Rising Wedges Explained for Dummies

What is a rising wedge?

A rising wedge is a bearish chart pattern used in technical analysis comprising two upward sloping and converging trendlines, respectively connecting a series of higher pivot highs and a series of higher pivot lows.  

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The two wedge patterns

The rising wedge, also called the ascending wedge, is one of two wedge patterns, the other one being the falling or descending wedge. A wedge pattern signals a pause in a current price trend and can be observed as either a continuation or reversal pattern, depending on where it occurs on a price chart. A wedge formation is an indication that forex traders are still deciding where to take their next trading position. A falling wedge is a chart pattern that signals future bullish movement, occurring when price moves in an upward direction, with the trend lines sloping down. A rising wedge is a chart pattern that indicates future bearish price movement that takes place in a downward price trend, with the trend lines sloping up.  

The forming of a rising wedge

A rising wedge chart pattern is formed when the price movement of a currency or security (asset) tightens and consolidates between two upward sloping and converging trend lines, respectively the support and resistant line. To qualify as a rising wedge, both the support and resistance lines have to move in an upward direction, with the support line representing a steeper inclination than the resistance line. The resistance line connects the higher highs while the support line connects the higher lows. To be considered a valid rising wedge, the highs and lines must be in line. Put differently, a rising wedge is a chart pattern that starts wide at the bottom and narrows as the trading range contracts and the prices increases. Rising wedges can form when the price of a currency/security is an uptrend or downtrend:

• In an uptrend, there is an indication that traders are reassessing the bullish trend.
• When the price of a currency/security is in a downtrend, it signals a short-term pause before the bears take control again.

   

Identifying a rising wedge chart pattern

A rising wedge pattern is referred to as a bearish chart pattern because it suggests that a bear market is imminent after a period where the bulls were in control. The rising wedge is considered a terminal chart pattern, indicating that a specific trade pattern must eventually come to an end. When the rising wedge is in line with the current market trend, the probability of a market reversal is high. However, when there is a contradiction between the rising wedge and the current price trend, the change for a continuation of a price trend is good.  

Identifying the reversal pattern

When the price of a currency/security is making higher highs and higher lows in a rising wedge in an uptrend, it is considered a reversal pattern. Put in other words, usually, a rising wedge formed after an uptrend leads to a reversal (a downtrend). Typically, this pattern is identified by a contracting price range in which the price is fenced in between two trend lines that get closer together to create a wedge pattern. This signals a decreasing of price momentum, usually setting the scene for a reversal to the downside. This implies that traders can look for potential selling opportunities.  

Identifying the continuation pattern

Another example of a rising edge formation is when the wedge pattern acts as a bearish continuation signal. A rising wedge in a price downtrend is a temporary price movement in the opposite direction, also called market retracement. This pattern occurs when the price came from a downtrend before consolidating, indicating higher highs and even higher lows. In line with a rising wedge in an uptrend, the wedge pattern is recognised by decreasing prices that are closed in between two price trend lines, respectively the support and trend line. Typically, in this case, the price breaks to the downside, continuing its downward trend. As with a rising wedge in an upward trend, this is an indication that traders can look for potential selling opportunities.  

Trading the rising wedge

Rising wedge patterns are typically helpful to predict general price trends. Generally, this type of pattern will affect a breakout towards a reversal about two-thirds of the time. Ensure that the rising wedge pattern is valid. The wedge pattern is considered valid if the price touches the support line at least twice and the resistance line three times or touches the support line at least thrice and the resistance line two times. Once you have confirmed the validity of the rising wedge (whether in an uptrend or downtrend) you can place a sell order (take a short position) on the break of the bottom side of the wedge. To avoid false breakouts, a candlestick should close below the bottom trend line before entering. A stop-loss should be placed above the top side of the rising wedge. Finally, the profit target is measured by taking the height of the back of the wedge, extending that measured distance down from where the trend line breakout occurred.  

Advantages of rising wedges

• Rising wedges have a relatively low risk-high reward ratio.
• Rising wedge patterns are relatively easy to use and quite common among day traders.
• They are easy to use with other technical indicators, such as the Fibonacci retracement.
• They can be useful at any time period.
• Wedge patterns have a high degree of accuracy.
• A rising wedge pattern is considered an important sign that a reversal will eventually happen.
• They can be utilised to trade currencies and various types of assets, such as shares and commodities.

Disadvantages of rising wedges

• There are many false patterns or patterns in disguise that appear as rising wedges.
• Rising wedges may show ambiguous behaviour, making interpretation difficult.
• They can take some time to form - a few hours or even days.
• Novice traders can confuse wedge patterns with other chart patterns like flags and pennants.

    Note: This article does not intend to provide investment or trading advice. Its aim is solely informative.

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