Adam Grimes - The Art and Science of Technical Analysis: Market Structure, Price Action, and Trading Strategies

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Copyright 2012 by Adam Grimes. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Grimes, Adam, 1973
The art and science of technical analysis : market structure, price action, and trading strategies Adam Grimes.
pages cm. (Wiley trading series ; 544)
Includes bibliographical references and index.
ISBN 978-1-118-11512-1 (cloth); ISBN 978-1-118-22427-4 (ebk);
ISBN 978-1-118-23814-1 (ebk); ISBN 978-1-118-26247-4 (ebk)
1. Investment analysis. I. Title.
HG4529.G75 2012
332.632042dc23
2012000874

To my wife Betsy. Without her unfailing love and support I could have accomplished nothing.

Preface

The book you are holding in your hands is the product of nearly two decades of my study and experience as a trader, covering the full span of actively traded markets and time frames. I owe much to authors and traders who have come before me, for no one produces anything significant in a vacuum. I would not have been successful without the help and guidance of my mentors, but I learned many of the lessons here from my own mistakes. In some ways, this work represents a radical break from many of the books that have preceded it, and I hope it encourages you to question much of the traditional thinking of technical analysis.

This book does not present a rigid system to be strictly followed, nor a set of setups and patterns that can be assembled at the traders whim. Rather, it offers a comprehensive approach to the problems of technically motivated, directional trading. The book is structured to be read from beginning to end, but individual sections and chapters stand on their own. Through the entire work, deliberate repetition of important concepts helps to build a complete perspective on many of the problems traders face. The tools and techniques must be adapted to the traders personality and business situation, but most will find a firm foundation between these covers.

There are some underlying themes, perhaps not expressed explicitly, that tie this work together, and they may be surprising to many readers: Trading is hard. Markets are extremely competitive. They are usually very close to efficient, and most observed price movements are random. It is therefore exceedingly difficult to derive a method that makes superior risk-adjusted profits , and it is even more difficult to successfully apply such a method in actual trading. Last, it is essential to have a verifiable edge in the markets otherwise no consistent profits are possible. This approach sets this work apart from the majority of trading books published, which suggest that simple patterns and proper psychology can lead a trader to impressive profits. Perhaps this is possible, but I have never seen it work in actual practice.

This book is divided into four parts:

• Part One begins with a look at some of the probability theory supporting the concepts of successful trading. Next comes an in-depth look at a specific approach to chart reading that focuses on clarity and consistency lays the foundation for building and understanding of price patterns in markets. This section concludes with an overview of the Wyckoff market cycle, which is already well known in the literature of technical analysis.
• Part Two focuses on the details of trends, trading ranges, and critically, the transitions from one to the other in considerable detail. This is a deep look at the underlying foundation of price movements, and there is information here that, to my knowledge, has never appeared in print before.
• Part Three might appear, at first glance, to be the meat of this book, as it includes specific trading patterns and examples of those patterns applied to real markets. It also advocates a way of looking at indicators and other confirming factors that requires a deep understanding of the nuances of these tools. One of the key elements of any trading plan is how the trader sizes the trade and manages the position as it develops; these elements are also covered in considerable depth. Much attention is devoted to the many risks traders will encounter, both from the market and from themselves. Though most traders are going to be tempted to turn directly to this section, remember that these patterns are only the tip of the spear, and they are meaningless unless they are placed within the context provided by Parts One and Two.
• Part Four is specifically written for the individual trader, and begins by focusing on elements of psychology such as cognitive biases and issues of emotional control. Chapter 11 takes a look at many of the challenges developing traders typically face. Though it is impossible to reduce the trader development process to a one-size-fits-all formula, the majority of traders struggle with the same issues. Most traders fail because they do not realize that the process of becoming a trader is a long one, and they are not prepared to make the commitment. This section concludes with a look at some performance analysis tools that can help both the developing and the established trader to track key performance metrics and to target problems before they have a serious impact on the bottom line.