Book of the Month – “Technical Analysis of the Financial Markets” by John J. Murphy

Book of the Month - “Technical Analysis of the Financial Markets” by John J. Murphy

Book of the Month - “Technical Analysis of the Financial Markets” by John J. Murphy

Our review of what many consider the “Bible” of technical analysis

Although there are books with more statistical analysis on how indicators are built and how they perform, this particular one remains a favourite among all readers who are looking for a understandable description of what technical analysis in trading is.

In this expanded edition (although it can seem a bit dated at times) we truly have all the bases covered for what technical analysis, what the thinking behind it is and it’s packed with examples.

It has a well laid out content and arrangement and for many it doubles up as a reference book long after they’ve read it for the first time.

The chapters cover charting, identifying trends, key patterns and behaviours of different instruments, moving averages, oscillators, cycles, etc. These act as the building blocks of the technical analysis, but the mortar that makes it all click is the way the author serves the information to the reader. There is no bias towards a specific indicator or style based on one of them. The language is clear and although it doesn’t lack its fair share of terminology things don’t get too deep into particularities that are hard to understand and make the more inexperienced switch off.

Explanations about how markets interact between each other, as well as the distinction between which indicators are suitable for markets that are trending and markets that are in a range, would be of great help to traders that have limited time. Money management and other aspects of trading that aren’t directly related with technical analysis are also touched upon, adding even more credibility to the overall message.

We can’t find many faults with the book, but keep in mind that it employs examples that suit its purposes and wouldn’t show cases that wouldn’t add value to the content itself. Intuition and experience still have a role to play for those that have studied the book and mixed with the excellent foundation provided here, that is what leads to building a solid trading style.

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7 Tips on How to Use Technical Indicators

7 Tips on How to Use Technical Indicators

7 Tips on How to Use Technical Indicators

How experienced traders apply them

After we introduced technical indicators and analysis the next logical step was to expand on them. Not because they are incorrect or incomplete, but because they only give you the tools for using indicators without necessarily showing you how to use them. These seven tips give insight into what experience has taught many a trader.

Pick the right indicator

Base your decision on our previous articles, as some indicators are not suited to reflect and predict certain instruments. Some are more volatile, others take time to react to changing conditions and some indicators can’t catch these differences. The devil is in the detail.

2. Visually confirm if the indicator works

This means looking at the movement on the chart and comparing it with what the indicator shows. If they do resemble or correlate with each other (depending on their visualisation) then that can be the foundation of a beautiful relationship. But if they are clearly not related, then you can go to step three on this list or back to step one.

3. Adjust the values of indicators

To make better use of an indicator, just like any piece of equipment, tweaking it to better suit the task at hand is recommended. Study the variables of the indicator you’ve chosen and adjust them to better reflect the behaviour of an instrument and the conditions in which it’s operating. It might turn out that it wasn’t tuned properly.

4. Keep the basics in mind

Support and resistance and trends are powerful allies in technical analysis. They have proven to be some of the most reliable tools that can be employed during trading and can show if an indicator is reliable in general, or only for some signals, or only in certain conditions. They are ideally suited for confirming signals based on the calculations that define the indicators. An indicator can be good when it says when to follow a trend, but not for short-term movements in the opposite direction.

5. Two is company, three’s a crowd

Quite true when it comes to working with technical indicators. You simply don’t need more than two at a time. If you rely on more indicators the usual effect is that they act as filters that stack up on each other, giving you a smaller number of trades to make. You can even get opposing signals for when to buy or sell.

6. Indicators around (major) news events need extra attention

These are times of heightened volatility when emotions can take over the markets. Things might eventually turn around, but for a certain period fear and greed might overcome a trend or what a solid indicator is showing.

Other traders actually use the indicators as predictors of directions before the events, relying fully on the principle that emotions should be excluded from trading and often acting contrary to popular opinion and sentiment.

7. Patience

Once you start using the levels of an indicator as your entry and exit signals, it’s a different trading experience. Initially traders feel more secure, more relaxed, as the responsibility for making the trade has shifted elsewhere. But then comes the harder part – seeing it through if things don’t go your way. Waiting for the exit signal, which might come either sooner or later than expected, is a familiar challenge for traders that rely on the news or fundamentals, but here it requires a new mindset. As you are effectively trading within a framework, the best thing would be to see it out and adjust accordingly if your initial plan wasn’t so good, but not before that.

Do you have other tips for using technical indicators? Any questions about this list? Let us know in the comments and we’ll get back to you.