The New Trading for a Living Study Guide (Wiley Trading)
Transcript of The New Trading for a Living Study Guide (Wiley Trading)
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STUDYGUIDEFOR
THENEW
TRADINGFORALLIVING
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The Wiley Trading seriesfeaturesbooksbytraderswhohave survived the market’sever-changing environmentand have prospered—someby reinventing systems,others by getting back tobasics. Whether you are anovice trader,professionalorsomeone in-between, these
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bookswill deliver the adviceand strategies you need toprosper today and in thefuture. For more on thisseries, visit our website atwww.WileyTrading.com.Foundedin1807,JohnWiley& Sons is the oldestindependent publishingcompanyintheUnitedStates.With offices in NorthAmerica, Europe, Australiaand Asia, Wiley is globally
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committed to developing andmarketingprintandelectronicproductsand services forourcustomers’ professional andpersonal knowledge andunderstanding.
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STUDYGUIDEFOR
THENEW
TRADINGFORALIVING
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Psychology•Discipline
TradingToolsandSystems
RiskControl•TradeManagement
Dr.AlexanderElder
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Coverdesign:PaulDiNovoCopyright©2014bybyDr.AlexanderElder.Allrightsreserved.PublishedbyJohnWiley&Sons, Inc.,Hoboken,NewJersey.PublishedsimultaneouslyinCanada.No part of this publication may bereproduced,storedinaretrievalsystem,or transmitted in any form or by anymeans, electronic, mechanical,photocopying, recording, scanning, orotherwise, except as permitted underSection107or108of the1976UnitedStatesCopyrightAct,withouteithertheprior written permission of thePublisher, or authorization throughpaymentoftheappropriateper-copyfee
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totheCopyrightClearanceCenter,Inc.,222 Rosewood Drive, Danvers, MA01923, (978)750-8400, fax (978)646-8600, or on the Web atwww.copyright.com. Requests to thePublisher for permission should beaddressed to the PermissionsDepartment, JohnWiley& Sons, Inc.,111 River Street, Hoboken, NJ 07030,(201)748-6011,fax(201)748-6008,oronline athttp://www.wiley.com/go/permissions.Limit of Liability/Disclaimer ofWarranty: While the publisher andauthor have used their best efforts inpreparing this book, they make norepresentations or warranties withrespecttotheaccuracyorcompleteness
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of the contents of this book andspecifically disclaim any impliedwarrantiesofmerchantabilityor fitnessfor a particular purpose. No warrantymay be created or extended by salesrepresentatives or written salesmaterials. The advice and strategiescontainedhereinmaynotbesuitableforyoursituation.Youshouldconsultwitha professional where appropriate.Neither the publisher nor author shallbe liable for any loss of profit or anyother commercial damages, includingbut not limited to special, incidental,consequential,orotherdamages.For general information on our otherproducts and services or for technicalsupport, please contact our Customer
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Care Department within the UnitedStates at (800) 762-2974, outside theUnitedStatesat (317)572-3993or fax(317)572-4002.Wileypublishesinavarietyofprintandelectronic formats and by print-on-demand. Some material included withstandardprintversionsofthisbookmaynot be included in e-books or in print-on-demand.Ifthisbookreferstomediasuch as a CD or DVD that is notincluded in the version you purchased,you may download this material athttp://booksupport.wiley.com.FormoreinformationaboutWileyproducts,visitwww.wiley.com.Library of Congress Cataloging-in-PublicationData:
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ISBN978-1-118-46745-9(Paperback)ISBN978-1-118-98470-3(ebk)ISBN978-1-118-98471-0(ebk)
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CONTENTS
1. ABOUTTHISSTUDYGUIDE
2. PARTI:QUESTIONSRATINGSCALES1. Introduction2. ONE:Individual
Psychology
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3. TWO:MassPsychology
4. THREE:ClassicalChartAnalysis
5. FOUR:ComputerizedTechnicalAnalysis
6. FIVE:VolumeandTime
7. SIX:GeneralMarketIndicators
8. SEVEN:Trading
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Systems9. EIGHT:Trading
Vehicles1. Note
10. NINE:RiskManagement
11. TEN:PracticalDetails
12. ELEVEN:GoodRecord-Keeping
3. PARTII:ANSWERSANDCOMMENTS
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1. Introduction1. Rating
Yourself2. ONE:Individual
Psychology1. Rating
Yourself2. Recommended
Reading3. TWO:Mass
Psychology1. Rating
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Yourself2. Recommended
Reading4. THREE:Classical
ChartAnalysis1. Rating
Yourself2. Recommended
Reading5. FOUR:
ComputerizedTechnicalAnalysis
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1. RatingYourself
2. RecommendedReading
6. FIVE:VolumeandTime1. Rating
Yourself2. Recommended
Reading7. SIX:General
MarketIndicators
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1. RatingYourself
2. RecommendedReading
8. SEVEN:TradingSystems1. Rating
Yourself2. Recommended
Reading9. EIGHT:Trading
Vehicles
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1. RatingYourself
10. NINE:RiskManagement1. Rating
Yourself2. Recommended
Reading11. TEN:Practical
Details1. Rating
Yourself
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12. ELEVEN:GoodRecord-Keeping1. Rating
Yourself4. Afterword5. Sources6. AbouttheAuthor7. EndUserLicense
Agreement
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ListofIllustrations1. THREE
1. FIGURE3.4Medtronic,Inc.(MDT)weeklychart.(ChartbyStockcharts.com).
2. FIGURE3.8WalterEnergyInc.(WLT)daily.(ChartbyStockcharts.com).
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3. FIGURE3.10JetBlueAirwaysCorp.(JBLU)daily.(ChartbyStockcharts.com).
4. FIGURE3.12BoeingCo.(BA)daily.(ChartbyStockcharts.com).
2. FOUR1. FIGURE4.7
Williams-SonomaInc.(WSM)daily,
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13-dayEMA.(ChartbyStockcharts.com).
2. FIGURE4.8BlackBerryLimited(BBRY)weekly,13-weekEMA.(ChartbyStockcharts.com).
3. FIGURE4.11DRHortonInc.(DHI)daily,26-dayEMAand12-26-9
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MACD.(ChartbyStockcharts.com).
4. FIGURE4.14AlexcoResourceCorporation(AXU)with22-dayEMAanda13-dayDirectionalSystem(green+DI,red–DI,blackADX).(ChartbyStockcharts.com).
5. FIGURE4.18
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LeapfrogEnterprisesInc.(LF)with26-dayEMAand7/3SlowStochastic.(ChartbyStockcharts.com).
6. FIGURE4.20Tiffany&Co.(TIF)with26-dayEMAand13-dayRSI.(ChartbyStockcharts.com).
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3. FIVE1. FIGURE5.3
CapstoneTurbineCorp.(CPST)with26-dayEMAanddailyvolume.(ChartbyStockcharts.com).
2. FIGURE5.13ScorpioTankers,Inc.(STNG)with13-dayEMAofpriceanda2-day
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EMAofForceIndex.(ChartbyStockcharts.com).
3. FIGURE5.15EMCCorp.(EMC)with13-dayEMAofpriceanda13-dayEMAofForceIndex.(ChartbyStockcharts.com).
4. FIGURE5.18Molycorp,Inc.(MCP)with13-day
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EMAofpriceanda12-26-9MACD-Histogram.(ChartbyStockcharts.com).
4. SIX1. FIGURE6.3S&P
500witha22-dayEMA,aNewHigh–NewLowIndex,withaoneyearlook-backperiod.(NH-NLdatafrom
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Barchart.com,chartbyTradeStation).
5. SEVEN1. FIGURE7.8Onthe
left:BBBYweeklychartwitha13-barEMAand12-26-9MACD-Histogram.Ontheright:BBBYdailychartwitha13-barEMAand2-barForceIndex.(Chartby
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Stockcharts.com).2. FIGURE7.12JCP
dailywitha13-barEMA,a12-26-9MACD-Histogram,andtheImpulsesystem.(ChartbyStockcharts.com).
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ABOUTTHISSTUDYGUIDE
Experiencedtradersseemtoglide through the markets,swinging into and out oftrades. Their trading appears
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effortless, like downhillskiingonTV.Theillusionofease vanishes when youclamp on a pair of skis anddiscover the bumps on theslope.Ifyouwanttoimproveyour trading skills, you haveto work, study, and do yourhomework.I created thisStudyGuide tohelpyougrowandsucceedasa trader. It is based on myyears of experience as a
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trader and teacher of traders.The more you study themarketsandyourreactionstothem,themorelikelyyouaretosucceed.Youneedtolearnmore about yourself as wellas themarkets—good tradersalwayslearn.EachquestioninthisGuideislinkedtoaspecificchapterinTheNewTradingforaLiving—psychology, riskmanagement, indicators, and
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so on. Write down youranswers and compare themwiththoseinthebook.Whenanswering chart-relatedquestions, cover each chartwith a sheet of paper andmove it slowly from left toright to imitate the unfoldingof market action. Practicedealing with the uncertaintyofthemarketswhileworkingwiththisGuide.This Guide asks questions
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and provides answers—butreasonable people maydisagree with some of them.Trading is partly a scienceand partly an art—partlyobjective and partlysubjective. Let this Guidechallengeyoutothinkdeeperabout the markets and yourreactionstothem.I am grateful to HenryAbelman and Jeff Parker,both repeatwinners of Spike
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Trade'sEagleEye award, forreviewing all questions andanswers. Carol KeeganKaynedidthefinalcheckforclarityandprecision.Thanks to my formerprofessorsandstudentsattheuniversitiesinEstoniaandtheUnited States for providingmany opportunities to teachand develop my educationalstyle.Thanks to the membersofSpikeTrade.com,whokeep
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sending me trading-relatedquestions.Postinganswers tothem week after week keepsmeonmytoes.IhopethisGuidehelpsyoutosharpen your skills and tobecome a better, moreconfidenttrader.
Dr.AlexanderElderNewYork—
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Vermont,2014
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PARTI
QUESTIONSAND
RATINGSCALES
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Introduction
Towinintrading,youmustoutperform masses of
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competitors. The majoritymust lose in order to paythosewhowin.Tobecomeasuccessful trader, you mustbeat the odds against you.You must learn to think andact differently from themarketcrowd.TheNewTradingforaLivingcontains several unorthodoxtradingideas.TheaimofthisIntroductionistopauseatthebeginning of the journey and
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toseewhetheryouareintunewith some of theunconventional thinkingabouttrading.
Questions Trial1Trial2
Trial3
1 2 3 4 5
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6 7 8 9
Correctanswers
Question0-1
1. Whichofthe
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followingmethodsofmakingtradingdecisionscanservetraderswellinthelongrun?
1. Fundamental
analysis2. Insideinformation3. Hunchesandtips4. Technicalanalysis
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1. IandII2. IIandIII3. IandIV4. IIIandIV
Question0-2
1. Whichofthefollowingisn'tneededfortradingsuccess?
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1. Tradingpsychology2. Analyticmethod3. Connectionswith
marketinsiders4. Money
managementmethod
Question0-3
1. Thebest
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approachtoreadingabookontradingisto
1. testalltheideas
thatinterestyouonyourownmarketdata.
2. incorporatealltheideasinyourwork.
3. nottrustwhatyouread—whywouldanyonesharegood
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tradingideas?4. askothertraders
whethertheideasinthebookworkedforthem.
Question0-4
1. Whichofthefollowingisnotamajorcauseoftradinglosses?
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1. Slippage2. Commissions3. Emotionaltrading4. Theft
Question0-5
1. TraderJimandTraderJohntaketheoppositesides
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ofatrade.Bothpaycommissions,andbothgethitwithslippage.TraderJim,thewinner,collects$920,whileTraderJohn,theloser,isout$1080.Theresultofthistrade
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illustratesthefactthattradingisa:
1. Zero-sumgame2. Positive
expectationsgame3. RandomWalk4. Minus-sumgame
Question0-6
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1. Youfindastocktradingat$20andplantobuy100shares.Yourbrokerwillchargeacommissionof$10.Whichofthefollowingstatementsisincorrect?
1. Whendealingwith
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thousandsofdollars,don'tquibbleabout$10.
2. Youneedtomake1%profittoavoidlosingmoneyonthistrade.
3. Using50%margin,youneedtomakemorethan2%profittoavoidlosingmoneyonthistrade.
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Question0-7
1. Youplaceamarketordertobuy100sharesofarisingstockthatcurrentlytradesat$20.Yourordergetsfilledat$20.08.Yourslippageonthe
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tradeis1. 80cents2. $83. $164. $80
Question0-8
1. ThestockyouboughtinQuestion7
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ralliedto$22.Youexpecttherallytocontinuebutraiseyourstopto$21toprotecthalfofyourpaperprofit.Thestocksinksandhitsyourstop—yougetfilledat$20.88.Your
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slippageonthistraderepresentswhatpercentageofyourgrossprofit?
1. 5percent2. 10percent3. 25percent4. 50percent
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Question0-9
1. InthetradedescribedinQuestions7and8,thetradingindustrytookwhatpercentageofyourgrossgain?
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1. 25percent2. 50percent3. 75percent4. 100percent
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ONE
IndividualPsychology
Your greatest danger in
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trading comes from theperson holding this book—you. Our emotions often tipthe scale between winningand losing. If you can staycool and make rationaldecisions, tradingprofitswillfollow.A professional trader is calmandcollected.Heknowswhathe'lldoifthemarketgoesup,down, or sideways. On dayswhenhe isnot sure,he stays
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out, patiently monitoring themarket from the sidelines. Aprofeelsincontrol.If you feel giddy with joywhen the market goes yourwaybutfreezeinfearwhenitswings against you, youractionswillbeemotionalandyour account will suffer.When the mind becomesclouded by greed or fear,eventhebest tradingsystemsfly out the window. The
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questions that follow aredesignedtohelpyoufocusontradingpsychology.
Questions Trial1Trial2
Trial3
1 2 3 4 5 6
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7 8 9 10 11 12 13 14 15 16
Correct
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answers
Question1-1
1. Asuccessfultrader'sattitudetowardriskisusuallyoneof
1. avoidingrisk.
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2. thrivingonrisk.3. enjoyingrisky
situations,eventhoughlosseshurt.
4. measuringeachrisk.
Question1-2
1. Thegoalofasuccessfultraderisto
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1. becomethebest
traderhecan.2. makemoremoney
thanothertraders.3. buythingsthatwill
sethimaboveothertraders.
4. winrespectoffamilyandfriends.
Question1-3
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1. Atraderonalosingstreakhaslost20percentofhisaccount.Hewouldbestbeadvisedto
1. subscribetoa
newsletterwithaverifiedtrackrecord.
2. purchaseatradingsystemwitha
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historyofprofitabilityandlowdrawdowns.
3. stoptradinguntilhehasanalyzedhislosingtradesanddeterminedtheircauses.
4. continuetotradebecausethelawsofprobabilityindicatealikelyturninhisfavor.
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Question1-4
1. Havingalargetradingaccountisdesirableforallofthefollowingreasonsexceptthat
1. youcanaffordto
losemore.
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2. youcandiversifyamongmoremarkets.
3. youcantradedifferentsystems.
4. yourexpensesrepresentasmallerpercentageofyouraccount.
Question1-5
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1. Whichtwoofthefollowingstatementsaboutcommerciallysoldtradingsystemsaremostaccurate?
1. Atrackrecord
providesconfidencethatasystemwillcontinuetoperformwell.
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2. Thefactthatasystemissoldbyaprominenttraderprovidesanextramarginofconfidence.
3. Tradingsystemsaredesignedtofitolddata,andtheyself-destructwhenmarketschange.
4. Youcanbuyasystemfromatop
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analystandlosemoneyusingit.1. IandII2. IandIII3. IIandIII4. IIIandIV
Question1-6
1. Whichofthefollowingisakeysignofa
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gamblingattitudetowardtrading?
1. Theinabilityto
resisttheurgetotrade
2. Feelingelatedwhentradesgowellandashamedafterlosing
3. Alwaysreversinglosingpositions
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4. Astringoftradinglosses1. Ionly2. IandII3. I,II,andIII4. I,II,III,and
IV
Question1-7
1. Withinayear,allofthe
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followingoccurinthelifeofatrader:hereceivesthreetraffictickets,paysapenaltyforfilinghistaxeslate,getstworeprimandsfortardinessonhisnon-tradingjob,andhistrading
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accountisdown35percent.Whichofthefollowingwouldbethebestadviceforthistrader?
1. It'sahardlife.Try
tomakealotofmoneytrading,quityourjob,andhiresomeonetohandle
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yourfinances.2. Trafficticketshave
nothingtodowithtrading—don'tworryaboutthem.
3. You'resabotagingyourselfandneedtoworkonchangingyourselfasaperson.
4. Hanginthere;itishardtokeepajobandtradeatthe
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sametime.
Question1-8
1. Picktwocorrectstatementsabouttradingpsychology.
1. Yourfeelings
impactyourequity.2. Towinyouhaveto
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bemoreintelligentthanmosttraders.
3. Feelingelatedafterprofitabletradesreinforcesgoodtradinghabits.
4. Fearandgreedhaveagreaterimpactonyourequitythanabrillianttradingsystem.1. IandII
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2. IIandIII3. IIIandIV4. IandIV
Question1-9
1. You'vemadeaseriesofsuccessfultradesinrecentmonths.Nowisthe
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timeto1. congratulate
yourselfandincreasethesizeofyourpositions.
2. usefewerstops.3. takeavacation.4. realizethatyou
havebecomeacompetenttraderandcanspendlesstimestudyingthe
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markets.1. IandII2. IIandIV3. IandIII4. IIIandIV
Question1-10
1. Themainsimilaritybetweenalosingtrader
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andanalcoholicis:
1. Losersareaddicted
totheexcitementoftradingthewayalcoholicsareaddictedtoalcohol.
2. Losershidetheextentoftheirlossesfromthemselvesandothers,justasalcoholicshidehow
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muchtheydrink.3. Loserstrytotrade
theirwayoutofahole,justasalcoholicstrytoswitchfromliquortowine.
4. Alloftheabove
Question1-11
1. The
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psychologyoflosersinvolvesallofthefollowingexceptthat
1. Losersfindtrading
veryexciting,evenwhenitleadstolosses.
2. Fewlosersrecoveraftertheydestroytheiraccounts.
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3. Losersknowthattheyhaveapersonalproblemwithtrading.
4. Losersusuallyshootfora“bigwin.”
Question1-12
1. Thefirststepinalosingtrader's
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recoveryistosay,
1. “Ineedabetter
tradingsystem.”2. “Imustfindabull
market.”3. “Ineedtolearna
newtradingmethod.”
4. “Iamaloser.”
Question1-13
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1. Whenatradersays,“Mynameisso-and-soandIamaloser”theresultis
1. afearfulattitude
towardtrading.2. cuttinglossesshort.3. avoidanceof
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overtrading.4. lowercommissions
andslippage.1. IandII2. IIandIII3. IIIandIV4. IandIV
Question1-14
1. Themost
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importantfactorinbecomingasuccessfultraderis
1. startingwitha
good-sizedtradingaccount.
2. beingabletolearnfromothersuccessfultraders.
3. usingwritten
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tradingplansandavoidingemotionaldecisions.
4. relyingonusefulskillsinyourbusinessorprofessionalbackground.
Question1-15
1. If,afterayearoftrading,the
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marketsseemmysterioustoyou,itisbecause
1. yourtrading
behaviorisimpulsive.
2. youlackgoodfundamentalortechnicalinformation.
3. youraccountistoo
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small.4. themarketsare
chaotic(RandomWalk).
Question1-16
1. Atradebeginswhen
1. themarketappears
overboughtoroversold.
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2. anindicatorgivesyouanentrysignal.
3. youdecidetoplaceabuyorsellorder.
4. anewslettermakesanattractiverecommendation.
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TWO
MassPsychology
Whenever you buy or sell,
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you're surrounded by a hugecrowd of other buyers andsellers, many of whom aredrivenbygreedandfear.Thesum of their orders createshugewavesofmassoptimismand pessimism. Wavesbecome tides that sweep themarkets,causingpricestoriseorfall.Crowdsareextremelypowerful—itmakes no senseto fight them. Crowds arestrong but primitive.Recognizing this will help
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you trade in the direction inwhich the crowd is runningbut hop off when a trend isabouttoend.It ishard to remainobjectivewhen analyzing marketsbecause crowds suck us in.Anyone who has attended apoliticalrallyorabigconcerthasfeltthepullofthecrowd.Some questions in thischapter test your knowledgeof the basic laws of crowd
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psychology. Others help youbecome aware of the impactof the tradingcrowdonyourown feelings and judgment.Nowisagoodtimetoreflectonyour reactions, rational orirrational, when you trade.Aimtorelateyouranswerstothe following questions toyourtradingexperiences.
Questions Trial1Trial2
Trial3
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1 2 3 4 5 6 7 8 9 10 11
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12 13
Correctanswers
Question2-1
1. Priceis1. theintersectionof
supplyanddemand
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curves.2. thevalueofa
tradingvehicle.3. areflectionof
companyassetsinthestockmarketorademandforacommodity.
4. theconsensusofvalueofallmarketparticipantsatthemomentofthetrade.
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Question2-2
1. Whichofthefollowingstatementsisincorrect?
1. Bullsbetthatprices
willrise;theytrytobuyaslowaspossible.
2. Uncommitted
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tradersputpressureonbullsandbearsbytheirpresence.
3. Thegoalofatechnicalanalystistoforecastwhetherbullsorbearswillwin.
4. Bearsbetthatpriceswillfall;theywanttosellashighaspossible.
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Question2-3
1. Whenyouareunsurewhethertobuyorsell,itpaysto
1. surfthenettofind
outwhatothersaredoing.
2. tradeasmallersizethanusual.
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3. stayoutofthemarket.
4. seekadvicefromacurrently“hot”guru.
Question2-4
1. Anyprofitsyoumakeintradingcomefrom
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1. thebrokers.2. thetraders.3. theeconomy.4. theexchanges.
Question2-5
1. Whenapersonjoinsacrowd,he
1. becomesmore
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impulsiveandemotional.
2. benefitsfromthestrengthsofothers.
3. trustscrowdleadersmorethanhimself.
