The wedge pattern is a unique formation given that it appears as a reversal pattern and as a continuation pattern too. It is quite different from other triangle patterns in that it is a long-term pattern and the trendlines converge upward or downward. Do you want to learn how to use this pattern in your binary options trading?
The Falling and Rising Wedge Trading Strategies
The falling and rising wedge pattern is a contrarian pattern. It forms depending on whether the pattern appears in a downtrend or an upward trend. The falling wedge is a downward slopping pattern while the rising wedge is an upward slanting pattern.
The falling wedge
This pattern forms during a contracting price range when the markets encounter lower highs and lower lows. In a downward trend, it is regarded as a reversal pattern. The fact that it takes place within a contracting price range is an indication of a loss in momentum of the downward trend. The falling wedge can also form in an uptrend as a bullish formation. At this time, the price range contracts into the correction, an indication of an increasing momentum in the uptrend.
As mentioned earlier, both the falling and the rising wedge can be categorized as either continuation and as reversal patterns. As a continuation formation, the falling wedge forms a downward slope that goes contrary to the prevailing upward trend. When it forms as a reversal pattern, the falling wedge slopes downward in line with the prevailing trend. Whether it forms as a reversal or a continuation pattern, the falling edge is always considered bullish.
Admittedly, it is not always easy to accurately identify and trade the falling wedge. The underlying asset goes on a downward trend when there are low lows and low highs as is the case with falling wedge patterns. The role of this particular pattern is to identify a decreasing momentum in the downward trend thereby signaling traders to an imminent price reversal. Only until the resistance is broken does demand increase against a backdrop of a waning selling trend.
Although the falling wedge pattern can be traded as a reversal pattern, the trades are much more profitable in a continuation pattern. The continuation falling wedge pattern forms when the trade volume decreases in a solid uptrend.
The Rising Wedge
This formation occurs when the market encounters higher highs and higher lows. When this patterns forms in an uptrend, it is regarded as a reversal pattern. The contracting price range is an indication of the decreasing momentum of the upward trend. When the rising wedge forms in a downward trend, it is regarded as a bullish formation. At this time, the formation is an indication of an increase in the momentum of the downward trend.
Although the rising wedge typically forms as a reversal pattern, it also occurs as a continuation format. As a reversal formation, the rising wedge pattern will slope up alongside the prevailing trend. On the contrary, as a reversal pattern, it will slope downward in the opposite direction of the prevailing trend. In both situations, the rising wedge pattern is always regarded as a bearish formation. It is worthwhile noting that the rising wedge is a consolidation pattern. However, the distinct decrease in the uptrend momentum makes this pattern all the more bearish. Interestingly, the rising wedge demonstrates bullish characteristics due to the high highs and high lows.