As of 05/20/2022
  Indus: 31,262 +8.77 +0.0%  
  Trans: 13,491 +51.76 +0.4%  
  Utils: 991 +1.46 +0.1%  
  Nasdaq: 11,355 -33.88 -0.3%  
  S&P 500: 3,901 +0.57 +0.0%  
YTD
-14.0%  
-18.1%  
 +1.0%  
-27.4%  
-18.1%  
  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 4/21/22
As of 05/20/2022
  Indus: 31,262 +8.77 +0.0%  
  Trans: 13,491 +51.76 +0.4%  
  Utils: 991 +1.46 +0.1%  
  Nasdaq: 11,355 -33.88 -0.3%  
  S&P 500: 3,901 +0.57 +0.0%  
YTD
-14.0%  
-18.1%  
 +1.0%  
-27.4%  
-18.1%  
  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 4/21/22

Bulkowski on Pattern Pairs: Ascending Scallops

 

Initial release: 10/22/2021. In Table 5, the Roof pattern near table bottom should have been excluded due to low sample counts but wasn't. I removed the 4 cells of data but did not adjust the rankings (was: annualized rank 7, expectancy rank 12) on the 4 tables. Ranks above 7 and 12 will be off by 1. Fixed: 12/30/21.

The idea behind pattern pairs is to pick a chart pattern type (like broadening bottom 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.

In this article, when I refer to "scallops", I mean ascending scallops.

Trading Ascending Scallops: 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 either an upward breakout from a ascending scallop or a busted scallop (price breaks out downward, drops no more than 10%, reverses, and closes above the top of the broadening bottom). Buy as price rises above the top of the scallop.

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 pairs are shown below in the list, based on annualized gain (annualized because the hold time is often years, in parenthesis).

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.

To improve performance, try these tips.

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Trading Ascending 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 broadening 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 Ascending 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), 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 changed with various stop loss orders.

For example, if I tested non-busted ascending scallops and sold various non-busted patterns (broadening bottoms, broadening tops, head-and-shoulders tops, and so on), I made an average of 59% ("Stop Loss Only" column) after having a stop loss order in place. Losses averaged 20%. Replacing the stop loss with a 10% trailing stop cut the gain to 5% but also trimmed the average loss to 5%. Using a 25% trailing stop allowed me to keep more money, 19%, but losses climbed to 14%. If I didn't use any type of stop, the gain averaged 110% with losses averaging 33%.

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%)  14% (-11%)  19% (-14%)  59% (-20%)  110% (-33%) 
Busted buys, non-busted sales 1% (-6%)  3% (-9%)  2% (-9%)  6% (-13%)  35% (-14%)  109% (-26%) 
Non-busted buys, busted sales 4% (-5%)  9% (-8%)  14% (-10%)  17% (-14%)  58% (-19%)  114% (-30%) 
Busted buys, busted sales 0% (-6%)  4% (-10%)  4% (-9%)  9% (-13%)  47% (-13%)  121% (-22%) 

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Trading Ascending Scallops: Busted Patterns

Table 2 shows what I found when comparing the performance of non-busted patterns (both buy and sell) with busted and non-busted chart patterns. In 22 or 31 contests (22 or 31 different chart pattern types, depending on which apply), I compared the three combinations of busted and non-busted buy and sell signals to non-busted buy and sell signals. The table below shows the percentage of time the busted combination beat the non-busted combination in the contests.

For example, I found that busted patterns won half (45%) the 22 contests when trading using a busted pattern for the sale. The worst performance came from trading busted patterns. That configuration won only 3 of 22 contests (14%).

Trading using a busted chart pattern often results in worse performance than using non-busted patterns (at least for ascending scallops as the buy signal).

Table 2: Busted or Non-Busted Contest Winners
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted patternN/A (benchmark)45%
Buy busted pattern16%14%

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

Picture of a busted pattern pair.

Table 3 shows statistics I collected for scallops using the trading rules described above and shown in the figure. A stop loss order was used and priced a penny below the bottom of the scallop (after buying).

