Trading Rounded Tops

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 Tops: 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 top 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.

Trading Rounded Tops: 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 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.

I used the following 43 chart patterns in the analysis, but some only applied if they were busted.

Trading Rounded Tops: 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 tops and sold various non-busted patterns (ascending triangles, broadening tops, head-and-shoulders tops, and so on), I made an average of 65% ("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 5%. Using a 25% trailing stop allowed me to keep more money, 34%, but losses climbed to 13%. If I didn't use any type of stop, the gain averaged 90% with losses averaging 30%.

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% (-5%)	13% (-8%)	21% (-11%)	34% (-13%)	65% (-25%)	90% (-30%)
Busted buys, non-busted sales	3% (-6%)	4% (-8%)	26% (-11%)	30% (-16%)	50% (-30%)	114% (-18%)
Non-busted buys, busted sales	8% (-5%)	14% (-8%)	20% (-11%)	32% (-14%)	53% (-24%)	87% (-25%)
Busted buys, busted sales	3% (-5%)	4% (-9)	25% (-13%)	26% (-18%)	43% (-23%)	75% (-15%)

Trading Rounded Tops: Busted 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 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 up to 45% of the time or 10 of 22 contests when buying a non-busted rounded top and selling a busted chart pattern (compared to non-busted for both).

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

Table 2: Busted or Non-Busted Contest Winners
	Sell Non-Busted Pattern	Sell Busted Pattern
Buy non-busted pattern	N/A (benchmark)	45%
Buy busted pattern	29%	32%

Table 3 shows statistics I collected for rounded 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 rounded 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 54% on the 124 (41 winners, 83 losers) trades. That's an average of 212% on your winners, 25% average loss on your losers. You'd find that only 33% of the trades made money but you'd gain an average of 16% per year (ranking 28th 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 98% per trade.

The expectancy averages a gain of $0.17 per share per trade which ranks 65th where 1 is the best value.

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 Rounded 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	212%	-25%	54%	16%	28	98%	41/83	33%	$0.17	65
Broadening top	189%	-24%	78%	23%	8	124%	124/135	48%	$10.48	16
Broadening formation, right-angled and ascending	165%	-25%	58%	18%	20	85%	59/77	43%	$5.40	38
Broadening formation, right-angled and descending	107%	-24%	30%	12%	50	45%	37/52	42%	$0.70	63
Broadening wedge, ascending	267%	-23%	117%	43%	1	158%	42/45	48%	$5.18	40
Broadening wedge, descending	112%	-24%	35%	9%	62	75%	36/48	43%	$2.96	55
Bump-and-run reversal top	149%	-25%	70%	22%	9	100%	182/153	54%	$6.56	30
Diamond bottom	162%	-25%	95%	20%	15	145%	25/14	64%	$10.10	18
Diamond top	153%	-22%	78%	28%	5	108%	54/40	57%	$8.30	22
Adam & Adam double top	289%	-24%	133%	29%	3	181%	311/306	50%	$17.33	3
Adam & Eve double top	166%	-26%	62%	16%	29	103%	138/163	46%	$11.78	9
Eve & Adam double top	259%	-24%	123%	27%	6	173%	153/142	52%	$14.88	4
Eve & Eve double top	127%	-23%	41%	13%	42	88%	153/203	43%	$10.05	19
Falling wedge	91%	-24%	23%	8%	67	41%	33/48	41%	-$1.74	74
Head-and-shoulders top	190%	-25%	68%	19%	17	108%	432/569	43%	$6.09	34
Head-and-shoulders, complex top	97%	-23%	33%	13%	47	60%	79/89	47%	$2.30	56
Rectangle top	133%	-25%	36%	12%	58	66%	62/98	39%	$3.88	48
Rising wedge	186%	-25%	64%	20%	14	113%	102/141	42%	$2.99	54
Rounding top	141%	-23%	52%	15%	30	67%	99/118	46%	$4.18	46
Ascending scallop	100%	-28%	33%	14%	35	59%	35/39	47%	$2.11	57
Descending scallop	161%	-26%	57%	16%	25	89%	227/284	44%	$6.23	33
Scallop, inverted and ascending	167%	-22%	46%	12%	53	72%	14/25	36%	-$0.26	68
Scallop, descending and inverted	118%	-24%	47%	13%	44	55%	151/153	50%	$4.28	44
Triangle, ascending	159%	-27%	47%	15%	33	95%	59/89	40%	$1.49	61
Triangle, descending	221%	-23%	66%	22%	12	79%	58/101	36%	-$0.09	66
Triangle, symmetrical	174%	-26%	55%	18%	23	89%	196/288	40%	$3.01	53
Triple top	186%	-25%	65%	18%	19	114%	347/467	43%	$7.67	27
Rectangle bottom	109%	-27%	21%	8%	66	61%	43/79	35%	-$0.34	69
3 falling peaks	146%	-24%	55%	14%	36	88%	390/448	47%	$8.30	21
Roof	72%	-23%	3%	1%	74	73%	13/34	28%	-$0.72	71
Roof, inverted	125%	-27%	49%	14%	38	90%	31/31	50%	$5.70	37
Sell Pattern	Average Win	Average Loss	Net	Annualized Net	Rank	No Stop Net	Win/Loss Samples	Win Loss	Average Expectancy	Expectancy Rank

