Trading The Rising Wedge Pattern

Today we will look into the rising wedge pattern which occurs in the markets when price contracts in a specific direction. On a chart, you will observe a trendline underneath price and channel line above.

Within the wedge, the market still has bullish momentum, but breakouts out of this pattern can occur in either direction.

If price trades within the wedge for an extended period and volume decreases, the probability of a bearish breakout increases. This is shown through candlestick formations etc.

What to look for?

Now, when looking for rising wedges in the Forex Market, you should have a minimum of 3 confirmed points/touches that create the support level (trendline), and the same goes for the resistance level (channel line). This makes spotting and trading the pattern easier.

Why trade on the breakout or retest?

Some Forex traders enjoy trading within the wedge, which may have its benefits some times, BUT more often than not, it could land you in some trouble. The correct approach would be to trade the breakout and retest of the rising wedge pattern for various reasons, such as:

  1. There is a better risk to reward ratio.
  2. It is easier to spot when your trade is incorrect.

Confirmation

With any wedge pattern, you can get confirmation from candlesticks. No matter the timeframe traded. Without the confirmation, it is crucial to stay away from the trade so you don’t lose money that you shouldn’t have risked without a signal!

Many traders ask, “Do we have to wait for a break and retest or is there another way to get in on the action??” The answer to that is you don’t have to wait (even though that would be advised).

You can get in on the 3rd touch for the sell, provided there is confluence to support your bias. Whether it be – Support and resistance levels, Fibonacci, or even a head and shoulders pattern (it is possible to find patterns within patterns). I say this because the markets are not perfect and not every opportunity will present itself perfectly.

Placing stop losses

Where and why?

  1. Place your stop loss above the previous high or a certain amount of pips above your entry according to market conditions and backtested data.
  2. It may sometimes be hard to place stops or find areas to place stops because each rising wedge is unique. Some traders may decide to put their stops above the close of their confirmation candle, which is also fine, as long as you manage risk correctly.

 

Why would someone do either?

Well, the first is the safest option and it gives the trade breathing room, in case of any sudden movements.

The second method is more aggressive and aims to achieve a higher risk to reward ratio (which isn’t guaranteed).

Placing take profits

If this has been your worry, then you don’t need to worry anymore. Setting take profits has never been easier! In the case of a rising wedge pattern, you would set your take profit at the appropriate support levels.

Each of those support levels could be a take profit area, depending on how long you are willing to hold the trade, what time frame you are trading, fundamentals etc.

From this point on, it is all about management! How you manage the trade determines whether you enjoy the end result or not. So focus on the setup and managing the trade!

 

Happy trading fellow Traders!

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Emmanuel Maphosa

Emmanuel Maphosa

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