The Art and

Science of
Technical
Analysis
Market Structure, Price Action,
and Trading Strategies

ADAM GRIMES

WILEY
John Wiley & Sons, Inc.

Contents

PART I

Preface

xi

Acknowledgments

xv

The Foundation of Technical Analysis

CHAPTER 1 The Trader's Edge

Denning a Trading Edge
Finding and Developing Your Edge
General Principles of Chart Reading
Indicators
The Two Forces: Toward a New Understanding
of Market Action
Price Action and Market Structure on Charts
Charting by Hand

CHAPTER 2 The Market Cycle and the Four Trades

Wyckoffs Market Cycle
The Four Trades
Summary

PART 11

3
4
7
8
12
13
15
28

31
32
40
45

Market Structure

CHAPTER 3 On Trends
The Fundamental Pattern
Trend Structure
A Deeper Look at Pullbacks: The Quintessential Trend
Trading Pattern

49
49
51
65

vii

viii

CONTENTS

Trend Analysis
Summary

CHAPTER 4 On Trading Ranges

Support and Resistance
Trading Ranges as Functional Structures
Summary

CHAPTER 5 Interfaces between Trends and Ranges

Breakout Trade: Trading Range to Trend
Trend to Trading Range
Trend to Opposite Trend (Trend Reversal)
Trend to Same Trend (Failure of Trend Reversal)
Summary

PART III

77
95
97
97
113
120
121
122
134
137
143
145

Trading Strategies

CHAPTER 6 Practical Trading Templates

Failure Test
Pullback, Buying Support or Shorting Resistance
Pullback, Entering Lower Time Frame Breakout
Trading Complex Pullbacks
The Anti
Breakouts, Entering in the Preceding Base
Breakouts, Entering on First Pullback Following
Failed Breakouts
Summary

CHAPTER 7 Tools for Confirmation

The Moving AverageThe Still Center
Channels: Emotional Extremes
Indicators: MACD
Multiple Time Frame Analysis

149
150
154
162
165
170
174
181
183
186
189
190
195
202
213

CHAPTER 8 Trade Management

231

Placing the Initial Stop

Setting Price Targets

232
235

ix

Contents

Active Management
Portfolio Considerations
Practical Issues

CHAPTER 9

Risk Management
Risk and Position Sizing
Theoretical Perspectives on Risk
Misunderstood Risk
Practical Risks in Trading
Summary

CHAPTER 10 Trade Examples

Trend Continuation
Trend Termination
Failure Test Failures
Trading Parabolic Climaxes
The Anti
Trading at Support and Resistance
Summary

PART IV

240
251
253
263

263
279
282
283
290
291
293
313
319
323
327
336
343

The Individual, Self-Directed Trader

CHAPTER 11 The Trader's Mind

Psychological Challenges of the Marketplace
Evolutionary Adaptations

Cognitive Biases
The Random Reinforcement Problem
Emotions: The Enemy Within
Intuition
Flow
Practical Psychology
Summary

CHAPTER 12 Becoming a Trader

The Process
Record Keeping
Statistical Analysis of Trading Results
Summary

347

348
349
353
356
357
360
364
367
372
375

376
385
388
397

CONTENTS

APPENDIX A Trading Primer

399

APPENDIX B A Deeper Look at Moving Averages

and the MACD

409

APPENDIX C Sample Trade Data

425

Glossary

427

Bibliography

443

About the Author

447

Index

449