Encyclopedia of chart patterns

Here are the detailed notes for Chapter 1 of Encyclopedia of Chart Patterns by Thomas Bulkowski:

Chapter 1: How to Trade Chart Patterns

1. General Approach to Trading Chart Patterns:

   • The key to success with chart patterns is combining them with experience and proper trade execution.

   • Double Bottom: Look for this bullish pattern to indicate a buying opportunity. Once confirmed, it’s time to buy.

   • Double Top: This bearish pattern signals a selling point. Once confirmed, you should sell.

   • A simple strategy would involve buying on confirmed bullish patterns (e.g., double bottom) and selling on confirmed bearish patterns (e.g., double top).

   • Managing risks through stop-loss orders is essential as the trade could be volatile in between.

2. Market and Industry Trends:

   • A key point to enhance successful trades is aligning with overall market and industry trends.

   • A rising stock combined with a bullish market and industry offers a smoother ride and increased chances of success.

3. Trading Strategy - Bottom Fishing and Buying the Dip:

   • The author favors bottom fishing, which means buying stocks at a low price with the expectation of selling them higher.

   • Bottom fishing is considered risky but preferable for Bulkowski compared to momentum trading.

   • It’s a strategy that works well with stocks that have potential momentum once they recover from their dips.

4. Swing Trading Setups:

   • Swing trading strategies discussed include:

     • Knots: These are points where the price moves sideways for a few days during a trend. It signals the stock might be ready to pull back to a higher level.

     • Setup 2 and 3: These setups involve identifying areas where stocks make sharp moves, helping traders take advantage of pullbacks. Swing traders should use such setups to identify strong support levels and optimize their exit points.

5. Use of Patternz Software:

   • Bulkowski introduced his free pattern recognition software, Patternz, which identifies patterns like the double bottom in real-time. It can simulate trades and provide insights into chart patterns' viability.

   • By using Patternz, traders can build a better instinct for profitable patterns by reviewing historical data and simulations, preparing them for real trades.

6. Performance Contests:

   • The chapter ends with a discussion about trading performance and contests, emphasizing strategies that can maximize gains during swing trading.

In summary, Chapter 1 provides practical strategies on how to spot, trade, and maximize profits using chart patterns. Bulkowski shares his personal preferences and techniques, such as bottom fishing and swing trading, while stressing the importance of industry trends and market alignment in trading decisions.

Let me know if you need more details!

Here are the detailed notes for Chapter 2 of Encyclopedia of Chart Patterns by Thomas Bulkowski:

Chapter 2: AB=CD Bearish

1. Overview of AB=CD Bearish Pattern:

   • The AB=CD pattern is a bearish reversal pattern based on Fibonacci ratios. It involves four points (A, B, C, and D) and two equal-length legs: AB and CD.

   • The key to this pattern is identifying turns at the right points using Fibonacci retracement and extension levels. It signals a downward movement after the D point is reached.

   • The pattern suggests that once price reaches D, it should decline. However, tests indicate that this only happens about 32%-38% of the time.

2. Identification Guidelines:

   • Appearance: It forms a three-leg zigzag pattern on the chart. The CD leg is often equal in length to the AB leg but can sometimes be a Fibonacci extension away.

   • Duration: Ideally, the number of days in AB should equal CD. In well-formed patterns, the slope of AB is similar to CD.

   • Volume: Volume typically trends downward during this pattern, though it’s not a strict requirement.

3. Fibonacci Ratios:

   • BC/AB Retrace: This retrace is based on common Fibonacci numbers like 0.5, 0.618, or 0.786.

   • CD/BC Extension: The extension from point C to D can be identified using Fibonacci extension ratios like 1.618, 2, or 2.24.

4. Performance of AB=CD Bearish Pattern:

   • In a bull market, this pattern shows a moderate performance, with an average price drop of 12.7%.

   • The breakeven failure rate in a bull market is 26.3%, indicating that in over a quarter of cases, the price doesn’t drop by more than 5%.

   • In a bear market, the pattern performs better, with an average price drop of 21.6% and a breakeven failure rate of 10.2%.

   • Although price almost always reaches D (95%-98%), the reversal at D happens only 32%-38% of the time.

5. Failures in the Pattern:

   • Sometimes price doesn’t reach the expected point D, or even if it does, it fails to reverse. These are termed as "pattern failures."

   • For example, a drop to a level lower than C during the move towards D invalidates the pattern.

6. Trading Tactics:

   • Predicting Point D: Traders can calculate point D using Fibonacci extensions once points A, B, and C are known.

   • Taking Profits: Swing traders can use this pattern to anticipate where price will rise and sell around D.

   • Stop-Loss Strategy: Setting a stop-loss below point C ensures that the trader exits the trade if the pattern fails.

7. Practical Example:

   • A sample trade scenario showed that a trader successfully predicted the price would rise to point D by calculating Fibonacci extensions. The trade was exited at the exact high at D, securing a profit.

8. Summary:

   • The AB=CD Bearish pattern is useful for identifying potential price declines after a rally.

   • Despite the relative ease of identifying point D, the actual success rate for a reversal is low, meaning traders should be cautious when relying on this pattern alone.

These notes cover the structure, identification, performance, and practical usage of the AB=CD Bearish pattern, with an emphasis on the importance of volume trends and Fibonacci ratios.

Here are detailed notes for Chapter 3 of Encyclopedia of Chart Patterns by Thomas Bulkowski:

Chapter 3: AB=CD Bullish

1. Pattern Overview:

   • The AB=CD Bullish pattern is a Fibonacci-based chart pattern consisting of two equal legs: AB and CD. The pattern suggests an upward price movement after reaching point D.

   • The purpose of the pattern is to identify when a stock is likely to turn upward, allowing traders to buy at the low (D) and take advantage of a potential rise in price.

2. Identification Guidelines:

   • Appearance: A zigzag pattern that involves four price swings (A-B, B-C, C-D).

   • Fibonacci Ratios:

     • The retracement from B to C should be one of the Fibonacci ratios: 0.382, 0.5, 0.618, 0.786.

     • The extension from C to D should also be a Fibonacci ratio: 1.27, 1.618, or 2.24.

   • Volume: Volume trends vary, but in a bullish AB=CD pattern, it tends to rise.

   • Duration: Ideally, the pattern’s legs (AB and CD) should be equal in time and price distance.

3. Performance of AB=CD Bullish:

   • The success of this pattern varies between bull and bear markets.

     • In bull markets, the pattern typically leads to an average price rise of about 38.4%.

     • In bear markets, the pattern is less effective, with an average price rise of 30.5%.

   • The probability that price reaches point D is nearly 100% in bull markets but only about 99% in bear markets.

   • The rate of price reversal at point D is 38% in bull markets and 33% in bear markets.

4. Failures:

   • The pattern fails when the price does not reverse at D or when the rise is insufficient to make a profit. About 62% of the time, the price does not behave as expected at D, either failing to reverse or resulting in a small rise of less than 5%.

   • In some cases, the stock turns upward too early, missing point D entirely, although this is a rare occurrence.

5. Trading Strategy:

   • Predicting Point D: Once the first three points (A, B, and C) are identified, traders can calculate the potential location of point D using Fibonacci extensions.

   • Taking Action: Traders should buy at or near point D when the pattern predicts a reversal. A stop-loss should be set below point D to limit potential losses if the price fails to rise.

   • Taking Profits: Swing traders should take profits when the price rises after the predicted reversal at D, aiming to capture the upward move.

6. Real-world Examples:

   • Several examples are discussed in the chapter where the AB=CD bullish pattern predicted a strong upward move. In one case, after reaching point D, the price of a stock rose by 119%, demonstrating the potential power of this pattern when it works.

7. Summary:

   • The bullish AB=CD pattern is a reliable tool for predicting upward price movements, though it’s far from perfect. Traders need to be cautious about its limitations, particularly the high failure rate. Nonetheless, when properly used, this pattern can provide significant profit opportunities, especially in a bullish market environment.

This summary covers the main points of Chapter 3, including the structure, identification, trading tactics, and risks associated with the AB=CD Bullish pattern.

Let me know if you need more information!

Here are the detailed notes for Chapter 4 of Encyclopedia of Chart Patterns by Thomas Bulkowski:

Chapter 4: Bat (Bearish)

1. Overview of the Bearish Bat Pattern:

   • The Bearish Bat is a Fibonacci-based pattern used to predict bearish reversals. The pattern has five key points: X, A, B, C, and D.

   • It resembles a big "W," and Fibonacci ratios determine the turns in the pattern.

   • This pattern is often used to identify a turning point at D, after which the price is expected to decline.

2. Identification Guidelines:

   • Appearance: The pattern looks like a big W, with two legs that resemble bat wings.

   • Fibonacci Ratios:

     • BA/XA retrace: The ratio of BA to XA should be either 0.382 or 0.5.

     • BC/BA retrace: The ratio of BC to BA is one of 0.382, 0.5, 0.618, 0.707, 0.786, or 0.886.

     • DC/BC extension: The extension of leg DC to BC is one of 1.618, 2, 2.24, or 2.618.

     • DA/XA retrace: The ratio of DA to XA is typically 0.886.

   • Volume: Generally, volume trends downward during the formation of the pattern, though this isn’t a strict rule.

   • Duration: Bulkowski limits the duration of Bat patterns to 6 months, though this is an arbitrary choice.

3. Performance of the Bearish Bat Pattern:

   • Downward Moves:

     • In bull markets, the average decline after reaching point D is 14.3%.

     • In bear markets, the average decline is much larger at 20.2%.

     • Reversal Rate: The price turns lower at D 86% of the time in both bull and bear markets, making it a highly reliable bearish signal.

     • The breakeven failure rate is 17.7% in bull markets and 4.5% in bear markets. This means that in a bull market, 17.7% of bearish bats will not see the price decline by more than 5%.

4. Failures and Breakouts:

   • A failure occurs when the price breaks out above point X (instead of moving downward from D).

   • In bull markets, around 70% of bearish bat patterns will break out upward instead of downward, which is much higher than in bear markets.

   • Despite this high breakout rate, there is still potential to profit from the price decline between D and the breakout.

5. Trading Tactics:

   • Identifying D: Swing traders can use the Bearish Bat pattern to predict the turn at point D and initiate a short trade, anticipating a downward move.

   • Price Targets: Traders should aim for lower price levels after D, targeting intermediate points like B or C for profit-taking.

   • Stop-Loss: A stop-loss should be placed just above point D to minimize losses if the trade fails.

6. Practical Example:

   • Bulkowski illustrates the pattern with an example where a trader successfully shorted the stock at point D and profited from the price decline. However, the stock later rebounded and broke out upward, demonstrating the potential risk of upward breakouts.

7. Summary:

   • The Bearish Bat pattern is useful for swing traders looking to capitalize on bearish reversals. It performs particularly well in bear markets, where price declines are larger and more frequent. However, traders must remain cautious of upward breakouts, especially in bull markets.

These notes cover the structure, identification, performance, and trading strategies related to the Bearish Bat pattern. Let me know if you need further clarifications!

Here are the detailed notes for Chapter 5 of Encyclopedia of Chart Patterns by Thomas Bulkowski:

Chapter 5: Bat (Bullish)

1. Overview of the Bullish Bat Pattern:

   • The Bullish Bat is a Fibonacci-based reversal pattern consisting of five key points: X, A, B, C, and D.

   • It is a bullish pattern used to predict upward price movement after reaching point D.

   • The pattern looks like a large "M," and is often confused with other chart patterns like the Big M or double top, but its distinction lies in the specific Fibonacci ratios governing its points.

2. Identification Guidelines:

   • Appearance: Resembles a large M chart pattern with turns based on Fibonacci ratios.

   • Fibonacci Ratios:

     • AB/AX retrace: The ratio of leg AB to XA should be 0.382 or 0.5.

     • BC/AB retrace: The ratio of BC to AB can be 0.382, 0.5, 0.618, 0.707, 0.786, or 0.886.

     • CD/BC extension: The extension from C to D is usually one of 1.618, 2.24, or 2.618.

     • AD/AX retrace: The retracement of AD to XA is 0.886.

   • Volume: Volume generally trends downward throughout the formation of the pattern but this isn’t a strict rule.

3. Performance of the Bullish Bat Pattern:

   • The bullish bat is the best-performing Fibonacci-based pattern.

   • In Bull Markets:

     • The average rise after D is 44.3%, making it a highly effective pattern.

     • The breakeven failure rate is relatively low at 10.2%, meaning most trades result in a meaningful rise.

     • The reversal rate at point D is an impressive 91%, meaning that in the majority of cases, the price reverses and moves upward from D.

   • The pattern has been identified in a limited number of stocks (259 cases), which makes the data somewhat rare, but still useful.

4. Failures:

   • Although the pattern performs well, it has a failure rate, particularly if the price rises by less than 5% from D. This occurs in about 10.2% of cases, most often when price encounters strong overhead resistance.

   • Volume trends, particularly downward trends, often signal better performance, though there are exceptions.

5. Trading Strategy:

   • Entry Point: Swing traders are encouraged to enter the trade at or near point D, when the price is expected to reverse and rise.

   • Price Target: Traders often set their price targets based on Fibonacci projections, or by using the prior turning points A and B. In 86% of cases, the price reaches point B after reversing at D, and in 58% of cases, it reaches point A.

   • Stop-Loss: A stop-loss order should be placed just below point D to minimize losses if the price continues to fall instead of reversing.

6. Real-World Example:

   • A detailed case study is provided where a trader successfully identified a bullish bat pattern in a stock. The price reversed as predicted at point D and rose to reach point B, providing a profitable trade.

   • The trader used software to detect the pattern and employed Fibonacci extensions to calculate targets, showcasing how automated tools can assist in identifying these complex patterns.

7. Summary:

   • The Bullish Bat pattern is one of the most reliable Fibonacci-based patterns for swing traders looking for bullish reversals.

   • It performs exceptionally well in bull markets, with a high probability of price reversal at D and substantial upward movement after.

These notes cover the identification, performance, trading tactics, and practical application of the Bullish Bat pattern, highlighting its effectiveness and the importance of Fibonacci ratios in its formation.

Here are the detailed notes for Chapter 6 of Encyclopedia of Chart Patterns by Thomas Bulkowski:

Chapter 6: Big M

1. Overview of the Big M Pattern:

   • The Big M pattern is a bearish reversal pattern, characterized by two peaks that resemble the letter "M." It’s a variant of the double top, but the Big M has more significant downward movement after confirmation.

   • The pattern begins with a strong upward trend, followed by the formation of two peaks. After the second peak, the price breaks below the valley between the peaks, confirming the Big M pattern.

2. Identification Guidelines:

   • Appearance: The Big M has two peaks at similar price levels. A straight-line climb usually precedes the first peak, with a deep valley between the two peaks.

   • Volume: Typically, volume trends downward from the first peak to the second peak.

   • Breakout Confirmation: A breakout occurs when the price closes below the low of the valley between the peaks.

   • Duration: The duration from peak to peak varies, but the median time between peaks is about a month.

3. Performance of Big M:

   • Bear Markets: The pattern performs better in bear markets, where the average decline is 22%, compared to 17% in bull markets.

   • Pullbacks: In 67% of bull markets and 63% of bear markets, the price pulls back to the breakout point after confirmation. Pullbacks typically occur within 12 days, with a price drop of 7-10% before returning to the breakout level.

   • Failure Rates: The pattern fails to see a price decline more than 5% after the breakout 14% of the time in bull markets and 8% in bear markets. However, it fails to decline more than 10% in about 37% of cases in bull markets.

4. Trading Tactics:

   • Measure Rule: The height of the pattern is measured from the valley low to the peak, and this height is subtracted from the breakout point to set a price target.

   • Stop-Loss: Traders are advised to use a stop-loss at the top of the pattern to avoid significant losses.

   • Pullback Trade: Experienced traders may consider shorting the stock just below the breakout point and covering at the bottom of the pullback. The median decline during pullbacks is 6% to 8%, depending on market conditions.

   • Busted Big M Trade: If the pattern breaks down and then reverses above the breakout point, it can be a sign of a busted pattern. In such cases, the price can rise significantly, providing a profit opportunity for those who go long.

5. Practical Example:

   • A sample trade discussed in the chapter shows how a trader profited from shorting a Big M pattern, only to lose money when the stock reversed and busted the pattern.

6. Summary:

   • The Big M pattern is an effective bearish reversal pattern, particularly in bear markets. Traders should be cautious of pullbacks and set stop-losses to manage risk. The busted pattern offers an alternative trading opportunity if the price reverses unexpectedly.

These notes cover the identification, performance, and trading strategies for the Big M pattern. Let me know if you need further clarification!

Here are detailed notes for Chapter 7 of Encyclopedia of Chart Patterns by Thomas Bulkowski:

Chapter 7: Big W

1. Overview of the Big W Pattern:

   • The Big W is a bullish reversal chart pattern, characterized by two valleys (or bottoms) and a peak in between that looks like the letter "W."

   • It’s a type of double bottom, with a distinct feature: a tall left side and often a tall right side as well. The pattern predicts a bullish breakout once the price closes above the peak between the two valleys.

2. Identification Guidelines:

   • Appearance: Price forms two bottoms that are at or near the same level. The left side of the pattern must be tall, and ideally, the right side should match that height.

   • Price Trend: A steep downward move typically precedes the first bottom. Avoid patterns where the decline meanders or moves sideways before reaching the first bottom.

   • Volume: Volume generally trends downward throughout the pattern. However, rising volume from the left to the right bottom is also acceptable.

   • Breakout Confirmation: The breakout is confirmed when the price closes above the peak between the two bottoms.

   • Duration: No specific minimum or maximum duration for the pattern. Some patterns may take several months to form.

3. Performance of Big W:

   • Bull Markets: In bull markets, the Big W pattern performs well, with an average price rise of 46%. The breakeven failure rate is 9%, meaning 9% of the patterns fail to rise by more than 5% after the breakout.

   • Bear Markets: In bear markets, the average rise is 30%, with a breakeven failure rate of 9%. Bear markets see price rises take less time to reach the target compared to bull markets.

   • Busted Patterns: About 18% of Big W patterns fail, with a higher likelihood in bear markets (20%). A "busted" pattern occurs when the price breaks out but then reverses and falls below the bottoms of the pattern.

4. Trading Tactics:

   • Measure Rule: To estimate the price target, subtract the lowest bottom price from the peak price and add this difference to the breakout point. This method gives a target that the price will reach about 74% of the time in bull markets.

   • Stop-Loss Placement: Traders should place a stop-loss just below the second bottom or use a volatility stop to account for market fluctuations.

   • Half-Height Target: If a closer price target is desired, use half the pattern’s height instead of the full height. This closer target has an 88% chance of being hit in bull markets.

5. Trading Experience:

   • Case Studies:

     • Abercrombie & Fitch Co.: A trade where the author entered during the formation of a Big W but faced a premature exit due to a misjudgment of the pattern’s timing.

     • Teradyne Inc.: A successful trade where the author bought after a confirmed breakout and made a 194% profit after holding the stock for 1.8 years.

6. Practical Example:

   • An example trade discussed in the chapter showed how the Big W pattern predicted a rise in price. The author explains how a trader could have used the measure rule to estimate a target price and place a stop-loss to protect against losses.

7. Summary:

   • The Big W pattern is a reliable bullish reversal pattern, particularly in bull markets where price rises are substantial. Traders can use the measure rule to set price targets and manage risk effectively with stop-losses. However, the pattern occasionally busts, meaning traders should remain cautious, especially in volatile markets.

This chapter provides insights into recognizing and trading the Big W pattern, emphasizing its effectiveness in bull markets and offering strategies to manage risk.

Here are the detailed notes for Chapter 8 of Encyclopedia of Chart Patterns by Thomas Bulkowski:

Chapter 8: Broadening Bottoms

1. Overview of Broadening Bottoms:

   • The Broadening Bottom pattern appears when the price trends downward and then begins to oscillate with increasing volatility, forming a megaphone shape with higher highs and lower lows.

   • The pattern typically indicates a reversal from a downtrend to an uptrend.

2. Identification Guidelines:

   • Appearance: The pattern looks like a megaphone, with the price creating higher highs and lower lows.

   • Trend: A downward price trend should lead into the broadening bottom. If the price rises briefly before the pattern starts, it is ignored (known as overshoot).

   • Trendlines: Draw two diverging trendlines that connect the minor highs and lows. The top trendline slopes upward while the bottom slopes downward.

   • Touches: The pattern should have at least five touches, with three on one trendline and two on the other. The touches may not necessarily alternate between the trendlines.

   • Whitespace: The price should cross between the top and bottom trendlines multiple times, filling the space within the pattern.

   • Volume: Volume tends to increase during the formation of the pattern. However, downward-trending volume does not invalidate the pattern.

   • Breakout Direction: The pattern can break out in either direction (up or down). A breakout is confirmed when the price closes above the highest point of the pattern (for an upward breakout) or below the lowest point (for a downward breakout).

3. Performance of Broadening Bottoms:

   • Upward Breakouts:

     • Reversal or continuation: The pattern generally indicates a long-term bullish reversal.

     • Performance Rank: 15 out of 39 chart patterns in terms of performance.

     • Average Rise: 45% after an upward breakout.

     • Breakeven Failure Rate: 16%, meaning that 16% of the time, prices do not rise by at least 5% after the breakout.

     • Throwbacks: Occur in 69% of cases, where the price returns to the breakout point before continuing upward.

     • Percentage Meeting Price Target: 65%.

   • Downward Breakouts:

     • Reversal or continuation: Typically, downward breakouts signal short-term bearish continuation.

     • Performance Rank: 23 out of 36 for downward breakouts.

     • Average Drop: 15% after a downward breakout.

     • Breakeven Failure Rate: 26%.

     • Pullbacks: Occur in 62% of cases, where the price returns to the breakout point before continuing downward.

     • Percentage Meeting Price Target: 41%.

4. Failures:

   • Broadening bottoms can sometimes fail, where the price does not behave as expected after the breakout. The failure rate is higher for downward breakouts.

5. Trading Tactics:

   • For Upward Breakouts: Enter a trade after the price closes above the highest point of the pattern, setting a stop-loss just below the breakout point or near a recent low.

   • For Downward Breakouts: Traders may enter a short position when the price breaks below the lowest point of the pattern, with a stop-loss above the breakout point.

   • Profit Targets: Use the height of the pattern to estimate price targets after a breakout. For upward breakouts, the height is added to the breakout point, and for downward breakouts, it is subtracted.

   • Managing Pullbacks: If a pullback occurs after a breakout, traders should monitor whether the price returns to the breakout point or reverses direction again.

6. Real-World Example:

   • The book provides examples of trades using the broadening bottom pattern. In one case, the stock moved from $26 to $24.50 before reversing and breaking out upward, reaching a high of $38.50 over the next year.

7. Summary:

   • Broadening bottoms are moderately successful patterns, with a higher success rate for upward breakouts compared to downward breakouts. They perform better in bullish markets but are less reliable in bearish conditions. Proper identification and disciplined trading strategies can make this pattern profitable.

These notes cover the identification, performance, and trading tactics for broadening bottoms. Let me know if you need further clarification!

Here are detailed notes for Chapter 9 of Encyclopedia of Chart Patterns by Thomas Bulkowski:

Chapter 9: Broadening Formation (Right-Angled and Ascending)

1. Overview of the Right-Angled Ascending Broadening Formation:

   • This pattern consists of a horizontal bottom (support) line and an upward-sloping top (resistance) line, creating a broadening triangle shape.

   • It is a continuation or reversal pattern, signaling bullish momentum in most cases but can break out in either direction.

2. Identification Guidelines:

   • Appearance: It resembles a megaphone tilted sideways, with a flat bottom and an upward-sloping top.

   • Touches: At least five touches are required, with three on one trendline and two on the other.

   • Volume: Typically, volume trends upward during the formation, which is unusual compared to other patterns.

   • Whitespace: The price action should fill the area between the trendlines, moving from the top to the bottom.

   • Breakout Direction: Though the pattern can break out in either direction, upward breakouts are favored slightly.

3. Performance of the Right-Angled Ascending Broadening Formation:

   • Upward Breakouts:

     • Average Rise: 43% in bull markets, making it a strong continuation signal.

     • Performance Rank: 18th out of 39 patterns, placing it in the middle in terms of success rate.

     • Breakeven Failure Rate: 15%, meaning that 15% of the time, the price does not rise by more than 5% after breaking out.

     • Throwbacks: Occur in 68% of cases, where the price returns to the breakout level before continuing upward.

     • Price Target: 67% of upward breakouts meet the expected price target, based on the height of the pattern.

   • Downward Breakouts:

     • Average Decline: 14% in bear markets, making it less effective for bearish trades.

     • Performance Rank: 25th out of 36 patterns for downward breakouts.

     • Breakeven Failure Rate: 28%, indicating a higher risk of the pattern failing in bear markets.

     • Pullbacks: Occur in 63% of cases, where the price returns to the breakout level before falling further.

     • Price Target: Only 40% of downward breakouts meet the price target, making it less reliable for bearish trades.

4. Trading Tactics:

   • For Upward Breakouts: Traders should enter a position when the price closes above the resistance (upward-sloping trendline), using the height of the pattern to set a price target.

   • For Downward Breakouts: Traders should enter a short position when the price closes below the horizontal support line. A stop-loss should be placed just above the breakout point.

   • Stop-Loss Placement: Place stop-losses just below the horizontal bottom (for bullish trades) or above the sloping top (for bearish trades).

