John J. MurphyVisual Investor. How to identify market trends. Read online - Visual Investor. How to spot market trends - John J. Murphy J Murphy visual investor how to spot trends

28.10.2023

Visual investor. How to spot trends. John Murphy

John Murphy, host of a popular television program on financial markets and author of two seminal books, Technical Analysis of Futures Markets and Intermarket Technical Analysis, is one of the leading authorities on market analysis today.

This time, his professionalism and practical experience are translated into The Visual Investor, a comprehensive and accessible guide to visual analysis. After explaining key terms and concepts, Murphy teaches the reader the tricks of reading price and volume charts—the “pictures” that will help you make informed investment decisions and earn consistent profits.

Particular emphasis is placed on sector and global investing through mutual funds. Murphy will teach you how to track and analyze the state of these funds themselves on charts.

As Murphy argues, the key to visual analysis is the ability to distinguish when a stock is up and when it's down, rather than explaining why it behaves the way it does: "Knowing why a stock moves is certainly interesting... [but] the real meaning is has only a picture, a simple line on a graph."

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Visual analysis allows an investor to examine the behavior of a stock or industry group of the stock market without resorting to complex mathematical formulas and technical concepts. On the contrary, with its help, just by price movement, you can quickly and easily determine whether the fundamental characteristics of a particular stock are bullish or bearish. As Murphy argues, the key to visual analysis is the ability to distinguish when a stock is rising and falling, rather than explaining why it behaves the way it does: Knowing why a stock moves is certainly interesting, but what really matters is the picture, the simple line. on the chart. The visual investor does not avoid the difficulties of working with charts, which makes their practical development easier. The author provides a broad overview of all major areas of technical analysis, from various types of charts and market indicators to sector analysis and global investing. Using real examples and clear graphs, you will learn: to carry out...

Description	Year	Price	Book type
Visual analysis allows an investor to examine the behavior of a stock or 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 investing and various methods of graphical analysis. The author shows how to read charts to help make investment decisions, how to determine the direction... - (format: 70x100/16 (~170x240 mm), 328 pp. (graphs) pp.)	2012	574	paper book
326 pp. Visual analysis allows an investor to examine the behavior of a stock or industry group in the stock market. A publication for investors and traders. A visual investor does not avoid 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 industry group in the stock market. A publication for investors and traders. A visual investor does not avoid difficulties in his work... - DIAGRAM, (format: 70x100/16, 328 pages)	2004	896	paper book
This is the second edition of the best-selling book by one of the world's most renowned market analysts, John Murphy. It has been completely updated in accordance with current market realities. The book introduces... - Alpina Digital, e-book	2012	459	eBook

Reviews about the book:

This book tells you how to use technical analysis in the stock market. If you compare it 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 beginner traders who do not have the slightest idea about the concept of “technical analysis”. It is poorly written: there are ambiguous and incomprehensible passages in the text (I don’t know if these are the faults of the translator or the author), and the “Indicators” section is generally written very poorly: the author did not even bother to provide comprehensive explanations of how to interpret the indicator readings - after reading questions will remain. The desire for abbreviation did not lead to any good: the author skimmed over the top without delving into the essence and without delving into “concepts that are too complex 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 one - after all, he is not a trader. His whole “method” is to collect more indicators and try to snatch money here and there: “The best way to increase the significance 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 one case or another”, “Combining indicators always gives an advantage”, etc. The whole book is full of such nonsense, which has nothing to do with successful stock trading. The translation and editing match the content - there are typos even on the cover. In general, the book is complete misery and an example of a careless attitude to business, written, obviously, with the aim of making money on naive beginners. Bottom line - I don’t recommend reading it, it’s better to take a good book for beginners. Let me close with 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.

A great book for beginners. I can’t imagine how it is possible to explain the basic postulates of graphical and technical analysis more simply and concisely. The first two sections are quite enough to begin a competent analysis of graphs. 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 anything new here. The third section is devoted to intermarket analysis. THOSE. relationships between the movements of stock prices, bonds, interest rates, and raw materials currencies. I have not seen such information in other books. Very interesting and useful. Well, in conclusion, a lot of recommendations are given for investing in various mutual funds. Methods are given for selecting the most attractive mutual funds at the moment, and recommendations for choosing entry and exit points. The book contains a huge amount of graphic material showing in detail everything that is described. In general, the book will undoubtedly be useful to novice traders and anyone involved in investing in mutual funds.

Alexey 0

Preface

This may come as a surprise, but I never imagined myself as a writer. I've always thought of myself as a market analyst who writes about what he sees on the charts. I was lucky and achieved some success in both areas. My first book, Technical Analysis of 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. My other book is Intermarket Technical Analysis (John Wiley & Sons, 1991), which is considered a landmark because it brought into focus for the first time the relationships between financial markets and asset classes. The second edition of this book, Intermarket Analysis, was published only 12 years later.

It was decided to call this book “The 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 as 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 calling my occupation visual analysis also in order not to frighten television producers so much, who seemed to shy away from my topics, although TV is a visual media by definition. These days, no serious program can do without a schedule, but for some reason producers are reluctant to invite those who really know how to interpret graphs. Economists, securities analysts, and even television commentators are trying to find out what a particular chart means. But for some reason they don’t want to ask certified technical analysts (professional technical analysts now have diplomas). They probably fear that the answer will be “too technical” for them or the audience. Or maybe also because now you don’t have to watch TV to find out which markets are growing and which ones are falling. One of the goals of this second edition is to convince you that you are capable of independently conducting visual analysis of various financial markets. 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 a certain extent, this may be due to the fact that as we age, energy leaves us. Personally, I like to think that the desire to simplify is a manifestation of experience, and hopefully also maturity and wisdom. When I started 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 almost everything. And in each method there was something valuable. When the study of intermarket interactions captivated me and forced me to include all financial markets from around the world in my field of view, there was simply no time left for in-depth analysis of the charts for each of them (especially using analytical programs that include up to 80 technical indicators). And then I realized that this was not necessary. All you really need to do is identify which markets are growing and which are not. Yes, it's really that simple.

