CMT LVL II 2018 Theory and Analysis

Transcription

1 CMT LVL II 2018 Theory and Analysis Page numbers followed by n indicate note numbers. A Absolute return, 504 Accumulation and distribution, 40 53, 211 extended rectangle bottom, Accumulative average, 112 ACD method, 295 Active portfolio weights, 506 Adaptive markets hypothesis (AMH), 513, Adaptive Trading Model, 494 A/D oscillator, Advance-decline system, , 720 Advance Market Technologies (AMTEC), n2 ADX line, Alexander filter, 638 Allais Paradox, 537 Alpha description of, 504 method, returns, 504 Amex QQQ volatility index, 386 AMH. See Adaptive markets hypothesis Amplitude, 437 AMTEC. See Advance Market Technologies Anchoring, Animal spirits, 528 Annualized rate of return, 768 Apex, 248, 290 Appel, Gerry, 221 APT, 694n22 Arbitrage, limits of, 669 Arguments, ARIMA. See Autoregressive integrated moving average Aristotle, , 602 Arithmetic moving average, 74 Arms, Richard, 204 Arms index, Arms index (TRIN), Array investing and, 402 Ascending triangle, 248, Aspray, Thomas, 212 demand oscillator, Asset allocation, 394 intrinsic value of, 507 Athens General, ATR. See Average true range Autoregressive integrated moving average (ARIMA), forecast results, 587 Kalman filters, mean-reverting indicator, 595 slope, 588 trading strategies, use of highs and lows, 588 Autoregressive model, Average-modified method, 107 Average-off method, 107 Average true range (ATR), 82 Average volume, 205 B Bacon, Francis, Bailout, bindex 1 November 29, :56 PM

2 2 Bands, 21, 92 95, confidence, formed by highs and lows, 125 rules for using, trading strategies using, Bandwidth indicator, 95 Barberis, Shleifer, and Vishny (BSV) hypothesis, Bar chart, 241 interpretation by Charles Dow, 7 25 long-term patterns with best performance and lowest risk of failure, practical use of, price objectives for, Bar chart patterns, See also Patterns classic patterns, learning objective statements, 234 overview, Base, 248 Bat indicator, 466 Bayes theorem, 693n9 Bearish belt-hold, 318 Bearish key reversal, 32 Bear market end of, 12 formation, 10 phases, signal, 10 transition from bull market, 15 traps, 67 Behavioral finance, , , 697n84 anchoring and adjustment to, bias and, competing hypotheses of, diffusion of information among investors, foundations of, herd behavior, imitative behavior and, 675 information cascades, investor attention shifts, 677 investors stories, limits of arbitrage, 669 limits of human rationality, optimism, 673 overconfidence and, 519 pattern recognition and, psychological factors of, role of feedback in systematic price movements, sample size neglect, social factors of, Bernard, V., 694n19 Beta description of, returns, Blau, William, 189 tick volume indicator, Blow-off, 43 Bogle, John, 511, Bold conjecture, 623. See also Popper, Karl Bollinger bands, 92 93, , combined with other indicators, 134 modified, Bolton-Tremblay (BT) value, 218 Bonds AAA, 497, n39 learning objective statements, 496 long-term interest rates, model, to stocks, 400 Bottom reversal bar, 281 Bottoms accumulation and distribution, double and triple, extended rectangle, profit targets after bottom formation, 58 rounded, targeting profits after, V-bottoms, wedges, 51 Bottom-up analysis, , 530 Bowl, Box pattern, Breadth as a countertrend indicator, 227 highs and lows, 222 indicators, interpreting, learning objective statements, 197 market breadth indicators, 719 overview, Breadth thrust, Breakaway gap, 26, 27, 28, Breakout failed, 19 false and premature, 244 bindex 2 November 29, :56 PM

3 gaps, systems, 753 Breakout price to set price targets, 243 Broadening patterns, 248, Broad Market Equity Series All-Cap, 466, 467 BSV. See Barberis, Shleifer, and Vishny hypothesis BT. See Bolton-Tremblay value Bubbles, 520, 525 Keynes on, 528 Buffett, Warren, 675 Bulkowski, Thomas N., 28, 235 Bullish belt-hold, 317, 318 Bullish divergence, 736 Bullish engulfing pattern, Bullish nonconfirmation, 736 Bullish piercing pattern, Bull market end of, 12 formation, 10 phases, transition to bear market, 15 traps, 67 Business cycle, 432 Busted rectangles, 246 Butterfly effect, 416 Buy relative strength and, 451 signals, Buy-and-hold return, 762 C CADR. See Cumulative advance-decline ratio CADV. See Cumulative accumulationdistribution volume Calculation period, 105 Calls, with alternative characteristics, 354 American versus European, combinations, early exercise of an American call, 356 margins and, 358n6 minimum value of a European call, 355 parity, , profits from, 349 VIX and, Call writer, 348 Candlestick charts applications, best of, 64 candle formations, 61 to confirm resistance, to confirm support, 338 confluence of candles, to enter or exit trades, 340 implied strategies in, to preserve capital, Qstick, quantifying candle formations, Candlestick patterns, See also Multicandle patterns; Single candle lines description of, ranking, 307 CANSLIM method, Capital asset pricing model (CAPM), 656, 694n20 Capitalization EMH and, 665 CAPM. See Capital asset pricing model Caps, Case studies of designing HAL (2001: A Space Odyssey), , of gaps and classic patterns, rule data mining for the S&P 500, Catalysts, 513 Cattle cycle, 429, 430 CBOE DJIA volatility index, See also Channel breakout operator CBOE NASDAQ-100 volatility index, CBOE Russell 2000 volatility index, CBOE S&P volatility index, 385 CCI. See Commodity Channel ; Commodity Cycle ; Continuous Commodity CFTC. See Commodity Futures Trading Commission CHADTP. See Connors-Hayward Advance- Decline Trading Patterns Chaiken, Mark, 210, 715, 716 volume accumulator, Chande, Tushar, 220 thrust oscillator, Channel breakout operator (CBO), , 743n12 3 bindex 3 November 29, :56 PM

