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CPI (updated daily): Arrows on 4/21/22
As of 05/20/2022
  Indus: 31,262 +8.77 +0.0%  
  Trans: 13,491 +51.76 +0.4%  
  Utils: 991 +1.46 +0.1%  
  Nasdaq: 11,355 -33.88 -0.3%  
  S&P 500: 3,901 +0.57 +0.0%  
YTD
-14.0%  
-18.1%  
 +1.0%  
-27.4%  
-18.1%  
  Targets    Overview: 05/15/2022  
  Up arrow33,500 or 30,500 by 06/01/2022
  Up arrow14,700 or 12,400 by 06/01/2022
  Up arrow1,050 or 940 by 06/01/2022
  Up arrow12,800 or 11,000 by 06/01/2022
  Up arrow4,150 or 3,700 by 06/01/2022
CPI (updated daily): Arrows on 4/21/22

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.

Trading Three Falling Peaks: Summary

Picture of the pattern pairs.

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...

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...

To improve performance, try these tips.

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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.

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

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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:

Table 1: Various Trailing Stop Settings: Net Profit and (Average Loss)
Data 10%  15%  20%  25%  Stop Loss 
Only
 No Stop
Busted buys, non-busted sales 3% (-6%)  5% (-9%)  12% (-10%)  17% (-14%)  33% (-15%)  65% (-35%) 
Busted buys, busted sales 3% (-6%)  5% (-9%)  12% (-10%)  15% (-13%)  31% (-14%)  63% (-33%) 

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.

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

Picture of a busted pattern pair.

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.


Table 2: Statistics for Busted Buys, Non-Busted Sales
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Broadening bottom158%-17%25%11%3571%69/21524%$1.2445
Broadening top175%-17%40%16%1389%141/33430%$13.066
Broadening formation, right-angled and ascending142%-17%25%11%3662%50/14026%-$0.0651
Broadening formation, right-angled and descending115%-17%24%10%4077%57/12631%$4.5123
Broadening wedge, ascending103%-20%19%9%4474%43/9332%$2.5938
Broadening wedge, descending111%-16%13%6%5845%38/12823%-$0.5654
Bump-and-run reversal top141%-17%36%17%1174%184/36334%$4.3626
Diamond bottom227%-17%47%20%498%11/3126%$2.7437
Diamond top108%-16%29%14%2178%70/12336%$5.3421
Adam & Adam double top199%-16%49%17%9116%405/93830%$10.479
Adam & Eve double top201%-16%53%20%5127%181/38332%$15.074
Eve & Adam double top175%-17%43%16%14101%186/41431%$7.6416
Eve & Eve double top189%-17%48%19%6103%190/40832%$16.512
Falling wedge172%-19%28%13%2749%33/10324%$1.7243
Head-and-shoulders top141%-16%32%13%2378%555/126031%$4.0527
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Head-and-shoulders, complex top119%-16%14%7%5451%60/21022%-$3.6859
Rectangle top121%-18%19%9%4559%88/24726%$1.4944
Rising wedge103%-16%20%9%4258%169/39230%-$3.0058
Rounding top169%-18%31%13%2655%84/23926%$2.7636
Ascending scallop156%-16%39%17%1063%61/12832%$0.7848
Descending scallop135%-17%27%12%3063%506/122229%$2.7835
Scallop, inverted and ascending206%-19%41%18%791%41/11327%$0.3950
Scallop, descending and inverted124%-18%19%8%4744%252/73825%-$1.4156
Triangle, ascending124%-18%29%12%3174%79/15933%$4.3725
Triangle, descending101%-17%14%7%5639%53/15226%$0.4849
Triangle, symmetrical158%-17%32%14%2073%234/60628%$4.4524
Triple top157%-17%37%15%1791%421/93331%$8.8113
Rectangle bottom237%-17%38%16%1585%62/22122%$2.2139
3 falling peaks160%-17%34%14%1971%1082/263929%$2.9832
Roof195%-14%58%25%193%27/5135%$5.5020
Roof, inverted78%-17%17%8%4854%53/9636%$2.9831
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank

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Trading Three Falling Peaks: Busted Buy, Busted Sale

Picture of a busted pattern pair.

