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3 Wiley Global Finance is a market-leading provider of over 400 annual books, mobile applications, elearning products, workflow training tools, newsletters and websites for both professionals and consumers in institutional finance, trading, corporate accounting, exam preparation, investing, and performance management.

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5 Advanced Charting Techniques for High Probability Trading

6 Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers professional and personal knowledge and understanding. The Wiley Trading series features books by traders who have survived the market s ever changing temperament and have prospered some by reinventing systems, others by getting back to basics. Whether a novice trader, professional or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future. For a list of available titles, visit our Web site at

7 Advanced Charting Techniques for High Probability Trading The Most Accurate and Predictive Charting Method Ever Created Joseph Hooper Aaron Zalewski Ed Watanabe John Wiley & Sons, Inc.

8 Cover Design: John Wiley & Sons, Inc. Cover Image: Danil Melekhin/iStockphoto Copyright 2013 by Joseph Hooper, Aaron Zalewski, and Ed Watanabe. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) , fax (978) , or on the Web at Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) , fax (201) , or online at Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) , outside the United States at (317) or fax (317) Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at Library of Congress Cataloging-in-Publication Data: Hooper, Joseph, Advanced charting techniques for high probability trading : the most accurate and predictive charting method ever created / Joseph Hooper, Aaron Zalewski, and Ed Watanabe. p. cm. (Wiley trading series) Includes index. ISBN (cloth); ISBN (ebk); ISBN (ebk); ISBN (ebk) 1. Stocks Charts, diagrams, etc. 2. Investment analysis. I. Zalewski, Aaron, II. Watanabe, Ed. III. Title. HG4638.H dc Printed in the United States of America

9 To My Father, Frank Watanabe I have stated in my advanced charting seminars that to be a successful trader, a person must practice discipline and perseverance and learn to follow rules. I dedicate this book to my father, Frank Watanabe, because he demonstrated those qualities to me as a young boy. My father came to America as a young man in his early twenties just before World War II broke out. Although he knew just a few English words, he demonstrated amazing bravery traveling to America in search of fulfilling his dream. He overcame extreme prejudice and adversity to become a very successful business-and family man. I am a product of that environment an environment of discipline, perseverance, and following the rules of life. Ed Watanabe

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11 c o n t e n t s Preface xiii Chapter 1: Introduction to Advanced Charting 1 Why Use Charting? 2 Advanced Charting Techniques 4 Validating the V 6 Advanced Charting Upper and Lower Indicators 6 ix Chapter 2: Straight-Line Chart 9 Straight-Line Charting/Parallel Channels 11 Chapter 3: Direction of a Trend 13 Four Phases of a Cycle 15 Moving Averages Defined 18 Moving Average 1: Lead MA1 (White) M1 19 Moving Average 2: M2 (Green) 27 Moving Average 3: M3 (Blue) 30 Chapter 4: Moving Average Crossovers 33 M1 (White) Crossing M2 (Green) 33 M1 (White) Crossing M2 (Green) and Then Crossing M3 (Blue) Key Points of M1, M2, and M3 Crossovers 35 Supplementary Moving Averages 44

12 Chapter 5: Bollinger Bands, PSAR, Channels, Zones, and FTL 51 PSAR 54 Channel Indicators: C1, C2, C3 57 Zones 59 Friday Target Line 61 Chapter 6: Putting It All Together: MAs and the BBs 63 Window 1 Chart 1 Analysis 67 Chapter 7: Lower Chart Indicators L1 through L4 71 Defining the Lower Chart Indicators 73 x contents Chapter 8: The Second Chart: Window 2 Chart 2 85 Modified Candlestick 85 Understanding the Modified Candlestick 87 Pivot Points: Support and Resistance 94 Lower Indicators: L5 to L8 95 Chapter 9: Recap of Advanced Charting 105 Entering New Positions on the Roll Up above M2 106 Roll Up Below M2 107 Touch/Convergence: Example Touch/Convergence: Example True V/Double V 109 The 10-Cent Rule 109 Entering New Position on the Roll Up 110 Upward Momentum Confirmed 111 Exit the Position When Price Tic Falls through M1 111 TSS for Income 111 TSS: Stacked Up with M1 Rolling Down 112 TSS: Upward Moving M1 and Roll at M2 113 When to Buy Back a TSS 114

13 Chapter 10: RS: Advanced Charting Relative Strength Indicator 117 Comparing the Relative Strengths 119 Conclusion 122 Chapter 11: Momentum Trading and Trading the Moment 123 Momentum Trades 124 Tomato Fields 126 Recap of the Momentum Trade 127 Trading the Moment 128 About the Authors Day Free Trial 139 Index 141 xi contents

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15 P r e f a c e WARNING: Reading this book will change your life as a trader/investor. Charting for me was a struggle for years as I tried to figure out how to interpret the many technical indicators that were available to use. Which ones should I use? Why is this one better than another one? How do I interpret what the lines mean? I attended many charting seminars, read many books, and still have a library of cassette tapes and videos on charting... I never found an answer to charting that satisfied me. It wasn t until I attend my first Compound Stock Earnings seminar on trading covered calls that I again became very interested in charting. I had a renewed drive to master technical charting. Over the years with the advancement of charting software, many different charting programs became available to test. Many programs had features to change formulas and numerous charting criteria to make the indicators perform differently. This is was the birth of advanced charting. I was determined to test, back test, and change formulas. Finding the correct formulas took months of persistence and trial and error. This book is the fruit of my labor. It started with a drive to trade covered calls and make a consistent 3 to 4 percent per month and to improve those returns. Advanced charting has advanced even further with streaming data charts. Why is advanced charting different than all other charting programs? The final version of 20 proprietary indicators have been redefined and reformulated after hundreds of tests. Why so many? Trading is all about probabilities. There are no absolutes and no guarantees. Every day is a new trading day that depends on the emotions of the marketplace. My indicators are designed to either agree or disagree with each other. There are xiii