For example, if you were to buy the upward breakout from an ascending 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 65% on the 306 (93 winners, 213 losers) trades. That's an average of 267% on your winners, 23% average loss on your losers, and holding onto the position an average of 3.3 years. You'd find that only 30% of the trades made money but you'd gain an average of 20% per year. 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 115% per trade.

The expectancy averages $1.38 per share per trade which ranks 67th where 1 is the best value.

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 all four performance tables (tables 3 to 6) shown below. Trades with sample counts below 30 are not ranked.

Table 3: Statistics for Ascending Scallops
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Broadening bottom267%-23%65%20%29115%93/21330%$1.3854
Broadening top283%-20%86%34%9146%196/36635%$10.5218
Broadening formation, right-angled and ascending132%-21%28%14%4659%97/21131%-$1.2068
Broadening formation, right-angled and descending147%-20%37%14%4673%67/13134%$5.7530
Broadening wedge, ascending171%-18%64%27%23107%122/16043%$3.3636
Broadening wedge, descending129%-21%20%9%6041%49/13327%-$1.0967
Bump-and-run reversal top123%-18%44%23%2683%419/52744%$4.3832
Diamond bottom187%-21%48%20%2967%27/5533%$2.1550
Diamond top127%-20%36%17%3890%97/15738%$2.7241
Adam & Adam double top403%-19%115%32%12216%369/78532%$10.9617
Adam & Eve double top397%-21%113%34%9190%174/37232%$11.9114
Eve & Adam double top303%-20%91%27%23167%205/39434%$9.2319
Eve & Eve double top340%-20%100%41%8185%262/52433%$11.6416
Falling wedge248%-20%63%29%1793%60/13331%$2.6642
Head-and-shoulders top199%-20%59%21%27109%719/126836%$6.6728
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Head-and-shoulders, complex top118%-20%31%14%4670%157/26737%$2.3148
Rectangle top133%-19%31%13%5168%121/24333%$0.7258
Rising wedge150%-20%40%16%4082%234/42735%$1.4953
Rounding top154%-22%22%8%6157%116/34125%-$0.2162
Ascending scallop91%-16%26%18%3650%166/25939%$3.2037
Descending scallop210%-21%52%19%3295%558/120632%$2.4945
Scallop, inverted and ascending204%-21%58%19%32118%47/8835%$6.7426
Scallop, descending and inverted163%-20%36%17%3872%360/80431%$2.3847
Triangle, ascending168%-21%40%16%4079%107/22332%$3.0440
Triangle, descending85%-20%14%7%6531%136/28133%-$1.2670
Triangle, symmetrical147%-20%40%15%4476%327/58536%$3.1038
Triple top277%-22%77%25%25144%506/103433%$6.7127
Rectangle bottom231%-22%40%15%4456%67/20525%$2.6243
3 falling peaks218%-22%57%19%32110%1010/206333%$7.0124
Roof155%-16%71%28%19104%57/5551%$7.9922
Roof, inverted221%-22%71%28%19141%69/11138%$8.0921
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank

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Trading Ascending Scallops: Busted Buy, Non-Busted Sale

Picture of a busted pattern pair.

The figure shows the setup for this scenario. When price busts the bearish chart pattern (downward breakout from a scallop in a bull market), buy. Sell after a downward breakout from the target chart pattern.

Table 4 shows the performance of busted ascending scallops for the entry and sales after downward breakouts from various bearish chart patterns. I used a stop loss order and priced it a penny below the bottom of the broadening bottom (after buying).

A busted scallop has a downward breakout but price drops no more than 10% before reversing and moving above the top of the scallop. Buy when price moves at least a penny above the top of the busted scallop. Sell after price drops at least a penny below the target chart pattern.

