As of 12/20/2024
Indus: 42,840 +498.02 +1.2%
Trans: 15,892 +32.54 +0.2%
Utils: 986 +14.76 +1.5%
Nasdaq: 19,573 +199.83 +1.0%
S&P 500: 5,931 +63.77 +1.1%
|
YTD
+13.7%
0.0%
+11.9%
+30.4%
+24.3%
|
 44,200 or 41,750 by 01/01/2025 16,100 or 17,700 by 01/01/20251,050 or 975 by 01/01/202520,500 or 19,300 by 01/01/20256,100 or 5,775 by 01/01/2025 |
As of 12/20/2024
Indus: 42,840 +498.02 +1.2%
Trans: 15,892 +32.54 +0.2%
Utils: 986 +14.76 +1.5%
Nasdaq: 19,573 +199.83 +1.0%
S&P 500: 5,931 +63.77 +1.1%
|
YTD
+13.7%
0.0%
+11.9%
+30.4%
+24.3%
| |
|
44,200 or 41,750 by 01/01/202516,100 or 17,700 by 01/01/20251,050 or 975 by 01/01/202520,500 or 19,300 by 01/01/20256,100 or 5,775 by 01/01/2025 | ||
Initial release: 11/12/2021.
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.
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 a busted bump-and-run reversal top (BARR top). Buy as price rises above the top of the pattern.
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...
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.
Sell a...
Trading using a busted chart pattern results in worse performance than using non-busted patterns (at least for BARR Tops as the buy signal).
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 busted BARR top 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.
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 busted BARR tops and sold various non-busted patterns (broadening bottoms, broadening tops, head-and-shoulders tops, and so on), I made an average of 47% ("Stop Loss Only" column) after having a stop loss order in place. Losses averaged 19%. 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, 18%, but losses climbed to 13%. If I didn't use any type of stop, the gain averaged 109% 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 |
| Busted buys, non-busted sales | 5% (-5%) | 11% (-8%) | 12% (-10%) | 18% (-13%) | 47% (-19%) | 109% (-32%) |
| Busted buys, busted sales | 5% (-5%) | 11% (-8%) | 14% (-10%) | 17% (-13%) | 33% (-17%) | 106% (-29%) |
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 6 or 27% of the time selling a busted pattern gave a higher net gain than selling a non-busted pattern.
Table 2 shows statistics I collected for BARR Tops 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 a busted BARR top 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 24% on the 79 (32 winners, 47 losers) trades. That's an average of 91% on your winners, 22% average loss on your losers, and holding onto the position an average of 3.2 years. You'd find that only 41% of the trades made money but you'd gain an average of 7% per year (ranking 40th 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 56% per trade.
The expectancy averages $5.58 per share per trade which ranks 28th where 1 is the best value. Using my data to trade, you'd average $558 per trade (on 100 shares).
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. Trades with sample counts below 30 are not ranked.
| Table 2 Statistics for Busted BARR Tops, non-Busted Sales | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Sell Pattern | Average Win | Average Loss | Net | Annualized Net | Rank | No Stop Net | Win/Loss Samples | Win Loss | Average Expectancy | Expectancy Rank |
| Broadening bottom | 91% | -22% | 24% | 7% | 40 | 56% | 32/47 | 41% | $5.58 | 28 |
| Broadening top | 134% | -21% | 36% | 12% | 15 | 79% | 75/131 | 36% | $5.81 | 27 |
| Broadening formation, right-angled and ascending | 108% | -18% | 25% | 8% | 35 | 93% | 30/58 | 34% | -$0.92 | 50 |
