As of 04/17/2024
Indus: 37,753 -45.66 -0.1%
Trans: 14,987 -259.68 -1.7%
Utils: 853 +17.82 +2.1%
Nasdaq: 15,683 -181.88 -1.1%
S&P 500: 5,022 -29.20 -0.6%
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YTD
+0.2%
-5.7%
-3.2%
+4.5%
+5.3%
|
 39,800 or 37,150 by 05/01/202416,200 or 15,000 by 05/01/2024885 or 850 by 05/01/202416,700 or 15,800 by 05/01/20245,250 or 5,025 by 05/01/2024 |
As of 04/17/2024
Indus: 37,753 -45.66 -0.1%
Trans: 14,987 -259.68 -1.7%
Utils: 853 +17.82 +2.1%
Nasdaq: 15,683 -181.88 -1.1%
S&P 500: 5,022 -29.20 -0.6%
|
YTD
+0.2%
-5.7%
-3.2%
+4.5%
+5.3%
| |
|
39,800 or 37,150 by 05/01/202416,200 or 15,000 by 05/01/2024885 or 850 by 05/01/202416,700 or 15,800 by 05/01/20245,250 or 5,025 by 05/01/2024 | ||
Initial release: 12/22/2021.
In this article, I refer to "three rising valleys" as 3RVs.
The idea behind pattern pairs is to pick a chart pattern type (like three rising valleys) to buy and another to sell (like double tops). You buy the upward breakout from the 3RV, 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.
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 an upward breakout from a 3RV. 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).
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.
Sell a...
To improve performance, try these tips.
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 on the way to the one I did catalog. So buying an upward breakout from a 3RV and selling at the double top I cataloged would be different than choosing to sell a different double top. 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.
I used a stop loss order set a penny below the bottom of the 3RV. 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 non-busted 3RVs and sold various non-busted patterns (broadening bottoms, broadening tops, head-and-shoulders tops, and so on), I made an average of 73% ("Stop Loss Only" column) after having a stop loss order in place. Losses averaged 24%. Replacing the stop loss with a 10% trailing stop cut the gain to 5% but also trimmed the average loss to 5%. Using a 25% trailing stop allowed me to keep more money, 19%, but losses climbed to 12%. If I didn't use any type of stop, the gain averaged 140% with losses averaging 31%.
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 |
| Non-busted buys, non-busted sales | 5% (-5%) | 8% (-7%) | 13% (-11%) | 19% (-12%) | 73% (-24%) | 140% (-31%) |
| Non-busted buys, busted sales | 4% (-5%) | 8% (-7%) | 13% (-11%) | 17% (-12%) | 74% (-22%) | 116% (-27%) |
I compared the performance of sell signals for 22 different chart patterns and found that only 36% of the time did a busted pattern outperform a non-busted pattern. To do this, I averaged the performance of each chart pattern and then compared that average to its busted counterpart in 22 contests. The pattern with the higher average gain won.
Trading using a busted chart pattern often results in worse performance than using non-busted patterns.
Table 2 shows statistics I collected for 3RVs using the trading rules described above and shown in the figure. I placed a stop loss order priced a penny below the bottom of the 3RV (after buying).
For example, if you were to buy the upward breakout from a 3RV chart pattern and hold it until you encountered a broadening bottom (the first chart pattern listed in the table), but one with a downward breakout, you'd net an average of 27% (annualized: 8%, ranking 62) on the 686 (241 winners, 445 losers) trades. That's an average of 120% on your winners, 24% average loss on your losers. You'd find that only 35% of the trades made money.
If you removed the stop loss order and just held on until the broadening bottom with a downward breakout appeared, you'd make an average of 58% per trade.