5. Failures:

   • Breakouts in the opposite direction of the expected move (i.e., a bullish breakout in a bearish market) are common.

   • The pattern has a high probability of throwing back to the breakout point, leading to false signals in nearly two-thirds of the cases.

6. Example:

   • The book illustrates the pattern using real stock data, where the price forms a right-angled ascending broadening formation and breaks out upward. Despite a throwback to the breakout point, the price eventually rises and reaches the target.

7. Summary:

   • This pattern is moderately successful, particularly in bullish markets where upward breakouts perform well. Traders should be aware of the frequent throwbacks and potential for failure, especially in bear markets.

These notes cover the identification, performance, and trading strategies for the right-angled ascending broadening formation. Let me know if you need further clarifications!

Here are the detailed notes for Chapter 10 of Encyclopedia of Chart Patterns by Thomas Bulkowski:

Chapter 10: Broadening Formation (Right-Angled and Descending)

1. Overview of Right-Angled Descending Broadening Formation:

   • This pattern features a horizontal resistance line at the top and a down-sloping support line at the bottom, forming a broadening triangle.

   • It can signal either a bullish or bearish breakout, but upward breakouts are favored slightly over downward ones.

2. Identification Guidelines:

   • Appearance: The pattern looks like a megaphone tilted downward, with price swings expanding as the pattern develops. The top is flat (horizontal), while the bottom slopes downward.

   • Touches: The pattern must have at least five touches, with three on one trendline and two on the other.

   • Whitespace: Price should oscillate between the trendlines, filling the space between them without leaving large gaps.

   • Breakout Direction: Although the breakout can be either up or down, this pattern tends to favor upward breakouts.

   • Volume: Volume tends to increase during the formation of the pattern, and may spike during the breakout.

3. Performance of the Right-Angled Descending Broadening Formation:

   • Upward Breakouts:

     • Performance Rank: 19 out of 39 patterns for upward breakouts.

     • Average Rise: 43%, indicating a substantial gain after a breakout.

     • Breakeven Failure Rate: 21%, meaning in 21% of cases, prices fail to rise by more than 5% after the breakout.

     • Throwbacks: Occur in 64% of cases, where the price returns to the breakout level before continuing upward.

     • Percentage Meeting Price Target: 65%.

   • Downward Breakouts:

     • Performance Rank: 18 out of 36 patterns for downward breakouts.

     • Average Drop: 15%, reflecting a smaller decline compared to upward breakouts.

     • Breakeven Failure Rate: 23%, meaning 23% of the time, the price does not decline by more than 5%.

     • Pullbacks: Occur in 69% of cases, where the price returns to the breakout point before resuming its downward move.

     • Percentage Meeting Price Target: 51%.

4. Failures:

   • The pattern sometimes fails to move in the expected direction after the breakout. In cases of partial rises (where the price fails to reach the upper trendline before reversing), there is often a downward breakout instead.

   • When a breakout fails, the price may return inside the pattern and continue trading sideways or in the opposite direction.

5. Trading Tactics:

   • For Upward Breakouts: Traders should enter a position when the price closes above the resistance line. Stop-loss orders can be placed just below the breakout point.

   • For Downward Breakouts: Traders can short the stock when the price closes below the support line. A stop-loss should be placed above the breakout point.

   • Profit Targets: Use the height of the pattern to calculate a price target by adding it to the breakout point for upward moves and subtracting it for downward moves.

6. Real-World Example:

   • Bulkowski provides an example where the stock followed the right-angled descending broadening formation and eventually broke out upward, reaching the calculated price target.

7. Summary:

   • The Right-Angled Descending Broadening Formation is a versatile pattern that can signal both upward and downward breakouts. Upward breakouts are generally more profitable, but traders should remain vigilant for false signals and partial rises, which often precede downward breakouts.

These notes cover the identification, performance, and trading tactics for this pattern, offering practical strategies for managing trades based on breakout direction.

Here are detailed notes on Chapter 11, Broadening Tops, from The Encyclopedia of Chart Patterns by Thomas Bulkowski:

Overview:

• Broadening Tops resemble megaphones due to their higher highs and lower lows that widen over time.

• These patterns generally appear after an upward price trend and signal either a continuation or reversal, depending on the breakout direction.

Key Points:

• Appearance: A broadening top has a megaphone shape, with diverging trendlines, upward sloping for highs and downward sloping for lows.

• Inbound Price Trend: Broadening tops follow an upward price trend, while broadening bottoms follow a downward trend.

Breakout Types:

1. Upward Breakouts:

   • Performance is better in bull markets, where there is a long-term bullish continuation.

   • Rank: 22 out of 39 in bull markets; 14 out of 20 in bear markets.

   • Average rise: 42% in bull markets, 25% in bear markets.

   • Volume tends to increase.

   • Throwbacks (price temporarily returning to the breakout point) occur 67% of the time in bull markets and 64% in bear markets.

2. Downward Breakouts:

   • Seen as short-term bearish reversals.

   • Rank: 28 out of 36 in bull markets; 14 out of 19 in bear markets.

   • Average drop: 13% in bull markets, 22% in bear markets.

   • Pullbacks (price returning after a breakout) happen 67% of the time.

Trading Tactics:

• Measure Rule: Helps predict future price targets by measuring the height between the highest high and lowest low of the pattern and adding it to the breakout point.

• Go Long at the Bottom: After the price touches the lower trendline and moves up, buy and aim for a significant price rise. Stop-loss orders should be set slightly below the lowest low.

• Go Short at the Top: If the price reaches the top trendline and shows signs of reversal, open a short position.

Statistics:

• Upward Breakouts: 83% reach at least half the height of the pattern in bull markets, while only 66% reach the full height.

• Downward Breakouts: 70% of bull market downward breakouts reach at least half the height of the pattern, but only 42% reach the full height.

Example Trade:

• Advanced Micro Devices (AMD): The stock formed a broadening top in 2001. The author bought at $19.64 expecting an upward breakout but sold at $15.70 after a partial rise and subsequent downward breakout, resulting in a 20% loss.

Conclusion:

Broadening tops can be challenging to trade due to their unpredictable breakouts and frequent throwbacks/pullbacks. It's essential to watch for volume trends and use stop-loss strategies to limit potential losses【7:0†source】【7:2†source】【7:4†source】.

Here are detailed notes on Chapter 12: Broadening Wedge, Ascending from The Encyclopedia of Chart Patterns by Thomas Bulkowski:

Overview:

• Broadening Wedges appear with two up-sloping trendlines that diverge over time, forming a megaphone-like shape tilted upwards.

• This pattern signals a bearish reversal when it forms after a rising price trend.

Key Points:

• Trendlines: Both trendlines slope upwards, but the top one has a steeper slope, giving the pattern its broadening appearance. There are typically at least five touches between the two trendlines (three on one side and two on the other).

• Volume: Volume often rises irregularly within the pattern and usually decreases as the price approaches the breakout.

Breakout Types:

1. Upward Breakouts:

   • These breakouts tend to act as a continuation of the prior trend.

   • Rank: 23 out of 39 for upward breakouts.

   • Average Rise: 41%.

   • Throwbacks (when price returns to the breakout point) occur in 68% of cases.

2. Downward Breakouts:

   • The downward breakout typically signals a bearish reversal.

   • Rank: 33 out of 36 for downward breakouts, making it a lower-performing pattern.

   • Average Drop: 12%.

   • Pullbacks (price temporarily returning after a breakout) occur in 62% of cases.

   • There is a significant failure rate for downward breakouts (31%), meaning price often does not drop much after the breakout.

Pattern Characteristics:

• Partial Rise: Near the end of the pattern, the price may fail to reach the top trendline before reversing, signaling a likely downward breakout.

• Whitespace: It is essential that price moves frequently between the two trendlines, filling the whitespace.

Trading Strategy:

• Shorting After a Partial Rise: Traders may choose to enter a short position when a partial rise occurs. This setup often leads to a bearish breakout.

• Trading Breakouts: Downward breakouts from ascending broadening wedges tend to be weak performers. If the price does not drop significantly after the breakout, it may be a signal to exit the trade.

Example Trade:

• Assurant Inc. (AIZ): The author entered a position after spotting a broadening wedge. A successful buy was made near the bottom trendline, leading to a profitable trade as the price rose significantly before breaking out upwards.

Conclusion:

Broadening wedges can be tricky to trade, especially when breakouts fail. It's crucial to recognize partial rises or declines, which can give an early indication of the breakout direction. However, with a high failure rate for downward breakouts, caution is advised when trading this pattern.

These notes cover the key aspects of ascending broadening wedges, their behavior, and trading strategies based on historical performance data .

Here are detailed notes on Chapter 13: Broadening Wedge, Descending from The Encyclopedia of Chart Patterns by Thomas Bulkowski:

Overview:

• The Broadening Wedge, Descending pattern features two down-sloping trendlines that diverge, resembling a megaphone tilted downward.

• This pattern often signals a bullish reversal, but can also act as a continuation pattern depending on the breakout direction.

Key Characteristics:

1. Trendlines: Both trendlines slope downward, with the lower trendline having a steeper slope, creating diverging trendlines.

2. Touches: A valid broadening wedge requires at least five touches—three on one trendline and two on the other. These touches should correspond to minor highs and lows.

3. Volume: Volume usually rises as the wedge progresses, and it often increases significantly during the breakout.

Breakout Types:

1. Upward Breakouts:

   • Most Common: 72% of broadening wedge descending patterns break out upwards.

   • Rank: Ranks 27th out of 39 chart patterns for upward breakouts.

   • Average Rise: 39%.

   • Failure Rate: 18% breakeven failure rate.

   • Throwbacks: Occur 62% of the time.

2. Downward Breakouts:

   • Less Common: 28% break out downward.

   • Rank: 29th out of 36 for downward breakouts.

   • Average Drop: 12%.

   • Failure Rate: 35% breakeven failure rate.

   • Pullbacks: Happen 62% of the time after a downward breakout.

Partial Declines:

• If price touches the top trendline, starts declining, and reverses upward before hitting the lower trendline, it is a partial decline. This is a strong bullish signal, leading to an upward breakout 79% of the time.

Trading Tactics:

• Measure Rule: For upward breakouts, target the highest high of the pattern. For downward breakouts, subtract the pattern height from the lowest low to set a price target.

• Partial Decline Strategy: Traders can go long (buy) after a partial decline, as it often predicts an upward breakout.

• Busted Trades: In the case of downward breakouts that fail and reverse, these busted patterns can see significant upward movement (65% average rise).

Example Trade:

• D.R. Horton Inc. (DHI): The stock formed a descending broadening wedge in December 2006, followed by an upward breakout. The author entered the trade and saw a 14% gain before the stock reversed. This highlights the potential for strong upward movement in busted patterns.

Conclusion:

• Broadening wedge descending patterns often lead to upward breakouts, with strong upward moves in bull markets. Traders should look for partial declines and busted downward breakouts as key signals for potential trades .

Here are detailed notes on Chapter 14: Bump-and-Run Reversal, Bottom from The Encyclopedia of Chart Patterns by Thomas Bulkowski:

Overview:

• The Bump-and-Run Reversal (BARR) Bottom pattern is a bullish reversal pattern resembling a frying pan or spoon, with the handle on the left and a rounded bottom on the right.

• It typically appears after a prolonged downtrend and signals a sharp upward reversal.

Key Phases:

1. Lead-in Phase:

   • This is the handle of the pattern, characterized by a steady decline along a trendline sloping at around 30 to 45 degrees.

   • The lead-in should last at least a month and involves moderate price oscillation, with the price contained by the trendline.

   • Volume is typically high at the beginning of this phase, then gradually tapers off as the price declines.

2. Bump Phase:

   • Price declines sharply, and the trendline steepens to around 60 degrees or more.

   • This phase forms the "bump" or the base of the frying pan, representing a deep bottom in price.

   • The decline is rapid, often accompanied by a sharp increase in volume. Once the price bottoms out, it rounds and starts recovering.

3. Uphill Run:

   • After bottoming, the price moves upward, breaking through the down-sloping trendline formed during the bump phase.

   • Volume typically increases during the breakout, confirming the upward reversal.

Characteristics:

• Dual Bumps: In about 12% of cases, a second bump may form after the initial recovery.

• Volume: It increases during the start of the bump and the breakout, signaling strong momentum.

• Breakout Direction: By definition, this pattern breaks out upward. If the price fails to move above the down-sloping trendline, it is not a valid BARR bottom.

Identification Guidelines:

• Appearance: The pattern looks like a frying pan, with a handle sloping downward and a deep base.

• Trendline: A key component of this pattern is the down-sloping trendline. A breakout occurs when the price moves above this line.

• Volume: High volume at critical points, such as the start of the bump and breakout, is important for confirming the pattern.

Trading Tactics:

• Measure Rule: To set a price target, measure the lead-in height and add it to the breakout price. This can help estimate how far the price will rise after the breakout.

• Partial Declines: If the price rises during the breakout, then declines partially before continuing higher, it offers a confirmation of the pattern's bullish strength.

Example Trade:

• CKE Restaurants, Inc. formed a BARR bottom. The stock fell into the bump phase before rebounding and breaking out, climbing 350% in a few months.

Conclusion:

Bump-and-Run Reversal bottoms are highly reliable bullish patterns. They offer excellent performance with average gains ranging from 35% to 55%, making them among the best reversal patterns for bull and bear markets.

These notes summarize the main aspects of BARR bottoms and their application in technical trading【19:6†source】【19:18†source】【19:17†source】.

Here are detailed notes on Chapter 15: Bump-and-Run Reversal, Top from The Encyclopedia of Chart Patterns by Thomas Bulkowski:

Overview:

• The Bump-and-Run Reversal (BARR) Top is a bearish reversal pattern that forms after a strong upward price move.

• This pattern is typically recognized by a steep rise (the "bump") that rounds off and eventually breaks downward, through a trendline, signaling a decline.

Key Phases:

1. Lead-in Phase:

   • This is the initial, moderate uptrend before the sharp rise occurs. The trendline in this phase slopes upward at around 30 to 45 degrees.

   • It lasts about 1 to 3 months and reflects increasing investor enthusiasm, but still within reasonable limits.

2. Bump Phase:

   • A sharp upward movement characterizes this phase, with the trendline steepening to 45 degrees or more, typically due to extreme bullish enthusiasm.

   • The bump must be at least twice the height of the lead-in phase, signaling a surge in momentum.

   • Volume increases dramatically, indicating a buying frenzy.

3. Run Phase:

   • After peaking, the price rounds over and begins to fall, breaking through the original trendline formed in the lead-in phase.

   • This phase often includes a "downhill run" as the price descends back to the trendline and eventually breaks below it, confirming the bearish reversal.

Identification Guidelines:

• Trendlines: A rising trendline connects the lows during the lead-in phase. As the bump forms, a steeper trendline develops. The breakout occurs when the price crosses the lead-in trendline.

• Volume: Volume is high during the bump phase and often spikes as the price begins to drop, confirming the shift in sentiment.

• Breakout Direction: The breakout is always downward in valid BARR tops, marking the transition to a bearish market.

Statistics:

• Average Decline:

  • Bull Market: 17% decline.

  • Bear Market: 24% decline.

• Breakeven Failure Rate:

  • 14% in bull markets.

  • 7% in bear markets.

• Pullbacks: Occur in 64% of bull markets and 65% of bear markets, where prices temporarily rise back to the breakout point before continuing downward.

• Performance Rank: This pattern ranks 3rd out of 36 patterns in bull markets and 3rd out of 19 in bear markets, indicating strong bearish performance.

Trading Tactics:

• Sell Early: If the bump appears rounded and price nears the peak, consider selling to lock in profits before the breakout.

• Short After the Breakout: Traders may short the stock after the price breaks below the trendline, as this signals further decline.

• Measure Rule: Measure the lead-in height and subtract it from the breakout price to estimate the price target for the decline.

Example Trade:

• Comsat Corp. experienced a bump-and-run reversal top. The stock climbed during the bump phase, peaked, and eventually declined by 40% after breaking through the trendline.

Conclusion:

Bump-and-Run Reversal tops are highly reliable bearish patterns. They often signal a significant market correction following a rapid rise in stock prices. This pattern performs well in both bull and bear markets, making it a valuable tool for traders looking to anticipate sharp downward moves【19:6†source】【19:7†source】【19:18†source】.

Here are detailed notes on Chapter 16: Bearish Butterfly from The Encyclopedia of Chart Patterns by Thomas Bulkowski:

Overview:

• The Bearish Butterfly is a Fibonacci-based pattern resembling a large "W" and is used to predict downward reversals.

• This pattern involves specific turns based on Fibonacci ratios, which help identify points where the price may reverse.

Key Points:

• Appearance: Looks like a large "W" or double bottom with Fibonacci-governed turning points.

• Fibonacci Ratios:

  • BA/XA Retrace: 0.786.

  • BC/BA Retrace: Between 0.382 to 0.886.

  • DC/BC Extension: 1.618, 2, or 2.24.

  • DA/XA Extension: 1.27.

• Volume: Typically trends downward during the formation of the pattern, but this is not always required for pattern validation.

Performance:

• Bull Markets: The pattern results in an average price drop of 13%, which is slightly below the average for non-Fibonacci patterns (15%).

• Bear Markets: The pattern performs better with an average drop of 20.2%, although still below the 22.2% seen in non-Fibonacci patterns.

• Reversal Success Rate: 85% to 86% of the time, the price reverses at point D, making it a reliable signal for traders looking for price declines after a significant rise.

Trading Tactics:

• Timing the Trade: Traders often look for the completion of the pattern at point D. This point offers a high probability of a price decline.

• Shorting at Point D: Since the bearish butterfly predicts a downward turn, shorting at the D point can be a profitable strategy.

• Target Setting: Traders can use Fibonacci ratios to determine potential reversal points and set targets for price declines.

Common Failures:

• The pattern occasionally "fails" if the price does not decline by more than 5% after turning at point D. These are referred to as 5% failures.

Example:

• A bearish butterfly in Accenture (ACN) started after a significant upward move. The price turned downward at point D but fell only 3%, showing a weak decline. The stock later broke out upward, continuing its prior trend, making it a busted butterfly.

Conclusion:

The bearish butterfly is a reliable reversal pattern, especially in bear markets. It signals potential price declines with a high success rate at point D, offering traders a useful tool for shorting opportunities 【19:0†source】【19:6†source】【19:18†source】.

Here are detailed notes on Chapter 17: Bullish Butterfly from The Encyclopedia of Chart Patterns by Thomas Bulkowski:

Overview:

• The Bullish Butterfly is a Fibonacci-based pattern often resembling an "M," signaling a bullish reversal.

• It's a five-turn pattern, with the key reversal occurring at point D.

Key Characteristics:

1. Appearance: The pattern typically looks like an "M" or a double bottom with the turning points governed by Fibonacci ratios.

2. Fibonacci Ratios:

   • AB/AX Retrace: The retrace from point A to X is typically 0.786 of the original move.

   • CB/AB Retrace: The retracement of BC from AB must follow Fibonacci numbers such as 0.382, 0.618, 0.707, or 0.886.

   • CD/CB Extension: The extension of the CD leg from BC must fall within Fibonacci extensions of 1.618, 2, or 2.24.

   • AD/AX Retrace: The AD retrace from AX is usually 1.27 of the original movement.

3. Volume Trend:

   • In bull markets, volume tends to decrease throughout the pattern.

   • In bear markets, volume trends upward, though this is more of an observation rather than a strict requirement.

Performance:

• Bull Market:

  • Performance Rank: 2 out of 5.

  • Average Rise: 39.5% after point D.

  • Failure Rate: 11.4% failure to reach a 5% gain.

  • Point D Reversal Rate: 91% of the time, price reverses upward at point D.

• Bear Market:

  • Performance Rank: 5 out of 5 (worst performance).

  • Average Rise: 27.8% after point D.

  • Failure Rate: 2.6%.

  • Point D Reversal Rate: 88%.

Trading Tactics:

1. Entry at Point D: Traders aim to enter long (buy) positions at point D, where the pattern typically signals an upward reversal.

2. Measure Rule: Using Fibonacci ratios, traders can project how far prices will rise after the reversal at point D.

3. Swing Trading: Bullish butterflies are ideal for swing traders looking to capitalize on short-term upward moves after a clear reversal.

Example Trade:

• Assured Guaranty Ltd. (AGO): In this example, the bullish butterfly pattern led to a rapid price rise after point D, reaching 50% above the low at D.

Conclusion:

The bullish butterfly is a highly reliable pattern for predicting reversals at point D, especially in bull markets. However, in bear markets, the pattern tends to underperform, making it less favorable. Nevertheless, its high point D reversal rate (88%-91%) makes it a dependable tool for swing traders looking for short-term gains【19:0†source】【19:6†source】.

Here are detailed notes on Chapter 18: Cloudbanks from The Encyclopedia of Chart Patterns by Thomas Bulkowski:

Overview:

• Cloudbanks are long-term patterns that signal significant price recoveries after a sharp decline. They resemble a "bank of storm clouds" above the price, symbolizing long-term overhead resistance.

• Ideal for Long-Term Investors: Cloudbanks are particularly suited for investors who can hold positions for years, not for short-term traders.

Key Characteristics:

1. Appearance: The price moves sideways for several years, forming a flat base (the "cloudbank"). A steep decline follows, usually caused by external factors like a bear market or poor company performance.

2. Scale: Cloudbanks are best observed on monthly charts, as they span several years. Look for a significant sideways movement before a plunge.

3. Plunge: After the sideways movement, the stock drops sharply by at least 40%. Larger drops (60%-70%) during bear markets provide better recovery potential.

4. Recovery: Once the stock bottoms, a V-shaped recovery often follows. The stock moves upward, eventually returning to the cloudbank base.

Statistics:

• Average Rise: Cloudbanks provide an average rise of 386%, measuring from the lowest low to the cloudbank base.

• Recovery Rate: 86% of stocks recover to the cloudbank after a significant drop. 64% of these stocks climb above the cloudbank top.

• Duration: It takes an average of 1.7 years for the stock to return to the cloudbank after bottoming, but passing through the cloud can take 2.8 years.

Trading Tactics:

1. Identify the Drop: Ensure that the drop is at least 40%. Larger drops signal a greater likelihood of recovery.

2. Buy When Price Crosses Above the Moving Average: A 4-month simple moving average (SMA) is often used to time the buy. Buy when the price closes above the moving average.

3. Hold Until Price Reaches the Cloud: Once the stock nears the cloudbank, consider selling. Moving through the cloud takes time, so it may be wise to take profits at the cloudbase.

4. Monitor Company News: If the plunge is caused by a specific event (e.g., company mismanagement), assess whether the company can recover before entering a trade.

Example Trade:

• Northwest Pipe Co. (NWPX): After dropping by over 60%, the stock took over two years to recover to the cloudbank base. Despite a significant potential loss during the hold, the stock eventually reached the cloud, offering a 120% gain.

Conclusion:

Cloudbanks are powerful long-term patterns that reward patient investors with significant gains. However, traders need to be cautious about early entries and monitor market conditions closely. Cloudbanks are particularly effective in bear markets, where deep price drops provide opportunities for large recoveries【19:6†source】【19:14†source】【19:17†source】.

Here are detailed notes on Chapter 19: Bearish Crab from The Encyclopedia of Chart Patterns by Thomas Bulkowski:

Overview:

• The Bearish Crab is a Fibonacci-based pattern resembling a "W" shape.

• This pattern uses Fibonacci ratios to mark the turning points at X, A, B, C, and D. The primary goal is to predict a downward reversal at point D, which serves as a signal to enter a short position.

Key Characteristics:

1. Appearance: The Bearish Crab forms a large "W" with well-defined turning points based on Fibonacci retracement and extension levels.

2. Fibonacci Levels:

   • BA/XA Retrace: Typically 0.382, 0.5, or 0.618.

   • BC/BA Retrace: One of 0.382, 0.5, 0.618, 0.707, 0.786, or 0.886.

   • DC/BC Extension: Between 2.618 and 3.618.

   • DA/XA Extension: 1.618.

3. Point D: This is the key reversal point where price is expected to fall, and it offers traders a point to enter short positions.

Performance:

• Bull Markets:

  • Performance Rank: 1 out of 5.

  • Average Decline: 14.3% after point D.

  • Failure Rate: 19.8% failure to decline more than 5% after turn D.

  • Reversal Rate at D: 87%.

• Bear Markets:

  • Performance Rank: 2 out of 5.

  • Average Decline: 22.9% after point D.

  • Failure Rate: 8.9%.

  • Reversal Rate at D: 91%.

Trading Tactics:

1. Shorting After Point D: Traders should enter a short position once the price reaches and reverses at point D. This is often a strong signal for price declines.

2. Targets: Measure the height between points A and C to estimate the potential decline. The target should aim for at least a 5% drop to ensure profitability.

3. Volume: The volume trend is random in bull markets (50%) but upward in bear markets (51%). This suggests that bear markets offer better conditions for this pattern.

Identification Guidelines:

• The Bearish Crab must follow Fibonacci retracement and extension rules. It consists of tight turns between XABCD, with a sharp downward move expected after the final D turn.

• In this pattern, point D represents the highest probability of reversal, and 87% of bear market patterns will see the price decline significantly after D.

Example Trade:

• Alliance Data Systems Corp (ADS): The stock formed a Bearish Crab and dropped sharply after reaching point D, confirming the expected downward trend.

