.76, - 686.2 - ], - "text": "“Fallen angels” is the name of a scan I use to look for possible investment candi-\ndates. It marks stocks that have fallen over 90% from their peaks, stopped declining,", - "type": "text" - }, - { - "block_id": "p234-b6", - "global_id": 2502, - "bbox": [ - 71.96, - 285.18, - 426.77, - 306.03 - ], - "text": "FIGURE 53.3  IGOI with 13- and 26-day EMAs, the Impulse system, and a 4% envelope. MACD 12-26-9. \n(Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p234-b7", - "global_id": 2503, - "bbox": [ - 72.0, - 312.03, - 419.0, - 324.93 - ], - "text": "Setting a Profit Target for a Long-Term Trade at the Resistance Level", - "type": "text" - }, - { - "block_id": "p234-b8", - "global_id": 2504, - "bbox": [ - 72.0, - 328.93, - 434.16, - 399.41 - ], - "text": "At the right edge of the weekly chart, iGo, Inc. (IGOI) is trading slightly above $3, with \na rising EMA confirming a new uptrend. Its previous major top was above $60 (notice a \nkangaroo tail), two recent intermediate rallies had fizzled out, the most recent one near \n$15, and the previous one near $22 (all marked with purple dashed lines). If this is the \nstart of a new bullish trend, it would be reasonable to set the first profit target near $15, \nthe next near $22.", - "type": "text" - } - ] - }, - { - "page_num": 235, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p235-b0", - "global_id": 2505, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "54. HOW TO SET STOPS\t\n219", - "type": "text" - }, - { - "block_id": "p235-b1", - "global_id": 2506, - "bbox": [ - 71.94, - 57.83, - 434.59, - 85.14 - ], - "text": "bottomed out, and slowly began to rise. A stock that had lost 90% of its value has \nevery right to die, but if it chooses to live, it’s likely to rally.", - "type": "text" - }, - { - "block_id": "p235-b2", - "global_id": 2507, - "bbox": [ - 71.94, - 85.84, - 434.65, - 169.16 - ], - "text": "The best time to look for “fallen angels” is when a bear market starts showing signs \nof bottoming. That’s when you find many candidates that survived bear attacks and \nare starting to get up from the floor. This example shows an old bull market darling \nIGOI that got badly mauled but stopped declining and began to rise. The weekly \nchart in Figure 53.3 shows two prior attempts to return to the multiyear peak area. \nEach of those rallies retraced just about half of the previous bear market.", - "type": "text" - }, - { - "block_id": "p235-b3", - "global_id": 2508, - "bbox": [ - 71.94, - 169.86, - 434.69, - 267.19 - ], - "text": "Is this going to be an easy trade? Far from it. First of all, the latest bottom was \nnear $2, and if you place your stop there, your risk per share will be quite high, and \nyou’ll have to reduce trade size. Also, the expected rally may take anywhere from a \nfew months to several years to get going. Are you prepared to wait that long, with \nyour capital tied up? Last but not least, the volume of this stock is low. It will rise if \nprices rally, but if the rally fizzles out, selling will not be easy. Taking all these factors \ninto account, you can see how hard it is to buy for the long haul.", - "type": "text" - }, - { - "block_id": "p235-b4", - "global_id": 2509, - "bbox": [ - 73.55, - 291.86, - 260.16, - 310.5 - ], - "text": "■\n■54. How to Set Stops:", - "type": "text" - }, - { - "block_id": "p235-b5", - "global_id": 2510, - "bbox": [ - 88.5, - 307.86, - 303.4, - 326.5 - ], - "text": "Say No to Wishful Thinking", - "type": "text" - }, - { - "block_id": "p235-b6", - "global_id": 2511, - "bbox": [ - 72.0, - 336.83, - 434.71, - 392.15 - ], - "text": "A trade without a stop is a gamble. If you’re after thrills, better go to a real casino. \nTake a trip to Macao, Las Vegas, or Atlantic City, where a gambling house will serve \nyou free drinks and may even comp you a room while you’re having fun. Gamblers \nwho lose money on Wall Street receive no freebies.", - "type": "text" - }, - { - "block_id": "p235-b7", - "global_id": 2512, - "bbox": [ - 72.0, - 392.84, - 434.72, - 490.18 - ], - "text": "Stops are a must for long-term survival and success, but most of us feel a great \nemotional reluctance to use them. The market reinforces our bad habits by training \nus not to use stops. We all have been through this unpleasant experience: you buy \na stock and set a stop that gets hit and you exit with a loss—only to see your stock \nreverse and rally just as you originally expected. Had you held that stock without a \nstop, you would’ve profited instead of losing. Getting repeatedly whipsawed like that \nmakes you feel disgusted with stops.", - "type": "text" - }, - { - "block_id": "p235-b8", - "global_id": 2513, - "bbox": [ - 72.0, - 490.87, - 434.74, - 588.2 - ], - "text": "After several such events, you start trading without stops, and it works beautifully \nfor a while. There are no more whipsaws. When a trade doesn’t work well, you get \nout of it without a stop—you have enough discipline. This happy ride ends after a \nlarge trade starts going bad. You keep waiting for it to rally a bit and give you a better \nexit, but it keeps sinking. As the days go by, it inflicts more and more damage on your \naccount—you’re being chewed up by a shark. Soon enough your survival is in dan-\nger, and your confidence is shattered.", - "type": "text" - }, - { - "block_id": "p235-b9", - "global_id": 2514, - "bbox": [ - 72.0, - 588.9, - 434.76, - 658.22 - ], - "text": "While you trade without stops, the sharks circling the perimeter of every account \ngrow bigger and meaner. If you trade without stops, a shark bite is only a question of \ntime. Yes, stops are a pain—but using them is a lesser evil than trading without them. \nThis reminds me of what Winston Churchill said about democracy: “It is the worst \nform of government except all the others that have been tried.”", - "type": "text" - }, - { - "block_id": "p235-b10", - "global_id": 2515, - "bbox": [ - 72.0, - 658.92, - 434.65, - 686.23 - ], - "text": "What should we do? I suggest accepting the irritation and the pain of stops but \nfocusing on making them more logical and less unpleasant.", - "type": "text" - } - ] - }, - { - "page_num": 236, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p236-b0", - "global_id": 2516, - "bbox": [ - 72.0, - 33.66, - 432.03, - 47.21 - ], - "text": "220\t\nPRACTICAL DETAILS", - "type": "text" - }, - { - "block_id": "p236-b1", - "global_id": 2517, - "bbox": [ - 72.0, - 57.83, - 434.72, - 99.14 - ], - "text": "In my previous book The New Sell and Sell Short, I dedicated a long chapter to the \nintricacies of placing various types of stops. Rather than repeat myself here, I’ll offer \nyou a quick summary.", - "type": "text" - }, - { - "block_id": "p236-b2", - "global_id": 2518, - "bbox": [ - 72.0, - 119.2, - 365.13, - 136.13 - ], - "text": "Place Stops outside the Zone of “Market Noise”", - "type": "text" - }, - { - "block_id": "p236-b3", - "global_id": 2519, - "bbox": [ - 72.0, - 141.83, - 434.66, - 169.14 - ], - "text": "Put a stop too close and it’ll get whacked by some meaningless intraday swing. Put it \ntoo far, and you’ll have very skimpy protection.", - "type": "text" - }, - { - "block_id": "p236-b4", - "global_id": 2520, - "bbox": [ - 72.0, - 169.84, - 434.7, - 239.16 - ], - "text": "To borrow an engineering concept, all market moves have two components: sig-\nnal and noise. The signal is the trend of your stock. When the trend is up, we can \ndefine noise as that part of each day’s range that protrudes below the previous day’s \nlow. When the trend is down, we can define noise as that part of each day’s range that \nprotrudes above the previous day’s high.", - "type": "text" - }, - { - "block_id": "p236-b5", - "global_id": 2521, - "bbox": [ - 72.0, - 239.69, - 434.75, - 379.2 - ], - "text": "SafeZone stops are described in detail in Come into My Trading Room. They mea-\nsure market noise and place stops at a multiple of noise level away from the market. \nIn brief, use the slope of a 22-day EMA to define the trend. If the trend is up, mark \nall downside penetrations of the EMA during the look-back period (10 to 20 days), \nadd their depths, and divide the sum by the number of penetrations. This gives you \nthe Average Downside Penetration for the selected look-back period. It reflects the \naverage level of noise in the current uptrend. You want to place your stops farther \naway from the market than the average level of noise. That’s why you need to multi-\nply an average downside penetration by a factor of two or greater. Placing your stop \nany closer would be self-defeating.", - "type": "text" - }, - { - "block_id": "p236-b6", - "global_id": 2522, - "bbox": [ - 72.0, - 379.9, - 434.75, - 463.22 - ], - "text": "When the trend, as defined by the EMA slope, is down, we calculate SafeZone \non the basis of upside penetrations of the previous bars’ highs. We count each upside \npenetrations during a selected time window and average that data to find the Average \nUpside Penetration. We multiply it by a coefficient, starting with 3, and add that to \nthe high of each bar. Shorting near the highs requires wider stops than buying near \nquiet, sold-out bottoms.", - "type": "text" - }, - { - "block_id": "p236-b7", - "global_id": 2523, - "bbox": [ - 72.0, - 463.92, - 434.72, - 533.24 - ], - "text": "Like all systems and indicators in this book, SafeZone is not a mechanical gadget to \nreplace independent thought. You have to establish the look-back period, the window \nof time during which SafeZone is calculated. You also need to fine-tune the coefficient \nby which you multiply the average penetration, so that your stop goes outside the \nnormal noise level.", - "type": "text" - }, - { - "block_id": "p236-b8", - "global_id": 2524, - "bbox": [ - 72.0, - 533.94, - 434.7, - 575.26 - ], - "text": "Even when not using SafeZone, you may wish to follow its principle of calculating \nan average penetration against the trend that you are aiming to trade—and putting \nyour stop well outside the zone of market noise.", - "type": "text" - }, - { - "block_id": "p236-b9", - "global_id": 2525, - "bbox": [ - 72.0, - 595.2, - 321.69, - 612.14 - ], - "text": "Don’t Place Your Stops at Obvious Levels", - "type": "text" - }, - { - "block_id": "p236-b10", - "global_id": 2526, - "bbox": [ - 72.0, - 617.83, - 434.75, - 673.15 - ], - "text": "A recent low that sticks out like a sore thumb from a tight weave of prices draws \ntraders to place stops slightly below that level. The trouble is most people place their \nstops there, creating a target-rich environment for the running of stops. The market \nhas an uncanny habit of quickly sinking back to those obvious lows and triggering", - "type": "text" - } - ] - }, - { - "page_num": 237, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p237-b0", - "global_id": 2527, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "54. HOW TO SET STOPS\t\n221", - "type": "text" - }, - { - "block_id": "p237-b1", - "global_id": 2528, - "bbox": [ - 71.94, - 57.83, - 434.58, - 85.14 - ], - "text": "stops before reversing and launching a new rally. Without trying to assign blame for \nraiding stops, let me suggest several solutions.", - "type": "text" - }, - { - "block_id": "p237-b2", - "global_id": 2529, - "bbox": [ - 71.94, - 85.84, - 434.71, - 141.16 - ], - "text": "It pays to place your stops at non-obvious levels—either closer to the market or \ndeeper below an obvious low. A closer stop will cut your dollar risk but increase the \nrisk of a whipsaw. A deeper stop will help you sidestep some false breakouts, but if \nit gets hit you’ll lose more.", - "type": "text" - }, - { - "block_id": "p237-b3", - "global_id": 2530, - "bbox": [ - 71.94, - 141.85, - 434.69, - 197.17 - ], - "text": "Take your pick. For short-term swing trading, it generally pays to place your stops \ntighter, while for long-term position trades, you’d be better off with wider stops. \nRemember “the Iron Triangle of risk control”—a wider stop demands a smaller \ntrade size.", - "type": "text" - }, - { - "block_id": "p237-b4", - "global_id": 2531, - "bbox": [ - 71.94, - 197.7, - 434.7, - 281.2 - ], - "text": "One method I like is Nic’s stop, named after my Australian friend Nic Grove. \nHe invented this method of placing a stop not near the lowest low, but at the second \nlowest (more shallow) low. The logic is simple—if the market is sliding to its second \nlowest low, it is almost certain to continue falling and hit the key low, where the bulk \nof stops cluster. Using Nic’s stop, I get out with a smaller loss and lower slippage than \nwould occur when the markets drop to more visible lows.", - "type": "text" - }, - { - "block_id": "p237-b5", - "global_id": 2532, - "bbox": [ - 71.94, - 281.89, - 434.7, - 323.21 - ], - "text": "The same logic works when shorting—place your Nic’s stop not “a tick above the \nhighest high” but at the level of the second highest high. Let’s review some recent \nexamples of both longs and shorts in Figure 54.1.", - "type": "text" - }, - { - "block_id": "p237-b6", - "global_id": 2533, - "bbox": [ - 71.94, - 323.9, - 434.63, - 407.23 - ], - "text": "You may want to explore several different systems for placing stops, such as Para-\nbolic, SafeZone, and Volatility stops, described in the books mentioned above. You \ncan get fancy or you can stay plain, but keep in mind the most important principles: \nfirst, use stops; and second, don’t place them at obvious levels, easily visible to any-\none looking at that chart. Make your stops a little tighter or wider than average—\nstay away from the crowd because you don’t want to be an average trader.", - "type": "text" - }, - { - "block_id": "p237-b7", - "global_id": 2534, - "bbox": [ - 71.94, - 407.93, - 434.69, - 477.25 - ], - "text": "For the same reason, avoid placing stops at round numbers. If you buy at $80, \ndon’t place a stop at $78 but at $77.94. If you enter a day-trade at $25.60, don’t \nplace a stop at $25.25—move it to $25.22 or even $22.19. Round numbers attract \ncrowds—put your stop a little farther away. Let the crowd take the first hit, and \nperhaps your own stop will remain untouched.", - "type": "text" - }, - { - "block_id": "p237-b8", - "global_id": 2535, - "bbox": [ - 71.94, - 477.78, - 434.7, - 561.28 - ], - "text": "Another method, popularized by Kerry Lovvorn, is to use Average True Range \n(ATR) stops (see Chapter 24 for the explanation of the ATR). When you enter \nduring a price bar, place your stop at least one ATR away from the extreme of that \nbar. A two ATR stop is even safer. You can use it as a trailing stop, moving it at every \nbar. The principle is the same—place your stop outside the zone of market noise. \n(Figure 54.2)", - "type": "text" - }, - { - "block_id": "p237-b9", - "global_id": 2536, - "bbox": [ - 71.94, - 561.97, - 434.65, - 617.29 - ], - "text": "One of the advantages of using trailing stops is that they gradually reduce the \namount of money at risk. Earlier we discussed the concept of “available risk” (Chap-\nter 51). As a trade followed by a trailing stop moves in your favor, it gradually frees \nup available risk, allowing you to make new trades.", - "type": "text" - }, - { - "block_id": "p237-b10", - "global_id": 2537, - "bbox": [ - 71.94, - 617.99, - 434.71, - 673.31 - ], - "text": "Even if you don’t use SafeZone or ATR stops, be sure to place stops at some dis-\ntance from recent prices. You don’t want to be like one of those fearful traders who \njam their stops so close to current prices that the slightest meaningless fluctuation is \ncertain to hit them.", - "type": "text" - } - ] - }, - { - "page_num": 238, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p238-b0", - "global_id": 2538, - "bbox": [ - 72.0, - 33.66, - 432.03, - 47.21 - ], - "text": "222\t\nPRACTICAL DETAILS", - "type": "text" - }, - { - "block_id": "p238-b1", - "global_id": 2539, - "bbox": [ - 72.0, - 603.03, - 434.77, - 686.36 - ], - "text": "The concept of signal and noise can help you not only place intelligent stops but \nalso find good entries into trades. If you see a stock in a strong trend but don’t like \nto chase prices, drop down one timeframe. For example, if the weekly trend is up, \nswitch to the daily chart, and you’ll probably see that once every few weeks, it has \na pullback below the value zone. Measure the depths of several recent penetrations \nbelow the slow EMA to calculate an average penetration (see Figure 39.3). Place a", - "type": "text" - }, - { - "block_id": "p238-b2", - "global_id": 2540, - "bbox": [ - 173.32, - 163.92, - 238.8, - 176.29 - ], - "text": "D\nA\nC\nB", - "type": "text" - }, - { - "block_id": "p238-b3", - "global_id": 2541, - "bbox": [ - 224.2, - 63.31, - 234.59, - 71.67 - ], - "text": "KO", - "type": "text" - }, - { - "block_id": "p238-b4", - "global_id": 2542, - "bbox": [ - 71.96, - 237.18, - 407.06, - 258.03 - ], - "text": "FIGURE 54.1  Daily charts with 13-day EMA, the Impulse system, and MACD-Histogram 12-26-9. \n(Charts by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p238-b5", - "global_id": 2543, - "bbox": [ - 72.0, - 264.03, - 267.19, - 276.93 - ], - "text": "Nic’s Stops—Long KO and Short ISRG", - "type": "text" - }, - { - "block_id": "p238-b6", - "global_id": 2544, - "bbox": [ - 72.0, - 280.93, - 434.14, - 315.42 - ], - "text": "On the chart of The Coca-Cola Company (KO), we see a false downside breakout with a \nbullish divergence. The Impulse system has turned from red to blue, permitting buying. If \nwe go long, where should we place our stop?", - "type": "text" - }, - { - "block_id": "p238-b7", - "global_id": 2545, - "bbox": [ - 88.0, - 322.93, - 197.17, - 333.42 - ], - "text": "Bar A—the low was $37.10", - "type": "text" - }, - { - "block_id": "p238-b8", - "global_id": 2546, - "bbox": [ - 88.0, - 338.93, - 197.51, - 349.42 - ], - "text": "Bar B—the low was $37.05", - "type": "text" - }, - { - "block_id": "p238-b9", - "global_id": 2547, - "bbox": [ - 88.0, - 354.93, - 431.65, - 365.42 - ], - "text": "Bar C—the low was $36.89 (a false downside breakout, exceeded the low A by 21 cents).", - "type": "text" - }, - { - "block_id": "p238-b10", - "global_id": 2548, - "bbox": [ - 88.0, - 370.93, - 197.68, - 381.43 - ], - "text": "Bar D—the low was $37.14", - "type": "text" - }, - { - "block_id": "p238-b11", - "global_id": 2549, - "bbox": [ - 72.0, - 388.93, - 434.04, - 411.42 - ], - "text": "The crowd will have set its stops below 36.89, but Nic’s stop will go to $37.04—a cent \nbelow the second lowest recent low, the bottom of bar B.", - "type": "text" - }, - { - "block_id": "p238-b12", - "global_id": 2550, - "bbox": [ - 72.0, - 424.93, - 434.06, - 459.42 - ], - "text": "On the chart of Intuitive Surgical, Inc. (ISRG), we see a false upside breakout with a \nbearish divergence. The Impulse system has turned from green to blue, permitting short-\ning. If we go short, where should we place our stop?", - "type": "text" - }, - { - "block_id": "p238-b13", - "global_id": 2551, - "bbox": [ - 88.0, - 466.93, - 245.72, - 477.42 - ], - "text": "Bar A—previous peak reached $447.50", - "type": "text" - }, - { - "block_id": "p238-b14", - "global_id": 2552, - "bbox": [ - 88.0, - 482.93, - 205.69, - 493.42 - ], - "text": "Bar B—the high was $444.99", - "type": "text" - }, - { - "block_id": "p238-b15", - "global_id": 2553, - "bbox": [ - 88.0, - 498.93, - 434.09, - 509.42 - ], - "text": "Bar C—the high was $447.75 (a false upside breakout, exceeded previous peak by", - "type": "text" - }, - { - "block_id": "p238-b16", - "global_id": 2554, - "bbox": [ - 100.06, - 510.93, - 139.41, - 521.42 - ], - "text": "25 cents).", - "type": "text" - }, - { - "block_id": "p238-b17", - "global_id": 2555, - "bbox": [ - 88.07, - 526.93, - 205.93, - 537.42 - ], - "text": "Bar D—the high was $442.03", - "type": "text" - }, - { - "block_id": "p238-b18", - "global_id": 2556, - "bbox": [ - 72.06, - 544.93, - 434.15, - 567.42 - ], - "text": "The crowd will have its stops above $447.75, but Nic’s stop will go to $445.05—a few \ncents above the second highest recent high, the top of bar B.", - "type": "text" - }, - { - "block_id": "p238-b19", - "global_id": 2557, - "bbox": [ - 257.0, - 59.23, - 414.91, - 73.54 - ], - "text": "D\nA\nC\nB\nISRG", - "type": "text" - } - ] - }, - { - "page_num": 239, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p239-b0", - "global_id": 2558, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "54. HOW TO SET STOPS\t\n223", - "type": "text" - }, - { - "block_id": "p239-b1", - "global_id": 2559, - "bbox": [ - 71.94, - 449.27, - 434.6, - 490.58 - ], - "text": "buy order for the day ahead at that distance below the EMA and keep adjusting it \nevery day. You will use a splash of noisy behavior to get a good entry into a trend-\nfollowing trade.", - "type": "text" - }, - { - "block_id": "p239-b2", - "global_id": 2560, - "bbox": [ - 72.0, - 510.6, - 331.79, - 527.54 - ], - "text": "Don’t Let a Winning Trade Turn into a Loss", - "type": "text" - }, - { - "block_id": "p239-b3", - "global_id": 2561, - "bbox": [ - 72.0, - 533.23, - 434.76, - 602.55 - ], - "text": "Never let an open trade that shows a decent paper profit turn into a loss! Before you \nput on a trade, start planning at what level you’ll begin protecting your profits. For \nexample, if your profit target for that trade is about $1,000, you may decide that a \nprofit of $300 will need to be protected. Once your open profit rises to $300, you’ll \nmove your protective stop to a breakeven level. I call that move “cuffing the trade.”", - "type": "text" - }, - { - "block_id": "p239-b4", - "global_id": 2562, - "bbox": [ - 72.0, - 603.25, - 434.74, - 644.56 - ], - "text": "Soon after moving your stop to breakeven, you’ll need to focus on protecting \na portion of your growing paper profit. Decide in advance what percentage you’ll \nprotect.", - "type": "text" - }, - { - "block_id": "p239-b5", - "global_id": 2563, - "bbox": [ - 72.0, - 645.26, - 434.72, - 686.58 - ], - "text": "For example, you may decide that once the breakeven stop is in place, you’ll pro-\ntect a third of your open profit. If the open profit on the trade described above rises \nto $600, you’ll move up your stop, so that the $200 profit is protected.", - "type": "text" - }, - { - "block_id": "p239-b6", - "global_id": 2564, - "bbox": [ - 85.4, - 181.51, - 90.22, - 189.33 - ], - "text": "A", - "type": "text" - }, - { - "block_id": "p239-b7", - "global_id": 2565, - "bbox": [ - 152.7, - 168.51, - 156.91, - 176.33 - ], - "text": "B", - "type": "text" - }, - { - "block_id": "p239-b8", - "global_id": 2566, - "bbox": [ - 274.6, - 151.51, - 376.8, - 159.33 - ], - "text": "C\nD\nE", - "type": "text" - }, - { - "block_id": "p239-b9", - "global_id": 2567, - "bbox": [ - 71.96, - 246.78, - 415.95, - 267.63 - ], - "text": "FIGURE 54.2  S&P 500 and a 20-day New High–New Low Index. (Chart by TradeStation, programming by \nKerry Lovvorn)", - "type": "text" - }, - { - "block_id": "p239-b10", - "global_id": 2568, - "bbox": [ - 72.0, - 273.63, - 344.7, - 286.53 - ], - "text": "A 2-ATR Trailing Stop following a Spike Bounce signal", - "type": "text" - }, - { - "block_id": "p239-b11", - "global_id": 2569, - "bbox": [ - 72.0, - 290.53, - 434.13, - 361.01 - ], - "text": "A Spike Bounce signal (described in Chapter 34) occurs when the 20-day New High—New \nLow Index drops below minus 500, indicating a bearish imbalance, and then rallies above \nthat level, showing that bulls are coming back. Spike Bounce signals are marked by verti-\ncal green arrows. Here S&P bars get colored green while the Spike Bounce signal is, in \neffect, purple after it disappears. The red line trails two ATRs below the highs of the bars \nof the S&P 500.", - "type": "text" - }, - { - "block_id": "p239-b12", - "global_id": 2570, - "bbox": [ - 72.0, - 362.51, - 434.15, - 421.0 - ], - "text": "The Spike Bounce gives buy signals for the entire market, and this chart trails each buy \nsignal with a 2-ATR close-only stop (intraday crossovers don’t count—the market has to \nclose below the stop to activate it). Notice the very productive signals A, B, and C. The buy \nsignal E is still in effect at the time of this writing. The signal D resulted in a loss—there are \nno universally profitable signals.", - "type": "text" - } - ] - }, - { - "page_num": 240, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p240-b0", - "global_id": 2571, - "bbox": [ - 72.0, - 33.66, - 432.03, - 47.21 - ], - "text": "224\t\nPRACTICAL DETAILS", - "type": "text" - }, - { - "block_id": "p240-b1", - "global_id": 2572, - "bbox": [ - 72.0, - 57.83, - 434.66, - 85.14 - ], - "text": "These levels aren’t set in stone. You may choose different percentages, depending \non your level of confidence in a trade and risk tolerance.", - "type": "text" - }, - { - "block_id": "p240-b2", - "global_id": 2573, - "bbox": [ - 72.0, - 85.84, - 434.72, - 155.16 - ], - "text": "As a trade moves in your favor, your remaining potential gain begins to shrink, \nwhile your risk—the distance to the stop—keeps increasing. To trade is to manage \nrisk. As the reward-to-risk ratio for your winning trades slowly deteriorates, you \nneed to begin reducing your risk. Protecting a portion of your paper profits will \nkeep your reward-to-risk ratio on a more even keel.", - "type": "text" - }, - { - "block_id": "p240-b3", - "global_id": 2574, - "bbox": [ - 72.0, - 182.2, - 390.77, - 199.13 - ], - "text": "Move Your Stop Only in the Direction of Your Trade", - "type": "text" - }, - { - "block_id": "p240-b4", - "global_id": 2575, - "bbox": [ - 72.0, - 204.83, - 434.76, - 274.15 - ], - "text": "You buy a stock and, being a disciplined trader, put a stop underneath. That stock \nrises, generating nice paper profits, but then it stalls. Next, it sinks a little, then a \nbit more, and then goes negative, inching towards your stop. As you study the chart, \nits bottom formation looks good, with a bullish divergence capable of supporting a \nstrong rally. What will you do next?", - "type": "text" - }, - { - "block_id": "p240-b5", - "global_id": 2576, - "bbox": [ - 72.0, - 274.85, - 434.75, - 344.17 - ], - "text": "First of all, learn from your mistake of not having moved up your stop. That stop \nshould have been raised to breakeven a while ago. Failing that, your options have nar-\nrowed: take a small loss right away and be ready to reposition later—or continue to \nhold. Trouble is you feel tempted to go for the third and utterly unplanned choice—\nto lower your stop, giving your losing trade “more room.”", - "type": "text" - }, - { - "block_id": "p240-b6", - "global_id": 2577, - "bbox": [ - 72.0, - 344.87, - 434.64, - 386.18 - ], - "text": "Don’t do it!\nGiving a trade “more room” is wishful thinking, pure and simple. It doesn’t belong \nin the toolkit of a serious trader.", - "type": "text" - }, - { - "block_id": "p240-b7", - "global_id": 2578, - "bbox": [ - 72.0, - 386.88, - 434.72, - 442.2 - ], - "text": "Giving “more room” to a losing trade is like telling your kid you’ll take away his \ncar keys if he misbehaves, but then not following through. That’s how you teach him \nthat rules don’t matter and encourage even worse behavior. Standing firm brings \nbetter long-term results.", - "type": "text" - }, - { - "block_id": "p240-b8", - "global_id": 2579, - "bbox": [ - 72.0, - 442.9, - 434.74, - 498.22 - ], - "text": "The logical thing to do when a trade starts acting badly is to accept a small loss. \nContinue to monitor that stock and be ready to buy it again if it bottoms out. Persis-\ntence pays, commissions are cheap, and professional traders often take several quick \nstabs at a trade before it starts running in their favor.", - "type": "text" - }, - { - "block_id": "p240-b9", - "global_id": 2580, - "bbox": [ - 72.0, - 525.2, - 359.1, - 542.14 - ], - "text": "Catastrophic Stops: A Professional’s Life Jacket", - "type": "text" - }, - { - "block_id": "p240-b10", - "global_id": 2581, - "bbox": [ - 72.0, - 547.83, - 434.74, - 603.15 - ], - "text": "Soon after moving to a house near a lake I bought a kayak, and immediately went \nshopping for a life jacket. All I had to do to be legal was to have a jacket in the \nkayak—any cheap piece of junk would suffice. Still, I spent good money on a quality \njacket that felt snug and didn’t interfere with rowing when I wore it.", - "type": "text" - }, - { - "block_id": "p240-b11", - "global_id": 2582, - "bbox": [ - 72.0, - 603.84, - 434.66, - 659.16 - ], - "text": "All I planned to do with that kayak was to paddle peacefully on a lake, not any-\nwhere near white water or currents. I never expected to actually need that jacket. \nDid I waste my money buying it? Well, if ever some motor boat clips me, then wear-\ning a high-quality jacket can make the difference between life and death.", - "type": "text" - }, - { - "block_id": "p240-b12", - "global_id": 2583, - "bbox": [ - 72.0, - 659.86, - 434.74, - 687.17 - ], - "text": "It’s the same with stops. They’re a nuisance and often cost you money. Still, there \nwill be a day when a stop will save your account from a life-threatening collision.", - "type": "text" - } - ] - }, - { - "page_num": 241, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p241-b0", - "global_id": 2584, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "55. IS THIS AN A-TRADE?\t\n225", - "type": "text" - }, - { - "block_id": "p241-b1", - "global_id": 2585, - "bbox": [ - 71.94, - 57.83, - 434.59, - 85.14 - ], - "text": "Keep in mind that a bad accident is much more likely in the market than on a lake. \nThat’s why it’s essential to use stops.", - "type": "text" - }, - { - "block_id": "p241-b2", - "global_id": 2586, - "bbox": [ - 71.94, - 85.84, - 434.63, - 141.16 - ], - "text": "A “hard stop” is an order you give to your broker. A “soft stop” is an order you \nkeep in your head, ready to place it when needed. Beginners and intermediate trad-\ners must use hard stops. A professional trader, sitting in front of a live screen all day, \nmay use a soft stop if he has the discipline to exit when his system tells him to do it.", - "type": "text" - }, - { - "block_id": "p241-b3", - "global_id": 2587, - "bbox": [ - 71.94, - 141.85, - 434.66, - 211.18 - ], - "text": "Still, accidents happen. A professional trader friend described how he fought \nagainst a market reversal. His soft stop was set at a $2,000 loss level, but by the time \nhe threw in the towel and got out, his loss grew to $40,000—the worst of his trading \ncareer. This is why, even if you don’t use hard stops on a regular basis, you should at \nthe very least use a “catastrophic stop” for every trade.", - "type": "text" - }, - { - "block_id": "p241-b4", - "global_id": 2588, - "bbox": [ - 71.94, - 211.87, - 434.68, - 281.18 - ], - "text": "For any A-trade, whether long or short, draw a line on your chart where you ab-\nsolutely do not expect that stock to go. Place your hard stop at that level and make \nit GTC: “good ’til cancelled.”  That will be your catastrophic stop. Now you can play \nwith the luxury of soft stops. Paddle your kayak hard, knowing that you’re wearing \na reliable life jacket.", - "type": "text" - }, - { - "block_id": "p241-b5", - "global_id": 2589, - "bbox": [ - 71.94, - 281.88, - 434.69, - 323.2 - ], - "text": "Had my friend whose $2,000 drawdown metastasized into a $40,000 loss used a \nhard “catastrophic” stop, he would have taken only a relatively small loss, sidestepped \na disaster, and avoided the financial and psychological hurt of a shark bite.", - "type": "text" - }, - { - "block_id": "p241-b6", - "global_id": 2590, - "bbox": [ - 72.0, - 343.2, - 345.32, - 360.14 - ], - "text": "Stops and Overnight Gaps: Only for the Pros", - "type": "text" - }, - { - "block_id": "p241-b7", - "global_id": 2591, - "bbox": [ - 72.0, - 365.83, - 434.69, - 407.14 - ], - "text": "What will you do if your stock gets hit by a major piece of bad news after the market \ncloses for the day? Looking at pre-opening quotes the next morning, you realize that \nit’ll open sharply lower, deep below your stop, promising massive slippage.", - "type": "text" - }, - { - "block_id": "p241-b8", - "global_id": 2592, - "bbox": [ - 72.0, - 407.84, - 434.75, - 477.16 - ], - "text": "This is a rare occurrence, but it does happen.\nIf you’re a new or intermediate trader, there isn’t much you can do—just grit \nyour teeth and take your loss. Only coldly disciplined pros have an additional \noption: day-trade your way out of that stock. Pull your stop, and after the stock begins \ntrading, handle it as if it was a day-trade you bought at the first tick of that morning.", - "type": "text" - }, - { - "block_id": "p241-b9", - "global_id": 2593, - "bbox": [ - 72.0, - 477.86, - 434.74, - 519.18 - ], - "text": "Opening gaps are often followed by bounces, giving nimble traders an opportunity \nto get out at a smaller loss. This doesn’t always happen—which is why most traders \nshould never use this technique. You may actually deepen your loss instead of reducing it.", - "type": "text" - }, - { - "block_id": "p241-b10", - "global_id": 2594, - "bbox": [ - 72.0, - 519.87, - 434.7, - 561.19 - ], - "text": "Be sure to get out before the close. Your damaged stock may bounce today, but \ntomorrow more sellers are likely to come in and drive it lower. Don’t let a bounce \nlull you into a false hope of a reversal.", - "type": "text" - }, - { - "block_id": "p241-b11", - "global_id": 2595, - "bbox": [ - 73.55, - 588.86, - 266.31, - 607.5 - ], - "text": "■\n■55. Is This an A-Trade?", - "type": "text" - }, - { - "block_id": "p241-b12", - "global_id": 2596, - "bbox": [ - 72.0, - 617.83, - 434.63, - 659.14 - ], - "text": "Your performance in any field will improve if you take tests. Getting graded on them \nwill help you recognize your strengths and weaknesses. Now you can work on rein-\nforcing what’s good and correcting what’s not.", - "type": "text" - }, - { - "block_id": "p241-b13", - "global_id": 2597, - "bbox": [ - 72.0, - 659.84, - 434.71, - 687.15 - ], - "text": "Whenever you complete a trade, the market gives you three grades. It grades the \nquality of your entry and exit, and most importantly, it delivers your overall trade grade.", - "type": "text" - } - ] - }, - { - "page_num": 242, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p242-b0", - "global_id": 2598, - "bbox": [ - 72.0, - 33.66, - 432.03, - 47.21 - ], - "text": "226\t\nPRACTICAL DETAILS", - "type": "text" - }, - { - "block_id": "p242-b1", - "global_id": 2599, - "bbox": [ - 72.0, - 57.83, - 434.71, - 99.14 - ], - "text": "If you’re a swing trader and use a combination of weekly and daily charts, look for \nyour grades on the dailies. Your buy grade is based on the location of your entry, \nrelative to the high and low of the daily bar during which you bought.", - "type": "text" - }, - { - "block_id": "p242-b2", - "global_id": 2600, - "bbox": [ - 246.4, - 104.43, - 319.49, - 117.74 - ], - "text": "(high–buy point)", - "type": "text" - }, - { - "block_id": "p242-b3", - "global_id": 2601, - "bbox": [ - 184.59, - 109.84, - 306.83, - 131.74 - ], - "text": "(high–low)\nBuy grade =", - "type": "text" - }, - { - "block_id": "p242-b4", - "global_id": 2602, - "bbox": [ - 72.0, - 138.63, - 434.76, - 249.96 - ], - "text": "The closer to the bar’s low and the farther away from the bar’s high you buy, the \nbetter your buy grade. Suppose the high of the day was $20, the low $19, and you man-\naged to buy at $19.25. Entering those numbers into the formula gives you a buy grade \nof 75%. If your buy grade is 100%, it means you bought at the bottom tick of the day. \nThat’s brilliant, but don’t count on it happening. If your buy grade is 0%, it means you \nbought the top tick of the day. This is terrible and should serve as a reminder not to \nchase runaway prices. I calculate my buy grade for every trade and consider anything \nabove 50% a very good result, meaning I bought in the lower half of the daily bar.", - "type": "text" - }, - { - "block_id": "p242-b5", - "global_id": 2603, - "bbox": [ - 84.0, - 250.49, - 291.05, - 264.04 - ], - "text": "The following is the formula for your sell grade", - "type": "text" - }, - { - "block_id": "p242-b6", - "global_id": 2604, - "bbox": [ - 245.9, - 271.23, - 315.26, - 284.54 - ], - "text": "(sell point–low)", - "type": "text" - }, - { - "block_id": "p242-b7", - "global_id": 2605, - "bbox": [ - 187.29, - 276.6, - 304.53, - 298.54 - ], - "text": "(high–low)\nSell grade =", - "type": "text" - }, - { - "block_id": "p242-b8", - "global_id": 2606, - "bbox": [ - 72.0, - 305.43, - 434.7, - 416.76 - ], - "text": "The closer to the bar’s high and the farther away from the low of the bar you sell, \nthe better your sell grade. Suppose the high of the day was $20, the low $19, and \nyou managed to sell at $19.70. Entering those numbers into the formula gives you a \nsell grade of 70%. If your sell grade is 100%, it means you sold at the top tick of the \nday. If your sell grade is 0%, it means you sold at the bottom tick of the day. This ter-\nrible grade should serve as a reminder to sell earlier instead of panicking. I calculate \nmy sell grade for every trade and consider anything above 50% a very good result, \nmeaning I sold in the upper half of the daily bar.", - "type": "text" - }, - { - "block_id": "p242-b9", - "global_id": 2607, - "bbox": [ - 72.0, - 417.46, - 434.76, - 500.79 - ], - "text": "When evaluating any trade, most people assume that the amount of money they \nmake or lose in that trade reflects its quality. Money is important for plotting the \nequity curve, but it’s a poor measure of a single trade. It makes more sense to rate \nthe quality of every trade by comparing what you’ve got to what was realistically \navailable. I find my trade grade by comparing points gained or lost in a trade to the \nheight of the daily chart’s channel measured on the day of the entry.", - "type": "text" - }, - { - "block_id": "p242-b10", - "global_id": 2608, - "bbox": [ - 159.39, - 508.03, - 344.57, - 535.34 - ], - "text": "(sell–buy)\n(channel high–channel low)\nTrade grade =", - "type": "text" - }, - { - "block_id": "p242-b11", - "global_id": 2609, - "bbox": [ - 72.0, - 544.23, - 434.76, - 655.56 - ], - "text": "A well-drawn channel contains between 90% and 95% of prices for the past 100 \nbars (see Chapter 22). You may use any number of channels—parallel to the EMA, \nAutoenvelope, Keltner, or ATR channels—as long as you’re being consistent. A chan-\nnel contains normal price moves, with only the extreme highs and lows protruding \noutside it. The distance between the upper and the lower channel lines on the day you \nenter a trade represents a realistic maximum of what’s available to a swing trader in \nthat market. Shooting for a maximum, though, is a very dangerous game. I consider \nany trade that gains 30% or more of its channel height an A-trade.1 (Figure 55.1)", - "type": "text" - }, - { - "block_id": "p242-b12", - "global_id": 2610, - "bbox": [ - 72.0, - 675.36, - 432.43, - 686.45 - ], - "text": "1 This term comes from the U.S. school grading system: A is excellent, B good, C mediocre, and D poor.", - "type": "text" - } - ] - }, - { - "page_num": 243, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p243-b0", - "global_id": 2611, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "55. IS THIS AN A-TRADE?