Regardless of whether you consider yourself a technical analyst or not, there are very few investment skills at least that do not involve the technical aspects of investment. Some investment styles only use technical analysis, and their practitioners often claim that they know nothing about stock fundamentals because all they need are charts. This part of the investment is not made out of thin air. In this article, we will look at the people who pioneered the field of technical analysis. (Also take a look: technical analysis.)
Everything comes from the Dow
Charles Dow occupies an important place in financial history. He founded the Wall Street Journal-the benchmark for measuring all financial papers-and more importantly, for our purposes, he created the Dow Jones Industrial Index. By doing so, the Dow Jones Index opened the door to technical analysis. The Dow Jones Index recorded his daily, weekly and monthly average highs and lows, linking these patterns to the ebb and flow of the market. Then he will write articles, always after the fact, pointing out how certain patterns explain and predict previous market events.
However, Dow cannot owe all the credit—or even most of it—to him for the theory named after him. Without William P. Hamilton, Dow Theory would only become an afterthought of loose principal. (Also take a look: Financial tycoon: Charles Dow.)
First launch: William P. Hamilton
Dow Theory is a series of market trends closely related to ocean metaphors. The basic long-term trend of four years or more is the trend of the market-either up (bullish) or down (bearish). This was followed by short-term fluctuations lasting from a week to a month. And, in the end, there are turbulent water splashes and tiny ripples, which fluctuate insignificantly every day.
In addition to some rules, Hamilton also uses these measures—such as railroad averages and industrial averages to determine each other’s direction—to predict bull and bear markets with commendable accuracy. Although he did believe that the 1929 crash was premature (1927, 1928), he filed a final appeal on October 21, 1929, three days before the crash and a few weeks before his death at the age of 63.
Practitioner: Robert Rhea
Robert Rhea turned the Dow Theory into a practical indicator of going long or short in the market. He literally wrote a book on this subject: “Dow Theory” (1932). Rhea successfully used the theory to predict tops and bottoms—and was able to profit from these calls. Soon after mastering Dow Theory, Rhea didn’t need to use his knowledge to trade. He just needs to write it down.
After the market bottomed in 1932 and peaked in 1937, the wealth created by the subscribers of Rhea’s investment letter, Dow Theory Review, brought thousands of subscribers. However, like Hamilton, Rhea’s life as a market forecaster was short-he died in 1939. (See also: Dow Theory Course.)
Wizard: Edson Gould
Perhaps the oldest and most accurate predictor, Edson Gould, remained until 1983 at the age of 81. Most of his income also comes from writing newsletters rather than investing, and he sold subscriptions for $500 in 1930. Several very accurate predictions have been made for all major bull and bear market points. For example, the Dow Jones Index will rise 400 points in a 20-year bull market, the Dow Jones Index will exceed 1,040 points in 1973, and so on.
Gould uses charts, market psychology and indicators, including Senti-Meter—DJIA divided by the company’s dividend per share. Gould was so good at his trading that he continued to make accurate judgments outside the grave. Gould died in 1987, but in 1991, the Dow Jones Index reached 3,000 points as he predicted. When he made his prediction in 1979, the Dow had not broken through 1,000.
[The work of these pioneers formed the foundation for a huge array of technical tools used by traders today to develop profitable trading strategies. To learn more, check out the Technical Analysis course on the investingclue Academy, which includes interactive content and real-world examples to boost your trading skills.]
Chartist: John Magee
John Magee wrote the Bible of Technical Analysis “Technical Analysis of Stock Trends” (1948). Magee was one of the first companies to trade solely based on stock prices and their patterns on historical charts. Magee draws all charts: individual stocks, averages, trading volume-basically any chart that can be drawn. Then, he poured these diagrams to determine a wide range of patterns and specific shapes, such as weak triangles, flag shapes, bodies, shoulders, etc.
Unfortunately, for Magee, in the early days, he was better at taking care of clients than his own portfolio. Although his charts showed strong holding signals, he often sold his portfolio based on intuition. However, from his 40s to his death at 86, Magee was one of the most disciplined technical analysts around, and he even refused to read the current newspaper so as not to interfere with his chart signals. (For more information, see: Analysis chart mode.)
There will definitely be some controversy over a list like this. Where is the infamous Jesse Livermore, where this trader’s intuition of price changes can be said to be the first successful technical transaction? What about RN Elliott? WD Gann?
Well, Livermore did very little theorization and eventually went bankrupt. Elliott adjusted the technical analysis with his own assumptions, but his theory is difficult to test, and even harder to trade—involving some mysticism stacked on top of the numbers. Similarly, Gann’s lines, although conceptually useful, are so sensitive to errors that their usefulness is questionable. Both men allegedly traded through their theories, but there is no reliable record like Livermore to support this. Of course, neither of them left a multi-million dollar legacy.
Dow, Hamilton, Rhea, Gould and Magee are on the main track of technical analysis, and everyone takes theory and practice one step further. Of course, although the trails with many branches are interesting, they did not advance this main driving force. Every time investors—fundamental or technical—talk about entering lows or choosing entry and exit points, they are paying tribute to these people and the technology they have laid the foundation for. (Also take a look: Introduction to Transaction Type: Technical Trader.)