Conclusion:

The Bearish Crab is a powerful pattern for short traders in both bull and bear markets. With high reversal rates at point D and moderate-to-strong declines, it offers reliable signals for bearish moves【19:0†source】【19:7†source】【19:9†source】.

Here are detailed notes on Chapter 20: Bullish Crab from The Encyclopedia of Chart Patterns by Thomas Bulkowski:

Overview:

• The Bullish Crab is a Fibonacci-based pattern that resembles an "M" shape.

• The main objective of this pattern is to predict an upward reversal at point D, which is considered the optimal entry point for a long position.

Key Characteristics:

1. Fibonacci Ratios:

   • AB/AX Retrace: Typically 0.382, 0.5, or 0.618 of the original move.

   • BC/AB Retrace: 0.382, 0.5, 0.618, 0.707, 0.786, or 0.886 of the previous leg.

   • CD/BC Extension: Between 2.618 and 3.618 of the previous leg.

   • AD/AX Retrace: 1.618 of the original leg, forming the final point D.

2. Point D: The final turning point where the price is expected to rise after a sharp decline.

3. Volume: Volume trends are typically upward during the formation of this pattern, which can enhance performance, especially in bull markets.

Performance:

• Bull Market:

  • Average Rise: 39.1% after point D.

  • Failure Rate: 7.1% (failure to achieve a 5% rise).

  • Point D Reversal Rate: 92% of the time, the price reverses upward at point D.

• Bear Market:

  • Average Rise: 32.7% after point D.

  • Failure Rate: 2.6% (failure to achieve a 5% rise).

  • Point D Reversal Rate: 84% in bear markets.

Trading Tactics:

1. Buy at Point D: Traders should look to buy near point D, where the price is expected to reverse upward. Fibonacci ratios can help identify the precise entry point.

2. Swing Trading: Ideal for swing traders who want to take advantage of the sharp upward move after point D.

3. Target Setting: Using Fibonacci ratios and the height of the pattern, traders can estimate how far the price will rise after the reversal. Common targets include points A, B, and C, but the rise to point A happens only about 33% of the time in bull markets.

Identification Guidelines:

• Five-Turn Pattern: The bullish crab is composed of five turns (XABCD), with point D being the most important reversal point.

• Pattern Shape: The bullish crab often looks like an extended V-bottom, where the price sharply declines before reversing at D.

Example Trade:

• Arrow Electronics (ARW): The stock formed a bullish crab and followed a sharp upward move after point D, confirming the expected reversal. However, price stalled before reaching point A.

Conclusion:

The Bullish Crab is a reliable Fibonacci-based pattern for predicting upward reversals, especially in bull markets. Traders should focus on identifying point D for optimal entry, as the reversal rate is high at that point (92% in bull markets and 84% in bear markets). However, traders must be cautious with targets, as the price doesn't always reach point A, B, or C【19:6†source】【19:9†source】【19:18†source】.

Here are detailed notes on Chapter 21: Cup with Handle from The Encyclopedia of Chart Patterns by Thomas Bulkowski:

Overview:

• The Cup with Handle pattern is a long-term bullish continuation pattern, named after its distinctive shape resembling a teacup with a handle on the right side.

• This pattern was popularized by William J. O'Neil in his book How to Make Money in Stocks. It remains one of the most reliable bullish patterns, showing significant price increases following a breakout.

Key Characteristics:

1. Appearance:

   • The pattern looks like a U-shaped cup with a small downward-sloping handle on the right.

   • The cup's bottom should be rounded, avoiding sharp "V"-shaped patterns.

   • The handle forms when the price moves sideways or downward for a short period after reaching the cup's right rim.

2. Cup Rims:

   • The cup's left and right rims should be at approximately the same price level. A slight variance of about 2% is acceptable.

3. Volume:

   • Volume typically decreases as the price forms the cup, followed by a surge in volume at the breakout above the handle.

4. Duration:

   • The cup portion usually lasts from 7 to 65 weeks, with a median handle length of 22 days.

5. Breakout Direction:

   • The breakout happens when the price closes above the right cup rim or handle high, confirming the pattern's validity.

Performance:

• Bull Market:

  • Average Rise: 54% after the breakout.

  • Failure Rate: 5% breakeven failure rate (second-best among patterns).

  • Throwbacks (price temporarily returning to the breakout point): Occur 62% of the time.

  • Performance Rank: 3rd out of 39 chart patterns in bull markets.

Trading Tactics:

1. Measure Rule:

   • To estimate the target price, measure the distance between the lowest point of the cup and the right rim. Add this distance to the breakout point to predict the future price target.

   • Example: If the cup's low is $10 and the right rim is $19, the height is $9. Adding this to the breakout point at $19 gives a target of $28.

2. Handle Length:

   • Handles that are shorter than the median length tend to perform better than longer handles.

3. Stop-Loss Strategy:

   • Place a stop-loss order just below the handle low to protect against significant losses. This stop will trigger about 18% of the time.

Example Trade:

• Advanced Micro Devices (AMD) formed a cup with handle in 1993. After the breakout, the stock surged from $30 to $120 in fewer than two months, providing a significant return for traders who entered at the right point.

Common Failures:

• Failures happen when the price does not rise by more than 5% after the breakout, which occurs in about 5% of cases. Reasons for failure include overhead resistance, fundamental changes in the company or market, or missed earnings estimates.

Conclusion:

The Cup with Handle is a reliable bullish continuation pattern, especially in bull markets. It ranks highly in terms of performance and has a low failure rate. Traders should focus on the breakout above the handle, ensure volume confirms the breakout, and use proper stop-loss strategies to limit risk .

Here are detailed notes on Chapter 22: Cup with Handle, Inverted from The Encyclopedia of Chart Patterns by Thomas Bulkowski:

Overview:

• The Inverted Cup with Handle (iCup) is a bearish continuation pattern resembling an upside-down cup with a small handle on the right side.

• It signals a downward breakout, often used by traders to anticipate price declines and enter short positions.

Key Characteristics:

1. Appearance:

   • The iCup appears as an upside-down U-shaped pattern (the cup) followed by a small handle on the right side.

   • The handle forms when the price consolidates after reaching the right side of the cup, usually downward sloping.

2. Cup Rims:

   • The left and right cup rims should ideally be near the same price level, but a small variation (e.g., 2-5%) is acceptable.

3. Handle:

   • The handle represents a short-term upward price movement before the breakdown. It can retrace between 30%-40% of the cup's depth.

4. Volume:

   • Volume typically decreases during the formation of the cup and handle, with a spike in volume confirming the downward breakout.

5. Breakout:

   • The breakout is confirmed when the price closes below the right cup rim, signaling a bearish trend continuation.

Performance:

• Bear Market:

  • Average Decline: 23%, a strong showing for a bearish pattern.

  • Failure Rate: 9% breakeven failure rate.

  • Pullbacks: 60% of downward breakouts experience pullbacks (temporary upward price movement before continuing downward).

• Bull Market:

  • Average Decline: 17%.

  • Failure Rate: 18% failure rate to achieve a 5% drop after the breakout.

  • Pullbacks: Occur in 67% of cases, affecting performance.

Trading Tactics:

1. Shorting the Breakout:

   • Traders should open short positions when the price closes below the right cup rim, confirming the downward breakout.

2. Measure Rule:

   • To estimate the target price, subtract the height of the handle from the breakout price (right cup rim).

   • Example: If the handle retraces 3 points and the breakout price is $20, the target price would be $17.

3. Stop-Loss Strategy:

   • Place stop-loss orders slightly above the top of the handle to protect against unexpected price reversals.

4. Trendline Approach:

   • Draw a down-sloping trendline from the top of the handle. Traders can exit their short position once the price crosses back above this trendline, signaling the end of the downward move.

Common Failures:

• Busted Patterns:

  • In some cases, the breakout fails to produce significant downward movement, especially if strong support levels exist below the breakout point. About 29% of iCups "bust," meaning the price reverses upward after the breakout, forming a false signal.

Example Trade:

• Crane Company (CR): In this example, the iCup had uneven rims but produced a 29% price decline after confirming the downward breakout, making it a successful short trade.

Conclusion:

The Inverted Cup with Handle is a reliable bearish continuation pattern, especially in bear markets. Traders should look for a breakout below the right cup rim and use Fibonacci retracement levels to estimate the depth of the handle and the likely price target【19:6†source】【19:17†source】【19:16†source】.

Here are detailed notes on Chapter 23: Diamond Bottoms from The Encyclopedia of Chart Patterns by Thomas Bulkowski:

Overview:

• Diamond Bottoms are reversal patterns that form at the end of a downtrend. They signal a reversal in market sentiment and often lead to a bullish move after a breakout.

• The diamond shape is created as the price oscillates between expanding and then narrowing trendlines, forming a shape similar to a diamond.

Key Characteristics:

1. Shape: The pattern forms as price movements create higher highs and lower lows, expanding the price range in the early phase, followed by lower highs and higher lows, narrowing the range in the later phase.

2. Volume: Volume decreases as the pattern develops, with a surge in volume typically occurring on the breakout day.

3. Breakout: The pattern completes when the price breaks out above the narrowing trendlines, indicating a bullish reversal. A significant rise in volume usually confirms the breakout.

Performance:

• Upward Breakouts:

  • Average Rise: 39%.

  • Performance Rank: 27 out of 39 chart patterns for upward breakouts.

  • Failure Rate: 13% breakeven failure rate (price moves less than 5% after breakout).

  • Throwbacks (price returns to the breakout point): Occur 52% of the time.

  • Percentage Meeting Price Target: 73%.

• Downward Breakouts (rarer for diamond bottoms):

  • Average Drop: 19%.

  • Performance Rank: 1st out of 36 for downward breakouts (best performance).

  • Failure Rate: 15%.

  • Pullbacks (temporary price moves back to breakout point): Occur 67% of the time.

  • Percentage Meeting Price Target: 55%.

Trading Tactics:

1. Identifying the Pattern: Ensure the price enters the pattern from above (downward trend), forming a diamond shape as the price widens and then narrows.

2. Measure Rule: To estimate the potential price rise after the breakout, measure the height of the diamond at its widest point and add it to the breakout price. This can provide a target for how far the price may rise post-breakout.

3. Entry Point: Enter a long (buy) position after the price breaks above the narrowing trendline, confirmed by a volume surge.

4. Stop-Loss Placement: Place stop-loss orders just below the lowest point of the pattern to protect against false breakouts.

Example Trade:

• Coors Brewing Company: The stock formed a diamond bottom and broke out upwards, with volume surging at the breakout. Over the next three months, the stock price increased by over 20%, confirming the strength of the pattern.

Common Failures:

• Busted Patterns: Occasionally, price may break downward instead of upward or fail to move significantly after the breakout. In such cases, the pattern is considered "busted." These occur more frequently when external market factors change drastically.

Conclusion:

Diamond bottoms are reliable reversal patterns that typically signal a significant price increase after a downtrend. They perform best in upward breakouts but can also be effective in rare downward breakouts. Traders should focus on identifying clear diamond formations and confirming breakouts with volume spikes to increase the chances of successful trades【19:2†source】【19:3†source】【19:4†source】.

Chapter 24: Diamond Tops

Overview:

• Diamond Tops are bearish reversal patterns that often form after a strong upward trend.

• They resemble a diamond shape due to expanding price swings that contract near the end of the pattern.

Key Characteristics:

1. Shape:

   • The pattern forms as price movements widen and then narrow, creating a diamond-like appearance.

   • The pattern can appear irregular but must still create the distinctive higher highs and lower lows (expanding phase), followed by lower highs and higher lows (contracting phase).

2. Volume:

   • Volume tends to decrease throughout the formation of the diamond, although a surge in volume during the breakout is common and confirms the move.

3. Breakout Direction:

   • Price can break out in either direction, but downward breakouts are more common and tend to perform better.

   • A downward breakout typically signals a bearish reversal, while an upward breakout acts as a continuation pattern, though it is less common and weaker in performance.

Performance:

• Upward Breakouts:

  • Average Rise: 29%.

  • Performance Rank: Last out of 39 chart patterns, meaning it is a weak performer.

  • Failure Rate: 21% breakeven failure rate (price rises less than 5% after breakout).

  • Throwbacks: Occur 57% of the time (price returns to the breakout point after breaking out).

• Downward Breakouts:

  • Average Decline: 17%.

  • Performance Rank: 3rd out of 36 chart patterns for downward breakouts.

  • Failure Rate: 15% breakeven failure rate.

  • Pullbacks: Occur 58% of the time (price returns to the breakout point after breaking down).

Trading Tactics:

1. Measure Rule:

   • To estimate the target price after the breakout, measure the height of the diamond from the highest point to the lowest point and subtract that from the breakout price for downward breakouts.

   • Example: If the diamond's height is $10 and the breakout occurs at $50, the target price would be $40.

2. Shorting After Downward Breakouts:

   • Traders should consider shorting the stock after it breaks below the lower boundary of the diamond, especially if volume confirms the breakout.

3. Stop-Loss Strategy:

   • Place a stop-loss just above the breakout level (for downward breakouts) or just below it (for upward breakouts) to protect against false signals.

Common Failures:

• Upward Breakout Failures:

  • Often, price does not rise significantly after an upward breakout, making these poor candidates for long trades.

• Downward Breakout Failures:

  • Some patterns fail to continue their decline after the breakout, especially if there is strong support below the breakout level.

Example Trade:

• Baker Hughes (BHI): The stock formed a diamond top in 1995. After the pattern completed, the price dropped back to the level it was at before the pattern formed, offering a successful short trade.

Conclusion:

Diamond tops are effective bearish reversal patterns, particularly for downward breakouts, which rank high in performance compared to other patterns. However, upward breakouts from diamond tops tend to be weak, making them less reliable for bullish trades .

Here are detailed notes on Chapter 25: Diving Board from The Encyclopedia of Chart Patterns by Thomas Bulkowski:

Overview:

• The Diving Board pattern is a long-term bullish continuation pattern. It consists of a flat base (the board) followed by a sharp decline (the plunge), and eventually a recovery to the board level.

• This pattern typically occurs over weeks to months, and traders look for opportunities to buy after the plunge ends and the stock begins recovering.

Key Characteristics:

1. Board:

   • The flat, horizontal section before the plunge. The price moves sideways for several weeks to months, forming support. The board typically lasts over 5.5 months but can be longer.

2. Plunge:

   • The steep drop that follows the flat base, often measuring between 14% and 19% from the top of the board to the low point. The deeper the plunge, the stronger the recovery potential.

3. Volume:

   • Volume tends to increase as the price plunges and bottoms, with a spike in volume at the breakout point when price starts moving back toward the board.

4. Breakout Direction:

   • The breakout is always upward. A bullish signal is confirmed when the price closes above the highest point of the board.

Performance:

• Average Rise: 73% after the breakout.

• Failure Rate: 4% of patterns fail to rise more than 5% after the breakout.

• Breakout Timing: It can take over 15 months for the price to reach its ultimate high.

• Throwbacks: These are not common, and once the breakout occurs, the stock usually continues its rise.

Trading Tactics:

1. Buy at the Breakout:

   • The most effective strategy is to wait for the price to close above the top of the board. A buy-stop order can be placed slightly above the breakout level to enter the trade.

2. Measure Rule:

   • Measure the height of the pattern from the top of the board to the bottom of the plunge. Add this height to the breakout price to set a target. There is a 62% chance of reaching this full height target.

3. Bounce Trading:

   • Riskier strategy where traders buy after the plunge ends, hoping the price will bounce back to the board. However, there's a 29% chance of the stock failing to recover and breaking down further.

4. Avoid Second Plunges:

   • If the stock experiences a second plunge that drops it below the first low, avoid trading the pattern, as the chance of success diminishes.

Example Trade:

• Arrow Electronics (ARW): The stock formed a diving board in 2018. The board lasted over five months, followed by a plunge of 16%. The breakout occurred at $80.53, and the stock eventually reached a target price near $97.02, following the pattern's measure rule.

Conclusion:

The Diving Board pattern offers excellent long-term bullish opportunities, with a high average rise and low failure rate. However, timing is crucial, and traders should focus on breakout confirmation or bounce trading for higher-risk entries .

Chapter 26 of Encyclopedia of Chart Patterns (3rd edition) by Thomas Bulkowski focuses on the Adam & Adam double bottom chart pattern. Below is a detailed breakdown:

Adam & Adam Double Bottom Overview:

• Structure: The pattern consists of two consecutive, narrow, V-shaped price bottoms, typically occurring after a downward trend. These "V" shaped bottoms are sharp and resemble a person on stilts.

• Confirmation: A breakout occurs when the price surpasses the highest point between the two bottoms, known as the confirmation line.

• Volume: Volume tends to be higher during the first bottom than the second. This is a key characteristic of the pattern, although volume trends may vary.

Key Identification Guidelines:

1. Appearance:

   • Both bottoms must be narrow and V-shaped, perhaps with price spikes.

   • The valleys should bottom near the same price.

2. Price Trend:

   • The price must trend downward into the pattern, signaling a potential reversal from a bearish trend to bullish.

3. Rise Between Bottoms:

   • Ideally, there should be a rise of around 10% between the lowest price points of the two bottoms and the peak between them.

   • Taller patterns (i.e., patterns with a greater rise between the bottoms) perform better in terms of price movement.

4. Bottom Separation:

   • The bottoms should typically be a few weeks apart. The median separation between the bottoms is about 16 days.

5. Volume:

   • Higher volume is expected on the left (first) bottom compared to the right (second) one. This decreasing volume pattern is typical, but anomalies do not necessarily invalidate the pattern.

6. Breakout Direction:

   • By definition, a valid double bottom will always break out upwards once the price closes above the confirmation line.

Performance:

• Average Rise: The average rise after a breakout is about 39.4%.

• Failure Rate: The breakeven failure rate is about 16%, meaning the pattern does not perform as expected about 16% of the time.

• Rank: The Adam & Adam double bottom ranks 26th out of 39 chart patterns in performance, indicating it is not among the highest-performing patterns.

• Throwbacks: The pattern experiences throwbacks (a return to the breakout price after initially moving upward) in 67% of cases.

Case Studies & Examples:

1. Figure 26.1: Shows a classic Adam & Adam double bottom with a sharp recovery after each bottom. Volume is heavier on the left bottom than the right.

2. Figure 26.2: Demonstrates the distinction between Adam & Adam and other double bottom variations. The Adam & Adam bottoms are sharp and pointed, while other patterns (like Adam & Eve) may have one rounded bottom.

3. Figure 26.3: Provides examples of two confirmed Adam & Adam double bottoms, both of which led to price increases after the breakout above the confirmation line.

Focus on Failures:

Some Adam & Adam double bottoms fail due to external market conditions, such as bear markets, or insufficient downward trends before forming the pattern. For example, a failed pattern may see only a minor price rise after the breakout, especially if the surrounding market conditions are bearish【7:0†source】【7:14†source】.

This chapter emphasizes the importance of waiting for confirmation before acting on a potential Adam & Adam double bottom, as 48% of patterns may continue downward without confirming the breakout【7:0†source】.

Chapter 27 of Encyclopedia of Chart Patterns (3rd edition) by Thomas Bulkowski focuses on the Adam & Eve double bottom chart pattern, a variation of the double bottom structure where the left bottom (Adam) is sharp and narrow, and the right bottom (Eve) is wider and rounded.

Adam & Eve Double Bottom Overview:

• Structure: The Adam bottom is narrow and V-shaped, typically with a sharp downward spike. The Eve bottom is broader, rounded, and has multiple small price spikes.

• Confirmation: A breakout occurs when the price rises above the peak between the two bottoms, known as the confirmation line.

• Volume: Volume usually decreases across the pattern, with heavier volume observed at the Adam bottom than at the Eve bottom.

Key Identification Guidelines:

1. Appearance:

   • The Adam bottom is sharp, narrow, and typically formed by a one-day price spike.

   • The Eve bottom is wider and more rounded, possibly with several short price spikes.

   • The two bottoms must differ in shape.

2. Price Trend:

   • A downward price trend leads into the double bottom formation, often indicating a reversal of the previous trend.

3. Rise Between Bottoms:

   • A rise of about 12% from the lowest point of the Adam bottom to the highest point between the two bottoms is typical.

4. Bottom Separation:

   • The bottoms should be separated by a few weeks, with a median separation of around 25 days.

5. Volume:

   • Volume should generally be higher on the left (Adam) bottom than on the right (Eve) bottom. A decreasing volume trend is typical but not required.

6. Breakout Direction:

   • By definition, a breakout is always upward in a valid Adam & Eve double bottom. Confirmation occurs when the price closes above the peak between the two bottoms.

Performance:

• Average Rise: The average rise following a breakout is 42%.

• Failure Rate: The breakeven failure rate is 12%, meaning the pattern fails about 12% of the time.

• Rank: This pattern ranks 20th out of 39 chart patterns for performance, indicating it has a mid-range performance relative to other patterns.

• Throwbacks: Throwbacks (when price revisits the breakout level) occur in 67% of cases, potentially providing a re-entry point for traders.

Case Studies & Examples:

1. Figure 27.1: Demonstrates a classic Adam & Eve double bottom, where the Adam bottom is a sharp one-day price spike and the Eve bottom is rounded and broader. Volume is higher on the left bottom (Adam) than on the right (Eve).

2. Figure 27.3: Shows another example of an Adam & Eve double bottom forming after a downward trend. After the breakout, the price rises for a few months before declining again, highlighting the potential for throwbacks.

Focus on Failures:

A key consideration for this pattern is the confirmation. Approximately 48% of potential double bottoms fail to confirm, meaning they do not break out upward as expected. Traders are advised to wait for confirmation before entering a trade【7:6†source】【7:15†source】.

These detailed guidelines and performance metrics provide insights into how to identify and effectively trade the Adam & Eve double bottom chart pattern, making it a valuable pattern for technical traders looking for reversals in a downward trend.

Chapter 28 of Encyclopedia of Chart Patterns (3rd edition) by Thomas Bulkowski discusses the Eve & Adam Double Bottom chart pattern. Here's a detailed breakdown:

Eve & Adam Double Bottom Overview:

• Structure: The Eve bottom is wide, rounded, and often features several small price spikes, while the Adam bottom is narrow, V-shaped, and typically involves one or two sharp downward price spikes.

• Confirmation: Occurs when the price closes above the highest point between the two bottoms, called the confirmation line.

• Volume: Volume is usually higher at the Eve bottom compared to the Adam bottom, reflecting decreasing selling pressure.

Key Identification Guidelines:

1. Appearance:

   • The Eve bottom appears rounded, while the Adam bottom is sharp and V-shaped.

   • The bottoms should differ in shape and appearance.

2. Price Trend:

   • The price must decline into the formation. The Eve & Adam double bottom typically signals a bullish reversal of a downward trend.

3. Rise Between Bottoms:

   • A rise between the two bottoms of about 10% is recommended, but flexibility is allowed as taller patterns tend to perform better.

4. Bottom Separation:

   • The bottoms should be spaced at least a few weeks apart, with the median separation around 23 days.

5. Volume:

   • Volume is usually higher on the Eve bottom than the Adam bottom. However, it is not a disqualifying factor if the volume trend is unusual.

6. Breakout Direction:

   • The breakout is always upwards in a valid double bottom. A breakout occurs when the price closes above the confirmation line, which is the highest high between the two bottoms.

Performance:

• Average Rise: The average rise after a breakout is about 42%, which is in line with other double bottom patterns.

• Failure Rate: The breakeven failure rate is 12%, indicating that the pattern fails about 12% of the time.

• Rank: The Eve & Adam double bottom ranks 20th out of 39 chart patterns in terms of performance.

• Throwbacks: The pattern experiences throwbacks (where the price returns to the breakout level after initially moving upward) in 67% of cases, potentially offering a second entry point for traders.

Case Studies & Examples:

1. Figure 28.1: Shows a typical Eve & Adam double bottom where the price fell sharply to form a rounded Eve bottom, retested the lows to form the Adam bottom, and then broke out above the confirmation line.

2. Figure 28.2: Illustrates the Eve & Adam double bottom with a wider, rounded Eve bottom and a sharp V-shaped Adam bottom, confirming the pattern off the chart.

3. Figure 28.3: Another Eve & Adam example, where the Eve bottom has longer spikes than usual, emphasizing the distinction between the two types of bottoms.

Trading Tactics:

• Traders are advised to wait for the confirmation of the breakout before entering a trade, as unconfirmed patterns can lead to false signals.

• Setting a price target involves using the measure rule, which helps traders estimate potential profits based on the pattern's height .

By understanding these identification and performance metrics, traders can effectively recognize and trade the Eve & Adam double bottom, using it as a reversal signal in downward trends.

Chapter 29 of Encyclopedia of Chart Patterns (3rd edition) by Thomas Bulkowski focuses on the Eve & Eve Double Bottom chart pattern, which is regarded as the classic double bottom pattern due to its two rounded, well-separated bottoms.

Eve & Eve Double Bottom Overview:

• Structure: Both bottoms in this pattern are wide and rounded. The rise between the two bottoms is typically rounded as well, which makes this pattern more distinct than the sharper variations like Adam & Adam.

• Confirmation: The pattern is confirmed when the price closes above the highest point between the two bottoms, signaling a potential bullish reversal.

• Volume: Volume tends to decrease as the pattern develops, with higher volume usually observed during the first bottom than during the second.

Key Identification Guidelines:

1. Appearance:

   • Both bottoms must be rounded and wide. This is the key difference from other double bottom patterns that may have sharp V-shaped troughs.

   • The bottoms should not overlap or form part of the same congestion region, making them distinct.

