Trading the Rising Wedge
We will now use the same chart to show how you should trade the rising wedge. Of course, there are many rising wedges that we can use to show how to trade the ascending wedge, however, we use the same chart to provide a continuity and complete the process - from spotting the wedge to finalizing the trade.
Hence, once we identify the wedge, we process towards the second stage when we look at the trade elements - possible entry, stop loss, and take profit. But first, pay more attention to two vertical red lines. In between these two, the volume is decreasing as the wedge progresses.
We also have three horizontal lines:
The moment the volume breaks the decreasing trend is when the candle breaks out of the wedge. A higher volume behind the break is a great evidence that the breakout is happening, as you can see a strong increase in volume figures once the breakout starts taking place.
- black (entry)
- red (stop loss)
- and green (take profit)
Entry is placed once we have a first daily close outside of the wedge’s territory. Stop-loss
should be set inside the wedge’s territory as any return of the price action to the inside of the wedge invalidates the pattern.
In this particular case, the distance between the entry and stop loss is very short, since two trend lines have almost intersected. Hence, the risk in this trade is extremely low. As with the falling wedges, the take profit is calculated by measuring the distance (the short blue vertical line) between the two converging lines when the pattern is first formed.
Finally, we have our trade details: Entry - $0.9835, stop loss - $0.9855, take profit - $0.9695. Thus, we are risking 20 pips to make 140 pips, which is an extreme scenario in the risk-reward context.
Given the very small amount of pips that you risk with this scenario, you may also opt to decrease the amount of pips you are targeting from 140 pips to 70, given that a level of $0.9765 is where an important horizontal resistance is located. Choosing between these two options depends on your risk tolerance and overall trading approach.
You can also check how both of these approaches work by opening trades on the demo account, which you can do here. This way you start practicing first and choosing the best trading approach that fits your skill set, as one size does not fit all.