Sunday, July 10, 2016

Bulkowski, Chart Patterns: After the Buy

Thomas Bulkowski has been researching chart patterns for years. His Encyclopedia of Chart Patterns was first published in 2000 and became an instant classic. Since then he has written several more books on trading and chart patterns, including Trading Classic Chart Patterns, Getting Started in Chart Patterns, Encyclopedia of Candlestick Charts, Visual Guide to Chart Patterns, and a three-volume series on the evolution of a trader.

Chart Patterns: After the Buy (Wiley, 2016) is, I believe, his best book yet. He looks at 20 popular chart patterns and analyzes, using 43,229 case studies, how they tend to play out. One qualifier: he studies the behavior of these patterns only during bull markets. That is, he is excluding the periods from March 24, 2000 to October 10, 2002 and from October 12, 2007 to March 6, 2009.

Most chapters follow the same (dare I say?) pattern: behavior at a glance, identification guidelines, buy and sell setups, best stop locations, configuration trading (that is, how the setup is likely to behave), the measure rule (for setting targets, and how likely they are to be reached), trading examples, and setup synopsis charts.

Bulkowski covers the most familiar chart patterns, such as double tops and bottoms, flags and pennants, head-and-shoulders tops and bottoms, measured moves, rectangles, and triangles. But he also looks at patterns that are less obviously visual, such as the behavior of stock prices after an earnings miss.

Bulkowski’s statistics can be sobering, though again we have to remember that he is dealing only with bull markets. Topping reversal patterns that might have some efficacy in bear markets will be more prone to fail when markets are moving to the upside. For instance, unconfirmed double bottoms fail 44% of the time whereas unconfirmed double tops fail 53% of the time. Admittedly, neither statistic is heartwarming, but a bull market regime obviously favors double bottoms.

The author offers specific recommendations on how to trade each pattern to improve the odds of a successful outcome. In the process, he gives what amounts to a mini-course in trading in general.

Although statistics (and good computer programming) is at the core of Bulkowski’s research, he writes remarkably clear, sometimes even breezy prose. And he includes lots of illustrative charts.

Chart Patterns: After the Buy is a reference book that belongs on the shelf of every trader who thinks he can see something in the squiggles of price movement. And, in one way or another, don’t we all?

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