Technical
Analysis of the Financial Markets by John Murphy
"One way to get started in
technical analysis is to read a good book on the subject. One of my
favorites is Technical Analysis of the Financial Markets: A
Comprehensive Guide to Trading Methods and Applications by John J.
Murphy. It's an easy read."
-Ralph J. Acampora, CMT, Managing Director, Prudential Securities Inc.
"No one in this generation has contributed more to technical
analysis than John Murphy. Through his series of books, he has both
opened the door to many and raised the standard for all who use
technical analysis. His books should be required reading for everyone in
the securities business and are never more than a step away from my
desk."
-Gail M. Dudack, Chief Investment Strategist, Warburg Dillon Read
"John Murphy appears to have done it again ... only this time in a
more contemporary fashion. Technical Analysis of the Financial Markets
is a must read for the novice and the professional and most important
the Chartered Market Technician (C.M.T.) candidate. As a long-time
pointand-figure chart devotee, I was enthused to see the book's
point-and-figure chapter not only cover some of the more popular methods
such as Chartcraft and Dorsey Wright, but also explore the usefulness of
the original point-and-figure methodology which we practice here at
Salomon Smith Barney"
-Alan R. Shaw, Managing Director, Salomon Smith Barney
Table of Contents
About the Author xxiii
About the Contributors xxv
Introduction xxvii
Acknowledgments xxxi
Chapter
1 Philosophy of Technical Analysis
Introduction
Philosophy or Rationale
Technical versus Fundamental Forecasting
Analysis versus Timing
Flexibility and Adaptability of Technical Analysis
Technical Analysis Applied to Different Trading Mediums
Technical Analysis Applied to Different Time Dimensions
Economic Forecasting
Technician or Chartist?
A Brief Comparison of Technical Analysis in Stocks and Futures
Less Reliance on Market Averages and Indicators
Some Criticisms of the Technical Approach
Random Walk Theory
Universal Principles
Chapter 2 Dow
Theory
Introduction
Basic Tenets
The Use of Closing Prices and the Presence of Lines
Some Criticisms of Dow Theory
Stocks as Economic Indicators
Dow Theory Applied to Futures Trading
Conclusion
Chapter
3 Chart
Construction
Introduction
Types of Charts Available
Candlesticks
Arithmetic versus Logarithmic Scale
Construction of the Daily Bar Chart
Volume
Futures Open Interest
Weekly and Monthly Bar Charts
Conclusion
Chapter
4 Basic Concepts
of Trend
Definition of Trend
Trend Has Three Directions
Trend Has Three Classifications
Support and Resistance
Trendlines
The Fan Principle
The Importance of the Number Three
The Relative Steepness of the Trendline
The Channel Line
Percentage Retracements
Speed Resistance Lines
Gann and Fibonacci Fan Lines
Internal Trendlines
Reversal Days
Price Gaps
Conclusion
Chapter
5 Major Reversal
Patterns
Introduction
Price Patterns
Two Types of Patterns: Reversal and Continuation
The Head and Shoulders Reversal Pattern
The Importance of Volume
Finding a Price Objective
The Inverse Head and Shoulders
Complex Head and Shoulders
Triple Tops and Bottoms
Double Tops and Bottoms
Variations from the Ideal Pattern
Saucers and Spikes
Conclusion
Chapter
6 Continuation
Patterns
Introduction
Triangles
The Symmetrical Triangle
The Ascending Triangle
The Descending Triangle
The Broadening Formation
Flags and Pennants
The Wedge Formation
The Rectangle Formation
The Measured Move
The Continuation Head and Shoulders Pattern
Confirmation and Divergence
Conclusion
Chapter
7 Volume and
Open Interest
Introduction
Volume and Open Interest as Secondary Indicators
Interpretation of Volume for All Markets
Interpretation of Open Interest in Futures
Summary of Volume and Open Interest Rules
Blowoffs and Selling Climaxes
Commitments of Traders Report
Watch the Commercials
Net Trader Positions
Open Interest In Options
Put/Call Ratios
Combine Option Sentiment With Technicals
Conclusion
Chapter
8 Long Term
Charts
Introduction
The Importance of Longer Range Perspective
Construction of Continuation Charts for Futures
The Perpetual Contract
Long Term Trends Dispute Randomness
Patterns on Charts: Weekly and Monthly Reversals
Long Term to Short Term Charts
Why Should Long Range Charts Be Adjusted for Inflation?
