What is a Wedge Chart Pattern?
A Wedge Chart formation is a technical analysis tool used to identify continuation and/or reversal in forex price trends. It occurs when two trend lines converge or tend to converge.
When this formation occurs, it indicates that the price movements are decreasing in magnitude. In other words, the market is at a pause as traders decide what to do next.
If majority of traders choose to continue with the existing trend, a continuation occurs.
If most traders choose to trade in the opposite direction, a reversal occurs.
There are two types of Wedge Chart Patterns: Rising and Falling Wedges
How to Trade Rising Wage and Falling Wedge
Rising Wedge
A Rising Wedge occurs when the prices consolidate along rising support and resistance lines. In a rising wedge, the slope of the support trend line is steeper than that of the resistance trend line. This shows that the prices form higher lows faster than they form the higher highs.
There are two ways of trading a rising wedge: continuation and reversal.
A reversal occurs when the Rising Wedge occurs at the end of an uptrend. In this case, prices are likely to break support as shown in the figure below.
In the above scenario, prices have broken the lower trend line. To trade the reversal in a rising wedge chart pattern, you should place a sell entry when the prices close below the trend line.
The second scenario is when a rising wedge occurs in a downtrend as shown below.
In this situation, the rising wedge acts as a signal of bearish continuation. It shows that the prices are about to go down to continue the downtrend as shown below.
Based on the figure, the prices eventually broke the support trend line. Thus, you should place a sell order just below support.
Falling Wedge
A Falling Wedge occurs when the prices consolidate along falling support and resistance lines. It can either be a reversal of a downward trend or a continuation of an upward trend.
When a falling Wedge occurs in a downward trend, it signals a possible reversal as traders prepare to sell. This shown below.
As shown above, prices make lower lows and lower highs, signaling a reversal to a new upward tend. The upper trend line is steeper than the lower trend line. After the reversal, the resulting chart is shown below:
To trade a reversal falling wedge, you should place a buy entry above the upper trend line.
In the second scenario, a falling wedge can be used to trade a continuation of an upward trend. First, the prices in a rising trend will consolidate shortly and form a falling wedge as shown below.
When this chart pattern forms, it signals a continuation of the rising trend. It shows that buyers paused shortly, and new buyers are about to enter. This will lead to a break out of the upper trend line as shown below.
In the figure above, a trader should place a long entry just as prices close above the upper trend line.
In summary,
A continuation of an upward trend occurs when a falling wedge chart forms in an upward trend. The idea here is to place a buy order above the upper trend line.
A reversal of an upward trend occurs when a rising wedge chart pattern forms in an upward trend. In this case, you should sell below the lower trend line.
A continuation of a downward trend occurs when a rising wedge pattern forms in a downward trend. When this happens, you should sell below the lower trend line.
A reversal of a downward trend occurs when a falling wedge pattern occurs in a downward trend. In this case, you should buy just above the upper trend line.