In our last lesson, we looked at specific strategies for trading the head and shoulders pattern and the reverse head and shoulders pattern, two patterns which can be considered reversal patterns when they show upon a chart. In today’s lesson, we’re going to look at something which is known as the wedge pattern, which is unique in the sense that it can be considered either a reversal or a continuation pattern depending on the shape of the pattern and whether it occurs in an uptrend or a downtrend. So let’s get started.
We’re going to start this one out by looking at the falling wedge pattern which is characterized by a pattern which forms when the market makes lower lows and lower highs, with a contracting range. When you find this pattern in a downtrend it’s considered a reversal pattern as the contraction of the range indicates the downtrend is losing steam. When you find this pattern in an uptrend, it is considered a bullish pattern as the market becomes narrower into the correction, indicating that it is running out of steam and the resumption of the uptrend is in the making.
You see here a chart of the dollar index. And you see the downtrend in place there. You can see the falling wedge in place there. And you can see the two lines, the two trend lines coming together as the pattern or the market continues into the downtrend, indicating a contraction of the range and a potential reversal there — which we did actually get, in this instance.
On the opposite side of that, you see the uptrend on the left hand side of the chart here. You see the falling wedge there. You see the contraction of the trend lines on one another, indicating the correction narrowing into the bottom there and indicating a potential continuation of the uptrend. So the market corrects then turns back around into the original uptrend. So you can see why it’s considered a continuation pattern there.
The rising wedge pattern, on the other hand, is characterizes by a pattern which forms when the market makes higher highs and higher lows with a contracting range. When you find this pattern in an uptrend it’s considered a reversal pattern as the contraction of the range indicates that the uptrend is losing steam. When you find this pattern in a downtrend it’s considered a bullish pattern as the market becomes narrower into the correction, indicating that the correction’s running out of steam, and the resumption of the downtrend is in the making.
See here rising wedge. See the start of the downtrend to the left of that. See the break below in the continuation of the downtrend on that. You see the contraction of the two lines together, two lines coming together there. Contraction of the market trend indicating it’s losing steam or that the correction is losing steam and a resumption of the downtrend.
Here we have the uptrend in place. On the left hand side of the chart we see the rising wedge. At the top of that indicating that uptrend is losing steam. And we see the reversal actually coming into play there, as well on this one.
So that’s our lesson for today. You should now have a good understanding of the falling and rising wedge patterns in situations which they’re considered a reversal pattern and continuation pattern.
The 5th lesson in a series on charting patterns which goes over the rising and falling wedge patterns.