Written and copyright © 2009 by Thomas N. Bulkowski. All rights reserved.

Top Headlines

• Thursday 7/2/09. Patterns for the Weekend.
• Wednesday 7/1/09. What’s Hot Wednesday
• Tuesday 6/30/09. Tutorial Tuesday: Position Sizing. Does Size Matter?
• Monday 6/29/09. Mental Monday: Transforming Talk

Older Headlines

• Thursday 6/25/09. Inverted Roof in Gold?
• Tuesday 6/23/09. Tutorial Tuesday: Trading the Inverted Dead-Cat Bounce
• Monday 6/22/09. Mental Monday: Proactive vs Reactive Trading, Part 2.
• Thursday 6/18/09. Bullish Doji Star in the Dow.
• Tuesday 6/16/09. Tutorial Tuesday: How To Make 80% and Feel Like a Loser
• Monday 6/15/09. Mental Monday: Which is Best, Proactive or Reactive Trading?
• Thursday 6/11/09. Is Sliver Tarnished?
• Tuesday 6/9/09. Tutorial Tuesday: A Close Look at the 2B Pattern
• Monday 6/8/09. Mental Monday: Learn How to Trade Decisively, Part 2!
• Thursday 6/4/09. Hope For S&P
• Tuesday 6/2/09. When Bees Invade!
• Monday 6/1/09. Mental Monday: Learn How to Trade Decisively!

Archives

• June Archive
• May Archive
• All Archives

Thursday, 7/2/2009. Patterns for the Weekend.

Tomorrow is a US market holiday (Independence day), so no blog tomorrow.

The following message is computer generated and not a comment by Mr. Bulkowski.

There were 38 chart patterns found this week (except for horns and pipes which appear on the weekly scale, so I give them more time) out of 673 stocks searched, or 5.6%. Based only on the percentage of chart patterns found, the market is likely moving sideways (consolidating), creating those chart patterns. Strongly trending markets (straight-line runs with little overlap from price bar to price bar) dampen the appearance of chart patterns, but individual stocks will consolidate from time to time, allowing chart patterns to form.

There were 30 bullish chart patterns this week and 7 bearish ones with any remaining (1) being undecided. Based on the comparison of bullish to bearish patterns only, this suggests the market is hinting of a coming bullish (up) turn.

If a high and tight flag appears in the list, the start and end dates highlight the flagpole (a near double in price) and not the complete chart pattern (that is, it does not include the flag).

The following table shows the security symbol and type of chart pattern, including the start and end date of the chart pattern. Use the dates to help locate the pattern on your chart. The information can serve as a starting point in your hunt for a promising trade using chart patterns.

The following tips may help.

• Look for patterns with unusual breakout directions, such as an ascending triangle with a downward breakout. The unusual breakout direction can suggest a strong run.
• Busted patterns, where price breaks out in one direction, turns around and then breaks out in the opposite direction can lead to powerful moves.
• Throwbacks and pullbacks occur about half the time, so be prepared for a retrace after the breakout.
• Look for underlying support and overhead resistance to help gauge how far price will move after the breakout.

Good luck. -- Thomas Bulkowski

Weekly screen for chart patterns ending between 06/23/2009 and 07/01/2009.

Here are the chart patterns that appeared within the last week, many are unconfirmed (still in development and may not be valid). If no securities appear, then I have not identified any new patterns.

Industry: Chemical (Specialty)

Industry RS rank: 21 out of 51

Stock RS rank: 404 out of 665

Latest close as of 07/01/2009: $40.50

1 Month average volatility: $1.24. Volatility based stop (assuming a downward breakout): $43.76 or 8.0% above the close.

Change year to date: 3.87%

Volume: 565,100 shares

3 month average volume: 882,842 shares

 

Chart pattern: Scallop, descending continuation pattern from 06/02/2009 to 07/01/2009

Performance rank: 16 out of 21.

Breakout is downward 66% of the time.

Average decline: 17%.

Break-even failure rate: 15%.

Pullbacks occur 55% of the time.

Price meets the measure rule target 30% of the time.

