Understanding and effectively employing trading patterns to your trading arsenal can work wonders for your investment portfolio. Throughout the aim of today’s writing is to provide traders with a thorough understanding on how to effectively apply a couple of reversal trading patterns. As you can infer from the title of this article, these reversal patterns are known as wedge formations. Before we get started it should be noted that since we are working with reversal patterns that access to a charting solution is a must.
A few charting solutions that you could consider using would be MetaTrader4, FreeStockCharts or TradingView. Each of these charting solutions are free and include a wide number of technical indicators, custom alert features and much more!
One of the best advantages about the wedge trading formations would be how they can be used on any time frame along with any market. So whether you are a binary options, forex, cryptocurrency or contracts-for-difference investor the ability to apply this trading approach is always available to you.
Now if you are relatively new to online day-trading and aren’t familiar with the basic principles of price action we advise you to learn more about price action trading patterns prior to applying this trading concept in a live investment situation. The two trading formations that we are going to be covering today are known as the Bearish Wedge and Symmetrical Wedge pattern.
Both of these formations tend to possess a bullish tendency to them so essentially we are going to be executing buy orders (call trades) when our contingencies are met.
Bearish Wedge Formation
Perhaps the most common formation to occur out of these two wedge formations would be the Bearish Wedge pattern. Bearish wedge formations are characterized by two distinct components. The first component being that a bearish trend must be present before this pattern develops (hint bearish wedge). While the second component involves the appearance of price action which develops into a triangular (wedge) shape.
As you can gather from the image above, the bearish wedge pattern takes the shape of a downward pointing wedge that looks quite similar to an obtuse triangle. The upper portion of the wedge formation is developed by a resistance level that plots the highest high with the lowest low. While the lower section of the wedge is developed from the highest low extending to the lowest low.
An important note to remember when applying this trading approach would be that each lower point should reflect less value than the previous lows. In addition, each higher point should reflect a value lower than the preceding high. Without these truths then the formation would not reflect one of a bearish wedge.
Eventually what will occur would be that the further down the wedge you go the more likely that price will be unable to establish new lower lows. This is also characterized by the wedge compressing making each new lower high and lower low more tightly bound together. When this situation occurs our resistance wedge line will eventually intersect with our support wedge line. It isn’t after our falling wedge pattern breaks our resistance wedge line that we are able to execute a buy investment.
Bear in mind that when investing with both of these trading formations that you want to stick with an expiration near the time frame that you are using to analyze your targeted asset. So for example, if you have a 15 minute time frame then you will want to select an expiration period ranging between 15 to 30 minutes.
Symmetrical Wedge Formation
Uncharacteristically like the bearish wedge formation, the symmetrical wedge formation appears in the shape of a symmetrical triangle. Similar to the bearish wedge formation, the symmetrical wedge pattern is composed of two characteristics. The first being that the resistance level is comprised of linking a consecutive series of subsequent higher lows. While the second is composed of linking sub-sequential lower lows.
Unlike the bearish wedge pattern, the symmetrical wedge pattern can materialize near the end of a bullish or bearish trend. What makes this formation rather unique would be how it can invested not only has a reversal pattern but also a trend continuation pattern. One should note that once the wedge becomes more tightly bound that price action becomes more sporadic and volatile. What you need to do during these moments is just sit tight, relax and execute your investment once the breakout occurs.
Applying the bearish and symmetrical wedge trading approach is a great way to take advantage of unexpected trading opportunities. These formations are quite numerous and since they can be applied to essentially any investable asset day-traders have the ability to take advantage of investment opportunities that other investment approaches wouldn’t grant them otherwise. Make sure that each formation exhibits their two designated qualities and if at anytime you notice that a break in the continuation of a lower high or lower low ever occurs simply void the investment and wait for a better set up to occur.
Make sure to apply a passive money management approach (5% or less of account balance per trade) when testing out new strategies or better yet use a free demo account to verify that you have the hang of the strategy before committing.
For those of you who need assistance with this strategy or online investing in general feel free to leave a comment below and we’ll get back to you as soon as possible! Make sure to stick around for more strategic trading approaches to come!