A rising wedge trading pattern shows both the support and resistance lines sloping upward, but the support line slopes upward at a greater angle than the top resistance line. The pattern is generally considered a bearish chart pattern and can be either part of a continuation or reversal pattern. The wedge represents a narrowing or consolidation of the price before a break to the downside. Chart patterns are not a guarantee that an asset price will move in the predicted direction. It only provides an indication of what might happen to the asset’s price.
Wedge patterns used in price action and trading can seem very counterintuitive. With falling wedges, you have two downward lines converging, where the trading thesis revolves around a break to the upside. This can seem confusing because, for novice traders, lines pointing downward should generally indicate a bearish direction. However, this is not necessarily the case with the falling wedge.
The falling wedge indicates that there will be a break to the upside, and the pattern is generally considered bullish. Likewise, with a rising wedge, the pattern is generally considered to be bearish, even though the pattern consists of two trend lines heading in an upward trajectory. A rising wedge is a period of price consolidation when prices narrow until there is a break to the downside.
What is a candlestick pattern?
A candlestick pattern is a graphic representation of changes in price on a candlestick chart that some traders believe can predict future price movements. Bullish patterns predict increases in price, while bearish patterns indicate that the price may drop. Check out our in-depth article about how to read these charts and some other common patterns.
It’s important to note that there are no guarantees when using chart patterns in technical analysis. Chart patterns are only an indication of what might happen to an asset’s price.
What is a rising wedge?
A rising wedge consists of both the top resistance line and the bottom support line sloping upwards, acting as converging trend lines that form a wedge shape. The slope of support at the bottom will be at a greater angle of upward trajectory than the angle of the resistance line at the top. Rising wedges are used in conjunction with various other forms of technical analysis to place trades.
In the trading battle between buyers and sellers, the rising wedge can indicate a period of time when the sellers are gathering strength and waiting to make a push to the downside. Momentum is running out for the buyers, and thus the top resistance line is indeed affected, but not to the extent that it would if the buyers had significant momentum.
A rising wedge can be both a reversal and a continuation trend. In many cases, a rising wedge is part of a reversal trend; the wedge will start to form at the top point of a bullish trend in the market. Once the wedge lines converge and begin reaching their apex or possible convergence point, there should be a break to the downside.
What makes up a rising wedge pattern?
Although wedges look like triangles, there are differences. They both contain two converging trend lines, unlike triangles which consist of either the top line or bottom line being horizontal or both being equally symmetrical. But wedges follow a different path of unequal sloping lines. In the case of a rising wedge, both lines will slope upwards, but the bottom line will slope up at a sharper angle upward than the bottom resistance line. In a way, you can look at it as the bottom line (support) catching up with the resistance. Here is what needs to be present when looking for a rising wedge pattern.
Consolidation occurs when the market is trading within a range but hasn’t broken out significantly in either direction. This may be caused by traders being indecisive with their trades, whether buying or selling. However, in this consolidation timeframe, small patterns can emerge that can indicate a significant break out in one direction or another as the trading range narrows.
Progressively higher highs with a less steep upward slope
A rising wedge pattern will have a top line of resistance level that continues to hit higher highs yet at less of a steep upward trajectory than the support line below. It must also be converging in a direction with the bottom support line. The progressively higher highs represent a push by the buyers, who are losing momentum. The sellers are now biding their time and gaining their strength until they can make a push for the downside.
Progressively higher lows with a steep slope
A rising wedge pattern will encompass a bottom support line that is angled upward with higher lows at a steeper upward slope. It will also be on the path to converge with the top-side resistance trend line. It’s important to note here that the main feature of a wedge is the unequal slopes; the lower support line must be at a more pronounced angle than the resistance trend line to qualify as a wedge.
Multiple points hit
The pattern must hit multiple points to be considered a viable pattern. Most textbooks will say that two points make a viable pattern, meaning there must be two high touches on the resistance line and two low touches on the support line. However, some traders will say that three to five point touches need to be made to constitute an actual pattern.
Break to the downside
The breaking point on a rising wedge pattern is to the downside. The sellers have now gained strength during the consolidation phase as the price has narrowed, and they are making a push to the downside. Regardless of whether the pattern was a continuation pattern in a previous bear market or the reversal of a bull market, a falling wedge is a bearish pattern that will break to the downside.