Industry: Electric Utility (Central)

Industry RS rank: 41 out of 51

Stock RS rank: 597 out of 665

Latest close as of 07/01/2009: $25.39

1 Month average volatility: $0.57. Volatility based stop (assuming an upward breakout): $23.74 or 6.5% below the close.

Change year to date: -23.66%

Volume: 1,157,400 shares

3 month average volume: 1,660,129 shares

 

Chart pattern: Triangle, ascending reversal pattern from 05/01/2009 to 06/29/2009

WARNING: A dead-cat bounce occurred on 02/17/2009. There is a 38% chance that a 15% or higher decline will occur (or has occurred since then) by 08/18/2009.

Performance rank: 17 out of 23.

Breakout is upward 70% of the time.

Average rise: 35%.

Break-even failure rate: 13%.

Throwbacks occur 57% of the time.

Price meets the measure rule target 75% of the time.

Industry: Semiconductor Cap Equip.

WARNING: This industry is within the top 7 that Dead-cat bounce often.

Industry RS rank: 10 out of 51

Stock RS rank: 327 out of 665

Latest close as of 07/01/2009: $11.13

1 Month average volatility: $0.36. Volatility based stop (assuming a downward breakout): $12.10 or 8.7% above the close.

Change year to date: 9.87%

Volume: 18,802,200 shares

3 month average volume: 20,156,202 shares

 

Chart pattern: Triangle, descending reversal pattern from 04/07/2009 to 06/25/2009

Performance rank: 10 out of 21.

Breakout is downward 64% of the time.

Average decline: 16%.

Break-even failure rate: 16%.

Pullbacks occur 54% of the time.

Price meets the measure rule target 54% of the time.

Industry: Computers and Peripherals

WARNING: This industry is within the top 7 that Dead-cat bounce often.

Industry RS rank: 7 out of 51

Stock RS rank: 6 out of 665

Latest close as of 07/01/2009: $8.67

1 Month average volatility: $0.40. Volatility based stop (assuming an upward breakout): $7.52 or 13.3% below the close.

Change year to date: 240.00%

Volume: 1,499,200 shares

3 month average volume: 891,072 shares

 

Chart pattern: Flag, high and tight continuation pattern from 05/13/2009 to 06/29/2009

Performance rank: 1 out of 23.

Breakout is upward 100% of the time.

Average rise: 69%.

Throwbacks occur 54% of the time.

Price meets the measure rule target 90% of the time.

Industry: Insurance (Diversified)

Industry RS rank: 48 out of 51

Stock RS rank: 569 out of 665

Latest close as of 07/01/2009: $24.06

1 Month average volatility: $0.69. Volatility based stop (assuming an upward breakout): $22.58 or 6.2% below the close.

Change year to date: -19.80%

Volume: 1,423,400 shares

3 month average volume: 1,891,768 shares

 

Chart pattern: Triangle, symmetrical continuation pattern from 11/20/2008 to 06/26/2009

Performance rank: 16 out of 23.

Breakout is upward 54% of the time.

Average rise: 31%.

Break-even failure rate: 9%.

Throwbacks occur 37% of the time.

Price meets the measure rule target 66% of the time.

Industry: Homebuilding

Industry RS rank: 39 out of 51

Stock RS rank: 159 out of 665

Latest close as of 07/01/2009: $1.83

1 Month average volatility: $0.20. Volatility based stop (assuming an upward breakout): $1.41 or 23.0% below the close.

Change year to date: 15.82%

Volume: 790,000 shares

3 month average volume: 2,565,245 shares

 

Chart pattern: Triangle, ascending reversal pattern from 06/18/2009 to 07/01/2009

WARNING: A dead-cat bounce occurred on 06/17/2009. There is a 26% chance that a 15% or higher decline will occur (or has occurred since then) by 09/16/2009 and a 38% chance by 12/16/2009.

Performance rank: 17 out of 23.

Breakout is upward 70% of the time.

Average rise: 35%.

Break-even failure rate: 13%.

Throwbacks occur 57% of the time.

Price meets the measure rule target 75% of the time.

