Table 8.7 How Often Stops Hit
| Description | Up Breakout | Down Breakout |
|---|---|---|
| Pattern top | 77% | 1% |
| Middle | 23% | 15% |
| Pattern bottom | 3% | 73% |
Table 8.8 Performance and Failures Over Time for Bull Markets
| Description | Up Breakout | Down Breakout |
|---|---|---|
| 1990s | 40% | –17% |
| 2000s | 46% | –14% |
| 2010s | 46% | –14% |
| Performance (above), Failures (below) | ||
| 1990s | 15% | 13% |
| 2000s | 17% | 30% |
| 2010s | 17% | 31% |
If you place a stop at the top of the pattern, price will take out the stop 77% of the time after an upward breakout. Downward breakouts will only reach the top of the pattern 1% of the time. That makes sense, doesn't it?
Table 8.8 shows the performance over three decades. How has the pattern performed over time? Let's find out.
Performance over time. Upward breakouts in the 1990s suffered but downward breakouts did better. I can't explain why. The 2000s contained not one but two bear markets, but I excluded those results from the table.
Failures over time. The 1990s were the worst performers, but they have the best (lowest) failure rates. Again, this puzzles me. Because the failure rate is a function of performance, then I'd expected patterns that showed big moves to have lower failure rates. They don't.
Table 8.9 shows busted pattern performance. At one time, I thought that busted patterns were the way to make a bundle trading chart patterns. They can be, but it's not as easy as you might expect.
Busted patterns count. I counted the number of busted patterns and found that 42% of broadening bottoms with downward breakouts will bust. Ouch. It's less painful for upward breakouts, with a quarter of them busting.
Busted occurrence. If we sort the busted patterns into three bins, single busts, double busts, and three or most busts (triple+), we see the results in the table. Notice that most of the busts are single ones.
Busted and non‐busted performance. The last three lines in the table show the performance of busted and non‐busted ones. Notice that single busted patterns perform better than all busted patterns (single, double, triple+) and also beat the non‐busted pattern performance.
Perhaps now you understand why trading busted patterns might be the way to riches. Probably not, but we can dream. Try looking for a single busted downward breakout from a broadening bottom. Then try to carve out a portion of the 46% average rise.
Trading Tactics
Table 8.10 shows trading tactics for broadening bottoms.
Measure rule. The first tactic is to determine how much money you are likely to make in a trade. The measure rule helps with the prediction, but it's not a guarantee.
To use the rule, compute the height by subtracting the highest high from the lowest low in the broadening bottom. Add the results to the highest high to get the target price for upward breakouts and subtract the height from the lowest low for downward breakouts.
For downward breakouts, if the prediction says the stock will drop below zero, then ignore it. For both breakout directions, use common sense. A large gain or loss probably won't occur.
The bottom portion of the table shows how well the measure rule works. Based on the full height, a stock will reach an upward target 65% of the time, but a downward target is harder to reach. It works just 41% of the time.
You can change the height in the computation to assess how often price will reach a target. I provide a few possibilities (from half the height to three times).
Let's use Figure 8.5 to make the computation clear. Point A shows the highest high in the chart pattern at 14.13. The lowest low is point B at 12. The formation height is the difference between the two, or 2.13. Add the value to the high to arrive at the upward price target, or 16.26.
Table 8.9 Busted Patterns
| Description | Up Breakout | Down Breakout |
|---|---|---|
| Busted patterns count | 149 or 25% | 169 or 42% |
| Single bust count | 84 or 56% | 111 or 66% |
| Double bust count | 40 or 27% | 8 or 5% |
| Triple+ bust count | 25 or 17% | 50 or 30% |
| Performance for all busted patterns | –15% | 32% |
| Single busted performance | –24% | 46% |
| Non‐busted performance | –15% | 45% |
Table 8.10 Trading Tactics