4 4 Channel-normalization operator (CN), See also Stochastic indicator Channels, 21, 95 96, creating with trendlines, description of, 256 formation of, 23 Keltner, Charting, 3 70 accumulation and distribution, bar chart and interpretation by Charles Dow, 7 25 causes of chart patterns, 5 6 chart formations, concepts in chart trading, consistent patterns, 4 6 continuation patterns, episodic patterns, evolution in price patterns, implied strategies in candlestick charts, learning objective statements, 3 major and minor formations, 40 one-day patterns, overview, 3 4 practical use of the bar chart, price moves and trends, 6 7 price objectives for bar charting, trendlines, trends in retrospect, Chicago Board Options Exchange options trading, 348n1 CHLR. See Cumulative new high-lows ratio Climax pattern, , 278, 279 Closing prices, 13 14, 19 Cluster, 269 CMF. See Cumulative money flow CMT Association about, ix exam topics and question weightings, xvi level II content selections, xiii level II exam, xv program, xi CN. See Channel-normalization operator CNV. See Cumulative negative volume index CNVR. See Cumulative net volume ratio Coarse Theorem, 556n8 Coefficient of determination, 565 Cognitive consonance, 519 Cognitive dissonance, Cognitive errors, 669 Coil, Commodity Channel (CCI), 759 Commodity Cycle (CCI), Commodity Futures Trading Commission (CFTC), 690 Commodity Research Bureau (CRB), 419 Commodity Trading Advisors (CTAs), 114 Common gap, 26, 27 Computers pattern recognition and, testing of trend system, 148 Confirmation of double bottom, 46 earnings with technical confirmation, 666 errors, 519 principle of, 13 Connors, Larry, 289, 293 Connors-Hayward Advance-Decline Trading Patterns (CHADTP), Consolidation identifying direction from consolidation patterns, 23 Constant forward contracts, Continuation patterns, flags, pennants, 38 run days, 39 symmetric, descending, and ascending triangles, wedges, Continuous Commodity (CCI), 485 Cooper, Michael, Correction within a trend, 288 Correlation, assumptions, coefficient, , 584 homoscedasticity, learning objective statements, 563 normality, outliers, 575 Correlogram, Counterattack patterns, 324 Countertrend trading, 174 breadth as a countertrend indicator, 227 CPB. See Cumulative positive volume index Crabel, Toby, 283, , Cradle, 248 CRB. See Commodity Research Bureau Crime of small numbers, bindex 4 November 29, :56 PM

5 Crossovers left and right, 181 CTAs. See Commodity Trading Advisors Cumulative accumulation-distribution volume (CADV), moving averages of, 717 Cumulative advance-decline ratio (CADR), 720 Cumulative money flow (CMF), 717 Cumulative negative volume index (CNV), Cumulative net volume ratio (CNVR), 720 Cumulative new high-lows ratio (CHLR), 721 Cumulative on-balance volume, Cumulative positive volume index (CPB), Cups, 31 32, with handle, 31 Currency rates, foreign, 422 risk, 688 Curve-fitting, 756, 763 Cycle definition of, 437 Cycle analysis, business cycle, 432 cattle cycle, 429, 430 cycle channel index, identification, Kondratieff wave, learning objective statements, 427 observing, overview, phasing, removing the trend, short cycle indicator, Swiss Franc cycle, 429 triangular weighting, uncovering the cycle, using Fisher Transform, using Hilbert Transform, Cycle channel index, Cyclical stocks, D Daily raw figure (DRF), 183 Daily Sentiment Composite, 473, 479 Danger points, 412 Daniel, Hirshleifer, and Subrahmanyam (DHS) hypothesis, Dark cloud cover, 62, , 303, 321, 322 Data back-adjusted, 20 in-sample, 764 special data problems for futures systems, testing with clean data, Data mining. See Rule data mining for the S&P 500 DCB. See Dead cat bounce Dead cat bounce (DCB), Death cross, Demand, Demand oscillator, Derivatives, 240 Descartes, Rene, 614 Descending triangle, DHS. See Daniel, Hirshleifer, and Subrahmanyam hypothesis Diamond top pattern, 248, pullbacks in, 255 trading, 255 Directional movement constructing indicators for, 87 description, using, Disposition effect, Distribution frequency of, Divergence index, Divergence rules, limitations of proposed indicator, need for double channel normalization, objective measure of, parameter combinations and naming convention for, subjective analysis, types, Divisor changing, DJIA. See Dow Jones Industrial Average Doji pattern, 61, 298, , Doji star, 303 Dollar, stock market and, bindex 5 November 29, :56 PM

