The first example shows a rising wedge that follows a strong uptrend and develops over an approximately three-month period. The true breakout is a bearish reversal, as expected for rising wedges, and comes on high trading volume. Falling wedges are the inverse of rising wedges and are always considered bullish signals. They develop when a narrowing trading range has a downward slope, such that subsequent lows and subsequent highs within the wedge are falling as trading progresses. As we previously discussed, the falling wedge pattern can be formed after a prolonged downtrend or during a trend. Or, in other words, it may indicate a trend reversal or trend continuation.
- There is difficulty identifying this pattern sometimes due to its dual interpretation as both a bullish continuation and a bullish reversal pattern.
- All of the highs must be in-line so that they can be connected by a trend line.
- It’s important to keep in mind that although the swing lows and swing highs make for ideal places to look for support and resistance, every pattern will be different.
- In both cases, we enter the market after the wedges break through their respective trend lines.
- Rising Wedge- On the left upper side of the chart, you can see a rising wedge.
- Notice how price action is forming new highs, but at a much slower pace than when price makes higher lows.
The falling wedge chart pattern is a recognisable 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. Conversely, the two ascending wedge patterns develop after a price increase as well.
How to start trading wedges
While price can be out of either trend line, wedge patterns have a tendency to break in the opposite direction from the trend lines. A wedge is a price pattern marked by converging trend lines on a price chart. The two trend lines are drawn to connect the respective highs and lows of a price series over the course of 10 to 50 periods. The lines show that the highs and the lows are either rising or falling at differing rates, giving the appearance of a wedge as the lines approach a convergence. Wedge shaped trend lines are considered useful indicators of a potential reversal in price action by technical analysts. As long as the risk/reward ratio is good, a stop loss might be put below the most recent swing low or at a previous resistance level.
When the price breaks the upper trend line, the security is expected to reverse and trend higher. Traders identifying bullish reversal signals would want to look for trades that benefit from the security’s rise in price. The 4-hour chart above illustrates why we need to trade this on the daily time frame. Notice how the market had broken above resistance intraday, but on the daily time frame this break simply appears as a wick.
Trading the Falling Wedge Pattern
For ascending wedges, for example, traders will often watch out for a move beyond a previous support point. Alternatively, you can use the general rule that support turns into resistance in a breakout, meaning the market may bounce off previous support levels on its way down. As a result, you can wait for a breakout to begin, then wait for it to return and bounce off the previous support area in the ascending wedge. This will enable you to ensure that the move is confirmed before opening your position.
The same holds true for a falling wedge, only this time we wait for the market to close above resistance and then watch for a retest of the level as new support. Just like the rising wedge, the falling wedge can either be a reversal or continuation signal. A rising wedge formed after an uptrend usually leads to a REVERSAL (downtrend) while what does a falling wedge mean in trading a rising wedge formed during a downtrend typically results in a CONTINUATION (downtrend). Wedges can be tricky to identify since the trend preceding the formation of the wedge can be encompassed partially or entirely within the wedge itself. As the trading price range narrows as the wedge progresses, trading volume should decrease.
What the Falling Wedge Tells Us
Without volume expansion, the breakout may lack conviction and be susceptible to failure. The Falling Wedge can be a valuable tool in your trading arsenal, offering valuable insights into potential bullish reversals or continuations. Because of its nuances and complexity, however, it’s important for you to have a good understanding of this pattern in order to effectively leverage it in a live trading environment.
Notice how the rising wedge is formed when the market begins making higher highs and higher lows. All of the highs must be in-line so that they can be connected by a trend line. It cannot be considered a valid rising wedge if the highs and lows are not in-line. One of the great things about this type of wedge pattern is that it typically carves out levels that are easy to identify. This makes our job as price action traders that much easier not to mention profitable.
Active Trading Blog
In a rising wedge, both boundary lines slant up from left to right. Although both lines point in the same direction, the lower line rises at a steeper angle than the upper one. Prices usually decline after breaking through the lower boundary line. As far as volumes are concerned, they keep on declining with each new price advance or wave up, indicating that the demand is weakening at the higher price level. In a bullish trend what seems to be a Rising Wedge may actually be a Flag or a Pennant (stepbrother of a wedge) requiring about 4 weeks to complete. Here is another example of a falling wedge pattern but this time it formed during a corrective phase in Gold which signaled a potential trend continuation once the pattern completed.
If a trend line cannot be placed cleanly across both the highs and the lows of the pattern then it cannot be considered valid. While both patterns can span any number of days, months or even years, the general rule is that the longer it takes to form, the more explosive the ensuing breakout is likely to be. A good upside target would be the height of the wedge formation. As you can see, the price came from a downtrend before consolidating and sketching higher highs and even higher lows. Many traders make the mistake of buying oversold stocks or selling overbought stocks and suffer financial losses as a result. This often happens when traders are unaware of the proper analytical tool to use.
Descending triangle vs. falling wedge
This is why learning how to draw key support and resistance levels is so important, regardless of the pattern or strategy you are trading. Let’s take a look at the most common stop loss placement when trading wedges. Lastly, when identifying a valid pattern to trade, it’s imperative that both sides of the wedge have three touches. In other words, the market needs to have tested support three times and resistance three times prior to breaking out.