Wedges are a chart pattern used in technical analysis. A wedge is formed by taking two trendlines for the price behavior of an asset over time. If the trendlines converge–if, over time, the slope of the high price trendline exceeds the slope of the low price trendline, or if the slope of the low price trendline exceeds the slope of the high price trendline–then the pattern is a wedge, so named due to its wedge-like shape.
There are two major types of wedges: rising wedge and a falling wedge. Rising wedges most commonly appear during a general downtrend in price, and represent a temporary reversal in the trend. Falling wedges most commonly appear during a general uptrend and represent the same reversal. Depending on which direction the price moves when it breaks through the lines of support and resistance established by the pattern, wedges generate either a strong buying or selling signal: a buying signal is generated if the prices break the upper resistance trendline, and a selling signal is generated if the prices break the lower support trendline.
The interpretation of a wedge depends on whether the wedge is moving with or against the current trend. If a wedge is moving with the current trend, traders consider this a signal that the trend will reverse at the wedge’s conclusion. Conversely, if a wedge is moving against the current trend, the indication is that the trend will continue as it is.
Types of Wedges: