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: 12/8/2021.
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 an upward breakout from either a diamond top or a busted one (price breaks out downward, drops no more than 10%, reverses, and closes above the top of the diamond). Buy as price rises above the top of the diamond.
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).
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.
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 diamond 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 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 diamond tops and sold various non-busted patterns (ascending triangles, broadening tops, head-and-shoulders tops, and so on), I made an average of 39% ("Stop Loss Only" column) after having a stop loss order in place. Losses averaged 8%. 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, 8%, but losses climbed to 13%. If I didn't use any type of stop, the gain averaged 95% with losses averaging 30%.
The results show that trades which do not use a stop make the most money but losses are huge.
| 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%) | 4% (-6%) | 7% (-9%) | 8% (-13%) | 39% (-8%) | 95% (-30%) |
| Busted buys, non-busted sales | 1% (-6%) | 5% (-7%) | 10% (-11%) | 15% (-14%) | 15% (-9%) | 115% (-27%) |
| Non-busted buys, busted sales | 4% (-5%) | 4% (-6%) | 6% (-9%) | 8% (-13%) | 28% (-7%) | 88% (-24%) |
| Busted buys, busted sales | 1% (-6%) | 8% (-7%) | 13% (-11%) | 15% (-13%) | 16% (-8%) | 81% (-27%) |
According to the contest results, avoid trading using busted chart 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 20, 22, or 31 contests (up to 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 just 27% of the time or 6 of 22 contests when buying using a non-busted pattern and selling a busted pattern (compared to non-busted for both).
| Table 2: Busted or Non-Busted Contest Winners | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy non-busted pattern | N/A (benchmark) | 27% |
| Buy busted pattern | 19% | 10% |
Table 3 shows statistics I collected for diamond 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 chart pattern (after buying).
For example, if you were to buy the upward breakout from a diamond 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 net an average of 24% on the 98 (15 winners, 83 losers) trades. That's an average of 201% on your winners, 8% average loss on your losers. You'd find that only 15% of the trades made money but you'd gain an average of 17% per year (ranking 32nd 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 loss of $7.67 per share per trade which ranks 63rd where 1 is the best value. It suggests you'll have difficulty profiting from this pattern pair.
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.
| Table 3: Statistics for Diamond Tops | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Sell Pattern | Average Win | Average Loss | Net | Annualized Net | Rank | No Stop Net | Win/Loss Samples | Win Loss | Average Expectancy | Expectancy Rank |
| Broadening bottom | 201% | -8% | 24% | 17% | 32 | 88% | 15/83 | 15% | -$7.67 | 69 |
| Broadening top | 151% | -7% | 33% | 22% | 24 | 88% | 43/125 | 26% | $3.27 | 15 |
| Broadening formation, right-angled and ascending | 168% | -8% | 26% | 19% | 27 | 76% | 16/67 | 19% | $1.92 | 30 |
