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%
|
 46,000 or 43,000 by 12/01/202418,000 or 16,600 by 12/01/20241,075 or 1,000 by 12/01/202420,000 or 18,400 by 12/01/20246,100 or 5,800 by 12/01/2024 |
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%
| |
|
46,000 or 43,000 by 12/01/202418,000 or 16,600 by 12/01/20241,075 or 1,000 by 12/01/202420,000 or 18,400 by 12/01/20246,100 or 5,800 by 12/01/2024 | ||
Initial release: 11/16/21.
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.
Before I continue, when I refer to a wedge in this article, I'm referring to a descending broadening wedge.
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 descending broadening wedge or a busted wedge (price breaks out downward, drops no more than 10%, reverses, and closes above the top of the wedge). Buy as price rises above the top of the wedge.
On the sale side, you can 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 sell signals, 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.
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.
I used a stop loss order set a penny below the bottom of the wedge. 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 wedges and sold various non-busted patterns (broadening bottoms, broadening tops, head-and-shoulders tops, and so on), I made an average of 34% ("Stop Loss Only" column) after having a stop loss order in place. Losses averaged 14%. Replacing the stop loss with a 10% trailing stop cut the gain to 4% but also trimmed the average loss to 6%. Using a 25% trailing stop allowed me to keep more money, 13%, but losses climbed to 15%. If I didn't use any type of stop, the gain averaged 95% with losses averaging 31%.
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 | 4% (-6%) | 5% (-8%) | 10% (-12%) | 13% (-15%) | 34% (-14%) | 95% (-31%) |
| Busted buys, non-busted sales | 2% (-6%) | 7% (-9%) | 17% (-10%) | 22% (-12%) | 31% (-10%) | 62% (-33%) |
| Non-busted buys, busted sales | 4% (-6%) | 5% (-8%) | 9% (-11%) | 13% (-14%) | 34% (-13%) | 93% (-28%) |
| Busted buys, busted sales | 1%(-6%) | 7% (-10%) | 20% (-11%) | 22% (-12%) | 31% (-10%) | 53% (-35%) |
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 buy patterns and non-busted sell pattern won over a third (39%) or 12 of 31 contests compared to trading using non-busted patterns for buying and selling.
Trading using a busted chart pattern often results in worse performance than using non-busted patterns (at least for wedges as the buy signal).
| Table 2: Busted or Non-Busted Contest Winners | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy non-busted pattern | N/A (benchmark) | 36% |
| Buy busted pattern | 39% | 27% |
Table 3 shows statistics I collected for wedges 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 wedge (after buying).
For example, if you were to buy the upward breakout from a wedge 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 25% on the 160 (37 winners, 123 losers) trades. That's an average of 157% on your winners, 15% average loss on your losers, and holding onto the position an average of 2.1 years. You'd find that only 23% of the trades made money but you'd gain an average of 12% per year (ranking 38th 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 83% per trade.
The expectancy averages a loss of $1.24 per share per trade which ranks 72nd 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.
