Trading Wedge Patterns in 2020 : The Definitive Guide

Rising and falling wedges… you’ve no doubt heard of them before, but how do we utlize them when it comes to breakout trading and reversals?

 First we must realise that wedges can help us identify changes (or pause) in the direction of trend and can often lead to fairly profitable trade set ups. Wedges begin to occur during times of consolidations where the bulls and bears are fighting for control of the market. 

Wedges can occur on a number of different timeframes, but we find them to play out best on the 1D and 4H timeframes and the general rules is that the longer it takes to form, the more dramatic the breakout will be. 

In part 2 of our wedge guide – we take a look at Broadening wedges

Rising Wedge

Rising wedges form when price begins to make higher highs and lows (HH & HL), within a consolidated channel. In this case channel is making a “wedge” formation, where using our trend lines, we can see that all of these HH and HL’s are connected and are in line. This validates to rising wedge pattern and indicates that the bulls are in control and a trend reversal MAY be on the cards.

This is especially true if it forms after an uptrend, which is a strong bearish reversal pattern. If the wedge forms within a larger, overall downtrend, we would expect a bearish continuation. 

Another thing to notice is that the angle of the support line. We know that the steeper the trend line, the less stable the trend is… and that means we have either our exits (or) entries prepped if we are confident enough in our TA to short this potential bearish set up.

Notice how the rising wedge is in a clear uptrend and makes consistent Higher Highs (HH) and Lows (HL)?

Falling Wedge

The opposite of the rising wedge is of course, a falling wedge and signals that a reversal or continuation is on the cards and should be traded in the context of the overall trend as we mentioned above.

We can see below that the bears are in control of this market, with clear Lower Highs (LH) and Lower Low’s (LL) occuring and just like above, we have a steeply angled support and resistance lines and price again consolidating in a “wedge” like formation.

An important thing to remember when looking to trade these patterns is that the wedge must have at least 3 or more touches to validate it. 

In the example below, if it were to occur in a downtrend, we would expect the price to break to the upside, retrest the trend line and continue upwards, giving us a strong reversal signal from bearish, to bullish. 

However, had it occurred during an overall uptrend, it would serve as a continuation signal and we would expect price to continue upwards after testing the channels of the wedge. 

Note: Yes, we keep harping on about the context of the overall trend, i know.. but this is super important and something that a lot of traders often overlook, but that won’t be you! 

Just like the above, but opposite, the falling wedge is making consistent Lower Highs and (LH) and Lower Lows (LL). 

Trading Wedge Breakouts

By now, we well and truly know what a breakout trade is, so let’s get right into how we can trade wedge breakouts and make some sats. As above we mentioned that the longer the time in which these formation has occurred, the stronger the breakout will be. 

It’s great to use the wedge pattern on 4hr time frames for shorter trades, and 1D timeframes for the longer play, particularly if you are trading the likes of FX or other regulated markets. Ultimately, you can trade the timeframe that you feel most comfortable with and that respects the rules best. 

Rising Wedge

As we mentioned above, you’ll already have an idea of the way you think the wedge will break by looking at the overall trend of the market and the time frame you are trading on. So if we were expecting a trend reversal, the first thing we look for is a confirmation and a retest of the broken wedge level. 

Q: Why do we wait for a confirmation, rather than just jumping in to the trade beforehand?
A: Because it gives you a better chance of a successful trade and R:R

In the image above, we can see the stages of the trade playing out where we break the wedge and confirm a close below support, we re-test the wedge where we can then exit our position if you were long, locking in the profits OR, we open a short position and ride that sucker down by using the guide below. 

Falling Wedge

Again with the falling wedge, we are waiting for a break and close OUTSIDE the wedge before we consider opening a position. Just like before, we would wait for a retest of the resistance – now turned support line to open a long position, or lock in profits from our short.

This bullish move would be further bolstered if we were to see a bullish engulfing candle, or other bullish style candles (hammer, pin bar, dragonfly doji, bullish spining top etc)

Want to know more about candle structure? Download your free copy of the “Candlestick Trading Bible” Now (Free for UTGU and IC members) 

Finding Levels to Take Profit

Taking profit during and profitable trade is really important and something that a lot of traders overlook beacause we get lazy or worse…greedy. There’s nothing wrong with locking in some profits, than giving away any profit because we get complacent. 

The beauty of taking profits using wedges is that the levels are pretty well defined because of our pivot points within the channel (HH, HH, LH, LL). 

Rising Wedge

You will find a few different trains of thought online when it comes to where price may rally to after a break and re-test of the wedge, so we have looked at both below and whichever you choose to utilize will be dependant on your confident and the strength of the trent at the time.

1) For the overall profit take, a rule of thumb is that the final profit targets are equal (or near to) the size of the first pushing within the wedge. So in this case 10% and unfortunately, a lot of trader will simply wait for that level to take profit, or close their position… but there’s a smarter way to lock in profits..

2) However, this is crypto, so things don’t alway play out like that, so the smarter play would be to look at the levels of the wedge where price as acted as levels of support and very well may do again. So it’s at these levels where we would lock in a % of our profits, on the chance that the market reverses back to the original direction of the trend and against our positions. 

Falling Wedge

What About Stop Losses?

Great question, because realistic traders understand that things don’t always play out the way we like, so being prepared for all scenarios is vitally important to preserve sats. 

Finding stop loss levels can be a little tricky, because not all wedges play out exactly as we’ve outlined above and are as well defined as those. 

Rising Wedge

Place your stop loss just above the last swing high as we’re expecting the trend to reverse and hitting this point would invalidate the wedge pattern.. unless of course therer’s a stop hunt, in which we’d take the hit and re-adjust our position (if we choose to re-enter) upon confirmation of the ACTUAL trend reversal. 

Falling Wedge

The opposite of course, is our falling wedge, where our stop loss is placed slightly below the last swing low.