- August 30, 2010
Bullish Ascending Triangle Pattern Success Rate: Updating Bulkowski
by Donald HarderA bullish ascending triangle chart pattern is a continuation pattern and theoretically prices should continue to rise, sometimes dramatically when the upper resistance level is broken through.
But is this true?
A few years ago Thomas Bulkowski did some much needed research on chart patterns and technical analysis methods. Because we have noticed what appears to be an erosion of success rates over the past few years we decided to update Bulkowski’s research on our own and see for ourselves if indeed patterns like the bullish ascending triangle do indeed provide an edge.
The results will likely surprise you.
Bulkowski’s research showed that this pattern had a 75% success rate and that the average rise for a successful move was 35%. Pretty good.
Our research shows that over the past few years the results from this pattern are not quite so promising.
We researched the success rate of this pattern over the past two years and we made the following assumptions:
- A successful move is one that extended at least 10% after the breakout
- A failed move is one that broke through the bottom support of the triangle without first climbing 10%.
In addition to the chart pattern, we made the assumption that the success or failure rate would be tied to the performance over the overall market and the volume on the breakout, so we measured each individual stock’s volume and we juxtaposed each stock against the following S&P 500 factors:
- Investor sentiment level (overly bullish +75, overly bearish +30)
- Strength of market trend (ADX +30 = strong trend)
Results:
Overall Success Rate: 40%
Volume:
- 66% of successful moves saw a significant volume increase on the breakout
- Only 33% of the failed moves broke out on increased volume
Sentiment:
- 33% of all successful breakouts occurred when investor sentiment was overly bullish (75 or above)
- 83% of all failed breakouts occurred when investor sentiment was at a bullish extreme (75 or above)
Trend Strength:
- 75% of all successful breakouts occurred when the uptrend was strong (ADX 30+)
- 36% of all failed breakouts occurred when the uptrend was strong (ADX 30+)
Conclusion:
Buying ascending triangle breakouts is a losing proposition in the current market environment. This is likely due to the fact that smart traders fade the technical analysis crowds opening short positions on the breakouts.
There are, however, a couple of hidden edges. If you buy breakouts accompanied by volume probabilities increase, but odds probably only move up to 50/50. But, if you buy breakouts accompanied by volume when investor sentiment is not at an extreme and/or when the uptrend in the market is strong your probabilities increase significantly.
Bottom line, as those of you who are successful traders have surely suspected, you need to add a little bit of nuance to your technical analysis strategies in order to come away successful in today’s stock market environment.
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