Technical trading by John Murphy (2)

As explained in section (1), John Murphy prefer direction of price movement or trend in applying technical analysis. Once we identify the direction of the trend generally so gained the perspective of price movements in the long term, the following its preliminary steps:

2. Know and follow the direction of the current trend of
Observe the pattern of price movements and and specify the direction of the trend. Uptrend occurs when the lowest price level (valleys) is higher than the level of the Valley before, and the highest price level (peak) is also higher than the previous peak level. Otherwise a pattern of price movements is called downtrend when the levels of the Valley and the peak level is lower than the peaks and valleys. The trend in the market, there are three types: the trend of long term, medium term and short term.


Specify in advance you will be trading at a middle or long term, short term. Use the appropriate trading time frame. If you like trading on the medium, use the chart weekly and daily chart. If you are trader daily, at least you use daily chart beside the chart's 4-hour or lower.

In each time frame you choose, should always be compared to the chart on the higher time frame so as to determine the direction of long-term trends as a reference. For timing the opening position trading, you could use a lower time frame. John Murphy suggested that buy at the lowest price level for an uptrend, and sell at the highest price level for downtrend.

3. Determine the level of the lowest and the highest level of
After determining the direction of the trend, then determine the level of support and resistance. The most fitting to open a buy position is at a level close to the level of support. In contrast to open a sell position preferably at a level approaching the resistance level. If the peak level of resistance has been penetrated (break), then typically the reverse direction of the Valley level (correction) is the closest to a new support level, and the downtrend as the line resistance change as the line support. The previous peak level into a new Valley level, and vice versa for the support level that had penetrated the Valley level, before becoming its new peak levels.



4. Identify when a trend will turn around the direction of
I need to know the difference between a retracement and reversal. The meaning of both is the same that is the reversal of the direction of price movements, but retracement are corrections to the direction of the primary trend remains the same, being reversal is the direction of the major trend reversals. Retracement which occurred in long-term time frame could mean the reversal on a lower time frame. Good retracement or reversal there are limits or size, usually expressed in a percentage of the overall level limits (range) prices on the main trend.

In the real market is indeed always the case retracement and reversal as outlined in the Elliot wave theory (Elliott wave). You can determine the percentage of correction with a simple, usually 50% of the price range on the main trend, with a minimum of one-third (33.3%) and a maximum of two-thirds (66.7%) of the price range of the main trend. Retracement rule Foibonacci a very popular stated retracement levels always occur at 38.2%, 50% and 38.4% of the price range of the main trend. When the retracement on the uptrend, John Murphy recommends that if you want to open a buy position preferably on an area between 33%-38% of the price range of the main trend.

5. Draw trend lines on important points the direction of price movement of
important points the direction of price movement is at least a 2 point uptrend support, and for downtrend at least 2 point resistance. Uptrend lines drawn by connecting the 2 nearest support point and the line drawn by connecting the downtrend 2 point resistance

. Trend line is the most technical analysis tool is simple but effective. Usually the trend lines are difficult to penetrate, and the trend line can be considered quite valid when it is touched by a minimal price movement as much as 3 times. The more long a trend line and the more frequently tested, it will be more powerful and important. The trend line has been penetrated (break) usually hinted at the impending reversal of the direction of the trend.