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Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications

John J. Murphy · 3 HN comments
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Amazon Summary
John J. Murphy has updated his landmark bestseller Technical Analysis of the Futures Markets, to include all of the financial markets. This outstanding reference has already taught thousands of traders the concepts of technical analysis and their application in the futures and stock markets. Covering the latest developments in computer technology, technical tools, and indicators, the second edition features new material on candlestick charting, intermarket relationships, stocks and stock rotation, plus state-of-the-art examples and figures. From how to read charts to understanding indicators and the crucial role technical analysis plays in investing, readers gain a thorough and accessible overview of the field of technical analysis, with a special emphasis on futures markets. Revised and expanded for the demands of today's financial world, this book is essential reading for anyone interested in tracking and analyzing market behavior.
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> broad economical trends and projections

Any good Economics Text book will do: like Principles of Economics/ Principles of Microeconomics, Gregory Mankiw

You can also try, although, personally I have not taken these:

> FT and all the stats that CNBC shows me

For Investment valuation and Corporate Finance Damodaran is one of the best sources:

Visit his blog, read his books. He has online classes as well

Also you can try, (I've not taken this course):

For Value Investing, Benjamin Graham is a classic:

> For Technical Analysis and Futures Trading though, there are tonnes of books. May be you can start with these:

And lastly,

> combine my CS background with Finance and do something interesting in it

Fantastic. Thanks for this!
Damodaran and Graham are fantastic, as is Shiller's Financial Markets. His 2008 course on Open Yale was an early spark in my career.

After a quick look at the "Technical Analysis" book preview on Amazon, I would caution that technical analysis is generally a rorschach test of humans finding patterns in data when there really aren't any. Skip that one.

I'm enjoying this discussion heavily, particularly your contributions to it which are great. Just a minor (but important) nitpick -

> A stock analyst is going off of timing and trends more than data.

Not necessarily. You can broadly divide analysis into two camps - "technical analysis" [1] which is what you're describing, and "fundamental analysis" [2] which is looking more at intrinsic value, numbers, assets, things like that.

Warren Buffett, for instance, does plenty of stock analysis and he's not a technical trader at all. He repeatedly says he doesn't try to time the market. [3]

The first book I read on trading - Technical Analysis of the Financial Markets [4] - was from a technical analysis perspective, and I lost money trying to implement it.

Then I read about value investing and started trying to apply those principles - only buying fundamentally sound stocks trading at a favorable price earnings ratio, either in fundamentally defensible businesses or with lots of solid assets on their books, and buying with a big margin of safety.

I haven't had a losing trade since then, though in fairness my sample size is small and I don't sell unless the price of a stock I bought gets over what I consider reasonable. I'm currently holding Microsoft and HP which are down, but both I think are way undervalued (Microsoft is extremely stable, has some upside in the way of a strong research division, and could potentially translate a hit like the Kinect into alternate input devices. HP is being treated as toxic despite owning some nice high margin businesses that most people don't think about when they think of HP, as well as a huge patent portfolio and some good assets... yeah, their management sucks lately, but who cares if a company is trading below its liquidation value? anyways, do your own research, check the financials, etc, etc)

Anyways. Not all traders are technical traders. Fundamental analysis is also analysis, and probably easier to implement to be consistently successful. The top book on that is "The Intelligent Investor" [5] by Ben Graham, which Warren Buffets calls the best book on finance ever written (I agree).



[3] “If you’re an investor, you’re looking on what the asset is going to do, if you’re a speculator, you’re commonly focusing on what the price of the object is going to do, and that’s not our game.” (1997 Berkshire Hathaway Annual Meeting)

[4] Generally considered one of the best intro books to technical analysis.


I love your response. This is the kind of thoughtful reply I greatly respect, and yes, when I said 'economists' vs. 'analysts', I really wanted to just make a point between how detailed an economist can be and the difference between such and a stock trader.

Your response is one of the reasons I have to force myself to stay away from Hacker News; I have too much to do but there are some great conversations on here.

> Your response is one of the reasons I have to force myself to stay away from Hacker News; I have too much to do but there are some great conversations on here.

This might shock you, but 2-3 years this was the only kind of conversation we ever had on HN with any regularity. It was pretty cool back then.

Anyways, I appreciate the kind words and the discussion as well - drop a line if I can ever lend a hand with anything.

> The top book on that is "The Intelligent Investor" [5] by Ben Graham [...]

Isn't the top book on value investing "Security Analysis", and "The Intelligent Investor" is just the popular science alternative?

I've come to almost the exact opposite conclusion. I went from fundamental trading to almost completely technical/algorithmic trading.

After the 87 crash, the 2001 crash and the 2008 crash, I'm a firm believer that we will experience crashes every 7-10 years, because the financial markets are fundamentally unstable, and keeping your money in the stock market for long term will only lose you money.

