Trading Broadening Tops

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.

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

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 to use for the sell signal is a diamond top (with a downward breakout).

Here's a list of the top five performing 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.

For example, the pattern pair with the highest trade expectancy is to buy a broadening top and sell a busted Adam & Eve double bottom (upward breakout which busts). If you traded 100 shares, the average gain would be $1,563 or $15.63 per share.

Trading Broadening Tops: 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 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.

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

Trading Broadening Tops: Stops

I used a stop loss order set a penny below the bottom of the broadening top. 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 broadening tops and sold on various non-busted patterns (broadening bottoms, broadening tops, head-and-shoulders tops, and so on), I made an average of 35% ("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 14% (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, 21%, but the average loss also climbed to 13%. If I didn't use any type of stop, the profit averaged 96% but the average loss was huge: 31%.

Trading Broadening Tops: Busted Patterns

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%)	15% (-11%)	21% (-13%)	35% (-14%)	96% (-31%)
Busted buys, non-busted sales	3% (-6%)	7% (-8%)	14% (-10%)	14% (-13%)	15% (-9%)	75% (-29%)
Non-busted buys, busted sales	5% (-5%)	8% (-8%)	15% (-11%)	20% (-13%)	30% (-13%)	86% (-28%)
Busted buys, busted sales	4% (-6%)	9% (-7%)	16% (-10%)	14% (-13%)	16% (-9%)	68% (-25%)

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

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 about a third (36%) of the 22 contests when trading using a busted pattern for the sale. The worst performance came from buying and selling busted patterns. That configuration won only 2 of 22 contests (9%). The remaining cell won 4 of 31 contests (13%).

Trading Broadening Tops: Non-busted Buy, Non-Busted Sale

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	13%	9%

Table 3 shows statistics I collected for broadening tops 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 broadening top (after buying).

For example, if you were to buy the upward breakout from a broadening top 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 make an average of 25% on the 338 (76 winners, 262 losers) trades. That's an average of 160% on your winners, 14% average loss on your losers, and holding onto the position an average of 2.1 years. You'd find that only 22% of the trades made money but you'd gain an average of 12% per year (ranking 47th where 1 is best). 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 58% per trade.

When you combine gains and losses, the expectancy says it's difficult to make money trading this setup. Each trade lost 12 cents on average, ranking it 98th where 1 is best.

Notes: All of the above numbers appear in the table except for the average hold time (2.1 years). The rank is based on the net gain for all four performance tables (tables 3 to 6) shown below. A rank of 1 is best. Trades with sample counts below 30 are not ranked.

Table 3: Statistics for Broadening Tops
Sell Pattern	Average Win	Average Loss	Net	Annualized Net	Rank	No Stop Net	Win/Loss Samples	Win Loss	Average Expectancy (Rank)
Broadening bottom	160%	-14%	25%	12%	47	58%	76/262	22%	$-0.12 (98)
Broadening top	154%	-13%	31%	15%	25	92%	188/533	26%	$6.00 (14)
Broadening formation, right-angled and ascending	159%	-13%	25%	12%	47	64%	69/241	22%	$0.54 (83)
Broadening formation, right-angled and descending	114%	-14%	16%	9%	67	47%	68/217	24%	$0.12 (92)
Broadening wedge, ascending	123%	-14%	36%	15%	25	91%	80/138	37%	$5.53 (19)
Broadening wedge, descending	126%	-14%	22%	13%	39	55%	51/148	26%	$0.87 (80)
Bump-and-run reversal top	156%	-14%	37%	21%	4	101%	199/460	30%	$4.05 (33)
Diamond bottom	119%	-15%	22%	9%	67	68%	26/68	28%	$1.63 (69)
Diamond top	231%	-14%	62%	28%	1	115%	93/208	31%	$4.25 (29)
Adam & Adam double top	238%	-12%	49%	20%	5	148%	412/1263	25%	$10.04 (3)
Adam & Eve double top	232%	-13%	48%	20%	5	135%	188/573	25%	$7.86 (7)
Eve & Adam double top	210%	-13%	36%	16%	21	123%	192/683	22%	$3.83 (37)
Eve & Eve double top	138%	-13%	24%	11%	55	98%	212/654	24%	$9.72 (4)
Falling wedge	90%	-13%	5%	3%	102	38%	33/149	18%	$1.14 (77)
Head-and-shoulders top	161%	-13%	31%	15%	25	100%	692/2014	26%	$3.86 (36)
Sell Pattern	Average Win	Average Loss	Net	Annualized Net	Rank	No Stop Net	Win/Loss Samples	Win Loss	Average Expectancy (Rank)
Head-and-shoulders, complex top	114%	-13%	23%	12%	47	60%	123/307	29%	$1.35 (73)
Rectangle top	199%	-13%	40%	18%	9	93%	117/347	25%	$3.46 (43)
Rising wedge	130%	-13%	24%	13%	39	78%	196/557	26%	$2.02 (64)
Rounding top	201%	-15%	31%	13%	39	95%	87/325	21%	$2.72 (51)
Ascending scallop	213%	-16%	39%	20%	5	87%	44/139	24%	$-1.06 (109)
Descending scallop	232%	-15%	59%	25%	3	121%	379/893	30%	$3.33 (45)
Scallop, inverted and ascending	144%	-12%	22%	8%	70	86%	29/102	22%	$4.51 (25)
Scallop, descending and inverted	124%	-15%	19%	10%	61	50%	182/548	25%	$0.82 (81)
Triangle, ascending	188%	-13%	40%	18%	9	88%	106/295	26%	$4.11 (31)
Triangle, descending	90%	-14%	11%	6%	85	38%	87/267	25%	$-.04 (96)
Triangle, symmetrical	151%	-14%	28%	14%	34	75%	325/955	25%	$2.77 (50)
Triple top	177%	-13%	35%	16%	21	94%	516/1526	25%	$5.28 (21)
Rectangle bottom	114%	-15%	8%	4%	98	38%	46/218	17%	$-2.28 (113)
3 falling peaks	185%	-14%	41%	17%	17	95%	651/1686	28%	$3.28 (46)
Roof	160%	-12%	41%	18%	9	85%	39/88	31%	$3.73 (39)
Roof, inverted	143%	-13%	39%	17%	17	102%	58/115	34%	$7.34 (10)
Sell Pattern	Average Win	Average Loss	Net	Annualized Net	Rank	No Stop Net	Win/Loss Samples	Win Loss	Average Expectancy (Rank)

