The Handbook of Technical Analysis + Test Bank The Practitioner's Comprehensive Guide to Technical Analysis

Written by the course director and owner of www.tradermasterclass.com, a leading source of live and online courses in trading, technical analysis, and money management, A Handbook of Technical Analysis: The Practitioner's Comprehensive Guide to Technical Analysis is the first financial technical analysis examination preparatory book in the market. It is appropriate for students taking IFTA CFTe Level I and II (US), STA Diploma (UK), Dip TA (Aus), and MTA CMT Level I, II, and III exams in financial technical analysis, as well as for students in undergraduate, graduate, or MBA courses.

The book is also an excellent resource for serious traders and technical analysts, and includes a chapter dedicated to advanced money management techniques. This chapter helps complete a student's education and also provides indispensable knowledge for FOREX, bond, stock, futures, CFD, and option traders.

• Learn the definitions, concepts, application, integration, and execution of technical-based trading tools and approaches
• Integrate innovative techniques for pinpointing and handling market reversals
• Understand trading mechanisms and advanced money management techniques
• Examine the weaknesses of popular technical approaches and find more effective solutions

The book allows readers to test their current knowledge and then check their learning with end-of-chapter test questions that span essays, multiple choice, and chart-based annotation exercises. This handbook is an essential resource for students, instructors, and practitioners in the field. Alongside the handbook, the author will also publish two full exam preparatory workbooks and a bonus online Q&A Test bank built around the most popular professional examinations in financial technical analysis.

MARK ANDREW LIM graduated from King's College London in Special Physics. He was awarded the Bronwen Wood Memorial Prize in financial technical analysis by the Society of Technical Analysis (UK) in 2007 and holds IFTA's CFTe designation. Mark is the author of The Profitable Art and Science of Vibratrading and also a contributing author of The Wiley Trading Guide Volume II. He conducts a range of technical analysis and trading Masterclasses via online webinars and onsite seminars, covering intermediate to advanced profit extraction methodologies for directional and non-directional trading. He can be reached at www.tradermasterclass.com.

