that price makes it up that far less than half the time (40%).
Hopefully you can use the information in these tables to help improve trading results using Fibonacci‐based patterns.
Sample Trade
Figure 3.4 shows a trade George made. His computer program found the AB=CD pattern on the way down to D. Let's go through his buy decision.
The pattern appears at turns ABCD on the chart. The high at point A is 6.65, the low at B is 5.81, for a height of 84 cents. Subtracting the height from the high at C (6.55) gives a calculated turn D of 5.71. The high–low range at D is 5.94–5.59. It's the first point where the stock drops below the target, and it accurately marks the turn. So that becomes point D.
Let's see if we can predict when the stock will reach D. Point A is 9 November 2009, B is at 8 December, and C turns at 16 December. The ratio of CB/BA is 8/29 or .28. That's the ratio between the two legs.
Figure 3.4 George took a loss buying this AB=CD.
For point D, we use the formula D = (C – B)/Ratio + C or (8)/.28 + (16 December 2009). Turn D is predicted to appear on 14 January 2010. In this example, turn D appeared on 20 January, and that's within a week of the predicted time. I consider that a good prediction.
Volume sloped downward as line G shows. Even though volume slopes upward most of the time in an AB=CD pattern, the direction is nearly random (53%). He made this trade in a bull market (the bear market ended in early 2009), and Table 3.2 says a falling volume trend penalizes performance, but only by about a percentage point (dropping from 38.4% to 37%).
He used the traditional measure rule for chart patterns to estimate how far price would climb if the pattern broke out upward. The height of the pattern is A – D (6.65 – 5.59) or 1.06, so the target would be 1.06 + 6.65 or 7.71, which is the height added to the high at point A. A downward breakout would be D – 1.06 or 4.53 (or 19% lower).
“When the stock made a strong push upward at E,” he told me, “I bought at the open the next day and received a fill at 6.02. And I just ate breakfast, too.” He grinned.
I scratched my head.
“The stock filled…ate breakfast. Get it?”
I exhaled, rolled my eyes, but said nothing. With a calculated rise to 7.71, he was looking at a potential gain of 18%. “That sounds reasonable,” he said.
For grins, he calculated a new target based on half the height (1.06/2 or .53 added to the high at A) or 7.18. If he sold at the closer target, he'd make 9%.
“Let's look at the historical chart.” He punched keys on his computer and pulled up a chart from 2007. “Overhead resistance here,” he pointed and swept his finger across the screen. Price moved horizontally for a year. “Looks like a cloudbank pattern,” before the bear market started and sucked the stock down. If the stock worked as he hoped, it would have to traverse through that resistance to reach the full height target. “Am I asking too much for price to rise that far?”
A check of Table 3.3 didn't set well with him. With just 38% of patterns showing a reversal at D, he decided to place a tight stop a penny below the low at D (5.59 – .01 or 5.58).
“The trade went bad right from the start. The day I bought, the stock closed lower, almost reversing the move up at price bar E. Four days later,” he pointed to F, “the stock hit my stop and cashed me out at 5.58 for a loss of 7%. That's one day before it bottomed.”
The day after he was stopped out, the stock began a rebound that carried the stock up to the full‐height target, 7.71, shown on the chart as point H.
Looking back at the trade, the AB=CD pattern found point D accurately and on time (within a week of the prediction), but the stock broke out downward (at F), not upward. It busted the downward breakout when it closed above the top of the pattern (above A) and continued higher to reach the full‐height target (H).
4 Bat®, Bearish
RESULTS SNAPSHOT
Appearance: Looks like a big W with turns located by Fibonacci ratios.
Downward Moves
| Bull Market | Bear Market | ||
| Performance rank | 1 (best) out of 5 | 4 out of 5 | |
| Breakeven failure rate | 17.7% | 4.5% | |
| Average drop | –14.3% | –20.2% | |
| Volume trend | Downward | Downward | |
| Point D reversal rate | 86% | 86% | |
| See also | Big W, bearish crab, bearish butterfly, double bottoms (all types), and bearish Gartley | ||
Every time I see a bearish bat pattern, my first thought is it's a Big W chart pattern. It's as if the Big W was computerized and the developer used Fibonacci ratios to determine the turning points. The bat pattern joins other Fibonacci‐based patterns: AB=CD, butterfly, crab, and Gartley.
I measured performance of Fibonacci‐based patterns differently than I do other chart pattern types. That's because we're looking for a reversal at the end of the pattern and not an upward or downward breakout. Therefore, the layout of this chapter is different from most other chapters in this book.
The above Results Snapshot gauges the downward move after the pattern ends. The stocks I looked at saw price turn lower 86% of the time after reaching point D. That percentage is not good but great!
The average decline in bull markets is a hair over 14%. The breakeven failure rate isn't too bad, at 17.7%. That means an average of almost 18% of the bearish bats will fail to see price drop more than 5% below the high at D (end of the pattern).
All of this may be confusing unless you can see what a typical bat pattern looks like. So let's take a quick tour.
Tour
Figure 4.1 shows an example of a bearish bat. The pattern begins at X, which is any significant turn. The locations of points A and B follow, but their placement is determined by one of two Fibonacci numbers. Once points XAB are found, the search for C can begin using
