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Charles Dow
Charles Henry Dow (Nov. 6, 1851 – Dec. 4, 1902) to capital-market analysis is what Charles Darwin is to evolutionary biology. This brilliant economist was the first to express the idea of bundling several stocks to create an index – in order to thereby create an indicator for a national economy. With that, he gave the Dow Jones Industrial Average its name. Aside from that, in the late 19th century he founded the Wall Street Journal, in which he, in the course of hundreds of articles, compiled his thoughts on the markets and the economy in general. Unfortunately, he never wrote a book.
Stocks are “bid up” or “sold down” according to the public’s estimate of the merit of each particular company. If the public’s demand for a certain company’s stock is greater than the supply, the price is bid up until the demand is satisfied. Conversely, if more stock is offered than bid for, the price declines until the pressures of supply and demand are again in balance. Back in the early days of trading in securities it was assumed that the shares of different companies fluctuated in price independently of each other. Perhaps they did and surely they still do to some extent. However, with the advent of organized stock exchanges, the perfection of instant communication, rapid transportation, and the widespread dissemination of news, a novel element became discernible in price fluctuations. It was in the late 1890s that a few market students, led by Charles H. Dow, discovered that the stock market had a “trend,” that the great body of stocks moved more or less in unison, regardless of the price fluctuations in individual stocks. This “trend” action led to the development of a “trend theory” and ultimately to the Dow Theory. Dow theory was formulated from a series of Wall Street Journal editorials authored by Charles H. Dow from 1900 until the time of his death in 1902. These editorials reflected Dow’s beliefs on how the stock market behaved and how the market could be used to measure the health of the business environment. Due to his death, Dow never published his complete theory on the markets, but several followers and associates have published works that have expanded on the editorials. Some of the most important contributions to Dow theory were William P. Hamilton's "The Stock Market Barometer" (1922), Robert Rhea's "The Dow Theory" (1932), and Richard Russell's "The Dow Theory Today" (1961). Six basic tenets of Dow theory is as follows: (1) The Markets Discount Everything This first premise states that any information from the past, the present and even the future is discounted by the markets and is reflected by the current market prices of stocks or indices. That includes everything – from the market participants’ moods to published economic data or company reports to future expectations. Even in absolutely unpredictable events such as an earthquake (according to the proposition), a certain risk of its occurrence is always factored in; and if such an unpredictable event then actually occurs, the market reacts almost immediately. That is obviously a stark blow to all friends of fundamental analysis, since, following this presumption, one can gain no advantage in terms of the forecast of market prices when one does in-depth research or compares companies’ ratios, because this kind of information is, as a rule, both available to anyone and (see above) has already been considered factored into market prices. (2) The Market Consists of Three Trends Dow broke possible trends down into three categories: the primary (long-term), secondary (medium-term), and the subsidiary (short-term) trend. Since, however, Charles Dow’s focus of interest lay on correlations to the national economy, the primary trend had top priority for him. Ideally, a primary trend continues for several years and Dow believes it can be clearly identified. The secondary trend has a duration of several months. Dow largely disregarded the subsidiary trend – in other words, all movements which lie within a secondary trend. These continue, as a rule, for no longer than days or weeks, are subject to short-term market “mood swings”, and are therefore largely insignificant in terms of the development of the national economy. (3) The Three Phases of the Primary Trend Dow saw a primary upward trend as being divided into three phases. Following the end of an upward trend, it begins with the accumulation phase, in which resourceful investors bought plenty of “inexpensive” stocks. This phase lasts for some period of time and occurs in the context of a solid upward trend. The third and last phase is the distribution phase, in which the early investors gradually cut back their positions. Most of the time, these long-term positions are cut back in phases of exuberance and “bubble formation”, when an exceedingly euphoric mood prevails. (4) The Indices Must Confirm Each Other Charles Dow was of the opinion that every primary trend can only be referred to as such when it is confirmed in all large-scale indices. In that context, he presumed a close correlation between the Dow Jones Industrial and the Dow Jones Transportation Index. Today's researchers often try to use other major indices, such as also commodities or currencies, to display such an correlation for confirmation. (5) The Volume Confirms the Trend Dow believed that an ongoing trend is always confirmed by the volume of trading. In this regard, he presumed that the upward movement in an upward trend would be accompanied, as a rule, by a higher volume than that in interim downward movements. Analogous to that, trading volume, during a downward trend, should be strongest when market prices fall, and lessen when counter movements set in. Dow treated volume as a secondary indicator. (6) A Trend Continues Until It Is Definitely over As mentioned above, Dow failed to write a book about his thoughts – and so never clearly described them. Consequently, the word “definitely” in his last proposition has a certain controversial leeway. Which signal, which price pattern is definite enough to allow the end of a trend to be announced? The most direct answer which can be given to this question is: When the market prices penetrate the last large-scale extreme point – in other words, the last low in an upward trend or the last high in a downward trend. The goal of Dow and Hamilton was to identify the primary trend and catch the big moves up and be out of the market the rest of the time. They well understood that the market was influenced by emotion and prone to over-reaction, both up and down. With this in mind, they concentrated on identification and following the trend. | ||
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Ralph Elliott
Ralph Nelson Elliott (July 28, 1871 – January 15, 1948) was an American accountant and author, whose study of Dow Theory and stock market data led him to develop the Wave Principle, a form of technical analysis that identifies trends in the financial markets. He proposed that market prices unfold in specific patterns, which practitioners today call Elliott waves. Ralph Nelson Elliott developed the Elliott Wave Theory in the late 1920s by discovering that stock markets, thought to behave in a somewhat chaotic manner, in fact traded in repetitive cycles.
