Encyclopedia of Chart Patterns. Thomas N. Bulkowski

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Figure 11.5 Use the measure rule to compute the target price. First, compute the formation height from the highest high to the lowest low, then add or subtract the height from the highest high or lowest low, respectively. Depending on the breakout direction, the result is the expected target price.

“Two days after the stock bottomed [at A], I bought at 10.50. I placed a stop 15 cents below the bottom of the pattern [below A] for a potential loss of 6%.”

      She applied the measure rule and was looking at a target of 14.25. If everything worked as expected, that would give her a profit of over 35%.

      “When price paused here,” she pointed near the start of the flag, “I wondered if the trend was going to reverse. I thought about cashing out and running to the bank, but didn't. I decided to drive.”

      She winked at me and smiled at her pun.

      “The flag formed, and I hoped it would be a half‐staff pattern, meaning the flag was halfway up the move.” If that were true, she could expect a climb to 13.25 (that is the distance from the top of the flag (12.13) to the start of the move at 10.00 projected upward using the lowest low in the flag at 11.13).

      A few days later, the stock not only fulfilled the measure rule for the flag, but for the broadening top as well.

      “Did you sell?”

      “No.”

      “Why not?”

      “Because the stock was moving up. I decided to let my profits ride. However, I did raise my stop to 11.85,” which was below the top of the flag and also below the high at B. “I thought it was a support area and hoped the stock would rebound before taking me out.”

      “In mid‐February, just after the second peaked at 17, I saw a potential double top pattern. I raised my stop to 15 cents below the double bottom's confirmation point, or 14.25.”

      About 2 weeks after raising her stop, her position sold when the stock plunged from the prior close at 15.63 to 12.13. After commissions, she made 33% in less than 4 months.

      My stomach growled again.

      “Yes, I'll feed you. I make this killer Swiss cheese, macaroni, and veggies casserole, lightly topped with toasted breadcrumbs. It has enough carbs to power the city. Let's go.”

      She grabbed my hand, towed me to her kitchen, and handed me a carrot peeler.

      “What's this?” I asked.