After establishing the entry, stop-loss and target, consider the profit potential that the trade offers. Consider the risk/reward ratio before proceeding.If the price action moves favourably, the stop loss is trailed behind the price to help lock in profit. A trailing stop-loss could also be used.An estimated profit target may be the height of the wedge at its thickest part, added to the breakout/entry point. Set a profit target or choose how you will exit a profitable position.Risk-management is an important element of trading. Others may place the stop loss closer to keep the stop-loss size smaller. Some traders opt to place their stop-loss just outside the opposite side of the wedge from the breakout. This can provide another entry opportunity. Once the price has broken out, it will sometimes come back to retest the old trendline of the wedge. You could open a buy position if the price passes above the upper trendline of a descending wedge, or a sell position when the price falls below the lower trendline of an ascending wedge. Check the trendlines to make sure that you have drawn them to your liking (typically, they are drawn along, and connecting, swing highs and lows). Verify that the price has moved outside the wedge. This means the price moves outside the drawn wedge pattern. Draw trendlines along the swing highs and the swing lows to highlight the pattern. Its opposite is an ascending broadening wedge. In 40% of cases, the price makes a pullback in support on the descending broadening wedge’s resistance line.įor your information: A descending broadening wedge is a reversal chart pattern. In 81% of cases, the pattern's price objective is achieved when the resistance line is broken. In 23% of cases, a descending broadening wedge occurs in a consolidation movement. Statistics of the descending broadening wedge after a bullish movement NB: pullbacks are harmful to the pattern’s performance. The price objective is given by plotting the wedge’s maximum height onto the breaking point Resumption of the bullish movement after correction. CASE 2: formation of a descending broadening wedge after a peak This type of pattern appears during the correction in a bullish movement, it is a bullish continuation pattern. In 21% of cases, the price makes a pullback in support on the descending broadening wedge’s resistance line. In 60% of cases, a descending broadening wedge’s price objective is achieved when the resistance line is broken. In 75% of cases, a descending broadening wedge is a reversal pattern. NB: often, the steeper the descending broadening wedge’s trend lines, the faster the price objective is reached. The price objective is determined by the highest point at which the descending broadening wedge was formed. The break in the resistance line definitively validates the pattern. CASE 1: formation of a descending broadening wedge after a trough This type of pattern appears on the troughs, it is a bullish reversal pattern. A third wave forms afterwards but the sellers lose control again after the formation of new lowest points.ĭuring the formation of a descending broadening wedge, volumes do not behave in any particular way but they increase strongly when the support line breaks. A second wave of decline then occurs of more magnitude, signalling the sellers' loss of control after a new lowest point. The highest point reached during the first correction on the descending broadening wedge’s resistance line forms the resistance. The sellers manage to make the price rebound on the resistance line but lose control after the formation of a new lowest point. The divergence of the two lines in the same direction (increase in price magnitude) informs us that the price continues to fall with movements that are increasingly low in magnitude. This implies that the descending broadening wedge pattern is considered valid if the price touches the support line at least 3 times and the resistance line twice (or the support line at least twice and the resistance line 3 times).Ī descending broadening wedge does not mark the exhaustion of the selling current, but the buyers’ ambition to take control. NB: a line is said to be "valid" if the price line touches the support or resistance at least 3 times. The upper line is the resistance line the lower line is the support line.Įach of these lines must have been touched at least twice to validate the pattern. It is formed by two diverging bullish lines.Ī descending broadening wedge is confirmed/valid if it has good oscillation between the two upward lines. A descending broadening wedge is bullish chart pattern (said to be a reversal pattern).
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