Technical Analysis of the Financial Markets : A Comprehensive Guide to Trading Methods and Applications

by Murphy, John J.

• ISBN13: 9780735200661
• ISBN10: 0735200661
• Edition: 2nd
• Format: Hardcover
• Copyright: 1999-01-01
• Publisher: Prentice Hall Press

Summary

This outstanding reference has already taught thousands of traders the concepts of technical analysis and their application in the futures and stock markets. Covering the latest developments in computer technology, technical tools, and indicators, the second edition features new material on candlestick charting, intermarket relationships, stocks and stock rotation, plus state-of-the-art examples and figures. From how to read charts to understanding indicators and the crucial role technical analysis plays in investing, readers gain a thorough and accessible overview of the field of technical analysis, with a special emphasis on futures markets. Revised and expanded for the demands of today's financial world, this book is essential reading for anyone interested in tracking and analyzing market behavior.

Table of Contents

About the Author	xxiii	(2)
About the Contributors	xxv	(2)
Introduction	xxvii	(4)
Acknowledgments	xxxi
1 Philosophy of Technical Analysis	1	(22)
Introduction	1	(1)
Philosophy or Rationale	2	(3)
Technical versus Fundamental Forecasting	5	(1)
Analysis versus Timing	6	(1)
Flexibility and Adaptability of Technical Analysis	7	(1)
Technical Analysis Applied to Different Trading Mediums	8	(1)
Technical Analysis Applied to Different Time Dimensions	9	(1)
Economic Forecasting	10	(1)
Technician or Chartist?	10	(2)
A Brief Comparison of Technical Analysis in Stocks and Futures	12	(2)
Less Reliance on Market Averages and Indicators	14	(1)
Some Criticisms of the Technical Approach	15	(4)
Random Walk Theory	19	(2)
Universal Principles	21	(2)
2 Dow Theory	23	(12)
Introduction	23	(1)
Basic Tenets	24	(6)
The Use of Closing Prices and the Presence of Lines	30	(1)
Some Criticisms of Dow Theory	31	(1)
Stocks as Economic Indicators	32	(1)
Dow Theory Applied to Futures Trading	32	(1)
Conclusion	33	(2)
3 Chart Construction	35	(14)
Introduction	35	(1)
Types of Charts Available	36	(1)
Candlesticks	37	(2)
Arithmetic versus Logarithmic Scale	39	(1)
Construction of the Daily Bar Chart	40	(1)
Volume	41	(1)
Futures Open Interest	42	(3)
Weekly and Monthly Bar Charts	45	(1)
Conclusion	46	(3)
4 Basic Concepts of Trend	49	(50)
Definition of Trend	49	(2)
Trend Has Three Directions	51	(1)
Trend Has Three Classifications	52	(3)
Support and Resistance	55	(10)
Trendlines	65	(9)
The Fan Principle	74	(2)
The Importance of the Number Three	76	(1)
The Relative Steepness of the Trendline	76	(4)
The Channel Line	80	(5)
Percentage Retracements	85	(2)
Speed Resistance Lines	87	(3)
Gann and Fibonacci Fan Lines	90	(1)
Internal Trendlines	90	(1)
Reversal Days	90	(4)
Price Gaps	94	(4)
Conclusion	98	(1)
5 Major Reversal Patterns	99	(30)
Introduction	99	(1)
Price Patterns	100	(1)
Two Types of Patterns: Reversal and Continuation	100	(3)
The Head and Shoulders Reversal Pattern	103	(4)
The Importance of Volume	107	(1)
Finding a Price Objective	108	(2)
The Inverse Head and Shoulders	110	(3)
Complex Head and Shoulders	113	(2)
Triple Tops and Bottoms	115	(2)
Double Tops and Bottoms	117	(4)
Variations from the Ideal Pattern	121	(4)
Saucers and Spikes	125	(3)
Conclusion	128	(1)
6 Continuation Patterns	129	(28)
Introduction	129	(1)
Triangles	130	(2)
The Symmetrical Triangle	132	(4)
The Ascending Triangle	136	(2)
The Descending Triangle	138	(2)
The Broadening Formation	140	(1)
Flags and Pennants	141	(5)
The Wedge Formation	146	(1)
The Rectangle Formation	147	(4)
The Measured Move	151	(2)
The Continuation Head and Shoulders Pattern	153	(2)
Confirmation and Divergence	155	(1)
Conclusion	156	(1)
7 Volume and Open Interest	157	(24)
Introduction	157	(1)
Volume and Open Interest as Secondary Indicators	158	(4)
