Overview
Author: John J. Murphy Published: 1999 (Revised and Updated Edition; original published as Technical Analysis of the Futures Markets in 1986) Genre: Technical Analysis / Trading Reference Pages: 576 Publisher: New York Institute of Finance
Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications is, without any serious competition, the most complete, authoritative, and widely read textbook on technical analysis ever written. It is the book that has introduced more traders, analysts, and investment professionals to the discipline of technical analysis than any other single work in the field’s history.
If Mark Douglas wrote the definitive book on the psychology of trading, and Al Brooks wrote the definitive book on price action, then John Murphy wrote the definitive book on technical analysis as a complete discipline — its history, its philosophy, its tools, its methods, and its applications across every major financial market.
It is, in the truest sense of the word, a bible — not because it is infallible, but because it is comprehensive, foundational, and enduringly authoritative. To study technical analysis seriously without reading this book is like studying law without reading Blackstone, or medicine without reading Gray’s Anatomy.
Context & Background
John Murphy spent over three decades as a technical analyst, including a long tenure as the technical analyst for CNBC and as director of technical analysis at Merrill Lynch. He is a past president of the Market Technicians Association (now the CMT Association) and a holder of the Chartered Market Technician (CMT) designation.
The original version of this book — Technical Analysis of the Futures Markets — was published in 1986 and quickly became the standard reference text for the CMT examination. The substantially revised and expanded 1999 edition broadened its scope to cover all financial markets — stocks, bonds, currencies, commodities, and futures — and incorporated the technological developments of the intervening decade, including computerized technical analysis and intermarket analysis.
What Murphy brought to the book was not just encyclopedic knowledge but a practitioner’s clarity — the ability to explain complex technical concepts in plain language without sacrificing precision or depth. The book reads as if written by someone who has spent decades not just studying technical analysis academically but applying it in real markets under real conditions.
Core Premise
Murphy’s central argument is both straightforward and profound:
Everything that is known, believed, anticipated, and feared about a financial market is already reflected in its price. Therefore, the study of price — its patterns, its trends, its momentum, and its history — is the most direct and reliable path to understanding where that market is likely to go next.
This is the foundational philosophy of technical analysis, and Murphy articulates it with exceptional clarity in the book’s opening chapters. He grounds it in three classical premises:
- Market action discounts everything — all fundamental information is already embedded in price
- Prices move in trends — directional persistence is a reliable and exploitable characteristic of market behavior
- History repeats itself — human psychological responses to market conditions are consistent enough to produce recurring, identifiable patterns
From these three premises, Murphy builds an entire intellectual edifice — a complete technical framework that spans everything from basic trend theory to advanced intermarket analysis.
Structure of the Book
The book is organized into nineteen comprehensive chapters that proceed logically from foundational philosophy to specialized applications:
- Philosophy of Technical Analysis
- Dow Theory
- Chart Construction
- Basic Concepts of Trend
- Major Reversal Patterns
- Continuation Patterns
- Volume and Open Interest
- Long-Term Charts
- Moving Averages
- Oscillators and Contrary Opinion
- Point and Figure Charting
- Japanese Candlestick Charts
- Elliott Wave Theory
- Time Cycles
- Computers and Trading Systems
- Money Management and Trading Tactics
- The Link Between Stocks and Futures — Intermarket Analysis
- Stock Market Indicators
- Bringing It All Together — A Checklist
This structure is masterfully designed. Each chapter builds on the previous, creating a cumulative technical education that moves from the simple to the complex, from the general to the specific, and from philosophy to application.
Key Themes & Concepts
1. Dow Theory — The Historical Foundation
Murphy dedicates an early chapter to Dow Theory — the intellectual ancestor of all modern technical analysis — and does so with more clarity and completeness than almost any other source. Developed by Charles Dow in the late 19th century and formalized by his successors, Dow Theory established the conceptual framework on which every subsequent development in technical analysis rests.
