Horn Tops
Horn Tops occur after an uptrend and consist of two taller than normal price spikes with roughly equivalent high prices (on a weekly chart) with a smaller price bar in between them. The pattern looks like two horns of a bull or the letter “H”. A sell signal is triggered when price closes below the lowest low of the three price bars that create the horn top pattern.
Horn Bottoms
In contrast, a Horn Bottom occurs after a downtrend and consists of two taller than average weekly price spikes with similar low prices separated by a smaller price bar in between. A buy signal is triggered when prices close above the highest high in the pattern. When compared to the quite similar pipe bottom and pipe top formations, Kirkpatrick & Dahlquist (2010) state that horn tops are “not as effective as the pipe at bottoms and tops” (p. 375).
Horn Tops Average Downward Breakout Decline
According to Bulkowski (2005), the average height of a move downward after a sell signal is triggered for the horn top formation and before any 20% reversal correction is 21%;
Horn Bottoms Average Upward Breakout Gain
The average height of a move upward after a buy signal is triggered for the horn bottom formation is 35%.
Price Targets
The suggested price target for Horn Tops & Bottoms Pattern given by Bulkowski (2005) is shown below:
Traits that Increase the Effectiveness of the Horn Top and Bottom
Traits that increase the effectiveness of the pipe pattern are given next (Bulkowski, 2005):
- Horn Tops perform best when they occur after a long, multi-month uptrend
- Horn Tops should be avoided when they occur after a downtrend
- Tall Horn Bottoms are superior than shorter Horn Bottoms
- Horn Bottoms with heavy breakout volume perform better
Horn Bottom Chart Example
The weekly chart of the iShares MSCI Spain ETF (EWP) illustrates a horn bottom. It occurs after a downtrend; the prices before and after the horn bottom pattern are near the upper portion of the horn bottom pattern, which means that the pattern stands out on a chart. Once prices close above the highest high of the pattern, a buy signal is triggered, which in this chart resulted in a nice reversal of trend to the upside.
Trading
Because of the usage of the weekly timeframe , we can see that trading horn patterns can be more suited to longer term investors.
Two approaches can be used when trading horn patterns, trading on identification, that is when the pattern is clearly identified, or trading on confirmation, the latter is the one covered by Bulkowski.
A horn top pattern is confirmed when the price breaks below the minimum of the pattern formation, while a horn bottom pattern is confirmed when the price breaks above the maximum of the pattern formation.
Measure Rule
The measure rule for horn patterns allows traders to set stop losses and take profit according to the pattern.
For horn bottoms patterns the target price is found by adding the formation height (maximum – minimum) to the formation maximum.
For horn top patterns the target price is found by subtracting the formation height (maximum – minimum) to the formation minimum.