Industry: Electric Utility (East)

Industry RS rank: 44 out of 51

Stock RS rank: 567 out of 665

Latest close as of 07/01/2009: $18.90

1 Month average volatility: $0.67. Volatility based stop (assuming an upward breakout): $16.83 or 11.0% below the close.

Change year to date: -20.79%

Volume: 74,400 shares

3 month average volume: 85,088 shares

Based on the average volume, this security may be thinly traded (less than 100,000 shares)!

 

Chart pattern: Triangle, symmetrical continuation pattern from 06/08/2009 to 06/25/2009

Performance rank: 16 out of 23.

Breakout is upward 54% of the time.

Average rise: 31%.

Break-even failure rate: 9%.

Throwbacks occur 37% of the time.

Price meets the measure rule target 66% of the time.

Industry: Drug

WARNING: This industry is within the top 7 that Dead-cat bounce often.

Industry RS rank: 32 out of 51

Stock RS rank: 624 out of 665

Latest close as of 07/01/2009: $56.28

1 Month average volatility: $1.54. Volatility based stop (assuming a downward breakout): $60.25 or 7.1% above the close.

Change year to date: -26.95%

Volume: 1,825,300 shares

3 month average volume: 2,301,108 shares

 

Chart pattern: Triangle, descending reversal pattern from 05/28/2009 to 07/01/2009

Performance rank: 10 out of 21.

Breakout is downward 64% of the time.

Average decline: 16%.

Break-even failure rate: 16%.

Pullbacks occur 54% of the time.

Price meets the measure rule target 54% of the time.

Industry: Air Transport

Industry RS rank: 49 out of 51

Stock RS rank: 653 out of 665

Latest close as of 07/01/2009: $9.22

1 Month average volatility: $0.67. Volatility based stop (assuming an upward breakout): $7.43 or 19.4% below the close.

Change year to date: -48.95%

Volume: 8,146,000 shares

3 month average volume: 7,932,518 shares

 

Chart pattern: Falling wedge from 04/22/2009 to 06/25/2009

Performance rank: 20 out of 23.

Breakout is upward 68% of the time.

Average rise: 32%.

Break-even failure rate: 11%.

Throwbacks occur 56% of the time.

Price meets the measure rule target 70% of the time.

Industry: Medical Supplies

Industry RS rank: 18 out of 51

Stock RS rank: 318 out of 665

Latest close as of 07/01/2009: $30.48

1 Month average volatility: $0.71. Volatility based stop (assuming an upward breakout): $28.85 or 5.4% below the close.

Change year to date: 7.93%

Volume: 1,098,000 shares

3 month average volume: 1,557,674 shares

 

Chart pattern: Triangle, ascending reversal pattern from 05/20/2009 to 06/24/2009

Performance rank: 17 out of 23.

Breakout is upward 70% of the time.

Average rise: 35%.

Break-even failure rate: 13%.

Throwbacks occur 57% of the time.

Price meets the measure rule target 75% of the time.

Industry: None

Industry RS rank is unavailable.

Latest close as of 07/01/2009: $361.65

1 Month average volatility: $6.87. Volatility based stop (assuming an upward breakout): $343.77 or 4.9% below the close.

Change year to date: -2.46%

Volume: 17,749,100 shares

3 month average volume: 21,260,432 shares

 

Chart pattern: Triangle, symmetrical continuation pattern from 06/12/2009 to 06/24/2009

Performance rank: 16 out of 23.

Breakout is upward 54% of the time.

Average rise: 31%.

Break-even failure rate: 9%.

Throwbacks occur 37% of the time.

Price meets the measure rule target 66% of the time.

Industry: Electric Utility (East)

Industry RS rank: 44 out of 51

Stock RS rank: 466 out of 665

Latest close as of 07/01/2009: $34.23

1 Month average volatility: $0.80. Volatility based stop (assuming a downward breakout): $35.92 or 4.9% above the close.

Change year to date: -4.49%

Volume: 3,568,300 shares

3 month average volume: 3,434,543 shares

 

Chart pattern: Rising wedge reversal pattern from 05/27/2009 to 06/29/2009

Performance rank: 20 out of 21.

Breakout is downward 69% of the time.

Average decline: 14%.

Break-even failure rate: 24%.

Pullbacks occur 63% of the time.

Price meets the measure rule target 46% of the time.

