WEDGES

In technical analysis, a wedge is a price pattern that forms when the price of an asset moves in a narrowing range, forming a triangle or wedge shape.

Wedges are chart patterns formed by converging two trend lines and can be both a continuation or reversal pattern.

Wedges are often used as a signal for potential trend reversal. Traders typically look for the breakout of the pattern, which occurs when the price moves outside of the wedge formation, as a confirmation of the new trend direction.

There are two types of wedges:

  1. Rising wedge

    This pattern forms when the price of an asset makes higher highs and higher lows, but the angle of ascent becomes narrower and narrower over time.

    The pattern is considered bearish because it suggests that the price is likely to break down and move lower.

    Rising wedges always breakdown the support line


    How to use Rising Wedge?

    • As the rising wedge is a bearish reversal pattern, identify an uptrend before the pattern develops.
    • Look for a triangle pattern that is pointing up, indicating a rising wedge.
    • Draw a trend line connecting a series of higher lows followed by a series of higher highs, forming support and resistance levels.
    • Wait for the price to break below the support level to confirm the breakout of the pattern.
    • Breakout with a big candlestick and an increase in trading volume near the support line, as this can determine the perfect breakout.
    • Note that the rising wedge pattern is not confirmed until the breakout occurs to the downside of the support line.

  2. Falling Wedge

    This pattern forms when the price of an asset makes lower lows and lower highs, but the angle of descent becomes narrower and narrower over time.

    The pattern is considered bullish because it suggests that the price is likely to break up and move higher.

    Falling wedges always breakouts the Resistance line


    How to use Falling Wedge?

    • As the falling wedge is a bullish reversal pattern, identify a bearish trend before the pattern develops
    • Look for a triangle pattern that is pointing down, indicating a falling wedge.
    • Draw a trend line connecting a series of lower highs followed by a series of lower lows, forming support and resistance levels.
    • Wait for the price to break above the resistance level to confirm the breakout of the pattern.
    • Breakout with a big candlestick and an increase in trading volume near the resistance line, as this can determine the perfect breakout.
    • Note that the falling wedge pattern is not confirmed until the breakout occurs to the upside of the resistance line.

How to take position in the market?
- Depending on trading psychology and individual risk, some Traders follow below rules to enter into positions.

  1. Entry

    • Traders may look for a break of the trendline or the wedge pattern to enter a trade.

  2. Target

    • Measure the size of the pattern(height) from the initial points of Support and Resistance and then apply the same distance after the breakout point. This would be your minimum target profit.
    • Most of the times target will be higher than the above mentioned step.

  3. Stop Loss

    • Traders usually place stop-loss orders below the trendline or the low of the pattern for bullish wedges and above the trendline or the high of the pattern for bearish wedges.
    • Falling Wedges: After breaking resistance, Falling Wedge's Support will be the Stop Loss
    • Rising Wedges: After breaking of support, Rising Wedge's Resistance will be the Stop Loss

Caution

Sometimes market or stock might move in the opposite direction immediately after a breakout of a Wedge pattern, which is known as a False Breakout.

This can occur due to various factors such as market volatility, news events, or other technical indicators.

Always put a StopLoss to avoid Big loss.

Example-1 : Simple Falling Wedge Pattern

Example-2 : Rising Wedge Pattern

Example-3 : Rising Wedge Pattern

Example-4 : Rising Wedge Pattern Psychology

Example-5 : Falling Wedge Pattern Psychology

Example-6 : Falling Wedge Pattern with Target

Example-7 : Falling Wedge Pattern with Target

Example-8 : High Probability that price may go down as chart looks like Rising Wedge Pattern and RSI has a divergence.

Example-9 : Reversal Rising Wedge Pattern

Example-10 : Falling Wedge Pattern with MACD divergence

Example-11 : Rising Wedge Pattern with RSI and MACD having Divergence



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