As of 08/11/2020
  Indus: 27,687 -104.53 -0.4%  
  Trans: 10,890 +24.59 +0.2%  
  Utils: 822 -19.04 -2.3%  
  Nasdaq: 10,783 -185.54 -1.7%  
  S&P 500: 3,334 -26.78 -0.8%  
YTD
-3.0%  
-0.1%  
-6.5%  
 +20.2%  
 +3.2%  
  Targets    Overview: 07/31/2020  
  Up arrow28,150 or 25,000 by 08/15/2020
  Up arrow11,100 or 10,050 by 09/01/2020
  Up arrow870 or 800 by 08/15/2020
  Up arrow11,300 or 10,200 by 08/15/2020
  Up arrow3,500 or 3,250 by 09/01/2020
CPI (updated daily): Arrows on 6/29/20
As of 08/11/2020
  Indus: 27,687 -104.53 -0.4%  
  Trans: 10,890 +24.59 +0.2%  
  Utils: 822 -19.04 -2.3%  
  Nasdaq: 10,783 -185.54 -1.7%  
  S&P 500: 3,334 -26.78 -0.8%  
YTD
-3.0%  
-0.1%  
-6.5%  
 +20.2%  
 +3.2%  
  Targets    Overview: 07/31/2020  
  Up arrow28,150 or 25,000 by 08/15/2020
  Up arrow11,100 or 10,050 by 09/01/2020
  Up arrow870 or 800 by 08/15/2020
  Up arrow11,300 or 10,200 by 08/15/2020
  Up arrow3,500 or 3,250 by 09/01/2020
CPI (updated daily): Arrows on 6/29/20

Bulkowski on the One-Day Reversal, Bottom Pattern

 

The one-day reversal pattern
One-Day Reversal, Bottom

 

One-Day Reversal, Bottom: Important Bull Market Results

Overall performance rank (1 is best)**: 20/23
Break even failure rate*: 39% (up breakouts)
Average rise*: 8%
Percentage meeting price target*: 73%
 
The above numbers are based on hundreds of perfect trades as of 3/13/2013. See the glossary for definitions.
* Based on the trend high, not the ultimate high. See text.
** Based on the average rise compared to other small patterns with upward breakouts in a bull market

One-Day Reversal, Bottom: Identification Guidelines

CharacteristicDiscussion
3 barsThe pattern is composed of one bar, but for identification, I use three bars, one day before to one day after the one-day reversal.
BottomLook for the pattern in a short-term down trend. In other words, wait for an upward breakout (a close above the top of the pattern).
Open and closeThe open and close on the one-day reversal must be within 25% of the intraday high.
Surrounding daysThe low price of the two adjacent bars must be above the mid point of the one-day reversal. This should make the one-day reversal bar stand alone, like a tree atop a peak (only inverted).
TallThe one-day reversal should be at least as tall as the one-month average height of other price bars.
VolumeHigh volume should be present on the one-day reversal. However, I excluded this requirement since the pattern is rare enough without it.

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One-Day Reversal, Bottom: Trading Tips

Trading TacticExplanation
ReversalThe pattern is supposed to act as a reversal of the down trend. Only trade those that reverse the short-term down trend.
BuyOnce price closes above the top of the pattern, buy at the open the next day.
Measure ruleThe one-day reversal fulfills the measure rule 73% of the time (bull market). That is, measure the height of the pattern and add it to the high price to get an upward target.

One-Day Reversal, Bottom: Performance Statistics

For the following statistics, I used 1,160 stocks, starting from January 1990 to March 2013, but few stocks covered the entire range. All stocks had a minimum price of $5. There were two bear markets in the 2000s (as determined by the S&P 500 index), from 3/24/2000 to 10/10/2002 and 10/12/2007 to 3/6/2009. Everything outside of those dates represents a bull market.

For each one-day reversal, I found when the trend started and when it ended. To find the trend peak or valley, I found the lowest valley and highest peak within plus or minus 10 days (21 days total) each, before the one-day reversal and the same peak/valley test after the one-day reversal. The closest valley or peak before the one-day reversal is where the trend began. The closest peak or valley after the one-day reversal is where the trend ended. I compared the peak or valley to the average of the highest high and lowest low price of the one-day reversal pattern.

The 10-bar peak or valley number tends to find major turning points on the daily charts.

I measured performance from the day after the pattern ended to the nearest trend peak or trend valley.

To determine the inbound price trend (I was looking for a down trend), I used linear regression on the average of the high-low prices in the five days before the pattern. That caught the short-term trend.

One-Day Reversal, Bottom: Performance and Failure Rates

Table 1: Performance and Failure Rates
Market 5% Failure  Average 
 Rise 
Bull39%8%
Bear31%10%

Table 1 lists failure rates, sorted by market condition along with the average rise. Since the one-day reversal acts as a reversal of the downward trend, I looked for an upward breakout.

A failure occurs when the stock fails to rise more than 5%.

The failure rates may appear high, but that's typical for short-term patterns like the one-day reversal. The highest failures occur in a bull market: 39% fail to see price rise at least 5%. The average rise is just 8%.

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One-Day Reversal, Bottom: Measure Rule

Table 2: Measure Rule Performance
Market Success 
Bull73%
Bear65%

Table 2 shows how often the measure rule works. Use the measure rule to estimate of how far price is likely to drop.

To do this, measure from the highest high to the lowest low in the pattern to get the height. Add the height to the highest high to get the target.

The best performance of the measure rule occurs in a bull market, with 73% of patterns reaching their target. This makes sense since a bear market is trending lower, making it harder for an upward breakout to outperform in a stock (it fights the downtrend).

One-Day Reversal, Bottom: Trading Performance

Table 3: Testing the One-Day Reversal, Bottom
Market Bull  Bear 
Net profit/loss$61.35$(92.17)
Wins56%45%
Winning trades2,193403
Average gain of winners$705.07$711.62
Losses44%55%
Losing trades1,752496
Average loss($744.40)($745.25)
Average hold time (calendar days)2714

Table 3 shows the performance based on 5,532 trades using $10 commissions per trade ($20 round trip), starting with $10,000 per trade. No other adjustments were made for interest, fees, slippage and so on.

The results are sorted by bull or bear market. The trades used the same setup as listed in One-Day Reversal, Bottom, Performance Statistics.

Here's the setup.

For example, in a bull market, the net gain was $61.35 for all trades. The method won 56% of the time and there were 2,193 winning trades. The average gain of winning trades was $705.07.

Forty-four percent, or 1,752 trades were losers. They lost an average of $744.40.

The average hold time was 27 calendar days.

Notice how the gains and losses were pegged near 7%, which is how the test was setup.

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One-Day Reversal, Bottom: Trading Example

One-Day reversal in Arkansas Best (ABFS)

The figure shows a one-day reversal pattern in Alaska Air (ALK) on the daily scale, at A.

Price drops into the one day reversal. The open and closing prices are near the top of the pattern. The day is an unusually tall one, too.

The next day, the stock closes above the top of the one-day reversal. Buy at the open the following day, B.

When the stock climbs to the sell target, C, close out the position. If the stock tumbled instead of rising, a stop placed 7% below the buy price would have closed out the trade for a loss.

-- Thomas Bulkowski

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See Also

 

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My novels:  Bumper's Story Head's Law

Chart Patterns: After the Buy Getting Started in Chart Patterns, Second Edition Trading Basics Fundamental Analysis and Position Trading Swing and Day Trading Visual Guide to Chart Patterns Encyclopedia of Candlestick Charts Encyclopedia of Chart Patterns 2nd Edition Trading Classic Chart Patterns

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