In previous lessons on charting patterns we have talking about channel up and channel down. We have discussed how these patterns can be good indications of when a breakout is about to occur. In today’s lesson, we are going to be discussing another charting pattern called the wedge.
The wedge is simply a price pattern in which the trendlines above and below the pattern form an arrow. I like to think of it like a baseball field where everything in converging to home plate. Once the price breaks out of this wedge then there is said to be a major breakout coming. If the price breaks above the top trendline then we can see a price breakout in a positive direction. If it breaks below the bottom trendline we can expect to see a price breakout in a negative direction.
A wedge shape pointing upwards is used in analyzing an upward price trend within a bearish potential breakout.
A wedge pointing downwards is used to analyze a downward price trend within an overall bullish potential breakout
The wedge play is one of my favorite technical indicators to get into a stock position. If you see this kind of pattern on a chart you can put a buy stop in above the upper trend line so that you buy in if there is a price breakout. If this does not occur, then you never buy in and never risk any money. That’s the beauty of a stop. If you don’t recall what a buy stop is check out my article on order entry tools at your disposable, “Putting your Account on Autopilot.”
Just like any trading strategy, the stock breaking above the trendline does NOT GUARANTEE that there will be a breakout in price. It is best to see the move with a good amount of volume behind it for a higher probability for success. As always, have an exit strategy in case things don’t go your way.
Importance of Volume Behind the Move
Homework: Here is a link to Finviz which allows you to screen for different charting movements such as the wedge! You don’t even have to search through charts, finviz does the work for you and draws trendlines to show the wedge. Monitor 3 stocks from this screener and see if they have a price breakout in the future.