Greetings traders and welcome back to another Survival Guide.
Chris here, bringing you some more information.
Today, we're going to be discussing the rising wedge pattern.
This is one of the more common bearish indicators that technical
traders are looking for when trying to identify a reason
to look for a short opportunity in the market.
It's a very common pattern. It occurs a lot more than traders
realize, and once we talked about what it looks like, how to
identify it, and how to trade it, you'll be able to incorporate it into your
daily trading as well. Knowing how to use these patterns is great
if you plan on taking the Gauntlet or Gauntlet Mini challenge.
This is the kind of stuff that will allow you to gain that
competitive edge to make sure you reach your profit goals.
But before we go any further, please do me a favor and click
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out with these videos for you guys.
Now without further ado, let's dive on into that material.
The rising wedge pattern is so popularized and so loved by
traders, we would be doing ourselves a disservice
if we didn't talk about it at some point.
It's a beautiful pattern that allows us to potentially identify
some bear situations in the market, which means we can capitalize
on some of those selling opportunities.
First, we'll cover what exactly is a rising wedge, and a
rising wedge is going to be a technical trading indicator
that signals a trend reversal or a continuation, usually within
a bear market. The pattern is also known as an ascending
wedge. This is important to understand because you may
see it worded this way as you Google around the web. The ascending
wedge pattern can form when a stock, or whatever
we're analyzing is in an uptrend or downtrend depending on
the unfolding scenario. So, if the price that we were analyzing was in an uptrend,
a rising wedge is usually an indication that traders are
reconsidering the bullish price move. If what we're analyzing
is in a downtrend, a rising wedge is an indication that a
short-term pause before the bear market continues is to be
expected. However, the rising wedge pattern can also fit
within the continuation indicators category as well.
No matter whether it is a reversal or continuation signal,
in both cases the rising wedge
indicates an increase in bearish sentiment, so that is the key takeaway.
The rising wedge pattern is widely spread within the stock
futures and Forex markets amongst traders, and it makes it
a very preferred technical trading tool for the traders that
feel comfortable enough to identify and utilize it, because
it's relatively simple. This trading pattern is also considered
to be quite reliable once understood correctly.
A rising wedge forms when the price's movement consolidates
between two sloping trend lines that are collectively displayed as a triangle formation.
These sloping lines are basically just support and resistance,
at an angle, and they are converging together to a centralized
point. The bottom line is going to be our support line, while
the upper line is going to be our resistance line. The support
and resistance lines both point towards and upwards direction,
as you can see. The support line usually has to be a bit steeper than the resistance line.
The lines are constructed by connecting two or more points of separate highs and lows.
There are several prerequisites for the formation of a rising
wedge, in the context of a reversal pattern that is. These
include things like a presence of a prior trend. Understandably
the rising wedge needs to reverse an existing trend. In the general case,
the pattern will form across the span of say, three to six trading
periods, and can reverse either a medium or long-term trend,
but once again, because it's a pattern,
it depends on the time frame of the charts that we're looking
at. We can find a rising wedge on a 5-minute chart, all the way up to a monthly chart.
Then, we also want a formation of a lower support line and an upper resistance line,
like we mentioned. The condition for the formation of a rising
wedge is to have a support line connecting at least two lows.
Each low should appear higher on the chart
than the previous one. This is the case with the resistance line as well
naturally, because we want things to be equal.
It should connect two or more highs, each of which should
be higher than the previous one before it.
In a nutshell, the presence of lows and highs that are
higher than the previous ones help form this ascending-
like shape that is creating this wedge pattern.
We also want contraction of both lines and a break of the
support line. As the pattern matures, the support and resistance
move towards each other and converge at the end.
In fact, it is the breaking point at the convergence that
closes the pattern and generates the signal. Similar to the case with other indicators,
the more convincing the break is, the more stable and reliable
the sentiment of this signal that's being provided is. We
also want to see declining volume. As the rising wedge evolves
and matures, and the price starts heading downwards, the volume
should naturally be decreasing as well. The crucial point
for the pattern is where the support line is actually broken.
