Wedge chart pattern in forex refers to a reversal chart pattern that consists of two trend lines and indicates a decrease in momentum of price trend with the time. Price structure resembles a rising or falling wedge pattern. Like first swing will be the biggest one and then next will be smaller and so on until a trend line breakout will happen against the trend. This chart pattern is most widely used in forex technical analysis. Wedge pattern in forex is categorized into two types.
Rising wedge pattern
Falling wedge pattern
Rising Wedge Pattern
Rising wedge or ascending wedge pattern in forex is a reversal chart pattern that predict the upcoming reversal in bullish trend. It is a bearish chart pattern in forex technical analysis.
Draw two trend lines. The first trend line will meet the higher lows of swings in upward direction. Then the second line will meet the higher highs of swings in upward direction. This will form a rising wedge like pattern. Look at the image below.
Now the next step is to look for breakout of the first trend line in the ascending wedge. Price will continue consolidating until a breakout of trend line will happen. After breakout, price will change its trend from bullish into bearish. A formation of lower low after breakout of trend line is a plus point.
As rising wedge pattern is very common nowadays. So there can be many false breakouts. We can avoid these false breakouts by filtering best trade setups only. I have explained below a strategy to trade a wedge pattern effectively.
Falling Wedge Pattern
Falling wedge or descending wedge pattern in forex is a reversal chart pattern that predicts reversal in trend from bearish into bullish. This pattern is formed by drawing two downward trend lines. Draw the first trend line by connecting the swing lower lows, and then draw the second trend by connecting the swing lower highs. It will form a falling wedge like shape.
After downward consolidation, a breakout of trend line in bullish direction will occur. Consolidation is a symbol of upcoming impulsive move in the price. After trend line breakout, trend will be reversed from bearish into bullish.
Rising wedge trading strategy
Trading only wedge pattern will not make you profitable in forex until you will trade it with confluences. Confluence in forex is the use of another technical parameter with the strategy to enhance its winning rate.
For example, use of MACD and RSI divergence with the rising wedge pattern will enhance its winning rate or just use support and resistance or supply and demand as a confluence to trade this pattern. I will explain both by use of indicator and by use of price action. I will prefer pure price action trading.
When price will form higher highs and also continue consolidation inward like a wedge corner, then there must be divergence on RSI and MACD indicator. Divergence also indicates upcoming reversal. That’s why we will use wedge pattern breakout and MACD and RSI divergence as a confirmation. If there is no any divergence on MACD and RSI, then we will skip that wedge pattern.
Key levels
This is the recommended method to use with rising and falling wedge pattern. Price action is the best strategy in forex trading. For example, use of supply and demand or support and resistance zones with rising or falling wedge will increase the winning ratio of this setup. Because there are many chances of reversal from a key level.
Like if there is forming a rising wedge pattern and there is also a strong resistance or supply level above then if Price break trend line after touching the resistance and supply level then it is a good pattern. If Price break the trend line without touching resistance or supply level, then it can be a false breakout to trap retail traders. This is the simple use of key levels. Now let’s talk about the stop loss, take profit and entry of trade setup.
Stop loss
Stop loss will be above the last high made by the price before breakout of trend line in case of rising wedge chart pattern. Make sure to add spread while adjusting the stop loss level. Stop loss can also be placed above the key level which will be a more safe option but as we also have to look for a good risk reward that’s why first one is good.
Entry
There are two options here, either to trigger a trade just after breakout of the trend line or to wait for retracement to the Fibonacci 50 level. Here you will use your common sense and calculate risk reward ratio for each case. And then you will decide yourself which one option will be good. Keep in mind, breakout candlestick must have at least 70% body (means small wick and big body).
Take profit
Take profit level is mirrored by measuring the height of the first swing wave in a rising or falling wedge pattern. Like in the image below. You can also split it into two take profit levels. One at the origin and the next one at the 1.272 Fibonacci extension level to maximize profits.
Reading Price Action is the Best Strategy
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Note: All the viewpoints here are according to the rules of technical analysis and for educational purposes only. we are not responsible for any type of loss in forex trading.
it indicates change of trend from bearish into bullish. Falling wedge pattern is a reversal chart pattern that changes bearish trend into bullish trend. Rising Wedge Pattern is a trend reversal chart pattern that that indicates gradually decrease in market momentum.
The rising wedge is a chart pattern used in technical analysis to predict a likely bearish reversal. it is characterized by a narrowing range of price with higher highs and higher lows, both of which are enclosed by upward sloping trendlines.
As a continuation pattern, the rising wedge will still slope up, but the slope will be against the prevailing downtrend. As a reversal pattern, the rising wedge will slope up and with the prevailing trend. Regardless of the type (reversal or continuation), rising wedges are bearish.
Set Initial Profit Targets Based on Pattern Measurements
Project the maximum height of the falling wedge pattern upwards from the breakout point to estimate a minimum price target. The pattern's height signifies the prevailing price range and signals how far prices may rise after breaking out.
It indicates traders take long positions in the market. Traders using a falling wedge pattern should buy as soon as the prices break above the upper converging trend line with a stop loss at the bottom of the falling wedge. Typically, the price targets are equal to the height of the back of the wedge.
The rising (ascending) wedge pattern is a bearish chart pattern that signals an imminent breakout to the downside. It's the opposite of the falling (descending) wedge pattern (bullish), as these two constitute a popular wedge pattern.
A wedge pattern can signal either bullish or bearish price reversals. In either case, this pattern holds three common characteristics: first, the converging trend lines; second, a pattern of declining volume as the price progresses through the pattern; third, a breakout from one of the trend lines.
A wedge is a chart formation that shows a narrowing price range over time, where price highs in an ascending wedge decrease incrementally, or in a descending wedge, price declines are incrementally smaller. Rising wedges typically end with a downside breakout and falling wedges typically end with an upside breakout.
During the pattern formation, volume is most likely to fall, which is best observed when the Rising Wedge follows the market climax. The estimated performance of the Rising Wedge is somewhat lower than that of the falling one, with Rising Wedge that breakouts downward being one of the least reliable patterns.
The breakout is the most important part of the rising wedge pattern. If the price breaks down below the lower trend line, it is a signal that the pattern has been invalidated and that the trend is likely to reverse.
According to published research, the falling wedge pattern has a 74% success rate in bull markets with an average potential profit of +38%. The descending wedge is a reasonably reliable pattern that, if used correctly, can improve your trading outcomes.
How long should the preceding downtrend be for a Falling Wedge to qualify as a reversal pattern? To qualify as a reversal pattern, a Falling Wedge should ideally form after an extended downtrend that's at least three months old. The Falling Wedge pattern itself can form over a three to six-month period.
The falling wedge pattern is formed by converging trendlines that slope downward. The upper trendline connects lower highs, while the lower trendline connects lower lows. This creates a narrowing price range, with price gradually moving towards the apex of the wedge.
When price touches the bottom trendline for the third time and starts climbing then buy. Watch out for partial declines. If price starts reversing back to the lower trendline then sell. The first target in this trade is the upper trendline.
A falling wedge is formed by two converging trend lines when the stock's prices have been falling for a certain period. The price target is equal to the height of the back of the wedge.
What is a Rising Wedge? The rising (ascending) wedge pattern is a bearish chart pattern that signals an imminent breakout to the downside. It's the opposite of the falling (descending) wedge pattern (bullish), as these two constitute a popular wedge pattern.
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.
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