As of 11/26/2021
  Indus: 34,899 -905.04 -2.5%  
  Trans: 16,216 -610.57 -3.6%  
  Utils: 907 -15.90 -1.7%  
  Nasdaq: 15,492 -353.57 -2.2%  
  S&P 500: 4,595 -106.84 -2.3%  
YTD
 +14.0%  
 +29.7%  
 +4.9%  
 +20.2%  
 +22.3%  
  Targets    Overview: 11/12/2021  
  Up arrow38,000 or 35,000 by 12/01/2021
  Up arrow17,700 or 16,000 by 12/01/2021
  Up arrow935 or 890 by 12/01/2021
  Up arrow16,400 or 15,350 by 12/01/2021
  Up arrow4,850 or 4,560 by 12/01/2021
CPI (updated daily): Arrows on 11/17/21
As of 11/26/2021
  Indus: 34,899 -905.04 -2.5%  
  Trans: 16,216 -610.57 -3.6%  
  Utils: 907 -15.90 -1.7%  
  Nasdaq: 15,492 -353.57 -2.2%  
  S&P 500: 4,595 -106.84 -2.3%  
YTD
 +14.0%  
 +29.7%  
 +4.9%  
 +20.2%  
 +22.3%  
  Targets    Overview: 11/12/2021  
  Up arrow38,000 or 35,000 by 12/01/2021
  Up arrow17,700 or 16,000 by 12/01/2021
  Up arrow935 or 890 by 12/01/2021
  Up arrow16,400 or 15,350 by 12/01/2021
  Up arrow4,850 or 4,560 by 12/01/2021
CPI (updated daily): Arrows on 11/17/21

Bulkowski on Pattern Pairs: Broadening Tops

 

Initial release: 9/16/2021. Fixed trend start info: 11/12/2021.

The idea behind pattern pairs is to pick a chart pattern type (like broadening tops with upward breakouts) to buy and another to sell (like double tops). You buy the upward breakout from the broadening top, 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 Broadening Tops: 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 either an upward breakout from a broadening top or a busted broadening top (price breaks out downward, drops no more than 10%, reverses, and closes above the top of the broadening top). Buy as price rises above the top of the broadening top.

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.

The best pattern to use for the sell signal is a diamond top (with a downward breakout).

Here's a list of the top five performing 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.

For example, the pattern pair with the highest trade expectancy is to buy a broadening top and sell a busted Adam & Eve double bottom (upward breakout which busts). If you traded 100 shares, the average gain would be $1,563 or $15.63 per share.

Sell a...

To improve performance, try these tips.

Top of page

Trading Broadening 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 broadening 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.

Here's what I used in my analysis.

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

Top of page

Trading Broadening Tops: Stops

I used a stop loss order set a penny below the bottom of the broadening top. Price on the way down may have gapped below the stop price (for the sale price, 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 broadening tops and sold on various non-busted patterns (broadening bottoms, broadening tops, head-and-shoulders tops, and so on), I made an average of 35% ("Stop Loss Only" column) after having a stop loss order in place a penny below the bottom of the chart pattern. The average loss was 14% (shown in parenthesis). Replacing the stop loss with a 10% trailing stop cut the profit to 5% but also trimmed the average loss to 5%. Using a 25% trailing stop allowed me to keep more money, 21%, but the average loss also climbed to 13%. If I didn't use any type of stop, the profit averaged 96% but the average loss was huge: 31%.

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 5% (-5%)  9% (-8%)  15% (-11%)  21% (-13%)  35% (-14%)  96% (-31%) 
Busted buys, non-busted sales 3% (-6%)  7% (-8%)  14% (-10%)  14% (-13%)  15% (-9%)  75% (-29%) 
Non-busted buys, busted sales 5% (-5%)  8% (-8%)  15% (-11%)  20% (-13%)  30% (-13%)  86% (-28%) 
Busted buys, busted sales 4% (-6%)  9% (-7%)  16% (-10%)  14% (-13%)  16% (-9%)  68% (-25%) 

Top of page

Trading Broadening Tops: Busted Patterns

Trading using a busted chart pattern results in worse performance than using non-busted patterns (at least for broadening tops as the buy signal).

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 (22 or 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 about a third (36%) of the 22 contests when trading using a busted pattern for the sale. The worst performance came from buying and selling busted patterns. That configuration won only 2 of 22 contests (9%). The remaining cell won 4 of 31 contests (13%).

Table 2: Busted or Non-Busted Contest Winners
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted patternN/A (benchmark)36%
Buy busted pattern13%9%

Top of page

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

Picture of a busted pattern pair.

