I want to start a series of articles on various
technical chart patterns. I do believe that if you learn them and start
applying in your trading you will significantly increase your chances of making
stable money in financial markets. I have recently finished one series on
different market conditions: calm trend, calm range, volatile trend and
volatile range and I would suggest that you read those very carefully at least
once. You should find a lot of useful practical tips in each article. Now, this
article will cover a pretty power technical pattern: wedge. I like trading this
one as we usually have a very powerful breakout out of the pattern and prices
move very strongly and fast when a wedge is broken. So, let us analyze what
this pattern is and how you can successfully trade it.
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Become a popular investor at eToro and make money foryourself and others
What is a wedge? It is a technical pattern with a
narrowing range within two converging trendlines (that slant in upward or
downward direction (depending on the type of a pattern: upward or downward))
and that usually indicates an end of a trend that can be traced in the pattern
itself. It means that if you have a falling wedge (prices are going down) the
breakout will most probably be upwards. Price moves between the two trendlines
and the narrowing range builds pressure for an upcoming breakout. If you have a
rising wedge (prices are going down) the breakout will most probably be
upwards. Well, maybe the explanation was kind of difficult, but when you see
the examples you will clearly understand what the pattern is like.
When you finish reading the post I recommend reading other related posts and watch a video below:
Falling
wedge
Falling wedge is recognized as a bullish technical
chart pattern. You can clearly see converging trendlines in the pattern that
has a downward direction. The range is narrowing towards the end of the pattern
and most often than not prices break upwards starting a new trend or continuing
a previous one.
The example above in usd/jpy pair clearly shows us a
nice falling wedge pattern. As the price was moving down and the range of the
wedge narrowing increasing pressure and finally causing the pattern to be
broken upwards with an explosive move. The pair moved around 600 pips when the
upper trendline of the wedge was broken. That is precisely what you are looking
for. You expect the upper trendline to be broken in a wedge. If it is not, the
pattern is finally distorted and loses its’ validity.
How
to trade the pattern?
You need to place a buy stop order above the closest
point where the price hit the upper trendline and then retraced. If it failed
to reach the lowest low (of the pattern) you place the stop loss a few pips
below the retracement (from the upper trendline). In the example above you can
see that the point for entry in usd/jpy was 93.68 level (a few pips above that)
since that was the place where the price hit upper trendline and retraced. The
price however failed to reach previous low and started rising again. The lowest
point of retracement marked a level where we need to place our stop loss order.
In our case that would be 92.71 level (a few pips below that). Open your chart
to find out yourself entry and stop levels for the trade. You either exit your
trades by moving stop loss as the price moves in the direction of the trend
till the stop is hit or you exit your trade at a predefined level. In the
latter case you still need to move your stop in order to protect your profits.
Rising formation
Falling wedge is recognized as a bearish technical
chart pattern. You can clearly see converging trendlines in the pattern that
has an upward direction. The range is narrowing towards the end of the pattern
and most often than not prices break downwards starting a new trend or
continuing a previous one.
The example above in eur/usd pair shows an excellent
rising wedge pattern. As the price was moving up and the range of the wedge
narrowing increasing pressure and finally causing the pattern to be broken
downwards with an explosive move. The pair moved around 900 pips (with minor
retracements) when the lower trendline of the wedge was broken. That is
precisely what you are looking for. You expect the lower trendline to be broken
in a wedge. If it is not, the pattern is finally distorted and loses its’
validity.
How
to trade it?
You need to place a sell stop order below the
closest point where the price hit the lower trendline and then retraced. If it
failed to reach the highest high (of the pattern) you place the stop loss a few
pips above the retracement (from the lower trendline). In the example above you
can see that the point for entry in eur/usd was 1.3203 level (a few pips below
that) since that was the place where the price hit lower trendline and
retraced. The price however failed to reach previous high and started falling
again. The highest point of retracement marked a level where we need to place
our stop loss order. In our case that would be 1.3243 level (a few pips above
that). Again, you either exit your trades by moving stop loss as the price
moves in the direction of the trend till the stop is hit or you exit your trade
at a predefined level. In the latter case you still need to move your stop in
order to protect your profits. As you may see your stop loss was only 45 pips
and the potential profit very big (900 pips). So, when you see a wedge forming
next time get ready to take a trade.
Time
frames
Some say that the pattern has to be three or six
months in length and I could not agree less. You will notice those patterns on
various time frames. If it is a continuation pattern and a wedge is formed in a
counter trend move you would usually see it on hourly chart and that may last a
few days. And then you have a nice breakout in the direction of the prevailing
trend. On a longer term chart (lasting months and weeks) the pattern will
probably signal a reversal and a change of trend.
Ok, I will finish now. Be sure to read related
articles to learn more on technical analysis. I promise to expand on this in my
future posts.
I hope you benefited from the post. If you liked the
post I would also be happy if you gave a plus on Google+, tweeted, liked it on
Facebook and other social platforms. Have a nice day.
Disclaimer
Trading
financial markets carries a high level of risk, and may not be suitable for all
investors. All information on the blog http://trend0.blogspot.com/ is of educational
nature and cannot be considered as advice, recommendation or signals to trade
in any financial markets.