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  1. Beginner
    Early Stages for Beginners
    8 Topics
  2. Forex Terminology
    11 Topics
  3. Margin & Leverage
    2 Topics
  4. Personal Psychology Questions
    2 Topics
  5. Psychology for Beginners
    7 Topics
  6. Intermediate
    Identifying Scams
    2 Topics
  7. Brokers for Beginners
    5 Topics
  8. Technical Analysis
    13 Topics
  9. Market Structure
    5 Topics
  10. Completion
    Risk Management for Beginners
    8 Topics
  11. Fundamental Analysis
    9 Topics
  12. Advanced
    Using Indicators
    6 Topics
  13. Technical Analysis (Part 2)
    8 Topics

Wedge Formation Pattern in Trading

A wedge is a trend continuation pattern with converging prices within two-directional trendlines. It can also help us pick a trend reversal, depending on how it forms. It signifies that volatility from the previous trend is decreasing. It may mean that traders are pausing to decide whether to continue in the same direction or not. Wedge formations resemble pennant patterns with minimal differences. Here are the main characteristics:

  • Price Rally: First, the price must rally either upwards or downwards. This happens as the start of the trend.
  • Consolidation: After a period of a strong bullish or bearish price movement, we expect to see consolidation. Price takes a break and pulls back slightly in a narrowing range. This is our wedge pattern.
  • Breakout: A proper wedge formation occurs as a trend continuation pattern. We must see a breakout to confirm that there was a good wedge.

There are only two main wedge patterns that you need to learn:

  • Rising Wedge Pattern
  • Falling Wedge Pattern

A Rising Wedge forms when candlesticks consolidate in between two narrowing upward trendlines. This leads to a wedge-like formation that appears to be pointing upwards. Refer to the illustration below.

Now let’s learn how to find trading opportunities using a rising wedge. A rising wedge signals a trend reversal when it occurs in an uptrend. So traders start looking for opportunities to go short when they spot it. On the other hand, a rising wedge in a downtrend is a strong trend continuation signal. 

Rising Wedge in a Downtrend

Place a pending order at the center of the Rising Wedge formation. This prevents you from catching fake signals. You don’t want to call a trade too early and start nursing drawdowns. At the same time, you want to enter the market when the new trend is still young!

Rising Wedge in an Uptrend

Now let’s look at a Rising Wedge pattern in an uptrend. The formation is similar to that of a downtrend. Only this time, it acts as a trend reversal signal. Stop loss and entry rules are the same whether on an uptrend or downtrend.

Falling Wedge Pattern

A Falling Wedge forms when price consolidates, creating two descending trendlines. The upper trendline shows a reducing gradient, while the lower trendline supports lower lows. In this section, we will apply the reverse of everything we learned about the rising wedge. A falling wedge can help us to identify trend continuation and reversals in the market.

A Falling Wedge in a downtrend tells us we are at the bottom of a trend. You should stay alert not to miss buy signals once you see a falling wedge at the bottom of a trend. Just like a rising wedge, we recommend that you place your buy pending order at the center of the falling wedge to avoid jumping into the market too early.

When a Falling Wedge appears in an uptrend, brace yourself for a strong bullish breakout. Make sure you have a buy order ready before the breakout happens.