The Ten Golden Rules of John Murphy for Successful Trading

Who is John Murphy, and Why Are His Trading Rules So Important

John Murphy, often referred to as the “Father of Technical Analysis,” is one of the most influential figures in the world of financial market analysis. With over 35 years of market experience, Murphy served as a technical analyst for CNBC for seven years and authored several best-selling books, most notably Technical Analysis of the Financial Markets, which has become a foundational reference for traders worldwide.

Murphy distilled decades of experience into ten core principles that serve as essential guidelines for anyone seeking long-term success in the financial markets. These are not academic theories but practical, time-tested rules derived from extensive market observation and professional practice.

Rule 1 Identify the Trend

The cornerstone of technical analysis is trend identification. Begin by analyzing longer time frames—monthly and weekly charts spanning several years. Murphy emphasizes starting with the big picture before drilling down into finer details.

How to apply it
    • Start with long-term charts (monthly, weekly) to understand the broader market direction.
    • Shift to medium-term analysis using daily charts.
    • Use short-term charts (4-hour, 1-hour, 30-minute) to fine-tune entry points.

Relying solely on short-term charts can be misleading; understanding the larger trend provides a more comprehensive view.

Rule 2 Trade with the Trend—Don’t Fight the Market

One of Murphy’s most important principles is to align with the prevailing market direction. Trends exist on multiple time frames long, medium, and short term and these may align or diverge.

Practical implementation
    • Define the time frame you intend to trade.
    • Use the corresponding chart to identify trend direction.
    • Ensure your trades align with the dominant trend, not against it.

Rule 3 Identify Support and Resistance Levels

Support and resistance are key price levels that help in timing entries and exits. The optimal time to buy is near a support level; the optimal time to sell is near a resistance level.

How to identify these levels
    • Look for price zones where the market has repeatedly reversed.
    • The more a level is tested, the stronger it becomes.
    • When a resistance is broken, it may turn into a new support, and vice versa.

Use these levels to define stop-loss and take-profit points.

Rule 4 Use Fibonacci Retracements to Measure Corrections

Market corrections often occur in measurable proportions. Fibonacci retracement levels help forecast where these pullbacks might end.

Key Fibonacci levels
    • 23.6% – Minor pullback
    • 38.2% – Moderate correction
    • 50% – Common retracement (not a true Fibonacci level)
    • 61.8% – Golden ratio (deep retracement)
    • 78.6% – Strong correction

Usage
    • In uptrends, look for buy setups around 38.2%, 50%, and 61.8% levels.
    • In downtrends, look for sell setups at the same retracement levels.
    • Combine with other tools for confirmation.

Rule 5 Draw Trendlines

Trendlines are among the simplest and most effective tools in technical analysis. A trendline connects at least two highs or lows and can indicate the continuation or reversal of a trend.

Key traits of valid trendlines
    • Must connect two or more significant points.
    • Uptrend lines are drawn along rising lows.
    • Downtrend lines follow descending highs.
    • A trendline break often signals a potential trend reversal.

Rule 6 Use Moving Averages to Track Trends

Moving averages help identify whether a trend is intact and generate trade signals.

Common types
    • Simple Moving Average (SMA)
    • Exponential Moving Average (EMA)

Popular combinations
    • 5-day and 20-day MA for short-term trading
    • 50-day and 200-day MA for medium to long-term trading

A buy signal occurs when the shorter MA crosses above the longer one; a sell signal occurs when it crosses below.

Rule 7 Apply Oscillators to Spot Overbought and Oversold Conditions

Oscillators are useful in identifying market extremes and potential reversals, especially in ranging markets.

Key oscillators
    • Relative Strength Index (RSI)
    • Above 70 Overbought
    • Below 30 Oversold
    • Stochastic Oscillator
    • Above 80 Overbought
    • Below 20 Oversold

Tips
    • Best used in sideways markets.
    • In trending markets, oscillators can stay overboughtoversold for extended periods.
    • Look for divergence between price and indicator for strong reversal signals.

Rule 8 Use MACD – Combining Trend and Momentum Analysis

The Moving Average Convergence Divergence (MACD) indicator blends moving averages with momentum signals, providing early warnings of trend changes.

How MACD works
    • Buy signal MACD line crosses above the signal line below zero.
    • Sell signal MACD line crosses below the signal line above zero.

Advanced use
    • Watch for divergence between MACD and price as a sign of potential reversals.

Rule 9 Determine if the Market is Trending or Ranging

Not every market is trending. Some periods are range-bound, requiring different strategies.

Tool ADX (Average Directional Index)
    • Scale from 0 to 100
    • Above 25 Trending market use trend-following strategies
    • Below 20 Sideways market use range-trading strategies

Knowing the market condition helps you apply the appropriate trading approach.

Rule 10 Use Volume as a Confirmation Tool

Volume is a key indicator of the strength behind price movements. It acts as a confirmation signal for trend validity and breakouts.

Key insights
    • In an uptrend Volume should increase during price advances.
    • In a downtrend Volume should increase during declines.
    • Falling volume in a continuing trend may signal weakness.
    • High volume during a breakout adds credibility to the move.

Tracking volume during pre-market or futures trading sessions can also provide valuable clues about the upcoming market behavior.

Why John Murphy’s Rules Still Matter

Over three decades since their introduction, John Murphy’s trading rules remain a cornerstone for technical analysts of all levels.

What makes them enduring
    • Comprehensive Cover all aspects from trend recognition to entry timing.
    • Adaptable Apply to all markets—stocks, forex, commodities—and time frames.
    • Behavioral Reflect human psychology and crowd behavior.
    • Testable Their effectiveness can be verified with historical data.
    • Scalable Accommodate modern tools while preserving core principles.

In Murphy’s own words
“Technical analysis is a skill that develops through study and experience. Always remain a student of the market.”

By consistently applying these principles, traders can build a disciplined framework that increases their probability of long-term success.