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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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Bulkowski's Price Velocity

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Busted
Patterns
Candles Chart
Patterns
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Patterns
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Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 04/21/2017
20,548 -30.95 -0.2%
9,134 7.68 0.1%
706 4.81 0.7%
5,911 -6.26 -0.1%
2,349 -7.15 -0.3%
YTD
4.0%
1.0%
7.0%
9.8%
4.9%
Tom's Targets    Overview: 04/17/2017
20,100 or 21,150 by 05/01/2017
8,500 or 9,500 by 05/01/2017
725 or 685 by 05/01/2017
5,950 or 5,650 by 05/01/2017
2,275 or 2,425 by 05/01/2017
Mutt Winners: None YTD

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.

Price velocity is the speed at which price moves over time. Measured in cents per day, the speed at which price moves into a chart pattern often resumes after the breakout from the chart pattern. This page shows results from a study of velocity I conducted from August 22-25, 2005.

 

Price Velocity: Summary

I looked at 16,664 stock market chart patterns of various types using daily price data from 1991 to 2005, encompassing both bull and bear markets. I found the following.

  • The price velocity leading to a chart pattern often resumes after the breakout. If price moved at a high velocity leading to the chart pattern, high velocity would resume after the breakout. The same is true of low velocity moves: A low velocity move after the breakout follows a low velocity move leading to the chart pattern.
  • Price drops further (downward breakout) after a high velocity run leading to the chart pattern, regardless of the market conditions (bull or bear markets).
  • Upward breakouts from chart patterns perform better if velocity was slow leading to the chart pattern, regardless of the market conditions (bull or bear markets).

Price Velocity: Details

The following table shows the post breakout performance of various chart patterns in bull and bear markets, when the velocity leading to the chart pattern (inbound velocity) was above (high velocity) or below (low velocity) the median velocity.

The numbers show that a high velocity move leading to the chart pattern results in superior performance after a downward breakout. Upward breakouts perform better if low velocity leads to the chart pattern.

 

High velocity downtrend inbound

Low velocity downtrend inbound

Median Down Velocity

(cents per day)

High velocity uptrend inbound

Low velocity uptrend inbound

Median Up Velocity

(cents per day)

Bull market, down breakout

19%

17%

6

21%

16%

6

Bull market, up breakout

36%

37%

6

33%

35%

5

Bear market, down breakout

26%

23%

12

26%

22%

13

Bear market, up breakout

26%

29%

10

24%

25%

9

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The following table shows the results of a frequency distribution of how often price showed high velocity after the breakout when compared to the velocity before the chart pattern (inbound velocity).

High velocity move post breakout and --->

High downward inbound velocity

Low downward inbound velocity

High upward inbound velocity

Low upward inbound velocity

Bull market, down breakout

62%

39%

62%

38%

Bull market, up breakout

65%

34%

70%

31%

Bear market, down breakout

66%

34%

60%

39%

Bear market, up breakout

68%

36%

62%

34%

For example, the upper left cell for high downward inbound velocity in a bull market after a downward breakout shows 62%. That means 62% of the time price showed a high velocity move after the breakout when the downward price trend leading to the chart pattern also showed a high velocity move. Just 38% of the time (100% - 62%) did a high velocity inbound move result in a low velocity post breakout move. The results show that a high velocity move after the breakout follows a high velocity move leading to the breakout.

Another example. The cell to the right shows a result of 39% for low downward inbound velocity and bull market, downward breakouts. That means just 39% of the time did a low velocity, downward price trend leading to the chart pattern result in a high velocity, downward post breakout move. To flip the numbers around, 61% of the time a low velocity post breakout move followed a low velocity inbound move.

Price Velocity: Definitions

The inbound velocity measures from the trend start to the start of the chart pattern. I used the average price at the trend start and the closing price at the chart pattern start. (I could have used the closing price at the trend start, but I didn't log that into my spreadsheet). The trend start is the lowest low or highest high before the chart pattern. It's the point where price changes trend by at least 20% moving backward in time. I disregarded any overshoot or undershoot a few days before the start of the chart pattern.

The outbound velocity measures from the breakout to the ultimate high or ultimate low. I used the average intraday price at the breakout (because I didn't log the closing price) to the ultimate high or ultimate low price. The ultimate high is the highest high before price drops at least 20%, measured from the highest high to the close. The ultimate low is the lowest low before price rises at least 20% measured from the lowest low to the close. The search for the ultimate high or ultimate low was stopped if price closed below the chart pattern's low (upward breakouts) or above the chart pattern's high (downward breakouts). If data ended before the ultimate high or low was found, the highest high or lowest low to that point was used.

-- Thomas Bulkowski

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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 bird in the bush usually has a friend in there with him.