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
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: Bump and Run Reversal Bottoms

Initial release: 11/10/2021. Fixed trend start info: 11/12/21.

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.

Trading BARR Bottoms: 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 an upward breakout from a bump-and-run reversal bottom. Buy as price rises above the top trendline of bump-and-run reversal (BARR).

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...

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.

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

To improve performance, try these tips.

Top of page

Trading BARR 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 a BARR 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.

I used the following 43 chart patterns in the analysis, but some only applied if they were busted.

Top of page

Trading BARR Bottoms: Stops

I used a stop loss order set a penny below the bottom of the BARR. 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 BARR bottoms and sold various non-busted patterns (broadening bottoms, broadening tops, head-and-shoulders tops, and so on), I made an average of 83% ("Stop Loss Only" column) after having a stop loss order in place. Losses averaged 17%. 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, 30%, but losses climbed to 13%. If I didn't use any type of stop, the gain averaged 162% with losses averaging 30%.

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 8% (-5%)  14% (-7%)  20% (-10%)  30% (-13%)  83% (-17%)  162% (-30%) 
Non-busted buys, busted sales 8% (-5%)  15% (-7%)  22% (-10%)  30% (-12%)  77% (-15%)  155% (-30%) 

Trading BARR Bottoms: Busted Patterns

I compared the sale of busted chart patterns versus non-busted ones, sorted by the type of chart pattern sold. In 22 contests, I found that 12 or 55% of the time selling a busted pattern gave a higher net gain than selling a non-busted pattern.

Top of page

Trading BARR Bottoms: Non-busted Buy, Non-Busted Sale

Picture of a busted pattern pair.

Table 2 shows statistics I collected for BARR bottoms using the trading rules described above and shown in the figure. A stop loss order was used and priced a penny below the bottom of the BARR (after buying).

For example, if you were to buy the upward breakout from a BARR bottom 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 55% on the 265 (99 winners, 166 losers) trades. That's an average of 180% on your winners, 19% average loss on your losers, and holding onto the position an average of 3.4 years. You'd find that only 37% of the trades made money but you'd gain an average of 16% per year (ranking 48th where 1 is best). 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 142% per trade.

The expectancy averages $3.31 per share per trade which ranks 52nd where 1 is the best value. Using my data to trade, you'd average $331 per trade.

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 two performance tables (tables 2 and 3) shown below.

Table 2 Statistics for BARR Bottoms
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Broadening bottom180%-19%55%16%48142%99/16637%$3.3152
Broadening top167%-17%69%21%27138%236/27246%$10.4421
Broadening formation, right-angled and ascending144%-16%54%19%38119%116/15044%$5.2943
Broadening formation, right-angled and descending121%-17%41%13%53113%72/10042%$7.8033
Broadening wedge, ascending129%-17%40%18%41113%67/10439%$5.9742
Broadening wedge, descending145%-15%50%17%47101%58/8526%$4.1351
Bump-and-run reversal top152%-17%63%25%14126%354/39947%$6.8139
Diamond bottom232%-18%97%24%17174%34/4046%$8.3831
Diamond top277%-17%127%40%2189%100/10549%$11.0416
Adam & Adam double top400%-16%161%37%3278%555/74643%$20.911
Adam & Eve double top278%-16%111%27%13246%241/31643%$18.422
Eve & Adam double top240%-16%88%22%23192%251/36841%$13.427
Eve & Eve double top290%-16%108%31%9204%279/40841%$13.239
Falling wedge75%-16%20%8%6351%51/7740%$3.1854
Head-and-shoulders top218%-16%90%25%14166%869/105445%$11.1615
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Head-and-shoulders, complex top236%-17%108%34%6152%183/18849%$6.8738
Rectangle top170%-16%64%20%33127%143/18943%$7.5535
Rising wedge120%-17%42%16%48108%239/31343%$5.1446
Rounding top151%-17%46%13%53102%124/20538%$6.5540
Ascending scallop199%-16%79%36%4153%62/7844%$8.3930
Descending scallop304%-17%119%41%1168%392/53742%$3.2553
Scallop, inverted and ascending224%-15%76%21%27145%32/5238%$10.5120
Scallop, descending and inverted194%-17%53%20%33130%185/37533%$2.9355
Triangle, ascending228%-17%89%29%10164%136/18043%$7.3736
Triangle, descending108%-16%32%13%5395%132/20639%$2.8456
Triangle, symmetrical175%-17%59%18%41133%369/56739%$6.9337
Triple top188%-16%67%21%27147%686/99541%$10.6918
Rectangle bottom248%-19%67%22%2394%66/13932%-$0.5962
3 falling peaks237%-17%84%24%17174%637/96640%$5.2145
Roof81%-17%23%9%60113%56/8141%$4.2950
Roof, inverted127%-17%52%18%41112%85/9148%$8.4029
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank

Top of page

Trading BARR Bottoms: 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 BARR bottom and selling only after a busted chart pattern appears). A stop loss order was used and priced a penny below the bottom of the BARR bottom (after buying).