4. canleavethecrowdwhenhewantsto.1. IandII2. IandIII3. IIandIII
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4. IIandIV
Question2-6
1. Peoplejoincrowdsoutofa
1. fearofuncertainty.2. lifelonghabit.3. desiretobeledby
strongleaders.
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4. searchforcomfort.1. I2. IandII3. I,II,andIII4. I,II,III,and
IV
Question2-7
1. Whichofthefollowingiscorrect?
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1. Crowdsare
primitive;itisOKtousesimpletradingstrategies.
2. Beingsmarterthanthecrowdassuresyouofwinning.
3. Agoodtraderfeelselatedwhenthemarketgoesinhisdirectionanddepressedwhenit
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goesagainsthim.4. Marketcrowdsare
almostalwayswrong.1. I2. IandII3. I,II,andIII4. I,II,III,and
IV
Question2-8
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1. Identifythemainleaderofmarkettrends.
1. Powerfulfinancial
interests2. Prominentgurus3. Priceitself4. Fundamental
changesintheeconomy
Question2-9
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1. Marketsrisewhen
1. therearemore
buyersthansellers.2. buyersaremore
aggressivethansellers.
3. sellersareafraidanddemandapremium.
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4. moresharesorcontractsareboughtthansold.1. IandII2. IIandIII3. IIandIV4. IIIandIV
Question2-10
1. Whenthetrendisdown,
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1. shortsellerstendto
increasetheirpositions.
2. longstendtoquitindisgust.
3. longsagreetobuyonlyatasteepdiscount.
4. shortsellersarewillingtosellatalowerprice.
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1. I2. IandII3. I,II,andIII4. I,II,III,and
IV
Question2-11
1. Apriceshockduringanuptrend
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1. isasuddenjumpinprice.
2. isasuddendropinprice.
3. makesbullsfeelvulnerable.
4. frightensthebears.1. IandIII2. IIandIII3. IIandIV4. IandIV
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Question2-12
1. Apriceshockinterruptsarally,butpricesrecover.Whentheyrisetoanewpeak,severalindicatorsreachalowerpeak.Thispatternis
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calleda1. bullishdivergence.2. suddendropin
price.3. bearishdivergence.4. suddenriseinprice.
Question2-13
1. Themaingoalsofa
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traderareto1. identifythecurrent
trend.2. forecastpricesin
thenearfuture.3. forecastlong-term
prices.4. stayobjectiveand
unemotional.1. IandII2. IandIV
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3. IIandIII4. IIIandIV
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THREE
ClassicalChartAnalysis
The original chartists had a
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revolutionary idea—to useprice and volume data ratherthan fundamental factors fordeciding what and when tobuyandsell.Eachfundamentalanalysthasto specialize in a fairlynarrow field. Technicalanalysis, on the contrary, isuniversal. Once youunderstand the principles ofcharting,youcanapply themto stocks, bonds, currencies,
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futures, or any other market.As the number of tradingvehicles around the globeincreases, technical analysisisbecomingmorepopular.As longasyouhave thedataon high, low, opening, andclosingprices,alongwiththatonvolume andopen interest,you can make intelligentjudgments about the balanceof power between bulls andbears in any market. Then
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youcantradeinthedirectionof the dominant marketgroup.Inthischapteryou'llbeaskedto make trading decisionsusing charts. It's relativelyeasy to recognize patterns inthe middle of a chart, butgoodtradingsignalsaremuchharder to identify near theright edge. That's whereyou'll have to make yourtrading decisions—amid the
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uncertainty, noise, andtensionofthemarkets.
Questions Trial1Trial2
Trial3
1 2 3 4 5 6 7
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8 9 10 11 12 13
Correctanswers
Question3-1
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1. Matchthefollowingtwosetsofstatementsregardingprices.
1. Thehighoftheday2. Thelowoftheday3. Theclosingprice4. Theopeningprice
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1. Amateurs'opinion
2. Professionals'opinion
3. Maximumpowerofbulls
4. Maximumpowerofbears
Question3-2
1. Threeanalysts
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lookatthesamechart.Onearguesthatthetrendisup,theotherthatthetrendisdown,andthethirdthatthetrendissideways.Inallprobability,
1. oneortwoofthem
maybeguiltyof
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wishfulthinking.2. theymaynothave
agreedonthebasicdefinitionofatrend.
3. theymaybelookingatdifferenttimeframes.
4. ifeachdidabetterjob,allthreewouldagree.1. I
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2. IandII3. I,II,andIII4. I,II,III,and
IV
Question3-3
1. Whentryingtoenteraliquidmarketonaquietday,youarelikelyto
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encounter1. higherslippage.2. higher
commissions.3. lowerslippage.4. lowercommissions.
Question3-4
1. Whichlinesonthechartin
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Figure3.4markthelevelsofbothsupportandresistance?
1. LineA2. LinesAandB3. LinesA,B,andC4. LinesA,B,C,and
D
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FIGURE3.4Medtronic,Inc.(MDT)weeklychart.(ChartbyStockcharts.com).
TheLinesofSupportandResistance
Question3-5
1. Supportandresistancelinesshould
1. bedrawnacrossthe
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edgesofcongestionareas.
2. bedrawntotouchextremehighorlowprices.
3. connecthighswithlowsandlowswithhighs.
4. connecthighswithhighsandlowswithlows.1. IandII
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2. IIandIII3. IIIandIV4. IandIV
Question3-6
1. Thestrengthofsupportandresistancedependson
1. thenumberoftimes
priceshitthatarea.
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2. thevolumeoftradinginthatarea.
3. theheightofthatarea.
4. thelengthoftimepricesspentinthatarea.1. I2. IandII3. I,II,andIII4. I,II,III,and
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IV
Question3-7
1. Pricesspendseveralweeksinacongestionareaandthendropbelowsupport.Whichofthefollowingtradingchoices
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shouldbeconsideredonthefollowingday?
1. Sellshortifprices
falltoanewlow,withastopaboveyesterday'shigh
2. Golongifpricesrallybackintothecongestionarea,withastopbelowyesterday'slow
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3. Sellshortattheopening
4. Golongattheopening1. I2. IandII3. I,II,andIII4. I,II,III,and
IV
Question3-8
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1. MatchthelettersunderneaththelastfourbarsinthechartinFigure3.8tothefollowingstatements.
1. Alowerlowanda
lowerclose—monitorthedownmove.
2. Startmovingup
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yourstop.3. Afalsedownside
breakout—golong.4. Abreakouttoa
newlow—monitorwhetherthedownmovewillcontinue.
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FIGURE3.8WalterEnergyInc.(WLT)daily.(ChartbyStockcharts.com).
ACongestionZone
Question3-9
1. MarkthestatementsbelowwithaTiftheyapplytotrendsandwithanRiftheyapplyto
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tradingranges:1. Eachrallyreachesa
higherhigh.2. Eachdeclinestops
atapproximatelythesamelevel.
3. Keepaddingtoyourpositions.
4. Runatthefirstsignofareversal.
Question3-10
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1. MatchtheareasmarkedbylettersinthechartinFigure3.10tothefollowingstatements.
1. Inabilitytoreach
resistanceindicatesweakness—considershorting.
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2. Inabilitytoreachsupportindicatesstrength—considerbuying.
3. Hittingresistance—sell.
4. Falseupsidebreakout—goshort.
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FIGURE3.10JetBlueAirwaysCorp.(JBLU)daily.(ChartbyStockcharts.com).
DecisionsatSupportandResistance
Question3-11
1. Whichofthefollowingtacticsworkwellinuptrends?
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1. Buybreakoutsto
newhighs.2. Buypullbacksinto
support.3. Buywhenprofits
onyourpreviouslongpositionareprotectedbyastop.
4. Buywhenpricestakeoutthepreviouslow.
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1. I2. IandII3. I,II,andIII4. I,II,III,and
IV
Question3-12
1. Whichofthefollowingdoesnotapplyto“kangaroo
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tails,”marked“T”inFigure3.12?
1. Whenatailpoints
down,goshort.2. Tailsaresinglebars
protrudingfromcompactcongestionareas.
3. Whenatailpointsup,itgivesasellsignal.
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4. Marketsusuallyrecoilfromtheir“tails.”
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FIGURE3.12BoeingCo.(BA)daily.(ChartbyStockcharts.com).
KangarooTails
Question3-13
1. IfyoubuyinareaTneartherightedgeofFigure3.12,youmaydoallofthefollowing,
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except1. placeaprotective
ordermidwaydownthetail.
2. addtoyourlongpositiononthenextbarthattradeshigher.
3. takeprofitswhentherallystopsmakingnewhighs.
4. placeaprotective
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stopbelowthetipofthetail.
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FOUR
ComputerizedTechnicalAnalysis
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Today it would be unusualto see an analyst or a traderwho doesn't use a computer.The dropping cost ofequipment,software,anddatahas evened out the playingfieldbetween individualsandinstitutions.A computer can help youprocess the torrent ofmarketinformation and make youranalysismoreobjective,butit
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isonlyatool.Buyingthebestcar will not automaticallyturn a beginning driver intoan expert. In this section,you'lltestyourselftoseehowwell you've mastered thelessons on computerizedmarket analysis. If you owntechnical analysis software,pleasefeelfreetouseitwhileanswering questions in thischapter.
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Questions Trial1
Trial2
Trial3
1 2 3 4 5 6 7 8 9
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10 11 12 13 14 15 16 17 18 19 20
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21 22
Correctanswers
Question4-1
1. Computerizedtechnicalanalysis
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1. ismoreobjective
thanclassicalcharting.
2. allowstraderstoforecastthefuture.
3. removesemotionsfromtrading.
4. assuressuccessintrading.1. I2. IandII
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3. I,II,andIII4. I,II,III,and
IV
Question4-2
1. Matchthefollowingthreetypesofsoftwarewiththeirdescriptions:
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1. Graybox2. Toolbox3. Blackbox
1. Youfeedthisprogramcurrentmarketdataandreceivespecificbuyandsellsignals.
2. Sameas
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above,butyoucanchooseindicatorsettings.
3. Acollectionofchartingtoolsandindicators.
Question4-3
1. Matchthefollowingthreemain
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groupsoftechnicalindicatorswiththeirdescriptions:
1. Oscillators2. Trend-following
indicators3. Miscellaneous
indicators1. Provide
insightsinto
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masspsychologyofthemarkets.
2. Catchturningpointsinflatmarketsbutgiveprematureanddangeroussignalswhenthemarketsbegintotrend.
3. Workbestwhenmarkets
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aremovingbutgivebadsignalswhenthemarketsareflat.
Question4-4
1. Astockhasclosedat23,22,21,20,23,and24duringthepast6
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days.Whatisits5-daysimplemovingaverageonthelastday?
1. 212. 223. 234. Noneoftheabove
Question4-5
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1. ExponentialmovingaveragesworkbetterthansimpleMAsforallofthefollowingreasons,exceptthatEMAs
1. areeasierto
calculatebyhand.2. respondtochanges
inpricesfaster.
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3. donotjumpinresponsetoolddata.
4. trackthemassmoodofthecrowdmoreclosely.
Question4-6
1. Themostimportantmessageofan
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exponentialmovingaverageis
1. thewidthofitstime
window.2. itsabilitytoriseto
anewpeak.3. itsabilitytofalltoa
newlow.4. thedirectionofits
slope.
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Question4-7
1. MatchtheletteredsectionsatthebottomofFigure4.7tothefollowingEMA-basedstrategies.
1. Tradeonlyfromthe
longside.
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2. Tradeonlyfromtheshortside.
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FIGURE4.7Williams-SonomaInc.(WSM)daily,13-dayEMA.(ChartbyStockcharts.com).EMASignals—Daily
Question4-8
1. MatchtheletteredareasofFigure4.8tothefollowing
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EMA-basedtactics.
1. Golong,witha
protectivestopinthevicinityofthelatestlow.
2. Goshort,withaprotectivestopinthevicinityofthelatesthigh.
3. Liquidatepositionsandstandaside—
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themarketmaybeturning.
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FIGURE4.8BlackBerryLimited(BBRY)weekly,13-weekEMA.(ChartbyStockcharts.com).EMASignals—Weekly
Question4-9
1. Whichofthefollowingstatementsregarding
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MovingAverageConvergence-Divergence(MACD)aretrue?
1. Thefastlineof
MACDreflectsshort-termbullishnessorbearishness.
2. Theslowlineof
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MACDreflectslong-termbullishnessorbearishness.
3. Whenthefastlineisabovetheslowline,bullsareincontrol.
4. Whenthefastlineisbelowtheslowline,bearsareincontrol.1. IandII
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2. IIIandIV3. Noneofthe
above4. I,II,III,and
IV
Question4-10
1. WhichstatementaboutMACD-Histogramisn't
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true?1. Itmeasuresthe
spreadbetweenthefastandslowMACDlines.
2. Whenitrises,itshowsthatbullsareincontrol.
3. Itforecastshigherorlowerpricesahead.
4. Itidentifiesthe
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dominantmarketgroup.
Question4-11
1. MatchthefollowingstatementstotheletteredareasinthechartinFigure4.11
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1. MACD-Histogramrisestoahigherpeak—expectpricestoretestorexceedtheirpricepeak.
2. MACD-Histogramfallstoanewlow—expectpricestoretestorexceedtheirlatestbottom.
3. Breakingthepowerofthedominant
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group.4. Abearish
divergenceisoccuring.
5. Abullishdivergenceisoccuring.
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FIGURE4.11DRHortonInc.(DHI)daily,26-dayEMAand12-26-9MACD.(ChartbyStockcharts.com).MACDLinesandMACD-Histogram
Question4-12
1. AttherightedgeofFigure4.11,MACD-
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Histogram,EMA,andpricearetellingusthat
1. thelatestpricepeak
islikelytoberetestedorexceeded;golongimmediately.
2. bearsareincontrol;goshortimmediately.
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3. loweryourstopandbereadytotakeprofitsontheshortpositionfromthebearishdivergenceD-F.
Question4-13
1. Whichofthefollowingstatementsdescribes
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DirectionalMovement?
1. Thepartoftoday's
barthatisabovethepreviousday'sbar
2. Thepartoftoday'sbarthatisbelowthepreviousday'sbar
3. Thelargestpartoftoday'sbarthatisoutsidetheprevious
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day'sbar4. Noneoftheabove
Question4-14
1. MatchtheletteredareasinFigure4.14tothefollowingactions.
1. Whenthe
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DirectionalIndicator(ADX)turnsdownfromabovebothDirectionalLines,takeatleastpartialprofits.
2. WhentheDirectionalIndicatorpenetratesabovethelowerDirectionalLine,tradeinthe
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directionoftheupperDirectionalLine.
3. Donotuseatrend-followingmethodwhentheDirectionalIndicatorisbelowbothDirectionalLines.
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FIGURE4.14AlexcoResourceCorporation(AXU)with22-dayEMAanda13-dayDirectionalSystem(green+DI,red–DI,blackADX).(ChartbyStockcharts.com).DirectionalSystem
Question4-15
1. Attheright
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edgeofFigure4.14,theDirectionalSystemistellingusto
1. golong.2. goshort.3. standaside.
Question4-16
1. Oscillatorscan
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helptradersaccomplishallofthefollowingexcept
1. identifythe
extremesofmasspessimismandoptimism.
2. catchalltopsandbottoms.
3. findwhetherbulls
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orbearscurrentlypredominate.
4. betagainstdeviationsandforareturntonormalcy.
Question4-17
1. Whenanoscillatorreachesitshighestpeakinseveral
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months,whichofthefollowingisleastlikely?
1. Therallyislikely
topause.2. Pricesarelikelyto
risetoahigherhigh.
3. Longpositionscanbeheld.
4. Pricesarelikelyto
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drop.
Question4-18
1. MatchthelettersinFigure4.18tothefollowingformationsofStochastic:
1. Overbought2. Oversold
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3. Bullishdivergence4. Bearishdivergence5. Failureswing
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FIGURE4.18LeapfrogEnterprisesInc.(LF)with26-dayEMAand7/3SlowStochastic.(ChartbyStockcharts.com).Stochastic
Question4-19
1. AttherightedgeofFigure4.18,the
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tradingmessageofStochasticis:
1. Stochasticis
overbought;goshort.
2. Stochasticisrising;golong.
3. Thedowntrendisstillinforce;goshort.
4. Stochasticis
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neutral;standaside.
Question4-20
1. MatchletteredformationsofRSI(RelativeStrengthIndex)inFigure4.20tothepatternslistedbelow.
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1. Overbought2. Oversold3. Bullishdivergence4. Bearishdivergence
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FIGURE4.20Tiffany&Co.(TIF)with26-dayEMAand13-dayRSI.(ChartbyStockcharts.com).RelativeStrengthIndex
Question4-21
1. AttherightedgeofFigure4.20,RSIistellingusthat:
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1. Thestockis
oversold;golong.2. Thereisabearish
divergence;goshort.
3. RSIistrendinglower;standaside.
4. Signalsaremixed;standasidefornow.
Question4-22
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1. Withthemarketinadowntrend,anoscillator,suchasStochasticorRSI,identifies
1. shorting
opportunities.2. sellingareas.3. buying
opportunities.
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4. short-coveringareas.1. IandII2. IIIandIV3. I,II,III,and
IV4. Noneofthe
above
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FIVE
VolumeandTime
Beginners watch only
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prices. It's easy to becomehypnotizedby stocksmovingupanddown.Experienced analysts gain amuch deeper understandingof the markets by includingvolume in their analysis. Inaddition, price changes needto be linked to the length oftimeittookforthemtooccur.All trading decisions have tobe made by analyzing morethanonetimeframe.
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This chapter also reviewsopen interest, a measurerelevant only for thederivatives markets, such asfutures or options. If youdon't trade derivatives anddon't wish to study openinterest, skip questions 5–7,5–8, and 5–9 and add threepointstoyourscore.
Questions Trial1Trial2
Trial3
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1 2 3 4 5 6 7 8 9 10 11
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12 13 14 15 16 17 18 19
Correctanswers
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Question5-1
1. Volumereflectsallofthefollowingexcept:
1. Howmarket
participantswillreacttofuturepricechanges
2. Howmanywinnersandlosersare
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activeinthemarket3. Whethermassesof
losersarestayingputorrunning
4. Thedegreeofemotionalinvolvementamongtraders
Question5-2
1. Themarket
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hasbeenrisingforseveralmonthsinanorderlypatternofralliesandshallowdeclines;anewrallyisinprogress.Matchthefollowingpairsofstatementsconcerningthisrally's
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volume:1. Volumeisslightly
higherthanduringthepreviousrally.
2. Volumeisdoublewhatitwasduringthepreviousrally.
3. Volumeishalfofwhatitwasduringthepreviousrally.
4. Volumeisapproximatelythe
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sameasitwasduringthepreviousrally.1. Bearsare
panicking;takeatleastpartialprofitsonlongpositions.
2. Theuptrendishealthy;holdlongsoraddtothem.
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3. Theuptrendisrunningoutofsteam;takeatleastpartialprofitsonlongpositions.
4. Theuptrendishealthy;holdlongs.
Question5-3
1. Identifythe
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followingpatternsofvolumebymatchingthemwiththeappropriatelettersinFigure5.3.
1. Volumetracesa
lowerpeakwhilepricestraceahigherone—expectadeeperreaction,
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takeprofitsonlongpositions.
2. Volumeshrinkswhilepricesslidenearthebottomoftheirrange—lookforabuyingopportunity.
3. Volumeexpandsonarally—expecthigherpricesahead,holdthroughanycorrection.
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4. Volumeshrinksduringapullbacktovalue—looktogolongoraddtolongs.
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FIGURE5.3CapstoneTurbineCorp.(CPST)with26-dayEMAanddailyvolume.(ChartbyStockcharts.com).Volume
Question5-4
1. AttherightedgeofFigure5.3,thepattern
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ofvolumeandpricesshowsthat
1. pricesarerisingon
heavyvolume;golongimmediately.
2. pricesarepullingbacktovalueonfallingvolume—waitforthedeclinetostopandthengolong.
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3. thelastrallyhadanunsustainablevolumelevel—goshort.
4. it'sbettertostandasidefornow.
Question5-5
1. Whichoneofthefollowingstatementsiscorrect?On-
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BalanceVolume(OBV)
1. confirmsbear
moveswhenitfallstoanewlow.
2. trackstherunningtotaloftraders'emotionalcommitments.
3. oftenreachesanewpeakbeforeanew
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peakinprice.4. riseswheneverthe
marketcloseslower.1. I2. IandII3. I,II,andIII4. I,II,III,and
IV
Question5-6
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1. MatchstatementsaboutAccumulation/Distributionfromthefollowingtwosets.
1. Pricesopenbelow
thepreviousday'scloseandcloselower.
2. Pricesopenabovethepreviousday's
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openandclosehigher.
3. Pricesopenabovethepreviousday'sclose,butcloseatthelows.
4. Pricesopenbelowthepreviousday'sclose,butcloseatthehighs.1. Amateurs
relativelybearish,
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professionalsrelativelybullish
2. Amateursrelativelybullish,professionalsrelativelybearish
3. Amateursandprofessionalsbullish
4. Amateursand
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professionalsbearish
Question5-7
1. TheChicagoBoardofTradereportsthatopeninterestinsoybeansstandsat300,000
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contracts.Thismeansthat
1. 150,000contracts
areheldbythelongsand150,000owedbytheshorts.
2. 300,000contractsareheldbythelongsand300,000owedbytheshorts.
3. 600,000contractsareheldbythe
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longsand600,000owedbytheshorts.
4. thereisn'tenoughinformationtotellwhoholdshowmanycontracts.
Question5-8
1. Matchthefollowingactionswiththeirimpacton
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openinterest.1. Atraderwhois
longsellstoanotherwhoisshort.
2. Anewbearentersthemarketandsellsshorttoanearlierbearwhobuystocoverhisshorts.
3. Anewbullentersthemarketandbuysfromanearlierbull
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whosellshisposition.
4. Anewbuyerandanewsellertradewitheachother.1. Openinterest
increases.2. Openinterest
decreases.3. Openinterest
staysunchanged.
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Question5-9
1. Risingopeninterestshowsthat
1. bullsareconfident
andaggressive.2. thesupplyoflosers
isgrowing.3. thetrendislikelyto
continue.
