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Visual analysis allows an investor to explore the behavior of a stock or an industry group of the stock market without resorting to complex mathematical formulas and technical concepts. On the contrary, with its help, only by the price movement, you can quickly and easily determine whether the alignment of the fundamental characteristics of a particular stock: bullish or bearish. According to Murphy, the main thing in visual analysis is the ability to distinguish between when a stock is rising and when it is falling, and not to explain why it behaves the way it does: Knowing the reason for the movement of the stock is, of course, interesting, but only the picture, the simple line, matters. on the chart. A visual investor does not bypass the difficulties in working with charts, which facilitates their practical development. The author gives a broad overview of all the main sections of technical analysis from various types of charts and market indicators to sectoral analysis and global investing. Using real examples and clear graphs, you will learn how to: conduct...

Description	Year	Price	book type
Visual analysis allows an investor to explore the behavior of a stock or an industry group of the stock market without resorting to complex mathematical formulas and technical concepts. On the contrary, with its help… - SmartBook, Euro, (format: 70x100/16, 326 pages)	2010	896	paper book
From the publisher: About visual investment and various methods of graphical analysis. The author shows how to read charts that help make investment decisions, how to determine the direction ... - (format: 70x100/16 (~170x240 mm), 328pp. (graphics) p.)	2012	574	paper book
326 pp. Visual analysis allows an investor to examine the behavior of a stock or stock market group. Edition for investors, traders. A visual investor does not bypass the difficulties in his work ... - SmartBook, (format: 70x100 / 16, 328 pages)	2010	896	paper book
326 pp. Visual analysis allows an investor to examine the behavior of a stock or stock market group. Edition for investors, traders. A visual investor does not bypass the difficulties in his work ... - DIAGRAM, (format: 70x100 / 16, 328 pages)	2004	896	paper book
This is the second edition of the bestselling book by one of the world's most famous market analysts, John Murphy. It has been completely updated in accordance with the current market realities. The book introduces… - Alpina Digital, e-book	2012	459	eBook

Reviews about the book:

This book tells how to use technical analysis in the stock market. If compared with others, it covers in more detail almost all the technical analysis tools that most traders use.

Blanar Vyacheslav 0

The book is only for novice traders who do not have the slightest idea about the concept of "technical analysis". It is written badly: there are ambiguous and incomprehensible places in the text (I don’t know if this is the translator’s or the author’s flaws), and the “Indicators” section is generally written very badly: the author did not even bother to give exhaustive explanations of how to interpret the readings of the indicators - after reading questions remain. The desire for abbreviation did not lead to good: the author ran through the tops, without delving into the essence and not delving into "concepts that are too complicated for non-specialists." The style of presentation is tongue-tied and superficial. No matter how much I tried to see the author's approach in the book, I could not, probably because the author does not have it - after all, he is not a trader. His whole "method" is to collect as many indicators as possible and try to snatch money here and there: "The best way to increase the value of any indicator is to combine it with another indicator", "The most important thing for a visual investor is to know which group of indicators choose in this or that case", "Combining indicators always gives an advantage", etc. The whole book is full of such nonsense, which has nothing to do with successful trading on the stock exchange. Translation and editing to match the content - there are even typos on the cover. In general, the book is a complete misery and an example of a careless attitude to business, written, obviously, with the aim of making money on naive newcomers. Bottom line - I do not advise reading, it is better to take a good book for beginners. In conclusion, I will give one quote: "Simplicity leads to discipline. To be successful, a trader must choose a small number of markets and a small set of tools and master them well." A. Elder.

Excellent book for beginners. I can't imagine how to explain the main postulates of graphical and technical analysis as simply and concisely as possible. The first two sections are quite enough to start a competent analysis of charts. Previously, I thought that the first book for beginners should be "Secrets of Stock Trading". So, this book should be the second. Advanced users are unlikely to find something new here. The third section is devoted to intermarket analysis. THOSE. the relationship between the movement of prices of shares, bonds, interest rates, raw currencies. I have not seen this information in other books. Very curious and helpful. Well, in the end, a lot of recommendations are given for investing in various mutual funds. Methods for choosing the most attractive mutual funds at the moment, recommendations for choosing the moments of entry and exit are given. The book contains a huge amount of graphic material showing in detail everything that is described. In general, the book, no doubt, will be useful to novice traders and everyone involved in investing in mutual funds.

Alexey 0

Foreword

It may come as a surprise, but I never imagined myself as a writer. I have always thought of myself as a market analyst who writes about what he sees on the charts. I was lucky, and I have achieved some success in both areas. My first book, Technical Analysis of the Futures Markets, which many call the bible of technical analysis, has been translated into half a dozen foreign languages. Its second edition, in addition to the new title "Technical Analysis of the Financial Markets" (Prentice Hall, 1999), had a wider scope and considered all financial markets. Another book of mine is Intermarket Technical Analysis (John Wiley & Sons, 1991), which is considered a milestone because it was the first to focus on the relationship between financial markets and asset classes. The second edition of this book, Intermarket Analysis, did not see the light of day until 12 years later.

It was decided to call this book "Visual Investor" for two reasons. The fact is that in my market commentary on TV, I show pictures of the market in much the same way that a meteorologist shows his weather maps. This is a classic visual representation. There is no point in calling it anything else. Among other things, the term “technical analysis” scares many people. Even I don't fully understand what it means. So we decided to replace it with a term that accurately reflects the essence of the matter, in order to attract the attention of more people to this valuable form of market analysis, without overloading it with unnecessary technical baggage and jargon.

I started naming my occupation visual analysis also in order not to scare the TV producers, who seemed to shy away from my subject matter, even though TV is a visual medium by definition. These days, no serious show is complete without a schedule, but producers are somehow reluctant to invite those who really know how to interpret schedules. They try to find out what this or that chart means from economists, securities analysts and even TV commentators. But for some reason, they don’t want to ask certified technical analysts (professional technical analysts now have diplomas). Perhaps they are afraid that the answer will be "too technical" for them or for the audience. Or maybe it’s also because now you don’t have to watch TV to find out which markets are rising and which are falling. One of the goals of this second edition is to convince you that you are capable of doing visual analysis of various financial markets on your own. And it's not as difficult as it might seem.

Most market veterans come to one thing over the years: they begin to simplify their work. To some extent, this may be due to the fact that as we age, energy leaves us. Personally, I prefer to think that the desire for simplification is a manifestation of experience, as well as, hopefully, maturity and wisdom. Early in my career as a technical analyst 40 years ago, I used to work through (and try to apply) every technical tool and theory that came my way. Believe me, there were a lot of them. I have studied and tried just about everything. And there was something of value in every method. When the study of intermarket interactions captured me and forced me to include all financial markets from around the world in my field of vision, there was simply no time left for a deep analysis of the charts for each of them (especially with the use of analytical programs that include up to 80 technical indicators). And then I realized that this is not necessary. In fact, you just need to determine which markets are growing and which are not. Yes, it's really that simple.

I usually scan hundreds of financial markets in a day. To do this, I do not have to look at every chart. We now have screening tools (which I'll talk about later) that help us quickly identify which markets are up and which are down. In the stock market, for example, one can tell at a glance the strongest market sectors and industry groups from the weakest on any given day. After that, you can find out which stocks make their group rise or fall. And only when we determine the leaders (or trailing behind), we should move on to the charts. The same can be done with foreign stocks, and indeed with any other financial market, such as the market for bonds, commodities or currencies. The internet makes things a lot easier.

One of the positives of scanning multiple markets is that it allows me to see the big picture. Since all financial markets are interconnected in one way or another, it is very useful to have an idea of the main trend. A rise in stock prices is usually accompanied by a fall in bond prices. A fall in the dollar usually coincides with an increase in the prices of commodities and related stocks. Strong foreign markets usually signal an increase in the US market and vice versa. The strength of the stock market is usually favorable for economic-sensitive groups of stocks, such as stocks of technology and transport companies. In a sluggish market, "defensive" groups, such as FMCG and medical stocks, tend to outperform. No market operates in a vacuum. Traders who only focus on a few markets are missing out on valuable information. By the time you finish reading this book, you will have a better understanding of the significance of the big picture.

