Bulkowski’s Glossary

This page serves as a glossary of terms and definitions for methods used to measure performance of chart, event, and candlestick patterns described on ThePatternSite.com website. Be sure to return to the home page for more trading information

Warning!

• The statistics shown in ThePatternSite.com are based on hundreds of perfect trades, buying at the breakout price and selling at the highest high before price drops. The likelihood of duplicating these results in actual trading is zero. Instead, use the numbers as guides when comparing one chart pattern to another, to gauge relative performance.

Average rise or decline

Average is the sum of the samples divided by the number of samples. The average rise/decline measures from the breakout price to the ultimate high or ultimate low.

Bear market

The decline in the S&P 500 Index from March 24, 2000 to October 10, 2002.

Break even failure rate.

A measure of the number of patterns that fail to rise (upward breakout) or decline (downward breakout) by at least 5%.

Breakout

When price pierces a chart pattern trendline or above the top or below the bottom of a chart pattern. In the case of a head-and-shoulders, a neckline pierce is used or the right shoulder armpit.

Breakout volume

The volume on the day of a chart pattern breakout as compared to the average of the prior 3 months.

Bull market

Everything outside of the March 24, 2000 to October 10, 2002 bear market .

Busted patterns

Price that moves less than 10% after the breakout before reversing and zipping to the other side of the chart pattern, thus trending in a new direction. The move busts the original breakout direction.

Change after the tend ends

After a breakout, measures the move from the end of the price trend until price peaks or hits bottom and then moves more than 20% in a new direction. Similar to the measure for the ultimate high or ultimate low. The thinking here is that a trader would short an upward breakout after the upward trend ends and then ride price lower, or go long at the end of a downtrend.

Confirmation

The price at which squiggles on a chart become a valid chart pattern. Usually occurs when price breaks out of the chart pattern trendline boundary.

Continuation

When price enters and exits a chart pattern in the same direction.

Failure rate

See break even failure rate

Flat base

If you know what a rectangle chart pattern looks like, then you know what a flat base is. Look for a price area in which the stock touches the same value multiple times over several weeks or months. The bottom or top of this area appears flat, hence the name. Many chart patterns appear at a price just below the base, like a pothole in a road, before price takes off.

Gaps

Occur when yesterday's high is below today's low (bull gap) or yesterday's low is above today's high.

Divergence

Price diverges from an indicator. Price will make higher highs but the indicator will make lower highs or price will make lower lows and the indicator will make higher lows. See Divergence

Horizontal consolidation region (HCR)

Is a congestion area marked by a flat top, flat bottom, (or both), or prices that share a common value. A HCR means any area in which price moves horizontally.

Linear regression

A method of drawing a line such that the distance between the points and the line is at a minimum.

Market capitalization

The number of shares outstanding for a stock multiplied by the breakout price.

Market trend

The difference in the S&P 500 index from the day the chart pattern ended to the day it started.

Measure rule

A method, usually using the chart pattern height, to determine the minimum price move after a breakout

Minor high

A significant turning point in a stock, resulting in a peak.

Minor low

A significant turning point in a stock, resulting in a valley.

Neckline

In a head-and-shoulders chart pattern, a line joining the armpits, extended into the future to show trading signals when price crosses it.

Overall rank

A sorted and ranked sum of the ranks of: the average rise or decline, the break-even failure rate, and the change after the trend ends. A rank of 1 is best.

Overshoot

When price rises briefly above the start of a chart pattern.

Partial decline

After a chart pattern is formed, obeying all of the identification guidelines, price drops but does not touch the bottom trendline before staging an immediate upward breakout.

Partial rise

After a chart pattern is formed, obeying all of the identification guidelines, price rises but does not touch the top trendline before staging an immediate downward breakout.

Pattern height

The difference between the highest high and lowest low in the chart pattern divided by the breakout price.

Percentage meeting price target

Measures how often price fulfills the measure rule. The measure rule is usually the chart pattern height added to (upward breakouts) or subtracted from (downward breakouts) the chart pattern. The result gives a target price. The measure rule computation varies from pattern to pattern and is usually inaccurate. Try multiplying the measure rule height by the percentage meeting the price target to get a final target price. See measure rule for more information.

Performance for upward breakouts

A rank of the rise from the breakout price to the ultimate high.

Performance rank

I rank each chart pattern in 3 ways: by failure rate, by average rise or decline, and by the average decline or rise after the original trend ends (the change after the trend ends in case you want to reverse the direction of the last trade). The performance rank is a sum of the scores of each rank, sorted again, and ranked. A rank of 1 is best. A rank of 3 out of 23, for example, means it ranks third out of 23 other chart pattern types (that is, those with the same breakout direction in the same bull or bear market).

Pullbacks

Price breaks out downward, drops, and then returns to the breakout price within 30 days.

Reversal

When price enters and exits a chart pattern in opposite directions.

Swing measure

For flags and pennants, measure from the breakout to the swing high or low (usually the nearest minor high or low after the breakout, where the short term trend ends). I use this method because these chart patterns are small and many suggest that they appear midway in a price trend. Gaps, measured moves, and some event patterns do not have a conventional breakout or ultimate high/low, so their performance is not ranked or the method does not apply to the standard measure (that of finding the highest high or lowest low before a 20% trend change).

Throwbacks

Price breaks out upward, climbs, and then returns to the breakout price within 30 days.

Throwback/pullback rate

The percentage of stocks that throw back or pull back to the breakout price after the breakout.

Traps

Occurs when price breaks out in one direction, moves less than 10% before reversing trend and moving in the new direction by either 20% or closing on the side opposite the breakout.

Trend start

Where the price trend begins, as measured from a major price turning point. To determine the trend start, look backward in time for the lowest low followed by a rise of at least 20%, or the highest high followed by a decline of at least 20%. Those turning points, the lowest low or highest high, represent where the trend starts. Whether to search for the lowest low or highest high, I use whichever drops below or rises above the bottom/top of the chart pattern first.

Ultimate high

The highest peak before price declines by at least 20%, measured from the high to the close. If the stock did not have a 20% move before the end of data, then the highest peak was used as the measure. The search for the ultimate high was called off if price closed below the chart pattern’s low.

Ultimate low

The lowest valley before price rises at least 20%, measured from the low to the close. If the stock did not have a 20% move before the end of data, then the lowest valley reached was used as the measure. The search for the ultimate low was called off if price closed above the chart pattern’s high.

Volume trend

Use linear regression to determine if volume trends upward or downward from the start to end of the chart pattern.

Yearly price range

The difference between the highest high and lowest low of the prior year, starting from the day before the chart pattern begins, split into thirds: highest third, middle third, and lowest third.