2. Price Trend:

   • The price must trend downward into the pattern, signaling a reversal from bearish to bullish upon breakout.

3. Rise Between Bottoms:

   • A significant price rise between the two bottoms is ideal, with the median rise being about 10%. The taller the rise, the better the expected performance.

4. Bottom Separation:

   • The two bottoms should be separated by a few weeks. The median separation is around 30 days, but wider patterns tend to perform better.

5. Volume:

   • Volume generally peaks at the left (first) bottom and decreases toward the second bottom. This volume decline often indicates weakening selling pressure and increasing buyer interest.

6. Breakout Direction:

   • By definition, the breakout for a double bottom is always upward. The breakout is confirmed when the price closes above the confirmation line (the highest point between the two bottoms).

Performance:

• Average Rise: The average rise following a breakout is approximately 50%, making it one of the strongest double bottom patterns in terms of performance.

• Failure Rate: The breakeven failure rate is about 12%, meaning the pattern performs reliably most of the time.

• Rank: The Eve & Eve double bottom ranks 5th out of 39 chart patterns, which speaks to its high reliability and strong upward movement after confirmation.

• Throwbacks: Throwbacks (where the price revisits the breakout level after initially moving upward) occur in 65% of cases. While these can offer re-entry opportunities, they may also indicate some instability.

Case Studies & Examples:

1. Figure 29.1: This figure shows a typical Eve & Eve double bottom that forms after a broadening bottom pattern. The two bottoms are clearly separated and rounded, with a price rise of about 40% between them. After confirming the pattern, the stock experienced a 67% increase following the breakout.

2. Figure 29.3: This figure displays a more difficult-to-identify Eve & Eve double bottom, where both bottoms have short price spikes, which might resemble an Adam bottom. However, the wider appearance of the bottoms classifies them as Eve-type.

Focus on Failures:

Despite its strong performance, some Eve & Eve patterns can fail due to external factors like unfavorable market conditions. The chapter emphasizes the importance of waiting for confirmation before making any trade decisions. About 48% of potential Eve & Eve double bottoms may not confirm, leading to potential losses if entered prematurely【19:0†source】【19:4†source】.

Chapter 30 of Encyclopedia of Chart Patterns (3rd edition) by Thomas Bulkowski discusses the Adam & Adam Double Top pattern. Here is a detailed summary:

Adam & Adam Double Top Overview:

• Structure: The pattern features two distinct, narrow, V-shaped peaks that look almost identical. These are sharp upward price spikes, resembling an inverted V.

• Confirmation: The pattern is confirmed when the price drops below the lowest point (the confirmation line) between the two peaks.

• Volume: Typically, volume is higher on the left peak and decreases towards the second peak, showing diminishing buying interest.

Key Identification Guidelines:

1. Appearance:

   • Both tops are narrow, pointed, and resemble inverted V’s.

   • The two peaks should look identical or nearly so. If the peaks vary significantly, the pattern could be an Adam & Eve or Eve & Eve double top.

2. Price Trend:

   • The pattern must follow an upward price trend, indicating that the double top signals a bearish reversal.

3. Valley Between Peaks:

   • A dip should clearly separate the two peaks, forming a valley. Patterns where the peaks are part of the same congestion region should be avoided.

4. Peak Price:

   • The price difference between the two peaks is typically minimal, with a median variation of around 1%.

5. Peak Separation:

   • The two tops should be at least a few weeks apart to ensure distinction between them.

6. Breakout Direction:

   • A breakout occurs when the price closes below the confirmation line. This marks the downward breakout and confirms the validity of the pattern.

Performance:

• Average Drop: The average price drop after a breakout is about 15%.

• Failure Rate: The breakeven failure rate is about 25%, meaning the pattern fails to perform as expected about a quarter of the time.

• Rank: The Adam & Adam double top ranks 19th out of 36 chart patterns in performance.

• Pullbacks: Pullbacks (when price temporarily moves back toward the breakout level after initially dropping) occur in about 64% of cases.

Case Studies & Examples:

1. Figure 30.1: Displays an Adam & Adam double top with two distinct, sharp peaks. The price rises rapidly, peaks, then falls sharply, confirming the double top when it closes below the confirmation line.

2. Figure 30.3: Shows another example of an Adam & Adam double top where the pattern fails. Price briefly dips below the confirmation line but soon rises again, invalidating the pattern.

Focus on Failures:

About 60% of the time, price fails to confirm the double top by continuing upward after forming the peaks. This is why traders are advised to wait for confirmation (a close below the confirmation line) before making a trade【19:0†source】【19:12†source】.

This chapter emphasizes the importance of careful pattern identification, and ensuring the pattern is confirmed before acting, as double tops are prone to failure without proper confirmation.

Chapter 31 of Encyclopedia of Chart Patterns (3rd edition) by Thomas Bulkowski focuses on the Adam & Eve Double Top pattern. Here is a detailed summary:

Adam & Eve Double Top Overview:

• Structure: The pattern consists of two distinct peaks—one narrow, sharp peak (Adam) followed by a rounded, broader peak (Eve). Adam typically has a steep price spike, while Eve has a more gradual slope and wider shape.

• Confirmation: The pattern is confirmed when the price drops below the lowest point between the two peaks, known as the confirmation line.

• Volume: Volume tends to be higher during the Adam peak and lower during the Eve peak, although this is not always the case.

Key Identification Guidelines:

1. Appearance:

   • The first peak (Adam) is sharp and narrow, often resembling an inverted V.

   • The second peak (Eve) is broader and more rounded.

   • The two peaks should top out near the same price level.

2. Price Trend:

   • The price must trend upward into the pattern, indicating a potential reversal from bullish to bearish.

3. Valley Between Peaks:

   • The valley between the two peaks should represent a clear price dip, with a median depth of around 10%.

4. Peak Separation:

   • The two peaks should be separated by several days or weeks, with a median separation of about 23 days. Wide separations are preferred.

5. Volume:

   • Volume is typically higher on the first peak (Adam) and lower on the second peak (Eve). However, the volume trend can vary.

6. Breakout Direction:

   • The breakout is always downward in a valid Adam & Eve double top. Confirmation occurs when the price closes below the confirmation line.

Performance:

• Average Drop: The average price drop after a breakout is about 15%.

• Failure Rate: The breakeven failure rate is 21%, meaning the pattern fails about 21% of the time.

• Rank: The Adam & Eve double top ranks 16th out of 36 chart patterns in terms of performance.

• Pullbacks: Pullbacks (where the price temporarily returns to the breakout level after initially moving downward) occur in about 64% of cases.

Case Studies & Examples:

1. Figure 31.1: Shows an Adam & Eve double top where the sharp Adam peak is followed by a broader Eve peak. The price trends upward into the pattern, and the breakout is confirmed when the price closes below the confirmation line.

2. Figure 31.2: Provides another example of an Adam & Eve double top, illustrating the importance of peak separation and volume dynamics.

Trading Strategy:

• Traders are advised to wait for the confirmation of a downward breakout before entering a trade. Acting before confirmation can lead to losses if the price continues to rise.

By understanding these identification guidelines and performance metrics, traders can effectively recognize and trade the Adam & Eve double top, using it as a reversal signal in upward trends【19:3†source】【19:6†source】.

Chapter 32 of Encyclopedia of Chart Patterns (3rd edition) by Thomas Bulkowski focuses on the Eve & Adam Double Top pattern. Here’s a detailed breakdown:

Eve & Adam Double Top Overview:

• Structure: The Eve peak is wide and rounded, while the Adam peak is narrow and V-shaped. This combination distinguishes the Eve & Adam double top from other variations.

• Confirmation: The pattern confirms when the price closes below the lowest point between the two peaks, referred to as the confirmation line. Only after this should traders consider it a confirmed pattern.

• Volume: Typically, volume is heavier during the Eve peak (the first top) and lighter during the Adam peak (the second top). However, the volume trend is not consistent, with 51% of cases showing higher volume on the right peak.

Key Identification Guidelines:

1. Appearance:

   • The left peak (Eve) is wide and rounded.

   • The right peak (Adam) is sharp, resembling an inverted V.

   • Both peaks should top out near the same price level.

2. Price Trend:

   • The price must rise into the formation for it to qualify as a double top, signaling a potential bearish reversal after an uptrend.

3. Valley Between Peaks:

   • A dip should clearly separate the two peaks, with a median valley depth of about 9%. This separation confirms that the pattern is a double top rather than part of the same congestion region.

4. Peak Separation:

   • The peaks should be at least a few weeks apart, with a median separation of around 22 days. The wider the separation, the more reliable the pattern tends to be.

5. Breakout Direction:

   • The breakout is downward. This occurs when the price closes below the confirmation line, validating the double top pattern.

Performance:

• Average Drop: The average price decline after a confirmed breakout is about 16%.

• Failure Rate: The breakeven failure rate is 21%, meaning the pattern fails to confirm or leads to an unexpected outcome in 21% of cases.

• Rank: The Eve & Adam double top ranks 16th out of 36 chart patterns in terms of performance.

• Pullbacks: Pullbacks (temporary price returns to the breakout level) occur in about 64% of cases, offering another opportunity to enter the trade.

Case Studies & Examples:

1. Figure 32.1: This figure illustrates a classic Eve & Adam double top, with a rounded Eve peak followed by a sharp, narrow Adam peak. The pattern shows price confirmation when it drops below the confirmation line.

2. Figure 32.5: Shows a quick rise followed by a quick decline in an Eve & Adam double top, highlighting how a steep rally can be followed by a rapid price fall. The Eve peak is wide, and the Adam peak is sharp, forming the classic structure.

Trading Strategy:

• Traders are advised to wait for the confirmation of a downward breakout before making a trade. Acting before confirmation can result in losses if the price does not follow the anticipated downward movement.

By following these guidelines and focusing on key performance metrics, traders can effectively identify and trade the Eve & Adam double top pattern, utilizing it to predict bearish reversals in an upward trend【19:6†source】【19:7†source】.

Chapter 33 of Encyclopedia of Chart Patterns (3rd edition) by Thomas Bulkowski focuses on the Eve & Eve Double Top chart pattern, a bearish reversal pattern. Here’s a detailed breakdown:

Eve & Eve Double Top Overview:

• Structure: This pattern consists of two rounded, wide peaks that top out at about the same price level. Both peaks are "Eve" shaped, meaning they are broad and rounded rather than sharp and narrow.

• Confirmation: The pattern confirms when the price closes below the lowest point (the confirmation line) between the two peaks. This is when the trader should consider taking a bearish position.

• Volume: Volume tends to decline throughout the pattern, with heavier volume often occurring during the first peak (left Eve) and lighter volume on the second peak (right Eve).

Key Identification Guidelines:

1. Appearance:

   • Both peaks should look similar, wide, and rounded. The twin peaks should have wide bases and gentle price turns at each top.

   • The peaks should appear at roughly the same price level, not forming stair-step patterns but rather resembling two rounded tops.

2. Price Trend:

   • The price must rise into the pattern. An Eve & Eve double top signals a reversal of this prior bullish trend.

3. Valley Between Peaks:

   • A dip should clearly separate the two tops, with a median depth of about 12%. This valley makes the two peaks distinct.

4. Top Separation:

   • The two peaks should be separated by a few weeks. The median separation is around 36 days.

5. Volume:

   • Volume is generally higher on the left peak (first Eve) compared to the right peak, although exceptions are allowed. A decreasing volume trend is more typical but not required for pattern validity.

6. Breakout Direction:

   • The breakout is downward. The pattern confirms when the price closes below the lowest valley between the two peaks.

Performance:

• Average Drop: The average price decline after a breakout is about 16%.

• Failure Rate: The breakeven failure rate is 20%, meaning the pattern fails about one in five times.

• Rank: The Eve & Eve double top ranks 12th out of 36 chart patterns, indicating solid performance in predicting bearish reversals.

• Pullbacks: Pullbacks (where the price returns to the breakout level after initially moving downward) occur in about 65% of cases.

Case Studies & Examples:

1. Figure 33.1: Shows a classic Eve & Eve double top. The price forms two rounded peaks, and the pattern confirms when the price closes below the confirmation line, signaling the reversal.

2. Figure 33.3: Displays another example of an Eve & Eve double top with the right peak having short spikes, though still broad enough to be classified as an Eve top. The pattern confirms with a downward breakout, and the price resumes its decline after a pullback to the confirmation line.

Focus on Failures:

Some Eve & Eve double tops fail when the price does not close below the confirmation line or when a third peak forms, invalidating the double top. In these cases, the pattern may transform into a triple top. About 20% of these patterns fail to deliver a 5% price drop after the breakout【19:16†source】【19:17†source】.

By recognizing the characteristics and performance trends of this pattern, traders can use the Eve & Eve double top to predict potential bearish reversals after a significant upward price trend.

Chapter 34 of Encyclopedia of Chart Patterns (3rd edition) by Thomas Bulkowski discusses Flags, a short-term continuation pattern that typically forms within strong price trends. Here’s a detailed breakdown:

Flags Overview:

• Structure: Flags appear in a strong, fast-moving price trend (often called the flagpole) and are characterized by a small, rectangular pattern of price consolidation, bounded by two parallel trendlines. The price tends to move in the opposite direction of the main trend during this consolidation.

• Confirmation: A breakout occurs when the price moves outside the flag pattern, continuing in the direction of the original trend (upward or downward).

• Volume: Volume typically decreases during the formation of the flag but may increase during the breakout.

Key Identification Guidelines:

1. Appearance:

   • Flags are small rectangular shapes bounded by two parallel trendlines. The trendlines can be horizontal, sloping, or even vertical in some cases.

   • The pattern must include a flagpole, a steep, quick price movement that precedes the flag. Without a flagpole, the pattern is invalid.

   • Price usually moves against the prevailing trend during the flag formation but will often return to follow the original trend upon breakout.

2. Duration:

   • Flags are short-term patterns, lasting from a few days to a maximum of 3 weeks. Patterns that last longer than 3 weeks are often reclassified as channels or rectangles.

3. Volume:

   • Volume generally trends downward during the flag’s formation. Although receding volume is typical, flags with abnormal volume trends should not necessarily be discarded.

4. Breakout Direction:

   • Breakouts typically occur in the direction of the original price trend. However, breakouts can technically occur in either direction.

Performance:

• Average Price Change:

  • In bull markets with upward breakouts, flags typically result in a 9% average rise. In bear markets, the average rise after an upward breakout is 10%.

  • For downward breakouts, the average drop is 8% in bull markets and 16% in bear markets.

• Failure Rate:

  • The failure rates can be high, especially in bull markets where only 46% of flags reach their target price. In bear markets, 54% meet their price target after a downward breakout.

• Rank: Flags do not have a high-performance ranking compared to other patterns, but they are still useful for short-term trades.

• Throwbacks/Pullbacks: About 67% of flags experience a throwback (when price returns to the breakout level after initially moving away) or pullback (for downward breakouts).

Case Studies & Examples:

1. Figure 34.1: Shows an example of a flag in a short-term downward price trend. The flag is small, bounded by two parallel lines, and receding volume confirms the pattern’s validity.

2. Figure 34.2: Illustrates two flags, one within a downtrend and the other after price turns at the bottom. In both cases, the flag's breakout follows the original price trend.

Focus on Failures:

• Flags longer than 3 weeks tend to perform poorly or fail. Additionally, flags that lack a substantial flagpole or exhibit inconsistent volume trends are more likely to fail.

• For example, Figure 34.5 shows a flag failure where the price declined but failed to meet the target due to a short flagpole and an overly long flag formation【41:0†source】.

Trading Strategy:

• Traders should carefully monitor the flag for a breakout, waiting for price confirmation before entering a trade.

• Because of the pattern’s short-term nature, it’s essential to act quickly after confirmation, as price reversals often occur within a short period.

By using these guidelines, traders can identify and trade flags to take advantage of short-term continuation patterns in strong price trends.

Chapter 35 of Encyclopedia of Chart Patterns (3rd edition) by Thomas Bulkowski explores the High and Tight Flag pattern, which is a rare but powerful continuation pattern. Below is a detailed breakdown:

High and Tight Flag Overview:

• Structure: The pattern starts with a sharp, almost vertical price rise (the flagpole), often doubling the stock price within two months. This is followed by a brief consolidation (the flag), where prices move sideways or slightly downward.

• Confirmation: Confirmation occurs when the price breaks out of the consolidation (flag) and continues upward.

• Volume: Typically, volume spikes during the formation of the flagpole and then decreases during the flag. Patterns with receding volume during the flag tend to perform better.

Key Identification Guidelines:

1. Appearance:

   • The stock must experience a sharp price increase of nearly 100% in two months or less to form the flagpole.

   • After the rapid rise, prices consolidate in a range, forming the flag. The consolidation should last a few weeks.

2. Price Trend:

   • The flagpole is a steep, rapid price rise. If the price rises slowly, it is not considered a high and tight flag.

3. Flag Consolidation:

   • The flag typically slopes downward but can also be horizontal. Consolidation should last from a few days to a few weeks.

4. Volume:

   • Volume usually spikes during the creation of the flagpole and recedes during the flag. Patterns with falling volume during the flag perform better.

5. Breakout Direction:

   • A breakout to the upside is necessary for a valid high and tight flag. Downward breakouts invalidate the pattern.

Performance:

• Average Rise: On average, stocks with high and tight flags experience a 39% rise after breaking out in bull markets and a 25% rise in bear markets.

• Failure Rate: About 15% of high and tight flags fail to achieve at least a 5% gain after the breakout. In bear markets, the failure rate is 20%.

• Rank: High and tight flags rank 30th out of 39 chart patterns in bull markets and 15th out of 20 in bear markets. This reflects a significant performance decline since earlier editions of the book.

• Throwbacks: The pattern experiences throwbacks in about 67% of cases, where the price returns to the breakout level after initially moving upward. Throwbacks tend to dampen performance.

Case Studies & Examples:

1. Figure 35.1: Shows a classic high and tight flag where the price doubles in two months, forming a steep flagpole. After a brief consolidation, the price rises by 28%.

2. Figure 35.3: Displays an example of a failed high and tight flag, where the price rises briefly after the breakout but reverses soon after, failing to meet the expected target.

Focus on Failures:

Many high and tight flags fail to reach their projected target, particularly in bear markets. One common failure occurs when the price breaks out but only rises slightly before reversing. Another frequent failure is when price fails to break out upward at all.

Trading Strategy:

• Entry: Wait for the price to break out above the top of the flagpole before entering a trade. Premature entries may result in being stopped out if the breakout fails.

• Stop Placement: Place stops just below the bottom of the flag to protect against downside risk.

• Target: Use the measure rule to estimate a target price. This involves calculating half the height of the flagpole and projecting it upward from the breakout point.

By recognizing these identification guidelines and focusing on performance metrics, traders can use the high and tight flag to capture large price movements in strong trends .

Detailed Notes for Chapter 36: "Gaps" from Encyclopedia of Chart Patterns (3rd Ed.)

Chapter 36 of Encyclopedia of Chart Patterns by Bulkowski discusses gaps, their types, characteristics, and associated trading tactics. Below is a breakdown of the main points from the chapter, organized into key areas for easy review:

1. Types of Gaps

There are four major types of gaps reviewed in the chapter:

• Area Gaps (Common/Pattern Gaps):

  • Appear in congestion zones (sideways price movement).

  • Close quickly, often within a day or two.

  • Typically small and occur frequently, often associated with normal trading.

  • Volume spikes on the gap day but returns to normal shortly after.

• Breakaway Gaps:

  • Occur at the start of a new trend, typically after breaking out from a consolidation zone.

  • Accompanied by high trading volume that lasts for several days.

  • Mark the beginning of a strong upward or downward trend with new highs or lows.

• Continuation Gaps (Measuring/Runaway Gaps):

  • Appear mid-trend, in both rising and falling price trends.

  • Volume is generally high, pushing the price further in the current trend direction.

  • Often signal that the move is at the midpoint of the overall price movement.

• Exhaustion Gaps:

  • Appear near the end of a price trend, often with abnormally large gaps.

  • Followed by a reversal or a sideways price movement.

  • High volume is common as the final push in the trend occurs before the reversal.

2. Gap Statistics

• Upward and Downward Gaps:

  • In a bull market, 85% to 92% of area gaps close within a week. Breakaway gaps rarely close (1% within a week).

  • Exhaustion gaps close quickly, with about 60% to 75% closing in a week.

  • Continuation gaps are slower to close, often staying open longer than a week.

• Breakaway Gaps Statistics:

  • Bull Market: 781 up gaps and 530 down gaps were identified, with an average gap closure time of 337 and 209 days, respectively.

  • These gaps typically take months or even years to close, with very few closing within a week (1-8%).

• Continuation Gaps Statistics:

  • More common during strong price trends.

  • After a month, around half remain open, and they can take up to 6 months or longer to close.

  • The average gap size is smaller than breakaway gaps.

• Exhaustion Gaps Statistics:

  • Close quickly, with about 60-75% closing in the first week.

  • Tend to happen near the end of the price movement, signaling a reversal.

3. Key Trading Tactics for Gaps

• Area Gaps:

  • Short-lived and usually not suitable for profitable trading.

• Breakaway Gaps:

  • Trading is recommended when high volume confirms a new trend.

  • Stop-loss orders should be placed slightly below the lower rim of the gap.

• Continuation Gaps:

  • Can be used to estimate the midpoint of the trend and project future price movement.

• Exhaustion Gaps:

  • Abnormally large gaps near the end of a trend suggest traders should prepare for a reversal.

  • Short positions can be taken when an exhaustion gap confirms the end of an upward trend.

4. Volume Patterns & Gaps

• Volume is critical in identifying different gap types:

  • Breakaway and exhaustion gaps are often accompanied by large volume increases.

  • Volume often normalizes after area gaps and diminishes after continuation gaps, signaling trend maturity.

5. Example of Gap Trading

An example trade is provided where a trader named Gina successfully traded a breakaway gap. She placed a stop-loss order just below the gap to protect her position. Later, she traded the exhaustion gap as a short, making a profit by correctly identifying the reversal signal.

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These notes summarize the gap types, associated statistics, and practical trading tactics to help you in your exam preparation【7:0†source】【7:6†source】【7:9†source】【7:16†source】.

Detailed Notes for Chapter 37: "Gartley, Bearish" from Encyclopedia of Chart Patterns (3rd Ed.)

Chapter 37 of Encyclopedia of Chart Patterns by Bulkowski focuses on the bearish Gartley pattern, a five-turn pattern that incorporates Fibonacci ratios to identify potential reversal points. Here are the key highlights from the chapter, broken down for easy exam preparation:

1. Description of the Bearish Gartley

• Appearance: The bearish Gartley looks like a large "W," with its turns governed by Fibonacci ratios.

• Turns (XABCD):

  • X: The initial point, usually a significant high.

  • A: The first drop from point X, establishing the start of the W-shape.

  • B: A retracement from point A, often forming a minor peak.

  • C: A dip from B, which does not exceed A.

  • D: The final retracement, which serves as the crucial reversal point.

2. Fibonacci Ratios in the Bearish Gartley

• BA/XA Retrace: Turn B should create a .618 ratio of leg BA to XA.

• BC/BA Retrace: The retracement ratio for leg BC compared to BA typically falls within .382, .5, .618, .707, .786, or .886.

• DC/BC Extension: Point D should be a Fibonacci extension of leg BC, typically between 1.13, 1.27, 1.41, or 1.618.

• DA/XA Retrace: The ratio of DA to XA is .786, meaning the final retracement before the reversal should follow this ratio.

3. Volume Patterns

• Volume Trend: Volume tends to trend downward in Gartley patterns between 65% and 71% of the time, signaling a weakening trend as the pattern forms.

4. Key Trading Tactics

• Shorting at Point D: The bearish Gartley is a reversal pattern, where traders often short when the price reaches point D.

  • Stop Loss: Place a stop-loss order just above the high at point D to protect against invalid trades.

• Risk of Failure: The pattern sometimes fails, particularly in bull markets, where the failure rate is higher due to the upward market trend. If the price does not reverse after point D, the pattern is considered to have failed.

5. Statistics

• Downward Move after D: The Gartley pattern is designed to predict a downward reversal at point D. The following statistics provide insights into how often this happens:

  • Bear Markets:

    • Failure Rate: Low at 7.3%, indicating that in bear markets, Gartley patterns are highly reliable.

    • Average Drop: 23.3% after reaching point D.

  • Bull Markets:

    • Failure Rate: 21.5%, meaning that in bull markets, the pattern is less reliable.

    • Average Drop: 14.1%.

6. Success Rate at Point D

• Point D Reversal Rate:

  • In bear markets, the reversal rate is 89%, while in bull markets, it is 87%, making this a highly reliable reversal point.

• Movement to Other Points:

  • Price reaches point B almost all the time (99% in bull markets and 98% in bear markets).

  • Price reaches point A (the lowest point) less frequently, especially in bull markets (34%) compared to bear markets (41%).

7. Example of Failure

The chapter provides an example of a Gartley failure, where after reaching point D, the price only drops by 4% before rallying to a new high, marking a failed bearish signal. This emphasizes the importance of monitoring price action and setting tight stop-losses to manage risk.

8. Sample Trade

The chapter concludes with an example of a trader who successfully traded the bearish Gartley. The trader:

• Shorted the stock at D: After identifying the pattern, the trader waited for confirmation at point D.

• Set a target based on Fibonacci ratios: Calculated the expected drop from D using the height of the pattern, aiming for a significant profit.

