Wedges could serve as either continuation or reversal patterns depending on the market sentiment at the time.
A rising wedge is formed when price consolidates between upward sloping support and resistance lines.
The slope of the support line is steeper than that of the resistance. This indicates that higher lows are being formed faster than higher highs. With prices consolidating, we know that a potential trend change is possible, so we can expect a breakout to either the top or bottom.
If the rising wedge forms after an uptrend, it could indicate a bearish reversal pattern is imminent.
On the other hand, if it forms during a downtrend, it could signal a continuation of the trend.
In this first example, a rising wedge formed at the end of an uptrend. Notice how price action is forming new highs, but at a much slower pace than when price makes higher lows.
There are more sellers (bears) than buyers (bulls)
The sellers have forced the price down to break the trend line, indicating that a downtrend could be imminent.
Generally, the price movement after the breakout is approximately the same magnitude as the height of the formation.
A rising wedge formation as a bearish continuation signal.
The price came from a downtrend before consolidating and sketching higher highs and even higher lows.
In this case, the price broke to the down side and the downtrend continued. The price made a move down that’s approximately the same height as the wedge
A rising wedge formed after an uptrend usually leads to a reversal (downtrend) while a rising wedge formed during a downtrend typically results in a continuation (downtrend).
Simply put, a rising wedge leads to a downtrend, which means that it’s a bearish chart pattern
As with the rising wedge, the falling wedge can either be a reversal or continuation signal.
As a reversal signal, it is formed at a bottom of a downtrend, indicating that an uptrend would be imminent.
As a continuation signal, it is formed during an uptrend, implying that the upward trend would resume. The falling wedge is a bullish chart pattern.
In this example, the falling wedge serves as a reversal signal. After a downtrend, the price made lower highs and lower lows.
Notice how the falling trend line connecting the highs is steeper than the trend line connecting the lows.
Upon breaking above the top of the wedge, the pair made a reversal upwards move, again approximately equal to (or greater than) the height of the formation.
The falling wedge as a continuation signal.
As mentioned previously, when the falling wedge forms during an uptrend, it usually signals that the trend will resume at a later point.
In this case, the price consolidated for a period after a strong rally. This could mean that buyers simply paused or sellers pulled out of positions, reducing pressure.
The price broke to the top side and the uptrend continued.
If we placed an entry order above that falling trend line connecting the pair’s highs. A good upside target would be the height of the wedge formation.
If you want to go for more gains, either use a trailing stop or liquidate part of the position.