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Mastering Technical Analysis

Mastering Technical Analysis

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Mastering Technical Analysis

4/5 (18 évaluations)
423 pages
6 heures
Feb 18, 2015


Discover the Secrets of Reading Charts like an Expert Trader to Predict the Markets

More than 10 years ago I was frustrated. I knew people were making money trading the markets, but I just didn't understand how.

I read lots of newsletters and searched for information online, but somehow it didn't seem to fit together – I had no system. My choice was to work at finding out more, or just give up.

In my "real life" I was an engineer, so I was used to solving problems. That meant I had to figure it out. I set about learning as much as I could, I drew charts and made discoveries, and even interviewed experts such as Steve Nison (the Japanese candlestick guru), Curtis Faith (the Turtle Trader), Daryl Guppy, Sean Hyman, Stuart McPhee, Brian McAboy, Bill Poulos, etc. (You can see the interviews in some of my earlier books).

All this learning and experience has been compiled into Mastering Technical Analysis, a comprehensive work in which I share my insights. But you needn't take my word for it – just look at the reviews that the book has received:

From Top 1000 reviewer D. Buxman
This is an exceptionally well-written, comprehensive course on technical analysis. It is a wonderful resource for a beginner, and has a good deal to offer even more sophisticated investors.

From Top 1000 reviewer Thomas Dunham
..this book is pure gold, it basically hands you everything to enter the market and not lose your butt! Highly recommended.

From Top 1000 reviewer Steve Burns
It is amazing the depth of knowledge contained in this book and the simplicity of the explanations that accompany complex topics. I highly recommend this book as a great place to start for the aspiring new trader to get a complete understanding of important market concepts that will lead to their success.

What You Get

Mastering Technical Analysis reveals all the methods and techniques that are available to you to ramp up your trading performance. You'll find out

How to read charts

How to understand indicators

How to earn money consistently

How to spot a trend

When to trade - and when not to

How to figure the amount you should trade

Where to set your stop losses, and why

How to prepare your personal trading plan

Don't wait! Scroll to the top of the page and click the Buy Now button, so you can start benefiting from the wealth of information I crammed into this 450+ page book.

Feb 18, 2015

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Mastering Technical Analysis - Alan Northcott

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Strategies and Tactics for Trading the Financial Markets

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Copyright Notice

Copyright © 2014 by Alan Northcott.  All Rights Reserved.

Reproduction or translation of any part of this work beyond that permitted by section 107 or 108 of the 1976 United States Copyright Act without permission of the copyright owner is unlawful. Requests for permission or further information should be addressed to the author.

Alan Northcott

924 S. Easy Street, Sebastian, FL 32958


This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold on the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.

First Printing, 2014

Printed in the United States of America

Table of Contents

What is Trading?

Technical Analysis and the Dow Theory

Charting Basics

Trend Concepts

Reversal and Continuation Patterns

Volume and Open Interest

Moving Averages

Oscillators and Sentiment Indicators

Further Charting

Ichimoku Cloud Charts

Elliott Waves and Cycles of Time

Money Management and Computers

How to Build a Trading System

The Stock Market




Contracts for Difference and Spread Betting

Final Notes

What is Trading?


ut simply, trading is buying and selling things to try and make a profit. The things may be baseball cards, works of art, or used cars. This book won’t help you buy and sell those. In the financial world, the things are stocks and shares, and other types of things that I will explain later, and that’s what this course is about.

Stocks and shares represent ownership in a company. The words are often used interchangeably, and usually shares will refer to just one company, and stocks refer to ownership in several companies. For instance, you might have a shareholding in IBM, and that could be part of your stock portfolio.

Not all companies have public ownership, but this is something that often happens as private companies grow in size. By a process called the Initial Public Offering (IPO), a company will offer shares for people to buy, and in this way will get money to help expansion, operation, research or whatever. Once the shares have been sold into the market with the IPO, then they are traded between individual and corporate owners, and the original company has little to do with this buying and selling, which is the function of the stock market.