| Table 3: Statistics for wedges | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Sell Pattern | Average Win | Average Loss | Net | Annualized Net | Rank | No Stop Net | Win/Loss Samples | Win Loss | Average Expectancy | Expectancy Rank |
| Broadening bottom | 157% | -15% | 25% | 12% | 38 | 83% | 37/123 | 23% | -$1.24 | 72 |
| Broadening top | 202% | -14% | 46% | 22% | 19 | 112% | 82/215 | 28% | $4.24 | 22 |
| Broadening formation, right-angled and ascending | 101% | -15% | 13% | 8% | 51 | 56% | 38/120 | 24% | $0.37 | 58 |
| Broadening formation, right-angled and descending | 91% | -15% | 8% | 5% | 59 | 69% | 21/77 | 21% | -$2.84 | 81 |
| Broadening wedge, ascending | 244% | -14% | 65% | 35% | 9 | 127% | 32/72 | 31% | $5.44 | 17 |
| Broadening wedge, descending | 114% | -12% | 21% | 11% | 44 | 43% | 28/77 | 27% | $1.50 | 44 |
| Bump-and-run reversal top | 122% | -13% | 34% | 20% | 24 | 79% | 105/195 | 35% | $1.90 | 40 |
| Diamond bottom | 229% | -17% | 58% | 22% | 19 | 94% | 13/30 | 30% | $4.03 | 23 |
| Diamond top | 155% | -14% | 26% | 15% | 32 | 89% | 33/106 | 24% | $1.93 | 38 |
| Adam & Adam double top | 252% | -13% | 49% | 21% | 23 | 163% | 148/485 | 23% | $4.39 | 20 |
| Adam & Eve double top | 259% | -14% | 60% | 25% | 17 | 115% | 80/216 | 27% | $5.58 | 16 |
| Eve & Adam double top | 182% | -13% | 37% | 16% | 30 | 125% | 82/239 | 26% | $4.40 | 19 |
| Eve & Eve double top | 125% | -14% | 23% | 12% | 38 | 105% | 106/294 | 27% | $1.66 | 42 |
| Falling wedge | 138% | -14% | 11% | 6% | 56 | 26% | 17/85 | 17% | -$3.92 | 86 |
| Head-and-shoulders top | 183% | -14% | 37% | 18% | 27 | 104% | 289/824 | 26% | $2.12 | 36 |
| 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 | 120% | -15% | 25% | 14% | 34 | 70% | 59/143 | 29% | -$0.57 | 68 |
| Rectangle top | 203% | -14% | 32% | 16% | 30 | 85% | 42/156 | 21% | $5.29 | 18 |
| Rising wedge | 110% | -13% | 20% | 12% | 38 | 79% | 97/257 | 27% | $0.38 | 57 |
| Rounding top | 72% | -15% | 5% | 2% | 76 | 50% | 39/137 | 22% | -$2.93 | 82 |
| Ascending scallop | 175% | -15% | 49% | 27% | 12 | 93% | 26/51 | 34% | $3.63 | 27 |
| Descending scallop | 160% | -14% | 31% | 15% | 32 | 79% | 136/394 | 26% | $2.54 | 34 |
| Scallop, inverted and ascending | 159% | -12% | 57% | 20% | 24 | 105% | 17/25 | 40% | $3.86 | 24 |
| Scallop, descending and inverted | 160% | -13% | 36% | 17% | 28 | 68% | 90/227 | 28% | $3.60 | 28 |
| Triangle, ascending | 195% | -14% | 39% | 24% | 18 | 93% | 46/136 | 25% | $3.14 | 29 |
| Triangle, descending | 125% | -15% | 19% | 10% | 48 | 35% | 51/158 | 24% | -$2.59 | 79 |
| Triangle, symmetrical | 118% | -14% | 23% | 12% | 38 | 62% | 159/406 | 28% | $2.76 | 31 |
| Triple top | 135% | -14% | 23% | 11% | 44 | 102% | 211/646 | 25% | $2.91 | 30 |
| Rectangle bottom | 49% | -17% | -3% | -2% | 84 | 4% | 29/114 | 20% | -$3.04 | 83 |
| 3 falling peaks | 284% | -14% | 62% | 26% | 15 | 130% | 229/675 | 25% | $3.69 | 26 |
| Roof | 61% | -14% | 3% | 3% | 72 | 68% | 14/47 | 23% | $1.89 | 41 |
| Roof, inverted | 110% | -16% | 12% | 7% | 53 | 65% | 17/53 | 24% | $0.13 | 63 |
| 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 the setup for this scenario. When price busts the bearish chart pattern, buy. Sell after a downward breakout from the target chart pattern.
Table 4 shows the performance of busted wedges for the entry and sales after downward breakouts from various bearish chart patterns. A stop loss order was used and priced a penny below the bottom of the wedge (after buying).
A busted wedge has a downward breakout but price drops no more than 10% before reversing and moving above the top of the wedge. Buy when price moves at least a penny above the top of the busted wedge. Sell after price drops at least a penny below the target chart pattern.