Elliott discovered that these market cycles resulted from investors' reactions to outside influences, or predominant psychology of the masses at the time. He found that the upward and downward swings of the mass psychology always showed up in the same repetitive patterns, which were then divided further into patterns he termed "waves". Elliott's theory advanced the knowledge of the Dow theory in that stock prices move in waves. Because of the "fractal" nature of markets, however, Elliott was able to break down and analyze them in much greater detail. Fractals are mathematical structures, which on an ever-smaller scale infinitely repeat themselves. Elliott discovered stock-trading patterns were structured in the same way. The Elliott Wave Principle is a detailed description of how groups of people behave. It reveals that mass psychology swings from pessimism to optimism and back in a natural sequence, creating specific and measurable patterns. One of the easiest places to see the Elliott Wave Principle at work is in the financial markets, where changing investor psychology is recorded in the form of price movements. If you can identify repeating patterns in prices, and figure out where we are in those repeating patterns today, you can predict where we are going. Elliott Wave Principle measures investor psychology, which is the real engine behind the stock markets. When people are optimistic about the future of a given issue, they bid the price up. For hundreds of years, investors have noticed that events external to the stock markets seem to have no consistent effect on the their progress. The same news that today seems to drive the markets up are as likely to drive them down tomorrow. The only reasonable conclusion is that the markets simply do not react consistently to outside events. However, when you study historical charts, you see that the markets continuously unfold in waves. Remember, using the Elliott Wave Principle is an exercise in probability. The results are difficult to be repeated. | ||
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William Gann
William Delbert Gann (June 6, 1878 – June 18, 1955) or W. D. Gann, was a trader who developed the technical analysis tools known as Gann angles, Square of 9, Hexagon, Circle of 360 (these are Master charts). Gann market forecasting methods are based on geometry, astronomy and astrology, and ancient mathematics. Opinions are sharply divided on the value and relevance of his work. Gann wrote a number of books on trading.
Gann was born in Texas. His father was a cotton farmer. He started trading in 1902 when he was 24. He was believed to be a religious man by nature who believed in religious as well as scientific value of Bible as the greatest book ever written. He was also a 33rd degree Freemason of the Scottish Rite Order, to which some have attributed his knowledge of ancient mathematics, though he was also known to have studied the ancient Greek and Egyptian cultures. Predicting the future is impossible as we all know today. If he were around today, W.D. Gann would beg to differ. His first prophecy is believed to have happened during World War I when he predicted the Nov. 9, 1918, abdication of the Kaiser and the end of the war. Then in 1927, he wrote a book entitled "Tunnel Through The Air," which many believe predicted the Japanese attack on Pearl Harbor, and the air war between the two countries. His financial predictions were perhaps even more profound. In early 1929, he predicted that the markets would probably continue to rally on speculation and hit new highs until early April. In his publication, The Supply and Demand Letter, he delivered daily financial forecasts focusing on both the stock and commodity markets. As this daily financial publication gained notoriety, Gann published several books - most notably "Truth", which was hailed by the Wall Street Journal as his best work. Finally, he began releasing the techniques that he used to make these forecasts: the Gann studies. In 1908, Gann discovered what he called the "market time factor," which made him one of the pioneers of technical analysis. To test his new strategy, he opened one account with $300 and one with $150. It turned out to be wildly successful: Gann was able to make $25,000 profit with his $300 account in only three months; meanwhile, he made $12,000 profit with his $150 account in only 30 days! After his results were verified, he became famous on Wall Street as one of the best forecasters of all time. Here's how his techniques work. Gann based predictions of price movements on three premises:
