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Table 11.10 outlines trading tactics for broadening tops.

Measure rule. The first thing to consider about trading tactics is the measure rule. The measure rule predicts the price to which the stock will move (in theory). For many chart patterns, one simply computes the height of the chart pattern and adds or subtracts the height from the breakout price. Apply the same method to broadening tops.

Consider Figure 11.5 as an example. The height of the broadening top is the difference between the highest high (B, 12.13) and the lowest low (A, 10), or 2.13. For upward breakouts, add the height to the highest high in the chart pattern, giving a target of 14.26, as shown in the figure.

For downward breakouts, subtract the height from the bottom of the pattern, giving a target of 7.87. If the computation gives a target below zero, then don't use the measure rule. If the target is too far away (21% in this case), there's a good chance price won't drop that far. Use common sense.

Table 11.10 Trading Tactics

Trading Tactic	Explanation
Measure rule	Compute the height between the highest high and the lowest low in the pattern. Add the height to or subtract it from the highest high or lowest low, respectively. The result is the target price for upward and downward breakouts. The bottom portion of the table shows how often the measure rule works.
Go long at the bottom	Once a broadening top appears, buy after the stock makes its turn at the bottom trendline.
Long stop	Place a stop‐loss order 15 cents below a nearby minor low. Should the stock reverse course, you will be protected.
Go short at the top	Sell short after price starts heading down at the top.
Short stop	Place a stop 15 cents above a nearby minor high to protect against an adverse breakout. Cover the short when it turns at the bottom trendline and starts moving up. For a downward breakout, cover as it nears the target price or any support level.
Partial rise and decline	Go long if a broadening top shows a partial decline. Consider adding to your position once it makes an upward breakout. Partial declines work 72% of the time in bull markets. Partial rises (downward breakout, bull markets) work 52% of the time.
Stop location	See Table 11.7 for stop location guidance.
Busted trade	Table 11.9 can help with busted patterns.

Description	Bull Market, Up Breakout	Bear Market, Up Breakout	Bull Market, Down Breakout	Bear Market, Down Breakout
Percentage reaching half height target	83%	73%	70%	73%
Percentage reaching full height target	66%	52%	42%	46%
Percentage reaching 2× height	48%	26%	19%	24%
Percentage reaching 3× height	37%	18%	9%	13%

The bottom portion of the table shows how often price reaches the measure rule target. For the full height (as in our example above, bull markets, upward breakouts), price will reach the target 66% of the time. You can adjust the height to get different targets that may be easier or harder for price to reach.

Once you know the target, read the text associated with Table 11.3 to see if the potential move is reasonable.

How do you make use of the measure rule? Imagine that you are considering purchasing the stock. Try the following tips:

Go long at the bottom. Since a broadening formation should have five touches (three on one trendline, two on the other) before it becomes valid, point A in Figure 11.5 shows one likely investment location. Before placing the buy order, compute the target price using the measure rule. The target price will help you determine if the potential gain is worth the risk.

In the example shown in Figure 11.5, the purchase price is about 10.38 (at A) and the target price is 14.25, a 37% move. The stop‐loss should be 9.85 (15 cents below the low at A), for a potential loss of 5%, which gives a reward‐to‐risk ratio of 7 to 1, more than enough to risk a trade.

Long stop. Buy the stock soon after it touches the lower trendline and moves higher (after the pattern has fully developed following the identification guidelines). Place a stop‐loss order 15 cents below the lowest low (0.15 below point A). Should price drop, your position will likely be sold before a large loss occurs.

Price climbs across the pattern. Be ready to sell once price reaches the prior minor high. Confused? Look at Figure 11.3. On the way to point 5, be prepared to sell as the stock climbs to the price of point 3. Price may pause for a bit before moving higher and tagging the top trendline, or it may reverse at this point (which it does in Figure 11.3, at point 5). Make sure your stops have been raised to protect your profits.

Go short at the top, short stop. For short positions in broadening tops, open the short after price touches point B (Figure 11.5) and begins heading down. Place a stop 15 cents above the highest high (12.28 in this case) to limit losses. Lower your stop to the next minor high or apex of the broadening top (either 11.88 or 11.13 in Figure 11.5) once the stock nears point A. Sometimes the stock will not make it down to the trendline before beginning to move up. At other times, there is a lengthy pause before price turns around or continues down. A lower stop‐loss point helps you achieve at least some measure of profit.

Partial rise and decline. Partial rises and declines are like deer in mating season when you're driving: Look out for them. See the Glossary (“Partial rise” or “Partial decline”) for details on spotting the pesky critters. When you see a partial rise or decline, place a trade once the stock reverses course. If a breakout happens, then consider adding to your position.

Using a partial rise or decline to enter a trade before the breakout is a reliable trading technique. You get in at a better price, and they accurately predict the breakout direction.

Stop location. Use Table 11.7 for guidance on stop placement.

Busted trade. Consult Table 11.9 for tips on trading busted patterns. If you are lucky enough to trade a single busted pattern, you can make a lot of money.