Why would you buy shares in a company? It almost goes without saying that you do this to increase your wealth, or make a profit. Probably, you expect the shares to increase in value, so you can sell them for more than you paid. Sometimes, companies will send some of their profits to the shareholders, and these are called dividends. These payouts are usually not guaranteed, and some companies don’t issue dividends at all. So the shareholder may get some income, and is usually hoping that the shares will increase in value over time, and he will make a profit that way.

But the shareholder has literally bought part of the company, and has a voting voice in the running of the company, usually at the Annual General Meeting. Unless you are wealthy like Warren Buffett, you probably won’t hold enough shares to be heard, but many shareholders getting together can influence the course of the business. Shareholders want the business to succeed so that the company can afford larger dividends and the shares increase in value.

With that said, shares go up and down in value every day and the price really depends on what everybody en masse thinks it should be. Trading is not precise mathematics, but more group psychology, and emotions play a strong part in how you trade, and how others perceive the market.

Stocks and Bonds

You often hear about stocks and bonds in the same sentence, but they are very different. Stocks represent ownership in the company, and that’s it. If the company does not do well, then they may not issue a dividend, and if the company really doesn’t do well, and goes bankrupt, then the shareholders may lose everything. The banks and finance houses who lent money to the company will be paid out first from any sale of assets. If there’s anything money left after the assets are sold off and the debtors paid back, then the shareholders get their share of it.

Bonds are totally different. Bonds are issued so that companies can borrow money, and there is a promise to pay it back with interest. The government does the same thing, issuing Treasury Bonds to get working capital. Bonds are usually scheduled to be paid back in a number of years, and at that time the bond holder will get their money back with interest. Bonds can also be traded, or bought and sold, and you may be surprised to learn that they don’t always change hands for the initial value, particularly if it is some time before the bond is due to be paid back. But bonds are guaranteed if the company fails, at least to the extent that assets can be sold to cover the debt.

The Stock Exchange

People talk about the stock exchange, but actually there are many different stock exchanges, and some countries have several. Basically, they are places where stocks are bought and sold between brokers and market makers, and they can have quite a hectic image as portrayed in the movies. But some others, like the US NASDAQ market, are all electronic, basically a bulletin board, rather than a trading floor.

Different shares are traded in different stock exchanges. For instance, the NASDAQ has a reputation for trading technology stocks. Depending how you approach trading, which exchange lists what company may not matter to you. You may just deal through your broker who will take care of that detail. However, you will often find that you can only trade shares of the country where your broker is located. If you want to take part in trading in other areas of the world, you will be limited in your involvement unless you can open an account over there.

A term you may hear about in trading is liquidity. It basically means how much a stock is traded, and therefore how easy it is to find buyers and sellers if you want to sell or buy at any time. How liquid a stock is matters, as with low liquidity you may not find many people wanting to trade with you when you think the time is right, and that may force you to pay more or sell for less than you planned to.

Another pair of terms that is used frequently is the bulls and bears. A bull is someone who thinks the prices are rising, a bullish market, and the way to remember it is bulls’ horns go up. A bear is the opposite, and a bearish market goes down in value, just as a bear would knock you down.


Did I mention, you can’t actually go to a stock exchange and buy and sell shares for yourself? You have to go through someone who is authorized to make deals there, and that is a stockbroker. There are many types of stockbroker, giving different facilities and charging different amounts for their services.

The traditional stockbroker such as your father may have used is only a phone call away, and will help and advise you on where to place your money. He makes it his business to research the companies, and tell you which he thinks are good investments. He makes money every time you buy and sell, and you have to trust he is not telling you to trade just to make more commissions – this does happen, and it is called churning your account.

You don’t want that type of stockbroker when you are taking responsibility for your own trading. You want a broker who will give you access for trading the shares that you select, and who will give you fast execution, obeying your instructions right away while the shares are at the price you want. The Internet has changed the face of stock broking, and there are many online brokers who can provide a reasonable and efficient service. You should check out several before deciding which to use, based on cost, ease of use, and recommendations.

Depending on the type of trading that you intend, there is another option – with a fast internet connection and for a monthly fee you can have what is called a Level II screen, and this gives you immediate access to what the broker sees. This shows pending orders that haven’t been satisfied. For instance, if a stock is trading at 97.5, it may show that someone would like to buy 500 shares at 97.4, if only the price came down that much, and that someone else would like to sell 2000 shares at 97.55, if only the price would go up to that. If you are daytrading, then it is useful; if you don’t need it, then don’t bother.

