As of 04/18/2024
Indus: 37,775 +22.07 +0.1%
Trans: 14,947 -39.62 -0.3%
Utils: 860 +6.95 +0.8%
Nasdaq: 15,602 -81.87 -0.5%
S&P 500: 5,011 -11.09 -0.2%
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YTD
+0.2%
-6.0%
-2.4%
+3.9%
+5.1%
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 39,800 or 37,150 by 05/01/202416,200 or 15,000 by 05/01/2024885 or 850 by 05/01/202416,700 or 15,800 by 05/01/20245,250 or 5,025 by 05/01/2024 |
As of 04/18/2024
Indus: 37,775 +22.07 +0.1%
Trans: 14,947 -39.62 -0.3%
Utils: 860 +6.95 +0.8%
Nasdaq: 15,602 -81.87 -0.5%
S&P 500: 5,011 -11.09 -0.2%
|
YTD
+0.2%
-6.0%
-2.4%
+3.9%
+5.1%
| |
|
39,800 or 37,150 by 05/01/202416,200 or 15,000 by 05/01/2024885 or 850 by 05/01/202416,700 or 15,800 by 05/01/20245,250 or 5,025 by 05/01/2024 | ||
Initial release: 9/17/2021. Fixed trend start info: 11/12/21
The idea behind pattern pairs is to pick a chart pattern type (like broadening tops with upward breakouts) to buy and another to sell (like double tops). You buy the upward breakout from the broadening top, hold for a few years, and sell when a double top appears and breaks out downward. Along the way, you give price a chance to rise far enough to overcome those trades which are stopped out for a loss. This is a trend-following strategy.
The figure illustrates the idea for trading pattern pairs, where price is the red line and the boxes are chart patterns. This articles assumes you buy a double bottom as price rises above the top of the double bottom (a penny above the peak between the two bottoms).
On the sale side, you can sell the first bearish chart pattern which comes along, or wait for your favorite bearish chart pattern to appear and sell then.
The best pattern to use for the sell signal is a busted rising wedge. That pattern has an upward breakout which sees price reverse before rising far.
Here's a list of the top five performing sell signals, based on annualized gain (annualized because the hold time is often years, in parenthesis).
Sell a...
The following list shows the expected performance of chart pattern pairs, ranked by their expectancy. Expectancy is a way of gauging winning and losing trades and how much money you might make trading a pattern pair. I put the expected profit per trade, per share, in parenthesis.
For example, the pattern pair with the highest trade expectancy is to buy a Adam & Adam double bottom with an upward breakout and sell a busted diamond bottom. If you traded 100 shares, the average gain would be $2,352 or $23.52 per share.
Sell a...
To improve performance, try these tips.
The databases I built over several decades doesn't identify every chart pattern. There may be plenty of double tops over the years, for example, that I didn't catalog on the way to the one I did catalog. So buying an upward breakout from a chart patterns and selling at the double top I cataloged would be different than choosing to sell a different double top. However, the following analysis does give a real-world flavor for how well you might do trading chart patterns if you follow the pattern pair strategy.
Here's what I used in my analysis.
I used the following chart patterns in the analysis, but some only applied if they were busted.
I used a stop loss order set a penny below the bottom of the double bottom (the lower of the two bottoms). Price on the way down may have gapped below the stop price (I used the lower of the stop price or the opening price on the day of sale).
For trailing stops, I removed the stop loss order and used a trailing stop set at 10%, 15%, 20%, or 25% below a peak, never lowering the stop value, but raising it if a higher peak came along during the trade.
In Table 1, I calculated the percentage net gain (the average of gains and losses) when using various trailing stop loss amounts (10%, 15%, 20%, and 25%) for all tested chart patterns according to the busted/non-busted buy/sell configuration. In parenthesis is the size of the average loss so I could detail how losses change with various stop loss orders.
For example, if I tested double bottoms and sold on various non-busted patterns (broadening bottoms, broadening tops, head-and-shoulders tops, and so on), I made an average of 42% ("Stop Loss Only" column) with an average loss of 12% after having a stop loss order in place (only. No trailing stop). Replacing the stop-loss order with a 10% trailing stop cut the gain to 7% and limited losses to 5%. Using a 25% trailing stop allowed me to keep more money, 27%, but losses climbed to 13%. If I didn't use a stop loss order on the trade, I made an average of 78% but the average loss was 30%.
