Wedge Chart Pattern: Forex Chart Pattern

Wedge Chart Pattern Definition

The wedge graphical price model is a minor, short-term, trend continuation pattern that shows the previous direction will prevail in the future after its formation. As for the daily chart the pattern is generally formed within a week.

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Wedge Chart Pattern Formation

This pattern is represented by two converging trendlines, support and resistance, visually forming a triangle, which conclude price fluctuations within. Both trendlines are either upward sloping (in a downtrend) or downward sloping (in an uptrend) against the direction of the main trend. The pattern is often characterized by a sharp price entering after intensive movement.

Interpretation of Wedge

This pattern confirms the trend movement direction in case of breaking through:

a sell signal arises if the pattern is formed in a downtrend and the price falls below the support line (plus certain deviation is possible);
a buy signal arises if the pattern is formed in an uptrend and the price rises above the resistance line (plus certain deviation is possible).

Target price

Following a wedge pattern formation the price is generally believed to change in the same direction it was going prior to the pattern by at least the same amount as the price change from the start of the trend to the formation of the wedge. The target level is calculated as follows:

In case of a downtrend:
T = BP – (TS – PS)

In case of an uptrend:
T = BP + (PS – TS)

Where:
T – target price;
BP – breakthrough point;
TS – trend start point;
PS – pattern start point.