Introduction 1 About This Book 1 Foolish Assumptions 3 Icons Used in This Book 3 Beyond the Book 4 Where to Go from Here 4 Part 1: Getting Started with Technical Analysis 5 Chapter 1: Introducing Technical Analysis 7 Stepping Up to Science 9 Unpacking Lingo 10 Buy-and-Hold Is Bunk 11 Recognizing Who Uses Technical Analysis 13 Remembering the Trend Is Your Friend 13 Charting your path 14 Picking a time frame 14 Viewing the Scope of Technical Analysis 15 Charting 16 Market timing 16 Trend-following 16 Technical analysis 16 Algorithmic trading 17 Why Technical Analysis Works and What Can Go Wrong 20 Setting new rules 21 Controlling losses to protect gains 21 Why Technical Analysis Gets a Bad Rap 22 Beating the Market Is Hard Work 23 Finding Order 24 What You Need to Get Started 25 Chapter 2: Tapping into the Wisdom of the Crowd 27 Securities Are Not Socks 28 The eBay Model of Supply and Demand 30 Securities have their own economics 30 Creating demand from scratch 31 Identifying Crowd Behavior 32 Defining Normal 33 Reverting to the mean 33 Trading mean reversion 34 Breaking Normal 35 Going against the grain: Retracements 36 Recognizing why retracements happen 37 Accepting When the Crowd Is Extreme 40 Avoiding stampedes 41 Lesser devilry -- playing games with traders'' heads 42 Chapter 3: Trade What You See: Market Sentiment 43 The Origin of Market Sentiment 44 Thinking Outside the Chart: Defending Sentiment 47 Monitoring investors: The bull/bear ratio 47 Following the money: Breadth indicators 47 Viewing volatility: The VIX 48 New and improved sentiment indicators 48 Getting the Lowdown on Volume 49 Tracking on-balance volume 50 Refining volume indicators 50 Leading the way with spikes 51 Getting a two-for-the price-of-one coupon 52 Blindsiding Yourself 52 Understanding confirmation bias and anchoring 53 Being aware of potential errors 54 Thinking Scientifically 55 Humility: Conditions and contingencies 55 Sample size 56 Chapter 4: Gaining Critical Advantage from Indicators 59 Overcoming Noise 60 Distinguishing between noise and an Event 61 Knowing where noise comes from 61 Noise from inside the market 62 Indicators Give You the Edge 62 Classifying indicators 63 Understanding what indicators identify 64 Choosing your trading style 64 Examining How Indicators Work 66 Finding relevant time frames 66 Heeding indicator signals 67 Establishing Benchmark Levels 69 Choosing Indicators 70 Examining Indicators in Detail 71 Constructing a backtest 71 The other top metrics 73 Fixing the indicator 73 Evaluating the risks of backtesting 74 Chapter 5: Managing the Trade 75 Finding Your Risk Profile 76 What''s your ratio? 76 Introducing positive expectancy 76 Measuring the trade 77 Considering your stake 77 Adhering to the no-guru rule 78 Building Trading Rules 78 Creating your trading plan with four easy rules 79 Combining indicators with trading rules 79 Trading styles 80 Knowing How Much Is Enough 81 Using the First Line of Defense: Stop-Loss Orders 81 Mental stops are hogwash 82 Sorting out the types of stops 83 Chapter 6: Taming Uncertainty: How to Use Technical Analysis 87 Numbers Are Better than Words 87 Distinguishing between feeling and thinking 88 Realizing cognitive psychology is useful to technical trading 88 Between a rock and a hard place 90 Introducing Positive Expectancy 91 Measuring the trade 92 Considering your stake 92 Adopting the Technical Mindset 94 Chapter 7: Slicing the Pie 95 Adjusting Positions 96 Scaling in 96 Scaling out 97 What Is Asset Allocation? 