The results show that:
| Table 1: Various Trailing Stop Settings: Net Profit and (Average Loss) | ||||||
|---|---|---|---|---|---|---|
| Data | 10% | 15% | 20% | 25% | Stop Loss Only | No Stop |
| Non-busted buys, non-busted sales | 7% (-5%) | 13% (-7%) | 19% (-10%) | 27% (-13%) | 42% (-12%) | 78% (-30%) |
| Non-busted buys, busted sales | 7% (-5%) | 12% (-8%) | 18% (-10%) | 25% (-13%) | 36% (-11%) | 67% (-26%) |
Selling a busted chart pattern results in better performance than using non-busted patterns (at least for double bottoms as the buy signal).
I compared the performance of non-busted double bottoms with busted and non-busted chart patterns in 22 contests (22 different chart pattern types). I found that selling a busted bullish chart pattern outperformed in 68% of the 22 contests (compared to selling using a non-busted chart pattern).
However, if we ignore the contest results we find that non-busted patterns perform better with and without stop loss or trailing stops. That result comes from the prior table.
Also, non-busted patterns outperform busted ones when using the trend start, 50- and 200-day moving average, or when selling the first bearish chart pattern.
The evidence suggests that trading non-busted patterns will give better results.
Table 2 shows statistics I collected for double bottoms using the trading rules described above and shown in the figure. I used a stop loss order priced a penny below the bottom of the double bottom (after buying).
For example, if you were to buy the upward breakout from a double bottom chart pattern and hold it until you encountered a broadening bottom (the first chart pattern listed in the table), but one with a downward breakout, you'd make an average of 60% on the 214 (53 winners, 161 losers) trades. That's an average of 279% on your winners, 12% average loss on your losers, and holding onto the position an average of 1.9 years. You'd find that only 25% of the trades made money but you'd gain an average of 31% per year. If you removed the stop loss order and just held on until the broadening bottom with a downward breakout appeared, you'd make an average of 80% per trade.
Notes: All of the above numbers appear in the table except for the average hold time. The rank is based on the net gain for tables 2 and 3). A rank of 1 is best.
Trades with sample counts below 30 are not ranked.
| Table 2: Statistics for Adam & Adam Double Bottoms | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Sell Pattern | Average Win | Average Loss | Net | Annualized Net | Rank | No Stop Net | Win/Loss Samples | Win Loss | Average Expectancy (Rank) |
| Broadening bottom | 279% | -12% | 60% | 31% | 2 | 80% | 53/161 | 25% | $-0.35 (57) |
| Broadening top | 145% | -12% | 43% | 22% | 12 | 75% | 136/252 | 35% | $10.01 (7) |
| Broadening formation, right-angled and ascending | 110% | -14% | 23% | 12% | 50 | 49% | 47/112 | 30% | $1.12 (52) |
| Broadening formation, right-angled and descending | 112% | -15% | 31% | 13% | 43 | 47% | 52/92 | 36% | $3.96 (34) |
| Broadening wedge, ascending | 112% | -14% | 41% | 21% | 18 | 74% | 44/57 | 44% | $7.99 (11) |
| Broadening wedge, descending | 146% | -15% | 26% | 13% | 43 | 47% | 25/73 | 26% | $-0.19 (56) |
| Bump-and-run reversal top | 137% | -14% | 50% | 24% | 7 | 99% | 146/197 | 43% | $5.28 (23) |
| Diamond bottom | 125% | -8% | 53% | 24% | 7 | 62% | 17/20 | 46% | $5.75 (20) |