Industry: Electric Utility (West)

Industry RS rank: 47 out of 51

Stock RS rank: 415 out of 665

Latest close as of 07/01/2009: $31.86

1 Month average volatility: $0.81. Volatility based stop (assuming an upward breakout): $29.90 or 6.2% below the close.

Change year to date: -0.81%

Volume: 2,240,000 shares

3 month average volume: 3,039,389 shares

 

Chart pattern: Rectangle top continuation pattern from 06/15/2009 to 07/01/2009

Performance rank: 12 out of 23.

Breakout is upward 68% of the time.

Average rise: 39%.

Break-even failure rate: 9%.

Throwbacks occur 64% of the time.

Price meets the measure rule target 80% of the time.

Industry: Toiletries/Cosmetics

Industry RS rank: 29 out of 51

Stock RS rank: 610 out of 665

Latest close as of 07/01/2009: $9.15

1 Month average volatility: $0.47. Volatility based stop (assuming an upward breakout): $7.70 or 15.8% below the close.

Change year to date: -27.44%

Volume: 168,900 shares

3 month average volume: 154,715 shares

 

Chart pattern: Double Bottom, Eve and Eve reversal pattern from 05/28/2009 to 06/24/2009

WARNING: A dead-cat bounce occurred on 01/16/2009. There is a 38% chance that a 15% or higher decline will occur (or has occurred since then) by 07/17/2009.

Performance rank: 6 out of 23.

Breakout is upward 100% of the time.

Average rise: 40%.

Break-even failure rate: 4%.

Throwbacks occur 55% of the time.

Price meets the measure rule target 67% of the time.

Industry: Computers and Peripherals

WARNING: This industry is within the top 7 that Dead-cat bounce often.

Industry RS rank: 7 out of 51

Stock RS rank: 511 out of 665

Latest close as of 07/01/2009: $32.88

1 Month average volatility: $0.88. Volatility based stop (assuming a downward breakout): $35.11 or 6.8% above the close.

Change year to date: -10.19%

Volume: 3,553,400 shares

3 month average volume: 5,733,894 shares

 

Chart pattern: Triangle, descending reversal pattern from 04/21/2009 to 06/29/2009

Performance rank: 10 out of 21.

Breakout is downward 64% of the time.

Average decline: 16%.

Break-even failure rate: 16%.

Pullbacks occur 54% of the time.

Price meets the measure rule target 54% of the time.

Industry: Electric Utility (East)

Industry RS rank: 44 out of 51

Stock RS rank: 494 out of 665

Latest close as of 07/01/2009: $51.56

1 Month average volatility: $1.37. Volatility based stop (assuming an upward breakout): $48.47 or 6.0% below the close.

Change year to date: -7.28%

Volume: 3,701,500 shares

3 month average volume: 4,318,958 shares

 

Chart pattern: Triangle, ascending reversal pattern from 05/08/2009 to 06/29/2009

Performance rank: 17 out of 23.

Breakout is upward 70% of the time.

Average rise: 35%.

Break-even failure rate: 13%.

Throwbacks occur 57% of the time.

Price meets the measure rule target 75% of the time.

Industry: Air Transport

Industry RS rank: 49 out of 51

Stock RS rank: 372 out of 665

Latest close as of 07/01/2009: $33.64

1 Month average volatility: $1.12. Volatility based stop (assuming a downward breakout): $36.58 or 8.7% above the close.

Change year to date: 1.11%

Volume: 1,649,900 shares

3 month average volume: 2,732,652 shares

 

Chart pattern: Triangle, descending reversal pattern from 04/21/2009 to 06/25/2009

Performance rank: 10 out of 21.

Breakout is downward 64% of the time.

Average decline: 16%.

Break-even failure rate: 16%.

Pullbacks occur 54% of the time.

Price meets the measure rule target 54% of the time.

Industry: Insurance (Life)

Industry RS rank: 40 out of 51

Stock RS rank: 17 out of 665

Latest close as of 07/01/2009: $6.84

1 Month average volatility: $0.51. Volatility based stop (assuming an upward breakout): $5.74 or 16.2% below the close.

Change year to date: 141.70%

Volume: 11,866,600 shares

3 month average volume: 21,151,862 shares

 

Chart pattern: Flag, high and tight continuation pattern from 05/14/2009 to 06/29/2009

Performance rank: 1 out of 23.