I usually scan hundreds of financial markets in a day. I don't have to look at every chart to do this. We now have screening tools (which I'll talk about later) to help us quickly determine which markets are rising and which are falling. In the stock market, for example, you can tell the strongest market sectors and industry groups from the weakest on any given day at a glance. You can then figure out which stocks are causing their group to rise or fall. And only when we identify the leaders (or those trailing behind), should we move on to the charts. The same can be done with foreign stocks, or with any other financial market, such as the bond, commodity or currency markets. The Internet makes things a lot easier.

One of the good things about 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 underlying trend. A rise in stock prices is usually accompanied by a fall in bond prices. A fall in the dollar usually coincides with a rise in the prices of commodities and commodity-related stocks. Strong foreign markets usually signal growth in the US market and vice versa. Stock market strength tends to favor economically sensitive stock groups, such as technology and transportation stocks. In soft markets, defensive stocks such as consumer staples and healthcare stocks tend to outperform. No market operates in a vacuum. Traders who focus on only 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 follows 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 the difference between a rise and a fall by looking at a graph, then you should have no problem understanding visual analysis techniques. 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 this doesn't matter. There are also plenty of people in the media telling how markets should behave. However, all that matters is how markets actually behave. Visual analysis is the best way to understand this. This is what this book is dedicated to.

As you master the principles of visual analysis, you will gain confidence. You may find that you don’t have to listen to all those 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 them the day before yesterday). You will begin to realize that all these financial “experts” actually have nothing worth saying. Just remember 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 wasn't that serious after all. Even the Federal Reserve Board insisted in the second half of 2007 that the economy was doing well and inflation was tightly controlled. And while they were saying this, the stock market and the US dollar were falling, and bond and commodity prices were rising - the classic formula for stagflation. By mid-2008, the Fed admitted that it was trying to prop up the weakening American economy while raising inflation. It took these experts seven months to see what the markets had been saying all along. This is why we prefer to watch the markets rather than listen to experts.

When I first began writing about cross-market principles more than a decade ago, many of the strategies were challenging to implement. Commodities, for example, have been the best-performing 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 greatly simplified the average investor's access to commodities. ETFs have facilitated trading in other sectors and made foreign stocks available. I'll show you how much easier ETFs have made the life of the visual investor.

I decided from the very beginning to make this book " visual." I wanted to show “pictures” of the market that speak for themselves. That's why you will find numerous graphs in the book. I selected them from the latest market sources. These are not some idealized textbook examples, but living illustrations of the principles of visual analysis in current market conditions. I hope they were chosen well. Remember that the only question you need to constantly ask yourself is: “Where is the market I am studying going up or down?” If you can answer it, everything will be okay.

John Murphy
June 2008

Acknowledgments

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 engage in visual analysis. Thanks to the growth of online resources, all you need to do now is find a good analytics website. In other words, all you need to do is register on the website and start analyzing charts. 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 illustrations. More information about StockCharts.com can be found at the end of the book. This is a good place to start with visual analysis.

Part I. Introduction

Traders and investors have been using a 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 province 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. The intimidating jargon and complex formulas repelled non-professionals and were not part of their interests. However, two very significant changes have occurred over the past 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 at their disposal 30 years ago.

The second change is associated with a significant expansion of the industry mutual funds, which now outnumber the shares listed on the New York Stock Exchange. This phenomenal growth has brought both benefits and challenges to ordinary investors. The problem now turns out to be choosing the right mutual fund. In other words, the growth in the number of mutual funds has made the life of the individual investor very difficult, although they were created specifically for simplification investing. If a person did not have the time or experience to select stocks, then he could delegate this task to the mutual fund manager. In addition to professional management, the fund provided him with diversification. Previously, by purchasing one fund, an investor gained access to the entire market. Now mutual funds are so segmented that he is simply overwhelmed by the abundance of options. Over the past decade, exchange-traded funds (ETFs) have taken the place of many mutual funds.

Fund categories

Domestic market equity funds are classified by purpose and operating style as funds aggressive growth(aggressive growth), growth(growth), growth and income(growth and income) and income from shares(equity income). The funds are also divided according to the 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 indexes. Small Cap Equity Funds(small-cap funds) form portfolios of stocks included in the Russell 2000 or S&P 600 Small-Cap indexes. In addition, equity funds can be classified according to their specialization in different sectors of the stock market - such as technology, heavy industry, medical manufacturing, financial services, energy, precious metals And public utilities. Sectors, in turn, are divided into industries, which are handled by even more specialized funds. Thus, 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 investing. Now, to enter the market of other countries or geographic regions, an investor only needs to select a suitable equity fund. As a result, investors should monitor market movements not only in the United States, but around the world. Investing abroad involves higher risk than in domestic markets, but the rewards more than make up for it. From 2003 to the end of 2007, the growth of foreign stocks exceeded the growth of American stocks by more than two times.

Over the same four years, emerging markets grew four times more than the US market. Investing overseas allows you to diversify your portfolio of U.S. stocks, which is why financial advisors recommend placing about a third of your portfolio abroad to increase returns and reduce risk.

Investor needs more information

Many investors have found funds alternative to 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 investors today is a double-edged sword.

The same applies to the technological advances of the last decade. The problem is how to select 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 can solve the problem of sector investing primarily through exchange-traded funds.

The benefits of visual investing

The positive side of the growing specialization of funds is the unprecedented variety of investment instruments. Thus, investors who prefer a certain market sector or industry, but do not want to engage in stock selection, can now purchase shares of an entire 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. This is when visual analysis comes in handy.

The tools discussed in this book are applicable 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 buying and selling rules, scan charts for investment opportunities, and rank funds by their performance. The challenges of mastering new technologies and applying them to investing in funds and sectors, of course, remain – but so do the benefits. If you have entered the market, it means that you are not afraid of these difficulties. This book will show you how to take advantage of the positives.

Murphy J. Intermarket technical analysis: trading strategies for global markets of stocks, bonds, commodities and currencies. Per. from English – M.: Diagram, 2002.

