The Art andScience ofTechnicalAnalysis

Market Structure, Price Action,and Trading Strategies

ADAM GRIMES

WILEY

John Wiley & Sons, Inc.

Contents

Preface xi

Acknowledgments xv

PART I The Foundation of Technical Analysis

CHAPTER 1 The Trader's Edge 3

Denning a Trading Edge 4Finding and Developing Your Edge 7General Principles of Chart Reading 8Indicators 12The Two Forces: Toward a New Understanding

of Market Action 13Price Action and Market Structure on Charts 15Charting by Hand 28

CHAPTER 2 The Market Cycle and the Four Trades 31

Wyckoffs Market Cycle 32The Four Trades 40Summary 45

PART 11 Market Structure

CHAPTER 3 On Trends 49

The Fundamental Pattern 49Trend Structure 51A Deeper Look at Pullbacks: The Quintessential Trend

Trading Pattern 65

vii

viii CONTENTS

Trend AnalysisSummary

CHAPTER 4 On Trading Ranges

Support and ResistanceTrading Ranges as Functional StructuresSummary

CHAPTER 5 Interfaces between Trends and Ranges

Breakout Trade: Trading Range to TrendTrend to Trading RangeTrend to Opposite Trend (Trend Reversal)Trend to Same Trend (Failure of Trend Reversal)Summary

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97

97113120

121

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PART III Trading Strategies

CHAPTER 6 Practical Trading Templates

Failure TestPullback, Buying Support or Shorting ResistancePullback, Entering Lower Time Frame BreakoutTrading Complex PullbacksThe AntiBreakouts, Entering in the Preceding BaseBreakouts, Entering on First Pullback FollowingFailed BreakoutsSummary

CHAPTER 7 Tools for Confirmation

The Moving Average—The Still CenterChannels: Emotional ExtremesIndicators: MACDMultiple Time Frame Analysis

CHAPTER 8 Trade Management

Placing the Initial StopSetting Price Targets

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189

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231

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Contents ix

Active ManagementPortfolio ConsiderationsPractical Issues

CHAPTER 9 Risk Management

Risk and Position SizingTheoretical Perspectives on RiskMisunderstood RiskPractical Risks in TradingSummary

CHAPTER 10 Trade Examples

Trend ContinuationTrend TerminationFailure Test FailuresTrading Parabolic ClimaxesThe AntiTrading at Support and ResistanceSummary

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2 6 3

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PART IV The Individual, Self-Directed Trader

CHAPTER 11 The Trader's Mind

Psychological Challenges of the MarketplaceEvolutionary AdaptationsCognitive BiasesThe Random Reinforcement ProblemEmotions: The Enemy WithinIntuitionFlowPractical PsychologySummary

CHAPTER 12 Becoming a Trader

The ProcessRecord KeepingStatistical Analysis of Trading ResultsSummary

3 4 7

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375

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CONTENTS

APPENDIX A Trading Primer 399

APPENDIX B A Deeper Look at Moving Averagesand the MACD 409

APPENDIX C Sample Trade Data 425

Glossary ~ 427

Bibliography 443

About the Author 447

Index 449