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4. bearsareconfidentandaggressive.1. 12. 1and23. 1,2,and34. 1,2,3,and4
Question5-10
1. Aspriceschange,whichfactorsreflect
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theforceoftheirmove?
1. Theamountof
pricechange2. Volumeoftrading
duringthatmove3. Directionofthe
move4. Relatedmarkets
1. 12. 1and2
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3. 1,2,and34. 1,2,3,and4
Question5-11
1. TheForceIndexformulais
1. Closetoday•
(Volumetoday–Volumeyesterday)
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2. Closetoday•(Volumetoday+Volumeyesterday)
3. Volumetoday•(Closetoday+Closeyesterday)
4. Volumetoday•(Closetoday–Closeyesterday)
Question5-12
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1. WhysmoothForceIndexwithamovingaverage?
1. Thehistogramof
thedailyForceIndexistoojagged.
2. A2-dayEMAofForceIndexhelpsfindentrypointsintotrades.
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3. A13-dayEMAofForceIndexhelpsfindmajorshiftsintheforceofbullsandbears.
4. DivergencesbetweenthesmoothedForceIndexandpriceshelptoidentifyturningpointsinthemarkets.1. I
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2. IandII3. I,II,andIII4. I,II,III,and
IV
Question5-13
1. Ashort-termForceIndex,smoothedwitha2-dayEMA,helpsdecide
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whentoputontradesinthedirectionofthecurrentpricetrend,whichwemaydefineusingtheslopeofapriceEMA.ForceIndexcanalsoshowwhentotakeshort-termprofits.Match
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theletteredareasinthechartinFigure5.13tothefollowingstatements.
1. Buy2. Stopshorting,look
tobuy3. Sellshort4. Covershorts
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FIGURE5.13ScorpioTankers,Inc.(STNG)with13-dayEMAofpriceanda2-dayEMAofForceIndex.(ChartbyStockcharts.com).ForceIndex,2-dayEMA
Question5-14
1. AttherightedgeofFigure5.13,the
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messageofthe2-dayForceIndexis:
1. Standaside.2. Golong.3. Sellshort.
Question5-15
1. Along-termForceIndex,smoothedwith
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a13-dayEMA,deliversseveralstrategicmessages.PleasematchtheletteredareasinthechartinFigure5.15tothefollowingstatements.
1. Bearishcrossover
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—tradeshort.2. Bullishcrossover—
tradelong.3. Dominantforceis
weakening.
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FIGURE5.15EMCCorp.(EMC)with13-dayEMAofpriceanda13-dayEMAofForceIndex.(ChartbyStockcharts.com).ForceIndex,13-dayEMA
Question5-16
1. AttherightedgeofFigure5.15,the
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messageofthe13-dayForceIndexis:
1. Standaside.2. Golong.3. Sellshort.
Question5-17
1. Thepresenceofcyclesinmarketdata
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dependson1. changesinthe
economicfundamentals.
2. greedingoodtimesandfearinbadtimesamongproducersandconsumers.
3. swingsbetweenpessimismandoptimismamong
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traders.4. planetary
influences.1. 12. 1and23. 1,2,and34. 1,2,3,and4
Question5-18
1. Identifythe
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“indicatorseasons”bymatchingthemwiththeappropriatelettersinFigure5.18.
1. Spring;golong.2. Summer;start
takingprofitsonlongs.
3. Autumn;goshort.
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4. Winter;starttakingprofitsonshorts.
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FIGURE5.18Molycorp,Inc.(MCP)with13-dayEMAofpriceanda12-26-9MACD-Histogram.(ChartbyStockcharts.com).IndicatorSeasons
Question5-19
1. Traderscananalyzemarketsin
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greaterdepthbylookingatthemintwotimeframes.Whichofthefollowingcombinationsmakesthemostsense?
1. Weeklyanddaily2. Monthlyanddaily3. Yearlyanddaily
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4. Yearlyandweekly
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SIX
GeneralMarketIndicators
Markets consist of huge
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crowds of traders whosebuying and selling createwaves ofmass optimism andpessimism. The resultingprice trends lure inbystanders, and their buyingand selling reinforces thosetrends, driving them tounsustainable extremes.Fundamental economicfactors may rule the marketsin the long run, but masspsychology determinesintermediate- and short-term
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trends.Several indicators take thepulseof themarket crowd instocks and futures. Theindicators that analyze thestock market as a whole areespecially useful for tradingstock index futures andoptions. Since the broadmarket trends influencemoststocks,thosesignalsalsohelpstocktraders.Generalmarketindicatorsare
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especially important to thosewho trade in the UnitedStates, where severaladvisory services track them.Overseas traders could profitfromdevelopingsimilartoolsintheirowncountries.
Questions Trial1Trial2
Trial3
1 2 3
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4 5 6 7 8 9 10 11 12
Correctanswers
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Question6-1
1. TheNewHigh–NewLowIndex(NH-NL)
1. measuresthe
numberofnewhighsonanygivenday.
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2. tracksthenumberoftheweakeststocksontheexchange.
3. measuresthenumberofnewlowsonanygivenday.
4. tracksthenumberofthestrongeststocksontheexchange.1. 1and3
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2. 2and43. 1,2,3,and44. Noneofthe
above
Question6-2
1. MatchthefollowingNH-NLpatternswiththeirmarket
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messages.1. NH-NLispositive;
risestoanewhighforthemove.
2. Stockmarketfallstoanewlow;NH-NLtracesahigherbottom.
3. NH-NLisnegative;declinestoanewlowforthemove.
4. Stockmarket
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reachesanewpeak;NH-NLtracesalowerpeak.1. Bearish
leadershipisstrong;tradefromtheshortside.
2. Bearishdivergenceshowsthatbullsarebecoming
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weak;starttakingprofitsonlongpositionsandlooktogoshort.
3. Bullishdivergenceshowsthatbearsarebecomingweak;starttakingprofits
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onshortpositionsandlooktogolong.
4. Bullishleadershipisstrong;tradefromthelongside.
Question6-3
1. Identifythe
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followingpatternsbymatchingthemwiththeappropriatelettersinthechartofNH-NLinFigure6.3.
1. Bullspredominate;
tradefromthelongside.
2. Bearspredominate;
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tradefromtheshortside.
3. Abullishdivergence;takeprofitsonshortsandgetreadytogolong.
4. Abearishdivergence;takeprofitsonlongsandgetreadytogoshort.
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FIGURE6.3S&P500witha22-dayEMA,aNewHigh–NewLowIndex,withaoneyearlook-backperiod.(NH-NLdatafromBarchart.com,chartbyTradeStation).TheNewHigh–NewLowIndex
Question6-4
1. Attheright
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edgeofFigure6.3,NH-NLtellsusthat
1. NH-NLis
overbought;sellshort.
2. NH-NLispositiveandrising;golong.
3. nobullishdivergenceispresent;standaside.
4. tradingsignalsare
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mixed;standaside.
Question6-5
1. WhichofthefollowingstatementsapplytotheAdvance/Declineline?
1. Ittracksthe
numbersofrising
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andfallingstocks.2. Itindicatesstrength
whenitrisestoanewhighandweaknesswhenitfallstoanewlow.
3. ThepatternofA/Dpeaksandvalleysismoreimportantthanitslevel.
4. Itshowswhenvolumeconfirmspricemoves.
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1. 12. 1and23. 1,2,and34. 1,2,3,and4
Question6-6
1. Whenbullishconsensusinthestockmarketrisestoarecordhigh,
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itshowsthat1. themarketisneara
top;startsellingandlookforpotentialshorts.
2. theuptrendisstrong;golong.
3. therearen'tenoughnewbuyerstosupportthemarket.
4. youshoulddoubleuponlong
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positions.1. 12. 1and33. 24. and4
Question6-7
1. Duringapowerfuluptrendincopperfutures,
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bullishconsensusrisesto75percent.Thismeansthat
1. anaveragebearhas
investedthreetimesmoremoneythananaveragebull.
2. anaveragebearhasinvestedapproximatelyasmuchmoneyasan
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averagebull.3. anaveragebullhas
investedthreetimesmoremoneythananaveragebear.
4. thereisnotenoughinformationtodecidewhohasinvestedmoremoney.
Question6-8
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1. Arichcornharvestincreasesthesupplyandsendscornfuturesintoabearmarket.Aspricesgrindtheirwaydown,bullishconsensusfallsto20percent.Thismeans
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that1. anaveragebullhas
investedfivetimesmoremoneythananaveragebear.
2. anaveragebullhasinvestedapproximatelyasmuchmoneyasanaveragebear.
3. anaveragebearhasinvestedfourtimes
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moremoneythananaveragebull.
4. anaveragebullhasinvestedfourtimesmoremoneythananaveragebear.
Question6-9
1. Yournewspaperreportsthatcoffeeprices
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areattheirhighestlevelinsixyears;aTVnewsshowfeaturessnowincoffee-growingBrazil;andyourmother-in-lawtellsyoushebought10lbsofinstantcoffeebefore
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pricesriseanyhigher.Yourresponseasatraderistoplanto
1. golongcoffee
futuresorlongcalls.
2. goshortcoffeefuturesorlongputs.
3. golongcocoafutures,asaplayon
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acatch-upmovewithcoffee.
4. buygoldbecausetheriseincoffeeisasignofinflation.
Question6-10
1. Matchthefollowingstatementsabouttraders'positions.
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1. Positionlimits2. Reporting
requirements3. Insidertrading4. Hedging
1. Thelevelatwhichyourtradegetsreportedtoagovernmentagency
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2. Enteringafuturestradeinordertooffsetapositioninanactualcommodity
3. Canbeexceededbycommercials
4. Legalinthefuturesmarkets
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Question6-11
1. Matchthefollowingstatementsaboutdifferentgroupsofmarketparticipants.
1. Smallspeculators2. Largespeculators
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3. Commercials4. Companyinsiders
1. Holdcontractsinexcessofreportinglevels
2. Hedgebusinessrisks
3. Officersandlargestockholders
4. Thegroup
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mostlikelytoloseinthemarket
Question6-12
1. Abearmarketis11monthsold;thecompanywhosestockyoufollowreportslower
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quarterlyearnings;itstwovicepresidentsandamajorshareholderbuyitsstock;thestockis$1aboveitslowfortheyear.Asaninvestor,you
1. goshort
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immediately(thebearmarketisinforce).
2. golongimmediately(insiderbuying).
3. stayawayfromthemarketuntilthenextbullmarketstarts.
4. startbuildingalongposition.
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SEVEN
TradingSystems
Atradingsystemprovidesa
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decision-making tree forsetting entries, targets, andstops.Itisausefulinstrumentbut not a magic device thatcanbefine-tunedonolddataandthenputonautomaticforeffortlesslypullingprofitsoutofthemarkets.Youdevelopatradingsystemin the quiet of your office,whenthenoiseofthemarketshasquieteddown.Acarefullycrafted system becomes your
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island of stability andintelligence in the stormyenvironmentofthemarket.Atrusted system will help youmaintain control at a timewhen the tide of massemotion sweeps people offtheirfeet.This chapter will test yourknowledge of several tradingsystems that have stood thetestoftime.Whileansweringquestions, consider whether
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to start trading with one ofthese systemsoruse themasa starting point fordevelopingyourown.
Questions Trial1Trial2
Trial3
1 2 3 4 5
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6 7 8 9 10 11 12 13 14 15 16
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Correctanswers
Question7-1
1. Whichofthefollowingstatementscanbetrueatthesametimeinanygiven
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market?1. Thetrendisup.2. Thetrendisdown.3. Anindicatorgivesa
buysignal.4. Anindicatorgivesa
sellsignal.1. IandIII2. IIandIV3. I,II,III,and
IV
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4. Noneoftheabove
Question7-2
1. Whentryingtofindatradeonadailychart,
1. focusallyour
attentiononthatchart.
2. identifythetrendof
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theweeklychartandusethedailycharttolookonlyfortradesinthedirectionoftheweeklytrend.
3. findatradeonthedailychartandcheckwhethertheweeklychartpointsinthesamedirection.
4. identifythetrendof
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themonthlychartandusethedailycharttolookonlyfortradesinthatdirection.
Question7-3
1. Whenexploringapotentialtradingsystem,allof
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thefollowingstepsareessential,except
1. one-bar-at-a-time
backtesting.2. forward-testing
withsmallamountsofmoney.
3. lookingforfeedbackfromothersystemusers.
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4. keepingrecordsofeverytrade.
Question7-4
1. Theessentialnumberstowritedownbeforeenteringanytradeincludeallofthefollowing,except
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1. thepriceorarange
foryourentry.2. thepotentialprofit
indollars.3. thetargetforyour
trade.4. theprotectivestop.
Question7-5
1. Ifyouusethe
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slopeoftheweeklyMACD-HistogramasthefirstscreenoftheTripleScreentradingsystemandthatslopeisdown,youmay
1. Golong.2. Goshort.
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3. Standaside.4. Alloftheabove
1. IandIII2. IIandIII3. III4. IV
Question7-6
1. Thefirstscreenofthe
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TripleScreentradingsystempointsup.Ifyouusea5-dayStochasticasyoursecondscreenanditrisesto85,youmay
1. golong
immediately.2. goshort
immediately.
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3. waitforStochastictodeclinebelow40andthengolong.
4. waitforStochastictodeclinebelow40andthengoshort.
Question7-7
1. Theweeklytrendisup,butthedeclineof
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thepastfewdayshaspushedthe2-dayEMAofForceIndex,whichyouuseasthesecondscreen,belowzero.Yournextstepisto
1. waituntilboth
screensgetingear.2. placeanorderto
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buyabovethepreviousday'shigh.
3. placeanordertosellshortbelowthepreviousday'slow.
4. closeoutanyopenpositions.
Question7-8
1. Attherightedgesofthe
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twochartsinFigure7.8,theTripleScreentradingsystemtellsusthat
1. theweeklytrendis
up;thedailytrendisup;golongimmediately.
2. thedailyForceIndexshowsabearishdivergence;goshort
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immediately.3. theweeklytrendis
upandthedailyForceIndexisoversold;placeabuyorderabovethehighofthelastdailybar.
4. theweeklyanddailytrendspointindifferentdirections;standaside.
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FIGURE7.8Ontheleft:BBBYweeklychartwitha13-barEMAand12-26-9MACD-Histogram.Ontheright:BBBYdailychartwitha13-barEMAand2-barForceIndex.(ChartbyStockcharts.com).TripleScreenTradingSystem
Question7-9
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1. MatchthefollowingstatementsabouttheTripleScreentradingsystemwiththeactionsindicated.
1. Theweeklytrendis
up;thedailytrendisup.
2. Theweeklytrendis
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up;thedailytrendisdown.
3. Theweeklytrendisdown;thedailytrendisup.
4. Theweeklytrendisdown;thedailytrendisdown.1. Startplacing
buyorders.2. Startplacing
orderstosell
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short.3. Standaside.
Question7-10
1. WhichofthefollowingstatementsregardingtheImpulsesystemisincorrect?
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1. TheImpulsesystemtellstraderswhentobuyorsell.
2. Theslopeofafastmovingaveragereflectsthedirectionofmarketinertia.
3. TheslopeofthelasttwobarsofMACD-Histogramreflectsthedirectionofmarket
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power.4. TheImpulsesystem
removesaprohibitionofbuyingorshortingbychangingitscolor.
Question7-11
1. Matchthefollowingindicator
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readingswiththemessagesoftheImpulsesystem.
1. EMAisrising,
MACD-Histogramrising.
2. EMAisrising,MACD-Histogramfalling.
3. EMAisfalling,MACD-Histogram
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falling.4. EMAisfalling,
MACD-Histogramrising.1. Impulse
systemgreen(bullish)
2. Impulsesystemred(bearish)
3. Impulsesystemblue
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(neutral)
Question7-12
1. MatchtheletteredbarsinthechartinFigure7.12withthefollowingstatements.
1. Buyingorstanding
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asidepermitted;shortingforbidden.
2. Shortingorstandingasidepermitted;buyingforbidden.
3. Buying,shorting,orstandingasideispermitted.
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FIGURE7.12JCPdailywitha13-barEMA,a12-26-9MACD-Histogram,andtheImpulsesystem.(ChartbyStockcharts.com).TheImpulseSystem
Question7-13
1. LookingattheweeklychartofBBBYin
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Figure7.8,whatwouldbethecolorofitsrightmostbarifweappliedtheImpulsesystem?
1. Green2. Red3. Blue4. Notenough
informationto
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decide
Question7-14
1. Thecorrectwidthofachannelaroundamovingaverage
1. isacloselyguarded
secretof
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professionaltraders.
2. containsallpricesforthepast50to100bars.
3. containsabout90percentofthepricesforthepast50to100bars.
4. containsabouthalfofthepricesforthepast50to100bars.
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Question7-15
1. Matchstatementsregardingmovingaveragechannelsfromthefollowingtwosets.
1. Themarketis
undervalued.
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2. Themarketisovervalued.
3. Dependsonvolatility.
4. Themarketisfairlyvalued.1. Theupper
channelline2. Themoving
average3. Thelower
channelline
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4. Channelcoefficient
Question7-16
1. Whichstatementaboutchannelsisincorrect?
1. Goinglongorshort
inthemiddleofachannelalways
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offersattractivetradesbecauseyoubuyorsellattheconsensusofvalue.
2. Whenachannelrisessharply,anupsidepenetrationoftheupperchannellineindicatesthatthemarketisstrongandshouldbeboughtwhenit
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returnstoitsmovingaverage.
3. Whenachannelisrelativelyflat,themarketisalmostalwaysagoodbuynearthebottomofitstradingchannelandagoodsellnearthetop.
4. Abreakoutbelowthelowerlineofasharplyfalling
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channelindicatesthatthemarketisweakandapullbacktothemovingaveragewillofferashortingopportunity.
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EIGHT
TradingVehicles
Some professionals say—“I
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don't trade stocks, futures, oroptions; I trademoney inmyaccount.” They focus onsystem design and riskmanagement,whilewhattheytrade are just vehicles inwhichtheirmoneygoesforaride, hopefully in the rightdirection.1
You have an enormouschoice of trading vehicles.Beforeyou focuson a singleclassorevenasmallergroup
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within that class, it pays toknowwhat other instrumentsareavailabletoyou.This chapter will test yourknowledge of several majorclasses of tradinginstruments.Whileansweringquestions, think about whatyou're currently trading.Youmay even decide to broadenyour attention and tradeanother type of instrument,andofcourse,youcanalways
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trademorethanonetype.
Questions Trial1Trial2
Trial3
1 2 3 4 5 6 7
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8 9 10 11 12
Correctanswers
Question8-1
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1. Inselectingatradinginstrument,whichofthefollowingisnotakeyconsideration?
1. Liquidity2. Volatility3. Popularity4. Timezones
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Question8-2
1. Whenbuyingastock,you
1. makealoantothe
company.2. becomeaninsider.3. willprofitifthe
companymakesmoney.
4. becomeapart
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ownerofthecompany.
Question8-3
1. HowdoesWarrenBuffettsuggestdealingwith“Mr.Market”?
1. BuywhenMr.
Marketishappy.
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2. SellwhenMr.Marketishappy.
3. SellwhenMr.Marketisdepressed.
4. BuywhenMr.Marketisdepressed.1. I2. II3. IandIII
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4. IIandIV
Question8-4
1. Anexchange-tradedfund(ETF)isanasset-holdingvehicle,designedtotradelikeastock.Whichoneofthe
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followingstatementsaboutETFsisincorrect?
1. ETFsoffera
narrowchoiceofassets.
2. ETFslooselytrackunderlyingsecurities.
3. AdministrativeexpensesofETFs
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take‘haircuts’fromprofits.
4. ETFsallowyoutopurchaseanassetclassorastockgroup.
Question8-5
1. Matchthefollowingsetsofstatementsregarding
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stockoptions.1. Abetthatastock
willdrop2. Abetthatastock
willrise3. Acallwhose
underlyingstockisbelowtheexerciseprice
4. Acallwhoseunderlyingstockisabovetheexercise
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price1. Out-of-the-
money2. Put3. In-the-money4. Call
Question8-6
1. Optionpricesdependonallofthe
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following,except
1. theclosenesstothe
optionexpirationdate.
2. theclosenesstotheoptionexerciseprice.
3. howcloselytheunderlyingstocksfollowstheirindustrygroup.
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4. thevolatilityoftheunderlyingstocks.
Question8-7
1. Matchthefollowingstatementsoncallsandputs.
1. Thepriceofthe
underlyingstockrises.
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2. Thepriceoftheunderlyingstockfalls.
3. Thepriceoftheunderlyingstockremainsflat.1. Profitablefora
callbuyer2. Profitablefora
putbuyer3. Profitablefora
callwriter
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4. Profitableforaputwriter
Question8-8
1. Whichofthefollowingsafety-orientedstepsisbesttoavoidwhenwritingoptions?
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1. Aimtowriteoptionsoutsidepricelevelsyouexpecttheunderlyingsecuritytoreach.
2. Placeastoptoexityouroptionpositionifitmovesagainstyoubyacertainamount.
3. Aimtowriteoptionswithlow
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Deltas.4. Openaninsurance
account.
Question8-9
1. What'sthegreatestdifferencebetweenbuyingfuturesandoptions?
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1. Thenumberoflongandshortpositions.
2. Futuresarelesscorrelatedwitheachotherthanstockoptions.
3. Therearethousandsofoptionablestocksbutonlydozensoffutures.
4. Themostanoptionbuyercanloseistheinitialpremium,
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butafuturesbuyercanlosealotmore.
Question8-10
1. Themaindangeroffuturesmarketsis
1. therelativelyshort
lifeoftheircontracts,compared
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tostocks.2. tradingwithsmall
margindeposits.3. theexistenceofthe
dailypricelimits.4. insidertradingby
hedgers.
Question8-11
1. Matchthefollowing
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statementsregardingfutures.
1. Acontractforthe
nextmonth'sdeliveryofacommodityispricedhigherthanformoredistantdeliveries.
2. Atraderopensafuturespositionoppositetohis
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positionintheactualcommodity.
3. Amajorweatherdisturbancethreatenscottonharvest.
4. Acoldspelldrivesupthepriceofheatingoil;atradershortsheatingoilandgoeslongcrudeoil.1. Supply-driven
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market2. Spreadtrading3. Inverted
market4. Hedging
Question8-12
1. Whichstatementsregardingtheforexmarket
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arecorrect?1. Theforexmarket
hasnocentrallocation;institutionaltradersdealdirectlywitheachother.
