Contents
Preface iii Acknowledgements PART I
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Evaluating Technical Market Indicators
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Chapter 1 Introducing Technical Market Indicators 3 24 Advantages of Using Technical Market Indicators 3 Trends Are the Most Important Considerations in Trading and Investing 5 Back-Testing Technical Market Indicators Has Proved to Be Effective 6 Types of Technical Market Indicators: Trend, Momentum, Sentiment 7 Criteria for Judging Technical Market Indicators, Trading Systems, Investment Timing Models 9 Chapter 2 Walk-Forward Simulation of Technical Market Indicators Offers the Potential for Consistent Profits Through Time 10 Nine Steps to Walk-Forward Simulation of Technical Market Indicators 10 A Specific Example of a Walk-Forward Simulation of a Simple Technical Indicator 13 Example of Using the Nine Steps to Walk-Forward Simulation on the Dow-Jones Industrial Average 15 Summary and Conclusions about Walk-Forward Simulation 25 Chapter 3 Finding a Technical Market Indicator That Is Right for You 27 Six Common Errors to Avoid 27 Do Your Own Work 29 Chapter 4 What Others Say about Technical Market Indicators, Models, and Trading Systems 36 A Useful Guide to Decision Making: Bierman, Bonini, and Hausman 36 Effective Application of Pattern Recognition Decision Rules: Ted C. Earle 37 The Advantages of Developing Your Own Trading System: Joe Krutsinger 38 Keep It Simple and Do Adequate Testing: Robert C. Pelletier 39 The Cells Method of Indicator Evaluation: David R. Aronson 39
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PART II
Technical Market Indicators
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Absolute Breadth Index 47 Accumulation/Distribution (AD) 51 Accumulation Swing Index (ASI) 55 Adaptive Moving Average 59 Advance/Decline Divergence Oscillator (ADDO) 59 Advance-Decline Line, A-D Line 60 Advance-Decline Non-Cumulative: Hughes Breadth-Momentum Oscillator Advance/Decline Ratio 75 Advisory Sentiment Index 78 American Association of Individual Investors Survey 83 Andrews’ Pitchfork: Median Line Method 85 Arms’ Ease of Movement Value (EMV) 89 Arms’ Short-Term Trading Index (TRIN, MKDS) 92 Aroon, Aroon Oscillator 102 Astrology, Financial Applications of Astronomical Cycles 108 Astrology, Long-Term Cycles 112 Average True Range 113 Black-Box Systems 114 Bollinger Bands 114 Bollinger Band Width Index 120 Bolton-Tremblay Indicator 121 Bracketing, Brackets, Dynamic Brackets 122 Breadth Advance/Decline Indicator: Breadth Thrust 123 Bullish Consensus 128 Call-Put Dollar Value Flow Line (CPFL) 130 Call-Put Dollar Value Ratio 134 Call-Put Premium Ratio 138 Call-Put Volume Ratio 142 Chande Momentum Oscillator (CMO) 146 Chi-Squared Test of Statistical Significance 150 Circuit Breakers, Daily Price Limits, Trading Halts, Curbs 152 Combining Multiple Technical Indicators 153 Commitment of Traders Report 154 Commodity Channel Index (CCI) 155 Commodity Channel Index Crossing Zero: Zero CCI 159 Commodity Selection Index (CSI) 162 Confidence Index 166 Contrary Opinion: The Art of Contrary Thinking 167 Coppock Curve (Coppock Guide) 168 Cumulative Equity Line 175 Cumulative Volume Index 176 Cycles of Time and Price 176 Data 189
