As potential readers, investors or traders alike, must have a very limited time to read these suggestions, I will keep my recommendations short.
Firstly, I understand that there are many skeptics about technical analysis. Most people who read Seeking Alpha are probably of the fundamental type, and hope to seek the chance to capture "CAPM Alpha" or "Multi-Factor Model Alpha" or "Jensen's Alpha" (they have differences in what they stand for). In any case, you believe in that fundamental analysis is the best way to understanding a company, and I agree. However, there are some problems against trading or investing by the sole use of fundamental analysis.
- Sometimes you may find that the stock you are trading is a very different creature from the company that stands behind it, that you may be frustrated at the fact that even if the company releases a positive unexpected earning in the quarter, its stock just refuses to rise. Or the company's business is relatively stable, yet its stock price is amazingly volatile. All of these doubts may tell you that a stock is different from the company behind it. To trade or invest in stocks, our primary focus is to understand the stock, and then the understanding of the company may aid us later.
- Have you ever thought about how would you realize a profit in your trade or investment? Let's say a new technology has been developed, and it can cure baldness. Instantly you will find this idea of tremendous value. However, it doesn't mean that this idea will help you immediately profit. We, as individuals, may profit only in one occasion: At first, the majority of the market has a different understanding of the technology/stock/company than we do; in the end, the market converges to our beliefs, and the price converges to our expectations. Therefore, the profit doesn't rely on your viewpoint being accurate, but rather, it relies on the procedure of market misinterpreting it at first, but later collectively realizing that you are right in your special viewpoint.
Such things may never happen, or it may be 10 years, 20 years or 30 years until the market finally confirms that you are right, or it may be 10 days or 10 months. In the former occasion, you will have your capital mired in such an investment, a piece of capital you may well wish to put in some other places, and to be put back in this specific stock only when the market shows a signal in its belief of your side of the story.
Thus, I believe in the use of all scientific methods in investing or trading stocks, and I believe a combination of fundamental and technical approach is a very good start. Also, changing market conditions, i.e. the development of new technology, may change the method you use. Maybe someday the market is so computerized and the software which employs the technical rules have made the current technical analysis futile in the future. That's perfectly possible. However, right now, I believe that the combination of both approaches is a good way to start.
Starting level (If you haven't had any technical analysis exposure yet):
First, read Technical Analysis of Stock Trends, 9th edition, by Robert Edwards and John Magee.
The book has an exceptionally well organized structure, namely two parts: first, recognizing price patterns, trends, support/resistances, i.e. the technical theory; second, trading tactics in each pattern and trend. The book is great in the sense that it's concise and elegant, both the writing style and the philosophy. It helps you to develop comprehensive idea about stock charts and trading tactics by just looking at the two most "fundamental" things on a chart: price and volume, which is, as a matter of fact, the basis for nearly every technical indicators you will learn in the future. It tells you what mindset to take on when starting to trade, how to protect your profit by avoiding riding on an "elevator" of price swings etc. through concrete examples and rules, instead of blurry words. To be short, it's a Bible accompanied with a multi-million paycheck, if you are able to read it, think about it, and trade by it in depth.
Then, read Technical Analysis of the Financial Markets, by John Murphy.
After reading the first book, you may feel you have comprehensive understanding of technical analysis in depth, and you are ready to trade. However, it's important to broaden your scope and know about all the new indicators other precursors develop with their years of valuable experience. This book by John Murphy, is such a book that helps you develop such a broadened scope that may prove to be crucial in your later trading.
Other two candidates, as you may have heard of, are Technical Analysis: the Complete Resource for Financial Market Technicians, by Charles Kirkpatrick and Julie Dahlquist and Technical Analysis Explained by Martin Pring. These are truly wonderful books as well, yet with several minor flaws that result in my final recommendation of John Murphy's book. The first book doesn't cover certain topics in depth, and it's more of a welcome edition for people who haven't read Robert Edwards and John Magee.
The second book, which explains price actions with more coarse definitions and explanations, (in every price pattern, you want to have an idea about what's the possibility of an exception, 10% or 20%? or what's the extent of Minor Reaction, about 40% or 45% or more? while this book only gives you something like "it's rare" or "it might react quite a margin") is less refined than John Murphy's book, if I venture to say. Therefore, John Murphy's book might well be your second book.
Now, it's time to delve in depth into the subfields of technical analysis, and I recommend one book for each subfield:
- Point and Figure: The Definitive Guide to Point and Figure, by Jeremy du Plessis.
- Japanese Candlestick: Japanese Candlestick Charting Techniques, by Steve Nison.
- Technical Analysis' Investment Psychology: Investment Psychology Explained, by Martin Pring.
Another book, Technical Analysis for the Trading Professional, by Constance Brown is a good book to read after you have some experience in using technical analysis in trading and want to consult on some practical doubts developed during your trading.
Having said this much, I have a final suggestion. Don't buy too many books at once. Buy one book, read it through with sufficient time, and continually think over the questions and doubts you have, until you resolve them. Then, only then, you may proceed to another book. I really hope that my recommendations, of however useful degree to you, may help you in the build-up of financial wealth. And I sincerely wish that you may use that wealth wisely, to fulfill your dreams, to pursue your passions, or to build up beneficial projects for the society.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.