Technical Classroom: How to make trading strategy through Wedge pattern
Continuing now with the Classic chart patterns we will be discussing about Wedge pattern.
It is a type of formation in which trading activities are confined within converging straight lines which form a pattern. This pattern has a rising or falling slant pointing in the same direction.
It is characterized by a contracting range in prices coupled with an upward trend in prices which is known as a rising wedge or a downward trend in prices which is known as a falling wedge.
a) Bullish Wedge: (Falling Wedge)
The falling Wedge is a bullish pattern that begins wide at the top and contracts as prices move lower. This price action forms a cone that slopes down as the reaction highs and reaction lows converge. In contrast to symmetrical triangles, which have no definitive slope and no bias falling wedges definitely slope down and have a bullish bias. However, this bullish bias cannot be realized until a resistance breakout.
The falling wedge can also fit into the continuation category. As a continuation pattern, the falling wedge will still slope down, but the slope will be against the prevailing uptrend.
As a reversal pattern, the falling wedge slopes down and with the prevailing trend. Regardless of the type whether reversal or continuation falling wedges are regarded as bullish patterns.
b) Bearish Wedge: (Rising Wedge)
The Rising Wedge is a bearish pattern that begins wide at the bottom and contracts as prices move higher and the trading range narrows. In contrast to symmetrical triangles, which have no definitive slope and no bullish or bearish bias, rising wedges definitely slope up and have a bearish bias.
As a continuation pattern, the rising wedge will still slope up but the slope will be against the prevailing downtrend. As a reversal pattern, the rising wedge will slope up and with the prevailing trend. Regardless of the type reversal or continuation rising wedges are bearish in nature.
The author is Associate Vice President | Analyst-Derivatives at Motilal Oswal Financial Services Limited.
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