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%
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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: 11/23/21.
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 cup (or cups) in this article, I'm referring to a cup with handle chart pattern.
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 upward breakout from a cup. Buy as price rises above the right cup lip.
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).
Buy a cup and 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.
Buy a cup and sell a...
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 cup. 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 cups and sold various non-busted patterns (broadening bottoms, broadening tops, head-and-shoulders tops, and so on), I made an average of 65% ("Stop Loss Only" column) after having a stop loss order in place. Losses averaged 23%. 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, 27%, but losses climbed to 11%. If I didn't use any type of stop, the gain averaged 113% 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 sales | 8% (-5%) | 12% (-7%) | 20% (-9%) | 27% (-11%) | 65% (-23%) | 113% (-33%) |
| Busted sales | 7% (-5%) | 11% (-7%) | 19% (-9%) | 26% (-12%) | 62% (-22%) | 113% (-30%) |
I compared the performance of selling busted and non-busted patterns in 22 contests (22 different chart pattern types, depending on which apply). I found that busted patterns outperformed non-busted ones 59% of the time.
Table 2 shows statistics I collected for cups 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 cup (after buying).
For example, if you were to buy the upward breakout from a cup 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 64% on the 228 (83 winners, 145 losers) trades. That's an average of 218% on your winners, 25% average loss on your losers, and holding onto the position an average of 3.5 years. You'd find that only 36% of the trades made money but you'd gain an average of 18% per year (ranking 21st 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 88% per trade.
The expectancy averages a gain $3.98 per share per trade which ranks 46th 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 tables (tables 2 and 3) shown below.
| Table 2: Statistics for cups | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 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% | -25% | 64% | 18% | 21 | 88% | 83/145 | 36% | $3.98 | 46 |
| Broadening top | 212% | -23% | 92% | 25% | 5 | 133% | 207/214 | 49% | $13.24 | 8 |
| Broadening formation, right-angled and ascending | 135% | -22% | 41% | 13% | 43 | 62% | 97/147 | 40% | $2.24 | 53 |
| Broadening formation, right-angled and descending | 169% | -25% | 61% | 18% | 21 | 66% | 65/82 | 44% | $4.27 | 43 |
| Broadening wedge, ascending | 175% | -22% | 67% | 25% | 5 | 124% | 67/81 | 45% | $6.36 | 28 |
| Broadening wedge, descending | 132% | -21% | 27% | 10% | 52 | 41% | 37/81 | 31% | $0.22 | 57 |
| Bump-and-run reversal top | 130% | -23% | 53% | 21% | 11 | 91% | 296/301 | 50% | $6.73 | 27 |
| Diamond bottom | 148% | -26% | 54% | 16% | 31 | 75% | 30/35 | 46% | $3.72 | 47 |
| Diamond top | 128% | -22% | 45% | 16% | 31 | 75% | 94/116 | 45% | $5.69 | 31 |
| Adam & Adam double top | 295% | -23% | 115% | 27% | 3 | 188% | 375/487 | 44% | $19.67 | 1 |
| Adam & Eve double top | 289% | -25% | 94% | 25% | 5 | 168% | 181/295 | 38% | $13.17 | 9 |
| Eve & Adam double top | 238% | -24% | 75% | 21% | 11 | 150% | 196/321 | 38% | $10.66 | 13 |
| Eve & Eve double top | 239% | -23% | 78% | 23% | 8 | 127% | 221/349 | 39% | $16.43 | 5 |
