As a reversal pattern, the rising wedge forex is a popular one that gives traders a clue about future price directions and distances. As a result, the rising wedge pattern frequently appears in the financial markets, and traders are drawn to it because it is easy to identify and apply.
Throughout the article, we will explain how to spot and trade rising wedges on forex charts.
Characteristics of a wedge
The rising wedge pattern and falling wedge pattern are similar to the pattern we use in our breakout strategy. However, because these wedges are directional and therefore have bullish or bearish connotations, I deemed them worthy of a lesson of their own.
Usually, these wedges signal a market reversal since they signify market reversals. Like other wedge patterns, these patterns are formed after consolidation, during which the bears and bulls jockey for position.
Both patterns can take a long time to form and last for days, months, or even years. However, the longer the formation process takes, the more explosive the ensuing breakout is likely to be.
As its name implies, a rising wedge slopes upward and is commonly viewed as a topping pattern characterised by a market breakout down.
Below is an illustration of the rising wedge’s characteristics.
The rising wedge begins when the market makes higher highs and higher lows. Highs can only connect trend lines in line with each other. It is the same with lows. If the highs and lows are not in line, the rising wedge cannot be considered valid.
This pattern is referred to as a terminal pattern since the levels are not parallel. This implies that it must eventually cease to exist.
As the name implies, a falling wedge represents the opposite of a rising wedge, where the bears are in control and making lower highs and lower lows. A falling wedge is also likely to break higher.
The illustration below illustrates how a falling wedge behaves.
Using the illustration above, we can see that the bears are clearly in control during the consolidation period due to the market’s lower highs and lower lows.
It’s very noticeable how all of the highs align with one another, and the same goes for the lows. Trend lines can only be considered valid if they are cleanly drawn across both highs and lows of the pattern.
Furthermore, both sides of the wedge must appear on both sides when identifying an excellent pattern to trade. For example, for the market to break through support, it should have tested resistance three times and support three times. Otherwise, the market would not have been considered tradable.
What is a rising wedge pattern?
The rising wedge chart pattern occurs when two converging support and resistance lines collide to form a price move. The supporting and resistance lines must both point upwards for the wedge to form, and the support line must be steeper than the resistance line.
Wedges frequently lead to breakouts, just as triangles, flags, and head and shoulders do. Usually, rising wedges lead to a bearish breakout.
In rising or falling markets, ascending wedges can be seen:
- The fact that a market is in an uptrend signals traders are reconsidering the bullish move
- When a market falls, it is merely a pause before the bear market takes over again
On the surface, an ascending wedge appears to be bullish. Every successive trough and peak is indeed higher than the one before. However, it is essential to note that as the upward trends get shorter, the downward trends get longer. If the trend continues, this signals bearish sentiment forming (or reforming).
This negative sentiment increases when the market moves beyond its rising support line, leading anyone with long positions to close their positions and limit their losses. Short-term traders will also jump in when this occurs. There is a resulting wave of selling that propels the market downward.
A rising wedge can appear on any famous market with technical traders, including indices, forex, and stocks.
Falling wedge pattern
The falling wedge is distinguished from the rising wedge by slanting the triangle. This pattern declines downward between two converging trend lines to reach an apex point that is respected as a bullish candlestick pattern (see image below).
How to trade a rising wedge pattern in an uptrend?
- Current Trend: This pattern forms at the top of an uptrend, so an uptrend should already be in place to form the pattern. To validate the pattern, traders must identify an uptrend.
- Resistance line: The upper trend line acting as a resistance line should slope upward with successive highs and lows.
- Support line: A sloped downward trend line acts as a support line since it slopes upwards at a greater angle than a sloped upward trend line.
- Contraction area: This feature shows how the trend lines converge as the consolidation area moves forward. During this timeframe, prices make higher highs and higher lows.
Ideally, the price should touch and bounce off the trend line at least twice to qualify as a trend line.
- Support line break: The price breaks the support line when it reaches the end of the pattern. There could be false breakouts, and it is essential to follow the breakout rules to validate the breakout. The price will reverse if the support is sustained, and the trade will pay off if the support is not sustained. A false breakout will trigger the stops, however.
- Volume: A breakout can be confirmed by traders by using volume since increased volumes are an indication that new buyers are entering the market or that the current buyers are looking to buy more.
How To trade a rising wedge pattern in a downtrend?
- Current Trend: The pattern develops at the apex of an established downtrend, so a downtrend should already be established. To validate patterns, traders should look for downtrends.
