, 81ETFs, 16Eurexchange.com, 80Euro, 80, 86, 134–135, 137Eurodollar, 74Even number trades, 172–173Event-driven systems, 115–116Event-driven trends, 107–108, 251–252Excel spreadsheets, 41, 52, 72, 99, 197, 216–218Exhaustion gaps, 134Exit points, 82Exit rules, 29Exit strategies:average exit price, 240case examples, 11–15entire position at a time, 240importance of, 120, 127mistakes, recovery from, 242scaling out with losses, 241scaling out with profits, 240volatility and, 252Expectations, as influential factor, 19, 22, 46Exponential smoothing:calculation of, 58–59defined, 57–58
320
INDEX
Exponential smoothing (continued)false signals, 69moving averages compared with, 58–59price movement and, 59profits per trade, 66–67trading frequency, 67trend speed, 74Exports, 19, 21Extraordinary Popular Delusions and theMaddening of the Crowds (Mackay), 130,214Extreme volume day, 197Exxon, 271–272False break, 27False breakouts, 36, 39–40, 62, 94, 122False signals, 68–69Fan lines, 177%FastK, 221Fast market, 63Fast stochastic, 221, 225Fast trading, 75Fast trends, 119Fat tail, 30, 48–49, 70, 93Federal Reserve, 5, 7, 16, 19–20, 271Fibonacci numbers:in art, 174in behavior, 174in nature, 174price retracements, 175ratios, 171, 173summation series, 173time targets, 175–176Financial statements, as information resource,10, 155-day moving average, 755-day run day, 140Fixed dollar stop-loss, 120, 123Flags, 147–149Floor traders, 115Foreign exchange market, 73400-day moving average, 5214-day moving average, 18540-day moving average, 53–54, 58, 20140-day rolling breakout, 108–10940-week moving average, 52, 54Free exposure, 47, 70, 126, 130, 260Front-weighted trends, 58–59Fundamental analysis, 78Fundamental investors, 6Fund management, 16Futures market:characteristics of, 5, 15, 27, 73, 80, 169contracts, 80, 143, 156, 195–196, 251, 271margin, 84–85open interest, 195–196
order placement, 81–82trading, 84–85volatility and, 256–257Gann, W.D., 176–177Gann’s square, 177–178Gaps:breakaway, 131–133common, 131defined, 131exhaustion, 134runaway, 134sources of, 131spikes, 134–136General Electric (GE), 12–13, 36–37, 149–151,211, 272Global markets, 16, 19Goes above, defined, 114Goes below, defined, 114Gold Fields (GOLD), 254, 259Gold market, 146–147, 172, 211–212,259–260Good-faith deposit, 85Good ’til cancelled (GTC) order, 83Government economic reports, 76Government policies, 19, 107–108Gross domestic product (GDP), 168Hadady, Earl, 216Head-and-shoulders formations:bottoms, 164characteristics of, 163–164profit target, 164skewed tops, 164–165tops, generally, 164Hedging, 73, 253, 271Hexagon, Gann’s, 178High-momentum trading, 16High threshold level, 211High volatility, 249–250High-yielding stocks, 267IBM, 27, 112Implied volatility, 177Index markets, 130Industrials average, 262Industry sectors, 272Inflation, 19Information reliability, importance of, 9–10Inside days, 141–143Intel, 251Interest rate, changes in, 5, 7, 16, 19–22, 46,49, 271Intermediate trendlines, 28, 33International trade, 19Internet stocks, 214
321
Index
Intraday charts, 23, 29, 127Intraday low, 109Investor confidence, 147. See also Consumerconfidence; Confidence levelInvestor’s Business Daily, 80Irregular rounded bottom, 161–162Island bottom, 137Island reversal, 159Island tops, 136Japanese yen, 162–163%K, 216–218, 221–222%K-fast, 221%K-slow, 217–219, 228Lane, George, 216Large-cap stocks, 259Limit orders, 81, 116, 166Lind-Waldock, 89Line, in Dow Theory, 268Linear regression slope, 74Liquidation, 72, 82, 267Lognormal calculation, volatility, 246, 248Long positions, 82, 120, 198, 240Long-term investments, 3–4Long-term traders, 132, 272Long-term trends, 6–7, 73, 78, 125, 145, 241Loss(es):calculation of, 84incidence of, 29–30, 50, 105Low volatility, 249Low-volume periods, 197Luck, skill vs., 96, 252, 260MACD line, 204Mackay, Charles, 130, 214Major points, defined, 32Margin, 84–85Marked-to-market, 81, 87Market breadth indices:advance-decline (AD) index, 193Arm’s Index—TRIN, 194Bolton-Tremblay (BT) Index, 194–195comparison of, 194–195market breadth, defined, 192–193Schultz A/T Index (SAT), 194Sibbett’s Demand Index (DI), 193Market changes, impact of, 1–3, 16Market conditions:as influential factor, 27, 41volatility and, 246Market correction, 27. See also CorrectionsMarket entry, see Entry pointsMarket exit, see Exit strategiesMarket noise, 23, 26–27, 46, 72–73, 166, 269
