Wedge Pattern :Falling and Rising wedge chart pattern
A Wedge pattern is a chart pattern formed by two converging lines, indicating that the magnitude of price movement within the wedge decreases.
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Depending upon trendlines wedges can form falling and rising wedge pattern.
They consist of steep and slanted trendlines that may trend upward or downward.
Wedges can be a reversal or continuation chart pattern, depending on their formation in the chart.
Types of Wedge Patterns
The two forms of Wedge Patterns are:
- Rising Wedge
- Falling Wedge
What is a Rising Wedge Pattern?
Rising wedge forms when the price consolidates between two upwardly sloping trend lines, creating higher highs and higher lows.
The slope of the support line appears to be steeper than the slope of the upper line.
As the trend lines narrow, the breakout appears to be visible on the bottom side.
In the chart, the position of the rising wedge indicates whether the trend will continue or reverse.
Rising Wedge Pattern bullish or Bearish?
Rising Wedge during an uptrend signal a bearish reversal.
It occurs when the price forms higher highs and higher lows within the wedge.
Breakout of the support level indicates that the upswing has ended and the bears have outnumbered the bulls.
After the candlestick closes below the support level, a trader might enter a short position.
A Rising Wedge on a downtrend on the other hand suggests that the bearish trend would continue.
It is formed when two trendlines slope upward and create a string of higher highs and higher lows that move opposite the current trend.
The breach of the support level indicates the reversal of a prevailing trend.
After the complete breakthrough of the support level, a trader might enter a short position.
What is a Falling Wedge Pattern?
The inverse of a Rising Wedge, a Falling wedge is formed when two converging trend lines slope downwards, creating lower highs and lower lows.
The top line appears to have a steeper slope than the bottom line.
As the trendlines narrow, the breakout appears to be visible on the upper side.
The position of the falling wedge in the chart indicates whether the trend will reverse or continue.
Falling Wedge Pattern Bullish or Bearish?
On an uptrend, a falling wedge indicates a bullish continuation movement.
It is formed when the two trendlines slope downwards to create a series of lower highs and lower lows.
Breakout of a resistance level implies the continuance of a trend.
A falling wedge on a downtrend signals a bullish turnaround.
It is formed when the price creates lower highs and lower lows within the wedge.
Breaking through the resistance level indicates a bullish reversal.
Traders can place a long entry after the breakout of the resistance level.
How To Trade Rising Wedge Chart Pattern ?
The break of the rising wedge to the upside signals buying opportunity in two ways:
First, as soon as a close occurs beyond a support level, a trader might put a short entry.
Second, a trader might wait for the price to drop and retest the previously broken resistance level.
Stop Loss Order
Place your stop loss order above the rising wedge.
The Take profit objective should be equal to the height of the wedge’s back.
How to Trade Falling Wedge pattern?
Because a falling wedge is a bullish pattern, traders should wait for the resistance level to break before entering a short position.
Traders might also wait for the price to retest the broken resistance level.
Stop loss order
Place your stop loss order below the falling wedge.
The Take Profit level should be equal to the height of the wedge’s back.
The rising wedge is bearish (ascending wedge).
The falling wedge is bullish (descending wedge).
A rising wedge chart pattern suggests a potential selling opportunity, whilst a falling wedge indicates a potential buying opportunity.
Using wedges with price action to place entry orders offers a strong risk-reward ratio.
When used in conjunction with other technical analysis tools, it provides a high probability setup for trading wedge formations.Author is senior technical analyst
and experinced price action trader