Technical Analysis John Murphy Flashcards
Market action is what three things?
Price, volume, and open interest (applies to futures and options only)
What philosophy is TA based on what three things?
Market action discounts everything (means it takes into account everything at the time) - Price moves in trends - history repeats itself
The most up to date comprehensive source of information is the price and how it’s moving, as it has taken everything into account, as opposed to looking at news sources peace meal for example
The price tells you what’s really happening the market
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Why do we chart?
To identify trends, nothing more - its trend following. Chart is based on the fact humans are creatures of habit and so the strategies they employ via bots or directly will have cyclical natures and so trends to be exploited.
Why is technical analysis great?
It can be used on any stock or futures, it’s a skill that scales. Crypto, bonds and others for example.
TA can forecast economies
For example the direction of commodities can forecast inflation and indicate a strong economy.
Futures can be different
Some futures contracts expire after 18 months - this causes challenges for forecasting.
Moving average on S&P 500 is what for the market?
It’s an indicator of the overall health of the market.
TA isn’t much use with commodities
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Why learn? To take advantage of next cycle, protect family pension and parents
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Dow index is what for the market?
Leading barometer for market activity
Dow saw three types of trend
Primary trend (1-8 years), secondary trend (1-3 months) these are correction on the primary trend (around 50% usually) , minor trends last less than 3 weeks - a trend isn’t the high water mark, but rather the direction of the successive waves. Once a trend reveres
Major trend phases
Accumulation (informed buying by astute investors), public participation phase (when technical trend followers join, news around stock or sector gets bullish), distribution phase (news very bullish, astute investors start to unload)
Dow - “and increase in volume must confirm a trend” -
For an uptrend volume goes up as price rises and volume down as it reverses. In a downtrend volume goes up as it drops and volume is down as price rises
What’s a good what to confirm a trend
Looking at price action and volume to see if they confirm each other (there are some good volume indicators for this)
How long do trends last?
They last until they’ve given definite signals they’ll reverse, MAs and resistance levels as well as trend lines assist in spotting this. The odds are usually on the trend continuing
Secondary corrections of primary trends or a primary trend moving in the other direction can be confused
Dow theory in general misses 20-25% of the move before generating a signal many think this is too slow
Always trade the trend
The trend if your friend
Trends have 3 directions
Upward, downward, sideways (for more than a third of the time markets are flat / sideways)
What trend does the market spend most of its time in
The sideways trend (trend less chop) - staying out of the market when it’s going sideways is generally the best approach
The amount of trading in a given support area can be determined in 3 ways
Time spent there, volume, how recently the trade took place
How to identity support/resistance as strong
- The more time trading spends in the support/resistance area the significant the area becomes.
How to identity support/resistance as strong
Volume is another way to measure if support/resistance is a significant area
How to identity support/resistance as strong
How recently the trading took place in the support / resistance congestion level also indicates if this will be a key level, an FTA as Nils mentions. )
Support resistance flips
The strong the resistance or support - if it flips, it’s just as strong when reversed
What % of breach of support or resistance means it has been flipped?
This is very subjective, but some Chartists say 3%, for short term / smaller time frames can be 1%
Areas of support?
Recent FTA, first trouble areas, and whole numbers something as well, or 10,25 50 and so on, but looking at recent congestion and FTA is the best indicator
Where to place stops and buy and sell orders?
Avoid FTA / liquidity pools and obvious round numbers where there’s a congestion of trades (stop hunting hedge funds will grab these), round numbers for example
What’s a trend line?
A line that touched the highs or the lows in recent rally’s or drops, see image take Dec 7th
Difference between tentative and valid trendline
Valid = line touching 3 peaks or troughs, tentative = touching only 2
Why are trend lines useful?
They can advise the extremness of any trend, and assist in indicating when the trend may be over. Trend lines can also be support and resistance areas if the trend line isn’t violated. If a trend line is broken this can signal a reversal.
What can make a trendline especially strong
When it’s been tested multiple times, 5,10 or more, or consistent for a few months
Where should trend lines be drawn? Closing price, or under or over high or low of the day?
It’s the high or low of the day, this accounts for ALL price action not just the closing price
Minor intr-day breach of trend line
These can often be ignore but there’s not hard or fast rule.)
What’s a significant break from a trendline
A close behind the trend line, but be wary of whipsaws stop hunting, closing 3% plus the wrong side of a trend line can be a good signal of a trend reversal ANOTHER is the trend line being broken for 2 consecutive days, a 1-3% break can also be needed here
How are broken trend lines like broken support and resistance?
Once broken they flip for trend line support to resistance or vice versa - this is why projecting trend lines into the future is important quite far out as it’s surprising how often OLD trend lines come into pay as FTA
What’s a strong indicator of a reversal? And Fan trend line
Note How 3 trend line breaks is key. The number 3 is very prominent throughout technical analysis. See 3 images 7th Dec. Trend lines keep getting broken with FAN -
What number is prominent throughout technical analysis?
The Number 3, 3 trend line breaks, 3 of certain things used in head and shoulders Elliot wave and dow, triple top and so on)
Trendline steepness?