The second edition of The Visual Investor has the same structure as the first. I tried very hard not to complicate the material and chose only those indicators that I considered the most useful. If you can tell a rise from a fall by looking at a chart, then you should have no problem understanding the methods of visual analysis. Knowing why the market rises or falls is interesting, but not necessary. The media is full of people who will tell you why they think this is happening. But in practice it doesn't matter. There are also plenty of people in the media who tell how the markets should behave. What matters, however, is how the markets actually behave. Visual analysis is the best way to understand this. That is what this book is about.

As you master the principles of visual analysis, you will gain confidence. You may find that you don't have to listen to all these analysts and economists who like to speculate about why the market behaved the way it did yesterday (even though they didn't know it themselves or didn't bother to tell the day before yesterday). You will begin to realize that all these financial "experts" really have nothing worth saying. Suffice it to recall all those experts who in 2007 did not see the mortgage bubble inflating until it burst. Or those experts who assured us in the summer of 2007 that this subprime mortgage mess was not that serious. Even the Board of Governors of the Federal Reserve System harped on in the second half of 2007 that the economy was in great shape and inflation was tightly controlled. And while they were talking about it, the stock market and the US dollar were falling, and the prices of bonds and commodities were rising - the classic stagflation formula. By mid-2008, the Fed was admitting that it was trying to prop up a failing US economy while raising inflation at the same time. It took these experts seven months to see what the markets had been talking about from the very beginning. That is why we prefer to watch the markets rather than listen to experts.

When I first started writing about the principles of intermarket interaction more than a decade ago, applying many strategies was not easy. Commodities, for example, have been the most profitable asset class over the past five years. In the past, the only opportunity to play on this was the futures markets. The advent of exchange-traded funds (ETFs) has made it much easier for the average investor to access commodities. ETFs have made it easier to trade in other sectors as well, making foreign stocks available. I'll show you how ETFs have made life easier for the visual investor.

From the very beginning I decided to make this book " visual." I wanted to show "pictures" of the market that speak for themselves. Therefore, you will find numerous graphics in the book. I selected them from the freshest market sources. These are not some idealized textbook examples, but living illustrations of the principles of visual analysis in the current market conditions. I hope they are well chosen. Remember that the only question you need to constantly ask yourself is: "Where is the market that I study going, up or down?" If you can answer it, everything will be ok.

John Murphy

June 2008

Thanks

In the first edition of this book, I recommended that investors purchase chart analysis software and connect to an online information service if they want to do visual analysis. Thanks to the growth of the Internet resources, now you just need to find a good analytical website. In other words, all you need is to register on the website and start chart analysis. One such site is StockCharts.com As the chief technical analyst (and co-owner) of this award-winning site, I have a lot to say in its favor. Needless to say, I am very proud of the result. All charts (and visual tools) in this book are borrowed from there. I would like to thank Chip Anderson, President of StockCharts.com, for allowing me to do this. I would also like to thank Mike Kivowitz of Leafygreen.info for his help with the artwork. More information about StockCharts.com can be found at the end of the book. This is a good place to start doing visual analysis.

Part I. Introduction

Traders and investors have been using the visual approach to investing for over a century. Until the last decade, visual analysis as a serious method of trading and investing was largely the lot of specialists and professional traders. Most successful traders simply won't trade without looking at the charts first. Even the Federal Reserve Board now uses price charts.

What changed

For a long time, the world of visual trading was closed to the average investor. Frightening jargon and complex formulas repelled non-professionals and did not enter into their circle of interests. However, two very important changes have taken place in the last decade. First of all, inexpensive personal computers and analytical Internet services appeared. Today's investors have an impressive array of technical and visual tools that even professionals did not have 30 years ago.

The second change is associated with a significant expansion of the industry mutual funds, which is now more than stocks listed on the New York Stock Exchange. This phenomenal growth has brought both benefits and challenges to ordinary investors. The problem now is choosing the right mutual fund. In other words, the growth in the number of mutual funds has made life very difficult for the individual investor, although they were created specifically for simplification investment. If a person didn't have the time or experience to pick stocks, they could leave the task to a mutual fund manager. In addition to professional management, the fund provided him with diversification. Previously, by purchasing one fund, an investor got access to the entire market. Now, mutual funds are so segmented that he's lost in the plethora of options. In the past decade, exchange-traded funds (ETFs) have taken the place of many mutual funds.

Fund categories

Domestic equity funds are classified by purpose and style of operation as funds aggressive growth(aggressive growth), growth(growth), growth and income(growth and income) and share income(equity income). Funds are also divided by the level of market capitalization of the stocks included in their portfolios. Large cap equity funds(large-cap stock funds) are limited to stocks included in the Standard & Poor's 500 index. Mid-Cap Equity Funds(midsize funds) work with stocks included in the S&P 400 Mid-Cap and Wilshire Mid-Cap 750 indices. Small-Cap Equity Funds(small-cap funds) form portfolios of stocks included in the Russel 2000 or S&P 600 Small-Cap indices. In addition, equity funds can be classified according to their specialization in different sectors of the stock market - such as technology, heavy industry, medical products, financial services, energy, precious metals And public utilities. Sectors, in turn, are divided into industries, handled by even more specialized funds. So, the technology sector includes funds with the following specialization: computers, defense and aerospace, communications, electronics, software, semiconductors, telecommunications. For example, the management company Fidelity Investments offers a choice of 40 funds specializing in various sectors.

Global Funds

Another direction is global investment. Now, in order to enter the market of other states or geographic regions, it is enough for an investor to choose a suitable stock fund. As a result, investors must keep an eye on market movements not only in the US, but throughout the world. Investing abroad carries a higher risk than in domestic markets, but the rewards more than pay for it. From 2003 to the end of 2007, the growth of foreign stocks exceeded that of US stocks more than twice.

In the same four years, emerging markets grew four times as much as the US market. Foreign investment allows you to diversify the portfolio of US stocks, which is why financial advisers recommend placing about a third of the portfolio abroad - to increase profitability and reduce risk.

Investor needs more information

Many investors have found funds alternative choice shares. However, the level of segmentation of this industry requires the investor to be more informed and actively involved in choosing the right fund. Investors need to know what is happening in different sectors of the US market, as well as in global markets. The breadth of choice available to the investor today is a double-edged sword.

The same applies to the technical advances of the last decade. The problem is how to choose and use the available resources. Technology has overtaken the public in its ability to effectively use new information. That is why the purpose of this book is to help the average investor quickly master visual trading and show how its relatively simple principles solve the problem of sector investing primarily through exchange-traded funds.

Pros of visual investing

The positive side of the growing specialization of funds is the unprecedented variety of investment instruments. For example, investors who prefer a particular sector of the market or industry, but do not want to engage in the selection of shares, can now purchase shares of the whole group. In addition, sector funds provide the investor with additional opportunities to diversify the main stock portfolio and more aggressively build up one or another part of it. That's when visual analysis comes in handy.

The tools covered in this book apply to any market or fund anywhere in the world. Thanks to the computer and the availability of price data, the procedure for monitoring and analyzing funds has become extremely simplified. The power of a personal computer can also be used to monitor portfolios, backtest buy and sell rules, scan charts for investment opportunities, and rank funds by their performance. Difficulties in mastering new technologies and their application to investing in funds and sectors, of course, remain - but there are also pluses. If you entered the market, then you are not afraid of these difficulties. This book will show you how to take advantage of the benefits.

book structure

The book consists of four parts. Part I explains what visual analysis is and how it fits in with more traditional forms of investment analysis. In addition, the key concept market trend and some visual tools for its identification are shown. You may be surprised to learn how useful some of the simple tools discussed in the first part. Throughout the book, special attention is paid to exchange-traded funds. ETFs have made asset allocation and sector rotation extremely easy.

Part II is dedicated to the most popular market indicators. Particular attention is paid concepts underlying indicators, as well as interpretation of indicators. I limited myself to only the most useful tools. Those wishing to delve deeper into the world of indicators can use the links to additional literature at the end of the book.

Part III introduces the idea market interconnections. This is especially important to understand why stock market investors should also keep an eye on commodity prices, bond prices, and the dollar. Intermarket Analysis also helps to understand the issues of asset allocation and rotation of sectors in the stock market. Along the way, you'll gain insight into how the Federal Reserve makes its policies. You will be following much of the same facilities as the Fed.

Part IV focuses on sectoral analysis. The role of analysis is emphasized relative strength in the selection process. Here are examples of the analysis of global markets.

