One huge mistake that a lot of traders make is that they get concerned when a trade does not go in their direction or hit their target right away. This is because of those who have missed the initial move or wanting to get in and take advantage of what seems to be a change in direction, and of course those who are on the wrong side of the trade are happy to get out at either breakeven or something close enough to it in order to protect their trading capital. This is quite common when it comes to market patterns, as it is a phenomenon known as “market memory”, which is where support becomes resistance in vice versa. If you look forward several days, you can see that the same area offered support on a pullback at least twice. The stop loss would have been on the other side of the wedge, which also would have been supported by the hammer that made up the last candle of the wedge before the breakout. Beyond that, we reached the blue line which represents the top of the wedge almost immediately on the breakout. Notice that the trajectory of the lows was not as strong as before, and then of course the highs were becoming as aggressive as well.Īs you draw the two trendlines, you can see that a wedge is most certainly forming. In this case, you are talking about the “falling wedge.” As you can see on the chart below, the US dollar had been falling against the Canadian dollar quite sharply, and then drifted a bit lower. Like almost all chart patterns, there is the opposite of the rising wedge as well. The stop loss that would have been placed above the top of the rising wedge was never even remotely threatened, and you can see we not only hit the target, but bounced back towards the break down again, and then hit the target two more times during the spring and early summer. As soon as the market broke down below the uptrend line of the rising wedge, it was relatively quick to reach towards the target of the bottom of the pattern itself. You can see that the market had been rallying during the months of January, February, and March of 2017. In the example below, take a look at the US dollar/Swiss franc currency pair. While quite often traders will use them on shorter-term time frames, the reality is you can see them on a daily and weekly charts as well, and I would even argue that perhaps they may have a bit more potency and importance built into him on these higher time frames, because it takes much more effort to form the pattern to begin with. By paying attention to the rising wedge, you are noticing that the market is running out of momentum, and that an eminent reversal may be coming. The stop loss would be placed on the other side of the rising wedge pattern, and in this case, it is an easy 1:2 risk to reward ratio. When they get broken, they catch everybody’s attention. So even if they are not trading wedge patterns and are ignoring this current rising wedge, almost all traders pay attention to trendlines. Beyond that, what is even more important is that at the very least most traders around the world will see that the trend line had been broken. The beauty of this pattern is that a break down below the uptrend line signals that we are going to the bottom of the pattern itself, denoted by the blue line. We are losing some of our momentum, and as a result the highs just are not as impressive as they once were. In this example, it is what is known as a “rising wedge.” A rising wedge shows compression in and uptrend that signals that there could be something wrong. The two red lines show what a rising wedge looks like. The highs were getting higher than the ones before but slowing down in terms of momentum. However, you can also see that the sellers were becoming a bit more aggressive, compressing market action on the way up. In this chart, you can see that the New Zealand dollar has been rising for quite some time, and the red uptrend line shows where there was support on the last move towards the top of the chart. Compression is something that should always be paid attention because markets will not compress forever, and eventually inertia comes back into play. If there is an uptrend line, the wedge formation is known as a rising wedge. In other words, you may have an uptrend line as per usual, but at the top of trading during the last several candlesticks, the sellers are becoming a bit more aggressive, compressing the market. It is like a triangle but does not converge in a horizontal manner. In other words, price is compressing from both selling and buying pressure. A wedge is simply two trendlines that converge towards an apex. The first thing that we need to do is identify what a wedge actually is.
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