Rising Wedge Pattern: Technical Analysis of Stock Charts

To be a valid, both the resistance and the support line need to have a “steep” down slope. During this development phase of the pattern, there is substantial trading activity in the market, indicating a strong selling or buying interest in the asset. High level, the Rising Wedge formation is the result of three broad market psychology phases.

The stock consolidated for a few weeks and then advanced further on increased volume again. FCX provides a textbook example of a falling wedge at the end of a long downtrend. That is to say, always wait for a confirmation signal before entering a trade. Japanese Candlesticks and Candlestick Patterns can provide considerable aid in improving the reliability of Wedge Patterns. These are easy to read, quick to comprehend, and relatively simpler to integrate with your chart pattern trading strategies. Hence, for that reason, Japanese Candlesticks and Candlestick Patterns are very complementary to trading the Wedges.

technical analysis falling wedge

Some studies suggest that a wedge pattern will breakout towards a reversal more often than two-thirds of the time, with a falling wedge being a more reliable indicator than a rising wedge. In a falling wedge, when there is a sustained what does a falling wedge indicate decline in the price of security, at a certain time, the lines drawn above and below the wedge chart will convergence. The convergence signifies a reversal from a bearish pattern with points that a bullish pattern will commence.

When a falling wedge can indicate a reversal

To understand the reliability of the falling wedge specifically in forex, I looked at five currency pairs each over a ten year period. I checked for patterns of up to 50 bars in duration using a detection indicator. Of course, it is not possible to know right from the start that the market is forming a wedge. However, after a while, considering the rising trendlines, the wedge formation is obvious. To wait for the break, it means to look at the lower trendline to be broken. If we label the wedge, the result should be like the one in the picture below.

For some people it is a passive way of earning some extra cash, while for others it is a rather active way of earning full-time income. Navdeep has been an avid trader/investor for the last 10 years and loves to share what he has learned about trading and investments here on TradeVeda. When not managing his personal portfolio or writing for TradeVeda, Navdeep loves to go outdoors on long hikes. Discussed below are each of the four steps to trade Wedges using this strategy. Discussed in the following sections are both these use cases of Moving Average, Momentum, and Divergence Indicators, along with a few examples of these indicators.

How to Recognize and Interpret Rising Wedge Patterns

A wedge pattern is considered to be a pattern which is forming at the top or bottom of the trend. It is a type of formation in which trading activities are confined within converging straight lines which form a pattern. This pattern has a rising or falling slant pointing in the same direction. It differs from the triangle in the sense that both boundary lines either slope up or down.

Fibonacci Retracement and Extension Levels can help forecast where the forthcoming swings in the Wedge Pattern formation would end. With these levels identified, a considerable edge can be attained in understanding https://xcritical.com/ the potential points of reversal in trading these patterns. With a correctly identified Rising or Falling Wedge Pattern, you can easily determine the direction of an upcoming price movement or breakout.

Although the index continued to move lower, we exited the position and started looking for other rising wedge patterns. That is, most of the times, as there is one instance that calls for a rising wedge to have a bullish outcome and a falling one to have bearish follow-through price action. Falling Wedges often come after a climax trough (sometimes called a “panic”), a sudden reversal of an uptrend, often on heavy volume. In this case, price within the Falling Wedge is usually not expected to fall below the panic value, ending up in breaking through the upper trendline. During the pattern formation, volume is most likely to fall; however, better performance is expected in wedges with high volume at the breakout point. 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.

Be aware though that the support and resistance won’t always meet before the breakout takes place. Futures, futures options, and forex trading services provided by Charles Schwab Futures & Forex LLC. Trading privileges subject to review and approval. After the trend line breakout, there was a brief pullback to support from the trend line extension.

Therefore, in comparison to many other price chart types, identifying the upper and the lower trendlines, and hence the Wedges, becomes much simpler when leveraging a Candlestick Chart. As a result, short-sellers begin to exit the market and there is a parallel surge in the buying interest for the security. Moving average convergence/divergence is a momentum indicator that shows the relationship between two moving averages of a security’s price. Traders can look to the starting point of the descending wedge pattern and measure the vertical distance between support and resistance.

