06, 223, 225-227, 230-234,251, 252, 266. See also priceshocks.classes A, B, and C, 143-145triple bullish or bearish, 135, 145,185indicator seasons, 188-192, 237defined, 190leading and coincident, 120, 145, 148,162, 172oscillators, 120, 142-166, 199. Seealso Elder-ray, Momentum,Relative Strength Index,Stochastic, Williams %R.psychological, 120, 209-219. Seealso Consensus indicators andCommitment indicators.three major groups, 119-120, 142,235-236, 243trend-following, 120. See also theDirectional System; MACD;Moving averages, On-BalanceVolume.Inside information, 50, 52-54, 215-218.See also Theft.
Leaders of market trends, 23, 57-60, 63,195-200, 206. See also NewHigh-New Low Index.282
Managing others’ money, 25, 34, 55-56,67, 259track record, 14, 54, 117Market(s), 47-50international, 48, 51, 96, 206as an ocean, 38-39related, 96, 101, 112, 117source of money in the markets,49-50, 164uncertainty, 82-83Market analysis, 18-21, 65-68, 88. Seealso Trading.astrology and mysticism, 74-75common sense, 67-68Dow Theory, 69, 109, 236Efficient Market theory, 74-75forecasting, 18-21, 75, 91, 231. Seealso Prices, price targets.managing vs. forecasting, 66-67,125, 220fundamental analysis, 65, 187-188Random Walk theory, 74-75seasonality, 179technical analysis, 46-47, 50, 61,64-68art or science, 65-66the 5 percent rule, 164, 248and poll-taking, 47, 66, 236Market crowds, 56-60. See also Chartpatterns, crowd psychology;Indicators, ctowd psychology;Traders.changes in individualschildlike behavior, 13, 57-58, 60crowd behavior vs. individualbehavior, 48-49, 187reasons for joining crowds, 58-60mass maniasthe Dutch tulip mania, 17, 56-57,209the South Seas bubble, 17, 56-57,209
INDEX
mass psychology, 43-68, 187, 203,209laws of social psychology, 57-58,64-65optimism and pessimism, 56, 142,146, 201-203, 217, 249Mathematics for traders, 256-262. Seealso Money Management,Trading systems, optimization.innumeracy, 15, 256margin, 7minus-sum game, 6-7, 258negative expectation, 256-257, 259,261positive expectation, 256-257, 261probabilities, 254-258odds, 24, 256-258tisk of ruin, 260zero-sum game, 6-7Media, 20-21, 48, 60, 63, 197, 209,213-215advertisers, 214-215Barron’s, 21, 272Business Week, 213-214Futures, 117, 235, 237, 272Futures and Options World, 17, 272the impact of news, 95Technical Analysis of Stocks andCommodities, 117, 272The Wall Street Journal, 28, 70,214-215Momentum, 120, 142-151, 250. Seealso Indicators, oscillators;Overbought and oversold.Momentum indicator, 145-149crowd psychology, 146-148how to construct, 145-147trading rules, 148Rate of Change, 145-149crowd psychology, 146-148how to construct, 145-147trading rules, 148INDEX
Smoothed Rate of Change, 147-151crowd behavior, 150how to construct, 148-150trading rules, 150-151Money management, 14-16, 27, 42,59-60, 67, 145, 257-268, 270.See also Mathematics fortraders; Stop-Loss orders.businessman’s risk, 36-37drawdown, 14, 33, 261, 262Martingale systems, 261optimal f 262pyramiding, 225-226, 230-231, 243,261risk/reward ratio, 84the 2 percent rule, 36, 85, 260-261,267, 270the 6-8 percent rule, 260, 270Moving averages, 120-127, 137, 146,222, 227. See also Indicators,trend-following.simplea fatal flaw, 121-122, 146how to construct, 121market psychology, 122a mechanical system, 125-126exponential, 83, 122~129, 148, 172,200, 202-203, 220-226,228-234, 238, 248-253, 265how to construct, 123-124choosing the length, 123-125good and bad features, 127lagging by half-cycle, 127trading rules, 125weighted, 121, 127Moving Average Convergence-Divergence (MACD), 83. See
also Indicators, trend-following.