Breakout is upward 100% of the time.

Average rise: 69%.

Throwbacks occur 54% of the time.

Price meets the measure rule target 90% of the time.

Industry: Human Resources

Industry RS rank: 33 out of 51

Stock RS rank: 649 out of 665

Latest close as of 07/01/2009: $1.85

1 Month average volatility: $0.18. Volatility based stop (assuming a downward breakout): $2.35 or 27.2% above the close.

Change year to date: -44.78%

Volume: 35,400 shares

3 month average volume: 185,560 shares

 

Chart pattern: Triangle, descending reversal pattern from 05/06/2009 to 07/01/2009

Performance rank: 10 out of 21.

Breakout is downward 64% of the time.

Average decline: 16%.

Break-even failure rate: 16%.

Pullbacks occur 54% of the time.

Price meets the measure rule target 54% of the time.

Industry: Biotechnology

Industry RS rank: 24 out of 51

Stock RS rank: 13 out of 665

Latest close as of 07/01/2009: $8.44

1 Month average volatility: $0.50. Volatility based stop (assuming an upward breakout): $7.14 or 15.4% below the close.

Change year to date: 146.06%

Volume: 514,200 shares

3 month average volume: 695,658 shares

 

Chart pattern: Triangle, ascending reversal pattern from 06/09/2009 to 06/25/2009

Performance rank: 17 out of 23.

Breakout is upward 70% of the time.

Average rise: 35%.

Break-even failure rate: 13%.

Throwbacks occur 57% of the time.

Price meets the measure rule target 75% of the time.

Industry: Electric Utility (East)

Industry RS rank: 44 out of 51

Stock RS rank: 275 out of 665

Latest close as of 07/01/2009: $33.08

1 Month average volatility: $0.80. Volatility based stop (assuming an upward breakout): $30.98 or 6.4% below the close.

Change year to date: 13.40%

Volume: 2,911,200 shares

3 month average volume: 3,167,649 shares

 

Chart pattern: Triangle, symmetrical continuation pattern from 05/28/2009 to 06/29/2009

Performance rank: 16 out of 23.

Breakout is upward 54% of the time.

Average rise: 31%.

Break-even failure rate: 9%.

Throwbacks occur 37% of the time.

Price meets the measure rule target 66% of the time.

Industry: Toiletries/Cosmetics

Industry RS rank: 29 out of 51

Stock RS rank: 142 out of 665

Latest close as of 07/01/2009: $18.32

1 Month average volatility: $0.80. Volatility based stop (assuming a downward breakout): $20.05 or 9.5% above the close.

Change year to date: 26.08%

Volume: 533,100 shares

3 month average volume: 435,780 shares

 

Chart pattern: Triangle, descending reversal pattern from 05/01/2009 to 07/01/2009

Performance rank: 10 out of 21.

Breakout is downward 64% of the time.

Average decline: 16%.

Break-even failure rate: 16%.

Pullbacks occur 54% of the time.

Price meets the measure rule target 54% of the time.

Industry: Semiconductor

WARNING: This industry is within the top 7 that Dead-cat bounce often.

Industry RS rank: 3 out of 51

Stock RS rank: 4 out of 665

Latest close as of 07/01/2009: $3.89

1 Month average volatility: $0.22. Volatility based stop (assuming an upward breakout): $3.36 or 13.5% below the close.

Change year to date: 398.72%

Volume: 5,720,500 shares

3 month average volume: 6,862,955 shares

 

Chart pattern: Flag, high and tight continuation pattern from 05/13/2009 to 06/29/2009

Performance rank: 1 out of 23.

Breakout is upward 100% of the time.

Average rise: 69%.

Throwbacks occur 54% of the time.

Price meets the measure rule target 90% of the time.

Industry: Chemical (Diversified)

Industry RS rank: 14 out of 51

Stock RS rank: 92 out of 665

Latest close as of 07/01/2009: $24.47

1 Month average volatility: $1.08. Volatility based stop (assuming an upward breakout): $22.00 or 10.1% below the close.

Change year to date: 46.79%

Volume: 1,008,200 shares

3 month average volume: 1,922,917 shares

 

Chart pattern: Falling wedge from 06/03/2009 to 07/01/2009

Performance rank: 20 out of 23.

