Hello everyone 🤗
I hope we are all in good health.
I have gone through the lesson by professor @sachin08 and so today I will be working on the assignment.
Please enjoy.
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sourceAlot of indicators and pattern are always utilise by traders for price analysis when trading cryptocurrency using a chart.
These patterns helps trader understand the market more as well as given a clear Insight of the market.
One of this pattern that can can use to carry out price analysis is the WEDGE PATTERN
The wedge pattern which is often formed by the covergence of two slope trendlines on a price chart is a pattern that can either indicate a reversal or continuation in price trend or direction, depending on the location or point where the wedge is formed in price chart.
screenshot from trading viewThe wedge signifies a pause in the direction of an initial trend.This pause will either resume in continuation or in a reversal depending on the location the wedge was formed in the chart,but most times it reverses rather than continue.
This is because wedge pattern is known to be a reversal pattern and the continuation only occurs rarely.
Wedge as a pattern comes in 2 types or is categories into 2 types,mainly
•RISING WEDGE
•FALLING WEDGE
The rising wedge or acsending wedge indicates a bearish reversal while the falling or decending wedge indicates a bullish reversal.
we will discuss more about this two types of wedge in the next task.
Just like I mentioned earlier,we are going to discuss more about the types of wedge in this task.
Recall I already stated the two type of wedge we have above which are
-Rising and falling wedge
so now, we will proceed to doing justice to them by explaining them further.
•RISING WEDGE
The rising or ascending wedge just like the name implies occurs in a price chart when price of an asset which has been up and experiencing series of highs begin to reverse into a downtrend whereby experiencing lows which is as a result of price of the asset breaking the lower slope line or the support line.
it is a Bearish reversal which is formed when price of an asset is consolidating between an upper slope of both the resistance and the support line in a chart.
screenshot from trading viewThis particular type of wedge indicates that price is inevitably going to breakout downward whereby pushing price down towards a downtrend.
It is important to note that the rising wedge can either signify a continuation in trend or a reversal depending on the area it is formed.
Let me explain this part further,so as to make things crystal clear.
If by chance the rising or acsending wedge forms or is located after an uptrend,then price is inevitably going to reverse into a bearish trend.
But if it is formed during a downtrend,this could mean and indicate a continuation into a downward trend.
However,we still notice from the above stated that price still goes down!wether it reverses or it continues.
But in most cases we see price reverses more than it continues, continuation rarely occur in the wedge pattern.
The rising wedge is often and most times taking as a signal to sell either after an upward movement/uptrend or an existing downward movement.
HOW TO IDENTIFY A RISING WEDGE
To Identify a rising wedge is not as difficult as it might look,one just have to understand and be familiar with some step and procedure as to how it is formes and how it can be located.
so in this part of the question,I will be highlighten ways to identify a rising wedge.
•Price trend/action
this is the first thing to look for in the price chart,a point or region where price is making temporal series of higher highs and higher low and then start consolidating at some point.
•Make Trendlines
Draw or make two trendline representing the resistance and support line enclosing the highs formed in the consolidation phase to form a wedge.
•Multiple Touches
Take note of the touches, ensure that there are multiple touches on each trend line(atlest 5 touches) to make sure the wedge is valid.
•Decrease in volume:See to it that there is a decrease in volume at the point where the wedge forms,it is an additional confirmation that the wedge is valid.
As wedge moves and continue towards a breakout the volume will be seen declining.
•Breakout
breakout should be to the downward direction, price should break the support line.
•FALLING WEDGE
The falling or decending wedge occur in a chart when price of an asset which has been down and experiencing series of lows begins to reverse Into an uptrend or upward directions as a result of price breaking the upper trend line.
This type of wedge pattern can also signifies a reversal or continuation of trend depending on where it is formed.
screenshot from trading viewIf the falling wedge forms at the button of a downtrend,this will signal a reversal in price as price will start going up in an uptrend but if it forms during an uptrend then we will see continuing in an uptrend.
