Although I made the decision not to have an open blog or forum on Right Side of the Chart, at least while I continue to build out the site, I do welcome feedback and questions via the Contact page. A follower of the site recently had some good questions regarding trading wedge patterns (bullish falling wedges and bearish rising wedges), which make up a good percentage of the trade ideas posted on the site. In lieu of having a forum, I like to occasionally share some of the questions & replies, articles, trade ideas, etc.. shared by fellow traders and followers of the site. As such, here are the questions regarding trading wedge patterns, followed by my responses:
Hi ya Randy, On these falling wedges….
Should one take a starter position within the channel? (i.e in the middle or towards the bottom.)
Occasionally I will take a starter position within the wedge in anticipation of a breakout assuming that my confidence is high that it will play out. I prefer to see multiple bullish technicals coming together such as that wedge falling down to a key support level(s)… preferably on more than one time frame; bullish divergences in place; etc… The more “check marks” I have on the bullish side (vice versa for shorting rising wedges), the more confidence I will have. Regardless, taking a starter position within a pattern before it breaks out/triggers an entry should be considered an aggressive strategy.
Or do you prefer placing a buy stop above the top of the falling wedge?
I typically don’t use buy stops since I have the luxury of trading full time & always being in front of the computer. Therefore, I will often pass on a breakout if something doesn’t “smell right”, such as below average volume on the breakout or maybe the breakout happens as the broad market is approaching a key resistance level (where it is likely to pullback, causing the breakout to fail). However, for those who work another day job, buy stops are probably the best option. Most brokers allow conditional orders so that if the buy stop is triggered, you can have a stop-loss order immediately put in place just in case the breakout fails the same day.
Or perhaps buy a little within the wedge and add on the break out above?
Yes, if the wedge looks really good and I do take a starter position pre-breakout, I usually bring it to a full position once the breakout is confirmed.
Further I would assume stops are placed just out side the bottom line of the falling wedge?
That all depends on how steep the wedge is. E.g.- If the wedge is very steep OR the stock breaks out well before the apex of the wedge, then the bottom of the wedge can be very far below in percentage terms. Probably better to use a stop on a solid move (preferably a close) back inside the wedge… in other words, back below the upper trendline. Many wedge breakouts (bullish falling or bearish rising wedges) often see prices come back to make a backtest of the wedge after the initial breakout. Sometimes I will add to my position or enter the initial position on the backtest if I missed or passed on the breakout. Typically, I will set my stop not too far below (or above on shorts) that backtest level but it really depends on my average cost, the percentage loss to that point, etc… as every trade is different.
I would also assume the reverse applies on shorting rising wedges….
Yes, basically the same principles and strategies apply in reverse when shorting rising wedges vs. going long falling wedges. Also keep in mind that most wedges breakout around roughly 65-85% towards the apex of the wedge. Breakouts that occur much beyond or before that point are less likely to play out for a good trade.