The Wedge Reversal Pattern

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How to Trade Wedge Chart Patterns

Wedges signal a pause in the current trend. When you encounter this formation, it signals that forex traders are still deciding where to take the pair next.

Wedges could serve as either continuation or reversal patterns.

Rising Wedge

A rising wedge is formed when price consolidates between upward sloping support and resistance lines.

This indicates that higher lows are being formed faster than higher highs. This leads to a wedge-like formation, which is exactly where the chart pattern gets its name from!

With prices consolidating, we know that a big splash is coming, so we can expect a breakout to either the top or bottom.

If the rising wedge forms after an uptrend, it’s usually a bearish reversal pattern.

Either way, the important thing is that, when you spot this forex trading chart pattern, you’re ready with your entry orders!

In this first example, a rising wedge formed at the end of an uptrend. Notice how price action is forming new highs, but at a much slower pace than when price makes higher lows.

See how price broke down to the downside? That means there are more forex traders desperate to be short than be long!

They pushed the price down to break the trend line, indicating that a downtrend may be in the cards.

Just like in the other forex trading chart patterns we discussed earlier, the price movement after the breakout is approximately the same magnitude as the height of the formation.

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Now let’s take a look at another example of a rising wedge formation. Only this time it acts as a bearish continuation signal.

As you can see, the price came from a downtrend before consolidating and sketching higher highs and even higher lows.

In this case, the price broke to the down side and the downtrend continued. That’s why it’s called a continuation signal yo!

See how the price made a nice move down that’s the same height as the wedge?

A rising wedge formed after an uptrend usually leads to a REVERSAL (downtrend) while a rising wedge formed during a downtrend typically results in a CONTINUATION (downtrend).

Simply put, a rising wedge leads to a downtrend, which means that it’s a bearish chart pattern!

Falling Wedge

Just like the rising wedge, the falling wedge can either be a reversal or continuation signal.

As a reversal signal, it is formed at a bottom of a downtrend, indicating that an uptrend would come next.

As a continuation signal, it is formed during an uptrend, implying that the upward price action would resume. Unlike the rising wedge, the falling wedge is a bullish chart pattern.

In this example, the falling wedge serves as a reversal signal. After a downtrend, the price made lower highs and lower lows.

Notice how the falling trend line connecting the highs is steeper than the trend line connecting the lows.

Upon breaking above the top of the wedge, the pair made a nice move upwards that’s approximately equal to the height of the formation. In this case, the price rally went a few more pips beyond that target!

Let’s take a look at an example where the falling wedge serves as a continuation signal.

Like we mentioned earlier, when the falling wedge forms during an uptrend, it usually signals that the trend will resume later on.

In this case, the price consolidated for a bit after a strong rally. This could mean that buyers simply paused to catch their breath and probably recruited more people to join the bull camp.

Hmm, it looks like the pair is revving up for a strong move. Which way would it go?

See how the price broke to the top side and went on to climb higher?

A good upside target would be the height of the wedge formation.

If you want to go for more pips, you can lock in some profits at the target by closing down a portion of your position, then letting the rest of your position ride.

The Wedge Reversal Pattern

The wedge is fairly common pattern, and if you familiar with Elliott Wave analysis a wedge often appears in wave 5–the final stage–of a trend. Rising wedges are bearish and falling wedges are bullish. Depending on trend direction and the angle of the wedge, that could mean there are occasions when a wedge is a continuation pattern. Here we’ll learn how to identify a wedge as either a reversal or continuation pattern, or then how to trade it. Wedges can be very large, creating major moves in markets and are therefore very relevant to traders on all time frames.

A wedge occurs when the price is moving either higher or lower overall, but the price range covered is narrowing. The pattern starts with a large move, but as the pattern progress the swing highs and lows in price converge, creating a cone like shape. In a rising wedge, this pattern indicates buyers are as interested as they once were. A falling wedge shows sellers are no longer as interested as they once were.

Figure 1 shows a rising wedge in American International Group (AIG) and figure 2 a falling wedge in American Realty Capital Properties (ARCP).

