This is to continue the series of articles sharing about chart patterns in Howtotradeblog. Today, I will bring to you a new one. It is the Wedge pattern. The Wedge pattern is an effective trading signal for Forex traders around the world. Join me in this article to learn about this special chart pattern.
What is the Wedge pattern? Characteristics and how to identify
Wedge is a popular chart pattern in Forex trading. This is a form of recovery or accumulation of price after a strong trend. Morphologically, the Wedge pattern is a narrowing price channel with the two support and resistance levels converging to one point to the right. This pattern ends when the price breaks out of the resistance or support and creates a new trend.
In some cases, the price can retests the level just broken and then return to create a new trend in the opposite direction with the wedge. If you don’t know what retest is, please review this article: What is Retest?
Types of Wedge patterns
There are 2 types of Wedge patterns: Rising Wedge and Falling Wedge.
Rising Wedge patterns
The rising wedge pattern is a narrowing price channel with the 2 resistance and support levels pointing up the right corner. After creating a rising wedge, the price will usually break out of the support to enter a downtrend.
The pattern often appears in a downtrend as a form of accumulation. After that, the price breaks out of the support and continues to decline.
It can also appear at the top of an uptrend and signal a trend reversal from bullish to bearish.
Falling Wedge patterns
This is a narrowing price channel with the two support and resistance levels pointing down. After creating a falling wedge, the price will usually break out of the resistance and create an uptrend.
Unlike Rising Wedge, Falling Wedge usually appears during an uptrend and is a signal for a new bull run in price.
Or it can also be at the bottom of a downtrend, signaling a bearish to bullish reversal.
Characteristics of the Wedge pattern
+ When the breakout is in the opposite direction of the wedge, it will be more accurate.
+ The steeper the wedge is, the more accurate the signal gives.
How to trade Forex and binary options with the Wedge pattern
I will show you how to open a Forex order in the most detailed and effective way using the Wedge pattern. Watch it carefully as I will illustrate the best entry point, stop-loss, and take-profit with this pattern.
The general rule for trading using this pattern is to wait for the breakout or retest of the price and then open the order.
+ With a Rising Wedge, we will open a DOWN order when the price breaks out of the support and goes down.
+ With a Falling Wedge, we will open an UP order when the price breaks out of the resistance and goes up.
Please go through the following images to better understand.
For the Rising Wedge
There are two cases where you can open a DOWN order with a rising wedge. The first one is when it comes after an uptrend and the price breaks out and then goes down.
+ Entry Point: Right after the candlestick breaks out of the support.
+ Stop-Loss: At the highest resistance level of the Wedge pattern.
+ Take-Profit: From the entry point, the distance is equal to the maximum width of the rising wedge pattern.
The second case is when a rising wedge appears in a downtrend signaling a continuation of the trend. You can also open a DOWN order when the price breaks out and goes down. Take-profit and stop-loss points are similar to the first case.
For Falling Wedge
You can only open UP orders in the following 2 cases with a falling wedge.
In the first case, the price is in an uptrend. The falling wedge pattern appears as an accumulation period for a new increase.
+ Entry Point: Right after the candlestick breaks out of the resistance.
+ Stop-Loss: At the lowest support level of the Falling Wedge pattern.
+ Take-Profit: From the entry point, the distance is equal to the maximum width of the pattern.
In the second case, the price is in a downtrend. A falling wedge pattern appears. This is a signal that the price will reverse from bearish to bullish. Open an order when the breakout occurs. Take-profit and stop-loss points are set similarly to the first case.
Trade binary options with a Wedge pattern
For binary options trading, the perfect entry point using this pattern is the retest point of the price after a breakout. You can use a 5-minute or 10-minute Japanese candlestick chart to search for wedge patterns.
Requirements: A long expiration time (If you use the 5-minute Japanese candlestick chart to analyze the market, the expiration time for a binary options order should be between 30 and 45 minutes.)
How to open an order
+ Open an UP order when the price retests the resistance of the Falling Wedge pattern.
+ Open a DOWN order when the price retests the support of the Rising Wedge pattern.
The Wedge pattern is a popular pattern used in Forex trading. In addition to being an entry signal, this chart pattern also helps traders identify price reversal points effectively. Experience this special chart pattern on a Demo account carefully before trading on a real account.
In the article, I used images taken from the Olymp Trade trading platform. This is a platform supporting 2 types of trading including Forex and binary options (FIXED TIME TRADE). Register now for yourself an Olymp Trade Demo account in the box below to get acquainted with the Wedge pattern. I wish you successful transactions.