6 6 Donchian channel, 96, 753. See also Moving averages 5- and 20-day moving average system, and 40-day breakout, 142 Dorn, Anne, 524 Dorn, Daniel, 524 Double bottoms, 44 47, Double-smoothed momentum, Double-smoothed stochastic, 191 Double tops, 44 47, Dow, Charles interpretation of bar chart, 7 25 Dow Jones 20 Bond Average, 497 Dow Jones Industrial Average (DJIA), 9, 31 industry weightings, 383 members of, 382 Dow Jones Industrials, Dow Jones Transportation, 9 Downs, Walter, Dow theory description of, 8 9 futures markets and, S&P and, tenets of, 9 10 Dragonfly doji, 315 Drawdown, 758 maximum cumulative, 768 DRF. See Daily raw figure Drop-off effect, 79 time-based trend calculations and, 113 Dysart, Paul, 744n29 E EasyLanguage, 33 EBTA. See Evidence-based technical analysis Efficiency factor, 768 Efficient markets hypothesis (EMH), 71, 406, , , See also Behavioral finance; Nonrandom price motion theories; Random walk hypothesis assumptions of, challenges to, consequences of market efficiency, contradiction to, cost of information paradox, 658 description of, 651 evidence in favor of, false notions of, flaws in assumptions of, forms of, 694n17 nonrandom price motion in, Ponzi schemes and, predictability studies contradicting semistrong EMH, predictability studies contradicting weak form of EMH, price predictability and, price volatility of, 663 smart versus dumb paradox, understanding, Ehlers, John, 188, Ehrlich Cycle Finder, 430 Einstein, Albert, 599, 627 Elder, Alex, 206 Force, Ellis, Charles, Levels of the Game, The Winner s Game, EMA. See Exponentially smoothed moving average; Exponential moving average EMH. See Efficient markets hypothesis Endowment effect, Engulfing patterns, 61, 301, 302, Entropy, 751 Entry, Envelopes, trading strategies using, Environmental model. See Fab Five Environmental Risk, Episodic patterns, Equity curve, Equity market, 698n99 risk premium, 688 VIX and, Equivolume, 204 Errors analysis of, cognitive, 669 confirmation, 519 extrapolation, 519 hindsight, 519 investor, 661 judgment, 680 Eve and Eve double top pattern, 243 Evening Star, 62, 63, , 304, 328 Evidence-based technical analysis (EBTA), 645 evwma. See Variably weighted moving average Exchange rate, 416 Exhaustion gap, 27, 28, 275 bindex 6 November 29, :56 PM

7 Exit, Exogenous signal systems, Expected utility theory, 660 Exponentially smoothed moving average (EMA), variable, Exponential moving average (EMA), 80 81, 82, Extrapolation errors, 519 F Fab Five, combo component, final tape component, 472 monetary component, overview, 464 sentiment component, tape component, using, 495 Fading, 164, 755 gaps, 333 Failed breakout, 19 Failures, 237 in flags and pennants, 263 Failure swing, 173 Fair value, Falling window, Falsification. See also Popper, Karl limitations of, scientists response to, Fama, Eugene, 406, 655 Fat tail, , 154 FBNDX. See Fidelity Investment Grade Bond Fund Fed. See Federal Reserve Federal Reserve (Fed), 6, 65, 67 Feedback role in systematic price movements, Fidelity Investment Grade Bond Fund (FBNDX), 501 Figure charts, 412 Financial crisis of 1988, 7 8, 527 Financial Data Calculator, 711 Fisher, Mark, 295 Fisher Transform, inverse, 442 Flags, 37 38, failures in, 263 objectives, Flat time, longest, 769 Force index, Forecasting, , elimination of meaningless, learning objective statements, 335 limiting to direction, 102 overview, subjective, Forward-looking horizon, 696n56 Fosback, Norman, 212, crossover model, Fractal, 236 Framing, Frequency, 438 Fries, Charistian, 215 Front-loaded technique, 108 Full-span moving average, 445 Functional relationships, 601 Funnel, 252 Futures choosing between stock markets and, Dow theory and, substituting open interest for volume, volume, G GAAP. See Generally accepted accounting principles Galilei, Galileo, 598 Gambler s fallacy, 673 Gann, W. D., 5 Gaps, 25 28, Bulkowski on, 28 case study of, fading, 333 filling, 27 one-day patterns and, trading rules for, Gaussian filter, 110 Gaussian PDF, 440 Generally accepted accounting principles (GAAP), 517 Geometric mean, Geometric moving average (GMA), 82, Globalization Asian markets and, communication and, bindex 7 November 29, :56 PM

8 8 GMA. See Geometric moving average Gold, 101, , 464 long-term interest rates, performance, Golden Cross, Goldman Sachs, 374 Goldman Sachs Commodity (GSCI), 460 Government, 460 libertarian paternalism, 557 price moves and trends, 6 Grand rush, 5 Granville, Joseph, 207 on-balance volume, Gravestone doji, , Gross loss, 761 Gross profit, 761 GSCI. See Goldman Sachs Commodity H Half-mast formation, Hamilton, William P., 7 Hammer, 62, 312, Hammer pattern, Handle, 258 Hanging man pattern, 62, , 312 Happy guess, 618 Harami pattern, 299, Hard assets, 395 Harmonics, 428 Head, 260 Head-and-shoulders formation, 51 53, back test results, price objective, trading, 262 Hedging, 454 Herd behavior, 674, Herrick payoff index (HPI), , 204 Heuristics, 519, 672 High-low index (HLX), High-low logic indicator, 469 High wave candle, 311 Hikkake, 286, 287 Hilbert s Transform, 83, Hill, John R., 756 Hindsight errors, 519 HLR1. See Moving averages of new highs/ lows ratio HLR30. See Moving averages of new highs/ lows ratio HLX. See High-low index Homoscedasticity, Hong and Stein (HS) hypothesis, Hook reversal day, 286 Horizontal symmetry rule, 640 Horn pattern, 282, 283 HPI. See Herrick payoff index HS. See Hong and Stein hypothesis Hulbert, Mark, 511 Hulbert Newsletter Stock Sentiment, Hume, David, , 653 Hurst, J. M., 445 Hutson, Jack, 192 Hypothetico-deductive method, example from, stages of, I Implied volatility, estimating price movement, fluctuations based on supply and demand, historical versus forward-looking volatility, impact on option prices, learning objective statements, 361 option pricing models, 366 overview, 361 put-call parity and, valuing options, VIX and, 372 Indicators, predictability, price and volume functions, raw time series and, scripting, volume and, Indicator scripting language (ISL), 711 Industrial metals, 396 Industrial raw materials, 396 Industry sectors, 698n105 Inertial effects, disposition effect, endowment effect, bindex 8 November 29, :56 PM

