Encyclopedia of Chart Patterns. Thomas N. Bulkowski

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Preface to the First Edition

      When I was a little tyke, I decided the easiest way to riches was to play the stock market. It was, after all, a level playing field, a negative‐sum game with somebody winning and somebody losing. (Hint: The winner is always the broker.) All one had to do to win was pick stocks that went up and avoid stocks that went down. Easy.

      I kept this in mind when I graduated from Syracuse University with an engineering degree and showed up early for my first professional job. Each morning I cracked open the newspaper and plotted my stock picks on a piece of graph paper taped to the wall. Bob, my office mate, used the same newspaper to select his stocks. I chose my selections after exhausting fundamental research, but Bob simply closed his eyes, twirled his hand around, and plunged his finger into the newspaper. When he opened his eyes and removed his finger, he announced another pick.

      After several months of tracking both our selections, I made a startling discovery: I was getting creamed. Bob's random selections were beating the tar out of my carefully researched choices. I also discovered something else: I was learning a lot by paper trading.

      With the hesitancy and distrust inherited from my parents, I studied two dozen firms before making my final selection and first purchase: I opened a money market account. The timing was excellent; I was earning over 17% on my cash. At first glance, the return might imply a very risky investment, but it was not. The prime rate was, after all, at 21%.

      Flush with success, I gathered my courage and opened a brokerage account and began investing the few pennies I saved. Again, the timing was excellent as I caught the beginning of a major bull market. I bought a stock at a split‐adjusted price of 88 cents and watched it go to $30 and change.

Lest you think that everything was easy, consider what happened. My stock portfolio was growing by leaps and bounds, but my professional career was about to take a turn for the worse. After switching careers more often than I sometimes like to admit, I landed a job with a company I could finally call home—a job that would last a lifetime, or so I hoped. Almost 6 months after my 10‐year anniversary with the company, I received a letter from the chairman. He congratulated me on my decade with the company and looked forward to even more success for me in the coming years.

      Six weeks later I was laid off.

The Missing Million

      I took stock of the situation and decided that, at the age of 36, I had enough. Newspapers term guys like me The Missing Million. We are the ones who, for whatever reason, leave their jobs and decide not to go back into the workforce. We retire. Everyone, and I mean everyone (with the notable exception of my cousin Mary Ann—bless her heart), thinks we are nuts.

      They're right, of course!

      For the longest time, I have been fascinated with technical analysis of stocks. In the early years, I considered the little squiggles to be nothing short of voodoo. Still, I was curious as to why the major brokerage houses were hiring technical analysts in droves. But I did not dare take my eye off the fundamentals simply because I did not know anything about the technicals.

      Then I discovered Technical Analysis of Stocks and Commodities magazine. During my lunch hour, I would take the elevator down to the library and read back issues. Although I saw chart patterns in the stocks I bought, I never really attached much significance to them. As some of my selections went sour, I began to view chart patterns with more respect. The fundamentals always looked good, but the technicals were signaling a trend change just as I was about to pull the trigger. The stocks I bought either lost money outright or I sold them too soon and cut my profits short.

      Perhaps this has happened to you. You do fundamental research on a stock and then buy it, only to watch it go nowhere for a year or more. Even worse, once you get in, the stock tumbles. Had you looked at the chart the answer was always there. Prices pierced a trend line, a head‐and‐shoulders top appeared out of nowhere, the relative strength index signaled an overbought situation. In short, any number of technical indicators were screaming that a buy now would cost you your shirt. But you never saw the signs.

      You are not alone; I did the same thing for years. I eventually got so frustrated with the performance of my stock selections that I decided to do my own research on technical analysis. I went to the library and read the same thing in many books: A head‐and‐shoulders formation works most of the time. What does that mean? Does it mean they are successful 51% of the time or 90% of the time? No one had the answer. I was not willing to risk my hard‐earned dollars on simple bromides. As an engineer I wanted hard, cold facts, not fuzzy platitudes. So, I wrote this book.

Book Layout

At the back of the book is an Index of Chart Patterns. If you suspect your stock is making a chart pattern but do not know what to call it, the Index of Chart Patterns is the first place to look. Page numbers beside each pattern direct you to the associated chapter.

      The chapters are arranged alphabetically in two sections: chart patterns and event patterns. Within each chapter, you are first greeted with a “Results Snapshot” of the major findings followed by a short discussion. Then, a “Tour” invites you to explore the chart pattern. “Identification Guidelines,” in both table form and in‐depth discussion, make selecting and verifying your choices easier.

      No work would be complete without an exploration of the mistakes, and the “Focus on Failures” section dissects the cause of failures. The all‐important “Statistics” section follows. How do you trade a chart pattern? That is what the “Trading Tactics” and “Sample Trade” sections explore. The “For Best Performance” section includes a list of tips and observations on how to select better performing patterns.

      If you have ever worked on a car or done some woodworking, then you will recognize the importance of selecting the right tool for the job. You would not want to use a flat‐head screwdriver when a Phillips works better. Both do the job, but they are hardly interchangeable. Sometimes it is not a screwdriver you should be using, but a chisel. Selecting the proper tools and knowing how to use them is half the battle. This book is a lot like that, helping to sort the wheat from the chaff. Sometimes a chart pattern is frightening enough that you will want to take profits. At other times, the best trade that you can make is none at all.

      I cannot give you the experience needed to make money in the stock market using chart patterns. I can only give you the tools and say, “Go to work on paper first.” That is the first step in developing a trading style that works for you, one you are comfortable with, one that improves as you do. If you review your paper trades, you will understand why a stop‐loss order is more than a tool for the professionals. You will improve your ability to predict support and resistance levels that will, in turn, allow you to tighten your stops and get out near the top, cut your losses short, and let your profits run. You will understand why the statistics in this book are useful for comparison purposes, but your trading results СКАЧАТЬ