How to trade wedge pattern
The wedge pattern is a type of reversal pattern formation or trend continuation in which the price pattern forms a converging straight line that resembles a wedge.
If we draw a straight line it will show a conical up or downslope resembling a wedge triangle.
Although it is similar to the triangle pattern the wedge pattern is different, the pattern of the two wedge lines tends to point up or down.
The wedge pattern is a pattern in technical analysis which as chart patterns like the head and shoulder pattern.
It has an accuracy high enough to square off before opening a new position. If the wedge pattern has broken out, it will lose its effectiveness.
The wedge patterns are grouped into two of the most famous types, namely the rising wedge and the falling wedge.
What is Wedge Pattern?
The Wedge price pattern is almost similar to the Triangle and Pennant patterns. This wedge pattern forms a conical price movement.
If a wedge pattern appears, this gives a signal that the trend will stop for a moment, in other terms it is a pause before the continuation or reversal of the trend.
When finding this formation, it indicates that forex traders are still reluctant to decide where to make the next decision.
Wedges can function as a continuation or reversal pattern.
The indication is that the strength between the seller and the buyer is consolidating (equally strong, but the volume usually decreases), with high potential to break out in one direction.
Wedge price patterns like circle slices. if the "slice" bends, it's called the Falling Wedge. Conversely, if the "slice" faces up, the term Rising Wedge.
What is a rising wedge pattern?
The Rising Wedge chart pattern appears because the market is consolidating after previously being in an uptrend or downtrend. This pattern has a slope angle of the Support line that is steeper than the resistance line so that the lower price rises faster than the high value.
This indicates that higher lows are forming faster than higher highs. This leads to a formation like a wedge, which is the origin of the graphic pattern.
With price consolidation, we know that big moves will come, so we can expect a break-up or down.
The rising wedge pattern is a signal of a downward reversal if it is formed after an uptrend, so pay attention to this rule, although it is not absolute, it usually happens.
On the other hand, if it forms during a downtrend, it can indicate a continuation of the descending movement.
Whatever it is, the important thing is, when you see this forex trading chart pattern, you are ready with your entry order!
Although at a glance the price seems to continue to rise, the pattern of the Rising Wedge price indicates that the momentum of the climbing trend is getting weaker. That is, the volume is decreasing.
If this pattern is formed during an Uptrend, the price has the potential to turn plunge. Whereas if it is formed along with the downward trend, the biggest possibility is that the price will continue to decline.
Take a look at how the price drops down? This means that there are more traders tend to choose short over long!
They push prices down to break the trend line, suggesting that the downtrend may be more dominant
Now let's look at another example of a rising wedge formation. But this is a pattern that signals a bearish continuation.
As shown in the image above, a trend initially starts from a downtrend before consolidating and making highs and even higher.
In this case, the price is broken and the downtrend continues. That's why it's called a follow-up signal
See how the price makes a nice move down the wedge high?
A rising wedge that is formed after an uptrend will usually have a reversal (downtrend), while a rising wedge that is formed after a downtrend usually results in a continuous (downtrend).
In other words, if the rising wedge appears after a downtrend, it means a bearish chart pattern.
What is a falling wedge pattern?
Unlike the Rising wedge, this pattern appears when the market consolidates down with the Resistance line steeper than the Support line. So, high prices are always appear lower than the previous high.
The rule of the falling wedge pattern is, if this pattern occurs after a downtrend, the price has the potential for a reversal and then an uptrend. And if a falling wedge pattern appears after an uptrend, the biggest possibility is that the price will continue to rise as a signal of trend continuation.
In this example, the falling slice functions as a reversal signal. After the trend drops, the price makes the highest and lowest prices lower.
Look at how the falling trend line connects the highs, which are steeper than the trend line connecting the lows.
In the image above we can conclude that after the price broke above the top of the wedge, the pair made an upward movement which is a pips distance equal to the height of the formation.
In this case, the price rally went up a few pips beyond the target!
Let's look at an example where the falling pieces served as a follow-up signal.
Please keep in mind the falling wedge pattern rules that appear after an uptrend, usually indicating that the trend will continue.
In this case, the price consolidated slightly after a strong rally.
Take a look at how the prices break to the upper and higher sides.
If we place the entry sequence above the falling trend line connecting the highest level, we will be able to jump on a strong uptrend and catch a few pips. A good rising target is the height of the wedge formation.
You can lock some of the profits on the target by partially closing your position, then leaving the rest of your position up. You will get maximum profit if trend continue.
How To Trade Wedge Pattern Trading Strategy?
