Technical Analysis of the Futures Markets:

Transcription

1 Technical Analysis of the Futures Markets: A Comprehensive Quide to Trading Methods and Applications John J. Murphy New York Institute of Finance A Prentice-Hall Company

2 Introduction, xiii Acknowledgments, xix 1 Philosophy of Technical Analysis, 1 INTRODUCTION, I 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

3 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 vi

4 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, 11I FINDING A PRICE OBJECTIVE, III THE INVERSE HEAD AND SHOULDERS, II3 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, 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 vii

5 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, 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 SUMMARYOF 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, 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 viii

6 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, 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, 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 ix

7 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, 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 X

8 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, 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 xi

9 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 OPTION1 529 WHY PURCHASE AN OPTION INSTEAD OF A FUTURES CONTRACT? 530 HOW OPTIONS AND FUTURES CAN BE USED TOGETHER, 531 WHAT 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 Bibliography, 548 Index, 552 xii