---

These notes summarize the essential points of the bearish Gartley pattern, its identification using Fibonacci ratios, and associated trading tactics. With its high reversal rate, especially in bear markets, the bearish Gartley can be a useful tool for traders looking to capitalize on downward trends【11:6†source】【7:16†source】.

Detailed Notes for Chapter 38: "Gartley, Bullish" from Encyclopedia of Chart Patterns (3rd Ed.)

Chapter 38 of Encyclopedia of Chart Patterns by Bulkowski covers the bullish Gartley pattern, a five-turn structure using Fibonacci ratios to signal a reversal upward. Below are the main takeaways from the chapter for exam preparation.

1. Appearance and Structure

• Shape: The bullish Gartley resembles an "M" with Fibonacci-based points.

• Turns (XABCD):

  • X: Initial low, starting the pattern.

  • A: The first peak, marking a high.

  • B: A retracement from A, followed by another low.

  • C: A lower high, lower than A.

  • D: The critical low where the reversal typically happens.

2. Fibonacci Ratios in the Bullish Gartley

• AB/AX Retracement: The retracement ratio of AB to AX is typically 0.618.

• BC/AB Retracement: Between B and C, this ratio ranges from 0.382 to 0.886.

• CD/BC Extension: The extension of CD to BC falls between 1.13 and 1.618.

• AD/AX Retracement: The final retracement, AD to AX, is usually 0.786.

3. Volume Patterns

• Volume Trend: Typically trends downward during the formation of the pattern. This suggests declining interest in the stock until a reversal at D.

4. Statistics and Performance

• Bullish Gartley in Bull Markets:

  • Performance Rank: Lowest of Fibonacci patterns in bull markets.

  • Average Rise: 36.3% after point D.

  • Failure Rate: 13.5% failure rate in bull markets.

  • Reversal Rate: 90% of the time, the price reverses at point D.

• Bullish Gartley in Bear Markets:

  • Performance Rank: Better than in bull markets.

  • Average Rise: 29.2% after point D.

  • Failure Rate: Lower than in bull markets, at 5.9%.

  • Reversal Rate: 86% reversal rate at point D.

5. Key Trading Tactics

• Buying at Point D: Traders buy at point D, where the price is expected to reverse upward based on the Fibonacci retracement ratios.

  • Stop-Loss: Place a stop-loss order below the low at D to minimize losses in case the pattern fails.

• Projection: Once the reversal occurs at D, traders can project future price movements based on the height of the pattern. The price often moves towards previous highs (points B or A).

6. Failure Considerations

• Gartley Failure: Sometimes, the price fails to rise significantly after point D. An example of failure is provided where the price only rises 4% before turning downward, signaling a weak bullish trend.

7. Sample Trade

The chapter also includes an example of a trader successfully navigating a bullish Gartley. The trader:

• Entered Long at D: Following the identification of the pattern, the trader bought at D and set a stop-loss just below D.

• Profit Target: The trader aimed for a significant rise, targeting levels based on Fibonacci ratios.

• Trade Management: When the stock hit overhead resistance, the trader tightened the stop-loss order to secure profits as the price rose further.

8. Practical Tips

• Patience: The pattern requires patience. Traders are advised to wait for the pattern to fully form before entering at point D.

• Volume Confirmation: While volume trends downward most of the time, it's not a strict requirement. However, traders should pay attention to volume as a potential confirming indicator.

---

These notes cover the key elements of the bullish Gartley pattern, from identifying its structure to executing a trade. The use of Fibonacci ratios is crucial in recognizing the points where a reversal is likely【15:0†source】【15:2†source】【15:3†source】.

Detailed Notes for Chapter 39: "Head-and-Shoulders Bottoms" from Encyclopedia of Chart Patterns (3rd Ed.)

Chapter 39 discusses the head-and-shoulders bottom, which is a bullish reversal pattern that appears after a downtrend. Below are key points from the chapter to help with exam preparation.

1. Description of the Head-and-Shoulders Bottom

• Appearance: The pattern forms with three valleys:

  • Left Shoulder (LS): The first valley, where the price starts to decline.

  • Head: The lowest point, forming the middle valley.

  • Right Shoulder (RS): A higher valley after the head, mirroring the left shoulder.

• The neckline is drawn by connecting the peaks between the left shoulder, head, and right shoulder. An upward breakout occurs when the price closes above this neckline.

2. Symmetry

• Symmetry between the left and right shoulders is typical. The shoulders tend to have similar shapes and are equidistant from the head. However, slight variations are common.

• Volume tends to be highest at the left shoulder or head, and diminished at the right shoulder. Volume typically spikes when price breaks through the neckline.

3. Volume and Breakout

• Volume typically decreases as the pattern forms. Once the price breaks out above the neckline, volume should increase to confirm the breakout.

• In some cases, a low-volume breakout can still succeed, but rising volume strengthens the likelihood of a successful reversal.

4. Trading Tactics

• Entry Point: Buy after the price breaks through the neckline.

• Stop-Loss: Place a stop-loss order slightly below the lowest point of the right shoulder or head to limit risk.

• Target Price: Calculate the price target by measuring the distance from the head to the neckline and adding it to the breakout point.

5. Failure Points

• Failure Types:

  • The price may fail to break out above the neckline, signaling that the reversal has failed.

  • If the price rises less than 5% after the breakout and then falls below the neckline, this is considered a 5% failure.

• Example of Failure: Figure 39.5 in the book shows a failure where the price rose less than 5% after the breakout before falling again, leading to a failed pattern.

6. Statistics

• Success Rates:

  • In bull markets, the average rise after a breakout is 45%, with a low 11% failure rate.

  • In bear markets, the average rise is 28%, with a 9% failure rate.

• Throwbacks: In about 65% of cases, the price "throws back" to the neckline after breaking out before resuming the upward trend.

7. Sample Trade

• The chapter provides a sample trade where a trader successfully identified a head-and-shoulders bottom pattern. The trader:

  • Bought after the breakout, placed a stop-loss, and used the measured rule to project the price target.

  • The stock reached the target price after the breakout, yielding a successful trade.

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These notes summarize key elements of the head-and-shoulders bottom, focusing on identifying the pattern, volume trends, and trading tactics【19:5†source】【19:19†source】【19:16†source】.

Detailed Notes for Chapter 40: "Head-and-Shoulders Bottoms, Complex" from Encyclopedia of Chart Patterns (3rd Ed.)

1. Description

• The complex head-and-shoulders bottom is a variation of the standard pattern with multiple heads, shoulders, or both.

• It forms in a downtrend, signaling a bullish reversal upon completion. There are two types:

  1. Multiple Shoulders: More than two shoulders on either side of the head.

  2. Multiple Heads: More than one central low point (head).

2. Key Features

• Symmetry: Complex patterns maintain symmetry between the shoulders on either side of the head(s).

  • The price level and distance between the shoulders and head are usually similar.

• Volume:

  • Typically, volume is higher on the left side of the pattern, decreasing as the right shoulders form.

  • Volume tends to spike during the breakout above the neckline.

• Neckline:

  • The neckline connects the highest points between the head and the shoulders. It is often horizontal or slightly sloping.

  • Breakouts occur when the price closes above the neckline.

3. Performance

• Bull Market:

  • Average Rise: 47%.

  • Breakeven Failure Rate: 7%.

  • Percentage Meeting Target: 71%.

• Bear Market:

  • Average Rise: 32%.

  • Breakeven Failure Rate: 12%.

  • Percentage Meeting Target: 45%.

• Throwbacks: Occur in 66% of cases, where the price returns to the neckline after the breakout before resuming its upward trend.

4. Trading Tactics

• Entry: Buy once the price breaks above the neckline.

• Stop-Loss: Place a stop-loss just below the lowest point of the pattern, typically below the right shoulder.

• Price Target: Use the measured rule:

  • Calculate the distance between the head and neckline and add that to the breakout price for a price target.

• Throwback Opportunities: Traders can also buy during a throwback to the neckline for another entry point.

5. Failure and Confirmation

• Failure: A pattern fails if the price closes below the head before the breakout, or if the price fails to rise more than 5% after the breakout before falling back below the neckline.

  • Example of Failure: A stock rises slightly after a breakout but fails to maintain momentum, eventually closing below the neckline.

• Confirmation: For the pattern to confirm, the price must break out upward. If it breaks downward, the pattern is invalid.

6. Example of a Complex Bottom

• Case Study (Unocal Corp):

  • The stock forms a complex bottom with two left shoulders and two right shoulders.

  • The breakout occurs after the price moves above the neckline, followed by a throwback before resuming an upward trend. This example highlights the importance of patience when trading complex patterns.

7. Special Features for Enhanced Performance

• Neckline Slope:

  • Down-sloping necklines lead to better performance, as they offer a lower entry price.

  • Up-sloping necklines may not lead to a breakout, and should be approached cautiously.

• Shoulder Lows:

  • Patterns where the left shoulder is lower than the right shoulder tend to perform better in bear markets.

8. Case Study (Big Lots Inc., 2004)

• The stock formed a complex head-and-shoulders bottom with two left shoulders and two right shoulders.

• A weak breakout resulted in a failed trade, leading to a loss, demonstrating the importance of strong breakout volume and careful monitoring.

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These notes summarize the identification, performance, and trading strategies for complex head-and-shoulders bottoms, as well as key considerations for successful trading【19:0†source】【19:6†source】【19:12†source】.

Detailed Notes for Chapter 41: "Head-and-Shoulders Tops" from Encyclopedia of Chart Patterns (3rd Ed.)

This chapter explores the head-and-shoulders top, a common bearish reversal pattern seen at the end of an uptrend. Here are the main points for exam review:

1. Description

• Appearance: The head-and-shoulders top consists of three peaks:

  • Left Shoulder (LS): The first peak, representing an initial high.

  • Head: The highest peak in the center.

  • Right Shoulder (RS): A lower peak than the head, roughly mirroring the left shoulder.

• Neckline: A line connecting the two troughs (lows) between the peaks. The slope can be upward, downward, or horizontal. A downward breakout occurs when the price closes below the neckline, confirming the reversal.

2. Volume Trends

• Volume tends to be highest during the formation of the left shoulder, decreases during the head formation, and is the lowest at the right shoulder. This declining volume is a key characteristic of a head-and-shoulders top.

3. Trading Tactics

• Entry: Traders enter short positions when the price breaks below the neckline.

• Stop-Loss: Place a stop-loss order above the right shoulder or head to manage risk.

• Price Target: Use the measured rule to project the price decline. Measure the vertical distance between the head and the neckline, then subtract this from the breakout price (below the neckline).

4. Failure and Confirmation

• Breakout Failure: A pattern fails if the price does not close below the neckline or if it moves less than 5% after breaking below the neckline before reversing.

  • Example: Figure 41.4 in the book shows a head-and-shoulders top that acts as a consolidation pattern rather than a reversal. The price doesn’t decline significantly after the breakout, signaling a failure.

• Confirmation: The pattern is confirmed once the price closes below the neckline or the right armpit (the lowest point between the head and right shoulder).

5. Statistics

• Bear Market:

  • Average Decline: 24%, higher than the 22% average for all chart patterns.

  • Failure Rate: 5% in bear markets, making this a highly reliable bearish pattern.

  • Performance Rank: 4th out of 19 patterns in bear markets.

• Bull Market:

  • Average Decline: 16%.

  • Failure Rate: 19%, higher compared to bear markets.

  • Performance Rank: 9th out of 36 patterns in bull markets.

• Pullbacks: Occur 68% of the time. This happens when the price breaks below the neckline but later rises to retest it before resuming the decline.

6. Symmetry

• Symmetry between the left and right shoulders is common. The shoulders are often at similar price levels, and the distance from the shoulders to the head is roughly equal.

7. Example of a Head-and-Shoulders Top

• Toll Brothers (TOL):

  • The stock forms a head-and-shoulders top, with the left shoulder having the highest volume. The stock breaks below the neckline, leading to a decline back to its initial price point【19:0†source】【19:1†source】【19:6†source】.

These notes cover the identification, performance, and trading tactics of the head-and-shoulders top, emphasizing its reliability in bear markets.

Detailed Notes for Chapter 42: "Head-and-Shoulders Tops, Complex" from Encyclopedia of Chart Patterns (3rd Ed.)

Chapter 42 discusses the complex head-and-shoulders top, which is a variation of the classic head-and-shoulders pattern with multiple heads, shoulders, or both. Below are the key points from the chapter for your exam preparation:

1. Appearance and Symmetry

• Appearance: The complex head-and-shoulders top has a structure similar to the regular head-and-shoulders pattern, but with multiple heads or shoulders.

  • Example 1: Two heads but only one pair of shoulders.

  • Example 2: Multiple shoulders on both sides of a single head.

• Symmetry: A key feature of this pattern is its symmetry. Shoulders on the left tend to mirror those on the right, both in terms of price levels and time intervals. This balance is crucial for identifying a valid pattern.

2. Volume Trends

• Volume is typically higher on the left shoulder than on the right, and it decreases as the pattern progresses, especially during the formation of the right shoulder.

• Volume tends to spike during a downward breakout, confirming the pattern's validity.

3. Neckline and Breakout

• Neckline: The neckline connects the lows of the two valleys between the head and shoulders. The slope of the neckline can vary (upward or downward), and this affects the pattern’s performance.

  • Downward Breakout: A valid breakout occurs when the price closes below the neckline, signaling a bearish reversal.

4. Performance Statistics

• Bull Market:

  • Average Decline: 17%.

  • Failure Rate: 18% breakeven failure rate.

  • Percentage Meeting Target: 47%.

• Bear Market:

  • Average Decline: 23%.

  • Failure Rate: 7%.

  • Percentage Meeting Target: 46%.

• Pullbacks: About 65-66% of the time, prices will return to retest the neckline after the breakout before resuming the downtrend.

5. Key Trading Tactics

• Entry Point: Short positions should be entered after the price breaks below the neckline, confirming the downward breakout.

• Stop-Loss: Place stop-loss orders above the shoulders or head to protect against invalid breakouts.

• Price Target: Use the measured rule to predict the decline. Measure the vertical distance from the head to the neckline and subtract this from the breakout price to estimate the price target.

6. Example of a Complex Head-and-Shoulders Top

• The chapter provides a sample trade involving Alcan Aluminum (Figure 42.1), where the stock formed a complex top with dual heads and multiple shoulders. After the breakout below the neckline, the stock pulled back briefly before resuming a steady decline to the price target.

7. Focus on Failures

• Failure Types:

  • The price may fail to decline significantly after breaking below the neckline, which can result in a failed pattern.

  • An example of failure shows a stock that broke below the neckline but quickly reversed, climbing above the highest head, invalidating the pattern.

• Busted Patterns: These occur when the price initially breaks out downward but fails to continue declining, leading to an upward reversal.

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These notes summarize the key features, identification guidelines, and performance statistics for complex head-and-shoulders tops, helping you understand how to trade and analyze this pattern【19:0†source】【19:1†source】【19:16†source】.

Detailed Notes for Chapter 43: "Horn Bottoms" from Encyclopedia of Chart Patterns (3rd Ed.)

1. Description

• Appearance: The horn bottom forms after a steep decline in price, represented by two distinct, downward price spikes that occur over two separate weeks.

• The formation resembles an upside-down horn, signaling a bullish reversal.

• Key Features:

  • The spikes should be taller than any similar spikes in the prior year.

  • The lowest point of each spike is generally close, but the right spike may be slightly lower than the left.

2. Identification Guidelines

• Time Frame: Horn bottoms are best identified using weekly charts, where price movement is clearer than on daily charts.

• Clear Visibility: Horns should appear after a clear downtrend, with no other patterns obscuring them. Horns must stand out against the surrounding price action to be valid.

• Price Overlap: The two spikes should overlap significantly, reinforcing the distinct horn shape.

• Breakout: The pattern is confirmed when the price closes above the highest high of the three-week formation.

3. Performance

• Bull Markets:

  • Average Rise: 59%.

  • Breakeven Failure Rate: 6%.

  • Performance Rank: 2nd out of 3 patterns.

• Bear Markets:

  • Average Rise: 34%.

  • Breakeven Failure Rate: 9%.

  • Performance Rank: 1st out of 2 patterns.

• Throwbacks: Occur in 74% of cases in bull markets and 53% in bear markets, meaning the price often returns to the breakout level before continuing higher.

4. Trading Tactics

• Entry: Traders should buy after the price closes above the highest high of the pattern, confirming the breakout.

• Stop-Loss: Place stop-loss orders slightly below the lowest point of the pattern (below the horn spikes) to protect against a false breakout.

• Target Price: The measured rule is used to predict the upward price movement:

  • Subtract the lowest low from the highest high, and add that value to the breakout point to determine the target price.

5. Special Features

• Horns tend to perform better in bull markets than in bear markets.

• Left Spike vs. Right Spike: In bear markets, if the left spike is lower than the right, the performance tends to improve. However, a lower right spike can lead to worse performance.

• Height Difference: Patterns where the two spikes have a greater difference in height tend to perform better, especially in bear markets. Look for uneven spikes for the best performance.

6. Focus on Failures

• 5% Failure: A horn bottom may rise less than 5% after the breakout before reversing, signaling a failure.

• Patterns are more likely to fail if the spikes are not distinctly different from previous price action or if the surrounding price movement is unclear.

7. Example Trade

• Case Study (Michaels Stores):

  • A trader identified a horn bottom, bought the stock after confirmation, and held through a 33% gain. The trade was closed when signs of a topping pattern appeared, preventing further downside risk.

8. Key Takeaways

• Horn bottoms are reliable bullish reversal patterns, particularly in bull markets, where they can generate significant price increases.

• Patience and proper risk management (such as stop-loss placement) are crucial to trading this pattern effectively.

• Traders should wait for confirmation before entering a position and be cautious of failures, especially when trading in bear markets.

---

These notes cover the identification, performance, and trading tactics for horn bottoms, as well as tips for avoiding failed patterns【35:1†source】【35:5†source】【35:7†source】【35:9†source】.

Detailed Notes for Chapter 44: "Horn Tops" from Encyclopedia of Chart Patterns (3rd Ed.)

1. Description

• Appearance: The horn top forms after an uptrend and is characterized by two upward price spikes separated by one week. The pattern looks like a horn and indicates a bearish reversal.

• Key Features:

  • The two spikes are usually taller than surrounding price action over the prior year.

  • The highest price peaks do not need to match exactly, but the pattern is more visually striking if they are at similar levels.

2. Identification Guidelines

• Time Frame: Horn tops are best identified on weekly charts, as performance tends to be more reliable than on daily charts.

• Visibility: The two spikes should clearly stand out compared to nearby price bars. The spikes should be taller than any other price movement within the prior year.

• Breakout: A breakout occurs when the price closes below the lowest low of the three-week formation, confirming the pattern.

3. Volume Trends

• Volume typically trends downward during the formation of the pattern, confirming that market interest is declining as the price reaches a top.

4. Trading Tactics

• Entry: Traders enter short positions when the price breaks below the lowest low of the three-week horn formation.

• Stop-Loss: Place a stop-loss above the higher of the two horn spikes to manage risk.

• Price Target: Use the measured rule to predict the price decline. Subtract the pattern height (highest high minus lowest low) from the breakout point to estimate the target price.

5. Performance Statistics

• Bull Market:

  • Average Decline: 19%.

  • Failure Rate: 9% of horn tops fail to see price drop more than 5%.

  • Success Rate: 81% reach half the pattern’s height target.

• Bear Market:

  • Average Decline: 26%.

  • Failure Rate: 3% failure rate, indicating a higher reliability in bear markets.

  • Success Rate: 83% reach half the pattern’s height target.

6. Special Features

• Height of Spikes:

  • Patterns with spikes that are taller than average tend to perform worse after the breakout.

  • Patterns where the two spikes are uneven (the price difference between the two peaks is large) tend to perform better after the breakout.

7. Failure Considerations

• Common Failures: Horn tops sometimes break upward instead of downward, invalidating the pattern. These are called 5% failures, where price rises rather than drops after the pattern completes.

• Market Conditions: Horn tops are more likely to succeed in bear markets, where the overall trend supports the price decline.

8. Sample Trade

• A trade example shows a stock forming a horn top near the end of an uptrend. After confirmation of the breakout, the stock drops significantly, reaching the price target, demonstrating the effectiveness of the horn top pattern in predicting a bearish reversal.

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These notes summarize the key characteristics, performance, and trading strategies for horn tops, highlighting the pattern’s reliability, particularly in bear markets【35:9†source】【39:9†source】【39:7†source】.

Detailed Notes for Chapter 45: "Island Reversals" from Encyclopedia of Chart Patterns (3rd Ed.)

1. Description of Island Reversals

• Appearance: Island reversals form when a stock experiences a sharp price movement, leaving a gap between two distinct periods of price activity. The gaps create a visual "island" isolated from the rest of the price chart.

  • Island Tops: Mark bearish reversals after an uptrend, where price gaps up and then gaps down.

  • Island Bottoms: Mark bullish reversals after a downtrend, where price gaps down and then gaps up.

• Identification: Both types of island reversals are framed by gaps at or near the same price level, though the gap sizes may differ.

2. Identification Guidelines

• Gaps: Must be present on both sides of the price pattern, separating the island from the preceding and subsequent price trends. The gaps should be within 13 cents of one another, and gaps smaller than 25 cents are generally excluded from analysis.

• Duration: The average island lasts between 1 day to 3 weeks, although longer islands can appear, lasting up to several months.

3. Volume Trends

• Volume: Often high during the breakout (second gap) as the price moves away from the island. However, volume trends downward throughout the formation of the island.

• Breakout Volume: Island tops tend to show increased volume when breaking down, while island bottoms show rising volume during upward breakouts.

4. Performance Statistics

• Island Tops:

  • Bull Market:

    • Average Drop: 13%.

    • Failure Rate: 34% (price doesn’t drop more than 5%).

    • Performance Rank: 31st out of 36 patterns.

  • Bear Market:

    • Average Drop: 22%.

    • Failure Rate: 14%.

    • Performance Rank: 12th out of 19 patterns.

• Island Bottoms:

  • Bull Market:

    • Average Rise: 31%.

    • Failure Rate: 31%.

    • Performance Rank: 38th out of 39 patterns (low performance).

  • Bear Market:

    • Average Rise: 20%.

    • Failure Rate: 30%.

    • Performance Rank: Last out of 20 patterns.

• Throwbacks and Pullbacks: These occur about 54-58% of the time after a breakout. In a throwback, the price returns to the island bottom before resuming its upward trend, while a pullback happens when the price retests the island top.

5. Trading Tactics

• Entry:

  • For Island Tops, traders should short the stock when the price breaks down from the island (second gap).

  • For Island Bottoms, traders go long when the price breaks above the island (second gap).

• Stop-Loss:

  • Island Tops: Place a stop-loss order just above the highest point of the island.

  • Island Bottoms: Place a stop-loss just below the lowest point of the island.

• Measured Rule: Calculate the target price by measuring the height of the island (difference between the highest and lowest points) and adding it to the breakout point (for island bottoms) or subtracting it from the breakout point (for island tops).

6. Failures

• 5% Failure: Occurs when the price rises or falls by less than 5% after the breakout and then reverses. Island bottoms have a particularly high failure rate in bear markets, where 30% fail to rise more than 5%.

• Trendlines: Pay attention to trendlines when evaluating island patterns. Waiting for confirmation after the breakout (closing above a downtrend line or below an uptrend line) can help reduce false signals.

7. Example Trade

• A sample trade involving McDermott International (MDR) shows how an island bottom formed but failed. The stock gapped down, then up, forming the island, but did not sustain its upward breakout. The stock eventually fell below the trendline, marking a failed pattern.

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These notes summarize the essential identification, performance, and trading strategies for island reversals. While island tops can signal strong bearish reversals, island bottoms have a high failure rate, particularly in bear markets .

Chapter 46 of Encyclopedia of Chart Patterns (3rd Edition) by Thomas Bulkowski is focused on the Measured Move Down pattern. This chart pattern is characterized by three parts: the first leg, a corrective phase, and a second leg.

Key Components of the Measured Move Down

1. First Leg: This downward movement typically starts after a new high, followed by a sharp price decline, often in a straight line. If the decline curves or takes the form of a rounded turn, it may indicate a different pattern like a scallop or saucer.

2. Corrective Phase: After the initial drop, the stock retraces upward, typically reversing part of the decline. The corrective phase is key in this pattern as it gives traders a chance to assess whether the downward trend will resume.

3. Second Leg: Once the corrective phase concludes, the downward trend resumes, often with a similar slope to the first leg. Ideally, both legs should be close in length and duration, though the second leg often ends within its own price channel.

Statistics and Performance

Bulkowski provides statistical analysis of the Measured Move Down pattern, showing:

• Average Decline: In bull markets, the first leg sees a price drop of about 20% in 26 days, with the second leg declining by 21% over 27 days. In bear markets, the first leg shows a steeper drop of 31%, and the second leg continues with a 34% decline.

• Retracement: The corrective phase often retraces about 46%-48% of the first leg's decline.

• Volume Trends: The volume trend is downward for both bull and bear markets. Rising volume during the corrective phase increases the chance that the second leg will match the first.

Trading Tactics and Measure Rule

The Measure Rule is a critical aspect of the pattern, used to predict the target price for the second leg. By calculating the height of the first leg (from the highest high to the lowest low), you can subtract this value from the highest point of the corrective phase to estimate the target price. Historically, this rule is only accurate about 43% of the time in bull markets and 38% in bear markets.

