Читать книгу Encyclopedia of Chart Patterns - Thomas N. Bulkowski - Страница 135

Table 10.10 outlines trading tactics for descending broadening formations.

Measure rule. Figure 10.7 illustrates the use of the measure rule. Compute the broadening pattern's height by first taking the difference between the highest high (A, 49.50) and the lowest low (B, 43.50). Add the result (6) to the value of the horizontal trendline to get a target price of 55.50 (for an upward breakout). Price reaches this target during mid‐March 1996 as the stock climbs on its way to 60.

If the stock breaks out downward, the measure rule computation is nearly the same. Subtract the pattern's height from the lowest low, giving a target price of 37.50. Be aware that upward breakouts in bull markets are more likely to reach their targets (65%) than other combinations.

The lower portion of the table shows how often price will reach the target based on various heights. For example, if you slice the height of the pattern in half and use that in the measure rule computation, you'll find price will reach the target 82% of the time if your pattern behaves like the average pattern.

Once you've computed a target, change the difference between the target and the current price into a percentage of the current price. Then use Table 10.3 to see how often the stock will fail to exceed the move.

Using our example, the target is 6 points away from the top of the pattern (49.50, which we assume is the current price), or 12% above A (or 100 × 6/49.50). Table 10.3 shows that 32% will fail to see price rise more than 10%, so the failure rate would be higher for a 12% target. That also means 68% of the trades will see price exceed a 10% rise. That sounds like a reasonable number.

Table 10.10 Trading Tactics

Trading Tactic	Explanation
Measure rule	Compute the formation height by taking the difference between the horizontal top and the lowest low in the pattern. For upward breakouts, add the height to the value of the horizontal trendline. For downward breakouts, subtract the height from the lowest low in the pattern. The result is the target price. The bottom portion of this table shows how often the measure rule works.
Wait for breakout	It is unclear which way price will break out (upward breakouts happen most often), so it is best to wait for price to close outside the trendlines. Once they do, expect price to continue moving in the direction of the breakout.
Stop location	Once a breakout occurs, consider the opposite side of the formation as the stop‐loss point. However, in many cases you will want something closer to your purchase price, so look for nearer support or resistance zones or use a volatility stop.
Intraformation trading	For aggressive and experienced traders, consider placing a trade as price reverses course at the pattern's lower trendline boundary. Go long at the bottom (which hopes for an upward breakout), but be sure to use stops.
Partial decline	Short a stock if you see a partial decline once price curls around and begins heading back up. A partial decline correctly predicts an upward breakout 75% of the time.
Busted trade	If you see a busted downward breakout, then consider buying the stock. See Table 10.9 for details.

Description	Up Breakout	Down Breakout
Percentage reaching half height target	82%	76%
Percentage reaching full height target	65%	51%
Percentage reaching 2× height	49%	23%
Percentage reaching 3× height	38%	13%

Wait for breakout. Because the breakout direction isn't known until price closes outside one of the trendline boundaries, don't try to anticipate the breakout direction. Price may reverse at the trendline, handing you a loss.

Stops location. Let's say price breaks out upward. Compute the target price and make a profit‐and‐loss assessment of the potential trade. What is the likely downward move compared with the target price? Does the potential profit justify the risk of the trade? For Figure 10.7, there is support in the 46‐to‐47 area.

Looking for prior peaks and valleys helps determine support and resistance levels. In March 1995 (not shown in the figure), there was an area of congestion bounded by a symmetrical triangle with an apex at about 46. Additional resistance appeared in July and October, as shown. Together, the 46‐to‐47 area made a good location for a stop‐loss order.

Let's say the stop price you select is at 45.75, just below the bottom of the support area. If the breakout price is 50.50 (which is the close the day after the upward breakout), that gives a potential loss of less than 10%. With a target price of 55.50, or 10% upside, the win/loss ratio is an unexciting one‐to‐one. In such a situation, you could either tighten your stop by moving it higher (and risk getting taken out by normal price action) or look elsewhere for a more profitable trade.

Remember there is no rule that says you have to place a trade. Let me also say that I'm not a fan of win/loss ratios. If you trade patterns well, the profit should come.

Intraformation trading. If the broadening pattern is tall enough, go long after price rebounds off the lower trendline and hope for an immediate upward breakout. Only try this if you're an experienced swing trader and only after the pattern passes all of the identification guidelines.

Partial decline. A partial rise correctly predicts a downward breakout 47% of the time. However, a partial decline correctly predicts an upward breakout 75% of the time. So if you can tell when a partial decline is in place, meaning the broadening pattern is fully formed (see “Partial decline” in the Glossary for details), then consider buying the stock and hoping for an upward breakout. The partial decline might be a pause that happens as price moves to the lower trendline, so if price breaks out downward, then close out the position. Otherwise hold onto the trade and hope price starts to head back up.

Busted trade. With a 60% average rise after a single busted downward breakout, busted patterns might be the way to profit from this chart pattern. See Table 10.9 for details.