Edwards & Magee Chapter 1 Page 1

Technical Analysis of Stock Trends by Robert D. Edwards and John Magee is widely considered to be the Bible of Technical Analysis. Today I thought it would be a good idea to share with you guys Page 1 of Chapter 1, so you can see exactly what these guys were thinking when they first wrote the book in 1948.

Enjoy!

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The Technical Approach to Trading and Investing

Few Human activities have been so exhaustively studied during the past century, from so many angles by so many different sorts of people, as has the buying and selling of corporate securities. The rewards which the stock market holds out to those who read it right are enormous; the penalties it exacts from careless, dozing, or "unlucky" investors are calamitous. No wonder it has attracted some of the world's most astute accountants, analysts, and researchers, along with a motley crew of eccentrics, mystics, and "hunch players", and a multitude of just ordinary hopeful citizens.

Able brains have sought, and continue constantly to seek, for safe and sure methods of appraising the state and trend of the market, of discovering the right stock to buy and the right time to buy it. This intensive research has not been fruitless - far from it. There are a great many successful investors and speculators (using the word in its true sense, which is without opprobrium) who, by one road or another, have acquired the necessary insight into the forces with which they deal and the judgement, the forethought, and the all-important self-discipline to deal with them profitably.

In the course of years of stock market study, two quite distinctive schools of thought have arisen, two radically different methods of arriving at the answers to the trader's problem of what and when. In the parlance of "the Street", one of these is commonly referred to as the fundamental or statistical, and the other as the technical. (In recent years a third approach, the cyclical, has made rapid progress and, although still beset by a "lunatic fringe", it promises to contribute a great deal to our understanding of economic trends.)

The stock market fundamentalist depends on statistics. He examines the auditors' reports, the profit-and-loss statements, the quarterly balance sheets, the dividend records, and policies of the companies whose shares he has under observation. He analyzes sales data, managerial ability, plant capacity, the competition. He turns to bank and treasury reports, production indexes, price statistics, and crop forecasts to gauge the state of business in general, and reads the daily news carefully to arrive at an estimate of future business conditions. Taking all these into account, he evaluates his stock; if it is selling currently below his appraisal, he regards it as a buy.

As a matter of fact, aside from the greenest of newcomers when they first tackle the investment problem, and to whom, in their inexperience, any other point of view is not only irrational but incomprehensible, your pure fundamentalist is a very rare bird. Even those market authorities who pretend to scorn charts and "chartists" utterly are not oblivious to the "action" chronicled by the ticker tape, nor do they conceal their respect for the Dow Theory which, whether they realize it or not, is, in its very essence, purely technical.

Definition of Technical Analysis

The term "technical", in its application to the stock market, has come to have a very special meaning, quite different from its ordinary dictionary definition. It refers to the study of the action of the market itself as opposed to the study of the good in which the market deals. Technical Analysis is the science of recording, usually in graphic form, the actual history of trading (price changes, volume of transactions, etc.) in a certain stock or in "the Averages" and then deducing from that pictured history the probable future trend.

.....the technician claims, with complete justification, that the bulk of statistics which the fundamentalists study are past history, already out of date and sterile, because the market is not interested in the past or even the present! It is constantly looking ahead, attempting to discount futurt developments, weighing and balancing all the estimates and guesses of hundreds of investors who look into the future from different points of view and through the glasses of many different hues. In brief, the going price, as established by the market itself, comprehends all the fundamental information which the statistical analyst can hope to learn (plus some that is perhaps secret from him, known only to a few insiders) and much else besides of equal or even great importance.

All of which, admitting its truth, would be of little significance were it not for the fact, which no one of experience doubts, that prices move in trends and trends tend to continue until something happens to change the supply-demand balance. Such changes are usually detectable in the action of the market itself. Certain patterns or formations, levels or areas, appear on the charts which have a meaning, and can be interpreted in terms of probable future trend development. They are not infallible, it must be noted, but the odds are definitely in their favor. Time after time, as experience has amply proved, they are far more prescient than the best-informed and most shrewd of statisticians.

The technical analyst may go even further in his claims. He may offer to interpret the chart of a stock whose name he does not know, so long as the record of trading is accurate and covers a long enough term to enable him to study its market background and habits. He may suggest the he could trade with profit in a stock knowing only its ticker symbol, completely ignorant of the company, the industry, what it manufactures or sells, or how it is capitalized. Needless to say, such practice is not recommended, but if your market technician is really experienced at his business, he could, in theory, do exactly what he claims.

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Source:

Technical Analysis of Stock Trends (Edwards & Magee)

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