Rising wedge patterns are bigger overall patterns that form a big bullish move to the upside. They form by connecting 2-3 points on support and resistance levels. Price action forms a big up channel. It becomes bearish once the price fails the base of the wedge. Look for a retest of the base of the wedge, and if it fails, then you have bearish confirmation.
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A rising wedge pattern consists of a bunch of candlesticks forming a big angular wedge that is increasing price. It is a bullish candlestick pattern that turns bearish when the price breaks out of a wedge.
Rising wedge patterns form by connecting at least two to three higher highs and two to three higher lows, becoming trend lines. They are bearish reversal patterns. The rising wedge pattern can sometimes be a continuation pattern, but that’s a rare occasion.
Wedges hold price waves. The waves are made when the price moves inside a narrowing range. Those waves are filled with candlesticks that give you signs.
Basics
When rising wedge patterns complete, the price breaks out, usually in the opposite direction the wedge was pointing. Rising wedges point up, so it breaks down when the price breaks out.
Some rising wedges are vectored at steeper inclines than others, known as a reversal pattern. They were starting wide at the bottom and moving into a point at the top as the price began to trade in the narrowing range. If they are part of a continuation pattern, it still has the slope up.
Instead of price breaking down, though, it continues up until a point (they always end, even if it is only briefly). As a reversal trend, it slopes up with the trend and then breaks down (and signals a good entry or exit on a trade).
Candlesticks such as the long-legged doji, bullish candlesticks, or even dragonfly dojis give warnings ahead of time. RW’s will sometimes break and expand into larger rising wedges.
Wedges look like triangles, but the pattern they form means something different. Triangles are formed by price moving sideways as wedges move up or down with significant price movement.
As the price begins to trade in the narrowing trading range, wait for confirmation of the breakout before shortening the move down.
Insecure Markets
Rising Wedge Patterns show the emotions on the charts. For rising wedge patterns to form, they need upper resistance and lower support lines. Hence…trend lines that double as support and resistance and pattern forms. Buyers and sellers show their emotions as they create large amounts of buying and selling (as shown on the volume portion of the chart) at support and resistance.
The upper resistance line needs at least two reaction highs; ideally, we want three to form. Each high should be higher than the previous high. It is heading up.
The lower support line needs at least two reaction lows, thus forming the support level. Each low should be higher than the previous low. It is forming higher lows.
Rising Wedge Pattern Trading Strategy
- Look for a rising wedge pattern to form by connecting two to three peaks and valleys
- Connect the peaks and valleys via trend lines
- Once the price breaks down out of the peak of the wedge, take short entry
- Use a candlestick close above the peak of the wedge as your stop
Rising Wedge Pattern Example
Note the fairly low volume during the melt-up within the wedge on $SPY. Buyers and sellers tend to appear when major areas of support or resistance are broken.
This chart example of $SPY shows specific events that built the overall wedge pattern.
Check out the reversal pattern looming with $SPY here – notice the red candle at support. The chart pattern provides a good entry at several points along the pattern.
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Rising Wedge Pattern Confirmation
This can be one of the more difficult patterns to trade due to the need for bearish confirmation to occur, which only happens once the support line is broken. It cannot just be broken but needs to be broken convincingly. Please always wait for that confirmation before you jump into short-selling. Once support is broken, there may be a reaction rally to test the new resistance level. What once was support is now resistance. Traders test that to make sure it is going to hold.
You can buy put options or short sell if that resistance level holds. This pattern has higher and lower highs, making it inherently bullish despite its bearish bias. Stocks trade on supply and demand; when the final break of support happens, you know the supply exceeds the demand.
This makes the price of the stock fall. Shorts look to hop in, and bulls look to take profit!
$XLF rising wedge – This is near ALL-TIME HIGHS! Similar area to the levels during the 2008 Global Financial Crisis. It started as a falling wedge pattern inside a bigger cup and handle pattern.
Final Thoughts
Rising wedge patterns indicate that a bearish downturn can be expected when the RW channel begins to get too tight or the price breaks down out of the lower half of the trend line. Look for a wedge with about 15-20% left of the expected move.
There is no way traders can perfectly measure the decline, so using technical analysis helps. Some traders prefer to use Fibonacci retracements and other trend lines to find the next level of support after a rising wedge has broken.
Frequently Asked Questions
A rising wedge is a bearish pattern. It starts in a bullish trend but reverses and goes bearish when the price fails the peak of the wedge.
The psychology of the rising wedge shows the buyer's sentiments at support levels and sellers' sentiments at resistance. It starts as a bullish pattern and ends bearish as support levels fail.
- Identify a rising wedge on a chart
- Draw angular support levels
- Draw angular resistance levels
- Enter a short position when the price fails the wedge
- Place a stop loss above the top of the wedge
The outcome of a rising wedge pattern is bearish when the price fails the support level of the wedge. It starts bullish but reverses when support fails.
Traders should enter a short-sell position once the price fails the apex level of the wedge. They should exit their long positions when the price reaches the wedge's apex at resistance.