In conclusion, I bring all of the above together and once again remind you of simplicity. The appendices provide guidance on how to get started and where to find valuable resources. It also introduces you to some of the popular techniques that can be incorporated into visual analysis.

Chapter 1. What is visual investing

It is said that it is better to show once than to say a thousand times. That's exactly what I'm trying to do. The book talks about how to make money by presenting market pictures. Everything is extremely simple: the stock either rises or falls. If it's growing and it's your stock, great. If it falls and this is also your action, it is bad. You can speculate as much as you like about where it should be going and why it is going in the wrong direction. You can talk about inflation, interest rates, profits and investor expectations. But in the end, the picture decides everything: is the stock going up or down? Understanding the reasons for a particular movement is interesting, but not necessary. When your stock goes up, no one will take your winnings from you, even if you don't know why it goes up. And when a stock goes down, knowing the reasons won't make it back. Only the picture is really important - a simple line on the chart. The secret of visual investing lies in the ability to distinguish between what is growing and what is falling. The purpose of this book is to help you see the differences.

What is meant by market analysis

As you read through this book, you will be introduced to a number of relatively simple visual tools to help you analyze the market and decide when to trade. Pay attention to the use of the term market analysis. For all its ambiguity, this book deals mainly with the visual analysis of financial markets using price and volume charts. An analysis of fundamentals such as expected returns and the state of the economy helps determine how must move promotion. Market analysis shows how it actually moves. These two approaches are very different from each other. The use of projected returns refers generally to fundamental analysis, and market analysis means graphic, or visual, analysis. Most investors are more familiar with the fundamental approach because they study it at universities or read about it in the press. Undoubtedly, in the long run, it is fundamental factors that determine in which direction a stock or group of stocks will move. The question is how to interpret this data and its impact on stocks.

Striving for combination

The fact is that most successful traders and fund managers use something in between visual and financial analysis. Recently, there has been a tendency to combine graphical and fundamental methods. Usage intermarket analysis, studying market relations(see Part III) further blur the line between these two approaches. In this book, I simply try to explain what the difference is and help the reader understand why a graphical (visual) approach should be part of any investment or trading decision.

What's in your name

visual analysis(also called graphic or technical analysis) involves studying the market itself. Price charts show the movement of individual stocks, industry groups, stock indices, bonds, as well as international, commodity and currency markets. You can perform a visual analysis of funds of various types. Many are afraid of the term technical analysis. As a result, they forgo a very valuable type of analysis. If you have the same problem just call it visual analysis because they are one and the same. Dictionaries define visual as "visible to the eye, visual", and technical - how"abstract, theoretical". But in this kind of analysis, believe me, there is nothing abstract or theoretical. It's amazing how many people who shy away from technical analysis successfully use price charts. They are more afraid of the name than the analysis itself. To make readers feel at ease, I will use the terms visual analysis, market analysis And graphic analysis.

Why study the market

Suppose an investor has funds that can be invested in the stock market. The first thing to determine is whether now is the right time for new investments in the market. If so, which sector of the market is the most suitable. The investor must study the market in order to make an informed decision. But how to accomplish this task?

You can read newspapers, study income statements, call a broker, subscribe to a financial publication, or register on a specialized website. Perhaps all of these options are suitable, but only as part of the process. Meanwhile, there is a faster and easier way: not to guess how the market should move, but to see how it actually moves. Start by studying the trends of the major stock indexes. Then look at the charts of the various sectors of the stock to see where they are going. Both can be done in a matter of minutes - just look at the corresponding graphs.

Graphic analysts are cheaters

Graphical analysis is somewhat of a hoax. After all, why does a stock go up or down? It rises because it has positive fundamentals, and falls because of negative fundamentals. At least that's how the market reacts to fundamentals. However, remember how many times have you seen a stock fall after positive news? Real news does not always matter, it is important what the market expects and what it thinks about this news.

Then why is graphical analysis a scam? Yes, because it is a truncated form of fundamental analysis. It allows a charting analyst to study a stock or industry group without doing everything a fundamental analyst should. How? Through an assessment of the nature of fundamental indicators, based only on the direction of price movement. If the market sees fundamentals as positive, it rewards the stock with growth. With a negative assessment of the fundamental indicators that determine the intrinsic value of the stock, the market punishes it with a decrease. A graphical analyst can only keep track of where the stock is going: up or down. It looks like a scam, but it really isn't. And there is just ingenuity.

It's all about supply and demand

The difference between the two approaches is most easily understood through the concepts demand And offers. According to a simple economic rule, if demand exceeds supply, prices rise. If supply exceeds demand, prices fall. This rule also applies to the markets for stocks, bonds, currencies and commodities. Yes, but how do you figure out what is demand and what is supply? After all, the ability to determine what is higher is, of course, the key to price prediction. But to really study for this purpose all the factors (both together and separately) that affect supply and demand is a laborious task. It is easier to judge by the signals of the prices themselves. If the price rises, then the demand is higher. If the price falls, then there seems to be more supply.

Just graphics faster

I got a great example of the difference between the two approaches early in my career as a market analyst. One day, the portfolio manager called me and the fundamental analyst into his office and gave both of them the same task: to analyze the historical price levels of a number of stocks that he was going to add to the company's investment portfolio. He needed to know at what level each stock was becoming overvalued and which stocks were closer to moderate and more buyable levels.

When I got back to my room, I pulled out a catalog of long-term charts with decades of price data for each stock. I have noted the highs and lows in the past and the stocks that have come closest to them. The task was completed on the same day.

However, my report lay on the table for two whole weeks - that's how much time it took for my fundamental partner to prepare the data. And when both reports were reviewed, our results - ironically - were broadly the same. He took into account all the fundamental factors in his analysis, including the price/earnings ratio and the like. I just looked at the charts. We got the same numbers, but I got two hours and he got two weeks. This allowed me to draw two conclusions. First, both approaches often give the same result, demonstrating their tremendous interchangeability. Secondly, the graphical approach is much faster and does not require deep knowledge of the stocks in question.

Charts look ahead

The market is always looking to the future. He - mechanism that takes everything into account. But why the market rises or falls is not always clear. And when the cause is still possible to find out, it often goes in the opposite direction. It is the tendency of markets to outperform fundamentals that explains most of the discrepancies in the results of the two approaches.

Charts don't lie

Since the market takes into account all the fundamentals, market analysis is just another form of fundamental analysis - more visual, if you will. When asked why the market is growing, I often answer that it has positive fundamentals. Sometimes I have no idea what they are, but I am always sure that a price increase signals a bullish view of the market on fundamentals. This is where the power of market analysis lies.

It also helps to understand why visual market research is such an important part of the investment process. This also implies that fundamental analysis should not be carried out in isolation. Market analysis can alert an investor to changes in supply and demand, which, in turn, will force him to evaluate fundamentals differently. Among other things, market analysis can serve as a measure or filter of fundamental valuations. In any case, the two approaches complement each other in many ways.

You can follow any set of pictures

One of the biggest strengths of the visual approach to market analysis is the ability to follow multiple markets at the same time and move into other investment environments. The investor can watch the markets around the world. You can easily keep an eye on the global markets for stocks and bonds, currencies, equity sectors, individual stocks, bonds and commodities. In addition, the principles of charting are applicable to any of these markets, even with little knowledge of their fundamentals. And this is far from a trifle, given the trend towards global investment and the problem of vast choice faced by the modern individual investor. But the beauty of the approach is that a reliable analysis of these markets can be done with literally a handful of visual tools.

The market is always right

Graphs work for two reasons. First, they show how the market evaluates the value of a given stock. You've probably heard the expression "don't fight the trend." If you are betting on a stock going up and it is going down, then you have misjudged it (or, as fortune tellers sometimes like to say, “hurried”). If you are shorting a stock and it is going up, then you are wrong again. The market gives us a daily report. Analysts sometimes say that the market is rising or falling unreasonably (usually they say this when they themselves made a mistake in predicting its movement). The market cannot move unreasonably - it does not happen. The market is always right. And synchronous movement with it depends only on ourselves. I have been told many times in my career that I was right - but by accident. Usually the one who made a mistake said so - but rightly so. I'd rather be right by chance than rightly wrong. And you?

It's all about the trend

The second reason why the chart works is because of the directional movement of the markets. Don't believe? Then take a look at the chart of the Dow Jones Industrial Average (Figure 1.1). If he doesn't convince, then buy yourself a falling stock. Then you will immediately feel a downtrend. The study of the trend is the essence of visual analysis. Therefore, further use of all tools and indicators will be aimed at one thing: identifying a stock or market trend - up or down. On fig. Figure 1.2 shows why it is so important to understand whether things are going up or down.