The first step to trading with a wedge is to identify the wedge pattern that appears whether it is a rising or falling wedge.
How to trade a rising wedge pattern
I take the example that the pattern that is formed is a rising wedge, you can mark it by using a trend line to draw the high to high and low to low of the wedge pattern that is formed.
The trading method is very simple, namely by choosing the sell option by waiting for the price to break below the wedge line. But you have to wait for the close candle to close below the wedge line to avoid false breakouts.
The image below is an example, how to place a sell order below the trend line.
For stop-loss, it is recommended to place the stop loss above the trend line. Why do you need to use a stop loss.? Because price movements may not occur as usual. This is an anticipatory step when the price moves not as expected.
And what about the profit target? For-profit targets, you can use additional toolboxes such as the Fibonacci retracement by drawing from the swing high and swing low of the wedge pattern that is formed. Or by taking a support point formed from the wedge pattern at the start of the low line.
The wedge pattern is not always the same, where after a breakout the price will sometimes retest before it actually goes down.
In the second method of trading, the trader waits for the price to bounce and a retest occurs before finally opening a sell.
The image below represents the second trading method.
For stop-loss, you can place the highest price of the wedge pattern that appears, and the profit target can be with the Fibonacci combination or by looking at the reversal candlestick pattern.
How to trade a falling wedge pattern
You must first identify the shape of the falling wedge, and draw a line using a trendline from high to high and low to low of the wedge pattern.
Once you've found the pattern, look back if it was formed after an uptrend or downtrend.
Due to the tendency of falling wedge patterns that form after an uptrend, it is usually a continuation of the trend, while in a downtrend, this pattern is often a reversal pattern.
The image below is a falling wedge in an uptrend which is a signal of trend continuation.
When the falling wedge pattern starts to converge, it finally breaks out, and that's when the trader opens a buy order.
The way to place a stop loss is the same as for the rising wedge, which is below the wedge line, with your target by calculating the distance of the high and low points where the wedge starts.
You can also use Fibonacci expansion to determine profit targets.
In the example above, after hitting the target, the price is still continuing its upward trend, so you might be disappointed because your target was not reached at the maximum.
But be aware that it is better to practice discipline because that is the ideal target that has the best chance of being achieved.
However, you can also modify the stop loss when it is floating profit, by shifting the stop loss to the break-even point.
Your target is allowed to float by watching the potential for the trend to weaken to determine the exit point.
Downtrend falling wedge pattern
The example above is the falling wedge pattern when the uptrend is a continuation of the trend.
Then what when a falling wedge pattern appears in a downtrend? This pattern is a trend reversal signal, it is not certain but has a tendency, often it is a reversal signal.
First, identify the falling wedge pattern by drawing a trend line.
After the price, the pattern has started to weaken and both trend lines have converged, get ready to wait for the breakout.
When the breakout occurs, you will open Buy by placing a stop loss below the bottom wedge line. Target profit by measuring the initial distance the wedge forms from high to low.
But it depends on the method you use because apart from that, you can also use Fibonacci expansion, and/or use the ATR indicator.
Advantage and disadvantage wedge pattern
To be highlighted that the Falling Wedge pattern and the Rising Wedge pattern have advantages and disadvantages that must be considered before being applied to the trading system. The following is a description:
However, this two-wedge or wedge pattern is subjective in nature, not being an exact fixed rule. because the market is always dynamic.
Due of this condition, the price pattern has high flexibility so that it can be used on all kinds of Pair and Timeframe. The problem is because there are no definite benchmarks, the opening rules, and closing positions will vary from one trader to another.
Why each trader gets the results varies because maybe one trader needs the additional use of the MACD indicator to confirm the signal, but other traders don't even use any indicator other than the Trendline line to highlight the formation of the price pattern. Both have the chance to get big profits, even though the approach to the Entry and Exit rules is different.
The wedge pattern occurs frequently in financial markets, so it is an identifiable trading signal.
It is also easier to place a stop loss by looking at the top or bottom slice.
The common weakness is incorrect signals so that the patterns that occur are not in accordance with the theory. In this case, a stop loss is absolutely necessary.
The wedge pattern is a part of all kinds of harmonic patterns that occur in financial markets.
Psychologically, the appearance of this pattern is that the trend starts to weaken or pause for a moment before continuing its journey.
This pattern is one of the insights in recognizing the market based on price action and harmonic patterns.
The accuracy of the wedge pattern provides a profit potential of more than 80% by understanding it, it may be a little ambiguous for beginners, but with practice, it can become a weapon in catch the profits.