Wedge Chart Formation - Pause In Current Trend
Definition of Wedge Chart Formation
A wedge chart formation is created when price fluctuations converge to a point on a straight line. There are two types of wedge formations: rising and falling. The wedge chart formation is not a trend reversal pattern, but only a temporary pause in the current trend. Volume in a wedge formation like a symmetrical triangle, diminishes as the formation develops. In order to draw a valid wedge, the trend pattern must be compact with frequent price fluctuations and tightly bound lines that converge to a point.
A falling wedge formation develops as price continues to converge to a point after falling rapidly. When price breaks out of a falling wedge, it drifts sideways or in a dull rounding bottom before the rally begins. Falling wedges are most common in bull markets, as they provide the fuel for the continuation of the primary trend.
A rising wedge chart pattern develops as price continues to converge to a point after rallying for a period of time. In many cases the price will rise to a clear apex, and in some cases, it will actually push through the top of the formation. However, once price breaks out of the wedge to the downside, they often begin to decline quite rapidly. Trading volume in a wedge follows the common rule of diminishing gradually as the price moves towards the apex. This is the one difference between rising and falling wedges, because remember with falling wedges the price action may drift out of the wedge before rallying sharply. Rising wedges are most common in bear markets, as they provide the fuel for the continuation of the primary trend.