Adam Grimes (Chief Investment Officer of Waverly Advisors) prefaces his 2012 book, The Art and Science of Technical Analysis: Market Structure, Price Action, and Trading Strategies, by stating: “This book…offers a comprehensive approach to the problems of technically motivated, directional trading. …Trading is hard. Markets are extremely competitive. They are usually very close to efficient and most observed price movements are random. It is therefore exceedingly difficult to derive a method that makes superior risk-adjusted returns, and it is even more difficult to successfully apply such a method in actual practice. Last, it is essential to have a verifiable edge in the markets–otherwise no consistent profits are possible. This approach sets this work apart from the majority of trading books published, which suggest that simple patterns and proper psychology can lead a trader to impressive profits. Perhaps this is possible, but I have never seen it work in actual practice. …The self-directed trader will find many sections specifically addressed to the struggles he or she faces, and to the errors he or she is likely to make along the way. …[Institutional] traders will also find new perspectives on risk management, position sizing, and pattern analysis that may be able to inform their work in different areas.” Using example charts for many assets from different times over different time frames and from different markets, he concludes that:
From Chapter 1, “The Trader’s Edge” (Page 7): “Every edge we have, as technical traders, comes from an imbalance of buying and selling pressure. …we do not trade patterns in the market–we trade the underlying imbalances that create those patterns.”
From Chapter 2, “The Market Cycle and the Four Trades” (Page 45): “When buying pressure seems to be strongest, the end of the uptrend is often near. When the sellers seem to be decisively winning the battle, the stage is set for a reversal into an uptrend. This is why it is so important for traders to learn to stand apart from the crowd, and the only way to do this is to understand the actions and emotions of that market crowd.”
From Chapter 3, “On Trends” (Page 95): “…many outstanding trades come in trending environments. Market structure in trends is often driven by a strong imbalance of buying and selling pressure, it is often easy to define risk points for trades, and some of the cleanest, easiest trades come from trends. However, markets do not always trend.”
From Chapter 4, “On Trading Ranges” (Page 120): “Compared to trends, trading ranges are more complicated, and present more challenges and dangers to traders who would trade within these structures. The highly random nature of price action in these ranges often creates illusions of patterns that do not exist. …However, market structure rests on an alternation of trending and trading range patterns…”
From Chapter 5, “Interfaces between Trends and Ranges” (Page 121): “At best, these interfaces between trends and trading ranges are periods of great uncertainty and potential volatility. At worst, many traders will find that these are the most difficult areas of market structure to read reliably, and that they are the source of consistent losses.”
From Chapter 6, “Practical Trading Templates” (Pages 187-188): “There are only three core concepts here, which express the tendency of the trend to continue and the tendency of support and resistance to both hold and break. …this simple set of trading patterns offers a comprehensive tool kit for approaching market structure and price action in any market and any time frame.”
From Chapter 7, “Tools for Confirmation” (Page 230): “The only reliable patterns are those that are truly driven by large-scale institutional buying and selling pressure, and technical traders have an edge only in the presence of a real buying and selling imbalance. …using a relative strength screen as the first step in a technical process that then focuses on individual patterns will usually have the trader focused on the markets that are, by definition, experiencing an imbalance of buying pressure.”
From Chapter 8, “Trade Management” (Page 253): “The work of monitoring and reviewing your positions must be done every day without fail. The less you want to do it, the more important it is.”
From Chapter 9, “Risk Management” (Page 290): “Traders must make clear distinctions between the normal risks associated with any trade and the more extraordinary risks that can potentially destroy a trading account or end a trading career.”
From Chapter 10, “Trade Examples” (Page 291): “…my trading style, which is a pure swing trader’s approach…can be summarized as follows: Understanding the bigger picture money flows between markets. …Waiting for precise patterns that indicate the presence of an imbalance. …Executing trades to position with the statistical tendency behind the pattern. Managing the risk in the trade appropriately, perhaps adjusting the positions as the trade develops. …playing for one clean swing in the market.”
From Chapter 11, “The Trader’s Mind” (Pages 372-373): “Consistency is important from at least two perspectives. First, it is not possible to evaluate the efficacy of any trading system or rule set if you are not applying it with perfect consistency and discipline. …Second,…consistency in your planned study times, review and even specific screen setups will foster the rapid assimilation of market patterns on a deep level, quickly leading to the growth of real market sense and flow.”
From Chapter 12, “Becoming a Trader” (Page 375): “…trading is hard–very hard. It will challenge you in ways that you cannot imagine, and it will take much longer than you expect to reach a level of competence. Your success will be incremental and ephemeral at first. Expect an emotional roller coaster where progress is followed by errors and failures that erase most of that progress in the next period.”
In summary, traders will find The Art and Science of Technical Trading a clear explication of technical trading and trade/risk management beliefs, but not a source of benchmarks for successful technical trading performance.
Cautions regarding findings include:
- In general, the book does not offer empirical (statistical) evidence for stated beliefs about technical trading rules/patterns and practices.
- Presented trading rules and practices are often quite complex, making empirical validation very difficult and suggesting the potential for data snooping bias in their selection.
- As noted in the summary statement, the book does not quantify expected trade-level or portfolio-level outcomes associated with correctly applying stated beliefs.
Frequently Asked Questions
What is technical analysis in trading and how does it try to generate an edge?
Technical analysis is the practice of trading directionally based on price action and market structure rather than fundamentals. Adam Grimes argues in The Art and Science of Technical Analysis (2012) that every technical trader's edge comes from an imbalance of buying and selling pressure, so traders are really trading the underlying imbalances that create chart patterns, not the patterns themselves.
Do technical trading patterns actually produce superior risk-adjusted returns?
Technical trading patterns are not shown to produce superior returns in Grimes's book, which offers no empirical or statistical evidence for its stated beliefs. Grimes himself says markets are very close to efficient, most price movements are random, and a verifiable edge is essential, arguing that technical traders have an edge only when a real buying or selling imbalance is present. The book does not quantify expected trade-level or portfolio-level outcomes.
How do technical traders use trends, support and resistance, and relative strength screens to find trades?
Grimes's approach rests on three core concepts: the tendency of a trend to continue and the tendency of support and resistance to both hold and break. He suggests using a relative strength screen as a first step to find markets experiencing a buying imbalance, then focusing on precise patterns that signal that imbalance. His swing-trading style also involves watching money flows between markets, managing risk in each trade, and playing for one clean swing.
How do trending markets compare to trading ranges for technical traders?
Trending markets are generally easier for technical traders than trading ranges, according to Grimes. Trends are often driven by a strong buying-selling imbalance and make risk points easier to define, while trading ranges are more complicated, highly random, and often create illusions of patterns that do not exist. Markets alternate between the two, and the transitions between trends and ranges are among the hardest areas to read reliably and can be a source of consistent losses.
What are the limitations and risks of relying on technical trading rules like those in this book?
The main limitation is that the book provides no empirical or statistical evidence for its technical trading rules, patterns, and practices, and it gives no benchmarks for successful performance. The presented rules are often complex, which makes empirical validation very difficult and suggests a potential for data snooping bias in how they were selected. Grimes also warns that trading is very hard, markets are highly competitive, and traders must distinguish normal trade risks from extraordinary risks that can end a trading career.