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Jaenisch, ron roger babson's action-reaction techniques


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Roger Babson's action-reaction techniques

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Jaenisch, ron roger babson's action-reaction techniques

  1. 1. Roger Babson’s Action Reaction Technique By Ron Jaenisch Utilizing Newton’s Laws of Motion For Market Forecasting
  2. 2. To contact the author go to He can be reached via email at Discover the genius of Roger Ward Babson’s techniques for finding future reversal points in stocks, Forex, futures, ETF’s and market indices. See how they are integrated with modern techniques and made useable by anyone. The methods were handed down from Roger Babson at Gravity Foundation meetings to Alan Andrews. Thereafter, by Alan Andrews, at his seminars, and private meetings, to the author. Copyrights Notice © RCS division of Reinhart Industries Inc 2013 all rights reserved ALL RIGHTS RESERVED: No part of this material may be reproduced without written permission from the publisher and the author. No part of this book may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, photocopying, electronic, mechanical, or otherwise, without the prior permission of the publisher and the author. Library of Congress Cataloguing-in-Publication Protected by United States Copyright Law in accordance with title 17, United States Code
  3. 3. Table of Contents Origins of Action Reaction Market Geometry Babson’s Action Reaction Technique– How it works The Science-Newtonian Physics verses the Arrow of Time The Rules of A/R theory – The Center lines The Babson Profit Ladder Trading using Action Reaction Lines Finding the End of the Corrections Entering the Trade Improving Popular Indicators Getting Started with Little Capital Risk Secrets Discovered Along the Way The Amazing Alan Andrews REQUIRED LEGAL STUFF Resources
  4. 4. The Origins of Action Reaction Market Geometry Roger Babson was at the New York stock exchange on March 14, 1907, at the request of a friend. The market had started a drop from a high of 111 on March 6, 1907 on the way to a low point of 60. Much of the drop occurred on March 14. “On that day I actually saw men’s hair turn gray.” Roger wrote in his autobiography. It motivated him to do a study of stock exchange transactions and what he referred to as foolish investments. He came to the conclusion that the cost to even thrifty investors was one and a half billion dollars a year at that time. At that point he made a life changing decision, to do something to prevent the losses. It put him on the path, which resulted in the founding of Babson Business Statistics, Babson Business College and the Gravity Research Foundation. Prior to Babson graduating from M.I T. in 1898 he sat in Professor Swains Civil Engineering class. To make the class more interesting, Professor Swain used stock market charts to illustrate the application of Isaac Newton’s laws – particularly of the law of action and reaction. Babson used the exercises learned in the class to develop his method of analyzing the stock market and investing, subsequently making his fortune as a financial adviser and investor. At the Massachusetts Institute of Technology, he lobbied for the first ever business course. Effectively he was the originator of the MBA degree. Eventually he founded Babson Business College where Mark Cuban discussed important points with the students. A video link to this event is: v=6bQa3NDeA7w Roger Babson, himself said that his interest in gravity started with the childhood drowning of his older sister in a river near Gloucester, Massachusetts. In an essay called “Gravity- Our Enemy No. 1,” he wrote, “She was unable to fight gravity, which came up and seized her like a dragon and brought her to the bottom One of the things he valued throughout his life was learning about the British scientist, mathematician, and philosopher, Isaac Newton. Roger Babson was impressed by Newton's discoveries, especially his third law of motion--"For every action there is an equal and opposite reaction." He intuitively combined Newton’s various laws of motion, and focused upon the easiest to explain to the public, which was the third law of motion. He eventually incorporated Newton's theory into many of his personal and business endeavors. Later in this article the reader will see how specifically Newton’s Action Reaction theory is applied to trading. Upon graduating in 1898, Roger knew for certain that he preferred an alternative career. His father Nathaniel Babson counseled Roger to find a line of work that would ensure "repeat" business indefinitely. After careful consideration, Roger Babson decided to try the world of finance and looked for work as an investment banker. In 1898, Roger began his business career working for a Boston investment firm where he learned about securities, stocks, and bonds. Inquisitive by nature, Roger Babson soon knew enough about investments to get himself fired. Acting in the best interests of his clients, he had questioned the methods and prices of his employer and quickly found himself out of work. Babson subsequently set up his own business selling bonds at competitive prices in New York
  5. 5. City and then in Worcester, Massachusetts. He published his analysis of stocks and bonds in newsletters and sold subscriptions to interested banks and investors. In 1904, with an initial investment of $1,200, Roger and Grace Babson founded Babson's Statistical Organization, later evolved into Business Statistics Organization and then Babson's Reports, until eventually it thrived as Babson-United Investment Reports. Probably due to the Internet and free stock data, it closed its doors in 2001. Babson, in his autobiography titled the last chapter “How $2,000 can become $831,543 without borrowing a penny”. As the reader will later in this article, there are powerful techniques that he developed that are useful for a technical trader to achieve and surpass such a goal. Roger read several books and kept Brenner’s Prophecies of future ups and downs in prices as one of his prize possessions. He found that a particular quote from the book was important to remember. “There is a time in the price of certain products and commodities, Which if taken by men at the advance, But if taken on the decline leads to bankruptcy and ruin.” It was Brenner’s book and a book by Henry Hall, How money is made in securities investments, that Roger Babson brought with him to an important meeting with his old friend, Professor Swain. It was Professor Swain that originally introduced him to the idea of applying Newton’s third law of motion to investing. It was Professor Swain that worked with Roger Babson to come up with a composite chart called the Babson chart. As can be seen in the Babson Chart, a normal line is drawn through the chart, Times above this line were thought of as times of prosperity and times below it were times of recession or depression. Babson utilized the charts to forecasts not only the times of prosperity but the degree and length of the periods.
