As of 09/27/2022
  Indus: 29,135 -125.82 -0.4%  
  Trans: 12,153 +153.95 +1.3%  
  Utils: 934 -19.25 -2.0%  
  Nasdaq: 10,830 +26.58 +0.2%  
  S&P 500: 3,647 -7.75 -0.2%  
YTD
-19.8%  
-26.2%  
-4.7%  
-30.8%  
-23.5%  
  Targets    Overview: 09/15/2022  
  Up arrow32,000 or 29,200 by 10/15/2022
  Up arrow13,800 or 11,800 by 10/15/2022
  Up arrow990 or 900 by 10/15/2022
  Up arrow11,975 or 10,700 by 10/15/2022
  Up arrow3,800 or 3,500 by 10/15/2022
CPI (updated daily): Arrows on 9/13/22
As of 09/27/2022
  Indus: 29,135 -125.82 -0.4%  
  Trans: 12,153 +153.95 +1.3%  
  Utils: 934 -19.25 -2.0%  
  Nasdaq: 10,830 +26.58 +0.2%  
  S&P 500: 3,647 -7.75 -0.2%  
YTD
-19.8%  
-26.2%  
-4.7%  
-30.8%  
-23.5%  
  Targets    Overview: 09/15/2022  
  Up arrow32,000 or 29,200 by 10/15/2022
  Up arrow13,800 or 11,800 by 10/15/2022
  Up arrow990 or 900 by 10/15/2022
  Up arrow11,975 or 10,700 by 10/15/2022
  Up arrow3,800 or 3,500 by 10/15/2022
CPI (updated daily): Arrows on 9/13/22

Bulkowski on Pattern Pairs: Triple Bottoms

Initial release: 12/22/2021.

The idea behind pattern pairs is to pick a chart pattern type (like triple bottoms) to buy and another to sell (like double tops). You buy the upward breakout from the triple 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 Triple 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 a triple bottom. On the sale side, you can sell the first bearish chart pattern which comes along, or you can 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.

Sell a...

To improve performance, try these tips.

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Trading Triple 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 triple 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.

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Trading Triple Bottoms: Stops

I used a stop loss order set a penny below the bottom of the triple bottom. 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 triple bottoms and sold various non-busted patterns (broadening bottoms, broadening tops, head-and-shoulders tops, and so on), I made an average of 49% ("Stop Loss Only" column) after having a stop loss order in place. Losses averaged 12%. Replacing the stop loss with a 10% trailing stop cut the gain to 7% but also trimmed the average loss to 5%. Using a 25% trailing stop allowed me to keep more money, 23%, but losses climbed to 14%. If I didn't use any type of stop, the gain averaged 196% with losses averaging 29%.

The results show that:

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 7% (-5%)  10% (-7%)  17% (-10%)  23% (-14%)  49% (-12%)  196% (-29%) 
Non-busted buys, busted sales 6% (-5%)  10% (-7%)  16% (-10%)  21% (-14%)  46% (-12%)  178% (-30%) 

Trading Triple Bottoms: Busted Patterns

I compared the performance of sell signals for 22 different chart patterns and found that half (50%) of the time did a busted pattern outperform a non-busted pattern. To do this, I averaged the performance of each chart pattern and then compared that average to its busted counterpart in 22 contests. The pattern with the higher average gain won.

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

Picture of a busted pattern pair.

Table 2 shows statistics I collected for triple bottoms using the trading rules described above and shown in the figure. I placed a stop loss order priced a penny below the bottom of the triple bottom (after buying).

For example, if you were to buy the upward breakout from a triple 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 39% (annualized: 19%, ranking 33) on the 624 (169 winners, 455 losers) trades. That's an average of 176% on your winners, 12% average loss on your losers. You'd find that only 27% of the trades made money.

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 75% per trade.

The expectancy was $0.99 per share per trade which ranks 55th where 1 is the best value.

Table 2: Statistics for Triple Bottoms
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Broadening bottom176%-12%39%19%3375%169/45527%$0.9955
Broadening top195%-11%57%28%15118%353/71233%$12.769
Broadening formation, right-angled and ascending151%-12%33%16%4570%142/36828%$2.5348
Broadening formation, right-angled and descending89%-12%18%9%6056%112/26530%$2.3650
Broadening wedge, ascending234%-13%80%37%2181%120/19938%$6.7020
Broadening wedge, descending169%-11%33%16%4373%84/25825%$2.6845
Bump-and-run reversal top168%-12%52%26%17107%395/71136%$6.2722
Diamond bottom223%-13%52%22%2680%32/8328%$2.4749
Diamond top123%-12%36%18%3590%149/27235%$5.0426
Adam & Adam double top302%-11%82%32%5196%882/211029%$14.416
Adam & Eve double top277%-11%74%30%10167%364/87429%$13.398
Eve & Adam double top197%-11%55%21%31137%471/101532%$8.9713
Eve & Eve double top301%-11%79%34%3155%390/95929%$15.883
Falling wedge207%-11%45%21%3064%78/22626%$6.8319
Head-and-shoulders top186%-12%49%22%27120%1270/283931%$7.0718
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Head-and-shoulders, complex top118%-12%26%15%5165%182/43430%$1.5553
Rectangle top131%-11%30%16%4466%219/55428%$3.8640
Rising wedge158%-11%45%22%25103%412/81334%$4.5930
Rounding top240%-12%64%23%21127%212/48730%$6.5321
Ascending scallop144%-14%27%15%5087%79/22826%$0.6657
Descending scallop161%-13%36%17%4188%877/226728%$3.2842
Scallop, inverted and ascending190%-12%49%23%2096%77/18030%$4.0537
Scallop, descending and inverted158%-12%32%17%4085%395/111226%$2.3451
Triangle, ascending168%-12%42%21%29100%193/45130%$4.4233
Triangle, descending206%-13%41%22%2377%130/39925%$1.4354
Triangle, symmetrical147%-12%35%17%4275%592/141929%$4.9627
Triple top191%-11%49%22%22106%999/235630%$8.9614
Rectangle bottom181%-14%15%10%5852%77/43615%-$2.1364
3 falling peaks202%-12%48%22%28110%1747/445328%$4.0736
Roof213%-10%61%32%4114%60/12932%$3.6241
Roof, inverted223%-12%68%38%1142%103/20034%$8.3815
Broadening bottom120%-24%27%8%6258%241/44535%$3.6649
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank

