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%	Targets    Overview: 12/12/2024     44,200 or 41,750 by 01/01/2025   16,100 or 17,700 by 01/01/2025   1,050 or 975 by 01/01/2025   20,500 or 19,300 by 01/01/2025   6,100 or 5,775 by 01/01/2025
Chart Pattern Indicator: on 12/5/24

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%
Targets    Overview: 12/12/2024     44,200 or 41,750 by 01/01/2025   16,100 or 17,700 by 01/01/2025   1,050 or 975 by 01/01/2025   20,500 or 19,300 by 01/01/2025   6,100 or 5,775 by 01/01/2025
Chart Pattern Indicator: on 12/5/24

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.

• Summary
• Entry and Exit Conditions
• Stops
• Busted Patterns
• Results: Non-Busted Buy, Non-Busted Sale
• Results: Non-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 Rounded Bottoms: 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 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).

• 1. Sell a Eve & Eve double top (40%)
• 2. Sell a bump-and-run reversal top (33%)
• 3. Sell a busted ascending triangle (31%)
• 4. Sell a falling wedge (31%)
• 5. Sell a busted inverted and ascending scallop (29%)

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 ascending triangle ($24.66)
• 1. Sell a Eve & Eve double top ($22.56)
• 3. Sell a busted broadening bottom ($22.25)
• 4. Sell a falling wedge ($22.22)
• 5. Sell a busted inverted and ascending scallop ($22.14)

To improve performance, try these tips.

• Avoid trading using busted patterns.
• Table 4: Buy patterns with a short-term (up to 3 months) duration from the trend start to the pattern's start.
• Tables 5, 6: Buy if the breakout price is above either the 50-day or 200-day SMA.
• Table 7: Sell the first non-busted pattern which appears or sell a designated busted pattern.

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.

• Rounded bottom patterns provided the buy signal.
• No commissions or fees were included.
• Entry: place a buy stop a penny above the left rim. Buy then or buy the opening price if the stock gaps open higher.
• Stop loss: A penny below the bottom of the rounded bottom 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.
• 517 stocks used. The first chart pattern appeared in July 1991 and the last in April 2020, giving me 14,860 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
• Rounded: 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 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.

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.

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

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.

Trading Rounded Bottoms: 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 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.

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.

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 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.

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).

-- Thomas Bulkowski

See Also

• More about rounded bottoms
• 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?