STUDYGUIDEFOR

THENEW

TRADINGFORALLIVING

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STUDYGUIDEFOR

THENEW

TRADINGFORALIVING

Psychology•Discipline

TradingToolsandSystems

RiskControl•TradeManagement

Dr.AlexanderElder

www.elder.com

www.spiketrade.com

Coverdesign:PaulDiNovoCopyright©2014bybyDr.AlexanderElder.Allrightsreserved.PublishedbyJohnWiley&Sons, Inc.,Hoboken,NewJersey.PublishedsimultaneouslyinCanada.No part of this publication may bereproduced,storedinaretrievalsystem,or transmitted in any form or by anymeans, electronic, mechanical,photocopying, recording, scanning, orotherwise, except as permitted underSection107or108of the1976UnitedStatesCopyrightAct,withouteithertheprior written permission of thePublisher, or authorization throughpaymentoftheappropriateper-copyfee

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CONTENTS

1. ABOUTTHISSTUDYGUIDE

2. PARTI:QUESTIONSRATINGSCALES1. Introduction2. ONE:Individual

Psychology

3. TWO:MassPsychology

4. THREE:ClassicalChartAnalysis

5. FOUR:ComputerizedTechnicalAnalysis

6. FIVE:VolumeandTime

7. SIX:GeneralMarketIndicators

8. SEVEN:Trading

Systems9. EIGHT:Trading

Vehicles1. Note

10. NINE:RiskManagement

11. TEN:PracticalDetails

12. ELEVEN:GoodRecord-Keeping

3. PARTII:ANSWERSANDCOMMENTS

1. Introduction1. Rating

Yourself2. ONE:Individual

Psychology1. Rating

Yourself2. Recommended

Reading3. TWO:Mass

Psychology1. Rating

Yourself2. Recommended

Reading4. THREE:Classical

ChartAnalysis1. Rating

Yourself2. Recommended

Reading5. FOUR:

ComputerizedTechnicalAnalysis

1. RatingYourself

2. RecommendedReading

6. FIVE:VolumeandTime1. Rating

Yourself2. Recommended

Reading7. SIX:General

MarketIndicators

1. RatingYourself

2. RecommendedReading

8. SEVEN:TradingSystems1. Rating

Yourself2. Recommended

Reading9. EIGHT:Trading

Vehicles

1. RatingYourself

10. NINE:RiskManagement1. Rating

Yourself2. Recommended

Reading11. TEN:Practical

Details1. Rating

Yourself

12. ELEVEN:GoodRecord-Keeping1. Rating

Yourself4. Afterword5. Sources6. AbouttheAuthor7. EndUserLicense

Agreement

ListofIllustrations1. THREE

1. FIGURE3.4Medtronic,Inc.(MDT)weeklychart.(ChartbyStockcharts.com).

2. FIGURE3.8WalterEnergyInc.(WLT)daily.(ChartbyStockcharts.com).

3. FIGURE3.10JetBlueAirwaysCorp.(JBLU)daily.(ChartbyStockcharts.com).

4. FIGURE3.12BoeingCo.(BA)daily.(ChartbyStockcharts.com).

2. FOUR1. FIGURE4.7

Williams-SonomaInc.(WSM)daily,

13-dayEMA.(ChartbyStockcharts.com).

2. FIGURE4.8BlackBerryLimited(BBRY)weekly,13-weekEMA.(ChartbyStockcharts.com).

3. FIGURE4.11DRHortonInc.(DHI)daily,26-dayEMAand12-26-9

MACD.(ChartbyStockcharts.com).

4. FIGURE4.14AlexcoResourceCorporation(AXU)with22-dayEMAanda13-dayDirectionalSystem(green+DI,red–DI,blackADX).(ChartbyStockcharts.com).

5. FIGURE4.18

LeapfrogEnterprisesInc.(LF)with26-dayEMAand7/3SlowStochastic.(ChartbyStockcharts.com).

6. FIGURE4.20Tiffany&Co.(TIF)with26-dayEMAand13-dayRSI.(ChartbyStockcharts.com).

3. FIVE1. FIGURE5.3

CapstoneTurbineCorp.(CPST)with26-dayEMAanddailyvolume.(ChartbyStockcharts.com).

2. FIGURE5.13ScorpioTankers,Inc.(STNG)with13-dayEMAofpriceanda2-day

EMAofForceIndex.(ChartbyStockcharts.com).

3. FIGURE5.15EMCCorp.(EMC)with13-dayEMAofpriceanda13-dayEMAofForceIndex.(ChartbyStockcharts.com).

4. FIGURE5.18Molycorp,Inc.(MCP)with13-day

EMAofpriceanda12-26-9MACD-Histogram.(ChartbyStockcharts.com).

4. SIX1. FIGURE6.3S&P

500witha22-dayEMA,aNewHigh–NewLowIndex,withaoneyearlook-backperiod.(NH-NLdatafrom

Barchart.com,chartbyTradeStation).

5. SEVEN1. FIGURE7.8Onthe

left:BBBYweeklychartwitha13-barEMAand12-26-9MACD-Histogram.Ontheright:BBBYdailychartwitha13-barEMAand2-barForceIndex.(Chartby

Stockcharts.com).2. FIGURE7.12JCP

dailywitha13-barEMA,a12-26-9MACD-Histogram,andtheImpulsesystem.(ChartbyStockcharts.com).

ABOUTTHISSTUDYGUIDE

Experiencedtradersseemtoglide through the markets,swinging into and out oftrades. Their trading appears

effortless, like downhillskiingonTV.Theillusionofease vanishes when youclamp on a pair of skis anddiscover the bumps on theslope.Ifyouwanttoimproveyour trading skills, you haveto work, study, and do yourhomework.I created thisStudyGuide tohelpyougrowandsucceedasa trader. It is based on myyears of experience as a

trader and teacher of traders.The more you study themarketsandyourreactionstothem,themorelikelyyouaretosucceed.Youneedtolearnmore about yourself as wellas themarkets—good tradersalwayslearn.EachquestioninthisGuideislinkedtoaspecificchapterinTheNewTradingforaLiving—psychology, riskmanagement, indicators, and

so on. Write down youranswers and compare themwiththoseinthebook.Whenanswering chart-relatedquestions, cover each chartwith a sheet of paper andmove it slowly from left toright to imitate the unfoldingof market action. Practicedealing with the uncertaintyofthemarketswhileworkingwiththisGuide.This Guide asks questions

and provides answers—butreasonable people maydisagree with some of them.Trading is partly a scienceand partly an art—partlyobjective and partlysubjective. Let this Guidechallengeyoutothinkdeeperabout the markets and yourreactionstothem.I am grateful to HenryAbelman and Jeff Parker,both repeatwinners of Spike

Trade'sEagleEye award, forreviewing all questions andanswers. Carol KeeganKaynedidthefinalcheckforclarityandprecision.Thanks to my formerprofessorsandstudentsattheuniversitiesinEstoniaandtheUnited States for providingmany opportunities to teachand develop my educationalstyle.Thanks to the membersofSpikeTrade.com,whokeep

sending me trading-relatedquestions.Postinganswers tothem week after week keepsmeonmytoes.IhopethisGuidehelpsyoutosharpen your skills and tobecome a better, moreconfidenttrader.

Dr.AlexanderElderNewYork—

Vermont,2014

PARTI

QUESTIONSAND

RATINGSCALES

     

Introduction

Towinintrading,youmustoutperform masses of

competitors. The majoritymust lose in order to paythosewhowin.Tobecomeasuccessful trader, you mustbeat the odds against you.You must learn to think andact differently from themarketcrowd.TheNewTradingforaLivingcontains several unorthodoxtradingideas.TheaimofthisIntroductionistopauseatthebeginning of the journey and

toseewhetheryouareintunewith some of theunconventional thinkingabouttrading.

Questions Trial1Trial2

Trial3

1 2 3 4 5

6 7 8 9

Correctanswers

Question0-1

1. Whichofthe

followingmethodsofmakingtradingdecisionscanservetraderswellinthelongrun?

1. Fundamental

analysis2. Insideinformation3. Hunchesandtips4. Technicalanalysis

1. IandII2. IIandIII3. IandIV4. IIIandIV

Question0-2

1. Whichofthefollowingisn'tneededfortradingsuccess?

1. Tradingpsychology2. Analyticmethod3. Connectionswith

marketinsiders4. Money

managementmethod

Question0-3

1. Thebest

approachtoreadingabookontradingisto

1. testalltheideas

thatinterestyouonyourownmarketdata.

2. incorporatealltheideasinyourwork.

3. nottrustwhatyouread—whywouldanyonesharegood

tradingideas?4. askothertraders

whethertheideasinthebookworkedforthem.

Question0-4

1. Whichofthefollowingisnotamajorcauseoftradinglosses?

1. Slippage2. Commissions3. Emotionaltrading4. Theft

Question0-5

1. TraderJimandTraderJohntaketheoppositesides

ofatrade.Bothpaycommissions,andbothgethitwithslippage.TraderJim,thewinner,collects$920,whileTraderJohn,theloser,isout$1080.Theresultofthistrade

illustratesthefactthattradingisa:

1. Zero-sumgame2. Positive

expectationsgame3. RandomWalk4. Minus-sumgame

Question0-6

1. Youfindastocktradingat$20andplantobuy100shares.Yourbrokerwillchargeacommissionof$10.Whichofthefollowingstatementsisincorrect?

1. Whendealingwith

thousandsofdollars,don'tquibbleabout$10.

2. Youneedtomake1%profittoavoidlosingmoneyonthistrade.

3. Using50%margin,youneedtomakemorethan2%profittoavoidlosingmoneyonthistrade.

Question0-7

1. Youplaceamarketordertobuy100sharesofarisingstockthatcurrentlytradesat$20.Yourordergetsfilledat$20.08.Yourslippageonthe

tradeis1. 80cents2. $83. $164. $80

Question0-8

1. ThestockyouboughtinQuestion7

ralliedto$22.Youexpecttherallytocontinuebutraiseyourstopto$21toprotecthalfofyourpaperprofit.Thestocksinksandhitsyourstop—yougetfilledat$20.88.Your

slippageonthistraderepresentswhatpercentageofyourgrossprofit?

1. 5percent2. 10percent3. 25percent4. 50percent

Question0-9

1. InthetradedescribedinQuestions7and8,thetradingindustrytookwhatpercentageofyourgrossgain?

1. 25percent2. 50percent3. 75percent4. 100percent

ONE

IndividualPsychology

Your greatest danger in

trading comes from theperson holding this book—you. Our emotions often tipthe scale between winningand losing. If you can staycool and make rationaldecisions, tradingprofitswillfollow.A professional trader is calmandcollected.Heknowswhathe'lldoifthemarketgoesup,down, or sideways. On dayswhenhe isnot sure,he stays

out, patiently monitoring themarket from the sidelines. Aprofeelsincontrol.If you feel giddy with joywhen the market goes yourwaybutfreezeinfearwhenitswings against you, youractionswillbeemotionalandyour account will suffer.When the mind becomesclouded by greed or fear,eventhebest tradingsystemsfly out the window. The

questions that follow aredesignedtohelpyoufocusontradingpsychology.

Questions Trial1Trial2

Trial3

1 2 3 4 5 6

7 8 9 10 11 12 13 14 15 16

Correct

answers

Question1-1

1. Asuccessfultrader'sattitudetowardriskisusuallyoneof

1. avoidingrisk.

2. thrivingonrisk.3. enjoyingrisky

situations,eventhoughlosseshurt.

4. measuringeachrisk.

Question1-2

1. Thegoalofasuccessfultraderisto

1. becomethebest

traderhecan.2. makemoremoney

thanothertraders.3. buythingsthatwill

sethimaboveothertraders.

4. winrespectoffamilyandfriends.

Question1-3

1. Atraderonalosingstreakhaslost20percentofhisaccount.Hewouldbestbeadvisedto

1. subscribetoa

newsletterwithaverifiedtrackrecord.

2. purchaseatradingsystemwitha

historyofprofitabilityandlowdrawdowns.

3. stoptradinguntilhehasanalyzedhislosingtradesanddeterminedtheircauses.

4. continuetotradebecausethelawsofprobabilityindicatealikelyturninhisfavor.

Question1-4

1. Havingalargetradingaccountisdesirableforallofthefollowingreasonsexceptthat

1. youcanaffordto

losemore.

2. youcandiversifyamongmoremarkets.

3. youcantradedifferentsystems.

4. yourexpensesrepresentasmallerpercentageofyouraccount.

Question1-5

1. Whichtwoofthefollowingstatementsaboutcommerciallysoldtradingsystemsaremostaccurate?

1. Atrackrecord

providesconfidencethatasystemwillcontinuetoperformwell.

2. Thefactthatasystemissoldbyaprominenttraderprovidesanextramarginofconfidence.

3. Tradingsystemsaredesignedtofitolddata,andtheyself-destructwhenmarketschange.

4. Youcanbuyasystemfromatop

analystandlosemoneyusingit.1. IandII2. IandIII3. IIandIII4. IIIandIV

Question1-6

1. Whichofthefollowingisakeysignofa

gamblingattitudetowardtrading?

1. Theinabilityto

resisttheurgetotrade

2. Feelingelatedwhentradesgowellandashamedafterlosing

3. Alwaysreversinglosingpositions

4. Astringoftradinglosses1. Ionly2. IandII3. I,II,andIII4. I,II,III,and

IV

Question1-7

1. Withinayear,allofthe

followingoccurinthelifeofatrader:hereceivesthreetraffictickets,paysapenaltyforfilinghistaxeslate,getstworeprimandsfortardinessonhisnon-tradingjob,andhistrading

accountisdown35percent.Whichofthefollowingwouldbethebestadviceforthistrader?

1. It'sahardlife.Try

tomakealotofmoneytrading,quityourjob,andhiresomeonetohandle

yourfinances.2. Trafficticketshave

nothingtodowithtrading—don'tworryaboutthem.

3. You'resabotagingyourselfandneedtoworkonchangingyourselfasaperson.

4. Hanginthere;itishardtokeepajobandtradeatthe

sametime.

Question1-8

1. Picktwocorrectstatementsabouttradingpsychology.

1. Yourfeelings

impactyourequity.2. Towinyouhaveto

bemoreintelligentthanmosttraders.

3. Feelingelatedafterprofitabletradesreinforcesgoodtradinghabits.

4. Fearandgreedhaveagreaterimpactonyourequitythanabrillianttradingsystem.1. IandII

2. IIandIII3. IIIandIV4. IandIV

Question1-9

1. You'vemadeaseriesofsuccessfultradesinrecentmonths.Nowisthe

timeto1. congratulate

yourselfandincreasethesizeofyourpositions.

2. usefewerstops.3. takeavacation.4. realizethatyou

havebecomeacompetenttraderandcanspendlesstimestudyingthe

markets.1. IandII2. IIandIV3. IandIII4. IIIandIV

Question1-10

1. Themainsimilaritybetweenalosingtrader

andanalcoholicis:

1. Losersareaddicted

totheexcitementoftradingthewayalcoholicsareaddictedtoalcohol.

2. Losershidetheextentoftheirlossesfromthemselvesandothers,justasalcoholicshidehow

muchtheydrink.3. Loserstrytotrade

theirwayoutofahole,justasalcoholicstrytoswitchfromliquortowine.

4. Alloftheabove

Question1-11

1. The

psychologyoflosersinvolvesallofthefollowingexceptthat

1. Losersfindtrading

veryexciting,evenwhenitleadstolosses.

2. Fewlosersrecoveraftertheydestroytheiraccounts.

3. Losersknowthattheyhaveapersonalproblemwithtrading.

4. Losersusuallyshootfora“bigwin.”

Question1-12

1. Thefirststepinalosingtrader's

recoveryistosay,

1. “Ineedabetter

tradingsystem.”2. “Imustfindabull

market.”3. “Ineedtolearna

newtradingmethod.”

4. “Iamaloser.”

Question1-13

1. Whenatradersays,“Mynameisso-and-soandIamaloser”theresultis

1. afearfulattitude

towardtrading.2. cuttinglossesshort.3. avoidanceof

overtrading.4. lowercommissions

andslippage.1. IandII2. IIandIII3. IIIandIV4. IandIV

Question1-14

1. Themost

importantfactorinbecomingasuccessfultraderis

1. startingwitha

good-sizedtradingaccount.

2. beingabletolearnfromothersuccessfultraders.

3. usingwritten

tradingplansandavoidingemotionaldecisions.

4. relyingonusefulskillsinyourbusinessorprofessionalbackground.

Question1-15

1. If,afterayearoftrading,the

marketsseemmysterioustoyou,itisbecause

1. yourtrading

behaviorisimpulsive.

2. youlackgoodfundamentalortechnicalinformation.

3. youraccountistoo

small.4. themarketsare

chaotic(RandomWalk).

Question1-16

1. Atradebeginswhen

1. themarketappears

overboughtoroversold.

2. anindicatorgivesyouanentrysignal.

3. youdecidetoplaceabuyorsellorder.

4. anewslettermakesanattractiverecommendation.

TWO

MassPsychology

Whenever you buy or sell,

you're surrounded by a hugecrowd of other buyers andsellers, many of whom aredrivenbygreedandfear.Thesum of their orders createshugewavesofmassoptimismand pessimism. Wavesbecome tides that sweep themarkets,causingpricestoriseorfall.Crowdsareextremelypowerful—itmakes no senseto fight them. Crowds arestrong but primitive.Recognizing this will help

you trade in the direction inwhich the crowd is runningbut hop off when a trend isabouttoend.It ishard to remainobjectivewhen analyzing marketsbecause crowds suck us in.Anyone who has attended apoliticalrallyorabigconcerthasfeltthepullofthecrowd.Some questions in thischapter test your knowledgeof the basic laws of crowd

psychology. Others help youbecome aware of the impactof the tradingcrowdonyourown feelings and judgment.Nowisagoodtimetoreflectonyour reactions, rational orirrational, when you trade.Aimtorelateyouranswerstothe following questions toyourtradingexperiences.

Questions Trial1Trial2

Trial3

1 2 3 4 5 6 7 8 9 10 11

12 13

Correctanswers

Question2-1

1. Priceis1. theintersectionof

supplyanddemand

curves.2. thevalueofa

tradingvehicle.3. areflectionof

companyassetsinthestockmarketorademandforacommodity.

4. theconsensusofvalueofallmarketparticipantsatthemomentofthetrade.

Question2-2

1. Whichofthefollowingstatementsisincorrect?

1. Bullsbetthatprices

willrise;theytrytobuyaslowaspossible.

2. Uncommitted

tradersputpressureonbullsandbearsbytheirpresence.

3. Thegoalofatechnicalanalystistoforecastwhetherbullsorbearswillwin.

4. Bearsbetthatpriceswillfall;theywanttosellashighaspossible.

Question2-3

1. Whenyouareunsurewhethertobuyorsell,itpaysto

1. surfthenettofind

outwhatothersaredoing.

2. tradeasmallersizethanusual.

3. stayoutofthemarket.

4. seekadvicefromacurrently“hot”guru.

Question2-4

1. Anyprofitsyoumakeintradingcomefrom

1. thebrokers.2. thetraders.3. theeconomy.4. theexchanges.

Question2-5

1. Whenapersonjoinsacrowd,he

1. becomesmore

impulsiveandemotional.

2. benefitsfromthestrengthsofothers.

3. trustscrowdleadersmorethanhimself.

4. canleavethecrowdwhenhewantsto.1. IandII2. IandIII3. IIandIII

4. IIandIV

Question2-6

1. Peoplejoincrowdsoutofa

1. fearofuncertainty.2. lifelonghabit.3. desiretobeledby

strongleaders.

4. searchforcomfort.1. I2. IandII3. I,II,andIII4. I,II,III,and

IV

Question2-7

1. Whichofthefollowingiscorrect?

1. Crowdsare

primitive;itisOKtousesimpletradingstrategies.

2. Beingsmarterthanthecrowdassuresyouofwinning.

3. Agoodtraderfeelselatedwhenthemarketgoesinhisdirectionanddepressedwhenit

goesagainsthim.4. Marketcrowdsare

almostalwayswrong.1. I2. IandII3. I,II,andIII4. I,II,III,and

IV

Question2-8

1. Identifythemainleaderofmarkettrends.

1. Powerfulfinancial

interests2. Prominentgurus3. Priceitself4. Fundamental

changesintheeconomy

Question2-9

1. Marketsrisewhen

1. therearemore

buyersthansellers.2. buyersaremore

aggressivethansellers.

3. sellersareafraidanddemandapremium.

4. moresharesorcontractsareboughtthansold.1. IandII2. IIandIII3. IIandIV4. IIIandIV

Question2-10

1. Whenthetrendisdown,

1. shortsellerstendto

increasetheirpositions.

2. longstendtoquitindisgust.

3. longsagreetobuyonlyatasteepdiscount.

4. shortsellersarewillingtosellatalowerprice.

1. I2. IandII3. I,II,andIII4. I,II,III,and

IV

Question2-11

1. Apriceshockduringanuptrend

1. isasuddenjumpinprice.

2. isasuddendropinprice.

3. makesbullsfeelvulnerable.

4. frightensthebears.1. IandIII2. IIandIII3. IIandIV4. IandIV

Question2-12

1. Apriceshockinterruptsarally,butpricesrecover.Whentheyrisetoanewpeak,severalindicatorsreachalowerpeak.Thispatternis

calleda1. bullishdivergence.2. suddendropin

price.3. bearishdivergence.4. suddenriseinprice.

