Before reading this lesson, you should have read through:

The wedge pattern can be used as either a continuation or reversal pattern, depending on where it is found on a price chart. There are two types of wedge pattern: the rising (or ascending) wedge and the falling (or descending wedge).

This lesson shows you how to identify the rising wedge pattern and how you can use it to look for possible selling opportunities.

Identifying the rising wedge pattern in an uptrend

A rising wedge in an uptrend is considered a reversal pattern that occurs when the price is making higher highs and higher lows. As the chart below shows, this is identified by a contracting range in prices. The price is confined within two lines which get closer together to create a pattern. This indicates a slowing of momentum and it usually precedes a reversal to the downside. This means that you can look for potential selling opportunities.

Ascending wedge

In the following exercise, you can practice how to identify a rising wedge in an uptrend:

Identifying the rising wedge pattern in an downtrend

A rising wedge in a downtrend is a temporary price movement in the opposite direction (market retracement). As in the case of a rising wedge in a uptrend, it is characterised by shrinking prices that are confined within two lines coming together to form a pattern. It indicates the continuation of the downtrend and, again, this means that you can look for potential selling opportunities.

The charts below show an example of a rising wedge pattern in a downtrend:

Ascending wedge 3

You can practice how to identify rising wedges in a downtrend in the following exercise:

Trading the rising wedge: method one

Once you have identified the rising wedge (whether in a uptrend or downtrend), one method you can use to enter the market with is to place a sell order (short entry) on the break of the bottom side of the wedge. In order to avoid false breakouts, you should wait for a candle to close below the bottom trend line before entering.

The chart below demonstrates the area where price breaks the lower support trend line and where you should place the sell order:

Ascending wedge method 1 entry

number_1 Area where price has broken the lower support trend line
es1 Sell order (short entry)

The chart below shows where you should place the stop loss. This is placed above the top side of the rising wedge.


Ascending wedge method 1 stop loss

number_1 Area where price has broken the lower support trend line
es1 Sell order (short entry)
sl2 Stop loss

Finally, the last chart shows the profit target. This is measured by taking the height of the back of the wedge and by extending that distance down from the trend line breakout.

Ascending wedge method 1 take profit

number_1 Area where price has broken the lower support trend line
number_2 Back of the wedge
number_3 Distance between entry (sell order) es1 and take profit tp3 (this is the same height as the back of the wedge number_2)
es1 Sell order (short entry)
sl2 Stop loss
tp3 Take profit

In the following exercise, you can practice where to place the entry, stop loss and take profit when trading the rising wedge according to method one:

Exercise 1: Where would you place your entry, stop loss and profit target? Show exercise

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Trading the rising wedge: method two

The second way to trade the rising wedge is to wait for the price to trade below the trend line (broken support), as in the first example. Then, you should place a sell order on the retest of the trend line (broken support now becomes resistance).

The chart below shows how to place the sell order:

Ascending wedge method 2 entry

number_1 Point at which the price finds resistance at the lower part of the wedge.
es1 Short entry

The stop loss would go above the new resistance area, as shown by the following chart:

Ascending wedge method 2 stop loss

number_1 Point at which the price finds resistance at the lower part of the wedge
es1 Short entry
sl2 Stop loss

Finally, the last chart shows the profit target. As in method one, this is done by taking the height of the back of the wedge and by extending that distance down from the entry:

Ascending wedge method 2 take profit

number_1 Point at which the price finds resistance at the lower part of the wedge
number_2 Back of the wedge
number_3 Distance between entry (sell order) es1 and take profit tp3, same height as back of wedge number_2
es1 Sell order (short entry)
sl2 Stop loss
tp3 Take profit

Exercise 1: Where would you place your entry, stop loss and profit target? Show exercise

Summary


  • … the rising wedge pattern signals a possible selling opportunity either after an uptrend or during an existing downtrend.
  • … the entry (sell order) is placed either when the price breaks below the bottom side of the wedge or the price finds resistance at the lower trend line.
  • … you can place the stop loss above the back of the wedge.
  • … the take profit target is measured by taking the height of the back of the wedge and by extending that distance down from the entry.

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  • Just for clarification, are those the same known as channel down/up? Thank you
  • Hey Petry05,

    A wedge is similar to a channel but not the same.
    The difference with a channel is that the upper and lower trendline are slightly moving towards each other while in a channel the trend lines are parallel to each other. A channel indicates a trend and possible entry and exit points within that trend.
    a wedge is a reversal sign so if the wedge is going up it often breaks to the downside to either continue a trend which was already down on a bigger timeframe or start a new trend.
  • Oh ok, so a channel is what you call Bullish/Bearish Rectangle. Thank you.
  • uhm bullish bearish rectangles are a sort of channel yes.
    But channels can also be in a trend
    read more about it here
  • I'm wondering if there is a way to identify a wedge (trending down) at the beginning of its formation, to place pending order if I'm not around my computer, so I wouldn't have to wait for the completions of the wedge patteren to place an entry.
  • Hi Deeny,
    i am sure it is possible. Are you talking about a falling wedge? Keep in mind you need minimum of 4 touch points before you can identify the pattern. Then you can place a buy either above the upper trend line or if already broken a limit order for a retest. Pretty much the same as above. Obviously the risk is that you are not there when the breakout occurs so if the candles don't look to convincing you won't have the chance to revise your plan. Hope it makes sense.
    Regards.
    Peter
  • Thank you Peter
    I'm talking about the faling wedge. It sounds like I need to stay infront of my computer to make sure the pattern stay on downtrend and it dosent reverse to the upside.

    Thanks again for your response.
  • Oh i might have misunderstood something! ... A falling wedge is a reversal pattern, that is you want to trade it to the upside when the pattern breaks. That's what the (next) lesson is about, the current one deals with rising wedge. Of course you can trade inside the wedge as well just like you would with a trend line strategy smile
  • deeny111:
    Thank you Peter
    I'm talking about the faling wedge. It sounds like I need to stay infront of my computer to make sure the pattern stay on downtrend and it dosent reverse to the upside.

    Thanks again for your response.

    Hi Deeny,

    there is ofcourse also your stop loss smile
    Which usually is put above or below thetrendline of the wedge.
    So you should always give it a bit of slack but then when the trendline is broken the stop loss should protect you from the reversal .

    Regards,
    Timothy
  • so rising wedge is a reversal signal in uptrend
    but
    is a continuation signal in downtrend
    right ?
  • Hi Harnas,
    Yes, any wedge once resolved signals potential direction in the opposite direction of the wedge.
    Regards.
    Peter
  • hi, in question number 3. The profit should be the height of the back part from the point of crossing or my entry?

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