As of 11/20/2024
Indus: 43,408 +139.53 +0.3%
Trans: 17,002 -26.31 -0.2%
Utils: 1,055 +1.25 +0.1%
Nasdaq: 18,966 -21.33 -0.1%
S&P 500: 5,917 +0.13 +0.0%
|
YTD
+15.2%
+6.9%
+19.7%
+26.3%
+24.1%
|
 46,000 or 43,000 by 12/01/202418,000 or 16,600 by 12/01/20241,075 or 1,000 by 12/01/202420,000 or 18,400 by 12/01/20246,100 or 5,800 by 12/01/2024 |
As of 11/20/2024
Indus: 43,408 +139.53 +0.3%
Trans: 17,002 -26.31 -0.2%
Utils: 1,055 +1.25 +0.1%
Nasdaq: 18,966 -21.33 -0.1%
S&P 500: 5,917 +0.13 +0.0%
|
YTD
+15.2%
+6.9%
+19.7%
+26.3%
+24.1%
| |
|
46,000 or 43,000 by 12/01/202418,000 or 16,600 by 12/01/20241,075 or 1,000 by 12/01/202420,000 or 18,400 by 12/01/20246,100 or 5,800 by 12/01/2024 | ||
Revised 5/15/18
Begin your journey to becoming a better trader or investor by buying a copy of my book,
Trading Basics
The book discusses pattern width (not peak width, like this article) and performance starting on page 107.
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This article discusses how you can improve your trading performance by selecting peaks and valleys based on their width.
You may be able to boost profits by selecting stocks with peaks or valleys based on their width and combining that with the direction of the primary price trend.
Based on tests performed for this article, narrow peaks in a declining price trend outperform.
Narrow valleys that act as reversals of the primary price trend also do well.
Although the differences are slight, peaks will tend to appear more rounded looking than valleys.
I used my computer to find all peaks and valleys in 486 stocks between January 2000 to April 2015, excluding bear markets. I found 51,548 peaks and valleys, split almost evenly between the two.
To find those peaks and valleys, I looked for the highest high or lowest low in a 15-day window. Fifteen days was wide enough to define and include the wider peaks or valleys.
I experimented with 3% and 10% values but 5% seemed to work best.
Once I had that information, I found the median width for tops (9 price bars) and for valleys (7 price bars). I used the median width as the separator between narrow and wide.
I also used the primary price trend, either up or down, by finding the closing price a year before each peak top or valley bottom. This method works surprisingly well at determining the longer-term (primary) price trend.
The first thing I noticed is that peaks are wider than valleys. We know that by the difference in the median widths, 9 and 7 price bars, respectively. Although the differences are slight, peaks will tend to appear more rounded looking than valleys.
Figure 2 shows the performance differences for the various combinations of peaks (top half of chart) and valleys (bottom half).
For example, variation A shows the primary trend moving lower going into a narrow peak. Stocks with that combination showed median declines of 20%. That value measures from the high at the peak to the lowest low before a trend change. Consider it a perfect trade. This configuration represents the best performance from the peak variations.
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Figure 2: The various combinations of trend for peaks, valleys, and performance.
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A trend change for a peak is the lowest low before price rises at least 20% or before it closes above the top of the peak. For valleys, a trend change means the highest high before the stock drops at least 20% or closes below the bottom of the valley.
For valleys, the best performance occurred with variation F. The narrow valley acted as a reversal of the primary downtrend. The trend dropped into the valley and soared out of it. The median rise for those valleys having this configuration was 43%. Again, that median (mid range) number comes from thousands of perfect trades, without any commissions or fees.
Use the number not as an example of how your trade might do, but as a comparison with the other variations.
Notice that narrow peaks outperformed wide ones (A, B versus C, D) and those acting as continuations of the primary price trend (A, C) did best (among the narrow and wide groupings, respectively).
For valleys, the best performance came from narrow valleys (E, F) and from those acting as reversals (F, H).
Use Figure 2 to help decide how your selection may perform. There is no guarantee of success, of course, but by selecting stocks with the right variation may help you achieve better profit and help you decide to hold onto a stock that may decline less than you expect.
To use the chart, do the following.
Often you can estimate whether the peak or valley is narrow just be looking at it, but you may wish to go through the steps to be sure.
Once you have that information, match your results to the images shown in Figure 2.
Consider the valley at A. Does this valley represent a good profit opportunity?
Obviously the answer is yes since we can see how the stock behaved. But let's use the information in this article to prove that.
Is the primary trend up or down?
Valley A bottomed on 10/15/14 at a low price of 16.37. A year before this, the stock closed at 16.86. Thus the primary trend is down since the stock dropped from 16.86 to 16.37.
Is the valley narrow or wide?
I drew a red line showing where 5% above the low is (approximately).
Price closes above the red line 5 bars on the left (starting at C) and 2 bars on the right (ending at D) of A (including A), for a total of 7 bars. Since the median valley is also 7 bars, this valley qualifies as a narrow one (ties are considered narrow).
So we have a narrow valley with price dropping into the valley and moving upward after the valley. Using Figure 2, we see that variation F applies. It is the best performing of the valleys.
The gain so far from this stock has been (22.69 - 16.37)/16.37 or 38.6% as I write this on April 29, 2015.
Of course, not all situations will work like this and you will not be buying at the low price (since you have to wait for price to close at least 5% above the low), but the method can help you make more informed trading decisions.
-- Thomas Bulkowski
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