| Falling wedge | 111% | -24% | 15% | 5% | 59 | 21% | 39/97 | 29% | -$2.54 | 61 |
| Head-and-shoulders top | 198% | -22% | 71% | 21% | 11 | 136% | 720/980 | 42% | $9.04 | 17 |
| 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 | 103% | -21% | 35% | 13% | 43 | 54% | 151/181 | 45% | $4.73 | 37 |
| Rectangle top | 121% | -23% | 33% | 11% | 51 | 72% | 105/165 | 39% | $1.48 | 56 |
| Rising wedge | 156% | -24% | 57% | 18% | 21 | 106% | 226/276 | 45% | $4.98 | 36 |
| Rounding top | 188% | -26% | 54% | 15% | 38 | 105% | 107/180 | 37% | $2.88 | 49 |
| Ascending scallop | 92% | -20% | 39% | 15% | 38 | 94% | 79/70 | 53% | $4.51 | 39 |
| Descending scallop | 167% | -23% | 53% | 16% | 31 | 99% | 378/565 | 40% | $4.49 | 40 |
| Scallop, inverted and ascending | 346% | -25% | 87% | 27% | 3 | 136% | 27/62 | 30% | $13.55 | 6 |
| Scallop, descending and inverted | 183% | -22% | 53% | 18% | 21 | 87% | 206/357 | 37% | $2.79 | 50 |
| Triangle, ascending | 140% | -23% | 42% | 13% | 43 | 84% | 109/163 | 40% | $4.30 | 42 |
| Triangle, descending | 96% | -24% | 16% | 7% | 55 | 41% | 100/199 | 33% | -$0.16 | 58 |
| Triangle, symmetrical | 193% | -25% | 63% | 18% | 21 | 100% | 313/468 | 40% | $7.19 | 25 |
| Triple top | 208% | -24% | 75% | 21% | 11 | 123% | 529/711 | 43% | $9.54 | 16 |
| Rectangle bottom | 98% | -25% | 8% | 3% | 60 | 16% | 51/137 | 27% | -$1.03 | 60 |
| 3 falling peaks | 223% | -23% | 72% | 21% | 11 | 126% | 609/962 | 39% | $7.65 | 23 |
| Roof | 163% | -18% | 54% | 20% | 16 | 96% | 36/55 | 40% | $4.00 | 45 |
| Roof, inverted | 134% | -26% | 46% | 16% | 31 | 98% | 57/70 | 45% | $8.14 | 20 |
| 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 3 shows the performance statistics for this setup (buying a cup and selling only after a busted chart pattern appears). A stop loss order was used and priced a penny below the bottom of the cup (after buying).
For example, buying a cup with an upward breakout in a bull market and selling a busted broadening bottom shows winning trades making an average of 168%. Losing trades lost 23%, giving a net of 60%. The annualized gain is 14%, giving the setup a rank of 41 (where 1 is best). If you traded this without a stop, the net gain climbed to 90%. Of the stocks I looked at, I found 69 trades with 43% of them winning. Expectancy was $9.62 per share, ranking 15th where 1 is best.
Trades with sample counts below 30 are not ranked.
| Table 3: 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 | 168% | -23% | 60% | 14% | 41 | 90% | 30/39 | 43% | $9.62 | 15 |
| Broadening top | 184% | -23% | 70% | 18% | 21 | 124% | 91/111 | 45% | $7.70 | 22 |
| Broadening formation, right-angled and ascending | 154% | -24% | 52% | 12% | 49 | 80% | 30/41 | 42% | $5.54 | 35 |
| Broadening formation, right-angled and descending | 108% | -20% | 24% | 7% | 55 | 42% | 29/55 | 35% | $2.02 | 55 |
| Broadening wedge, ascending | 80% | -20% | 19% | 7% | 55 | 62% | 13/20 | 39% | $4.09 | 44 |
| Broadening wedge, descending | 161% | -24% | 50% | 13% | 43 | 75% | 26/39 | 40% | $4.47 | 41 |
| Bump-and-run reversal bottom | 208% | -21% | 60% | 19% | 20 | 97% | 19/35 | 35% | $2.06 | 54 |
| Cup with handle | 174% | -23% | 76% | 22% | 10 | 84% | 17/17 | 50% | $7.63 | 24 |
| Diamond bottom | 187% | -24% | 58% | 18% | 21 | 91% | 19/30 | 39% | $10.28 | 14 |
| Diamond top | 307% | -22% | 132% | 32% | 1 | 197% | 29/33 | 47% | $19.24 | 2 |
| Adam & Adam double bottom | 235% | -23% | 67% | 15% | 38 | 150% | 104/193 | 35% | $12.97 | 10 |
| Adam & Eve double bottom | 174% | -25% | 40% | 10% | 52 | 103% | 59/122 | 33% | $5.60 | 33 |
| Eve & Adam double bottom | 458% | -23% | 144% | 30% | 2 | 221% | 45/85 | 35% | $17.70 | 4 |