Trading Rounded Tops: Busted Buy, Non-Busted Sale

The figure shows the setup for this scenario. When price busts the bearish chart pattern (busts a downward breakout from a rounded top in a bull market), buy. Sell after a downward breakout from the target chart pattern.

Table 4 shows the performance of busted rounded tops for the entry and non-busted sales after downward breakouts from various bearish chart patterns. A stop loss order was used and priced a penny below the bottom of the pattern (after buying).

A busted rounded top has a downward breakout but price drops no more than 10% before reversing and moving above the top of the pattern. Buy when price moves at least a penny above the top of the busted pattern. Sell after price drops at least a penny below the target chart pattern.

For example, buying a rounded 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 pattern or the opening price) and selling after the downward breakout from a broadening top shows winners averaging gains of 109%. Losses average 20%, for a net of 37%. Only 39 trades occurred with a win/loss ratio of 44%. This scenario ranks the annualized net gain as 57th among the four tables. If you traded this as a buy-and-hold position, meaning no stops were used, the net gain climbed to 76%. Expectancy was a gain of $14.61 per share, ranking 6th where 1 is best.

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	65%	-27%	14%			40%	10/12	45%
Broadening top	109%	-20%	37%	12%	57	76%	17/22	44%	$14.61	6
Broadening formation, right-angled and ascending	46%	-27%	-8%			14%	5/14	26%
Broadening formation, right-angled and descending	49%	-21%	11%			26%	6/7	46%
Broadening wedge, ascending	66%	-18%	38%			65%	4/2	67%
Broadening wedge, descending	75%	-35%	20%			245%	2/2	50%
Bump-and-run reversal top	81%	-23%	33%	14%	37	84%	28/24	54%	$7.82	24
Diamond bottom	815%	-27%	254%			261%	1/2	33%
Diamond top	127%	-22%	75%			80%	15/8	65%
Adam & Adam double top	245%	-25%	120%	22%	13	161%	51/44	54%	$21.18	1
Adam & Eve double top	134%	-22%	42%	13%	49	93%	19/27	41%	$13.77	7
Eve & Adam double top	188%	-20%	56%	16%	27	130%	17/29	37%	$6.28	32
Eve & Eve double top	137%	-21%	48%	15%	31	80%	21/27	44%	$7.39	28
Falling wedge	75%	-26%	25%			14%	6/6	50%
Head-and-shoulders top	181%	-22%	84%	22%	11	109%	74/67	52%	$11.74	10
Head-and-shoulders, complex top	75%	-25%	23%			41%	14/15	48%
Rectangle top	166%	-28%	54%			58%	11/15	42%
Rising wedge	93%	-22%	34%	11%	60	71%	18/19	49%	$6.32	31
Rounding top	159%	-25%	44%	11%	59	61%	12/20	38%	$5.19	39
Ascending scallop	27%	-33%	1%			133%	8/6	57%
Descending scallop	234%	-27%	88%	29%	4	130%	33/42	44%	$9.23	20
Scallop, inverted and ascending	62%	-33%	-6%			104%	2/5	29%
Scallop, descending and inverted	67%	-28%	-11%	-7%	75	109%	8/37	18%	-$0.79	72
Triangle, ascending	106%	-26%	49%	14%	40	65%	18/14	56%	$10.10	17
Triangle, descending	72%	-24%	12%	5%	71	33%	12/20	38%	$3.64	50
Triangle, symmetrical	111%	-23%	46%	13%	43	79%	30/28	52%	$11.30	13
Triple top	106%	-25%	39%	12%	51	76%	56/59	49%	$7.81	25
Rectangle bottom	144%	-24%	46%			38%	5/7	42%
3 falling peaks	145%	-30%	29%	12%	54	92%	40/80	33%	$3.30	52
Roof	112%	-12%	71%			76%	4/2	67%
Roof, inverted	36%	-23%	7%			16%	6/6	50%
Sell Pattern	Average Win	Average Loss	Net	Annualized Net	Rank	No Stop Net	Win/Loss Samples	Win Loss	Average Expectancy	Expectancy Rank

