As of 12/05/2024
Indus: 44,766 -248.33 -0.6%
Trans: 16,976 -190.93 -1.1%
Utils: 1,047 +2.22 +0.2%
Nasdaq: 19,700 -34.86 -0.2%
S&P 500: 6,075 -11.38 -0.2%
|
YTD
+18.8%
+6.8%
+18.8%
+31.2%
+27.4%
|
44,000 or 46,000 by 12/15/2024
17,025 or 18,000 by 12/15/2024
1,025 or 1,100 by 12/15/2024
20,000 or 18,500 by 12/15/2024
6,200 or 5,900 by 12/15/2024
|
As of 12/05/2024
Indus: 44,766 -248.33 -0.6%
Trans: 16,976 -190.93 -1.1%
Utils: 1,047 +2.22 +0.2%
Nasdaq: 19,700 -34.86 -0.2%
S&P 500: 6,075 -11.38 -0.2%
|
YTD
+18.8%
+6.8%
+18.8%
+31.2%
+27.4%
| |
44,000 or 46,000 by 12/15/2024
17,025 or 18,000 by 12/15/2024
1,025 or 1,100 by 12/15/2024
20,000 or 18,500 by 12/15/2024
6,200 or 5,900 by 12/15/2024
| ||
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This article discusses a trading setup and lists open and pending trades based on the double bottom chart pattern.
Signals from the double bottom trading setup discussed below are updated each day, after the market close.
The system searches for double bottom chart patterns and waits for price to climb part way up off the second bottom before signaling a potential buy. The trade exits using a limit order at the confirmation price -- the highest high between the two bottoms. During the trade, place an initial stop below the second bottom's low.
The system has been profitable on an annual basis 80% of the time over the past 20 years. It even made money during the two recent bear markets, but it does exceptionally well the year or two after a bear market ends.
Tests shows that the system wins about 70% of the time with profits between 2.4 and 4.0 times as high as losses.
I did not test the system using a trailing stop, only an initial "worst case" stop.
Update: In the choppy markets of 2011, the system has suffered (as of June 2011) with 2 wins and 5 losses. In 2010, the average loss exceeded the average win, so that suggests the setup may not be as good as hoped in real time.
While reading an article on top stop exits (Active Trader magazine article by Volker Knapp in the September 2008 issue, pg 54), I thought of double bottoms and wondered if I could build a trading setup around the measure rule for chart patterns. This page is a result of that research.
It's not important to define what a top stop exit is because it doesn't apply. Nevertheless, here is what Knapp says about it. "The Top Stop exit approach is a type of 'trailing' profit target. If the stock makes a new high in a long position, for example, the exit level will jump up. When the stock falls or enters a temporary consolidation, the profit target will drop."
I wondered if I could buy a stock after it forms the second bottom of a double bottom and ride the price rise up to the confirmation level -- which is the highest peak between the two bottoms.
The image on the right is an ideal example of the setup. Point A represents the first bottom of a double bottom and point B is the second bottom.
I'll discuss details in the next section, but look for price to make two bottoms with a tall peak between. Once you recognize the pattern sometime after price bottoms at B, open a position in the stock (E) and ride it up to the price of the peak, D. Set a "worst case" stop loss at C, a penny below the low at B.
I programmed my computer to find bottoms that are at least 11 days wide (an 11 day window). That's 5 days before and after price makes a low. I show an example of that in the figure's inset. Price at F trends lower for 5 days until day 6, when it bottoms and forms the lowest low of the bunch. Then price rises for 5 days, with point 6 remaining as the lowest low. I use this procedure for both bottoms. Once price completes 5 days after the second bottom, then the highest high during those 11 days represents the buy signal. When price closes above that high, buy at the open the next day.
In the example, I show F as the highest high. Once price closes above this price, buy at the next day's open.
Here's what to look for.
To test this setup, I used in-sample and out-of-sample tests. During in-sample tests, I optimized the parameters for the pattern recognition system. If you can't find a double bottom accurately, then what's the point of developing a setup based on it? I used the period from March 20, 2000 to July 9, 2007, a period in which the S&P 500 index reached the same price level at the end points, but suffering a V-shaped decline between. Out-of-sample tests were from July 10, 2007 to May 25, 2010. The test period included the 2000 to 2002 bear market. I tested the system on 571 stocks, but excluded all stocks with prices at or below $1 at the entry signal. Stocks at that price are on the verge of bankruptcy and the share amounts become huge and unrealistic. Plus, small swings in price mean huge percentage moves.
