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 | ||
Initial release: 9/12/2021. Fixed trend start numbers: 11/12/21.
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.
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 Adam & Adam double top (price breaks out downward, drops no more than 10%, reverses, and closes above the top of the double top). 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.
The best pattern to use for the sell signal is a busted rectangle top (upward breakout which sees price reverse).
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 Adam & Adam double top 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.
For example, the pattern pair with the highest trade expectancy is to buy a busted Adam & Adam double top and sell a busted rectangle top. If you traded 100 shares, the average gain would be $467 or $4.67 per share.
Buy a busted Adam & Adam double top and sell a...
Selling busted chart patterns results in better performance than using non-busted patterns (based on 22 contests).
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 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.
I used a stop loss order set a penny below the bottom of the busted Adam & Adam double top. 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 Adam & Adam double Tops and sold various non-busted patterns (broadening bottoms, broadening tops, head-and-shoulders tops, and so on), I made an average of 5% ("Stop Loss Only" column) after having a stop loss order in place. Losses averaged 8%. Replacing the stop loss with a 10% trailing stop cut the gain to 2% but also trimmed the average loss to 6%. Using a 25% trailing stop allowed me to keep more money, 12%, but losses climbed to 14%. If I didn't use any type of stop, the gain averaged 37% with losses averaging 22%.
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 | 2% (-6%) | 4% (-8%) | 9% (-11%) | 12% (-14%) | 5% (-8%) | 37% (-22%) |
| Busted buys, busted sales | 2% (-6%) | 4% (-8%) | 8% (-12%) | 11% (-15%) | 7% (-7%) | 38% (-18%) |
A busted Adam & Adam double top 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 busted and non-busted patterns and found that selling a busted pattern resulted in better performance than selling a non-busted pattern (type) 73% of the time.
The figure shows the setup for this scenario. When price busts the downward breakout from a bearish Adam & Adam double top, 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 Adam & Adam double Top (after buying).
For example, buying an Adam & Adam double top with a busted downward breakout in a bull market (the entry price is really the higher of a penny above the top of the double top or the opening price) and selling after the downward breakout from a broadening bottom shows winners averaging gains of 56%. Losses average 8%, for a net loss of 2%. Because trades are often years long, annualized the net becomes a loss of 2% (no change in this case). Only 68 trades occurred with a win/loss ratio of 10%. This scenario ranks the net gain as 33rd 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 21%. Expectancy was a loss of $1.17 per share, ranking 32nd where 1 is best.
| Table 2: Statistics for Busted Buys, Non-Busted Sales | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Sell Pattern | Average Win | Average Loss | Net | Annualized Net | Rank | No Stop Net | Win/Loss Samples | Win Loss | Average Expectancy | Expectancy Rank |
| Broadening bottom | 56% | -8% | -2% | -2% | 33 | 21% | 7/61 | 10% | -$1.17 | 32 |
| Broadening top | 56% | -8% | 4% | 6% | 20 | 34% | 26/114 | 19% | $2.07 | 11 |
| Broadening formation, right-angled and ascending | 30% | -8% | -3% | -8% | 36 | 4% | 7/44 | 14% | $0.20 | 25 |
| Broadening formation, right-angled and descending | 34% | -10% | -9% | 47% | 1/28 | 3% | ||||
| Broadening wedge, ascending | 41% | -9% | -2% | -4% | 35 | 21% | 5/33 | 13% | -$0.43 | 27 |
| Broadening wedge, descending | 79% | -9% | 12% | 24% | 5/16 | 24% | ||||
