Wedge patterns are a type of candlestick pattern that is used to measure the momentum of price movements in the stock exchange. Steve Nison introduced candlestick patterns to the west as an analytical tool for Japanese rice traders in order to predict the price movements in the commodities market. Since then, these patterns have been widely accepted by traders in the sharemarket.
When two lines connect the successive highs or lows of a security over a trading period, a wedge pattern is formed. These patterns indicate that an asset's price range is shrinking. There are two types of wedge patterns: rising wedge patterns signify an upward trend in prices, and falling wedge patterns signify a downward trend.
Wedge patterns are usually found at the top and bottom of a trend. Trading must be done when straight lines intersect, i.e. wedges. Within the time frame of pattern formation. A wedge can take anywhere from a few weeks up to six months to complete. These patterns are characterized by a downward trend line that is evolving in the same direction as an upward trend line. The major difference between triangle patterns and wedge patterns is that they both have two trendlines. In the former, the lines can be either upward or downward. For triangle patterns, only one line is either upward or downward sloping.
A falling wedge is also known as the descending wedge. It occurs when the price of security keeps touching lower highs or lower lows. This contracting the price range. A falling wedge is considered to be a reversal pattern if it appears during a market downturn. The shrinking range indicates that bearishness regarding an asset is losing steam.
If the descending wedge pattern occurs during an upward shift of momentum in the market, it can be considered a bullish pattern. A contraction in the range indicates that the correction in asset price is becoming smaller, and therefore there will be an uptrend. The falling wedge can be seen as both a reversal or continuation bullish pattern depending on the point at which it appears in a trend.
1. The falling wedge will appear after a prolonged downtrend, signaling the end of the downtrend. If there is a previous trend, it qualifies for a reversal.
2. To form the upper resistance line, at least two intermittent highs must be achieved. To form the lower support line, at least two intermittent lows are required
3. The successive highs of the descending wedge pattern should not be higher than the previous highs, and the successive lows must be lower than the prior lows
4. Shallower lows indicate that bears are losing control over the market pressure. The lower sell-side momentum leads to a lower support line, with a slope less steep than the higher resistance line.
5. While it is important to consider the volume of trades in a downward wedge pattern, this is not the case for a rising wedge. The breakdown won't be confirmed if there isn't an increase in volume.
It can be difficult to spot the falling wedge pattern and trade it in a sharemarket. This indicator is used to detect a decrease in momentum in a bear market. It also signals potential changes in the other direction. It is important to confirm the reversal using other indicators, such as RSI and stochastic.
It is better to open a trade when the price of security has breached the top trend line. The stop loss should be set at the lowest point of the lower trend line by a trader. Measure the height of the wedge, and then extend it after the breakpoint to set a price target.