9 learning objective statement, 552 overview, 552 status quo effect, Information cascades, InPhase, 438 In-sample (IS) data, 764 Inside bar, Inside days, 35 Integrated probability model, 228 Interest rates, 65, 476 changes in, 482 decline in, 154 long-term, prices-of-debt instruments from, 722 spread, 722 Intermarket analysis, determining intermarket relations, example of, 416 learning objective statement, 415 using correlations for portfolio diversification, Intraday intensity, 211 Intraday patterns, , Intraday volume patterns, Intrinsic value, 507, 512 Inverted hammer, 300, 301 Inverted triangle, 252 Investing, array and, 402 issue selection, perspectives on, relative strength strategies for, relative versus absolute return investment, 504 Investment policy statements (IPS), overview, 529 philosophy, process of, 530 sample investment policy, Investments losses from, 559n14 Investors active versus passive, 504 diffusion of information among, errors, 661 rational assumptions of, shifts in attention, 677 IPS. See Investment policy statements ISL. See Indicator scripting language Island reversals, 30 32, 280 pivot point reversals and swings, Isosceles triangle, J January effect, 519 Jegadeesh, Narishimhan, 406 Jiler, William L., 3 4 K Kalman filters, KAMA. See Kaufman adaptive moving average Kasakasa, 300 Kaufman adaptive moving average (KAMA), 83 Kelly Criterion, 662 Keltner, Chester, 92 Keltner band, Keltner channels, Kepler s laws of planetary motion, 649 Kernel regression, 647n50 Kestner, Lars, Keynes, John Maynard, animal spirits and, 528 on bubbles, 528 on efficient markets, on excessive volatility, 526 on investment professionals and market efficiency, 526 long-term expectations and stock values, 525 long-term expectations for investors, on professional investing versus beauty contest, 527 on the professional investor, on reduced role of fundamental investors, warning for long-term investors, 528 Key reversal bar, 281 Key reversal days, programming, 33 Kirkpatrick, Charles D., 410 method, KISS philosophy, 464, Knetsch, Jack, Knockout pattern (KO), KO. See Knockout pattern Kondratieff wave (K-wave), Kuhn, Thomas, 635 K-wave. See Kondratieff wave 9 bindex 9 November 29, :56 PM

10 10 L Lag, 100, 191 Landry, David, Lane, Dr. George, 743n18 Law of noncontradiction, 602 Law of percentages, Least-squares model, 101 Left and right translation, 438 Legislation Uniform Prudent Investor Act, 532 Levels of the Game, Levy, Robert, method, 409 Libertarian paternalism, 557 Linearity, Linearly weighted moving average (LMA; LWMA), 79, 725 Linear regression model, Linear regression slope, 591 Lines, 12 Lip, 258 Liquidity liquidity premium and gains to countertrend trading in stocks, premium, 688 of trading, 393 LMA. See Linearly weighted moving average Logic, consistency of, 602 deductive, induction by enumeration, inductive, propositions and arguments, 602 Long-legged doji, 316 Long real bodies, Long sale, 181 Long Term Capital Management (LTCM), 662 Lookback, 407 Lorca-Susino, Francisco, Lorenz, Edward, 416 Loss aversion, distribution, 117 large, 769 maximum consecutive losses, 768, 769 Lost motion, 5 LTCM. See Long Term Capital Management LWMA. See Linearly weighted moving average M MA. See Moving average; Moving-average operator MACD. See Moving average convergence/ divergence Macrotrends, 154 Major Price Trend Directional Indicator (MPTDI), MAMA-FAMA strategy system, 83, Market breadth indicators, 719 Market facilitation index, 233 Markets crash, 680 efficiency of, entropy and, 751 intermarket analysis, market efficiency, maturity of, measuring market strength, money and, 115 sectors, 698n104 tone, 33 VIX and, Market-to-market accounting, 106 MAR ratio, 764, 768 Maximum adverse excursion, 763 Maximum consecutive losses, 768 Maximum drawdown (MDD), 768 Maximum Entropy Spectral Analysis (MESA), Maximum favorable and adverse excursions, 769 McClellan oscillator, MDD. See Maximum drawdown Measured rule, 243, 264 Measuring gap, 275 Media underreaction to news, 518 Megaphone, 252 MESA. See Maximum Entropy Spectral Analysis Mill, John Stuart, 619 Minute-to-minute patterns, 239 Misunderstanding randomness, 520 MLM. See Mt. Lucas Management Mode bat, 465, 475 Models Adaptive Trading Model, 494 autoregressive model, Barberis, Shleifer, and Vishny hypothesis, bindex 10 November 29, :56 PM

