There must be three touches on either side of the pattern, and the pattern is only confirmed once price has broken out of the wedge formation. We’ll using a rising wedge as our example to illustrate the measured-move method.Īlternatively, traders could use the previous swing lows/highs as areas of support or resistance when determining profit target areas as per our falling wedge illustration below.Īs I’ve shown, rising and falling wedge patterns can present very lucrative trading opportunities.Īs discussed there are a couple of caveats that qualify a valid wedge setup. Simply put, this means taking the height of the first swing and using that as your target. The first is by using a measured-move target. There are a couple of ways to set your profit areas when trading a wedge breakout. Not surprisingly, the falling wedge is the same. If price hits the stop loss in this trade, the market has made a new high which invalidates our pattern and of course means that we no longer want to hold a position in this trade. Notice how stop losses are placed above the most recent high. The below image illustrates a common area where traders tend to place their stops. This is the point at which the market has proven your setup invalid. One of the most common areas to place your stop loss when trading wedge patterns is just above or below the retracement immediately prior to the breakout. Once again, we always wait for the breakout to be confirmed, and then the retest.Īs I always harp on about, you should have a very distinct idea of where your stop loss will be placed when you trade any position, and wedges are no exception. Only when price retests the wedge support (former) will our short entry be triggered.Īs I’ve discussed in previous articles about breakout trading, such as Breakouts vs Retests, it’s simply because it offers a more favourable R-multiple. One of the first things you’ll notice is that price retraces to test the breakout line. Let’s check out how to trade the rising wedge. Though it is helpful to have a look at various timeframes to see which ones a respecting the trendlines best. When it comes to timeframes, you all know I’m an advocate of trading four hourly charts and higher, and this is no different. In short, to trade a wedge pattern we wait for the market to break through our support or resistance lines, with price typically breaking to the opposite direction as the wedge itself. Without this, the patterns cannot be considered tradable. With both rising and falling wedge patterns, it’s vital that both the support and resistance lines of the wedge have at least three touches from price. The falling wedge setup is the exact inverse of the rising wedge with price likely to break to the upside. If price doesn’t respect either the upper or lower trendline then the pattern is not a valid setup. You’ll also notice that all these lows and highs are connected by a trendline which is key for wedge patterns. You’ll notice that a rising wedge takes shape when the Forex market is making higher highs and higher lows. The below image illustrates the traits of a rising wedge pattern. While both rising and falling wedges can form over a period of any length, typically the longer the consolidation period, the more explosive the breakout will be when it eventuates. Much the same as other wedge patterns, they’re formed by a consolidation period representing either distribution or accumulation. One of the first things to know about rising and falling wedge patterns, is that they’re a great indicator of an upcoming reversal.
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