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: Ugly Double Bottoms

Initial release: 12/23/2021.

The idea behind pattern pairs is to pick a chart pattern type (like ugly double bottoms) to buy and another to sell (like double tops). You buy the upward breakout from the ugly double 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 Ugly Double 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 ugly double bottom. 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...

To improve performance, try these tips.

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Trading Ugly Double 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 an ugly double 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.

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Trading Ugly Double Bottoms: Stops

I used a stop loss order set a penny below the bottom of the ugly double bottom. 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 ugly double bottoms and sold various non-busted patterns (broadening bottoms, broadening tops, head-and-shoulders tops, and so on), I made an average of 43% ("Stop Loss Only" column) after having a stop loss order in place. Losses averaged 13%. 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, 21%, but losses climbed to 12%. If I didn't use any type of stop, the gain averaged 45% with losses averaging 20%.

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%)  10% (-8%)  13% (-10%)  21% (-12%)  43% (-13%)  45% (-20%) 
Non-busted buys, busted sales 7% (-5%)  11% (-7%)  15% (-9%)  25% (-11%)  46% (-12%)  50% (-21%) 

Trading Ugly Double Bottoms: Busted Patterns

I compared the performance of sell signals for 22 different chart patterns and found that less than half (45%) of the time did a busted pattern outperform a non-busted pattern. To do this, I averaged the performance of each chart pattern and then compared that average to its busted counterpart in 22 contests. The pattern with the higher average gain won.

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Trading Ugly Double Bottoms: Non-busted Buy, Non-Busted Sale

Picture of a busted pattern pair.

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

For example, if you were to buy the upward breakout from a ugly double bottom 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 60% (annualized: 21%, ranking 12) on the 59 (30 winners, 29 losers) trades. That's an average of 132% on your winners, 15% average loss on your losers. You'd find that 51% of the trades made money.

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 84% per trade.

The expectancy was $6.92 per share per trade which ranks 16th where 1 is the best value.

Table 2: Statistics for Ugly Double Bottoms
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Broadening bottom132%-15%60%21%1284%30/2951%$6.9216
Broadening top117%-11%45%16%2577%63/7944%$7.2514
Broadening formation, right-angled and ascending94%-13%38%15%3050%56/6347%$3.1736
Broadening formation, right-angled and descending103%-8%60%22%1064%27/1761%$17.192
Broadening wedge, ascending64%-12%26%25%341%81/8050%$2.2141
Broadening wedge, descending88%-14%37%20%15102%35/3550%$5.1226
Bump-and-run reversal top86%-14%40%28%269%282/23954%$4.1231
Diamond bottom88%-7%40%42%8/850%
Diamond top107%-11%47%23%771%62/6549%$6.1322
Adam & Adam double top185%-13%69%16%28157%126/17642%$11.127
Adam & Eve double top197%-13%98%23%6162%69/6153%$16.693
Eve & Adam double top131%-14%62%18%19128%89/8152%$8.639
Eve & Eve double top98%-12%39%17%2164%127/14447%$5.0427
Falling wedge41%-14%5%4%499%22/4234%$0.4347
Head-and-shoulders top97%-12%45%17%2373%392/36052%$6.7418
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Head-and-shoulders, complex top72%-11%34%23%848%115/9455%$3.6933
Rectangle top134%-13%61%25%471%61/6150%$6.3821
Rising wedge76%-14%32%15%3257%141/13252%$2.9238
Rounding top98%-14%30%11%4045%51/7840%$4.8728
Ascending scallop76%-15%30%17%2292%74/7649%$3.3535
Descending scallop81%-15%26%13%3360%213/28543%$4.5129
Scallop, inverted and ascending135%-18%49%10%44111%15/1944%$3.3934
Scallop, descending and inverted81%-15%25%12%3782%171/24741%$2.0842
Triangle, ascending87%-13%41%20%1449%85/7254%$4.3030
Triangle, descending66%-14%19%16%2927%119/17141%$1.6644
Triangle, symmetrical119%-13%47%18%1877%157/18546%$5.5725
Triple top157%-12%69%20%13105%197/21448%$8.5211
Rectangle bottom134%-14%48%22%1147%41/5742%$13.155
3 falling peaks154%-19%67%16%26124%256/26150%$6.0323
Roof49%-11%6%5%4724%32/8029%$1.6245
Roof, inverted58%-13%20%11%4139%39/4546%$1.9043
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank

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Trading Ugly Double 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 ugly double bottom and selling only after a busted chart pattern). A stop loss order was used and priced a penny below the bottom of the ugly double bottom (after buying).

