As of 11/01/2024
Indus: 42,052 +288.73 +0.7%
Trans: 16,351 +99.18 +0.6%
Utils: 1,019 -17.89 -1.7%
Nasdaq: 18,240 +144.77 +0.8%
S&P 500: 5,729 +23.35 +0.4%
|
YTD
+11.6%
+2.8%
+15.6%
+21.5%
+20.1%
|
43,100 or 41,250 by 11/15/2024
16,800 or 15,700 by 11/15/2024
1,075 or 1,000 by 11/15/2024
19,000 or 17,600 by 11/15/2024
5,900 or 5,600 by 11/15/2024
|
As of 11/01/2024
Indus: 42,052 +288.73 +0.7%
Trans: 16,351 +99.18 +0.6%
Utils: 1,019 -17.89 -1.7%
Nasdaq: 18,240 +144.77 +0.8%
S&P 500: 5,729 +23.35 +0.4%
|
YTD
+11.6%
+2.8%
+15.6%
+21.5%
+20.1%
| |
43,100 or 41,250 by 11/15/2024
16,800 or 15,700 by 11/15/2024
1,075 or 1,000 by 11/15/2024
19,000 or 17,600 by 11/15/2024
5,900 or 5,600 by 11/15/2024
| ||
Initial release: 10/18/2021. Fixed trend start numbers: 11/12/2021.
The idea behind pattern pairs is to pick a chart pattern type (like broadening tops with upward breakouts) to buy and another to sell (like double tops). You buy the upward breakout from the broadening top, 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.
To make this article easier to read, I'm going to refer to an ascending and Inverted scallop as just a scallop. There are four varieties of scallops. This article discusses the ascending and inverted ones.
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 scallop. Buy as price rises above the top of the scallop.
Sell the first bearish chart pattern which comes along or wait for your favorite bearish chart pattern to appear and sell then.
Here's a list of the top five performing signals, based on annualized gain (annualized because the hold time is often years, in parenthesis).
Buy a scallop 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 scallop (upward breakout) and sell a busted Adam & Eve double bottom (upward breakout which busts). If you traded 100 shares, the expected gain would be $4,028 or $40.28 per share.
Buy a scallop and 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 scallop 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 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 scallop. Price on the way down may have gapped below the stop price (for the sale price, 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 scallops and sold on various non-busted patterns (broadening bottoms, scallops, head-and-shoulders tops, and so on), I made an average of 48% ("Stop Loss Only" column) after having a stop loss order in place a penny below the bottom of the chart pattern. The average loss was 19% (shown in parenthesis). Replacing the stop loss with a 10% trailing stop cut the profit to 5% but also trimmed the average loss to 5%. Using a 25% trailing stop allowed me to keep more money, 20%, but the average loss also climbed to 13%. If I didn't use any type of stop, the profit averaged 107% but the average loss was huge: 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 | 5% (-5%) | 9% (-8%) | 15% (-11%) | 20% (-13%) | 48% (-19%) | 107% (-32%) |
Non-busted buys, busted sales | 5% (-5%) | 9% (-8%) | 15% (-10%) | 19% (-13%) | 44% (-18%) | 108% (-28%) |
Selling using busted chart patterns results in worse performance than selling non-busted patterns (at least for scallops as the buy signal).
I compared the performance of non-busted scallops for buy signals to busted and non-busted chart patterns for sales. Using 22 different chart pattern types for the sale, I found that only 32% of the time did a busted chart pattern work better as a sell signal than a non-busted chart pattern.
Table 2 shows statistics I collected for scallops using the trading rules described above and shown in the figure. I used a stop loss order priced a penny below the bottom of the scallop (after buying).
For example, if you were to buy the upward breakout from a scallop 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 41% on the 552 (168 winners, 384 losers) trades. That's an average of 178% on your winners, 19% average loss on your losers, and holding onto the position an average of 3.2 years. You'd find that only 30% of the trades made money but you'd gain an average of 15% per year (ranking 26th). If you removed the stop loss order and just held on until selling on a downward breakout from a broadening bottom, you'd make an average of 90% per trade.
