Technical Analysis of Stock Trends

by Edwards, Robert D.

• ISBN13: 9780814406809
• ISBN10: 0814406807
• Edition: 8th
• Format: Hardcover
• Copyright: 2001-05-01
• Publisher: Amacom Books

Summary

The classic work that lays the groundwork and sets the standards for technical investors, Technical Analysis of Stock Trends, 8th Edition, is a critical reference for investors-especially in today's tumultuous markets. This seminal book-the first to produce a methodology for interpreting and profiting from the predictable behavior of investors and markets-revolutionized technical investment approaches and continues to show traders and investors how to make money regardless of what the market is doing.Now, with the addition of noted technical analysis authority W. H. Charles Bassetti (editor)-as well as charts and graphs that pertain to today's market environment and major stocks-this completely updated and revised edition confirms the wisdom of the original work for today's markets. Technical traders and chartists will turn to it for information on utilizing electronic markets, the Internet, wireless communications, and new exchanges, plus current ideas on portfolio management and risk management; chapters on futures and derivatives charting and trading; expanded treatment of "runaway" markets-to help put the recent Internet stock craze in perspective."Chart formations," states Charles Bassetti in the preface, "are the language of the market." Technical Analysis of Stock Trends, 8th Edition, translates that language for a new generation of technical traders and investors.

Author Biography

Robert D. Edwards and John Magee wrote the original edition of Technical Analysis of Stock Trends. Magee is considered the "father of technical analysis," while Edwards is a pioneer in pattern formation and trend analysis. W. H. Charles Bassetti (San Geronimo, CA) is Adjunct Professor of Finance and Economics at Golden Gate University.

