Getting Started in Chart Patterns (Thomas N. Bulkowski)

Technical Analysis (Charles Kirkpatrick, Julie Dahldust)

Selected by the Market Technicians Association as the principle textbook for its prestigious chartered Market Technician (CMT) program, this book systematically and objectively introduces the entire discipline.

Readers learn to use tested sentiment, momentum indicators, seasonal effects, flow of funds, and many other indicators.

Drawing on key research, the authors reveal which chart patterns and indicators remain the most reliable, demonstrate how to test a system, and show how to use technical analysis to mitigate risk.

"Whether you are a novice or experienced professional, we are confident that you will find this book helpful. For the student new to technical analysis, this book will provide you with the basic knowledge and building blocks to begin a life long study of technical analysis."

"For the more experienced technician, you will find this book to be an indispensable guide, helping you to organize your knowledge, question your assumptions and beliefs, and implement new techniques."

--

CH.1 Introduction to Technical Analysis 

Technical analysis is used in 2 ways: predictive and reactive

CH.2 The Basic Principle of Technical Analysis -The Trend

...

Investing with Volume Analysis (Buff Dormeier, CMT)

According to Dormeier, volume:

validates price, liberates liquidity, substantiates information, reveals convictions, expresses interest and enthusiasm, denotes the disparity of opinions, is the fuel of the market, exposes the truth, volume is the cause, gives rise to velocity, leads price, and interprets price.

Volume also allows you to: uncover trends sooner, validated, interpret, project price, and assess the strength and weakness in both supply and demand.

--

Indicators developed by Dormeier:

-volume weighted moving averages (VWMAs) / VW-MACD

-the volume price confirmation indicator (VPCI)

- VPCI stochastics

-the anti volume stop loss (AVSL)

-the trend thrust indicator (TTI)

-capital weighted volume indexes

--

Pointers from Domeier:

"Fundamental analyst are concerned with how volume is reflected in the price, but can't say "when" to buy."

"Technical analysts study 4 major areas: sentiment, cycles, price, and volume."

"The price chart represents the actions and behavioral patterns of investors -the market's testimony. Price testifies to what investor believe and how strongly they believe it. However, if price is the market's testimony, volume is the market's polygraph."

"If fewer and fewer investors are willing to participate as the stock price continues to rise, then volume contradicts the price movement  In this way, volume substantiates price by measuring the force and extent of investor convictions. When volume increases, it confirms price movements; when volume decreases, it contradicts price movements." 

"Price goes up because demand has surpasses available supply. When available supply outweighs demand, the price must go back down. Volume is the scale weighing these forces of supply & demand that produces price."

"Volume provides valuable information in 2 ways: by indicating price change before it happens, and help technicians interpret the meaning of price change as it happens."

"Volume leads prices, especially when volume reaches high levels. It also accelerates returns."

"Volume interprets price. Prices down't rise because there are more buyers than sellers, or vice versa, but more demand than supply."

"Price and volume are jointly determined through the agreement to trade. B=S=T (buyer's volume = seller's volume = total volume."

"Price is determined by "the net of demand less supply. This is how rising/falling channels are formed."

"Think of volume as the force that drives the market. Force has been defined as a power exerted against support or resistance. To a technician this definition of force is quite revealing."

"an uptrend is simply a supply line that rises during the course of time. A downtrend is simply a falling resistance line. A downtrend is a line of resistance that with time falls even lower. A downtrend indicates that demand is overrun by supply."

--

CH. 4 Volume Analysis

Terminology

-Market Volume: The number of shares exchanged between buyers and sellers during a given period of time, typically a day.

Total Volume: Describes the entire volume of all issues trades on an exchange, such as the NYSE.

Index Volume: The cumulative sum of the volume traded in all of the components of an index, such as the Dow or the S&P 500.

Total Trades: How many transactions occurred within the trading session.

Dollar Volume: The value of all the shares traded over the course of the trading session.

Float: The number of shares owned by the public available for exchange.

Average Volume: Computer as a moving average, which will smooth the peaks and valleys to show a more representative view of typical volume over a predefined period of time. Average volume enables decreasing relative to the past. In short, is the mall fuller this Saturday compared to every Saturday in the past year-or relatively empty?

