How to Trade Wedge
Chart Patterns
• In a Wedge chart pattern, two trend lines converge.
• It means that the magnitude of price movement within the Wedge pattern is
decreasing.
• Wedges signal a pause in the current trend.
• When you encounter this formation, it signals that forex traders are still
deciding where to take the pair next.
• A Falling Wedge is a bullish chart pattern that takes place in an upward
trend, and the lines slope down.
• A Rising Wedge is a bearish chart pattern that’s found in a downward trend,
and the lines slope up.
• Wedges can serve as either continuation or reversal patterns.
Rising Wedge
• A rising wedge is formed when the price consolidates between upward sloping support and
resistance lines.
• Here, the slope of the support line is steeper than that of the resistance.
• This indicates that higher lows are being formed faster than higher highs. This leads to a wedge-like
formation, which is exactly where the chart pattern gets its name from!
• With prices consolidating, we know that a big splash is coming, so we can expect a breakout to
either the top or bottom.
• If the rising wedge forms after an uptrend, it’s usually a bearish reversal pattern.
• On the other hand, if it forms during a downtrend, it could signal a continuation of the down move.
• Either way, the important thing is that, when you spot this forex trading chart pattern, you’re ready
with your entry orders!
• In this first example, a rising wedge formed at the end of an uptrend.
• Notice how price action is forming new highs, but at a much slower pace than when price makes
higher lows.
•
• See how price broke down to the downside? That means there are
more forex traders desperate to be short than be long!
• They pushed the price down to break the trend line, indicating
that a downtrend may be in the cards.
• Just like in the other forex trading chart patterns we discussed
earlier, the price movement after the breakout is approximately
the same magnitude as the height of the formation.
• Now let’s take a look at another example of a rising wedge
formation. Only this time it acts as a bearish continuation signal.
• As you can see, the price came from a downtrend before consolidating and
sketching higher highs and even higher lows.
• In this case, the price broke to the downside and the downtrend continued.
That’s why it’s called a continuation signal yo!
• See how the price made a nice move down that’s the same height as the
wedge?
• What did we learn so far about these Japanese candlestick chart patterns?
• A rising wedge formed after an uptrend usually leads to a REVERSAL
(downtrend) while a rising wedge formed during a downtrend typically results
in a CONTINUATION (downtrend).
• Simply put, a rising wedge leads to a downtrend, which means that it’s a
bearish chart pattern!
Falling Wedge
• Just like the rising wedge, the falling wedge can either be a reversal or continuation signal.
• As a reversal signal, it is formed at a bottom of a downtrend, indicating that an uptrend would come next.
• As a continuation signal, it is formed during an uptrend, implying that the upward price action would
resume. Unlike the rising wedge, the falling wedge is a bullish chart pattern.
• In this example, the falling wedge serves as a reversal signal. After a downtrend, the price made lower
highs and lower lows.
• Notice how the falling trend line connecting the highs is steeper than the trend line connecting the lows.
• Upon breaking above the top of the wedge, the pair made a nice move upwards that’s approximately
equal to the height of the formation. In this case, the price rally went a few more pips beyond that target!
• Let’s take a look at an example where the falling wedge serves as a continuation signal.
• Like we mentioned earlier, when the falling wedge forms during an uptrend, it usually signals that the
trend will resume later on.
• In this case, the price consolidated for a bit after a strong rally. This could
mean that buyers simply paused to catch their breath and probably recruited
more people to join the bull camp.
• Hmm, it looks like the pair is revving up for a strong move. Which way would
it go?
• See how the price broke to the top side and went on to climb higher?
• If we placed an entry order above that falling trend line connecting the pair’s
highs, we would’ve been able to jump in on the strong uptrend and caught
some pips!
• A good upside target would be the height of the wedge formation.
• If you want to go for more pips, you can lock in some profits at the target by
closing down a portion of your position, then letting the rest of your position
ride.
