Which way will the market? How far up or down? And when it changes its direction? Here are the basic questions of a technical analyst. In addition to charts, graphs and mathematical formulas used in the analysis of market trends, there are some basic concepts that apply to most theories used by today's technical analysts.
John Murphy, the leader in technical analysis of futures markets, based on his thirty years of experience developed ten basic laws of technical trading: rules that are intended to help explain the general idea of technical trading beginner and simplify the methodology for the more experienced trade practices. These regulations define the key tools of technical analysis, as well as how to use them to identify opportunities to sell and buy.
Mr. Murphy was a technical analyst for CNBC-TV, for seven years led the popular show "Tech Talk" and is the author of three best-selling books on the subject - Technical Analysis of the Financial Markets, Intermarket Technical Analysis and The Visual Investor.
His latest book demonstrates the essential "visual" elements of technical analysis. The basic principles of the approach of Mr. Murphy to technical analysis illustrate what is more important to determine where the market goes (up or down), than why it happens.
Here are the ten most important rules of technical trading by Mr. Murphy
1. Trend Map
Examine the long-term charts. Begin analysis chart with the monthly and weekly charts spanning several years. A larger scale "map of the market" provides the best long-term visibility on the market. As soon as the long-term trend is set, analyze the daily and intraday graphics. The mere presentation of a short-term can often be misleading. Even if you trade only in the shallowest time frame, you will do better if you make a transaction in the same direction as the intermediate and longer-term trend.
2. Determine the trend and follow it
Market trends come in many sizes - long-term, intermediate and short-term. First, determine what you are going to trade and use the appropriate chart. Make sure that you are trading in the direction of this trend. Buy the bottom if the trend is upwards. Sell at the top, if the trend - down. If you're trading the intermediate trend, use daily and weekly charts. If you are - day trader, use daily and intraday charts. But in any case, let the longer-term charts to identify trends and then use the shorter term chart for timing of entry into the transaction.
3. Find it highs and lows.
Find support and resistance levels. The best place to buy - about the level of support. The best place to sell - about the level of resistance .. Once the resistance line was broken, it will usually be supported on subsequent pullbacks. In other words, the old "high" becomes the new "low". In the same way, when the support level was broken, it usually will mean follow-ups for sale - the old "low", can become the new "high".
4. Calculate kickbacks
Measure the correct percentages. Market corrections up or down usually recover a significant portion of the previous trend. You can measure the correction of the current trend in simple percentages. Fifty percent of the restoration prior trend is most common. The minimum recovery - usually a third of the previous trend. Maximum recovery - usually two-thirds. Fibonacci 38% and 62% are also worth watching. During a rollback in an uptrend, therefore, the point of purchase stands at 33-38%.
5. Hold the line
Draw trend lines. The trend lines - one of the easiest and most effective tools. All you need to - direct and two points on the chart. Uptrend line held by two successive lows. Line downward trend held for two successive peaks. Prices will often pull back to trend lines before resuming its movement along the trend. Violation of the trend line usually signals a trend change. Reliable trend line should touch the prices of at least three times. The longer the trend line is stronger and the more it has been verified, the more important it becomes.
6. Follow the middle
Follow moving averages. Moving averages provide objective buy and sell signals. They will tell you that the existing trend is still in force, and will help to confirm the change. However, the moving averages do not tell you in advance, which will inevitably change in trend. Schedule a combination of two moving averages - the most popular way of finding trading signals. Here are some popular combinations - 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. Intersection of prices above and below the 40-day moving average also provide good signals to trade. Since the moving average line - trend-following indicators, they work best in developing markets.
7. Study spreads
Watch for the oscillators. They help identify overbought and oversold market. While moving averages confirm the trend change, oscillators often warn us in advance that the market rose or fell too far and would soon unfold. Two of the most popular - Relative Strength Index (RSI) and Stochastics. They both operate on a scale from 0 to 100. For RSI, the values over 70 indicate overbought, while readings below 30 - oversold. Overbought and oversold for Stochastics - 80 and 20. Most traders use 14-day or weekly stochastics and 9 or 14 days or weeks for RSI. Differences oscillator often warn of market turns. These tools work best in a trading range. Weekly signals can be used as filters on daily signals. Daily signals can be used as filters for daily schedules.
8. Remember the warning signs
Trade MACD. Indicator (MACD) Moving Average Convergence Divergence (founded by Gerald Appel) combines a moving average crossover in with overbought / oversold elements of an oscillator. A buy signal comes when the faster line crosses the slow upward and the two lines - below zero. A sell signal occurs when the faster line crosses the slow down on the ground level. Weekly signals take precedence over daily. MACD histogram is based on the difference between these two lines and gives even earlier warnings of trend changes. It is called "histogram", because it uses vertical bars to show the difference between the two lines on the chart.
9. Trend or not?
Use ADX. Average Directional Movement Index (ADX) helps determine whether a market is trending or in the hallway. ADX measures the degree of trend or direction of the market. Increasing ADX line suggests the presence of a strong trend. Fall ADX line suggests the presence of the corridor and the lack of a trend. Increasing ADX line suggests to use moving averages, falling ADX - oscillators. Constructing ADX line, the trader is able to determine which trading style and which set of indicators is most appropriate for the current market situation.
10. Remember confirmations
Include volume and open interest. Volume and open interest - important indicators confirm the market. Volume precedes price. It is important to ensure that more the case in the direction of the prevailing trend. In an uptrend, a larger volume should be seen in the days of growth. Increase the open interest confirms that new money is supporting the prevailing trend. Decrease of open interest - often warns that the trend is near completion. The uptrend should be accompanied by rising volume and rising open interest.
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