Technical Analysis of the Futures Markets

Superb book, exceptionally well written. Both the most comprehensive book on and a standard reference for technical analysis. Provides clear and lucid coverage of all major analytical techniques. Major emphasis on charting as a basis for price forecasting and trading. Selected by Market Technicians Association as one of two basic texts for those wishing to qualify as a Chartered Market Technician.

This book is designed to meet the need for a logical, sequential reference on the subject, this book describes-for beginners and more experienced traders alike---the concepts of technical analysis and their applications. In a down-to-earth style. John J. Murphy interprets the role of technical forecasters and explains how they apply their techniques to the futures markets.

The book starts with a discussion of the rationale for and premises of technical analysis in demonstrating how to track market behavior, it illustrates the full gamut of methodologies---from Dow Theory's first application, almost a century ago, to the latest computer technology.
Building on the basic concepts of charting theory, the book shows how to construct daily bar and point-and-figure charts and demonstrates the uses of longer-range continuation charts in revealing tend and price patterns. You will gain an understanding of support and resistance, key reversal days, head-and-shoulders patterns, flag and pennant patterns, Elliott Wave theory, and the analysis of volume and open interest as indicators of trend changes Moving averages and oscillators of trend changes. Moving averages and oscillators also are explained and illustrated.

Cyclic theory, the chartist's valuable tool for factoring in the dimension of time in analyzing trends and patterns, permits the analyst to predict how the market is moving, how far it is likely to go, and when a move is likely to end. Extensive charts examples show you how time cycles enhance the effectiveness of the various technical tools.

The book concludes with an especially useful discussion of the respective roles, in the trading process, of analysis, timing, and money management. It also cites relevant bibliographies---both at the end of each chapter and at the book's end.

Contents

Introduction, xiii

Acknowledgments, xix

1 Philosophy of Technical Analysis 1

INTRODUCTION, 1
PHILOSOPHY OR RATIONALE, 2
TECHNICAL VERSUS FUNDAMENTAL
FORECASTING, 5
ANALYSIS VERSUS TIMING, 6
FLEXIBILITY AND ADAPTABILITY OF
TECHNICAL ANALYSIS, 7
TECHNICAL ANALYSIS APPLIED TO
DIFFERENT TRADING MEDIUMS, 8
TECHNICAL ANALYSIS APPLIED TO
DIFFERENT TIME DIMENSIONS, 8
ECONOMIC FORECASTING, 10
TECHNICIAN OR CHARTIST? 12
A BRIEF COMPARISON OF TECHNICAL
ANALYSIS IN STOCKS AND FUTURES, 13
SOME CRITICISMS OF THE TECHNICAL
APPROACH, 17
RANDOM WALK THEORY, 20
CONCLUSION, 23

2 Dow Theory, 24

INTRODUCTION, 24
BASIC TENETS, 26
THE USE OF CLOSING PRICES AND THE
PRESENCE OF LINES, 32
SOME CRITICISMS OF DOW THEORY, 32
SUMMARY, 33
CONCLUSION, 33

3 Chart Construction, 35

INTRODUCTION, 35
TYPES OF CHARTS AVAILABLE, 36
ARITHMETIC VERSUS LOGARITHMIC
SCALE, 40
CONSTRUCTION OF THE DAILY BAR CHART:
PRICE, VOLUME, AND OPEN INTEREST, 41
VOLUME AND OPEN INTEREST, 43
HOW TO PLOT VOLUME AND OPEN
INTEREST IN GRAIN MARKETS, 47
PERSONAL CHARTS VERSUS A CHART
SERVICE, 48
WEEKLY AND MONTHLY BAR CHARTS, 48
CONCLUSION, 49

4 Basic Concepts of Trend, 53

DEFINITION OF TREND, 53
TREND HAS THREE DIRECTIONS, 55
TREND HAS THREE CLASSIFICATIONS, 56
SUPPORT AND RESISTANCE, 58
TRENDLINES, 68
THE FAN PRINCIPLE, 77
THE IMPORTANCE OF THE NUMBER
THREE, 79
THE RELATIVE STEEPNESS OF THE
TRENDLINE, 79
THE CHANNEL LINE, 83
PERCENTAGE RETRACEMENTS, 88
SPEED RESISTANCE LINES, 91
REVERSAL DAYS, 94
PRICE GAPS, 97
SUMMARY, 102