2. Forexhousestendtoacceptcustomerorderswithoutexecutinganytrades.
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3. Marginsof1:30andhigherhelptradersprofit.
4. Aretailforexbrokeragehouseearnsitsincomefromcommissions.1. I2. IandII3. I,II,andIII4. I,II,III,and
IV
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Note
1 Several years ago, aBedouin guide in Jordanasked me about myprofession,andItoldhimItraded on Wall Street. Hedrove by the local marketwhere his buddies tradedgoats,which,atabout$300apiece,were amajor storeof value in the desert. Heasked whether I'd like to
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trade, but I laughed andsaid that ifwe brought hisdesert traders to WallStreet and showed themhowtousecomputers,theywouldout-trademanylocalguys.
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NINE
RiskManagement
Even a brilliant systemwill
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not guarantee winning inevery trade. This is whyevery system must includeriskmanagementrules.Manycreators of promising tradingsystems keep losing moneybecauseofpoororabsentriskcontrol.Eachandeverysystemhasitsdrawdown periods. That'swhenriskmanagementmeansthe difference between lifeanddeath.Nosystemwilldo
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you any good if you don'tmanagerisk.Professionals spend much oftheir time calculating howmuch money to risk on anygiven trade and how to varytrade size, depending onmarket conditions andaccount equity. Riskmanagement is essential foryoursurvivalandsuccess.Youoweittoyourselftoearnan excellent rating in this
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sectionof theStudyGuide—nothing less will do! Astraders, we sail on a stormyocean. Risk managementrulesareourlifeboatsandlifepreservers. Make sure thatyour safety gear is in goodorder.
Questions Trial1Trial2
Trial3
1 2
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3 4 5 6 7 8 9 10 11 12 13
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14 15 16 17
Correctanswers
Question9-1
1. Atraderfeels
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overjoyedafteraprofitabletradeanddisgustedafteralosingtrade.Thismeansthat
1. heisontheright
track;itisimportanttolistentoyourfeelings.
2. hismindiscloudedbyemotionsthat
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interferewithmakinggoodtradingdecisions.
3. heshoulddoublethesizeofhispositionwhenhefeelshappyandgetoutwhenhefeelshurt.
4. feelingdisgustedisaproperreactiontoalosingtrade.
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Question9-2
1. Tradershangontolosingtradesforallofthefollowingreasons,except
1. theybecome
attachedtopositions.
2. theyhatetoadmit
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theyarewrong.3. theyfollowsound
tradingplans.4. takingalossmeans
givinguphope.
Question9-3
1. Youbuyafterindicatorsturnup.Twodayslaterthe
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marketslides,theindicatorsturndown,andyouhavea$200paperloss.Yourinitialstopwas$300belowthemarket,andthenextsupportlevelis$350belowyourentrypoint.Whatdo
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youdo?1. Continueinthe
trade,keepyourstop.
2. Takeyourlossandretreattothesidelines.
3. Doubleupyourpositiontoloweritsaverageprice.
4. Loweryourstoptoslightlybelowthe
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nextlogicalsupportlevel.
Question9-4
1. Twotradersdecidetospendtheircoffeebreakflippingacoinandbettingadollaroneachflip.TraderA
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brings$3tothegame,traderBbrings$10.ThechanceoftraderAbeingawinnerattheendofthatcoffeebreakis
1. near100percent.2. near50percent.3. near0percent.
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4. Notenoughtinformationtoanswer.
Question9-5
1. Choosetheorderofimportanceofthefollowingthreemoneymanagementgoals.
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1. Earnhighprofits2. Ensuresurvival3. Earnasteadyrate
ofreturn1. I,II,III2. II,III,I3. Ill,II,I
Question9-6
1. Theusefulness
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ofwhichofthefollowingruleshasbeenprovenbyexperience?
1. Nevermeeta
margincall.2. Neveraverage
down.3. Thefirstmistakeis
thecheapest.4. Ifyoumustlighten
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up,liquidateyourworstposition.1. I2. IandII3. I,II,andIII4. I,II,III,and
IV
Question9-7
1. Whenyoufindyourself
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countingmoneyinatrade,youshould
1. stop—andifyou
can't,closeoutthattrade.
2. Countmoneytocalculateyourstops.
3. Countmoneytocalculateyour
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profittargets.4. plotachartofyour
paperprofits.1. I2. IandII3. I,II,andIII4. I,II,III,and
IV
Question9-8
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1. Yourtradingsystemindicatesatradewithanattractiveprofitpotentialandastop$0.98persharebelowtheentryprice.Youhave$28,000inyouraccount.Accordingto
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the2%Rule,howmanysharesmayyoubuy?
1. 3002. 4003. 5004. 600
Question9-9
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1. Youbuy300sharesofarisingstock,anditrallies$3.Nowyoushouldthinkabout:
1. Wheretomove
yourstop2. Whethertomove
yourtarget3. Howmanydollars
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you'vemadesofar4. Howmuchyou
wouldhavemadeifyoubought600shares1. I2. IandII3. I,II,andIII4. I,II,III,and
IV
Question9-10
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1. Whichofthefollowingstatementsaboutstopsaretrue?
1. Whenyouarelong,
donotmovedownyourstop.
2. Whenyouareshort,youmaymovedownyour
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stop.3. Whenyouarelong,
youmaymoveupyourstop.
4. Whenyouareshort,donotmoveupyourstop.1. IandIV2. IIandIII3. Noneofthe
above
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4. Alloftheabove
Question9-11
1. Astop-lossorder
1. limitsyourlosson
abadtrade.2. reducesyourstress
level.3. limitsthedamage
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fromabadtradingsystem.
4. guaranteesthatyourlosswillnotexceedacertainamount.1. I2. IandII3. I,II,andIII4. I,II,III,and
IV
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Question9-12
1. Whichofthefollowingtradersareincompliancewiththe2%Rule?
1. TraderA:$18,000
intheaccount,bought200sharesat$20,stopat$18
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2. TraderB:$50,000intheaccount,bought400sharesat$20,stopat$18
3. TraderC:$25,000intheaccount,bought400sharesat$20,stopat$19
4. TraderD:$60,000intheaccount,bought1,500sharesat$20,stopat$191. IandII
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2. IIandIII3. IllandIV4. I,II,III,and
IV
Question9-13
1. Whichtwomistakesonthislistaremostdeadlyfortraders?
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1. Tradingonrumors
andhearsay2. Tradingwithout
stops3. Forgettingto
monitoropentrades4. Puttingontrades
whosesizeistoolargefortheaccount1. IandII
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2. IIandIII3. IandIV4. IIandIV
Question9-14
1. TheIronTriangleofriskcontroltellsyouhowmanysharesyoumaybuy
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orsellshortbyperformingwhichcalculation?
1. Subtractyourentry
fromyourtargetprice
2. Divideyourtargetpricebyyourstop
3. Addyourstoptoyourtargetprice
4. Divideyourtotal
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dollarriskbytheriskpershare
Question9-15
1. Whichofthefollowingstatementsregardingthe6%Ruleiscorrect?
1. Youmaynotrisk
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morethan6%ofyouraccountequityonanysingletrade.
2. Ifyourisk2%pertradeandhadthreelosingtradesinamonth,youhavetoreduceyourriskonthenextthreetrades.
3. Ifyourisk2%pertradeandtakethreelossesinarow,you
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maynottradefortherestofthismonth.
4. Paperlossesonopentradesdon'tcountagainstthe6%Rulelimit.
Question9-16
1. Incalculatingyour“available
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risk,”the6%Ruletakesintoaccountallofthefollowing,except:
1. Yourpaperprofits
forthemonth2. Yourtotallosses
forthemonth3. Youramountsat
riskinopentrades4. Whatwouldhappen
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ifallyouropentradesturnednegative
Question9-17
1. Allofthefollowingstatementsapplytocomingbacktotradingafterasevere
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drawdown,except:
1. Beginbytradinga
tinysizeandincreaseitinstepsaftermeetingperformancegoals.
2. Jumpintotradingfullsize—dealwithyourfearsbyfacingthem.
3. Becomeyourown
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tradingmanagerbyfocusingonriskmanagement.
4. Lowerthe2%Ruletoasmallernumber.
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TEN
PracticalDetails
I was in a room where a
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world-famous technicalanalyst lectured about gold.He projected his charts on ascreenandpointedouttrendsand potential reversals. Atrader in the audience raisedhis hand: “So, at the rightedge,wouldyoubuyorsell?”Thegreatexpertponderedthescreenanduttered:“Well,I'msure that in two to threeweeks,theanswertothatwillbe very clear.” The traderstared at him
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incomprehensibly.Intrading,youdon'thavetheluxuryofwaitingforacoupleofweeks for an answer.Youneed to decide now, today,what you'll do at the rightedgeofthechart:buy,sell,orstand aside. Standing aside,by the way, is a legitimatechoice.Ifyoudecidetotrade,youneed to choosewhere toenter, set targets, and placestops.
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Tradersuseawidevarietyofmethods to accomplish thesetasks. In this chapter, we'llreview the methods that aredescribed in The NewTradingforaLiving.
Questions Trial1Trial2
Trial3
1 2 3
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4 5 6 7 8 9 10 11 12
Correctanswers
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Question10-1
1. Theleastadvisablemethodofenteringalongpositionistobuy
1. abreakoutabove
yesterday'shigh.
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2. abreakoutabovethechannel.
3. apullbacktothevaluezone.
4. apenetrationofthevaluezone.
Question10-2
1. Goldisinanuptrend,confirmedbya
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risingmovingaverage.Everyfewweeksthereisabriefpanic,aspricesstabbelowtheirmovingaveragebeforeresumingtheiruptrend.Threemonthsago,pricesstabbed$2.50below
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theirEMA,twomonthsago$1.50,andlastmonth$4.HowdeepbelowtheEMAwouldyouconsiderplacingabuyorder?
1. Immediatelybelow
theEMA2. $1below
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3. $3below4. $5below
Question10-3
1. Whenbuyinginthevicinityofarisingmovingaverage,areasonableprofittarget
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wouldbe1. theupperchannel
line.2. thelowerchannel
line.3. thesamedistance
abovetheEMAasthelatestpenetrationwasbelow.
4. whenthemovingaverageturnsdown.
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Question10-4
1. Settingprofittargetsforlong-termtradesisbestdoneonthebasisof
1. movingaverages.2. channels.3. divergences.
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4. supportandresistance.
Question10-5
1. Whichofthefollowingstatementsaboutstopsisincorrect?
1. Theyleadto
whipsaws.
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2. Theyallowyoutocalculatereward/riskratios.
3. Theylimitthemaximumamountofloss.
4. Theygiveyouanideaofamaximumlossinatrade.
Question10-6
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1. Whichofthefollowingmethodsofplacingstopshelpsavoidgettinghitby“marketnoise”?
1. Stopsoutsideofthe
pricechannel2. SafeZonestops3. ATRstops
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4. Stopsbasedonsupportorresistance1. I2. IandII3. I,II,andIII4. I,II,III,and
IV
Question10-7
1. Whichofthe
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followingrulesapplytoplacingstops?
1. Don'tplacestopsat
obviouslevels.2. Don'tplacestopsat
roundnumbers.3. Moveyourstopsto
protectwinningtradesfromturningintolosingones.
4. Moveyourstop
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onlyinthedirectionofyourtrade.1. I2. IandII3. I,II,andIII4. I,II,III,and
IV
Question10-8
1. Thehighofthedailybaris
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$23andthelow$21.Youbuyat$21.50.Whatisyourbuygrade?
1. 25%2. 50%3. 75%4. Noneoftheabove
Question10-9
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1. Thehighofthedailybaris$29andthelow$26.Yousellat$27.Whatisyoursellgrade?
1. 33%2. 50%3. 66%4. 75%
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Question10-10
1. Thetrend,definedbytheEMAslope,isrising.Onthedayyoubuy,theupperchannellineisat$32.50andthelowerchannellineisat$26.50.You
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golongat$29andsellseveraldayslaterat$31.Whatisyourtradegrade?
1. 25%2. 33%3. 50%4. 66%
Question10-11
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1. Whichofthefollowingstatementsaboutscanningisincorrect?
1. Ascanmaycovera
thousandstocks.2. Ascanfindsstocks
thatfitapatterndefinedbyyou.
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3. Awell-designedscanfindsprofitabletrades.
4. Onecanscanstockindustrygroupsaswellasindividualstocks.
Question10-12
1. Negativerulesforscanningmayfilterout
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stocksonthebasisofallofthefollowingcriteria,except:
1. Unprofitable2. Trendingdown3. Insufficientvolume
levels4. Toocheaportoo
expensive
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ELEVEN
GoodRecord-Keeping
Keepinggoodrecordshelps
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you identify past mistakesand stop repeating them.Good records make clearwhat steps brought youprofits,sothatyoucanrepeatthemgoingforward.Good record-keeping tiestogether psychology, marketanalysis, and riskmanagement. It is the besttool for developing andmaintainingdiscipline.To improve your
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performance, you must learnfromyourexperiences,whichis what good record-keepingallows you to do. It is themost important skill for yourgrowthasatrader.
Questions Trial1Trial2
Trial3
1 2 3
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4 5 6 7 8 9
Correctanswers
Question11-1
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1. Goodrecord-keepinghelpsaccomplishallofthefollowing,except:
1. Greaterdiscipline2. Lessimpulsive
trading3. Stopmaking
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mistakes4. Becomeyourown
teacher
Question11-2
1. Performingroutinemorninghomeworkisespeciallyimportantforwhatreason?
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1. Ithelpsyouwake
up.2. Itallowsyouto
reviewnewsandreportsrelevanttotradingduringtheday.
3. Itallowsyoutoreviewyesterday'sperformance.
4. Itallowsyoutoadjuststops.
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Question11-3
1. What'sthemainpurposeoftakingadailypsychologicalself-testbeforethemarketopens?
1. Toevaluateyour
mood
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2. Toevaluateyourreadinesstotrade
3. Toseeonwhatdaysyoushouldn'tbetrading
4. Tobereadytotradeagreatersizeonthedayswithaperfectscore1. IandII2. IIandIII3. IllandIV
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4. IandIV
Question11-4
1. Atradeplanmustincludeallofthefollowing,except:
1. Thestrategyyou'll
use2. Yourentry,exit,
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andstop3. Theamountof
moneyyou'llrisk4. Theamountof
moneyyouplantomake
Question11-5
1. Whichstatementsaboutusinga
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TradeApgararecorrect?
1. Themorequestions
youaskaboutyourplan,thebetteryou'llbepreparedtotrade.
2. Keepthenumberofquestionsaboutatradeplandowntofive.
3. Writedown
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detailedresponsestoquestionsandweighthemcarefully.
4. Useonlyoneofthreeresponses:yes,no,andin-between.1. IandIII2. IIandIV3. IandIV4. IIandIII
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Question11-6
1. CompletingaTradebillpriortoenteringatrademakesyoufocusonwhichofthefollowing?
1. Entry,exit,andstop2. Earningsreports
andex-dividend
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dates3. Thestrategyyou'll
trade4. Amountofriskand
positionsize1. I2. IandII3. I,II,andIII4. I,II,III,and
IV
Question11-7
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1. Afteryouenteratrade,yourTradebillshoulddocumentwhichofthefollowing?
1. Stopplacement,
bothsoftandhardifyouuseboth
2. Thelevelatwhich
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you'llmoveyourstoptobreakeven
3. Thefactofhavingmadeanentryinthetradediary
4. Theamountoftargetedprofit1. I2. IandII3. I,II,andIII4. I,II,III,and
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IV
Question11-8
1. Whichstatementaboutreviewingclosedtradesiscorrect?
1. Giveyourfull
attentiontocurrent
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trades,don'tdwellinthepast.
2. Losseshurttoomuchatthetimeyoutookthem,andthereisnopointrevisitingthem.
3. Spendyourtimeplanningforthefuture,notthinkingaboutthepast.
4. Learnfrompastmistakes,soyou
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don'trepeatthem.
Question11-9
1. ThemosteducationalpartofaTradeJournalis
1. documentingyour
strategy.2. addingentryand
exitcharts.
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3. postingafollow-upchartweeksormonthsafteratrade.
4. documentingentry,exit,andtradegrades.
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PARTII
ANSWERSAND
COMMENTS
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Introduction
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1. Answer0-1:C(IandIV)Fundamentalanalystsstudyeconomicconditions;technicalanalystsfocusonmarketbehavior.Bothcanhelpyou
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spotgoodtradingopportunities.Tipsaretricky—theyalmostalwayscomelate;plus,thetipperwhotellsyoutobuywillalmostnevertellyouwhentosell.Tips
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canbeusedonlyifyourunthemthroughyourdecision-makingsystem.Usinginsideinformationisacriminaloffenseinmostdevelopedcountries.
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2. Answer0-2:CThethreepillarsofsuccessfultradingaresoundpsychology,agoodanalyticmethod,andcarefulmoneymanagement.Agoodtrader
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withasoundanalyticmethodishisowninsider.
3. Answer0-3:ATheattitudeofbenignskepticismisthebest.Borrowtheideasthatseemtomake
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senseandthentesttheminthecrucibleofyourownexperience.Begintradingasmallsizeandgraduallyincreaseitasyougainconfidence.
4. Answer0-4:D
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Slippageandcommissionsslantthe“playingfield”againstmosttraders;emotionaltradingfinishesthemoff.Theftisonlyaminorfactorinwell-policedmarkets.
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5. Answer0-5:DWhenthewinnerreceiveslessthantheloserlost,thattransactioniscalleda“minus-sumgame.”Commissionsandslippage
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maketradingaprimeexampleofsuchagame.Manyprovidersoffinancialservicestrytohidethisfact.
6. Answer0-6:AYoupaycommissionsonstocktrades
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whenyoubuyandagainwhenyousell.100sharesofa$20stockwillcost$2,000.You'llpaya$10commission(0.5%)whenyoubuyandagainwhenyousell,foratotalof$20or
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1%.Ifyoudothistradeonmargin,payingonly$1,000foryoursharesandborrowingtherest,thatcommissionwillbe2%ofyourcapital—andthenyou'llhavetopayinterestonmargindebt.
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Thatseeminglysmallcommissionmultipliedbythenumberoftradesthatyoumakeinayear,cantakeaseriousbiteoutofyouraccount.Thisproblemisespecially
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acuteforsmallaccounts,andofcourse,usingmarginmakesitevenworse.Lesson:beveryselectiveinwhatyoutrade,weigheachtradeplancarefully.
7. Answer0-7:
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BYourslippageenteringthistradewas8centsforeachofthe100sharesyoubought,foratotalof$8.Itwasalmostasbigasyourcommission.Whiletrading
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largerpositionsreducestherelativecostofcommissionspershare,thereisnosuchbreakwithslippage—ifyoutraded1,000shares,yourslippagewouldhavebeen$80
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orworse.Theremedyisstraightforward:uselimitordersforenteringtrades.
8. Answer0-8:CYoubought100sharesat$20.08andsoldat$20.88
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foragrossprofitof80centspershareor$80for100shares.Yourslippagewas8centswhenyouboughtand12centswhenyousold,foratotalof20centspershare,$20total.The$20
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totalslippageis25%ofyour$80profitforthetrade.Whenitcomestostops,limitorderswon'tdo.Use“marketiftouched”orders—whenit'stimetoescape,hitthe
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ejectbutton.Someslippageisinevitable,butthegoalistokeepitaslowaspossible.
9. Answer0-9:BYou'veboughtyoursharesat$20.08andsoldat$20.88
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for80centsprofitpershareoratotalgrossprofitof$80.Yourcommissionsateup$10enteringandanother$10exiting.Therewasalsothatslippageof$8ontheentryandanother
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$12duringtheexit.Thetotalbitecameto$40or50%ofyourgrossprofit—andnowUncleSamislickinghislips,waitingtotaxyou.Youneedtofocuson
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reducingtheexpensesoftrading:askyourbrokertolowerhiscommissionrateorshopforamorecompetitivebroker,beselectiveaboutyourtrades,andwheneverpossibleuse
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limitratherthanmarketorders.
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■RatingYourself
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1. 0–3correct:poor.Takeheart—thequestionsthatyoufailedtoanswerareseldomasked.Manyinthefinancialservicesindustrytryto
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muddleupthefacts.Takeyourtime,rereadtheIntroductioninTheNewTradingforaLiving,andretakethistest.
2. 4–6correct:fairlygood.Youhavegraspedthe
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basicideas.Lookuptheanswerstothequestionsyou'vemissed.Thinkaboutthemandretakethistestafewdayslater.
3. 7–9correct:excellent.You
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understandtheseneglectedbutveryimportantconcepts.You'llenjoythechaptersonpsychologyandriskmanagement.
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ONE
IndividualPsychology
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1. Answer1-1:DTradingisinherentlyriskybecausewedealwiththeuncertaintyofthefuture.Iftherewerenoriskofloss,therecouldbe
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noreward.Amateurshaveemotionalreactions—fear,elation,anger.Aprofessionaltradermeasureseachriskinadvanceandtradesonlywhentheoddsareclearlyinhis
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favor.2. Answer1-2:
AYoumuststrivetoachieveyourpersonalbest,tobecomethebesttraderyoucan.Focusingonmoney,buyingtoys,ortryingto
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impressotherswillonlydivertyourattentionfromthetopgoal—reachingyourpersonalbest.Agoodsurgeondoesn'tcountmoneyattheoperatingtable—andneitherdoesan
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intelligenttraderwhileheisinatrade.
3. Answer1-3:CTreatyourmistakesaslearningopportunities:findthecausesofyourlosses,andcorrectthosemistakes
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goingforward.Thisisanemotionallyhardtask,butitneedstobedoneinordertowin.Withoutsuchanalysis,tryingtotradeyourwayoutofahole,evenwithanewguru,is
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doomedtofailure.Youneedtofigureoutexactlywhatgotyouintoaholeinthefirstplace.We'llreturntothistopicinthechapteronkeepingatradingdiary.