| Broadening formation, right-angled and descending | 547% | -8% | 80% | 50% | 6 | 109% | 10/53 | 16% | $2.20 | 24 |
| Broadening wedge, ascending | 214% | -8% | 73% | 47% | 10 | 107% | 19/33 | 37% | $4.60 | 8 |
| Broadening wedge, descending | 162% | -9% | 27% | 16% | 36 | 70% | 11/42 | 21% | $1.03 | 40 |
| Bump-and-run reversal top | 196% | -8% | 34% | 42% | 13 | 77% | 36/140 | 20% | -$2.44 | 64 |
| Diamond bottom | 73% | -8% | 16% | 45% | 6/14 | 30% | ||||
| Diamond top | 287% | -7% | 63% | 56% | 4 | 143% | 22/70 | 24% | $1.32 | 36 |
| Adam & Adam double top | 526% | -7% | 75% | 48% | 7 | 163% | 56/305 | 16% | $3.22 | 16 |
| Adam & Eve double top | 141% | -7% | 15% | 12% | 43 | 119% | 27/150 | 15% | $2.44 | 21 |
| Eve & Adam double top | 223% | -8% | 30% | 17% | 33 | 87% | 32/166 | 16% | $3.50 | 13 |
| Eve & Eve double top | 569% | -7% | 92% | 70% | 2 | 158% | 41/197 | 17% | $0.45 | 46 |
| Falling wedge | 156% | -9% | 21% | 17% | 34 | 30% | 8/36 | 18% | -$1.65 | 61 |
| Head-and-shoulders top | 148% | -8% | 17% | 15% | 37 | 96% | 106/574 | 16% | -$0.87 | 58 |
| 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 | 456% | -8% | 69% | 65% | 3 | 124% | 19/96 | 17% | -$0.18 | 52 |
| Rectangle top | 289% | -7% | 40% | 29% | 16 | 107% | 16/85 | 16% | $0.84 | 41 |
| Rising wedge | 235% | -8% | 24% | 21% | 26 | 81% | 24/159 | 13% | -$2.54 | 65 |
| Rounding top | 197% | -9% | 15% | 11% | 46 | 73% | 12/90 | 12% | -$10.59 | 71 |
| Ascending scallop | 486% | -6% | 82% | 55% | 5 | 120% | 7/32 | 18% | $2.06 | 28 |
| Descending scallop | 449% | -8% | 49% | 48% | 8 | 88% | 33/233 | 12% | -$0.74 | 56 |
| Scallop, inverted and ascending | 487% | -6% | 85% | 131% | 5/22 | 19% | ||||
| Scallop, descending and inverted | 255% | -8% | 45% | 30% | 15 | 73% | 34/135 | 20% | $0.21 | 48 |
| Triangle, ascending | 216% | -8% | 21% | 22% | 23 | 64% | 11/73 | 13% | -$0.40 | 54 |
| Triangle, descending | 43% | -8% | -4% | -6% | 70 | 33% | 7/94 | 7% | -$4.47 | 67 |
| Triangle, symmetrical | 138% | -8% | 17% | 18% | 30 | 61% | 51/248 | 17% | -$0.81 | 57 |
| Triple top | 284% | -8% | 41% | 27% | 18 | 107% | 79/394 | 17% | $1.06 | 39 |
| Rectangle bottom | 122% | -8% | 1% | 1% | 68 | 28% | 5/66 | 7% | -$6.99 | 68 |
| 3 falling peaks | 268% | -7% | 45% | 28% | 17 | 94% | 96/407 | 19% | $0.39 | 47 |
| Roof | 90% | -6% | 20% | 15% | 39 | 40% | 8/22 | 27% | $2.34 | 22 |
| Roof, inverted | 687% | -8% | 86% | 48% | 9 | 144% | 5/32 | 14% | $1.72 | 33 |
| 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 (busts a downward breakout from a diamond top in a bull market), buy. Sell after a downward breakout from the target chart pattern.
Table 4 shows the performance of busted diamond tops 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 diamond (after buying).
A busted diamond top has a downward breakout but price drops no more than 10% before reversing and moving above the top of the diamond. Buy when price moves at least a penny above the top of the busted diamond. Sell after price drops at least a penny below the target chart pattern.
For example, buying a diamond 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 diamond or the opening price) and selling after the downward breakout from a broadening top shows winners averaging gains of 122%. Losses average 8%, for a net of 7%. Only 66 trades occurred with a win/loss ratio of 14%. This scenario ranks the annualized net gain as 50th among the four tables. If you traded this as a buy-and-hold position, meaning no stops were used, the net gain climbed to 69%. Expectancy was $1.29 per share, ranking 38th 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 | 142% | -8% | 35% | 74% | 6/15 | 29% | ||||