--



"Volume analysis analyzes volume data to determine the strength of supply and demand by examining the intrinsic relationship between price and volume."

"Volume data is informational in this setting because prices alone do not fully reveal the magnitude of private signals and their precision." 

"Benjamin Graham, the father of value investing and mentor of Warren Buffett, often called the market a "voting machine." If so, then volume is the ballot box. Volume is a literal illustration of the power behind the forces of supply and demand."

--



Volume Validates Price

"The more shares exchange at a given price, the more that volume confirms price. More traders "vote," in the parlance of Graham (above), for that price at that point in time. If fewer investors participate at a given price point, more doubt is casts on the validity of that price."

"Let's say you are looking to buy an item on eBay and found just one seller. How much confidence would you have that the listed price is fair and reasonable? Probably not much. However,  if you found an item listed by a multitude of retailers with tens of thousands of transactions occurring at a similar price, you would reasonably conclude that the price is a good representation of the item's value."

"The more people participating in a price movement  the more the price movement is validated. For the technical trader, volume dictates the quality of the price."



Volume Liberates Liquidity

"Another point from the eBay example; assume that there was only one seller and no buyers  In that case, what is the probability of being able to exchange quickly the item back into cash at about the same price?"

"If volume is low, the odds of selling quickly at a good price are not very good. In the high-volume scenario, though, where many transaction occur in a narrow range of prices, the opposite is true: You can sell it for cash immediately and likely at the same price you bought it."



Volume Substantiates Information

"Volume validates price, but it also contributes to forming price. As new information is disseminated to the public, value reveals the flow of this information. By observing the change in value as information is released, a trader can tell how quickly new facts are absorbed by market participants. In this way, volume substantiates the importance of new information. As volume rises it equates to more emphasis being placed on new information by investors. Similarly, news or information that does not greatly impact volume indicates that the information has little significance to the market."



Volume Reveals Convictions

"The volume of shares traded often reveals the market's true conviction. Let's say you hear that renowned investor has bought a certain stock. Upon learning this, you buy 1,000 shares of the same stock. Later on, though, you learn that the famous investor bought just 100 shares. This should change your view of the security considerably  You expect a wealthy investor to buy 1 million shares -if he or she acted on conviction."



Volume Expresses Interest and Enthusiasm

"Market volume is money searching for a place to reside. Rising volume reveals that investors believe there is a greater interest and enthusiasm  whether on the buying or selling side of a given market. Falling volume shows fewer investors see opportunities, so they stay on the sidelines."



Volume Denotes the Disparity of Opinions

"Trading activity expressed as volume is the empirical evidence that these diverging (longs/shorts) are at work, with each side betting on its own beliefs. The greater the disparity of opinion, the greater  return each side expects to realize from an investment. Thus, a wide divergence in these beliefs shows up as higher volume as the bulls and bears take positions to attempt to profit."



Volume is the Fuel of the Market

"The fuel of the market is provided by new supply (selling) and demand (buying). Volume is a measure of the total supply and demand produced by market participants. In the words of Billy Williams, "Volume is literally the fuel for stock values. Like the space shuttle when it is launched into space, the majority of fuel is spent just to get into orbit. This explosive force of energy to propel the space shuttle into space or new heights requires an above average reserve of the fuel, but then the space shuttle can then use only a small portion of the remaining fuel reserve to carry out the rest of its mission." -volume is to stocks what rocket fuel is to the space shuttle."



Volume Exposes the Truth

"If price is truth, volume keeps price honest. Institutions try to hid their movements, but can't. One way to hide a big trade is to sell at the "offer" or buy at the "bid," the publicly available price of the moment. But volume analysis sees through that trick. If a trade goes through, it must be reported. A significant increase in volume is a clear sign that a big institution is at the table -even if price movement is subdued."



Volume is the Cause

"---the gap between the number of shares offered by sellers versus those bidded on by buyers is the cause of price change."



