Making the Most Out of the Wedge Pattern Formation

Posted on 16th August 2018
Making the Most Out of the Wedge Pattern Formation

Rising and falling wedges are chart pattern formations mostly employed by day traders for their potential in predicting the upcoming price actions. It wouldn’t be precise to group wedges into one category; Wedges can either be reversal or continuation pattern. And just as the name suggests, the ever wavering graph gives rise to a formation much similar to that of a wedge.

Rising Wedge: Formation

A rising wedge is formed when the sloping support line goes steeper than the resistance line. The support line is the slope or plane below which the price actions struggle to stoop, and the line above which the price action struggles to break through is the resistance line. The distance between lines decrease gradually and when the lines come close to each other, the chart will be inflicted by a redirection.

Reversal or Continuation

The factor which decides the formation’s character is not how long it takes to complete the formation, rather the emphasis is on when the pattern is formed. If the rising wedge is formed in the uptrend, then it is most likely a reversal; and in the downtrend, the wedge is most likely to go as a continuation.

Price Target:

The right position to take the trade is when the prices fall below the support line. It signifies that more traders are willing to go short than the ones willing to go long.

The safest position to exit with substantial profits is by the difference between the resistance and support at the start of the wedge. The measured height is used from the entry point to determine the exit point in the downtrend.

The stop loss is placed at the recent high within the wedge, just to be safe in case of a misinterpretation.

Falling Wedge: Formation

Falling wedge is much similar to the rising wedge. The resistance line progressively narrows down to the support line and establishes a wedge-shaped pattern. The distance between the lines gradually comes down and after the narrowed part is when the surge is likely to occur.

Reversal or Continuation

The falling wedge can be a continuation or reversal, just like its bearish counterpart. The falling wedge occurring at the downtrend is mostly suspected to be a reversal pattern. On the other hand, the wedge falling at the uptrend is most likely to be a continuation.

Price Target:

The right position to take the trade is when the prices rise above the resistance line. It signifies that more traders are willing to go long, rather than short.

The safest position to exit with substantial profits is the difference between the resistance and support at the start of the wedge. When the price thrusts above the resistance line, the exit can be marked at the approximate height of the wedge.

The stop loss is placed at the recent low formed within the wedge, to limit the losses in case of a misinterpretation.

Bottom Line:

Identifying and trading chart patterns are one of the peerless ways to make quick profits, but rudiments astuteness to banish misinterpretations and miscalculations. The catch in trading wedges is that once the formation is complete, taking the trade can be profitable irrespective of the reversal and continuation.

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