Once I had the program finding the pattern correctly, I adjusted the entry and exit conditions. Should I buy at the current close on the day price signals an entry or wait for the open the next day? Where should the stop be placed, at the lower of the two bottoms, below the first bottom or below the second one? Those are the types of questions I asked and found answers to during in-sample testing.
Out-of-sample testing showed the results using the most recent price data. To expand the number of trades allowed, I adjusted a few of the pattern recognition parameters which degraded performance somewhat.
Metric | In-Sample | Out-of-Sample |
Number of trades: | 121 | 76 |
Percentage winning: | 70% | 72% |
Average profit per trade: | $746.98 | $1,610.63 |
Median profit per trade: | $971.73 | $1,290.54 |
Average of winners: | $1,807.57 | $2,953.18 |
Average of losers: | $744.23 | $727.58 |
Winners (total): | $153,643.31 | $162,425.04 |
Losers (total): | $63,259.20 | $40,017.03 |
Win/loss ratio: | 2.43 | 4.06 |
Average hold time: | 57 days | 46 days |
The following are the results of in-sample and out-of-sample tests, shown in the table on the right. Each trade begins with an investment of $10,000. In-sample means trades from March 20, 2000 to July 9, 2007 and out-of-sample means trades from July 10, 2007 to May 25, 2010.
Much to my surprise, the out-of-sample tests show a vast improvement over the in-sample period despite including the 2007 to 2009 bear market.
The percentage of winners remained about the same, but the average winning trade exploded to almost $3,000 (on a $10,000 investment per trade) up from $1,808, and yet the average loss dropped slightly to $728 from $744.
The win/loss ratio climbed to over 4.0.
The average hold time dropped about two weeks, to 46 days.
Notes to the following table heading, by year:
Year | Net | Win TTL | Loss TTL | Avg Win | Avg Loss | W/L | Hold Time | Wins | Losses | Trades |
1990 | $6,398 | $6,398 | $0 | $1,066 | $0 | N/A | 27 days | 6 | 0 | 6 |
1991 | $15,766 | $13,924 | -$4,557 | $1,392 | -$1,519 | 3.1 | 30 days | 10 | 3 | 13 |
1992 | $28,508 | $21,486 | -$8,744 | $1,343 | -$1,457 | 2.5 | 43 days | 16 | 6 | 22 |
1993 | $21,324 | $6,731 | -$13,915 | $1,346 | -$1,739 | 0.5 | 52 days | 5 | 8 | 13 |
1994 | $13,948 | $12,542 | -$19,918 | $1,140 | -$1,811 | 0.6 | 53 days | 11 | 11 | 22 |
1995 | $22,626 | $12,788 | -$4,110 | $1,163 | -$2,055 | 3.1 | 44 days | 11 | 2 | 13 |
1996 | $18,688 | $10,578 | -$14,516 | $1,322 | -$1,815 | 0.7 | 51 days | 8 | 8 | 16 |
1997 | $25,649 | $15,841 | -$8,880 | $1,584 | -$1,776 | 1.8 | 51 days | 10 | 5 | 15 |
1998 | $19,553 | $8,157 | -$14,253 | $906 | -$2,036 | 0.6 | 22 days | 9 | 7 | 16 |
1999 | $22,497 | $30,155 | -$27,211 | $1,885 | -$2,093 | 1.1 | 39 days | 16 | 13 | 29 |
2000 | $31,744 | $44,964 | -$35,717 | $1,550 | -$2,381 | 1.3 | 50 days | 29 | 15 | 44 |
2001 | $37,604 | $23,485 | -$17,625 | $1,678 | -$2,203 | 1.3 | 73 days | 14 | 8 | 22 |
2002 | $71,085 | $40,092 | -$6,610 | $2,673 | -$1,653 | 6.1 | 65 days | 15 | 4 | 19 |
2003 | $104,201 | $45,326 | -$12,210 | $1,813 | -$1,221 | 3.7 | 55 days | 25 | 10 | 35 |
2004 | $119,226 | $16,936 | -$1,911 | $1,411 | -$1,911 | 8.9 | 108 days | 12 | 1 | 13 |
2005 | $122,177 | $7,049 | -$4,098 | $1,410 | -$1,366 | 1.7 | 38 days | 5 | 3 | 8 |
2006 | $126,278 | $6,073 | -$1,973 | $1,518 | -$986 | 3.1 | 18 days | 4 | 2 | 6 |
2007 | $132,282 | $9,668 | -$3,663 | $1,934 | -$1,221 | 2.6 | 63 days | 5 | 3 | 8 |
2008 | $136,564 | $21,404 | -$17,122 | $1,529 | -$1,712 | 1.3 | 41 days | 14 | 10 | 24 |
2009 | $248,848 | $129,177 | -$16,892 | $3,914 | -$2,112 | 7.6 | 54 days | 33 | 8 | 41 |
2010 | $254,690 | $11,844 | -$6,003 | $1,481 | -$2,001 | 2.0 | 29 days | 8 | 3 | 11 |
The table above shows how the system has performed over the last ~20 years, ending May 30, 2010. Most of the years cover out-of-sample tests, bull and bear markets, recessions, and irrational exuberance. However, few of the 571 stocks covered the entire period.
