What are Falling and Rising Wedges?
When you are trading currency pairs in the forex market, it is essential to know when the market can possibly reverse. The Falling and Rising Wedges pattern help identify market reversal signals and accurate market entry and exit points. The wedges alert you against any significant market highs and lows, enabling you to mitigate risks and maximise profits. Let us understand all about falling and rising wedges in depth.
What is a Falling Wedge Pattern?
A Falling Wedge Pattern is formed when two trendlines meet due to the continuously falling prices of two currency pairs. (A trendline is formed by connecting either two or more highs or two or more lows in a currency pair’s price charts.) The convergence between these two lines sends traders a signal of a market reversal during a downtrend. The prices also start to increase as more and more traders enter the market.
What is a Rising Wedge Pattern?
A Rising Wedge Pattern is formed when two trendlines meet due to the continuously rising prices of two currency pairs. The convergence sends traders a signal of a market reversal during an uptrend, and the prices start to decrease as more and more traders start shorting their trades and exit the market.
How to identify a falling wedge pattern?
The falling or declining wedge pattern indicates a market uptrend reversal. It occurs during falling markets and reverses into increasing prices thereafter. Here is how you can identify the falling wedge pattern in five easy steps –
- Identify the existing trend in the market to be a downtrend.
- Connect the lower low and lower high price points to get two downward sloping lines that converge during a downtrend.
- Calculate the divergence between the current trading price of the currency pairs and the trendlines to see how much the market has deviated from the price highs and lows.
- Confirm the downtrend when the currency pair price moves below the support level and finally reveres and reverses into an uptrend.
- Long the trade at this point to benefit from the rising markets.
How to identify a rising wedge pattern?
The rising or expanding wedge chart pattern indicates a market downtrend reversal. It occurs during rising markets and reverses into falling prices thereafter. Here is how you can identify the rising wedge pattern in five easy steps –
- Identify the existing trend in the market to be an uptrend.
- Connect the higher high and higher low price points to get two upward sloping lines that converge during an uptrend.
- Calculate the divergence between the current trading price of the currency pairs and the trendlines to see how much the market has deviated from the price highs and lows.
- Confirm the uptrend when the currency pair price moves above the resistance level and finally reverses into a downtrend.
- Short the trade at this point to benefit from the falling markets.
Trading Falling and Rising Wedges
To trade the falling wedge, place the buy order immediately at the point where the trendline ends to enter the market and benefit from the increasing prices later on. Placing a buy/long order here is essential because the trend indicates an increase in the prices in the coming trading days reaping traders significant profits.
- The stop-loss order can be placed below the falling wedge’s bottom part to limit losses.
- The take profit order can be placed at the topmost part of the falling wedge’s trendlines to lock in substantial profits.
After identifying a rising wedge, place a shorting order immediately at the trendline’s end to exit the market and lock in profits. This is because the trend indicates a decrease in the prices in the coming forex trading days, and placing a sell order at the top of the wedge minimises losses.
- The stop-loss order can be placed right above the rising wedge’s top part to limit losses.
- The take profit order can be placed at the bottom of the lower trendline to lock in substantial profits.
What are the top trends that Falling and Rising Wedges can confirm
Market trend continuation
When a falling wedge appears in a market uptrend, and a rising wedge appears in a market downtrend, they confirm a continuation pattern, signalling that decreasing prices will continue falling and increasing prices will continue rising.
- The continuation trend in a falling wedge appears whenever the currency pair prices make lower highs and lower lows compared to their historical price range, enabling traders to open new buy positions and average out their previous ones.
- The continuation trend in a rising wedge appears whenever the currency pair prices make higher highs and higher lows compared to their historical price range, enabling traders to either short the trade or hold it and maximise profits.
- Traders can place a stop-loss order below the lowest currency pair price in the falling wedge or above the highest price in the rising wedge to minimise losses.
- The profit target can be the difference between the height of both the trendlines.
Market trend reversal
When the falling market wedge appears in a market downtrend, and the rising wedge appears in a market uptrend, they confirm a reversal pattern, signalling the decreasing prices to now increase and increasing prices to now decrease.
- The market reversal trend in a falling wedge appears whenever the currency pair prices make higher lows and higher highs compared to their historical price range, enabling traders to open new buy positions to benefit from the rising prices.
- The continuation trend in a rising wedge appears whenever the currency pair prices make lower highs and lower lows, compared to their historical price range, enabling traders to short the trade to minimise losses.
- Traders can place a stop-loss order at the end of the wedge, right before the market reversal, to minimise losses.
- The profit target can be placed at a previous resistance level.
How to trade using the Falling and Rising wedges?
1. Open your trade position
Once you have identified a Falling or Rising wedge in the forex chart pattern, you must confirm the trend direction through a breakout or breakdown before opening a new trade. The breakout occurs either above the support trendline (when there is a rising wedge) or above the resistance trendline (when there is a falling wedge). However, a breakdown occurs either below the support trendline of a rising wedge or below the resistance trendline of a falling wedge. Breakouts signal traders to open new trade positions, whereas breakdowns suggest they hold onto the trade for a while.
