One of the most popular technical analysis tools is the wedge pattern . And I want to talk about her today. A feature of this pattern is the fact that it can indicate both a trend reversal and its continuation. It is necessary to track it on the charts during the trend movement.
A wedge pattern is two lines at different angles that represent support and resistance. This is what distinguishes it from the triangle shape, in which both lines have approximately the same angle of inclination, or one of the lines is located horizontally.
An example of a wedge shape:
Depending on which way the wedge is directed, it can be downward (in my example) and upward. The pattern can be formed both on an uptrend and on a downtrend.
In general, we can see four variants of the wedge:
- on an uptrend, a rising wedge;
- on an uptrend, a falling wedge;
- on a downtrend, a rising wedge;
- on a downtrend, a falling wedge.
How to trade a wedge pattern
Consider two options: trading when a rising wedge appears and trading when a falling wedge appears.
Rising wedge formation
In order to consider a possible entry into the market, one must make sure that there is a trend in the market (up or down).
The two lines forming the wedge point up.
As practice shows, in most cases, the breakdown of the rising wedge occurs downward regardless of where the trend is directed. That is, it turns out that the appearance of a rising wedge on an uptrend signals its possible reversal. And the appearance of this figure on a downtrend indicates a high probability of continued downward movement.
You can sell when the support line is broken. A breakout is considered the closing of the candle below this line. If you prefer a more cautious trade, then it is better to wait for the price to return to the broken line and rebound from it.
Place the stop loss just above the resistance line. And you can focus on the local maximum.
The wedge shape has such an indicator as the height of the base. It is he who is used to determine the size of the take profit. It is recommended to close part of the trade at a level equal to the height of the base, and the second part of the trade at a level equal to double the height of the base of the wedge.
Falling wedge formation
In this case, we proceed in the same way, but with the appropriate adjustments. The falling wedge most often breaks up. That is, we are waiting for the breakdown of the resistance line and make a decision to open a trade. Stop loss is set below the support line. When a downtrend is formed, there is a high probability that if it is broken on an uptrend, the upward movement will continue, and if a downtrend is broken, the price will reverse.
An example of opening a trade deal:
In general, everything is quite simple. It is enough to look at a few examples of how the wedge pattern is formed and what happens next to understand the essence of this analysis method.