- Resistance line: If the upper trend line slopes upward, the price should hit higher highs and lower highs in consecutive sequences, forming a resistance line.
- Support line: A slope trend line should be a support line, though steeper than an upward upper trend line.
- Contraction area: The end of a pattern shows converging trend lines. It makes higher highs and lower lows during this period.
- Support line break: If the price breaks the support line, it should be validated using the rules for support breakouts.
- Volume: Traders can confirm breakouts by looking at higher volumes during the breakout.
All the above components are essential to successfully trade the bearish rising wedge pattern. The traders must not fail to identify each component and learn its corresponding features.
Strategies to trade wedge patterns
To successfully design your wedge strategy, you must determine when to enter your wedge trade, take your profits, and cut your losses.
1. Opening your position
It is essential to confirm the breakout before opening a position – not all wedges end in a breakout.
Waiting for the breakout can be an effective way to confirm a move. For example, with a wedge, you are looking for a significant move beyond the support trendline, or the resistance trendline, for a falling wedge.
Traders often watch for a break above a previous support point, for example, in ascending wedges. On the way down, the market may still bounce off previous support levels instead of the general rule that support turns to resistance in a breakout.
This means you can wait for a breakout to begin and then wait for the breakout to return to bounce off the previous support area in the ascending wedge. In this way, you can verify that the move is confirmed before opening a position.
Another common sign that a wedge is about to break out is falling volume as the market consolidates. Conversely, a spike in volume after it breaks out usually indicates that a more significant move is in the works.
2. Taking profit
There are two general rules about trading breakouts. The first is that previous levels of support became new levels of resistance, and vice versa. For example, consider ABC’s stock hitting $65 (above), $55 (below), and $45 (above) as the peaks in its descending wedge. There may be support at these levels in the future.
Second, a previous move helps determine the size of a subsequent move. As a result, the gap between the high and low of the wedge at its outset is often what determines its size. For example, when a rising wedge begins with resistance and supports 100 points, the market could fall by 100 once the breakout is confirmed.
3. Cutting losses
Any breakout trader will benefit from knowing when a potential move has been invalidated – and wedge trading falls into the same category. Again, a rising wedge can be used as an example.
Consider the scenario where EUR/USD breaks below the support line on its wedge, then rallies and hits a new higher high. In this instance, both lines have been crossed, indicating that the pattern has been broken. Therefore, you can close the trade before further losses happen if you place your stop loss at the previous market high.
You can set your stop loss a little above the previous support level. Should the previous support fail to prove a new resistance level, your trade is closed.
Rising wedge pattern vs falling wedge pattern
Falling wedge patterns are the opposite of rising wedge patterns, which can be applied to any chart. Falling wedge charts are Bullish chart patterns while rising wedge charts are Bearish charts.
These two can be traded quickly and spotted by even novice forex traders using the rules. Moreover, they have the same success rate and simplify identification and trading. Therefore, both patterns are equally suitable for forex traders.
Rising wedge pattern in stock trading
All financial charts can apply the pattern, so traders can apply the same rules and use stocks, futures, options, and forex charts to trade. Moreover, you can apply them to any chart time frame, whether intraday, short-term, or long-term.
How reliable is the rising wedge pattern?
Most of the time, the rising wedge chart pattern produces positive results. However, this chart pattern is susceptible to failure and all other technical chart patterns. False trend line breakouts frequently occur in lower time frame charts, so traders should approach them cautiously and validate them correctly.
However, patterns forming in high time frame charts and patterns forming during more significant trends are more reliable indicators of forex trading results.
FAQs
- Is a Rising Wedge Bullish or Bearish?
A rising wedge indicates the possibility of a reversal during an uptrend. A breakout through the lower trend line indicates that prices will fall after a rising wedge pattern appears.
- How reliable are Rising Wedges?
Wedge patterns and other technical patterns are still debated regarding their long-term usefulness. For example, a falling wedge tends to indicate reversals more often than a rising wedge, and a wedge breakout is a better indicator of reversal than a wedge breakout.
- What does a Rising Wedge mean?
Rising wedges are believed to indicate the end of a bull trend.
Bottom line
Above, we discussed that a rising wedge pattern is a bearish chart pattern that all levels of traders can trade. Patterns have a set of rules to follow, and if followed correctly, they produce the best results in trading. This pattern is easy to recognise and a standalone pattern, as it provides entry and stop-loss points and takes profit targets.
To confirm the components of a rising wedge forex pattern, additional technical indicators are recommended for best results. Traders of all levels should take the time to learn and understand this chart pattern before engaging in live trading to reap its benefits consistently.