A

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A

Account equity, 204 reviewing equity curve, 247 6% Rule for, 208–210 2% Rule for, 203–207 Accumulation/Distribution (A/D), 110–112 and crowd behavior, 110 trading rules, 111 Advance/Decline (A/D) line, 140–142 Advertisers, signals from, 144–145 Advisors, 39 Advisory opinion, 143–144 ADX (Average Directional Indicator), 91, 92 Alcoholics Anonymous (AA) 20-21 applied to trading, 20–21, 23–27 first step, 25–26 going into the hole, 24 “meeting for one,” 26–27 rock bottom, 24–25 urge to trade, 23–24 to control self-destructiveness, 19 denial, 21–22 first step, 22 for gamblers, 17

Alcoholics Anonymous (AA) principles (Cont.): lessons from, 21–23 meetings, 23 one day at a time, 22–23 rock bottom, 22 Apgar, Virginia, 238–239 Apgar score: for newborns, 239 Trade Apgars, 238–243 Appel, Gerald, 80, 170 Apple Inc., 127 Ariely, Dan, 16 Art of Contrary Thinking, The (Humphrey B. Neill), 143 ASIC, 186 Ask, 8, 32. See also Bid-ask spreads ATR (Average True Range) stops, 221 ATR (Average True Range), 93–94, 169 A-trades, 225–230 Attachment to positions, 199 At-the-money options, 179 Autoenvelope, 168 Autopilot myth, 12–13 Available risk, 208–210, 221 Average Directional Indicator (ADX), 91, 92

Average Downside Penetration, 220 Average True Range (ATR), 93–94, 169 Average True Range (ATR) stops, 221

B

Backtesting systems, 151–152 Bar charts, 50 closing prices on, 50, 53 distance between highs and lows on, 53 highs on, 52, 53 lows on, 53 meaning of, 51–53 opening prices on, 50 Bears (traders), 31–33, 39, 43–45 balance of power between bulls and: A/D, 110 closing prices, 96 divergences, 87, 98, 101 Force Index, 113, 115, 116 MACD-Histogram, 84 MACD Line, 81 miscellaneous indicators, 74 and NH-NL zero line, 136 On-Balance Volume, 108 open interest, 119–120 volume, 104 and channel lines, 169 conflict between bulls and, 119–120 emotional commitment of, 58 and kangaroo tails, 66 maximum power of, 53 and open interest, 118, 119 pain and regret of, 57 trend behavior of, 62 and volume of trading, 105–107 Bearish divergences, 87–89, 98 between A/D and prices, 111 between Force Index and price, 115, 116 NH-NL indicating, 136–137 RSI signals of, 100, 101

Bear markets: of 2007-2009, 86–87 advisors in, 143 price highs and lows in, 51 “Beginner’s luck,” 28 Belveal, L. Dee, 119–120 Bending rules, 19–20 Betas, 174 Bias, detecting, 47 Bid, 8, 32 Bid-ask spreads, 8 with CFDs, 186 with forex trades, 194, 195 “slicing the bid-ask spread” technique, 183 Big traders, 192. See also Institutional traders Black boxes, 38, 71 Bleczinski, Bob, 236 Blume, Sheila, 17 Bollinger bands, 167, 172 Bottoms. See also specific indicators “climax,” 107 and divergences, 87, 89 since the 1950s, 51 in trends, 71 in triple divergences, 89 Bottom-pickers, 105, 120 Bounces, 226 Brain myth, 11 Breakeven, moving stops to, 223 Breakouts: amateurs’ vs. pros’ interpretations of, 170 and buying decisions, 63 false, 56, 59–60, 97 downside, 61, 229 reinforcing Stochastic signals, 97 from support and resistance, 56 upside, 61 pain and regret created by, 57 in Triple Screen system, 159 true, 59–60

Breakouts (Cont.): upside, 59 and volume, 106 Brokers: commissions of, 6–8 in forex trading, 194, 195 free analytic software from, 70 money taken by, 35 of stocks, options, or futures, 194, 195 supported by private traders, 36 Bruce, Erin, 236 Bruns, John, 165, 231 “Bucketing” orders, 194, 195 Buffett, Warren, 54, 168, 175 Bulls (traders), 31–33, 39, 43–45 balance of power between bears and: A/D, 110 closing prices, 96 divergences, 87, 98, 101 Force Index, 113, 115, 116 MACD-Histogram, 84 MACD Lines, 81 miscellaneous indicators, 74 and NH-NL zero line, 136 On-Balance Volume, 108 open interest, 119–120 volume, 104 and channel lines, 169 conflict between bears and, 119–120 emotional commitment of, 58 and kangaroo tails, 65 maximum power of, 52 and open interest, 118, 119 pain and regret of, 57 trend behavior of, 62 and volume of trading, 105–107 Bullish consensus, 74 Bullish divergences, 86–87, 89, 98 between A/D and prices, 111 false downside breakouts with, 229 between Force Index and price, 115, 116

Bullish divergences (Cont.): NH-NL indicating, 137 RSI signals of, 101 Bull markets: of 2007, 87–88 in commodities, 192 price highs and lows in, 51 and weekly NH-NL, 137, 138 Businessman’s risk, 25–26, 201–202 Buyers, 32 expectations of, 32 and open interest, 118–120 of options, 178 Buying. See also specific trading vehicles “at the market,” 7 emotional commitment in, 105 indicators for, see specific indicators by insiders, 147 and trading ranges, 63 during trends, 63–64 value zone in, 80 Buy orders: Force Index indicator for, 114, 115 and Stochastic signals, 98 in Triple Screen system, 160–161 Buy-stops, 161

C

Call options, 178, 180–183 Candlestick charting, 52, 53, 112 Candlestick graphs, 50. See also Japanese candlesticks Cash trades, futures compared to, 188–189 Catastrophic stops, 224–225 Ceilings, for commodities, 191 CFDs (contracts for difference), 186–187 CFTC, see Commodity Futures Trading Commission Channels, 166–167 in A-trades, 226 Average True Range, 94, 169 combining divergences and, 170–171 Channels (Cont.): constructing, 167 in day-trading, 131 defined, 79 and moving averages, 79 in setting profit targets, 217, 218 symmetrical, 167–168 Channel trading systems, 166–172 constructing channels, 167 and mass psychology, 168–170 standard deviation (Bollinger bands), 172 symmetrical, 167–168 trading rules, 170–171 Chaos theory, 54–55 Chart analysis, 49–67 bar charts, 51–53 chaos theory, 54–55 detecting bias in, 47 diagonals in, 50 Efficient Market theory, 54 history of charting, 50–51 and insider trading, 36 Japanese candlesticks, 53 kangaroo tails, 65–67 “nature’s law,” 55 Random Walk, 54 subjectiveness in, 49 support and resistance, 55–60 causes of, 56–57 strength of, 58 trading rules and, 58–59 true and false breakouts, 59–60 trends and trading ranges, 60–65 and conflicting timeframes of markets, 64–65 deciding to trade or wait, 63–64 hard right edge, 62 identifying, 63–64 and mass psychology, 62 as window into mass psychology, 43 Charting Commodity Market Price Behavior (L. Dee Belveal), 119–120

