Fulfilling The Dream
Thomas Bulkowski
by Jayanthi Gopalakrishnan
Trader and chart-pattern expert Thomas N. Bulkowski, former hardware and software engineer and current Contributing Writer for Technical Analysis of STOCKS & COMMODITIES (and best-selling author of the classic Encyclopedia Of Chart Patterns as well as Trading Classic Chart Patterns and Getting Started In Chart Patterns), realized the potential of the stock market when he opened a brokerage account to deposit the stock certificates he received from his employer's stock purchase plan. On 27 trades, he at least doubled his money and made over 1,000% on six of his stock picks (one resulted in a 4,300% gain). It's safe to say that he's a successful investor. He has had 25 years of experience trading stocks, and with his trading savvy, he was able to retire from his job at the age of 36, thus fulfilling the dream of trading for a living. Best of all, with his trading methods, he doesn't have to sit in front of his computer screen all day! Find out how he does it. S&C Editor Jayanthi Gopalakrishnan interviewed Bulkowski via email on July 10, 2006.
I started out wondering how often patterns worked, but sources I checked said patterns worked "most of the time." What does that mean? I decided to find out.
You've done as much work as can be done on chart patterns. How did you start recognizing and realizing the importance of chart formations?
I couldn't find much information on chart patterns until I discovered STOCKS & COMMODITIES magazine. I started out wondering how often patterns worked and how often they failed, but sources I checked said patterns worked "most of the time." What does that mean? I decided to find out, and that's how my first book, Encyclopedia Of Chart Patterns, came about. Now, pattern traders can own a book that says "head & shoulders bottoms fail 3% of the time in a bull market and price throws back 51% of the time in a bear market." Compared to other chart patterns, performance statistics like that give you an edge, and an edge is all you need to beat the other guy in the markets.
How do you screen for stocks to trade?
First, I'll check the industry relative strength by ranking the 46 industries I follow for performance over the last six months. The order of the top 10 doesn't change much-stocks doing well continue to do well. I want to know what's working and what industries to avoid.
Then I'll page through nearly 450 securities, mostly stocks. Each stock is sorted by industry, so all airline stocks appear first and then basic chemicals, and so on. I look at the same 450 each day, so I get a feel not only for each stock, but for the industry as well.
Next, as each screen appears, my computer searches for chart patterns and candlesticks automatically, and the chart border changes color depending on the industry relative strength, so that alerts me to the leaders and laggards. So my computer and I catch most of the chart patterns worth finding.
And finally, when I see an interesting chart pattern worth trading, I push a button and my electronic notebook appears, formatted with a checklist of stuff I look for, such as my stop price, target price, future market direction, chart pattern score, and so on. It may take up to an hour to qualify a pattern, but once I'm done with my research, I make a trading decision.
What type of information is in your electronic notebook?
I'll send you a page from my notebook. [Editor's note: See sidebar on page 50.]
What trading setups do you look for?
I do best when I'm trading chart patterns with breakouts at or near the yearly high. Statistics say that's not the best place for a trade-within a third of the yearly low is best. Those show the best average rises and lowest failure rates, but in today's markets, those near the bottom tend to break out upward and then collapse.
Near the yearly high, there's no overhead resistance except round numbers to worry about. A descending triangle with an upward breakout is my preferred setup. It ranks second in terms of the average rise (47%), seventh for failure rate (7%), and has an overall performance rank of 5 out of 23, where 1 is best.
...Continued in the September 2006 issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the September 2006 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2006, Technical Analysis, Inc.
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