Encyclopedia of Chart Patterns. Thomas N. Bulkowski
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Want to make 50% on your trades? You'll lose 73% of the time in bull markets (that's one winner and three losers, and that's if you trade it perfectly). In bear markets, the results are even worse with 84% failing to climb more than 50%.
Set realistic goals and realize that you'll have to make more on winning trades to compensate for losing ones. Trading perfectly also helps… (that's a joke, but focusing on improving technique often leads to making more profit).
Table 7.4 shows breakout and post‐breakout statistics.
Breakout direction. All big Ws break out upward. If they don't, then they are not big Ws.
Yearly position, performance. I sorted patterns according to the breakout price and checked performance of the three ranges.
The best performance for both bull and bear markets comes from big Ws near the yearly low. The worst performance comes from those near the yearly high. It suggests that bottom fishing (buy low, sell high) works better for big Ws than momentum trading (buy high, sell higher).
Throwbacks. A throwback happens after the breakout when price rises but quickly returns to the breakout price (within 30 days). Often price resumes the rise thereafter. In Figure 7.1, for example, the throwback peaks at E before returning to the breakout price. Figure 7.2 shows a throwback after point E.
Throwbacks occur about twice every three trades. Price peaks in 6 days after rising between 8% and 11%, on average, before completing the trip back to the breakout price (or nearly so) in 12 days (that's the roundtrip total).
Notice that price does better if a throwback is absent. We've seen this behavior in other chart patterns, too. How can you tell if a throwback will happen? Look for nearby overhead resistance, such as prior peaks, round numbers (10, 20, 30, and so on), or sideways price movement between the breakout price and about 10% higher. If you see some, then expect a throwback. In my trading, I always expect a throwback will happen, and I party when they don't.
The vast majority of the time, between 60% (bear market) and 76% (bull market), price will resume the upward move after a throwback completes. Few things are more aggravating than placing a buy stop a penny above the breakout price, getting into the trade perfectly, only to see a throwback take price lower. Sometimes, the stock continues down below the bottom of the pattern and you're stopped out. Then you sit on the sidelines as the stock recovers and soars like an eagle. Fortunately, this type of behavior is rare for big Ws (Table 7.9 says it happens 20% or less).
You can always wait for a throwback to complete before making a trade. However, if you wait, you'll miss investment opportunities where a throwback doesn't occur (that is, you'll miss the best performers).
Gaps. Breakout day gaps push price higher, meaning performance is better if a gap appears. However, in bull markets, the extra push probably won't be enough to wake you from a sound sleep. In bear markets, it's more of a jolt.
How can you tell if price will gap higher? I've no idea. However, I measured performance from the opening price the day after the gap to the ultimate high. So if you see a gap, you can buy into the situation and maybe score extra performance points for doing so.
Table 7.5 shows how the sizes of big Ws perform.
Height. Tall big Ws perform better than do short ones. To use this finding, measure the height of the big W from the peak between the two bottoms to the lower of the two bottoms. Divide the result by the breakout price (the price of the peak between the two bottoms). If the result is bigger than that shown in the table, then you have a tall pattern.
Table 7.5 Size Statistics
| Description | Bull Market | Bear Market |
|---|---|---|
| Tall pattern performance | 48% | 31% |
| Short pattern performance | 44% | 29% |
| Median height as a percentage of breakout price | 11.9% | 16.2% |
| Narrow pattern performance | 45% | 30% |
| Wide pattern performance | 47% | 30% |
| Median width | 23 days | 21 days |
| Short and narrow performance | 44% | 30% |
| Short and wide performance | 44% | 26% |
| Tall and wide performance | 49% | 32% |
| Tall and narrow performance | 48% | 29% |
Table 7.6 Volume Statistics
| Description | Bull Market | Bear Market |
|---|---|---|
| Volume trend | 69% down | 74% down |
| Rising volume trend performance | 45% | 25% |
| Falling volume trend performance |
47%
|