As of 04/17/2024
Indus: 37,753 -45.66 -0.1%
Trans: 14,987 -259.68 -1.7%
Utils: 853 +17.82 +2.1%
Nasdaq: 15,683 -181.88 -1.1%
S&P 500: 5,022 -29.20 -0.6%
|
YTD
+0.2%
-5.7%
-3.2%
+4.5%
+5.3%
|
 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 04/17/2024
Indus: 37,753 -45.66 -0.1%
Trans: 14,987 -259.68 -1.7%
Utils: 853 +17.82 +2.1%
Nasdaq: 15,683 -181.88 -1.1%
S&P 500: 5,022 -29.20 -0.6%
|
YTD
+0.2%
-5.7%
-3.2%
+4.5%
+5.3%
| |
|
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: 10/14/2021. Fixed trend start numbers: 11/12/21.
The idea behind pattern pairs is to pick a chart pattern type (like busted Adam & Eve double tops) to buy and another to sell (like head-and-shoulder tops). You buy the upward breakout from the double top, hold for a few years, and sell when a head-and-shoulders 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 busted Adam & Eve double top (price breaks out downward, drops no more than 10%, reverses, and closes above the top of the Adam & Eve double top). Buy as price rises above the top of the Adam & Eve double top.
On the sale side, you can sell the first bearish chart pattern which comes along. Or you can wait for your favorite bearish chart pattern to appear and sell then.
The best pattern to use for the sell signal is a Eve & Adam double top
Here's a list of the top five performing signals, based on annualized gain (annualized because the hold time is often years, in parenthesis).
Buy a busted Adam & Eve double top and 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 busted Adam & Eve double top (a downward breakout which busts) and sell a busted Eve & Adam double bottom (upward breakout which busts). If you traded 100 shares, the average expected gain would be $1,902 or $19.02 per share.
Buy a busted Adam & Eve double top and 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 a busted Adam & Eve double top and selling at a head-and-shoulders top I cataloged would be different than choosing to sell a different head-and-shoulders 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 Adam & Eve double top. Price on the way down may have gapped below the stop price (for the sale 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 bought busted Adam & Eve double tops and sold on various non-busted patterns (broadening bottoms, Adam & Eve double tops, head-and-shoulders tops, and so on), I made an average of 29% ("Stop Loss Only" column) after having a stop loss order in place a penny below the bottom of the chart pattern. The average loss was 10% (shown in parenthesis). Replacing the stop loss with a 10% trailing stop cut the profit to 4% but also trimmed the average loss to 6%. Using a 25% trailing stop allowed me to keep more money, 17%, but the average loss also climbed to 15%. If I didn't use any type of stop, the profit averaged 70% but the average loss was huge: 28%.
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 |
| Busted buys, non-busted sales | 4% (-6%) | 8% (-9%) | 13% (-11%) | 17% (-15%) | 29% (-10%) | 70% (-28%) |
| Busted buys, busted sales | 3% (-5%) | 8% (-8%) | 13% (-11%) | 16% (-15%) | 23% (-10%) | 60% (-24%) |
Selling a busted chart pattern results in worse performance than selling non-busted patterns (at least for busted Adam & Eve double tops as the buy signal).
In 22 contests (22 different chart pattern types), I compared busted and non-busted sell signals and gauged performance. I found that selling a busted chart pattern gave better performance 45% of the time (meaning non-busted patterns worked better for the sale 55% of the time).
The figure shows the setup for this scenario. When price busts the bearish chart pattern (downward breakout from a Adam & Eve double top in a bull market), buy. Sell after a downward breakout from the target chart pattern.
Table 2 shows the performance of busted Adam & Eve double tops for the entry and sales after downward breakouts from various bearish chart patterns. I used a stop loss order priced a penny below the bottom of the Adam & Eve double top (after buying).
A busted Adam & Eve double top has a downward breakout but price drops no more than 10% before reversing and moving above the top of the Adam & Eve double top. Buy when price moves at least a penny above the top of the busted Adam & Eve double top. Sell after price drops at least a penny below the target chart pattern.
