In this part of the course, we will introduce the concept of trading wedge patterns in forex trading for beginners.
Wedges are slightly different because they appear mid-trend and can be either a continuation or reversal pattern in forex trading.
What is a wedge pattern
Wedges occur when the market has pushed in a general direction and then stalls by trading in a range channel that is narrowing over time.
The bars of each session are slowing getting smaller and smaller until the market breakouts out.
Wedges can be identified quite easily by their shape.
The highs are getting lower and the lows are getting higher
These are powerful patterns to spot and can be quite rare on higher timeframes. Spotting one of these patterns can allow you to get a solid breakout trade and we have a couple of tips on ensuring you can achieve maximum results over time.
How To Trade Wedge Patterns In Forex
Let’s have a look at the different types:
Rising Wedge
When the assets price consolidates between an upward sloping support and resistance lines this forms a rising wedge.
A rising wedge forms after the assets price starts to consolidate and trade between a resistance and support level in an upward direction, narrowing as the price goes along – hence forming a rising wedge.
The longer the consolidation period, the more extreme a breakout may occur.
As you can see the pattern creates a similar level of highs and higher lows as the pattern continues.
Hence the terminology – rising wedge.
How To Trade A Rising Wedge
With all wedge patterns note this, the price can breakout on either side of the pattern – it is the breakout direction that we trade.
Bearish Breakout
In this example, you can see after a period of consolidation and the formation of the rising wedge.
Step 1: Identify the rising wedge
You will be able to spot these patterns in candlestick charts easily, but we like to set up our resistance and rising support levels through our line graphs to give us a better representation.
As you can see these lines give us high-quality indications of the price rejection. We must make sure that when we draw these lines that they cover the majority of the close prices. This further validates the lines.
When you switch back to candlestick mode, you will notice how accurate they are to trade from.
Step 2: Breakout Confirmation and Trade Execution.
Standard entry and stop loss execution rules apply. (Should go without saying by now!).
As you can see the wedge respected the resistance level (top of the wedge) and broke out to the downside.
Step 3: Calculate Take Profit Level
To do this we take the range from the widest part of the wedge – this gives us an expected breakout range for the market to fall. In this case, it was 22 pips.
In this example, the green bars represent the wedge’s range which was 22 pips.
By using this information we will be able to place a take profit order at 22 pips with a high chance of profiting 22 pips.
Bullish Breakout
We use the same rules as the previous example but apply it to when the price breaks out of the wedge formation to the upside.
In the brief example above, you should already understand how to generate the pattern and process from the previous example.
In the example above, we can deduce a 10 pip move to the upside as a minimum target level.
Falling Wedge
Next on the agenda is the fall wedge formation.
When the assets price consolidates between a downward sloping support and resistance lines this forms a falling wedge.
A falling wedge forms after the assets price starts to consolidate and trade between a resistance and support level in a downward direction, narrowing as the price goes along – hence forming a downward wedge.
We can easily spot a falling wedge by the formation of the forex market structure producing lower highs and lower lows whilst narrowing over time.
The longer the consolidation period, the more extreme a breakout may occur.
How to trade a falling wedge pattern
Bullish Breakout
Step 1: Identify the falling wedge
You will be able to spot these formations easily, but we like to set up our falling resistance and support levels through our line graphs to give us a better representation.
In the example above, it shows that these lines give us strong indications of the price rejection. We must make sure that when we draw these lines that they cover the majority of the close prices. This further validates the lines.
When you switch back to candlestick mode, you will notice how accurate they are to trade from.
Step 2: Breakout Confirmation and Trade Execution.
Standard entry and stop loss execution rules apply. (Should go without saying by now!).
As you can see the wedge respected the support level (bottom of the wedge) and broke out to the upside.
Step 3: Calculate Take Profit Level
To do this we take the range from the widest part of the wedge – this gives us an expected breakout range for the market to rise. In this case, it was 24 pips.
In this example, the yellow bars represent the wedge’s range which was 24 pips.
By using this information we will be able to place a take profit order at 24 pips with a high chance of profiting 24 pips.
Bearish Breakout
Step 1: Identify the falling wedge
You will be able to identify these chart patterns easily, but we like to set up our falling resistance and support levels through our line graphs to give us a better representation.
The more you get used to switching between the chart and line chart, the better. The methodologies outlined in our free forex course demonstrates the accuracy of using these processes, thus higher quality technical analysis You must draw these lines so that they cover the majority of the close prices.
When you switch back to the candlestick patterns chart, you will notice how accurate they are to trade from.
Step 2: Breakout Confirmation and Trade Execution.
Standard entry and stop loss execution rules apply. (Should go without saying by now!).
As you can see the wedge respected the support level (bottom of the wedge) and broke out to the downside.
Step 3: Calculate Take Profit Level
Just like the other examples, we want to take the widest range of the wedge to give us the best possible indication of how much the market will break out to. In this case, it was 24 pips.
In this example, the yellow bars represent the wedge’s range which was 24 pips.
By using this information, we will be able to place a take profit order at 24 pips with a high chance of profiting 24 pips.
By now, wedges should be fairly straightforward to you and that you should be able to open the MT4 platform and find plenty of examples across different assets.
