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 | ||
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Visual Guide to Chart Patterns
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This article discusses three methods of entering a trade after a chart pattern throwback. Which performs best?
I tested three types of setups after a throwback.
Results shows that the best setup is to wait for price to close above the top of the chart pattern before buying into the stock that has a throwback.
Trailing the stop cuts profit almost in half and the number stopped out jumps from 14% to 42%.
Should you wait to enter a trade until after a throwback? The answer to that is complex. If the chart pattern does not throwback, performance improves (I proved this). If you waited for a throwback, you would miss the best trades. Waiting for a throwback means a higher failure rate and poorer performance.
Let's say that you still want to wait for a throwback or you missed finding the chart pattern before the breakout and a throwback is in progress. When should you enter the trade?
I tested three setups to answer that question.
I used 11 types of chart patterns in the tests. They are
The database provided chart patterns with throwbacks going back to mid 1991 and extending to February 2012, the date of this article.
All setups followed these rules unless specified otherwise.
This setup buys when price completes a throwback and closes above the top of the chart pattern. Referring to the figure, price is in red and the top of the chart pattern is at A. The throwback is the move represented by the drop from C to D. After the throwback, when price again closes above A, which happens at B, buy at the open the next day.
Here are the rules for the setup.
This setup buys when price closes above the top of the throwback. Referring to the figure on the right, the highest peak in the throwback is at A. When price closes above it at B, buy at the open the next day.
Here are the rules for the setup.
This setup buys when price closes above the lowest minor high during the throwback. Referring to the figure on the right, as price drops during a throwback, it makes minor highs. One is at A. Then price drops and makes a lower minor high at B only this time, price bottoms and closes above peak B at C. The day after it closes above C, buy. Price may reverse and make a lower minor high, but that does not change the original entry signal. Lower entry signals are ignored.
Here are the rules for the setup.
I tested the three setups as described above and here is what I found.
| Setup 1 | Setup 2 | Setup 3 | |
|---|---|---|---|
| Average net profit | $3,622.28 | $2,924.59 | $3,118.02 |
| Wins | 89% | 83% | 84% |
| Trades | 4,875 | 4,698 | 3,919 |
| Maximum loss | -22% | -23% | -27% |
| Number of ultimate high exits | 4,367 | 4,017 | 3,377 |
| Number stopped out | 508 or 10% | 681 or 14% | 542 or 14% |
WARNING: Before you get too excited, do not believe that you will win 89% of the time or make $3,622 on a $10,000 investment following this approach. These results are for thousands of perfect trades: buying at the breakout low price or pattern high and selling at the highest high price the day before price tumbles. However, the numbers make for good comparisons.
Setup 1 wins hands down in every category. Setup 1 is where you wait for price to close above the top of the chart pattern before buying the stock.
Setup 2, where you wait for price to close above the high posted during the throwback, performed poorly. You were stopped out 40% more often and the average trade made only 29%.
I thought that Setup 3 would be the big winner. That is when you buy the stock after price closes above a minor high. I figured you would buy in at a lower price, which you do, but it appears that you get stopped out 40% more often and the rise to the ultimate high is diminished, too. The average trade makes 31% versus 36% for Setup 1.
| Setup 1 | Setup 2 | Setup 3 | |
|---|---|---|---|
| Average net profit | $1,980.55 | $1,575.45 | $1,705.87 |
| Wins | 81% | 74% | 75% |
| Trades | 4,880 | 4,700 | 3,926 |
| Maximum loss | -22% | -23% | -27% |
| Number of ultimate high exits | 2,827 | 2,768 | 2,283 |
| Number stopped out | 2,053 or 42% | 1,932 or 41% | 1,643 or 42% |
For stops, I computed the height of the chart pattern and then used that percentage as the stop loss level below the buy price. That is what I used for the three setups already described. I chose this method so that each of the three setups used the same percentage stop level. The stop was not moved after initial placement.
For the trailing stops tests, I applied the pattern's height percentage to price whenever it made a higher high as a kind of high-water mark. I never lowered the stop but trailed it higher as price climbed.
Here are the results using a trailing stop on the three setups.
The average net profit drops almost in half. The percentage of winning trades drops, and the number stopped out rises from a maximum of 14% to 42%. Ouch.
-- Thomas Bulkowski
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