# Understanding Falling and Rising Wedge Patterns in Trading

![Wedge](https://www.investopedia.com/thmb/BWxIeGxeGW5KPYvbluTIJG2A744=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/wedge.asp-final-28ba0f53199c4b1ca577ed9b8b66d816.jpg)

*— Investopedia / Jake Shi*

## What Is a Wedge?

A wedge is a crucial pattern in technical analysis that traders use to recognize potential reversals or continuations in market trends. By connecting the highs and lows over a series of periods, wedge patterns form as trend lines converge, creating a distinct arrow shape. These patterns, observed as either falling or rising wedges, often serve as indicators of significant shifts in price direction—offering valuable insights for making informed trading decisions. Understanding how to interpret these patterns can empower traders to anticipate market movements effectively.

### Key Takeaways

*   Wedge patterns, marked by converging trend lines on price charts, can indicate potential reversals or continuations in price action, making them valuable tools for technical analysts.
*   A rising wedge usually suggests a bearish price reversal when it occurs in an uptrend, and signals a continuation in a downtrend, hinting at falling prices after breakout from the lower trend line.
*   A falling wedge is typically seen as a bullish signal, often indicating that a price decline is losing momentum and predicting a price increase when the breakout occurs above the upper trend line.
*   The predictability of wedge patterns can help traders set close stop-loss orders, offering potentially higher returns relative to the initial risk if their trades are successful.

## How to Interpret Wedge Patterns in Trading

A wedge pattern signals bullish or bearish [reversals](https://www.investopedia.com/terms/r/reversal.asp) and has three features: converging trend lines, declining volume, and a breakout from one trend line. The two forms of the wedge pattern are a rising wedge (which signals a bearish reversal) and a falling wedge (which signals a bullish reversal).

### Identifying and Trading a Rising Wedge

This usually occurs when a security's price has been rising over time, but it can also occur in the midst of a downward trend as well.

![Image](https://www.investopedia.com/thmb/18eINVQlMGWoYZ5R1L6xjWarbLA=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Wedge_May_2020-01-3fc3337b20824354b64193a8e1a949c5.jpg)

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[Trend lines](https://www.investopedia.com/terms/t/trendline.asp) above and below the price chart converge, helping traders anticipate a breakout. Wedge patterns often break in the opposite direction.

Therefore, rising wedge patterns indicate the potential for falling prices after a breakout of the lower trend line. Traders can make bearish trades after the breakout by selling the security short or using [derivatives](https://www.investopedia.com/terms/d/derivative.asp) such as futures or options, depending on the security being charted. These trades seek to profit from the potential for prices to fall.

### Recognizing and Profiting from a Falling Wedge

When a security's price has been falling over time, a wedge pattern can occur just as the trend makes its final downward move. The trend lines drawn above the highs and below the lows on the price chart pattern can converge as the price slide loses [momentum](https://www.investopedia.com/terms/m/momentum.asp) and buyers step in to slow the rate of decline. Before the lines converge, the price may breakout above the upper trend line.

![Image](https://www.investopedia.com/thmb/PIRfWtwv2ZK0vBWCzIoFs2znqUI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Wedge_May_2020-02-67d7156b6b40435584b05b73f969181c.jpg)

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When the price breaks the upper line, the trend is expected to reverse and rise. Traders looking for bullish signals may seek trades that benefit from rising prices.

## The Advantages and Risks of Wedge Pattern Strategies

As a general rule, price pattern strategies for trading systems rarely yield returns that outperform buy-and-hold strategies over time, but some patterns do appear to be useful in forecasting general price trends nonetheless.

As wedge patterns converge, the gap between the entry price and stop loss is smaller than at the start. This allows a stop loss to be placed close by, potentially yielding higher returns if the trade succeeds.

## Is a Wedge a Continuation or a Reversal Pattern?

A wedge pattern can be either a continuation or a reversal. Which one it is will depend on the breakout direction of the wedge. For example, a rising wedge that occurs after an uptrend typically results in a reversal. A rising wedge that occurs in a downtrend will usually signify that the downtrend will continue, hence being a continuation.

## Is a Falling Wedge Pattern Bullish?

A falling wedge pattern is seen as a bullish signal as it reflects that a sliding price is starting to lose momentum and that buyers are starting to move in to slow down the fall.

## Is a Rising Wedge Pattern Bullish or Bearish?

Usually, a rising wedge pattern is bearish, indicating that a stock that has been on the rise is on the verge of having a breakout reversal, and therefore likely to slide.

## The Bottom Line

Traders using [technical analysis](https://www.investopedia.com/terms/t/technicalanalysis.asp) rely on chart patterns to help make trading decisions, particularly to help decide on entry and exit points. There are many patterns that technical traders employ, the wedge pattern being one of them. This pattern employs two trend lines that connect the highs and lows of a price series, indicating either a reversal or continuation of the trend.