Foreword xiii

Preface xv

Acknowledgments xxi

About the Author xxiii

Chapter 1 Introduction to the Art and Science of Technical Analysis 1

1.1 Main Objective of Technical Analysis 1

1.2 Dual Function of Technical Analysis 3

1.3 Forecasting Price and Market Action 3

1.4 Classifying Technical Analysis 11

1.5 Subjectivity in Technical Analysis 16

1.6 Basic Assumptions of Technical Analysis 30

1.7 Four Basic Assumptions in the Application of Technical Analysis 39

1.8 Market Participants 40

1.9 Chapter Summary 42

Chapter 1 Review Questions 43

Chapter 2 Introduction to Dow Theory 45

2.1 Origins and Proponents of Dow Theory 45

2.2 Basic Assumptions of Dow Theory 46

2.3 Challenges to Dow Theory 62

2.4 Chapter Summary 64

Chapter 2 Review Questions 64

Chapter 3 Mechanics and Dynamics of Charting 65

3.1 The Mechanics and Dynamics of Charting 65

3.2 Gap Action: Four Types of Gaps 72

3.3 Constant Chart Measures 73

3.4 Futures Contracts 89

3.5 Chapter Summary 97

Chapter 3 Review Questions 98

Chapter 4 Market Phase Analysis 99

4.1 Dow Theory of Market Phase 99

4.2 Chart Pattern Interpretation of Market Phase 104

4.3 Volume and Open Interest Interpretation of Market Phase 112

4.4 Moving Average Interpretation of Market Phase 115

4.5 Divergence and Momentum Interpretation of Market Phase 116

4.6 Sentiment Interpretation of Market Phase 118

4.7 Sakata’s Interpretation of Market Phase 119

4.8 Elliott’s Interpretation of Market Phase 120

4.9 Cycle Analysis Interpretation of Market Phase 122

4.10 Chapter Summary 124

Chapter 4 Review Questions 124

Chapter 5 Trend Analysis 125

5.1 Definitions of a Trend 125

5.2 Quality of Trend: 16 Price Characteristics Impacting Future Price Action and Trend Strength 132

5.3 Price and Trend Filters 144

5.4 Trend Participation 145

5.5 Price Inflection Points 148

5.6 Trendlines, Channels, and Fan Lines 155

5.7 Trend Retracements 166

5.8 Gaps and Trends 166

5.9 Trend Directionality 168

5.10 Drummond Geometry 169

5.11 Forecasting Trend Reversals 170

5.12 Chapter Summary 171

Chapter 5 Review Questions 171

Chapter 6 Volume and Open Interest 173

6.1 The Mechanics of Volume Action 173

6.2 Volume Oscillators 203

6.3 Chapter Summary 208

Chapter 6 Review Questions 208

Chapter 7 Bar Chart Analysis 209

7.1 Price Bar Pattern Characteristics 209

7.2 Price Bar Pattern Characteristics 211

7.3 Popular Bar Reversal Patterns 218

7.4 Volatility‐Based Breakout Patterns 230

7.5 Chapter Summary 233

Chapter 7 Review Questions 233

Chapter 8 Window Oscillators and Overlay Indicators 235

8.1 Defining Indicators and Oscillators 235

8.2 Eight Ways to Analyze an Oscillator 240

8.3 Cycle Period, Multiple Timeframes, and Lagging Indicators 252

8.4 Input Data 253

8.5 Trend Trading Using Oscillators 255

8.6 Window Oscillators 255

8.7 Overlay Indicators 262

8.8 Chapter Summary 266

Chapter 8 Review Questions 266

Chapter 9 Divergence Analysis 267

9.1 Definition of Divergence 268

9.2 General Concept of Divergence 272

9.3 Standard and Reverse Divergence 291

9.4 Price Confirmation in Divergence Analysis 323

9.5 Signal Alternation between Standard and Reverse Divergence 337

9.6 More Examples of Divergence 338

9.7 Chapter Summary 354

Chapter 9 Review Questions 355

Chapter 10 Fibonacci Number and Ratio Analysis 357

10.1 The Fibonacci Number Series 357

10.2 Fibonacci Ratios 359

10.3 Fibonacci Retracements, Extensions, Projections, and Expansions 363

10.4 Fibonacci (Φ‐Based) Percentage Retracement Levels within an Observed Price Range 368

10.5 Fibonacci (Φ‐Based) Percentage Extension Levels beyond an Observed Price Range 375

10.6 Fibonacci (Φ‐Based) Percentage Expansion Levels beyond an Observed Price Range 379

10.7 Fibonacci (Φ‐Based) Percentage Projection Levels from a Significant Peak or Trough 384

10.8 Why Should Fibonacci Ratios or Numbers Work at All? 388

10.9 Geometrically versus Numerically Based Fibonacci Operations 389

10.10 The Fibonacci Trader’s Technical Toolbox 392

10.11 Area of Application 394

10.12 Selecting Effective Inflection Points for Fibonacci Operations 396

10.13 Fibonacci, Dow, Gann, and Floor Trader’s Pivot Point Levels 397

10.14 Probability of Continuation and Reversal in Fibonacci Retracements and Extensions 400

10.15 Fibonacci‐Based Entries, Stoplosses, and Minimum Price Objectives 400

10.16 Fibonacci Two‐ and Three‐Leg Retracements 402

10.17 Fibonacci Fan Lines 409

10.18 Fibonacci Channel Expansions 412

10.19 Fibonacci Arcs 414

10.20 Supportive and Resistive Fibonacci Clusters 415

10.21 Potential Barriers in Fibonacci Projections 417

10.22 Fibonacci Time and Ratio Projection Analysis on Elliott Waves 417

10.23 Chapter Summery 431

Chapter 10 Review Questions 431

Chapter 11 Moving Averages 433

11.1 Seven Main Components of Moving Averages 433

11.2 Nine Main Applications of Moving Averages 451

11.3 Chapter Summary 462

Chapter 11 Review Questions 463

Chapter 12 Envelopes and Methods of Price Containment 465

12.1 Containing Price Action and Volatility about a Central Value 465

12.2 Adjusting Bands for Effective Price Containment 475

12.3 Methods of Price Containment 477