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.


Table 3: Statistics for Busted Buys and Sales
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Broadening bottom100%-16%23%9%4664%38/7733%$4.7422
Broadening top133%-16%28%11%3377%85/20030%$2.8534
Broadening formation, right-angled and ascending168%-17%31%14%1889%20/5726%$3.2729
Broadening formation, right-angled and descending117%-16%17%7%5146%23/7025%$1.1146
Broadening wedge, ascending89%-18%33%13%2560%20/2248%$8.5214
Broadening wedge, descending92%-17%16%7%5554%21/4930%$2.0041
Bump-and-run reversal bottom215%-14%74%22%3114%32/5139%$11.747
Cup with handle55%-16%4%2%619%11/2828%-$0.1352
Diamond bottom78%-14%13%5%5935%22/5329%$3.3728
Diamond top151%-15%33%12%2975%31/7729%$3.2030
Adam & Adam double bottom154%-16%35%11%3481%133/30830%$15.823
Adam & Eve double bottom155%-17%30%11%3864%59/15428%$15.005
Eve & Adam double bottom160%-15%42%12%2888%59/12133%$9.8511
Eve & Eve double bottom166%-16%30%11%3784%41/12125%$11.288
Falling wedge110%-14%16%8%4940%20/6224%$0.8647
Head-and-shoulders complex bottom53%-15%-1%0%6232%9/3421%-$21.2163
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Rectangle top97%-16%15%9%4342%40/10528%-$0.5453
Rising wedge119%-17%38%17%1271%34/5040%-$14.1062
Round bottom63%-10%7%67%4/1324%
Rounding top99%-16%8%5%6028%7/2621%-$4.5560
Ascending scallop131%-17%32%13%2474%54/10933%-$1.0155
Descending scallop103%-18%26%10%3971%47/8236%$6.6918
Scallop, inverted and ascending162%-15%42%15%1695%119/25232%$8.4115
Scallop, descending and inverted91%-15%18%7%5043%60/13431%-$2.8657
Triangle, ascending158%-17%30%12%3272%34/9327%$5.9919
Triangle, descending94%-17%17%7%5264%39/9030%$2.0040
Triangle, symmetrical103%-15%14%6%5744%132/40125%$1.8142
Triple bottom189%-16%44%17%879%213/51429%$9.0012
Rectangle bottom143%-16%27%10%4155%29/7927%$10.2110
3 rising valleys152%-16%38%14%2276%259/54532%$7.6017
Roof132%-18%72%22%2107%18/1260%$20.251
Roof, inverted72%-15%16%7%5326%19/3337%-$12.7161
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank

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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.

Table 4: Short (S) Medium (M) or Long (L) Trend Start and Performance
 Sell Non-Busted PatternSell Busted Pattern
Buy busted patternS57% M11% L23%S57% M9% L19%

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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 5: Above (A) Below (B) 50-Day Simple Moving Average
 Sell Non-Busted PatternSell Busted Pattern
Buy busted patternA33% B31%A30% B50%

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.

Table 6: Above (A) Below (B) 200-Day Simple Moving Average
 Sell Non-Busted PatternSell Busted Pattern
Buy busted patternA26% B74%A26% B56%

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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.

Table 7: Selling the First Bearish Pattern (Annualized)
 Sell Non-Busted PatternSell Busted Pattern
Buy busted pattern9% (21% v 14%)4% (7% v 12%)
Expectancy (Below)
 Sell Non-Busted PatternSell Busted Pattern
Buy busted pattern$3.87$0.20

-- Thomas Bulkowski

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See Also

 

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