Chart patterns: defined, 51 at right edge of charts, 62 RSI trendlines, 101 subjective interpretation of, 49 swings of mass psychology shown in, 33 Checklists, 149 Checklist Manifesto, The (Atul Gawande), 149 Childhood, mental baggage from, 18 Churchill, Winston, 219 Classical chart analysis, see Chart analysis “Climax bottoms,” 107 Climax indicator, 108–110 Closing prices: Advance/Decline line, 140–142 on candlestick charts, 53 of daily and weekly bars, 51 of daily charts, 53 as most important consensus of value, 100–101 relationship of opening prices and, 52, 110 for settlement of trading accounts, 96, 110 Cohen, Abraham W., 143 Come into My Trading Room (Alexander Elder), 163, 220 Commercials (hedgers), 146, 147 Commissions, 5–7, 33–34, 37, 186 Commitment indicators, see Consensus and commitment indicators Commitments of Traders (COT) indicator, 74, 192–193 Commodities. See also Futures agricultural, 122, 189 bull markets in, 192 cost of carry for, 191 floors and ceilings for, 191 Commodity Futures Trading Commission (CFTC), 145, 146, 192, 195

Computers in trading, 69–71 See also Technical analysis hardware, 71–72 toolboxes, 70–71 Conditional formatting, 165–166 Conflicting timeframes, 64–65 Congestion zones, 55, 58, 59 Consensus and commitment indicators, 142–148 futures traders’ commitments, 145–147, 192–193 legal insider trading, 147 short interest, 147–148 signals from advertisers, 144–145 signals from press, 144 tracking advisory opinion, 143–144 Consensus of value: on MACD-Histogram, 84 moving averages as, 75, 81 price as, 32–33, 100–101 and trades above/below EMA, 139 Contango market, 191 Continuing to learn, 249–251 Contracts for difference (CFDs), 186–187 Contrary opinion indicators, 143 Contrary opinion theory, 143 Cost of carry, 191 COT (Commitments of Traders) indicator, 74, 192–193 Covered writers (options), 181 Crash of 1929, 193 Crossovers: of MACD and Signal lines, 81–84 moving-average, 78 Crowds: lack of time sense in, 121 leaders of, 41 markets as, 33, 39–43 and crowd mentality, 41–42 experts on, 40 independent thinking vs., 42 reasons for joining crowds, 40

Crowds (Cont.): and wisdom of crowds, 42–43 relative slowness of, 125 respecting strength of, 34 worldwide, 34 Crowd, The (Gustave LeBon), 40 Crowd behavior. 110 See also Accumulation/Distribution; Mass psychology creating downtrends, 45 creating uptrends, 44–45 and Efficient Market theory, 54 and opening prices, 110 reflected in price, 32–33 reflected in volume, 33 tracked by Directional system, 91–92 Crowd mentality, 41–42 “Cuffing the trade,” 223 Cult of personality, 13–16 Currencies: CFDs on, 186–187 electronic currency futures, 196 forex trading, 194–196 Currency market, 194 Cycles, 122

D

Daily charts, 51–53, 59, 60. See also Timeframes; individual indicators Daily Directional Indicator, 91 Daily homework, 234–236 Daily volume, 103, 104 Days to Cover, 147–148 Day-trading, 126, 131–132 computers for, 71 to handle overnight gaps, 226 and learning to trade, 72–73 market data for, 72 profit taking in, 217 profit targets in, 217, 218 timeframes in, 125, 156, 162 Triple Screen system in, 161–162 Dead gurus, 15 Declines. See also individual indicators contracts for difference on, 186 in downtrends, 60–61 open interest in, 121 psychology of, 44 in trading ranges, 61 in uptrends, 60 volume during, 106, 107 Delta, 183 Denial (AA principle), 21–22 Derivatives markets, magic method gurus in, 14–15 Diagonal trendlines, 50 Directional Indicators (+DI, −DI), 90–91 Directional Movement (DM), 89, 90 Directional system, 89–94 Average True Range indicator, 93–94 constructing, 89–91 crowd behavior tracked by, 91–92 identifying trends with, 64 trading rules, 93 in Triple Screen trading, 157 Discipline, 213, 233–234 Disciplined Trader, The (Mark Douglas), 29, 30 Discretionary traders, 149–151 Divergences, 86–89 between A/D and prices, 111 bearish, see Bearish divergences bullish, see Bullish divergences combining channels and,170–171 Force Index indication of, 115, 116 Hound of the Baskervilles signal, 89 NH-NL, 136–137 as OBV signal, 108 as Stochastic signal, 97–98 triple bullish or bearish, 89 DM (Directional Movement), 89, 90

Documentation, see Record-keeping Donchian, Richard, 74, 75, 78 Douglas, Mark, 29, 30 Dow, Charles, 50, 155 Dow Jones Industrial Average, 72 MACD-Histogram of, 86–87 OBV for stocks in, 108, 109 Downside penetration, 220 Downtrends, 61 bullish divergences during, 86–87 channel trading during, 170 crowd behavior creating, 45 Force Index indication of, 113, 115, 116 identifying, 63 Impulse system in, 166 mass psychology of, 62 NH-NL, 136 noise in, 220 open interest during, 120, 121 oversold oscillators in, 95 pain and regret in, 57 perfect, 60–61 and Stochastic signals, 98, 99 stocks above MAs in, 139 at support level, 55 Triple Screen indicators for selling short in, 160, 161 volume during, 107 volume spikes in, 106 Dow Theory, 50, 155 Dow Theory, The (Robert Rhea), 50 Doyle, Sir Arthur Conan, 89 Drawdowns: comebacks from, 210–213 maximum allowed for, 213 6% Rule for, 208–210

E

Edge(s): defined, 72 and follow-up charts, 130 with trends and trading ranges, 62

INDEX 267

Efficient Market theory, 54 Ehlers, John, 122 Elder.com, 3, 71 Electronic currency futures, 196 Elliott, R. N., 15, 51, 55 EMAs, see Exponential moving averages E-mini futures, 205–206 Emotions: of crowds, 40–41 and irrational thinking, 28, 44 managing, see Individual psychology and profit targets, 216 in trading, 19, 197–200 and trends, 43–44 Emotional trading, 28–29, 197–200 businessman’s risk, 201–202 and counting money in open trades, 198 and not being able to sell, 198–200 End-of-day charts, 131 Engel, Louis, 1, 2 Entering trades: and Average True Range, 93 and bar charts, 53 commissions for, 5 and crowd emotions, 39 in day-trading, 131 in Impulse trading system, 164–166 planning for, 216 trade plan for, 42 and trends or trading ranges, 63 in Triple Screen system, 158–160 using signal and noise in, 222, 223 using technical analysis for, 128 Equity curve, reviewing, 247 Exchange rates, 194 Exchange-traded funds (ETFs),176–178 Exercise price (options), 179 Exiting trades: commissions for, 5 in day-trading, 131