This is precisely when the rising wedge has finally been
confirmed. After that, things usually unfold pretty quickly. Once a breakdown occurs,
the target is reached almost immediately, especially when
compared to alternative trading patterns.
This means that with the rising wedge, traders don't necessarily
have to wait for further confirmation as at the breaking
point things begin moving very quickly, and we probably want
to be involved, if we plan on being involved at all.
This is also what makes chartist love the rising wedge pattern
so much, because it's relatively straightforward in interpretation
and can provide some high-accuracy results, when understood
correctly. The only critical moment where things might not
go as easy as planned in terms of signal interpretation is
the fact that, in some situations, once the breakdown happens,
you might see a new rally that tests the new created resistance
level. However, even in that case, if we keep our eyes on
the breakdown point, we won't have trouble identifying and
interpreting the pattern signals, as we do this over and over again.
Before we find out what happens at the end of a rising
wedge, we should say a few words on how to recognize when
the pattern is actually coming to an end.
If we see that the lower support lines advances start getting
shorter, it is a sign that the rallies are getting weaker. In this scenario,
the upper resistance line would be struggling to keep pace
with the support line slope, and this is an indication that
the end of the rising wedge is just looming around the corner.
With that, we would have every sign that the rising wedge
is about to be completed.
The actual end of the rising wedge occurs when the
support and resistance lines, constructed of pivot highs and
lows, converge in a single point at the end of the wedge pattern.
The point that they're converging is usually referred to as the apex.
Once the lines converge in the apex, the price usually embraces a downward movement.
To sum it up, after the rising wedge has been drawn and
created and comes to fruition and is finally completed,
the resulting direction of price is usually downwards from a rising wedge.
On the chart, the rising wedge appears as a figure that starts
wide usually at the bottom, and contracts as it moves higher and the lines narrow.
The ascending wedge is very similar to the way that the bear
flag pattern generally appears on a chart. Now, after we know
what the rising wedge looks like on a chart, it's usually
time to focus on how to identify whether the pattern that
we are seeing is actually a rising wedge or if it's just
a misleading action by price. There are several indicators that can help us with this.
But first, the thing that we want to pay attention to is that
the pattern's movement should be going towards the right. Besides
that, the volume should be decreasing, a sign of divergence with price.
Another thing to look for is the advancement of the retrace.
Depending on how far it has gone from the beginning of the
downtrend, we'll be able to recognize whether the pattern is
valid. The best way to look at this is to see if the retracement
itself exceeds the 50% Fibonacci level or not.
If it doesn't, then the pattern is valid. If it does, then we
probably don't want it. To successfully implement the rising
wedge pattern into our technical trading indicators toolbox,
we should learn how to identify it in an uptrend and in a
downtrend. In an uptrend,
the rising wedge is considered a reversal pattern. It forms
when price hits the higher highs and the higher lows, resulting
in a contracting price range. During the uptrend, the closer
the support and resistance
levels go and work their way towards each other, the slower
the momentum gets. Alternatively, a downside reversal is usually
what is expected to take place.
In these cases, traders will start looking for opportunities
to short the market. On the other hand, during a downtrend,
the rising wedge pattern indicates a temporary retracement.
In other words, the price moves in the opposite direction of the trend for a short time.
Once again, the support and resistance levels here are starting
to move closer towards each other, indicating a continuation
of the existing bearish trend. In that case traders will
also start looking for selling opportunities to go back in
the direction of the prevailing trend.
There are different ways to trade once we've identified the
ascending wedge pattern on the chart.
The first way, and the most common way, is to simply place a
sell order when we are breaking the bottom side of the wedge.
To protect ourself from false signals,
we can make sure to wait for a candle to actually close below
the bottom of the trendline.
Once it actually does this, we can then go ahead and make
our short entry. This example shows where the price breaks
the lower support line, over here where we have the one, and
then we can see the exact point of the sell order marked
off by number two. The number two represents when we broke
the bottom of the base of the wedge, not just breaking the trend line itself.
