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Recommended Reading List
View our other recommended reading lists -- Investor
Update, Market Advisor, ETF
Authority
Reading technical analysis theory is my hobby and I
have read dozens of books over the last 40 years. I continue to devour
information on this subject. But of all the books I have encountered,
there are only four that I would unhesitatingly say belong in the
library of every serious technical analysis student. These are the
classics of technical analysis.
For me, a classic is a book that you cannot absorb
fully in just one reading. No matter how carefully you pour over it, no
matter how detailed the notes you might take, you are going to need to
return to the book many, many times to fully absorb its teaching.
Here, then, are my four classics of technical
analysis. After I name them, I will briefly tell you why I think they
are so valuable. The books are listed in rank order. (To purchase these
books or to review pricing information, please click on the link for
each book below.)
1. Robert D. Edwards and John Magee. Technical
Analysis of Stock Trends. ISBN: 0814406807.
2. Steve Nison. Japanese
Candlestick Charting Techniques. ISBN: 0139316507.
3. Stan Weinstein. Secrets
For Profiting in Bull and Bear Markets. ISBN: 1556236832.
4. Dr. Alexander Elder. Trading
For A Living. ISBN 0471592242.
1. Technical
Analysis of Stock Trends
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Written by Edwards and Magee, this book is
considered by many to be the "bible" of technical
analysis. First published in 1948, the book is now in its 8th
edition and has sold more than 850,000 copies!
Many of the companies they use as chart examples
-- Nash-Kelvinator, New York Central and Hudson Motor -- are of
firms that no longer exist. What makes the text so valuable then?
The book is the authoritative classification of chart patterns --
the same ones other writers rely on and even imitate.
Part One of the book divides chart formations
into two categories -- Reversal and Consolidation. The book
devotes four chapters to Reversal formations represented by such
chart patterns as the head and shoulders, rounding bottoms, triple
bottom and top and rising and falling wedge.
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Consolidation patterns include flags, pennants,
saucers and the various kinds of gaps. The book also includes several
chapters on support, resistance, trendlines and channel lines.
The second part of the book addresses the question of
trading tactics. Clear advice is given on how to set stops, how to use
trendlines and support and resistance for trading decisions, and what
action to take when you spot a pattern.
Edwards and Magee is by no means light reading. They
start with head and shoulders reversals. My own preference when teaching
technical analysis is to start with the concepts of trend and trendlines
before addressing the question of what a reversal is. Still, if you want
to recognize chart patterns and their nuances, then this is the book to
read and reread. As you grow, so does it.
2. Japanese
Candlestick Charting Techniques
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When Steve Nison published his book on
candlestick patterns in 1991, candles were virtually unknown to
Western chartists. Today, less than 12 years later, candlesticks
are the default form of charting in most serious technical
analysis programs.
Nison loves his subject and shares it very
generously with his readers. After explaining how to construct
candles, he covers how candles help the trader spot reversals.
While Edwards and Magee focus on long-term pattern reversals that
might take a month or two to complete, Nison puts his attention on
candle patterns that may take one to four trading days to occur.
And while weekly candle analysis is important, many of the
reversals he illustrates are on daily charts. As such, his
teaching is vital for swing trading success.
The book discusses some of the most important
candles first: hammer/hangman, bullish and bearish engulfing,
dark-cloud cover and piercing. The reader is then shown how to
identify stars, inverted hammers, harami and the ominous three
black crows.
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Separate chapters are devoted to how candlestick
theory treats gaps, which it refers to as "windows," and to
what Nison labels the "magic" doji.
The second part of the book shows the reader how to
use candles in conjunction with Western technical analysis tools such as
support and resistance, moving averages, oscillators and volume. All
together, Nison's book names and describes approximately 65 separate
candle patterns. The ability to accurately name these patterns and to
assess their implications can make the difference between a winning and
losing trade. Of the candle literature I've studied, Nison presents
these patterns and their implications most lucidly.
3. Secrets
For Profiting in Bull and Bear Markets
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Stan Weinstein's book is remarkable for its
ability to simplify technical analysis into a limited number of
concepts. He places the majority of his emphasis on the 30-week
moving average, which is the indicator he uses to define the
long-term trend.
Using the 30-week average, Weinstein defines
four main stages of market action: basing, advancing, toping and
declining. These are called stages I-IV. Stage I occurs when a
stock trades sideways above and below a flat 30-week moving
average. In stage II the moving average rises and slopes upward
below rising stock prices.
In stage III, the market tops and plays
"tag" with a sideways moving average. In stage IV, price
remains below a consistently falling moving average. This is the
bear market stage and it is here when many investors are seduced
into buying a stock because it "looks cheap."
Weinstein's advice here bears repeating, "Never buy a stage
IV decline."
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While Weinstein's system is oriented toward long-term
investors, it makes an excellent starting point in analyzing any stock
in any time frame. It can also be adapted to a swing trading
perspective, as I have done in "The
Trading Technique That Will Always Keep You On The Right Side of The
Market," a free report that I mail out to all one- and
two-year subscribers of this publication.
4. Trading
For A Living
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Dr. Alexander Elder is a psychiatrist by
training. He brings that background to the stock market where he
comments extensively on the psychology of trading, money
management and the importance of controlling impulsiveness.
The parts of the book I find most valuable,
however, are his comments on specific indicators such as
stochastics and MACD. He is perhaps at his most creative when he
takes the MACD histogram and discusses how it has four seasons:
Summer, Fall, Winter and Spring. Elder's advice is to avoid buying
in the peak of Summer when the stock looks most attractive and to
avoid shorting in the height of Winter when the stock looks most
vulnerable.
For all the concepts that Elder discusses, he
also provides specific trading rules. That makes this text a
treasure trove of practical stock market wisdom and one well worth
studying.
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Taken together, these four texts should provide you
with an excellent grounding in classical chart patterns, candlesticks,
moving averages and the use of indicators. While that may not include
every tool in the technical analyst's tool kit, it certainly is a major
part of the foundation.
Thank you for giving me an opportunity to
share my list of favorite trading books with you.
Good trading!
Dr. Melvin Pasternak
Editor
The StreetAuthority
Swing Trader
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Advisor -- ETF Authority
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