Last Updated on October 22, 2022
There are some very aggressive market strategies that seek to capitalize on very fast-moving markets. The Bump and Run chart pattern is one of such aggressive strategies that will help you spot the end of a trend and the beginning of a new one. But what does the pattern entail?
The Bump and Run Reversal (BARR) is a reversal chart pattern that is formed when an asset’s price goes through a fast and large price hike or decline due to excessive speculation in the asset leading to a buying or selling climax, as the case may be, and a subsequent price reversal.
Let’s take a look at this pattern and describe what it is, and at the end of the article we provide you with trading statistics and a backtest of the strategy.
What is the Bump and Run chart pattern strategy?
As the name implies, the Bump and Run Reversal (BARR) is a reversal pattern that forms from excessive speculation. In an uptrend, it results from a buying climax that gives way to a bearish reversal, while in a downtrend, it often from a selling climax or capitulation, which eventually gives way to a bullish reversal.
The pattern was developed by Thomas Bulkowski in 1996 but was introduced to the trading world in the June 97 issue of Technical Analysis of Stocks and Commodities. It is also one of the patterns included in Bulkowski’s book, the Encyclopedia of Chart Patterns. Bulkowski identified three main phases to the pattern:
The Lead-in Trend: This is the first phase of the pattern. It is just the general trend with the usual up and down waves forming on normal volume. A trendline across the swing lows (uptrend) or (downtrend) highs shows the gradient of the trend.
The Bump: This second phase of the pattern is marked by a rapid price movement, creating a steeper trendline. This is often caused by excessive speculative interest in the asset and happens on high trading volume.
The Run: This is the final phase of the pattern. It starts with the price pulling back to the main trendline (lead-in trendline), but it eventually breaks the trendline, leading to a reversal.
Below is an example of how it might look like:
Bump and run reversal bottom pattern
This is also known as the bullish bump and run pattern because it could lead to a reversal to a bullish trend. The pattern starts with a standard bearish trend. Suddenly, a relatively big bearish trend impulse appears on the chart – the bump. After new lows are reached, the price action reverses, reaches the lead-in downtrend line, and breaks it upwards to start a fresh bullish move – the run.
Bearish bump and run pattern
The bearish Bump and Run pattern starts with a standard bullish trend (the lead-in trend). Then the price starts climbing faster, creating a steeper trendline (the bump). After reaching a new high, the price declines to the lead-in trendline and breaks it. This line break is the start of the run, which is the emergence of a bearish trend. If you are able to catch a stock at this point, you stand to make a significant gain on a short-sell trade.
Bump and run trading strategy (backtest and example)
It’s pretty difficult to backtest this strategy. And unfortunately, we are not able to make a meaningful backtest of the bump and run pattern strategy. Any backtest requires strict trading rules and some additional settings, but because this is a very subjective pattern, we are not able to jot down what is needed. It’s simply too many rules that are needed.
Because of the lack of objectivity, we believe traders are better off NOT trading on classical chart patterns (or technical analysis in general). Why spend time on something that is mostly based on subjectivity and not any objective standards? How do you know a pattern is profitable if you have not backtested it?
Backtesting is no sure thing, but at least you have an idea that something has worked in the past. If it has not worked in the past, you can skip it immediately. If you know how to backtest you can develop a portfolio of trading strategies pretty fast. There is no best trading strategy because you need many to smooth returns.
(If you are new to backtesting and it looks like a daunting task, you might be interested in our backtesting course.)
We believe you can get many trading ideas to form a 100% quantifiable trading strategy by looking at what we have to offer. We have hundreds of different trading strategies on this website – all of them backtested with strict trading rules. You find all our products in our shop.
Instead of a backtest, we rely on the data from the research of Thomas Bulkowski in his classic book from the year 2000: The Encyclopedia of Chart Patterns.
Bulkowski, an engineer, sat down and went through technical formations for 500 stocks over a period of five years. This gave a total database of 2 500 years, although of course there are sources of error as all the stocks are from the same time period. In total, he registered over 15 000 technical formations, of which bump and run was one of these.
Let’s summarize Bulkowski’s findings (both the reversal bottom and top):
Bump and run chart pattern strategy – reversal bottom (trading statistics and data)
We start with the reversal bottom. The trading statistics look like this:
|#Formations among 500 stocks from 1991 to 1996||360|
|Reversal or consolidation||161 consolidations, 199 reversals|
|#False signals||67 (19%)|
|Average rise of successful formations||37%|
|Most likely rise||20%|
|#Formations that reached the target||271 (92%)|
|The average length of the formation||157 days|
Bump and run chart pattern strategy – reversal top (trading statistics and data)
The reversal top trading statistics are summarized in this table:
|#Formations among 500 stocks from 1991 to 1996||650|
|Reversal or consolidation||531 consolidations, 119 reversals|
|#False signals||123 (19%)|
|Average decline of successful formations||24%|
|Most likely decline||15 to 20%|
|#Formations that reached the target||462 (88%)|
|The average length of the formation||213 days|
Bump and Run Chart Pattern Strategy – ending remarks
Although we didn’t manage to make a complete backtest with clearly defined trading rules and settings, we believe that Bulkowski’s data and statistics can shed some insights into the robustness of the bump and run chart pattern strategy. His findings suggest this is a pretty good strategy.