Preface xv Chapter 1 Introduction 1 The Expanding Role of Technical Analysis 1 Convergence of Trading Styles in Stocks and Futures 3 Professional and Amateur 5 Random Walk 6 Deciding on a Trading Style 7 Measuring Noise 9 Maturing Markets and Globalization 12 Background Material 14 System Development Guidelines 15 Objectives of This Book 16 Profile of a Trading System 17 A Word about the Notation Used in This Book 20 A Final Comment 20 Chapter 2 Basic Concepts and Calculations 21 A Brief Word About Data 22 Simple Measures of Error 23 On Average 24 Price Distribution 28 Moments of the Distribution: Mean, Variance, Skewness, and Kurtosis 32 Choosing Between Frequency Distribution and Standard Deviation 37 Measuring Similarity 38 Standardizing Risk and Return 40 The Index 45 An Overview of Probability 50 Supply and Demand 56 Chapter 3 Charting 67 Finding Consistent Patterns 68 What Causes the Major Price Moves and Trends? 70 The Bar Chart and Its Interpretation by Charles Dow 71 Chart Formations 80 Trendlines 81 One-Day Patterns 89 Continuation Patterns 101 Basic Concepts in Chart Trading 105 Accumulation and Distribution: Bottoms and Tops 106 Episodic Patterns 118 Price Objectives for Bar Charting 119 Implied Strategies in Candlestick Charts 126 Practical Use of the Bar Chart 131 Evolution in Price Patterns 134 Chapter 4 Charting Systems 137 Dunnigan and the Thrust Method 138 Nofri''s Congestion-Phase System 141 Outside Days and Inside Days 143 Pivot Points 145 Action and Reaction 146 Programming the Channel Breakout 153 Moving Channels 155 Commodity Channel Index 156 Wyckoff''s Combined Techniques 157 Complex Patterns 158 Computer Recognition of Chart Patterns 160 Chapter 5 Event-Driven Trends 167 Swing Trading 167 Point-and-Figure Charting 176 The N -Day Breakout 195 Chapter 6 Regression Analysis 207 Components of a Time Series 207 Characteristics of the Price Data 208 Linear Regression 210 Linear Correlation 218 Nonlinear Approximations for Two Variables 222 Transforming Nonlinear to Linear 225 Multivariate Approximations 228 ARIMA 233 Basic Trading Signals Using a Linear Regression Model 238 Measuring Market Strength 241 Chapter 7 Time-Based Trend Calculations 243 Forecasting and Following 244 Price Change over Time 247 The Moving Average 248 The Moving Median 255 Geometric Moving Average 255 Accumulative Average 256 Drop-off Effect 256 Exponential Smoothing 257 Plotting Lags and Leads 267 Chapter 8 Trend Systems 269 Why Trend Systems Work 269 Basic Buy and Sell Signals 274 Bands and Channels 280 Choosing the Calculation Period for the Trend 290 A Few Classic Single-Trend Systems 291 Comparison of Single-Trend Systems 295 Techniques Using Two Trendlines 307 Three Trends 314 Comprehensive Studies 318 Selecting the Trend Speed to Fit the Problem 318 Moving Average Sequences: Signal Progression 319 Early Exits from a Trend 322 Projecting Moving Average Crossovers 323 Early Identification of a Trend Change 323 Chapter 9 Momentum and Oscillators 325 Momentum 326 Adding Volume to Momentum 339 Divergence Index 342 Visualizing Momentum 343 Oscillators 345 Double-Smoothed Momentum 364 Velocity and Acceleration 369 Hybrid Momentum Techniques 375 Momentum Divergence 377 Some Final Comments on Momentum 385 Chapter 10 Seasonality and Calendar Patterns 387 Seasonality Never Disappears 388 The Seasonal Pattern 389 Popular Methods for Calculating Seasonality 390 Classic Methods for Finding Seasonality 408 Weather Sensitivity 420 Identifying Seasonal Trades 422 Seasonality and the Stock Market 439 Common Sense and Seasonality 449 Chapter 11 Cycle Analysis 451 Cycle Basics 451 Uncovering the Cycle 465 Maximum Entropy 481 Short Cycle Indicator 489 Phasing 491 Chapter 12 Volume, Open Interest, and Breadth 495 Futures Volume and Open Interest 496 Extended Hours and 24-Hour Trading 497 Variations from the Normal Patterns 498 Standard Interpretation 502 Volume Indicators 506 Breadth Indicators 518 Is One Volume or Breadth Indicator Better than Another? 