For example, buying a wedge with a busted downward breakout in a bull market (the entry price is really the higher of a penny above the top of the wedge or the opening price) and selling after the downward breakout from a broadening bottom shows winners averaging gains of 26%. Losses average 9%, for a net loss of 5%. Because trades are often years long, annualized the net becomes -4%. Only 31 trades occurred with a win/loss ratio of 13%. This scenario ranks the annualized net gain as 85th among the four tables. If you traded this as a buy-and-hold position, meaning no stops were used, the net gain climbed to 0%. Expectancy was a loss of $3.22 per share, ranking 84th where 1 is best.
Trades with sample counts below 30 are not ranked.
| Table 4: Statistics for Busted Buys, Normal 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 | 26% | -9% | -5% | -4% | 85 | 0% | 4/27 | 13% | -$3.22 | 84 |
| Broadening top | 200% | -10% | 35% | 26% | 15 | 79% | 13/48 | 21% | $7.57 | 9 |
| Broadening formation, right-angled and ascending | 81% | -14% | 7% | 5% | 59 | 8% | 7/25 | 22% | -$2.01 | 77 |
| Broadening formation, right-angled and descending | 186% | -10% | 13% | 40% | 2/15 | 12% | ||||
| Broadening wedge, ascending | 27% | -12% | 2% | 8% | 8/15 | 35% | ||||
| Broadening wedge, descending | 36% | -7% | 2% | 10% | 5/17 | 23% | ||||
| Bump-and-run reversal top | 375% | -11% | 100% | 52% | 5 | 130% | 17/42 | 29% | $20.97 | 5 |
| Diamond bottom | 25% | -18% | -9% | 50% | 1/4 | 20% | ||||
| Diamond top | 62% | -10% | 5% | 75% | 5/19 | 21% | ||||
| Adam & Adam double top | 112% | -10% | 10% | 6% | 56 | 86% | 22/113 | 16% | $1.16 | 50 |
| Adam & Eve double top | 83% | -10% | 13% | 6% | 56 | 46% | 13/41 | 24% | $1.53 | 43 |
| Eve & Adam double top | 300% | -9% | 69% | 39% | 7 | 85% | 20/59 | 25% | $13.81 | 7 |
| Eve & Eve double top | 609% | -11% | 172% | 79% | 2 | 236% | 18/43 | 30% | $36.08 | 1 |
| Falling wedge | 81% | -12% | 2% | 30% | 2/11 | 15% | ||||
| Head-and-shoulders top | 60% | -10% | 2% | 1% | 77 | 32% | 39/189 | 17% | -$0.39 | 67 |
| 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 | 27% | -11% | -2% | -1% | 83 | 78% | 9/30 | 23% | -$1.51 | 75 |
| Rectangle top | 144% | -9% | 1% | 1% | 77 | 9% | 3/41 | 7% | -$2.34 | 78 |
| Rising wedge | 52% | -10% | 8% | 4% | 64 | 39% | 18/45 | 29% | $0.70 | 53 |
| Rounding top | 54% | -10% | 0% | 0% | 81 | 14% | 5/28 | 15% | -$2.78 | 80 |
| Ascending scallop | 176% | -12% | 129% | 202% | 3/1 | 75% | ||||
| Descending scallop | 34% | -10% | -1% | 0% | 81 | 24% | 19/71 | 21% | -$1.56 | 76 |
| Scallop, inverted and ascending | 1848% | -10% | 403% | 441% | 2/7 | 22% | ||||
| Scallop, descending and inverted | 461% | -11% | 38% | 27% | 12 | 35% | 4/35 | 10% | $5.67 | 14 |
| Triangle, ascending | 96% | -12% | 5% | 4% | 64 | 60% | 6/33 | 15% | $0.68 | 54 |
| Triangle, descending | 52% | -12% | 5% | 4% | 64 | 25% | 8/22 | 27% | $0.07 | 65 |
| Triangle, symmetrical | 191% | -10% | 30% | 22% | 19 | 35% | 25/100 | 20% | $5.59 | 15 |
| Triple top | 140% | -10% | 28% | 17% | 28 | 60% | 46/134 | 26% | $6.98 | 10 |
| Rectangle bottom | 52% | -9% | 6% | -4% | 6/19 | 24% | ||||
| 3 falling peaks | 307% | -10% | 74% | 37% | 8 | 93% | 41/113 | 27% | $13.84 | 6 |
| Roof | 116% | -9% | 24% | 59% | 4/11 | 27% | ||||
| Roof, inverted | 55% | -10% | 0% | 64% | 3/17 | 15% | ||||
| 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 5 shows the performance statistics for this setup (buying a non-busted wedge and selling only after a busted chart pattern). A stop loss order was used and priced a penny below the bottom of the wedge (after buying).
