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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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Chart Patterns: After the Buy
Getting Started in Chart Patterns, Second Edition book.
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Visual Guide to Chart Patterns book.
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Bulkowski's Study: Long versus Short

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Busted
Patterns
Candles Chart
Patterns
Event
Patterns
Small Patterns
Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 11/21/2017
23,591 160.50 0.7%
9,615 92.77 1.0%
758 2.01 0.3%
6,862 71.77 1.1%
2,599 16.89 0.7%
YTD
19.4%
6.3%
14.9%
27.5%
16.1%
Tom's Targets    Overview: 11/14/2017
23,700 or 22,800 by 12/01/2017
9,300 or 9,800 by 12/01/2017
800 or 750 by 12/01/2017
7,000 or 6,500 by 12/01/2017
2,625 or 2,540 by 12/01/2017

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.

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.

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

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.

-- 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. Beauty is only skin deep, but ugly goes down to the bone.