Chart wedges are inclined plane-shaped patterns that provide reliable signals about potential trend reversals or continuation.
You draw a wedge on your price chart by connecting the highs and lows of the converging price action. This provides valuable insight into the trend's strength—whether it will continue or reverse.
In this lesson, you'll learn the two main types of wedges – the Rising and Falling Wedges – and how to spot them during a bullish or bearish market.
When you chart the market, draw trendlines based on the price actions, and notice a wedge – an inclined-plane-shaped pattern, what do you think will happen to the market?
The price consolidates on a sloping support and resistance. After that pause, the market trend will either continue or reverse.
A wedge pattern forms either ascending or descending converging trendlines. This pattern may form during a bearish or bullish market.
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When a wedge forms at the peak of a bullish market, it could either make an ascending wedge or a descending wedge. The type of wedge you'll draw from an upward market gives valuable insights into the potential bullish continuation or a bearish reversal.
The formation of a wedge pattern at the bottom of an extended bearish market indicates a potential bearish continuation or a bullish reversal. Which is which? It depends on the type of wedge it produces.
The rising wedge indicates a bearish movement. It typically forms after an extended upward market and signifies a potential bearish reversal or continuation of a bearish trend. This pattern is recognized by two ascending trend lines that converge as the price progresses.
The lower trend line is steeper than the upper trend line. This indicates that the lower trendline rises more quickly than the upper trendline.
When a rising wedge forms during an uptrend, it signifies a weakening buying pressure and a potential bearish trend reversal. A rising wedge in a bearish market, on the other hand, indicates a bearish continuation.
You must be cautious when you spot a rising wedge. This presents an entry opportunity for your short (sell) position and provides risk management insight to exit your long (buy) position.
A falling wedge is the counterpart of a rising wedge – it's a bullish pattern that signals a bullish continuation or a bullish reversal.
While this typically forms during an extended downtrend market, it can also be seen in an appreciating market to indicate trend continuation.
The market must show these characteristics to confirm the pattern formation and signal:
The formation of a falling wedge pattern offers buyers an opportunity to execute a long position. A seller should place a stop-loss order above the upper trendline to limit potential further losses.
Trading the chart is one of the most common strategies technical traders use. However, these patterns don't guarantee returns and can sometimes bring false signals.
Remember to use it with other indicators or ask the community to confirm the signal of the pattern.