| Diamond top | 154% | -13% | 48% | 22% | 12 | 104% | 56/98 | 36% | $3.14 (40) |
| Adam & Adam double top | 210% | -10% | 57% | 27% | 3 | 99% | 372/844 | 31% | $11.25 (5) |
| Adam & Eve double top | 154% | -10% | 45% | 22% | 12 | 77% | 164/319 | 34% | $9.44 (8) |
| Eve & Adam double top | 159% | -11% | 42% | 21% | 18 | 90% | 178/396 | 31% | $6.08 (19) |
| Eve & Eve double top | 141% | -12% | 39% | 22% | 12 | 78% | 180/362 | 33% | $4.39 (29) |
| Falling wedge | 106% | -15% | 17% | 8% | 54 | 25% | 24/67 | 26% | $0.79 (54) |
| Head-and-shoulders top | 152% | -12% | 43% | 21% | 18 | 79% | 531/1049 | 34% | $8.64 (9) |
| Sell Pattern | Average Win | Average Loss | Net | Annualized Net | Rank | No Stop Net | Win/Loss Samples | Win Loss | Average Expectancy (Rank) |
| Head-and-shoulders, complex top | 131% | -14% | 35% | 19% | 24 | 68% | 82/162 | 34% | $2.41 (42) |
| Rectangle top | 93% | -13% | 20% | 11% | 52 | 48% | 72/160 | 31% | $4.66 (27) |
| Rising wedge | 127% | -12% | 44% | 24% | 7 | 77% | 145/213 | 41% | $4.11 (31) |
| Rounding top | 157% | -12% | 38% | 17% | 30 | 57% | 71/168 | 30% | $3.93 (35) |
| Ascending scallop | 59% | -14% | 10% | 7% | 56 | 40% | 32/65 | 33% | $1.26 (51) |
| Descending scallop | 170% | -13% | 45% | 23% | 10 | 92% | 204/433 | 32% | $4.00 (33) |
| Scallop, inverted and ascending | 79% | -12% | 14% | 6% | 58 | 42% | 14/34 | 29% | $-2.64 (60) |
| Scallop, descending and inverted | 213% | -14% | 54% | 26% | 4 | 93% | 104/244 | 30% | $1.35 (50) |
| Triangle, ascending | 107% | -13% | 33% | 18% | 29 | 79% | 81/129 | 39% | $6.29 (18) |
| Triangle, descending | 92% | -14% | 22% | 12% | 50 | 35% | 74/142 | 34% | $1.84 (48) |
| Triangle, symmetrical | 123% | -14% | 33% | 16% | 34 | 64% | 252/493 | 34% | $4.11 (31) |
| Triple top | 160% | -12% | 45% | 23% | 10 | 80% | 391/793 | 33% | $7.62 (12) |
| Rectangle bottom | 89% | -15% | 7% | 4% | 60 | 18% | 36/136 | 21% | $-1.86 (59) |
| 3 falling peaks | 167% | -12% | 40% | 20% | 23 | 85% | 331/820 | 29% | $3.81 (36) |
| Roof | 84% | -13% | 28% | 14% | 40 | 67% | 22/31 | 42% | $8.22 (10) |
| Roof, inverted | 109% | -11% | 39% | 22% | 12 | 70% | 35/48 | 42% | $10.48 (6) |
| Sell Pattern | Average Win | Average Loss | Net | Annualized Net | Rank | No Stop Net | Win/Loss Samples | Win Loss | Average Expectancy (Rank) |
The figure shows an example of how this trade unfolds.
A bullish chart pattern appears and you buy at the breakout. Continue holding until your selected chart pattern appears. The chart pattern is bullish because it has an upward breakout but then things go wrong. Price reverses. Sell when the stock dips below the bottom of the chart pattern (meaning it busts the upward breakout).
Table 3 shows the performance statistics for this setup (buying a normal double bottom and selling only after a busted chart pattern). I used a stop loss order priced a penny below the bottom of the double bottom (after buying).
For example, buying a double bottom with an upward breakout in a bull market and selling a busted broadening bottom shows winning trades making an average of 67%. Losing trades lost 12%, giving a net of 15%. Because the hold time is often years long, the annualized gain is 8%, giving the setup a rank of 58th (where 1 is best). If you traded this without a stop, the net gain climbed from 15% to 38%. Of the stocks I looked at, I found 74 trades with 34% of them winning.
