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Technical Analysis of the Financial Markets : A Comprehensive Guide to Trading Methods and Applications
By: Murphy, John J. ; Murphy, John J.

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Item #: 10239
Pages: 542
Publisher: 560 - PHP Investment Analysis
ISBN: 0735200661
Type: Book - Soft Cover
Publish Date : 12/31/1998
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From how to read charts to understanding indicators and the crucial role of technical analysis in investing, you won’t find a more thorough or up-to-date source. Revised and expanded for today’s changing financial world, it applies to equities as well as the futures markets.

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Jacket Description:
In the late 1980s, John J. Murphy's massive Technical Analysis of the Futures Markets created an uproar when it burst upon the scene. The most comprehensive, yet easy-to-follow guide to the concepts of technical analysis and their applications to the futures markets, it swiftly became a classic -- cited in research studies by the Federal Reserve and used as a primary source in the Market Technicians Association testing program. Today, it is widely considered the bible in its field.

In response to widespread demand, John Murphy has completely updated and revised this landmark volume, broadened its scope, and expanded it to cover all financial markets.

While it retains the clarity, simplicity, and logical structure that made the earlier book so popular, Technical Analysis of the Financial Markets thoroughly covers all the new techniques in charts and charting and the many recent developments in this fast-changing field. Every chapter has been updated. There is new emphasis on the stock market, hundreds of up-to-date illustrations, and three completely new chapters featuring extensive information on:

- Stock market in indicators -- advancing versus declining issues, new highs versus new lows, up volume versus down volume, and other tools to gauge market breadth and provide early warning of potential trend changes

- Candlestick charting -- how to best use these fascinating, visually appealing charts that deliver data with such impact it seems to literally jump off the page or computer screen

- Intermarket analysis -- a much-needed clear explanation of the vital interrelationships between the various financial markets

In addition, the guide provides extensive new sections covering systems development advanced technical indicators, and such newer forms of charting as market profiling.

An invaluable tool for traders of all levels of experience, Technical Analysis of the Financial Markets guides you from the first application of the Dow Theory and the basics of charting through the latest computer technology and most advanced analysis system.

"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 point-and 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

Technical Analysis of the Financial Markets expands upon and updates Murphy's classic Technical Analysis of the Futures Markets. Packed with some 400 real-life charts that clarify every key point it covers:

- The fundamentals of technical analysis and chart construction
- What you must know about trends and the building blocks of chart analysis
- Price patterns, including major reversal and continuation patterns
- Methods of analysis -- moving averages, oscillators, contrary opinion, and other indicators
- Time cycles, market interrelationships, money management, and trading tactics

Beginners and experienced traders alike will find a wealth of immediately useful information in this authoritative, yet easy-to-follow guide.

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Table of Contents:

About the Author xxiii
About the Contributors xxv
Introduction xxvii
Acknowledgments xxxi

1 Philosophy of Technical Analysis

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 9
Economic Forecasting 10
Technician or Chartist? 10
A Brief Comparison of Technical Analysis in
Stocks and Futures 12
Less Reliance on Market Averages and
Indicators 14
Some Criticisms of the Technical Approach 15
Random Walk Theory 19
Universal Principles 21

2 Dow Theory 23

Introduction 23
Basic Tenets 24
The Use of Closing Prices and the Presence of
Lines 30
Some Criticisms of Dow Theory 31
Stocks as Economic Indicators 32
Dow Theory Applied to Futures Trading 32
Conclusion 33

3 Chart Construction 35

Introduction 35
Types of Charts Available 36
Candlesticks 37
Arithmetic versus Logarithmic Scale 39
Construction of the Daily Bar Chart 40
Volume 41
Futures Open Interest 42
Weekly and Monthly Bar Charts 45
Conclusion 46

4 Basic Concepts of Trend 49

Definition of Trend 49
Trend Has Three Directions 51
Trend Has Three Classifications 52
Support and Resistance 55
Trendlines 65
The Fan Principle 74
The Importance of the Number Three 76
The Relative Steepness of the Trendline 76
The Channel Line 80
Percentage Retracements 85
Speed Resistance Lines 87
Gann and Fibonacci Fan Lines 90
Internal Trendlines 90
Reversal Days 90
Price Gaps 94
Conclusion 98

5 Major Reversal Patterns 99

Introduction 99
Price Patterns 100
Two Types of Patterns: Reversal and
Continuation 100
The Head and Shoulders Reversal Pattern 103
The Importance of Volume 107
Finding a Price Objective 108
The Inverse Head and Shoulders 110
Complex Head and Shoulders 113
Triple Tops and Bottoms 115
Double Tops and Bottoms 117
Variations from the Ideal Pattern 121
Saucers and Spikes 125
Conclusion 128

6 Continuation Patterns 129

Introduction 129
Triangles 130
The Symmetrical Triangle 132
The Ascending Triangle 136
The Descending Triangle 138
The Broadening Formation 140
Flags and Pennants 141
The Wedge Formation 146
The Rectangle Formation 147
The Measured Move 151
The Continuation Head and Shoulders
Pattern 153
Confirmation and Divergence 155
Conclusion 156

