Last Updated on August 24, 2022
The Rising Wedge pattern is among many day traders’ favorite bearish technical trading indicators. The reason is that, depending on where exactly it appears on the chart, it can be highly efficient in predicting trend reversals or continuations. However, traders often confuse it with other indicators or struggle to interpret its signals.
In this guide, we will explore the concept of the Rising Wedge. Our goal is to find out how to identify it on a chart. We will focus on and compare the Rising Wedge vs. Falling Wedge to examine the key differences. You will also learn the reasoning behind the ongoing Rising Wedge vs. Ascending Triangle debate to better identify the indicators suitable for your strategy.
What is the Rising Wedge?
The rising wedge is a technical trading indicator that signals trend reversals or continuations, usually within bear markets. The pattern is also known as “ascending wedge” due to the way it appears on a chart.
The ascending wedge pattern can form when the stock is either in an uptrend or a downtrend market. Depending on the unfolding scenario, the signal is interpreted as follows:
- When the stock is in an uptrend, a rising wedge is an indication that traders are reconsidering the bullish price move
- When the stock is in an uptrend, a rising wedge is an indication that a short-term pause before a bear market might be expected
However, the rising wedge pattern can also fit within the continuation indicators category. No matter whether it is a reversal or a continuation signal, in both cases, the rising wedge indicates increased bearish sentiment.
The rising wedge pattern is widely spread within stock, futures, and FX markets. It is a preferred technical trading tool for many day traders.
Besides, the indicator is considered very reliable and one of the best reversal patterns out there.
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How is The Rising Wedge Pattern Formed?
A rising wedge forms when the price’s movement consolidates between two sloping trend lines collectively displayed as a triangle.
These sloping lines are basically support and resistance levels that move in a converging pattern (the lower line is the support line, while the upper one is the resistance line).
The support and resistance lines both point towards an upwards direction. The support line usually has to be a bit steeper than the resistance one.
The lines are constructed by connecting two or more separate highs and lows.
Prerequisites
There are several prerequisites for the formation of a rising wedge (in the context of a reversal pattern). These include:
Presence of a prior trend
Understandably, the rising wedge needs to reverse an existing trend. In most cases, the pattern will form across the span of 3 to 6 months. It can reverse either a medium- or long-term trend.
Formation of a lower support line and an upper resistance line
The condition for forming a rising wedge is to have a support line connecting at least two lows. Each low should appear higher on the chart than the previous one.
So is the case with the resistance line. It should connect two or more highs, each of which should be higher than the previous one.
In a nutshell, the presence of lows and highs higher than the previous ones helps form the “ascending-like” shape of the wedge pattern.
Contraction of both lines and a break of the support line
As the pattern matures, the support and the resistance move towards each other and converge at the end. In fact, it is the breaking point that closes the pattern and generates the signal.
As the case with other indicators, the more convincing the break is, the more stable the sentiment is.
Declining volume
As the rising wedge evolves and matures, and the price starts heading down, the volume should naturally decrease as well.
The Breakdown
The crucial point for the pattern is where the support line is broken. This is precisely when the rising wedge is confirmed.
After that, things unfold pretty quickly. Once a breakdown occurs, the target is reached almost immediately, especially when compared with alternative indicators. This means that with the ascending wedge, traders don’t necessarily have to wait for further confirmations. That’s because, after the breaking point, the price quickly drops to the target.
This is also what makes chartists love the rising wedge pattern so much. Its relatively straightforward interpretation and high accuracy usually are guaranteed.
The only critical moment where things might not go as easy as planned in terms of signal interpretation is the fact that, in some situations, once the breakdown happens, you might see a rally that tests the new resistance level.
However, even in that case, if you keep your eyes on the breakdown point, you won’t have trouble identifying and interpreting the pattern’s signals.
What Happens at The End of a Rising Wedge?
Before finding out what happens at the end of the rising wedge, we should say a few words on how to recognize when the pattern is coming to an end.
If you see that the lower support line’s advances start getting shorter, it is a sign that the rallies are getting weaker. In that scenario, the upper resistance line struggles to keep pace with the support line’s slope, indicating that the end of the rising wedge is looming.
