What is a wedge pattern in trading?
A formation that is called the wedge pattern is the chart pattern which can be used in trading. The wedge is determined by two converging trend lines. Together they form a sort of a wedge and that is where the name derives from. This pattern's appearance represents a temporal pause in the momentum of the trend or it is a sign of an ending trend. The price will continue in the previous direction afterwards or reverse.
There are two sorts of the wedge, the rising and the falling wedge. The rising wedge is a bearish pattern determined by two trend lines that are inclined upwards. The falling wedge is a bullish formation that can be recognised when the trend lines are tilted down.
How to trade with the wedge patterns on the IQ Option platform
Using the rising wedge in trading
As I mentioned above, the rising wedge is a bearish pattern which you can identify by drawing two trend lines. Both will slope upwards however, the support is a bit steeper than the line that creates the resistance. This is because the higher lows develop faster than higher highs.
So we have the shape of the wedge on the chart. We know this is the time of the consolidation of the price and the big move is expected.
Let's take a look at the exemplary chart for the EURUSD currency pair.
The wedge appeared after the downtrend. We may presume the price will continue to fall after the pattern. You should enter the short trade at the moment of the price breakout from the support level. Moreover, you can expect, that the move will be as high as the formation altitude.
Let's now focus on the next wedge example.
The rising wedge works here as the reversal pattern. It has appeared after a strong uptrend and so you can predict the price will soon fall. Open a short transaction when the bars cross the support level on their way down. The size of the movement should be as big as the height of the wedge.
Using the falling wedge in trading
The falling wedge can be described as a bullish pattern. The two trend lines that form the pattern will slope down. The upper line is a bit steeper as the lower highs develop faster than the lower lows.
The falling wedge can be used either as a continuation pattern or as the trend reversal pattern. It will depend on the moment it forms on the price chart.
Consider the example below.
The price was rising for some time. Then, the wedge has formed. It signals the price will soon resume its previous direction. Go long at the moment of the price breakout from the resistance level. You shall anticipate that the move will be at least as long as the formation altitude.
The next example shows the price chart for the AUDUSD currency pair. Here, the falling wedge works as the trend reversal pattern.
The price has consolidated forming the falling wedge pattern after the downtrend. It gives a signal that the direction of the trend will change in the near future. Open a long position when the price goes past the resistance line. The price should move upwards at least as high as the wedge height.
Is a wedge a continuation or a reversal pattern?
The wedge formation shows the moment the price consolidates for a while. After that, the upwards or downwards move can be expected.
Falling and rising wedge pattern and further price movements
We can distinguish two kinds of the wedge and they are the rising and falling wedge patterns.
The bearish rising wedge pattern gives a signal the price will go down. It will be used as the continuation pattern when it develops after the downtrend and as the trend reversal pattern after the uptrend.
The falling wedge is the bullish pattern that results in the rise of the prices. It is a continuation pattern if it develops after the uptrend and a trend reversal pattern if it is recognised after there was a downtrend in the market.
Remember that trading always carries risk and so you should be well prepared before you begin.
Tell us in the comments section below if you have ever traded with the wedge formations. I would be glad to hear from you.
Best of luck!
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