There are many different chart patterns that technical traders leverage in making informed trading decisions; this includes the Wedge Patterns. Wedges are considered very reliable in most trading communities and are counted among the most popular chart patterns. Plus, to the eyes of an experienced pattern trader, Wedges are easy to identify and simple to trade. That being said, to the novice, trading and identifying this pattern requires some discovery first.
The Wedge Patterns, or Wedges, are chart patterns that last 10 to 50 trading sessions and that frequently appear on the price chart of a security. In these patterns, the highs and lows of price converge to move towards each other to form a triangular-shaped structure. Based on orientation, there are two popular types of Wedges, namely – the Rising Wedge and the Falling Wedge.
In most trading scenarios, the Wedge Pattern primarily indicates to traders that a reversal in the direction of the price is upcoming. This allows the traders to accordingly pivot their trading plan and strategies. That being said, there are a few situations where the Wedge Pattern can also be used as a sign of potential trend continuation. To delve deeper into the Wedge Pattern, how it works, how it can be identified, and how to use it in a trading strategy, read on.
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Table of Contents
Types of Wedge Pattern (or Wedges)
As discussed above, there are two main types of the Wedge Pattern that as a trader you must learn to recognize. These are –
- The Rising Wedge Pattern or the Rising Wedges
- The Falling Wedge Pattern or the Falling Wedges
In principle, both these variations work the same way, with some subtle nuances. Additionally, Even though both these types of the Wedge Pattern differ in their shape and orientation, they both hold three key characteristics that generally makes them easy to identify. These characteristics are listed as follows –
- Both types of Wedge Patterns have an upper and a lower trendline that converge over time.
- During the formation of Wedges, irrespective of the type, the trading volume declines as the price progresses through the pattern.
- With both, the Rising and the Falling Wedges, the pattern completion is marked by a breakout that occurs in the direction of the trendline with a higher slope.
Now that we have briefly discussed the key characteristics that would generally apply to both types of the Wedge Pattern, let us discuss both variations of this pattern in some more detail.
Rising Wedge Pattern
As its name may have already indicated, in the Rising Wedge Pattern, the trendlines are both sloping upwards while converging at the same time.
In this pattern, the upper trendline that maps out the series of consecutive price highs increases at a slower rate than the lower trendline as the time moves forward. During the formation of this pattern, generally, the price remains in an uptrend, but its momentum gradually decreases. This reduction in momentum is an indication that the market will turn around, and the price will fall. Hence, this type of wedge pattern would typically represent a bearish reversal.
That being said, on rare occasions, a Rising Wedge pattern can also appear on the price chart of a security after a prevailing downtrend. When that happens, the breakout still occurs in the bearish direction. Therefore, a Rising Wedge Pattern can either be a bearish reversal or a bearish continuation chart pattern.
To conclude, a Rising Wedge is a bearish reversal or a bearish continuation chart pattern that appears on a security’s price chart after a high momentum sustained price trend. It is characterized by two converging trendlines, the upper trendline and the lower trendline. Additionally, for a Rising Wedge Pattern, the slope and the momentum of the upper trendline is less than that of the lower trendline.
Falling Wedge Pattern
In the Falling Wedge Pattern, the two trendlines converge as they both slope downwards. During the development of this pattern, the line representing the series of price lows over the allotted time decreases at a rate that is slower than the upper trendline. This type of wedge pattern mostly occurs after a prevailing downtrend is therefore most associated with a bullish reversal. However, just as with Rising Wedges, a Falling Wedge Pattern can occasionally form after a prevailing uptrend, and due to scenarios such as these, it can also act as a bullish continuation chart pattern.
Finally, to conclude, a Falling Wedge is a bullish reversal or a bullish continuation chart pattern that is marked by two converging trendlines, the upper trendline and the lower trendline. These trendlines are drawn on a security’s price chart by connecting a series of consecutive price highs and price lows and move at a pace different from each other. With a Falling Wedge Pattern, the slope and the momentum of the lower trendline is relatively lower than that of the upper trendline.