| Broadening formation, right-angled and descending | 133% | -21% | 23% | 9% | 28 | 66% | 17/42 | 29% | $7.93 | 21 |
| Broadening wedge, ascending | 119% | -21% | 35% | 14% | 11 | 107% | 28/43 | 39% | $1.56 | 40 |
| Broadening wedge, descending | 163% | -18% | 32% | 9% | 28 | 102% | 17/44 | 28% | $2.76 | 35 |
| Bump-and-run reversal top | 98% | -19% | 40% | 15% | 8 | 85% | 121/121 | 50% | $5.42 | 29 |
| Diamond bottom | 177% | -17% | 80% | 19% | 3 | 127% | 16/16 | 50% | $6.61 | 24 |
| Diamond top | 116% | -15% | 49% | 19% | 3 | 71% | 33/356 | 49% | $9.12 | 17 |
| Adam & Adam double top | 321% | -18% | 98% | 21% | 2 | 204% | 147/283 | 34% | $15.08 | 8 |
| Adam & Eve double top | 174% | -18% | 46% | 11% | 23 | 114% | 70/142 | 33% | $9.81 | 15 |
| Eve & Adam double top | 189% | -19% | 52% | 12% | 15 | 125% | 85/164 | 34% | $9.02 | 18 |
| Eve & Eve double top | 169% | -19% | 56% | 15% | 8 | 109% | 93/140 | 40% | $19.34 | 2 |
| Falling wedge | 65% | -18% | 9% | 3% | 52 | 51% | 21/44 | 32% | $0.45 | 45 |
| Head-and-shoulders top | 171% | -18% | 49% | 13% | 13 | 129% | 266/484 | 35% | $12.34 | 10 |
| 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 | 134% | -19% | 40% | 10% | 26 | 67% | 51/82 | 38% | $9.74 | 16 |
| Rectangle top | 162% | -18% | 33% | 12% | 15 | 75% | 30/76 | 28% | $1.66 | 39 |
| Rising wedge | 135% | -19% | 44% | 12% | 15 | 99% | 90/131 | 41% | $3.73 | 32 |
| Rounding top | 154% | -20% | 45% | 12% | 15 | 97% | 41/70 | 37% | $5.88 | 26 |
| Ascending scallop | 134% | -18% | 63% | 22% | 1 | 79% | 33/29 | 53% | $16.46 | 7 |
| Descending scallop | 165% | -19% | 49% | 16% | 6 | 75% | 135/232 | 37% | $4.08 | 31 |
| Scallop, inverted and ascending | 348% | -19% | 70% | 104% | 7/22 | 24% | ||||
| Scallop, descending and inverted | 111% | -19% | 29% | 9% | 28 | 45% | 93/162 | 36% | $3.69 | 33 |
| Triangle, ascending | 143% | -19% | 27% | 10% | 26 | 110% | 33/83 | 28% | $1.19 | 42 |
| Triangle, descending | 118% | -18% | 24% | 9% | 28 | 57% | 36/79 | 31% | -$1.06 | 51 |
| Triangle, symmetrical | 119% | -19% | 29% | 9% | 28 | 85% | 117/223 | 34% | $6.12 | 25 |
| Triple top | 153% | -18% | 46% | 12% | 15 | 108% | 225/376 | 37% | $8.84 | 19 |
| Rectangle bottom | 142% | -19% | 19% | 6% | 44 | 37% | 19/61 | 24% | -$2.45 | 52 |
| 3 falling peaks | 170% | -19% | 52% | 14% | 11 | 106% | 287/481 | 37% | $16.87 | 6 |
| Roof | 56% | -17% | 9% | 3% | 52 | 76% | 11/20 | 35% | $6.94 | 22 |
| Roof, inverted | 231% | -18% | 57% | 18% | 5 | 114% | 17/39 | 30% | $10.46 | 11 |
| 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 busted BARR top appears and you buy at the day after it closes above the top of the chart pattern. 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 busted BARR top 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 top (after buying).
For example, buying a busted BARR top in a bull market and selling a busted broadening bottom shows winning trades making an average of 101%. Losing trades lost 17%, giving a net of 20%. Because the hold time is often years long, the annualized gain is 6%, giving the setup a rank of 44th (where 1 is best). If you traded this without a stop, the net gain climbed to 122%. Of the stocks I looked at, I found 51 trades with 31% of them winning. Expectancy was a gain of $0.07 per share, ranking 46th where 1 is best. The expectancy suggests making a profit trading this pair would be difficult.
Trades with sample counts below 30 are not ranked.
