Technical Analysis of the Futures Markets: A Comprehensive Guide to Trading Methods and Applications
by John J. Murphy

Jun 2001

Speaks with authority

Murphy has written a very good reference book, useful for brushing up on the finer points of charting, indicators and so forth. He also does a good job of going over the various technical theories with a straight face, neither endorsing favorites nor casting ridicule on the ones that are more logically suspect (ahem, cough, gann-elliott-fibonacci, cough cough).

The only thing I really took issue with was Murphy's habit of trying to predict the size and extent of price moves, rather than sticking with more general observations regarding momentum and overall movement.

Looking for something to happen before there is evidence of its arrival is a dangerous game for technical players, methinks. To devotees of the approach, a friendly warning -- be careful not to become a fundamentechnicalyst. Meaning, always keep in mind that effective technical analysis highlights probability rather than makes predictions.

Since I just made up the word for this review, I'll now throw in the definition: A "fundamentechnicalyst" is one who makes predictions, just like the run of the mill fundamental analyst does... except the fundamentechnicalyst is making predictions based on technicals -- chart patterns and various indicators, rather than supply and demand, weather, politics, etcetera.

In giving advance notice of how the movie is going to end, the approaches have similarity in their folly. The answer (in my opinion) is to not say, "aha! because of pattern ABC, result XYZ must now occur...."

Instead, ‘tis better to say, "aha! because of pattern ABC, there is a favorable probability that XYZ could occur. But I recognize this is an odds game which means 1) it is normal, reasonable and expected for me to be wrong a portion of the time (the odds say so), and B) I must have a risk point, just in case this is "one of those occurrences" where the outcome falls against me.

The difference in the thought process is subtle but critical. A hard prediction locks you in, creates a psychological commitment, brings your ego into the game, and threatens to screw up your mindset in general. Whereas if you recognize trading is essentially nothing but an odds game, then flexibility and peace of mind have a better shot of remaining intact.

One of the hidden gems of this book was an excellent outline of why the contrarian method works. I don't want to give away Murphy's goods here, so I will just say that he points out a few very interesting reasons why it is natural for the majority to be wrong at turning points, and it is not simply because the masses lack trading ability or intelligence (though that is a factor, of course; the lumbering beast called Crowd is known for strong back and weak mind.)

To sum up, buy this book if you are new to technicals, if you want to brush up on your knowledge, or if you just want a handy reference. But be wary of the prediction trap. Keep your understanding of probability and odds intact.