\t\n227", - "type": "text" - }, - { - "block_id": "p243-b1", - "global_id": 2612, - "bbox": [ - 71.94, - 575.27, - 434.69, - 644.59 - ], - "text": "A comment by Kerry Lovvorn at the 2012 annual reunion of SpikeTrade grabbed \nmy attention: he challenged all participants to define what he called ‘an A-trade’—a \nsetup that signals the likelihood of an excellent trade. “You have to define this pattern \nfor yourself,” he said. “If you don’t know what’s your ‘A-trade,’ you have no business \nbeing in the market.”", - "type": "text" - }, - { - "block_id": "p243-b2", - "global_id": 2613, - "bbox": [ - 71.94, - 645.29, - 434.6, - 686.6 - ], - "text": "I knew full well what my A-trades were—a divergence coupled with a false break-\nout or a pullback to value. Still, if I saw no A-trades on my screen, I’d go for B-trades, \nand on a really slow day, reach for a C-trade.", - "type": "text" - }, - { - "block_id": "p243-b3", - "global_id": 2614, - "bbox": [ - 389.6, - 103.74, - 394.46, - 111.64 - ], - "text": "A", - "type": "text" - }, - { - "block_id": "p243-b4", - "global_id": 2615, - "bbox": [ - 396.33, - 96.59, - 400.58, - 104.49 - ], - "text": "B", - "type": "text" - }, - { - "block_id": "p243-b5", - "global_id": 2616, - "bbox": [ - 402.06, - 90.37, - 406.56, - 98.27 - ], - "text": "C", - "type": "text" - }, - { - "block_id": "p243-b6", - "global_id": 2617, - "bbox": [ - 408.53, - 80.49, - 413.51, - 88.39 - ], - "text": "D", - "type": "text" - }, - { - "block_id": "p243-b7", - "global_id": 2618, - "bbox": [ - 71.96, - 284.18, - 417.61, - 305.22 - ], - "text": "FIGURE 55.1  ADSK daily with 13- and 26-day EMAs and a 7% envelope. Impulse system with MACD-\nHistogram 12-26-9. (Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p243-b8", - "global_id": 2619, - "bbox": [ - 72.0, - 311.03, - 212.02, - 323.93 - ], - "text": "Buy, Sell, and Trade Grades", - "type": "text" - }, - { - "block_id": "p243-b9", - "global_id": 2620, - "bbox": [ - 72.0, - 327.93, - 434.14, - 386.41 - ], - "text": "This chart comes from my diary of a trade in Autodesk, Inc. (ADSK) while working on this \nbook (you saw my plan for this trade in Figure 38.1). I was piggybacking one of the Spike \npicks, and my strategy here was “pullback to value.” ADSK had recently staged a deeper \nthan average pullback—notice a false downside breakout marked by a red arrow, followed \nby a successful retest, marked with a green arrow.", - "type": "text" - }, - { - "block_id": "p243-b10", - "global_id": 2621, - "bbox": [ - 88.0, - 393.92, - 434.12, - 404.41 - ], - "text": "Day A—Feb. 10, 2014, Monday: high $52.49, low $51.75, upper channel line $53.87,", - "type": "text" - }, - { - "block_id": "p243-b11", - "global_id": 2622, - "bbox": [ - 100.0, - 405.92, - 434.12, - 429.12 - ], - "text": "lower $47.61 (we’ll need channel values to calculate the trade grade on exit). Bought \nat $51.77. Buy grade = (52.49 − 51.77) / (52.49 − 51.75) = 97%.", - "type": "text" - }, - { - "block_id": "p243-b12", - "global_id": 2623, - "bbox": [ - 88.0, - 433.92, - 409.08, - 444.41 - ], - "text": "Days B and C—Tuesday and Wednesday): rally continues, start moving up stop.", - "type": "text" - }, - { - "block_id": "p243-b13", - "global_id": 2624, - "bbox": [ - 88.0, - 449.4, - 434.1, - 461.12 - ], - "text": "Day D—Thursday: high $54.49, low $53.39. Sold at $53.78. Sell grade = (53.78 − 53.39) /", - "type": "text" - }, - { - "block_id": "p243-b14", - "global_id": 2625, - "bbox": [ - 100.04, - 461.39, - 433.85, - 485.12 - ], - "text": "(54.49 − 53.39) = 35%. Trade grade = (sell − buy) divided by channel height = \n(53.78 – 51.77) / (53.87 − 47.61) = 32%.", - "type": "text" - }, - { - "block_id": "p243-b15", - "global_id": 2626, - "bbox": [ - 72.05, - 491.91, - 434.2, - 538.4 - ], - "text": "My buy grade in this trade was unusually high, the sell grade below average, but the \noverall trade grade was very good. Busy with the book, I traded only 200 shares, so my \nprofit, after commissions, was less than $400. Had I graded my trades by profits, this one \nwould be easy to overlook, but catching 32% of channel earned me an A.", - "type": "text" - } - ] - }, - { - "page_num": 244, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p244-b0", - "global_id": 2627, - "bbox": [ - 72.0, - 33.66, - 432.03, - 47.21 - ], - "text": "228\t\nPRACTICAL DETAILS", - "type": "text" - }, - { - "block_id": "p244-b1", - "global_id": 2628, - "bbox": [ - 72.0, - 309.33, - 434.76, - 364.65 - ], - "text": "Returning home from that reunion, I attached a plastic strip to one of my trad-\ning screens with the question: “Is this an A-trade?” Ever since then, I have it in front \nof me whenever I place an order. The results came quickly: as the number of non- \nA-trades sharply declined, my equity curve began to rise at a steeper angle.", - "type": "text" - }, - { - "block_id": "p244-b2", - "global_id": 2629, - "bbox": [ - 72.0, - 365.34, - 434.76, - 434.67 - ], - "text": "You need to have a clear idea of what would be a perfect setup for you, \n“an A-trade.” Perfect doesn’t guarantee profits—there are no guarantees in the \nmarket—but it means a setup with a strong positive expectation. It also means \nsomething you’ve traded before with which you are comfortable. Once you know \nwhat it is, you can start looking for stocks that exhibit that pattern.", - "type": "text" - }, - { - "block_id": "p244-b3", - "global_id": 2630, - "bbox": [ - 72.0, - 435.36, - 434.74, - 490.68 - ], - "text": "One of the few advantages of a private trader over an institutional one is that we \ncan trade or not trade when we like. We have the luxury of being free to wait for \nexcellent setups. Unfortunately, most of us, in our eagerness to trade, throw away \nthis amazing advantage.", - "type": "text" - }, - { - "block_id": "p244-b4", - "global_id": 2631, - "bbox": [ - 72.0, - 491.38, - 434.76, - 560.7 - ], - "text": "I’ve added the question “Is this an A-trade?” to my Tradebill, a trade management \nform we’ll discuss in the next chapter. Whenever I see a potential trade, I ask myself \nthis question. If the answer is “yes,” I start calculating risk management, position siz-\ning, and planning my entry. If the answer is “no,” I turn the page and go looking for \nanother pick. (Figure 55.2)", - "type": "text" - }, - { - "block_id": "p244-b5", - "global_id": 2632, - "bbox": [ - 72.0, - 561.4, - 434.78, - 602.72 - ], - "text": "No matter how grand an idea or a stock tip, I will not trade it unless it fits into one \nof my three strategies. Ideas come and go, fly or flop—but strategies stay and grow \nbetter with age, as you learn how they perform under various market conditions.", - "type": "text" - }, - { - "block_id": "p244-b6", - "global_id": 2633, - "bbox": [ - 72.0, - 603.41, - 434.7, - 644.73 - ], - "text": "Gradually, you may develop new strategies and drop others. You can see that the \nones I use are numbered 1, 4, and 7. The rest of the numbers were strategies I \nstopped using.", - "type": "text" - }, - { - "block_id": "p244-b7", - "global_id": 2634, - "bbox": [ - 72.0, - 645.42, - 434.65, - 686.74 - ], - "text": "Your system can be very mechanical or quite general, with just a few key prin-\nciples, like my Triple Screen. Either way, you must know what your “A-trade” looks \nlike before you plan your next trade.", - "type": "text" - }, - { - "block_id": "p244-b8", - "global_id": 2635, - "bbox": [ - 72.0, - 156.58, - 326.38, - 166.63 - ], - "text": "FIGURE 55.2  The Strategy box in the Trade Journal. (Source: SpikeTrade.com)", - "type": "text" - }, - { - "block_id": "p244-b9", - "global_id": 2636, - "bbox": [ - 71.96, - 173.33, - 431.59, - 195.82 - ], - "text": "Whenever you plan a trade, be sure to specify what system you’ll use. Ask yourself wheth-\ner this planned trade looks like an “A-trade” according to your system.", - "type": "text" - }, - { - "block_id": "p244-b10", - "global_id": 2637, - "bbox": [ - 71.96, - 197.33, - 434.1, - 267.81 - ], - "text": "I use the words “system” and “strategy” interchangeably—both mean a trade plan. As \nyou can see from this snapshot of my trade journal’s Strategy box, taken in September \n2013, I currently trade three systems. My main one is a “false breakout with a divergence.” \nI also occasionally trade pullbacks to value—buying pullbacks during uptrends and short-\ning rallies in downtrends. On rare occasions, I trade against the extremes, buying severely \nbeaten down stocks or shorting stocks whose wild rallies are stalling.", - "type": "text" - } - ] - }, - { - "page_num": 245, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p245-b0", - "global_id": 2638, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "55. IS THIS AN A-TRADE?\t\n229", - "type": "text" - }, - { - "block_id": "p245-b1", - "global_id": 2639, - "bbox": [ - 71.94, - 57.83, - 434.7, - 127.15 - ], - "text": "I’ll walk you through one of my strategies, but remember that you don’t have to \ncopy it (Figure 55.3). The way we trade is as personal as handwriting. Define a strate-\ngy that feels comfortable to you, test it, and then find a chart that perfectly represents \nit. Print that chart and post it on a wall near your trading desk. Now you can search \nfor trades that look the way that chart looked on the day you entered that trade.", - "type": "text" - }, - { - "block_id": "p245-b2", - "global_id": 2640, - "bbox": [ - 232.8, - 334.91, - 237.62, - 342.73 - ], - "text": "A", - "type": "text" - }, - { - "block_id": "p245-b3", - "global_id": 2641, - "bbox": [ - 343.3, - 292.11, - 347.51, - 299.92 - ], - "text": "B", - "type": "text" - }, - { - "block_id": "p245-b4", - "global_id": 2642, - "bbox": [ - 377.0, - 332.91, - 381.45, - 340.73 - ], - "text": "C", - "type": "text" - }, - { - "block_id": "p245-b5", - "global_id": 2643, - "bbox": [ - 71.96, - 366.78, - 411.85, - 387.82 - ], - "text": "FIGURE 55.3  SLB daily with 13- and 26-day EMAs and a 6% envelope. Impulse system with MACD- \nHistogram 12-26-9. (Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p245-b6", - "global_id": 2644, - "bbox": [ - 72.0, - 393.63, - 332.86, - 406.53 - ], - "text": "False Downside Breakout with a Bullish Divergence", - "type": "text" - }, - { - "block_id": "p245-b7", - "global_id": 2645, - "bbox": [ - 72.0, - 410.53, - 434.12, - 517.0 - ], - "text": "This chart, from my Trade Journal, shows a near-perfect example of a swing trade strategy \nthat I abbreviate as “01 FB + BD”—a false breakout with a bullish or bearish divergence. \nSchlumberger, Ltd. (SLB) was in a well-established downtrend, and when it reached a new \nlow at A, it looked like just another bottom during a long and painful slide. I look at the entire \ncircled area of MACD-Histogram as a single bottom because it never crossed above the zero \nline. In area B, the picture became more interesting: MACD-Histogram rallied above its center-\nline, “breaking the back of the bear.” The weekly Impulse system (not shown), which had been \nred until then, turned blue, removing its prohibition of buying. In area C, SLB cracked to a \nnew low, but MACD declined to a much more shallow low, setting up for a bullish divergence.", - "type": "text" - }, - { - "block_id": "p245-b8", - "global_id": 2646, - "bbox": [ - 72.0, - 518.51, - 434.12, - 564.99 - ], - "text": "Look carefully at the first blue bar after several red bars in area C. That’s where MACD-\nHistogram ticked up, completing a bullish divergence. In addition, that bar rallied and \nclosed above the downside breakout level, marked by a purple dashed line: it marked \nprevious bars as a false downside breakout.", - "type": "text" - }, - { - "block_id": "p245-b9", - "global_id": 2647, - "bbox": [ - 72.0, - 566.49, - 434.15, - 636.97 - ], - "text": "I bought during that bar (marked by a vertical green arrow), without waiting for it to \nclose, going long 2,000 shares at $60.80, with a stop at $59.12. Four days later, as prices \nbegan approaching the upper channel line as well as the level of the previous top I started \ntaking profits. I sold 1,000 shares at $66.55 and the rest on the following day at $67 (both \nmarked by red arrows). I booked nearly $6 per share, for a total of $11,950 before commis-\nsions in five trading days. The system delivered a beautiful trade.", - "type": "text" - }, - { - "block_id": "p245-b10", - "global_id": 2648, - "bbox": [ - 72.0, - 638.48, - 434.11, - 684.96 - ], - "text": "This is the chart I have in mind when looking for stocks and futures to trade. I want to \nfind those that have completed their bottom A and top B and are declining into what could \nbecome bottom C. In the background, the Impulse system on the weekly chart cannot be \nred because that would prohibit buying.", - "type": "text" - } - ] - }, - { - "page_num": 246, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p246-b0", - "global_id": 2649, - "bbox": [ - 72.0, - 33.66, - 432.03, - 47.21 - ], - "text": "230\t\nPRACTICAL DETAILS", - "type": "text" - }, - { - "block_id": "p246-b1", - "global_id": 2650, - "bbox": [ - 72.0, - 57.83, - 434.71, - 127.15 - ], - "text": "In the next section, on trade planning, you’ll see how to use a form I named \nTradebill to make trading decisions more objective. Every trade has several param-\neters, and it’s easy to overlook some of them in the heat of action. Just as a pilot goes \nthrough a preflight checklist, a trader needs to check his list before deciding to place \nan order.", - "type": "text" - }, - { - "block_id": "p246-b2", - "global_id": 2651, - "bbox": [ - 73.55, - 154.86, - 341.96, - 173.5 - ], - "text": "■\n■56. Scanning for Possible Trades", - "type": "text" - }, - { - "block_id": "p246-b3", - "global_id": 2652, - "bbox": [ - 72.0, - 183.83, - 434.69, - 253.15 - ], - "text": "There are thousands of stocks out there, and in the days and weeks ahead, some \nwill rise, others fall, and some will fluctuate. Each stock will make money for trad-\ners whose systems are in gear with it—and lose money for the rest. Developing a \ntrading system or a strategy must come before scanning. If you don’t have a clearly \ndefined strategy, what will you scan for?!", - "type": "text" - }, - { - "block_id": "p246-b4", - "global_id": 2653, - "bbox": [ - 72.0, - 253.85, - 434.72, - 323.17 - ], - "text": "Begin by developing a system that you trust. Once you have it, looking for trad-\ning candidates will become quite logical and straightforward. Looking at your list \nof candidates, the first question about any pick will be “Is this an A-trade?” In other \nwords, is this pick close to your ideal pattern? If the answer is “yes,” you may start \nworking up a trade.", - "type": "text" - }, - { - "block_id": "p246-b5", - "global_id": 2654, - "bbox": [ - 72.0, - 323.87, - 434.72, - 393.19 - ], - "text": "Scanning means reviewing a group of trading vehicles and zooming in on trading \ncandidates. Your scanning can be visual or computerized: you may flip through mul-\ntiple charts, taking a quick glance at each, or else have your computer run through \nthat list and flag stocks whose patterns appeal to you. To repeat, defining a pattern \nyou trust must be your first step, scanning a more distant second.", - "type": "text" - }, - { - "block_id": "p246-b6", - "global_id": 2655, - "bbox": [ - 72.0, - 393.89, - 434.71, - 477.22 - ], - "text": "Be sure to have realistic expectations for scanning. No scan can find you the needle \nin a haystack—the one and only gem to trade. What a good scan does is bring up a \ngroup of candidates on which to focus your attention. You can make that group big-\nger or smaller by loosening or tightening scan parameters. A scan is a time saver that \ndelivers potential candidates; it is not a piece a magic to free you from the necessity \nof working up your picks.", - "type": "text" - }, - { - "block_id": "p246-b7", - "global_id": 2656, - "bbox": [ - 72.0, - 477.91, - 434.75, - 547.24 - ], - "text": "Begin by describing what stocks you want to find. For example, if you’re a trend-\nfollower, but don’t like chasing stocks, you may design a scan to find stocks whose \nmoving average is rising but the latest price is only a small percentage above that \naverage. You can write a scan yourself or hire someone to do it for you—there are \nprogrammers who offer this service.", - "type": "text" - }, - { - "block_id": "p246-b8", - "global_id": 2657, - "bbox": [ - 72.0, - 547.93, - 434.76, - 673.27 - ], - "text": "The raw list of stocks to be scanned can be as small as a few dozen or as large as \nthe S&P 500, or even Russell 2,000. I like looking for trading candidates on week-\nends, and depending on how much time I have, take one of the two approaches—one \nlazy and the other hardworking. The lazy way, when my time is limited, is to review \nSpikers’ picks for the week ahead. Spikers are the elite members of SpikeTrade.com, \nand I figure that among a dozen picks by super-smart traders who compete for the \nbest pick of the week there ought to be a stock or two for me to piggyback. I examine \nthose picks, while adding my market opinion to the mix. Depending on my outlook \nfor the week ahead, I focus primarily on long or short candidates.", - "type": "text" - } - ] - }, - { - "page_num": 247, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p247-b0", - "global_id": 2658, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "56. SCANNING FOR POSSIBLE TRADES\t\n231", - "type": "text" - }, - { - "block_id": "p247-b1", - "global_id": 2659, - "bbox": [ - 71.94, - 57.83, - 434.66, - 169.16 - ], - "text": "The hard-working way consists of dropping all 500 components of the S&P 500 \ninto my software and running a scan for potential MACD divergences. I’ve seen \nmany divergence scans, but never a reliable one—they all delivered too many false \npositives and missed many good divergences. Then I realized that a divergence was \n“an analog pattern”—clearly visible to a naked eye but hard to pick with digital pro-\ncessing. I turned to John Bruns, who built me a semiautomatic MACD divergence \nscanner. Instead of looking for divergences, it scans for patterns that precede diver-\ngences and delivers the list of candidates to watch in the days ahead. (Figure 56.1)", - "type": "text" - }, - { - "block_id": "p247-b2", - "global_id": 2660, - "bbox": [ - 71.94, - 169.86, - 434.66, - 267.19 - ], - "text": "Running my MACD divergence semiautomatic scan over the weekly and daily \ncharts of all 500 components of the S&P 500 takes only a minute, but the real work \nbegins when I review the lists of bullish and bearish candidates delivered by this scan. \nFirst, I compare the sizes of bullish and bearish lists. For example, for several weeks \nprior to writing this chapter, my scan for bullish divergences among the components \nof the S&P 500 produced four to five candidates, while the scan for potential bearish \ndivergences returned between 70 and 80 stocks. This great imbalance indicated that", - "type": "text" - }, - { - "block_id": "p247-b3", - "global_id": 2661, - "bbox": [ - 84.9, - 467.71, - 89.72, - 475.52 - ], - "text": "A", - "type": "text" - }, - { - "block_id": "p247-b4", - "global_id": 2662, - "bbox": [ - 104.7, - 430.11, - 108.91, - 437.92 - ], - "text": "B", - "type": "text" - }, - { - "block_id": "p247-b5", - "global_id": 2663, - "bbox": [ - 151.5, - 415.21, - 156.32, - 423.02 - ], - "text": "A", - "type": "text" - }, - { - "block_id": "p247-b6", - "global_id": 2664, - "bbox": [ - 182.0, - 464.21, - 186.21, - 472.02 - ], - "text": "B", - "type": "text" - }, - { - "block_id": "p247-b7", - "global_id": 2665, - "bbox": [ - 273.4, - 420.31, - 278.22, - 428.12 - ], - "text": "A", - "type": "text" - }, - { - "block_id": "p247-b8", - "global_id": 2666, - "bbox": [ - 296.9, - 456.41, - 301.11, - 464.23 - ], - "text": "B", - "type": "text" - }, - { - "block_id": "p247-b9", - "global_id": 2667, - "bbox": [ - 318.6, - 466.91, - 323.42, - 474.73 - ], - "text": "A", - "type": "text" - }, - { - "block_id": "p247-b10", - "global_id": 2668, - "bbox": [ - 364.0, - 423.91, - 368.21, - 431.73 - ], - "text": "B", - "type": "text" - }, - { - "block_id": "p247-b11", - "global_id": 2669, - "bbox": [ - 71.96, - 497.58, - 420.6, - 529.42 - ], - "text": "FIGURE 56.1  WFM daily with 13- and 26-day EMAs. Impulse system with MACD-Histogram 12-26-9. \nRed dots—potential or actual bearish divergences. Green dots—potential or actual bullish divergences. \n(Chart by TradeStation, scanner by John Bruns/elder.com)", - "type": "text" - }, - { - "block_id": "p247-b12", - "global_id": 2670, - "bbox": [ - 72.0, - 535.43, - 346.67, - 548.33 - ], - "text": "MACD-Histogram Semiautomatic Divergence Scanner", - "type": "text" - }, - { - "block_id": "p247-b13", - "global_id": 2671, - "bbox": [ - 72.0, - 552.33, - 434.14, - 610.81 - ], - "text": "We’ve reviewed MACD Histogram and its divergences in Chapter 23 and returned to this \npattern repeatedly throughout this book. Instead of looking for completed divergences, \nthis semiautomatic scan finds stocks that have completed parts A and B of a potential \ndivergence. As part C (the second top or bottom) begins to emerge, this scan starts putting \nred dots above or green dots below the bar to alert one to the possibility of a divergence.", - "type": "text" - }, - { - "block_id": "p247-b14", - "global_id": 2672, - "bbox": [ - 72.0, - 612.32, - 434.12, - 670.8 - ], - "text": "This chart of Whole Foods Market, Inc. (WFM) shows that a scanner isn’t an automatic \ntrade finder. It is a watchdog that alerts you to the possibility that this market is ready \nto trade—long or short. Having received such a signal, a trader needs to work up that stock \nto establish the level at which the divergence would be completed and write down entry, \ntarget, and stop levels.", - "type": "text" - } - ] - }, - { - "page_num": 248, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p248-b0", - "global_id": 2673, - "bbox": [ - 72.0, - 33.66, - 432.03, - 47.21 - ], - "text": "232\t\nPRACTICAL DETAILS", - "type": "text" - }, - { - "block_id": "p248-b1", - "global_id": 2674, - "bbox": [ - 72.0, - 57.83, - 434.76, - 141.16 - ], - "text": "the market was perched at the edge of a cliff and I needed to find some shorts for the \ncoming downturn. I prune my weekly list of trading candidates down to five or six \npicks that show the most attractive patterns and the best reward to risk ratios. These \nare the stocks that I’ll aim to trade during the week. I have friends who can juggle \ntwenty stocks at once—this can be done, but not by me, and every serious trader \nmust know his limitations.", - "type": "text" - }, - { - "block_id": "p248-b2", - "global_id": 2675, - "bbox": [ - 72.0, - 141.85, - 434.8, - 211.18 - ], - "text": "Another “hardworking way” of finding trade candidates involves scanning stock in-\ndustry groups. For example, if I think that gold is approaching an important bottom, \nI’ll pull up the list of all 52 gold stocks and 14 silver stocks that are listed at this time \nand look for buying candidates. While doing that, I’ll keep in mind my SLB chart \nshown in Figure 55.3—I want to find stocks whose patterns look close to my ideal.", - "type": "text" - }, - { - "block_id": "p248-b3", - "global_id": 2676, - "bbox": [ - 72.0, - 211.7, - 434.76, - 323.21 - ], - "text": "If you’re going to scan a large number of stocks, it pays to add some negative \nrules. For example, you may want to omit stocks whose average daily volume is be-\nlow half a million or even a million shares. Their charts tend to be more ragged and \ntheir slippage worse than in more actively traded stocks. You may want to exclude \nexpensive stocks from your scans for buying candidates and cheap stocks from your \nscans for shorting candidates. Choosing at what levels to place your price filters is a \nmatter of personal choice. This is why scanning is best left for experienced traders. \nLearn to fish with just a few lines in the water before casting a broad net.", - "type": "text" - } - ] - }, - { - "page_num": 249, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p249-b0", - "global_id": 2677, - "bbox": [ - 72.0, - 118.61, - 429.94, - 171.84 - ], - "text": "Good Record-Keeping", - "type": "text" - }, - { - "block_id": "p249-b1", - "global_id": 2678, - "bbox": [ - 72.1, - 673.7, - 432.15, - 687.25 - ], - "text": "233", - "type": "text" - }, - { - "block_id": "p249-b2", - "global_id": 2679, - "bbox": [ - 344.3, - 59.86, - 399.91, - 73.41 - ], - "text": "PA R T 1 1\nPA R T 11", - "type": "text" - }, - { - "block_id": "p249-b3", - "global_id": 2680, - "bbox": [ - 71.8, - 331.94, - 98.01, - 372.34 - ], - "text": "“T", - "type": "text" - }, - { - "block_id": "p249-b4", - "global_id": 2681, - "bbox": [ - 71.95, - 337.63, - 434.67, - 392.95 - ], - "text": "here is no free lunch. As with so many other things, either you’re going to pay \nup front or you’re going to pay on the back end for being disorganized, and \nunfortunately, when you pay on the way out it’s always more expensive…” writes \nAndrew J. Mellon in Unstuff Your Life.", - "type": "text" - }, - { - "block_id": "p249-b5", - "global_id": 2682, - "bbox": [ - 71.95, - 393.64, - 434.7, - 448.96 - ], - "text": "The market is perversely inconsistent in dishing out rewards and punishments. \nThere is always a chance that a poorly planned trade may bring profits, while a well-\nplanned and carefully executed trade may end in a loss. This random reinforcement \nsubverts our discipline and encourages sloppy trading.", - "type": "text" - }, - { - "block_id": "p249-b6", - "global_id": 2683, - "bbox": [ - 71.95, - 449.66, - 434.66, - 490.98 - ], - "text": "Good record-keeping is the best tool for developing and maintaining discipline. It \nties together psychology, market analysis, and risk management. Whenever I teach a \nclass, I say: “Show me a trader with good records, and I’ll show you a good trader.”", - "type": "text" - }, - { - "block_id": "p249-b7", - "global_id": 2684, - "bbox": [ - 71.95, - 491.67, - 434.68, - 575.0 - ], - "text": "Writing down your trade plans will ensure that you don’t miss any essential mar-\nket factors. Good record-keeping will save you from stumbling into impulsive trades. \nTrading discipline is similar to weight control, which is very hard for most people. If \nyou don’t know what you weigh today and whether the curve of your weight is ris-\ning or falling, how can you control it? Losing weight begins with standing naked on \na scale in the morning and writing down your weight for that day.", - "type": "text" - }, - { - "block_id": "p249-b8", - "global_id": 2685, - "bbox": [ - 71.95, - 575.7, - 434.65, - 617.01 - ], - "text": "We all make mistakes, but if you keep reviewing your records and reflecting on \npast mistakes, you’ll be unlikely to repeat them. Good record-keeping will turn you \ninto your own teacher and do wonders for your account equity.", - "type": "text" - }, - { - "block_id": "p249-b9", - "global_id": 2686, - "bbox": [ - 71.95, - 617.71, - 434.65, - 645.02 - ], - "text": "A quick read of a chapter will not make you a disciplined trader. You’ll have to in-\nvest hours in doing homework and accept the pain of having your stops hit. The work", - "type": "text" - } - ] - }, - { - "page_num": 250, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p250-b0", - "global_id": 2687, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "234\t\nGOOD RECORD-KEEPING", - "type": "text" - }, - { - "block_id": "p250-b1", - "global_id": 2688, - "bbox": [ - 72.0, - 57.83, - 434.75, - 85.14 - ], - "text": "comes first, the rewards later. As your account grows, you’ll experience a wonderful \nfeeling of accomplishment.", - "type": "text" - }, - { - "block_id": "p250-b2", - "global_id": 2689, - "bbox": [ - 84.0, - 85.84, - 334.44, - 99.14 - ], - "text": "Let’s review the three key components of record-keeping:", - "type": "text" - }, - { - "block_id": "p250-b3", - "global_id": 2690, - "bbox": [ - 76.0, - 112.84, - 432.02, - 140.15 - ], - "text": "1.\tDiscipline begins with doing your homework (I’ll offer you a homework spread-\nsheet).", - "type": "text" - }, - { - "block_id": "p250-b4", - "global_id": 2691, - "bbox": [ - 75.98, - 146.84, - 434.74, - 174.16 - ], - "text": "2.\tDiscipline is reinforced by writing down your trade plans (I’ll offer you PDF files \nfor working up long and short candidates).", - "type": "text" - }, - { - "block_id": "p250-b5", - "global_id": 2692, - "bbox": [ - 75.97, - 180.83, - 434.65, - 208.14 - ], - "text": "3.\tDiscipline culminates in executing those plans and completing trade records (I’ll \noffer you a link to an online Trade Journal).", - "type": "text" - }, - { - "block_id": "p250-b6", - "global_id": 2693, - "bbox": [ - 71.96, - 222.83, - 434.71, - 278.15 - ], - "text": "Please feel free to personalize all of these documents. The markets are huge and \ndiverse, and there is no “one size fits all” system of analysis, trading, and record-\nkeeping. The basic principles are in this book, but the way you implement them can \nbe your own.", - "type": "text" - }, - { - "block_id": "p250-b7", - "global_id": 2694, - "bbox": [ - 73.55, - 308.86, - 287.38, - 327.5 - ], - "text": "■\n■57. Your Daily Homework", - "type": "text" - }, - { - "block_id": "p250-b8", - "global_id": 2695, - "bbox": [ - 72.0, - 337.83, - 434.65, - 407.15 - ], - "text": "When you wake up in the morning and know that you need to be at the office in an \nhour, you don’t spend time planning every little step. You follow an established rou-\ntine: get out of bed, wash, get dressed, have breakfast, get in a car, etc. This routine \nputs you in the groove for the day ahead, leaving your mind free for strategic think-\ning. By the time you arrive at the office, you’re ready to face the day.", - "type": "text" - }, - { - "block_id": "p250-b9", - "global_id": 2696, - "bbox": [ - 72.0, - 407.85, - 434.75, - 463.17 - ], - "text": "It pays to have a morning routine for the market: a sequence of steps for touching \nbase with the key factors that may dominate today’s trading. This routine should \nput you in gear with the market before the opening bell, making you alert and \nready to act.", - "type": "text" - }, - { - "block_id": "p250-b10", - "global_id": 2697, - "bbox": [ - 72.0, - 463.86, - 434.7, - 533.19 - ], - "text": "I use a spreadsheet for my pre-open routine. The person who gave me this idea \nwas Max Larsen, a money manager in Ohio. I’ve changed Max’s spreadsheet: my cur-\nrent version is numbered 3.7, reflecting two major revisions and a handful of lesser \nones. It is based on how I view the markets, while its imbedded links help me reach \nvarious websites for the information I want.", - "type": "text" - }, - { - "block_id": "p250-b11", - "global_id": 2698, - "bbox": [ - 72.0, - 533.88, - 434.7, - 589.2 - ], - "text": "My homework spreadsheet (Figure 57.1) is a work in progress, as I keep adding \nand deleting lines. If you start using it, I’m sure that you’ll modify it to suit your pref-\nerences. My firm, Elder.com, offers my latest spreadsheet, complete with its psycho-\nlogical self-test as a public service—simply write to info@elder.com and ask for it.", - "type": "text" - }, - { - "block_id": "p250-b12", - "global_id": 2699, - "bbox": [ - 72.0, - 589.9, - 434.76, - 687.23 - ], - "text": "After filling out this spreadsheet, I turn to my open trades. I review their stops \nand profit targets, making any adjustments for the coming day if necessary. Then, if \nI’m planning to trade today, I review my short list of candidates, focusing on planned \nentries, targets, and stops. Now I am in gear with the market, ready to place orders. \nI do this homework even if I know that I will not be able to trade during the day, for \nexample when traveling. This discipline is just like washing and dressing in the morn-\ning, even on the days when you don’t plan to go to the office.", - "type": "text" - } - ] - }, - { - "page_num": 251, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p251-b0", - "global_id": 2700, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "57. YOUR DAILY HOMEWORK\t\n235", - "type": "text" - }, - { - "block_id": "p251-b1", - "global_id": 2701, - "bbox": [ - 72.0, - 296.68, - 281.08, - 306.73 - ], - "text": "FIGURE 57.1  Daily homework spreadsheet. (Source: elder.com)", - "type": "text" - }, - { - "block_id": "p251-b2", - "global_id": 2702, - "bbox": [ - 71.96, - 313.43, - 434.09, - 347.92 - ], - "text": "I begin by looking at the overseas markets, then major news, key currencies and commodi-\nties, and the key stock market indicators. With practice, the entire process can be handled \nin about 15 minutes. Let’s explore it, line by line.", - "type": "text" - }, - { - "block_id": "p251-b3", - "global_id": 2703, - "bbox": [ - 76.97, - 361.43, - 434.02, - 371.92 - ], - "text": "1.\t Check Far East Markets—This link takes me to the relevant page on Finance.Yahoo", - "type": "text" - }, - { - "block_id": "p251-b4", - "global_id": 2704, - "bbox": [ - 96.96, - 373.43, - 431.57, - 395.92 - ], - "text": ".com. I write down overnight percentage changes for Australia and China. Each per-\nson’s memory works differently, and mine serves me best when I write things down.", - "type": "text" - }, - { - "block_id": "p251-b5", - "global_id": 2705, - "bbox": [ - 76.97, - 401.18, - 434.09, - 411.68 - ], - "text": "2.\t Check Europe markets—Here I write down percentage changes for the German DAX", - "type": "text" - }, - { - "block_id": "p251-b6", - "global_id": 2706, - "bbox": [ - 96.96, - 413.18, - 434.11, - 447.67 - ], - "text": "and the UK FTSE. Markets follow the sun, and you get a feel for how a wave gener-\nated in the United States travels to Asia and then to Europe, before returning to our \nshores.", - "type": "text" - }, - { - "block_id": "p251-b7", - "global_id": 2707, - "bbox": [ - 76.97, - 452.93, - 431.57, - 463.43 - ], - "text": "3.\t Economic Calendar—This link takes me to the page at Briefing.com that lists fun-", - "type": "text" - }, - { - "block_id": "p251-b8", - "global_id": 2708, - "bbox": [ - 96.96, - 464.93, - 434.1, - 511.41 - ], - "text": "damental reports scheduled to be released each day. It shows the previous number \nfor each release and the consensus forecast. When an important report, such as \nUnemployment or Capacity Utilization, either beats or misses its estimates, you can \nexpect market fireworks.", - "type": "text" - }, - { - "block_id": "p251-b9", - "global_id": 2709, - "bbox": [ - 76.97, - 516.65, - 434.03, - 527.15 - ], - "text": "4.\t Marketwatch—This is a website for the masses, and I look at it to see what they are", - "type": "text" - }, - { - "block_id": "p251-b10", - "global_id": 2710, - "bbox": [ - 96.96, - 528.65, - 388.01, - 539.14 - ], - "text": "being fed this morning. Occasionally it suggests contrary opinion trades.", - "type": "text" - }, - { - "block_id": "p251-b11", - "global_id": 2711, - "bbox": [ - 76.97, - 544.37, - 434.09, - 554.87 - ], - "text": "5.\t Euro—I write down the current price of the most active futures contract, followed by", - "type": "text" - }, - { - "block_id": "p251-b12", - "global_id": 2712, - "bbox": [ - 96.96, - 556.37, - 434.06, - 614.85 - ], - "text": "the initials for the Impulse system—green, blue, or red—first for the weekly, then for \nthe daily. This is the format I use for all other markets mentioned below. I look at the \nEuro futures charts for two reasons. First, there are stretches of time when this cur-\nrency dances either in gear with or against the U.S. stock market. The other reason \nis that sometimes Euro futures offer nice day-trading opportunities.", - "type": "text" - }, - { - "block_id": "p251-b13", - "global_id": 2713, - "bbox": [ - 76.97, - 620.15, - 431.51, - 630.65 - ], - "text": "6.