The expectancy was $3.66 per share per trade which ranks 49th where 1 is the best value.
| Table 2: Statistics for Three Rising Valleys | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Sell Pattern | Average Win | Average Loss | Net | Annualized Net | Rank | No Stop Net | Win/Loss Samples | Win Loss | Average Expectancy | Expectancy Rank |
| Broadening bottom | 120% | -24% | 27% | 8% | 62 | 58% | 241/445 | 35% | $3.66 | 49 |
| Broadening top | 300% | -26% | 115% | 32% | 6 | 164% | 556/733 | 43% | $21.42 | 8 |
| Broadening formation, right-angled and ascending | 167% | -25% | 36% | 12% | 51 | 71% | 152/324 | 32% | $1.60 | 57 |
| Broadening formation, right-angled and descending | 165% | -24% | 46% | 14% | 42 | 86% | 193/328 | 37% | $6.54 | 36 |
| Broadening wedge, ascending | 190% | -25% | 64% | 21% | 22 | 97% | 165/234 | 41% | $5.80 | 39 |
| Broadening wedge, descending | 171% | -25% | 56% | 17% | 32 | 82% | 137/194 | 41% | $4.71 | 46 |
| Bump-and-run reversal top | 275% | -26% | 103% | 35% | 3 | 141% | 625/839 | 43% | $9.14 | 19 |
| Diamond bottom | 114% | -24% | 22% | 10% | 58 | 61% | 31/62 | 33% | $0.27 | 61 |
| Diamond top | 173% | -24% | 64% | 20% | 24 | 111% | 247/306 | 45% | $7.71 | 25 |
| Adam & Adam double top | 290% | -24% | 114% | 27% | 12 | 192% | 1425/1809 | 44% | $20.57 | 9 |
| Adam & Eve double top | 313% | -25% | 110% | 28% | 9 | 177% | 545/819 | 40% | $22.99 | 6 |
| Eve & Adam double top | 295% | -25% | 108% | 27% | 11 | 178% | 670/940 | 42% | $12.88 | 14 |
| Eve & Eve double top | 437% | -25% | 164% | 48% | 1 | 225% | 679/980 | 41% | $34.38 | 2 |
| Falling wedge | 264% | -24% | 64% | 21% | 20 | 82% | 118/268 | 31% | $12.42 | 15 |
| Head-and-shoulders top | 194% | -24% | 61% | 18% | 29 | 108% | 1810/2807 | 39% | $7.91 | 23 |
| Sell Pattern | Average Win | Average Loss | Net | Annualized Net | Rank | No Stop Net | Win/Loss Samples | Win Loss | Average Expectancy | Expectancy Rank |
| Head-and-shoulders, complex top | 157% | -23% | 48% | 15% | 36 | 79% | 308/470 | 40% | $2.43 | 51 |
| Rectangle top | 133% | -23% | 44% | 13% | 46 | 90% | 356/471 | 43% | $6.58 | 34 |
| Rising wedge | 152% | -24% | 47% | 15% | 38 | 88% | 606/902 | 40% | $1.39 | 58 |
| Rounding top | 191% | -26% | 53% | 15% | 35 | 93% | 327/579 | 36% | $4.88 | 45 |
| Ascending scallop | 187% | -25% | 67% | 21% | 19 | 99% | 249/328 | 43% | $7.28 | 27 |
| Descending scallop | 189% | -26% | 58% | 17% | 31 | 96% | 1723/2679 | 39% | $4.09 | 48 |
| Scallop, inverted and ascending | 366% | -27% | 122% | 33% | 4 | 165% | 214/350 | 38% | $6.90 | 30 |
| Scallop, descending and inverted | 172% | -25% | 44% | 15% | 37 | 67% | 1146/2127 | 35% | $1.69 | 56 |
| Triangle, ascending | 180% | -23% | 53% | 17% | 30 | 93% | 237/392 | 38% | $5.10 | 44 |
| Triangle, descending | 182% | -24% | 42% | 16% | 33 | 84% | 186/391 | 32% | $2.32 | 52 |
| Triangle, symmetrical | 202% | -24% | 64% | 20% | 25 | 100% | 837/1305 | 39% | $6.57 | 35 |
| Triple top | 222% | -25% | 76% | 21% | 21 | 119% | 1440/2072 | 41% | $12.05 | 17 |
| Rectangle bottom | 213% | -24% | 47% | 14% | 44 | 83% | 218/504 | 30% | $5.25 | 43 |
| 3 falling peaks | 211% | -25% | 67% | 20% | 23 | 103% | 3999/6334 | 39% | $6.86 | 31 |
| Roof | 207% | -24% | 86% | 25% | 15 | 110% | 75/83 | 47% | $6.17 | 38 |
| Roof, inverted | 220% | -26% | 85% | 23% | 17 | 154% | 226/276 | 45% | $12.25 | 16 |
| Sell Pattern | Average Win | Average Loss | Net | Annualized Net | Rank | No Stop Net | Win/Loss Samples | Win Loss | Average Expectancy | Expectancy Rank |
The figure shows an example of how this trade unfolds.
