Rising Wedge Pattern: All You Need to Know About It

  •  6 min read
  • 0
  • 02 Nov 2023
Rising Wedge Pattern: All You Need to Know About It

Key Highlights

  • The rising wedge pattern suggests a potential selling opportunity following an uptrend or during a current fall.

  • The entry (sell order) is placed when the price breaches the lower trend line or the bottom edge of the wedge.

  • The stop loss is placed above the back of the wedge.

  • One may figure out the take profit target by extending the height of the wedge's back end downward from the entry.

The rising wedge pattern is a type of convergence pattern. It is also referred to as an ascending wedge. A rising wedge can form when an asset's price rises over time. However, it may occur even during a downtrend. The lines gradually move together as the asset's price stays inside them. Analysts can employ rising wedges to construct trend lines above and/or below them. A trader can predict a probable breakout reversal as long as the lines continue to converge.

Given that wedge formations typically break in the polar opposite direction from the predicted trendline, the price may be outside of either trendline. As a result, the main goal of a rising wedge pattern is to recognise and predict the dropping prices following a price breakout of the lower trendline. Traders can place bearish trades using this breakout. Depending on the asset type, they can do this by shorting their stocks and utilising derivatives like options and futures. Therefore, the goal of the trades would be to profit from the declining prices.

A rising wedge is noticeable when the price of a security increases over time. As long as the lines continue to converge, a trader might anticipate a potential breakout turnaround. Wedge formations sometimes break in the opposite direction from the anticipated trendline. So, it is possible that the price may be outside of either trend line.

Two converging trend lines that link to their respective lows and highs over a period of ten to fifty days are a sign that a wedge is forming. The two lines illustrate how the lows or highs rise, fall, or oscillate at different rates. This gives the appearance of a wedge-shaped configuration when the lines approach their convergence point. The wedge-shaped trendline is an indication of a likely price turnaround of an asset.

Therefore, the primary objective of rising wedge pattern trading is to identify and predict dropping prices after a price breakout of the lower trendline. This enables traders to take bearish positions. They do this by shorting their assets and using derivatives like options and futures, depending on the kind of asset being tracked. Therefore, a transaction's main objective would be to benefit from the falling prices.

A rising wedge forms when the price oscillates between upward-sloping support and resistance lines. This means that higher lows are forming faster than higher highs. The wedge-shaped structure that arises from this gives the chart pattern its name. As prices consolidate, traders may predict a breakthrough to either the top or bottom. This is because it is obvious that a significant impact is coming. If it forms after a rise, the rising wedge is often a bearish reversal pattern.

It's not difficult to identify a wedge that is expanding. You should first get rid of wedges in a sideways trading scenario. The rising wedge can emerge in an uptrend or a downturn when the market movement momentarily corrects higher. The price action shall move lower till it produces the third lower bottom in a row. Following that, buyers keep forcing the price up, creating a growing wedge.

Finally, there is a breakout to the negative as the sellers were unable to profit on their favourable momentum. This wedge slightly shrinks due to the quick convergence of two trendlines. This phenomenon is beneficial in terms of returns against the risks.

Place a sell order (short entry) to enter the stock market as the prices cross the bottom half of the wedge. To avoid false breakouts, wait until the candle closes below the lower trend line before entering. You should place the sell order in the area when the price crosses the lower support trend line.

The Breakdown

The place where the support line breaks is a critical point for the pattern. The rising wedge is confirmed at precisely this point. After that, things move quite fast. The target is rapidly attained whenever a breakdown happens. As a result, traders don't necessarily need to wait for further confirmations when using the ascending wedge. That's because the price immediately lowers to the objective following the breaking point. This is another reason why traders like the rising wedge pattern. It generally comes with a promise of high accuracy and a reasonably simple interpretation.

There is one instance where signal interpretation cannot proceed as smoothly as anticipated. It happens when a price rise tests the new resistance level after the breakdown. However, you shall not face any problem in identifying and interpreting the pattern's signals if you observe the breakdown point carefully.

Conclusion

The rising wedge pattern is a bearish pattern that forms at the peak of an uptrend. It is a convergence pattern. It is a very good indicator to spot trend reversals. The converging trend lines and higher lows indicate a fall in prices. Traders can use it to take bearish positions. The rising wedge may become your new go-to if you're looking for a low-risk/high-return ratio indicator. The indicator is quite appropriate for all kinds of traders, from novices to experts. However, it is essential to properly practise it before using it. Remember that many false trading patterns might appear like a rising wedge. You can lose money if you can’t identify the right pattern.

FAQs on Rising Wedge Pattern

Most of the time, there is no requirement for confirmation before entering a trade using the wedge pattern, particularly the rising wedge pattern in an upswing. Breaking, the rising wedge stock pattern immediately falls to its goals. So, it saves time for the traders.

The rising wedge pattern indicates a weakening trend. It suggests that a downside reversal may take place.

To find the potential target levels, traders often measure the height of the wedge pattern. They are calculated by measuring the widest part of a wedge and projecting that distance downward from the breakout point.

Yes, there are variations like the falling wedge (bullish) and the symmetrical wedge (neutral). Additionally, patterns like triangles and channels share some similarities with the rising wedge.

Yes, there can be false breakouts from a rising wedge pattern. The traders should use other indicators or wait for a decisive price action to confirm a breakout direction.

Enjoy Zero brokerage on ALL Intraday Trades
+91 -

personImage