71% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. If the potential reward is less than the risk, it will be more difficult to make money over many trades, since losses will be bigger than profits. For example, if the profit target is 1000 points above the entry, as in the chart below, then ideally, the difference between the entry stop-loss (risk) is 500 points or less. Ideally, the potential reward is twice as much as the risk. After establishing the entry, stop-loss and target, consider the profit potential that the trade offers. Consider the risk/reward ratio before proceeding.If the price action moves favourably, the stop loss is trailed behind the price to help lock in profit. A trailing stop-loss could also be used.An estimated profit target may be the height of the wedge at its thickest part, added to the breakout/entry point. Set a profit target or choose how you will exit a profitable position.Risk-management is an important element of trading. Others may place the stop loss closer to keep the stop-loss size smaller. Some traders opt to place their stop-loss just outside the opposite side of the wedge from the breakout. This can provide another entry opportunity. Once the price has broken out, it will sometimes come back to retest the old trendline of the wedge. You could open a buy position if the price passes above the upper trendline of a descending wedge, or a sell position when the price falls below the lower trendline of an ascending wedge. Check the trendlines to make sure that you have drawn them to your liking (typically, they are drawn along, and connecting, swing highs and lows). Verify that the price has moved outside the wedge. This means the price moves outside the drawn wedge pattern. Draw trendlines along the swing highs and the swing lows to highlight the pattern. If in doubt, wait for the candlestick to close in the desired direction before entering the trade. The wedge doesn’t appear as often as the flag, for example, but gives a fairly accurate signal of an imminent reversal. At this point, you can open a repeated position in the same direction: sell trade for an ascending wedge and buy trade for a descending one.Īs you can see, trading this pattern is very easy. The market might return to the price level for retesting.The trade exit is usually set at a distance equal to the widest part of the wedge.On the descending wedge, open a buy trade after the breakout of the resistance level. If the wedge is ascending, wait for the breakout of the support level and open a short position.Draw the resistance and support levels at highs and lows.When price breaks through the lower edge of the wedge, the market declines sharply to the downside. A bullish wedge on a bearish trend also becomes a powerful reversal signal.At some point, the bears gain the upper hand and the market turns down. When the bulls lose their strength, the price starts to fluctuate more often and forms a bullish wedge.These peaks are used to draw support and resistance that are directed to the upside and strive towards each other.Īn ascending wedge can also form on both trends: A descending wedge on a bearish trend indicates an imminent chart reversal to the upside.Ī bullish wedge is built on at least two (or better three) rising extremes.If a bearish wedge occurs on an uptrend, then the price continues to rise again after a short pause during the formation of the pattern. These lines are drawn at at least two extremes, preferably, three.Ī descending wedge can form on any trend: Support and resistance levels are built along the highs and lows which are directed to the downside and tend to each other. In this case, the amplitude of the price movement decreases. Descending WedgeĪ bearish wedge is built in a market that makes highs and lows that are constantly declining. Let's take a look at both types with chart examples. Let's start with the main thing: a wedge is a chart figure that is formed during price fluctuations in a narrowing channel.
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