I believe the only way to be in the stock market is to realize that it is a game, that the dominant players all believe it is a game, and you have to know how to play by their rules. In this case, it means that you have to follow the technicals in order to understand the ebbs and flows of the market, and know how to trade, not invest. I believe that given the nature of the markets these days, it's more of a market of probabilities, and short-term momentum rather than fundamentals.

I still think there is room for "investing", but it is high risk to hold things in the market these days.

Elliott Wave much?
Buy stock of fundamentally solid companies that pay dividends when their stock price is low.

Sell if their stock price gets overinflated, otherwise just hold and collect dividends.

Don't buy stocks that are trading at stupid prices. Don't even buy stocks that are trading at reasonable prices. Only buy stocks that are trading at a steep discount to their reasonably projected future cashflow + asset value + large margin of safety.

I mean, you kind of can't lose if you do that. Sure, sell if your stocks get overheated. Or just collect dividends forever if it's a great company that's consistently underpriced. Avoid stocks that are priced high relative to earnings/assets, and even avoid reasonably priced stocks. Kind of a no lose proposition that way, no?

The problem with a strategy of only buying stocks when they're clearly undervalued is that it's generally extremely rare for companies to actually trade at an obviously undervalued level. Generally, when their price is depressed below the level you'd expect based on their dividends and/or earnings, it's because there's some other black cloud hanging over their future earnings potential.

It's great in theory, but in practice it's not realistic to believe you can reliability know what a company's "reasonably projected future cashflow" really is. Even if they're in the most reliable business in the world, if someone comes up with a lower-cost alternative next year, all those future cash flows go poof.

Conversely, it's damn hard to tell when some stocks are overpriced. I remember folks saying in 2007/2009 that Apple was wildly overpriced at about $90. I heard the same things about Amazon over the past few years.

There are plenty of problems with this strategy.

1) Dividend might get cut. All the banks had their dividends drastically cut, and their stock prices kept dropping. I'm talking pre-crisis, EVERYONE was saying that the financials were screaming buys. When a stock's dividend yield is too rich relative to its stock price, and it can't get its stock price to appreciate, many companies will tend to just cut the dividend outright.

2) Just because a stock is low doesn't mean it won't go lower, especially if the prospects for growth keep dropping. Look at CSCO. People bought in at 21 thinking it was a good value investment. Now they are trapped longs, waiting to get out at break even. The same goes for MSFT and HP at this point. These are called value traps, because your money gets trapped while you wait for a pop.

The worst case scenario, which happened in 2008 to many, many stocks and which I believe will continue happening, is that you buy a "value" stock, the we get a recession or another crash, the stock price halves, and then the dividend gets cut or eliminated altogether. Then you're left holding a crappy stock for months or years.

The point is that your strategy is not fool-proof. I believe there are probably plenty of companies where it might work, but there are also plenty of companies in-this-day-and-age where you could get massively whacked following this strategy. And history in the last 3-5 years shows that it doesn't work that well.

I did it with WaMu and lost a boatload. Watching cashflows, etc, etc is fine during a healthy environment, but right now, we have no clues as to the underpinnings of many, many companies, because you really need to understand how to interpret financial statements better than a casual observer. Look at Groupon... would you have been able to tell that their cashflows were positive only because they collected their moneys quickly, but paid their merchants slowly? That takes significant amount of experience to understand this. Probably for most of us here that isn't in the industry, it would have looked great.

Good insights here, but -

> EVERYONE was saying that the financials were screaming buys.

Investing on fundamentals means giving not a damn what everyone is saying or thinking. It's just about the numbers. Actually, if EVERYONE is really thinking something is a great buy, it's probably not.

> Look at CSCO. People bought in at 21 thinking it was a good value investment.

Nothing at 21 is ever a value investment. That's still looking for growth. Just because a whole industry is insane doesn't mean a less insane number is good. As a very rough and flexible guideline, I won't spend too much time looking at something with price/earnings above 12. There's just too many solid companies priced below that with solid businesses and assets.

> The worst case scenario, which happened in 2008 to many, many stocks and which I believe will continue happening, is that you buy a "value" stock, the we get a recession or another crash, the stock price halves, and then the dividend gets cut or eliminated altogether. Then you're left holding a crappy stock for months or years.

That's a good point, yeah. I'm comfortable holding forever with my buys, and when "forever" comes around these things correct, but you've got potential opportunity cost in there.

Good comment here, good discussion, cheers.

I still stand by my above claim that Tech Analysis (and especially LONG term trending) has no theoretical basis, except for the fact that everyone else believes in it.

Then you better not buy index funds. Those are basically trend-following systems over the long term.

And there is statistical data to back up that trend following does work.

I think he means that there is no theoretical basis for a long-term system that claims to beat the indexes. Index funds don't, by definition.
regardless of whether it has "theoretical basis", there are plenty of hedge funds that make plenty of money with it.
I agree that trend analysis has a lot smaller foundation for the long term, but in the short run its essentially analyzing the supply and demand of the stock, which can be predicted (not all of the time of course).

Outside factors like news don't occur everyday, so the using technical analysis for intraday trading is very reasonable

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