For example, buying a scallop with a busted downward breakout in a bull market (the entry price is really the higher of a penny above the top of the scallop or the opening price) and selling after the downward breakout from a broadening bottom shows winners averaging gains of 53%. Losses average 16%, for a net loss of 9%. Annualized, it's still a 9% loss. Only 19 trades occurred with a win/loss ratio of 11%, so I don't rank the low sample count trades. If you traded this as a buy-and-hold position, meaning no stops were used, you'd make 118%. Expectancy was a loss of $2.72 per share, suggesting you'll have a hard time making a profit trading these two patterns.

Avoid placing too much emphasis on patterns with fewer than 30 trades.

Table 4: Statistics for Busted Buys, Normal Sales
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Broadening bottom53%-16%-9%-9%118%2/1711%-$2.72
Broadening top260%-13%78%31%99%9/1833%$25.14
Broadening formation, right-angled and ascending32%-11%0%-1%66%4/1225%$0.33
Broadening formation, right-angled and descending151%-18%16%11%48%2/820%$4.01
Broadening wedge, ascending44%-14%1%1%32%4/1225%-$1.65
Broadening wedge, descending18%-16%-14%-8%108%1/156%-$4.38
Bump-and-run reversal top314%-14%104%62%5166%19/3436%$32.456
Diamond bottom46%-16%-3%-14%23%1/420%-$2.27
Diamond top43%-13%7%6%60%8/1535%$0.40
Adam & Adam double top129%-12%13%8%61132%13/6118%$1.9951
Adam & Eve double top61%-15%-2%-1%76100%6/2818%-$0.3465
Eve & Adam double top449%-13%147%67%4253%17/3235%$39.674
Eve & Eve double top858%-13%186%108%1239%13/4423%$62.923
Falling wedge39%-12%-5%-5%-6%1/713%-$1.95
Head-and-shoulders top66%-13%2%1%7395%25/10719%$1.3256
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Head-and-shoulders, complex top39%-15%11%5%32%11/1248%$6.64
Rectangle top196%-12%11%7%120%3/2411%$1.09
Rising wedge36%-14%2%1%7392%11/2431%$2.6044
Rounding top35%-14%-5%-4%7836%6/2619%-$1.4872
Ascending scallop77%-12%23%17%68%8/1240%$5.45
Descending scallop53%-16%-6%-5%7977%13/8613%-$1.2871
Scallop, inverted and ascending828%-12%251%101%350%5/1131%$83.83
Scallop, descending and inverted164%-15%9%8%6148%12/7614%$2.2249
Triangle, ascending15%-14%-10%-11%55%3/1814%-$3.24
Triangle, descending45%-15%-5%-2%16%3/1418%-$1.30
Triangle, symmetrical335%-14%49%29%17123%13/5918%$17.429
Triple top138%-14%20%11%5792%26/8923%$6.5629
Rectangle bottom87%-16%8%3%17%4/1324%$5.74
3 falling peaks282%-13%48%28%19128%45/17121%$16.2711
Roof132%-8%38%10%117%1/233%$4.61
Roof, inverted12%-12%-7%-4%8%2/722%-$3.08
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank

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Trading Ascending Scallops: 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 5 shows the performance statistics for this setup (buying a normal scallop and selling only after a busted chart pattern). A stop loss order was used and 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 81%. Losing trades lost 20%, giving a net of 10%. Because the hold time is often years long, the annualized gain is just 3%, ranking the setup at 85th (where 1 is best). If you traded this without a stop, the net gain climbed to 65%. Of the stocks I looked at, I found 74 trades with 30% of them winning. Expectancy was $1.37 per share, ranking 68th where 1 is best.

Trades with fewer than 30 samples were not ranked.

