Traders sometimes have a hard time telling the difference between a wedge and a triangle pattern because they look so similar. Here is an explanation of this very confusing concept and exactly how to use both patterns in your trading.
The most important difference between a falling wedge and an ascending triangle is that a falling wedge typically has both sides moving in the same direction, while a falling triangle usually features a flat base.
The chart below showcases a falling wedge pattern on a stock.
Chart 1: A falling wedge
There are two ways in which you can trade a falling wedge pattern depending on where it is formed in a particular trend. For example, a falling wedge that forms within an uptrend is usually interpreted as a continuation pattern because there is a high likelihood that price will break out of the wedge and continue rising.
The same is true for a falling wedge pattern that forms within a downtrend, which typically has a high chance of breaking to the upside. However, this means that a falling wedge that forms within a downtrend is regarded as a reversal pattern because of the high likelihood that it will result in an uptrend.
Chart 2: Examples of the different types of triangles
The chart above illustrates the different types of triangles that can be formed on a price chart. These images clearly show that a falling triangle is likely to result in a break to the upside, with a rising triangle pattern often leading to a bearish breakout.
However, the triangle with both sides converging at a similar angle poses a significant challenge when it comes to identifying the direction of the price breakout. In such cases, it is better to wait for the price to break out above or below the triangle’s height before entering into any trade. This is because the chances of a breakout in either direction are pretty high, making it quite easy to enter into a losing trade.
Tips for successfully trading a wedge pattern
From the two charts above, you can clearly see that there is a significant difference between the structure of a wedge and a triangle based on the angles of the two lines that make up each of these structures.
A defining characteristic of a wedge is that during its formation, one of the sides is usually much steeper than the opposite side. If you find yourself doubting whether the wedge being formed is a continuation or reversal pattern, you can apply this general rule: the steeper side is usually not likely to hold.
This means that the price is likely to break out in the direction aligned with the steeper side which, in the case of a falling wedge pattern, is the upper side. This rule also applies to the falling triangle pattern as supported by the above charts.
Chart 3: Falling wedge pattern on EUR/GBP 1-hr live chart
Trading the wedge pattern on a recent price chart
The above chart shows an example of the falling wedge pattern that occurred on the EUR/GBP hourly chart in August 2019, where price broke out higher to form a bullish continuation pattern. This is an excellent example of how the falling wedge pattern can form on a price chart in the current market environment.
Using the general rule that was explained above, we can clearly see that the price broke out in the direction of the steeper side as expected. The rationale behind this rule is that a wedge usually represents a heated battle for control of an asset’s price between bullish and bearish traders.
The side that wins is the side that does not spend all its buying power on the battle, allowing the other side to have more control. In the case of a falling wedge, it is the bears who push the price lower at a stiff incline. The bullish traders wait for the bearish traders to exhaust their buying power before swiftly coming in at the wedge’s tip to push the price much higher.
The bottom line
The key to trading the falling wedge and triangle patterns is to understand the general rule that price typically breaks out in the direction of the steeper slope, which in this case is the upward slope. This rule applies to both types of wedges and triangles, except for the symmetrical triangle, which rarely reveals the most likely price breakout direction.