11 bonds model, capital asset pricing model, 656, 694n20 Daniel, Hirshleifer, and Subrahmanyarn hypothesis, Fab Five model, crossover model, Hong and Stein hypothesis, integrated probability model, 228 least-squares model, 101 linear regression model, modified 3-crossover model, 146 Nine-Indicator Model, option pricing models, real-time models, stock market model, Zweig Bond Model, Modern Portfolio Theory (MPT), 407 Modified 3-crossover model, 146 Momentum, 406 adding volume to, basic exit, 165 characteristics of, comparing stochastic indicator to momentum and RSI, comparing stochastic indicator to RSI and, confirmed by trading volume, 667 description, as the difference between price and trend, double-smoothed, geometric representation of, 157 high-momentum trading, 168 identifying and fading price extremes, learning objective statements, 156 moving convergence/divergence, nonreversal of, oscillators and, overview, pattern of, persistence of, 666 relative strength and, reversal of, 666 system, 135 timing an entry, as trend indicator, volume and percentage change, Momentum-volume (MV) indicator, 194 Money markets and, 115 Money flow cumulative, 717 moving averages of, 717 Money flow index, 210 Money management, adaptive markets hypothesis, alpha returns, 504 analysts and, behavioral finance and, beta returns, learning objective statements, 503 market efficiency, money managers record, overview, 503 perspectives on investing, professional investment policy statements, relative versus absolute return investing, 504 top-down fundamental analysis process, underperformance of money managers, Monte Carlo permutation, 700, Morgan Stanley Focus Growth Strategy Profile, Morning star, 62, 63, , 304, Mt. Lucas Management (MLM), Moving average (MA), See also Donchian channel of accumulation distribution volume, 717 of advance-decline ratio, 719 approaches to, ARIMA and, bands, calculating, channel, components of, crossover projection, description, 72 directional movement and, envelopes, full-span, 445 learning objective statements, 71 length of, 76 of money flow, 717 multiple, of negative volume index, 718 of net volume ratio, 721 overview, performance of, bindex 11 November 29, :56 PM

12 12 Moving average (MA) (continued) price substitution in, profile of, sequences, simple, 743n13 smoothing effect, 707 step-weighted, strategies for using, systems, day moving average rule, 137 time-based trend calculations and, types of, 78 83, 107 weighted by group, 109 Moving average convergence/divergence (MACD), , 755 reading the indicator, RSI version of, 177 trading, 170 variably weighted, 215 volume-weighted, 214 Moving-average operator (MA), Moving averages of new highs/lows ratio (HLR1; HLR30), 722 MPTDI. See Major Price Trend Directional Indicator ; Modern Portfolio Theory MSCI EAFE description of, 460 Multi-candle patterns, See also Candlestick patterns; Single candle lines learning objective statements, 320 Multi-Cap Equity Series, 475 Multiperiod horizons, 695n43 Multiple-bar patterns, Multiple regression, 578, MV. See Momentum-volume indicator N NA. See Net advances Naked bar upward reversal, 286 NAREIT. See National Association of Real Estate Investment Trusts Narrow-range bar (NR), NASDAQ 100 sector weightings, 384 trend system for, NASDAQ Composite, NASDAQ futures performance statistics, 124 National Association of Real Estate Investment Trusts (NAREIT), 460 Natural log, 112 NAV. See Net asset value NDR. See Ned Davis Research Neckline, 52, 261 Ned Davis Research (NDR), 461. See also Fab Five Negative volume index (NVI), Net advances (NA), Net asset value (NAV), 106 Net borrowed reserves, 487 Net profit, 761 Neural network, 765 Neuro-Shell, 711 Nietzsche, 200 9/11, See also Price shocks Nine-Indicator Model, Noise, 40 about one-day patterns, 36 Non-correlated asset classes, hedge risk premium and commodity futures, Noninformative event, 694n20 Nonparametric regression, 582 Nonrandom price motion theories, See also Efficient markets hypothesis; Technical analysis in the context of efficient markets, importance of theory, 649 learning objective statements, 648 liquidity premium and gains to countertrend trading in stocks, Mt. Lucas Management of trend following returns, overview, 648 scientific theory, 649 systematic price motion and market efficiency, Northern doji, 316 NR4 day, 292 Null hypothesis, , NVI. See Negative volume index O OBM. See On-balance volume Ockham s Razor, 599, 632 On-balance volume (OBM), , price substitution in moving average, One-bar reversal patterns, 281 One-day patterns charting, bindex 12 November 29, :56 PM

13 cups and caps, gaps, inside days, 35 island reversals, noise about, 36 outside days, 35 reversal days and key reversal days, spikes, trading rules for gaps, wide-ranging days, O Neil, William, 409 CANSLIM method, Oops! pattern, 289, 301 OOS. See Out-of-sample optimization Opening gap, Open interest description of, 198 learning objective statements, 197 overview, substituting for volume using futures, volume and, Optimizing measuring system results for robustness, methods of, profit measures, risk measures, screening for parameters and, 766 smoothness and the equity curve, Option pricing, characteristics of option values, impact from implied volatility, implied volatility and, learning objective statements, 347 models, 366 overview, 347 selling an option, 349n2 types of options, Oscillators description, forecast, 592 learning objective statements, 156 momentum and, overview, relative strength index and, stochastic indicator, trending versus sideways markets, 193 volume, 207 O Shaughnessy, James, 410 method, 410 Outlier-adjusted profit, 767 Outliers, 575 Out-of-sample optimization (OOS), 756, Outside bar, Outside days, 35 Overbuy, 164 Oversell, 164 P Pairs trading, 738 Paper assets, 395 Paper umbrella, 300 Parameter set, 758 Path dependence, Pattern completion rule, Pattern recognition systems, 755 Patterns. See also Bar chart patterns broadening, bull and bear traps, 67 causes of chart patterns, 5 6 change of character and, characteristics of, computers and, consistent, 4 6 continuation, description of, 235 entry and exit, evolution in price patterns, existence of, failures, future information leakage, identifying direction from consolidation patterns, 23, 242 long-term bar chart patterns with best performance and lowest risk of failure, market structure and recognizing, 240 objective, 637 one-day, postpattern activity, 66 profitability of, recognizing, 67 68, with rounded edges, shorter continuation trading patterns, subjective, variations from, in volatility, 519 Payoff ratio, 768 PDF. See Probability density function 13 bindex 13 November 29, :56 PM

