Wedge Trading Strategy

The wedge trading strategy is nothing more than a reversal trading strategy that has the potential to generate big profits. When it comes to price action trading the most important thing is recognizing certain patterns in the market.

In this guide, we’ll go through exactly how to define or what defines the falling wedge pattern.

Like most price patterns you’ll be able to trade this pattern on any market and on any time frame. No matter what type of trader you’re – swing trader, daytrader, and scalper – you can make big profits trading the falling wedge pattern.

Now …

Regardless of the environment that you see a falling wedge pattern the shape of it and the information that it’s actually offering to you with its price pattern has a very definite bullish bias. Going forward, we’re going to focus on recognizing the falling wedge pattern and then we want to focus on how to effectively trade the strategy.

Note* No technical indicators are required to trade the wedge trading strategy because we’re dealing with a pure price action trading strategy.

Before we start covering in depth the rules of the strategy we’re going first to define and learn how to recognize each one.

Falling Wedge Pattern Explained

It’s important to recognize that the falling wedge pattern, it has two parts in its price pattern structure:
The primary characteristic of a falling wedge pattern is that we need to have a bearish trend before the pattern develops because it’s a reversal pattern.

Part two is the actual falling wedge pattern which looks like a triangle that is pointing down.

Now, how to recognize the price structure of a falling wedge pattern?

You need to have a series of lower highs followed by a series of lower lows, the more the better. Each lower point should be lower than the previous lows and each higher point should be lower than the previous high.

However, as we approach the end of the falling wedge pattern you’ll notice the price will fail to make lower lows.

While the falling wedge pattern develops you’ll notice that the length of the swing waves are becoming tighter and tighter as we move to the downside. And at some point in the future, the two trendlines that connect the highs and the lows will converge.

The falling wedge pattern is not confirmed until it’s breaking to the upside resistance.

Here is real example:

Philippine National Bank (PNB) Weekly Chart

Wedge Trading Strategy Rule – Buying Opportunities

As a general rule, we have to keep in mind that the longer the market consolidates between the upper and lower limits of the falling wedge pattern and the symmetrical wedge pattern the higher the odds of a breakout happening sooner rather than later.

First, we’re going to focus on the falling wedge pattern because it has the potential of outstanding profits to be made.

Step #1: Wait until you can Spot on the Price Chart the Structure of a Falling Wedge Pattern and Draw the two trendline that connects the highs and the lows.

We’re just looking for that visual representation of a falling wedge pattern. So, the more compressed the pattern is the better because when eventually we’ll break to the upside the volatility behind the breakout will push the price higher very fast.

Note** Often times you’ll find that the shape and the price structure of a falling wedge pattern can vary from pattern to pattern. Ideally, as long as we follow the definition given earlier, we’re good to trade any falling wedge pattern that respects those rules
Next, we need to figure out where we need to get into the trade, which brings us to the next step:

Step #2: Buy when we break and Close above the Downward Resistance Trendline

It’s important before the breakout to see the price contracting within the two trendlines. So when the price hit the resistance trendline the sellers will step in and when the price hit the support trendline the buyers will step in.

Ultimately, we’re getting the price squeezed inside this range bound action.

As we get tighter and tighter that’s what we’re focused on as the buildup in pressure will eventually lead to a breakout. In order to avoid possible false breakouts, we’re also going to wait for a close above the upper slope before we actually buy.

Now that we’re in a trade we need to find our target, which brings us to the next step.

Step #3: Take profit once we Break Above of the Origins (Starting Point) of the Falling Wedge Pattern
The starting point of the falling wedge pattern is our first wall of resistance and obviously, we want to cash I our profits at the first trouble area. This is a more conservative target.

Step #4: Place the Protective SL below the last swing low before the Breakout

The place we’re going to hide our stop loss is quite intuitive to figure out. The last swing low before the breakout can provide us with a very attractive low risk in comparison with the potential profit available.

A break below the last swing low will invalidate the falling wedge price structure so we want to minimize our losses and get out of the trade.

Note* The above was an example of a buy trade… For a sell trade, we need to trade the “cousin” pattern which is the rising wedge pattern. Use the same rules – but in reverse – for a sell trade.

Summary

The reason why we’ve chosen to use the falling wedge pattern falling wedge pattern because people won’t realize what is developing until after the breakout, but if you train your eyes to spot these price patterns in advance big profits are waiting for you down the line.

The psychology behind the falling wedge pattern is that as the price action narrow down the buyers become more aggressive while the sellers don’t have enough power to continue pressing down the paddle.

If you compress an object hard enough after it reaches a maximum level of compression it will snap back hard. The same principle can be applied to the falling wedge pattern which is the reason why it has such a tremendous potential to make substantial profits

Thank you for reading!
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