John Murphy is an icon of technical analysis and a talented book writer. This article is a collection of his recommendations to new traders.
1. Map the trend
The trend is not always easy to spot. Sometimes you have to find it using various technical analysis tools. What may seem like a flat movement in the short run can turn out to be a trend in the long-run. Even if you trade on shorter time frames, it may be beneficial to understand the general picture and act accordingly. This method can also help when getting rid of the price noise.
2. Draw the line
As soon as you determine the trend direction, mark the trend with a support/resistance line or two (the so-called price corridor). The line should connect the dots on the price chart. A downtrend is a series of lows that get lower as the time passes. An uptrend, on the contrary, is a collection of highs that get higher with time. By connecting them you will get a clear picture and will find the navigation on the price chart to be more comfortable.
3. Use moving averages
A moving average (MA) is a simple technical analysis tool that can provide a lot of information to an experienced trader. It is capable of determining the trend direction (in case it is not clear from the chart). A moving average can also help you find optimal entry and exit points. Not to be used on its own, it can always come in handy.
4. Follow the trend
According to Murphy, trend is your #1 friend. Most traders do not go against it, they follow it. However, you have to decide on what time frame you are trading before engaging in the deal. Make sure that you do not make a short-term entry based on the long-term trend.
5. Find support and resistance
Support and resistance levels are key technical analysis concepts. For some time, support acts as a lower boundary for the price action. The resistance, in turn, is the upper threshold the price is not supposed to exceed. When the asset price goes above the resistance, the area could act as a new support level.
These tips should not be treated as laws you can’t and shouldn’t brake. Rather, it is a collection of valuable tips that will help you better understand the markets and, if applied correctly, improve your trading strategy.