7 Volume and Open Interest 157

Introduction 157
Volume and Open Interest as Secondary
Indicators 158
Interpretation of Volume for All Markets 162
Interpretation of Open Interest in Futures 169

Summary of Volume and Open Interest Rules 174
Blowoffs and Selling Climaxes 175
Commitments of Traders Report 175
Watch the Commercials 176
Net Trader Positions 177
Open Interest In Options 177
Put/Call Ratios 178
Combine Option Sentiment With Technicals 179
Conclusion 179

8 Long Term Charts 181

Introduction 181
The Importance of Longer Range
Perspective 182
Construction of Continuation Charts for
Futures 182
The Perpetual Contract 184
Long Term Trends Dispute Randomness 184
Patterns on Charts: Weekly and Monthly
Reversals 185
Long Term to Short Term Charts 185
Why Should Long Range Charts Be Adjusted for
Inflation? 186
Long Term Charts Not Intended for Trading
Purposes 188
Examples of Long Term Charts 188

9 Moving Averages 195

Introduction 195
The Moving Average: A Smoothing Device with a
Time Lag 197
Moving Average Envelopes 207
Bollinger Bands 209
Using Bollinger Bands as Targets 210
Band Width Measures Volatility 211
Moving Averages Tied to Cycles 212
Fibonacci Numbers Used as Moving
Averages 212
Moving Averages Applied to Long Term
Charts 213
The Weekly Rule 215
To Optimize or Not 220
Summary 221
The Adaptive Moving Average 222
Alternatives to the Moving Average 223

10 Oscillators and Contrary Opinion 225

Introduction 225
Oscillator Usage in Conjunction with Trend 226
Measuring Momentum 228
Measuring Rate of Change (ROC) 234
Constructing an Oscillator Using Two Moving
Averages 234
Commodity Channel Index 237
The Relative Strength Index (RSI) 239
Using the 70 and 30 Lines to Generate
Signals 245
Stochastics (K%D) 246
Larry Williams %R 249
The Importance of Trend 251
When Oscillators are Most Useful 251
Moving Average Convergence/Divergence
(MACD) 252
MACD Histogram 255
Combine Weeklies and Dailies 256
The Principle of Contrary Opinion in Futures 257
Investor Sentiment Readings 261
Investors Intelligence Numbers 262

11 Point and Figure Charting 265

Introduction 266
The Point and Figure Versus the Bar Chart 270
Construction of the Intraday Point and Figure
Chart 270
The Horizontal Count 274
Price Patterns 275
3 Box Reversal Point and Figure Charting 277
Construction of the 3 Point Reversal Chart 278
The Drawing of Trendlines 282
Measuring Techniques 286
Trading Tactics 286
Advantages of Point and Figure Charts 288
P&F Technical Indicators 292
Computerized P&F Charting 292
P&F Moving Averages 294
Conclusion 296 12

12 Japanese Candlesticks 297

Introduction 297
Candlestick Charting 297
Basic Candlesticks 299
Candle Pattern Analysis 301
Filtered Candle Patterns 306
Conclusion 308
Candle Patterns 309

13 Elliott Wave Theory 319

Historical Background 319
The Basic Tenets of the Elliott Wave
Principle 320
Connection Between Elliott Wave and Dow
Theory 324
Corrective Waves 324
The Rule of Alternation 331
Channeling 332
Wave 4 as a Support Area 334
Fibonacci Numbers as the Basis of the Wave
Principle 334
Fibonacci Ratios and Retracements 335
Fibonacci Time Targets 338
Combining All Three Aspects of Wave Theory 338
Elliott Wave Applied to Stocks Versus
Commodities 340
Summary and Conclusions 341
Reference Material 342

14 Time Cycles 343

Introduction 343
Cycles 344
How Cyclic Concepts Help Explain Charting
Techniques 355
Dominant Cycles 358
Combining Cycle Lengths 361
The Importance of Trend 361
Left and Right Translation 362
How to Isolate Cycles 363
Seasonal Cycles 369
Stock Market Cycles 373
The January Barometer 373
The Presidential Cycle 373
Combining Cycles with Other Technical Tools 374
Maximum Entropy Spectral Analysis 374
Cycle Reading and Software 375

15 Computers and Trading Systems 377
Introduction 377
Some Computer Needs 379
Grouping Tools and Indicators 380
Using the Tools and Indicators 380
Welles Wilder's Parabolic and Directional
Movement Systems 381
Pros and Cons of System Trading 387
Need Expert Help? 389
Test Systems or Create Your own 390
Conclusion 390

