[REPOST] Trading Using Wedge Pattern - Crypto Academy / S5W5 - Homework Post for @sachin08
Introduction
Hello Crypto Lovers!
I hope you have been enjoying the season five in the steemit crypto academy. This week marks the 5th week of the 5th season. I am Kehinde Micheal and my username is @msquaretwins on this platform. I have gone through the lecture presented by professor @sachin08 on the topic "Trading Using Wedge Pattern" in the beginners class. Therefore, in this post, I will take out my time to answer the questions posted in the homework post. Happy reading!
1. Explain Wedge Pattern in your own word.
There are different types of price formation in trading, and this formation often formed different patterns which help traders or investors to know the direction of price or to predict where price is going to reverse as well as to take good market decision. One of the most commonly used patterns in trading is wedge pattern.
The name wedge is given to this pattern base on the formation of price on chart. Wedge is used in many fields to indicate or show something that has two ends with one thin and the other thick. For instance, in Physics, wedge is known as a machine that has inclined shape with one end thin and the other end thick. The same is applicable for wedge pattern in trading.
Wedge pattern is a triangular shape that has a wide base but with a very thin or narrow end. This means that a wedge pattern is a price pattern that starts wide and then converges over a period of time to meet at a end. Wedge pattern indicate a slow or pause in the movement of price in a direction. It is usually indicated as a convergence of trendlines on a chart.
Wedge pattern has two trendlines, the upper trendline and the lower trendline. The upper trendline is the dynamic resistance and the lower trendline is the dynamic support. In wedge pattern, the price keeps touching both dynamic resistance and support trendline until a break out occurs.
The wedge pattern can form either to show trend continuation or a trend reversal. It signifies a trend reversal when it occurs at the end of a current trend, but when it forms at the middle of a trend, trend continuation is always envisage. There are two types of wedge pattern, rising wedge and falling wedge. More on this in the next question.
2. Explain both types of Wedges and How to identify them in detail. (Screenshots required)
As I said earlier, the two types of wedge in trading are rising wedge and falling wedge. Let's begin with rising wedge.
Rising Wedge
Rising wedge is a special type of wedge pattern that occurs to signifies bearish move. It has an upward convergence of trendline. This means that the wide side of the trendlines start from below and keep narrowing as price moves up and finally meet at a point above before a break to the downside.
Rising wedge is regarded as bearish chart pattern because when it occurs it shows reversal of a bullish trend or continuation of a bearish trend. In rising wedge the highs and lows keep rising while the the price range keep narrowing such that the resistance trendline and support trendline that connecting highs and lows meet at the apex.
This chart pattern usually form at the end of a bullish trend such that after formation, the price reverses to the opposite direction. Although, it can also be spotted during a bearish move. In such a case, the rising pattern will form during upward retracement of a bearish trend and then when the price break out of the pattern, it continues it bearish move. This second case is occasionally in market, the formation at the top of a bullish trend is the most common one.
The image uploaded above shows a rising wedge on chart. As seen in the screenshot, prior to the formation of rising wedge, the price was making a series of lower highs and lower lows. Then when it get to a point, the price retraced and this retracement formed the rising wedge as indicated in the image.
The upper trendline acts as dynamic resistance while the lower trendline is the dynamic support. As price keep touching thee trendlines, it keeps bouncing back. The trendline keeps narrowing as trading range keeps decreasing until it break to the downward side and price continue it trend. As seen in the image uploaded above, the volume also keeps decreasing.
How to Identify Rising Wedge
• Identify Where there is a slow Movement in a Trend. The first thing to note is to identify where there is a slow movement or a small pause in the movement of price. This could be a pointer that rising wedge may form around that area.
• Draw two slope lines: The second steps after the recognition of possible area where rising wedge can occur is to draw the trendlines. The upper trendline will connect highs while the lower one will connect the lows. There must be at least two touches of each trendline.
Multiple touches: There must be multiple touches of both support trendline and resistance trendline. Overall, there should be at least 5 touches of the two trend line for rising wedge to be valid.
Volume reaction: During a rising wedge, volume usually decrease. So the knowledge of volume will also help traders.
Breakout Volume The volume at breakout can be heavy or small. But generally it is always at an average.
Falling Wedge
Falling wedge is the direct opposite of rising wedge. While rising wedge has an upward convergence of trendline, falling wedge is associated with downward convergence of trendline. This means that the wide side of the trendlines start from the above and keep narrowing as price moves down and finally meet at a point below before a break to the upside.
Falling wedge is regarded as bullish chart pattern because when it occurs it shows reversal of a bearish trend or continuation of a bullish trend. In falling wedge the highs and lows keep decreasing while the the price range keep narrowing such that the resistance trendline and support trendline that connect the highs and lows meet at the bottom.