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Trading Triple 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 triple bottom and selling only after a busted chart pattern). A stop loss order was used and priced a penny below the bottom of the triple bottom (after buying).

For example, buying a triple bottom with an upward breakout in a bull market and selling a busted broadening bottom shows winning trades making an average of 148%. Losing trades lost 11%, giving a net of 36%, and ranking 48th (where 1 is best). Because the hold time is often years long, the annualized gain is 15%.

If you traded this without a stop, the net gain climbed to 81%. Of the stocks I looked at, I found 237 trades with 30% of them winning. Expectancy was $6.24 per share, ranking 23rd where 1 is best.

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 bottom148%-11%36%15%4881%70/16730%$6.2423
Broadening top152%-11%40%18%38101%183/40431%$7.6817
Broadening formation, right-angled and ascending194%-11%47%24%1994%56/14228%$4.2435
Broadening formation, right-angled and descending143%-10%39%18%3684%57/12032%$4.5331
Broadening wedge, ascending186%-11%48%21%32100%30/7130%$4.5032
Broadening wedge, descending61%-12%10%6%6131%39/9230%$0.9656
Bump-and-run reversal bottom109%-10%29%12%5664%39/7933%$4.6029
Cup with handle66%-11%4%3%6424%15/6020%-$0.3161
Diamond bottom312%-11%89%31%6150%48/10731%$17.532
Diamond top124%-9%24%12%55107%52/15725%$5.2024
Adam & Adam double bottom320%-10%81%29%13161%263/68928%$15.845
Adam & Eve double bottom293%-12%76%27%16118%140/34929%$22.431
Eve & Adam double bottom290%-11%73%25%18158%139/36128%$10.1511
Eve & Eve double bottom299%-11%66%28%14124%82/24825%$15.884
Falling wedge136%-12%35%15%4787%71/15531%$3.9539
Head-and-shoulders bottom150%-10%33%15%4967%218/59927%$5.0525
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Head-and-shoulders complex bottom288%-11%60%31%9107%23/7424%-$1.5063
Rectangle top125%-10%31%18%3468%106/23931%$2.5747
Rising wedge225%-12%63%29%12135%52/11332%$0.2358
Round bottom67%-13%8%4%6379%11/3027%$0.2159
Rounding top116%-11%25%12%5441%19/4729%-$1.1262
Ascending scallop196%-11%46%22%2498%82/21727%$3.0944
Descending scallop114%-13%19%9%5966%53/16225%$4.0238
Scallop, inverted and ascending223%-10%58%30%11117%169/40729%$10.3110
Scallop, descending and inverted98%-10%20%10%5786%86/22827%$3.2643
Triangle, ascending246%-11%57%31%8109%75/21026%$9.0712
Triangle, descending137%-11%27%16%4667%66/19126%$1.6352
Triangle, symmetrical160%-22%48%14%5292%490/78438%$4.3834
Triple bottom144%-10%37%17%39101%367/82931%$4.6928
Rectangle bottom186%-13%24%13%5338%44/19019%$2.6046
3 rising valleys173%-11%45%18%3790%400/91330%$7.9616
Roof162%-9%71%31%7128%35/4047%$13.557
Roof, inverted54%-10%8%5%6228%31/8128%-$0.2260
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank

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Trading Triple 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 triple bottom. 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.

Selling patterns with a medium-term (3 to 6 months) duration from the trend start to the pattern's start can give you a slight edge.

Table 4: Short (S) Medium (M) or Long (L) Trend Start and Performance
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted patternS53% M62% L32%S51% M52% L34%

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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).

Buy if the breakout price is above the 50-day SMA.

Table 5: Above (A) Below (B) 50-Day Simple Moving Average
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted patternA53% B40%A51% B34%

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.

The results flip from the prior table. Better performance comes from breakouts below the 200-day SMA.

Table 6: Above (A) Below (B) 200-Day Simple Moving Average
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted patternA47% B55%A44% B54%

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Selling First Bearish Chart Pattern

The prior discussion assumes you buy a triple bottom and 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 a triple bottom and sell the first non-busted chart pattern which comes along, you'd make 15% on average. Annualized, you'd make 32%. 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).

Sell the first non-busted bearish pattern one which comes along. They also give you the highest expectancy of profit, which the bottom portion of the table shows.

Table 7: Selling the First Bearish Pattern (Annualized)
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted pattern15% (32% v 23%)7% (15% v 20%)
Expectancy (Below)
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted pattern$3.64$1.19

-- Thomas Bulkowski

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See Also

 

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