Getting Started in Chart Patterns

Executive Summary

Thomas N. Bulkowski's Getting Started in Chart Patterns provides a data-driven, statistically grounded introduction to chart pattern trading that draws on the author's extensive research involving over 38,500 chart and event patterns. Published in 2006 as part of the Wiley Getting Started series, the book distills Bulkowski's encyclopedic knowledge (from his larger Encyclopedia of Chart Patterns) into an accessible yet rigorous guide for beginning and intermediate traders. Through a fictional character named Jake, Bulkowski makes the material engaging while delivering hard statistical evidence about pattern performance, failure rates, and practical trading rules. The book covers everything from trading psychology through trendlines, support and resistance, candlestick patterns, event patterns, and the innovative concept of "busted" patterns.

Core Thesis

Chart patterns are the "footprints of smart money" -- institutional investors and informed traders who cannot hide their trading activity. By learning to identify, categorize, and trade these patterns using statistically validated performance data, retail traders can achieve a meaningful edge. However, success requires not just pattern recognition but also proper trading psychology, the use of stop-loss orders on every trade, alignment with market and sector trends, and realistic expectations about win rates (which typically range from 40-60%). The book emphasizes that busted patterns (patterns that fail) can often provide even better trading opportunities than patterns that work as expected.

Chapter-by-Chapter Summary

Chapter 1: The Smart Money's Footprints

Introduces the book's central metaphor through a narrative about Jake, a fictional self-employed engineer who has lost money trading through fundamental analysis, moving averages, Elliott waves, cycles, candlesticks, and black box systems. Establishes that chart patterns represent the observable traces of institutional trading activity, and that unlike the institutions, retail traders have the advantage of being able to act on these signals without moving the market.

Chapter 2: Trading Psychology

A foundational chapter on the behavioral biases that undermine trading success. Discusses the experimental evidence showing that people prefer certain small gains over uncertain larger gains but prefer uncertain larger losses over certain small losses. Covers the critical importance of stop-loss orders, the need to match expectations with reality (40-60% win rates), rules for diversification (no more than 5% of portfolio in one stock), and guidance on whether to hold or sell through earnings announcements. Provides practical tips on managing trading as a part-time activity.

Chapter 3: The Truth about Trendlines

Challenges common assumptions about trendlines with statistical analysis. Covers proper methods for drawing trendlines (connecting peaks or valleys), the distinction between internal and external trendlines, and evidence-based rules for trendline validity including the relationship between trendline angle, touch frequency, and predictive power.

Chapter 4: Support and Resistance -- The Most Important Chart Patterns

Presents support and resistance as the most fundamental and important chart patterns, backed by statistical evidence of their reliability. Covers identification methods, the phenomenon of role reversal (support becoming resistance and vice versa), round number effects, and practical trading applications.

Chapter 5: Special Situations

Addresses specific market conditions and chart configurations that require specialized analysis, expanding the pattern recognition toolkit beyond standard formations.

Chapter 6: The Top 10 Performing Bottoms

Ranks and analyzes the ten best-performing bottom patterns based on statistical evidence from thousands of historical examples. Each pattern is presented with performance statistics, identification guidelines, trading rules, and real-world examples.

Chapter 7: Common Patterns for the Toolbox

Covers the most frequently occurring chart patterns that every trader should know, including their statistical performance characteristics, identification criteria, and trading guidelines.

Chapter 8: Event Patterns -- What They Are and How to Trade Them

Introduces the concept of event patterns -- chart formations triggered by specific events such as earnings announcements, analyst upgrades/downgrades, stock splits, and other catalysts. Provides performance statistics and trading strategies for each event type.

Chapter 9: Busted Patterns -- Making Money by Trading Failure

One of the book's most original contributions: a systematic analysis of patterns that fail to reach their price targets. Demonstrates that busted patterns often provide superior trading opportunities because the failure itself triggers a strong move in the opposite direction. Provides specific criteria for identifying and trading busted patterns.

Chapter 10: More Trades -- Putting It All Together

Synthesizes all concepts through detailed trade examples, walking the reader through complete trades from identification through execution and exit.

Chapter 11: The Art of Trading -- Checklists

Provides comprehensive trading checklists covering every aspect of the trading process, designed to ensure consistent execution and prevent common errors.

Chapter 12: Crunching the Numbers

Presents the statistical foundation underlying the book's recommendations, including performance rankings for all discussed chart and event patterns.

Key Concepts

• Smart Money Footprints: Chart patterns as observable traces of institutional trading activity that retail traders can identify and exploit.
• Busted Patterns: Patterns that fail to reach their price targets, often providing even more profitable trading opportunities than successful patterns.
• Event Patterns: Chart formations triggered by specific corporate events that create predictable price behaviors.
• 40-60% Win Rate Reality: The statistical truth that even successful traders win less than two-thirds of their trades, making risk management and position sizing critical.
• Support and Resistance as Primary Patterns: The argument that support and resistance are more important and reliable than any other chart patterns.
• Stop-Loss Discipline: The non-negotiable requirement to use stops on every trade, which Bulkowski identifies as the single factor that separates professionals from amateurs.

Practical Applications

• Statistically validated identification and trading rules for dozens of chart and event patterns
• Performance ranking system allowing traders to prioritize the highest-probability patterns
• Busted pattern recognition and trading methodology for profiting from pattern failures
• Trading psychology framework with concrete rules for managing behavioral biases
• Comprehensive checklists for pre-trade analysis, trade execution, and post-trade review
• Trendline analysis methodology grounded in statistical evidence rather than subjective interpretation
• Portfolio management guidelines including position sizing limits and diversification rules

Critical Assessment

Bulkowski's greatest strength is his commitment to statistical evidence. Unlike most chart pattern books that rely on hand-picked examples and subjective interpretation, Bulkowski backs every claim with data from his database of over 38,500 patterns. The use of the fictional character Jake makes potentially dry material engaging without sacrificing rigor. The chapter on busted patterns is a genuinely original contribution that goes against conventional chart pattern wisdom. The performance rankings provide practical utility for pattern selection. Weaknesses include the limitation that historical pattern performance may not predict future results (a caveat Bulkowski himself acknowledges), the visual nature of chart patterns that can make precise identification subjective despite statistical backing, and the relatively basic treatment of position sizing and portfolio management.

Key Quotes

• "Chart patterns are the footprints of smart money."
• "Having a stop in place takes the agonizing decision out of your hands. Either you're stopped or you're not."
• "Unwillingness to use a stop is what separates an amateur trader from a professional."
• "Many traders will tell you that their win/loss ratio ranges between 40% and 60%."
• "If you feel you're going to be stopped out, close out the trade."

Conclusion

Getting Started in Chart Patterns stands out in the crowded field of chart pattern books through its rigorous statistical foundation and practical, evidence-based approach. Bulkowski transforms what is often treated as a subjective art into a data-driven discipline with quantifiable performance expectations. The concept of busted patterns alone makes the book worth reading for any chart-based trader. The book is best suited for beginning and intermediate traders who want to learn chart patterns properly from the start, with realistic expectations and statistically grounded trading rules.