The ascending wedge can be traded on the short side entering the trade as the stock breaks out of the pattern to the downside. Text books will tell you that this is how they should be traded, but our results do not back this up. 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 Profitable, No Surprise
Most ascending wedges would be expected to break down but in reality just 32%, break out to the downside making this pattern better when traded on the long side. 42% of these breakouts are profitable and on average the profit per trade is a meager 0.02% over a period of 8 days. The ascending wedge is certainly not one of the best chart patterns when it breaks to the downside, but applying some filters makes this pattern more attractive to trade.
Improve Your Trades
A break to the downside works better in a rising market, with the sector falling. By using filters that require the market and stock to be in a consolidation or an up trend you can improve the results. The sector should also be in a consolidation or a down trend for the best results.
Breakouts can occur anywhere along the length of the ascending wedge pattern. The best pattern length is between 5 and 30 days, so very short term patterns and very long term patterns are best avoided.
Ensure that the volume is supportive of the breakout, i.e. volume as the stock falls is greater than volume as the stock rises. Avoid patterns that have two closes the same prior to the breakout as this is often a sign of an illiquid stock. Lower highs or lower lows prior to the breakout produce better results.
Trading Ascending Wedges Can Be Profitable
You can improve your trading results by using a series of filters that have been outlined here. These filters are harsh, significantly reducing the number of trades to get good results. (1275 trades are reduced to just 74). This select group of ascending wedges delivers an average profit of 1.46% in 10 days and is profitable on 48% of the trades. Overall this makes ascending wedges possible to trade short.
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 the author of Supercharge Your Trading with CFDs and created the website LearnCFDs.com A Simple Timeless Method for Huge Gains
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