45 degrees can be normal, if it’s very steep a break can be seen as a return to normality, if the trend line is quite flat it’s not a strong indicator of a trend, not to be trusted - SEE IMAGE 4.137th Dec photo of trend line adjustment
What’s a channel trendline (hint, randing)
Image 4.16 in photos
Certain indicators work better than others in areas so MA, trend lines and others, need to have a few tools in the tool box
What are buy the dip retracement areas? They are generally 33-50% from resistance, if 66% is breached this often means a trend reversal - see image 4.20 7th Dec
Fib levels can sometimes be useful indicators of support levels when price is falling, when a line is broken often is falls to the next line
Two types of price patter
Reversal and continuation - confirming when is what is important, using volume has a deciding factor can be very effective when used to with price data
What are indicators of a reversal?
Trend needs to exist, usually a trend line is broken first, topping patterns are usually shorter in duration and more volatile in bottoms, bottoms have small price changes and take longer to build. Volume is more important on the upside
Skipped the head and shoulders section
What are double tops
Why a correction returns to the high then a true reversal begins
Image 5.5a in photos
5.5b
Does TA appear in the chart perfectly
The patterns are often some degree from the exact pattern we are looking for
Saucers, what are they and what can the mean
5.8
What is a V spike?
5.9
What’s the difference between reversal and continuation patterns aside from the obvious
Reversal usually take much longer to play out when reversing a major trend. Continuations are much shorter in duration
Reasons to trade
All the smartest people I know practice this discipline and it’ll spill over into the rest of my life. Maltin, Nils, Geertz, Charly
Reasons to trade
The financial freedom will allow me to add value in other places and provide for family and parents
What are the 3 types of triangles?
Ascending (bullish), descending (bearish), symmetrical (usually is a pause and then continuation, could go either way) - triangles
Photo 6.1a
Why must trade
Will allow me gather skills to surpass in this cycle what I did in the last cycle,
How to learn
Scribing, speaking to Nils, get into his pod discord even, and use twitter’s he has assembled
For triangle continuation when does this usually occur?
When looking at a triangle, generally from 2/3 to 3/4 between the start of the triangle an it’s point forming is where this happens
Photo 6.1 with red notes
Volume and triangles
When breaching a trendline or resuming an uptrend volume should see a spike, for a down trend this can happen but less so
Ascending triangles are usually what?
Bullish more often than not
Triangles are used over which time frames?
Intermediate - so 1-3 months time frames really, not more
Flag and Pennant usually good signs of continuation
6.6 photo
Trading rectangles / ranges can be very efficient (generally look at these if 1-3 month ranges)
Trade it as it ranges with stops on the other side of the liquidity pool, and can switch direction if range is broken. The last trade once the range is broken is exited immediately
6.9
Head and shoulders example
6.11
6.11 C
How to learn trading
Scribe, brainscape and look at charts daily for 60 minutes at least
One approach to trading
Test out snap shooting, like when in a forest, make super quick decisions, stops overthinking. Less than 30 seconds, or less than 5, try different time periods
Volumes in futures behave a bit differently
Interest also i futures acts differently
Trade this cycle well to set me up to mail the next company
Best volume indicator is OBV - on balance volume - just eye balling is it’s not enough often
Best to use OBV on days the trend is clear or is can be misleading
BlowOffs - selling climaxes
Often there’s an initial duo then return to top, like a double too
Put / Call Ratios skipped
Studying weekly longer trend can assist / don’t ignore it
Tell no one outside crypto profits, including loozen, Just Nils, pearl and harry don’t mention stuff, or to parents
What sequence should you study charts in
Start with long terms charts, monthly or weeks, then move to daily to identify assets moving in the right direction - go back as far as 20 years, look for proximity to major support lines and resistance levels - look at 20 years on the monthly, then 5 years on the weeks, then the last 9 months on the daily - a Macro to Micro approach
8.6
What are MA envelopes
These help determine what % the price has gotten away from the MA and maybe is over extended - for stocks on short term traders, using 21 SMA for example. 3% above is enough to signal overextension, for long range 5% for 10 week long trade or 10% for 40 wk avg - these envelopes are a little like bollinger bands
9.8
Bollinger bands - how to use ?
Use upper and lower as price targets for either a long or a short . How are bollinger bands different from envelopes, bollinger bands account for volatility
9.9
When MAs don’t work
When it’s choppy they are useless. Trending is usually 30-50% of the time depending on the time frame
4 week rule looks interesting, but skipped section
When MAs don’t work in chop, switch to Oscillators )
What do oscillators do?
They alert traders to overbought or oversold periods - good for chop periods, can also be used for trend as a supporting indicator not a primary signal – at the beginning of moves oscillators can be misleading
Why are oscillators useful
One price reaches top or bottom of the band this can indicate the price is overbought or oversold and so a reversal can come
10.1
Which oscillator indicator periods to use?
