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[SID2060]

John Murphy's Ten Laws of Technical Trading


Technical Analyst, John Murphy, is a very popular author, columnist, and speaker on the subject of Technical Analysis. John's "Ten Laws of Technical Trading" is the best guide available anywhere for people who are new to the field of charting. I urge you to print out this page and refer to it often.

Which way is the market moving? How far up or down will it go? And when will it go the other way? These are the basic concerns of the technical analyst. Behind the charts and graphs and mathematical formulas used to analyze market trends are some basic concepts that apply to most of the theories employed by today's technical analysts.

John Murphy has drawn upon his thirty years of experience in the field to develop ten basic laws of technical trading: rules that are designed to help explain the whole idea of technical trading for the beginner and to streamline the trading methodology for the more experienced practitioner. These precepts define the key tools of technical analysis and how to use them to identify buying and selling opportunities.

John was the technical analyst for CNBC-TV for seven years on the popular show Tech Talk, and has authored three best-selling books on the subject: Technical Analysis of the Financial Markets, Intermarket Technical Analysis and The Visual Investor.

The fundamentals of John's approach to technical analysis illustrate that it is more important to determine where a market is going (up or down) rather than the why behind it.

The following are John's ten most important rules of technical trading:

Map the Trends
Spot the Trend and Go With It
Find the Low and High of It
Know How Far to Backtrack
Draw the Line
Follow That Average
Learn the Turns
Know the Warning Signs
Trend or Not a Trend?
Know the Confirming Signs

1. Map the Trends

Study long-term charts. Begin a chart analysis with monthly and weekly charts spanning several years. A larger scale map of the market provides more visibility and a better long-term perspective on a market. Once the long-term has been established, then consult daily and intra-day charts. A short-term market view alone can often be deceptive. Even if you only trade the very short term, you will do better if you're trading in the same direction as the intermediate and longer term trends.

2. Spot the Trend and Go With It

Determine the trend and follow it. Market trends come in many sizes – long-term, intermediate-term and short-term. First, determine which one you're going to trade and use the appropriate chart. Make sure you trade in the direction of that trend. Buy dips if the trend is up. Sell rallies if the trend is down. If you're trading the intermediate trend, use daily and weekly charts. If you're day trading, use daily and intra-day charts. But in each case, let the longer range chart determine the trend, and then use the shorter term chart for timing.

3. Find the Low and High of It

Find support and resistance levels. The best place to buy a market is near support levels. That support is usually a previous reaction low. The best place to sell a market is near resistance levels. Resistance is usually a previous peak. After a resistance peak has been broken, it will usually provide support on subsequent pullbacks. In other words, the old "high" becomes the new low. In the same way, when a support level has been broken, it will usually produce selling on subsequent rallies – the old "low" can become the new "high."

4. Know How Far to Backtrack

Measure percentage retracements. Market corrections up or down usually retrace a significant portion of the previous trend. You can measure the corrections in an existing trend in simple percentages. A fifty percent retracement of a prior trend is most common. A minimum retracement is usually one-third of the prior trend. The maximum retracement is usually two-thirds. Fibonacci retracements of 38% and 62% are also worth watching. During a pullback in an uptrend, therefore, initial buy points are in the 33-38% retracement area.

5. Draw the Line

Draw trend lines. Trend lines are one of the simplest and most effective charting tools. All you need is a straight edge and two points on the chart. Up trend lines are drawn along two successive lows. Down trend lines are drawn along two successive peaks. Prices will often pull back to trend lines before resuming their trend. The breaking of trend lines usually signals a change in trend. A valid trend line should be touched at least three times. The longer a trend line has been in effect, and the more times it has been tested, the more important it becomes.

6. Follow that Average

Follow moving averages. Moving averages provide objective buy and sell signals. They tell you if existing trend is still in motion and help confirm a trend change. Moving averages do not tell you in advance, however, that a trend change is imminent. A combination chart of two moving averages is the most popular way of finding trading signals. Some popular futures combinations are 4- and 9-day moving averages, 9- and 18-day, 5- and 20-day. Signals are given when the shorter average line crosses the longer. Price crossings above and below a 40-day moving average also provide good trading signals. Since moving average chart lines are trend-following indicators, they work best in a trending market.