Murphy J. Intermarket analysis: principles of interaction of financial markets. Per. from English – M.: Alpina Publisher, 2012.

John J. Murphy

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 Creative Bureau "Howard Roark"

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

Preface

John Murphy

June 2008

Acknowledgments

Part I. Introduction

What changed

Fund categories

Global funds

Investor needs more information

The benefits of visual investing

Book structure

The book consists of four parts. Part I explains what visual analysis is and how it combines with more traditional forms of investment analysis. In addition, the key concept market trend and shows some visual tools for its identification. You might be surprised at how useful some of the basic tools discussed in Part 1 are. Throughout the book, special attention is paid to exchange-traded funds. ETFs have made asset allocation and sector rotation extremely easy.

Part II is devoted 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 gain a deeper understanding of the world of indicators can use the links to additional literature at the end of the book.

Part III introduces the idea market relationships. This is especially important to understand why stock market investors also need to monitor movements in commodity prices, bond prices and the dollar. Intermarket analysis also helps to understand the issues of asset allocation and sector rotation in the stock market. Along the way, you'll gain insight into how the Federal Reserve makes its policies. You'll be monitoring many of the same things as the Fed.

The focus of Part IV is sector analysis. The role of analysis is especially noted relative strength during the selection process. Examples of analysis of global markets are also given here.

In conclusion, I bring everything said above together and once again remind you of simplicity. The appendices provide guidance on how to get started and where to find valuable resources. There you will also learn about some popular techniques that can be included in visual analysis.

Chapter 1. What is visual investing

They say that it is better to show once than to tell a thousand times. That's 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 grows and it’s your stock, great. If it falls and this is also your stock, it’s bad. You can argue 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, earnings and investor expectations. But in the end, it's all about the picture: 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 can take your winnings away from you, even if you don't know why it goes up. And when a stock falls, knowing why won't bring back what was lost. The only thing that really matters is the picture - a simple line on a graph. The secret to visual investing is knowing how to differentiate what's up from what's down. The purpose of this book is to help you see the differences.

What is meant by market analysis

As you read the book, you will become familiar with a number of relatively simple visual tools to help you analyze the market and choose the moment to make transactions. Pay attention to the use of the term market analysis. For all its versatility, this book is primarily concerned with the visual analysis of financial markets using price and volume charts. Analyzing 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 forecast returns applies generally to fundamental analysis, and market analysis implies graphic, or visual, analysis. Most investors are more familiar with the fundamental approach because they study it in universities or read about it in the press. Undoubtedly, fundamental factors ultimately determine which direction a stock or group of stocks will move. The question is how to interpret this data and its impact on stocks.

The desire to combine

The fact is that most successful traders and fund managers use something between visual and financial analysis. Recently, there has been a tendency to combine graphical and fundamental methods. Usage intermarket analysis, studying market connections(see Part III) further blur the line between these two approaches. In this book, I simply try to explain how they differ and help the reader understand why a charting (visual) approach should be part of any investing 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 movements of individual stocks, industry groups, stock indices, bonds, and international, commodity, and foreign exchange markets. You can perform a visual analysis of funds of various types. Many people are scared by the term technical analysis. As a result, they give up a very valuable form of analysis. If you have the same problem, just call him visual analysis, because they are the same thing. Dictionaries define visual as “visible to the eye, visual”, and technical - how"abstract, theoretical." But in this type 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 it easier for readers, I will use the terms visual analysis, market analysis And graphical 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 to make new investments in the market. If so, which market sector is most suitable. An investor must study the market to make an informed decision. But how to accomplish this task?

You can read the newspaper, study profit and loss reports, call your 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 different stock sectors to get an idea of where they are going. Both can be done in a matter of minutes - just look at the corresponding graphs.

Graphics analysts are liars

Graphical analysis is somewhat of a scam. 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, this is 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, what matters is what the market expects and what it thinks about this news.

Then why is graphical analysis a hoax? Yes, because it represents a truncated form of fundamental analysis. It allows a charting analyst to study a stock or industrial group without doing all the work that a fundamental analyst would have to do. How? Through assessing the nature of fundamental indicators, based only on the direction of price movement. If the market views fundamentals as positive, it rewards the stock with growth. If there is a negative assessment of the fundamental indicators that determine the intrinsic value of a stock, the market punishes it by lowering it. The graphical analyst can only monitor where the stock is going: up or down. This looks a lot like deception, but in reality it is not. And there is simply 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 stock, bond, currency and commodity markets. Yes, but how do you figure out what is the demand and what is the supply? After all, the ability to determine what is higher is, of course, the key to predicting the price. But to actually study for this purpose all the factors (both together and separately) influencing supply and demand is a labor-intensive task. It’s easier to judge by the price signals themselves. If the price goes up, then demand goes up. If the price falls, then it seems that the supply is higher.

The graphics are just faster.

I had an excellent example of the difference between the two approaches early in my career as a market analyst. One day, a portfolio manager called me and a 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 planning to add to the company's investment portfolio. He needed to know at what level each stock became overvalued and which stocks were closer to moderate and more buyable levels.

Returning to my room, I pulled out a catalog of long-term charts with price data for each of the stocks over several decades. I noted past highs and lows and the stocks that came closest to them. The task was completed on the same day.

However, my report lay on the table for two whole weeks - that’s exactly how long it took my fundamentalist partner to prepare the data. And when both reports were reviewed, our results—ironically—were basically 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 graphs. We got the same numbers, but I got it in two hours, and he got it in two weeks. This allowed me to draw two conclusions. First, both approaches often produce the same results, demonstrating their tremendous interchangeability. Secondly, the graphical approach is much faster and does not require in-depth knowledge of the stocks in question.

Charts look forward

The market always looks to the future. He - a mechanism that takes everything into account. But why the market rises or falls is not always clear. And when the reason is still found out, he 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 fundamental indicators, market analysis is simply 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 rise in price signals a bullish view of the market on fundamentals. This is the power of market analysis.

This also helps to understand why visual market research is such an important part of the investment process. It also follows 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 cause him to evaluate fundamentals differently. Among other things, market analysis can serve as a yardstick or filter for fundamental assessments. In any case, the two approaches complement each other in many ways.