When you combine gains and losses, the expectancy says it's difficult to make money trading this setup. Each trade gained just 70 cents on average, per share, ranking it 56th where 1 is best.
Notes: All of the above numbers appear in the table except for the average hold time. The rank is based on the net gain for tables 2 and 3 shown below. A rank of 1 is best.
Table 2: Statistics for scallops | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|
Sell Pattern | Average Win | Average Loss | Net | Annualized Net | Rank | No Stop Net | Win/Loss Samples | Win Loss | Average Expectancy | Expectancy Rank |
Broadening bottom | 178% | -19% | 41% | 15% | 26 | 90% | 168/384 | 30% | $0.70 | 56 |
Broadening top | 225% | -19% | 78% | 25% | 3 | 151% | 384/586 | 40% | $18.00 | 4 |
Broadening formation, right-angled and ascending | 149% | -20% | 31% | 11% | 46 | 70% | 147/334 | 31% | $0.76 | 55 |
Broadening formation, right-angled and descending | 178% | -20% | 55% | 19% | 13 | 90% | 145/240 | 38% | $9.91 | 12 |
Broadening wedge, ascending | 247% | -21% | 71% | 26% | 2 | 110% | 109/210 | 34% | $2.34 | 45 |
Broadening wedge, descending | 132% | -19% | 27% | 10% | 47 | 60% | 92/209 | 31% | $1.79 | 48 |
Bump-and-run reversal top | 134% | -18% | 40% | 16% | 19 | 80% | 438/705 | 38% | $7.43 | 19 |
Diamond bottom | 111% | -19% | 21% | 12% | 42 | 81% | 40/90 | 31% | $0.03 | 60 |
Diamond top | 183% | -18% | 70% | 25% | 3 | 114% | 194/250 | 44% | $7.10 | 20 |
Adam & Adam double top | 276% | -19% | 76% | 21% | 9 | 175% | 744/1560 | 32% | $11.09 | 11 |
Adam & Eve double top | 236% | -20% | 60% | 19% | 13 | 171% | 333/742 | 31% | $12.33 | 9 |
Eve & Adam double top | 183% | -19% | 41% | 13% | 39 | 132% | 350/819 | 30% | $4.07 | 35 |
Eve & Eve double top | 243% | -19% | 73% | 25% | 3 | 158% | 472/872 | 35% | $16.68 | 6 |
Falling wedge | 155% | -19% | 34% | 15% | 26 | 68% | 87/202 | 30% | $9.90 | 13 |
Head-and-shoulders top | 178% | -19% | 48% | 16% | 19 | 107% | 1320/2595 | 34% | $6.58 | 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 | 163% | -20% | 42% | 16% | 19 | 81% | 230/448 | 34% | $5.33 | 28 |
Rectangle top | 157% | -19% | 33% | 14% | 33 | 85% | 194/461 | 30% | $3.74 | 39 |
Rising wedge | 170% | -19% | 56% | 20% | 11 | 113% | 459/703 | 40% | $6.38 | 24 |
Rounding top | 172% | -20% | 41% | 13% | 39 | 92% | 226/490 | 32% | $4.96 | 31 |
Ascending scallop | 146% | -21% | 38% | 13% | 39 | 64% | 139/256 | 35% | $5.75 | 27 |
Descending scallop | 189% | -20% | 48% | 18% | 15 | 97% | 855/1779 | 32% | $3.81 | 38 |
Scallop, inverted and ascending | 141% | -20% | 27% | 9% | 51 | 78% | 107/261 | 29% | -$1.10 | 62 |
Scallop, descending and inverted | 125% | -19% | 21% | 9% | 51 | 54% | 537/1379 | 28% | $3.21 | 44 |
Triangle, ascending | 234% | -20% | 66% | 22% | 8 | 125% | 209/406 | 34% | $5.13 | 29 |
Triangle, descending | 192% | -20% | 38% | 14% | 33 | 74% | 141/374 | 27% | $0.08 | 59 |
Triangle, symmetrical | 162% | -20% | 45% | 16% | 19 | 87% | 642/1169 | 35% | $3.99 | 36 |
Triple top | 188% | -20% | 50% | 16% | 19 | 120% | 1009/2007 | 33% | $9.82 | 14 |
Rectangle bottom | 139% | -21% | 25% | 9% | 51 | 63% | 144/359 | 29% | $1.23 | 51 |
3 falling peaks | 166% | -19% | 41% | 15% | 26 | 95% | 1759/3638 | 33% | $6.21 | 25 |
Roof | 176% | -16% | 59% | 17% | 17 | 126% | 66/103 | 39% | $6.11 | 26 |
Roof, inverted | 191% | -21% | 61% | 21% | 9 | 141% | 122/195 | 38% | $8.35 | 17 |
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 normal scallop and selling only after a busted chart pattern). I used a stop loss order priced a penny below the bottom of the scallop (after buying).