Table 3 shows statistics I collected for broadening tops using the trading rules described above and shown in the figure. I used a stop loss order priced a penny below the bottom of the broadening top (after buying).

For example, if you were to buy the upward breakout from a broadening 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 make an average of 25% on the 338 (76 winners, 262 losers) trades. That's an average of 160% on your winners, 14% average loss on your losers, and holding onto the position an average of 2.1 years. You'd find that only 22% of the trades made money but you'd gain an average of 12% per year (ranking 47th where 1 is best). If you removed the stop loss order and just held on until selling on a downward breakout from a broadening bottom, you'd make an average of 58% per trade.

When you combine gains and losses, the expectancy says it's difficult to make money trading this setup. Each trade lost 12 cents on average, ranking it 98th where 1 is best.

Notes: All of the above numbers appear in the table except for the average hold time (2.1 years). The rank is based on the net gain for all four performance tables (tables 3 to 6) shown below. A rank of 1 is best. Trades with sample counts below 30 are not ranked.

Table 3: Statistics for Broadening Tops
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
(Rank)
Broadening bottom160%-14%25%12%4758%76/26222%$-0.12 (98)
Broadening top154%-13%31%15%2592%188/53326%$6.00 (14)
Broadening formation, right-angled and ascending159%-13%25%12%4764%69/24122%$0.54 (83)
Broadening formation, right-angled and descending114%-14%16%9%6747%68/21724%$0.12 (92)
Broadening wedge, ascending123%-14%36%15%2591%80/13837%$5.53 (19)
Broadening wedge, descending126%-14%22%13%3955%51/14826%$0.87 (80)
Bump-and-run reversal top156%-14%37%21%4101%199/46030%$4.05 (33)
Diamond bottom119%-15%22%9%6768%26/6828%$1.63 (69)
Diamond top231%-14%62%28%1115%93/20831%$4.25 (29)
Adam & Adam double top238%-12%49%20%5148%412/126325%$10.04 (3)
Adam & Eve double top232%-13%48%20%5135%188/57325%$7.86 (7)
Eve & Adam double top210%-13%36%16%21123%192/68322%$3.83 (37)
Eve & Eve double top138%-13%24%11%5598%212/65424%$9.72 (4)
Falling wedge90%-13%5%3%10238%33/14918%$1.14 (77)
Head-and-shoulders top161%-13%31%15%25100%692/201426%$3.86 (36)
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
(Rank)
Head-and-shoulders, complex top114%-13%23%12%4760%123/30729%$1.35 (73)
Rectangle top199%-13%40%18%993%117/34725%$3.46 (43)
Rising wedge130%-13%24%13%3978%196/55726%$2.02 (64)
Rounding top201%-15%31%13%3995%87/32521%$2.72 (51)
Ascending scallop213%-16%39%20%587%44/13924%$-1.06 (109)
Descending scallop232%-15%59%25%3121%379/89330%$3.33 (45)
Scallop, inverted and ascending144%-12%22%8%7086%29/10222%$4.51 (25)
Scallop, descending and inverted124%-15%19%10%6150%182/54825%$0.82 (81)
Triangle, ascending188%-13%40%18%988%106/29526%$4.11 (31)
Triangle, descending90%-14%11%6%8538%87/26725%$-.04 (96)
Triangle, symmetrical151%-14%28%14%3475%325/95525%$2.77 (50)
Triple top177%-13%35%16%2194%516/152625%$5.28 (21)
Rectangle bottom114%-15%8%4%9838%46/21817%$-2.28 (113)
3 falling peaks185%-14%41%17%1795%651/168628%$3.28 (46)
Roof160%-12%41%18%985%39/8831%$3.73 (39)
Roof, inverted143%-13%39%17%17102%58/11534%$7.34 (10)
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
(Rank)

Top of page

Trading Broadening Tops: Busted Buy, Non-Busted Sale

Picture of a busted pattern pair.

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

Table 4 shows the performance of busted broadening tops for the entry and sales after downward breakouts from various bearish chart patterns. I used a stop loss order priced a penny below the bottom of the broadening top (after buying).

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

For example, buying a broadening 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 broadening pattern or the opening price) and selling after the downward breakout from a broadening bottom shows winners averaging gains of 64%. Losses average 9%, for a net of 8%. Because trades are often years long, annualized the net becomes 5%. Only 101 trades occurred with a win/loss ratio of 24%. This scenario ranks the annualized net gain as 95th among the four tables. If you traded this as a buy-and-hold position, meaning no stops were used, the net gain climbed from 5% to 31%. However, the expectancy is negative, $-2.30, placing it 114th where 1 is best. It suggests this setup won't make money in the long run.

