Article Reviews, Trading

Tom Bulkowski’s Tips on Chart Patterns

I just read an old [2005] article by Thomas Bulkowski titled “Ten New Tips for Trading Chart Patterns”. I am not going to list the 10 tips here but just some of my takeaways.

  • Patterns form faster (i.e. form in a shorter amount of time) as they occur in the later part of a rising price trend.
    • I figured that this is likely due to more people jumping on board the ship leading to higher volatility and faster “reactions” to the stock price movements.
  • Trade with the market trend
    • Statistics works in your favor that way.
  • Trade with the best industries
    • Bulkowski’s best trades usually come from the top 10 industries showing the best price performance over the previous 6 months.
    • The best performers tend to continue to perform well for months, same thing for the worst performers. Hence do not be hasty in putting in spread trades to short the best performers and long the worst performers.
    • From my own experience, this mirrors or is a subset of the fact that “themes” usually work well for months.
  • There is still time for laggards in a good performing industry
    • Of course, you would need to pay special attention to see if the fact that the stock did not move in the first place, whether there is indeed something wrong with the stock.
  • Prices firm up around a month after a downward breakout in a bear market
    • Consider closing out your short if prices begin to move up between 3 to 5 weeks after a breakdown.
  • Trade head-fakes (i.e. failed chart patterns)
    • E.g. short a failed breakout that quickly reversed, or long a stock after a shakeout.
  • Halving the target price move improves the probability
    • Technical analysis typically measures the vertical height of a pattern from lowest low to highest high, and adds that to the point of breakout / breakdown to project the target price.
    • That works about 70% of the time. If you half the expected price move, that works 90% of the time.




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