24# Wedge Pattern Forex Trading System

Submit by JanusTrader (written by Dike Everistus)

 

Description

This system can be used for both position trading and intraday trading; depending on the

timeframe being used. This system depends on only three components and that is what makes

this system very simple and fun. These components include; the Rising Wedge Pattern

(ascending wedge), the Falling Wedge Pattern (descending wedge) and Japanese Candlestick formations.

Chart setup

There is no need to setup your chart because this system does not use any indicators; instead I am looking to recognize significant support & resistance and the Rising and Falling Wedges on any timeframe. I prefer using the 30 minute, 1 hour, 4 hour or Daily time frames because most of these Japanese Candlestick formations are not sensitive on the lower time frames. The Japanese candlestick formations are used to identify tops & bottom before applying the wedges.


System Rules

After the identification of the tops/highs & bottoms/lows on your chart, all you need to do is to start by identifying and forming the wedge.

Wedge Patterns

Wedge patterns are similar to triangle patterns in that they are marked by narrowing price ranges and converging trend lines. Wedge patterns can act as both continuation and reversal patterns and are known to have a noticeable upward or downward tilt. There are a number of different methods that a trader can use to identify these patterns.


What I am about to present to you is basically my interpretation of wedges and my own unique method of labeling them.

There are two primary wedge patterns, the Falling Wedge (descending) pattern and the Rising Wedge (ascending) pattern.

My Method of Identifying a Falling Wedge

Have a look at the following diagrams. Here you can see examples of a falling or descending wedge. Notice how the top line connects the highs while it is descending and the bottom line connects the lows.

Here again you can see the top line connecting the highs while it is descending and the bottom line connecting the lows. 

 

 

Here’s another example where you can see the top line connecting the highs while it is

descending and the bottom line connecting the lows.

 

 

Daily Chart of a Falling Wedge Structure

 

Entry: - You may look to enter a trade whenever you form a Falling or Descending Wedge in a declining market and confirm the bottom with a Japanese Candlestick reversal formation (we’ll look at some of the different Candlestick formations to look out for soon).

Enter long when price breaks the upper line of the Falling or Descending Wedge. There are two ways to enter long when using this system.

1. You can enter at the close of the break out candle. This type of entry requires a high

margin level i.e. you must have enough balance/equity to be able to carry the position if

there is a sudden price pullback. A benefit of using this entry is that after the breakout if

price decides to move in the direction of the breakout without retracement you would not

miss the entry.

2. You can better still wait for the first pull back after the break out. I like this type of entry

because it requires a lower margin level but it can miss an entry in a highly volatile

market.

Stop loss: - Place your stop loss 15-20 pips below the edge of the blunt trend line (lower trend line) in a Falling or Descending Wedge.

Target: - Place your target at least twice the difference between the sharp (higher) & blunt

(lower) trend lines of the Falling or Descending Wedge (this should be considered based on the open side of the wedge). See the image above. For example: Look at the wider end of the wedge formation on the left. If the distance between the high on the upper trendline and the low on the bottom trendline is 100 pips, your target will be 200 pips away from your entry level.

Exits: - I also look out for reversal candlestick formations. This will trigger my early exit provided that it is one of the candlestick formations I have included in this document. See the Candlestick patterns section for more information on these patterns.

My Method of Identifying a Rising Wedge

Have a look at the following diagrams. Here you can see examples of rising or ascending

wedges. Notice how the bottom line connects the lows while it is ascending and the top lineconnects the highs. 

 

 

4 Hour Chart of a raising wedge structure

 

Entry: - You may look to enter a trade whenever you form a Rising or Ascending Wedge in a

rising market and confirm the top with a Japanese candlestick reversal formation (we’ll look at some of the different Candlestick formations to look out for soon). Enter short when price breaks the lower line of the inclined wedge. But remember, there are two ways that you can enter short with this system.

1. You can enter at the close of the break out candle. This type of entry requires a high

margin level i.e. you must have enough balance/equity that is able to carry the position if

there is a sudden price pullback. A benefit of using this entry is that after the breakout if

price decides to move in the direction of the breakout without retracement you would not

miss the entry.

2. You can better still wait for the first pull back after the break out. I like this type of entry

because it requires low margin level but it can miss an entry in a highly volatile market.

Stop loss: - This system is very simple and easy because every thing which was applied to long trades is applied to short trades too. So, place your stop loss 15-20 pips above the edge of the blunt trend line (upper trend line) in a Rising or Ascending Wedge.

Target: - Just as explained above, place your target at least twice the difference between the sharp (lower) & blunt (higher) trend lines of the Rising or Ascending Wedge (this should be

considered based on the open side of the wedge). See the image above. For example: Look at the wider end of the wedge formation on the left. If the distance between the high on the upper trendline and the low on the bottom trendline is 100 pips, your target will be 200 pips away from your entry level.

Exits: - I also look out for reversal candlestick formations

 

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