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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 Volatility versus Performance Study

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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 05/26/2017
21,080 -2.67 0.0%
9,176 12.36 0.1%
720 -0.08 0.0%
6,210 4.93 0.1%
2,416 0.75 0.0%
YTD
6.7%
1.5%
9.2%
15.4%
7.9%
Tom's Targets    Overview: 05/15/2017
21,400 or 20,450 by 06/01/2017
9,500 or 8,700 by 06/01/2017
730 or 700 by 06/15/2017
6,350 or 6,000 by 06/01/2017
2,450 or 2,375 by 06/15/2017

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.

Volatility versus Performance: Summary

I looked at price volatility versus performance and found that rising volatility during the five days leading to the upward breakout from a chart pattern suggests better post breakout performance than falling volatility, but the difference is slight.

For downward breakouts, the results were less pronounced and reversed, with falling volatility showing better post breakout performance than rising volatility.

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My book, Encyclopedia of Chart Patterns Second EditionEncyclopedia of Chart Patterns 2nd Edition book. pictured on the left, takes an in-depth look at 63 chart and event patterns, including performance statistics.

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Volatility versus Performance: Definitions and Method

Volatility is the daily difference between the high and low prices. I used three look back periods in the test: start of chart pattern to day before breakout, 10 days, and 5 days before the breakout. I used linear regression to determine the slope of a line based on price volatility. Then I measured the rise from the breakout to the ultimate high, or the decline from the breakout to the ultimate low. The ultimate high is the highest high before a 20% price drop. The ultimate low is the lowest low before a 20% price rise. The search for the ultimate high or low ends if price moves to the side opposite the chart pattern (meaning, if price hits a stop first).

In the test, I used 45 chart pattern types (double bottoms, head-and-shoulders bottoms, and so on) in 1,275 stocks from 7/1991 to 3/2006, but few of the stocks covered the entire period. Not all stocks had useful chart patterns.

Volatility versus Performance: Detailed Results

Here are the detailed results.

5 days before breakout All PatternsFalling volatilityRising volatility
Upward breakout31.6% (11217)31.0% (5004)32.2% (6017)
Downward breakout20.8% (9866)21.2% (4504)20.6% (5132)

Each box shows the number of samples involved in the test in parentheses and the resulting rise or decline from the chart pattern after the breakout. The 5-day look back appears to be the best measure of volatility versus post breakout performance (compared to a 10-day look back or from the start of the chart pattern to the day before the breakout).

For example, a stock showing rising volatility has an average rise of 32.2% after an upward breakout. A stock with falling volatility rises an average of 31.0%. Downward breakouts show that chart patterns with falling volatility tend to outperform, 21.2% versus 20.6%.

-- 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 day or firm decisions! Or is it?