MACD-Histogram, 131-135,190-191, 237-241, 251, 265how to construct, 131market psychology, 131-132
283
trading rules, 132-135divergences, 133-135when to expect new highs or lows,
134, 250MACD Lines, 127-131
how to construct, 128-129optimization and cycles, 130-131“quick-and-dirty,” 131
market psychology, 128-129
trading rules, 129-130
New High-New Low Index, 194-200,205-206. See also Stock marketindicators.
crowd psychology, 195-197how to construct, 195trading rules, 197-200
On-Balance Volume, 172-175. See alsoIndicators, trend-following;Volume.
additional indicatorsClimax indicator, 174-175Net Field Trend indicator, 174-175crowd psychology, 173how to construct, 172trading rules, 173-174Open Interest, 178-187. See alsoHerrick Payoff Index.crowd psychology, 179-181measure of conflict, 179-181in currencies, 179trading rules, 181-182
Options, 80, 100, 117, 201, 251
Overbought and oversold, 142-143,153, 155-156, 160-161, 164,166, 203-205. See alsoIndicators.
Parabolic trading system, 244-247, 267,268. See also Trading systems.how to construct, 244-245284
trading psychology, 245trading rules, 245-247Plummer, Tony, 60, 63, 108, 265, 272Prices. See also Charts.deviations and normalcy, 142, 250strength and weakness, 80directional movement, 135-136meaning, 43-47, 61, 70-73, 222-224closing, 70-73, 156-158, 162-164consensus of value, 44-46, 131,248, 252high and low, 70-73, 83, 156-158,222, 253mean, 127, 178, 184-185moved by mass emotions, 61-65opening, 70-73price shocks, 63-64price targets, 93, 95, 99, 103,107-109, 111-112, 265-266.See also Channels.Fibonacci ratios, 109, 112, 192,265-266retracements, 192quote machine, 43, 46, 48, 52, 87, 201rallies and declines, 60-64, 170trends, 60-64, 167
Pring, Martin, 142, 189, 271
Psychiatry, 1-2, 3-4, 13, 25, 27-29,203, 249, 270, 272, 273
Psychological indicators. See Consensusindicators and Commitmentindicators.
Psychology of trading. See alsoAlcoholics Anonymous andtrading.
amateurs, 39, 47, 75, 85, 235, 258blaming others, 25-26overtrading, 53
discipline, 1, 14, 35, 41, 68, 243, 259and dieting, 2-3and trading limits, 53, 259. See also
Traders, institutional.emotional trading, 17, 27, 38-41, 47,
INDEX
53, 56-62, 66, 75-76, 83,169-171, 227, 254-256,259-260, 262elation, 24-25, 27-28, 33, 38-40,53, 58fear, 35, 38-39, 53, 56, 58-59,61-63, 70, 142, 181, 254-255,263-264, 269-270selling climax, 59greed, 15, 40, 50, 53, 59, 61-63, 70,142, 203, 254, 263-264hope, 56, 179-181, 255self-destructiveness, 12, 24-27fantasies of tradersthe autopilot myth, 15-16, 246the brain myth, 13-14the greater fool theory, 44, 225-226the rescue fantasy, 34the Rorschach test, 69, 113Santa Claus, 64, 116the undercapitalization myth, 14-15models of tradingas an addiction, 24, 33-34, 40, 257as a battle, 26, 47-50, 57, 72, 77, 82,111, 199, 207, 229, 249as entertainment, 3-4, 10, 11, 24, 28,39-40, 47, 51, 54, 254, 260, 261as gambling, 2425, 27, 33, 35, 40,51, 65, 208, 257, 261and masturbation, 24pain, 35, 76measured by volume, 169-171, 173reality and fantasy, 4, 12-17, 30, 47,75, 265. See also Maiketcrowds, mass manias, the DutchTulip mania, the South Seasbubble.psychology of losers, 13-17, 24,31-41, 53-54, 87, 169,179-181, 229, 245, 254-256,261, 263counting money, 263-264laziness, 15INDEX
psychology of winners, 6-7, 16, 27,31-42, 49, 58-60, 68differences between winners andlosers, 17, 24, 33-42, 55, 63-64,169, 182, 258goals, 12, 53, 254, 258, 264independence, 41, 49, 58-60signs of losing, 58intellect, 13-14, 23, 38, 40, 57, 229,254, 263Odysseus at the mast, 60responsibility, 54self-esteem, 35self-fulfillment, 11-12
Rectangles, 107-110. See also Charts.flag, 109-110line (Dow theory), 109trading rules, 109Relative Strength Index, 162-166,240-241. See also Indicators,oscillators.how to construct, 162-163mass psychology, 164trading rules, 164-166charting patterns, 165-166divergences, 164-166
Stochastic, 112, 156-162, 239-240, 251,265. See also Indicators, oscil-lators.
