Technical Analysis of Stock Trends - REVIEW
Edwards and Magee’s Technical Analysis of Stock Trends
This is (and must be) the first book review posted on Trading What I See. It’s the first technical analysis book I ever bought, and from its condition it is obviously my most-used book. Besides continually pulling it out for reference, I read it from cover to cover every few years.I won’t tell you how long I’ve had it, but I started with hand-drawn charts using colored pencils for drawing trendlines. There weren’t any personal computer trading programs back then.This is the book that taught me how to draw and interpret trendlines, and although at the time it was written a daily or weekly chart was about all anyone used, almost everything in the book can apply all the way down to trade-by-trade tick charts.
The book is written in two sections: Part One – Technical Theory, written by Robert Edwards, and Part Two – Trading Tactics, written by John Magee.
In Part One, Edwards gives a detailed look at all the various patterns that appear in markets, from triangles to wedges to head and shoulders reversal patterns and everything in between. You’ll find out the volume requirements of the patterns, and information on support and resistance, trendlines and channels.
In Part Two, Magee shows you how to make use of the theory from Part One in actual trading. If you’ve wondered which bottoms or tops to use when drawing trendlines, he covers this in his “three-days-away” rule. (For Intraday charts just substitute bar for day.) Want to know how far a breakout from a pattern will probably carry? He has a chapter titled “Measuring Implications of Chart Patterns.”
But to me, the most valuable section is “Trendlines in Action.” Every pattern is made up of trendlines, and if you have a set of rules to follow, you don’t even need to know the pattern names. Here are the signals to follow when price breaks up through a rising trendline. Or when price breaks up through a flat or falling trendline.
What is your plan of action when you see converging trendlines forming a triangle? What do you do if you already have a position, and then trendlines start converging? This section covers the parts of trading where too many authors stop writing – Magee gives you the answers.
Then he gives you a tactical review of the different types of chart patterns, what to do if you see one, what to do if the pattern forms in a position you already hold. There is even a short chapter giving a quick summary of what to do in different situations.
There is a reason why this book is called “the bible” of Technical Analysis. Many authors assume you have read this one before you pick up their book. This is not a quick read, but with some study it will give you the best education in charting you can find. Highly recommended.
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Edwards and Magee’s Technical Analysis of Stock TrendsA Tale of Two Triangles
After a gap down, the market decided to go sideways for a while. What developed was a TRIANGLE pattern. But there are two triangles showing on the chart, and understanding the difference between them can be the difference between making and losing money.
Unless the volume decreases markedly during triangle formation, you don’t really have a triangle — just two converging trendlines. This morning the volume bars went down nicely as the pattern formed. There were other ways to draw the original triangle. I could have used yesterday’s high and today’s early low. In fact I did that for a while. But understanding how triangles usually act led to the yellow trendlines you see now.
The blue trendline was an early possibility, so let’s talk about it first. If a triangle extends all the way to its apex, you will often have what is called an “end run.” Price will push out the tip, move a slight distance, and then end up going in the opposite direction. That’s what happened to the blue triangle.
Not only did price go to the end of the triangle, but the “breakout” had absolutely no increase in volume. From any type of congestion pattern you need volume for an upside breakout or the move is likely false. That’s when I started looking for a better set of trendlines.
The first volume spike occurred, depending upon how you want to view it, on the “end run” or on the actual breakdown from the final triangle. A large percentage of the time you will get a pullback for a better entry, and this one was perfect — right back to the lower trendline.
Where are we going? Let’s check with my favorite charting book, which is also the book that taught me how to draw trendlines. In Technical Analysis of Stock Trends, 8th Edition
A decisive breakout from a Symmetrical Triangle is likely to carry at least as far as the height of the Triangle measured along its first reaction. This is a conservative measurement. The move may go much farther.
How much farther? How about a long pause at the Fibonacci 127% retracement level of today’s first up move, followed by a drop to the 162% level before the market closed. Trendlines and Fibonacci, guidelines along the market’s path.
Reference: Technical Analysis of Stock Trends, 8th Edition