  6. 6. Babson wrote in his autobiography,” Our contribution to the analyzing and forecasting of business conditions was in connection of the areas above and below this Normal line. Other systems of forecasting considered only the high and low of the charts, while our studies considered the areas of the charts. Based upon Newton’s Law of Action and Reaction, we assumed that after a depression area, equal in area to the preceding area of prosperity, had developed, another area of prosperity would be due. In making these studies we took cognizance primarily of the shape of the areas.” The size and shape of next area of prosperity, which was above the normal line, was independent of the size and shape of the prior area that was below the normal line. Many scholars have examined the theory and found it to be flawed. As you will see in this work, the scholars did not truly understand the concept.
  7. 7. The Science Newtonian Physics verses the Arrow of Time Roger Babson based his theory upon Newtonian Physics. For readers that are unfamiliar with these theories, suffice it to say that when something is moving in a specific direction, it will keep on moving in that direction until other force(s) get it to stop or go in the opposite direction. Then we get to the third law of motion which is a bit more complicated. The third law states that all forces exist in pairs: if one object A exerts a force FA on a second objectB, then B simultaneously exerts a force FB on A, and the two forces are equal and opposite: FA = −FB. The third law means that all forces are interactions between different bodies, and thus that there is no such thing as a unidirectional force or a force that acts on only one body. This law is sometimes referred to as the action-reaction law, with FA called the "action" and FB the "reaction". The action and the reaction are simultaneous, and it does not matter which is called the action and which is called reaction; both forces are part of a single interaction, and neither force exists without the other The two forces in Newton's third law are of the same type (e.g., if the road exerts a forward frictional force on an accelerating car's tires, then it is also a frictional force that Newton's third law predicts for the tires pushing backward on the road). From a conceptual standpoint, Newton's third law is seen when a person walks: they push against the floor, and the floor pushes against the person. Similarly, the tires of a car push against the road while the road pushes back on the tires—the tires and road simultaneously push against each other. In swimming, a person interacts with the water, pushing the water backward, while the water simultaneously pushes the person forward—both the person and the water push against each other. The reaction forces account for the motion in these examples. These forces depend on friction; a person or car on ice, for example, may be unable to exert the action force to produce the needed reaction force. Roger Babson is well known for applying the laws of physics over one hundred years ago to forecast future price movement in securities and indices. This brings some to wonder if Roger Babson’s techniques could be used to prove the arrow of time concept. Physicists, like Elliott wave theorists, differ in their opinion about the same thing. In the interest of simplicity, this paper will answer two questions that may be asked regarding the arrow of time. Can the future be accurately predicted by the past? Can the past be accurately predicted by the future? According to Wikipedia… Psychological time is, in part, the cataloguing of ever increasing items of memory from continuous changes in perception. In other words, things we remember make up the past, while the future consists of those events that cannot be remembered. The ancient method of comparing unique events to generalized repeating events such as the apparent movement of the sun, moon, and stars provided a convenient grid work to accomplish this. The consistent increase in memory volume creates a mental
  8. 8. arrow of time. Storing a memory, from an information theoretic perspective, requires an increase in entropy, thus the perceptual arrow ultimately follows from the thermodynamic arrow. A related mental arrow arises because one has the sense that one's perception is a continuous movement from the known (Past) to the unknown (Future). Anticipating the unknown forms the psychological future which always seems to be something one is moving towards, but, like a projection in a mirror, it makes what is actually already a part of memory, such as desires, dreams, and hopes, seem ahead of the observer. The association of "behind = past" and "ahead = future" is itself culturally determined. For example, the Chinese and the Aymara people both associate "ahead = past" and "behind = future".[8] In Chinese, for instance, the term "the day after tomorrow" literally means "behind day" while "the day before yesterday" is referred to as "front day" and in Hindi (an Indian language), the term used for "tomorrow" and "yesterday" is the same. As one considers the Arrow of Time theory there are two straightforward questions. Can the future be accurately predicted by the past and can the past be accurately predicted by the Future? As you will see in the next chapters the Reaction in the future are equal and opposite and as a result the future event can predict the past event. The second question is ……….does the action create the reaction in the future? If actions and reactions are equal and opposite, is it possible that actions and reactions, which are separated by time, are actually created at the same moment? In private discussions Roger noted that during the long term upward move of a company stock, the company often makes foolish investments. These are ignored at the time because of the overwhelming increase in revenue and profits from other aspects of the company. There comes a time when the company writes off these foolish investments or divests itself of them. These are commonly known as write offs. Write offs typically occur when the stock of a company is in a down trend.
  9. 9. Babson’s Action Reaction – How it works Recent computer based studies of this theory have led some to the conclusion, that the area above the normal line is very useful at forecasting the turning points in the area below the normal line. Furthermore, as will be shown, that the extremes of the areas above the normal line can also be forecast successfully as you will see. An example of the application to the FXI chart above took three steps. First, using a special protocol the Normal line was selected and drawn There after the high pivot point was selected for drawing an Action line that is parallel to the Normal
  10. 10. line as seen in Chart B. Finally the pivot area of the recession area below the normal line was forecasted by drawing a Reaction line. The Reaction line is always drawn parallel to the Action and Normal line. The Reaction Lines are located by drawing a line that is parallel to the normal line and the same distance from the Normal line as the Action line. In the above gold chart the Normal line was selected using the normal line selection procedure. At his last public seminar Professor Andrews was recorded on video. He explained the process for finding reliable Normal aka Center lines and the process for finding reliable reaction lines.
