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When wedges appear on the exchange rate chart for a currency pair, it can indicate to an astute technical forex trader a coming reversal or continuation of the preceding trend. The rising wedge pattern occurs quite often on exchange rate charts, giving forex traders valuable trading signals they can use to initiate positions.
In this article, Benzinga describes the basic shape of the rising wedge pattern, how to identify it on an exchange rate chart and techniques for trading rising wedge patterns.
This article also covers how to discern whether the rising wedge pattern is a bearish wedge that suggests the continuation of the former downtrend or a bullish wedge that indicates an upside reversal, as well as how to trade the bullish or bearish pattern once the rising wedge appears on an exchange rate chart.
What is a Rising Wedge Pattern?
Wedges represent the counter-trend convergence of bullish and bearish sentiment on an exchange rate chart seen after a notable directional move. Although wedges have a triangle-like appearance, the main difference is that a wedge’s two converging trendlines will have a well-defined slope in the same counter-trend direction. In contrast, a triangle’s converging trendlines will slope in opposite directions.
The rising wedge pattern appears when the exchange rate of a currency pair consolidates between two rising trendlines, while the falling wedge pattern forms between a pair of falling trendlines. The rising wedge is generally preceded by a downward trend, so the rising wedge evolves as an upwards correction to that falling trend.
When a rising wedge pattern appears on a currency pair’s exchange rate chart, it has two upward-sloping trend lines. The upper of the two converging trendlines represents resistance, while the lower trendline represents support. A rising wedge pattern can be both a reversal and a continuation pattern depending on which of its two trendlines break first.
As the downward trend’s momentum pauses to form the rising wedge, the slope of the lower support line will generally be steeper than that of the upper resistance line. The rising wedge pattern thus forms when the higher lows have a greater magnitude than the pattern’s higher highs.
The following section will describe how rising wedge patterns can be identified on exchange rate charts.
How to Identify a Rising Wedge Pattern on Forex Charts
Rising wedges occur frequently on exchange rate charts, and they are also easy to identify. As shown below in the schematic diagram of a rising wedge pattern, a rising wedge pattern consists of two upwards-sloping and converging trend lines occurring after a downwards directional move.
A breakout below the lower support trendline of the rising wedge pattern is a bearish continuation signal, while a breakout above the upper resistance trendline of the rising wedge is a bullish reversal signal.
A rising wedge can therefore appear either as a bearish continuation pattern or as a bullish reversal pattern in the following situations.
- Bearish continuation pattern: A rising wedge progresses between converging rising trend lines and most frequently occurs as a temporary upwards correction to an overall downtrend. A bearish continuation of the preceding downtrend occurs when the lower support trendline of the rising wedge shows a sustained break to the downside. The initial target for such a breakout is the low point at which the rising wedge pattern originated.
- Bullish reversal pattern: In some cases, a rising wedge pattern can signal that a more sustained upwards correction is likely after a downtrend by starting a reversal to the upside. This less common outcome for a rising wedge pattern signals a bullish reversal when the upper rising resistance trendline of the pattern shows a sustained break to the upside.
When it comes to confirming the more common bearish rising wedge pattern, technical forex traders often look for decreasing trading or tick volume as a bearish rising wedge forms. This chart pattern shows up as a divergence observed between the exchange rate and volume peaks, and it serves to add evidence to the case that a downside reversal could be forthcoming once the market breaks below the wedge’s rising lower trendline.
Another helpful sign to watch for involves to what extent the rising wedge has retraced the preceding downtrend. If the rising wedge has advanced beyond the downtrend’s 50% Fibonacci retracement level, then this may not be a valid bearish pattern. If the 50% retracement level remains unbroken, then a bearish rising wedge pattern remains possible.
The next section will describe how to use a rising wedge pattern strategically when trading currencies to help you incorporate the rising wedge pattern into your forex trading plan.
Trading the Rising Wedge Pattern
A rising wedge pattern can be either a bearish continuation pattern or a bullish reversal pattern. This means forex traders observing what they think is a rising wedge have to exercise patience when this pattern appears and wait for a breakout to show them the most probable subsequent direction for the market rather than assuming in advance what direction the market will move in.
In practice, the trick many technical forex traders use to discern whether the rising wedge pattern is a bullish or bearish pattern involves waiting until either the top or bottom line of the pattern breaks. If the top line of the rising wedge pattern breaks, then it signals a bullish follow-on move, while if the bottom line breaks, it signals a bearish follow-on move.
A breakout from the rising wedge can be confirmed in the usual manner by observing an uptick in trading volume when a breach of the upper or lower trendlines occurs. Once a sustained and confirmed rising wedge breakout is observed, a forex trader can then establish a position in the correct bullish or bearish direction to profit from the anticipated follow-on move.
Regarding the taking of profits when trading a downside breakout from a rising wedge pattern, a good target level to cover a short position would be near the low point where the bearish pattern formation started. The image below shows how a bearish rising wedge appearing on the chart for the EUR/USD currency pair might be analyzed and then traded profitably.
For example, if a rising wedge’s lower trend line were to break on decent volume, then a trader could consider that a bearish signal. They might then look for an opportunity to short the market near that trendline with stops placed safely above it. Once a short position is established, their take-profit order could be placed near the low point of the rising wedge pattern.
On the other hand, if the upper trendline of a rising wedge pattern were to break on rising volume, then an astute trader might consider that a bullish signal. They could then look for a pullback to that trendline to buy the currency pair. They might also place their stop-loss sell orders to protect such a long position safely below the level of the rising wedge’s broken upper trendline.
Incorporating Rising Wedge Patterns Into a Forex Trade Plan
Now that you know how to trade a rising wedge pattern to make profits in the forex market, the next step is to incorporate a strategy for trading this classic chart pattern into your overall trade plan.
If you prefer to automate your forex trading activities, then you can purchase or code an algorithmic trading program or “forex robot” that will first identify promising rising wedge patterns in the currency pairs you wish to trade and then trade them automatically for you based on the instructions you provide. You can see examples of some top forex robots reviewed by Benzinga here.
Many forex traders like to use the popular and free MetaTrader 4 or 5 (MT4/5) trading platforms developed by MetaQuotes for this purpose. You can use those platforms’ MQL4 or 5 programming languages to code such a trading bot or use one coded by someone else as an Expert Advisor (EA).
Frequently Asked Questions
Are wedges in forex profitable?
Yes, you can trade wedges profitably as a forex trader, although since most retail forex traders lose money, getting a decent education on how to do this properly can help considerably.
Can a rising wedge be bullish?
Yes, a rising wedge can be bullish, as well as bearish. If a rising wedge pattern’s upper trendline breaks, then that generates a bullish trading signal.
What happens after a rising wedge?
Once either the upper or lower converging trendlines of a rising wedge pattern break, the market typically continues to trade further in the same direction as the breakout.