Question2-13

1. Themaingoalsofa

traderareto1. identifythecurrent

trend.2. forecastpricesin

thenearfuture.3. forecastlong-term

prices.4. stayobjectiveand

unemotional.1. IandII2. IandIV

3. IIandIII4. IIIandIV

THREE

ClassicalChartAnalysis

The original chartists had a

revolutionary idea—to useprice and volume data ratherthan fundamental factors fordeciding what and when tobuyandsell.Eachfundamentalanalysthasto specialize in a fairlynarrow field. Technicalanalysis, on the contrary, isuniversal. Once youunderstand the principles ofcharting,youcanapply themto stocks, bonds, currencies,

futures, or any other market.As the number of tradingvehicles around the globeincreases, technical analysisisbecomingmorepopular.As longasyouhave thedataon high, low, opening, andclosingprices,alongwiththatonvolume andopen interest,you can make intelligentjudgments about the balanceof power between bulls andbears in any market. Then

youcantradeinthedirectionof the dominant marketgroup.Inthischapteryou'llbeaskedto make trading decisionsusing charts. It's relativelyeasy to recognize patterns inthe middle of a chart, butgoodtradingsignalsaremuchharder to identify near theright edge. That's whereyou'll have to make yourtrading decisions—amid the

uncertainty, noise, andtensionofthemarkets.

Questions Trial1Trial2

Trial3

1 2 3 4 5 6 7

8 9 10 11 12 13

Correctanswers

Question3-1

1. Matchthefollowingtwosetsofstatementsregardingprices.

1. Thehighoftheday2. Thelowoftheday3. Theclosingprice4. Theopeningprice

1. Amateurs'opinion

2. Professionals'opinion

3. Maximumpowerofbulls

4. Maximumpowerofbears

Question3-2

1. Threeanalysts

lookatthesamechart.Onearguesthatthetrendisup,theotherthatthetrendisdown,andthethirdthatthetrendissideways.Inallprobability,

1. oneortwoofthem

maybeguiltyof

wishfulthinking.2. theymaynothave

agreedonthebasicdefinitionofatrend.

3. theymaybelookingatdifferenttimeframes.

4. ifeachdidabetterjob,allthreewouldagree.1. I

2. IandII3. I,II,andIII4. I,II,III,and

IV

Question3-3

1. Whentryingtoenteraliquidmarketonaquietday,youarelikelyto

encounter1. higherslippage.2. higher

commissions.3. lowerslippage.4. lowercommissions.

Question3-4

1. Whichlinesonthechartin

Figure3.4markthelevelsofbothsupportandresistance?

1. LineA2. LinesAandB3. LinesA,B,andC4. LinesA,B,C,and

D

FIGURE3.4Medtronic,Inc.(MDT)weeklychart.(ChartbyStockcharts.com).

TheLinesofSupportandResistance

Question3-5

1. Supportandresistancelinesshould

1. bedrawnacrossthe

edgesofcongestionareas.

2. bedrawntotouchextremehighorlowprices.

3. connecthighswithlowsandlowswithhighs.

4. connecthighswithhighsandlowswithlows.1. IandII

2. IIandIII3. IIIandIV4. IandIV

Question3-6

1. Thestrengthofsupportandresistancedependson

1. thenumberoftimes

priceshitthatarea.

2. thevolumeoftradinginthatarea.

3. theheightofthatarea.

4. thelengthoftimepricesspentinthatarea.1. I2. IandII3. I,II,andIII4. I,II,III,and

IV

Question3-7

1. Pricesspendseveralweeksinacongestionareaandthendropbelowsupport.Whichofthefollowingtradingchoices

shouldbeconsideredonthefollowingday?

1. Sellshortifprices

falltoanewlow,withastopaboveyesterday'shigh

2. Golongifpricesrallybackintothecongestionarea,withastopbelowyesterday'slow

3. Sellshortattheopening

4. Golongattheopening1. I2. IandII3. I,II,andIII4. I,II,III,and

IV

Question3-8

1. MatchthelettersunderneaththelastfourbarsinthechartinFigure3.8tothefollowingstatements.

1. Alowerlowanda

lowerclose—monitorthedownmove.

2. Startmovingup

yourstop.3. Afalsedownside

breakout—golong.4. Abreakouttoa

newlow—monitorwhetherthedownmovewillcontinue.

FIGURE3.8WalterEnergyInc.(WLT)daily.(ChartbyStockcharts.com).

ACongestionZone

Question3-9

1. MarkthestatementsbelowwithaTiftheyapplytotrendsandwithanRiftheyapplyto

tradingranges:1. Eachrallyreachesa

higherhigh.2. Eachdeclinestops

atapproximatelythesamelevel.

3. Keepaddingtoyourpositions.

4. Runatthefirstsignofareversal.

Question3-10

1. MatchtheareasmarkedbylettersinthechartinFigure3.10tothefollowingstatements.

1. Inabilitytoreach

resistanceindicatesweakness—considershorting.

2. Inabilitytoreachsupportindicatesstrength—considerbuying.

3. Hittingresistance—sell.

4. Falseupsidebreakout—goshort.

FIGURE3.10JetBlueAirwaysCorp.(JBLU)daily.(ChartbyStockcharts.com).

DecisionsatSupportandResistance

Question3-11

1. Whichofthefollowingtacticsworkwellinuptrends?

1. Buybreakoutsto

newhighs.2. Buypullbacksinto

support.3. Buywhenprofits

onyourpreviouslongpositionareprotectedbyastop.

4. Buywhenpricestakeoutthepreviouslow.

1. I2. IandII3. I,II,andIII4. I,II,III,and

IV

Question3-12

1. Whichofthefollowingdoesnotapplyto“kangaroo

tails,”marked“T”inFigure3.12?

1. Whenatailpoints

down,goshort.2. Tailsaresinglebars

protrudingfromcompactcongestionareas.

3. Whenatailpointsup,itgivesasellsignal.

4. Marketsusuallyrecoilfromtheir“tails.”

FIGURE3.12BoeingCo.(BA)daily.(ChartbyStockcharts.com).

KangarooTails

Question3-13

1. IfyoubuyinareaTneartherightedgeofFigure3.12,youmaydoallofthefollowing,

except1. placeaprotective

ordermidwaydownthetail.

2. addtoyourlongpositiononthenextbarthattradeshigher.

3. takeprofitswhentherallystopsmakingnewhighs.

4. placeaprotective

stopbelowthetipofthetail.

FOUR

ComputerizedTechnicalAnalysis

Today it would be unusualto see an analyst or a traderwho doesn't use a computer.The dropping cost ofequipment,software,anddatahas evened out the playingfieldbetween individualsandinstitutions.A computer can help youprocess the torrent ofmarketinformation and make youranalysismoreobjective,butit

isonlyatool.Buyingthebestcar will not automaticallyturn a beginning driver intoan expert. In this section,you'lltestyourselftoseehowwell you've mastered thelessons on computerizedmarket analysis. If you owntechnical analysis software,pleasefeelfreetouseitwhileanswering questions in thischapter.

Questions Trial1

Trial2

Trial3

1 2 3 4 5 6 7 8 9

10 11 12 13 14 15 16 17 18 19 20

21 22

Correctanswers

Question4-1

1. Computerizedtechnicalanalysis

1. ismoreobjective

thanclassicalcharting.

2. allowstraderstoforecastthefuture.

3. removesemotionsfromtrading.

4. assuressuccessintrading.1. I2. IandII

3. I,II,andIII4. I,II,III,and

IV

Question4-2

1. Matchthefollowingthreetypesofsoftwarewiththeirdescriptions:

1. Graybox2. Toolbox3. Blackbox

1. Youfeedthisprogramcurrentmarketdataandreceivespecificbuyandsellsignals.

2. Sameas

above,butyoucanchooseindicatorsettings.

3. Acollectionofchartingtoolsandindicators.

Question4-3

1. Matchthefollowingthreemain

groupsoftechnicalindicatorswiththeirdescriptions:

1. Oscillators2. Trend-following

indicators3. Miscellaneous

indicators1. Provide

insightsinto

masspsychologyofthemarkets.

2. Catchturningpointsinflatmarketsbutgiveprematureanddangeroussignalswhenthemarketsbegintotrend.

3. Workbestwhenmarkets

aremovingbutgivebadsignalswhenthemarketsareflat.

Question4-4

1. Astockhasclosedat23,22,21,20,23,and24duringthepast6

days.Whatisits5-daysimplemovingaverageonthelastday?

1. 212. 223. 234. Noneoftheabove

Question4-5

1. ExponentialmovingaveragesworkbetterthansimpleMAsforallofthefollowingreasons,exceptthatEMAs

1. areeasierto

calculatebyhand.2. respondtochanges

inpricesfaster.

3. donotjumpinresponsetoolddata.

4. trackthemassmoodofthecrowdmoreclosely.

Question4-6

1. Themostimportantmessageofan

exponentialmovingaverageis

1. thewidthofitstime

window.2. itsabilitytoriseto

anewpeak.3. itsabilitytofalltoa

newlow.4. thedirectionofits

slope.

Question4-7

1. MatchtheletteredsectionsatthebottomofFigure4.7tothefollowingEMA-basedstrategies.

1. Tradeonlyfromthe

longside.

2. Tradeonlyfromtheshortside.

FIGURE4.7Williams-SonomaInc.(WSM)daily,13-dayEMA.(ChartbyStockcharts.com).EMASignals—Daily

Question4-8

1. MatchtheletteredareasofFigure4.8tothefollowing

EMA-basedtactics.

1. Golong,witha

protectivestopinthevicinityofthelatestlow.

2. Goshort,withaprotectivestopinthevicinityofthelatesthigh.

3. Liquidatepositionsandstandaside—

themarketmaybeturning.

FIGURE4.8BlackBerryLimited(BBRY)weekly,13-weekEMA.(ChartbyStockcharts.com).EMASignals—Weekly

Question4-9

1. Whichofthefollowingstatementsregarding

MovingAverageConvergence-Divergence(MACD)aretrue?

1. Thefastlineof

MACDreflectsshort-termbullishnessorbearishness.

2. Theslowlineof

MACDreflectslong-termbullishnessorbearishness.

3. Whenthefastlineisabovetheslowline,bullsareincontrol.

4. Whenthefastlineisbelowtheslowline,bearsareincontrol.1. IandII

2. IIIandIV3. Noneofthe

above4. I,II,III,and

IV

Question4-10

1. WhichstatementaboutMACD-Histogramisn't

true?1. Itmeasuresthe

spreadbetweenthefastandslowMACDlines.

2. Whenitrises,itshowsthatbullsareincontrol.

3. Itforecastshigherorlowerpricesahead.

4. Itidentifiesthe

dominantmarketgroup.

Question4-11

1. MatchthefollowingstatementstotheletteredareasinthechartinFigure4.11

1. MACD-Histogramrisestoahigherpeak—expectpricestoretestorexceedtheirpricepeak.

2. MACD-Histogramfallstoanewlow—expectpricestoretestorexceedtheirlatestbottom.

3. Breakingthepowerofthedominant

group.4. Abearish

divergenceisoccuring.

5. Abullishdivergenceisoccuring.

FIGURE4.11DRHortonInc.(DHI)daily,26-dayEMAand12-26-9MACD.(ChartbyStockcharts.com).MACDLinesandMACD-Histogram

Question4-12

1. AttherightedgeofFigure4.11,MACD-

Histogram,EMA,andpricearetellingusthat

1. thelatestpricepeak

islikelytoberetestedorexceeded;golongimmediately.

2. bearsareincontrol;goshortimmediately.

3. loweryourstopandbereadytotakeprofitsontheshortpositionfromthebearishdivergenceD-F.

Question4-13

1. Whichofthefollowingstatementsdescribes

DirectionalMovement?

1. Thepartoftoday's

barthatisabovethepreviousday'sbar

2. Thepartoftoday'sbarthatisbelowthepreviousday'sbar

3. Thelargestpartoftoday'sbarthatisoutsidetheprevious

day'sbar4. Noneoftheabove

Question4-14

1. MatchtheletteredareasinFigure4.14tothefollowingactions.

1. Whenthe

DirectionalIndicator(ADX)turnsdownfromabovebothDirectionalLines,takeatleastpartialprofits.

2. WhentheDirectionalIndicatorpenetratesabovethelowerDirectionalLine,tradeinthe

directionoftheupperDirectionalLine.

3. Donotuseatrend-followingmethodwhentheDirectionalIndicatorisbelowbothDirectionalLines.

FIGURE4.14AlexcoResourceCorporation(AXU)with22-dayEMAanda13-dayDirectionalSystem(green+DI,red–DI,blackADX).(ChartbyStockcharts.com).DirectionalSystem

Question4-15

1. Attheright

edgeofFigure4.14,theDirectionalSystemistellingusto

1. golong.2. goshort.3. standaside.

Question4-16

1. Oscillatorscan

helptradersaccomplishallofthefollowingexcept

1. identifythe

extremesofmasspessimismandoptimism.

2. catchalltopsandbottoms.

3. findwhetherbulls

orbearscurrentlypredominate.

4. betagainstdeviationsandforareturntonormalcy.

Question4-17

1. Whenanoscillatorreachesitshighestpeakinseveral

months,whichofthefollowingisleastlikely?

1. Therallyislikely

topause.2. Pricesarelikelyto

risetoahigherhigh.

3. Longpositionscanbeheld.

4. Pricesarelikelyto

drop.

Question4-18

1. MatchthelettersinFigure4.18tothefollowingformationsofStochastic:

1. Overbought2. Oversold

3. Bullishdivergence4. Bearishdivergence5. Failureswing

FIGURE4.18LeapfrogEnterprisesInc.(LF)with26-dayEMAand7/3SlowStochastic.(ChartbyStockcharts.com).Stochastic

Question4-19

1. AttherightedgeofFigure4.18,the

tradingmessageofStochasticis:

1. Stochasticis

overbought;goshort.

2. Stochasticisrising;golong.

3. Thedowntrendisstillinforce;goshort.

4. Stochasticis

neutral;standaside.

Question4-20

1. MatchletteredformationsofRSI(RelativeStrengthIndex)inFigure4.20tothepatternslistedbelow.

1. Overbought2. Oversold3. Bullishdivergence4. Bearishdivergence

FIGURE4.20Tiffany&Co.(TIF)with26-dayEMAand13-dayRSI.(ChartbyStockcharts.com).RelativeStrengthIndex

Question4-21

1. AttherightedgeofFigure4.20,RSIistellingusthat:

1. Thestockis

oversold;golong.2. Thereisabearish

divergence;goshort.

3. RSIistrendinglower;standaside.

4. Signalsaremixed;standasidefornow.

Question4-22

1. Withthemarketinadowntrend,anoscillator,suchasStochasticorRSI,identifies

1. shorting

opportunities.2. sellingareas.3. buying

opportunities.

4. short-coveringareas.1. IandII2. IIIandIV3. I,II,III,and

IV4. Noneofthe

above

FIVE

VolumeandTime

Beginners watch only

prices. It's easy to becomehypnotizedby stocksmovingupanddown.Experienced analysts gain amuch deeper understandingof the markets by includingvolume in their analysis. Inaddition, price changes needto be linked to the length oftimeittookforthemtooccur.All trading decisions have tobe made by analyzing morethanonetimeframe.

This chapter also reviewsopen interest, a measurerelevant only for thederivatives markets, such asfutures or options. If youdon't trade derivatives anddon't wish to study openinterest, skip questions 5–7,5–8, and 5–9 and add threepointstoyourscore.

Questions Trial1Trial2

Trial3

1 2 3 4 5 6 7 8 9 10 11

12 13 14 15 16 17 18 19

Correctanswers

Question5-1

1. Volumereflectsallofthefollowingexcept:

1. Howmarket

participantswillreacttofuturepricechanges

2. Howmanywinnersandlosersare

activeinthemarket3. Whethermassesof

losersarestayingputorrunning

4. Thedegreeofemotionalinvolvementamongtraders

Question5-2

1. Themarket

hasbeenrisingforseveralmonthsinanorderlypatternofralliesandshallowdeclines;anewrallyisinprogress.Matchthefollowingpairsofstatementsconcerningthisrally's

volume:1. Volumeisslightly

higherthanduringthepreviousrally.

2. Volumeisdoublewhatitwasduringthepreviousrally.

3. Volumeishalfofwhatitwasduringthepreviousrally.

4. Volumeisapproximatelythe

sameasitwasduringthepreviousrally.1. Bearsare

panicking;takeatleastpartialprofitsonlongpositions.

2. Theuptrendishealthy;holdlongsoraddtothem.

3. Theuptrendisrunningoutofsteam;takeatleastpartialprofitsonlongpositions.

4. Theuptrendishealthy;holdlongs.

Question5-3

1. Identifythe

followingpatternsofvolumebymatchingthemwiththeappropriatelettersinFigure5.3.

1. Volumetracesa

lowerpeakwhilepricestraceahigherone—expectadeeperreaction,

takeprofitsonlongpositions.

2. Volumeshrinkswhilepricesslidenearthebottomoftheirrange—lookforabuyingopportunity.

3. Volumeexpandsonarally—expecthigherpricesahead,holdthroughanycorrection.

4. Volumeshrinksduringapullbacktovalue—looktogolongoraddtolongs.

FIGURE5.3CapstoneTurbineCorp.(CPST)with26-dayEMAanddailyvolume.(ChartbyStockcharts.com).Volume

Question5-4

1. AttherightedgeofFigure5.3,thepattern

ofvolumeandpricesshowsthat

1. pricesarerisingon

heavyvolume;golongimmediately.

2. pricesarepullingbacktovalueonfallingvolume—waitforthedeclinetostopandthengolong.

3. thelastrallyhadanunsustainablevolumelevel—goshort.

4. it'sbettertostandasidefornow.

Question5-5

1. Whichoneofthefollowingstatementsiscorrect?On-

BalanceVolume(OBV)

1. confirmsbear

moveswhenitfallstoanewlow.

2. trackstherunningtotaloftraders'emotionalcommitments.

3. oftenreachesanewpeakbeforeanew

peakinprice.4. riseswheneverthe

marketcloseslower.1. I2. IandII3. I,II,andIII4. I,II,III,and

IV

Question5-6

1. MatchstatementsaboutAccumulation/Distributionfromthefollowingtwosets.

1. Pricesopenbelow

thepreviousday'scloseandcloselower.

2. Pricesopenabovethepreviousday's

openandclosehigher.

3. Pricesopenabovethepreviousday'sclose,butcloseatthelows.

4. Pricesopenbelowthepreviousday'sclose,butcloseatthehighs.1. Amateurs

relativelybearish,

professionalsrelativelybullish

2. Amateursrelativelybullish,professionalsrelativelybearish

3. Amateursandprofessionalsbullish

4. Amateursand

professionalsbearish

Question5-7

1. TheChicagoBoardofTradereportsthatopeninterestinsoybeansstandsat300,000

contracts.Thismeansthat

1. 150,000contracts

areheldbythelongsand150,000owedbytheshorts.

2. 300,000contractsareheldbythelongsand300,000owedbytheshorts.

3. 600,000contractsareheldbythe

longsand600,000owedbytheshorts.

4. thereisn'tenoughinformationtotellwhoholdshowmanycontracts.

Question5-8

1. Matchthefollowingactionswiththeirimpacton

openinterest.1. Atraderwhois

longsellstoanotherwhoisshort.

2. Anewbearentersthemarketandsellsshorttoanearlierbearwhobuystocoverhisshorts.

3. Anewbullentersthemarketandbuysfromanearlierbull

whosellshisposition.

4. Anewbuyerandanewsellertradewitheachother.1. Openinterest

increases.2. Openinterest

decreases.3. Openinterest

staysunchanged.

Question5-9

1. Risingopeninterestshowsthat

1. bullsareconfident

andaggressive.2. thesupplyoflosers

isgrowing.3. thetrendislikelyto

continue.

4. bearsareconfidentandaggressive.1. 12. 1and23. 1,2,and34. 1,2,3,and4

Question5-10

1. Aspriceschange,whichfactorsreflect

theforceoftheirmove?

1. Theamountof

pricechange2. Volumeoftrading

duringthatmove3. Directionofthe

move4. Relatedmarkets

1. 12. 1and2

3. 1,2,and34. 1,2,3,and4

Question5-11

1. TheForceIndexformulais

1. Closetoday•

(Volumetoday–Volumeyesterday)

2. Closetoday•(Volumetoday+Volumeyesterday)

3. Volumetoday•(Closetoday+Closeyesterday)

4. Volumetoday•(Closetoday–Closeyesterday)

Question5-12

1. WhysmoothForceIndexwithamovingaverage?

1. Thehistogramof

thedailyForceIndexistoojagged.

2. A2-dayEMAofForceIndexhelpsfindentrypointsintotrades.

3. A13-dayEMAofForceIndexhelpsfindmajorshiftsintheforceofbullsandbears.

4. DivergencesbetweenthesmoothedForceIndexandpriceshelptoidentifyturningpointsinthemarkets.1. I

2. IandII3. I,II,andIII4. I,II,III,and

IV

Question5-13

1. Ashort-termForceIndex,smoothedwitha2-dayEMA,helpsdecide

whentoputontradesinthedirectionofthecurrentpricetrend,whichwemaydefineusingtheslopeofapriceEMA.ForceIndexcanalsoshowwhentotakeshort-termprofits.Match

theletteredareasinthechartinFigure5.13tothefollowingstatements.

