Technical traders have many patterns and indicators in their toolkit. One key pattern that traders look for is the wedge. A wedge pattern typically indicates that a reversal of trend may be in the cards. Here’s a look at the two main wedge patterns: the rising wedge and the falling wedge.
A rising wedge typically is seen as a bearish pattern, despite the stock appearing to be in an uptrend. The stock makes a series of higher highs and higher lows, but the lower trendline fails to hold as support. In essence, the trend lines appear to be converging, a signal that momentum is weakening. If the price breaks below the lower trendline, many traders see this as bearish price action. Let’s look at an example.
Check out Agree Realty Corporation (NYSE: ADC) on the daily chart.Source: TradingView
Notice how the stock has made a series of higher highs and higher lows. However, near the end of this trend, the trend lines look to potentially converge, and price starts to consolidate. Thereafter, the stock starts to lose momentum and breaks below the lower trendline, as annotated. This is a prime example of a rising wedge pattern.
Keep in mind that these patterns don’t always work out, and you’ll need to properly manage your positions for risk.
On the other hand, the falling wedge typically is considered a bullish pattern. With a falling wedge pattern, the stock trades in a downtrend, starts to consolidate and loses steam. Thereafter, these two trend lines look like they might converge. Thereafter, the stock tends to break above the upper downtrend line, indicating a potential reversal of trend. Here’s an example:
Take a look at the daily chart on Eros International PLC (NYSE: EROS).Source: TradingView
This looks like the opposite of a rising wedge pattern. The stock breaks above the upper downtrend line, indicating a rebound may be in the offing.
Rising and falling wedges are typically seen as reversal patterns, an essential tool for many traders. That said, have a basic understanding of these patterns; you’ll need to keep practicing to spot these patterns quickly if and when you start trading.