As of 05/26/2022
  Indus: 32,637 +516.91 +1.6%  
  Trans: 14,142 +397.70 +2.9%  
  Utils: 1,022 +1.32 +0.1%  
  Nasdaq: 11,741 +305.91 +2.7%  
  S&P 500: 4,058 +79.08 +2.0%  
YTD
-10.2%  
-14.2%  
 +4.2%  
-25.0%  
-14.9%  
  Targets    Overview: 05/15/2022  
  Up arrow33,500 or 30,500 by 06/01/2022
  Up arrow14,700 or 12,400 by 06/01/2022
  Up arrow1,050 or 940 by 06/01/2022
  Up arrow12,800 or 11,000 by 06/01/2022
  Up arrow4,150 or 3,700 by 06/01/2022
CPI (updated daily): Arrows on 5/23/22
As of 05/26/2022
  Indus: 32,637 +516.91 +1.6%  
  Trans: 14,142 +397.70 +2.9%  
  Utils: 1,022 +1.32 +0.1%  
  Nasdaq: 11,741 +305.91 +2.7%  
  S&P 500: 4,058 +79.08 +2.0%  
YTD
-10.2%  
-14.2%  
 +4.2%  
-25.0%  
-14.9%  
  Targets    Overview: 05/15/2022  
  Up arrow33,500 or 30,500 by 06/01/2022
  Up arrow14,700 or 12,400 by 06/01/2022
  Up arrow1,050 or 940 by 06/01/2022
  Up arrow12,800 or 11,000 by 06/01/2022
  Up arrow4,150 or 3,700 by 06/01/2022
CPI (updated daily): Arrows on 5/23/22

Bulkowski on Pattern Pairs: Rounded Bottoms

 

Initial release: 12/21/2021.

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.

Trading Rounded Bottoms: Summary

Picture of the pattern pairs.

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 rounded bottom or a busted one (price breaks out downward, drops no more than 10%, reverses, and closes above the top of the pattern. Buy as price rises above the top of the pattern).

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).

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.

Top of page

Trading Rounded Bottoms: 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 rounded 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.

Top of page

Trading Rounded Bottoms: 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 rounded bottoms and sold various non-busted patterns (ascending triangles, broadening tops, head-and-shoulders tops, and so on), I made an average of 80% ("Stop Loss Only" column) after having a stop loss order in place. Losses averaged 25%. Replacing the stop loss with a 10% trailing stop cut the gain to 8% but also trimmed the average loss to 4%. Using a 25% trailing stop allowed me to keep more money, 26%, but losses climbed to 13%. If I didn't use any type of stop, the gain averaged 176% with losses averaging 31%.

There's not much difference between the results when selling busted or non-busted patterns using stops.

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 8% (-4%)  12% (-7%)  20% (-9%)  26% (-13%)  80% (-25%)  176% (-31%) 
Non-busted buys, busted sales 8% (-5%)  12% (-7%)  20% (-10%)  23% (-14%)  76% (-24%)  186% (-29%) 

Top of page

Trading Rounded Bottoms: Busted Patterns

I compared the performance of non-busted patterns (both buy and sell) with non-busted buys and busted sales. In 7 of 22 contests, selling a busted pattern won. That's only 32% of the time.

It suggests you avoid trading busted patterns.

Top of page

Trading Rounded Bottoms: Non-busted Buy, Non-Busted Sale

Picture of a busted pattern pair.

Table 2 shows statistics I collected for rounded bottoms 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 rounded bottom 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 64% on the 153 (76 winners, 77 losers) trades. That's an average of 154% on your winners, 25% average loss on your losers. You'd find that 50% of the trades made money but you'd gain an average of 15% per year (ranking 49th 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 93% per trade.

The expectancy averages a gain of $6.19 per share per trade which ranks 48th 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 Rounded Bottoms
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Broadening bottom154%-25%64%15%4993%76/7750%$6.1948
Broadening top207%-24%102%27%10145%173/14455%$19.428
Broadening formation, right-angled and ascending173%-27%68%19%32110%63/6948%$4.6955
Broadening formation, right-angled and descending121%-26%50%13%5485%61/5752%$7.9138
Broadening wedge, ascending114%-25%53%22%25110%55/4356%$9.5328
Broadening wedge, descending182%-22%67%18%4088%36/4644%$4.7254
Bump-and-run reversal top154%-24%86%33%2112%323/20062%$10.3525
Diamond bottom115%-25%50%17%4575%24/2153%$5.5950
Diamond top168%-23%90%29%7137%82/5659%$9.8627
Adam & Adam double top242%-22%102%27%11154%450/50747%$17.7812
Adam & Eve double top250%-22%105%29%6160%206/23547%$19.587
Eve & Adam double top216%-23%90%23%24156%223/24747%$13.7514
Eve & Eve double top288%-23%124%40%1181%213/23847%$22.562
Falling wedge279%-24%116%31%4136%38/4446%$22.224
Head-and-shoulders top150%-23%67%20%29109%713/65852%$9.3029
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Head-and-shoulders, complex top146%-24%69%24%1993%133/11055%$4.6756
Rectangle top149%-24%57%15%5093%108/12347%$7.7039
Rising wedge166%-25%84%24%17128%192/14357%$11.0820
Rounding top181%-22%55%14%5276%91/14838%$2.9059
Ascending scallop130%-27%68%25%1586%70/4660%$5.4951
Descending scallop204%-25%80%23%23107%326/38346%$6.1349
Scallop, inverted and ascending298%-28%129%26%13196%39/4248%$18.8511
Scallop, descending and inverted157%-26%57%20%3177%212/25445%$8.3335
Triangle, ascending161%-26%64%17%42114%81/8848%$5.2752
Triangle, descending108%-24%46%17%4457%104/9353%$8.1936
Triangle, symmetrical171%-25%67%19%36114%273/30647%$8.4634
Triple top187%-25%70%20%30119%512/62045%$11.8718
Rectangle bottom229%-26%65%18%37110%59/10536%$7.6440
3 falling peaks223%-24%91%24%20127%616/71046%$10.9621
Roof124%-20%59%23%22113%37/3055%$7.1142
Roof, inverted104%-24%45%15%4756%46/3954%$9.2030
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank

Top of page

Trading Rounded Bottoms: Non-busted Buy, Busted Sale

Picture of a busted pattern pair.

