Subscribe to RSS feeds Bulkowski Blog via RSS

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

Support this site! Clicking the links (below) takes you to Amazon.com. If you buy ANYTHING, they pay for the referral.

Picture of Bumper.
Kindle
Paperback
Nook
Picture of the head's law.
Kindle
Paperback
Nook
Chart Patterns: After the Buy
Getting Started in Chart Patterns, Second Edition book.
Trading Basics: Evolution of a Trader book.
Fundamental Analysis and Position Trading: Evolution of a Trader book.
Swing and Day Trading: Evolution of a Trader book.
Visual Guide to Chart Patterns book.
Encyclopedia of Chart Patterns 2nd Edition book.

Bulkowski's Buy Low or Buy High?

Class Elliott Wave Fundamentals Psychology Quiz Research Setups Software Tutorials More...
Busted
Patterns
Candles Chart
Patterns
Event
Patterns
Small Patterns
Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 12/11/2017
24,386 56.87 0.2%
10,371 -31.68 -0.3%
763 4.90 0.6%
6,875 35.00 0.5%
2,660 8.49 0.3%
YTD
23.4%
14.7%
15.6%
27.7%
18.8%
Tom's Targets    Overview: 11/30/2017
24,600 or 23,500 by 12/15/2017
9,900 or 10,500 by 12/15/2017
800 or 750 by 12/15/2017
7,100 or 6,700 by 12/15/2017
2,725 or 2,575 by 12/15/2017

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.

Should you buy near the yearly low or use upward momentum to buy near the yearly high, surfing to a higher high? Research indicates that buying near the yearly low gives you better gains with lower risk.

 

Average Rise or Decline

I looked at 12,385 chart patterns using 25 different chart pattern types in 500 stocks from 1991 to 1996 and another 739 stocks from 1995 to 2005, encompassing both a bull and bear market. I wanted to know if it is better to buy within a third of the yearly low or buy within a third of the yearly high. Table 1 shows the results.

Market condition,
breakout direction
Lowest 10%Lowest ThirdMiddle ThirdHighest ThirdHighest 10%
Bull market up breakout42% (179)38% (1421)35% (1874)36% (2715)36% (1294)
Bull market down breakout21% (236)19% (705)17% (852)16% (871)15% (75)
Bear market up breakout36% (118)32% (607)27% (764)23% (924)23% (413)
Bear market down breakout30% (185)26% (461)23% (443)22% (263)16% (15)

Table 1: Market condition and breakout direction versus the average rise or decline after the breakout from a chart pattern as a function of the yearly trading range.

Let's take the lowest 10% column where it shows 42% (179). That means the average rise in a bull market from an upward breakout was 42% and 179 samples qualified. To qualify, the breakout must have been within 10% of the yearly trading range from the yearly low. The next column uses a third from the low, and so on until the last column. The last column is a mirror of the lowest 10% except it applies to the yearly high. Patterns that qualify are within 10% or less of the yearly price range below the yearly high.

Regardless of the breakout direction and market condition the average rise and the average decline are higher as the buy point approaches the yearly low.

Top

Failure Rate

What about risk? Does the risk of failure increase when you buy low? The next table shows the answer.

Failure Rate in a bull
market, upward breakout
Lowest 10%Lowest ThirdMiddle ThirdHighest ThirdHighest 10%
5%3% (5)4% (62)5% (97)6% (168)6% (72)
10%8% (15)12% (172)16% (307)16% (440)17% (217)
15%17% (31)23% (320)28% (522)26% (711)27% (347)
20%23% (41)32% (450)38% (711)34% (935)36% (469)
25%32% (57)41% (589)46% (866)43% (1155)45% (583)

Table 2: Failure rate for bull market, upward breakouts.

Table 2 shows how often price fails to rise at least 5%, 10%, 15%, and so on in a bull market after an upward breakout from a chart pattern. Bull market/upward breakouts showed the highest sample counts (in parentheses) so that's why they were chosen. The sample counts are slim for the lowest 10%, but the trend is clear, especially when comparing the lowest third column with the columns to the right.

Failure rates decrease the closer to the yearly low the breakout occurs. In short, it means buy a chart pattern breakout near the yearly low, not the high, and stay out of the middle.

-- Thomas Bulkowski

Top 

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. According to my calculations the problem doesn't exist.