Broadening Wedge Pattern Updated 2023

If the trading volume increases along with the price, this indicates that the momentum is still strong and the previous price trend is likely to continue. The trend is usually sideways within the expanding wedge pattern. It is created by drawing two diverging trend lines that connect a series of price peaks and troughs. The Falling Wedge can be a valuable tool in your trading arsenal, offering valuable insights into potential bullish reversals or continuations.

Swing traders can trade the pattern from top to bottom and from bottom to top. The breakout direction for Broadening Tops & Bottoms is random. Tall and wide patterns work better than short and narrow patterns. The resistance is the level where the sellers are likely to step in and start selling the security. The support is the level where the buyers are likely to step in and start buying the security. However, you will need to stay flexible until the formation fully develops.

The appearance of this structure thus suggests an overall increase in market activity as the pattern progresses. To trade the descending wedge pattern, you’d look to open a buy position once the market breaks through support, in order to take advantage of the resulting bullish price action. However, a break out doesn’t necessarily mean that an uptrend is definitely on the way – so you’ll want to pay attention to your risk management too. The rising and falling wedge patterns can provide useful signals of upcoming price action, if you know how to trade them. Ascending broadening wedge forms when the price makes higher highs that are connected by an upper trendline and lower lows that are connected by a lower trendline.

Descending Broadening Wedge: Trading Tips

You can trade these chart patterns as range trades between the highs and lows of the support/resistance lines. The Falling Wedge is a bullish pattern that begins wide at the top and contracts as prices move lower. This price action forms a cone that slopes down as the reaction highs and reaction lows converge. In contrast to symmetrical falling broadening wedge triangles, which have no definitive slope and no bias, falling wedges definitely slope down and have a bullish bias. However, this bullish bias can only be realized once a resistance breakout occurs. Broadening wedges are also known as megaphone patterns since they look like a megaphone tilted upwards or downwards.

The higher highs make a rising trend line, this forms the upper boundary to our pattern. The higher lows make a lower rising trend line, this forms the lower boundary to our pattern. Also, certain cross-currency pairs like AUD/JPY, GBP/JPY and EUR/JPY can show prolonged trends that typically arise from the existence of sustained interest rate differentials between the two currencies involved. As the above diagrams illustrate, rising megaphones are usually seen in a bull market and are followed by a downside breakout, while falling megaphones tend to appear in declining markets and break out to the upside. Note that the example above also shows a decline in the MACD-Histogram’s peaks before the patter ends.

• Broadening wedges are difficult to trade for a number of reasons.
• In the context of a reversal pattern, it suggests an upcoming reversal of a preceding downtrend, marking the final low.
• Typically, traders will wait to confirm the uptrend before executing their order.
• This article is for informational and educational use only and is not a recommendation or endorsement of any particular investment or investment strategy.
• StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider.
• This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day.

They then place their take-profit buy order just above that target level and watch it carefully, possibly adjusting their stop-loss order higher as profits accrue on the trade. The ideal place to set a target will be at the upper level where the falling wedge started from, with a stop loss a few pips below the final low before the breakout occurred. Rising wedges typically appear after uptrends, acting as a bearish reversal pattern.

They initially look to sell just below the wedge’s broken lower trendline, while placing their stop-loss order safely above the upper trendline of the rising wedge. Consider a theoretical example of trading a wedge chart pattern involving the EUR/USD currency pair. The rising converging wedge is characterized by a series of higher highs and higher lows, as well as by a narrowing exchange rate range that reflects reducing volatility levels over time as it progresses. Although the rising wedge shows an overall pattern of increasing exchange rates, it generally signals the potential for a downward breakout since upside market momentum is waning along with volatility. We have highlighted partial rises/declines as well as how the measure rule applies to such patterns. Momentum traders follow the initial impulse further pushing prices up.Contrarian traders judge the price to be trading above its intrinsic value, selling and thus creating a decline in prices.