For example, buying a scallop with an upward breakout in a bull market and selling a busted broadening bottom shows winning trades making an average of 117%. Losing trades lost 20%, giving a net of 17%. Because the hold time is often years long, the annualized gain is a paltry 5%, giving the setup a rank of 61 (where 1 is best). If you traded this without a stop, the net gain soared to 74%. Of the stocks I looked at, I found 196 trades with 27% of them winning. The expectancy is $0.85 per trade, per share, meaning the average 100-share trade would make $85, ranking the setup 54th 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 | 117% | -20% | 17% | 5% | 61 | 74% | 53/143 | 27% | $0.85 | 54 |
Broadening top | 127% | -18% | 30% | 10% | 47 | 131% | 171/352 | 33% | $3.28 | 43 |
Broadening formation, right-angled and ascending | 205% | -19% | 55% | 15% | 26 | 99% | 71/142 | 33% | $2.10 | 46 |
Broadening formation, right-angled and descending | 74% | -19% | 13% | 5% | 61 | 59% | 58/109 | 35% | $1.23 | 51 |
Broadening wedge, ascending | 165% | -20% | 31% | 9% | 51 | 104% | 23/61 | 27% | $22.77 | 3 |
Broadening wedge, descending | 159% | -19% | 50% | 17% | 17 | 106% | 53/83 | 39% | $3.87 | 37 |
Bump-and-run reversal bottom | 53% | -15% | 6% | 2% | 64 | 35% | 34/80 | 30% | -$0.52 | 61 |
Cup with handle | 63% | -18% | 10% | 4% | 63 | 23% | 22/42 | 34% | $1.00 | 53 |
Diamond bottom | 274% | -17% | 91% | 24% | 6 | 158% | 50/84 | 37% | $0.48 | 58 |
Diamond top | 104% | -17% | 26% | 9% | 51 | 78% | 77/142 | 35% | $14.13 | 8 |
Adam & Adam double bottom | 215% | -18% | 54% | 15% | 26 | 170% | 218/486 | 31% | $17.29 | 5 |
Adam & Eve double bottom | 286% | -20% | 74% | 20% | 11 | 193% | 112/253 | 31% | $40.28 | 1 |
Eve & Adam double bottom | 246% | -19% | 68% | 18% | 15 | 162% | 103/211 | 33% | $6.78 | 22 |
Eve & Eve double bottom | 284% | -18% | 89% | 23% | 7 | 173% | 104/190 | 35% | $30.91 | 2 |
Falling wedge | 132% | -19% | 39% | 14% | 33 | 106% | 65/105 | 38% | $4.55 | 32 |
Head-and-shoulders bottom | 205% | -17% | 59% | 16% | 19 | 120% | 236/453 | 34% | $9.66 | 15 |
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 | 377% | -15% | 126% | 34% | 1 | 202% | 33/59 | 36% | $3.37 | 42 |
Rectangle top | 166% | -18% | 36% | 14% | 33 | 81% | 76/183 | 29% | $1.24 | 50 |
Rising wedge | 173% | -18% | 39% | 15% | 26 | 114% | 64/151 | 30% | -$5.80 | 64 |
Round bottom | 106% | -18% | 25% | 8% | 58 | 52% | 17/32 | 35% | $3.67 | 41 |
Rounding top | 85% | -20% | 22% | 9% | 51 | 42% | 22/33 | 40% | $1.60 | 49 |
Ascending scallop | 112% | -19% | 29% | 12% | 42 | 53% | 119/206 | 37% | $0.53 | 57 |
Descending scallop | 107% | -18% | 27% | 10% | 47 | 72% | 73/129 | 36% | $7.01 | 21 |
Scallop, inverted and ascending | 139% | -16% | 40% | 14% | 33 | 96% | 314/555 | 36% | $14.59 | 7 |