Murphy covers all six of Dow’s core tenets:
- The averages discount everything
- The market has three trends — primary, secondary, and minor
- Primary trends have three phases — accumulation, public participation, and distribution
- The averages must confirm each other
- Volume must confirm the trend
- A trend is assumed to be in effect until it gives definite signals of reversal
He explains not just what these tenets say but why they remain valid nearly 130 years after their formulation — a testament to the enduring nature of the human behavioral dynamics they describe.
2. Trend Analysis — The Cornerstone of Everything
Murphy’s treatment of trend analysis is the most important section of the book and the conceptual foundation on which everything else is built. He approaches trend with rare precision and completeness, covering:
Defining Trend
Murphy insists on a rigorously structural definition: an uptrend is a series of successively higher peaks and higher troughs; a downtrend is a series of successively lower peaks and lower troughs. This structural definition — rather than a subjective visual impression — is the bedrock of disciplined trend analysis.
The Three Degrees of Trend
Borrowing from Dow, Murphy formalizes the concept of three simultaneously operating trend timeframes:
- Major (Primary) trend — lasting months to years
- Intermediate (Secondary) trend — lasting weeks to months
- Minor (Near-term) trend — lasting days to weeks
Understanding that all three trends operate simultaneously — and that what looks like a correction on a daily chart may be a primary trend on a weekly chart — is one of the most practically important insights in the entire book.
Support and Resistance
Murphy’s coverage of support and resistance is the most thorough and nuanced available in any introductory or intermediate text. He covers:
- The role reversal principle — prior support becomes resistance after a breakdown, and prior resistance becomes support after a breakout
- The significance of the amount of trading at a given level in determining its strength
- The round number effect and its psychological basis
- The percentage retracement levels — particularly the Fibonacci-related 38%, 50%, and 62% retracements
Trendlines and Channels
His treatment of trendlines — how to draw them correctly, how to validate them, when they signal reversals, and how to use trend channels — is definitive. He addresses the common mistake of drawing trendlines through price bars rather than connecting closes or wicks, and provides clear rules for determining when a trendline violation is significant versus merely noise.
3. Chart Patterns — The Visual Language of Markets
Murphy’s coverage of chart patterns is comprehensive, precise, and beautifully illustrated. He covers both major categories:
Reversal Patterns
These are formations that signal the end of a trend and the beginning of a move in the opposite direction:
- Head and Shoulders — the most reliable and widely recognized reversal pattern, covered in exceptional detail including the neckline, volume characteristics, measuring implications, and the significance of the return move
- Double Tops and Double Bottoms — including the critical distinction between a genuine double top/bottom and a simple consolidation
- Triple Tops and Bottoms
- Rounding Tops and Bottoms (Saucers)
- Spike (V) Reversals
For each pattern, Murphy covers: recognition criteria, volume behavior, measuring technique for price targets, and the psychological narrative underlying the pattern’s formation.
Continuation Patterns
These are formations that signal a pause in an existing trend before its resumption:
- Triangles — symmetrical, ascending, and descending, with careful attention to the differences in their directional implications
- Flags and Pennants — the most reliable short-term continuation patterns
- Wedges — rising and falling
- Rectangles
Murphy’s consistent emphasis on volume as a confirmation tool throughout his pattern analysis distinguishes his treatment from more superficial accounts. He shows repeatedly that price pattern alone is insufficient — the volume behavior during and after pattern formation is essential for confirming validity.
4. Volume and Open Interest
Murphy’s dedicated chapter on volume and open interest fills a gap in most technical education. While most traders are aware of volume, few understand it at the depth Murphy provides.
He covers:
- Volume as a measure of the intensity of conviction behind price moves — rising prices on rising volume confirm the trend; rising prices on falling volume warn of weakening momentum
- The on-balance volume (OBV) indicator and its role in identifying accumulation and distribution
- Open interest in futures markets — the total number of outstanding contracts — as a unique additional dimension of market analysis unavailable in equity markets
- The combined interpretation of price, volume, and open interest to produce more reliable conclusions than any single variable alone
His rules for interpreting price-volume-open interest relationships remain among the most practically useful summary frameworks in the book.
