Wedge patterns in forex trading are a valuable tool for traders looking to make informed decisions about the market.
By identifying wedge patterns, traders can gain valuable insights into market trends and make predictions about future price movements.
Whether you are a seasoned trader or just starting out, understanding wedge patterns is a critical aspect of successful forex trading.
In this article, we will take an in-depth look at wedge patterns and explore the benefits of incorporating them into your trading strategy.
Read on to learn more and take your forex trading to the next level.
What is a wedge pattern?
A wedge pattern is a technical analysis chart formation that can occur in an uptrend or downtrend and signals a potential trend reversal. It is characterized by two trendlines that converge towards each other, forming a narrowing triangle shape.
The pattern can be bullish (ascending wedge) or bearish (descending wedge), depending on the direction of the trendlines and the price action within the pattern.
The break of the trendline signals the completion of the pattern and the start of a new trend in the opposite direction.
As you can see in the image above this pattern is formed because of lower highs and higher lows.
These are powerful patterns to spot and can be quite rare on higher timeframes.
Spotting one of these patterns can allow you to get a solid breakout trade and we have a couple of tips on ensuring you can achieve maximum results over time.
Types of Wedge Patterns
There are two main types of wedge patterns: falling wedges and rising wedges.
A falling wedge is a bullish pattern that forms during a downtrend and indicates a potential reversal to an uptrend. These are also known as descending wedges.
The trendlines in a falling wedge converge at a downward angle, with the upper trendline at a steeper angle than the lower trendline.
As the pattern forms, the trading range narrows, indicating a decrease in selling pressure.
A breakout above the upper trendline of a falling wedge can signal a potential uptrend reversal.
On the other hand, a rising wedge is a bearish pattern that forms during an uptrend and indicates a potential reversal to a downtrend.
The trendlines in a rising wedge converge at an upward angle, with the upper trendline at a shallower angle than the lower trendline.
As the pattern forms, the trading range narrows, indicating a decrease in buying pressure.
A breakout below the lower trendline of a rising wedge can signal a potential downtrend reversal.
How To Trade Wedge Patterns In Forex
When trading with wedge patterns, traders can use a variety of strategies.
One common strategy is to wait for a breakout above or below the trendlines and enter a position in the direction of the breakout.
Another strategy is to enter a position upon a trend reversal, as indicated by a move above or below the trendlines.
In this article, we are going to cover the breakout moves.
With all wedge patterns note this, the price can break out on either side of the pattern – it is the breakout direction that we trade.
How To Trade A Rising Wedge
Rising wedges are also known as ascending wedges due to the price action move is creating a squeeze upwards, below I’ll demonstrate a bullish and bearish ascending wedge breakout.
Bearish Rising Wedge Breakout
In this example, you can see after a period of consolidation and the formation of the rising wedge.
Step 1: Identify the rising wedge
You will be able to spot these patterns in candlestick charts easily, but we like to set up our resistance and rising support levels through our line graphs to give us a better representation.
As you can see these lines give us high-quality indications of the price rejection. We must make sure that when we draw these lines they cover the majority of the close prices. This further validates the lines.
When you switch back to candlestick mode, you will notice how accurate they are to trade from.
Step 2: Breakout Confirmation and Trade Execution.
Standard entry and stop loss execution rules apply. (Should go without saying by now!).
As you can see the wedge respected the resistance level (top of the wedge) and broke out to the downside.
Step 3: Calculate Take Profit Level
To do this we take the range from the widest part of the wedge – this gives us an expected breakout range for the market to fall. In this case, it was 22 pips.
In this example, the green bars represent the wedge’s range which was 22 pips.
By using this information we will be able to place a take profit order at 22 pips with a high chance of profiting 22 pips.
Bullish Ascending Wedge Breakout
We use the same rules as the previous example but apply them to when the price breaks out of the wedge formation to the upside.
In the brief example above, you should already understand how to generate the pattern and process from the previous example.
In the example above, we can deduce a 10-pip move to the upside as a minimum target level.
How to trade a falling wedge pattern
Bullish Falling Wedge Breakout
Step 1: Identify the falling wedge
You will be able to spot these formations easily, but we like to set up our falling resistance and support levels through our line graphs to give us a better representation.
The example above, it shows that these lines give us strong indications of the price rejection. We must make sure that when we draw these lines they cover the majority of the close prices. This further validates the lines.
When you switch back to candlestick mode, you will notice how accurate they are to trade from.
Step 2: Breakout Confirmation and Trade Execution.
Standard entry and stop loss execution rules apply. (Should go without saying by now!).
As you can see the wedge respected the support level (bottom of the wedge) and broke out to the upside.
Step 3: Calculate Take Profit Level
To do this we take the range from the widest part of the wedge – this gives us an expected breakout range for the market to rise. In this case, it was 24 pips.
In this example, the yellow bars represent the wedge’s range which was 24 pips.
By using this information we will be able to place a take profit order at 24 pips with a high chance of profiting 24 pips.
Bearish Descending Wedge Breakout
Step 1: Identify the falling wedge
You will be able to identify these chart patterns easily, but we like to set up our falling resistance and support levels through our line graphs to give us a better representation.
The more you get used to switching between the chart and the line chart, the better. The methodologies outlined in our free forex course demonstrate the accuracy of using these processes, thus higher quality technical analysis.
You must draw these lines so that they cover the majority of the close prices.
When you switch back to the candlestick patterns chart, you will notice how accurate they are to trade from.
Step 2: Breakout Confirmation and Trade Execution.
Standard entry and stop loss execution rules apply. (Should go without saying by now!).
As you can see the wedge respected the support level (bottom of the wedge) and broke out to the downside.
Step 3: Calculate Take Profit Level
Just like the other examples, we want to take the widest range of the wedge to give us the best possible indication of how much the market will break out to. In this case, it was 24 pips.
In this example, the yellow bars represent the wedge’s range which was 24 pips.
By using this information, we will be able to place a take-profit order at 24 pips with a high chance of profiting 24 pips.
In Summary
In conclusion, by now you should have a strong understanding of wedge patterns in forex trading. You should be able to easily identify them and understand their significance in the market.
Remember, wedge patterns are just one of the many chart patterns that traders can use to make informed trading decisions.
To further expand your trading knowledge, consider continuing your education on chart patterns and other technical analysis techniques. With this information, you will be well on your way to becoming a successful trader.