Trades with sample counts below 30 are not ranked.

Table 4: Statistics for Busted Buys, Normal Sales
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
(Rank)
Broadening bottom64%-9%8%5%9531%24/7724%$-2.30 (114)
Broadening top78%-10%11%7%7860%47/15124%$2.90 (48)
Broadening formation, right-angled and ascending170%-10%27%18%944%16/6121%$4.31 (28)
Broadening formation, right-angled and descending120%-9%25%12%4759%22/6127%$4.93 (22)
Broadening wedge, ascending88%-10%20%12%4769%18/4031%$2.71 (52)
Broadening wedge, descending90%-9%16%6%8556%10/2926%$2.83 (49)
Bump-and-run reversal top101%-10%22%15%2563%52/12929%$2.33 (58)
Diamond bottom67%-13%0%0%97%5/2517%$-1.34 ()
Diamond top100%-10%16%11%5562%20/6424%$4.21 (30)
Adam & Adam double top192%-9%25%14%34120%88/43717%$5.48 (20)
Adam & Eve double top148%-9%20%10%61108%37/16818%$3.43 (44)
Eve & Adam double top179%-9%23%11%55105%40/19817%$5.71 (18)
Eve & Eve double top138%-9%25%13%3998%59/19323%$2.62 (54)
Falling wedge74%-9%6%3%10226%11/5018%$-0.04 (96)
Head-and-shoulders top120%-9%19%11%5580%171/61722%$3.62 (41)
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
(Rank)
Head-and-shoulders, complex top84%-10%12%6%8529%27/8823%$1.67 (67)
Rectangle top39%-9%-2%-2%11445%15/9614%$-0.93 (108)
Rising wedge89%-10%11%8%7073%46/16921%$0.53 (84)
Rounding top129%-11%19%9%6767%25/9321%$-0.37 (104)
Ascending scallop56%-9%6%6%8578%9/3123%$1.33 (74)
Descending scallop154%-10%24%16%2184%70/26521%$3.69 (40)
Scallop, inverted and ascending107%-11%9%8%7095%6/3017%$2.53 (55)
Scallop, descending and inverted100%-9%8%5%9537%35/18416%$0.88 (79)
Triangle, ascending65%-9%3%2%10558%19/9916%$0.28 (89)
Triangle, descending70%-10%1%1%10940%16/10813%$-2.80 (116)
Triangle, symmetrical67%-9%4%3%10252%63/29917%$-0.51 (106)
Triple top87%-9%9%6%8570%114/50019%$1.67 (67)
Rectangle bottom63%-9%1%0%11166%9/6113%$-2.01 (112)
3 falling peaks149%-9%18%12%4780%116/57317%$2.38 (57)
Roof111%-9%23%15%2553%11/3027%$4.71 (23)
Roof, inverted83%-11%12%8%7099%15/4625%$1.32 (75)
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
(Rank)

Top of page

Trading Broadening Tops: 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 5 shows the performance statistics for this setup (buying a normal broadening top and selling only after a busted chart pattern). I used a stop loss order priced a penny below the bottom of the broadening top (after buying).

For example, buying a broadening top with an upward breakout in a bull market and selling a busted broadening bottom shows winning trades making an average of 117%. Losing trades lost 11%, giving a net of 19%. Because the hold time is often years long, the annualized gain is 8%, giving the setup a rank of 70th (where 1 is best). If you traded this without a stop, the net gain climbed from 19% to 62%. Of the stocks I looked at, I found 158 trades with 23% of them winning. The expectancy is $2.05 per trade, per share, meaning the average 100-share trade would make $2,050, ranking the setup 63rd where 1 is best.

Trades with sample counts below 30 are not ranked.