Volume Gives Rise to Velocity

"Market volume is a quantity that, when increased, tends to produce an acceleration of price direction. Charles Dow, the founder of The Wall Street Journal and namesake of the Dow Jones averages, believed that a high volume indicated a more accurate price and that, in turn, volume actually led price. In short, Dow felt that a substantial increase in volume often preceded significant price movements. Since that simple proclamation more than a century ago, the concept has been validated by a multitude of research studies."

--

CH. 6 Decoding Price with Volume

"The market communicates to us using price and volume. Volume is more important, because it allows us to discern the meaning of price."

"If volume is expanding, then price change demonstrates that the market has the strenth to continue its current course. If volume contracts during price change, a weakening market is expressed, which indicates that investors do not have the will to continue."

--

CH.7 The 4 Phases of Volume Analysis

Phase 1: Strong Demand

"When volume tends to increase during advances, it is a bullish indication." -Harold M. Gartley

Phase 2: Weak Demand

"When volume tends to decrease during price advances, it is bearish." -Harold Gartley

Phase 3: Strong Supply

"When volume tends to increase during price declines, it is a bearish indication." -Harold Gartley

Phase 4: Weak Supply

"When volume tends to decrease during price declines, it is bullish." -Harold Gartley

--

CH.9 Measuring Volume Information

- High-volume movements confirm the trend.

- Low-volume movements contradict the trend.

- Volume declines in consolidation patterns.

- Volume spikes at the onset of a new price trend.

All of these principle assume an analyst can differentiate between normal, low, and high volume. By reading the tape and chart, indications of the tensions between supply and demand can be observed with the naked eye and a trained mind. However, a quantifiable measurement exhibiting those tensions is a more useful tool for analysis. There is a time to get out or tape measure  and likewise, there is a time to turn our general volume principles into indicators with numerical values.

--

Volume indicators are important in 2 ways:

1) They lead price: When indicators make new highs/lows while stock price does not change, volume indicates which direction price will go.

2) They confirm price: Volume should rise in the direction of the trend. If volume falls as a trend matures, the volume divergence is warning the trend may be coming to an end.

--

CH. 10-17 Seven Types of Volume Indicators

1. Pure volume: A volume indicator without any price data

2. Volume accumulation based on interday price change: Volume accumulation based on the price change from daily close to daily close

3. Volume accumulation based on intraday price change: Volume accumulation based on intraday price movements.

4. Volume-price range indicators: Volume analysis based on the price's intraday range

5. Price accumulation based on volume: Price accumulation based upon volume change.

6. Tick volume: Intraday accumulation of trades by each tick of the tape.

7. Volume-adjusted price indicators: Volume-weighted price based on participation

--

1. Pure Volume

Volume
Volume Moving Averages
Volume Oscillators
Volume Bands
Volume Accumulation
Volume at Price
Price: Volume/Crocker Charts

--

2. Volume Accumulation Based on Interday  Price Change

On-Balance Volume

Volume Price Trend

Volume Zone Oscillator

--

3. Volume Accumulation Based on Intraday Price Change

Intraday Intensity Index/Accumulation Distribution

Williams' Variable Accumulation Distribution

Williams' Accumulation Distribution

3.a. Intraday Volume Accumulation Oscillators

Chaikin's Money Flow
Twiggs' Money Flow

--

4. Volume-Price Range Indicators

Market Facilitation Index
Equivolume charts
Ease of Movement

--

5. Price Accumulation Based on Volume

Positive & Negative Volume Indexes

--

6. Tick-Based Volume Indicators

Volume-Weighted Average Price
Money Flow/Tick Volume

--

7. Volume-Adjusted (weighted) Price Indicators

The Money Flow Index
Volume-Weighted Moving Averages
VW-MACD
Trend Thrust Indicator

--

Day Trade Online (Christopher A. Farrell)

   Another must read for the would-be trader. Christopher Farrell draws upon years of experience as a NYSE trade floor specialist by revealing how specialists make money, how to mimic them, and how to keep on the right side of every trade. 

Farrell will teach you how NYSE specialists have been profiting for years by exploiting the bid-ask price,  naive public market-orders, taking the opposite side of bad trades, and manipulating the supply-demand picture to their advantage -"keeping the general public's interest in mind" -all within the means of regulatory. 

