In this lesson, we’ll cover the Wedge formation—a pattern that can signal either a potential trend reversal or the continuation of the existing move. There are two main types of wedges: Rising Wedge and Falling Wedge. Rising Wedges often precede price declines, while Falling Wedges tend to foreshadow rallies.
Rising Wedge
Characteristics:
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Forms during short‐term rallies within a longer downtrend, or in the late stages of a bull market.
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Defined by four pivot points that trace two converging, upward‐sloping trendlines.
Breakout:
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Typically resolves to the downside.
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Should occur no earlier than 30% of the pattern’s duration away from the apex to avoid false signals.
Expected Decline:
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Measured from the highest point of the wedge downward; price often targets the nearest clear support zone.
Falling Wedge
Characteristics:
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Commonly appears during corrections within an uptrend.
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Constructed by four pivot points that form two converging, downward‐sloping trendlines.
Breakout:
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Usually resolves to the upside, ideally confirmed by rising volume.
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Should occur no earlier than 30% of the pattern’s duration away from the apex.
Expected Rally:
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Measured from the lowest point of the wedge upward; price often targets the nearest clear resistance zone.
Trading Tactics
Rising Wedge
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Existing Holders: Exit on a confirmed breakdown below the lower trendline.
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Non-Holders: Wait for a decisive downside breakout before considering a short position.
Falling Wedge
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Existing Holders: You may lighten up at the breakout high, then look to repurchase on the subsequent pullback if volume supports the move.
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Non-Holders: Enter on the pullback after a confirmed upside breakout—volume confirmation is essential.
Key Considerations
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Safety Stop: Place your stop-loss just above the wedge’s upper boundary (for a Rising Wedge) or just below the lower boundary (for a Falling Wedge).
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Timing & Volume: A valid breakout should occur within the correct time window and be accompanied by a surge in volume to confirm the move.
Summary
Wedges offer powerful clues about shifts in market momentum. By correctly identifying pattern boundaries, waiting for properly-timed, volume-backed breakouts, and applying disciplined risk management, you can use Rising and Falling Wedges to enhance your trading effectiveness.
