Forum Archive Index - December 2001

[Phaedrus <Phaedrus@techemail.com>]

 I have just bought the book "Encyclopedia of Chart Patterns" by Thomas 
Bulkowski, on the strength of the excellent review I read at 
http://www.stanz.co.nz/    672 pages. $56 US.
 The author was an experienced investor, basing his decisions on "Fundamental 
analysis, emotional analysis and money management". He was aware that others 
were using chart patterns to trade stocks, and looked for some proof that these 
patterns worked - as an engineer, he wanted hard, cold facts. He was unable to 
find any. He then did his own research, and this book is the result. His method 
was to analyse the charts of 500 stocks over a 5 year period, finding over 
15,000 formations in the process. All the common formations are there - rising 
wedges, descending triangles, double tops, daily reversals, head and shoulders, 
island reversals etc, plus others I had never heard of. Over 50 chart patterns 
were defined, identified, measured and assessed statistically. The author 
considered a failure rate of over 20% to be unsatisfactory. Keep in mind that a 
failure rate of 50% is as bad as it gets and is no better than tossing a coin. 
(If a pattern had a failure rate of 100% it would be an infallible contrarian 
indicator.)
 The results are absolutely fascinating. Some patterns are useless. Some are 
worse than useless. Others are incredibly good, with failure rates of 5% or 
less. 
 To give you an example, consider the Ascending Triangle formation (considered 
to be bullish). 725 examples were found in the "2500 years" of the study. 32% 
failed - not much use as a predictive pattern. But, if you waited for 
confirmation of the pattern (an upside breakout) the failure rate was only 2%.
 A full statistical breakdown is given for each pattern, including number of 
formations, failure rates, frequency distribution of gains, average gain/loss, 
most likely gain/loss, average formation length etc. etc. Page after page of 
hard facts. This book is an absolute gem - I wish I had known about it years 
ago.
 Bulkowski now bases his investment decisions on "Fundamental analysis, 
technical analysis, emotional analysis and money management".
                     Phaedrus. 

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