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Written and copyright © 2010-2011 by Thomas N. Bulkowski. All rights reserved.
This article is a quiz designed to test your knowledge of breakouts.
Look at the chart of two fictitious ascending triangles on the daily scale.
The triangle is outlined in blue with a horizontal top trendline and an up-sloping bottom trendline. Both
A and B show upward breakouts but there is a difference between the two charts.
Which setup (A or B) represents the best trading opportunity?
The difference, if you didn't find it, is in the five days leading to the breakout. In A, price makes a straight-line run but in
B, price runs into a congestion area in the five days before the breakout.
I proved in a study that the differences between trading a chart pattern with a straight-line run (A) and a congestion area
(B) is not huge. In the straight-line run, on average, the rise after the breakout will be farther, but the risk of failure increases, too.
Throwbacks will occur more often and that is usually a bad thing.
When looking for chart patterns, trade those with a congestion area forming
just before the breakout. If a straight-line run appears, then consider waiting for a throwback to occur and complete. Once price starts moving up again, then enter the trade.
-- Thomas Bulkowski
Written and copyright © 2010-2011 by Thomas N. Bulkowski. All rights reserved. You worry too much about your job. Stop it. You're not paid enough to worry.
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