Broadening Wedge Pattern: What Is It and How to Trade It
Unlike other chart patterns like triangles, the lines here move away from each other. Volume often increases as the pattern develops, adding another layer of complexity to your analysis. If you’ve spent time analyzing charts, you’ve probably noted that markets often give us clues about where they might be headed next. Some patterns signal a trend continuation, while others hint at a potential reversal.
A general rule suggests seeking opportunities where the possible profit (distance to target) is at least twice the risk (distance to stop loss). For instance, if your stop loss sits $1 above your entry point, your price target should be at least $2 below to maintain a healthy two-to-one risk-reward ratio. There are a few ways to setup a trade when the price moves within the range. The pattern often appears during major economic releases or geopolitical events.
I report this distance from the last low construction point of the rising broadening wedge. This gives me a clear exit strategy based on the pattern’s size and market conditions. Even if you ensure the breakout validation and its confirmation by volumes and market strength, you can never be sure your trade will go well. If the price reverses and goes above this level, your trade will automatically close, limiting your potential losses.
What are the common trading strategies for the broadening wedge pattern?
- There are easy and simple ways to identify an ascending broadening pattern in a price chart.
- When it’s a reversal pattern, the rising wedge is one of the classic setups in technical analysis, signaling a bearish turn in the market.
- These strategies can be used to profit from a downturn in the security’s value.
- Set initial stop losses below recent swing lows on long plays or above overhead resistance levels if trading wedge pattern breakdown.
Once you have identified this series, you will then need to look for the divergence between the highs and lows. This shift typically occurs after a period of consolidation or range-bound trading. Pullbacks into the pattern after breakout do occur regularly so place your stops accordingly. Swing traders can trade the pattern from top to bottom and from bottom to top. Tall and wide patterns work better than short and narrow patterns.
- Ideally, the next day’s opening should be below the previous close, which is your confirmation candle.
- Ascending Broadening Wedge is a bearish trend reversal chart pattern consisting of expanding wave with two trendlines in an upward direction.
- Unlike the rising wedge pattern, which typically indicates a bearish trend reversal, the ascending triangle pattern signals a continuation of the existing bullish trend.
- Wait for the price to break down and close below the bottom line before opening a short entry.
- The break-out from the wedge formation is often accompanied by an increase in trading volume, which can confirm the strength of the move.
Broadening Wedge Pattern: What Is It and How to Trade It
In comparison, both lines will slope downward, and the resistance line will be steeper in a falling wedge. In either case, ascending wedges are overwhelmingly bearish patterns once completed. Uniquely to the broadening wedge, the bias is neutral when the pattern consolidates sideways. This means the pattern does not signal a higher probability of breaking out to either side.
However, the next day the price opened even below the opening of that day, confirming the reversal of the pattern. Although it’s unclear who founded the wedge pattern, but the wedge pattern is a very well-documented chart pattern. The wedge pattern is mentioned in respected books such as “Encyclopaedia of Chart Patterns” (published in 2000) by Thomas Bulkowski, an investor since 1981. Rising wedges are renowned for their high success rate in forecasting trend reversals. Many traders have traded this classic pattern to great effect, which speaks volumes about its reliability.
Manage Your Broadening Wedge Trades
Wait for the price to break down and close below the bottom line before opening a short entry. A false breakout happens when the price temporarily breaks below the downline but quickly reverses into the pattern. I will show you later how to confirm a breakout using volume and strength indicators. The rule of thumb is to wait for the price to break the trendlines before taking a position.
It is common for day traders to rely on price charts to time the market. And, what helps them in identifying the exact time to market are various chart rising broadening wedge pattern patterns. Several of these patterns indicate market volatility or moments of consolidation when indecision prevails in the market. Traders reckon that when price action breaks away from a certain pattern, it signifies either continuation or reversal of a trend. After the manifestation of the ascending wedge pattern in an uptrend, the asset price trend reverses downtrend.