The wedge pattern is a technical analysis tool, which predicts the oncoming breach of the market trend.
Visually Wedge is similar to a Triangle, the only difference is that both its forming lines are pointed in one direction.
Wedge patterns are trend reversal patterns. They are composed of the support and resistance trend lines that move in the same direction as the channel gets narrower until one of the trend lines get broken and reverse the immediate trend on heavy volume. These reversals can be quite violent due to the complacent nature of the participants who expect the trend to continue. Trend lines are the best way to spot the narrowing of the channel, which is the first key sign that the reversal may be forming.
The wedge is usually formed at the top or bottom of the market, only the trend lines converge.
If the wedge is directed upwards in an uptrend, most likely there will be a breakdown and the trend will reverse. If it is directed downwards in a downtrend - an upward trend breakdown is similarly possible.
But if the wedge is directed against the main movement, the pattern will be the continuation of the movement. That is, the breakdown mainly takes place in the direction opposite to the tilt of the Forex pattern, although it is not always necessary.
Is a Rising Wedge bullish or bearish?
A rising wedge is a figure that is composed of an oscillating chart and is conditioned by a narrowing amplitude. If we draw straight lines on maxima and minima respectively, two lines will form an imaginary angle that will narrow with time. In this case, it is obligatory that the inclination of this angle is positive; i.e. the formed angle should be directed upwards, showing a non-standard upward trend.
An upward wedge is a bearish figure. As a rule, an uptrend is reversed by an uptrend, but there are exceptions. It happens that an upward wedge continues the upward trend. If before the uptrend was downward, after the wedge the price goes down and it turns out that the uptrend continued. But it is important to remember that in any case, after an uptrend there is a downturn in the price.
An uptrend is not a very common figure, and it is not very easy to notice. Despite the fact that it seems that the bulls and bears are in a conditional balance, the narrowing of the upward wedge indicates that the supply wins. In the end, buyers fail and sellers take control of the market. In order to determine how the price will behave further, it is necessary to conduct further analysis of this instrument.
Is a descending wedge bullish?
A descending wedge is a reversal pattern of technical analysis that manifests itself in a downward wave-like movement, whose amplitude decreases.
A descending wedge is formed at the touchpoints of two lines, which form an angle looking down to the right. An imaginary angle is the downward wedge. It is important that the price should touch each line at least twice.
A descending wedge is a reversal pattern. It means that it is impossible to say exactly where the price will go until the figure is finished. Usually, the price after the pattern is directed upwards, thus reversing the price, but it is not always the case. The direction of price movement after the complete pattern formation depends on the side from which the price has broken-down the pattern (i.e. from below or above). In its turn, it means that crossing the price of one of the straight lines is a key point for a technical analyst.
Formation, maturation and completing a pattern consists of several key elements:
the preceding trend is usually descending; it is necessary to have something to unfold
the resistance line is formed by two (better - three) touchpoints; each touchpoint must be lower than the previous one
the support line from below must also "reflect" at least 2 touchpoints, each of which must be lower than the previous one
narrowing of the angle formed by support and resistance lines means correct figure formation
If the price crosses one of the lines (either resistance or support), it means the end of the pattern; it is important to note that the side from which the price crossed the pattern determines the further price movement
the trading volume is essential in the descending wedge; at the end of the figure, at the intersection, the trading volume must necessarily increase, otherwise, the figure will not be considered reliable
An important point for the technical analyst is the timely detection of the downward wedge in the chart; it can easily be confused with other similar figures. Always wait until the end of the figure to check the price direction and trading volume.
Usually, a downward wedge foreshadows a bullish (i.e. upward) trend, but this is not always so: it is important to watch which side of the pattern the price has come out of.
Main technical conditions of the wedge formation
The previous trend has to be broken. In an uptrend, every minimum must be higher than the previous one.
The line of resistance or support that price breakdown when it forms a wedge must be a minimum of two highs in a bearish market or a low in a bullish market. Ideally, there should be three touches by the price of any of these lines.
The slanting support line in a bearish market should include a minimum of two touches, respectively, the resistance line in a bullish market should also be drawn on two lows.
Grounds for wedge pattern formation
Being a U-turn model, wedge suggests the presence of manipulations in its formation. The purpose of the manipulations is simple - to drop unnecessary "passengers" or set positions by a large participant.
Often wedge is similar to a triangle with a horizontal flat side, but if the "Triangle" specially creates conditions for the accumulation of orders, then in the case of a wedge, these orders are constantly knocked out.
Let us specify: as a rule, when an inclination is planned with an update of the maximum, the price waits for time, accumulating stops/teaks on both sides of the range. In our case, the price constantly updates the maximum on one side and sharply returns to the shape's range, so the impulse in this direction is not interesting. This may indicate that a big player is gaining positions and preparing for a reversal.
How do you trade a wedge pattern?
At the top or the bottom of a trend movement a pattern is formed whose trend lines converge;
We draw the trend line on the minimum of this pattern and the maximum as well as the trend line, as a result, we get a figure or a wedge pattern;
It is usually better to place trades after the breakdown of one of the trend lines, especially if it occurs against a pattern`s tilt;
you can use a pending Buy Stop order for a descending figure or a Sell Stop order for an ascending figure set to the last extremum of the pattern;
after the already completed breakdown of the trend line and closing of the candlestick (for example, if it is an hour timeframe, then at the opening of the next hour we open a trade towards the breakdown);
on the return to a broken-down trend line (retest of a broken wedge trend line) is the best time to open positions;
be sure to set a protection order - Stop Loss is at least below or above the previous local minimum or maximum of the formed graphic model, depending on the breakdown.
Take Profit is usually recommended to set at the beginning of the pattern formation or it is easier to calculate the profit according to the rules of graphic analysis.
The wedge is a pattern of medium complexity, and due to constant updating of maximums, price movements are sharp, and the steeper the slope of the formation, the harder it is to work it out successfully.
Many traders strictly tie the wedge pattern to the reversal of the previous trend (although it often does happen before the trend reversal). But we view it independently from the trend, that is, the wedge has its direction, and the reversal comes from this direction. Besides, it is often the basis of the pennant pattern, wherein the overall picture it plays the role of trend continuation.
Summary
A wedge pattern is not as popular as some other trend reversal models. But, taking into account its reliability and stability, it is not inferior to them. The more elements of technical analysis you master, the more trading opportunities you will have in front of you. The trend after consolidation can continue, and who knows, maybe it is the wedge shape that will give you the first signal of this.
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