Trading Broadening Tops: Busted Buy, Non-Busted Sale

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

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

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

For example, buying a broadening top with a busted downward breakout in a bull market (the entry price is really the higher of a penny above the top of the broadening pattern or the opening price) and selling after the downward breakout from a broadening bottom shows winners averaging gains of 64%. Losses average 9%, for a net of 8%. Because trades are often years long, annualized the net becomes 5%. Only 101 trades occurred with a win/loss ratio of 24%. This scenario ranks the annualized net gain as 95th among the four tables. If you traded this as a buy-and-hold position, meaning no stops were used, the net gain climbed from 5% to 31%. However, the expectancy is negative, $-2.30, placing it 114th where 1 is best. It suggests this setup won't make money in the long run.

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 (Rank)
Broadening bottom	64%	-9%	8%	5%	95	31%	24/77	24%	$-2.30 (114)
Broadening top	78%	-10%	11%	7%	78	60%	47/151	24%	$2.90 (48)
Broadening formation, right-angled and ascending	170%	-10%	27%	18%	9	44%	16/61	21%	$4.31 (28)
Broadening formation, right-angled and descending	120%	-9%	25%	12%	47	59%	22/61	27%	$4.93 (22)
Broadening wedge, ascending	88%	-10%	20%	12%	47	69%	18/40	31%	$2.71 (52)
Broadening wedge, descending	90%	-9%	16%	6%	85	56%	10/29	26%	$2.83 (49)
Bump-and-run reversal top	101%	-10%	22%	15%	25	63%	52/129	29%	$2.33 (58)
Diamond bottom	67%	-13%	0%	0%		97%	5/25	17%	$-1.34 ()
Diamond top	100%	-10%	16%	11%	55	62%	20/64	24%	$4.21 (30)
Adam & Adam double top	192%	-9%	25%	14%	34	120%	88/437	17%	$5.48 (20)
Adam & Eve double top	148%	-9%	20%	10%	61	108%	37/168	18%	$3.43 (44)
Eve & Adam double top	179%	-9%	23%	11%	55	105%	40/198	17%	$5.71 (18)
Eve & Eve double top	138%	-9%	25%	13%	39	98%	59/193	23%	$2.62 (54)
Falling wedge	74%	-9%	6%	3%	102	26%	11/50	18%	$-0.04 (96)
Head-and-shoulders top	120%	-9%	19%	11%	55	80%	171/617	22%	$3.62 (41)
Sell Pattern	Average Win	Average Loss	Net	Annualized Net	Rank	No Stop Net	Win/Loss Samples	Win Loss	Average Expectancy (Rank)
Head-and-shoulders, complex top	84%	-10%	12%	6%	85	29%	27/88	23%	$1.67 (67)
Rectangle top	39%	-9%	-2%	-2%	114	45%	15/96	14%	$-0.93 (108)
Rising wedge	89%	-10%	11%	8%	70	73%	46/169	21%	$0.53 (84)
Rounding top	129%	-11%	19%	9%	67	67%	25/93	21%	$-0.37 (104)
Ascending scallop	56%	-9%	6%	6%	85	78%	9/31	23%	$1.33 (74)
Descending scallop	154%	-10%	24%	16%	21	84%	70/265	21%	$3.69 (40)
Scallop, inverted and ascending	107%	-11%	9%	8%	70	95%	6/30	17%	$2.53 (55)
Scallop, descending and inverted	100%	-9%	8%	5%	95	37%	35/184	16%	$0.88 (79)
Triangle, ascending	65%	-9%	3%	2%	105	58%	19/99	16%	$0.28 (89)
Triangle, descending	70%	-10%	1%	1%	109	40%	16/108	13%	$-2.80 (116)
Triangle, symmetrical	67%	-9%	4%	3%	102	52%	63/299	17%	$-0.51 (106)
Triple top	87%	-9%	9%	6%	85	70%	114/500	19%	$1.67 (67)
Rectangle bottom	63%	-9%	1%	0%	111	66%	9/61	13%	$-2.01 (112)
3 falling peaks	149%	-9%	18%	12%	47	80%	116/573	17%	$2.38 (57)
Roof	111%	-9%	23%	15%	25	53%	11/30	27%	$4.71 (23)
Roof, inverted	83%	-11%	12%	8%	70	99%	15/46	25%	$1.32 (75)
Sell Pattern	Average Win	Average Loss	Net	Annualized Net	Rank	No Stop Net	Win/Loss Samples	Win Loss	Average Expectancy (Rank)