During the formation of this pattern, generally, the price remains in an uptrend, but its momentum gradually decreases. This reduction in momentum is an indication that the market will turn around, and the price will fall. Hence, this type of wedge pattern would typically represent a bearish reversal.

WTI Crude Oil Monthly Price Chart

Wedges frequently appear on the price chart of various securities in the financial markets. Therefore, if you have a strategy to trade them, they can provide a good number of trading opportunities. Similar to other chart patterns in technical analysis, the Wedge Patterns come with their own set of advantages and limitations. If the price were to, in fact, swing below this point shortly after the breakout has occurred, it would mean that the trade idea is invalidated. In such situations, you would need to close out the trade and minimize your losses.

technical analysis falling wedge

Upper and lower trendlines are important to investors, especially when making investment decisions. Bearish and bullish patterns in the market are detected through a wedge. Price Data sourced from NSE feed, price updates are near real-time, unless indicated. Technical/Fundamental Analysis Charts & Tools provided for research purpose. Please be aware of the risk’s involved in trading & seek independent advice, if necessary. During the pattern’s formation, there are a few indicators that can be used to determine whether the pattern is a real pattern or a disguise.

Notes on falling wedges

The first is marked with the same support trendline but matched with a dashed resistance trendline, taken from August and September swing highs. That resistance held the highs through October and early-November, finally giving way on another CPI print that was released on November 10th. That breakout led to a higher-high which was then matched with a higher-low, and that was followed by bullish continuation into last week’s high. A wedge pattern is commonly formed when securities, stocks and assets are being traded in the market.

technical analysis falling wedge

Just as with Rising Wedges, the first phase of market psychology for the Falling Wedge Pattern is marked by a prevailing trend. With Falling Wedges, this preceding trend is usually bearish, but in rare scenarios, it can also be an uptrend. In a Falling Wedge Pattern, this trendline has a lower slope than the upper trendline. Additionally, a price move below this trendline indicates a pattern failure when identifying a Falling Wedge Pattern. Furthermore, when the pattern construction is complete, the price breaks through this trendline.

Advantages and Limitations of Trading Rising and Falling Wedges

However, in my opinion, the Volume Price Trend Indicator would be the ideal choice for this purpose. This is because this indicator measures the changes in volume relative to the direction of the price change. Therefore, it will show you both the direction and the magnitude of the volume change, which are both crucial in identifying the Wedge Patterns. In a Rising Wedge Pattern, this trendline has a higher slope than the upper trendline.

Is a Rising Wedge Bullish or Bearish?

Because of this characteristic, you can use a volume indicator to measure the changes in trading volume and use it as a confirmation sign when identifying the Wedge Patterns. The Wedge Patterns, or Wedges, are chart patterns that last 10 to 50 trading sessions and that frequently appear on the price chart of a security. In these patterns, the highs and lows of price converge to move towards each other to form a triangular-shaped structure. Based on orientation, there are two popular types of Wedges, namely – the Rising Wedge and the Falling Wedge.

Traders can look to the volume indicator to see higher volume in the move up. Additionally, divergence can be observed as the market is making lower lows but the stochastic indicator is making higher lows – this indicates a potential reversal. Given the grind on the way up, there’s a number of possible levels to track here.

For longer-term or for more aggressive trading, the above-stated guidelines might come across as too conservative. Therefore, for setting more aggressive profit targets, you can leverage Fibonacci Extension Levels. The two momentum indicators that we will discuss in the following subsections are – MACD and Stochastic Indicator. Now, in the following sections, let us briefly discuss how you would integrate these above-stated tools into your strategy to trade the Wedge Pattern. At its core, the market forces leading to the development of a Falling Wedge Pattern are similar, but opposite, to the market forces that lead to the development of the Rising Wedges. Now that we have already covered the interpretation of the Rising Wedge Pattern, understanding the formation of the Falling Wedge Pattern should be relatively easy.

Once established, the falling wedge is traded using a breakout strategy. This is done in much the same way as the pennant trade or the triangle trade. Commodity and historical index data provided by Pinnacle Data Corporation. The information provided by StockCharts.com, Inc. is not investment advice. For experienced traders, the Wedge Patterns are relatively easy to identify on the price chart of a security.