Descending Broadening Wedge Pattern

Volatility grows throughout the pattern, as bulls and bears battle to take control. If it breaks out through support instead, the pattern has failed. The price easily crosses this line and the breakout moves further down before retracing some of the fall. Your profit target points can be found by taking the height of the pattern and adding it to the entry price. Once you have identified this series, you will then need to look for the divergence between the highs and lows. This shift typically occurs after a period of consolidation or range-bound trading.

To trade the ascending wedge, you take the opposite action to a falling wedge. And instead of watching the resistance line, you watch support. The 4-hourly chart of the GBPUSD pair made an ascending broadening wedge from mid-July to mid-August. When the pattern is oriented against the trend the price tends to breakout in the same direction as the original trend. These are continuation patterns and are usually quite small relative to the overall trend. These cases are quite similar to pennants, wedge, flags, and triangles.

When these indicators align with the pattern’s direction, traders can gain more confidence in their trading decisions. You might sometimes see broadening wedges referred to as expanding wedge patterns. Rising (or ascending) wedges don’t just look like the opposite of falling ones. They signify the opposite price action too, with the upward momentum of the pattern itself set to turn into a renewed downtrend if the market breaks down through support.

How long should the preceding downtrend be for a Falling Wedge to qualify as a reversal pattern?

Example of an ascending broadening wedge followed by a downward breakout on AVAX 1h. A falling wedge pattern is seen as a bullish signal as it reflects that a sliding price is starting to lose momentum, and that buyers are starting to move in to slow down the fall. My final chart shows the same falling wedge in Gold that led to a trend continuation when it ended.

Additionally, the resistance should be steeper than the support.Volume tends to increase during the formation of such pattern.Ascending broadening wedges have a bearish bias with breakouts mostly occurring downward. The above figure shows an example of a descending broadening wedge chart pattern. This long and loose descending broadening wedge is typical for this chart pattern type. A partial decline forms at B, and that might be the only redeeming feature of this chart

pattern.

Trading the expanding wedge pattern

If the descending broadening wedge formation emerges in a downtrend, then the trend will reverse. This means that the breakout should happen at the inferior trend line, and results in a continued price movement. It provides crypto traders with opportunities to take sell positions or average their position. When the rising wedge appears in an uptrend, and after an extended price move higher. This is a signal that a reversal of the downtrend is likely to happen.

• Instead, most traders look to take advantage of the oscillations within the pattern itself to earn a profit.
• This phrase means that if you have a rising wedge pattern, you anticipate the forex market to decline by an amount equal to the size of the formation.
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• The horizontal trend line can act as a support or resistance level, depending on where the formation appears on a chart.

Each element provides a particular insight on the direction of the stocks future trend. Pullbacks into the pattern after breakout do occur regularly so place your stops accordingly. The Descending Broadening Wedge is similar to the Ascending Broadening Wedge pattern and the descending variety of wedge broadens downwards. Asktraders is a free website that is supported by our advertising partners. As such we may earn a commision when you make a purchase after following a link from our website.

Broadening Wedge Patterns – “Megaphones”

This occurrence does not necessarily always happen but is another confirmation signal to look out for since the MACD-Histogram also showed a wedge-like formation. In the example shown in Figure 2, the lowest point of the pattern is the target level for the breakout. This formation https://g-markets.net/ is created by two trendlines that diverge from each other and form a right angle. The price will usually trade within the wedge until it breaks to either the upside or downside. Volume levels will then rise significantly upon a breakout (either upward or downward).

71% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. CFD and Forex Trading are leveraged products and your capital is at risk. Please ensure you fully understand the risks involved by reading our full risk warning. You’ll still want to confirm the trend, though, with a red candlestick after the breakout or by looking at indicators.

Once the breakout occurs, traders can execute their trades with calculated precision to profit from the anticipated market reversal that a wedge pattern indicates. Identifying optimal trade entry and exit points to take advantage of a wedge pattern generally requires taking a strategic analytical approach. You may sometimes see falling wedges described as reversal patterns, as the falling price action within the wedge reverses once the market breaks out above the resistance line.