|
Written by and copyright © 2005-2010 by Thomas N. Bulkowski. All rights reserved.
Quick note: Busted patterns work for both stock and
option plays, so I repeated the trading setup (it appears in both Options setups and Stocks setups).
A busted pattern occurs when price
breaks out in one direction and
moves less than 10% away from the breakout
price, reverses, and then breaks out in the new direction. After the pattern busts, price tends to trend in the new direction,
setting up a profitable trade. The new trend is often a powerful one, so it lasts longer than usual and is less likely to be fake.
If you search for busted patterns and trade the new breakout direction, you can have a higher success rate (more winning trades
that make more money) than if you trade the initial breakout of a chart pattern. Of course anything can happen, so use stops to protect
your position.
I show a busted symmetrical triangle in the chart.
The breakout is upward when price rises above the top trendline. Then, price busts
the pattern when it reverses and plunges
downward.
With some patterns, the breakout occurs well before the end of the
pattern so that when it busts, it is clear that price
has zoomed out the other side of the pattern. The situation shown in the chart is
difficult to separate from a
throwback. Sometimes it is best
to wait for price to close below the chart pattern low before you place the trade. In this example, you would want to short the stock
when it becomes clear that price is making a determined move down.
Symmetrical triangles are also notorious
for busting out in both directions, sometimes multiple times. Price breaks out
upward then downward, then upward and finally
moves off horizontally. Ascending and descending triangles make safer plays than
symmetrical triangles.
 
Pages 215 to 237 of Getting Started
in Chart Patterns (pictured to the left) discusses busted chart patterns. On pages 216,
223, and 230, I show what 18 busted chart patterns look like, so I need not repeat
myself here. Read those pages to become
more familiar with busted patterns and how to trade them.
-- Thomas Bulkowski
|
. If you buy ANYTHING, they pay for the referral.
on 