Trading Broadening Tops: Non-busted Buy, Busted Sale

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 broadening top and selling only after a busted chart pattern). I used a stop loss order priced a penny below the bottom of the broadening top (after buying).

For example, buying a broadening top 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 11%, giving a net of 19%. Because the hold time is often years long, the annualized gain is 8%, giving the setup a rank of 70th (where 1 is best). If you traded this without a stop, the net gain climbed from 19% to 62%. Of the stocks I looked at, I found 158 trades with 23% of them winning. The expectancy is $2.05 per trade, per share, meaning the average 100-share trade would make $2,050, ranking the setup 63rd where 1 is best.

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 (Rank)
Broadening bottom	117%	-11%	19%	8%	70	62%	37/121	23%	$2.05 (63)
Broadening top	144%	-13%	36%	15%	25	89%	122/267	31%	$4.59 (24)
Broadening formation, right-angled and ascending	121%	-12%	23%	11%	55	57%	35/95	27%	$1.36 (71)
Broadening formation, right-angled and descending	77%	-12%	15%	7%	78	44%	47/110	30%	$1.86 (65)
Broadening wedge, ascending	211%	-14%	29%	17%	17	112%	10/43	19%	$-0.30 (103)
Broadening wedge, descending	108%	-12%	10%	6%	85	47%	18/81	18%	$0.50 (86)
Bump-and-run reversal bottom	76%	-12%	7%	4%	98	46%	17/61	22%	$-0.22 (101)
Cup with handle	206%	-12%	35%	14%	34	90%	10/36	22%	$0.16 (90)
Diamond bottom	133%	-13%	15%	8%	70	84%	18/75	19%	$1.73 (66)
Diamond top	93%	-11%	19%	8%	70	59%	36/89	29%	$4.48 (26)
Adam & Adam double bottom	185%	-13%	34%	13%	39	102%	119/388	23%	$9.23 (5)
Adam & Eve double bottom	188%	-14%	35%	12%	47	101%	70/218	24%	$15.63 (1)
Eve & Adam double bottom	200%	-12%	39%	15%	25	116%	58/186	24%	$5.98 (15)
Eve & Eve double bottom	141%	-14%	17%	8%	70	68%	38/158	20%	$11.00 (2)
Falling wedge	267%	-13%	64%	26%	2	114%	35/93	27%	$4.08 (32)
Head-and-shoulders bottom	116%	-12%	16%	7%	78	64%	122/427	22%	$2.41 (56)
Sell Pattern	Average Win	Average Loss	Net	Annualized Net	Rank	No Stop Net	Win/Loss Samples	Win Loss	Average Expectancy (Rank)
Head-and-shoulders complex bottom	68%	-13%	9%	4%	98	27%	23/62	27%	$0.10 (93)
Rectangle top	178%	-12%	35%	18%	9	111%	56/172	25%	$1.48 (70)
Rising wedge	132%	-13%	33%	18%	9	92%	41/89	32%	$0.09 (94)
Round bottom	110%	-13%	12%	6%	85	40%	7/28	20%	$0.39 (87)
Rounding top	39%	-15%	1%	0%	111	19%	13/32	29%	$-4.34 (117)
Ascending scallop	163%	-13%	46%	17%	17	97%	52/103	34%	$4.48 (26)
Descending scallop	125%	-12%	32%	13%	39	70%	25/53	32%	$4.00 (34)
Scallop, inverted and ascending	143%	-13%	35%	15%	25	93%	85/192	31%	$8.80 (6)
Scallop, descending and inverted	132%	-12%	31%	13%	39	69%	36/84	30%	$3.88 (35)
Triangle, ascending	90%	-13%	9%	5%	95	50%	41/152	21%	$2.13 (62)
Triangle, descending	163%	-13%	39%	19%	8	96%	55/131	30%	$3.74 (38)
Triangle, symmetrical	118%	-13%	26%	12%	47	88%	189/455	29%	$3.55 (42)
Triple bottom	183%	-13%	45%	18%	9	111%	211/508	29%	$5.76 (17)
Rectangle bottom	179%	-13%	27%	11%	55	52%	21/81	21%	$-0.13 (99)
3 rising valleys	157%	-13%	37/%	15%	25	100%	156/372	30%	$6.88 (11)
Roof	156%	-14%	39%	14%	34	142%	12/27	31%	$7.67 (8)
Roof, inverted	50%	-13%	4%	2%	105	57%	21/59	26%	$0.08 (95)
Sell Pattern	Average Win	Average Loss	Net	Annualized Net	Rank	No Stop Net	Win/Loss Samples	Win Loss	Average Expectancy (Rank)