1. Buy2. Stopshorting,look

tobuy3. Sellshort4. Covershorts

FIGURE5.13ScorpioTankers,Inc.(STNG)with13-dayEMAofpriceanda2-dayEMAofForceIndex.(ChartbyStockcharts.com).ForceIndex,2-dayEMA

Question5-14

1. AttherightedgeofFigure5.13,the

messageofthe2-dayForceIndexis:

1. Standaside.2. Golong.3. Sellshort.

Question5-15

1. Along-termForceIndex,smoothedwith

a13-dayEMA,deliversseveralstrategicmessages.PleasematchtheletteredareasinthechartinFigure5.15tothefollowingstatements.

1. Bearishcrossover

—tradeshort.2. Bullishcrossover—

tradelong.3. Dominantforceis

weakening.

FIGURE5.15EMCCorp.(EMC)with13-dayEMAofpriceanda13-dayEMAofForceIndex.(ChartbyStockcharts.com).ForceIndex,13-dayEMA

Question5-16

1. AttherightedgeofFigure5.15,the

messageofthe13-dayForceIndexis:

1. Standaside.2. Golong.3. Sellshort.

Question5-17

1. Thepresenceofcyclesinmarketdata

dependson1. changesinthe

economicfundamentals.

2. greedingoodtimesandfearinbadtimesamongproducersandconsumers.

3. swingsbetweenpessimismandoptimismamong

traders.4. planetary

influences.1. 12. 1and23. 1,2,and34. 1,2,3,and4

Question5-18

1. Identifythe

“indicatorseasons”bymatchingthemwiththeappropriatelettersinFigure5.18.

1. Spring;golong.2. Summer;start

takingprofitsonlongs.

3. Autumn;goshort.

4. Winter;starttakingprofitsonshorts.

FIGURE5.18Molycorp,Inc.(MCP)with13-dayEMAofpriceanda12-26-9MACD-Histogram.(ChartbyStockcharts.com).IndicatorSeasons

Question5-19

1. Traderscananalyzemarketsin

greaterdepthbylookingatthemintwotimeframes.Whichofthefollowingcombinationsmakesthemostsense?

1. Weeklyanddaily2. Monthlyanddaily3. Yearlyanddaily

4. Yearlyandweekly

SIX

GeneralMarketIndicators

Markets consist of huge

crowds of traders whosebuying and selling createwaves ofmass optimism andpessimism. The resultingprice trends lure inbystanders, and their buyingand selling reinforces thosetrends, driving them tounsustainable extremes.Fundamental economicfactors may rule the marketsin the long run, but masspsychology determinesintermediate- and short-term

trends.Several indicators take thepulseof themarket crowd instocks and futures. Theindicators that analyze thestock market as a whole areespecially useful for tradingstock index futures andoptions. Since the broadmarket trends influencemoststocks,thosesignalsalsohelpstocktraders.Generalmarketindicatorsare

especially important to thosewho trade in the UnitedStates, where severaladvisory services track them.Overseas traders could profitfromdevelopingsimilartoolsintheirowncountries.

Questions Trial1Trial2

Trial3

1 2 3

4 5 6 7 8 9 10 11 12

Correctanswers

Question6-1

1. TheNewHigh–NewLowIndex(NH-NL)

1. measuresthe

numberofnewhighsonanygivenday.

2. tracksthenumberoftheweakeststocksontheexchange.

3. measuresthenumberofnewlowsonanygivenday.

4. tracksthenumberofthestrongeststocksontheexchange.1. 1and3

2. 2and43. 1,2,3,and44. Noneofthe

above

Question6-2

1. MatchthefollowingNH-NLpatternswiththeirmarket

messages.1. NH-NLispositive;

risestoanewhighforthemove.

2. Stockmarketfallstoanewlow;NH-NLtracesahigherbottom.

3. NH-NLisnegative;declinestoanewlowforthemove.

4. Stockmarket

reachesanewpeak;NH-NLtracesalowerpeak.1. Bearish

leadershipisstrong;tradefromtheshortside.

2. Bearishdivergenceshowsthatbullsarebecoming

weak;starttakingprofitsonlongpositionsandlooktogoshort.

3. Bullishdivergenceshowsthatbearsarebecomingweak;starttakingprofits

onshortpositionsandlooktogolong.

4. Bullishleadershipisstrong;tradefromthelongside.

Question6-3

1. Identifythe

followingpatternsbymatchingthemwiththeappropriatelettersinthechartofNH-NLinFigure6.3.

1. Bullspredominate;

tradefromthelongside.

2. Bearspredominate;

tradefromtheshortside.

3. Abullishdivergence;takeprofitsonshortsandgetreadytogolong.

4. Abearishdivergence;takeprofitsonlongsandgetreadytogoshort.

FIGURE6.3S&P500witha22-dayEMA,aNewHigh–NewLowIndex,withaoneyearlook-backperiod.(NH-NLdatafromBarchart.com,chartbyTradeStation).TheNewHigh–NewLowIndex

Question6-4

1. Attheright

edgeofFigure6.3,NH-NLtellsusthat

1. NH-NLis

overbought;sellshort.

2. NH-NLispositiveandrising;golong.

3. nobullishdivergenceispresent;standaside.

4. tradingsignalsare

mixed;standaside.

Question6-5

1. WhichofthefollowingstatementsapplytotheAdvance/Declineline?

1. Ittracksthe

numbersofrising

andfallingstocks.2. Itindicatesstrength

whenitrisestoanewhighandweaknesswhenitfallstoanewlow.

3. ThepatternofA/Dpeaksandvalleysismoreimportantthanitslevel.

4. Itshowswhenvolumeconfirmspricemoves.

1. 12. 1and23. 1,2,and34. 1,2,3,and4

Question6-6

1. Whenbullishconsensusinthestockmarketrisestoarecordhigh,

itshowsthat1. themarketisneara

top;startsellingandlookforpotentialshorts.

2. theuptrendisstrong;golong.

3. therearen'tenoughnewbuyerstosupportthemarket.

4. youshoulddoubleuponlong

positions.1. 12. 1and33. 24. and4

Question6-7

1. Duringapowerfuluptrendincopperfutures,

bullishconsensusrisesto75percent.Thismeansthat

1. anaveragebearhas

investedthreetimesmoremoneythananaveragebull.

2. anaveragebearhasinvestedapproximatelyasmuchmoneyasan

averagebull.3. anaveragebullhas

investedthreetimesmoremoneythananaveragebear.

4. thereisnotenoughinformationtodecidewhohasinvestedmoremoney.

Question6-8

1. Arichcornharvestincreasesthesupplyandsendscornfuturesintoabearmarket.Aspricesgrindtheirwaydown,bullishconsensusfallsto20percent.Thismeans

that1. anaveragebullhas

investedfivetimesmoremoneythananaveragebear.

2. anaveragebullhasinvestedapproximatelyasmuchmoneyasanaveragebear.

3. anaveragebearhasinvestedfourtimes

moremoneythananaveragebull.

4. anaveragebullhasinvestedfourtimesmoremoneythananaveragebear.

Question6-9

1. Yournewspaperreportsthatcoffeeprices

areattheirhighestlevelinsixyears;aTVnewsshowfeaturessnowincoffee-growingBrazil;andyourmother-in-lawtellsyoushebought10lbsofinstantcoffeebefore

pricesriseanyhigher.Yourresponseasatraderistoplanto

1. golongcoffee

futuresorlongcalls.

2. goshortcoffeefuturesorlongputs.

3. golongcocoafutures,asaplayon

acatch-upmovewithcoffee.

4. buygoldbecausetheriseincoffeeisasignofinflation.

Question6-10

1. Matchthefollowingstatementsabouttraders'positions.

1. Positionlimits2. Reporting

requirements3. Insidertrading4. Hedging

1. Thelevelatwhichyourtradegetsreportedtoagovernmentagency

2. Enteringafuturestradeinordertooffsetapositioninanactualcommodity

3. Canbeexceededbycommercials

4. Legalinthefuturesmarkets

Question6-11

1. Matchthefollowingstatementsaboutdifferentgroupsofmarketparticipants.

1. Smallspeculators2. Largespeculators

3. Commercials4. Companyinsiders

1. Holdcontractsinexcessofreportinglevels

2. Hedgebusinessrisks

3. Officersandlargestockholders

4. Thegroup

mostlikelytoloseinthemarket

Question6-12

1. Abearmarketis11monthsold;thecompanywhosestockyoufollowreportslower

quarterlyearnings;itstwovicepresidentsandamajorshareholderbuyitsstock;thestockis$1aboveitslowfortheyear.Asaninvestor,you

1. goshort

immediately(thebearmarketisinforce).

2. golongimmediately(insiderbuying).

3. stayawayfromthemarketuntilthenextbullmarketstarts.

4. startbuildingalongposition.

SEVEN

TradingSystems

Atradingsystemprovidesa

decision-making tree forsetting entries, targets, andstops.Itisausefulinstrumentbut not a magic device thatcanbefine-tunedonolddataandthenputonautomaticforeffortlesslypullingprofitsoutofthemarkets.Youdevelopatradingsystemin the quiet of your office,whenthenoiseofthemarketshasquieteddown.Acarefullycrafted system becomes your

island of stability andintelligence in the stormyenvironmentofthemarket.Atrusted system will help youmaintain control at a timewhen the tide of massemotion sweeps people offtheirfeet.This chapter will test yourknowledge of several tradingsystems that have stood thetestoftime.Whileansweringquestions, consider whether

to start trading with one ofthese systemsoruse themasa starting point fordevelopingyourown.

Questions Trial1Trial2

Trial3

1 2 3 4 5

6 7 8 9 10 11 12 13 14 15 16

Correctanswers

Question7-1

1. Whichofthefollowingstatementscanbetrueatthesametimeinanygiven

market?1. Thetrendisup.2. Thetrendisdown.3. Anindicatorgivesa

buysignal.4. Anindicatorgivesa

sellsignal.1. IandIII2. IIandIV3. I,II,III,and

IV

4. Noneoftheabove

Question7-2

1. Whentryingtofindatradeonadailychart,

1. focusallyour

attentiononthatchart.

2. identifythetrendof

theweeklychartandusethedailycharttolookonlyfortradesinthedirectionoftheweeklytrend.

3. findatradeonthedailychartandcheckwhethertheweeklychartpointsinthesamedirection.

4. identifythetrendof

themonthlychartandusethedailycharttolookonlyfortradesinthatdirection.

Question7-3

1. Whenexploringapotentialtradingsystem,allof

thefollowingstepsareessential,except

1. one-bar-at-a-time

backtesting.2. forward-testing

withsmallamountsofmoney.

3. lookingforfeedbackfromothersystemusers.

4. keepingrecordsofeverytrade.

Question7-4

1. Theessentialnumberstowritedownbeforeenteringanytradeincludeallofthefollowing,except

1. thepriceorarange

foryourentry.2. thepotentialprofit

indollars.3. thetargetforyour

trade.4. theprotectivestop.

Question7-5

1. Ifyouusethe

slopeoftheweeklyMACD-HistogramasthefirstscreenoftheTripleScreentradingsystemandthatslopeisdown,youmay

1. Golong.2. Goshort.

3. Standaside.4. Alloftheabove

1. IandIII2. IIandIII3. III4. IV

Question7-6

1. Thefirstscreenofthe

TripleScreentradingsystempointsup.Ifyouusea5-dayStochasticasyoursecondscreenanditrisesto85,youmay

1. golong

immediately.2. goshort

immediately.

3. waitforStochastictodeclinebelow40andthengolong.

4. waitforStochastictodeclinebelow40andthengoshort.

Question7-7

1. Theweeklytrendisup,butthedeclineof

thepastfewdayshaspushedthe2-dayEMAofForceIndex,whichyouuseasthesecondscreen,belowzero.Yournextstepisto

1. waituntilboth

screensgetingear.2. placeanorderto

buyabovethepreviousday'shigh.

3. placeanordertosellshortbelowthepreviousday'slow.

4. closeoutanyopenpositions.

Question7-8

1. Attherightedgesofthe

twochartsinFigure7.8,theTripleScreentradingsystemtellsusthat

1. theweeklytrendis

up;thedailytrendisup;golongimmediately.

2. thedailyForceIndexshowsabearishdivergence;goshort

immediately.3. theweeklytrendis

upandthedailyForceIndexisoversold;placeabuyorderabovethehighofthelastdailybar.

4. theweeklyanddailytrendspointindifferentdirections;standaside.

FIGURE7.8Ontheleft:BBBYweeklychartwitha13-barEMAand12-26-9MACD-Histogram.Ontheright:BBBYdailychartwitha13-barEMAand2-barForceIndex.(ChartbyStockcharts.com).TripleScreenTradingSystem

Question7-9

1. MatchthefollowingstatementsabouttheTripleScreentradingsystemwiththeactionsindicated.

1. Theweeklytrendis

up;thedailytrendisup.

2. Theweeklytrendis

up;thedailytrendisdown.

3. Theweeklytrendisdown;thedailytrendisup.

4. Theweeklytrendisdown;thedailytrendisdown.1. Startplacing

buyorders.2. Startplacing

orderstosell

short.3. Standaside.

Question7-10

1. WhichofthefollowingstatementsregardingtheImpulsesystemisincorrect?

1. TheImpulsesystemtellstraderswhentobuyorsell.

2. Theslopeofafastmovingaveragereflectsthedirectionofmarketinertia.

3. TheslopeofthelasttwobarsofMACD-Histogramreflectsthedirectionofmarket

power.4. TheImpulsesystem

removesaprohibitionofbuyingorshortingbychangingitscolor.

Question7-11

1. Matchthefollowingindicator

readingswiththemessagesoftheImpulsesystem.

1. EMAisrising,

MACD-Histogramrising.

2. EMAisrising,MACD-Histogramfalling.

3. EMAisfalling,MACD-Histogram

falling.4. EMAisfalling,

MACD-Histogramrising.1. Impulse

systemgreen(bullish)

2. Impulsesystemred(bearish)

3. Impulsesystemblue

(neutral)

Question7-12

1. MatchtheletteredbarsinthechartinFigure7.12withthefollowingstatements.

1. Buyingorstanding

asidepermitted;shortingforbidden.

2. Shortingorstandingasidepermitted;buyingforbidden.

3. Buying,shorting,orstandingasideispermitted.

FIGURE7.12JCPdailywitha13-barEMA,a12-26-9MACD-Histogram,andtheImpulsesystem.(ChartbyStockcharts.com).TheImpulseSystem

Question7-13

1. LookingattheweeklychartofBBBYin

Figure7.8,whatwouldbethecolorofitsrightmostbarifweappliedtheImpulsesystem?

1. Green2. Red3. Blue4. Notenough

informationto

decide

Question7-14

1. Thecorrectwidthofachannelaroundamovingaverage

1. isacloselyguarded

secretof

professionaltraders.

2. containsallpricesforthepast50to100bars.

3. containsabout90percentofthepricesforthepast50to100bars.

4. containsabouthalfofthepricesforthepast50to100bars.

Question7-15

1. Matchstatementsregardingmovingaveragechannelsfromthefollowingtwosets.

1. Themarketis

undervalued.

2. Themarketisovervalued.

3. Dependsonvolatility.

4. Themarketisfairlyvalued.1. Theupper

channelline2. Themoving

average3. Thelower

channelline

4. Channelcoefficient

Question7-16

1. Whichstatementaboutchannelsisincorrect?

1. Goinglongorshort

inthemiddleofachannelalways

offersattractivetradesbecauseyoubuyorsellattheconsensusofvalue.

2. Whenachannelrisessharply,anupsidepenetrationoftheupperchannellineindicatesthatthemarketisstrongandshouldbeboughtwhenit

returnstoitsmovingaverage.

3. Whenachannelisrelativelyflat,themarketisalmostalwaysagoodbuynearthebottomofitstradingchannelandagoodsellnearthetop.

4. Abreakoutbelowthelowerlineofasharplyfalling

channelindicatesthatthemarketisweakandapullbacktothemovingaveragewillofferashortingopportunity.

EIGHT

TradingVehicles

Some professionals say—“I

don't trade stocks, futures, oroptions; I trademoney inmyaccount.” They focus onsystem design and riskmanagement,whilewhattheytrade are just vehicles inwhichtheirmoneygoesforaride, hopefully in the rightdirection.1

You have an enormouschoice of trading vehicles.Beforeyou focuson a singleclassorevenasmallergroup

within that class, it pays toknowwhat other instrumentsareavailabletoyou.This chapter will test yourknowledge of several majorclasses of tradinginstruments.Whileansweringquestions, think about whatyou're currently trading.Youmay even decide to broadenyour attention and tradeanother type of instrument,andofcourse,youcanalways

trademorethanonetype.

Questions Trial1Trial2

Trial3

1 2 3 4 5 6 7

8 9 10 11 12

Correctanswers

Question8-1

1. Inselectingatradinginstrument,whichofthefollowingisnotakeyconsideration?

1. Liquidity2. Volatility3. Popularity4. Timezones

Question8-2

1. Whenbuyingastock,you

1. makealoantothe

company.2. becomeaninsider.3. willprofitifthe

companymakesmoney.

4. becomeapart

ownerofthecompany.

Question8-3

1. HowdoesWarrenBuffettsuggestdealingwith“Mr.Market”?

1. BuywhenMr.

Marketishappy.

2. SellwhenMr.Marketishappy.

3. SellwhenMr.Marketisdepressed.

4. BuywhenMr.Marketisdepressed.1. I2. II3. IandIII

4. IIandIV

Question8-4

1. Anexchange-tradedfund(ETF)isanasset-holdingvehicle,designedtotradelikeastock.Whichoneofthe

followingstatementsaboutETFsisincorrect?

1. ETFsoffera

narrowchoiceofassets.

2. ETFslooselytrackunderlyingsecurities.

3. AdministrativeexpensesofETFs

take‘haircuts’fromprofits.

4. ETFsallowyoutopurchaseanassetclassorastockgroup.

Question8-5

1. Matchthefollowingsetsofstatementsregarding

stockoptions.1. Abetthatastock

willdrop2. Abetthatastock

willrise3. Acallwhose

underlyingstockisbelowtheexerciseprice

4. Acallwhoseunderlyingstockisabovetheexercise

price1. Out-of-the-

money2. Put3. In-the-money4. Call

Question8-6

1. Optionpricesdependonallofthe

following,except

1. theclosenesstothe

optionexpirationdate.

2. theclosenesstotheoptionexerciseprice.

3. howcloselytheunderlyingstocksfollowstheirindustrygroup.

4. thevolatilityoftheunderlyingstocks.

Question8-7

1. Matchthefollowingstatementsoncallsandputs.

1. Thepriceofthe

underlyingstockrises.

2. Thepriceoftheunderlyingstockfalls.

3. Thepriceoftheunderlyingstockremainsflat.1. Profitablefora

callbuyer2. Profitablefora

putbuyer3. Profitablefora

callwriter

4. Profitableforaputwriter

Question8-8

1. Whichofthefollowingsafety-orientedstepsisbesttoavoidwhenwritingoptions?

1. Aimtowriteoptionsoutsidepricelevelsyouexpecttheunderlyingsecuritytoreach.

2. Placeastoptoexityouroptionpositionifitmovesagainstyoubyacertainamount.

3. Aimtowriteoptionswithlow

Deltas.4. Openaninsurance

account.

Question8-9

1. What'sthegreatestdifferencebetweenbuyingfuturesandoptions?

1. Thenumberoflongandshortpositions.

2. Futuresarelesscorrelatedwitheachotherthanstockoptions.

3. Therearethousandsofoptionablestocksbutonlydozensoffutures.

4. Themostanoptionbuyercanloseistheinitialpremium,

butafuturesbuyercanlosealotmore.

Question8-10

1. Themaindangeroffuturesmarketsis

1. therelativelyshort

lifeoftheircontracts,compared

tostocks.2. tradingwithsmall

margindeposits.3. theexistenceofthe

dailypricelimits.4. insidertradingby

hedgers.

Question8-11

1. Matchthefollowing

statementsregardingfutures.

1. Acontractforthe

nextmonth'sdeliveryofacommodityispricedhigherthanformoredistantdeliveries.

2. Atraderopensafuturespositionoppositetohis

positionintheactualcommodity.

3. Amajorweatherdisturbancethreatenscottonharvest.

4. Acoldspelldrivesupthepriceofheatingoil;atradershortsheatingoilandgoeslongcrudeoil.1. Supply-driven

market2. Spreadtrading3. Inverted

market4. Hedging

Question8-12

1. Whichstatementsregardingtheforexmarket

arecorrect?1. Theforexmarket

hasnocentrallocation;institutionaltradersdealdirectlywitheachother.

2. Forexhousestendtoacceptcustomerorderswithoutexecutinganytrades.

3. Marginsof1:30andhigherhelptradersprofit.

4. Aretailforexbrokeragehouseearnsitsincomefromcommissions.1. I2. IandII3. I,II,andIII4. I,II,III,and

IV

Note

1 Several years ago, aBedouin guide in Jordanasked me about myprofession,andItoldhimItraded on Wall Street. Hedrove by the local marketwhere his buddies tradedgoats,which,atabout$300apiece,were amajor storeof value in the desert. Heasked whether I'd like to

trade, but I laughed andsaid that ifwe brought hisdesert traders to WallStreet and showed themhowtousecomputers,theywouldout-trademanylocalguys.

NINE

RiskManagement

Even a brilliant systemwill

not guarantee winning inevery trade. This is whyevery system must includeriskmanagementrules.Manycreators of promising tradingsystems keep losing moneybecauseofpoororabsentriskcontrol.Eachandeverysystemhasitsdrawdown periods. That'swhenriskmanagementmeansthe difference between lifeanddeath.Nosystemwilldo

you any good if you don'tmanagerisk.Professionals spend much oftheir time calculating howmuch money to risk on anygiven trade and how to varytrade size, depending onmarket conditions andaccount equity. Riskmanagement is essential foryoursurvivalandsuccess.Youoweittoyourselftoearnan excellent rating in this

sectionof theStudyGuide—nothing less will do! Astraders, we sail on a stormyocean. Risk managementrulesareourlifeboatsandlifepreservers. Make sure thatyour safety gear is in goodorder.

