Down Breakout
Table 9.7 How Often Stops Hit
| Description | Up Breakout | Down Breakout |
|---|---|---|
| Pattern top | 74% | 2% |
| Middle | 22% | 17% |
| Pattern bottom | 2% | 70% |
Breakout day volume. Heavy breakout volume helped the pattern perform for both breakout directions. That finding matches conventional lore where lots of sources claim that a high volume breakout helps. Here's the proof for this chart pattern. However, a survey of the chart patterns says it's only true for upward breakouts, not downward ones.
Table 9.7 shows how often price reaches a stop location. I split the pattern into thirds and found how often price as it moved from the breakout to the ultimate high or low slid into one of the thirds.
For example, I found that price on the way to the ultimate high (upward breakouts) would touch the top of the chart pattern 74% of the time. So a stop placed there would trigger too often to be viable. If you moved the stop to the bottom of the pattern, price would reach it only 2% of the time, but if it were to trigger, you might see a big loss.
Thus, stop placement, where you have to balance the loss size with how often it'll be triggered, is something traders need to master.
Table 9.8 shows the performance over three decades.
Performance over time. The 2010s, for upward breakouts, showed the worst performance for this chart pattern compared to the other two decades. For downward breakouts, the 2000s were worst. I excluded the two bear markets during that decade, too.
Failures over time. The most recent decade, the 2010s, showed substantially higher failure rates than the 1990s. I'm not sure why that is.
Table 9.9 shows busted pattern performance.
Busted patterns count. A quarter to nearly half of broadening patterns will bust. That means price moved no more than 10% away from the breakout price before reversing and closing beyond the other side of the pattern.
Table 9.8 Performance and Failures Over Time for Bull Markets
| Description | Up Breakout | Down Breakout |
|---|---|---|
| 1990s | 41% | –16% |
| 2000s | 50% | –13% |
| 2010s | 36% | –14% |
| Performance (above), Failures (below) | ||
| 1990s | 10% | 20% |
| 2000s | 13% | 34% |
| 2010s | 23% | 33% |
Table 9.9 Busted Patterns
| Description | Up Breakout | Down Breakout |
|---|---|---|
| Busted patterns count | 146 or 26% | 220 or 48% |
| Single bust count | 77 or 53% | 140 or 64% |
| Double bust count | 45 or 31% | 10 or 5% |
| Triple+ bust count | 24 or 16% | 70 or 32% |
| Performance for all busted patterns | –14% | 33% |
| Single busted performance | –23% | 49% |
| Non‐busted performance | –14% | 43% |
Busted occurrence. I counted how often price single, double, or triple (or more) busted a pattern. See the Glossary for details. Single busts happened the most. You might think that triple busts would be rare, but they often come in second place (which they do here, but only for downward breakouts).
Busted and non‐busted performance. I compared the performance of all busted patterns, single busted patterns, and non‐busted patterns. I wanted to know if busted patterns performed better than non‐busted ones.
The table shows that single busted patterns performed better than the other two categories. The problem with a single bust is you don't know ahead of time that a pattern will single bust.
Non‐busted patterns performed better after downward breakouts compared to all busted patterns. All busted patterns means it's the average for the three busted types (single, double, and three or more).
Trading Tactics
Table 9.10 lists trading tactics.
Measure rule. The measure rule sets a target price, but it makes no guarantee that price will reach it.
Table 9.10 Trading Tactics
| Trading Tactic | Explanation |
|---|---|
| Measure rule |
Compute the formation height from highest high to the horizontal trendline. For upward breakouts, add the height to the highest high in the pattern. For downward breakouts, subtract the height from the value of the horizontal trendline. The result is the target price. More accurate targets use a formation height divided by 2. The bottom portion
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