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The Rising Wedge Pattern Explained - All You Need To Know About It - YouTube
Channel: Earn2Trade
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Greetings traders and welcome back
to another Survival Guide.
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Chris here, bringing you
some more information.
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Today, we're going to be discussing
the rising wedge pattern.
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This is one of the more common bearish
indicators that technical
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traders are looking for when
trying to identify a reason
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to look for a short opportunity
in the market.
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It's a very common pattern. It occurs
a lot more than traders
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realize, and once we talked about
what it looks like, how to
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identify it, and how to trade it, you'll be
able to incorporate it into your
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daily trading as well. Knowing
how to use these patterns is great
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if you plan on taking the Gauntlet
or Gauntlet Mini challenge.
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This is the kind of stuff that
will allow you to gain that
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competitive edge to make sure
you reach your profit goals.
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But before we go any further, please
do me a favor and click
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that like and subscribe button down
below so I can keep coming
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out with these videos for you guys.
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Now without further ado, let's
dive on into that material.
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The rising wedge pattern is so
popularized and so loved by
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traders, we would be doing
ourselves a disservice
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if we didn't talk about it at some point.
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It's a beautiful pattern that allows
us to potentially identify
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some bear situations in the market,
which means we can capitalize
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on some of those selling opportunities.
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First, we'll cover what exactly is
a rising wedge, and a
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rising wedge is going to be a
technical trading indicator
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that signals a trend reversal or a
continuation, usually within
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a bear market. The pattern is also
known as an ascending
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wedge. This is important to
understand because you may
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see it worded this way as you Google
around the web. The ascending
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wedge pattern can form when
a stock, or whatever
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we're analyzing is in an uptrend
or downtrend depending on
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the unfolding scenario. So, if the price
that we were analyzing was in an uptrend,
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a rising wedge is usually an
indication that traders are
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reconsidering the bullish price move.
If what we're analyzing
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is in a downtrend, a rising
wedge is an indication that a
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short-term pause before the bear
market continues is to be
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expected. However, the rising wedge
pattern can also fit
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within the continuation indicators
category as well.
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No matter whether it is a reversal
or continuation signal,
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in both cases the rising wedge
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indicates an increase in bearish sentiment,
so that is the key takeaway.
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The rising wedge pattern is widely
spread within the stock
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futures and Forex markets amongst
traders, and it makes it
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a very preferred technical trading tool
for the traders that
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feel comfortable enough to identify
and utilize it, because
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it's relatively simple. This trading
pattern is also considered
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to be quite reliable once
understood correctly.
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A rising wedge forms when the price's
movement consolidates
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between two sloping trend lines that are
collectively displayed as a triangle formation.
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These sloping lines are basically just
support and resistance,
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at an angle, and they are converging
together to a centralized
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point. The bottom line is going to be
our support line, while
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the upper line is going to be our
resistance line. The support
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and resistance lines both point
towards and upwards direction,
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as you can see. The support line usually has to
be a bit steeper than the resistance line.
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The lines are constructed by connecting two
or more points of separate highs and lows.
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There are several prerequisites for
the formation of a rising
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wedge, in the context of a reversal
pattern that is. These
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include things like a presence of a
prior trend. Understandably
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the rising wedge needs to reverse
an existing trend. In the general case,
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the pattern will form across the span
of say, three to six trading
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periods, and can reverse either a
medium or long-term trend,
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but once again, because it's a pattern,
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it depends on the time frame of
the charts that we're looking
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at. We can find a rising wedge on a 5-minute
chart, all the way up to a monthly chart.
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Then, we also want a formation of a lower
support line and an upper resistance line,
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like we mentioned. The condition for
the formation of a rising
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wedge is to have a support line
connecting at least two lows.
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Each low should appear
higher on the chart
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than the previous one. This is the case
with the resistance line as well
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naturally, because we
want things to be equal.
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It should connect two or more
highs, each of which should
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be higher than the previous
one before it.
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In a nutshell, the presence of
lows and highs that are
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higher than the previous ones
help form this ascending-
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like shape that is creating
this wedge pattern.
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We also want contraction of
both lines and a break of the
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support line. As the pattern
matures, the support and resistance
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move towards each other
and converge at the end.
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In fact, it is the breaking point
at the convergence that
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closes the pattern and generates the signal.
Similar to the case with other indicators,
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the more convincing the break is,
the more stable and reliable
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the sentiment of this signal
that's being provided is. We
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also want to see declining volume.
