consolidating and sketching higher highs and even higher lows. Wedges could serve as either continuation or reversal patterns. Which way would it go? Thats why its called a continuation signal yo! A rising wedge formed after an uptrend usually leads to a reversal (downtrend) while a rising wedge formed during a downtrend typically results in a continuation (downtrend). If the rising wedge forms after an uptrend, its usually a bearish reversal pattern. Notice how price action is forming new highs, but at a much slower pace than when price makes higher lows. Notice how the falling trend line connecting the highs is steeper than the trend line connecting the lows.
Simply put, a rising wedge leads to a downtrend, which means that its a bearish chart pattern! This could mean that buyers simply paused to catch their breath and probably recruited more people to join the bull camp. This leads to a wedge-like formation, which is exactly where the chart pattern gets its name from! In this case, the price broke to the down side and the downtrend continued. In this case, the price consolidated for a bit after a strong rally. Wedges signal a pause in the current trend. If we placed an entry order above that falling trend line connecting the pairs highs, we wouldve been able to jump in on the strong uptrend and caught some pips! On the other hand, if it forms during a downtrend, it could signal a continuation of the down move.
See how the price made a nice move down thats the same height as the wedge? This indicates that higher lows are being formed faster than higher highs. As a reversal signal, it is formed at a bottom of a downtrend, indicating that an uptrend would come next. Just like in the other forex trading chart patterns we discussed earlier, the price movement after the breakout is approximately the same magnitude as the height of the formation.