The process used to construct a Gann angle has always been more an art than a science. It requires some fine-tuning with experience in order to perfect. Because of this, the results will vary from person to person. Some people, like Gann, will experience extraordinary success, while others - who don't use such refined techniques - will experience sub-par returns. Gann described the use of angles in the stock market in The Basis of My Forecasting Method (1935). Calculating a Gann angle is equivalent to finding the derivative of a particular line on a chart in a simple way. Each geometrical angle (which is really a line extended into space) divides time and price into proportionate parts. The most important angle Gann called the 1x1 or the 45° angle, which he said represented one unit of price for one unit of time. If you draw a perfect square and then draw a diagonal line from one corner of the square to the other, you have illustrated the concept of the 1x1 angle, which moves up one point per day. There has been a general disagreement whether he made profits by speculation himself. However, his famous Ticker Interview shows that his claim to profits was as real as his documented forecasts. Is it possible to predict the future? W.D. Gann probably thought so, and seemingly proved it with his wildly successful returns. The system is relatively simple to use, but difficult to master. After all, it was Gann's uncanny ability to fine-tune his techniques that led him to enormous profits - the average investor is not likely to obtain these kinds of returns. Like many technical tools, Gann angles are best used in conjunction with other tools to predict price movements and profit. | ||
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Benjamin Graham
Benjamin Graham (May 9, 1894 - Sept. 21, 1976) is widely known today as the father of fundamental analysis. Graham was a great economist who introduced the present day security analysis. Being the founder of value investing Graham paved the way for a new era of economical strategy setting and planning which were carried forward by his students like Warren Buffett, John Bogle and many others. Graham’s books ‘Security Analysis’ and ‘The Intelligent Investor’ are regarded as immortal references for financial and economical experts, strategists and enthusiasts. Graham’s books have been referred to by many economy proponents to help writing several other similar books. Even to the present day Graham’s ideas and economical approaches are religiously followed and retained. According to Warren Buffet, Graham was a sheer genius who was much like a father to Warren Buffet and many other disciples to whom he imparted his great knowledge and brilliance in order for them to make path breaking contributions after him.
Benjamin Graham was born in London, England to Jewish parents. He was just 1 year old when his family migrated to New York City. Graham is known to have excelled in his studies only after his father had died. Graham and his family had experienced poverty which led him to become a good student. Graham did his graduation from Columbia University being awarded with the Salutatorian title which was awarded to the second highest graduate of the entire graduating class in the United States of the time. He was 20 when he completed his graduation. He was invited to join as an instructor in English, Mathematics, and Philosophy but he refused the recruitment offers to become a part of Wall Street. Graham took up a job there and with time found a successful Graham-Newman Partnership. Graham wrote his first book, ‘Security Analysis’ with David Dodd which was published in 1934. This book discussed about the right nature of an investor who would be able to evaluate a company roughly from an assessment of all its financial statements and would make just purchases in order to gain satisfactory returns without having a danger of financial losses. This book went on to become a ‘bible’ for serious investors. Warren Buffet who is a renowned American investor and a multi-billion dollar industrialist was Graham’s student and a great follower of the Graham and Dodd’s multiple market examples. Buffet made most of his money by methodically and rationally implementing the dogmas of Graham and Dodd's book. Graham published ‘The Intelligent Investor’ in 1949 which was equally path breaking as Security Analysis was. ‘The Intelligent Investor’ is a widely acclaimed book on value investing, an investment approach. Graham began teaching (most of his teachings were later published in the Investor book) on value investing at Columbia Business School in 1928 and ideas and theories about value investing got subsequently refined with David Dodd’s help in ‘The Intelligent Investor’. Both the books created equal tremor in the financial world. According to Warren Buffet ‘The Intelligent Investor’ is “the best book about investing ever written”. In this book as well as in his ‘Security Analysis’ Graham’s ingenious inspiration was drawn for a stock market participant who would be needed to distinguish between investment and speculation. Graham made the world see clearly about investment and speculation. To put it more aptly Graham changed the stock market scenario and revolutionized investment earning. In ‘Security Analysis’ he wrote “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative”. Graham was brilliant in putting across Mr. Market an imaginary person who is made to buy and sell shares in order to make people understand the risks and gaining points in investment. Graham wanted people to understand that investment should be dealt in a professional and businesslike manner. In treating investment in a businesslike manner makes investment look more intelligent. | ||