Rising Wedge and Falling Wedge Pattern: Meaning and Interpretation – Products traded in the capital market and commodity futures market are among the most transparent products in the world with price movements. Changes in the price of products such as forex and stocks will continue updates every minute or even second.
One of the technical analyzes used to predict product price movements in this market is named wedge. wedge divided by two, namely rising wedge and falling wedge. Here is the full discussion.
- 1 Understanding Wedge Patterns
- 2 Definition of Rising Wedge Pattern
- 3 Understanding Falling Wedge Pattern
- 4 Trading Strategy With Rising Wedge and Falling Wedge
- 5 Conclusion
Understanding Wedge Patterns
Wedge pattern is a pattern of price movement which is characterized by the movement of two lines (resistance and support) go in the same direction (converge). Usually the two lines connect the highest and lowest price levels of an asset in 10 to 50 trading periods.
This pattern has some common characteristics such as:
- There are two lines resistance and support pointing in the same direction (can be up or down).
- A decrease in the amount of trading volume along with price changes.
- There is a part of the trend that is affected breakouts.
Wedge pattern generally indicates that the current trend of price movements will end soon (reversal). But there is also wedge pattern certain indicators that indicate the continuity of the existing trend.
Definition of Rising Wedge Pattern
Rising wedgeor what is often referred to as ascending wedgeis a wedge pattern that is formed usually after trend price increase where the resistance line and support line move in the same direction but the support line looks more sloping.
This indicates that the formation of new lows is faster than the formation of new highs so that at a certain point, prices do not go higher but instead reverse or fall down. So therefore, ascending wedge also mentioned as one of the bearish reversal.
However, there are times too ascending wedge Instead, it becomes a signal of the continuation of the ongoing trend. This happens when ascending wedge formed after a downward trend in price.
Figure 1: Rising wedge (Source: hsb.co.id)
In the picture above, it can be seen that the support (bottom) and resistance (top) lines are pointing in the same direction, namely increasing prices. The support line has a sharper degree of slope. This is evidenced by the smaller difference between the highest price and the lowest price depicted by the blue line. Sure enough, after rallying for some time, the price of these assets showed a decline.
Figure 2: Rising wedge (Source: hsb.co.id)
Contrary to picture number 1, it can be seen in picture 2 that rising wedge occurs after a downward trend in prices. This shows a symptom of the continued downward trend in asset prices. If seen from Figure 2 above, the price of an asset did go up, but soon it decreased.
Understanding Falling Wedge Pattern
Falling wedge is a pattern where the resistance and support lines are pointing in the same direction (converging) which is pointing towards a decline in price. This time, the degree of slope of the resistance line is sharper than the support line.
This means that the formation of a new high (which is lower than the previous one) is faster than the formation of a new low so that at one point the distance between the resistance and support lines narrows and the price reverses up. Therefore, falling wedge pattern or also known as descending wedge often seen as a sign bullish reversal.
Figure 3: Falling wedge (Source: hsb.co.id)
In the picture, it can be seen that the resistance line is more sloping than the support line. This means, the price of the asset is experiencing a downward trend in the highest price while the lowest price remains relatively unchanged.
That is, the trader is still willing to buy the asset at the same lowest price level. Because at one time the highest price was almost the same as the lowest price, traders naturally flocked to buy the asset so that the price rose again (reversal).
On the other hand, descending wedge can also be a signal of the continuation of the price trend. This happens when wedge it lies after the price increase. For example:
Figure 4: Falling wedge (Source: hsb.co.id)
The phenomenon in Figure 4 can occur because there are several traders who take profit even though the price of these assets can still rise to a higher level. Therefore, do not be surprised if not long after the price went up again.
Trading Strategy With Rising Wedge and Falling Wedge
1. Identify the wedge first
The first step you have to do is identify the shape wedges first. The trick is first to connect the resistance and support points for 10 trading periods. After that, look at the pattern. If the resistance and support lines are close to each other and there is a decrease in trading volume, then therein lies wedges occur.
2. Wait for the breakout to appear
As has been written above, a breakout is one component of the occurrence of a wedge pattern I don `t know ascending nor descending wedge pattern. The existence of a breakout on the resistance and support lines seems to be a confirmation that on the wedge there will be a trend reversal (reversal).
You need to remember that on rising wedge, breakout confirmation should be located at the support line. On the other hand, on falling wedgesignal breakout lies on the resistance line.
3. Buy when falling and sell when rising
As written above, falling wedge is one signal bullish reversal or the price will bounce up. Therefore, if the breakout breaks the resistance line in this pattern, then traders are advised to enter the market by buying the related asset.
On the other hand, if what exists is rising wedge with a breakout at the support line, traders are advised to close positions or sell the asset because wedge this type is signal bearish reversal.
But regardless of the shape and interpretation of this price pattern, traders are advised to make the necessary preparations before trading such as, trading planinstall stop loss and take profit and prepare a trading mentality.
wedge is a price pattern where the resistance and support lines move in the same direction. A rising wedge occurs when the resistance and support lines are sloping upwards but with a temporarily more sloping support line falling wedge occurs when both lines dip down and the resistance line looks more sloping than the support line.
With the development of technology called big data processing that is increasingly advanced, it is not surprising that the ups and downs of product prices can be predicted in advance using technical indicators. Although sometimes less accurate, this prediction of price changes directly helps traders to fight uncertainty in the market.