5. Moving Averages — The Trend Following Workhorse
Murphy’s treatment of moving averages is thorough, balanced, and appropriately humble about their limitations. He covers:
- Simple, weighted, and exponential moving averages and their respective characteristics
- Single, double, and triple moving average systems
- The moving average crossover — one of the most widely used mechanical trading signals
- The golden cross (50-day MA crossing above 200-day MA) and death cross (50-day MA crossing below 200-day MA) as long-term trend signals
- The envelope and Bollinger Bands approaches to creating dynamic support and resistance around a moving average
Critically, Murphy addresses the fundamental limitation of moving averages directly and honestly: they are trend-following, lagging indicators that work beautifully in trending markets and produce a cascade of costly false signals in ranging markets. This honest acknowledgment of limitations — present throughout the book — is one of its most valuable characteristics.
6. Oscillators and Contrary Opinion
Murphy’s chapter on oscillators is one of the most technically complete treatments of momentum analysis available in any general text. He covers:
Momentum and Rate of Change
The conceptual foundation — measuring the speed of price movement rather than just its direction — is explained with exceptional clarity.
RSI (Relative Strength Index)
Murphy covers Wilder’s RSI in thorough detail, including:
- The 70/30 overbought/oversold levels and their limitations
- Divergence between RSI and price as the most reliable RSI signal
- Failure swings as high-probability reversal signals
- The importance of adjusting RSI parameters for different market conditions and timeframes
MACD (Moving Average Convergence Divergence)
His coverage of MACD — both the indicator and the histogram — includes the crossover signal, centerline crossings, and the critically important concept of divergence.
Stochastic Oscillator
Murphy covers both the fast and slow stochastic, with particular emphasis on the %K and %D crossover signals and the use of stochastic in conjunction with trend analysis.
The Contrary Opinion Principle
His integration of contrary opinion — the idea that extreme bullish or bearish sentiment among market participants is a contrarian indicator — adds a behavioral dimension to his oscillator analysis that most purely technical treatments omit.
7. Japanese Candlestick Charts
Murphy dedicates a full chapter to Japanese candlestick charting — at the time of the book’s 1999 publication, still a relatively new import to Western technical analysis. His coverage, while necessarily less comprehensive than a dedicated text like Steve Nison’s work, is sufficiently complete to give readers a solid foundation in the most important candlestick patterns:
- Single-bar patterns: Doji, Hammer, Hanging Man, Shooting Star, Inverted Hammer
- Two-bar patterns: Engulfing patterns, Harami, Dark Cloud Cover, Piercing Line
- Three-bar patterns: Morning Star, Evening Star, Three White Soldiers, Three Black Crows
He integrates candlestick analysis with his broader Western technical framework, showing how candlestick signals are most reliable when they occur at technically significant levels — trendlines, support/resistance, and moving averages.
8. Elliott Wave Theory
Murphy’s treatment of Elliott Wave Theory is one of the most balanced and accessible introductions to this complex subject available anywhere. He covers:
- The five-wave impulse structure and three-wave corrective structure
- The Fibonacci number sequence and its relationship to Elliott Wave proportions
- The rules and guidelines governing wave structure — including the cardinal rule that Wave 4 cannot overlap Wave 1
- The practical challenges of Elliott Wave analysis — the subjectivity of wave counting, the problem of alternating interpretations, and the tendency of wave counts to be revised after the fact
Crucially, Murphy is honest about the limitations and controversies surrounding Elliott Wave Theory, presenting it as a powerful interpretive framework while acknowledging that its practical application is far more art than science.
9. Intermarket Analysis — Murphy’s Unique Contribution
One of the most distinctive and valuable contributions of this book — and an area where Murphy’s expertise particularly shines — is his comprehensive treatment of intermarket analysis: the study of the relationships between different financial markets and asset classes.
Murphy, who literally wrote the book on intermarket analysis (his separate work Intermarket Technical Analysis is the definitive text on the subject), provides an authoritative overview of the key relationships:
- Bonds and stocks — rising bond prices (falling yields) are generally bullish for stocks; falling bond prices (rising yields) are generally bearish
- Commodities and bonds — rising commodity prices signal inflationary pressure, which is bearish for bonds
- The US Dollar and commodities — a rising dollar is generally bearish for commodity prices, particularly gold
- Gold as an inflation barometer — gold tends to lead other commodity prices and serves as an early warning of inflationary or deflationary pressures
- Global market linkages — how trends in one national equity market influence and are influenced by trends in others
This intermarket framework gives traders and investors a macro-level context for their technical analysis — a way of understanding not just what a single market is doing, but why, and how it fits into the broader global financial picture.
