Wedge Pattern: What It Is and How To Use It in Technical Analysis?

These levels provide an excellent starting point to begin identifying possible areas to take profit on a short setup. Before we move on, also consider that waiting for bullish or bearish price action in the form of a pin bar adds confluence to the setup. That said, if you have an extremely well-defined pattern a simple retest of bearish wedge vs bullish wedge the broken level will suffice. A subsequent move toward the lower band, followed by a breakout below the lower trend line, confirms a bearish wedge pattern. In a downtrend, a falling wedge indicates that the bearish momentum is decreasing. Depending on the type of wedge pattern that forms, this move could be in the same direction as the current trend or in the opposite direction.

What Does a Wedge Pattern in Technical Analysis Indicate?

• Calculate the vertical distance between the highest high and the lowest low within the pattern.
• For example, a rising wedge that occurs after an uptrend typically results in a reversal.
• While price can out of either trend line, wedgepatterns have a tendency to break in the opposite direction from the trendlines.
• One of the biggest misconceptions about the falling wedge is that its downward slope always signals bearish momentum.
• The narrowing price action and declining volume are indicative of a weakening trend, making a bearish reversal more likely.

A market analyst and member of the Research Team for the Arab region at XS.com, with diplomas in business management and market economics. Since 2006, she has specialized in technical, fundamental, and economic analysis of financial markets. Known for her economic reports and analyses, she https://www.xcritical.com/ covers financial assets, market news, and company evaluations. She has managed finance departments in brokerage firms, supervised master’s theses, and developed professional analysis tools.

What Trading Indicators Are Best to Use with a Rising Wedge Pattern?

However, by applying the rules and concepts above, these breakouts can be quite lucrative. The first thing to know about these wedges is that they often hint at a reversal in the market. Just like other wedge patterns they are formed by a period of consolidation where the bulls and bears jockey for position. A rising wedge is generally bearish, indicating that an uptrend is losing momentum and a potential downtrend is imminent.

How to Set Stop Loss Levels for a Wedge Pattern

Uniquely to the broadening wedge, the bias is neutral when the pattern consolidates sideways. This means the pattern does not signal a higher probability of breaking out to either side. Therefore, when you encounter this pattern, wait for a proper breakout with high volume before taking a trade.

The area of the wedge breakout then serves as a resistance line on a subsequent rally. Note that the volume on the bearish breakout is relatively low in this continuation move, although it is still higher than the trading volume in the days prior to the breakout. 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 price may retest the resistance level before continuing its upward movement, providing another opportunity to enter a long position. However, the entry point should be based on the traders‘ risk management plan and trading strategy.

As the price forms lower highs and lower lows within converging trendlines, it shows that the selling pressure is decreasing. This means that fewer traders and investors are willing to sell their assets at lower prices. The narrowing of the wedge at the peak implies further breaching of the diagonal support line, indicating a bearish trend reversal. Once the price breaks through the pattern from above, short trades can be opened. When the rising wedge acts as a continuation pattern, it suggests that the market sentiment remains bearish.

Then, after the price breaks out, this signals the beginning of an uptrend. The bullish falling wedge shows that the downward momentum is weakening, and buyers are gradually gaining control. When the breakout occurs, it often comes with increased volume, confirming the bullish reversal and signaling traders to consider entering long positions. A „Rising wedge“ is a bearish reversal pattern emerging at the peak or a bearish trend continuation pattern. A „Bull flag“ involves a downward correction, retracing 30%–50% of the flagpole size.

Utilizing additional technical analysis indicators for validation and employing sound risk management strategies are crucial for maximizing the pattern’s predictive utility. The falling wedge chart pattern is a recognizable price move that is formed when a market consolidates between two converging support and resistance lines. To form a descending wedge, the support and resistance lines have to both point in a downwards direction and the resistance line has to be steeper than the line of support. Stop-loss orders in a rising or falling wedge pattern can be placed either some price points above the last support level or below the resistance level.

The pattern consists of two upward sloping trend lines that will eventually connect with each other. The Rising and Falling wedge patterns often provide lucrative risk-to-reward ratios, as the spread cost of the trade tends to eat up any potential profits. However, it’s important to remember that these chart patterns are not a guarantee of price movement; they should only be used as an indication of potential market sentiment. As always, it’s important to use sound money management and risk management practices when trading Rising and Falling Wedge patterns. Of all the reversal patterns we can use in the Forex market, the rising and falling wedge patterns are two of my favorite.

For example, a rising wedge that occurs after an uptrend typically results in a reversal. A rising wedge that occurs in a downtrend will usually signify that the downtrend will continue, hence being a continuation. As a bullish descending wedge pattern, you should notice that volume is increasing as the stock puts in new lows. As this “effort” to push the stock downward increases along the lows, you’ll notice that the result of the price action is diminishing. It forms during a downtrend, with the price making lower highs and lower lows that converge towards a point.

Because the two levels are not parallel it’s considered a terminal pattern. This written/visual material is comprised of personal opinions and ideas and may not reflect those of the Company. The content should not be construed as containing any type of investment advice and/or a solicitation for any transactions. It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance.

Technical analysts consider wedge-shaped trend lines useful indicators of a potential reversal in price action. The difference is that rising wedge patterns should appear in the context of a bearish trend in order to signal a trend continuation. Note that the rising wedge pattern formation only signifies the potential for a bearish move. Depending on the previous market direction, this “bearish wedge” could be either a trend continuation or a reversal. In other words, during an ascending wedge pattern, price is likely to break through the figure’s lower level.

We introduce people to the world of trading currencies, both fiat and crypto, through our non-drowsy educational content and tools. We’re also a community of traders that support each other on our daily trading journey. With prices consolidating, we know that a big splash is coming, so we can expect a breakout to either the top or bottom. Both formations reflect a struggle between buyers and sellers, with the breakout direction revealing the dominant force. Recently, we discussed the general history of candlesticks and their patterns in a prior post.

It typically indicates a bullish reversal, as the price breaks upwards after a period of declining highs and lows. We suggest flipping through as many charts of the more liquid names in the market. Get out your trend line tools and see how many rising and falling wedges you can spot. Draw them, and then make note of the price action on the breakout or breakdown, identifying what made them a bearish wedge or a bullish wedge. In short, the falling wedge suggests a potential upward reversal, while the descending triangle points to a likely downward continuation.

However, a breakdown occurs either below the support trendline of a rising wedge or below the resistance trendline of a falling wedge. Breakouts signal traders to open new trade positions, whereas breakdowns suggest they hold onto the trade for a while. It’s worth noting that a higher volume behind the break is great evidence that the breakout is happening. After the breakout is confirmed, traders could open a short position if the price falls below the lower trendline of a rising wedge.

Learn all about the falling wedge pattern and rising wedge pattern here, including how to spot them, how to trade them and more. A Rising Wedge Pattern is formed when two trendlines meet due to the continuously rising prices of two currency pairs. The convergence sends traders a signal of a market reversal during an uptrend, and the prices start to decrease as more and more traders start shorting their trades and exit the market.