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How to Trade a Falling & Rising Wedge Pattern Like a PRO

The wedge pattern (Falling wedge pattern & Rising wedge pattern) is a frequent pattern observed in the price charts of financial instruments (stocks, bonds, futures, etc.).

The wedge pattern is distinguished by a narrowing price range combined with either an upward (known as a rising wedge) or a downward (known as a falling wedge) price trend (known as a falling wedge).

A wedge pattern is seen to be a brief stop in the major trend.

It is a pattern development in which trade activity are restricted to converging straight lines.

This design has a slant that rises or falls in the same way.

It varies from a triangle in that both of its border lines slope up or down.

Another distinction from the triangle is the price breaking out point.

Falling and rising wedges are only a minor component of an intermediate or main trend.

They are not considered prominent patterns since they are designated for minor trends.

When the basic or major trend returns, the wedge formation loses its usefulness as a technical indicator.

How to Trade a Falling Wedge Pattern

The falling wedge pattern is defined by a chart pattern that appears when the market makes lower lows and lower highs with a shrinking range.

When this pattern is seen in a downward trend, it is called a reversal pattern since the range contraction suggests that the downtrend is losing speed.

When this pattern is observed in an upswing, it is considered a bullish pattern since the market range narrows during the correction, signaling that the negative trend is losing momentum and the uptrend is about to resume.

Both boundary lines of a falling wedge slant down from left to right.

The top line drops more steeply than the bottom line.

Volume continues to fall, and trading activity decreases as prices narrow.

The breaking point arrives, and trading behaviour after the breakthrough differs.

Prices are more likely to drift laterally and saucer-out as they exit the particular boundary lines of a falling wedge.

The steps to identifying falling wedge pattern are as follows:

  • Determine if an uptrend or a downtrend exists.
  • Make use of a trend line to connect lower highs and lower lows. The two lines will merge and slope downwards.
  • Look for divergence between the price and an oscillator.
  • Use other technical tools to validate the oversold indication.
  • For a lengthy entry, look for a break above resistance.

How to Trade a Rising Wedge Pattern

The rising wedge pattern is a chart pattern that emerges when the market makes higher highs and higher lows with a shrinking range.

When this pattern is seen in an uptrend, it is called a reversal pattern since the range contraction signals that the upswing is losing momentum.

When this pattern is discovered in a downtrend, it is considered a bearish pattern because the market range narrows into the correction, signaling that the correction is losing power and that the downtrend is about to resume.

Both boundary lines of a rising wedge slope up from left to right.

Despite the fact that both lines are pointing in the same direction, the lower line climbs at a steeper angle than the higher one.

Prices often fall after breaching the lower boundary line.

In terms of quantities, they continue to fall with each successive price advance or wave up, suggesting that demand is diminishing at the higher price level.

In a bearish market, a rising wedge is more trustworthy.

The steps to identifying Rising wedge pattern are as follows:

  • Established downtrend
  • Rising wedge consolidation formation
  • Using trend lines to connect higher highs and lower lows towards a narrowing point
  • Confirmation of price-volume divergence using the volume function
  • Using technical instruments, you can confirm an overbought indication.
  • For a quick entry, look for a break below support.

References

[1] http://www.investopedia.com/university/charts/charts7.asp