Tips for Trading Descending Wedges Long with CFDs

The descending wedge is a very well known chart pattern that you would expect to trade on the long side, but can also be traded if it breaks out to the downside. A descending wedge is formed when the price action is contained within two lines. Both the bottom line and the top line slope down, but the top line has a steeper slope meeting the bottom line.

Descending Wedges, Surprise On The Downside

Most descending wedges would be expected to break up and they do. In fact 61%, break out to the upside making this pattern predictable to trade on the long side even if the results are not so strong. Only 37% of these breakouts are profitable and on average the profit per trade is 0.12% over a period of 7 days. The descending wedge is not the best chart pattern when it breaks to the upside, but applying some filters makes this pattern much more attractive to trade.

Improve Your Trades

A break to the upside works better in a rising market environment. By using filters that require the market to be in an up trend and the stock and the sector to be in a consolidation or an up trend you can improve the results substantially.

A breakout from a descending 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 (2% or less) produces smaller returns, as do patterns that take more than 25 days to form.

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Descending wedges with two highs, closes or lows at the same price should be avoided, as this usually occurs in an illiquid stock. If the volume supports the breakout the results are better. Supportive volume means the volume on the way up is higher than the volume on the way down.

Trading Descending Wedges Can Be Profitable

You can improve your trading results by using a series of filters that have been outlined here. This select group of descending wedges delivers an average profit of 1.92% in 11 days and is profitable on 57% of the trades. Overall this makes descending wedges attractive to trade, but these filters are important.

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 A Simple Timeless Method for Huge Gains