Rising and Falling Wedge Patterns: How to Trade Them

On average, you may only find one tradable falling broadening wedge pattern each month. And that assumes you’re consistently scanning for these formations and trading a couple of dozen currency pairs. Often recognized as a reversal pattern that occurs after an extended move up or downwhere the price action “fans out” from the starting point. Because the trend was losing steam and a reversal was likely to occur, we could look for a short entry when the price broke outside the formation. The horizontal trend line can act as a support or resistance level, depending on where the formation appears on a chart.

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Join thousands of traders who choose a mobile-first broker for trading the markets. Harness the market intelligence you need to build your trading strategies. Deepen your knowledge of technical analysis indicators and hone your skills as a trader. Volatility grows throughout the pattern, as bulls and bears battle to take control. If it breaks out through support instead, the pattern has failed.

Bulkowski on Descending Broadening Wedges

https://g-markets.net/ FX or CFDs on leverage is high risk and your losses could exceed deposits. It is easy to detect that the mean values are somewhere in the shaded area. As you can see, the downward and upward expansions resulted in a divergence from these mean values. Let’s imagine the EUR/NZD market has been decreasing for some time because interest rates in New Zealand have been improving compared to the eurozone.

Open the charts of the currency pairs you’re interested in trading on a longer timescale, such as daily or weekly. As a result, you can utilize a greater stop loss and set your profit goal further out to capture a larger price move. Your might place your stop loss above the wedge, and your take profit can be placed well below.

The target is the full height of the pattern, from the lowest low to the highest high forming the trendlines. Watch out for price reversing at the upper trendline on the fourth touch. Broadening Wedges are plentiful in price charts and can provide good risk and reward trades. The broadening aspect of them suggests increasing price volatility and increasing volume this spells out opportunity. The profit target is calculated by taking the height of the back of the wedge and by extending that distance up from the trend line breakout.

Placing your stop loss on a falling wedge

FCX provides a textbook example of a falling wedge at the end of a long downtrend. A retest of the broken level offers the best risk to reward ratio but keep in mind that this can also cause you to miss the entry. The first and most important thing to consider are the time frames you will use. While I occasionally trade from the 1-hour chart, I conduct 90% of my trading from the 4-hour and daily time frames. Although it was an impressive move, the fact that prices didn’t retrace a portion of the breakout meant the risk to reward was less than favorable. The first is to use horizontal support or resistance levels to time your exit.

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However, this is just a tendency and not necessarily a requirement for defining an ascending broadening wedge. The falling wedge pattern will also be outlined using two contracting trendlines. But in this case the two converging trendlines that contain the price action will be pointing downward. The upper trendline represents diagonal resistance, while the lower trendline represents diagonal support. A descending broadening wedge pattern is the mirror image of the ascending broadening wedge. A wedge pattern is considered to be a pattern which is forming at the top or bottom of the trend.

How to Trade the descending Broadening Wedge?

In essence, both continuation and reversal scenarios are inherently bullish. This article explains the structure of a falling wedge formation, its importance as well as technical approach to trading this pattern. We will discuss the rising wedge pattern in a separate blog post. This is particularly true if you spot a falling wedge that doesn’t follow an uptrend, which is rarer but can arise.

To begin, open a short-term chart, such as the 5-minute or even 1-minute chart, of a major currency pair (EUR/USD, GBP/USD, etc.). The money acquired or paid in this manner adds up over time, making interest rate differentials difficult to overlook if you intend to retain a position for the long run. This is because you always pay interest on the currency you short and gain interest on the currency you long when you hold a forex trade overnight. The currency pair you choose is less crucial in this case, but try to stick with more active pairs because they are less expensive to trade and provide more opportunities. You’ll know a price has reached a support zone when you see that the market hangs around an area where it has often turned around in the past.

Forex Wedge Patterns in 2023: The Ultimate Guide

Experience award-winning platforms with fast and secure execution. Testimonials appearing on this website may not be representative of other clients or customers and is not a guarantee of future performance or success. And tracking results isn’t going to make you money, at least not directly. Perhaps this is why it’s one of the most overlooked steps of becoming a successful Forex trader. As with everything you do while trading the Forex market, it’s important that you track your results both good and bad.

In the case of the USDCHF chart above, that’s a 4-hour close below support. Notice how we’re entering on a retest of a former intraday swing low. This retracement helped offset the risk to some degree by allowing us to secure a favorable risk to reward ratio. Likewise, a structure that’s developing on the daily time frame would need a daily close beyond support or resistance for confirmation.

You’ll get full access to our platform, preloaded with virtual funds. So, you can test out your wedge trading strategy with zero risk. Rising wedges typically appear after uptrends, acting as a bearish reversal pattern.

Rising wedges don’t just look like the opposite of falling ones. They signify the opposite price action too, with the upward momentum of the pattern itself set to turn into a renewed downtrend if the market breaks down through support. While this article will focus on the falling wedge as a reversal pattern, it can also fit into the continuation category. As a continuation pattern, the falling wedge will still slope down, but the slope will be against the prevailing uptrend. As a reversal pattern, the falling wedge slopes down and with the prevailing trend.

And this pattern completes when the price breaks the resistance line. This phrase means that if you have a rising wedge pattern, you anticipate the forex market to decline by an amount equal to the size of the formation. If you have a falling wedge, you anticipate the FX market to rise by an amount equal to the size of the formation.

The actual distance will be determined by your estimate of what price the fundamentals justify. First, open a daily chart of the currency pair you wish to trade. Transaction costs won’t have a significant impact on your bottom line because your holding time is long, so you can trade practically any pair. Your stop loss should be above the resistance and your profit objective should be a few pips below. Landing the perfect forex wedge strategy—and knowing how to recognize all the different variations of the pattern—is no mean feat.

Enter the market by placing a buy order on the break of the top side of the wedge. After some practice, you’ll be ready to look into how you can create your own trading strategy. As you can see in the chart above, the market plummeted back when the price increase came to a halt. However, it’s also possible that the rally hasn’t achieved its full potential, and that the short reversal will be followed by a new move higher.

As we can see from the price chart, the price action leading up to the rising wedge was clearly bullish. The most common falling wedge formation occurs in a clean uptrend. The price action trades higher, however the buyers lose the momentum at one point and the bears take temporary control over the price action. The broadening wedge pattern is a type of wedge that looks a bit different to the ascending and descending variants. Instead of pointing towards each other, the support and resistance lines diverge – hence the ‘broadening’ in the name.