The ascending wedge is a very well known chart pattern that you would expect to trade on the short side, but can also be traded if it breaks out to the upside. An ascending wedge is formed when the price action is contained within two lines. Both the bottom line and the top line slope up, but the bottom line has a steeper slope meeting the top line.
Ascending Wedges, Ok To Trade
Most ascending wedges would be expected to break down but, in fact 68%, break out to the upside making this pattern tradable on the long side. And what is more 48% of these breakouts are profitable and on average the profit per trade is 0.94% over a period of 9 days. The ascending wedge is not the best chart pattern when it breaks to the upside, but applying some filters makes this pattern attractive to trade.
Refine Your Entries
A long breakout from an ascending wedge works better in unusual market conditions. A rising or consolidating market is beneficial, but the sector environment should be in consolidation or falling. The stock should also be falling or consolidating. Essentially you are trading the ascending wedge when the stock and sector pull back in a bullish market environment.
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.
Jeff Cartridge is a private trader and created the website LearnCFDs.com A Simple Timeless Method for Huge Gains
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