Larry Williams on False Break Outs

Discussion in 'Technical Analysis' started by marketsurfer, Jun 18, 2008.

  1. LW has some pretty good ideas here:

    As someone who has been studying the markets since 1962, I assure you that not all market moves are predictable. But there are some reliable patterns I have discovered over the years that can be of great value. The false break buy and sell pattern is one of them.

    Markets seldom bottom on what is commonly known as the key reversal... I've lectured on that point for many years. Markets have more twists and turns to them than a climb up the Cooke City Highway in my native home of Montana. Each twist and turn on the highway is a little different than the last one, yet in there are similarities in roads as well as in markets. I would like to show you a very simple pattern with a solid record of calling short term explosive moves in stocks and commodities.

    The false break buy and sell pattern

    The idea of the pattern is pretty simple... and pretty emotional. What I am looking for to set up a buy signal is a day that closes below the prior day's low. Such days, (aka, naked close days), look very bearish on a chart and typically act as a continuation of a market decline. Usually when this condition is reversed (i.e. the very next day it takes out the high of the down close day), we find good market follow-through to the upside.

    The exact opposite of this creates a sell signal; a market makes a close greater than the prior day's high, then the very next day takes out the low of the up close day. I have taught this to many traders at seminars and written about it in my books for several years.

    However, there is a new dimension we can add to this pattern. I am surprised people have not noticed this little twist: if on the day following the naked close we have a naked close in the opposite direction, we typically have established a reversal point in the market.

    In other words, we have a down close below the prior day's low. Then the very next day we have an up close and a close above the high of the down close day. That is extremely unusual action and tends to be quite bullish.

    The opposite of course will be a bearish situation, a day that closes greater than the prior day's high and then the very next day closes below that same day's low.

    The following chart gives you an idea of how these patterns actually operate in the marketplace.......
  2. Nice article, thanks.
  3. sanny2005


    Thanx marketsurfer...

    Nice of you to share, keep up the good work
  4. Thanks for posting this article.
  5. Nice article...:)
  6. Gary Fox

    Gary Fox

    Isn’t that pattern just a variation of the simple 3 bar swing pivot that John Hill teaches, except he’s added the close into the setup.

    For instance – the simple Hill 3 bar swing pivot up requires a) today’s high to be > than yesterday’s high, b) today’s low > than yesterday’s low and c) yesterday’s low < previous day’s low. In TC Companion it’s: (H>H1) AND (L>L1) AND (L1<L2). If we take that and require today’s close to be > 18 dsma and also have the 9 dsma > 18 dsma and then only buy if the next day’s H exceeds today’s H by $.05 cents, and then exit at the end of day 3, we get:

    a) 3,360 setup and entries, b) 1,564 winning trades (46.55%), c) loss of $3,787 and all the other important no edge statistics (this assumes a 100 stock purchase for each setup and $5.00 cost each way).

    Williams pattern is: (C>H1) AND (C1<L2). If we take that along with the other criteria from above we get:

    a) 828 setup and entries, b) 421 winning trades (50.85%) and c) gain of $8,247.

    Now, say we require that not only must today’s C be > than yesterday’s H, but that today’s close must be in the top 15% of its range (C > (L + (H - L) * .85)). Then we get:

    a) 527 setup and entries, b) 272 winning trades (51.61%) and c) gain of $5,547.

    Or, we ….. yada yada.

    Now this is the Chuck Le Beau method for backtesting idiots (which I am). First, you want entries that break the coin toss percent before employing fancy exit strategies. You do that by creating a setup and entry and then exit after x number of bars to see if you are catching moves that are > than 50% and actualy more in the 55% area. I also ran this on 5, 8, 10 and 15-day exits. Again, isn’t this pattern really just another filtering method of the basic 3-bar pivot?

  7. Very common strategy, has been printed in many different ways. With good MM this is a very solid approach.