Technical Analysis How To

Edwards-Magee.com is directed to the investor who manages his own investments, is moderately well informed, makes his own decisions and is independent minded. While written primarily for investors, short term traders can profit from the report by always being aware of the three trends of the market.

How Edwards-Magee.com is Used by Investors

  • We focus on the major market indices and instruments–the Dow, the S&P and the NASDAQ composite, et al.
  • Subscribers may trade off the analysis in a number of ways–by buying Diamonds (DIA), Spydrs (SPY), and NASDAQ 100 (QQQ), or by buying a basket of stocks, or futures or options. Generally we encourage the use of ETFs — though not to discourage individual issues.
  • Hedging of the positions may be accomplished by taking a position in the different direction in one of the other instruments–as for example, long the DIA, long a put results in a hedge. Or long the DIA, short the SPY.
  • We believe that positions should be hedged when conditions indicate and will so report.
  • Investors should assume responsibility for their own decisions. The information provided on Edwards-Magee.com is not to be considered advice or recommendation.

How the Report is used by Traders

Short term traders can skillfully trade with the direction of the long, intermediate and short term trends. In other words, trades with this philosophy will not be taken against the indicated trend, damping down equity volatility. Or the trader might decide to use only two of these indicators. Even daytraders might find this philosophy useful.

Trading and Investment Strategies
 
We believe that:

  • Capital should be divided into tranches or units, generally speaking the number of units depending on the individual’s attitude to risk and the amount of capital–the more capital the more units.
  • These units are committed to each individual market or trading situation over a varied period of time and diversity of market situations.
  •  As the individual situation develops an investor will be finally completely invested if the trend is sufficiently long in time and price.
  • Once completely invested the investor does nothing until the market dictates that he should:
    • begin scaling out of the market on a scale up by hedging or liquidating a unit at a time.
    • hedge or liquidate an entire position in the case of change of major trend.
    • if possessed of sufficient capital look for trades which increase profit potential and reduce risk at the same time. 
  • On a major change of trend from long to short or bull to bear an investor should be completely hedged, out of the market, or short. If short then scaled in positions should be used as the reverse of the above long strategy. 

Our long-term strategy takes the following views:

  • Taxes can be minimized by investing in the Amex unit trusts: Spydrs, Diamonds and NASDAQ. Rather than liquidating these units and paying tax, hedge these positions and pay the taxes on profits taken on hedges, when this occurs. 
  • Short term losses on hedges and some positions should be expected. This is better than being deliquified by falling markets or of seeing the erosion of capital that occurs in a bear market. While fin de siecle fashion would have it that bear markets no longer exist it would be wise to act as if they will in fact occur at some point in the next millennium.

Basic Principles of Technical Analysis
 
Technical analysis, unlike fundamental analysis, uses as its source material the objective facts about stocks:

  • Prices as observed on exchanges where stock is traded.
  • Open, high, low, close.
  • Volume as observed in trading of stock.

Basic Tenets of Technical Analysis

  • Market action of any particular stock reflects all known factors affecting that stock’s present and future, or, as John Magee used to say, ‘…every thing known or suspected about a stock is distilled down to today’s closing price on the NYSE.’
  • Stock Prices move in trends: bull, bear and mule.
  • The volume of a stock will go with the trend.
  • A trend, once established, will tend to continue .
  • Trend rules:
    • An uptrend is in effect as long as each successive rally reaches a new price higher than the previous rally, and each successive reaction stops at a higher level than the previous reaction.
    • Major Trends last a year or more and result in price changes of 20% or more, up or down
    • Intermediate Trends consist of movement in the opposite direction to the Major Trend and may retrace 50-66% of the Major Trend.
    • Minor Trends consist of daily fluctuations which are of no importance except insofar as they combine to form larger trends. 

Basic Tools of Technical Analysis

Data is charted on bar charts in objective formats. The charts are then analyzed to find patterns and formations which have proven in the past to be productive in trading and investing in stocks in general. In particular:

  • Support and resistance.
  • Archtypal pattern models–heads and shoulders, double tops,  reversal, continuation and consolidation formations trends, trend lines and trend channels.