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Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30+ years of stock market experience and widely regarded as a leading expert on chart patterns. He may be reached at

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Bulkowski's Swing Trading Setup

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Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 01/13/2017
19,886 -5.27 0.0%
9,202 57.87 0.6%
657 -0.99 -0.2%
5,574 26.63 0.5%
2,275 4.20 0.2%
YTD
0.6%
1.8%
-0.4%
3.5%
1.6%
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19,250 or 20,250 by 01/15/2017
8,880 or 9,550 by 01/15/2017
625 or 690 by 01/15/2017
5,650 or 5,400 by 01/15/2017
2,350 or 2,240 by 01/15/2017
Indus strength: None YTD
Mutt Losers: None YTD
Mutt Winners: None YTD

Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information.

My book, Swing and Day TradingSwing and Day Trading: Evolution of a Trader book., shown on the left, discusses several swing and day trading setups.

If you click on this link and then buy the book (or anything) at Amazon.com, the referral will help support this site. Thanks. -- Tom Bulkowski

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This article discusses a swing trading setup based on price retracing a portion of a prior rise and it also explores Fibonacci retracements.

An example of a retrace

Swing Trading Setup: Background

The figure on the right shows an example of price retracing a portion of the prior rise.

After trending downward (most of which is not shown), price begins a recovery at A, 19.51. Price rises to B in a nice straight-line run to 24.07. Then the stock drops, bottoming at C, or 21.75.

The move from A to B is 4.56 (24.07 - 19.51) and the drop from B to C measures 2.32 (24.07 - 21.75). The ratio between the two numbers is the retrace value: 2.32/4.56 or 51%. In other words, price has dropped about half of the AB move.

I created a test to find and measure these rise-retrace patterns and discovered how often they reached an arbitrary chosen target and exceeded that target. This article discusses those results and the method behind the test.

In the discussion that follows, I use these definitions.

  • Rise refers to the AB move.
  • Retrace is the drop from B to C.
  • Target is the highest close (not the highest high) from A to C. In this example, I show the target as a horizontal red line beginning to the right of B.
  • Ultimate high is the next peak after price reaches the target, providing we haven't been stopped out first. I show that in the figure as D.
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Swing Trading Setup: Methodology

An example of price turning points

I found every minor high that was higher than any peak within 5 days (before and after), and the lowest valley that was lower than any other low within 5 days (before and after). The 5 day number resulted in significant turning points as the above chart shows. Each asterisk (*) represents a 5 day turning point. Once I found the turning points, then it was just a matter of connecting the dots.

I measured the rise from valley to peak and the following retrace from peak to valley and various other points.

In the tests that follow, The buy occurs at C (shown in the first chart), which is the lowest low in the retrace. You can think of this as the perfect entry. The exit occurs when price reaches the target or drops at least 5% or more below the buy price. If price has not gapped lower, a stop loss order is assumed to close out the trade.

I used 23,921 samples from 576 stocks with data starting on January 1, 1995 to October 20, 2009. Not all stocks covered the entire period.

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Swing Trading Setup: Fibonacci

In an earlier test using inverted and ascending scallop chart patterns and manually found patterns, a Fibonacci retrace of 50% and 61% became visible. With this automated test, those peaks disappeared. In fact, only the "catch-all" end points showed any variation above 1% of the totals. The frequency distribution of the counts resembled a bell-shaped curve.

In other words, there were no spikes at 38%, 50% and 62% as one would expect. The results suggest that using Fibonacci retracements offers no advantage than using any other number as a turning point.

Swing Trading Setup: Results

I found the following results using all of the available data (meaning almost 24,000 samples).

  • 71% of the rise-retrace patterns reached their target without being stopped out.
  • From the buy price to the target meant an average gain of 17.0%.
  • If you use the ultimate high instead of the target, price rises an average of 30.1%. Consider this to be a perfect trade, buying in at the retrace low and selling at the ultimate high.
  • If losses are included (which the prior two items did not), the average rise is 9.3% (a loss occurs when price drops 5% or more below the buy price).
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Swing Trading Setup: Up Trends Only

Since the 24,000 sample database did not show Fibonacci retrace peaks of 38%, 50% or 62%, I decided to filter the results by an upward trend leading to the start of the rise. I used the slope of a linear regression line of the prior 20 closing prices leading to the start of the rise. That is approximately a month's worth of data. If the slope was upward, then I included the sample.

Here's what I found

  • 70% of the rise-retrace patterns reached their target without being stopped out (down from 71%).
  • From the buy price to the target meant an average gain of 14.7% (down from 17%).
  • If you use the ultimate high instead of the target, price rises an average of 25.5% (down from 30.1%).
  • If losses are included, the average rise is 8.9% (down from 9.3%).

In other words, the results are somewhat inferior to the full sample set.

I did find that the most winning trades occurred when the rise is between 21% and 38% and the retrace between 45% and 75%.

Swing Trading Setup: Trading Tactics

The lessons from this study are manifold and they are listed below.

  • Look for a substantial rise leading to price retracing a portion of that rise. The larger the rise, the larger the potential profit. Rises from 21% to 38% worked best.
  • Look for a significant turning point as the retrace low. If it is too close to the top of the rise, skip the trade (there is not enough profit potential).
  • The best retraces are between 45% and 75%.
  • Buy in as close to the retrace low as possible. Place a stop 5% below the low.
  • Ride price higher and set an exit at the highest close (not the highest high) between the start of the rise and the retrace low.
  • If price appears to stall near the prior high, then exit the trade.
  • Price may continue higher for significant additional gains (almost double), so do not be in too much of a rush to exit. Check other stocks in the same industry. If they are moving up along with a rising general market, then continue holding the position.

-- Thomas Bulkowski

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Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Good news is just life's way of keeping you off balance.