Sample chapter extract from

CHART TRADING: AN APPROACH FOR INVESTORS AND TRADERS

This extract copyright 1999

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NOT EVERY CHART HAS A PIRATE

Buried somewhere in the backyard where I grew up are several old bottles. Each contains a treasure map, the paper authentically browned by lightly burning with a candle until it resembled parchment. Each map is a fantastic mythical island on the edge of the known world. Each is marked with a childish 'X' to show the treasure buried under a coconut palm.

The lust for buried treasure grew early and it was my first introduction to charts. These invented charts were eventually replaced with real maps. They provided enticement, opening my eyes to the vast, and to me, unknown regions of Australia beyond the settled districts. Later I followed the Northern Territory roads and tracks marked on topographic maps which themselves carried the magic words " not fully mapped."

Working in the middle of an Australian desert I stumbled across a real treasure map; a chart of the financial market. This is a practical map always charting new areas as the boundaries of exploration push forward. Charting for me had come a full circle, although there was no 'X' marking the buried treasure. These charts provide profit making opportunities undreamt of by the child who buried the bottles.

Tradition holds that atop every treasure chest is a collection of bones. Textbooks give you the bones of technical analysis. In this book we put some flesh on them.  Critics may suggest I, and others like myself, are still looking for buried treasure and adventure. The 'X' on my charts and yours show opportunity and risk. There is a treasure but it is constructed personally by every trader from his chosen entry and exit points. The treasure is buried in a blur of market detail and a mountain of steady work.

Navigate through outback Australia, or metropolitan Melbourne, and you soon discover the difference between having a map and actually arriving at your destination. Map reading takes skill. Chart reading also requires skill so this book is written to help you make sense of common charts, patterns and market indicators.

CHARTING AND TRADING

Even basic charting software comes with over 30 indicators. Choosing the right combination assumes you understand what they mean. This book is an introduction to those indicators. It is not an exhaustive coverage of all the indicators available, and as you grow in your charting skills you will develop nuances of interpretation not covered here.

Charting sounds like a map which shows past paths and future destinations. It is more effectively considered as a record of the emotions of the crowd of buyers and sellers who drive prices up and down every day. Our focus is on how technical analysis and charting delivers information about the way the crowd is thinking. We show the trading rules and how they grow out of the aspects of crowd behaviour each indicator is designed to measure.

This book is written as a user's guide to make sense of the basic indicators available on most charting programs. Where appropriate we provide additional reading to explore the use and application of each indicator in more detail. A few of the indicators we include do not work particularly well in Australian markets, but you will find them in many software packages. You need to know what works, and what does not work, preferably without losing you trading capital in finding out.

There is the difference between analysis and prediction. Unfortunately for many people it is also the difference between trading and investing -between active risk management and risk control. Despite many claims of infallibility, nobody can predict where the market is going. Better analysts will identify a range of outcomes, ranked in order of probability. Better traders select the high probability outcomes, keenly aware high probability does not equal infallibility. Trading skills are much more than just analysis.  Every treasure map includes a dotted line and significant features so the treasure hunter knows he is on the right path. This book is divided into three sections. Follow the path and you will have a better idea of where the 'X' is located on your personal treasure chart.

PART 1 - MARKET MAPS

Would you recognise a treasure map if you saw one? Probably not, so we start with an exploration of the MESSAGE IN A CHART. How effectively we use the chart depends on our purpose. Road maps do not help fishermen find the deep river holes so we must match form and function for effective trading and risk control. All maps are based on observation and data and each collects topographical information in different ways.

DRUMMING UP THE NUMBERS shows what data is used or ignored. The choice determines the accuracy of the chart.Charts provide precise numbers for calculating risk but many reject this advantage in favour of PUNTING ON PROPHETS. Risk eats away at our trading or investment capital. Although we crave certainty it is not an antidote for risk. This chapter examines several types of prophets so you can avoid them in favour of active risk management. We start with the basic chart display with PLAIN PLOTS. These are the basic contour lines of the market. Some charts use specialised displays and we examine how they are used in SUMMARY PLOTS.

PART 2 - IMPROVING THE CHART

We move through chart applications starting with simple concepts based on how the chart tells us about CROWD BEHAVIOUR. Each chapter includes trading rules and a section explaining how it is related to crowd behaviour. We consider a trading example and provide a ready reference summary. THE STRAIGHT EDGE covers trend lines and support and resistance concepts. These come together in COMBINATION LINES. These dynamic chart patterns capture crowd behaviour and provide clues to future directions.

Some BAR SET-UPS signal high probability trading opportunities. This is basic bar chart analysis.

We take a step into the world of technical analysis in the CROWD MOVEMENT section. If we know how the crowd is moving in the past then we have a better opportunity to understand where it might move in the future. The most common of these approaches consider AVERAGE PERFORMANCE while others look for indicators which are BETTER THAN AVERAGE. These technical indicators manipulate basic price data. Some use AVERAGE CHAOS to venture into the uncertain world of complexity and use this to manage risk.Traders anticipate crowd reactions more effectively when they understand CROWD THINKING. In this section we examine those indicators which suggest SIGNS OF THOUGHT. Other indicator groups work as MIND READERS giving the trader a glimpse into the collective thoughts of the crowd or its leaders. The market demonstrates THE POWER OF THOUGHT by using relative strength concepts. We apply them to real trades.

Behaviour, movement, thought all add up to CROWD ANALYSIS and the final section collects some statistical tools. The END OF EMPIRE is signalled not by the activity of an individual stock, but by the character of an entire market. Watch these to avoid fiddling while Rome burns. Even the ECHOES OF THE CROWD warns the trader about the risk of market collapse. These are not traders' tools applied to individual trades. They are survival indicators telling us when to abandon the ship or take extra care.

PART 3 - THERE IS A RISK OF LOSS

Risk and fear are FOUR LETTER WORDS FOR TRADERS. They do become an advantage when understood and applied in particular ways. We show how to combine them with charting tools in COUNTING CASH. This is an important step in turning trading activity into trading profits. We include a general guide to SELECTING SOFTWARE. The right software for your style of trading positions you for success. Finally we point in the direction of true trading success. Success or failure lies in avoiding the MIND TRAPS and until we accept this responsibility reward remains inconsistent and elusive.

TRADING SKILLS

Effective trading takes common skills and stretches them, sometimes to breaking point. We step into a world where our competitors are skilled professionals and they will not go easy on us just because we are learners. You are not a treasure hunting pirate just because you use charts. Focus on using the tools well. Trading profits will come.