babson article2

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How Roger Babsons applications of Newtonian Physics areapplied to the stock market. by Ron Jaenisch

Roger Babson was at the New York stock exchange on March 14, 1907, at the request ofa friend. The market had started a drop from a high of 111 on March 6, 1907 on the wayto a low point of 60. Much of the drop occurred on March 14. On that day I actually sawmens hair turn gray. Roger wrote in his autobiography.

It motivated him to do a study of stock exchange transactions and what he referred to asfoolish investments. He came to the conclusion that the cost to even thrifty investors wasone and a half billion dollars a year at that time. At that point he made a life changingdecision, to do something to prevent the losses. It put him on the path, which resulted inthe founding of Babson Business Statistics, Babson Business College and the GravityResearch Foundation.

Prior to Babson graduating from M.I T. in 1898 he sat in Professor Swains CivilEngineering class. To make the class more interesting, Professor Swain used stockmarket charts to illustrate the application of Isaac Newtons laws particularly of the lawof action and reaction. Babson used the exercises learned in the class to develop hismethod of analyzing the stock market and investing, subsequently making his fortune as afinancial adviser and investor. While at M.I.T he lobbied for the first ever businesscourse. Effectively he was the originator of the MBA degree.


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Roger Babson, himself said that his interest in gravity started with the childhooddrowning of his older sister in a river near Gloucester, Massachusetts. In an essay calledGravity- Our Enemy No. 1, he wrote, She was unable to fight gravity, which came upand 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 byNewton's discoveries, especially his third law of motion--"For every action there is anequal and opposite reaction." He intuitively combined Newtons 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 businessendeavors. Later in this article the reader will see how specifically Newtons ActionReaction 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 trythe world of finance and looked for work as an investment banker. In 1898, Roger beganhis business career working for a Boston investment firm where he learned aboutsecurities, stocks, and bonds. Inquisitive by nature, Roger Babson soon knew enoughabout investments to get himself fired. Acting in the best interests of his clients, he hadquestioned the methods and prices of his employer and quickly found himself out ofwork. Babson subsequently set up his own business selling bonds at competitive prices inNew York City and then in Worcester, Massachusetts.

He published his analysis of stocks and bonds in newsletters and sold subscriptions tointerested banks and investors. In 1904, with an initial investment of $1,200, Roger andGrace Babson founded Babson's Statistical Organization, later evolved into BusinessStatistics 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 itsdoors in 2001.

Babson, in his autobiography titled the last chapter How $2,000 can become $831,543without borrowing a penny. As the reader will later in this article, there are powerfultechniques that he developed that are useful for a technical trader to achieve and surpasssuch a goal.

Roger read several books and keptBrenners Prophecies of future ups and downs inprices as one of his prize possessions. He found that a particular quote from the bookwas important to remember.

There is a time in the price of certain products and commodities, Which if taken by menat the advance, But if taken on the decline leads to bankruptcy and ruin.

It was Brenners book and a book by Henry Hall, How money is made in securitiesinvestments, that Roger Babson brought with him to an important meeting with his old


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friend, Professor Swain. It was Professor Swain that originally introduced him to the ideaof applying Newtons 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, Timesabove 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 ofprosperity but the degree and length of the periods.

Babson wrote in his autobiography,Our contribution to the analyzing and forecasting ofbusiness 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 ourstudies considered the areas of the charts.

Based upon Newtons Law of Action and Reaction, we assumed that after a depressionarea, equal in area to the preceding area of prosperity, had developed, another area ofprosperity 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, wasindependent 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 inthis article, the scholars did not truly understand the concept.


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Recent computer based studies of this theory have led some to the conclusion, that thearea above the normal line is very useful at forecasting the turning points in the areabelow the normal line. Furthermore, as will be shown, that the extremes of the areasabove the normal line can also be forecast successfully with a few modifications to theapplication to theory.

An example of the application to the FXI chart above took three steps. First, using aspecial protocol the Normal line was selected and drawn


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There after the high pivot point was selected for drawing an Action line that is parallel tothe Normal line as seen in Chart B.

Finally the pivot area of the recession area below the normal line was forecasted bydrawing a Reaction line. The Reaction line is always drawn parallel to the Action andNormal line. It is the same distance to the normal line as the action line is.


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In the above gold chart the Normal line was selected using the normal line selectionprocedure. There after three action points were selected. Note that the Action andReaction points are equidistant form each other in relation to the normal line. Note thatwhen 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 fromextremes is not universal in the Action Reaction line calculations processes. What is alsonot universal is that in this case the Action points are equal and opposite to the reactionfrom the normal line.


