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Bulkowski's Congestion Quiz

 BustedPatterns Candles ChartPatterns EventPatterns Small Patterns
 As of 04/25/2019   Industrials: 26,462 -134.97 -0.5%     Transports: 10,846 -253.37 -2.3%     Utilities: 780 +3.53 +0.5%     Nasdaq: 8,119 +16.67 +0.2%     S&P 500: 2,926 -1.08 0.0% YTD  +13.4%    +18.3%    +9.5%    +22.4%    +16.7% Overview: 04/12/2019     26,900 or 25,500 by 05/01/2019   11,200 or 10,500 by 05/01/2019   825 or 755 by 05/01/2019   8,250 or 7,850 by 05/15/2019   2,975 or 2,800 by 05/01/2019
 As of 04/25/2019   Industrials: 26,462 -134.97 -0.5%     Transports: 10,846 -253.37 -2.3%     Utilities: 780 +3.53 +0.5%     Nasdaq: 8,119 +16.67 +0.2%     S&P 500: 2,926 -1.08 0.0% YTD  +13.4%    +18.3%    +9.5%    +22.4%    +16.7% Overview: 04/12/2019     26,900 or 25,500 by 05/01/2019   11,200 or 10,500 by 05/01/2019   825 or 755 by 05/01/2019   8,250 or 7,850 by 05/15/2019   2,975 or 2,800 by 05/01/2019

Look at the chart of two fictitious ascending triangles on the daily scale. The triangle is outlined in blue with a horizontal top trendline and an up-sloping bottom trendline. Both A and B show upward breakouts but there is a difference between the two charts.

Which setup (A or B) represents the best trading opportunity?

The difference, if you didn't find it, is in the five days leading to the breakout. In A, price makes a straight-line run but in B, price runs into a congestion area in the five days before the breakout.

I proved in a study that the differences between trading a chart pattern with a straight-line run (A) and a congestion area (B) is not huge. In the straight-line run, on average, the rise after the breakout will be further, but the risk of failure increases, too. Throwbacks will occur more often and that is usually a bad thing.

When looking for chart patterns, trade those with a congestion area forming just before the breakout. If a straight-line run appears, then consider waiting for a throwback to occur and complete. Once price starts moving up again, then enter the trade.

-- Thomas Bulkowski

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