Identifying Rising and Falling Wedges
The Wedges Patterns, both Rising and Falling Wedges, are counted among the easiest to identify chart patterns. But, to the eyes of a novice trader, it might still take some effort to identify them. This is because these patterns share some striking similarities with other chart patterns such as – the Triangles and the Pennants.
There are two methods that can be leveraged to correctly and timely identify the Wedge Patterns. These are –
- Identifying Rising and Falling Wedges Using Geometry and Shape Recognition
- Identifying Rising and Falling Wedges Using Technical Indicators and Tools
For the best results, you should use both of these above-stated methods in conjunction with each other. Now, without further ado, let us briefly discuss both these methods for identifying Wedges.
Identifying Rising and Falling Wedges Using Geometry and Shape Recognition
The Rising and the Falling Wedges are both characterized by several structural components. You can leverage these structural components to identify and to confirm Wedges on the price chart of a security.
Listed below are the structural components that every complete Wedge Pattern will have –
- Preceding Trend
- Upper Trendline
- Lower Trendline
- Convergence
- Slowdown in Trading Volume
- Breakout
In the following subsections, each of these structural components are further discussed.
Preceding Trend
Before the Wedge Pattern really begins to form, there is almost always an established price trend, which is characterized by high trading volume.
This preceding trend is generally bullish in the case of a Rising Wedge, whereas, a Falling Wedge is usually preceded by a downtrend. However, regardless of the trend’s direction, you must note that for a Wedge Pattern to form, having a period of strong momentum in price change is the prerequisite.
Upper Trendline
The upper trendline in the Wedge Pattern is composed of connected, consecutive, price highs depicted over a period.
- In the case of a Falling Wedge Pattern, this trendline has a higher slope than the lower trendline. Furthermore, when the pattern construction is complete, the price breaks through this trendline.
- Contrarily, in the case of a Rising Wedge Pattern, this trendline exhibits a slope that is lower than the lower trendline. Additionally, with a Rising Wedge Pattern, a substantial price move past this trendline often indicates a failed Wedge Pattern.
Lower Trendline
The lower trendline in the pattern is composed of connected, consecutive price lows depicted over the given period.
- In a Falling Wedge Pattern, this trendline has a lower slope than the upper trendline. Additionally, a price move below this trendline indicates a pattern failure when identifying a Falling Wedge Pattern.
- In a Rising Wedge Pattern, this trendline has a higher slope than the upper trendline. Moreover, with a Rising Wedge Pattern, it is this trendline through which the price breaks once the pattern construction is complete.
Convergence
During the development of the Wedge Pattern, the upper and the lower trendlines begin to contract towards each other. As time progresses, both these trendlines move in the same direction, but at a different pace. As a result, these trendlines are not parallel and grow on an intersection trajectory as the pattern develops.
- In the case of a Rising Wedge Pattern, the lower trendline grows at a faster pace and therefore has a higher slope than the upper trendline.
- Contrastingly, for a Falling Wedge Pattern, the upper trendline has a higher slope as it grows at a faster pace than the lower trendline.
Slowdown in Trading Volume
Irrespective of the Wedge Pattern type, be it the Rising Wedge or the Falling Wedge, the trading volume declines as the convergence occurs and it spikes to accommodate the breakout when it happens.
Breakout
Breakout is the point at which the reversal is signaled and it begins to occur.
- In a Falling Wedge, the breakout occurs above the upper trendline.
- Contrarily, with a Rising Wedge, the breakout would occur below the lower trendline.
In essence, during this phase, the market generally reverts to how it was before the pattern’s formation.
Identifying Rising and Falling Wedges Using Technical Indicators and Tools
Wedges have a distinguishable structure, making it simple to identify them with some practice. However, identifying them could be made even simpler by leveraging several technical indicators and technical analysis concepts.