Table 5: Statistics for Normal Buy, Busted Sale
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
(Rank)
Broadening bottom117%-11%19%8%7062%37/12123%$2.05 (63)
Broadening top144%-13%36%15%2589%122/26731%$4.59 (24)
Broadening formation, right-angled and ascending121%-12%23%11%5557%35/9527%$1.36 (71)
Broadening formation, right-angled and descending77%-12%15%7%7844%47/11030%$1.86 (65)
Broadening wedge, ascending211%-14%29%17%17112%10/4319%$-0.30 (103)
Broadening wedge, descending108%-12%10%6%8547%18/8118%$0.50 (86)
Bump-and-run reversal bottom76%-12%7%4%9846%17/6122%$-0.22 (101)
Cup with handle206%-12%35%14%3490%10/3622%$0.16 (90)
Diamond bottom133%-13%15%8%7084%18/7519%$1.73 (66)
Diamond top93%-11%19%8%7059%36/8929%$4.48 (26)
Adam & Adam double bottom185%-13%34%13%39102%119/38823%$9.23 (5)
Adam & Eve double bottom188%-14%35%12%47101%70/21824%$15.63 (1)
Eve & Adam double bottom200%-12%39%15%25116%58/18624%$5.98 (15)
Eve & Eve double bottom141%-14%17%8%7068%38/15820%$11.00 (2)
Falling wedge267%-13%64%26%2114%35/9327%$4.08 (32)
Head-and-shoulders bottom116%-12%16%7%7864%122/42722%$2.41 (56)
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
(Rank)
Head-and-shoulders complex bottom68%-13%9%4%9827%23/6227%$0.10 (93)
Rectangle top178%-12%35%18%9111%56/17225%$1.48 (70)
Rising wedge132%-13%33%18%992%41/8932%$0.09 (94)
Round bottom110%-13%12%6%8540%7/2820%$0.39 (87)
Rounding top39%-15%1%0%11119%13/3229%$-4.34 (117)
Ascending scallop163%-13%46%17%1797%52/10334%$4.48 (26)
Descending scallop125%-12%32%13%3970%25/5332%$4.00 (34)
Scallop, inverted and ascending143%-13%35%15%2593%85/19231%$8.80 (6)
Scallop, descending and inverted132%-12%31%13%3969%36/8430%$3.88 (35)
Triangle, ascending90%-13%9%5%9550%41/15221%$2.13 (62)
Triangle, descending163%-13%39%19%896%55/13130%$3.74 (38)
Triangle, symmetrical118%-13%26%12%4788%189/45529%$3.55 (42)
Triple bottom183%-13%45%18%9111%211/50829%$5.76 (17)
Rectangle bottom179%-13%27%11%5552%21/8121%$-0.13 (99)
3 rising valleys157%-13%37/%15%25100%156/37230%$6.88 (11)
Roof156%-14%39%14%34142%12/2731%$7.67 (8)
Roof, inverted50%-13%4%2%10557%21/5926%$0.08 (95)
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
(Rank)

Top of page

Trading Broadening Tops: Busted Buy, Busted Sale

Picture of a busted pattern pair.

Table 6 shows the last combination of trading statistics. It shows busted broadening tops as the entry signal and various busted chart patterns as the exit signal. Keep in mind that some trades were few in number. I used a stop loss order priced a penny below the bottom of the broadening top (after buying).

The associated figure shows the setup.

For example, buying a busted broadening top and selling a busted broadening bottom made 77% from the winners, lost 9% on the losers for a net gain of 10%. Annualized, it was 7%. The net gain placed the performance of this setup 78th, where 1 is best. Removing stops from the trades allowed them to make 53%, far above the 10% net when using a stop loss order. Only 45 trades were taken and 22% of them were winners. Expectancy was $0.88 per trade, per share, placing it 82nd (1 is best).


Trades with sample counts below 30 are not ranked.

Table 6: Statistics for Busted Buys and Sales
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
(Rank)
Broadening bottom77%-9%10%7%7853%10/3522%$0.80 (82)
Broadening top98%-8%14%7%7874%25/9720%$2.69 (53)
Broadening formation, right-angled and ascending76%-8%11%6%8547%9/3023%$2.21 (60)
Broadening formation, right-angled and descending209%-8%34%16%2173%8/3419%$7.53 (9)
Broadening wedge, ascending359%-8%13%9%68%1/176%$0.88 ()
Broadening wedge, descending36%-11%0%0%11125%8/2624%$-0.27 (102)
Bump-and-run reversal bottom66%-7%6%3%16%5/2318%$0.97 ()
Cup with handle171%-11%65%22%87%8/1142%$13.94 ()
Diamond bottom150%-9%42%21%119%9/1932%$19.84 ()
Diamond top26%-9%-6%-6%11774%4/399%$-2.61 (115)
Adam & Adam double bottom183%-9%35%13%39101%39/13223%$6.69 (12)
Adam & Eve double bottom255%-10%33%14%34100%15/7716%$5.92 (16)
Eve & Adam double bottom134%-8%12%7%7873%11/6714%$0.34 (88)
Eve & Eve double bottom79%-8%6%4%9831%11/5616%$-1.19 (110)
Falling wedge53%-9%-5%-5%11669%3/397%$-1.88 (111)
Head-and-shoulders bottom92%-9%12%6%8564%36/13721%$1.36 (71)
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
(Rank)
Head-and-shoulders complex bottom19%-8%-3%-2%5%5/2219%$6.58 ()
Rectangle top190%-7%30%18%962%13/5519%$6.66 (13)
Rising wedge61%-6%14%7%7875%10/2330%$-0.45 (105)
Round bottom150%-11%55%20%116%7/1041%$13.91 ()
Rounding top88%-12%21%8%21%3/633%$1.40 ()
Ascending scallop47%-9%9%6%8536%14/2933%$2.27 (59)
Descending scallop35%-9%-5%-3%11540%3/2710%$-0.19 (100)
Scallop, inverted and ascending42%-9%1%1%10949%13/5519%$1.30 (76)
Scallop, descending and inverted77%-7%2%2%10545%4/3211%$-0.69 (107)
Triangle, ascending164%-8%16%10%6136%6/3814%$0.53 (84)
Triangle, descending64%-9%4%2%10541%9/4517%$0.13 (91)
Triangle, symmetrical104%-8%16%10%6181%46/17121%$2.20 (61)
Triple bottom128%-9%18%10%6176%48/20019%$0.92 (78)
Rectangle bottom22%-10%-6%-3%23%4/2414%$-2.98 ()
3 rising valleys156%-9%16%10%6166%26/14515%$3.10 (47)
Roof282%-9%35%24%152%2/1115%$7.52 ()
Roof, inverted67%-8%8%9%48%3/1121%$-0.19 ()
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
(Rank)

