Ascending wedges have been very popular with traders on the short side, but not so often traded when it breaks in the upward direction. An ascending wedge is defined by two lines, one on the lower boundary of the price movement which slopes up steeply towards the line on the upper side which also slopes up at a less of an angle.

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.

Specific Setups to Improve Profitability

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.

A breakout from an ascending wedge ideally occurs before the pattern gets 80% of the way to the point of the pattern. Avoid patterns that breakout late. In a similar way patterns with a very low height relative to the share price (6% or less) produces smaller returns along with very long patterns (44 days or more).

Avoid ascending wedges where there are two consecutive closes at the same level prior to the breakout. These are often signs of an illiquid stock. The pattern works better if the low is less than or equal to the previous day prior to the breakout. Ensure that the volume is supportive of the breakout, i.e. volume as the stock rises is greater than volume as the stock falls.

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 has been trading CFDs since 2002 and created the website LearnCFDs.com Trading Chart Patterns – All The Insider Tricks