For example, buying a Adam & Eve double top with a busted downward breakout in a bull market (the entry price is really the higher of a penny above the top of the double top or the opening price) and selling after the downward breakout from a broadening bottom shows winners averaging gains of 126%. Losses average 11%, for a net of 23%. Because trades are often years long, annualized the net becomes 21%. Only 57 trades occurred with a win/loss ratio of 25%. This scenario ranks the net gain as 7th among tables 2 and 3. If you traded this as a buy-and-hold position, meaning no stops were used, the net gain climbed to 48%. The expectancy is $2.18, placing it 21st where 1 is best.
Trades with sample counts below 30 are not ranked.
| Table 2: Statistics for Busted Buys, Normal Sales | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Sell Pattern | Average Win | Average Loss | Net | Annualized Net | Rank | No Stop Net | Win/Loss Samples | Win Loss | Average Expectancy | Expectancy Rank |
| Broadening bottom | 126% | -11% | 23% | 21% | 7 | 48% | 14/43 | 25% | $2.18 | 21 |
| Broadening top | 142% | -10% | 40% | 23% | 3 | 91% | 32/64 | 33% | $7.25 | 6 |
| Broadening formation, right-angled and ascending | 150% | -11% | 32% | 18% | 13 | 56% | 12/33 | 27% | $0.95 | 27 |
| Broadening formation, right-angled and descending | 83% | -11% | 14% | 9% | 27 | 40% | 11/31 | 26% | $2.60 | 20 |
| Broadening wedge, ascending | 186% | -12% | 49% | 80% | 7/16 | 30% | ||||
| Broadening wedge, descending | 285% | -9% | 53% | 78% | 4/15 | 21% | ||||
| Bump-and-run reversal top | 130% | -11% | 28% | 21% | 7 | 54% | 21/56 | 27% | $2.04 | 22 |
| Diamond bottom | 34% | -12% | -5% | 28% | 2/11 | 15% | ||||
| Diamond top | 164% | -11% | 39% | 21% | 7 | 81% | 12/30 | 29% | $3.57 | 13 |
| Adam & Adam double top | 197% | -8% | 49% | 24% | 2 | 90% | 77/202 | 28% | $9.75 | 3 |
| Adam & Eve double top | 102% | -9% | 18% | 13% | 22 | 61% | 29/91 | 24% | $3.87 | 12 |
| Eve & Adam double top | 202% | -9% | 60% | 25% | 1 | 93% | 46/94 | 33% | $13.18 | 2 |
| Eve & Eve double top | 166% | -9% | 27% | 20% | 10 | 82% | 25/94 | 21% | $2.75 | 18 |
| Falling wedge | 3% | -12% | -11% | 11% | 2/24 | 8% | ||||
| Head-and-shoulders top | 135% | -10% | 29% | 18% | 13 | 66% | 98/271 | 27% | $5.28 | 7 |
| Sell Pattern | Average Win | Average Loss | Net | Annualized Net | Rank | No Stop Net | Win/Loss Samples | Win Loss | Average Expectancy | Expectancy Rank |
| Head-and-shoulders, complex top | 120% | -11% | 29% | 22% | 6 | 53% | 18/41 | 31% | $2.97 | 15 |
| Rectangle top | 134% | -12% | 30% | 16% | 18 | 55% | 15/37 | 29% | $2.75 | 18 |
| Rising wedge | 129% | -11% | 40% | 23% | 3 | 97% | 32/55 | 37% | $5.20 | 9 |
| Rounding top | 143% | -10% | 19% | 17% | 16 | 98% | 11/47 | 19% | $1.45 | 26 |
| Ascending scallop | 85% | -14% | 9% | 54% | 4/13 | 24% | ||||
| Descending scallop | 65% | -11% | 6% | 7% | 29 | 61% | 27/93 | 23% | $0.78 | 29 |
| Scallop, inverted and ascending | 79% | -10% | 24% | 27% | 5/8 | 38% | ||||
| Scallop, descending and inverted | 127% | -12% | 20% | 18% | 13 | 75% | 15/51 | 23% | $1.53 | 25 |
| Triangle, ascending | 94% | -11% | 21% | 13% | 22 | 89% | 13/30 | 30% | $5.21 | 8 |
| Triangle, descending | 108% | -12% | 15% | 12% | 24 | 41% | 12/43 | 22% | -$0.52 | 32 |
| Triangle, symmetrical | 113% | -12% | 14% | 11% | 26 | 59% | 35/135 | 21% | $0.89 | 28 |
| Triple top | 138% | -9% | 26% | 15% | 19 | 72% | 69/218 | 24% | $3.07 | 14 |
| Rectangle bottom | 99% | -12% | 12% | 8% | 28 | 12% | 8/28 | 22% | -$0.36 | 31 |
| 3 falling peaks | 153% | -9% | 36% | 23% | 3 | 70% | 66/174 | 28% | $7.33 | 5 |
| Roof | 3% | -8% | -6% | 52% | 2/10 | 17% | ||||
| Roof, inverted | 143% | -10% | 31% | 123% | 6/16 | 27% | ||||
| Sell Pattern | Average Win | Average Loss | Net | Annualized Net | Rank | No Stop Net | Win/Loss Samples | Win Loss | Average Expectancy | Expectancy Rank |
Table 3 shows busted Adam & Eve double tops as the entry signal and various busted chart patterns as the exit signal. Keep in mind that some trades were few in number. I used a stop loss order priced a penny below the bottom of the Adam & Eve double top (after buying).