Questions Trial1Trial2

Trial3

1 2

3 4 5 6 7 8 9 10 11 12 13

14 15 16 17

Correctanswers

Question9-1

1. Atraderfeels

overjoyedafteraprofitabletradeanddisgustedafteralosingtrade.Thismeansthat

1. heisontheright

track;itisimportanttolistentoyourfeelings.

2. hismindiscloudedbyemotionsthat

interferewithmakinggoodtradingdecisions.

3. heshoulddoublethesizeofhispositionwhenhefeelshappyandgetoutwhenhefeelshurt.

4. feelingdisgustedisaproperreactiontoalosingtrade.

Question9-2

1. Tradershangontolosingtradesforallofthefollowingreasons,except

1. theybecome

attachedtopositions.

2. theyhatetoadmit

theyarewrong.3. theyfollowsound

tradingplans.4. takingalossmeans

givinguphope.

Question9-3

1. Youbuyafterindicatorsturnup.Twodayslaterthe

marketslides,theindicatorsturndown,andyouhavea$200paperloss.Yourinitialstopwas$300belowthemarket,andthenextsupportlevelis$350belowyourentrypoint.Whatdo

youdo?1. Continueinthe

trade,keepyourstop.

2. Takeyourlossandretreattothesidelines.

3. Doubleupyourpositiontoloweritsaverageprice.

4. Loweryourstoptoslightlybelowthe

nextlogicalsupportlevel.

Question9-4

1. Twotradersdecidetospendtheircoffeebreakflippingacoinandbettingadollaroneachflip.TraderA

brings$3tothegame,traderBbrings$10.ThechanceoftraderAbeingawinnerattheendofthatcoffeebreakis

1. near100percent.2. near50percent.3. near0percent.

4. Notenoughtinformationtoanswer.

Question9-5

1. Choosetheorderofimportanceofthefollowingthreemoneymanagementgoals.

1. Earnhighprofits2. Ensuresurvival3. Earnasteadyrate

ofreturn1. I,II,III2. II,III,I3. Ill,II,I

Question9-6

1. Theusefulness

ofwhichofthefollowingruleshasbeenprovenbyexperience?

1. Nevermeeta

margincall.2. Neveraverage

down.3. Thefirstmistakeis

thecheapest.4. Ifyoumustlighten

up,liquidateyourworstposition.1. I2. IandII3. I,II,andIII4. I,II,III,and

IV

Question9-7

1. Whenyoufindyourself

countingmoneyinatrade,youshould

1. stop—andifyou

can't,closeoutthattrade.

2. Countmoneytocalculateyourstops.

3. Countmoneytocalculateyour

profittargets.4. plotachartofyour

paperprofits.1. I2. IandII3. I,II,andIII4. I,II,III,and

IV

Question9-8

1. Yourtradingsystemindicatesatradewithanattractiveprofitpotentialandastop$0.98persharebelowtheentryprice.Youhave$28,000inyouraccount.Accordingto

the2%Rule,howmanysharesmayyoubuy?

1. 3002. 4003. 5004. 600

Question9-9

1. Youbuy300sharesofarisingstock,anditrallies$3.Nowyoushouldthinkabout:

1. Wheretomove

yourstop2. Whethertomove

yourtarget3. Howmanydollars

you'vemadesofar4. Howmuchyou

wouldhavemadeifyoubought600shares1. I2. IandII3. I,II,andIII4. I,II,III,and

IV

Question9-10

1. Whichofthefollowingstatementsaboutstopsaretrue?

1. Whenyouarelong,

donotmovedownyourstop.

2. Whenyouareshort,youmaymovedownyour

stop.3. Whenyouarelong,

youmaymoveupyourstop.

4. Whenyouareshort,donotmoveupyourstop.1. IandIV2. IIandIII3. Noneofthe

above

4. Alloftheabove

Question9-11

1. Astop-lossorder

1. limitsyourlosson

abadtrade.2. reducesyourstress

level.3. limitsthedamage

fromabadtradingsystem.

4. guaranteesthatyourlosswillnotexceedacertainamount.1. I2. IandII3. I,II,andIII4. I,II,III,and

IV

Question9-12

1. Whichofthefollowingtradersareincompliancewiththe2%Rule?

1. TraderA:$18,000

intheaccount,bought200sharesat$20,stopat$18

2. TraderB:$50,000intheaccount,bought400sharesat$20,stopat$18

3. TraderC:$25,000intheaccount,bought400sharesat$20,stopat$19

4. TraderD:$60,000intheaccount,bought1,500sharesat$20,stopat$191. IandII

2. IIandIII3. IllandIV4. I,II,III,and

IV

Question9-13

1. Whichtwomistakesonthislistaremostdeadlyfortraders?

1. Tradingonrumors

andhearsay2. Tradingwithout

stops3. Forgettingto

monitoropentrades4. Puttingontrades

whosesizeistoolargefortheaccount1. IandII

2. IIandIII3. IandIV4. IIandIV

Question9-14

1. TheIronTriangleofriskcontroltellsyouhowmanysharesyoumaybuy

orsellshortbyperformingwhichcalculation?

1. Subtractyourentry

fromyourtargetprice

2. Divideyourtargetpricebyyourstop

3. Addyourstoptoyourtargetprice

4. Divideyourtotal

dollarriskbytheriskpershare

Question9-15

1. Whichofthefollowingstatementsregardingthe6%Ruleiscorrect?

1. Youmaynotrisk

morethan6%ofyouraccountequityonanysingletrade.

2. Ifyourisk2%pertradeandhadthreelosingtradesinamonth,youhavetoreduceyourriskonthenextthreetrades.

3. Ifyourisk2%pertradeandtakethreelossesinarow,you

maynottradefortherestofthismonth.

4. Paperlossesonopentradesdon'tcountagainstthe6%Rulelimit.

Question9-16

1. Incalculatingyour“available

risk,”the6%Ruletakesintoaccountallofthefollowing,except:

1. Yourpaperprofits

forthemonth2. Yourtotallosses

forthemonth3. Youramountsat

riskinopentrades4. Whatwouldhappen

ifallyouropentradesturnednegative

Question9-17

1. Allofthefollowingstatementsapplytocomingbacktotradingafterasevere

drawdown,except:

1. Beginbytradinga

tinysizeandincreaseitinstepsaftermeetingperformancegoals.

2. Jumpintotradingfullsize—dealwithyourfearsbyfacingthem.

3. Becomeyourown

tradingmanagerbyfocusingonriskmanagement.

4. Lowerthe2%Ruletoasmallernumber.

TEN

PracticalDetails

I was in a room where a

world-famous technicalanalyst lectured about gold.He projected his charts on ascreenandpointedouttrendsand potential reversals. Atrader in the audience raisedhis hand: “So, at the rightedge,wouldyoubuyorsell?”Thegreatexpertponderedthescreenanduttered:“Well,I'msure that in two to threeweeks,theanswertothatwillbe very clear.” The traderstared at him

incomprehensibly.Intrading,youdon'thavetheluxuryofwaitingforacoupleofweeks for an answer.Youneed to decide now, today,what you'll do at the rightedgeofthechart:buy,sell,orstand aside. Standing aside,by the way, is a legitimatechoice.Ifyoudecidetotrade,youneed to choosewhere toenter, set targets, and placestops.

Tradersuseawidevarietyofmethods to accomplish thesetasks. In this chapter, we'llreview the methods that aredescribed in The NewTradingforaLiving.

Questions Trial1Trial2

Trial3

1 2 3

4 5 6 7 8 9 10 11 12

Correctanswers

Question10-1

1. Theleastadvisablemethodofenteringalongpositionistobuy

1. abreakoutabove

yesterday'shigh.

2. abreakoutabovethechannel.

3. apullbacktothevaluezone.

4. apenetrationofthevaluezone.

Question10-2

1. Goldisinanuptrend,confirmedbya

risingmovingaverage.Everyfewweeksthereisabriefpanic,aspricesstabbelowtheirmovingaveragebeforeresumingtheiruptrend.Threemonthsago,pricesstabbed$2.50below

theirEMA,twomonthsago$1.50,andlastmonth$4.HowdeepbelowtheEMAwouldyouconsiderplacingabuyorder?

1. Immediatelybelow

theEMA2. $1below

3. $3below4. $5below

Question10-3

1. Whenbuyinginthevicinityofarisingmovingaverage,areasonableprofittarget

wouldbe1. theupperchannel

line.2. thelowerchannel

line.3. thesamedistance

abovetheEMAasthelatestpenetrationwasbelow.

4. whenthemovingaverageturnsdown.

Question10-4

1. Settingprofittargetsforlong-termtradesisbestdoneonthebasisof

1. movingaverages.2. channels.3. divergences.

4. supportandresistance.

Question10-5

1. Whichofthefollowingstatementsaboutstopsisincorrect?

1. Theyleadto

whipsaws.

2. Theyallowyoutocalculatereward/riskratios.

3. Theylimitthemaximumamountofloss.

4. Theygiveyouanideaofamaximumlossinatrade.

Question10-6

1. Whichofthefollowingmethodsofplacingstopshelpsavoidgettinghitby“marketnoise”?

1. Stopsoutsideofthe

pricechannel2. SafeZonestops3. ATRstops

4. Stopsbasedonsupportorresistance1. I2. IandII3. I,II,andIII4. I,II,III,and

IV

Question10-7

1. Whichofthe

followingrulesapplytoplacingstops?

1. Don'tplacestopsat

obviouslevels.2. Don'tplacestopsat

roundnumbers.3. Moveyourstopsto

protectwinningtradesfromturningintolosingones.

4. Moveyourstop

onlyinthedirectionofyourtrade.1. I2. IandII3. I,II,andIII4. I,II,III,and

IV

Question10-8

1. Thehighofthedailybaris

$23andthelow$21.Youbuyat$21.50.Whatisyourbuygrade?

1. 25%2. 50%3. 75%4. Noneoftheabove

Question10-9

1. Thehighofthedailybaris$29andthelow$26.Yousellat$27.Whatisyoursellgrade?

1. 33%2. 50%3. 66%4. 75%

Question10-10

1. Thetrend,definedbytheEMAslope,isrising.Onthedayyoubuy,theupperchannellineisat$32.50andthelowerchannellineisat$26.50.You

golongat$29andsellseveraldayslaterat$31.Whatisyourtradegrade?

1. 25%2. 33%3. 50%4. 66%

Question10-11

1. Whichofthefollowingstatementsaboutscanningisincorrect?

1. Ascanmaycovera

thousandstocks.2. Ascanfindsstocks

thatfitapatterndefinedbyyou.

3. Awell-designedscanfindsprofitabletrades.

4. Onecanscanstockindustrygroupsaswellasindividualstocks.

Question10-12

1. Negativerulesforscanningmayfilterout

stocksonthebasisofallofthefollowingcriteria,except:

1. Unprofitable2. Trendingdown3. Insufficientvolume

levels4. Toocheaportoo

expensive

ELEVEN

GoodRecord-Keeping

Keepinggoodrecordshelps

you identify past mistakesand stop repeating them.Good records make clearwhat steps brought youprofits,sothatyoucanrepeatthemgoingforward.Good record-keeping tiestogether psychology, marketanalysis, and riskmanagement. It is the besttool for developing andmaintainingdiscipline.To improve your

performance, you must learnfromyourexperiences,whichis what good record-keepingallows you to do. It is themost important skill for yourgrowthasatrader.

Questions Trial1Trial2

Trial3

1 2 3

4 5 6 7 8 9

Correctanswers

Question11-1

1. Goodrecord-keepinghelpsaccomplishallofthefollowing,except:

1. Greaterdiscipline2. Lessimpulsive

trading3. Stopmaking

mistakes4. Becomeyourown

teacher

Question11-2

1. Performingroutinemorninghomeworkisespeciallyimportantforwhatreason?

1. Ithelpsyouwake

up.2. Itallowsyouto

reviewnewsandreportsrelevanttotradingduringtheday.

3. Itallowsyoutoreviewyesterday'sperformance.

4. Itallowsyoutoadjuststops.

Question11-3

1. What'sthemainpurposeoftakingadailypsychologicalself-testbeforethemarketopens?

1. Toevaluateyour

mood

2. Toevaluateyourreadinesstotrade

3. Toseeonwhatdaysyoushouldn'tbetrading

4. Tobereadytotradeagreatersizeonthedayswithaperfectscore1. IandII2. IIandIII3. IllandIV

4. IandIV

Question11-4

1. Atradeplanmustincludeallofthefollowing,except:

1. Thestrategyyou'll

use2. Yourentry,exit,

andstop3. Theamountof

moneyyou'llrisk4. Theamountof

moneyyouplantomake

Question11-5

1. Whichstatementsaboutusinga

TradeApgararecorrect?

1. Themorequestions

youaskaboutyourplan,thebetteryou'llbepreparedtotrade.

2. Keepthenumberofquestionsaboutatradeplandowntofive.

3. Writedown

detailedresponsestoquestionsandweighthemcarefully.

4. Useonlyoneofthreeresponses:yes,no,andin-between.1. IandIII2. IIandIV3. IandIV4. IIandIII

Question11-6

1. CompletingaTradebillpriortoenteringatrademakesyoufocusonwhichofthefollowing?

1. Entry,exit,andstop2. Earningsreports

andex-dividend

dates3. Thestrategyyou'll

trade4. Amountofriskand

positionsize1. I2. IandII3. I,II,andIII4. I,II,III,and

IV

Question11-7

1. Afteryouenteratrade,yourTradebillshoulddocumentwhichofthefollowing?

1. Stopplacement,

bothsoftandhardifyouuseboth

2. Thelevelatwhich

you'llmoveyourstoptobreakeven

3. Thefactofhavingmadeanentryinthetradediary

4. Theamountoftargetedprofit1. I2. IandII3. I,II,andIII4. I,II,III,and

IV

Question11-8

1. Whichstatementaboutreviewingclosedtradesiscorrect?

1. Giveyourfull

attentiontocurrent

trades,don'tdwellinthepast.

2. Losseshurttoomuchatthetimeyoutookthem,andthereisnopointrevisitingthem.

3. Spendyourtimeplanningforthefuture,notthinkingaboutthepast.

4. Learnfrompastmistakes,soyou

don'trepeatthem.

Question11-9

1. ThemosteducationalpartofaTradeJournalis

1. documentingyour

strategy.2. addingentryand

exitcharts.

3. postingafollow-upchartweeksormonthsafteratrade.

4. documentingentry,exit,andtradegrades.

PARTII

ANSWERSAND

COMMENTS

     

Introduction

1. Answer0-1:C(IandIV)Fundamentalanalystsstudyeconomicconditions;technicalanalystsfocusonmarketbehavior.Bothcanhelpyou

spotgoodtradingopportunities.Tipsaretricky—theyalmostalwayscomelate;plus,thetipperwhotellsyoutobuywillalmostnevertellyouwhentosell.Tips

canbeusedonlyifyourunthemthroughyourdecision-makingsystem.Usinginsideinformationisacriminaloffenseinmostdevelopedcountries.

2. Answer0-2:CThethreepillarsofsuccessfultradingaresoundpsychology,agoodanalyticmethod,andcarefulmoneymanagement.Agoodtrader

withasoundanalyticmethodishisowninsider.

3. Answer0-3:ATheattitudeofbenignskepticismisthebest.Borrowtheideasthatseemtomake

senseandthentesttheminthecrucibleofyourownexperience.Begintradingasmallsizeandgraduallyincreaseitasyougainconfidence.

4. Answer0-4:D

Slippageandcommissionsslantthe“playingfield”againstmosttraders;emotionaltradingfinishesthemoff.Theftisonlyaminorfactorinwell-policedmarkets.

5. Answer0-5:DWhenthewinnerreceiveslessthantheloserlost,thattransactioniscalleda“minus-sumgame.”Commissionsandslippage

maketradingaprimeexampleofsuchagame.Manyprovidersoffinancialservicestrytohidethisfact.

6. Answer0-6:AYoupaycommissionsonstocktrades

whenyoubuyandagainwhenyousell.100sharesofa$20stockwillcost$2,000.You'llpaya$10commission(0.5%)whenyoubuyandagainwhenyousell,foratotalof$20or

1%.Ifyoudothistradeonmargin,payingonly$1,000foryoursharesandborrowingtherest,thatcommissionwillbe2%ofyourcapital—andthenyou'llhavetopayinterestonmargindebt.

Thatseeminglysmallcommissionmultipliedbythenumberoftradesthatyoumakeinayear,cantakeaseriousbiteoutofyouraccount.Thisproblemisespecially

acuteforsmallaccounts,andofcourse,usingmarginmakesitevenworse.Lesson:beveryselectiveinwhatyoutrade,weigheachtradeplancarefully.

7. Answer0-7:

BYourslippageenteringthistradewas8centsforeachofthe100sharesyoubought,foratotalof$8.Itwasalmostasbigasyourcommission.Whiletrading

largerpositionsreducestherelativecostofcommissionspershare,thereisnosuchbreakwithslippage—ifyoutraded1,000shares,yourslippagewouldhavebeen$80

orworse.Theremedyisstraightforward:uselimitordersforenteringtrades.

8. Answer0-8:CYoubought100sharesat$20.08andsoldat$20.88

foragrossprofitof80centspershareor$80for100shares.Yourslippagewas8centswhenyouboughtand12centswhenyousold,foratotalof20centspershare,$20total.The$20

totalslippageis25%ofyour$80profitforthetrade.Whenitcomestostops,limitorderswon'tdo.Use“marketiftouched”orders—whenit'stimetoescape,hitthe

ejectbutton.Someslippageisinevitable,butthegoalistokeepitaslowaspossible.

9. Answer0-9:BYou'veboughtyoursharesat$20.08andsoldat$20.88

for80centsprofitpershareoratotalgrossprofitof$80.Yourcommissionsateup$10enteringandanother$10exiting.Therewasalsothatslippageof$8ontheentryandanother

$12duringtheexit.Thetotalbitecameto$40or50%ofyourgrossprofit—andnowUncleSamislickinghislips,waitingtotaxyou.Youneedtofocuson

reducingtheexpensesoftrading:askyourbrokertolowerhiscommissionrateorshopforamorecompetitivebroker,beselectiveaboutyourtrades,andwheneverpossibleuse

limitratherthanmarketorders.

■RatingYourself

1. 0–3correct:poor.Takeheart—thequestionsthatyoufailedtoanswerareseldomasked.Manyinthefinancialservicesindustrytryto

muddleupthefacts.Takeyourtime,rereadtheIntroductioninTheNewTradingforaLiving,andretakethistest.

2. 4–6correct:fairlygood.Youhavegraspedthe

basicideas.Lookuptheanswerstothequestionsyou'vemissed.Thinkaboutthemandretakethistestafewdayslater.

3. 7–9correct:excellent.You

understandtheseneglectedbutveryimportantconcepts.You'llenjoythechaptersonpsychologyandriskmanagement.

ONE

IndividualPsychology

1. Answer1-1:DTradingisinherentlyriskybecausewedealwiththeuncertaintyofthefuture.Iftherewerenoriskofloss,therecouldbe

noreward.Amateurshaveemotionalreactions—fear,elation,anger.Aprofessionaltradermeasureseachriskinadvanceandtradesonlywhentheoddsareclearlyinhis

favor.2. Answer1-2:

AYoumuststrivetoachieveyourpersonalbest,tobecomethebesttraderyoucan.Focusingonmoney,buyingtoys,ortryingto

impressotherswillonlydivertyourattentionfromthetopgoal—reachingyourpersonalbest.Agoodsurgeondoesn'tcountmoneyattheoperatingtable—andneitherdoesan

intelligenttraderwhileheisinatrade.

3. Answer1-3:CTreatyourmistakesaslearningopportunities:findthecausesofyourlosses,andcorrectthosemistakes

goingforward.Thisisanemotionallyhardtask,butitneedstobedoneinordertowin.Withoutsuchanalysis,tryingtotradeyourwayoutofahole,evenwithanewguru,is

doomedtofailure.Youneedtofigureoutexactlywhatgotyouintoaholeinthefirstplace.We'llreturntothistopicinthechapteronkeepingatradingdiary.

4. Answer1-4:

AAlargeaccountallowsyoutodiversify,trademultiplepositions,andspendproportionatelylessonservices.Beginnersoftendiscard

theseadvantagesbyblowingmoneysimplybecauseitexistsintheiraccounts.We'llreturntotherulesonmanagingtradesizeinthechapteronmoneymanagement.

5. Answer1-5:D(IIIandIV)Commercialtradingsystemsarebuiltandoptimizedusingolddata;theyself-destructwhenmarketschange.Anintelligent

traderwhodevelopshisownsystemcanmakeneededadjustments;atraderwhopurchasesasystemsinkswithit.Evensystemswithbuilt-inoptimizationeventually

self-destructbecausewedonotknowwhatkindsofoptimizationwillworkinthefuture.Followingtradingsignalsfromanysystemrequiresdisciplineandevokes

essentiallythesameemotionsasindependenttrading.Thereisnosubstituteformaturejudgment.

6. Answer1-6:C(I,II,andIII)Oneofthekeysignsofagambling

attitudeistheinabilitytostoptrading,stayonthesidelines,andreflectonone'sbehavior.Traderswhogambletendtoreversetheirpositionsandfeeldepressedorelateddependingon

theoutcomeoftheirlatesttrade.Alosingstreakisacommonexperience;whenyouhitone,stoptradinguntilyou'vespenttimereevaluatingyourmethod.Serioustraders

learnfromtheirlosses,whilegamblerscontinuewiththeircompulsivetrading.