Doesn't the past always serve as a prologue?

According to critics of the charting approach, past prices cannot be used to predict future prices, and charts work because they are "self-fulfilling prophecies." Consider whether the first statement is reasonable: is it possible to make forecasts at all without relying on past data? Doesn't economic and financial forecasting involve studying the past? Think about it. After all, there is no such thing as future data. Any person has only historical data.

If you're interested in the question of self-fulfilling prophecy, watch a CNBC show where market analysts argue. They often interpret the same data in different ways, which happens with any other forecasting methods. I am often asked why charts work. But is the reason really that important? Isn't it enough that they actually work? Keep in mind that charts are nothing more than a visual history of a stock's market path. In fact, each of its movements is reflected in the price chart. Therefore, if these movements can be seen, they can be used.

Timing is everything

In the first chapter, I want to not only explain the differences between the visual approach and traditional forms of financial analysis, but also show how they can be combined. Let's consider the question of choosing the moment of time. Suppose, as a result of fundamental analysis, a stock is identified that is attractive for purchase. How to be? Just take it and buy it? What if the results of the analysis are correct, but the moment in time is not suitable for a purchase? In such cases, graphical analysis comes in handy: it will tell you when it is better to buy – immediately or later. Thus, it is quite easy to combine both approaches.

Summary

The purpose of this chapter is to present the philosophy of visual analysis and explain how and why it should be introduced into general analysis. The logic and simplicity of the visual approach is both impressive and convincing. At the same time, it is useful to at least begin to study this approach in order to understand its true value.

Consider the position of one who acts without any visual analysis. Imagine a driver driving a bus without looking ahead or in the rearview mirror. Another example is a surgeon who operates on a patient blindfolded or without first examining his x-ray. What about meteorologists? Find someone who would make a weather forecast without a map! All these people use visual tools. Yes, you yourself - would you really take up some business with your eyes closed? Or would you go on a trip without a map? Why, then, can you think about investing in a stock or mutual fund without first looking at the picture of their performance?

In the next chapter, we will begin to analyze the details of this picture.

Chapter 2. The trend is your friend

As mentioned at the beginning, markets move in a direction. They usually move in a certain direction - either up or down. However, there are periods when the markets go sideways, without a clear trend. This happens during periods of indecision. Lateral movement is often nothing more than a pause in an existing trend, after which it resumes. However, sometimes sideways movement signals a trend reversal. It is very important to distinguish one from the other. But first, let's say what a trend is, and formulate some rules for determining when it is in motion, when it can resume, and when it can reverse.

What is a trend

Since the primary task of visual analysis is to study the trend, it is necessary to explain what it is. Trend - it is, quite simply, the direction of the market. It should be understood that no market moves in a straight line. If you look at the stock bull market chart that began in 2003, it is easy to see periods of downward corrections and horizontal consolidation (see Figure 2.1). An uptrend is most often represented by a series of rising peaks (highs) and troughs (lows). As long as each subsequent peak or trough is higher than the previous ones, the uptrend remains unchanged (see Figure 2.2). Any failed attempt to break the previous high is an early signal that a trend reversal is possible. Any drop below the previous low is usually a confirmation of a reversal (see Figure 2.3). A downtrend is just a mirror image of an uptrend; it is characterized by a series of descending peaks and troughs (see Figure 2.4). We can talk about a reversal of the previous downtrend if the market managed to stay above the previous low and then broke through the previous high.

Support and resistance levels

Fortunately, these peaks and troughs have eloquent names (see Figure 2.5). support level called a minimum, or a trough that formed in the past. Analysts often say that prices bounce off support levels. By doing this, they usually mean the previous low reached last week, last month or year. Remember that the support level is always located below market. How the market behaves near the support level is very important. If it closes below support (breaks the support level), then the downtrend resumes. Price rebound from the support level (successful support level testing) is usually the first sign of bottoming out and the end of a downtrend.

resistance level name any previous peak. You've probably heard analysts speculating that "the market is approaching a resistance level." It is only about the price level at which the previous peak was formed. The ability of the market to exceed it is of great importance. If the market closes above the peak, then the uptrend will continue. If it rolls back from it, then this is a signal of a possible trend change (see Fig. 2.6). The resistance level represents a barrier above the market.

Role reversal

This is a market phenomenon that you should be aware of. After a significant breakout, support and resistance levels often reverse roles. In other words, a broken support level (previous bottom) becomes a resistance level above the market. In an uptrend, a broken resistance level (previous peak) usually becomes a new support level on subsequent market corrections. This is illustrated in Fig. 2.7. Market analysts are looking for a support level near the previous market peak. On fig. Figure 2.8 shows what usually happens in a downtrend. After the breakdown, the previous support level becomes a resistance level above the market.

The logic of such a change of roles is due to the psychology of the investor. If the previous low serves as a support level, then investors bought at this level. After a decisive breakdown of this level, investors see their mistake and usually seek to break even. In other words, they start selling where they bought before. The former support level becomes the resistance level. Investors who were selling near the previous peak on an uptrend, catch on at the sight of further growth and try to buy where they previously sold. The previous level of resistance becomes a new level of support when the market falls.

What is "short term" and "long term"

Many investors are confused by the concepts of "short-term" (short term) and "long-term" (long term), which are so easily operated by professionals. In fact, it is quite easy to make a distinction, but one must understand that there are many gradations of trends. Main trend(major trend), as the name implies, belongs to the category of large ones that last from six months to several years. When talking about the main trend of the stock market, analysts mean long term trend which is especially important for investors to remember. The main trend is also called the primary trend.

The next most important is secondary(secondary trend), or intermediate trend(intermediate trend). It usually means a correction of the main trend and can last one to six months. In other words, it is not long enough to be considered a major trend, but too long to be considered short-term. Trends of the third category - short-term(short-term trend), or small(minor trend). They are often a correction or consolidation lasting less than a month and lasting days or weeks. This is usually just a pause in an intermediate or main trend. Typically, short-term trends are more important to traders than to investors (see Figures 2.9 and 2.10).

Dividing market trends into three categories is an oversimplification. There are an infinite number of trends of any duration - from intraday, where the chart shows hourly changes, to 50-year, in which the trend is characterized by annual movements. But for simplicity and convenience, most analysts operate with variations on the three categories mentioned. Keep in mind that analysts may use different time frames when determining the significance of a trend. Some measure short-term trends in days, intermediate trends in months, and major ones in years. But the unit of measurement as such is not that important. Another thing is important: to understand the main difference between these three categories of trends.

For example, an analyst might consider a stock to be bullish but with short-term bearish moves. In other words, the most significant (major) trend will remain up, but a short-term downward retreat (often referred to as volatility). This situation can be assessed differently by market participants. It is possible that a short-term trader will sell a stock that is undergoing a downward correction in the market. A long-term investor may see a short-term correction in a major uptrend as a buying opportunity.

Daily, weekly and monthly charts

Assessing the current state of each trend is of great importance. Therefore, it is necessary to take price charts representing various trends. For a long-term perspective, you can start with monthly charts, reflecting the movement of the market for 10 years. To get a more detailed view of the main trend, it is recommended weekly charts for at least a five year period. Daily charts over the past year are needed to study short-term trends. Monthly and weekly charts are more suitable for determining the mood of the market - bullish or bearish, while daily charts are best for determining the moment of implementation of various trading strategies. The importance of using all three types of graphs is demonstrated in Figs. 2.11 and 2.12.

Recent and distant past

Time is very important in market analysis. In general, the longer a trend exists, the more significant it is. A five-day trend is clearly not as significant as a five-month or five-year trend. The same goes for support and resistance levels, as they characterize different categories of trends. A support or resistance level formed two weeks ago is not as important as a level formed two years ago. Usually, the earlier a support or resistance level is formed, the more significant it is. In addition, the more often a support or resistance level is tested, the more significant it becomes. Sometimes the market rolls back from the resistance level three or four times. It is clear that any subsequent breakthrough of this barrier will be much more significant. The number of tests of support or resistance levels is also important in determining price movement patterns, which will be discussed in the next chapter.

trend lines

Simple trend line is perhaps the most useful tool in studying market trends. I hasten to please readers: it is quite simple to build it. Chart analysts use trendlines to determine the angle of inclination and reversal moment. You can also draw horizontal trend lines on the chart, but most often we are talking about ascending or descending lines. Rising trend line carried out simply under successively rising lows of pullbacks. Downtrend Line held above successively lower market peaks. Markets often rise or fall at a certain angle. The trend line helps determine the magnitude of this angle.