Short Selling

Selling something short is a topic that confuses some people. It is important to be comfortable doing it when you are trading, as otherwise you will miss out on a lot of potential profit. Often, shares fall in value more quickly than they rise, so the prospective profits can be greater. Fortunately, it is not really that difficult, and you don’t need to be scared about it as your broker will take care of the details.

Normally when you buy shares, this is known as going long or taking a long position in the shares. You would do this in anticipation that the shares will increase in price. The opposite of this, as you might expect, is going short, taking a short position, or shorting the stock – these all mean the same thing, and you would do it in anticipation that the shares will fall in price.

What you are doing is selling the shares before you buy them, and that’s what worries people. You sell the shares at the current high price, wait for the price to drop, and then buy the shares to replace those you sold and profit by the difference in price. You finish up not owing anyone any shares, and with a profit.

So how do you sell what you don’t have? That’s where the broker comes in. The broker either has the shares in his own portfolio, or finds a client who owns the shares, and he borrows them for you to sell. When you close your short position and buy the shares, the broker just puts them back, and no one is worse off. Because of the way this works, you cannot short all stocks, but only the more popular ones that have some liquidity.

A minor point is that if the shares have a dividend payout while you are short, then the broker will make sure the dividend gets paid to his client, taking the money out of your account. The principle is that the client should have no idea that the shares have been borrowed, and obviously should not lose out because of it. And if the client wants his shares, and the broker cannot find somewhere else to borrow a replacement, there is the remote possibility that he would make you buy them back, whether or not you wanted to yet. But generally the system works well, and you don’t need to worry about the mechanics of it.

Types of Orders

When you trade, you give your broker an order to buy or sell the shares. You have choices on how you present that order, and that will influence how the broker fulfils it. This is covered in detail in one of the course Chapters about money management, but at this stage you should know that you have choices.

For instance, you can tell the broker to buy or sell the shares immediately, regardless of the price, and hope that the price will be similar to what you have been looking at on your screen. Usually it won’t be very different, and often a good broker can improve on the price when he places the order.

On the other hand, you can place an order and say that you don’t want to pay more than a certain price, and the broker will either get the shares at that price or better, or he won’t fulfill the order. You can do the same type of thing when selling.

A very common type of order when you are trading is called the stoploss order. You can instruct your broker, or you can watch the prices yourself, but either way the stoploss is valuable protection for your account. The idea is that, if your trade goes the wrong way, say falling in value rather than increasing, the stoploss order tells your broker to sell your shares at a lower price before they drop any further. That way you prevent any more losses to your account even if you are not watching the market.

There are a number of other types of order, and you need to become familiar with the ones that apply to your method of trading. They help you manage your money and control your account, so they are discussed later in the money management Chapter.

What Can I Trade?

Stocks and shares are one commonly known type of financial instrument which can be traded, but there are several others. Some traders are involved with the Forex market, that is buying and selling currencies, and many look to the derivative financial instruments so they can multiply the effectiveness of their trading capital. The details will come in later Chapters, but here’s an outline of what types of financial things are available to trade.

By the way, don’t be scared by the name derivative, and the mathematical connotations that it has to Calculus. The financial derivative is just something that derives its value from something else. All it means is that you are not buying that something else directly, whether it be a stock or a commodity; what you are trading in just has a relationship to the price of that something else.


Futures provide an exceptional opportunity for profit, which must be balanced against the risk involved. A futures contract is simply a binding contract to buy or sell something at a future date. The price is agreed and the quantity and quality, if appropriate, is set. A futures contract is a derivative, as any value it has as a contract is derived from something – it is only later that the actual goods will change hands for money, as the agreed transaction.

One of the reasons that futures were invented was to help farmers control their costs and predict their income without suffering wild fluctuations. A farmer could know in advance how much they would be paid for their crop or livestock when they sold it six months hence, and this would allow them to plan their expenditure, and even to switch crops if another would give them better returns.

