What's a Wedge? - ChiefIdea

Introduction

A wedge pattern is a type of market trend that can be seen on a technical analysis chart (stocks, bonds, futures, etc.).

The pattern is made up of a narrowing price range and either an upward price trend (called a rising wedge) or a downward price trend (known as a falling wedge).

A pattern that forms at the top or bottom of the trend is called a "wedge pattern." It is a type of formation in which trading takes place along straight lines that come together to make a pattern. The wedge should take about 3 to 4 weeks to finish. 

This pattern has a rising or falling slant that points in the same direction. It's not the same as a triangle because both of its sides either go up or down.

The price breaking out of the triangle is another difference. The falling and rising of wedges is only a small part of the major or intermediate trends. 

They are not considered major patterns because they are only used for small trends. Once that main or basic trend starts up again, the wedge pattern is no longer a good technical indicator.

KEY POINTS

• Most wedge patterns are made up of trend lines that come together over 10 to 50 trading periods.
• Depending on which way they go, the patterns can be thought of as either rising or falling wedges.
• When it comes to predicting price changes, these patterns have a very good track record.

Let's talk about how to trade with these two types of wedges:

What's a Rising Wedge Pattern?

When stock prices have been rising up for a certain amount of time, two trend lines that meet form a rising wedge.

Before the line converges in the middle, sellers enter the market, which slows down the prices.

This causes the prices to break from the upper or lower trend lines, but most of the time the prices break from the trend line in the opposite direction.

Depending on where the rising wedges are, the direction of the trend will either continue or change:

Rising Wedges in Uptrend:

• In an uptrend, a rising wedge shows that the uptrend will turn into a downtrend.
• It happens when the prices make higher highs and higher lows than they have in the past.
• It gives traders the chance to sell short on the market.

Wedges rising Up in a Downtrend:

• The Rising Wedge in a downtrend shows that the previous trend will keep going.
• It happens when the prices make higher highs and higher lows than they have in the past.
• It gives traders the chance to take average positions in the market or short positions.

What's a Falling Wedge Pattern?

When stock prices have been falling down for a certain amount of time, two trend lines meet to form a "falling wedge."

Before the line meets, buyers start to enter the market. As a result, the price drop starts to slow down.

Because of this, the prices move away from the upper trend line. Depending on where the falling wedges land, it shows if the trend will continue or change:

In an uptrend, falling wedges:

• The falling wedge in the uptrend shows that the uptrend will keep going.
• It happens when the prices go up and down less than they did before.
• It gives traders a chance to buy positions or to average their market positions.

In a downtrend, falling wedges:

• In a downtrend, the Falling Wedge shows a change to an uptrend.
• It happens when the prices go up and down less than they did before.
• It gives traders chances to buy positions in the market.

How was the Rising and Falling Wedge Pattern Made?

The Rising and Falling Wedge pattern is shown in the uptrend and downtrend below:

Using the Rising Wedge Pattern to Trade:

The Sundaram Finance Ltd. Daily chart shows an example of a Rising Wedge that formed in a downtrend.

The line below that meets in the middle is called the support line. When the prices break through the support line, the downtrend is sure to keep going.

Stop Loss:

Stop-loss can be put on the rising wedge line at the top.

Price Target:

The price goal is the same as the height of the wedge's back.

Using a falling wedge pattern to trade:

When prices break above the upper trend line that is coming together, traders should buy.

Stop Loss:

Stop-loss can be put at the bottom of the line, which looks like a falling wedge.

Price Target:

The price goal is the same as the height of the wedge's back.

Conclusion

Wedge patterns are often reversal patterns. A rising wedge is bearish, while a falling wedge is bullish.

These patterns can be hard to spot and understand on a chart because they look like triangle patterns and don't always form cleanly.

So, it's important to be careful when trading wedge patterns and to use trading volume to confirm a suspected breakout.