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Rising Wedge or Ascending Wedge Chart Pattern

The rising wedge or ascending wedge chart pattern is a popular formation used by investors who follow technical analysis. The rising wedge helps to identify a stock pattern that is reaching a high point and is about to turn down. Ascending wedge or rising wedge is the same concept and I will use the terms interchangeably.

A rising wedge can offer the investor an additional advantage to help them beat the market. On the other hand, when used incorrectly, the pattern can contribute to further losses. This article will help you get started in using ascending wedges to help improve your investing results.

Description of Rising Wedge Chart Patterns

The classic ascending wedge pattern used by technical analysts has a two up-sloping trend lines. The upper trend connects the closing highs while the lower rising trend connects the closing lows. This pattern of higher highs and higher lows tends to occur at an interim top in the stock or the market. Volume tends to decline during the formation of the ascending wedge.

According to the study by Thomas Bulkowski on chart patterns, a rising wedge should have multiple touches on the upper and the lower trends. He points out that you should see no fewer than five touches with three on one side and two on the other before you get a break down.

Volume normally declines over the life of the rising wedge as the buying demand tends to fall. This decrease in volume helps to open the door to the break down through the lower rising trend. Often, this break is accompanied by higher volume, though it is not required, as much of the buying demand has fallen and the selling pressure has taken over.

The formation of an ascending wedge indicates that buying volume diminishes as fewer investors are acquiring shares. In addition, selling pressure has not built up, so there is sufficient buying to stop the pull backs before they reach a prior low. A buy on the dips helps to keep the price rising as investors believe the higher lows are a sign of strength in the stock.

The problem is the higher highs are not keeping up proportionally with the higher lows. Eventually, the volume of buyers does not overcome the volume of sellers and the price falls.

The rising trend is defined by at least two price declines creating higher lows. While the price does not have to touch the rising trend, it should come close as this is an indication of the underlying buying strength of the stock price pattern.

Often the price will re-test the lower rising trend, giving investors another opportunity to sell. In the example below, look for a retest of the break of the lower trend.

The hourly chart below is from one we provide to our Premium members. It shows the formation of an rising wedge with resistance at the upper rising trend with support at the lower rising trend. Notice the multiple touches made at the upper trend. A touch should come close to the trend, though it does not have to actually reach the trend. Coming close is sufficient. On the third touch at the lower trend the price broke down, a sign the index is turning down.

Ascending wedges can form on charts with any time frame. When used in daily, weekly or monthly charts, it can take some time to form completely.

Trading Ascending Wedge Chart Patterns

When the price pierces the lower rising trend we have a break down. Higher volume is not necessary. In fact, if the move down is is accompanied by the lack of buyer volume, the price can fall with below average volume based just on what the sellers are creating.

The most success using the rising wedge pattern comes when you wait for the break down through the lower rising trend. According to Bulkowski's research the break down only experiences a 6 percent failure rate, which is excellent.

Investors should look to buy on the initial break. However, you can also wait for the re-test as another re-entry point. Unfortunately, the re-test does not always take place, so you cannot count on it.

The measure rule for rising wedges is easy to determine. It is the lowest point in the formation. For the chart above the measure rule gives you a target on the NASDAQ of the 1,725 area. Not all ascending wedges achieve this target, so it is important to use trailing stops to protect your gains.

It is good trading discipline to be ready to take profits quickly when you are short. In addition, many investors sell half of their position after achieving half of the move to capture profit, which frees the money to use on other opportunities. The remaining half is covered by a trailing stop that is below the breakout, allowing them to capture any further move down.

Risks using Rising Wedge Chart Patterns

The success of the ascending wedge pattern is closely aligned with shorting at the break of the lower rising trend. Investors who enter before the break down assume higher risk primarily from a premature break up.

Premature breakouts occur when the rising wedge has not fully developed and the price breaks through the upper rising trend. The price can break up through the rising trend ending the validity of the pattern before it develops. Like many chart patterns the ascending wedge is prone to these type of failures, which is why an investor should be sure the rising wedge fully develops before making a commitment.

Many investors and investing sites will classify a stock pattern as an ascending wedge, even though it fails to meet the specific guidelines. When this occurs, it is more likely the pattern will fail. It is tempting to call a pattern an rising wedge even when it does not meet all the criteria. When investors take this action they are creating additional risk of a bad trade. There is enough risk when investing in the stock market. Why add to the risk with an improperly classified ascending wedge chart pattern.

To avoid these risks take the time to properly identify the rising wedge. If the pattern fails to meet the criteria review other possibilities including a pennant.

While the ascending wedge is a popular stock chart pattern, it does not transpire that often. When you find an occurrence, you should follow it carefully as the pattern produces some of the best results.

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