The button line is that wether it reverses or continue,we see price breakout from the uptrend line and then goes upward in an uptrend.
But the most common trend direction pattern that occur in wedge pattern in general wether rising or falling wedge is the reversal, continuation only happens rarely.
The falling wedge is often taking as a buy signal either after a downtrend/downward movement or an upward movement/uptrend.
HOW TO IDENTIFY A FALLING WEDGE
•Price trend/action;
look for a point or region where price is making lower high and lower lows and then price start consolidating.
•Make Trendlines;
Draw or make 2 sloping trendlines to represent resistance and support line whereby enclosing the price and forming a wedge.
•Multiple Touches;
Ensure that there are multiple touches on each trendlines,atlest 5 touches to establish the wedge as a valid one.
•Decrease in volume;
The decrease in volume concrete the fact that the wedge is valid,it helps trader to determine if truly the wedge pattern is genuine or not.
•Breakout;
After all the aforementioned factors has been met,then we ensure that price of the security breaks out from the upper trendline or the resistance line for it to start reversing upwardly.
Of course YES!
they do give false signals atimes.
People who are familiar and conversant with trading using price chart understands that sometimes patterns as well as indicators do not give precise and perfect result and so they are always of the opinion of making use of multiple pattern and indicators to be on the safer side.
False signal can occur and yes it occurs in the wedge pattern.
It occurs when price is suppose to reverse in another direction after breakout but eventually it falls back into the existing trend.
screenshot from trading viewFor instance,it occurs in falling wedge when price that has been experiencing series of lows begin to consolidate and then eventually Breakout from the upper trendline,after the breakout,we expect price to reverse in an uptrend but no,it falls back into the downward trend and continued the existing downward trend.
Now, personally I feel the best way to filter and cushion the effect of false Breakout signal is to be patience and wait for additional confirmation before entry into the market to place an order.
Making use of split order entry system and waiting for restest is very effective in filtering false breakout signal.
Also the use of Indicators along side pattern will give traders a clear view on the market trend and will alert the trader when a trend is strong or weak to continue or reverse.
Trade setup for Rising wedge pattern.
•Start by making 2 slope trendlines representing resistance and support and forming a wedge.
•Place a sell order(short entry) where the price broke out of the lower trendline which is the support.
•The stop loss should be place above the wedge pattern
•To take profit ,a target has to be set.
The take profit should done by measuring the height of the back of the wedge and then replicating that same height from the breakout point down below the wedge.
screenshot from trading viewLooking at my screenshot above,I place a sell order(short entry) at the point where the price break the support line which is the lower trendline and set my profit target below the wedge pattern and then my stop loss was just above the lower trendline which is the support line .
This is the best way to setup trade for sell order using the rising wedge.
Trade setup for Falling wedge.
•start by making 2 slope trendlines to indicate resistance and support line.
•Place a buy order(long entry) where price broke the resistance line which is the upper slope line.
•The stop loss should be place below the buttom of the wedge pattern
•take profit should be targeted above the wedge pattern by measuring the back height of the wedge and then replicating that same height from the point of breakout to the top of the wedge.
screenshot from trading viewIn my screenshot,you see how I place my long entry(buy order) as soon as price broke the resistance line,I also place my stop loss below the trend line and I set my profit target above the wedge using the measurement of the back of the wedge pattern.
Wedge pattern are wonderful pattern that can alert trader on the possible reversal in price of an asset.
This wedge pattern does not only serve as a reversal pattern but also a continuation pattern.
It can either serve as a reversal or continuation pattern depending on where it forms or is located.
The wedge pattern is categorize into 2 types mainly Falling and Rising wedge pattern which are both bullish and bearish in nature.
I also won't fail to acknowledge the effort of professor @sachin08 for putting together this wonderful and eye opening lecture.
Thanks for reading
assignment by :@dibie