5 Major Reversal Patterns, 103

INTRODUCTION, 103
PRICE PATTERNS, 104
TWO TYPES OF PATTERNS: REVERSAL AND
CONTINUATION, 104
THE HEAD AND SHOULDERS REVERSAL
PATTERN, 107
THE IMPORTANCE OF VOLUME, 111
FINDING A PRICE OBJECTIVE, 111
THE INVERSE HEAD AND SHOULDERS, 113
COMPLEX HEAD AND SHOULDERS
PATTERNS, 116
TACTICS, 116
THE FAILED HEAD AND SHOULDERS
PATTERN, 117
THE HEAD AND SHOULDERS AS A
CONSOLIDATION PATTERN, 118
TRIPLE TOPS AND BOTTOMS, 118
DOUBLE TOPS AND BOTTOMS, 121
VARIATIONS FROM THE IDEAL
PATTERN, 125
SAUCERS OR ROUNDING TOPS AND
BOTTOMS, 128
V-FORMATIONS, OR SPIKES, 130
CONCLUSION, 135

6 Continuation Patterns, 136

INTRODUCTION, 136
TRIANGLES, 137
THE SYMMETRICAL TRIANGLE, 139
THE ASCENDING TRIANGLE, 144
THE ASCENDING TRIANGLE AS A
BOTTOM, 147
THE DESCENDING TRIANGLE, 148
THE BROADENING FORMATION, 150
THE DIAMOND FORMATION, 153
CONCLUSION, 155
FLAGS AND PENNANTS, 156
THE WEDGE FORMATION, 160
THE RECTANGLE FORMATION, 163
THE MEASURED MOVE, 167
THE CONTINUATION HEAD AND
SHOULDERS PATTERN, 168
THE PRINCIPLE OF
CHARACTERIZATION, 172
CONFIRMATION AND DIVERGENCE, 174

7 Volume and Open Interest, 176

INTRODUCTION, 176
VOLUME AND OPEN INTEREST AS
SECONDARY INDICATORS, 177
INTERPRETATION OF VOLUME, 181
INTERPRETATION OF OPEN INTEREST, 193
SUMMARY OF VOLUME AND OPEN
INTEREST RULES, 199
BLOWOFFS AND SELLING CLIMAXES, 199
COMMITMENTS OF TRADERS REPORT, 200
SEASONAL CONSIDERATIONS, 203
CONCLUSION, 206

8 Long-Term Charts and Commodity Indices, 207

INTRODUCTION, 207
THE IMPORTANCE OF LONGER-RANGE
PERSPECTIVE, 208
CONSTRUCTION OF CONTINUATION
CHARTS, 208
THE PERPETUAL CONTRACT 210
THE PERPETUAL INDEX, 211
CHARTING TECHNIQUES CAN BE APPLIED TO LONG-TERM CHARTS, 211
SUMMARY OF TECHNICAL PRINCIPLES, 212
TERMINOLOGY OF TECHNICAL
ANALYSIS, 213
PATTERNS ON CHARTS, 214
LONG-TERM TO SHORT-TERM CHARTS, 215
COMMODITY INDICES: A STARTING
POINT, 215
SHOULD LONG-RANGE CHARTS BE
ADJUSTED FOR INFLATION? 217
LONG-TERM CHARTS NOT INTENDED FOR
TRADING PURPOSES, 218
CONCLUSION, 218
EXAMPLES OF WEEKLY AND MONTHLY
CHARTS, 219
TECHNICAL INDICATORS, 233

9 Moving Averages, 234

INTRODUCTION, 234
THE MOVING AVERAGE: A SMOOTHING
DEVICE WITH A TIME LAG, 235
MOVING AVERAGE COMBINATIONS THAT
WORK BEST, 251
PLACEMENT OF THE AVERAGES, 257
MOVING AVERAGES TIED TO CYCLES, 258
FIBONACCI NUMBERS USED AS MOVING
AVERAGES, 260
MOVING AVERAGES APPLIED TO ANY TIME
DIMENSION, 262
CONCLUSION, 263
THE WEEKLY RULE, 267
ADDITIONAL REFERENCE MATERIAL, 274