You can follow any set of pictures

One of the greatest strengths of the visual approach to market analysis is the ability to monitor multiple markets simultaneously and move into different investment environments. An investor can observe markets around the world. You can easily keep an eye on global stock and bond markets, currencies, stock sectors, individual stocks, bonds and commodities. In addition, the principles of graphical analysis are applicable to any of these markets, even with little knowledge of their fundamentals. And this is far from a small thing, given the trend towards global investing and the problem of extensive choice that the modern individual investor faces. But the beauty of the approach is that reliable analysis of these markets can be carried out by mastering literally a handful of visual tools.

The market is always right

Graphs work for two reasons. First, they show how the market values a given stock. You've probably heard the expression "don't fight the trend." If you bet on a stock going up and it goes down, it means you've misjudged it (or, as forecasters sometimes like to say, "jumped the gun"). If you are shorting a stock and it goes up, then you are wrong again. The market gives us a daily report. Analysts sometimes say that the market is rising or falling unjustifiably (usually they say this when they themselves made a mistake in forecasting its movement). The market cannot move unreasonably - it doesn’t happen. The market is always right. And synchronous movement with it depends only on ourselves. Over the course of my career, I have been told more than once that I was right – but by accident. Usually the one who made a mistake said this - but rightly so. I’d rather be accidentally right than rightly wrong. And you?

It's all about the trend

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

Isn't the past always 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 even possible to make forecasts 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 are interested in the issue of self-fulfilling prophecies, watch a CNBC show where market analysts debate. They often interpret the same data differently, as happens with any other forecasting method. 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, its every movement is reflected on 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 ways to combine them. Let's consider the issue of timing. Suppose, as a result of fundamental analysis, a stock is identified that is attractive for purchase. What should I do? Just go ahead and buy it? What if the analysis results 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. This way you can combine both approaches quite easily.

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 explore this approach to understand its true value.

Think about the situation of someone 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 the patient's x-ray. What about meteorologists? Find someone who can make a weather forecast without a map! All these people use visual tools. Yes, you yourself - would you really take on any business with your eyes closed? Or would you go on a trip without a map? Why then would you consider investing in a stock or mutual fund without first looking at the performance picture?

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

Chapter 2. Trend is your friend

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

What is a trend

Since the primary purpose of visual analysis is to study the trend, it is necessary to explain what it is. Trend - it is, simply put, the direction the market is moving. It should be understood that no market moves in a strictly straight line. If you look at a chart of the stock bull market 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 upward trend remains unchanged (see Fig. 2.2). Any failure to exceed the previous high is an early signal of a possible trend reversal. Any fall below the previous low usually confirms that a reversal has occurred (see Figure 2.3). A downtrend is simply the mirror image of an uptrend; it is characterized by a series of decreasing peaks and troughs (see Fig. 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 meaningful names (see Figure 2.5). Level of support called a minimum, or a depression that formed in the past. Analysts often say that prices are bouncing off support levels. When they do this, they usually mean the previous low made last week, last month or last year. Remember that the support level is always located below market. How the market behaves around support levels is very important. If it closes below the support level (breaks the support level), then the downward trend resumes. Price rebound from support level (successful support level testing) is usually the first sign of bottoming and the end of a downtrend.

Resistance level call any previous peak. You've probably heard analysts say that “the market is approaching a resistance level.” We are talking only about the price level at which the previous peak was formed. The market's ability to outperform is important. If the market closes above the peak, 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 switch roles. In other words, the broken support level (former bottom) becomes a resistance level above the market. In an uptrend, a broken resistance level (previous peak) usually becomes the new support level in subsequent market corrections. This is illustrated in Fig. 2.7. Market analysts are looking for a support level near the previous market peak. In Fig. Figure 2.8 shows what typically happens in a downtrend. After the breakout, the previous support level becomes a resistance level above the market.

The logic of such a change of roles is determined by the psychology of the investor. If the previous low serves as a support level, it means that investors bought at this level. After a decisive breakout of this level, investors see their mistake and usually seek to exit at the break-even level. In other words, they start selling where they previously bought. The previous support level becomes a resistance level. Investors who sold near the previous peak during an uptrend, come to their senses at the sight of further growth and try to buy where they previously sold. The previous resistance level becomes a new support level when the market falls.

What is “short-term” and “long-term”

Many investors are confused by the concepts of “short term” and “long term”, which are so easily used by professionals. In reality, the distinction is quite simple, but you need to understand that there are many gradations of trends. Main trend(major trend), as the name implies, belongs to the category of large ones, which 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.

Next in importance is secondary(secondary trend), or intermediate trend(intermediate trend). It usually marks a correction in 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 it is too long to be considered short-term. Trends of the third category – short-term(short-term trend), or small(minor trend). They are often corrections or consolidations lasting less than a month and lasting days or weeks. This is usually just a pause in an intermediate or major 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 the intraday, where the chart shows hourly changes, to the 50-year, where the trend is characterized by annual movements. But for simplicity and convenience, most analysts operate with variations of the three categories mentioned. Keep in mind that analysts may use different time parameters when determining the significance of a trend. Some measure short-term trends in days, intermediate trends in months, and major trends in years. But the unit of measurement as such is not that important. Another important thing is to understand the main difference between these three categories of trends.

For example, an analyst might view a stock as bullish, but with short-term bearish movements. In other words, the most significant (main) trend will remain upward, but a short-term retreat downward (often called volatility). This situation can be assessed differently by market participants. It is possible that a short-term trader will sell a stock whose market is experiencing a downward correction. 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 important. Therefore, it is necessary to take price charts that represent different trends. To get an idea of the long term, you can start with monthly charts, reflecting market movements over 10 years. To obtain a more detailed view of the main trend, it is recommended weekly charts at least for a five year period. Daily charts over the past year are necessary to study short-term trends. Monthly and weekly charts are more suitable for determining the market mood - bullish or bearish, and daily charts are best used to determine the moment of implementation of various trading strategies. The importance of using all three types of graphs is demonstrated in Fig. 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. Typically, 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 when studying market trends. I hasten to please readers: building it is quite simple. Graphics analysts use trend lines to determine the angle of inclination and the moment of reversal. You can also draw horizontal trend lines on the chart, but most often we are talking about ascending or descending lines. Rising trend line It is carried out simply under successively growing minimums of rollbacks. Descending trend line carried out over successively lower market peaks. Markets often rise or fall at certain angles. The trend line helps determine the magnitude of this angle.