10. Money Management and Trading Tactics
Murphy dedicates a chapter to money management and trading tactics that, while not as comprehensive as dedicated works on the subject, covers the essential principles:
- The risk-reward ratio and why no trade should be entered with a ratio below 3:1
- Position sizing based on the distance to the stop loss
- The three-to-one rule for minimum acceptable profit targets
- Entry tactics — breakout entries versus pullback entries, and the trade-offs between them
- Stop loss placement — technical stops versus dollar stops, and why technical stops are superior
- The importance of diversification across markets and timeframes
His treatment of money management is practical and principle-based, providing the essential framework without drowning the reader in mathematical complexity.
11. The Technical Analysis Checklist
The book concludes with what may be its most immediately practical contribution — a comprehensive technical analysis checklist that walks through the systematic process of evaluating a market from the longest timeframe to the shortest, integrating all the tools covered in the preceding chapters.
This checklist is a distillation of the entire book into an actionable analytical process:
- What is the direction of the major trend?
- What is the direction of the intermediate trend?
- What is the direction of the minor trend?
- Where are the key support and resistance levels?
- Where are the important trendlines or channels?
- Are volume and open interest confirming the trend?
- Where are the Fibonacci retracement levels?
- Are there any major reversal or continuation patterns present?
- What are the moving averages showing?
- Are the oscillators overbought or oversold?
- Are there any divergences between oscillators and price?
- What is the intermarket environment saying?
Used consistently, this checklist ensures that no major technical dimension is overlooked in the analytical process — a discipline that separates professional technical analysis from casual chart-reading.
The Illustrations and Chart Examples
The book contains several hundred chart illustrations covering all major markets across multiple decades. Unlike Brooks’s handwritten annotations, Murphy’s charts are clean, professionally reproduced, and clearly labeled — making them genuinely easy to study.
The breadth of the chart examples is one of the book’s great strengths. By showing the same technical principles operating across stocks, bonds, currencies, commodities, and futures — across bull markets and bear markets, across decades of market history — Murphy convincingly demonstrates the universal applicability of technical analysis principles.
Strengths of the Book
- Encyclopedic completeness: No other single volume covers the full breadth of technical analysis with this level of depth and precision
- Crystal clear writing: Complex concepts are explained with exceptional clarity and illustrated with abundant examples
- Intermarket framework: Murphy’s integration of intermarket relationships gives the book a macro-analytical dimension unavailable elsewhere at this level
- Balance and intellectual honesty: Murphy consistently acknowledges the limitations of every tool he presents — a rare and valuable quality in technical analysis literature
- Universal applicability: The principles are demonstrated across every major asset class and multiple decades of market history
- The checklist: The concluding analytical checklist alone is worth the price of the book
- CMT curriculum standard: Its status as the foundational text for the CMT examination is the ultimate professional endorsement.
Weaknesses & Criticisms
- Breadth over depth in some areas: Given its encyclopedic scope, some topics — Elliott Wave, candlesticks, cycles — receive introductory rather than comprehensive treatment
- Dated technology references: The chapter on computers and trading systems reflects 1999-era technology and is the most obviously dated section
- Limited coverage of modern indicators: Indicators developed or popularized after the late 1990s — Ichimoku Cloud, Volume Profile, Market Profile — are absent
- No coverage of algorithmic or quantitative approaches: The book is entirely discretionary in its orientation, which reflects the era of its writing but limits its relevance to modern quantitative traders
- The intermarket chapter is introductory: Given Murphy’s expertise in intermarket analysis, serious students will need to supplement with his dedicated intermarket volume.