Exiting trades (Cont.): Force Index indicator for, 115 in futures and options, 118 in Impulse trading system, 166 and open interest, 118 options, 184 trade plan for, 42 using technical analysis for, 128 Expectations: of buyers and sellers, 32 mathematical, 200–201 for scanning, 230 Expenses of trading, 5, 8 commissions, 6–7 slippage, 7–8 Exponential moving averages (EMAs), 75–80 and channel trading systems, 168 dual, 78–79 with Force Index, 112–115 identifying trends with, 63 in Impulse system, 165, 166 lagging, 78 length of, 76–77, 80 of MACD line, 81 and SafeZone stops, 220 trading rules, 77–78 in Triple Screen system, 159–161 and value zone, 80 of volume, 107 Exponential moving average charts, 63, 64 Extraordinary Popular Delusions and the Madness of Crowds (Charles Mackay), 39–40, 143

F

Factor of five, 125–126, 155–156 “Fallen angels” scan, 218–219 False breakouts, 59–60 downside, 61, 229 reinforcing Stochastic signals, 97

False breakouts (Cont.): from support and resistance, 56 upside, 61 “False breakout with a divergence” strategy, 239 Fantasies: autopilot myth, 12–13 brain myth, 11 cult of personality, 13–16 reality vs., 10–11 undercapitalization myth, 11–12 wishful thinking, 16 Far-out-of-the-money options, 181, 185 Fast Stochastic, 96 Fear, 40, 41, 44, 106, 148, 185 Filters, 78 Financial instrument futures, 187–188 Financial journalists, 142–144 Financing charges (CFDs), 186 Fingers (kangaroo tails), 65–67 First 20 Hours, The (Josh Kaufman), 249, 250 First step (AA principle), 22, 25–26 Floors, for commodities, 191 Floor traders, 34, 35, 46, 192 Followers of gurus, 15–16 Follow-up analysis: buying a pullback, 246 shorting a top, 245–247 Force Index, 112–117 constructing, 112–113 intermediate-term, 116–117 short-term, 113–116 and trading psychology, 113 trading rules, 113–117 in Triple Screen system, 158, 159 Forecasting: dramatic, 48 and Force Index, 115 managing trades vs., 47 by market cycle gurus, 14 Forecasting Financial Markets (Tony Plummer), 41

Forex, 104, 194–196 Forward-testing systems, 151, 152 Fractal patterns, 54–55 Fraud, in forex trading, 195 Freud, Sigmund, 17, 121 Friedman, Milton, 54 Fundamental analysis, 46 for finding stocks, 128 technical analysis with, 127–128 Fundamental analysts, concept of value for, 79 Futures, 187–194 closing prices on daily charts, 53 commitments of traders, 145–147, 192–193 compared to cash trades, 188–189 contango, 191 currency, 196 floors and ceilings, 191 hedging, 189–190 insider trading in, 36 inversions, 191 margins and risk control with, 193–194 options vs., 187 seasonality with, 191 spreads, 192 supply and demand factors with, 190–191 time period for, 118 2% Rule for, 205–207 volume trends for, 105 Futures traders: commitments of, as indicator, 145–147 survival rate for, 188

G

Gallacher, William R., 15 Galleon fund, 35 Gamblers Anonymous, 17 “Gambler’s ruin,” 195

Gambling, 17, 219 Gann, W. D., 15, 51 Gawande, Atul, 149 Gender: and reasons for gambling, 17 of traders, 3–4 General market indicators, 133–148 Advance/Decline line, 140–142 of consensus and commitment, 142–148 futures traders’ commitments, 145–147 legal insider trading, 147 short interest, 147–148 signals from advertisers, 144–145 signals from press, 144 tracking advisory opinion, 143–144 Most Active Stocks indicator, 142 New High–New Low Index, 133–139 constructing, 134 and crowd psychology, 134–135 in multiple timeframes and lookback periods, 137–139 65-day and 20-day, 138–139 trading rules, 135–137 weekly, 137–138 stocks above 50-day MA, 139–140 Goepfert, Jason, 144 Gold: resistance zone for, 56–57 trading in futures vs. cash, 188–189 “Good ‘til cancelled” (GTC) orders, 225 Granville, Joseph, 103, 107–109 Gray box software, 38, 71 Greed, 44, 106, 148, 185 Greeks (indicators in options analysis), 183 Greenson, Ralph, 17 Group behavior, 45–46. See also Crowd behavior Group loyalty, 41, 44 Grove, Nic, 221 GTC (good ‘til cancelled) orders, 225

Gurus, 13–16 dead, 15 followers of, 15–16 magic method, 14–15 market cycle, 13–14

H

Hamilton, William, 50 Hard stops, 225 Havens, Leston, 29 Hedgers, 146 COT reports, 192–193 reports on positions of, 145–146 Hedging: futures, 189–190 line between speculating and, 37 “High” volume, 106–107 History of charting, 50–51 Homework, daily, 234–236 Hound of the Baskervilles signal, 89, 112 Hourly charts, 156 House advantage, 200, 201 How I Made One Million Dollars (Larry Williams), 110 How to Buy Stocks (Louis Engel), 1, 2 Hurst, J. M., 74, 75, 166

I

Impulse trading system, 156, 157, 162–166 entries in, 164–166 exits in, 166 Independent thinking, crowd mentality vs., 41, 42 Index CFDs, 186–187 Indicators. See also individual indicators and types of indicators applying moving averages to, 78 basic data used for, 73 changing parameters of, 77 clarity of signals from, 74 contradictory, 73 identifying trends with, 63

Indicators (Cont.): at right edge of charts, 62 seasons of, 122–124 “shopping for,” 102 in Triple Screen trading system, 155 at true and false breakouts, 60 Indicator seasons, 122–124 Individual psychology, 9–30 and Alcoholics Anonymous principles, 20–27 applied to trading, 20–21, 23–27 denial, 21–22 first step, 22, 25–26 lessons from, 21–23 meetings, 23 one day at a time, 22–23 rock bottom, 22, 24–25 autopilot myth, 12–13 and bending rules, 19–20 brain myth, 11 emotions in trading, 19 following gurus, 13–16 reality vs. fantasy, 10–11 autopilot myth, 12–13 brain myth, 11 cult of personality, 13–16 undercapitalization myth, 11–12 wishful thinking, 16 reasons for trading, 9–10 rational and irrational, 9 self-fulfillment, 9–10 rule-bending, 19–20 self-destructiveness, 16–19 controlling, 19 gambling, 17 and lack of normal human helpfulness in markets, 18–19 self-sabotage, 17–18 undercapitalization myth, 11–12 winners and losers, 27–30 emotional trading, 28–29