  11. 11. In the above gold chart the Normal line was selected using the normal line selection procedure. There after three action points were selected. Note that the Action and Reaction points are equidistant from each other in relation to the normal line. Note that when the normal line is down sloping the action points that are selected are low points and the reaction points are high points. The selection of the low action points from extremes is not universal in the Action Reaction line calculations processes. What is also not universal is that in this case the Action points are equal and opposite to the reaction from the normal line. You will see more on this in the chapter on the Babson Profit Ladder. The protocol was applied to selecting the normal line in the above Semiconductor Index chart. The action points were selected and the computer program drew in the reaction lines. Note that in this case again the normal line is down sloping, the action points are low points and the reaction points are typically high points. The action points are equal and opposite to the reaction points, when measured from the normal-center line.
  12. 12. When Alan Andrews drew the Action Reaction lines by hand the charts would look like the June 2010 Gold chart above and the action lines and reaction lines would be numbered in order to identify the pairs of Action and Reaction points easily. It is well known that Roger Babson used Action Reaction theory for indices. Above is a chart of a stock where the Action Reaction lines are drawn. The Action point is equal and opposite to the reaction point when measured from the center or normal line. The prior three examples utilized a peak to low line for the normal line, this is the appropriate line in over 5% of all charts.
  13. 13. Roger Babson researched the application of Newton’s third law of motion and used it to forecast important turns in the stock market. Speaking at the Annual National Business Conference on September 5, 1929 Roger Babson observed, "Sooner or later a crash is coming, and it may be terrific". JK Gailbraith records: "Babson was not a man who inspired confidence as a prophet in the manner of Irving Fisher or the Harvard Economic Society. As an educator, philosopher, theologian, statistician, forecaster and friend of the law of gravity he has sometimes been thought to have spread himself too thin. The methods by which he reached his conclusions were a problem. They involved a hocus pocus of lines and areas on a chart. Intuition and even mysticism played a part. Those who employed rational, objective and scientific methods failed to foretell the crash. In these matters, as so often in our culture, it is far, far better to be wrong in a respectable way than to be right for the wrong reasons. Wall St was not at a loss as what to do about Babson. It promptly and soundly denounced him." Perhaps one of the reasons that Roger Babson was denounced by JK Gailbraith, was that his AR theory seemed to simplistic to those that did not understand it completely. They would have learned that applying the theory was a process. Since Mr. Babson probably did not want to confuse his audience he did not give the details to the general public about his forecasting methods, which as you can see in the above chart forecasted the low in the SPX after the market made a massive drop due to the events of September 11, 2001.
  14. 14. Comments made by JK Gailbraith indicated that, Roger Babsons forecasting methods were far more complex than the public was led to believe. Those that came to the Gravity Research Foundation meetings such as Alan Andrews, Igor Sigorsky and Clarence Birdseye were privileged to the details. Alan Andrews taught some of the Action Reaction trading concepts to the public in his “Action/Reaction Course” that he offered after he retired as a Professor of Civil Engineering at the University of Miami. He privately taught a course covering the methods and called it “The Action Reaction Course” He published various market theories in his weekly newsletter. The library of his writings is now referred to as “The Expanded Advanced Andrews Course”. It consists of over eight hundred pages. In private sessions with this author, Andrews revealed the unwritten rules, as well as something he called the Ore indicator. It is what he referred to in his writings in 1974, as his most reliable indicator for determining reversal points. In this example the peak to low method was used to determine the important points in the run up in gold during 2010-2012. Roger Babson’s techniques gave us the insights almost 100 years ago with his Action Reaction method. In order to forecast the location of future reaction points in price movement he would first draw a center or normal line. Figure one is a gold chart with a peak to low center line drawn.
  15. 15. Thereafter, from prior low chart points action lines are drawn that are parallel to the Peak to Low Center line. Step Three is to draw a parallel reaction in the future to see where the future reaction points would be. Roger believed that this demonstrated Newton’s third law of motion.
  16. 16. Looking at Figure #3 you see multiple Action lines. They are all labeled and parallel to the center line. Figure 4 is the same gold chart with the data converted to a weekly format. As one can see the reaction lines came in where prices made various high pivots. This demonstrates the concept that Actions and Reactions are equal and opposite. If the reactions are indeed equal and opposite then the reaction points may also be used to forecast the action lines. As Roger Babson put it in his autobiography, Action Reaction, the trick is to find reliable center lines. The accurate center line provides a place where some traders prefer to enter a trade with a new trend. This is in addition to giving the trader the ability to find future reliable reaction line points. The author suggests that the Golden Pivot Rule found in the Advanced Andrews Course is an excellent tool to find centerlines that are useful. For this the Advanced Andrews Course, and Expanded Course and Babson Pro Course by the author, is suggested. There are specific things that occur at or near the end of trends. These techniques are exclusive to the courses.
  17. 17. The Rules of A/R theory – the Center lines Alan Andrews wrote that there are a wide variety of lines that may be used for center lines. They include 1) Peak to Low lines The DJIA chart shows an example of the Peak to Low Center line with the relevant Action and Reaction Lines. Due to the fact that this is a down sloping line the action points are previous low pivots. As you can see in the charts the pivots occurred near the reaction lines.
  18. 18. 2) Low to Peak lines The Newmont Mining chart shows the Low to Peak Center line with the Action and Reaction Lines drawn in. Because this is an up sloping center line the action points that are used are high pivots. The objective is to find pivots as the prices go down.
  19. 19. 3) 0-3 lines O-3 lines typically look for a three wave move and then the Action and Reaction lines are drawn. They are often used in very choppy markets. O-3 reaction lines are known for being lines where a weaving pattern by the market is present. As you may notice in the DJIA chart several smaller pivots occurred near the reaction line, prior to the counter trend move being over.
  20. 20. Traders use reaction lines to estimate where a temporary reaction will occur. In addition when prices go to a line and then temporarily pull back, prior to going past it, the chartist has a reference point as to what the market needs to go past for a break out to occur. In other cases prices go past the reaction line and use it as support. This gives the chartist the ability to estimate where support will be in an up trend. For intraday traders this insight would be very handy.