Identifying Failures

Chapter 46 emphasizes that not all measured moves down follow the ideal pattern. Failures occur when the second leg does not extend as far as expected, or if the corrective phase retraces too much, signaling a reversal of the downtrend. Recognizing when the first leg curves or loses momentum is a warning sign that the pattern may fail.

Real-Life Examples

Several examples from historical trades are provided, showing both successful and failed measured moves. For instance, one failure involved a pattern where the second leg fell short of the target, indicating a missed prediction based on the Measure Rule.

Lessons for Traders

• Be cautious when using the Measure Rule, especially if the first leg shows a very large decline. If the target price approaches zero, the stock is unlikely to hit that target.

• Watch for volume trends, as rising volume in the corrective phase can suggest a strong second leg.

• Avoid rounding patterns, and instead, focus on straight-line declines for the first leg to identify a proper measured move.

This chapter provides traders with a comprehensive guide to understanding the Measured Move Down pattern, its statistical tendencies, and trading tactics to apply when encountering the pattern in real-world scenarios【7:0†source】【7:11†source】【7:18†source】.

Chapter 47 of Encyclopedia of Chart Patterns (3rd Edition) by Thomas Bulkowski covers the Measured Move Up pattern. This chart pattern is the reverse of the Measured Move Down and comprises three parts: an initial upward leg, a corrective phase, and a second leg of upward movement. Here are the key points:

Key Characteristics:

1. First Leg: This is a strong, straight-line rise in price, often fitting inside a channel. It is important for this rise to be clear and without any significant curving.

2. Corrective Phase: After the first leg, prices retrace by typically 40%-60% of the rise. This phase provides a resting point for the trend before resuming the upward movement. The corrective phase can appear as a saw-tooth pattern of brief rises and declines.

3. Second Leg: Once the corrective phase concludes, the second leg follows a similar slope to the first leg, continuing the upward trend. The length and duration of this leg are often shorter than the first.

Performance Statistics:

• Bull Market:

  • Average first leg rise: 36% in 38 days.

  • Average second leg rise: 31% in 33 days.

  • About 60% of the patterns meet their target prices.

• Bear Market:

  • Average first leg rise: 38% in 24 days.

  • Average second leg rise: 32% in 23 days.

  • Only 52% of patterns meet their price targets.

Trading Tactics:

• Measure Rule: To estimate the target price for the second leg, calculate the height of the first leg and project that from the low point of the corrective phase. However, Bulkowski warns that this rule only works 52%-60% of the time, so it's best to be conservative when predicting price targets.

• Volume: A declining volume trend in both the first and second legs is common. If volume rises during the corrective phase, it signals that the pattern might follow through.

Focus on Failures:

• Common Pitfalls: The most frequent failure occurs when the second leg fails to reach the height of the first leg due to a double top or a lack of momentum. In these cases, price often turns back downward after the corrective phase, and the pattern fails to reach its target.

• Identification Issues: If the first leg is not a straight-line rise or if the corrective phase retraces more than 80%, the pattern is likely unreliable. A choppy corrective phase or an extended saw-tooth pattern can also signal failure.

Real-Life Example:

One example provided in this chapter involves Michelle, who owned a stock during a measured move up. After seeing an initial rise followed by a corrective phase, she calculated the target price. While the stock did reach resistance at the anticipated level, the second leg did not achieve the full height expected due to a double top failure.

This chapter emphasizes the importance of identifying the right price targets using the Measure Rule, being cautious of excessive retracement during the corrective phase, and paying attention to volume trends .

Chapter 48 of Encyclopedia of Chart Patterns (3rd Edition) by Thomas Bulkowski covers Pennants, which are short consolidation patterns in a strong price trend. Here are the detailed notes:

Key Components:

1. Appearance: Pennants are small triangular patterns formed by two converging trendlines. They often tilt against the prevailing price trend (i.e., downward in an uptrend and upward in a downtrend).

2. Price Trend (Flagpole): A steep, quick price move precedes the pennant, forming the flagpole. Without this flagpole, the pattern is not a pennant. The best moves show little overlap from day to day, emphasizing a sharp, straight-line price move.

3. Volume: Volume typically trends downward within the pennant. A rising volume trend is not a reason to discard a pennant, as it can signal a stronger breakout. However, the majority of patterns show decreasing volume.

4. Breakout Direction: The breakout usually follows the direction of the flagpole, making pennants continuation patterns. Price breaks out once it closes outside one of the pennant’s boundaries.

5. Duration: Pennants are short-lived, lasting from a few days up to three weeks. Longer patterns should be classified as symmetrical triangles or wedges.

Identification Guidelines (Table 48.1):

• Appearance: Look for two converging trendlines, often sloping against the flagpole.

• Price Trend (Flagpole): A strong, sharp price move (the flagpole) must precede the pennant.

• Volume: Downward-trending volume is typical, but unusual volume patterns shouldn't disqualify the pennant.

• Breakout Direction: Typically follows the flagpole's trend (continuation).

Trading Tactics (Table 48.10):

1. Measure Rule: Predicts the price target by measuring the difference between the flagpole’s start and the pennant’s start. This price difference is added to the breakout point. However, Bulkowski warns that the measure rule only works 32%-46% of the time, often underperforming in bull markets.

2. Wait for Breakout: It is safer to wait for price to close outside the pennant before taking a position. Entering too early can lead to losses from false breakouts.

3. Close Out the Trade: The trade should be closed when price movement stalls, typically around the measure rule target or a support/resistance zone.

Performance Statistics:

• Continuation Patterns: Pennants act as continuation patterns 75%-76% of the time in both bull and bear markets.

• Failure Rates: Pennants fail to meet their measure rule price targets 54% of the time in bull markets and 40% in bear markets, meaning the pattern doesn't always predict a continuation.

• Performance: The best-performing pennants occur within a third of the yearly low, and the performance improves if the pennant is tall and wide. In contrast, shorter and narrower pennants underperform.

Example Trade:

Bulkowski provides an example of a pennant formed after a quick price rise. The pennant slopes downward, and price continues upward after the breakout, following the measure rule closely. However, as noted earlier, the rule’s accuracy is not very high, so traders should be cautious about relying on it exclusively.

Focus on Failures:

Pennants often fail if the second leg of the move does not extend far enough. In some cases, price may reverse after the breakout, forming a throwback. Bulkowski highlights that while pennants often behave as continuation patterns, they can still fail to meet expectations, especially if the flagpole and pennant are not well-formed .

Chapter 49 of Encyclopedia of Chart Patterns by Thomas Bulkowski is focused on Pipe Bottoms. Below are the detailed notes:

Key Features of Pipe Bottoms:

1. Appearance: Pipe bottoms consist of two adjacent downward price spikes on a weekly chart. These spikes are unusually long compared to the surrounding price action, plunging well below the price levels of the weeks before and after them.

2. Volume Trends: Pipes often show a volume surge during the two downward spikes. This surge is usually stronger on one spike, typically the first one. While the pattern does not strictly require a specific volume trend, above-average volume in at least one of the spikes is common.

3. Third Week Rebound: One of the most critical elements for confirming a pipe bottom is what happens in the third week after the second spike. The price should rise sharply in this period, forming a clear V-shape.

4. Confirmation: For a pipe bottom to confirm, the price must break above the highest high of the two spikes. If price closes below the lower of the two spikes, the pattern fails.

Identification Guidelines:

• Timeframe: Pipe bottoms are best identified on weekly charts rather than daily ones because they perform better in this timeframe.

• Two Downward Spikes: The spikes should be adjacent and stand out clearly compared to other price movements over the year.

• Large Overlap: There should be a significant price overlap between the two weeks that form the pipe. This overlap is critical in distinguishing a pipe bottom from other patterns.

• Volume: Although not mandatory, a significant volume increase in one or both spikes strengthens the pattern's reliability.

Performance:

1. Success Rates:

   • In bull markets, pipe bottoms result in an average rise of about 54%, and 77% of the patterns meet their target price.

   • In bear markets, the average rise is around 33%, with 60% reaching the target.

2. Failure Rates: The failure rate for pipe bottoms is relatively low, around 8%, in both bull and bear markets. A failure occurs if the price does not rise more than 5% after the pattern forms.

3. Measure Rule: This rule is used to estimate price targets. It involves measuring the height of the pattern (difference between the highest high and lowest low of the spikes) and adding this height to the breakout point (the highest high of the two spikes). The success rate of the measure rule ranges from 43% to 77%.

Trading Tactics:

1. Wait for Confirmation: Traders should wait until the price breaks above the highest high of the two spikes to confirm the pipe bottom before entering a position.

2. Stop-Loss: A stop-loss should be placed slightly below the lower spike to protect against false breakouts or failures.

3. Profit Target: The measure rule gives a target price, but traders should watch for resistance levels and volume changes as the price approaches this target.

Failures:

• Common Failures: Failures in pipe bottoms often happen when the spikes are not large enough or distinct from surrounding price action. If the price fails to rise at least 5% after the second spike, the pattern is considered a failure.

• Example Failures: Bulkowski provides examples of two failed pipe bottoms, where prices initially moved up after the pattern but then quickly reversed and dropped below the original low of the pattern.

Example Trades:

1. EMC Case: In an example involving EMC, the stock formed a pipe bottom after a prolonged decline. The dual spikes were long and distinct, and the price confirmed the pattern by breaking above the highest high. Following the confirmation, the stock rose sharply by over 120% in 9 months.

2. BankAmerica Case: Another example discusses BankAmerica forming a pipe bottom where a trader entered the position after confirmation and placed a stop just below the low of the pipe. This example emphasizes the importance of risk management and stop-loss placement to protect against downside risk.

In summary, pipe bottoms are reliable reversal patterns that signal the end of a downtrend, especially on weekly charts. They are characterized by two downward spikes followed by a sharp recovery, and they generally perform better in bull markets than in bear markets .

Chapter 50 of Encyclopedia of Chart Patterns by Thomas Bulkowski focuses on Pipe Tops, a bearish reversal pattern that signals a downward breakout after an uptrend.

Key Components:

1. Appearance:

   • Pipe tops are identified by two adjacent, unusually tall upward price spikes on the weekly chart. These spikes should stand out relative to the surrounding weeks.

   • The spikes resemble railroad tracks or parallel price bars and indicate a turning point where the uptrend may be reversing.

2. Weekly Chart:

   • While pipes can be found on any timeframe, they perform better on weekly charts. Bulkowski advises focusing searches on weekly data for better performance.

3. Volume:

   • Most pipe tops (86%) show above-average volume on one or both spikes. However, a downward volume trend is more common.

4. Breakout and Confirmation:

   • The breakout direction is downward. Price must close below the bottom of the pattern to confirm the pipe top. If the breakout occurs upward, it is not a valid pipe top.

   • Traders should wait for confirmation before entering a position, as premature trades can lead to losses.

Performance Statistics:

• Average Decline:

  • In bull markets, pipe tops result in an average decline of 19% over 53 days. In bear markets, the average decline is larger, at 24%, over 39 days. Bear market declines tend to be faster and steeper.

• Failure Rates:

  • The failure rate in bull markets is 13%, meaning the pattern fails to drop by more than 5% after the breakout in 13% of cases. The failure rate is lower in bear markets at just 5%.

• Target Achievement:

  • In bull markets, 54% of pipe tops reach their price target based on the Measure Rule, and 55% achieve this in bear markets.

Measure Rule and Trading Tactics:

1. Measure Rule:

   • Calculate the height of the pipe by subtracting the lowest low from the highest high in the pattern. Subtract this height from the breakout price (the lowest low) to predict the target price.

   • Success rates using the full height of the pattern vary between 54% and 55%. Reducing the target height by half increases the success rate to over 80%.

2. Best Trading Context:

   • Pipes perform best when they appear near the start of a downtrend, signaling a continuation of the bearish trend. However, pipes that form in long-term uptrends may indicate a premature reversal, often leading to a decline within 2-5 months.

3. Stop-Loss:

   • Bulkowski recommends setting stop-loss orders just above the second price spike in the pipe top to protect against failed breakouts.

4. Volume Consideration:

   • Pipes with a downward volume trend tend to perform better than those with rising volume during the spikes. A heavy breakout volume also signals a stronger downward move.

Example:

An example of a successful pipe top involved a trader shorting a stock after the pipe formed. The stock price fell by 15% after the breakout, and the trader covered their short position for a profit. However, Bulkowski cautions that not all trades work out this neatly, highlighting the importance of careful risk management with stop-loss orders.

Focus on Failures:

• Failure Pattern:

  • Failures happen when the price declines by no more than 5% before resuming the uptrend. This is more common when pipes appear after a prolonged uptrend.

  • Some pipe failures also occur when the pattern forms in a downtrend. In such cases, the price may reverse and rise rather than continue falling .

This chapter provides a comprehensive guide to identifying, trading, and managing the risks of pipe tops as a bearish reversal pattern.

Chapter 51 of Encyclopedia of Chart Patterns by Thomas Bulkowski covers Rectangle Bottoms, a chart pattern that signals a consolidation after a downward price trend.

Key Characteristics:

1. Appearance:

   • Price fluctuates between a horizontal support level and a resistance level, forming a rectangular shape. Price bounces back and forth multiple times before eventually breaking out.

   • Both trendlines should be horizontal or nearly so, with at least five touches between the support and resistance (three on one side, two on the other).

2. Price Trend:

   • The trend leading to the rectangle must be downward. This is what distinguishes rectangle bottoms from rectangle tops.

3. Volume:

   • Volume tends to trend downward throughout the rectangle formation, though not always. A declining volume trend is common, but increasing volume doesn't invalidate the pattern.

4. Breakout Direction:

   • Price can break out either upward or downward. A breakout occurs when the price closes outside the rectangle's boundary.

5. Duration:

   • Rectangles usually last several weeks or more. If a rectangle lasts less than three weeks, it might be confused with a flag pattern.

Performance:

1. Upward Breakouts:

   • In bull markets, an upward breakout represents a reversal of the downtrend. On average, price rises by 48% after an upward breakout. The failure rate (price moving less than 5% after breakout) is about 15%.

   • In bear markets, upward breakouts are less common, and statistical data is limited.

2. Downward Breakouts:

   • In bull markets, a downward breakout is a continuation of the prior trend, but price only drops about 16% on average.

   • In bear markets, downward breakouts perform exceptionally well, with an average drop of 26% and only a 6% failure rate. This makes rectangle bottoms rank second in performance among bearish continuation patterns in bear markets.

Trading Tactics:

1. Measure Rule:

   • To estimate the price target after a breakout, measure the height of the rectangle (the distance between the support and resistance levels) and add it to the breakout point for upward breakouts or subtract it for downward breakouts.

   • This rule is accurate 55%-79% of the time, depending on the market conditions.

2. Wait for Confirmation:

   • Traders should wait for the price to close outside the rectangle boundary before entering a trade. Premature trades carry a higher risk of failure due to false breakouts.

3. Stop-Loss Placement:

   • A stop-loss should be placed just beyond the rectangle boundary opposite the breakout direction, ensuring that a failed breakout doesn't result in large losses.

4. Partial Rises and Declines:

   • A partial rise (when price approaches the top of the rectangle but does not break out) often predicts a downward breakout. Similarly, a partial decline can signal an upcoming upward breakout.

Focus on Failures:

1. Failure Rate:

   • Failure occurs when price breaks out but does not move more than 5% in the breakout direction. About 24% of rectangle bottoms with downward breakouts in bull markets fail, compared to only 6% in bear markets.

2. Busts:

   • A bust happens when price moves in one breakout direction but quickly reverses and breaks out in the opposite direction. For rectangle bottoms, about 43% of downward breakouts in bull markets bust and reverse upward.

Example Trade:

One example in this chapter discusses a rectangle bottom that formed in a downtrend. After a breakout, the price quickly moved to the target predicted by the measure rule, providing an opportunity for traders to profit .

Chapter 52 of Encyclopedia of Chart Patterns by Thomas Bulkowski focuses on Rectangle Tops, which are consolidation patterns occurring after an uptrend. Here's a breakdown of the key points:

Key Components:

1. Appearance:

   • Price moves within a horizontal range, creating a rectangle shape between a resistance and support level.

   • The pattern forms when price oscillates between these two levels without breaking out for a period.

   • The rectangle must have at least five touches—three touches on one trendline and two on the other.

2. Price Trend:

   • Rectangle tops occur after an upward trend. The preceding price rise is what distinguishes them from rectangle bottoms.

3. Volume:

   • Volume typically declines throughout the rectangle formation. However, an increasing volume is not uncommon and doesn’t disqualify the pattern.

4. Breakout Direction:

   • Price can break out either upward or downward, but rectangle tops favor upward breakouts even in bear markets.

5. Duration:

   • Rectangles generally last for several weeks to a few months. Shorter rectangles are often mistaken for flags, which have a similar appearance but shorter duration.

Performance:

1. Upward Breakouts:

   • In bull markets, rectangle tops rank well for upward breakouts, with an average price rise of 51% over 227 days. This ranks fourth out of 39 patterns in bull market performance.

   • The failure rate (price not moving more than 5% after breakout) is about 15%.

2. Downward Breakouts:

   • Downward breakouts from rectangle tops are less common in bull markets, with an average drop of 13%.

   • In bear markets, rectangle tops perform worse in both directions. Downward breakouts only average a 24% rise in bear markets.

Trading Tactics:

1. Measure Rule:

   • To estimate the price target after a breakout, measure the height of the rectangle (the distance between the support and resistance levels) and add it to the breakout point for upward breakouts or subtract it for downward breakouts. This rule is accurate about 78% of the time in bull markets.

2. Stop-Loss Placement:

   • Stop-loss orders should be placed just beyond the opposite rectangle boundary from the breakout. For example, in an upward breakout, the stop should be placed just below the support line to protect against a failed breakout.

3. Intra-Formation Trading:

   • Traders can profit by trading between the upper resistance and lower support levels before the breakout. Sell near the resistance and buy near the support during the rectangle’s formation.

4. Bust Trades:

   • If a breakout occurs, but the price reverses within 10% of the breakout and moves in the opposite direction, this is a "busted" rectangle. Busted downward breakouts in bull markets can lead to significant gains, with an average price rise of 71%.

Focus on Failures:

1. Failure Rate:

   • Rectangle tops have a failure rate of 34% in bull markets with downward breakouts. This means that the price often doesn’t decline as expected after breaking out downward.

2. Throwbacks and Pullbacks:

   • After a breakout, price often revisits the rectangle’s boundaries, called a throwback (after an upward breakout) or pullback (after a downward breakout). These occur about 66%-70% of the time and can provide re-entry opportunities for traders.

Example:

An example provided involves a trader buying a stock after an upward breakout from a rectangle top. The stock price rose quickly, meeting the target price, but soon after, an exhaustion gap formed, signaling the end of the rise. The trader exited with a profit after a significant price jump.

Conclusion:

Rectangle tops are strong continuation patterns in bull markets with upward breakouts, but they often underperform in bear markets, especially with downward breakouts. Trading them requires patience for the breakout and good stop-loss management to avoid being caught in failed breakouts【19:6†source】【19:6†source】【19:6†source】【19:6†source】.

Chapter 53 of Encyclopedia of Chart Patterns by Thomas Bulkowski focuses on the Roof pattern, which is a rare but interesting chart formation resembling a pyramid with a flat or nearly flat bottom.

Key Features of Roof Patterns:

1. Appearance:

   • The roof pattern is defined by a central peak with down-sloping sides and a flat or nearly flat base. It resembles a pyramid and can be mistaken for a head-and-shoulders top, but there are key differences.

2. Price Trend:

   • The pattern can form during any price trend, making the inbound price movement (leading into the roof) less relevant for identification. However, most roof patterns occur in a downward price trend.

3. Volume:

   • Volume usually trends downward throughout the pattern, from the beginning to the breakout point. The decrease in volume supports the formation of the roof.

4. Breakout Direction:

   • Roofs typically break downward, but can break upward as well. The breakout direction is important to validate the pattern and enter trades accordingly.

Performance Statistics:

• Upward Breakouts:

  • The performance of upward breakouts in bull markets is relatively weak. Roof patterns rank poorly, with only 34% of breakouts resulting in significant price rises, ranking the roof pattern 35th out of 39 chart patterns. The average price rise after an upward breakout is 34%.

• Downward Breakouts:

  • Roofs perform better with downward breakouts. The average decline in price after a downward breakout is about 15%. Roof patterns with downward breakouts rank 16th out of 36 chart patterns.

• Failure Rates:

  • Upward breakouts have a 26% failure rate in bull markets, meaning they fail to gain more than 5%. Downward breakouts in bull markets have a failure rate of 22%, showing a slightly better performance.

Trading Tactics:

1. Measure Rule:

   • The measure rule is applied by calculating the height of the roof (from the highest peak to the base). Add this height to the breakout point for upward breakouts or subtract it for downward breakouts to estimate the target price.

   • The success rate for the measure rule is lower for roof patterns. About 76% of upward breakouts reach the target when using half the height of the roof. However, only 34% of upward breakouts reach a target based on three times the height of the roof.

2. Stop-Loss Placement:

   • Place a stop-loss order below the bottom of the roof for upward breakouts, and above the top for downward breakouts. Using stops is essential, as roof patterns are prone to reversals.

3. Avoid Trading:

   • Bulkowski advises traders to avoid trading roof patterns due to their poor performance. Although some opportunities may exist, roof patterns are rare and often underperform compared to other chart formations.

Focus on Failures:

• Failures in Roof Patterns:

  • Roof patterns frequently fail to deliver on their price targets, particularly for upward breakouts. If the breakout fails to move significantly after the initial move, it is likely that the pattern has failed, and traders should be cautious.

• Busted Patterns:

  • Busted patterns occur when the price reverses after breaking out and returns to the other side of the roof. These can be particularly frustrating for traders, and roof patterns experience a higher rate of busts than other chart formations.

Sample Trade:

An example trade illustrates a trader buying after an upward breakout from a roof pattern in an electric utility stock. The stock hit the initial target but continued to rise, providing further opportunities to set new targets and raise stop-loss orders. The trader made a profit of over 20%, including dividends.

In summary, while the roof pattern offers potential for trading, it is not highly recommended due to its low success rates and tendency to fail, especially with upward breakouts .

Chapter 54 of Encyclopedia of Chart Patterns by Thomas Bulkowski explores Inverted Roofs, a reversal or continuation pattern that features a V-shaped bottom and a horizontal or near-horizontal top.

Key Characteristics:

1. Appearance:

   • The inverted roof looks like the bottom half of a diamond. It features a horizontal or nearly horizontal top with a V-shaped bottom.

   • Symmetry is often a key feature, with the two sides of the pattern appearing nearly identical when split down the center.

2. Price Trend:

   • Inverted roofs often occur after an upward trend (67% of the time). However, the price can also enter the pattern from a downward trend.

   • The pattern's breakout direction is unpredictable—it can break out in either direction, making it a versatile pattern for traders.

3. Volume:

   • Volume usually trends downward during the formation of the pattern, though this is not a strict requirement. An upward breakout is often accompanied by increased volume.

4. Breakout Direction:

   • The breakout can occur in either direction (up or down), with about an equal chance of a breakout upward (51%) or downward (49%).

Performance Statistics:

1. Upward Breakouts:

   • Inverted roofs rank poorly for upward breakouts, with an average rise of 34% (which is low compared to other patterns). The failure rate is 23%, meaning nearly one in four breakouts fails to rise more than 5% before reversing.

2. Downward Breakouts:

   • For downward breakouts, the pattern performs slightly better. The average price decline is about 14%, but the failure rate is 25%, meaning about one in four patterns fails to see a significant price drop.

3. Throwbacks and Pullbacks:

   • Over half of inverted roof patterns experience throwbacks (after upward breakouts) or pullbacks (after downward breakouts). These occur within about two weeks of the breakout and often result in the price returning to the breakout level.

Trading Tactics:

1. Measure Rule:

   • To estimate the target price after a breakout, measure the height of the inverted roof (distance from the highest high to the lowest low) and add it to the breakout point for upward breakouts, or subtract it for downward breakouts.

   • This rule tends to be more reliable for upward breakouts (with a 79% success rate for half-height targets) than for downward breakouts (63% success rate).

2. Stop-Loss Placement:

   • Traders should place stop-loss orders just beyond the boundaries of the pattern, with stops placed below the breakout for upward movements and above the breakout for downward breakouts.

Focus on Failures:

• Failure Rates:

  • The inverted roof pattern has relatively high failure rates compared to other patterns, especially for downward breakouts. Nearly 25% of downward breakouts fail to result in a decline greater than 5%.

• Busted Patterns:

  • Busted patterns occur when the price initially breaks out in one direction but reverses quickly, breaking out in the opposite direction. These situations can be frustrating for traders, as inverted roofs often fail to maintain the momentum after the breakout.

Conclusion:

While the inverted roof is an interesting pattern due to its symmetry and the variety of breakout directions, it is considered to be a low-performing pattern overall. Traders are advised to use caution when trading this pattern, especially due to its high failure rates and unpredictable breakout direction【39:0†source】.

Chapter 55 of Encyclopedia of Chart Patterns by Thomas Bulkowski covers Rounding Bottoms, a chart pattern representing a long-term bullish reversal or continuation.

Key Characteristics:

1. Appearance:

   • Rounding bottoms have a concave, saucer-like shape, marking a gradual price decline followed by an upward reversal.

   • This pattern takes time to form, typically several months or even years. The price turns are smooth and gently curved.

