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%	Targets    Overview: 11/12/2024     46,000 or 43,000 by 12/01/2024   18,000 or 16,600 by 12/01/2024   1,075 or 1,000 by 12/01/2024   20,000 or 18,400 by 12/01/2024   6,100 or 5,800 by 12/01/2024
Chart Pattern Indicator: on 11/18/24

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%
Targets    Overview: 11/12/2024     46,000 or 43,000 by 12/01/2024   18,000 or 16,600 by 12/01/2024   1,075 or 1,000 by 12/01/2024   20,000 or 18,400 by 12/01/2024   6,100 or 5,800 by 12/01/2024
Chart Pattern Indicator: on 11/18/24

Bulkowski on Pattern Pairs: Ascending and Inverted Scallops

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.

• Summary
• Entry and Exit Conditions
• Stops
• Busted Patterns
• Results: Non-Busted Buy, Non-Busted Sale
• Results: Non-Busted Buy, Busted Sale
• Performance Improvements
• Trend Start: Short, Medium, or Long
• Moving Averages: 50 and 200 SMA
• Selling First Bearish Chart Pattern
• See Also

Trading Ascending and Inverted Scallops: Summary

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...

• 1. Busted Head-and-shoulders complex bottom (34%)
• 2. Ascending broadening wedge (26%)
• 3 (tie). Broadening top (25%)
• 3 (tie). diamond top (25%)
• 3 (tie). Eve & Eve double top (25%)

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...

• 1. Busted Adam & Eve double bottom ($40.28)
• 2. Busted Eve & Eve double bottom ($30.91)
• 3. Busted Ascending broadening wedge ($22.77)
• 4. Broadening top ($18.00)
• 5. Busted Adam & Adam double bottom ($17.29)

To improve performance, try these tips.

• Table 4: 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 other durations.
• Table 5: Scallops work best if the breakout price is above the 50-day simple moving average, but only when selling a busted chart pattern.
• Table 6: The best performance comes after buying a pattern with the breakout price below the 200-day SMA.

Trading Ascending and Inverted Scallops: 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 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.

• Scallops provided the buy signal.
• No commissions or fees were included.
• Entry: Buy a penny above the top of the scallop. A buy stop placed a penny above the top of the scallop was assumed to be the entry price unless the stock gapped higher on the breakout day (in which case, the opening price was used).
• Busted patterns included. I used an upward breakout from a scallop and determined the average rise to various chart patterns, including busted ones. I do not include busted scallops in this article because they appeared in too few trades.
• Stop loss: A penny below the bottom of the scallop served as the stop price. The stop was not raised, but I did test trailing stops separately.
• Sell signal: Downward breakouts from various bearish chart patterns (or busted bullish patterns) provided the sell signal.
• 457 stocks tested. The first chart pattern appeared in December 1991 and the last in October 2019, giving me 46,881 trades.
• Bear market excluded. If the breakout from the scallop was in a bear market, I excluded the trade because I only wanted bull market results. If price dropped into a bear market while in the trade, that was fine.
• Sales. Sales happened when price dropped a penny below the bottom of the bearish chart pattern (or busted bullish one) or the opening price if the stock gapped open lower.

I used the following chart patterns in the analysis, but some only applied if they were busted.

• Broadening: bottoms, tops, right-angled and ascending, right-angled and descending
• Broadening wedges: ascending and descending
• Bump-and-run reversal: tops and bottoms
• Cup with handle
• Diamond: tops and bottoms
• Double bottoms and tops: all four combinations of Adam and Eve
• Rising and falling wedges
• Head-and-shoulders: tops, bottoms, complex top, complex bottom
• Rectangle: tops and bottoms
• Roof, inverted roof
• Rounding: tops and bottoms
• Scallops: ascending, descending, ascending and inverted, descending and inverted
• Triangles: ascending, descending, and symmetrical
• Triple tops and bottoms
• Three rising peaks
• Three falling valleys
• Ugly double bottom

Trading Ascending and Inverted Scallops: Stops

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:

• Using a stop loss order does best for non-busted buys (gains of 48%).
• Using trailing stops hurt performance by limiting gains on winning trades but also kept losses reasonable.
• Trades which do not use a stop make the most money but losses are huge.

Trading Ascending and Inverted Scallops: Busted Patterns

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.

Trading Ascending and Inverted Scallops: Non-busted Buy, Non-Busted Sale

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.

Trading Ascending and Inverted Scallops: Non-busted Buy, Busted Sale

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.

Trading Ascending and Inverted Scallops: 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 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.

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 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 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.

Selling First Bearish Chart Pattern

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.

-- Thomas Bulkowski

See Also

• Inverted and ascending scallops. What does it look like?
• Hold on. How long do you need to hold onto a stock? Find out...
• Moving average study & stock trends. Buy in a downtrend, sell on the uptrend.
• Moving averages. Boost performance using chart patterns with moving averages!
• Can Stops Hurt?