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Your point on volume is well taken and a very important aspect. Curtis
Arnold in his book Pattern Probability System, measured profitability on
the h&s top at 52% and h&s bottom at 13.5%. This was based on
programming the patterns and running them against historical data. I've
found his criteria to be a bit more tightly defined than the E&M classic
and of course he provides statistical profitability measures which E&M
does not.
For both tops and bottoms, "the developmental period was restricted to
10-75 days." "Shoulders were required to achieve a height of between 25
percent and 50 percent of the height of the head" ... "the distance
between valleys was required to be nearly equal in keeping with
cyclicality considerations responsible for pattern formation." No
mention is made of volume. "The results of my research debunk the
popular myth that one of the best ways to make money is to wait for a
head and shoulders bottom and then buy or to wait for a head and
shoulders top and then sell. Either approach falls into the categories
known as bottom picking or top picking and should be avoided."
Although I have found Arnold's work credible and useful, particularly
with respect to wedges and triangles, I seem to remember that he was
directly or indirectly involved in some messiness regarding
profitability claims of his PPS software.
Earl
----- Original Message -----
From: "Steven W. Poser (PSN)" <swp@xxxxxxxxxxxxxxx>
To: <realtraders@xxxxxxxxxxx>
Sent: Wednesday, October 11, 2000 6:17 PM
Subject: RE: [RT] Spoo and Boo tracking
> There is a book out there that scientifically studies the multitude of
> patterns out there and finds the head and shoulders to be reliable
(though
> others are better). It uses advanced pattern matching techniques. The
book
> is called, "Encyclopedia of Chart Patterns" by Thomas Bulkowski. I
have to
> admit that though I have it, I have only glanced through it. I do have
issue
> with some of the statistics however. I will say though that the most
highly
> respected technicians in the business, professionals from the Market
> Technicians Association, have lauded it, including Bob Colby who wrote
the
> "Encyclopedia of Technical Analysis".
>
> The biggest problem with head and shoulders patterns is that people do
not
> apply all of the requirements to the h&s. They ignore volume, for one
thing.
> You must have the proper volume pattern as well as the proper price
pattern.
> The other thing is that people spend time anticipating it rather than
> letting it be confirmed.
>
> ---
> Steven W. Poser, President
> Poser Global Market Strategies Inc.
> http://www.poserglobal.com
> swp@xxxxxxxxxxxxxxx
> Tel: 201-995-0845
> Fax: 201-995-0846
>
> -----Original Message-----
> From: Earl Adamy [mailto:eadamy@xxxxxxxxxx]
> Sent: Wednesday, October 11, 2000 5:54 PM
> To: realtraders@xxxxxxxxxxx
> Subject: Re: [RT] Spoo and Boo tracking
>
>
> I generally agree that h&s patterns are over-identified and are
> generally under whelming in their reliability because they over
> identified. The "h&s" in the spoo has been bandied about by analysts
> ever since the spike high was put in in Mar00 bounded by roughly equal
> lows just below 1350 cash. While a major decline in the spoo may
indeed
> be underway, I believe any h&s pattern which includes a right side
> retracement of much more than 38% in the direction of the head, is
prone
> to failure. Certainly the oft cited h&s in the spoo with a 78%
> retracement on the right side falls into that category.
>
> There is, however, a variant of the h&s pattern which William O'Niell
> (of IBD) called a cup and handle. This is a pattern I find regularly
in
> many markets in both standard and inverse form, and which I trade with
> great regularity using all time frames from 1 minute through daily.
When
> identified and traded properly, this pattern has a very high
reliability
> and even the failures can lead to profitable trades.
>
> Looking at attached 5 minute futures, we begin with the most recent
low
> and look to the higher pivot low to the left and the higher pivot high
> which lies to the right of the higher pivot low. These two pivots
> (horizontal blue lines) are the anchors for the trade. If price can a)
> run through the pivot high (the rim of the cup) before doing a
> significant retracement (the handle) and b) the retracement is then
> contained above the left pivot low (and generally no more than
25-38%),
> we have the setup for a profitable trade which can be entered during
the
> retracement with stop at the left pivot low or for those who prefer to
> buy breakouts, on the breakout.
>
> Expected behavior is a breakout above the previous high for a run of
> 62-100% of the cup depth above the rim. I have, in days past posted
> several examples of such trades in real-time. Using a c&h found a bit
> lower in the 1 minute spoo, a good dozen points was taken out of this
> rally with only a few points risk. There were some irregularities to
> that c&h which can be identified and traded successfully with study
and
> practice.
>
> Unexpected behavior is a failed breakout which is seen in this
example.
> When the rally from the bottom of the handle failed and then rolled
over
> going through the bottom of the handle, it was a excellent clue that a
> major decline would follow. In fact, there is an irregular inverse c&h
> to be found in the failure just before it performed its final swan
dive
> through the lower blue line.
>
> Earl
>
> ----- Original Message -----
> From: "DH" <catapult@xxxxxxxxxxx>
> To: <realtraders@xxxxxxxxxxx>
> Sent: Wednesday, October 11, 2000 1:01 PM
> Subject: Re: [RT] Spoo and Boo tracking
>
>
> > I'm not a big fan of H&S patterns but my understanding is that the
> > pattern is not valid until the neckline is penetrated and the
> > penetration holds. To talk about H&S before then is premature as one
> can
> > find 'almost' H&S patterns all over the chart. Somebody who actually
> > trades these things please correct me if I'm wrong.
>
>
>
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>
>
>
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