As of 10/07/2024   Indus: 41,954 -398.51 -0.9%     Trans: 15,783 -31.37 -0.2%     Utils: 1,027 -24.05 -2.3%     Nasdaq: 17,924 -213.95 -1.2%     S&P 500: 5,696 -55.13 -1.0%	YTD  +11.3%   -0.7%    +16.5%    +19.4%    +19.4%	Targets    Overview: 09/30/2024     43,500 or 41,600 by 10/15/2024   16,800 or 15,700 by 10/15/2024   1,125 or 1,025 by 10/15/2024   19,000 or 17,600 by 10/15/2024   5,900 or 5,600 by 10/15/2024
Chart Pattern Indicator: on 10/7/24

As of 10/07/2024   Indus: 41,954 -398.51 -0.9%     Trans: 15,783 -31.37 -0.2%     Utils: 1,027 -24.05 -2.3%     Nasdaq: 17,924 -213.95 -1.2%     S&P 500: 5,696 -55.13 -1.0%	YTD  +11.3%   -0.7%    +16.5%    +19.4%    +19.4%
Targets    Overview: 09/30/2024     43,500 or 41,600 by 10/15/2024   16,800 or 15,700 by 10/15/2024   1,125 or 1,025 by 10/15/2024   19,000 or 17,600 by 10/15/2024   5,900 or 5,600 by 10/15/2024
Chart Pattern Indicator: on 10/7/24

Bulkowski on Improving Pattern Pair Trading Success

Initial release: 1/4/2022.

• Download Improvements Spreadsheet (500k, .xlsx file)
• Summary
• Avoid Busted Patterns
• 50-Day SMA
• 200-Day SMA
• Trend Start Rise/Fall
• Trend Start Duration
• See Also

Pattern Pair Improvements: Summary

Want to improve the success rate when trading pattern pairs? Try the following, listed by order of importance.

• Trade non-busted chart patterns (for both buying and selling).
• Buy when the breakout price is above the 50-day simple moving average.
• Buy when the breakout price is below the 200-day simple moving average.
• Buy only if the price trend is rising from the trend start to the start of the chart pattern.
• Buy only if the duration from the trend start to the pattern's start is less than 3 months.

Pattern Pair Improvements: Avoid Busted Patterns

Much to my surprise, trading using busted chart patterns doesn't work as well as trading non-busted patterns.

A review of the statistics for many pattern pairs shows this to be true, but I catalogued the results. I compared non-busted buying and selling of pattern pairs with the other combinations (buying a busted pattern/selling a non-busted one, buying/selling busted patterns, etc).

I found that trading using a busted pattern only improved results 18% of the time. That means you'll do better trading a non-busted pattern pair 82% of the time.

Pattern Pair Improvements: 50-Day Simple Moving Average

If the breakout price from a chart pattern is above the 50-day simple moving average, then buy. In my tests of pattern pairs, I found that buying above the 50-day SMA worked better 67% of the time (compared to buying below the 50-day SMA). Oddly, the 200-day SMA results are reversed. See below.

Pattern Pair Improvements: 200-Day Simple Moving Average

Many trades and articles written in magazines will tell you to trade when your stock is above the x-day moving average. Often they are talking about the 200-day moving average (simple or exponential moving average). They'll tell you that they want to catch the uptrend. That sounds reasonable but if you do your research, you'll find that performance often improves if price is below the moving average.

I think what you're seeing when it's below the moving average is price snapping back. This is true when the market slumps. Those issues which drop furthest rise more than those which drop little. I proved that. There's also the thinking that patterns acting as reversals of the price trend work better than continuation patterns. Unfortunately, that belief isn't true. Continuations work slightly better than reversals. (I proved that, too).

In my tests of pattern pairs, I found that buying a chart pattern when the breakout price was below the 200-day simple moving average led to a higher gain 65% of the time.

Pattern Pair Improvements: Trend Start Rise/Fall

Determine where the trend starts (leading to the start of a chart pattern, that is). Often you can tell by looking, but there's a formal way to tell, too. Check the glossary for details.

If the closing price at the trend start is below the chart pattern (meaning price is trending upward), you will get better performance 63% of the time compared to a falling inbound price trend.

Pattern Pair Improvements: Trend Start Duration

If you found where the trend starts from the prior step, measure the duration from the trend start to the pattern's start. Your results can improve if it's short term.

1. Short term (up to 3 months) works best 50% of the time
2. Medium term (3 to 6 months) outperforms 32% of the time
3. Long term (more than 6 months) wins 18% of the time

The reasoning for the results are that you want to buy a stock near the start of an uptrend, not as it gets closer and closer to the end of the trend. That reasoning makes intuitive sense.

-- Thomas Bulkowski

See Also

• Pattern pairs trading. Buy a bullish pattern and later sell a bearish one.
• Summary report on the top 10 performing pattern pairs, sorted by various categories.
• Improvements. Describes what can you do to boost performance when trading pattern pairs.
• In a bear market, stocks which dropped most gain more.
• Compare performance of chart patterns over decades.
• Failures by month. Which months show the most failures?
• Failure rates. Chart patterns fail more often than before.
• Price mountains. How long to recover after a price run-up and run-down?
• Want more? Check out the Studies page.