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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, Surprise On The Upside

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.

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.

Ascending wedges that breakout late in the pattern, produce inferior results. A breakout is better if it occurs before the pattern gets 80% of the way to the point of the pattern. Shallow patterns are also best avoided, where the pattern height is less than 6% when compared to the stock price as well as avoiding patterns that take more than 44 days to form.

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 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 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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