Encyclopedia of Chart Patterns, Second Edition

Author: Thomas N. Bulkowski Categories: Technical Analysis

Quick Summary

The definitive statistical reference on chart patterns, covering over 50 patterns with performance statistics derived from tens of thousands of real trades. Bulkowski provides failure rates, average rises/declines, breakout volume characteristics, and throwback/pullback frequencies for each pattern, transforming chart pattern analysis from subjective art into quantified, evidence-based methodology.

Detailed Summary

Thomas Bulkowski's "Encyclopedia of Chart Patterns" stands as the most rigorous empirical investigation of chart pattern performance ever published. Drawing on a database of over 38,500 individually identified chart patterns spanning from 1991 through 2004, across approximately 500 stocks on the NYSE, AMEX, and Nasdaq, Bulkowski subjects classical technical analysis to the kind of systematic statistical scrutiny that the field had long lacked. The second edition significantly expands the first by incorporating bear market data from the 2000-2002 decline, thereby providing dual-regime (bull and bear) performance statistics for every pattern cataloged.

The book is organized into two major sections: 53 chapters on classical chart patterns and 10 chapters on event patterns. Each chart pattern chapter follows a standardized analytical framework: a Results Snapshot summarizing key findings, identification guidelines in both tabular and narrative form, a Focus on Failures section dissecting why certain patterns fail, a comprehensive Statistics section, Trading Tactics with sample trades, and a For Best Performance summary. This systematic structure allows direct cross-pattern comparison -- a methodological advance that transforms pattern analysis from anecdotal lore into a comparative empirical discipline.

Among the classical patterns covered are broadening formations (bottoms, tops, ascending and descending variants), bump-and-run reversals, cups with handles (and inverted), diamond tops and bottoms, four variants each of double bottoms and double tops (Adam & Adam, Adam & Eve, Eve & Adam, Eve & Eve), flags (including the rare high-and-tight flag), gaps, head-and-shoulders formations (simple and complex, tops and bottoms), horns, island reversals, measured moves, pennants, pipes, rectangles, rounding formations, scallops (ascending, descending, and inverted variants), three falling peaks, three rising valleys, ascending/descending/symmetrical triangles, triple tops and bottoms, and falling/rising wedges. The event patterns section -- new to the second edition -- covers dead-cat bounces (and inverted), earnings surprises (good and bad), FDA drug approvals, earnings flags, same-store sales announcements, and stock upgrades/downgrades.

The statistical methodology is particularly noteworthy. For each pattern, Bulkowski provides: average rise or decline after breakout, failure rates at ten breakpoints (e.g., percentage of patterns that fail to achieve at least a 5%, 10%, 15% move), breakout and postbreakout statistics including performance relative to yearly price ranges, pullback and throwback rates, performance after gaps, frequency distributions showing the timing of ultimate highs or lows, size statistics examining how pattern height and width affect performance, and volume statistics including volume trends, volume shapes (a concept Bulkowski originated), and breakout-day volume effects. The inclusion of "busted pattern" performance -- what happens when a pattern breaks out in one direction then reverses -- provides actionable intelligence for contrarian traders.

Key empirical findings challenge conventional technical analysis wisdom. For example, Bulkowski demonstrates that throwbacks and pullbacks occur in roughly 50-60% of breakouts and that prices tend to underperform after such events; that volume trends heading into a breakout are less predictive than commonly believed; that tall patterns outperform short ones on a percentage basis; and that certain patterns widely considered reliable (such as the symmetrical triangle) have surprisingly high failure rates under specific market conditions. The high-and-tight flag emerges as one of the strongest performers, while many reversal patterns perform better as continuations under certain conditions.

The book's empirical contribution to technical analysis cannot be overstated. By providing precise, statistically grounded performance metrics, Bulkowski enables traders to make probability-weighted decisions about pattern trading -- knowing not only what the expected move is, but also the distribution of outcomes and the likelihood of failure. This transforms chart pattern analysis from qualitative pattern recognition into quantitative risk assessment.