Long Term Charts Not Intended for Trading Purposes
Examples of Long Term Charts
Chapter
9 Moving
Averages
Introduction
The Moving Average: A Smoothing Device with a Time Lag
Moving Average Envelopes
Bollinger Bands
Using Bollinger Bands as Targets
Band Width Measures Volatility
Moving Averages Tied to Cycles
Fibonacci Numbers Used as Moving Averages
Moving Averages Applied to Long Term Charts
The Weekly Rule
To Optimize or Not
Summary
The Adaptive Moving Average
Alternatives to the Moving Average
Chapter
10 Oscillators
and Contrary Opinion
Introduction
Oscillator Usage in Conjunction with Trend
Measuring Momentum
Measuring Rate of Change (ROC)
Constructing an Oscillator Using Two Moving Averages
Commodity Channel Index
The Relative Strength Index (RSI)
Using the 70 and 30 Lines to Generate Signals
Stochastics (K%D)
Larry Williams %R
The Importance of Trend
When Oscillators are Most Useful
Moving Average Convergence/Divergence (MACD)
MACD Histogram
Combine Weeklies and Dailies
The Principle of Contrary Opinion in Futures
Investor Sentiment Readings
Investors Intelligence Numbers
Chapter
11 Point and
Figure Charting
Introduction
The Point and Figure Versus the Bar Chart
Construction of the Intraday Point and Figure Chart
The Horizontal Count
Price Patterns
3 Box Reversal Point and Figure Charting
Construction of the 3 Point Reversal Chart
The Drawing of Trendlines
Measuring Techniques
Trading Tactics
Advantages of Point and Figure Charts
P&F Technical Indicators
Computerized P&F Charting
P&F Moving Averages
Conclusion
Chapter
12 Japanese
Candlesticks
Introduction
Candlestick Charting
Basic Candlesticks
Candle Pattern Analysis
Filtered Candle Patterns
Conclusion
Candle Patterns
Chapter
13 Elliott Wave
Theory
Historical Background
The Basic Tenets of the Elliott Wave Principle
Connection Between Elliott Wave and Dow Theory
Corrective Waves
The Rule of Alternation
Channeling
Wave 4 as a Support Area
Fibonacci Numbers as the Basis of the Wave Principle
Fibonacci Ratios and Retracements
Fibonacci Time Targets
Combining All Three Aspects of Wave Theory
Elliott Wave Applied to Stocks Versus Commodities
Summary and Conclusions
Reference Material
Chapter
14 Time Cycles
Introduction
Cycles
How Cyclic Concepts Help Explain Charting Techniques
Dominant Cycles
Combining Cycle Lengths
The Importance of Trend
Left and Right Translation
How to Isolate Cycles
Seasonal Cycles
Stock Market Cycles
The January Barometer
The Presidential Cycle
Combining Cycles with Other Technical Tools
Maximum Entropy Spectral Analysis
Cycle Reading and Software
Chapter
15 Computers and
Trading Systems
Introduction
Some Computer Needs
Grouping Tools and Indicators
Using the Tools and Indicators
Welles Wilder's Parabolic and Directional Movement Systems
Pros and Cons of System Trading
Need Expert Help?
Test Systems or Create Your own
Conclusion
Chapter
16 Money
Managements and Trading Tactics
Introduction
The Three Elements of Successful Trading
Money Management
Reward to Risk Ratios
Trading Multiple Positions: Trending versus Trading Units
What to Do After Periods of Success and Adversity
Trading Tactics
Combining Technical Factors and Money Management
Types of Trading Orders
From Daily Charts to Intraday Price Charts
The Use of Intraday Pivot Points
Summary of Money Management and Trading Guidelines
Application to Stocks
Asset Allocation
Managed Accounts and Mutual Funds
Market Profile
Chapter
17 The Link Between Stocks and Futures:
Intermarket Analysis
Intermarket Analysis
Program Trading: The Ultimate Link
The Link Between Bonds and Stocks
The Link Between Bonds and Commodities
The Link Between Commodities and the Dollar
Stock Sectors and Industry Groups
The Dollar and Large Caps
Intermarket Analysis and Mutual Funds
Relative Strength Analysis
Relative Strength and Sectors
Relative Strength and Individual Stocks
Top-Down Market Approach
Deflation Scenario
Intermarket Correlation
Intermarket Neural Network Software
Conclusion
Chapter
18 Stock Market
Indicators
Measuring Market Breadth
Sample Data
Comparing Market Averages
The Advance-Decline Line
AD Divergence
Daily Versus Weekly AD Lines
Variations in AD Line
McClellan Oscillator
McClellan Summation Index
New Highs Versus New Lows
New High-New Low Index
Upside Versus Downside Volume
The Arms Index
TRIN Versus TICK
Smoothing the Arms Index
Open Arms
Equivolume Charting
Candlepower
Comparing Market Averages
Conclusion
Chapter
19 Pulling It
All Together-A Checklist
Technical Checklist
How to Coordinate Technical and Fundamental Analysis
Chartered Market Technician (CMT)
Market Technicians Association (MTA)
The Global Reach of Technical Analysis
Technical Analysis by Any Name
Federal Reserve Finally Approves
Conclusion
A Advanced Technical Indicators
Demand Index (DI)
Herrick Payoff Index (HPI)
Starc Bands and Keltner Channels
Formula for Demand Index
B Market Profile
Introduction
Market Profile Graphic
Market Structure
Market Profile Organizing Principles
Range Development and Profile Patterns
Tracking Longer Term Market Activity
Conclusion
C The Essentials of Building a Trading System
5-Step Plan
Step 1: Start with a Concept (an Idea)
Step 2: Turn Your Idea into a Set of Objective Rules
Step 3: Visually Check It Out on the Charts
Step 4: Formally Test It with a Computer
Step 5: Evaluate Results
Money Management
Conclusion
D Continuous Futures Contracts
Nearest Contract
Next Contract
Gann Contract
Continuous Contracts
Constant Forward Continuous Contracts
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