14 14 P/E. See Price-to-earnings ratio Pearson s correlation, , 567, 568 Pennants, 38, failures in, 263 Percentage bands, 126 Percentage change method, 407 Percentage envelopes, Percentage filter, 638 Percentage winning trades, 768 %R method, 187 Perception biases, anchoring, framing, learning objective statement, 544 overview, 544 saliency, sunk-cost bias, Perfect fit correlation, 764 Period, 437 Perpetual contracts, Phase, 438 Phase angle, 438 Phasing, Piercing line, 62, 303 Piercing pattern, Pipe formation, 281 Pivot, 272 Pivot point reversals, Pivot-point weighting, Point-and-figure patterns, 241 Point of equilibrium, 45 Politics presidential election cycle, Ponzi, Charles, 680 schemes, Popper, Karl, 608, Portfolio construction and implementation, 530 diversification away from US markets, 418 diversification using intermarket analysis, Positive volume index (PVI), PPI. See Producer price index Presidential election cycle, , , 435 election year analysis, 435 Price change over time, 104 changing price objectives using channels, 57 distribution of, 115 estimating price movement, evolution in price patterns, extremes, historical data, 646n32 history of, 137 moves and trends, 6 7 objectives for bar charting, predictability of, for promoting market efficiency, 689 proxy for, 189 role of feedback in systematic price movements, tick-to-tick, 239 volatility of EMH, 663 Price extremes determining, Prices closing prices, Price shocks, 4, 53 Price targets using breakout price to set, 243 Price-to-book-value effect EMH and, 665 Price-to-earnings ratio (P/E), 518, 530, 661 EMH and, 665 Pring, Martin, 34, 397 Probability density function (PDF), 440 Producer price index (PPI), 483 Profit factor, 120, 761, 767 patterns and, percent profitable, 761 Profits from calls, 349 distribution, 117 elements of objectives, 55 from puts, 350 from a straddle, targeting profits after tops and bottoms, targets for consolidation areas and channels, Program trading, 68 Propositions, Prospect theory, description of, 540n9 drawbacks of, 542 learning objective statements, 537 loss aversion, bindex 14 November 29, :56 PM

15 overview, 537 in practice, 541 reference point, S-curve, Pruitt, George, 756 Pseudoscience versus science, Pullbacks, 22, in diamond patterns, 255 Puts, combinations, parity, , payoffs, 357 profits from, 350 VIX and, PVI. See Positive volume index Pythagoras, 600 Pythagorean Theorem, 600 Q Qstick, Quadrature, 438 Quadruple witching day, 204 R Random walk hypothesis (RWH), 71, 406, 651. See also Efficient markets hypothesis Raschke, Linda Bradford, Rate of change (ROC), 157, 157n1 Rate of return, 768 Ratio analysis, 394 Ratio method, 405 Raw time series indicators and, Real-time models, Recovery ratio, 768 time to recovery, 769 Rectangle pattern, busted, 246 trading, 246 Regression, assumptions, 582 equation, , 579 learning objective statements, 577 multiple, 578, nonparametric regression, 582 Regression analysis, autoregressive integrated moving average, learning objective statements, 588 measuring market strength, trading signals using a linear regression model, Regression line, 764 Regression studies, 765 Relative return, 504 Relative strength. See Momentum academic studies of, bottom up analysis and, buy rule, 451 data, 449 data sources, learning objective statement, 448 measuring, momentum, overview, 448 ranking, 451 real world implementation, sector returns, sell rule, solutions to drawbacks of, strategies for investing, Relative strength index (RSI), , 755 countertrend trading, 174 creating the stochastic indicator from, modifying, net momentum oscillator, 174 standard 2-period, day, ups and downs, 174 version of MACD, 177 volume-weighted, Relative vigor index (RVI), Reset accumulative average, 113 Resistance lines, candlestick charts and, determining, 84 trading rules for, Return on account, 762 Return on invested capital (ROIC), 530 Return retracement ratio, 769 Reversal days, bar reversal patterns, 34 Reverse triangle, 252 Reversions to the mean, 755 Rising wedge, 256 Rising window, ROC. See Rate of change 15 bindex 15 November 29, :56 PM

16 16 ROIC. See Return on invested capital Rolling calculation period, 104 Rolling trend calculations, 113 Rollo Tape. See Wyckoff, Richard D. Rounding bottoms, Rounding tops, Rouwenhorst, K. G., 406 RSI. See Relative strength index Rule data mining for the S&P 500, See also Technical analysis analyzed data series, average return, 701 avoidance of data snooping bias, 700 bias and evaluation, data input series used in case study, divergence rules, evaluation of complex rules, extreme values and transitions, learning objective statement, 699 naming convention for extreme value and transition rules, 733 overview, 699 parameter sets and total number of E-type rules, 733 raw time series and indicators, statistical significance level, 703 statistical terms used, technical analysis themes, 701 time-series operators, transforming data series into market positions, trend rules, Rule of seven, 60 Runaway gap, 27, 28, 42, 275 Run bars, 286 Run days, 39 Runs distribution of, 116 Russell 2000 volatility index (RVX), RVI. See Relative vigor index RVX. See Russell 2000 volatility index RWH. See Random walk hypothesis S Saliency, Salk, Jonas, Saucer, Scaling, 194 Scallops, Scatterplot, Schabacker s rules, 12 Schultz, 218 Science functional relationships, 601 knowledge and, laws versus theories, 601 logic in, philosophy of, predictions, 621 versus pseudoscience, restriction of, skepticism and, 614 Scientific knowledge, purpose of science, 601 quantitative, 600 Scientific method, technical analysis and, critical analysis of observed results, description of, 596 Greek science and, hypothetico-deductive method, information content of scientific hypotheses, key aspects of, learning objective statements, 595 objectification of subjective TA, objective reality and objective observations, observations, 646n14 overview, 595 philosophy of science, prediction versus observation, role of logic in science, scientific attitude and, 629 scientific knowledge and, scientific revolution and, subsets of TA, technical analysis and, Scientific Revolution, Screen trading, 392 S-curve, Sector overweights versus underweights, Secular analysis, Securities AAA, 545 mean reversion or reversal effect in, 518 price behavior in an efficient market, bindex 16 November 29, :56 PM

