1. Analyzing Chart Patterns: Introduction
  2. Analyzing Chart Patterns: Why Charts?
  3. Analyzing Chart Patterns: Head And Shoulders
  4. Analyzing Chart Patterns: Cup And Handle
  5. Analyzing Chart Patterns: Double Top And Double Bottom
  6. Analyzing Chart Patterns: Triangles
  7. Analyzing Chart Patterns: Flags And Pennants
  8. Analyzing Chart Patterns: The Wedge
  9. Analyzing Chart Patterns: Gaps
  10. Analyzing Chart Patterns: Triple Tops And Bottoms
  11. Analyzing Chart Patterns: Round Bottoms
  12. Analyzing Chart Patterns: Conclusion

Wedges are a multiple price wave reversal pattern. Wedges form when the waves of an asset move within a narrowing range, angled either up or down. Whereas triangles are formed by the price moving sideways, wedges can make significant progress either up or down. 

When the pattern completes, and the price breaks out of wedge, it is usually in the opposite direction the wedge was pointed. This is why it is called a reversal pattern. For example, if a wedge is angled downward—called a "falling wedge"—the price will often break above the top of the pattern and rally. In the case of a wedge angled upwards—a "rising wedge"—the breakout is typically to the downside, indicating lower prices to come. 

Examples of Wedges

Draw a wedge by connecting the multiple swing highs with a trendline, and connect the swing lows with another trendline. During a falling wedge, watch for the price to move above the upper trendline. This is a breakout and completes the pattern. Consider taking a long trade, and shy away from short trades.

falling wedge chart pattern

For a rising wedge, consider a short trade when the price breaks below the lower trendline. Also consider exiting any long positions.

rise wedge chart pattern

If trading a rising wedge, place a stop loss just above the most recent high within the wedge. When trading a falling wedge, place a stop loss just below the most recent swing low within the wedge.

Price Target

Wedges can be significant turning points. A breakout may see the price run in the breakout direction for long periods of time. Therefore, isn't a long-term price target for wedge. Rather the pattern gives us analytical insight into where the price is headed, and an entry point into what could be a large move. 

Following a breakout, the price typically moves at least the height of the wedge (measured at the base where the two trendlines start). For example, if the trendlines start at a swing high of $36 and a swing low of $33, the wedge is $3 high at the base. When the price breaks out, expect at least a $3 move in the breakout price. Therefore, in this case, place targets $3 or more away from the entry.

wedge chart pattern with stop loss and target

Trading Considerations

Estimate how far the price could run after a breakout by measuring the height of the pattern, but understand that if a major trend is underway, the price could run a lot further. If you are long during a rising wedge, a downside breakout is a warning sign to get out. If short in a falling wedge, and the price breaks upward, consider exiting.

Wedges can last a long time, narrowing into a smaller or smaller price area. This may result in anticipating when then it will end, or taking trades before the breakout thinking that a breakout will occur soon. It is better to wait until the actual breakout occurs than to speculate on when it will happen.


Analyzing Chart Patterns: Gaps
Related Articles
  1. Trading

    HYG Continues Downward After Breakdown From Rising Wedge

    The iShares iBoxx High Yield Corporate Bond ETF has continued to move downward since its breakdown in late January.
  2. Trading

    Currency ETFs Near Long-term Breakout Levels

    These currency ETFs could be heading into the next wave of the uptrend, but beware of resistance. (FXA,FXC,FXY)
  3. Small Business

    Facebook Headed Lower After Failed Breakout (FB, TWTR)

    Facebook could head much lower after failing the April breakout with a Monday's gap through 116.
  4. Trading

    Introduction to Technical Analysis Price Patterns

    How to recognize price patterns that are key to technical analysis.
  5. Trading

    Home Depot Rally Looks Bearish Under The Hood

    Home Depot has posted a long series of nominally higher highs since November 2015 while shareholders have abandoned positions at a rapid pace.
  6. Trading

    Nasdaq-100 May Dictate Fate of Post-Election Rally

    The Nasdaq-100 has lagged SP-500 and Russell-2000 since the election, signaling a bearish divergence that could end the broad rally, dead in its tracks.
  7. Trading

    Breakout Stocks to Watch Right Now

    These three stocks are near major breakout points, which will affect the short-term, and potentially the long-term direction of the stocks.
  8. Trading

    Watch These Global Market ETFs for Big Breakouts (EWZ, PIN)

    These four global market ETFs are all heading toward breakouts right now. Here's what to watch for, and where these ETFs could be heading next.
  9. Trading

    Stock Chart Patterns to Keep an Eye On

    Some of these stocks are exhibiting big chart patterns, so a breakout is likely to be significant.
  10. Trading

    Costco Challenging Bull Market High After Earnings

    Costco has lifted into long-term resistance after a surprisingly strong first-quarter earnings report, raising odds for an intermediate reversal.
Frequently Asked Questions
  1. Is it a good idea to take out a loan to invest?

    It is inadvisable for an investor to invest using a loan through a risky investment avenue like the stock or derivatives ...
  2. How can I find out which stocks pay dividends?

    To learn which stocks pay dividends, these resources help investors identify the companies that pay out earnings to shareholders ...
  3. How is interest charged on most lines of credit?

    Learn how most financial institutions calculate interest on lines of credit by using the average daily balance method and ...
  4. Can you borrow from a Vanguard 401(k)?

    Learn how Vanguard allows its 401(k) participants to take loans against their account with specific borrowing provisions ...
Trading Center