Top of page

Trading Broadening 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 broadening top. 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.

Buying non-busted patterns with a short-term (up to 3 months) duration from the trend start to the pattern's start results in better performance than longer terms.

Buying busted patterns shows better performance if the trend start to pattern start is long term (more than 6 months long).

Notice that non-busted buy patterns perform better than busted ones (compare the two rows). Again, don't buy a busted broadening top.

Table 7: Short (S) Medium (M) or Long (L) Trend Start and Performance
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted patternS48% M41% L20%S40% M35% L21%
Buy busted patternS13% M14% L17%S10% M14% L20%

Top of page

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 8 shows the performance of buying or selling busted or non-busted patterns when the breakout price was above or below the 50-day simple moving average (SMA).

Broadening tops work best if the breakout price is above the 50-day SMA (in all four cells, the above number beats the below number). The best performance comes from non-busted buys which are above the 50-day SMA and accompany the sale of a non-busted pattern.

Table 8: Above (A) Below (B) 50-Day Simple Moving Average
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted patternA35% B-7%A30% B-8%
Buy busted patternA16% B13%A16% B3%

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.

Buying non-busted patterns outperformed buying busted ones (compare the two rows). Buying a pattern with the breakout price below the 200-day SMA in all four cells resulted in better performance.

Table 9: Above (A) Below (B) 200-Day Simple Moving Average
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted patternA34% B49%A29% B47%
Buy busted patternA14% B40%A16% B25%

Top of page

Selling First Bearish Chart Pattern

The prior discussion assumes you buy a broadening 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 10 shows the results sorted by the type of patterns involved (busted or non-busted). For example, if you buy a non-busted broadening top and sell the first non-busted chart pattern which comes along, you'd make 11% on average. Annualized, you'd make 25%. This compares to a 16% 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 best results come from buying a non-busted broadening top and selling the first non-busted pattern which appears. That combination makes 25% annually, beating the 16% rate for selling designated patterns.

The worst performance comes from trading busted buy and sell patterns (0% per trade or 1% annually).

The lower half of the table shows the expectancy for the various combinations of busted and non-busted patterns. The best return comes from trading non-busted patterns (both buy and sale). They make $2.54 per trade, per share. The worst performance comes from trading busted patterns (both buys and sales). The other two cells are close to the best performance, which I find interesting. The results emphasize that avoiding busted patterns could be more profitable than trading them.

Table 10: Selling the First Bearish Pattern (Annualized)
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted pattern11% (25% v 16%)5% (11% v 13%)
Buy busted pattern8% (20% v 9%)0% (1% v 9%)
Expectancy (Below)
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted pattern$2.54$2.28
Buy busted pattern$2.24$1.00

-- Thomas Bulkowski

Top of page

See Also

 

Support this site! Clicking any of the books (below) takes you to Amazon.com. If you buy ANYTHING while there, they pay for the referral.
Legal notices: "As an Amazon Associate I earn from qualifying purchases." Paid links).

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 Encyclopedia of Candlestick Charts Trading Classic Chart Patterns

Copyright © 2005-2021 by Thomas N. Bulkowski. All rights reserved.
Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information.
Some pattern names are registered trademarks of their respective owners.

Home Advertise Contact Donate Links Privacy/Disclaimer