Rising And Falling Wedge Patterns: The Complete Guide

Wedge patterns are a cornerstone of technical analysis in trading, used extensively to predict potential price movements based on visible formations on charts. Now that we have a good understanding of the different types of wedge formations, and their implications, let’s try to build a wedge pattern trading strategy. We will focus on the rising and falling wedge patterns that occur as terminal structures. Wedge patterns are powerful technical formations that signal potential reversals or continuations in the Forex market. Recognising and trading wedge patterns effectively can give traders a strategic edge, especially when combined with advanced strategies.

Traders take their short positions after the breakout of lower trend line. Notice how we simply use the lows of each swing to identify potential areas of support. These levels provide an excellent starting point to begin identifying possible areas to take profit on a short setup.

As a reversal signal, it is formed at a bottom of a downtrend, indicating that an uptrend would come next. Get fresh market news, expert insights, and bite-sized educational materials in Space, your personalised feed available for free on all OctaTrader accounts. Apply the insights to trade in one touch with necessary technical analysis tools included. Once we have located a well-defined wedge structure, will want to add a few additional elements to the trade strategy to isolate the best trade setups. For one, we want to ensure that the current market conditions are pointing to an overextended price move. Even volume started to steadily decline before the pattern ended, and once price broke below the lower support line, the previous downtrend resumed.

Let’s take a look at the most common stop loss placement when trading wedges. Before we move on, also consider that waiting for bullish or bearish price action in the form of a pin bar adds confluence to the setup. That said, if you have an extremely well-defined pattern a simple retest of the broken level will suffice. Here, a common strategy for placing your stop loss is to put it just below the market’s previous high – the last time it tested resistance. Rising wedges typically appear after uptrends, acting as a bearish reversal pattern.

What are the Different Types of Wedge Patterns?

Conversely, a falling wedge, characterised by converging downward trendlines, typically reflects a bullish reversal if it occurs in a downtrend. The wedge pattern trading involves identifying the formation of the pattern and determining entry and exit points based on the price breakout signals. Traders enter long trade positions when the price breaks above the resistance line of a falling wedge pattern or short trade positions when it breaks below the support line of a rising wedge pattern. The falling wedge pattern is a bullish reversal chart formation that signals the potential end of a downtrend and the start of an upward movement.

How Reliable are Wedge Patterns in Forex Trading?

Rising wedges typically end with a downside breakout and falling wedges typically end with an upside breakout. The falling wedge is a bullish pattern and the inverse version of the rising wedge. The rising wedge is a bearish pattern and the inverse version of the falling wedge. Third, see if you can identify a wedge pattern as discussed in this post. The 4-hour chart above illustrates why we need to trade this on the daily time frame. Notice how the market had broken above resistance intraday, but on the daily time frame this break simply appears as a wick.

1. With rising broadening wedges, the top trendline slopes more steeply than the bottom one, while in falling broadening wedges the lower trendlines fall more rapidly than the upper one.
2. In technical analysis, a wedge pattern signals that the current price trend is pausing to consolidate before moving in a new direction.
3. Identifying a wedge pattern involves specific rules regarding the number of price touchpoints on the converging trendlines.
4. The rising wedge pattern is useful when a trader anticipates a bearish reversal following an uptrend.
5. The wedge chart formations appear in short-term and long-term charts, which provides opportunities for day traders and swing traders.
6. The rising converging wedge is characterized by a series of higher highs and higher lows, as well as by a narrowing exchange rate range that reflects reducing volatility levels over time as it progresses.

Elliott wave traders will recognize the technical wedge formation as an ending diagonal. Identifying optimal trade entry and exit points to take advantage of a wedge pattern generally requires taking a strategic analytical approach. The rising converging wedge is characterized by a series of higher highs and higher lows, as well as by a narrowing exchange rate range that reflects reducing volatility levels over time as it progresses.

The chart above shows a large rising wedge that had formed on the EURUSD daily time frame over the course of ten months. To wrap up this lesson, let’s take a look at a rising wedge that formed on EURUSD. The break wedges forex of this wedge eventually lead to a massive loss of more than 3,000 pips for the most heavily-traded currency pair. Similar to the breakout strategy we use here at Daily Price Action, the trade opportunity comes when the market breaks below or above wedge support or resistance respectively.

Below are some of the more important points to keep in mind as you begin trading these patterns on your own. If the market hits our stop loss in the image above it means a new low has been made which would invalidate the setup. Although the illustrations above show more of a rounded retest, there are many times when the retest of the broken level will occur immediately following the break. Put simply, waiting for a retest of the broken level will give you a more favorable risk to reward ratio. Because the two levels are not parallel it’s considered a terminal pattern.

To practically implement these strategies and explore the dynamics of forex markets, consider opening an FXOpen account, a gateway to applying these insights in real-world trading scenarios. Traders often look for a breakout from these patterns as a signal to enter trades. For rising wedges, a downward breakout can be seen as a sell signal, while an upward breakout from a falling wedge is often interpreted as a buy signal. When combined with divergences, this chart pattern can add confirmation and precede strong movements. Forex traders rely on a broad range of indicators and tools beyond wedge patterns.

Trading a rising or falling wedge pattern

To apply the pattern, traders use Wedge’s bullish and bearish variations. The falling Wedge is a bullish pattern, while the rising Wedge is a bearish pattern. The rising wedge is generally considered bearish and is usually found in downtrends.

1. The additional information enhances the effectiveness of wedge patterns for further confirmation of potential reversals or continuations.
2. The following instructions detail how to analyze a wedge pattern and execute a trade in response.
3. Technical tools like the Relative Strength Index (RSI) provide insights into market conditions by indicating when it is overbought or oversold.
4. One of the reasons for this is that the broadening variety creates a less attractive risk to reward profile compared to the contracting wedge formation.
5. Once the breakout occurs, traders can execute their trades with calculated precision to profit from the anticipated market reversal that a wedge pattern indicates.
6. By using options, futures, or other derivative products as part of a comprehensive trading plan, traders can secure their positions against sudden market shifts.

They can be found in uptrends too, but would still be regarded as bearish. Of course, we can use the same concept with the falling wedge where the swing highs become areas of potential resistance. Finding an appropriate place for the stop loss is a little trickier than identifying a favorable entry. This is because every wedge is unique and will, therefore, be marked by different highs and lows than that of the last pattern.

In forex trading, the concept of divergence plays a pivotal role in identifying potential market shifts. This discrepancy is a valuable tool in divergence chart trading, as it may indicate a possible reversal or continuation of the current trend. To trade the descending wedge pattern, you’d look to open a buy position once the market breaks through support, in order to take advantage of the resulting bullish price action. However, a break out doesn’t necessarily mean that an uptrend is definitely on the way – so you’ll want to pay attention to your risk management too. You may sometimes see falling wedges described as reversal patterns, as the falling price action within the wedge reverses once the market breaks out above the resistance line. This is particularly true if you spot a falling wedge that doesn’t follow an uptrend, which is rarer but can arise.

Momentum divergence, just like declining volume, tends to occur prior to reversals and can be seen on the chart above. Both the MACD-Histogram (green and red bars) and the MACD line (blue line) started moving lower as price continued making higher highs. The moving average convergence divergence indicator (MACD) is a great tool to spot declining momentum in a market.