Listed below are several key concepts and indicators in technical analysis that you can leverage to identity a Wedge Pattern –
Japanese Candlesticks
Candlesticks that are shown on the price chart depicting high, low, opening and closing prices can prove extremely helpful in identifying a Wedge Pattern. They help a trader identify the consecutive highs and lows over a given period of time. Identifying these consecutive highs and lows is essential in drawing the upper and the lower trendlines, which are a pivotal part of this pattern’s formation and its identification.
Hence, by using a Candlestick Chart, you can make the process of identifying a potential Wedge Pattern much simpler.
Volume Price Trend (VPT) Indicator
As covered in the previous section, with the Rising Wedge and the Falling Wedge Patterns, the overall trading volume first decreases as the trendlines converge, and it later increases in a spike when the breakout occurs. Because of this characteristic, you can use a volume indicator to measure the changes in trading volume and use it as a confirmation sign when identifying the Wedge Patterns.
There are several different volume indicators that can be used for this purpose. In fact, you can directly use volume itself as an indicator here.
However, in my opinion, the Volume Price Trend (VPT) Indicator would be the ideal choice for this purpose. This is because this indicator measures the changes in volume relative to the direction of the price change. Therefore, it will show you both the direction and the magnitude of the volume change, which are both crucial in identifying the Wedge Patterns.
Interpreting Wedge Pattern
Wedges have an interesting psychological effect on the market. They send mixed signals to traders who are unfamiliar with it. Therefore, to trade these patterns with confidence, it is extremely important to understand the market forces that lead to the development of a Wedge Pattern.
For that reason, in the following sections, we will jump into the market psychology behind the formation of Wedges, and discuss all details that you need to know on the subject.
Interpreting Rising Wedge Pattern
High level, the Rising Wedge formation is the result of three broad market psychology phases. Described below are each of these three phases.
Phase-1: The Prevailing Trend Phase
At the beginning of this pattern’s formation, the market is defined in a particular trend. As discussed in the previous sections, in the case of a Rising Wedge Pattern, this prevailing trend is generally bullish. But, on rare occasions, Rising Wedges can also be preceded by a bearish price trend.
As also discussed before, the prevailing trend phase of a Rising Wedge formation is characterized by a high trading volume. Depending on the kind of prevailing trend, bullish or bearish, this high volume indicates the presence of substantial buying or selling interest for the asset in question during this phase.
Phase-2: The Convergence Phase
During this phase, as the prevailing trend proceeds, more and more traders begin to grow skeptical about the existing sentiment (bullish sentiment in the case of uptrend and bearish sentiment in the case of a downtrend) for the security.
Consequently, many traders that hold the security gradually begin to close their positions with the objective of either booking profits or to protect any further losses on their trades. Moreover, the trading activity in the market considerably reduces during this phase. Furthermore, in the case of a prevalent uptrend, short-sellers also begin to rush to the market at this stage.
As a result of this growing contrarian sentiment for the security during this phase, the upper and the lower trendlines of the Rising Wedge Pattern begin to converge, resulting in the convergence phase of the pattern, and a significant reduction in the overall trading volume of the security.
Phase-3: The Breakout Phase
The pattern of traders rushing out of the market to protect their profits or to minimize their losses persists until the market reaches a point where it is saturated. Due to this, the pressure on buyers for the security increases further and the market becomes overbought.
At this stage, the market cannot sustain any additional buys, and hence a bearish breakout occurs, marking the completion of the Rising Wedge Pattern.
Interpretation Falling Wedge Pattern
At its core, the market forces leading to the development of a Falling Wedge Pattern are similar, but opposite, to the market forces that lead to the development of the Rising Wedges. Now that we have already covered the interpretation of the Rising Wedge Pattern, understanding the formation of the Falling Wedge Pattern should be relatively easy.