For example, buying a wedge with an upward breakout in a bull market and selling a busted broadening bottom shows winning trades making an average of 218%. Losing trades lost 13%, giving a net of 75%. The annualized gain is 27%, giving the setup a rank of 12 (where 1 is best). If you traded this without a stop, the net gain climbed to 95%. Of the stocks I looked at, I found 71 trades with 38% of them winning. Expectancy was $6.05 per share, ranking 13th where 1 is best.
Trades with sample counts below 30 are not ranked.
| Table 5: 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 | 218% | -13% | 75% | 27% | 12 | 95% | 27/44 | 38% | $6.05 | 13 |
| Broadening top | 228% | -13% | 56% | 22% | 19 | 98% | 42/106 | 28% | $4.27 | 21 |
| Broadening formation, right-angled and ascending | 71% | -13% | 9% | 5% | 59 | 63% | 18/51 | 26% | $1.36 | 45 |
| Broadening formation, right-angled and descending | 75% | -14% | 5% | 3% | 72 | 35% | 10/37 | 21% | -$0.97 | 70 |
| Broadening wedge, ascending | 192% | -14% | 17% | 88% | 4/23 | 15% | ||||
| Broadening wedge, descending | 58% | -13% | 8% | 4% | 64 | 19% | 13/31 | 30% | $0.14 | 62 |
| Bump-and-run reversal bottom | 68% | -10% | 7% | 4% | 64 | 65% | 9/31 | 23% | $0.35 | 59 |
| Cup with handle | 74% | -18% | 13% | 47% | 8/16 | 33% | ||||
| Diamond bottom | 166% | -13% | 8% | 4% | 64 | 261% | 4/30 | 12% | $0.16 | 61 |
| Diamond top | 525% | -12% | 124% | 40% | 6 | 193% | 17/50 | 25% | -$0.58 | 69 |
| Adam & Adam double bottom | 143% | -12% | 20% | 8% | 51 | 115% | 47/179 | 21% | $2.58 | 33 |
| Adam & Eve double bottom | 154% | -13% | 23% | 9% | 50 | 137% | 24/86 | 22% | $0.71 | 52 |
| Eve & Adam double bottom | 794% | -13% | 148% | 60% | 4 | 232% | 20/80 | 20% | $8.72 | 8 |
| Eve & Eve double bottom | 556% | -14% | 82% | 30% | 10 | 123% | 15/74 | 17% | $1.19 | 49 |
| Falling wedge | 117% | -14% | 23% | 11% | 44 | 74% | 18/45 | 29% | $1.21 | 48 |
| Head-and-shoulders bottom | 132% | -12% | 28% | 12% | 38 | 75% | 53/139 | 28% | $1.22 | 47 |
| 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 | 146% | -12% | 51% | 20% | 24 | 85% | 12/18 | 40% | $23.30 | 4 |
| Rectangle top | 68% | -13% | 9% | 5% | 59 | 44% | 23/63 | 27% | $2.17 | 35 |
| Rising wedge | 156% | -13% | 33% | 13% | 35 | 69% | 17/45 | 27% | $0.57 | 56 |
| Round bottom | 121% | -12% | -2% | 13% | 1/12 | 8% | ||||
| Rounding top | 40% | -15% | -3% | 32% | 3/11 | 21% | ||||
| Ascending scallop | 139% | -13% | 25% | 12% | 38 | 81% | 18/53 | 25% | $0.58 | 55 |
| Descending scallop | 101% | -14% | 11% | 5% | 59 | 61% | 10/35 | 22% | -$0.24 | 66 |
| Scallop, inverted and ascending | 88% | -12% | 15% | 7% | 53 | 87% | 25/68 | 27% | $0.08 | 64 |
| Scallop, descending and inverted | 57% | -12% | 4% | 1% | 77 | 69% | 11/37 | 23% | $0.28 | 60 |
| Triangle, ascending | 234% | -14% | 68% | 30% | 10 | 94% | 27/55 | 33% | $6.12 | 12 |
| Triangle, descending | 117% | -14% | 19% | 11% | 44 | 74% | 19/58 | 25% | $1.93 | 38 |
| Triangle, symmetrical | 122% | -13% | 20% | 10% | 48 | 80% | 68/215 | 24% | $2.10 | 37 |
