Getting Started in Chart Patterns, 2nd Edition

Chapter 8

Busted Patterns

Making Money by Trading Failure

Traders have known about busted patterns for decades, but I consider them new. You never hear anything about trading a chart pattern that doesn't work as expected, and yet there's money to be made by doing so.

I classify a busted chart pattern as one in which price moves less then 10% after the breakout before changing trend and moving beyond the other side of the chart pattern. This chapter takes a closer look at busted chart patterns.

• A busted pattern occurs when price breaks out in one direction, fails to move more than 10% before reversing and breaking out in the opposite direction.

Busted patterns are a subset of regular patterns, meaning the sample size can be tiny. For example, of the 1,215 broadening tops I used in this study, after sorting them for bull and bear markets, up and down breakouts, I found that just over 173 busted up (upward breakout) and 174 busted down (downward breakouts) in a bull market. In short, expect the performance numbers to change as more samples become available. I noted low sample counts in the tables when necessary. If the sample sizes are not shown, that means I found more than 100.

busted pattern performance

a chart pattern that reaches the ultimate high or low less than 10% away from the breakout and then reverses direction. The performance measures how far price moves in the new ...