Rising and Falling Wedge Chart Patterns: A Traders Guide

Place stop losses below key support levels, such as the most recent higher low or the lower wedge trendline. The prior downtrend provides the context for the eventual wedge breakout. Without a preceding downtrend, the pattern may be less reliable.

We introduce people to the world of trading currencies, both fiat and crypto, through our non-drowsy educational content and tools. We’re also a community of traders that support each other on our daily trading journey. A good upside target would be the height of the wedge formation. As you can see, the price came from a downtrend before consolidating and sketching higher highs and even higher lows. Note that the example above also shows a decline in the MACD-Histogram’s peaks before the patter ends.

Key Characteristics of Falling Wedges

The second is that the range of a previous channel can indicate the size of a subsequent move. In this case, it’s often the gap between the high and low of the wedge at its outset. If a rising wedge begins with support and resistance 100 points apart, the market may then fall 100 points once the breakout is confirmed. Like head and shoulders, triangles and flags, wedges often lead to breakouts. In the case of rising wedges, this breakout is usually bearish. In different cases, wedge patterns play the role of a trend reversal pattern.

In this case, you will observe that you will get a slight downward slant in the wedge pattern by connecting the lower highs and lows before rising prices. This will eventually lead to a falling wedge breakout to continue on the larger uptrend formation. What is important in this method is to lace the stops at the appropriate places so that there is some space available before the final closing out of any trade. There are essentially two places where a stop can be placed for the maximum benefit, including a stop below the lowest trade price present in the wedge and a stop below the wedge only.

Intro — Falling Wedge Pattern Trading

In the context of a reversal pattern, it suggests an upcoming reversal of a preceding downtrend, marking the final low. As a continuation pattern, it slopes down against the prevailing uptrend, implying that the uptrend will continue after a brief period of consolidation or pullback. It’s important before the breakout to see the price contracting within the two trendlines. So when the price hits the resistance trendline the sellers will step in and when the price hits the support trendline the buyers will step in. Often times, a breakout of either of the two trendlines will lead to a volatile directional move.

We recommend that you seek independent advice and ensure you fully understand the risks involved before trading. Not all wedges will end in a breakout – so you’ll want to confirm the move before opening your position. The blue arrows next to the wedges show the size of each edge and the potential of each position. The green areas on the chart show the move we catch with our positions. The red areas show the amount we are willing to cover with our stop loss order.

What Does a Rising Wedge Pattern Signal?

With proper confirmation, forex falling wedges can offer favorable risk-reward potential on long trades. A falling wedge is essentially the exact opposite of a rising wedge. So it also often leads to breakouts – but while ascending wedges lead to bearish moves, downward ones lead to bullish moves. Another notable characteristic of a falling wedge is that the upper resistance line tends to have a steeper descending angle than the lower support line.

• The rising wedge pattern develops when price records higher tops and even higher bottoms.
• If a rising wedge begins with support and resistance 100 points apart, the market may then fall 100 points once the breakout is confirmed.
• Notice how the market had broken above resistance intraday, but on the daily time frame this break simply appears as a wick.
• The pattern typically forms after a sustained uptrend, indicating potential exhaustion among buyers.
• It’s generally wise to wait for confirmation before trading the first breakout from a falling wedge pattern.

The USD/CHF chart below presents such a case, with the market continuing its downward trajectory by making new lows. Price action then start to trade sideways in more of a consolidation pattern before reversing sharply higher. The falling wedge pattern is interpreted as both a bullish continuation and bullish reversal pattern which gives rise to some confusion in the identification of the pattern. Both scenarios contain different market conditions which must be taken into consideration.

quiz: Understanding Butterfly pattern

Recognizing and trading a rising wedge pattern involves identifying converging, upward-sloping trendlines during an uptrend (for reversal) or downtrend (for continuation). The pattern is confirmed when the price breaks below the lower support trendline, often accompanied by declining volume. Traders and investors generally use additional technical indicators for validation. Although many newbie traders confuse wedges with triangles, rising and falling wedge patterns are easily distinguishable from other chart patterns. They are also known as a descending wedge pattern and ascending wedge pattern. The descending wedge pattern aligns with an uptrend when there is a consolidation in prices, or the trade is more sideways.

This is common in a market with immense selling pressure, where the bears take control the moment support is broken. To wrap up this lesson, let’s take a look at a rising wedge that formed on EURUSD. The break of this wedge eventually lead to a massive loss of more than 3,000 pips for the most heavily-traded currency pair. Notice how we simply use the lows of each swing to identify potential areas of support.

Head and Shoulders Pattern: Your Guide to Massive Profits

The volatility behind the breakout will push the price higher very fast. The chart above shows a large rising wedge that had formed on the EURUSD daily time frame over the course of ten months. There are two things I want to point out about this particular pattern. Both the rising and falling wedge will often lead to the formation of another common reversal pattern. Notice how the rising wedge is formed when the market begins making higher highs and higher lows.