Publish date:

The Source of Technical Analysis

Forget Edwards & Magee and go to the original 'Bible' of technical analysis.

Richard W. Schabacker, (edited by Donald Mack) Technical Analysis and Stock Market Profits, Financial Times Publishing, London, 1998, $65.00

Over the years, many a Wall Street acolyte has made pilgrimages to the

Trinity Church Bookstore to buy the Bible. Not the King James version, mind you, but the "bible" for technical analysis authored by

Edwards & Magee

, which has sold more than 800,000 copies since its first printing in 1948. What most readers don't realize, however, is that Edwards and Magee were not the real creators of modern technical analysis. It was a little-known technical analyst named

Richard W. Schabacker

.

A brilliant market technician, Schabacker codified almost everything there was to know about technical analysis up to his time -- which included such pioneering work as Charles Dow's

Dow Theory

. Between 1930 and 1937, he taught several courses to serious Wall Street traders and investors. Unfortunately, Schabacker died in 1938 when he was less than 40.

Shortly before, Schabacker gave a mimeographed copy of his lessons to his brother-in-law, Robert D. Edwards, who rewrote Schabacker's lessons with the help of his collaborator, John F. Magee, an MIT-trained engineer. As a result, it was not Schabacker who received credit for the original compilation of technical analysis, but Edwards and Magee, whose work became a perennial bestseller.

TheStreet Recommends

Even so, Schabacker is the Godfather of technical analysis, and his magnum opus, entitled

Technical Analysis and Stock Market Profits

, first appeared as a series of lessons in 1930. Subsequent editions appeared in mimeograph in 1932 and 1937. In 1997, it was finally issued in book form, edited by Donald Mack.

But there are more than historical reasons for preferring Schabacker's original to his brother-in-law's adaptation. Schabacker's text is clearer, simpler and far easier to assimilate than the famously murky Edwards & Magee -- a tribute to both the originator's greater insight as well as Mack's good organization. Thus, as it gets better known, this book may well become the preferred starting point for those who want to master classic technical analysis.

Everything a trader needs is here in its original form. Schabacker called his 12 chapters "studies." Four are dedicated to the all-important reversal formations. Other studies, or chapters, cover continuation formations, trend line action, support and resistance levels, measuring rules and formations, using long-term charts, and trading tactics.

Schabacker explains his topics with a formal but definitive clarity. Early on, he poses the question of why early success for a beginning trader is so dangerous. That's because, Schabacker says,

"... he is likely to mistake a probable forecast for a certain one, to become overconfident, to over-trade, and suddenly to find himself involved in a dangerous quagmire of heavy losses ... a hopeless state of indecision, mistrust, skepticism, and bitter disappointment."

He is wonderfully clear on the importance of charting volume as well as price.

"The genuine breakout into the new trend (or the rapid resumption of the older trend), is almost invariably confirmed promptly by noticeably greater volume.... The general rule -- that volume picks up noticeably with the break of prices into a new trend or out of a congestion -- holds with practically every important technical pattern."

This is valuable stuff, and forms the basis for much technical trading practice today, "improved" though it may arguably be by the application of computerized charting systems. But instead of using the popular version of this investing classic, i.e. -- Edwards and Magee -- go to the source itself, Schabacker. It belongs in every trader's library of essential books.

Desmond MacRae is a New York--based freelance journalist specializing in banking, finance and investments. He is a regular contributor to Managed Account Reports, Global Investment and Plan Sponsor. TheStreet.com has a revenue--sharing relationship with Amazon.com under which it receives a portion of the revenue from Amazon purchases by customers directed there from TheStreet.com.