Let’s face it, if you are fairly new to trading your initial exposure to technical analysis will, if nothing else, make you feel like an idiot.
Nothing surprising, though, as learning technical analysis is no different than learning any other skill. It takes time, patience, dedication, and a willingness to accept humble pie as part of your diet. Obviously, with the internet, there is a proliferation of information on technical analysis now available to go along with the hundreds, maybe even thousands, of books on the subject. I’ve been trading for years and I still feel like an idiot, so when I am asked what book would be best suited to the beginner I am usually at a loss. However, I did recently find a book that may just fit the bill.
Jan Arps has been using and developing his own award winning technical analysis tools for more than 40 years so his knowledge of technical analysis deserves attention and respect. Who better, then, to ask to write The Complete Idiot’s Guide to Technical Analysis (Alpha Books, 2010). I recently had the pleasure of meeting Mr Arps at his home and I find him to be a wealth of information as well as a reminder of my idiot status. He offered me his book and I decided to give my humbled opinion, for what it is worth.
The outline of the book is very simple and well designed, consisting of four parts: Introduction to Technical Analysis, Tools For Technical Analysis, Time to Trade, and Trading Mechanics. There is a wealth of information here so let’s look at a few nuggets.
INTRODUCTION TO TECHNICAL ANALYSIS
Arps does a good job of explaining the purpose of technical analysis as a way to “help you anticipate potential changes in the direction of market prices resulting from crowd behavior driven by the emotions of greed and fear” and not as a “business of absolute predictions.” All too often the new trader considers technical analysis to be the answer to predicting future price action; Arps tempers this expectation with a good analogy: “Like weather forecasting, technical analysis doesn’t result in absolute predictions about the future. Instead, technical analysis can help investors anticipate what is “likely” to happen to prices over time.” After laying the foundation Arps begins to build a firm structure by covering topics that include market structure, charting, and various swing patterns.
TOOLS FOR TECHNICAL ANALYSIS
Part 2 covers the technical of technical analysis. Here Arps dissects just about every tool available to traders from trendlines to moving averages; oscillators to point and figure charts; and price to support and resistance. These tools help the trader better anticipate future price direction by considering recent price support/resistance areas, overbought/oversold areas, trending/consolidation conditions, divergence, etc. “Answers to these questions can alert you in advance as to when prices are likely to change direction and thus provide you with powerful information that can significantly improve your trading profits.” Much of what is covered here is your traditional meat and potatoes but there is a little extra gravy, such as Arps’ own Fear-Greed Index, a chapter on Volume Float analysis, made popular by Steve Woods, and the Jackson Probability Zones, a method named after J.T. Jackson.
TIME TO TRADE
Understanding the basics of technical analysis is one thing: applying it to current market conditions is quite another. In part 3, Arps discusses how to use technical analysis for building the skills necessary to become a successful trader. What is of particular interest to me is Arps discussion of developing a trading plan, which, he says, consist of four parts: rules for entry, rules for exit, money management rules, and the selection of a strategy. Anyone who has traded for any length of time will quickly point out that the trader may have more degrees in technical analysis than a thermostat but if he does not have a plan for using that knowledge it will be worthless. In fact, it could be dangerous. Arps does a great job of cautioning the would be trader who believes that technical analysis knowledge is key when it is not. “There are several reasons to have a trading plan, but probably the biggest is the way it simplifies things. Decision making becomes very clear cut. The trading plan defines what is supposed to be done, when, and how. Just follow the plan. The plan serves as a roadmap to entering and holding, profit taking, or cutting losses. Writing down your plan gives you an immediate edge over most traders and investors.” Bottom line: the trader’s edge is following a plan; not the plan itself.
In part 4, Arps takes the trader through the actual process of trading based on the trading plan and knowing when to pull the trigger. He uses breakouts as an example explaining that a breakout strategy provides three opportunities to enter a position: 1) from a consolidation area, 2) from pullbacks into consolidation, and 3) from pullbacks into moving averages. These process steps can help the trader develop any strategy, breakouts or otherwise. As Arps explains, “pretty much all you need to survive and thrive as a trader, no matter if the markets go up, down, or sideways, whether the economy is growing or we are in the midst of a great depression, are chart setups to look for, markets that best fit that particular setup, and a set of rules to apply to that setup.”
At the end of each chapter Arps concludes with “The Least You Need to Know” summary. In concluding his book he gives the following least things to know: technical analysis helps you identify the best entry and exit points of a trade; trading success requires discipline: proper planning takes emotion out of trading; and following proven strategies provides for a high probability of success.
Although we may always feel like idiots when it comes to trading, at least after reading this book, understanding its concepts, and applying its principles, we may graduate to become an idiot savant.
See You Later...IN THE CROSSHAIRS!
Disclaimer: I am not compensated for this review nor do I receive any compensation for books sold here or otherwise.