Interpretation of Volume for All Markets	162	(7)
Interpretation of Open Interest in Futures	169	(5)
Summary of Volume and Open Interest Rules	174	(1)
Blowoffs and Selling Climaxes	175	(1)
Commitments of Traders Report	175	(1)
Watch the Commercials	176	(1)
Net Trader Positions	177	(1)
Open Interest In Options	177	(1)
Put/Call Ratios	178	(1)
Combine Option Sentiment With Technicals	179	(1)
Conclusion	179	(2)
8 Long Term Charts	181	(14)
Introduction	181	(1)
The Importance of Longer Range Perspective	182	(1)
Construction of Continuation Charts for Futures	182	(2)
The Perpetual Contract(TM)	184	(1)
Long Term Trends Dispute Randomness	184	(1)
Patterns on Charts: Weekly and Monthly Reversals	185	(1)
Long Term to Short Term Charts	185	(1)
Why Should Long Range Charts Be Adjusted for Inflation?	186	(2)
Long Term Charts Not Intended for Trading Purposes	188	(1)
Examples of Long Term Charts	188	(7)
9 Moving Averages	195	(30)
Introduction	195	(2)
The Moving Average: A Smoothing Device with a Time Lag	197	(10)
Moving Average Envelopes	207	(2)
Bollinger Bands	209	(1)
Using Bollinger Bands as Targets	210	(1)
Band Width Measures Volatility	211	(1)
Moving Averages Tied to Cycles	212	(1)
Fibonacci Numbers Used as Moving Averages	212	(1)
Moving Averages Applied to Long Term Charts	213	(2)
The Weekly Rule	215	(5)
To Optimize or Not	220	(1)
Summary	221	(1)
The Adaptive Moving Average	222	(1)
Alternatives to the Moving Average	223	(2)
10 Oscillators and Contrary Opinion	225	(40)
Introduction	225	(1)
Oscillator Usage in Conjunction with Trend	226	(2)
Measuring Momentum	228	(6)
Measuring Rate of Change (ROC)	234	(1)
Constructing an Oscillator Using Two Moving Averages	234	(3)
Commodity Channel Index	237	(2)
The Relative Strength Index (RSI)	239	(6)
Using the 70 and 30 Lines to Generate Signals	245	(1)
Stochastics (K%D)	246	(3)
Larry Williams %R	249	(2)
The Importance of Trend	251	(1)
When Oscillators are Most Useful	251	(1)
Moving Average Convergence/Divergence (MACD)	252	(3)
MACD Histogram	255	(1)
Combine Weeklies and Dailies	256	(1)
The Principle of Contrary Opinion in Futures	257	(4)
Investor Sentiment Readings	261	(1)
Investors Intelligence Numbers	262	(3)
11 Point and Figure Charting	265	(32)
Introduction	266	(4)
The Point and Figure Versus the Bar Chart	270	(1)
Construction of the Intraday Point and Figure Chart	270	(4)
The Horizontal Count	274	(1)
Price Patterns	275	(2)
3 Box Reversal Point and Figure Charting	277	(1)
Construction of the 3 Point Reversal Chart	278	(4)
The Drawing of Trendlines	282	(4)
Measuring Techniques	286	(1)
Trading Tactics	286	(2)
Advantages of Point and Figure Charts	288	(4)
P&F Technical Indicators	292	(1)
Computerized P&F Charting	292	(2)
P&F Moving Averages	294	(2)
Conclusion	296	(1)
12 Japanese Candlesticks	297	(22)
Introduction	297	(1)
Candlestick Charting	297	(2)
Basic Candlesticks	299	(2)
Candle Pattern Analysis	301	(5)
Filtered Candle Patterns	306	(2)
Conclusion	308	(1)
Candle Patterns	309	(10)
13 Elliott Wave Theory	319	(24)
Historical Background	319	(1)
The Basic Tenets of the Elliott Wave Principle	320	(4)
Connection Between Elliott Wave and Dow Theory	324	(1)
Corrective Waves	324	(7)
The Rule of Alternation	331	(1)
Channeling	332	(2)
Wave 4 as a Support Area	334	(1)
Fibonacci Numbers as the Basis of the Wave Principle	334	(1)
Fibonacci Ratios and Retracements	335	(3)
Fibonacci Time Targets	338	(1)
Combining All Three Aspects of Wave Theory	338	(2)
Elliott Wave Applied to Stocks Versus Commodities	340	(1)
Summary and Conclusions	341	(1)
Reference Material	342	(1)
14 Time Cycles	343	(34)
Introduction	343	(1)
Cycles	344	(11)
How Cyclic Concepts Help Explain Charting Techniques	355	(3)
Dominant Cycles	358	(3)
Combining Cycle Lengths	361	(1)
The Importance of Trend	361	(1)
Left and Right Translation	362	(1)
How to Isolate Cycles	363	(6)
Seasonal Cycles	369	(4)
Stock Market Cycles	373	(1)
The January Barometer	373	(1)
The Presidential Cycle	373	(1)
