As of 04/18/2024   Indus: 37,775 +22.07 +0.1%     Trans: 14,947 -39.62 -0.3%     Utils: 860 +6.95 +0.8%     Nasdaq: 15,602 -81.87 -0.5%     S&P 500: 5,011 -11.09 -0.2%	YTD  +0.2%   -6.0%   -2.4%    +3.9%    +5.1%	Targets    Overview: 04/12/2024     39,800 or 37,150 by 05/01/2024   16,200 or 15,000 by 05/01/2024   885 or 850 by 05/01/2024   16,700 or 15,800 by 05/01/2024   5,250 or 5,025 by 05/01/2024
Chart Pattern Indicator: on 4/1/24

As of 04/18/2024   Indus: 37,775 +22.07 +0.1%     Trans: 14,947 -39.62 -0.3%     Utils: 860 +6.95 +0.8%     Nasdaq: 15,602 -81.87 -0.5%     S&P 500: 5,011 -11.09 -0.2%	YTD  +0.2%   -6.0%   -2.4%    +3.9%    +5.1%
Targets    Overview: 04/12/2024     39,800 or 37,150 by 05/01/2024   16,200 or 15,000 by 05/01/2024   885 or 850 by 05/01/2024   16,700 or 15,800 by 05/01/2024   5,250 or 5,025 by 05/01/2024
Chart Pattern Indicator: on 4/1/24

Bulkowski on Pattern Pairs: Descending Scallops

Initial release: 12/2/2021.

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.

• Summary
• Entry and Exit Conditions
• Stops
• Busted Patterns
• Results: Non-Busted Buy, Non-Busted Sale
• Results: Busted Buy, Non-Busted Sale
• Results: Non-Busted Buy, Busted Sale
• Results: 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 Descending Scallops: 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 either a descending scallop or a busted one (price breaks out downward, drops no more than 10%, reverses, and closes above the top of the scallop). Buy as price rises above the top of the scallop.

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).

• 1. Buy a busted descending scallop, sell an ascending scallop (60%)
• 2. Buy a busted descending scallop, sell an ascending broadening wedge (52%)
• 3. Buy a busted descending scallop, sell a busted symmetrical triangle (47%)
• 4. Buy a busted descending scallop, sell a head-and-shoulders top (37%)
• 5. Buy a busted descending scallop, sell a busted triple bottom (32%)

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. Sell a busted inverted and ascending scallop ($33.86)
• 2. Buy a descending scallop, sell an ascending scallop ($28.66)
• 3. Buy a descending scallop, sell a broadening formation, right-angled and descending ($27.26)
• 4. Buy a descending scallop, sell a head-and-shoulders top ($18.95)
• 5. Sell a busted complex head-and-shoulders bottom ($18.87)

Trading using a busted chart pattern often can result in better performance than using non-busted patterns (based on contests).

To improve performance, try these tips.

• Table 7: Buy descending scallops with a short-term (up to 3 months) inbound price trend.
• Table 8: Buy non-busted descending scallops when the breakout price is above the 50-day SMA. Buy busted descending scallops if the buy price was below the SMA.
• Table 9: Descending scallops worked best if the breakout price was below the 200-day SMA whenever a busted pattern (either buy or sell) was involved.

Trading Descending Scallops: 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 descending scallop 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.

• Descending scallops provided the buy signal.
• No commissions or fees were included.
• Entry: Place a buy order a penny above the top of the chart pattern. If the stock gapped open higher, then enter at the open.
• Busted patterns included.
• Stop loss: A penny below the bottom of the descending scallop 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.
• 334 stocks tested. The first chart pattern appeared in August 1991 and the last in November 2018, giving me 22,702 trades.
• Bear market excluded. If the breakout from the chart pattern 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 Descending Scallops: Stops

I used a stop loss order set a penny below the bottom of the chart pattern. 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 descending scallops and sold various non-busted patterns (ascending triangles, broadening tops, head-and-shoulders tops, and so on), I made an average of 26% ("Stop Loss Only" column) after having a stop loss order in place. Losses averaged 20%. Replacing the stop loss with a 10% trailing stop cut the gain to 5% but also trimmed the average loss to 6%. Using a 25% trailing stop allowed me to keep more money, 9%, but losses climbed to 14%. If I didn't use any type of stop, the gain averaged 85% with losses averaging 34%.

