Richard Schabacker's tips to become a successful chart trader

Richard Schabacker is considered the grandfather of technical analysis, and his theories and acumen still continue to influence investment philosophies even today.

Because Richard Schabacker died at a very young age of thirty-six, he left a remarkably strong mark on the investment world. During his lifetime, he was granted prestigious editorial positions by the leading financial publications of the 1920s, including that of Financial Editor of Forbes magazine.

In 1930 he published his first book on contemporary investment practices, Stock Market Theory and Practice, followed in 1932 by Technical Analysis and in 1934 by Stock Market Profits: A Course in Forecasting.

Schabacker's books are still of tremendous value for long-term, short-term, and investors who are just beginning their investment journey, and it covers all the basics of how to make smart money in the long run.

According to Schabacker, the most important rule for a trader is to trade mostly along with a confirmed major trend, rather than switching positions to try for every suggested intermediate movement contrary to that trend.

"The trader is always justified in taking small profits and in playing in and out of the market, but the point is that in such short-turn, trading he must never lose sight of the direction of the major movement, for in that direction lie his best chances for profit," he wrote in his book Technical Analysis and Stock Market Profits.

Schabacker said the art of selecting the best stocks for trading comes gradually from experience and practical observation.

He said investors often accumulate certain 'pet’ stocks for various reasons, which are-

1.These stocks constitute the longest chart records, perhaps because they offer more perfect patterns.

2. These stocks have always been of interest to investors

3. The forecasts for these stocks have worked out more profitably than in others they have tried.

Schabacker said such an accumulation of ‘‘pet’’ stocks is quite logical, provided it does not lead to stubbornness, overtrading, lack of proper diversification or a narrow point of view which fails to retain an open mind and a keen inquisitiveness.

Schabacker said diversification of risk is also an important factor in practical chart trading. He said investors should appreciate the usefulness of chart patterns but at the same time be wary of their fallibility and sudden reversal.

He said one means of turning these two opposing facts to profit is diversification and limiting individual risk.

Schabacker said some novice investors, having selected and charted several stocks for only a few weeks, start spotting technical patterns where none in fact exist.

Hence Schabacker suggested investors "never force the picture."

"The investor is never justified in actually trading based on what slightly resembles a specific formation. Chart trading is by no means infallible even on nearly perfect patterns, without adding the risk which arises from careless or wishful analysis through the aid of active imagination," he said.

Schabacker said investors should wait for the ideal situation before investing in stock as sometimes it may take a long time without a chart presenting any sort of a pattern or formation definite enough to justify an actual trading opportunity.

He said it is much better to be patient, to restrain one’s ambition for profits, and to stay out of the market entirely when no perfect patterns appear for a time rather than to become impatient and rush in enthusiastically on less than ideal situations.

According to Schabacker, conservative investors may be more successful in the long run, but they must guard against over-conservatism, over-caution, and too much doubt and timidity.

Schabacker said investors should guard against being overconfident or stubborn in a decision which has been controverted by subsequent chart action.

Schabacker said that before any individual stock is bought or sold, the trader should assume that all hopes, expectations, plans, and technical analysis, may all turn out to be wrong.

Schabacker said over-trading brings much greater financial and psychological loss than profit and hence, should be avoided.

Schabacker said investors need to pay scant attention to technical analysis, ticker talk, boardroom gossip, brokerage advice, rumour, unconfirmed reports and hearsay as this may lead investors to make wrong investment decisions and incur huge losses.

Schabacker said not every individual is eminently fitted for chart trading as it requires time, interest and patience to a fairly high degree to make the right trading decisions.

"Probably the most important characteristics are a basic sincerity and a desire to learn, for practical experience is the fundamental key to success. And only actual trading will show an investor how well-fitted he is for successful and active trading," he said.

(Disclaimer: This article is based on Richard Schabacker's book Technical Analysis and Stock Market Profits.)