| Bump-and-run reversal top | 50% | -9% | 5% | 7% | 13 | 34% | 24/75 | 24% | $0.22 | 24 |
| Diamond bottom | 54% | -8% | 2% | 52% | 3/16 | 16% | ||||
| Diamond top | 43% | -7% | 7% | 9% | 8 | 26% | 14/36 | 28% | $1.40 | 15 |
| Adam & Adam double top | 74% | -7% | 8% | 9% | 8 | 47% | 101/447 | 18% | $3.87 | 3 |
| Adam & Eve double top | 69% | -7% | 6% | 7% | 13 | 46% | 41/188 | 18% | $3.24 | 6 |
| Eve & Adam double top | 93% | -7% | 8% | 11% | 5 | 40% | 34/198 | 15% | $1.16 | 18 |
| Eve & Eve double top | 50% | -8% | 4% | 5% | 23 | 43% | 47/189 | 20% | $0.49 | 23 |
| Falling wedge | 43% | -9% | -2% | 11% | 3/21 | 13% | ||||
| Head-and-shoulders top | 61% | -7% | 6% | 7% | 13 | 37% | 109/474 | 19% | $1.86 | 12 |
| 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 | 82% | -9% | 6% | 9% | 8 | 31% | 13/66 | 16% | $1.29 | 17 |
| Rectangle top | 70% | -10% | 11% | 13% | 4 | 46% | 15/44 | 25% | $3.14 | 7 |
| Rising wedge | 52% | -8% | 4% | 6% | 20 | 48% | 23/88 | 21% | $0.18 | 26 |
| Rounding top | 87% | -8% | 3% | 4% | 24 | 18% | 10/76 | 12% | -$1.59 | 34 |
| Ascending scallop | 15% | -10% | -6% | 17% | 3/16 | 16% | ||||
| Descending scallop | 110% | -9% | 4% | 7% | 13 | 43% | 22/175 | 11% | -$1.26 | 33 |
| Scallop, inverted and ascending | 23% | -7% | -2% | 21% | 3/15 | 17% | ||||
| Scallop, descending and inverted | 28% | -9% | -5% | -9% | 37 | 11% | 10/83 | 11% | -$3.63 | 39 |
| Triangle, ascending | 22% | -8% | -5% | -14% | 38 | 38% | 6/56 | 10% | -$1.82 | 35 |
| Triangle, descending | 59% | -9% | 8% | 11% | 5 | 36% | 15/46 | 25% | $0.84 | 20 |
| Triangle, symmetrical | 68% | -8% | 6% | 8% | 12 | 34% | 40/185 | 18% | $0.65 | 22 |
| Triple top | 61% | -7% | 7% | 7% | 13 | 43% | 82/335 | 20% | $3.58 | 5 |
| Rectangle bottom | None | -9% | -9% | -32% | 39 | 7% | 0/41 | 0% | -$3.05 | 38 |
| 3 falling peaks | 76% | -8% | 6% | 7% | 13 | 28% | 63/304 | 17% | -$1.16 | 31 |
| Roof | 34% | -8% | 1% | 51% | 6/21 | 22% | ||||
| Roof, inverted | 249% | -8% | 22% | 26% | 2 | 88% | 4/30 | 12% | $3.72 | 4 |
| Sell Pattern | Average Win | Average Loss | Net | Annualized Net | Rank | No Stop Net | Win/Loss Samples | Win Loss | Average Expectancy | Expectancy Rank |
Table 3 shows trading statistics for busted Adam & Adam double tops 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 Adam & Adam double top (after buying).
The associated figure shows the setup.
For example, buying a busted Adam & Adam double top and selling a busted broadening bottom made 51% from the winners, lost 8% on the losers for a net gain of 4%. Annualized, it was 4%. The net gain placed the performance of this setup at 24, where 1 is best.
Removing stops from the trades allowed them to make 25%, far above the 4% net when using a stop loss order. Three hundred twenty trades were taken and 21% of them were winners. Expectancy was a gain of $1.43 per share, ranking 14th where 1 is best.
| Table 3: Statistics for Busted Buys and Sales | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Sell Pattern | Average Win | Average Loss | Net | Annualized Net | Rank | No Stop Net | Win/Loss Samples | Win Loss | Average Expectancy | Expectancy Rank |
| Broadening bottom | 51% | -8% | 4% | 4% | 24 | 25% | 8/312 | 21% | $1.43 | 14 |
| Broadening top | 68% | -6% | -1% | -2% | 33 | 39% | 5/65 | 7% | -$1.95 | 36 |
| Broadening formation, right-angled and ascending | 47% | -7% | 9% | 32% | 6/14 | 30% | ||||
| Broadening formation, right-angled and descending | 53% | -7% | 9% | 35% | 8/21 | 28% | ||||
| Broadening wedge, ascending | 77% | -8% | 3% | 31% | 1/7 | 13% | ||||
| Broadening wedge, descending | 43% | -6% | 4% | 16% | 2/8 | 20% | ||||
| Bump-and-run reversal bottom | 41% | -6% | 0% | 7% | 2/13 | 13% | ||||
| Cup with handle | 29% | -10% | -6% | 40% | 1/9 | 10% | ||||
| Diamond bottom | 120% | -7% | 22% | 29% | 5/19 | 21% | ||||
| Diamond top | 109% | -5% | 18% | 20% | 3 | 63% | 7/28 | 20% | $4.58 | 2 |
| Adam & Adam double bottom | 89% | -6% | 9% | 9% | 8 | 39% | 31/164 | 16% | $3.13 | 8 |
