Hello and welcome to another edition of the bulls vs the bears. Last time we touched on How To Ring In The Profits Trading The Head And Shoulders Pattern.This week we continue our series on trading chart patterns by looking at how to trade and cash in on wedge chart patterns. Now wedge patterns are continuous or reversal patterns where traders are contemplating their next move at the end of a trend. When you see this this information, it means traders are thinking about where to drive the currency pair to next.
So when you see a wedge chart pattern it means forex traders are contemplating on where next to drive price. Wedge chart patterns could be either continuous or reversal patterns.
What are we going to do? Of course we’ll look at a few wedge patterns. And then w are going to learn how to trade them.
A rising wedge takes shape when price takes a breather between support’s upward slope and resistance lines. In plain English, price goes into consolidation between these two lines. You will find that the support slope is steeper than the support lines. In this setup you have lows forming faster than highs. This leads to the wedge-like formation that we’re talking about.
When price consolidates be ready for a spectacular breakout. This breakout could end up at either the top or the bottom. if the rising wedge forms after the bulls shift ends(or end of uptrend), it means the bears shift is about to start. In other words a reversal pattern is about to commence. However, if a rising trend forms during the downtrend, it means a continuation of the move. In other words the bears are still running the show. Regardless’, the formation of this pattern can only mean one thing – Get your orders ready.
Let’s take a look at the price action in a rising wedge pattern
Ladies and gentlemen, here is a rising wedge formed at a end of an uptrend. Notice how price action is forming new highs, but at a slower pace compared to the lows.
Now let’s watch price breaking to the downside in the next graphic
Ladies and gentlemen, the bears have have broken to the downside. When this happens, it means it’s time to go short. In other words, put in your sell order. The bears have broken through the trend line, meaning get ready for the beginning of a down trend,
Like we discusses in the last lesson, the price movement after the breakout is the same size as the height of the wedge pattern,
Now let’s look at the rising wege pattern in the bearish continuation signal
Price descends from the downtrend.And then it goes into consolidation, resulting into higher highs and even higher lows(Would you believe?) Now let’s see price break down to the downside
Now price has broken at the downside. But the bears are like”Who cares? We’re still moving down the slope. That’s why it’s called the a continuation signal. And the bearish move is the same size as that of the height of the formation. Anh when that shapes up, it’s time to sell.
Last but not the least is:
Just like the rising wedge, the falling wedge acts as a reversal or continuation signal. The reversal signal is formed at the end of the bears shift(downtrend), suggesting that the bulls are about to start their shift. In other words un uptrend is about to commence.
The continuation signal is formed at the uptrend. This means the bulls continue their upward surge. Mind you, unlike the rising wedge, the falling wedge is a bullish pattern, Let’s take a look at the price action in the falling wedge pattern
Here the falling wedge is in reverse mode. Notice the creation of lower highs and lower lows as a consequence of this reverse signal. This comes about at the end of the bears shift(downtrend).
Also, see how the highs’ trendline is steeper than the lows, trendline. Now let’s see the highly anticipated breakout by the bulls.
The bulls launch a humongous surge for the hills after breaking breaking above the top of the wedge.The surge is equal to the height of the formation -as indicated by the vertical line. The surge upwards is the same size as that of the height of the formation.
Now let’s look at where the falling wedge acts as a continuation signal
Here price pauses briefly(or consolidates) after a strong push. This simply means that traders are recouping to consider their next move. It also looks like price is raring for one last surge. Which direction will it go?Let’s find out in the next graphic\
See price break to the top side and head for the mountain. If you are smart. you can place a buy order above the falling trend line connecting the highs. You should be able to grab some much needed cash along the way. You can take your profits at the height of the formation, as indicated by the blue line.
If you want more profits, just lock down a portion of your profits at the height of the formation. You close down part of your trading position and let the rest of your trading position ride with the trend.
For more information on highs and lows look up Trade Trends With Price Action Analysis as Your Weapon of Choice
IF you want to know more about trend lines, look up look up How to Cash In Drawing and Trading Trend Lines
That’s a wrap for “How to Trade and Cash in on Wedge Chart Patterns.” Wedges signal a time out in the current trend. The forex traders are basically deciding which direction to take the currency pair. Wedge patterns could be either continuation or reversal patterns.
Next time we will look at how to us e rectangle patterns to trade breakouts
Til next time take care
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