12.4 Chapter Summery 492

Chapter 12 Review Questions 492

Chapter 13 Chart Pattern Analysis 495

13.1 Elements of Chart Pattern Analysis 495

13.2 Preconditions for Reliable Chart Pattern Reversals 499

13.3 Popular Chart Patterns 502

13.4 Chapter Summery 540

Chapter 13 Review Questions 540

Chapter 14 Japanese Candlestick Analysis 541

14.1 Elements of Candlestick Analysis 541

14.2 Popular Candlestick Patterns and Their Psychology 555

14.3 Integrating Candlestick Analysis 578

14.4 Filtered Candlesticks 583

14.5 Trading with Candlesticks 584

14.6 Chapter Summary 588

Chapter 14 Review Questions 588

Chapter 15 Point‐and‐Figure Charting 589

15.1 Basic Elements of Point‐and‐Figure Charts 589

15.2 Basic Point‐and‐Figure Chart Patterns 600

15.3 Point‐and‐Figure Minimum Price Objectives 619

15.4 Bullish Percent Index and Relative Strength 623

15.5 Chapter Summary 624

Chapter 15 Review Questions 624

Chapter 16 Ichimoku Charting and Analysis 627

16.1 Constructing the Five Ichimoku Overlays 627

16.2 Functional Aspect of Ichimoku Overlays 633

16.3 Advantages and Disadvantages of Using Ichimoku Charting 643

16.4 Time and Price Domain Characteristics of Ichimoku Overlays 644

16.5 Basic Ichimoku Price‐Projection Techniques 649

16.6 Chapter Summary 649

Chapter 16 Review Questions 650

Chapter 17 Market Profile 651

17.1 The Search for Fair Price or Value 651

17.2 The Daily Profile Formations 665

17.3 Chapter Summary 671

Chapter 17 Review Questions 671

Chapter 18 Basic Elliott Wave Analysis 673

18.1 Elements of Elliott Wave Analysis 673

18.2 Rules and Guidelines 676

18.3 Motive Waves 676

18.4 Corrective Waves 678

18.5 Wave Extensions and Truncation 682

18.6 Alternation 683

18.7 Wave Equality 683

18.8 Fibonacci Ratio and Number Analysis of Elliott Waves 684

18.9 Chapter Summary 684

Chapter 18 Review Questions 684

Chapter 19 Basics of Gann Analysis 687

19.1 Techniques of W. D. Gann 687

19.4 Chapter Summary 710

Chapter 19 Review Questions 711

Chapter 20 Cycle Analysis 713

20.1 Elements of Cycle Analysis 713

20.2 Principles of Cycle Analysis 720

20.3 Additional Cyclic Characteristics 724

20.4 Tuning Oscillator and Overlay Indicators to the Dominant Cycle Period 725

20.5 Identifying Price Cycles 726

20.6 Chapter Summary 731

Chapter 20 Review Questions 731

Chapter 21 Volatility Analysis 733

21.1 The Concept of Change and Volatility 733

21.2 Some Statistical Measures of Price Volatility 743

21.3 Other Measures of Market Volatility 754

21.4 Chapter Summary 757

Chapter 21 Review Questions 757

Chapter 22 Market Breadth 759

22.1 Elements of Broad Market Action 759

22.2 Components of Market Breadth 762

22.3 Market‐Breadth Indicators in Action 765

22.4 Chapter Summary 777

Chapter 22 Review Questions 777

Chapter 23 Sentiment Indicators and Contrary Opinion 779

23.1 Assessing the Emotion and Psychology of Market Participants 779

23.2 Price‐Based Indicators versus Sentiment Indicators 783

23.3 Assessing Participant Actions 784

23.4 Assessing Participants’ Opinions 788

23.5 Chapter Summary 791

Chapter 23 Review Questions 791

Chapter 24 Relative Strength Analysis 793

24.1 Measuring Relative Performance 793

24.2 Chapter Summary 811

Chapter 24 Review Questions 811

Chapter 25 Investor Psychology 813

25.1 General Behavioral Aspects 813

25.2 Behavioral Elements Associated with Chart Patterns 815

25.3 Behavioral Elements Associated with Market Trends 817

25.4 Behavioral Aspects of Market Consolidations 820

25.5 Behavioral Aspects of Market Reversals 821

25.6 Chapter Summary 823

Chapter 25 Review Questions 823

Chapter 26 Trader Risk Profiling and Position Analysis 825

26.1 Fulfilling Client Objectives and Risk Capacity 826

26.2 Aggressive and Conservative Market Participation 827

26.3 Categorizing Clients according to Term Outlook and Sentiment 835

26.4 The Seven Participatory Options 838

26.5 Triggers, Signals, Price Targets, and Stoplosses 838

26.6 Confirming and Non‐Confirming Price Action and Filters 841

26.7 Collecting, Categorizing, and Organizing Technical Data 843

26.8 Multi‐Timeframe Confirmation 845

26.9 Reconciling Technical Outlook with Client Interest 846

26.10 Hedging Positions with Derivatives 847

26.11 Chapter Summary 847

Chapter 26 Review Questions 847

Chapter 27 Integrated Technical Analysis 849

27.1 The Integrated Components of Technical Analysis 849

27.2 Classification of Clusters and Confluences 854

27.3 Chapter Summary 877

Chapter 27 Review Questions 877

Chapter 28 Money Management 879

28.1 Elements of Money Management 879

Chapter 28 Review Questions 912

Chapter 29 Technical Trading Systems 913

29.1 Conceptualizing a Trading System 913

29.2 Basic Components of a Trading System 915

29.3 System Testing and Optimization 915

29.4 Performance Measurement 919

29.5 Chapter Summary 920

Chapter 29 Review Questions 920

Appendix A Basic Investment Decision Making Based on Chart Analysis 923

Appendix B Official IFTA CFTe, STA Diploma (UK), and MTA CMT Exam Reading Lists 933

About the Test Bank and Website 937

Index 939

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