Market on close (MOC) orders, 81, 83–84,116–117Market on open (MOO) orders, 81, 83–84Market orders, 80, 83, 116, 118Market sentiment:bullish consensus, 214–216contrary opinion, 214significance of, 213–214Merck (MRK), 18, 254, 258–259Microsoft, 3–5, 54–58, 60–64, 70, 131–132,182–183, 230Minimum swing value, 265Minor points, defined, 32Minor trends, in Dow Theory, 269Mistakes, recovery from, 241–242, 260Momentum:acceleration, 201characteristics of, 199defined, 199, 230detrending a price series, 202–203double-smoothed, 229–232high-momentum periods, 210–211high threshold level, 211increasing prices and, 200interpretation of, 200–201moving average compared with, 201–202smoothing and, 230stochastic signals compared with, 220–221as trend indicator, 201Momentum investing, 154. See also MomentumMoneyCentral.msn.com, 80, 87Money market accounts, 82Monthly charts, 23, 30Moving average convergence-divergence(MACD):calculation of, 204–205characteristics of, 199, 203defined, 203divergence, 206–208, 231indicator reading, 205MACD line, 204signal line, 204, 219, 222signal reliability, 231trading, 205Moving averages:backtesting, 64calculation of, 59direction changes, 72false signals, 68–69longer, 52–53market noise and, 73Microsoft case example, 54–57momentum compared with, 201–202overuse of, 105profits per trade, 66–67purpose of, 78
322
INDEX
Moving averages (continued)smoothest trends, 52–53stochastic signals and, 219stock selection and, 89trading frequency, 67–68trading rules, 53–56trend direction, 52trend speed, 73–74two-trend system, in risk management,123–125types of, 51–52Multiple breakouts, 38Nasdaq, 247–248, 254, 266Nasdaq QQQ, 176Natural log (Ln), 246Neckline, 163–164Net profits, 65, 68–69, 179New York Federal Reserve, 172New York Stock Exchange (NYSE), 189, 254News announcements, impact of, 7, 15–16,21–22, 29, 167–168Nokia, 216–218Normal distribution, 30On-balance volume (OBV), 185–188, 196One cancels the other (OCO) order, 83–84One-day patterns:gaps, 131–136inside, 141–143outside, 141–142reversal, 137–139run, 139–141thrust, 139wide-ranging, 141–142, 151100-day moving average, 52Opening price, 70, 135, 242Open interest, 5, 195–196Open trades, 86Order placement, 70, 80, 82–84. See alsospecific types of ordersOscillators:relative strength index, 225–229stochastic, 216–225volume, 185–186Outside days, 141–142Overbought market, indicators of:market sentiment, 213–216oscillators, 216–231Overbought prices, 209Overpriced stock, 134Oversold market, indicators of:market sentiment, 213–216oscillators, 216–231Oversold prices, 209
Panic phase, in bear market, 267, 269Paper trading, 89, 258Partial retracement, 169Pattern recognition, 6Pennants, 148–149Pension funds, 72, 76Percentage bands, 97–98, 103Perfect hedge, 253Persistent trends, 20–21, 29–30, 96, 113,269Pessimism, in bear market, 267Piggy-back orders, 16Pisano, Leonardo (Fibonacci), 173Point-and-figure charting:plotting rules, 112–114sample, 74trading signals, 114–115Point of equilibrium, 157Political policies, economic impact of, 49Pork bellies, 251Portfolio diversification, 81, 151Portfolio management:balanced portfolios, 253–256diversification, importance of, 81, 151portfolio review, 261, 272–273volatility, 252–256Portfolio optimization, 251Price changes, in volatility measurement,243–245Price fluctuations, in volatility measurement,244Price gaps, 26, 33, 47, 126Price history, 74–75, 258Price movement, generally:implications of, 3–4, 7, 15, 30, 37, 49, 68,126trend speed and, 75Price order, 83–84Price patterns:evolution in, 271–273implications of, 25Price persistence, 113. See also PersistenttrendsPrice shocks, 5, 125, 251–252, 264. See alsoCrises, market response toPrice swings, 30Primary trends, 264–265Proactive traders, 220, 260Profitability, 3–4, 63, 65Profitable trades, percentage of, 68–69Profitable trends, 29–30Profit-taking, 78, 93–94, 267–269Profit-taking fights with trend, 78Profits, calculation of, 84Profits per trade, 66–67, 69
