Big Mike's Trading Blog

Day trading futures, discussing money management and trade management techniques, and more

Murrey Math in more detail

I wrote an article on the forum yesterday giving a lot more specifics about Murrey Math.  I hope you will check it out and discuss it with us:
http://forum.bigmiketrading.com/general-discussion/173-murrey-math.html

The forum has attachments for the indicators and powerpoints, but I wanted to briefly touch on some of what I said in the forum here in the blog.

I know many of you had not heard of Murrey Math Lines (MML) prior to reading my blog or this forum. I must also admit I only recently discovered it, so we will all learn together!

From my blog you probably know I am not a fan of pivot points or fibonacci numbers, simply because I think there are too many of them and they end up covering your entire chart. You can find a reason to trade/not trade every few ticks it seems. I know that many traders are extremely successful using these methods, and that goes to my next point.

Successful trading is all about confidence. If you have confidence in pivot points and fib retracements, then you can make them work. If you have confidence in Murrey Math Lines, you can make them work. I believe this is mostly true of any system. It's when your confidence starts to falter, for instance due to holes in the method, that trouble arises.

So, let's get back on topic and discuss Murrey Math Lines!

First, it's a good idea to memorize what each MML represents.




This graphic illustrates the following:
8/8: Hardest line to rise above (overbought)
7/8: Fast reverse line (weak)
6/8: Pivot reverse line
5/8: Upper trading range
----------------------------------------
4/8: Major reversal line
----------------------------------------
3/8: Lower trading range
2/8: Pivot reverse line
1/8: Fast reverse line (weak)
0/8: Hardest line to fall below (oversold)

Price is between 3/8 and 5/8 MML's about 43% of the time.

Here is another graphic illustrating the buy/sell options:



As you start observing the interaction between price and MML's, you'll start to notice some patterns. Take a look at these:

 
 




What this is showing us is that many times, if price is above the 5/8 line and falling, it will generally stop and consolidate around 5/8 first before heading lower. The same is true in the opposite direction: if price is below the 3/8 line and rising, it will generally stop and consolidate around the 3/8 line before heading higher.

On top of that, if price is between the 5/8 line and 6/8 line and heading higher, the tendency is to bounce off/reverse off the 6/8 line and retest 5/8 before heading higher. The same is true for shorts, if price is between the 3/8 line and 2/8 line and heading lower, it tends to bounce off the 2/8 line and retest 3/8 before heading lower.

Why does price do this? Remember, price is between the 3/8 and 5/8 line about 43% of the time. So before it jumps outside of its comfort zone, it needs to be sure (hence the retest).

Now let's take a quick look at what happens when price moves above 8/8 or below 0/8. This does not occur too often, but when it does it's important to know what to expect.



The above illustration tells us the following: If price moves above 8/8, 75% of the time the price will reverse off the +1/8 line and retest 8/8 before moving higher to +2/8. Similarly, if price falls below 0/8, 75% of the time the price will reverse off the -1/8 line and retest 0/8 before moving lower to -2/8.

Now, if price moves beyond the +1/8 or -1/8 lines, then 95% of the time it will reverse when it hits +2/8 or -2/8. Remember, the market was already in overbought (8/8) or oversold (0/8) mode, so once we push that to the extreme (+2/8 or -2/8) it is extremely unlikely (95% chance) to reverse.

Check out this illustration to see it demonstrated:

 
 




I hope this has been a helpful exercise in better understanding Murrey Math Lines!

Mike

2 comments:

Anonymous said...

i cann't see any pictuers. is it just me?

Big Mike said...

reload and let me know, should be fixed.

Mike

Post a Comment

Note: Only a member of this blog may post a comment.