7. Answer1-7:CWetradethewaywelive.Personal

disciplineisessentialforsuccess.Lookforcommonproblemsinyourtradingandeverydaylife.Thistraderseemstohaveseriousissueswithresponsibility.Heneedstofaceitandget

himselforganizedineverydaylifeaswellasintrading.

8. Answer1-8:D(IandIV)Towin,youdon'thavetobemoreintelligentorknowledgeablethanother

traders,butyoumustbebetterdisciplined.Yourfeelingsinfluenceyourtrades,includingentries,exits,andriskmanagement.Ifyourmindiscloudedbyfearorgreed,

nosystemwillhelp.Gettinghighfromtradingleadstogambling,acceptingbadodds,andlosing.

9. Answer1-9:C(IandIII)Youmayincreaseyourtradingsizeas

longasyoudon'triskagreaterpercentageofyourequity—we'llreturntothisinthechapteronriskmanagement.Avacationfromtradingmaynotbeabadidea—spendsomeof

thetimeanalyzingwhatyoudidright.Ontheotherhand,becomingsloppywithstopsandlazyinresearcharetypicalbehaviorsofaloseronaluckystreak.

10. Answer1-10:DLosersareaddictedtothethrillofthegameandhopeforabigwin.Theykeeppoorrecords,justlikealcoholicsdon'tcounttheirdrinks.

Theyswitchbetweentradingsystemsandmethods,justlikealcoholicsswitchfromdrinkinginbarstodrinkingathome.

11. Answer1-11:C

Losersarehookedontheexcitementoftradingandkeephopingforabigwin.Theyblameothersfortheirlossesandavoidacceptingpersonalresponsibility.

12. Answer1-12:DAcceptingresponsibilityforyourlossesblowsawaythesmokeofillusionsandputsyourtradingonanew,realisticfooting.Abettertrading

system,newtradingmethods,andamajorbullmarketcanhelp,butpersonalresponsibilitycomesfirst.

13. Answer1-13:B(IIandIII)Atraderwhohasthe

couragetofacehisownroleinlosingcanturnaround;goingforward,heislikelytocutlossesshortandavoidovertrading.Hisdisciplinewillfreehimfromfear,butitwillnot

lowerhisratesofcommissionsandslippage—forthatheneedstocarefullyshopforabrokerandavoidmarketorders.

14. Answer1-14:CBeingcalm

anddisciplinedisthecornerstoneofsuccessfultrading.Writingdownyourtradeplansandimplementingthemwillputyouontheroadtosuccess—we'llreturntothistopicin

thechapterontradeplans.Biggercapital,knowledgeablefriends,andahistoryofsuccessinotherendeavorsarealldesirable—butnoneequalstheimportanceofdisciplined

planning.Emotionaltradingistheenemyofsuccess.Iftradingmakesyoufeelgiddyorfearful,thosefeelingswillcloudyourjudgment.Exityourtradeswhenyoufeel

thegripofemotions.

15. Answer1-15:AAtrader'sownimpulsivitymakesthemarketappearconfusingandillogical.Otherproblems,suchasashortageofgood

information,smallcapital,oreventhemarket'speriodsofrandomness,contributelesstoconfusionthanemotionaltrading.

16. Answer1-16:CAtradebegins

whenyoudecidetoenterthemarket,anditendswhenyoudecidetoexit.Thosedecisionsarelikethebookendsofeverytrade,andtheyareyoursalone.Youmayuse

technicalindicators,fundamentalanalysis,orevenpayattentiontotrustedadvisors—butonlyyoucandecidewhenatradebeginsandwhenitends.

■RatingYourself

1. 0–4correct:poor.Theredlightisflashing—yourlowlevelofself-awarenessputsyouindanger.Youneedtolearnmoreabouttrading

psychologyinordertohaveachanceofsuccess.Manypsychologicaltricksthathelpusinourdailylivesdestroytradingaccounts.Manyeducationalsystemspromote

dependenceandfollow-the-leadermentality.Successfultradersareindependent,creative,andrealistic.Pleaserereadtherelevantchapterandretakethistestbefore

proceedingtotherestofthisStudyGuide.

2. 5–8correct:belowaverage.Gettinghalftheanswersrightmeansbeinginthebottomhalfandthat'snotgoodenough

forwinning.Youneedtolearnmoreabouttheindividualpsychologyoftrading.Pleaserereadtherelevantmaterialsandretakethistest.

3. 9–12correct:fairlygood.

Youhaveaworkinggraspoftheessentialconceptsoftradingpsychologybutneedtofillinthegaps.Studytherecommendedmaterialsandretakethistestinafewdays.Sound

psychologyanddisciplineareessentialforyoursuccessinthemarkets.

4. 13–16correct:excellent.Youhavemasteredthetopicsinthischapter.Please

reviewthosequestionswhereyouranswersdifferedfromthoseprovidedinthisbook.Successfultradersareveryindependent.Seewhetherthediscrepancies

wereduetoerrors—ortoyourown,individualwayofthinking.

■ RecommendedReading1. Douglas,Mark,TheDisciplinedTrader(NewYork:NewYorkInstituteofFinance,1990).

2. Lefevre,Edwin,ReminiscencesofaStockOperator(1923)(Greenville,SC:Traders

Press,1985).

TWO

MassPsychology

1. Answer2-1:DPricesaresetbycrowdmemberswhoplaceorderstobuyorsell,orelsestandaside.Eachpricetickreflectsthe

latestconsensusofvalue,hammeredoutbythoseordersorthewithholdingoforders.Tickscoalesceintopatterns—thefootprintsofbullsandbearsonourcharts.“Supplyand

demandcurves”arefarremovedfromthissweatyrealityofthemarket.Pricesareconnectedtofundamentalvaluesinthelongrunbutaregovernedbycrowdpsychologyfromdayto

day.2. Answer2-2:

CBullstrytobuyaslowaspossible,andbearstrytosellashighaspossible.Bothknowthattheyhavetohurrybeforesomeuncommitted

traderstepsinandsnatchesawaytheirbargain.Professionalsaimtoidentifythedominantgroupandtradewithit.Thegoalofagoodtechnicalanalystistodiscoverthebalanceof

powerbetweenbullsandbears—inordertotradeinthesamedirectionasthewinninggroup.Thedangerofforecastingisthatitlocksusintoaspecificmind-setinsteadoffocusingon

thecurrentrealityofthemarket.

3. Answer2-3:CReadingnewspapers,watchingTV,andsurfingthenetoftenleadtopoorlyplannedandimpulsive

trades.Whytrade,whetheralargeorasmallsize,whenyouaren'tsurewhattodoatthemoment?“Whenindoubt,stayout”isasensiblerule.

4. Answer2-4:

BTheprofitsyou'retryingtomakecancomefromonlyonesource—fromothertraders'accounts.Themirrorimageofthatisthatanylossesyoutakewillgive

yourmoneytoothertraders.Tradedefensivelybecauseothertraderswilltrytopickyourpocketsbeforeyoucanpicktheirs.Brokersandexchangeswillalsotaketheircut,whetheryou

win,lose,ordraw.

5. Answer2-5:B(IandIII)Whenwejoincrowds,ourindependencedissolves,andthecapacityforcriticalthinkinggoesoutthewindow.

Crowdsareimpulsive,addingtovolatility.Crowdmembersblindlyfollowtrends,andtheirpsychologicaldependencemakesthemunlikelytoleavethe

crowd,untilshakenbyasevereloss.

6. Answer2-6:D(I,II,III,andIV)Thegreatertheuncertainty,themorelikelywearetoturntoothersforreassuranceandcomfort.

Thisbehaviorisdeeplyingrainedinhumannature.Groupsareheldtogetherbytheirloyaltytotheleader.

7. Answer2-7:A(I)Crowdsarebiggerand

strongerthananyofus;don'targuewiththemarket.Crowdsarestrongbutprimitive,andyoucanexploittheirrepetitivebehavior—butonlyifyoucanstandapart

fromthem.Marketcrowdsarerightduringtrendsbutwrongatturningpoints.Whenyouletthemarketmakeyoufeelelatedordepressed,yougiveitpoweroveryourself;professional

traderstrainthemselvesnottoreactemotionallytogainsorlosses.

8. Answer2-8:CAlleyesinthemarketaregluedtoprices.Thelongerarallylasts,themore

peopleturnbullish,pushingpriceshigherandattractingevenmorebulls.Apersistentdeclinemakesmorepeoplefeelbearish,andtheirsellinghelpspushthemarkereven

lower.Priceisthetrend'sleader.Fewfinancialfirmsarebigenoughtodominateamarketfordaysorevenhours.Gurusaretothemarketlikeatailistoadog,andfewdogschasetheir

tailsforverylong.Fundamentalchangesintheeconomysetconditionsforbullandbearmarkets,butonlytraderscanbuyandsell,creatingself-reinforcingpricetrends.

9. Answer2-9:B(IIandIII)Pricesarehammeredoutinthebattlesbetweenbullsandbears.Pricesrallywhenconfidentbullsarepayingup,whilesellersdemanda

premiumforparticipatinginthegamethat'sgoingagainstthem.Thereisabuyerandasellerbehindeverytransaction.Thenumberofstocksorfuturesboughtandsoldisequalby

definition.10. Answer2-10:

D(I,II,III,andIV)Inadowntrend,theshortsaremakingmoney,andmanybecomewillingtosellatalowerpriceto

increasetheirpositions.Atthesametime,bullsarelosing,andmanywanttogetout.Thosethatagreetobuydoitonlyatadiscount.Theyplacetheirbidsbelowthemarket,

forcingbearstosellcheaper.Thisprocessisreversedduringuptrends.

11. Answer2-11:B(IIandIII)Apriceshockisasuddenmoveagainstthetrend.Itfrightensthe

dominantgroupandmakestheoppositionbolder.Asuddenpricebreakinanuptrendprovidesapriceshockthatfrightensthebulls.Eveniftheymanagetotakeprices

toanewhigh,theirconfidenceisshaken,andtheuptrendmaywellbereadytoreverse.

12. Answer2-12:CAbearishdivergenceoccurswhen

pricesrallytoanewhigh,whileanindicatorrisestoalowerpeak.Inabullishdivergence,pricesfalltoanewlow,whileanindicatorfallstoamoreshallowlow.

Bearishdivergenceshelpidentifyuptrendtops.Bullishdivergenceshelpidentifydowntrendbottoms.Theyareamongthemostusefulpatternsintechnicalanalysis.

13. Answer2-13:B(IandIV)Atradermuststaycalm,focusontherealityofthemarket,identifythecurrenttrend,andgetingearwithit.Whentraderstrytoforecast

exactlywhatthemarketwilldo,theiregosbecomeweddedtotheirpredictions,anditbecomeshardforthemtochangetheirtradingstance.Whenthemarketrefusestofollow

forecasts,traderswhosticktothemgetfinanciallyhurt.

■RatingYourself

1. 0-4correct:poor.Youhaveaverylimitedunderstandingofmasspsychologyofthemarkets.Ifyoudon'tunderstandhowmarket

crowdsinfluenceyourbehavior,you'llbesweptawaybythemandlosemoney.Pleaserereadtherelevantsectionofthebook,andretakethistestinafewdays,before

proceedinganyfurther.

2. 5–9correct:fairlygood.Youhaveaworkinggraspoftheessentialconceptsofmasspsychology,butneedtolearnmoreaboutthe

balancebetweenbullsandbears,theimpactofthetradingcrowdsonyou,andthedifferencebetweenmanagingtradesandforecastingprices.Pleasereviewtherelevant

sectionofthebookandretakethistestinafewdays.

3. 10–13correct:excellent.Youhavemasteredtheessentialconceptsofmasspsychology.

Nowreviewsomeofyourrecenttradesinlightoftheseprinciples.Continuetomonitorhowthemarketimpactsyou.Asyouproceedtothechaptersonmarket

analysis,keepinmindthattechnicalanalysisisappliedsocialpsychology.

■ RecommendedReading1. Mackay,Charles,ExtraordinaryPopularDelusionsandtheMadnessofCrowds(1841)(NewYork:CrownPublishers,1980).

THREE

ClassicalChartAnalysis

1. Answer3-1:I=C;II=D;III=B;IV=AAmateurstendtogettheirinformationafterworkandtradeinthemorning.Professionals

respondtochangingconditionsthroughoutthedayandtendtodominatethemarketnearclosingtime.Buyingpushespricesup,andthehighestpriceofthedaymarksthe

maximumpowerofbulls.Sellingpushespricesdown,andthelowestpriceofthedaymarksthemaximumpowerofbears.Thisreasoningalsoappliestoweeklyandintra-day

charts.2. Answer3-2:

C(I,II,andIII)Wishfulthinkingisrampantamonganalysts,especiallythosewhodon'ttrade.Keepingbasic

definitionsfuzzycontributestotheconfusion.Itisquitecommonforthemarketstobetrendinghigherandloweratthesametimeindifferenttimeframes.Goodanalysts

whofocusondifferenttimeframesmaycometodifferentconclusions,andallcanmakeprofitabletrades.

3. Answer3-3:CSlippagetends

tobeloweronquiet,narrow-rangedays.That'swhenyoucangetabetterentry,butitdoesn'tchangeyourcommissions.

4. Answer3-4:4(A,B,C,andD)MDTis

tracingapatternofralliesanddeclines.Assoonaspricesbegintodeclinefromthelatestpeak,drawahorizontallineacrossthatpeak,markingaresistancelevel.As

pricesrallyagain,theysometimesslowdownattheresistancelevel.Aftertheypenetrateit,theyusuallypullback—whatusedtoberesistancebecomesasupportlevel.

5. Answer3-5:D(IandIV)Supportlinesaredrawnacrossthelows,andresistancelinesacrossthehighs.Theycanchangeroleswiththepassageoftime,asthe

marketmovesawayfromthoselevels.Theedgesofcongestionzonesshowwheremassesoftradershavetradedandreversedtheirpositions.Extremepricesshowonlythelevelsofpanic

amongtheweakestmarketparticipants.

6. Answer3-6:D(I,II,III,andIV)Supportandresistanceexistbecausetradershavememories.Themoreintense

theirmemories,themoreactivelytheybuyandsell,strengtheningsupportandresistance.Highvolumereflectsagreaterdegreeoffinancialandemotionalcommitment,

whilethegreaterheightofthesupportandresistancezonesshowsahigherlevelofactivity,andconsequently,strongermemories.Thegreaterthedurationofacongestionareaandthe

moretimesit'sbeenhit,themoretradersexpectanewreversaltooccur,reinforcingsupportandresistance.

7. Answer3-7:C(I,II,andIII)Waitingfora

newlowbeforeshortinghelpsensureyou'redealingwithadownsidebreakout.Falsebreakoutsarethebaneofamateurs,butprofessionaltraderslovethem.They

oftenwaituntiladownsidebreakoutstopsmakingnewlowsandthentradeagainstit:buyandplaceaprotectivestopnearthelatestlow.Sincepricesmadeanewlow

yesterday,shortingattheopeningwouldmeanfollowingthetrend,butbuyingwouldbeapooroption.

8. Answer3-8:A=IV;B=I;C=III;D=IIThelower

dashedline,drawnacrosstheedgeofacongestionarea,marksthelevelofsupport.WhenpricesbreakouttoanewlowduringbarA,andevenslightlylowerduringbarB,thereisa

possibilitythatthedowntrendwillresume.Still,theshortnessofthosebarsindicatesthatthedownmoveisfacingastiffresistance.AsbarCmovesupintothecongestionarea,itleaves

behindafalsedownsidebreakout.Youmaystartbuyingwhenitcrossesabovethepreviouslybrokensupportline,withastopneartherecentlows.Theshortnessofthelastbarindicatesthat

therallyisslowingdown—tightenyourstopandconsidermovingituptothebreakevenlevel.

9. Answer3-9.Trends=AandC;Trading

ranges=BandDWhenpricestrend,theykeeprisingorfallingovertime,reachinghigherhighsorlowerlows.Intradingranges,mostralliespeteroutatapproximately

thesamehighs,anddeclinesstopatapproximatelythesamelows.Asatrader,whenyourecognizeatrend,followitandhangontopositions.Ifyoutradetheswingswithin

atradingrange,beextracarefulnottooverstayyourpositions.

10. Answer3-10.I=G;II=A,B,andF;III=CandD;IV=ETheactionsofanytradingvehicleasit

nearssupportorresistanceprovideinformationaboutitsstrengthorweakness.Whenastockcannotriseuptotouchresistance,itshowsweakness.Holdingabove

supportindicatesstrength.Falsebreakoutsprovidesomeofthebestsignalsintechnicalanalysis.

11. Answer3-11:C(I,II,andIII)Thetrendis

yourfriend.Aslongasyouseethepatternofhigherhighsandhigherlows,tradethatmarketfromthelongside.Makesuretoprotectyourpositionswithstopsandmovethemupasthetrend

progresses.Addtoyourpositionsonlyafteryourpaperprofitshavebeenprotected.Ifthemarkettakesoutitspreviouslow,itthrowstheuptrendindoubt.

12. Answer3-12:AdoesnotapplyTailsshowthateitherahighoralowpricelevelhasbeenrejectedbythemassofmarketparticipants.Sincemarketstendtomove

awayfromrejectedpricelevels,itpaystotradeinthedirectionoppositeatail.Sometradingvehiclesaremorelikelytohavetailsthanothers—youseethreeofthemonthischartofBA,

followedbyreversals.

13. Answer3-13:DisnotpermittedPayingcloseattentiontomarketactionafterakangarootail,youmayincreaseyourpositionsize

ortakeprofitswhenthemoveappearstostall.Whatyoushouldn'tdoisplaceyourstopbelowthetipofthetailbecauseitwouldexposeatradetotoomuchrisk.

■RatingYourself

1. 0-4correct:poor.Chartstellanimportantstory—andifyoucan'treadit,you'llmissthemarket'smessage.You'llrunaseriousriskof

buyingatthetopsandsellingatthebottoms.Pleaserereadtherelevantsectionofthebook,reviewyourmistakes,andthenretakethistest.Donotproceedtothenextchapter

untilthen—thesematerialsaretooimportanttoskip.

2. 5–9correct:fairlygood.Youhaveaworkingknowledgeofthekeyconceptsofcharting.Now

youhavetodecidewhether“fairlygood”isgoodenoughforyou.Itmaybeenoughifyouplantofocusoncomputerizedtechnicalanalysis,butnotenoughifyouplanto

workwithcharts.Allseriousinvestorsandtradersneedtograspsuchessentialconceptsastrendsandtradingranges,supportandresistance,continuationandreversal.It

wouldbeagoodideatoreturntotherelevantsection,reviewit,andthenretakethistest.

3. 10–13correct:excellent.You'vemasteredtheessential

conceptsofcharting.Theycanhelpyoudiscovertheshiftsofpowerbetweenbullsandbears.Nowproceedtothechaptersoncomputerizedtechnicalanalysis.

■ RecommendedReading1. Edwards,RobertD.,and

JohnMagee,TechnicalAnalysisofStockTrends(1948).(NewYork:NewYorkInstituteofFinance,1992).

2. Pring,MartinJ.,TechnicalAnalysisExplained,5thedition

(NewYork:McGraw-Hill,2013).

FOUR

ComputerizedTechnicalAnalysis

1. Answer4-1:A=(I)Computerizedtechnicalanalysisismoreobjectivethanclassicalcharting.Youmayarguewhethersupportor

resistanceispresent,buttherecanbenoargumentaboutthedirectionofanindicator—it'seitherup,down,orflat.Agoodtechnicianaimstodiscoverthebalanceof

powerbetweenbullsandbearsandbetonthewinninggroup—nottoforecastthefuture.Acomputerdoesn'tremoveemotionsfromtradingbecausewestillhavetoplaceour

orders.Anyonewhotriestosellyou“asurething”shouldbeviewedwithuttersuspicion.

2. Answer4-2:I=B;II=C;III=AAtoolboxisacollectionof

analyticandchartingtools.Blackboxesforautomatictradingcomewithexcellenthistoricalrecordsbutself-destructwhenmarketschange;grayboxesstraddletheboundarybetweenthose

twogroups.3. Answer4-3:I

=B;II=C:III=AItpaystocombineindicatorsfromdifferentgroupssothattheirnegativefeaturescanceleachotheroutwhiletheir

positivefeaturesremainundisturbed.We'llreturntothisthemeinthechapterontheTripleScreentradingsystem.

4. Answer4-4:BTocalculatea

simplemovingaverage,addtheclosingpricesinitstimewindowanddividetheirsumbythenumberofdaysinthatwindow.Addingpricesforthepast5daysproduces110,and

dividing110by5is22.

5. Answer4-5:AExponentialmovingaveragesarehardertocalculatebyhandthansimpleMAs.Ifyouuseacomputer,both

areequallyeasy.

6. Answer4-6:DArisingEMAconfirmsthatbullsareincontrol—it'stimetogolong.WhenEMAdeclines,itshowsthatbearsarein

control—it'stimetogoshort.TheabilityofanEMAtoreachanewhighshowsthatbullsarestrongerthanbefore,whiledecliningtoanewlowshowsthatbearsare

strongerthanbefore.Theseareimportantsignals,butlessfrequentorimportantthanthedirectionoftheEMAslope.ThewidthoftheEMA'stimewindowissetbythetrader.

