Rising wedge patterns are bigger overall patterns that form a big bullish move to the upside. They form by connecting 2-3 points on both support and resistance levels. Price action forms a big up channel. It becomes bearish once price fails the base of the wedge. Look for a retest of the base of the wedge and if it fails then you have bearish confirmation.
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What Are Rising Wedge Patterns?
A rising wedge pattern consists of a bunch of candlesticks that form a big angular wedge that is moving up in price. It is a bullish candlestick pattern that turns bearish when price breaks down out of wedge.
Rising wedge patterns form by connecting at least two to three higher highs and two to three higher lows which become trend lines. They are bearish reversal patterns. The rising wedge pattern can sometimes be a continuation pattern as well but that’s a rare occasion.
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.
Note how the volume was fairly low here during the melt up within the wedge. Buyers and sellers tend to appear when major areas of support or resistance are broken.
Candlesticks such as the long legged doji, bullish candlesticks or even dragonfly dojis give warnings ahead of time. Rising wedges will sometimes break, and expand into larger rising wedges.
Wedges 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.
As price begins to trade in the narrowing trading range; wait for confirmation of the break out before shorting the move down.
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 than others; this is known as a reversal pattern. Starting wide at the bottom and moves into a point at the top as price begins to trade in the narrowing range. If they are 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).
Check out the reversal pattern looming with $SPY here – notice the red candle at support. The chart pattern provides a good entry in several different points along the pattern.
Rising Wedge Patterns show the emotions on the charts. 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. Buyers and sellers show their emotions as they create large amounts of buying and selling (as shown on the volume portion of the chart) at support and resistance.
The upper resistance line needs at least two reaction highs; ideally want three to form. Each high should be higher than the previous high. It is heading up.
The lower support line needs at least two reaction lows thus forming the support level. Each low should be higher than the previous low. It is forming higher lows.
How to Trade Rising Wedge Patterns
- Look for a rising wedge pattern to form by connecting two to three peaks and valleys
- Connect the peaks and valleys via trend lines
- Once price breaks down out of the peak of the wedge take short entry
- Use candlestick close above peak of wedge as your stop
Support Break Confirmation
This can be one of the more difficult patterns to trade due to needing the bearish confirmation to occur and that does not happen until the support line is broken.
It cannot just be broken but needs to be broken in a convincing fashion. Always wait for that confirmation 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 is going to hold.
If that resistance level holds, 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!
$XLF rising wedge in Dec 2019 – This is near ALL TIME HIGHS! Similar area to the levels during the 2008 Global Financial Crisis
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. Look for a wedge with about 15-20% left of the expected a move
There is no way traders can perfectly measure the decline so using technical analysis helps. Some traders prefer to use Fibonacci retracements and other trend lines to find the next level of support after a rising wedge has broken.