DavidWaring

In our last lesson we learned about the falling wedge and the rising wedge patterns, two chart patterns which can be seen as reversal or continuation patterns depending on whether they appear in an uptrend or a downtrend. In this lesson we are going to learn a trading strategy traders of the stock, futures, and forex markets commonly use to trade these chart patterns.

The Falling Wedge Reversal Strategy:

As you hopefully remember from our last lesson when a falling wedge appears in a downtrend it is considered a reversal pattern. As this is the case when traders see this pattern occur in a downtrend they commonly look to trade a reversal of that downtrend so they are looking for buying opportunities. The buy point they will commonly use is the breakpoint of the upper resistance line as this is seen as a potential confirmation that the downtrend is reversing. The target for the trade is then calculated by measuring the distance from the highest peak on the pattern to the lowest trough, projected upward from the beak point. Lastly, the stop loss is placed just below the outside of the wedge formation.

Example of the Falling Wedge Reversal Strategy:


When a falling wedge appears in an uptrend, this is seen as a potential continuation pattern. As this is the case when traders see this pattern occur in an uptrend in the forex, futures, or stock market, they will commonly look to trade in the direction of the prevailing trend. The buy point they will use here as well is the breakpoint of the upper resistance line as this is seen as a potential confirmation of the continuation of the prevailing uptrend. The target for the trade is then calculated by measuring the distance from the highest peak on the pattern to the lowest trough, projected upward from the breakpoint. Lastly, the stop loss is placed just below the outside of the wedge pattern.

Example of the Falling Wedge Continuation Strategy:


As you also hopefully remember from our last lesson, when a rising wedge appears in an uptrend this is considered a reversal pattern. As this is the case when traders see this pattern occur in an uptrend, they will commonly position to trade the reversal of that uptrend by looking for selling. The sell point they will commonly use is the breakpoint of the bottom support line as this is seen as confirmation the uptrend is reversing. The target for the trade is then calculated by measuring the distance from the lowest trough on the pattern to the highest peak, projected downward from the breakpoint. Lastly, the stop loss is then placed just above the outside of the wedge pattern.

Example of a Rising Wedge Reversal Strategy:


When a rising wedge appears in a down trend in the forex, futures, or stock market, it is considered a continuation pattern. As this is the case when traders see this pattern occur in a downtrend they will commonly look to trade the continuation of that downtrend by looking for selling opportunities on the break of the lower support line. The target for the trade is then calculated by measuring the distance from the lowest trough on the pattern to the highest peak, projected downward from the breakpoint. Lastly, the stop loss for this strategy is then placed just above the outside of the wedge pattern.

Example of a Rising Wedge Continuation Pattern:


That concludes our lesson. You should now have a good understanding of how to trade both the falling wedge and rising wedge pattern. In our next lesson we will start looking at continuation patterns beginning with the Flag and Pennant chart patterns.

As always if you have any questions or comments please leave them in the comments section below so we can all learn to trade together, and good luck with your trading!

rocketman7

David,
Just an observation, in the example for the falling wedge reversal strategy, the target should be 800 points, not 700 as indicated.

Also, in the falling wedge continuation chart, there is a large red candle on the right side of the chart - was there a gap open and then pullback?

David Waring

Hi Rocketman7,

My apologies for the error there you are correct it should be 800 instead of 700 good catch.

Yes that long red candle shows a gap open and then a pullback.

Best Regards,
Dave

Gerard

Dave, don't you mean eight (8) points ? 800 ?? I'm confused.

David Waring

Hi Gerard,

Glad to hear from you.

A 1 point (also referred to as tick) move in the US Dollar Index is from .01 to .02 so it is 800 points.

Let me know if that still does not make sense.

Best Regards,
Dave

Unregistered

Hi David, this is a well put together and informative site you've got here, great job.


This isnt so much of a question but more of an observation that i would just like confirmed or corrected on. I watched the video on the head and shoulders trading strategies and it looks to me that on the falling wedge continuation diagram that you use, the majority of the wedge also makes up a head and shoulders pattern, but then does not go on to break what would be the neckline for a while afterwards. Would you have went into this trade or is this only the case when the neckline is broken immediately after the second shoulder is formed?

Best regards,
Cal.

David Waring

Hi Cal,

Thanks for the comment I am glad you like the site.

Yes I see what you are talking about there and this is really more a matter of preference than a rule I think but I personally like to see head and shoulders patterns go ahead and break and not linger around as this one did. Once a pattern lingers like that and becomes a less clean pattern I tend to place more emphasis on other patterns that may have formed as a result like we did here.

Hope that helps. Please feel free to post any other questions or comments.

Best Regards,
Dave

jsl

Thanks for this website -

In the risisng and falling wedge pattern i find it hard to understand where one would pick the starting point (on the left side) to draw the bottom and maybe the top trend line - it seems arbitrary and I dont have a clue or visual picture of why you or one would pick that particular point to start from.

Is there a support or pivot that it is picked or what. It seems very subjective and at this point my "eye" (my brain) doesn't get it .

The right side of the wege (as you face the chart) is clear to me.

If you can break it down for me it would be much appreciated as I've seen pictures of triangles before and have had the same question.

Thanks much,

jsl

p.s. I hope I've typed this in the right box - I don't see a send button

David Waring

Hi JSL,

Thanks for the comment.

You are correct that the drawing of technical patterns and technical analysis in general is far from an exact science and relies on each traders interpretation of the chart.

With this being said the start point for a triangle or wedge would be the point where you could draw at top line that had at least two touches of that line which forms the top resistance of the wedge or triangle. The bottom support line is formed in the same manner.

Another way to think about it is that you look for places on the chart where if you drew a line across at least two points on both the upper and lower sides of the market action that it would make a wedge or triangle formation and start there.

Hope that helps. Feel free to post any other questions or comments.

Best Regards,
Dave

beachtrader

Hi Dave,

Apologies if this has been answered elsewhere but I wondered what indicators might back this up. I notice volume doesn't seem to be important?

All the best

Beachtrader