- The support trendline in a rising wedge is the point where the decreasing prices stop falling, reverse and start rising.
- The resistance trendline in a falling wedge is the point where the increasing prices stop rising, reverse and start falling.
2. Identify the take profit order
Since falling and rising wedges provide you with market reversal trends in downtrends and uptrends, respectively, it signals traders to place their take profit orders equal to the distance between the wedge’s two trendline’s highest high (support) and lowest low (resistance) price. For example, if the support price of the rising or falling wedge is $100 and the resistance price is $50, the take profit can be placed at $50 after the price breakout.
3. Place the stop-loss order
Stop-loss orders in a rising or falling wedge pattern can be placed either some price points above the last support level or below the resistance level. The trade is closed at these points to ensure that losses are minimised, and profits are maximised if the support level fails to turn into a resistance level and vice versa.
What does a descending wedge mean?
The descending wedge pattern is the other name for the falling wedge pattern that provides traders with future upward market direction price signals.
Is a wedge a continuation or a reversal pattern?
A wedge pattern can either be a reversal or a continuation pattern depending on during which market trend it occurs.
- If a falling wedge occurs during a downtrend, it is a reversal pattern. However, if it occurs during a temporary uptrend, it is a continuation signal that the prices will keep on decreasing in the long run. At this point, the pattern indicates that the currency pair prices are making lower lows and lower highs when compared to their historical price movement. Traders receive a signal to short or exit the trade in this situation.
- The rising wedge in upturned is a reversal pattern. However, if it occurs during a temporary downtrend, it is a continuation signal that the prices will keep on increasing in the long run. At this point, the pattern indicates that the currency pair prices are making higher highs and higher lows when compared to their historical price movement. Traders receive a signal to enter or long the trade in this situation.
Are falling wedges bullish or bearish?
Falling wedges are bearish in nature and signal a bullish reversal. It is bearish in nature because it appears after a bearish trend and signifies that bears (sellers) have temporary control of the situation before the market reverses. Since more and more sellers exit the market, selling their currency pairs, the currency pairs hit lower lows before finally correcting themselves and reversing into an uptrend.
Are rising wedges bullish or bearish?
A rising or ascending wedge is bullish in nature and signals a bearish reversal. It is bullish in nature because it appears after a bullish trend and signifies that bulls (buyers) have temporary control of the situation before the market reverses. Since more and more buyers enter the market, buying the currency pairs, the currency pairs hit higher highs before finally correcting themselves and reversing into a downtrend.
Example of a falling wedge
Let us assume that you want to trade USD/EUR, which currently trades at an exchange rate of 2. Due to a news announcement against the Euro, the exchange rate starts falling as the market trends in a downtrend. The currency’s exchange rate falls from 2 to 1.5 to 1.3 in the next few days. This makes the existing traders in the market exit their positions due to the falling prices, and the currency pair starts making lower lows hitting exchange rates at 1.2, 1.0 and 0.75. making new lower lows, the currency pair price corrects itself after touching its support level at 0.70, creating a falling wedge pattern. This pattern indicates an uptrend reversal and provides you with price levels to enter or long the trade at 0.70 to benefit from the market prices. After entering the trade at 0.70, the currency pair prices start increasing thereafter and correct themselves back at an exchange rate of 2 and continue increasing further, reaping significant profits.
Example of a rising wedge
Let us assume that the same currency pair that picked up on an uptrend in the previous example continues to be in the uptrend for the next five months. The currency pair is currently trading at a price level of 3.2, which is very close to its resistance level of 3.5. Due to another economic announcement in favour of the Euro, the exchange rate starts rising even more as the market continues trending in an uptrend. This makes new traders enter the market due to the rising prices, and currency pairs start making higher highs hitting the exchange rate of 3.45. After this point, the currency pair corrects itself after touching the resistance level and creates a rising wedge pattern. This pattern indicates a downtrend reversal and provides you with price levels to exit or short the trade either at 3.45 or any exchange rate close to it due to the downtrend reversal. You decide to exit the current trade at 3.45 and open a short position at 3.4 to benefit from the falling markets. After you close and open the new position, the currency corrects and continues falling further until it corrects itself back at the initial exchange rate of around 2. This leads to you benefitting from the profits reaped by exiting the trade and entering the short position.
Trade Falling and Rising wedges to profit from market reversals
The Falling and Rising wedges provide you with the market reversal trends and critical entry and exit points that can help you significantly improve profits for each trade. Blueberry Markets is a forex trading platform that offers real-time forex currency charts and a secure trading platform for placing forex trades seamlessly, whether you are a new trader or an experienced one. Start forex trading in Australia to kickstart your forex journey. Sign up for a live trading account or try a risk-free demo account.
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