How to trade with the rising wedge pattern?

A rising wedge is a technical indicator that indicates a reversal pattern that is common in bear markets.

When the price advances upward, the pivot highs and lows converge into a single point known as the apex.

This pattern appears on the chart. When combined with dropping volume, it might indicate a trend reversal and the continuance of the bad market.

In this post, we will discuss the rising wedge pattern and apply it to a historical example to demonstrate its use.

While the example is from the past, the fundamentals of identifying and trading this pattern are still the same today.

What exactly are wedge chart patterns?

Wedges form the price action contracts, resulting in a narrowing price range. If trendlines are established along the swing highs and swing lows and those trendlines converge, this indicates the possibility of a wedge.

Wedges can either rise or fall. They can also be tilted, such as when there is a downturn or an upswing and the price waves within the wedge are shrinking.

Here's an example of a collapsing wedge in an overall uptrend using our Next Generation trading platform's Oil & Gas share basket.

Wedges can appear as a continuation or a reversal pattern. This suggests that the price may break out of the wedge pattern and continue in the asset's main trend direction.

However, the price may break out of a wedge and terminate a trend, therefore beginning a new trend in the opposite direction.

In the preceding chart example, the falling wedge turned out to be a continuation pattern.

Because the general trend was positive, to begin with, when the price broke out of the wedge to the upside, the uptrend was maintained. In this scenario, the retreat within the uptrend took the form of a wedge.

What exactly is a rising wedge pattern?

The rising wedge is a bearish chart pattern that appears towards the conclusion of a bullish trend and indicates a trend reversal.

The pattern denotes the end of a bullish trend and is a common occurrence in financial markets. It is the bullish counterpart to the falling wedge pattern that happens at the end of a bearish decline.

Rising wedge reversal patterns can be seen by forex traders as a price consolidation created at the conclusion of a medium-long market trend.

Because this pattern signals that the preceding trend's strength is waning, traders will typically take a short-selling position or exit a position.

How to recognize and trade the rising wedge pattern?

The rising wedge is a price consolidation pattern that occurs toward the end of a rally. The pattern may be detected by a narrowing price range (two converging trend lines) during a bullish rise, as shown in the USD/JPY daily chart below.

To keep things simple and orderly, you should follow the procedures outlined below to recognize and use the rising wedge bearish reversal pattern in forex trading.

Determine a current trend in a currency pair.
Draw two trend lines for support and resistance, as well as the trend's highs and lows.
Expect a price consolidation as well as a contraction of support and resistance lines.
When the rising wedge forms and the price falls below the support line, place a sell order.
Place your stop-loss order at the same support trend line.

What is the best way to trade a rising wedge pattern?

The following is a general trading technique for wedges that should not be blindly followed. It may be customized based on how far the trader believes the price will run (target) after a breakout and how much risk they are willing to take.

Larger stop-losses have a lower probability of being met than smaller stop-losses, and larger objectives have a lower probability of being met than smaller targets.

Here are some typical trading strategy procedures for a wedge formation.

Locate the wedge on a chart. To accentuate the pattern, draw trendlines along the swing highs and swing lows.

Look out for the breakout. This indicates that the price has moved outside of the outlined wedge formation.

Verify the breakout: Check to see whether the price has gone outside of the wedge. Check the trendlines to ensure that they are drawn to your taste (typically, they are drawn along and connecting, swing highs and lows).

Enter the market: If the price rises above the higher trendline of a descending wedge or fall below the lower trendline of an ascending wedge, you might start a buy position. Once the price has broken out, it will occasionally return to retest the wedge's previous trendline. This may give an additional entry point.

Set the trade's stop-loss order: Some traders like to position their stop-loss right outside the wedge's opposite side from the breakout. Others may position the stop-loss closer together in order to keep the stop-loss amount smaller. Risk management is an essential component of trading.

Set a profit goal or decide how to leave a lucrative investment. The height of the wedge at its thickest point plus the breakout/entry point might be used as an anticipated profit objective.

A trailing stop-loss might be employed as well. If the price action is favorable, the stop loss lagged behind the price to aid in profit locking.

Before going, consider the risk/reward ratio: Consider the profit possibilities of the trade after defining the entry, stop-loss, and objective. Ideally, the potential benefit should be twice as large as the risk.

For example, if the profit objective is 1000 points higher than the entrance, as shown in the chart below, the difference between the entry stop-loss (risk) should be 500 points or less.

If the potential gain is smaller than the risk, it will be more difficult to benefit from several transactions since losses will be greater than profits.

Conclusion

Rising wedges are popular among professional technical traders because they have a low risk/high reward ratio.

There are a lot of false patterns or patterns that look like rising wedges but aren't what they seem to be.

The only way to tell a real rising wedge from a fake one is to look for price/volume divergences and make sure that the failure is still below the 50% Fibonacci retracement.

Fundamental Aspects Of Rising Wedge!

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