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: Ugly Double Bottoms

Initial release: 12/23/2021.

The idea behind pattern pairs is to pick a chart pattern type (like ugly double bottoms) to buy and another to sell (like double tops). You buy the upward breakout from the ugly double 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 Ugly Double 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 a ugly double 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...

• 1. Busted roof (49%)
• 2. Bump-and-run reversal top (28%)
• 3. Ascending broadening wedge (25%)
• 4. Rectangle top (25%)
• 5. Busted descending triangle (24%)

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...

• 1. Busted inverted and ascending scallop ($21.05)
• 2. Broadening formation, right-angled and descending ($17.19)
• 3. Adam & Eve double top ($16.69)
• 4. Busted broadening top ($15.01)
• 5. Rectangle bottom ($13.15)

To improve performance, try these tips.

• Table 1: When using stop loss orders and trailing stops, sell busted patterns.
• Table 4: Sell patterns with a short-term duration from the trend start.
• Table 5: Buy if the breakout price is above the 50-day SMA.
• Table 6: Buy if the breakout price is below the 200-day SMA.
• Table 7: Sell the first non-busted bearish pattern that appears.

Trading Ugly Double 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 an ugly double 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.

• Ugly double bottoms provided the buy signal.
• No commissions or fees were included.
• Entry: A buy stop placed a penny above the top of the ugly double bottom was assumed to be the entry price unless the stock gapped higher on the breakout day (in which case, the opening price was used).
• Stop loss: A penny below the lowest bottom of the ugly double 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.
• 196 stocks tested. The first chart pattern appeared in July 1991 and the last in May 2021, giving me 8,430 trades.
• Bear market excluded. If the breakout from the ugly double bottom 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
• Rounding: tops and bottoms
• Scallops: ascending, descending, ascending and inverted, descending and inverted
• Triangles: ascending, descending, and symmetrical
• Ugly Double tops and bottoms
• Three rising peaks
• Three falling valleys
• Ugly double bottom

Trading Ugly Double Bottoms: Stops

I used a stop loss order set a penny below the bottom of the ugly double 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 ugly double bottoms and sold various non-busted patterns (broadening bottoms, broadening tops, head-and-shoulders tops, and so on), I made an average of 43% ("Stop Loss Only" column) after having a stop loss order in place. Losses averaged 13%. 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, 21%, but losses climbed to 12%. If I didn't use any type of stop, the gain averaged 45% with losses averaging 20%.

The results show that:

• Selling busted patterns does well, including those using trailing stops (except for the 10% stop, but it's close).
• Trades which do not use a stop make the most money but losses are huge.

Trading Ugly Double Bottoms: Busted Patterns

I compared the performance of sell signals for 22 different chart patterns and found that less than half (45%) 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.

Trading Ugly Double Bottoms: Non-busted Buy, Non-Busted Sale

Table 2 shows statistics I collected for ugly double 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 ugly double bottom (after buying).

For example, if you were to buy the upward breakout from a ugly double 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 60% (annualized: 21%, ranking 12) on the 59 (30 winners, 29 losers) trades. That's an average of 132% on your winners, 15% average loss on your losers. You'd find that 51% 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 84% per trade.

The expectancy was $6.92 per share per trade which ranks 16th where 1 is the best value.

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

For example, buying a ugly double bottom with an upward breakout in a bull market and selling a busted broadening top shows winning trades making an average of 206%. Losing trades lost 11%, giving a net of 87%, annualized net is 19% ranking 16th (where 1 is best).

If you traded this without a stop, the net gain climbed to 117%. Of the stocks I looked at, I found 64 trades with 45% of them winning. Expectancy was $15.01 per share, ranking 4th where 1 is best.

Trading Ugly Double 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 ugly double 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 short-term (0 to 3 months) duration from the trend start to the pattern's start can give you a slight edge.

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 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.

Selling First Bearish Chart Pattern

The prior discussion assumes you buy a ugly double 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 ugly double bottom and sell the first non-busted chart pattern which comes along, you'd make 30% on average. Annualized, you'd make 24%. This compares to a 17% 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 that appears.

The bottom half of the table shows the expectancy of profit, which is higher when selling busted patterns.

-- Thomas Bulkowski

See Also

• Ugly Double bottoms
• Busted double 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?