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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 Gap2H

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Busted
Patterns
Candles Chart
Patterns
Event
Patterns
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Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 01/13/2017
19,886 -5.27 0.0%
9,202 57.87 0.6%
657 -0.99 -0.2%
5,574 26.63 0.5%
2,275 4.20 0.2%
YTD
0.6%
1.8%
-0.4%
3.5%
1.6%
Tom's Targets    Overview: 12/30/2016
19,250 or 20,250 by 01/15/2017
8,880 or 9,550 by 01/15/2017
625 or 690 by 01/15/2017
5,650 or 5,400 by 01/15/2017
2,350 or 2,240 by 01/15/2017
Indus strength: None YTD
Mutt Losers: None YTD
Mutt Winners: None YTD

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.

I found out about the Gap2H pattern from an article in Traders.com (a printed magazine, not the website) and according to the author Paolo Pezzutti, it's based on the work of Michael Harris.

The article says to use a 7% profit target and 7% stop loss, which I tested. He also recommends that the position be sold if the gap is closed. I tested a stop order, as a close below the bottom of the pattern (upward breakout) or above the top of the pattern (for downward breakouts)

The Gap2H pattern
Gap2H

 

Important Bull Market Results for Gap2H

Overall performance rank (1 is best)**: 21/23
Break even failure rate*: 34% (up breakouts)
Average rise*: 10%
Percentage meeting price target*: 53%
 
The above numbers are based on hundreds of perfect trades as of 2/11/2013. See the glossary for definitions.
* Based on the trend high, not the ultimate high. See text.
** Based on the average rise compared to other small patterns with upward breakouts in a bull market

Gap2H Identification Guidelines

CharacteristicDiscussion
3 barsThe pattern is composed of three bars, a gap followed by two higher highs and two higher lows.
Price gapLook for price to gap higher. Yesterday's low price is above the prior days high, forming a gap.
Higher highThe third bar in the pattern makes a higher high.
Higher lowThe third bar in the pattern makes a higher low.

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Gap2H Trading Tips

Trading TacticExplanation
ContinuationThe pattern acts as a continuation pattern 72% of the time. This high value is probably due to its height.
BreakoutA breakout occurs when the stock closes either above the top of the pattern or below the bottom of it.
Trade with the trendSince Gap2H act as continuation patterns most often, expect the breakout to be upward.
Wait for breakoutWait for price to either close above the top or below the bottom of the pattern before taking a position.
Measure ruleThe Gap2H fulfills the measure rule 53% of the time (bull market, up breakout). That is, measure the height of the pattern and add it to the high price to get an upward breakout target or subtract the height from the low price to get a downward price target.

Gap2H Example

Gap2H in AMD

I show two Gap2Hs on the daily chart.

The first Gap2H occurs in early January. Price forms a tall white candle after a short-term downtrend and then gaps higher. A day later, price continues the upward momentum and forms a higher high and higher low. After that, the pattern completes and the rise continues.

The second Gap2H occurs in late January. Again, price gaps upward and then forms a higher high and higher low. This gap also appears in a very short-term downtrend. After the pattern completes, price moves up to a new high before tumbling.

 

 

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Gap2H Performance Statistics

For the following statistics, I used 1,225 stocks, starting from December 1989 to February 2013, but few stocks covered the entire range. All stocks had a minimum price of $5. Since samples were so numerous, I chose every other pattern. There were two bear markets in the 2000s (as determined by the S&P 500 index), from 3/24/2000 to 10/10/2002 and 10/12/2007 to 3/6/2009. Everything outside of those dates represents a bull market.

For each Gap2H, I found where the trend started and when it ended. To find the trend peak or valley, I found the lowest valley and highest peak within plus or minus 10 days (21 days total) each, before the Gap2H and the same peak/valley test after the Gap2H. The closest valley or peak before the Gap2H is where the trend began. The closest peak or valley after the Gap2H is where the trend ended.

The 10-bar peak or valley number tends to find major turning points on the daily charts.

I measured performance from the breakout price (the highest high or lowest low in the pattern, depending on the breakout direction) to the nearest trend peak or trend valley after the breakout.

Gap2H Performance and Failure Rates

Table 1: Performance and Failure Rates
  5% Failure  Average 
 Rise/Drop 
Bull market, up breakout34%10%
Bull market, down breakout38%-8%
Bear market, up breakout28%11%
Bear market, down breakout19%-18%

Table 1 lists the failure rates, sorted by market condition and breakout direction along with the average rise or decline after the breakout.

A failure occurs when the stock fails to move more than 5% in the direction of the breakout.

The failure rates may appear high, but that's typical for short-term patterns like the Gap2H. The highest failures occur after a downward breakout in a bull market 38% fail to drop at least 5%). The average drop is just 8%.