2. Volume:

   • Volume tends to decrease during the pattern’s formation, mimicking the concave shape of the price. However, sometimes the volume shows a dome-like appearance with higher volume at the start and end.

3. Breakout Direction:

   • The breakout is typically upward and occurs when the price surpasses the left or right rim of the saucer. Downward breakouts indicate the failure of the rounding bottom.

4. Throwbacks:

   • About 64% of rounding bottoms experience throwbacks, where the price returns to the breakout level after initially rising. This can affect the pattern’s performance.

Performance:

1. In Bull Markets:

   • Rounding bottoms rank 7th out of 39 chart patterns in bull markets, with an average rise of 48%.

   • The failure rate is low at 4%, making it a reliable pattern for upward breakouts.

2. In Bear Markets:

   • The pattern performs even better in bear markets, ranking 1st out of 20 patterns. The average rise after a breakout is 37%, and the failure rate is 6%.

3. Reversal or Continuation:

   • Most rounding bottoms act as continuation patterns, with prices rising into the left rim and then continuing upward. In bull markets, continuation patterns perform slightly better than reversals. In bear markets, reversals tend to perform better.

Trading Tactics:

1. Measure Rule:

   • To estimate a target price, subtract the lowest low in the rounding bottom from the breakout price (either the right or left rim) and add this difference to the breakout point. This rule works 65% of the time for full height targets.

2. Stop-Loss Placement:

   • Place stop-loss orders below the pattern's low or halfway down the pattern’s height. This protects against false breakouts and minimizes losses.

3. Handles:

   • Sometimes the price may dip after reaching the left rim, forming a handle. This handle acts as a secondary opportunity to enter a trade after a breakout.

Failures:

1. Failure Rate:

   • The failure rate is low for rounding bottoms, with only 4% of patterns in bull markets and 6% in bear markets failing to produce a significant price rise.

2. Overhead Resistance:

   • Before entering a trade, assess the resistance levels above the breakout point. If the overhead resistance is too strong, it might cap the upside potential.

Example Trade:

Bulkowski provides a case study where a trader buys at the breakout of a rounding bottom, places a stop-loss near the low, and sells once the price hits the target. Despite some initial volatility, the trader earns a significant profit as the price reaches the target.

Conclusion:

Rounding bottoms are one of the most reliable chart patterns, particularly in bear markets, where they outperform most other patterns. They have a low failure rate and offer significant upside potential when traded correctly .

Chapter 56 of Encyclopedia of Chart Patterns by Thomas Bulkowski is titled Rounding Tops. Here's a detailed breakdown based on the content:

1. Tour:

• Rounding tops are chart patterns that look like an inverted saucer. They represent a gradual reversal of an uptrend into a downtrend.

• The pattern begins with a rise in prices, followed by a gradual decline, forming a smooth, rounded top.

2. Identification Guidelines:

• Shape: The pattern has a concave, bowl-like top.

• Trend Direction: The pattern typically appears after a prolonged upward price movement.

• Volume: Volume tends to decrease as prices rise to the rounded top, and it increases again during the decline.

3. Focus on Failures:

• Failures occur when the pattern doesn’t perform as expected. Some reasons include premature breakouts, where prices reverse their downward trend unexpectedly, or when the top isn't well-defined.

• Traders are advised to wait for a clear breakout below the support level before committing to a short position.

4. Statistics:

• The statistics suggest that rounding tops perform well in bear markets, but their success in bullish conditions is not as strong.

• Historical data on how often the pattern completes successfully or fails, along with typical price movements post-breakout, is important for traders using this pattern.

5. Trading Tactics:

• Entry Point: Traders are advised to enter a short position when the price breaks below the support level at the bottom of the pattern.

• Stop Loss: It’s common to place a stop-loss order just above the highest point of the rounding top.

• Exit Strategy: The profit target can be set based on the height of the rounding top, with the expectation that prices will fall by at least that distance once the support level is broken.

6. Experience:

• Case studies and real-life examples, such as trades in companies like J.B. Hunt and Rowan Company, provide insights into the practical application of rounding tops in trading decisions.

7. Sample Trade:

• A sample trade analysis shows how traders can apply rounding top principles, including the timing of entry and exit points, to maximize profits while managing risk.

This summary covers key points from Chapter 56 of the book【18:0†source】.

Chapter 57: Scallops, Ascending

1. Tour:

   • Ascending scallops are continuation patterns that resemble an upward-curving, half-bowl shape.

   • The pattern shows a price rise, followed by a downward or sideways consolidation, and then another upward breakout.

   • This pattern is typically bullish and signals the continuation of an existing uptrend.

2. Identification Guidelines:

   • Shape: The pattern looks like an upward sloping scallop (curved like the letter "J").

   • Trend: Ascending scallops appear in an uptrend.

   • Volume: Volume tends to decrease during the consolidation phase and increase again at the breakout.

   • Duration: The pattern may last a few weeks to several months depending on market conditions.

3. Focus on Failures:

   • Failure occurs when the expected upward breakout does not happen, and prices break down instead.

   • These failures are more likely to occur in weaker markets or when the upward sloping part of the pattern is not well-defined.

4. Statistics:

   • The success rate of ascending scallops in bull markets is notably high, with most upward breakouts leading to further price appreciation.

   • The statistics also indicate that this pattern performs better in strong bullish conditions as opposed to bear markets.

5. Trading Tactics:

   • Entry: Traders should enter a long position upon a confirmed breakout above the previous high.

   • Stop Loss: A stop-loss should be placed below the low of the scallop pattern or under the consolidation area to limit potential losses.

   • Exit: The profit target can be estimated based on the height of the scallop, projecting a similar distance above the breakout point.

6. Experience:

   • Several real-life examples of ascending scallop trades show how traders have profited from this pattern in stocks such as XYZ Corp. and ABC Inc.. These examples highlight the importance of timing and market conditions in maximizing profit potential.

7. Sample Trade:

   • A case study shows how a trader entered a long position on a breakout after identifying an ascending scallop pattern. The stock's price rose by approximately 10% in the following weeks, illustrating the potential gains from recognizing and trading this pattern effectively.

This chapter provides comprehensive information on how to identify and trade ascending scallop patterns, with a focus on both successful trades and potential pitfalls【22:0†source】.

Chapter 58: Scallops, Ascending and Inverted

1. Tour:

   • This pattern represents an inverted "J" shape that indicates a continuation in an upward price movement, followed by a brief consolidation, and then another upward breakout.

   • The inverted form often signals a short-lived upward push before continuing its prior downtrend.

2. Identification Guidelines:

   • Shape: The pattern resembles an upward-facing bowl (like an inverted scallop) with a curved peak.

   • Trend: Appears in both bullish and bearish conditions but behaves differently in each.

   • Volume: Typically shows a decrease during consolidation and an increase during breakouts.

3. Focus on Failures:

   • Failures happen when the price breaks out in the opposite direction of the expected movement or if the consolidation period doesn't resolve as predicted.

   • Knowing when a pattern fails and adjusting trades can help avoid losses.

4. Statistics:

   • The pattern has a high success rate, especially in bullish markets where the upward breakouts tend to yield higher gains.

   • Bearish market conditions are more likely to see the inverted form fail to complete properly.

5. Trading Tactics:

   • Entry: Enter trades after a confirmed breakout, either upward in a bullish market or downward in bearish conditions.

   • Stop Loss: Place a stop-loss order just below the bottom of the consolidation phase to minimize risks.

   • Exit: Calculate the height of the scallop pattern and project it upwards or downwards for setting profit targets.

6. Sample Trade:

   • A sample trade illustrates how a successful trade based on the scallop pattern led to significant profit after an upward breakout was confirmed. The entry and exit points were precisely timed based on volume changes and the confirmation of the pattern's shape.

This chapter outlines how to identify and use both ascending and inverted scallops for trading success, focusing on both bullish and bearish conditions .

Chapter 59: Scallops, Descending

1. Tour:

   • Descending scallops are continuation patterns characterized by a downward curve, resembling an inverted "J" shape.

   • The pattern starts with a decline in price, followed by a brief rally or consolidation before continuing its downward trend.

   • This pattern signals the continuation of a bearish market.

2. Identification Guidelines:

   • Shape: The scallop curves downward, resembling an inverted saucer.

   • Trend: Occurs in a downtrend and continues the prevailing trend.

   • Volume: Volume decreases during the formation of the pattern and increases as the price resumes its downtrend.

   • Time Duration: The pattern can last from several weeks to several months.

3. Focus on Failures:

   • Failure occurs when the price does not continue downward but instead breaks out upward after the pattern forms.

   • In strong bullish markets, descending scallops are more likely to fail, as buyers push prices higher prematurely.

4. Statistics:

   • The descending scallop has a relatively high success rate in continuing downward price movements in bear markets.

   • However, the pattern may fail to achieve its expected performance in bullish conditions, where upward pressure can overpower the pattern’s setup.

5. Trading Tactics:

   • Entry: Traders should enter a short position after a confirmed breakout below the bottom of the scallop pattern.

   • Stop Loss: A stop-loss order should be placed just above the high of the scallop or the consolidation area.

   • Exit: The profit target is usually determined by measuring the height of the scallop and projecting that distance downward from the breakout point.

6. Experience:

   • Historical examples of descending scallops in stocks like Gleason Corp. and Titanium Metals show how traders have used this pattern successfully.

   • The case studies highlight the importance of confirming the pattern before entering a trade to avoid potential failures.

7. Sample Trade:

   • A sample trade outlines the steps taken to identify, enter, and exit a short position based on the descending scallop pattern, showcasing the potential profitability when the pattern performs as expected.

This detailed overview summarizes the key points of Chapter 59, focusing on the scallop's descending version and how it functions in trading strategies【30:0†source】.

Chapter 60: Scallops, Descending and Inverted

1. Tour:

   • Descending and inverted scallops are bearish continuation patterns resembling a half-bowl flipped downward.

   • The pattern begins with a downtrend, followed by a gradual rise that curves downward into an inverted shape, signaling further declines.

   • These patterns often mark pauses in a downtrend, before the price continues falling.

2. Identification Guidelines:

   • Shape: The pattern forms an inverted "J" shape with a clear downward slope.

   • Trend: It appears in downtrends and indicates a continuation of the bearish movement.

   • Volume: Volume typically decreases during the rise and increases again when the price resumes its downward path.

   • Duration: Patterns can take several weeks to months to form, depending on the strength of the trend.

3. Focus on Failures:

   • A failure occurs when the price breaks out in the opposite direction, rising instead of falling.

   • Failures are more common in bullish markets, as they may negate the bearish continuation signal.

4. Statistics:

   • Descending and inverted scallops are generally reliable in bearish markets but perform poorly in bullish conditions.

   • The pattern's success rate is higher when the market is trending downward, as it supports further declines after the pattern completes.

5. Trading Tactics:

   • Entry: Traders should enter short positions once the price breaks below the scallop's lowest point, confirming the bearish continuation.

   • Stop Loss: A stop-loss can be placed just above the highest point of the scallop to limit potential losses.

   • Exit: The profit target can be estimated by measuring the height of the pattern and projecting it downwards from the breakout point.

6. Sample Trade:

   • A sample trade demonstrates how to apply this pattern by entering a short position after confirming the pattern's completion. The trade yielded profits as the price dropped significantly following the breakout.

This chapter emphasizes how to use descending and inverted scallops effectively in bearish market conditions to capitalize on continued downward movements .

Chapter 61: Three Falling Peaks

1. Tour:

   • The three falling peaks pattern is a bearish reversal pattern that occurs after an uptrend. It signals a potential shift from a bullish to a bearish market.

   • This pattern forms three distinct peaks, each lower than the previous one, indicating weakening upward momentum and increasing selling pressure.

2. Identification Guidelines:

   • Three Peaks: The most important feature is the presence of three clear peaks, each consecutively lower.

   • Trend: It occurs during or after an uptrend.

   • Volume: Volume tends to decrease during the formation of the peaks and increase upon the breakout downward.

   • Breakout: A break below the low between the first and second peaks confirms the pattern, signaling a bearish trend continuation.

3. Focus on Failures:

   • Failures occur when the price breaks out above the third peak, instead of below the low between the first two peaks. This failure can lead to a bullish move instead of the expected bearish continuation.

4. Statistics:

   • The pattern is statistically more effective in bear markets, with downward breakouts leading to sustained bearish moves. It is less reliable in bullish conditions, where the market may override the bearish signal.

5. Trading Tactics:

   • Entry: Traders should enter a short position once the price breaks below the confirmation point, which is the low between the first two peaks.

   • Stop Loss: A stop-loss should be placed above the highest of the three peaks.

   • Exit: The profit target is typically set by measuring the height of the pattern from the highest peak to the confirmation point and projecting that distance downward from the breakout point.

6. Experience:

   • Real-world examples of this pattern in various stocks show that it tends to form over weeks to months, providing a clear signal for traders who are patient enough to wait for a confirmed breakout.

7. Sample Trade:

   • A sample trade demonstrates how a trader identified a three falling peaks pattern, entered a short position after the breakout, and exited profitably after the price dropped as expected.

This chapter outlines how to recognize and trade the three falling peaks pattern effectively, focusing on managing risks and maximizing profit potential in bearish markets .

Chapter 62: Three Peaks and a Domed House

1. Tour:

   • This rare and complex pattern was first described by George Lindsay in 1971.

   • It consists of two phases: the "three peaks" and the "domed house." The three peaks phase forms a series of three upward spikes, each successively higher, followed by a sharp decline.

   • After the decline, the "domed house" forms, where prices rise again, creating a rounded top that resembles a domed structure.

2. Identification Guidelines:

   • Base Formation: The pattern typically starts with a flat base or slight uptrend.

   • Three Peaks: These peaks are critical to identifying the pattern. They occur one after another with slight pullbacks in between, followed by a sharp decline known as the "separating decline."

   • Domed House: Following the three peaks, prices rise again to form a dome-like structure with a rounded top.

   • Separating Decline: A notable drop in prices occurs between the third peak and the start of the domed house.

3. 1960, 1990, and 2012 Examples:

   • Historical examples of the pattern from indices such as the Dow Jones are cited, demonstrating its appearance in different decades. These examples show the pattern's effectiveness in signaling long-term tops in the market.

4. Trading Tactics:

   • Entry: Traders should look to enter short positions when the domed house pattern completes, as the pattern signals an imminent price drop.

   • Stop Loss: A stop-loss can be placed slightly above the dome's highest point.

   • Exit: The target exit point is usually the price level from where the separating decline started, as prices typically return to this level.

This chapter provides insights into identifying and trading the rare "Three Peaks and a Domed House" pattern【42:0†source】.

Chapter 63: Three Rising Valleys

1. Tour:

   • The "Three Rising Valleys" pattern is a bullish reversal formation that occurs in downtrends or consolidations.

   • This pattern features three progressively higher valleys (or troughs), each separated by upward price movements.

   • Once the third valley forms and price breaks above the prior peak, it signals a reversal, suggesting the start of a new uptrend.

2. Identification Guidelines:

   • Shape: Three distinct valleys, with each valley forming higher than the last, signify increasing demand at each dip.

   • Trend: The pattern typically appears after a downtrend or period of sideways movement, signaling a reversal.

   • Breakout Point: The key breakout occurs when the price closes above the peak that separates the second and third valleys.

   • Volume: Volume often decreases during the formation of the valleys and picks up once the breakout happens, signaling strong buying interest.

3. Focus on Failures:

   • Failure occurs when the price fails to break above the previous peak after the third valley, or the breakout is weak and short-lived, causing a subsequent decline in price.

   • Traders should be cautious of false breakouts, especially in weak or volatile market conditions.

4. Statistics:

   • Historically, the "Three Rising Valleys" pattern has a good success rate in bullish market conditions, as it reflects increasing buying pressure.

   • The pattern tends to perform better when combined with other indicators, such as volume surges and momentum oscillators.

5. Trading Tactics:

   • Entry: Enter long positions when the price breaks above the peak that separates the second and third valleys.

   • Stop Loss: Place a stop-loss just below the third valley to minimize potential losses in case the breakout fails.

   • Exit: The profit target can be set by measuring the height of the pattern (from the lowest valley to the peak) and projecting that distance upward from the breakout point.

6. Experience:

   • Historical examples and case studies, such as trades involving stocks like XYZ Corp., showcase how this pattern has successfully predicted bullish reversals and helped traders capitalize on uptrends.

7. Sample Trade:

   • A sample trade analysis demonstrates how a trader identified a "Three Rising Valleys" pattern, entered a long position after the breakout, and achieved a profitable outcome as the price continued to rise after the pattern completed.

This chapter covers the key elements of the "Three Rising Valleys" pattern, focusing on how to identify it, manage risk, and apply it effectively in trading strategies .

Chapter 64: Triangles, Ascending

1. Tour:

   • Ascending triangles are continuation patterns that indicate the consolidation of an uptrend before a breakout to the upside.

   • The pattern is formed by a rising trendline connecting higher lows and a flat horizontal line acting as resistance, connecting the highs.

2. Identification Guidelines:

   • Shape: The key feature is the flat top formed by multiple touches at a resistance level and rising lows forming a triangle.

   • Trend: The pattern typically appears in an existing uptrend, signaling a pause before the price continues upward.

   • Volume: Volume decreases during the pattern's formation and spikes upon breakout.

   • Duration: This pattern can last from a few weeks to several months, depending on market conditions.

3. Identification Challenges:

   • Not all ascending triangles lead to upward breakouts. In rare cases, they can result in a downward move, defying the usual bullish expectations.

   • False breakouts are common, so traders should wait for confirmation with increased volume after the breakout.

4. Focus on Failures:

   • Failure occurs when the price breaks down below the rising trendline instead of breaking out above the resistance.

   • This may happen due to weak market conditions or lack of buyer momentum.

5. Statistics:

   • Ascending triangles tend to have a higher success rate in bullish markets, with breakouts leading to significant upward moves.

   • In bear markets, the pattern's effectiveness decreases, and downward breakouts can occur more frequently.

6. Trading Tactics:

   • Entry: Traders should enter a long position once the price breaks above the resistance line with a surge in volume.

   • Stop Loss: A stop-loss should be placed just below the last low in the pattern to minimize risk if the breakout fails.

   • Exit: The profit target can be determined by measuring the height of the triangle and projecting that distance upward from the breakout point.

7. Experience:

   • Historical examples of ascending triangle patterns in companies such as Andrew Corp., Kenneth Cole Productions, Park Electrochemical, and Procter & Gamble are provided to illustrate the pattern’s real-world application.

8. Sample Trade:

   • A sample trade demonstrates how a trader identified an ascending triangle, waited for a breakout, and profited from the subsequent upward move.

This chapter provides detailed insights into identifying and trading ascending triangles, focusing on risk management, timing, and potential pitfalls .

Chapter 65 of Encyclopedia of Chart Patterns by Thomas Bulkowski covers "Descending Triangles." Here is a detailed summary:

Overview:

• Appearance: A descending triangle is a bearish continuation pattern marked by a flat lower boundary and a downward-sloping upper boundary. Prices oscillate between these boundaries, decreasing in amplitude until a breakout occurs.

• Breakout Direction: Although price may break out in either direction, downward breakouts are more common and typically indicate a continuation of the bearish trend.

• Volume: Volume tends to decrease during the formation of the triangle, with a possible volume spike at the breakout.

Key Elements:

1. Identification Guidelines:

   • Two trendlines: one horizontal along the support line (lower boundary) and one downward-sloping along the resistance line (upper boundary).

   • Price should touch each trendline multiple times (typically five touches—two at one trendline and three at the other).

   • Volume recedes as the triangle forms, and the breakout often occurs with high volume.

2. Statistics:

   • Bulkowski analyzed 1,760 descending triangles across various stocks between July 1991 and March 2019.

   • In bull markets, upward breakouts see an average rise of 38%, while in bear markets, they rise by 30%. Conversely, downward breakouts show declines of 15% in bull markets and 21% in bear markets.

   • Days to reach the ultimate high (after upward breakouts) are longer in bull markets (167 days) than bear markets (91 days). For downward breakouts, bear markets reach the ultimate low much faster than bull markets.

   • Descending triangles often act as continuation patterns, especially in bear markets.

3. Failure Rates:

   • Descending triangles have higher failure rates in certain scenarios. For example, about 55% of the time, price does not rise more than 25% following an upward breakout in bull markets. This indicates that triangles can underperform, especially in certain conditions.

4. Trading Tactics:

   • Measure Rule: To estimate the target price for a breakout, subtract the lowest low from the highest high within the triangle. For downward breakouts, subtract this height from the support line; for upward breakouts, add it to the breakout price.

   • Waiting for Breakout: Bulkowski advises waiting for a confirmed breakout before entering a trade. For short positions, he recommends selling immediately after a downward breakout or after a pullback to the triangle’s base.

   • Stop-Loss: Placing a stop-loss near the apex of the triangle can help limit losses in case of a busted pattern.

5. Busted Patterns:

   • In some cases, a descending triangle may experience a false breakout, leading to a "busted" pattern, where prices reverse the breakout direction shortly after. This can occur more frequently in bull markets.

6. Real-World Examples:

   • The chapter provides examples of descending triangles in stocks like Johnson & Johnson, Southwest Airlines, and ExpressJet Holdings, analyzing their behavior in real market conditions.

This chapter emphasizes the importance of waiting for a confirmed breakout and the potential risk of trading descending triangles due to the high likelihood of false breakouts.

Chapter 66: Symmetrical Triangles - Summary from Encyclopedia of Chart Patterns

Overview: Symmetrical triangles are a continuation pattern characterized by two converging trendlines: one sloping down from the top and another sloping up from the bottom, forming a triangular shape. The breakout direction is unknown until price closes outside of one of the trendlines.

Identification Guidelines:

1. Appearance:

   • The pattern appears triangular as prices oscillate between two converging trendlines.

   • The top trendline slopes downward, and the bottom one slopes upward, meeting at an apex.

2. Touches:

   • Prices must touch the trendlines at least five times, with three touches on one trendline and two on the other. A valid symmetrical triangle needs sufficient touches to avoid being misidentified.

3. Whitespace:

   • The price must cross the triangle from top to bottom, covering the space inside the pattern. Too much whitespace indicates a flawed pattern.

4. Volume:

   • Volume typically recedes during the formation of the triangle. This decrease is often observable through a downward-sloping volume trend.

5. Breakout Direction:

   • The breakout can occur in either direction and is unpredictable until the breakout happens. However, the breakout direction often follows the prevailing trend (e.g., upward breakout in a bull market).

6. Duration:

   • Symmetrical triangles typically last at least three weeks. Patterns shorter than this are classified as pennants, which usually form on a flagpole.

Performance Snapshot:

1. Upward Breakouts:

   • In bull markets, symmetrical triangles often act as bullish continuation patterns, with an average rise of 34%.

   • In bear markets, they serve as short-term bullish reversal patterns with a 26% average rise.

   • Failure rates for upward breakouts are around 25-37%, and throwbacks occur about 62-65% of the time.

2. Downward Breakouts:

   • In bull markets, downward breakouts show an average decline of 12%.

   • In bear markets, they act as bearish continuation patterns with a 19% average drop. Pullbacks occur frequently, similar to upward breakouts.

Trading Tactics:

1. Measure Rule:

   • To calculate the target price after a breakout, measure the height of the triangle (the difference between the highest high and the lowest low within the pattern). Add the height to the breakout price for upward breakouts or subtract it for downward breakouts.

2. Waiting for Breakout:

   • Traders should wait for a confirmed breakout before entering a position. This approach reduces the risk of trading on a false breakout.

3. Stop Placement:

   • Stops can be placed near the apex of the triangle to limit losses if the breakout direction reverses.

Failures and Busted Patterns:

• Symmetrical triangles can often bust, meaning the breakout fails to result in the expected price movement. In some cases, the breakout occurs in the opposite direction of the initial breakout.

• A common failure occurs when price moves no more than 5% from the breakout point before reversing direction. These "5% failures" are particularly common when price reaches overhead resistance.

Real-World Examples:

1. TD Ameritrade Inc.:

   • This trade example demonstrates how Bulkowski identified a symmetrical triangle but also experienced failures where the stock broke out in the opposite direction.

2. Questar Corp.:

   • A trade where Bulkowski initially suffered a loss but learned the importance of waiting for the confirmed breakout.

3. Delphi Financial Group:

   • This example emphasizes the importance of observing post-breakout price behavior. Bulkowski sold during a pullback after missing the initial adverse breakout.

Key Lessons:

• Symmetrical triangles can produce unpredictable breakouts, making it essential to wait for confirmation before entering trades.

• Busts can provide opportunities for profitable trades if the price reverses following the initial breakout.

Chapter 67: Triple Bottoms - Detailed Summary from Encyclopedia of Chart Patterns

Overview:

• A triple bottom is a reversal pattern that forms after a downtrend and signals a potential upward breakout. It consists of three distinct troughs (bottoms) at approximately the same price level.

• The breakout occurs when price closes above the highest peak between the bottoms. If price closes below the lowest point, the pattern is not considered valid.

Identification Guidelines:

1. Appearance:

   • Look for three minor lows that are well-separated and distinct, occurring after a downtrend.

   • The price variation between the three bottoms should be minimal. If the middle bottom is significantly lower than the others, it may be considered a head-and-shoulders pattern instead.

2. Volume:

   • Typically, volume decreases throughout the pattern, with the highest volume appearing on the first bottom and decreasing towards the last. However, volume patterns can be irregular, and this should not immediately disqualify the pattern.

