The Art

and Science
of Trading
Course Workbook

Adam Grimes

Hunter Hudson Press, New York, New York

MMXVII
Copyright 2017 by Adam Grimes. All rights reserved.

Published by Hunter Hudson Press, New York, NY.

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 prior written permission.

Requests for permission should be addressed to the author at adam@adamhgrimes.com.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in pre-
paring 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 tness 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 prot or any other
commercial damages, including but not limited to special, incidental, consequential, or other damages.

This book is set in Garamond Premier Pro, using page proportions and layout principles derived from Medieval
manuscripts and early book designs, codified in the work of J. A. van de Graaf.

ISBN-13:

ISBN-10:

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1
 3

Chapter 2
Module 4: The Pullback

This module looks at the pullback: a simple, but powerful, trading pattern that uses the normal fluctuations
in trend strength to set up and to manage trades. Though the concept of trading pullbacks is probably familiar to
most traders, many traders overlook the power and utility of this pattern.
The second major area of focus is on applying quantitative techniques to market data. On one hand, we are
asking a simple question: does it work? We quickly find that getting the answer to that not-so-simple question
is fraught with complications and difficulties. After a look at calculating expected value, we take a long detour
into investigating the patterns in the relationship and geometry of swings, specifically looking at applications of
Fibonacci ratios to market data.
This module concludes with a section on journaling and doing manual (bar by bar) backtesting of trading
ideas. You will do a research project centering around the pullback concept. The goal of this project is both to
understand the edge in the pattern and to familiarize yourself with the process of backtesting a trading idea. This
will lay a solid foundation for both discretionary trading and deeper quantitative work.
4 Chapter 2: Module 4: The Pullback

Section 1: Record Keeping

Your work for this module might appear to be less than for previous modulescertainly, the page count is
lower. But that is an illusion! In this module, the emphasis and focus shifts to you doing the work, and this begins
with record keeping.

Journal
This is the perfect timetoday, right now, immediatelyto start keeping a journal.
Though you can consider the issues of format and exactly what you want to put into the journal later, this
practice will be most effective if it is a routine done consistently. Essentially, you want to make journaling a hab-
ita very good, constructive habit that will ultimately play a big part in your success.
For the beginning trader, its sometimes confusing to know what to put your in journal. If you arent sure
what to write, write that. Write about your feelings about journaling, your feelings about building habits. Write
about things in your life and world you want to change. Write about your experiences trading. Write about your
future trading, and what you think of the work youre doing in this course. Write about kittens. It doesnt matter!
Just write a little bit, each day, and let this work evolve as you go along.

P&L Sheet
You also do need a P&L sheet that allows you to record at least the following datapoints for each trade:
Date In
Price In
Price Out
Initial Stop
You will use this in your research project this week.
 5

Section 2: Pullback backtest

First of all, it needs to be said that this will not be a proper, rigorous statistical backtest. Rather, it is a process
designed to do a few things:
Train your eye to see the pullback pattern in the market
Get some idea what edge might (or might not) be in the specific way you see the pattern
Point you toward some improvements in your perception
And to get you used to doing some work on historical data
Before you can really do this work, you need access to historical charts and some record keeping system;
pencil and paper will work, but electronic formats are much better. You then need to define the pullback pattern.
This can be difficult, because there is admittedly (and deliberately) some element of discretion. Do not be dis-
couraged. The way in which you see these patterns will evolve and change, but it is the exposure to market data
that will let you evolve. This is truly a case where the only way you learn is by doing.
So, define the pullback pattern. What, specifically, will get you interested in looking for a pullback? How
will you define a strong enough or sharp enough move to tell you that a pullback might set up? How will you
monitor the shape of the pullback as it develops? Where will you actually get into trades? Where will you place
that initial stop?
Take some time to answer those questions, and come up with a rule sheet for pullbacks. (Write it down.)
Then, go through some market data bar by bar, recording key stats for each trade, and see how it works and how
it feels; your subjective sense or feeling is valuable. At the first stages, this exercise is as much about you as it is
about the market.
Like anything else, this process becomes easier the more you do it. To have a valid test, you need a significant
number of trades, but just get started with the exercise this week.
6 Chapter 2: Module 4: The Pullback

Section 3: Charting by hand

This is still a valuable exercise, and this will be the last module that carries an explicit reminder to do hand
charting. In the first module, we discussed the several ways you can do this exercise. The details are not import-
ant; it is far more important that you do it.
This should also not be a tremendous time suckthis is not a unique form of torture I have devised. A few
minutes every day (but every day!) directed to drawing your charts, or a few minutes each hour if you are an
intraday trader, will reward you with deep understanding of price action.
You may wish to leave this exercise, but come back to it whenenever you feel out of touch with the market, or
when youve been away from trading for a period of time. There is something about the practice of writing down
prices and/or charting by hand that has deep power to connect us to the flow of the market.
 7

Section 4: Readings

From the Art and Science of Technical Analysis:

65-77 (pullback intro)
154-169 (pullback detail)
291-315 (pullback examples)
385 - 388 (journalling)

The readings this week will help us to move from the purely theoretical, high-level perspectives on markets
to looking at applied trading patterns. Seeing many examples of the pullback, and considering how to manage
trades that set up based on this pattern, will give the trader good ideas for continuing to explore this aspect of
market behavior.
Section 7: Blog Readings 39

Section 7: Blog Readings

On Trend Patterns
https://adamhgrimes.com/reading-trend-strength-through-patterns/
https://adamhgrimes.com/how-do-you-know-when-youre-wrong/
https://adamhgrimes.com/too-much-of-a-good-thing/
https://adamhgrimes.com/draw-trend-lines/
https://adamhgrimes.com/power-channel/
https://adamhgrimes.com/the-trend-is-your-friend-except-at-the-end/
https://adamhgrimes.com/slip-and-slide-along-the-bands/
On Technical Trading
https://adamhgrimes.com/toward-a-simple-model-of-price-behavior/
https://adamhgrimes.com/the-two-forces/
https://adamhgrimes.com/simplify-simplify-simplify/
https://adamhgrimes.com/technical-analysis-thinking-in-categories/
https://adamhgrimes.com/hey-thats-different/
On Rhythm
https://adamhgrimes.com/rhythm-of-the-market/
https://adamhgrimes.com/too-much-of-a-good-thing/