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After the protocol has been applied to selecting the normal line in the aboveSemiconductor Index chart. the action points were selected and the computer programdrew 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 thenormal-center line.


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When Alan Andrews drew the Action Reaction lines by hand the charts would look linethe June 2010 Gold chart above and the action lines and reaction lines would benumbered in order to identify the pairs of Action and Reaction points easily.


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It is well known that Roger Babson used Action Reaction theory for indices. Aboveis a chart of a stock where the Action Reaction lines are drawn. The Action point is equaland opposite to the reaction point when measured from the center or normal line. Theprior three examples utilized a peak to low line for the normal line, this is the appropriate

line in over 5% of all charts.

Roger Babson researched the application of Newtons third law of motion andused it to forecast important turns in the stock market. Speaking at the Annual NationalBusiness Conference on September 5, 1929 Roger Babson observed, "Sooner or later acrash is coming, and it may be terrific". JK Gailbraith records: "Babson was not a manwho inspired confidence as a prophet in the manner of Irving Fisher or the HarvardEconomic Society. As an educator, philosopher, theologian, statistician, forecaster andfriend of the law of gravity he has sometimes been thought to have spread himself toothin. The methods by which he reached his conclusions were a problem. They involved ahocus 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 thecrash. In these matters, as so often in our culture, it is far, far better to be wrong in arespectable way than to be right for the wrong reasons. Wall St was not at a loss as whatto do about Babson. It promptly and soundly denounced him."


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Perhaps one of the reasons that Roger Babson was denounced by JK Gailbraith, was thathis theory seemed to simplistic to those that did not understand it completely. Theywould have learned that applying the theory was a complex process.

Since Mr. Babson probably did not want to confuse his audience he did not give thedetails to the general public about his forecasting methods, which as you can see in theabove chart forecasted the low in the SPX after the market made a massive drop due tothe events of September 11, 2001.


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Comments made by JK Gailbraith indicated that, Roger Babsons forecasting methodswere far more complex than the public was led to believe. Those that came to the GravityResearch Foundation meetings such as Alan Andrews, Igor Sigorsky and ClarenceBirdseye were privileged to the details.


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Alan Andrews taught some of the Action Reaction trading concepts to the public in hisAction/Reaction Course that he offered after he retired as a Professor of CivilEngineering at the University of Miami. In private sessions and writings recently

discovered (often referred to as the hidden cache of Andrews writings), he revealed themany rules as well as something he called the Ore rule. It is a mathematical formulathat Professor Andrews recommended for the selection of the Normal lines for highprobability trades. Tests by RCS which owns the website Innovative Physics.com andPrecisiontrader.com, studies have found that there are two extremely reliable types oflines that give users low risk entry points at the start of trends.

When it comes to Normal lines, there are a wide variety of types of lines that may bedrawn and important rules as to which one to use under varying market conditions. Inaddition there are rule sets to determine the selection of Action points, which are used todetermine the Reaction points. With the advent of computer technology the rule sets are

very easy to implement.

The Author, Ron Jaenisch is a high performance psychologist, and has spent yearsstudying the techniques, much of which was with Dr. Alan Hall Andrews in Miami. Ronhas a library of over 900 pages of the writings of Professor Andrews, referred to as thelost cache of Andrews writing. The documents are full of rich details on the day to dayuse of the Action Reaction Techniques, how they were applied in real time to generatesubstantial profits and various techniques that Alan Andrews only told to a select few.

This treasure of documents gave Ron a unique opportunity to apply NLP in order tomodel the extremely successful trading periods of Dr. Andrews in the 1960s and early1970s. During this time Andrews would send out exact trading directions on Friday forthe next week via U. S. mail. During a 6-month demonstration period Andrews was ableto turn $5,000 into $50,000 trading futures while giving his students orders ahead of timevia snail mail.

His most recent research involves a unique method of signal generation, that utilizesautomatic signal alternation. This is something that Alan Andrews appeared to be doingsubconsciously in order to get his spectacular results.

Ron Jaenisch, lives in the USA His website iswww.Andrewscourse.com where theupdated Advanced Andrews Course (with manuals and videos) can be ordered as well asa leather bound copy of the hidden cache Andrews techniques.
http://www.andrewscourse.com/http://www.andrewscourse.com/http://www.andrewscourse.com/


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