\t Yen—The second of the two reasons outlined above applies here more than the first.", - "type": "text" - }, - { - "block_id": "p251-b14", - "global_id": 2714, - "bbox": [ - 76.97, - 635.9, - 434.03, - 646.4 - ], - "text": "7.\t Oil—This is the lifeblood of the economy, and oil futures rise and fall with its ups and", - "type": "text" - }, - { - "block_id": "p251-b15", - "global_id": 2715, - "bbox": [ - 96.96, - 647.9, - 230.83, - 658.39 - ], - "text": "downs. Oil futures can be traded.", - "type": "text" - }, - { - "block_id": "p251-b16", - "global_id": 2716, - "bbox": [ - 76.97, - 663.62, - 434.04, - 674.12 - ], - "text": "8.\t Gold—A sensitive indicator of fear and inflationary expectations as well as a popular", - "type": "text" - }, - { - "block_id": "p251-b17", - "global_id": 2717, - "bbox": [ - 96.96, - 675.62, - 158.14, - 686.11 - ], - "text": "trading vehicle.", - "type": "text" - } - ] - }, - { - "page_num": 252, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p252-b0", - "global_id": 2718, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "236\t\nGOOD RECORD-KEEPING", - "type": "text" - }, - { - "block_id": "p252-b1", - "global_id": 2719, - "bbox": [ - 72.0, - 453.7, - 258.29, - 470.64 - ], - "text": "Are You Ready to Trade Today?", - "type": "text" - }, - { - "block_id": "p252-b2", - "global_id": 2720, - "bbox": [ - 72.0, - 476.33, - 434.72, - 531.65 - ], - "text": "There are times when you feel in gear with the market, but at other times you’re \nout of touch. Your mood, health, and time pressures influence your ability to trade. \nFor example, imagine trading while suffering from a toothache. You can’t fully con-\ncentrate on the market and should be calling your dentist, not your broker.", - "type": "text" - }, - { - "block_id": "p252-b3", - "global_id": 2721, - "bbox": [ - 72.0, - 532.34, - 434.75, - 615.67 - ], - "text": "This is why each morning, I take a 30-second psychological self-test for an ob-\njective rating of my readiness to trade. The first person I saw use a self-test was \nBob Bleczinski, a former Spiker. He may have posted his test online because in 2011, \nI saw SpikeTrade member Erin Bruce present her self-test at that year’s reunion. The \nquestions she asked herself were completely different, but the format looked like \nBob’s.", - "type": "text" - }, - { - "block_id": "p252-b4", - "global_id": 2722, - "bbox": [ - 72.0, - 616.37, - 434.74, - 671.69 - ], - "text": "I modified Erin’s self-test to fit my personality and take it every day before the \nmarket opens. Any self-test must be short and specific. Mine has only five questions, \nand each of them can have only one of three answers: yes, no, or so-so. We’ll discuss \nthe logic of designing such tests in the following chapter. If you start using this test,", - "type": "text" - }, - { - "block_id": "p252-b5", - "global_id": 2723, - "bbox": [ - 77.0, - 57.83, - 431.95, - 68.33 - ], - "text": "9.\t Bonds—Rising or falling interest rates are among major drivers of stock market trends.", - "type": "text" - }, - { - "block_id": "p252-b6", - "global_id": 2724, - "bbox": [ - 77.0, - 73.83, - 434.53, - 132.32 - ], - "text": "10.\t Baltic Dry Index—A sensitive leading indicator of world economy. BDI represents the \ncost of shipping dry goods, for example textiles from Vietnam to Europe or lumber \nfrom Alaska to Japan. BDI is very volatile, and the absence of any trading vehicles \nbased on it helps BDI reflect true economic activity. It is extra useful if you trade \nshipping industry stocks.", - "type": "text" - }, - { - "block_id": "p252-b7", - "global_id": 2725, - "bbox": [ - 77.0, - 137.82, - 434.53, - 172.31 - ], - "text": "11.\t NH-NL—I consider the New High–New Low Index the best leading indicator of the \nstock market and like to write down the latest weekly and daily figures every morning \nas a refresher.", - "type": "text" - }, - { - "block_id": "p252-b8", - "global_id": 2726, - "bbox": [ - 77.0, - 177.8, - 434.51, - 212.29 - ], - "text": "12.\t VIX—The volatility index, also called “the fear index.” There is a saying: “When VIX is \nhigh, it’s safe to buy; when VIX is low, go slow.” A footnote: beware VIX ETFs, notori-\nous for trading out of sync with the VIX index.", - "type": "text" - }, - { - "block_id": "p252-b9", - "global_id": 2727, - "bbox": [ - 77.0, - 217.8, - 434.52, - 240.34 - ], - "text": "13.\t S&P 500—I write down yesterday’s closing price for the index and add the Impulse \nsystem initials for its weekly and daily charts.", - "type": "text" - }, - { - "block_id": "p252-b10", - "global_id": 2728, - "bbox": [ - 77.0, - 245.84, - 434.5, - 280.33 - ], - "text": "14.\t Daily value—I switch to the daily chart of the S&P and note whether its latest bar \nclosed above, at, or below value and also its relation to the channel lines. It helps me \nsee whether the market is overbought or oversold.", - "type": "text" - }, - { - "block_id": "p252-b11", - "global_id": 2729, - "bbox": [ - 77.0, - 285.8, - 434.48, - 308.29 - ], - "text": "15.\t Force Index—I note whether its 13-day EMA is above or below its centerline (bullish \nor bearish), as well as any divergences.", - "type": "text" - }, - { - "block_id": "p252-b12", - "global_id": 2730, - "bbox": [ - 77.0, - 313.79, - 434.51, - 360.28 - ], - "text": "16.\t Expectation of the S&P candle—I test the accuracy of my market expectations by \nwriting down whether I expect the market to close above or below today’s opening \nprice. If no opinion, I leave this field blank. The next day I color this box green or red, \ndepending on whether my expectations turned out to be correct.", - "type": "text" - }, - { - "block_id": "p252-b13", - "global_id": 2731, - "bbox": [ - 77.0, - 365.79, - 434.5, - 400.3 - ], - "text": "17.\t On the last line of my homework spreadsheet, I summarize it by stating how I’ll trade \ntoday: actively, conservatively, defensively (closing trades only), day-trade, or no \ntrades at all.", - "type": "text" - } - ] - }, - { - "page_num": 253, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p253-b0", - "global_id": 2732, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "57. YOUR DAILY HOMEWORK\t\n237", - "type": "text" - }, - { - "block_id": "p253-b1", - "global_id": 2733, - "bbox": [ - 72.42, - 57.83, - 435.06, - 85.14 - ], - "text": "you’ll probably modify it to fit your personality and ask the questions that are most \nimportant to you (Figure 57.2).", - "type": "text" - }, - { - "block_id": "p253-b2", - "global_id": 2734, - "bbox": [ - 72.42, - 85.84, - 435.17, - 127.15 - ], - "text": "A zero rating on some of the questions also warns me not to trade. If I haven’t \ndone my trade planning or if my schedule is very booked up, this would be a bad day \nto trade—better stand aside or place only exit orders.", - "type": "text" - }, - { - "block_id": "p253-b3", - "global_id": 2735, - "bbox": [ - 72.42, - 127.85, - 435.16, - 169.16 - ], - "text": "You, your mind, your mood, and your personality are the essential components of \ntrading. This is why a quick self-test helps you see whether you should be trading \ntoday.", - "type": "text" - }, - { - "block_id": "p253-b4", - "global_id": 2736, - "bbox": [ - 72.4, - 285.78, - 286.85, - 295.83 - ], - "text": "FIGURE 57.2  “Am I ready to trade?” self-test. (Source: elder.com)", - "type": "text" - }, - { - "block_id": "p253-b5", - "global_id": 2737, - "bbox": [ - 72.36, - 302.53, - 432.02, - 313.03 - ], - "text": "I take this test immediately following completion of my homework. Let’s review it line by line:", - "type": "text" - }, - { - "block_id": "p253-b6", - "global_id": 2738, - "bbox": [ - 74.36, - 326.54, - 190.6, - 373.02 - ], - "text": "1.\t How do I feel physically?\nA. Feeling ill = 0\nB. Feeling average = 1\nC. Feeling excellent = 2", - "type": "text" - }, - { - "block_id": "p253-b7", - "global_id": 2739, - "bbox": [ - 74.37, - 381.53, - 291.02, - 428.04 - ], - "text": "2.\t How did I trade yesterday?\nA. Lost money = 0\nB. Both made and lost money or didn’t trade = 1\nC. Made money = 2", - "type": "text" - }, - { - "block_id": "p253-b8", - "global_id": 2740, - "bbox": [ - 74.38, - 436.54, - 269.1, - 483.03 - ], - "text": "3.\t Have I done my trade planning this morning?\nA. Not prepared = 0\nB. Middling = 1\nC. Well prepared = 2", - "type": "text" - }, - { - "block_id": "p253-b9", - "global_id": 2741, - "bbox": [ - 74.39, - 491.53, - 161.41, - 538.02 - ], - "text": "4.\t How is my mood?\nA. Poor = 0\nB. Average = 1\nC. Great = 2", - "type": "text" - }, - { - "block_id": "p253-b10", - "global_id": 2742, - "bbox": [ - 74.4, - 546.52, - 221.43, - 593.01 - ], - "text": "5.\t How busy is my schedule today?\nA. Very busy = 0\nB. Normally busy = 1\nC. Pretty open = 2", - "type": "text" - }, - { - "block_id": "p253-b11", - "global_id": 2743, - "bbox": [ - 72.41, - 600.51, - 434.54, - 670.99 - ], - "text": "The spreadsheet adds up scores for all five questions and uses Excel’s conditional \nformatting to color the summary cell. If my score is four or lower, this cell turns red. With \nso many negatives, it signals me not to trade today. The score of five or six flashes a yel-\nlow light—trade very cautiously. The score of seven or eight gives me a green light, but if \nthe score rises to nine or ten, the light turns yellow again—with everything so perfect, any \nchange is bound to be for the worse. Don’t let recent success go to your head.", - "type": "text" - } - ] - }, - { - "page_num": 254, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p254-b0", - "global_id": 2744, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "238\t\nGOOD RECORD-KEEPING", - "type": "text" - }, - { - "block_id": "p254-b1", - "global_id": 2745, - "bbox": [ - 73.55, - 55.86, - 378.42, - 74.5 - ], - "text": "■\n■58. Creating and Scoring Trade Plans", - "type": "text" - }, - { - "block_id": "p254-b2", - "global_id": 2746, - "bbox": [ - 72.0, - 84.83, - 434.76, - 140.15 - ], - "text": "A plan for any trade must specify what strategy you’ll use. It must prompt you to \ncheck the dates of earnings and dividends or contract rollovers, in order to save you \nfrom being blindsided by predictable news. It must spell out your planned entry, \ntarget, and stop as well as your trade size.", - "type": "text" - }, - { - "block_id": "p254-b3", - "global_id": 2747, - "bbox": [ - 72.0, - 140.84, - 434.76, - 196.16 - ], - "text": "Writing down a trade plan makes it real. Once you enter a trade and your equity \nstarts fluctuating, you may feel stressed and forget to perform certain tasks. The plan \nyou write prior to entering a trade becomes your island of sanity and stability in the \nmiddle of a storm; it helps ensure that you don’t overlook anything essential.", - "type": "text" - }, - { - "block_id": "p254-b4", - "global_id": 2748, - "bbox": [ - 72.0, - 196.86, - 434.76, - 252.18 - ], - "text": "A really good plan will include a scale for measuring its quality. This objective \nrating, which we’ll discuss below, takes less than a minute, but it encourages you to \nimplement only those plans that have a higher likelihood of success. It prompts you \nto drop marginal plans and not chase borderline trade ideas.", - "type": "text" - }, - { - "block_id": "p254-b5", - "global_id": 2749, - "bbox": [ - 72.0, - 252.88, - 434.76, - 336.2 - ], - "text": "While all my records are in electronic format, I like having my trade plans on \npaper. I use preprinted forms that I named Tradebills, similar to waybills that come \nwith the packages we order online. When a company sends you a product, it comes \nwith a waybill that shows the name of the product, its quantity, your address, the \nmode of delivery, rules for returns, and other essential facts. My trades are accom-\npanied by tradebills from the planning stage to the closing day.", - "type": "text" - }, - { - "block_id": "p254-b6", - "global_id": 2750, - "bbox": [ - 72.0, - 336.9, - 434.74, - 378.22 - ], - "text": "I have two separate tradebills for each trading system, one for buying and another \nfor shorting. Here we’ll review a tradebill for one of my favorite strategies. You can \nuse it as a starting point for developing your own tradebill.", - "type": "text" - }, - { - "block_id": "p254-b7", - "global_id": 2751, - "bbox": [ - 72.0, - 378.91, - 434.72, - 462.24 - ], - "text": "Whenever a potential trade catches my eye, I decide which system it fits and then \npick up the appropriate blank tradebill. Right there, if a seemingly attractive trade \nfits no trading system, then there is no trade. Having decided on a system, I write \ndown the date and the ticker symbol, and then score that potential trade, as shown \nbelow. If the score is high enough, I proceed to complete my trade plan; otherwise, \nI toss that sheet of paper into a wastebasket and go looking for other trades.", - "type": "text" - }, - { - "block_id": "p254-b8", - "global_id": 2752, - "bbox": [ - 72.0, - 462.94, - 434.76, - 518.26 - ], - "text": "Wherever I go, I carry my tradebills for open trades. If I’m at my desk, they are \nnext to my keyboard. If I go out during the day and bring my laptop, I put those \ntradebills between the keyboard and the screen, so they’ll be the first thing to see \nwhen I open up my laptop.", - "type": "text" - }, - { - "block_id": "p254-b9", - "global_id": 2753, - "bbox": [ - 72.0, - 518.95, - 434.71, - 602.28 - ], - "text": "Having written down my trade plans for years, I gradually developed a method for \nscoring them before making a go/no-go decision. My habit of scoring plans was re-\ninforced when I read Thinking, Fast and Slow by Prof. Daniel Kahneman. This book on \ndecision making by a behavioral economist and a Nobel Prize winner underscored \nthe value of simple scoring systems—they make our decisions more rational and less \nimpulsive.", - "type": "text" - }, - { - "block_id": "p254-b10", - "global_id": 2754, - "bbox": [ - 72.0, - 623.2, - 321.39, - 640.14 - ], - "text": "Scoring Your Trade Plans (a Trade Apgar)", - "type": "text" - }, - { - "block_id": "p254-b11", - "global_id": 2755, - "bbox": [ - 72.0, - 645.83, - 434.7, - 673.14 - ], - "text": "Among the examples in Prof. Kahneman’s book was his description of the work of \nDr. Virginia Apgar (1909–1974), a pediatric anesthesiologist at Columbia University.", - "type": "text" - } - ] - }, - { - "page_num": 255, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p255-b0", - "global_id": 2756, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "58. CREATING AND SCORING TRADE PLANS\t\n239", - "type": "text" - }, - { - "block_id": "p255-b1", - "global_id": 2757, - "bbox": [ - 71.94, - 57.83, - 434.62, - 85.14 - ], - "text": "She is widely credited with saving countless lives. Doctors and nurses worldwide use \nthe Apgar scale for deciding which newborns require immediate medical care.", - "type": "text" - }, - { - "block_id": "p255-b2", - "global_id": 2758, - "bbox": [ - 71.94, - 85.84, - 434.69, - 141.16 - ], - "text": "Most babies are born normal; some have complications, while others are at risk \nof dying. Prior to Dr. Apgar, doctors and nurses used clinical judgment to tell those \ngroups apart, and their mistakes contributed to infant mortality. Dr. Apgar’s scoring \nsystem made their decisions objective.", - "type": "text" - }, - { - "block_id": "p255-b3", - "global_id": 2759, - "bbox": [ - 71.94, - 141.85, - 434.7, - 267.19 - ], - "text": "The Apgar score summarizes answers to five simple questions. Each newborn is \nrated on its pulse, breathing, muscle tone, response to a pinch, and skin color. A good \nresponse to any question earns two points, poor zero, or one for an in-between. The \ntest is generally done at one and five minutes after birth. Total scores of seven and \nabove are considered normal, 4 to 6 fairly low, and less than 4 critically low. Babies \nwith a good score are safe to put into general care, while those with low Apgar scores \nrequire immediate medical attention. The entire decision-making process, focusing \non whom to treat aggressively, is quick and objective. Dr. Apgar’s simple scoring \nsystem has improved infant survival rates around the world.", - "type": "text" - }, - { - "block_id": "p255-b4", - "global_id": 2760, - "bbox": [ - 71.94, - 267.89, - 434.66, - 337.21 - ], - "text": "After reading Prof. Kahneman’s book, I renamed my scoring system the “trade \nApgar.” It helps me decide which of my trade ideas are strong and healthy or sickly \nand weak. Of course, as a trader, my actions are completely opposite to those of a \npediatrician. A doctor focuses on the sickest kids, to help them survive. As a trader, \nI focus on the healthiest ideas and trash the rest.", - "type": "text" - }, - { - "block_id": "p255-b5", - "global_id": 2761, - "bbox": [ - 71.94, - 337.91, - 434.6, - 393.23 - ], - "text": "Before I show you my Trade Apgar, a word of caution: the scoring method you’re \nabout to see is designed for one system—my “false breakout with a divergence” \nstrategy. All other systems will require a different test. Use my Trade Apgar as a \nstarting point for developing a test for your own system.", - "type": "text" - }, - { - "block_id": "p255-b6", - "global_id": 2762, - "bbox": [ - 71.94, - 393.92, - 434.69, - 477.25 - ], - "text": "For example, I recently gave the file of my Trade Apgar to a professional option \nwriter who consulted with me. He loved the idea of a written test, which reduced im-\npulsivity, one of his key problems. Within a few weeks, he showed me his own Trade \nApgar, which greatly differed from mine. He replaced one of my indicators with his \nfavorite RSI and Stochastic and added questions directly relevant only to option writ-\ning. I was happy to see that he was trading more profitably.", - "type": "text" - }, - { - "block_id": "p255-b7", - "global_id": 2763, - "bbox": [ - 71.94, - 477.95, - 434.64, - 533.27 - ], - "text": "A Trade Apgar demands clear answers to five questions that go the heart of a trad-\ning strategy. As you develop a Trade Apgar for your own strategy, I suggest keeping \nthe number of questions down to five and rating your answers on a zero/one/two \npoint scale. Simplicity makes this test more objective, practical, and quick.", - "type": "text" - }, - { - "block_id": "p255-b8", - "global_id": 2764, - "bbox": [ - 71.94, - 533.96, - 434.68, - 645.3 - ], - "text": "While looking at a potential trade, I take a blank tradebill from a stack and circle \nmy answers to its five questions. A circle in the red column earns a zero, in the yellow \ncolumn one point, and in the green column two points. I write down each number \nin the score box and add up the five lines. Also, if I circle the red column, I may write \nin the box next to it at what price the answer will change to a more favorable yellow \nor green. That will raise the plan’s score, allowing me to enter a trade at that level. \nFigure 58.1 shows a Trade Apgar for going long; Figure 58.2 shows a Trade Apgar \nfor shorting.", - "type": "text" - }, - { - "block_id": "p255-b9", - "global_id": 2765, - "bbox": [ - 71.94, - 646.0, - 434.7, - 673.31 - ], - "text": "It takes less than a minute to generate a Trade Apgar for any stock. I want to trade \nonly healthy ideas whose score is 7 or higher, and not a single line rated zero. If the", - "type": "text" - } - ] - }, - { - "page_num": 256, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p256-b0", - "global_id": 2766, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "240\t\nGOOD RECORD-KEEPING", - "type": "text" - }, - { - "block_id": "p256-b1", - "global_id": 2767, - "bbox": [ - 72.0, - 482.83, - 434.63, - 510.14 - ], - "text": "score is 7 or higher, I go on to complete my trade plan. I establish my entry, target, \nand stop, decide what size to trade, etc.", - "type": "text" - }, - { - "block_id": "p256-b2", - "global_id": 2768, - "bbox": [ - 72.0, - 510.84, - 434.66, - 552.15 - ], - "text": "Trade Apgars provide objective ratings for potential trades. With thousands of \ntrading vehicles available to us, there is no need to waste energy on poor candidates. \nUse a Trade Apgar to help you zoom in on the best prospects.", - "type": "text" - }, - { - "block_id": "p256-b3", - "global_id": 2769, - "bbox": [ - 72.0, - 567.2, - 175.41, - 584.14 - ], - "text": "Using a Tradebill", - "type": "text" - }, - { - "block_id": "p256-b4", - "global_id": 2770, - "bbox": [ - 72.0, - 589.83, - 434.65, - 617.14 - ], - "text": "Once you become interested in a stock and a Trade Apgar confirms your idea for \na trade, completing a tradebill will help you focus on the key aspects of that trade.", - "type": "text" - }, - { - "block_id": "p256-b5", - "global_id": 2771, - "bbox": [ - 72.0, - 617.84, - 434.75, - 659.15 - ], - "text": "Let’s review a tradebill for long positions (Figure 58.3).\nI designed my Tradebills in PowerPoint, fitting two to a page. I always keep some \nblanks handy, but don’t preprint too many because I keep tweaking these forms.", - "type": "text" - }, - { - "block_id": "p256-b6", - "global_id": 2772, - "bbox": [ - 72.0, - 659.85, - 434.75, - 687.16 - ], - "text": "My tradebill for short trades is the same, except for a different Trade Apgar, as \nshown in Figure 58.2. When you start developing your own tradebills, you may want", - "type": "text" - }, - { - "block_id": "p256-b7", - "global_id": 2773, - "bbox": [ - 71.88, - 175.38, - 396.67, - 196.23 - ], - "text": "FIGURE 58.1  Trade Apgar for going long, using a strategy of  “false breakout with a divergence.” \n(Source: elder.com)", - "type": "text" - }, - { - "block_id": "p256-b8", - "global_id": 2774, - "bbox": [ - 71.88, - 203.13, - 329.72, - 213.62 - ], - "text": "Rate your answers to five questions on a scale from zero to two:", - "type": "text" - }, - { - "block_id": "p256-b9", - "global_id": 2775, - "bbox": [ - 73.88, - 221.13, - 434.1, - 243.62 - ], - "text": "1.\t Weekly Impulse (described in this book)—zero for Red, one for Green, two for Blue on \nthe weekly chart.", - "type": "text" - }, - { - "block_id": "p256-b10", - "global_id": 2776, - "bbox": [ - 96.96, - 249.13, - 434.02, - 271.62 - ], - "text": "Red Impulse prohibits buying, Green is OK but could be too late, while Blue (after \nred) shows that bears are losing power, which is a good time to buy.", - "type": "text" - }, - { - "block_id": "p256-b11", - "global_id": 2777, - "bbox": [ - 73.96, - 280.13, - 336.36, - 290.65 - ], - "text": "2.\t Daily Impulse—same questions and ratings on the daily chart.", - "type": "text" - }, - { - "block_id": "p256-b12", - "global_id": 2778, - "bbox": [ - 73.96, - 299.14, - 434.07, - 321.63 - ], - "text": "3.\t Daily price—zero if the latest price is above value, one if it’s in the value zone, two if \nbelow value on the daily chart.", - "type": "text" - }, - { - "block_id": "p256-b13", - "global_id": 2779, - "bbox": [ - 96.96, - 327.14, - 434.03, - 349.63 - ], - "text": "Prices above value may be too late to buy, in the value zone OK, below value could \nbe a bargain.", - "type": "text" - }, - { - "block_id": "p256-b14", - "global_id": 2780, - "bbox": [ - 73.96, - 358.09, - 431.57, - 380.58 - ], - "text": "4.\t False breakout—zero if none, one if it already happened, two if on the verge of hap-\npening.", - "type": "text" - }, - { - "block_id": "p256-b15", - "global_id": 2781, - "bbox": [ - 73.96, - 389.09, - 429.5, - 399.64 - ], - "text": "5.\t Perfection—zero if neither timeframe, one if only one, two points if both look perfect.", - "type": "text" - }, - { - "block_id": "p256-b16", - "global_id": 2782, - "bbox": [ - 96.96, - 405.14, - 434.09, - 463.63 - ], - "text": "I always analyze markets in two timeframes; one of them must show a perfect \npattern for any strategy in order for me to enter a trade. Very rarely both time- \nframes are perfect—it is fine for one to be perfect and for the other to be merely \ngood. If neither timeframe looks perfect, it can’t be an A trade—drop this stock and \nmove on to another one.", - "type": "text" - } - ] - }, - { - "page_num": 257, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p257-b0", - "global_id": 2783, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "58. CREATING AND SCORING TRADE PLANS\t\n241", - "type": "text" - }, - { - "block_id": "p257-b1", - "global_id": 2784, - "bbox": [ - 72.2, - 173.38, - 382.61, - 183.43 - ], - "text": "FIGURE 58.2  Trade Apgar for shorting, using strategy of  “divergence with a false breakout.”", - "type": "text" - }, - { - "block_id": "p257-b2", - "global_id": 2785, - "bbox": [ - 72.17, - 190.13, - 366.07, - 200.63 - ], - "text": "This is a mirror image of Trade Apgar for buying, using the same strategy.", - "type": "text" - }, - { - "block_id": "p257-b3", - "global_id": 2786, - "bbox": [ - 106.4, - 260.92, - 113.72, - 275.79 - ], - "text": "1", - "type": "text" - }, - { - "block_id": "p257-b4", - "global_id": 2787, - "bbox": [ - 106.4, - 316.52, - 113.72, - 331.39 - ], - "text": "2", - "type": "text" - }, - { - "block_id": "p257-b5", - "global_id": 2788, - "bbox": [ - 106.4, - 382.42, - 113.72, - 397.29 - ], - "text": "3", - "type": "text" - }, - { - "block_id": "p257-b6", - "global_id": 2789, - "bbox": [ - 106.4, - 525.62, - 113.72, - 540.49 - ], - "text": "4", - "type": "text" - }, - { - "block_id": "p257-b7", - "global_id": 2790, - "bbox": [ - 106.4, - 632.72, - 113.72, - 647.59 - ], - "text": "5", - "type": "text" - }, - { - "block_id": "p257-b8", - "global_id": 2791, - "bbox": [ - 72.0, - 676.03, - 431.6, - 686.08 - ], - "text": "FIGURE 58.3  Tradebill for going long, using the strategy “divergence with a false breakout.” (Source: elder.com)", - "type": "text" - } - ] - }, - { - "page_num": 258, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p258-b0", - "global_id": 2792, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "242\t\nGOOD RECORD-KEEPING", - "type": "text" - }, - { - "block_id": "p258-b1", - "global_id": 2793, - "bbox": [ - 72.4, - 57.83, - 183.95, - 68.39 - ], - "text": "Part 1: Trade identification.", - "type": "text" - }, - { - "block_id": "p258-b2", - "global_id": 2794, - "bbox": [ - 72.43, - 73.83, - 248.74, - 84.33 - ], - "text": "■\n■The green stripe marks it as a long trade.", - "type": "text" - }, - { - "block_id": "p258-b3", - "global_id": 2795, - "bbox": [ - 72.43, - 89.83, - 434.53, - 100.33 - ], - "text": "■\n■A thumbnail picture of a bullish divergence with a false breakout is a reminder of the", - "type": "text" - }, - { - "block_id": "p258-b4", - "global_id": 2796, - "bbox": [ - 84.2, - 101.83, - 118.53, - 112.32 - ], - "text": "strategy.", - "type": "text" - }, - { - "block_id": "p258-b5", - "global_id": 2797, - "bbox": [ - 72.43, - 117.83, - 230.72, - 128.33 - ], - "text": "■\n■The first box is for the ticker symbol.", - "type": "text" - }, - { - "block_id": "p258-b6", - "global_id": 2798, - "bbox": [ - 72.43, - 133.83, - 434.53, - 144.33 - ], - "text": "■\n■The next box is for the next earnings date. You can look it up at several free websites,", - "type": "text" - }, - { - "block_id": "p258-b7", - "global_id": 2799, - "bbox": [ - 84.2, - 145.83, - 434.53, - 192.31 - ], - "text": "such as www.Briefing.com, www.earnings.com, or www.Finviz.com. Most traders avoid \nholding stocks whose earnings are about to be reported. A nasty earnings surprise can \ndo serious damage to your position. Writing down that date forces you to focus on \navoiding trouble.", - "type": "text" - }, - { - "block_id": "p258-b8", - "global_id": 2800, - "bbox": [ - 72.43, - 197.83, - 434.56, - 208.33 - ], - "text": "■\n■The next box is the dividend date, if any. I usually look it up at http://finance.yahoo.com.", - "type": "text" - }, - { - "block_id": "p258-b9", - "global_id": 2801, - "bbox": [ - 84.2, - 209.83, - 434.57, - 232.32 - ], - "text": "Dividends create tax consequences for longs, while shorts have to pay dividends, so \nthey definitely want to avoid holding on that day.", - "type": "text" - }, - { - "block_id": "p258-b10", - "global_id": 2802, - "bbox": [ - 72.43, - 239.83, - 238.57, - 250.33 - ], - "text": "■\n■The last box is for the date of my plan.", - "type": "text" - }, - { - "block_id": "p258-b11", - "global_id": 2803, - "bbox": [ - 72.45, - 267.34, - 152.82, - 277.89 - ], - "text": "Part 2: Trade Apgar", - "type": "text" - }, - { - "block_id": "p258-b12", - "global_id": 2804, - "bbox": [ - 72.43, - 283.33, - 434.52, - 293.83 - ], - "text": "■\n■My Trade Apgar was described above. Remember that each strategy demands its own", - "type": "text" - }, - { - "block_id": "p258-b13", - "global_id": 2805, - "bbox": [ - 84.2, - 295.33, - 434.54, - 329.82 - ], - "text": "Apgar. You’re perfectly welcome to replace my questions with those that are relevant to \nyour own system. For example, you may ask whether Stochastic is in the overbought \nzone (zero), oversold (one), or oversold with a bullish divergence (two).", - "type": "text" - }, - { - "block_id": "p258-b14", - "global_id": 2806, - "bbox": [ - 72.43, - 335.33, - 434.56, - 345.83 - ], - "text": "■\n■After you sum up the numbers for the Trade Apgar, answer this key question in writing:", - "type": "text" - }, - { - "block_id": "p258-b15", - "global_id": 2807, - "bbox": [ - 84.2, - 347.33, - 432.11, - 357.82 - ], - "text": "Is this an A-trade? If the total score is below 7, drop this stock and look for another trade.", - "type": "text" - }, - { - "block_id": "p258-b16", - "global_id": 2808, - "bbox": [ - 72.45, - 374.83, - 278.87, - 385.39 - ], - "text": "Part 3: Market, entry, target, stop, and risk control", - "type": "text" - }, - { - "block_id": "p258-b17", - "global_id": 2809, - "bbox": [ - 72.43, - 390.83, - 434.51, - 401.33 - ], - "text": "■\n■The five boxes along the left edge require me to answer questions about the general", - "type": "text" - }, - { - "block_id": "p258-b18", - "global_id": 2810, - "bbox": [ - 84.2, - 402.83, - 434.58, - 449.31 - ], - "text": "state of the market. Is the Spike Bounce signal in effect? Is the indicator that traces \nstocks above their MAs bullish or bearish? What is the short interest in this stock and \nhow many days to cover? All of these studies have been described in this book. The last \nbox is for a few words of a summary.", - "type": "text" - }, - { - "block_id": "p258-b19", - "global_id": 2811, - "bbox": [ - 72.43, - 454.83, - 434.56, - 465.33 - ], - "text": "■\n■Three boxes linked by arrows are at the heart of my decision-making process. They", - "type": "text" - }, - { - "block_id": "p258-b20", - "global_id": 2812, - "bbox": [ - 84.2, - 466.83, - 417.88, - 477.32 - ], - "text": "demand three essential numbers for every trade: the entry, the target, and the stop.", - "type": "text" - }, - { - "block_id": "p258-b21", - "global_id": 2813, - "bbox": [ - 72.43, - 482.83, - 434.51, - 493.33 - ], - "text": "■\n■Dollar risk—How many dollars are you willing to risk on this trade? This number can", - "type": "text" - }, - { - "block_id": "p258-b22", - "global_id": 2814, - "bbox": [ - 84.2, - 494.83, - 434.55, - 517.32 - ], - "text": "never exceed two percent of your account equity. I usually keep it considerably below \nthat threshold.", - "type": "text" - }, - { - "block_id": "p258-b23", - "global_id": 2815, - "bbox": [ - 72.43, - 522.83, - 434.53, - 533.33 - ], - "text": "■\n■Size—How many shares or futures contracts will you buy, based on the permitted dollar", - "type": "text" - }, - { - "block_id": "p258-b24", - "global_id": 2816, - "bbox": [ - 84.2, - 534.83, - 434.52, - 557.32 - ], - "text": "risk and the distance from the entry to the stop. This is explained in detail in “The Iron \nTriangle of risk control” in Chapter 50.", - "type": "text" - }, - { - "block_id": "p258-b25", - "global_id": 2817, - "bbox": [ - 72.45, - 574.33, - 161.31, - 584.89 - ], - "text": "Part 4: After the entry", - "type": "text" - }, - { - "block_id": "p258-b26", - "global_id": 2818, - "bbox": [ - 72.43, - 590.33, - 373.35, - 600.83 - ], - "text": "■\n■The A target is 30% of the daily channel height added to the entry price.", - "type": "text" - }, - { - "block_id": "p258-b27", - "global_id": 2819, - "bbox": [ - 72.43, - 605.33, - 434.59, - 615.83 - ], - "text": "■\n■The soft stop is what you may keep in mind, while the hard or catastrophic stop is the", - "type": "text" - }, - { - "block_id": "p258-b28", - "global_id": 2820, - "bbox": [ - 84.2, - 617.33, - 362.61, - 627.82 - ], - "text": "actual order. It may not be any lower than the stop listed in Section 3.", - "type": "text" - }, - { - "block_id": "p258-b29", - "global_id": 2821, - "bbox": [ - 72.43, - 633.33, - 348.09, - 643.83 - ], - "text": "■\n■Put in the price level at which you’ll move your stop to breakeven.", - "type": "text" - }, - { - "block_id": "p258-b30", - "global_id": 2822, - "bbox": [ - 72.43, - 649.33, - 434.51, - 659.83 - ], - "text": "■\n■Check the boxes on the right as you perform these essential steps: place a stop, create", - "type": "text" - }, - { - "block_id": "p258-b31", - "global_id": 2823, - "bbox": [ - 84.2, - 661.33, - 261.74, - 671.82 - ], - "text": "a diary entry, and place a profit-taking order.", - "type": "text" - } - ] - }, - { - "page_num": 259, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p259-b0", - "global_id": 2824, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "59. TRADE JOURNAL\t\n243", - "type": "text" - }, - { - "block_id": "p259-b1", - "global_id": 2825, - "bbox": [ - 71.94, - 143.63, - 434.58, - 170.94 - ], - "text": "to copy sections 1, 3, and 4, but develop your own section 2—the Trade Apgar for \nyour own system or strategy.", - "type": "text" - }, - { - "block_id": "p259-b2", - "global_id": 2826, - "bbox": [ - 73.55, - 198.66, - 223.67, - 217.3 - ], - "text": "■\n■59. Trade Journal", - "type": "text" - }, - { - "block_id": "p259-b3", - "global_id": 2827, - "bbox": [ - 72.0, - 227.63, - 434.68, - 268.94 - ], - "text": "Memory is the cornerstone of civilized life. It allows us to learn from our success-\nes and even more from our failures. Keeping a diary of your trades will help you \ngrow and become a better trader.", - "type": "text" - }, - { - "block_id": "p259-b4", - "global_id": 2828, - "bbox": [ - 72.0, - 269.64, - 434.72, - 338.96 - ], - "text": "Keeping detailed trade records feels burdensome—but that’s what serious trad-\ners do. Many people asked me after I published a book of interviews with traders \n(Entries & Exits, 2006), what all of them had in common. They lived in different coun-\ntries, traded different markets, and used different methods—but all kept excellent \nrecords.", - "type": "text" - }, - { - "block_id": "p259-b5", - "global_id": 2829, - "bbox": [ - 72.0, - 339.66, - 434.77, - 479.0 - ], - "text": "The best example came from the woman whose interview was in the first \nchapter of that book. While finishing the manuscript, I realized that our inter-\nview had been incomplete and I needed to ask additional questions about her \ntrades. A year later, on another visit to California where she lived, I asked to \nmeet again. I assumed she’d show me some recent trades, but she went to a filing \ncabinet and pulled out a folder with all her trades for the week of my previous visit. \nWe completed our interview by reviewing her charts from a year ago as if those \ntrades were made yesterday. A bull market was in full swing, she was doing great, \nbut still worked to improve her performance. Her detailed diary was her self- \nimprovement tool.", - "type": "text" - }, - { - "block_id": "p259-b6", - "global_id": 2830, - "bbox": [ - 72.0, - 479.7, - 434.68, - 507.01 - ], - "text": "Let your diary entries serve as your “extra-cranial memory,” a tool for building \nthe structure of success.", - "type": "text" - }, - { - "block_id": "p259-b7", - "global_id": 2831, - "bbox": [ - 72.0, - 507.71, - 434.75, - 577.03 - ], - "text": "For years, I struggled with developing a record-keeping system that would be \neasy to update and analyze. In the beginning, I kept the diary of my trades in a paper \njournal, gluing in chart printouts and marking them up—I still keep one of those an-\ntiques next to my trading desk. Later I kept my diary in Word, and then in Outlook. \nFinally, in 2012, Kerry Lovvorn and I created a web-based Trade Journal1.", - "type": "text" - }, - { - "block_id": "p259-b8", - "global_id": 2832, - "bbox": [ - 72.0, - 577.63, - 434.71, - 632.95 - ], - "text": "This Trade Journal is a joy to keep, and both Kerry and I use it for all our trade \ndiaries. Our Trade Journal is available to all, and its use is free (up to a limit). The jour-\nnals are online, password protected, and absolutely private—although SpikeTrade \nmembers have an option of sharing their trade journals for selected trades.", - "type": "text" - }, - { - "block_id": "p259-b9", - "global_id": 2833, - "bbox": [ - 72.0, - 57.83, - 176.05, - 68.39 - ], - "text": "Part 5: The copyright line", - "type": "text" - }, - { - "block_id": "p259-b10", - "global_id": 2834, - "bbox": [ - 72.03, - 73.83, - 432.07, - 108.32 - ], - "text": "■\n■\nThis line shows when this tradebill was updated. As a reader of this book, you’re wel-\ncome to write to info@elder.com and request the latest version, which we send to trad-\ners as a public service.", - "type": "text" - }, - { - "block_id": "p259-b11", - "global_id": 2835, - "bbox": [ - 72.0, - 660.82, - 431.13, - 671.91 - ], - "text": "1We relied on capable programming by Helena Trent and used several ideas suggested