| Triple bottom | 177% | -13% | 29% | 13% | 35 | 70% | 64/224 | 22% | $0.96 | 51 |
| Rectangle bottom | 178% | -11% | 43% | 13% | 35 | 86% | 11/27 | 29% | $6.98 | 10 |
| 3 falling peaks | 115% | -12% | 18% | 7% | 53 | 83% | 42/131 | 24% | $2.66 | 32 |
| 3 rising valleys | 131% | -13% | 19% | 164% | 4/14 | 22% | ||||
| Roof | 78% | -13% | 10% | 4% | 64 | 53% | 8/23 | 26% | $1.27 | 46 |
| Sell Pattern | Average Win | Average Loss | Net | Annualized Net | Rank | No Stop Net | Win/Loss Samples | Win Loss | Average Expectancy | Expectancy Rank |
Table 6 shows the last combination of trading statistics. It shows busted wedges as the entry signal and various busted chart patterns as the exit signal. Keep in mind that some patterns had few trades. A stop loss order was used and priced a penny below the bottom of the wedge (after buying).
The associated figure shows the setup.
For example, buying a busted wedge and selling busted broadening top (second data line down) made 70% from the winners, lost 11% on the losers for a net gain of 5%. Annualized, it was 3%. The net gain placed the performance of this setup at 72, where 1 is best. Removing stops from the trades allowed them to make 33%. Only 45 trades were taken and 20% of them were winners. Expectancy was a loss of $1.21 per share, ranking 71st. You'd be hard pressed to make a profit with this combination.
Trades with sample counts below 30 are not ranked.
| Table 6: Statistics for Busted Buys and 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 | 68% | -9% | 12% | 3% | 3/8 | 27% | ||||
| Broadening top | 70% | -11% | 5% | 3% | 72 | 33% | 9/36 | 20% | -$1.21 | 71 |
| Broadening formation, right-angled and ascending | 50% | -8% | 14% | 52% | 5/8 | 38% | ||||
| Broadening formation, right-angled and descending | 74% | -9% | 12% | 13% | 3/9 | 25% | ||||
| Broadening wedge, ascending | none | -8% | -8% | 53% | 0/4 | 0% | ||||
| Broadening wedge, descending | 70% | -16% | -4% | 29% | 1/6 | 14% | ||||
| Bump-and-run reversal bottom | 123% | -9% | 39% | 59% | 4/7 | 36% | ||||
| Cup with handle | None | -29% | -29% | -49% | 0/2 | 0% | ||||
| Diamond bottom | 20% | -10% | -7% | -6% | 1/10 | 9% | ||||
| Diamond top | 69% | -7% | -3% | 16% | 1/18 | 5% | ||||
| Adam & Adam double bottom | 57% | -10% | 8% | 4% | 64 | 22% | 14/37 | 27% | $3.85 | 25 |
| Adam & Eve double bottom | 44% | -10% | -5% | -4% | 85 | 32% | 3/29 | 9% | -$3.29 | 85 |
| Eve & Adam double bottom | 117% | -9% | 15% | 102% | 5/21 | 19% | ||||
| Eve & Eve double bottom | 86% | -13% | -2% | 26% | 2/16 | 11% | ||||
| Falling wedge | 31% | -12% | -8% | -21% | 1/11 | 8% | ||||
| Head-and-shoulders bottom | 39% | -10% | 2% | 1% | 77 | 35% | 13/38 | 25% | -$1.29 | 74 |
| 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 | 29% | -9% | -4% | -16% | 1/7 | 13% | ||||
| Rectangle top | 33% | -9% | -1% | 14% | 4/17 | 19% | ||||
| Rising wedge | 161% | -9% | 41% | 57% | 5/12 | 29% | ||||
| Rounding top | 200% | -10% | 32% | 26% | 1/4 | 20% | ||||
| Ascending scallop | 89% | -10% | 13% | 49% | 3/10 | 23% | ||||