A bullish chart pattern appears and you buy at the breakout. Continue holding until your selected chart pattern appears. The chart pattern is bullish because it has an upward breakout but then things go wrong. Price reverses. Sell when the stock dips below the bottom of the chart pattern (meaning it busts the upward breakout).
Table 3 shows the performance statistics for this setup (buying a 3RV and selling only after a busted chart pattern). A stop loss order was used and priced a penny below the bottom of the 3RV (after buying).
For example, buying a 3RV with an upward breakout in a bull market and selling a busted broadening bottom shows winning trades making an average of 170%. Losing trades lost 22%, giving a net of 15%, and ranking 39th (where 1 is best). Because the hold time is often years long, the annualized gain is 15%.
If you traded this without a stop, the net gain climbed to 94%. Of the stocks I looked at, I found 270 trades with 43% of them winning. Expectancy was $6.92 per share, ranking 29th where 1 is best.
| Table 3: Statistics for Normal Buy, Busted Sale | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Sell Pattern | Average Win | Average Loss | Net | Annualized Net | Rank | No Stop Net | Win/Loss Samples | Win Loss | Average Expectancy | Expectancy Rank |
| Broadening bottom | 170% | -22% | 61% | 15% | 39 | 94% | 117/153 | 43% | $6.92 | 29 |
| Broadening top | 161% | -22% | 47% | 14% | 45 | 107% | 260/425 | 38% | $5.35 | 41 |
| Broadening formation, right-angled and ascending | 136% | -24% | 53% | 16% | 34 | 91% | 128/136 | 48% | $8.63 | 21 |
| Broadening formation, right-angled and descending | 62% | -24% | 8% | 3% | 64 | 54% | 70/119 | 37% | $0.15 | 62 |
| Broadening wedge, ascending | 147% | -23% | 32% | 10% | 56 | 68% | 27/57 | 32% | $26.25 | 4 |
| Broadening wedge, descending | 94% | -23% | 19% | 7% | 63 | 41% | 65/114 | 36% | $1.11 | 60 |
| Bump-and-run reversal bottom | 120% | -21% | 35% | 10% | 57 | 61% | 76/116 | 40% | $6.83 | 32 |
| Cup with handle | 116% | -24% | 33% | 11% | 52 | 50% | 50/73 | 41% | $2.06 | 54 |
| Diamond bottom | 136% | -22% | 36% | 9% | 59 | 76% | 86/149 | 37% | $1.94 | 55 |
| Diamond top | 206% | -23% | 80% | 19% | 26 | 118% | 162/197 | 45% | $7.16 | 28 |
| Adam & Adam double bottom | 320% | -23% | 105% | 26% | 14 | 178% | 349/589 | 37% | $25.85 | 5 |
| Adam & Eve double bottom | 559% | -24% | 154% | 40% | 2 | 220% | 130/295 | 31% | $47.08 | 1 |
| Eve & Adam double bottom | 308% | -22% | 101% | 23% | 18 | 154% | 163/274 | 37% | $13.58 | 13 |
| Eve & Eve double bottom | 398% | -23% | 122% | 32% | 5 | 152% | 143/273 | 34% | $31.71 | 3 |
| Falling wedge | 144% | -22% | 46% | 13% | 47 | 117% | 85/122 | 41% | $5.41 | 40 |
| Head-and-shoulders bottom | 176% | -22% | 49% | 12% | 49 | 92% | 345/617 | 36% | $7.84 | 24 |
| Sell Pattern | Average Win | Average Loss | Net | Annualized Net | Rank | No Stop Net | Win/Loss Samples | Win Loss | Average Expectancy | Expectancy Rank |
| Head-and-shoulders complex bottom | 133% | -22% | 31% | 10% | 55 | 53% | 40/78 | 34% | $8.60 | 22 |
| Rectangle top | 117% | -24% | 36% | 12% | 50 | 66% | 139/188 | 43% | $5.33 | 42 |
| Rising wedge | 246% | -24% | 87% | 26% | 13 | 143% | 113/162 | 41% | -$8.53 | 64 |
| Round bottom | 97% | -24% | 31% | 9% | 61 | 67% | 33/39 | 46% | $7.45 | 26 |
| Rounding top | 193% | -27% | 80% | 24% | 16 | 115% | 32/34 | 48% | $9.02 | 20 |
| Ascending scallop | 125% | -23% | 42% | 13% | 48 | 64% | 200/258 | 44% | $1.34 | 59 |