Trading Broadening Tops: Busted Buy, Busted Sale

Table 6 shows the last combination of trading statistics. It shows busted broadening tops as the entry signal and various busted chart patterns as the exit signal. Keep in mind that some trades were few in number. I used a stop loss order priced a penny below the bottom of the broadening top (after buying).

For example, buying a busted broadening top and selling a busted broadening bottom made 77% from the winners, lost 9% on the losers for a net gain of 10%. Annualized, it was 7%. The net gain placed the performance of this setup 78th, where 1 is best. Removing stops from the trades allowed them to make 53%, far above the 10% net when using a stop loss order. Only 45 trades were taken and 22% of them were winners. Expectancy was $0.88 per trade, per share, placing it 82nd (1 is best).

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 (Rank)
Broadening bottom	77%	-9%	10%	7%	78	53%	10/35	22%	$0.80 (82)
Broadening top	98%	-8%	14%	7%	78	74%	25/97	20%	$2.69 (53)
Broadening formation, right-angled and ascending	76%	-8%	11%	6%	85	47%	9/30	23%	$2.21 (60)
Broadening formation, right-angled and descending	209%	-8%	34%	16%	21	73%	8/34	19%	$7.53 (9)
Broadening wedge, ascending	359%	-8%	13%	9%		68%	1/17	6%	$0.88 ()
Broadening wedge, descending	36%	-11%	0%	0%	111	25%	8/26	24%	$-0.27 (102)
Bump-and-run reversal bottom	66%	-7%	6%	3%		16%	5/23	18%	$0.97 ()
Cup with handle	171%	-11%	65%	22%		87%	8/11	42%	$13.94 ()
Diamond bottom	150%	-9%	42%	21%		119%	9/19	32%	$19.84 ()
Diamond top	26%	-9%	-6%	-6%	117	74%	4/39	9%	$-2.61 (115)
Adam & Adam double bottom	183%	-9%	35%	13%	39	101%	39/132	23%	$6.69 (12)
Adam & Eve double bottom	255%	-10%	33%	14%	34	100%	15/77	16%	$5.92 (16)
Eve & Adam double bottom	134%	-8%	12%	7%	78	73%	11/67	14%	$0.34 (88)
Eve & Eve double bottom	79%	-8%	6%	4%	98	31%	11/56	16%	$-1.19 (110)
Falling wedge	53%	-9%	-5%	-5%	116	69%	3/39	7%	$-1.88 (111)
Head-and-shoulders bottom	92%	-9%	12%	6%	85	64%	36/137	21%	$1.36 (71)
Sell Pattern	Average Win	Average Loss	Net	Annualized Net	Rank	No Stop Net	Win/Loss Samples	Win Loss	Average Expectancy (Rank)
Head-and-shoulders complex bottom	19%	-8%	-3%	-2%		5%	5/22	19%	$6.58 ()
Rectangle top	190%	-7%	30%	18%	9	62%	13/55	19%	$6.66 (13)
Rising wedge	61%	-6%	14%	7%	78	75%	10/23	30%	$-0.45 (105)
Round bottom	150%	-11%	55%	20%		116%	7/10	41%	$13.91 ()
Rounding top	88%	-12%	21%	8%		21%	3/6	33%	$1.40 ()
Ascending scallop	47%	-9%	9%	6%	85	36%	14/29	33%	$2.27 (59)
Descending scallop	35%	-9%	-5%	-3%	115	40%	3/27	10%	$-0.19 (100)
Scallop, inverted and ascending	42%	-9%	1%	1%	109	49%	13/55	19%	$1.30 (76)
Scallop, descending and inverted	77%	-7%	2%	2%	105	45%	4/32	11%	$-0.69 (107)
Triangle, ascending	164%	-8%	16%	10%	61	36%	6/38	14%	$0.53 (84)
Triangle, descending	64%	-9%	4%	2%	105	41%	9/45	17%	$0.13 (91)
Triangle, symmetrical	104%	-8%	16%	10%	61	81%	46/171	21%	$2.20 (61)
Triple bottom	128%	-9%	18%	10%	61	76%	48/200	19%	$0.92 (78)
Rectangle bottom	22%	-10%	-6%	-3%		23%	4/24	14%	$-2.98 ()
3 rising valleys	156%	-9%	16%	10%	61	66%	26/145	15%	$3.10 (47)
Roof	282%	-9%	35%	24%		152%	2/11	15%	$7.52 ()
Roof, inverted	67%	-8%	8%	9%		48%	3/11	21%	$-0.19 ()
Sell Pattern	Average Win	Average Loss	Net	Annualized Net	Rank	No Stop Net	Win/Loss Samples	Win Loss	Average Expectancy (Rank)