The best performance occurs in a bear market. They have the fewest failures, 28% and 19%. Those also have the highest average rise or drop, 11% and -18%, respectively.

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Gap2H Measure Rule

Table 2: Measure Rule Performance
  Success 
Bull market, up breakout53%
Bull market, down breakout46%
Bear market, up breakout44%
Bear market, down breakout56%

Table 2 shows how often the measure rule works. Use the measure rule to find an estimate of how far price is likely to move.

To do this, measure from the highest high to the lowest low in the pattern to get the height. Add the height to the highest high to get the target for an upward breakout.

For downward breakouts, subtract the height from the lowest low in the pattern. Ignore price predictions below 0 and those that represent a large percentage move.

The best performance of the measure rule occurs after a downward breakout in a bear market, with 56% of patterns reaching their target. Those patterns that trade with the trend (upward breakouts in bull markets or downward breakouts in bear markets) reach the target slightly more often than the counter-trend moves.

Gap2H Trading Performance

Table 3: Testing the Gap2H
Market/Breakout direction Bull/Up  Bull/Down  Bear/Up  Bear/down 
Net profit/loss$56.08$(72.55)$(107.27)$93.63
Wins55%44%44%55%
Winning trades8,8871,8821,203569
Average gain of winners$703.43$746.76$714.98$784.78
Losses45%56%56%45%
Losing trades7,1852,4111,547463
Average loss($744.63)($712.09)($746.68)($755.75)
Average hold time (calendar days)28231611

Table 3 shows the performance based on 24,147 trades using $10 commissions per trade ($20 round trip), starting with $10,000 per trade. No adjustments were made for interest, fees, slippage and so on.

The results are sorted by bull or bear market, up or down breakouts. The trades used the same setup as listed in Gap2H Performance Statistics.

Here's the setup.

  • Find a gap2H
  • If price closes above the pattern's high, buy at the open the next day.
  • If price closes below the pattern's low, short at the open the next day.
  • Sell/cover when price moves 7% in the direction of the breakout.
  • If price moves 7% in the direction opposite the breakout, close out the trade for a loss.

For example, in a bull market after an upward breakout from a Gap2H, the net gain was $56.08 for all trades. The method won 55% of the time and there were 8,887 winning trades. The average gain of winning trades was $703.43.

Forty-five percent, or 7,185 trades were losers. They lost an average of $744.63.

The average hold time was 28 calendar days.

Notice how the gains and losses were pegged near 7%, which is how the test was setup.

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Gap2H Trading Performance With Pattern Stop

Table 4: Testing the Gap2H with Pattern Stop
Market/Breakout direction Bull/Up  Bull/Down  Bear/Up  Bear/down 
Net profit/loss$96.01$(80.59)$(114.61)$130.66
Wins62%50%58%70%
Winning trades9,9532,1621,588723
Average gain of winners$705.38$746.00$709.91$780.39
Losses38%50%42%30%
Losing trades6,1052,1271,162313
Average loss($897.43)($920.79)($1,241.42)($1,370.14)
Average hold time (calendar days)31262517

Table 4 shows the results of 24,133 trades, but this time, a penny below the bottom of the Gap2H pattern (upward breakout) or a penny above the top of the Gap2H pattern (downward breakout) was used as a stop instead of a 7% stop.

For example, in a bull market after an upward breakout from a Gap2H, the net gain was $96.01 for all trades. The method won 62% of the time and there were 9,953 winning trades. The average gain of winning trades was $705.38.

Thirty-eight percent, or 6,105 trades were losers. They lost an average of $897.43.

The average hold time was 31 calendar days.

When compared to the 7% stop method, placing a stop below the bottom of the pattern showed that losses increased dramatically, probably because the bottom of the pattern was further than 7% away from the buy price (the reverse for downward breakouts). Net profits increased and net losses also went up. However, the win/loss ratio improved.

Gap2H Trading Example

Gap2H in Apple Computer

The figure shows a Gap2H pattern in Apple computer on the daily scale.

The Gap2H begins at A and ends two days later (the top of it touches the buy line). This Gap2H breaks out upward as the buy line shows. A close above the buy line is the entry signal. The trade begins at the open the next day, at 650.01.

The target is 7% higher than the buy price, or 695.51.

The stock rises and hits the sell target as shown in the chart.

If the pattern stop method were used, the blue line, which is a penny below the bottom of the Gap2H, would serve as the stop location. Had the stock dropped far enough to touch the stop price, the trade would have been closed for a loss.

If not using the pattern stop, a loss of 7% would have triggered the exit.

-- Thomas Bulkowski

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See Also

Below are other short patterns...

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. Q: How can you tell if a man is aroused? A: He's breathing.