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Chart Patterns: Wedges

This article will explore a few chart patterns, which act as extra confluences when looking to take trades. It is important to use chart patterns together with candlestick patterns to give the best risk/reward trades. Today’s topic will be about rising wedges and falling wedges.

Rising wedge:

This rising wedge pattern consists of higher highs connected with a trendline and higher lows which form faster than the higher highs (hence having a steeper trendline to connect them). A rising wedge pattern usually forms in an uptrend and is a signal indicative of a potential reversal. However, sometimes a rising wedge also occurs in a downtrend during a retracement and price is predominantly expected to continue to go on the downside. To note, traders should expect a breakout in both directions. Below are examples of the rising wedge pattern.

Here as you can see price is breaking out to the downside after a strong move up. This is an example of a rising wedge occurring before a reversal. When the breakout occurs, we should monitor closely for a telling candle (shooting star, marubozu or dojis), to determine when and if to enter. Sometimes a retest of the broken lower trendline occurs before continuation downwards, this is a good time for entry. Target will usually be at the next support and stop loss at the previous high.

As mentioned earlier, rising wedges can occur in a downtrend as well, and act as a period of consolidation. An example of this is shown below.

Here we have a rising wedge after a sell off, this usually indicates a continuation downwards, and usually occurs at a time of retracement (which can be measured by Fibonacci). In this case one would enter at the breakout or retest and target fib extensions -27% or -61.8% which show some confluence with support regions, with stops at previous highs. Remember, breakouts could occur upward as well as downwards in rising wedges and in such case one would enter at breakout or retest and target resistance zones above.

Falling wedge:

Like the rising wedge pattern, the falling wedge pattern has the properties of two trendlines. However, this time we have lower highs and lower lows connected by trendlines and the trendline connecting the highs is steeper than the one connecting the lows as the lower highs are being created faster than lower lows. In this case we also have falling wedges in two instances; one which may signal a reversal or one which may signify continuation. I will show both in diagrams below.

Here as you can see a reversal to the upside has occurred after a falling wedge pattern formed in a downtrend. We had a break and a nice retest of the upper broken trendline (connecting lower highs), before a strong move up (reversal). In this case we would have entry at the break/retest and target the resistance levels above. A typical stop will be just below the previous low.

As mentioned earlier, falling wedges can occur in an uptrend as well, and act as a period of consolidation. An example of this is shown below.

Next, we have the falling wedge pattern in the instance of continuation of trend. As you can see price is an uptrend and we then have a slight retracement (which can be measured by Fibonacci levels), after which we see a continuation upwards and a break above the upper trendline of the falling wedge. In this case we would again enter at the break or retest and target Fibonacci extension targets confluent with some historical resistance levels.

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