Rising wedge patterns are bearish reversal patterns. The rising wedge pattern can sometimes be a continuation pattern as well but that's a rare occasion. Watch our video below to learn more about rising wedges.
Wedges hold price waves. The waves are made when the price moves inside a narrowing range. Those waves are filled with candlesticks that give you signs. Candlesticks such as the long legged doji candlesticks, bullish candlesticks or even dragonfly doji candlesticks give you warnings ahead of time.
Wedges kind of look like triangles but the pattern they form means something different. Triangles are formed by price moving sideways where as wedges move up or down with pretty significant price movement.
When rising wedge patterns complete, the price breaks out, usually in the opposite direction the wedge was pointing. Rising wedges point up so when price breaks out it breaks down. Some rising wedges are vectored at steeper inclines then others.
This is why it’s known as a reversal pattern. It starts wide at the bottom and moves into a point at the top as price begins to trade in the narrowing range. If the rising wedge is part of a continuation pattern it still has the slope up.
Instead of price breaking down though, it continues up, until a point (they always end, even if it is only briefly). As a reversal trend it slopes up with the trend and then breaks down (and signals a good entry or exit on a trade!).
As price begins to trade in the narrowing trading range you may see doji candlesticks that tell you of indecision. Wait for confirmation of the break out before shorting the move down. You don’t want to get caught in thinking it’s breaking down and instead it goes up.
If you’ve been watching our candlesticks patterns videos or reading our blog posts, you’ve probably noticed by now that trend lines are pretty important. Being able to draw trend lines correctly is a pretty important skill.
Not only do they map out patterns such as rising wedge patterns but also symmetrical triangle patterns or ascending triangle patterns. Trend lines also form key support and resistance levels.
Price will break above or below these levels and then retest them. Not being able to draw these properly can result in making bad entries into a stock.
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In order for rising wedge patterns to form they need an upper resistance line and a lower support line. Hence…trend lines that double as support and resistance and pattern forms.
The upper resistance line needs at least two reaction highs to form. Ideally you’d want three. Each high should be higher than the previous high. It’s heading up.
The lower support line also needs at least two reaction lows. This forms the support level. Each low should be higher than the previous low. It’s forming higher lows.
The two support and resistance lines move together to form the pattern as it matures. The moves up from the support line become shorter which makes rallies unconvincing.
This in turn, creates a resistance level that fails to keep up with the slope of the lower line.
Rising wedge patterns can be one of the more difficult Japanese candlesticks patterns to trade. You need the bearish confirmation to occur and that doesn’t happen until the support line is broken.
It can’t just be broken but needs to be broken in a convincing fashion. It’s important to wait for that conformation before jumping in to short sell.
Once support is broken there may be a reaction rally to test the new resistance level. What once was support is now resistance. Traders test that to make sure it’s going to hold.
If that resistance level holds, they can buy put options or short sell. This pattern has higher highs and higher lows making it inherently bullish even though it has a bearish bias.
Stocks trade on supply and demand and when the final break of support happens, you know the supply is more than the demand. This makes the price of the stock fall. Shorts look to hop in and bulls look to take profit!
Rising wedge patterns indicate that a bearish downturn can be expected when the rising wedge channel begins to get too tight, or the price breaks down out of the lower half of the trend line. I look for when there is about 15-20% left of the wedge pattern left and expect a move in this zone.
There’s no way you can perfectly measure the decline so using technical analysis helps. I prefer to use Fibonacci retracements and other trend lines to find the next level of support after a rising wedge has broken.
Price is always moving so using patterns along with candlesticks can help you trade a stock that is in a down trend or up trend, and anticipate the next move so you can place a trade and profit!
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