The Wedge pattern is a price reversal pattern that can be drawn by two converging trend lines. The Wedge pattern represents that the market is in the decision phase.
What is the Wedge pattern?
The Wedge pattern contains a series of highs and lows which are connected by two trend lines. These converging lines are based over a period of 10 to 50.
To identify the Wedge pattern, traders look for three things; converging trend lines, declining volume, and breakout from one trend line. The declining volume is a sign of indecision, and breakout at one of the trend lines signifies a reversal.
The highs and lows of the Wedge give it two types; rising and falling.
a. Rising Wedge
The rising Wedge emerges when the price is in an uptrend. It can also appear when the price is between uptrend and downtrend. The converging line drawn between lows and highs, helps traders identify a price reversal. The reversal happens after the breakout of the lower trend line.
b. Falling Wedge
The falling Wedge occurs when the price is in the final phases of the downtrend. Converging lines are marked between highs and lows, signals a price reversal. The reversal takes place after the breakout of a higher trend line.
How to use the Wedge pattern?
To apply the pattern, traders use Wedge’s bullish and bearish variations. The falling Wedge is a bullish pattern, while the rising Wedge is a bearish pattern.
In the rising Wedge, the higher lows are stronger than, the higher highs. The breakout surfaces on either the upper or lower trend line. Traders take their short positions after the breakout of lower trend line.
The falling Wedge is the opposite of the rising Wedge. In the falling Wedge, lower highs are more powerful than the lower lows. The breakout happens on upper or lower trend lines, and traders take their long positions after a higher trend line breakout.
In both rising and falling Wedge, stop-losses are set close to enter positions. In other words, traders should set stop-losses close to entry points. This way, it can yield profitable results.
Sometimes the Wedge pattern tends to move in the opposite direction. This means rather than signaling a reversal, and it shows the continuation of a trend. In this scenario, the Wedge should be applied as a bearish pattern.
For example, in the falling Wedge, instead of a reversal, the price continues to move in the same direction. Here, a trader should trade with the trend rather than against it.
To confirm the movement of the price, traders may wish to use momentum oscillators like RSI or Stochastics.
Wedge pattern trading strategy
The Wedge can develop on shorter and longer timeframes. So, both short-term and long-term traders can take advantage of it. On higher timeframes like weekly or monthly charts, the Wedge may give stronger signals. Traders may look for the Wedge patterns on any timeframe according to their own individual trading needs.
Wedge pattern buy strategy
- Locate the falling Wedge on a chart.
- Wait for the price bar to go bullish before entering.
- Enter after the breakout of a higher trend line.
- Place a stop-loss near the entry point.
- Exit the trade before the price drops.
Wedge pattern sell strategy
- Locate the rising Wedge on a chart.
- Wait for the price bar to go bearish before entering.
- Enter after a breakout of a lower trend line.
- Place a stop-loss near the entry point.
- Exit the trade before the price rises.
Wedge pattern conclusion
The Wedge pattern is a helpful pattern for defining a price reversal. Sometimes, it can also predict the continuation of a trend. A day trader or a short-term trader may look for the pattern on longer timeframes, and then apply the Wedge according to those analysis.
The Wedge Pattern can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy.
I would prefer to use the majority of candlestick patterns such as the Wedge Pattern on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels, candlestick pattern has been formed or a particular indicator value has been reached.
The Wedge Pattern is just one method of market analysis amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.
Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.
The methods of implementing the Wedge Pattern into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.
Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.
If you would like to practice trading with the Wedge Pattern, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.