Bulkowski’s Trading Checklist

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Before Buying

• Check the markets and trade in the direction of the prevailing market trend.
• Check the industry. Are other stocks in the same industry moving the same way?

Are they showing signs of topping out or bottoming?

Which stock leads the pack? Study it for clues to future price direction.

• Look at the weekly scale (or the next higher scale) for any threatening chart patterns.

Is the stock trending in the same direction as on the shorter time scale?

Do you see any existing chart patterns?

Do you see underlying support or overhead resistance?

Draw trendlines to see where price may intersect them.

• Score the chart pattern. See my book, Trading Classic Chart Patterns to gauge how likely the stock will reach the price target.
• Historical review. Find another chart pattern in the same stock and see how it performed in the past.
• Check your favorite indicators. What are they telling you?

Relative strength index (RSI): I use this for divergence and as an indicator of overbought (too pricey) or oversold (too cheap).

Bollinger bands: When the bands narrow (low volatility) that tells me price is going to make a big move. Price often bounces from one band to the other, especially when the band is horizontal and price touches it.

Is the stock price diverging from the indicator?

Is the indicator signaling a trade?

Check for failure swings, little M or W shaped patterns that may signal a short-term reversal.

• Review the industry relative strength. How is this industry doing compared to others? You’ll find that industries performing well will continue to do well, usually for months.
• Is the stock trending up? Why buy a stock today when it will be cheaper tomorrow? Wait for price to turn up before buying. View the stock on the weekly scale (or higher time scale) to help decide the trend.
• Is the stock trading near the yearly high? Buy stocks showing chart patterns near the yearly high, preferably breaking out to a new high. When the breakout occurs, price coasts higher on momentum, so you can raise your stop. You do use stops, don’t you?
• Get a quote before trading. Delay buying if the quote is lower than the last time you checked.
• If the stock is up too much intraday, skip the trade. Don’t chase a stock higher.
• Look for overhead resistance. Where is price likely to stall or reverse?
• Look for underlying support. How far down is the stock likely to go?
• Place that stop with your broker.
• Will a throwback or pullback happen? Prices return to the breakout price usually in about a week. Consider initiating or adding to your position once price resumes the original breakout direction. Statistics show that chart patterns with throwbacks or pullbacks perform worse than those without throws or pulls.
• Check for DCBs. Avoid any stock showing a dead-cat bounce within the last six months to a year.
• Prices don’t trend forever. If you are about to buy a stock that has been trending upward for several days in a row, count on price reversing just after you buy. The same goes for a consecutive declining price series. Wait for the turn then trade.

How to sell?

• Use a stop. Raise the stop as price rises. If you can’t make money in the markets, chances are you don’t use stops.

When to sell?

• The stock is about to hit your stop. Sell it now! Why wait for price to hit your stop if you know that it will?
• A bearish chart pattern has broken out downward. Sell now! If price turns around, it’s a pullback and the stock will soon head back down.
• The stock has closed below an up-sloping trendline. This is the first indication of a trend change. The longer the trendline the more reliable it is. Switch to the weekly (or higher time) scale and check the trendline again. Use the log scale for earlier exit trendline signals.
• Stock falls more than 62% retrace. Measure the retrace after an up move. A retrace larger than 62% means the stock is going down. Period. Sell it.
• Price has hit the target. If this is a short-term trade, then sell it. If not a short-term trade, then raise your stop.
• The averages are dropping. If the market is taking other stocks down along with yours, it’s time to sell. Flip to the weekly scale. If the trend is still down, then sell.
• Stocks in the industry are topping out. Any bearish chart patterns in stocks in the same industry are warning bells. Consider selling. Rare is the stock that can swim against the current for long.
• Look at the weekly scale. New chart patterns, trendlines, support and resistance all appear on the weekly chart. Use them as sell signals.
• The market is up but the stock is down. If the Dow is up 100 points but your stock is down, find out why. This intraday price divergence is a warning signal. Sometimes there is a good reason for the divergence – a hurricane approaching oil rigs for example.
• Historical price review. What happened the last time the stock made a new high, shot upward in a straight-line run, consolidated, dropped a few points in just days, or stalled at an old high? Past behavior can give you an indication of how well the stock will behave in the future. However, the more you rely on past behavior, the more likely the stock will surprise you.
• Check the indicators. Are your favorite indicators saying sell? What does the best indicator say -- price? Is price rising or falling? Is price trending up or down? Don’t know? Then switch to the weekly scale and ask if price is rising or falling. If it’s falling then sell.
• Indicators are diverging from price. This is usually a reliable sell signal, but not an automatic one. Price can diverge from indicators for months before the stock turns down, if it turns down at all.
• Indicator failure swings. These M and W shapes in the indicator can call short-term turning points accurately.
• Overhead resistance. Has the stock hit overhead resistance and is now heading down? Sell.
• Is a throwback or pullback happening? Throws and pulls happen often after a breakout. Initiate or add to your position after a throwback once price resumes the move up. For a pullback, it’s often your last chance to exit a stock before the decline resumes. Take the sell signal and get out.