So, let us jump straight into the three market psychology phases behind the development of a Falling Wedge Pattern.
Phase-1: The Prevailing Trend Phase
Just as with Rising Wedges, the first phase of market psychology for the Falling Wedge Pattern is marked by a prevailing trend. With Falling Wedges, this preceding trend is usually bearish, but in rare scenarios, it can also be an uptrend.
During this development phase of the pattern, there is substantial trading activity in the market, indicating a strong selling or buying interest in the asset.
Phase-2: The Convergence Phase
During the convergence phase of the Falling Wedge Pattern, as trading activity continues, the sentiment around the security starts to turn contrarian, in comparison to the direction of the prevalent trend. As a result, short-sellers begin to exit the market and there is a parallel surge in the buying interest for the security.
Due to this gradual shift in the market sentiment for the security, trading volume sees a sharp decline. Consequently, as buying sentiment continues to grow for the security, the upper and the lower trendline begin to converge towards each other, with the upper trendline growing at a faster pace.
Phase-3: The Breakout Phase
As the pattern develops further, a flurry of bullish traders continue to enter the market, increasing the pressure on the short-sellers of the security even further. This trend continues until the market gets fully saturated and is oversold, at which point a bullish breakout occurs. In essence, this bullish breakout marks the completion of the Falling Wedge Pattern.
Improving Reliability of Rising and Falling Wedges in Trading
The Wedge Pattern, similar to all other trading tools, comes with its own set of limitations. As mentioned above, due to striking similarities with several other chart patterns, Wedges may seem a little complex to trade at first.
However, the reliability of Wedges, both Rising and Falling, in making accurate trading decisions can be considerably improved when they are used alongside supplemental signals from the following indicators and tools –
- Japanese Candlestick Patterns
- Moving Average, Momentum, and Divergence Indicators
- Fibonacci Retracement and Extension Levels
Now, in the following sections, let us briefly discuss how you would integrate these above-stated tools into your strategy to trade the Wedge Pattern.
Japanese Candlestick Patterns
Japanese Candlesticks and Candlestick Patterns can provide considerable aid in improving the reliability of Wedge Patterns. These are easy to read, quick to comprehend, and relatively simpler to integrate with your chart pattern trading strategies. Hence, for that reason, Japanese Candlesticks and Candlestick Patterns are very complementary to trading the Wedges.
When trading a Wedge Pattern, you can improve the reliability of your trades using the Japanese Candlesticks and Candlestick Patterns in three ways. These are –
- Accurate Pattern Recognition
- Identify Potential Reversal Zones
- Confirm Breakouts
Described below are each of these three use cases in some more details.
Accurate Pattern Recognition
As discussed earlier, to correctly identify and trade a Rising or a Falling Wedge pattern, it is critical to accurately mark consecutive highs and lows for drawing pattern trendlines. Japanese Candlesticks are easy to read and clearly indicate the open, close, high, and low for a trading session.
Therefore, in comparison to many other price chart types, identifying the upper and the lower trendlines, and hence the Wedges, becomes much simpler when leveraging a Candlestick Chart.
Identify Potential Reversal Zones
Wedges are counted among the most popular and widely traded reversal patterns. They are great at providing a general idea that a reversal may potentially occur, but to identify and to confirm exact reversal zones, you will need to rely on other complementary tools. This is where Candlestick Patterns, more specifically – Reversal Candlestick Patterns, can be leveraged to improve the reliability of your trade entries.
Confirm Breakouts
One of the most popular ways to trade Wedges is through breakout trades. But, just as with any other chart patterns, false breakouts frequently occur when trading Wedges. Therefore, when trading breakouts with the Wedge Patterns, the accuracy of your trades can be significantly improved with a breakout confirmation signal from a complementary trading tool. Continuation Candlestick Patterns form one such complementary tool that you can leverage for this purpose.