Table of Contents

Preface to the Eighth Edition	v
In Memoriam	xix
Prefaces to Previous Editions	xxi
Part 1: Technical Theory
The Technical Approach to Trading and Investing	3	(6)
Technical vs. Fundamental Theory
Philosophy of Technical Approach
Drawbacks of Fundamental Approach
Charts	9	(4)
Different Types of Charts
Data Required
Arithmetic and Logarithmic Scales
The Dow Theory	13	(12)
The Forerunner of All Technical Theories
Use of Market Averages
Basic Tenets of Dow Theory
Characteristic Phases of Bull and Bear Trends
The Dow Theory in Practice	25	(20)
Applying Dow Theory to the Averages through 1941
The 1942 Action
The Bull Market Signal
The Secondary Correction of 1943
Bull Market Reaffirmed
The Spring of 1946
Third Phase Symptoms
The Bear Market Signal
The Dow Theory's Defects	45	(4)
Second Guessing
The ``Too Late'' Criticism
The Fifty-Year Record of Results
Little Help in Intermediate Term Trading
The Dow Theory in the 20th and 21st Centuries	49	(4)
Updating the Record of the Dow
Results to 2000
Important Reversal Patterns	53	(18)
Divergence between Individual Stocks and Averages
Definition of Reversal and Reversal Formation
Time Required to Build
How Insiders Distribute
The Head-and-Shoulders Top Pattern
Volume Characteristics
Breaking the Neckline
Symmetry and Variations
Measuring Formula
Important Reversal Patterns --- Continued	71	(24)
Head-and-Shoulders Bottoms
Volume and Breakout Differences
Multiple Head-and-Shoulders Patterns
Rounding Tops and Bottoms
Trading Activity on Rounding Turns
Dormant Bottoms
Patterns on Weekly and Monthly Charts
Important Reversal Patterns --- The Triangles	95	(30)
Triangles
The Symmetrical Form
Volume
How Prices Break Out
A Theoretical Example
Reversal or Consolidation
Right Angle Triangles, Ascending and Descending
Measuring Implications
On Weekly and Monthly Charts
Important Reversal Patterns --- Continued	125	(22)
Rectangles
Pool Tactics
Relation to Dow Line
Double and Triple Tops and Bottoms
Important Recognition Criteria
Completion and Breakout
Triple Tops and Bottoms
Other Reversal Phenomena	147	(30)
Broadening Formations
The Broadening Top
Right-Angles Broadening Patterns
Diamonds
Wedge Formations
The Falling Wedge
Rising Wedges in Bear Market Rallies
The One-Day Reversal
Selling Climax
Short-term Phenomena of Potential Importance	177	(8)
Key Reversal Days
Spikes
Runaways
Consolidation Formations	185	(22)
Flags and Pennants
Pennant vs. Wedge
Measuring Formula
Reliability Tests for Flags and Pennants
On Weekly and Monthly Charts
Head-and-Shoulders Consolidations
Scallops and Saucers
Modern vs. Old-Style Markets
Gaps	207	(20)
Which Gaps Are Significant?
Common or Area Gaps
Breakaway Gaps Continuation or Runaway Gaps
Measuring Implications
Exhaustion Gaps
Island Reversals
Gaps in the Averages
Support and Resistance	227	(22)
Definition of Support and Resistance Levels
How They Reverse Their Roles
Reasons for Support/Resistance Phenomena
Tests for Determining Potential
Importance of Volume
Rules for Locating
Implications of a Breakthrough
Round Figures
Historical Levels
Panic Moves and Recoveries
Pattern Resistance
Support-Resistance in the Averages
Trendlines and Channels	249	(28)
Basic Trendlines
How They Form
Arithmetic vs. Logarithmic Scale
Intermediate Uptrends
Tests for Trendline Authority
Validity of Penetration
Throwback Moves
Amendment of Trendlines
Double Trendlines
Trend Channels
Practices to Avoid
Consequences of Penetration
Intermediate Downtrends
Corrective Trends
The Fan Principle
Major Trendlines	277	(10)
Different Forms of Major Uptrends
Arithmetic and Logarithmic Scaling
Tests for Significance
Major Downtrends
Major Trend Channels
Trendlines in the Averages
Trading the Averages in the 21st Century	287	(4)
Power of Trendlines in Trading the Averages
Redrawing the Trendlines as Markets Accelerate
Technical Analysis of Commodity Charts	291	(6)
Theoretical Application
Commodity Markets of the 20th (and 21st) Century Suitable for Technical Trading
Intrinsic Differences Between Stocks and Commodities as Trading Mediums
Summary and Some Concluding Comments	297	(6)
Philosophy of Technical Approach
Review of Technical Methods
Need for Perspective
Patience
Technical Analysis and Technology in the 21st Century: The Computer and the Internet, Tools of the Investment/Information Revolution	303	(8)
The Computer and the Internet
Tools of the Investment/Information Revolution
Separating the Wheat from the Chaff
Advancements in Investment Technology	311	(26)
Options and Derivatives
Quantitative Analysis
Futures on Indexes
Options on Futures and Indexes
Modern Portfolio Theory
Importance to the Private Investor
