Subscribe to RSS feeds Bulkowski Blog via RSS

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

Support this site! Clicking the links (below) takes you to Amazon.com. If you buy ANYTHING, they pay for the referral.

Picture of Bumper.
Kindle
Paperback
Nook
Picture of the head's law.
Kindle
Paperback
Nook
Chart Patterns: After the Buy
Getting Started in Chart Patterns, Second Edition book.
Trading Basics: Evolution of a Trader book.
Fundamental Analysis and Position Trading: Evolution of a Trader book.
Swing and Day Trading: Evolution of a Trader book.
Visual Guide to Chart Patterns book.
Encyclopedia of Chart Patterns 2nd Edition book.

Bulkowski's No-Nines

Class Elliott Wave Fundamentals Psychology Quiz Research Setups Software Tutorials More...
Busted
Patterns
Candles Chart
Patterns
Event
Patterns
Small Patterns
Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 12/11/2017
24,386 56.87 0.2%
10,371 -31.68 -0.3%
763 4.90 0.6%
6,875 35.00 0.5%
2,660 8.49 0.3%
YTD
23.4%
14.7%
15.6%
27.7%
18.8%
Tom's Targets    Overview: 11/30/2017
24,600 or 23,500 by 12/15/2017
9,900 or 10,500 by 12/15/2017
800 or 750 by 12/15/2017
7,100 or 6,700 by 12/15/2017
2,725 or 2,575 by 12/15/2017

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 the no-nines trading strategy. No-nines delays the purchase of a stock until the price rises to avoid false breakouts. But does it work? Let's take a closer look.

Initial release September 19, 2017.

 

No-Nines Summary

The no-nines strategy delays the purchase of a stock until the price rises above a "nine." A nine comes from the first digit to the left of the decimal. When it's a 9, you delay buying until fifty cents above the next higher whole dollar amount. For example, if the stock signaled a buy in the range of 49.00 to 49.99, you'd place a buy order at 50.50. Similarly, a trade with a breakout price of 39.79 would be delayed until the stock climbed to 40.50.

Tests show that the no-nines strategy of delaying a stock purchase increases profit and reduces failure. The tests also confirm that tight stops diminish profit and lowering the buy price of stocks can increase profit while reducing failures.

No-Nines Background

I read an article in Technical Analysis of Stocks & Commodities magazine, August 2017 issue, titled "Avoiding false breakouts; No 9s," by Ken Calhoun.

In the article, he writes, "Professional traders also use every increment of $10 as a price-action resistance level. So prices with 9s in them often fail to continue upward until after pullbacks or congestion areas -- and are therefore best avoided. Buying at price levels with a 9 in them frequently lead to false breakouts. You may wish to wait until after price has moved up at least 50 cents above the decade value."

Picture of Kohls (KSS) on the daily scale.

For example, look at the picture of Kohls (KSS) on the daily scale.

The stock shows a double bottom at AB. This confirms as a valid chart pattern when price closes above the peak between the two bottoms (the red line at C).

If you placed a buy order a penny above the red line, your order would have filled at E. And then you'd see your stock drop to F before recovering.

However, because the buy price is a 9 (39 something), you'd delay buying it until priced reached at least 40.50 (fifty cents above the next higher whole dollar amount). You'd buy into the stock at D, and ride it upward for a few weeks.

That's how the no-nines strategy is supposed to work. But does it?

Top

No-Nines Methodology

I selected chart patterns with easily identifiable breakouts, namely double tops and bottoms, triple tops and bottoms, rectangles, ascending triangles with upward breakouts and descending triangles with downward breakouts.

I catalogued 11,077 of these patterns from March 1992 to September 2017. That 25-year period included several bull and bear markets in the 1,010 stocks I used in the test.

Not all stocks covered the entire range. Several don't trade any more, mostly because they were merged out of existence or filed for bankruptcy.

For upward breakouts, I measured the rise from either the day price broke out or the opening price on the breakout day, whichever was higher. That is, if price gapped open higher on the breakout day, I used the opening price of that day. Otherwise, I used the breakout price (the highest high in the chart pattern).

I followed price higher until it either dropped by 20% or closed below the bottom of the chart pattern. This is what I call the ultimate high but with a change.

When price either dropped by $2 ($2 stop) or dropped to a penny below the bottom of the chart pattern (chart pattern stop), I considered the trade stopped out and logged it as a loss.

The loss measured from the breakout price to the stop price, and it replaces the rise to the ultimate high (which is usually a small rise in this case).

If I ran out of data, I used the highest price so far as the ultimate high.

For downward breakouts, the measures were similarly applied to the downward direction. I found the ultimate low and measured the drop from the breakout to the ultimate low. If the stock broke out downward and then climbed by $2 above the breakout price ($2 stop), I logged the loss. If it climbed a penny above the top of the pattern, it triggered a chart pattern stop, and I logged the loss separately.

The reason for the two stop levels is because Mr. Calhoun uses a $2 stop and for testing, I use a chart pattern stop. So I logged them both.

The following tables show the average results from perfect trades, without commissions or fees applied. When I discuss the cost of a stock, I used split un-adjusted prices to make sure the analysis is correct.

