Click here to Download Technical Analysis For Dummies PDF Book by Barbara Rockefeller having PDF Size11.8 MB and No of Pages364.
I want you to grasp the mindset of the technical trader or investor: To think independently, to take responsibility for actions, and most of all, to act on observation rather than conventional wisdom. Try to leave your preconceptions about trading and investing behind. For example, a core technical concept is that the technical trader cuts losses and lets the winning trades run. Chances are you think that, after taking a loss, you should continue to hold the security, because if it’s a true value investment, it’ll come back.
Technical Analysis For Dummies PDF Book by Barbara Rockefeller
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But try to think like a 10-year-old as you read this book. In fact, go find a 10-year-old, if you have one handy, and ask him, “Which is better to hang on to: a thing that has already let you down (losses) or a different thing that’s delivering exactly what you wanted (profits)?” See? Technical analysis is subversive that way. Beating the system is fun and rewarding.
The market doesn’t know you, your age, gender, ethnicity, good looks or lack of them, singing talent, or anything else about you except whether you’re a successful trader. The market is blind. In fact, the market is indifferent. It’s the one place you can go to be judged solely on your merits. Use this book to help you find your way.
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Creating a chart like the one in Figure 1-1 is easy. To illustrate classic trend behavior, I could’ve taken any security out of thousands in my database and found some period of time over which the security’s price looked like this chart. However, I could have also found many time periods when this same security was not trending.
In fact, some securities are frequently in a trending mode, others seldom trend, or their trends are short lived. To complicate matters, some securities exhibit a “habit” of tidy trending while others trend in a sloppy way (with high variability around the average). Charles Dow may have started the ball rolling in technical analysis over 100 years ago, but in the grand scheme of things, we’re still in frontier days.
Ask a group of technical traders, “What percentage of time are securities trending and what percentage of the time are they nontrending?” and you will get a different answer from each person. Each technical analyst has a different idea about the percentage of time securities are trending based on his own personal definition of trendedness and the time frame he looks at. Technical Analysis For Dummies PDF Book
Prices seldom move in one direction for long. Even a major trend exhibits retracements. When the market runs out of cash, traders have to close positions to get their cash back so they can put on new trades. If they’ve been buyers, they need to sell. If they’ve been sellers (shorting the security), they need to buy.
Therefore, at the extreme outside limit of a price move, you should expect a temporary, minor reversal of the previous price move. In an uptrend, a retracement is always a drop in price. In a downtrend, a retracement is always a rise in price. Position squaring generally causes a price move in the opposite direction of the trend. Retracements can get out of hand and transform themselves into trend reversals, too.
At the time a retracement starts, you don’t know for sure that it is a retracement. For all you know, it could be a full reversal, with the price switching directions. In this situation, you do well to check the fundamentals — the news and events pertaining to the security. An ordinary retracement caused by normal position squaring can suddenly turn into a full-fledged rout in the opposite direction if fresh news comes out that seems to support a reversal. Technical Analysis For Dummies PDF Book
But also remember that sometimes big traders try to trick you into thinking they have interpreted fresh news in a particular way, when all they’re trying to do is push a retracement farther so that they can stampede you into a trading action that is to their benefit. The price bar tells you the outcome of the battle between the buyers (bulls) and the sellers (bears).
Hidden in every price bar are a winning group and a losing group. If the price opened at the low and closed at the high, the winners that day were the buyers. If the price opened at the high and closed at the low, the winners that day were the sellers. You almost always have to take into consideration the price action embedded in the bar the day before in order to make the winner-loser judgment.
For example, you can have an opening gap down from the day before that still delivers a close at the high of the new bar — but that close at the high is still lower than the close the day before. Who is the winner on this day? Well, anyone who bought at today’s low (not the poor guy who had bought the previous day). But back to the single bar. Technical Analysis For Dummies PDF Book
Each bar reflects a very real contest — and you measure the outcome in money. If the bar is very tall, encompassing a $10 range when the normal bar for this security is only $3, the trading was a Titanic battle. If the bar is very short, say $1, it was a pillow fight. On every single trade, one party wins and the other party loses. That is why trading — like war — is called a zero sum game.
The relationship between prices and volume is important in judging the bar. Volume is the number of shares or contracts traded during the period that your bar encompasses. Everything that you infer about the state of mind of the market participants is subject to confirmation by volume. For example, if the price bar is three times the usual size.
You would want to verify that a large number of traders were active that day by looking at volume. It would be wrong to see a trading battle if only one trade was done at the $10 high. In that case, the $10 price is an anomaly. Somebody made a mistake — either the buyer at $10 or the data collection department at the exchange. Technical Analysis For Dummies PDF Book Download
That’s why gaps are such a valuable pattern — you know instantly how the market is interpreting the news. The reason to read bars is to get an accurate assessment of whether news is big or merely ordinary. Some news is easy to interpret. News will start a new uptrend if it’s wildly favorable or halt an uptrend dead in its tracks if it’s wildly unfavorable.