  21. 21. 4) 0-4 lines The NZD chart , shows an excellent example of a 0-4 line. It is not unusual to see prices break the 0- 4 line and them come back to it and use it as a support or resistance line at a pivot #2 in a new trend. 5) 0-1 lines
  22. 22. A unique feature of the 0-1 center lines is that they only use closes for the purpose of drawing the center line. They are used to determine the location of pivot #2
  23. 23. The Action lines for the 0-1 line may use closes also. 6) Ore Reaction Lines The prior center lines can be considered static because they use a set standard line. The Ore uses a dynamic line that is dependent upon the pattern. There is a multi-step process that is followed in order to draw the Ore center line. The Ore technique was first written about in March of 1974 by Dr. Alan Hall Andrews. The original Ore charts and directions are an integral part of the Expanded Andrews Course. The Ore reaction lines are used to determine the end of a correction and the end of a thrust move. The chartist knows ahead of time whether the end of a thrust move or the end of a correction is called for. It appears that It appears that shortly after sending out the March newsletters with the details about the Ore method, Andrews realized that for it to continue to remain an end of move finder a limitation would need to be placed upon its use. He then wrote that it was only to be used for the management of the funds of worthy causes for non profit organizations. In keeping with the wishes of Andrews we have limited the distribution of the expanded course with the original Ore material. After Alan Andrews passing, the author’s team went to work on testing and improving the Ore technique. The details of this technique are covered at live seminars, regularly given by the author.
  24. 24. 7) SB Lines These are used to determine the end of moves and covered in the Babson Pro Course. Their reaction lines are known for their high degree of reliability. Roger Babson, in his Autobiography stated that the key is finding reliable center lines. Dr Andrews told the author that using the Golden Pivot Rule is very helpful at finding reliable center lines. SB lines comply with this rule. The author has found through his own research that the Golden Pivot Rule is essential in finding reliable center lines. This results in having center lines that are very different from those mentioned here.
  25. 25. The Babson Profit Ladder The Babson Profit Ladder utilizes a center line and a single reaction line to determine the location of multiple reaction lines. It was developed by Alan Andrews. All of the reaction lines are equidistant. The market reacts to them with support, resistance or an acceleration, which sometimes is in the form of a gap. On the GLD chart the Babson Profit Ladder is drawn. Note that near each reaction line prices used it for support and resistance. This technique was developed by Alan Andrews. As can be clearly seen in the SPY chart, the Babson Profit Ladder is on the chart. As prices went down to the ladder points they found support at the Reaction Lines.
  26. 26. The Wheat chart also has the Babson Profit Ladder drawn in. Do you see how the market went down in an orderly manner? Note how the lines were support and resistance points. Many investors are interested in currencies. The euro chart shows how the Euro market used the reaction lines as support and resistance.
  27. 27. Trading using Action Reaction Lines Reaction lines are used to determine an area where a probable trend will end. In some cases this is the end of a correction. In other cases it is the end of a thrust or advancement pattern. In either case since the reaction line is used to determine an area where a probable trend will end other indicators, which in this example are reaction lines, are used in conjunction with it. In Chart Bid 1 The prices have been going down for months. In the last few bars they went up to reaction line #1 and it was temporary resistance. The prices have now come back down to reaction line #1 and are using it as support.
  28. 28. Chart Bid 2 has action and reaction lines #2 drawn. Note that price found resistance at reaction line #2. At this point it appears that line #1 may be a support line for the up move as prices are breaking above reaction line #2 again. It would be useful to draw action reaction lines, using a center line in the opposite direction. Utilizing a 0-3 center line action and reaction lines were drawn. Note that prices reversed at the intersection of two reaction lines. With the prices finding support at a reaction line of a reliable center line, a buy signal was generated. Note that it also met the criteria of two different trading
  29. 29. styles to enter a trade, covered in another chapter of this book. Thereafter prices went through the next reaction lines. They utilized reaction lines four and five as temporary resistance. As long as prices go through them a few days later the trend continues.
  30. 30. Finding the End of the Correction When using AR lines, with reliable center lines, one can draw the lines for two different directions. When price goes to the intersection of two lines watch for a pivot Note the points on the GBP chart where the >>>> are placed. These are points where lines that had center lines from two different trends came together.
  31. 31. a Currencies, like the Aussie $ above are sometimes in a strong trend. Traders often look for a place to enter after a multi-day correction. To find the probable ends of corrections reaction lines may be used as guide posts.
  32. 32. Entering the Trade There are primarily five approaches for entering a trade, when it comes to technical analyses. In the four main categories an example using Action /Reaction is given. 1) Theme. This is when a fund manager or investor buys Bonds or anything else in order to bring the portfolio into balance. Balance is different for each investor. A theme investor may be a personal investor who is knowledgeable about a specific company or industry and places an order based on specific beliefs about the company or industry. 2) Reversal point. Prices are forecast to go to a specific reversal point, which could be a major reaction line and a trade is put on at that point. To see an example that was posted on August 16 2012 on CNN go to . If you bring up a chart on TCX you today you will see that the low noted as R5 on the chart was not surpassed and prices went up over 100%. A reversal point trade is often made where a price reversal is expected. An example is in the GBP chart. This is where the end of multi day moves took place.
  33. 33. Another example of reversal points is in the AUD chart. Here prices broke through the reaction lines and then pulled back. The end of the correction was near the reaction lines. 3) Break away. After an extended down trend, the trend reverses at a major reaction line. Then prices go up to a minor reaction line and then travel down. When they break past the reaction line, this is a break away.