by Jeff Parker.", - "type": "text" - } - ] - }, - { - "page_num": 260, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p260-b0", - "global_id": 2836, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "244\t\nGOOD RECORD-KEEPING", - "type": "text" - }, - { - "block_id": "p260-b1", - "global_id": 2837, - "bbox": [ - 72.0, - 603.43, - 434.64, - 630.74 - ], - "text": "Our Trade Journal is shown in Figure 59.1. Even if you prefer to build your \nown, look at it to see what must be included in your own record-keeping system.", - "type": "text" - }, - { - "block_id": "p260-b2", - "global_id": 2838, - "bbox": [ - 72.0, - 631.44, - 434.72, - 686.76 - ], - "text": "The Trade Journal is designed to make your record-keeping simple and logical, \nhelping you plan, document, and learn from your trades. We have already reviewed \nseveral sections of the Trade Journal. Figure 38.1 showed its three sections—Setup, \nRisk, and Parameters. Figure 55.2 showed the strategy box in the Trade Journal.", - "type": "text" - }, - { - "block_id": "p260-b3", - "global_id": 2839, - "bbox": [ - 352.9, - 88.67, - 360.07, - 100.32 - ], - "text": "A", - "type": "text" - }, - { - "block_id": "p260-b4", - "global_id": 2840, - "bbox": [ - 370.2, - 126.67, - 376.47, - 138.32 - ], - "text": "B", - "type": "text" - }, - { - "block_id": "p260-b5", - "global_id": 2841, - "bbox": [ - 177.1, - 293.27, - 183.2, - 304.92 - ], - "text": "E", - "type": "text" - }, - { - "block_id": "p260-b6", - "global_id": 2842, - "bbox": [ - 234.7, - 250.47, - 241.33, - 262.12 - ], - "text": "C", - "type": "text" - }, - { - "block_id": "p260-b7", - "global_id": 2843, - "bbox": [ - 356.6, - 226.27, - 363.95, - 237.92 - ], - "text": "D", - "type": "text" - }, - { - "block_id": "p260-b8", - "global_id": 2844, - "bbox": [ - 72.2, - 349.58, - 300.07, - 359.63 - ], - "text": "FIGURE 59.1  Trade Journal (a partial view). (Source: Spiketrade.com)", - "type": "text" - }, - { - "block_id": "p260-b9", - "global_id": 2845, - "bbox": [ - 88.15, - 366.33, - 434.27, - 376.83 - ], - "text": "Section A—The Trade Journal asks why I decided to trade this stock. I usually leave", - "type": "text" - }, - { - "block_id": "p260-b10", - "global_id": 2846, - "bbox": [ - 100.15, - 378.33, - 434.21, - 412.82 - ], - "text": "this box blank because I like to write such comments on the charts, using SnagIt \nsoftware. In the case of ADSK, I attached a combination chart, featuring weekly, \ndaily, and 25-minute charts.", - "type": "text" - }, - { - "block_id": "p260-b11", - "global_id": 2847, - "bbox": [ - 88.15, - 417.33, - 434.29, - 427.82 - ], - "text": "Section B—Documenting entry and exit dates and prices; accounting for slippage and", - "type": "text" - }, - { - "block_id": "p260-b12", - "global_id": 2848, - "bbox": [ - 100.15, - 429.32, - 237.68, - 439.82 - ], - "text": "seeing buy, sell, and trade grades.", - "type": "text" - }, - { - "block_id": "p260-b13", - "global_id": 2849, - "bbox": [ - 88.15, - 444.33, - 434.24, - 454.82 - ], - "text": "Section C—Reasons for exit with an attached combination chart showing both entry", - "type": "text" - }, - { - "block_id": "p260-b14", - "global_id": 2850, - "bbox": [ - 100.15, - 456.32, - 134.66, - 466.82 - ], - "text": "and exit.", - "type": "text" - }, - { - "block_id": "p260-b15", - "global_id": 2851, - "bbox": [ - 88.15, - 471.33, - 434.25, - 481.82 - ], - "text": "Section D—The list of exit tactics is longer than that of trade strategies. I may", - "type": "text" - }, - { - "block_id": "p260-b16", - "global_id": 2852, - "bbox": [ - 100.21, - 483.32, - 434.35, - 529.81 - ], - "text": "exit because my trade hit its target, or its stop, or is reaching the value zone \nor the envelope. I may exit if a trade is going nowhere or starting to turn. There \nare also two negative exits: couldn’t stand the pain or recognizing a junk trade \nafter I entered.", - "type": "text" - }, - { - "block_id": "p260-b17", - "global_id": 2853, - "bbox": [ - 88.22, - 534.32, - 434.37, - 544.81 - ], - "text": "Section E—Post-trade analysis. I like to return to every trade two months after the exit", - "type": "text" - }, - { - "block_id": "p260-b18", - "global_id": 2854, - "bbox": [ - 100.21, - 546.31, - 434.36, - 580.8 - ], - "text": "and review it with the benefit of hindsight. I create a follow-up chart, mark my entry \nand exit with arrows, and then write a comment on how my trade looks after the \npassage of time. This is the best way of learning what I did right or wrong.", - "type": "text" - } - ] - }, - { - "page_num": 261, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p261-b0", - "global_id": 2855, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "59. TRADE JOURNAL\t\n245", - "type": "text" - }, - { - "block_id": "p261-b1", - "global_id": 2856, - "bbox": [ - 71.94, - 57.83, - 434.64, - 113.15 - ], - "text": "Most of us quickly forget past trades, but the Trade Journal prompts you to return \nto them. The trades you entered and exited at the hard right edge of the chart are \nnow in the middle of that chart, where you can re-examine your decisions and learn \nhow to improve them.", - "type": "text" - }, - { - "block_id": "p261-b2", - "global_id": 2857, - "bbox": [ - 72.0, - 133.2, - 161.13, - 150.13 - ], - "text": "Three Benefits", - "type": "text" - }, - { - "block_id": "p261-b3", - "global_id": 2858, - "bbox": [ - 72.0, - 155.83, - 434.69, - 211.15 - ], - "text": "Keeping a trade journal delivers three major benefits. One is immediate—a greater \nsense of order. The second comes a month or two later, when you start reviewing \nyour closed trades. Finally, after you accumulate dozens of records, you’ll have sev-\neral ways to analyze them and learn from your equity curves.", - "type": "text" - }, - { - "block_id": "p261-b4", - "global_id": 2859, - "bbox": [ - 71.96, - 223.83, - 434.7, - 321.16 - ], - "text": "A Sense of Order and Structure comes from documenting the plan, the entry, \nand the exit for each trade. Where exactly will you enter, what is your target, where \nwill you place your stop? Defining and writing down those numbers will steer you \ntowards disciplined trading. You’ll become less likely to slip into an impulsive buy, \noverstay a profitable trade, or let a loss snowball without a stop. Filling out risk \nmanagement numbers will give you a handle on trade sizing. Documenting exits will \nmake you face your trade grades.", - "type": "text" - }, - { - "block_id": "p261-b5", - "global_id": 2860, - "bbox": [ - 358.46, - 477.7, - 405.52, - 494.36 - ], - "text": "A perfect\ntrade in good", - "type": "text" - }, - { - "block_id": "p261-b6", - "global_id": 2861, - "bbox": [ - 375.62, - 493.0, - 388.36, - 502.01 - ], - "text": "size", - "type": "text" - }, - { - "block_id": "p261-b7", - "global_id": 2862, - "bbox": [ - 72.36, - 594.58, - 392.42, - 615.62 - ], - "text": "FIGURE 59.2  DISCA daily with 13- and 26-day EMAs and a 6% channel. Impulse system with \nMACD-Histogram 12-26-9. (Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p261-b8", - "global_id": 2863, - "bbox": [ - 72.4, - 621.43, - 252.97, - 634.33 - ], - "text": "Follow-Up Analysis (Shorting a Top)", - "type": "text" - }, - { - "block_id": "p261-b9", - "global_id": 2864, - "bbox": [ - 72.4, - 638.33, - 434.52, - 684.82 - ], - "text": "My strategy for shorting Discovery Communications, Inc. (DISCA) was “fading an ex-\ntreme;” my exit tactic “started turning.” Entry and exit are marked by arrows. A review two \nmonths later confirmed that both decisions were correct. Lesson: the next time I see this \npattern, jump aboard.", - "type": "text" - } - ] - }, - { - "page_num": 262, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p262-b0", - "global_id": 2865, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "246\t\nGOOD RECORD-KEEPING", - "type": "text" - }, - { - "block_id": "p262-b1", - "global_id": 2866, - "bbox": [ - 71.97, - 57.83, - 434.73, - 141.16 - ], - "text": "Reviewing Every Trade a month or two after your exit is one of the best learning \nexperiences you can have. Trading signals that may have appeared vague and uncertain \nat the right edge of a chart become crystal clear when you view them in the middle \nof your screen. Returning to your past trades and adding an “after the trade” chart \nmakes you reevaluate your decisions. Now you can clearly see what you did right or \nwrong. Your journal will be teaching you priceless lessons.", - "type": "text" - }, - { - "block_id": "p262-b2", - "global_id": 2867, - "bbox": [ - 71.97, - 141.85, - 434.7, - 309.2 - ], - "text": "I make my strategic decisions on the weekly charts, tactical on the dailies. Since \nmy daily charts are formatted to show five to six months of data, once a month I \nspend a few hours reviewing trades that I closed two months ago. For example, at \nthe end of March or in the beginning of April, I’ll review all trades that I closed out \nin January. I’ll pull up their current charts, mark my entries and exits with arrows, \nand write a comment on every trade. Let me share two examples with you (Figures \n59.2 and 59.3). \nSuch reviews teach you what’s right with your trading, and what needs to be \nchanged. Soon after I started doing my “two months later” reviews, I became aware of \ntwo problems with my exits. I noticed that my stops were a bit tight and that helped \nme figure out that by slightly increasing the amount of risk, I could substantially re-\nduce the number of whipsaws and come out ahead. I also noticed that while my short-", - "type": "text" - }, - { - "block_id": "p262-b3", - "global_id": 2868, - "bbox": [ - 348.68, - 371.47, - 405.83, - 395.55 - ], - "text": "As a short-term\ntrade good, but\nof course missed", - "type": "text" - }, - { - "block_id": "p262-b4", - "global_id": 2869, - "bbox": [ - 352.2, - 394.2, - 402.31, - 403.13 - ], - "text": "the big picture", - "type": "text" - }, - { - "block_id": "p262-b5", - "global_id": 2870, - "bbox": [ - 71.96, - 570.98, - 390.14, - 592.02 - ], - "text": "FIGURE 59.3  MCP daily with 13- and 26-day EMAs and a 16% channel. Impulse system with \nMACD-Histogram 12-26-9. (Chart by Stockcharts.com)", - "type": "text" - }, - { - "block_id": "p262-b6", - "global_id": 2871, - "bbox": [ - 72.0, - 597.83, - 270.1, - 610.73 - ], - "text": "Follow-Up Analysis (Buying a Pullback)", - "type": "text" - }, - { - "block_id": "p262-b7", - "global_id": 2872, - "bbox": [ - 72.0, - 614.73, - 434.13, - 685.21 - ], - "text": "My strategy for buying Molycorp, Inc. (MCP) was “pullback to value”—I thought that a new \nuptrend had begun. The following day, I was no longer so sure and sold for a small profit. \nA review two months later showed that I missed the resumption of the bear trend; my deci-\nsion to cut and run with a small profit was correct, but I overlooked a major trade. Lesson: \ncontinue to monitor closed-out trades for a week or so and be prepared to re-enter or to \nreverse.", - "type": "text" - } - ] - }, - { - "page_num": 263, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p263-b0", - "global_id": 2873, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "59. TRADE JOURNAL\t\n247", - "type": "text" - }, - { - "block_id": "p263-b1", - "global_id": 2874, - "bbox": [ - 71.94, - 57.83, - 434.66, - 85.14 - ], - "text": "term swing trades tended to be good, I often missed bigger trends that emerged from \nthose short-term moves. I used that knowledge to adjust my methods going forward.", - "type": "text" - }, - { - "block_id": "p263-b2", - "global_id": 2875, - "bbox": [ - 72.0, - 97.83, - 434.71, - 153.15 - ], - "text": "Reviewing Your Equity Curve is essential because only a rising curve certifies you \nas a successful trader. If your equity curve is in a downtrend, your system may be at \nfault, or your risk management poor, or your discipline lacking—whatever it is, you \nmust track it down and solve that problem.", - "type": "text" - }, - { - "block_id": "p263-b3", - "global_id": 2876, - "bbox": [ - 72.02, - 153.84, - 434.74, - 237.17 - ], - "text": "Still, a combined equity curve for all your trades and accounts is a pretty crude \ntool. The Trade Journal allows you to zoom in and trace your equity curves for spe-\ncific markets, strategies, and exit tactics. For example, I can run separate equity \ncurves for longs and shorts, for different strategies and exits, and even for sources of \nmy trade ideas. Believe me: once you see an equity curve for exits marked “Couldn’t \nstand the pain,” you’ll never trade without stops!", - "type": "text" - } - ] - }, - { - "page_num": 264, - "width": 504.0, - "height": 720.0, - "blocks": [] - }, - { - "page_num": 265, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p265-b0", - "global_id": 2877, - "bbox": [ - 72.0, - 118.61, - 406.18, - 255.84 - ], - "text": "A Journey without \nan End: How to \nContinue Learning", - "type": "text" - }, - { - "block_id": "p265-b1", - "global_id": 2878, - "bbox": [ - 72.1, - 673.7, - 432.15, - 687.25 - ], - "text": "249", - "type": "text" - }, - { - "block_id": "p265-b2", - "global_id": 2879, - "bbox": [ - 324.9, - 59.86, - 419.15, - 73.41 - ], - "text": "PA R T 4\nC O N C L U S I O N", - "type": "text" - }, - { - "block_id": "p265-b3", - "global_id": 2880, - "bbox": [ - 71.2, - 331.94, - 92.84, - 372.34 - ], - "text": "A", - "type": "text" - }, - { - "block_id": "p265-b4", - "global_id": 2881, - "bbox": [ - 71.97, - 337.63, - 434.72, - 392.95 - ], - "text": "s we near the end of this book, I compliment you on your persistence and \ncommitment. We have worked through the essential trading topics: psychology, \ntactics, risk management, and record-keeping. Still, becoming a successful trader \nwill take more than reading a single book.", - "type": "text" - }, - { - "block_id": "p265-b5", - "global_id": 2882, - "bbox": [ - 72.04, - 393.64, - 434.69, - 476.97 - ], - "text": "How long do you think it might take?\nYou may have seen this huge number—10,000.  According to some authors, that’s \nthe number of hours it takes to become an expert in major pursuits, such as profes-\nsions or sports. If that is true and you spend 40 hours per week, 50 weeks a year, it’ll \ntake five years to become a pro. If you can invest only 20 hours per week, it’ll take \nten years. That’s a scary thought.", - "type": "text" - }, - { - "block_id": "p265-b6", - "global_id": 2883, - "bbox": [ - 72.04, - 477.67, - 434.78, - 532.99 - ], - "text": "If you, like so many people, came to trading after a successful career in another \nfield, be it engineering, farming, or business, you may well have invested that many \nhours in it. Do you really want to spend another 10,000 hours on a new project at \nthis stage of your life?", - "type": "text" - }, - { - "block_id": "p265-b7", - "global_id": 2884, - "bbox": [ - 72.04, - 533.68, - 434.76, - 603.01 - ], - "text": "Before you shudder at this prospect, let me share a very different number with \nyou—20 hours. It comes from a book, The First 20 Hours: How to Learn Anything...\nFast! Its author, Josh Kaufman, makes a sensible point that while becoming a world-\nclass expert will take years, you can achieve a basic level of competence in most \nfields in a much shorter time.", - "type": "text" - }, - { - "block_id": "p265-b8", - "global_id": 2885, - "bbox": [ - 72.04, - 603.7, - 434.8, - 659.02 - ], - "text": "“The early hours of practicing something new are always the most frustrating. \nThat’s why it’s difficult to learn how to speak a new language, play an instrument, hit \na golf ball, or shoot great photos. It’s so much easier to watch TV or surf the web...” \nhe writes. To learn a new skill, you need to find the experts and get their materials,", - "type": "text" - } - ] - }, - { - "page_num": 266, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p266-b0", - "global_id": 2886, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "250\t\nCONCLUSION", - "type": "text" - }, - { - "block_id": "p266-b1", - "global_id": 2887, - "bbox": [ - 72.0, - 57.83, - 434.74, - 85.14 - ], - "text": "create an action plan, and make an absolute commitment to studying and practicing \nwithout any distractions.", - "type": "text" - }, - { - "block_id": "p266-b2", - "global_id": 2888, - "bbox": [ - 72.0, - 85.84, - 434.74, - 183.17 - ], - "text": "By completing just 20 hours of focused, deliberate practice, you can go from \nnear zero to performing reasonably well in many fields. Kaufman describes how he \ntook 20 hours to learn several new skills, including windsurfing and programming \na website. Even if you take up a more complex activity, such as flying, 20 hours \nwill get you through the ground school and the first few lessons with an instructor. \nThis won’t make you a pilot, but 50 hours of flight time should earn you a private \npilot’s license.", - "type": "text" - }, - { - "block_id": "p266-b3", - "global_id": 2889, - "bbox": [ - 72.0, - 183.86, - 434.7, - 211.18 - ], - "text": "The number of hours for mastering basic trading skills is even higher, but much \ncloser to flying than to 10,000 hours.", - "type": "text" - }, - { - "block_id": "p266-b4", - "global_id": 2890, - "bbox": [ - 72.0, - 211.87, - 434.76, - 267.19 - ], - "text": "The intellectual demands of trading aren’t high. After all, we deal with only five \nnumbers—open, high, low, and closing prices, plus volume. The main difficulty \ncomes from our emotions. Trading stirs up powerful feelings, the strongest of which \nare greed and fear.", - "type": "text" - }, - { - "block_id": "p266-b5", - "global_id": 2891, - "bbox": [ - 72.0, - 267.89, - 434.7, - 337.21 - ], - "text": "New traders focus on money, dream about what their profits will buy, and throw \ncaution to the wind. They buy as many shares as they can afford and double up on \nmargin. Filled with joyful anticipation, they write down no trade plans. When a trade \nturns against them, their emotions swing from greed to fear. That’s when they freeze, \nwhile the market grinds down their accounts.", - "type": "text" - }, - { - "block_id": "p266-b6", - "global_id": 2892, - "bbox": [ - 72.0, - 337.91, - 434.71, - 365.22 - ], - "text": "Technically, trading isn’t very hard. Psychologically, it’s the hardest game on \nthe planet.", - "type": "text" - }, - { - "block_id": "p266-b7", - "global_id": 2893, - "bbox": [ - 72.0, - 365.92, - 434.7, - 393.23 - ], - "text": "To reduce the stress of trading, keep in mind several essential points. Your trading \nlife depends on following these rules:", - "type": "text" - }, - { - "block_id": "p266-b8", - "global_id": 2894, - "bbox": [ - 72.03, - 407.83, - 222.98, - 421.14 - ], - "text": "■\n■Trade small sizes while learning.", - "type": "text" - }, - { - "block_id": "p266-b9", - "global_id": 2895, - "bbox": [ - 72.03, - 427.83, - 246.65, - 441.14 - ], - "text": "■\n■Do not count money while in a trade.", - "type": "text" - }, - { - "block_id": "p266-b10", - "global_id": 2896, - "bbox": [ - 72.03, - 447.83, - 307.32, - 461.14 - ], - "text": "■\n■Use risk management rules, primarily the 2% Rule.", - "type": "text" - }, - { - "block_id": "p266-b11", - "global_id": 2897, - "bbox": [ - 72.03, - 467.83, - 426.41, - 481.14 - ], - "text": "■\n■Write down your plans, especially these three numbers: entry, stop, and target.", - "type": "text" - }, - { - "block_id": "p266-b12", - "global_id": 2898, - "bbox": [ - 72.03, - 487.83, - 327.51, - 501.14 - ], - "text": "■\n■Keep a trading diary and review it at least once a month.", - "type": "text" - }, - { - "block_id": "p266-b13", - "global_id": 2899, - "bbox": [ - 72.05, - 515.82, - 434.76, - 571.14 - ], - "text": "Most traders are terribly isolated and never get to see how others practice their \ncraft. This isolation contributes to impulsive trading. A private trader who violates \nevery rule in the book and makes gross errors remains invisible to others. Nobody \nwill warn him to stay out of trouble or praise him for a good trade.", - "type": "text" - }, - { - "block_id": "p266-b14", - "global_id": 2900, - "bbox": [ - 72.05, - 571.84, - 434.82, - 627.16 - ], - "text": "In the old days, our brokers knew what we were doing, but now we place orders \nonline. The only human who may contact you about your trades is the margin clerk \nat a brokerage firm. Getting a call or an e-mail from him is never good news. I hope \nthat you never meet a margin call, sending good money after bad.", - "type": "text" - }, - { - "block_id": "p266-b15", - "global_id": 2901, - "bbox": [ - 72.05, - 627.86, - 434.8, - 669.17 - ], - "text": "To break out of your isolation, to see what good traders are doing, and to be \nrewarded for your performance, I suggest you look into SpikeTrade.com—a website \nI run with my friend Kerry Lovvorn. That’s where traders share ideas and advice,", - "type": "text" - } - ] - }, - { - "page_num": 267, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p267-b0", - "global_id": 2902, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "A JOURNEY WITHOUT AN END: HOW TO CONTINUE LEARNING\t\n251", - "type": "text" - }, - { - "block_id": "p267-b1", - "global_id": 2903, - "bbox": [ - 71.94, - 57.83, - 434.62, - 99.14 - ], - "text": "engage in a friendly competition, and comment on each other’s trades. Time and \nagain we see people come in at a fairly basic level, start submitting picks on a volun-\ntary basis, earn performance bonuses, and rise to become serious traders.", - "type": "text" - }, - { - "block_id": "p267-b2", - "global_id": 2904, - "bbox": [ - 71.94, - 99.84, - 434.63, - 183.17 - ], - "text": "I wish you success. Trading is one of the hardest pursuits on Earth, but it’s an end-\nlessly fascinating adventure that can be very rewarding. I’ve been on this journey for \ndecades, and still look forward to every Monday, when markets reopen. While trading \nhas made me free, I still catch myself making occasional mistakes and have to concen-\ntrate on my discipline. I reserve the right to be smarter tomorrow than I am today. It \nis a great journey, and I look forward to sharing it with you.", - "type": "text" - }, - { - "block_id": "p267-b3", - "global_id": 2905, - "bbox": [ - 333.76, - 184.12, - 431.93, - 210.91 - ], - "text": "Dr. Alexander Elder\nNew York–Vermont, 2014", - "type": "text" - } - ] - }, - { - "page_num": 268, - "width": 504.0, - "height": 720.0, - "blocks": [] - }, - { - "page_num": 269, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p269-b0", - "global_id": 2906, - "bbox": [ - 72.0, - 118.61, - 205.49, - 171.84 - ], - "text": "Sources", - "type": "text" - }, - { - "block_id": "p269-b1", - "global_id": 2907, - "bbox": [ - 72.1, - 673.7, - 432.15, - 687.25 - ], - "text": "253", - "type": "text" - }, - { - "block_id": "p269-b2", - "global_id": 2908, - "bbox": [ - 72.0, - 337.63, - 434.66, - 350.94 - ], - "text": "Angell, George. Winning in the Futures Market (1979) (Chicago: Probus Publishing,", - "type": "text" - }, - { - "block_id": "p269-b3", - "global_id": 2909, - "bbox": [ - 90.0, - 351.63, - 119.24, - 364.94 - ], - "text": "1990).", - "type": "text" - }, - { - "block_id": "p269-b4", - "global_id": 2910, - "bbox": [ - 72.0, - 375.63, - 434.68, - 388.94 - ], - "text": "Appel, Gerald. Day-Trading with Gerald Appel (video) (New York: Financial Trading", - "type": "text" - }, - { - "block_id": "p269-b5", - "global_id": 2911, - "bbox": [ - 90.0, - 389.64, - 186.56, - 402.94 - ], - "text": "Seminars, Inc., 1989).", - "type": "text" - }, - { - "block_id": "p269-b6", - "global_id": 2912, - "bbox": [ - 72.0, - 413.64, - 412.63, - 426.94 - ], - "text": "Ariely, Dan. The Honest Truth about Dishonesty (New York: HarperCollins, 2013).", - "type": "text" - }, - { - "block_id": "p269-b7", - "global_id": 2913, - "bbox": [ - 72.0, - 437.64, - 434.71, - 450.94 - ], - "text": "Belveal, L. Dee. Charting Commodity Market Price Behavior (1969) (Homewood, IL:", - "type": "text" - }, - { - "block_id": "p269-b8", - "global_id": 2914, - "bbox": [ - 90.0, - 451.64, - 198.26, - 464.95 - ], - "text": "Dow Jones Irwin, 1989).", - "type": "text" - }, - { - "block_id": "p269-b9", - "global_id": 2915, - "bbox": [ - 72.0, - 475.64, - 302.32, - 488.95 - ], - "text": "Bruce, Erin. SpikeTrade Reunion presentation, 2011.", - "type": "text" - }, - { - "block_id": "p269-b10", - "global_id": 2916, - "bbox": [ - 72.0, - 499.64, - 283.32, - 512.95 - ], - "text": "Cameron, Peter. Personal communication, 2012.", - "type": "text" - }, - { - "block_id": "p269-b11", - "global_id": 2917, - "bbox": [ - 72.0, - 523.63, - 357.72, - 536.95 - ], - "text": "Davis, L. J. “Buffett Takes Stock,”  The New York Times, April 1, 1990.", - "type": "text" - }, - { - "block_id": "p269-b12", - "global_id": 2918, - "bbox": [ - 72.0, - 547.63, - 432.48, - 560.94 - ], - "text": "Douglas, Mark. The Disciplined Trader (New York: New York Institute of Finance, 1990).", - "type": "text" - }, - { - "block_id": "p269-b13", - "global_id": 2919, - "bbox": [ - 72.0, - 571.63, - 434.64, - 584.94 - ], - "text": "Edwards, Robert D., and John Magee. Technical Analysis of Stock Trends (1948) (New York:", - "type": "text" - }, - { - "block_id": "p269-b14", - "global_id": 2920, - "bbox": [ - 90.0, - 585.63, - 252.23, - 598.94 - ], - "text": "New York Institute of Finance, 1992).", - "type": "text" - }, - { - "block_id": "p269-b15", - "global_id": 2921, - "bbox": [ - 72.0, - 609.63, - 432.52, - 622.94 - ], - "text": "Ehlers, John. MESA and Trading Market Cycles (Hoboken, NJ: John Wiley & Sons, 1992).", - "type": "text" - }, - { - "block_id": "p269-b16", - "global_id": 2922, - "bbox": [ - 72.0, - 633.63, - 432.42, - 646.94 - ], - "text": "Elder, Alexander, Come into My Trading Room (Hoboken, NJ: John Wiley & Sons, 2003).", - "type": "text" - } - ] - }, - { - "page_num": 270, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p270-b0", - "global_id": 2923, - "bbox": [ - 72.0, - 33.66, - 432.01, - 47.21 - ], - "text": "254\t\nSOURCES", - "type": "text" - }, - { - "block_id": "p270-b1", - "global_id": 2924, - "bbox": [ - 72.0, - 57.83, - 432.46, - 71.14 - ], - "text": "———, Directional System (video) (New York: Financial Trading Seminars, Inc., 1988).", - "type": "text" - }, - { - "block_id": "p270-b2", - "global_id": 2925, - "bbox": [ - 72.0, - 81.83, - 355.13, - 95.14 - ], - "text": "———, Entries & Exits (Hoboken, NJ: John Wiley & Sons, 2006).", - "type": "text" - }, - { - "block_id": "p270-b3", - "global_id": 2926, - "bbox": [ - 72.0, - 105.83, - 346.07, - 119.14 - ], - "text": "———, Force Index (video) (New York: Elder.com, Inc., 2010).", - "type": "text" - }, - { - "block_id": "p270-b4", - "global_id": 2927, - "bbox": [ - 72.0, - 129.83, - 434.65, - 143.14 - ], - "text": "———. MACD & MACD-Histogram (video) (New York: Financial Trading Seminars,", - "type": "text" - }, - { - "block_id": "p270-b5", - "global_id": 2928, - "bbox": [ - 90.0, - 143.83, - 141.59, - 157.14 - ], - "text": "Inc., 1988).", - "type": "text" - }, - { - "block_id": "p270-b6", - "global_id": 2929, - "bbox": [ - 72.0, - 167.83, - 407.32, - 181.14 - ], - "text": "———, “Market Gurus,” Futures and Options World, London, September 1990.", - "type": "text" - }, - { - "block_id": "p270-b7", - "global_id": 2930, - "bbox": [ - 72.0, - 191.83, - 434.74, - 205.14 - ], - "text": "——— & Kerry Lovvorn, The New High–New Low Index (Alabama: SpikeTrade,", - "type": "text" - }, - { - "block_id": "p270-b8", - "global_id": 2931, - "bbox": [ - 90.0, - 205.84, - 119.24, - 219.14 - ], - "text": "2012).", - "type": "text" - }, - { - "block_id": "p270-b9", - "global_id": 2932, - "bbox": [ - 72.0, - 229.84, - 434.66, - 243.14 - ], - "text": "———, The New Sell & Sell Short: How to Take Profits, Cut Losses, and Benefit from Price", - "type": "text" - }, - { - "block_id": "p270-b10", - "global_id": 2933, - "bbox": [ - 90.0, - 243.84, - 306.23, - 257.15 - ], - "text": "Declines (Hoboken, NJ: John Wiley & Sons, 2011).", - "type": "text" - }, - { - "block_id": "p270-b11", - "global_id": 2934, - "bbox": [ - 72.0, - 267.84, - 434.75, - 281.15 - ], - "text": "———, Technical Analysis in Just 52 Minutes (video) (New York: Financial Trading", - "type": "text" - }, - { - "block_id": "p270-b12", - "global_id": 2935, - "bbox": [ - 90.0, - 281.84, - 186.56, - 295.15 - ], - "text": "Seminars, Inc., 1992).", - "type": "text" - }, - { - "block_id": "p270-b13", - "global_id": 2936, - "bbox": [ - 72.0, - 305.84, - 375.28, - 319.15 - ], - "text": "———, “Triple Screen Trading System,” Futures Magazine, April 1986.", - "type": "text" - }, - { - "block_id": "p270-b14", - "global_id": 2937, - "bbox": [ - 72.0, - 329.84, - 434.72, - 343.15 - ], - "text": "———, Triple Screen Trading System (video) (New York: Financial Trading Seminars,", - "type": "text" - }, - { - "block_id": "p270-b15", - "global_id": 2938, - "bbox": [ - 90.0, - 343.85, - 141.59, - 357.16 - ], - "text": "Inc., 1989).", - "type": "text" - }, - { - "block_id": "p270-b16", - "global_id": 2939, - "bbox": [ - 72.0, - 367.85, - 403.19, - 381.16 - ], - "text": "———, Two Roads Diverged: Trading Divergences (New York: Elder.com, 2012).", - "type": "text" - }, - { - "block_id": "p270-b17", - "global_id": 2940, - "bbox": [ - 72.0, - 391.85, - 434.66, - 405.16 - ], - "text": "Elliott, Ralph Nelson, Nature’s Law (1946) (Gainesville, GA: New Classics Library,", - "type": "text" - }, - { - "block_id": "p270-b18", - "global_id": 2941, - "bbox": [ - 90.0, - 405.85, - 119.24, - 419.16 - ], - "text": "1980).", - "type": "text" - }, - { - "block_id": "p270-b19", - "global_id": 2942, - "bbox": [ - 72.0, - 429.85, - 385.04, - 443.16 - ], - "text": "Engel, Louis, How to Buy Stocks (1953) (New York: Bantam Books, 1977).", - "type": "text" - }, - { - "block_id": "p270-b20", - "global_id": 2943, - "bbox": [ - 72.0, - 453.85, - 434.76, - 467.16 - ], - "text": "Freud, Sigmund, Group Psychology and the Analysis of the Ego (1921) (London: Hogarth", - "type": "text" - }, - { - "block_id": "p270-b21", - "global_id": 2944, - "bbox": [ - 90.0, - 467.86, - 147.36, - 481.16 - ], - "text": "Press, 1974).", - "type": "text" - }, - { - "block_id": "p270-b22", - "global_id": 2945, - "bbox": [ - 72.0, - 491.86, - 434.71, - 505.16 - ], - "text": "Friedman, Milton, Essays in Positive Economics (Chicago: The University of Chicago", - "type": "text" - }, - { - "block_id": "p270-b23", - "global_id": 2946, - "bbox": [ - 90.0, - 505.86, - 147.36, - 519.17 - ], - "text": "Press, 1953).", - "type": "text" - }, - { - "block_id": "p270-b24", - "global_id": 2947, - "bbox": [ - 72.0, - 529.86, - 432.01, - 543.17 - ], - "text": "Frost, A. J., and R. R. Prechter, Jr., Elliott Wave Principle (Gainesville, GA: New Clas-", - "type": "text" - }, - { - "block_id": "p270-b25", - "global_id": 2948, - "bbox": [ - 90.0, - 543.86, - 172.93, - 557.17 - ], - "text": "sics Library, 1978).", - "type": "text" - }, - { - "block_id": "p270-b26", - "global_id": 2949, - "bbox": [ - 72.0, - 567.86, - 273.32, - 581.17 - ], - "text": "Gajowiy, Nils, Personal communication, 2012.", - "type": "text" - }, - { - "block_id": "p270-b27", - "global_id": 2950, - "bbox": [ - 72.0, - 591.86, - 434.76, - 605.17 - ], - "text": "Gallacher, William, Winner Takes All—A Privateer’s Guide to Commodity Trading (Toronto:", - "type": "text" - }, - { - "block_id": "p270-b28", - "global_id": 2951, - "bbox": [ - 90.11, - 605.87, - 214.08, - 619.18 - ], - "text": "Midway Publications, 1983).", - "type": "text" - }, - { - "block_id": "p270-b29", - "global_id": 2952, - "bbox": [ - 72.11, - 629.87, - 432.53, - 643.18 - ], - "text": "Gann, W. D., How to Make Profits in Commodities (Chicago: W. D. Gann Holdings, 1951).", - "type": "text" - }, - { - "block_id": "p270-b30", - "global_id": 2953, - "bbox": [ - 72.11, - 653.87, - 434.75, - 667.18 - ], - "text": "Gawande, Atul, The Checklist Manifesto: How to Get Things Right (New York: Henry Holt", - "type": "text" - }, - { - "block_id": "p270-b31", - "global_id": 2954, - "bbox": [ - 90.11, - 667.87, - 180.08, - 681.18 - ], - "text": "and Company, 2011)", - "type": "text" - } - ] - }, - { - "page_num": 271, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p271-b0", - "global_id": 2955, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "SOURCES\t\n255", - "type": "text" - }, - { - "block_id": "p271-b1", - "global_id": 2956, - "bbox": [ - 71.94, - 57.83, - 408.07, - 71.14 - ], - "text": "Gleick, James, Chaos: Making a New Science (New York: Viking/Penguin, 1987).", - "type": "text" - }, - { - "block_id": "p271-b2", - "global_id": 2957, - "bbox": [ - 71.94, - 82.58, - 236.64, - 95.89 - ], - "text": "Goepfert, Jason, SentimenTrader.com", - "type": "text" - }, - { - "block_id": "p271-b3", - "global_id": 2958, - "bbox": [ - 71.94, - 107.34, - 434.6, - 120.65 - ], - "text": "Granville, Joseph, New Strategy of Daily Stock Market Timing for Maximum Profit", - "type": "text" - }, - { - "block_id": "p271-b4", - "global_id": 2959, - "bbox": [ - 89.94, - 121.34, - 282.56, - 134.65 - ], - "text": "(Englewood Cliffs, NJ: Prentice Hall, 1976).", - "type": "text" - }, - { - "block_id": "p271-b5", - "global_id": 2960, - "bbox": [ - 71.94, - 146.1, - 434.66, - 159.41 - ], - "text": "Greenson, Ralph R., “On Gambling” (1947), in Explorations in Psychoanalysis (New York:", - "type": "text" - }, - { - "block_id": "p271-b6", - "global_id": 2961, - "bbox": [ - 89.94, - 160.1, - 260.08, - 173.41 - ], - "text": "International Universities Press, 1978).", - "type": "text" - }, - { - "block_id": "p271-b7", - "global_id": 2962, - "bbox": [ - 71.94, - 184.86, - 263.09, - 198.17 - ], - "text": "Grove, Nic, Personal communication, 2004.", - "type": "text" - }, - { - "block_id": "p271-b8", - "global_id": 2963, - "bbox": [ - 71.94, - 209.62, - 270.72, - 222.92 - ], - "text": "Gunter, Jock, Personal communication, 2013.", - "type": "text" - }, - { - "block_id": "p271-b9", - "global_id": 2964, - "bbox": [ - 71.94, - 234.37, - 431.78, - 247.68 - ], - "text": "Havens, Leston, Making Contact (Cambridge, MA: Harvard University Press, 1986).", - "type": "text" - }, - { - "block_id": "p271-b10", - "global_id": 2965, - "bbox": [ - 71.94, - 259.13, - 434.6, - 272.44 - ], - "text": "Hurst, J. M., The Profit Magic of Stock Transaction Timing (Englewood Cliffs, NJ:", - "type": "text" - }, - { - "block_id": "p271-b11", - "global_id": 2966, - "bbox": [ - 89.95, - 273.13, - 182.94, - 286.44 - ], - "text": "Prentice-Hall, 1970).", - "type": "text" - }, - { - "block_id": "p271-b12", - "global_id": 2967, - "bbox": [ - 71.95, - 297.89, - 151.46, - 311.2 - ], - "text": "Investopedia.com.", - "type": "text" - }, - { - "block_id": "p271-b13", - "global_id": 2968, - "bbox": [ - 71.95, - 322.64, - 434.63, - 335.95 - ], - "text": "Kahneman, Daniel, Thinking, Fast and Slow (New York: Farrar, Straus and Giroux,", - "type": "text" - }, - { - "block_id": "p271-b14", - "global_id": 2969, - "bbox": [ - 89.95, - 336.65, - 119.2, - 349.96 - ], - "text": "2011).", - "type": "text" - }, - { - "block_id": "p271-b15", - "global_id": 2970, - "bbox": [ - 71.95, - 361.4, - 434.65, - 374.71 - ], - "text": "Kaufman, Josh, The First 20 Hours: How to Learn Anything ... Fast! (New York:", - "type": "text" - }, - { - "block_id": "p271-b16", - "global_id": 2971, - "bbox": [ - 89.95, - 375.41, - 204.36, - 388.72 - ], - "text": "Portfolio/Penguin, 2013).", - "type": "text" - }, - { - "block_id": "p271-b17", - "global_id": 2972, - "bbox": [ - 71.95, - 400.16, - 431.93, - 413.47 - ], - "text": "Kaufman, Perry, Trading Systems and Methods (Hoboken, NJ: John Wiley & Sons, 2013)", - "type": "text" - }, - { - "block_id": "p271-b18", - "global_id": 2973, - "bbox": [ - 71.95, - 424.92, - 306.24, - 438.23 - ], - "text": "Larsen, Max, SpikeTrade Reunion presentation, 2007.", - "type": "text" - }, - { - "block_id": "p271-b19", - "global_id": 2974, - "bbox": [ - 71.95, - 449.68, - 407.36, - 462.98 - ], - "text": "LeBon, Gustave, The Crowd (1897) (Atlanta, GA: Cherokee Publishing, 1982).", - "type": "text" - }, - { - "block_id": "p271-b20", - "global_id": 2975, - "bbox": [ - 71.95, - 474.43, - 434.66, - 487.74 - ], - "text": "Lefevre, Edwin, Reminiscences of a Stock Operator (1923) (Greenville, SC: Traders", - "type": "text" - }, - { - "block_id": "p271-b21", - "global_id": 2976, - "bbox": [ - 89.95, - 488.44, - 147.31, - 501.74 - ], - "text": "Press, 1985).", - "type": "text" - }, - { - "block_id": "p271-b22", - "global_id": 2977, - "bbox": [ - 71.95, - 513.19, - 434.62, - 526.5 - ], - "text": "Mackay, Charles, Extraordinary Popular Delusions and the Madness of Crowds (1841)", - "type": "text" - }, - { - "block_id": "p271-b23", - "global_id": 2978, - "bbox": [ - 89.95, - 527.2, - 253.13, - 540.5 - ], - "text": "(New York: Crown Publishers, 1980).", - "type": "text" - }, - { - "block_id": "p271-b24", - "global_id": 2979, - "bbox": [ - 71.95, - 551.95, - 434.62, - 565.26 - ], - "text": "McMillan, Lawrence G., Options as a Strategic Investment (Englewood Cliffs, NJ:", - "type": "text" - }, - { - "block_id": "p271-b25", - "global_id": 2980, - "bbox": [ - 90.0, - 565.96, - 181.93, - 579.26 - ], - "text": "Prentice Hall, 2012).", - "type": "text" - }, - { - "block_id": "p271-b26", - "global_id": 2981, - "bbox": [ - 72.0, - 590.71, - 376.57, - 604.06 - ], - "text": "Mellon, Andrew J., Unstuff  Your Life (New York: Avery/Penguin, 2010).", - "type": "text" - }, - { - "block_id": "p271-b27", - "global_id": 2982, - "bbox": [ - 71.98, - 615.5, - 432.0, - 628.81 - ], - "text": "Murphy, John J., Technical Analysis of the Financial Markets (New York: New York Insti-", - "type": "text" - }, - { - "block_id": "p271-b28", - "global_id": 2983, - "bbox": [ - 