The "rising wedge" pattern of price movement is an example of a Technical Analysis (TA) chart pattern, where prices are moving up to new highs and new lows, but the space between the highs and the lows (i.e., the price movement) becomes narrower and narrower each time price starts moving upwards. Essentially, the trader is watching two trendlines - one that connects the swing highs and one that connects the swing lows - and both of these trendlines are pointing upwards and getting closer together like a funnel.

You can see this by looking at the distance between the recent swing highs; the distance between each swing high is less than the distance between each swing low, which indicates that, although the stock is making new highs, the need for a greater amount of momentum to create new highs is a sign that there is a decreasing amount of momentum for the stock moving forward in its trend. 

Key Features of Rising Wedge Pattern – 5 Must-Know Criteria

Not every increasing pattern on a chart is an upward-trending wedge. You will need to know what makes up an upward-trending wedge so you can differentiate between a legitimate upward-wedge pattern and a fake signal or other structures like channels and triangles.

The first component for identifying a legitimate upward-trending wedge is having at least two higher swing highs on the chart. The second swing high should be above the first swing high. You also need to pay attention to how far apart the two swing highs are from each other. If they are too close together or far apart from each other, they may not form a legitimate upward-trending wedge. Price action is indicative of volatility, and the more volatility in the stock market, the less people are willing to enter the market to buy stocks.  

Step-by-Step Guide to Drawing a Rising Wedge Pattern

Determining a rising wedge shape on a chart can be relatively easy after you recognise a rising wedge formation on a chart isn’t that difficult, just know what to look for, but accurately drawing it will take some practice if you’re new to doing it. Below is a step-by-step process for creating your own rising wedge regardless of whether you trade forex, stock, or cryptocurrency.

Before you create anything, meaning draw anything, zoom out to a larger timeframe, look at the daily or weekly actionable chart to see what the trend looks like. Is it in an upward direction? A rising wedge configuration provides the most bang for your buck if it appears after an extended bullish trend move, and if it appears following a downtrend, then more than likely, you are viewing a different chart pattern.

Is Rising Wedge Bullish or Bearish? Core Trading Logic Explained

The reason why a rising wedge is Bearish is that during the development of the pattern, buying momentum is deteriorating (or decaying) while new highs are made. In addition to the decrease in buying momentum, volume on this pattern is also decreasing.

The rising wedge has also created increasing amounts of selling pressure. Selling pressure occurs when sellers enter each time the price reaches the upper trend line to take profits. Some bulls will remain in the trade, but they are also becoming tired, and the power is beginning to shift toward sellers, resulting in the price breaking below the wedge.

Common Mistakes and Failed Rising Wedge Trades

Premature shorting is probably the most common mistake made by traders. You see a rising wedge forming, and it gets you excited. So you jump into a short position before there is any confirmation that the price has indeed broken below the lower trend line. Then price continues to rise, you get stopped out of your trade, and you lose money. Always wait for confirmation; a wedge pattern is not completed until there is a confirmed break of the trend line.

There may be instances where a rising wedge forms on a lower time frame chart, but the overall market trend is strongly bullish. Entering a short position in a bull trend is basically trying to fight against the majority of market participants. Always make sure to check your higher time frames before deciding to go long or short. For instance, if you see a rising wedge pattern forming on a 15-minute chart, it does not mean much if there is a bullish trend on the daily chart that has a long-term uptrend.

Summary and Next Steps

The rising wedge indicates bullish momentum is decreasing and indicates a reversal is likely, but confirmation is needed before you can take any action. Draw the rising wedge carefully, wait for confirmation of the breakout and always manage your risk.

Rising wedging patterns are created when the price makes a series of higher lows and higher highs, while the two trend lines converge towards each other. Rising wedge patterns should typically be accompanied by decreasing volume and have divergences between momentum indicators (such as RSI and MACD). When the price breaks below the lower trend line on increased volume, this is the signal to look for the potential of opening a short position.

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