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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 Throwback Entry

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My book, Visual Guide to Chart PatternsVisual Guide to Chart Patterns book., pictured on the left, has an entire chapter dedicated to throwbacks and pullbacks, starting on page 47.

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This article discusses three methods of entering a trade after a chart pattern throwback. Which performs best?

Throwback Entry Summary

I tested three types of setups after a throwback.

  1. (Best) Wait for price to close above the top of the chart pattern again and then buy.
  2. Buy after price closes above the throwback peak.
  3. Buy after price climbs above the lowest minor high.

Results shows that the best setup is to wait for price to close above the top of the chart pattern before buying into the stock that has a throwback.

Trailing the stop cuts profit almost in half and the number stopped out jumps from 14% to 42%.

Throwback Entry Background

Should you wait to enter a trade until after a throwback? The answer to that is complex. If the chart pattern does not throwback, performance improves (I proved this). If you waited for a throwback, you would miss the best trades. Waiting for a throwback means a higher failure rate and poorer performance.

Let's say that you still want to wait for a throwback or you missed finding the chart pattern before the breakout and a throwback is in progress. When should you enter the trade?

I tested three setups to answer that question.

  1. Wait for price to close above the top of the chart pattern again and then buy.
  2. Buy after price closes above the throwback peak.
  3. Buy after price climbs above the lowest minor high.
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Throwback Entry Methodology

I used 11 types of chart patterns in the tests. They are

  1. 4 combinations of Adam and Eve double bottoms
  2. Head-and-shoulders bottom
  3. Rectangle top and bottom
  4. 3 triangles (ascending, descending, symmetrical)
  5. Triple bottom

The database provided chart patterns with throwbacks going back to mid 1991 and extending to February 2012, the date of this article.

All setups followed these rules unless specified otherwise.

Picture of an incomplete throwback.
  1. Applies to stocks and chart patterns on the daily scale.
  2. Commissions were $10 per trade ($20 round trip).
  3. Ignore the trade if the low price during the throwback (B in the figure on the right) remained above the chart pattern's high price (A). In other words, ignore the trade if price remained above the top of the pattern.
  4. Each trade buys $10,000 worth of stock.
  5. An initial stop loss order is placed at a percentage determined by the height of the chart pattern below the buy price and is never moved. In other words, subtract the pattern's low price from its high and divide by the high price and convert it into a percentage. The stop is the buy price times 1 minus the percentage. For example, if the height of the pattern is 20%, then the stop is set at 80% of the buy price.
  6. Buy at the opening price the day after an entry signal.
  7. Exit occurs after hitting the stop, at end of data, or at the ultimate high. The ultimate high is the highest peak before price drops at least 20%, measured from the high to the close.
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Throwback Entry Setup 1: Buy Above Chart Pattern

Picture of throwback scenario 1.

This setup buys when price completes a throwback and closes above the top of the chart pattern. Referring to the figure, price is in red and the top of the chart pattern is at A. The throwback is the move represented by the drop from C to D. After the throwback, when price again closes above A, which happens at B, buy at the open the next day.

Here are the rules for the setup.

Setup 1 Rules

  1. Find the highest high in the chart pattern (A).
  2. After the throwback completes (D, found manually in the tests), buy at the open the next trading day when the stock closes above the top of the chart pattern (B). This applies to double bottoms, rectangles, triple bottoms and ascending triangles.
  3. For head-and-shoulders, descending and symmetrical triangles, I used a close above the breakout day's low price as the entry signal. The breakout day is when price closes above a trendline or neckline boundary. Breakouts for these trio of patterns were found manually.
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Throwback Entry Setup 2: Buy Above Throwback Top

Picture of throwback scenario 2.

This setup buys when price closes above the top of the throwback. Referring to the figure on the right, the highest peak in the throwback is at A. When price closes above it at B, buy at the open the next day.

Here are the rules for the setup.

Setup 2 Rules

  1. Find the highest peak during the throwback (A), from the breakout (C) to the end of the throwback (D).
  2. After the throwback completes, buy at the open the next trading day after the stock closes above the top of the throwback (B).

Throwback Entry Setup 3: Buy Above A Minor High

Picture of throwback scenario 3.

This setup buys when price closes above the lowest minor high during the throwback. Referring to the figure on the right, as price drops during a throwback, it makes minor highs. One is at A. Then price drops and makes a lower minor high at B only this time, price bottoms and closes above peak B at C. The day after it closes above C, buy. Price may reverse and make a lower minor high, but that does not change the original entry signal. Lower entry signals are ignored.

Here are the rules for the setup.

Setup 3 Rules

  1. Place a buy stop to enter a trade at the open the day after price closes above a minor high during the throwback (A).
  2. Lower the buy stop if a lower minor high appears (B in this example).
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Throwback Trading Results

I tested the three setups as described above and here is what I found.

 
Three Throwback Setups Test Results
Setup 1Setup 2Setup 3
Average net profit$3,622.28$2,924.59$3,118.02
Wins89%83%84%
Trades4,8754,6983,919
Maximum loss-22%-23%-27%
Number of ultimate high exits 4,3674,0173,377
Number stopped out 508 or 10%  681 or 14%  542 or 14% 

WARNING: Before you get too excited, do not believe that you will win 89% of the time or make $3,622 on a $10,000 investment following this approach. These results are for thousands of perfect trades: buying at the breakout low price or pattern high and selling at the highest high price the day before price tumbles. However, the numbers make for good comparisons.

Setup 1 wins hands down in every category. Setup 1 is where you wait for price to close above the top of the chart pattern before buying the stock.

Setup 2, where you wait for price to close above the high posted during the throwback, performed poorly. You were stopped out 40% more often and the average trade made only 29%.

I thought that Setup 3 would be the big winner. That is when you buy the stock after price closes above a minor high. I figured you would buy in at a lower price, which you do, but it appears that you get stopped out 40% more often and the rise to the ultimate high is diminished, too. The average trade makes 31% versus 36% for Setup 1.

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Stops and Trailing Stops

 
Trailing Stop Test Results
Setup 1Setup 2Setup 3
Average net profit$1,980.55$1,575.45$1,705.87
Wins81%74%75%
Trades4,8804,7003,926
Maximum loss-22%-23%-27%
Number of ultimate high exits 2,8272,7682,283
Number stopped out 2,053 or 42%  1,932 or 41%  1,643 or 42% 

For stops, I computed the height of the chart pattern and then used that percentage as the stop loss level below the buy price. That is what I used for the three setups already described. I chose this method so that each of the three setups used the same percentage stop level. The stop was not moved after initial placement.

For the trailing stops tests, I applied the pattern's height percentage to price whenever it made a higher high as a kind of high-water mark. I never lowered the stop but trailed it higher as price climbed.

Here are the results using a trailing stop on the three setups.

The average net profit drops almost in half. The percentage of winning trades drops, and the number stopped out rises from a maximum of 14% to 42%. Ouch.

-- Thomas Bulkowski

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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. A bird in the bush usually has a friend in there with him.