A wedge pattern consists a falling or rising band of prices that can be delimited with two trend lines, acting as immediate support and resistance, that are sloping towards each other and gradually would reach an intersection point.
The upper sloping line, best drawn over three point, is a resistance or supply line. The lower sloping line, best drawn over three point, is a support or demand line.During the formation of a wedge, prices consolidate or correct a bit, which is telling of some indecision between bears and bulls. A wedge shows that price action and momentum during the primary and present trend is under pressure.
As a reversal pattern, the falling wedge slopes down and with the prevailing trend. As a continuation pattern, the falling wedge will still slope down, but the slope will be against the prevailing uptrend.
Triangles and Flags and pennants can look much the same to the untrained eye. However, flags and pennants are patterns that form for a much shorter time period (~1 to 4 weeks) and require a much steeper, up- or downtrend prior to the pattern.
Wedge patterns usually mature over a 3-6 month period and the preceding trend, of which there has to be one, should be at least 3 months old.
Wedges patterns are also of two other kinds – rising (bearish) and falling (bullish).
Rising wedges are labeled bearish because they tend to break downwards.
A rising wedge pattern is recognized by the two sloping lines in an upward trend. The rising wedge pattern shows that the market is making successively higher highs and higher lows. However, while the lower line of the pattern is sloping up faster than the upper line, the highs are getting decreasingly lower. Upward pressure is softening and bullish sentiments are losing momentum to the effect that the trend possibly reverses.
Sometimes, the current trend is totally contained within the rising wedge; other times the pattern will form after an extended advance.
Falling wedges are labeled bullish because they tend to break upwards.
A falling wedge pattern is recognized by the two sloping lines in a downward trend. The falling wedge pattern shows that the market is making successively lower highs and lower lows. However, while the upper line of the pattern is sloping down faster than the lower line, the lows are getting decreasingly lower. Downward pressure is softening and bearish sentiments are losing momentum to the effect that the trend possibly reverses.
Even though selling pressure may be diminishing, demand does not win out until resistance is broken.
Traders may look for additional confirmation of price continuing in the direction of the breakout and avoid buying a breakout on low volume. Bullish confirmation of the pattern does not come until the resistance line is broken in convincing fashion. It is sometimes prudent to wait for a break above the previous reaction high for further confirmation. Once resistance is broken, there can sometimes be a correction to test the newfound support level.
Ideally, volume will decline as prices rise and the rising wedge forms. However, volume is not particularly important on rising wedges. However, it is an essential ingredient to confirm a falling wedge breakout. Without an expansion of volume, the breakout will lack conviction and be vulnerable to failure.