Breakout is upward 68% of the time.

Average rise: 32%.

Break-even failure rate: 11%.

Throwbacks occur 56% of the time.

Price meets the measure rule target 70% of the time.

Industry: Cement and Aggregates

Industry RS rank: 50 out of 51

Stock RS rank: 643 out of 665

Latest close as of 07/01/2009: $42.83

1 Month average volatility: $1.87. Volatility based stop (assuming an upward breakout): $38.98 or 9.0% below the close.

Change year to date: -38.44%

Volume: 1,282,500 shares

3 month average volume: 1,804,554 shares

 

Chart pattern: Triangle, symmetrical continuation pattern from 05/26/2009 to 06/25/2009

Performance rank: 16 out of 23.

Breakout is upward 54% of the time.

Average rise: 31%.

Break-even failure rate: 9%.

Throwbacks occur 37% of the time.

Price meets the measure rule target 66% of the time.

Industry: Drug

WARNING: This industry is within the top 7 that Dead-cat bounce often.

Industry RS rank: 32 out of 51

Stock RS rank: 241 out of 665

Latest close as of 07/01/2009: $45.37

1 Month average volatility: $0.56. Volatility based stop (assuming an upward breakout): $44.03 or 3.0% below the close.

Change year to date: 20.95%

Volume: 7,781,900 shares

3 month average volume: 11,783,888 shares

 

Chart pattern: Triangle, ascending reversal pattern from 05/22/2009 to 06/24/2009

Performance rank: 17 out of 23.

Breakout is upward 70% of the time.

Average rise: 35%.

Break-even failure rate: 13%.

Throwbacks occur 57% of the time.

Price meets the measure rule target 75% of the time.

Wednesday 7/1/09. What’s Hot Wednesday

Largest winners and losers over the past week, from the close on 06/23/2009 to 06/30/2009 and year to date.

Below are the top 10 stocks with the best performance during the past week out of 572 stocks. Stocks from this list may suggest what stocks or industries will do well in the future.

Below are the 10 worst performing stocks during the past week out of 572 stocks. Stocks from this list suggest companies or industries that may be having difficulty and might be future short sale candidates.

Below are the top 10 stocks with the best performance year to date out of 572 stocks. Knowing which securities are trending higher makes selecting stocks for momentum trades much easier, especially if some share the same industry.

Below are the 10 worst performing stocks year to date out of 572 stocks. These stocks might represent a good momentum trade from the short side. If some stocks also share the same industry, then the industry may be weak, so concentrate your search there.

Below are the top 10 exchange traded funds (ETF) with the best performance this past week out of 93 ETFs. A hot ETF may suggest an industry or commodity that is doing well, so look there for individual stock picks or just trade the ETF for a momentum play.

Below are the 10 worst performing ETFs over the past week out of 93 ETFs. These funds may represent companies or industries that are suffering. Avoid going long in those stocks or buying any stocks from those industries.

Below are the top 10 exchange traded funds (ETF) with the best performance year to date out of 93 ETFs. Concentrate your individual stock picks from industries that are doing well, or trade the ETF for a momentum play.

Below are the 10 worst performing ETFs year to date out of 93 ETFs. These represent the stocks or industries you will want to avoid buying or want to concentrate selling short.

Below is a list of market index performance over the past week.

Below are the top 10 country exchange traded funds with the best performance this past week out of 23 ETFs. These may highlight emerging markets that are ready to soar.

Below are the top 10 country exchange traded funds with the best performance year to date out of 23 ETFs. Finding several countries from a similar region that is performing well helps identify which international mutual fund or ETF may continue to do well in the future.

-- Thomas Bulkowski

Tuesday 6/30/09. Tutorial Tuesday: Position Sizing. Does Size Matter?

The picture is of a bachelor button, I think, from my garden. It reminds me of a microphone or an eyeball.