The other party to this futures contract might be a cereal manufacturer, who would like to control and regulate his costs, and secure a supply of grain for future production. Both the farmer and the manufacturer would gain out of having a predictable future, so they wouldn’t really be concerned if the market price in six months time was a little higher or lower than they had agreed. What they are doing is hedging their positions so that they don’t have any surprises.

Now the farmer and the manufacturer would not purposely make themselves out of pocket. The price that they agree at the outset is one that they are both happy with, so the futures contract has no bias or built in disadvantage. It is only over the course of time that it may become obvious that the price will be higher or lower than the market price that will be available when the contract comes due.

Enter the speculator. Wherever there is the prospect of money to be made, then someone will try to do so. Suppose it looks like there will be a bumper crop, so supply and demand will push the price lower. Do you think the speculator would like to hold a contract where a manufacturer has promised to pay a certain price, regardless of what the market price is? Of course. That means that the futures contract takes on a value, and can be bought and sold to different people.

Generally futures contracts have a value that is derived both from the basic price of the goods and from how long it is until the date it must be settled, called the time value. Some futures contracts are easier to value than others. For instance, you can have a futures contract on gold, or something else that does not deteriorate. The seller in the contract could simply borrow money to buy the gold now, and pay interest on the loan until the settlement date. This is called a cash-and-carry way of figuring a value. If the contract was worth more than the current price plus interest, then the seller would make money without any risk, and everybody would do that until the opportunity was closed, so that sets a limit on how high a price could be in the contract.

You can get futures contracts on many different things. The thing is usually called the underlying, because it is the underlying basis of the contract. As above, the underlying can be a solid physical item such as gold. The underlying may be perishable, such as crops or pig bellies, and this is the basis of commodity trading. But the underlying could also be single stocks or stock market indices, and the futures contract would be based on what value these things attained by the expiration date of the contract.

Futures contracts are a commitment to a transaction, a buying and selling, of the underlying at the future expiration date. You can buy and sell futures contracts before they expire, as they change in value over time, and this is how you would make a trading profit. Some contracts have actual deliverables, but it is not likely you would let the contract reached that point – you may like bacon, but 40,000 pounds of frozen pigs’ bellies, the standard size for that contract, is probably more than you will eat in a lifetime. But if a futures contract was on a stock market index it would only be settled with the cash difference, and not by you receiving a bunch of different stocks. Depending what you decide to trade, you will learn what the rules are for settlement, as well as the standard dates of expiration.

I have to tell you that futures are not the only way to commit to buying and selling something in the future. Before futures were standardized by the markets, there was a very similar thing called a forward contract. Forward contracts were specifically written to suit the two parties who wanted a contract. They could specify the price, the date, the quantity and type of stuff to be bought and sold; in fact they could put whatever they wanted in the contract. And forward contracts are still used today when two parties can agree on specific requirements.

Forward contracts don’t work so well for trading. As they are so specific, there is not much of a market for buying and selling them. In contrast, futures contracts are highly standardized, specifying in detail the amount and quality of the goods involved, and a set date in the month when the buying and selling should take place. This means the market for them is generally highly liquid, and they are easily traded, which is much better for our purposes. As they are traded on an exchange, the performance is also guaranteed, whereas with forward contracts you have to rely on the other party going through with their side of the deal.

Now the great advantage of futures contracts is what is called leverage, which basically multiplies the power of your money. You see you don’t have to pay the total costs for the buying and selling you’ve agreed to in the contract until that future date when the sale takes place. All you have to have is a small percentage, called a margin, on deposit with your broker. Yet if you go right through to the sale date, you will make a profit from the change in total value of the goods.

As an example, say you put down 10% of the contract price as a margin – the percentage varies depending what the goods are, and what your broker will want. And say the goods went up 10% above the contracted price by the time the contract was due. That 10% represents a doubling of your margin money, and this is an example of leverage.

Of course, it is not all great. If you get it wrong, and for instance the price fell by 10%, you would lose money – in this case, all of your original stake. You could even lose more than your original stake, if the price fell more sharply. Leverage works both ways. But if you are a winning trader, then you can get much greater gains more quickly trading futures.