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Data Exploration, Data Mining 189 Days of the Month 190 Days of the Week 198 Decennial Pattern, Decennial Cycle 203 Demand Index (DI) 208 DiNapoli Levels, Fibonacci Profit Objectives 209 Directional Movement Index (DMI) 212 Divergence Analysis 217 Donchian’s 4-Week Rule 219 Double Exponential Moving Averages (DEMA) 219 Dow Theory 224 Dunnigan’s One-Way Formula 254 Dunnigan’s Thrust Method 254 Efficient Market Hypothesis 256 Elder-Ray 256 End Point Moving Average (EPMA) 257 Envelopes, Moving Average Envelopes, and Trading Bands 257 Equity Drop Ratio 260 Exploratory Data Analysis 261 Exponential Moving Average (EMA), Exponential Smoothing 261 Fibonacci Numbers, Fibonacci Cycles 270 Force Index 275 Fourier Analysis: Fast Fourier Transform 275 Funds Net Purchases Index 280 Futures Algorithm of Rollovers for CSI’s Perpetual Contract ® 280 Futures Contracts: Expiration Months and Symbols 282 Gann Angles* 283 Gann’s Square of Nine 287 General Motors as a Market Bellwether Stock 289 Gross Trinity Index 293 Haurlan Index 295 Herrick Payoff Index 298 Hi Mom System, High Momentum System 302 High Low Logic Index 302 The Hindenberg Omen 303 Holidays 303 Holy Grail 305 Hook 305 Hypothesis Testing 305 Indicator Seasons, Elder’s Concept 306 Inertia 314 Insiders’ Sell/Buy Ratio 314 Intermarket Divergences 321 Intraday Trading, Day Trading, Behavior of Prices Through the Day 322
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January Barometer 327 January Effect 330 January’s First Five Days, an “Early Warning” System 332 Kagi Charts 334 Kane’s % K Hooks 336 Kase Indicators 336 Keltner Channel with EMA Filter 337 Keltner’s Minor Trend Rule 341 Keltner’s 10-Day Moving Average Rule 341 Key Reversal Day 341 Klinger Oscillator (KO) 346 KST (Know Sure Thing) 346 Large Block Ratio 354 Large Block Transactions 355 Least Squares Method 355 Linear Regression Line 356 Linear Regression Slope 360 Liquidity 364 Livermore Swing System, Livermore Penetration Filter 364 Lowry’s Reports 365 Lucas Numbers 374 Margin 375 Margin Debt 375 Margin Requirement 380 Market Profile 381 Market Vane 382 Mart’s Master Trading Formula 382 Mathematical Models 384 Maximum Entropy Spectral Analysis 384 McClellan Oscillator 385 McClellan Summation Index 390 Meander 396 Member/Odd Lot Index 396 Member Short Ratio 397 Momentum 400 Months of the Year: Significant Seasonal Tendencies to Rise or Fall 402 Most Active Stocks 410 Moving Average Convergence-Divergence Trading Method (MACD) 412 Moving Average Filters and Multiple Confirmation 416 Moving Average Slope 416 Multicolinearity 416 Multiple Time Frame Analysis Using Exponential Moving Average Crossover Rules 417 Mutual Funds Cash/Assets Ratio 422
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N-Day Rule 424 Negative Volume Index (NVI) 424 New Highs–New Lows 428 (New Highs–New Lows)/Total Issues Traded: New Highs/New Lows Ratio 432 New Highs/Total Issues Traded 436 New Issue Thermometer (IPO Monthly Total) 440 New Lows/Total Issues Traded 442 Ninety Percent Days, Nine to One Days 446 Nofri’s Congestion-Phase System 454 Number of Advancing Issues 454 Number of Declining Issues 458 Number of Total Issues Traded 459 Odd Lot Balance Index: Odd Lot Total Sales/Odd Lot Total Purchases 463 Odd Lot Short Ratio 466 Ohama’s 3-D Technique 480 Open Interest 480 Open Interest, Larry Williams’ Variation 485 Open Interest Trend-Following Strategy 486 Optimism/Pessimism Index (OP) 489 Option Activity by Public Customers: Customer Option Activity Index 489 Options 490 Oscillators 491 Outside Day with an Outside Close 493 Overbought/Oversold Oscillators 494 Parabolic Time/Price System 495 Percentage of Stocks Above Their Own 30-Week and 10-Week Simple Moving Averages 502 Permission Filters, Permission Screens 510 Pivot Point 510 Pivot Point Reverse Trading System 510 Point and Figure Charts (P&F Charts) 514 Polarized Fractal Efficiency (PFE) 520 Positive Volume Index (PVI) 520 Pre-Holiday Seasonality 526 Presidential Election Cycle 526 Price Channel Trading Range Breakout Rule 534 Price Channel Trading Range Breakout Rule, Dynamic 538 Price Oscillators: Moving Average Oscillators 538 Price Trend Channels, Sloping Upward or Downward 543 Program Trading Volume 543 Projection Bands 545 Projection Oscillator 549 Proprietary Indicators 554 Psychological Line, PI Opinion Oscillator, PI 555