  34. 34. As you can see in the BID chart prices went up to the reaction line #4 and #5 and temporarily stopped and went down a little. After the pull back they broke past the lines. This is a break away pattern and may be used as a break away signal 4) Pull Back. After an extended down trend, the trend reverses at a major reaction line. Then prices go up past a minor reaction line and then travel down. They then pull back to the minor reaction. In the above TD chart you see that prices broke past and pulled back to R1. This was a pull back line
  35. 35. that is used as a pull back buy signal for those that use it. Another example of the pullback approach is at the R2 line in Bid chart 4. The four methods are those that are commonly featured in technical analysis books. But for the astute trader there are more. 5) Andrews Dynamic Entry Method. This was pointed out by Dr. Andrews in a seminar the author taped and assumes knowledge considerably beyond what is contained in this EBook. It is discussed at live Advanced Andrews Course seminars and in one of the Expanded Andrews course videos. This approach requires on going analysis every few bars by the chartist. But the results are well worth the effort. It seeks to enter the trade as close as possible to the price reversal of the major trend. It uses the same indicators as the voting method that will be described later.
  36. 36. Prior to buying this one, the author posted on CNN ireport. An example of this signal was the purchase of TD stock near the R2 line by the author. Several days prior to the low at the R2 line there was discussion about why the stock had to drop down below the prior lows near the R1 line. It was also mentioned why prices would then make an important price reversal according to the Advanced Andrews course methods. Knowing that an up move was probable after prices hit the R2 line area was justification for using the R2 line for a probable reversal point. 6) The author tested out a voting methodology. This is a technique that is used by firms that manages assets of well healed clients. The theory being that near each major pivot the markets announce ahead of time that a major reversal is about to occur and then when it does other Andrews indicators light up. One of these is prices bouncing off of a specific type of reaction line. The highest certainty is when a high number of these things are true. When five or more of these things have occurred then the probability of a strong long term price reversal occurring there is very high. When tops or bottoms occur there are often less than five true. In most of those cases the counter move is not very strong. This is covered in detail in the Andrews Expanded Course.
  37. 37. The chart with the R5 on it is TCX, it was posted back in August 2012 to the email group. This one was rated a 5 because five of the potential nine were true. There after prices went up 42% from their lows during the following month. The 40% + rise along with the Action and Reaction line are seen in the above chart.
  38. 38. Improving Popular Indicators An indicator noted by many traders is what is referred to as the golden cross. This is when the 50 day moving average crosses above 200 day moving average. After this occurs, price will often travel above the fifty day moving average, indicating a strong up trend. Many traders have noticed that price will correct down to the fifty day moving average, where it Bounces. The concept is noted in down trends also as can be seen in the Newmont Mining chart.
  39. 39. Newmont mining is in a down trend and prices go up to and reverse near the 50 day MA. The correction, back to the fifty day moving average is often enough to then be the reversal point for a further move that goes 15-50% of price.
  40. 40. This concept, of using the moving average, can be very useful as an initial indicator for a computerized scanning tool. Thereafter adding an Andrews indicator is used to determine the geometric line where prices should reverse and continue.
  41. 41. The Andrews Ore indicator was revealed in the writings of Alan Andrews in March of 1974. It is a relatively unknown indictor. What was the source of the market geometry of Alan Hall Andrews ? This and more will be revealed in the another book. If you prefer the be with the trend and enter a trade when many others are also looking to enter the trade the moving averages may serve you well. In the above NEM chart the trend is down using the two moving averages discussed earlier in this chapter. The price of Newmont mining goes to a reaction line and reverses. As you can see after prices broke through it again the trend continued for another 20% of price. This is an excellent example. If you
  42. 42. were to use the power trend method the entry would have been prior to price breaking below the line. The above TD chart shows the moving average trend, and the Action Reaction Lines. Note that when prices pulled back to the reaction lines in each case they reversed and the trend continues. And finally a third example of combining the Action Reaction method with the Moving Average trend indicator. As you can see prices went up to the R2 line and then found support at the R1 line before taking off like a rocket.
  43. 43. The above TD chart shows that prices once again utilized the R2 line as the most important line to note for the trader. In this case at the bottom the reversal in prices was clearly against the trend indicator. This is not unusual at major turning points. Which reaction line is considered the most important one? The R2 line.
  44. 44. Getting Started with no Capital Risk According to the Author of the best seller “The Black Swan”, when it appears that there is no risk, is when risk is greatest. This is the point where what the trader or investor perceives to be a white swan is really a black swan. He suggests that it is more productive to handle various risks in innovative ways that lead to better long term results, than to look only for situations that have no risk. Even putting assets in cash has risk. In this case it is inflation risk, where the use of the money will turn less valuable over time. Perhaps this is why strong markets are known to climb a wall of worry. They go up for reasons unknown to most investors, in spite of the risks known by many. In this chapter there will be a discussion of ways to eliminate various risks in trading and the investor will be shown and encouraged to utilize tools that result in no risk to their trading capital, initially. There are various strategies that the investor or trader can use to deal with the various risk factors. For example, after developing a trading strategy, it’s time to trade without capital risk by using a trading simulator. The obvious benefit is not risking your capital, only your time. Probably the most important reason is that it gives you the opportunity to test various strategies and learn what the weaknesses are. Performing tests on historical data by developing the method on an early time period and then testing it on a later time period is useful to see what might have occurred in the later time period. When that system development stage is completed it is vital to do what is often referred to as real time paper trading. With the advent of the internet the paper trading has turned into using parallel trading simulators. is one of many free services that give traders the opportunity to invest parallel to the actual market in a manner that requires the trader to do everything that would normally be done, in a zero capital risk environment. There are other free services that permit parallel trading so that the trader can properly prepare and have a clearer sense as to when it is proper for him to use risk capital in trading. How long should one trade as part of proper preparation with a simulator trading parallel to actual market activity? The amount of time and trades will vary depending upon a variety of factors the first of which is the frequency of trades, but in any case it would take a minimum of six month for a new trader and a bare minimum of fifty buy and sell transactions. During that period it is common for the trader to find good reasons to modify something that is involved with trading. At that point, the clock and number of trades needs to start all over again. For some traders it means back to the original testing time period to see how the trading method would have worked out years ago. Some investors find that they need to do this a few times in order to have a model that fits their preferences and style. This makes perfect sense because if one puts capital at risk during this time period it is most likely lost. Even with a rare white swan trading system that has nothing but winning trades, weaknesses such as distractions or other events that cause improper action can hinder the trader and cause losses. Events that cause improper action can be anything from bad price data to spilling coffee on a keyboard. To
  45. 45. prevent market moves surprising you and destroying excessive capital, place a stop order.