Trading Rounded Tops: Non-busted Buy, Busted Sale

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 rounded 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 rounded top with an upward breakout in a bull market and selling a busted broadening bottom shows winning trades making an average of 122%. Losing trades lost 23% giving a net gain of 54%. The annualized gain is 13% in this case, giving the setup a rank of 45th (where 1 is best). If you traded this without a stop, the net gain climbed to 70%. Of the stocks I looked at, I found 53 trades with 53% of them winning. Expectancy was a gain of $21.09 per share, ranking 2nd where 1 is best.

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	122%	-23%	54%	13%	45	70%	28/25	53%	$21.09	2
Broadening top	130%	-23%	41%	15%	32	88%	50/70	42%	$7.79	26
Broadening formation, right-angled and ascending	165%	-28%	71%	18%	24	96%	21/20	51%	$1.69	59
Broadening formation, right-angled and descending	170%	-23%	45%	12%	52	71%	17/31	35%	-$0.21	67
Broadening wedge, ascending	238%	-28%	100%	22%	10	127%	13/14	48%
Broadening wedge, descending	104%	-24%	22%	9%	64	63%	15/27	36%	$0.57	64
Bump-and-run reversal bottom	121%	-22%	33%	9%	65	49%	13/21	38%	$0.84	62
Cup with handle	83%	-20%	42%			45%	9/6	60%
Diamond bottom	67%	-20%	10%			46%	7/13	35%
Diamond top	237%	-21%	120%	27%	7	151%	30/25	55%	$11.10	14
Adam & Adam double bottom	167%	-24%	54%	13%	48	113%	87/127	41%	$13.62	8
Adam & Eve double bottom	161%	-25%	50%	12%	55	107%	47/69	41%	$4.67	42
Eve & Adam double bottom	248%	-23%	94%	20%	16	152%	35/46	43%	$11.53	12
Eve & Eve double bottom	128%	-26%	22%	6%	70	96%	23/51	31%	-$1.33	73
Falling wedge	129%	-20%	51%	19%	18	66%	22/24	48%	$1.80	58
Head-and-shoulders bottom	189%	-22%	74%	18%	21	112%	82/98	46%	$8.21	23
Head-and-shoulders complex bottom	131%	-22%	36%			40%	9/15	38%
Rectangle top	246%	-24%	122%	31%	2	152%	39/33	54%	$11.58	11
Rising wedge	115%	-27%	37%	9%	63	56%	20/24	45%	$1.54	60
Round bottom	34%	-21%	-1%			24%	5/9	36%
Rounding top	100%	-15%	43%			55%	9/9	50%
Ascending scallop	156%	-24%	51%	16%	26	71%	27/38	42%	$4.20	45
Descending scallop	65%	-29%	10%	3%	72	45%	15/21	42%	$5.72	36
Scallop, inverted and ascending	118%	-22%	51%	15%	34	96%	42/38	53%	$5.78	35
Scallop, descending and inverted	168%	-25%	57%	13%	41	80%	14/19	42%	$4.12	47
Triangle, ascending	109%	-24%	18%	7%	69	40%	21/45	32%	$3.49	51
Triangle, descending	102%	-23%	38%	13%	46	80%	23/24	49%	$4.84	41
Triangle, symmetrical	145%	-24%	46%	14%	39	87%	89/127	41%	$3.77	49
Triple bottom	129%	-24%	41%	12%	56	87%	98/133	42%	$10.48	15
Rectangle bottom	71%	-27%	11%	3%	73	31%	18/28	39%	-$0.35	70
3 rising valleys	190%	-21%	71%	18%	22	103%	66/86	43%	$14.81	5
Roof	180%	-28%	52%			127%	5/8	38%
Roof, inverted	137%	-27%	28%			92%	9/18	33%
Sell Pattern	Average Win	Average Loss	Net	Annualized Net	Rank	No Stop Net	Win/Loss Samples	Win Loss	Average Expectancy	Expectancy Rank

Trading Rounded Tops: Busted Buy, Busted Sale

Table 6 shows the last combination of trading statistics. It shows busted rounded 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).

