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: Bump and Run Reversal Bottoms

Initial release: 11/10/2021. Fixed trend start info: 11/12/21.

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

• 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 BARR Bottoms: Summary

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 bump-and-run reversal bottom. Buy as price rises above the top trendline of bump-and-run reversal (BARR).

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.

Here's a list of the top five performing sell signals, based on annualized gain (annualized because the hold time is often years, in parenthesis).

Sell a...

• 1. Descending scallop (41%)
• 2. Diamond top (40%)
• 3. Adam & Adam double top (37%)
• 4 (tie). Ascending scallop (36%)
• 4 (tie). Busted descending and inverted scallop (36%)

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.

• 1. Adam & Adam double top ($20.91)
• 2. Adam & Eve double top ($18.42)
• 3. Busted Adam & Adam double bottom ($14.86)
• 4. Busted head-and-shoulders bottom ($14.56)
• 5. Busted broadening top ($14.08)

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

To improve performance, try these tips.

• Table 4: Buy patterns with a short-term (0 to 3 months) duration from the trend start to the pattern's start.
• Tables 5, 6: Buy BARR bottoms when the breakout price is below the 50- or 200-day simple moving average.
• Table 7: Sell the first non-busted pattern which appears.

Trading BARR 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 BARR 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.

• BARR bottoms provided the buy signal.
• No commissions or fees were included.
• Entry: Buy at the open the day after an upward breakout from the BARR.
• Stop loss: A penny below the bottom of the BARR 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.
• 556 stocks tested. The first chart pattern appeared in July 1991 and the last in April 2018, giving me 21,429 trades.
• Bear market excluded. If the breakout from the BARR 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 43 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 BARR Bottoms: Stops

I used a stop loss order set a penny below the bottom of the BARR. 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 BARR bottoms and sold various non-busted patterns (broadening bottoms, broadening tops, head-and-shoulders tops, and so on), I made an average of 83% ("Stop Loss Only" column) after having a stop loss order in place. Losses averaged 17%. Replacing the stop loss with a 10% trailing stop cut the gain to 8% but also trimmed the average loss to 5%. Using a 25% trailing stop allowed me to keep more money, 30%, but losses climbed to 13%. If I didn't use any type of stop, the gain averaged 162% with losses averaging 30%.

The results show that:

• Trades which do not use a stop make the most money but losses are huge.
• Sales of busted chart patterns give slightly better results when using trailing stops (than selling non-busted patterns).

Trading BARR Bottoms: Busted Patterns

I compared the sale of busted chart patterns versus non-busted ones, sorted by the type of chart pattern sold. In 22 contests, I found that 12 or 55% of the time selling a busted pattern gave a higher net gain than selling a non-busted pattern.

Trading BARR Bottoms: Non-busted Buy, Non-Busted Sale

Table 2 shows statistics I collected for BARR bottoms 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 BARR (after buying).

For example, if you were to buy the upward breakout from a BARR bottom 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 55% on the 265 (99 winners, 166 losers) trades. That's an average of 180% on your winners, 19% average loss on your losers, and holding onto the position an average of 3.4 years. You'd find that only 37% of the trades made money but you'd gain an average of 16% per year (ranking 48th where 1 is best). 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 142% per trade.

The expectancy averages $3.31 per share per trade which ranks 52nd where 1 is the best value. Using my data to trade, you'd average $331 per trade.

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 two performance tables (tables 2 and 3) shown below.

Trading BARR Bottoms: 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 BARR bottom and selling only after a busted chart pattern appears). A stop loss order was used and priced a penny below the bottom of the BARR bottom (after buying).

For example, buying a BARR bottom with an upward breakout in a bull market and selling a busted broadening bottom shows winning trades making an average of 284%. Losing trades lost 25%, giving a net of 116%. Because the hold time is often years long, the annualized gain is 32%, giving the setup a rank of 8th (where 1 is best). If you traded this without a stop, the net gain climbed to 328%. Of the stocks I looked at, I found 96 trades with 44% of them winning. Expectancy was a gain of $13.46 per share, ranking 6th where 1 is best.

Trades with sample counts below 30 are not ranked.

Trading BARR 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 BARR 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 sales for busted/non-busted patterns and the resulting performance.

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

Notice that selling non-busted patterns outperformed the busted patterns in for most 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 (A) or below (B) the 50-day simple moving average (SMA).

Notice that selling non-busted patterns outperformed selling busted ones. I found that buying a BARR bottom when the breakout price was below the moving average resulted in substantially better performance than if the buy price was above the SMA.

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 results show the same trend as the prior table: Buy when the breakout price is below the 200-day SMA.

Selling First Bearish Chart Pattern

The prior discussion assumes you buy a BARR bottom 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 sell patterns involved (busted or non-busted). For example, if you buy a non-busted BARR bottom and sell the first non-busted chart pattern which comes along, you'd make 23% on average. Annualized, you'd make 38%. This compares to a 25% 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 selling the first non-busted pattern which appears. That combination makes 38% annually, beating the other annualized rates.

The bottom half of the table shows expectancy. For best performance, sell the first non-busted pattern which appears.

-- Thomas Bulkowski

See Also

• Bump-and-run reversal bottoms.
• 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?