crowd psychology, 158
how to construct, 156-157Fast and Slow, 157
trading rules, 158-161divergences, 158-160overbought/oversold, 160-161
Stock market indicators, 18, 20. Seealso Advance/Decline Line,New High-New Low Index,Traders’ Index.
the Member Short Sale Ratio, 208,218
285
the Most Active Stocks, 207-208
the Odd-lot Sale Ratio, 219
the Odd-lot Short Sale Ratio, 208,219
the Specialist Short Sale Ratio, 208,218
the Volume of Low-Priced Stocks,208
Stop-loss orders, 80, 81, 85, 89, 93, 97,
102-107, 113, 133, 159, 180,225-226, 230-231, 244-247,266-267. See also Money man-agement.
break-even orders, 243, 267
the 50 percent rule, 243, 267-268
losses, cutting, 254-255, 260
protect-profit orders, 267-268
stop-and-reverse orders, 104-105. Seealso Parabolic trading system.
Support and resistance, 75-80, 100,
107-108, 127, 149, 247-248,266-267. See also Charts.
crowd psychology, 76-77
edges of congestion areas, 75—76
and indicators, 127, 149, 166
measuring, 78
trading rules, 78-79
Theft, 8-9, 50. See also Inside informa-tion.Time, 76, 78, 82, 90, 152, 156-157, 161,185, 187-193, 203, 244-245,267. See also Parabolic tradingsystem.the factor of five, 192-193, 236-237,266-267indicator length—rule of thumb,124-125, 152. See alsoIndicators.indicator seasons, 188-192, 237timeframes, 85-87, 90, 104, 146,235-237, 250how to define, 236-237286
Traders. See also Psychology of trading.amateurs and professionals, 3-5,24-25, 47, 72-73, 76, 79-80,87, 96, 101, 142, 167, 170, 176,243, 250, 254, 258, 262-264,265, 267, 271bulls and bears, hogs and sheep, 43buyers, sellers, and undecided, 45—47,179-181commercials, 179, 182-183futures and cash markets, 52engineers, 14, 47floor traders, 8-9, 64-65, 96, 100,109, 258. See also TradingIndustry.hedgers, large, and small speculators,216-217. See also Commitmentindicators, Commitments ofTraders index.institutional, 4, 19, 46, 52-53, 259men and women, 4private, 51, 53, 259professional, 12-13, 24, 36, 37, 39,41, 47, 51, 82-83, 85, 98, 120,167, 205, 254, 269-270, 272Traders’ Index (TRIN), 201-206. Seealso Stock market indicators.crowd psychology, 203~205how to construct, 201-203trading rules, 205-206Trading, 11,24approaches, 34, 59, 68buying opportunity, 81, 89-90, 93-95,114, 132-133, 143-145, 171,247decisions at the right edge of the chart,76, 81, 82-83, 84, 89, 94, 97,103, 106, 108, 149, 154, 159,165, 180, 189, 204, 223, 233,240entering trades, 27, 56, 58, 60,111-113, 126, 239, 241-243
INDEX
exiting trades, 27, 56, 58, 60, 141,226-227, 230-232, 263-268learning to trade, 5—6, 42, 51, 54. Seealso Financial TradingSeminars, Inc.plan, 12, 14-15, 24, 28, 42, 56, 58, 60,64. See also Trading systems.profitability, 112, 117, 235, 259-260record-keeping, 34, 36-37and a trading diary, 27-28, 60,268risk, 11, 24, 33, 36-37, 262tules, 42, 78-79, 93, 99-100,104-105, 109, 112-113, 125,129-130, 132-135, 139-141,148, 150, 153-155, 158-161,164-166, 171-172, 173-174,176-177, 181-182, 185-187,190, 197-200, 205-206,224-226, 229-234, 241,245-247, 250-251strength and weakness, 80shorting opportunity, 84, 90, 92-94,97, 102, 103, 114, 132-133,143-145, 172, 247uncertainty, 58, 86, 103whipsaws, 123, 125, 129-130, 141,192, 236, 244-247, 267Trading industry, 6-7, 258advisors, 6, 10, 13, 16-23, 34, 53-55,67, 161, 209-213. See alsoConsensus indicators, ContraryOpinion theory; Gurus.newsletters, 54-55, 209-213Bullish Review, 217Club 3000, 116, 133, 135Investors’ Intelligence, 210-211Market Vane, 210-213software developers, 117-118,161-162brokers, 6-10, 48, 49, 51, 56, 216commissions and slippage, 6-10, 28,INDEX