97 Tharp method 98 Vince method 98 Chapter 8: Using AI in Technical Analysis-Based Trading 101 Exploring the Wonders of Perfect Memory 102 Reviewing the Drawbacks of Using AI 103 Not knowing what to ask 103 Incomplete training 104 Cost 105 Picking an AI Program 105 Getting Acquainted with AI Tools 106 Part 2: Building Indicators From the Ground Up 109 Chapter 9: Reading Basic Bars: How to Pounce on Opportunities 111 Building Basic Bars 112 Reality in a nutshell 112 Setting the tone: The opening price 114 Summarizing sentiment: The closing price 115 Going up: The high 117 Getting to the bottom of it: The low 119 Putting It All Together: Using Bars to Identify Trends 119 Identifying an uptrend 120 Pinpointing a downtrend 121 Overcoming Murky Bar Waters 121 Paying heed to bar series 122 Knowing when bar reading doesn''t work 122 Framing Your Bars 123 Using daily data 124 Zooming out to a higher time frame 124 Zooming in to a shorter time frame 125 Applying Bar Reading in Real Time 128 Chapter 10: Special Bars: An Early Warning System 129 Finding Clues to Trader Sentiment 129 Tick and bar placement 130 Williams three-bar system 130 Trading range 131 Identifying Common Special Bars 132 Closing on a high note 132 Spending the day inside 133 Getting outside for the day 133 Finding the close at the open 133 Decoding Spikes 133 Getting Gaps 135 Pinpointing a gap 135 Using gaps to your advantage 137 Filling the Gap 141 Using the Trading Range as a Tool 142 Paying attention to a changing range 142 Determining the meaning of a range change 143 Looking at the average trading range 144 Chapter 11: Redrawing the Price Bar: Japanese Candlesticks 149 Appreciating the Candlestick Advantage 150 Dissecting the Anatomy of a Candlestick 150 Drawing the real body 151 Doing without a real body: The doji 152 Catching the shadow 152 Sizing Up Emotions 155 Identifying Special Emotional Extreme Candlestick Patterns 157 Interpreting candlestick patterns 157 Turning to reversal patterns 159 Bearish engulfing candlestick 159 Shooting star 159 Continuation patterns 159 Combining Candlesticks with Other Indicators 161 Trading on Candlesticks Alone 163 Part 3: Finding Patterns 165 Chapter 12: Seeing Patterns 167 Introducing Patterns 168 Using imagination 168 Coloring inside the lines 170 Cozying Up to Continuation Patterns 170 Ascending and descending triangles 170 Dead-cat bounce 171 Cup and handle 172 Recognizing Classic Reversal Patterns 173 Double bottom 173 Double tops 175 The ultimate triple top: Head-and-shoulders 176 Evaluating the Measured Move 177 Taking dictation from the pattern 177 Resuming the trend after retracement 179 Measuring from the gap 179 Current-day warning 179 Chapter 13: Drawing Trendlines 181 Looking Closely at a Price Chart 182 Following the Rules with Rule-Based Trendlines 182 Drawing support and resistance lines 182 Using the support line to enter and exit 183 Noting breakouts and false breakouts 184 Using resistance to enter and exit 185 Being aware of the 1-2-3 Rule 187 Playing games with support and resistance lines 188 Do Prices Pivot? 189 Drawing Internal Trendlines 191 Rules for drawing a linear regression 191 Identifying trendedness 192 Using the linear regression 194 Chapter 14: Transforming Channels into Forecasts 197 Diving into Channel-Drawing Basics 197 The swing bar problem 198 Drawing channels by hand 198 Benefitting from channels 200 Delving into the drawbacks of channels 201 Channeling to make gains and avoid losses 201 Riding the Regression Range 201 Introducing the standard deviation 202 Drawing a linear regression channel 202 Confirming hand-drawn channels 204 Sizing up the special features of the linear regression channel 204 Discovering the drawbacks of linear regression channels 205 Dealing with Breakouts 206 Distinguishing between false breakouts and the real thing 207 Putting breakouts into context 210 Part 4: Dynamic Analysis 213 Chapter 15: Using Dynamic Lines 215 Introducing the Simple Moving Average 216 Starting with the crossover rule 217 Using the moving average level rule 219 Dealing with limitations 220 Comparing moving average rules with Donchian rules 223 Magic moving average numbers 223 Adjusting the Moving Average 224 Weighted and exponential moving averages 225 Adaptive moving averages 225 Wild and woolly moving averages 226 Choosing a moving average type 226 Using Multiple Moving Averages 227 Putting two moving averages into play 228 Trying the three-way approach 229 Throw them all at the wall and see what sticks 230 Delving into Moving Average Convergence and Divergence 231 Calculating convergence and divergence 232 Creating a decision too.