Technical Analysis for the Trading Professional, Second Edition: Strategies and Techniques for Today's Turbulent Global Financial Markets

by Constance M. Brown

Overview

THE TECHNICAL ANALYSIS CLASSIC—REVISED AND UPDATED TO HELP YOU SUCCEED, EVEN DURING TIMES OF EXTREME VOLATILITY

“This book contains the most advanced methodology I’ve ever seen.”
—GEORGE C. LANE, from the Foreword

Required reading for certification in the Chartered Market Technician (CMT) program

Over a decade ago, when this groundbreaking guide was first published, the world of technical analysis had experienced vast change. Seemingly overnight, technological advances had utterly transformed the way market analysts performed their jobs. A growing army of professional technical traders, armed with global plug-and-play software, needed to improve their skills of price projection, timing, and risk management to weather the increasing market ranges and volatility.

Technical Analysis for the Trading Professional helped them achieve it. The word spread that this practical guide provided radical new uses and combinations of indicators and formulas—and it became an instant classic.

By comparison, today’s markets make those of 1999 look simple—so Technical Analysis for the Trading Professional has been expanded to reflect the author’s experiences over the past decade to bring you fully up to date. It provides comprehensive coverage of new techniques, as well as the timeless insight and tools that analysts will always need to maintain a competitive edge in the global financial markets, including:

• Explanations of why common oscillators do not travel between 0 and 100 and why signals develop in different ranges during bull versus bear market trends
• Expanded guidelines for the use of the Composite Index. Formulas are fully detailed for this custom oscillator that warn when the Relative Strength Index is failing to detect a trend reversal
• A comprehensive foundation of Gann analysis, with an explanation of how Gann Squares, the Gann Fan, and the Square of 9 are geometrically related to one another
• Methods for calculating Fibonacci retracements and swing projections in rapidly expanding or contracting markets
• A more expansive discussion of cycle analyses and their asymmetrical properties

Each chapter presents the given topic as a separate building block, moving step-by-step through 150 charts that lead toward new methods of price triangulation. The result enables you to pinpoint a market objective—even in the most extreme and volatile trading environment.

Use Technical Analysis for the Trading Professional to establish the trading dominance you need to excel in today’s uncertain markets.

Product Details

ISBN-13:	9780071759151
Publisher:	McGraw Hill LLC
Publication date:	12/09/2011
Sold by:	Barnes & Noble
Format:	eBook
Pages:	384
File size:	14 MB
Note:	This product may take a few minutes to download.

About the Author

Constance Brown, CMT (Chartered Market Technician), founded Aerodynamic Investments, Inc., after working for more than 15 years as an institutional trader in New York City. She continues to actively trade and advises numerous financial institutions and banks around the world.

Read an Excerpt

TECHNICAL ANALYSIS FOR THE TRADING PROFESSIONAL

Strategies and Techniques for Today's Turbulent Global Financial Markets

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By CONSTANCE M. BROWN

The McGraw-Hill Companies, Inc.

Copyright © 2012Constance M. Brown
All rights reserved.
ISBN: 978-0-07-175915-1

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Excerpt

CHAPTER 1

OSCILLATORS DO NOT TRAVEL BETWEEN 0 AND 100

"Why does it appear that conventional technical indicators are failing us as we approach the twenty-first century? What has changed?" Thirteen years ago this was an opening which did not know the volatility changes that would be ahead. However, this method of describing oscillator movement to determine trend and entry/exits in volatile conditions has stood up to the test of time. I believe strongly that a method you favor should be able to handle market changes; therefore, the original text requires no revision. The only suggestion I would offer is to stop reading occasionally and study how a 14-period Relative Strength Index (RSI) has moved in your own charts. Take any time horizon or market. Study global indexes, Gold, Oil, Bonds, and Forex trend or trendless markets, as the method described here will stand up to the challenge. The ranges defined in this chapter remain valid and of value. However, the astute analyst and trader will know there are times when the RSI will fail to give any divergence warning of a coming major trend reversal. For this there is a solution: this time the chapter on the Composite Index will be fully disclosed and both the Composite Index and RSI will be displayed in more current charts. Therefore, this chapter will accurately describe the methodology for you and Chapter 12 will continue the discussion in a more current market environment.

I am asked these two questions by professional traders before a lecture or seminar far more frequently than any others. The implications are that the technical studies that brought a trader prior success have changed. Traders employed by major institutions throughout Europe, Asia, and the United States seem puzzled by this same phenomenon. The traders affected utilize both eastern and western technical analysis; the problem is clearly widespread and undiscriminating. Have the indicators failed, or have the markets changed, making older methods obsolete? Neither suggestion is true. Technical analysis has proved that it will hold up to whatever the world puts in front of us. But technology makes everything more tightly connected. We are waking up to the new awareness that for my country to do well, so must you. No one should look at markets in isolation.

How did this group become so tightly linked together when they were working independently with their own technical tools? All quote vendors use the same default variables within their analysis software; professional systems and retail software products alike still use the exact same defaults. Think about that statement for a moment. Every quote system shipped to a new location anywhere in the world with charting capabilities starts off with the exact same setup periods and formulas. Less experienced traders rarely change these default variables as they are overwhelmed with the long list of indicators available to them by the click of a mouse button. It is all too easy to set up a chart and then read a quick description in a manual that proclaims, "Sell your Stochastics when it rolls over and crosses the 80 line with divergence, and buy when you roll back up through the 20 line." In mass, the orders from the same signal pour in with instantaneous execution.