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Public Short Ratio 555 Public/Specialist Short Ratio 560 Put/Call Premium Ratio 564 Put/Call Ratio: Put/Call Volume Ratio 568 Qstick 572 R-squared 579 Random Walk Hypothesis 582 Random Walk Index (RWI) 583 Range: Upshaw’s “Home On The Range” Price Projection Method (HOTR) The Range Indicator (TRI) 590 Rate of Change (ROC) 596 Relative Strength (Ratio Analysis) 600 Relative Strength Index (RSI) 610 Relative Volatility Index (RVI) 618 Renko Charts 622 Resistance 622 Resistance Index, Art Merrill’s 622 The Rule of Seven 624 Santa Claus Rally 626 Schultz Advances/Total Issues Traded (A/T) 626 Second Hour Index 630 Secondary Offerings 631 Sector Rotation 631 Sentimeter 633 Sharpe Ratio 635 Short Interest for Individual Stocks, Phil Erlanger’s Indicators 636 Short Interest Ratio 637 Sign of the Bear 640 Simple Moving Average (SMA): Moving Arithmetic Mean 644 Specialist Short Ratio 649 Speed Resistance Lines 653 Springboard 654 Stage Analysis 654 Standard Deviation 657 Statistics 657 STIX: The Polymetric Short-term Indicator 659 Stochastics (Lane’s Stochastics) 664 Stochastic Pop Breakout: Popsteckle 674 Stock Market Price Indexes 674 Support and Resistance 678 Swing Filter 680 Swing Index (Wilder’s) 682 Swing Retracement Levels 683 Taylor Book Method 684
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Three Line Break Charts 684 Three Moving Average Crossover 686 TICK 686 Tick Volume Bar 691 Time Segmented Volume (TSV) 691 Time Series Forecast (TSF), Moving Linear Regression, End Point Moving Average (EPMA) 692 Total Issues Traded 692 Total Short Ratio 692 Total Win Trade %, the Trader’s Advantage 693 Trap: Bull Trap, Bear Trap 693 Trailing Reversal Trading System 693 Trend Channel 694 Trendlines, Trend Lines 694 Trident Commodity Trading System 696 Triple Crossover Method 696 Triple Exponential Moving Averages (TEMA) 697 Triple Screen Trading System 702 TRIX (triple exponential smoothing of the log of closing price) 702 True Range 706 25-Day Plurality Index 706 Two Moving Average Crossover 714 Turtle Soup 714 Typical Price 714 Ultimate Oscillator 715 Unchanged Issues Index 720 Upside/Downside Ratio 724 Volatility, Introduction 728 Volatility, Chaikin’s 729 Volatility, CBOE Volatility Index (VIX) 729 Volatility Bands 733 Volatility & Price Channel 734 Volatility Expansions 738 Volatility Index, Art Merrill’s Version 739 Volatility Ratios 739 Volume 743 Volume Acceleration 748 Volume Accumulation Oscillator, Volume Accumulation Trend 752 Volume: Cumulative Volume Index of Net Advancing Issues Minus Declining Issues 758 Volume: Cumulative Volume Ratio 759 Volume of Issues, Advancing 759 Volume of Issues, Declining 762 Volume: Klinger Oscillator (KO) 762
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Volume: New York Stock Exchange versus Over-the-Counter 766 Volume: On-Balance Volume (OBV) 766 Volume Oscillator 772 Volume * Price Momentum Oscillator (V*PMO) 774 Volume Reversal 778 Volume Up Days/Down Days 781 Volume: Williams’ Variable Accumulation Distribution (WVAD) 782 Wall $treet Week (W$W) Technical Market Index 784 Weighted Moving Average: Moving Position Weighted Arithmetic Mean Weighting Different Technical Indicators 794 Wilder’s Smoothing 795 Williams’ Percent Range (%R) 795 Wyckoff Wave 795 About the Author 795 Special Discount Offer from MetaStock® and Robert W. Colby Index
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