Rising and Falling Wedges are one of the most interesting patterns in technical analysis and pattern recognition. What distinguishes them from triangle consolidation patterns is that price forms an upward or downward sloping coil that precedes the price move. Ascending or Descending Triangles have one trendline that is parallel to the X-Axis while neither trendline is parallel in Wedge Formations.
Here are two examples of the Rising Wedge Pattern, with the first being an Idealized Representation while the second is a real-world example.
What characterizes the Wedge pattern is the converging slope of both trendlines. The trendlines converge to meet at the Apex, though price is expected to eject out of the pattern prior to reaching the full apex (point at which the trendlines converge).
Classic Technical Analysis states the following:
- Rising Wedges are Bearish Reversal Patterns
- Falling Wedges are Bullish Reversal Patterns
While this is not always the case, it is the classic interpretation of the pattern, which gives excellent risk-reward when traded.
How to Trade the Wedge Patterns
For this example, let us assume we have a rising wedge that forms after a lengthy price advance. Let us assume the pattern is a bearish reversal pattern and we are expecting a market top.
A rising wedge needs at least four ‘touches’ or tests of a trendline to confirm the pattern. Remember, a trendline needs at least two points to confirm it as valid. Generally, upon the fourth touch (or test), we would want to be waiting to enter on a breakdown of the lower trendline and place a stop above the upper trendline.
For a more aggressive method of trading rising wedges, you can enter short inside the consolidation inside the 5th swing in price to try for a better execution price. For falling wedges, you would buy on the 5th swing inside the converging trendlines and place a stop beneath the lower trendline.
Most wedges will break-out of the consolidation range anywhere from 66% to 80% of the way to the apex, though some wedges can wait until price reaches the apex for the actual breakout to occur.
The wedge is a consolidation pattern, and as such, we would expect to see the volume trend decline (reduce) as either the Rising or Falling Wedge pattern develops, and then expand as price breaks outward from the pattern. Your confidence is decreased if we see volume surging during the formation of a suspected wedge.