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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 Peak and Valley Width

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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.

Begin your journey to becoming a better trader or investor by buying a copy of my book, Trading BasicsTrading Basics: Evolution of a Trader book., picture on the left. It's full of tips and ideas. It's the first book in the "Evolution of a Trader" trilogy.

The book discusses pattern width (not peak width, like this article) and performance starting on page 107.

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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This article discusses how you can improve your trading performance by selecting peaks and valleys based on their width.

 

Peak and Valley Width: Summary

You may be able to boost profits by selecting stocks with peaks or valleys based on their width and combining that with the direction of the primary price trend.

Based on tests performed for this article, narrow peaks in a declining price trend outperform.

Narrow valleys that act as reversals of the primary price trend also do well.

Although the differences are slight, peaks will tend to appear more rounded looking than valleys.

Peak and Valley Width: Methodology

I used my computer to find all peaks and valleys in 486 stocks between January 2000 to April 2015, excluding bear markets. I found 51,548 peaks and valleys, split almost evenly between the two.

To find those peaks and valleys, I looked for the highest high or lowest low in a 15-day window. Fifteen days was wide enough to define and include the wider peaks or valleys.

Then I counted the number of price bars 5% below the peak's high, looking for the first close below the 5% line on either side of the peak. I did the same for valleys, except I looked for the first close 5% above the valley floor, on either side of the valley.

This method gave me the width of the peak or valley.

Figure 1 illustrates this process. The red line is 5% below the peak at C. The width of the peak is the number of price bars between A and B.

For valleys, imagine the figure flipped upside down. I counted the number of price bars between A and B, at 5% above the valley floor (C).

Figure 1: How to determine peak width.
Picture of peak witdh.

I experimented with 3% and 10% values but 5% seemed to work best.

Once I had that information, I found the median width for tops (9 price bars) and for valleys (7 price bars). I used the median width as the separator between narrow and wide.

I also used the primary price trend, either up or down, by finding the closing price a year before each peak top or valley floor. This method works surprisingly well at determining the longer-term (primary) price trend.

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Peak and Valley Width: Results

The first thing I noticed is that peaks are wider than valleys. We know that by the difference in the median widths, 9 and 7 price bars, respectively. Although the differences are slight, peaks will tend to appear more rounded looking than valleys.

Figure 2 shows the performance differences for the various combinations of peaks (top half of chart) and valleys (bottom half).

For example, variation A shows the primary trend moving lower going into a narrow peak. Stocks with that combination showed median declines of 20%. That value measures from the high at the peak to the lowest low before a trend change. Consider it a perfect trade. This configuration represents the best performance from the peak variations.

Figure 2: The various combinations of trend for peaks, valleys, and performance.
The ideal peak and valley width combinations.

A trend change for a peak is the lowest low before price rises at least 20% or before it closes above the top of the peak. For valleys, a trend change means the highest high before the stock drops at least 20% or closes below the bottom of the valley.

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For valleys, the best performance occurred with variation F. The narrow valley acted as a reversal of the primary downtrend. The trend dropped into the valley and soared out of it. The median rise for those valleys having this configuration was 43%. Again, that median (mid range) number comes from thousands of perfect trades, without any commissions or fees.

Use the number not as an example of how your trade might do, but as a comparison with the other variations.

Notice that narrow peaks outperformed wide ones (A, B versus C, D) and those acting as continuations of the primary price trend (A, C) did best (among the narrow and wide groupings, respectively).

For valleys, the best performance came from narrow valleys (E, F) and from those acting as reversals (F, H).

Peak and Valley Width: Trading

Use Figure 2 to help decide how your selection may perform. There is no guarantee of success, of course, but by selecting stocks with the right variation may help you achieve better profit and help you decide to hold onto a stock that may decline less than you expect.

To use the chart, do the following.

  1. Find the direction of the primary trend: Compare the high price at the peak (low price at the valley) with the closing price a year before.
  2. Determine if the peak is narrow or wide. Measure down 5% below the high price at the peak (5% above the valley low) and look for the first close below that price before and after the peak (first close above that price before and after the valley). Once you have those two points, count the number of price bars between the two points. The median width is 7 price bars for valleys and 9 price bars for peaks. A narrow valley would be 7 or fewer price bars. A narrow peak would be 9 or fewer bars. See Figure 1.

Often you can estimate whether the peak or valley is narrow just be looking at it, but you may wish to go through the steps to be sure.

Once you have that information, match your results to the images shown in Figure 2.

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Peak and Valley Width: Trading Example

The ideal peak and valley width combinations.

Consider the valley at A. Does this valley represent a good profit opportunity?

Obviously the answer is yes since we can see how the stock behaved. But let's use the information in this article to prove that.

Is the primary trend up or down?

Valley A occurred on 10/15/14 at 16.37. A year before this, the stock closed at 16.86. Thus the primary trend is down since the stock dropped from 16.86 to 16.37.

Is the valley narrow or wide?

I drew a red line showing where 5% above the low is (approximately).

Price closes above the red line 5 bars on the left (starting at C) and 2 bars on the right (ending at D) of A (including A), for a total of 7 bars. Since the median valley is also 7 bars, this valley qualifies as a narrow one (ties are considered narrow).

So we have a narrow valley with price dropping into the valley and moving upward after the valley. Using Figure 2, we see that variation F applies. It is the best performing of the valleys.

The gain so far from this stock has been (22.69 - 16.37)/16.37 or 38.6% as I write this on April 29, 2015.

Of course, not all situations will work like this and you will not be buying at the low price (since you have to wait for price to close at least 5% above the low), but the method can help you make more informed trading decisions.

-- Thomas Bulkowski

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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. Fashion is a form of ugliness so intolerable that we have to alter it every six months. -- Oscar Wilde.