Thomas N. Bulkowski - Encyclopedia of Chart Patterns

If you want to participate in a gap trade, know that I measured performance using the opening price the day after the gap, so you can buy a stock after it shows a gap and maybe you can participate in the better performance.

Table 11.4 Breakout and Post‐Breakout Statistics

Table 11.5shows statistics related to size.

Height.In all cases, tall patterns see better post‐breakout performance than short ones.

To use this finding, measure the pattern's height from the highest high to the lowest low. Divide the difference by the breakout price (for upward breakouts, it is the highest high in the pattern; for downward breakouts, use the lowest low). Then compare the result with the median shown in the table. A result higher than the median means you have a tall pattern; lower means a shorter pattern. For best results, select tall broadening tops and avoid short ones.

Table 11.5 Size Statistics

Width.In three of four contests (columns), wide patterns see better post‐breakout performance than do narrow ones. The one exception happens in bear markets after upward breakouts.

I found it odd that bear market, up breakout percentages for height and width are the same. I checked my spreadsheet, and the information is correct.

To use width as an indicator, compute the time from the end of the pattern to the start (in calendar days, not price bars). If the result is more than the median listed in the table, then you have a wide pattern.

Height and width combinations. Table 11.5shows the performance results after combining the characteristics of height and width. Most of the time, tall and wide patterns show the best performance. In bear markets, after downward breakouts, short and wide patterns outperform. That's probably a statistical fluke, and the percentages are close, anyway.

Table 11.6shows volume‐related statistics.

Table 11.6 Volume Statistics

Volume trend.Volume trends upward from 66% to 73% of the time on average. However, don't throw away a trade because the pattern has a downward volume trend. Try to recycle.

Rising/Falling volume.Half the time, the volume trend doesn't really matter to performance. In bear markets, we see a wider separation of results. For example, after upward breakouts in bear markets, price averages a climb of 27% compared to just 19% for patterns with falling volume. The sample counts (146 versus 54, respectively) are not as robust as I like to see, so the results may change.

Breakout day volume.The broadening top is a rebel: It doesn't conform to common wisdom about heavy breakout volume (which is, heavy breakout volume helps performance). As the table shows, sometimes it helps, sometimes it hurts, and half the time it can't make up its mind. However, as a general rule, you should see improved performance (probably meager) if breakout day volume is above the prior 30‐day average.

I added Table 11.7to this edition to highlight where price might stop on the way to the ultimate high or low. For example, I found that 79% of the time, price will return to the top of the pattern after an upward breakout. You'll likely be stopped out a lot if you choose to place a stop‐loss order there.

Place a stop at the bottom of the pattern and a stop‐loss order will be hit less than 5% of the time, on average. However, the size of the loss, after an upward breakout, could be large, so do consider the size of the potential loss before deciding where to place a stop.

Table 11.8shows how the chart pattern performed over three decades. This table only shows bull market numbers because bear markets only happened in the 2000s.

Table 11.7 How Often Stops Hit

Table 11.8 Performance and Failures Over Time for Bull Markets

Performance over time.Upward breakouts saw the best performance and downward breakouts saw the worst performance in the 2000s. That makes sense. If the market is rising after an upward breakout, those patterns with downward breakouts will struggle to see price drop. It's like trying to swim against the current.