In the investment market, whether it is stocks, futures, or other traders, how to achieve stable profits is the "Holy Grail" they have been pursuing in trading. If trading theory is the foundation of investment trading, then trading technology is the practical operation. The famous American technical analysis master John Murphy has published several best-selling books on technical analysis, which are regarded as the "Bible" of technical analysis in China.
Let's learn about the three cognitions he proposed about technical analysis and the ten trading principles.
1. Correctly understand and understand technical analysis
Technical analysis is to infer and predict future market changes with the help of historical information of the market. The history of the market will be repeated, but this repetition is by no means a simple repetition. For example, the Shanghai Composite Index has experienced a 7-year bull market, showing a complete 5-wave upward pattern, among which the 1st, 3rd, and 5th three driving waves all have a 5-wave structure, but their internal structure, operating time, and wave length are all different.
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Technical analysis mostly uses statistical analysis as a means, and the analysis results are actually a probability event, not an absolute event. That is to say, the market analysis results are just a kind of prediction, which may be right or wrong. We can only use this prediction result as the basis for formulating investment plans, but we must be prepared to deal with the wrong prediction results in the plan. And stop loss is a necessary measure to prevent the analysis results from being wrong.
Each technical analysis method has its advantages and disadvantages, and they are all applicable to certain market environments, not all markets. For example, trend indicators (such as moving average methods) are suitable for use in a market with a trend. In a consolidating market, generally speaking, their application value will be reduced. Oscillation indicators (such as the Relative Strength Index, Stochastic Index, etc.) are suitable for a consolidating market, and their application value will be reduced in a market with a trend.
Therefore, there is no distinction between the advantages and disadvantages of technical analysis methods, only the difference between applicability and inapplicability to specific markets. Do not easily give up a certain method, nor apply a certain method casually. Investors must master the application characteristics of technical analysis methods and choose different analysis methods for different market environments.II. Top Ten Trading Principles in Practical Analysis
1. Follow the major trend, but go against the minor trend: Trends are divided into short-term, medium-term, and long-term. First, determine which type of trend you are dealing with. Buy on an uptrend pullback and sell on a downtrend pullback to seize the right trading opportunities.
2. Focus on the long-term trend: Study long-term charts, pay more attention to monthly and weekly charts, and not just hourly or daily charts. Maintain a broad perspective, as only with a certain grasp of the long-term trend will your trading confidence be more substantial.
3. Draw trend lines: Trend lines are one of the simplest and most effective graphical analysis tools. An upward trend line connects two consecutive lows, while a downward trend line connects two consecutive highs. Prices usually pull back to the trend line and then continue the upward trend. A breakthrough in the trend line is often a signal of a trend change. An effective trend line should be touched at least three times, and the more times the trend line is tested, the more important it becomes.
4. Confirm signals: Trading volume precedes price, confirming whether new funds support the existing trend. A solid upward price trend should be supported by an increase in trading volume and an increase in open interest.
5. Anticipate turning points: By tracking oscillator indicators, determine whether the trading instrument has overshot its rise or fall and is about to reach a turning point. Pay close attention to whether technical divergence signals have appeared in RSI, KDJ, and MACD.
6. Identify highs and lows: Important support and resistance levels determine the next possible direction. Once a resistance high is broken, it often provides support for future pullbacks. In short, old highs become new lows.
7. Follow moving averages: Moving averages are trend-following indicators, so they are most effective in markets with clear trends. Pay attention to the golden cross and death cross of moving averages. Moving averages can tell us whether the existing trend is still ongoing and can also help confirm trend changes.
8. Judge the extent of the pullback: Use percentage lines and Fibonacci lines to judge the strength of the pullback in the instrument. The smallest pullback is usually one-third of the previous trend, and the largest pullback is usually two-thirds. A 50% pullback is the most common, and the 38% and 62% Fibonacci retracement lines are also worth paying attention to.9. Warning Signals: Taking the MACD as an example, when the fast line crosses the slow line from below and both lines are below zero, a buy signal is generated; when the fast line crosses the slow line from above and both lines are above zero, a sell signal is generated. Signals from the weekly chart take precedence over those from the daily chart, and the MACD histogram can issue earlier warning signals of trend changes.
10. Judging Trends or Oscillations: Using the Average Directional Index (ADX) to determine whether a market is in a clear trend or a range-bound market, an increasing ADX indicates the presence of a strong trend, while a decreasing ADX indicates a range-bound market with no clear trend. By observing the direction of the ADX line, traders can determine the trading style and indicators suitable for the current market environment.
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