4. Answer1-4:
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AAlargeaccountallowsyoutodiversify,trademultiplepositions,andspendproportionatelylessonservices.Beginnersoftendiscard
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theseadvantagesbyblowingmoneysimplybecauseitexistsintheiraccounts.We'llreturntotherulesonmanagingtradesizeinthechapteronmoneymanagement.
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5. Answer1-5:D(IIIandIV)Commercialtradingsystemsarebuiltandoptimizedusingolddata;theyself-destructwhenmarketschange.Anintelligent
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traderwhodevelopshisownsystemcanmakeneededadjustments;atraderwhopurchasesasystemsinkswithit.Evensystemswithbuilt-inoptimizationeventually
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self-destructbecausewedonotknowwhatkindsofoptimizationwillworkinthefuture.Followingtradingsignalsfromanysystemrequiresdisciplineandevokes
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essentiallythesameemotionsasindependenttrading.Thereisnosubstituteformaturejudgment.
6. Answer1-6:C(I,II,andIII)Oneofthekeysignsofagambling
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attitudeistheinabilitytostoptrading,stayonthesidelines,andreflectonone'sbehavior.Traderswhogambletendtoreversetheirpositionsandfeeldepressedorelateddependingon
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theoutcomeoftheirlatesttrade.Alosingstreakisacommonexperience;whenyouhitone,stoptradinguntilyou'vespenttimereevaluatingyourmethod.Serioustraders
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learnfromtheirlosses,whilegamblerscontinuewiththeircompulsivetrading.
7. Answer1-7:CWetradethewaywelive.Personal
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disciplineisessentialforsuccess.Lookforcommonproblemsinyourtradingandeverydaylife.Thistraderseemstohaveseriousissueswithresponsibility.Heneedstofaceitandget
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himselforganizedineverydaylifeaswellasintrading.
8. Answer1-8:D(IandIV)Towin,youdon'thavetobemoreintelligentorknowledgeablethanother
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traders,butyoumustbebetterdisciplined.Yourfeelingsinfluenceyourtrades,includingentries,exits,andriskmanagement.Ifyourmindiscloudedbyfearorgreed,
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nosystemwillhelp.Gettinghighfromtradingleadstogambling,acceptingbadodds,andlosing.
9. Answer1-9:C(IandIII)Youmayincreaseyourtradingsizeas
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longasyoudon'triskagreaterpercentageofyourequity—we'llreturntothisinthechapteronriskmanagement.Avacationfromtradingmaynotbeabadidea—spendsomeof
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thetimeanalyzingwhatyoudidright.Ontheotherhand,becomingsloppywithstopsandlazyinresearcharetypicalbehaviorsofaloseronaluckystreak.
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10. Answer1-10:DLosersareaddictedtothethrillofthegameandhopeforabigwin.Theykeeppoorrecords,justlikealcoholicsdon'tcounttheirdrinks.
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Theyswitchbetweentradingsystemsandmethods,justlikealcoholicsswitchfromdrinkinginbarstodrinkingathome.
11. Answer1-11:C
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Losersarehookedontheexcitementoftradingandkeephopingforabigwin.Theyblameothersfortheirlossesandavoidacceptingpersonalresponsibility.
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12. Answer1-12:DAcceptingresponsibilityforyourlossesblowsawaythesmokeofillusionsandputsyourtradingonanew,realisticfooting.Abettertrading
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system,newtradingmethods,andamajorbullmarketcanhelp,butpersonalresponsibilitycomesfirst.
13. Answer1-13:B(IIandIII)Atraderwhohasthe
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couragetofacehisownroleinlosingcanturnaround;goingforward,heislikelytocutlossesshortandavoidovertrading.Hisdisciplinewillfreehimfromfear,butitwillnot
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lowerhisratesofcommissionsandslippage—forthatheneedstocarefullyshopforabrokerandavoidmarketorders.
14. Answer1-14:CBeingcalm
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anddisciplinedisthecornerstoneofsuccessfultrading.Writingdownyourtradeplansandimplementingthemwillputyouontheroadtosuccess—we'llreturntothistopicin
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thechapterontradeplans.Biggercapital,knowledgeablefriends,andahistoryofsuccessinotherendeavorsarealldesirable—butnoneequalstheimportanceofdisciplined
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planning.Emotionaltradingistheenemyofsuccess.Iftradingmakesyoufeelgiddyorfearful,thosefeelingswillcloudyourjudgment.Exityourtradeswhenyoufeel
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thegripofemotions.
15. Answer1-15:AAtrader'sownimpulsivitymakesthemarketappearconfusingandillogical.Otherproblems,suchasashortageofgood
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information,smallcapital,oreventhemarket'speriodsofrandomness,contributelesstoconfusionthanemotionaltrading.
16. Answer1-16:CAtradebegins
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whenyoudecidetoenterthemarket,anditendswhenyoudecidetoexit.Thosedecisionsarelikethebookendsofeverytrade,andtheyareyoursalone.Youmayuse
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technicalindicators,fundamentalanalysis,orevenpayattentiontotrustedadvisors—butonlyyoucandecidewhenatradebeginsandwhenitends.
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■RatingYourself
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1. 0–4correct:poor.Theredlightisflashing—yourlowlevelofself-awarenessputsyouindanger.Youneedtolearnmoreabouttrading
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psychologyinordertohaveachanceofsuccess.Manypsychologicaltricksthathelpusinourdailylivesdestroytradingaccounts.Manyeducationalsystemspromote
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dependenceandfollow-the-leadermentality.Successfultradersareindependent,creative,andrealistic.Pleaserereadtherelevantchapterandretakethistestbefore
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proceedingtotherestofthisStudyGuide.
2. 5–8correct:belowaverage.Gettinghalftheanswersrightmeansbeinginthebottomhalfandthat'snotgoodenough
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forwinning.Youneedtolearnmoreabouttheindividualpsychologyoftrading.Pleaserereadtherelevantmaterialsandretakethistest.
3. 9–12correct:fairlygood.
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Youhaveaworkinggraspoftheessentialconceptsoftradingpsychologybutneedtofillinthegaps.Studytherecommendedmaterialsandretakethistestinafewdays.Sound
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psychologyanddisciplineareessentialforyoursuccessinthemarkets.
4. 13–16correct:excellent.Youhavemasteredthetopicsinthischapter.Please
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reviewthosequestionswhereyouranswersdifferedfromthoseprovidedinthisbook.Successfultradersareveryindependent.Seewhetherthediscrepancies
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wereduetoerrors—ortoyourown,individualwayofthinking.
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■ RecommendedReading1. Douglas,Mark,TheDisciplinedTrader(NewYork:NewYorkInstituteofFinance,1990).
2. Lefevre,Edwin,ReminiscencesofaStockOperator(1923)(Greenville,SC:Traders
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Press,1985).
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TWO
MassPsychology
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1. Answer2-1:DPricesaresetbycrowdmemberswhoplaceorderstobuyorsell,orelsestandaside.Eachpricetickreflectsthe
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latestconsensusofvalue,hammeredoutbythoseordersorthewithholdingoforders.Tickscoalesceintopatterns—thefootprintsofbullsandbearsonourcharts.“Supplyand
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demandcurves”arefarremovedfromthissweatyrealityofthemarket.Pricesareconnectedtofundamentalvaluesinthelongrunbutaregovernedbycrowdpsychologyfromdayto
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day.2. Answer2-2:
CBullstrytobuyaslowaspossible,andbearstrytosellashighaspossible.Bothknowthattheyhavetohurrybeforesomeuncommitted
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traderstepsinandsnatchesawaytheirbargain.Professionalsaimtoidentifythedominantgroupandtradewithit.Thegoalofagoodtechnicalanalystistodiscoverthebalanceof
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powerbetweenbullsandbears—inordertotradeinthesamedirectionasthewinninggroup.Thedangerofforecastingisthatitlocksusintoaspecificmind-setinsteadoffocusingon
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thecurrentrealityofthemarket.
3. Answer2-3:CReadingnewspapers,watchingTV,andsurfingthenetoftenleadtopoorlyplannedandimpulsive
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trades.Whytrade,whetheralargeorasmallsize,whenyouaren'tsurewhattodoatthemoment?“Whenindoubt,stayout”isasensiblerule.
4. Answer2-4:
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BTheprofitsyou'retryingtomakecancomefromonlyonesource—fromothertraders'accounts.Themirrorimageofthatisthatanylossesyoutakewillgive
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yourmoneytoothertraders.Tradedefensivelybecauseothertraderswilltrytopickyourpocketsbeforeyoucanpicktheirs.Brokersandexchangeswillalsotaketheircut,whetheryou
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win,lose,ordraw.
5. Answer2-5:B(IandIII)Whenwejoincrowds,ourindependencedissolves,andthecapacityforcriticalthinkinggoesoutthewindow.
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Crowdsareimpulsive,addingtovolatility.Crowdmembersblindlyfollowtrends,andtheirpsychologicaldependencemakesthemunlikelytoleavethe
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crowd,untilshakenbyasevereloss.
6. Answer2-6:D(I,II,III,andIV)Thegreatertheuncertainty,themorelikelywearetoturntoothersforreassuranceandcomfort.
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Thisbehaviorisdeeplyingrainedinhumannature.Groupsareheldtogetherbytheirloyaltytotheleader.
7. Answer2-7:A(I)Crowdsarebiggerand
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strongerthananyofus;don'targuewiththemarket.Crowdsarestrongbutprimitive,andyoucanexploittheirrepetitivebehavior—butonlyifyoucanstandapart
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fromthem.Marketcrowdsarerightduringtrendsbutwrongatturningpoints.Whenyouletthemarketmakeyoufeelelatedordepressed,yougiveitpoweroveryourself;professional
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traderstrainthemselvesnottoreactemotionallytogainsorlosses.
8. Answer2-8:CAlleyesinthemarketaregluedtoprices.Thelongerarallylasts,themore
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peopleturnbullish,pushingpriceshigherandattractingevenmorebulls.Apersistentdeclinemakesmorepeoplefeelbearish,andtheirsellinghelpspushthemarkereven
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lower.Priceisthetrend'sleader.Fewfinancialfirmsarebigenoughtodominateamarketfordaysorevenhours.Gurusaretothemarketlikeatailistoadog,andfewdogschasetheir
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tailsforverylong.Fundamentalchangesintheeconomysetconditionsforbullandbearmarkets,butonlytraderscanbuyandsell,creatingself-reinforcingpricetrends.
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9. Answer2-9:B(IIandIII)Pricesarehammeredoutinthebattlesbetweenbullsandbears.Pricesrallywhenconfidentbullsarepayingup,whilesellersdemanda
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premiumforparticipatinginthegamethat'sgoingagainstthem.Thereisabuyerandasellerbehindeverytransaction.Thenumberofstocksorfuturesboughtandsoldisequalby
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definition.10. Answer2-10:
D(I,II,III,andIV)Inadowntrend,theshortsaremakingmoney,andmanybecomewillingtosellatalowerpriceto
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increasetheirpositions.Atthesametime,bullsarelosing,andmanywanttogetout.Thosethatagreetobuydoitonlyatadiscount.Theyplacetheirbidsbelowthemarket,
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forcingbearstosellcheaper.Thisprocessisreversedduringuptrends.
11. Answer2-11:B(IIandIII)Apriceshockisasuddenmoveagainstthetrend.Itfrightensthe
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dominantgroupandmakestheoppositionbolder.Asuddenpricebreakinanuptrendprovidesapriceshockthatfrightensthebulls.Eveniftheymanagetotakeprices
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toanewhigh,theirconfidenceisshaken,andtheuptrendmaywellbereadytoreverse.
12. Answer2-12:CAbearishdivergenceoccurswhen
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pricesrallytoanewhigh,whileanindicatorrisestoalowerpeak.Inabullishdivergence,pricesfalltoanewlow,whileanindicatorfallstoamoreshallowlow.
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Bearishdivergenceshelpidentifyuptrendtops.Bullishdivergenceshelpidentifydowntrendbottoms.Theyareamongthemostusefulpatternsintechnicalanalysis.
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13. Answer2-13:B(IandIV)Atradermuststaycalm,focusontherealityofthemarket,identifythecurrenttrend,andgetingearwithit.Whentraderstrytoforecast
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exactlywhatthemarketwilldo,theiregosbecomeweddedtotheirpredictions,anditbecomeshardforthemtochangetheirtradingstance.Whenthemarketrefusestofollow
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forecasts,traderswhosticktothemgetfinanciallyhurt.
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■RatingYourself
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1. 0-4correct:poor.Youhaveaverylimitedunderstandingofmasspsychologyofthemarkets.Ifyoudon'tunderstandhowmarket
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crowdsinfluenceyourbehavior,you'llbesweptawaybythemandlosemoney.Pleaserereadtherelevantsectionofthebook,andretakethistestinafewdays,before
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proceedinganyfurther.
2. 5–9correct:fairlygood.Youhaveaworkinggraspoftheessentialconceptsofmasspsychology,butneedtolearnmoreaboutthe
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balancebetweenbullsandbears,theimpactofthetradingcrowdsonyou,andthedifferencebetweenmanagingtradesandforecastingprices.Pleasereviewtherelevant
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sectionofthebookandretakethistestinafewdays.
3. 10–13correct:excellent.Youhavemasteredtheessentialconceptsofmasspsychology.
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Nowreviewsomeofyourrecenttradesinlightoftheseprinciples.Continuetomonitorhowthemarketimpactsyou.Asyouproceedtothechaptersonmarket
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analysis,keepinmindthattechnicalanalysisisappliedsocialpsychology.
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■ RecommendedReading1. Mackay,Charles,ExtraordinaryPopularDelusionsandtheMadnessofCrowds(1841)(NewYork:CrownPublishers,1980).
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THREE
ClassicalChartAnalysis
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1. Answer3-1:I=C;II=D;III=B;IV=AAmateurstendtogettheirinformationafterworkandtradeinthemorning.Professionals
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respondtochangingconditionsthroughoutthedayandtendtodominatethemarketnearclosingtime.Buyingpushespricesup,andthehighestpriceofthedaymarksthe
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maximumpowerofbulls.Sellingpushespricesdown,andthelowestpriceofthedaymarksthemaximumpowerofbears.Thisreasoningalsoappliestoweeklyandintra-day
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charts.2. Answer3-2:
C(I,II,andIII)Wishfulthinkingisrampantamonganalysts,especiallythosewhodon'ttrade.Keepingbasic
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definitionsfuzzycontributestotheconfusion.Itisquitecommonforthemarketstobetrendinghigherandloweratthesametimeindifferenttimeframes.Goodanalysts
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whofocusondifferenttimeframesmaycometodifferentconclusions,andallcanmakeprofitabletrades.
3. Answer3-3:CSlippagetends
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tobeloweronquiet,narrow-rangedays.That'swhenyoucangetabetterentry,butitdoesn'tchangeyourcommissions.
4. Answer3-4:4(A,B,C,andD)MDTis
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tracingapatternofralliesanddeclines.Assoonaspricesbegintodeclinefromthelatestpeak,drawahorizontallineacrossthatpeak,markingaresistancelevel.As
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pricesrallyagain,theysometimesslowdownattheresistancelevel.Aftertheypenetrateit,theyusuallypullback—whatusedtoberesistancebecomesasupportlevel.
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5. Answer3-5:D(IandIV)Supportlinesaredrawnacrossthelows,andresistancelinesacrossthehighs.Theycanchangeroleswiththepassageoftime,asthe
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marketmovesawayfromthoselevels.Theedgesofcongestionzonesshowwheremassesoftradershavetradedandreversedtheirpositions.Extremepricesshowonlythelevelsofpanic
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amongtheweakestmarketparticipants.
6. Answer3-6:D(I,II,III,andIV)Supportandresistanceexistbecausetradershavememories.Themoreintense
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theirmemories,themoreactivelytheybuyandsell,strengtheningsupportandresistance.Highvolumereflectsagreaterdegreeoffinancialandemotionalcommitment,
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whilethegreaterheightofthesupportandresistancezonesshowsahigherlevelofactivity,andconsequently,strongermemories.Thegreaterthedurationofacongestionareaandthe
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moretimesit'sbeenhit,themoretradersexpectanewreversaltooccur,reinforcingsupportandresistance.
7. Answer3-7:C(I,II,andIII)Waitingfora
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newlowbeforeshortinghelpsensureyou'redealingwithadownsidebreakout.Falsebreakoutsarethebaneofamateurs,butprofessionaltraderslovethem.They
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oftenwaituntiladownsidebreakoutstopsmakingnewlowsandthentradeagainstit:buyandplaceaprotectivestopnearthelatestlow.Sincepricesmadeanewlow
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yesterday,shortingattheopeningwouldmeanfollowingthetrend,butbuyingwouldbeapooroption.
8. Answer3-8:A=IV;B=I;C=III;D=IIThelower
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dashedline,drawnacrosstheedgeofacongestionarea,marksthelevelofsupport.WhenpricesbreakouttoanewlowduringbarA,andevenslightlylowerduringbarB,thereisa
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possibilitythatthedowntrendwillresume.Still,theshortnessofthosebarsindicatesthatthedownmoveisfacingastiffresistance.AsbarCmovesupintothecongestionarea,itleaves
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behindafalsedownsidebreakout.Youmaystartbuyingwhenitcrossesabovethepreviouslybrokensupportline,withastopneartherecentlows.Theshortnessofthelastbarindicatesthat
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therallyisslowingdown—tightenyourstopandconsidermovingituptothebreakevenlevel.
9. Answer3-9.Trends=AandC;Trading
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ranges=BandDWhenpricestrend,theykeeprisingorfallingovertime,reachinghigherhighsorlowerlows.Intradingranges,mostralliespeteroutatapproximately
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thesamehighs,anddeclinesstopatapproximatelythesamelows.Asatrader,whenyourecognizeatrend,followitandhangontopositions.Ifyoutradetheswingswithin
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atradingrange,beextracarefulnottooverstayyourpositions.
10. Answer3-10.I=G;II=A,B,andF;III=CandD;IV=ETheactionsofanytradingvehicleasit
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nearssupportorresistanceprovideinformationaboutitsstrengthorweakness.Whenastockcannotriseuptotouchresistance,itshowsweakness.Holdingabove
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supportindicatesstrength.Falsebreakoutsprovidesomeofthebestsignalsintechnicalanalysis.
11. Answer3-11:C(I,II,andIII)Thetrendis
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yourfriend.Aslongasyouseethepatternofhigherhighsandhigherlows,tradethatmarketfromthelongside.Makesuretoprotectyourpositionswithstopsandmovethemupasthetrend
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progresses.Addtoyourpositionsonlyafteryourpaperprofitshavebeenprotected.Ifthemarkettakesoutitspreviouslow,itthrowstheuptrendindoubt.
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12. Answer3-12:AdoesnotapplyTailsshowthateitherahighoralowpricelevelhasbeenrejectedbythemassofmarketparticipants.Sincemarketstendtomove
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awayfromrejectedpricelevels,itpaystotradeinthedirectionoppositeatail.Sometradingvehiclesaremorelikelytohavetailsthanothers—youseethreeofthemonthischartofBA,
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followedbyreversals.
13. Answer3-13:DisnotpermittedPayingcloseattentiontomarketactionafterakangarootail,youmayincreaseyourpositionsize
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ortakeprofitswhenthemoveappearstostall.Whatyoushouldn'tdoisplaceyourstopbelowthetipofthetailbecauseitwouldexposeatradetotoomuchrisk.
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■RatingYourself
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1. 0-4correct:poor.Chartstellanimportantstory—andifyoucan'treadit,you'llmissthemarket'smessage.You'llrunaseriousriskof
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buyingatthetopsandsellingatthebottoms.Pleaserereadtherelevantsectionofthebook,reviewyourmistakes,andthenretakethistest.Donotproceedtothenextchapter
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untilthen—thesematerialsaretooimportanttoskip.
2. 5–9correct:fairlygood.Youhaveaworkingknowledgeofthekeyconceptsofcharting.Now
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youhavetodecidewhether“fairlygood”isgoodenoughforyou.Itmaybeenoughifyouplantofocusoncomputerizedtechnicalanalysis,butnotenoughifyouplanto
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workwithcharts.Allseriousinvestorsandtradersneedtograspsuchessentialconceptsastrendsandtradingranges,supportandresistance,continuationandreversal.It
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wouldbeagoodideatoreturntotherelevantsection,reviewit,andthenretakethistest.
3. 10–13correct:excellent.You'vemasteredtheessential
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conceptsofcharting.Theycanhelpyoudiscovertheshiftsofpowerbetweenbullsandbears.Nowproceedtothechaptersoncomputerizedtechnicalanalysis.
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■ RecommendedReading1. Edwards,RobertD.,and
JohnMagee,TechnicalAnalysisofStockTrends(1948).(NewYork:NewYorkInstituteofFinance,1992).
2. Pring,MartinJ.,TechnicalAnalysisExplained,5thedition
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(NewYork:McGraw-Hill,2013).
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FOUR
ComputerizedTechnicalAnalysis
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1. Answer4-1:A=(I)Computerizedtechnicalanalysisismoreobjectivethanclassicalcharting.Youmayarguewhethersupportor
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resistanceispresent,buttherecanbenoargumentaboutthedirectionofanindicator—it'seitherup,down,orflat.Agoodtechnicianaimstodiscoverthebalanceof
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powerbetweenbullsandbearsandbetonthewinninggroup—nottoforecastthefuture.Acomputerdoesn'tremoveemotionsfromtradingbecausewestillhavetoplaceour
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orders.Anyonewhotriestosellyou“asurething”shouldbeviewedwithuttersuspicion.
2. Answer4-2:I=B;II=C;III=AAtoolboxisacollectionof
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analyticandchartingtools.Blackboxesforautomatictradingcomewithexcellenthistoricalrecordsbutself-destructwhenmarketschange;grayboxesstraddletheboundarybetweenthose
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twogroups.3. Answer4-3:I
=B;II=C:III=AItpaystocombineindicatorsfromdifferentgroupssothattheirnegativefeaturescanceleachotheroutwhiletheir
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positivefeaturesremainundisturbed.We'llreturntothisthemeinthechapterontheTripleScreentradingsystem.
4. Answer4-4:BTocalculatea
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simplemovingaverage,addtheclosingpricesinitstimewindowanddividetheirsumbythenumberofdaysinthatwindow.Addingpricesforthepast5daysproduces110,and
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dividing110by5is22.