323
Index
Profit target:exit strategy and, 240high-momentum trading, 211significance of, 159–160, 164, 166volatility and, 248–249Pro forma, 10Program trading, 271Prudent investor, 267Pullbacks, implications of, 105, 122, 167, 170,179, 239Pyramiding, 238–239Pythagoras, 173QQQ, 176Quarterly reports, 76Railroads Average, 262Raw stochastic, 216, 221, 223–224Raytheon, 259Recordkeeping, 86–88, 237Recoveries, 267. See also Corrections; MarketcorrectionsRegression bands, 102–103Regression line, defined, 59Regression slopes, 59–61, 67Relative strength index (RSI):calculation of, 225–228stochastic compared with, 227–229Resistance level, implications of, 24, 134, 205.See also Support and resistanceResistance line, 131, 139Retracement, price:Fibonnaci numbers and, 175partial, 169–170percentage, 167–171S&P levels, 171–172size of, 167Reversal day, 137–139Reversals, island, 136–137Reverse positions, 82, 260, 269Ripples, 262Rising prices, 24Rising wedge, 149–151Risk control, 273. See also Risk managementstrategies; Risk minimization strategies;Risk protection; Risk reductionstrategiesRisk exposure, 73Risk management strategies:equalizing risk of futures and stocks,256–257moving averages, 123–125stop-loss order, 118–123, 125–127trading tips, 126–127Risk measurement, 245
Risk minimization strategies, 252Risk protection, 166, 238Risk reduction strategies, 81, 119–120Risk vs. reward analysis, 165Risk tolerance, 8, 30–31, 167Rolling breakout:sideways breakout compared with, 43–4530-week breakout, 41–45traditional rolling breakouts compared with,41Rolling calculation period, 108Rolling linear regression bands, 104Rounded bottoms, 161–162Rounded tops, 160–161Rumors, market response to, 16, 143Run days:usefulness of, 139–140when to use, 140–141Runaway gaps, 134S&P 500, 2–3, 25, 43–44, 80, 130, 143, 192,258–259, 270–271S&P futures, 26, 34, 271S&P Mutual Funds, 259Scaling down technique, 237–238Schultz A/T Index (SAT), 194Seasonal trends, 8, 21–22Secondary reactions, 268, 270–271Secondary stocks, 267Secondary swings, 264Secondary trends, 267–268Securities and Exchange Commission (SEC),168Sell-off, 142. See also Panic phase, in bearmarketSell orders, 39–40, 81, 127Sell signals:breakouts, 39, 41–42, 61–62channels, 92, 96high volatility, 250moving average convergence-divergence(MACD), 205, 209moving averages, 53–54, 125one-day patterns, 143point-and-figure, 114–115risk management and, 119smoothing and, 231using stochastics, 220, 222–224swing trading, 111using trendlines, 29–30Semilog chart, 246Short futures, selling, 86Short positions, 82, 120Short sales, 45, 151Short-term traders, 132, 146, 249
324
INDEX
Short-term trading, 78Short-term trends, 73Short trends, 21–22Sibbett’s Demand Index (DI), 193Side-by-side trading, 16Sideways breakout:implications of, 36–38, 46, 63rolling compared with, 43–45Sideways market, 2–3, 5, 133, 179, 219,222–223Signal line, 204, 219, 222Size of position:balanced portfolios, 253–254entry points strategies, 238volatility, influences on, 254–256Slippage, 81Slope values, 60%SlowD, 222%SlowK, 222Slow trading, 75Smart order entry, 16Smoothing:double-, 229–232exponential, 57–59, 66–67, 69, 74implications of, 217–218, 225South Sea Bubble, 130Soybeans, 168–171, 177Speculation, 156, 267, 269, 271Spike high, 134–135Spike low, 135Spikes:cautionary advice, 135–36implications of, 151–152types of, 134–135volume, 184–185, 191–192, 196, 231Spreadsheet applications, 6, 31–32, 41, 43, 51,70–71, 87, 216–218, 227, 255Spyders (SPY), 143, 259Squaring of price and time, 177Stochastic:buy signals, 222calculation of, 216–218charting, 218–219confusing signals, 219–220divergence signals, 223–226, 228–229fast, 221–222, 225raw, 216, 221, 223–224relative strength index compared with,227–228sell signals, 222slow, 222timing example, 222–223trading, 21920-day, 20-day momentum compared with,220–221
