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.
If you see EADB in the text below, it means Eve & Adam double bottom.
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 an Eve & Adam double bottom.
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 an EADB 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 EADBs and sold various non-busted patterns (ascending triangles, broadening tops, head-and-shoulders tops, and so on), I made an average of 51% ("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 6% but also trimmed the average loss to 5%. Using a 25% trailing stop allowed me to keep more money, 21%, but losses climbed to 12%. If I didn't use any type of stop, the gain averaged 87% with losses averaging 31%.
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 | 6% (-5%) | 8% (-8%) | 15% (-10%) | 21% (-12%) | 51% (-14%) | 87% (-31%) |
| Non-busted buys, busted sales | 5% (-5%) | 8% (-8%) | 15% (-10%) | 21% (-13%) | 52% (-13%) | 86% (-27%) |
In 22 contests (22 different chart pattern types, depending on which apply), I compared the combination of non-busted buy/sell with non-busted buy/busted sell signals. I found that busted patterns won 50% of the time (11 of 22 contests) when buying using a non-busted pattern and selling a busted pattern (compared to non-busted for both).
Table 2 shows statistics I collected for this chart pattern 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 an EADB 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 31% on the 160 (46 winners, 114 losers) trades. That's an average of 142% on your winners, 14% average loss on your losers. You'd find that only 29% of the trades made money but you'd gain an average of 16% per year (ranking 41 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 70% per trade.
The expectancy averages $1.19 per share per trade which ranks 54th where 1 is the best value.
Notes: The rank is based on the net gain for both performance tables (tables 2 and 3) shown below. Trades with sample counts below 30 are not ranked.
| Table 2: Statistics for Eve & Adam Double Bottoms | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 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% | -14% | 31% | 16% | 41 | 70% | 46/114 | 29% | $1.19 | 54 |
| Broadening top | 173% | -15% | 58% | 23% | 16 | 92% | 107/170 | 39% | $7.41 | 23 |
| Broadening formation, right-angled and ascending | 108% | -16% | 24% | 11% | 53 | 57% | 49/102 | 32% | $2.55 | 50 |
| Broadening formation, right-angled and descending | 74% | -15% | 18% | 9% | 55 | 33% | 39/65 | 38% | $4.77 | 41 |
| Broadening wedge, ascending | 183% | -16% | 75% | 35% | 2 | 102% | 47/56 | 46% | $6.64 | 31 |
| Broadening wedge, descending | 166% | -15% | 59% | 21% | 20 | 77% | 32/46 | 41% | $4.38 | 45 |
| Bump-and-run reversal top | 187% | -14% | 81% | 35% | 3 | 105% | 137/154 | 47% | $8.64 | 18 |
| Diamond bottom | 323% | -12% | 147% | 44% | 1 | 181% | 20/22 | 48% | $11.26 | 10 |
| Diamond top | 147% | -15% | 66% | 28% | 10 | 102% | 64/65 | 50% | $10.98 | 13 |
| Adam & Adam double top | 212% | -13% | 68% | 25% | 12 | 127% | 296/522 | 36% | $10.75 | 15 |
| Adam & Eve double top | 148% | -13% | 45% | 19% | 30 | 84% | 123/221 | 36% | $10.31 | 17 |
| Eve & Adam double top | 170% | -13% | 60% | 21% | 21 | 106% | 156/238 | 40% | $11.20 | 11 |
| Eve & Eve double top | 153% | -14% | 49% | 21% | 22 | 106% | 151/251 | 38% | $14.09 | 4 |
| Falling wedge | 128% | -14% | 29% | 16% | 46 | 33% | 23/53 | 30% | $0.28 | 56 |
| Head-and-shoulders top | 161% | -14% | 52% | 20% | 24 | 92% | 432/718 | 38% | $8.38 | 19 |
