Wedges are a mid-term or long-term patterns and depending on the time frame, they could take several months to form. Wedge formation and elementsīecause wedges are trend continuation or reversal patterns, there must be a trend to continue or reverse. Logically, all Falling Wedges, both in an uptrend and a downtrend, are bullish. Keep in mind that regardless which of the upper two scenarios we have in front of us, all Rising Wedges are bearish. It is usually a temporary price movement to the opposite side, a retracement. However, a rising wedge during a downtrend, as illustrated on the next screenshot, often acts as a continuation pattern. Often, such a scenario during an uptrend acts as an early sign of a possible price reversal. One is visualized below.Īs you can see from the picture, the market is forming higher highs and higher lows, but because the lows are being formed faster than the highs, the support line is steeper than the resistance. In our case, a Rising Wedge is a price action zone, bound between upward sloping support and resistance lines. The price forms highs and lows in the same direction, but the pace at which the two types of extremes are formed differs. The amplitude of the cyclical variations within a broadening wedge increases over time, thus potentially highlighting volatility clusters in higher time-frames.In general, a wedge is a market consolidation zone, bound between two sloping support and resistance lines, which would eventually converge. This scenario eventually repeats itself with increased volume, causing impulses and retracements of higher magnitude reinforcing a positive feedback loop until the price is judged overbought even by initial buyers.Ī broadening falling wedge follows the same scenario structure but with sellers instead of buyers. This allows the creation of a new impulse, with only a divergence left. These participants can be composed of initial buyers, accumulating positions, or late traders seeing the potential to buy at a better price. However, before the decline reaches the previously established low, certain market participants buy again. Momentum traders follow the initial impulse further pushing prices up.Ĭontrarian traders judge the price to be trading above its intrinsic value, selling and thus creating a decline in prices. The cause of an ascending broadening wedge is a surge from an initial buying impulse, driving the price higher. Causes Of Broadening Wedgesīulkowski offers a description of the causes of broadening wedges in the market in terms of the market participant's behavior. Selling directly after a partial decline would allow for higher profits.Ĭertain analysts close trades caused by partial rises/declines when the price reaches the support/resistance of the wedge, opening a new position in the case of a breakout while using the metric rule for setting their take profit. Selling directly after a partial rise would allow for higher profits.įor a broadening descending wedge the measure rule would place our take profit at the highest high inside the formation. For a broadening ascending wedge the measure rule would place our take profit at the lowest low inside the formation.
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