524 More Trading Methods Using Volume and Breadth 525 An Integrated Probability Model 533 Intraday Volume Patterns 534 Filtering Low Volume 537 Market Facilitation Index 538 Chapter 13 Spreads and Arbitrage 541 Dynamics of Futures Intramarket Spreads 542 Carrying Charges 543 Spreads in Stocks 546 Spread and Arbitrage Relationships 547 Risk Reduction in Spreads 548 Arbitrage 549 The Carry Trade 580 Implied Versus Historic Volatility 584 Changing Spread Relationships 589 Intermarket Spreads 591 Chapter 14 Behavioral Techniques 607 Measuring the News 608 Event Trading 614 Commitment of Traders Report 627 Opinion and Contrary Opinion 635 Fibonacci and Human Behavior 642 Elliott''s Wave Principle 646 Price Target Constructions Using the Fibonacci Ratio 656 Fischer''s Golden Section Compass System 657 W. D. Gann: Time and Space 662 Financial Astrology 668 Chapter 15 Short-Term Patterns 683 Projecting Daily Highs and Lows 684 Time of Day 686 Opening Gaps 699 Weekday, Weekend, and Reversal Patterns 707 Computer-Based Pattern Recognition 729 Artificial Intelligence Methods 732 Chapter 16 Day Trading 735 Impact of Transaction Costs 736 Slippage and Liquidity 738 Key Elements of Day Trading 741 Trading Using Price Patterns 748 Intraday Breakout Systems 752 High-Frequency Trading 769 Intraday Volume Patterns 773 Intraday Price Shocks 773 Chapter 17 Adaptive Techniques 777 Adaptive Trend Calculations 777 Adaptive Variations 787 Other Adaptive Momentum Calculations 792 Adaptive Intraday Breakout System 795 An Adaptive Process 797 Chapter 18 Price Distribution Systems 799 Accuracy is in the Data 799 Use of Price Distributions and Patterns to Anticipate Moves 803 The Importance of the Shape of the Distribution 808 A Purchaser''s Inventory Model 819 A Producer''s Selling Model 823 Steidlmayer''s Market Profile 824 A Fast Version of Market Profile 833 Chapter 19 Multiple Time Frames 835 Tuning Two Time Frames to Work Together 836 Displaying Two or Three Time Frames 837 Elder''s Triple Screen Trading System 838 Robert Krausz''s Multiple Time Frames 841 Martin Pring''s KST System 845 Chapter 20 Advanced Techniques 849 Measuring Volatility 849 The Price-Volatility Relationship 856 Using Volatility for Trading 860 Liquidity 869 Trends and Price Noise 871 Trends and Interest Rate Carry 874 Fuzzy Logic 874 Expert Systems 880 Game Theory 885 Fractals, Chaos, and Entropy 890 Genetic Algorithms 897 Neural Networks 905 Machine Learning and Artificial Intelligence 915 Replication of Hedge Funds 917 Chapter 21 System Testing 919 Expectations 920 Selecting the Test Data 921 Testing Integrity 927 Identifying the Parameters 929 Searching for the Best Result 931 Too Large to Test Everything 935 Visualizing and Interpreting Test Results 937 The Impact of Costs 950 Refining the Strategy Rules 951 Arriving at Valid Test Results 952 Comparing the Results of Two Trend Systems 959 Retesting to Stay Current 962 Profiting from the Worst Results 963 Testing Across a Wide Range of Markets 965 Price Shocks 970 Anatomy of an Optimization 972 Summarizing Robustness 976 Chapter 22 Adding Reality 983 Some Computer Basics 983 The Abuse of Power 988 Final Steps before Launch 989 Extreme Events 992 Gambling Techniques: The Theory of Runs 1000 Selective Trading 1008 System Trade-Offs 1008 Silver and Amazon: Too Good to Be True 1013 Similarity of Systematic Trading Signals 1014 Chapter 23 Risk Control 1021 Mistaking Luck for Skill 1021 Risk Aversion 1022 Liquidity 1027 Measuring Return and Risk 1028 Position Sizing 1041 Individual Trade Risk 1046 Kaufman on Stops and Profit-Taking 1050 Entering a Position 1053 Leverage 1058 Compounding a Position 1060 Selecting the Best Markets 1064 Probability of Success and Ruin 1072 Managing Equity Risk 1075 Ideal Leverage Using Optimal f 1078 Comparing Expected and Actual Results 1081 Chapter 24 Diversification and Portfolio Allocation 1089 Diversification 1090 Types of Portfolio Models 1095 Classic Portfolio Allocation Calculations 1097 Finding Optimal Portfolio Al.