Falling and rising wedges are a small part of intermediate or major trend. As they are reserved for minor trends, they are not considered to be major patterns. Once that basic or primary trend resumes itself, the wedge pattern loses its effectiveness as a technical indicator. The rising wedge pattern is a formation that looks like the opposite of a falling wedge. A market’s highs and lows form support and resistance lines that are both rising – but point towards one another, indicating a period of consolidation.

You may sometimes see falling wedges described as reversal patterns, as the falling price action within the wedge reverses once the market breaks out above the resistance line. This is particularly true if you spot a falling wedge that doesn’t follow an uptrend, which is rarer but can arise. The rising and falling wedge patterns are similar in nature to that of the pattern that we use with our breakout strategy. However because these wedges are directional and thus carry a bullish or bearish connotation, I figured them worthy of their own lesson. A wedge is a price pattern marked by converging trend lines on a price chart.

Immediate Retest of the Broken Level

Notice how we simply use the lows of each swing to identify potential areas of support. These levels provide an excellent starting point to begin identifying possible areas to take profit on a short setup. In the illustration above we have a bearish pin bar that formed after retesting former support as new resistance. This provides us with a new swing high which we can use to “hide” our stop loss. There is one caveat here, and that is if we get bullish or bearish price action on the retest. In which case, we can place the stop loss beyond the tail of the pin bar as illustrated in the example below.

However, a break out doesn’t necessarily mean that an uptrend is definitely on the way – so you’ll want to pay attention to your risk management too. While this article will focus on the falling wedge as a reversal pattern, it can also fit into the continuation category. As a continuation pattern, the falling wedge will still slope down, but the slope will be against the prevailing uptrend. As a reversal pattern, the falling wedge slopes down and with the prevailing trend.

Is a Rising Wedge Pattern Bullish or Bearish?

Then, if the pattern fails, your position is closed automatically. Even if you see falling volume, a green confirmation candle and check a momentum indicator before trading, there’s still the chance for the trend to fail when trading wedges. This is why we’d always recommend setting a stop loss when you open your position. As well as momentum indicators such as RSI and the stochastic oscillator, volume can be a useful gauge of a wedge’s strength. Wedges are often accompanied by falling volume within the pattern, which then returns as the market breaks out. Essentially, a wedge looks a bit like a bullish flag or a triangle pattern, except the lines aren’t parallel (like a flag) and neither of them is flat (like a triangle).

• 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.
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• Notice how we simply use the lows of each swing to identify potential areas of support.

It’s important to note a difference between a descending channel and falling wedge. For this reason, we have two trend lines that are not running in parallel. Together with the rising wedge formation, these two create a powerful pattern that signals a change in the trend direction. In general, a falling wedge pattern is considered to be a reversal pattern, although there are examples when it facilitates a continuation of the same trend. This article explains the structure of a falling wedge formation, its importance as well as technical approach to trading this pattern. The falling wedge pattern is characterized by a chart pattern which forms when the market makes lower lows and lower highs with a contracting range.

How can I trade rising and falling wedges?

Regardless of which stop loss strategy you choose, just remember to always place your stop at a level that would invalidate the setup if hit. In this case, the price consolidated for a bit after a strong rally. This could mean that buyers simply paused to catch their breath and probably recruited more people to join the bull camp. When it comes to the speed we execute your trades, no expense is spared. ThinkMarkets ensures high levels of client satisfaction with high client retention and conversion rates.

• The continuous trend of a decreasing volume is significant as it tells us that the buyers, who are still in control despite the pull back, are not investing much resources yet.
• Alternatively, you can practise trading wedges with a cost-free City Index demo account.
• 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.
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• The illustration below shows the characteristics of a falling wedge.

Similar to the breakout strategy we use here at Daily Price Action, the trade opportunity comes when the market breaks below or above wedge support or resistance respectively. 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.

Placing your stop loss on a falling wedge

If you want to go for more pips, you can lock in some profits at the target by closing down a portion of your position, then letting the rest of your position ride. Notice how the falling trend line connecting the highs is steeper than the trend line connecting the lows. They pushed the price down to break the trend line, indicating that a downtrend may be in the cards.

What is a rising broadening 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. This can make broadening wedges appealing to swing and day traders, as there is lots of short-term volatility. Longer-term traders and investors, however, can be put off by widening wedges as the volatility isn’t paired with a trend in either direction. Here, a common strategy for placing your stop loss is to put it just below the market’s previous high – the last time it tested resistance.

As you may have guessed, the approach to placing a stop loss for a falling wedge is very similar. The illustration below shows the characteristics of a falling wedge. The illustration below shows the characteristics of the rising wedge.