7. Learn the Turns

Track oscillators. Oscillators help identify overbought and oversold markets. While moving averages offer confirmation of a market trend change, oscillators often help warn us in advance that a market has rallied or fallen too far and will soon turn. Two of the most popular are the Relative Strength Index (RSI) and Stochastics. They both work on a scale of 0 to 100. With the RSI, readings over 70 are overbought while readings below 30 are oversold. The overbought and oversold values for Stochastics are 80 and 20. Most traders use 14-days or weeks for stochastics and either 9 or 14 days or weeks for RSI. Oscillator divergences often warn of market turns. These tools work best in a trading market range. Weekly signals can be used as filters on daily signals. Daily signals can be used as filters for intra-day charts.

8. Know the Warning Signs

Trade MACD. The Moving Average Convergence Divergence (MACD) indicator (developed by Gerald Appel) combines a moving average crossover system with the overbought/oversold elements of an oscillator. A buy signal occurs when the faster line crosses above the slower and both lines are below zero. A sell signal takes place when the faster line crosses below the slower from above the zero line. Weekly signals take precedence over daily signals. An MACD histogram plots the difference between the two lines and gives even earlier warnings of trend changes. It's called a "histogram" because vertical bars are used to show the difference between the two lines on the chart.

9. Trend or Not a Trend

Use ADX. The Average Directional Movement Index (ADX) line helps determine whether a market is in a trending or a trading phase. It measures the degree of trend or direction in the market. A rising ADX line suggests the presence of a strong trend. A falling ADX line suggests the presence of a trading market and the absence of a trend. A rising ADX line favors moving averages; a falling ADX favors oscillators. By plotting the direction of the ADX line, the trader is able to determine which trading style and which set of indicators are most suitable for the current market environment.

10. Know the Confirming Signs

Include volume and open interest. Volume and open interest are important confirming indicators in futures markets. Volume precedes price. It's important to ensure that heavier volume is taking place in the direction of the prevailing trend. In an uptrend, heavier volume should be seen on up days. Rising open interest confirms that new money is supporting the prevailing trend. Declining open interest is often a warning that the trend is near completion. A solid price uptrend should be accompanied by rising volume and rising open interest.

"11."

Technical analysis is a skill that improves with experience and study. Always be a student and keep learning.

- John Murphy

[SID2060]

Till nw 850 lucky guys have read these golden rules by John Murphy. I wish that evry1 who visit thìs website also read this article FOR atleast 2-3 times to understand it perfectly. Any doubt may be solved by me if possible as m not a big expert but a guy like u guys only.

[rocky1980]

thanks a lot

[SID2060]

[Padkondu]

Hi SID, i gone through the articles some time back. i would like to thank you for bringing it over here, and remind me of this once again.

may i add a little to this?, the first point in his 10 laws.

while it is most important to map the trend with higher time frame, it is equally important to map the markets, i.e. "intermarket analysis", readers of this artilcle may please add this sub point to the point 1.

we are not as great as john murphy to modify this but he might have forgotten this while bringing out his article. infact john murphy has written a book on intermarket analysis.

now i shall try to explain this; look at the daily chart of suzlong here, it has been in a clear down trend during recent weeks. i got into this stock well in advance at 52.40 on 16th, forthe following reasons;

a. nifty is moving up with good strength, the heavy weights will do their best to do this. however, other stocks in nifty have to follow sooner or later.
b. if once suzlon starts moving, any little movement will cause the breach of neck line of inverted hs pattern.
c. once it crosses, it will try to fill the previous gap.
d.simultaneously, this will be a breach of previous down trend.
then it may head to the target of inverted hs pattern, by which time it will change its intermediate down trend.

(i trade swings on 60 min charts)

this is all assuption, but calculated and more probable. had i been mapping only to its previous trend i would not have gone long. so i feel that while the first point is a must follow, one shall view this point in a greater sense.

i am here not to exhibit what i have done, but to add the "intermarket" mapping such as, mapping (1)stock to secto, (2)sector to market, (3)market to global trends and commodity stocks to the commodity markets etc.

similarly, if any stock is moving north in a market that is heading south wards, sooner or later it shall follow the suit.

good luck
padkondu.

[SID2060]

Till now 1235 lucky guys have read these golden rules by John Murphy. I wish that evry1 who visit this website also read this article FOR atleast 2-3 times to understand it perfectly. Any doubt may be solved by me if possible as m not a big expert but a guy like u guys only.

[marthandan]

Those who wants to follow technical analysis in trading can read this article also.

http://www.investopedia.com/articles/forex/06/movingaverageexplosion.asp?partner=fxweekly9

marthandan

[SID2060]

Plz visit

www.icharts.in/forum/swing-trading-for-dummies-t2809.html

U will find my latest and brilliantly working strategy here... C u there as this thread is closed nw...

Regards
SID