A wedge pattern in trading is a type of pattern that is reflected by converging two trend lines. Traders recognize rising and falling wedges. Both can fit into the reversal and reversal chart patterns indicating different signals.
The Rising Wedge Pattern forms right after an uptrend indicating its potential downtrend or bearish reversal. Keep reading the article to learn what is a Rising Wedge Pattern and how to use it in reversal and continuation patterns.
What is a Rising Wedge Pattern
The Rising Wedge Pattern, also called an ascending wedge, is a bearish chart pattern. It begins wide at the bottom, where trend lines form, and then the pattern narrows as the price moves higher.
This pattern shows a sign of an imminent breakout toward the downside trend. A rising wedge is the opposite of the falling or a descending wedge which is a bullish pattern.
A rising wedge stock pattern is reflected by a trend line trapped between diagonal resistance and support lines that move in a converging pattern. The upper line in the chart is of resistance, and the lower line is of support.
As mentioned, rising wedges indicate a bearish reversal immediately after their formation, and the market experiences a downward price trend. By spotting and confirming this signal, traders can identify a potential stock selling opportunity to get the maximum profit while the prices are at the maximum.
The mentioned opportunity occurs when a wedge forms as a reversal pattern. But as mentioned, rising wedges can also form continuation patterns also this is less common and efficient. Most traders prefer tracking reversal patterns as they are more effective since the reversal pattern follows the direction of a trend.
But if a wedge falls into a continuation pattern, it slopes up. The key difference here is that instead of following the overall trend, the slope will form against the prevailing downtrend. It’s also worth mentioning that rising wedges, whether they fall into reversal or continuation patterns, are always bearish and are never bullish.
When and How Rising Wedge Pattern Forms?
The rising wedge forms when the market makes higher highs and higher lows with a narrowing range. When this pattern occurs in an uptrend, it is a bearish pattern since the market range is becoming more narrow into the correction.
This occurrence indicates correction’s losing strength, which means a downtrend is about to form as the demand is weakening at the higher price. Rising wedges form during an uptrend and downtrend.
If the stock is rising, traders are considering buying the stock. If the stock indicates a downtrend, traders will start getting rid of stock, which is an indicator of a bear market.
How to Spot a Rising Wedge Pattern?
As mentioned, ascending wedges can fall into reversal and continuation patterns. If wedges form along with the current trend, a market reversal is most probable. But if the wedge aligns against the trend, then it’s a sign of trend continuation.
It is possible to conform either to a reversal or a continuation pattern. You can check the characteristics of each pattern below to be able to identify continuation and reversal trends.
Reversal trend has the following characteristics:
- An uptrend is established.
- Rising wedge forms along with the uptrend.
The trend line trapped between resistance and support levels has to link higher highs and lower lows to show a reversal. Here is your best way to confirm the reversal:
- Use the volume function to confirm divergence between volume and price. Using MACD may be a better choice than using the volume function.
- Consider using reliable oscillators to double-check that the signal of reversal is real.
- Keep an eye on the support line. If you notice a break of the trend line below the support level at a higher low, then it’s most likely a sign to sell stock as it’s a reversal pattern.
That’s how you spot a resistance pattern and use it for a timely exit point.
As for the other pattern, the continuation one, here are a few characteristics to spot before it starts forming:
- The downtrend is established on the chart, and it was a downtrend during the previous close period.
- A rising wedge keeps forming in consolidation with the downtrend.
Just like in the previous example, you will notice on your chart that the trend line keeps linking higher highs and lower lows. The line keeps going from wider to a narrower point. Here is what you need to confirm the continuation trend:
- Use the volume function or MACD indicator to confirm divergence.
- Confirm the overbought signal by using a reliable oscillator.
- When the trend line reaches the higher high closer to the narrow point, instead of touching another lower low, the line will break below the support lever at a narrower point.
This pattern confirms the continuation of a downtrend. Take a look at the previous close to see if there was a reversal trend. If it was a reversal, then all mentioned above characteristics confirm a continuation trend.
How to Trade the Rising Wedge Stock Pattern?
Spotting ascending wedges may be a difficult task. The best way to avoid making mistakes is to confirm patterns with other tools for technical analysis. Check out below how to trade ascending wedges when they fall into reversal and continuation patterns.
If you notice a rising wedge forming, get ready for a potential exit point. The resistance and support lines start forming, and the trend line keeps connecting higher highs with lower lows.
Pay attention to the trend line when it approaches the narrower spot; it should soon break the lower support line. As soon as the trend line breaks the support line, it is likely that traders will start selling their stock. As a result, the line will start dropping even lower. Confirm the trend with an oscillator and sell the stock.
As mentioned, continuation forms in a downtrend. Confirm that it’s a continuation of a downtrend as rising wedges resistance and support levels form again.
The trend line should connect lower lows with higher highs. Then the trend line breaks through the support level. The line will keep falling. Use other tools to keep an eye on a potential uptrend to buy stock successfully, but a continuation of a downtrend isn’t a sign to buy stock.