Wedge Chart Pattern in Forex Trading
- What is the wedge chart pattern?
- What does the wedge chart pattern show us?
- How to spot the wedge chart pattern on your charts
- How to use the wedge chart pattern while you trade
- General tips for using the wedge chart pattern
If you are using price action to trade Forex, one helpful chart pattern to be on the lookout for is the wedge.
Wedge patterns may form in uptrends or downtrends, and may signal either a reversal of a trend or a continuation.
In this guide, we explain exactly what a wedge pattern is, what it shows us, and how you can identify wedge patterns on your charts and use them to plan trade entries.
What is the wedge chart pattern?
A wedge pattern is a triangular pattern on your chart that is formed by two trend lines converging together. These trend lines are drawn across the highs and lows of your bars or candles. The wedge may either point upwards or downwards.
There are four main types of wedge patterns. We will explain them in the section below and tell you what each of them mean.
What does the wedge chart pattern show us?
Here are the four types of wedge patterns you may encounter and what each of them is telling you.
Upward-pointing wedges (bearish wedges)
Wedges that point upwards form when you see progressively higher highs and higher lows. Upward-pointing wedges are bearish, and may occur in either of two contexts:
- In an uptrend: When you see an upward-pointing wedge in an uptrend, it is a reversal pattern. It is telling you that bullish momentum is declining and price is about to break downward.
- In a downtrend: When you see an upward-pointing wedge in a downtrend, it is a continuation pattern. It is again telling you that bullish momentum is failing and price is going to continue downward.
Downward-pointing wedges (bullish wedges)
Wedges that pint downwards are always bullish. They feature lower lows and lower highs. Here are the two contexts in which you can trade them:
- In a downtrend: When you see a downward-pointing wedge in a downtrend, it is a reversal pattern. It is telling you that bearish momentum is decreasing and price is about to break upward.
- In an uptrend: When you see a downward-pointing wedge in an uptrend, it is a continuation pattern. It is telling you that bearish momentum is failing and price is going to continue upward.
Of course, price does not always do what you expect 100% of the time based on the wedge patterns you identify.
No type of price pattern is completely reliable. So, you will need to become an expert in identifying the best-formed patterns in the most promising contexts. You also might want to pair up wedge patterns with other patterns or indicators.
How to spot the wedge chart pattern on your charts
Wedge patterns are not something you add to your chart like an indicator; you simply do your best to see what is already there.
Examine price itself, and try to spot wedge shapes. You can plot trend lines on your charts to make it easier to visualize wedges. Draw the trend lines across the tops and bottoms of the candles.
How to use the wedge chart pattern while you trade
Trading with wedge patterns is just a matter of spotting patterns and entering trades based on what they are telling you about what price is doing. Let’s look at a couple of examples.
Here is a bearish wedge occurring during a downtrend. The wedge is formed of higher highs and higher lows. If you sold, you would have been able to take advantage of the continuation of the downtrend that follows.
Below, you see a bullish wedge with lower highs and lower lows that is forming during a downtrend. Sure enough, price reverses directions and begins trending upwards right afterwards.
The chart also shows a pinbar giving a sell signal (it is the bar with the short body and the long "nose" pointing downward). So, this is a great setup with confluence that would have paid off nicely.
In this chart, you can see a bullish wedge that has formed during an uptrend. The uptrend continues afterwards (not for very long, but with a well-timed entry, you could make a decent profit with this trade).
General tips for using the wedge chart pattern
- While the concept of the wedge pattern is easy to grasp, it can take practice to learn what a well-shaped wedge really looks like. Spend some time simply scrolling through Forex charts and looking for wedge patterns. Draw the trend lines so you can be sure of what you have discovered. Save images of those that were particularly well-formed and generated great signals. Study the images so you know exactly what to look for.
- Context is vital. Ideally, you should trade wedges that have formed in the midst of a relatively smooth uptrend or downtrend. It might be harder to predict what will happen if a wedge forms in a ranging market, especially one with a lot of whipsaws.
- Since wedge patterns are not 100% reliable, it can be useful to look for some kind of confirmation before you enter a trade. You could, for example, plot moving averages or other indicators on your chart to give you additional context and information. If more than one pattern/indicator is telling you to trade, it can be a stronger setup.
- Always do your tests. Whatever trading method you decide to incorporate wedge patterns into, you will need to put it to the test before you risk real money trading with it. Conduct backtests and demo tests until you are confident you have the potential to trade profitably.
The wedge chart pattern helps you spot continuations and reversals. The simple triangular shape of the wedge pattern stands out, and makes it easy to identify opportunities for trades.
Now you know how to draw trend lines to identify wedges and buy or sell based on their surrounding contexts.