7. Answer4-7:1=A&C;2=BWhentheEMArises,tradethestockonlyfromthelongside—placeyourbuyordersslightlybelowtheEMA.WhentheEMAturns

down,tradethestockfromtheshortsidebyplacingsellordersslightlyabovethefallingEMA.You'refreetostandasidewheneveryou'dlike.

8. Answer4-8:1=D,E,F,and

G;2=A,B,andI;3=C,H,andJWhentheEMApointsup,pullbacksmarkbuyingopportunities.WhentheEMApointsdown,pricesareusuallybelowit,and

ralliestotheEMAmarkshortingopportunities.Thetransitionalzonesbetweenuptrendsanddowntrendsarethehardesttotrade.Whenindoubt,standasideuntilacleartrend

emerges.9. Answer4-9:

D(I,II,III,andIV)Eachpriceisamomentaryconsensusofvalue,whileamovingaveragereflectstheaverageconsensusof

value.Ashorter-termMAtracksshort-termconsensus,andalonger-termMAtrackslonger-termconsensus.MACDlinesconsistofmovingaverages,andwhenthefast

lineofMACDisaboveorbelowtheslowline,itshowswhetherbullsorbearscurrentlydominatethemarket.

10. Answer4-10:Cisn'ttrueMACD-Histogram

tracksthespreadbetweenthefastandslowMACDLines.ItsslopeisdefinedbytherelationshipbetweenthelasttwobarsofMACD-Histogram.Whenthesloperises,it

showsthatbullsareincontrol,andwhenitdeclines,itshowsthatbearsareincontrol.Itpaystotradeinthedirectionofthedominantmarketgroup.Thisisnotforecasting—

it'sreadingthemarketandbettingthattheinertiaofthemarketcrowdwillcontinue.

11. Answer4-11:1=D;2=A;3=BandE;4=F;5=CWhenMACD-Histogramreachesanew

high,ittellsyouthatbullsarestrongandpricesarelikelytoretestorexceedtheirlatestpeak.Whenitfallstoanewlow,itshowsthatbearsarestrongandpricesarelikelytoretest

orexceedthelatestlow.Afterwards,whenMACD-Histogramcrossesitszeroline,itsignalsthatthepowerofthedominantgrouphasbeenbroken.Abullish

divergencegivesastrongbuysignal;itoccurswhenpricesfalltoanewlow,butMACD-Histogramtracesashallowerbottom.Abearishdivergencegivesastrong

sellsignal;itoccurswhenpricesrisetoanewhigh,butMACD-Histogramtracesalowerhigh.

12. Answer4-12:CThebearishdivergencehassentprices

lower,buttheyrefusedtobreakbelowtheirEMA.Atthesametime,MACD-Histogramhasdroppedbelowzero,showingthatbearsarenearingtheirmaximumeffortlevel.Withbears

havingdeliveredaboutasmuchpowerastheycouldandpricesholdingup,it'sbettertotakeprofitsandmovetothesidelines.

13. Answer4-13:CThepartof

today'sbarthatprotrudesaboveorbelowyesterday'sbarrepresentstoday'sdirectionalmovement.Iftoday'sbarextendsbothaboveandbelowyesterday's

bar,thenonlythelongerpartrepresentsdirectionalmovement.Iftoday'sbarisinsideofyesterday'sbar,orifitextendsaboveandbelowbyequalamounts,directionalmovementis

zero.14. Answer4-14:

I=B;II=A,C,E;III=DTradeinthedirectionoftheupperDirectionalLineaslongasADXrisesabovethelowerDirectional

Line.ExitwhenADXrisesabovebothDirectionalLinesandthenticksdown.AnotherexitsignaloccurswhenADXsinksbelowbothDirectionalLines.Aslong

asADXstaysbelowboth+DIand−DI,avoidusingatrend-followingmethod.

15. Answer4-15:CWhenADXrisesabovebothDirectional

Linesandthenticksdown,itsignalstheendofastronglydirectionalmoveandsuggeststheonsetofgreatervolatility.Youcanstilltradethismarket,butonlyusingshorter-term

indicatorsratherthantheDirectionalsystem.

16. Answer4-16:BOscillatorsshowwhetherbullsorbearsarecurrentlyincontrol.Theirpeaksandbottoms

marktheextremesofmassoptimismandpessimism.Overboughtreadingsofoscillatorshelpidentifymarkettops,andoversoldreadingshelpcatchmarketbottoms.

Thesesignalstendtoworkwellduringtradingrangesbutarelessusefulduringtrends.Noindicatorcancatchalltopsandbottoms.

17. Answer4-17:DWhenan

oscillatorreachesanewrecordhigh,itreflectsstrengthandtellstradersthattherallyislikelytocontinue,evenifthereisatemporarypause.Youmayaddtolongpositions

ortakepartialprofits,butit'sbettertoignoreshortingsignalsbecauseunderthoseconditions,pricesaren'tlikelytodropbyameaningfulamount.

18. Answer4-18:1=A,C,I;2=B,E,F;3=E–F;4=C–DandI–J;5=D,G,H,andJStochasticbecomesoverboughtwhenitrisestooraboveitsupper

referenceline.Thereitgivesasignaltoselloratleastavoidbuying.Stochasticbecomesoversoldwhenitfallstoorbelowitslowerreferenceline.Thereitgivesasignaltobuy

oratleastavoidshorting.AfailureswingoccurswhenStochasticfailstoreachitsreferencelineduringamarketmove.WhenStochasticcouldnot

reachitsupperreferencelineduringtherallyG,itshowedthatbullswereweakandgaveasellsignal.FailureswingsDandJbecamepartsofbearishdivergences.Inthebullish

divergenceE–F,thesecondbottomwasshallowerthanthefirst,butnotafailureswingbecauseitwasbelowthelowerreferenceline.

19. Answer4-19:CStochasticis

nearitsneutralmidpoint—butit'sfallingfromapowerfulbearishpattern.Ithasjusttracedafailureswingandabearishdivergence.Inaddition,youcanseeanupward-

pointingkangarootailonthepricechart,reinforcingStochastic'sbearishmessage.

20. Answer4-20:1=A,B,F;2=D;3=D–E;4=B–CRSIbecomes

overboughtwhenitrisesaboveitsupperreferenceline.Thereitgivessellsignals,whichhelptraderssellshortindowntrendsorinflatmarkets,butareoftenpremature

duringuptrends.RSIbecomesoversoldwhenitfallsbelowitslowerreferenceline.Thereitgivesbuysignals,whichhelptradersgolonginuptrendsorflatmarketsbutareoften

prematureduringdowntrends.Bullishandbearishdivergencesgivethestrongestbuyandsellsignals.Alldivergencesyouseeonthischartprecededsubstantial

marketmoves.21. Answer4-21:

BRSIhasjusttracedaclearbearishdivergence,withitsfirsttopaboveandthesecondbelowtheupperreferenceline.

ThisbearishmessageisreinforcedbythefactthattheslightpricedeclineofthepastfewdaystookTIFbelowthetopitreachedseveralmonthsearlier.Afalseupsidebreakoutis

nowinplaceandthat,reinforcedbytheRSIdivergence,givesasignaltosellshort.

22. Answer4-22:A(IandII)Whenthemarkettrendisdownandanoscillatorrises

aboveitsupperreferenceline,itidentifiesashort-termsplashofbullishness—ashortingopportunity.Afterward,youmaywanttocovershortswhenanoscillatorfalls

belowitslowerreferenceline,oryoumaywanttoholdshorts.Inanycase,donotuseoscillatorstogolonginawell-establisheddowntrend.AsPeterLynch,anotedmoney

manager,oncewrote:“Tryingtocatchabottomisliketryingtocatchafallingknife—youinvariablygrabitinthewrongspot.”

■RatingYourself

1. 0-8correct:poor.Youhaveaverylimitedunderstandingofmoderntechnicalanalysis.Youoweittoyourselftolearnthe

essentialconceptsofusingindicators.Pleaserereadtherelevantchapterandretakethistestbeforeproceedingtotherestofthisbook.

2. 9–15correct:

fairlygood.Itisimportanttounderstandthemessagesoftrend-followingindicatorsandoscillators.Theyofferinsightsintothebalanceofpowerbetweenbullsand

bears.Youhaveadecentgraspoftheessentialconceptsofcomputerizedtechnicalanalysis.Nowreviewyouranswerstofindoutyourareasofstrengthandweakness.Are

youmorecomfortablewithtrend-followingindicatorsoroscillators?Areyoubetteratfindingsignalsthatidentifytrendsorreversals?Pleasereviewtherecommended

literature,andretakethistestseveraldayslater.Thinkaboutwhatthesetestsrevealaboutyourpreferences.Mostsuccessfultradersconcentrateonjustafew

typesoftrades.Someprefertofollowtrends,whileothersarebetteroffatcatchingreversals.Trader,knowthyself.

3. 16–22correct:excellent.Youhavea

goodcommandofcomputerizedtechnicalanalysis.Theseindicatorsarethebuildingblocksofseveralproventradingsystems(seePart7).Beforeweworkona

system,let'sreviewothertypesofindicatorsavailabletomarketanalysts(Parts5and6).

■ RecommendedReading1. Murphy,JohnJ.,TechnicalAnalysisoftheFinancialMarkets(NewYork:NewYorkInstituteofFinance,1999).

FIVE

VolumeandTime

1. Answer5-1:AEachtradereflectsafinancialandemotionalcommitmentbytwotraders:abuyerandaseller.Sinceoneofthemis

boundtoberightandtheotherwrong,volumerepresentstheactivityofwinnersandlosers.Itsurgeswhenloserspanic.Itmirrorscurrentactivitybutdoesn'tforecastthe

future.2. Answer5-2:1

=B;2=A;3=C;4=DTrendstendtopersistwhenthevolumeissteadyorrisesinanorderlymanner.Theyusuallyexpirewitheitherabangora

whimper—aburstofvolumeoritsdrasticshrinkage.Thetrendcannotcontinueaftermassesoflosersstartleaving.

3. Answer5-3:1=D;2=AandB;3=C

andF;4=EandGRisingorsteadyvolumeconfirmstrends.Whenpricesrisetoanewhighorfalltoanewlowwhilevolumeshrinks,ittellsusthatthe

pricetrendislikelytoreverseoratleasttopause.

4. Answer5-4:BThereisapowerfulrallygoingon,withasteadypatternofhigherhighsandlows.

CPSTisslowlydecliningfromitslatesthigh,whilevolumeisshrinking.Waitforabarorafewbarsthatfailtoreachanewlowforthisminordownmove—andthengo

long.5. Answer5-5:

C(I,II,andIII)OBViscreatedbyaddingeachday'svolumetoarunningtotalwhenatradingvehiclerisesandsubtractingit

onthedayswhenthatvehiclefalls.OBVconfirmsbullmoveswhenitrisestoahigherhighthanatthepreviouspeak;itconfirmsdeclineswhenitfallstoalowerlowthanattheprevious

bottom.Pricesrepresenttheconsensusofvalue,whilevolume,measuredbyOBV,trackstraders'emotions.

6. Answer5-6:1=D;2=C;3=B;4=AOpeningand

closingpricesareamongthemostimportantpricesoftheday.Openingstendtobedominatedbyamateurswhoseordersfloodthemarketsinthemornings.Closingstendtobe

dominatedbyprofessionalswhomonitortheconditionsallday.Accumulation/Distributiontiesdailyvolumetotherelationshipbetweenopeningandclosingprices.

7. Answer5-7:

BThenumberoflongandshortpositionsinthederivativesmarketsisalwaysequal.Whilestocksrepresentcurrentownership,derivativesarecontractsfor

futuredelivery.Eachcontracthastwosides:asellerandabuyer.Thisiswhyopeninterestreflectsthenumberofcontractsheldbylongsorowedbyshortsinanygiven

marketonanygivenday.Itequalsthetotallongorthetotalshortposition.

8. Answer5-8:1=B;2=C;3=C;4=AOpeninterestrisesonlywhenanewbuyeranda

newsellerenterthemarketbecausetheirtradecreatesanewcontract.Openinterestfallswhenabullwhoislongsellshiscontracttoabearwhobuysittocoverhisshorttrade,

andbothcloseouttheirpositions.Ifanewbullbuysfromanoldbullwho'sgettingout,openinterestremainsunchanged.Nordoesitchangewhenanewbearsellstoanoldbear

whobuystogetoutofhisshortposition.

9. Answer5-9:D(1,2,3,and4)Whenopeninterestrises,itshowsthatacrowdofconfidentbullsisfacingdownacrowdof

equallyconfidentbears.Onegroupissuretolose,butaslongaspotentialloserskeeppouringin,thetrendislikelytocontinue.

10. Answer5-10:C(1,2,and3)

Thedirectionofthemoveshowswhetherthedominantforcewasupordown.Thedistancebetweentoday'sandyesterday'sclosingpricesreflectsthemarginofvictoryby

bullsorbears.High-volumeralliesanddeclinesaremoreforcefulandmorelikelytopersist.Whilerelatedmarketsareimportant,theydon'treflecttheforceofmoves

elsewhere.11. Answer5-11:

DForceIndexlinksthreeessentialfactors:thedirectionofpricechange,itsextent,andthevolumeonwhichitoccurred.To

calculatethedailyForceIndex,subtractyesterday'sclosingpricefromtoday'sandmultiplytheresult,whetherpositiveornegative,bytoday'svolume.

12. Answer5-12:D(I,II,III,andIV)SmoothingtherawForceIndexwithamovingaveragehelpsrecognizeitstrend—ashort-termtrendusingashortEMAoran

intermediatetrendusingalongerEMA.Whenthe2-dayEMAofForceIndexdipsbelowzeroduringmarketrallies,itidentifiesbuyingopportunities,andwhenitralliesabove

zeroduringmarketdrops,itmarksshortingopportunities.The13-dayEMAofForceIndexhelpsidentifybullishandbearishzonesbyitspositionaboveorbelowitszeroline.

DivergencesbetweenForceIndexandpricetendtomarkapproachingtrendreversals.

13. Answer5-13:1=GandH;2=F;3=A,B,C,andD;4=E

Inthelefthalfofthechart,pricesareinadowntrend,confirmedbyafallingEMA.Wheneverthe2-dayEMAofForceIndexrisesabovezero,itshowsabriefrecoverybythebulls—a

shortingopportunity.InareaE,pricesfalltoanewlowbutrecoilfromit,leavingbehindafalsedownsidebreakout,whileForceIndextracesabullishdivergence,

withamuchmoreshallowlow.Thisisagoodtimetocovershorts.InareaF,theEMAofpricesturnsup—itsignalstostopshortingandlookforbuyingopportunities.Afterwards,

ForceIndexdeclinesbelowzeroinareasGandH,givingbuysignals.

14. Answer5-14:BAttherightedgeofthescreen,amovingaverageofpriceis

trendinghigher,indicatinganuptrend.The2-dayForceIndexhasdippedbelowzero,signalingthatthestockisshort-termoversoldandgivingabuysignal.Youhavetwomain

waystoactonthissignal.Youmayplaceabuyorderatthehighofthecurrentbar,aimingtocatchanupsidebreakout.Alternatively,youmaymeasuretheextentofan

averagedownsidepenetrationoftheEMAandplaceyourbuyorderatasimilardistancebelowthecurrentEMA.

15. Answer5-15:1=C;2=AandD;3=B

Thelonger-termForceIndex,smoothedwitha13-barEMA,helpsidentifytrendreversals:bullishwhenitcrossesabovethezerolineandbearishwhenitcrossesbelow

thatline.Itisalsopossibletodrawhorizontalbullishandbearishlinesslightlyaboveandbelowthezeroline.Waitingfortheircrossovers,ratherthanthoseofthe

zeroline,willreducewhipsaws—butitwillalsoslowdownthegoodsignals.Whatyou'dgaininonetrade,you'llloseinanother.AlowerpeakofForceIndexinareaBshows

thatthebullishforceisweakeningandpreparesyouforacomingtrendreversal.

16. Answer5-16:BTheForceIndexispositive—bullish,whilethetrendisup,

confirmedbyarisingEMA.Thiscombinationsuggestsgoinglong,usingpullbackstotheEMAforbuying.

17. Answer5-17:C(1,2,and3)Pricecyclesowetheir

existencetofundamentalproductionfactors,suchasweatherandseasonalshiftsinsupplyanddemand,aswellaswavesofgreedandfearamongtraders.

18. Answer5-18:

1=D;2=AandE;3=BandF;4=CandGTheseasonofanindicatorisdefinedbyitsslopeanditspositionaboveorbelowthecenterline.Whenanindicatorturns

upbutisbelowitscenterline,itisspring;whenitrisesaboveitscenterline,itissummer;whenitdeclinesbutisaboveitscenterline,itisautumn;andwhenitfallsbelowitscenterline,itis

winter.Springisthebestseasonforgoinglong,andautumnisthebestseasonforsellingshort.Seasonsarenotrigid—notinnatureandnotinthemarkets.Noticeabriefwarmspellin

winterintheareabetweenlettersBandC.

19. Answer5-19:AEachtimeframerelatestoitsnextgreaterandlessertimeframesbyafactorof5.

Whenyouanalyzeamarketintwotimeframes,theshorterofthemhastobeaboutfivetimesshorterthanthelongerone.Ifyourfavoritetimeframeisdaily,youmustfirst

examineweeklycharts.

■RatingYourself

1. 0-7correct:poor.Youneedtolearnmoreaboutvolumeandtime.Theseessentialaspectsofmarketanalysiswillgiveyouan

edgeovermosttraders.Pleaserereadtherelevantchapterandretakethistestbeforeproceedingtotherestofthisbook.

2. 8–14correct:fairlygood.Youhavea

workinggraspoftheessentialconceptsofvolumeandtime,whichmosttradersneglectattheirperil.Pleasereviewyouranswerstoseewhetheryourscorewasloweredbyaweak

knowledgeofacertainarea,suchastime,volume,oropeninterest.Reviewtheappropriatechaptersandretakethistestafewdayslater.

3. 15–19correct:

excellent.Youunderstandtheconceptsmosttradersmiss.Time,volume,andopeninterestprovideanextradimensionofanalysisanddeepenyour

understandingofmarketdynamics.

■ RecommendedReading1. Belveal,L.Dee.ChartingCommodityMarketPriceBehavior(1969)(Homewood,IL:BusinessOneIrwin,1985).

SIX

GeneralMarketIndicators

1. Answer6-1:C(1,2,3,and4)NewHighsarethestocksthathaverisentothehighestlevelinayear,whileNewLowsarethestocksthat

havefallentothelowestlevelinayearonanygivenday.NewHighsaretheleadersinstrengthandNewLowsaretheleadersinweakness.TheNewHigh–NewLowIndex(NH-

NL)worksbymeasuringthedifferencebetweenthestrongestandtheweakeststocksonanygivenday.Itisaleadingindicatorofthestockmarket.

2. Answer6-2:1

=D;2=C;3=A;4=BWhenthemarketralliesandNH-NLrisestoanewhigh,itshowsagrowingbullishleadership.Itpaystofollowtheleadersandgolong.When

themarketdeclinesandNH-NLdropstoanewlow,itshowsthatbearishleadershipisbecomingstronger.Thisbearishdivergenceindicatesthatitpaystogoshort.Ifthe

broadmarketralliesbutNH-NLtracesalowerpeak,itshowsthattheuptrendislosingitsleadersandmaybeintrouble.IfthemarketfallstoanewlowbutNH-NLtracesahigher

bottom,itshowsthatthedowntrendislosingitsleadersandnearingabottom.

3. Answer6-3:1=AandD;2=BandF;3=G–H;4=D–ENH-NLtracksthenumbersof

themarketleaders,makingitaleadingindicatorofthestockmarket.Itsbullishzoneisabovethezerolineor,ifyouwanttomakeitlesspronetowhipsaws,abovetheplus

100level.Itsbearishzoneisbelowthezerolineor,ifyouwanttomakeitlesspronetowhipsaws,belowtheminus100level.Divergencesshowthattheleadershipof

thecurrenttrendisbecomingweaker.BoththeS&P500andtheNH-NLralliedtonewhighsinareaD,butinareaE,onlytheS&Preachedanewhigh—thisbearish

divergenceofNH-NLgaveasellsignal.BoththeS&P500andtheNH-NLfelltonewlowsinareaG,butinareaH,onlytheS&Pfelltoalowerlow;NH-NLbottomedoutatahigher

level,anditsbullishdivergenceflashedabuysignal.

4. Answer6-4:2TheEMAisrisingandtheNH-NLIndexispositive,showingthatthebullsareincharge.The

NewHigh–NewLowIndexhasjustralliedtoanewhighforthecurrentmove,showingthatthebullishleadershipisbecomingstronger.Pricesarealreadyabove

value,butstillcloseenoughtoittomakegoinglongarealisticchoice.

5. Answer6-5:C(1,2,and3)TheA/Dlinemeasuresmassparticipationinralliesanddeclines.A

stockmarketrallyislikelytopersistwhentheA/Dlinerisestoanewhigh,whileadeclineislikelytocontinuewhentheA/Dlinefallstoanewlow.Tradersneedtomonitorthe

patternofA/Dpeaksandvalleysbecauseitsabsoluteleveldependsmainlyonitsstartingdate.TheA/Dlinetracksonlypricechanges,notvolume.

6. Answer6-6:

B(1and3)Uptrendsattracttraders,andpoorlycapitalizednewcomersenterthemarketindrovesnearmajorpeaks.Manyofthemdoubleupattheworst

possibletime.AsHumphreyNeillputit,“Wheneveryonethinksalike,everyoneislikelytobewrong.”Whenbullishconsensusreachesarecordpeak,asavvytrader

startstakingprofitsonlongpositionsandlookingforshortingopportunities.Heknowsthattherecordhighbullishconsensusmeansthatbullsarealreadyloadedwithstocks

andcanhardlybuymoretosupporttheuptrend.

