As of 03/28/2024
  Indus: 39,807 +47.29 +0.1%  
  Trans: 16,212 +183.07 +1.1%  
  Utils: 882 +7.51 +0.9%  
  Nasdaq: 16,379 -20.06 -0.1%  
  S&P 500: 5,254 +5.86 +0.1%  
YTD
 +5.6%  
 +2.0%  
 +0.1%  
 +9.1%  
 +10.2%  
  Targets    Overview: 03/13/2024  
  Up arrow40,000 or 38,500 by 04/01/2024
  Up arrow16,300 or 15,350 by 04/01/2024
  Up arrow885 or 830 by 04/01/2024
  Up arrow16,600 or 15,200 by 04/01/2024
  Up arrow5,350 or 5,100 by 04/01/2024
As of 03/28/2024
  Indus: 39,807 +47.29 +0.1%  
  Trans: 16,212 +183.07 +1.1%  
  Utils: 882 +7.51 +0.9%  
  Nasdaq: 16,379 -20.06 -0.1%  
  S&P 500: 5,254 +5.86 +0.1%  
YTD
 +5.6%  
 +2.0%  
 +0.1%  
 +9.1%  
 +10.2%  
  Targets    Overview: 03/13/2024  
  Up arrow40,000 or 38,500 by 04/01/2024
  Up arrow16,300 or 15,350 by 04/01/2024
  Up arrow885 or 830 by 04/01/2024
  Up arrow16,600 or 15,200 by 04/01/2024
  Up arrow5,350 or 5,100 by 04/01/2024

Bulkowski on Pattern Pairs: Bump-and-Run Reversal Tops

Initial release: 11/12/2021.

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.

Trading BARR 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 a busted bump-and-run reversal top (BARR top). 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).

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.

Sell a...

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

To improve performance, try these tips.

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Trading BARR 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 busted BARR 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 43 chart patterns in the analysis, but some only applied if they were busted.

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Trading BARR Tops: 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 busted BARR tops and sold various non-busted patterns (broadening bottoms, broadening tops, head-and-shoulders tops, and so on), I made an average of 47% ("Stop Loss Only" column) after having a stop loss order in place. Losses averaged 19%. Replacing the stop loss with a 10% trailing stop cut the gain to 5% but also trimmed the average loss to 5%. Using a 25% trailing stop allowed me to keep more money, 18%, but losses climbed to 13%. If I didn't use any type of stop, the gain averaged 109% with losses averaging 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
Busted buys, non-busted sales 5% (-5%)  11% (-8%)  12% (-10%)  18% (-13%)  47% (-19%)  109% (-32%) 
Busted buys, busted sales 5% (-5%)  11% (-8%)  14% (-10%)  17% (-13%)  33% (-17%)  106% (-29%) 

Trading BARR Tops: 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 6 or 27% of the time selling a busted pattern gave a higher net gain than selling a non-busted pattern.

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Trading BARR Tops: Busted Buy, Non-Busted Sale

Picture of a busted pattern pair.

Table 2 shows statistics I collected for BARR Tops 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 a busted BARR top 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 24% on the 79 (32 winners, 47 losers) trades. That's an average of 91% on your winners, 22% average loss on your losers, and holding onto the position an average of 3.2 years. You'd find that only 41% of the trades made money but you'd gain an average of 7% per year (ranking 40th 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 56% per trade.

The expectancy averages $5.58 per share per trade which ranks 28th where 1 is the best value. Using my data to trade, you'd average $558 per trade (on 100 shares).

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. Trades with sample counts below 30 are not ranked.

Table 2 Statistics for Busted BARR Tops, non-Busted Sales
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Broadening bottom91%-22%24%7%4056%32/4741%$5.5828
Broadening top134%-21%36%12%1579%75/13136%$5.8127
Broadening formation, right-angled and ascending108%-18%25%8%3593%30/5834%-$0.9250
Broadening formation, right-angled and descending133%-21%23%9%2866%17/4229%$7.9321
Broadening wedge, ascending119%-21%35%14%11107%28/4339%$1.5640
Broadening wedge, descending163%-18%32%9%28102%17/4428%$2.7635
Bump-and-run reversal top98%-19%40%15%885%121/12150%$5.4229
Diamond bottom177%-17%80%19%3127%16/1650%$6.6124
Diamond top116%-15%49%19%371%33/35649%$9.1217
Adam & Adam double top321%-18%98%21%2204%147/28334%$15.088
Adam & Eve double top174%-18%46%11%23114%70/14233%$9.8115
Eve & Adam double top189%-19%52%12%15125%85/16434%$9.0218
Eve & Eve double top169%-19%56%15%8109%93/14040%$19.342
Falling wedge65%-18%9%3%5251%21/4432%$0.4545
Head-and-shoulders top171%-18%49%13%13129%266/48435%$12.3410
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Head-and-shoulders, complex top134%-19%40%10%2667%51/8238%$9.7416
Rectangle top162%-18%33%12%1575%30/7628%$1.6639
Rising wedge135%-19%44%12%1599%90/13141%$3.7332
Rounding top154%-20%45%12%1597%41/7037%$5.8826
Ascending scallop134%-18%63%22%179%33/2953%$16.467
Descending scallop165%-19%49%16%675%135/23237%$4.0831
Scallop, inverted and ascending348%-19%70%104%7/2224%
Scallop, descending and inverted111%-19%29%9%2845%93/16236%$3.6933
Triangle, ascending143%-19%27%10%26110%33/8328%$1.1942
Triangle, descending118%-18%24%9%2857%36/7931%-$1.0651
Triangle, symmetrical119%-19%29%9%2885%117/22334%$6.1225
Triple top153%-18%46%12%15108%225/37637%$8.8419
Rectangle bottom142%-19%19%6%4437%19/6124%-$2.4552
3 falling peaks170%-19%52%14%11106%287/48137%$16.876
Roof56%-17%9%3%5276%11/2035%$6.9422
Roof, inverted231%-18%57%18%5114%17/3930%$10.4611
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank

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Trading BARR Tops: Busted Buy, Busted Sale

Picture of a busted pattern pair.

