What is a Rising Wedge Pattern?
The Rising Wedge is a bearish pattern that begins wide at the bottom and contracts as prices move higher and the trading range narrows. In contrast to symmetrical triangles, which have no definitive slope and no bullish or bearish bias, rising wedges definitely slope up and have a bearish bias.
The Rising Wedge can also be a pattern of continuation, with the wedge still sloping up, but against the prevailing downtrend. As a reversal pattern, the rising wedge will slope up and with the prevailing trend. The most important takeaway is regardless of the type either reversal or confirmation, all rising wedges are bearish.
What Does the Rising Wedge Pattern Signal?
The Rising Wedge signals bearish momentum about to take form in the markets. Here are the 6 key points of a rising wedge:
- Prior Trend: In order to qualify as a reversal pattern, there must be a prior trend to reverse. The rising wedge usually forms over a 3-6 month period and can mark an intermediate or long-term trend reversal. Sometimes the current trend is totally contained within the rising wedge; other times the pattern will form after an extended advance.
- Upper Resistance Line: It takes at least two reaction highs to form the upper resistance line, ideally three. Each reaction high should be higher than the previous high.
- Lower Support Line: At least two reaction lows are required to form the lower support line. Each reaction low should be higher than the previous low.
- Contraction: The upper resistance line and lower support line converge as the pattern matures. The advances from the lower support line become shorter and shorter, which makes the rallies unconvincing. This creates an upper resistance line that fails to keep pace with the slope of the lower support line and indicates a supply overhang as prices increase.
- Support Break: Bearish confirmation of the pattern does not come until the support line is broken in a convincing fashion. It is sometimes prudent to wait for a break of the previous reaction low. Once support is broken, there can sometimes be a reaction rally to test the newly found resistance level.
- Volume: Ideally, volume will decline as prices rise and the wedge evolves. An expansion of volume on the support line break can be taken as bearish confirmation.
Trading a Rising Wedge Pattern
The rising wedge can be one of the most difficult chart patterns to accurately recognize and trade. While it is a consolidation formation, the loss of upside momentum on each successive high gives the pattern its bearish bias. However, the series of higher highs and higher lows keeps the trend inherently bullish. The final break of support indicates that the forces of supply have finally won out and lower prices are likely.
Looking at the Bitcoin chart on a 4-hour time frame, there is an upwards move that was created at $13604 and formed a rising wedge all the way up to $19000. As the price of Bitcoin is making higher and higher highs, the price is squeezed until it eventually loses support and breaks out below the bottom trend line.
Looking at the S&P chart on a daily time frame we can see an obvious sell off here, but let’s analyze the chart. Starting with the start of the uptrend at $284.82, making higher highs and the price squeezing together between the two trend lines until it eventually can’t contain itself and breaks out and closes below the bottom trend. This rising wedge that formed was actually the corona crash in Feb-March 2020 with the start of the uptrend forming the move to get up there in October.
Similarities Between the Rising and Falling Wedge
Rising Wedges and Falling Wedges are both wedge patterns marked by converging trend lines on a candlestick chart. The two trend lines are drawn to consolidate the price until it is squeezed out and breaks either up or down out of the wedge. Wedge shaped trend lines are considered useful indicators of a potential reversal, both in rising and falling wedge patterns.
Differences Between the Rising and Falling Wedge
Although Rising Wedges and Falling Wedges are both wedge patterns, they have a few differences. For starters, they are the exact opposite of each other. A Rising Wedge, hence the name, rises in price as the trend lines consolidate the asset upwards until eventually breaking out to the bottom side of the wedge. On the other hand, a falling wedge consolidates lower in price until the asset is eventually squeezed upwards breaking out through the topside of the wedge.
Limitations of Rising Wedges
The falling wedge pattern allows traders to get into a trending market after missing the initial move upwards. This offers a second chance for buyers to long the asset, however, a limitation of using a falling wedge in your technical analysis is that it requires additional confirmation using other technical indicators and oscillators.