The associated figure shows the setup.
For example, buying a busted Adam & Eve double top and selling a busted broadening bottom made 34% from the winners, lost 10% on the losers for a net gain of 10%. Annualized, it was 5% (not shown). Because fewer than 30 samples were used, I did not rank this pattern. Removing stops from the trades allowed them to make 27%, far above the 10% net when using a stop loss order. Only 15 trades were taken and 47% of them were winners. Expectancy was $2.75 per trade (not shown), per share, but it's not ranked because of few samples.
Trades with sample counts below 30 are not ranked.
| Table 3: Statistics for Busted Buys and Sales | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Sell Pattern | Average Win | Average Loss | Net | Annualized Net | Rank | No Stop Net | Win/Loss Samples | Win Loss | Average Expectancy | Expectancy Rank |
| Broadening bottom | 34% | -10% | 10% | 27% | 7/8 | 47% | ||||
| Broadening top | 126% | -10% | 34% | 17% | 16 | 69% | 14/29 | 33% | $4.59 | 11 |
| Broadening formation, right-angled and ascending | 144% | -10% | 15% | 43% | 3/15 | 17% | ||||
| Broadening formation, right-angled and descending | 86% | -16% | 14% | 27% | 5/12 | 29% | ||||
| Broadening wedge, ascending | 69% | -19% | 1% | 50% | 2/7 | 22% | ||||
| Broadening wedge, descending | 222% | -15% | 28% | 73% | 2/9 | 18% | ||||
| Bump-and-run reversal bottom | 9% | -14% | -10% | 21% | 1/4 | 20% | ||||
| Cup with handle | None | -10% | -10% | 14% | 0/5 | 0% | ||||
| Diamond bottom | 477% | -9% | 54% | 84% | 3/20 | 13% | ||||
| Diamond top | 133% | -7% | 26% | 69% | 5/16 | 24% | ||||
| Adam & Adam double bottom | 170% | -8% | 34% | 19% | 12 | 69% | 20/64 | 24% | $2.86 | 16 |
| Adam & Eve double bottom | 47% | -10% | 1% | 1% | 32 | 46% | 12/47 | 20% | $1.71 | 23 |
| Eve & Adam double bottom | 199% | -7% | 59% | 20% | 10 | 81% | 14/30 | 32% | $19.02 | 1 |
| Eve & Eve double bottom | 287% | -9% | 54% | 104% | 6/22 | 21% | ||||
| Falling wedge | 202% | -10% | 61% | 90% | 6/12 | 33% | ||||
| Head-and-shoulders bottom | 79% | -9% | 11% | 6% | 30 | 42% | 21/69 | 23% | $5.13 | 10 |
| Sell Pattern | Average Win | Average Loss | Net | Annualized Net | Rank | No Stop Net | Win/Loss Samples | Win Loss | Average Expectancy | Expectancy Rank |
| Head-and-shoulders complex bottom | None | -11% | -11% | -5% | 0/10 | 0% | ||||
| Rectangle top | 24% | -12% | -1% | 45% | 7/16 | 30% | ||||
| Rising wedge | 241% | -10% | 62% | 107% | 4/10 | 29% | ||||
| Round bottom | 77% | -7% | 21% | 23% | 1/2 | 33% | ||||
| Rounding top | 74% | -4% | 29% | 20% | 3/4 | 43% | ||||
| Ascending scallop | 73% | -13% | 37% | 65% | 11/8 | 58% | ||||
| Descending scallop | 96% | -8% | 27% | 42% | 3/6 | 33% | ||||
| Scallop, inverted and ascending | 69% | -12% | 3% | 3% | 31 | 66% | 6/26 | 19% | $0.68 | 30 |
| Scallop, descending and inverted | 270% | -6% | 132% | 127% | 3/3 | 50% | ||||
| Triangle, ascending | 74% | -14% | 10% | 17% | 7/19 | 27% | ||||
| Triangle, descending | 65% | -10% | 6% | 27% | 5/19 | 21% | ||||
| Triangle, symmetrical | 96% | -10% | 21% | 14% | 20 | 70% | 32/75 | 30% | $2.86 | 16 |
| Triple bottom | 99% | -8% | 19% | 14% | 20 | 48% | 21/61 | 26% | $1.54 | 24 |
| Rectangle bottom | 77% | -12% | 28% | 69% | 4/5 | 44% | ||||
