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  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: Complex Head-and-Shoulders Tops

Initial release: 11/23/2021.

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 Complex Head-and-Shoulders Tops: Summary

Picture of the pattern pairs.

For simplicity, I refer to complex head-and-shoulders tops as cHSTs.

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 cHST (price breaks out downward, drops no more than 10%, reverses, and closes above the top of the cHST). 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).

Buy a busted cHST 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.

Buy a busted cHST and sell a...

Selling non-busted chart patterns results in better performance than selling busted patterns (based on 22 contests).

To improve performance, try these tips.

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Trading Complex Head-and-Shoulders 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 along the way to the one I did catalog. So buying a busted double top and selling the downward breakout from a rising wedge I cataloged would be different than choosing to sell a different rising wedge. 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 Complex Head-and-Shoulders Tops: Stops

I used a stop loss order set a penny below the bottom of the busted cHST. 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 cHSTs and sold various non-busted patterns (broadening bottoms, broadening tops, head-and-shoulders tops, and so on), I made an average of 6% ("Stop Loss Only" column) after having a stop loss order in place. Losses averaged 10%. Replacing the stop loss with a 10% trailing stop cut the gain to 2% but also trimmed the average loss to 6%. Using a 25% trailing stop allowed me to keep more money, 7%, but losses climbed to 14%. If I didn't use any type of stop, the gain averaged 65% 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
Busted buys, non-busted sales 2% (-6%)  4% (-9%)  6% (-11%)  7% (-14%)  6% (-10%)  65% (-30%) 
Busted buys, busted sales 2% (-6%)  3% (-9%)  5% (-10%)  6% (-13%)  7% (-10%)  64% (-29%) 

Trading Complex Head-and-Shoulders Tops: Busted Patterns

A busted cHST has a downward breakout but price drops no more than 10% before reversing and moving above the top of the pattern.

In 22 contests (selling 22 different chart pattern types, depending on which apply), I compared the performance of sales using busted and non-busted patterns. I found that selling non-busted patterns resulted in better performance than selling busted ones 59% of the time.

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Trading Complex Head-and-Shoulders Tops: Busted Buy, Non-Busted Sale

Picture of a busted pattern pair.

The figure shows the setup for this scenario. When price busts the downward breakout from a bearish cHST, buy. Sell after a downward breakout from a non-busted target chart pattern.

Table 2 shows the performance of this scenario. A stop loss order was used and priced a penny below the bottom of the cHST (after buying).

For example, buying an cHST with a busted downward breakout in a bull market and selling after the downward breakout from a broadening bottom shows winners averaging gains of 65%. Losses average 10%, for a net gain of 1%. The annualized net remains 1%. Only 65 trades occurred with a win/loss ratio of 14%. This scenario ranks the net gain as 26th among the two tables (2 and 3). If you traded this as a buy-and-hold position, meaning no stops were used, the net gain climbed to a gain of 87%. Expectancy was a loss of $1.04 per share, ranking 32nd where 1 is best.

Trades with sample counts below 30 are not ranked.

Table 2: Statistics for Busted Buys, Non-Busted Sales
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Broadening bottom65%-10%1%1%2687%9/5614%-$1.0432
Broadening top97%-11%4%3%2187%16/10413%$1.5515
Broadening formation, right-angled and ascending22%-11%-2%-2%3214%16/4427%-$1.1033
Broadening formation, right-angled and descending68%-11%-2%-2%3239%5/4011%-$1.8134
Broadening wedge, ascending35%-10%1%1%2648%8/2425%-$0.5029
Broadening wedge, descending39%-10%-7%-8%414%2/306%-$3.1842
Bump-and-run reversal top79%-12%6%6%1450%23/9220%$0.5423
Diamond bottom16%-11%-9%41%1/147%
Diamond top58%-11%11%8%754%14/3032%$4.166
Adam & Adam double top133%-10%20%11%3115%58/21721%$4.833
Adam & Eve double top98%-11%10%6%1497%22/9419%$2.9712
Eve & Adam double top93%-11%3%2%25101%17/11213%$0.0127
Eve & Eve double top95%-10%12%8%786%32/12221%$3.598
Falling wedge117%-11%-3%-2%3212%2/287%-$2.6639
Head-and-shoulders top89%-11%7%5%1869%82/37018%$1.1417
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Head-and-shoulders, complex top28%-10%-3%-3%3732%13/5818%-$2.0237
Rectangle top82%-11%3%3%2134%11/6215%$1.6114
Rising wedge67%-10%6%5%1856%30/11221%$0.7320
Rounding top111%-12%17%9%560%22/3924%$4.255
Ascending scallop22%-11%-8%25%2/1810%
Descending scallop95%-12%8%6%1448%35/15518%$1.1018
Scallop, inverted and ascending154%-9%13%8%781%4/2613%$1.9913
Scallop, descending and inverted33%-11%-6%-5%3827%11/7812%-$1.8435
Triangle, ascending71%-10%12%8%764%20/5327%$4.504
Triangle, descending27%-11%-1%-1%3116%15/4525%-$0.6830
Triangle, symmetrical53%-11%1%1%2642%39/17318%$0.5922
Triple top75%-10%5%4%2071%60/28218%$0.5423
Rectangle bottom70%-11%-7%-7%39-3%3/535%-$2.8240
3 falling peaks99%-11%8%6%1449%58/28517%$0.7021
Roof56%-11%8%59%6/1529%
Roof, inverted49%-11%13%9%558%17/2640%$4.027
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank

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Trading Complex Head-and-Shoulders Tops: Busted Buy, Busted Sale

Picture of a busted pattern pair.

