How to Trade Wedge Chart Patterns in Forex

One extra clue that a bullish pennant is forming is falling volume as price consolidates. Then, when the market begins to break out of the pattern, volume spikes. Bearish pennants and bullish pennants can indicate that major price action is on the cards – so understanding them is crucial for any technical trader. Here’s an introduction to how pennants work, and how to trade them. This information has been prepared by IG, a trading name of IG US LLC.

There are two types of wedge formation – rising (ascending) and falling (descending). Due to the confident mindset of the investors who anticipate the trend to persist, these reversals can be rather severe. The simplest approach to notice the narrowing of the channel, which is the initial significant clue that a reversal is brewing, is to use trend lines. As a reversal signal, it is formed at a bottom of a downtrend, indicating that an uptrend would come next.

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The falling wedge is a bullish price pattern that forms in a positive trend, marking a short pause that’s expected to result in a breakout to the upside. Still, some traders choose to regard the pattern as a bearish sign. In trading, a bearish pattern is a technical chart pattern that indicates a potential trend reversal from an uptrend to a downtrend. These patterns are characterized by a series of price movements that signal a bearish sentiment among traders.

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Overall guidelines to identify the pattern

FCX provides a textbook example of a falling wedge at the end of a long downtrend. For a pattern to be considered a falling wedge, the following characteristics must be met. This usually occurs when a security’s price has been rising over time, but it can also occur in the midst of a downward trend as well. You can also check how both of these approaches work by opening trades on the demo account, which you can do here. This way you start practicing first and choosing the best trading approach that fits your skill set, as one size does not fit all.

This is an indication that bullish opinion is either forming or reforming. Being a bullish pattern, most breakouts are expected to occur to the upside, which becomes the signal that the bullish phase will continue or begin, depending on the preceding trend. Unlike trading other chart patterns, the original range of a pennant is rarely used to plan where to take profit. Instead, the breakout often matches the size of the bear or bull move that preceded the consolidation. The second is to use the general rule of thumb that markets will often revert briefly before a full breakout begins.

How to start trading wedges

Unless otherwise indicated, all data is delayed by 15 minutes. The information provided by StockCharts.com, Inc. is not investment advice. To qualify as a reversal pattern, a Falling Wedge should ideally form after an extended downtrend that’s at least three months old.

The bottom line climbs at a sharper angle as compared to the top one, despite the fact that they both head in the same exact direction, thereby leading to convergence. After passing through the bottom boundary line, prices normally fall. If the rising wedge forms after an uptrend, it’s usually a bearish reversal pattern. As with their counterpart, the falling wedge may seem counterintuitive. They push traders to consider a falling market as a sign of a coming bullish move. But in this case, it’s important to note that the downward moves are getting shorter and shorter.

Falling Wedge

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So by placing a stop loss at the previous market high, you can close the trade before further losses are incurred. Another common signal of a wedge that’s close to breakout is falling volume as the market consolidates. A spike in volume after it breaks out is a good sign that a bigger move is on the cards. One way to confirm the move is to wait for the breakout to start.