The pattern represents a short and medium-term reversal in the market’s price movement. Technical analysts apply wedge patterns to depict trends in the market. How does a Wedge Pattern in Technical Analysis work? Wedges, which are either continuation or reversal technical analysis chart patterns, indicate a pause in the current trend and signify that traders are still deciding where to take the pair next. Wedges are an easy-to-understand chart pattern, and when they diverge from a prior pattern, there are favorable risk/reward trading potentials. The breakout direction from the wedge determines whether the price resumes the previous trend or moves in the same direction. What does a Wedge Pattern in Technical Analysis indicate?Ī wedge pattern is a popular trading chart pattern that indicates possible price direction changes or continuations. The benefits of using a wedge pattern in technical analysis include its ability to give traders a clear visual indication of a likely trend reversal, enabling them to initiate or exit positions at a suitable period. The height of the wedge pattern often plays an important role in placing the targets. They place stop-losses on the opposite side of the wedge. Traders wait for a breakout to occur above or below the wedge, to enter the trade. A rising or falling slant heading in the same direction defines this pattern. The wedge pattern has three common elements observed in each scenario: firstly, the trendlines that are converging towards each other secondly, the volume tends to decline as the price progresses through the pattern and finally, there is a breakout from one of the trend lines. The characteristic feature of the pattern is the narrowing price range between two trend lines that are converging towards each other, creating a wedge shape.Ī contracting price range paired with either an upward price trend (known as a rising wedge) or a downward price trend (known as a falling wedge) defines the pattern. The wedge pattern is frequently seen in traded assets like stocks, bonds, futures, etc. Past performance of a security or strategy does not guarantee future results or success.A wedge pattern is a price pattern identified by converging trend lines on a price chart. Technical analysis is not recommended as a sole means of investment research. Not a recommendation of a specific security or investment strategy. The wedge width can also be a performance factor: wider wedges seem to be more reliable than the narrow ones.įor educational purposes only. Nonetheless, the results for the non-classical combination of Falling Wedge in downtrend with a downward breakout seems to work surprisingly better than all other wedge combinations as one can expect, they are rare to find. The estimated performance of the Falling Wedge is a bit higher than that of the rising one, but still questionable. Gaps before the breakout are also said to improve the performance. During the pattern formation, volume is most likely to fall however, better performance is expected in wedges with high volume at the breakout point. In this case, price within the Falling Wedge is usually not expected to fall below the panic value, ending up in breaking through the upper trendline. Thus, the Falling Wedge is generally regarded as a bullish pattern.įalling Wedges often come after a climax trough (sometimes called a "panic"), a sudden reversal of an uptrend, often on heavy volume. Downward breakouts are much less expected: one study shows that virtually all breakouts happen to the upside and another study states that at least two thirds do. When following an uptrend, the Falling Wedge pattern shows gradual decline in price which, in most cases, will end up breaking through the upper line, thus continuing the preceding trend. Statistically, the latter are less often to occur but seem more striking than consolidation. It takes at least five reversals (two for one trendline and three for the other) to form a good Falling Wedge pattern.īoth Rising and Falling wedges show great versatility: they could appear as consolidation patterns with the trend, or against the trend, or even as topping patterns after a climax. The Falling Wedge pattern is the opposite of the Rising Wedge: it is defined by two trendlines drawn through peaks and bottoms, both headed downward.
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