| Head-and-shoulders, complex top | 114% | -16% | 35% | 16% | 40 | 64% | 74/114 | 39% | $3.26 | 48 |
| Rectangle top | 139% | -15% | 42% | 19% | 29 | 59% | 63/107 | 37% | $6.78 | 29 |
| Rising wedge | 124% | -14% | 38% | 18% | 33 | 75% | 119/195 | 38% | $4.55 | 44 |
| Rounding top | 147% | -15% | 44% | 17% | 38 | 56% | 56/98 | 36% | $5.88 | 40 |
| Ascending scallop | 82% | -15% | 20% | 15% | 49 | 32% | 25/44 | 36% | -$0.79 | 57 |
| Descending scallop | 161% | -16% | 53% | 24% | 14 | 80% | 197/314 | 39% | $6.19 | 36 |
| Scallop, inverted and ascending | 136% | -12% | 43% | 19% | 32 | 68% | 19/32 | 37% | $13.14 | 5 |
| Scallop, descending and inverted | 119% | -15% | 31% | 16% | 47 | 42% | 90/173 | 34% | $2.29 | 52 |
| Triangle, ascending | 176% | -15% | 53% | 24% | 13 | 85% | 70/127 | 36% | $4.72 | 42 |
| Triangle, descending | 154% | -16% | 36% | 17% | 36 | 63% | 63/141 | 31% | $1.65 | 53 |
| Triangle, symmetrical | 181% | -16% | 57% | 23% | 17 | 84% | 208/353 | 37% | $6.17 | 37 |
| Triple top | 195% | -15% | 59% | 22% | 19 | 107% | 299/558 | 35% | $6.01 | 39 |
| Rectangle bottom | 111% | -17% | 23% | 11% | 52 | 21% | 41/92 | 31% | $11.27 | 9 |
| 3 falling peaks | 133% | -14% | 39% | 17% | 39 | 67% | 321/561 | 36% | $6.74 | 30 |
| Roof | 161% | -12% | 63% | 32% | 5 | 76% | 19/25 | 43% | $6.83 | 26 |
| Roof, inverted | 211% | -15% | 71% | 29% | 6 | 117% | 30/49 | 38% | $11.03 | 12 |
| 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 normal EADB 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 EADB with an upward breakout in a bull market and selling a busted broadening top shows winning trades making an average of 115%. Losing trades lost 10%, giving a net gain of 44%. The annualized gain is 14% in this case, giving the setup a rank of 50 (where 1 is best). If you traded this without a stop, the net gain climbed to 53%. Of the stocks I looked at, I found 70 trades with 43% of them winning. Expectancy was a $6.81 per share, ranking 27th 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 | 115% | -10% | 44% | 14% | 50 | 53% | 26/34 | 43% | $6.81 | 27 |
| Broadening top | 198% | -13% | 88% | 28% | 9 | 122% | 64/69 | 48% | $14.89 | 3 |
| Broadening formation, right-angled and ascending | 83% | -13% | 20% | 7% | 57 | 38% | 16/31 | 34% | $6.21 | 35 |
| Broadening formation, right-angled and descending | 120% | -14% | 26% | 12% | 51 | 76% | 17/39 | 30% | $0.83 | 55 |
| Broadening wedge, ascending | 123% | -13% | 30% | 87% | 6/13 | 32% | ||||
| Broadening wedge, descending | 58% | -14% | 17% | 9% | 56 | 35% | 13/18 | 42% | $3.65 | 46 |
| Bump-and-run reversal bottom | 167% | -14% | 43% | 16% | 43 | 62% | 11/24 | 31% | $7.14 | 24 |
| Cup with handle | 179% | -15% | 54% | 59% | 6/11 | 35% | ||||
| Diamond bottom | 87% | -10% | 25% | 15% | 48 | 36% | 15/26 | 37% | $13.06 | 6 |
| Diamond top | 217% | -14% | 56% | 28% | 8 | 122% | 16/37 | 30% | $6.14 | 38 |
| Adam & Adam double bottom | 283% | -12% | 95% | 28% | 11 | 140% | 85/149 | 36% | $10.61 | 16 |
| Adam & Eve double bottom | 147% | -14% | 39% | 16% | 42 | 77% | 51/103 | 33% | $6.80 | 28 |
| Eve & Adam double bottom | 163% | -12% | 45% | 17% | 37 | 107% | 42/88 | 32% | $6.44 | 32 |
| Eve & Eve double bottom | 181% | -17% | 56% | 19% | 27 | 81% | 32/55 | 37% | $10.79 | 14 |
| Falling wedge | 168% | -15% | 55% | 29% | 7 | 112% | 24/39 | 38% | $3.16 | 49 |
| Head-and-shoulders bottom | 164% | -12% | 50% | 18% | 34 | 72% | 71/130 | 35% | $6.96 | 25 |
| Head-and-shoulders complex bottom | 141% | -11% | 30% | 50% | 7/19 | 27% | ||||
