A Rising Wedge pattern is a bearish price pattern that is characterized by four impulses, or waves. The first impulse can rise above the average price. The second impulse then comes down from the peak of the first impulse to touch or close below “support.” This support area can be found between the two peaks and not above them.
The third impulse must top out over support to create a new bottom high, after which there may be two more impulses, one for each side of that down-sloping middle line. This can be an area that is a support area of its own, although it can also be a supportive price zone. The fourth impulse finally bottoms out before the first impulse occurs, again and again, forming higher highs in a rising-wedge shape.
Where Does the Falling Wedge Occur?
A Falling Wedge is a solid bearish price pattern that is also characterized by four impulses, or waves. It can be in any direction. It is important to note the difference between the price pattern and a trading strategy for both rising and falling wedges. This can make things difficult for many traders, especially if the pattern does not make sense or is not similar to their typical trading setups.
The object is to keep in mind that it can be a price pattern, which would not necessarily mean it is the same as a trading strategy. Moreover, the wedge pattern will give the trader a good sense of where the price might be headed. The key features of a rising-wedge are:
- The price activity is currently in an uptrend (the higher highs and higher lows).
- Two converging trend lines (support and resistance).
- As the wedge approaches the breakout, the volume decreases.
Spotting the Rising wedge
A rising-wedge is a bearish reversal pattern that is formed by drawing two trendlines on an uptrend chart. The first and the second trendlines are drawn by connecting the peak of the waves with a slightly downward sloping line drawn in between. The distance between both of these lines should increase as the pattern develops. Three similar triangles are formed from then, with each successive one being smaller than the preceding one.
These triangles are used to identify the moving averages. It is important to note that the triangle itself should not be drawn on the chart. A straight line can be drawn to connect both trendlines with a short distance between them. This technique identifies the trendlines, but it cannot determine the direction of price movement once it breaks out of the wedge pattern.
Identifying the Rising-wedge Pattern in an Uptrend
A rising-wedge with an upward price movement is considered to be bullish and the two higher than normal highs are often followed by the third impulse in the form of a “diamond.” Conversely, a falling wedge with downward price movement indicates the third impulse follows a bearish pattern and the two lower than normal lows in the form of “scallop.”
Identifying the Rising-wedge Pattern in an Downtrend
A rising-wedge with a downward price movement is considered to be bearish and the two lower than normal lows are followed by the third impulse in the form of an “arrowhead.” Conversely, a falling wedge with upward price movement is considered to be bullish and the two higher than normal highs are followed by the third impulse in the form of an “inverted-diamond.”
Trading the Rising-wedge
If the price breaks out of the second signal line and continues on to rise, then a higher high territory will be created. The chart might act as a support area until the third signal line breaks through it. This would mean that the next impulse will be weaker than usual and would take longer to happen. A second impulse is likely after this event. Some traders might consider this as an opportunity to profit from trading the peak, but others will take profits at a lower price level (which might not yet be achieved but is more resistant). The second impulse might fail to reach the top of the first signal line.
This might mean that traders will not see a third signal line and instead, they will get only two impulses as a pair of triangles. These converging trendlines suggest that price will head back downward, although there may be more upward attempts. Therefore, the final signal line could be drawn from the second impulse below (where the second signal line was located) instead of at the top of the first impulse. The third signal line can be drawn with a horizontal line between both trendlines. A suitable trading strategy for these charts would be a falling wedge pattern breakout.
How to Use the Rising wedge Pattern
Identifying the double-wedge pattern is not always easy, as it may be difficult to see a reversal as price goes above or below this pattern. This is especially true if there are no longer any trending movements, but only a sideways price action. Also, this pattern may not appear if there are no signs of the direction of price movement and so the pattern remains hidden beyond what could be “lucky guesses.
How Does the Rising wedge Affect Price Action?
The Rising-wedge is a bearish pattern in that it shows a price that moves slowly but steadily downward after an initial move up. The first wave moves up and can reach a new high, or peak, before moving back down and touching support at the bottom of wave 2 and below.
This creates a lower peak below the highs of wave 1, with both waves touching the support line before being drawn back up toward the original peak. Wave 4 forms a peak before forming a pattern that is similar to one of the other three impulses. These waves can become more complex as they form smaller waves within larger primary waves and more frequent turns in between.
The Rising-wedge can be an effective trading tool for any trader of any experience level, regardless of what type of market they are trading in. The rising-wedge is a pattern that forms when the price starts in an upward trend and then gets trapped within a series of low-volume reactions. As it moves towards a breakout, the volume will suddenly drop off as the price nears either support or resistance levels. A trader should consider using this pattern if they have high confidence in their prediction and can visualize where it will end up.