The results show that:

• Trades which do not use a stop make the most money but losses are huge.
• Non-busted buys work best for 10% and 15% trailing stops, with busted buys outperforming when using 20% and 25% trailing stops as well as "stop loss only" and "no stop" categories.

Trading Descending Scallops: Busted Patterns

Trading using busted chart patterns can improve results than using non-busted patterns.

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 the most (74% of the time or 23 of 31 contests) when buying using a busted pattern and selling a non-busted pattern (compared to non-busted for both).

Trading Descending Scallops: Non-busted Buy, Non-Busted Sale

Table 3 shows statistics I collected for descending scallops 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 scallop (after buying).

For example, if you were to buy the upward breakout from a descending scallop 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 net an average of 6% on the 115 (24 winners, 91 losers) trades. That's an average of 104% on your winners, 20% average loss on your losers. You'd find that only 21% of the trades made money but you'd gain an average of 3% per year (ranking 97th 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 31% per trade.

The expectancy averages $0.41 per share per trade which ranks 88th where 1 is the best value.

Notes: The rank is based on the net gain for all four performance tables (tables 3 to 6) shown below. Trades with sample counts below 30 are not ranked.

Trading Descending Scallops: Busted Buy, Non-Busted Sale

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

Table 4 shows the performance of busted scallops 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 scallop (after buying).

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

For example, buying a descending scallop with a busted downward breakout in a bull market (the entry price is really the higher of a penny above the top of the scallop or the opening price) and selling after the downward breakout from a broadening bottom shows winners averaging gains of 201%. Losses average 13%, for a net of 28%. Only 110 trades occurred with a win/loss ratio of 19%. This scenario ranks the annualized net gain as 37th among the four tables. If you traded this as a buy-and-hold position, meaning no stops were used, the net gain climbed to 97%. Expectancy was a loss of $0.23 per share, ranking 96th where 1 is best. It suggests you will have difficulty making money trading this pair.

Trades with sample counts below 30 are not ranked.

Trading Descending Scallops: 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 5 shows the performance statistics for this setup (buying a normal descending scallop and selling only after a busted chart pattern appears). A stop loss order was used and priced a penny below the bottom of the scallop (after buying).

For example, buying a descending scallop with an upward breakout in a bull market and selling a busted broadening bottom shows winning trades making an average of 271%. Losing trades lost 19%, giving a net gain of 73%. The annualized gain is 26% in this case, giving the setup a rank of 7th (where 1 is best). If you traded this without a stop, the net gain climbed to 115%. Of the stocks I looked at, I found 44 trades with 32% of them winning. Expectancy was a $2.33 per share, ranking 66th where 1 is best.

Trades with sample counts below 30 are not ranked.

Trading Descending Scallops: Busted Buy, Busted Sale

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

The associated figure shows the setup.

For example, buying a busted descending scallop and selling a busted broadening bottom (first data line in the table) made 85% from the winners, lost 14% on the losers for a net gain of 13%. Annualized, it was 5%. The net gain placed the performance of this setup at 87th, where 1 is best. Removing stops from the trades allowed them to make 53%. Only 44 trades were taken and 27% of them were winners. Expectancy was a gain of $1.41 per share, ranking 82nd among the four tables.

Trades with sample counts below 30 are not ranked.

Trading Descending Scallops: 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 scallop. 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.

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 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).

Buy non-busted descending scallops when the breakout price is above the 50-day SMA. Buy busted descending scallops if the buy price was below the SMA.

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.

Descending scallops worked best if the breakout price was below the 200-day SMA whenever a busted pattern (either buy or sell) was involved.

Selling First Bearish Chart Pattern

The prior discussion assumes you buy a descending scallop (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 descending scallop and sell the first non-busted chart pattern which comes along, you'd make 8% on average. Annualized, you'd make 20%. This compares to an 11% 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 bearish pattern works best if the sale pattern is not busted. Selling designated patterns (like waiting for a busted double bottom) works best if the sale pattern is busted.

The bottom half of the table shows expectancy for the four combinations. The highest expectancy ($3.39) associates with buying a busted descending scallop and selling the first non-busted pattern which appears.

-- Thomas Bulkowski

See Also

• More about descending scallops
• 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?

 

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