Trades with sample counts below 30 are not ranked.
| Table 3: Statistics for Normal Buy, Busted Sale | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Sell Pattern | Average Win | Average Loss | Net | Annualized Net | Rank | No Stop Net | Win/Loss Samples | Win Loss | Average Expectancy (Rank) |
| Broadening bottom | 67% | -12% | 15% | 8% | 54 | 38% | 25/49 | 34% | $4.80 (26) |
| Broadening top | 137% | -11% | 49% | 19% | 24 | 82% | 85/123 | 41% | $12.18 (3) |
| Broadening formation, right-angled and ascending | 141% | -13% | 39% | 17% | 30 | 92% | 20/39 | 34% | $7.21 (14) |
| Broadening formation, right-angled and descending | 126% | -13% | 42% | 19% | 24 | 67% | 25/38 | 40% | $0.97 (53) |
| Broadening wedge, ascending | 190% | -13% | 76% | 27% | 123% | 11/14 | 44% | $5.77 () | |
| Broadening wedge, descending | 186% | -14% | 39% | 15% | 37 | 51% | 10/28 | 26% | $1.42 (49) |
| Bump-and-run reversal bottom | 144% | -13% | 53% | 21% | 18 | 101% | 13/18 | 42% | $2.18 (44) |
| Cup with handle | 75% | -15% | 30% | 13% | 43% | 12/12 | 50% | $6.39 () | |
| Diamond bottom | 155% | -12% | 42% | 22% | 12 | 79% | 18/38 | 32% | $23.52 (1) |
| Diamond top | 88% | -8% | 29% | 13% | 43 | 53% | 29/47 | 38% | $3.38 (39) |
| Adam & Adam double bottom | 158% | -10% | 45% | 19% | 24 | 73% | 127/264 | 32% | $12.04 (4) |
| Adam & Eve double bottom | 143% | -11% | 29% | 14% | 40 | 54% | 51/142 | 26% | $4.53 (28) |
| Eve & Adam double bottom | 164% | -10% | 26% | 15% | 37 | 69% | 33/126 | 21% | $4.91 (25) |
| Eve & Eve double bottom | 97% | -10% | 21% | 11% | 52 | 30% | 33/81 | 29% | $4.25 (30) |
| Falling wedge | 84% | -15% | 28% | 13% | 43 | 48% | 27/36 | 43% | $3.51 (38) |
| Head-and-shoulders bottom | 122% | -11% | 34% | 15% | 37 | 57% | 97/188 | 34% | $7.32 (13) |
| Sell Pattern | Average Win | Average Loss | Net | Annualized Net | Rank | No Stop Net | Win/Loss Samples | Win Loss | Average Expectancy (Rank) |
| Head-and-shoulders complex bottom | 105% | -15% | 26% | 13% | 43 | 47% | 12/23 | 34% | $0.31 (55) |
| Rectangle top | 163% | -12% | 55% | 26% | 4 | 103% | 43/69 | 38% | $6.39 (17) |
| Rising wedge | 196% | -14% | 81% | 38% | 1 | 97% | 23/28 | 45% | $1.96 (47) |
| Round bottom | 198% | -16% | 67% | 26% | 71% | 5/8 | 38% | $9.81 () | |
| Rounding top | 117% | -16% | 35% | 11% | 61% | 5/8 | 38% | $0.48 () | |
| Ascending scallop | 157% | -13% | 46% | 21% | 18 | 84% | 26/49 | 35% | $2.85 (41) |
| Descending scallop | 63% | -12% | 11% | 7% | 56 | 18% | 11/25 | 31% | $3.56 (37) |
| Scallop, inverted and ascending | 129% | -12% | 31% | 17% | 30 | 80% | 42/97 | 30% | $2.03 (46) |
| Scallop, descending and inverted | 190% | -11% | 68% | 25% | 6 | 97% | 16/25 | 39% | $6.52 (16) |
| Triangle, ascending | 116% | -13% | 37% | 16% | 34 | 58% | 40/63 | 39% | $5.54 (21) |
| Triangle, descending | 143% | -13% | 34% | 17% | 30 | 83% | 26/61 | 30% | $2.32 (43) |
| Triangle, symmetrical | 100% | -12% | 31% | 14% | 40 | 68% | 135/214 | 39% | $4.94 (24) |
| Triple bottom | 120% | -10% | 27% | 13% | 43 | 60% | 123/299 | 29% | $5.29 (22) |
| Rectangle bottom | 67% | -13% | 10% | 5% | 59 | 29% | 17/41 | 29% | $2.12 (45) |
| 3 rising valleys | 128% | -11% | 32% | 16% | 34 | 66% | 73/162 | 31% | $6.54 (15) |
| Roof | 139% | -10% | 54% | 19% | 24 | 79% | 9/12 | 43% | $13.99 (2) |
| Roof, inverted | 88% | -14% | 23% | 13% | 43 | 59% | 11/19 | 37% | $-1.67 (58) |
| Sell Pattern | Average Win | Average Loss | Net | Annualized Net | Rank | No Stop Net | Win/Loss Samples | Win Loss | Average Expectancy (Rank) |
Here are a few ideas the data suggested which may improve performance of your pattern pairs trading.
