As of 03/27/2020
  Indus: 21,637 -915.39 -4.1%  
  Trans: 7,699 -346.29 -4.3%  
  Utils: 759 +1.01 +0.1%  
  Nasdaq: 7,502 -295.16 -3.8%  
  S&P 500: 2,541 -88.60 -3.4%  
YTD
-24.2%  
-29.4%  
-13.7%  
-16.4%  
-21.3%  
  Targets    Overview: 03/15/2020  
  Down arrow19,000 or 25,600 by 04/15/2020
  Down arrow6,700 or 9,000 by 04/15/2020
  Down arrow600 or 800 by 04/15/2020
  Down arrow7,000 or 8,400 by 04/15/2020
  Down arrow2,300 or 2,900 by 04/15/2020
CPI (updated daily): Arrows on 3/27/20
As of 03/27/2020
  Indus: 21,637 -915.39 -4.1%  
  Trans: 7,699 -346.29 -4.3%  
  Utils: 759 +1.01 +0.1%  
  Nasdaq: 7,502 -295.16 -3.8%  
  S&P 500: 2,541 -88.60 -3.4%  
YTD
-24.2%  
-29.4%  
-13.7%  
-16.4%  
-21.3%  
  Targets    Overview: 03/15/2020  
  Down arrow19,000 or 25,600 by 04/15/2020
  Down arrow6,700 or 9,000 by 04/15/2020
  Down arrow600 or 800 by 04/15/2020
  Down arrow7,000 or 8,400 by 04/15/2020
  Down arrow2,300 or 2,900 by 04/15/2020
CPI (updated daily): Arrows on 3/27/20

Bulkowski on Money Management

 

Money Management: Overview

This page explores money management using throwbacks and pullbacks, answering the questions, should I exit a position if a throwback or pullback retraces too far, and does a close stop result in more profit than a stop farther away?

$ $ $

My book, Getting Started in Chart Patterns, Second EditionGetting Started in Chart Patterns, Second Edition book., shown on the left, discusses throwbacks and pullbacks starting on page 217.

If you click on the above link and then buy the book (or anything) while at Amazon.com, the referral will help support this site. Thanks.

-- Tom Bulkowski

$ $ $

Summary
Methodology and Results
Stops
See Also

Money Management Summary

In the book, Swing Trading: Power strategies to cut risk and boost profits, by Jon Markman, Markman writes (page 36) "Upside breakouts through the reaction high often lead to small two percent to three percent advances followed by an immediate test of the breakout level. If the stock closes below this level (now support) for any reason, the pattern becomes invalid." In other words, if price throws back below the buy price, then exit. You can make the same case for pullbacks. If price climbs too far then exit a position. Is that the proper thing to do?

To answer that question, I looked at both throwbacks and pullbacks. The average rise for chart patterns with throwbacks that do not drop below the breakout price is 41.3%. When a throwback takes the stock below the breakout price, the average rise is just 26.7%. Pullbacks are similar with declines averaging 25.1% when price does not climb above the breakout price to 17.3% when it does.

If you follow his advice, you will be stopped out more often with a smaller loss, but trades that work will tend to do well.

If you place a stop loss order two cents below the breakout day's low and then calculate a volatility stop (using the higher of the two), you will make 11% more than if you just use a volatility stop alone. However, this finding applies only to throwbacks since I did not run the same test for pullbacks.

Top of page More

Money Management Methodology and Results

I sifted through three databases from July 1991 to June 2008 to find chart patterns that qualified for the test. I included only those patterns with throwbacks or pullbacks, and measured how far price dropped (during a throwback) or rose (during a pullback). I found 9,372 samples in 841 stocks using 30 different types of chart patterns (such as triple bottoms, head-and-shoulder tops, and so on). Not all stocks covered the entire period, and I used over a thousand securities to winnow it down to 841 unique ones.

The following table shows the results.

Partial RetraceFull Retrace
TypeAvg MoveSamplesAvg MoveSamples
Throwbacks41.3%1,71726.7%3,311
Pullbacks25.1%1,35517.3%2,989

 

Breakout from an ascending triangle with a throwback.

I show the difference between a partial retrace and a full retrace in the chart. The left image shows price breaking out at point A, climbing and then throwing back to the triangle at C, but not quite making it. Price climbs after that.

The image on the right shows a similar situation only price completes the throwback and drifts into and below the lower trendline of the ascending triangle, bottoming at D, which is below the breakout day's low price, B.

What Markman suggests is that the partial retrace (the left image) represents a better trading setup than the right image. My tests verify that. Those chart patterns with a throwback that does not drop below B (the breakout day's low price) show a post breakout climb that averages 41.3%, using 1,717 samples. For chart patterns like those on the right, a full retrace, the average post-breakout rise is 26.7%, using 3,311 samples.

Pullbacks show a similar trend and you can think of the picture flipped upside down. When the stock tries to pull back to the breakout price but does not quite make it, the average post-breakout decline is 25.1%, using 1,355 samples. Those situations in which the pullback rises above the high on the day of breakout show drops averaging 17.3%, using 2,989 samples.

Top of page More

Money Management Stops

In another test, I wanted to determine whether a stop placed two cents below the breakout day's low and then using a trailing volatility stop thereafter (whichever one was higher) performed better than just using a volatility stop from the start. In other words, would a stop placed at B (see above chart) result in more profitable performance than one farther away?

For this test, I used only chart patterns with upward breakouts and throwbacks, not those with downward breakout or pullbacks. I found 5,188 samples that qualified using 811 unique stocks from 1991 to June 2008 (the same setup as with the prior test). The following table shows the results.

Stop TypeGross Profit
Breakout day stop, then volatility stop$165,148.26
Volatility stop only$148,499.56

For those chart patterns using the breakout day's low (resembling the left image, above), the trade's gross profit was $165,148.26, using $1,000 per buy and not including commissions, fees, slippage or anything else. Using a volatility stop beginning on the day of breakout, the gross profit was $148,499.56, a difference of 11%.

In other words, my tests showed that a stop 2 cents below the breakout day's low (a tight stop) followed by a trailing volatility stop works better than does a trailing volatility stop alone.

The bottom line for traders is this: After you enter a trade, place a close stop below the breakout day's low. As price rises, calculate a volatility stop and use that once the stop value rises above the original stop. This technique will cut your losses and yet allow you to stay in trades that perform better.

-- Thomas Bulkowski

Top of page More

See Also

 

Support this site! Clicking any of the books (below) takes you to Amazon.com. If you buy ANYTHING while there, they pay for the referral.

My novels:  Bumper's Story Head's Law

Chart Patterns: After the Buy Getting Started in Chart Patterns, Second Edition Trading Basics Fundamental Analysis and Position Trading Swing and Day Trading Visual Guide to Chart Patterns Encyclopedia of Candlestick Charts Encyclopedia of Chart Patterns 2nd Edition Trading Classic Chart Patterns

Copyright © 2005-2019 by Thomas N. Bulkowski. All rights reserved.
Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information.
Some pattern names are registered trademarks of their respective owners.

Home Advertise Contact Donate Links Privacy/Disclaimer

Your momma is so fat that when she was diagnosed with a flesh eating disease, the doctor gave her 13 years to live!Smiley