Individual psychology (Cont.): and self-control vs. controlling markets, 27–28 taking charge of your life, 29–30 wishful thinking, 16 Individual traders, 36–37 competing against institutional traders, 37–38 former institutional traders as, 212 isolation of, 250 one advantage over institutional traders, 228 Inertia, of trading vehicles, 162, 163 Innumeracy, 200–201 Innumeracy (John Allen Paulos), 200 Inside information, 35–36 Insider trading: in futures markets, 36 illegitimate, 35–36 legal, as indicator, 147 Institutional commissions, 37 Institutional traders, 37–38 advantages for, 37 CFDs used by, 186 trade managers of, 212–213 Insurance account, for options writing, 184–185 Intelligence networks, of institutional traders, 37 Interbank market, 194 Interest rate futures, 192 Intermediate-term Force Index, 116–117 Intermediate timeframe, 155–156 International exchanges, volume reported by, 104 In-the-money options, 179 Intraday charts, 51. See also Timeframes; individual indicators Intrinsic value (options), 179 Inverse ETFs, 176 Inversions (futures), 191 Investing (long-term trading), 126–128 Investors Intelligence, 143

Iron Triangle of risk control, the, 204–205, 221 Isolation in trading, 250

J

Japanese candlesticks, 53, 112 Japanese Candlestick Charting Techniques (Steve Nison), 53

K

Kahneman, Daniel, 200, 238 Kangaroo tails (fingers), 65–67 Kaufman, Josh, 249, 250 Keelan, Brian, 186 Key demands for trades, 153–154 Keynes, John Maynard, 175

L

Lag, of moving averages, 78 Lane, George, 95 Large speculators, 146 Larsen, Max, 234 Leaders: of crowds, 41 and fear of uncertainty, 40 gurus, 13–16 dead, 15 followers of, 15–16 magic method, 14–15 market cycle, 13–14 loyalty to, 44 Learning trading skills, 249–251 LeBon, Gustave, 40 Letter writers (financial), 142–143 Leverage, in forex, 195 Leveraged ETFs, 177, 178 Leveraged inverse ETFs, 176 Life, taking charge of, 29–30 Limits, on futures, 187–188 Limit orders, 7–8 Liquidity, 122, 173–174 Long-term price cycles, 122 Long-term timeframe, 155, 156

Long-term trading (investing), 118, 126–128 Look-back windows (New High–New Low Index), 138–139 Losers: AA principles for, 23–27 denial by, 21–22 emotional responses of, 199 and emotional trading, 28–29 fantasies of, 10–16 autopilot myth, 12–13 brain myth, 11 cult of personality, 13–16 undercapitalization myth, 11–12 pain and regret felt by, 57 and self-control vs. controlling markets, 27–28 self-destructive, 16–19 and volume of trading, 105, 106 wishful thinking by, 16 Losers Anonymous, 26–27 Losses: in account as a whole, 204 businessman’s risks vs., 25 on CFDs, 186 cutting, 198–200 of former institutional traders, 212 inability to manage, 197 on options, 180, 182 per share, limiting, 204 psychological effect of, 211–212 6% Rule to limit, 208–210 2% Rule to limit, 203–207 Loss aversion, 200 Lovvorn, Kerry, 19, 42, 88–89, 93, 169, 221, 227, 243, 250 Low-priced stocks, indictors based on volume of, 142 “Low” volume, 106–107

M

MAs, see Moving averages MACD, see Moving Average Convergence-Divergence MACD-Histogram, 83–89 combined with channels, 170, 171 divergences, 86–89 in Impulse system, 165, 166 and market psychology, 84 peaks and valleys, 85 seasons of, 123 semiautomatic divergence scanner, 231 slope of, 84, 85 time windows of, 85 trading rules, 84–85 in Triple Screen system, 156–158 MACD Lines, 81–83 crossover of Signal lines and MACD line, 81–84 in divergences, 87–88 and market psychology, 81 trading rules, 81–82 Mackay, Charles, 39–40, 143 MacMillan, Lawrence, 185 Magic method gurus, 14–15 Managing trades, 46–48 forecasting vs., 47 and poll-taking, 47 by reading markets and managing yourself, 47–48 Mandelbrot, Benoit, 167 Margins, 193–194 Margin calls, 193, 250 Market(s): attempts to manipulate, 29 and automatic trading systems, 13 comparing volumes of, 104 contango, 191 as crowds, 39–43. See also Mass psychology crowd mentality, 41–42 experts on, 40 independent thinking vs., 42 of individuals, 33, 34 leaders of crowds, 41

Market(s) (Cont.): reasons for joining crowds, 40 wisdom of crowds, 42–43 ETFs, 176 groups vs. individuals in, 34 harshness of, 33–34 inability to control, 27–28 inside information in, 35–36 overbought and oversold, 95, 98, 115 randomness in, 198, 203 reading, 47–48 seasons of, 122–124 size of, 34 source of money in, 34–35 spikes in, 115–116 as sport, 28 theories of, 54–55 timeframes of, 125 analysis using multiple timeframes, 55 conflicting, 64–65 trading ranges vs. trends in, 59 worldwide crowds, 34 Market cycle gurus, 13–14 Market data: in computerized technical analysis, 72–73 in moving averages, 75 Market indexes, in technical analysis,72 Market makers, 34 Market noise: perceived cycles as, 122 and placement of stops, 222, 223 setting stops outside zone of, 220 Market orders, 7 bid-ask spreads for, 8 slippage on, 7 Market panics, 137 Market participants, groups of, 146 Market tide screen (Triple Screen system), 156–158 Market time, 124–125 Market Vane, 143

Market wave screen (Triple Screen trading system), 158, 159 MAS (Most Active Stocks) indicator, 142 Mass manias, 39–40 Mass psychology, 31–48 and emergence of gurus, 14 managing trades, 46–48 forecasting vs., 47 and poll-taking, 47 by reading markets and managing yourself, 47–48 the market, 33–36 groups vs. individuals in, 34 inside information in, 35–36 source of money in, 34–35 worldwide crowds, 34 and markets as crowds, 39–43 crowd mentality, 41–42 experts on, 40 independent thinking vs., 42 leaders of crowds, 41 reasons for joining crowds, 40 wisdom of crowds, 42–43 price, 32–33 as consensus of value, 32–33 crowd behavior reflected in, 32–33 trading scene participants, 36–39 advisors, 39 individual traders, 36–37 institutional traders, 37–38 sword makers, 38 trend psychology, 43–46 emotions in, 43–44 price shocks, 44–45 rallies and declines, 44 social psychology, 45–46 Mathematical expectation, 200–201 Maximum Entropy Spectral Analysis (MESA), 122 Mean between high and low, moving averages based on, 78 Measuring volume, 104–105

Mechanical traders, 149–150 Mechanical Trading Systems (Richard Weissman), 149 Meetings, AA, 23 Mellon, Andrew J., 233 Member Short Sale Ratio, 142 Memory(-ies): and support or resistance levels, 56–57 in trade diary, 243 Mental stops, 184 MESA (Maximum Entropy Spectral Analysis), 122 Mind, as component of trading, 237. See also Thinking Mini-contracts (futures), 193–194 Minus-sum game, trading as, 5–6 Miscellaneous indicators, 74. See also New High–New Low Index (NH-NL) “Missing right shoulder” divergences, 88 Moltke, Helmuth von, 197 Money: making, 47 motives for seeking, 200 in open trades, 198 source of, 34–35 Money management. See also Risk management businessman’s risk, 25–26, 201–202 commissions, 6–7 conservative, 47 and emotions, 197–200 businessman’s risk, 201–202 and counting money in open trades, 198 not being able to sell, 198–200 expenses of trading, 5–8 following rules of, 20 with futures, 193 and negative mathematical expectation, 201 rules as safety net in, 19 slippage, 7–8