| Adam & Eve double bottom | 94% | -7% | 3% | 6% | 20 | 36% | 9/80 | 10% | -$0.57 | 28 |
| Eve & Adam double bottom | 78% | -7% | 9% | 7% | 13 | 54% | 14/63 | 18% | $1.30 | 16 |
| Eve & Eve double bottom | 53% | -7% | 1% | 1% | 29 | 22% | 7/45 | 13% | -$0.69 | 29 |
| Falling wedge | 216% | -10% | 66% | 141% | 7/14 | 33% | ||||
| Head-and-shoulders bottom | 32% | -7% | 3% | 3% | 26 | 18% | 30/92 | 25% | $3.08 | 9 |
| 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 | 60% | -10% | 2% | 18% | 2/10 | 17% | ||||
| Rectangle top | 172% | -8% | 36% | 47% | 1 | 91% | 10/31 | 24% | $4.67 | 1 |
| Rising wedge | 186% | -7% | 51% | 102% | 6/14 | 30% | ||||
| Round bottom | None | -13% | -13% | 20% | 0/4 | 0% | ||||
| Rounding top | None | -11% | -11% | 0% | 0/6 | 0% | ||||
| Ascending scallop | 52% | -6% | 8% | 52% | 6/18 | 25% | ||||
| Descending scallop | 25% | -7% | 5% | 31% | 4/7 | 36% | ||||
| Scallop, inverted and ascending | 56% | -7% | 1% | 1% | 29 | 34% | 5/39 | 11% | -$0.89 | 30 |
| Scallop, descending and inverted | 71% | -6% | 5% | 46% | 3/18 | 14% | ||||
| Triangle, ascending | 34% | -9% | -1% | -1% | 32 | 35% | 6/24 | 20% | $0.83 | 21 |
| Triangle, descending | 33% | -7% | 0% | 0% | 31 | 23% | 6/27 | 18% | $2.16 | 10 |
| Triangle, symmetrical | 73% | -7% | 12% | 11% | 5 | 41% | 30/96 | 24% | $1.73 | 13 |
| Triple bottom | 54% | -6% | 2% | 2% | 27 | 22% | 23/142 | 14% | $0.92 | 19 |
| Rectangle bottom | 44% | -6% | 3% | 22% | 4/18 | 18% | ||||
| 3 rising valleys | 82% | -7% | 1% | 2% | 27 | 43% | 9/84 | 10% | -$2.60 | 37 |
| Roof | None | -8% | -8% | 37% | 0/5 | 0% | ||||
| Roof, inverted | None | -7% | -7% | 13% | 0/15 | 0% | ||||
| 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 Adam & Adam double top. 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.
Buying a busted Adam & Adam double top with a short-term (0 to 3 months) duration from the trend start to the pattern's start resulted in significantly better performance than the other combinations.
| Table 4: Short (S) Medium (M) or Long (L) Trend Start and Performance | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy busted pattern | S9% M3% L2% | S15% M3% L1% |
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).
There's not a big performance difference between the results. Selling a non-busted pattern works better if you first bought the stock when the breakout price was below the 50-day moving average. Busted patterns show the reverse with better results at buy time if price is above the SMA.
| Table 5: Above (A) Below (B) 50-Day Simple Moving Average | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy busted pattern | A5% B8% | A7% B4% |
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 above the 200-day SMA.
| Table 6: Above (A) Below (B) 200-Day Simple Moving Average | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy busted pattern | A6% B1% | A8% B3% |
The prior discussion assumes you buy a busted Adam & Adam double top but 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 busted Adam & Adam double top and sell the first non-busted chart pattern which comes along, you'd make 3% on average. Annualized, you'd make 12%. This compares to a 7% 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 7% number is the average of all chart pattern types fitting the non-busted category).
The best results come from buying a busted Adam & Adam double top and selling the first non-busted pattern which appears. That combination makes 12% annually, beating the other annualized rates.
The worst performance comes from trading busted patterns which lose money (-2% per trade or -9% annually).
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 Pattern | Sell Busted Pattern | |
| Buy busted pattern | 3% (12% v 7%) | -2% (-9% v 8%) |
| Expectancy (Below) | ||
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy busted pattern | $2.53 | $-1.24 |
-- Thomas Bulkowski
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