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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 Wide Ranging Day Downside Reversal

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The wide ranging day downside reversal pattern
Wide Ranging Day Downside Reversal

 

Important Bull Market Results for Wide Ranging Day Downside Reversal

Overall performance rank (1 is best)**: 4/23
Break even failure rate*: 43% (up breakouts)
Average rise*: 7%
Percentage meeting price target*: 42%
 
The above numbers are based on hundreds of perfect trades as of 3/15/2013. 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

Wide Ranging Day Downside Reversal, Identification Guidelines

CharacteristicDiscussion
1 barThe pattern is composed of one bar.
UptrendLook for the pattern in a short-term upward trend.
CloseThe close must be within 25% of the intraday low.
Wide RangeLook for an unusually tall price bar. For testing, I used a high-low range on the reversal day that was at least three times the one-month average.

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Wide Ranging Day Downside Reversal, Trading Tips

Trading TacticExplanation
ReversalThe pattern is supposed to act as a reversal of the upward trend, and it does, but only 43% of the time in a bull market. In other words, look for price to continue upward most often.
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 wide ranging day downside reversal fulfills the measure rule only 42% of the time (bull market, up breakout). That is, measure the height of 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.

Wide Ranging Day Downside Reversal, Performance Statistics

For the following statistics, I used 1,138 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 wide ranging day downside 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 5 days (11 days total) each, before the wide ranging day downside reversal and the same peak/valley test after the wide ranging day downside reversal. The closest valley or peak before the wide ranging day downside reversal is where the trend began. The closest peak or valley after the wide ranging day downside reversal is where the trend ended. I compared the peak or valley to the average of the high and low price of the wide ranging day downside reversal pattern (2nd day).

The 5-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.

Wide Ranging Day Downside Reversal, Performance and Failure Rates

Table 1: Performance and Failure Rates
Market/Breakout direction 5% Failure  Average 
 Rise/Drop 
Bull market, up breakout43%7%
Bull market, down breakout43%-7%
Bear market, up breakout44%10%
Bear market, down breakout28%-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 wide ranging day downside reversal.

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Wide Ranging Day Downside Reversal, Measure Rule

Table 2: Measure Rule Performance
Market/Breakout direction Success 
Bull market, up breakout42%
Bull market, down breakout30%
Bear market, up breakout31%
Bear market, down breakout33%

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.

 

 

Wide Ranging Day Downside Reversal, Trading Performance

Table 3: Testing the Wide Ranging Day Downside Reversal
Market/Breakout direction Bull/Up  Bull/Down  Bear/Up  Bear/down 
Net profit/loss$92.04$(35.77)$8.32$(33.63)
Wins58%46%53%47%
Winning trades45795567166
Average gain of winners$715.68$757.06$683.23$778.41
Losses42%54%47%53%
Losing trades3281,11459186
Average loss($776.87)($715.43)($758.10)($758.35)
Average hold time (calendar days)29242014

Table 3 shows the performance based on 3,357 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 wide ranging day downside 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 $92.04 for all trades. The method won 58% of the time and there were 457 winning trades. The average gain of winning trades was $715.68.

Forty-two percent, or 328 trades were losers. They lost an average of $776.87.

The average hold time was 29 calendar days.

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

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Wide Ranging Day Downside Reversal, Trading Example

Open-Close reversal in 3M (MMM)

The figure shows the wide ranging day downside reversal at A.

Price rises in the days leading to the wide ranging day. Price opens at the top of the day in this example and closes near the intraday low, making a very tall price bar.

It takes several days for price to close below the bottom of the wide ranging day, but it finally happens at B.

Short at the open of the next bar, C.

Not shown is a 7% profit target or 7% stop loss, both based on the entry price.

-- 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. There are two credit cards for every person in the United States. And I have most of them.