Written by and copyright © 2011-2014 by Thomas N. Bulkowski. All rights reserved.
Information on busted chart patterns is discussed in my book,
Visual Guide to Chart Patterns.
You can find information in the book in Chapter 22: "Busted Pattern Buy Setups" (starting on page 229) and in Chapter 25, "Busted Pattern Sell Signals" starting on page 271.
I show a picture of the book on the right.
If you click on this link and then buy the book (or anything) at Amazon.com, the referral will help support this site. Thanks. -- Tom Bulkowski
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Table of Contents
What Are Busted Chart Patterns?
A busted chart pattern is one in which price breaks out in one direction from a chart pattern, but moves less than 10% before reversing and breaking out in the new direction.
A "breakout" means a close above the top or a close below the bottom of a chart pattern. This measure is used so that all busted chart patterns can be compared on an apples-to-apples
The idea behind a busted chart pattern is that the move is often stronger from a failed chart pattern than from one that works. For example, in my book,
Encyclopedia of Chart Patterns, Second Edition,
pictured on the right, the average rise from 286 triple bottoms in a bull market is 37%.
The average rise from 145 failed triple tops in bull markets, is 42%.
Why does better performance happen? I can only guess at the cause. Perhaps you have heard of the belief that the market likes to confound the most people. If everyone expects the market to
drop, it rises instead. A triple top is supposed to break out downward, and it does. But when the drop is meager and price rises, it takes on a life of its own and soars.
Unfortunately, like all market techniques, busted chart patterns are not perfect, meaning that they fail to perform as expected, too.
Busted Pattern Elements
All busted chart patterns share these elements, but the benchmarks are arbitrary, set by me years ago.
- Price breaks out in the normal manner with price closing below the bottom (downward breakout), above the top (upward breakout), or outside of a trendline boundary
of a chart pattern (such as a symmetrical triangle which uses two trendlines to mark the breakout).
- Price continues less than 10% in the breakout direction.
- Price reverses direction.
- Price closes on the side opposite the breakout direction. If the breakout is downward, then price busts the pattern when it closes above the top
of the pattern. For upward breakouts, price must close below the lowest low in the chart pattern to bust it.
Examples of busted chart patterns are included in the links below.
Busting a Bust?
A chart pattern can bust multiple times. For example, price breaks out downward then soars and busts out upward, reverses and moves lower for a double bust. If it
drops less than 10% before shooting upward and closing above the top of the pattern, it's a triple bust. This type of up and down motion can continue for months.
How often does it occur? Research using triple tops shows that single busts happen 19% of the time. Double and triple busts occur 1% of the time, each. A triple bust includes those
busting three or more times.
-- Thomas Bulkowski
Other Busted Examples
Copyright © 2011-2014 by Thomas N. Bulkowski. All rights reserved. Chili: It's not just for breakfast anymore!