| Table 3: Statistics for Busted 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 | 101% | -17% | 20% | 6% | 44 | 122% | 16/35 | 31% | $0.07 | 46 |
| Broadening top | 111% | -17% | 31% | 8% | 35 | 91% | 34/57 | 37% | $6.71 | 23 |
| Broadening formation, right-angled and ascending | 125% | -20% | 25% | 9% | 28 | 71% | 11/25 | 31% | -$0.67 | 48 |
| Broadening formation, right-angled and descending | 97% | -15% | 27% | 8% | 35 | 45% | 18/30 | 38% | $1.78 | 38 |
| Broadening wedge, ascending | 109% | -15% | 50% | 88% | 10/9 | 53% | ||||
| Broadening wedge, descending | 72% | -18% | 15% | 5% | 46 | 57% | 12/21 | 36% | $0.58 | 43 |
| Bump-and-run reversal bottom | 155% | -12% | 42% | 12% | 15 | 140% | 10/21 | 32% | $10.17 | 14 |
| Cup with handle | 81% | -23% | 16% | 30% | 6/10 | 38% | ||||
| Diamond bottom | 93% | -18% | 32% | 166% | 13/16 | 45% | ||||
| Diamond top | 77% | -16% | 25% | 7% | 40 | 53% | 17/22 | 44% | -$0.20 | 47 |
| Adam & Adam double bottom | 248% | -18% | 67% | 15% | 8 | 190% | 43/91 | 32% | $10.18 | 13 |
| Adam & Eve double bottom | 109% | -17% | 19% | 5% | 46 | 110% | 22/55 | 29% | $2.21 | 37 |
| Eve & Adam double bottom | 140% | -17% | 42% | 9% | 28 | 187% | 22/37 | 37% | $8.06 | 20 |
| Eve & Eve double bottom | 118% | -20% | 19% | 4% | 50 | 69% | 14/36 | 28% | $3.33 | 34 |
| Falling wedge | 44% | -17% | 2% | 31% | 9/20 | 31% | ||||
| Head-and-shoulders bottom | 146% | -16% | 46% | 11% | 23 | 106% | 68/108 | 39% | $14.76 | 9 |
| 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 | 39% | -20% | -4% | 44% | 6/16 | 27% | ||||
| Rectangle top | 190% | -19% | 29% | 7% | 40 | 80% | 14/47 | 23% | $2.72 | 36 |
| Rising wedge | 89% | -16% | 15% | 4% | 50 | 41% | 12/29 | 29% | -$11.96 | 53 |
| Round bottom | 65% | -19% | 13% | 36% | 5/8 | 38% | ||||
| Rounding top | 78% | -18% | 15% | 62% | 10/19 | 34% | ||||
| Ascending scallop | 96% | -20% | 23% | 8% | 35 | 39% | 21/35 | 38% | -$0.74 | 49 |
| Descending scallop | 99% | -12% | 37% | 90% | 8/10 | 44% | ||||
| Scallop, inverted and ascending | 128% | -16% | 48% | 12% | 15 | 68% | 35/44 | 44% | $24.88 | 1 |
| Scallop, descending and inverted | 151% | -17% | 45% | 16% | 6 | 110% | 14/24 | 37% | $10.45 | 12 |
| Triangle, ascending | 87% | -16% | 17% | 5% | 46 | 59% | 16/34 | 32% | $0.53 | 44 |
| Triangle, descending | 82% | -17% | 19% | 5% | 46 | 76% | 19/33 | 37% | $5.19 | 30 |
| Triangle, symmetrical | 125% | -17% | 28% | 7% | 40 | 82% | 57/124 | 31% | $1.49 | 41 |
| Triple bottom | 153% | -18% | 40% | 11% | 23 | 106% | 71/139 | 34% | $17.04 | 5 |
| Rectangle bottom | 135% | -18% | 43% | 13% | 13 | 177% | 14/21 | 40% | $17.29 | 4 |
| 3 rising valleys | 113% | -17% | 27% | 8% | 35 | 126% | 57/111 | 34% | $17.30 | 3 |
| Roof | 314% | -16% | 55% | 167% | 3/11 | 21% | ||||
| Roof, inverted | 181% | -18% | 70% | 144% | 11/14 | 44% | ||||
| 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 BARR top. 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.
Selecting BARR tops with a short-term (up to 3 months) duration from the trend start to the pattern's start (buy pattern only) results in significantly better performance than the other combinations.
Notice that selling non-busted patterns outperformed the busted patterns for each duration (comparing short to short, medium to medium, and long to long).
| Table 4: Short (S) Medium (M) or Long (L) Trend Start and Performance | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy busted pattern | S75% M23% L38% | S44% M19% L33% |
I checked two moving averages at buy time, 50- and 200-day simple moving averages (not as a crossover setup). I compared the entry price to the value of the moving average. Table 5 shows the performance of buying busted patterns when the breakout price was above (A) or below (B) the 50-day simple moving average (SMA).
Given that BARR patterns are wide and the buy price will be at the top of the BARR, few patterns will be below the SMA, so expect those numbers to change.
I found that buying a BARR top when the breakout price was above the moving average resulted in substantially better performance than if the buy price was below the SMA.
| Table 5: Above (A) Below (B) 50-Day Simple Moving Average | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy busted pattern | A47% B-10% | A34% B-10% |
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 above the 200-day SMA.
| Table 6: Above (A) Below (B) 200-Day Simple Moving Average | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy busted pattern | A49% B-14% | A35% B-16% |
The prior discussion assumes you buy a busted BARR top 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 busted BARR top and sell the first non-busted chart pattern which comes along, you'd make 11% on average. Annualized, you'd make 21%. This compares to a 13% 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 21% 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.
| Table 7: Selling the First Bearish Pattern (Annualized) | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy busted pattern | 11% (21% v 13%) | 8% (11% v 9%) |
| Expectancy (Below) | ||
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy busted pattern | $6.77 | $2.15 |
-- Thomas Bulkowski
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