Thomas N. Bulkowski - Encyclopedia of Chart Patterns

I didn't see any significant performance difference for patterns with and without throwbacks or pullbacks. With other chart patterns, if a throwback or pullback occurs, performance suffers (on average).

Price resumes the upward move 71% of the time (which is quite good) and the downtrend 55% of the time (which needs improvement, but it's not bad).

Gaps.Most of the time (for other chart patterns), breakout day gaps help performance but we see that behavior in this pattern only after a downward breakout.

The rumors you've heard are true: Table 10.5shows size‐related statistics.

Height.Tall patterns perform substantially better than short ones. How do you use this result? Compute the pattern's height from the price of the top trendline to the last touch of the lower trendline (the lowest low in the pattern). Divide the difference by the breakout price. If the result is above the median shown in the table, then you have a tall pattern; below the median means it is a short one. Invest only in tall patterns unless you feel confident of your assessment.

Table 10.5 Size Statistics

Width.Wide patterns outperform narrow ones but not by an amount worth telling Mom about. I used the median length to separate narrow patterns from wide ones.

Height and width combinations.The worst performance comes from patterns that are both short and wide. You will want to avoid those. The best performance happens for patterns both tall and wide. The performance differences are large enough that you should pay attention to them when contemplating a trade.

Table 10.6shows volume‐related statistics.

Volume trend.Volume trends upward most often, but the direction is near random.

Rising/Falling volume.Broadening patterns with rising volume trend show better performance after the breakout than when volume recedes (as measured from the start to the end of the pattern).

Breakout volume.Technical analysts seem to place a lot of emphasis on heavy breakout volume, but as the table shows, the results I found are not statistically significant (for heavy or light breakout volume versus performance).

Table 10.7shows how often price reaches a stop location. I split the pattern in half (I sedated it ahead of time) and checked how often price returned to the various parts on the journey from the breakout to the ultimate high or low.

Table 10.6 Volume Statistics

Table 10.7 How Often Stops Hit

For example, broadening patterns with upward breakouts saw price return to the top of the pattern 78% of the time. It suggests you don't want to place a stop‐loss order there. If you stick the stop order at the bottom of the pattern, it'll avoid being hit 95% of the time, but the resulting loss may be higher than you can tolerate. So do check both the position of the stop and the size of the loss should the stop trigger. A volatility stop may be just what you're looking for. I've hidden some in the Glossary (see “Volatility stop”).

Table 10.8shows the performance over three decades.

Performance over time.For upward breakouts, the 2000s posted stellar gains. Downward breakouts suffered during the same time (and that makes intuitive sense).

Failures over time.Failures (failure of price to rise or fall more than 5% after the breakout) after upward breakouts happened most often in the 2010s, and downward breakouts also show a lot of failures in that decade, but the 2000s edged them out. There were two bear markets during the 2000s, but I used a coffee filter to remove them from the statistics.

Table 10.9shows statistics for busted patterns.

Table 10.8 Performance and Failures Over Time for Bull Markets

Table 10.9 Busted Patterns

Busted patterns count.I'm always surprised at how many patterns fail to move more than 10% away from the pattern, then reverse and shoot out the other side of the pattern. Here, we have over a quarter (29%) to nearly half (43%) bust the up or down breakout, respectively.

Busted occurrence.I sorted the number of busts into one, two, or more than two busts (triple+). Single busts happen most often. Notice that triple+ busts place second after a downward breakout. I've seen this in other patterns, too.

Busted and non‐busted performance.Look at the performance after a single busted downward breakout: Broadening patterns see price rise an average of 60%. When I read that, my jaw swung open, my dentures fell out, and I had to pick them up off the carpet. Single busts also outperformed after a busted upward breakout.

The 60% number is so startling that if you can find a busted downward breakout, then do consider trading the pattern.

Non‐busted patterns seem to have the edge (and it's slight) on performance if you disregard the single busted patterns and downward breakouts.

Table 10.10outlines trading tactics for descending broadening formations.

Measure rule. Figure 10.7illustrates the use of the measure rule. Compute the broadening pattern's height by first taking the difference between the highest high (A, 49.50) and the lowest low (B, 43.50). Add the result (6) to the value of the horizontal trendline to get a target price of 55.50 (for an upward breakout). Price reaches this target during mid‐March 1996 as the stock climbs on its way to 60.