A Box Play Target Suggestion

I was flipping through the June issue of TAoS&C at Borders tonight, and there’s an article about rectangle patterns. These are the daily chart equivalent of the box play. In it, a formula is given for selecting a price target. I’ve always just used the box height as the target, but this article suggests the formula:

t = 2.3 h0.8

… where t is the profit target, and h is the height of the box. This more or less suggests that you can safely choose larger targets for small boxes. Here’s a graph I made for the formula, against a straight line that represents the classic 1:1 ratio I have been using:

You can see that it starts out aggressive, but somewhere between 60 and 70, this profit target actually becomes more conservative than 1:1.

A couple things I don’t like about this idea:

• I was just skimming the article, and don’t have it in front of me, but I think it said that the formula did not care about units. So, you could plug in dollars, or inches on the printed chart, or whatever. You get out the same units you put in.

  But, because of the nature of this function, I fail to see how that works. For instance, if I plug in 100 cents, I get the conservative target of 91.5 cents. But, if I plug in 1 dollar, I get a target of 2.3 dollars. wha? Maybe I misread that section. Anyone with the issue care to comment?

• 2.3? 0.8 (which, when used as an exponent, represents the fifth root of the number raised to the fourth power)? Doesn’t feel very natural to me… it’s most likely the result of statistical regression. Not that numerically derived formulas are a bad thing, necessarily. But, before you believe stuff like this, make sure the sample size was very large, at least. Sadly, I didn’t read the article close enough to see how big their sample was.

So, the message I take away from this is: for small boxes, consider raising your target a little, and for large boxes, consider bringing your target in a little. That’s easier than doing the fancy calculations, and probably more reliable anyway if you are watching the action in real time.