A wedge is a typical chart pattern defined by two converging trend lines. This article will teach you about finding bullish and bearish wedges and choosing a trading strategy to apply.
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The wedge pattern forms between two converging trend lines
along a narrowing price range. Wedges can occur on both upward and
downward trends. The pattern's body direction is what defines the outcome.
A wedge with a rising body (pointing up) is a bearish pattern: the price
will probably decrease. A wedge with a falling body (pointing down) is a bullish
pattern: the price will likely increase after the breakout.
Wedges may look similar to flags and triangle patterns, but they are all different. Unlike flags, wedges do not require a strong preceding trend (the so-called flagpole) to be valid. Unlike triangles, wedge patterns usually have no horizontal trend lines—both are diagonal and lean in the same direction.
A wedge can occur for any trading instrument on any timeframe.
It is known as a reversal pattern, but that applies to the direction
of the wedge itself and not to the previous trend.
However, the strongest wedge patterns that provide reliable trading signals
generally form after powerful trends on the longest timeframes:
several weeks or even months.
A valid wedge usually lasts 10 to 50 candlesticks. Look for a consolidation in the characteristic shape and wait for a breakout. You can also check out whether the trading volume is declining to confirm the pattern.
A rising wedge occurs within a narrowing price range with both trend lines pointing up.
After the breakout, the price collapses regardless of the previous trend direction, starting
a downward trend.
A falling wedge forms as a converging price range with both trend
lines pointing down. After the breakout, the price rushes up regardless of the previous
trend direction, starting an upward trend.
The ascending wedge pattern signifies that the price will probably decrease, so you should sell the asset.
The descending wedge pattern signifies that the price will likely increase, so you should buy the asset.
After a rising wedge, the price usually goes down, after a falling wedge—up
Look for a consolidation in a narrowing price range with two diagonal trend lines
Rising (ascending) wedges are bearish (Sell), falling (descending)—bullish (Buy)
Longer timeframes, preceding trends, and decline in volume provide better signals
Differentiate wedges from triangles and flags to predict upcoming trends correctly