The full name is: “Technical Analysis of the Financial Markets:
A Comprehensive Guide to Trading Methods and Applications”
by John J. Murphy

Carrying on with my financial education, a serious text on
technical reference was due. After having read a soft primer
on fundamental analysis (Lynch), I felt a need to see
“the other side” as well. There’s an Israeli online forum of
stock market enthusiasts I’m following, and most of the discussions
there are “technical” (no doubt because it’s the sexiest topic
of stock trading – more on this later). So, I just wanted to
finally understand all those idioms people are using. I mean, I can
grasp what a “trend” is, but when they dive into RSI, stochastics,
Doji candles, continuation head & shoulders, fibonacci retraces and
Eliott’s 3rd wave I just feel a need to get myself acquianted with
the whole topic.

So, after some online searching, I came upon “Technical Analysis of
the Financial Markets” as the de-facto text on the topic. Its first
edition came out somewhere in the 80s, and since then it’s definitely
considered as “the one, if you only want to read one book on the topic”.

The book itself is somewhat encyclopedic in nature. Over 500+ pages,
the author presents the theory/applications of technical analysis,
from the best-known methods to some obscure ones. Though there is
probably more to the topic than covered in this text, I’m sure the
99.9% of the things people actually know/use is there.

It starts with a chapter on the philosophy of technical analysis,
and then dives right into the theory. Beginning with the “simplest”
and the most traditional – Dow theory (trends, basic charting),
and going on to charting, reversal/continuation patterns, options/futures,
moving averages, oscillators, Japanese candle-sticks, time series,
and so on. The scope, as I mentioned, is vast.

I personally feel that there’s too little “philosophy” in this book.
The first chapter is good, and is a must read for everyone who’s
interested in stocks, but I think that the rest of the book would use
some “justification” as well. At some point, the impressions is that
“patterns” are thrown at the reader in a rapid pace, without giving time
to think them over, and without even trying to stress the reason _why_
these patterns work. Maybe it’s because the book is intended more as
a reference and not as a light-read.

In this review I don’t want to go much into my own view of trading
- fundamental vs. technical, etc. I think, however, that this book
should’ve spent a little more time explaining some of the drawbacks
of techinal analysis, it would be only fair. The amount of information
is overwhelming, and one could be easily fooled to believe that these
are “magic methods” that just work. Naturally, most of the examples
are tailored with perfect patterns. Perhaps more examples which show
how patterns fail, and explain why they fail would be helpful.

Technical analysis is dangerous exactly because of such books – a wealth
of information, “neat tricks” that tell you how stocks will behave.
What is more “cool” – a trader that spends days reading financial reports
(dull !!) of a company prior to deciding about buying their stock, or
someone who fiddles with formulas on a computer, drawing pretty “candles”,
“trend lines” and counting fibonacci sequences ? Clearly, the latter
is much more attractive to investors. People want it quick, without too
much hard work. “Just show me the numbers”.

To the defense of the author, I must say that he indeed warns people
of using the techniques frivolously. Applying many analysis techniques
in parallel is recommended, and tips are given on how to manage investment
funds better (how much money to allocate to each trade, etc.)

All in all, the book is useful if you’re seriously into trading. Although
technical analysis is definitely no panacea, I think that it can be combined
with fundamentals, and some common sense to produce good results. After all,
though the market is clearly driven not only by sentiments, it’s not driven
solely by fundamentals either. Technical elements do play role in the movement
of stocks, and having tools to analyze these elements is important.

Related posts:

1. technical analysis – a critical look
2. Book review: “Beating the street” by Peter Lynch
3. Book review: “A random walk down Wall Street” by B. Malkiel
4. Book review: “Stock market for beginners”, by S. Simonovsky
5. annoying stock market commentaries

This entry was posted on Thursday, July 29th, 2004 at 23:03 and is filed under Book reviews, Finance. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.