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What Is A Wedge?: Key Takeaways

A wedge is a price pattern on a chart marked by converging trend lines connecting highs and lows over 10-50 periods. It can indicate a potential reversal. A rising wedge with converging upper and lower trend lines suggests falling prices after a break below the lower line. A falling wedge, with converging but upward sloping lines, forecasts rising prices if there is a break above the upper line. Wedge patterns correctly predict the direction of reversal over two-thirds of the time, making them useful signals for traders.

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Ali Abdelfatah Mahmoud
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349 views2 pages

What Is A Wedge?: Key Takeaways

A wedge is a price pattern on a chart marked by converging trend lines connecting highs and lows over 10-50 periods. It can indicate a potential reversal. A rising wedge with converging upper and lower trend lines suggests falling prices after a break below the lower line. A falling wedge, with converging but upward sloping lines, forecasts rising prices if there is a break above the upper line. Wedge patterns correctly predict the direction of reversal over two-thirds of the time, making them useful signals for traders.

Uploaded by

Ali Abdelfatah Mahmoud
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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What Is a Wedge?

A wedge is a price pattern marked by converging trend lines on a price chart. The two trend lines are drawn
to connect the respective highs and lows of a price series over the course of 10 to 50 periods. The lines
show that the highs and the lows are either rising or falling and differing rates, giving the appearance of a
wedge as the lines approach a convergence. Wedge shaped trend lines are considered useful indicators of
a potential reversal in price action by technical analysts.

KEY TAKEAWAYS
 Wedge patterns are usually characterized by converging trend lines over 10 to 50 trading periods.
 The patterns may be considered rising or falling wedges depending on their direction.
 These patterns have an unusually good track record for forecasting price reversals.

Understanding the Wedge Pattern


A wedge pattern can signal either bullish or bearish price reversals. In either case, this pattern holds three
common characteristics: first, the converging trend lines; second, a pattern of declining volume as the price
progresses through the pattern; third, a breakout from one of the trend lines. The two forms of the wedge
pattern are a rising wedge (which signals a bearish reversal) or a falling wedge (which signals a bullish
reversal).

Rising Wedge
This usually occurs when a security’s price has been rising over time, but it can also occur in the midst of a
downward trend as well.

The trend lines drawn above and below the price chart pattern can converge to help a trader or analyst
anticipate a breakout reversal. While price can be out of either trend line, wedge patterns have a tendency to
break in the opposite direction from the trend lines.
Therefore, rising wedge patterns indicate the more likely potential of falling prices after a breakout of the
lower trend line. Traders can make bearish trades after the breakout by selling the security short or using
derivatives such as futures or options, depending on the security being charted. These trades would seek to
profit on the potential that prices will fall.
Falling Wedge
When a security's price has been falling over time, a wedge pattern can occur just as the trend makes its
final downward move. The trend lines drawn above the highs and below the lows on the price chart pattern
can converge as the price slide loses momentum and buyers step in to slow the rate of decline. Before the
lines converge, price may breakout above the upper trend line.

When price breaks the upper trend line the security is expected to reverse and trend higher. Traders
identifying bullish reversal signals would want to look for trades that benefit from the security’s rise in price.

Trading Advantages for Wedge Patterns


As a general rule price, pattern strategies for trading systems rarely yield returns that outperform buy-and-
hold strategies over time, but some patterns do appear to be useful in forecasting general price trends
nonetheless. Some studies suggest that a wedge pattern will breakout towards a reversal (a bullish breakout
for falling wedges and a bearish breakout for rising wedges) more often than two-thirds of the time, with a
falling wedge being a more reliable indicator than a rising wedge.

Because wedge patterns converge to a smaller price channel, the distance between the price on entry of the
trade and the price for a stop loss, is relatively smaller than the start of the pattern. This means that a stop
loss can be placed close by at the time the trade begins, and if the trade is successful, the outcome can
yield a greater return than the amount risked on the trade to begin with.

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