I made a change to the grid at the top of this page. I removed the Russell and Wilshire indexes. Having to repeat the price targets for so many indexes became tedious. I added a market overview link since many of you want to know why I change the targets. The link will explain it in more detail.

# # #

I have always used a fixed dollar amount for money management when buying stocks. At the beginning, it was $2,000. That bought me 100 shares of a $20 stock. I thought that’s the method that everyone used. As I learned about the stock market, I knew there were better ways to size a position (money management) but I didn’t know what they were.

In the August 2007 issue of Active Trader magazine, Volker Knapp tests a system that uses volatility to determine the position size. I already use volatility to determine stop placement, so this was a welcome addition.

Percent-Risk Position Sizing

The first method, percent-risk position sizing, is well-known and it’s based on risk to determine the position size. For example, if you are looking to buy a stock with a price of $20 and a stop loss of $19, with a maximum loss of $2,000, you should buy 2,000 shares.

The formula for this approach is:

DollarRiskSize/(BuyPrice - StopPrice)

In this example, the DollarRiskSize is $2,000, the BuyPrice is $20 and the StopPrice is 19 giving a result of $2,000/($20 - $19) or 2,000 shares.

Percent-Volatility Position Sizing

This method adjusts the risk for volatility of the stock. Tests described in the article says it performs much better than the percent-risk method.

Here’s the formula.

PositionSize = (CE * %PE) / SV

Where CE is the current account equity (size of portfolio)

%PE is the percentage of portfolio equity to risk per trade.

SV is the stock’s volatility (10-day EMA of the true range).

For example, if the current account equity (CE) is $100,000, the percent of portfolio equity we want to risk (%PE) is 2%, and the stock’s volatility is $1.25, then the result is: ($100,000 * 2%) / $1.25 or 1,600 shares.

Instead of calculating the 10-day exponential moving average of the true range, I just calculate the volatility using Patternz, which provides it at the click of a button.

The downfall of these two methods is that if your portfolio is $100,000, then the trade just described would chew up 1,600 shares x $20 buy price or $32,000. Thus, you can buy just over 3 stocks, giving you a concentrated portfolio. The percent-risk method would be even worse with $40,000 used for just one stock. (Of course this assumes that the stocks share the same buy price, volatility, and so on).

One way to avoid the concentrated portfolio problem is to divide the $100,000 into $10,000 allotments (or whatever size you feel comfortable with that would lead to a diversified portfolio), one for each stock. Use the same formula to determine the share size. In the percent-volatility example, the computation would be: ($10,000 x 2%) / 1.25 or 160 shares.

I don’t know what this does to the profitability of the method because the article’s author didn’t discuss this.

-- Thomas Bulkowski

Monday 6/29/09. Mental Monday: Transforming Talk

My collarbone is still hurting, feeling as if someone sticks pins into me when I move to certain positions. My guess is I fractured it in my bike accident over a week ago. Just putting on my socks hurt, but it's getting better. Perhaps one day I will be able to sleep on my right side again.

# # #

Thanks to a comment made by Jim in an email, I have been working on improving the look of ThePatternSite.com. This week, I will work on the home page. If you see no changes then I probably gave up in frustration. Many times I feel like a painter with an image in my head that I can't draw.

# # #

If you have been having trouble with the RSS feed, then you can try the "enhanced feed" from google/feedburner or just sign up at the RSS link on this page (upper left). The RSS feed allows you to check for updates on the website without having to visit the site. News updates are posted there, like changes to the chart pattern indicator signal, and when I add a file to my watch list.

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Today's Mental Monday is based on a article by Adrienne Toghraie, from the November 1996 issue of Technical Analysis of Stocks & Commodities magazine, titled, "Transforming trader self-talk."

In the last episode of Basket Case Bob, he met Smooth Sally and they got along famously. Since that time he settled down with her and had a son. In the early days of his life, Basket Case Bob was a positive individual, with a smile on his face and love in his heart. Brought up in an optimistic family with money, he always had a sunny disposition, facing each day with renewed optimism, a happy-go-lucky guy.

But one rainy afternoon, he asked his wife to go on an errand. During that errand, she got into a car accident which took both her life and that of their son. Since that time, he has been, well, a basket case.

