As of 09/18/2020
  Indus: 27,657 -244.56 -0.9%  
  Trans: 11,432 -120.44 -1.0%  
  Utils: 798 -12.86 -1.6%  
  Nasdaq: 10,793 -117.00 -1.1%  
  S&P 500: 3,319 -37.54 -1.1%  
YTD
-3.1%  
 +4.9%  
-9.2%  
 +20.3%  
 +2.7%  
  Targets    Overview: 09/14/2020  
  Up arrow29,400 or 26,700 by 10/01/2020
  Up arrow11,750 or 10,600 by 10/01/2020
  Up arrow845 or 775 by 10/01/2020
  Up arrow11,800 or 10,400 by 10/01/2020
  Up arrow3,600 or 3,200 by 10/01/2020
CPI (updated daily): Arrows on 8/18/20
As of 09/18/2020
  Indus: 27,657 -244.56 -0.9%  
  Trans: 11,432 -120.44 -1.0%  
  Utils: 798 -12.86 -1.6%  
  Nasdaq: 10,793 -117.00 -1.1%  
  S&P 500: 3,319 -37.54 -1.1%  
YTD
-3.1%  
 +4.9%  
-9.2%  
 +20.3%  
 +2.7%  
  Targets    Overview: 09/14/2020  
  Up arrow29,400 or 26,700 by 10/01/2020
  Up arrow11,750 or 10,600 by 10/01/2020
  Up arrow845 or 775 by 10/01/2020
  Up arrow11,800 or 10,400 by 10/01/2020
  Up arrow3,600 or 3,200 by 10/01/2020
CPI (updated daily): Arrows on 8/18/20

Bulkowski's Study: Long Trading versus Selling Short

 

Revised 12/24/19. Tweaked 9/11/2020.

A question I am asked frequently is why I do not recommend shorting a stock. The answer is simple. You can make more money from the long side than the short side, even in a bear market.

Before I get to that, read this article about Joe Campbell who turned a $37,000 portfolio into a debt of more than $100,000 overnight when a short position went against him.

For proof, I used 500 stocks from 1991 to 1996 and another 739 from 1995 to 2005 and found 12,385 chart patterns. I measured the rise from the breakout price to the ultimate high, which is the highest high before price drops by at least 20%. For downward breakouts, I measured the decline from the breakout price to the ultimate low, which is the lowest low before price rebounds by at least 20%.

Average Rise or Decline
Failure Rates
Another Look
See Also

 

Average Rise or Decline

The following table shows the average rise or decline of perfectly traded chart patterns without any fees deducted. I split the yearly price range into thirds and measured the performance of the 12,385 chart patterns, placing each in one of the three categories according to the breakout price. Comparing the long versus short numbers, going long in both bull and bear markets beats going short in either a bull or bear market.

For example, those chart patterns with breakouts within a third of the yearly low showed gains of 38% in a bull market, but shorting in a bull market produced a gain of just 19%. In a bear market, going long made an average of 32% but going short made just 26%.

Market condition
Trade direction
Lowest
Third
Middle
Third
Highest
Third
Bull market long38%35%36%
Bull market short19%17%16%
Bear market long32%27%23%
Bear market short26%23%22%

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Failure Rates

The following table shows failure rates over the same three yearly trading ranges. The easiest way to explain the failure rate is to cite examples. Using the Lowest Third captioned column (those chart patterns with breakouts within a third of the yearly low), 4% of the chart patterns I looked at failed to rise at least 5%, and double that -- or 8% -- failed to drop at least 5%. The next two rows down: 12% failed to rise at least 10% and 24% failed to drop at least 10%. In all cases, shorting a stock after a chart pattern breakout means an increased risk of failing than if you were to go long.

Failure
Rate
Lowest
Third
Middle
Third
Highest
Third
5% long4%5%7%
5% short8%9%15%
10% long12%17%18%
10% short24%28%34%
15% long22%29%29%
15% short39%46%51%
20% long32%39%38%
20% short53%63%66%
25% long41%48%47%
25% short65%74%78%

Another Look

Having said that long trades work better both in reward (the rise to the ultimate high) and risk of failure, let me add this thought. Since gains in a rising market can be unlimited, and you can only lose 100% of your money by owning a stock that drops (excluding leverage), the comparison of the long side to the short side is probably unfair.

What I can say is that price drops faster than it rises, often by about two to one (it drops twice as fast as it rises). So you can make more money in a short period of time by shorting. I found this out by comparing a chart pattern with up and down breakouts.

For example, a symmetrical triangle sees price rise an average of 34% in 176 days after an upward breakout. Downward breakouts drop 12% in 42 days. If the downward speed was a fast as the upward speed, it would take 62 days to drop 12%. And yet it take just 42 days. So the downward drop is 50% faster than the upward rise.

-- Thomas Bulkowski

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See Also

 

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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

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