The Wedge pattern is a price reversal pattern that can be drawn by two converging trend lines. The Wedge pattern represents that the market is in the decision phase. Wedge patterns are chart patterns similar to symmetrical triangle patterns in that they feature trading that initially takes place over a wide price range and then narrows in range as trading continues. However, unlike symmetrical triangles, wedge patterns are reversal signals and have a strong bias towards being either bullish – for falling wedges – or bearish – for rising wedges.
What is the Wedge pattern?
The Wedge pattern contains a series of highs and lows which are connected by two trend lines. These converging lines are based over a period of 10 to 50.
To identify the Wedge pattern, traders look for three things; converging trend lines, declining volume, and breakout from one trend line. The declining volume is a sign of indecision, and breakout at one of the trend lines signifies a reversal.
The highs and lows of the Wedge give it two types; rising and falling.
a. Rising Wedge
The rising Wedge emerges when the price is in an uptrend. It can also appear when the price is between uptrend and downtrend. The converging line drawn between lows and highs, helps traders identify a price reversal. The reversal happens after the breakout of the lower trend line.
b. Falling Wedge
The falling Wedge occurs when the price is in the final phases of the downtrend. Converging lines are marked between highs and lows, signals a price reversal. The reversal takes place after the breakout of a higher trend line.
How to use the Wedge pattern?
To apply the pattern, traders use Wedge’s bullish and bearish variations. The falling Wedge is a bullish pattern, while the rising Wedge is a bearish pattern.
In the rising Wedge, the higher lows are stronger than, the higher highs. The breakout surfaces on either the upper or lower trend line. Traders take their short positions after the breakout of lower trend line.
The falling Wedge is the opposite of the rising Wedge. In the falling Wedge, lower highs are more powerful than the lower lows. The breakout happens on upper or lower trend lines, and traders take their long positions after a higher trend line breakout.
In both rising and falling Wedge, stop-losses are set close to enter positions. In other words, traders should set stop-losses close to entry points. This way, it can yield profitable results.
Sometimes the Wedge pattern tends to move in the opposite direction. This means rather than signaling a reversal, and it shows the continuation of a trend. In this scenario, the Wedge should be applied as a bearish pattern.
For example, in the falling Wedge, instead of a reversal, the price continues to move in the same direction. Here, a trader should trade with the trend rather than against it.
To confirm the movement of the price, traders may wish to use momentum oscillators like RSI or Stochastics.
Wedge pattern trading strategy
The Wedge can develop on shorter and longer timeframes. So, both short-term and long-term traders can take advantage of it. On higher timeframes like weekly or monthly charts, the Wedge may give stronger signals. Traders may look for the Wedge patterns on any timeframe according to their own individual trading needs.
The most common way to use wedge patterns is by opening forex positions based on an expected breakout. This can be an effective strategy for targeting profit opportunities that can be timed around the convergence of these lines.
Wedges can also help you determine when you want to close a position. Sometimes this is done to secure profit near the end of an ascending wedge predicted to produce a bearish breakout. But you might also use wedges to cut your losses on a position that didn’t work out the way you intended—and to avoid further losses from the price breakout.
Wedge pattern buy strategy
- Locate the falling Wedge on a chart.
- Wait for the price bar to go bullish before entering.
- Enter after the breakout of a higher trend line.
- Place a stop-loss near the entry point.
- Exit the trade before the price drops.
Wedge pattern sell strategy
- Locate the rising Wedge on a chart.
- Wait for the price bar to go bearish before entering.
- Enter after a breakout of a lower trend line.
- Place a stop-loss near the entry point.
- Exit the trade before the price rises.
Wedge pattern conclusion
The Wedge pattern is a helpful pattern for defining a price reversal. Sometimes, it can also predict the continuation of a trend. A day trader or a short-term trader may look for the pattern on longer timeframes, and then apply the Wedge according to those analysis.
A Wedge is similar to a Triangle, the main difference between the two patterns is the inclination of the two lines and the pattern itself: all the lines are inclined either upwards or downwards.
These patterns can be extremely difficult to recognize and interpret on a chart since they bear much resemblance to triangle patterns and do not always form cleanly. Therefore, it is important to be careful when trading wedge patterns and to use trading volume as a means of confirming a suspected breakout.
The Wedge Pattern can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy.
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