We all have read John Murphy's laws of technical trading. Haven't we? Well, folks who are yet to read them will get a chance to glance at them here. But, my target readers are those who have not only read them, but perhaps even mugged them by heart. I present to you the commandments of technical trading in an entirely refreshed manner keeping in view my trading experience and modern trading techniques. All observations and opinions are solely mine and I do not intend to disagree with the original rules. They may have worked the best in those times as well may be working still for modern traders in the same old style.
Map the Trends
What is meant by mapping the trend? Mapping is a technique that involves at least 2 entities. Remember those school times when we used to map the left and right columns. Mapping object images on left with their respective names on the right. Mapping those objects on the left with their definitions on the right. And so on. If we try to map this golden rule with modern world of technical analysis, we are talking about trading multiple time-frames in this rule. Essentially, what we are saying is that the trade must be opened in the direction of higher time-frame. So, if you trade using 5-min chart and the trend in 30-min or hourly chart is long, you should look for trading opportunities in long side alone and ignore the opportunities on short side since the underlying trend is long. The same fact holds true for any timescale which you prefer to trade in. Mapping the trend means mapping the direction of your traded timescale with the higher timescale trend. If they do not map or violate in some manner, avoid the trading opportunity.
Spot the Trend and Go with It
You must determine the trend and choose to ride the same. Determining the trend correctly is indeed the most important and time-consuming step in trading. However, buying dips of up-trend and selling rallies of down-trend does not seem to be a flavor of modern stock markets. Rather, I don't mind buying a stock if in a up-trend and has even crossed and stayed above the resistances and selling a stock which is in down-trend and crossed and stayed below the support levels. This I recommend based on my experience in trading the stock markets. The old golden rule of buying low and selling high seem to have been exploited a little too much over the years.
Find the Low and High of It
Find support and resistance levels. Yes. They are indeed important to mark on a chart. However, the best place to buying today is beyond resistance levels and sell below support levels. Breakouts are the flavor of today and not merely buying at support and sell at resistance. No matter how smart we get, markets will overshadow our smartness with time. Time changes the rules of stock trading like it changes everything else.
Know How Far to Backtrack
Backtracking refers to Fibonacci retracing method which is widely used by traders even today. This technique is still seen as working effectively. However, I don't rely even on the retracing technique. The reason is that I tend to dissolve in numbers and levels when I start to consider retracing levels. The retracing is a subjective technique. Let me explain how. Say, you trade using 5-min chart and calculate the crucial retracing points. But, what about retracing points for 15-min, 30-min, hourly, daily, weekly charts. They are bound to be different. So, you calculate all retracing levels for all charts and keep them with you to hope that market will reverse from any of them. I have seen the market reversing beautifully from crucial retracing levels. It all depends on which levels are your favorite to trust, which ones to ignore. It is indeed a personal choice. No wonder different traders using this technique tend to predict the market differently. Personally, this technique is what I stay away purely because of my personal choice. Also, I keep myself away from any technique which tends to time the market which retracing technique does in a subtle way. If it works for you, stay with it. Having said all, it is indeed a remarkable technique to use while trading.
Draw the Line
Trend lines. The first lesson to learn for each trader. Those trend lines whether connecting the lows, highs, bottoms or tops really seem to be very effective. You must draw as many lines as being noticed on your charts. Even in the modern trading world, trend lines are indeed a good resource. However, they are subjective again. In my experience, I have seen these lines break more often than retained. Hence, although I love to draw those lines, but, to look for the trend break signals and not retain signals. Again, it is a personal choice. Anyway you use them; the lines prove to be magical many times.
Follow that Average
Moving averages are by far the sole technique not needing any evidence of surety. And, I believe they will continue to be winners at all times because markets will remain to be disturbed forever. When you have disturbance, averages will help you in some way surely. Averages are built on the unchanged principle that disturbance is followed at some time by normalcy. But what we do not know is when and for how much time. All technical indicators use averages whether to smooth-en the output or assist you in taking trade decisions. No matter what your trading style, moving averages must be relied upon as a great trading tool.
Learn the Turns
Oscillators are being referred to here in this rule. Your stochastic and RSI are contained in this rule. Although the old rule refers to spot the over-bought and over-sold levels hinting a turn could be on the cards, with my experience with stochastic, you will see more winners and with greater profit percentages when you buy in the over-bought zones and sell in over-sold zones. You must ask yourselves why a stock is in over-bought zone. We call it a over-bought zone which gives us a feeling that the stock is stretched a bit too much. However, with my experience, I have noticed that there is nothing called stretched stock. On the contrary, a stock which is apparently stretched is the one in demand. I would call it over demand zone and not over-bought. The old rules were a result of a certain degree of predictability of the markets. Markets were saner at that time. But, today, I would call the markets as more insane. They can show you levels which you could never even imagine despite more regulations. Why? Because markets do not move as per regulations, but as per human mind. The human mind though was always mad or insane; it truly is far close to being mad today than it was 20-25 years ago. More mad is your mind, more insane shall be the markets. Hence, I would say do not learn the turns. But, learn to grab a seat while the stock is heading towards even more mad levels. Oscillators can surely help you there.
Know the Warning Signs
This is where I agree even in today's trading climate provided you really can know the warning signs. No matter what you use, whether A-D-X for directional sense or M-A-C-D, you ought to end up either miss a very good trade or trade in favor of a disaster. For me, the only way to know a warning sign is if you know something which nobody else knows. You surely can evolve into a true stock predictor by giving enormous amount of screen time. You can know the warning signs merely by looking at those candles. Irrespective of the technique, you must learn to understand such warnings before you can become a successful trader.
Know the Confirming Signs
Volume and open interest is being referred to here. I almost never use them in my trading. With my experience, I can say that if at all markets and market trading can ever be manipulated (I strongly believe it cannot be manipulated. Even if it could, it would be for a very short span of time like seconds), volume and open interest would be used tools. These provide the most misleading signals as per me. Again, if they work for you, stick with them. But, not me. However, I certainly believe in trading in high liquid stocks only since those with too less volume or open interest tend to give you incorrect signals many times.
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