What Is A Rising Wedge Pattern?
A rising wedge pattern is a bearish breakout pattern that is used by retail traders in the forex markets, stock markets, and commodities markets. This breakout pattern is great for looking for short positions in the market to capitalize on in a bearish trending market. Most of the time a rising wedge indicates that there is a compression in price action where prices of an asset are slowly rising by creating internal higher highs and higher lows. This can also be seen as a simple pullback in the market.
How To Use Rising Wedge Patterns In The Forex Market
If you recognize a rising wedge breakout pattern starting to emerge in the forex market, it’s a good idea to first do a top-down analysis looking at multiple timeframes to get a sense of the market’s direction, and then to decide whether or not it’s worth the risk of trying to enter the market to catch the breakout.
The important thing to note about certain retail patterns like the rising wedge pattern is that sometimes prices can be manipulated to first sweep people out of their positions, then it will go in the direction you expect it to. Alternatively, prices could perform a false breakout, baiting traders into getting into short positions, only to reverse and have prices rise in the opposite direction.
How Retail Traders Use The Rising Wedge Pattern
Retail traders typically will look to start entering a rising wedge pattern when it’s developed clear levels of trendline support and resistance and will enter the market as prices start to violate the support trendline while covering the last high. Of course, this is a viable strategy if you’re a retail trader and can prove to be a profitable way to trade this pattern, however, it’s not without some risks.
The first problem is that it’s very difficult to know if price has finished consolidating (pulling back) in its corrective bullish move, and you may get stopped out if it continues to pull back higher.
How Supply & Demand and SMC Traders Use The Rising Wedge Pattern
At Phantom Trading, we don’t overtly look for the rising wedge pattern but we do acknowledge it as a simple corrective, bullish pullback in an otherwise bearish trend that can actually be traded several different ways.
First, when prices start to pull back and begin breaking internal structure to the upside, there is always an opportunity to scalp longs if you want to capitalize on some of the counter-trend moves as the retail rising wedge price pattern starts to develop.
Second, when prices start to shift back into bearish orderflow (internal structure break to the downside, aligning with the bearish overarching trend), you can begin to start to look for shorts, especially if prices have tapped into a previous level of supply, and/or are forming a nice supply chain.
In order to enter, you can either day a “riskier” entry similar to one that a retail trader would take, or you can simply wait for a retest after prices have already started to break to the downside to ensure you have orderflow (sellers in this case) on your side.
What Are The Pros and Cons To Using The Rising Wedge Pattern
Pros Of Using The Rising Wedge Pattern
This is actually one of the better classic technical patterns because you’re going to be trading pro-trend (bearish trend), and you’re trading a pattern that involves building both buy-side and sell-side liquidity at the top and bottom of the consolidation which is a great recipe for a pro-trend breakout pattern.
Cons Of Using The Rising Wedge Pattern
Again, the only major downside to using the rising wedge pattern is that sometimes price will do things like seek liquidity and create false breakouts, but this is something that is usually unavoidable in most instances. If you’re going to enter using a market short sell order the way a retail trader would, you also incur potentially more risk because you’re trading against orderflow, and entering when demand is still presumably in control.
Rising Wedge Patterns In Conclusion
All in all, we actually use this pattern a lot at Phantom Trading without classifying it as a “rising wedge” pattern, because we like to trade both pull-backs and breakouts in the market but through the lens of a trader that uses simple trend analysis combined with supply and demand to get a sense of market direction and to help pick good levels or zones to buy or sell from.
Unlike average traders, we at Phantom we aim to capitalize on both sides of the market when a pattern like this emerges if it’s within our risk appetite, so you stand to gain more from the move than your average trader.
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Robert Castillo – Currency & Commodities Trader,
Financial Analyst, Writer & Editor.
Robert is a funded trader based out of Toronto, Canada, and has been trading currencies, commodities, stocks, and cryptocurrencies for over 7 years. Outside of trading he enjoys producing music, mixed martial arts, and riding his motorcycle in the summer.