Bullish wedge is a trend reversal pattern that will also appear on your trading chart. For that, this time we will discuss the bullish wedge. You can also read other articles such as How to Read Bullish Stocks and What are the Characteristics.

What is a Wedge?

Wedge patterns are trend reversal patterns. They consist of support and resistance trendlines moving in the same direction in a narrowing channel, until one of the trendlines is broken and reverses the trend immediately on heavy volume. These reversals can be very violent due to the complacent nature of participants expecting the trend to continue. Trendlines are a great way to spot channel narrowing, which is the first key sign that a reversal may be forming. Wedges occur when price action contracts, forming a narrowing price range. If trendlines are drawn along swing highs and swing lows, and they meet, then it has the potential to be a Wedge. Wedges can be either upward or downward. They can also be sideways — for example, where there is a downtrend or an uptrend and the price waves inside the wedge are getting smaller. Wedges can present as both continuation and reversal patterns. This means that price may break out of the Wedge pattern and continue in the direction of the asset’s overall trend. However, price may also break out of the wedge and end the trend, starting a new trend in the opposite direction. In the chart example above, the falling wedge eventually became a continuation pattern. This is because the overall trend is up, so when the price breaks above it, the uptrend continues. In this case, the pullback in the uptrend takes the form of a Wedge.

What is a Bullish Wedge?

The Falling Wedge is a bullish pattern. Together with the rising wedge formation, they create a strong pattern that signals a change in trend direction. In general, the Falling Wedge pattern is considered a reversal pattern, although there are examples that facilitate a continuation of the same trend. The Falling Wedge is a bullish pattern that starts wide at the top and contracts as price moves lower. This price action forms a cone that slopes downward as the reaction high and reaction low meet. Unlike symmetrical triangles that have no definitive slope and no bias, falling wedges definitely slope downward and have a bullish bias. However, this bullish bias cannot be realized until a resistance breakout occurs. The Falling Wedge shows both trendlines sloping downward with a narrowing channel indicating an immediate downtrend. As the trendlines get closer to converging, price makes a big surge higher through the upper descending trendline on heavy volume. This catches participants by surprise, triggering the breakout and subsequent uptrend.

Characteristics of Bullish Wedge Pattern

Price patterns on cryptocurrency charts don’t form randomly. Instead, they tell a story about the activity of buyers and sellers. Likewise, the Falling Wedge pattern, which occurs after a bearish trend, tells a story about what bulls and bears are doing — and what they might do next. Bullish trends form after significant events, encouraging buyers to purchase assets in the hope of future price appreciation. However, it is often difficult for investors to hold these positions for long. They typically book profits after making some gains, often adding more positions when the price is discounted. As a result, the bearish wedge pattern we see after a bullish trend is partly the result of buyers taking profits. Once the profit-taking is over and the price has fallen, investors will start buying again. The approach to trading with the falling wedge pattern is to look for the moment when the correction is over and the bullish trend is likely to resume. The global financial markets are driven by institutional traders who need liquidity. There must be enough buyers to sell and enough sellers to buy. Therefore, a pattern like the Falling Wedge suggests that the institutional traders who created the uptrend may be opening another long position, continuing the trend after the discount.

 

The above chart shows a Falling Wedge pattern that appears after a bearish trend. Bitcoin price moved sharply down from $64,000 to $30,000, but despite strong selling pressure, it did not break below $30,000. As a result, the price remained corrective and formed a Falling Wedge. In this pattern, new lower lows and lower highs are formed as the price remains within the support and resistance of the converging trend lines. In addition to swing levels, investors should monitor how volume changes. As price moves into a consolidation phase, volume will decrease due to less trading activity. However, once a breakout occurs, it should be supported by higher volume.

The image above shows the same BTC/USD chart with trading volume added. Here we can see that volume was higher at the start of the Falling Wedge pattern, but the volume bars started moving lower as the Wedge pattern expanded. Once price moved up from the wedge pattern with a bullish breakout, volume started to increase again.

Bullish Wedge Type

Below are the types of wedge patterns themselves. Types of wedge patterns are:

Rising Wedges

Rising wedges are bearish signals that develop when the trading range narrows over time but has a definite upward slope. This means that unlike an ascending triangle, both the next low and the next high in a wedge pattern will be higher as the trading range narrows toward the top of the wedge. As a bearish signal, rising wedges usually form at the end of a strong bullish trend and indicate an impending reversal. However, rising wedges can sometimes form in the middle of a strong bearish trend, in which case they are counter to the main price movement. In this case, the bearish move at the end of the rising wedge is a continuation of the main downtrend.

Falling Wedge

Falling wedges are the opposite of rising wedges and are always considered bullish signals. They develop when a narrowing trading range slopes downward, so the next low and the next high are within the Falling Wedge as the trade progresses. Falling Wedges are usually reversal signals that occur at the end of a strong downtrend. However, they can occur in the middle of a strong uptrend, in which case the bullish move at the end of the wedge is a continuation of the overall bullish trend.

Advantages of Using a Bullish Wedge

In technical analysis, analysts use wedges to depict price movements and major trends in the market. Here are the advantages of Wedge;
  • Slices provide a general view of market trends.
  • The reversal points that form a convergence for the price trend give rise to the formation of a wedge.
  • Investors can gain compelling market insights through technical analysis depicted on the slices.
  • Bearish and bullish patterns in the market are detected through wedges.
  • Upper and lower trend lines are important for investors, especially when making investment decisions.
  • The Falling Wedge pattern occurs frequently in financial markets.
  • The Falling Wedge pattern acts as a trend reversal and trend continuation pattern.
  • Finding stop-loss and take-profit levels is easy.
  • This pattern offers a good risk-to-reward ratio.

After learning about Bullish Wedge along with the types of patterns, benefits, and other related things, then you can trade by following the identification method that has been explained above. In addition, register so you can trade with the help of expert traders at GIC! Also follow the GIC Instagram account for information about trading!