Once an actual trend line is plotted, you can see that markets often bounce off it several times. For example, during a rally, markets often return to and bounce from an ascending trend line. Retesting these lines usually creates excellent buying conditions (see Figure 2.13). During downturns, the market often returns to the downward trend 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 constructed so that it covers all price movements. On a bar chart (where the price range is represented by a vertical bar), the upward trend line is drawn at the lows of the bars. The downward trend line 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 top and bottom points of individual bars.

Two points are needed to draw a line. An ascending line can be drawn already when two depressions have appeared. But at the same time she will not necessarily be valid trend line. The market must test and bounce off it for it to become valid. It is desirable for the market to touch 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 goes through, the more significant it becomes. In Fig. Figure 2.14 shows three market touches of a downward trend line.

Most analysts draw several lines on charts. Sometimes the original line turns out to be false; then a new line must be built. It is also better to have not one, but several trend lines because they characterize different trends: some are short-term, others are longer. As with the 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 constructed on price charts and often help determine support and resistance levels. Markets often move between two parallel trend lines, one above price movements and the other below. In a bear market, you first draw a regular downward trend line through two market peaks, then move to the bottom of the trough between them and draw a line parallel to the downward trend line. The result will be two downward trend lines, one of which will be above the price movement, and the other (channel line) will be below (see Fig. 2.15). The stock often finds support at the lower line of the channel.

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

Although the price channel method does not always work, it is usually a good idea to know where the channel lines are located. A rise above the ascending channel line is a sign of market strength, while a fall beyond the descending line is a signal of market weakness. Some graphics services call channel lines parallel lines.

Percentage kickbacks by ⅓, ½ and ⅔

One of the simplest and most valuable patterns in market movement to be aware of is percentage retracement(percentage retracement). As stated earlier, markets generally do not move in a straight line. The movement occurs in a zigzag manner, in the form of a series of peaks and troughs. Intermediate trends are corrections of the main trends, and short-term trends are corrections of intermediate ones. These corrections (or retracements) usually reverse the previous trend by a certain amount in percentage terms. Best known 50% correction. A stock that rises from 20 to 40 often pulls back about 10 points (50%) and then resumes its rise. Knowing this, an investor can plan to buy the stock when it has lost about half of its previous rise. In a downtrend, stocks often rise by half of their previous decline before resuming their decline. This tendency to correct by a certain percentage value is valid for all categories of trends.

Corrections for ⅓ and ⅔

Typically, the minimum correction amount is 1/3 of the previous movement. A rise from 30 to 60 is often accompanied by a pullback of 10 points (1/3 of a 30 point rise). The tendency for a minimum retracement of this magnitude is especially valuable when choosing the moment to buy or sell. In an uptrend, an investor can determine the 1/3 correction point in advance and use this level to buy. In a downtrend, a 1/3 correction can serve as a sell zone. Sometimes, during a strong correction, the market rolls back even further - by 2/3 of the previous movement. This level becomes very significant. With a strong return, the market rarely rolls back more than 2/3. The indicated area becomes another effective support zone on the charts. If the market goes beyond 2/3, then most likely it completely reverses.

Most charting programs allow the user to define retracement levels on the chart. This is done in two ways. You can, for example, specify (using the cursor) the beginning and end of the market movement, after which a sign indicating the percentage correction levels will appear on the screen. Another way is to draw horizontal lines on the chart indicating percentage correction levels. 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 member is equal to the sum of the two previous ones (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), hence the 62% retracement value. A level of 38% is the reciprocal of 62 (100 − 62 = 38). That's probably all you need to know about these numbers at the moment. They are very popular among professional traders and are widely used to determine the possible size of the correction. In Fig. Figure 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 the price doubles. This technique is sometimes called halving rule(cut in half rule), which is not equivalent to a 50% correction. At a 50% correction, the stock loses half its previous advance. On a 50% correction, a market that rises from 50 to 100 drops to 75. And the halving rule applies when a stock loses half its full value, which in our example means a fall to 50.

Weekly reversals

Weekly reversal is another simple market model to look at. Weekly reversal up(upside weekly reversal) occurs when the market falls; it is only visible on weekly bar charts. The stock starts the week with active sales and usually breaks through some support level. However, by the end of the week it sharply turns upward and closes above the previous week's range. The longer the weekly price bar and the greater the trading volume, the more significant this reversal is.

Weekly downward reversal(downside weekly reversal) – this is the direct opposite of an upward reversal. The week begins with a sharp rise in prices and ends with a collapse. Typically, this pattern alone is not enough to indicate a bearish chart, but it does indicate the need to take a closer look at the situation and think about defensive actions. Weekly reversals become more significant if they occur near historical support or resistance levels. The daily version of the weekly reversal is called the day of the key reversal(key reversal day). While daily reversals are significant, weekly reversals are much more significant.

Summary

The main goal of a visual trader is to recognize the market trend and understand when it is reversing. 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 that represent 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 timing trades. 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 decreasing peaks (resistance) and troughs (support). Resistance levels are always located above the market. Support levels are always below the market. Trend lines- and they are carried out 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. Double the price usually talks about overbought market. Price drop by half signals his oversold. The next chapter will show how trend lines, support and resistance levels overlap each other to form predictive price movement patterns.

Chapter 3. Eloquent pictures

Having learned to recognize a trend, determine support and resistance levels, and draw a trend line, the visual investor can begin to look for price movement patterns. Prices tend to form patterns, or pictures, that often foreshadow the direction of a stock's movement. It is clear that it is necessary to distinguish between models that indicate only interrupt primary trend, from models that indicate its approach U-turn, and this must be learned. For a comprehensive analysis of any chart, it is important to consider not only the price, but also the trading volume (trading activity). The following will show how to include volume indicators in graphical analysis. But first, a few words about the types of graphs suitable for visual analysis.

