Wedge Types
Let's start with the main thing: a wedge is a chart figure that is formed during price fluctuations in a narrowing channel. The two types of the pattern:
- Bearish or descending
- Bullish or ascending
Let's take a look at both types with chart examples.
Descending Wedge
A bearish wedge is built in a market that makes highs and lows that are constantly declining. In this case, the amplitude of the price movement decreases. Support and resistance levels are built along the highs and lows which are directed to the downside and tend to each other. These lines are drawn at at least two extremes, preferably, three.
A descending wedge can form on any trend:
- If a bearish wedge occurs on an uptrend, then the price continues to rise again after a short pause during the formation of the pattern.
- A descending wedge on a bearish trend indicates an imminent chart reversal to the upside.
Descending Wedge
- Uptrend
- Downtrend
- Resistance
- Support
- Declining highs
- Declining lows
- Breakout - entry point
- Distance to exit point
Ascending Wedge
A bullish wedge is built on at least two (or better three) rising extremes. These peaks are used to draw support and resistance that are directed to the upside and strive towards each other.
An ascending wedge can also form on both trends:
- When the bulls lose their strength, the price starts to fluctuate more often and forms a bullish wedge. At some point, the bears gain the upper hand and the market turns down.
- A bullish wedge on a bearish trend also becomes a powerful reversal signal. When price breaks through the lower edge of the wedge, the market declines sharply to the downside.
Ascending Wedge
- Uptrend
- Downtrend
- Resistance
- Support
- Rising highs
- Rising lows
- Breakout - entry point
- Distance to exit point
Trading strategy
The steps to make are quite simple:
- Draw the resistance and support levels at highs and lows.
- If the wedge is ascending, wait for the breakout of the support level and open a short position. On the descending wedge, open a buy trade after the breakout of the resistance level.
- The trade exit is usually set at a distance equal to the widest part of the wedge.
- The market might return to the price level for retesting. At this point, you can open a repeated position in the same direction: sell trade for an ascending wedge and buy trade for a descending one.
As you can see, trading this pattern is very easy. The wedge doesn’t appear as often as the flag, for example, but gives a fairly accurate signal of an imminent reversal. If in doubt, wait for the candlestick to close in the desired direction before entering the trade. Follow the charts and good luck!