RISING AND FALLING WEDGES
Good afternoon.
Today we are looking at another chart pattern
RISING AND FALLING WEDGES .
Let’s get on it.
Wedges can either be continuation or reversal patterns.
Just to refresh your memory, continuation patterns are formations that show side way price action, signalling a temporary pause in the trend; whereas reversal patterns indicate a change in the trend.
Whether wedges are continuation or reversal, it’s not really significant, what matters is spotting the pattern, and knowing how to make money out of it.
Wedge patterns are classified as either RISING WEDGES OR FALLING WEDGES.
Rising wedges, as the name implies, slopes upwards, and they eventually break to the downside
Graphically, rising wedges look like the above sketch chart(Sketch 1)
notice how the slope of the support line is steeper than that of the resistance.
This indicates that higher lows are being formed faster than higher highs. That is precisely how the wedge pattern get to be formed.
The inverse of the rising wedge is the FALLING WEDGE , which usually breaks to the upside.(Sketch 2)
Just like on the rising wedge pattern, the falling trend line connecting the highs (resistance) is steeper than the trend line connecting the lows (support).
As mentioned earlier, rising and falling wedges can either be continuation or reversal patterns.
But whether they be continuation or reversal patterns is not our focus, our focus is on making money when these patterns ‘BREAKOUT’ .
If you case you are wondering what we mean by ‘breakout’; consider the chart above(Sketch 3) of a falling wedge and a rising wedge, and how they typically break to the upside and downside, respectively
Now let’s look at how we can make money out of a RISING WEDGE PATTERN.
Let’s start by considering the chart (Sketch 4)
Now, when entering a Short trade based on a rising wedge, it’s important to wait for a break and close below the support line.
After this close, aggressive traders can ‘pull the trigger’.
But a more conservative way to enter the trade, is to wait for a retest of the previous support (now resistance) before pulling the trigger.
In this case the sequence will be something like this:
1. Wait for a close below support
2. Wait for a retest of the previous support
3. If the previous support act as resistance, then enter short trade
A Long trade based on a falling wedge is entered on the same principle (but in reverse), that is,
1. Wait for a price close above resistance
2. Enter Long trade at that close (for aggressive traders)
3. For conservative traders, wait for a retest of the previous resistance (now support) before pulling the trigger
That’s ENTRY, now let’s look at placing stop loss and take profit levels when trading wedge patterns.
Take profit target should ideally be the height of the wedge formation.
Consider the chart above(Sketch 4)
Stop loss orders should always be placed at a level that if hit, it will invalidate the trading set up.
In the case of rising wedges, this level will be the area just above resistance.
The opposite is true for falling wedges, place stop loss just below support.
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Until next time, let’s keep if Profitable!
