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78.94% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

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What is a Rising Wedge?

The rising (ascending) wedge pattern is a bearish chart pattern that signals an imminent breakout to the downside. It’s the opposite of the falling (descending) wedge pattern (bullish), as these two constitute a popular wedge pattern. A rising wedge can be both a continuation and reversal pattern, although the former is more common and more efficient as it follows the direction of an overall trend. 

 

In this blog post, we discuss the rising wedge formation, its main characteristics, how to spot it, and how to make sure that your trades involving the rising wedge pattern are profitable. 

Where Does the Falling Wedge Occur?

Similar to the bullish wedge, the rising wedge consists of two converging trend lines that connect the most recent higher lows and higher highs. In a rising wedge, the lows are catching up with the highs at a higher pace, which means that the lower (supporting) trend line is steeper.

 

rising wedge pattern

 

A rising wedge can occur either in the downtrend, when it is seen as a continuation pattern as it seeks to extend the current bearish move. Or it can occur in an uptrend, ultimately resulting in a reversal pattern. The former is considered to be a more popular, and more effective form of a rising wedge. 

As with the falling wedge, we note three key features of a rising wedge:

  • The price action temporarily trades in an uptrend (the higher highs and higher lows)

  • Two trend lines (support and resistance) that are converging

  • The decrease in volume as the wedge progresses towards the breakout


The third point is seen more as a boost to the validity and effectiveness of the pattern, rather than a mandatory element. The decreasing volume suggests that the sellers are consolidating their energy before they start pushing the price action lower towards the breakout.

Strengths and Weaknesses of the Pattern

The main strength of an ascending wedge pattern is its ability to warn us of an imminent change in the trend direction. Despite the fact that the wedge captures the price action moving higher, the consolidation of the energy means the breakout is likely to happen soon. 

Given that the lows are progressing faster than the highs, the wedge is squeezing towards the point where the two trend lines intersect. Despite a push from the downside, the buyers are finding it difficult to break out to the upside, which triggers a move in the opposite direction. 

On the other hand, the rising wedge is still a technical indicator that only generates a signal. As every other indicator, it is not, and it can’t be 100% correct in predicting future price movements. Thus, it is best applied alongside other technical indicators. 

The best possible way to identify the key strengths and weaknesses of a rising wedge is to start analyzing the pattern yourself. For this purpose, MetaTrader 5 trading platform offers a great trading environment which allows you to focus on the price action and get more familiar with this and other chart formations. 

Spotting the Rising Wedge

Identifying a rising wedge is not so difficult. As a first step, you should eliminate all types of wedges that are present in the sideways-trading environment. The ascending wedge occurs either in a downtrend as the price action temporarily corrects higher, or in an uptrend.

USD/CHF daily chart

 

Down here we have a USD/CHF daily chart. The price action is moving lower until a point when it creates a third in the series of the lower lows. Afterwards, the buyers start pushing the price again higher, creating a rising wedge. 

 

Finally, we have a breakout to the downside, as the buyers were unable to capitalize on the positive momentum they had. This wedge is a bit narrower as two trend lines converge quite quickly, which is positive from the risk/reward perspective.

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.

 

Trading rising wedge pattern

 

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. 

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. 

We also have three horizontal lines:
  • 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. 

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