CFD Trading Strategy - Descending Wedges Upside Breakout
Descending wedges have been very popular with traders on the long side and not so often traded when it breaks in the downward direction. A descending wedge is defined by two lines, one on the upper boundary of the price movement which slopes down steeply towards the line on the lower side which also slopes down at less of an angle.
Descending Wedges, Surprise On The Downside
Descending wedges would normally be traded long, but at a look at the base results may change your mind. The majority of the patterns (61%) break upward, but do not deliver good returns when they do. The average gain is just 0.12% in 7 days with only a third of the breakouts (37%) being profitable. There are better patterns to trade on the long side, but selecting the right conditions can make trading descending wedges attractive.
Improve Your Trades
A long breakout from a descending wedge works better in a rising market and sector environment. Ensure the market is in an up trend while the sector and stock, are in a consolidation phase or an up trend prior to the breakout.
Descending 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 best avoided, where the pattern height is less than 2% when compared to the stock price. Also watch out for patterns that take longer than 25 days to form, these produce inferior results.
Illiquid stock can sometimes be identified by two identical lows, closes or highs and if this is the case you are better to avoid these trades. If volume supports a descending 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 Descending Wedges Can Be Profitable
By following these rules the profitability of trading descending wedges can be improved substantially. With an average return per trade of 1.92% in 11 days, more than 10 times the base return, and a hit rate of 57% descending wedges can be traded successfully when the market 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. - 23311
Descending Wedges, Surprise On The Downside
Descending wedges would normally be traded long, but at a look at the base results may change your mind. The majority of the patterns (61%) break upward, but do not deliver good returns when they do. The average gain is just 0.12% in 7 days with only a third of the breakouts (37%) being profitable. There are better patterns to trade on the long side, but selecting the right conditions can make trading descending wedges attractive.
Improve Your Trades
A long breakout from a descending wedge works better in a rising market and sector environment. Ensure the market is in an up trend while the sector and stock, are in a consolidation phase or an up trend prior to the breakout.
Descending 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 best avoided, where the pattern height is less than 2% when compared to the stock price. Also watch out for patterns that take longer than 25 days to form, these produce inferior results.
Illiquid stock can sometimes be identified by two identical lows, closes or highs and if this is the case you are better to avoid these trades. If volume supports a descending 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 Descending Wedges Can Be Profitable
By following these rules the profitability of trading descending wedges can be improved substantially. With an average return per trade of 1.92% in 11 days, more than 10 times the base return, and a hit rate of 57% descending wedges can be traded successfully when the market 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. - 23311
About the Author:
Jeff Cartridge has been trading chart patterns since 1998 and created the website LearnCFDs.com A Simple Timeless Method for Huge Gains
posted by Mr. Forex at
4:14 AM
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