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Wedges | |
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Wedges can be either a reversal pattern or a continuation pattern and the manner in which it appears, normally determines which one it is. A wedge is a trading range where prices tend to converge during the range. Therefore, as the wedge forms, the highs and lows will move in the same direction (up or down), whilst simultaneously converging towards an apex. A rising wedge occurs when the highs and lows of the trading range are both rising, as seen in the chart below. Should a rising wedge form in an up trend, it will normally be a reversal pattern, however should it form in a down trend, it will be a continuation pattern.  A falling wedge occurs when the highs and lows of the trading range are both falling. Should a falling wedge form in an up trend, it will normally be a continuation pattern, however should it form in a down trend, it will be a reversal pattern.  An easy rule to remember with wedges is should the wedge form in the same direction as the prevailing trend, it will likely be a reversal pattern. However, should the wedge form in the opposite direction to the prevailing trend, it will likely be a continuation pattern. Volume can also be used as a confirmation tool for a wedge. Volume will normally decrease as the wedge is forming but then increase again as the security breaks out from the wedge. A suggested trading strategy might be to initiate a trade when the security trades out from the wedge when it is forming a continuation pattern, i.e. when it establishes a high (or low) above (below) the previous highs (lows) that form the top (bottom) part of the wedge. An initial stop would ideally be placed on the other side of the wedge. The opposite is true for a reversal pattern. You could close any existing position and initiate a trade in the direction of the breakout from the wedge. Similarly, an initial stop would ideally be placed on the other side of the wedge. Click here to return to the main Chart Patterns page.
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