Encyclopedia of Chart Patterns. Thomas N. Bulkowski
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average rise.
Trading Tactics
Table 8.10 shows trading tactics for broadening bottoms.
Measure rule. The first tactic is to determine how much money you are likely to make in a trade. The measure rule helps with the prediction, but it's not a guarantee.
To use the rule, compute the height by subtracting the highest high from the lowest low in the broadening bottom. Add the results to the highest high to get the target price for upward breakouts and subtract the height from the lowest low for downward breakouts.
For downward breakouts, if the prediction says the stock will drop below zero, then ignore it. For both breakout directions, use common sense. A large gain or loss probably won't occur.
The bottom portion of the table shows how well the measure rule works. Based on the full height, a stock will reach an upward target 65% of the time, but a downward target is harder to reach. It works just 41% of the time.
You can change the height in the computation to assess how often price will reach a target. I provide a few possibilities (from half the height to three times).
Let's use Figure 8.5 to make the computation clear. Point A shows the highest high in the chart pattern at 14.13. The lowest low is point B at 12. The formation height is the difference between the two, or 2.13. Add the value to the high to arrive at the upward price target, or 16.26.
Table 8.9 Busted Patterns
| Description | Up Breakout | Down Breakout |
|---|---|---|
| Busted patterns count | 149 or 25% | 169 or 42% |
| Single bust count | 84 or 56% | 111 or 66% |
| Double bust count | 40 or 27% | 8 or 5% |
| Triple+ bust count | 25 or 17% | 50 or 30% |
| Performance for all busted patterns | –15% | 32% |
| Single busted performance | –24% | 46% |
| Non‐busted performance | –15% | 45% |
Table 8.10 Trading Tactics
| Trading Tactic | Explanation |
|---|---|
| Measure rule | Compute the difference between the highest high and the lowest low in the broadening bottom. Add or subtract this value from the breakout price. The result is the target price for upward and downward breakouts, respectively. The bottom portion of this table shows how often the measure rule works. |
| Go long at the low | After recognizing a broadening pattern, buy after the stock makes its turn at the lower trendline. |
| Long stop | Place a stop‐loss order 15 cents below the prior minor low to protect against a trend reversal. |
| Go short at the high | Sell short after price starts down from the top trendline. |
| Short stop | Place a stop 15 cents above the minor high to protect against an adverse breakout. Cover the short when price turns at the bottom trendline and starts moving up. For a downward breakout, cover as it nears the target price or any support level. |
| Move stops | Raise or lower the stop to the next closest minor low or high once price makes a new high (for long trades) or low (for short sales). |
| Partial rises/declines | If a broadening bottom shows a partial decline or rise, trade accordingly (on a partial decline, go long; on a partial rise, short the stock). Partial rises work 53% of the time, and partial declines work 73% of the time. |
| Stop location | Use Table 8.7 to help determine stop location. |
| Busted trade | Busted patterns perform slightly better than non‐busted ones. See Table 8.9. |
| Description | Up Breakout | Down Breakout |
|---|---|---|
| Percentage reaching half height target | 81% | 70% |
| Percentage reaching full height target | 65% | 41% |
| Percentage reaching 2× height | 46% | 18% |
| Percentage reaching 3× height | 35% | 7% |
For the downward target, subtract the height from the lowest low (that is, 12 – 2.13 or 9.87). You can see in Figure 8.5 that the price never quite reaches the downward price target.
Go long at the low. Once you have uncovered a broadening bottom with the identification guidelines met, you can think about trading it (as price crosses from side to side).
When the price bounces off the lower trendline, buy the stock. Sell when price turns down. The downturn may occur as a partial rise partway across the chart pattern, or price may cross completely to the other side, touch the top trendline, and head down. Remember, the formation may stage an upward breakout, so don't sell too soon and cut your profit short.
Long stop. In a rising price trend, place a stop‐loss order 15 cents below a prior minor low. Should the stock reverse and head down, you will be taken out with a small loss. As the stock rises to the opposite side of the chart pattern, move your stop upward to 15 cents below the prior minor low. The minor low may act as support, so you will be giving the stock every opportunity to bounce off support before being cashed out.
Go short at the high. The trading tactic for downward breakouts is the same. When price touches the top trendline and begins moving down, short the stock. Only advanced traders should attempt to short a stock.
Short stop. Place a stop‐loss order 15 cents above the highest high in the formation, then pray that price declines.
Move stop. If luck is on your side and the stock heads down, move your stop lower. Use the prior minor high—place the stop 15 cents above it.
Partial rises/declines. If the stock makes a partial rise or decline, consider acting on it. The table shows how often they work (partial declines work best). Take advantage of them when they appear, but make sure you place a stop‐loss