Chart patterns are price formations that occur on the markets frequently. Patterns help traders to conduct technical analysis and choose the best trading setups. Both professional and novice traders are actively using patterns in their currency price predictions. Wedge is a chart pattern that appears on the charts frequently and we’ll discuss what Wedge means and how to trade it in detail.
Wedge definition
Wedge is a forex chart pattern that is marked by the crossing of two trend lines. The two lines get closer to one another as the price trading range narrows over time. If the lines are sloped upwards as can be seen in the example below, we have a Rising Wedge. If the lines are sloped down, we have a Falling Wedge. Wedges represent a slow down of energy and determination. When they appear at tops or bottoms, they typically signal reversals.
Why is Wedge important for traders?
- Wedge can be used as a sign of trend reversal.
- If traders know how to set up trend lines, Wedge is easy to spot, and it becomes very useful.
- Wedge can be used as a signal to either enter or exit the market.
- Wedges are quite common. In addition, they offer great risk to reward ratios.
- Wedges can be formed in an uptrend or a downtrend.
Thorough Wedge explanation
Wedge is a price pattern that consists of high and low trend lines that converge towards each other. It can be classified as a reversal pattern when it forms at an uptrend or downtrend. The reversals can be both bullish and bearish. Wedges have converging trend lines, the trading volume always declines as price progresses and lastly, there is a break-out from one of these trend lines and gives traders entry signals.
Wedges are categorized as Rising and Falling depending on their shape. Rising Wedges usually appear in uptrends and signal reversal as the support trendline breaks. Falling Wedges are the opposite in nature but traded the same way. Falling Wedges usually form in downtrends and signal price reversal when trendline resistance is broken. Wedges are very common and offer great risk to reward ratios.
Example of Wedge in Forex
In order to better understand what Wedge means and how to trade it in Forex, let’s take a look at the example below. In the US Dollar vs Japanese Yen example, price action created a Wedge pattern. In order to trade the pattern correctly, we should always wait for the trendline breakout. We can enter the trade after the first candle closes outside the trendline. The Stop Loss target is right below the Wedge formation. The Take Profit target is dependent on the strengths of the newly established trend.
FAQs on Wedge in trading
Is Wedge bullish or bearish?
Wedge can be both bullish and bearish depending on the type of Wedge we are seeing. If it is a rising Wedge that appears in an uptrend, it is likely that a bearish market is approaching, while a falling wedge in a downtrend is a signal of an upcoming bullish run.
How do you trade Wedge in Forex?
Wedges are common in Forex. In order to trade Wedges the right way, you should always wait for the trendline to get broken and only enter the trade after the first or second (confirmation) candle closes outside the trendline. Stop Loss placement is usually on the opposite side of the trendline and Take Profit target depends on the setup.