How can I recognize a wedge pattern?

Wedges are price patterns that indicate a reversal is imminent. Unlike symmetrical triangles, which are continuation patterns, wedges will continue in their upward or downward progress until the pattern completes and a breakout occurs in the direction opposite that of the wedge. A downward pointing wedge, known as a falling wedge, is actually a bullish signal. Conversely, an upward pointing wedge, or rising wedge, is a bearish signal. They almost always form within the context of an existing trend, although rarely they occur at the top or bottom of one. A wedge is drawn by connecting multiple high swings and low swings within a trendline; you generally need a minimum of four reversal points to form a wedge, although many go on to have six or more as with a triangle. As the wedge closes, watch for the price to break out of the pattern; this breakout completes the wedge and is a trade signal. On a falling wedge, the breakout is a buy signal, and on a rising wedge, the breakout is a sell signal. Volume should decrease the further you get into the wedge, although this isn’t always the case. Volume should, however, increase on the lows in a bearish wedge and the highs in a bullish wedge. Once the pattern is completed with a breakout, you can expect to see the price move at least as much as the differential at the start of the wedge pattern. In the Johnson & Johnson example above, the difference at the beginning of the pattern was about $10, from $125 to $135. Based on that, you would expect the price to hit at least $145. In this case, it peaked at $149 before the December 2018 correction. Occasionally, a rising or falling wedge can actually be a continuation pattern as opposed to a reversal. These can be more difficult to identify, but they typically occur against the prevailing trend. In other words, you may see a rising wedge within the context of a downtrend or a falling wedge in the context of an uptrend. In these situations, the wedge is a continuation pattern and is not indicative of a reversal, so you have to be cautious when you see a wedge forming against the trend. If you’re trading wedges, you can use them to estimate the size of the breakout based on the height of the pattern, but you should know that the price could run much further depending on the momentum. If you’re short in a falling wedge, you should buy to cover if the price breaks through resistance. The bad thing about trading wedges is that they can last a long, long time, and you can get ahead of yourself thinking it’s bound to end as it narrows into a tighter and tighter price range. Too many novice traders jump the gun anticipating the breakout, when the smarter move would be to wait until the breakout actually occurs to trade.