Читать книгу Encyclopedia of Chart Patterns - Thomas N. Bulkowski - Страница 22

How about selling at E, when price peaks? That would give you the most profit before the stock dropped into loss territory. That peak is what I call the ultimate high. If you traded this stock perfectly, you'd buy at 17.06, using the opening price the day after an upward breakout, and you'd sell at the high price at E.

I'm not testing how well a stop‐loss order works because I'm not using a stop or MACD or a moving average crossover system to find the exit. I'm selling at the highest possible price before things go wrong. I'm selling at the ultimate high. A perfect double bottom trade.

How do I automate this? In my software, I use two rules to find the ultimate high (on a historical price chart, not real time).

1 Find the highest high before price drops 20%, measured from the high to the close.

2 If price closes below the bottom of the chart pattern, then the search for the ultimate high stops, and we use the highest high found after entering the trade.

In this example, the stock drops to F and closes at 15.70. The low at B is 15.71, so price has closed below the bottom of the pattern at F. We use rule 2 to find the ultimate high: The highest high between the entry price (17.06) and F (the bottom of the pattern) is E. E is the ultimate high.

Let's pretend the double bottom is much lower so I can tell you how rule 1 works. Let's also assume that the close at J is at 13.

Rule 1 says to look for the highest high before price drops 20%, measured from the high to the close. The high between the buy price and J is E, at 17.80. So we look for price to close 20% below this, or 14.24. When price closes at or below 14.24 (again, assuming this happens at J, at 13), we've found the ultimate high, which is E, at 17.80. So we bought at 17.06 and sold at 17.80 and made a profit of 74 cents a share.

We didn't use a stop‐loss order. We didn't use MACD or the moving average crossover. We executed a perfect trade by buying exactly when we should have and selling at the ultimate high. We tested how well the double bottom worked if you traded it perfectly.

And that's how I measured how bullish chart patterns work.

Years ago, someone asked me if this was the same as placing a trailing stop‐loss order 20% below the high price. It's not. If you did that, you'd be stopped out at J (the fictitious one at 13) and not E.

Incidentally, the 20% value in rule 1 comes from the idea of bull and bear markets. A decline of 20% from a high in the market averages means it slid into a bear market. A rise of 20% off a market low means it entered bull market territory. I applied that idea to individual stocks when searching for the ultimate high and low.