Find the trend start for your double bottom. Often you can just look at a chart and see where the trend begins. If not, or you want to be sure, then the glossary describes how to find it.
Determine the length from the trend start to the pattern's start: short term (less than 3 months), medium term (3 to 6 months) or long term (more than 6 months).
Table 4 shows the results for the combinations of busted/non-busted trades and the resulting performance. I set a stop loss order placed a penny below the lower of the two bottoms.
Buying non-busted patterns with a medium-term (3 to 6 months) duration from the trend start to the pattern's start results in significantly better performance than the other durations. Also notice that non-busted sales outperformed their corresponding busted sales.
| Table 4: Short (S) Medium (M) or Long (L) Trend Start and Performance | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy non-busted pattern | S37% M68% L20% | S36% M51% L15% |
I checked two moving averages at buy time, 50- and 200-day simple moving averages (not as a crossover setup). I compared the breakout price to the value of the moving average. Table 5 shows the performance of buying non-busted patterns when the breakout price was above or below the 50-day simple moving average (SMA). I set a stop loss order placed a penny below the lower of the two bottoms.
Double bottoms work best if the breakout price is above the 50-day SMA. Notice that on the sell side, non-busted patterns outperform busted ones.
| Table 5: Above (A) Below (B) 50-Day Simple Moving Average | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy non-busted pattern | A50% B37% | A41% B33% |
Table 6 shows the results of using a longer moving average, the 200-day. Traders often use this as a proxy for the long-term trend.
Buying a pattern with the breakout price below the 200-day SMA resulted in much better performance. Again, non-busted sell patterns outperformed busted ones.
| Table 6: Above (A) Below (B) 200-Day Simple Moving Average | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy non-busted pattern | A26% B56% | A22% B48% |
The prior discussion assumes you buy a double bottom and sell a chart pattern of your choosing, such as a downward breakout from a head-and-shoulders top (you wait for one to appear). What if you sold the first bearish chart pattern which comes along? How would you do?
Table 7 shows the results sorted by the type of patterns involved (busted or non-busted).
For example, if you buy a non-busted double bottom, place a stop loss order a penny below the lower of the two bottoms, and sell the first non-busted chart pattern which comes along, you'd make 12% on average. Annualized, you'd make 34%. This compares to a 21% annualized gain if you sell a designated pattern (like you waited for a double top to confirm before selling, which may or may not be the first bearish chart pattern to come along).
The best results come from buying a double bottom and selling the first non-busted pattern which appears. That combination makes 34% annually, beating the 21% rate for selling designated patterns.
The lower half of the table shows the expectancy for selling the first bearish pattern which appears. The most money per trade, per share, is $4.02 for trading non-busted patterns. Buying a non-busted Adam & Adam double bottom and selling the first busted pattern which appeared has an expectancy of only $0.69 or $69 per 100 shares, far below the $402 for the non-busted combination.
| Table 7: Selling the First Bearish Pattern (Annualized) | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy non-busted pattern | 12% (34% v 21%) | 4% (11% v 17%) |
| Expectancy (Below) | ||
| Buy non-busted pattern | $4.02 | $0.69 |
-- Thomas Bulkowski
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