Encyclopedia of Chart Patterns. Thomas N. Bulkowski
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Width. Bear markets don't see a performance difference, but in bull markets, wide patterns perform slightly better than narrow ones. The median width between narrow and wide is about 3 weeks (see the table). The width is the time between the two bottoms.
Height and width combinations. Patterns that are tall and wide outperform the other combinations of height and width. You might want to avoid short patterns (either narrow or wide). They underperform in bull markets and don't do that well in bear markets.
Table 7.6 shows volume statistics for the big W pattern.
Volume trend. Volume trends downward most of the time, as measured using linear regression between (and including) the two bottoms of the big W. As I mentioned, don't discard a big W because it has an unusual volume trend. Remember, the trend is your friend.
Rising/Falling volume. Patterns with falling volume, as measured from bottom to bottom in the big W, perform best in both bull and bear markets. The bear market shows the biggest difference between the two values (31% versus 25%). The 25% number comes from 136 samples, so additional samples will likely narrow the gap.
Breakout day volume. Bull markets don't see a performance difference, but bear markets do with heavy breakout volume helping performance. The difference seems unusually wide, though, so additional samples will likely narrow the spread.
Table 7.7 is one of my favorite tables because this kind of trading information can pay for the price of this book.
How often are stops hit? I placed a stop‐loss order at the peak between the two bottoms and price touched this (after the breakout and on the way to the ultimate high) over 70% of the time. Scoot the stop a bit lower (the middle of the big W, measured from the peak to lowest valley) and the stop triggers less often, between 13% and 20% of the time. Place it at the lower of the two bottoms and it'll hardly trigger at all.
The safe place to locate a stop‐loss order is below the bottom of the big W, but the distance between the stop and the buy price may entail a large potential loss. The rumors are true: Positioning a stop is an art you need to master to become a successful trader.
Once you decide where to place the stop, convert the potential loss into a percentage of the current price. If you gasp at the result, then the stop is too far below the current price. Either adjust the stop location, abandon the trade altogether, or hope the trade succeeds.
Table 7.8 shows how big W performance has changed over three decades. Because bear markets only occurred in the 2000s, they were excluded from consideration.
Table 7.7 How Often Stops Hit
| Description | Bull Market | Bear Market |
|---|---|---|
| Pattern top | 73% | 75% |
| Middle | 20% | 13% |
| Pattern bottom | 2% | 1% |
Table 7.8 Performance and Failures Over Time for Bull Markets
| Description | Bull Market |
|---|---|
| 1990s | 42% |
| 2000s | 51% |
| 2010s | 45% |
| Performance (above), Failures (below) | |
| 1990s | 8% |
| 2000s | 8% |
| 2010s | 11% |
Performance over time. The 2000s were the outstanding decade for performance with gains averaging 51%. The worst performance came in the 1990s with the 2010s nestled comfortably between those two.
Failures over time. I would expect to see low failure rates in the 2000s because that was the best performing decade, and yet the table shows it's tied at 8% with the 1990s. The 2010s showed a slight uptick in failures. The failures I'm reporting on, by the way, are 5% failures. They count how many big Ws fail to see price rise more than 5% after the breakout.
Table 7.9 shows statistics related to busted patterns.
Busted patterns count. Big Ws rarely bust, as the table shows (compared to other patterns, which see busts in the 40% range). What does this mean? Up to 20% of the time, on average, price will fail to rise more than 10% after the breakout before reversing and closing below the bottom of the big W. So if you want to make a lot of money, then one in five trades won't exceed 10% profit, on average, and that's if you trade it perfectly.
Busted occurrence. For those patterns that busted, I sorted them into one of three bins: single, double, and three or more busts (triple+). The table shows single busts happening most often followed by double and triple busts. In some other pattern types, we see triple busts coming in second place, so big Ws behave themselves.
Busted and non‐busted performance. Compare the performance for all busted patterns (drops of 15% in bull markets) with the performance of big Ms (not Ws). Big Ms see price drop an average of 17% after a downward breakout, and they act as the proxy for a non‐busted big W.
Busted pattern performance for big Ws is not as good as trading a big M chart pattern. However, if you are lucky enough to trade a single busted big W, then price drops an average of 23% (in bull markets). That's exceptional for a bearish pattern; of course, your mileage may vary.
How can you tell if the big W will single bust (as opposed to double or triple bust)? I'll leave that as an exercise for the reader (translation: I have no idea, but focus on nearby overhead resistance that might turn price down or the timing of an earnings announcement).
Table 7.9 Busted Patterns
| Description | Bull Market | Bear Market |
|---|---|---|
| Busted patterns count | 389 or 18% | 105 or 20% |
| Single bust count | 220 or 57% | 78 or 74% |
| Double bust count | 123 or 32% | 19 or 18% |
| Triple+ bust count | 46 or 12% | 8 or 8% |
| Performance for all busted patterns | –15% | –18% |
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Single busted performance
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