Getting Started in Chart Patterns, 2nd Edition

Chapter 5

Ten Buy Signals

Over 30 years ago, I researched stocks and opened a brokerage account. Then I bought my first stock, 100 shares of Essex Chemical for $2,250, and held on. I sold it less than three years later for a profit of almost $2,000, a gain of 88% including dividends.

average rise or decline (ARD)

I measure the rise from the breakout price to the ultimate high, or the decline from the breakout price to the ultimate low, for each stock, and then compute the average.

Two months after I bought Essex, I grabbed Nuclear Pharmacy with its way-cool name. I found it in the prospectus of my mutual fund and researched the fundamentals. Everything looked good, so I bought 200 shares for $1,800. Two weeks after I bought, the stock did a dead-cat bounce (dropped substantially, bounced up, dropped more). On paper, I lost a bundle. Another company swooped in and swallowed the stock on the cheap. I held it for less than three years before giving up and selling for a 25% loss.

Lesson 1: If your mutual fund owns the stock, there is no need for you to buy it—you already own it. Lesson 2: Don't fall in love with a stock just because it has a way-cool name.

Since those trades, I have learned much about stocks and stock market behavior. In this chapter, I share some of that knowledge by discussing ten buy signals—chart patterns. These are arranged according to how well they perform ...