The rising channel is a well known chart pattern that you would expect to trade on the short side, but can also be traded if it breaks out to the upside. A rising channel is formed when the price action is contained within two lines. Both the bottom line and the top line slope up, with both lines near to parallel.
Rising Channel, Surprise On The Upside
Rising channels are normally patterns that would be considered to trade on the short side, but also can perform on the upside. 51% of the patterns break upwards and can deliver good returns when they do. The average gain is 0.53% in 8 days with under half of the breakouts (40%) being profitable. There are better patterns to trade on the long side, but selecting the right conditions can make trading a rising channel attractive.
Improve Your Trades
A long breakout from a rising channel works better in bullish market conditions. A rising or consolidating market is beneficial and the sector environment should not be in consolidation, but rising or falling. The stock should also be falling or consolidating. Essentially you are best trading the rising channel long when the stock has a pull back in a bullish market environment.
Tall patterns are best avoided when trading rising channels. A tall pattern is where the pattern height is more than 10% when compared to the stock price. Also avoid patterns that take more than 40 days to form. If a pattern has been formed around a large candle that marks both the top and bottom of the pattern it does not perform strongly.
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 rising channel 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.
Rising Channels Can Deliver Good Profits
Following a series of rules to determine which rising channel to trade can improve results dramatically, but heavy filtering is required, more than 2000 trades are reduced to less than 100 to get decent results. By applying these filters rising channels are profitable on 63% of the trades and return an average of 2.11% per trade in 10 days. This is a profitable pattern to trade.
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 is a private trader and created the website LearnCFDs.com Discover Patterns of Success
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