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%	Targets    Overview: 11/12/2024     46,000 or 43,000 by 12/01/2024   18,000 or 16,600 by 12/01/2024   1,075 or 1,000 by 12/01/2024   20,000 or 18,400 by 12/01/2024   6,100 or 5,800 by 12/01/2024
Chart Pattern Indicator: on 11/18/24

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%
Targets    Overview: 11/12/2024     46,000 or 43,000 by 12/01/2024   18,000 or 16,600 by 12/01/2024   1,075 or 1,000 by 12/01/2024   20,000 or 18,400 by 12/01/2024   6,100 or 5,800 by 12/01/2024
Chart Pattern Indicator: on 11/18/24

Bulkowski on Pattern Pairs: 3 Falling Peaks

Initial release: 12/22/2021. I removed a bogus entry for rounding bottoms in Table 3 on 12/30/21.

In this article I refer to "3 falling peaks" as 3FPs for simplicity.

The idea behind pattern pairs is to pick a chart pattern type (like broadening bottoms with upward breakouts) to buy and another to sell (like double tops). You buy the upward breakout from the broadening bottom, hold for a few years, and sell when a double top appears and breaks out downward. Along the way, you give price a chance to rise far enough to overcome those trades which are stopped out for a loss. This is a trend-following strategy.

• Summary
• Entry and Exit Conditions
• Stops
• Busted Patterns
• Results: Busted Buy, Non-Busted Sale
• Results: Busted Buy, Busted Sale
• Performance Improvements
• Trend Start: Short, Medium, or Long
• Moving Averages: 50 and 200 SMA
• Selling First Bearish Chart Pattern
• See Also

Trading Three Falling Peaks: Summary

The figure illustrates the idea for trading pattern pairs, where price is the red line and the boxes are chart patterns. This articles assumes you buy a busted 3FP (price breaks out downward, drops no more than 10%, reverses, and closes above the top of the 3FP). Buy as price rises above the top of the pattern.

On the sale side, you can sell the first bearish chart pattern which comes along, or you can wait for your favorite bearish chart pattern to appear and sell then.

Here's a list of the top five performing sell signals, based on annualized gain (annualized because the hold time is often years, in parenthesis).

Buy a busted 3FP and sell a...

• 1. Roof (25%)
• 2. Busted Roof (22%)
• 3. Busted bump-and-run reversal bottom (22%)
• 4. Diamond bottom (20%)
• 5. Adam & Eve double top (20%)

The following list shows the expected performance of chart pattern pairs, ranked by their expectancy. Expectancy is a way of gauging winning and losing trades and how much money you might make trading a pattern pair. I put the expected profit per trade, per share, in parenthesis.

Buy a busted 3FP and sell a...

• 1. Busted Roof ($20.25)
• 2. Eve & Eve double top ($16.51%)
• 3. Busted Adam & Adam double bottom ($15.82)
• 4. Adam & Eve double top ($15.07)
• 5. Busted Adam & Eve double bottom ($15.00)

To improve performance, try these tips.

• Table 1: Selling non-busted patterns do slightly better than busted ones.
• Table 4: Trend start to pattern start: The short-term (0 to 3 months) worked best.
• Table 6: Buy if the breakout price is below the 200-day SMA.
• Table 7: Buy busted 3FP and sell the first bearish non-busted chart pattern which appears.

Trading Three Falling Peaks: Entry and Exit Conditions

The databases I built over several decades doesn't identify every chart pattern. There may be plenty of double tops over the years, for example, that I didn't catalog along the way to the one I did catalog. So buying a busted double top and selling the downward breakout from a rising wedge I cataloged would be different than choosing to sell a different rising wedge. However, the following analysis does give a real-world flavor for how well you might do trading chart patterns if you follow the pattern pair strategy.

Here's what I used in my analysis.

• Busted three falling peaks provided the buy signal.
• No commissions or fees were included.
• Entry: Buy a penny above the tallest peak in the pattern unless the stock gapped higher on the breakout day (in which case, the opening price was used).
• Busted patterns included. I used a 3FP which busted and determined the average rise to various chart patterns, both busted and non-busted.
• Stop loss: A penny below the bottom of the 3FP served as the stop price. The stop was not raised, but I did test trailing stops separately.
• Sell signal: Downward breakouts from various bearish chart patterns (or busted bullish patterns) provided the sell signal.
• 243 stocks tested. The first chart pattern appeared in June 1996 and the last in April 2020, giving me 24,810 trades.
• Bear market excluded. If the breakout from the 3FP was in a bear market, I excluded the trade because I only wanted bull market results. If price dropped into a bear market while in the trade, that was fine.
• Sales. Sales happened when price dropped a penny below the bottom of the bearish chart pattern (or busted bullish one) or the opening price if the stock gapped open lower.

I used the following 43 chart patterns in the analysis, but some only applied if they were busted.

• Broadening: bottoms, tops, right-angled and ascending, right-angled and descending
• Broadening wedges: ascending and descending
• Bump-and-run reversal: tops and bottoms
• Cup with handle
• Diamond: tops and bottoms
• Double bottoms and tops: all four combinations of Adam and Eve
• Rising and falling wedges
• Head-and-shoulders: tops, bottoms, complex top, complex bottom
• Rectangle: tops and bottoms
• Roof, inverted roof
• Rounding: tops and bottoms
• Scallops: ascending, descending, ascending and inverted, descending and inverted
• Triangles: ascending, descending, and symmetrical
• Triple tops and bottoms
• Three rising peaks
• Three falling valleys
• Ugly double bottom

Trading Three Falling Peaks: Stops

I used a stop loss order set a penny below the bottom of the busted 3FP. Price on the way down may have gapped below the stop price (for the sale price), so I used the lower of the stop price or the opening price on the day of sale).

