V. 19:11 (50-54): Winning With Failure by Christopher Narcouzi

Winning With Failure by Christopher Narcouzi

Believe it or not, you can take advantage of failed patterns and profit handsomely.

Have you ever bought a stock after it broke through the resistance line, only to see the price drop a few days later? Have you ever bought into a breakout from a reverse head and shoulders pattern, just to watch that breakout fail a few days later? If you had placed a stop, as recom-mended, your position would have closed out. But you don’t have to stop there. In-stead, close your position and trade the stock in the opposite direction.

Patterns form because the market expends effort to create a pattern that explains price direction. Ideally, the activity on a price chart after a pattern has started should confirm the continuation of the pattern. But if you trade chart patterns the way I do, you know that they often don’t continue as expected. When this happens, it means that the market refused to follow through and thus should be traded in the opposite direction. Jack Schwager, in his Schwager On Futures: Technical Analysis, states that a failed signal is among the most reliable of all chart signals. In the examples that follow, you’ll see the strength of his statement.