5. Answer4-5:AExponentialmovingaveragesarehardertocalculatebyhandthansimpleMAs.Ifyouuseacomputer,both
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areequallyeasy.
6. Answer4-6:DArisingEMAconfirmsthatbullsareincontrol—it'stimetogolong.WhenEMAdeclines,itshowsthatbearsarein
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control—it'stimetogoshort.TheabilityofanEMAtoreachanewhighshowsthatbullsarestrongerthanbefore,whiledecliningtoanewlowshowsthatbearsare
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strongerthanbefore.Theseareimportantsignals,butlessfrequentorimportantthanthedirectionoftheEMAslope.ThewidthoftheEMA'stimewindowissetbythetrader.
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7. Answer4-7:1=A&C;2=BWhentheEMArises,tradethestockonlyfromthelongside—placeyourbuyordersslightlybelowtheEMA.WhentheEMAturns
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down,tradethestockfromtheshortsidebyplacingsellordersslightlyabovethefallingEMA.You'refreetostandasidewheneveryou'dlike.
8. Answer4-8:1=D,E,F,and
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G;2=A,B,andI;3=C,H,andJWhentheEMApointsup,pullbacksmarkbuyingopportunities.WhentheEMApointsdown,pricesareusuallybelowit,and
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ralliestotheEMAmarkshortingopportunities.Thetransitionalzonesbetweenuptrendsanddowntrendsarethehardesttotrade.Whenindoubt,standasideuntilacleartrend
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emerges.9. Answer4-9:
D(I,II,III,andIV)Eachpriceisamomentaryconsensusofvalue,whileamovingaveragereflectstheaverageconsensusof
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value.Ashorter-termMAtracksshort-termconsensus,andalonger-termMAtrackslonger-termconsensus.MACDlinesconsistofmovingaverages,andwhenthefast
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lineofMACDisaboveorbelowtheslowline,itshowswhetherbullsorbearscurrentlydominatethemarket.
10. Answer4-10:Cisn'ttrueMACD-Histogram
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tracksthespreadbetweenthefastandslowMACDLines.ItsslopeisdefinedbytherelationshipbetweenthelasttwobarsofMACD-Histogram.Whenthesloperises,it
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showsthatbullsareincontrol,andwhenitdeclines,itshowsthatbearsareincontrol.Itpaystotradeinthedirectionofthedominantmarketgroup.Thisisnotforecasting—
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it'sreadingthemarketandbettingthattheinertiaofthemarketcrowdwillcontinue.
11. Answer4-11:1=D;2=A;3=BandE;4=F;5=CWhenMACD-Histogramreachesanew
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high,ittellsyouthatbullsarestrongandpricesarelikelytoretestorexceedtheirlatestpeak.Whenitfallstoanewlow,itshowsthatbearsarestrongandpricesarelikelytoretest
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orexceedthelatestlow.Afterwards,whenMACD-Histogramcrossesitszeroline,itsignalsthatthepowerofthedominantgrouphasbeenbroken.Abullish
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divergencegivesastrongbuysignal;itoccurswhenpricesfalltoanewlow,butMACD-Histogramtracesashallowerbottom.Abearishdivergencegivesastrong
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sellsignal;itoccurswhenpricesrisetoanewhigh,butMACD-Histogramtracesalowerhigh.
12. Answer4-12:CThebearishdivergencehassentprices
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lower,buttheyrefusedtobreakbelowtheirEMA.Atthesametime,MACD-Histogramhasdroppedbelowzero,showingthatbearsarenearingtheirmaximumeffortlevel.Withbears
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havingdeliveredaboutasmuchpowerastheycouldandpricesholdingup,it'sbettertotakeprofitsandmovetothesidelines.
13. Answer4-13:CThepartof
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today'sbarthatprotrudesaboveorbelowyesterday'sbarrepresentstoday'sdirectionalmovement.Iftoday'sbarextendsbothaboveandbelowyesterday's
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bar,thenonlythelongerpartrepresentsdirectionalmovement.Iftoday'sbarisinsideofyesterday'sbar,orifitextendsaboveandbelowbyequalamounts,directionalmovementis
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zero.14. Answer4-14:
I=B;II=A,C,E;III=DTradeinthedirectionoftheupperDirectionalLineaslongasADXrisesabovethelowerDirectional
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Line.ExitwhenADXrisesabovebothDirectionalLinesandthenticksdown.AnotherexitsignaloccurswhenADXsinksbelowbothDirectionalLines.Aslong
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asADXstaysbelowboth+DIand−DI,avoidusingatrend-followingmethod.
15. Answer4-15:CWhenADXrisesabovebothDirectional
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Linesandthenticksdown,itsignalstheendofastronglydirectionalmoveandsuggeststheonsetofgreatervolatility.Youcanstilltradethismarket,butonlyusingshorter-term
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indicatorsratherthantheDirectionalsystem.
16. Answer4-16:BOscillatorsshowwhetherbullsorbearsarecurrentlyincontrol.Theirpeaksandbottoms
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marktheextremesofmassoptimismandpessimism.Overboughtreadingsofoscillatorshelpidentifymarkettops,andoversoldreadingshelpcatchmarketbottoms.
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Thesesignalstendtoworkwellduringtradingrangesbutarelessusefulduringtrends.Noindicatorcancatchalltopsandbottoms.
17. Answer4-17:DWhenan
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oscillatorreachesanewrecordhigh,itreflectsstrengthandtellstradersthattherallyislikelytocontinue,evenifthereisatemporarypause.Youmayaddtolongpositions
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ortakepartialprofits,butit'sbettertoignoreshortingsignalsbecauseunderthoseconditions,pricesaren'tlikelytodropbyameaningfulamount.
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18. Answer4-18:1=A,C,I;2=B,E,F;3=E–F;4=C–DandI–J;5=D,G,H,andJStochasticbecomesoverboughtwhenitrisestooraboveitsupper
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referenceline.Thereitgivesasignaltoselloratleastavoidbuying.Stochasticbecomesoversoldwhenitfallstoorbelowitslowerreferenceline.Thereitgivesasignaltobuy
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oratleastavoidshorting.AfailureswingoccurswhenStochasticfailstoreachitsreferencelineduringamarketmove.WhenStochasticcouldnot
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reachitsupperreferencelineduringtherallyG,itshowedthatbullswereweakandgaveasellsignal.FailureswingsDandJbecamepartsofbearishdivergences.Inthebullish
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divergenceE–F,thesecondbottomwasshallowerthanthefirst,butnotafailureswingbecauseitwasbelowthelowerreferenceline.
19. Answer4-19:CStochasticis
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nearitsneutralmidpoint—butit'sfallingfromapowerfulbearishpattern.Ithasjusttracedafailureswingandabearishdivergence.Inaddition,youcanseeanupward-
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pointingkangarootailonthepricechart,reinforcingStochastic'sbearishmessage.
20. Answer4-20:1=A,B,F;2=D;3=D–E;4=B–CRSIbecomes
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overboughtwhenitrisesaboveitsupperreferenceline.Thereitgivessellsignals,whichhelptraderssellshortindowntrendsorinflatmarkets,butareoftenpremature
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duringuptrends.RSIbecomesoversoldwhenitfallsbelowitslowerreferenceline.Thereitgivesbuysignals,whichhelptradersgolonginuptrendsorflatmarketsbutareoften
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prematureduringdowntrends.Bullishandbearishdivergencesgivethestrongestbuyandsellsignals.Alldivergencesyouseeonthischartprecededsubstantial
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marketmoves.21. Answer4-21:
BRSIhasjusttracedaclearbearishdivergence,withitsfirsttopaboveandthesecondbelowtheupperreferenceline.
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ThisbearishmessageisreinforcedbythefactthattheslightpricedeclineofthepastfewdaystookTIFbelowthetopitreachedseveralmonthsearlier.Afalseupsidebreakoutis
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nowinplaceandthat,reinforcedbytheRSIdivergence,givesasignaltosellshort.
22. Answer4-22:A(IandII)Whenthemarkettrendisdownandanoscillatorrises
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aboveitsupperreferenceline,itidentifiesashort-termsplashofbullishness—ashortingopportunity.Afterward,youmaywanttocovershortswhenanoscillatorfalls
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belowitslowerreferenceline,oryoumaywanttoholdshorts.Inanycase,donotuseoscillatorstogolonginawell-establisheddowntrend.AsPeterLynch,anotedmoney
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manager,oncewrote:“Tryingtocatchabottomisliketryingtocatchafallingknife—youinvariablygrabitinthewrongspot.”
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■RatingYourself
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1. 0-8correct:poor.Youhaveaverylimitedunderstandingofmoderntechnicalanalysis.Youoweittoyourselftolearnthe
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essentialconceptsofusingindicators.Pleaserereadtherelevantchapterandretakethistestbeforeproceedingtotherestofthisbook.
2. 9–15correct:
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fairlygood.Itisimportanttounderstandthemessagesoftrend-followingindicatorsandoscillators.Theyofferinsightsintothebalanceofpowerbetweenbullsand
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bears.Youhaveadecentgraspoftheessentialconceptsofcomputerizedtechnicalanalysis.Nowreviewyouranswerstofindoutyourareasofstrengthandweakness.Are
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youmorecomfortablewithtrend-followingindicatorsoroscillators?Areyoubetteratfindingsignalsthatidentifytrendsorreversals?Pleasereviewtherecommended
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literature,andretakethistestseveraldayslater.Thinkaboutwhatthesetestsrevealaboutyourpreferences.Mostsuccessfultradersconcentrateonjustafew
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typesoftrades.Someprefertofollowtrends,whileothersarebetteroffatcatchingreversals.Trader,knowthyself.
3. 16–22correct:excellent.Youhavea
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goodcommandofcomputerizedtechnicalanalysis.Theseindicatorsarethebuildingblocksofseveralproventradingsystems(seePart7).Beforeweworkona
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system,let'sreviewothertypesofindicatorsavailabletomarketanalysts(Parts5and6).
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■ RecommendedReading1. Murphy,JohnJ.,TechnicalAnalysisoftheFinancialMarkets(NewYork:NewYorkInstituteofFinance,1999).
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FIVE
VolumeandTime
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1. Answer5-1:AEachtradereflectsafinancialandemotionalcommitmentbytwotraders:abuyerandaseller.Sinceoneofthemis
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boundtoberightandtheotherwrong,volumerepresentstheactivityofwinnersandlosers.Itsurgeswhenloserspanic.Itmirrorscurrentactivitybutdoesn'tforecastthe
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future.2. Answer5-2:1
=B;2=A;3=C;4=DTrendstendtopersistwhenthevolumeissteadyorrisesinanorderlymanner.Theyusuallyexpirewitheitherabangora
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whimper—aburstofvolumeoritsdrasticshrinkage.Thetrendcannotcontinueaftermassesoflosersstartleaving.
3. Answer5-3:1=D;2=AandB;3=C
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andF;4=EandGRisingorsteadyvolumeconfirmstrends.Whenpricesrisetoanewhighorfalltoanewlowwhilevolumeshrinks,ittellsusthatthe
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pricetrendislikelytoreverseoratleasttopause.
4. Answer5-4:BThereisapowerfulrallygoingon,withasteadypatternofhigherhighsandlows.
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CPSTisslowlydecliningfromitslatesthigh,whilevolumeisshrinking.Waitforabarorafewbarsthatfailtoreachanewlowforthisminordownmove—andthengo
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long.5. Answer5-5:
C(I,II,andIII)OBViscreatedbyaddingeachday'svolumetoarunningtotalwhenatradingvehiclerisesandsubtractingit
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onthedayswhenthatvehiclefalls.OBVconfirmsbullmoveswhenitrisestoahigherhighthanatthepreviouspeak;itconfirmsdeclineswhenitfallstoalowerlowthanattheprevious
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bottom.Pricesrepresenttheconsensusofvalue,whilevolume,measuredbyOBV,trackstraders'emotions.
6. Answer5-6:1=D;2=C;3=B;4=AOpeningand
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closingpricesareamongthemostimportantpricesoftheday.Openingstendtobedominatedbyamateurswhoseordersfloodthemarketsinthemornings.Closingstendtobe
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dominatedbyprofessionalswhomonitortheconditionsallday.Accumulation/Distributiontiesdailyvolumetotherelationshipbetweenopeningandclosingprices.
7. Answer5-7:
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BThenumberoflongandshortpositionsinthederivativesmarketsisalwaysequal.Whilestocksrepresentcurrentownership,derivativesarecontractsfor
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futuredelivery.Eachcontracthastwosides:asellerandabuyer.Thisiswhyopeninterestreflectsthenumberofcontractsheldbylongsorowedbyshortsinanygiven
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marketonanygivenday.Itequalsthetotallongorthetotalshortposition.
8. Answer5-8:1=B;2=C;3=C;4=AOpeninterestrisesonlywhenanewbuyeranda
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newsellerenterthemarketbecausetheirtradecreatesanewcontract.Openinterestfallswhenabullwhoislongsellshiscontracttoabearwhobuysittocoverhisshorttrade,
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andbothcloseouttheirpositions.Ifanewbullbuysfromanoldbullwho'sgettingout,openinterestremainsunchanged.Nordoesitchangewhenanewbearsellstoanoldbear
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whobuystogetoutofhisshortposition.
9. Answer5-9:D(1,2,3,and4)Whenopeninterestrises,itshowsthatacrowdofconfidentbullsisfacingdownacrowdof
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equallyconfidentbears.Onegroupissuretolose,butaslongaspotentialloserskeeppouringin,thetrendislikelytocontinue.
10. Answer5-10:C(1,2,and3)
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Thedirectionofthemoveshowswhetherthedominantforcewasupordown.Thedistancebetweentoday'sandyesterday'sclosingpricesreflectsthemarginofvictoryby
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bullsorbears.High-volumeralliesanddeclinesaremoreforcefulandmorelikelytopersist.Whilerelatedmarketsareimportant,theydon'treflecttheforceofmoves
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elsewhere.11. Answer5-11:
DForceIndexlinksthreeessentialfactors:thedirectionofpricechange,itsextent,andthevolumeonwhichitoccurred.To
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calculatethedailyForceIndex,subtractyesterday'sclosingpricefromtoday'sandmultiplytheresult,whetherpositiveornegative,bytoday'svolume.
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12. Answer5-12:D(I,II,III,andIV)SmoothingtherawForceIndexwithamovingaveragehelpsrecognizeitstrend—ashort-termtrendusingashortEMAoran
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intermediatetrendusingalongerEMA.Whenthe2-dayEMAofForceIndexdipsbelowzeroduringmarketrallies,itidentifiesbuyingopportunities,andwhenitralliesabove
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zeroduringmarketdrops,itmarksshortingopportunities.The13-dayEMAofForceIndexhelpsidentifybullishandbearishzonesbyitspositionaboveorbelowitszeroline.
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DivergencesbetweenForceIndexandpricetendtomarkapproachingtrendreversals.
13. Answer5-13:1=GandH;2=F;3=A,B,C,andD;4=E
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Inthelefthalfofthechart,pricesareinadowntrend,confirmedbyafallingEMA.Wheneverthe2-dayEMAofForceIndexrisesabovezero,itshowsabriefrecoverybythebulls—a
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shortingopportunity.InareaE,pricesfalltoanewlowbutrecoilfromit,leavingbehindafalsedownsidebreakout,whileForceIndextracesabullishdivergence,
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withamuchmoreshallowlow.Thisisagoodtimetocovershorts.InareaF,theEMAofpricesturnsup—itsignalstostopshortingandlookforbuyingopportunities.Afterwards,
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ForceIndexdeclinesbelowzeroinareasGandH,givingbuysignals.
14. Answer5-14:BAttherightedgeofthescreen,amovingaverageofpriceis
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trendinghigher,indicatinganuptrend.The2-dayForceIndexhasdippedbelowzero,signalingthatthestockisshort-termoversoldandgivingabuysignal.Youhavetwomain
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waystoactonthissignal.Youmayplaceabuyorderatthehighofthecurrentbar,aimingtocatchanupsidebreakout.Alternatively,youmaymeasuretheextentofan
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averagedownsidepenetrationoftheEMAandplaceyourbuyorderatasimilardistancebelowthecurrentEMA.
15. Answer5-15:1=C;2=AandD;3=B
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Thelonger-termForceIndex,smoothedwitha13-barEMA,helpsidentifytrendreversals:bullishwhenitcrossesabovethezerolineandbearishwhenitcrossesbelow
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thatline.Itisalsopossibletodrawhorizontalbullishandbearishlinesslightlyaboveandbelowthezeroline.Waitingfortheircrossovers,ratherthanthoseofthe
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zeroline,willreducewhipsaws—butitwillalsoslowdownthegoodsignals.Whatyou'dgaininonetrade,you'llloseinanother.AlowerpeakofForceIndexinareaBshows
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thatthebullishforceisweakeningandpreparesyouforacomingtrendreversal.
16. Answer5-16:BTheForceIndexispositive—bullish,whilethetrendisup,
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confirmedbyarisingEMA.Thiscombinationsuggestsgoinglong,usingpullbackstotheEMAforbuying.
17. Answer5-17:C(1,2,and3)Pricecyclesowetheir
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existencetofundamentalproductionfactors,suchasweatherandseasonalshiftsinsupplyanddemand,aswellaswavesofgreedandfearamongtraders.
18. Answer5-18:
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1=D;2=AandE;3=BandF;4=CandGTheseasonofanindicatorisdefinedbyitsslopeanditspositionaboveorbelowthecenterline.Whenanindicatorturns
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upbutisbelowitscenterline,itisspring;whenitrisesaboveitscenterline,itissummer;whenitdeclinesbutisaboveitscenterline,itisautumn;andwhenitfallsbelowitscenterline,itis
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winter.Springisthebestseasonforgoinglong,andautumnisthebestseasonforsellingshort.Seasonsarenotrigid—notinnatureandnotinthemarkets.Noticeabriefwarmspellin
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winterintheareabetweenlettersBandC.
19. Answer5-19:AEachtimeframerelatestoitsnextgreaterandlessertimeframesbyafactorof5.
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Whenyouanalyzeamarketintwotimeframes,theshorterofthemhastobeaboutfivetimesshorterthanthelongerone.Ifyourfavoritetimeframeisdaily,youmustfirst
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examineweeklycharts.
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■RatingYourself
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1. 0-7correct:poor.Youneedtolearnmoreaboutvolumeandtime.Theseessentialaspectsofmarketanalysiswillgiveyouan
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edgeovermosttraders.Pleaserereadtherelevantchapterandretakethistestbeforeproceedingtotherestofthisbook.
2. 8–14correct:fairlygood.Youhavea
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workinggraspoftheessentialconceptsofvolumeandtime,whichmosttradersneglectattheirperil.Pleasereviewyouranswerstoseewhetheryourscorewasloweredbyaweak
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knowledgeofacertainarea,suchastime,volume,oropeninterest.Reviewtheappropriatechaptersandretakethistestafewdayslater.
3. 15–19correct:
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excellent.Youunderstandtheconceptsmosttradersmiss.Time,volume,andopeninterestprovideanextradimensionofanalysisanddeepenyour
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understandingofmarketdynamics.
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■ RecommendedReading1. Belveal,L.Dee.ChartingCommodityMarketPriceBehavior(1969)(Homewood,IL:BusinessOneIrwin,1985).
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SIX
GeneralMarketIndicators
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1. Answer6-1:C(1,2,3,and4)NewHighsarethestocksthathaverisentothehighestlevelinayear,whileNewLowsarethestocksthat
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havefallentothelowestlevelinayearonanygivenday.NewHighsaretheleadersinstrengthandNewLowsaretheleadersinweakness.TheNewHigh–NewLowIndex(NH-
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NL)worksbymeasuringthedifferencebetweenthestrongestandtheweakeststocksonanygivenday.Itisaleadingindicatorofthestockmarket.
2. Answer6-2:1
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=D;2=C;3=A;4=BWhenthemarketralliesandNH-NLrisestoanewhigh,itshowsagrowingbullishleadership.Itpaystofollowtheleadersandgolong.When
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themarketdeclinesandNH-NLdropstoanewlow,itshowsthatbearishleadershipisbecomingstronger.Thisbearishdivergenceindicatesthatitpaystogoshort.Ifthe
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broadmarketralliesbutNH-NLtracesalowerpeak,itshowsthattheuptrendislosingitsleadersandmaybeintrouble.IfthemarketfallstoanewlowbutNH-NLtracesahigher
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bottom,itshowsthatthedowntrendislosingitsleadersandnearingabottom.
3. Answer6-3:1=AandD;2=BandF;3=G–H;4=D–ENH-NLtracksthenumbersof
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themarketleaders,makingitaleadingindicatorofthestockmarket.Itsbullishzoneisabovethezerolineor,ifyouwanttomakeitlesspronetowhipsaws,abovetheplus
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100level.Itsbearishzoneisbelowthezerolineor,ifyouwanttomakeitlesspronetowhipsaws,belowtheminus100level.Divergencesshowthattheleadershipof
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thecurrenttrendisbecomingweaker.BoththeS&P500andtheNH-NLralliedtonewhighsinareaD,butinareaE,onlytheS&Preachedanewhigh—thisbearish
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divergenceofNH-NLgaveasellsignal.BoththeS&P500andtheNH-NLfelltonewlowsinareaG,butinareaH,onlytheS&Pfelltoalowerlow;NH-NLbottomedoutatahigher
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level,anditsbullishdivergenceflashedabuysignal.
4. Answer6-4:2TheEMAisrisingandtheNH-NLIndexispositive,showingthatthebullsareincharge.The
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NewHigh–NewLowIndexhasjustralliedtoanewhighforthecurrentmove,showingthatthebullishleadershipisbecomingstronger.Pricesarealreadyabove
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value,butstillcloseenoughtoittomakegoinglongarealisticchoice.
5. Answer6-5:C(1,2,and3)TheA/Dlinemeasuresmassparticipationinralliesanddeclines.A
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stockmarketrallyislikelytopersistwhentheA/Dlinerisestoanewhigh,whileadeclineislikelytocontinuewhentheA/Dlinefallstoanewlow.Tradersneedtomonitorthe
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patternofA/Dpeaksandvalleysbecauseitsabsoluteleveldependsmainlyonitsstartingdate.TheA/Dlinetracksonlypricechanges,notvolume.