But much of the time, you don’t know how to interpret news — and there is so much news! — until you see how the market treats it in the form of the bar on the chart. Traders often get the bit between their teeth on news and this is especially clear with gaps. Consider how a gap develops. Say that Blue Widget stock closes on Monday at $15 per share.
After the closing bell, it announces bad news — the bookkeeper embezzled several million dollars and ran off to Rio. (You’ve probably noticed how companies always wait, if they can, until after the market closes to deliver bad news. Presumably they hope that what looks just awful at 5 p.m. won’t look so bad the next morning.) However, in this case, the market is unforgiving and the next day. Technical Analysis For Dummies PDF Book Download
Blue Widget opens gap down at $10. Most people deduce that the opening gap down implies further price drops, and they proceed to sell — in droves. The total gap for the day may not be $5, though. During the course of the day, Blue Widget may trade as high as $12, making the net gap a $3 gap.
If the price of Blue Widget normally trades in a $2 high-low range, $3 is still a significant number — 50 percent higher than normal. Gaps are significant when they’re proportionally large compared to the trading range (see the “Kicking things off: Breakaway gaps” section in this chapter.
The stochastic oscillator became fabulously popular in the 1990s as technology permitted the spread of swing trading to the general public. “Trade like the professionals!” was the sales pitch, and an accurate one, too, in the sense that professionals are heartless about not holding a security that isn’t performing. The fad for this indicator, however, resulted in some technical writers making exaggerated claims for it. Technical Analysis For Dummies PDF Book Download
The stochastic oscillator has some serious drawbacks, such as having almost no trend identification capability and often signaling a premature exit. Do not use the stochastic oscillator in a strongly trending market. When your security exhibits an abnormally long period of trendedness, you can get jumpy wondering how long it will last.
However, this type of situation is when the stochastic oscillator isn’t useful and can be downright dangerous. See Figure 13-6. The stochastic oscillator rises up from the oversold level in the oval and a little later the price rises over the hand-drawn resistance line. Surely this is a buy signal! But the price turns around after only a few days and puts in a lower low.
If you’re a very short-term trader, you may have been able to eke out a small gain from the buy signal, but not from this instance of the stochastic oscillator alone. You can backtest a variety of box sizes and reversal amounts to arrive at the best numbers to use for any particular security. Technical Analysis For Dummies PDF Book Free
As a general rule, though, point-and-figure chartists recommend sticking to the three-box rule for reversals and adopting different box sizes for chart entries, depending on the absolute level of the prices. A box size of $4, the appropriate box for a security selling over $200, with a three-box reversal, works out to $12.
If you have 100 shares, you would exit on a reversal of at least $1,200, which is a fairly hefty sum of money. If you use the three-box reversal as a stop level (see Chapter 5 for stops), you have to accept that big of a loss when the price goes against you. If you judge that $1,200 is too big a loss to take on a single position, you can trade a smaller number of shares (an odd-lot) or trade a cheaper security.
You can trade this chart any number of equally valid ways, depending on your appetite for risk. You can say to yourself, for example, that the first indicator (three higher highs with three higher lows plus break of resistance) gives you a 25 percent expectancy that the price is going to rise farther. The gap gives you another 25 percent. The cross of the 20-day moving averages gives you a further 25 percent. Technical Analysis For Dummies PDF Book Free
You now assign a 75 percent probability of a further price rise — in fact, a full-blown trend. By the time you get to the fourth confirming indicator, you’re 100 percent convinced. Where does the 25 percent come from? You determine it — from experience, from backtesting, and from reading other traders’ work. Go back and look at the history of gaps in this security.
If you’re trading a security that has gaps only once a year or so and every time the move continued in the same direction, you’re safe in giving it a pro-entry value. On the other hand, you may be looking at a security that gaps a lot without delivering the expected move in the direction of the gap. In that case, be sensible — don’t assign the gap any weight toward the trade.
Having just poured cold water on the idea of building a system, why include this chapter at all? Two reasons. First, building a system forces you to examine indicator effectiveness and reliability in a strict and fact-based way. It also opens the door to refining your money-management rules, which often yields as much or more profit than replacing indicators or adjusting indicator parameters. Technical Analysis For Dummies PDF Book Free
Second, the process is a scientific one. You create a hypothesis, you test it, and you get results that can be evaluated to refine the hypothesis for another round of tests. The scientific process is disciplined. If you aren’t scientifically trained or oriented, having a system is invaluable to help you discard sloppy thinking, unwarranted assumptions, and general bias.