Understanding wedges

Beginner Questions
1

Hello to all. I am currently learing wedges, and would love it if someone could possible explain them to me in terms of buyers and sellers. For instance, rising wedges consist of higher resistance and even higher support, then how come it leads to a downfall of the price afterwards ? is it cause the resistance remains somewhat consistent in the face of buyers who are quickly exhausting themselves ? Thanks

2

You can get this from Edge copilot. It’s faster than raising a question on the forum.

You

I am currently learing wedges, and would love it if someone could possible explain them to me in terms of buyers and sellers. For instance, rising wedges consist of higher resistance and even higher support, then how come it leads to a downfall of the price afterwards ? is it cause the resistance remains somewhat consistent in the face of buyers who are quickly exhausting themselves ?

Copilot

Certainly! Let’s delve into the fascinating world of wedge patterns in technical analysis, specifically focusing on the rising wedge. Buckle up, and let’s explore!

Rising Wedge Pattern: An Overview

The rising wedge pattern is a powerful tool used by traders to identify potential trend reversals. Here are the key points:

  1. Formation:
  • The rising wedge pattern appears as an upward-sloping price chart featuring two converging trendlines.
  • These trendlines enclose a narrowing range of prices.
  • The pattern typically forms during an upward price movement.
  1. Characteristics:
  • Higher Highs and Higher Lows: Within the rising wedge, you’ll notice that the price forms higher highs and higher lows.
  • Upward-Sloping Trendlines: Both the support and resistance trendlines slope upwards.
  • Convergence: Over time, the two trendlines converge (see Figure 1 below).
  • Decreasing Volume: The formation of a rising wedge is often accompanied by decreasing trading volume.
  1. Bearish Signal:
  • The rising wedge pattern typically occurs after an uptrend.
  • It signals a potential reversal in the security’s price.
  • In other words, it suggests that the buying momentum is slowing down.
  1. Breakout:
  • Confirmation of the pattern occurs when the price breaks below the lower support trendline.
  • This breakout signals a potential bearish reversal (see Figure 2 below).

!Figure 1 Figure 1: Rising Wedge Pattern

!Figure 2 Figure 2: Confirmation of Bearish Reversal

Why Does It Lead to a Price Downfall?

Great question! Let’s break it down:

  1. Buyer Exhaustion:
  • As the rising wedge forms, buyers continue to push the price higher.
  • However, the narrowing range and decreasing volume indicate that buyers are losing control.
  • Essentially, they are exhausting themselves.
  1. Resistance Remains Consistent:
  • While the support line slopes upward, the resistance line also rises but at a shallower angle.
  • This means that the resistance remains somewhat consistent even as the price reaches higher highs.
  • Buyers struggle to push the price beyond this consistent resistance.
  1. Bearish Breakout:
  • When the price eventually breaks below the lower support trendline, it triggers a bearish breakout.
  • Sellers gain the upper hand, leading to a price downfall.

In summary, the rising wedge pattern serves as a warning sign that the bullish momentum is waning, and a reversal may be imminent. Traders use this information to make informed decisions about market entry and exit.

Remember, no pattern is foolproof, so always combine it with other technical indicators and sound risk management strategies.

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3

Thank you very much. I appreciate you taking the time to provide this thorough explanation. Is there a way to objectively differentiate between falling wedges, bullish pennants, and ascending/ symmetical triangles ?

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Check out this chart patterns lesson and the cheat sheet at the end.

You’ll get better at recognizing them with practice and experience.

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6

I never did, and as a result I have absolutely no confidence at all in them.

It may be my own powers of recognition and interpretation that are the failure, or it may just be that “wedges” are a pretty bad and unreliable pattern (Bulkowski, the widely acknowledged expert, seems to think so?).

I don’t know which. :blush:

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