Mood, as component of trading, 237 Most Active Stocks indicator (MAS), 142 Moving averages (MAs), 74–80 choosing length of, 76–78 dual EMAs, 78–79 exponential, 75–80. See also Exponential moving averages (EMAs) with Force Index, 112 and market psychology, 75–76 in setting profit targets, 217, 218 simple, 75 as support and resistance, 78 time windows of, 74, 75 weighted, 75 Moving Average Convergence-Divergence (MACD), 80–89 creating, 81 MACD-Histogram, 83–89 divergences, 86–89 and market psychology, 84 peaks and valleys, 85 semiautomatic divergence scanner, 231 trading rules, 84–85 MACD Lines, 81–83 and market psychology, 81 trading rules, 81–82 and market psychology, 81 “quick-and-dirty” plotting of, 83 scanner for, 231 Mr. Market, 175 Mysticism, 55

N

Naked writers (options), 181–182 NASDAQ, 72, 140 Nature’s law, 55 “Nature’s Law” (R. N. Elliott), 55 Negative Directional line, 91–92 Negative mathematical expectation, 200–201

Negative rules, in scanning for stocks, 232 Neill, Humphrey B., 143 Net Field Trend indicator, 108–110 Neurotic gamblers, 17 New High–New Low Index (NH-NL), 133–139 constructing, 134 and crowd psychology, 134–135 in multiple timeframes and look-back periods, 137–139 65-day and 20-day, 138–139 trading rules, 135–137 weekly, 137–138 New Sell and Sell Short, The (Alexander Elder), 175, 220 Newsletters, 38–39, 142–144 New Strategy of Daily Stock Market Timing (Joseph Granville), 107 New York Stock Exchange, 34 daily volume in 1940s, 51 stocks above 50-day MA for, 140 volume reported by, 104 Western European hours for, 174 New York Times, The 195 NH-NL, see New High–New Low Index Nic’s stop, 221, 222 Nison, Steve, 53 Noise, market, see Market noise Notis, Steve, 157

O

OBV, see On-Balance Volume Odds against traders, 5–8 bid-ask spread, 8 commissions, 6–7 with ETFs, 176 expenses, 5, 8 slippage, 7–8 and trading as minus-sum game, 5–6 Odd-lot Short Sale Ratio, 142 Odd-lot statistics, 142 Odysseus, 42 On-Balance Volume (OBV), 107–110 and crowd psychology, 108 trading signals, 108 One-bar-at-a-time testing, 152 One day at a time (AA principle), 22–23 Opening gaps, 226 Opening prices: on candlestick charts, 53 and crowd behavior, 110 of daily bars, 51 relationship of closing prices and, 52, 110 Open interest, 117–121 and crowd psychology, 118–120 defined, 117 trading rules, 120–121 Open trades: changing trade plan during, 42 counting money in, 198 money at risk in, 208–210 Options, 178–185 buying, 180–181, 185 futures vs., 187 limiting risk with, 183–185 price of, 179–180 time decay with, 183 writing, 180–185 Options as a Strategic Investment (Lawrence MacMillan), 185 Oscillators, 73 in bearish divergences, 87 in bullish divergences, 86 Force Index, 112–117 constructing, 112–113 intermediate-term, 116–117 short-term, 113–116 and trading psychology, 113 trading rules, 113–117

Oscillators (Cont.): identifying trends with, 63 MACD-Histogram, 83–89 divergences, 86–89 and market psychology, 84 peaks and valleys, 85 slope of, 84, 85 time windows of, 85 trading rules, 84–85 and mass psychology, 95 Relative Strength Index, 99–102 and mass psychology, 100–101 trading rules, 101–102 Stochastic, 95–99 and crowd psychology, 96–97 trading rules, 97–99 in Triple Screen trading system, 155, 158 Out-of-the-money options, 179, 181 Overbought: oscillator levels, 95 RSI levels, 99–201 as Stochastic signal, 98, 99 Overnight gaps, 225 Oversold: oscillator levels, 95 RSI levels, 99–101 as Stochastic signal, 98, 99

P

Pain: and support or resistance, 57–58 volume as measure of, 105 Paper trading, 152–153 Parabolic stops, 221 “Passing the book,” 196 Patterns. See also Chart patterns for A-trades, 225–230 defining, 215 emerging from chaos, 54 fractal, 54–55 and Hound of the Baskervilles signal, 89

Patterns (Cont.): for scanning, 230–232 and trading young stocks, 72 Paulos, John Allen, 200 Penny stocks, 145 %D line, 95, 96 %K line, 95, 96 “Perfect order” in markets, 55 Personality: as component of trading, 237 matching trading styles to, 149, 150 Piranha bite losses, 208 Player’s edge, 200 Plummer, Tony, 41 Point-and-figure chartists, 50 Poll-taking, 47 Portfolio Management Formulas (Ralph Vince), 200 Position limits, 146 Position trading: day-trading vs., 73 market data for, 72 profit targets in, 217 stops in, 221 Positive Directional line, 91, 92 Positive mathematical expectation, 201 Power: of bears vs. bulls: A/D, 110 closing prices, 96 divergences, 87, 98, 101 Force Index, 113, 115, 116 MACD-Histogram, 84 MACD Line, 81 miscellaneous indicators, 74 and NH-NL zero line, 136 On-Balance Volume, 108 open interest, 119–120 volume, 104 profits and feeling of, 22 of trends, 162, 163

Premiums: futures, 191–192 options, 179 Press, signals from, 144 Prechter, Robert, 201 Price(s), 32–33. See also Closing prices; Opening prices on bar charts, 51–52 as consensus of value, 32–33, 100–101 crowd behavior reflected in, 32–33 divergences from, 86–89 in Force Index, 112–117 indicators derived from, 73 as leader of market crowd, 41, 44 long-term cycles in, 122 memories of, 56–57 of options, 179–180 in Random Walk theory, 54 short-term cycles in, 122 slippage, 7–8 support and resistance levels, 55 and understanding of volume, 103, 104 value vs., 79–80 Price risk, hedging and, 189–190 Price shocks, 44–45 Pring, Martin, 122 Private traders, see Individual traders Probabilities, 198–202 businessman’s risk, 201–202 choices based on emotions vs., 199–200 innumeracy, 200–201 positive expectation, 201 Profit(s): calculating potential for, 217 on CFDs, 186 “enough,” 218 feeling of power from, 22 in open trades, 198