89.98, - 629.51, - 189.2, - 642.82 - ], - "text": "tute of Finance, 1999).", - "type": "text" - }, - { - "block_id": "p271-b29", - "global_id": 2984, - "bbox": [ - 71.98, - 654.26, - 434.65, - 667.57 - ], - "text": "Neill, Humphrey B., The Art of Contrary Thinking (1954) (Caldwell, ID: Caxton", - "type": "text" - }, - { - "block_id": "p271-b30", - "global_id": 2985, - "bbox": [ - 89.98, - 668.27, - 160.06, - 681.58 - ], - "text": "Printers, 1985).", - "type": "text" - } - ] - }, - { - "page_num": 272, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p272-b0", - "global_id": 2986, - "bbox": [ - 72.0, - 33.66, - 432.01, - 47.21 - ], - "text": "256\t\nSOURCES", - "type": "text" - }, - { - "block_id": "p272-b1", - "global_id": 2987, - "bbox": [ - 72.0, - 57.83, - 434.7, - 71.14 - ], - "text": "Nison, Steve, Japanese Candlestick Charting Techniques (New York: New York Institute", - "type": "text" - }, - { - "block_id": "p272-b2", - "global_id": 2988, - "bbox": [ - 90.0, - 71.83, - 169.15, - 85.14 - ], - "text": "of Finance, 1991).", - "type": "text" - }, - { - "block_id": "p272-b3", - "global_id": 2989, - "bbox": [ - 72.0, - 95.83, - 434.75, - 109.14 - ], - "text": "Notis, Steve, “How to Gain an Edge with a Filtered Approach,” Futures Magazine,", - "type": "text" - }, - { - "block_id": "p272-b4", - "global_id": 2990, - "bbox": [ - 90.0, - 109.84, - 164.94, - 123.14 - ], - "text": "September 1989.", - "type": "text" - }, - { - "block_id": "p272-b5", - "global_id": 2991, - "bbox": [ - 72.0, - 133.84, - 434.7, - 147.14 - ], - "text": "Paulos, John Allen, Innumeracy. Mathematical Illiteracy and Its Consequences (New York,", - "type": "text" - }, - { - "block_id": "p272-b6", - "global_id": 2992, - "bbox": [ - 90.0, - 147.84, - 183.01, - 161.15 - ], - "text": "Vintage Press, 1988).", - "type": "text" - }, - { - "block_id": "p272-b7", - "global_id": 2993, - "bbox": [ - 72.0, - 171.84, - 386.6, - 185.15 - ], - "text": "Plummer, Tony, Forecasting Financial Markets (London: Kogan Page, 1989).", - "type": "text" - }, - { - "block_id": "p272-b8", - "global_id": 2994, - "bbox": [ - 72.0, - 195.84, - 432.52, - 209.15 - ], - "text": "Pring, Martin J., Technical Analysis Explained, 5th ed. (New York: McGraw-Hill, 2013).", - "type": "text" - }, - { - "block_id": "p272-b9", - "global_id": 2995, - "bbox": [ - 72.0, - 219.84, - 323.57, - 233.15 - ], - "text": "Rhea, Robert, The Dow Theory (New York: Barron’s, 1932).", - "type": "text" - }, - { - "block_id": "p272-b10", - "global_id": 2996, - "bbox": [ - 72.0, - 243.84, - 432.46, - 257.15 - ], - "text": "Shapiro, Roy, Why Johnny Can’t Sell Losers: Psychological Roots, unpublished article, 1991.", - "type": "text" - }, - { - "block_id": "p272-b11", - "global_id": 2997, - "bbox": [ - 72.0, - 267.84, - 434.72, - 281.15 - ], - "text": "Steidlmayer, J., Peter, and Kevin Koy, Markets & Market Logic (Chicago: Porcupine", - "type": "text" - }, - { - "block_id": "p272-b12", - "global_id": 2998, - "bbox": [ - 90.0, - 281.84, - 146.94, - 295.15 - ], - "text": "Press, 1986).", - "type": "text" - }, - { - "block_id": "p272-b13", - "global_id": 2999, - "bbox": [ - 72.0, - 305.84, - 314.87, - 319.15 - ], - "text": "Surowiecki, James, The Wisdom of Crowds (Anchor, 2005).", - "type": "text" - }, - { - "block_id": "p272-b14", - "global_id": 3000, - "bbox": [ - 72.0, - 329.84, - 286.62, - 343.15 - ], - "text": "Stoller, Manning, Personal communication, 1988.", - "type": "text" - }, - { - "block_id": "p272-b15", - "global_id": 3001, - "bbox": [ - 72.0, - 353.84, - 434.72, - 367.15 - ], - "text": "Teweles, Richard J., and Frank J. Jones, The Futures Game, 2nd ed. (New York:", - "type": "text" - }, - { - "block_id": "p272-b16", - "global_id": 3002, - "bbox": [ - 90.0, - 367.85, - 183.07, - 381.16 - ], - "text": "McGraw-Hill, 1987).", - "type": "text" - }, - { - "block_id": "p272-b17", - "global_id": 3003, - "bbox": [ - 72.0, - 391.85, - 434.65, - 405.16 - ], - "text": "Twelve Steps and Twelve Traditions (New York: Alcoholics Anonymous World Services,", - "type": "text" - }, - { - "block_id": "p272-b18", - "global_id": 3004, - "bbox": [ - 90.0, - 405.85, - 119.24, - 419.16 - ], - "text": "1952).", - "type": "text" - }, - { - "block_id": "p272-b19", - "global_id": 3005, - "bbox": [ - 72.0, - 429.85, - 432.49, - 443.16 - ], - "text": "Vince, Ralph, Portfolio Management Formulas (Hoboken, NJ: John Wiley & Sons, 1990).", - "type": "text" - }, - { - "block_id": "p272-b20", - "global_id": 3006, - "bbox": [ - 72.0, - 453.85, - 432.02, - 467.16 - ], - "text": "Weissman, Richard L., Mechanical Trading Systems: Pairing Trader Psychology with Techni-", - "type": "text" - }, - { - "block_id": "p272-b21", - "global_id": 3007, - "bbox": [ - 90.0, - 467.86, - 319.03, - 481.16 - ], - "text": "cal Analysis (Hoboken, NJ: John Wiley & Sons, 2004).", - "type": "text" - }, - { - "block_id": "p272-b22", - "global_id": 3008, - "bbox": [ - 72.0, - 491.86, - 142.32, - 505.16 - ], - "text": "Wikipedia.com.", - "type": "text" - }, - { - "block_id": "p272-b23", - "global_id": 3009, - "bbox": [ - 72.0, - 515.86, - 434.66, - 529.16 - ], - "text": "Wilder, J. Welles, Jr., New Concepts in Technical Trading Systems (Greensboro, SC: Trend", - "type": "text" - }, - { - "block_id": "p272-b24", - "global_id": 3010, - "bbox": [ - 90.0, - 529.86, - 164.22, - 543.17 - ], - "text": "Research, 1976).", - "type": "text" - }, - { - "block_id": "p272-b25", - "global_id": 3011, - "bbox": [ - 72.0, - 553.86, - 434.75, - 567.17 - ], - "text": "Williams, Larry, How I Made One Million Dollars (Carmel Valley, CA: Conceptual", - "type": "text" - }, - { - "block_id": "p272-b26", - "global_id": 3012, - "bbox": [ - 90.0, - 567.86, - 180.85, - 581.17 - ], - "text": "Management, 1973).", - "type": "text" - }, - { - "block_id": "p272-b27", - "global_id": 3013, - "bbox": [ - 72.0, - 591.86, - 434.72, - 605.17 - ], - "text": "———, The Secret of Selecting Stocks (Carmel Valley, CA: Conceptual Management,", - "type": "text" - }, - { - "block_id": "p272-b28", - "global_id": 3014, - "bbox": [ - 90.0, - 605.87, - 119.24, - 619.18 - ], - "text": "1972).", - "type": "text" - }, - { - "block_id": "p272-b29", - "global_id": 3015, - "bbox": [ - 72.0, - 629.87, - 282.0, - 643.18 - ], - "text": "Yannidis, Nikos, Personal communication, 2011.", - "type": "text" - } - ] - }, - { - "page_num": 273, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p273-b0", - "global_id": 3016, - "bbox": [ - 71.3, - 324.04, - 95.6, - 364.44 - ], - "text": "N", - "type": "text" - }, - { - "block_id": "p273-b1", - "global_id": 3017, - "bbox": [ - 72.0, - 329.73, - 434.86, - 385.05 - ], - "text": "obody’s born smart. We accomplish what we do we after learning from others \nand being helped by them. Then, if we do a good job, we may be able to build \nupon what we learned, advance a few steps, and share our knowledge with those \nwho may follow us.", - "type": "text" - }, - { - "block_id": "p273-b2", - "global_id": 3018, - "bbox": [ - 72.0, - 385.74, - 434.86, - 427.06 - ], - "text": "This book is dedicated to Lou Taylor, probably the most remarkable person I met \nin my life. He was a brilliant, fearless, and a completely “out of the envelope” man, \nthe amazing story of whose life (he died in 2000) deserves its own book.", - "type": "text" - }, - { - "block_id": "p273-b3", - "global_id": 3019, - "bbox": [ - 72.0, - 427.76, - 434.86, - 511.08 - ], - "text": "The New Trading for a Living reflects how I think, feel, and act in the markets. I am \ntempted to thank by name all those who helped me become who I am today, and per-\nhaps kick at a few who would have loved to see me fail. If I give in to this temptation \nit’ll become an autobiography instead of a brief acknowledgment. So let me mention \nonly those who directly and substantially helped me during the past 18 months while \nI was working on this book.", - "type": "text" - }, - { - "block_id": "p273-b4", - "global_id": 3020, - "bbox": [ - 72.0, - 511.78, - 434.88, - 567.1 - ], - "text": "Kerry Lovvorn began as my student but became a partner and a friend. While my \nbackground is in psychiatry, his is in steel. As he became more attuned to psychologi-\ncal issues, I became more structured and data oriented. It’s a great partnership, and \nrunning SpikeTrade together is today at the center of my intellectual life.", - "type": "text" - }, - { - "block_id": "p273-b5", - "global_id": 3021, - "bbox": [ - 72.0, - 567.8, - 434.88, - 665.13 - ], - "text": "Jeff Parker, an old friend, carefully read and critiqued this book as well as its Study \nGuide—a tough but friendly critic. Chip Anderson of StockCharts.com not only \nhelped me master his software but converted my personal charts into the format \nsuitable for the book. My agent Ted Bonanno took care of business, while Nancy \nDimitry and Gabriella Kadar of D&P Editorial Services did a yeoman’s job of con-\nverting my files into a physical book. It was a pleasure working with John Wiley & \nSons again, and I greatly appreciate what Paul diNovo, their creative director, did for", - "type": "text" - }, - { - "block_id": "p273-b6", - "global_id": 3022, - "bbox": [ - 72.0, - 118.61, - 393.55, - 171.84 - ], - "text": "Acknowledgments", - "type": "text" - }, - { - "block_id": "p273-b7", - "global_id": 3023, - "bbox": [ - 72.1, - 673.7, - 432.15, - 687.25 - ], - "text": "257", - "type": "text" - } - ] - }, - { - "page_num": 274, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p274-b0", - "global_id": 3024, - "bbox": [ - 72.0, - 33.66, - 432.0, - 47.21 - ], - "text": "258\t\nACKNOWLEDGMENTS", - "type": "text" - }, - { - "block_id": "p274-b1", - "global_id": 3025, - "bbox": [ - 72.0, - 57.83, - 434.66, - 85.14 - ], - "text": "the visual style of this book. Carol Keegan Kayne continues to check all my books, \nincluding this one, for clarity and precision.", - "type": "text" - }, - { - "block_id": "p274-b2", - "global_id": 3026, - "bbox": [ - 72.0, - 85.84, - 434.7, - 127.15 - ], - "text": "In conclusion, a big thanks to two groups: SpikeTraders who keep me on my \ntoes with their questions and Traders’ Camps graduates who sharpened my teach-\ning skills.", - "type": "text" - }, - { - "block_id": "p274-b3", - "global_id": 3027, - "bbox": [ - 84.0, - 127.85, - 185.95, - 141.16 - ], - "text": "Thank you and see you!", - "type": "text" - }, - { - "block_id": "p274-b4", - "global_id": 3028, - "bbox": [ - 336.36, - 148.1, - 432.01, - 174.9 - ], - "text": "Dr. Alexander Elder\nNew York–Vermont 2014", - "type": "text" - } - ] - }, - { - "page_num": 275, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p275-b0", - "global_id": 3029, - "bbox": [ - 72.0, - 118.61, - 375.12, - 171.84 - ], - "text": "About the Author", - "type": "text" - }, - { - "block_id": "p275-b1", - "global_id": 3030, - "bbox": [ - 72.1, - 673.7, - 432.15, - 687.25 - ], - "text": "259", - "type": "text" - }, - { - "block_id": "p275-b2", - "global_id": 3031, - "bbox": [ - 71.2, - 331.94, - 92.84, - 372.34 - ], - "text": "A", - "type": "text" - }, - { - "block_id": "p275-b3", - "global_id": 3032, - "bbox": [ - 71.97, - 337.63, - 434.69, - 378.94 - ], - "text": "lexander Elder, MD, is a professional trader and a teacher of traders. He is the \nauthor of several best-sellers, considered modern classics among traders. He \nalso wrote books about Russia and New Zealand.", - "type": "text" - }, - { - "block_id": "p275-b4", - "global_id": 3033, - "bbox": [ - 71.97, - 379.64, - 434.75, - 448.96 - ], - "text": "Dr. Elder was born in Leningrad and grew up in Estonia, where he entered medi-\ncal school at the age of 16. At 23, while working as a ship’s doctor, he jumped a \nSoviet ship in Africa and received political asylum in the United States. He worked as \na psychiatrist in New York City and taught at Columbia University. His experience \nas a psychiatrist provided him with unique insight into the psychology of trading.", - "type": "text" - }, - { - "block_id": "p275-b5", - "global_id": 3034, - "bbox": [ - 71.92, - 449.66, - 434.66, - 518.95 - ], - "text": "Dr. Elder is an active trader, but he continues to teach and is a sought-after speak-\ner at conferences in the United States and abroad. Dr. Elder is the originator of  Trad-\ners’ Camps—week-long classes for traders. He is the founder of SpikeTrade group, \na community of traders whose members share their best stock picks each week in \ncompetition for prizes.", - "type": "text" - }, - { - "block_id": "p275-b6", - "global_id": 3035, - "bbox": [ - 83.92, - 531.64, - 219.28, - 573.02 - ], - "text": "Websites: www.elder.com\n\t\n www.spiketrade.com\nEmail: info@elder.com", - "type": "text" - } - ] - }, - { - "page_num": 276, - "width": 504.0, - "height": 720.0, - "blocks": [] - }, - { - "page_num": 277, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p277-b0", - "global_id": 3036, - "bbox": [ - 229.6, - 143.86, - 274.34, - 157.41 - ], - "text": "I N D E X", - "type": "text" - }, - { - "block_id": "p277-b1", - "global_id": 3037, - "bbox": [ - 72.0, - 262.78, - 159.07, - 293.44 - ], - "text": "A\nAccount equity, 204", - "type": "text" - }, - { - "block_id": "p277-b2", - "global_id": 3038, - "bbox": [ - 72.0, - 294.02, - 228.44, - 349.02 - ], - "text": "reviewing equity curve, 247\n6% Rule for, 208–210\n2% Rule for, 203–207\nAccumulation/Distribution (A/D),", - "type": "text" - }, - { - "block_id": "p277-b3", - "global_id": 3039, - "bbox": [ - 72.0, - 349.61, - 206.35, - 404.6 - ], - "text": "110–112\nand crowd behavior, 110\ntrading rules, 111\nAdvance/Decline (A/D) line,", - "type": "text" - }, - { - "block_id": "p277-b4", - "global_id": 3040, - "bbox": [ - 72.0, - 405.19, - 238.02, - 474.08 - ], - "text": "140–142\nAdvertisers, signals from, 144–145\nAdvisors, 39\nAdvisory opinion, 143–144\nADX (Average Directional Indicator),", - "type": "text" - }, - { - "block_id": "p277-b5", - "global_id": 3041, - "bbox": [ - 72.0, - 474.67, - 223.34, - 501.88 - ], - "text": "91, 92\nAlcoholics Anonymous (AA) 20-21", - "type": "text" - }, - { - "block_id": "p277-b6", - "global_id": 3042, - "bbox": [ - 81.0, - 502.46, - 224.76, - 515.77 - ], - "text": "applied to trading, 20–21, 23–27", - "type": "text" - }, - { - "block_id": "p277-b7", - "global_id": 3043, - "bbox": [ - 81.0, - 516.36, - 227.94, - 641.59 - ], - "text": "first step, 25–26\ngoing into the hole, 24\n“meeting for one,” 26–27\nrock bottom, 24–25\nurge to trade, 23–24\nto control self-destructiveness, 19\ndenial, 21–22\nfirst step, 22\nfor gamblers, 17", - "type": "text" - }, - { - "block_id": "p277-b8", - "global_id": 3044, - "bbox": [ - 258.0, - 263.72, - 428.78, - 277.03 - ], - "text": "Alcoholics Anonymous (AA) principles", - "type": "text" - }, - { - "block_id": "p277-b9", - "global_id": 3045, - "bbox": [ - 258.0, - 277.73, - 373.49, - 375.06 - ], - "text": "(Cont.):\nlessons from, 21–23\nmeetings, 23\none day at a time, 22–23\nrock bottom, 22\nApgar, Virginia, 238–239\nApgar score:", - "type": "text" - }, - { - "block_id": "p277-b10", - "global_id": 3046, - "bbox": [ - 258.0, - 375.76, - 377.17, - 459.08 - ], - "text": "for newborns, 239\nTrade Apgars, 238–243\nAppel, Gerald, 80, 170\nApple Inc., 127\nAriely, Dan, 16\nArt of Contrary Thinking, The", - "type": "text" - }, - { - "block_id": "p277-b11", - "global_id": 3047, - "bbox": [ - 258.0, - 459.78, - 430.28, - 627.13 - ], - "text": "(Humphrey B. Neill), 143\nASIC, 186\nAsk, 8, 32. See also Bid-ask spreads\nATR (Average True Range) stops, 221\nATR (Average True Range), 93–94, 169\nA-trades, 225–230\nAttachment to positions, 199\nAt-the-money options, 179\nAutoenvelope, 168\nAutopilot myth, 12–13\nAvailable risk, 208–210, 221\nAverage Directional Indicator (ADX),", - "type": "text" - }, - { - "block_id": "p277-b12", - "global_id": 3048, - "bbox": [ - 285.0, - 627.83, - 312.71, - 641.14 - ], - "text": "91, 92", - "type": "text" - }, - { - "block_id": "p277-b13", - "global_id": 3049, - "bbox": [ - 72.12, - 672.84, - 432.17, - 686.39 - ], - "text": "261", - "type": "text" - } - ] - }, - { - "page_num": 278, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p278-b0", - "global_id": 3050, - "bbox": [ - 72.0, - 33.66, - 432.01, - 47.21 - ], - "text": "262\t\nINDEX", - "type": "text" - }, - { - "block_id": "p278-b1", - "global_id": 3051, - "bbox": [ - 72.0, - 57.83, - 230.5, - 85.14 - ], - "text": "Average Downside Penetration, 220\nAverage True Range (ATR), 93–94,", - "type": "text" - }, - { - "block_id": "p278-b2", - "global_id": 3052, - "bbox": [ - 72.0, - 85.84, - 235.28, - 113.15 - ], - "text": "169\nAverage True Range (ATR) stops, 221", - "type": "text" - }, - { - "block_id": "p278-b3", - "global_id": 3053, - "bbox": [ - 72.0, - 122.38, - 202.18, - 169.14 - ], - "text": "B\nBacktesting systems, 151–152\nBar charts, 50", - "type": "text" - }, - { - "block_id": "p278-b4", - "global_id": 3054, - "bbox": [ - 81.0, - 169.84, - 239.83, - 197.15 - ], - "text": "closing prices on, 50, 53\ndistance between highs and lows on,", - "type": "text" - }, - { - "block_id": "p278-b5", - "global_id": 3055, - "bbox": [ - 72.0, - 197.84, - 220.34, - 281.17 - ], - "text": "53\nhighs on, 52, 53\nlows on, 53\nmeaning of, 51–53\nopening prices on, 50\nBears (traders), 31–33, 39, 43–45", - "type": "text" - }, - { - "block_id": "p278-b6", - "global_id": 3056, - "bbox": [ - 81.0, - 281.87, - 238.06, - 295.18 - ], - "text": "balance of power between bulls and:", - "type": "text" - }, - { - "block_id": "p278-b7", - "global_id": 3057, - "bbox": [ - 81.0, - 295.87, - 211.79, - 477.23 - ], - "text": "A/D, 110\nclosing prices, 96\ndivergences, 87, 98, 101\nForce Index, 113, 115, 116\nMACD-Histogram, 84\nMACD Line, 81\nmiscellaneous indicators, 74\nand NH-NL zero line, 136\nOn-Balance Volume, 108\nopen interest, 119–120\nvolume, 104\nand channel lines, 169\nconflict between bulls and,", - "type": "text" - }, - { - "block_id": "p278-b8", - "global_id": 3058, - "bbox": [ - 72.0, - 477.92, - 220.5, - 603.26 - ], - "text": "119–120\nemotional commitment of, 58\nand kangaroo tails, 66\nmaximum power of, 53\nand open interest, 118, 119\npain and regret of, 57\ntrend behavior of, 62\nand volume of trading, 105–107\nBearish divergences, 87–89, 98", - "type": "text" - }, - { - "block_id": "p278-b9", - "global_id": 3059, - "bbox": [ - 81.0, - 603.96, - 242.28, - 631.27 - ], - "text": "between A/D and prices, 111\nbetween Force Index and price, 115,", - "type": "text" - }, - { - "block_id": "p278-b10", - "global_id": 3060, - "bbox": [ - 81.0, - 631.97, - 204.11, - 673.28 - ], - "text": "116\nNH-NL indicating, 136–137\nRSI signals of, 100, 101", - "type": "text" - }, - { - "block_id": "p278-b11", - "global_id": 3061, - "bbox": [ - 258.0, - 57.94, - 318.05, - 71.24 - ], - "text": "Bear markets:", - "type": "text" - }, - { - "block_id": "p278-b12", - "global_id": 3062, - "bbox": [ - 258.0, - 71.94, - 382.03, - 211.28 - ], - "text": "of 2007-2009, 86–87\nadvisors in, 143\nprice highs and lows in, 51\n“Beginner’s luck,” 28\nBelveal, L. Dee, 119–120\nBending rules, 19–20\nBetas, 174\nBias, detecting, 47\nBid, 8, 32\nBid-ask spreads, 8", - "type": "text" - }, - { - "block_id": "p278-b13", - "global_id": 3063, - "bbox": [ - 267.0, - 211.98, - 432.46, - 253.3 - ], - "text": "with CFDs, 186\nwith forex trades, 194, 195\n“slicing the bid-ask spread” technique,", - "type": "text" - }, - { - "block_id": "p278-b14", - "global_id": 3064, - "bbox": [ - 258.0, - 253.99, - 420.64, - 281.3 - ], - "text": "183\nBig traders, 192. See also Institutional", - "type": "text" - }, - { - "block_id": "p278-b15", - "global_id": 3065, - "bbox": [ - 258.0, - 282.0, - 400.45, - 365.33 - ], - "text": "traders\nBlack boxes, 38, 71\nBleczinski, Bob, 236\nBlume, Sheila, 17\nBollinger bands, 167, 172\nBottoms. See also specific indicators", - "type": "text" - }, - { - "block_id": "p278-b16", - "global_id": 3066, - "bbox": [ - 258.0, - 366.02, - 398.4, - 505.37 - ], - "text": "“climax,” 107\nand divergences, 87, 89\nsince the 1950s, 51\nin trends, 71\nin triple divergences, 89\nBottom-pickers, 105, 120\nBounces, 226\nBrain myth, 11\nBreakeven, moving stops to, 223\nBreakouts:", - "type": "text" - }, - { - "block_id": "p278-b17", - "global_id": 3067, - "bbox": [ - 267.0, - 506.06, - 431.88, - 519.37 - ], - "text": "amateurs’ vs. pros’ interpretations of,", - "type": "text" - }, - { - "block_id": "p278-b18", - "global_id": 3068, - "bbox": [ - 267.0, - 520.07, - 372.48, - 561.38 - ], - "text": "170\nand buying decisions, 63\nfalse, 56, 59–60, 97", - "type": "text" - }, - { - "block_id": "p278-b19", - "global_id": 3069, - "bbox": [ - 267.0, - 562.08, - 417.0, - 631.4 - ], - "text": "downside, 61, 229\nreinforcing Stochastic signals, 97\nfrom support and resistance, 56\nupside, 61\npain and regret created by,", - "type": "text" - }, - { - "block_id": "p278-b20", - "global_id": 3070, - "bbox": [ - 267.0, - 632.1, - 388.79, - 673.42 - ], - "text": "57\nin Triple Screen system, 159\ntrue, 59–60", - "type": "text" - } - ] - }, - { - "page_num": 279, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p279-b0", - "global_id": 3071, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "INDEX\t\n263", - "type": "text" - }, - { - "block_id": "p279-b1", - "global_id": 3072, - "bbox": [ - 71.94, - 57.83, - 150.25, - 71.14 - ], - "text": "Breakouts (Cont.):", - "type": "text" - }, - { - "block_id": "p279-b2", - "global_id": 3073, - "bbox": [ - 71.94, - 71.83, - 153.12, - 113.15 - ], - "text": "upside, 59\nand volume, 106\nBrokers:", - "type": "text" - }, - { - "block_id": "p279-b3", - "global_id": 3074, - "bbox": [ - 80.94, - 113.84, - 232.84, - 183.17 - ], - "text": "commissions of, 6–8\nin forex trading, 194, 195\nfree analytic software from, 70\nmoney taken by, 35\nof stocks, options, or futures, 194,", - "type": "text" - }, - { - "block_id": "p279-b4", - "global_id": 3075, - "bbox": [ - 71.94, - 183.86, - 220.63, - 281.2 - ], - "text": "195\nsupported by private traders, 36\nBruce, Erin, 236\nBruns, John, 165, 231\n“Bucketing” orders, 194, 195\nBuffett, Warren, 54, 168, 175\nBulls (traders), 31–33, 39, 43–45", - "type": "text" - }, - { - "block_id": "p279-b5", - "global_id": 3076, - "bbox": [ - 80.94, - 281.89, - 240.48, - 295.2 - ], - "text": "balance of power between bears and:", - "type": "text" - }, - { - "block_id": "p279-b6", - "global_id": 3077, - "bbox": [ - 80.94, - 295.9, - 211.73, - 477.25 - ], - "text": "A/D, 110\nclosing prices, 96\ndivergences, 87, 98, 101\nForce Index, 113, 115, 116\nMACD-Histogram, 84\nMACD Lines, 81\nmiscellaneous indicators, 74\nand NH-NL zero line, 136\nOn-Balance Volume, 108\nopen interest, 119–120\nvolume, 104\nand channel lines, 169\nconflict between bears and,", - "type": "text" - }, - { - "block_id": "p279-b7", - "global_id": 3078, - "bbox": [ - 71.94, - 477.95, - 221.54, - 617.29 - ], - "text": "119–120\nemotional commitment of, 58\nand kangaroo tails, 65\nmaximum power of, 52\nand open interest, 118, 119\npain and regret of, 57\ntrend behavior of, 62\nand volume of trading, 105–107\nBullish consensus, 74\nBullish divergences, 86–87, 89, 98", - "type": "text" - }, - { - "block_id": "p279-b8", - "global_id": 3079, - "bbox": [ - 80.94, - 617.99, - 242.22, - 659.3 - ], - "text": "between A/D and prices, 111\nfalse downside breakouts with, 229\nbetween Force Index and price, 115,", - "type": "text" - }, - { - "block_id": "p279-b9", - "global_id": 3080, - "bbox": [ - 98.94, - 660.0, - 115.43, - 673.31 - ], - "text": "116", - "type": "text" - }, - { - "block_id": "p279-b10", - "global_id": 3081, - "bbox": [ - 257.94, - 57.96, - 376.01, - 71.27 - ], - "text": "Bullish divergences (Cont.):", - "type": "text" - }, - { - "block_id": "p279-b11", - "global_id": 3082, - "bbox": [ - 257.94, - 71.96, - 367.56, - 113.28 - ], - "text": "NH-NL indicating, 137\nRSI signals of, 101\nBull markets:", - "type": "text" - }, - { - "block_id": "p279-b12", - "global_id": 3083, - "bbox": [ - 257.94, - 113.98, - 415.86, - 197.3 - ], - "text": "of 2007, 87–88\nin commodities, 192\nprice highs and lows in, 51\nand weekly NH-NL, 137, 138\nBusinessman’s risk, 25–26, 201–202\nBuyers, 32", - "type": "text" - }, - { - "block_id": "p279-b13", - "global_id": 3084, - "bbox": [ - 257.94, - 198.0, - 414.84, - 253.32 - ], - "text": "expectations of, 32\nand open interest, 118–120\nof options, 178\nBuying. See also specific trading vehicles", - "type": "text" - }, - { - "block_id": "p279-b14", - "global_id": 3085, - "bbox": [ - 257.94, - 254.02, - 410.4, - 365.35 - ], - "text": "“at the market,” 7\nemotional commitment in, 105\nindicators for, see specific indicators\nby insiders, 147\nand trading ranges, 63\nduring trends, 63–64\nvalue zone in, 80\nBuy orders:", - "type": "text" - }, - { - "block_id": "p279-b15", - "global_id": 3086, - "bbox": [ - 257.94, - 366.05, - 418.36, - 421.37 - ], - "text": "Force Index indicator for, 114, 115\nand Stochastic signals, 98\nin Triple Screen system, 160–161\nBuy-stops, 161", - "type": "text" - }, - { - "block_id": "p279-b16", - "global_id": 3087, - "bbox": [ - 258.0, - 430.38, - 402.59, - 491.14 - ], - "text": "C\nCall options, 178, 180–183\nCandlestick charting, 52, 53, 112\nCandlestick graphs, 50.", - "type": "text" - }, - { - "block_id": "p279-b17", - "global_id": 3088, - "bbox": [ - 258.0, - 491.84, - 409.01, - 519.15 - ], - "text": "See also Japanese candlesticks\nCash trades, futures compared to,", - "type": "text" - }, - { - "block_id": "p279-b18", - "global_id": 3089, - "bbox": [ - 258.0, - 519.85, - 399.08, - 575.17 - ], - "text": "188–189\nCatastrophic stops, 224–225\nCeilings, for commodities, 191\nCFDs (contracts for difference),", - "type": "text" - }, - { - "block_id": "p279-b19", - "global_id": 3090, - "bbox": [ - 258.0, - 575.86, - 428.42, - 603.18 - ], - "text": "186–187\nCFTC, see Commodity Futures Trading", - "type": "text" - }, - { - "block_id": "p279-b20", - "global_id": 3091, - "bbox": [ - 258.0, - 603.87, - 342.22, - 631.18 - ], - "text": "Commission\nChannels, 166–167", - "type": "text" - }, - { - "block_id": "p279-b21", - "global_id": 3092, - "bbox": [ - 267.0, - 631.88, - 428.71, - 673.2 - ], - "text": "in A-trades, 226\nAverage True Range, 94, 169\ncombining divergences and, 170–171", - "type": "text" - } - ] - }, - { - "page_num": 280, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p280-b0", - "global_id": 3093, - "bbox": [ - 72.0, - 33.66, - 432.01, - 47.21 - ], - "text": "264\t\nINDEX", - "type": "text" - }, - { - "block_id": "p280-b1", - "global_id": 3094, - "bbox": [ - 72.0, - 57.83, - 147.12, - 71.14 - ], - "text": "Channels (Cont.):", - "type": "text" - }, - { - "block_id": "p280-b2", - "global_id": 3095, - "bbox": [ - 72.0, - 71.83, - 223.8, - 169.16 - ], - "text": "constructing, 167\nin day-trading, 131\ndefined, 79\nand moving averages, 79\nin setting profit targets, 217, 218\nsymmetrical, 167–168\nChannel trading systems, 166–172", - "type": "text" - }, - { - "block_id": "p280-b3", - "global_id": 3096, - "bbox": [ - 81.0, - 169.86, - 242.54, - 211.18 - ], - "text": "constructing channels, 167\nand mass psychology, 168–170\nstandard deviation (Bollinger bands),", - "type": "text" - }, - { - "block_id": "p280-b4", - "global_id": 3097, - "bbox": [ - 72.0, - 211.87, - 180.59, - 281.2 - ], - "text": "172\nsymmetrical, 167–168\ntrading rules, 170–171\nChaos theory, 54–55\nChart analysis, 49–67", - "type": "text" - }, - { - "block_id": "p280-b5", - "global_id": 3098, - "bbox": [ - 81.0, - 281.89, - 211.04, - 463.25 - ], - "text": "bar charts, 51–53\nchaos theory, 54–55\ndetecting bias in, 47\ndiagonals in, 50\nEfficient Market theory, 54\nhistory of charting, 50–51\nand insider trading, 36\nJapanese candlesticks, 53\nkangaroo tails, 65–67\n“nature’s law,” 55\nRandom Walk, 54\nsubjectiveness in, 49\nsupport and resistance, 55–60", - "type": "text" - }, - { - "block_id": "p280-b6", - "global_id": 3099, - "bbox": [ - 81.0, - 463.94, - 226.39, - 533.27 - ], - "text": "causes of, 56–57\nstrength of, 58\ntrading rules and, 58–59\ntrue and false breakouts, 59–60\ntrends and trading ranges, 60–65", - "type": "text" - }, - { - "block_id": "p280-b7", - "global_id": 3100, - "bbox": [ - 90.0, - 533.96, - 218.65, - 547.27 - ], - "text": "and conflicting timeframes of", - "type": "text" - }, - { - "block_id": "p280-b8", - "global_id": 3101, - "bbox": [ - 90.0, - 547.97, - 205.22, - 575.28 - ], - "text": "markets, 64–65\ndeciding to trade or wait,", - "type": "text" - }, - { - "block_id": "p280-b9", - "global_id": 3102, - "bbox": [ - 72.0, - 575.98, - 243.49, - 659.3 - ], - "text": "63–64\nhard right edge, 62\nidentifying, 63–64\nand mass psychology, 62\nas window into mass psychology, 43\nCharting Commodity Market Price Behavior", - "type": "text" - }, - { - "block_id": "p280-b10", - "global_id": 3103, - "bbox": [ - 99.0, - 660.0, - 214.15, - 673.31 - ], - "text": "(L. Dee Belveal), 119–120", - "type": "text" - }, - { - "block_id": "p280-b11", - "global_id": 3104, - "bbox": [ - 258.0, - 57.96, - 324.65, - 71.27 - ], - "text": "Chart patterns:", - "type": "text" - }, - { - "block_id": "p280-b12", - "global_id": 3105, - "bbox": [ - 267.0, - 71.96, - 428.03, - 141.29 - ], - "text": "defined, 51\nat right edge of charts, 62\nRSI trendlines, 101\nsubjective interpretation of, 49\nswings of mass psychology shown in,", - "type": "text" - }, - { - "block_id": "p280-b13", - "global_id": 3106, - "bbox": [ - 258.0, - 141.98, - 427.46, - 183.3 - ], - "text": "33\nChecklists, 149\nChecklist Manifesto, The (Atul Gawande),", - "type": "text" - }, - { - "block_id": "p280-b14", - "global_id": 3107, - "bbox": [ - 258.0, - 184.0, - 416.38, - 239.32 - ], - "text": "149\nChildhood, mental baggage from, 18\nChurchill, Winston, 219\nClassical chart analysis, see Chart", - "type": "text" - }, - { - "block_id": "p280-b15", - "global_id": 3108, - "bbox": [ - 258.0, - 240.01, - 374.33, - 295.33 - ], - "text": "analysis\n“Climax bottoms,” 107\nClimax indicator, 108–110\nClosing prices:", - "type": "text" - }, - { - "block_id": "p280-b16", - "global_id": 3109, - "bbox": [ - 267.0, - 296.03, - 433.12, - 365.35 - ], - "text": "Advance/Decline line, 140–142\non candlestick charts, 53\nof daily and weekly bars, 51\nof daily charts, 53\nas most important consensus of value,", - "type": "text" - }, - { - "block_id": "p280-b17", - "global_id": 3110, - "bbox": [ - 267.0, - 366.05, - 418.5, - 393.36 - ], - "text": "100–101\nrelationship of opening prices and,", - "type": "text" - }, - { - "block_id": "p280-b18", - "global_id": 3111, - "bbox": [ - 267.0, - 394.06, - 418.9, - 421.37 - ], - "text": "52, 110\nfor settlement of trading accounts,", - "type": "text" - }, - { - "block_id": "p280-b19", - "global_id": 3112, - "bbox": [ - 258.0, - 422.06, - 372.76, - 463.38 - ], - "text": "96, 110\nCohen, Abraham W., 143\nCome into My Trading Room", - "type": "text" - }, - { - "block_id": "p280-b20", - "global_id": 3113, - "bbox": [ - 258.0, - 464.08, - 429.22, - 519.4 - ], - "text": "(Alexander Elder), 163, 220\nCommercials (hedgers), 146, 147\nCommissions, 5–7, 33–34, 37, 186\nCommitment indicators, see Consensus", - "type": "text" - }, - { - "block_id": "p280-b21", - "global_id": 3114, - "bbox": [ - 258.0, - 520.09, - 404.39, - 547.4 - ], - "text": "and commitment indicators\nCommitments of Traders (COT)", - "type": "text" - }, - { - "block_id": "p280-b22", - "global_id": 3115, - "bbox": [ - 258.0, - 548.1, - 387.66, - 575.41 - ], - "text": "indicator, 74, 192–193\nCommodities. See also Futures", - "type": "text" - }, - { - "block_id": "p280-b23", - "global_id": 3116, - "bbox": [ - 258.0, - 576.11, - 382.84, - 645.43 - ], - "text": "agricultural, 122, 189\nbull markets in, 192\ncost of carry for, 191\nfloors and ceilings for, 191\nCommodity Futures Trading", - "type": "text" - }, - { - "block_id": "p280-b24", - "global_id": 3117, - "bbox": [ - 285.0, - 646.13, - 426.5, - 673.44 - ], - "text": "Commission (CFTC), 145, 146, \n192, 195", - "type": "text" - } - ] - }, - { - "page_num": 281, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p281-b0", - "global_id": 3118, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "INDEX\t\n265", - "type": "text" - }, - { - "block_id": "p281-b1", - "global_id": 3119, - "bbox": [ - 71.94, - 57.83, - 204.26, - 71.14 - ], - "text": "Computers in trading, 69–71", - "type": "text" - }, - { - "block_id": "p281-b2", - "global_id": 3120, - "bbox": [ - 71.94, - 71.83, - 245.26, - 169.16 - ], - "text": "See also Technical analysis \nhardware, 71–72\ntoolboxes, 70–71\nConditional formatting, 165–166\nConflicting timeframes, 64–65\nCongestion zones, 55, 58, 59\nConsensus and commitment indicators,", - "type": "text" - }, - { - "block_id": "p281-b3", - "global_id": 3121, - "bbox": [ - 80.94, - 169.86, - 215.72, - 197.17 - ], - "text": "142–148\nfutures traders’ commitments,", - "type": "text" - }, - { - "block_id": "p281-b4", - "global_id": 3122, - "bbox": [ - 71.94, - 197.87, - 235.34, - 295.2 - ], - "text": "145–147, 192–193\nlegal insider trading, 147\nshort interest, 147–148\nsignals from advertisers, 144–145\nsignals from press, 144\ntracking advisory opinion, 143–144\nConsensus of value:", - "type": "text" - }, - { - "block_id": "p281-b5", - "global_id": 3123, - "bbox": [ - 80.94, - 295.9, - 218.27, - 351.22 - ], - "text": "on MACD-Histogram, 84\nmoving averages as, 75, 81\nprice as, 32–33, 100–101\nand trades above/below EMA,", - "type": "text" - }, - { - "block_id": "p281-b6", - "global_id": 3124, - "bbox": [ - 71.94, - 351.91, - 215.78, - 407.23 - ], - "text": "139\nContango market, 191\nContinuing to learn, 249–251\nContracts for difference (CFDs),", - "type": "text" - }, - { - "block_id": "p281-b7", - "global_id": 3125, - "bbox": [ - 71.94, - 407.93, - 215.45, - 477.25 - ], - "text": "186–187\nContrary opinion indicators, 143\nContrary opinion theory, 143\nCost of carry, 191\nCOT (Commitments of Traders)", - "type": "text" - }, - { - "block_id": "p281-b8", - "global_id": 3126, - "bbox": [ - 71.94, - 477.95, - 207.2, - 533.27 - ], - "text": "indicator, 74, 192–193\nCovered writers (options), 181\nCrash of 1929, 193\nCrossovers:", - "type": "text" - }, - { - "block_id": "p281-b9", - "global_id": 3127, - "bbox": [ - 71.94, - 533.96, - 225.86, - 575.28 - ], - "text": "of MACD and Signal lines, 81–84\nmoving-average, 78\nCrowds:", - "type": "text" - }, - { - "block_id": "p281-b10", - "global_id": 3128, - "bbox": [ - 80.94, - 575.98, - 190.69, - 617.29 - ], - "text": "lack of time sense in, 121\nleaders of, 41\nmarkets as, 33, 39–43", - "type": "text" - }, - { - "block_id": "p281-b11", - "global_id": 3129, - "bbox": [ - 89.94, - 617.99, - 220.02, - 673.31 - ], - "text": "and crowd mentality, 41–42\nexperts on, 40\nindependent thinking vs., 42\nreasons for joining crowds, 40", - "type": "text" - }, - { - "block_id": "p281-b12", - "global_id": 3130, - "bbox": [ - 257.94, - 57.96, - 327.32, - 71.27 - ], - "text": "Crowds (Cont.):", - "type": "text" - }, - { - "block_id": "p281-b13", - "global_id": 3131, - "bbox": [ - 257.94, - 71.96, - 406.88, - 155.29 - ], - "text": "and wisdom of crowds, 42–43\nrelative slowness of, 125\nrespecting strength of, 34\nworldwide, 34\nCrowd, The (Gustave LeBon), 40\nCrowd behavior. 