If you're trading the re-test, make sure that this trough is also higher than the final trough before the breach, so that you now have a higher low and a higher high. With a falling wedge, the trend has changed once the price action has been breached and closed above the level of the last peak. Another point worth noting is that the wedge chart pattern will usually reverse the direction of the trend. It is true that some money will be "left on the table" but entering after the re-test increases the odds of success more than simply entering on the breach. Nevertheless, this is a more conservative trading style. So if you only try to trade wedges after the retest, you may miss some moves. Please remember that "tendency" does not mean "every time". A wedge does have the tendency of re-testing the line it has just breached prior to going for a run. This brings us to the behavior of the wedge pattern when it does decide to break out. When a valid breakout occurs you will see an increase in volume and this provides reassurance that it stands a chance of continuing in the short term. In our first image above, the price action did exactly that - it broke out to the upside. When examining this statement it is apparent that the "steeper side" for a falling wedge chart pattern is the upper side, or resistance line. It has been put this way: "A wedge has a habit of breaking out towards the steeper side". Falling wedge patterns have a habit of breaking out in an upwards direction and increased volume on the up-swings is our warning signal. The only time you are likely to notice an increase in volume for the upward price action, is when a breakout is in preparation. This is primarily due to the well known fact that a falling share price will have less volume on the pull backs and more on the runs. Trading in the opposite direction, indicated by the green dots, will usually have a reduced level of volume. Looking at the image above, you'll notice the trading area indicated by red dots will typically have higher volume and consequently, trading put options or short selling will be more profitable. When we have a falling wedge chart pattern, the falls of the share price when bouncing off the upper trend line will offer better option trading opportunities for a while because they are in harmony with the overall trend, while the upward price action will see increasingly less probability of success because the overall momentum of the price action is still downwards. This is a warning sign that at some point in the near future, the channel will either continue, or more likely, break down. If you're well into the channel - and particularly if it has formed 5 or more 'waves' in true Elliott Wave fashion, then you may notice that the peaks and troughs are now converging together. Before this happens however, it's not uncommon to have previously identified the price action as a channel.Ī good channel pattern can be traded both upwards and downwards but as the saying goes "all good things must come to an end". Another typical feature of wedge chart patterns is, that the further the price action drives into the apex, the more the trading volume for the stock will begin to decline. You will also notice that as the price action moves further into the wedge, the range of price movement between support and resistance is constantly reduced.Īs the constriction takes hold, it no longer becomes profitable for directional traders to enter directional positions within this pattern. In above chart we see both support and resistance lines converging toward each other.
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