Swing Trading Strategies & Stock Picks Since 2003

Rising and Falling Wedges are one of the most interesting patterns in technical analysis.  What distinguishes them from triangle consolidation patterns is that price forms an upward or downward sloping coil that leads to the price move.

Here are two examples of the Rising Wedge Pattern, with the first being an Idealized Representation while the second is a real-world example.

Idealized Pattern:

“Real World” Pattern (with stock name and price removed):

What characterizes the Wedge pattern is the converging slope of both trendlines.  The trendlines converge to meet at the Apex, though price is expected to eject out of the pattern prior to reaching the full apex (point at which the trendlines converge).

Classic Technical Analysis states the following:

• Rising Wedges are Bearish Reversal Patterns
• Falling Wedges are Bullish Reversal Patterns

While this is not always the case, it is the classic interpretation of the pattern, which gives a possible pathway (expectation) and yields excellent risk-reward when traded.

How to Trade the Wedge Pattern

For this example, let us assume we have a rising wedge that forms after a lengthy price advance.  Let us assume the pattern is a bearish reversal pattern and we are expecting a market top.

A rising wedge needs at least four ‘touches’ or tests of a trendline to confirm the pattern.  Remember, a trendline needs at least two points to confirm it as valid.  Generally, upon the fourth touch (or test), we would want to be waiting to enter on a breakdown of the lower trendline and place a stop above the upper trendline.

For a more aggressive method of trading rising wedges, you can enter short inside the consolidation inside the 5th swing in price to try for a better execution price.  For falling wedges, you would buy on the 5th swing inside the converging trendlines and place a stop beneath the lower trendline.

Most wedges will break-out of the consolidation range anywhere from 66% to 80% of the way to the apex, though some wedges can wait until price reaches the apex for the actual breakout to occur.

For trivia’s sake, the wedge is comparable to an Ending Diagonal (5-wave impulse pattern) in Elliott Wave.

Volume Confirmation

The wedge is a consolidation pattern, and as such, we would expect to see the volume trend decline (reduce) as either the Rising or Falling Wedge pattern develops, and then expand as price breaks outward from the pattern.  Your confidence is decreased if we see volume surging during the formation of a suspected wedge.

We would expect volume to increase, or perhaps surge, as price breaks out of the trendline and gathers momentum to the downside (or upside).

I scanned various charts and timeframes to find clean examples of this pattern and it was a difficult task, and from my experience, these patterns aren’t all that common.  However, they can be quite powerful if you recognize them developing in real time and act accordingly.