Definitions and Method
Volatility is the daily difference
between the high and low prices. I used three look back periods in the test: start
of chart pattern to day before breakout,
10 days, and 5 days before the breakout. I used linear regression to determine the
slope of a line based on price volatility.
Then I measured the rise from the breakout to the ultimate high, or the decline
from the breakout to the ultimate low. The
ultimate high is the highest high before a 20% price drop. The ultimate low is the
lowest low before a 20% price rise. The
search for the ultimate high or low ends if price moves to the side opposite the
chart pattern (meaning, if price hits a stop first).
In the test, I used 45 chart
pattern types (double bottoms, head-and-shoulders bottoms, and so on) in 1,275
stocks from 7/1991 to 3/2006, but few of the
stocks covered the entire period. Not all stocks had useful chart patterns.
Detailed Results
Here are the detailed results.
|
5 days before breakout |
All Patterns |
Falling volatility |
Rising volatility |
|
Upward breakout |
31.6% (11217) |
31.0% (5004) |
32.2% (6017) |
|
Downward breakout |
20.8% (9866) |
21.2% (4504) |
20.6% (5132) |
Each box shows the number
of samples involved in the test in parentheses and the resulting rise or decline
from the chart pattern after the breakout.
The 5-day look back appears to be the best measure of volatility versus post
breakout performance (compared to a 10-day look
back or from the start of the chart pattern to the day before the breakout). For
example, a stock showing rising volatility
has an average rise of 32.2% after an upward breakout. A stock with falling
volatility rises an average of 31.0%. Downward
breakouts show that chart patterns with falling volatility tend to outperform,
21.2% versus 20.6%.
|
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