10 Oscillators and Contrary Opinion, 275

INTRODUCTION, 275
OSCILLATOR USAGE IN CONJUNCTION WITH
TREND, 276
MEASURING MOMENTUM, 277
MEASURING RATE OF CHANGE (ROC), 284
CONSTRUCTING AN OSCILLATOR USING
TWO MOVING AVERAGES, 286
OSCILLATOR INTERPRETATION, 289
THE RELATIVE STRENGTH INDEX (RSI), 295
USING THE 70 AND 30 LINES TO GENERATE
SIGNALS, 302
STOCHASTICS (K%D), 304
LARRY WILLIAMS %R, 309
THE IMPORTANCE OF TREND, 311
WHEN OSCILLATORS ARE MOST
USEFUL, 312
MOVING AVERAGE
CONVERGENCE/DIVERGENCE TRADING
METHOD (MACDTM), 312
VOLUME ACCUMULATION USED AS AN
OSCILLATOR, 314
COMPU TRAC SOFTWARE FOR OSCILLATOR
ANALYSIS, 316
THE PRINCIPLE OF CONTRARY OPINION, 316

11 Intra-Day Point and Figure Charting, 322

INTRODUCTION, 322
THE POINT AND FIGURE VS. THE BAR
CHART, 324
CONSTRUCTION OF THE INTRA-DAY POINT
AND FIGURE CHART, 328
CONGESTION AREA ANALYSIS, 336
THE HORIZONTAL COUNT, 337
PRICE PATTERNS, 339
CONCLUSION, 342
WHERE TO OBTAIN POINT AND FIGURE
CHARTS AND DATA, 343

12 Three-Box Reversal and Optimized Point and Figure Charting, 350

INTRODUCTION, 350
CONSTRUCTION OF THE THREE-POINT
REVERSAL CHART, 351
THE DRAWING OF TRENDLINES, 356
MEASURING TECHNIQUES, 360
TRADING TACTICS, 362
ADVANTAGES OF POINT AND FIGURE
CHARTING, 364
OPTIMIZED POINT AND FIGURE
CHARTS, 364
SOURCES OF INFORMATION, 366
CONCLUSION, 370

13 Elliott Wave Theory, 371

HISTORICAL BACKGROUND, 371
INTRODUCTION TO THE THEORY, 373
BASIC TENETS OF THE ELLIOTT WAVE
PRINCIPLE, 373
CONNECTIONS BETWEEN ELLIOTT WAVE
AND DOW THEORY, 377
EXTENSIONS, 379
CORRECTIVE WAVES, 383
THE RULE OF ALTERNATION, 391
CHANNELING, 392
WAVE FOUR AS A SUPPORT AREA, 393
FIBONACCI NUMBERS AS THE BASIS OF THE
WAVE PRINCIPLE, 394
THE LOGARITHMIC SPIRAL, 395
FIBONACCI RATIOS AND
RETRACEMENTS, 396
FIBONACCI TIME TARGETS, 397
COMBINING ALL THREE ASPECTS OF WAVE
THEORY, 398
FIBONACCI NUMBERS IN THE STUDY OF
CYCLES, 398
ELLIOTT WAVE APPLIED TO STOCKS
VERSUS COMMODITIES, 399
SUMMARY AND CONCLUSIONS, 399
REFERENCE MATERIAL, 401
EXAMPLES OF ELLIOTT WAVES IN
ACTION, 402

14 Time Cycles, 414

INTRODUCTION, 414
CYCLES, 415
HOW CYCLIC CONCEPTS HELP EXPLAIN
CHARTING TECHNIQUES, 427
DOMINANT CYCLES, 430
COMBINING CYCLE LENGTHS, 433
THE IMPORTANCE OF TREND, 433
LEFT AND RIGHT TRANSLATION, 436
HOW TO ISOLATE CYCLES-
DETRENDING, 440
SEASONAL CYCLES, 447
COMBINING CYCLES WITH OTHER
TECHNICAL TIMING TOOLS, 450
COMBINING CYCLES AND OSCILLATORS, 451
SUMMARY AND CONCLUSION, 454

