Wedge chart pattern definition

• An ascending wedge features price highs which decrease incrementally while price lows increase incrementally. Ascending wedges typically conclude with a downside breakout, making them a bearish indicator
• A descending wedge features price declines which become incrementally smaller, concluding with an upside breakout, making the descending wedge pattern a bullish indicator

How do you trade a wedge pattern?

A wedge pattern can alert you to a potential reversal or continuation of price action, depending on the shape of the wedge and the direction of the breakout. The following instructions detail how to analyse a wedge pattern and execute a trade in response.

1. Identify a wedge pattern on the chart by drawing trendlines along highs and lows in accordance with the ascending and descending shapes identified above
2. Watch for the breakout to occur when price action moves past one of the lines you’ve drawn
3. Enter the trade according to the breakout. An upward breakout from an ascending wedge means the bullish action is continuing, while a downward breakout indicates a bearish reversal is occurring. With a descending wedge, a downward breakout indicates a continuation of the prevailing bear trade, and an upward breakout indicates a bullish reversal
4. Set a stop-loss order. Many traders set stop-loss orders on the rim of the opposite wedge line from the breakout. You may also place the stop-loss closer to where the breakout occurred depending on the level of risk you can incur
5. Set a profit target. An estimated profit target may be the same level as the wedge line at its thickest part, otherwise identified as the price at which you began drawing the wedge line. Basically, your profit target would be at the price level before the wedge pattern began