As of 12/07/2022
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-16.4%  
-0.8%  
-30.0%  
-17.5%  
  Targets    Overview: 12/01/2022  
  Up arrow35,500 or 32,800 by 12/15/2022
  Down arrow13,400 or 14,500 by 12/15/2022
  Up arrow1,000 or 925 by 12/15/2022
  Up arrow12,000 or 10,600 by 12/15/2022
  Up arrow4,250 or 3,850 by 12/15/2022
CPI (updated daily): Arrows on 12/5/22
As of 12/07/2022
  Indus: 33,598 +1.58 +0.0%  
  Trans: 13,768 -130.21 -0.9%  
  Utils: 973 -6.18 -0.6%  
  Nasdaq: 10,959 -56.34 -0.5%  
  S&P 500: 3,934 -7.34 -0.2%  
YTD
-7.5%  
-16.4%  
-0.8%  
-30.0%  
-17.5%  
  Targets    Overview: 12/01/2022  
  Up arrow35,500 or 32,800 by 12/15/2022
  Down arrow13,400 or 14,500 by 12/15/2022
  Up arrow1,000 or 925 by 12/15/2022
  Up arrow12,000 or 10,600 by 12/15/2022
  Up arrow4,250 or 3,850 by 12/15/2022
CPI (updated daily): Arrows on 12/5/22

Bulkowski on Pattern Pairs: Ascending and Inverted Scallops

Initial release: 10/18/2021. Fixed trend start numbers: 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 Ascending and Inverted Scallops: Summary

Picture of the pattern pairs.

To make this article easier to read, I'm going to refer to an ascending and Inverted scallop as just a scallop. There are four varieties of scallops. This article discusses the ascending and inverted ones.

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 scallop. Buy as price rises above the top of the scallop.

Sell the first bearish chart pattern which comes along or wait for your favorite bearish chart pattern to appear and sell then.

Here's a list of the top five performing signals, based on annualized gain (annualized because the hold time is often years, in parenthesis).

Buy a scallop and 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 scallop (upward breakout) and sell a busted Adam & Eve double bottom (upward breakout which busts). If you traded 100 shares, the expected gain would be $4,028 or $40.28 per share.

Buy a scallop and sell a...

To improve performance, try these tips.

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Trading Ascending and Inverted Scallops: 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 scallop 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.

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Trading Ascending and Inverted Scallops: Stops

I used a stop loss order set a penny below the bottom of the scallop. 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 scallops and sold on various non-busted patterns (broadening bottoms, scallops, head-and-shoulders tops, and so on), I made an average of 48% ("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 19% (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, 20%, but the average loss also climbed to 13%. If I didn't use any type of stop, the profit averaged 107% but the average loss was huge: 32%.

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%)  20% (-13%)  48% (-19%)  107% (-32%) 
Non-busted buys, busted sales 5% (-5%)  9% (-8%)  15% (-10%)  19% (-13%)  44% (-18%)  108% (-28%) 

Trading Ascending and Inverted Scallops: Busted Patterns

Selling using busted chart patterns results in worse performance than selling non-busted patterns (at least for scallops as the buy signal).

I compared the performance of non-busted scallops for buy signals to busted and non-busted chart patterns for sales. Using 22 different chart pattern types for the sale, I found that only 32% of the time did a busted chart pattern work better as a sell signal than a non-busted chart pattern.

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Trading Ascending and Inverted Scallops: Non-busted Buy, Non-Busted Sale

Picture of a busted pattern pair.

Table 2 shows statistics I collected for scallops 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 scallop (after buying).

For example, if you were to buy the upward breakout from a scallop 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 41% on the 552 (168 winners, 384 losers) trades. That's an average of 178% on your winners, 19% average loss on your losers, and holding onto the position an average of 3.2 years. You'd find that only 30% of the trades made money but you'd gain an average of 15% per year (ranking 26th). 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 90% per trade.

When you combine gains and losses, the expectancy says it's difficult to make money trading this setup. Each trade gained just 70 cents on average, per share, ranking it 56th where 1 is best.

Notes: All of the above numbers appear in the table except for the average hold time. The rank is based on the net gain for tables 2 and 3 shown below. A rank of 1 is best.

Table 2: Statistics for scallops
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Broadening bottom178%-19%41%15%2690%168/38430%$0.7056
Broadening top225%-19%78%25%3151%384/58640%$18.004
Broadening formation, right-angled and ascending149%-20%31%11%4670%147/33431%$0.7655
Broadening formation, right-angled and descending178%-20%55%19%1390%145/24038%$9.9112
Broadening wedge, ascending247%-21%71%26%2110%109/21034%$2.3445
Broadening wedge, descending132%-19%27%10%4760%92/20931%$1.7948
Bump-and-run reversal top134%-18%40%16%1980%438/70538%$7.4319
Diamond bottom111%-19%21%12%4281%40/9031%$0.0360
Diamond top183%-18%70%25%3114%194/25044%$7.1020
Adam & Adam double top276%-19%76%21%9175%744/156032%$11.0911
Adam & Eve double top236%-20%60%19%13171%333/74231%$12.339
Eve & Adam double top183%-19%41%13%39132%350/81930%$4.0735
Eve & Eve double top243%-19%73%25%3158%472/87235%$16.686
Falling wedge155%-19%34%15%2668%87/20230%$9.9013
Head-and-shoulders top178%-19%48%16%19107%1320/259534%$6.5823
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Head-and-shoulders, complex top163%-20%42%16%1981%230/44834%$5.3328
Rectangle top157%-19%33%14%3385%194/46130%$3.7439
Rising wedge170%-19%56%20%11113%459/70340%$6.3824
Rounding top172%-20%41%13%3992%226/49032%$4.9631
Ascending scallop146%-21%38%13%3964%139/25635%$5.7527
Descending scallop189%-20%48%18%1597%855/177932%$3.8138
Scallop, inverted and ascending141%-20%27%9%5178%107/26129%-$1.1062
Scallop, descending and inverted125%-19%21%9%5154%537/137928%$3.2144
Triangle, ascending234%-20%66%22%8125%209/40634%$5.1329
Triangle, descending192%-20%38%14%3374%141/37427%$0.0859
Triangle, symmetrical162%-20%45%16%1987%642/116935%$3.9936
Triple top188%-20%50%16%19120%1009/200733%$9.8214
Rectangle bottom139%-21%25%9%5163%144/35929%$1.2351
3 falling peaks166%-19%41%15%2695%1759/363833%$6.2125
Roof176%-16%59%17%17126%66/10339%$6.1126
Roof, inverted191%-21%61%21%9141%122/19538%$8.3517
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank

