There are numerous technical analysis patterns that indicate a reversal in market trends. A rising wedge is a formation that helps traders spot downward price reversals. This FXOpen article will explain how to identify a rising wedge to spot market trends and explore whether it provides bullish or bearish signals.
What Does a Rising Wedge Signify?
A rising wedge, also known as the ascending wedge, is a technical analysis chart pattern. Is the ascending wedge bullish or bearish? It’s usually considered a reversal pattern that is formed in an uptrend signalling a reversal of a market trend. Still, it can occur in a downtrend, signalling a continuation of an existing bearish trend. The wedge appears when the upper and lower trend lines connecting the higher highs and higher lows converge with the gap squeezing towards the intersecting point.
Though the buyers push the price from the downside, they face resistance in breaking it towards the upside, which finally triggers a move in the opposite direction.
It works on any timeframe. However, the larger the timeframe, the greater its success rate. Additionally, it can be applied to any asset class; for instance, you can spot an ascending wedge stock pattern or a commodity, cryptocurrency*, or currency pattern. You will only need to adjust the parameters according to your trading strategy.
How to Spot a Rising Wedge Reversal Pattern
A rising wedge chart pattern can be formed in an existing downtrend or an uptrend. Moreover, the use of other technical indicators with the pattern helps in further determining its validity. Traders can spot the formation with the following features.
- Price. The price temporarily trades in an uptrend forming higher tops and higher lows.
- Trendlines. The two trendlines connecting the higher tops and higher lows converge at the intersection point as the gap squeezes. The upper trendline connecting the higher tops should connect two or more points. Similarly, the lower trend line should connect two or more higher lows. The higher the number of points the trendlines connect, the greater the chance of a price breakdown.
- Volume. The volume decreases as the formation progresses, signalling that buyers are finding it difficult to push the price upside. Further, the sellers consolidate their force before they start to push the price lower from the support point.
Falling and Rising Wedge: The Differences
The wedge formation can be of two types – rising (ascending) or falling (descending).
The ascending wedge occurs with the slope of highs and lows rising, whereas the same slopes fall in the case of a descending wedge. The slope of the lows is steeper in the case of a rising wedge so that it converges with the upper trendline, whereas in the case of a falling wedge, the slope of the highs is steeper as it converges with the lower trendline.
The rising wedge pattern usually means a breakdown to the downside. At the same time, the falling or descending wedge generally results in a breakout to the upside.
How to Trade the Rising Wedge: Is It Bullish or Bearish?
The rising wedge pattern in an uptrend indicates a price reversal. Similarly, in a downtrend, it indicates the continuation of the prevailing bearish trend. However, the trading rules are the same in both. Using other technical indicators with the pattern is useful to confirm its validity.
For example, the Fibonacci retracement can also be used. The price retracing up to 50 to 61.8% of the previous downtrend and facing resistance there may indicate that the chart formation could lead to a downside breakout. You will see in the trading example below how Fibonacci retracement can be used to confirm the ascending wedge.
The bearish rising wedge pattern suggests that a trader should go short when the price breaks the lower support trendline. Depending upon whether they have a conservative or risky approach, traders wait for a few candlesticks after the breakdown or open a short position when the breakout candlestick closes, respectively.
- Take Profit
A general take profit equals the size of the largest part of the pattern and is measured by adding the same to the breakout point. The target is often reached quickly in comparison with the time taken for the formation.
- Stop Loss
Traders often use the risk-reward criteria of 1:2 or 1:3, depending on their risk appetite. Larger stop losses can lead to unfavourable risk-reward ratios, thereby significantly increasing risk exposure; hence traders can use the upper trendline to place a stop loss just near it.
The rules are general, and the traders can adjust the parameters according to their own trading style. You can try TickTrader to learn to identify different chart formations in the live market.
Rising Wedge: Trading Example
The figure above shows that an ascending wedge was formed on the weekly chart of the GBP/USD pair. After the downtrend, the pattern appeared with bulls trying to push the price from the downside but facing resistance at the higher level. It can be seen that the resistance coincides with the 50% retracement of the previous downtrend, which further confirms the validity of the chart formation.
The gap squeezed as the two trendlines converged, finally leading to a breakdown. Traders can go short when the breakout candle closes at 1.35053 and place the stop loss near the upper trend line at 1.43853. The take target can be the size of the largest part of the pattern added to the breakout point, which comes at 1.14799.
The Bottom Line
The rising or ascending wedge is among the most popular technical analysis patterns that traders use to identify trade opportunities. However, traders can’t be 100% sure that it will work all the time; hence, it should be used in combination with other technical indicators, and the risk must be properly defined.
You can open an FXOpen account to learn more about technical analysis and how to use different chart formations to spot trade opportunities.
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