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Lesson 6: The Falling and Rising Wedge Trading Strategies

By: Informedtrades.com Lesson 6: The Falling and Rising Wedge Trading Strategies In our last lesson we learned about the falling wedge and the rising wedge patterns, two chart patterns which can be seen as reversal or continuation patterns depending on whether they appear in an uptrend or a downtrend. In this lesson we are going to learn a trading strategy traders of the stock, futures, and forex markets commonly use to trade these chart patterns. The Falling Wedge Reversal Strategy: As you hopefully remember from our last lesson when a falling wedge appears in a downtrend it is considered a reversal pattern. As this is the case when traders see this pattern occur in a downtrend they commonly look to trade a reversal of that downtrend so they are looking for buying opportunities. The buy point they will commonly use is the breakpoint of the upper resistance line as this is seen as a potential confirmation that the downtrend is reversing. The target for the trade is then calculated by measuring the distance from the highest peak on the pattern to the lowest trough, projected upward from the beak point. Lastly, the stop loss is placed just below the outside of the wedge formation. Example of the Falling Wedge Reversal Strategy: When a falling wedge appears in an uptrend, this is seen as a potential continuation pattern. As this is the case when traders see this pattern occur in an uptrend in the forex, futures, or stock market, they will commonly look to trade in the direction of the prevailing trend. The buy point they will use here as well is the breakpoint of the upper resistance line as this is seen as a potential confirmation of the continuation of the prevailing uptrend. The target for the trade is then calculated by measuring the distance from the highest peak on the pattern to the lowest trough, projected upward from the breakpoint. Lastly, the stop loss is placed just below the outside of the wedge pattern. Example of the Falling Wedge Continuation Strategy: As you also hopefully remember from our last lesson, when a rising wedge appears in an uptrend this is considered a reversal pattern. As this is the case when traders see this pattern occur in an uptrend, they will commonly position to trade the reversal of that uptrend by looking for selling. The sell point they will commonly use is the breakpoint of the bottom support line as this is seen as confirmation the uptrend is reversing. The target for the trade is then calculated by measuring the distance from the lowest trough on the pattern to the highest peak, projected downward from the breakpoint. Lastly, the stop loss is then placed just above the outside of the wedge pattern. Example of a Rising Wedge Reversal Strategy: When a rising wedge appears in a down trend in the forex, futures, or stock market, it is considered a continuation pattern. As this is the case when traders see this pattern occur in a downtrend they will commonly look to trade the continuation of that downtrend by looking for selling opportunities on the break of the lower support line. The target for the trade is then calculated by measuring the distance from the lowest trough on the pattern to the highest peak, projected downward from the breakpoint. Lastly, the stop loss for this strategy is then placed just above the outside of the wedge pattern. Example of a Rising Wedge Continuation Pattern: That concludes our lesson. You should now have a good understanding of how to trade both the falling wedge and rising wedge pattern. In our next lesson we will start looking at continuation patterns beginning with the Flag and Pennant chart patterns.