A wedge pattern can signal either a bullish or bearish reversal pattern.
They are commonly found on all time frames across the charts. However, if one doesn't know how to correctly identify a wedge pattern, they will start to see them everywhere.
Part of the process is using the trend lines drawing tool to highlight the wedge pattern.
You should never try to force the drawing of such patterns to fit your bias. Instead, look for signs of confluence such as declining volume and smaller moves in price action as the pattern reaches its completion.
A wedge pattern can signal either a bullish or bearish reversal pattern.
They are commonly found on all time frames across the charts. However, if one doesn't know how to correctly identify a wedge pattern, they will start to see them everywhere.
Part of the process is using the trend lines drawing tool to highlight the wedge pattern.
You should never try to force the drawing of such patterns to fit your bias. Instead, look for signs of confluence such as declining volume and smaller moves in price action as the pattern reaches its completion.
Furthermore, you will also need a price target for where you expect to take profit and thus we refer to Fibonacci levels.
Risk management is a given with any trade, be aware of liquidity grabs/stop hunts and fake-outs with such a pattern. Price may momentarily leave the pattern range to stop out those who entered prematurely, only then to re-enter the pattern with continuation.
Have your stop loss set accordingly.
As always, you never want to enter a trade based on this pattern alone. Always have confluence to reinforce your strategy.
NOTE: There are patterns similar to the wedge such as; pennants, and triangles, be sure not to get them confused.
Key Points of the Lesson
UTILITY
Wedges can provide powerful trend reversal entries.
There are two types of wedges: rising & falling wedges.
Used on all time frames, higher timeframe is stronger.
IMPLEMENTATION
Formed by using two trendlines with at least 5 touches (3 and 2).
Volume should decline as the wedge forms.
Target the 0.382, 0.618 Fibonacci retracements and the start of the wedge formation.
Three possibilities to trade a wedge
Entry at the apex with other confluence.
At the break of the trendline with other confluences (entry with market order).
At the backtest of the trendline break.
RISING WEDGE PRACTICAL EXAMPLE
TIPS & TRICKS
Impulses should become weaker as volume decreases.
It’s possible to have more than 5 trendline touches.
Higher success probabilities on higher timeframe.
Can be used in Elliot Wave theory:
They are described as ending diagonals.
Wave 3 is shorter than Wave 1.
Wave 5 is shorter than Wave 3.
FALLING WEDGE PRACTICAL EXAMPLE
TAKE HOME MESSAGE
Wedges can provide powerful reversal entries.
Target 0.382, 0.618 and full length.
Monitor volume and look for confluence.