Combining Cycles with Other Technical Tools	374	(1)
Maximum Entropy Spectral Analysis	374	(1)
Cycle Reading and Software	375	(2)
15 Computers and Trading Systems	377	(16)
Introduction	377	(2)
Some Computer Needs	379	(1)
Grouping Tools and Indicators	380	(1)
Using the Tools and Indicators	380	(1)
Welles Wilder's Parabolic and Directional Movement Systems	381	(6)
Pros and Cons of System Trading	387	(2)
Need Expert Help?	389	(1)
Test Systems or Create Your Own	390	(1)
Conclusion	390	(3)
16 Money Management and Trading Tactics	393	(20)
Introduction	393	(1)
The Three Elements of Successful Trading	393	(1)
Money Management	394	(3)
Reward to Risk Ratios	397	(1)
Trading Multiple Positions: Trending versus Trading Units	398	(1)
What to Do After Periods of Success and Adversity	399	(1)
Trading Tactics	400	(3)
Combining Technical Factors and Money Management	403	(1)
Types of Trading Orders	403	(2)
From Daily Charts to Intraday Price Charts	405	(2)
The Use of Intraday Pivot Points	407	(1)
Summary of Money Management and Trading Guidelines	408	(1)
Application to Stocks	409	(1)
Asset Allocation	409	(1)
Managed Accounts and Mutual Funds	410	(1)
Market Profile	411	(2)
17 The Link Between Stocks and Futures: Intermarket Analysis	413	(20)
Intermarket Analysis	414	(1)
Program Trading: The Ultimate Link	415	(1)
The Link Between Bonds and Stocks	416	(2)
The Link Between Bonds and Commodities	418	(1)
The Link Between Commodities and the Dollar	419	(1)
Stock Sectors and Industry Groups	420	(2)
The Dollar and Large Caps	422	(1)
Intermarket Analysis and Mutual Funds	422	(1)
Relative Strength Analysis	423	(1)
Relative Strength and Sectors	424	(2)
Relative Strength and Individual Stocks	426	(1)
Top-Down Market Approach	427	(1)
Deflation Scenario	427	(1)
Intermarket Correlation	428	(1)
Intermarket Neural Network Software	429	(1)
Conclusion	430	(3)
18 Stock Market Indicators	433	(20)
Measuring Market Breadth	433	(1)
Sample Data	434	(1)
Comparing Market Averages	435	(1)
The Advance-Decline Line	436	(1)
AD Divergence	437	(1)
Daily Versus Weekly AD Lines	437	(1)
Variations in AD Line	437	(1)
McClellan Oscillator	438	(1)
McClellan Summation Index	439	(1)
New Highs Versus New Lows	440	(1)
New High-New Low Index	441	(2)
Upside Versus Downside Volume	443	(1)
The Arms Index	444	(1)
TRIN Versus TICK	444	(1)
Smoothing the Arms Index	445	(1)
Open Arms	446	(1)
Equivolume Charting	447	(1)
Candlepower	448	(1)
Comparing Market Averages	449	(3)
Conclusion	452	(1)
19 Pulling It All Together--A Checklist	453	(10)
Technical Checklist	454	(1)
How to Coordinate Technical and Fundamental Analysis	455	(1)
Chartered Market Technician (CMT)	456	(1)
Market Technicians Association (MTA)	457	(1)
The Global Reach of Technical Analysis	458	(1)
Technical Analysis by Any Name	458	(1)
Federal Reserve Finally Approves	459	(1)
Conclusion	460	(3)
A Advanced Technical Indicators	463	(12)
Demand Index (DI)	463	(3)
Herrick Payoff Index (HPI)	466	(3)
Starc Bands and Keltner Channels	469	(4)
Formula for Demand Index	473	(2)
B Market Profile	475	(18)
Introduction	475	(3)
Market Profile Graphic	478	(1)
Market Structure	479	(1)
Market Profile Organizing Principles	480	(4)
Range Development and Profile Patterns	484	(2)
Tracking Longer Term Market Activity	486	(4)
Conclusion	490	(3)
C The Essentials of Building a Trading System	493	(12)
5-Step Plan	494	(1)
Step 1: Start with a Concept (an Idea)	495	(2)
Step 2: Turn Your Idea into a Set of Objective Rules	497	(1)
Step 3: Visually Check It Out on the Charts	497	(1)
Step 4: Formally Test It with a Computer	497	(3)
Step 5: Evaluate Results	500	(1)
Money Management	501	(1)
Conclusion	501	(4)
D Continuous Futures Contracts	505	(6)
Nearest Contract	506	(1)
Next Contract	506	(1)
Gann Contract	507	(1)
Continuous Contracts	507	(1)
Constant Forward Continuous Contracts	508	(3)
Glossary	511	(12)
Selected Bibliography	523	(4)
Selected Resources	527	(4)
Index	531