REPOST: Trading Using Wedge Pattern - Crypto Academy / S5W5 - Homework Post for @sachin08

in hive-108451 •  8 months ago 

Hello guys, I welcome you all as we participate in season 5 - week 5 of the steemitcryptoacademy lessons. My first lesson this week would be on "Trading Using wedge Pattern", a lesson presented by professor @sachin08.

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Explain Wedge Pattern in your own word.


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Wedge patterns are all important technical indicators used in the price chart analysis by traders while taking trade positions. This consists of two trendlines that both originate from different horizontal points but definitely converge on the same point. This kind of formation can be likened to that of a fallen triangle shape with its sharp pointer edge observed to be that of a converging point or wedge.

The existence of these two trendlines is observed to act as Resistance levels for the upper trendlines and as well as Support levels for the lower trendlines. Both trendline formations are all found in the different scenarios of any given wedge pattern. That is to say, Wedge Patterns can be seen to be either a Rising or Falling Wedge. It is a Rising Wedge when the price trend is observed in the upward direction. This is the opposite for the Falling Wedge where the price trend is observed in the downward direction.

Most importantly, traders have to take into cognizance the trade signals derived from this wedge pattern. When we have the Rising Wedge signal, there is a possibility of an observed Price trend reversal in the downward direction. This is also applicable to the Falling wedge where possible price reverse, is anticipated in the opposite direction which is the upward direction.

At the point of a trend reversal, this is a position where we observe a valid breakout from the wedge pattern formation which vis-a-vis a place for possible trade positions.

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(Rising Wedge_Image from Tradingview site)

From the image above, we can observe that the Rising wedge is characterized by the trendlines in an upward direction before the complete formation of the wedge pattern. The price trend is observed to be in an opposite direction which is in a downtrend direction.

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(Falling Wedge_Image from Tradingview site)

From the image above, we can observe that the Falling wedge is characterized by the trendlines in an upward direction before the complete formation of the wedge pattern. The price trend is observed to be in an opposite direction which is in the Uptrend direction.

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Explain both types of Wedges and How to identify them in detail. (Screenshots required)


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Just as briefly narrated above, Wedges can be observed in a Rising or Falling pattern scenario. This shows or represents the price movement in either the uptrend or downtrend direction which anticipates possible market reversals. These types of Wedge patterns include;

Rising Wedge

In the Rising Wedge scenario, the price trend is observed to be on the uptrend just as the name implies. The drawn trendlines are headed towards the upward direction relative to the wedge pattern formation. The rising wedge pattern comes with an anticipated Bearish reversal trend which gives a trade signal each time this rising wedge pattern is formed.

When this wedge pattern formation is done after the intersection of the trendlines which forms both as a Resistance and Support to price trend, there is an anticipated breakout from this pattern which is basically the price entry position to take trade before asset price makes its low and lower lows.

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(Rising Wedge_Image from Tradingview site)

Identifying the Rising Wedge

In identifying the Rising wedge scenario, both trendlines would be observed in the upward direction with the possibility of intersecting.

The price trends should be able to have multiple touches with the trendlines. When this price trend meets rebounds with the upper trendline, it acts as a dynamic resistance level and when it rebounds with the lower trendline, it acts as the dynamic support level.

Volume trade when we have the Rising Trendline is observed to trend downward. This is basically due to the downward reversal pattern that accompanies the rising trendline which anticipates a possible reversal trade signal. Traders are expected to make trade positions each time this scenario is observed. In addition, volume is usually below average.

Falling Wedge

Unlike what we have already mentioned for the rising wedge, the Falling Wedge is the opposite scenario. In this case, we observe that the price trend is headed downwards with both drawn trendlines intersecting at a point in the downwards direction. Just like the name, Falling Wedge, it represents a bearish movement of prie trends which is followed by a Bull trend reversal thereafter.

After the formation of the wedge pattern, there is a likelihood of a possible breakout of price trend which validates a trade position for a buy order. In this scenario, traded volume is observed on the increase given to the technical indicator which is designed that for every falling wedge, price is expected to reverse with a bullish trend. Hence this is an early market signal when this scenario is confirmed in trade.

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(Falling Wedge_Image from Tradingview site)

Identifying the Falling Wedge

In this scenario, we find the trendlines all headed downward with the formation of the wedge pattern also sound in the downward direction. This is followed by a market reveal in the opposite direction (Bullish trend).

The price trends should be able to have multiple touches with the trendlines. When this price trend meets rebounds with the upper trendline, it acts as a dynamic resistance level and when it rebounds with the lower trendline, it acts as the dynamic support level.
Aso in addition, the volume trend is also observed to be in the downward direction.

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Do the breakout of these Wedge Patterns produce False Signals sometimes? If yes, then Explain how to filter out these false signals.


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It is known that no technical indicator is perfect or standalone rather they tend to produce fakeouts or false signals. In ameliorating some of these false signals, it is best to combine the Wedge pattern with another technical indicator. A breakout of the already formed wedge pattern helps in anticipating a possible trend reversal, hence this signal should observe in situations where it is, on the contrary, it is termed false signals. In this case, we may use the Volume indicator which specifically tells us the position of volume which is usually below average for a rising wedge pattern.

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For instance, when the volume is observed on the decline or bearish, this possibly shows an early trade signal for an anticipate d market reversal in the bearish direction despite the trend being on the rising wedge.

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On the other hand too when we combine the RSI indicator, at the point where the wedge pattern is formed, the price trend is already observed in the Overbought position. This simply shows the price peak and there is every likelihood of market reversal as the buying pressure not be sufficient to keep pushing up the price trend and hence, we will have more selling pressure due to the profit-taking (trend reversal).

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Show full trade setup using this pattern for both types of Wedges. ( Entry Point, Take Profit, Stop Loss, Breakout)


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For a Rising Wedge Trade Setup
  • In this scenario, we should expect that the price trend should be observed in the upward direction
  • Formation of Wedge pattern should also be found in the upward direction
  • Presence of a valid breakout observed and price trend exit this market pattern
  • Market sell order position is opened to maximize market gains
  • Stop-loss is placed at the edge of the wedge formation
  • Reward Risk ratio placed at 2:1

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For a Falling Wedge Trade Setup
  • In this scenario, we should expect that the price trend should be observed in the Downward direction
  • Formation of Wedge pattern should also be found in the downward direction
  • Presence of a valid breakout observed and price trend exit this market pattern
  • Market Buy order position is opened to maximize market gains
  • Stop-loss is placed at the edge of the wedge formation
  • Reward Risk ratio placed at 2:1

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Conclusion

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Wedge patterns are also reliable and an all-important technical indicator that guides the trader on how best to make his trade positions relative to the different trade scenarios available. For the Rising Wedge pattern, price trends and the formation of Wedge are all observed to occur in the upward direction but this comes with an anticipated trend reversal in the opposite direction (Bearish ). For the Falling Wedge pattern formation, price trend and its formation are all observed to occur in the downward direction with an anticipated trend reversal in the opposite direction which is in the Uptrend.

Thank you prof @sachin08 for your lessons.

Note that all images used for the task are screenshots from the trading view site.

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