Chart Pattern #6: Wedges
Slow and steady wins the race…
Little drops of water make the ocean…
One step at a time…
Sure, that’s all timeless advice…
But would you turn down an opportunity to speed up the process?
I mean, if you could zoom right to the finish line, wouldn’t you set yourself up for that instead?
Well, that’s what happens with wedges.
This pattern shows you opportunities to “speed up” any gains you make in the marketplace.
A wedge chart pattern is a period where there is not a lot of volume or momentum before a breakout or reversal occurs.
This period usually goes against an underlying bearish or bullish market that’s either in a downtrend or uptrend.
For example, in a bearish downtrend, there could be a huge sell off of assets that leads to prices being undervalued…
But as said earlier, there is not enough volume or momentum, hence the rising wedges.
As this continues, there’s suddenly a breakout…
Which creates demand and eventually leads to a bullish uptrend where demand is in excess and leads to a peak surge in price and then a reversal.
This sudden change in price momentum is what creates the opportunity for traders to “speed up” their profits.
Watch Out for Wedges
There are two types of wedges to keep track of:
- Rising Wedge: The asset’s price rises over time but it can occur in the midst of a downtrend as well (also depends on a bearish or bullish market sentiment)
- Falling Wedge: The asset’s price falls over time in contrast with a wedge pattern before a reversal
What Does This Mean For You?
According to technical analysts, wedge-shaped trend lines are extremely useful indicators of a potential reversal or breakout in price action.
They happen 66% percent of the time.
Falling wedges are also a more reliable indicator than a rising wedge. This means that a stop-loss can be placed close to your entry point. If the trade is successful, you could yield some greater returns than the amount you risked to begin with.
How To Trade a Wedge Chart Pattern
Since wedges can signal either bullish or bearish price reversals, there are common characteristics to look for such as:
- Converging trend lines
- Decline in volume
- Price progression
- A breakout from one of the trend lines
Keep this in mind as a sign that the flood gates are about to open.