Table 5: 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 bottom81%-20%10%3%7265%22/5230%$1.3755
Broadening top149%-18%34%12%5485%70/15531%$4.1035
Broadening formation, right-angled and ascending177%-21%40%13%5180%30/6831%$1.1257
Broadening formation, right-angled and descending77%-20%13%5%7053%25/4834%-$0.1361
Broadening wedge, ascending120%-24%24%11%57105%11/2233%$33.525
Broadening wedge, descending136%-16%29%13%5155%19/4530%-$0.2363
Bump-and-run reversal bottom226%-17%47%16%4095%17/4727%$0.0660
Cup with handle54%-18%1%1%7311%17/4527%-$2.1875
Diamond bottom265%-18%99%33%11125%24/3441%-$1.2068
Diamond top154%-19%37%11%5792%26/5532%$0.3359
Adam & Adam double bottom420%-19%123%30%16227%106/22332%$17.858
Adam & Eve double bottom606%-21%176%49%6296%59/12931%$21.537
Eve & Adam double bottom531%-18%105%31%13247%34/11822%$7.4823
Eve & Eve double bottom491%-24%108%31%13182%42/12226%$11.7515
Falling wedge190%-17%55%18%36102%38/7135%$3.0539
Head-and-shoulders bottom181%-17%35%12%5481%79/21927%$4.1633
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Head-and-shoulders complex bottom153%-18%48%21%2789%19/3039%-$2.3576
Rectangle top100%-20%16%7%6557%45/10730%-$1.8574
Rising wedge159%-17%48%16%4092%40/6937%-$6.0380
Round bottom28%-19%-6%-2%7729%10/2628%-$2.5977
Rounding top130%-20%-35%14%4659%23/3937%-$3.1879
Ascending scallop55%-16%11%7%6531%107/17338%-$0.6866
Descending scallop92%-20%16%6%6950%30/6532%$4.1134
Scallop, inverted and ascending265%-19%87%28%19145%107/18037%$16.8410
Scallop, descending and inverted138%-18%36%12%5471%48/9035%$8.3820
Triangle, ascending248%-19%69%31%13115%59/12133%$5.3931
Triangle, descending121%-21%20%8%6155%34/8329%$1.7352
Triangle, symmetrical220%-18%63%20%29121%169/32834%$2.4346
Triple bottom192%-20%45%14%4690%176/40430%$6.9225
Rectangle bottom119%-22%21%7%6547%29/6631%-$1.6673
3 rising valleys221%-20%66%19%32127%188/34136%$12.1113
Roof195%-13%109%158%14/1058%
Roof, inverted114%-17%10%4%7127%10/3920%-$2.6678
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank

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Trading Ascending Scallops: Busted Buy, Busted Sale

Picture of a busted pattern pair.

Table 6 shows the last combination of trading statistics. It shows busted ascending scallops as the entry signal and various busted chart patterns as the exit signal. Keep in mind that some pattern combinations were rare. A stop loss order was used and priced a penny below the bottom of the scallop (after buying).

The associated figure shows the setup.

For example, buying and selling a busted scallop made nothing because no trade was profitable. Losing trades lost 20% for a net loss of 20%. Annualized, the loss was 35%. Removing stops from the trades allowed them to make 52%, far above the 20% loss when using a stop loss order. Only 7 trades were taken (too few to rank) and none of them were winners. Expectancy was a loss of $7.08 per share, meaning you'd be hard pressed to make money trading this setup.

Trades with fewer than 30 samples were not ranked.