After drawing a real trend line, you can see that markets often bounce off it several times. For example, during a rally, markets often return to and bounce off an ascending trendline. Retesting these lines usually creates excellent buying conditions (see Figure 2.13). In downtrends, the market often returns to the downtrend line, giving a chance to sell profitably. Analysts often call such phenomena support and resistance on trend lines.

How to draw a trend line

Most often, a trend line is built so that it covers all price movements. On a bar chart (where the price range is represented by a vertical bar), an ascending trend line is drawn across the lows of the bars. The descending trendline touches the highs of the bars. Some analysts prefer to connect only closing prices rather than individual price bars. When analyzing a long-term trend, the difference is small. When analyzing a short-term trend, I prefer to connect the upper and lower points of individual bars.

Two points are needed to draw a line. An ascending line can be drawn already when two troughs have appeared. However, it will not necessarily be valid trend line. The market must test and rebound from it for it to become valid. It is desirable that the market touches the trend line three times (however, it does not always take into account our desires and can only touch it twice). The more tests a trend line passes, the more significant it becomes. On fig. 2.14 three touches of the market of a descending trend line are shown.

Most analysts draw multiple lines on charts. Sometimes the original line turns out to be false; then you need to build a new line. Having not one, but several trend lines is also better because they characterize different trends: some are short-term, others are longer. As with trends themselves, long-term lines are more significant than short-term ones (see Figures 2.13 and 2.14).

Channel lines

Channel lines(channel lines) are easily plotted on price charts and often help identify support and resistance levels. Markets often move between two parallel trendlines, one of which is above price movements and the other is below. In a bear market, you first need to draw a normal downtrend line through two market peaks, then go to the bottom of the trough between them and draw a line parallel to the downtrend line. The result will be two downward trendlines, one of which will be above the price movement and the other (the channel line) will be below (see Figure 2.15). The stock often finds support at the lower channel line.

To draw an ascending channel (during a bull market), one must first draw a normal ascending trend line through two market lows. Then, moving to the peak between the two troughs, you should draw another ascending trend line (channel line), strictly parallel to the lower one. This will be the channel line above the normal uptrend line. It is helpful to know where the rising channel lines are, as markets often stop at this level.

While the price channel method doesn't always work, it's usually good to know where the channel lines are. A rise above the ascending channel line is a sign of market strength, while a fall below the descending line is a signal of market weakness. Some graphics services call channel lines parallel lines.

Percentage rollbacks of ⅓, ½ and ⅔

One of the simplest and most valuable patterns in market movement to be aware of is percentage rollback(percentage retracement). As stated earlier, markets do not usually move in a straight line. The movement occurs in a zigzag pattern, in the form of a series of peaks and troughs. Intermediate trends are corrections of major trends, and short-term trends are corrections of intermediate ones. Correction data (or retracements) usually push back the previous trend by a certain amount in percentage terms. Most famous 50% correction. A stock that has risen from 20 to 40 often pulls back about 10 points (50%) and then picks up again. Knowing this, an investor can plan to buy a stock when it has lost about half of its previous advance. In a downtrend, stocks often rally half the previous downtrend and then resume their decline. This propensity to correct by a certain percentage is valid for all trend categories.

Corrections by ⅓ and ⅔

Typically, the minimum amount of correction is 1/3 of the previous move. A rally from 30 to 60 is often followed by a 10 pip retracement (1/3 of a 30 pip advance). The propensity for a minimum pullback of this amount is especially valuable when choosing the moment to buy or sell. In an uptrend, an investor can predetermine a 1/3 retracement point and use that level to buy. In a downtrend, a 1/3 retracement can serve as a sell zone. Sometimes, with a strong correction, the market rolls back even further - by 2/3 of the previous movement. This level becomes very significant. With a strong retracement, the market rarely pulls back more than 2/3. This area becomes another effective support zone on the charts. If the market goes beyond 2/3, then most likely it will reverse completely.

Most charting programs allow the user to define correction levels on the chart. This is done in two ways. You can, for example, set (using the cursor) the beginning and end of the market movement, after which a plate will appear on the screen indicating the percentage levels of correction. Another way is to draw horizontal lines on the chart, indicating the percentage levels of correction. These correction lines serve as support levels in an uptrend and resistance levels in a downtrend. The user can set the desired percentage correction levels. The most commonly used levels are 38%, 50% and 62%.

Why 38% and 62%?

These two correction levels are derived from a numerical series formed from the so-called Fibonacci numbers. The series begins with the number 1, and each subsequent term is equal to the sum of the previous two (1 + 1 = 2; 1 + 2 = 3, etc.). The most commonly used Fibonacci numbers are: 1, 2, 3, 5, 8, 13, 21, 34, 55, and 89. Fibonacci ratios very important, especially 38% and 62%. Each Fibonacci number is approximately 62% of the next one (for example, 5/8 = 0.625), which is where the 62% retracement comes from. The 38% level is the reciprocal of 62 (100 − 62 = 38). Here, perhaps, is all you need to know at the moment about these numbers. They are very popular among professional traders and are widely used to determine the amount of a possible correction. On fig. 2.16 shows the use of correction lines at 38%, 50% and 62%.

Doubling and halving

This simple technique can be useful when you need to decide when to sell a rising stock or buy a falling one. You should think about selling at least part of the shares when the price doubles, and about buying when it falls twice. This technique is sometimes called bisection rule(cut in half rule), which is not equivalent to a 50% correction. At a 50% retracement, the stock loses half of its previous advance. With a 50% retracement of the market going from 50 to 100, it drops to 75. And the halving rule refers to when a stock loses half of its full value, which in our example means falling to 50.

Weekly reversals

Weekly reversal is another simple market model worth paying attention to. Weekly reversal up(upside weekly reversal) happens when the market falls; it is visible only on the weekly bar charts. A stock starts the week with strong selling and usually breaks through some support level. However, by the end of the week, it turns up sharply and closes above the previous week's range. The longer the weekly price column and the larger the trading volume, the more significant this reversal.

Weekly reversal down(downside weekly reversal) is the exact opposite of a reversal up. The week begins with a sharp rise in prices, and ends with a collapse. Usually this model alone is not enough to talk about a bearish chart, but it indicates the need to take a closer look at the situation and think about protective actions. The significance of weekly reversals increases if they occur near historical support or resistance levels. The daily version of the weekly reversal is called key reversal day(key reversal day). While daily reversals are significant, weekly reversals are much more significant.

Summary

The main goal of the visual trader is to recognize the market trend and understand when it is reversed. This is to take advantage of large uptrends and avoid large downtrends. There are different categories of trends. Main trend(usually lasting more than six months) characterizes the most important market movement. Intermediate trend(lasting from one to six months) characterizes less important movements, which are corrections of the main trend. Small trend(usually lasting less than a month) - the least significant of the three categories; it reflects short-term market fluctuations. This shorter trend is extremely important for the timing of transactions. To get an adequate picture of the market, it is necessary to observe all three categories of trends and therefore use daily, weekly and monthly charts.

Uptrend is a series of rising peaks (resistance) and troughs (support). downtrend is a series of lower peaks (resistance) and troughs (support). Resistance levels always located above the market. Support levels are always below market. trend lines- and they are drawn through peaks and troughs - are one of the simplest ways to assess market trends. Another useful trick is 50% correction. Corrections of 33%, 38% and 62% are also used. Doubling the price usually talking about overbought market. Price drop by half signals his oversold. The next chapter will show how trend lines, support and resistance levels, overlapping each other, form predictive price movement patterns.

Chapter 3

Having learned to recognize a trend, identify support and resistance levels, and plot a trend line, a visual investor can begin to look for patterns in price movement. Prices tend to form patterns, or patterns, that often foreshadow the direction of a stock. It is clear that it is necessary to distinguish between models that point only to interrupt primary trend, from models that speak of its approach reversal, and this needs to be learned. For an exhaustive analysis of any chart, it is important to take into account not only the price, but also the trading volume (trading activity). The following will show how to include graphical analysis and volume indicators. But first, a few words about the types of charts suitable for visual analysis.