  46. 46. Secrets discovered along the way A well known trader is George Soros. He is quoted as saying “if I had it to do over again, I would trade less” This gave this author pause for thought. If one was to limit the indicators used what would be the most useful? The answer is a multi time level approach which finds many longer term tops and bottoms. What normally occurs at these points is that the Advanced Andrews Course methods point out that an important reversal is in the making. Then entry for the trade is found with an entry technqiue reffered to as SB. The disadvantage of using this technique as a stand alone technique is that it only results in a few trades a year. But then the benefit is that entry occurs at the start of moves that are normally 8- 25% of price in the S&P. To understand how Alan Andrews was able to find tops and bottoms to trade one needs to examine his logic along the way. What he wrote at the time he examined the charts is the most relevant and reflects not only what he noticed in the price pattern but how he responded to it. What this student of his found important were the explanations he would give when he did not follow his “course rules”. This was very normal. For example there was the SH, or Sliding parallel line rule. Chart A shows an excellent example of this recently. According to Andrews “course rules” after prices make a pivot a Median Line with Parallels is drawn. If it is noted that prices spent time outside of the parallel then an SH is drawn. This SH is a line that is parallel to the Median line and is drawn from the outside point. In chart A the SH point is noted with <<.
  47. 47. The Sliding Parallel (SH) can be clearly seen in Chart B. Andrews rule set say that a stop is placed beyond the SH Line. Chart C shows the incredible surge that occurs as a result of stops being hit when prices first broke up through the SH line. It is marked as break 1. Andrews wrote in his weekly course letters, over thirty years ago, that the way to trade it is to wait until the second break of the SH, as this is a more advantageous price point.
  48. 48. As can be seen on Chart C, prices did break the SH line a second time in early July, which gave a buy signal according to what most would consider Andrews real rules. These are the real rules because they are the ones he actually followed. The real rules were discovered as a result of going through original weekly course newsletters. This is viewable in a video referred to as “The treasure of Alan Andrews” by going to the video link at Besides the 1%, who are the wealthiest, there are others who make fortunes off of the moves of the markets. Many of these individuals do so as a result of expertise they developed in knowing when to buy and when to sell. There are a multitude of firms on the web that will allow you to generate substantial revenue from trading the accounts of others. They will display your track record and advertise your advisory service for you at little or no cost to you. In theory this can be done on a smart phone or other small computer like device while at the beach. There is a big difference in investing in a company verses investing in a stock. But the possibility of combining the two can be very advantageous. Prior to moving to San Diego from Silicon Valley, my wife interviewed with a communications company in San Diego. When she came home she told me about them and their interview process. Being the owner of an executive search firm at the time, I immediately recognized that this company had an exceptional interview process that supported their long term success. The firm was developing a new type of communications gadget and had sustaining income from having put computers in trucks. This enabled the truckers to communicate with dispatch from the cab rather than on the pay phones. This in turn resulted in the trucking companies using the gadget were able to recruit the better truckers. The company had several favorable things going for them and had recently gone public. I used the Andrews Babson technical analysis techniques to determine my low risk entry point. Several years later I sold my shares in QCOM, which paid for the college education of my sons. Roger Babson stressed having a business operation that has repeat business. The idea being that one can average out the high cost of getting customer. If one is to see the stock market as a potential repeat customer then short term trading is a possible avenue to the repeat business goal. Along the way we developed several mechanical trading systems. The idea was to have a simple mechanical way to select stocks that were going to move 10-30% in our favor in the next 60 days. After the first week , the portfolio was up 3% and there were over 40 stocks in the portfolio, with four stocks hitting a stop loss and four stocks having surging profits. The next challenge was to determine which of these stocks were most likely to have a very strong (10-25%)surge move within a week of the purchase or shorting the stock. The next step was to label the stocks that had a potential surge pattern (PS). What was noted was that the PS stocks did best in terms of quick surging profits and a very low percentage of losers. They constituted about 10% of the total trades, but accounted for a large percentage of the total profits. This was partially because of our take profits after a wild surge rule. As a result one could have a portfolio of ten to twenty stocks that are generating profits, during a strong bull market.
  49. 49. What the research also found was that, during a strong bull market it was easy to have 100+ positions within a month with the simple system. To find the quick strength trades took utilizing multiple time levels of analysis. This made it somewhat more time consuming, but worth it. The results of our research, is in the Babson Trading Course. The techniques are taught only at live seminars, year to individuals that have already taken the Expanded Andrews Course. A concept that I learned from Ken Fisher has served me well. He suggests that it is better to pick the sector than the stock. This is because the sector will pull the stock in the proper direction. In the book “Book Beyond the Andrews Pitchfork” is a technique that I use for finding groups or sectors.
