Essentials of Technical Analysis for Financial Markets

Preface xiii

Acknowledgments xvii

1 Introduction to Technical Analysis: Pursuing Profit in the Financial Markets 1

What Is Technical Analysis? 2

Technical versus Fundamental 2

Methods 5

What to Expect 5

Summary 9

2 The Story of Technical Analysis: From the Japanese Rice Markets to Dow Theory to Automated Trading 11

The Beginning: Japanese Rice Markets 12

Dow Theory 14

Charting 17

Elliott Wave 18

W. D. Gann 20

Indicators 20

Trend Followers 22

Market Technicians Association 23

Technical Analysis Today 23

Summary 24

3 The Power of Technical Analysis: Principles of Price Action 27

Introduction to Price Action Concepts 28

Components of Price Action 29

Summary 32

4 The Basics of Technical Analysis: Bars, Candlesticks, Lines, and Point and Figure 33

Bars and Candlesticks 34

Line Charts 37

Point-and-Figure Charts 38

Summary 40

5 The Heart of Technical Analysis: Uptrends and Downtrends 41

Introduction to Trend 42

Effect of Time Frames on Trend Determination 50

Parallel Trend Channels 52

Trend Lines 54

Summary 55

6 The Soul of Technical Analysis: Support and Resistance 57

Introduction to Support and Resistance 58

Support Becomes Resistance Becomes Support 60

Summary 64

7 Primary Drawing Tools: Trend Lines, Trend Channels, and Horizontal Support and Resistance 65

Introduction to Drawing Tools 66

Static Support and Resistance 67

Dynamic Support and Resistance 72

Horizontal Support and Resistance Lines 78

Trend Lines 81

Parallel Trend Channels 87

Summary 89

8 Chart Patterns: Bar Shapes and Candlestick Formations 91

Introduction to Chart Patterns 91

Continuation Bar Patterns 93

Reversal Bar Patterns 102

Gaps 106

Candlestick Patterns 110

Single-Candle Patterns 111

Multiple-Candle Patterns 116

Summary 118

9 The World of Moving Averages 119

Introduction to Moving Averages 119

Moving Average Crossovers 123

Moving Averages as Support and Resistance 131

Summary 134

10 Key Technical Indicators and Oscillators 135

Introduction to Indicators and Oscillators 135

Key Indicators 139

Key Oscillators 148

Summary 159

11 Fibonacci and Elliott Wave 161

Fibonacci Theory and Methods 161

Elliott Wave Theory 170

Summary 175

12 Point-and-Figure Charting 177

Introduction to Point and Figure 177

Point-and-Figure Patterns 181

Point-and-Figure Price Targets 188

Summary 190

13 Volume 193

Introduction to Volume 193

On-Balance Volume 196

Tick Volume 198

Summary 199

14 Technical Trading Strategies: Practical Applications 201

Introduction to Technical Trading Strategies 202

Moving Average Crossovers 203

Breakout Trading 212

Trend Trading 224

Range Trading 238

Price-Oscillator Divergences 244

Oscillator Trading 249

Fibonacci Trading 254

Positive Expectancy 256

Summary 258

15 Risk Control and Money Management 261

Introduction to Risk Control and

Money Management 262

Stop-Losses 263

Reward:Risk Ratio 266

Maximum Allowable Loss 269

Multiple Fractional Positions 271

Diversification 273

Summary 273

Index 277