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The Wedge Pattern Trading Strategy Guide PDF
The Wedge Pattern Trading Strategy Guide PDF
The pattern formed by the price of a security when the support trendline, and, the resistance
trendline converge is known as the wedge pattern.
Support trendline can be constructed by drawing a straight line connecting the price lows.
Resistance trendline can be constructed by drawing a straight line connecting the price highs.
An example of a wedge pattern is shown below:
The wedge pattern is a commonly found pattern in the price charts of financial securities. The
securities could be anything – equities, bonds, indices, currency, commodities, derivatives, etc.
The most important feature of a wedge pattern is that the price must contract. Take a look at the
picture below to see where the contraction of price occurs in the wedge:
As already mentioned, it is generally considered as a bullish pattern. It could be that the support
trendline is broken, and, a downtrend is formed.
Now that we know that either of the trend lines could be broken, let’s devise a strategy to trade
falling wedge pattern.
Track the total number of buyers, and, the total number of sellers, when the price is close to the
resistance trendline. If the total number of buyers is greater than the total number of sellers at, or
around, the resistance level, generally, the resistance level would be broken, and, the price would
form an uptrend.
Falling Wedge Pattern Example:
As already mentioned, it is generally considered as a bearish pattern. It could be that the resistance
trendline is broken, and, an uptrend is formed.
Remember nothing in the market is certain. Any strategy can fail. Smart traders use stop loss order
to protect themselves from adverse move.
Now that we know that either of the trend lines could be broken, let’s devise a strategy to trade rising
wedge pattern.
Track the total number of buyers, and, the total number of sellers, when the price is close to the
support trendline. If the total number of sellers is greater than the total number of buyers at, or
around, the support trendline, generally, the support trend line would be broken, and, a downtrend
would begin.
Step 1
Wait for the points A, B, C, and D to appear; as only then a wedge pattern can be formed.
Step 2
Connect Point A with Point B to get a straight line. This gives us the support trendline (say line AB).
Connect Point C with Point D to get a straight line. This gives us the resistance trendline (say line
CD.
Step 3
Produce the line AB and the line CD; as shown in the picture above. If the two lines meet, we can be
assured that the price is contracting. Hence, this is a wedge pattern. Now determine if it is a rising
wedge or a falling wedge.
As the price has made higher lows and higher highs, it is a rising wedge. Hence, most probably the
price will break the support trendline.
Step 4
At point E in the picture below, if the total number of sellers is more than the total number of buyers,
the support trend-line will break and price would move below the support trend-line to form a
downtrend.