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Trading Ascending and Inverted Scallops: 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 normal scallop and selling only after a busted chart pattern). I used a stop loss order priced a penny below the bottom of the scallop (after buying).

For example, buying a scallop 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 20%, giving a net of 17%. Because the hold time is often years long, the annualized gain is a paltry 5%, giving the setup a rank of 61 (where 1 is best). If you traded this without a stop, the net gain soared to 74%. Of the stocks I looked at, I found 196 trades with 27% of them winning. The expectancy is $0.85 per trade, per share, meaning the average 100-share trade would make $85, ranking the setup 54th 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 bottom117%-20%17%5%6174%53/14327%$0.8554
Broadening top127%-18%30%10%47131%171/35233%$3.2843
Broadening formation, right-angled and ascending205%-19%55%15%2699%71/14233%$2.1046
Broadening formation, right-angled and descending74%-19%13%5%6159%58/10935%$1.2351
Broadening wedge, ascending165%-20%31%9%51104%23/6127%$22.773
Broadening wedge, descending159%-19%50%17%17106%53/8339%$3.8737
Bump-and-run reversal bottom53%-15%6%2%6435%34/8030%-$0.5261
Cup with handle63%-18%10%4%6323%22/4234%$1.0053
Diamond bottom274%-17%91%24%6158%50/8437%$0.4858
Diamond top104%-17%26%9%5178%77/14235%$14.138
Adam & Adam double bottom215%-18%54%15%26170%218/48631%$17.295
Adam & Eve double bottom286%-20%74%20%11193%112/25331%$40.281
Eve & Adam double bottom246%-19%68%18%15162%103/21133%$6.7822
Eve & Eve double bottom284%-18%89%23%7173%104/19035%$30.912
Falling wedge132%-19%39%14%33106%65/10538%$4.5532
Head-and-shoulders bottom205%-17%59%16%19120%236/45334%$9.6615
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Head-and-shoulders complex bottom377%-15%126%34%1202%33/5936%$3.3742
Rectangle top166%-18%36%14%3381%76/18329%$1.2450
Rising wedge173%-18%39%15%26114%64/15130%-$5.8064
Round bottom106%-18%25%8%5852%17/3235%$3.6741
Rounding top85%-20%22%9%5142%22/3340%$1.6049
Ascending scallop112%-19%29%12%4253%119/20637%$0.5357
Descending scallop107%-18%27%10%4772%73/12936%$7.0121
Scallop, inverted and ascending139%-16%40%14%3396%314/55536%$14.597
Scallop, descending and inverted87%-16%16%7%6042%89/19232%$3.7439
Triangle, ascending145%-18%36%12%4297%84/17133%$11.5210
Triangle, descending108%-19%30%10%4783%93/14739%$5.0130
Triangle, symmetrical188%-18%52%16%19101%323/62334%$4.2533
Triple bottom141%-18%37%12%4285%347/66434%$8.0518
Rectangle bottom142%-18%20%8%5837%37/11924%$4.1034
3 rising valleys173%-18%47%15%26110%342/66234%$9.2716
Roof121%-16%28%9%51167%13/2832%$1.8447
Roof, inverted181%-19%50%14%33113%37/7035%-$2.1063
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank

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Trading Ascending and Inverted Scallops: 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 scallop. 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.

Buying patterns with a short-term (up to 3 months) duration from the trend start to the pattern's start resulted in better performance than the other durations.

Table 4: Short (S) Medium (M) or Long (L) Trend Start and Performance
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted patternS64% M45% L21%S57% M51% L20%

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

Scallops work best if the breakout price is above the 50-day SMA but only when selling a busted chart pattern.

Table 5: Above (A) Below (B) 50-Day Simple Moving Average
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted patternA48% B49%A45% B39%

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 best performance comes after buying a pattern with the breakout price below the 200-day SMA. Also notice that selling a non-busted pattern outperforms selling a busted one.

Table 6: Above (A) Below (B) 200-Day Simple Moving Average
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted patternA45% B73%A44% B49%

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Selling First Bearish Chart Pattern

The prior discussion assumes you buy a non-busted scallop 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 7 shows the results sorted by the type of patterns involved (busted or non-busted). For example, if you buy a non-busted scallop and sell the first non-busted chart pattern which comes along, you'd make 16% on average. Annualized, you'd make 35%. 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).

The best results come from buying a non-busted scallop and selling the first non-busted pattern which appears.

The lower half of the table shows the expectancy for busted and non-busted pattern sales. The best return comes from selling non-busted patterns. Expect to make $5.32 per trade, per share.

Table 7: Selling the First Bearish Pattern (Annualized)
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted pattern16% (35% v 17%)4% (7% v 14%)
Expectancy (Below)
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted pattern$5.32$0.07

-- Thomas Bulkowski

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See Also

 

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