For example, buying a BARR bottom with an upward breakout in a bull market and selling a busted broadening bottom shows winning trades making an average of 284%. Losing trades lost 25%, giving a net of 116%. Because the hold time is often years long, the annualized gain is 32%, giving the setup a rank of 8th (where 1 is best). If you traded this without a stop, the net gain climbed to 328%. Of the stocks I looked at, I found 96 trades with 44% of them winning. Expectancy was a gain of $13.46 per share, ranking 6th where 1 is best.

Trades with sample counts below 30 are not ranked.

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 bottom284%-25%116%32%8328%42/5444%$13.466
Broadening top266%-15%118%28%12181%111/12347%$14.085
Broadening formation, right-angled and ascending186%-18%66%20%33131%35/5041%$6.0241
Broadening formation, right-angled and descending157%-15%62%18%41114%49/6145%$5.2444
Broadening wedge, ascending196%-13%94%25%14145%19/1851%$8.8827
Broadening wedge, descending70%-14%23%9%6063%30/3745%$2.6058
Bump-and-run reversal bottom98%-12%24%9%6060%26/5233%$2.4460
Cup with handle280%-14%77%23%21115%14/3131%$7.8132
Diamond bottom197%-16%94%21%27171%37/3551%$10.3922
Diamond top195%-14%86%24%17145%41/4548%$10.8417
Adam & Adam double bottom217%-15%74%18%41208%153/24339%$14.863
Adam & Eve double bottom298%-17%100%22%23198%85/14437%$13.0111
Eve & Adam double bottom405%-15%146%34%6237%69/11138%$13.328
Eve & Eve double bottom149%-16%47%12%59109%63/10238%$7.7234
Falling wedge107%-15%29%13%5382%32/5836%-$1.2063
Head-and-shoulders bottom227%-15%98%24%17167%182/20847%$14.564
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Head-and-shoulders complex bottom129%-17%60%19%3889%27/2453%$2.6457
Rectangle top192%-16%67%20%33135%76/11540%$10.3623
Rising wedge128%-14%40%13%53112%29/4838%$4.5349
Round bottom68%-23%2%7%6/1627%
Rounding top125%-16%38%13%53102%15/2438%$2.6058
Ascending scallop139%-15%47%19%38100%54/8140%$4.6448
Descending scallop144%-17%31%15%5137%17/4030%$1.0961
Scallop, inverted and ascending152%-16%75%21%27122%87/7354%$8.9626
Scallop, descending and inverted271%-13%100%36%4179%31/4740%$5.0347
Triangle, ascending182%-15%58%20%33165%58/9837%$10.6519
Triangle, descending143%-16%57%21%27115%67/7946%$10.2124
Triangle, symmetrical219%-15%87%23%21189%220/28444%$11.4313
Triple bottom172%-16%62%18%41129%207/29641%$11.2614
Rectangle bottom143%-16%44%14%5260%30/5038%$11.7512
3 rising valleys202%-15%81%22%23154%129/16244%$13.0910
Roof112%-12%38%16%48113%14/2140%$8.4828
Roof, inverted230%-15%90%29%10216%32/4343%$9.4125
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank

Top of page

Trading BARR 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 BARR 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 sales for busted/non-busted patterns and the resulting performance.

Buying patterns with a short-term (0 to 3 months) duration from the trend start to the pattern's start results in significantly better performance the other durations.

Notice that selling non-busted patterns outperformed the busted patterns in for most durations.

Table 4: Short (S) Medium (M) or Long (L) Trend Start and Performance
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted patternS111% M76% L46%S102% M65% L54%

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 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).

Notice that selling non-busted patterns outperformed selling busted ones. I found that buying a BARR bottom when the breakout price was below the moving average resulted in substantially better performance than if the buy price was above the SMA.

Table 5: Above (A) Below (B) 50-Day Simple Moving Average
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted patternA50% B110%A47% B103%

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 show the same trend as the prior table: Buy when the breakout price is below the 200-day SMA.

Table 6: Above (A) Below (B) 200-Day Simple Moving Average
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted patternA52% B121%A55% B108%

Top of page

Selling First Bearish Chart Pattern

The prior discussion assumes you buy a BARR bottom 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 sell patterns involved (busted or non-busted). For example, if you buy a non-busted BARR bottom and sell the first non-busted chart pattern which comes along, you'd make 23% on average. Annualized, you'd make 38%. This compares to a 25% 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 selling the first non-busted pattern which appears. That combination makes 38% annually, beating the other annualized rates.

The bottom half of the table shows expectancy. For best performance, sell the first non-busted pattern which appears.

Table 7: Selling the First Bearish Pattern (Annualized)
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted pattern23% (38% v 25%)13% (19% v 22%)
Expectancy (Below)
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted pattern$5.01$3.41

-- 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:  Bedroom to Boardroom book Remember Me book Bumper's Story book Head's Law book
My stock market books:  Chart Patterns: After the Buy Getting Started in Chart Patterns 2nd edition book Trading Basics book Fundamental Analysis and Position Trading book Swing and Day Trading book Encyclopedia of chart patterns book Encyclopedia of Chart Patterns 3rd Edition book Trading classic chart patterns book

Copyright © 2005-2022 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