INDEX 277

Profit(s) (Cont.): protection levels for, 223–224. See also Stops source of, 34–35 Profit Magic of Stock Transaction Timing, The (J. M. Hurst), 74, 166 Profit taking: in day-trading, 217 in swing trading, 216 and tall bars, 53 Profit-taking zone, for options, 184 Profit targets: and Average True Range, 94 in day-trading, 131 setting, 215–219 in Triple Screen system, 162 Protective stops, 58–60. See also Stops defined, 59 with EMAs, 77 with kangaroo tails, 67 to reduce open risk, 209 with RSI, 100 and Stochastic signals, 98 Psychological readiness for trading, 19, 236–237 Psychology: of trading, 3–4. See also Mass psychology; Individual psychology and focus on reality, 3 and paper trading, 152 of trends, 43–46 emotions in, 43–44 price shocks, 44–45 rallies and declines, 44 and social psychology, 45–46 Put-Call Ratio, 74 Put options, 178–183, 185 Pyramiding: Force Index indication for, 115 guidelines for, 210

Q

Quality of trades, 225–230

R

Rallies. See also individual indicators from 1966 to 1982, 56 and channel lines, 169 contracts for difference on, 186 in downtrends, 60–61 open interest in, 121 psychology of, 44 short-covering, 148 in trading ranges, 61 in uptrends, 60 volume during, 106 Random Walk theory, 54 Readiness for trading, 236–237 Reading markets, 47–48 Reality: fantasy vs., 10–11 wishful thinking vs., 16 Reasons for trading, 9–10 Record-keeping, 26, 233–247 daily homework, 234–236 and psychological readiness for trading, 236–237 Trade Journal, 243–247 trade plans, 233, 238–243 creating, 238 scoring, 238–240 using Tradebills, 240–243 Regret, support or resistance and, 57–58 Relative Strength Index (RSI), 99–102 and mass psychology, 100–101 trading rules, 101–102 Reporting levels, 146 Resettlement fees, 195 Resistance. See also Support and resistance defined, 55, 166 pain and regret, 57

Reversals, 61 betting on, 54, 58 consensus preceding, 143 Force Index indication of, 113, 116 journalists’ writings signaling, 144 kangaroo tails, 65–67 losers’ responses to, 199 NH-NL indicating, 136–137 and open interest, 120 and price shocks, 56 protection from, 59. See also Protective stops pullbacks signaling, 63 and stocks above 50-day MA, 140 timing of trades and, 125 and value zone, 80 and volume of trading, 107 Reverse splits (ETFs), 177 Reviews: of equity curve, 247 of trades, 246–247 Reward-to-risk ratio, 224 Rhea, Robert, 50, 155 Risk management, 154, 197–213 comebacks from drawdowns, 210–213 and emotions, 197–200 businessman’s risk, 201–202 and counting money in open trades, 198 not being able to sell, 198–200 essential nature of, 153 with futures, 193–194 main rules of, 202–210 6% Rule, 208–210 2% Rule, 203–207 with options, 181, 183–185 probabilities in, 198–202 and self-management, 3 stops for protecting winning trades, 223–224

Risk management (Cont.): by trading managers, 38, 212–213 for trends and trading ranges, 63 worst mistakes in, 202–203 Rock bottom (AA principle), 22, 24–25 Rorschach, Herman, 50 RSI, see Relative Strength Index Rule-bending, 19–20

S

SAC Capital, 35 SafeZone stops, 220, 221 Scanning for trades, 230–232 defined, 230 defining patterns before, 215 “fallen angels,” 218–219 negative rules in, 232 stocks, 175 using toolboxes, 70 Seasonality, with futures, 191 Securities and Exchange Commission (SEC), 146, 147, 186, 187 Self-control, 27–28, 30, 47–48 Self-deception, 49 Self-destructiveness, 10, 16–19 controlling, 19 gambling, 17 and lack of normal human helpfulness in markets, 18–19 self-sabotage, 17–19 Self-fulfillment, 9–10 Self-help groups, 20. See also Alcoholics Anonymous (AA) principles Self-sabotage, 10, 17–19 Self-test, of readiness for trading, 236–237 Sellers, 32 expectations of, 32 and open interest, 118–120 of options, 178–179 Selling. See also specific trading vehicles based on fear, 41 emotional commitment in, 105

Selling (Cont.): indicators for, 87, see specific indicators by insiders, 147 not being able to sell, 198–200 Sell orders: Force Index indicator for, 115 and Stochastic signals, 98 SentimenTrader.com, 144 Shapiro, Roy, 199, 200 “Shark bite” losses, 203, 219 “Shopping for indicators,” 102 Short interest, 147–148 Short Percent of Float, 147–148 Short sellers, rallies/declines and, 44 Short selling: Force Index indicator for, 115 making money with, 174–175 Stochastic signals for, 98 stops with, 221 Triple Screen indicators for, 160, 161 value zone in, 80 Shortsqueeze.com, 148 Short-term Force Index, 113–116 Short-term price cycles, 122 Short-term timeframe, 155, 156 Short-term trading, 118, 121, 174–175 “Shoulders,” 212 Sibbet, James H., 143 Signal(s). See also Indicators confidence in, 73 in market moves, 220, 222, 223 Signal line (MACD), 81 crossover of MACD line and, 81–83 difference between MACD line and, 83 and MACD-Histogram, 83, 84 Simple moving averages, 75 6% Rule, 208–210, 213 and concept of available risk, 208–210 as guideline for pyramiding, 210

65-day New High–New Low Index, 138–139 Size of trades, 203 Iron Triangle of risk control for, 204–206 risk associated with, 210–212 2% Rule for, 203–207 Skills, learning, 249–251 Slater, Tim, 35 “Slicing the bid-ask spread” technique, 183 Slippage, 5–8, 33–34 and open interest, 121 overnight gaps, 225 in quiet markets, 53 Slow Stochastic, 96 Small traders, 146, 147 CFDs for, 186 COT reports, 192 of options, 180 Smoothed Directional Lines (+DI13, −DI13), 91 Social psychology, 43, 45–46 Stock Market Barometer, The (William Hamilton), 50 Soft stops, 225 Soros, George, 6 Source of money, in markets, 3 4–35 S&P 500 index, 72 applying OBV to, 110 and beta, 174 in scanning for trades, 230–232 Specialist Short Sale Ratio, 142 Speculative trading, in currencies, 194 Speculators, 36–37, 145 farmers and engineers as, 190 institutional investors as, 37 position limits of, 146 Spikes, 137 Spike bounce signal, 139 Spikers, 230

280 INDEX

SpikeTrade.com, 42–43, 130, 137, 153, 230, 250–251 Spreads: bid-ask, 8 with CFDs, 186 with forex trades, 194, 195 “slicing the bid-ask spread” technique, 183 futures, 192 Spreadsheet, for pre-open routine, 234–236 Spread trading, 192 Standard deviation channels (Bollinger bands), 167, 172 Steidlmayer, J. Peter, 66 Stochastic oscillator, 95–99 and crowd psychology, 96–97 time window of, 96, 99 trading rules, 97–99 in Triple Screen trading system, 158 Stocks, 175–176 liquidity of, 173–174 margins with, 193 options vs., 180 prices of, 175 scanning for, 230–232 selecting, 175–176 short interest, 147–148 volatility of, 174 Stocks above 50-day MA indicator, 139–140 StockCharts.com, 70 Stoller, Manning, 170 Stops, 219–225. See also Protective stops and Average True Range, 93 avoiding obvious levels for, 220–223 catastrophic, 224–225 mental, 184 moving in direction of trade, 224

