The moving average convergence divergence indicator ( MACD) is a great tool to spot declining momentum in a market. Although a decline in volume is a typical characteristic of these patterns, it is also important to note that not all patterns will always behave in the same way – which is why it would make sense to be flexible and use another popular indicator to achieve the same goal. Note that there was no clear decline in volume in this example, unlike the previous chart image. The conservative entry method, however, might not always happen, especially when the resulting breakout moves too fast with an increase in momentum. The second chart example shows the conservative entry method, whereby traders will wait for a break of the lower support line and a retest of the same line before they enter short positions.īoth the stop loss and target levels were calculated using the same instruction as before. A target level can be calculated by measuring the height at the start of the wedge pattern (black lines) and projecting it lower (by the same distance) from the entry level.Ĭonservative entries can be taken after price breaks below the lower support line, but traders following this method will also wait for a retest of the lower support line before they enter (as in the example below). When it comes to finding an entry level to short the market, traders can choose between an aggressive and a conservative entry method.Īggressive entries can be taken as soon as price breaks the lower support line for the first time, with a stop loss positioned above the swing high from where the pattern ended. Later on, we will look at another indicator that can be used to identify a decrease in momentum. This is a common occurrence during an ascending wedge formation and confirms that the buyers of a market are getting less interested in opening long positions, or that they are starting to take profits. Note how volume significantly declined after the beginning phases of the wedge pattern. It is often a good idea to use another form of technical analysis to confirm that you are dealing with a high probability pattern setup. Next, we will look at how traders use these popular wedge patterns to enter trades, place their stop losses, and set their targets.Īs the ascending wedge pattern forecasts a potential bearish reversal, traders will first wait for price to break below the lower trendline support to signal that the pattern has ended before they plan their entries.Īnother important characteristic of a wedge pattern (other than the converging trendlines) is that volume (or momentum) tends to decline towards the final stages of this formation. With descending wedges, the upper and lower trendlines are drawn by connecting the lower highs and lower lows to form the familiar wedge shape. Both the upper resistance and lower support lines also converge as price moves lower in a narrowing range. The descending wedge pattern, also known as a falling wedge, typically appears at the end of a bearish market before a strong bullish breakout occurs. Here also, the trendlines started to converge as price moved higher within a narrowing range towards the end of the pattern.īoth of the above ascending wedge pattern examples formed prior to strong bearish reversals, which is why traders will seek to make a profit on the assumption that prices will fall when this pattern ends. The next chart example shows an ascending wedge pattern that formed during a downtrend. The narrowing range toward the end of this bull run signalled that the upward momentum was decreasing and that a strong reversal might occur at any moment. To draw the upper resistance and lower support lines, technical analysts will connect the higher highs and higher lows with trendlines to see whether price is contracting within a narrowing range as price moves higher. The chart example above shows two converging trendlines (orange lines) that were drawn above and below the price structure of a market during the final phases of an uptrend, revealing what an ascending wedge pattern looks like. The ascending wedge, also known as a rising wedge, can be seen as a bearish reversal pattern that can either form after a market has been trending higher over time or during a corrective phase in a downtrend.
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