The information on this page is not a personal recommendation and does not take into account your personal circumstances or appetite for risk.

Introduction

Technical analysis or Charting allows investors to use a range of patterns to assist them with timing their entry to and exit from positions. In contrast to triangles, which are continuation patterns, Wedges are reversal patterns (like Head & Shoulders and Double/Triple Top/Bottoms). They signal a change of trend – via breakout or breakdown – following consolidation within a narrowing range where both support and resistance are either rising or falling.

Wedges exist in both Bullish and Bearish form and each can be split into 3 distinct sections;

Bullish wedges

1. The initial sell-off into the wedge can be steep or gradual.
2. The wedge represents a pause to consolidate, with falling highs and lows in a narrowing pattern being the first sign that a bullish wedge is forming.
3. Once the shares break higher it is possible that a reversal rally – measured from the highest peak to the lowest trough – could be delivered.

Bearish wedges

1. The initial rally into the wedge can be steep or gradual.
2. The wedge represents a pause to consolidate, with rising highs and lows in a narrowing pattern being the first sign that a bearish wedge is forming.
3. Once the shares break down it is possible that a reversal sell-off  – measured from the lowest trough to the highest peak – could be delivered.

Remember! Nobody’s perfect

Whilst trade objectives are calculated by assuming and projecting a repeat of the initial up or down move, note that Bullish or Bearish wedges don’t always deliver a move equating to the full wedge height. Sometimes they undershoot. Sometimes they overshoot. And the wedge itself is not always a perfectly neat affair. What is most important is that overall pattern respects the general steps mentioned above.

Caveat

Individual technical indicators should never be relied upon in isolation for trading decisions, however strong the signal may be. Ultimately they are one of many indicators, which may, in the majority, be pointing the other way. Always use look at other indicators (moving averages, trendlines, price, price patterns, volume) to assist in the final trading decision. Lastly, the current trend of a share should always be respected – preempting a change can prove costly.