We now have every sign that the rising wedge pattern is about to be completed. The actual end is when the support and resistance lines, constructed of pivot highs and lows, converge in a single point at the end of the figure. The point is what we know as the apex.
Once the lines converge in the apex, the price embraces a downward movement. The convergence between both lines takes place toward the upper right part of the figure.
How to Identify The Rising Wedge Pattern?
On a chart, the rising wedge appears as a figure that starts wide at the bottom and contracts as it moves higher and the trending line narrows.
The ascending wedge is very similar to the way the bear flag pattern appears on a chart.
Now, after you know how the rising wedge looks on a chart, it’s time to focus on how to identify whether the pattern you are seeing is actual or misleading. Several indicators can help in that regard.
First, the pattern’s movement should be toward the right. Besides, the volume should be decreasing – a sign of divergence with the price.
Another thing to look for is the advancement of the retrace. Depending on how far it has gone from the beginning of the downtrend, you will be able to recognize whether the pattern is valid. The best way to apply this is to look at whether the retracement exceeds the 50% Fibonacci level or not. If it doesn’t, then the pattern is valid.
Uptrends & Downtrends
To successfully implement the rising wedge pattern into your technical trading indicators toolbox, you should learn how to identify it in an uptrend and a downtrend.
In an uptrend, most traders consider the rising wedge a reversal pattern. It forms when the price hits higher highs and higher lows, resulting in a contracting price range. The closer the support and the resistance lines get to each other during the uptrend, the slower the momentum gets. Alternatively, a downside reversal is about to take place. In these cases, traders start looking for opportunities to sell.
On the other hand, during a downtrend, the rising wedge pattern indicates a temporary retracement. In other words, the price moves in the opposite direction of the trend for a short time. Once again, the support and resistance line here start moving closer to each other. This indicates a continuation of the existing bearish trend. In that case, traders can also start looking for selling opportunities.
It is worth noting that there might be some differences in the rising wedge pattern’s appearance on a chart, depending on whether it is intended to serve as a continuation or a reversal pattern.
As a reversal pattern, which is its most common application, the rising wedge slopes up, alongside the prevailing trend.
On the other hand, as a continuation pattern, which is the rarer application, the ascending wedge still slopes up, but this time against the downtrend.
How to Trade After Identifying a Rising Wedge Pattern?
There are different ways to trade once you have identified the ascending wedge pattern on a chart.
One is to place a sell order at the breaking point on the bottom side of the wedge. To protect yourself from false signals, make sure to wait for a candle to close below the bottom trend line. Once it does, you can make a short entry.
Example 1
The example below shows where the price breaks the lower support trend line (1). You can also see the exact point to place a sell order (2).
Now let’s think about the stop-loss. The ideal scenario is to place it close to the top of the pattern.
Example 2
In the example below, you will see the breakdown area (1), the short entry point (2), and the level at which you can place the stop-loss (3).
The profit target estimate isn’t set in stone. It can vary depending on the trader’s profile and risk appetite. Some would shoot for the stars, thus accept more risk, while others will be more conservative.
Example 3
Below is a middle ground scenario. Many traders adopt this approach since it provides an optimal mix of risk and profit opportunities.
The profit target here equals the height of the back of the wedge (4). It is projected by dragging the same height down from the trend line breakout (5). The take-profit line is visualized with blue at the bottom of the height projections (6).
This trade setup usually works in both uptrends and downtrends.
An alternative way to trade the rising wedge is by waiting for the price to fall below the support line. Once it does that, you can place a sell order on the level where the trend line is retested. In that case, the broken support becomes the new resistance level.
Example 4
In the example below, you can see the exact point where the price finds resistance at the lower part of the wedge (1) and the area where the sell order should be placed (2).
Next, you can proceed to place the stop loss above the new resistance level. In the example below, you will see where the price finds resistance (1) and an idea where you can place the stop-loss (2).
The take-profit line here is similar to the previous scenario. It equals the height of the back of the wedge.
When it comes to trading the rising wedge pattern, there is one common practice. More often than not, targets are placed at the beginning of the upper trend line — alternatively, the first high.
