The rising wedge
The price rises, but inside a wedge that keeps narrowing. Many see fading strength and expect a downside break.
At first glance the rising wedge looks positive, because the price is rising. But the lows rise faster than the highs, and the climb becomes harder.
What it's about
Both boundaries rise but converge. Each new high is only slightly above the last. When the price breaks below the lower line, the wedge counts as complete.
How to recognise it
- At least two rising highs and two rising lows.
- The lower line rises more steeply than the upper one.
- The swings get smaller.
- A close below the lower line counts as a break.
How the price target is estimated
The start of the wedge counts as a rough target. If it began at €108, many expect a decline back there after the break.
Where it misleads you
A wedge can keep going for a long time, and the downside break may never come. Also, you can draw two converging lines into almost any uptrend if you choose the points to fit.
An example trade with made up numbers
Maja holds 60 shares bought at €100. The stock has risen to about €120 in a narrowing wedge. Many people don't use a falling pattern for short selling but as a reason to sell or protect an existing position. So does Maja.
The decision: Maja sells when the stock falls below the lower wedge line, at €117.50. After a €1 fee and a little spread, Maja locks in about €1,048 in profit.
If the pattern holds: The stock falls to €108. Maja avoided a €570 drop in value.
If it was a false breakout: The stock then rises to €124. Maja misses out on €390.
The wedge gave Maja a reason to lock in gains. Whether that was the better choice only shows afterwards.
Rising wedges count as reversal patterns at the end of a rise, or as continuation patterns in a downtrend when they appear as a recovery within it. Many watch for falling volume while the wedge forms.
Summary
- In a rising wedge the price rises, but with fading strength.
- Only the break below the lower line completes the pattern.
- The lines are easy to draw to fit.
Did you get it?
Why does a rising wedge count as a warning sign?
Because each new high is only slightly higher and the rise is losing strength.
When is the wedge complete?
When the price closes below the lower line.
What counts as a rough target?
The start of the wedge.
Sources and further reading
- StockCharts ChartSchool, Rising Wedge. View source ↗
- Thomas N. Bulkowski: Encyclopedia of Chart Patterns, 3rd edition 2021.
Related
- Falling wedgeChart pattern
- Double topChart pattern
- What chart patterns can doLesson