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CPI (updated daily): Arrows on 5/23/22
As of 05/26/2022
  Indus: 32,637 +516.91 +1.6%  
  Trans: 14,142 +397.70 +2.9%  
  Utils: 1,022 +1.32 +0.1%  
  Nasdaq: 11,741 +305.91 +2.7%  
  S&P 500: 4,058 +79.08 +2.0%  
YTD
-10.2%  
-14.2%  
 +4.2%  
-25.0%  
-14.9%  
  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 5/23/22

Bulkowski on Pattern Pairs: Adam & Eve Double Bottoms

 

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.

Trading Adam & Eve Double Bottoms: 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 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.

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Trading Adam & Eve Double Bottoms: 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 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.

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Trading Adam & Eve Double Bottoms: Stops

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 Adam & Eve Double Bottoms: Busted Patterns

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.

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Trading Adam & Eve Double Bottoms: Non-busted Buy, Non-Busted Sale

Picture of a busted pattern pair.

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 PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Broadening bottom142%-15%25%12%3544%56/16725%-$1.9159
Broadening top164%-15%47%20%1298%128/23935%$6.1913
Broadening formation, right-angled and ascending113%-14%28%13%3157%65/13033%$1.6343
Broadening formation, right-angled and descending90%-15%18%9%4535%51/10932%$6.787
Broadening wedge, ascending74%-15%24%14%2960%60/7744%$2.8836
Broadening wedge, descending150%-15%54%23%564%54/7642%$5.8517
Bump-and-run reversal top132%-16%44%21%1093%168/24740%$4.5324
Diamond bottom133%-15%34%18%1895%15/3033%$4.0827
Diamond top149%-16%61%30%2100%71/8147%$6.856
Adam & Adam double top315%-13%86%34%1156%303/69730%$10.592
Adam & Eve double top137%-14%38%16%2195%146/27834%$6.1614
Eve & Adam double top197%-14%54%23%5129%155/32332%$7.104
Eve & Eve double top122%-16%29%15%2679%173/36132%$2.9435
Falling wedge87%-16%11%7%5323%32.8926%-$0.2155
Head-and-shoulders top168%-14%50%22%893%544/98635%$6.2311
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Head-and-shoulders, complex top126%-16%38%19%1566%94/15138%$3.6728
Rectangle top135%-16%38%16%2180%90/16535%$5.0621
Rising wedge139%-15%44%22%885%140/22838%$4.3425
Rounding top222%-14%46%21%1086%62/18026%$0.3752
Ascending scallop87%-18%26%15%2642%40/5642%$2.7037
Descending scallop136%-16%27%13%3176%200/51628%$2.0941
Scallop, inverted and ascending152%-17%31%12%3579%17/4328%-$0.9657
Scallop, descending and inverted97%-16%20%10%4350%125/27132%$0.4551
Triangle, ascending150%-16%45%20%1280%93/16037%$5.9416
Triangle, descending100%-17%16%8%4639%73/18928%$0.0053
Triangle, symmetrical111%-15%26%12%3564%265/53533%$3.1433
Triple top176%-15%45%19%1599%352/77931%$6.489
Rectangle bottom89%-16%8%4%5710%45/15323%-$1.9260
3 falling peaks153%-15%41%16%2186%371/75233%$3.3032
Roof61%-14%2%1%6063%15/5422%-$0.0954
Roof, inverted90%-14%26%12%3589%42/6739%$5.1119
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank

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Trading Adam & Eve Double Bottoms: Non-busted Buy, Busted Sale

Picture of a busted pattern pair.

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 PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Broadening bottom75%-14%16%7%5350%30/5934%$3.4430
Broadening top179%-14%61%24%3111%66/10439%$6.1415
Broadening formation, right-angled and ascending91%-14%19%8%4642%22/4931%$4.9722
Broadening formation, right-angled and descending67%-13%14%6%5631%22/4334%$1.7742
Broadening wedge, ascending81%-14%32%10%43109%16/1748%$5.5318
Broadening wedge, descending101%-15%15%8%4643%13/3726%$0.4850
Bump-and-run reversal bottom108%-14%17%8%4642%13/3825%$1.1246
Cup with handle103%-16%4%38%4/2017%
Diamond bottom40%-11%2%2%599%11/3027%-$0.5756
Diamond top99%-10%32%16%21113%23/3639%$12.131
Adam & Adam double bottom179%-12%43%15%2698%102/25329%$6.2012
Adam & Eve double bottom216%-13%54%23%5104%48/11829%$8.043
Eve & Adam double bottom106%-13%19%8%4662%37/10027%$7.025
Eve & Eve double bottom136%-14%25%11%4256%36/10226%$1.5145
Falling wedge79%-14%20%12%35103%23/4037%$4.7323
Head-and-shoulders bottom125%-13%33%14%2967%93/18533%$6.4210
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Head-and-shoulders complex bottom179%-14%42%20%1254%11/2729%$3.0634
Rectangle top186%-13%38%24%3101%25/7326%$1.0847
Rising wedge72%-15%20%12%3595%26/3940%$0.7648
Round bottom128%-20%13%36%4/1422%
Rounding top93%-18%23%27%10/1737%
Ascending scallop75%-16%19%12%3549%29/4639%$0.7349
Descending scallop81%-16%6%4%5749%10/3323%$1.5644
Scallop, inverted and ascending118%-13%25%13%3169%34/8229%$3.4430
Scallop, descending and inverted155%-12%51%18%1882%20/3338%$3.5829
Triangle, ascending77%-15%16%8%4649%45/6734%$2.1240
Triangle, descending121%-16%30%16%2173%33/6633%$2.6438
Triangle, symmetrical144%-15%43%19%1584%124/21437%$5.0920
Triple bottom162%-12%45%18%1888%121/24833%$4.1026
Rectangle bottom115%-14%18%8%4649%16/4925%$2.3739
3 rising valleys114%-13%31%13%3188%81/15634%$6.598
Roof275%-15%77%143%7/1532%
Roof, inverted63%-14%11%7%5328%12/2532%-$1.4458
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank

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Trading Adam & Eve Double Bottoms: 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 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 PatternSell Busted Pattern
Buy non-busted patternS46% M40% L29%S32% M44% L28%

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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 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 PatternSell Busted Pattern
Buy non-busted patternA39% 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 PatternSell Busted Pattern
Buy non-busted patternA39% B44%A26% B40%

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Selling First Bearish Chart Pattern

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 PatternSell Busted Pattern
Buy non-busted pattern17% (39% v 19%)12% (27% v 15%)
Expectancy (Below)
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted pattern$2.39$0.98

-- Thomas Bulkowski

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