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

Figure 4.36
IBM chart from 05–02 to 09–02. Triple bottom formation daily.
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3-POINT CHART PATTERNS FOR TREND REVERSALS
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recent peak in a prof it (on short signals) or the most recent valley in
a prof it (on long signals) is a successful strategy.
Rectangle Formations
Rectangles can be at the top or the bottom. Prices oscillate between
two horizontal trend lines before breaking out.
Rectangle formations are very reliable. Bulkowski found just two
failures (losing trades) for rectangle bottoms out of 95 formations in
his test runs. For rectangle tops, the ratio shows f ive failures in nearly
300 rectangles tested. If the rectangle is wide enough, trading counter-
trend within the rectangle can be a smart short-term strategy.
Figure 4.37 depicts a chart of the Japanese Yen cash currency
against the U.S Dollar (Figure 4.37).
There is likely to be a pullback after the breakout from the rec-
tangle. Should this happen, we can build up additional trading posi-
tions. This strategy works for rectangle bottoms and rectangle tops.
Figure 4.37
Japanese Yen chart from 12–01 to 04–02. Rectangle formation daily.
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APPLICATIONS OF TRADING STRATEGIES
Another picture-book example of a rectangle formation is the
Intel stock in July and August 2002 (see Figure 4.38).
Since we cannot predict the breakout direction, we wait for the
market price to close outside the rectangle trend lines and then trade
in the direction of the main trend.
The stop-loss can be placed f irst at the median line of the rec-
tangle. If the market price after we have entered a position forms a
peak or valley inside the trend lines of the rectangle, this peak or val-
ley is the indicator for the stop-loss.
We set our prof it target by doubling the distance from highest
high to lowest low of the rectangle. In results presented by Bulkowski
on a comparable exit rule, 93 percent of his predicted price targets for
breakouts to the upside out of rectangle bottoms proved to be accu-
rate. Breakouts to the downside reached the prof it targets at a 65 per-
cent rate. The f igures for rectangle tops were 91 percent (upside
breakouts) and 77 percent (breakouts to the downside).