| Descending scallop | 139% | -26% | 41% | 11% | 53 | 66% | 144/209 | 41% | $10.60 | 18 |
| Scallop, inverted and ascending | 198% | -21% | 73% | 19% | 27 | 116% | 577/758 | 43% | $18.58 | 10 |
| Scallop, descending and inverted | 152% | -22% | 48% | 14% | 43 | 75% | 191/284 | 40% | $3.61 | 50 |
| Triangle, ascending | 273% | -24% | 99% | 31% | 7 | 138% | 143/201 | 42% | $22.33 | 7 |
| Triangle, descending | 108% | -22% | 30% | 9% | 60 | 56% | 108/164 | 40% | $2.29 | 53 |
| Triangle, symmetrical | 160% | -22% | 48% | 14% | 41 | 92% | 490/784 | 38% | $4.38 | 47 |
| Triple bottom | 300% | -23% | 105% | 29% | 8 | 146% | 638/973 | 40% | $16.30 | 11 |
| Rectangle bottom | 164% | -25% | 39% | 10% | 54 | 55% | 77/151 | 34% | $6.27 | 37 |
| 3 rising valleys | 283% | -23% | 104% | 28% | 10 | 152% | 784/1098 | 42% | $15.74 | 12 |
| Roof | 123% | -24% | 52% | 14% | 40 | 141% | 26/24 | 52% | $6.59 | 33 |
| Roof, inverted | 180% | -23% | 75% | 19% | 28 | 96% | 60/64 | 48% | -$8.05 | 63 |
| Sell Pattern | Average Win | Average Loss | Net | Annualized Net | Rank | No Stop Net | Win/Loss Samples | Win Loss | Average Expectancy | Expectancy Rank |
Here are a few ideas the data suggested which may improve performance of your pattern pairs trading.
Find the trend start for your 3RV. 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 combinations of busted/non-busted trades and the resulting performance.
Selling patterns with a short-term (up to 3 months) duration from the trend start to the pattern's start outperformed the other two durations.
| Table 4: Short (S) Medium (M) or Long (L) Trend Start and Performance | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy non-busted pattern | S100% M78% L31% | S113% M76% L28% |
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 buying or selling busted or non-busted patterns when the breakout price was above (A) or below (B) the 50-day simple moving average (SMA).
Sell non-busted patterns if the breakout price is above the 50-day SMA or busted patterns below the SMA.
| Table 5: Above (A) Below (B) 50-Day Simple Moving Average | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy non-busted pattern | A74% B61% | A73% B98% |
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.
The results flip from the prior table. Better performance comes from breakouts below the 200-day SMA for non-busted patterns and above the 200-day SMA for busted patterns.
| Table 6: Above (A) Below (B) 200-Day Simple Moving Average | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy non-busted pattern | A72% B78% | A75% B63% |
The prior discussion assumes you buy a 3RV and sell a chart pattern of your choosing, such as a downward breakout from a head-and-shoulders 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 3RV and sell the first non-busted chart pattern which comes along, you'd make 15% on average. Annualized, you'd make 32%. This compares to a 21% 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).
Non-busted sell patterns outperform when you sell the first bearish one which comes along. For busted patterns, wait for the designated one to appear before selling.
The bottom half of the table shows expectancy for the combinations.
| Table 7: Selling the First Bearish Pattern (Annualized) | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy non-busted pattern | 15% (32% v 21%) | 8% (12% v 20%) |
| Expectancy (Below) | ||
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy non-busted pattern | $4.66 | $2.58 |
-- Thomas Bulkowski
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