By selling when we break the bottom of the trendline, this
represents one way that we can sell. By selling when we break
the base of the wedge, this further confirms that we have
bearish activity potentially following the market that we
can take advantage of. When it comes to identifying where
we should expect price to go,
we can get a little bit of foreshadowing in an expected
distance when we pay attention to the base of the wedge.
The base of the wedge is going to be the area from where
the support has initially built upon creation of the wedge
to the high point where then began its first swing high, creating
its first area of resistance.
This is going to be the area that we're usually using to
connect to our next swing high, giving us those two points
of connection. Other than that, with the bottom side, where
we have our support, this is going to be representative of
an area that is going to plateau sideways
usually, where the market is going to be continuously
working its way higher, as you can see from the swing lows
progressing higher, but you're usually going to see an area
in the chart where we're seeing a horizontal area of support,
where price has essentially benchmarked before working higher.
The distance between the base, which is going to be the baseline
of horizontal support, and the first swing high Is usually
a representation of what we can expect in terms of distance,
once that baseline of support has broken after the rising
wedge has already pushed outside the bottom of the trend
line. That means as we broke out of one, and we worked our
way down towards this baseline of support ,the distance that
we saw over here is going to be something comparable to what
we expect over here.
It's very comparable to other patterns out there, like a head
and shoulders, where you can get an
idea of what to expect from the distance the neck to the
head, once the neckline is broken. Except in this case,
once again, we're waiting for that horizontal area of support
that was created, the baseline of support, at the beginning
of our wedge to the high point of the swing high in this
scenario, where we would be using that distance to get an
idea of how far to expect price to go
once it breaks out the other side.
If hypothetically, if this represented say, 10 points from
the base to the high point, the initial high point that is,
then we'd be looking to achieve somewhere around 10 points,
or perhaps just under to stay in the safe conservative side,
once we break the bottom of that horizontal support. If
I set my take profit order, I would set it something like
right down here, where I may be at say, 8 points, instead
of a full 10, to make sure that I'm well within reason of
what the market is doing, and well within reason of what we
expect based on the distance that was traveled from the baseline
of support to the high point of resistance.
initially when the pattern was created. When we compare rising
wedges to falling wedges, it's easy to understand because
in a nutshell, what we had already mentioned about rising
wedges is true for falling wedges as well.
It can also serve as a continuation or a reversal pattern
and can be trusted due to its high degree of accuracy when
understood correctly. The main difference though,
is that unlike its rising counterpart, the falling wedge signals
an upcoming bullish trend reversal,
so the end outcome is just a different direction. Besides, the falling
wedge forms support and resistance lines with a downward slope
versus an upward slope, like we have with the rising wedge.
It's worth noting that with the rising wedge,
the figure is pointing in an upward direction, whereas with the falling wedge,
the apex is simply pointing in a downward direction. Between
that, the general trading concept is exactly the same.
It's just a mirror image opposite. Instead of looking for a short opportunity,
like we just talked about with our rising wedge,
we would simply be looking for a long opportunity once we've
encountered a falling wedge.
This would provide us an opportunity to get in with an expectation
based on the base of the wedge.
It doesn't matter if it's rising or falling, it allows us
to get an idea of how far to expect the market to move when
we pay attention to the distance between the baseline of
support or resistance and the swing high or swing low at
the beginning of these both rising and falling wedge patterns.
In conclusion, the rising and falling wedge for that matter
are both great patterns to incorporate into a regular trading
toolbox or a regular trading arsenal.
They are technical patterns that not only provide an idea
of where the market is going,
but also how far to potentially expect the market to go in
that direction. Any pattern that gives you not only a direction,
but also an expected outcome, as far as how far it's going
in that direction, can be very valuable once mastered correctly.
I strongly encourage checking out some of the rising wedge
patterns that we've seen on the market today, or on any other
marketscape that you feel analyzing. Go back
through your charts and see how many you can find.
It's good practice, but until next time folks, happy hunting.
Happy trading. I'll see you all soon.