Wedge patterns are trend reversal patterns. They are composed of the support and resistance trend lines that move in the same direction as the channel gets narrower, until one of the trend lines get broken and reverse the immediate trend on heavy volume. These reversals can be quite violent due to the complacent nature of the participants who expect the trend to continue. Trend lines are the best way to spot the narrowing of the channel, which is the first key sign that the reversal may be forming.
The Falling Wedge is a bullish pattern that begins wide at the top and contracts as prices move lower. The falling wedge shows both trend lines sloping down with a narrowing channel indicating an immediate downtrend. As the trend lines get closer to converging, the price makes a violent spike higher through the upper falling trend line on heavy volume. This takes the participants by surprise triggering a breakout and subsequent up trend.
The Rising Wedge is a bearish pattern that begins wide at the bottom and contracts as prices move higher and the trading range narrows. The rising wedge is a bearish pattern and the inverse version of the falling wedge. Both trend lines are sloping up with a narrowing channel up trend. Participants are complacent as the immediate up trend continues to grind but they don’t notice the narrowing channel. As the trend lines get closer to convergence, a violent sell-off forms collapsing the price through the lower trend line. This breakdown triggers longs to panic sell as the downtrend forms.