Table 3 shows trading statistics for busted Complex Head-and-Shoulders Tops as the entry signal and various busted chart patterns as the exit signal. Keep in mind that some trades were few. A stop loss order was used and priced a penny below the bottom of the cHST (after buying).

The associated figure shows the setup.

For example, buying a busted cHST and selling a busted broadening bottom made 50% from the winners, lost 12% on the losers for a net loss of 3%. Annualized, it was -2%. The net loss placed the performance of this setup at 32, where a rank of 1 is best.

Removing stops from the trades allowed them to make 37%. Only 33 trades were taken and 15% of them were winners. Expectancy was a loss of $0.27 per share, ranking 28th where 1 is best.

Trades with sample counts below 30 are not ranked.

Table 3: Statistics for Busted Buys and Sales
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Broadening bottom50%-12%-3%-2%3237%5/2815%-$0.2728
Broadening top57%-9%5%3%2136%15/5521%$1.5216
Broadening formation, right-angled and ascending66%-11%1%1%2639%5/2815%$0.2425
Broadening formation, right-angled and descending34%-12%-7%-9%4257%3/2810%-$2.8240
Broadening wedge, ascending119%-10%67%82%3/260%
Broadening wedge, descending3%-11%-10%-2%1/176%
Bump-and-run reversal bottomNone-8%-8%7%0/180%
Cup with handle6%-12%-7%31%2/529%
Diamond bottom96%-9%-3%12%1/166%
Diamond top62%-8%-1%49%3/2511%
Adam & Adam double bottom86%-10%4%3%2181%16/9115%$0.9819
Adam & Eve double bottom209%-11%37%16%151%9/3222%$11.561
Eve & Adam double bottom104%-10%24%11%397%14/3330%$3.4110
Eve & Eve double bottom152%-11%2%70%2/238%
Falling wedge128%-10%18%33%4/1620%
Head-and-shoulders bottom42%-10%-2%-2%3241%16/9315%-$2.2238
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank
Head-and-shoulders complex bottom40%-14%4%46%5/1033%
Rectangle top92%-10%9%7%1275%9/4018%$0.1926
Rising wedge74%-10%11%35%5/1525%
Round bottom3%-12%-8%4%2/625%
Rounding topNone-15%-15%-4%0/90%
Ascending scallop50%-10%-3%84%3/2212%
Descending scallop60%-14%5%98%3/925%
Scallop, inverted and ascending57%-11%13%7%12116%14/2536%$6.502
Scallop, descending and inverted49%-11%4%40%5/1525%
Triangle, ascending16%-12%-5%-7%3950%8/2624%-$1.8435
Triangle, descending35%-9%-3%91%4/2215%
Triangle, symmetrical46%-11%0%0%3051%21/9318%-$0.8531
Triple bottom109%-11%22%14%260%35/9327%$3.499
Rectangle bottom16%-10%-7%25%3/2013%
3 rising valleys106%-11%17%8%767%19/6024%$3.3911
Roof289%-16%106%98%2/340%
Roof, inverted36%-7%7%15%3/633%
Sell PatternAverage
Win
Average
Loss
NetAnnualized
Net
RankNo Stop
Net
Win/Loss
Samples
Win
Loss
Average
Expectancy
Expectancy
Rank

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Trading Complex Head-and-Shoulders 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 cHST. 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 two combinations of busted/non-busted trades and the resulting performance.

The medium term (3 to 6 months) worked best when selling non-busted patterns and the short-term (up to 3 months) worked best for selling busted patterns.

Table 4: Short (S) Medium (M) or Long (L) Trend Start and Performance
 Sell Non-Busted PatternSell Busted Pattern
Buy busted patternS5% M9% L6%S10% M6% L5%

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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 (A) or below (B) the 50-day simple moving average (SMA).

The results are obvious: buy a busted cHST if the breakout price is below the 50-day SMA. Keep in mind that the number of trades are few when price is below the SMA (as few as 39 trades below the SMA versus 1,186 when price is above the SMA). A low sample count may be the reason for the startling performance difference.

Table 5: Above (A) Below (B) 50-Day Simple Moving Average
 Sell Non-Busted PatternSell Busted Pattern
Buy busted patternA4% B59%A6% B50%

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.

For both busted and non-busted sales, performance improves if the breakout price is below the 200-day SMA. The same caution applies to small sample counts here, too (as few as 110).

Table 6: Above (A) Below (B) 200-Day Simple Moving Average
 Sell Non-Busted PatternSell Busted Pattern
Buy busted patternA4% B35%A3% B51%

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Selling First Bearish Chart Pattern

The prior discussion assumes you buy a busted cHST but sell a chart pattern of your choosing, such as a downward breakout from a double 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 busted cHST and sell the first non-busted chart pattern which comes along, you'd make 5% on average. Annualized, you'd make 14%. This compares to a 5% 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 5% number is the average of all chart pattern types fitting the non-busted category).

The best results come from buying a busted cHST and selling the first non-busted pattern which appears. That combination makes 14% annually, beating the other annualized rates.

The bottom half of the table shows expectancy for the two combinations. Selling a non-busted pattern leads to a higher expectancy of profit.

Table 7: Selling the First Bearish Pattern (Annualized)
 Sell Non-Busted PatternSell Busted Pattern
Buy busted pattern5% (14% v 5%)0% (-1% v 5%)
Expectancy (Below)
 Sell Non-Busted PatternSell Busted Pattern
Buy busted pattern$1.80$-0.57

-- Thomas Bulkowski

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See Also

 

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