Wedges are chart patterns that sign a continuation in the market trend formed before the wedge. Wedges are quite similar to the triangle formations (simetrical triangle, ascending triangle and descending triangle) and it is formed along with 2 trendlines which are a support and a resistance. This chart pattern is basically a long-term pattern and it lasts up to 3 to 6 months but it can be seen in shorter time frames (in lower time frames is less reliable). In this case the trader can foresee those converging trendlines which remains slant in position.

The trendline remains upward or either in downward direction. This remains quite distinct from the uniform trendlines occurring in the triangles.  Unlike triangles formations, in wedges formations the bands or lines among which the price fluctuates point in the same direction.

Wedges Description

Wedges are categorized into 2 different forms:
  • Rising wedges: Bearish continuation patterns. Rising wedges slope up and have a bearish bias. These formations are usually found in down-trending markets. They can become a reversal pattern if the price moves above the upper (resistance) trendline. 
  • Falling wedges:  Bullish continuation patterns. Falling wedges slope down and have a bullish bias. These formations are usually found in up-trending markets. They can become a reversal pattern if the price moves below the lower (support) trendline. 
Ideal Falling Wedge
 
Ideal Rising Wedge





These two types vary on their slanting pattern. The rising wedge generally slants towards the upward direction whereas the falling wedge slants towards the downward direction. Falling wedge joins the bullish chart pattern signal and the rates break towards the uptrend via the wedges. The pattern coverage of the trendlines remains in the slant in the downtrend direction.

In other words, in an uptrend the two lines have a bearish direction, while in downtrend these lines have an upward direction. Normally the price fluctuates within this formation very quickly, as the flags, and almost reaches the apex of the wedge, that is, where the two webs converge, before resuming the trend. The wedges are often accompanied by a decrease in volume during its formation, however once the figure is complete, the volume increases again.

In the wedges is interpreted that prices will continue in the opposite direction to that which indicates the wedge. This means that rising wedges are bearish signals while falling wedges indicate a possible continuation of an uptrend.

The name of rising or falling that is given to a wedge does not correspond with the trend that follows the price in the market after the pattern, but with the shape of the figure, ie if the apex of the wedge is directed upward it is a rising wedge and if the apex is directed downward it is a falling wedge.

Sometimes the wedges like triangles are unreliable patterns and the trader needs to wait for the price to break the wedge to act and enter the market. At this moment there is disturbance of the balance between buyers and sellers and the market will probably continue with the same trend, which should be leveraged by the trader to buy or sell.

How to trade with the webges

-Rising Wedges
  • Entry: Open a sell position when there is a breakout in the lower band.
  • Stop: The stop is placed above the last high.
  • Objective: Use the theoretical target pattern. When the breakout occurs, the target price is given by the lowest point that resulted in the formation of the wedge. 
  • Advantage: The movement is usually quite strong when there is a bearish breakout. Also there is a very small percentage of false signals so the risk is very low
  • Disadvantage: The price objetive is not achieved in 63% of cases, so the trader needs to set his own target prices.
-Falling Wedges
  • Entry: Open a buy position when there is a breakout in the higher band.
  • Stop: The stop is placed below the last low.
  • Objective: Use the theoretical target pattern. When the breakout occurs, the target price is given by the highest point that resulted in the formation of the wedge.
  • Advantage: The theorical target of this formation is almost always reached (88%).
  • Disadvantage: There is 25% of false breakouts.

What to consider in wedges patterns?

-Rising Wedges
  • In 82% of cases, the price breakout occurs in the direction corresponding to the previous trend.
  • In 63% of cases, the price target of the pattern is reached.
  • In 53% of cases there is a pullback.
  • In 27% of cases there is a false breakout.
  • Usually the breakout is located around 60% of the length of the formation.
  • In most cases, the stronger the previous movement before the formation of the pennant, the stronger the subsequent movement due to the breakout of the price from the pattern.
  • The pullbacks adversely affect the performance of the pattern.
  •  More the trend lines are sloped, more the downward movement will be strong.
  • The space between each contact point over the lines should be wide or the formation could be a pennant.
  • The false breakouts can provide a signal on the side of the exit as in only 3% of cases when a bearish breakout is produced, the price will exit the wedge by the top. The risk of a false bearish break out is very low.
  • The rising wedges that are large offer better results than narrow formations.
-FallingWedges
  • In 92% of cases, the price breakout occurs in the direction corresponding to the previous trend.
  • In 47% of cases, the price target of the pattern is reached.
  • In 53% of cases there is a pullback.
  • In 27% of cases there is a false breakout.
  • Usually the breakout is located around 60% of the length of the formation.
  • In most cases, the stronger the previous movement before the formation of the pennant, the stronger the subsequent movement due to the breakout of the price from the pattern.
  • The pullbacks adversely affect the performance of the pattern.
  •  More the trend lines are sloped, more the upward movement will be strong.
  • The space between each contact point over the lines should be wide or the formation could be a pennant.
  • The falling wedges that are large offer better results than narrow formations.

Example of a Falling Wedge

 



The wedges are continuation chart patterns which can be observed in bearish and bullish trends. In some cases these formations can be also reversal formations.

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