Figure 1. Rising Wedge in AIG

Figure 2. Falling Wedge in ARCP

Price will typically breakout of a wedge in the opposite direction the wedge is sloping. Figure 1 and 2 are considered reversal patterns because the wedge is part of the overall trend and therefore when the pattern breaks it will signal a likely end to the current trend.

In the case of figure 1, AIG is in overall uptrend, but if the price breaks below the support line of the pattern (horizontal line connecting the price lows of the pattern) it is a strong indication that the uptrend is over and the price is likely to fall.

In the case of figure 2 the right side of the charts shows the price in a downtrend, but if the price breaks above resistance (horizontal line connecting the price highs of the pattern) it strongly indicates the downtrend is over and the price is likely to head higher.

Therefore reversal wedges are part of the overall trend, and indicate that trend is ending when the pattern breaks out in the opposite direction of the wedge/trend.

Wedges often see a “throw-over” in the direction of the trend/wedge. For example, in figure 1 you may the price rise above the resistance line which some will interpret as an acceleration of the trend to the upside. Don’t trust a throw-over though; quite often these types of price moves quickly fail and then the price falls through the bottom of the wedge.

Therefore, I prefer to wait and only trade wedges in the direction I expect the breakout to occur. In a downtrend or falling wedge, wait for the price to break resistance and then go long. In an uptrend or rising wedge wait for the price to break through support and then go short.

For a wedge to be a reversal pattern we saw that the wedge is part of the trend and moving in the same direction as the overall trend. It is possible to have smaller wedges though. Assume for a moment the a market is in an overall downtrend, then price then begins to move higher in a wedge formation, but compared to the overall downtrend this wedge is quite small. In this case the wedge signals that the trend direction is likely to continue once the price breaks below the wedge pattern.

Figure 3 shows an overall uptrend in Citigroup (C), but a small wedge forms moving in the opposite direction of the trend. In this case the wedge is likely to be a continuation pattern (meaning the trend is likely to continue). For one, we have a strong trend up and the wedge does not form the trend but is rather just a consolidation showing the stock is pausing. Also, the price will typically breakout out in the opposite direction the wedge is sloping–which in this case is higher, and in alignment with the trend.

Figure 3. Continuation Wedge in C

Whether you see a wedge which is the trend, or a small wedge which is a consolidation within an overall trend, the pattern is quite tradable. We know that wedges generally breakout in the opposite direction they are sloping. While there may be exceptions to this, typically I will only take trades where this condition is met. When a large uptrend or downtrend takes a on a wedge formation, it typically signals a major reversal could be forthcoming when the price breaks to the downside or upside, respectively. Since we draw lines on the chart to mark the pattern which can be somewhat subjective, it is possible to get the occasional false breakout. Therefore, I won’t usually take a trade the second the price breaks the support/resistance I have drawn, but rather wait to see if the price continues to move outside the pattern–if it does, then I will take the trade.

How to Identify & Trade Falling Wedge Patterns

Watch our video on how to identify and trade falling wedge patterns!

What Is a Falling Wedge Pattern & How to Identify These Patterns?

  • A falling wedge pattern consists of a bunch of candlesticks that form a big sloping wedge. It is a bearish candlestick pattern that turns bullish when price breaks out of wedge. Falling wedge patterns form by connecting at least two to three lower highs and two to three lower lows which become trend lines.

They are bullish reversal patterns. The falling wedge pattern name might throw you off because it sounds like it’d be bearish but it isn’t. Watch our video above to learn more about falling wedges.

When the pattern has completed it breaks out of the wedge, usually in the opposite direction. This is why it’s known as a reversal pattern. The bullish bias of a falling wedge can’t be confirmed until a breakout. Until it breaks out, you can ride the wedge to the downside.

They are one of Bullish Bears Dan’s favorite patterns!

Check out the falling wedge on the $VXX – volatility has been heavily shorted this second half of 2020 and creates a nice falling wedge setup for a squeeze.

