Today I'm analyzing Bulkowski’s pipe bottom setups (+ pipe top). I know these setups are best performing on a weekly scale, but I'm interested to view how they could perform in smaller time frames.
First I have attempted pattern on a daily scale with several selected securities and got -6% average yearly loss from 1990 till the end of 2012. Performed was good in 2000-2004, but bear market of 2007-2008 was devastating. Anyway, I have suspected issues with the pattern recognition, so this result does not yet count.
I have fixed the algorithm a little and got 62% winning trades, but losses were too big and average yearly loss of 3% meant that half of trading capital would be lost in 20 years. So, setting fixed target and stop does not work very well.
If setting very loose stops (trail 135 last days), pipe tops under-perform (after 10 years trading capital is gone), but pipe bottom performs nice - 37.5% of winning trades, 27.5% average yearly profits. But profits are not consistent (most of the profits are from 2010-2012, in 2000-2002 performance was very bad. As it basically becomes buy and hold strategy, it would be nice to compare it to some benchmark, but I'll leave it for another time.
With tighter stops (trail 1-3 days) pipe bottoms under-perform (constant looses guaranteed).
I have adjusted algorithm several more times and it appears that search for very tall pipes gives better results (only 30 entries in 20 years using about 300 stocks). With 20 day trailing stops 1991-1999 years were quite successful (10000$ turns into 80000$), but later all the gains were lost in 5 years and there only few positive spikes in later years.
Anyway, I did not found any consistent and reliable setup while trading pipe bottoms in 5-15 min. scale.
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