Trading Using Wedge Pattern- Crypto Academy / S5W5 - Homework Post for @sachin08
Hello everyone!
The 5th week this season has been exciting and educative in the art of trading. Trading as we all know is a risky venture, however, some techniques and strategies can be applied to help stem losses and increase profits.
This week professor @sachin08 explained how to trade with one of these strategies in this lecture post titled Trading Using Wedge Pattern, hence this homework post is published to fulfill the tasks given in the lecture post.
Task 1
Explain Wedge Pattern in your own word
Wedge patterns are very difficult patterns to spot, although they can be referred to as patterns that are identified by the intersection of trendlines on the trading chart.
These wedge patterns occur at the beginning of a trend (showing a recent trend reversal) or at the middle of a trend( showing a pause in an ongoing trend caused by the consolidation of the price before it continues trending in its initial direction)
Wedge patterns are formed by two convergence of two different trendlines, these trend lines can be described as upper/Resistance trendline and lower/Support trendline.
In addition, these wedge patterns are never totally vertical or horizontal rather they are either rising at an angle or falling at an angle, hence all wedges are classified into two types namely;
- Falling Wedge
- Rising Wedge
Task 2
Explain both types of Wedges and How to identify them in detail. (Screenshots required)
To adequately explain both types of edges and how to identify them, I will be splitting this task into two sections where I will handle the Falling wedge and Rising wedge in each of them respectively.
Section 1
Falling Wedge
The falling wedge pattern is formed on the price chart when two Trendlines glide down a downtrend (One on the top of the price candlesticks and the other below) until they intersect forming a tapered shape that looks like an arrowhead pointing downwards at an angle.
The occurrence of the falling wedge pattern at the end of a bearish trend usually signifies a trend reversal that results in the start of a bullish trend.
However, in rare cases where the Falling Wedge forms during an uptrend, it signifies a retracement in price before the price continues in an uptrend direction, therefore this scenario can be referred to as a strong continuation signal. An example of the falling wedge pattern is shown in the screenshot below.
The Falling wedge pattern is difficult to spot on the price chart, however, these are some clues that can help a trader spot the falling wedge pattern easily;
- Draw Two down-sloping trendlines: one of the trend lines should glide downwards along the top of the price candlesticks and the other one should glide downwards along the bottom of the candlesticks until they both finally intersect.
- Multiple pivot points touching the Trendlines: The Falling Wedge pattern must have a minimum of 5 pivot points touching it, 3 points on one trendline and 2 on the other trendline.
- Take note of Volume trends: During the formation of a falling wedge, Volume usually trends downward.
Section 2
Rising Wedge
The Rising wedge pattern is formed on a price chart when two Trendlines glide up an uptrend (One on the top of the price candlesticks and the other below) until they intersect forming a tapered shape that looks like an arrowhead pointing upward at an angle.
Usually, The occurrence of the Rising wedge pattern during a bullish trend signifies a trend reversal that results in the start of a bearish trend, hence, the price will inevitably fall.
However, in rare cases where the Rising Wedge forms during a downtrend, it signifies a consolidation period before the price continues in a downtrend direction most times. This scenario can be referred to as the formation of a continuation signal. An example of the rising wedge pattern is shown in the screenshot below
The Rising wedge pattern is difficult to spot on the price chart, however, these are some clues that can help a trader spot the falling wedge pattern easily;
- Draw Two up-sloping trendlines: one of the trend lines should glide upwards along the top of the price candlesticks and the other one should glide upwards along the bottom of the candlesticks until they both finally intersect.
- Multiple pivot points touching the Trendlines: The Rising Wedge pattern must have a minimum of 5 pivot points touching it, 3 points on one trendline and 2 on the other trendline.
- Take note of Volume trends: Similarly to the falling wedge pattern, the volume at the formation of a Rising wedge trend downward.
- Breakout Volume: The Breakout Volume differentiates the fall from the rising wedge because whether the breakout volume is heavy or light but it is usually below average and after the breakout, the volume starts to increase rapidly.
Task 3
Do the breakout of these Wedge Patterns produce False Signals sometimes? If yes, then Explain how to filter out these false signals.
The answer to the question above is YES!, false signals occur after many price patterns, and the wedge pattern is certainly not left out.
Sometimes, the breakout of these Wedge Patterns might produce False Signals but with the proper knowledge, traders will be able to filter these signals. In the next paragraph, I will be explaining how to filter out these false signals produced by the wedge pattern breakout.
Conclusion
Trading offers a lot of promise if the trader understands how the market works. A trader might not know everything about how the market works but it is wise to trade using price action movements and simple patterns like the wedge pattern.
The wedge pattern is not that easy to spot but the guidelines stated previously in the article should help any trader easily identify.
All the trader has to do is, watch out for either the falling wedge pattern or the rising wedge pattern and trade using their breakouts, but traders need to be wary of false signals.
I have found this week's lecture exciting, I hope to participate more in the cryptoacademy.
Thank you for reading!