Types of charts

Bar graph

In this chapter, we will limit ourselves to the most popular types of graphs and begin our discussion with bar graphs. Daily bar chart(daily bar chart) represents the market movement for each day in the form of a vertical column with horizontal lines: one to the left and the other to the right of the vertical column (see Fig. 3.1). The vertical bar connects the maximum and minimum prices of the day and reflects the daily price range(price range) shares. The 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 line), where it closed (right line) and what the high and low of the day are (top and bottom of the vertical price bar). A weekly bar chart shows the price range for the entire week, with the left bar showing the opening price on Monday and the right bar 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 about the value of the stock for that day. When you turn on the evening news to see how your stock portfolio is performing, you get information about where the stock closed and how much its price has changed compared to the previous day. You are told that IBM, for example, closed at 110, i.e., 2 points below 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 that shows only closing prices. It represents a line connecting successive closing prices for each day. The result is a curve called line graph(line chart) (see Fig. 3.2).

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

Japanese candles

This chart, which is a Japanese version of the bar chart, has become extremely popular in recent years. It uses the same price data as for a bar chart, i.e. opening price, high, low and closing price. However, candlesticks visualize data better (see Figure 3.3). In Japanese candlesticks, the thin bar representing the daily price range is called the shadow. The thicker part of the candle, called body(real body), shows the difference between 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 movement. 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. Candlesticks are attractive because they add another dimension to the information provided by a bar chart. It's not just the color of the candles that indicates a bearish or bullish market, but also their shape, which visualizes bullish or bearish patterns not visible on a bar chart. Among other things, all the techniques for analyzing bar charts also apply to Japanese candlesticks. Additional information on Japanese candlesticks is provided in Appendix B.

Selecting a 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 trends. Intraday charts that reflect hourly price changes can also be used for short-term trading. In this case, we were talking about line and bar graphs. Japanese candlesticks are also time scaled: each candlestick can represent 1 hour, 1 day, 1 week or 1 month, just like a bar on a bar chart. On daily line charts, daily closing prices are connected, on weekly line charts - weekly closing prices, etc. All types of charts considered are suitable for both short-term and long-term analysis: you just need to select the appropriate time scale (Fig. 3.4 and 3.5 ).

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 chart. One of the tangible benefits that computer charting programs provide is the ability to instantly change time perspective, switching from daily to weekly charts and back again with just a single keystroke. It is also easy to switch from a bar chart to a linear chart or to Japanese candlesticks. Thus, the user needs to select the graph type and time scale. But the choice doesn't stop there.

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 displayed on it from bottom to top in increasing order. Price data can be presented in two ways. The most commonly used scale is linear, or arithmetic. On a line chart, all price movements are displayed equally. Each 1 point increase is displayed the same as any other 1 point increase. An increase from 10 to 20 looks the same as 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 people. Another option is the logarithmic scale (see Figure 3.6).

Logarithmic or semilogarithmic plots represent the price change not in absolute units, but in percentages. In other words, an increase from 10 to 20 looks much larger than an increase from 50 to 60. The reason is that, in percentage terms, an increase from 50 to 60 is not as significant as 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 until it rises to 60 earns only a 20% return, even though the stock rises 10 points in both cases. To show the same 100% growth as in the first case, the second stock must double in price, i.e. rise from 50 to 100 (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 a more familiar arithmetic scale in these cases, which readers need not abandon. But for long-term charts the differences can be significant. On a semi-log chart, subsequent price increases appear minor compared to earlier movements. 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 assessments, 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 volume corresponds to a shorter one. By looking at the chart, an analyst can easily determine which days (or weeks) the volume was the highest. This is important because volume largely characterizes the strength or weakness of a trend. In general, when a stock rises, buying pressure should exceed selling pressure. In a strong uptrend, volume bars tend to be higher when prices rise and lower when prices fall. In other words, volume confirms the trend. If the analyst sees that the pullback is on a higher volume than the rise, then this is an early signal of 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.

Granville balance volume

This valuable indicator was first described by Joseph Granville in the book “The Granville Method: A New Key to Stock Market Profits” (Granville’s New Key to Stock Market. Profits, 1963). B balance volume(on-balance volume - OBV) is useful because it allows you to more clearly visualize 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 whether this is the current situation. Constructing a balance volume curve is extremely simple. Each day the market closes higher or lower for a certain amount of trading activity. If the market closes higher, the total trading volume for that day receives a positive value and is added to the previous day's total. If the market falls, the volume is considered negative and is subtracted from the previous day's indicator. On those days when the market stands still, the volume line also remains the same. In other words, the balance volume is current aggregate (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. Supplementing the chart with an OBV line (below or just above the price curve) allows the analyst to see whether the price and volume curves are in the same direction. If both curves move upward in concert, the uptrend is stable. In this case the volume confirms current trend. But if the price rises and volume falls, then there is a negative discrepancy: it warns that the uptrend may change. A 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, and not its quantitative indicators. OBV values vary depending on the starting point, i.e., on the period of observation. Focus on the trend, not the numbers. Computer programs will take care of them: they will calculate and build an OBV curve.

Graphic models

Reversal or continuation

Over many years of working with charts, technical analysts have identified many chart patterns (patterns) that have predictive value. We will limit ourselves to considering a small group of the most recognizable and reliable models. Among reversal patterns(reversal patterns) the three most important are: 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 identified correctly, can warn of a trend reversal. From continuation models(continuation patterns) we will 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. This is why the triangle is called the continuation pattern. To recognize such patterns, you need to learn very little - identify peaks (resistance levels) and troughs (support levels) and draw trend lines.

