What is a Wedge Pattern?
A Wedge pattern is a pause in the prevailing trend which appears as the price movement shift from being wide to narrow forming a wedge-like shape. This pattern can appear either on an uptrend or a downtrend. The orientation of the price movements on either trend will tell whether it is a Rising Wedge or a Falling Wedge.
Ideally, a pattern is classified as – Rising or falling when it occurs on an Uptrend or a Downtrend.
With a preferred classification comes an implied signal. Signals shown on the wedge pattern can either imply a reversal or continuation of the trend.
A Rising Wedge formed on an Uptrend implies a reversal of the uptrend to become a downtrend. On the flip side, a Rising Wedge occurring on a Downtrend implies the continuation of such Downtrend.
A Falling Wedge formed on a Downtrend implies a reversal of the Downtrend to become an Uptrend. On the other hand, a Falling Wedge formed on an Uptrend implies the continuation of such an Uptrend.
Trading Using the Wedges Pattern on Olymp Trade.
Follow the following quick steps to trade using this pattern;
1. Identify the Wedges pattern.
Here, you need to identify price movements moving from being wide to gradually becoming narrow thus forming a wedge-like shape. Establish if the orientation of the Wedge is Upwards forming a Rising Wedge or Downwards forming a Falling Wedge.
If support and resistance lines were drawn on that small channel where the wedge is occurring, they would be sloping upwards for a Rising Wedge and Downwards for a Falling Wedge. However, the Slope of the Support would be steeper than that of Resistance for the Rising Wedge as the Resistance is steeper than the support for the Falling Wedge.
This implies that higher lows are being formed faster than higher highs for the Rising Wedge as lower highs are being formed faster than lower lows for the Falling Wedge.
Finally, establish whether the wedge is forming on an Uptrend or a Downtrend.
2. Identify the Wedge Breakout.
A Rising Wedge on an Uptrend is a reversal signal and therefore the price should breakout downwards and continue falling. A Rising Wedge on a Downtrend is a continuation signal and the price will breakout downwards and continue falling as well.
A Falling Wedge on a Downtrend is a reversal signal and the price with breakout upwards and continue rising. A Falling Wedge on an Uptrend is a continuation signal and the price will breakout upwards and continue rising as well.
3. Enter a Buy or Sell position.
Wait for the breakout to occur in the direction you anticipate and enter a Buy position if the breakout is upwards (Breakout) or a Sell position if the breakout is downwards (Breakdown).
4. Adjusting the Stop Loss.
It is wise to place the Stop Loss at the lowest low of the breakout candlestick in a Buy position or the highest high of the breakout candlestick in a Sell Position. These help you exit the trade in case the breakout was a takeout.
5. Adjusting the Take Profit.
Measure the height of the Wedge and place the Take Profit exactly the same distance from the point you entered the trade. This is because mostly the price movement after the breakout is approximately the same magnitude as the price movement of the wedge formation.
You have now heard it all about the Wedges Pattern. A Rising Wedge and a Falling Wedge which generate Reversal or Continuation signals depending on the prevailing trend during their formation. Apply this in your trading today for profitable trading.