110", - "type": "text" - }, - { - "block_id": "p281-b14", - "global_id": 3132, - "bbox": [ - 266.94, - 155.99, - 423.94, - 169.3 - ], - "text": "See also Accumulation/Distribution;", - "type": "text" - }, - { - "block_id": "p281-b15", - "global_id": 3133, - "bbox": [ - 266.94, - 169.99, - 404.2, - 281.33 - ], - "text": "Mass psychology\ncreating downtrends, 45\ncreating uptrends, 44–45\nand Efficient Market theory, 54\nand opening prices, 110\nreflected in price, 32–33\nreflected in volume, 33\ntracked by Directional system,", - "type": "text" - }, - { - "block_id": "p281-b16", - "global_id": 3134, - "bbox": [ - 257.94, - 282.02, - 371.72, - 351.35 - ], - "text": "91–92\nCrowd mentality, 41–42\n“Cuffing the trade,” 223\nCult of personality, 13–16\nCurrencies:", - "type": "text" - }, - { - "block_id": "p281-b17", - "global_id": 3135, - "bbox": [ - 257.94, - 352.04, - 406.58, - 421.37 - ], - "text": "CFDs on, 186–187\nelectronic currency futures, 196\nforex trading, 194–196\nCurrency market, 194\nCycles, 122", - "type": "text" - }, - { - "block_id": "p281-b18", - "global_id": 3136, - "bbox": [ - 258.0, - 431.38, - 415.44, - 464.14 - ], - "text": "D\nDaily charts, 51–53, 59, 60. See also", - "type": "text" - }, - { - "block_id": "p281-b19", - "global_id": 3137, - "bbox": [ - 258.0, - 464.83, - 389.44, - 562.16 - ], - "text": "Timeframes; individual \nindicators\nDaily Directional Indicator, 91\nDaily homework, 234–236\nDaily volume, 103, 104\nDays to Cover, 147–148\nDay-trading, 126, 131–132", - "type": "text" - }, - { - "block_id": "p281-b20", - "global_id": 3138, - "bbox": [ - 267.0, - 562.86, - 412.72, - 674.2 - ], - "text": "computers for, 71\nto handle overnight gaps, 226\nand learning to trade, 72–73\nmarket data for, 72\nprofit taking in, 217\nprofit targets in, 217, 218\ntimeframes in, 125, 156, 162\nTriple Screen system in, 161–162", - "type": "text" - } - ] - }, - { - "page_num": 282, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p282-b0", - "global_id": 3139, - "bbox": [ - 72.0, - 33.66, - 432.01, - 47.21 - ], - "text": "266\t\nINDEX", - "type": "text" - }, - { - "block_id": "p282-b1", - "global_id": 3140, - "bbox": [ - 72.0, - 57.83, - 227.84, - 85.14 - ], - "text": "Dead gurus, 15\nDeclines. See also individual indicators", - "type": "text" - }, - { - "block_id": "p282-b2", - "global_id": 3141, - "bbox": [ - 72.0, - 85.84, - 227.76, - 225.18 - ], - "text": "contracts for difference on, 186\nin downtrends, 60–61\nopen interest in, 121\npsychology of, 44\nin trading ranges, 61\nin uptrends, 60\nvolume during, 106, 107\nDelta, 183\nDenial (AA principle), 21–22\nDerivatives markets, magic method", - "type": "text" - }, - { - "block_id": "p282-b3", - "global_id": 3142, - "bbox": [ - 72.0, - 225.88, - 223.4, - 267.19 - ], - "text": "gurus in, 14–15\nDiagonal trendlines, 50\nDirectional Indicators (+DI, −DI),", - "type": "text" - }, - { - "block_id": "p282-b4", - "global_id": 3143, - "bbox": [ - 72.0, - 267.89, - 222.59, - 295.2 - ], - "text": "90–91\nDirectional Movement (DM), 89,", - "type": "text" - }, - { - "block_id": "p282-b5", - "global_id": 3144, - "bbox": [ - 72.0, - 295.9, - 186.68, - 323.21 - ], - "text": "90\nDirectional system, 89–94", - "type": "text" - }, - { - "block_id": "p282-b6", - "global_id": 3145, - "bbox": [ - 81.0, - 323.9, - 215.64, - 337.21 - ], - "text": "Average True Range indicator,", - "type": "text" - }, - { - "block_id": "p282-b7", - "global_id": 3146, - "bbox": [ - 72.0, - 337.91, - 237.52, - 449.24 - ], - "text": "93–94\nconstructing, 89–91\ncrowd behavior tracked by, 91–92\nidentifying trends with, 64\ntrading rules, 93\nin Triple Screen trading, 157\nDiscipline, 213, 233–234\nDisciplined Trader, The (Mark Douglas),", - "type": "text" - }, - { - "block_id": "p282-b8", - "global_id": 3147, - "bbox": [ - 72.0, - 449.94, - 208.79, - 491.26 - ], - "text": "29, 30\nDiscretionary traders, 149–151\nDivergences, 86–89", - "type": "text" - }, - { - "block_id": "p282-b9", - "global_id": 3148, - "bbox": [ - 81.0, - 491.95, - 233.48, - 575.28 - ], - "text": "between A/D and prices, 111\nbearish, see Bearish divergences\nbullish, see Bullish divergences\ncombining channels and,170–171\nForce Index indication of, 115, 116\nHound of the Baskervilles signal,", - "type": "text" - }, - { - "block_id": "p282-b10", - "global_id": 3149, - "bbox": [ - 72.0, - 575.98, - 230.88, - 659.3 - ], - "text": "89\nNH-NL, 136–137\nas OBV signal, 108\nas Stochastic signal, 97–98\ntriple bullish or bearish, 89\nDM (Directional Movement), 89, 90", - "type": "text" - }, - { - "block_id": "p282-b11", - "global_id": 3150, - "bbox": [ - 258.0, - 58.0, - 413.62, - 127.32 - ], - "text": "Documentation, see Record-keeping\nDonchian, Richard, 74, 75, 78\nDouglas, Mark, 29, 30\nDow, Charles, 50, 155\nDow Jones Industrial Average, 72", - "type": "text" - }, - { - "block_id": "p282-b12", - "global_id": 3151, - "bbox": [ - 258.0, - 128.02, - 392.83, - 183.34 - ], - "text": "MACD-Histogram of, 86–87\nOBV for stocks in, 108, 109\nDownside penetration, 220\nDowntrends, 61", - "type": "text" - }, - { - "block_id": "p282-b13", - "global_id": 3152, - "bbox": [ - 267.0, - 184.03, - 425.21, - 239.35 - ], - "text": "bullish divergences during, 86–87\nchannel trading during, 170\ncrowd behavior creating, 45\nForce Index indication of, 113, 115,", - "type": "text" - }, - { - "block_id": "p282-b14", - "global_id": 3153, - "bbox": [ - 267.0, - 240.05, - 418.52, - 435.41 - ], - "text": "116\nidentifying, 63\nImpulse system in, 166\nmass psychology of, 62\nNH-NL, 136\nnoise in, 220\nopen interest during, 120, 121\noversold oscillators in, 95\npain and regret in, 57\nperfect, 60–61\nand Stochastic signals, 98, 99\nstocks above MAs in, 139\nat support level, 55\nTriple Screen indicators for selling", - "type": "text" - }, - { - "block_id": "p282-b15", - "global_id": 3154, - "bbox": [ - 258.0, - 436.1, - 402.52, - 533.44 - ], - "text": "short in, 160, 161\nvolume during, 107\nvolume spikes in, 106\nDow Theory, 50, 155\nDow Theory, The (Robert Rhea), 50\nDoyle, Sir Arthur Conan, 89\nDrawdowns:", - "type": "text" - }, - { - "block_id": "p282-b16", - "global_id": 3155, - "bbox": [ - 267.0, - 534.13, - 383.39, - 575.45 - ], - "text": "comebacks from, 210–213\nmaximum allowed for, 213\n6% Rule for, 208–210", - "type": "text" - }, - { - "block_id": "p282-b17", - "global_id": 3156, - "bbox": [ - 258.0, - 585.38, - 294.26, - 618.14 - ], - "text": "E\nEdge(s):", - "type": "text" - }, - { - "block_id": "p282-b18", - "global_id": 3157, - "bbox": [ - 267.0, - 618.83, - 414.92, - 660.15 - ], - "text": "defined, 72\nand follow-up charts, 130\nwith trends and trading ranges, 62", - "type": "text" - } - ] - }, - { - "page_num": 283, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p283-b0", - "global_id": 3158, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "INDEX\t\n267", - "type": "text" - }, - { - "block_id": "p283-b1", - "global_id": 3159, - "bbox": [ - 71.94, - 57.83, - 212.83, - 141.16 - ], - "text": "Efficient Market theory, 54\nEhlers, John, 122\nElder.com, 3, 71\nElectronic currency futures, 196\nElliott, R. N., 15, 51, 55\nEMAs, see Exponential moving", - "type": "text" - }, - { - "block_id": "p283-b2", - "global_id": 3160, - "bbox": [ - 71.94, - 141.85, - 179.09, - 183.17 - ], - "text": "averages\nE-mini futures, 205–206\nEmotions:", - "type": "text" - }, - { - "block_id": "p283-b3", - "global_id": 3161, - "bbox": [ - 80.94, - 183.86, - 210.48, - 225.18 - ], - "text": "of crowds, 40–41\nand irrational thinking, 28, 44\nmanaging, see Individual", - "type": "text" - }, - { - "block_id": "p283-b4", - "global_id": 3162, - "bbox": [ - 71.94, - 225.88, - 228.37, - 295.2 - ], - "text": "psychology\nand profit targets, 216\nin trading, 19, 197–200\nand trends, 43–44\nEmotional trading, 28–29, 197–200", - "type": "text" - }, - { - "block_id": "p283-b5", - "global_id": 3163, - "bbox": [ - 80.94, - 295.9, - 238.45, - 323.21 - ], - "text": "businessman’s risk, 201–202\nand counting money in open trades,", - "type": "text" - }, - { - "block_id": "p283-b6", - "global_id": 3164, - "bbox": [ - 71.94, - 323.9, - 233.22, - 393.23 - ], - "text": "198\nand not being able to sell, 198–200\nEnd-of-day charts, 131\nEngel, Louis, 1, 2\nEntering trades:", - "type": "text" - }, - { - "block_id": "p283-b7", - "global_id": 3165, - "bbox": [ - 71.94, - 393.92, - 245.94, - 631.3 - ], - "text": "and Average True Range, 93\nand bar charts, 53\ncommissions for, 5\nand crowd emotions, 39\nin day-trading, 131\nin Impulse trading system, 164–166\nplanning for, 216\ntrade plan for, 42\nand trends or trading ranges, 63\nin Triple Screen system, 158–160\nusing signal and noise in, 222, 223\nusing technical analysis for, 128\nEquity curve, reviewing, 247\nExchange rates, 194\nExchange-traded funds (ETFs),176–178\nExercise price (options), 179\nExiting trades:", - "type": "text" - }, - { - "block_id": "p283-b8", - "global_id": 3166, - "bbox": [ - 80.94, - 631.99, - 162.89, - 659.3 - ], - "text": "commissions for, 5\nin day-trading, 131", - "type": "text" - }, - { - "block_id": "p283-b9", - "global_id": 3167, - "bbox": [ - 257.94, - 58.0, - 356.99, - 71.3 - ], - "text": "Exiting trades (Cont.):", - "type": "text" - }, - { - "block_id": "p283-b10", - "global_id": 3168, - "bbox": [ - 257.94, - 72.0, - 402.19, - 183.34 - ], - "text": "Force Index indicator for, 115\nin futures and options, 118\nin Impulse trading system, 166\nand open interest, 118\noptions, 184\ntrade plan for, 42\nusing technical analysis for, 128\nExpectations:", - "type": "text" - }, - { - "block_id": "p283-b11", - "global_id": 3169, - "bbox": [ - 257.94, - 184.03, - 371.7, - 239.35 - ], - "text": "of buyers and sellers, 32\nmathematical, 200–201\nfor scanning, 230\nExpenses of trading, 5, 8", - "type": "text" - }, - { - "block_id": "p283-b12", - "global_id": 3170, - "bbox": [ - 257.94, - 240.05, - 425.33, - 281.36 - ], - "text": "commissions, 6–7\nslippage, 7–8\nExponential moving averages (EMAs),", - "type": "text" - }, - { - "block_id": "p283-b13", - "global_id": 3171, - "bbox": [ - 266.94, - 282.06, - 396.11, - 309.37 - ], - "text": "75–80\nand channel trading systems,", - "type": "text" - }, - { - "block_id": "p283-b14", - "global_id": 3172, - "bbox": [ - 257.94, - 310.07, - 416.81, - 505.43 - ], - "text": "168\ndual, 78–79\nwith Force Index, 112–115\nidentifying trends with, 63\nin Impulse system, 165, 166\nlagging, 78\nlength of, 76–77, 80\nof MACD line, 81\nand SafeZone stops, 220\ntrading rules, 77–78\nin Triple Screen system, 159–161\nand value zone, 80\nof volume, 107\nExponential moving average charts,", - "type": "text" - }, - { - "block_id": "p283-b15", - "global_id": 3173, - "bbox": [ - 257.94, - 506.12, - 405.78, - 533.17 - ], - "text": "63, 64\nExtraordinary Popular Delusions and", - "type": "text" - }, - { - "block_id": "p283-b16", - "global_id": 3174, - "bbox": [ - 284.94, - 534.13, - 416.44, - 561.44 - ], - "text": "the Madness of Crowds \n(Charles Mackay), 39–40, 143", - "type": "text" - }, - { - "block_id": "p283-b17", - "global_id": 3175, - "bbox": [ - 258.0, - 570.38, - 403.63, - 631.14 - ], - "text": "F\nFactor of five, 125–126, 155–156\n“Fallen angels” scan, 218–219\nFalse breakouts, 59–60", - "type": "text" - }, - { - "block_id": "p283-b18", - "global_id": 3176, - "bbox": [ - 267.0, - 631.84, - 408.0, - 659.15 - ], - "text": "downside, 61, 229\nreinforcing Stochastic signals, 97", - "type": "text" - } - ] - }, - { - "page_num": 284, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p284-b0", - "global_id": 3177, - "bbox": [ - 72.0, - 33.66, - 432.01, - 47.21 - ], - "text": "268\t\nINDEX", - "type": "text" - }, - { - "block_id": "p284-b1", - "global_id": 3178, - "bbox": [ - 72.0, - 57.83, - 173.35, - 71.14 - ], - "text": "False breakouts (Cont.):", - "type": "text" - }, - { - "block_id": "p284-b2", - "global_id": 3179, - "bbox": [ - 72.0, - 71.83, - 222.59, - 113.15 - ], - "text": "from support and resistance, 56\nupside, 61\n“False breakout with a divergence”", - "type": "text" - }, - { - "block_id": "p284-b3", - "global_id": 3180, - "bbox": [ - 72.0, - 113.84, - 154.04, - 141.16 - ], - "text": "strategy, 239\nFantasies:", - "type": "text" - }, - { - "block_id": "p284-b4", - "global_id": 3181, - "bbox": [ - 72.0, - 141.85, - 232.12, - 239.18 - ], - "text": "autopilot myth, 12–13\nbrain myth, 11\ncult of personality, 13–16\nreality vs., 10–11\nundercapitalization myth, 11–12\nwishful thinking, 16\nFar-out-of-the-money options, 181,", - "type": "text" - }, - { - "block_id": "p284-b5", - "global_id": 3182, - "bbox": [ - 72.0, - 239.88, - 244.28, - 365.22 - ], - "text": "185\nFast Stochastic, 96\nFear, 40, 41, 44, 106, 148, 185\nFilters, 78\nFinancial instrument futures, 187–188\nFinancial journalists, 142–144\nFinancing charges (CFDs), 186\nFingers (kangaroo tails), 65–67\nFirst 20 Hours, The (Josh Kaufman), 249,", - "type": "text" - }, - { - "block_id": "p284-b6", - "global_id": 3183, - "bbox": [ - 72.0, - 365.92, - 228.52, - 449.24 - ], - "text": "250\nFirst step (AA principle), 22, 25–26\nFloors, for commodities, 191\nFloor traders, 34, 35, 46, 192\nFollowers of gurus, 15–16\nFollow-up analysis:", - "type": "text" - }, - { - "block_id": "p284-b7", - "global_id": 3184, - "bbox": [ - 72.0, - 449.94, - 185.54, - 491.26 - ], - "text": "buying a pullback, 246\nshorting a top, 245–247\nForce Index, 112–117", - "type": "text" - }, - { - "block_id": "p284-b8", - "global_id": 3185, - "bbox": [ - 72.0, - 491.95, - 225.0, - 589.28 - ], - "text": "constructing, 112–113\nintermediate-term, 116–117\nshort-term, 113–116\nand trading psychology, 113\ntrading rules, 113–117\nin Triple Screen system, 158, 159\nForecasting:", - "type": "text" - }, - { - "block_id": "p284-b9", - "global_id": 3186, - "bbox": [ - 72.0, - 589.98, - 192.9, - 659.3 - ], - "text": "dramatic, 48\nand Force Index, 115\nmanaging trades vs., 47\nby market cycle gurus, 14\nForecasting Financial Markets", - "type": "text" - }, - { - "block_id": "p284-b10", - "global_id": 3187, - "bbox": [ - 99.0, - 660.0, - 187.51, - 673.31 - ], - "text": "(Tony Plummer), 41", - "type": "text" - }, - { - "block_id": "p284-b11", - "global_id": 3188, - "bbox": [ - 258.0, - 57.96, - 407.69, - 155.29 - ], - "text": "Forex, 104, 194–196\nForward-testing systems, 151, 152\nFractal patterns, 54–55\nFraud, in forex trading, 195\nFreud, Sigmund, 17, 121\nFriedman, Milton, 54\nFundamental analysis, 46", - "type": "text" - }, - { - "block_id": "p284-b12", - "global_id": 3189, - "bbox": [ - 267.0, - 155.99, - 371.11, - 183.3 - ], - "text": "for finding stocks, 128\ntechnical analysis with,", - "type": "text" - }, - { - "block_id": "p284-b13", - "global_id": 3190, - "bbox": [ - 258.0, - 184.0, - 428.74, - 211.31 - ], - "text": "127–128\nFundamental analysts, concept of value", - "type": "text" - }, - { - "block_id": "p284-b14", - "global_id": 3191, - "bbox": [ - 258.0, - 212.0, - 335.33, - 239.32 - ], - "text": "for, 79\nFutures, 187–194", - "type": "text" - }, - { - "block_id": "p284-b15", - "global_id": 3192, - "bbox": [ - 267.0, - 240.01, - 399.65, - 253.32 - ], - "text": "closing prices on daily charts,", - "type": "text" - }, - { - "block_id": "p284-b16", - "global_id": 3193, - "bbox": [ - 267.0, - 254.02, - 421.82, - 281.33 - ], - "text": "53\ncommitments of traders, 145–147,", - "type": "text" - }, - { - "block_id": "p284-b17", - "global_id": 3194, - "bbox": [ - 267.0, - 282.02, - 415.94, - 407.36 - ], - "text": "192–193\ncompared to cash trades, 188–189\ncontango, 191\ncurrency, 196\nfloors and ceilings, 191\nhedging, 189–190\ninsider trading in, 36\ninversions, 191\nmargins and risk control with,", - "type": "text" - }, - { - "block_id": "p284-b18", - "global_id": 3195, - "bbox": [ - 267.0, - 408.06, - 409.85, - 477.38 - ], - "text": "193–194\noptions vs., 187\nseasonality with, 191\nspreads, 192\nsupply and demand factors with,", - "type": "text" - }, - { - "block_id": "p284-b19", - "global_id": 3196, - "bbox": [ - 258.0, - 478.08, - 365.54, - 547.4 - ], - "text": "190–191\ntime period for, 118\n2% Rule for, 205–207\nvolume trends for, 105\nFutures traders:", - "type": "text" - }, - { - "block_id": "p284-b20", - "global_id": 3197, - "bbox": [ - 267.0, - 548.1, - 400.6, - 561.41 - ], - "text": "commitments of, as indicator,", - "type": "text" - }, - { - "block_id": "p284-b21", - "global_id": 3198, - "bbox": [ - 267.0, - 562.1, - 356.74, - 589.42 - ], - "text": "145–147\nsurvival rate for, 188", - "type": "text" - }, - { - "block_id": "p284-b22", - "global_id": 3199, - "bbox": [ - 258.0, - 598.38, - 370.22, - 673.15 - ], - "text": "G\nGallacher, William R., 15\nGalleon fund, 35\nGamblers Anonymous, 17\n“Gambler’s ruin,” 195", - "type": "text" - } - ] - }, - { - "page_num": 285, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p285-b0", - "global_id": 3200, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "INDEX\t\n269", - "type": "text" - }, - { - "block_id": "p285-b1", - "global_id": 3201, - "bbox": [ - 71.94, - 57.83, - 157.72, - 113.15 - ], - "text": "Gambling, 17, 219\nGann, W. D., 15, 51\nGawande, Atul, 149\nGender:", - "type": "text" - }, - { - "block_id": "p285-b2", - "global_id": 3202, - "bbox": [ - 71.94, - 113.84, - 229.62, - 155.16 - ], - "text": "and reasons for gambling, 17\nof traders, 3–4\nGeneral market indicators, 133–148", - "type": "text" - }, - { - "block_id": "p285-b3", - "global_id": 3203, - "bbox": [ - 80.94, - 155.86, - 220.22, - 183.17 - ], - "text": "Advance/Decline line, 140–142\nof consensus and commitment,", - "type": "text" - }, - { - "block_id": "p285-b4", - "global_id": 3204, - "bbox": [ - 89.94, - 183.86, - 224.72, - 211.18 - ], - "text": "142–148\nfutures traders’ commitments,", - "type": "text" - }, - { - "block_id": "p285-b5", - "global_id": 3205, - "bbox": [ - 89.94, - 211.87, - 236.2, - 295.2 - ], - "text": "145–147\nlegal insider trading, 147\nshort interest, 147–148\nsignals from advertisers, 144–145\nsignals from press, 144\ntracking advisory opinion,", - "type": "text" - }, - { - "block_id": "p285-b6", - "global_id": 3206, - "bbox": [ - 80.94, - 295.9, - 245.77, - 337.21 - ], - "text": "143–144\nMost Active Stocks indicator, 142\nNew High–New Low Index, 133–139", - "type": "text" - }, - { - "block_id": "p285-b7", - "global_id": 3207, - "bbox": [ - 89.94, - 337.91, - 232.26, - 379.22 - ], - "text": "constructing, 134\nand crowd psychology, 134–135\nin multiple timeframes and look-", - "type": "text" - }, - { - "block_id": "p285-b8", - "global_id": 3208, - "bbox": [ - 71.94, - 379.92, - 230.48, - 477.25 - ], - "text": "back periods, 137–139\n65-day and 20-day, 138–139\ntrading rules, 135–137\nweekly, 137–138\nstocks above 50-day MA, 139–140\nGoepfert, Jason, 144\nGold:", - "type": "text" - }, - { - "block_id": "p285-b9", - "global_id": 3209, - "bbox": [ - 71.94, - 477.95, - 245.53, - 575.28 - ], - "text": "resistance zone for, 56–57\ntrading in futures vs. cash, 188–189\n“Good ‘til cancelled” (GTC) orders, 225\nGranville, Joseph, 103, 107–109\nGray box software, 38, 71\nGreed, 44, 106, 148, 185\nGreeks (indicators in options analysis),", - "type": "text" - }, - { - "block_id": "p285-b10", - "global_id": 3210, - "bbox": [ - 71.94, - 575.98, - 180.96, - 617.29 - ], - "text": "183\nGreenson, Ralph, 17\nGroup behavior, 45–46.", - "type": "text" - }, - { - "block_id": "p285-b11", - "global_id": 3211, - "bbox": [ - 71.94, - 617.99, - 235.63, - 673.31 - ], - "text": "See also Crowd behavior\nGroup loyalty, 41, 44\nGrove, Nic, 221\nGTC (good ‘til cancelled) orders, 225", - "type": "text" - }, - { - "block_id": "p285-b12", - "global_id": 3212, - "bbox": [ - 257.94, - 57.96, - 318.7, - 71.27 - ], - "text": "Gurus, 13–16", - "type": "text" - }, - { - "block_id": "p285-b13", - "global_id": 3213, - "bbox": [ - 266.94, - 71.96, - 362.22, - 127.28 - ], - "text": "dead, 15\nfollowers of, 15–16\nmagic method, 14–15\nmarket cycle, 13–14", - "type": "text" - }, - { - "block_id": "p285-b14", - "global_id": 3214, - "bbox": [ - 258.0, - 136.38, - 355.16, - 211.15 - ], - "text": "H\nHamilton, William, 50\nHard stops, 225\nHavens, Leston, 29\nHedgers, 146", - "type": "text" - }, - { - "block_id": "p285-b15", - "global_id": 3215, - "bbox": [ - 258.0, - 211.84, - 409.58, - 253.16 - ], - "text": "COT reports, 192–193\nreports on positions of, 145–146\nHedging:", - "type": "text" - }, - { - "block_id": "p285-b16", - "global_id": 3216, - "bbox": [ - 258.0, - 253.86, - 418.69, - 337.18 - ], - "text": "futures, 189–190\nline between speculating and, 37\n“High” volume, 106–107\nHistory of charting, 50–51\nHomework, daily, 234–236\nHound of the Baskervilles signal, 89,", - "type": "text" - }, - { - "block_id": "p285-b17", - "global_id": 3217, - "bbox": [ - 258.0, - 337.88, - 391.73, - 393.2 - ], - "text": "112\nHourly charts, 156\nHouse advantage, 200, 201\nHow I Made One Million Dollars", - "type": "text" - }, - { - "block_id": "p285-b18", - "global_id": 3218, - "bbox": [ - 258.0, - 393.9, - 412.6, - 435.21 - ], - "text": "(Larry Williams), 110\nHow to Buy Stocks (Louis Engel), 1, 2\nHurst, J. M., 74, 75, 166", - "type": "text" - }, - { - "block_id": "p285-b19", - "global_id": 3219, - "bbox": [ - 258.0, - 444.38, - 408.07, - 477.14 - ], - "text": "I\nImpulse trading system, 156, 157,", - "type": "text" - }, - { - "block_id": "p285-b20", - "global_id": 3220, - "bbox": [ - 258.0, - 477.83, - 429.65, - 533.15 - ], - "text": "162–166\nentries in, 164–166\nexits in, 166\nIndependent thinking, crowd mentality", - "type": "text" - }, - { - "block_id": "p285-b21", - "global_id": 3221, - "bbox": [ - 258.0, - 533.85, - 422.16, - 575.16 - ], - "text": "vs., 41, 42\nIndex CFDs, 186–187\nIndicators. See also individual indicators", - "type": "text" - }, - { - "block_id": "p285-b22", - "global_id": 3222, - "bbox": [ - 267.0, - 576.11, - 404.65, - 673.19 - ], - "text": "and types of indicators\napplying moving averages to, 78\nbasic data used for, 73\nchanging parameters of, 77\nclarity of signals from, 74\ncontradictory, 73\nidentifying trends with, 63", - "type": "text" - } - ] - }, - { - "page_num": 286, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p286-b0", - "global_id": 3223, - "bbox": [ - 72.0, - 33.66, - 432.01, - 47.21 - ], - "text": "270\t\nINDEX", - "type": "text" - }, - { - "block_id": "p286-b1", - "global_id": 3224, - "bbox": [ - 72.0, - 57.83, - 150.47, - 71.14 - ], - "text": "Indicators (Cont.):", - "type": "text" - }, - { - "block_id": "p286-b2", - "global_id": 3225, - "bbox": [ - 81.0, - 71.83, - 222.46, - 127.15 - ], - "text": "at right edge of charts, 62\nseasons of, 122–124\n“shopping for,” 102\nin Triple Screen trading system,", - "type": "text" - }, - { - "block_id": "p286-b3", - "global_id": 3226, - "bbox": [ - 72.0, - 127.85, - 210.86, - 183.17 - ], - "text": "155\nat true and false breakouts, 60\nIndicator seasons, 122–124\nIndividual psychology, 9–30", - "type": "text" - }, - { - "block_id": "p286-b4", - "global_id": 3227, - "bbox": [ - 81.0, - 183.86, - 247.51, - 197.17 - ], - "text": "and Alcoholics Anonymous principles,", - "type": "text" - }, - { - "block_id": "p286-b5", - "global_id": 3228, - "bbox": [ - 90.0, - 197.87, - 208.48, - 225.18 - ], - "text": "20–27\napplied to trading, 20–21,", - "type": "text" - }, - { - "block_id": "p286-b6", - "global_id": 3229, - "bbox": [ - 81.0, - 225.88, - 196.49, - 407.23 - ], - "text": "23–27\ndenial, 21–22\nfirst step, 22, 25–26\nlessons from, 21–23\nmeetings, 23\none day at a time, 22–23\nrock bottom, 22, 24–25\nautopilot myth, 12–13\nand bending rules, 19–20\nbrain myth, 11\nemotions in trading, 19\nfollowing gurus, 13–16\nreality vs. fantasy, 10–11", - "type": "text" - }, - { - "block_id": "p286-b7", - "global_id": 3230, - "bbox": [ - 90.0, - 407.93, - 205.16, - 463.25 - ], - "text": "autopilot myth, 12–13\nbrain myth, 11\ncult of personality, 13–16\nundercapitalization myth,", - "type": "text" - }, - { - "block_id": "p286-b8", - "global_id": 3231, - "bbox": [ - 81.0, - 463.94, - 189.7, - 505.26 - ], - "text": "11–12\nwishful thinking, 16\nreasons for trading, 9–10", - "type": "text" - }, - { - "block_id": "p286-b9", - "global_id": 3232, - "bbox": [ - 81.0, - 505.96, - 199.03, - 561.28 - ], - "text": "rational and irrational, 9\nself-fulfillment, 9–10\nrule-bending, 19–20\nself-destructiveness, 16–19", - "type": "text" - }, - { - "block_id": "p286-b10", - "global_id": 3233, - "bbox": [ - 90.0, - 561.97, - 205.49, - 603.29 - ], - "text": "controlling, 19\ngambling, 17\nand lack of normal human", - "type": "text" - }, - { - "block_id": "p286-b11", - "global_id": 3234, - "bbox": [ - 81.0, - 603.98, - 228.58, - 659.3 - ], - "text": "helpfulness in markets, 18–19\nself-sabotage, 17–18\nundercapitalization myth, 11–12\nwinners and losers, 27–30", - "type": "text" - }, - { - "block_id": "p286-b12", - "global_id": 3235, - "bbox": [ - 90.0, - 660.0, - 200.48, - 673.31 - ], - "text": "emotional trading, 28–29", - "type": "text" - }, - { - "block_id": "p286-b13", - "global_id": 3236, - "bbox": [ - 258.0, - 57.96, - 387.42, - 71.27 - ], - "text": "Individual psychology (Cont.):", - "type": "text" - }, - { - "block_id": "p286-b14", - "global_id": 3237, - "bbox": [ - 276.0, - 71.96, - 411.23, - 85.27 - ], - "text": "and self-control vs. controlling", - "type": "text" - }, - { - "block_id": "p286-b15", - "global_id": 3238, - "bbox": [ - 258.0, - 85.97, - 417.34, - 141.29 - ], - "text": "markets, 27–28\ntaking charge of your life, 29–30\nwishful thinking, 16\nIndividual traders, 36–37", - "type": "text" - }, - { - "block_id": "p286-b16", - "global_id": 3239, - "bbox": [ - 267.0, - 141.98, - 401.99, - 155.29 - ], - "text": "competing against institutional", - "type": "text" - }, - { - "block_id": "p286-b17", - "global_id": 3240, - "bbox": [ - 267.0, - 155.99, - 418.44, - 211.31 - ], - "text": "traders, 37–38\nformer institutional traders as, 212\nisolation of, 250\none advantage over institutional", - "type": "text" - }, - { - "block_id": "p286-b18", - "global_id": 3241, - "bbox": [ - 258.0, - 212.0, - 415.36, - 295.33 - ], - "text": "traders, 228\nInertia, of trading vehicles, 162, 163\nInnumeracy, 200–201\nInnumeracy (John Allen Paulos), 200\nInside information, 35–36\nInsider trading:", - "type": "text" - }, - { - "block_id": "p286-b19", - "global_id": 3242, - "bbox": [ - 258.0, - 296.03, - 384.67, - 365.35 - ], - "text": "in futures markets, 36\nillegitimate, 35–36\nlegal, as indicator, 147\nInstitutional commissions, 37\nInstitutional traders, 37–38", - "type": "text" - }, - { - "block_id": "p286-b20", - "global_id": 3243, - "bbox": [ - 258.0, - 366.05, - 428.95, - 421.37 - ], - "text": "advantages for, 37\nCFDs used by, 186\ntrade managers of, 212–213\nInsurance account, for options writing,", - "type": "text" - }, - { - "block_id": "p286-b21", - "global_id": 3244, - "bbox": [ - 258.0, - 422.06, - 422.65, - 449.38 - ], - "text": "184–185\nIntelligence networks, of institutional", - "type": "text" - }, - { - "block_id": "p286-b22", - "global_id": 3245, - "bbox": [ - 258.0, - 450.07, - 398.96, - 505.39 - ], - "text": "traders, 37\nInterbank market, 194\nInterest rate futures, 192\nIntermediate-term Force Index,", - "type": "text" - }, - { - "block_id": "p286-b23", - "global_id": 3246, - "bbox": [ - 258.0, - 506.09, - 405.9, - 547.4 - ], - "text": "116–117\nIntermediate timeframe, 155–156\nInternational exchanges, volume", - "type": "text" - }, - { - "block_id": "p286-b24", - "global_id": 3247, - "bbox": [ - 258.0, - 548.1, - 433.5, - 589.42 - ], - "text": "reported by, 104\nIn-the-money options, 179\nIntraday charts, 51. See also Timeframes;", - "type": "text" - }, - { - "block_id": "p286-b25", - "global_id": 3248, - "bbox": [ - 258.0, - 590.36, - 429.01, - 673.44 - ], - "text": "individual indicators\nIntrinsic value (options), 179\nInverse ETFs, 176\nInversions (futures), 191\nInvesting (long-term trading), 126–128\nInvestors Intelligence, 143", - "type": "text" - } - ] - }, - { - "page_num": 287, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p287-b0", - "global_id": 3249, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "INDEX\t\n271", - "type": "text" - }, - { - "block_id": "p287-b1", - "global_id": 3250, - "bbox": [ - 71.94, - 57.83, - 216.17, - 71.14 - ], - "text": "Iron Triangle of risk control, the,", - "type": "text" - }, - { - "block_id": "p287-b2", - "global_id": 3251, - "bbox": [ - 71.94, - 71.83, - 175.13, - 99.14 - ], - "text": "204–205, 221\nIsolation in trading, 250", - "type": "text" - }, - { - "block_id": "p287-b3", - "global_id": 3252, - "bbox": [ - 72.0, - 112.88, - 234.02, - 159.64 - ], - "text": "J\nJapanese candlesticks, 53, 112\nJapanese Candlestick Charting Techniques", - "type": "text" - }, - { - "block_id": "p287-b4", - "global_id": 3253, - "bbox": [ - 99.0, - 160.34, - 174.26, - 173.64 - ], - "text": "(Steve Nison), 53", - "type": "text" - }, - { - "block_id": "p287-b5", - "global_id": 3254, - "bbox": [ - 72.0, - 187.38, - 218.58, - 290.16 - ], - "text": "K\nKahneman, Daniel, 200, 238\nKangaroo tails (fingers), 65–67\nKaufman, Josh, 249, 250\nKeelan, Brian, 186\nKey demands for trades, 153–154\nKeynes, John Maynard, 175", - "type": "text" - }, - { - "block_id": "p287-b6", - "global_id": 3255, - "bbox": [ - 72.0, - 303.88, - 191.47, - 392.65 - ], - "text": "L\nLag, of moving averages, 78\nLane, George, 95\nLarge speculators, 146\nLarsen, Max, 234\nLeaders:", - "type": "text" - }, - { - "block_id": "p287-b7", - "global_id": 3256, - "bbox": [ - 81.0, - 393.35, - 194.77, - 434.66 - ], - "text": "of crowds, 41\nand fear of uncertainty, 40\ngurus, 13–16", - "type": "text" - }, - { - "block_id": "p287-b8", - "global_id": 3257, - "bbox": [ - 72.0, - 435.36, - 223.61, - 672.73 - ], - "text": "dead, 15\nfollowers of, 15–16\nmagic method, 14–15\nmarket cycle, 13–14\nloyalty to, 44\nLearning trading skills, 249–251\nLeBon, Gustave, 40\nLetter writers (financial), 142–143\nLeverage, in forex, 195\nLeveraged ETFs, 177, 178\nLeveraged inverse ETFs, 176\nLife, taking charge of, 29–30\nLimits, on futures, 187–188\nLimit orders, 7–8\nLiquidity, 122, 173–174\nLong-term price cycles, 122\nLong-term timeframe, 155, 156", - "type": "text" - }, - { - "block_id": "p287-b9", - "global_id": 3258, - "bbox": [ - 258.0, - 57.98, - 415.0, - 71.29 - ], - "text": "Long-term trading (investing), 118,", - "type": "text" - }, - { - "block_id": "p287-b10", - "global_id": 3259, - "bbox": [ - 258.0, - 71.99, - 425.48, - 99.3 - ], - "text": "126–128\nLook-back windows (New High–New", - "type": "text" - }, - { - "block_id": "p287-b11", - "global_id": 3260, - "bbox": [ - 258.0, - 100.0, - 379.78, - 127.31 - ], - "text": "Low Index), 138–139\nLosers:", - "type": "text" - }, - { - "block_id": "p287-b12", - "global_id": 3261, - "bbox": [ - 267.0, - 128.0, - 395.56, - 197.33 - ], - "text": "AA principles for, 23–27\ndenial by, 21–22\nemotional responses of, 199\nand emotional trading, 28–29\nfantasies of, 10–16", - "type": "text" - }, - { - "block_id": "p287-b13", - "global_id": 3262, - "bbox": [ - 267.0, - 198.02, - 416.45, - 281.35 - ], - "text": "autopilot myth, 12–13\nbrain myth, 11\ncult of personality, 13–16\nundercapitalization myth, 11–12\npain and regret felt by, 57\nand self-control vs. controlling", - "type": "text" - }, - { - "block_id": "p287-b14", - "global_id": 3263, - "bbox": [ - 258.0, - 282.05, - 406.22, - 365.38 - ], - "text": "markets, 27–28\nself-destructive, 16–19\nand volume of trading, 105, 106\nwishful thinking by, 16\nLosers Anonymous, 26–27\nLosses:", - "type": "text" - }, - { - "block_id": "p287-b15", - "global_id": 3264, - "bbox": [ - 258.0, - 366.07, - 418.92, - 547.43 - ], - "text": "in account as a whole, 204\nbusinessman’s risks vs., 25\non CFDs, 186\ncutting, 198–200\nof former institutional traders, 212\ninability to manage, 197\non options, 180, 182\nper share, limiting, 204\npsychological effect of, 211–212\n6% Rule to limit, 208–210\n2% Rule to limit, 203–207\nLoss aversion, 200\nLovvorn, Kerry, 19, 42, 88–89, 93,", - "type": "text" - }, - { - "block_id": "p287-b16", - "global_id": 3265, - "bbox": [ - 258.0, - 548.12, - 424.75, - 575.44 - ], - "text": "169, 221, 227, 243, 250\nLow-priced stocks, indictors based on", - "type": "text" - }, - { - "block_id": "p287-b17", - "global_id": 3266, - "bbox": [ - 258.0, - 576.13, - 363.47, - 603.44 - ], - "text": "volume of, 142\n“Low” volume, 106–107", - "type": "text" - }, - { - "block_id": "p287-b18", - "global_id": 3267, - "bbox": [ - 258.0, - 612.38, - 378.71, - 659.14 - ], - "text": "M\nMAs, see Moving averages\nMACD, see Moving Average", - "type": "text" - }, - { - "block_id": "p287-b19", - "global_id": 3268, - "bbox": [ - 285.0, - 659.84, - 394.9, - 673.14 - ], - "text": "Convergence-Divergence", - "type": "text" - } - ] - }, - { - "page_num": 288, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p288-b0", - "global_id": 3269, - "bbox": [ - 72.0, - 33.66, - 432.01, - 47.21 - ], - "text": "272\t\nINDEX", - "type": "text" - }, - { - "block_id": "p288-b1", - "global_id": 3270, - "bbox": [ - 72.0, - 57.83, - 186.52, - 71.14 - ], - "text": "MACD-Histogram, 83–89", - "type": "text" - }, - { - "block_id": "p288-b2", - "global_id": 3271, - "bbox": [ - 81.0, - 71.83, - 216.28, - 85.14 - ], - "text": "combined with channels, 170,", - "type": "text" - }, - { - "block_id": "p288-b3", - "global_id": 3272, - "bbox": [ - 81.0, - 85.84, - 233.3, - 183.17 - ], - "text": "171\ndivergences, 86–89\nin Impulse system, 165, 166\nand market psychology, 84\npeaks and valleys, 85\nseasons of, 123\nsemiautomatic divergence scanner,", - "type": "text" - }, - { - "block_id": "p288-b4", - "global_id": 3273, - "bbox": [ - 72.0, - 183.86, - 225.28, - 267.19 - ], - "text": "231\nslope of, 84, 85\ntime windows of, 85\ntrading rules, 84–85\nin Triple Screen system, 156–158\nMACD Lines, 81–83", - "type": "text" - }, - { - "block_id": "p288-b5", - "global_id": 3274, - "bbox": [ - 81.0, - 267.89, - 238.15, - 281.2 - ], - "text": "crossover of Signal lines and MACD", - "type": "text" - }, - { - "block_id": "p288-b6", - "global_id": 3275, - "bbox": [ - 72.0, - 281.89, - 197.81, - 393.23 - ], - "text": "line, 81–84\nin divergences, 87–88\nand market psychology, 81\ntrading rules, 81–82\nMackay, Charles, 39–40, 143\nMacMillan, Lawrence, 185\nMagic method gurus, 14–15\nManaging trades, 46–48", - "type": "text" - }, - { - "block_id": "p288-b7", - "global_id": 3276, - "bbox": [ - 81.0, - 393.92, - 227.74, - 435.24 - ], - "text": "forecasting vs., 47\nand poll-taking, 47\nby reading markets and managing", - "type": "text" - }, - { - "block_id": "p288-b8", - "global_id": 3277, - "bbox": [ - 72.0, - 435.94, - 178.93, - 505.26 - ], - "text": "yourself, 47–48\nMandelbrot, Benoit, 167\nMargins, 193–194\nMargin calls, 193, 250\nMarket(s):", - "type": "text" - }, - { - "block_id": "p288-b9", - "global_id": 3278, - "bbox": [ - 81.0, - 505.96, - 219.56, - 533.27 - ], - "text": "attempts to manipulate, 29\nand automatic trading systems,", - "type": "text" - }, - { - "block_id": "p288-b10", - "global_id": 3279, - "bbox": [ - 81.0, - 533.96, - 199.36, - 589.28 - ], - "text": "13\ncomparing volumes of, 104\ncontango, 191\nas crowds, 39–43. See also", - "type": "text" - }, - { - "block_id": "p288-b11", - "global_id": 3280, - "bbox": [ - 90.0, - 589.98, - 213.49, - 673.31 - ], - "text": "Mass psychology\ncrowd mentality, 41–42\nexperts on, 40\nindependent thinking vs., 42\nof individuals, 33, 34\nleaders of crowds, 41", - "type": "text" - }, - { - "block_id": "p288-b12", - "global_id": 3281, - "bbox": [ - 258.0, - 57.96, - 336.08, - 71.27 - ], - "text": "Market(s) (Cont.):", - "type": "text" - }, - { - "block_id": "p288-b13", - "global_id": 3282, - "bbox": [ - 267.0, - 71.96, - 415.43, - 183.3 - ], - "text": "reasons for joining crowds, 40\nwisdom of crowds, 42–43\nETFs, 176\ngroups vs. individuals in, 34\nharshness of, 33–34\ninability to control, 27–28\ninside information in, 35–36\noverbought and oversold, 95, 98,", - "type": "text" - }, - { - "block_id": "p288-b14", - "global_id": 3283, - "bbox": [ - 267.0, - 184.0, - 383.35, - 323.34 - ], - "text": "115\nrandomness in, 198, 203\nreading, 47–48\nseasons of, 122–124\nsize of, 34\nsource of money in, 34–35\nspikes in, 115–116\nas sport, 28\ntheories of, 54–55\ntimeframes of, 125", - "type": "text" - }, - { - "block_id": "p288-b15", - "global_id": 3284, - "bbox": [ - 276.0, - 324.04, - 429.5, - 337.34 - ], - "text": "analysis using multiple timeframes,", - "type": "text" - }, - { - "block_id": "p288-b16", - "global_id": 3285, - "bbox": [ - 258.0, - 338.04, - 399.83, - 421.37 - ], - "text": "55\nconflicting, 64–65\ntrading ranges vs. trends in, 59\nworldwide crowds, 34\nMarket cycle gurus, 13–14\nMarket data:", - "type": "text" - }, - { - "block_id": "p288-b17", - "global_id": 3286, - "bbox": [ - 267.0, - 422.06, - 419.82, - 435.37 - ], - "text": "in computerized technical analysis,", - "type": "text" - }, - { - "block_id": "p288-b18", - "global_id": 3287, - "bbox": [ - 258.0, - 436.07, - 429.11, - 505.39 - ], - "text": "72–73\nin moving averages, 75\nMarket indexes, in technical analysis,72\nMarket makers, 34\nMarket noise:", - "type": "text" - }, - { - "block_id": "p288-b19", - "global_id": 3288, - "bbox": [ - 258.0, - 506.09, - 411.13, - 561.41 - ], - "text": "perceived cycles as, 122\nand placement of stops, 222, 223\nsetting stops outside zone of, 220\nMarket orders, 7", - "type": "text" - }, - { - "block_id": "p288-b20", - "global_id": 3289, - "bbox": [ - 258.0, - 562.1, - 411.34, - 631.43 - ], - "text": "bid-ask spreads for, 8\nslippage on, 7\nMarket panics, 137\nMarket participants, groups of, 146\nMarket tide screen (Triple Screen", - "type": "text" - }, - { - "block_id": "p288-b21", - "global_id": 3290, - "bbox": [ - 258.0, - 632.12, - 362.98, - 673.44 - ], - "text": "system), 156–158\nMarket time, 124–125\nMarket Vane, 143", - "type": "text" - } - ] - }, - { - "page_num": 289, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p289-b0", - "global_id": 3291, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "INDEX\t\n273", - "type": "text" - }, - { - "block_id": "p289-b1", - "global_id": 3292, - "bbox": [ - 71.94, - 57.83, - 224.72, - 71.14 - ], - "text": "Market wave screen (Triple Screen", - "type": "text" - }, - { - "block_id": "p289-b2", - "global_id": 3293, - "bbox": [ - 71.94, - 71.83, - 231.4, - 99.14 - ], - "text": "trading system), 158, 159\nMAS (Most Active Stocks) indicator,", - "type": "text" - }, - { - "block_id": "p289-b3", - "global_id": 3294, - "bbox": [ - 71.94, - 99.84, - 176.54, - 141.16 - ], - "text": "142\nMass manias, 39–40\nMass psychology, 31–48", - "type": "text" - }, - { - "block_id": "p289-b4", - "global_id": 3295, - "bbox": [ - 80.94, - 141.85, - 201.29, - 169.16 - ], - "text": "and emergence of gurus, 14\nmanaging trades, 46–48", - "type": "text" - }, - { - "block_id": "p289-b5", - "global_id": 3296, - "bbox": [ - 89.94, - 169.86, - 236.68, - 211.18 - ], - "text": "forecasting vs., 47\nand poll-taking, 47\nby reading markets and managing", - "type": "text" - }, - { - "block_id": "p289-b6", - "global_id": 3297, - "bbox": [ - 80.94, - 211.87, - 167.46, - 239.18 - ], - "text": "yourself, 47–48\nthe market, 33–36", - "type": "text" - }, - { - "block_id": "p289-b7", - "global_id": 3298, - "bbox": [ - 80.94, - 239.88, - 213.89, - 309.2 - ], - "text": "groups vs. individuals in, 34\ninside information in, 35–36\nsource of money in, 34–35\nworldwide crowds, 34\nand markets as crowds, 39–43", - "type": "text" - }, - { - "block_id": "p289-b8", - "global_id": 3299, - "bbox": [ - 80.94, - 309.9, - 220.02, - 407.23 - ], - "text": "crowd mentality, 41–42\nexperts on, 40\nindependent thinking vs., 42\nleaders of crowds, 41\nreasons for joining crowds, 40\nwisdom of crowds, 42–43\nprice, 32–33", - "type": "text" - }, - { - "block_id": "p289-b9", - "global_id": 3300, - "bbox": [ - 89.94, - 407.93, - 216.61, - 435.24 - ], - "text": "as consensus of value, 32–33\ncrowd behavior reflected in,", - "type": "text" - }, - { - "block_id": "p289-b10", - "global_id": 