  50. 50. The Amazing Alan Andrews Alan Andrews liked to enter a position at the start of a new trend, ideally at the end of a correction. What did Andrews use to determine if a move had ended? It appeared that he would look at a chart and know. When the author asked him to explain how he knew, he drew several lines and showed how the market had set things up for a reversal. He showed how he did this with multiple charts and in most cases the logic for finding the reversal points varied slightly. Doing this on historical charts with perfect 20/20 hind sight is easy but what about doing this as the market was reversing? To relieve doubters he demonstrated his uncanny ability during a period of several months each year. His objective was to turn $5,000 into $50,000 by trading futures. To make it a bit more real for those observing, he sent out a newsletter on Friday. It contained a script to read to the broker on Monday ( the orders indicated section). In this newsletters he also explained the signals used and exactly what the logic was behind the orders. You can clearly see, in the two excerpt s from his newsletters, (sections cut out below) that the orders were given in advance and the profits were significant. These excerpts are from the nearly 1000 page Andrews Expanded Course, which contains years of newsletters and all of the documentation that this author has from Alan Andrews. It is available to a limited number.
  51. 51. Over the period of a few months he was up over 400% in this demonstration. There were other time periods where he did much better. How Andrews would enter the trades. An examination of Andrews’s writings in his newsletters shows that he used various entry techniques. When he would use the MMLH entry technique for a period of months he may have been doing it to demonstrate that this is one that can be used constituently. What he indicated to me was that the entry technique used was secondary to the primary analysis. In his primary analysis he would draw a number of lines to determine if the change in trend was at hand. He would also look for specific patterns. He knew that all tops and bottoms were not exactly alike and that the patterns the markets generated alternated. This is why he would not expect the stock, Forex or futures price to make it to the median line in every case. This author believes that Alan Andrews intuitively knew when prices would not make it to the median line and reverse. He would take trades at points that he knew would reverse earlier. Was there a method to his know how that he revealed in his weekly news letters? Research has found that when prices are in a counter trend movement for a few weeks, the area where the counter trend move will end is forecastle with the Andrews Ore formula. This was discussed in his newsletters in 1974.
  52. 52. In the above Hewlett Packard Chart, median lines are drawn when prices made a temporary up move, which was against the overall trend. In case A price made it up the median line drawn and in case B prices did not. At the end of each of these moves, the reversals were signals which Andrews described. In the case where they made the median line they were entirely different than in the case where did not. In both cases they were his indicators that showed him that the counter trend move was over. Alan treated counter trend moves differently than with trend moves. With what you have learned in this book, you could most likely verify that the A and B points are probable reversal points according to the Babson Action Reaction method. To quickly find all of the links below go to and click upon the Video page link. To see the original Andrews’ papers go to: To see Dr. Andrews and Ron Jaenisch go to: See the massive library of Andrews today: If you like what is in this book, go to our site for more information. Join the free email group by clicking upon the NEW? link at the website.
  56. 56. Resources To join the free yahoo based discussion group, go to and click upon…. NEW? After this book is written we will create a video produced that covers the material in this book and more.
  57. 57. Advanced Andrews Course The Course has everything that you need to trade with the Andrews and Babson techniques. We start with the basics and get into very advanced techniques. This course covers levels 1-3. Level 1....All the Basics of the Andrews and Babson Techniques. Level 2....Applying the Andrews and Babson techniques to Various Markets. Level 3....Setups and techniques only found in our course, that resulted from many private conversations with Alan Andrews and our own computer based research. This is done with over 25 videos (bite size-15-20 minutes each) over a period of three weeks. In the mail you also receive an extensive color manual. Some of the videos have Dr. Andrews teaching a seminar. More are available fro viewing at live events. Many of the techniques in the advanced course are not available elsewhere and may have been learned at the kitchen table with Alan Andrews. To keep things running well you are invited to be in a private email group where you and other Andrews Babson students ask questions and get answers with charts. Every week several examples are sent to the private group members. Often examples that are sent out are trades that someone in the group has made. The intent is to show examples. Some course members in the email forum have over 10 years’ experience with the methods. Our PT3 software as a gift to you, over and twenty videos that are only seen by course members. You are also able to attend a special live free get together held once a year. In our discussion group over 30% of the focus is upon intraday charts because of the quick learning factor. You see the results quickly. Now the course includes about 20 videos. What do recent course grads say? From India... Ever since I joined with Ron Sir, I have has some really successful trades, even a basic understanding of the subject has helped me a lot. Imagine what studying the Comprehensive would do. :) From Erich (an American living in Europe who took the level 1 basic course over 10 years ago and we gave him credit for prior payments towards the advanced course. Erich, As you can see the videos are very new, compared to what you received years ago. Please let me know what you think and how it compares. Night and day. The old paper slides hit on the concepts. The videos give the actual execution. If I'd had these videos years ago, or the time and resources to attend your actual classes, my long time dream of trading as you do would have happened years ago.
  58. 58. Still, all things happen for a reason. I enjoy trading more than anything and to actually know what I'm doing, minimizing risk, is the final step. One learns best from the best. Thank you for teaching this so long that I still have my chance to learn from you. From Richard down under ......... wow is an understatement, If i had only one thing to trade it would be (Signal description deleted). Now if other lines come in at this area it just adds to the strength I am doing minimal trading atm . With all the course lines I have learnt I am spending the next few months letting the market teach me so to speak. But the (Signal description deleted) is my bread and butter it is so simple and you quickly know when you are wrong and can get out with minimal damage Hi Ron, Can you hook me up on the direct charts list please, love the charts. Thanks for the video the other week, great stuff. Thanks, u the best David From the Middle East..."I have been getting good results so far. Trading much improved-thanks." I in Brazil " So far 1've traded using Andrews-Ron lines learned from the videos and although I've done some mistakes and learned from them I had a profitable month without much effort. Thank You very much!" A in Colorado...."I have been going through the video’s slowly and trying to take notes. I am really enjoying them. I can see that you have done a tremendous amount of research on this material. Thanks you for making this material available." "Your Video on Gold was one of the best I have seen from your work. Regards" Alaa.....England From India...........Truth is, just been part of your private email group is a big return on my investment.
