In the strategic section, we reviewed most of the important technical chart samples. Still, there are some more strategies. “Triangles” and “wedges” are two of the top 10 chart patterns, and in this article we explain how to trade them. It is true that they are different patterns, but they are very similar, so we both teach them in one article.
Apart from the very rare occasions, we all know that the price does not rise or fall in a straight line. Instead, it develops trends following different types of waves, as explained in the “Elliot Wave Strategy”. In an uptrend, the first phase goes up and then consolidates before the start of the second phase, and vice versa to the downtrend.
During the consolidation period, the price forms a triangle or a wedge. You need to change the charts to a smaller time frame for better visibility.
If you are trading 1-hour charts, when consolidation begins, switch to 5- or 15-minute charts and draw a trend line that connects the peaks and another that connects the bottom of the price range during the merger. As its name suggests, a triangle is formed when the top and bottom trend lines open into a single point and squeeze the price between them. In a wedge, the price bursts in both directions before the two trend lines meet. The images below show the formation of a triangle and a wedge.
You can start trading the wedge or triangle until it is formed. As you can see from the first image, the top and bottom lines provide resistance and support.
You can tighten the resistance line if the price is two peaks, and you can tighten the support if the price is two lows. The second depth must be higher than the first to be considered a wedge or triangle. The simplest and most obvious way to trade a wedge or triangle is to trade between the two lines. It basically sells in the top row, with a stop above the resistance, and in the bottom row, under the support.
This strategy works best in larger time frame charts, such as daily or 4-hour charts, because there is more space between the rows. Thus, the profit target may be higher and the reward / risk ratio may be higher. If you are trading on smaller time frame charts, choose a broker with small spreads and fast execution.
This is one way to take advantage of these chart formations, but wedges and triangles are the most famous for indicating eruptions. To predict how the eruption will occur, we need to know the types of these chart patterns. There are three types of wedges and triangles: ascending wedge / triangle, descending wedge / triangle, and symmetrical wedge / triangle.
Rising wedge / triangle
In the first diagram below, an ascending / descending wedge is formed after an ascending trend. This means that sellers will satisfy buyers, squeeze the price in a tight band, so the reverse can be the case. After breaking down, we see that the bottom line, which functions as support, is now becoming a resistance. Some traders sell when the price breaks the bottom line and some put a sell stop just below the line. But we all know that nothing works exactly in forex pip and fake eruptions (counterfeits) are not uncommon. I’d rather wait until the price clearly closes below the bottom line and try to sell on the retrace. This minimizes risk and maximizes profit target. The same logic applies to triangles.
Decreasing wedge / triangle
Descending wedges and triangles are opposite to ascendants and become valid after a declining trend. So instead of selling after the bottom line breaks, you buy after the top line lets go. When trading these patterns, the target profit target should be equal to the space between the first upper and first lower part of the range, as shown in the second figure below. I say the first top and the first bottom because there are cases where the two lines of the wedge are neither horizontal as the one rising above.
You can trade in a symmetrical triangle between the two lines and after the eruption
During these formations, bulls and bears fight bitterly until one party finally gives up. It does not matter whether this consolidation follows an upward or downward trend. If you use ascending and descending wedge or triangle chart patterns for trading, you know which direction the price is going after the eruption, but symmetrical wedges and triangles do not give a clear direction. This is not to say that they cannot be traded; you can trade with them in the same way as with rising and falling wedges / triangles. You buy and sell until the price bounces within the two lines of the triangle. And of course you can trade the eruption on either side by placing a stop buy or stop sell order above and below the triangle.