Triangle wedge patterns (Rising Wedge Pattern and Falling Wedge Pattern) or simply wedges are two of the most basic chart patterns that commonly occur during an uptrend and the downtrend. After a prolonged and a strong trend the appearance of either of these two wedge patterns signals a change of trend or a correction to the trend. Wedge patterns although simple to spot requires good practice in not only spotting them but also trading the wedges. Therefore, the wedge or triangle wedge patterns are not recommended for beginners.
The triangle wedge patterns occur at the top or the bottom. Typically when an ascending wedge is formed at the top of an uptrend, it signals that prices are likely to correct lower (or at times signals a change of trend). Likewise, when a descending wedge pattern appears near the bottom of a downtrend, it signals a correction or a change of trend.
The triangle wedge patterns are typically as shown in the chart below.
Rising Wedge Patterna and Falling Wedge Pattern
Why and when do wedge patterns occur?
The triangle wedge patterns occur when prices start to lose momentum which happens near the tops and the bottom of a strong trend. The wedge patterns usually indicate the end of momentum and thus signals a correction in the near term. Traders should note that the wedge patterns are typically counter trend. Meaning that, in most cases, the wedge patterns signal a correction to the main trend.
How to trade the wedge pattern?
After identifying the wedge pattern, long and short positions are taken when a falling wedge or a rising wedge is identified respectively. The general entry in the wedge patterns are taken as outlined below.
Rising Wedge Pattern Trading Example
The first step is to look for a strong uptrend in the markets which is a precursor to a rising wedge pattern. After the strong momentum led uptrend, prices start to consolidate making higher highs and higher lows. Once a triangle or a wedge pattern is identified, take a short position at the lowest high in the rising wedge pattern and set the target to the lowest low while stops are placed at the highest high on the wedge. The following chart below gives an example of a rising wedge pattern. Alternatively, short positions can be taken on breakout of the wedge pattern.
In the chart above we first notice that prices are in an uptrend and soon start to consolidate while posting higher highs. After connecting the highs and the lows and the wedge pattern is formed, we then take a short position on breakout of the triangle/wedge pattern, targeting the lowest low on the wedge while placing stops at the highest high.
Falling Wedge Pattern – Trading Example
For trading the falling wedge pattern, we first look for prices to post a strong downtrend in the market and then start to identify consolidation areas when prices make lower lows and lower highs. Connecting the highs and lows and plotting the wedge pattern, we then take long positions accordingly as shown in the chart below.
In the above chart, a falling wedge pattern is identified after a strong previous downtrend. Long positions are taken on breakout from the wedge pattern with stops set to the previous lows and targeting the highest high on the wedge pattern.
Trading Triangle Wedge Patterns – What You Must Know
Chart patterns are subjective and are not foolproof. Therefore it is essential traders get good chart time in practicing this chart pattern. It is always advised to trade only the best risk/reward set ups as chart patterns do fail and do not work 100% of the time. The triangle wedge patterns can be found in any time frame but it is advised to only trade from the 30 minute time frame and higher.
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