For trailing stops, I removed the stop loss order and used a trailing stop set at 10%, 15%, 20%, or 25% below a peak, never lowering the stop value, but raising it if a higher peak came along during the trade.

In Table 1, I calculated the percentage net gain (the average of gains and losses) when using various trailing stop loss amounts (10%, 15%, 20%, and 25%) for all tested chart patterns according to the busted/non-busted buy/sell configuration. In parenthesis is the size of the average loss so I could detail how losses change with various stop loss orders.

For example, if I tested busted 3FP and sold various non-busted patterns (broadening bottoms, broadening tops, head-and-shoulders tops, and so on), I made an average of 33% ("Stop Loss Only" column) after having a stop loss order in place. Losses averaged 15%. Replacing the stop loss with a 10% trailing stop cut the gain to 3% but also trimmed the average loss to 6%. Using a 25% trailing stop allowed me to keep more money, 17%, but losses climbed to 14%. If I didn't use any type of stop, the gain averaged 65% with losses averaging 35%.

The results show that:

• Trades which do not use a stop make the most money but losses are huge.
• Selling non-busted patterns do slightly better than busted ones.

Trading Three Falling Peaks: Busted Patterns

A busted 3FP has a downward breakout but price drops no more than 10% before reversing and moving above the top of the pattern.

In 22 contests (selling 22 different chart pattern types, depending on which apply), I compared the performance of sales using busted and non-busted patterns. I found that selling non-busted patterns resulted in better performance than selling busted ones 59% of the time.

Trading Three Falling Peaks: Busted Buy, Non-Busted Sale

The figure shows the setup for this scenario. When price busts the downward breakout from a bearish 3FP, buy. Sell after a downward breakout from a non-busted target chart pattern.

Table 2 shows the performance of this scenario. A stop loss order was used and priced a penny below the bottom of the 3FP (after buying).

For example, buying an 3FP with a busted downward breakout in a bull market and selling after the downward breakout from a broadening bottom shows winners averaging gains of 158%. Losses average 17%, for a net gain of 25%. The annualized the net is 11%. Fully 284 trades occurred with a win/loss ratio of 24%. This scenario ranks the net gain as 35th among the two tables (2 and 3). If you traded this as a buy-and-hold position, meaning no stops were used, the net gain climbed to a gain of 71%. Expectancy was a gain of $1.24 per share, ranking 45th where 1 is best.

Trading Three Falling Peaks: Busted Buy, Busted Sale

Table 3 shows trading statistics for busted 3FPs as the entry signal and various busted chart patterns as the exit signal. Keep in mind that some trades were few. A stop loss order was used and priced a penny below the bottom of the 3FP (after buying).

The associated figure shows the setup.

For example, buying a busted 3FP and selling a busted broadening bottom made 100% from the winners, lost 16% on the losers for a net gain of 23%. Annualized, it was 9%. The net gain placed the performance of this setup at 46, where a rank of 1 is best.

Removing stops from the trades allowed them to make 64%. Only 115 trades were taken and 33% of them were winners. Expectancy was a gain of $4.74 per share, ranking 22nd where 1 is best.

Trades with sample counts below 30 are not ranked.

Trading Three Falling Peaks: Performance Improvements

Here are a few ideas the data suggested which may improve performance of your pattern pairs trading.

Trend Start: Short, Medium, or Long

Find the trend start for your 3FP. Often you can just look at a chart and see where the trend begins. If not, or you want to be sure, then the glossary describes how to find it.

Determine the length from the trend start to the pattern's start: short term (less than 3 months), medium term (3 to 6 months) or long term (more than 6 months).

Table 4 shows the results for the two combinations of busted/non-busted trades and the resulting performance.

The short-term (0 to 3 months) worked best when selling.

Moving Averages: 50- and 200-Day SMA

I checked two moving averages at buy time, 50- and 200-day simple moving averages (not as a crossover setup). I compared the breakout price to the value of the moving average. Table 5 shows the performance of selling busted or non-busted patterns when the breakout price was above (A) or below (B) the 50-day simple moving average (SMA).

The results are mixed. Selling non-busted patterns work slightly better if you buy when price is above the 50-day SMA. Busted patterns show the reverse with much better performance coming from patterns if price was below the 50-day SMA at buy time.

Table 6 shows the results of using a longer moving average, the 200-day. Traders often use this as a proxy for the long-term trend.

For both busted and non-busted sales, performance improves if the breakout price is below the 200-day SMA.

Selling First Bearish Chart Pattern

The prior discussion assumes you buy a busted 3FP but sell a chart pattern of your choosing, such as a downward breakout from a double top (you wait for one to appear). What if you sold the first bearish chart pattern which comes along? How would you do?

Table 7 shows the results sorted by the type of patterns involved (busted or non-busted). For example, if you buy a busted 3FP and sell the first non-busted chart pattern which comes along, you'd make 9% on average. Annualized, you'd make 21%. This compares to a 14% annualized gain if you sell a designated pattern (like you waited for a double top before selling, which may or may not be the first bearish chart pattern to come along).

The best results come from buying a busted 3FP and selling the first non-busted pattern which appears. That combination makes 21% annually, beating the other annualized rates.

The bottom half of the table shows expectancy for the two combinations. Selling a non-busted pattern leads to a higher expectancy of profit.

-- Thomas Bulkowski

See Also

• Learn more about three falling peaks
• Hold on. How long do you need to hold onto a stock? Find out...
• Moving average study & stock trends. Buy in a downtrend, sell on the uptrend.
• Moving averages. Boost performance using chart patterns with moving averages!
• Can Stops Hurt?