3301, - "bbox": [ - 80.94, - 435.94, - 225.1, - 463.25 - ], - "text": "32–33\ntrading scene participants, 36–39", - "type": "text" - }, - { - "block_id": "p289-b11", - "global_id": 3302, - "bbox": [ - 80.94, - 463.94, - 208.61, - 533.27 - ], - "text": "advisors, 39\nindividual traders, 36–37\ninstitutional traders, 37–38\nsword makers, 38\ntrend psychology, 43–46", - "type": "text" - }, - { - "block_id": "p289-b12", - "global_id": 3303, - "bbox": [ - 71.94, - 533.96, - 231.02, - 617.29 - ], - "text": "emotions in, 43–44\nprice shocks, 44–45\nrallies and declines, 44\nsocial psychology, 45–46\nMathematical expectation, 200–201\nMaximum Entropy Spectral Analysis", - "type": "text" - }, - { - "block_id": "p289-b13", - "global_id": 3304, - "bbox": [ - 71.94, - 617.99, - 231.97, - 645.3 - ], - "text": "(MESA), 122\nMean between high and low, moving", - "type": "text" - }, - { - "block_id": "p289-b14", - "global_id": 3305, - "bbox": [ - 71.94, - 646.0, - 196.61, - 673.31 - ], - "text": "averages based on, 78\nMeasuring volume, 104–105", - "type": "text" - }, - { - "block_id": "p289-b15", - "global_id": 3306, - "bbox": [ - 257.94, - 57.96, - 384.59, - 85.27 - ], - "text": "Mechanical traders, 149–150\nMechanical Trading Systems", - "type": "text" - }, - { - "block_id": "p289-b16", - "global_id": 3307, - "bbox": [ - 257.94, - 85.97, - 393.18, - 155.29 - ], - "text": "(Richard Weissman), 149\nMeetings, AA, 23\nMellon, Andrew J., 233\nMember Short Sale Ratio, 142\nMemory(-ies):", - "type": "text" - }, - { - "block_id": "p289-b17", - "global_id": 3308, - "bbox": [ - 266.94, - 155.99, - 408.11, - 169.3 - ], - "text": "and support or resistance levels,", - "type": "text" - }, - { - "block_id": "p289-b18", - "global_id": 3309, - "bbox": [ - 257.94, - 169.99, - 414.28, - 225.31 - ], - "text": "56–57\nin trade diary, 243\nMental stops, 184\nMESA (Maximum Entropy Spectral", - "type": "text" - }, - { - "block_id": "p289-b19", - "global_id": 3310, - "bbox": [ - 257.94, - 226.01, - 416.9, - 253.32 - ], - "text": "Analysis), 122\nMind, as component of trading, 237.", - "type": "text" - }, - { - "block_id": "p289-b20", - "global_id": 3311, - "bbox": [ - 257.94, - 254.02, - 406.61, - 309.34 - ], - "text": "See also Thinking\nMini-contracts (futures), 193–194\nMinus-sum game, trading as, 5–6\nMiscellaneous indicators, 74.", - "type": "text" - }, - { - "block_id": "p289-b21", - "global_id": 3312, - "bbox": [ - 257.94, - 310.03, - 431.44, - 379.36 - ], - "text": "See also New High–New Low \nIndex (NH-NL)\n“Missing right shoulder” divergences, 88\nMoltke, Helmuth von, 197\nMoney:", - "type": "text" - }, - { - "block_id": "p289-b22", - "global_id": 3313, - "bbox": [ - 257.94, - 380.05, - 387.06, - 449.38 - ], - "text": "making, 47\nmotives for seeking, 200\nin open trades, 198\nsource of, 34–35\nMoney management. See also", - "type": "text" - }, - { - "block_id": "p289-b23", - "global_id": 3314, - "bbox": [ - 266.94, - 450.07, - 424.0, - 519.4 - ], - "text": "Risk management\nbusinessman’s risk, 25–26, 201–202\ncommissions, 6–7\nconservative, 47\nand emotions, 197–200", - "type": "text" - }, - { - "block_id": "p289-b24", - "global_id": 3315, - "bbox": [ - 275.94, - 520.09, - 404.29, - 547.4 - ], - "text": "businessman’s risk, 201–202\nand counting money in open", - "type": "text" - }, - { - "block_id": "p289-b25", - "global_id": 3316, - "bbox": [ - 266.94, - 548.1, - 410.15, - 631.43 - ], - "text": "trades, 198\nnot being able to sell, 198–200\nexpenses of trading, 5–8\nfollowing rules of, 20\nwith futures, 193\nand negative mathematical", - "type": "text" - }, - { - "block_id": "p289-b26", - "global_id": 3317, - "bbox": [ - 266.94, - 632.12, - 370.78, - 673.44 - ], - "text": "expectation, 201\nrules as safety net in, 19\nslippage, 7–8", - "type": "text" - } - ] - }, - { - "page_num": 290, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p290-b0", - "global_id": 3318, - "bbox": [ - 72.0, - 33.66, - 432.01, - 47.21 - ], - "text": "274\t\nINDEX", - "type": "text" - }, - { - "block_id": "p290-b1", - "global_id": 3319, - "bbox": [ - 72.0, - 57.83, - 232.54, - 85.14 - ], - "text": "Mood, as component of trading, 237\nMost Active Stocks indicator (MAS),", - "type": "text" - }, - { - "block_id": "p290-b2", - "global_id": 3320, - "bbox": [ - 72.0, - 85.84, - 207.19, - 113.15 - ], - "text": "142\nMoving averages (MAs), 74–80", - "type": "text" - }, - { - "block_id": "p290-b3", - "global_id": 3321, - "bbox": [ - 81.0, - 113.84, - 203.96, - 155.16 - ], - "text": "choosing length of, 76–78\ndual EMAs, 78–79\nexponential, 75–80. See also", - "type": "text" - }, - { - "block_id": "p290-b4", - "global_id": 3322, - "bbox": [ - 72.0, - 155.86, - 226.9, - 295.2 - ], - "text": "Exponential moving averages \n(EMAs)\nwith Force Index, 112\nand market psychology, 75–76\nin setting profit targets, 217, 218\nsimple, 75\nas support and resistance, 78\ntime windows of, 74, 75\nweighted, 75\nMoving Average Convergence-", - "type": "text" - }, - { - "block_id": "p290-b5", - "global_id": 3323, - "bbox": [ - 81.0, - 295.9, - 223.46, - 337.21 - ], - "text": "Divergence (MACD), 80–89\ncreating, 81\nMACD-Histogram, 83–89", - "type": "text" - }, - { - "block_id": "p290-b6", - "global_id": 3324, - "bbox": [ - 90.0, - 337.91, - 242.3, - 393.23 - ], - "text": "divergences, 86–89\nand market psychology, 84\npeaks and valleys, 85\nsemiautomatic divergence scanner,", - "type": "text" - }, - { - "block_id": "p290-b7", - "global_id": 3325, - "bbox": [ - 81.0, - 393.92, - 178.6, - 435.24 - ], - "text": "231\ntrading rules, 84–85\nMACD Lines, 81–83", - "type": "text" - }, - { - "block_id": "p290-b8", - "global_id": 3326, - "bbox": [ - 72.0, - 435.94, - 220.81, - 533.27 - ], - "text": "and market psychology, 81\ntrading rules, 81–82\nand market psychology, 81\n“quick-and-dirty” plotting of, 83\nscanner for, 231\nMr. Market, 175\nMysticism, 55", - "type": "text" - }, - { - "block_id": "p290-b9", - "global_id": 3327, - "bbox": [ - 72.0, - 542.38, - 229.06, - 645.16 - ], - "text": "N\nNaked writers (options), 181–182\nNASDAQ, 72, 140\nNature’s law, 55\n“Nature’s Law” (R. N. Elliott), 55\nNegative Directional line, 91–92\nNegative mathematical expectation,", - "type": "text" - }, - { - "block_id": "p290-b10", - "global_id": 3328, - "bbox": [ - 99.0, - 645.85, - 137.98, - 659.16 - ], - "text": "200–201", - "type": "text" - }, - { - "block_id": "p290-b11", - "global_id": 3329, - "bbox": [ - 258.0, - 57.85, - 424.32, - 71.16 - ], - "text": "Negative rules, in scanning for stocks,", - "type": "text" - }, - { - "block_id": "p290-b12", - "global_id": 3330, - "bbox": [ - 258.0, - 71.86, - 427.84, - 141.18 - ], - "text": "232\nNeill, Humphrey B., 143\nNet Field Trend indicator, 108–110\nNeurotic gamblers, 17\nNew High–New Low Index (NH-NL),", - "type": "text" - }, - { - "block_id": "p290-b13", - "global_id": 3331, - "bbox": [ - 267.0, - 141.88, - 406.79, - 197.2 - ], - "text": "133–139\nconstructing, 134\nand crowd psychology, 134–135\nin multiple timeframes and", - "type": "text" - }, - { - "block_id": "p290-b14", - "global_id": 3332, - "bbox": [ - 258.0, - 197.89, - 407.39, - 267.22 - ], - "text": "look-back periods, 137–139\n65-day and 20-day, 138–139\ntrading rules, 135–137\nweekly, 137–138\nNew Sell and Sell Short, The", - "type": "text" - }, - { - "block_id": "p290-b15", - "global_id": 3333, - "bbox": [ - 258.0, - 267.91, - 428.69, - 309.23 - ], - "text": "(Alexander Elder), 175, 220\nNewsletters, 38–39, 142–144\nNew Strategy of Daily Stock Market Timing", - "type": "text" - }, - { - "block_id": "p290-b16", - "global_id": 3334, - "bbox": [ - 258.0, - 309.92, - 387.16, - 337.24 - ], - "text": "(Joseph Granville), 107\nNew York Stock Exchange, 34", - "type": "text" - }, - { - "block_id": "p290-b17", - "global_id": 3335, - "bbox": [ - 267.0, - 337.93, - 394.63, - 365.24 - ], - "text": "daily volume in 1940s, 51\nstocks above 50-day MA for,", - "type": "text" - }, - { - "block_id": "p290-b18", - "global_id": 3336, - "bbox": [ - 267.0, - 365.94, - 397.6, - 407.26 - ], - "text": "140\nvolume reported by, 104\nWestern European hours for,", - "type": "text" - }, - { - "block_id": "p290-b19", - "global_id": 3337, - "bbox": [ - 258.0, - 407.95, - 409.06, - 449.27 - ], - "text": "174\nNew York Times, The 195\nNH-NL, see New High–New Low", - "type": "text" - }, - { - "block_id": "p290-b20", - "global_id": 3338, - "bbox": [ - 258.0, - 449.96, - 394.16, - 519.29 - ], - "text": "Index\nNic’s stop, 221, 222\nNison, Steve, 53\nNoise, market, see Market noise\nNotis, Steve, 157", - "type": "text" - }, - { - "block_id": "p290-b21", - "global_id": 3339, - "bbox": [ - 258.0, - 528.38, - 381.9, - 575.14 - ], - "text": "O\nOBV, see On-Balance Volume\nOdds against traders, 5–8", - "type": "text" - }, - { - "block_id": "p290-b22", - "global_id": 3340, - "bbox": [ - 267.0, - 575.84, - 425.18, - 659.16 - ], - "text": "bid-ask spread, 8\ncommissions, 6–7\nwith ETFs, 176\nexpenses, 5, 8\nslippage, 7–8\nand trading as minus-sum game, 5–6", - "type": "text" - } - ] - }, - { - "page_num": 291, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p291-b0", - "global_id": 3341, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "INDEX\t\n275", - "type": "text" - }, - { - "block_id": "p291-b1", - "global_id": 3342, - "bbox": [ - 71.94, - 57.83, - 233.98, - 113.15 - ], - "text": "Odd-lot Short Sale Ratio, 142\nOdd-lot statistics, 142\nOdysseus, 42\nOn-Balance Volume (OBV), 107–110", - "type": "text" - }, - { - "block_id": "p291-b2", - "global_id": 3343, - "bbox": [ - 71.94, - 113.84, - 219.83, - 169.16 - ], - "text": "and crowd psychology, 108\ntrading signals, 108\nOne-bar-at-a-time testing, 152\nOne day at a time (AA principle),", - "type": "text" - }, - { - "block_id": "p291-b3", - "global_id": 3344, - "bbox": [ - 71.94, - 169.86, - 153.35, - 211.18 - ], - "text": "22–23\nOpening gaps, 226\nOpening prices:", - "type": "text" - }, - { - "block_id": "p291-b4", - "global_id": 3345, - "bbox": [ - 80.94, - 211.87, - 230.53, - 267.19 - ], - "text": "on candlestick charts, 53\nand crowd behavior, 110\nof daily bars, 51\nrelationship of closing prices and,", - "type": "text" - }, - { - "block_id": "p291-b5", - "global_id": 3346, - "bbox": [ - 71.94, - 267.89, - 176.71, - 295.2 - ], - "text": "52, 110\nOpen interest, 117–121", - "type": "text" - }, - { - "block_id": "p291-b6", - "global_id": 3347, - "bbox": [ - 71.94, - 295.9, - 220.73, - 351.22 - ], - "text": "and crowd psychology, 118–120\ndefined, 117\ntrading rules, 120–121\nOpen trades:", - "type": "text" - }, - { - "block_id": "p291-b7", - "global_id": 3348, - "bbox": [ - 71.94, - 351.91, - 213.3, - 407.23 - ], - "text": "changing trade plan during, 42\ncounting money in, 198\nmoney at risk in, 208–210\nOptions, 178–185", - "type": "text" - }, - { - "block_id": "p291-b8", - "global_id": 3349, - "bbox": [ - 71.94, - 407.93, - 202.0, - 505.26 - ], - "text": "buying, 180–181, 185\nfutures vs., 187\nlimiting risk with, 183–185\nprice of, 179–180\ntime decay with, 183\nwriting, 180–185\nOptions as a Strategic Investment", - "type": "text" - }, - { - "block_id": "p291-b9", - "global_id": 3350, - "bbox": [ - 71.94, - 505.96, - 205.3, - 547.27 - ], - "text": "(Lawrence MacMillan), \n185\nOscillators, 73", - "type": "text" - }, - { - "block_id": "p291-b10", - "global_id": 3351, - "bbox": [ - 80.94, - 547.97, - 192.68, - 589.28 - ], - "text": "in bearish divergences, 87\nin bullish divergences, 86\nForce Index, 112–117", - "type": "text" - }, - { - "block_id": "p291-b11", - "global_id": 3352, - "bbox": [ - 89.94, - 589.98, - 215.38, - 659.3 - ], - "text": "constructing, 112–113\nintermediate-term, 116–117\nshort-term, 113–116\nand trading psychology, 113\ntrading rules, 113–117", - "type": "text" - }, - { - "block_id": "p291-b12", - "global_id": 3353, - "bbox": [ - 257.94, - 58.0, - 340.56, - 71.3 - ], - "text": "Oscillators (Cont.):", - "type": "text" - }, - { - "block_id": "p291-b13", - "global_id": 3354, - "bbox": [ - 266.94, - 72.0, - 381.94, - 99.31 - ], - "text": "identifying trends with, 63\nMACD-Histogram, 83–89", - "type": "text" - }, - { - "block_id": "p291-b14", - "global_id": 3355, - "bbox": [ - 266.94, - 100.01, - 407.7, - 211.34 - ], - "text": "divergences, 86–89\nand market psychology, 84\npeaks and valleys, 85\nslope of, 84, 85\ntime windows of, 85\ntrading rules, 84–85\nand mass psychology, 95\nRelative Strength Index, 99–102", - "type": "text" - }, - { - "block_id": "p291-b15", - "global_id": 3356, - "bbox": [ - 266.94, - 212.04, - 408.98, - 253.36 - ], - "text": "and mass psychology, 100–101\ntrading rules, 101–102\nStochastic, 95–99", - "type": "text" - }, - { - "block_id": "p291-b16", - "global_id": 3357, - "bbox": [ - 266.94, - 254.05, - 408.4, - 295.37 - ], - "text": "and crowd psychology, 96–97\ntrading rules, 97–99\nin Triple Screen trading system,", - "type": "text" - }, - { - "block_id": "p291-b17", - "global_id": 3358, - "bbox": [ - 257.94, - 296.06, - 417.64, - 337.38 - ], - "text": "155, 158\nOut-of-the-money options, 179, 181\nOverbought:", - "type": "text" - }, - { - "block_id": "p291-b18", - "global_id": 3359, - "bbox": [ - 257.94, - 338.08, - 381.3, - 407.4 - ], - "text": "oscillator levels, 95\nRSI levels, 99–201\nas Stochastic signal, 98, 99\nOvernight gaps, 225\nOversold:", - "type": "text" - }, - { - "block_id": "p291-b19", - "global_id": 3360, - "bbox": [ - 266.94, - 408.1, - 381.3, - 449.41 - ], - "text": "oscillator levels, 95\nRSI levels, 99–101\nas Stochastic signal, 98, 99", - "type": "text" - }, - { - "block_id": "p291-b20", - "global_id": 3361, - "bbox": [ - 258.0, - 458.38, - 279.83, - 491.14 - ], - "text": "P\nPain:", - "type": "text" - }, - { - "block_id": "p291-b21", - "global_id": 3362, - "bbox": [ - 258.0, - 491.83, - 409.37, - 575.16 - ], - "text": "and support or resistance, 57–58\nvolume as measure of, 105\nPaper trading, 152–153\nParabolic stops, 221\n“Passing the book,” 196\nPatterns. See also Chart patterns", - "type": "text" - }, - { - "block_id": "p291-b22", - "global_id": 3363, - "bbox": [ - 267.0, - 575.86, - 429.05, - 645.18 - ], - "text": "for A-trades, 225–230\ndefining, 215\nemerging from chaos, 54\nfractal, 54–55\nand Hound of the Baskervilles signal,", - "type": "text" - }, - { - "block_id": "p291-b23", - "global_id": 3364, - "bbox": [ - 285.0, - 645.88, - 295.99, - 659.18 - ], - "text": "89", - "type": "text" - } - ] - }, - { - "page_num": 292, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p292-b0", - "global_id": 3365, - "bbox": [ - 72.0, - 33.66, - 432.01, - 47.21 - ], - "text": "276\t\nINDEX", - "type": "text" - }, - { - "block_id": "p292-b1", - "global_id": 3366, - "bbox": [ - 72.0, - 57.83, - 143.18, - 71.14 - ], - "text": "Patterns (Cont.):", - "type": "text" - }, - { - "block_id": "p292-b2", - "global_id": 3367, - "bbox": [ - 72.0, - 71.83, - 204.89, - 183.17 - ], - "text": "for scanning, 230–232\nand trading young stocks, 72\nPaulos, John Allen, 200\nPenny stocks, 145\n%D line, 95, 96\n%K line, 95, 96\n“Perfect order” in markets, 55\nPersonality:", - "type": "text" - }, - { - "block_id": "p292-b3", - "global_id": 3368, - "bbox": [ - 81.0, - 183.86, - 222.78, - 211.18 - ], - "text": "as component of trading, 237\nmatching trading styles to, 149,", - "type": "text" - }, - { - "block_id": "p292-b4", - "global_id": 3369, - "bbox": [ - 72.0, - 211.87, - 199.52, - 309.2 - ], - "text": "150\nPiranha bite losses, 208\nPlayer’s edge, 200\nPlummer, Tony, 41\nPoint-and-figure chartists, 50\nPoll-taking, 47\nPortfolio Management Formulas", - "type": "text" - }, - { - "block_id": "p292-b5", - "global_id": 3370, - "bbox": [ - 72.0, - 309.9, - 179.75, - 351.22 - ], - "text": "(Ralph Vince), 200\nPosition limits, 146\nPosition trading:", - "type": "text" - }, - { - "block_id": "p292-b6", - "global_id": 3371, - "bbox": [ - 72.0, - 351.91, - 227.14, - 435.24 - ], - "text": "day-trading vs., 73\nmarket data for, 72\nprofit targets in, 217\nstops in, 221\nPositive Directional line, 91, 92\nPositive mathematical expectation,", - "type": "text" - }, - { - "block_id": "p292-b7", - "global_id": 3372, - "bbox": [ - 72.0, - 435.94, - 115.49, - 463.25 - ], - "text": "201\nPower:", - "type": "text" - }, - { - "block_id": "p292-b8", - "global_id": 3373, - "bbox": [ - 81.0, - 463.94, - 155.78, - 477.25 - ], - "text": "of bears vs. bulls:", - "type": "text" - }, - { - "block_id": "p292-b9", - "global_id": 3374, - "bbox": [ - 81.0, - 477.95, - 211.79, - 659.3 - ], - "text": "A/D, 110\nclosing prices, 96\ndivergences, 87, 98, 101\nForce Index, 113, 115, 116\nMACD-Histogram, 84\nMACD Line, 81\nmiscellaneous indicators, 74\nand NH-NL zero line, 136\nOn-Balance Volume, 108\nopen interest, 119–120\nvolume, 104\nprofits and feeling of, 22\nof trends, 162, 163", - "type": "text" - }, - { - "block_id": "p292-b10", - "global_id": 3375, - "bbox": [ - 258.0, - 58.0, - 305.64, - 71.3 - ], - "text": "Premiums:", - "type": "text" - }, - { - "block_id": "p292-b11", - "global_id": 3376, - "bbox": [ - 258.0, - 72.0, - 431.15, - 141.32 - ], - "text": "futures, 191–192\noptions, 179\nPress, signals from, 144\nPrechter, Robert, 201\nPrice(s), 32–33. See also Closing prices;", - "type": "text" - }, - { - "block_id": "p292-b12", - "global_id": 3377, - "bbox": [ - 267.0, - 142.02, - 398.94, - 183.34 - ], - "text": "Opening prices\non bar charts, 51–52\nas consensus of value, 32–33,", - "type": "text" - }, - { - "block_id": "p292-b13", - "global_id": 3378, - "bbox": [ - 267.0, - 184.03, - 393.67, - 211.34 - ], - "text": "100–101\ncrowd behavior reflected in,", - "type": "text" - }, - { - "block_id": "p292-b14", - "global_id": 3379, - "bbox": [ - 267.0, - 212.04, - 404.17, - 281.36 - ], - "text": "32–33\ndivergences from, 86–89\nin Force Index, 112–117\nindicators derived from, 73\nas leader of market crowd, 41,", - "type": "text" - }, - { - "block_id": "p292-b15", - "global_id": 3380, - "bbox": [ - 267.0, - 282.06, - 420.53, - 407.4 - ], - "text": "44\nlong-term cycles in, 122\nmemories of, 56–57\nof options, 179–180\nin Random Walk theory, 54\nshort-term cycles in, 122\nslippage, 7–8\nsupport and resistance levels, 55\nand understanding of volume, 103,", - "type": "text" - }, - { - "block_id": "p292-b16", - "global_id": 3381, - "bbox": [ - 258.0, - 408.1, - 416.78, - 505.43 - ], - "text": "104\nvalue vs., 79–80\nPrice risk, hedging and, 189–190\nPrice shocks, 44–45\nPring, Martin, 122\nPrivate traders, see Individual traders\nProbabilities, 198–202", - "type": "text" - }, - { - "block_id": "p292-b17", - "global_id": 3382, - "bbox": [ - 267.0, - 506.12, - 402.02, - 533.44 - ], - "text": "businessman’s risk, 201–202\nchoices based on emotions vs.,", - "type": "text" - }, - { - "block_id": "p292-b18", - "global_id": 3383, - "bbox": [ - 258.0, - 534.13, - 375.66, - 589.45 - ], - "text": "199–200\ninnumeracy, 200–201\npositive expectation, 201\nProfit(s):", - "type": "text" - }, - { - "block_id": "p292-b19", - "global_id": 3384, - "bbox": [ - 267.0, - 590.15, - 390.54, - 659.47 - ], - "text": "calculating potential for, 217\non CFDs, 186\n“enough,” 218\nfeeling of power from, 22\nin open trades, 198", - "type": "text" - } - ] - }, - { - "page_num": 293, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p293-b0", - "global_id": 3385, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "INDEX\t\n277", - "type": "text" - }, - { - "block_id": "p293-b1", - "global_id": 3386, - "bbox": [ - 71.94, - 57.83, - 143.32, - 71.14 - ], - "text": "Profit(s) (Cont.):", - "type": "text" - }, - { - "block_id": "p293-b2", - "global_id": 3387, - "bbox": [ - 80.94, - 71.83, - 220.21, - 85.14 - ], - "text": "protection levels for, 223–224.", - "type": "text" - }, - { - "block_id": "p293-b3", - "global_id": 3388, - "bbox": [ - 71.94, - 85.84, - 203.38, - 126.89 - ], - "text": "See also Stops\nsource of, 34–35\nProfit Magic of Stock Transaction", - "type": "text" - }, - { - "block_id": "p293-b4", - "global_id": 3389, - "bbox": [ - 71.94, - 127.85, - 229.26, - 169.16 - ], - "text": "Timing, The (J. M. Hurst), 74, \n166\nProfit taking:", - "type": "text" - }, - { - "block_id": "p293-b5", - "global_id": 3390, - "bbox": [ - 71.94, - 169.86, - 224.66, - 239.18 - ], - "text": "in day-trading, 217\nin swing trading, 216\nand tall bars, 53\nProfit-taking zone, for options, 184\nProfit targets:", - "type": "text" - }, - { - "block_id": "p293-b6", - "global_id": 3391, - "bbox": [ - 71.94, - 239.88, - 202.73, - 309.2 - ], - "text": "and Average True Range, 94\nin day-trading, 131\nsetting, 215–219\nin Triple Screen system, 162\nProtective stops, 58–60.", - "type": "text" - }, - { - "block_id": "p293-b7", - "global_id": 3392, - "bbox": [ - 71.94, - 309.9, - 243.8, - 421.24 - ], - "text": "See also Stops\ndefined, 59\nwith EMAs, 77\nwith kangaroo tails, 67\nto reduce open risk, 209\nwith RSI, 100\nand Stochastic signals, 98\nPsychological readiness for trading, 19,", - "type": "text" - }, - { - "block_id": "p293-b8", - "global_id": 3393, - "bbox": [ - 71.94, - 421.93, - 137.92, - 449.24 - ], - "text": "236–237\nPsychology:", - "type": "text" - }, - { - "block_id": "p293-b9", - "global_id": 3394, - "bbox": [ - 80.94, - 449.94, - 207.91, - 463.25 - ], - "text": "of trading, 3–4. See also Mass", - "type": "text" - }, - { - "block_id": "p293-b10", - "global_id": 3395, - "bbox": [ - 80.94, - 463.94, - 198.48, - 533.27 - ], - "text": "psychology; Individual \npsychology\nand focus on reality, 3\nand paper trading, 152\nof trends, 43–46", - "type": "text" - }, - { - "block_id": "p293-b11", - "global_id": 3396, - "bbox": [ - 71.94, - 533.96, - 215.35, - 631.3 - ], - "text": "emotions in, 43–44\nprice shocks, 44–45\nrallies and declines, 44\nand social psychology, 45–46\nPut-Call Ratio, 74\nPut options, 178–183, 185\nPyramiding:", - "type": "text" - }, - { - "block_id": "p293-b12", - "global_id": 3397, - "bbox": [ - 80.94, - 631.99, - 214.26, - 659.3 - ], - "text": "Force Index indication for, 115\nguidelines for, 210", - "type": "text" - }, - { - "block_id": "p293-b13", - "global_id": 3398, - "bbox": [ - 258.0, - 56.88, - 375.49, - 89.64 - ], - "text": "Q\nQuality of trades, 225–230", - "type": "text" - }, - { - "block_id": "p293-b14", - "global_id": 3399, - "bbox": [ - 258.0, - 108.88, - 405.24, - 141.64 - ], - "text": "R\nRallies. See also individual indicators", - "type": "text" - }, - { - "block_id": "p293-b15", - "global_id": 3400, - "bbox": [ - 258.0, - 142.33, - 403.42, - 337.69 - ], - "text": "from 1966 to 1982, 56\nand channel lines, 169\ncontracts for difference on, 186\nin downtrends, 60–61\nopen interest in, 121\npsychology of, 44\nshort-covering, 148\nin trading ranges, 61\nin uptrends, 60\nvolume during, 106\nRandom Walk theory, 54\nReadiness for trading, 236–237\nReading markets, 47–48\nReality:", - "type": "text" - }, - { - "block_id": "p293-b16", - "global_id": 3401, - "bbox": [ - 258.0, - 338.39, - 388.3, - 393.71 - ], - "text": "fantasy vs., 10–11\nwishful thinking vs., 16\nReasons for trading, 9–10\nRecord-keeping, 26, 233–247", - "type": "text" - }, - { - "block_id": "p293-b17", - "global_id": 3402, - "bbox": [ - 267.0, - 394.4, - 403.42, - 421.72 - ], - "text": "daily homework, 234–236\nand psychological readiness for", - "type": "text" - }, - { - "block_id": "p293-b18", - "global_id": 3403, - "bbox": [ - 267.0, - 422.41, - 381.0, - 463.73 - ], - "text": "trading, 236–237\nTrade Journal, 243–247\ntrade plans, 233, 238–243", - "type": "text" - }, - { - "block_id": "p293-b19", - "global_id": 3404, - "bbox": [ - 258.0, - 464.42, - 407.98, - 519.74 - ], - "text": "creating, 238\nscoring, 238–240\nusing Tradebills, 240–243\nRegret, support or resistance and,", - "type": "text" - }, - { - "block_id": "p293-b20", - "global_id": 3405, - "bbox": [ - 258.0, - 520.44, - 424.22, - 547.75 - ], - "text": "57–58\nRelative Strength Index (RSI), 99–102", - "type": "text" - }, - { - "block_id": "p293-b21", - "global_id": 3406, - "bbox": [ - 258.0, - 548.45, - 400.04, - 617.77 - ], - "text": "and mass psychology, 100–101\ntrading rules, 101–102\nReporting levels, 146\nResettlement fees, 195\nResistance. See also Support and", - "type": "text" - }, - { - "block_id": "p293-b22", - "global_id": 3407, - "bbox": [ - 267.0, - 618.47, - 349.12, - 659.78 - ], - "text": "resistance\ndefined, 55, 166\npain and regret, 57", - "type": "text" - } - ] - }, - { - "page_num": 294, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p294-b0", - "global_id": 3408, - "bbox": [ - 72.0, - 33.66, - 432.01, - 47.21 - ], - "text": "278\t\nINDEX", - "type": "text" - }, - { - "block_id": "p294-b1", - "global_id": 3409, - "bbox": [ - 72.0, - 57.83, - 129.31, - 71.14 - ], - "text": "Reversals, 61", - "type": "text" - }, - { - "block_id": "p294-b2", - "global_id": 3410, - "bbox": [ - 81.0, - 71.83, - 219.7, - 113.15 - ], - "text": "betting on, 54, 58\nconsensus preceding, 143\nForce Index indication of, 113,", - "type": "text" - }, - { - "block_id": "p294-b3", - "global_id": 3411, - "bbox": [ - 81.0, - 113.84, - 215.56, - 141.16 - ], - "text": "116\njournalists’ writings signaling,", - "type": "text" - }, - { - "block_id": "p294-b4", - "global_id": 3412, - "bbox": [ - 81.0, - 141.85, - 205.43, - 239.18 - ], - "text": "144\nkangaroo tails, 65–67\nlosers’ responses to, 199\nNH-NL indicating, 136–137\nand open interest, 120\nand price shocks, 56\nprotection from, 59. See also", - "type": "text" - }, - { - "block_id": "p294-b5", - "global_id": 3413, - "bbox": [ - 72.0, - 239.88, - 226.13, - 351.22 - ], - "text": "Protective stops\npullbacks signaling, 63\nand stocks above 50-day MA, 140\ntiming of trades and, 125\nand value zone, 80\nand volume of trading, 107\nReverse splits (ETFs), 177\nReviews:", - "type": "text" - }, - { - "block_id": "p294-b6", - "global_id": 3414, - "bbox": [ - 72.0, - 351.91, - 215.76, - 421.24 - ], - "text": "of equity curve, 247\nof trades, 246–247\nReward-to-risk ratio, 224\nRhea, Robert, 50, 155\nRisk management, 154, 197–213", - "type": "text" - }, - { - "block_id": "p294-b7", - "global_id": 3415, - "bbox": [ - 81.0, - 421.93, - 212.8, - 435.24 - ], - "text": "comebacks from drawdowns,", - "type": "text" - }, - { - "block_id": "p294-b8", - "global_id": 3416, - "bbox": [ - 81.0, - 435.94, - 183.77, - 463.25 - ], - "text": "210–213\nand emotions, 197–200", - "type": "text" - }, - { - "block_id": "p294-b9", - "global_id": 3417, - "bbox": [ - 90.0, - 463.94, - 247.51, - 491.26 - ], - "text": "businessman’s risk, 201–202\nand counting money in open trades,", - "type": "text" - }, - { - "block_id": "p294-b10", - "global_id": 3418, - "bbox": [ - 81.0, - 491.95, - 224.21, - 561.28 - ], - "text": "198\nnot being able to sell, 198–200\nessential nature of, 153\nwith futures, 193–194\nmain rules of, 202–210", - "type": "text" - }, - { - "block_id": "p294-b11", - "global_id": 3419, - "bbox": [ - 81.0, - 561.97, - 238.15, - 645.3 - ], - "text": "6% Rule, 208–210\n2% Rule, 203–207\nwith options, 181, 183–185\nprobabilities in, 198–202\nand self-management, 3\nstops for protecting winning trades,", - "type": "text" - }, - { - "block_id": "p294-b12", - "global_id": 3420, - "bbox": [ - 99.0, - 646.0, - 137.98, - 659.3 - ], - "text": "223–224", - "type": "text" - }, - { - "block_id": "p294-b13", - "global_id": 3421, - "bbox": [ - 258.0, - 58.0, - 370.45, - 71.3 - ], - "text": "Risk management (Cont.):", - "type": "text" - }, - { - "block_id": "p294-b14", - "global_id": 3422, - "bbox": [ - 258.0, - 72.0, - 431.76, - 169.33 - ], - "text": "by trading managers, 38, 212–213\nfor trends and trading ranges, 63\nworst mistakes in, 202–203\nRock bottom (AA principle), 22, 24–25\nRorschach, Herman, 50\nRSI, see Relative Strength Index\nRule-bending, 19–20", - "type": "text" - }, - { - "block_id": "p294-b15", - "global_id": 3423, - "bbox": [ - 258.0, - 178.38, - 385.22, - 239.14 - ], - "text": "S\nSAC Capital, 35\nSafeZone stops, 220, 221\nScanning for trades, 230–232", - "type": "text" - }, - { - "block_id": "p294-b16", - "global_id": 3424, - "bbox": [ - 258.0, - 239.84, - 421.78, - 351.18 - ], - "text": "defined, 230\ndefining patterns before, 215\n“fallen angels,” 218–219\nnegative rules in, 232\nstocks, 175\nusing toolboxes, 70\nSeasonality, with futures, 191\nSecurities and Exchange Commission", - "type": "text" - }, - { - "block_id": "p294-b17", - "global_id": 3425, - "bbox": [ - 258.0, - 351.87, - 399.86, - 407.19 - ], - "text": "(SEC), 146, 147, 186, 187\nSelf-control, 27–28, 30, 47–48\nSelf-deception, 49\nSelf-destructiveness, 10, 16–19", - "type": "text" - }, - { - "block_id": "p294-b18", - "global_id": 3426, - "bbox": [ - 267.0, - 407.89, - 433.07, - 449.2 - ], - "text": "controlling, 19\ngambling, 17\nand lack of normal human helpfulness", - "type": "text" - }, - { - "block_id": "p294-b19", - "global_id": 3427, - "bbox": [ - 258.0, - 449.9, - 430.25, - 505.22 - ], - "text": "in markets, 18–19\nself-sabotage, 17–19\nSelf-fulfillment, 9–10\nSelf-help groups, 20. See also Alcoholics", - "type": "text" - }, - { - "block_id": "p294-b20", - "global_id": 3428, - "bbox": [ - 258.0, - 505.92, - 406.4, - 547.23 - ], - "text": "Anonymous (AA) principles\nSelf-sabotage, 10, 17–19\nSelf-test, of readiness for trading,", - "type": "text" - }, - { - "block_id": "p294-b21", - "global_id": 3429, - "bbox": [ - 258.0, - 547.93, - 323.98, - 575.24 - ], - "text": "236–237\nSellers, 32", - "type": "text" - }, - { - "block_id": "p294-b22", - "global_id": 3430, - "bbox": [ - 258.0, - 575.94, - 413.92, - 631.26 - ], - "text": "expectations of, 32\nand open interest, 118–120\nof options, 178–179\nSelling. See also specific trading vehicles", - "type": "text" - }, - { - "block_id": "p294-b23", - "global_id": 3431, - "bbox": [ - 267.0, - 631.95, - 402.48, - 659.26 - ], - "text": "based on fear, 41\nemotional commitment in, 105", - "type": "text" - } - ] - }, - { - "page_num": 295, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p295-b0", - "global_id": 3432, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "INDEX\t\n279", - "type": "text" - }, - { - "block_id": "p295-b1", - "global_id": 3433, - "bbox": [ - 71.94, - 57.83, - 136.43, - 71.14 - ], - "text": "Selling (Cont.):", - "type": "text" - }, - { - "block_id": "p295-b2", - "global_id": 3434, - "bbox": [ - 71.94, - 71.83, - 241.12, - 127.15 - ], - "text": "indicators for, 87, see specific indicators\nby insiders, 147\nnot being able to sell, 198–200\nSell orders:", - "type": "text" - }, - { - "block_id": "p295-b3", - "global_id": 3435, - "bbox": [ - 71.94, - 127.85, - 232.73, - 267.19 - ], - "text": "Force Index indicator for, 115\nand Stochastic signals, 98\nSentimenTrader.com, 144\nShapiro, Roy, 199, 200\n“Shark bite” losses, 203, 219\n“Shopping for indicators,” 102\nShort interest, 147–148\nShort Percent of Float, 147–148\nShort sellers, rallies/declines and, 44\nShort selling:", - "type": "text" - }, - { - "block_id": "p295-b4", - "global_id": 3436, - "bbox": [ - 80.94, - 267.89, - 228.98, - 337.21 - ], - "text": "Force Index indicator for, 115\nmaking money with, 174–175\nStochastic signals for, 98\nstops with, 221\nTriple Screen indicators for, 160,", - "type": "text" - }, - { - "block_id": "p295-b5", - "global_id": 3437, - "bbox": [ - 71.94, - 337.91, - 219.83, - 435.24 - ], - "text": "161\nvalue zone in, 80\nShortsqueeze.com, 148\nShort-term Force Index, 113–116\nShort-term price cycles, 122\nShort-term timeframe, 155, 156\nShort-term trading, 118, 121,", - "type": "text" - }, - { - "block_id": "p295-b6", - "global_id": 3438, - "bbox": [ - 71.94, - 435.94, - 190.1, - 491.26 - ], - "text": "174–175\n“Shoulders,” 212\nSibbet, James H., 143\nSignal(s). See also Indicators", - "type": "text" - }, - { - "block_id": "p295-b7", - "global_id": 3439, - "bbox": [ - 71.94, - 491.95, - 218.96, - 533.27 - ], - "text": "confidence in, 73\nin market moves, 220, 222, 223\nSignal line (MACD), 81", - "type": "text" - }, - { - "block_id": "p295-b8", - "global_id": 3440, - "bbox": [ - 80.94, - 533.96, - 239.44, - 561.28 - ], - "text": "crossover of MACD line and, 81–83\ndifference between MACD line and,", - "type": "text" - }, - { - "block_id": "p295-b9", - "global_id": 3441, - "bbox": [ - 71.94, - 561.97, - 213.25, - 631.3 - ], - "text": "83\nand MACD-Histogram, 83, 84\nSimple moving averages, 75\n6% Rule, 208–210, 213\nand concept of available risk,", - "type": "text" - }, - { - "block_id": "p295-b10", - "global_id": 3442, - "bbox": [ - 80.94, - 631.99, - 220.45, - 659.3 - ], - "text": "208–210\nas guideline for pyramiding, 210", - "type": "text" - }, - { - "block_id": "p295-b11", - "global_id": 3443, - "bbox": [ - 257.94, - 58.0, - 415.7, - 99.31 - ], - "text": "65-day New High–New Low Index, \n138–139\nSize of trades, 203", - "type": "text" - }, - { - "block_id": "p295-b12", - "global_id": 3444, - "bbox": [ - 266.94, - 100.01, - 406.42, - 113.32 - ], - "text": "Iron Triangle of risk control for,", - "type": "text" - }, - { - "block_id": "p295-b13", - "global_id": 3445, - "bbox": [ - 257.94, - 114.01, - 424.64, - 197.34 - ], - "text": "204–206\nrisk associated with, 210–212\n2% Rule for, 203–207\nSkills, learning, 249–251\nSlater, Tim, 35\n“Slicing the bid-ask spread” technique,", - "type": "text" - }, - { - "block_id": "p295-b14", - "global_id": 3446, - "bbox": [ - 257.94, - 198.04, - 350.0, - 225.35 - ], - "text": "183\nSlippage, 5–8, 33–34", - "type": "text" - }, - { - "block_id": "p295-b15", - "global_id": 3447, - "bbox": [ - 257.94, - 226.04, - 364.04, - 295.37 - ], - "text": "and open interest, 121\novernight gaps, 225\nin quiet markets, 53\nSlow Stochastic, 96\nSmall traders, 146, 147", - "type": "text" - }, - { - "block_id": "p295-b16", - "global_id": 3448, - "bbox": [ - 257.94, - 296.06, - 417.82, - 353.62 - ], - "text": "CFDs for, 186\nCOT reports, 192\nof options, 180\nSmoothed Directional Lines (+DI13,", - "type": "text" - }, - { - "block_id": "p295-b17", - "global_id": 3449, - "bbox": [ - 257.98, - 349.38, - 383.28, - 393.14 - ], - "text": "−DI13), 91\nSocial psychology, 43, 45–46\nStock Market Barometer, The", - "type": "text" - }, - { - "block_id": "p295-b18", - "global_id": 3450, - "bbox": [ - 257.98, - 393.84, - 394.66, - 449.16 - ], - "text": "(William Hamilton), 50\nSoft stops, 225\nSoros, George, 6\nSource of money, in markets, 3", - "type": "text" - }, - { - "block_id": "p295-b19", - "global_id": 3451, - "bbox": [ - 257.98, - 449.86, - 339.08, - 477.17 - ], - "text": "4–35\nS&P 500 index, 72", - "type": "text" - }, - { - "block_id": "p295-b20", - "global_id": 3452, - "bbox": [ - 257.98, - 477.86, - 409.72, - 547.19 - ], - "text": "applying OBV to, 110\nand beta, 174\nin scanning for trades, 230–232\nSpecialist Short Sale Ratio, 142\nSpeculative trading, in currencies,", - "type": "text" - }, - { - "block_id": "p295-b21", - "global_id": 3453, - "bbox": [ - 257.98, - 547.88, - 363.65, - 575.2 - ], - "text": "194\nSpeculators, 36–37, 145", - "type": "text" - }, - { - "block_id": "p295-b22", - "global_id": 3454, - "bbox": [ - 257.98, - 575.89, - 396.08, - 659.22 - ], - "text": "farmers and engineers as, 190\ninstitutional investors as, 37\nposition limits of, 146\nSpikes, 137\nSpike bounce signal, 139\nSpikers, 230", - "type": "text" - } - ] - }, - { - "page_num": 296, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p296-b0", - "global_id": 3455, - "bbox": [ - 72.0, - 33.66, - 432.01, - 47.21 - ], - "text": "280\t\nINDEX", - "type": "text" - }, - { - "block_id": "p296-b1", - "global_id": 3456, - "bbox": [ - 72.0, - 57.83, - 228.55, - 71.14 - ], - "text": "SpikeTrade.com, 42–43, 130, 137,", - "type": "text" - }, - { - "block_id": "p296-b2", - "global_id": 3457, - "bbox": [ - 72.0, - 71.83, - 182.4, - 99.14 - ], - "text": "153, 230, 250–251\nSpreads:", - "type": "text" - }, - { - "block_id": "p296-b3", - "global_id": 3458, - "bbox": [ - 81.0, - 99.84, - 122.99, - 113.15 - ], - "text": "bid-ask, 8", - "type": "text" - }, - { - "block_id": "p296-b4", - "global_id": 3459, - "bbox": [ - 90.0, - 113.84, - 208.46, - 155.16 - ], - "text": "with CFDs, 186\nwith forex trades, 194, 195\n“slicing the bid-ask spread”", - "type": "text" - }, - { - "block_id": "p296-b5", - "global_id": 3460, - "bbox": [ - 72.0, - 155.86, - 223.98, - 197.17 - ], - "text": "technique, 183\nfutures, 192\nSpreadsheet, for pre-open routine,", - "type": "text" - }, - { - "block_id": "p296-b6", - "global_id": 3461, - "bbox": [ - 72.0, - 197.87, - 240.5, - 239.18 - ], - "text": "234–236\nSpread trading, 192\nStandard deviation channels (Bollinger", - "type": "text" - }, - { - "block_id": "p296-b7", - "global_id": 3462, - "bbox": [ - 72.0, - 239.88, - 190.22, - 281.2 - ], - "text": "bands), 167, 172\nSteidlmayer, J. Peter, 66\nStochastic oscillator, 95–99", - "type": "text" - }, - { - "block_id": "p296-b8", - "global_id": 3463, - "bbox": [ - 81.0, - 281.89, - 222.46, - 337.21 - ], - "text": "and crowd psychology, 96–97\ntime window of, 96, 99\ntrading rules, 97–99\nin Triple Screen trading system,", - "type": "text" - }, - { - "block_id": "p296-b9", - "global_id": 3464, - "bbox": [ - 72.0, - 337.91, - 144.58, - 365.22 - ], - "text": "158\nStocks, 175–176", - "type": "text" - }, - { - "block_id": "p296-b10", - "global_id": 3465, - "bbox": [ - 72.0, - 365.92, - 223.93, - 491.26 - ], - "text": "liquidity of, 173–174\nmargins with, 193\noptions vs., 180\nprices of, 175\nscanning for, 230–232\nselecting, 175–176\nshort interest, 147–148\nvolatility of, 174\nStocks above 50-day MA indicator,", - "type": "text" - }, - { - "block_id": "p296-b11", - "global_id": 3466, - "bbox": [ - 72.0, - 491.95, - 225.56, - 547.27 - ], - "text": "139–140\nStockCharts.com, 