As the rising wedge evolves
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and matures, and the price starts heading
downwards, the volume
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should naturally be decreasing
as well. The crucial point
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for the pattern is where the support
line is actually broken.
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This is precisely when the rising
wedge has finally been
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confirmed. After that, things usually unfold
pretty quickly. Once a breakdown occurs,
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the target is reached almost
immediately, especially when
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compared to alternative trading patterns.
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This means that with the rising wedge,
traders don't necessarily
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have to wait for further confirmation
as at the breaking
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point things begin moving very quickly,
and we probably want
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to be involved, if we plan on
being involved at all.
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This is also what makes chartist love
the rising wedge pattern
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so much, because it's relatively
straightforward in interpretation
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and can provide some high-accuracy
results, when understood
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correctly. The only critical moment
where things might not
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go as easy as planned in terms of
signal interpretation is
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the fact that, in some situations, once
the breakdown happens,
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you might see a new rally that tests the
new created resistance
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level. However, even in that case,
if we keep our eyes on
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the breakdown point, we won't have
trouble identifying and
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interpreting the pattern signals,
as we do this over and over again.
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Before we find out what happens
at the end of a rising
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wedge, we should say a few words
on how to recognize when
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the pattern is actually coming to an end.
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If we see that the lower support lines
advances start getting
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shorter, it is a sign that the rallies are
getting weaker. In this scenario,
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the upper resistance line would
be struggling to keep pace
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with the support line slope,
and this is an indication that
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the end of the rising wedge is just
looming around the corner.
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With that, we would have every
sign that the rising wedge
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is about to be completed.
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The actual end of the rising wedge
occurs when the
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support and resistance lines,
constructed of pivot highs and
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lows, converge in a single point at
the end of the wedge pattern.
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The point that they're converging is
usually referred to as the apex.
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Once the lines converge in the apex, the price
usually embraces a downward movement.
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To sum it up, after the rising wedge
has been drawn and
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created and comes to fruition and is finally completed,
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the resulting direction of price is usually
downwards from a rising wedge.
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On the chart, the rising wedge
appears as a figure that starts
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wide usually at the bottom, and contracts
as it moves higher and the lines narrow.
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The ascending wedge is very similar
to the way that the bear
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flag pattern generally appears on
a chart. Now, after we know
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what the rising wedge looks like
on a chart, it's usually
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time to focus on how to identify
whether the pattern that
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we are seeing is actually a rising
wedge or if it's just
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a misleading action by price. There are
several indicators that can help us with this.
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But first, the thing that we want to
pay attention to is that
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the pattern's movement should be
going towards the right. Besides
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that, the volume should be decreasing,
a sign of divergence with price.
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Another thing to look for is the
advancement of the retrace.
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Depending on how far it has gone
from the beginning of the
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downtrend, we'll be able to recognize
whether the pattern is
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valid. The best way to look at
this is to see if the retracement
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itself exceeds the 50%
Fibonacci level or not.
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If it doesn't, then the pattern is
valid. If it does, then we
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probably don't want it. To successfully
implement the rising
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wedge pattern into our technical
trading indicators toolbox,
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we should learn how to identify
it in an uptrend and in a
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downtrend. In an uptrend,
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the rising wedge is considered
a reversal pattern. It forms
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when price hits the higher highs
and the higher lows, resulting
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in a contracting price range. During
the uptrend, the closer
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the support and resistance
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levels go and work their way towards
each other, the slower
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the momentum gets. Alternatively,
a downside reversal is usually
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what is expected to take place.
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In these cases, traders will start
looking for opportunities
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to short the market. On the other
hand, during a downtrend,
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the rising wedge pattern indicates
a temporary retracement.
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In other words, the price moves in the
opposite direction of the trend for a short time.
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Once again, the support and resistance
levels here are starting
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to move closer towards each other,
indicating a continuation
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of the existing bearish trend.
In that case traders will
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also start looking for selling
opportunities to go back in
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the direction of the
prevailing trend.
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There are different ways to trade
once we've identified the
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ascending wedge
pattern on the chart.
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The first way, and the most common
way, is to simply place a
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sell order when we are breaking the
bottom side of the wedge.
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To protect ourself from false signals,
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we can make sure to wait for a
candle to actually close below
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the bottom of the trendline.
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Once it actually does this,
we can then go ahead and make
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our short entry. This example shows
where the price breaks
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the lower support line, over here where
we have the one, and
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then we can see the exact point of
the sell order marked
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off by number two. The number two
represents when we broke
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the bottom of the base of the wedge,
not just breaking the trend line itself.