Part 2: Trading Tactics
Midword	333	(4)
The Tactical Problem	337	(10)
Characteristics of Desirable Speculative Stocks
Strategies and Tactics for the Long-term Investor	347	(4)
What's a Speculator, What's an Investor?
Strategy of the Long-term Investor (Hypothetical)
Rhythmic Investing
The All-Important Details	351	(4)
Source of Data
Suggestions on Chart Keeping
Using Computer Technology
The Kind of Stocks We Want --- The Speculator's Viewpoint	355	(4)
Leverage
Swing Habit
Volatility
The Kind of Stocks We Want --- The Long-term Investor's Viewpoint	359	(8)
Changing Opinions about Conservative Investing
Index Shares and Similar Instruments
Importance of Modern Trading Instruments
Selection of Stocks to Chart	367	(4)
Character and Habits
Number
Advantages of Listed Issues
Selection of Stocks to Chart --- Continued	371	(6)
Diversification
Price Range
Swing Power within Groups
Slow-Moving Groups
Choosing and Managing High-risk Stocks: Tulip Stocks, Internet Sector, and Speculative Frenzies	377	(12)
Managing Speculative Frenzies and Runaways
The Probable Moves of Your Stocks	389	(6)
Choosing Stocks which Have the Potential to Move Volatility
Two Touchy Questions	395	(8)
Use of Margin
Short Selling
Round Lots or Odd Lots?	403	(2)
Extra Cost of Odd Lots
Occasional Advantages
Determining Trade Size and Risk
Stop Orders	405	(8)
Protective Stops
Computing Stop Levels
Table of Stop Distances
Progressive Stops
What Is a Bottom --- What Is a Top?	413	(6)
The Three Days Away Rule
Basing Points
Volume Signals
Trendlines in Action	419	(10)
Buying Stock
Selling Long Stock
Selling Stock Short
Covering Short Sales
Additional Suggestions
Use of Support and Resistance	429	(6)
Formulating a Rule for Buying
When a Support Fails
Placing Stop Orders
Not All in One Basket	435	(2)
Diversification
Its Cost and Benefits
Trading Index Shares
Measuring Implications in Technical Chart Patterns	437	(4)
Reactions vs. Primary Moves
Tactical Review of Chart Action	441	(30)
Dow Theory
Head-and-Shoulders
Multiple Head-and-Shoulders
Rounding Tops and Bottoms
Triangles
Broadening Tops
Rectangles
Double Tops and Bottoms
Diamonds
Wedges
One-Day Reversals
Flags and Pennants
Gaps
Support and Resistance
Trendlines
A Quick Summation of Tactical Methods	471	(4)
When to Get Out
When to Get In
Effect of Technical Trading on Market Action	475	(2)
Many Types of Investors
Technicians a Minority Group
Persistence of Ingrained Evaluative Habits
Automated Trendline: The Moving Average	477	(6)
Sensitizing Moving Averages
Crossovers and Penetrations
``The Same Old Patterns''	483	(58)
Repetitive Character of Market Behavior Over the Years
Additional Chart Examples Covering Market Action up through 2000
Balanced and Diversified	541	(8)
The ``Not All'' Principle
The Evaluative Index
Reducing Risk and Anxiety
Identifying Bull and Bear Market Tops and Bottoms with the Magee Evaluative Index
Trial and Error	549	(2)
Putting Experience to Work
How Much Capital to Use in Trading	551	(4)
Application of Capital in Practice	555	(6)
Using Composite Leverage According to the Market's Condition
Overall Strategy
Portfolio Risk Management --- Measurement and Management	561	(12)
Finding the Sensible Risk Posture
Overtrading and Undertrading
Controlling Risk per Trade
Risk of a Single Stock
Risk of a Portfolio
Pragmatic Portfolio Theory
Pragmatic Portfolio Risk Measurement
Pragmatic Portfolio Analysis
The Magee Method of Controlling the Risk
Stick to Your Guns	573	(20)
APPENDIX A Chapters A--D
Chapter A The Probable Moves of Your Stocks (Chapter 24 from the Seventh Edition)	575	(2)
Relative Sensitivity
The Market Reciprocal
Normal Range-for-Price-Volatility
Chapter B A Discussion of Composite Leverage (Chapter 42 from the Seventh Edition)	577	(6)
Overtrading and a Paradox
The Composite Leverage Index of a Single Stock
Composite Leverage on a Portfolio
Investment Account Policy
Negative Composite Leverage
Chapter C Normal Range-for-Price Indexes (Appendix B, Fifth Edition)	583	(2)
Chapter D Sensitivity Indexes of Stocks (Appendix C, Fifth Edition)	585	(8)
APPENDIX B	593	(10)
Section 1: The Mechanics of Building a Chart (Chapter 23 from the Fifth and Seventh Editions)
Section 2: TEKNIPLAT Chart Paper
APPENDIX C Technical Analysis of Futures Charts (Chapter 16 from the Seventh Edition by Richard McDermott)	603	(30)
Applications for the Use of Chart Patterns and Other Indicators in the Trading of Futures/Derivatives
Moving Averages, Bollinger Bands, Stochastics, and Others
APPENDIX D Resources	633	(10)
Gambler's Ruin
Volatility
Internet Sites
List of Illustrations and Text Diagrams	643	(18)
Glossary	661	(26)
Bibliography	687	(4)
Index	691