Market structure, Price Action, and Trading Strategies
Adam Grimes
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Book Details
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4.00 | ||
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Pages
| 3425 p | ||
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13,415 KB | ||
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PDF format | ||
ISBN
| 978-1-118-11512-1 (cloth) 978-1-118-22427-4 (ebk) 978-1-118-23814-1 (ebk) 978-1-118-26247-4 (ebk) |
||
Copyright©
| 2012 by Adam Grimes |
Adam Grimes has nearly two decades of experience in the
industry as a trader, analyst, and system developer. He
began his trading career with agricultural commodities, a
reflection of his roots in a Midwestern farming community, and traded
Chicago Mercantile Exchange (CME) listed
currency futures during the Asian financial crisis. Later,
he managed a successful private investment
partnership focused on shortterm trading of stock index
futures, and swing trading of other futures and options
products. He spent several years at the NYMEX, and has
held positions for a number of firms in roles such as
portfolio management, risk management, and quantitative
system development. Adam is the CIO of
Waverly Advisors, LLC, an asset management and
advisory firm specializing in tactical allocation and risk
management in liquid markets. Adam is an expert in
applying quantitative tools and methodology to market
data, particularly in modeling volatility and complex intramarket
relationships. In addition to his ongoing
research and trading, Adam is also a prolific writer and
educator. His personal website and blog
extends the work of this book with examples and
applications to live market data. He has been a
contributor on CNBC’s “FastMoney,” and his work
and research have been quoted in major media outlets
such as the Wall Street Journal, Investor’s Business
Daily, TheStreet.com, SmartMoney.com, SFO
Magazine, and many others.
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 trader’s 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 trader’s 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.
Last, there are three appendixes in this work.
The first appendix is a trading primer that will
be useful for developing traders or for managers
who do not have a familiarity with the
language used by traders. Like any
discipline, trading has its own idioms and lingo,
an understanding of which is important for effective
communication. The second expands on the
some specific details and quirks of moving
averages the MACD, which are used
extensively in other sections of this book.
The last appendix simply contains a list of trade
data used in the performance analysis of
Part Four. This book is written for two
distinct groups of traders. It is overtly addressed to the
individual, self-directed trader, either trading for his
or her own account or who has exclusive trading
authority over a number of client accounts. The selfdirected
trader will find many sections specifically
addressed to the struggles he or she faces, and to the errors
he or she is likely to make along the way. Rather than
focusing on arcane concepts and theories, this trader needs
to learn to properly read a chart, and most importantly,
to understand the emerging story of supply and demand
as it plays out through the patterns in the market.
Though this book is primarily written for that selfdirected
trader, there is also much information that will be
valuable to a second group of traders and managers who do
not approach markets from a technical perspective or who
make decisions within an institutional framework. For
these traders, some of the elements such as trader
psychology may appear, at first glance, to be less
relevant, but they provide a context for all market action.
These traders will also find new perspectives on risk
management, position sizing, and pattern analysis that may
be able to inform their work in different areas.
The material in this book is complex; repeated exposure
and rereading of certain sections will be an essential
part of the learning process for most traders. In addition,
the size of this book may be daunting to many readers.
Once again, the book is structured to be read and
absorbed from beginning to end. Themes and concepts are
developed and revisited, and repetition is used to reinforce
important ideas, but it may also be helpful to have a
condensed study plan for some readers. Considering
the two discrete target audiences, I would suggest
the following plans:
Both the individual and the institutional trader
should page through the entire book, reading
whatever catches their interest. Each chapter
has been made as selfcontained as possible,
while trying to keep redundancy to an absolute minimum.
After an initial quick read, the individual trader should carefully
read Chapters 1 and 2, which provide a
foundation for everything else. This
trader should probably next read Part Four
(Chapters 11 and 12) in depth, paying particular
attention to the elements of the trader
development process. Next, turn to Chapters 6
and 10, which focus on often-misunderstood
aspects of risk and position sizing. Two
important aspects of the book are missed on this
first read: in-depth analysis of market
structure and the use of confirming tools in
setting up and managing actual trades. These are
topics for deeper investigation once the
initial material has been assimilated.
For the institutional trader, Chapter 1 is also
a logical follow-up to a quick read. Next,
Chapter 2 would provide a good background and
motivation for the entire discipline of technical
analysis. Chapters 8 and
9 will likely be very interesting to this trader.
For managers who are used to thinking of risk
in a portfolio context, there are important
lessons to be learned from a tactical/technical
approach to position and risk management. Last,
many of these readers
will have an academic background. Chapters 2
through 5 would round out this trader's
understanding of evolving market structure.
Following both of these study plans, it is advisable to
then begin again from the beginning, or perhaps to turn
to the parts of the book not covered in these shorter plans
and pick up what you have missed. Intellectually, the
material can be assimilated fairly quickly, but flawless
application may remain elusive for some time.
Additional materials supporting this book,
including a blog updated with examples and trades drawn
from current market action, are available at my web site
and blog, www.adamhgrimes.com. The title of this book is The
Art and Science of Technical Analysis. Science deals
primarily with elements that are quantifiable and testable.
The process of teaching a science usually focuses on the development of a body of
knowledge, procedures, and approaches to data—the
precise investigation of what is known and knowable. Art
is often seen as more subjective and imprecise, but
this is not entirely correct. In reality, neither can exist
without the other. Science must deal with the
philosophical and epistemological issues of the
edges of knowledge, and scientific progress depends on
inductive leaps as much as logical steps. Art rests on a
foundation of tools and techniques that can and
should be scientifically quantified, but it also points
to another mode of knowing that stands somewhat apart
from the usual procedures of logic. The two depend on
each other: Science without Art is sterile; Art without
Science is soft and incomplete. Nowhere is this
truer than in the study of modern financial markets.
ADAM GRIMES
September 2011
New York, New York
Table of Contents
Series
Title Page
Copyright
Dedication
Preface
Acknowledgments
Part I: The
Foundation of
Technical
Analysis
Chapter 1: The
Trader’s Edge
DEFINING 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
WYCKOFF’S
MARKET CYCLE
THE FOUR
TRADES
SUMMARY
Part II: Market
Structure
Chapter 3: On Trends
THE
FUNDAMENTAL
PATTERN
TREND
STRUCTURE
A DEEPER
LOOK AT
PULLBACKS:
THE
QUINTESSENTIAL
TREND
TRADING
PATTERN
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: 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
AVERAGE—THE
STILL CENTER
CHANNELS:
EMOTIONAL
EXTREMES
INDICATORS:
MACD
MULTIPLE TIME
FRAME
ANALYSIS
CHAPTER 8: Trade
Management
PLACING THE
INITIAL STOP
SETTING PRICE
TARGETS
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: 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
Appendix A: Trading
Primer
THE SPREAD
TWO TYPES OF
ORDERS
CHARTS
Appendix B: A Deeper
Look at Moving
Averages and the
MACD
MOVING
AVERAGES
THE MACD
Appendix C: Sample
Trade Data
Glossary
Bibliography
About the Author
Index
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