Thomas N. Bulkowski - Encyclopedia of Chart Patterns

If price enters the pattern from the top and exits out the top, that's a reversal. The same can be said if price enters from the bottom and breaks out downward (it's also a reversal).

Upward breakouts act as continuations most often, so we know the inbound price trend must have been upward, too. Downward breakouts act more often as reversals (suggesting price was trending upward into the pattern).

Reversal/continuation performance.Reversals for both breakout directions show better performance than continuations.

Average rise or decline.The average rise or decline isn't exceptional. As I mentioned, this pattern is a mid‐list performer, so don't expect a standing ovation.

Table 9.2 General Statistics

Standard & Poor's 500 change.The performance of the chart pattern beats the tar out of the index. I can't think of any pattern that failed to beat the general market results. That suggests the measure favors the chart pattern.

The chart pattern is performing at its best, from the breakout to the ultimate high or low. But the index, using the same dates, may fall well short of what it's capable of. However, the numbers also show how the general market assists individual stocks to perform. The market rises during upward breakouts and falls during downward ones.

Days to ultimate high or low.How long will your trade last? It lasts as long as you do not close out your position. However, I measured the average hold time from the breakout to the ultimate high or low.

Pop quiz: If it takes 243 days for price to rise 43% after an upward breakout, how long should it take price to drop 14% after a downward breakout, assuming the same velocity? Answer: 79 days. However, the table shows that it completes the trip in just 51 days. Thus, price drops much faster after a downward breakout than it rises in an uptrend. Often, price drops twice as fast.

How many change trend?In a gauge of how well price moves more than 20% from the breakout, this pattern does well. However, it's still a mid‐list performer. Have I mentioned that?

Table 9.3shows failure rates for the broadening pattern. For example, I found that 15% of the patterns with upward breakouts failed to see price rise more than 5% after the breakout. Downward breakouts failed almost twice as often. Yuck.

Notice as you scan down the list how failure rates increase. Half of all upward breakouts will see price fail to rise 25%. Downward breakouts see half the patterns failing to rise more than 10%.

If you want to average 50% on your trades, 72% of them will fail to meet the threshold after an upward breakout. And that's if you trade it often and perfectly. You could make more or less, depending on your skill and the situation (such as just after a bear market ends when even the losers are winning). Sprinkle in some losing trades and your winners will have to make even more to reach your 50% target.

Table 9.4shows breakout‐related statistics.

Breakout direction.The breakout direction is almost random with a slight advantage going to upward breakouts.

Yearly position, performance.I sorted the breakout price into the yearly high–low range and mapped performance on top of it. The table shows that breakouts occurring near the yearly low do better than those near the yearly high. It suggests this chart pattern does well with bottom‐fishing strategies (buy low, sell high). Avoid momentum trading this pattern (buy high, sell higher).

Throwbacks and pullbacks.Throwbacks and pullbacks occur about two‐thirds of the time. Price leaves the pattern for 6 days until it reaches the apex, either rising or falling 6% during the journey (depending on the breakout direction), and the stock returns to the breakout in another 6 days, for a 12‐day roundtrip.

Table 9.3 Cumulative Failure Rates

Table 9.4 Breakout and Post‐Breakout Statistics

Notice that performance improves if a throwback or pullback does not occur.

After a throwback or pullback completes, we see that price resumes trending upward after an upward breakout but struggles to drop after a downward breakout. Be careful shorting this pattern after a downward breakout. A pullback may see price drop as far as it's going to.

Gaps.Regardless of the breakout direction, a breakout day gap helps performance. That's good news. Why? Because I measured performance from the opening price the day after a gap to the ultimate high or low. Thus, you can buy into the situation after you see a gap and participate in the better‐performance party.

Table 9.5shows size‐related statistics.

Height.For both breakout directions, broadening patterns taller than the median height performed better than did their shorter counterparts.

To use this finding, measure the height of the pattern from top to bottom and divide by the breakout price. If the result is higher than the median listed in the table for the associated breakout direction, then the pattern is tall.

Width.Wide patterns performed better than narrow ones. Take the difference between the end date and start date of the pattern and compare it to the median width in the table. Wide patterns will exceed the median.

Height and width combinations.Tall and wide patterns outperform all other combinations. As a general rule for this pattern, avoid tall and narrow patterns with upward breakouts and avoid short and narrow patterns with downward breakouts.