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: 9/13/2021. Trend start numbers fixed 11/12/21.
The idea behind pattern pairs is to pick a chart pattern type (like Adam & Eve double bottoms) to buy and another to sell (like double tops). You buy the upward breakout from the double 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 an upward breakout from a Adam & Eve double bottom. 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 an Adam & Adam double top.
Here's a list of the top five (eight, really) 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.
For example, the pattern pair with the highest trade expectancy is to buy an Adam & Eve double bottom and sell a busted diamond top. If you traded 100 shares, the expected average gain would be $1,213 or $12.13 per share.
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 double bottom 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 double bottom. 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 Adam & Eve double bottoms and sold various non-busted patterns (Adam & Eve double bottoms, broadening tops, head-and-shoulders tops, and so on), I made an average of 41% ("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 7% but also trimmed the average loss to 5%. Using a 25% trailing stop allowed me to keep more money, 23%, but losses climbed to 13%. If I didn't use any type of stop, the gain averaged 87% with losses averaging 32%.
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 | 7% (-5%) | 10.2% (-8%) | 17% (-11%) | 23% (-13%) | 41% (-15%) | 87% (-32%) |
| Non-busted buys, busted sales | 6% (-5%) | 9.6% (-8%) | 16% (-11%) | 20% (-14%) | 34% (-13%) | 77% (-28%) |
Trading using a busted chart pattern often results in worse performance than using non-busted patterns (at least for Adam & Eve double bottoms as the buy signal).
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.
Table 2 shows statistics I collected for Adam & Eve double bottoms 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 double bottom (after buying).
For example, if you were to buy the upward breakout from a double bottom 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 make an average of 25% (annualized: 12%, ranking 35th) on the 223 (56 winners, 167 losers) trades. That's an average of 142% on your winners, 15% average loss on your losers, and holding onto the position an average of two years (not shown). You'd find that only 25% 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 44% per trade.
The expectancy posted a loss of $1.91 per share per trade which ranks 59th where 1 is the best value. In other words, if you traded these two chart patterns, you'd expect to lose $191 per 100-share trade. Because the expectancy is negative, I'd pick another pattern pair to trade.
Trades with sample counts below 30 are not ranked.
| Table 2: Statistics for Adam & Eve double bottoms | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Sell Pattern | Average Win | Average Loss | Net | Annualized Net | Rank | No Stop Net | Win/Loss Samples | Win Loss | Average Expectancy | Expectancy Rank |
| Broadening bottom | 142% | -15% | 25% | 12% | 35 | 44% | 56/167 | 25% | -$1.91 | 59 |
| Broadening top | 164% | -15% | 47% | 20% | 12 | 98% | 128/239 | 35% | $6.19 | 13 |
| Broadening formation, right-angled and ascending | 113% | -14% | 28% | 13% | 31 | 57% | 65/130 | 33% | $1.63 | 43 |
| Broadening formation, right-angled and descending | 90% | -15% | 18% | 9% | 45 | 35% | 51/109 | 32% | $6.78 | 7 |
| Broadening wedge, ascending | 74% | -15% | 24% | 14% | 29 | 60% | 60/77 | 44% | $2.88 | 36 |
| Broadening wedge, descending | 150% | -15% | 54% | 23% | 5 | 64% | 54/76 | 42% | $5.85 | 17 |
| Bump-and-run reversal top | 132% | -16% | 44% | 21% | 10 | 93% | 168/247 | 40% | $4.53 | 24 |
| Diamond bottom | 133% | -15% | 34% | 18% | 18 | 95% | 15/30 | 33% | $4.08 | 27 |
| Diamond top | 149% | -16% | 61% | 30% | 2 | 100% | 71/81 | 47% | $6.85 | 6 |
| Adam & Adam double top | 315% | -13% | 86% | 34% | 1 | 156% | 303/697 | 30% | $10.59 | 2 |
| Adam & Eve double top | 137% | -14% | 38% | 16% | 21 | 95% | 146/278 | 34% | $6.16 | 14 |
