10 RULES OF TECHNICAL TRADING
There are two major types of analysis normally used to
forecast the performance of commodity futures: fundamental and technical.
Fundamental analysis examines the supply and demand factors that influence
price, while technical analysis is the study of price and price behavior. The
world of technical analysis is complex, but with a working knowledge can be
applied to virtually any market. There are literally hundreds of different
patterns and indicators that technical analysts look at, but you should find
early on what works for you and what doesn’t. Here we set out to introduce you
to 10 important rules of technical trading as first described by technical
trading legend John J. Murphy.
Anyone who has ever looked into technical analysis will
have heard of Murphy; a technical analyst with more than 35 years of market
experience. His book, “Technical
Analysis of the Financial Markets,” should be part of every trader’s library. Murphy wrote “The 10 Important Rules of
Technical Trading,” and these principles remain relevant today. We can learn
from and build on them.
Adding to their appeal, Murphy’s rules are designed to
explain the concept of technical trading to the beginner and to streamline the
trading methodology of the more experienced market participant. They are meant
to equip traders with a meaningful framework on which to pin their own
technical analysis, and assist with answering some of the following questions:
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.
Even if you have read Murphy’s rules before, it is
always a good idea to re-visit them. Below are Murphy's 10 Most Important Rules
of Technical Trading, followed by my commentary (in italics) on specific
aspects of the rules:
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.
Matt Bradbard: When establishing a position trade, look
at the monthly, weekly, and then daily chart in that order. My best trades have
said the same thing on all three time frames; buy or sell.
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 EOD
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.
Matt Bradbard: You’ve heard “the trend is your friend”,
now apply it.
(to be contd)
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