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: Complex Head-and-Shoulders Tops

Initial release: 11/23/2021.

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: Busted Buy, Non-Busted Sale
• Results: 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 Complex Head-and-Shoulders Tops: Summary

For simplicity, I refer to complex head-and-shoulders tops as cHSTs.

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 a busted cHST (price breaks out downward, drops no more than 10%, reverses, and closes above the top of the cHST). 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 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).

Buy a busted cHST and sell a...

• 1. Busted Adam & Eve double bottom (16%)
• 2. Busted Triple bottom (14%)
• 3 (tie). Adam & Adam double top (11%)
• 3 (tie).Busted Eve & Adam double bottom (11%)
• 5 (tie). Rounded top (9%)
• 5 (tie). Inverted roof (9%)

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.

Buy a busted cHST and sell a...

• 1. Busted Adam & Eve double bottom ($11.56)
• 2. Busted inverted and ascending scallop ($6.50)
• 3. Adam & Adam double top ($4.83)
• 4. Ascending triangle ($4.50)
• 5. Rounded top ($4.25)

Selling non-busted chart patterns results in better performance than selling busted patterns (based on 22 contests).

To improve performance, try these tips.

• Table 4: Trend start to pattern start: The medium term (3 to 6 months) worked best when selling non-busted patterns and the short-term (up to 3 months) worked best for selling busted patterns.
• Table 6: Buy busted cHSTs if the breakout price is below the 50-day SMA.
• Table 6: Buy busted cHSTs if the breakout price is below the 2000-day SMA.
• Table 7: Buy busted cHSTs and sell the first bearish non-busted chart pattern which appears.

Trading Complex Head-and-Shoulders 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 along the way to the one I did catalog. So buying a busted double top and selling the downward breakout from a rising wedge I cataloged would be different than choosing to sell a different rising wedge. 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.

• Busted complex head-and-shoulders tops provided the buy signal.
• No commissions or fees were included.
• Entry: Buy a penny above the tallest armpit on the right unless the stock gapped higher on the breakout day (in which case, the opening price was used).
• Busted patterns included. I used a cHST which busted and determined the average rise to various chart patterns, both busted and non-busted.
• Stop loss: A penny below the bottom of the cHST 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.
• 167 stocks tested. The first chart pattern appeared in October 1991 and the last in July 2020, giving me 4,725 trades.
• Bear market excluded. If the breakout from the cHST 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
• Triple tops and bottoms
• Three rising peaks
• Three falling valleys
• Ugly double bottom

Trading Complex Head-and-Shoulders Tops: Stops

I used a stop loss order set a penny below the bottom of the busted cHST. 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 busted cHSTs and sold various non-busted patterns (broadening bottoms, broadening tops, head-and-shoulders tops, and so on), I made an average of 6% ("Stop Loss Only" column) after having a stop loss order in place. Losses averaged 10%. Replacing the stop loss with a 10% trailing stop cut the gain to 2% but also trimmed the average loss to 6%. Using a 25% trailing stop allowed me to keep more money, 7%, but losses climbed to 14%. If I didn't use any type of stop, the gain averaged 65% with losses averaging 30%.

The results show that:

• Trades which do not use a stop make the most money but losses are huge.

Trading Complex Head-and-Shoulders Tops: Busted Patterns

A busted cHST has a downward breakout but price drops no more than 10% before reversing and moving above the top of the pattern.

In 22 contests (selling 22 different chart pattern types, depending on which apply), I compared the performance of sales using busted and non-busted patterns. I found that selling non-busted patterns resulted in better performance than selling busted ones 59% of the time.

Trading Complex Head-and-Shoulders Tops: Busted Buy, Non-Busted Sale

The figure shows the setup for this scenario. When price busts the downward breakout from a bearish cHST, buy. Sell after a downward breakout from a non-busted target chart pattern.

Table 2 shows the performance of this scenario. A stop loss order was used and priced a penny below the bottom of the cHST (after buying).

For example, buying an cHST with a busted downward breakout in a bull market and selling after the downward breakout from a broadening bottom shows winners averaging gains of 65%. Losses average 10%, for a net gain of 1%. The annualized net remains 1%. Only 65 trades occurred with a win/loss ratio of 14%. This scenario ranks the net gain as 26th among the two tables (2 and 3). If you traded this as a buy-and-hold position, meaning no stops were used, the net gain climbed to a gain of 87%. Expectancy was a loss of $1.04 per share, ranking 32nd where 1 is best.

Trades with sample counts below 30 are not ranked.

Trading Complex Head-and-Shoulders Tops: Busted Buy, Busted Sale

Table 3 shows trading statistics for busted Complex Head-and-Shoulders Tops as the entry signal and various busted chart patterns as the exit signal. Keep in mind that some trades were few. A stop loss order was used and priced a penny below the bottom of the cHST (after buying).

The associated figure shows the setup.

For example, buying a busted cHST and selling a busted broadening bottom made 50% from the winners, lost 12% on the losers for a net loss of 3%. Annualized, it was -2%. The net loss placed the performance of this setup at 32, where a rank of 1 is best.

Removing stops from the trades allowed them to make 37%. Only 33 trades were taken and 15% of them were winners. Expectancy was a loss of $0.27 per share, ranking 28th where 1 is best.

Trades with sample counts below 30 are not ranked.

Trading Complex Head-and-Shoulders 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 cHST. 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 two combinations of busted/non-busted trades and the resulting performance.

The medium term (3 to 6 months) worked best when selling non-busted patterns and the short-term (up to 3 months) worked best for selling busted patterns.

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 selling busted or non-busted patterns when the breakout price was above (A) or below (B) the 50-day simple moving average (SMA).

The results are obvious: buy a busted cHST if the breakout price is below the 50-day SMA. Keep in mind that the number of trades are few when price is below the SMA (as few as 39 trades below the SMA versus 1,186 when price is above the SMA). A low sample count may be the reason for the startling performance difference.

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.

For both busted and non-busted sales, performance improves if the breakout price is below the 200-day SMA. The same caution applies to small sample counts here, too (as few as 110).

Selling First Bearish Chart Pattern

The prior discussion assumes you buy a busted cHST but sell a chart pattern of your choosing, such as a downward breakout from a double 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 busted cHST and sell the first non-busted chart pattern which comes along, you'd make 5% on average. Annualized, you'd make 14%. This compares to a 5% 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 5% number is the average of all chart pattern types fitting the non-busted category).

The best results come from buying a busted cHST and selling the first non-busted pattern which appears. That combination makes 14% annually, beating the other annualized rates.

The bottom half of the table shows expectancy for the two combinations. Selling a non-busted pattern leads to a higher expectancy of profit.

-- Thomas Bulkowski

See Also

• Learn more about complex head-and-shoulders tops
• 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?