Trading Broadening Tops: 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 broadening 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 7 shows the results for the four combinations of busted/non-busted trades and the resulting performance.

Buying non-busted patterns with a short-term (up to 3 months) duration from the trend start to the pattern's start results in better performance than longer terms.

Buying busted patterns shows better performance if the trend start to pattern start is long term (more than 6 months long).

Notice that non-busted buy patterns perform better than busted ones (compare the two rows). Again, don't buy a busted broadening top.

Moving Averages: 50- and 200-Day SMA

Table 7: Short (S) Medium (M) or Long (L) Trend Start and Performance
	Sell Non-Busted Pattern	Sell Busted Pattern
Buy non-busted pattern	S48% M41% L20%	S40% M35% L21%
Buy busted pattern	S13% M14% L17%	S10% M14% L20%

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 or below the 50-day simple moving average (SMA).

Broadening tops work best if the breakout price is above the 50-day SMA (in all four cells, the above number beats the below number). The best performance comes from non-busted buys which are above the 50-day SMA and accompany the sale of a non-busted pattern.

Table 8: Above (A) Below (B) 50-Day Simple Moving Average
	Sell Non-Busted Pattern	Sell Busted Pattern
Buy non-busted pattern	A35% B-7%	A30% B-8%
Buy busted pattern	A16% B13%	A16% B3%

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.

Buying non-busted patterns outperformed buying busted ones (compare the two rows). Buying a pattern with the breakout price below the 200-day SMA in all four cells resulted in better performance.

Selling First Bearish Chart Pattern

The prior discussion assumes you buy a broadening top (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 9: Above (A) Below (B) 200-Day Simple Moving Average
	Sell Non-Busted Pattern	Sell Busted Pattern
Buy non-busted pattern	A34% B49%	A29% B47%
Buy busted pattern	A14% B40%	A16% B25%

Table 10 shows the results sorted by the type of patterns involved (busted or non-busted). For example, if you buy a non-busted broadening top and sell the first non-busted chart pattern which comes along, you'd make 11% on average. Annualized, you'd make 25%. This compares to a 16% 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 broadening top and selling the first non-busted pattern which appears. That combination makes 25% annually, beating the 16% rate for selling designated patterns.

The worst performance comes from trading busted buy and sell patterns (0% per trade or 1% annually).

The lower half of the table shows the expectancy for the various combinations of busted and non-busted patterns. The best return comes from trading non-busted patterns (both buy and sale). They make $2.54 per trade, per share. The worst performance comes from trading busted patterns (both buys and sales). The other two cells are close to the best performance, which I find interesting. The results emphasize that avoiding busted patterns could be more profitable than trading them.

Bulkowski on Pattern Pairs: Broadening Tops