Any group of submarines that includes no surface ships forms a wolfpack. Large groups are good for naval combat in HoI2 and ARMA, but considered ahistorical and gamey.
When using submarines to create pickets, Subs should be positioned on the high seas, as far as possible from enemy Air and Naval bases, in order to force the enemy to come out and fight the player's subs under conditions that give the enemy no advantage (no Air support, no Air spotting, no quick reaction from supporting forces in a nearby Port).
The other requirement for Sub-fleet positioning is that together they must form a complete blockade-cordon, cutting the enemy capital from all possible convoy destinations. The AI will automatically shift the route of a Convoy that has suffered U-Boat or Air attack... but this won't help it at all as long as all possible Convoy-routes are covered by subs.
Doomsday and Armageddon
In Doomsday, submarines were significantly reduced in power, so much so that many players called them worthless. In an infamous thread on the Paradox forums (Blue Emu's Are Submarines Worthless), it is shown that a German wolfpack strategy can be highly devastating to English supply convoys, effectively destroying their ability to fight overseas. With a 63 Uboat fleet (1938 model), Blue Emu tallied the following losses for the UK in 1939:
September : 227 Convoys, 27 Escorts
October : 149 Convoys, 33 Escorts
November : 117 Convoys, 13 Escorts
December : 161 Convoys, 26 Escorts
This accounted for nearly half of the British convoy fleet in the first four months of war. While England's home supply stockpile was not affected due to pre-war build up, their armies overseas (North Africa, India, and South East Asia) were rendered out of supply. This means relatively easy victories for Italy and Japan. Further, trade efficiencies drastically suffered:
Trade with Norway, Sweden and Latvia is 100%.
Trade with the USA, Mexico, Chile and Panama is 57.9%.
Trade with Saudi Arabia is 51.8%.
Trade with Yugoslavia is 51.1%.
Trade with China is 26.0%
Beginning with Armageddon 1.2, players have reported large success in using large sub stacks against surface ships, especially in the early war years.