HOW TO TRADE WEDGE (FALLING AND RISING)CHART PATTERN

in-depth tutorial

FALLING WEDGE EXPLAINED

FALLING WEDGE ILLUSTRATION

Bullish "Falling Wedge" chart pattern illustration
Direction: Neutral
Type: Bullish
Occurrence: Medium
Common term: Medium - Long

FALLING WEDGE PRICE ACTION STRUCTURE

  • Wedges are neutral patterns, they can be a reversal or continuation, thus the trend prior to the pattern formation doesn't really matter.
  • Since the falling wedge a bullish pattern, all touches to the wedge's upper border will be referred to as resistance, and touches to the lower border will be referred to as support.
    • Price action finds first resistance 1, where it reverses direction and goes downwards till finding first support 2.
    • Price action reverse direction from support 2 and goes upwards, till finding the second resistance 3 which must be lower than the first resistance 1.
    • Price action reverse direction from resistance 3 and goes downwards, till finding the second support 4, which must be lower than the first support 2.
    • The pattern is completed when price action reverse direction from 4 and goes upwards till it breaks the wedge's upper border at point 5.

    NOTES ON FALLING WEDGE

    • For the pattern shape to converge, the down-slope of the wedge's upper border (1 - 3 - ...) must be steeper than that of the lower border (2 - 4 - ...)
    • The price action inside the wedge formation is a downtrend, and since its target is a bullish one, the breakout volume should be considerably high to confirm that bulls are entering the market.
    • This pattern is commonly found on medium and long-term time-frames.

    HOW TO TRADE FALLING WEDGE

    • Trade entry: after breaking the wedge's upper border at point 5, with an entry after confirming the breakout.
    • Take profit: identified by measuring the vertical distance from the wedge's highest high 1 to the wedge's lower border, that measurement is then applied from the breakout point 5.
    • Stop loss: the wedge's lowest low 4.

    FALLING WEDGE REWARD:RISK

    • The steeper the upper border's down-slope than that of the lower border, the better the R:R.
    • R:R improves when the breakout is more near to the wedge borders' intersection point.
    • Always remember that the stop loss level explained above is absolute, the actual stop loss rate for your trade setup should be a bit beyond that level to give the trade setup some room to breathe, and of-course calculations for position size and R:R should be done with respect to that rate.

    FALLING WEDGE REAL EXAMPLE

    Real example for a bullish "Falling Wedge" chart pattern, using the H4 of NZD/CAD on XM's MT4 platform
    Currency pair: NZD/CAD
    Timeframe: H4
    Breakout: 12-Jan-2017
    Platform: MT4
    Broker: XM

    FALLING WEDGE FOREX TRADE SETUP

    • Trade entry: at the closing rate of the candle after breaking the upper border at point 5
    • Take profit: 254.8 pips - usual measurement applied from point 5
    • Stop loss 1: 72.5 pips (R:R .514) - set at 21% of target measurement, beyond absolute SL1
    • Stop loss 2: 158.6 pips (R:R 1.607) - set at 7% of target measurement, beyond absolute SL2

    NOTES ON THIS TRADE SETUP

    • The first breaking candle was followed by a long bearish candle that closed inside the wedge, thus it was treated as a false break. Right after that long bearish candle, a long bullish one was formed and broke the upper border again, followed by a candle that closed outside the wedge, where the trade entry was decided at that candle's closure rate.

    RISING WEDGE EXPLAINED

    RISING WEDGE ILLUSTRATION

    Bearish "Rising Wedge" chart pattern illustration
    Direction: Neutral
    Type: Bearish
    Occurrence: Medium
    Common term: Medium - Long

    RISING WEDGE PRICE ACTION STRUCTURE

  • Wedges are neutral patterns, they can be a reversal or continuation, thus the trend prior to the pattern formation doesn't really matter.
  • Since the rising wedge a bearish pattern, all touches to the wedge's upper border will be referred to as support, and touches to the lower border will be referred to as resistance.
    • Price action finds first resistance 1, where it reverses direction and goes upwards till finding first support 2.
    • Price action reverse direction from support 2 and goes downwards, till finding the second resistance 3 which must be higher than the first resistance 1.
    • Price action reverse direction from resistance 3 and goes upwards, till finding the second support 4, which must be higher than the first support 2.
    • The pattern is completed when price action reverse direction from 4 and goes downwards till it breaks the wedge's lower border at point 5.

    RISING WEDGE REAL EXAMPLE

    Real example for a bearish "Rising Wedge" chart pattern, using the daily chart of NZD/USD on Oanda's MT4 platform
    Currency pair: NZD/USD
    Timeframe: D1
    Breakout: 27-Jul-2014
    Platform: MT4
    Broker: Oanda

    RISING WEDGE FOREX TRADE SETUP

    • Trade entry: at the closing rate of the candle after breaking the lower border at point 5
    • Take profit: 607.3 pips - usual measurement applied from point 5
    • Stop loss 1: 178.4 pips (R:R 3.404) - set at 21% of target measurement, beyond absolute SL1
    • Stop loss 2: 369.7 pips (R:R 1.643) - set at 7% of target measurement, beyond absolute SL2

    NOTES ON THIS TRADE SETUP

    • The candle right after the breaking candle closed extremely near to the wedge's lower border and had a wick inside the pattern, thus the candle after that one was used to confirm the breakout.