6. Answer6-6:
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B(1and3)Uptrendsattracttraders,andpoorlycapitalizednewcomersenterthemarketindrovesnearmajorpeaks.Manyofthemdoubleupattheworst
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possibletime.AsHumphreyNeillputit,“Wheneveryonethinksalike,everyoneislikelytobewrong.”Whenbullishconsensusreachesarecordpeak,asavvytrader
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startstakingprofitsonlongpositionsandlookingforshortingopportunities.Heknowsthattherecordhighbullishconsensusmeansthatbullsarealreadyloadedwithstocks
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andcanhardlybuymoretosupporttheuptrend.
7. Answer6-7:AThestructureofthederivativesmarkets,includingfutures,ensuresthat
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thenumberoflongandshortcontractsisalwaysequal.If75percentofmarketparticipantsarebullish,thentherearethreetimesmorebullsthanbears.Inthatcase,anaveragebearis
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shortthreetimesasmanycontractsasanaveragebullislong.Itshowsthatthebigmoneyisonthebearishside.Bigmoneydidnotgrowbigbybeingstupid;itpaystobetonthewealthy
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minority.Whenbullishconsensusrisesto75percent,startsellingandlookforshortingopportunities.
8. Answer6-8:DThenumberofshortandlong
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contractsisalwaysequalinthefuturesmarkets.Ifthemajorityofparticipantsarebearish,thenthebullishminoritymustholdmorecontractspertrader.A20percentbullish
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consensusmeansthattherearefourbearsforeachbull—anaveragebullholdsfourtimesasmanycontractsasanaveragebearisshort.Withbigmoneyonthelongsideofthemarket,be
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preparedforasharprally.
9. Answer6-9:BAbullmarketthathascaughttheattentionofthegeneralpublicisprobablyveryoldandgettingreadytoreverse.
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Marketsareoftenveryvolatileattops;scalingintoaputpositionmaybethesafesttradingstrategy.Tryingtobuycoffeenowmeansbettingonagreaterfooltheory.
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Othermarketsshouldbetradedbasedontheirownmerits.
10. Answer6-10:1=C;2=A;3=D;4=BTraders'positionsgetreportedtothegovernmentaftertheir
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sizesreachreportinglevels.Thoselevelsdifferfrommarkettomarket.Positionlimitsindicatethemaximumnumberofcontractsthataspeculatorisallowedtoholdinany
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givenmarket.Hedgersareexemptfrompositionlimits.Manytradersareshockedtolearnthattradingonmanykindsofinsideinformationisperfectlylegalinthefuturesmarkets.
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11. Answer6-11:1=D;2=A;3=B;4=CCommercialsdealincommoditiesinthenormalcourseoftheirbusinessandusefuturestohedgeinventoryrisks.Large
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speculatorsarethosewhosepositionsreachorexceedreportinglevels.Ifyousubtracttheholdingsofthosetwogroupsfromopeninterest,you'llfindouthowmanycontractsare
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heldbysmalltraderswhooftenwinduponthewrongsideofmarkettrends.Corporateinsidersareofficersofpubliclytradedfirmsandthosewhohold5percentormoreof
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companyshares.
12. Answer6-12:DBuyingbycorporateinsidersisastrongbullishsign,butyouneedtoseeabullishconfirmationfromprice
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action.At11months,thebearmarketisold.Nobodywillringabelltoadvertisethestartofabullmarket.Asaninvestor,it'stimetostartslowlyaccumulatingthestockyou've
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selected.
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■RatingYourself
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1. 0-4correct:poor.Ifyoudon'ttradestocks,youmayskipNH-NL,butifyouplantotradestocksorstockindexfuturesoroptions,you
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oweittoyourselftolearnhowtousethebestleadingindicatorofthestockmarket.Indicatorsofmasspsychologyprovideuniqueinsightsintotheforcesthat
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movemarkets,andit'simportanttounderstandhowtheywork.
2. 5–8correct:fairlygood.Youhaveadecentgraspoftheindicatorsthatmeasuremass
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marketbehavior.Thismaybeenoughifyouonlywantageneralunderstandingoftheconcept.Ifyouplantousethemintrading,rereadtheappropriatechapter,lookuptheanswers
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tothequestionsyoumissed,andretakethistestseveraldayslater.
3. 9–12correct:excellent.Youunderstandtheessentialstockmarketindicators.
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Theyhelpyourecognizewhenthemarketisinatoporabottomarea.Armedwiththisknowledge,youcanusecomputerizedindicators(seePart4)tofine-tuneyour
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entriesandexits.
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■ RecommendedReading1. Elder,Alexander&
KerryLovvorn.TheNewHigh–NewLowIndex(Alabama:SpikeTrade,2012).
2. Neill,HumphreyB.,TheArtofContraryThinking(1954)(Caldwell,ID:CaxtonPrinters,1985).
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SEVEN
TradingSystems
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1. Answer7-1:C(I,II,III,andIV)Trendsmaypointindifferentdirectionsatthesametimeindifferenttimeframes:forexample,
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uponthedailychartbutdownontheweekly,orviceversa.Atrend-followingindicatormaybegivingabuysignal,whileanoscillatorisgivingasellsignal,orviceversa.The
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TripleScreentradingsystemisdesignedtomanagethosecontradictorysignals.
2. Answer7-2:BTheTripleScreentradingsystembeginsbyidentifyingthetrendona
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chartoneorderofmagnitudegreaterthantheoneyouareplanningtotrade.Findthetrendontheweeklychartandthenlookforentrypointsinthatdirectiononthedailies.Ifyoubeginby
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analyzingthedailychartandonlychecktheweeklychartlater,youreyeswillbeprejudicedbywhatyousawonthedailychart.Amonthlychartistoofarremovedfromthedaily—the
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timeframesoftwochartsshouldrelatetooneanotherbyafactoroffive.Aweeklybarcontainsthedatafrom5dailybars.
3. Answer7-3:CKeepinggoodrecordsis
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essentialfortestingasystem.Startatthebeginningofyourdatafileandmoveforwardonedayatatime,recordingeachsignalandplannedactions.Watching
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signalsemergeandgraduallydeliverpaperprofitsandlossesistheclosestyoucangettorealtradingwithoutriskingmoney.Ifyoulikewhatyouseeandstarttradingthatsysteminyour
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account,keepyourpositionssmall.Concentrateonlearninghowthesystemworksintherealworldbeforegraduallyincreasingpositionsize.Sinceyoucannotknow
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exactlyhowothersmayusethissystem,theirfeedbackisnotnearlyasmeaningfulasyourownresults.
4. Answer7-4:BTheentry,thetarget,andthestoparethe
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threeessentialnumbersforeverytrade—youmustwritethemdownbeforeyouenter.Theyprovidethestructureforeverytrade,allowingyoutocompareriskandrewardand
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decidewhatsizetotrade.Atradewithoutthesenumbersisnotatradebutagamble.Countingprofitsinanopentradewillonlydistractyoufrommanagingthattrade.
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5. Answer7-5:BAdirectionaltraderhasthreechoices:buy,sell,orstandaside.ThefirstscreenofTripleScreenactsasacensorthattakesaway
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oneofthosechoices.Youmaylookfortradesonlyinthedirectionofthelong-termtimeframeorstandaside.
6. Answer7-6:CWhenthefirstscreenofthe
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TripleScreentradingsystempointsup,usedeclinesofashort-termoscillatortofindbuyingopportunities.Whenthefirstscreenpointsdown,useralliesofashort-termoscillatorto
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identifyshortingopportunities.Thisrulehelpsavoidchasinguptrendsanddowntrends.Inthisexample,theshort-termoscillatorisalreadyoverbought;waitforittodeclinebefore
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goinglong.7. Answer7-7:
BWhentheweeklytrendisupbutthedailytrendisdown,TripleScreenpointstoabuyingopportunity.Oneoftheoptionsisto
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placeabuy-stopabovethelastday'shightocatchashort-termupsidebreakout.
8. Answer7-8:CTheuptrendofBed,Bath&BeyondInc.(BBBY)on
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theweeklychartisconfirmedbyitsrisingEMAaswellastheuptrendofMACD-Histogram.Theweeklyuptrendleadstoastrategicdecisiontolookonlyforbuying
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opportunitiesonthedailychart.ThereweseeapullbacktotheEMA,whiletheForceIndexbelowzeroindicatesanoversoldcondition.AccordingtoTripleScreen,pullbackson
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thedailychartsduringweeklyuptrendssignalbuyingopportunities.Placeabuyorderabovethelatestdailyhigh.Thefactthattheweeklyanddailytrendsareinconflict
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isanormaloccurrenceinthemarkets—itisthepurposeoftheTripleScreentoresolvesuchconflictstoyourbenefit.
9. Answer7-9:1=C;2=A;3=B;4=CWhenthe
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weeklytrendisupandthedailytrendisdown,usethosedeclinestocatchbuyingopportunities.Whentheweeklytrendisdownandthedailytrendisup,usethoserallies
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forenteringshorts.Tryingtoenteratradewhenbothweeklyanddailytrendsaremovinginthesamedirectionislikehoppingaboardamovingtrain.Itcanbedone,butit'ssaferto
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waitforapullback.
10. Answer7-10:ATheslopeofthefastEMAtracksthemarket'sinertia,whiletheslopeoftheMACD-Histogramreflectsthe
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directionofmarketpower.TheprimaryroleoftheImpulsesystemisnottotelltraderswhentobuyorsell.Rather,itshowsthemwhenthey'reprohibitedfrombuyingorshorting.Itisa
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censorshipsystem,andwhentheImpulsesystemisred,itprohibitsbuying.Itremovesthatprohibitionwhenitscolorchangesfromthebearishredtoaneutralblueora
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bullishgreen.11. Answer7-11:
1=A;2=C;3=B;4=CThecoloroftheImpulsesystemdependsonitstwocomponents—anEMAandMACD-Histogram.
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Whenbotharerising,theImpulseturnsgreen—bullish,prohibitingshorttrades.Whenbothdecline,theImpulseturnsred—bearish,forbiddingbuying.Whenthesetwo
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componentscontradictoneanother,theImpulseturnsblue—neutral.
12. Answer7-12:1=EandH;2=AandC;3=B,D,F,GandITheImpulsesystemisacensorship
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system.WhenboththeEMAandMACD-Histogramturndown,coloringthebarred,itprohibitsbuying.Whenbothindicatorsturnup,coloringthebargreen,shortingisnotallowed.
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TheImpulsesystemshouldn'tbeusedasanautomatictradingmethod:whileitcatcheseverytrend,itwouldsubjectanautomatictradertomultiplewhipsaws,for
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example,intheareabetweenthelettersCandG.Itsbestsignalsemergewhenredorgreencolorsdisappear.Forexample,thedisappearanceofredatthebarGshowedthatthedouble
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bottomwasbeingcompletedandsuggestedbuying.ThedisappearanceofgreenatthebarIsignaledtheapproachingendofapowerfulupswingandsuggested
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takingprofits.13. Answer7-13:
AAttherightedgeofthechart,boththeEMAandMACD-Histogramarerising—theImpulsesystemwouldcolorthatbar
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green.Hadbothindicatorsbeendeclining,thebarwouldbered;hadtheypointedinoppositedirections,thebarwouldbeblue.Thisisimportanttokeepinmindifyouwantto
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findtheImpulsecolorattherightedgeofachartusingsoftwarethatdoesn'tletyouactuallycolorthebars.
14. Answer7-14:CThereisnomysteryinconstructinga
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channel.Keepadjustingitswidthuntilitcontainsthebulkofprices,leavingoutonlythemostextremehighsandlowsforthepast50to100bars.Pricesmovingoutsideofawell-drawn
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channelidentifyzonesofunsustainableoptimismorpessimism,wherethemarketislikelytoreverse.Keepinmindthatonrareoccasionsthemarketmaystay
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outsideofitschannelforalongertime—butthat'sanexceptionthatconfirmstherule.
15. Answer7-15:1=C;2=A;3=D;4=BAmovingaveragereflectsthe
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averageconsensusofvalue.Achanneltrackstheboundariesbetweennormalandabnormalpriceaction.Themarketisundervaluedwhenitfallsbelowitslowerchannel
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lineandovervaluedwhenitrisesaboveitsupperchannelline.Thechannelcoefficientneedstobeadjusteduntilachannelcontains90percentto95percentofthe
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priceactionforthepast50to100bars.
16. Answer7-16:ATheslopeofachannelprovidesimportantinformation.Whenitrises,itshowsthatthemarketis
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bullish.Whenitfalls,themarketisbearish.Whenitisflat,themarketisneutral.Abreakoutinthedirectionofthechannelslopeindicatesapowerfultrend;areturntothemoving
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averagealmostalwaysoffersagoodopportunitytotradeinthedirectionofthetrend.Swingsbetweenthewallsofaflatchannelalsoprovidegoodtradingopportunities.
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Buyingandsellingatthemovingaverageisn'talwaysagoodidea.Ittendstoworkwhenachannelisslantedbutnotwhenitisflat.
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■RatingYourself
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1. 0-6correct:poor.Notunderstandingtradingsystemsisdangerous—tradingwithoutasystemislikesailingwithout
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arudder.Pleasetakethenextfewdaystorereadtherelevantsectionofthebook,andretakethistestbeforeproceedinganyfurther.
2. 7–11correct:fairlygood.
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Youhaveaworkinggraspoftheessentialconceptsoftradingsystems.Thislevelofknowledgemaysufficeelsewherebutnotindealingwithtradingsystems.Youmustknow
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theminsideout—theyhelpyousurviveandprosperinthemarkets.Pleasereviewyouranswersandlookforyourweakspots.Thenrereadtherelevantsectionandretakethistest.
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3. 12–16correct:excellent.Youhavemasteredtheessentialsoftradingsystems.Pleasereviewthosequestionsforwhichyouranswers
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differedfromthosegiveninthisbook.Seewhetherthediscrepancieswereduetoerrorsortoyourowntradingstyle.Successfultradersarecreativeandcanhavedifferencesof
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opinion.Thenproceedtothenexthighlyimportanttopic—selectingthemarketsyou'lltrade.
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■ RecommendedReading1. Kaufman,Perry,TradingSystemsandMethods(Hoboken,NJ:JohnWiley&Sons,2013).
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EIGHT
TradingVehicles
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1. Answer8-1:CTradingliquidhigh-volumevehicleshelpsreduceslippage.Volatilefast-movinginstrumentsoffermore
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opportunities.Itpaystofocusonthemarketswhosemaintradinghoursareclosetoyourowntimezone,sothatyou'reawakewhiletheactionistakingplace.Popularityisn'takeyfactor:
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someofthebestopportunitiesoccurinthemarketsthataren'tpopularbutarefinetotrade,aslongastheyhavegoodliquidityandvolatility.
2. Answer8-2:D
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Bondsrepresentloans,whilesharesrepresentcompanyownership.You'dhavetobuyagreatnumberofthemtobecomeaninsider.IntheUnitedStates,
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formandatoryreportingpurposes,corporateinsidersaredefinedasacompany'sofficersanddirectorsandtheownersofmorethan10%ofitsequitysecurities.It's
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adangerousmisconceptiontoexpectthepriceofastocktoriseifthecompanymakesmoney.Ifacompanywasexpectedtoreporta$100millionprofitinaquarterbutannounceda
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$70millionprofit,itssharesarelikelytotakeahitfromdisappointedholderswhenearningsarereported.
3. Answer8-3:DWarrenBuffettsaysthatwhen
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youbuyastockyoubecomeapartnerofamanic-depressivefellowhecallsMr.Market.Eachdayhewantstobuyyoursharesorsellhissharestoyou.Occasionally,
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Mr.Marketbecomessodepressedthatheoffersyouhissharesonthecheap—andthat'swhenyoushouldbuy.Atothertimeshebecomessomanicthatheoffersacrazypriceforyour
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shares—andthat'swhenyoushouldsell.Thisis,inanutshell,aremindertobuylowandsellhigh.
4. Answer8-4:AEachETFholdsaselectionof
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variousassets,suchasstocksfromspecificindustrygroupsorcountries,commodities,orbonds.WithahugenumberofETFsavailabletotraders,thechoicesarevast,butETF
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performancelagsduetoadministrativeexpenses,alwaysoneofthekeyfactorsforlong-termresults.PricesofmanyETFsgrosslydivergefrompricesofassetgroupstheyaresupposed
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totrack.5. Answer8-5:I
=B;II=D;III=A;IV=CAcallisabetthatastockwillrise,whileaputisabetthatit'lldecline.Buyinga$40callwhenthe
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underlyingstockistradingat$38makesthatcallout-of-the-money:itsentirepricerepresentshopethatthestockwillriseabove$40.Ifandwhenitdoes,thatcallwillbein-the-
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money.6. Answer8-6:
COptionslosevalueastheyneartheirexpirationdate;theygainvalueasthestockapproachestheoptionexerciseprice.Options
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forvolatilestockstendtobemoreexpensivebecausetheirpricescanswingmorethanthoseoflessvolatilestocks.Howcloselyastocktracksitsindustrygroupisnotafactor
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initsoptionpricing.
7. Answer8-7:I=AandD;II=BandC;III=CandDThepersonwhobuysacallcanprofitonlyiftheunderlyingstockrises;ifitfallsoreven
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staysflat,thewinnerwillbethetraderwhowrotethatcall.Aputbuyerwillprofitonlyiftheunderlyingstockfalls;ifitrisesorevenstaysflat,theoptionwriterwillprofit.Therearethree
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possiblescenariosforanystock:up,down,orsideways.Onlyoneoutofthreeworksfortheoptionbuyer,buttwoworkfortheoptionwriter.
8. Answer8-8:B
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Beginbyanalyzingtheunderlyingsecurity,decidewhatlevelit'sunlikelytoreach,andthensellanoptionbeyondthatlevel.Goingonlinetolookupastock'sDeltawillhelp
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youidentifythatlevel.Youalsoneedtodecideatwhatleveltheunderlyingsecuritywouldproveyouwrongandpromptyoutoexit.Placinganactualstopforanoptionwouldexpose
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youtotherunningofopenorders,whichisacommonprobleminoptions.Betterwritedownyourstopandplaceanordertoexitaftertheunderlyingsecuritygetsthere.
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Considerbankingasmallpercentageofyourprofitsinaninsuranceaccountforthedaywhenanoptionyouwrotejumpssharplyagainstyou.
9. Answer8-9:
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DThenumberoflongandshortcontractsforeveryoptionandfutureisalwaysequalbydefinition.Ahugedifferencebetweenoptionsandfuturesisthat
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ifyoubuyanoptionanditspricemovesagainstyou,youcanabandonitandwalkaway,losingonlywhatyoupaidforit.Thereisnowalkingawayfromfutures—youmusteither
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takealossorsendinadditionalmargintosupportadeepeningloss.Allotherdifferencesareminorincomparisonwiththisone.
10. Answer8-10:B
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Dailypricelimits,contractexpirations,andlegalinsidertradingarechallengingenough,buttheriskiestfactorinfuturesisthatpeoplecantradethemonverysmall
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margins,aslowas5%ofcontractvalue.Whenyour$5,000depositcontrols$100,000worthofacommoditythatmoves5%inyourfavor,you'lldoubleyourmoney.Troubleisthat
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ifitmovesagainstyoubyafewpercentagepoints,it'llwipeoutyourmargin.Youmustbeabsolutelydisciplinedandhaveexcellentmoneymanagementskillstoprofit
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fromfutures.11. Answer8-11:
I=C;II=D;III=A;IV=BDemandforanycommoditychangesslowly,butthemarketcanreactviolentlywhensupply
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becomesthreatened.Spreadtradersbetonaresumptionofnormalmarketrelationships;whentworelatedmarketsgooutofsync,theybuytheunderpricedoneandshort
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theoverpricedone,waitingfortheirrelationshiptoreturntonormal.Remotedeliverymonthsarenormallymoreexpensiveduetothe“costofcarry,”suchasstorageand
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insurance,butinbullmarkets,whendemandisred-hot,futurescanbecomeinverted,withapremiumforearlydelivery.Hedgingistheeconomicfoundationofthefuturesmarkets:a
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farmercansellwheatfutureslongbeforeharvestinghisgrainwhileanairlinecanbuygasolinecontractsmonthsorevenyearsbeforeitneedsairplanefuel.
12. Question8-
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12:B(IandII)Theforexmarketiscompletelydecentralized;institutionaltradersdealdirectlywitheachother,usingonlineplatforms.Retail
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customerscometogriefwhenforexhousestaketheoppositesidesoftheirordersinsteadoftransmittingthemtothemarket—foryoutowin,theforexhousemustlose.Wildmargins
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inthehandsofunsophisticatedtradersturnintoa“get-poor-quick”tool.Forexhousesseldomchargecommissions,butmanyprofitfrompositioningthemselvesagainsttheir
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customers.
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■RatingYourself
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1. 0-4correct:poor.Whateveryoutrade,youneedtounderstandthekeyfactorsaboutthatmarket.Lackingthatknowledge,
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you'llbecomeaneasymarkforsharpoperatorsandenduplosing.Pleasetakethenextfewdaystorereadtherelevantsectionofthemainbook,andretakethistestbeforeproceeding
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anyfurther.2. 5–8correct:
fairlygood.Youhaveaworkinggraspofatleastsomeclassesoftradingvehicles.Ifallyouranswersaboutstocksoroptionswerecorrectand
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thosearetheonlymarketsyouevertrade,thatmightbesufficient.Toobtainadeeperknowledgeofallclassesoftradingvehiclesavailabletoyou,pleaserereadthe
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relevantsection,andretakethistest.
3. 9–12correct:excellent.Yourknowledgeoftradingvehiclesisverygood.Pleasereviewthequestionswhoseanswers
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youmissedandlookuptherelevantpagesinthebook.Thenproceedtothenexthighlyimportanttopic—riskmanagement.
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NINE
RiskManagement
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1. Answer9-1:BEmotionaltradingistheenemyofsuccess.Nobodycangethighandconsistentlymakemoney.Atradercan
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getawaywithemotionaltradingforashortwhile,butuncheckedgreedandfearwilldestroyanyaccount.Yourgoalmustbetomakethemostintelligenttrades,calmlyweighing
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potentialgainsandlimitingrisks.
