![]() This brings us to the behavior of the wedge pattern when it does decide to break out. When a valid breakout occurs you will see an increase in volume and this provides reassurance that it stands a chance of continuing in the short term. In our first image above, the price action did exactly that - it broke out to the upside. When examining this statement it is apparent that the "steeper side" for a falling wedge chart pattern is the upper side, or resistance line. It has been put this way: "A wedge has a habit of breaking out towards the steeper side". Falling wedge patterns have a habit of breaking out in an upwards direction and increased volume on the up-swings is our warning signal. ![]() The only time you are likely to notice an increase in volume for the upward price action, is when a breakout is in preparation. This is primarily due to the well known fact that a falling share price will have less volume on the pull backs and more on the runs. Trading in the opposite direction, indicated by the green dots, will usually have a reduced level of volume. Looking at the image above, you'll notice the trading area indicated by red dots will typically have higher volume and consequently, trading put options or short selling will be more profitable. When we have a falling wedge chart pattern, the falls of the share price when bouncing off the upper trend line will offer better option trading opportunities for a while because they are in harmony with the overall trend, while the upward price action will see increasingly less probability of success because the overall momentum of the price action is still downwards. ![]() This is a warning sign that at some point in the near future, the channel will either continue, or more likely, break down. If you're well into the channel - and particularly if it has formed 5 or more 'waves' in true Elliott Wave fashion, then you may notice that the peaks and troughs are now converging together. Before this happens however, it's not uncommon to have previously identified the price action as a channel.Ī good channel pattern can be traded both upwards and downwards but as the saying goes "all good things must come to an end". Another typical feature of wedge chart patterns is, that the further the price action drives into the apex, the more the trading volume for the stock will begin to decline. You will also notice that as the price action moves further into the wedge, the range of price movement between support and resistance is constantly reduced.Īs the constriction takes hold, it no longer becomes profitable for directional traders to enter directional positions within this pattern. A common stop level is just outside the wedge on the opposite side of the breakout.In above chart we see both support and resistance lines converging toward each other. The target can be estimated through the technique of measuring the height of the back of the wedge and extending it in the direction of the breakout. These wedges tend to break upwards.Ĭonservative traders may look for additional confirmation of price continuing in the direction of the breakout. In other words: the highs are falling faster than the lows. The second is Falling wedges where price is contained by 2 descending trend lines that converge because the upper trend line is steeper than the lower trend line. In other words: the lows are climbing faster than the highs. The first is rising wedges where price is contained by 2 ascending trend lines that converge because the lower trend line is steeper than the upper trend line. There are 2 types of wedges indicating price is in consolidation. The Wedge pattern can either be a continuation pattern or a reversal pattern, depending on the type of wedge and the preceding trend.
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