The wedges can be both continuation patterns and reversal patterns. They are also similar to symmetrical triangles but take long to form about 3-6 months if on a daily chart therefore they are long-term patterns.
Wedges have converging trend lines that slant in either upward or down ward direction and form both in uptrend and downtrend. There are two types of wedge;
- A rising wedge
- A falling wedge.
A rising wedge is a bearish pattern. It makes higher lows faster than it makes higher highs making the lower support trend line steeper than the resistance trend line indicating a fall in momentum. When this happens, we expect a price break on either sides of the pattern as price approaches the apex.
When a rising wedge forms in uptrend, it may lead to a reversal of the trend. On the other hand, if it forms in a downtrend, it signals a continuation of the initial trend.
A rising wedge entry signal is confirmed by price break and close of candle on the lower trend line and this gives a sell opportunity.
Therefore, to trade a rising wedge, you have to first identify the direction of the trend and then wait for a confirmation of the pattern which is a break out on the lower trend line. The confirmation candle must close below the lower trend line of the wedge . Entry can either be immediately after the close of the confirmation candle or on a retest of the price on the resistance line which is formally a broken support for conservative traders.
Maximum profit target is equal to the distance moved by price before formation of the pattern and the minimum take profit target is equal to the size of the wedge. Stop loss is set slightly above your entry point.
Take a look at the chart below;
The above chart has a rising wedge. The confirmation for Sell entry is the candle close below the support line as shown on the chart above.
Take profit target 1 is equal to the size of the wedge (H1) and Profit target 2 is equal to the distance moved by price before formation (H2) of the pattern as shown . Stop loss should is set slightly above your entry point.
Let us take a look at another example;
Below is a CADJPY, Daily chart
From the above CADJPY, Daily chart , the confirmation for the Sell entry too is the candle close below the support line as shown on the chart above.
Take profit target 1 is equal to the size of the wedge (H1) and Profit target 2 is equal to the distance moved by price before formation (H2) of the pattern as shown . Stop loss is set slightly above your entry point.
A falling wedge is a bullish chart pattern. It can also either be a reversal or a continuation pattern depending on its position. A falling wedge forms steeper resistance trend lines. This is as a result of forming higher highs faster than higher lows.
It is the opposite of a rising wedge. When formed in a downtrend price is likely to reverse and when formed in uptrend, price is likely to continue at the completion of the pattern.
A falling wedge is traded the same way as a rising wedge only that a falling wedge gives a buy signal. It is confirmed by a breaking candle on the upper side of the wedge. Entry point is at the close of the confirmation candle or on a retest of price on the support line which is now a broken resistance.
You can book your profits after price has moved the same distance as the size of the wedge and place your stop-loss just slightly below your entry point.
Let’s take a look at the GBPJPY, Daily chart;
The above GBPJPY, Daily chart has a falling wedge. The confirmation for Buy entry is the candle close above the resistance line (upper side) as shown on the chart above.
Like we have mentioned before, your first target should be equal to the height/size of the wedge (H1) as illustrated above. Stop loss is set slightly below your entry point as shown on the chart above.
How long you should hold an open position, is a personal thing for all traders. The decision is all yours. You know what your goals are as a trader, the kind of strategy you use to trade. All this starts from what you are? and What you want? If I am to answer, this...