Technical Analysis: Insights from John Murphy’s Masterpiece

Technical Analysis and Analyzing is an integral part of capital market activity. Without understanding the technical analysis of the capital market and fundamental analysis, I can’t hope for the profitability of investments and even worse, I can’t save the capital, cheer up!

in this part, we go to the book “Technical Analysis of the Financial Markets” by “John Murphy” and follow his talks on this type of analysis. If you are a big fan of fundamental analysis or if you want to get more information from technical analysis, stay with us until the end of this story.

What is technical analysis?

Having a deep understanding of what technical analysis of the capital market is, is the key to being able to do it. If we don’t know what we’re talking about, we won’t have the strength to be creative. The main philosophy of technical analysis is based on three principles:

• The performance of the market shows itself on the prices
• Prices move according to trends
• History repeats itself

Let’s examine these three sections together:

Everything affects prices Proponents of technical analysis believe that market prices are not only related to corporate issues. Rather, this story is for the geographical, political, cultural impact, the way of movement and buying and selling of the market giants, psychological issues, national events, global adventures, etc. All these things together represent what we call “share price”.

The purpose of price tracking is to discover the trend and predict the direction of movement
Technical analysts study prices with the aim of discovering the hidden trend behind them and predicting its future state. Otherwise, following trends or even discovering them will be a waste of time, effort, and even capital.

History repeats itself again; You just have to look carefully
Technical analysts are very interested in studying the history of the capital market. They even compare the graphs of a few decades or a century ago with the current graphs. The hidden point in this review is to discover the psychological decisions of investors and the results they have produced.

Fundamental and technical analysts

Two ways to look at the same story You might think to yourself that fundamental and technical analysts are different from earth to heaven; Because one deals with small numbers and the other seeks to discover the hidden story behind the rise and fall of prices.

But according to John Murphy, the author of the book “Technical Analysis of the Capital Market”, these two types of analysis are just two different ways of looking at the same story; nothing more The fundamental analyst looks for the reason for the price change, but the technical analyst looks at the outcome.

Both of these analysts seek to discover the same thing: “to discover where the current trend is moving and where it is going to take in the future.” That is why many top analysts try to find a hand on fire in both types of analysis instead of drawing a line between fundamental and technical analysis. Because this can change the extent of their view of the capital market.

What are the advantages of technical analysis?

To better understand the technical analysis of the capital market, let’s examine some of its advantages together:

• High flexibility

There is no time or area in business that you cannot use technical analysis to investigate. From the oil market in the last 100 to the digital currency market at this very moment, there are areas that you can take under the microscope of “Technical analysis” without limits.

• Wide view of the market

Technical analysis examines the whole market instead of looking through a special lens. Because of this, he gets the ability to spot the trend and predict its next move much easier than other analysts.

• The ability to follow the active parts of the market

Markets are always fluctuating between active and inactive periods. When a technical analyst examines the market, he can distinguish between active and inactive trends. Then, instead of trial and error, invest your capital on the active parts of the market and do not consider inactive or dying trends. This means the ability to step with the pulse of the market!

• Traders of different time frames can also use it

It doesn’t matter what time frame you trade; Daily, weekly, short term, medium term or even long term. Because you can take full advantage of the technical analysis of the capital market without any restrictions to take the next step.

• Discovering the strengths and weaknesses of the market

Technical analysts can predict the increase or decrease in the price of various products or services in the market with high accuracy

What is the trend and what are its types?

In simple words, trends show the direction of price movement in the markets. We need to understand and analyze trends because markets do not always move in a fixed direction. If you take a look at various stock market charts, you will see that instead of a straight line going up or down, they are a series of irregular zigzag lines. In fact, it is the movement direction of the peaks and valleys of these zigzags that shows us the main trend of the market. All trends are divided into three main categories:

• upward trend : The direction of this trend is upward.
• downward trend : The direction of this trend is downward.
• Neutral process : It is also called the “trading range”, which is closest to the straight line. In this situation, supply and demand are in approximate balance.