Falling wedge chart pattern usually form at the end of a bearish trend such that after formation, price reverses to the opposite direction. It can also be spotted during bullish move. In such a case, the falling pattern will form during the retracement of a bullish trend and then when the price break out of the pattern, it continues it bullish move. This second case is not common in market, the formation at the end of a bearish trend is the most common one.
The picture uploaded below shows the falling wedge on chart. Before the formation of this pattern, price has been making a series of lower high and lower lows, but at a point, the falling wedge formed, and after a breakout, price reversed and went upward.
The upper trendline is the resistance line and lower trendline is the dynamic support line. Notice how price keeps boucing back at the touch of both trendline till it break upward.
How to Identify Falling Wedge
• Identify Where there is a slow Movement in a Trend. The first thing to note is to identify where there is a slow movement or pause in price. This could indicate where falling wedge is likely to take place.
• Draw two slope lines: The next step is to draw trendlines. The upper trendline will connect highs while the lower one will connect the lows. There must be at least two touches of each trendline.
Multiple touches: There must be multiple touches of both support trendline and resistance trendline. Generally, there should be at least 5 touches of the two trend lines for this pattern to be valid.
Volume reaction: During a falling wedge, volume usually decrease. So the knowledge of volume will also help traders.
Breakout Volume The volume at breakout can be heavy or small. But generally it is always at an average.
3. Do the breakout of these Wedge Patterns produce False Signals sometimes? If yes, then Explain how to filter out these False signals.
Yes I believe the breakout of the wedge patterns sometimes produce false signal. To filter out false signal in wedge pattern, we can use indicator as a confluence.
Let's see how we can filter false breakout in wedge pattern by using indicators.
In the picture uploaded above, we can see that price keep touching the resistance trendline and support trendline and that a wedge pattern is formed. But notice a false breakout to the upside. At this point some traders might have taken a buy order thinking that the pattern has broken upward not knowing that it's a false breakout. Now, the price break to the upside for some minutes, but after a while, price breaks reverses and break tobelow the pattern and there was a massive sell downward.
Then, how do we avoid this fake move or false break out when using this pattern. We can add indicator to it which will serves as a confluence to this strategy. A parabolic sar and a volume indicator is added to the same chart.
Parabolic sar indicator is a great indicator that help traders to determine the direction of price in market. It consists of a series of dots that moves in the direction of price on a chart. When the dots are below the price, it means that the trend is bullish, but when this dots are above the candles, that is the, the price is trading below the dots, it means the trend is bearish.
As seen from the chart above, When In this chart uploaded above, we can see how parabolic sar confirm the real breakout to the downside as price was trading below the dots consistently.
Also, during the wedge formation, volume suppose to be decreasing as the trendlines keep converging. But notice what volume did at the false break out, the volume increases which ought not to be. A traders with this knowledge would have know that the breakout is a false one, and we have waited to see what price would do at this point.
So with the help of a volume indicator and parabolic sar, we can filter false breakout of the wedge pattern.
4. Show full trade setup using this pattern for both types of Wedges.( Entry Point, Take Profit, Stop Loss, Breakout)
Trade Setup using Falling Wedge
From the image uploaded above, we can see that the falling wedge formed at the bottom of a bearish trend. The price keeps touching the resistance and the support trendline. After a while the price breaks the resistance trendline. At the break of the resistance trendline, a tradeentry was made. The stop loss was place slightly below the support line. The take profit order was set by measuring the widest distance between the support and resistance line as indicated in the screenshot above.
Trade Setup using Rising Wedge
The image uploaded above shows a full rising wedge trade setup. We see how the price keeps boucing back at the touches of both dynamic reaistance and support trendline. There are multiple touches at the trendlines before price later break downward. The entry order was place immediately after the break of the support trendline, with the stop loss order slightly above the resistance trendline. The take profit order was set as well. The distance of the start of the two trendlines was measured to get the target.
5. Conclusion
Wedge pattern is a chart pattern that is attributed to trendlines convergence over a period of time before it break out of the wedge. There must be at least 5 touches of the trendlines, having 2 touches on one side and 3 touches on the other side. Wedge pattern is one of the patterns that can deliver great result in trading. Although it is very difficult to find on chart, but when it is spotted, it usually deliver great.
In this post, I have explained wedge and different types of wedge pattern with clear indication of how the two types look like on chart. More so, I also illustrated the full set up of both rising and falling wedge on chart. Special thanks to Professor @sachin08 for this great lecture.
Cc: @sachin08
Cc: @steemcurator01
Cc:-@steemcurator02
Below is the link to the expired post is pasted below