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What are Rising and Falling Wedges?

What is a rising wedge?
Rising wedges form when the market makes higher lows and higher highs within a contracting range.

The pattern is considered to be a continuation pattern. A break of an upward line of the formation, allows for the price to ascend.

The pattern is negated if the price breaks the lower trendline of the formation.

How can we trade rising wedges?
risingwedge1

The following example of GBP/USD illustrates a rising wedge formation on a 30-minute chart. The pair drifted higher, making higher lows and higher highs while the range contracts. The volatility dropped off significantly during the formation of the pattern, while the higher and lower trendlines acted as buffers for the price action.

Because rising wedges are typically a continuation pattern, we look for an opportunity to buy GBP/USD. After bouncing off the lower trendline of the formation, a large up candle breaks the upper resistance, suggesting a possible breakout. We enter the trade upon the close of the candle at 1.6280, while placing our stop-loss slightly below the most recent significant low at 1.6180. The pair breaks out in the desired direction rising approximately 200 pips before topping, resulting in a 2:1 risk-to-reward ratio.

risingwedge2

What is a falling wedge?
A falling wedge forms when the market makes lower lows and lower highs with a contracting range.

This pattern is considered a continuation pattern. A break of a downward line of the formation, allows for the price to tumble.

The pattern is negated if the price breaks the higher trendline of the formation.

How can we trade falling wedge?
fallingwedge1

The following example of the USD/CHF illustrates a falling wedge formation on an eight-hour chart. The pair drifts lower, while making lower lows and lower highs as the range contracts. The volatility drops off significantly during the formation of the pattern, while the higher and lower trendlines act as buffers for the price action.

Because falling wedges are a continuation pattern, we look for an opportunity to sell USD/CHF. After bouncing off the higher trendline of the formation, a large down candle negates the lower support, suggesting a possible breakdown. We enter the trade upon the close of the candle at 1.2000, while placing our stop-loss slightly above the most recent significant high at 1.4100. The pair breaks out in the desired direction plummeting approximately 600 pips before topping, resulting in nearly 3:1 risk-to-reward ratio.

fallingwedge2

About Ziad Melhem

Ziad Melhem
Ziad Melhem is the Admin of Forex.com.lb with more than 10 years of experience in the local and regional "financial wheel". With vast experience in equities, capital markets, foreign exchange, derivatives, technical analysis, and financial services, he is one of the pioneers in online trading when this financial product was first introduced to Lebanon around 2000-2001. Ziad is currently the CMO of Amana Capital Group (www.amanacapital.com).

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