For example, buying a busted rounded top and selling a busted symmetrical triangle made 85% from the winners, lost 25% on the losers for a net gain of 22%. Annualized, it was 7%. The net gain placed the performance of this setup at 68, where 1 is best. Removing stops from the trades allowed them to make 32%. Only 40 trades were taken and 43% of them were winners. Expectancy was a gain of $6.73 per share, ranking 29th among the four tables.

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	415%	-25%	95%			129%	3/8	27%
Broadening top	209%	-22%	81%			96%	8/10	44%
Broadening formation, right-angled and ascending	489%	-23%	147%			215%	2/4	33%
Broadening formation, right-angled and descending	23%	-27%	-13%			-13%	2/5	29%
Broadening wedge, ascending	76%	None	76%			76%	2/0	None
Broadening wedge, descending	245%	-24%	111%			168%	1/1	50%
Bump-and-run reversal bottom	228%	-16%	106%			154%	1/1	50%
Cup with handle	23%	-29%	-8%			-17%	2/3	40%
Diamond bottom	102%	-24%	76%			108%	4/1	80%
Diamond top	172%	-20%	57%			52%	2/3	40%
Adam & Adam double bottom	151%	-25%	73%			139%	15/12	56%
Adam & Eve double bottom	184%	-27%	54%			85%	10/16	38%
Eve & Adam double bottom	79%	-21%	1%			68%	3/11	21%
Eve & Eve double bottom	36%	-28%	-2%			27%	2/3	40%
Falling wedge	150%	-12%	81%			112%	4/3	57%
Head-and-shoulders complex bottom	55%	-20%	18%			128%	3/3	50%
Rectangle top	96%	-22%	17%			19%	6/12	33%
Rising wedge	46%	-14%	6%			91%	2/4	33%
Round bottom	58%	-34%	28%			26%	2/1	67%
Rounding top	13%	-24%	4%			26%	3/1	75%
Ascending scallop	11%	-19%	-7%			24%	4/6	40%
Descending scallop	455%	-34%	64%			130%	1/4	20%
Scallop, inverted and ascending	105%	-24%	33%			73%	4/5	44%
Scallop, descending and inverted	10%	-21%	-6%			101%	1/1	50%
Triangle, ascending	81%	-29%	37%			65%	6/4	60%
Triangle, descending	694%	-20%	40%			104%	1/11	8%
Triangle, symmetrical	85%	-25%	22%	7%	68	32%	17/23	43%	$6.73	29
Triple bottom	174%	-25%	36%	10%	61	49%	11/25	31%	$4.31	43
Rectangle bottom	54%	-29%	12%			34%	3/3	50%
3 rising valleys	294%	-22%	136%			152%	6/6	50%
Roof	226%	-15%	146%			306%	2/1	67%
Roof, inverted	None	-19%	-19%			8%	0/2	0%
Sell Pattern	Average Win	Average Loss	Net	Annualized Net	Rank	No Stop Net	Win/Loss Samples	Win Loss	Average Expectancy	Expectancy Rank

Trading Rounded Tops: 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 7 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

Table 7: Short (S) Medium (M) or Long (L) Trend Start and Performance
	Sell Non-Busted Pattern	Sell Busted Pattern
Buy non-busted pattern	S84% M65% L30%	S70% M63% L21%
Buy busted pattern	S94% M12% L30%	S81% M26% L18%

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).

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

Table 8: Above (A) Below (B) 50-Day Simple Moving Average
	Sell Non-Busted Pattern	Sell Busted Pattern
Buy non-busted pattern	A57% B347%	A49% B186%
Buy busted pattern	A44% B164%	A38% B150%

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.

In all cases, buying if the breakout price is below the 200-day SMA gives the best results.

Selling First Bearish Chart Pattern

The prior discussion assumes you buy a rounded 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 9: Above (A) Below (B) 200-Day Simple Moving Average
	Sell Non-Busted Pattern	Sell Busted Pattern
Buy non-busted pattern	A58% B130%	A51% B73%
Buy busted pattern	A50% B51%	A40% B88%

Table 10 shows the results sorted by the type of patterns involved (busted or non-busted). For example, if you buy a non-busted rounded top and sell the first non-busted chart pattern which comes along, you'd make 22% on average. Annualized, you'd make 39%. This compares to a 19% 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 four combinations. Buying and selling non-busted patterns gives the highest expectancy ($5.50).

Bulkowski on Pattern Pairs: Rounded Tops