2. Answer9-2:CWeallliketothinkwe'resmart—takinglosseshurtsouregos.Takingalossmeansgivinguphopethata
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tradewillworkout—andnobodylikestolivewithouthope.Goodtradersarerealists;hangingontoalosingtradeisnotasoundtactic.
3. Answer9-3:B
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Areluctancetotakealossisasignofemotionaltrading.Addingtoalosingtradeshowsthatthetraderishangingontoafantasyofwinningratherthanfacingtherealityofa
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loss.Foraloser,adreamisaliveaslongasheholdshisposition.Infact,ifyouenteredatradeonasetofindicatorsignalsandthoseindicatorsreversed,what'sthe
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rationaleforstayinginthattrade?Itisnotworkingout—getouttopreserveyourcapitalandlookforabettertrade.
4. Answer9-4:CAseriesofthreelosses
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canwipeouttraderA,buttraderBcansurviveastreakof9losses.TraderAisonlythreethrowsawayfromgoingbust,whiletraderBhasenoughcapitaltosustainhimthrough9
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unluckythrows.Allotherfactorsbeingequal,thepoorerofthetwotraderswillgobrokefirst.
5. Answer9-5:B(II,III,I)Thefirstgoalofmoneymanagementis
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toensuresurvival.Thesecondistoearnasteadyrateofreturn,andthethirdistoearnhighreturns—butsurvivalcomesfirst.That'showprofessionalstrade;manybeginnershave
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theirprioritiesbackwards.
6. Answer9-6:D(I,II,III,andIV)Allofthesemoneymanagementruleshavestoodthetestoftime.Followthem—letyour
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competitorsviolatethem.
7. Answer9-7:A(I)Countingmoneyinanopentradeflashesaredlight—awarningthatyouremotionsarekickinginandyou're
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abouttolosebecausetheywilloverrideyourintellect.Ifyoucannotgetmoneyoffyourmind,getoutofatrade.Thetimetosetprofittargetsandstoplevelsisbeforethetrade.Thetimetotrackyour
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equityisafterthetradehasbeenclosed.
8. Answer9-8:CThe2%Ruledictatesyourmaximumdollarriskpertrade.Twopercentofa$28,000accountis
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$560,whichmustcovernotonlyyourriskbutalsoslippageandcommissions.Withastop98centsaway,ifyoubuy500shares,youwillhaveenoughlefttopaycommissions
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andcoveranypossibleslippage.Tradingabiggersizewouldbereckless.
9. Answer9-9:B(IandII)It'sdangeroustocountmoneyinopentradesbecause
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itleadstothinkingaboutwhatyourpaperprofitswillbuy.That'showpeoplestartdreaming,insteadofmanagingtrades,andlosemoney.Movingatargetor
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raisingastopispermitted.
10. Answer9-10:D(I,II,III,andIV)Serioustradersplaceastopthemomenttheyenteratradeandadjustitonlyoneway—inthedirection
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ofthattrade.Whenyougolong,youmaykeepyourstopinplaceorraiseitbutneverlowerit.Whenyougoshort,youmaykeepyourstopinplaceorloweritbutneverraiseit.
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11. Answer9-11:C(I,II,andIII)Astop-lossorderlimitsyourrisk,butitdoesn'talwaysworkasexpected.Pricesmaygapacrossastop.Astopisn'taperfect
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tool,butit'sthebestdefensivetoolthatwehave.
12. Answer9-12:B(IIandIII)TraderAisrisking$400,whilethe2%Ruleallowshimtorisknomorethan$360.TraderB
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isrisking$800,whilethe2%Rulepermitshimtoriskupto$1,000.TraderCisrisking$400,whilethe2%Rulepermitshimtoriskupto$800.TraderDisrisking$1,500,while
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the2%Ruleallowshimtoriskupto$1,200.TradersBandCacceptbusinessman'srisks,whiletradersAandDareriskingreallosses.The2%Rulesetsaclearlimitonyour
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riskpertrade—it'saneasyruletofollow,unlessgreedraisesitsuglyhead.
13. Answer9-13:D(IIandIV)Thetwodeadlyerrorsintradingarenotusingstopsandputtingon
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tradesthatriskmorethanyouraccountcanafford.Othermistakesarebadenough,butifyouusestopsandtradeareasonablesize,atleasttheywon'tkillyouraccount.
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14. Answer9-14:DTheIronTriangleasksthreesimplequestions:whatisyourmaximumacceptabledollarriskforthistrade?Wherewillyouenterthis
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trade?Wherewillyouplaceyourstop?Thedistancefromyourentrytoyourstopisyourriskpershare.Dividingyourtotalacceptableriskbyyourriskpersharewillgiveyouthe
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maximumnumberofsharesyoumaybuyorsellshortinthistrade.
15. Answer9-15:CAseriesofevenrelativelysmalllossescanadduptoaserious
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drawdown.The6%Ruleprotectsyoubymakingyoustoptradingearlyinadrawdown.Itcreatesacoolingoffperiod:reviewyoursystem,studythemarkets,andreturntothem
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thefollowingmonth.
16. Answer9-16:AThe6%Ruledoesn'tconcernitselfwithprofits.Itsjobistomanageriskandlimitdrawdowns.Youwillcount
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profitsattheendofthemonth.Ifyourequityhasincreased,boththe2%andthe6%Ruleswillgiveyoumoreavailableriskthefollowingmonth.
17. Answer9-17:B
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Lossestraumatizetraders.Returningtothemarketafterabreakyouneedtobegentletoyourself.Reducetheamountofriskyouacceptoneachtrade.Setrealistic
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performancetargets,andgraduallyincreaseyourtradingsize.
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■RatingYourself
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1. 0-6correct:poor.Theredlightison—youdonotunderstandmoneymanagement.Beforeyoumakeanothertradewithrealmoney,study
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therelevantchaptersandretakethistest.
2. 7–12correct:so-so.Therearegapsinyourunderstandingofriskmanagement.Thistopicistooimportanttosettlefor
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anythingbutthetopscoreonthistest.Pleasereviewyouranswerstothequestionsthatyoumissed,reviewtherelevantchapters,andretakethistestafewdayslater.
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3. 13–17correct:excellent.Youhaveaworkingcommandoftheessentialmoneymanagementrules.Reviewthequestionswhereyouranswers
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differedfromthoseinthisbook.Moneymanagementsetsaprotectivewallaroundyouraccount.Lookforeverygapinthatwallandplugitup.
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■ RecommendedReading1. Vince,Ralph.PortfolioManagementFormulas(Hoboken,NJ:JohnWiley&Sons,1990).
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TEN
PracticalDetails
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1. Answer10-1:BDependingonhowbullishyoufeel,youmaybuyabreakoutaboveyesterday'shigh,apullbackto
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value,orapenetrationofthevaluezonetothedepthatwhichpreviouspullbacksbottomedout.Itisgenerallynotagoodideatogolongabovethechannel.Theupperchannel
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linemarksthezonewherebullishnessbecomesmanic,andeventhoughitmaycontinue,itismorelikelytoreverse.
2. Answer10-2:BWhenthe
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trendisup,itmakessensetobuypullbacksbelowvalue.Theaverageofthepreviousthreemonths'penetrationswaslessthan$3.Thereisnopointinbeinggreedyandtryingtonailthevery
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bottomofapullback—catchinga$1penetrationwouldbemorereliablethana$3one.
3. Answer10-3:AAwell-designedchannelcontainsthe
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majorityofmarketswings,makingitsupperboundaryagoodtargetforrallies.Atradethatcaptures30%ofthechannelheightearnsanA.Inanuptrend,weshouldexpectpricestorise
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byagreateramountabovetheEMAthantheydippedbelowitonapullback.Bythetimethemovingaverageturnsdown,apaperprofitmayturnintoaloss.
4. Answer10-4:
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DWithlong-termpositiontrades,onehastobeleeryofusingsuchprofit-takingtoolsasmovingaverages,envelopes,andindicatordivergences.If
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youplantoholdforseveralmonths,thosesensitivetoolswouldgetyououtofthetradetoosoon.It'sbettertosetprofittargetsusingsupportandresistancezones.
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5. Answer10-5:CSettingstopsandprofittargetsallowsustocalculatereward/riskratios.Totheannoyanceofmosttraders,whipsawshappen,asmarkets
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reverseintheirfavorrightaftertheygotstoppedout.Stopsprovidegenerallyreliablemeansofprotectingyouraccount,butunfortunately,don'tguaranteelimitingyourmaximumrisk
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becausepricescangapacrossstoplevels.
6. Answer10-6:C(I,II,andIII)Placingstopsoutsideofthezoneofmarketnoisehelpsreducewhipsaws.Channels,
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SafeZone,andATRsdrawthelinebetweennormalandabnormalswings,eachinitsownway.Notsosupportandresistance:buyingveryclosetosupportstill
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exposesustomarketnoise.
7. Answer10-7:D(I,II,III,andIV)Stayawayfromthecrowd:ahighlyvisiblepriceextremeattractstoomanystops.Sodoround
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numbers.Placeyourstopsslightlyawayfromboth.Astopisariskmanagementtool,andasatrademovesinyourfavor,youcanrelocateyourstoptoprotectashareofyour
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profit.Nevermoveyourstoptogivemoreroomtoalosingtrade.
8. Answer10-8:CWhengoinglong,youwanttobuyasclosetothelowofthebarandasfarfromthe
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highofthebaraspossible.Therangeofthedaywas$2($23minus$21).Youbought$1.50awayfromthehigh.Dividing$1.50by$2showsthatyourgradewas75%—excellent!Any
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buygradeabove50%isgoodbecauseitshowsthatyouboughtinthebottomhalfofthebar.
9. Answer10-9:AYouwanttosellasclosetothetopofthebarandasfar
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fromthelowofthebaraspossible.Therangeofthedaywas$3($29minus$26).Yousold$1awayfromthelow.Dividing$1by$3showsthatyourgradewas33%—so-so.Agoodsell
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gradewouldbeabove50%,meaningyousoldinthetophalfofthebar.
10. Answer10-10:BOfthethreegradesforeverytrade—buy,sell,andoveralltradegrade—the
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tradegradeisthemostimportant.Sincechannelsaredrawntocontain90to95%ofrecentprices,theheightofthechannelonthedayyouenterreflectsarealisticmaximum
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availablegain.TakingonethirdormoreofachannelearnsanAgradeforthetrade.Inthisexample,youtook$2outofa$6channel—verygood!
11. Answer10-11:C
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Agoodscancanfindagroupofcandidatesonwhichtofocusyourattention,butitdoesn'tguaranteeprofitabletrades.Beginbydefiningthepatterntolookfor,andthencastyour
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scanningnetaswideorasnarrowasyoulike.Startoutscanningasmallgroup,andyoucanexpandlater.
12. Answer10-12:AYouhaveunlimitedchoicesin
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settingupscanparameters.Youmayprogramittoexcludestockswhosevolumeistoolow,whosepricesareoutsideofyourpreferredrange,orwhosetrendclasheswithyourcurrent
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marketview.Whatyoucan'tdoisfilteroutunprofitablestocks—thisissomethingyoutakeyourbestshotatduringthefinalreviewprocess,whenyouanalyzethelistofcandidates
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deliveredbyyourscan.
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■RatingYourself
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1. 0-4correct:poor.Thisscoreiswaytoolowforatrader.Thismaynotmatterforatheoreticalanalyst,butatradershouldrereadthe
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relevantchaptersandretakethetestbeforegoinganyfurther.
2. 5–8correct:fairlygood.Therearegapsinyourunderstandingofpracticalconcepts.Itisimportantto
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knowhowtosetentries,targets,andstops,andhowtomeasureyourperformanceineverytrade.Pleasereviewyouranswerstothequestionsthatyoumissed,rereadthe
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relevantchapters,andretakethistestafewdayslater.
3. 9–12correct:excellent.Youhaveaworkingknowledgeofsettingupentries,targets,andstops,and
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measuringyourperformance.Differenttradersusedifferenttactics—pleasereviewthequestionsforwhichyouranswersdifferedfromthoseinthisbooktosee
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whetheryou'vemadeamistakeoritwasanhonestdifferenceofopinion.
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ELEVEN
GoodRecord-Keeping
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1. Answer11-1:CKeepinggoodrecordswillhelpyoulearnfromyourexperiences,improvediscipline,andreduceimpulsivity.It
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willnotpreventyoufrommakingmistakes,butit'llhelpyoulearnfromthemandstoprepeatingthem.
2. Answer11-2:BReviewingyesterday's
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performanceandadjustingstopsareimportant,butthepurposeofmorninghomeworkistofocusonfactorslikelytoberelevantfortoday'strading.Theymayincludethebehaviorof
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theovernightmarkets,reviewoffundamentalreportsscheduledforreleasetoday,andallotherfactorsmeaningfultoyourdecisionmaking.
3. Answer11-3:
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B(IIandIII)Therearedayswhenyourhealth,mood,andhomeworkmakeyouwell-preparedfortrading.Therearealsodayswhenyourhealthbothersyou,yourmoodis
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gloomy,andyou'vedonelittleifanyhomework—onthosedaysyoushouldn'ttrade.Aquickself-test,tailoredtoyourpersonality,cangiveyouanobjectivemeasureof
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yourreadinessfortrading.Don'tincreasetradesizewheneverythingisperfectbecauseonsuchdaysanychangecanonlybefortheworse.
4. Answer11-4:
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DYouneedtodefinethestrategyyou'lluseforatradeandsetupyourentry,target,andstop.Allocatingasetamountofrisktoatradewillallowyou
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tousetheIronTriangleofriskcontroltodecidehowmanysharesorcontractsyou'lltrade.Itisbetternottocountprofitsuntilatradeisclosed—concentrateonquality,andthemoneywill
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follow.5. Answer11-5:
B(IIandIV)ThestructureofatradeApgarissimple:nomorethanfivequestions,withnomorethanthreepossibleanswerstoeachofthem.
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AtradeApgarleadsyouonaquickreviewofwhetherastockdeservesatradeplan.Ifnot,moveontothenextcandidate,butifyes,thenworkupadetailedtradeplan.
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6. Answer11-6:D(I,II,III,andIV)ATradebillisakeyplanningandtrackingdocumentforatrade.Youneedtoidentifythestrategyyou'lltrade;settheentry,target,
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andstop;allocaterisk;andcalculatethetradesize.Italsoneedstoincludewrittenremindersoftheessentialfactors,suchasthedatesofearningsreports.
7. Answer11-7:
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C(I,II,andIII)It'sessentialtodocumentyourstopsaswellasthelevelsatwhichyou'llmovethemtobreakeven.Suchdecisionsarebestmadeveryearlyinatrade.Same
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withthediary—documentyourentrywhilethememoryisstillfresh.Itisbetternottocountprofitswhileatradeisopen—concentrateontrademanagementandcount
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profitsafteryouexitatrade.
8. Answer11-8:DMostprivatetradersworkinisolationandreceivenofeedback.Thismakesreviewingyourpasttradesan
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especiallyvaluablelearningdevice.ThereisaRussiansaying:“Don'tsteponthesameraketwice.”Whenyousteponarakelyinginthegrass,itstandsupandhitsyouonthe
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forehead.Itcanhappentoanyone,butdon'tsteponitagain.Reviewingpasttradeshelpsyourememberwherethoserakesare.
9. Answer11-9:C
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Alloftheactionslistedinthisquestionareimportant,butthemosteducationaloneisreturningtoeachtradeseveralweeksorevenmonthsafteryouexitedit
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andreviewinganupdatedchart.Bythen,trendsandreversalsareclear,youcanseeexactlywhatyoudidrightorwrong—andusethoselessonsgoingforward.
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■RatingYourself
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1. 0-3correct:poor.Goodrecord-keepingisattheheartoftradingsuccess.Pleaserereadtherelevantchapters,andretakethetest
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beforegoinganyfurther.
2. 4–6correct:fairlygood.Goodrecord-keepingisdirectlylinkedtobettertrading.Itisafairlysimplebutessentialskill—don'tsettlefora
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“fairlygood”rating.Reviewyouranswerstothequestionsyoumissed,rereadtherelevantchapters,andretakethistestafewdayslater.
3. 7–9correct:excellent.
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Youhaveaworkingknowledgeofrecord-keeping.Pleasebesuretoimplementit—startkeepingatradingdiary.It'llrepayyoureffortsandserveyouwellforyears
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ahead.
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Afterword
Now that you have testedyourknowledgeoftradingby
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using this book, you're betterprepared for the biggest testofall—tradinginthemarkets.Financial trading is a never-ending test of your ability tothink straight under stress,make intelligent andunemotional decisions, andstay in control of the moneyinyouraccount.This book has given youseveral rating scales formeasuring your skills; it has
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provided a reading list andhasallowedyoutoretakethetests that you failed at first.Themainratingscaleofyourmarket performance will bethe slope of your equitycurve.Thebestcurvesshowasteady growth of an account,with small drawdowns. Youneed to keep track of yourequityandstoptradingfortherest of the month if it dropsmorethan6percentfromtheend-point of the preceding
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month.Be sure to keep a diary ofyour trades, including notonly dates, tickers, and sizesbut also charts and yourpersonalcomments.Thiswillhelp you learn from yourexperiencesandimproveyourperformance.I keep all my records in aTrade Journal atSpikeTrade.com, whoseformat has been sharpened
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and polished over the years.Even if you want to designyour own record-keepingsystem, take a good look attheTradeJournal to seehowa good system should lookandwork.Keep quiet about your tradeswhile they are open. Talkingabout open positions isdangerous because it putsyour ego on the line.Once atrade is closed out, you can
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benefit from the opinions offriendsyourespect.Thefactthatyouinvestedthetime and energy in studyingand taking the tests in thisbook shows that you areserious about trading.Continue to study themarkets, keep your cool, andfocus on growing youraccount equity with minimaldrawdowns. I wish yousuccess in fulfilling your
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dream—tradingforaliving.
Dr.AlexanderElderNewYork—Vermont,2014.
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Sources
This Study Guide is basedontheauthor'sbookTheNew
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Trading for a Living(Hoboken,NJ:JohnWiley&Sons, 2014). In addition, thefollowing books containuseful information for adeeperunderstandingofthesequestionsandanswers:1. Belveal,L.Dee,ChartingCommodityMarketPriceBehavior(1969)(Homewood,IL:BusinessOneIrwin,
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1985).
2. Douglas,Mark,TheDisciplinedTrader(NewYork:NewYorkInstituteofFinance,1990).
3. Edwards,RobertD.,andJohnMagee,TechnicalAnalysisofStockTrends(1948)(NewYork:NewYorkInstituteofFinance,1992).
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4. Elder,Alexander&KerryLovvorn,TheNewHigh—NewLowIndex(Alabama:SpikeTrade,2012).
5. Kaufman,Perry,TradingSystemsandMethods(Hoboken,NJ:JohnWiley&Sons,2013).
6. LeBon,Gustave,TheCrowd(1897)(Atlanta,GA:Cherokee
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Publishing,1982).
7. Lefevre,Edwin,ReminiscencesofaStockOperator(1923)(Greenville,SC:TradersPress,1985).
8. Mackay,Charles,ExtraordinaryPopularDelusionsandtheMadnessofCrowds(1841)(NewYork:CrownPublishers,1980).
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9. Murphy,JohnJ.,TechnicalAnalysisoftheFinancialMarkets(NewYork:NewYorkInstituteofFinance,1999).
10. Neill,HumphreyB.,TheArtofContraryThinking(1954)(Caldwell,ID:CaxtonPrinters,1985).
11. Pring,MartinJ.,TechnicalAnalysis
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Explained,5thedition(NewYork:McGraw-Hill,2013).
12. Vince,Ralph,PortfolioManagementFormulas(Hoboken,NJ:JohnWiley&Sons,1990).
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AbouttheAuthor
Alexander Elder, MD, is a
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professional trader andteacher of traders. He is theauthorof severalbest-sellers,considered modern classicsamong traders. He has alsowritten books about RussiaandNewZealand.Dr. Elder was born inLeningrad and grew up inEstonia, where he enteredmedical school at the age of16.At23,whileworkingasaship's doctor, he jumped a
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Soviet ship in Africa andreceived political asylum intheUnitedStates.HeworkedasapsychiatristinNewYorkCity and taught at ColumbiaUniversity.Hisexperienceasa psychiatrist provided himwith unique insight into thepsychologyoftrading.Dr. Elder is an active trader,buthecontinuestoteachandis a sought-after speaker atconferences in the United
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States and abroad. Dr. Elderis the originator of Traders'Camps—week-long classesfor traders.He is the founderof SpikeTrade group, acommunity of traders whosemembers share their beststock picks each week incompetitionforprizes.Dr. Elder's websites arewww.elder.com andwww.spiketrade.com.
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WILEY END USERLICENSEAGREEMENT
Go towww.wiley.com/go/eula toaccessWiley’sebookEULA.
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TableofContents
ABOUT THIS STUDYGUIDE
PART I: QUESTIONSRATINGSCALES
IntroductionONE: IndividualPsychologyTWO: MassPsychology
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THREE: ClassicalChartAnalysisFOUR:ComputerizedTechnicalAnalysisFIVE: Volume andTimeSIX: GeneralMarketIndicatorsSEVEN: TradingSystemsEIGHT: TradingVehicles
Note
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NINE: RiskManagementTEN: PracticalDetailsELEVEN: GoodRecord-Keeping
PART II: ANSWERS ANDCOMMENTS
IntroductionRatingYourself
ONE: IndividualPsychology
Rating
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YourselfRecommendedReading
TWO: MassPsychology
RatingYourselfRecommendedReading
THREE: ClassicalChartAnalysis
RatingYourselfRecommended
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ReadingFOUR:ComputerizedTechnicalAnalysis
RatingYourselfRecommendedReading
FIVE: Volume andTime
RatingYourselfRecommendedReading
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SIX: GeneralMarketIndicators
RatingYourselfRecommendedReading
SEVEN: TradingSystems
RatingYourselfRecommendedReading
EIGHT: TradingVehicles
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RatingYourself
NINE: RiskManagement
RatingYourselfRecommendedReading
TEN: PracticalDetails
RatingYourself
ELEVEN: GoodRecord-Keeping
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RatingYourself
AfterwordSourcesAbouttheAuthorEndUserLicenseAgreement