| Broadening top | 122% | -8% | 10% | 7% | 50 | 69% | 9/57 | 14% | $1.29 | 38 |
| Broadening formation, right-angled and ascending | 75% | -8% | 12% | 38% | 6/19 | 24% | ||||
| Broadening formation, right-angled and descending | 33% | -8% | -2% | 135% | 4/20 | 17% | ||||
| Broadening wedge, ascending | 35% | -8% | -6% | 147% | 1/16 | 6% | ||||
| Broadening wedge, descending | 184% | -9% | 15% | 144% | 2/14 | 13% | ||||
| Bump-and-run reversal top | 56% | -10% | 8% | 6% | 57 | 84% | 15/41 | 27% | $2.11 | 25 |
| Diamond bottom | None | -12% | -12% | 47% | 0/5 | 0% | ||||
| Diamond top | 65% | -9% | 11% | 79% | 8/21 | 28% | ||||
| Adam & Adam double top | 194% | -8% | 25% | 15% | 38 | 183% | 25/130 | 16% | $4.65 | 7 |
| Adam & Eve double top | 243% | -9% | 47% | 23% | 22 | 221% | 13/45 | 22% | $6.39 | 2 |
| Eve & Adam double top | 110% | -8% | 9% | 5% | 59 | 155% | 10/58 | 15% | $0.83 | 42 |
| Eve & Eve double top | 169% | -8% | 34% | 24% | 21 | 85% | 22/71 | 24% | $5.73 | 4 |
| Falling wedge | 103% | -8% | 4% | 52% | 2/16 | 11% | ||||
| Head-and-shoulders top | 139% | -8% | 22% | 14% | 40 | 98% | 56/217 | 21% | $3.68 | 12 |
| 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 | 202% | -7% | 29% | 18% | 31 | 57% | 6/29 | 17% | $3.91 | 10 |
| Rectangle top | 356% | -10% | 42% | 22% | 25 | 164% | 5/30 | 14% | $9.46 | 1 |
| Rising wedge | 60% | -8% | 11% | 7% | 49 | 73% | 21/51 | 29% | $3.27 | 14 |
| Rounding top | 107% | -9% | 20% | 10% | 48 | 145% | 11/34 | 24% | $2.00 | 29 |
| Ascending scallop | 91% | -13% | 5% | 110% | 3/15 | 17% | ||||
| Descending scallop | 47% | -10% | 2% | 1% | 64 | 39% | 19/76 | 20% | $1.31 | 37 |
| Scallop, inverted and ascending | 66% | -8% | -1% | 230% | 1/9 | 10% | ||||
| Scallop, descending and inverted | 81% | -11% | 2% | 1% | 66 | 93% | 10/62 | 14% | -$0.34 | 53 |
| Triangle, ascending | 57% | -7% | 5% | 36% | 5/21 | 19% | ||||
| Triangle, descending | 15% | -9% | -7% | 259% | 2/21 | 9% | ||||
| Triangle, symmetrical | 104% | -8% | 20% | 13% | 42 | 63% | 29/86 | 25% | $3.96 | 9 |
| Triple top | 95% | -8% | 9% | 6% | 56 | 91% | 26/131 | 17% | $1.91 | 32 |
| Rectangle bottom | 21% | -9% | -1% | 10% | 5/15 | 25% | ||||
| 3 falling peaks | 98% | -11% | 7% | 4% | 63 | 172% | 35/176 | 17% | $2.06 | 27 |
| Roof | 100% | -9% | 15% | 117% | 3/11 | 21% | ||||
| Roof, inverted | 53% | -9% | 4% | 224% | 4/16 | 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 5 shows the performance statistics for this setup (buying a normal diamond 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 chart pattern (after buying).
For example, buying a diamond top with an upward breakout in a bull market and selling a busted broadening top shows winning trades making an average of 29%. Losing trades lost 7%, giving a net gain of 1%. The annualized gain is 1% in this case, giving the setup a rank of 65th (where 1 is best). If you traded this without a stop, the net gain climbed to 120%. Of the stocks I looked at, I found 71 trades with 24% of them winning. Expectancy was a $2.10 per share, ranking 26th 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 | 26% | -8% | -6% | -7% | 71 | 32% | 2/28 | 7% | -$2.24 | 63 |
