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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, Unexpected Returns

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.

Improve Your Trades

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.

Ascending Wedges Can Deliver Good Profits

You can improve your trading results by using a series of filters that have been outlined here. This select group of ascending wedges delivers an average profit of 1.89% in 8 days and is profitable on 52% of the trades. Overall this makes ascending wedges attractive to trade.

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