The Pioneers of Technical Analysis

Dow, Hamilton, Rhea, Gould and also Magee are on the primary track of technological analysis, each carrying the concept and also exercise a little further. In doing so, Dow opened up the door to technical analysis.

All Things Flow From Dow

Dow Theory was a collection of market trends connected heavily to nautical metaphors.

Robert Rhea took Dow Theory and turned it right into a sensible sign for going long or short in the market. He caught all of the major bull and bear market factors, making several eerily accurate predictions, such as the Dow increasing 400 factors in a 20-year bull market, that the Dow would cover 1,040 in 1973 as well as so on.

First One Into the Water: William P. Hamilton

Dow, Hamilton, Rhea, Gould as well as Magee are on the main track of technological evaluation, each carrying the theory and practice a little more.

Hamilton used these measures in addition to a few rules – such as the railroad average and the industrial average confirming each other's direction – to call bull and bear markets with laudable accuracy. Although he did call the 1929 crash too early (1927, 1928), he made a final appeal on Oct. 21, 1929, three days before the crash and mere weeks before his death at the age of 63.

The Practitioner: Robert Rhea

Robert Rhea took Dow Theory and turned it into a practical indicator for going long or short in the market. He literally wrote the book on the topic: "The Dow Theory" (1932). Rhea was successful at using the theory to call tops and bottoms – and able enough to profit from those calls. Very soon after mastering Dow Theory, Rhea didn't need to trade on his knowledge. He only had to write it down.

After calling the market bottom in 1932 and a top in 1937, the fortunes made by subscribers to Rhea's investment letter, Dow Theory Comments, brought in thousands more subscribers. As with Hamilton, however, Rhea's life as a market prognosticator was short – he died in 1939. (See also: Dow Theory Tutorial.)

The Wizard: Edson Gould

Perhaps the most accurate forecaster with the longest track record, Edson Gould, was still making calls up to 1983 at the age of 81. Gould also made most of his money from writing newsletters rather than investing, selling subscriptions for $500 in 1930. He caught all of the major bull and bear market points, making several eerily accurate predictions, such as the Dow rising 400 points in a 20-year bull market, that the Dow would top 1,040 in 1973 and so on.

Gould used charts, market psychology and indicators including the Senti-Meter – the DJIA divided by the dividends per share of the companies. Gould was so good at his trade that he continued to make accurate calls from beyond the grave. Gould died in 1987, but in 1991, the Dow hit 3,000, as he'd predicted. At the time of his prediction in 1979, the Dow had yet to break 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 Investopedia Academy, which includes interactive content and real-world examples to boost your trading skills.]

The Chartist: John Magee

John Magee wrote the bible of technical analysis, "Technical Analysis of Stock Trends" (1948). Magee was one of the first to trade solely on the stock price and its pattern on the historical charts. Magee charted everything: individual stocks, averages, trading volumes – basically anything that could be graphed. He then poured over these charts to identify broad patterns and specific shapes like weak triangles, flags, bodies, shoulders and so on.

Unfortunately for Magee, early on, he was better at looking after his clients than his own portfolio, often selling out in his own portfolio based on gut feelings despite strong hold signals from his charts. From his 40s to his death at 86, however, Magee was one of the most disciplined technical analysts around, refusing to even read a current newspaper lest it interfere with the signals of his charts. (For more, see: Analyzing Chart Patterns.)

The Omissions

There is bound to be some controversy with a list like this. Where is the infamous Jesse Livermore, the trader whose gut calls on price ticks are arguably the first successful technical trades? What about R. N. Elliott? What about WD Gann?

Well, Livermore did little in the area of theorizing and died broke. Elliott tweaked technical analysis with his own hypothesis, but his theories are difficult to test and even harder to trade – involving something of mysticism piled on top of numbers. Similarly, Gann's lines, while seemingly useful in concept, are so sensitive to error that their practicality is questionable. Both of these men were purported to have made fortunes trading on their theories, but there is no solid record to back that up as there is for Livermore. Certainly no multi-million-dollar estate was left behind by either.

The Bottom Line

Dow, Hamilton, Rhea, Gould and Magee are on the main track of technical analysis, each carrying the theory and practice a little further. There are of course, many branching side paths that, while interesting detours, didn't advance this main thrust. Every time an investor – fundamental or technical – talks about getting in low or picking entry and exit points, they are paying homage to these men and the techniques for which they laid the foundation. (See also: Introduction to Types of Trading: Technical Traders.)

Tip: For investors’ reference only, it does not constitute investment advice. Financial investment products have high risks and are not suitable for every investor. If necessary, please consult a professional consultant.