A wedge is a chart pattern marked by converging trend lines on a price chart.
The pattern consists of two trend lines that move in the same direction as the channel gets narrower until one of the trend lines get broken.
The resulting shape forms a gradually narrowing wedge.
Since a wedge pattern has converging trend lines that come together at an apex, it looks similar to a symmetrical triangle.
The difference is that wedges have a noticeable slant, either upward or downward.
Wedge patterns are known as trend reversal chart patterns and can signal either bullish or bearish reversals.
The wedge pattern has three common characteristics:
- Converging trend lines.
- Declining volume as the price progresses through the pattern.
- A breakout from one of the trend lines.
Types of Wedge Patterns
There are two types of wedge chart patterns
- Rising wedge (which signals a bearish reversal)
- Falling wedge (which signals a bullish reversal)
A rising wedge (or ascending wedge) is formed when two trend lines are sloping UP with a narrowing channel created by a series of higher highs and higher lows.
The rising wedge is generally considered bearish and is usually found in downtrends. They can be found in uptrends too, but would still be regarded as bearish.
As the trend lines get closer to convergence, a violent sell-off occurs causing the price to collapse through the lower trend line.
This breakdown causes buyers to panic sell.
A falling wedge (or descending wedge) is formed when two trend lines are sloping DOWN with a narrowing channel created by a series of lower highs and lower lows.
The falling wedge is generally considered bullish and is usually found in uptrends. They can be found in uptrends too, but would still be regarded as bullish.
As the trend lines get closer to convergence, a violent spike occurs breaching the price through the upper trend line.
This breakout causes sellers to exit out of their short positions causing the price to rise further. (Sellers must buy in order to get out of their short position.)
A wedge is a chart formation that shows a narrowing price range over time, where price highs in an ascending wedge decrease incrementally, or in a descending wedge, price declines are incrementally smaller.
Rising wedges typically end with a downside breakout and falling wedges typically end with an upside breakout.