Who Should Read This Book?
| Reader | Verdict |
|---|---|
| Anyone serious about learning technical analysis | Absolutely essential — the starting point |
| Traders preparing for the CMT examination | Required reading — the primary curriculum text |
| Fundamental analysts wanting to add technical tools | Highly recommended |
| Experienced traders seeking to systematize their approach | Valuable reference and framework |
| Portfolio managers and investment professionals | Important for understanding market dynamics |
| Complete beginners with no market knowledge | Begin here — the most accessible comprehensive text |
| Quantitative traders focused on algorithmic approaches | Useful for conceptual foundation, limited for application |
Relationship to Other Essential Technical Analysis Texts
| Book | Relationship to Murphy |
|---|---|
| Technical Analysis of the Futures Markets (Murphy, 1986) | Original version — Murphy’s own predecessor |
| Intermarket Technical Analysis (Murphy, 1991) | Deep dive into Murphy’s most unique contribution |
| Japanese Candlestick Charting (Nison) | Definitive extension of Murphy’s candlestick chapter |
| Elliott Wave Principle (Frost & Prechter) | Definitive extension of Murphy’s Elliott Wave chapter |
| Reading Price Charts Bar by Bar (Brooks) | Advanced applied extension of Murphy’s price action concepts |
| Stan Weinstein’s Secrets for Profiting | Practical application of Murphy’s trend concepts to stocks |
Murphy’s Broader Legacy
Murphy’s contribution to the field of technical analysis extends well beyond this single book. He is one of the architects of intermarket analysis as a formal discipline, and his work in making technical analysis intellectually respectable and professionally credentialed — through his involvement with the CMT Association — has shaped the entire field.
His subsequent books extend and deepen specific dimensions of the framework introduced here:
| Book | Focus |
|---|---|
| Intermarket Technical Analysis (1991) | The relationships between stocks, bonds, currencies, and commodities |
| Intermarket Analysis (2004) | Updated intermarket framework incorporating post-1990s market developments |
| The Visual Investor (1996) | Simplified technical analysis for individual investors |
| Trading with Intermarket Analysis (2013) | Most recent and comprehensive intermarket work |
Standout Quotes
“The technician believes that anything that can possibly affect the price — fundamentally, politically, psychologically, or otherwise — is actually reflected in the price of that market.”
“The most important task of a technical analyst is to identify the direction of the primary trend and to trade in that direction.”
“Support and resistance levels are simply areas on a chart where buying and selling pressure have previously balanced. The more times a level has been tested, the more significant it becomes.”
“Technical analysis is really a study of human psychology and how it is reflected in the collective buying and selling decisions that create price movements.”
“A moving average is a follower, not a leader. It never anticipates — it only reacts.”
Final Verdict
Rating: 9.5 / 10
Technical Analysis of the Financial Markets achieves something that very few books in any discipline accomplish — it is simultaneously a beginner’s guide and an expert’s reference. A trader encountering technical analysis for the first time will find in these pages the clearest, most complete, and most logically organized introduction to the discipline available anywhere. An experienced technician will return to it repeatedly as a reference, a refresher, and a check against the drift that accumulates in any practitioner’s framework over years of market immersion.
Murphy’s genius was not in inventing new technical tools — most of what he covers existed before he wrote about it. His genius was in synthesis and clarity — in taking a vast, fragmented, sometimes contradictory body of technical knowledge and organizing it into a single coherent intellectual framework that any serious student could study, internalize, and apply.
The half-point deduction reflects only the inevitable dating of some content and the introductory rather than comprehensive treatment of certain specialized topics. On its core mission — providing the most complete and authoritative technical analysis education available in a single volume — the book is essentially flawless.
Every trader, investor, and financial professional who uses charts or follows markets owes it to themselves to read this book. Not once, but repeatedly — returning to it at different stages of their development, finding new layers of insight each time.
It is the foundation. Everything else is built on top of it.
For the complete technical education, pair this foundational text with Murphy’s Intermarket Analysis for macro context, Nison’s Japanese Candlestick Charting Techniques for advanced candlestick mastery, and Brooks’s Reading Price Charts Bar by Bar for deep price action application. Together, these four books cover every dimension of technical market analysis at the highest level.