| 3 rising valleys | 84% | -9% | 17% | 12% | 24 | 83% | 14/35 | 29% | $8.22 | 4 |
| Roof | 114% | -6% | 18% | 94% | 1/4 | 20% | ||||
| Roof, inverted | None | -11% | -11% | 30% | 0/10 | 0% | ||||
| Sell Pattern | Average Win | Average Loss | Net | Annualized Net | Rank | No Stop Net | Win/Loss Samples | Win Loss | Average Expectancy | 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 Adam & Eve double top. 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 sales and the resulting performance.
Buying busted patterns with a short-term (up to 3 months) duration from the trend start to the pattern's start resulted in significantly better performance than longer terms for selling both busted and non-busted patterns. Notice that sales of non-busted patterns performed better over each duration category.
| Table 4: Short (S) Medium (M) or Long (L) Trend Start and Performance | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy busted pattern | S46% M1% L25% | S41% M-2% L19% |
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 that sales of non-busted patterns outperformed busted ones. For best results, buy the busted Adam & Eve double top when the breakout price is above the 50-day simple moving average. Buying it when the breakout price is below the SMA results in a loss, but trades were few (as few as 27).
| Table 5: Above (A) Below (B) 50-Day Simple Moving Average | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy busted pattern | A30% B-2% | A24% B-5% |
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 above the 200-day SMA worked best for both busted and non-busted pattern sales.
| Table 6: Above (A) Below (B) 200-Day Simple Moving Average | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy busted pattern | A31% B22% | A24% B21% |
The prior discussion assumes you buy a busted Adam & Eve double top but 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 busted Adam & Eve double top and sell the first non-busted chart pattern which comes along, you'd make 6% on average. Annualized, you'd make 20%. This compares to a 19% annualized gain if you sell a designated pattern (like you waited for a double top before selling, which may or may not be the first bearish chart pattern to come along). The differences are a yawn.
The best results come from selling the first non-busted pattern which appears.
The lower half of the table shows the expectancy for the various combinations of busted and non-busted sales. The best expectancy comes from selling non-busted patterns. Expect to make $2.07 per trade, per share. The worst performance comes from selling busted patterns. Expect to lose 96 cents a share per trade.
| Table 7: Selling the First Bearish Pattern (Annualized) | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy busted pattern | 6% (20% v 19%) | 1% (3% v 14%) |
| Expectancy (Below) | ||
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy busted pattern | $2.07 | $-0.96 |
-- Thomas Bulkowski
Support this site! Clicking any of the books (below) takes you to
Amazon.com If you buy ANYTHING while there, they pay for the referral.
Legal notice for paid links: "As an Amazon Associate I earn from qualifying purchases."
|
My Stock Market Books
|
My Novels
|
on 