TrendSpider Strategy Guide: Trading Wedge Formations

When it comes to trading, a huge piece of figuring out the puzzle is being able to identify simple patterns and have the knowledge of what their general sentiment is (i.e. Bullish or bearish setup). One of the main patterns technical traders focus on is the wedge pattern. This pattern is essentially when support and resistance trend lines are both sloped instead of one being completely horizontal (triangle patterns) and the other being sloped.

Figure 1: This image shows a symmetrical wedge formation in which both the resistance and support have a slope. 

Figure 2: This image shows a descending triangle formation with resistance being a sloped like but support being flat. 

In this strategy guide article, we will focus on the 3 different types of wedge patterns out there as well as how to utilize the TrendSpider platform once one is found. One of the main things to remember with all patterns is that confirmation is needed before entering the trade. Each trader has a different set of confirmation signals they look for when entering a trade within these setups. The general conformation is a mix of volume and divergence on the preferred indicators they trade with.

What is an Ascending Wedge?

The first set up in the family of  “wedge patterns” is known as the “Ascending Wedge Pattern” (also known as a rising wedge) which forms when the price is in a strong upward channel but the slope of the support is steeper than the slope of the resistance, creating the “rising wedge” appearance. The resistance line on the ascending wedge essentially shows that buyers are exhausting as buyers are starting to lose momentum and the price gets continually tighter in the wedge. In general, this setup is generally looked at as bearish but there plenty of instances (like any setup) in which the pattern has not followed it’s general sentiment.

Figure 3: This image shows an ascending wedge setup on the SPY with the third touch of support looking promising. However, as the ascending wedge is usually a bearish setup, traders should take caution at this point and wait for some type of confirmation for a move. 

Figure 4: As you can see, the price dropped hard the next day after the price found support on the ascending wedge but formed a hammer candle and bounced hard the next day right back the previous support line now acting as resistance. 

What is a Descending Wedge?

A brother to the ascending wedge, the “Descending wedge” which is also known as the falling wedge, is the setup that generally has bullish sentiment out of the three wedge formations. In this case, selling starts to lose momentum at the end of the wedge and technical traders start to eye the ticker for a potential breakout play. Sometimes the self-fulfilling prophecy of technical trading can cause a falling wedge to breakout with no fundamental backing. As always this type of setup can easily break down as well which is why it is imperative to use a confirmation strategy that is backtested and each trader is comfortable with.

Figure 5: In this image, the price is in an overall downtrend but support and resistance lines are converging closer and closer as the trading range narrows. 

What is a Symmetrical Wedge?

The last setup in the family of the “wedges” is the most neutral one called the symmetrical wedge. In this case, both the support and resistance slopes are almost identical creating a “symmetrical wedge” appearance. The symmetrical wedge is considered neutral out of the three with confirmation needed the most on this one.

Figure 6: In this before and after shot, the price bounces right off the SMA (50) to the symmetrical wedge resistance above and pulls back at the end of the day to close right below. Some traders exclusively trade these narrow ranges within these wedge patterns. 

TrendSpider Wedge Strategy: Trendline and Indicator Alerts

As you have seen above, wedges can be a very profitable pattern if traded corrected with conviction to your trading plan. However, in some instances, these trades may only be prime for a few minutes so knowing exactly when these things occur is crucial to being successful.

In this section, we will focus on a couple of the main ways we have identified traders can utilize the TrendSpider platform to make their wedge trading more efficient. One of the main ways TrendSpider adds utility to traders is through our alerts feature which allows you to pick any trendline or

Figure 7: This figure shows the TrendSpider platform identifying the symmetrical wedge formation on HTGM and then immediately catching the next level of resistance once the wedge breakout occurred and the chart was refreshed. In this case, a user would have been able to take action on these moves up with a simple alert on both the wedge support (in case the price started to break to the downside) and resistance above (once price broke through resistance, the trader would have been alerted that this is possibly ready to move higher due to the technical breakout). 

Figure 8: Follow these easy steps witha simple right click on any trendline or indicator. 

Figure 9: This is another example of a falling wedge setup that was identified on the TrendSpider platform in which the price bounced off support and immediately gravitated right to the trendline and SMA (50) above. In this case, a trader would have been alerted on the resistance breakout, the test of resistance above the wedge resistance, and the SMA (50) resistance above. This could have been the difference between 20% and breakeven. 

Figure 10: The falling wedge setup alerted on TrendSpider’ Stocktwits account with a quick move the next day to test these areas above. 

Conclusion

In general, wedge setups can be very profitable for traders who trade them with conviction and a proper plan. It is important to remember that the TrendSpider platform should always be used as a resource for further research and due diligence for any stock, not a platform to alert traders when to enter or exit. Utilizing our automatic features will help you become more efficient so you can spend more time taking the next steps to be a more successful trader.

 

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