Scallop, descending and inverted | 87% | -16% | 16% | 7% | 60 | 42% | 89/192 | 32% | $3.74 | 39 |
Triangle, ascending | 145% | -18% | 36% | 12% | 42 | 97% | 84/171 | 33% | $11.52 | 10 |
Triangle, descending | 108% | -19% | 30% | 10% | 47 | 83% | 93/147 | 39% | $5.01 | 30 |
Triangle, symmetrical | 188% | -18% | 52% | 16% | 19 | 101% | 323/623 | 34% | $4.25 | 33 |
Triple bottom | 141% | -18% | 37% | 12% | 42 | 85% | 347/664 | 34% | $8.05 | 18 |
Rectangle bottom | 142% | -18% | 20% | 8% | 58 | 37% | 37/119 | 24% | $4.10 | 34 |
3 rising valleys | 173% | -18% | 47% | 15% | 26 | 110% | 342/662 | 34% | $9.27 | 16 |
Roof | 121% | -16% | 28% | 9% | 51 | 167% | 13/28 | 32% | $1.84 | 47 |
Roof, inverted | 181% | -19% | 50% | 14% | 33 | 113% | 37/70 | 35% | -$2.10 | 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 scallop. 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.
Buying patterns with a short-term (up to 3 months) duration from the trend start to the pattern's start resulted in better performance than the other 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 | S64% M45% L21% | S57% M51% L20% |
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 or below the 50-day simple moving average (SMA).
Scallops work best if the breakout price is above the 50-day SMA but only when selling a busted chart pattern.
Table 5: Above (A) Below (B) 50-Day Simple Moving Average | ||
---|---|---|
Sell Non-Busted Pattern | Sell Busted Pattern | |
Buy non-busted pattern | A48% B49% | A45% B39% |
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 best performance comes after buying a pattern with the breakout price below the 200-day SMA. Also notice that selling a non-busted pattern outperforms selling a busted one.
Table 6: Above (A) Below (B) 200-Day Simple Moving Average | ||
---|---|---|
Sell Non-Busted Pattern | Sell Busted Pattern | |
Buy non-busted pattern | A45% B73% | A44% B49% |
The prior discussion assumes you buy a non-busted scallop 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 non-busted scallop and sell the first non-busted chart pattern which comes along, you'd make 16% on average. Annualized, you'd make 35%. This compares to a 17% 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 non-busted scallop and selling the first non-busted pattern which appears.
The lower half of the table shows the expectancy for busted and non-busted pattern sales. The best return comes from selling non-busted patterns. Expect to make $5.32 per trade, per share.
Table 7: Selling the First Bearish Pattern (Annualized) | ||
---|---|---|
Sell Non-Busted Pattern | Sell Busted Pattern | |
Buy non-busted pattern | 16% (35% v 17%) | 4% (7% v 14%) |
Expectancy (Below) | ||
Sell Non-Busted Pattern | Sell Busted Pattern | |
Buy non-busted pattern | $5.32 | $0.07 |
-- 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
|