Broadening Wedge Patterns Guideline (PDF)
Broadening Wedge pattern is a type of chart pattern formed when two trend lines converge. In contrast to the broadening wedge that appears when two trend lines diverge. Indeed, both of these chart patterns are used by traders as a predictor of possible price reversal zones. They are considered to be a continuation or a reversal chart pattern depending on the type of wedge and the previous trend. Moreover, each one of them, wedge patterns, as well as broadening wedges, is categorized into two types. Thereby, we can find a rising wedge pattern and a falling wedge pattern. Similarly, we can find an ascending broadening wedge and a descending broadening wedge. In this course, we will explain what is wedge pattern, learn about broadening wedges, and tell you how to trade them in the forex market.
Broadening Wedge patterns
What is wedge pattern?
Wedge pattern happens when the price movement contracts and forms a narrower price range. This explains why the two trend lines converge. You see this phenomenon in the chart when the trendlines are plotted along the swing highs and the swing lows. Then the distance between them gets smaller. It resembles a triangle sloped up or down. There are two types of wedge patterns and they typically emerge at the terminal point of the trend. Therefore, the rising wedge pattern is a bullish chart pattern, which arises near the end of an upward trend, and the lines incline down. While the falling wedge pattern is a bearish chart pattern that, arises near the end of a downward trend, and the lines incline up.
When a wedge pattern occurs in the direction of the trend and at the end of the trend, then it is considered a reversal pattern. Therefore, it can signal bullish or bearish price reversals. In either case, this pattern has three characteristics. The first one is the convergence of trend lines. And the second is that there is a pattern of decreasing volume while the price progresses through the pattern. Third one is the occurrence of a breakout from one of the trend lines.
Rising wedge pattern example
Rising wedge pattern or also called ascending wedge pattern, takes shape after a longer uptrend, when the price makes higher highs and higher lows. All the highs and lows must be in-line, so they can be attached by a trend line. You cannot consider it a rising wedge pattern if these highs and lows are not in-line. In other words, if the price does not respect the upper or lower trend line, then the pattern is not valid. These lines are also considered support and resistance lines.
After that, the trend lines converge and form the wedge pattern. But before the lines converge, sellers arrive at the coins market, and consequently, the rise in prices begins to lose their momentum. However, this leads to the breaking of the price from the upper or the lower trend line. But generally, the prices break out in the reverse direction from the trend line. You can know whether the trend will continue or reverse depending on the location of the rising wedge.
Example of Rising Wedge in Uptrend
When the rising wedge appears in an uptrend, and after an extended price move higher. This is a signal that a reversal to the downtrend is likely to happen. It provides forex traders with opportunities to take sell positions.
Example of Rising Wedge in Downtrend
If the ascending wedge appears in a downtrend. This signals a continuation of the prior trend. This means that the breakout should happen at the inferior trend line, and results a continued price movement. It provides crypto traders with opportunities to take sell positions or average their position.
Falling wedge pattern example
Falling wedge pattern or also called descending wedge is the inverse of the rising wedge pattern. It formed after a longer downtrend when the price makes lower highs and lower lows. However, all the highs and lows should be in-line. This means that the upper and the lower trend lines should be easily placed across the highs and lows of the pattern to consider it valid. Then buyers arrive at the cryptocurrency market, and consequently, the fall in prices begins to lose its momentum. After the continuous fall of the prices of two currency pairs, the trendlines converge and form the falling wedge pattern. And this will lead to breakout of the prices. Moreover, the descending wedge pattern can be called a bullish continuation pattern or bullish reversal. That depends on where the pattern is located.
- Example of Falling Wedge in Uptrend
When the falling wedge appears in an uptrend, this signals the continuation of the previous trend (uptrend). It provides crypto traders with opportunities to take long positions or average their position in the forex market.
- Example of Failling Wedge in Downtrend
If the descending wedge pattern appears in a downtrend, this indicates that a reversal to the uptrend is likely to happen. It provides forex traders opportunities to take long positions in the coin’s market.
How to trade with wedge patterns?
The wedge trading strategy has a signal line, which could be the upper (support) or the lower (resistance) line. That depends on the type of wedge. However, if there is a rising wedge pattern, then the signal line would be the lower line. Instead, if you have a descending wedge pattern, then the signal line would be the upper line.
When you notice a break in the signal line, you should enter the forex market in the same direction as the breakout. Therefore, if you have a rising wedge pattern, and the price breaks the signal line which is the lower line in this case, you should enter a short position. On the other side, if you have a falling wedge, and the price breaks the upper line, you should enter a long position.
The stop-loss should be placed above or below the opposite side of the ascending or descending wedge from the breakout. Therefore, you should place your stop-loss just above the upper trend line when you are trading a rising wedge pattern. And below the lower trend line when you are trading a descending wedge pattern. Some traders choose to place it outside the signal line and others may place it closer to keep its size smaller.
The likely price target of any wedge is equal to its size. This phrase means that if you have a rising wedge pattern, you anticipate the forex market to decline by an amount equal to the size of the formation. If you have a falling wedge, you anticipate the FX market to rise by an amount equal to the size of the formation. However, you can place your take-profit at the bottom of the lower line to seal substantial profit if you have a rising wedge. And if you have a falling wedge you place your TP at the top of the upper trendline to gain substantial profit.
What is a Broadening wedge?
Broadening wedge formation or also called expanding wedge is another kind of wedge formation but it is less common. It is the reverse version of the typical wedge patterns. As the price movement expands rather than contracts. Therefore, they display in the chart as two diverging trendlines. Moreover, there are two types of broadening: the ascending broadening wedge which takes place in an uptrend direction. And, the descending broadening wedge which takes place in a downtrend direction.
Ascending broadening wedge example
Ascending broadening wedge forms when the price makes higher highs that are connected by an upper trendline and lower lows that are connected by a lower trendline. In this way, the wedge expands as the price progresses. Then, the price breaks out the lower line. And according to the direction of the trend at the beginning of the wedge formation, you can know whether the trend will continue or reverse.
- Ascending broadening wedge in an uptrend:
When ascending broadening wedge formation appears in the uptrend, this means that there is a reversal of the previous trend.
- Ascending broadening wedge in a downtrend:
When ascending broadening wedge formation appears in the downtrend, this means that there is a continuation of the previous trend.
Descending broadening wedge example
Descending broadening wedge forms when the price makes lower highs and lower lows. All the highs and lows must be in-line, means that they must be related by a trendline from above and from below. This lines will deverge as the price progresses. Then, the price breaks out the upper line. Depending on where the broadening formation is located, you can know whether the trend will continue in the same direction or it will reverse.
- Descending broadening wedge located in an uptrend:
When descending broadening wedge formation arises in an uptrend direction, then the trend will continue in the same direction as the previous trend.
- Descending broadening wedge located in a downtrend:
If the descending broadening wedge formation emerges in a downtrend, then the trend will reverse.
Wedge pattern and broadening wedge are two popular chart patterns. Lots of forex, stock, and crypto traders use them. They consist of two trendlines (upper and lower) that converge or diverge from each other. There are two types of wedge patterns: rising wedge pattern and falling wedge pattern. Also, two types of broadening wedge: ascending broadening wedge and descending broadening wedge. As we discussed, these patterns can arise as a continuation or a reversal pattern. That depends on the type and the location of the wedge on tradingview with this indicator.