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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 Open-Close Reversal, Downtrend

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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.

The open-close reversal pattern
Open-Close Reversal, Downtrend

 

Important Bull Market Results for Open-Close Reversal

Overall performance rank (1 is best)**: 5/23
Break even failure rate*: 42% (up breakouts)
Average rise*: 7%
Percentage meeting price target*: 82%
 
The above numbers are based on hundreds of perfect trades as of 3/14/2013. 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

Open-Close Reversal, Downtrend, Identification Guidelines

CharacteristicDiscussion
1 barThe pattern is composed of one bar but it references the close of the prior bar.
DowntrendLook for the pattern in a short-term down trend.
OpenThe open must be within 25% of the intraday low.
CloseThe close must be within 25% of the intraday high, but also be below the prior day's close.

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Open-Close Reversal, Downtrend, Trading Tips

Trading TacticExplanation
ReversalThe pattern is supposed to act as a reversal of the down trend, and it does, but only 51% of the time in a bull market.
BuyOnce price closes above the top of the pattern or below the bottom of it, buy/short at the open the next day, respectively.
Measure ruleThe open-close reversal fulfills the measure rule 82% 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 target or subtract it from the intraday low to get a downward price target.

Open-Close Reversal, Downtrend, Performance Statistics

For the following statistics, I used 1,149 stocks, starting from January 1990 to March 2013, but few stocks covered the entire range. All stocks had a minimum price of $5. 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 open-close reversal, I found when 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 open-close reversal and the same peak/valley test after the open-close reversal. The closest valley or peak before the open-close reversal is where the trend began. The closest peak or valley after the open-close reversal is where the trend ended. I compared the peak or valley to the average of the high and low price of the open-close reversal pattern (2nd day).

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

I measured performance from the day after the breakout (opening price) to the nearest trend peak or trend valley.

To determine the inbound price trend (I was looking for a down trend), I used linear regression on the average of the high-low prices in the five days before the pattern. That caught the short-term trend.

Open-Close Reversal, Downtrend, Performance and Failure Rates

Table 1: Performance and Failure Rates
Market/Breakout direction 5% Failure  Average 
 Rise/Drop 
Bull market, up breakout42%7%
Bull market, down breakout51%-6%
Bear market, up breakout33%10%
Bear market, down breakout27%-12%

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

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

The failure rates may appear high, but that's typical for short-term patterns like the open-close reversal. The highest failures occur in a bull market: 42% to 51% fail to see price move at least 5%.

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Open-Close Reversal, Downtrend, Measure Rule

Table 2: Measure Rule Performance
Market/Breakout direction Success 
Bull market, up breakout82%
Bull market, down breakout80%
Bear market, up breakout75%
Bear market, down breakout81%

Table 2 shows how often the measure rule works. Use the measure rule to estimate of how far price is likely to rise or drop.

To do this, measure from the high to the low in the pattern to get the height. Add the height to the high or subtract it from the low to get the target.

 

Open-Close Reversal, Downtrend, Trading Performance

Table 3: Testing the Open-Close Reversal, Downtrend
Market/Breakout direction Bull/Up  Bull/Down  Bear/Up  Bear/down 
Net profit/loss$90.31$(47.93)$(35.80)$57.44
Wins58%45%49%53%
Winning trades1,547621300181
Average gain of winners$702.46$754.00$728.42$768.96
Losses42%55%51%47%
Losing trades1,131765311160
Average loss($746.99)($698.91)($772.99)($747.47)
Average hold time (calendar days)30281614

Table 3 shows the performance based on 5,061 trades using $10 commissions per trade ($20 round trip), starting with $10,000 per trade. No other adjustments were made for interest, fees, slippage and so on.

Here's the setup.

  • Find a open-close reversal downtrend.
  • Wait for price to close above the top or below the bottom of the pattern.
  • Buy/short at the open the next day.
  • Take profit when price moves 7%.
  • A stop placed 7% away closes out the trade for a loss.

For example, in a bull market after an upward breakout, the net gain was $90.31 for all trades. The method won 58% of the time and there were 1,547 winning trades. The average gain of winning trades was $702.46.

Forty-two percent, or 1,131 trades were losers. They lost an average of $746.99.

The average hold time was 30 calendar days.

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

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Open-Close Reversal, Downtrend, Trading Example

Open-Close reversal in 3M (MMM)

The figure shows a open-close reversal pattern in 3M (MMM) on the daily scale, at A.

Price drops into the open-close reversal. The open is near the intraday low at A. The close is near the day's high but it remains below the prior day's close.

The next day, the stock closes above the top of A, staging an upward breakout. Buy at the open, at B.

When price climbs 7% above the buy price, sell. That happens at C.

A stop placed 7% below the buy price would stop out the trade in case of a reversal.

-- 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. The longest recorded flight of a chicken is thirteen seconds.