John Murphy is a mentor in the hearts of domestic technical analysis enthusiasts. He has published several best-selling books on technical analysis, and his "Technical Analysis of Futures Markets" is regarded as the "Bible" of technical analysis in China. Today, the editor introduces John Murphy's trading rules, hoping to be helpful to both speculators and investors.

Assess the overall trend

Study long-term charts. Start with monthly and weekly charts with a time span of several years for chart analysis. A longer time span can provide greater visibility and a better long-term perspective of a market.

After understanding the long-term trend, we can analyze daily and intraday charts. Short-term market analysis alone is often deceptive. Even if you only trade short-term, trading in the direction of the medium-term and long-term trends will increase your success rate.

Identify and follow the trend

Identify the trend and follow it. There are several sizes of market trends - long-term, medium-term, and short-term. First, decide which type of trading you want to do, then choose the appropriate chart. Determine which direction of the trend you are trading in. If the trend is up, buy on the pullback. If the trend is down, sell short on the rebound.

Advertisement

If you are trading medium-term trends, use daily and weekly charts. If you are an intraday trader, use daily and intraday charts. But in any case, you should use longer-term charts to determine the trend, and then use shorter-term charts to choose the entry and exit points.

Find highs and lows

Find support and resistance levels. The best place to buy is near the support level, which is often a previous low. The best place to sell short is near the resistance level, which is usually a previous high. After a resistance high is broken, it often provides support for future pullbacks. In other words, the old "high" becomes the new "low".By the same token, when a support level is breached, it often becomes a future selling point for a rebound — the old "low point" can turn into a new "high point."

Understanding the extent of the pullback

Measure the percentage of the pullback trend. The market often retraces a significant portion of the original trend when it corrects up or down. You can estimate the pullback against the existing trend with simple percentages. A 50% pullback of the previous trend is the most common.

The smallest pullback is usually one-third of the previous trend. The largest pullback is usually two-thirds. The 38% and 62% Fibonacci retracement levels are also worth paying attention to. Therefore, during the pullback process of an upward trend, the first buying point should be in the 33-38% retracement area.

Drawing trend lines

Draw trend lines. Trend lines are one of the simplest and most effective graphical analysis tools. All you need is a ruler and two points on the chart. An upward trend line is drawn by connecting two consecutive lows, while a downward trend line is drawn by connecting two consecutive highs.

Prices usually pull back to the trend line and then continue the upward trend. A breakthrough in the trend line is often a signal of a trend change. An effective trend line should be touched at least three times. The longer the effective time of the trend line and the more times it is tested, the more important it is.

Knowing the warning signals

Use the MACD indicator. The Moving Average Convergence Divergence (MACD) indicator combines the moving average crossover system with the overbought/oversold function of the oscillator.

A buy signal occurs when the fast line crosses the slow line from below and both lines are below zero; a sell signal occurs when the fast line crosses the slow line from above and both lines are above zero. Signals on the weekly chart take precedence over those on the daily chart. The MACD histogram reflects the difference between the two lines and can issue an earlier warning signal of a trend change.Trend or Consolidation

Utilize the ADX Indicator. The Average Directional Index (ADX) can assist in determining whether a market is in a clear trend or experiencing a consolidation phase. It measures the strength of the trend or the direction of the market.

An upward trend in ADX indicates a strong trend, while a downward trend suggests a consolidation market without a clear direction. When ADX is rising, it is advisable to use it in conjunction with moving averages; when ADX is falling, it is preferable to use it with oscillators. By observing the direction of the ADX line, traders can decide on the trading style to adopt and which indicators are most suitable for the current market environment.

Understanding Confirmation Signals

Include volume and open interest. In the market, volume and open interest are important confirmation signals. Volume precedes price.

We must ascertain that an increase in volume occurs in the direction of the dominant trend. In an uptrend, increased volume should occur on days when prices rise. Open interest can confirm whether new funds support the existing trend. A decrease in open interest is usually a warning signal that the trend is nearing its end. A solid upward price trend should be supported by an increase in volume and an increase in open interest.