Real-life example: United States Dollar and Swiss Franc
Here you can see a rising wedge form when looking at price action as it relates to a forex play involving the USD and Swiss Franc (CHF). The wedge pattern forms as a continuation pattern of a previous bear train. The price then consolidates on an upward trajectory, which is where the wedge forms before breaking significantly to the downside.
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Why does a rising wedge pattern occur?
When looking at the behavior of other traders, there are certain clues that can tell you a lot about what people are thinking. A rising wedge is almost always accompanied by a drop in volume during the formation of the wedge pattern, followed by a break to the downside. The drop in volume represents a period of time when the sellers are gathering strength and biding their time. The effect of this period is the price being consolidated, or squeezed, if you will. At a certain point, the buyers will tire of holding the price and, rather than little pushes down, the sellers will break to the downside and start gaining significant momentum.
Rising wedges in a reversal trend (previous bull market)
Rising wedges in a reversal trend occur when a bull market reverses. They will typically occur toward the top of a bull market. The buyers had momentum before the top of the bull market, and now the sellers are pushing back down. As the sellers push the price down, they are met with resistance at the support level, but not so much. This is the period when the sellers bide their time and gain strength, waiting to make a push downward.
Rising wedge in a continuation trend (previous bear market)
A rising wedge can also occur when a previous bear market precedes it. It merely represents a period of price consolidation and a market correction before there is a serious break to the downside. Sellers or people trying to short the price will tell you that this offers buying opportunities. The pattern acts counterintuitively to the general bear market with trend lines going up, which gives price points that would be better than if the bear market trend had just continued.
Why does a rising wedge break to the downside?
A break to the downside will happen in a rising wedge once the two lines reach their convergence or apex points. The buyer’s momentum has slowed, and the momentum is shifting to the sellers. As the window or funnel converges, the sellers will make a move at the breakpoint, and this should represent significant downward pressure.
Volume is important
One of the characteristics of a rising wedge is that volume will be low until the breakout point, in which volume should significantly increase as sellers jump in to confirm their bullish trading theses. If traders are looking at what seems to be a rising wedge pattern, but it cannot be 100% confirmed, then the volume is one of the best ways to measure if a rising wedge pattern is really forming and possibly about to break to the downside. A falling wedge pattern is typically accompanied by breaks to the downside.
Rising wedge trading philosophy
Now that you understand how a rising wedge pattern works, let’s explore how to respond to it.
When would traders open a trade?
Different traders will have their own philosophies when it comes to opening a short trade on the price of an asset showing a wedge pattern. On the one hand, wedge patterns, such as the rising wedge pattern, can take a while to confirm, and there might be false breakouts. However, rising wedge patterns can rapidly gain strength on a downward trajectory.
Some traders will open the short position right at the break, and some will wait for a pullback and a retest, then buy at that point. In terms of candlesticks, this represents buying the candlestick that broke out of the pattern or buying the candlestick down the line. According to most analyses, there is no exact right answer as to when to open the short. It depends on the trader’s own personal preferences.
Trading wedge patterns can be lucrative, but it can also be risky. If you are looking to trade but are concerned about having a stable plan for your retirement, you need to speak with an advisor. Here are some that can help.
How traders manage the downside
On a falling wedge, traders will also try to manage the downside, which would be an increase in the asset price. Some traders might put a buy stop (stop loss for sellers) of the previous low point before the support line was broken through.
Is an ascending wedge bullish?
No, an ascending wedge is typically bearish. It can, however, be preceded by both a bullish trend as a reversal pattern or a bearish trend as a continuation pattern.
What is an ascending wedge pattern?
An ascending wedge pattern consists of two converging trend lines, with the bottom support line sloping at a greater angle than the top resistance line.
Is an ascending triangle bullish or bearish?
An ascending triangle is typically bullish, although it occasionally can be bearish as well. An ascending triangle pattern is different than an ascending wedge pattern in that it usually means a bullish breakout to the upside, whereas an ascending wedge pattern indicates a bearish break down to the downside.
Is an ascending channel bullish or bearish?
An ascending channel will typically appear in a bullish market and, in the short term, indicate bullishness. They can sometimes indicate a change to a bearish reversal in the long term.
- A rising wedge trading pattern is a pattern in which both the support and resistance lines slope upward, but the support line slopes upward at a greater angle than the top resistance line.
- It can indicate a bearish break that will result in the asset price breaking to the downside.
- A rising wedge can be either a continuation pattern or a reversal pattern, depending on the trend that precedes it.
- The pattern typically represents sellers gathering strength while the price narrows until they can make a significant push to the downside.