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Have you ever heard of a price pattern called a wedge? It's basically when you see two trendlines on a price chart that are getting closer and closer together. These lines connect the highs and lows of the price series over a certain number of trading periods, usually between 10 and 50. Depending on whether the lines are sloping upwards or downwards, it's called a rising or falling wedge.
Now, why is this pattern important? Well, technical analysts use wedge patterns as an indicator of a potential reversal in price action. In other words, if you see a wedge forming, it could mean that the price is going to change direction soon. And the cool thing is, these patterns have a pretty good track record for predicting these reversals. So keep an eye out for those wedges on your price charts!
Wedge patterns are actually pretty interesting because they can signal a change in price direction, either bullish (meaning the price might go up) or bearish (meaning the price might go down). These patterns have three common characteristics: first, the trendlines start to get closer together; second, there's usually less trading volume as the pattern progresses; and third, there's a breakout from one of the trendlines.
There are two types of wedge patterns: a rising wedge and a falling wedge. A rising wedge usually indicates that the price might go down (so that's bearish), while a falling wedge typically indicates that the price might go up (which is bullish). So, if you see a wedge forming on your chart, pay attention to which way it's sloping and get ready for a potential price reversal!
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<source: thinkmarkets>
When a security's price has been going up over time, you might notice a rising wedge pattern on the chart. This can also happen during a downward trend. The trendlines above and below the price chart pattern start to come closer together, which can indicate a potential reversal.
But here's the thing: wedge patterns often break in the opposite direction from the trendlines. So, if you see a rising wedge pattern, it might be a sign that the price could fall after breaking out of the lower trendline. Traders can take advantage of this by selling the security short or using derivatives like futures or options to try and profit from the potential price drop.
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<source: thinkmarkets>
If a security's price has been dropping for a while, you might see a falling wedge pattern on the chart as the trend starts to level out. The trendlines drawn above the highs and below the lows start to come together as the price slide slows down and buyers start to step in.
Before the lines converge, you might see the price break out above the upper trendline. When this happens, it's a signal that the security is expected to reverse and start trending higher. Traders who see this as a bullish reversal signal would want to look for trades that can benefit from the expected rise in price.
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Disclaimer: This article was authored by Giottus Crypto Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.