As of 12/20/2024   Indus: 42,840 +498.02 +1.2%     Trans: 15,892 +32.54 +0.2%     Utils: 986 +14.76 +1.5%     Nasdaq: 19,573 +199.83 +1.0%     S&P 500: 5,931 +63.77 +1.1%	YTD  +13.7%   0.0%    +11.9%    +30.4%    +24.3%	Targets    Overview: 12/12/2024     44,200 or 41,750 by 01/01/2025   16,100 or 17,700 by 01/01/2025   1,050 or 975 by 01/01/2025   20,500 or 19,300 by 01/01/2025   6,100 or 5,775 by 01/01/2025
Chart Pattern Indicator: on 12/5/24

As of 12/20/2024   Indus: 42,840 +498.02 +1.2%     Trans: 15,892 +32.54 +0.2%     Utils: 986 +14.76 +1.5%     Nasdaq: 19,573 +199.83 +1.0%     S&P 500: 5,931 +63.77 +1.1%	YTD  +13.7%   0.0%    +11.9%    +30.4%    +24.3%
Targets    Overview: 12/12/2024     44,200 or 41,750 by 01/01/2025   16,100 or 17,700 by 01/01/2025   1,050 or 975 by 01/01/2025   20,500 or 19,300 by 01/01/2025   6,100 or 5,775 by 01/01/2025
Chart Pattern Indicator: on 12/5/24

Bulkowski on Wide Ranging Day Downside Reversal

Updated with new performance information on 11/25/24.

Important Results Identification Guidelines Trading Tips Performance Statistics Performance and Failure Rates Measure Rule Trading Performance Trading Example Target Exit, Stock Performance   Target Exit, ETF Performance   Target Exit, Crypto Performance See Also

Wide Ranging Day Downside Reversal

Wide Ranging Day Downside Reversal: Important Bull Market Results

Wide Ranging Day Downside Reversal: Identification Guidelines

Wide Ranging Day Downside Reversal: Trading Tips

Wide Ranging Day Downside Reversal: Performance Statistics

For the following statistics, I used 1,138 stocks, starting from January 1990 to March 2013, but few stocks covered the entire range. All stocks had a minimum price of $5. There were two bear markets in the 2000s (as determined by the S&P 500 index), from 3/24/2000 to 10/10/2002 and 10/12/2007 to 3/6/2009. Everything outside of those dates represents a bull market.

For each wide ranging day downside reversal, I found when the trend started and when it ended. To find the trend peak or valley, I found the lowest valley and highest peak within plus or minus 5 days (11 days total) each, before the wide ranging day downside reversal and the same peak/valley test after the wide ranging day downside reversal. The closest valley or peak before the wide ranging day downside reversal is where the trend began. The closest peak or valley after the wide ranging day downside reversal is where the trend ended. I compared the peak or valley to the average of the high and low price of the wide ranging day downside reversal pattern (2nd day).

The 5-bar peak or valley number tends to find major turning points on the daily charts.

I measured performance from the day after the breakout (opening price) to the nearest trend peak or trend valley.

To determine the inbound price trend (I was looking for a down trend), I used linear regression on the average of the high-low prices in the five days before the pattern. That caught the short-term trend.

Wide Ranging Day Downside Reversal: Performance and Failure Rates

Table 1 lists failure rates, sorted by market condition and breakout direction along with the average rise or decline.

A failure occurs when the stock fails to move in the direction of the breakout more than 5%.

The failure rates may appear high, but that's typical for short-term patterns like the wide ranging day downside reversal.

Wide Ranging Day Downside Reversal: Measure Rule

Table 2 shows how often the measure rule works. Use the measure rule to estimate of how far price is likely to rise or drop.

To do this, measure from the high to the low in the pattern to get the height. Add the height to the high or subtract it from the low to get the target.

Wide Ranging Day Downside Reversal: Trading Performance

Table 3 shows the performance based on 3,357 trades using $10 commissions per trade ($20 round trip), starting with $10,000 per trade. No other adjustments were made for interest, fees, slippage and so on.

Here's the setup.

• Find a wide ranging day downside reversal downtrend.
• Wait for price to close above the top or below the bottom of the pattern.
• Buy/short at the open the next day.
• Take profit when price moves 7%.
• A stop placed 7% away closes out the trade for a loss.

For example, in a bull market after an upward breakout, the net gain was $92.04 for all trades. The method won 58% of the time and there were 457 winning trades. The average gain of winning trades was $715.68.

