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Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30+ years of stock market experience and widely regarded as a leading expert on chart patterns. He may be reached at

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Bulkowski's Bierovic Setup

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Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information.

This article discusses a trading setup by Thomas Bierovic for ascending and descending triangles. Tests results for ascending triangles are presented.

 

Summary

The Bierovic setup uses ascending triangles to ride upward breakouts and capture profit from trending moves. He also has a similar setup for descending triangles with downward breakouts, but I didn't test it.

Performance results for ascending triangles show that the setup makes 0.8% per trade. If you look at trades excluded because the pattern was too short or price was below the exponential moving average(s), then the setup makes more money: 1.7%. Regardless, the amount of profit on a $10,000 trade is just $80 (included trades) or $170 (for excluded trades) with an average hold time of 15 days for both.

The maximum drawdown was 21% with a hold time loss of 30%. The average values for both were small, less than 4% for each.

Analysis of the setup suggests that the entry rules do more harm than good. Taking all trades would improve profits. Taking only excluded trades also increases profits.

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Setup: Ascending Triangles

The September 2002 Active Trader article titled, "The ups and downs of triangles," by Thomas Bierovic, discusses trading setups for ascending and descending triangles.

Here are the rules he used for ascending triangles with upward breakouts.

  1. The top of the triangle must be above the 13-day and 55-day EMAs (exponential moving averages).
  2. The start of the triangle to the day before the breakout must be at least 15 price bars.
  3. Place a buy stop ten cents above the top trendline (triangle top) and buy providing the buy price is above the 13 and 55-day EMAs.
  4. Set an initial stop a dime below the low the day before the breakout. Note that this could be higher or lower than the breakout day's low, but he doesn't address this.
  5. Raise the stop to break even after a close above the top of the triangle plus 50% of its height.
  6. "After a new highest close since entry, raise the stop to below the most recent swing low (if there is one above the break even stop." A swing low is a low surrounded by higher lows on each side. I show an example of a swing low at point E in the example trade and the inset.
  7. After price reaches the top of the triangle plus its height, place a trailing stop ten cents below the prior bar's low.

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Setup: Descending Triangles

Here are the rules for descending triangles with downward breakouts.

  1. The bottom of the triangle must be below both the 13-day and 55-day exponential moving averages.
  2. The pattern must be at least 15 bars from the start to the price bar before breakout.
  3. Short the stock if the breakout/entry price (which is 10 cents below the bottom of the triangle) is below both the 13- and 55-day EMAs.
  4. Place the initial stop loss 10 cents above the high of the price bar before the breakout.
  5. Move the stop to break even once price closes at or below the bottom of the triangle minus half its height.
  6. If price makes a new lowest close (the lowest close since the breakout, providing it is below the break even stop), lower the stop to 10-cents above the most recent swing high. The swing high is a high price with lower highs on the adjacent price bars.
  7. Once price reaches the full height subtracted from the bottom of the triangle, trail the stop to a dime above the prior bar's high.

I did not test this setup, but I include it here for completeness.

Methodology

I used ascending triangles with upward breakouts starting from 1991 to 2011 in 627 stocks (I actually used more stocks to find those that held triangles). That gave me 1,061 triangles. I found each triangle manually, over the years.

I programmed my computer and used daily price data to test the setup for ascending triangles with upward breakouts only. Bierovic says that this setup works with intraday data but instead of a dime, use two cents away from the stop values.

The test used $10 commissions ($20 round trip), but did not compensate for slippage or other factors. Each trade bought 100 shares of the stock and did not combine profits from prior trades. That meant all trades were taken (meaning the portfolio never suffered from a lack of cash to buy a position).

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Results

I tested his ascending triangle setup for upward breakouts only, and the following table shows the results.

TestCompleted
Trades
Excluded
Trades
Average gain per trade0.8%1.7%
Average gain on $10,000$80$170
Maximum drawdown21.1%30.7%
Average drawdown3.6%4.6%
Maximum hold time loss29.6%27.8%
Average hold time loss3.5%4.1%
Win/loss ratio60%63%
Average hold time (days)1515

Notes:

Excluded trades are those not taken because they were either too short or the top of the triangle was below one or both moving averages either at the start or at buy time.
The maximum drawdown is the largest percentage drop from the highest high to the following lowest low once the trade is underway. The maximum is the highest drawdown found in all trades. This differs from the maximum equity drawdown that some programs present. I think of the drawdown as the amount of profit I gave back as price dropped from the highest high.
The average drawdown is just an average of the drawdown found in all trades.
The maximum hold time loss is a measure of how far below the purchase price the stock drifts while owned. This is how far into a loss the trade dropped while held.

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Entry Rules: Good or Bad?

Of the 1,061 trades, 19 of them were excluded because they were less than 15 price bars long. Had they been included, their gains averaged 1.3%, which is above the 0.8% reported by the setup. Thus, it makes more sense to include short patterns than exclude them.

233 trades were excluded because the start of the triangle was below the 13 day-EMA. Those trades had gains averaging 2.6%. Similarly, 288 trades were excluded because the start was below the 55-day EMA. Those gains averaged 2.1%.

Just 5 trades at buy time were below the 13-day EMA but those excluded gained 6%. 87 trades were below the 55-day EMA at buy time. They showed gains averaging 2.9%.

Since each trade can be excluded for any of the five setup rules, a total of 469 trades were excluded, some because the EMA did not have enough data in the stock to calculate it (that means the triangle was too close to data start).

Based on this analysis, it appears that the pattern length and use of two moving averages do more harm than good.

If all excluded trades were included, the gain would average 1.1% with a 61% win/loss ratio.

Stops: Harmful or Helpful?

Next, I dissected the stops. Where was the trade being stopped out most?

The stock hit the initial stop 130 times (22% of trades) and lost 3.4%, on average. 206 trades, or 35%, were stopped out at break even (break even includes the cost of round trip commissions: $20).

The third type of stop is one the stock reaches the full height target and the setup tightens the stop to a dime below the prior candle's low. That stop gets hit 23% of the time but by then the stock averages a gain of 9.1%. The final stop is the swing low stop. That gets hit 20% of the time for a loss of 0.4%.

The following table shows this information in tabular form.

Stop TypeHitGain/Loss
Initial stop22%-3.4%
break even35%0.0%
Profit target reached23%9.1%
Swing low20%-0.4%

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Example Trade

Picture of XL Group (XL) on the daily scale.

The figure is of XL Group (XL) on the daily scale. It shows an ascending triangle spanning 2010-2011. The top of the pattern is at 22.30 so a buy stop at 22.40 is the entry price.

Entry occurs on the day shown, then price makes a quick move up. The initial stop would be at 22.08, which is 10 cents below the low the day before the breakout (point C in the figure).

The height of the ascending triangle is 22.30 - 21.53 or 77 cents. The full height target is at 22.30 + 0.77 or 23.07. The half-height target would be 22.30 + 0.77/2 or 22.69. The stock exceeds the half-height target on the entry day, so the stop gets raised to break even, or 22.50 (assumes 100 shares with $20 round trip commission).

The next day, price makes another strong move up, exceeding the full height target. Thus, the stop uses the prior candle's low minus a dime. In this case, that's 22.24 - 0.10, or 22.14. A day later, D, the stop gets raised to 22.76. On the sell day, the stop is raised again to 23.31, a dime below D, before trading begins.

The stock closes lower and hits the stop, closing out the trade for a gain of 4.1%

-- Thomas Bulkowski

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See Also

Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. George Westinghouse invented the electric chair. Think about that the next time you get in an elevator.