70\nStoller, Manning, 170\nStops, 219–225. See also Protective", - "type": "text" - }, - { - "block_id": "p296-b12", - "global_id": 3467, - "bbox": [ - 81.0, - 547.97, - 202.0, - 589.28 - ], - "text": "stops\nand Average True Range, 93\navoiding obvious levels for,", - "type": "text" - }, - { - "block_id": "p296-b13", - "global_id": 3468, - "bbox": [ - 81.0, - 589.98, - 224.02, - 645.3 - ], - "text": "220–223\ncatastrophic, 224–225\nmental, 184\nmoving in direction of trade, 224", - "type": "text" - }, - { - "block_id": "p296-b14", - "global_id": 3469, - "bbox": [ - 258.0, - 58.03, - 316.86, - 71.34 - ], - "text": "Stops (Cont.):", - "type": "text" - }, - { - "block_id": "p296-b15", - "global_id": 3470, - "bbox": [ - 267.0, - 72.04, - 405.24, - 85.34 - ], - "text": "outside zone of “market noise,”", - "type": "text" - }, - { - "block_id": "p296-b16", - "global_id": 3471, - "bbox": [ - 258.0, - 86.04, - 421.43, - 281.4 - ], - "text": "220\nand overnight gaps, 225\nplacing, 59\nplanning, 216\nprotective, 58–60, 67\nto protect winning trades, 223–224\npurpose of, 203–204\ntrading without, 202\nin trends vs. in trading ranges, 61\nin Triple Screen system, 162\n“Stop-and-reverse” orders, 89\nStress of trading, reducing, 250\nStrike price (options), 179\nSuccess:", - "type": "text" - }, - { - "block_id": "p296-b17", - "global_id": 3472, - "bbox": [ - 267.0, - 282.1, - 422.08, - 295.4 - ], - "text": "accumulating equity as hallmark of,", - "type": "text" - }, - { - "block_id": "p296-b18", - "global_id": 3473, - "bbox": [ - 267.0, - 296.1, - 412.27, - 393.43 - ], - "text": "20\nbarriers to, 5–8\ndesire for, 2–3\nand emotional trading, 19, 28–29\nqualities for, 30\nrealism for, 10\nand self-control vs. controlling", - "type": "text" - }, - { - "block_id": "p296-b19", - "global_id": 3474, - "bbox": [ - 267.0, - 394.13, - 417.07, - 421.44 - ], - "text": "markets, 27–28\nthrough taking charge of your life,", - "type": "text" - }, - { - "block_id": "p296-b20", - "global_id": 3475, - "bbox": [ - 258.0, - 422.14, - 377.66, - 449.45 - ], - "text": "29–30\nSupply and demand factors:", - "type": "text" - }, - { - "block_id": "p296-b21", - "global_id": 3476, - "bbox": [ - 258.0, - 450.14, - 364.16, - 491.46 - ], - "text": "with futures, 190–191\nreflected in price, 54\nSupport:", - "type": "text" - }, - { - "block_id": "p296-b22", - "global_id": 3477, - "bbox": [ - 258.0, - 492.16, - 389.29, - 533.47 - ], - "text": "defined, 55, 166\nfrom pain and regret, 57\nSupport and resistance, 55–60", - "type": "text" - }, - { - "block_id": "p296-b23", - "global_id": 3478, - "bbox": [ - 258.0, - 534.17, - 416.03, - 645.5 - ], - "text": "causes of, 56–57\nchannels identifying, 166–167\nmoving averages as, 78\nand profit targets, 218–219\nstrength of, 58\ntrading rules and, 58–59\ntrue and false breakouts, 59–60\nSurges, speed and momentum of, 95", - "type": "text" - } - ] - }, - { - "page_num": 297, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p297-b0", - "global_id": 3479, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "INDEX\t\n281", - "type": "text" - }, - { - "block_id": "p297-b1", - "global_id": 3480, - "bbox": [ - 71.94, - 57.83, - 198.38, - 85.14 - ], - "text": "Surowiecki, James, 42\nSwing trading, 126, 128–131", - "type": "text" - }, - { - "block_id": "p297-b2", - "global_id": 3481, - "bbox": [ - 71.94, - 85.84, - 210.97, - 211.18 - ], - "text": "for beginner traders, 73\ngrading trades in, 226\nwith Impulse system, 166\nmarket data for, 72\nprofit taking in, 216\nprofit targets in, 217, 218\nstops in, 221\ntimeframes in, 162\nSymmetrical channels, 167–168", - "type": "text" - }, - { - "block_id": "p297-b3", - "global_id": 3482, - "bbox": [ - 72.0, - 220.38, - 215.33, - 295.15 - ], - "text": "T\nTaking charge of your life, 29–30\nTANSTAFL principle, 178\nTaylor, Lou, 29n.1\nTechnical analysis, 46, 69–102", - "type": "text" - }, - { - "block_id": "p297-b4", - "global_id": 3483, - "bbox": [ - 81.0, - 295.84, - 199.57, - 337.16 - ], - "text": "and channels, 79\ncomputer hardware, 71–72\nDirectional system, 89–94", - "type": "text" - }, - { - "block_id": "p297-b5", - "global_id": 3484, - "bbox": [ - 90.0, - 337.86, - 221.94, - 351.16 - ], - "text": "Average True Range indicator,", - "type": "text" - }, - { - "block_id": "p297-b6", - "global_id": 3485, - "bbox": [ - 81.0, - 351.86, - 237.23, - 421.18 - ], - "text": "92–94\nconstructing, 89–91\ncrowd behavior tracked by, 91–92\ntrading rules, 93\nas for-profit social psychology,", - "type": "text" - }, - { - "block_id": "p297-b7", - "global_id": 3486, - "bbox": [ - 81.0, - 421.88, - 205.42, - 463.2 - ], - "text": "43\nwith fundamentals, 127–128\ngroups of indicators, 73–74", - "type": "text" - }, - { - "block_id": "p297-b8", - "global_id": 3487, - "bbox": [ - 81.0, - 463.89, - 219.8, - 561.22 - ], - "text": "miscellaneous indicators, 74\noscillators, 73\ntrend-following indicators, 73\nand insider trading, 36\nmarket data, 72–73\nmiscellaneous indicators, 74\nMoving Average Convergence-", - "type": "text" - }, - { - "block_id": "p297-b9", - "global_id": 3488, - "bbox": [ - 81.0, - 561.92, - 205.13, - 645.25 - ], - "text": "Divergence, 80–89\ncreating, 81\nMACD-Histogram, 83–89\nMACD Lines, 81–83\nand market psychology, 81\nmoving averages, 74–80", - "type": "text" - }, - { - "block_id": "p297-b10", - "global_id": 3489, - "bbox": [ - 258.0, - 57.98, - 368.77, - 71.29 - ], - "text": "Technical analysis (Cont.):", - "type": "text" - }, - { - "block_id": "p297-b11", - "global_id": 3490, - "bbox": [ - 267.0, - 71.98, - 408.12, - 197.32 - ], - "text": "choosing length of, 76–78\ndual EMAs, 78–79\nexponential, 75–80\nand market psychology, 75–76\nsimple, 75\nas support and resistance, 78\nweighted, 75\nobjectivity of, 49\noscillators, 73, 95", - "type": "text" - }, - { - "block_id": "p297-b12", - "global_id": 3491, - "bbox": [ - 267.0, - 198.02, - 416.76, - 281.35 - ], - "text": "MACD-Histogram, 83–89\noverbought and oversold, 95\nRelative Strength Index, 99–102\nStochastic, 95–99\nas poll-taking, 47\nprices, values, and value zone,", - "type": "text" - }, - { - "block_id": "p297-b13", - "global_id": 3492, - "bbox": [ - 267.0, - 282.04, - 406.25, - 337.36 - ], - "text": "79–80\nfor timing entries and exits, 128\ntoolboxes for, 70–71\ntrend-following indicators, 73", - "type": "text" - }, - { - "block_id": "p297-b14", - "global_id": 3493, - "bbox": [ - 258.0, - 338.06, - 391.25, - 379.38 - ], - "text": "Directional system, 89–94\nMACD Lines, 81–83\nTechnical Analysis of Stock Trends", - "type": "text" - }, - { - "block_id": "p297-b15", - "global_id": 3494, - "bbox": [ - 258.0, - 380.07, - 395.4, - 407.38 - ], - "text": "(Edwards and Magee), 51\nTechnical analysts:", - "type": "text" - }, - { - "block_id": "p297-b16", - "global_id": 3495, - "bbox": [ - 267.0, - 408.08, - 421.36, - 449.4 - ], - "text": "concept of value, 79\ngoals of, 33\nidentification of rallies and declines", - "type": "text" - }, - { - "block_id": "p297-b17", - "global_id": 3496, - "bbox": [ - 258.0, - 450.09, - 368.18, - 505.41 - ], - "text": "by, 44\nas social psychology, 46\nTemperament, 150\nTesting:", - "type": "text" - }, - { - "block_id": "p297-b18", - "global_id": 3497, - "bbox": [ - 258.0, - 506.11, - 411.12, - 547.42 - ], - "text": "of readiness for trading, 236–237\nof trading systems, 151–152\nThinking. See also Fantasies", - "type": "text" - }, - { - "block_id": "p297-b19", - "global_id": 3498, - "bbox": [ - 267.0, - 548.12, - 409.4, - 617.44 - ], - "text": "changing, 22\nand crowd mentality, 41–42\nemotions and, 28, 44\nindependent, 40, 42\nand Losers Anonymous concept,", - "type": "text" - }, - { - "block_id": "p297-b20", - "global_id": 3499, - "bbox": [ - 267.0, - 618.14, - 392.83, - 645.45 - ], - "text": "26–27\nwishful, 16, 49, 50, 219, 224", - "type": "text" - } - ] - }, - { - "page_num": 298, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p298-b0", - "global_id": 3500, - "bbox": [ - 72.0, - 33.66, - 432.01, - 47.21 - ], - "text": "282\t\nINDEX", - "type": "text" - }, - { - "block_id": "p298-b1", - "global_id": 3501, - "bbox": [ - 72.0, - 57.83, - 202.75, - 71.14 - ], - "text": "Thinking, Fast and Slow (Daniel", - "type": "text" - }, - { - "block_id": "p298-b2", - "global_id": 3502, - "bbox": [ - 72.0, - 71.83, - 193.07, - 141.16 - ], - "text": "Kahneman), 200, 238\nTICK, 142\nTicks, 52n.1\nTick volume, 104\nTime, 103, 121–126", - "type": "text" - }, - { - "block_id": "p298-b3", - "global_id": 3503, - "bbox": [ - 72.0, - 141.85, - 198.41, - 225.18 - ], - "text": "cycles, 122\nfactor of five, 125–126\nindicator seasons, 122–124\nmarket time, 124–125\nTime decay (options), 183\nTimeframes:", - "type": "text" - }, - { - "block_id": "p298-b4", - "global_id": 3504, - "bbox": [ - 81.0, - 225.88, - 197.87, - 267.19 - ], - "text": "and factor of five, 125–126\nand kangaroo tails, 65\nof markets, 125", - "type": "text" - }, - { - "block_id": "p298-b5", - "global_id": 3505, - "bbox": [ - 90.0, - 267.89, - 243.5, - 281.2 - ], - "text": "analysis using multiple timeframes,", - "type": "text" - }, - { - "block_id": "p298-b6", - "global_id": 3506, - "bbox": [ - 81.0, - 281.89, - 218.17, - 323.21 - ], - "text": "55\nconflicting, 64–65\nof New High–New Low Index,", - "type": "text" - }, - { - "block_id": "p298-b7", - "global_id": 3507, - "bbox": [ - 81.0, - 323.9, - 167.22, - 365.22 - ], - "text": "137–139\nseasons in, 124\nin trading, 126–132", - "type": "text" - }, - { - "block_id": "p298-b8", - "global_id": 3508, - "bbox": [ - 90.0, - 365.92, - 205.7, - 407.23 - ], - "text": "day-trading, 131–132, 162\nwith Impulse system, 165\nlong-term (investing),", - "type": "text" - }, - { - "block_id": "p298-b9", - "global_id": 3509, - "bbox": [ - 90.0, - 407.93, - 228.76, - 463.25 - ], - "text": "126–128\noptions, 182–183\nswing trading, 128–131, 162\nin Triple Screen trading system,", - "type": "text" - }, - { - "block_id": "p298-b10", - "global_id": 3510, - "bbox": [ - 72.0, - 463.94, - 184.57, - 505.26 - ], - "text": "155–156\nTime value (options), 179\nTime zones:", - "type": "text" - }, - { - "block_id": "p298-b11", - "global_id": 3511, - "bbox": [ - 72.0, - 505.96, - 201.58, - 561.28 - ], - "text": "and market data analysis, 72\ntrading in, 174\nToolboxes, 38, 70–71\nTops. See also specific indicators", - "type": "text" - }, - { - "block_id": "p298-b12", - "global_id": 3512, - "bbox": [ - 72.0, - 561.97, - 203.56, - 659.3 - ], - "text": "and divergences, 87–89\nreversal signals at, 125\nsince the 1950s, 51\nin trends, 71\nTR (True Range), 90\nTrade Apgars, 238–243\nTradebills, 228, 238, 240–243", - "type": "text" - }, - { - "block_id": "p298-b13", - "global_id": 3513, - "bbox": [ - 258.0, - 58.0, - 400.58, - 71.3 - ], - "text": "Trade Journal, 243–247. See also", - "type": "text" - }, - { - "block_id": "p298-b14", - "global_id": 3514, - "bbox": [ - 258.0, - 72.0, - 391.13, - 99.31 - ], - "text": "Trading diaries\nTrade plans, 42, 233, 238–243", - "type": "text" - }, - { - "block_id": "p298-b15", - "global_id": 3515, - "bbox": [ - 258.0, - 100.01, - 428.74, - 155.33 - ], - "text": "creating, 238\nscoring, 238–240\nusing Tradebills, 240–243\nTraders. See also Individual psychology;", - "type": "text" - }, - { - "block_id": "p298-b16", - "global_id": 3516, - "bbox": [ - 267.0, - 156.02, - 366.88, - 211.34 - ], - "text": "Mass psychology\ndiscretionary, 150–151\ngender of, 3–4\nindividual, 36–37", - "type": "text" - }, - { - "block_id": "p298-b17", - "global_id": 3517, - "bbox": [ - 276.0, - 212.04, - 410.99, - 225.35 - ], - "text": "competing against institutional", - "type": "text" - }, - { - "block_id": "p298-b18", - "global_id": 3518, - "bbox": [ - 276.0, - 226.04, - 413.65, - 253.36 - ], - "text": "traders, 37–38\nformer institutional traders as,", - "type": "text" - }, - { - "block_id": "p298-b19", - "global_id": 3519, - "bbox": [ - 276.0, - 254.05, - 415.48, - 295.37 - ], - "text": "212\nisolation of, 250\none advantage over institutional", - "type": "text" - }, - { - "block_id": "p298-b20", - "global_id": 3520, - "bbox": [ - 276.0, - 296.06, - 433.27, - 323.38 - ], - "text": "traders, 228\nperformance of institutional traders", - "type": "text" - }, - { - "block_id": "p298-b21", - "global_id": 3521, - "bbox": [ - 267.0, - 324.07, - 352.46, - 351.38 - ], - "text": "vs., 212\ninstitutional, 37–38", - "type": "text" - }, - { - "block_id": "p298-b22", - "global_id": 3522, - "bbox": [ - 276.0, - 352.08, - 424.01, - 379.39 - ], - "text": "advantages for, 37\nperformance of individual traders", - "type": "text" - }, - { - "block_id": "p298-b23", - "global_id": 3523, - "bbox": [ - 267.0, - 380.09, - 397.98, - 435.41 - ], - "text": "vs., 212\ntrade managers of, 212–213\nmechanical, 149–150\nodds against, 5–8", - "type": "text" - }, - { - "block_id": "p298-b24", - "global_id": 3524, - "bbox": [ - 258.0, - 436.1, - 423.19, - 547.44 - ], - "text": "bid-ask spread, 8\ncommissions, 6–7\nexpenses, 5, 8\nslippage, 7–8\ntrading as a minus-sum game, 5–6\nreasons for trading, 9–10\nTrade setup, 154\nTrading, 1–8. See also specific topics", - "type": "text" - }, - { - "block_id": "p298-b25", - "global_id": 3525, - "bbox": [ - 267.0, - 548.14, - 396.16, - 659.47 - ], - "text": "bid-ask spreads in, 8\ncommissions in, 6–7\nexpenses of, 5, 8\nand gender of traders, 3–4\nidentifying A-trades, 225–230\nlearning skills for, 249–250\nas a minus-sum game, 5–6\nodds against traders in, 5–8", - "type": "text" - } - ] - }, - { - "page_num": 299, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p299-b0", - "global_id": 3526, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "INDEX\t\n283", - "type": "text" - }, - { - "block_id": "p299-b1", - "global_id": 3527, - "bbox": [ - 71.94, - 57.83, - 140.71, - 71.14 - ], - "text": "Trading (Cont.):", - "type": "text" - }, - { - "block_id": "p299-b2", - "global_id": 3528, - "bbox": [ - 80.94, - 71.83, - 203.93, - 141.16 - ], - "text": "bid-ask spread, 8\ncommissions, 6–7\nexpenses, 5, 8\nslippage, 7–8\npsychological readiness for,", - "type": "text" - }, - { - "block_id": "p299-b3", - "global_id": 3529, - "bbox": [ - 80.94, - 141.85, - 201.74, - 169.16 - ], - "text": "236–237\npsychology of, 3–4. See also", - "type": "text" - }, - { - "block_id": "p299-b4", - "global_id": 3530, - "bbox": [ - 80.94, - 169.86, - 222.32, - 267.19 - ], - "text": "Mass psychology; Individual \npsychology\nreasons for, 9–10\nreducing stress of, 250–251\nscanning for trades, 230–232\nsetting profit targets, 215–219\nsetting stops, 219–225", - "type": "text" - }, - { - "block_id": "p299-b5", - "global_id": 3531, - "bbox": [ - 89.94, - 267.89, - 210.94, - 281.2 - ], - "text": "avoiding obvious levels for,", - "type": "text" - }, - { - "block_id": "p299-b6", - "global_id": 3532, - "bbox": [ - 89.94, - 281.89, - 226.25, - 323.21 - ], - "text": "220–223\ncatastrophic, 224–225\nmoving in direction of a trade,", - "type": "text" - }, - { - "block_id": "p299-b7", - "global_id": 3533, - "bbox": [ - 89.94, - 323.9, - 228.18, - 351.22 - ], - "text": "224\noutside zone of “market noise,”", - "type": "text" - }, - { - "block_id": "p299-b8", - "global_id": 3534, - "bbox": [ - 89.94, - 351.91, - 208.09, - 393.23 - ], - "text": "220\nand overnight gaps, 225\nto protect winning trades,", - "type": "text" - }, - { - "block_id": "p299-b9", - "global_id": 3535, - "bbox": [ - 80.94, - 393.92, - 245.18, - 463.25 - ], - "text": "223–224\nin Triple Screen trading system, 162\nslippage in, 7–8\nsucceeding in, 2–3\nas trying to take money from other", - "type": "text" - }, - { - "block_id": "p299-b10", - "global_id": 3536, - "bbox": [ - 71.94, - 463.94, - 167.39, - 505.26 - ], - "text": "people, 35\nTrading accounts, 204\nTrading diaries, 20", - "type": "text" - }, - { - "block_id": "p299-b11", - "global_id": 3537, - "bbox": [ - 80.94, - 505.96, - 227.33, - 519.26 - ], - "text": "to avoid self-destructiveness, 18,", - "type": "text" - }, - { - "block_id": "p299-b12", - "global_id": 3538, - "bbox": [ - 71.94, - 519.96, - 210.11, - 575.28 - ], - "text": "19\nTrade Journal, 243–247\nTrading managers, 38, 212–213\nTrading ranges, 60–65", - "type": "text" - }, - { - "block_id": "p299-b13", - "global_id": 3539, - "bbox": [ - 80.94, - 575.98, - 209.59, - 589.28 - ], - "text": "and conflicting timeframes of", - "type": "text" - }, - { - "block_id": "p299-b14", - "global_id": 3540, - "bbox": [ - 80.94, - 589.98, - 221.45, - 659.3 - ], - "text": "markets, 64–65\ndeciding to trade or wait, 63–64\nat hard right edge, 63-64\nidentifying, 63–64\nmass psychology of, 62", - "type": "text" - }, - { - "block_id": "p299-b15", - "global_id": 3541, - "bbox": [ - 257.94, - 58.0, - 357.05, - 71.3 - ], - "text": "Trading ranges (Cont.):", - "type": "text" - }, - { - "block_id": "p299-b16", - "global_id": 3542, - "bbox": [ - 257.94, - 72.0, - 384.73, - 169.33 - ], - "text": "as OBV signal, 108\nopen interest in, 120–121\noscillators in, 95\npain and regret in, 57\nand Stochastic signals, 98\ntime spent in trends vs., 59\nTrading rules. See also Risk", - "type": "text" - }, - { - "block_id": "p299-b17", - "global_id": 3543, - "bbox": [ - 257.94, - 170.03, - 417.55, - 253.36 - ], - "text": "management; specific topics and \nindicators\nbending, 19–20\nfor discretionary traders, 150\nfor mechanical traders, 149–150\nTrading scene participants, 36–39", - "type": "text" - }, - { - "block_id": "p299-b18", - "global_id": 3544, - "bbox": [ - 257.94, - 254.05, - 418.43, - 337.38 - ], - "text": "advisors, 39\nindividual traders, 36–37\ninstitutional traders, 37–38\nTrading skills, learning, 249–251\nTrading software, 38\nTrading systems/strategies, 149–172", - "type": "text" - }, - { - "block_id": "p299-b19", - "global_id": 3545, - "bbox": [ - 266.94, - 338.08, - 388.8, - 379.39 - ], - "text": "for A-trades, 228–229\nand autopilot fantasy, 12–13\nChannel system, 166–172", - "type": "text" - }, - { - "block_id": "p299-b20", - "global_id": 3546, - "bbox": [ - 275.94, - 380.09, - 372.71, - 407.4 - ], - "text": "constructing, 167\nand mass psychology,", - "type": "text" - }, - { - "block_id": "p299-b21", - "global_id": 3547, - "bbox": [ - 275.94, - 408.1, - 403.5, - 435.41 - ], - "text": "168–170\nstandard deviation (Bollinger", - "type": "text" - }, - { - "block_id": "p299-b22", - "global_id": 3548, - "bbox": [ - 266.94, - 436.1, - 405.48, - 505.43 - ], - "text": "bands), 172\nsymmetrical, 167–168\ntrading rules, 170–171\ndefined, 149\ndeveloped prior to scanning for", - "type": "text" - }, - { - "block_id": "p299-b23", - "global_id": 3549, - "bbox": [ - 266.94, - 506.12, - 401.22, - 561.44 - ], - "text": "trades, 230\ndiscretionary traders, 150–151\nfrequency of signals from, 8\nImpulse system, 162–166", - "type": "text" - }, - { - "block_id": "p299-b24", - "global_id": 3550, - "bbox": [ - 266.94, - 562.14, - 411.52, - 659.47 - ], - "text": "entries in, 164–166\nexits in, 166\nkey demands for trades, 153–154\nto limit commissions, 6\nfor mechanical traders, 149–150\noptimizing, 201\npaper trading, 152–153", - "type": "text" - } - ] - }, - { - "page_num": 300, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p300-b0", - "global_id": 3551, - "bbox": [ - 72.0, - 33.66, - 432.01, - 47.21 - ], - "text": "284\t\nINDEX", - "type": "text" - }, - { - "block_id": "p300-b1", - "global_id": 3552, - "bbox": [ - 72.0, - 57.83, - 223.39, - 71.14 - ], - "text": "Trading systems/strategies (Cont.):", - "type": "text" - }, - { - "block_id": "p300-b2", - "global_id": 3553, - "bbox": [ - 81.0, - 71.83, - 235.64, - 85.14 - ], - "text": "and psychological readiness to win,", - "type": "text" - }, - { - "block_id": "p300-b3", - "global_id": 3554, - "bbox": [ - 81.0, - 85.84, - 190.56, - 155.16 - ], - "text": "19\nsimplicity of, 201\ntesting systems, 151–152\ntradebills for, 238\nTriple Screen, 154–162", - "type": "text" - }, - { - "block_id": "p300-b4", - "global_id": 3555, - "bbox": [ - 90.0, - 155.86, - 233.33, - 253.19 - ], - "text": "choosing timeframes, 155–156\nin day-trading, 161–162\nentry technique screen, 158–160\nmarket tide screen, 156–158\nmarket wave screen, 158, 159\nstops and profit targets in, 162\ntrend-following indicators and", - "type": "text" - }, - { - "block_id": "p300-b5", - "global_id": 3556, - "bbox": [ - 72.0, - 253.88, - 201.2, - 281.2 - ], - "text": "oscillators, 155\nTrading timeframes, 126–132", - "type": "text" - }, - { - "block_id": "p300-b6", - "global_id": 3557, - "bbox": [ - 72.0, - 281.89, - 218.18, - 337.21 - ], - "text": "day-trading, 131–132\nlong-term (investing), 126–128\nswing trading, 128–131\nTrading vehicles, 173–196.", - "type": "text" - }, - { - "block_id": "p300-b7", - "global_id": 3558, - "bbox": [ - 81.0, - 337.91, - 225.97, - 407.23 - ], - "text": "See also individual vehicles\ncontracts for difference, 186–187\nexchange-traded funds, 176–178\nforex, 194–196\nfutures, 187–194", - "type": "text" - }, - { - "block_id": "p300-b8", - "global_id": 3559, - "bbox": [ - 90.0, - 407.93, - 218.2, - 421.24 - ], - "text": "and commitments of traders,", - "type": "text" - }, - { - "block_id": "p300-b9", - "global_id": 3560, - "bbox": [ - 90.0, - 421.93, - 238.94, - 519.26 - ], - "text": "192–193\ncompared to cash trades, 188–189\ncontango, 191\nfloors and ceilings, 191\nhedging, 189–190\ninversions, 191\nmargins and risk control with,", - "type": "text" - }, - { - "block_id": "p300-b10", - "global_id": 3561, - "bbox": [ - 90.0, - 519.96, - 232.85, - 575.28 - ], - "text": "193–194\nseasonality with, 191\nspreads, 192\nsupply and demand factors with,", - "type": "text" - }, - { - "block_id": "p300-b11", - "global_id": 3562, - "bbox": [ - 81.0, - 575.98, - 184.08, - 631.3 - ], - "text": "190–191\nliquidity of, 173–174\nlong vs. short, 174–175\noptions, 178–185", - "type": "text" - }, - { - "block_id": "p300-b12", - "global_id": 3563, - "bbox": [ - 90.0, - 631.99, - 209.5, - 659.3 - ], - "text": "buying, 180–181\nlimiting risk with, 183–185", - "type": "text" - }, - { - "block_id": "p300-b13", - "global_id": 3564, - "bbox": [ - 258.0, - 58.0, - 363.24, - 71.3 - ], - "text": "Trading vehicles (Cont.):", - "type": "text" - }, - { - "block_id": "p300-b14", - "global_id": 3565, - "bbox": [ - 258.0, - 72.0, - 363.06, - 183.34 - ], - "text": "price of, 179–180\nwriting, 181–183\nscanning for, 230–232\nstocks, 175–176\nand time zones, 174\nvolatility of, 174\nTrailing stops, 221, 223\nTrends, 60–65.", - "type": "text" - }, - { - "block_id": "p300-b15", - "global_id": 3566, - "bbox": [ - 267.0, - 184.03, - 417.92, - 225.35 - ], - "text": "See also Downtrends; Uptrends\nadvisors’ following of, 143\nand conflicting timeframes of", - "type": "text" - }, - { - "block_id": "p300-b16", - "global_id": 3567, - "bbox": [ - 267.0, - 226.04, - 417.71, - 295.37 - ], - "text": "markets, 64–65\ncreated by crowds, 34\ndeciding to trade or wait, 64\ndefined, 60\neffect of support or resistance on,", - "type": "text" - }, - { - "block_id": "p300-b17", - "global_id": 3568, - "bbox": [ - 267.0, - 296.06, - 392.29, - 323.38 - ], - "text": "55\nand factor of five, 125–126,", - "type": "text" - }, - { - "block_id": "p300-b18", - "global_id": 3569, - "bbox": [ - 267.0, - 324.07, - 407.5, - 449.41 - ], - "text": "155–156\nin futures markets, 190–191\nat hard right edge, 62\nhealth of, 59\nidentifying, 56, 62–63\non long-term charts, 126–127\nmoving averages indicating, 78\nNH-NL, 136\nand objective signals for trades,", - "type": "text" - }, - { - "block_id": "p300-b19", - "global_id": 3570, - "bbox": [ - 267.0, - 450.11, - 368.1, - 491.42 - ], - "text": "41\nand oscillator levels, 95\npsychology of, 43–46", - "type": "text" - }, - { - "block_id": "p300-b20", - "global_id": 3571, - "bbox": [ - 276.0, - 492.12, - 381.06, - 561.44 - ], - "text": "emotions in, 43–44\nand mass psychology, 62\nprice shocks, 44–45\nrallies and declines, 44\nand social psychology,", - "type": "text" - }, - { - "block_id": "p300-b21", - "global_id": 3572, - "bbox": [ - 267.0, - 562.14, - 410.46, - 603.46 - ], - "text": "45–46\nand Stochastic signals, 98, 99\ntime spent in trading ranges vs.,", - "type": "text" - }, - { - "block_id": "p300-b22", - "global_id": 3573, - "bbox": [ - 267.0, - 604.15, - 375.56, - 645.47 - ], - "text": "59\ntiming of trades and, 125\nand volume of trading,", - "type": "text" - }, - { - "block_id": "p300-b23", - "global_id": 3574, - "bbox": [ - 285.0, - 646.16, - 323.98, - 659.47 - ], - "text": "105–107", - "type": "text" - } - ] - }, - { - "page_num": 301, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p301-b0", - "global_id": 3575, - "bbox": [ - 72.0, - 33.66, - 431.99, - 47.21 - ], - "text": "INDEX\t\n285", - "type": "text" - }, - { - "block_id": "p301-b1", - "global_id": 3576, - "bbox": [ - 71.94, - 57.83, - 204.16, - 71.14 - ], - "text": "Trend-following indicators, 73", - "type": "text" - }, - { - "block_id": "p301-b2", - "global_id": 3577, - "bbox": [ - 80.94, - 71.83, - 222.4, - 113.15 - ], - "text": "Directional system, 89–94\nMACD Lines, 81–83\nin Triple Screen trading system,", - "type": "text" - }, - { - "block_id": "p301-b3", - "global_id": 3578, - "bbox": [ - 71.94, - 113.84, - 120.98, - 141.16 - ], - "text": "155\nTrendlines:", - "type": "text" - }, - { - "block_id": "p301-b4", - "global_id": 3579, - "bbox": [ - 71.94, - 141.85, - 236.72, - 197.17 - ], - "text": "diagonal, 50\nsubjectivity of, 56\nTRIN, 142\nTriple bullish or bearish divergences,", - "type": "text" - }, - { - "block_id": "p301-b5", - "global_id": 3580, - "bbox": [ - 71.94, - 197.87, - 240.17, - 225.18 - ], - "text": "89\nTriple Screen trading system, 154–162", - "type": "text" - }, - { - "block_id": "p301-b6", - "global_id": 3581, - "bbox": [ - 80.94, - 225.88, - 224.27, - 365.22 - ], - "text": "choosing timeframes, 155–156\nin day-trading, 161–162\nentry technique screen, 158–160\nForce Index in, 116\nmarket tide screen, 156–158\nmarket wave screen, 158, 159\nobjective of, 74\nStochastic signals in, 98\nstops and profit targets in, 162\ntrend-following indicators and", - "type": "text" - }, - { - "block_id": "p301-b7", - "global_id": 3582, - "bbox": [ - 71.94, - 365.92, - 242.47, - 547.27 - ], - "text": "oscillators, 155\nTrue breakouts, 59–60\nTrue Range (TR), 90\nTulip Mania, 39–40\n12-step programs, 21\nTwelve Steps and Twelve Traditions (AA), 21\n20-day New High–New Low Index, \n138–139\n2% Rule, 26, 64, 203–207\nin futures markets, 205–207\nas a guideline for pyramiding, 210\nfor institutional traders, 212–213\nand Iron Triangle of risk control,", - "type": "text" - }, - { - "block_id": "p301-b8", - "global_id": 3583, - "bbox": [ - 71.94, - 547.97, - 230.62, - 575.28 - ], - "text": "204–205\nTwo Roads Diverged: Trading Divergences", - "type": "text" - }, - { - "block_id": "p301-b9", - "global_id": 3584, - "bbox": [ - 71.94, - 575.98, - 194.11, - 603.29 - ], - "text": "(Alexander Elder), 88\nTyson, Mike, 197", - "type": "text" - }, - { - "block_id": "p301-b10", - "global_id": 3585, - "bbox": [ - 72.0, - 612.38, - 169.02, - 659.14 - ], - "text": "U\nUncertainty, 62, 217\nUndecided traders, 32", - "type": "text" - }, - { - "block_id": "p301-b11", - "global_id": 3586, - "bbox": [ - 258.0, - 57.83, - 400.96, - 85.14 - ], - "text": "Undercapitalization myth, 11–12\nU.S. stock market:", - "type": "text" - }, - { - "block_id": "p301-b12", - "global_id": 3587, - "bbox": [ - 258.0, - 85.84, - 418.42, - 127.22 - ], - "text": "price cycles in, 122\ntrends in, 155\nUnstuff  Your Life (Andrew J. Mellon),", - "type": "text" - }, - { - "block_id": "p301-b13", - "global_id": 3588, - "bbox": [ - 257.99, - 127.91, - 363.14, - 169.23 - ], - "text": "233\nUpside penetration, 220\nUptrends, 61", - "type": "text" - }, - { - "block_id": "p301-b14", - "global_id": 3589, - "bbox": [ - 266.99, - 169.92, - 415.91, - 225.24 - ], - "text": "bearish divergences during, 87–89\nchannel trading during, 170\ncrowd behavior creating, 44–45\nForce Index indication of,", - "type": "text" - }, - { - "block_id": "p301-b15", - "global_id": 3590, - "bbox": [ - 266.99, - 225.94, - 419.88, - 421.3 - ], - "text": "113–116\nidentifying, 63\nImpulse system in, 166\nmass psychology of, 62\nNH-NL, 136\nopen interest during, 120, 121\noverbought oscillators in, 95\npain and regret in, 57\nperfect, 60\nat resistance level, 55\nsignals in, 220\nand Stochastic signals, 98, 99\nstocks above MAs in, 139\nTriple Screen indicators for buying", - "type": "text" - }, - { - "block_id": "p301-b16", - "global_id": 3591, - "bbox": [ - 257.99, - 422.0, - 384.0, - 477.32 - ], - "text": "in, 160\nand volume of trading, 107\nvolume spikes in, 106\nUrge to trade, 23–24", - "type": "text" - }, - { - "block_id": "p301-b17", - "global_id": 3592, - "bbox": [ - 258.0, - 486.38, - 296.45, - 519.14 - ], - "text": "V\nValue(s):", - "type": "text" - }, - { - "block_id": "p301-b18", - "global_id": 3593, - "bbox": [ - 267.0, - 519.83, - 324.56, - 533.14 - ], - "text": "consensus of:", - "type": "text" - }, - { - "block_id": "p301-b19", - "global_id": 3594, - "bbox": [ - 276.0, - 533.84, - 413.33, - 589.16 - ], - "text": "on MACD-Histogram, 84\nmoving averages as, 75, 81\nprice as, 32–33, 100–101\nand trades above/below EMA,", - "type": "text" - }, - { - "block_id": "p301-b20", - "global_id": 3595, - "bbox": [ - 258.0, - 589.85, - 382.51, - 659.18 - ], - "text": "139\nof options, 180\nprices vs., 79–80\nValue zone, 79–80, 167, 216\nVince, Ralph, 200", - "type": "text" - } - ] - }, - { - "page_num": 302, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p302-b0", - "global_id": 3596, - "bbox": [ - 72.0, - 33.66, - 432.01, - 47.21 - ], - "text": "286\t\nINDEX", - "type": "text" - }, - { - "block_id": "p302-b1", - "global_id": 3597, - "bbox": [ - 72.0, - 57.83, - 131.84, - 71.14 - ], - "text": "Volatility, 174", - "type": "text" - }, - { - "block_id": "p302-b2", - "global_id": 3598, - "bbox": [ - 72.0, - 71.83, - 182.23, - 155.16 - ], - "text": "ATR lines showing, 93\nand channel width, 167\nmeasuring, 174\nVolatility index, 177\nVolatility stops, 221\nVolume, 103–121", - "type": "text" - }, - { - "block_id": "p302-b3", - "global_id": 3599, - "bbox": [ - 81.0, - 155.86, - 230.66, - 295.2 - ], - "text": "crowd behavior reflected in, 33\nand crowd psychology, 105–107\n“high” and “low,” 106–107\nand liquidity, 173–174\nmeasuring, 104–105\nmoving average of, 78\nof penny stocks, 145\nin support and resistance zones,58\nand true vs. false breakouts, 60\nvolume-based indicators, 107–121", - "type": "text" - }, - { - "block_id": "p302-b4", - "global_id": 3600, - "bbox": [ - 90.0, - 295.9, - 215.1, - 309.2 - ], - "text": "Accumulation/Distribution,", - "type": "text" - }, - { - "block_id": "p302-b5", - "global_id": 3601, - "bbox": [ - 72.0, - 309.9, - 222.71, - 379.22 - ], - "text": "110–112\nForce Index, 112–117\nOn-Balance Volume, 107–110\nopen interest, 117–121\nVolume-based indicators, 107–121", - "type": "text" - }, - { - "block_id": "p302-b6", - "global_id": 3602, - "bbox": [ - 81.0, - 379.92, - 240.14, - 393.23 - ], - "text": "Accumulation/Distribution (A/D),", - "type": "text" - }, - { - "block_id": "p302-b7", - "global_id": 3603, - "bbox": [ - 81.0, - 393.92, - 196.07, - 449.24 - ], - "text": "110–112\nand crowd behavior, 110\ntrading rules, 111\nForce Index, 112–117", - "type": "text" - }, - { - "block_id": "p302-b8", - "global_id": 3604, - "bbox": [ - 81.0, - 449.94, - 215.44, - 533.27 - ], - "text": "constructing, 112–113\nintermediate-term, 116–117\nshort-term, 113–116\nand trading psychology, 113\ntrading rules, 113–117\nOn-Balance Volume, 107–110", - "type": "text" - }, - { - "block_id": "p302-b9", - "global_id": 3605, - "bbox": [ - 81.0, - 533.96, - 207.3, - 575.28 - ], - "text": "and crowd psychology, 108\ntrading signals, 108\nopen interest, 117–121", - "type": "text" - }, - { - "block_id": "p302-b10", - "global_id": 3606, - "bbox": [ - 90.0, - 575.98, - 229.79, - 603.29 - ], - "text": "and crowd psychology, 118–120\ntrading rules, 120–121", - "type": "text" - }, - { - "block_id": "p302-b11", - "global_id": 3607, - "bbox": [ - 72.0, - 612.38, - 225.1, - 659.14 - ], - "text": "W\nWall Street, 31\nWall Street Journal, The, 50, 144, 195", - "type": "text" - }, - { - "block_id": "p302-b12", - "global_id": 3608, - "bbox": [ - 258.0, - 57.83, - 394.9, - 85.14 - ], - "text": "Watch list, building, 72\nWeekly charts, 51–53, 59, 60.", - "type": "text" - }, - { - "block_id": "p302-b13", - "global_id": 3609, - "bbox": [ - 258.0, - 85.84, - 418.88, - 127.16 - ], - "text": "See also Timeframes; individual \nindicators\nWeekly New High–New Low Index,", - "type": "text" - }, - { - "block_id": "p302-b14", - "global_id": 3610, - "bbox": [ - 258.0, - 127.85, - 419.72, - 169.17 - ], - "text": "137–138\nWeekly Stochastic, 99\nWeighted moving averages (WMAs),", - "type": "text" - }, - { - "block_id": "p302-b15", - "global_id": 3611, - "bbox": [ - 258.0, - 169.86, - 426.61, - 253.19 - ], - "text": "75, 78\nWeissman, Richard, 149\nWhipsaws, 81, 219, 221\nWilder, J. Welles, Jr., 89, 99\nWilliams, Larry, 110\nWinner Take All (William R. Gallacher),", - "type": "text" - }, - { - "block_id": "p302-b16", - "global_id": 3612, - "bbox": [ - 258.0, - 253.89, - 399.98, - 281.2 - ], - "text": "15\nWinning, 27–30. See also Success", - "type": "text" - }, - { - "block_id": "p302-b17", - "global_id": 3613, - "bbox": [ - 267.0, - 281.9, - 402.23, - 365.22 - ], - "text": "bending the rules after, 19–20\ndesire for, 2–3\ndifficulty of, 35\nand emotional trading, 28–29\nessential components for, 16\nand self-control vs. controlling", - "type": "text" - }, - { - "block_id": "p302-b18", - "global_id": 3614, - "bbox": [ - 267.0, - 365.92, - 395.89, - 393.23 - ], - "text": "markets, 27–28\nby taking charge of your life,", - "type": "text" - }, - { - "block_id": "p302-b19", - "global_id": 3615, - "bbox": [ - 258.0, - 393.93, - 406.22, - 449.25 - ], - "text": "29–30\nand volume of trading, 105, 106\nWisdom of crowds, 42–43\nWisdom of Crowds, The", - "type": "text" - }, - { - "block_id": "p302-b20", - "global_id": 3616, - "bbox": [ - 258.0, - 449.94, - 385.33, - 477.26 - ], - "text": "(James Surowiecki), 42\nWishful thinking, 16", - "type": "text" - }, - { - "block_id": "p302-b21", - "global_id": 3617, - "bbox": [ - 258.0, - 477.95, - 413.71, - 547.28 - ], - "text": "with classical charting, 49–50\ngiving trades “more room” as, 224\nand stops, 219\nWorldwide crowds, 34\nWriting options, 178–185", - "type": "text" - }, - { - "block_id": "p302-b22", - "global_id": 3618, - "bbox": [ - 258.0, - 556.38, - 341.96, - 589.14 - ], - "text": "Y\nYahoo Finance, 174", - "type": "text" - }, - { - "block_id": "p302-b23", - "global_id": 3619, - "bbox": [ - 258.0, - 598.38, - 329.86, - 631.14 - ], - "text": "Z\nZero-sum game:", - "type": "text" - }, - { - "block_id": "p302-b24", - "global_id": 3620, - "bbox": [ - 267.0, - 631.83, - 356.33, - 659.14 - ], - "text": "forex market as, 195\ntrading as, 5", - "type": "text" - } - ] - }, - { - "page_num": 303, - "width": 504.0, - "height": 720.0, - "blocks": [ - { - "block_id": "p303-b0", - "global_id": 3621, - "bbox": [ - 126.4, - 94.33, - 387.61, - 112.26 - ], - "text": "WILEY END USER LICENSE", - "type": "text" - }, - { - "block_id": "p303-b1", - "global_id": 3622, - "bbox": [ - 194.87, - 116.24, - 319.1, - 134.17 - ], - "text": "AGREEMENT", - "type": "text" - }, - { - "block_id": "p303-b2", - "global_id": 3623, - "bbox": [ - 95.61, - 142.84, - 418.5, - 166.76 - ], - "text": "Go to www.wiley.com/go/eula to access Wiley’s ebook\nEULA.", - "type": "text" - } - ] - } - ] -} \ No newline at end of file diff --git a/trading/llm.txt b/trading/llm.txt deleted file mode 100644 index fff0235c17833947f38d553197d81849759c46fc..0000000000000000000000000000000000000000 --- a/trading/llm.txt +++ /dev/null @@ -1,24 +0,0 @@ -# Category Index: trading -> Total Books in Category: 2 | Hugging Face Storage Backend - -## Category Overview -This index lists all books in **trading** stored on Hugging Face Dataset (learner20011/CloverTexts-Data). - -## Books Directory -### 1. Technical Analysis of the Financial Markets -- **Doc ID**: technical_analysis_of_the_financial_market_-_john_j_murphy -- **Author**: John J. Murphy -- **Pages**: 494 | **Year**: 2020 -- **Tags**: _john_j_murphy, technical_analysis_of_the_financial_market_ -- **Book LLM Text**: [https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/llm.txt](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/llm.txt) -- **PDF Download**: [https://huggingface.co/datasets/learner20011/CloverTexts-Data/resolve/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/technical_analysis_of_the_financial_market_-_john_j_murphy.pdf](https://huggingface.co/datasets/learner20011/CloverTexts-Data/resolve/main/trading/Technical_Analysis_of_the_Financial_Market_-_John_J_Murphy/technical_analysis_of_the_financial_market_-_john_j_murphy.pdf) -- **Chapters Count**: 32 - -### 2. The New Trading for a Living -- **Doc ID**: the_new_trading_for_a_living -- **Author**: Alexander Elder -- **Pages**: 303 | **Year**: 2014 -- **Tags**: the_new_trading_for_a_living -- **Book LLM Text**: [https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/The New Trading for a Living/llm.txt](https://huggingface.co/datasets/learner20011/CloverTexts-Data/raw/main/trading/The New Trading for a Living/llm.txt) -- **PDF Download**: [https://huggingface.co/datasets/learner20011/CloverTexts-Data/resolve/main/trading/The New Trading for a Living/the_new_trading_for_a_living.pdf](https://huggingface.co/datasets/learner20011/CloverTexts-Data/resolve/main/trading/The New Trading for a Living/the_new_trading_for_a_living.pdf) -- **Chapters Count**: 21