|
Do reversals work better than continuations? The results are mixed with 58% of reversals performing
better after an upward breakout. That means price trends down and then reverses.
Downward breakouts from chart patterns perform
better if price is already trending down. A more recent study shows reversals
outperforming continuations in both bull and bear markets, but does not separate
results by breakout direction. For more information, including an Excel spreadsheet
of the numbers, see the study Top 10
Reversals & Continuations.
Upward breakouts Reversals: 58%
Continuations: 42%
Downward breakouts Reversals: 44%
Continuations: 56%
Where do chart patterns perform best, with the
breakout near the yearly high, middle, or low?
Ignoring low sample counts which occurs when splitting the yearly range into
thirds, for both breakout directions, the yearly low is the best place for a
breakout. For downward breakouts, this bolsters the observation
that you should short stocks making new lows, not those making new highs.
Shorting a stock making a new high leads to the
worst performance. See Buy
low or buy high study for more information.
Upward breakouts High: 27%
Middle: 32%
Low: 41%
Downward breakouts High: 20%
Middle: 25%
Low: 55%
Do throwbacks hurt performance? Yes: 97% of chart
patterns with upward breakouts perform better postbreakout without a throwback. Avoid overhead resistance when trading.
See also Throwbacks.
Do pullbacks hurt performance? Yes. Again 97% of
chart patterns with downward breakouts perform better if a pullback does NOT occur. Look for underlying support before
taking a position in a stock. See also Pullbacks.
Do breakout day gaps help performance? In nearly 2
out of 3 trades, gaps that occur on the day of breakout help performance regardless of the breakout direction.
- Upward breakouts
Gap: 63%
No gap: 37%
- Downward breakouts
Gap: 65%
No gap: 35%
Do tall patterns perform best? Yes. Both breakout
directions make a strong showing. Always trade tall patterns and ignore short ones. What is meant by short and tall?
Take the height of the chart pattern and divide it by the breakout price then look up the chart pattern in the book,
Encyclopedia of Chart Patterns, Second Edition. Size
statistics appear in Table x.6. Compare your result with the “median height as a percentage of the breakout
price.” Patterns with numbers higher than the median are tall.
- Upward breakouts
Tall: 86%
Short: 14%
- Downward breakouts
Tall: 97%
Short: 3%
Do narrow patterns perform best? The results are mixed
with wide patterns performing better after an upward breakout (but not by much) and twice as many narrow patterns as
wide ones do well for downward breakouts. Thus, if you own a stock showing a downward breakout from a narrow pattern
then consider selling. What is meant by wide and narrow? Compute the length of your chart pattern from the start of the
pattern to the end (usually the time between the first and last peaks or valleys, not the breakout). Double tops, for
example, have a width measured from peak to peak (the highest high in each peak). Then find the size table in the book,
Encyclopedia of Chart Patterns, Second Edition. Size
statistics appear in Table x.6. Compare your result with the “median length.” Patterns with numbers lower
than the median are narrow.
- Upward breakouts
Narrow: 44%
Wide: 56%
- Downward breakouts
Narrow: 69%
Wide: 31%
What is the best performing pattern height and width combination?
As might be expected, chart patterns both tall and narrow outperform the other combinations. What is
meant by tall and narrow? See Do tall patterns perform best?
and Do narrow patterns perform best?
- Upward breakouts
Short and narrow performs best: 11%
Short and wide performs best: 6%
Tall and wide performs best: 26%
Tall and narrow performs best: 57%
- Downward breakouts
Short and narrow performs best: 6%
Short and wide performs best: 3%
Tall and wide performs best: 33%
Tall and narrow performs best: 58%
Does a rising volume trend within the chart pattern result in the best
performance? The results are close and mixed. Upward breakouts perform slightly better when volume
trends upward from the start of the chart pattern to the day before the breakout. Downward breakouts do better with a
falling volume trend. See also Volume Trend.
- Upward breakouts
Rising: 53%
Falling: 47%
- Downward breakouts
Rising: 42%
Falling: 58%
What is the best performing volume shape? Chart
formations with U-shaped volume perform best, but the results are close. What is U or dome shaped volume? On the right
of page 989 in my book Encyclopedia of Chart Patterns, Second Edition
shows examples of the various volume shapes. See also
Volume Shapes.
- Upward breakouts
U-shaped: 42%
Dome: 28%
Random: 31%
- Downward breakouts
U-shaped: 42%
Dome: 27%
Random: 30%
Does heavy breakout day volume mean better performance?
For both breakout directions, heavy breakout volume is very important to chart pattern performance after the
breakout. Heavy breakout day volume means above the 30-day volume average (one month of calendar days, not trading days)
up to but not including the breakout day. See also Breakout Day Volume
.
- Upward breakouts
Heavy: 71%
Light: 29%
- Downward breakouts
Heavy: 68%
Light: 32%
|
They pay for the referral on most items and that helps pay for the cost of this site.