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 rounded bottom 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 rounded bottom with an upward breakout in a bull market and selling a busted broadening bottom shows winning trades making an average of 245%. Losing trades lost 23% giving a net gain of 106%. The annualized gain is 26% in this case, giving the setup a rank of 14th (where 1 is best). If you traded this without a stop, the net gain climbed to 136%. Of the stocks I looked at, I found 58 trades with 48% of them winning. Expectancy was a gain of $22.25 per share, ranking 3rd where 1 is best.

Trades with sample counts below 30 are not ranked.

Table 3: Statistics for Normal Buy, Busted Sale
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Broadening bottom245%-23%106%26%14136%28/3048%$22.253
Broadening top159%-20%62%18%41118%66/7846%$11.6119
Broadening formation, right-angled and ascending206%-24%75%19%34128%22/2943%$8.8132
Broadening formation, right-angled and descending86%-17%40%12%5958%29/2455%$4.6357
Broadening wedge, ascending121%-27%42%107%13/1546%
Broadening wedge, descending179%-30%66%15%48115%17/2046%$6.6145
Bump-and-run reversal bottom239%-18%84%23%21131%19/2940%$7.9537
Cup with handle110%-22%24%11%6026%11/2134%-$0.4360
Diamond bottom153%-22%91%20%28121%24/1365%$9.0831
Diamond top168%-22%80%21%26135%38/3354%$10.7024
Adam & Adam double bottom203%-20%75%19%35122%129/17542%$17.4413
Adam & Eve double bottom317%-22%96%27%12143%57/10635%$19.119
Eve & Adam double bottom143%-22%51%13%55114%47/6044%$10.8623
Eve & Eve double bottom282%-23%106%28%8139%50/6842%$18.9210
Falling wedge179%-21%60%16%4677%21/3140%$6.4846
Head-and-shoulders bottom149%-22%56%15%5179%100/12045%$10.9022
Head-and-shoulders complex bottom176%-10%86%24%18103%17/1652%$10.1526
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Rectangle top131%-25%51%14%53140%50/5349%$6.4747
Rising wedge183%-29%87%25%16119%24/2055%$8.6133
Round bottom54%-24%0%32%4/931%
Rounding top106%-17%28%54%10/1737%
Ascending scallop117%-20%45%18%3970%41/4647%$3.6358
Descending scallop182%-24%66%17%4386%28/3644%$7.2741
Scallop, inverted and ascending262%-24%128%29%5165%76/6753%$22.145
Scallop, descending and inverted139%-24%79%18%38101%38/2263%$11.9117
Triangle, ascending249%-25%96%31%3123%34/4344%$24.661
Triangle, descending102%-23%38%13%5880%23/2449%$4.8453
Triangle, symmetrical99%-23%41%13%5765%41/3753%$6.9044
Triple bottom210%-25%86%20%27129%188/21047%$12.2116
Rectangle bottom162%-27%60%13%5693%24/2846%$13.6015
3 rising valleys272%-22%119%27%9179%128/13848%$20.926
Roof71%-18%16%60%8/1338%
Roof, inverted158%-23%74%19%33106%22/1954%$7.1143
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank

Top of page

Trading Rounded Bottoms: 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 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 four combinations of busted/non-busted trades and the resulting performance.

Buy patterns with a short-term (up to 3 months) duration from the trend start to the pattern's start.

Table 4: Short (S) Medium (M) or Long (L) Trend Start and Performance
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted patternS122% M53% L56%S131% M43% L54%

Top of page

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 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).

In all cases, buying if the breakout price is above the 50-day SMA gives the best results.

Table 5: Above (A) Below (B) 50-Day Simple Moving Average
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted patternA83% B8%A79% B-4%

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.

In all cases, buying if the breakout price is above the 200-day SMA works best but the results are close.

Table 6: Above (A) Below (B) 200-Day Simple Moving Average
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted patternA81% B73%A76% B75%

Top of page

Selling First Bearish Chart Pattern

The prior discussion assumes you buy a rounded bottom 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 sale pattern involved (busted or non-busted). For example, if you buy a non-busted rounded bottom and sell the first non-busted chart pattern which comes along, you'd make 21% on average. Annualized, you'd make 37%. This compares to a 23% 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).

The results split into non-busted and busted sales. Selling the first non-busted pattern which appears or selling a designated busted pattern worked best.

The bottom half of the table shows expectancy for the two combinations. Selling non-busted patterns gives the highest expectancy ($4.00).

Table 7: Selling the First Bearish Pattern (Annualized)
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted pattern21% (37% v 23%)11% (17% v 20%)
Expectancy (Below)
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted pattern$4.00$3.28

-- Thomas Bulkowski

Top of page

See Also

 

Support this site! Clicking any of the books (below) takes you to Amazon.com If you buy ANYTHING while there, they pay for the referral.
Legal notices: "As an Amazon Associate I earn from qualifying purchases." Paid links).

My novels:  Bumper's Story Head's Law

Chart Patterns: After the Buy

Copyright © 2005-2022 by Thomas N. Bulkowski. All rights reserved.
Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information.
Some pattern names are registered trademarks of their respective owners.

Home Advertise Contact Donate Links Privacy/Disclaimer