The wedge trading strategy is a reversal strategy that has the potential to generate huge profits. When it comes to price action trading, recognizing certain patterns in the market is most important. Our team at Trading Strategy Guides has spent a lot of time teaching you the most popular and profitable price patterns similar to the Head and Shoulders price pattern strategy.

 

 

In this guide we learn how to define or define the false wedge pattern and the symmetrical wedge pattern. These are almost identical patterns, but not quite the same.

Like most price patterns, you can trade this pattern on any market and on any time frame. No matter what type of trader you are – swing trader, day trader and scalper – you can make huge profits with the descending wedge pattern.

Regardless of the environment that you see a wedge pattern, its shape and the information it presents you with the price pattern has a very clear bearish bias. In the future we will focus on recognizing the descending wedge pattern and the symmetrical wedge pattern and then we will focus on how to trade the strategy effectively.

Note * No technical indicators are required to trade the wedge trading strategy. This is because we are dealing with a pure price action trading strategy.

Before we begin to cover the rules of the strategy in depth, we are going to define them and learn how to recognize each one. Also read Forex Mentors and the best investment you can make.

Fall wedge pattern explained

It is important to realize that the descending wedge pattern has two parts in the price pattern structure:

  • The most important feature of a descending wedge pattern is that we must have a bearish trend before the pattern develops. This is because it is a reversal pattern.
  • Part two is the actual wedge pattern which looks like a downward pointing triangle.

How can you recognize the price structure of a descending wedge pattern?

You should have a series of lower highs followed by a series of lower lows, the more the better. Each lower point must be lower than the previous lows and each higher point must be lower than the previous high.

However, as we approach the end of the descending wedge pattern, you will see the price make lower lows.

As the descending wedge pattern develops, you will see the swing waves become longer and tighter. Especially when we move to the downside. And at some point in the future, the two trend lines connecting the highs and the lows will converge.

The false wedge pattern is only confirmed until it hits the upside resistance.

We can definitely say that there are some characteristics in common between a falling wedge pattern and a bullish flag pattern, but the difference is that the flag pattern is more of a short-term aggressive pattern, while a wedge pattern is more of a long-term price action. We also have training for the best short term trading strategy.

Before we jump into the rules, we still need to define our second favorite pattern, the symmetrical wedge pattern.

Symmetric wedge pattern explained

The symmetrical wedge pattern is another simple price action pattern. It is very similar to the wedge pattern. The symmetrical wedge pattern has the shape of a symmetrical triangle. It can be recognized by the distinct shape created by two divergent trend lines.

It is identified by drawing two trends:

  • One trending downward resistance connecting a series of lower peaks.
  • One upward support line connecting a series of successively higher lows.

And at some point in the future, the two trend lines connecting the highs and the lows will meet on the right side of the pattern.

There are many opportunities to trade the symmetrical wedge pattern. This pattern can appear at the end of a bullish trend as well as at the end of a bearish trend. More than just a reversal pattern, it can also be traded as a continuation pattern.

Often a breakdown of one of the two trend lines will result in a volatile direction. Your job as a trader is to wait patiently and only enter once the breakout occurs.

Let’s see how you can effectively trade the descending wedge pattern and the symmetrical wedge pattern. Follow the wedge trading strategy rules below.

Wedge trading strategy rule – buy opportunities

As a general rule, we should keep in mind that the longer the market consolidates between the upper and lower boundaries of the descending wedge pattern and the symmetrical wedge pattern, the greater the chance of a faster and later rate.

First, we are going to focus on the descending wedge pattern because it has the potential to make outstanding profits.

Step 1: Wait until you can see the structure of a descending wedge pattern on the price chart and draw the two trend lines connecting the highs and lows.

We are just looking for that visual representation of a descending wedge pattern. So, the more compressed the pattern, the better. Finally we break to the top. The volatility behind the breakout will send the price higher very quickly.

Note ** You will often see that the shape and the price structure of a descending wedge pattern can vary from pattern to pattern. Ideally, as long as we follow the preceding definition, we are fine to trade any trap pattern that respects these rules.

Next, we need to figure out where to enter the trade, which brings us to the next step:

Step 2: buy if we break and close above the downward resistance line

It is important before the breakout to see that the price is converging within the two trend lines. So, if the price hits the resistance timeline, the sellers will enter and when the price hits the support trendline, the buyers will enter.

Finally, we get the price printed inside this bound action.

If we get tighter and tighter, that’s what we focus on, as the build-up in pressure can eventually lead to a breakout. To avoid potential false breakouts, we are also going to wait for a close above the upper slope before buying.

Comment *** We must have enough energy and enough momentum to break above the upper resistance level of a descending wedge pattern. If you’re still having trouble identifying a right tempo, we recommend you take a quick look at our trading strategy used by professional traders.

Now that we are trading, we need to find our goal, which brings us to the next step.

Step 3: Take profit as soon as we break above the origin (starting point) of the descending wedge pattern

The starting point of the descending wedge pattern is our first wall of resistance and obviously we want to cash in our profits at the first difficulty area. This is a more conservative target.

Alternatively, you can locate your stop loss below each swing low and try to take as much off the new trend as possible.

Now that we have a good understanding of where to take profit, there is one more thing left that we need to watch out for, namely the Stop Loss placement.

Step 4: Place the protective SL under the last swing layer before the breakout

The place where we are going to hide our stop loss is very intuitive to figure out. The last swing low before the breakout can offer us a very attractive low risk compared to the possible profit available.

A break below the last low would invalidate the falling wedge price structure, so we would want to limit our losses and exit the trade.

Comment * The above was an example of a buy trade… For a sell trade we need to trade the ‘cousin pattern’ which is the rising wedge pattern. Use the same rules – but in reverse – for a sale.

The symmetrical wedge pattern follows the same rule for wedge trading strategy, but the only difference is that we have a more practical way to measure our profit target.

For our profit target, we are going to measure the distance between the high point and the low point of our symmetrical wedge pattern, and you will add the distance to where the price action is.

Summary

The reason why we chose to use the descending wedge pattern and the symmetrical wedge pattern is because people will only realize what is developing after the breakout, but if you pay attention to see these price patterns beforehand, there are big profits waiting for you in the line. You can also trade with the breakout triangle strategy.

The psychology behind the descending wedge pattern is that as the price action narrows, the buyers become more aggressive, while the sellers do not have enough strength to continue pushing the paddle down.

If you compress an object hard enough after it reaches a maximum level of compression, it will bounce back hard. The same principle can be applied to the descending wedge pattern, which is why it has such tremendous potential to earn significant profits.

Thanks for reading!