| Eve & Adam double top | 197% | -14% | 54% | 23% | 5 | 129% | 155/323 | 32% | $7.10 | 4 |
| Eve & Eve double top | 122% | -16% | 29% | 15% | 26 | 79% | 173/361 | 32% | $2.94 | 35 |
| Falling wedge | 87% | -16% | 11% | 7% | 53 | 23% | 32.89 | 26% | -$0.21 | 55 |
| Head-and-shoulders top | 168% | -14% | 50% | 22% | 8 | 93% | 544/986 | 35% | $6.23 | 11 |
| 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 | 126% | -16% | 38% | 19% | 15 | 66% | 94/151 | 38% | $3.67 | 28 |
| Rectangle top | 135% | -16% | 38% | 16% | 21 | 80% | 90/165 | 35% | $5.06 | 21 |
| Rising wedge | 139% | -15% | 44% | 22% | 8 | 85% | 140/228 | 38% | $4.34 | 25 |
| Rounding top | 222% | -14% | 46% | 21% | 10 | 86% | 62/180 | 26% | $0.37 | 52 |
| Ascending scallop | 87% | -18% | 26% | 15% | 26 | 42% | 40/56 | 42% | $2.70 | 37 |
| Descending scallop | 136% | -16% | 27% | 13% | 31 | 76% | 200/516 | 28% | $2.09 | 41 |
| Scallop, inverted and ascending | 152% | -17% | 31% | 12% | 35 | 79% | 17/43 | 28% | -$0.96 | 57 |
| Scallop, descending and inverted | 97% | -16% | 20% | 10% | 43 | 50% | 125/271 | 32% | $0.45 | 51 |
| Triangle, ascending | 150% | -16% | 45% | 20% | 12 | 80% | 93/160 | 37% | $5.94 | 16 |
| Triangle, descending | 100% | -17% | 16% | 8% | 46 | 39% | 73/189 | 28% | $0.00 | 53 |
| Triangle, symmetrical | 111% | -15% | 26% | 12% | 35 | 64% | 265/535 | 33% | $3.14 | 33 |
| Triple top | 176% | -15% | 45% | 19% | 15 | 99% | 352/779 | 31% | $6.48 | 9 |
| Rectangle bottom | 89% | -16% | 8% | 4% | 57 | 10% | 45/153 | 23% | -$1.92 | 60 |
| 3 falling peaks | 153% | -15% | 41% | 16% | 21 | 86% | 371/752 | 33% | $3.30 | 32 |
| Roof | 61% | -14% | 2% | 1% | 60 | 63% | 15/54 | 22% | -$0.09 | 54 |
| Roof, inverted | 90% | -14% | 26% | 12% | 35 | 89% | 42/67 | 39% | $5.11 | 19 |
| 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 Adam & Eve double bottom and selling only after a busted chart pattern). A stop loss order was used and priced a penny below the bottom of the double bottom (after buying). I removed the rank of any entry with fewer than 30 trades.
For example, buying a double bottom with an upward breakout in a bull market and selling a busted broadening bottom shows winning trades making an average of 75%. Losing trades lost 14%, giving a net of 16%, and ranking 53rd (where 1 is best). Because the hold time is often years long, the annualized gain is 7%.
If you traded this without a stop, the net gain climbed to 50%. Of the stocks I looked at, I found 89 trades with 34% of them winning. Expectancy was $3.44 per share, ranking 30th where 1 is best. The way I look at expectance is I'd expect to make an average of $344 per 100-share trade using this setup.
| 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 | 75% | -14% | 16% | 7% | 53 | 50% | 30/59 | 34% | $3.44 | 30 |
| Broadening top | 179% | -14% | 61% | 24% | 3 | 111% | 66/104 | 39% | $6.14 | 15 |
| Broadening formation, right-angled and ascending | 91% | -14% | 19% | 8% | 46 | 42% | 22/49 | 31% | $4.97 | 22 |
| Broadening formation, right-angled and descending | 67% | -13% | 14% | 6% | 56 | 31% | 22/43 | 34% | $1.77 | 42 |
| Broadening wedge, ascending | 81% | -14% | 32% | 10% | 43 | 109% | 16/17 | 48% | $5.53 | 18 |
| Broadening wedge, descending | 101% | -15% | 15% | 8% | 46 | 43% | 13/37 | 26% | $0.48 | 50 |
| Bump-and-run reversal bottom | 108% | -14% | 17% | 8% | 46 | 42% | 13/38 | 25% | $1.12 | 46 |
| Cup with handle | 103% | -16% | 4% | 38% | 4/20 | 17% | ||||
| Diamond bottom | 40% | -11% | 2% | 2% | 59 | 9% | 11/30 | 27% | -$0.57 | 56 |
| Diamond top | 99% | -10% | 32% | 16% | 21 | 113% | 23/36 | 39% | $12.13 | 1 |
| Adam & Adam double bottom | 179% | -12% | 43% | 15% | 26 | 98% | 102/253 | 29% | $6.20 | 12 |
| Adam & Eve double bottom | 216% | -13% | 54% | 23% | 5 | 104% | 48/118 | 29% | $8.04 | 3 |
| Eve & Adam double bottom | 106% | -13% | 19% | 8% | 46 | 62% | 37/100 | 27% | $7.02 | 5 |
| Eve & Eve double bottom | 136% | -14% | 25% | 11% | 42 | 56% | 36/102 | 26% | $1.51 | 45 |
| Falling wedge | 79% | -14% | 20% | 12% | 35 | 103% | 23/40 | 37% | $4.73 | 23 |
| Head-and-shoulders bottom | 125% | -13% | 33% | 14% | 29 | 67% | 93/185 | 33% | $6.42 | 10 |