| Broadening top | 29% | -7% | 1% | 1% | 65 | 120% | 17/54 | 24% | $2.10 | 26 |
| Broadening formation, right-angled and ascending | 375% | -7% | 57% | 41% | 14 | 110% | 6/30 | 17% | $0.05 | 49 |
| Broadening formation, right-angled and descending | 27% | -7% | 0% | 30% | 5/19 | 21% | ||||
| Broadening wedge, ascending | 103% | -7% | 19% | 59% | 3/10 | 23% | ||||
| Broadening wedge, descending | 53% | -8% | 1% | 53% | 4/22 | 15% | ||||
| Bump-and-run reversal bottom | 87% | -8% | 10% | 30% | 4/17 | 19% | ||||
| Cup with handle | 30% | -7% | -2% | 41% | 2/15 | 12% | ||||
| Diamond bottom | 14% | -7% | -5% | 69% | 2/16 | 11% | ||||
| Diamond top | 95% | -8% | 8% | 7% | 55 | 56% | 5/28 | 15% | -$0.46 | 55 |
| Adam & Adam double bottom | 106% | -8% | 6% | 4% | 62 | 130% | 15/112 | 12% | $1.49 | 35 |
| Adam & Eve double bottom | 416% | -8% | 73% | 46% | 11 | 147% | 11/47 | 19% | -$1.85 | 62 |
| Eve & Adam double bottom | 1125% | -7% | 189% | 86% | 1 | 316% | 9/43 | 17% | $5.60 | 5 |
| Eve & Eve double bottom | 55% | -7% | -1% | -1% | 69 | 5% | 5/46 | 10% | -$8.27 | 70 |
| Falling wedge | 218% | -7% | 21% | 18% | 29 | 94% | 4/28 | 13% | $0.01 | 50 |
| Head-and-shoulders bottom | 209% | -8% | 29% | 25% | 19 | 71% | 22/108 | 17% | $1.63 | 34 |
| 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 | 103% | -6% | 12% | 82% | 2/10 | 17% | ||||
| Rectangle top | 33% | -7% | 1% | 1% | 67 | 52% | 9/36 | 20% | $3.03 | 17 |
| Rising wedge | 82% | -7% | -4% | 101% | 1/25 | 4% | ||||
| Round bottom | 29% | -9% | 0% | 4% | 2/7 | 22% | ||||
| Rounding top | 121% | -10% | 1% | 26% | 1/11 | 8% | ||||
| Ascending scallop | 163% | -7% | 26% | 25% | 20 | 90% | 8/33 | 20% | $2.61 | 18 |
| Descending scallop | 51% | -9% | -5% | 133% | 1/13 | 7% | ||||
| Scallop, inverted and ascending | 66% | -7% | 7% | 7% | 54 | 69% | 13/55 | 19% | $0.82 | 43 |
| Scallop, descending and inverted | 109% | -7% | 13% | 10% | 47 | 54% | 6/28 | 18% | -$0.02 | 51 |
| Triangle, ascending | 108% | -9% | 7% | 5% | 60 | 33% | 5/33 | 13% | $1.92 | 31 |
| Triangle, descending | 54% | -8% | 4% | 4% | 61 | 51% | 9/36 | 20% | -$1.09 | 59 |
| Triangle, symmetrical | 433% | -8% | 79% | 45% | 12 | 149% | 31/127 | 20% | $2.53 | 20 |
| Triple bottom | 134% | -7% | 21% | 13% | 41 | 66% | 34/134 | 20% | -$2.56 | 66 |
| Rectangle bottom | 126% | -7% | 6% | 7% | 51 | 104% | 3/28 | 10% | -$1.51 | 60 |
| 3 rising valleys | 189% | -7% | 26% | 18% | 28 | 77% | 19/92 | 17% | $0.70 | 45 |
| Roof | 87% | -7% | 40% | 66% | 3/3 | 50% | ||||
| Roof, inverted | 88% | -5% | 28% | 108% | 6/11 | 35% | ||||
| 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 diamond tops as the entry signal and various busted chart patterns as the exit signal. A stop loss order was used and priced a penny below the bottom of the chart pattern (after buying).
The associated figure shows the setup.
For example, buying a busted diamond top and selling a busted broadening top made 95% from the winners, lost 10% on the losers for a net gain of 17%. Annualized, it was 7%. The net gain placed the performance of this setup at 53, where 1 is best. Removing stops from the trades allowed them to make 87%. Only 35 trades were taken and 26% of them were winners. Expectancy was a gain of $2.59 per share, ranking 19th among the four tables.
