Average Rise or Decline
I looked at 12,385 chart
patterns using 25 different chart pattern types in 500 stocks from 1991 to 1996 and
another 739 stocks from 1995 to 2005,
encompassing both a bull and bear market. I wanted to know if it is better to buy
within a third of the yearly low or buy
within a third of the yearly high. Table 1 shows the results.
|
Market condition, breakout direction |
Lowest 10% |
Lowest Third |
Middle Third |
Highest Third |
Highest 10% |
|
Bull market up breakout |
42% (179) |
38%
(1421) |
35%
(1874) |
36% (2715) |
36%
(1294) |
|
Bull
market down breakout |
21%
(236) |
19%
(705) |
17%
(852) |
16%
(871) |
15%
(75) |
|
Bear
market up breakout |
36%
(118) |
32%
(607) |
27%
(764) |
23%
(924) |
23%
(413) |
|
Bear
market down breakout |
30%
(185) |
26%
(461) |
23%
(443) |
22%
(263) |
16%
(15) |
Table 1: Market condition and breakout direction versus the average rise or decline after the breakout from a
chart pattern as a function of the yearly trading range.
Let’s take the lowest
10% column where it shows 42% (179). That means the average rise in a bull market from an upward breakout was 42% and 179
samples qualified. To qualify, the breakout must have been within 10% of the yearly trading range from the yearly low. The
next column uses a third from the middle low, and so on until the last column. The last column is a mirror of the lowest 10%
except it applies to the yearly high. Patterns that qualify are within 10% of the yearly price range or less below the yearly
high.
Regardless of the breakout direction and market condition the average rise and the average decline
are higher as the buy point approaches the yearly low.
Failure Rate
What about risk? Does the
risk of failure increase when you buy low? The next table shows the answer.
|
Failure Rate in a bull market, upward breakout |
Lowest 10% |
Lowest Third |
Middle Third |
Highest Third |
Highest 10% |
|
5% |
3%
(5) |
4%
(62) |
5%
(97) |
6%
(168) |
6%
(72) |
|
10% |
8%
(15) |
12%
(172) |
16%
(307) |
16%
(440) |
17%
(217) |
|
15% |
17%
(31) |
23%
(320) |
28%
(522) |
26%
(711) |
27%
(347) |
|
20% |
23%
(41) |
32%
(450) |
38%
(711) |
34%
(935) |
36%
(469) |
|
25% |
32%
(57) |
41%
(589) |
46%
(866) |
43%
(1155) |
45%
(583) |
Table 2: Failure rate for bull market, upward breakouts.
Table 2 shows how often price
fails to rise at least 5%, 10%, 15%, and so on in a bull market with an upward breakout from a chart pattern. Those showed
the highest sample counts (in parentheses) so that’s why only bull markets and upward breakouts were chosen.
Failure rates decrease the closer to the yearly low the breakout occurs.
In short, it means buy a chart pattern breakout
near the yearly low, not the high, and stay out of the middle.
|
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