Table 6: Statistics for Busted Buys and Sales
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Broadening bottomnone-20%-20%-35%52%0/70%-$7.08
Broadening top44%-10%3%2%60%5/1723%-$1.28
Broadening formation, right-angled and ascending77%-17%-3%-1%147%1/614%-$1.11
Broadening formation, right-angled and descendingnone-9%-9%-8%248%0/50%-$1.59
Broadening wedge, ascendingnone-22%-22%-46%654%0/10%-$0.63
Broadening wedge, descendingnone-18%-18%-82%67%0/30%-$4.13
Bump-and-run reversal bottom23%-15%-10%-16%74%1/713%-$2.51
Cup with handlenone-9%-9%-67%-11%0/10%-$2.27
Diamond bottomnone-10%-10%-6%-19%0/40%-$4.14
Diamond top69%-9%15%5%65%3/730%$3.95
Adam & Adam double bottom53%-11%-4%-2%50%3/2511%-$1.25
Adam & Eve double bottom10%-13%-8%-14%91%2/820%-$2.84
Eve & Adam double bottom6%-11%-10%-5%192%1/910%-$2.26
Eve & Eve double bottom45%-12%-7%-7%136%1/109%-$1.40
Falling wedgenone-22%-22%-46%201%0/10%-$0.63
Head-and-shoulders bottom72%-17%7%3%42%6/1726%$7.85
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Head-and-shoulders complex bottom15%-26%-5%-3%15%3/350%-$3.96
Rectangle top1032%-11%197%136%267%3/1220%$6.55
Rising wedge209%-19%95%25%99%4/450%$20.91
Round bottomnone-9%-9%-3%-58%0/10%-$3.28
Rounding top112%-14%70%19%70%2/167%$18.33
Ascending scallop4%-17%-15%-21%16%1/811%-$3.50
Descending scallopnone-14%-14%-9%45%0/120%-$3.77
Scallop, inverted and ascending88%-14%16%7%112%8/1930%$6.43
Scallop, descending and inverted56%-15%-10%-8%27%1/137%-$2.30
Triangle, ascending7%-15%-13%-10%38%1/109%-$5.21
Triangle, descending45%-13%-8%-11%80%1/109%-$0.28
Triangle, symmetrical22%-14%-6%-5%7949%9/3620%-$0.3064
Triple bottom816%-14%193%80%2313%12/3625%$68.351
Rectangle bottom4%-16%-12%-8%21%1/420%-$4.58
3 rising valleys795%-12%189%79%3224%10/3025%$64.382
Roofnone-9%-9%-24%356%0/30%-$2.87
Roof, inverted65%-11%-1%-1%7%1/713%-$1.86
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank

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Trading Ascending 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

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 7 shows the results for the four combinations of busted/non-busted trades and the resulting performance.

Buying ascending scallops with a short-term (0 to 3 months) duration from the trend start to the pattern's start results in significantly better performance than the other combinations.

Table 7: Short (S) Medium (M) or Long (L) Trend Start and Performance
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted patternS78% M27% L45%S89% M23% L36%
Buy busted patternS73% M22% L9%S105% M41% L14%

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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 8 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).

Buying non-busted patterns outperformed buying busted ones (compare the two rows).

For three of four cells in the table, buying when the breakout price is above the 50-day moving average gives better performance. The one exception is trading non-busted (both buy and sell) patterns.

Table 8: Above (A) Below (B) 50-Day Simple Moving Average
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted patternA58% B74%A58% B49%
Buy busted patternA37% B-15%A48% B-15%

Table 9 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 conclusions are the same as the prior table. Buying non-busted patterns outperformed buying busted ones (compare the two rows). Non-busted buys work best if the breakout price is below the 200-day SMA. The other three table cells show buying when the breakout price is above the 200-day moving average works best.

Table 9: Above (A) Below (B) 200-Day Simple Moving Average
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted patternA58% B68%A59% B42%
Buy busted patternA40% B-8%A53% B-11%

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Selling First Bearish Chart Pattern

The prior discussion assumes you buy a scallop (busted or non-busted) 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 10 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 13% on average. Annualized, you'd make 29%. This compares to a 22% 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. That combination makes 29% annually, beating the other annualized rates.

The worst performance comes from trading busted patterns (1% per trade or 1% annually).

The bottom half of the table shows expectancy for the four combinations. Don't put much emphasis on the $2.70 value (lower right cell). There were only 12 trades involved. Only the non-busted cell (upper left) has a lot of samples, 1,017. Given the low sample counts, it's difficult to draw conclusions but it seems that trading non-busted patterns is the safe choice if you want to sell the first bearish pattern which appears.

Table 10: Selling the First Bearish Pattern (Annualized)
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted pattern13% (29% v 22%)6% (10% v 19%)
Buy busted pattern3% (10% v 22%)1% (1% v 26%)
Expectancy (Below)
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted pattern$2.50$0.42
Buy busted pattern$0.22$2.70

-- Thomas Bulkowski

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