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 | 118% | -10% | 6% | 48% | 1/7 | 13% | ||||
| Broadening top | 95% | -10% | 17% | 7% | 53 | 87% | 9/26 | 26% | $2.59 | 19 |
| Broadening formation, right-angled and ascending | 12% | -8% | -6% | 143% | 1/11 | 8% | ||||
| Broadening formation, right-angled and descending | None | -7% | -7% | -7% | 0/10 | 0% | ||||
| Broadening wedge, ascending | 89% | -13% | 21% | 106% | 3/6 | 33% | ||||
| Broadening wedge, descending | 33% | -8% | -1% | 36% | 2/10 | 17% | ||||
| Bump-and-run reversal bottom | 31% | -8% | -3% | 0% | 1/8 | 11% | ||||
| Cup with handle | 6% | -8% | -5% | 68% | 1/4 | 20% | ||||
| Diamond bottom | 95% | -7% | 3% | 25% | 1/9 | 10% | ||||
| Diamond top | 84% | -6% | 11% | 25% | 3/13 | 19% | ||||
| Adam & Adam double bottom | 325% | -8% | 41% | 17% | 35 | 259% | 8/46 | 15% | $4.67 | 6 |
| Adam & Eve double bottom | 221% | -9% | 52% | 98% | 5/14 | 26% | ||||
| Eve & Adam double bottom | 356% | -7% | 34% | 114% | 2/16 | 11% | ||||
| Eve & Eve double bottom | None | -8% | -8% | 30% | 0/12 | 0% | ||||
| Falling wedge | 35% | -14% | 8% | 72% | 5/6 | 45% | ||||
| Head-and-shoulders bottom | 163% | -8% | 25% | 12% | 44 | 65% | 11/46 | 19% | $3.71 | 11 |
| 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 | 3% | -8% | -6% | 29% | 1/8 | 11% | ||||
| Rectangle top | 73% | -7% | 1% | 54% | 2/19 | 10% | ||||
| Rising wedge | 155% | -8% | 5% | 120% | 1/11 | 8% | ||||
| Round bottom | None | -5% | -5% | 56% | 0/4 | 0% | ||||
| Ascending scallop | 114% | -9% | 35% | 41% | 5/9 | 36% | ||||
| Descending scallop | 18% | -6% | -2% | 56% | 2/8 | 20% | ||||
| Scallop, inverted and ascending | 49% | -11% | -6% | 87% | 2/24 | 8% | ||||
| Scallop, descending and inverted | 112% | -9% | 13% | 41% | 2/9 | 18% | ||||
| Triangle, ascending | 151% | -9% | 11% | 34% | 2/14 | 13% | ||||
| Triangle, descending | 54% | -8% | 5% | 31% | 3/12 | 20% | ||||
| Triangle, symmetrical | 108% | -8% | 9% | 7% | 52 | 91% | 11/61 | 15% | $0.79 | 44 |
| Triple bottom | 100% | -9% | 18% | 11% | 45 | 62% | 15/46 | 25% | $6.13 | 3 |
| Rectangle bottom | 512% | -9% | 78% | 96% | 2/10 | 17% | ||||
| 3 rising valleys | 83% | -9% | 14% | 5% | 58 | 71% | 15/45 | 25% | $2.28 | 23 |
| Roof, inverted | 167% | -7% | 32% | 72% | 2/7 | 22% | ||||
| 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 chart pattern. 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. Busted patterns do best using a medium (3 to 6 months) duration from the trend start.
| Table 7: Short (S) Medium (M) or Long (L) Trend Start and Performance | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy non-busted pattern | S58% M6% L28% | S51% M2% L14% |
| Buy busted pattern | S18% M52% L2% | S23% M59% L-1% |
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 diamond tops when the breakout price is below the 50-day SMA. Buy busted diamond tops if the buy price was above the SMA.
| Table 8: Above (A) Below (B) 50-Day Simple Moving Average | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy non-busted pattern | A31% B135% | A24% B97% |
| Buy busted pattern | A16% B5% | A17% B4% |
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.
Diamond tops worked best if the breakout price was below the 200-day SMA.
| Table 9: Above (A) Below (B) 200-Day Simple Moving Average | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy non-busted pattern | A13% B169% | A15% B93% |
| Buy busted pattern | A15% B16% | A16% B16% |
The prior discussion assumes you buy a diamond 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 10 shows the results sorted by the type of patterns involved (busted or non-busted). For example, if you buy a non-busted diamond top and sell the first non-busted chart pattern which comes along, you'd make 8% on average. Annualized, you'd make 26%. This compares to a 30% 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).
In three of four categories (table cells), selling a designated chart pattern will work better than selling the first bearish pattern. The only configuration where selling the first pattern works better is to buy a busted diamond top and sell the first non-busted pattern which appears. That makes 17% annually versus 10% when selling a designated pattern (like waiting for a double top to appear).
The bottom half of the table shows expectancy for the four combinations. The highest expectancy ($2.32) associates with buying a busted diamond top and selling non-busted patterns.
| Table 10: Selling the First Bearish Pattern (Annualized) | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy non-busted pattern | 8% (26% v 30%) | 5% (18% v 21%) |
| Buy busted pattern | 7% (17% v 10%) | -1% (-3% v 9%) |
| Expectancy (Below) | ||
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy non-busted pattern | $1.89 | $0.05 |
| Buy busted pattern | $2.32 | $-0.86 |
-- Thomas Bulkowski
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