Forex Wedge graphical price model is a minor, short-term, trend continuation pattern that shows the previous direction will prevail in the future after its formation. As for the daily chart pattern it is generally formed within a week and shares most of its characteristics with symmetrical triangle and flag. Wedges are often considered difficult chart patterns to recognize, and are often confused with triangles. The way of understanding the difference is found in the angle of the support line.
When observing triangles it became obvious that ascending triangles represent a resistance line, whereas descending triangles show a support line. Symmetrical triangles are neither slanted downwards nor upwards. Wedges, however, are represented by support lines and resistance lines which slant in the same direction, visually forming triangles, which conclude price fluctuations within. Both trendlines are either upward sloping (in a downtrend) or downward sloping (in an uptrend) against the direction of the main trend. The pattern is often characterized by a sharp price entering after intensive movement.
There are two types of wedges: falling wedges and rising wedges.
Falling wedges are considered bullish Forex chart pattern formations. It suggests a reversal of the trend when found in a downwards trend and a continuation of the upwards trend as found in an upwards trend. The falling wedge is formed by a series of lower highs and lower lows. The trendlines of this pattern converge, with both being slanted in a downward direction as the price is trading in a downtrend. The upper trendline in the falling wedge should have a sharper slope than the support level in the wedge construction. When the lower or support trendline is clearly flatter as the pattern forms, it signals that selling pressure is waning, as sellers have trouble in pushing the price down further each time the security is under pressure.
Rising wedges, on the contrary, are considered bearish patterns and are represented by higher highs and higher lows which are consolidating. This pattern suggests that though the buyers are reaching new highs, these progressively tighter highs indicate that the upwards trend is losing steam. A rising wedge which is found in an upwards trend would suggest a trend reversal whereas a rising wedge found in a downwards trend would suggest a short rally from the buyers, and finally a continuation of the downwards trend.
Price movement is based on two converging trendlines. Momentum is weakening together with the price movement towards the apex of the pattern. Traders would view the move below the lower support as a reversal in the upward trend.
The sellers start to get momentum when the buyers become less strong. The pattern is considered to be complete, with the sellers taking control of the security, when the price falls below the line of support.
This pattern confirms the trend movement direction in case of breaking through:
- a sell signal arises if the pattern is formed in a downtrend and the price falls below the support line (plus certain deviation is possible);
- a buy signal arises if the pattern is formed in an uptrend and the price rises above the resistance line (plus certain deviation is possible).
The price depending on wedge pattern formation price is generally believed to change in the same direction it was going prior to the pattern by at least the same amount as the price change from the start of the trend to the formation of the wedge. The target level is calculated as follows:
In case of a downtrend:
T = BP – (TS – PS)
In case of an uptrend:
T = BP + (PS – TS)
T – target price;
BP – breakthrough point;
TS – trend start point;
PS – pattern start point.