Volume

Volume is important when interpreting chart patterns. Thus, when a pattern forms at the top, volume usually falls during ups and rises during pullbacks. As for pullbacks in a downtrend, higher volume bars correspond to a period of price growth, and lower ones correspond to a period of decline. High volume is a necessary element of major breakouts, especially bullish ones. An upward trend breakout without a noticeable increase in trading activity in any market should cause distrust. With continuation patterns (such as a triangle), volume usually falls sharply, reflecting a period of indecision. Volume should increase noticeably after the formation of 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 movements usually reflect periods of market indecision, the analyst never knows for sure whether the stock he is interested in is turning around or is simply waiting. And often the volume curve helps answer this question by showing which direction the volume growth is accompanying. Thanks to this, the analyst can determine at an earlier stage what is happening with the stock he is interested in: accumulation (buy) or distribution (sale). The OBV curve very often leads price movements (as in Fig. 3.8). This is usually an early signal that they will go in the same direction. It is advisable to monitor the OBV line, especially when studying price patterns: it will either confirm the accuracy of the picture on the price chart, or warn about its inaccuracy.

Double top and double bottom

The names of these models speak for themselves. Imagine an uptrend with a series of rising peaks and troughs. Every time a stock rises to a previous peak, one of two things can happen: it either tops it or it doesn't. If the market closes above the peak, then the uptrend resumes - and everything is fine. But if it cannot surpass the previous peak and begins to weaken, this is an alarm signal. 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 approximately the same level (see Figure 3.9).

Trading ranges

From the graph in Fig. Figure 3.10 shows why it is impossible to say unambiguously whether the pullback is the beginning of a double top or whether it is a simple fluctuation near the previous resistance level. It is not uncommon for prices to move sideways for some time between the previous peak and trough before continuing higher. Usually lateral movement is called consolidation(consolidation), or trading range(trading range). But this is not enough to form a real double top. The market must not only stop at the previous peak, but also fall, closing below the previous trough. The sequence of higher peaks and troughs is then followed by lower peaks and troughs, creating a double top reversal pattern, also called model M(M pattern) because of its shape (also see Fig. 3.9).

We have described a double top, but a double bottom is simply its mirror image. Double bottom occurs when the market makes two large lows at approximately the same price level and then closes above the previous peak. This begins a new uptrend, especially during a breakout with high trading volume. In this case, graphic analysts also prefer to compare price behavior with the 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 a triple top has not two, but three large peaks. This simply means that the period of sideways price movement lasts significantly longer. However, the interpretation remains the same. If a market that has been rallying eventually closes at a new high, the uptrend resumes. But if three major peaks are approximately 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- these are, naturally, three large depressions at approximately the same level and a subsequent breakthrough above the previous peak. The names given are quite descriptive and the models are easily recognized. You can find countless examples of such patterns in any market chart library. In general, “double top” and “double bottom” patterns are much more common than triple ones, although the latter are not uncommon. Another popular variation of the triple top and triple bottom is the reversal pattern. head and shoulders.

Head and shoulders model

You probably already realized that there is nothing super complicated about these pricing models and their names. The same applies to inverted head and shoulders. In fact, this is a type of triple bottom, since there are also three large lows. The difference lies in the characteristics of the formation of the depressions. In a triple bottom, all three lows are located at approximately the same price level. Inverted head and shoulders are so called because one major low is in the middle (the head), and two other, less significant ones (the 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, the trendline (neckline) is drawn over two peaks located in the middle. After this line breaks upward, the formation of the pattern is completed, which is a signal of a new upward trend.

The head and shoulders pattern is the mirror image of the inverted head and shoulders pattern (see Figure 3.15). This figure has a middle peak (head) slightly higher than those around it (shoulders). The trend line (neck line) is drawn below the two depressions located in the middle. A price drop below this line signals the start of a new downward trend (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 moments of formation or completion of patterns, when its direction should correspond to a particular price movement. Remember that higher volume weighs more in upswings than downswings.

Measurement methods

Price models often predict how far the market will go. Their dimensions allow us to roughly determine the minimum distance that the market can travel after the completion of the model. The rule of thumb for all three models discussed is: the height of the model determines the market potential. In other words, you simply measure the height of the sideways trading range and plot this distance from the breakout point in the direction of the breakout. If the height of a double or triple top is 20 points, then prices will likely fall at least 20 points from the point where the low of the previous retracement was broken. For example, if the trading range is 50–70, the breakout to the downside will reach the 30 level.

The measurement in the case of head and shoulders is a little more accurate. In a head and shoulders pattern, the vertical distance from the high of the head to the neckline is subtracted from the level at which the neckline is broken down. In an inverted head and shoulders pattern, the vertical distance from the low of the head to the neckline is added to the point at which prices exceed the neckline. Remember, however, that these measurements are approximate and only give an approximate estimate of the minimum potential for market movement.

Graphical analysis at the service of the Fed

In the summer of 1995, central banks intervened successfully to support the US dollar. The financial press attributed some of this success to bankers applying some graphical analysis techniques to market trading. The seriousness of the Fed's board of governors in the graphical approach was evidenced by the August 1995 issue of its newsletter entitled "Head and Shoulders Isn't Just a Fun Pattern" (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 periodically referring to my first book, “Technical Analysis of Futures Markets,” as a primary source. The final conclusion of the newsletter was that when trading the foreign exchange markets, the head and shoulders model provides statistically and economically significant profits. Here's what it says in its introductory section:

As it turned out, technical analysis... allows you to get statistically significant profits despite its incompatibility with the principle of “efficient markets”, which 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- this is a signal that the market has gone too far and should consolidate for a while. After consolidation, it usually resumes moving in the same direction. Therefore, in an upward trend, the triangle is usually a bullish pattern, and in a downward trend, it is bearish. A triangle can have different shapes. Most common symmetrical triangle(symmetrical triangle) (see Fig. 3.17). This pattern is characterized by a gradually tapering lateral movement. Trend lines drawn along the peaks and troughs of the triangle converge, and each line is usually tested at least twice, and more often three times. After moving horizontally about 2/3 or 3/4 the length of the triangle, price usually breaks it in the direction of the previous trend. If the previous trend was up, then the market is likely to breakout upward.