Graph types

bar graph

In this chapter, we will limit ourselves to the most popular types of charts and start our discussion with bar charts. Daily bar chart(daily bar chart) represents the movement of the market for each day in the form of a vertical bar with horizontal bars: one to the left and the other to the right of the vertical bar (see Fig. 3.1). The vertical bar connects the high and low prices of the day and reflects the daily price range(price range) shares. A small horizontal line to the left of the column indicates opening price(opening price), and to the right of the column - closing price(closing price). Thus, the price bar indicates where the market opened (left dash), where it closed (right dash), and what the high and low of the day are (top and bottom of the vertical price bar). The weekly bar chart characterizes the price range of the entire week, with the left dash showing the opening price on Monday, and the right dash showing the closing price on Friday.

line graph

The most important price of the day is the closing price, as it reflects the market's final opinion of the stock's value for the day. When you turn on the evening news to see how your stock portfolio is doing, you get information about where the stock closed and how much its price has changed from the previous day. You are told that IBM stock, for example, closed at 110, 2 points lower than the previous day, or that the DJIA rose 10 points to close at 9000. For many analysts, it is the closing price that matters. As a rule, they use a simpler chart, where only closing prices are shown. It is a line connecting successive closing prices for each day. The result is a curve called line chart(line chart) (see Fig. 3.2).

Both types of charts are suitable for almost any kind of visual analysis. As discussed in the previous chapter, when analyzing long-term trends, the type of charts is not so important. But for shorter periods, most analysts prefer bar charts, which give a more complete picture of price action. The same applies to the analysis of trend lines. Thus, for short-term studies, in most cases, we will use bar charts, and for the study of long-term trends, both types of charts.

Japanese candles

This chart, which is the Japanese version of the bar chart, has become extremely popular in recent years. It uses the same price data as for the bar chart, i.e. open price, high, low and close price. However, candlesticks provide a better visualization of the data (see Figure 3.3). In Japanese candlesticks, a thin bar representing the range of daily prices is called a shadow. The thicker part of the candle, which is called body(real body), shows the difference between the opening and closing prices. If the closing price is higher than the opening price, the thick part of the candle is white. A white candle indicates a bullish move. If the closing price is lower than the opening price, the thick part is colored black. A black candle is considered bearish.

The Japanese attach great importance to the ratio of opening and closing prices. Japanese candlesticks are attractive in that they add another dimension to the information provided by the bar chart. It's not just the color of the candles that indicates the bearish or bullish nature of the market, but also their shape, which visualizes bullish or bearish patterns that are not visible on the bar chart. Among other things, all the methods of analyzing bar charts are applicable to Japanese candlesticks. For more information on Japanese candlesticks, see Appendix B.

Selecting the time scale

As discussed in the previous chapter, monthly and weekly charts are suitable for analyzing long-term trends, while daily charts are suitable for short-term ones. Intraday charts that reflect hourly price changes can also be used in short-term trading. In this case, it was about line and bar graphs. Japanese candlesticks are also time scalable: each candlestick can represent 1 hour, 1 day, 1 week or 1 month just like a bar on a bar chart. Daily line charts connect daily close prices, weekly line charts connect weekly close prices, and so on. ).

The basic rules of graphical analysis are the same for all time scales. In other words, the weekly chart is analyzed in the same way as the daily one. One of the tangible benefits that computer graphics analysis programs provide is the ability to instantly change time perspective, switching from daily charts to weekly charts and back again with the press of a single key. It is just as easy to move from a bar chart to a line chart or to Japanese candlesticks. Thus, the user needs to select the type of graph and the time scale. But the choice is not limited to this.

Scales

The most common price charts display two types of information: price and time. Time is counted horizontally: dates are plotted at the bottom of the graph from left to right. The price scale is located vertically, and prices are plotted on it from bottom to top in ascending order. Price data can be presented in two ways. The most commonly used linear, or arithmetic, scale. On a line chart, all price movements are displayed in the same way. Each 1 point increase is displayed in the same way as any other 1 point increase. A rise from 10 to 20 looks the same as a rise from 50 to 60. Each of them corresponds to 10 points and is represented by the same segment on the vertical scale. This scale is familiar to many. Another option is the logarithmic scale (see Figure 3.6).

logarithmic or semi-log graphs represent the price change not in absolute units, but in percentages. In other words, a rise from 10 to 20 looks much bigger than a rise from 50 to 60. The reason is that, in percentage terms, a rise from 50 to 60 is not as significant as a rise from 10 to 20. An investor who buys a stock at 10 and waits for it to grow to 20, doubles his capital: this is a profit of 100%. An investor who buys a stock at 50 and waits for it to rise to 60 makes a profit of only 20%, even though the stock rises 10 points in both cases. To demonstrate the same 100% growth as in the first case, the second stock must double in price, i.e. rise from 50 to 100 (by 100%). Therefore, on logarithmic graphs, an increase from 10 to 20 (100%) corresponds to the same segment as in the case of an increase from 50 to 100 (100%).

In general, the difference between the two types of scales is not so significant for short periods. Most traders use in these cases a more familiar arithmetic scale, which readers do not need to refuse. But for long-term charts, the differences can be significant. On a semi-log chart, the subsequent price increase looks insignificant compared to earlier moves. As a result, trend lines break much faster. But there is still no clear answer to the question of which method is better. In this book, most situations are illustrated on graphs with a simpler arithmetic scale. But for long-term evaluations, it is useful to use both scales, especially since the computer makes it easy to switch from one to the other.

Volume Analysis

Most price charts also show (at the bottom) a histogram trading volume. On a bar chart, for example, the vertical bars of the volume histogram at the bottom correspond to each price bar at the top (see Figure 3.7). It is clear that a higher volume corresponds to a higher bar, and a lower one, a shorter one. Looking at the chart, the analyst can easily determine which days (or weeks) the volume was the highest. This is important, since volume largely characterizes the strength or weakness of a trend. In general, when a stock rises, the buying pressure must exceed the selling pressure. In a strong uptrend, volume bars are usually higher when prices are rising and lower when prices are falling. In other words, volume confirms the trend. If the analyst sees that the pullback is on a higher volume than the increase, then this is an early signal of a loss of momentum. The general rule of thumb is: an increase in trading volume occurs when the price moves in the direction of the current trend.

Balance volume of Granville

This valuable indicator was first described by Joseph Granville in Granville's New Key to Stock Market. Profits, 1963. B balance volume(on-balance volume - OBV) is useful because it allows you to more visually represent the dynamics of trading volume and compare it with price movement (see Fig. 3.8). Volume growth should occur when the price moves in the direction of the existing trend. The Granville indicator helps to check if this is the situation. It is extremely easy to construct a balance volume curve. Each day the market closes higher or lower at a certain amount of trading activity. If the market closes higher, that day's total trading volume is positive and added to the previous day's volume. If the market falls, the volume is considered negative and is subtracted from the previous day's reading. On days when the market stands still, the volume line also remains the same. In other words, the balance sheet is the current cumulative (cumulative) indicator of positive and negative volume values.

Ultimately, the balance volume line acquires direction. If it goes up, it is considered bullish, i.e. trading volume increases on up days, not down days. A falling OBV line means that trading volume is higher on down days and is therefore considered bearish. Complementing the chart with an OBV line (below or right above the price curve) allows the analyst to see if the price and volume curves are in the same direction. If both curves move upwards in concert, the uptrend is stable. In this case, the volume confirms current trend. But if the price rises and the volume falls, then there is a negative discrepancy: it warns that the uptrend may change. The warning signal is precisely the divergence of the price and volume curves, i.e. their movement in opposite directions.

It is the direction of the OBV line that is important, not its quantitative indicators. The OBV values change depending on the reference point, i.e., on the period of observations. Focus on the trend, not the numbers. Computer programs will take care of them: they will calculate and build the OBV curve.

Graphic models

Reversal or continuation

Over the years of working with charts, technical analysts have identified many chart patterns (figures) that have predictive value. We will confine ourselves to a small group of the most recognizable and reliable models. Among reversal patterns(reversal patterns) three are most important: double top and double bottom(double top and bottom), triple top and triple bottom(triple top and bottom), head and shoulders and inverted head and shoulders(head and shoulders top and bottom). These patterns are fairly easy to see on a chart and if correctly identified, they can warn of a trend reversal. From continuation patterns(continuation patterns) we'll take triangle(triangle). When it is clearly visible on the chart, it usually means that the market is consolidating within the previous trend and is likely to return to it. That is why the triangle is called a continuation pattern. To recognize such patterns, you need to learn very little - to identify peaks (resistance levels) and troughs (support levels) and draw trend lines.