16 Money Managements and Trading Tactics 393

Introduction 393
The Three Elements of Successful Trading 393
Money Management 394
Reward to Risk Ratios 397
Trading Multiple Positions: Trending versus
Trading Units 398
What to Do After Periods of Success and
Adversity 399
Trading Tactics 400
Combining Technical Factors and Money
Management 403
Types of Trading Orders 403
From Daily Charts to Intraday Price Charts 405
The Use of Intraday Pivot Points 407
Summary of Money Management and Trading
Guidelines 408
Application to Stocks 409
Asset Allocation 409
Managed Accounts and Mutual Funds 410
Market Profile 411

17 The Link Between Stocks and Futures:
Intermarket Analysis 413

Intermarket Analysis 414
Program Trading: The Ultimate Link 415
The Link Between Bonds and Stocks 416
The Link Between Bonds and Commodities 418
The Link Between Commodities and the
Dollar 419
Stock Sectors and Industry Groups 420
The Dollar and Large Caps 422
Intermarket Analysis and Mutual Funds 422
Relative Strength Analysis 423
Relative Strength and Sectors 424
Relative Strength and Individual Stocks 426
Top-Down Market Approach 427
Deflation Scenario 427
Intermarket Correlation 428
Intermarket Neural Network Software 429
Conclusion 430

18 Stock Market Indicators 433

Measuring Market Breadth 433
Sample Data 434
Comparing Market Averages 435
The Advance-Decline Line 436
AD Divergence 437
Daily Versus Weekly AD Lines 437
Variations in AD Line 437
McClellan Oscillator 438
McClellan Summation Index 439
New Highs Versus New Lows 440
New High-New Low Index 441
Upside Versus Downside Volume 443
The Arms Index 444
TRIN Versus TICK 444
Smoothing the Arms Index 445
Open Arms 446
Equivolume Charting 447
Candlepower 448
Comparing Market Averages 449
Conclusion 452

19 Pulling It All Together-A Checklist 453

Technical Checklist 454
How to Coordinate Technical and Fundamental
Analysis 455
Chartered Market Technician (CMT) 456
Market Technicians Association (MTA) 457
The Global Reach of Technical Analysis 458
Technical Analysis by Any Name 458
Federal Reserve Finally Approves 459 Conclusion 460

A Advanced Technical Indicators 463
Demand Index (DI) 463
Herrick Payoff Index (HPI) 466
Starc Bands and Keltner Channels 469
Formula for Demand Index 473

B Market Profile 475
Introduction 475
Market Profile Graphic 478
Market Structure 479
Market Profile Organizing Principles 480
Range Development and Profile Patterns 484
Tracking Longer Term Market Activity 486
Conclusion 490

C The Essentials of Building a Trading
System 493
5-Step Plan 494
Step 1: Start with a Concept (an Idea) 495
Step 2: Turn Your Idea into a Set of Objective
Rules 497
Step 3: Visually Check It Out on the Charts 497
Step 4: Formally Test It with a Computer 497
Step 5: Evaluate Results 500
Money Management 501
Conclusion 501

D Continuous Futures Contracts 505
Nearest Contract 506
Next Contract 506
Gann Contract 507
Continuous Contracts 507
Constant Forward Continuous Contracts 508

Glossary 511
Selected Bibliography 523
Selected Resources 527

Index 531

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Book Review by Jaye Abbate, Traders' Library

Technical Analysis of the Financial Markets:
A Comprehensive Guide to Trading Methods and Applications
"If one could read only one book on technical analysis, this should be the one."
- Knight-Ridder Financial

Scores of investors - from entry-level individual investors to professionals and large scale institutional investors alike -
are learning to perfect their trading skills with John Murphy's landmark new book, Technical Analysis of the Financial
Markets. As one of the most thorough, comprehensive, yet easy to understand references ever published on the concepts of
technical analysis and their applications in the stock and futures markets, Murphy's new work has already established itself
as a modern day classic - and a "must have" for every investor and trader.

Even if you own a prior edition of John Murphy's landmark book - this new version is a worthwhile and essential investment.
Every single chapter has been completely revised and updated - and new chapters and information have been added to cover the
stock market, systems developments, newer forms of charting as market profiling, computer technology, technical tools and the
latest indicators in far greater depth. Readers will also find new material on …

- Stock Market Indicators - advancing vs. declining issues, volume indicators and those pinpointing trend changes

- Candlestick Charting - the ancient technical analysis tool that is now gaining increasing popularity with charts
providing data that literally "jumps off the page or computer screen"

- Intermarket Analysis - with clear-cut explanations of the vital interrelationships between the various financial

With it's clarity, simplicity and thorough treatment of the topic, Murphy has provided all levels of investors with a useful,
non-intimidating reference guide, placing an emphasis on the basics of charting and its relationship to the latest computer
technology and analysis software.

John Murphy's contribution to the field of technical analysis has been unmatched for years, and with this valuable new work,
he has once again proved that his analysis and insights are critical to the success of a new generation of investors. He
consistently gets the highest "four-star" rating from the top names in field, as is evident by this ringing endorsement from
Prudential Securities director Ralph Acampora:

"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 by John Murphy."

And - if you are actively investing today - it should quickly become one of your favorites, too.

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