Stock exchanges, 80Stock investments:market entry, see Entry pointsmarket exit, see Exit strategyprofit and loss calculation, 84recordkeeping, 86–87returns on, 85size of position, 238, 253–256stock selection, see Stock selection factorsStock market crash, 75, 191–192, 270Stock market fluctuations, in Dow Theory, 262,264Stock options, 195Stock selection factors:confidence level, 10information reliability, 9–10pro forma, 10types of, 9volatility, 123StockTrak.com, 89Stop-loss order:benefits of, 40, 238closing price, 122–123fixed dollar, 120, 123initial placement of, 120–121raising, 121–122risk management strategy, 118–119,125–127volatility and, 123, 248–249STOP-MOC orders, 84, 117Stop orders (STOP), 8, 81, 83–84, 116, 118,125–126, 166Sum of the absolute price changes, in volatilitymeasurement, 244–245Supply and demand, 19, 154, 156Support and resistance, significance of, 37–39,43, 45–47, 105, 121–122, 152, 176–177, 211,231, 271Support level, 24, 139, 151, 239. See alsoSupport and resistanceSwing charting:benefits of, 108–109calculation of changes, 109–110swing trading rules, 111–112Swing points, 32Swings:charting, see Swing chartingdefined, 74highs, 31–33, 109–110, 229lows, 31–33, 109–110minimum value, 265Symmetric triangles, 145, 147, 149Systematic trader, characteristics of, 6, 15Systematic trading, 6–8. See also Technicaltrading
325
Index
Target volatility, 255Taxation, 86Technical trading, generally:benefits of, 8–9characteristics of, 5–6downside to, 8value and, 6–710-day breakout system, 4310-day moving average, 51, 75, 12410-day stochastic, 216–217Terrorist attacks, financial impact of, 4, 13,95–96, 189–191, 251, 25930-week rolling breakout system, 41–4534-day moving average, 185Thrust days, 139Time-driven trends, 107–108Time horizon, 30–32Time target, 175–176Timing, significance of, 15–16Tops:double, 155–157, 159head-and-shoulders pattern, 163–164implications of, 30–32island, 136profit target after, 159–160rounded, 160–161skewed head-and-shoulders, 164–165triple, 158–159“V,” 153–155wedge, 163Trade blotter, 86–88, 127TradeStation, 89, 114, 246Trading benefits, 4–5Trading frequency, 67–68, 69Trading process:futures trading, 84–85loss calculation, 84order placement, 82–84profit calculation, 84recordkeeping, 86–88returns, 85–86short sales, 86stock selection, 79–80, 87, 89tracking stock, 80, 89trading rules, 80–82Trading ranges, 46, 48, 142Trading styles, types of, 78, 166, 273Trading the equity curve, 241Transaction costs, 81Treasury notes, 80, 149Trend(s):analysis, 78calculations, see Trend calculationscharacteristics of, 69–70in charting, see Trendlinesin Dow Theory, 264
evolution, 32–33followers, 20reversal, 133speed, 72–76Trend calculations:breakouts, 61–63exponential smoothing, 57–59fast vs. slow trending methods, 75methodologies comparison, 63–70moving averages, 51–57, 66price history, 74–75profit factor, 63, 65, 66–67regression slopes, 59–61, 67trend speed, 72–76Trendlines:downward, 24–26, 32–33exponential smoothing, 58–59false break, 27importance of, 23, 25moving average, 52–53, 58–59, 119points, 25, 31–32purpose of, 34, 78redrawing, 25–26regression slope, 60stop–loss orders, 120–123time horizon impact, 30–31trend trading rules, 28–30upward, 24–26Triangles:ascending, 145–147descending, 145–147,149symmetric, 145, 147, 149TRIN, 194Triple bottom formation, 158Triple top formations, 158–159Trusts, 14320-day breakout system, 41, 62–6320-day moving average, 54–55, 58, 75, 97–98, 20120-day rolling breakout, 4120-day stochastic, 220–22120-week moving average, 52–54200-day moving average, 51–52, 101–102,119–120Tulipmania, 130Undervalued stock, 7, 214U.S. dollar, 19, 21U.S. Treasury bonds, 75, 86, 135–136. See alsoTreasury notesUpthrust day, 139Uptrends, implications of, 22–24, 27, 205, 220,222Upward breakout, 37–38, 117, 148Upward channel, 91Upward flags, 148Upward gap, 131
326
INDEX
Upward reversal day, 13