7. Answer6-7:AThestructureofthederivativesmarkets,includingfutures,ensuresthat

thenumberoflongandshortcontractsisalwaysequal.If75percentofmarketparticipantsarebullish,thentherearethreetimesmorebullsthanbears.Inthatcase,anaveragebearis

shortthreetimesasmanycontractsasanaveragebullislong.Itshowsthatthebigmoneyisonthebearishside.Bigmoneydidnotgrowbigbybeingstupid;itpaystobetonthewealthy

minority.Whenbullishconsensusrisesto75percent,startsellingandlookforshortingopportunities.

8. Answer6-8:DThenumberofshortandlong

contractsisalwaysequalinthefuturesmarkets.Ifthemajorityofparticipantsarebearish,thenthebullishminoritymustholdmorecontractspertrader.A20percentbullish

consensusmeansthattherearefourbearsforeachbull—anaveragebullholdsfourtimesasmanycontractsasanaveragebearisshort.Withbigmoneyonthelongsideofthemarket,be

preparedforasharprally.

9. Answer6-9:BAbullmarketthathascaughttheattentionofthegeneralpublicisprobablyveryoldandgettingreadytoreverse.

Marketsareoftenveryvolatileattops;scalingintoaputpositionmaybethesafesttradingstrategy.Tryingtobuycoffeenowmeansbettingonagreaterfooltheory.

Othermarketsshouldbetradedbasedontheirownmerits.

10. Answer6-10:1=C;2=A;3=D;4=BTraders'positionsgetreportedtothegovernmentaftertheir

sizesreachreportinglevels.Thoselevelsdifferfrommarkettomarket.Positionlimitsindicatethemaximumnumberofcontractsthataspeculatorisallowedtoholdinany

givenmarket.Hedgersareexemptfrompositionlimits.Manytradersareshockedtolearnthattradingonmanykindsofinsideinformationisperfectlylegalinthefuturesmarkets.

11. Answer6-11:1=D;2=A;3=B;4=CCommercialsdealincommoditiesinthenormalcourseoftheirbusinessandusefuturestohedgeinventoryrisks.Large

speculatorsarethosewhosepositionsreachorexceedreportinglevels.Ifyousubtracttheholdingsofthosetwogroupsfromopeninterest,you'llfindouthowmanycontractsare

heldbysmalltraderswhooftenwinduponthewrongsideofmarkettrends.Corporateinsidersareofficersofpubliclytradedfirmsandthosewhohold5percentormoreof

companyshares.

12. Answer6-12:DBuyingbycorporateinsidersisastrongbullishsign,butyouneedtoseeabullishconfirmationfromprice

action.At11months,thebearmarketisold.Nobodywillringabelltoadvertisethestartofabullmarket.Asaninvestor,it'stimetostartslowlyaccumulatingthestockyou've

selected.

■RatingYourself

1. 0-4correct:poor.Ifyoudon'ttradestocks,youmayskipNH-NL,butifyouplantotradestocksorstockindexfuturesoroptions,you

oweittoyourselftolearnhowtousethebestleadingindicatorofthestockmarket.Indicatorsofmasspsychologyprovideuniqueinsightsintotheforcesthat

movemarkets,andit'simportanttounderstandhowtheywork.

2. 5–8correct:fairlygood.Youhaveadecentgraspoftheindicatorsthatmeasuremass

marketbehavior.Thismaybeenoughifyouonlywantageneralunderstandingoftheconcept.Ifyouplantousethemintrading,rereadtheappropriatechapter,lookuptheanswers

tothequestionsyoumissed,andretakethistestseveraldayslater.

3. 9–12correct:excellent.Youunderstandtheessentialstockmarketindicators.

Theyhelpyourecognizewhenthemarketisinatoporabottomarea.Armedwiththisknowledge,youcanusecomputerizedindicators(seePart4)tofine-tuneyour

entriesandexits.

■ RecommendedReading1. Elder,Alexander&

KerryLovvorn.TheNewHigh–NewLowIndex(Alabama:SpikeTrade,2012).

2. Neill,HumphreyB.,TheArtofContraryThinking(1954)(Caldwell,ID:CaxtonPrinters,1985).

SEVEN

TradingSystems

1. Answer7-1:C(I,II,III,andIV)Trendsmaypointindifferentdirectionsatthesametimeindifferenttimeframes:forexample,

uponthedailychartbutdownontheweekly,orviceversa.Atrend-followingindicatormaybegivingabuysignal,whileanoscillatorisgivingasellsignal,orviceversa.The

TripleScreentradingsystemisdesignedtomanagethosecontradictorysignals.

2. Answer7-2:BTheTripleScreentradingsystembeginsbyidentifyingthetrendona

chartoneorderofmagnitudegreaterthantheoneyouareplanningtotrade.Findthetrendontheweeklychartandthenlookforentrypointsinthatdirectiononthedailies.Ifyoubeginby

analyzingthedailychartandonlychecktheweeklychartlater,youreyeswillbeprejudicedbywhatyousawonthedailychart.Amonthlychartistoofarremovedfromthedaily—the

timeframesoftwochartsshouldrelatetooneanotherbyafactoroffive.Aweeklybarcontainsthedatafrom5dailybars.

3. Answer7-3:CKeepinggoodrecordsis

essentialfortestingasystem.Startatthebeginningofyourdatafileandmoveforwardonedayatatime,recordingeachsignalandplannedactions.Watching

signalsemergeandgraduallydeliverpaperprofitsandlossesistheclosestyoucangettorealtradingwithoutriskingmoney.Ifyoulikewhatyouseeandstarttradingthatsysteminyour

account,keepyourpositionssmall.Concentrateonlearninghowthesystemworksintherealworldbeforegraduallyincreasingpositionsize.Sinceyoucannotknow

exactlyhowothersmayusethissystem,theirfeedbackisnotnearlyasmeaningfulasyourownresults.

4. Answer7-4:BTheentry,thetarget,andthestoparethe

threeessentialnumbersforeverytrade—youmustwritethemdownbeforeyouenter.Theyprovidethestructureforeverytrade,allowingyoutocompareriskandrewardand

decidewhatsizetotrade.Atradewithoutthesenumbersisnotatradebutagamble.Countingprofitsinanopentradewillonlydistractyoufrommanagingthattrade.

5. Answer7-5:BAdirectionaltraderhasthreechoices:buy,sell,orstandaside.ThefirstscreenofTripleScreenactsasacensorthattakesaway

oneofthosechoices.Youmaylookfortradesonlyinthedirectionofthelong-termtimeframeorstandaside.

6. Answer7-6:CWhenthefirstscreenofthe

TripleScreentradingsystempointsup,usedeclinesofashort-termoscillatortofindbuyingopportunities.Whenthefirstscreenpointsdown,useralliesofashort-termoscillatorto

identifyshortingopportunities.Thisrulehelpsavoidchasinguptrendsanddowntrends.Inthisexample,theshort-termoscillatorisalreadyoverbought;waitforittodeclinebefore

goinglong.7. Answer7-7:

BWhentheweeklytrendisupbutthedailytrendisdown,TripleScreenpointstoabuyingopportunity.Oneoftheoptionsisto

placeabuy-stopabovethelastday'shightocatchashort-termupsidebreakout.

8. Answer7-8:CTheuptrendofBed,Bath&BeyondInc.(BBBY)on

theweeklychartisconfirmedbyitsrisingEMAaswellastheuptrendofMACD-Histogram.Theweeklyuptrendleadstoastrategicdecisiontolookonlyforbuying

opportunitiesonthedailychart.ThereweseeapullbacktotheEMA,whiletheForceIndexbelowzeroindicatesanoversoldcondition.AccordingtoTripleScreen,pullbackson

thedailychartsduringweeklyuptrendssignalbuyingopportunities.Placeabuyorderabovethelatestdailyhigh.Thefactthattheweeklyanddailytrendsareinconflict

isanormaloccurrenceinthemarkets—itisthepurposeoftheTripleScreentoresolvesuchconflictstoyourbenefit.

9. Answer7-9:1=C;2=A;3=B;4=CWhenthe

weeklytrendisupandthedailytrendisdown,usethosedeclinestocatchbuyingopportunities.Whentheweeklytrendisdownandthedailytrendisup,usethoserallies

forenteringshorts.Tryingtoenteratradewhenbothweeklyanddailytrendsaremovinginthesamedirectionislikehoppingaboardamovingtrain.Itcanbedone,butit'ssaferto

waitforapullback.

10. Answer7-10:ATheslopeofthefastEMAtracksthemarket'sinertia,whiletheslopeoftheMACD-Histogramreflectsthe

directionofmarketpower.TheprimaryroleoftheImpulsesystemisnottotelltraderswhentobuyorsell.Rather,itshowsthemwhenthey'reprohibitedfrombuyingorshorting.Itisa

censorshipsystem,andwhentheImpulsesystemisred,itprohibitsbuying.Itremovesthatprohibitionwhenitscolorchangesfromthebearishredtoaneutralblueora

bullishgreen.11. Answer7-11:

1=A;2=C;3=B;4=CThecoloroftheImpulsesystemdependsonitstwocomponents—anEMAandMACD-Histogram.

Whenbotharerising,theImpulseturnsgreen—bullish,prohibitingshorttrades.Whenbothdecline,theImpulseturnsred—bearish,forbiddingbuying.Whenthesetwo

componentscontradictoneanother,theImpulseturnsblue—neutral.

12. Answer7-12:1=EandH;2=AandC;3=B,D,F,GandITheImpulsesystemisacensorship

system.WhenboththeEMAandMACD-Histogramturndown,coloringthebarred,itprohibitsbuying.Whenbothindicatorsturnup,coloringthebargreen,shortingisnotallowed.

TheImpulsesystemshouldn'tbeusedasanautomatictradingmethod:whileitcatcheseverytrend,itwouldsubjectanautomatictradertomultiplewhipsaws,for

example,intheareabetweenthelettersCandG.Itsbestsignalsemergewhenredorgreencolorsdisappear.Forexample,thedisappearanceofredatthebarGshowedthatthedouble

bottomwasbeingcompletedandsuggestedbuying.ThedisappearanceofgreenatthebarIsignaledtheapproachingendofapowerfulupswingandsuggested

takingprofits.13. Answer7-13:

AAttherightedgeofthechart,boththeEMAandMACD-Histogramarerising—theImpulsesystemwouldcolorthatbar

green.Hadbothindicatorsbeendeclining,thebarwouldbered;hadtheypointedinoppositedirections,thebarwouldbeblue.Thisisimportanttokeepinmindifyouwantto

findtheImpulsecolorattherightedgeofachartusingsoftwarethatdoesn'tletyouactuallycolorthebars.

14. Answer7-14:CThereisnomysteryinconstructinga

channel.Keepadjustingitswidthuntilitcontainsthebulkofprices,leavingoutonlythemostextremehighsandlowsforthepast50to100bars.Pricesmovingoutsideofawell-drawn

channelidentifyzonesofunsustainableoptimismorpessimism,wherethemarketislikelytoreverse.Keepinmindthatonrareoccasionsthemarketmaystay

outsideofitschannelforalongertime—butthat'sanexceptionthatconfirmstherule.

15. Answer7-15:1=C;2=A;3=D;4=BAmovingaveragereflectsthe

averageconsensusofvalue.Achanneltrackstheboundariesbetweennormalandabnormalpriceaction.Themarketisundervaluedwhenitfallsbelowitslowerchannel

lineandovervaluedwhenitrisesaboveitsupperchannelline.Thechannelcoefficientneedstobeadjusteduntilachannelcontains90percentto95percentofthe

priceactionforthepast50to100bars.

16. Answer7-16:ATheslopeofachannelprovidesimportantinformation.Whenitrises,itshowsthatthemarketis

bullish.Whenitfalls,themarketisbearish.Whenitisflat,themarketisneutral.Abreakoutinthedirectionofthechannelslopeindicatesapowerfultrend;areturntothemoving

averagealmostalwaysoffersagoodopportunitytotradeinthedirectionofthetrend.Swingsbetweenthewallsofaflatchannelalsoprovidegoodtradingopportunities.

Buyingandsellingatthemovingaverageisn'talwaysagoodidea.Ittendstoworkwhenachannelisslantedbutnotwhenitisflat.

■RatingYourself

1. 0-6correct:poor.Notunderstandingtradingsystemsisdangerous—tradingwithoutasystemislikesailingwithout

arudder.Pleasetakethenextfewdaystorereadtherelevantsectionofthebook,andretakethistestbeforeproceedinganyfurther.

2. 7–11correct:fairlygood.

Youhaveaworkinggraspoftheessentialconceptsoftradingsystems.Thislevelofknowledgemaysufficeelsewherebutnotindealingwithtradingsystems.Youmustknow

theminsideout—theyhelpyousurviveandprosperinthemarkets.Pleasereviewyouranswersandlookforyourweakspots.Thenrereadtherelevantsectionandretakethistest.

3. 12–16correct:excellent.Youhavemasteredtheessentialsoftradingsystems.Pleasereviewthosequestionsforwhichyouranswers

differedfromthosegiveninthisbook.Seewhetherthediscrepancieswereduetoerrorsortoyourowntradingstyle.Successfultradersarecreativeandcanhavedifferencesof

opinion.Thenproceedtothenexthighlyimportanttopic—selectingthemarketsyou'lltrade.

■ RecommendedReading1. Kaufman,Perry,TradingSystemsandMethods(Hoboken,NJ:JohnWiley&Sons,2013).

EIGHT

TradingVehicles

1. Answer8-1:CTradingliquidhigh-volumevehicleshelpsreduceslippage.Volatilefast-movinginstrumentsoffermore

opportunities.Itpaystofocusonthemarketswhosemaintradinghoursareclosetoyourowntimezone,sothatyou'reawakewhiletheactionistakingplace.Popularityisn'takeyfactor:

someofthebestopportunitiesoccurinthemarketsthataren'tpopularbutarefinetotrade,aslongastheyhavegoodliquidityandvolatility.

2. Answer8-2:D

Bondsrepresentloans,whilesharesrepresentcompanyownership.You'dhavetobuyagreatnumberofthemtobecomeaninsider.IntheUnitedStates,

formandatoryreportingpurposes,corporateinsidersaredefinedasacompany'sofficersanddirectorsandtheownersofmorethan10%ofitsequitysecurities.It's

adangerousmisconceptiontoexpectthepriceofastocktoriseifthecompanymakesmoney.Ifacompanywasexpectedtoreporta$100millionprofitinaquarterbutannounceda

$70millionprofit,itssharesarelikelytotakeahitfromdisappointedholderswhenearningsarereported.

3. Answer8-3:DWarrenBuffettsaysthatwhen

youbuyastockyoubecomeapartnerofamanic-depressivefellowhecallsMr.Market.Eachdayhewantstobuyyoursharesorsellhissharestoyou.Occasionally,

Mr.Marketbecomessodepressedthatheoffersyouhissharesonthecheap—andthat'swhenyoushouldbuy.Atothertimeshebecomessomanicthatheoffersacrazypriceforyour

shares—andthat'swhenyoushouldsell.Thisis,inanutshell,aremindertobuylowandsellhigh.

4. Answer8-4:AEachETFholdsaselectionof

variousassets,suchasstocksfromspecificindustrygroupsorcountries,commodities,orbonds.WithahugenumberofETFsavailabletotraders,thechoicesarevast,butETF

performancelagsduetoadministrativeexpenses,alwaysoneofthekeyfactorsforlong-termresults.PricesofmanyETFsgrosslydivergefrompricesofassetgroupstheyaresupposed

totrack.5. Answer8-5:I

=B;II=D;III=A;IV=CAcallisabetthatastockwillrise,whileaputisabetthatit'lldecline.Buyinga$40callwhenthe

underlyingstockistradingat$38makesthatcallout-of-the-money:itsentirepricerepresentshopethatthestockwillriseabove$40.Ifandwhenitdoes,thatcallwillbein-the-

money.6. Answer8-6:

COptionslosevalueastheyneartheirexpirationdate;theygainvalueasthestockapproachestheoptionexerciseprice.Options

forvolatilestockstendtobemoreexpensivebecausetheirpricescanswingmorethanthoseoflessvolatilestocks.Howcloselyastocktracksitsindustrygroupisnotafactor

initsoptionpricing.

7. Answer8-7:I=AandD;II=BandC;III=CandDThepersonwhobuysacallcanprofitonlyiftheunderlyingstockrises;ifitfallsoreven

staysflat,thewinnerwillbethetraderwhowrotethatcall.Aputbuyerwillprofitonlyiftheunderlyingstockfalls;ifitrisesorevenstaysflat,theoptionwriterwillprofit.Therearethree

possiblescenariosforanystock:up,down,orsideways.Onlyoneoutofthreeworksfortheoptionbuyer,buttwoworkfortheoptionwriter.

8. Answer8-8:B

Beginbyanalyzingtheunderlyingsecurity,decidewhatlevelit'sunlikelytoreach,andthensellanoptionbeyondthatlevel.Goingonlinetolookupastock'sDeltawillhelp

youidentifythatlevel.Youalsoneedtodecideatwhatleveltheunderlyingsecuritywouldproveyouwrongandpromptyoutoexit.Placinganactualstopforanoptionwouldexpose

youtotherunningofopenorders,whichisacommonprobleminoptions.Betterwritedownyourstopandplaceanordertoexitaftertheunderlyingsecuritygetsthere.

Considerbankingasmallpercentageofyourprofitsinaninsuranceaccountforthedaywhenanoptionyouwrotejumpssharplyagainstyou.

9. Answer8-9:

DThenumberoflongandshortcontractsforeveryoptionandfutureisalwaysequalbydefinition.Ahugedifferencebetweenoptionsandfuturesisthat

ifyoubuyanoptionanditspricemovesagainstyou,youcanabandonitandwalkaway,losingonlywhatyoupaidforit.Thereisnowalkingawayfromfutures—youmusteither

takealossorsendinadditionalmargintosupportadeepeningloss.Allotherdifferencesareminorincomparisonwiththisone.

10. Answer8-10:B

Dailypricelimits,contractexpirations,andlegalinsidertradingarechallengingenough,buttheriskiestfactorinfuturesisthatpeoplecantradethemonverysmall

margins,aslowas5%ofcontractvalue.Whenyour$5,000depositcontrols$100,000worthofacommoditythatmoves5%inyourfavor,you'lldoubleyourmoney.Troubleisthat

ifitmovesagainstyoubyafewpercentagepoints,it'llwipeoutyourmargin.Youmustbeabsolutelydisciplinedandhaveexcellentmoneymanagementskillstoprofit

fromfutures.11. Answer8-11:

I=C;II=D;III=A;IV=BDemandforanycommoditychangesslowly,butthemarketcanreactviolentlywhensupply

becomesthreatened.Spreadtradersbetonaresumptionofnormalmarketrelationships;whentworelatedmarketsgooutofsync,theybuytheunderpricedoneandshort

theoverpricedone,waitingfortheirrelationshiptoreturntonormal.Remotedeliverymonthsarenormallymoreexpensiveduetothe“costofcarry,”suchasstorageand

insurance,butinbullmarkets,whendemandisred-hot,futurescanbecomeinverted,withapremiumforearlydelivery.Hedgingistheeconomicfoundationofthefuturesmarkets:a

farmercansellwheatfutureslongbeforeharvestinghisgrainwhileanairlinecanbuygasolinecontractsmonthsorevenyearsbeforeitneedsairplanefuel.

12. Question8-

12:B(IandII)Theforexmarketiscompletelydecentralized;institutionaltradersdealdirectlywitheachother,usingonlineplatforms.Retail

customerscometogriefwhenforexhousestaketheoppositesidesoftheirordersinsteadoftransmittingthemtothemarket—foryoutowin,theforexhousemustlose.Wildmargins

inthehandsofunsophisticatedtradersturnintoa“get-poor-quick”tool.Forexhousesseldomchargecommissions,butmanyprofitfrompositioningthemselvesagainsttheir

customers.

■RatingYourself

1. 0-4correct:poor.Whateveryoutrade,youneedtounderstandthekeyfactorsaboutthatmarket.Lackingthatknowledge,

you'llbecomeaneasymarkforsharpoperatorsandenduplosing.Pleasetakethenextfewdaystorereadtherelevantsectionofthemainbook,andretakethistestbeforeproceeding

anyfurther.2. 5–8correct:

fairlygood.Youhaveaworkinggraspofatleastsomeclassesoftradingvehicles.Ifallyouranswersaboutstocksoroptionswerecorrectand

thosearetheonlymarketsyouevertrade,thatmightbesufficient.Toobtainadeeperknowledgeofallclassesoftradingvehiclesavailabletoyou,pleaserereadthe

relevantsection,andretakethistest.

3. 9–12correct:excellent.Yourknowledgeoftradingvehiclesisverygood.Pleasereviewthequestionswhoseanswers

youmissedandlookuptherelevantpagesinthebook.Thenproceedtothenexthighlyimportanttopic—riskmanagement.

NINE

RiskManagement

1. Answer9-1:BEmotionaltradingistheenemyofsuccess.Nobodycangethighandconsistentlymakemoney.Atradercan

getawaywithemotionaltradingforashortwhile,butuncheckedgreedandfearwilldestroyanyaccount.Yourgoalmustbetomakethemostintelligenttrades,calmlyweighing

potentialgainsandlimitingrisks.

