When trading, it’s always helpful to understand how patterns tend to play out. This is especially true with wedge patterns.
Wedges signal a pause in a current trend. When you encounter this formation, it indicates that traders are still deciding where to go next. We have seen such patterns in cryptocurrency trading as of late, particularly the falling variety.
It’s important to note however that wedges can either serve as continuation or reversal patterns.
Rising Wedge – A Bearish Chart Pattern
A rising wedge forms when prices consolidate between upward sloping support and resistance lines. Here, the slope of the support line is steeper than that of the resistance.
This signal indicates that higher lows are forming faster than higher highs. It also leads to a wedge-like formation, which is exactly where the chart pattern gets its name!
When prices consolidate, we know that a big splash is coming so we can expect a breakout to either the top or the bottom. If the rising wedge forms after a downtrend, it’s usually a bearish continuation pattern (as above).
On the other hand, if a wedge forms during an uptrend, it could signal a reversal of the downtrend.
In this rising wedge pattern above, the price breaks to the downside, and the downward trend continues. That’s why it’s called a continuation signal.
And, as with other wedge patterns, the price movement after the breakout will approximate the same magnitude as the height of the wedge formation.
To summarize, a rising wedge formed after an uptrend usually leads to a REVERSAL (downtrend) while a rising wedge forms 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 – A Bullish Chart Pattern
Just like the rising wedge, the falling wedge can either be a reversal or a continuation signal.
As a continuation signal, a falling wedge forms during an uptrend and implies that upward price action will resume. As a reversal signal, this pattern forms at the bottom of a downtrend, indicating that an upward trend will come next. Unlike the rising wedge, the falling wedge is a bullish chart pattern.
In the above image, the falling wedge forms on an upward trend and thus serves as a continuation signal. That is, it signals that the upward trend will resume. In this case, the falling wedge immediately begins after an uptrend. The strong downward trend continues until the price breaks and quickly climbs higher.
However, a falling wedge can also serve as a reversal signal. As noted above, this occurs when a downward trend is occurring. Here, the falling wedge pattern equates to even lower highs and lower lows. Being in a falling wedge, the price eventually breaks out and moves higher, And, again, as with any wedge, the price movement after the breakout will approximate the same magnitude as the height of the formation.
It all takes some time to get used to but eventually, if you master the wedge patterns, you could be on the way to make some serious profits.
The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.