Traders use rising and falling wedges as technical chart strategies to forecast trend reversals and trend continuations. Wedge formations are typically seen when the market is trending.
The wedge indicator could be falling or rising, and it appears at the end of bearish or bullish trends. The wedge could have a reversal or continuation feature depending on the wedge type and trend direction.
What does the rising wedge look like?
Traders can identify the rising wedge pattern when price action forms higher highs and higher lows. The wedge is like a rising corridor, where the walls of the wedge patterns are contracting until the wedge lines finally connect at a point.
The formation of the rising wedge on a chart can only mean one thing: price is moving in an upward direction, whether it’s a trend reversal or continuation. Price action usually breaks through the previous lower level when a rising wedge forms in the market.
Below is an image showing the rising wedge formation on a chart:
What does the Falling Wedge Look Like?
The falling wedge formation is an exact opposite of the rising wedge. The falling wedge pattern forms on the chart when price action generates lower lows and lower highs.
In the falling wedge pattern, the lows continually decrease, but the highs fall at a faster pace. The falling wedge produces a bearish signal, and price action breaks through the last higher level.
How to trade breakouts with the wedge
The opportunity to trade wedge breakouts comes when a trader spots price breaking above or below the wedge’s resistance or support lines, respectively.
Traders should note that they can use time frames of one hour or longer. It is essential to find a time frame that respects the wedge levels on the chart.
Trading breakouts for rising wedges
When trading the rising wedge, a trader looks out for the price to close below the support level. The close will confirm the pattern. However, it’s not safe for a trader to enter a sell position until the price comes back to retest the former wedge support it previously broke.
Above is a graphical image showing how price reacts to the rising wedge
Traders trade the retest of a broken level because it provides a more favourable risk-to-reward ratio.
Trading breakouts for falling wedges
Trading a breakout for a falling wedge is essentially the opposite of the rising wedge. The trader watches for the price to break and close above the wedge resistance level to get a confirmation of the strategy.
A trader only enters a long position when the price comes back to retest the previous wedge resistance level as the level becomes a great support level.
However, traders must note that price doesn’t always move in a regular pattern. The retest can happen almost immediately, but this is not always the case. Traders must pay attention to the pattern to be able to detect the right entry points.
Also, traders should wait for bearish and bullish price action in the form of a pin bar that adds a confluence point to the trade setup. A simple retest of the broken level will suffice if there’s an apparent pattern on the chart.
Above is a graphical image showing how price reacts to the falling wedge.
Wedge stop-loss strategies
Finding a stop-loss point is a bit tricky when trading with the wedge strategy. The reason is simple: all wedge patterns are unique and marked by different lows and highs compared to the previous pattern.
Nevertheless, traders should place their stop-loss in an area where the strategy is null if the price hits there.
Graphical image above showing the stop-loss in a wedge pattern
In the graphical image above, we see price breaking through the level, then retesting before going up.
In such a scenario, a trader will set the stop loss at point A where price can’t reach it. If the price gets to point A, it invalidates the setup.
However, if traders see price form a pin bar at the retest level, it would be advisable to set the stop-loss directly on top of the pin bar.
The image below shows a stop-loss based on the pin bar reaction.
The bottom line
When it comes to trading rising and falling wedges, there is no specific pattern involved. However, a trader will be safer when they apply the concepts and rules of the strategy effectively.
A trader can find good reversal trades in the market with this trading pattern, but they must pay attention to all the factors surrounding confluences, including rising and falling wedges.
Finally, a trader must see three touches on each side of the wedge, a breakout, and a retest to confirm the trading strategy if they want to become profitable.