Notice how the stop loss is placed above the last swing high. Below is a closeup of the rising wedge following a breakout. Let’s take a look at the most common stop loss placement when trading wedges. However, the golden rule still applies – always place your stop loss in an area where the setup can be considered invalidated if hit. This is because every wedge is unique and will, therefore, be marked by different highs and lows than that of the last pattern. Now let’s discuss how to manage your risk using two stop loss strategies.įinding an appropriate place for the stop loss is a little trickier than identifying a favorable entry. Up to this point, we have covered how to identify the two patterns, how to confirm the breakout as well as where to look for an entry. That said, if you have an extremely well-defined pattern a simple retest of the broken level will suffice. That entry in the case of the falling wedge is on a retest of the broken resistance level which subsequently begins acting as new support.Īlthough the illustrations above show more of a rounded retest, there are many times when the retest of the broken level will occur immediately following the break.īefore we move on, also consider that waiting for bullish or bearish price action in the form of a pin bar adds confluence to the setup. Notice how we are once again waiting for a close beyond the pattern before considering an entry. The same holds true for a falling wedge, only this time we wait for the market to close above resistance and then watch for a retest of the level as new support. Put simply, waiting for a retest of the broken level will give you a more favorable risk to reward ratio. Register Exness Account Open demo account This close confirms the pattern but only a retest of former wedge support will trigger a short entry. Notice in the image above we are waiting for the market to close below the support level. For now, let’s focus on how to trade the breakout. It all comes down to the time frame that is respecting the levels the best. The answer depends on the setup in question. Should we wait for a 4 hour close beyond the level or should we only consider an entry on a daily close? Similar to the breakout strategy we use here at Daily Price Action, the trade opportunity comes when the market breaks below or above wedge support or resistance respectively.Ī common question when it comes to trading breakouts is which time frame is best to use. Otherwise, it cannot be considered tradable. In other words, the market needs to have tested support three times and resistance three times prior to breaking out. Lastly, when identifying a valid pattern to trade, it’s imperative that both sides of the wedge have three touches. If a trend line cannot be placed cleanly across both the highs and the lows of the pattern then it cannot be considered valid. Notice how all of the highs are in-line with one another just as the lows are in-line. We know this to be true because the market is making lower highs and lower lows. In the illustration above, we have a consolidation period where the bears are clearly in control. The illustration below shows the characteristics of a falling wedge. This also means that the pattern is likely to break to the upside. The falling wedge is the inverse of the rising wedge where the bears are in control, making lower highs and lower lows. This implies that it must eventually come to an end. It cannot be considered a valid rising wedge if the highs and lows are not in-line.īecause the two levels are not parallel it’s considered a terminal pattern. All of the highs must be in-line so that they can be connected by a trend line. Notice how the rising wedge is formed when the market begins making higher highs and higher lows. The illustration below shows the characteristics of the rising wedge. While both patterns can span any number of days, months or even years, the general rule is that the longer it takes to form, the more explosive the ensuing breakout is likely to be.Īs the name implies, a rising wedge slopes upward and is most often viewed as a topping pattern where the market eventually breaks to the downside. Just like other wedge patterns they are formed by a period of consolidation where the bulls and bears jockey for position. The first thing to know about these wedges is that they often hint at a reversal in the market. However because these wedges are directional and thus carry a bullish or bearish connotation, I figured them worthy of their own lesson. The rising and falling wedge patterns are similar in nature to that of the pattern that we use with our breakout strategy.
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