Trades were included in the year if a sale occurred within that year. Thus, this table shows more complete results than the table of recent years because trades can span the year boundary (trades that began in 2007 and ended in 2008 will appear in this table but not in the shorter one below, for example).
Losing years were 1993, 1994, 1996 and 1998 our of 21 periods, for a success rate of 81% (80% of you only include full years). Over that time, the system created profits in excess of losses by over a quarter million dollars, using $10,000 per trade.
Notice that the system remained profitable during the bear market years of 2000 to 2002 and 2007 to 2009. In the bull market years of 2003 and 2009, the system traded like crazy and made lots of money, too.
Here is a list of potential trades.
The double bottoms listed, if any, qualify as fitting the trading guidelines for the setup, but price has not closed above the 11-day window to signal an entry. Once that occurs, a buy occurs the next day at the opening price. Thus, the buy price shown in the table is approximate.
Symbol | Double Bottom | * Buy At | Sell At | Stop Price | Risk Notes |
FORM | 08/05/2024 to 10/31/2024 | ~$45.48 | $51.68 13.6% | $37.63 -17.3% | Less than 2 to 1 profit margin |
RES | 09/12/2024 to 10/31/2024 | ~$6.51 | $7.22 10.9% | $5.62 -13.7% | Less than 2 to 1 profit margin |
* The entry price is approximate.
The following is a list of completed trades for recent years and any open trades (trades not completed yet).
Symbol | Double Bottom | Buy | Sell | Profit/Loss | Exit |
AXDX | 12/28/2022 to 02/27/2023 | 03/31/2023 | 04/24/2023 | $1,068 11% | Hit target |
RRC | 02/21/2023 to 03/17/2023 | 04/04/2023 | 05/19/2023 | $1,048 10% | Hit target |
RIG | 03/15/2023 to 05/02/2023 | 05/25/2023 | 07/03/2023 | $1,297 13% | Hit target |
HBI | 09/27/2023 to 11/30/2023 | 12/14/2023 | 01/26/2024 | $1,310 13% | Hit target |
ATSG | 03/19/2024 to 06/14/2024 | 06/28/2024 | 07/16/2024 | $1,459 15% | Hit target |
CLNE | 04/22/2024 to 07/10/2024 | 08/01/2024 | 08/13/2024 | $1,384 14% | Hit target |
RIG | 05/01/2024 to 06/25/2024 | 07/16/2024 | 08/22/2024 | -$1,042 -10% | Stopped out |
INFN | 03/15/2024 to 04/16/2024 | 05/15/2024 | 09/16/2024 | $1,802 18% | Hit target |
GPRO | 06/27/2024 to 08/07/2024 | 11/12/2024 | 11/21/2024 | -$3,001 -30% | Stopped out |
The following is a list of trades, sorted by years. The totals for the first year in this list could differ from the longer list because of trades that began in the earlier year but are not included in this list. The most recent year may also have more trades since it's up to date.
Year | Net | Win TTL | Loss TTL | Avg Win | Avg Loss | W/L | Hold Time | Wins | Losses | Trades |
2022 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
2023 | $3,413 | $3,413 | $0 | $1,138 | $0 | N/A | 37 days | 3 | 0 | 3 |
2024 | $5,324 | $5,954 | -$4,043 | $1,489 | -$2,022 | 1.5 | 42 days | 4 | 2 | 6 |
The above picture shows an example of how the setup works.
Price makes a bottom at A, recovers to C and then suffers another setback when it tumbles back to B.
Point B is the same as point H in the inset. Five days after the second bottom, price has climbed to D. Since this is the highest peak of the 11 day window (5 days before H to 5 days after H), the high at D represents the buy signal. Price has to close above this price to trigger an entry at the open the next day.
When price closes above D at E, the system buys at the open the next day, F. A stop is placed a penny below the low at H with a target of the highest high between the two bottoms, C.
When price climbs to G, the stock is sold at the target price.
-- Thomas Bulkowski
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