Ascending and descending triangles

These two variations of the triangle usually have a more obvious predictive quality. When ascending triangle(ascending triangle) the line drawn along the upper border of the price range goes horizontally, and along the lower border it goes upward (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 models is indicated by a powerful breakthrough of one of the trend lines (either up or down). In this case, volume growth is also important, especially during an upward breakout.

The distance that the market will travel after the completion of the triangle can be determined in different ways. The simplest is to measure the height of the widest part of the triangle (on the left) and set it up from the breakout point on the right side of the triangle. As with the reversal patterns discussed above, the more vertical (volatility) the pattern is, the greater the price potential.

Another method uses the horizontal size of the models. A model that forms over two weeks is inferior in significance (and potential) to a model formed over two months or years. All in all, The longer the period of formation of the model, the more significant it is.

Tic-tac-toe charts

Concluding the enumeration of chart types, we cannot fail to mention the point-tac-toe chart (or point-and-number 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 - a decrease. A buy signal is when the last X column exceeds the previous X column. A sell signal is when the last O column moves below the previous O column. The user can change the size of the box to adjust the sensitivity of the chart. A 0.5% cell is more suitable for short-term trends, and a 2% cell is more suitable for longer-term trends (see Figure 3.20). Most investors can content themselves with simply recognizing buy and sell signals. Charting analysts, however, identify patterns of price movement on these charts. Appendix C provides more detailed information about them.

Programs for recognizing graphic patterns

Almost all of the technical indicators discussed in this book are relatively objective (as you will see in Part II). A signal is either generated or it is not. Indicators can also be backtested to determine their reliability and are very useful for creating objective trading systems. However, this cannot be said for graphic models. Recognizing price patterns is one of the most subjective aspects of visual analysis. Even now, models are not amenable to objective computer analysis. To find a way out of this situation, I, together with engineers at Equis International, developed a graphical pattern recognition program that can be used as a plugin for the MetaStock graphical analysis program. The recognition program scans a library of stock charts and identifies those that may contain the most important patterns discussed in this chapter. She even gives price predictions after the pattern is completed. 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 fragment.

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

Murphy J. Intermarket technical analysis: trading strategies for global markets of stocks, bonds, commodities and currencies. Per. from English – M.: Diagram, 2002.

Murphy J. Intermarket analysis: principles of interaction of financial markets. Per. from English – M.: Alpina Publisher, 2012.

John Murphy hosts a popular television program about financial markets. He is also the author of two seminal books. And today John is one of the most significant authorities in the field of market analysis. His practical experience and professionalism will tell the reader through the book The Visual Investor how to identify trends. It provides an accessible and comprehensive guide to visual analysis. Also, key concepts and terms are explained.

At the same time, Murphy teaches his reader the special tricks of volume and price charts that help make informed decisions and make stable profits. But the author of the book The Visual Investor: How to Identify Trends especially wanted to highlight global and sectoral investing through mutual funds. John Murphy will teach you how to analyze and track the status of these funds on charts. Thanks to visual analysis, an investor can study the behavior of an industry group of the stock market or its shares. In this case, you do not need to resort to various mathematical formulas and technical concepts.

John Murphy: Visual investor how to spot trends

According to the author, the main thing in visual analysis is the ability to see the differences in when a stock rises and when it falls. And explaining why she behaves this way is no longer so important. After all, it is better to see once than to hear a hundred times. And if you apply this slogan to the market, you can also add that it will cost less.

Murphy's book The Visual Investor: How to Identify Trends is dedicated to visual analysis. In essence, it reveals the question of how not only to increase, but also to preserve your own capital, based on the market picture you see. In reality, everything is simpler, because the value of the stock either goes down or goes up. If the price of a stock goes up and it's yours, that's great. And if your stock price falls, that's bad enough.

A lot can be said about such a stock movement. One can argue that at the moment it should take a different movement, or that it moves this way for such and such a reason. You can talk about anything, but such reasons for the behavior of stocks are not so important to pay so much attention to them. Only the simple picture of the line on the graph has real meaning.

Secrets of Visual Investing

Murphy's book The Visual Investor: How to Identify Trends reveals to its reader the main secret of such investing. This is the ability to recognize ups and downs. If you learn this, then most of the work is already done. This book was written to help the reader master this difficult science. According to the author, the modern development of the stock market has two divergent trends. On the one hand, market participants who do not have sufficient professionalism receive more opportunities to work at a higher professional level. This becomes possible due to the development of the mutual fund industry and the emergence of accessible software.

But on the other hand, according to the author of the book, Visual Investor: How to Determine Trends, there is a significant flow of information. Such a number of the same investment funds have appeared, and they have received such specialization that the investor has no choice but to choose them by analogy with shares. In his book, Murphy voices a possible solution to such an ambiguous and contradictory situation. The author will also point out the main directions in the search for answers to complex questions and help the reader understand the complex aspects of the stock market.

John J. MurphyVisual Investor. How to identify market trends. Read online - Visual Investor. How to spot market trends - John J. Murphy J Murphy visual investor how to spot trends

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Preface

Acknowledgments

Part I. Introduction

What changed

Fund categories

Global funds

Investor needs more information

The benefits of visual investing

Preface

Acknowledgments

Part I. Introduction

What changed

Fund categories

Global funds

Investor needs more information

The benefits of visual investing

Book structure

Chapter 1. What is visual investing

What is meant by market analysis

The desire to combine

What's in your name

Why study the market

Graphics analysts are liars

It's all about supply and demand

The graphics are just faster.

Charts look forward

Charts don't lie

You can follow any set of pictures

The market is always right

It's all about the trend

Isn't the past always a prologue?

Timing is everything

Summary

Chapter 2. 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 kickbacks by ⅓, ½ and ⅔

Weekly reversals

Summary

Chapter 3. Eloquent pictures

Types of charts

Bar graph

Line graph

Japanese candles

Selecting a time scale

Scales

Volume Analysis

Granville balance volume

Graphic models

Reversal or continuation

Volume

Balance volume

Double top and double bottom

Trading ranges

Triple top and triple bottom

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 recognizing graphic patterns

John Murphy: Visual investor how to spot trends

Secrets of Visual Investing