Rising Wedge Pattern vs. Other Indicators
You may often hear a debate among traders on the ascending wedge pattern’s pros and cons and how it stacks to other indicators.
In a nutshell, the pattern is among the most reliable and trustworthy, even when used on its own. On the other hand, however, it often is hard to recognize and trade accurately. The reason is that there are plenty of indicators that resemble the rising wedge formation. Alternatively, triangle-like figures based on the convergence between the support and resistance lines.
Symmetrical triangles, ascending and descending triangles – these and others can often leave you scratching your head exactly what pattern is unfolding on the chart. To avoid such scenarios, just look at the slope, and you will have the answer. The rising wedge is the only figure among these with unevenly-sloped lines (with the ascending and descending triangles, one of the lines is static, while the symmetrical triangles have an even slope).
To deep-dive into this concept, we will make a comparison between the rising wedge and the ascending triangle, as well as learn a bit more about the pattern’s counterpart – the falling wedge.
Rising Wedge vs. Falling Wedge
In a nutshell, what we had already said about the rising wedge pattern is true for the falling wedge one. It can also serve as a continuation or reversal pattern, and traders place a great deal of trust in it due to its high degree of accuracy.
Understandably, the main difference is that, unlike its rising counterpart, the falling wedge signals an upcoming bullish trend reversal.
Besides, the falling wedge forms between support and resistance lines with a downward slope. Once they converge, the price bounces back and proceeds to move upward.
It is worth noting that with the rising wedge, the figure is pointing in an upward direction, whereas with the falling wedge, the apex points in a downward direction.
There is also another interesting difference between both indicators that may often slip under the untrained eye. The support lines in the rising wedge are steeper than the resistance ones. When it comes to the falling wedge, the picture is the opposite as the resistance line is steeper than the support one.
If applied correctly, both indicators can provide good returns and an optimal risk/reward ratio. They are relatively easy to understand as they outline stop, entry, limit, and take-profit levels very clearly.
However, many traders feel intimidated by both indicators when starting for the first time. There is also the risk to mistake them for other indicators or misinterpret their signals, so the most important thing before starting with them is to first master the basics with paper money.
Rising Wedge vs. Ascending Triangle
The rising wedge and the ascending triangle share some key similarities. Both of them are powerful continuation or reversal patterns. Besides, both provide clear indications about the entry point, profit target, and stop-loss levels.
Traders can often mistake the rising wedge for the ascending triangle pattern, especially beginners. However, even the seasoned professional may find it hard to differentiate between both patterns because of their close resemblance in terms of shape and direction.
The main difference between both indicators is that, unlike in the rising wedge, the resistance line is horizontal for the ascending triangle. While it has no slope, the support line is steep and progressing towards the converging point. Usually, when both lines converge, the previous resistance becomes the new support. It is horizontal at first until the process repeats, and a new figure starts to shape.
To avoid mixing both indicators, it is essential to keep an eye on the price’s behavior after the pattern is completed.
It is not to say that the wedge and the triangle can’t serve both functions. However, most traders typically consider the ascending triangle more of a continuation pattern, while the rising wedge is more efficient as a reversal pattern.
Lastly, if you want to add a further dimension to your understanding of the rising wedge and ascending triangle patterns, you should switch your focus towards the volume. The theory suggests that rising wedges should exhibit a higher volume on the down-swings while ascending triangles should show a higher volume on the up-swings.
Conclusion
If you are looking for an indicator with a relatively low risk and high reward ratio (as much as this can be a thing in the trading world), the rising wedge might be your new favorite.
All types of traders can use the indicator, ranging from beginners, who had just finished studying the basics and testing the indicator with paper money, to seasoned professionals and experienced technicians.
If you want to adopt this highly-powerful technical trading tool, make sure to master recognizing it on a chart. It is mandatory to spend as much time as possible on the drawing board before jumping into real trades. Bear in mind that many false or deceiving patterns in the trading world may come off as a rising wedge and end up costing you money.
Once you learn how to differentiate real signals and timely identify the ascending wedge pattern on a chart, your trading strategy will get a significant boost.