| Rectangle top | 149% | -15% | 52% | 19% | 28 | 76% | 33/48 | 41% | $8.26 | 21 |
| Rising wedge | 230% | -12% | 115% | 33% | 4 | 161% | 29/26 | 53% | $6.43 | 33 |
| Round bottom | 105% | -17% | 10% | 9% | 2/7 | 22% | ||||
| Rounding top | 106% | -14% | 37% | 37% | 6/8 | 43% | ||||
| Ascending scallop | 138% | -13% | 54% | 23% | 18 | 79% | 39/48 | 45% | $6.35 | 34 |
| Descending scallop | 148% | -12% | 44% | 16% | 44 | 65% | 13/24 | 35% | $8.28 | 20 |
| Scallop, inverted and ascending | 144% | -13% | 55% | 20% | 26 | 79% | 40/53 | 43% | $12.37 | 7 |
| Scallop, descending and inverted | 135% | -12% | 57% | 18% | 35 | 57% | 22/25 | 47% | $12.17 | 8 |
| Triangle, ascending | 202% | -14% | 60% | 24% | 15 | 78% | 30/57 | 34% | $3.36 | 47 |
| Triangle, descending | 74% | -13% | 20% | 10% | 54 | 56% | 22/36 | 38% | $2.51 | 51 |
| Triangle, symmetrical | 173% | -13% | 43% | 20% | 25 | 88% | 74/173 | 30% | $4.65 | 43 |
| Triple bottom | 156% | -14% | 46% | 19% | 31 | 71% | 96/178 | 35% | $15.75 | 2 |
| Rectangle bottom | 241% | -14% | 46% | 21% | 23 | 74% | 11/36 | 23% | $7.55 | 22 |
| 3 rising valleys | 141% | -13% | 44% | 16% | 45 | 86% | 65/110 | 37% | $16.61 | 1 |
| Roof | 134% | -15% | 12% | 82% | 4/18 | 18% | ||||
| Roof, inverted | 121% | -13% | 29% | 49% | 9/20 | 31% | ||||
| 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 4 shows the results for the combinations of busted/non-busted trades and the resulting performance.
Buying EADBs with a short-term (up to 3 months) duration from the trend start to the pattern's start results in substantially better performance.
| Table 4: Short (S) Medium (M) or Long (L) Trend Start and Performance | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy non-busted pattern | S67% M36% L24% | S68% M38% L21% |
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 5 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 EADBs when the breakout price is below the 50-day SMA.
| Table 5: Above (A) Below (B) 50-Day Simple Moving Average | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy non-busted pattern | A43% B61% | A43% B62% |
Table 6 shows the results of using a longer moving average, the 200-day. Traders often use this as a proxy for the long-term trend.
EADBs worked best if the breakout price was below the 200-day SMA.
| Table 6: Above (A) Below (B) 200-Day Simple Moving Average | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy non-busted pattern | A46% B57% | A43% B62% |
The prior discussion assumes you buy an EADB 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 7 shows the results sorted by the type of patterns involved (busted or non-busted). For example, if you buy an EADB and sell the first non-busted chart pattern which comes along, you'd make 19% on average. Annualized, you'd make 43%. This compares to a 21% 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 chart pattern which appears makes more money than selling after a designated pattern.
The bottom half of the table shows expectancy for the combinations. The highest expectancy ($5.16) associates with buying an EADB and selling the first non-busted pattern which appears.
| Table 7: Selling the First Bearish Pattern (Annualized) | ||
|---|---|---|
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy non-busted pattern | 19% (43% v 21%) | 19% (43% v 20%) |
| Expectancy (Below) | ||
| Sell Non-Busted Pattern | Sell Busted Pattern | |
| Buy non-busted pattern | $5.16 | $3.46 |
-- Thomas Bulkowski
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