According to John J. Murphy, CNBC’s trader and technical analyst, simplifying its method of operating in the markets has significantly improved its results, as it affirmed during a trading conference held in the city of New Orleans, USA.
According to Murphy, he relies fully on five and sometimes six technical indicators, including indicators of relative strength, trend lines, moving averages, bollinger bands, Fibonacci levels and classical formations in graphs such as triangles and double-floor or double-ceilings .
According to Murphy the trader must operate a combination of technical signals, never a single indicator. It also states that before carrying out an operation establishes a “good” column and a “bad” column related to technical studies, that is to say that it observes to what extent its indicators support or not certain idea of trading. If the “good” column offers overwhelming evidence supporting a particular operation, Murphy will logically do the operation. On the other hand, if the evidence supporting this trade is not very solid, it will not even consider the idea any more.
In the past, Murphy correctly predicted a mid-summer drop in the SOX index (the stock index of US semiconductor companies). His reasoning for such a prediction was quite simple: First of all the SOX bullish trend line was broken which was followed by a double-roof formation. The first sign that it had already reached a high was the breach of the bullish line stated later.
With regard to moving averages for individual stocks, Murphy prefers to use 50, 100 and 200 days. So if the 200-day moving average of a particular stock is broken down, most likely that stock will be in trouble for several days at least. Also, for sectors, if the 50-day moving average is broken down for a given sector, it is fairly certain that the sector is in trouble.
A trading technique used by Murphy is to graph a market sector divided by the S & P 500, this being one of his favorite methods to determine if that sector has a performance below the market in general. Examples of these relationships are as follows:
The SOX index divided by the S & P 500.
The NASDAQ index divided by the S & P 500.
Another good indicator of technical analysis is MACD (Moving Average Convergence Divergence) according to Murphy. The MACD employs exponential moving averages, as opposed to the traditional use of simple moving averages in combination with an oscillator. The analyst who developed this indicator is called Gerald Appel.
Murphy says long-term technical signals are much more reliable than short-term signals. From their point of view the long-term charts give the trader the benefit of the prospect.
Currently many traders consider Murphy’s book “Technical Analysis of Futures Markets” as the bible of technical analysis, which is why it is never missing the shelves of many professionals in the field of trading.