Thus, we expect a price breakout from the wedge to the upside. The pattern typically forms after a sustained uptrend, indicating potential exhaustion among buyers. Both support and resistance trendlines are upward sloping, but they converge as the pattern matures, creating a wedge shape. A decrease in trading volume as the pattern progresses can serve as additional confirmation of an impending reversal.
Traders can make bearish trades after the breakout by selling the security short or using derivatives such as futures or options, depending on the security being charted. These trades would seek to profit on the potential that prices will fall. A falling wedge pattern consists of multiple candlesticks that form a big sloping wedge.
Falling Wedge
The Falling Wedge pattern itself can form over a three to six-month period. Trade up today – join thousands of traders who choose a mobile-first broker. As with any trade, proper position sizing and a stop loss should be used to minimize losing trades. Notice how price action is forming new highs, but at a much slower pace than when price makes higher lows.
Conversely, during a downtrend, we have the exact same scenario – price is likely to increase after a falling wedge pattern and price is likely to decrease after a rising wedge pattern. However, since the equity is moving downwards, our rising wedge pattern implies trend continuation and the falling wedge pattern – trend reversal. The rising wedge pattern is commonly known as a bearish reversal pattern, but it can also act as a continuation pattern in certain market conditions.
Is a Rising Wedge Bullish or Bearish?
When a security’s price has been falling over time, a wedge pattern can occur just as the trend makes its final downward move. The trend lines drawn above the highs and below the lows on the price chart pattern can converge as the price slide loses momentum and buyers step in to slow the rate of decline. Before the lines converge, the price may breakout above the upper trend line. Support and resistance are a key part of trading falling wedge patterns.
As you can see from this 10-minute chart of GM, it is in a strong uptrend, which is tested a total of 9-times 9 (the blue line). It all depends on the timeframe and market you trade, and how it resonates with the pattern. However, a good rule of thumb often is to place the stop at a level that signals that the you were wrong, if it. Most of the time you should aim to have a risk-reward ratio of at least 2, in order to stay profitable.
Volume
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Note in these cases, the falling and the rising wedge patterns have a reversal characteristic. This is because in both cases the formations are in the direction of the trend, representing moves on their last leg. The falling wedge is a bullish price pattern that forms in a positive trend, marking a short pause that’s expected to result in a breakout to the upside. Still, some traders choose to regard the pattern as a bearish sign. A rising wedge is generally a bearish signal as it indicates a possible reversal during an uptrend.
Rising Wedge as a Continuation Pattern
This pattern, while sloping downward, signals a likely trend reversal or continuation, marking a potential inflection point in trading strategies. Falling wedge patterns are bigger overall patterns that form a big bearish move to the downside. They form by connecting 2-3 points on both support and resistance levels. Look for a retest of the wedge after breakout and if it holds then you’ll have bullish confirmation.
Remarkably, this target was precisely met a month later, on March 27, 2023, providing an anecdote of the predictive power of the rising wedge pattern. Usually, a rising wedge pattern is bearish, indicating that a stock that has been on the rise is on the verge of having a breakout reversal, and therefore likely to slide. Just like in the other forex trading chart patterns we discussed earlier, the price movement after the breakout is approximately the same magnitude as the height of the formation.
Trend Reversal Chart Example
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.
