Visual Patterns Meet Computerised Tests

Debashis Basu 05 August 2016

This book is the third and last in the ‘Evolution of a Trader’ series by Thomas Bulkowski. I had reviewed the first two (Trading Basics and Fundamental Analysis and Position Trading) in August-September 2013. The third book is all about swing trading and day trading. Bulkowski is quite a fascinating character. He got a degree in computer engineering when computers were in their infancy. His first job was as a hardware design engineer at Raytheon. But his heart was in the stock market. Every day, he arrived early to office and charted his favourite stocks on graph papers. As an engineer, he focused on the ‘right way’ to analyse stocks—using ‘strict fundamentals analyses’. His office-mate, Bob Kelly, however, followed a different method. He closed his eyes, twirled his hand around, and plunged it into the Wall Street Journal to make his choices. Bulkowski tracked his selections, and Bob’s random picks. After six months, he discovered two things: one, Bob was beating him; and, two, he did not have a clue on what he was doing. Bulkowski continued to study company earnings and valuations, using price-to earnings (P/E) and price-to-sales ratios as his main filters. He poured through Forbes and Fortune in the libraries and learned to love fundamental analysis.

However, while Bulkowski was profitable, he still did not have an answer to the huge swings that stocks suffer from periodically. His stocks would double or triple and then drop by half. He retired at 36 and started trading stocks full-time, writing articles and then writing books. Over the years, he evolved from just a buy-and-hold investor to a trader. While he has a core holding in stocks that are likely to do well over the long term, he now buys and sells stocks for the medium term, to short term, to a day. His tools are price patterns, or technical analysis, which is seen as mumbo-jumbo by many investors. However, this does not mean he follows indicators like ‘Relative Strength Index’ or ‘Stochastics’ or moving averages. He uses patterns like rectangle bottoms, flags, triangles, pennants and so on. What makes Bulkowski’s approach distinctive is that he has used his programing skills to test dozens of patterns in technical analysis over sample sizes running into hundreds and has come with what you can expect from the different patterns.

This book, Swing and Day Trading, is divided into 14 chapters, seven each for Swing Trading and Day Trading. In the Swing Trading part, Bulkowski introduces basic swing trade tools such as support and resistance, trend-lines and channels. He then come straight to the point. Chapter 3 lays its bare: which chart patterns work best for swingers? Bulkowski has analysed 32 chart patterns and ranked them according to two-month performance. The book displays the top 20 patterns that offer meaningful profits. The best performer was high and tight flag, a momentum play: buy high, sell higher.

Bulkowski also explains how to trade the top seven frequently traded chart patterns, such as symmetrical triangles, ascending triangles, head and shoulders bottom, support or congestion and flag bottoms, flat base bottoms and rounding bottoms. If you are interested in trading price patterns, this book comes closest to as scientific a study as you could get. The only issue that still remains is to define the patterns in live situations because there is still some subjectivity in locating the patterns.

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