15 Computers and Trading Systems, 456

INTRODUCTION, 456
SOME COMPUTER BASICS, 458
ANALYSIS TOOLS, 459
WELLES WILDER'S PARABOLIC AND
DIRECTIONAL MOVEMENT SYSTEMS, 465
GROUPING TOOLS AND INDICATORS, 472
USING TOOLS AND INDICATORS, 473
AUTOMATION, OPTIMIZATION, AND
PROFITABILITY TESTING, 476
PROS AND CONS OF MECHANICAL
COMPUTERIZED SYSTEMS, 477
INCORPORATING MECHANICAL SIGNALS
INTO ANALYSIS, 479
ARTIFICIAL INTELLIGENCE PATTERN
RECOGNITION, 483
SUMMARY AND CONCLUSIONS, 485
SOURCES OF INFORMATION, 486

16 Money Management and Trading Tactics, 487

INTRODUCTION, 487
THE THREE ELEMENTS OF SUCCESSFUL
COMMODITY FUTURES TRADING, 488
MONEY MANAGEMENT, 488
REWARD-TO-RISK RATIOS, 491
TRADING MULTIPLE POSITIONS: TRENDING
VERSUS TRADING UNITS, 493
MONEY MANAGEMENT: CONSERVATIVE VS.
AGGRESSIVE TRADING, 493
WHAT TO DO AFTER PERIODS OF SUCCESS
AND ADVERSITY 494
MONEY MANAGEMENT IS A TRICKY BUT
CRUCIAL AREA, 495
THE MONEY MANAGEMENT INDUSTRY, 495
TRADING TACTICS, 496
COMBINING TECHNICAL FACTORS AND
MONEY MANAGEMENT, 499
TYPES OF TRADING ORDERS, 500
FROM DAILY CHARTS TO INTRA-DAY
CHARTS, 501
DUNNIGAN'S THRUST TECHNIQUE, 507
THE USE OF INTRA-DAY PIVOT POINTS, 510
SUMMARY OF MONEY MANAGEMENT AND
TRADING GUIDELINES, 511

Pulling It All Together-A Checklist, 512

TECHNICAL CHECKLIST, 513
HOW TO COORDINATE TECHNICAL AND
FUNDAMENTAL ANALYSIS, 514
WHAT'S A TECHNICIAN ANYWAY? 515
THE GLOBAL REACH OF TECHNICAL
ANALYSIS, 516
TECHNICAL ANALYSIS: THE LINK BETWEEN
STOCKS AND FUTURES, 517
CONCLUSION, 518

Appendix 1
Spread Trading and Relative Strength, 519

THE APPLICATION OF TECHNICAL ANALYSIS
TO SPREAD CHARTS, 520
RELATIVE STRENGTH BETWEEN NEARBY
AND DISTANT CONTRACTS, 524
RELATIVE STRENGTH BETWEEN
DIFFERENT MARKETS, 525
RATIO ANALYSIS, 526
RELATIVE STRENGTH BETWEEN
COMMODITY INDICES, 526
STOCK INDEX FUTURES VERSUS THE CASH
INDEX: A MEASURE OF SHORT-TERM
MARKET SENTIMENT, 527 REFERENCE
SOURCES, 527

Appendix 2
The Trading of Options, 529

WHAT IS AN OPTION? 529
WHY PURCHASE AN OPTION INSTEAD OF A
FUTURES CONTRACT? 530
HOW OPTIONS AND FUTURES CAN BE USED
TOGETHER, 531
"AT DETERMINES PREMIUM VALUE? 532
TECHNICAL ANALYSIS AND OPTION
TRADING, 533
TECHNICAL ANALYSIS APPLIED TO THE
UNDERLYING FUTURES MARKET, 533
RECOMMENDED READING, 534
PUT/CALL RATIOS AS A MEASURE OF
MARKET SENTIMENT, 534

Appendix 3
W. D. Gann: Geometric Angles and
Percentages, 536

INTRODUCTION, 536
GEOMETRIC ANGLES AND
PERCENTAGES, 538
THE IMPORTANCE OF THE 45-DEGREE
LINE, 540
COMBINING GEOMETRIC ANGLE LINES AND PERCENTAGE RETRACEMENTS, 542
REFERENCE SOURCES, 547