  59. 59. "Hi Ron, Thanks so much for the Andrews Expanded Course, really incredible and loving it. Just wondering if there is any other videos I have not viewed for the course, I've seen the group on Ewave. The recent Babson vids looked pretty interesting too. Appreciate how much you've helped me, it really means a lot." David (From NZ) From HH in South Africa, " Thanks Ron, Great videos" ........(regardIng the techniques) " have been using them - fucking beautiful" (excuse the language)." Peter in Sacramento, "Thanks for the video, in fact thanks for all of them. This last one you were clearer and more enthusiastic than some of the others, which made it all the more valuable." Q:There is free material on the web.......what is the difference? A: A lot ........
  60. 60. The Andrews Expanded Course This contains the ORE indicator and many other publicly unknown indicators, is also available. This is the store house of the written insights, newsletters and documents that we have been able to amass over the years. There are a limited number of copies that will be published. In addition to the three massive volumes there are also a large number of videos. The content is offered with this course, where we interpret what Andrews wrote and give our insights. The Expanded course includes videos where Wave theory and course techniques are combined to find the end of corrections and the start of powerful moves. The Expanded Course contains many things. One of them is the weekly explanations of trades by Dr. Andrews as he made the trades. The huge benefit of this is you get to see what Andrews actually used in terms of indicators, to produce success on a consistent basis. The Expanded course includes videos where you learn about combining Andrews and Elliott wave. As a bonus we include over special 25 videos They cover what we have discovered in the written material and the application of the techniques. The videos cover material not covered in the Advanced Course Videos. The price varies depending upon how many copies are left. For example the first purchaser will have paid a lot less than the final 100th purchaser etc. At any time a trading firm that sees the value in the indicator may purchase all remaining copies of the course. Video Original works before we copied it. Video ....Part of what you get. For more info contact The course is available only to owners of the Advanced Andrews Course.
  61. 61. Pro Babson Advanced Course With the Babson Trading Course, it’s all about ORE from the technical point of view. The result is the trader and investor is able to implement the business and investment values expressed by Roger Ward Babson in his autobiography. In his autobiography, Roger discussed the value of patience in implementing a massive wealth accumulation strategy. It was common to be holding an investment for years. Thereafter the strategy was to lend out monies “on call”, and profit from the panic cycles that others found themselves in .This was accomplished by British bankers. The loan portion of the strategy is not available to non- bankers. However there is the opportunity to go short with the same technical analysis signal, in modern markets. There are a multitude of advantages that today’s investor has over those in the days of Roger Babson. The main one is the speed of accurate data. Roger Babson founded a firm that sold historical data covering stocks and bonds, often in the form of charts. Today most brokers offer this important information at no cost to the investor. In addition the investor has a much tighter bid ask spread than over 50 years ago. It was less than fifty years ago when Merrill Lynch would offer stocks with a bid ask spread of over 5% when commissions were factored in. In the days of Roger Babson, a spread of more than double that was common. In 1982 Dr. Alan Hall Andrews first wrote about the Ore technique. A man named Older developed a way to determine Babson Reaction lines using a Center line and Action point that Dr. Andrews had not seen before. Andrews wrote that this method finds entry points that are very close to the extreme. Therefore they are golden and are categorized as Ore. Dr. Andrews did not use software that allows the trader to utilize multiple time frames at the same time. This led to strategy development and testing capabilities that were not available to Dr. Andrews in the 1980’s. It is this straight forward strategy that is taught in the Babson Course. The result is that today one is able to develop and back test strategies based upon technical analysis, in relatively short periods of time. Then one can test them out risk free in real time with free services offered by brokers and services such as The following charts illustrate the technique taught in the Advanced Babson Course. These are the charts that are used to illustrate the signals shown.
  62. 62. Chart above shows signals discussed in Precisiontrader or Andrews Course discussion groups. Prior to taking action, this was discussed in June in our private Andrews Course discussion group.
  63. 63. This trade was discussed in the Andrews Pitchfork newsletter as well as the web based discussion groups. The Advanced Babson Course takes what was done above and shows exactly how the signal was
  64. 64. determined in each case. Thereafter the student is tasked with finding additional similar signals in the past as well as during the future. To support this activity a private email group is used.
  65. 65. This trade was discussed in the discussion groups in August, prior to taking the trade.
  66. 66. In addition to these charts there will be several ES and S&P charts that are used to learn the technique. The Babson course is always taught in small groups, in order to insure that each individual understands the techniques. In addition there is a private email support group on an ongoing basis. In order to participate in the live Pro Babson Course seminar the prerequisite is having the material in the Advanced and Expanded Andrews Course. In his autobiography, Babson discussed the idea of having a business where business is reoccurring. If one is able to generate trades with ORE several times a month in futures or Forex and they are mostly successful, this would probably meet the criteria for a reoccurring business. Investing would require staying in the trade for months or years. This too is accomplishable with ORE. The techniques in the Pro Babson Course are compatible with short term and long term trading and have been used in stocks, futures and Forex.
  67. 67. Trader Trainer Course Share your Andrews/ Babson know how with others, we refer to you. Travel to clients who would like one on one, private training. After spending considerable time in San Diego at our HQ, you will have the opportunity to train others in the course methods. We will refer new course members to you and you may also bring in new course members. The Expanded Course is a limited edition; it has techniques not found elsewhere (such as the ORE indicator) and also has several videos covering how the course methods interact with the various Elliott wave points. …………………. All charts on our website and this book are courtesy of eSignal-Qcharts. This firm has an interesting service that comes with their data feed, it can save you hundreds in monthly exchange fees for data for the asking. We have an arrangement with Scott Fitzgerald, a sales rep that if you call him at 1.800.322.0940 and mention Andrewscourse you will get pricing that is at least $25 off the monthly service, listed on their website. Hint: You do not need to actively trade or make a purchase from us to take advantage of this, just have an account with one of many brokerage discount firms like interactive brokers.