Encyclopedia Of Chart Patterns 3rd Edition Pdf Free |WORK| Download
Lane Arcano
The presentations give traders a quick reference to the many Brooks Chart Patterns available when trading. The slides complement the Brooks Trading Course and can be used for self study or while trading. With that in mind, Al created a classification of patterns for swing traders. Here you will find 4 versions of each: buy, sell, failed buy, failed sell. This gives you about 100 basic patterns x 4 = 400 total sections. If you can recognize what the market is doing, you can look at the examples of that pattern to get an idea of what might follow.
"The most complete reference to chart patterns available. It goes where no one has gone before. Bulkowski gives hard data on how good and bad the patterns are. A must-read for anyone that's ever looked at a chart and wondered what was happening."
-- Larry Williams, trader and author of Long-Term Secrets to Short-Term Trading
Two years later, Tom pulls up the stock chart. The dog has been flat for so long it looks as if its heartbeat has stopped. He calls Jim and chats about the outlook for JCB Superstores. Jim gushes enthusiastically about a new retailing concept called the Internet. He is excited about the opportunity to sell office supplies online without the need for bricks and mortar. There is some risk because the online community is in its infancy, but Jim predicts it will expand quickly. Tom is impressed, so he starts doing his homework and is soon buying the stock again.
For this book, I used several databases in which to search for chart patterns. The main database consists of 500 stocks, each with durations of 5 years beginning from mid-1991. I included the 30 Dow Jones industrials and familiar names with varying market capitalizations. Stocks included in the database needed a heartbeat (that is, they were not unduly flat over the 5-year period) and did not have consistently large intraday price swings (too thinly traded or volatile).
For rare chart patterns, I use all three databases and search from 1991 to the most recent date available. For plentiful patterns, I use already found patterns and add those appearing during the bear market. Thus, the number of stocks I use to find patterns and the amount of historical price quotes varies.
In the first edition of this book, I used a combination of computerized algorithms and manual searching to find chart patterns. The current edition includes the 15,000 patterns from the first edition and others found manually since then, for a total of more than 38,500 patterns.
I call this book an encyclopedia because that is how I use it. Whenever I see a chart pattern forming in a stock I own, or am thinking of buying, I read the applicable chapter. The information refreshes my memory about identification quirks, performance, and any tips on how I can get in sooner or more profitably. Then I search for similar patterns in the same stock (using different time scales), and if that does not work, I search for similar patterns in stocks in the same industry. I look at them closely to determine if their secrets are applicable to the current situation. I try to learn from their mistakes.
If you read a chapter on a bullish chart pattern and buy the first stock showing the pattern in a bull market, you will probably be successful. The first trade nearly always works for the novice, maybe even the second or third one, too. Eventually, though, someone is going to pull the rug out from under you (who knows, maybe it occurs on the first trade). You will make an investment in a chart pattern and the trade will go bad. Maybe you will stumble across a herd of bad trades and get flattened. You might question your sanity, you might question God, but one thing is for certain: Your trading style is not working.
Of course, if you blindly invest in chart squiggles and it works for you, who am I to tell you you are doing it wrong? The fact is, you are not. If you consistently make money at it, then you have developed an investment style that fits your personality. Good for you!
Investing using chart formations is an exercise in probability. If you play the numbers long enough, you will win out. Sure, some of your investments will fail, and you must learn to cut your losses before they get out of hand. But the winners should serve you well, providing you let them ride. Just do not make the mistake of watching a stock double or triple only to reverse course and drop back to where it started. Or worse.
For position traders, those who hold the trade longer than a day but not forever, chart patterns offer convenient entry and exit signals. I put myself in this category. If the trade goes bad, I am out quickly. If it is profitable, I see no need to cut my profits short. When the gains plateau, or if the stock has moved about all it is going to, I consider moving on. Like the day trader, I try to keep cash employed by buying formations that promise reliable returns and reach the ultimate high quickly.
