How to Trade Wedge Chart Patterns
What Does a Rising Wedge Mean?
A rising wedge (or ascending wedge) is a type of a technical chart pattern used to identify changes in a price movement trend.
Generally, wedge patterns can be detected by drawing two lines: one at the resistance level and the other at the support level of the price chart. If the two lines are about to converge and cross each other, it’s a sign that the magnitude of price movement within these lines is decreasing and the bullish and bearish pressure are getting even. This means that the trend is about to get reversed or continued, depending on the type of the trend and the detected pattern.
If you notice a wedge pattern forming on a price chart, there’s going to be a pause in the current trend. The traders are still undecided about what to do with the asset, so both the reversal or continuation of the trend are technically possible.
A rising wedge pattern usually happens within an uptrend, whether a long-term or short-term one, when the pressure from the sellers starts to catch up to the buyers.
This is how a rising wedge looks on price charts. As you can see, at first the distance between the higher highs and the higher lows of the trend is noticeable. As the new prices form, the distance starts shrinking. The formation of the new higher highs slows down while the higher lows continue to appear at the same pace. The lines drawn along the higher highs and higher lows are getting closer and closer together and are about to converge, indicating the waning interest of the bulls that doesn’t seem to resist the growing pressure from the bears.
Then, when the resistance and the support lines get incredibly close together, the breakout occurs and the price gives a sharp downturn, breaching the support line. Unlike other chart patterns, a rising wedge happens quickly and the price drops quite dramatically. This indicates that the bulls have given way under the bearish pressure.
A falling wedge pattern is another technical chart pattern that serves as a trend reversal or continuation signal. But, unlike a rising wedge, a falling wedge occurs at the bottom of a downtrend and indicates potential rise in prices.
As you can see on this chart, a falling wedge typically appears at the bottom of a downtrend. The downtrend on the chart is becoming slower and the resistance of the bears seems weaker in comparison to the support of the bulls. The distance between the resistance and support lines is getting smaller, with the support line being the more stable of the two. Just when the trend is about to lose its momentum altogether and allow the resistance line to breach the support line, the price sharply turns up and continues to climb, starting a new uptrend. The bulls gather enough forces to breach the resistance of the bears, reversing the downtrend for good.
A falling wedge can also occur during a steady uptrend as part of a very short-term price rebound. But in this case, it still serves as a bullish pattern and signals the continuation of the uptrend, unlike a rising wedge.
Is a Rising Wedge Bullish or Bearish?
A rising wedge can happen both during an uptrend and a downtrend. In an uptrend, it comes before a downward reversal in price movement. In a downtrend, it usually comes in at the end of a small period of upward consolidation. Both situations show that the bulls are steadily yielding to the pressure from the bears. As a result, it signals a bearish reversal or continuation of the downtrend, so a rising wedge is considered a bearish pattern.
How reliable are rising wedges?
When a rising wedge appears on the chart, it’s considered a sign of an imminent breakout to the downtrend. Professional technical traders also praise it as a reliable bearish pattern. Moreover, a rising wedge is closely followed by a breakout with a sharp price decline, so a lot of traders specifically watch out for this pattern to get maximum profit within a short amount of time.
At the same time, there are quite a few false patterns that beginners may confuse with a rising wedge. To avoid this, you need to pay close attention to price/volume divergences. It’s also good to know that when a rising wedge pattern is genuine and valid, the price touches the support and resistance lines at least 3 times.
All in all, a rising wedge pattern is widely accepted as a very reliable and useful bearish reversal pattern. It’s easy to spot and it can apply to both short-term and long-term trades.
At the same time, it’s hard to interpret a rising wedge without taking into account all current market conditions. Before making a decision, it’s important to consider the length of the trend and the context of their formation. Using other technical indicators and tool can help verify that an alleged rising wedge is indeed valid and really predicts a bearish reversal.
Finally, now that you’ve identified a rising wedge and saw the breakout, you can enter the trade. Don’t forget to plan your exit by setting a profit target for your positions. You can also place a stop-loss order to minimize the risks.