John Murphy’s 10 Laws of Technical Analysis
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John Murphy is regarded as one of the founders of technical analysis, and his publications on it are considered to be accurate Bibles of online trading.

Any professional trader, regardless of the market in which he operates, will surely have read at least one of his books, which are considered essential to learn how best to use technical analysis in online trading.

These are, therefore, real bestsellers, which all traders should read sooner or later if they want to improve their trading experience.

John Murphy’s famous book “Technical Analysis of Futures Markets: Methodologies, Applications, and Operational Strategies” is one of the first readings for every trader.

In this book, every aspect of the technical analysis is explained in detail, including various examples and case studies, so as not to leave anything to chance.

The book opens with the philosophy of technical analysis, followed by the basic principles of Dow’s theory, with the explanation of graphs and how to use them.

The remaining chapters are devoted to explaining trends, their reversals, the importance of volume, the use of technical indicators such as the moving average, and so on.

 

In this article, we want to list here the ten laws of John Murphy’s technical analysis, considered fundamental and always to be applied in online trading.

 

John Murphy’s Ten Laws of Technical Analysis

1) Map the Trend:

John Murphy’s first law deals with the identification of current market trends. Murphy recommends that you start analyzing the charts in the long term, then with a monthly and weekly timeframe, to be able to identify the primary trend.

Only then can you go to analyze graphs daily or with a lower timeframe.

Murphy recommends always analyzing the long-term trend, even if you prefer to operate in the short term because, in this way, you can still follow the primary trend in your short-term operations.

 

2) Spot the trend and go with it:

Once the trend has been identified, it will be up to the trader to follow it.

Murphy recommends trading following the current trend, obviously using the timeframe chart that best suits your trading style.

For example, if you trade in the short term, you will necessarily need daily or intra-day charts; conversely, if you do so in the medium term, the weekly charts will be the best. However, always remember to look at the trend even in the long term, to get a better idea of ​ ​the general price movements.

 

3) Find the low and high of it:

Always find the levels of support and resistance of a trend.

This is Murphy’s third law, which recommends drawing levels of support and resistance on the graph.

These levels make it possible to understand how the market reacted when prices reached these levels.

A level of support is a value around which prices have failed to fall further; conversely, a level of resistance is a value around which prices have been unable to go also.

Murphy says the best time to buy is when prices touch support, while the best time to sell is when prices touch a resistance.

 

4) Know-how far to backtrack:

Always measure retraction percentages.

Each trend can retrace, or return “on its feet”: in this case, an upward trend can have a downward retraction, just as a downward trend can have an upward reversal.

These “corrections” can be measured as a percentage: normally a retraction equal to 50% of the current trend is customary.

On the other hand, a minimum retraction is equal to 1/3 of the trend, while a maximum reversal is equal to 2/3 of the trend. Fibonacci’s retracements at the levels of 38% and 62% should also be observed during these trend corrections.

 

5) Draw the line:

Always design the trending lines. Trend lines are one of the most accessible and most useful tools to apply when it comes to analyzing charts.

A trend line is a line that follows the trend.

To draw a trend line of an upward trend, you must bring a range between two consecutive lows of the upward trend; instead, as regards the trend line of a downward trend, you must draw a line between two successive lows of the downward trend.

Remember that a trend line to be valid must be “touched” at least three times by price movement: several times, the trend line is “tested” (i.e., touched) by prices, the more robust this trend line is.

Prices tend to move within the trend delimited by the trend line: if they emerge, it can be a sign of reversal of the pattern.

 

john murphy new book

 

6) Follow that average:

Follow the moving averages. Murphy considers moving averages as one of the best technical indicators for tracking trends in markets, which are used to receive trading signals (buy or sell).

Combinations of moving averages are also often used together, such as moving average at four periods and nine periods; moving average at nine periods and 18 periods; moving average at five periods and 20 periods.

When the moving average with the shortest period cuts the moving average upwards with the most extended period, we get an upward signal; conversely, if the short-term one cuts the long-term one downwards, we get a downward signal.

A moving average of 40 periods is also often used: when prices cut it downwards, a downward signal is obtained; when prices cut it upwards, an upward signal is obtained.

7) Learn the turns:

Check the oscillators. The oscillators serve to identify the moments of overbought and oversold markets, while the moving averages serve to confirm the directions of the current trend.

Oscillators, on the other hand, allow us to identify potential phases of trend reversal so that we know in advance when a trend has reached its natural end and is about to change direction.

One of the most commonly used oscillators is the RSI oscillator, which above values of 70 indicate a phase of overbought, while values ​ ​ below 30 indicate a phase of oversold.

Another oscillator instead is the Stochastic oscillator, which, if it has values ​ ​ above 80, signal a phase of overbought, while with values ​ ​ below 20 a phase of oversold.

 

8) Know the warning signs:

Use the MACD indicator. Murphy recommends using other technical analysis indicators to confirm the signals obtained from moving averages and oscillators such as RSI and Stochastic.

Among these, Murphy indicates the MACD indicator, which today is one of the most commonly used technical indicators by traders.

The MACD combines moving averages cuts with the identification of overbought/oversold phases typical of oscillators.

 

9) Trend or not a trend:

Use the ADX flag. Murphy also recommends the use of the ADX indicator, which allows us to understand if we are in the presence of a strong trend or a weak trend, and therefore of a side market phase.

When the ADX line is increasing, then it indicates the presence of a trend; when the ADX line is decreasing, then it suggests the absence of a strong trend and the beginning of a potential lateral market phase.

If there is a trend, it is good to use moving averages; if there is a side phase, it is good to use oscillators.

 

10) Know the confirming signs:

Don’t ignore the volumes. The volume can undoubtedly be used to confirm the trend of a trend. Murphy warns that any trend should be verified by the presence of high volumes of trade.

In case volumes are decreasing during a trend, then we can get a signal of a potential reversal of the current trend because a decrease in exchange volumes indicates the exhaustion of the current trend.

 

Conclusions on Murphy’s Ten Laws of Technical Analysis

Murphy concludes his ten laws with an eleventh law, plus some advice and good luck, where he states that a trader must always continue to study and learn new topics.

Only through study and practice will it be possible to know in depth the technical analysis and how to make the best use of it in daily online trading.

We also recommend the same, as we have always done: online trading requires time and patience, even consistency in the application.

 

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John Murphy Wikipedia

 

 

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My name is Luca. I grew up in Italy. I have a degree in law and I’m an independent trader since 2007. I’m a systematic trader and sometimes, I trade using options strategies with US ETFs and Stocks.I have built hundreds of automated trading systems and indicators for TradeStation, MultiCharts and MetaTrader.I started this blog in 2017 to share what I learned in the financial market.

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