It is not easy exploring the stock market and ensuring that the investments remain beneficial.
Doing good in the stock market is largely dependent on the insight of the stock market one possesses and how well that person understands the patterns of the stock market.
Stock patterns can be used to identify a consolidation in the market and traders use these patterns to forecast price patterns. Stock traders may also use many of these stock patterns to evaluate their decisions.
In this blog, we will talk about what is a rising wedge stock pattern, how it works, and how you can make money from it. Just read on!
Table of Contents
What Is a Rising Wedge Stock Pattern?
To put it simply, the rising wedge is a technical indicator that suggests a reversal pattern and frequently occurs in bear markets. This pattern can be seen in the charts when the prices move upward, forming a pivot and representing highs and slow and then converging towards a single point that is known as the apex.
The pattern is shown by using two trend lines, one for drawing across two or more pivotal points and the other for connecting two or more pivotal lows. The pattern is also similar to a bear flag pattern.
The rising wedge stock pattern occurs when there is an upward trend in the prices.
Rising wedges are considered bearish and are one of the hardest to recognize and trade.
However, the following are the elements that must be present for there to be a rising wedge pattern.
1. Prior Trend
For the pattern to be qualified as a reversal, there needs to be a prior tend that reverses it. The rising wedge pattern usually marks a long-term or an intermediate reversal of trends. Sometimes the pattern forms after a trend, and sometimes the trend itself is contained within the rising wedge.
2. Upper Resistance Line
For the pattern to be considered a reversal pattern, there need to be at least two reaction highs so the upper resistance line can be formed, or ideally three highs. The reaction high should also be higher than its previous high.
3. Lower Support Line
For the pattern to be considered a reversal pattern there needs to be at least two lower reaction lows so the lower support line can be formed. The reaction low should also be higher than the previous low.
Other factors are also at play here, such as contraction, volume, and the support break. The following is a guide on confirming the reversal and the continuation patterns.
4. Reversal Patterns for the Rising Wedge
The rising wedge, when in its reversal trend, has an established uptrend. Along with that, the rising wedge forms a consolidation, and the higher highs and lower lows link towards a narrowing point using trend lines.
The reversal patterns can be confirmed by moving average convergence divergence (MACD). The divergence between price and volume is confirmed using a volume function. The overbought signals are often confirmed by using other technical tools such as oscillators.
5. Continuation Pattern for the Rising Wedge
The continuation pattern, unlike the reversal pattern of the rising wedge, has an established downward trend. The rising wedge consolidation can be seen in this pattern, and the lower lows and the higher highs are linked towards a narrowing point using trend lines.
The rest of the confirmation process is similar to the reversal pattern.
How Does a Rising Wedge Stock Pattern Develop?
The Rising Wedge Stock Pattern is a reversal pattern that usually takes about 3-6 month time period to form. The wedge pattern is characterized by the chart pattern when the market makes higher highs and higher lows with contracting ranges.
In a rising wedge, both the boundary lines slant up from left to right. Even though both of these lines point towards the same direction, the lower line rises at a steeper angle compared to the upper line.
Prices tend to decline after breaking through the lower boundary line. Along with the volumes that keep on declining after each new price advances or with a new wave. This indicates that the demand is weakening as the prices are growing up.
A rising wedge is more reliable when it appears in a bearish market; a similar issue will be discussed in the following section. In the bullish market, what appears to be a rising wedge turns out to be a flag or a pennant, and it takes about 4 weeks to complete.
Is The Rising Wedge Bearish or Bullish?
The rising wedge can be easily described as being bearish since it’s a consolidation price pattern that is formed after the price is bound between two trend lines. The wedge pattern is considered a bearish chart pattern as it represents both reversal and continuous patterns.
How To Trade a Rising Wedge Stock Pattern ?
The rising wedge pattern after being identified can be used as a potential selling opportunity. One of the methods that you can use to avail the benefits of the stock pattern is to place a sell order on the break of the bottom side of the wedge.
Whilst trading a rising wedge, you need to be aware of the false breakthroughs that can show themselves.
To avoid this, you can wait for the candle to close below the bottom trend line before into it.
Another method to trade the rising wedge is to wait for the price to trade below the trend line. After that, you can place a sell order on the retest of the trend line.
The rising wedge pattern often signals a potential selling opportunity after an uptrend or during the on-going downward trend.
The take profit target of the rising wedge pattern is calculated by taking the height of the back of the wedge and by increasing the distance downwards from the entry.
What Does It Mean When the Pattern Appears?
When the Rising wedge appears, it usually signifies a slowing momentum as it then leads to a downside in the trends.
The rising wedge pattern is formed when the stock consolidates between two converging support and resistance lines.
The rising wedge pattern means that the traders have many potential selling opportunities if identified correctly.
The rising wedge pattern means that the increase in the prices is losing momentum, which often results in the breaking down of the security price down the lower trend line.
Usually, the price breakout is in the opposite direction from the trend line.
Why Is the Rising Wedge Pattern Important?
Experienced traders have come to love this pattern for its significance and for the potential selling opportunities it provides. Once the breakdown happens in the rising wedge stock pattern, the target can be reached very quickly.
The Target
Unlike other patterns that require a confirmation to be shown before the trade is taken, wedges do not have to follow this rule. Wedges often break and drop fast to their targets. The targets are usually persisted at the upper beginnings of the upper trend lines.
Predictive Nature
Another reason for the popularity of the rising wedge pattern is its predictive nature as it allows for a lot of clues to be taken by the traders about the direction and the distance of the next price move.
Simplicity
Traders are often attracted to this pattern due to its simplicity in identification and application.
Pros and Cons of the Rising Wedge Pattern
The rising wedge pattern has the following advantages and disadvantages.
Pros
1. The rising wedge pattern is easy to identify for traders who possess a considerable amount of experience in the stock market.
2. The rising wedge pattern can frequently be seen occurring in the financial markets and can, therefore, provide maximum selling opportunities to traders.
3. The rising wedge pattern provides a very defined and clear stop, entry, and limit levels.
4. The rising wedge pattern provides numerous opportunities for favorable, beneficial, and risk rewarded ratios.
Cons
1. The rising wedge pattern is although very easy to identify for those with experience in the stock market, can still be pretty ambiguous to novice level stock traders.
2. The rising wedge pattern, due to its ambiguous nature, is often identified incorrectly by novice level traders that lead to loss rather than a profit.
3. While the rising wedge pattern provides defined and clear stop, entry, and limit levels, the pattern still requires additional confirmation by using other technical indicators and oscillators.
4. The rising wedge pattern can also signify reversal and continuous patterns.
Conclusion
The rising wedge pattern has become the favorite pattern for more experienced stock traders due to the many potential selling opportunities it provides; however, for novice level stock traders, it is better to first gain insight on the rising wedge pattern before attempting to trade the rising wedge pattern.
The rising wedge pattern’s appealing feature is that it allows you to sell when the prices are moving upward and the wedge shape forms. However, it has its own limitations as every other pattern has.
We hope that the blog was insightful; looking forward to reading your thoughts in the comments.