Master Trader Frank Tubbs
Frank Tubbs was a well-known analyst and trader in the 1930s. It was around this time he published his highly respected Tubbs’ Stock Market Correspondence Lessons. He remains one of my favourite analysts of all time, and I have his original writings which are very rare.
Tubbs was not as well known as W. D. Gann, Charles Dow or Jesse Livermore, however his works remain of great value to this day. These are the headings of his main body of work:
– Trend of the Market.
– Groups – Aggregates and Individuals.
– Records. Recording. Weeklies.
– Bases. Heads. Progressions. Swing Rule.
– Manipulation, Pools (Sponsor and Active). The Public.
– Selection of Trading Stocks. Making Trading a Business.
– Resistance and Support Lines.
– Investments. Long Move and Fluctuation Trading. Proportion.
– Mergers. Action of New Listings.
– Methods. Weekly Record Plan. New Highs and New Lows.
– Ideals, Personal Efficiency.
– Tape Reading.
– Technical Position. Accumulation, Progression and Distribution.
Tubbs’ “Stock Market Correspondence Lessons” is an extensive course and would be of benefit to any stock market trader. The earlier lessons cover the basics of successful trading – trend, aggregates (indices), record keeping and charting. The lessons progress with a discussion of his famous Swing Rule, Stock Selection, Support and Resistance Lines, his Law of Proportion and Technical Position.
When one studies the course, one must bear in mind that the course was written prior to the regulation imposed on United States’ markets after the 1929 stock market crash and subsequent depression. Lesson Six, ‘Manipulation, Pools (Sponsor and Active). The Public’ is a lesson which has little relevance in today’s regulatory environment. Nevertheless, it helps us to gain an understanding of the wild stock market trading days of the roaring twenties.
The course has a number of highlights, including his Swing Rule and his Law of Proportion. Its one lowlight, ‘Scale Trading’, shows that even a market master like Frank Tubbs could be influenced by the greed that permeated the great bull market of the 1920s and the fact that, at the time, few people could imagine it ending.
In Lesson 12, Tubbs advocates buying on a ‘scale down’. He illustrates the technique as follows:
In the rough, that this method may be understood in its idea, we will suppose that a stock is bought at 60 and instead of going upward it goes downward to 55. That gives one opportunity to buy again at 55, which is 5 points below first purchase, or on a 5-point scale. Supposing it then recedes to 50. Again opportunity is given for buying 5 points cheaper than the other purchase, and we are still on the 5-point scale; so the movement might go to 40 or 35 or 30 and each depression of 5 points would be opportunity to buy again
(Tubbs, F., Tubbs’ Stock Market Correspondence Lessons, page 146.)
Sadly, this technique can be a recipe for disaster.
In theory, this technique can lead to good profits. When it fails, however, the losses can be enormous. The technique assumes that good stocks will always recover. Many do – but it is the few that do not that can decimate a trading account. We can all think of classic examples!
Although advocated by some prominent traders in the booming 1920s, both W. D. Gann and Jesse Livermore condemned buying on a scale down, or ‘averaging down’ as it is called today. Both stated that it was one of the greatest mistakes a trader could make – and they were correct!
The Swing Rule
One of Tubbs’ major contributions to technical analysis was his swing rule. It is used in markets that make a high above an upward movement, or a low below the low of a downward movement.
Tubbs’ Swing Rule states:
When an aggregate group [Index] or an individual stock passes above previous high of movement (realize what a movement is) it is due to swing as much above that former high as it has since been below it.
(Tubbs, F., Tubbs’ Stock Market Correspondence Lessons, page 55.)
On the downside of the market the Swing Rule states:
When an aggregate group or individual stock passes below a previous low of movement it is due to swing as much below that former low as it has since been above it.
(Tubbs, F., Tubbs’ Stock Market Correspondence Lessons, page 55.)
Put simply, when a market crosses a previous top, expect that market to move upwards as far above the previous top as it had retraced below it.
The above chart of the Dow Jones in 2012, illustrates the swing rule in action. The rule is an excellent guide to what a market should do. A strong market will exceed the target price; a weak market will fail to reach the target price. In this instance, the Dow retraces almost 1640 points over several months, and then moves 1640 points above the last high, before retracing again. The market is in exact proportion!
Similarly, on the downside, when a market crosses a previous bottom, expect that market to move downwards as far below the previous bottom as it had rallied above it.
Although Tubbs’ course was a stock market course, his Swing Rule applies equally well to stocks, indices and futures markets.
Tubbs’ Law of Proportion
Frank Tubbs is probably best known for his Law of Proportion.
The Law of Proportion states:
Aggregates and individual stocks tend to move one half, two thirds and three fourths of previous moves. First in relation to the next preceding move which was made; then with relation to the move preceding that, which was made, it might go on indefinitely to the highest and the lowest at which price that stock or aggregate has ever sold.
(Tubbs, F., Tubbs’ Stock Market Correspondence Lessons, page 96.)
Tubbs’ Law of Proportion is consistent with Gann’s method of calculating support and resistance points. Gann’s instructions for finding support and resistance levels based on ranges are as follows:
12 1/2 OR 1/8: Take the extreme low and the extreme high of any important move. Subtract the low from the high to get the range. Then divide the range of fluctuations by 8 to get the 1/8 points, or 12%, 25% etc. which are resistance levels of buying and selling points 33 1/3% AND 66 2/3% OR 1/3 AND 2/3 POINTS: After dividing a commodity by 8 to get the 1/8 points, the next important thing to do is to divide the range of fluctuation by 3 to get 1/3 and 2/3 points. These 1/3 and 2/3 points are very strong, especially if they fall near other Resistance Points of previous moves or when they are divisions of a very wide range. The 1/3 point equals 33 1/3 percent, and 2/3 equals 66 2/3 percent.
(Gann, W., How to Make Profits in Commodities, page 34.)
Gann also used the same principle to calculate support and resistance levels from significant market highs and lows.
Tubbs’ Stock Market Correspondence Lessons are lessons that were first documented some 70 years ago. Despite the passage of time, the vast majority of these lessons are as valuable today as they were when they were first written.
The book Tubbs’ Stock Market Correspondence Lessons is presently out of print. It was published by McGraw-Hill Bookstore and sold for US$49.95. Amazon.com (www.amazon.com) has also sold the book.