A rising wedge is formed when prices stay within a range of upward sloping support and resistance lines. Here, the slope of the support line is steeper than the slope of the resistance line. This means that higher lows are being made faster than higher highs. As prices consolidate, we know a big move is coming, so we can expect a breakout to either the upside or the downside.
If the rising wedge pattern forms after an uptrend, it is usually a reversal bearish pattern.
On the other hand, if it forms during a downtrend, it could mean a continuation of the downtrend.
Regardless, the important thing is that once you identify a wedge pattern, you are ready to set your own stop entry order.
In the first example, the rising wedge pattern forms at the end of an uptrend. Notice how the price action is making new highs, which is slower than the higher lows. See how the price then breaks below the support line and moves lower? This means that more traders are rushing to short. They are pushing the price below the uptrend line, which means a downtrend may be about to begin.
As we discussed in previous lessons, the price decline following a breakout is approximately equal to the height of the pattern.
Now, let’s look at another example of a rising wedge, but this time it’s acting as a downside continuation signal.
As shown in the chart, the price experienced a period of decline before entering a consolidation period, during which the highs and lows of the price continued to rise.
In this case, the price broke below the rebound uptrend line and continued the previous decline. That is why it is called a continuation signal. Notice how the price has made a beautiful downward move, and the decline is highly consistent with the pattern.
What have we learned so far?
A rising wedge forms late in an uptrend, which can lead to a reversal in price action, whereas a rising wedge forms during a downtrend, which is usually a sign of continued lower prices.
Simply put, a rising wedge leads to a downtrend, which means it is a bearish pattern.