Candlesticks, Fibonacci, and Chart Pattern Trading Tools : a synergistic Strategy to Enhance Profits and Reduce Risk

3-POINT CHART PATTERNS FOR TREND REVERSALS
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89
Encyclopedia of Chart Patterns
and 
Trading Classic Chart Patterns
provide detailed computer studies for many chart patterns that were
tested on 500 stocks and backward for f ive years. Bulkowski writes:
To knowledgeable investors, chart patterns are not squiggles on a
price chart; they are footprints of the smart money. The footprints
are all they need to follow as they line their pockets with greater
and greater riches. They are the one making the footprints. They
are the smart money that is setting the rules of the game—a game
anyone can play. It is called investing. (Bulkowski, p. 3)
We recommend this book to anyone who is interested in chart patterns.
In the following discussion of selected patterns, we refer to Bulkowski’s
key studies.
Applying 3-Point Chart Patterns
This discussion of important price chart patterns is subdivided into
reversal patterns and continuation patterns, but it is important to un-
derstand that these two categories might not always be correct. A head
and shoulder formation is generally considered to be a reversal price
pattern, but in rare situations it may show up as a continuation pat-
tern. Traders have to be aware of this complication.
Stop-Loss Rules
A general stop-loss rule applies immediately after market entry. It
states that we place the stop-loss on a close above or a close below the
highest peak (sell signals) or lowest valley (buy signals) of the chart
pattern we are working with.
Figure 4.29 illustrates the general stop-loss rule on a long and a
short position.
Figure 4.29
Stop-loss rule.
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