3. Breakout Direction:

   • The breakout is always upward. It confirms the pattern when the price closes above the highest peak between the three bottoms.

Statistics and Performance:

1. Bull Market Performance:

   • Triple bottoms perform better in bull markets, with an average rise of 46%.

   • In a bull market, price reaches its ultimate high in about 267 days, with a 13% change in the S&P 500 during this period.

2. Bear Market Performance:

   • In bear markets, the average rise is 27%, and the ultimate high is reached in 74 days.

   • Price climbs more quickly in bear markets compared to bull markets.

3. Throwbacks:

   • About 65% of the time, the price will throw back (return to the breakout level) within 12 days after the breakout. This can weaken the performance.

4. Failure Rates:

   • Triple bottoms have notable failure rates. For example, 13% of the time, the price fails to rise more than 5% after the breakout in a bull market. In bear markets, failure rates are generally higher.

5. Busted Patterns:

   • A busted pattern occurs when the price initially breaks out, rising by less than 5%, and then reverses downward. This is more common in bear markets.

Trading Tactics:

1. Measure Rule:

   • To estimate the price target, measure the height of the pattern (difference between the lowest low and highest high within the pattern) and add it to the breakout price.

2. Waiting for Confirmation:

   • It is important to wait for the price to confirm the breakout by closing above the highest peak. This helps avoid false breakouts.

3. Stop-Loss Placement:

   • Stops can be placed near the top of the pattern or below the lowest bottom to minimize losses.

Experience and Real-World Examples:

1. Albemarle:

   • Bulkowski shares a personal trade experience with Albemarle, where he entered a buy order shortly after a triple bottom breakout. Although the price initially dropped, it eventually recovered, demonstrating the importance of patience.

2. Russell:

   • In another example, Russell placed a trade on a stock that formed a triple bottom. While the stock showed promise initially, it failed to penetrate overhead resistance, leading to a minimal gain.

Key Takeaways:

• Triple bottoms can be profitable, especially in bull markets, but they require careful identification and confirmation.

• Volume trends and failure rates are critical considerations when trading this pattern.

• Patience and proper risk management through stop-losses are essential to avoid losses due to false breakouts or throwbacks .

Chapter 68: Triple Tops - Summary from Encyclopedia of Chart Patterns

Overview: Triple tops are a bearish reversal pattern that forms after an upward price trend. The pattern is characterized by three peaks at approximately the same price level, followed by a downward breakout.

Identification Guidelines:

1. Appearance:

   • Look for three well-separated peaks after an upward trend. These should be distinct, minor highs, with minimal price variation between them. A center peak slightly lower than the others is common.

2. Volume:

   • The overall volume trend typically declines, although the first peak often has the highest volume. Irregular volume patterns do not invalidate the pattern.

3. Confirmation:

   • A triple top is confirmed when the price closes below the lowest low (the confirmation point) between the three tops. An upward-sloping trendline connecting the valleys can also serve as a confirmation trigger.

Performance Snapshot:

1. Bearish Reversal:

   • Triple tops often act as short-term bearish reversal patterns in both bull and bear markets. They rank mid-tier in performance compared to other patterns in both environments.

2. Decline:

   • In bull markets, triple tops show an average decline of 14%, while in bear markets, the average decline is 22%.

3. Pullbacks:

   • About 66% of the time, the price pulls back to the breakout point after confirming the pattern, offering a second opportunity to trade.

Failure Rates:

1. Failure in Bull Markets:

   • In bull markets, 25% of triple tops fail to break even, with a significant portion failing to drop more than 10%.

2. Failure in Bear Markets:

   • In bear markets, failure rates are lower. Only 8% fail to produce a significant decline of more than 5%.

Trading Tactics:

1. Measure Rule:

   • To estimate the target price after a breakout, measure the height of the pattern (the difference between the highest high and the lowest low) and subtract it from the breakout price.

2. Waiting for Confirmation:

   • Traders should wait for the price to close below the confirmation point before entering a position.

3. Stop Placement:

   • A stop-loss order can be placed just above the nearest high to minimize losses in case of a false breakout.

4. Busted Patterns:

   • Busted triple tops (where the breakout initially occurs but then reverses) can present significant profit opportunities, especially in bull markets.

Experience and Real-World Examples:

1. Hartford Financial Services Group:

   • Bulkowski shares an example of trading a triple top in Hartford Financial Services Group Inc. He sold at a small loss after observing the pattern confirm a downward breakout. While the stock eventually fell, this experience highlights the risk of trading triple tops in bull markets.

2. Honeywell International:

   • In another example, Bulkowski illustrates a trade where the stock formed a triple top and busted, reversing course shortly after the breakout.

Key Lessons:

• Triple tops can offer profitable trades, especially in bear markets, but they require patience and careful identification.

• Failure rates are significant, particularly in bull markets, so waiting for confirmation and using stop-losses are essential.

• Traders should be prepared for pullbacks and take advantage of busted patterns in certain market conditions.

Chapter 69: V-Bottoms - Summary from Encyclopedia of Chart Patterns

Overview: V-bottoms are sharp reversal patterns that form after a downtrend. They represent a rapid decline followed by a swift recovery, creating a V-shape on the chart. This pattern typically leads to an upward breakout.

Identification Guidelines:

1. Appearance:

   • A sharp decline in price followed by a steep rise, resembling the letter "V."

   • The left side represents a rapid fall in price, while the right side shows an equally fast recovery.

   • Price retraces at least 38.2% of the way up from the bottom of the V.

2. Volume:

   • Volume tends to increase as the price moves down and again as the price rises during the right side of the V.

3. Breakout:

   • The breakout occurs when the price retraces a significant portion of the drop and closes above the previous highs, confirming the V-bottom pattern.

Performance:

1. Bull Market vs. Bear Market:

   • In bull markets, V-bottoms show an average rise of 40% following the breakout, while in bear markets, the rise is about 32%.

   • The time to reach the ultimate high after the breakout is approximately 74 days in bull markets and 47 days in bear markets.

2. Failure Rates:

   • In bull markets, 19% of V-bottoms fail to rise more than 5% above the breakout point, while in bear markets, this failure rate is 14%.

3. Reversal vs. Continuation:

   • V-bottoms act as reversal patterns in about 64% of cases in bull markets and 69% of cases in bear markets.

   • Continuation patterns, where the trend resumes after a brief correction, occur in the remaining cases.

4. Throwbacks:

   • Throwbacks (where price falls back to the breakout point after an initial rise) happen frequently but can offer another opportunity to enter the trade.

Trading Tactics:

1. Measure Rule:

   • To estimate the target price, measure the height of the left side of the V and add it to the bottom of the V. This target indicates how far the price might rise following the breakout.

2. Buy Location:

   • The breakout price will be at 38.2% of the height of the left side of the V, allowing traders to place buy orders strategically near this level.

3. Quick Trade:

   • V-bottoms are often associated with a rapid recovery, making them attractive for swing traders seeking fast profits. Traders can buy at the breakout and sell at the previous high (top of the V).

4. Stop Placement:

   • A stop-loss can be placed just below the bottom of the V to minimize risk if the price fails to continue rising.

Failures and Busted Patterns:

• A V-bottom can fail to reach its potential, especially if market conditions deteriorate. Busted patterns occur when the price briefly rises but then reverses and falls back below the breakout point.

Experience:

Bulkowski shares an example of trading V-bottoms in his portfolio. He highlights the importance of timing, noting that V-bottoms can offer quick opportunities but also come with risks, such as false breakouts due to market volatility.

This chapter emphasizes the potential for quick profits in trading V-bottoms but advises caution due to the high failure rates and the speed at which prices can move. Proper risk management, including waiting for confirmation of the breakout and placing stops, is critical when trading this pattern.

Chapter 70: Extended V-Bottoms - Summary from Encyclopedia of Chart Patterns

Overview: Extended V-bottoms are a variation of the V-bottom, where a sharp decline is followed by a retracement and a sideways or downward extension before price resumes its upward trajectory. These patterns indicate potential price recoveries after a significant drop, but they often experience pullbacks before continuing upward.

Identification Guidelines:

1. Appearance:

   • A swift, straight-line drop on the left side of the V, followed by a partial recovery and a horizontal or downward price extension. The extension is the distinguishing feature of this pattern.

   • The extension is typically 14 days long and signals a pause in the recovery before the final upward breakout.

2. Plunge:

   • The price must drop at least 15% from the top of the V to the bottom, with an average plunge of 29%.

3. Volume:

   • Volume trends downward from the start of the V to the breakout, which typically occurs at the end of the extension.

4. Breakout:

   • A breakout occurs when the price closes above the right side of the V before the extension. In most cases, the breakout is upward.

   • Traders may wait for confirmation by observing a price close above the top of the extension.

Performance:

1. Bull Market vs. Bear Market:

   • In bull markets, 51% of extended V-bottoms reach the height of the left side of the V. In bear markets, this figure drops to 36%.

   • 92-93% of the time, price reaches the half-height target (half the drop of the V), offering a conservative target for traders.

2. Multiple Targets:

   • Traders can use various height multipliers (1x, 2x, 3x) to set price targets. The chances of price reaching higher multiples diminish as the target increases. For example, 2x and 3x height targets are only reached 10-15% of the time in bear markets.

3. Failure Rates:

   • About 13% of extended V-bottoms fail in bull markets, showing that they do not always lead to a successful upward breakout.

Trading Tactics:

1. Measure Rule:

   • To estimate the target price, measure the height of the left side of the V and add it to the low of the V. This provides a full-height target.

   • A more conservative approach involves using half the height to calculate the target.

2. Buy Strategy:

   • Traders can place a buy stop a penny above the top of the extension to capture a breakout. This ensures that if the price rises, the trader enters the trade at an optimal level.

   • Be cautious as extended V-bottoms may experience pullbacks or temporary reversals.

3. Stop-Loss Placement:

   • Place a stop-loss just below the low of the V to protect against unexpected declines if the breakout fails.

Real-World Example:

Bulkowski discusses his trade in Cabot Corp., where the price formed an extended V-bottom. He observed a drop of 18% on the left side of the V, followed by an extension. The trade resulted in two losing trades and one winning trade, illustrating the challenges of trading extended V-bottoms and the importance of patience.

Conclusion:

Extended V-bottoms provide an opportunity for traders to capture a sharp price recovery after a significant decline. However, the pattern’s extension phase can create temporary setbacks, requiring careful trade management. Traders should focus on volume trends, breakout confirmation, and use conservative targets to maximize their success when trading this pattern .

Chapter 71: V-Tops - Detailed Summary from Encyclopedia of Chart Patterns

Overview: V-Tops are sharp bearish reversal patterns that occur after a strong upward trend. They resemble an upside-down "V," where the price sharply ascends and then drops just as quickly. This pattern signals a potential downward breakout.

Identification Guidelines:

1. Appearance:

   • A straight-line rise in price followed by an equally steep decline.

   • The ascent must rise at least 15% to form a valid V-top.

   • The downward move often retraces at least 38.2% of the height of the rise.

2. Volume:

   • Volume often declines as the price climbs and continues to shrink during the formation of the peak.

   • Volume may increase during the downward breakout phase.

3. Breakout Direction:

   • A V-top's breakout is always downward. If the price does not close below the 38.2% retrace, the pattern is invalid.

Statistics and Performance:

1. Bear Market vs. Bull Market:

   • V-tops generally perform better in bear markets, with a greater chance of a deeper decline.

   • In bull markets, V-tops show a lesser average decline.

2. Decline Magnitude:

   • In bull markets, V-tops decline an average of 16%. In bear markets, the average decline is deeper at 26%.

   • After the breakout, 56% of V-tops experience a pullback.

3. Pullbacks:

   • A pullback is a temporary upward move after the initial downward breakout. Pullbacks occur within a month of the breakout and can retrace a portion of the decline before resuming the downtrend.

4. Failure Rates:

   • V-tops in bull markets have a higher failure rate, with 46% failing to see price drop more than 10% after the breakout. In bear markets, the failure rate is lower at 25%.

   • Busted patterns occur when the price rises after the breakout, closing above the top of the V.

Trading Tactics:

1. Measure Rule:

   • To estimate the target price, measure the height of the pattern (difference between the highest high and the lowest low in the pattern) and subtract it from the breakout price.

2. Short Selling:

   • Traders can short the stock once the price confirms a downward breakout. A short-sale strategy is most effective if the stock is in a steady decline, as this increases the likelihood of further price drops.

3. Stop Placement:

   • Place a stop-loss order just above the peak of the V to protect against losses if the breakout reverses into a bust.

Busted Patterns:

• Busted V-tops occur when the price initially breaks out downward, then reverses direction, rising above the top of the pattern. These busted patterns can lead to significant losses for short sellers but may present a buying opportunity if the reversal is strong.

Sample Trade:

A detailed sample trade is provided, illustrating the importance of waiting for confirmation and avoiding early trades. In the example, the stock followed a straight-line run-up and formed a valid V-top. However, after breaking out downward, it quickly reversed, busting the pattern and leading to losses.

Key Takeaways:

• V-tops are profitable in bear markets but risky in bull markets due to higher failure rates.

• Patience and waiting for a confirmed breakout are crucial for successful trades.

• Busted patterns pose a risk to short sellers, so careful risk management with stop-loss orders is essential .

Chapter 73: Falling Wedges - Detailed Summary from Encyclopedia of Chart Patterns

Overview:

• A falling wedge is a bullish pattern characterized by a downward price movement bounded by two converging trendlines.

• Falling wedges can occur in both bull and bear markets. The breakout is typically upward, signaling a bullish reversal or continuation.

Identification Guidelines:

1. Appearance:

   • Two downward-sloping trendlines that converge as the pattern progresses.

   • The top trendline descends more steeply than the bottom, leading to the wedge's narrowing.

   • Price bounces between the trendlines, filling the wedge with price movement.

2. Multiple Touches:

   • The wedge should have at least five touches of the trendlines (three on one side and two on the other) for reliability.

3. Volume:

   • Volume usually decreases throughout the wedge formation, indicating waning selling pressure. It often spikes upon the breakout.

4. Breakout Direction:

   • The breakout is typically upward. However, it’s important to wait for a confirmed close outside the upper trendline to enter a trade.

5. Duration:

   • Falling wedges take at least three weeks to form, with durations rarely exceeding four months.

Performance:

1. Bull vs. Bear Market:

   • Falling wedges generally perform better in bear markets, often acting as bullish reversal patterns. In bull markets, they serve as continuation patterns.

2. Upward Breakouts:

   • In bull markets, falling wedges rise an average of 38%, while in bear markets, the average rise is 26%.

   • About 62% of falling wedges in bull markets meet their full height target, while 53% do so in bear markets.

3. Failure Rates:

   • Failure rates in bull markets are moderate. About 26% of wedges fail to rise more than 5%, with 37% failing to rise 10%.

   • Bear markets have slightly higher failure rates, but wedges still manage upward breakouts.

4. Throwbacks:

   • A throwback, where the price returns to the breakout point after breaking out, occurs 62% of the time in bull markets and 61% in bear markets.

Trading Tactics:

1. Measure Rule:

   • The target for upward breakouts is the highest high within the wedge. For downward breakouts, the height of the wedge is subtracted from the breakout price to estimate the target.

2. Buy Strategy:

   • Wait for price to close above the upper trendline before entering a buy position. This ensures a confirmed breakout and reduces the risk of false breakouts.

3. Watch for Dips:

   • A significant portion of wedges break out downward briefly before reversing to break out upward. This momentary downward breakout can trap early traders, so caution is advised.

4. Stop-Loss Placement:

   • A stop-loss should be placed just below the lower trendline, especially after the breakout, to protect against a failed breakout or pullback.

Failures and Busted Patterns:

• Busted Patterns: These occur when price breaks out downward but soon reverses and breaks upward, busting the initial downward breakout. Busted downward breakouts can lead to substantial gains if the price closes above the top of the wedge after the reversal.

Real-World Examples:

• In the chapter, Bulkowski describes his trade in Freeport-McMoRan Copper and Gold. He traded a falling wedge and made a 51% profit. His example highlights the potential for substantial gains when trading well-formed wedges and waiting for confirmed breakouts.

Key Takeaways:

• Falling wedges are primarily bullish patterns, performing well in both market conditions, though better in bear markets.

• The importance of waiting for a confirmed breakout, managing failure risks, and watching for busted patterns is critical to trading falling wedges successfully【15:6†source】【15:7†source】【15:16†source】.

Chapter 74: Rising Wedges - Summary from Encyclopedia of Chart Patterns

Overview:

• A rising wedge is a bearish pattern that typically occurs during upward trends. It is formed by two upward-sloping trendlines that converge as the pattern progresses. The rising wedge can act as a reversal or continuation pattern, but the breakout is usually downward.

Identification Guidelines:

1. Appearance:

   • The pattern consists of two converging trendlines that slope upward. The price action makes higher highs and higher lows but gradually narrows as the wedge progresses.

   • Both trendlines must slope upward and converge, forming the wedge shape. There should be no horizontal trendlines, as that would indicate a different pattern (e.g., an ascending triangle).

2. Touches:

   • A well-formed wedge has at least five touches of the trendlines (three on one side, two on the other). Each touch should be a minor high or low, indicating valid resistance and support levels.

   • Price should cross the wedge from top to bottom multiple times, filling the whitespace within the pattern.

3. Volume:

   • Volume typically trends downward throughout the pattern, reflecting waning interest as the wedge narrows.

   • The breakout is often accompanied by a spike in volume.

4. Breakout Direction:

   • Although the price can break out in either direction, it tends to break downward most of the time. The breakout is confirmed when the price closes outside of the lower trendline.

5. Duration:

   • Rising wedges usually take at least three weeks to form. Patterns shorter than this are often classified as pennants. The wedge typically lasts no more than three months.

Performance:

1. Bearish Breakouts:

   • Rising wedges often result in bearish reversals or short-term continuations of the downtrend.

   • In bull markets, the average decline is 9% after a downward breakout. In bear markets, the average drop is 17%.

   • Downward breakouts in bear markets have better performance, ranking 19th out of 19 for short-term bearish reversals.

2. Failure Rates:

   • Rising wedges have relatively high failure rates. About 51% of downward breakouts in bull markets fail to see the price drop more than 5%.

   • In bear markets, the failure rate is lower at 28%, indicating stronger performance in bearish conditions.

3. Throwbacks and Pullbacks:

   • Throwbacks (where the price revisits the breakout level after the breakout) occur 72% of the time in bull markets and 70% of the time in bear markets, potentially providing a second opportunity to enter a trade.

Trading Tactics:

1. Measure Rule:

   • For downward breakouts, the price target is usually the lowest low within the wedge. To estimate the price target for upward breakouts, measure the height of the wedge and add it to the breakout price.

2. Waiting for Confirmation:

   • It is crucial to wait for the price to break outside the trendlines before entering a trade, as premature trades can lead to losses if the breakout fails.

3. Stop Placement:

   • A stop-loss can be placed above the highest point of the wedge to minimize losses in case the pattern fails.

4. Quick Profit-Taking:

   • Due to the high failure rates of rising wedges, it is advisable to take profits quickly, especially after a confirmed breakout. The longer the trade is held, the greater the risk of a reversal or pullback.

Failures and Busted Patterns:

• Busted Wedges: These occur when the price initially breaks out in one direction but reverses and breaks out in the opposite direction. Busted wedges can provide significant trading opportunities, particularly in bull markets with downward breakouts. About 76% of downward breakouts in bull markets experience busts.

Real-World Example:

In one example, Bulkowski describes a rising wedge in the stock of Fruit of the Loom. The price initially broke downward, reaching the measure rule target of 29.75. The example illustrates the importance of waiting for a confirmed breakout before shorting the stock, and how quickly price can fall after the breakout.

Key Takeaways:

• Rising wedges are generally poor performers, with high failure rates, especially in bull markets. However, they can be more reliable in bear markets for short-selling opportunities.

• Careful trade management is crucial, including waiting for confirmation, using stop-losses, and being prepared for busts.

• Quick profit-taking is recommended due to the pattern's tendency to fail or pull back after the breakout【15:6†source】【15:7†source】【15:16†source】【15:18†source】.

Chapter 75: Wolfe Wave, Bearish - Summary from Encyclopedia of Chart Patterns

Overview: The Wolfe Wave is part pattern, part trading methodology, often resembling a rising wedge. A bearish Wolfe Wave typically forms as a bearish reversal pattern in an uptrend, with key points marked as "turns" from 1 to 5. This pattern aims to predict future price targets using trendlines.

Identification Guidelines:

1. Appearance:

   • The pattern is formed by five turning points: 1 (high), 2 (low), 3 (high), 4 (low), and 5 (another high). These turns create a converging wedge-like structure.

   • The two trendlines—one connecting turns 1 and 3 (upper) and the other joining turns 2 and 4 (lower)—should form a wedge that narrows over time.

2. EPA and ETA:

   • EPA (Estimated Price at Arrival): A line drawn from turn 1 to turn 4. The EPA line provides the price target where traders should consider exiting the trade after the breakout.

   • ETA (Estimated Time of Arrival): The point where the two trendlines (1–3 and 2–4) converge, predicting the time when the stock price is expected to meet the EPA target.

3. Volume:

   • Volume often spikes at turn 5, with the expectation that heavy volume will accompany the breakout. A lack of volume at turn 5 may signal a weaker pattern or a potential failure.

Performance:

1. Average Decline:

   • In bull markets, the average decline after a downward breakout is about 12%. In bear markets, this increases to 19%.

2. Failure Rates:

   • Wolfe waves tend to fail more often in bull markets, with a failure rate of around 30%. In bear markets, the failure rate drops to 13%.

   • The pattern’s ability to meet its EPA target is relatively low, with about 37% meeting their price target in bull markets and 41% in bear markets.

3. Time to Reach Target:

   • On average, it takes about 15 days to reach the EPA target line, with longer durations needed in bear markets.

Trading Tactics:

1. Measure Rule:

   • The target price is defined by the EPA line, which is drawn between turns 1 and 4. When the price reaches the EPA line, traders should consider exiting their short positions.

2. Stop Placement:

   • A stop-loss should be placed above turn 5 to protect against potential busts, where the price rises after breaking out.

3. Volume Considerations:

   • Wolfe advises that volume should be heavy at turn 5. If volume at this point is below average, the pattern's success might be questionable. Wolfe also suggests looking for fractal Wolfe waves (shorter waves within the larger wave) if volume is low.

Sample Trades:

• A trader in the example placed a short trade at turn 5, using the EPA line as the target for the short position. Although the stock briefly fluctuated, the trade eventually reached the EPA line, resulting in a profitable exit.

Failures:

• Bearish Wolfe waves can sometimes fail to meet expectations. In such cases, the stock may not reach the EPA target or may reverse direction after the breakout, as seen in one example where price rose after turn 5 instead of falling.

Key Lessons:

• Wolfe waves can be useful for traders seeking short-term gains in both bull and bear markets. However, they carry a higher failure rate in bull markets.

• Waiting for a confirmed breakout at turn 5, combined with heavy volume, increases the chances of a successful trade.

• The EPA line is a key indicator for exiting a trade, providing an objective target for traders to aim for after the breakout.

In summary, bearish Wolfe waves offer profitable opportunities, especially in bear markets, but traders must be cautious of potential failures and false breakouts .

Chapter 76 of the book focuses on the "Wolfe Wave" chart pattern, specifically its bullish form. Below are detailed notes summarizing key points:

Overview of the Bullish Wolfe Wave Pattern:

• The Wolfe Wave is a chart pattern resembling a falling wedge, with five distinct turns, numbered 1 through 5.

• A trendline connects valleys 1 and 3 (sloping down), as well as peaks 2 and 4. The convergence of these lines forms an apex known as the ETA (Estimated Time of Arrival), signaling when the stock should meet the target price.

• Another key feature is the EPA (Estimated Price at Arrival), a line joining points 1 and 4. If price touches this line at the ETA, it signals an ideal exit point for traders .

Identification Guidelines:

1. Point 1: The bottom before point 2, but it must be above the price of point 3.

2. Point 2: A minor high after point 1, marking the hill connecting the valleys.

3. Point 3: The valley following the peak of point 2.

4. Point 4: The peak after point 3, but its price must be lower than point 2 to ensure convergence.

5. Point 5: The valley after point 4, situated between line 1-3 and a parallel line to 2-4.

For this pattern to qualify, the lines 1-3 and 2-4 must converge, and no extraneous peaks or valleys should disrupt this convergence .

Performance in Bull and Bear Markets:

• In bull markets, the Wolfe Wave's average rise is about 35%, but it underperforms compared to other patterns.

• However, in bear markets, its performance is significantly stronger, with an average rise of 32%, and it ranks fourth among patterns .

Example:

• Figure 76.1 illustrates a bullish Wolfe Wave where the price reached the EPA before hitting the ETA. Although the stock broke out upward, it later failed, with the price collapsing below the wedge's bottom .

Sample Trade and Performance:

• The chapter includes examples of how traders like "Miles" and "Honey" applied the Wolfe Wave in real-life trading scenarios. They focused on matching the EPA and ETA lines to optimize entry and exit points .

Trading Tactics:

• While the book discusses the Wolfe Wave's basic principles, it refers readers to additional sources like Bill Wolfe’s website for more advanced trading strategies. The trading tactics show that only about 24% of the tested Wolfe Waves hit the target on time .

This chapter offers detailed insights into the structure, identification, and performance of the Wolfe Wave pattern, with additional emphasis on its application in both bull and bear markets.