According to Farrell, specialists, equipped with better tools, better timing, and better information, -never loose, by trading only when the odds are in their favor.

In Farrell's world, the exchange is a place where common investors and trade floor specialists duke-it-out for profit. A place in order to win, you must first understand the house rules, their strategy, and how to spot them in a trade so you never have to bet against the house.

Here are just a few things Farrell taught me:

Did you know that specialists are required to place your order before theirs? 

-They are, and that's how you can exploit the bid/ask price, too. Just don't let specialists become of aware of your presence, cautions Ferreall, or they'll "pick you off."

Did you know there was a way to find out where specialists are lurking in the stock? 

-It's called the "open book." Due to recent regulations, NYSE specialists are required to record price, volume, and time. You can look up a particular stocks "open book" activity on either the NYSE or the NASDAQ.

Did you know limit orders are a form of negation and can be used as such?

-It can. Instead of paying on the ask price next time, set your order at the bid. 

Trading Station Update

Options for the Beginner and Beyond (Edward Olmstead)

   Okay, so if you're an options trader, or trade options on the side, YOU NEED THIS BOOK IN YOUR TOOLBELT. 

The Arthur, Edward Olmstead, is a very accomplished individual with the brains to prove it. Olmstead is a professor of applied mathematics at McCormick School of Engineering and Applied Sciences at Northwestern University. 

His book is dry and straight to the point. He does a really job of explaining Options fundamentals. Like, what a call option is versus a put option, what it means to buy these types of options and sell them as well. Olmstead is a master of mathematics and handles numbers very well. Through countless examples, Olmstead goes to great length to show you just how each option behaves according to price action, including whether it is smarter to sell an option versus exercising them, how to use/create risk graphs, time decay, vertical spreads (such as bull or bear credit/debit spreads), back spreads, advanced calendar spreads, iron condors, double diagonals, backspreads, butterflies --you name it.

For anyone hoping to become a decent options traders, THIS BOOK IS A MUST READ.

A picture of Olmstead

3 Step Method to Spotting Trend Reversals (from swing-trade-stocks.com)

The three steps are:

1. A trendline is broken.
2. There is a retest and failure.
3. Price falls below the prior low

These three steps define a stock that has moved from an uptrend to a downtrend. Learn these three steps and you will never trade on the wrong side of the trend again.

Let's take these one at a time:

Step 1. A trendline is broken

This chart shows that the trendline has been broken. The trend has not changed yet. Stocks will often break a trendline and then continue to move in the direction of the prevailing trend. At this point we are concerned about the trend - but we do not know if the trend will change.

Step 2. There is a retest and failure

We know that a stock in an uptrend makes higher highs and higher lows. When a stock fails to do this, we should be begin to question the trend. This stock has now tested that prior high - and failed. So, this stock is no longer making higher highs. But, it is not making lower lows either!

So far, there is no confirmation that the trend has changed.

Step 3. Price falls below the prior low

This stock has now fallen below the previous swing low. We now have confirmation that the trend has changed. Why? Because this stock is now making lower highs and lower lows. And that is the definition of a downtrend!

This trend change example shows a stock moving from an uptrend to a downtrend. What about a stock that moves from a downtrend to an uptrend?

It's reversed:

It's official. This stock is now in an uptrend because it is making higher highs and higher lows.

How does this help you as a swing trader?

First, you want to be cautious of swing trading stocks after a trendline break. You can still trade them but watch carefully to see what happens next. If there is a retest and failure, the trend might change. If the trend does change, then you might consider trading it in the opposite direction.

Second, you want to trade stocks that are at the beginning of the trend because these stocks have the most potential for explosive moves.

How do you find these stocks?

You can use a moving average crossover scan to help you find stocks that are at the beginning of a trend. Here is an example:

The 10 period moving average has just crossed down through the 30 period moving average. This stockhas the potential to change from an uptrend to a downtrend. But, we won't have confirmation until we see if it falls below that prior low (rule 3).

Using Trader Vic's 3-step method will help you find winning trades and avoid losing ones.

Memorize it, and you will be able to spot trend changes instantly just by glancing at a stock chart.

Master it, and you'll be able to jump onto a trend...long before the crowd does.