2. Answer9-2:CWeallliketothinkwe'resmart—takinglosseshurtsouregos.Takingalossmeansgivinguphopethata

tradewillworkout—andnobodylikestolivewithouthope.Goodtradersarerealists;hangingontoalosingtradeisnotasoundtactic.

3. Answer9-3:B

Areluctancetotakealossisasignofemotionaltrading.Addingtoalosingtradeshowsthatthetraderishangingontoafantasyofwinningratherthanfacingtherealityofa

loss.Foraloser,adreamisaliveaslongasheholdshisposition.Infact,ifyouenteredatradeonasetofindicatorsignalsandthoseindicatorsreversed,what'sthe

rationaleforstayinginthattrade?Itisnotworkingout—getouttopreserveyourcapitalandlookforabettertrade.

4. Answer9-4:CAseriesofthreelosses

canwipeouttraderA,buttraderBcansurviveastreakof9losses.TraderAisonlythreethrowsawayfromgoingbust,whiletraderBhasenoughcapitaltosustainhimthrough9

unluckythrows.Allotherfactorsbeingequal,thepoorerofthetwotraderswillgobrokefirst.

5. Answer9-5:B(II,III,I)Thefirstgoalofmoneymanagementis

toensuresurvival.Thesecondistoearnasteadyrateofreturn,andthethirdistoearnhighreturns—butsurvivalcomesfirst.That'showprofessionalstrade;manybeginnershave

theirprioritiesbackwards.

6. Answer9-6:D(I,II,III,andIV)Allofthesemoneymanagementruleshavestoodthetestoftime.Followthem—letyour

competitorsviolatethem.

7. Answer9-7:A(I)Countingmoneyinanopentradeflashesaredlight—awarningthatyouremotionsarekickinginandyou're

abouttolosebecausetheywilloverrideyourintellect.Ifyoucannotgetmoneyoffyourmind,getoutofatrade.Thetimetosetprofittargetsandstoplevelsisbeforethetrade.Thetimetotrackyour

equityisafterthetradehasbeenclosed.

8. Answer9-8:CThe2%Ruledictatesyourmaximumdollarriskpertrade.Twopercentofa$28,000accountis

$560,whichmustcovernotonlyyourriskbutalsoslippageandcommissions.Withastop98centsaway,ifyoubuy500shares,youwillhaveenoughlefttopaycommissions

andcoveranypossibleslippage.Tradingabiggersizewouldbereckless.

9. Answer9-9:B(IandII)It'sdangeroustocountmoneyinopentradesbecause

itleadstothinkingaboutwhatyourpaperprofitswillbuy.That'showpeoplestartdreaming,insteadofmanagingtrades,andlosemoney.Movingatargetor

raisingastopispermitted.

10. Answer9-10:D(I,II,III,andIV)Serioustradersplaceastopthemomenttheyenteratradeandadjustitonlyoneway—inthedirection

ofthattrade.Whenyougolong,youmaykeepyourstopinplaceorraiseitbutneverlowerit.Whenyougoshort,youmaykeepyourstopinplaceorloweritbutneverraiseit.

11. Answer9-11:C(I,II,andIII)Astop-lossorderlimitsyourrisk,butitdoesn'talwaysworkasexpected.Pricesmaygapacrossastop.Astopisn'taperfect

tool,butit'sthebestdefensivetoolthatwehave.

12. Answer9-12:B(IIandIII)TraderAisrisking$400,whilethe2%Ruleallowshimtorisknomorethan$360.TraderB

isrisking$800,whilethe2%Rulepermitshimtoriskupto$1,000.TraderCisrisking$400,whilethe2%Rulepermitshimtoriskupto$800.TraderDisrisking$1,500,while

the2%Ruleallowshimtoriskupto$1,200.TradersBandCacceptbusinessman'srisks,whiletradersAandDareriskingreallosses.The2%Rulesetsaclearlimitonyour

riskpertrade—it'saneasyruletofollow,unlessgreedraisesitsuglyhead.

13. Answer9-13:D(IIandIV)Thetwodeadlyerrorsintradingarenotusingstopsandputtingon

tradesthatriskmorethanyouraccountcanafford.Othermistakesarebadenough,butifyouusestopsandtradeareasonablesize,atleasttheywon'tkillyouraccount.

14. Answer9-14:DTheIronTriangleasksthreesimplequestions:whatisyourmaximumacceptabledollarriskforthistrade?Wherewillyouenterthis

trade?Wherewillyouplaceyourstop?Thedistancefromyourentrytoyourstopisyourriskpershare.Dividingyourtotalacceptableriskbyyourriskpersharewillgiveyouthe

maximumnumberofsharesyoumaybuyorsellshortinthistrade.

15. Answer9-15:CAseriesofevenrelativelysmalllossescanadduptoaserious

drawdown.The6%Ruleprotectsyoubymakingyoustoptradingearlyinadrawdown.Itcreatesacoolingoffperiod:reviewyoursystem,studythemarkets,andreturntothem

thefollowingmonth.

16. Answer9-16:AThe6%Ruledoesn'tconcernitselfwithprofits.Itsjobistomanageriskandlimitdrawdowns.Youwillcount

profitsattheendofthemonth.Ifyourequityhasincreased,boththe2%andthe6%Ruleswillgiveyoumoreavailableriskthefollowingmonth.

17. Answer9-17:B

Lossestraumatizetraders.Returningtothemarketafterabreakyouneedtobegentletoyourself.Reducetheamountofriskyouacceptoneachtrade.Setrealistic

performancetargets,andgraduallyincreaseyourtradingsize.

■RatingYourself

1. 0-6correct:poor.Theredlightison—youdonotunderstandmoneymanagement.Beforeyoumakeanothertradewithrealmoney,study

therelevantchaptersandretakethistest.

2. 7–12correct:so-so.Therearegapsinyourunderstandingofriskmanagement.Thistopicistooimportanttosettlefor

anythingbutthetopscoreonthistest.Pleasereviewyouranswerstothequestionsthatyoumissed,reviewtherelevantchapters,andretakethistestafewdayslater.

3. 13–17correct:excellent.Youhaveaworkingcommandoftheessentialmoneymanagementrules.Reviewthequestionswhereyouranswers

differedfromthoseinthisbook.Moneymanagementsetsaprotectivewallaroundyouraccount.Lookforeverygapinthatwallandplugitup.

■ RecommendedReading1. Vince,Ralph.PortfolioManagementFormulas(Hoboken,NJ:JohnWiley&Sons,1990).

TEN

PracticalDetails

1. Answer10-1:BDependingonhowbullishyoufeel,youmaybuyabreakoutaboveyesterday'shigh,apullbackto

value,orapenetrationofthevaluezonetothedepthatwhichpreviouspullbacksbottomedout.Itisgenerallynotagoodideatogolongabovethechannel.Theupperchannel

linemarksthezonewherebullishnessbecomesmanic,andeventhoughitmaycontinue,itismorelikelytoreverse.

2. Answer10-2:BWhenthe

trendisup,itmakessensetobuypullbacksbelowvalue.Theaverageofthepreviousthreemonths'penetrationswaslessthan$3.Thereisnopointinbeinggreedyandtryingtonailthevery

bottomofapullback—catchinga$1penetrationwouldbemorereliablethana$3one.

3. Answer10-3:AAwell-designedchannelcontainsthe

majorityofmarketswings,makingitsupperboundaryagoodtargetforrallies.Atradethatcaptures30%ofthechannelheightearnsanA.Inanuptrend,weshouldexpectpricestorise

byagreateramountabovetheEMAthantheydippedbelowitonapullback.Bythetimethemovingaverageturnsdown,apaperprofitmayturnintoaloss.

4. Answer10-4:

DWithlong-termpositiontrades,onehastobeleeryofusingsuchprofit-takingtoolsasmovingaverages,envelopes,andindicatordivergences.If

youplantoholdforseveralmonths,thosesensitivetoolswouldgetyououtofthetradetoosoon.It'sbettertosetprofittargetsusingsupportandresistancezones.

5. Answer10-5:CSettingstopsandprofittargetsallowsustocalculatereward/riskratios.Totheannoyanceofmosttraders,whipsawshappen,asmarkets

reverseintheirfavorrightaftertheygotstoppedout.Stopsprovidegenerallyreliablemeansofprotectingyouraccount,butunfortunately,don'tguaranteelimitingyourmaximumrisk

becausepricescangapacrossstoplevels.

6. Answer10-6:C(I,II,andIII)Placingstopsoutsideofthezoneofmarketnoisehelpsreducewhipsaws.Channels,

SafeZone,andATRsdrawthelinebetweennormalandabnormalswings,eachinitsownway.Notsosupportandresistance:buyingveryclosetosupportstill

exposesustomarketnoise.

7. Answer10-7:D(I,II,III,andIV)Stayawayfromthecrowd:ahighlyvisiblepriceextremeattractstoomanystops.Sodoround

numbers.Placeyourstopsslightlyawayfromboth.Astopisariskmanagementtool,andasatrademovesinyourfavor,youcanrelocateyourstoptoprotectashareofyour

profit.Nevermoveyourstoptogivemoreroomtoalosingtrade.

8. Answer10-8:CWhengoinglong,youwanttobuyasclosetothelowofthebarandasfarfromthe

highofthebaraspossible.Therangeofthedaywas$2($23minus$21).Youbought$1.50awayfromthehigh.Dividing$1.50by$2showsthatyourgradewas75%—excellent!Any

buygradeabove50%isgoodbecauseitshowsthatyouboughtinthebottomhalfofthebar.

9. Answer10-9:AYouwanttosellasclosetothetopofthebarandasfar

fromthelowofthebaraspossible.Therangeofthedaywas$3($29minus$26).Yousold$1awayfromthelow.Dividing$1by$3showsthatyourgradewas33%—so-so.Agoodsell

gradewouldbeabove50%,meaningyousoldinthetophalfofthebar.

10. Answer10-10:BOfthethreegradesforeverytrade—buy,sell,andoveralltradegrade—the

tradegradeisthemostimportant.Sincechannelsaredrawntocontain90to95%ofrecentprices,theheightofthechannelonthedayyouenterreflectsarealisticmaximum

availablegain.TakingonethirdormoreofachannelearnsanAgradeforthetrade.Inthisexample,youtook$2outofa$6channel—verygood!

11. Answer10-11:C

Agoodscancanfindagroupofcandidatesonwhichtofocusyourattention,butitdoesn'tguaranteeprofitabletrades.Beginbydefiningthepatterntolookfor,andthencastyour

scanningnetaswideorasnarrowasyoulike.Startoutscanningasmallgroup,andyoucanexpandlater.

12. Answer10-12:AYouhaveunlimitedchoicesin

settingupscanparameters.Youmayprogramittoexcludestockswhosevolumeistoolow,whosepricesareoutsideofyourpreferredrange,orwhosetrendclasheswithyourcurrent

marketview.Whatyoucan'tdoisfilteroutunprofitablestocks—thisissomethingyoutakeyourbestshotatduringthefinalreviewprocess,whenyouanalyzethelistofcandidates

deliveredbyyourscan.

■RatingYourself

1. 0-4correct:poor.Thisscoreiswaytoolowforatrader.Thismaynotmatterforatheoreticalanalyst,butatradershouldrereadthe

relevantchaptersandretakethetestbeforegoinganyfurther.

2. 5–8correct:fairlygood.Therearegapsinyourunderstandingofpracticalconcepts.Itisimportantto

knowhowtosetentries,targets,andstops,andhowtomeasureyourperformanceineverytrade.Pleasereviewyouranswerstothequestionsthatyoumissed,rereadthe

relevantchapters,andretakethistestafewdayslater.

3. 9–12correct:excellent.Youhaveaworkingknowledgeofsettingupentries,targets,andstops,and

measuringyourperformance.Differenttradersusedifferenttactics—pleasereviewthequestionsforwhichyouranswersdifferedfromthoseinthisbooktosee

whetheryou'vemadeamistakeoritwasanhonestdifferenceofopinion.

ELEVEN

GoodRecord-Keeping

1. Answer11-1:CKeepinggoodrecordswillhelpyoulearnfromyourexperiences,improvediscipline,andreduceimpulsivity.It

willnotpreventyoufrommakingmistakes,butit'llhelpyoulearnfromthemandstoprepeatingthem.

2. Answer11-2:BReviewingyesterday's

performanceandadjustingstopsareimportant,butthepurposeofmorninghomeworkistofocusonfactorslikelytoberelevantfortoday'strading.Theymayincludethebehaviorof

theovernightmarkets,reviewoffundamentalreportsscheduledforreleasetoday,andallotherfactorsmeaningfultoyourdecisionmaking.

3. Answer11-3:

B(IIandIII)Therearedayswhenyourhealth,mood,andhomeworkmakeyouwell-preparedfortrading.Therearealsodayswhenyourhealthbothersyou,yourmoodis

gloomy,andyou'vedonelittleifanyhomework—onthosedaysyoushouldn'ttrade.Aquickself-test,tailoredtoyourpersonality,cangiveyouanobjectivemeasureof

yourreadinessfortrading.Don'tincreasetradesizewheneverythingisperfectbecauseonsuchdaysanychangecanonlybefortheworse.

4. Answer11-4:

DYouneedtodefinethestrategyyou'lluseforatradeandsetupyourentry,target,andstop.Allocatingasetamountofrisktoatradewillallowyou

tousetheIronTriangleofriskcontroltodecidehowmanysharesorcontractsyou'lltrade.Itisbetternottocountprofitsuntilatradeisclosed—concentrateonquality,andthemoneywill

follow.5. Answer11-5:

B(IIandIV)ThestructureofatradeApgarissimple:nomorethanfivequestions,withnomorethanthreepossibleanswerstoeachofthem.

AtradeApgarleadsyouonaquickreviewofwhetherastockdeservesatradeplan.Ifnot,moveontothenextcandidate,butifyes,thenworkupadetailedtradeplan.

6. Answer11-6:D(I,II,III,andIV)ATradebillisakeyplanningandtrackingdocumentforatrade.Youneedtoidentifythestrategyyou'lltrade;settheentry,target,

andstop;allocaterisk;andcalculatethetradesize.Italsoneedstoincludewrittenremindersoftheessentialfactors,suchasthedatesofearningsreports.

7. Answer11-7:

C(I,II,andIII)It'sessentialtodocumentyourstopsaswellasthelevelsatwhichyou'llmovethemtobreakeven.Suchdecisionsarebestmadeveryearlyinatrade.Same

withthediary—documentyourentrywhilethememoryisstillfresh.Itisbetternottocountprofitswhileatradeisopen—concentrateontrademanagementandcount

profitsafteryouexitatrade.

8. Answer11-8:DMostprivatetradersworkinisolationandreceivenofeedback.Thismakesreviewingyourpasttradesan

especiallyvaluablelearningdevice.ThereisaRussiansaying:“Don'tsteponthesameraketwice.”Whenyousteponarakelyinginthegrass,itstandsupandhitsyouonthe

forehead.Itcanhappentoanyone,butdon'tsteponitagain.Reviewingpasttradeshelpsyourememberwherethoserakesare.

9. Answer11-9:C

Alloftheactionslistedinthisquestionareimportant,butthemosteducationaloneisreturningtoeachtradeseveralweeksorevenmonthsafteryouexitedit

andreviewinganupdatedchart.Bythen,trendsandreversalsareclear,youcanseeexactlywhatyoudidrightorwrong—andusethoselessonsgoingforward.

■RatingYourself

1. 0-3correct:poor.Goodrecord-keepingisattheheartoftradingsuccess.Pleaserereadtherelevantchapters,andretakethetest

beforegoinganyfurther.

2. 4–6correct:fairlygood.Goodrecord-keepingisdirectlylinkedtobettertrading.Itisafairlysimplebutessentialskill—don'tsettlefora

“fairlygood”rating.Reviewyouranswerstothequestionsyoumissed,rereadtherelevantchapters,andretakethistestafewdayslater.

3. 7–9correct:excellent.

Youhaveaworkingknowledgeofrecord-keeping.Pleasebesuretoimplementit—startkeepingatradingdiary.It'llrepayyoureffortsandserveyouwellforyears

ahead.

    

Afterword

Now that you have testedyourknowledgeoftradingby

using this book, you're betterprepared for the biggest testofall—tradinginthemarkets.Financial trading is a never-ending test of your ability tothink straight under stress,make intelligent andunemotional decisions, andstay in control of the moneyinyouraccount.This book has given youseveral rating scales formeasuring your skills; it has

provided a reading list andhasallowedyoutoretakethetests that you failed at first.Themainratingscaleofyourmarket performance will bethe slope of your equitycurve.Thebestcurvesshowasteady growth of an account,with small drawdowns. Youneed to keep track of yourequityandstoptradingfortherest of the month if it dropsmorethan6percentfromtheend-point of the preceding

month.Be sure to keep a diary ofyour trades, including notonly dates, tickers, and sizesbut also charts and yourpersonalcomments.Thiswillhelp you learn from yourexperiencesandimproveyourperformance.I keep all my records in aTrade Journal atSpikeTrade.com, whoseformat has been sharpened

and polished over the years.Even if you want to designyour own record-keepingsystem, take a good look attheTradeJournal to seehowa good system should lookandwork.Keep quiet about your tradeswhile they are open. Talkingabout open positions isdangerous because it putsyour ego on the line.Once atrade is closed out, you can

benefit from the opinions offriendsyourespect.Thefactthatyouinvestedthetime and energy in studyingand taking the tests in thisbook shows that you areserious about trading.Continue to study themarkets, keep your cool, andfocus on growing youraccount equity with minimaldrawdowns. I wish yousuccess in fulfilling your

dream—tradingforaliving.

Dr.AlexanderElderNewYork—Vermont,2014.

    

Sources

This Study Guide is basedontheauthor'sbookTheNew

Trading for a Living(Hoboken,NJ:JohnWiley&Sons, 2014). In addition, thefollowing books containuseful information for adeeperunderstandingofthesequestionsandanswers:1. Belveal,L.Dee,ChartingCommodityMarketPriceBehavior(1969)(Homewood,IL:BusinessOneIrwin,

1985).

2. Douglas,Mark,TheDisciplinedTrader(NewYork:NewYorkInstituteofFinance,1990).

3. Edwards,RobertD.,andJohnMagee,TechnicalAnalysisofStockTrends(1948)(NewYork:NewYorkInstituteofFinance,1992).

4. Elder,Alexander&KerryLovvorn,TheNewHigh—NewLowIndex(Alabama:SpikeTrade,2012).

5. Kaufman,Perry,TradingSystemsandMethods(Hoboken,NJ:JohnWiley&Sons,2013).

6. LeBon,Gustave,TheCrowd(1897)(Atlanta,GA:Cherokee

Publishing,1982).

7. Lefevre,Edwin,ReminiscencesofaStockOperator(1923)(Greenville,SC:TradersPress,1985).

8. Mackay,Charles,ExtraordinaryPopularDelusionsandtheMadnessofCrowds(1841)(NewYork:CrownPublishers,1980).

9. Murphy,JohnJ.,TechnicalAnalysisoftheFinancialMarkets(NewYork:NewYorkInstituteofFinance,1999).

10. Neill,HumphreyB.,TheArtofContraryThinking(1954)(Caldwell,ID:CaxtonPrinters,1985).

11. Pring,MartinJ.,TechnicalAnalysis

Explained,5thedition(NewYork:McGraw-Hill,2013).

12. Vince,Ralph,PortfolioManagementFormulas(Hoboken,NJ:JohnWiley&Sons,1990).

    

AbouttheAuthor

Alexander Elder, MD, is a

professional trader andteacher of traders. He is theauthorof severalbest-sellers,considered modern classicsamong traders. He has alsowritten books about RussiaandNewZealand.Dr. Elder was born inLeningrad and grew up inEstonia, where he enteredmedical school at the age of16.At23,whileworkingasaship's doctor, he jumped a

Soviet ship in Africa andreceived political asylum intheUnitedStates.HeworkedasapsychiatristinNewYorkCity and taught at ColumbiaUniversity.Hisexperienceasa psychiatrist provided himwith unique insight into thepsychologyoftrading.Dr. Elder is an active trader,buthecontinuestoteachandis a sought-after speaker atconferences in the United

States and abroad. Dr. Elderis the originator of Traders'Camps—week-long classesfor traders.He is the founderof SpikeTrade group, acommunity of traders whosemembers share their beststock picks each week incompetitionforprizes.Dr. Elder's websites arewww.elder.com andwww.spiketrade.com.

WILEY END USERLICENSEAGREEMENT

Go towww.wiley.com/go/eula toaccessWiley’sebookEULA.

TableofContents

ABOUT THIS STUDYGUIDE

PART I: QUESTIONSRATINGSCALES

IntroductionONE: IndividualPsychologyTWO: MassPsychology

THREE: ClassicalChartAnalysisFOUR:ComputerizedTechnicalAnalysisFIVE: Volume andTimeSIX: GeneralMarketIndicatorsSEVEN: TradingSystemsEIGHT: TradingVehicles

Note

NINE: RiskManagementTEN: PracticalDetailsELEVEN: GoodRecord-Keeping

PART II: ANSWERS ANDCOMMENTS

IntroductionRatingYourself

ONE: IndividualPsychology

Rating

YourselfRecommendedReading

TWO: MassPsychology

RatingYourselfRecommendedReading

THREE: ClassicalChartAnalysis

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ReadingFOUR:ComputerizedTechnicalAnalysis

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FIVE: Volume andTime

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SIX: GeneralMarketIndicators

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SEVEN: TradingSystems

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EIGHT: TradingVehicles

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NINE: RiskManagement

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TEN: PracticalDetails

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ELEVEN: GoodRecord-Keeping

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