Moving Average, Momentum, and Divergence Indicators
Moving Average and Momentum based technical indicators form a very good combination with the different chart patterns, including the Wedges. These indicators provide reliable signals on the strength and the direction of a trend. This information is vital for improving the accuracy of trades made using the Wedge Patterns.
Momentum Indicators can help improve the reliability of the Wedge Patterns in two ways. These are –
- Pattern Confirmation
- Determining Breakout Strength
Discussed in the following sections are both these use cases of Moving Average, Momentum, and Divergence Indicators, along with a few examples of these indicators.
Pattern Confirmation
The Wedge Patterns are characterized by the slowness in trading activity and the loss in momentum during their convergence phase. Therefore, when identifying a potential Wedge on the price chart of a security, readings from a Momentum Indicator can come in really handy. These readings can be leveraged to confirm that the pattern that you are looking at is in fact a Wedge Pattern. For this purpose, you can either use readings from a Momentum Indicator directly or monitor the Divergence on the price chart using it.
Determining Breakout Strength
Breakout Trading is the most reliable method for trading Wedges. But not all breakouts are equal. There are breakouts that can change the complete price trajectory of a security and therefore have the potential to deliver massive profits. But, there are also breakouts that die down just after moving the price needle by a few percentage points.
Therefore, not all breakout trades might be worth the risk of trading. This is where momentum readings from these indicators or simply the position of price with respect to a moving average line can help determine if a breakout trade is even worth considering when trading a Wedge Pattern.
Examples: Moving Average, Momentum, and Divergence Indicators
Now that we have discussed the fundamentals of incorporating Moving Average and Momentum Indicators into your Wedge Pattern trading strategy, let us discuss how you can leverage a couple of popular momentum indicators for the above-stated purposes.
The two momentum indicators that we will discuss in the following subsections are – MACD (Moving Average Convergence Divergence) and Stochastic Indicator.
MACD (Moving Average Convergence Divergence)
MACD is a momentum indicator, useful in confirming the direction of the breakout that has either occurred or will occur. When using this indicator, you would want to use the following readings as confirmation signals for your trades –
- Bearish Trade Confirmation: When trading a Rising Wedge Pattern, if the shorter moving average line of MACD is below the longer moving average line of MACD, it confirms the bearish trade setup.
- Bullish Trade Confirmation: In the case of a Falling Wedge Pattern, if the shorter moving average of the MACD is above the longer moving average line of MACD, it confirms the bullish trade setup.
- In each scenario, the MACD’s directional movement confirms the movement of the wedge pattern’s breakout.
Stochastic Indicator
Stochastics Indicator, also known as the “Stochastic Oscillator”, is a line that oscillates between 0 and 100 to indicate when an asset is overbought or oversold. Below is how you can leverage the signals from this indicator to improve the reliability of breakout trades identified using a Wedge Pattern.
- When the Stochastic Oscillator is at 30 or less, and this reading is synchronous with a Rising Wedge formation, it confirms that there should be a breakout below the lower trendline. Additionally, this breakout has a grounding, and it is advisable to sell or short sell as this breakout occurs.
- Contrarily, when the Stochastic Oscillator is at 70 or more, and this reading is synchronous with a Falling Wedge Pattern, it confirms that the asset is oversold and a breakout to form an uptrend should occur. In situations such as these, it is advisable to buy the security that you are trading.
Fibonacci Retracement and Extension Levels
With a correctly identified Rising or Falling Wedge Pattern, you can easily determine the direction of an upcoming price movement or breakout. A Rising Wedge is known to breakout in the bearish direction, whereas the price breaks into an uptrend after a Falling Wedge.
While this sense of direction is of great use in making educated trading decisions, to make a reliable trade entry you would also need a way to identify the exact price zone where a breakout is likely to occur. Additionally, estimating how far will the price continue its new trajectory post-breakout is another critical insight needed to make profitable trades. These are the insights for which a Wedge Pattern falls short on its own. However, you can easily compensate for these shortcomings of a Wedge Pattern by integrating Fibonacci Retracement and Extension Levels into your pattern trading strategy.