17 prices in an efficient market, 514 returns, 518 Sell relative strength and, signals, Sengmueller, Paul, 524 Sequences, averaging, Setup, 268 Shading, 60 Shadows, 60 Shark-32, 290 Shark pattern, Sharpe, William F., 694n20 Sharpe ratio, , 762, 769 Shiller, Robert, 650, 677, 678 Shleifer, Andre, 661 Shooting star, 62, 300, 301, 312 Short cycle indicator, Short sale, 181 Short-term patterns, 241, learning objective statements, 267 overview, pattern construction and determination, traditional, Sibbett, James, 217 demand index, SIF. See Student Investment Fund Signals, anticipating the trend, buy and sell, comparing basic trading signals, giving specific, multiple, 66 progression of, for sell and buy, 21 trading signals using a linear regression model, trendlines and, Simple moving average (SMA), 74 76, 107 Single candle lines, See also Candlestick patterns; Multi-candle patterns Doji line, learning objective statements, 309 long real bodies, spinning tops and high wave candles, Size effect, 518 Sklarew, Arthur Rule of Seven, 60 Slippage, 393 Slope of the yield curve, 722 SMA. See Simple moving average Smith, Vernon, 556 Smoothness, 769 Soft assets, 395 Software user-friendly, 106 Sortino ratio, 769 Southern doji, 316 S&P transition from bull to bear market, 15 using Dow theory, S&P 100 volatility index (VXO) industry weightings, 385 S&P 500, Rule data mining for the S&P 500, S&P 500 description of, 460 Spearman, Charles, 565 coefficient, Spikes, 28 30, 278 quantifying, in volume, , S&P index industry weightings, 374 Spinning top, 299, SPIVA. See Standard & Poor s Indices vs. Active Funds Standard deviation moving average, 111, 112, 200, 762 Standard & Poor s Indices vs. Active Funds (SPIVA), 511 STARC band, 93 Star patterns, Status quo effect, Step-weighted moving average, Sterling ratio, 769 Stochastic indicator, , 466, 755. See also Channel-normalization operator calculating the 10-day indicator, 178 comparing to momentum and RSI, creating from the RSI, double-smoothed, 191 trading, bindex 17 November 29, :56 PM

18 18 Stock market. See also Fab Five bottom up analysis, diversification in, experience in, 392 industry sectors of, learning objective statements, 461 model, relative strength of, 405 screening for favorable stocks, U. S. dollar and, 401 Stocks from bonds, 400 choosing between futures markets and, cyclical, historical volatility of, 362 performance of, ranking, 695n42 returns, 424 Stop-loss order, Straddle, Strap, 351 Strauss, Charles, Stretch, 294 Strip, 351 Student Investment Fund (SIF), 531, 532 Sunk-cost bias, Supply and demand, 7 implied volatility and, Support determining, 84 Support lines, trading rules for, Suspension gaps, 275 Swings, Swing trading, 10 Swiss Franc cycle, 429 Syllogisms affirming the consequent, 608 categorical, conditional, invalid form of conditional, valid forms of conditional, Symmetrical triangle, 248, System design and testing, See also Trading benefits of nondiscretionary system, 749 best system, 756 case study of HAL, , discretionary versus nondiscretionary systems, initial decisions for, learning objective statements, 746 necessity of, optimization of, overview, pitfalls to nondiscretionary system, requirements for designing a system, special data problems for futures systems, successful, 750 testing methods and tools, 758 testing with clean data, test parameter ranges, types of technical systems, System MAR, 762 System Writer, 496. See also TradeStation T TA. See Technical analysis Taxes, 559n14 Technical analysis (TA). See also Nonrandom price motion theories; Rule data mining for the S&P 500 adoption of scientific method, elimination of meaningless forecasts, elimination of subjective TA, 633 objectification of subjective TA, paradigm shift, 635 popular theory of, scientific method and, subsets of, day moving average rule, year bonds, 460 Theories nonrandom price motion theories, scientific, 649 theory of elasticity, theory of general relativity, 627 Three black crows, , 305, crossover model, 146 Three inside down pattern, Three inside up pattern, Three outside down pattern, 306 Three outside up pattern, 306 Three white soldiers, , bindex 18 November 29, :56 PM