They can also be part of a continuation pattern but not matter what it’s always considered bullish. Knowing what Japanese candlesticks patterns are telling you is imperative when trading stocks.

Candlesticks such as the high wave candlesticks, doji candlesticks as well as hammer candlesticks give you warnings of impending moves.

1. Basics of Falling Wedge Patterns

Falling wedge patterns are wide at the top and contract to form the point as price moves lower. That’s what gives it it’s cone shape.

To be seen as a reversal pattern it has to be a part of a trend to reverse. In a perfect world, the falling wedge would form after an extended downturn to mark the final low. From there it would break up.

This pattern typically takes a few months to form if you are trading a daily chart. When you’re looking at charts you’ll notice it can even take up to 6 months to form. During intra-day trading, it may only take a few hours for a falling wedge to form.

It’s important to have confirmation of the breakout so you’re not caught in a trap. These patterns are formed by support and resistance and price will move back to retest those levels to see if they hold.

2. Technicals

Support and resistance are a huge part of trading. Especially when trading wedges or triangles. They’re the levels traders pay a ton of attention to. Watch for traders “lining up for the trade”

You can use moving averages such as the simple moving average formula as well as the VWAP trading strategy. These indicators not only form support and resistance but buy and sell signals.

Candlesticks such as long legged doji candlesticks and gravestone doji candlesticks can form these levels. The real bodies and wicks of bullish candlesticks and bearish candlesticks form key levels of support and resistance also.

They are only confirmed by breaking out of right angle resistance. That resistance then becomes support. Sometimes falling wedges will re-test the right angle of the wedge before running again!

Click here to read our post on how to draw support and resistance to learn more about the proper way to draw these lines. Take our candlesticks patterns course.

FW pattern on $NVCN today, looking for a breakout

How to Trade Falling Wedge Patterns

  1. How to trade falling wedge patterns:
  2. Watch for a falling wedge pattern to form by connecting two to three sloping peaks and valleys (lower highs and lower lows).
  3. Connect the peaks and valleys via trend lines.
  4. Once price breaks out of the base of the wedge take long entry.
  5. Use candlestick close below base of wedge as your stop.

As we stated above, support and resistance are a key part of trading falling wedge patterns. They form two lines. The upper resistance line and the lower support line.

You need at least 2 reaction highs to form the upper resistance line. If you have 3 highs that’s even better. Each high should be lower than the preceding highs.

To form the lower support line you need at least 2 reaction lows. The reaction lows need to be lower than the lows before it.

That’s how the falling wedge patterns get their shape. The support and resistance lines come together to form that cone shape as the pattern matures. The more shallow the lows the more of a decrease in selling pressure there is.

We teach how to trade candlesticks in our trading rooms. Check out our trading service to learn more.

Check out the 4hr chart of $DUST – here we see a massive falling wedge, with a mini descending triangle holding it up at the top of the wedge. When it breaks we expect the downtrend to continue.

1. Resistance Breakout Confirmation and Trend Lines

As you’ve seen on the charts, trend lines are used not only to form the patterns but become support and resistance. Falling wedge patterns can be really hard to trade.

To get confirmation of a bullish bias you need price to break the trend line that is resistance. It can’t be a sort of breakout though. You need a convincing breakout of resistance.

Once resistance is broken, that level now becomes support. There can sometimes be a correction to test the newfound support level just to make sure it holds and is a valid breakout.

Hence why we stress knowing how to properly draw trend lines.

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2. Patterns Inside Patterns

Falling wedge patterns may look like triangles or pennants. That’s why you’ve heard us say, if you’ve watched our candlesticks videos, not to get caught up in the minutia of exactly what a pattern is.

The important thing is to know what the patterns means and the story that it tells. Because these patterns can take a few months to trade, learning how to find and trade the other patterns forming inside the larger patterns is key to your trading success.

If you’re struggling with pattern recognition and making trades, come check out our stock alerts which offer real time entries and exits. Register for free to take our free online trading courses.

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