High level, Fibonacci Retracement and Extension Levels can play two roles in improving the reliability of trades that you make using the Wedge Patterns. These are –
- Identify Potential Trade Entries
- Identify Potential Trade Exits
Identify Potential Trade Entries
Fibonacci Retracement and Extension Levels can help forecast where the forthcoming swings in the Wedge Pattern formation would end. With these levels identified, a considerable edge can be attained in understanding the potential points of reversal in trading these patterns.
Identify Potential Trade Exits
Fibonacci Extension Levels are a powerful way to determine potential areas on the price chart of a security up to which the price wave is likely to continue after the breakout from the Wedge Pattern. Hence, these levels can provide you with a powerful way of determining the take profit targets for your trades.
Trading Rising and Falling Wedges
Identifying Wedges, both Rising and Falling, on the price chart of a security is not a very complex affair. However, the same cannot be said about trading them. Therefore, it is always good to have a few trading strategies up your sleeve for trading these chart patterns.
In this section, we will discuss one of the most popular and reliable strategies, the Breakout Strategy, to trade the Wedge Pattern.
The Wedge Pattern Breakout Strategy is a trading strategy that involves making a buy or sell decision after the price breaks out of the Wedge Pattern. When you are trading a Falling Wedge, the breakout will result in an uptrend, and the reverse will be true when trading a Rising Wedge Pattern.
In essence, there are four steps to trading breakouts using the Wedge Pattern. These are –
- Identifying Tradable Wave
- Determining Trade Entry
- Determining Stop Loss Level
- Determining Take Profit Level
Discussed below are each of the four steps to trade Wedges using this strategy.
Identifying Tradable Wave
For either type of Wedge pattern, when you are trading with the Breakout Strategy, the tradable price wave will be the one that emerges after the pattern construction is complete.
- In the case of a Rising Wedge Pattern, you will trade the bearish wave that emerges after the price breaks out of the lower trendline of the Wedge Pattern.
- Contrarily, when trading a Falling Wedge Pattern, you will trade the bullish price wave that emerges after the price breaks past the upper trendline of the Wedge Pattern.
Determining Trade Entry
The following should be considered before entering a breakout trade using the Wedge Pattern:
- The structure of the Wedge Pattern must be complete. You must be able to draw two trendlines on your trading chart and map out their convergence, before considering any trades using these patterns.
- Do not make a trading move until a breakout has been established. That is to say, always wait for a confirmation signal before entering a trade. Otherwise, you may wrongly trade on a false breakout.
Then, once the above-stated considerations are established, you can use the below-mentioned pointers under this strategy to trade Wedges:
- Go long on a Falling Wedge to make a profit as the price increases. This means you buy the security when a breakout is confirmed and wait for the price to increase to close out your position. Complementary tools such as Candlestick Patterns can serve as a confirmation signal for breakouts.
- Sell or short sell on a Rising Wedge to make a profit as price decreases. This means you sell or short sell the security when a breakout is confirmed and then buy it back at a lower price. Similar to trading the Falling Wedges, you can leverage Candlestick Patterns to get trade confirmation signals for Rising Wedge breakout trades.
Determining Stop Loss Level
With the Breakout Trading Strategy, you can use the following guidelines to determine the Stop Loss targets for your trades –
- Falling Wedge – With a Falling Wedge Pattern, you should place the stop loss for your trade a few points below the last swing low price of the Wedge. If the price were to, in fact, swing below this point shortly after the breakout has occurred, it would mean that the trade idea is invalidated. In such situations, you would need to close out the trade and minimize your losses.