Forty-two percent, or 328 trades were losers. They lost an average of $776.87.

The average hold time was 29 calendar days.

Notice how the gains and losses were pegged near 7%, which is how the test was setup.

Wide Ranging Day Downside Reversal: Trading Example

The figure shows the wide ranging day downside reversal at A.

Price rises in the days leading to the wide ranging day. Price opens at the top of the day in this example and closes near the intraday low, making a very tall price bar.

It takes several days for price to close below the bottom of the wide ranging day, but it finally happens at B.

Short at the open of the next bar, C.

Not shown is a 7% profit target or 7% stop loss, both based on the entry price.

Wide Ranging Day Downside Reversal: Target Exit, Stock Performance

The following tests are different from the ones above.

Trading using a target exit is simple to explain. Look at the adjacent chart.

I point to the WRDD day. Entry happens when the stock climbs above a buy stop placed a penny above the top of the pattern. The sell target is twice the height of the WRDD added to the top of the pattern.

A stop loss order placed a penny below the bottom of the pattern triggers to help prevent a bigger loss.

In this example, the stop triggers when the stock drops instead of rising to the target exit.

For a more detailed explanation of the method I used to test the WRDD, see the link.

Testing

As explained in the example above, I used a target exit placed twice as high as the height of the WRDD pattern added to the top of it. I placed a stop loss a penny below the bottom of the pattern.

Table 4 shows results for bull markets with upward breakouts and an inbound upward price trend leading to the WRDD (because an uptrend is built into the WRDD identification guidelines). In this test only, I used 746 stocks (from my archived stocks which no longer trade and those which continue to trade).

For stocks, the WRDD pattern substantially outperforms the benchmark using the same set of stocks ($200.40 versus $32.55 for the benchmark). However, the difference in the number of trades is startling, so be cautious when depending on the results. Also note that as I tested more stocks, the performance deteriorated (from $254.27 using 404 current trades to $200.40 with 460 archived and current trades).

The 3x height finds unusually tall price bars. Because of the low sample count, I dropped the height requirement of the WRDD to 2x the 1-month average height and retested. The sample counts climbed about six fold, and we see a dramatic drop in performance, to $91.83 per trade. This is more in line with other small pattern tests and it's still a vast improvement over the benchmark.

I think the reason for the big performance is the height requirement. With 2x or 3x the average height, the target exit is farther away, leading to higher profit than the benchmark which does not depend on a minimum height requirement.

With regular-size chart patterns, we see that tall patterns invariably outperform short ones, so this finding for small patterns fits in nicely with what we've seen in other patterns.

Wide Ranging Day Downside Reversal: Target Exit, ETF Performance

The associated chart shows an example of how I tested the WRDD pattern in exchange traded funds (ETFs).

The tall price bar shows the WRDD. It takes almost a week before the upward breakout.

The target exit is twice the height of the pattern added to the top of it. In this example, the ETF reaches the target exit and is sold for a profit.

Testing

This is the same test as the prior one except I used 94 exchange traded funds (ETFs) instead of common stocks.

Table 5. The WRDD pattern doesn't performs as well in ETFs as it does in stocks. However, it still beats the benchmark. Be aware of the low sample count (88 trades), though. I expect additional samples would show the average profit to drop, just as you see in the 2x Height column.

Wide Ranging Day Downside Reversal: Target Exit, Crypto Performance

This is an example trade in the cryptocurrency bitcoin on the daily scale. I highlight the WRDD pattern on the chart.

Entry is a penny above the top of the chart pattern with a buy-stop

A stop-loss order helps minimize the loss with a sell price of a penny below the bottom of the pattern. The two green lines show the approximate buy stop and stop-loss order locations.

The currency broke out upward and climbed far enough to reach the exit target for a profitable trade.

Testing

I tested the pattern in crypto using a height for the pattern of twice and three times the 1-month average height and found only 28 and 5 trades, respectively. Those are too few to be meaningful, so I did not post the results.

-- Thomas Bulkowski

See Also

Below are other 1-bar patterns...

• How did I test small patterns in stocks, ETFs, and crypto currency?
• Small pattern performance.
• Updated daily list of short patterns.
• Closing price reversal, uptrend
• Closing price reversal, downtrend
• One-day reversal top
• One-day reversal bottom (downtrend)
• Wide ranging day upward reversal

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