Volume

Volume is important when interpreting chart patterns. So, when a pattern is formed at the top, volume usually falls during takeoffs and rises during pullbacks. As for pullbacks in a downtrend, higher bars of volume correspond to a period of price growth, and lower bars correspond to a period of decline. High volume is a must for major breakouts, especially bullish ones. An uptrend breakout without a noticeable increase in trading activity in any market should be distrustful. On continuation patterns (such as a triangle), volume usually falls sharply, reflecting a period of indecision. Volume should rise noticeably after the pattern is completed and prices leave the previous trading range.

Balance volume

On-balance volume can be very useful when studying price patterns. Since sideways price movement usually reflects periods of indecision in the market, the analyst never knows for sure whether the stock he is interested in is turning or is simply in a state of waiting. And often the volume curve helps to answer this question, showing which direction the volume growth accompanies. Thanks to this, the analyst can determine at an earlier stage what is happening with the stock of interest to him: accumulation (purchase) or distribution (sale). The OBV curve very often leads the price movement (as in Figure 3.8). This is usually an early signal that they will move in the same direction. It is advisable to follow the OBV line, especially when studying price patterns: it will either confirm the accuracy of the picture on the price chart, or warn of its fallacy.

Double top and double bottom

The names of these models speak for themselves. Imagine an uptrend with a series of growing peaks and valleys. Each time a stock rises to a previous high, one of two things can happen: it either breaks it or it doesn't. If the market closes above the peak, then the uptrend resumes - and everything is in order. But if it fails to surpass the previous peak and begins to weaken, this is a wake-up call. Then, apparently, the analyst is dealing with a double top (at the beginning of the formation). A double top is nothing more than a chart with two large peaks at about the same level (see Figure 3.9).

Trading ranges

From the graph in Fig. Figure 3.10 shows why it is impossible to say unequivocally whether the pullback is the beginning of a double top or whether it is a simple swing near the previous resistance level. It is not uncommon for prices to move sideways for a period of time between a previous high and a low before continuing to rise. Usually lateral movement is called consolidation(consolidation), or trading range(trading range). But this is not enough for the formation of a real double top. The market should not only stop at the previous peak, but also fall, closing below the previous bottom. Thereafter, a succession of higher peaks and troughs is followed by lower peaks and troughs, resulting in a double top reversal pattern, also called model M(M pattern) because of its shape (see also Fig. 3.9).

We have described the double top, and the double bottom is just its mirror image. Double bottom occurs when the market makes two major lows at about the same price level and then closes above the previous high. This is how a new uptrend begins, especially on a high-volume upside breakout. In this case, graphical analysts also prefer to check the price action against the on-balance volume curve. Double bottom is also called model W(W pattern), (see fig. 3.11 and 3.12).

Triple top and triple bottom

It is clear that the triple top has not two, but three large peaks. It simply means that the period of sideways price movement lasts much longer. However, the interpretation remains the same. If the market that was up eventually closes at a new high, the uptrend resumes. But if the three major peaks are roughly at the same level, and the market breaks the low of the previous pullback, then a triple top reversal pattern is obtained (see Figure 3.13). triple bottom- this, of course, is three large troughs at about the same level and a subsequent break above the previous peak. The indicated names are quite eloquent, and the models are easily recognized. There are countless examples of such patterns in any market charting library. In general, “double top” and “double bottom” patterns are much more common than triple ones, although the latter are not uncommon. Another popular triple top and triple bottom variation is the reversal pattern. head and shoulders.

The head and shoulders model

You probably already understood that there is nothing super complicated in these price models and their names. The same applies to the inverted head and shoulders. In fact, this is a kind of triple bottom, since there are also three large lows here. The difference lies in the features of the formation of depressions. At a triple bottom, all three lows are located at approximately the same price level. The inverted head and shoulders are so named because one large low is in the middle (head) and two smaller lows (shoulders) are on the sides (see Figure 3.14). The model resembles a person standing on his head.

In an inverted head and shoulders pattern, a trend line (neck line) is drawn over two peaks located in the middle. After this line is broken upwards, the formation of the pattern is completed, which is a signal of a new uptrend.

The head and shoulders pattern is a mirror image of the inverted head and shoulders pattern (see Figure 3.15). This pattern has an average peak (head) slightly higher than the surrounding ones (shoulders). The trend line (neck line) is drawn below the two troughs located in the middle. Prices falling below this line signal the start of a new downtrend (see Figure 3.16).

When working with all the described reversal patterns, it is important to monitor the volume and look for confirmation of price movements. The balance volume line is especially valuable at the moment of formation or completion of patterns, when its direction must correspond to one or another price movement. Remember that higher volume weighs more on ups, not downs.

Measurement methods

Price patterns often predict how far the market will go. Their dimensions allow you to roughly determine the minimum distance that the market can travel after the pattern is completed. The rule of thumb for all three models considered is: the height of the model determines the potential of the market. In other words, you just need to measure the height of the sideways trading range and plot that distance from the breakout point in the direction of the breakout. If the height of a double or triple top is 20 pips, then prices are likely to fall at least 20 pips from the point where the low of the previous pullback was broken. For example, if the trading range is 50-70, the break down will reach the 30 level.

The measurement in case of head and shoulders is a bit more precise. On the head and shoulders pattern, the vertical distance from the high of the head to the neck line is subtracted from the level at which the neck line is broken down. On an inverted head and shoulders pattern, the vertical distance from the low of the head to the neckline is added to the point where prices exceed the neckline. Keep in mind, however, that these measurements are approximate and only provide a rough estimate of the minimum potential for a market move.

Graphical analysis at the service of the Fed

In the summer of 1995, central banks successfully intervened to support the US dollar. To some extent, the financial press explained this success by the fact that bankers applied some methods of graphical analysis to trading in the market. The seriousness of the Fed's Board of Governors about the charting approach was evidenced by the August 1995 issue of its bulletin entitled "Head and Shoulders Is Not Just a Fun Model" (C.L. Osier and P.H.K. Chang, Staff Report No. 4, Federal Reserve Bank of New York , August 1995). Personally, its authors pleasantly surprised me by the fact that they periodically referred to my first book "Technical Analysis of the Futures Markets" as a primary source. The bulletin's final conclusion was that when trading the foreign exchange markets, the head and shoulders pattern provided statistically and economically significant returns. And here is what it says in its introductory section:

As it turns out, technical analysis ... allows for statistically significant profits despite its inconsistency with the "efficient markets" principle that most economists adhere to.

Should we argue with the Fed?

Triangle

This model differs from those described earlier in that it is a trend continuation model. Education triangle is a signal that the market has gone too far and should consolidate for a while. After consolidation, it usually resumes movement in the same direction. Therefore, in an uptrend, a triangle is usually a bullish pattern, and in a downtrend, it is bearish. The triangle can have different shapes. Most often found symmetrical triangle(symmetrical triangle) (see Fig. 3.17). This figure is characterized by a gradually tapering lateral movement. The trend lines drawn along the peaks and troughs of the triangle converge, and each of the lines is usually tested at least twice, and more often three times. After going horizontally about 2/3 or 3/4 of the length of the triangle, the price usually breaks it in the direction of the previous trend. If the previous trend was up, then the market is likely to break out.

Ascending and descending triangles

These two versions of the triangle usually have a more pronounced predictive quality. When ascending triangle(ascending triangle) the line drawn along the upper border of the price range goes horizontally, and along the lower one it goes up (see Fig. 3.18). This is a bullish pattern. Descending triangle(descending triangle) has a horizontal bottom line and a descending top line; it refers to bearish patterns (see Figure 3.19). The completion of any of these three patterns is indicated by a powerful breakout of one of the trend lines (either up or down). In this case, the increase in volume is also important, especially on the upside breakout.

The distance that the market will travel after the completion of the triangle can be predetermined in many ways. The simplest of these is to measure the height of the widest part of the triangle (on the left) and plot it upwards from the breakout point on the right side of the triangle. As with the reversal patterns discussed above, the larger the vertical pattern (volatility), the higher the price potential.