36, 48, 52, 70-73, 85, 112, 169,182, 257-258, 260, 267floor traders, 8-10, 48-49, 65, 87,96, 101exchanges, 6-7, 25, 51, 87, 179, 200,206, 218American Stock Exchange, 200Chicago Mercantile Exchange, 96London Stock Exchange, 167,200Milan Stock Exchange, 200New York Stock Exchange, 48, 70,167, 195, 200, 201, 207, 208,215Over the Counter Exchange, 200trading contests, 55-56Wall Street, 20, 43, 58, 171, 218Trading systems, 10, 15-17, 27, 34,59-60, 117, 125, 257, 259-260,266-267, 270. See alsoChannel, channel trading sys-tems; Parabolic trading system;Triple Screen trading system.automatic, 15-16, 101, 125-126,161-162, 270optimization, 15, 117, 124, 130, 257and de-optimization, 257Trends and trading ranges, 80-95,98-100, 102, 105, 109-113,126, 156, 159-160, 170, 199,203, 249, 265. See also Charts.how to identify, 83accelerating trends, 91-92, 145differences in trading tactics, 80mass psychology, 81trading rules, 84-85Trendlines, 19, 83-84, 86-95, 102,165-166. See also Chart pat-terns.crowd psychology, 90-91how to plot, 88-89accelerating, 92
287
angles, 89-90breaks, 91-93preliminary, 94-95tating the importance, 89-91of volume and indicators, 95, 148,166, 172. See also HerrickPayoff Index; Relative StrengthIndex.trading rules, 93Triangles, 110-113. See also Charts.trading rules, 112-113typesascending, 110-111descending, 110-111diamonds, 113pennants, 113symmetrical, 110-111, 113widening, 113Triple Screen trading system, 86-87,120, 133, 160-161, 193, 224,232, 235-243, 246, 267. Seealso Trading systems.first screen, 237-239second screen, 239-241third screen, 241-243trailing buy-stop and sell-stop, 231,241-243
Volatility, 100, 113, 236, 248, 251-253.See also Channels, Bollingerbands.
Volume, 18, 20, 76, 95, 127, 167-178,201-203, 208, 227-229. Seealso Volume-based indicators.
and chart patterns, 80, 88, 91, 98-100,
102-107, 109, 111-113
crowd psychology, 167, 169-171reflection of pain, 169-171, 173
and a moving average, 172
three ways of measuring, 167-168tick volume, 168
trading rules, 171-172288
Volume Accumulator. SeeAccumulation/Distribution.
Volume-based indicators. See On-Balance Volume,Accumulation/Distribution. Seealso Indictors, trend-following.
Williams %R, 151-156, 239-240. Seealso Indicators, oscillators.
INDEX
crowd psychology, 152-153
how to construct, 151-153
trading rules, 153-155divergences, 153-155failure swings, 155overbought/oversold, 153, 155-156About the Author
Alexander Elder, M.D., was born in Leningrad and grew up inEstonia where he entered medical school at the age of 16. At 23,while working as a ship’s doctor, he jumped a Soviet ship in Africaand received political asylum in the United States. He continued towork as a psychiatrist in New York City, served as the book editor ofThe Psychiatric Times, and taught at Columbia University. Afterbecoming involved in financial trading, Dr. Elder published dozens ofarticles