Rising Wedge; Falling Wedge

A rising wedge is bearish and a falling wedge is bullish. At least this is what the theory says. I agree, however, with one big amendment: rising or falling wedges are not reversal patterns. A conservative approach when trying to actually trade such patterns would be to try to look for 50% retracement after the wedge is being completed as this being most common target for them.

The reason why these wedges are so important is they are to be found, according to Elliott Waves Theory, either to the beginning of a new move or the ending of an old one. So they may signal the end of a trend or a beginning of a new one, and this is the reason why they are not considered reversal patterns.

A rising wedge may take the shape of a leading diagonal, and in this case it is just the beginning of a move, with more to come into the same direction. In this case, even if the shape of the entire move is the one of a wedge, after the 50% retracement usually a powerful move comes, and this is a 3rd wave type structure for the Elliott waves fans, meaning price will likely accelerate strongly in the original direction. The same pattern, a rising wedge, may signal the end of a leg to the upside, and this structure it is being called and ending diagonal.

While ending diagonals are clearly topping formations, the measured move for the wedge it is still the same, namely 50% percent of the structure after the upward trendline it is being broken.

A falling wedge following a downward move may signal a reversal potential, and most important is to wait for the trendline between the 2nd wave and the 4th wave to be broken. This is a signal. Same for rising wedges in an uptrend.

The recording for this chapter shows a couple of examples of both rising and falling wedges, but what you should keep in mind are two important things: these patterns are not reversal patterns, and they are extremely tricky, as most traders look at them as turning points, when in fact they might just signal a powerful move to come in the original direction.

Book recommendation: Martin J. Pring, “Technical Analysis Explained”, Feb 20, 2002