General Trading Tips

• Tighten stops. If other stocks in the same industry begin trending down, then tighten your stop. If your stock shoots up several points over several days, then tighten the stop because price may reverse.
• Trade tall patterns. Tall patterns outperform short ones. What is short and tall? Refer to my book, Encyclopedia of Chart Patterns, Second Edition for details as it varies from pattern to pattern.
• Narrowing prices. If the daily high-low range narrows over time, then expect a trend change. A symmetrical triangle, with its narrowing price trend,shows this behavior. The breakout comes after the price range contracts and volume diminishes.
• Trade busted patterns. Chart patterns that breakout downward then quickly reverse often soar.
• Trade with the trend. If the market and industry are moving up, select stocks with upward breakouts. Avoid countertrend trades.
• Reversal chart patterns must have something to reverse. A stock showing a diamond top/downward breakout that appears several points above a price plateau often returns to the plateau.
• Don’t average down (buying more at a lower price). For traders, you will get fed up and sell just as price bottoms. If you buy-and-hold, then ignore this advice; you can likely ride out the downturn unless your stock is Enron, WorldCom, Penn Central, United Airlines ….
• Trade intraday. Switch to the intraday scale or the next shorter period to place the trade. The shorter time scale will zoom into the price action and highlight short-term support and resistance zones.
• Raise that stop as price rises. Check the volatility and place it no closer than 2 times the current price volatility.
• Never lower a stop. If you feel a desire to lower a stop, sell the stock.
• Follow the same stocks each day. Become familiar with them. Don’t invest in unfamiliar stocks.
• Choose chart patterns that work for you. Some chart patterns perform better than others do. Be selective and become an expert in the patterns you trade.
• Keep a trading diary and review it periodically. Log the date, number of shares traded, order type (stop, market, limit), price filled at, stop loss price, price target, reason for the trade, and so on.
• Diversify. Don’t load up your portfolio with stocks from one industry. Look what happened to airline stocks from 9/11/2001 to 9/17/2001.
• Don’t over diversify. Owning more than a dozen will make it hard to follow.
• Check commodities. Oil, copper, and natural gas are important ingredients for many industries. If the price of oil is shooting up, the airlines and truckers may suffer but oil service companies, refiners, and drillers should prosper.
• Tune your system. The markets change over time and so should your system and your trading style. If the markets are trending, remain in your position. If the markets are choppy, rely on short-term trades.
• Ignore chat room chatter. People in chat rooms are sometimes selling more than their opinion.
• If you have to ask, you’re making a mistake. If you have doubts about a trade then don’t trade. Don’t let others spend your money.
• Set price targets. Price targets work well for short-term trades (swing trades). Use trailing stops for longer hold times.
• Late entry. For proper entry, place an order to buy the stock a penny above the breakout price.
• Watch for a throwback or pullback. Prices turn an average of 3 days after a breakout and complete the move back to the breakout price in 10 or 11 days. Prices resume the original breakout direction 86% of the time.
• Don’t short a stock. If you can’t make money on the long side, you won’t make it on the short side either. Try it on paper first. You can make more money on the long side than the short side. See the study on shorts and longs.
• Prices drop faster than they rise. Price trends after downward breakouts are quicker and steeper than are their upward counterparts. If you can’t sell, your losses will grow quickly.
• Price reverses 1 month after the breakout in a bear market. This is also true in a bull market, but less often. The 1-month benchmark also varies from pattern to pattern. It’s rarely shorter, but often longer -- 5 to 7 weeks after the breakout.
• Price moves most in the first week after a breakout, so get in early.

Trading Psychology

• Are you trading because you want to trade? Consider trading a business not a game.
• Are you not trading? This is the opposite of trading too often. You may be so scared of taking a loss that you avoid trading altogether.
• If you get stopped out of several stocks, walk away. Paper trade until the profits return.
• Follow the system. Would you be making more money if you followed your trading signals? Understand why you’re ignoring the signals you receive.
• Don’t overtrade. Sometimes the best place for cash is in the bank. You don’ t HAVE to trade.
• Learn from mistakes. Review your trades periodically. It’ll uncover bad habits.
• Focus on the positive. The loss your suffered today pales to the killing you made last week.
• Ignore profits. If you find yourself getting nervous about a winning trade or making too much money, then concentrate not on the bottom line but on improving your trading skills. Get used to making too much money.
• Obey your trading signals. Otherwise, what are you trading for? Plan your trade and trade your plan.
• Don’t trade when you’re upset. This also goes for being too excited.
• Abandoning a winning system. Don’t become bored with your winning system and search for new, more exciting ways to lose money.