The figure shows an example of how this trade unfolds.

A busted BARR top appears and you buy at the day after it closes above the top of the chart pattern. 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 busted BARR top 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 top (after buying).

For example, buying a busted BARR top in a bull market and selling a busted broadening bottom shows winning trades making an average of 101%. Losing trades lost 17%, giving a net of 20%. Because the hold time is often years long, the annualized gain is 6%, giving the setup a rank of 44th (where 1 is best). If you traded this without a stop, the net gain climbed to 122%. Of the stocks I looked at, I found 51 trades with 31% of them winning. Expectancy was a gain of $0.07 per share, ranking 46th where 1 is best. The expectancy suggests making a profit trading this pair would be difficult.

Trades with sample counts below 30 are not ranked.

Table 3: Statistics for Busted Buy, Busted Sale
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Broadening bottom101%-17%20%6%44122%16/3531%$0.0746
Broadening top111%-17%31%8%3591%34/5737%$6.7123
Broadening formation, right-angled and ascending125%-20%25%9%2871%11/2531%-$0.6748
Broadening formation, right-angled and descending97%-15%27%8%3545%18/3038%$1.7838
Broadening wedge, ascending109%-15%50%88%10/953%
Broadening wedge, descending72%-18%15%5%4657%12/2136%$0.5843
Bump-and-run reversal bottom155%-12%42%12%15140%10/2132%$10.1714
Cup with handle81%-23%16%30%6/1038%
Diamond bottom93%-18%32%166%13/1645%
Diamond top77%-16%25%7%4053%17/2244%-$0.2047
Adam & Adam double bottom248%-18%67%15%8190%43/9132%$10.1813
Adam & Eve double bottom109%-17%19%5%46110%22/5529%$2.2137
Eve & Adam double bottom140%-17%42%9%28187%22/3737%$8.0620
Eve & Eve double bottom118%-20%19%4%5069%14/3628%$3.3334
Falling wedge44%-17%2%31%9/2031%
Head-and-shoulders bottom146%-16%46%11%23106%68/10839%$14.769
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Head-and-shoulders complex bottom39%-20%-4%44%6/1627%
Rectangle top190%-19%29%7%4080%14/4723%$2.7236
Rising wedge89%-16%15%4%5041%12/2929%-$11.9653
Round bottom65%-19%13%36%5/838%
Rounding top78%-18%15%62%10/1934%
Ascending scallop96%-20%23%8%3539%21/3538%-$0.7449
Descending scallop99%-12%37%90%8/1044%
Scallop, inverted and ascending128%-16%48%12%1568%35/4444%$24.881
Scallop, descending and inverted151%-17%45%16%6110%14/2437%$10.4512
Triangle, ascending87%-16%17%5%4659%16/3432%$0.5344
Triangle, descending82%-17%19%5%4676%19/3337%$5.1930
Triangle, symmetrical125%-17%28%7%4082%57/12431%$1.4941
Triple bottom153%-18%40%11%23106%71/13934%$17.045
Rectangle bottom135%-18%43%13%13177%14/2140%$17.294
3 rising valleys113%-17%27%8%35126%57/11134%$17.303
Roof314%-16%55%167%3/1121%
Roof, inverted181%-18%70%144%11/1444%
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank

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Trading BARR 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 BARR 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 4 shows the results for the combinations of sales for busted/non-busted patterns and the resulting performance.

Selecting BARR tops with a short-term (up to 3 months) duration from the trend start to the pattern's start (buy pattern only) results in significantly better performance than the other combinations.

Notice that selling non-busted patterns outperformed the busted patterns for each duration (comparing short to short, medium to medium, and long to long).

Table 4: Short (S) Medium (M) or Long (L) Trend Start and Performance
 Sell Non-Busted PatternSell Busted Pattern
Buy busted patternS75% M23% L38%S44% M19% L33%

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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 entry price to the value of the moving average. Table 5 shows the performance of buying busted patterns when the breakout price was above (A) or below (B) the 50-day simple moving average (SMA).

Given that BARR patterns are wide and the buy price will be at the top of the BARR, few patterns will be below the SMA, so expect those numbers to change.

I found that buying a BARR top when the breakout price was above the moving average resulted in substantially better performance than if the buy price was below the SMA.

Table 5: Above (A) Below (B) 50-Day Simple Moving Average
 Sell Non-Busted PatternSell Busted Pattern
Buy busted patternA47% B-10%A34% B-10%

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 above the 200-day SMA.

Table 6: Above (A) Below (B) 200-Day Simple Moving Average
 Sell Non-Busted PatternSell Busted Pattern
Buy busted patternA49% B-14%A35% B-16%

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Selling First Bearish Chart Pattern

The prior discussion assumes you buy a busted BARR top 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 busted BARR top and sell the first non-busted chart pattern which comes along, you'd make 11% on average. Annualized, you'd make 21%. This compares to a 13% 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 21% 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 busted pattern11% (21% v 13%)8% (11% v 9%)
Expectancy (Below)
 Sell Non-Busted PatternSell Busted Pattern
Buy busted pattern$6.77$2.15

-- Thomas Bulkowski

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