That brings us to one little housekeeping detail, and that is to do with something called marked to market. Each day your broker will look at the contracts you hold, and update their value according to the market price of the futures contracts. So the value of your account varies every day. If your account drops in value too much, your broker will ask you for more money, so that he has some assurance that any losses would be covered. It is just his guarantee against you finding you can’t pay up for a losing position.

When your broker asks for more money, this is called a margin call, and you have a limited time to respond. If you don’t send more money, the broker can do what he needs to do to protect himself from loss, which may include selling your contracts and any other holdings you have with him, such as stocks themselves. So you must make sure that you are always able and willing to respond to a margin call.

The upside of marking to market is that if your contracts increase in value, then your account is growing even though you haven’t closed out any deals yet. You could even trade some more with the extra money you get, but I would advise caution in getting overcommitted.

That’s the bare bones of how the futures markets work, and they’ll be discussed in more detail when we come to the training Chapter about using technical analysis with futures.


If you like the idea of the leverage you get with futures, but are concerned about the possibility of runaway losses, then you may find that options are more to your taste. Options, at least if you are buying them, will only cost you a certain amount and that is paid up front. There is no more liability no matter how far the price turns against you.

As you may have guessed from the name, options contracts give the buyer the option of buying or selling something at a certain price at some time in the future. So it is similar to a futures contract to the extent that a future deal is defined in advance at a set price. However, as you have the option or choice of whether to go through with the deal, then you will only exercise the option if it would make you a profit. It is just because you have this choice that you have to pay for the privilege, so options cost money – you have to buy an option.

That’s the basics of options – they will always cost you something, a premium, which is gone forever, but having paid that you don’t have to take any losses. The fact that you pay a premium means that you need to get a profit on the underlying price before you break even on the whole deal, but after that your potential gains are not limited, while your downside is already paid.

You have a lot of choices when you trade options. You can pick the price that you want for the underlying, and you can choose the expiration date, or strike date. These are factors in how much you pay for the premium. For instance, if the underlying is trading at $34, you may see a range of options for $30, $35, $40, $45, etc. The option to buy the underlying for $45 at the expiration date would probably be cheap, as it is not very likely to make a profit, and will probably expire worthless. The option to buy at $30 would cost much more, as even if the underlying price doesn’t change, you have a built-in gain.... of four dollars.

Options are referred to as in the money, at the money and out of the money depending on the price of the underlying compared with the contract price. For example, the $45 option is out of the money, and the $30 option is in the money. If the underlying was at the same price as the option contract price, then it would be at the money.

Up to now, I’ve been explaining the simple case of buying an option to buy something in the future. This is called a call option, as you can call for the shares or underlying goods to be sold to you at the expiration. You can also buy a put option, which gives you the right but not the obligation to sell the underlying at the expiration date for a certain price. This means that you can put the shares with someone else for an agreed payment. This is similar to going short, in that you would look for the price of the underlying to fall so that you made a profit by forcing someone to pay you the contracted price, if this was more than the market price at expiration. So you can make a profit in a rising or a falling market, as long as you anticipate the moves correctly.

That may be all you need to know about options in your trading, and that is a way to use them to limit your risk to the premium, while having an upside without limit. There is a second aspect to options contracts which can also prove profitable although it does carry more risk. We’ll talk about strategies to minimize risk in the later option Chapter, but for now you should consider that there is someone selling these options to the buyers.

There are two sides to each contract, and if you buy a call option, someone is taking your premium in return for guaranteeing they will supply you with shares at the option price in the future, if the shares are trading at a higher price. It is quite possible for you to be the seller rather than the buyer of the option, and pocket the premium in return for taking the risk. There are even ways you can mitigate the risk, one of the easiest being that you already own the shares, and so will not be open to big losses if you have to surrender them to the option buyer. This strategy is called the covered call, which means that you are covered by owning the shares if they are called away from you by the option buyer. If the price does not change in favor of the buyer, then after expiration you still have the shares and can sell another call option, and keep on doing this, generating a

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    1 personne a trouvé cela utile

    Nice Books understanding tA in share market Go for it


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