| Descending scallop | 4% | -12% | -4% | -11% | 1/1 | 50% | ||||
| Scallop, inverted and ascending | 209% | -10% | 47% | 119% | 5/14 | 26% | ||||
| Scallop, descending and inverted | 26% | -11% | -3% | -14% | 2/8 | 20% | ||||
| Triangle, ascending | 35% | -9% | -4% | 12% | 2/17 | 11% | ||||
| Triangle, descending | 55% | -7% | 4% | 29% | 2/9 | 18% | ||||
| Triangle, symmetrical | 75% | -9% | 4% | 3% | 72 | 25% | 13/69 | 16% | -$1.24 | 72 |
| Triple bottom | 899% | -10% | 147% | 84% | 1 | 165% | 10/48 | 17% | $29.85 | 3 |
| Rectangle bottom | 164% | -7% | 44% | 32% | 3/7 | 30% | ||||
| 3 rising valleys | 533% | -10% | 156% | 69% | 3 | 163% | 15/34 | 31% | $30.35 | 2 |
| Roof | 6% | none | 6% | 6% | 2/0 | none | ||||
| 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 wedge. 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 7 shows the results for the four 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 results in better performance than the other combinations.
| Table 7: Short (S) Medium (M) or Long (L) Trend Start and Performance | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy non-busted pattern | S51% M6% L12% | S56% M4% L7% |
| Buy busted pattern | S63% M11% L1% | S72% M-5% L2% |
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).
If you're using a 50-day SMA, buy a (busted or non-busted) wedge if the breakout price is above the moving average.
| Table 8: Above (A) Below (B) 50-Day Simple Moving Average | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy non-busted pattern | A39% B27% | A39% B27% |
| Buy busted pattern | A39% B9% | A41% B9% |
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.
Trades work best if the breakout price is above the 200-day moving average except when buying a non-busted wedge and selling a busted pattern.
| Table 9: Above (A) Below (B) 200-Day Simple Moving Average | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy non-busted pattern | A35% B31% | A33% B37% |
| Buy busted pattern | A36% B15% | A37% B13% |
The prior discussion assumes you buy a wedge (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 wedge and sell the first non-busted chart pattern which comes along, you'd make 12% on average. Annualized, you'd make 27%. 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).
Selling the first non-busted pattern which appears does well. Selling designated busted patterns work better than selling the first busted one.
The bottom half of the table shows expectancy for the four combinations. If you sell the first pattern which appears, trading non-busted patterns perform best.
| Table 10: Selling the First Bearish Pattern (Annualized) | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy non-busted pattern | 12% (27% v 17%) | 6% (14% v 15%) |
| Buy busted pattern | 9% (20% v 19%) | 4% (8% v 20%) |
| Expectancy (Below) | ||
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy non-busted pattern | $3.44 | $2.01 |
| Buy busted pattern | $2.75 | $0.88 |
-- Thomas Bulkowski
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