The ascending wedge can be traded very successfully on the long side entering the trade as the stock breaks out to the upside. This is not how you would normally trade this pattern though as the text books will tell you to trade it when it breaks down. The pattern forms when the two boundary lines that contain the price movement converge to a point. The top line slopes up, and the bottom line slopes up even steeper to meet the top line.
Ascending Wedges, Surprise On The Upside
The breakout of the ascending wedge would be expected to be down and conventional wisdom would have you trading this pattern short. In reality 68% of the patterns break to the upside, so a break down is relatively rare. The upside breakout of ascending wedges can deliver positive returns with 48% of the patterns being profitable. The average return for the long trades is 0.94% in 9 days. This is a respectable performance on the long side.
Refine Your Entries
When you look at the performance of an ascending wedge in bearish market conditions you will see the results were not as strong as they were in more bullish years. Trading ascending wedges when the market is in an up trend or consolidating improves your trading results. The sector and the stock are ideally in a down trend or a consolidation. So in effect you are entering a retracement in the stock and sector during a bullish market phase.
Avoid trading ascending wedge patterns that breakout late, in the last 20% of the pattern. Likewise avoid very shallow patterns where the height of the pattern is less than 6% of the stock price. Patterns that take longer than 44 days to form also perform poorly.
Illiquid stock can sometimes be identified by two identical closes and if this is the case you are better to avoid these trades. Prior to the breakout a low less than the previous day is beneficial. If volume supports an ascending wedge breakout then the profitability of the trades improves. For volume to support the breakout, volume when the stock is going up should be greater than volume when the stock is going down.
Trading Ascending Wedges Can Be Profitable
By following some very specific rules, and these rules do matter, profitability of trading ascending wedges can be improved substantially. With an average return per trade almost doubling to 1.89% in 8 days and a hit rate of 52% ascending wedges can be traded very successfully when the conditions are right.
Note: Statistics for this article have been provided by Patterns Trader after analyzing over 60,000 chart patterns on the Australian market from 2000 - 2008.
Ascending Wedges, Surprise On The Upside
The breakout of the ascending wedge would be expected to be down and conventional wisdom would have you trading this pattern short. In reality 68% of the patterns break to the upside, so a break down is relatively rare. The upside breakout of ascending wedges can deliver positive returns with 48% of the patterns being profitable. The average return for the long trades is 0.94% in 9 days. This is a respectable performance on the long side.
Refine Your Entries
When you look at the performance of an ascending wedge in bearish market conditions you will see the results were not as strong as they were in more bullish years. Trading ascending wedges when the market is in an up trend or consolidating improves your trading results. The sector and the stock are ideally in a down trend or a consolidation. So in effect you are entering a retracement in the stock and sector during a bullish market phase.
Avoid trading ascending wedge patterns that breakout late, in the last 20% of the pattern. Likewise avoid very shallow patterns where the height of the pattern is less than 6% of the stock price. Patterns that take longer than 44 days to form also perform poorly.
Illiquid stock can sometimes be identified by two identical closes and if this is the case you are better to avoid these trades. Prior to the breakout a low less than the previous day is beneficial. If volume supports an ascending wedge breakout then the profitability of the trades improves. For volume to support the breakout, volume when the stock is going up should be greater than volume when the stock is going down.
Trading Ascending Wedges Can Be Profitable
By following some very specific rules, and these rules do matter, profitability of trading ascending wedges can be improved substantially. With an average return per trade almost doubling to 1.89% in 8 days and a hit rate of 52% ascending wedges can be traded very successfully when the conditions are right.
Note: Statistics for this article have been provided by Patterns Trader after analyzing over 60,000 chart patterns on the Australian market from 2000 - 2008.
About the Author:
Jeff Cartridge has been trading CFDs since 2002 and created the website LearnCFDs.com A Simple Timeless Method for Huge Gains