Top

No-Nines Results

Table 1: Performance with $2 Stop
TypeBreakout
Direction
Gain
All Stocks
No-Nines
Gain
5% Failures
All Stocks
No-Nines
5% Failures
$20-70 priced stocksUp30.0%30.3%30.8%30.3%
$20-70 priced stocksDown13.2%13.5%31.8%31.0%

Table 1 shows tests performed as discussed above using Mr. Calhoun's parameters of a $2 stop loss level from stocks with breakouts in the $20 to $70 range.

For example, I found that the average gain from all stocks with upward breakouts was 30% compared to gains averaging 30.3% if the trade used the no-nines strategy to delay entry.

Remember, these results are based on thousands of perfect trades, when price rises from the breakout to the ultimate high, the highest high before the stock makes a large drop (or is stopped out along the way).

I counted the number of times a stock failed to rise at least 5% after an upward breakout, what I call a 5% failure. I chose 5% arbitrarily to compensate for commissions, slippage, and fees. I think of it as the minimum profit to break even.

I found that the no-nines strategy showed fewer failures than the results from all stocks which ignored the no-nines strategy. In short, no-nines works!

The results in this table surprised me. I expected delaying buying a stock up to $1.50 to hurt profits. However, you also bypass losing trades which never make it up to the buy price. That combination results in superior performance for stocks using the no-nines strategy.

Top

No-Nines Chart Pattern Stop

To tests the effects of the stop level ($2 or chart pattern) and price range ($20-$70), I show Table 2. Remember, the tables show the average results of thousands of perfect trades, split un-adjusted for some of the tests.

The results shown in Table 2 use the same methodology as Table 1 except a trade is considered a loss when price drops to a penny below the bottom of the chart pattern (instead of $2 below the breakout price for upward breakouts which Table 1 shows). I chose this method because placing a $2 stop on low priced stocks can result in large percentage losses or become unworkable (think of a $2 stop on a stock trading at $1). Also, low priced stocks tend to be more volatile, so a different stop type might work better (a volatility stop comes to mind). For this test, however, I used a penny below the bottom of the chart pattern as the stop location for upward breakouts, and a penny above the top of the pattern for downward breakouts.

Table 2: Performance with Chart Pattern Stop
TypeBreakout
Direction
Gain
All Stocks
No-Nines
Gain
5% Failures
All Stocks
No-Nines
5% Failures
1. $20-70 priced stocks, $2 stopUp30.0%30.3%30.8%30.3%
2. All stocksUp37.5%37.9%17.7%17.1%
3. $20-70 priced stocksUp34.9%35.2%19.6%19.0%
4. All stocksDown16.8%17.2%20.3%19.4%
5. $20-70 priced stocksDown16.0%16.4%21.9%21.0%
6. $0-19.99 priced stocksUp43.1%43.6%12.2%11.5%
7. $70.01-9999Up32.0%32.3%27.4%27.7%
8. Number of false breakoutsUp22 or 0.7%
9. Do throwbacks occur more often?UpNo. 59.6% for both

Line 1 in the table is a repeat of the prior table's line. It shows how using a $2 stop versus a chart pattern stop reduces the gain and increases the failure rate.

For example, compare lines 1 and 3. Both lines are from stocks having upward breakouts with breakout prices in the $20 to $70 range. Gains with a $2 stop averaged 30% compared to 34.9% from those with a chart pattern stop. Failures are also higher, 30.8% versus 19.6% for $2 stops versus chart pattern stops, respectively.

Compare lines 2 and 3. Line 2 ignores the buy price range, and it shows superior performance with fewer failures than stocks with breakouts in the $20 to $70 range.

Downward breakouts (lines 4, 5) show a similar trend.

Top

I tested the two price brackets outside of the $20 to $70 range and show the results in lines 6 and 7, both for upward breakouts.

If the breakout is below $20 (that is, compare line 6 to 3), the average trade results in vastly superior performance while substantially reducing risk.

For stocks priced above $70, performance deteriorates both in the gain and failures columns (lines 7 versus 3).

Line 8 show how often price fails to rise to 50 cents above the whole dollar, that is the no-nines buy price. Out of 3,257 trades, just 22 failed to rise that far before dropping below the bottom of the chart pattern (before being stopped out).

Line 9 shows what I found about throwbacks. I found no difference between the throwback rate for all stocks compared to those using the no-nine strategy. In other words, stocks price at a nine (like 49.30) do not throwback more often than normal.

Pullbacks, however, show a slight tendency to occur more if the stock has a nine in the price: 55.9% of stock with a nine in the price pullback compared to 55.6% for all other stocks.

No-Nines Wrap

The results of this analysis show several things. First, the no-nines strategy is a good one. If you are tempted to buy a stock with an anticipated breakout price with a nine as the number to the left of the decimal (29, 69, etc), then consider waiting until it gets to 50 cents above the higher whole dollar amount (30.50, 70.50, respectively).

Consider your stop loss levels. You may be able to increase your profit while reducing failures by tolerating a wider stop. Only you can determine what amount of risk you are willing to accept.

Finally, it appears that the higher the price of the stock, the worse the performance. Just be aware that very low priced stocks (below $1) can be subject to price manipulation by the pump-and-dump crowd, and the company may be teetering on bankruptcy.

-- Thomas Bulkowski

Top 

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. "I bought some batteries but they weren't included, so I had to buy them again." -- Steven Wright