Trading Smiles And Frowns by Thomas Bulkowski
Patterns With Personality
Can a technique this simple really boost trading
profits? Find out more.
Buy smiles and sell frowns: Itís easy to remember,
but is it easy to trade? In this article I will
show you how this simple pattern-recognition
technique works and how it could improve your
How it works
Figure 1 shows an idealized trade. Price is the wavy
black line. In any trade, one price represents the
perfect entry. Which of the labels ó A, B, or C
órepresents the best buy price? The correct choice
is B. Price bottoms at B, and forms the lowest price
on the chart.
Points A and C are at the same price, as denoted by
the horizontal dashed line. If you buy at point A, price
is still heading down toward the perfect entry price.
This is the entry that novices often use when bottomfishing.
They see the stock dropping and feel that it
canít go any lower, so they buy. The market knows
better and continues to punish the stock, driving price
lower. Within days of buying the stock, the trader who
bought at point A is already losing money.
If the trader is lucky, price will bottom close to
their buy price. If they are unlucky, price continues
lower. Eventually, the pain of holding a stock whose
value drops almost daily becomes so great that they
finally sell. Often, this happens about a week or two
before the stock bottoms at B.
Obviously, A is a bad price to pay for the stock.
You donít know where the bottom is, but you do
know that price is dropping (just look at the trend using a moving average, or switch to a line chart if
Consider price C. Itís at the same value as A.
But itís a better entry because price is moving up
instead of down. You are buying the stock after the
perfect entry (B), but at least the worry of selling for
a loss is diminished ó not absent, mind you, just
lessened. Almost every day, price climbs, making