Wedge
Candlefocus EditorWhen a trend has been established in the market, the price of a financial instrument will generally move in line with the trend until it reaches a point of equilibrium. At that point, a wedge pattern begins to form. The chart forms higher highs and lower lows as the price continues to move in the same direction within a channel.
In an ascending wedge pattern, the highs of each candlestick rise higher than the previous one, while the lows remain relatively stable, creating an ascending low line towards the right side of the chart The highs continue to rise until the wedge reaches the apex and buyers become exhausted. This exhaustion is evidenced by the slight dip on a candlestick that signals sellers taking control, leading to a sharp drop in price. The opposite is true for a descending wedge pattern: the highs remain relatively stable and the lows begin to dip lower after each candlestick until sellers become exhausted. When the descending wedge reaches the apex, the price experiences a surge upwards as buyers return to the market.
Wedges are considered to be reliable reversal patterns because of the way buyers and sellers behave in the market. When a wedge forms, bullish investors become overextended in an ascending wedge, while bearish investors become overextended in a descending wedge. As a result, the overvaluation of buyers results in a sharp drop in price in an ascending wedge and the overvaluation of sellers leads to a sharp increase in price in a descending wedge.
Wedges can provide traders with additional insight into expected market movements, and can help traders identify potential buy and sell price points. Traders should always use caution and diversify their portfolio when trading with wedge patterns. Indecision in the market, fundamental data unkown to traders, and other technical patterns may offer a convincing opinion to the contrary and invalidate the wedge pattern altogether. However, when used in combination with other technical indicators, wedge patterns can be an invaluable tool for traders to gain insight into potential price reversals.