- Rising Wedge – When trading a Rising Wedge Pattern, your stop loss can be placed a few points above the last swing high price of the Wedge. The rule is similar to what is described for the Falling Wedge pattern above. In this case, the trade gets invalidated and a loss could occur if the price reverts to negate the profit made from short selling the security soon after the breakout occurs. Therefore, setting your stop loss at this recommended level will protect you against losses in such circumstances.
Determining Take Profit Level
Listed below are some important guidelines that you can consider using to set Take Profit targets for your trades when using the Breakout Trading Strategy for Wedge Patterns –
- Falling Wedge – Staying conservative, you can set your take profit target at the price point that represents the start of the Falling Wedge Pattern on the upper trendline. This target is in line with our prediction that the market will consolidate after the breakout.
- Rising Wedge – Again, with a Rising Wedge Pattern, you can set your take profit target at the price point that represents the start of the Rising Wedge on the lower trendline. We are predicting here as well that the market will consolidate after the breakout.
For longer-term or for more aggressive trading, the above-stated guidelines might come across as too conservative. Therefore, for setting more aggressive profit targets, you can leverage Fibonacci Extension Levels.
Additional Notes:
- The direction of the price trend when the Wedge Pattern appears will determine whether it is a continuation or a reversal pattern.
- If a Falling Wedge occurs right in the middle of an uptrend, it is most likely a continuation pattern. That is to say that even if a breakout occurs below the lower trendline, it is most likely a superficial breakout. The price will eventually return to going back up.
- Equally, if a Rising Wedge occurs during a price downtrend, it will become a signal for continuation. Even if a breakout occurs above the upper trendline, it is superficial in most cases, and an uptrend will eventually follow.
- Equal to the reversal, the continuation is expected to consolidate, and the same strategy will apply for the Falling and Rising Wedge patterns.
Advantages and Limitations of Trading Rising and Falling Wedges
Similar to other chart patterns in technical analysis, the Wedge Patterns come with their own set of advantages and limitations.
When using these patterns to make trading decisions, it is critical that you are mindful of these pros and cons. Therefore, in the following sections, let us discuss a few of these common strengths and weaknesses of the Rising and the Falling Wedges.
Advantages of Trading Rising and Falling Wedges
Listed below are few important advantages of Wedges, both Rising and Falling, that you should know –
- For experienced traders, the Wedge Patterns are relatively easy to identify on the price chart of a security.
- On relative terms, when trading the Rising/Falling Wedge Patterns, there is less subjectivity around trade entry, stop, and limit points.
- With Wedge Patterns, even if you miss the initial move, there are still openings to enter the market for profitable trades.
- Wedges frequently appear on the price chart of various securities in the financial markets. Therefore, if you have a strategy to trade them, they can provide a good number of trading opportunities.
Limitations of Trading Rising and Falling Wedges
When trading Wedges, you should be mindful of several common limitations of these patterns. The most important of these limitations are listed as follows –
- For beginners, Wedge Patterns could be tricky to identify due to their structural similarities with other chart patterns such as Triangles and Pennants.
- As a trader, you would need to leverage complementary indicators and techniques to reliably trade Wedges.
- Depending on their orientation and the overall trend, Wedges can signal a continuation or a reversal: one is not necessarily guaranteed.
- The Wedge Patterns can be easily confused with other chart structures.
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Conclusion
To conclude, the Wedge Pattern is a chart pattern noted primarily for its use as a reversal or continuation signal. It can be identified by two converging trendlines that follow a previous trend and lead to the point of saturation, beyond which a breakout finally occurs. In most cases, Wedges would result in a trend reversal and you will get continuation signals from these patterns only on rare occasions.
There are two main types of Wedge Patterns: the Rising and Falling Wedge Patterns. Both these patterns mainly aid traders to have a fast and easy signal of an incumbent downtrend or uptrend in which they can profit. That being said, for improving the reliability of trades using these patterns, it is advisable that traders leverage confirmation signals from other complementary techniques and tools, such as – Candlestick Patterns, when trading Wedges as well.
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