Rising wedges are bearish biased patterns that are characterized by a series of higher highs and higher lows that converge in an upward pattern. Two trendlines can be drawn connecting the highs and the lows resulting in an upward sloping triangle. These upward trendlines should be tested several times with the most reliable formations touching the trendlines at least 5 times. The time length or duration of the pattern should be at least three weeks, anything shorter is a pennant. The volume tends to decrease during the formation of the pattern.

 

Rising wedges should only be shorted once a downside breakout has occurred as this lowers the risk substantially – see the table of statistics below. If one misses the breakdown, he/she may have a second chance to short the stock on a retest or pullback to the pattern – this happens about half the time per the statistics below. Downside breakouts generally occur about 2/3 of the way through the pattern to the apex. Also note that downside breakouts do not need to be confirmed with high volume, as stocks can fall under their own weight. Rising Wedges can are prone to premature breakouts either up or down as is any pattern and this does not signal the end to the pattern. However, if a a breakaway gap forms whereby the stock gaps up out of the pattern, this ends the pattern. A generic price target would be a fall to the bottom of the pattern, however some wedges may find support at one of the three Fibonacci numbers of 38.2, 50, and 62.8% - however the 38.2 and 50% levels seem to be the most like place to bounce.

 

All the statistical information for the chart patterns is referenced form the book: Encyclopedia of Chart Patterns by Thomas N. Bulkowski - Publisher: John Wiley & Sons. Click the title to buy this excellent book.

Statistics: based on a population of 179 examples in 500 stocks from 1991 - 1996.

Based on the statistics above it is obviously best to wait for the downside breakout confirmation before going short.

 

The other things that stand out is the low “most likely” decline of 15%. However, I wonder if this number is biased to the time from of study or 1991 - 1996. During this time period, there were periods of big declines, however the general market trend was up in contrast to the total market meltdown we have seen in the last few years. Therefore I wonder the Rising Wedge pattern would have performed better with contemporary data.

 

The number showing a downward volume trend 74%. Therefore, the majority of Rising Wedges have a downward volume trend as do most technical patterns, so this is not surprising.

Even though the average time for pullback completion takes about 10 days, note that pullback will begin much sooner than this, such as only a few days after breakout. Therefore, if you short a Rising Wedge after it breaks down, don’t ‘freak out’ if it starts to pullback, or if the volume is low – per the volume statistics above.

 

For swing trading, it is so important to let your winners run and sell you losers quickly. Most novice traders hold on to their losers too long - why does this happen??? After a trader has a string of losses, he/she surrenders to emotion which causes the trader to lose objectivity. In this example, once the trader surrenders to emotion, he/she will feel a psychological need to quickly lock in some profits to feel better to make up for the losses i.e. the trader does not let his winners run.

 

Do not fall into this destructive trap – sell your losers quickly and let your winners run – trade objectively, not emotionally. It’s also a lot easier to let a position run rather than constantly trading in and out of positions quickly – at least it is for me and is the reason I do not day trade.