The other method uses the horizontal size of the models. A model that is formed within two weeks is inferior in importance (and potential) to a model formed in two months or a year. All in all, the longer the period of formation of the model, the more significant it is.

Tic-tac-toe charts

Completing the list of chart types, one cannot fail to mention the Tic-Tac-Toe chart (or point-and-shoot chart), the main advantage of which is that it gives more accurate buy and sell signals. Price movements on such a chart are indicated by columns X and O. Column X reflects an increase in price, and column O indicates a decrease. A buy signal is a move when the last X column exceeds the previous X column. A sell signal is when the last O column falls below the previous O column. The user can change the cell size to adjust the sensitivity of the chart. A 0.5% box is more suitable for short-term trends, and 2% for longer-term trends (see Figure 3.20). Most investors may well be content with simply recognizing buy and sell signals. Chart analysts, however, identify price patterns on these charts. Appendix C provides more detailed information about them.

Programs for recognition of graphic patterns

Almost all of the technical indicators covered in this book are relatively objective (as you will see in Part II). A signal is either generated or not. Indicators, moreover, allow testing on historical data to determine their reliability and are very useful for creating objective trading systems. With regard to graphic models, however, this cannot be said. Recognizing price patterns is one of the most subjective aspects of visual analysis. Even now, the models are not amenable to objective computer analysis. To find a way out of this situation, I, together with Equis International engineers, developed a graphical pattern recognition program that can be used as a plug-in for the MetaStock graphical analysis program. The recognition program scans a library of stock charts and highlights those that may contain the most important patterns discussed in this chapter. It even gives price predictions after the pattern completes. More detailed information about this program and other visual analysis tools can be found in Appendix A at the end of the book.

End of introductory segment.

Murphy J. Technical analysis of futures markets. Per. from English. – M.: Alpina Publisher, 2011.

Murphy, J. Intermarket Technical Analysis: Trading Strategies for Global Equity, Bond, Commodity, and Currency Markets. Per. from English. - M .: Diagram, 2002.

Murphy J. Intermarket Analysis: Principles of Interaction of Financial Markets. Per. from English. – M.: Alpina Publisher, 2012.

Published with the assistance of the International Financial Holding FIBO Group, Ltd.

Translation V. Ionov

Editor A. Polovnikova

Corrector E. Smetannikova

Computer layout S. Novikov

Cover design Howard Roark Creative Bureau

Murphy J.

visual investor. How to identify market trends / John Murphy; Per. from English. - 2nd ed. – M.: Alpina Publisher, 2012.

ISBN 978-5-9614-2711-0

Dedicated to Claire and Brian

Foreword

Today, this author already has two successful publications in his inventory - "Intermarket Technical Analysis" and "Technical Analysis of Futures Markets", which put John Murphy among the most significant authorities in the field of market analysis. This time, a well-known author and popular TV presenter of a program about financial markets presented a comprehensive guide to visual analysis for the reader's judgment. Following the best traditions of previous projects, Murphy explains the terminology of the subject in the most accessible way, and then teaches the interested reader the intricacies of studying price and volume charts, which should serve to make optimal investor decisions and receive stable profits. The author pays close attention to the graphs of the status of mutual funds and their role in sectoral and global investment. The proposed visual analysis is clear and saves the potential user from complex mathematical calculations and technical terms. According to the author himself, the main goal of visual analysis is the ability to determine the "bullish" or "bearish" direction of the trend, and not to explain the reasons for the change in direction.

Occupation of John Murphy

Every well-known name in the field of investment is associated with people with some kind of strategy. For example, when talking about hedge funds, the name George Soros comes to mind. Peter Lynch is associated with mutual funds. And touching on the concept of "technical analysis", I recall the famous author and analyst John Murphy. He has successfully published several books on the subject and they are very popular today.

At the moment, 58-year-old Murphy leads two companies: MurphyMorris Inc. and MurphyMorris Money Management Corp. The first is a network resource based on technical analysis, and the second deals with money management.

Among several books published by Murphy, one of the most significant and popular is Technical Analysis of Financial Markets in 1999. Members of the Association of Market Technical Analysts actively use it in their practice. First published back in 1986, this book has been published in eight languages.

John Murphy is a weekly columnist for CNBC's financial news and a monthly talk show called Trading Week.

The beginning and development of Murphy's career

Murphy acquired his first skills in work in the second half of the 60s. At that time, technical analysis was charting with paper and pencil. In the 1970s, Murphy earned a bachelor's degree in economics and planned to build a career based on stock analysis. He began with a very modest position, which did not promise great prospects.

His specialization was "Master of Business Administration", obtained after two years of studying business, finance, accounting, management, marketing and real estate.

Describing his career, Murphy says that he never planned to become a technical analyst, but, on the contrary, aspired to be a securities analyst. But the unstable situation in the labor market at that time played a role. He was offered to become an assistant portfolio manager at CIT Financial Corporation, or rather, he needed a charting assistant.

At first, Murphy simply regarded this position as the beginning of a career in the company, but soon he became so carried away by the technical aspects of the market that he no longer thought about his previous plans.

Then Murphy studied all the books available at that time on this topic. However, as he himself admitted later, there were very few of them, today the number of specialized books is ten times greater.

Murphy got into the futures market only because of a combination of circumstances. Many were then left with papers in their hands when the market collapsed. According to Murphy, he was just lucky to be at the right time in the right place. During the 1970s, he worked mostly at Merrill Lynch, switching entirely to commodity markets. In particular, he was the head of the Technical Analysis Department. And it was then that interest in commodity markets began to grow.

Thus, the period of 1970 was marked by the rise of the futures market. At that time, many indicators were developed that gained popularity, are actually used in the current conditions and are successfully integrated into modern programs. Murphy's main focus was research and wealth management. When he left Merrill in the early 1980s, he went into independent consulting, writing extensively, teaching, and working in money management.

Technical analysis with the advent of the Internet

All his knowledge accumulated at that time, Murphy outlined in the book "Technical Analysis of the Futures Markets", which was published in 1986. Its popularity and demand was due to the beginning of the rapid development of the era of personal computers, and the large-scale branching of the Internet that continued into the next decade, which steadily led to a huge interest in relation to technical analysis.

Subsequently, Murphy, referring to the Internet as a great way to spread information about technical analysis trends, personally appeared on the net.

He came up with the idea to use the opportunities that the Internet provides. Then, together with Greg Morris, around 1996, he created the resource MurphyMor-ris.com. The plan was to educate people in the basic concepts of technical analysis, as Murphy did on CNBC, because the Internet seemed to them a more powerful tool in terms of information transfer than television.

Despite the fact that the time interval in which Murphy works is of medium length, he claims that the technical analysis system is applicable to any time period. Even short-term traders need to rely on the data that the market shows on a more global scale.

Murphy believes that, despite the fact that short-term trading is completely technical, the manager needs to understand the overall picture of the market, know the leading sectors and lagging behind, the direction of the trend. Thus, summing up, he notes that short-term trading is enna only when its methodology is associated with a longer-term trend.

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Foreword

Thanks

Part I. Introduction

What changed

Fund categories

Global Funds

Investor needs more information

Pros of visual investing

book structure

Chapter 1. What is visual investing

What is meant by market analysis

Striving for combination

What's in your name

Why study the market

Graphic analysts are cheaters

It's all about supply and demand

Just graphics faster

Charts look ahead

Charts don't lie

You can follow any set of pictures

The market is always right

It's all about the trend

Doesn't the past always serve as a prologue?

Timing is everything

Summary

Chapter 2. The trend is your friend

What is a trend

Support and resistance levels

Role reversal

What is "short term" and "long term"

Daily, weekly and monthly charts

Recent and distant past

trend lines

Channel lines

Percentage rollbacks of ⅓, ½ and ⅔

Weekly reversals

Summary

Chapter 3

Graph types

bar graph

line graph

Japanese candles

Selecting the time scale

Scales

Volume Analysis

Balance volume of Granville

Graphic models

Reversal or continuation

Volume

Balance volume

Double top and double bottom

Trading ranges

Triple top and triple bottom

The head and shoulders model

Measurement methods

Graphical analysis at the service of the Fed

Triangle

Ascending and descending triangles

Tic-tac-toe charts

Programs for recognition of graphic patterns

Occupation of John Murphy

The beginning and development of Murphy's career

Technical analysis with the advent of the Internet