He blamed himself, thinking that if he hadn't asked her to go on the errand, they would still be alive. Such negative thoughts affected not only his behavior but his trading results as well.

Bob used to earn big bucks and was a skilled trader, but now he can't find a profitable trade. On one trade, he cut his losses and sold. Three minutes later, the stock started the long uptrend that he had been waiting for all morning. Two losses later, he decided to hold on as a stock declined, believing that it was also going to turn up. The general market was moving higher, he reasoned, why not this stock? He held on longer than he should and crashed along with the airline stock, selling near the low for the day.

Toghraie wrote,

Self-talk controls your trading destiny. Self-talk is that inner voice that interprets what is happening and how you feel about it. Your self-talk can be positive, optimistic and encouraging so that it gives you the energy and confidence to stay the course in the face of the most overwhelming odds. Unfortunately, however, most of the traders with whom I have worked, regardless of their level of success, engage in negative self-talk, which results in their failing to achieve their ultimate potential.

Negative self-talk is a bad habit, like picking your nose in public. If you practice it long enough, it becomes familiar, comfortable, and costly. You listen to an inner voice that warns, "you are going to lose money on this trade," and you do. Or "the stock is going to turn higher one of these years." It will, the day after you sell it.

Research

She researched patterns of behaviors, attitudes, and past experiences with trading losses. "A pattern has emerged from this study that correlated market losses with negative self-talk. The correlation between having difficulty following rules, negative self-talk and losses is also very clear."

She says that the habit of negative self-talk can begin with a traumatic event like the deaths of Basket Case Bob's wife and son, with a series of losing trades, or even a single traumatic trade.

One trader I know lost no more than $5,000 in a single trade during his life. Then he moved into the currencies markets and was doing well. That confidence along with increased leverage allowed him to place a $1,300,000 bet on a currency play, one that went bad. He lost $31,000 on that trade. The resulting depression caused by that losing trade lasted more than 6 months, making life difficult for him and his family.

Unfortunately, his story is not unique. People think they can handle the leverage and wipe themselves out in one trade. How many times have you heard that from traders? And no, I haven't wiped myself out, but I have been stung many times by dead cat bounces. The stock in which I made the most money (almost 5,000%), dead cat bounced no less than eight times in eight years, taking me down between 20% and 50% each time.

When you face a losing trade or series of losing trades, do you repeat the same excuses? Toghraie writes, "Traders who cannot pull the trigger or exit too soon have their own special monologue that effectively sabotages their trading results. Their self-talk is all about their fears, their losses and their uncertainties."

Fueling Self-Talk

What powers negative self-talk? Basket Base Bob holds up four fingers and says, "There are three things...."

1. Coloring experiences black. During this year, I have had a fear of getting into a bicycle accident. I routinely hit 30 mph on my bicycle, but did the most damage at less than 10 mph. Imagine what I would look like hitting a parked car at 30 or licking the road with my face? Having three accidents since I have been riding hasn't helped, but the negative self-talk has taken the joy out of exercising by riding a bicycle.

   Trading can be the same way, like my friend that lost $31 grand. Traumatic losses in the past color your perception of the future.

2. Stress and poor habits. Trading for a living is stressful, so you need to find a way to release that stress. Some turn to pills. Some turn to alcohol. Others begin stuffing themselves with junk food or "comfort food." Are you feeling stressed? The answer may lie in the number of times you reach for a salty snack. The higher the number, the more stress you may be under. Think about it the next time you reach for those potato chips.

   Instead of exercising, do you form bad habits and don't exercise at all? How about meditation as a release for stress? Who wants to exercise and take care of themselves when they are depressed?

3. Other Downers. If you live with "glass half-empty" (pessimistic) people or come in contact with them regularly, they can be an emotional drain. They suck away your vibrant energy, leaving you feeling as if no trade will be a winner.

   After losing his wife and son, Basket Case Bob sought out others that also experienced such loss. While it might sound like a good idea, it was like being in the company of losers. No one was happy and they continued to be miserable, prolonging their suffering. Have you ever heard the phrase "misery loves company?"

In the next episode of Basket Case Bob, we'll discover the components of negative self talk and then learn how to eliminate it from our trading.

-- Thomas Bulkowski