As of 12/24/2024
Indus: 43,297 +390.08 +0.9%
Trans: 16,063 +127.24 +0.8%
Utils: 993 +4.93 +0.5%
Nasdaq: 20,031 +266.24 +1.3%
S&P 500: 6,040 +65.97 +1.1%
|
YTD
+14.9%
+1.0%
+12.7%
+33.4%
+26.6%
|
 44,200 or 41,750 by 01/01/202516,700 or 15,500 by 01/15/20251,050 or 975 by 01/01/202520,500 or 19,300 by 01/01/20256,100 or 5,775 by 01/01/2025 |
As of 12/24/2024
Indus: 43,297 +390.08 +0.9%
Trans: 16,063 +127.24 +0.8%
Utils: 993 +4.93 +0.5%
Nasdaq: 20,031 +266.24 +1.3%
S&P 500: 6,040 +65.97 +1.1%
|
YTD
+14.9%
+1.0%
+12.7%
+33.4%
+26.6%
| |
|
44,200 or 41,750 by 01/01/202516,700 or 15,500 by 01/15/20251,050 or 975 by 01/01/202520,500 or 19,300 by 01/01/20256,100 or 5,775 by 01/01/2025 | ||
This article discusses the Armchair Investors Golden Triangle™ stock trading setup, including performance tests on how well it works.
NOTE: If you have questions about this setup, contact Charlotte Hudgin.
The golden triangle setup is actually two related trading setups.
The first setup (Setup 1) has a confirmation signal that occurs on one day, and it has an average rise of 23% (if traded perfectly). The failure rate is 29% meaning that 29% of the trades are stopped out for a loss.
The second setup has an entry signal that can occur over a period of three weeks (if Setup 1 does not occur). It has an average rise of 15% with 49% of the trades stopped out for a loss.
A simplified version of Setup 1, described at the end of this article, boosts the number of trades from 153 to 2,944 while increasing the average rise to 28% (from 23%) and lowering the failure rate to 17% from 29% (stopped out).
The Armchair Investor Golden Triangle™ (hereinafter referred to as the Golden Triangle) setup is a variation of the buy-the-dip strategy, refined by Charlotte Hudgin.
I tested the setup and found that it could be useful when trading inverted and ascending scallop chart patterns.
The setup takes its name from the triangle pattern formed by the ideal trade. See the picture.
Price rises into the golden triangle, retraces, and then recovers to post a new high.
Here are the steps in the Golden Triangle setup (Setup 1). Refer to the figure on the right. Line D represents the 50-day simple moving average (SMA). H is the 50-day volume SMA. Point A is the first bottom in the pattern and C is the second. B is called the pivot, the highest peak between A and C.
Here are the rules for Setup 1.
When price crosses the SMA (C),
After price confirms, look for volume confirmation (in that order). This is done in two steps, 9 and 10.
If setup 1 does not occur, Hudgin offers a second setup. Refer to the figure on the right. Line E is the 50-day simple moving average of price and line F is the 50-day volume SMA.
Point A is the first time the stock touches the SMA. This would qualify price for setup 1 (above) however, volume doesn't confirm. In other words, volume on that day is below the moving average and below the prior 4 days, which are both rule breakers.
Point B shows a close below the SMA. Point C is the buy signal, which we'll see when we review the rules for the setup. Here they are.
I programmed my computer to test both setups using in-sample data from the bullish period 10/11/2002 to 10/11/2007. Dividends, commissions, fees or other income/expenses were not included.
Only stocks priced over $5 at the first bottom (point A in the figure of Setup 1) were allowed.
For bottoms, I found the lowest valley within 10 days and for peaks, I found the highest peak within 10 days. These two found major turning points. It's possible that values other that 10 would work better (such as all peaks or valleys within 5 days of the high or low, respectively).
I looked for a bottom-top-bottom combination that formed an inverted and ascending scallop pattern (a rise-retrace pattern). The second bottom must be above the low of the first, but not by much, so the scallop in many cases looks like an upside down U.
This gave me a spreadsheet of 12,701 samples using 854 stocks.
I measured the average rise using the opening price the day after the buy signal to the ultimate high. The ultimate high is the highest high before price tumbles at least 20%. If price dropped below the low of the first bottom (the lowest low in the pattern), the search for the ultimate high ended.
If price continued at least 6% below the buy price, I closed out the trade for a loss. In short, I used a 6% stop loss order.
For setup 1, I found only 153 trades that qualified out of 12,701 samples. The average rise was 23% (median rise: 14%). The 5% failure rate (a count of how many stocks moved up but peaked and tumbled after gaining less than 5%) was 7%. Twenty-nine percent were stopped out, so 71% of the time the setup made money.
For setup 2, if a stock did not qualify for setup 1 (those that qualified were excluded from the setup 2 test), I found 4,468 that qualified. The average rise was 15% with 7% failing to rise at least 5% and 49% of the trades were stopped out for a loss.