The method I used opened a door to a new world. In this world, you will find that a month after a breakout in a bear market, price often shows strength. You will discover that when pullbacks occur, performance suffers. You will find that failure rates start low but increase rapidly. Volume shapes, price gaps, pattern size, and a dozen other performance clues help some patterns but not others. Findings like these are what make this book unique. The numbers tell a story of fact that I share with you within the following pages.
Broadening bottoms (BBs) are middle-of-the-road performers, sporting a 9% break-even failure rate except in bull markets when double digits prevail (a poor showing). The average rise or decline is also below that posted by other chart pattern types.
Reversal or continuation. You can see that more patterns act as reversals than continuations. By definition, a bottom pattern has prices entering from the top and exiting any way it darn well pleases.
Rises or declines over 45%. Outstanding performance is rare for BBs. The best showing comes from upward breakouts in a bull market, with 20% of the patterns climbing more than 45%. That may sound like a lot, but other patterns do much better. Thus, do not expect a large move. Downward breakouts almost never fare well in this category.
Busted pattern performance. Few patterns bust, so the performance numbers are not solid. Still, they show how much better a busted pattern does than one that works. If you see prices move less than 5% after the breakout and then return to the pattern, consider trading the new direction, but only if it breaks out the other side.
Table 1.3 shows failure rates for BBs. The 5% break-even failure rate is lowest in a bear market (9%). The failure rates climb quickly as the maximum price rise or decline changes. For the 10% failure rate benchmark, BBs fail between two and three times more often than at the 5% rate. Over half the patterns with downward breakouts fail to drop more than 15%. For upward breakouts, patterns cross the halfway mark between rises of 15% and 25%.
Another way to use Table 1.3 is to assess how likely it is that your trade will fail. If you have a cost of trading of 5% and you want to make 20%, how many patterns in a bull market with upward breakouts will fail to rise at least 25% (5 + 20)? Answer: 59%. Just 41% of the patterns will meet your profit margins. Since the majority will fail, your winners must do quite well to compensate for the losses.
Table 1.5 shows a frequency distribution of time to the ultimate high or low. Using numbers, it tells how soon your chart pattern will likely top or bottom out. For example, in a bear market with a downward breakout, over half (53%, or 25 + 28) bottom out within 2 weeks. At the other end of the table, almost half the patterns (45%) in a bull market take longer than 2 months (over 70 days) to reach the ultimate high.
Height. Tall patterns perform better than short ones. Before you trade a BB, compute its height and divide the difference by the breakout price. If the result is above the median listed in the table, you have a tall pattern. It may not outperform, but it places the probability on your side.
Figure 1.4 makes the computation clear. Point A shows the highest high in the chart pattern at 14.13. The lowest low is point B at 12. The formation height is the difference between the two or 2.13. Add the value to the high to arrive at the upward price target. This turns out to be 16.26. I compute the downward target by subtracting the height from the lowest low (that is, 12 - 2.13 or 9.87). You can see in Figure 1.4 that the price never quite reaches the downward price target.
When the stock plunged to 10.38 on high volume, she wondered if she was looking at a one-day reversal chart pattern. With those formations, it is difficult to be sure if prices would reverse or not. She decided to hold on to her original target.
Surprises for this pattern include throwbacks and pullbacks that hurt performance when they occur. They interrupt price momentum. Tall patterns perform better than short ones, and for upward breakouts, patterns both tall and wide perform better than other combinations.
Figure 2.1 puts the formation in perspective. There are two formations shown in the chart. The first one is somewhat ill-formed but better performing than the second. Both formations have a base outlined by a horizontal trend line connecting the minor lows. The up-sloping trend line skirts the tops of the minor highs. The result is a triangle-appearing formation with prices that broaden out, but do not let the ascending price pattern fool you. This formation is bearish: Prices plummet through the base of the formation most of the time.
When the smart money trades the securities markets, they leave behind financial footprints. Combine enough footprints together and you have a trail to follow. That trail becomes what's called a chart pattern. Encyclopedia of Chart Patterns, Third Edition expands upon Bulkowski's immensely popular Second Edition with fully revised and updated material on chart patterns. Whether you're new to the stock market or an experienced professional trader, use this book as a reference guide to give you an edge.