Stops (Cont.): outside zone of “market noise,” 220 and overnight gaps, 225 placing, 59 planning, 216 protective, 58–60, 67 to protect winning trades, 223–224 purpose of, 203–204 trading without, 202 in trends vs. in trading ranges, 61 in Triple Screen system, 162 “Stop-and-reverse” orders, 89 Stress of trading, reducing, 250 Strike price (options), 179 Success: accumulating equity as hallmark of, 20 barriers to, 5–8 desire for, 2–3 and emotional trading, 19, 28–29 qualities for, 30 realism for, 10 and self-control vs. controlling markets, 27–28 through taking charge of your life, 29–30 Supply and demand factors: with futures, 190–191 reflected in price, 54 Support: defined, 55, 166 from pain and regret, 57 Support and resistance, 55–60 causes of, 56–57 channels identifying, 166–167 moving averages as, 78 and profit targets, 218–219 strength of, 58 trading rules and, 58–59 true and false breakouts, 59–60 Surges, speed and momentum of, 95

INDEX 281

Surowiecki, James, 42 Swing trading, 126, 128–131 for beginner traders, 73 grading trades in, 226 with Impulse system, 166 market data for, 72 profit taking in, 216 profit targets in, 217, 218 stops in, 221 timeframes in, 162 Symmetrical channels, 167–168

T

Taking charge of your life, 29–30 TANSTAFL principle, 178 Taylor, Lou, 29n.1 Technical analysis, 46, 69–102 and channels, 79 computer hardware, 71–72 Directional system, 89–94 Average True Range indicator, 92–94 constructing, 89–91 crowd behavior tracked by, 91–92 trading rules, 93 as for-profit social psychology, 43 with fundamentals, 127–128 groups of indicators, 73–74 miscellaneous indicators, 74 oscillators, 73 trend-following indicators, 73 and insider trading, 36 market data, 72–73 miscellaneous indicators, 74 Moving Average Convergence-Divergence, 80–89 creating, 81 MACD-Histogram, 83–89 MACD Lines, 81–83 and market psychology, 81 moving averages, 74–80

Technical analysis (Cont.): choosing length of, 76–78 dual EMAs, 78–79 exponential, 75–80 and market psychology, 75–76 simple, 75 as support and resistance, 78 weighted, 75 objectivity of, 49 oscillators, 73, 95 MACD-Histogram, 83–89 overbought and oversold, 95 Relative Strength Index, 99–102 Stochastic, 95–99 as poll-taking, 47 prices, values, and value zone, 79–80 for timing entries and exits, 128 toolboxes for, 70–71 trend-following indicators, 73 Directional system, 89–94 MACD Lines, 81–83 Technical Analysis of Stock Trends (Edwards and Magee), 51 Technical analysts: concept of value, 79 goals of, 33 identification of rallies and declines by, 44 as social psychology, 46 Temperament, 150 Testing: of readiness for trading, 236–237 of trading systems, 151–152 Thinking. See also Fantasies changing, 22 and crowd mentality, 41–42 emotions and, 28, 44 independent, 40, 42 and Losers Anonymous concept, 26–27 wishful, 16, 49, 50, 219, 224

Thinking, Fast and Slow (Daniel Kahneman), 200, 238 TICK, 142 Ticks, 52n.1 Tick volume, 104 Time, 103, 121–126 cycles, 122 factor of five, 125–126 indicator seasons, 122–124 market time, 124–125 Time decay (options), 183 Timeframes: and factor of five, 125–126 and kangaroo tails, 65 of markets, 125 analysis using multiple timeframes, 55 conflicting, 64–65 of New High–New Low Index, 137–139 seasons in, 124 in trading, 126–132 day-trading, 131–132, 162 with Impulse system, 165 long-term (investing), 126–128 options, 182–183 swing trading, 128–131, 162 in Triple Screen trading system, 155–156 Time value (options), 179 Time zones: and market data analysis, 72 trading in, 174 Toolboxes, 38, 70–71 Tops. See also specific indicators and divergences, 87–89 reversal signals at, 125 since the 1950s, 51 in trends, 71 TR (True Range), 90 Trade Apgars, 238–243 Tradebills, 228, 238, 240–243

Trade Journal, 243–247. See also Trading diaries Trade plans, 42, 233, 238–243 creating, 238 scoring, 238–240 using Tradebills, 240–243 Traders. See also Individual psychology; Mass psychology discretionary, 150–151 gender of, 3–4 individual, 36–37 competing against institutional traders, 37–38 former institutional traders as, 212 isolation of, 250 one advantage over institutional traders, 228 performance of institutional traders vs., 212 institutional, 37–38 advantages for, 37 performance of individual traders vs., 212 trade managers of, 212–213 mechanical, 149–150 odds against, 5–8 bid-ask spread, 8 commissions, 6–7 expenses, 5, 8 slippage, 7–8 trading as a minus-sum game, 5–6 reasons for trading, 9–10 Trade setup, 154 Trading, 1–8. See also specific topics bid-ask spreads in, 8 commissions in, 6–7 expenses of, 5, 8 and gender of traders, 3–4 identifying A-trades, 225–230 learning skills for, 249–250 as a minus-sum game, 5–6 odds against traders in, 5–8

Trading (Cont.): bid-ask spread, 8 commissions, 6–7 expenses, 5, 8 slippage, 7–8 psychological readiness for, 236–237 psychology of, 3–4. See also Mass psychology; Individual psychology reasons for, 9–10 reducing stress of, 250–251 scanning for trades, 230–232 setting profit targets, 215–219 setting stops, 219–225 avoiding obvious levels for, 220–223 catastrophic, 224–225 moving in direction of a trade, 224 outside zone of “market noise,” 220 and overnight gaps, 225 to protect winning trades, 223–224 in Triple Screen trading system, 162 slippage in, 7–8 succeeding in, 2–3 as trying to take money from other people, 35 Trading accounts, 204 Trading diaries, 20 to avoid self-destructiveness, 18, 19 Trade Journal, 243–247 Trading managers, 38, 212–213 Trading ranges, 60–65 and conflicting timeframes of markets, 64–65 deciding to trade or wait, 63–64 at hard right edge, 63-64 identifying, 63–64 mass psychology of, 62

