Thomas N. Bulkowski - Encyclopedia of Chart Patterns

After a throwback or pullback ends, the stock resumes moving upward 75% of the time after an upward breakout and drops 49% of the time after a downward breakout. Be careful when thinking you can short after a pullback completes. Price might continue rising instead (51% do).

Gaps.Do breakout day gaps help performance? Sometimes. Gaps are not a big indicator of future performance. I checked the statistics for various types of chart patterns (double bottoms, head‐and‐shoulders, and so on), and the average performance improvement is one percentage point. Upward breakouts in bull markets saw price climb by two percentage points if they had a gap. That's for all non‐Fibonacci chart patterns. In other words, there's not a big performance difference when you average all the numbers together.

For broadening bottoms, gaps help performance by an average of one to four percentage points, depending on the breakout direction. The gap size is slightly larger after a downward breakout, and that might have something to do with how price drops faster than it rises.

Table 8.5shows pattern size statistics. This is one of my favorite tables because height is usually the best indicator of future performance.

Height.Tall patterns outperform. What is meant by tall ? Compute the height of the pattern from the top of the broadening pattern to the bottom and divide the result by the breakout price. A tall pattern will have a ratio larger than that shown in the table for the associated breakout direction.

Table 8.5 Size Statistics

Warning: Just because a pattern is tall does not mean it'll outperform. The numbers are an average of hundreds of perfect trades. Plus, you might flub the trade anyway.

Width.Width is not as strong an indicator for future performance as is height. The table shows an example of this, too. After an upward breakout, narrow patterns outperform but wide ones do better after downward breakouts.

To determine width, measure the calendar days from the start of the pattern to the end and compare the result to the median width in the table. A value higher than the median means it's wide.

Height and width combinations.According to the table for upward breakouts, if tall patterns outperform and narrow patterns outperform, you'd expect the combination of tall and narrow to be the best performer. Indeed, that's what happens, but that's not always the case.

For downward breakouts, tall and wide patterns should outperform, but the results show that anything tall is best. Avoid short patterns.

Table 8.6shows volume‐related statistics. If the height table is my favorite, then volume is at the other end. I think traders put too much emphasis on volume. Remember that for every share sold, one is bought. If an institution buys a gazillion shares, they are probably buying it from another institution that is selling a gazillion shares.

Volume trend.Volume trends higher most often in the chart pattern.

Rising/Falling volume.I sorted performance by the trend direction and found that patterns with a rising volume trend outperform.

Breakout day volume.Heavy breakout day volume only sees improved performance for broadening bottoms after upward breakouts.

Table 8.7shows how often price reaches a stop location. You can use this information to help locate a stop‐loss order, should you decide to use one. I'm not being cute here. Investors (buy‐and‐holders) should not use a stop in my opinion. Shorter‐term traders would be wise to use a well‐placed stop or a mental stop (if you have the willpower to obey that).

I sliced the chart pattern in half and measured how often price during a trade returned to touch the top, middle, or bottom of the chart pattern. See the Glossary (“Stops”) for details on how I did this in case you're interested. ( Hint: I didn't use power tools.)

Table 8.6 Volume Statistics

Table 8.7 How Often Stops Hit

Table 8.8 Performance and Failures Over Time for Bull Markets

If you place a stop at the top of the pattern, price will take out the stop 77% of the time after an upward breakout. Downward breakouts will only reach the top of the pattern 1% of the time. That makes sense, doesn't it?

Table 8.8shows the performance over three decades. How has the pattern performed over time? Let's find out.

Performance over time.Upward breakouts in the 1990s suffered but downward breakouts did better. I can't explain why. The 2000s contained not one but two bear markets, but I excluded those results from the table.

Failures over time.The 1990s were the worst performers, but they have the best (lowest) failure rates. Again, this puzzles me. Because the failure rate is a function of performance, then I'd expected patterns that showed big moves to have lower failure rates. They don't.

Table 8.9shows busted pattern performance. At one time, I thought that busted patterns were the way to make a bundle trading chart patterns. They can be, but it's not as easy as you might expect.

Busted patterns count.I counted the number of busted patterns and found that 42% of broadening bottoms with downward breakouts will bust. Ouch . It's less painful for upward breakouts, with a quarter of them busting.

Busted occurrence.If we sort the busted patterns into three bins, single busts, double busts, and three or most busts (triple+), we see the results in the table. Notice that most of the busts are single ones.

Busted and non‐busted performance.The last three lines in the table show the performance of busted and non‐busted ones. Notice that single busted patterns perform better than all busted patterns (single, double, triple+) and also beat the non‐busted pattern performance.