| Eve & Eve double bottom | 266% | -23% | 79% | 18% | 21 | 102% | 51/94 | 35% | $11.61 | 12 |
| Falling wedge | 79% | -24% | 2% | 1% | 61 | 99% | 19/56 | 25% | -$0.72 | 59 |
| Head-and-shoulders bottom | 144% | -22% | 39% | 10% | 52 | 76% | 119/206 | 37% | $4.64 | 38 |
| 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 | 118% | -23% | 35% | 13% | 43 | 57% | 27/39 | 41% | $12.44 | 11 |
| Rectangle top | 129% | -20% | 44% | 14% | 41 | 75% | 61/81 | 43% | $5.62 | 32 |
| Rising wedge | 165% | -21% | 53% | 16% | 31 | 121% | 32/49 | 40% | $2.27 | 52 |
| Round bottom | 83% | -31% | 19% | 78% | 7/9 | 44% | ||||
| Rounding top | 134% | -14% | 48% | 13% | 43 | 48% | 13/18 | 42% | $2.36 | 51 |
| Ascending scallop | 142% | -20% | 57% | 20% | 16 | 72% | 57/63 | 48% | $5.58 | 34 |
| Descending scallop | 165% | -25% | 55% | 16% | 31 | 90% | 22/30 | 42% | $8.39 | 19 |
| Scallop, inverted and ascending | 225% | -21% | 90% | 23% | 8 | 142% | 86/105 | 45% | $8.87 | 18 |
| Scallop, descending and inverted | 170% | -24% | 65% | 16% | 31 | 84% | 30/36 | 45% | $5.75 | 30 |
| Triangle, ascending | 164% | -25% | 58% | 18% | 21 | 82% | 47/61 | 44% | $6.16 | 29 |
| Triangle, descending | 116% | -22% | 20% | 7% | 55 | 65% | 33/76 | 30% | $3.01 | 48 |
| Triangle, symmetrical | 172% | -22% | 68% | 17% | 30 | 146% | 181/211 | 46% | $7.81 | 21 |
| Triple bottom | 230% | -23% | 76% | 20% | 16 | 140% | 167/259 | 39% | $18.76 | 3 |
| Rectangle bottom | 212% | -27% | 44% | 12% | 49 | 53% | 21/49 | 30% | $6.74 | 26 |
| 3 rising valleys | 237% | -22% | 77% | 20% | 16 | 133% | 115/188 | 38% | $13.36 | 7 |
| Roof | 138% | -24% | 39% | 98% | 10/16 | 38% | ||||
| Roof, inverted | 145% | -24% | 18% | 38% | 6/18 | 25% | ||||
| 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 cup. 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 busted/non-busted sales 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. Selling a busted pattern works better than selling non-busted ones except for the medium term.
| Table 4: Short (S) Medium (M) or Long (L) Trend Start and Performance | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy non-busted pattern | S95% M70% L39% | S107% M42% L51% |
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. However, I didn't find any cups with the breakout price below the 50-day SMA, so I don't show any results.
Table 5 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. Keep in mind that sample counts were few (if you consider 130 as being "few").
| Table 5: Above (A) Below (B) 200-Day Simple Moving Average | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy non-busted pattern | A66% B58% | A63% B48% |
The prior discussion assumes you buy a cup 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 6 shows the results sorted by the type of patterns involved (busted or non-busted). For example, if you buy a cup and sell the first non-busted chart pattern which comes along, you'd make 30% on average. Annualized, you'd make 32%. This compares to a 20% 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 busted pattern which appears does best.
The bottom half of the table shows expectancy. If you sell the first pattern which appears, trading busted patterns perform best.
| Table 6: Selling the First Bearish Pattern (Annualized) | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy non-busted pattern | 30% (32% v 20%) | 34% (23% v 17%) |
| Expectancy (Below) | ||
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy non-busted pattern | $6.35 | $12.74 |
-- Thomas Bulkowski
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