Rising Wedge: Learn The Falling and Rising Wedge Patterns
The pattern is characteristically wide at the bottom and becomes narrower as the price of the underlying asset increases and the range of trading narrows. There are two types of wedge patterns — ascending or descending wedges both of which are bearish.
The formation of the ascending wedge in an uptrend
In an uptrend, the rising or ascending wedge is a reversal formation when the highs and lows of the underlying asset are at the extreme. The high highs and high lows are identifiable by a contracting trading range. In this case, the prices are trapped between two lines; when these two lines get closer to each other, they create the pattern. The rising wedge formation is also as a result of a declining momentum and offers an opportunity to sell.
The ascending wedge formation in a downtrend
When a rising wedge pattern forms in a downward trend, it is a signal of a short-term price movement against the predominant trend. This formation follows a contrasting price range held between two lines that come together to form a rising wedge pattern. It not only signifies an opportunity to sell; it also signifies that the downward trend will continue.
Characteristics of the rising wedge pattern
Existence of a preceding trend: The rising wedge pattern is a reversal formation. For a reversal pattern to occur, there must a preceding trend that then reverses. This particular pattern requires between 3 to 6 months to form and it is often an indication of a long-term or intermediate reversal in the predominant trend. Sometimes, the pattern forms following a prolonged trend and other times the trend could be within the pattern itself.
Occurrence of a lower support line - The lower support line is formed when at least two low price reactions occur with each of the reactions required to be above the prior high.
Occurrence of an upper resistance line - The upper resistance line is formed when at least two high price reactions occur with each reaction needing to be higher than the prior high.
Trade volume- The trade volume increases as the prices of the underlying asset reduce and vice-versa. As the volume and prices evolve, so does the formation of the wedge.
Contraction of trading range - The rising wedge pattern forms when the upper resistance line and the lower support line come closer together. At the same time, the lower support lines become shorter thereby prohibiting the resistance line from matching up to the slope of the lower support line. This is an indication of price increase resulting from an oversupply of the underlying asset.
How to trade the rising trend pattern
There are two ways that you can trade the rising wedge pattern. The first method that is effective in entering the market is to enter into a short position at the end of the bottom side of the formation. The best time to enter the market is when the candle closes at the break of the lower trend line prior to entering the market.
The other way to trade this particular formation is to enter the market when the prices are trading below the dominant trend line. At this point, you can enter into a short position upon retesting the trend line.