EDUCATION - Rising & Falling Wedges - Reversal PatternsWhat is an ascending/descending correction?
The most common reversal pattern is the rising and falling wedge, which typically occurs at the end of a trend. The pattern consists of two trendiness which contract price leading to an apex and then a breakout appears.
Rising Wedge – Bearish Reversal
The ascending reversal pattern is the rising wedge which consists of higher highs and higher lows whilst losing momentum to the upside. Price contracts and eventually has a bearish break.
Falling Wedge – Bullish Reversal
The falling wedge reversal pattern occurs at the end bear run and indicates that price is ready to reverse. Again, price contracts and then eventually breaks out upwards.
There are 2 types of ways we can trade wedge patterns; Risky Entry & Safe Entry. See below for the pros and cons for both and how to enter them
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Risk Entry:
The reason why it is called a risk entry is because we haven't got many confirmations apart from the third touch of the trendline (as indicated in the chart above). Price may have the potential to go past the trendline for a deeper correction before moving up hence why this is called a risk entry. Whereas for the safe entry, the confirmation would be the break of the wedge.
How to trade using Risk Entry:
Wait for price to bounce off the trendline and then enter with stops below/above the correction depending on whether it’s a rising wedge or falling wedge.
One of the advantages of doing a risk entry is that we can have small stop loss and have a great risk:reward ratio. Also, we can gain an entry at the start of the move and have massive gains!
Safe Entry:
Safe entry requires more than one confluence and requires confirmation. One of the confirmations of the safe entry is the third touch bounce and then another confirmation is when price breaks the correction which confirms that the structure has changed and that we are in a reversal.
How to trade using Safe Entry:
For a safe entry, enter when price has broken the correction with stops above/below the correction. Please note that with this entry method, the stoploss will be greater.
The disadvantage to using a safe entry is that we require a bigger stop loss which makes the risk:reward ratio not as great as the risk entry. However, the probability of the trade succeeding is higher.
RISING WEDGE EXAMPLES
RISK ENTRY
SAFE ENTRY
FALLING WEDGE EXAMPLES
RISK ENTRY
SAFE ENTRY