For example, buying a ugly double bottom with an upward breakout in a bull market and selling a busted broadening top shows winning trades making an average of 206%. Losing trades lost 11%, giving a net of 87%, annualized net is 19% ranking 16th (where 1 is best).

If you traded this without a stop, the net gain climbed to 117%. Of the stocks I looked at, I found 64 trades with 45% of them winning. Expectancy was $15.01 per share, ranking 4th 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 bottom105%-12%64%92%11/665%
Broadening top206%-11%87%19%16117%29/3545%$15.014
Broadening formation, right-angled and ascending62%-17%36%41%14/767%
Broadening formation, right-angled and descending70%-11%36%112%15/1158%
Broadening wedge, ascending96%-18%25%47%3/538%
Broadening wedge, descending90%-11%18%9%4642%10/2529%-$0.3449
Bump-and-run reversal bottom32%-11%-1%-1%519%11/3623%-$0.5850
Cup with handle60%-17%16%10%4322%15/2043%$0.3848
Diamond bottom143%-7%109%170%7/278%
Diamond top103%-7%44%10%4599%14/1647%$6.4320
Adam & Adam double bottom134%-14%51%12%36136%44/5744%$8.6310
Adam & Eve double bottom175%-11%71%19%17103%28/3644%$7.5012
Eve & Adam double bottom167%-10%63%16%2788%21/3041%$6.4519
Eve & Eve double bottom263%-15%63%17%2092%11/2828%$2.9737
Falling wedge35%-9%7%5%4836%23/3937%$0.8446
Head-and-shoulders bottom102%-12%39%12%3563%41/5045%$2.3440
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Head-and-shoulders complex bottom23%-10%2%2%504%12/2038%-$3.4251
Rectangle top68%-10%34%12%3858%41/3256%$7.5013
Rising wedge84%-11%27%81%10/1540%
Round bottom64%-9%28%28%2/250%
Rounding top126%-12%48%72%7/944%
Ascending scallop58%-12%24%15%3135%56/5252%$2.7739
Descending scallop76%-15%8%39%5/1525%
Scallop, inverted and ascending177%-18%121%23%9147%35/1471%$21.051
Scallop, descending and inverted175%-24%93%99%10/759%
Triangle, ascending48%-10%23%11%4228%41/3256%$3.8432
Triangle, descending169%-16%71%24%5117%15/1747%$5.7724
Triangle, symmetrical84%-13%41%12%3471%93/7456%$6.7417
Triple bottom137%-13%63%17%2485%69/6850%$6.9315
Rectangle bottom114%-19%66%89%16/964%
3 rising valleys117%-15%60%12%3996%58/4457%$12.566
Roof148%-9%80%49%188%17/1357%$8.938
Roof, inverted43%-9%11%18%11/1739%
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank

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Trading Ugly Double 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 ugly double 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 busted/non-busted trades and the resulting performance.

Selling patterns with a short-term (0 to 3 months) duration from the trend start to the pattern's start can give you a slight edge.

Table 4: Short (S) Medium (M) or Long (L) Trend Start and Performance
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted patternS57% M41% L12%S60% M49% L12%

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

Buy if the breakout price is above the 50-day SMA.

Table 5: Above (A) Below (B) 50-Day Simple Moving Average
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted patternA55% B34%A61% B34%

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 flip from the prior table. Better performance comes from breakouts 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 patternA25% B55%A19% B59%

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Selling First Bearish Chart Pattern

The prior discussion assumes you buy a ugly double bottom and 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 ugly double bottom and sell the first non-busted chart pattern which comes along, you'd make 30% on average. Annualized, you'd make 24%. 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).

Sell the first non-busted bearish pattern that appears.

The bottom half of the table shows the expectancy of profit, which is higher when selling busted patterns.

Table 7: Selling the First Bearish Pattern (Annualized)
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted pattern30% (24% v 17%)25% (13% v 14%)
Expectancy (Below)
 Sell Non-Busted PatternSell Busted Pattern
Buy non-busted pattern$2.82$4.07

-- Thomas Bulkowski

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See Also

 

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