Can we improve the results of setup 1 by testing the importance of each rule? Yes. I did not try to curve fit Setup 2.
I tested Setup 1 using the same data as already described. The 35% average gain often mentioned below is for the rise from the opening price the day after a buy signal occurs to the ultimate high. Consider it the perfect trade without slippage, commissions, or any fees deducted. A stop loss is not applied to the results since that would be testing the stop mechanism.
Once rules are added to the perfect trade, performance deteriorates.
Here are the individual test results (Refer to the figure associated with Setup 1).
Rule 1 Test: price rising faster than its SMA.
I tested performance of the setup when the SMA was above and below bottom 1 (the first bottom in the rise-retrace pattern. If price is ABOVE the SMA, the average gain of 2,236 samples was 34%. When price was BELOW the SMA, performance improved but only marginally, to 35% in 8,113 samples.
| Multiplier | Average Rise |
| 1 | 31% |
| 2 | 32% |
| 3 | 36% |
| 4 | 38% |
| 5 | 34% |
| 6 | 36% |
| 7 | 33% |
| 8 | 32% |
| 9 | 46% |
Rule 2 Test: White space. There should be white space between price and the SMA.
I found the highest low price in the pattern and measured the distance from that low to the SMA. I calculated the clearance using this: (Highest low price - SMA)/Average spike length. The average spike length is the average daily high low price range over the prior month. The result gave me a number (the median was 3). I tested numbers from 1 to 9 (multiplier) and found the performance ranged as shown in the table.
If you don't have any white space, the trades made an average of 20%, but there were only 14 samples.
The results say that it's important to have white space. As the amount of white space increased, so did performance, up to a point (multiplier 4). The nine multiplier had only 45 samples, so consider the 46% average rise unreliable.
Rule 4 Test: Lower trend volume (point E). From the pivot (highest peak in the pattern) to the day before the cross (B to the day before C), I used linear regression and looked at performance.
If volume trended higher, the trades made 35% (3,294 samples) with 11% failing to rise at least 5%. When volume trended lower, the trades made 34% (7,073 samples) with 10% failing to rise at least 5%. Trending volume made little difference.
Rule 5 Test: Price retraces from two days to four weeks.
I measured the time from the high at the pivot (B) to bottom 2 (C) or the date price crosses the SMA. When the time was within the specified range, the trades made an average of 34% (6,219 trades). Outside of the two day to four week range, the trades made the same, 34% (458 trades)
It was rare that a stock couldn't make it down to point C in less than a month.
Rules 6, 7 Tests: low on or below the SMA at C with a close above the SMA.
| Low Price Above or Below SMA | Closing Price Above or Below SMA | Avg Rise |
| Below | Below | 34% |
| Above | Below | N/A |
| Below | Above | 34% |
| Above | Above | 36% |
I tested the four combinations of above and below the SMA for the low and closing prices (but a close below the low was impossible). The table shows the results.
For example, when both the low and closing prices were below the SMA, the 3,069 trades made an average of 34%. When both were above the SMA, the rise averaged 36%.
Rule 9 Test: volume higher than prior four days.
If volume is above the prior four days, the trades make 35%. If volume is below any of the prior four days, the trades make 34%. That's not much of a difference.
Rule 10 Test: volume above the SMA.
Regardless of whether volume is above or below its SMA at point C, the average rise is 35%.
I tested various combinations of the rules and found a simple setup that improves performance.
Here are the steps for this setup
The setup increases the number of trades from 153 to 2,944. The average rise climbs from 23% to 28%. Five percent failures rise from 7% to 8% (which is bad). However the number stopped out drops from 29% to 17%.
| Test | Avg Rise | 5% Failures | Stopped Out |
| Original setup, in sample | 23% | 7% | 29% |
| Original setup, out of sample | 22% | 3% | 26% |
| Improved setup, in sample | 28% | 8% | 17% |
| Improved setup, out of sample | 26% | 5% | 22% |
The following table shows the results of in sample and out of sample tests on the original and improved setup.
The in-sample test used the bull market period from 10/11/2002 to 10/11/2007. This is the data I used to test setup 1 and create the improved setup.
The out-of-sample test used the more recent bull market period from 3/7/2009 to 12/24/2013.
The original setup shows improvement in the failure rates when using out-of-sample data. The improved setup shows deterioration in the number stopped out (rising from 17% to 22%) and average rise (it drops from 28% to 26%).
The figure on the right shows an example trade using the improved setup described above.
The rise-retrace pattern is at AB. As price drops toward B, it closes below the 50 SMA at B, triggering the buy signal. Luckily, the stock turns then, but it could have continued lower.
Entry is made at the opening price the next day, C, at 361.79.
Not shown, but the stock is sold at the ultimate high on 9/21/2012 at a price of 705.07. After that, the stock tumbles at least 20%. The trade made 95%.
Please recognize that this is a perfect trade. Entry is made just as price happens to turn and is sold at the highest high before a trend change. Do not expect your trades to duplicate this behavior.
-- Thomas Bulkowski
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