19 Threshold level, 168 Throwbacks, Thrust oscillator (TO), Tick-to-tick prices, 239 Tick volume indicator (TVI), , 229 Time-based trend calculations, accumulative average, 112 drop-off effect, 113 forecasting and following, geometric moving average, learning objective statements, 99 moving average and, overview, price change over time, 104 reset accumulative average, 113 Time intervals, 16, Time series operators, , 745n51 Time stamps, 229 Time-weighted average price (TWAP), 216 Timing momentum and, , 165 Titman, Sheridan, 406 TMA. See Triangular moving average TO. See Thrust oscillator Top-down analysis, , cyclical emphasis, secular emphasis, Tops accumulation and distribution, calculating profit target for top formation, 58 double and triple, rounded, targeting profits after, V-tops, wedges, 51 Trade average trade net profit, 761 dollar down, stocks up, 520 international, 7 length of average winning trade, 768 maximum consecutive losing trades, 762 number of, 761 risk-on, risk-off, 520 Trade MAR, 763 TradeStation, 33, , 129, 228, 496, 711, 743n19 Trading, See also System design and testing bottom up, comparing basic trading signals, concepts in chart trading, costs, 391, 459 cycle analysis, danger of trading double and triple tops, 47 day traders, , 392 diamond top pattern, double formations, 244 flags, 264 forecasting, frequency of, 459 between futures markets and stock markets, guidelines, head-and-shoulders pattern, high-momentum, 168 intermarket analysis, learning objective statements, 389 liquidity, 393 the MACD, 170 options, 348n1 overview, 389 pairs, 738 pennants, 264 rectangle patterns, 246 risks, 391 RSI countertrend, 174 rules for gaps, 27 28, 97 rules for head and shoulders, rules for trading using trendlines, screen, 392 selection, signals using a linear regression model, the stochastic indicator, strategies using ARIMA, strategies using bands and envelopes, suitability, 392 swing, , 392 techniques, time horizon, 392 top-down analysis of, trendline rules for horizontal support and resistance levels, triangles, volatility, volume, 393 wedges, 258 Trading range, 25, Trend-following systems, bindex 19 November 29, :56 PM

20 20 Trendlines, back-adjusted data, 20 creating a channel with trendlines, new trend direction, 21 redrawing, rules for trading using, for signals, support and resistance lines, trading rules for horizontal support and resistance levels, Trends, See also Time-based trend calculations anticipating trend signals, classifications of, 9 determining, followers of, 144, , 753 indicators for, long-term versus short-term, 65 66, 115 macrotrends, 154 minor, 13 momentum as trend indicator, persistence of, 14 price and volume, price moves and, 6 7 removing for analysis, in retrospect, 16 17, rules, secondary, systematic process and, 696n71 time intervals and, 16 volume and, 13 Trend slope method, 408 Trend systems, bands and channels, buy and sell signals, comprehensive studies, 147 computer testing of, 148 early exits from a trend, 154 frequency of, 115 learning objective statements, 114, 138 moving average projected crossover, moving average sequences, multiple trends, overview, 114 profit and loss distribution, 117 reliability and delay compromise, 133 selection of right trend method and speed, signal progression, single trend applications, success of, techniques using two trendlines, three trends, timing the order, trend period, 151 volatility system, 137 Triangles ascending, 36 descending, 36 formation of descending triangle, objectives, size of, 37 standard, symmetric, 36 trading, Triangular filtering, 109 Triangular moving average (TMA), 82 Triangular weighting, , TRIN, Triple bottoms, 44 47, Triple tops, 44 47, Triple witching day, 204 TRIX, 192, 193 True strength index (TSI), Truncated moving average, 107 TSI. See True strength index TSM pivot point average, TVI. See Tick volume indicator TWAP. See Time-weighted average price Tweezer pattern, bar reversal patterns, 34 Two-bar breakout, 282 Two-bar reversal patterns, Two-candle pattern, day relative strength index, U UDR. See Upside/downside ratio Ultimate oscillator, Umbrella lines, 313 Underdetermination of theories problem, 646n14 Underwater curve, Uniform Prudent Investor Act (UPIA), 532 UPIA. See Uniform Prudent Investor Act Upside/downside ratio (UDR), 219 Utility theory, 543 bindex 20 November 29, :56 PM

21 V Value Line Ranking System, 411 Variable accumulation distribution, 715 Variably weighted moving average (evwma), 215 V-bottoms, VCI. See Volume count indicator Vertical charts, 412 Vertical symmetry rules, VIX. See Volatility Volatility alpha versus beta returns, 504 implied, patterns in, 519 price and, 663 reduction in, 423 of trading, Volatility bands, Volatility (VIX), 134, 293, , Amex QQQ, 386 calculating, equity market, formula and calculations, history of, 374 implied volatility and, 372 learning objective statements, 373 market movement and, nonmathematical approach to, 375 overview, 373 put-call parity and, Volatility patterns, Volatility system, 137 Volume advancing versus declining, 217 breadth indicator and, 222 cumulative accumulation-distribution, cumulative on-balance, drop in, exceptions to, 204 filtering low volume, futures, indicators, interpreting, learning objective statements, 197 momentum and percentage change, moving averages of negative volume index, 718 normalizing, on-balance, open interest and, oscillator, 207 overview, positive and negative volume index, as predictor of volatility, 205 relative changes in, 231 removing low-volume periods, 232 removing volume associated with small price moves, spikes, , standard interpretation of, of trading, 393 trends and, 13 use of, 196 variance in, 200 Volume accumulator, Volume count indicator (VCI), 210 Volume-weighted average price (VWAP), 216 Volume-weighted MACD (VWMACD), 214 Volume-weighted RSI, V-tops, VWAP. See Volume-weighted average price VWMACD. See Volume-weighted MACD VXO. See S&P 100 volatility index W Walk forward optimization, 756, 766 Warrants, 351 Waters, Jim, 182 Wave definition of, 437 Wave analysis, 8 9, 437 Wealth-Lab, 711 Wedges, 38 39, 248, characteristics of, 257 performance rank of, 257 top and bottom patterns, 51 trading, 258 Weighted moving average, 81, Whaley, Dr. Robert, 374 Whewell, William, Whipsaws short-term, 78 White s Reality Check, 700, Whole sample optimizing, Why Do People Trade?, 524 Wide-range bar, bindex 21 November 29, :56 PM