Generals the 5, 10 or 40 days depending on how you are trading / the time period you want to look at / move / reversal you are looking for
Oscillators need a bit more work from me, need to watch YouTube video on them to demo what going above and below zero really means
You can construct them out of moving averages
RSI
Over 70 is considered over bought and under 30 oversold
We can look at trendlines on the RSI also
Stochastics K%D do more reading
Williams %R - do research later
Principle of contrary opinion - this is more a psycho-analysis than a techincal analysis
When the vast majority of people are highly bullish, or highly bearsih, they are generally wrong. We must determine what the majority are doing and then act in the opposite direction.
Example - of 80-90% of the market is highly bullish, they will already have bought in, where is the buy pressure going to come from to fulfill this bullish idea (it’s not there, so a reveral occurs)
Contrarian signs? If over 90% are bullish, this indicates a correction, if only 20% of below bullish, a rise may be due
Over 75% bullish or under 25% are also warning signs
Generally, wait for change in price action to confirm the trend change
Signal of overbought
If the market doesn’t react to bullish news and is overbought, this means a reversal could be due
This works in the reverse also
What’s a general rule?
Trade the trend, don’t trade in the opposite direction of the trend, or predict it turning, wait for it to happen and be confirmed, then get in, catching the meat of the move is what matters, not catching the top or bottom.
Japanese candle stick patterns - skipped this section
Elliot wave theory
Didn’t learn in detail, in short, 5 points forming 3 waves make up eliot wave theory
figure 13.1
Correct beliefs + going of gut with correct beliefs on it produces trading results, this is what Educo is, get beliefs onto guy, then trade through life effortlessly.
There are cycles on everything, and the market is cyclical. There’s a salmon abundance cycle, a sun spot cycle, an international battle occurrence cycle, and there will always be a market cycle
Real estate cycle is about 18 years according to some, and stocks 9.2 years according some
Types of cycles
Long term (2+ yrs), seasonal (1 yr), primary / intermediate (9-26 weeks), trading cycle (4 weeks), a trading cycle breaks down into two shorter cycles of two weeks, alpha and beta
How
How long is a trading cycle
4 weeks, with 2 two week cycles, alpha and beta
How to fund and use cycles?
The enrlich cycle forecaster tool is available on some charts, always trade the trend, go with the cycle - commodities have clear cycles, with wheat being around Harvest time for example, there are 100s of thosuands if not more of identifiable cycles
Interesting cycles
Nov to Jan is the strongest 3 months for the stock market, Feb is weaker then March and April strong June is soft then july strong - September is the weakest month
Interesting cycles
January can be seen as a bellwether for the year, according to “Hirsch”, “as January goes, so goes the year”.
Cycles and trends are not the same things, MAs are great for tracking trends, Oscillators are great for tracking cycles
John Elhere MESA tool allows for the measurement of cycles
A comprehensive list of tools and indicators put into groups
Pick one or two you’re happy with from Basic tools, and go with them, you can use Fib and cycle tools as secondary inputs if you have an interest in them
Picture taken 9th December
Important needs repeating
Welles Parabolic SAR system is very good for trend following, but useless in sideways chop
Can be used on monthly or weekly time frame, (daily I don’t know), trends occur about 30% of the time
15.2
How to know if the market is trending or in chop?
The DMI and ADX tools are useful indicators if we are in chop or trend. Can identify trend markets to use MAs on, or use oscillators or other tools for non trending markets
Pros and cons of mechanical based trading system (an example is the 50 SMA long short for example)
Pros - more discipline and consistency / Cons - most only work in trend following and no profitable otherwise
Simple rules
Never more than 15% in one trade, don’t have more than 50% of net worth in stocks / crypto
Futures risk to reward
The best futures traders only make money on 40% of their trades, a 3-to-1 payout is a commonly used risk reward target for futures traders
Great maximum for losses and gains
Let winners run and cut losses - practically how to do this? Have two types of trade, and trending trade and trading trade, trending ones have loose stops that don’t get hit by stop hunting / whipsawing, trading stops mean you take money off the table if the market becomes less certain, a closer stop. This flexibility makes a big different when trading, have two different accounts perhaps.
What to do after a winning streak and losing streak
The worst time to double down is at the end of a winning streak - peaks and troughs in every traders career,
Strong indicators of change
Breaking trend lines, support and resistance levels tell us a lot
Retracements for adding
40-60% changes usually provide good opportunity for retracements
Gaps on the chart?
This can be areas of support and resistance
Money management GUIDELINES
Best ones - trade in direction of trend, don’t take financial media too seriously.
See list on 9th dev picture
EMH lol
See two images
9th dec - screen shot on ChatOpenAI, and picture of page
What’s a good way to identify a strong area of support or resistance
Identifying a liquidity pool essentially
- If a lot of trading has occurred in that area
Longer it trades there the more significant the level
- Round or significant numbers
- Sometimes fibs when market is dropping
- How recently there was trading there
- Was there a lot of volume at a certain level
What’s a trend line that’s too steep and what could it do next
What’s a trend line that’s too flat and what could it do next
Examples of bearish and bullish rectangles
Bearish at top
Bullish at bottom
Bullish pennant