Trading ranges (Cont.): as OBV signal, 108 open interest in, 120–121 oscillators in, 95 pain and regret in, 57 and Stochastic signals, 98 time spent in trends vs., 59 Trading rules. See also Risk management; specific topics and indicators bending, 19–20 for discretionary traders, 150 for mechanical traders, 149–150 Trading scene participants, 36–39 advisors, 39 individual traders, 36–37 institutional traders, 37–38 Trading skills, learning, 249–251 Trading software, 38 Trading systems/strategies, 149–172 for A-trades, 228–229 and autopilot fantasy, 12–13 Channel system, 166–172 constructing, 167 and mass psychology, 168–170 standard deviation (Bollinger bands), 172 symmetrical, 167–168 trading rules, 170–171 defined, 149 developed prior to scanning for trades, 230 discretionary traders, 150–151 frequency of signals from, 8 Impulse system, 162–166 entries in, 164–166 exits in, 166 key demands for trades, 153–154 to limit commissions, 6 for mechanical traders, 149–150 optimizing, 201 paper trading, 152–153

Trading systems/strategies (Cont.): and psychological readiness to win, 19 simplicity of, 201 testing systems, 151–152 tradebills for, 238 Triple Screen, 154–162 choosing timeframes, 155–156 in day-trading, 161–162 entry technique screen, 158–160 market tide screen, 156–158 market wave screen, 158, 159 stops and profit targets in, 162 trend-following indicators and oscillators, 155 Trading timeframes, 126–132 day-trading, 131–132 long-term (investing), 126–128 swing trading, 128–131 Trading vehicles, 173–196. See also individual vehicles contracts for difference, 186–187 exchange-traded funds, 176–178 forex, 194–196 futures, 187–194 and commitments of traders, 192–193 compared to cash trades, 188–189 contango, 191 floors and ceilings, 191 hedging, 189–190 inversions, 191 margins and risk control with, 193–194 seasonality with, 191 spreads, 192 supply and demand factors with, 190–191 liquidity of, 173–174 long vs. short, 174–175 options, 178–185 buying, 180–181 limiting risk with, 183–185

Trading vehicles (Cont.): price of, 179–180 writing, 181–183 scanning for, 230–232 stocks, 175–176 and time zones, 174 volatility of, 174 Trailing stops, 221, 223 Trends, 60–65. See also Downtrends; Uptrends advisors’ following of, 143 and conflicting timeframes of markets, 64–65 created by crowds, 34 deciding to trade or wait, 64 defined, 60 effect of support or resistance on, 55 and factor of five, 125–126, 155–156 in futures markets, 190–191 at hard right edge, 62 health of, 59 identifying, 56, 62–63 on long-term charts, 126–127 moving averages indicating, 78 NH-NL, 136 and objective signals for trades, 41 and oscillator levels, 95 psychology of, 43–46 emotions in, 43–44 and mass psychology, 62 price shocks, 44–45 rallies and declines, 44 and social psychology, 45–46 and Stochastic signals, 98, 99 time spent in trading ranges vs., 59 timing of trades and, 125 and volume of trading, 105–107

INDEX 285

Trend-following indicators, 73 Directional system, 89–94 MACD Lines, 81–83 in Triple Screen trading system, 155 Trendlines: diagonal, 50 subjectivity of, 56 TRIN, 142 Triple bullish or bearish divergences, 89 Triple Screen trading system, 154–162 choosing timeframes, 155–156 in day-trading, 161–162 entry technique screen, 158–160 Force Index in, 116 market tide screen, 156–158 market wave screen, 158, 159 objective of, 74 Stochastic signals in, 98 stops and profit targets in, 162 trend-following indicators and oscillators, 155 True breakouts, 59–60 True Range (TR), 90 Tulip Mania, 39–40 12-step programs, 21 Twelve Steps and Twelve Traditions (AA), 21 20-day New High–New Low Index, 138–139 2% Rule, 26, 64, 203–207 in futures markets, 205–207 as a guideline for pyramiding, 210 for institutional traders, 212–213 and Iron Triangle of risk control, 204–205 Two Roads Diverged: Trading Divergences (Alexander Elder), 88 Tyson, Mike, 197

U

Uncertainty, 62, 217 Undecided traders, 32 Undercapitalization myth, 11–12 U.S. stock market: price cycles in, 122 trends in, 155 Unstuff Your Life (Andrew J. Mellon), 233 Upside penetration, 220 Uptrends, 61 bearish divergences during, 87–89 channel trading during, 170 crowd behavior creating, 44–45 Force Index indication of, 113–116 identifying, 63 Impulse system in, 166 mass psychology of, 62 NH-NL, 136 open interest during, 120, 121 overbought oscillators in, 95 pain and regret in, 57 perfect, 60 at resistance level, 55 signals in, 220 and Stochastic signals, 98, 99 stocks above MAs in, 139 Triple Screen indicators for buying in, 160 and volume of trading, 107 volume spikes in, 106 Urge to trade, 23–24

V

Value(s): consensus of: on MACD-Histogram, 84 moving averages as, 75, 81 price as, 32–33, 100–101 and trades above/below EMA, 139 of options, 180 prices vs., 79–80 Value zone, 79–80, 167, 216 Vince, Ralph, 200

Volatility, 174 ATR lines showing, 93 and channel width, 167 measuring, 174 Volatility index, 177 Volatility stops, 221 Volume, 103–121 crowd behavior reflected in, 33 and crowd psychology, 105–107 “high” and “low,” 106–107 and liquidity, 173–174 measuring, 104–105 moving average of, 78 of penny stocks, 145 in support and resistance zones,58 and true vs. false breakouts, 60 volume-based indicators, 107–121 Accumulation/Distribution, 110–112 Force Index, 112–117 On-Balance Volume, 107–110 open interest, 117–121 Volume-based indicators, 107–121 Accumulation/Distribution (A/D), 110–112 and crowd behavior, 110 trading rules, 111 Force Index, 112–117 constructing, 112–113 intermediate-term, 116–117 short-term, 113–116 and trading psychology, 113 trading rules, 113–117 On-Balance Volume, 107–110 and crowd psychology, 108 trading signals, 108 open interest, 117–121 and crowd psychology, 118–120 trading rules, 120–121

W

Wall Street, 31 Wall Street Journal, The, 50, 144, 195 Watch list, building, 72 Weekly charts, 51–53, 59, 60. See also Timeframes; individual indicators Weekly New High–New Low Index, 137–138 Weekly Stochastic, 99 Weighted moving averages (WMAs), 75, 78 Weissman, Richard, 149 Whipsaws, 81, 219, 221 Wilder, J. Welles, Jr., 89, 99 Williams, Larry, 110 Winner Take All (William R. Gallacher), 15 Winning, 27–30. See also Success bending the rules after, 19–20 desire for, 2–3 difficulty of, 35 and emotional trading, 28–29 essential components for, 16 and self-control vs. controlling markets, 27–28 by taking charge of your life, 29–30 and volume of trading, 105, 106 Wisdom of crowds, 42–43 Wisdom of Crowds, The (James Surowiecki), 42 Wishful thinking, 16 with classical charting, 49–50 giving trades “more room” as, 224 and stops, 219 Worldwide crowds, 34 Writing options, 178–185

Y

Yahoo Finance, 174

Z

Zero-sum game: forex market as, 195 trading as, 5

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