| 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 | 179% | -14% | 42% | 20% | 12 | 54% | 11/27 | 29% | $3.06 | 34 |
| Rectangle top | 186% | -13% | 38% | 24% | 3 | 101% | 25/73 | 26% | $1.08 | 47 |
| Rising wedge | 72% | -15% | 20% | 12% | 35 | 95% | 26/39 | 40% | $0.76 | 48 |
| Round bottom | 128% | -20% | 13% | 36% | 4/14 | 22% | ||||
| Rounding top | 93% | -18% | 23% | 27% | 10/17 | 37% | ||||
| Ascending scallop | 75% | -16% | 19% | 12% | 35 | 49% | 29/46 | 39% | $0.73 | 49 |
| Descending scallop | 81% | -16% | 6% | 4% | 57 | 49% | 10/33 | 23% | $1.56 | 44 |
| Scallop, inverted and ascending | 118% | -13% | 25% | 13% | 31 | 69% | 34/82 | 29% | $3.44 | 30 |
| Scallop, descending and inverted | 155% | -12% | 51% | 18% | 18 | 82% | 20/33 | 38% | $3.58 | 29 |
| Triangle, ascending | 77% | -15% | 16% | 8% | 46 | 49% | 45/67 | 34% | $2.12 | 40 |
| Triangle, descending | 121% | -16% | 30% | 16% | 21 | 73% | 33/66 | 33% | $2.64 | 38 |
| Triangle, symmetrical | 144% | -15% | 43% | 19% | 15 | 84% | 124/214 | 37% | $5.09 | 20 |
| Triple bottom | 162% | -12% | 45% | 18% | 18 | 88% | 121/248 | 33% | $4.10 | 26 |
| Rectangle bottom | 115% | -14% | 18% | 8% | 46 | 49% | 16/49 | 25% | $2.37 | 39 |
| 3 rising valleys | 114% | -13% | 31% | 13% | 31 | 88% | 81/156 | 34% | $6.59 | 8 |
| Roof | 275% | -15% | 77% | 143% | 7/15 | 32% | ||||
| Roof, inverted | 63% | -14% | 11% | 7% | 53 | 28% | 12/25 | 32% | -$1.44 | 58 |
| 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 double bottom. 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 non-busted patterns with a short-term (up to 3 months) duration from the trend start to the pattern's start outperformed the other two durations. For busted patterns, the medium term (3 to 6 months) worked best.
Notice that non-busted patterns outperformed busted ones except for the medium-term.
| Table 4: Short (S) Medium (M) or Long (L) Trend Start and Performance | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy non-busted pattern | S46% M40% L29% | S32% M44% 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).
Only selling busted patterns showed a large change in performance. If you buy a Adam & Eve double bottom and sell a busted chart pattern (whatever the variety), you'd make more if the buy price is above the 50-day moving average (gains of 40% when the breakout price is above the moving average versus 30% if the breakout price is below the moving average).
| Table 5: Above (A) Below (B) 50-Day Simple Moving Average | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy non-busted pattern | A39% B43% | A40% B30% |
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.
Here we see a wider performance difference between the two types of patterns (busted and non-busted). At the time of the buy, if price is below the 200-day moving average, you improve the chances of a more profitable trade.
| Table 6: Above (A) Below (B) 200-Day Simple Moving Average | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy non-busted pattern | A39% B44% | A26% B40% |
The prior discussion assumes you buy a double bottom 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 an Adam & Eve double bottom and sell the first non-busted chart pattern which comes along, you'd make 17% on average. Annualized, you'd make 39%. This compares to a 19% 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 bottom half of the table shows expectancy for the combinations. For example, the best performance comes from buying and selling non-busted patterns (Expectancy: $2.39). The worse performance, trading busted ones (Expectancy: $0.98).
| Table 7: Selling the First Bearish Pattern (Annualized) | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy non-busted pattern | 17% (39% v 19%) | 12% (27% v 15%) |
| Expectancy (Below) | ||
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy non-busted pattern | $2.39 | $0.98 |
-- Thomas Bulkowski
Support this site! Clicking any of the books (below) takes you to
Amazon.com If you buy ANYTHING while there, they pay for the referral.
Legal notice for paid links: "As an Amazon Associate I earn from qualifying purchases."
|
My Stock Market Books
|
My Novels
|
on