A look at how trends are categorized by size

Besides “direction of movement”, trends are also divided by size. At first, the number of these divisions may be a bit confusing, but it helps in understanding and technical analysis of the capital market. In this story, the trends fall into three categories:

• major trends Sometimes this process takes a long time; For example, half a century or even a century!
• Average trends They include time between big and short trends. Maybe a few months, a few weeks or a few years.
• Short trends The time frame of these trends is very short. Anything from a few minutes to a few hours.

Get to know the six fundamental principles of Dow theory

“Dow” and his partner “Jones” are one of the founders of fundamental changes in the technical analysis of the capital market. The Dow theory of the average of the stocks of the top listed companies is still one of the main ones used by analysts. In the following, we will become more familiar with six of Dow’s theories:

1. Averages cover everything:
   Averages are a snapshot of what happened in the market. All the ups and downs, big and small events or even things that are not directly related to the market – like natural disasters – can also leave their mark on these averages.

2. The market struggles with three trends:
   Dow likens the movement of trends in the market to the movement of waves in the sea and considers their impact on the market as the impact of waves on the beach. When it is an upward trend, it still hits the shore with strength despite the fluctuations; But if there is an event in the midst of its fluctuations that cannot reach the high price before the fluctuation, then it should no longer be considered a bullish wave because it starts a downward trend.

Overall, Dow has broken down each trend into three smaller trends:

• First: flow
  In general, they show the upward or downward trend. They are long-term and may even last for several years.
• Second: waves
  They are introduced as completers of the face of currents. These trends evolve between a few weeks and up to 3 months.
• Third: uneven surfaces
  It shows small but impactful trends. Usually these processes last less than a few weeks.

Every big trend consists of three parts

In this story, three major groups of traders enter the game.

The first group are large and highly professional investors, a significant part of whom use technical analysis of the capital market. They discover high value and low price stocks and buy them while the market is still asleep.

After some time, the second group enters the game, which we can consider including fundamental analysts and professional traders. After buying this group, everyone’s attention will be drawn towards those stocks.

Now it is the turn of the third group, namely newspapers and economic media. With their analyzes and shows, they light the fire under the price of those undervalued and undiscovered shares and bring them to the top. Upon reaching this stage, very professional investors start the next step; It means selling the same shares when everyone is looking to buy.

Indicators must have consistent signals

According to Dow’s opinion, the averages even in different time frames should provide signals confirming each other’s decreasing or increasing trends. The shorter the time frame, the stronger the confirmation of the trend flow.

The volume should also be in line with the trend

Dow believed that in addition to the indicators, the volume of transactions should also be in line with the trends; For example, in upward trends, when the prices increase, the volume also increases and vice versa.

Trends continue to move in their current direction until warnings are received

This opinion is based on Newton’s first law, which says: “Objects in their natural state tend to remain in their current state, either at rest or in motion, unless manipulated by an external force.” It goes on forever.”

Dow believed that this law also holds true for trends; That is, an upward trend tends to continue its upward trend without the presence of an external factor. This story will continue until the warnings of the change in the trend and the presence of the changing agent are not released. Of course, finding this type of trend is difficult without the use of tools.

What does a Japanese candlestick show?

The Japanese have been using their own special method of chart analysis for many years. Of course, this method is not very old for the West and it can even be said that it is very young compared to the Japanese. Now the real question is, what were the Japanese looking for in the candlestick pattern? In response, we must say that candlestick patterns are nothing but a snapshot of the trader’s mental state during trading! Examining candlestick patterns shows that despite our claims, we humans show repetitive behavior when we are in similar situations. Let’s take a look at some of the characteristics of candlestick patterns:

• They can be one line or a combination of several lines.
• 90% of the time, the number of lines does not exceed 5 numbers.
• They use them to mark reversal points in the market.
• Candlestick patterns are also called “reversal patterns” and “continuation”.
• There is little chance that they will use them to determine trends and flows

What was the main message of “John Murphy” in the book “Technical Analysis of the Financial Markets”?

John Murphy, who has more than 30 years of experience in analysis and direct activity in the capital market, sought to clarify the story of technical analysis for people interested in this topic in his book.

He started his explanations from the most basic things and raised them to a good level. In his opinion, knowing about technical analysis is very useful for all investors, whether they are looking for the same type of analysis or those who only work on fundamental analy

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