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By selling when we break the bottom
of the trendline, this
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represents one way that we can sell.
By selling when we break
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the base of the wedge, this
further confirms that we have
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bearish activity potentially following
the market that we
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can take advantage of. When it
comes to identifying where
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we should expect price to go,
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we can get a little bit of foreshadowing
in an expected
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distance when we pay attention to
the base of the wedge.
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The base of the wedge is going
to be the area from where
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the support has initially built
upon creation of the wedge
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to the high point where then
began its first swing high, creating
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its first area of resistance.
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This is going to be the area
that we're usually using to
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connect to our next swing high,
giving us those two points
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of connection. Other than that, with
the bottom side, where
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we have our support, this is going
to be representative of
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an area that is going to
plateau sideways
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usually, where the market is going
to be continuously
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working its way higher, as you can
see from the swing lows
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progressing higher, but you're
usually going to see an area
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in the chart where we're seeing a
horizontal area of support,
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where price has essentially benchmarked
before working higher.
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The distance between the base, which is
going to be the baseline
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of horizontal support, and the
first swing high Is usually
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a representation of what we can
expect in terms of distance,
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once that baseline of support
has broken after the rising
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wedge has already pushed
outside the bottom of the trend
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line. That means as we broke out of one,
and we worked our
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way down towards this baseline of
support ,the distance that
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we saw over here is going to be
something comparable to what
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we expect over here.
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It's very comparable to other patterns
out there, like a head
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and shoulders, where you can get an
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idea of what to expect from the
distance the neck to the
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head, once the neckline is broken.
Except in this case,
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once again, we're waiting for that
horizontal area of support
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that was created, the baseline
of support, at the beginning
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of our wedge to the high point of the
swing high in this
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scenario, where we would be
using that distance to get an
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idea of how far to expect price to go
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once it breaks out the other side.
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If hypothetically, if this represented
say, 10 points from
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the base to the high
point, the initial high point that is,
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then we'd be looking to achieve
somewhere around 10 points,
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or perhaps just under to stay
in the safe conservative side,
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once we break the bottom of that
horizontal support. If
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I set my take profit order, I would
set it something like
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right down here, where I may be
at say, 8 points, instead
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of a full 10, to make sure that
I'm well within reason of
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what the market is doing,
and well within reason of what we
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expect based on the distance that was
traveled from the baseline
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of support to the high point of resistance.
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initially when the pattern was created.
When we compare rising
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wedges to falling wedges,
it's easy to understand because
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in a nutshell, what we had already
mentioned about rising
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wedges is true for falling
wedges as well.
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It can also serve as a continuation
or a reversal pattern
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and can be trusted due to its high
degree of accuracy when
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understood correctly. The
main difference though,
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is that unlike its rising counterpart,
the falling wedge signals
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an upcoming bullish trend reversal,
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so the end outcome is just a
different direction. Besides, the falling
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wedge forms support and resistance
lines with a downward slope
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versus an upward slope, like we have
with the rising wedge.
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It's worth noting that
with the rising wedge,
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the figure is pointing in an upward direction,
whereas with the falling wedge,
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the apex is simply pointing in a
downward direction. Between
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that, the general trading concept
is exactly the same.
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It's just a mirror image opposite. Instead
of looking for a short opportunity,
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like we just talked about
with our rising wedge,
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we would simply be looking for a
long opportunity once we've
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encountered a falling wedge.
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This would provide us an opportunity
to get in with an expectation
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based on the base
of the wedge.
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It doesn't matter if it's rising
or falling, it allows us
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to get an idea of how far to expect
the market to move when
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we pay attention to the distance
between the baseline of
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support or resistance and
the swing high or swing low at
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the beginning of these both rising
and falling wedge patterns.
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In conclusion, the rising and falling
wedge for that matter
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are both great patterns to incorporate
into a regular trading
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toolbox or a regular trading arsenal.
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They are technical patterns that
not only provide an idea
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of where the market is going,
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but also how far to potentially
expect the market to go in
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that direction. Any pattern that gives
you not only a direction,
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but also an expected outcome,
as far as how far it's going
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in that direction, can be very valuable
once mastered correctly.
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I strongly encourage checking out
some of the rising wedge
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patterns that we've seen on the market
today, or on any other
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marketscape that you feel
analyzing. Go back
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through your charts and see
how many you can find.
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It's good practice, but until next time folks, happy hunting.
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Happy trading. I'll see you all soon.
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