Essentials of Technical Analysis for Financial Markets

Comprehensive, accessible guide to technical analysis and market trading strategies

Essentials of Technical Analysis for Financial Markets is an all-encompassing handbook on navigating the financial markets successfully using technical analysis. Clearly written, easy-to-understand, and straightforward, this guide focuses on the key information needed by traders and investors to take on any financial market effectively.

• Easy-to-use, at-your-fingertips information on using technical analysis to trade all major financial markets
• Explains how to navigate the markets successfully, including the top techniques for entries, exits, and risk management
• Straightforward descriptions of proven technical trading methods and strategies
• Filled with technical analysis insights, charts, and examples

With financial markets in "roller coaster" mode, technical analysis offers a unique advantage for managing risk and finding high-probability trading opportunities. Packed with insightful tips and guidance, Essentials of Technical Analysis for Financial Markets provides proven trading strategies from one of today's top technical strategists.

Preface xiii

Acknowledgments xvii

1 Introduction to Technical Analysis: Pursuing Profit in the Financial Markets 1

What Is Technical Analysis? 2

Technical versus Fundamental 2

Methods 5

What to Expect 5

Summary 9

2 The Story of Technical Analysis: From the Japanese Rice Markets to Dow Theory to Automated Trading 11

The Beginning: Japanese Rice Markets 12

Dow Theory 14

Charting 17

Elliott Wave 18

W. D. Gann 20

Indicators 20

Trend Followers 22

Market Technicians Association 23

Technical Analysis Today 23

Summary 24

3 The Power of Technical Analysis: Principles of Price Action 27

Introduction to Price Action Concepts 28

Components of Price Action 29

Summary 32

4 The Basics of Technical Analysis: Bars, Candlesticks, Lines, and Point and Figure 33

Bars and Candlesticks 34

Line Charts 37

Point-and-Figure Charts 38

Summary 40

5 The Heart of Technical Analysis: Uptrends and Downtrends 41

Introduction to Trend 42

Effect of Time Frames on Trend Determination 50

Parallel Trend Channels 52

Trend Lines 54

Summary 55

6 The Soul of Technical Analysis: Support and Resistance 57

Introduction to Support and Resistance 58

Support Becomes Resistance Becomes Support 60

Summary 64

7 Primary Drawing Tools: Trend Lines, Trend Channels, and Horizontal Support and Resistance 65

Introduction to Drawing Tools 66

Static Support and Resistance 67

Dynamic Support and Resistance 72

Horizontal Support and Resistance Lines 78

Trend Lines 81

Parallel Trend Channels 87

Summary 89

8 Chart Patterns: Bar Shapes and Candlestick Formations 91

Introduction to Chart Patterns 91

Continuation Bar Patterns 93

Reversal Bar Patterns 102

Gaps 106

Candlestick Patterns 110

Single-Candle Patterns 111

Multiple-Candle Patterns 116

Summary 118

9 The World of Moving Averages 119

Introduction to Moving Averages 119

Moving Average Crossovers 123

Moving Averages as Support and Resistance 131

Summary 134

10 Key Technical Indicators and Oscillators 135

Introduction to Indicators and Oscillators 135

Key Indicators 139

Key Oscillators 148

Summary 159

11 Fibonacci and Elliott Wave 161

Fibonacci Theory and Methods 161

Elliott Wave Theory 170

Summary 175

12 Point-and-Figure Charting 177

Introduction to Point and Figure 177

Point-and-Figure Patterns 181

Point-and-Figure Price Targets 188

Summary 190

13 Volume 193

Introduction to Volume 193

On-Balance Volume 196

Tick Volume 198

Summary 199

14 Technical Trading Strategies: Practical Applications 201

Introduction to Technical Trading Strategies 202

Moving Average Crossovers 203

Breakout Trading 212

Trend Trading 224

Range Trading 238

Price-Oscillator Divergences 244

Oscillator Trading 249

Fibonacci Trading 254

Positive Expectancy 256

Summary 258

15 Risk Control and Money Management 261

Introduction to Risk Control and

Money Management 262

Stop-Losses 263

Reward:Risk Ratio 266

Maximum Allowable Loss 269

Multiple Fractional Positions 271

Diversification 273

Summary 273

Index 277

JAMES CHEN, CTA, CMT, is Chief Technical Strategist at FX Solutions, a global leader in foreign exchange trading. An expert on technical analysis and financial market trading, he is also a registered Commodity Trading Advisor (CTA) and a Chartered Market Technician (CMT). Mr. Chen contributes daily and intraday technical analysis to key financial media, is a frequent speaker at trading seminars, and has authored numerous articles on trading strategies and technical analysis in major financial publications. His previous book, Essentials of Foreign Exchange Trading (Wiley), has become an industry-standard guide for currency traders. Praise for Essentials of Technical Analysis for Financial Markets

"A serious, workmanlike book, a terrific introduction to technical analysis. Chen offers beginners a clear sample of methods and techniques from which a reader may choose in what to specialize."
—Dr. Alexander Elder, www.SpikeTrade.com, author of Trading for a Living

"Wiley's Essentials Series promises need-to-have fundamentals for professionals. With James Chen's new book, it now delivers some need-to-have technicals as well."
—Robert Prechter, Jr., founder/President of Elliott Wave International, Publisher of The Elliott Wave Theorist

"Trend trading technical analysis is the most important lesson for all investors and Essentials of Technical Analysis for Financial Markets is a great start. If you choose to ignore technical analysis, I guarantee a lifetime of very difficult money-making."
—Michael Covel, author of Trend Following and The Complete TurtleTrader

Think of this as financial market technical analysis 101

A valuable resource for traders at all skill levels, Essentials of Technical Analysis for Financial Markets equips you with the knowledge you need to analyze any major financial market.

This accessible guide to the art and science of technical analysis points you to a wealth of essential methods for identifying potentially high-probability trading opportunities. Focusing on the key information you'll need as a trader or investor, author and leading technical strategist James Chen helps you take on any financial market effectively, manage risk, and target profitability.

Take a look inside this indispensable book for world-class guidance on:

• How you can pursue profit in the financial markets using technical analysis

• Principles of price action analysis and trading

• Charts—including bars, candlesticks, and point and figure

• The key concept of trend

• Support and resistance

• Making the most of financial drawing tools, chart patterns, indicators, and other essential elements of technical analysis

• Top technical trading strategies, risk control techniques, and money management concepts

Need the ultimate quick-start guide to technical analysis in the financial markets? Essentials of Technical Analysis for Financial Markets explains it all in a way that helps you hit the ground running and take your financial destiny into your own hands.

• Discover how technical analysis can dramatically improve your potential for success in trading and investing
• Understand the essential tools and methods of technical analysis to trade in any major financial market, including stocks, bonds, futures, and forex
• Explore the specific strategies technical traders use to make trading decisions and stack the odds in their own favor