I do not fear what the professional trader might do. Nor do I have strong views about market realities such as S&P programs that are triggered when the spread between the S&P Cash and Futures market becomes out of line. Now programs are triggered because the German Dax and Dow Jones Industrial Averages are out of line. The problem is not with the professional but with the growing mass of novice technical traders who operate as one large institutional wildcard. The professional trader who fails to move forward beyond this group is unknowingly operating within this new technically armed and dangerous mass. The impact of this new breed of mass psychology is indicator failure and capital erosion. This group cannot only be avoided but also used to the professional's advantage. The time has come to change conventional thinking about technical indicators. However, the professional faces a new risk. The buzzword is "alpha." With the collapse in the financial banking sector around the world, institutions are farming out their research to third parties. Alpha is the new model and this model is of little value if the majority rely on the defaults that failed them in the past.

The 1990s brought dramatic changes to the way technicians and traders apply their tools. At the same time the need for technical analysis grew because it became increasingly difficult to manage the global volume of fundamental factors and cross-market ramifications. More people continue to discover the value of charting techniques. However, to evolve beyond the foundations of technical analysis, we must change the way we utilize technical studies.

Traders still working under the premise that there are two groups of technical indicators—indicators for trending markets like moving averages and then indicators for nontrending markets such as the oscillators MACD, RSI, and Stochastics—are now very outdated. The books that segregated indicators into two primary groups are not wrong. Do not lose sight of the fact that the original works provided us with the foundation on which our industry is growing today. The important distinction is that early books on technical analysis will eventually be viewed as classics, but traders who fail to evolve beyond these original concepts face a far less pleasant fate: extinction.

A good place to begin to dispel some of the common beliefs about our technical indicators is with oscillators. The mainstream believe that oscillators generally travel between a scale of zero and 100. Generally 20 and below is viewed as oversold, and 80 or above is an overbought market. This is incorrect.

In Figure 1.1 the standard default period of 14 is used for the RSI with a daily bar chart of Yen futures. The Yen is falling in a bear market within this time horizon. The graph showing the RSI indicator has an upper black band marking a range of resistance from 60 to 65. A lower band marks 23 to 28 to highlight a support zone for the indicator. Study the indicator tops closely. At no time is the Yen strong enough to push the RSI oscillator successfully through the 65 level. (Spot traders need to keep in mind that this is a Futures chart, which will be inverted from the spot market.) Each time the indicator tests the range from 55 to 65, the Yen renews its former downtrend and establishes new lows against the dollar. The oscillator then declines to a support zone within a range of 20 to 30. There will be many more examples to reinforce this concept. The general rule to follow for a bear market is that RSI will oscillate within a range of 20 to 30 at the low end of the scale up to an upper resistance zone of 55 to 65. This is true regardless of market or time horizon.

In a bull market the RSI will shift and begin to oscillate within a range marked by a support zone of 40 to 50 toward an upper resistance zone of 80 to 90. Figure 1.2 shows the same Yen futures market but over a weekly time horizon when the Yen is in a bull market or the dollar is weak. Each time the Yen declines, the oscillator falls to a support zone near 40 to 50. The 40 level is never broken. The strong Yen rallies push the oscillator into the 80s. Even minor advances that lead to more complex consolidations allow the RSI to decline only as far back as the 40 to 50 zone.

Do these RSI ranges defining bull and bear markets apply to other oscillators? Yes, when the period used for the indicator has been correctly defined. We will cover how to find the correct period in the next chapter, and
(Continues...)

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Excerpted from TECHNICAL ANALYSIS FOR THE TRADING PROFESSIONAL by CONSTANCE M. BROWN. Copyright © 2012 by Constance M. Brown. Excerpted by permission of The McGraw-Hill Companies, Inc..
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents

Contents

Foreword....................          

Acknowledgments....................          

Disclaimer....................          

Part | 1 DISPELLING SOME COMMON BELIEFS ABOUT INDICATORS....................          

Chapter | 1 Oscillators Do Not Travel between 0 and 100....................          

Chapter | 2 Dominant Trading Cycles Are Not Time Symmetrical....................          

Chapter | 3 Choosing and Adjusting Period Setup for Oscillators....................          

Chapter | 4 Dominant Trend Lines Are Not Always from Extreme Price Highs or Lows............          

Chapter | 5 Signals from Moving Averages Are Frequently Absent in Real-Time Charts..........          

Part | 2 CALCULATING MARKET PRICE OBJECTIVES....................          

Chapter | 6 Adjusting Traditional Fibonacci Projections for Higher Probability Targets......          

Chapter | 7 Price Projections by Reverse-Engineering Indicators....................          

Chapter | 8 Price Objectives Derived from Positive and Negative Reversals in the RSI........          

Chapter | 9 Gann Analysis: Calculating Price and Time Objectives....................          

Chapter | 10 Using Oscillators with the Elliott Wave Principle....................          

Part | 3 NEW METHODS FOR IMPROVING INDICATOR TIMING AND FILTERING PREMATURE SIGNALS.........          

Chapter | 11 Volatility Bands on Oscillators....................          

Chapter | 12 The Composite Index....................          

Chapter | 13 The Principles of Depth Perspective Applied to Two-Dimensional Charting........          

Credits....................          

Appendix A....................          

Appendix B....................          

Appendix C....................          

Index....................