This resistance is a great place to take profit. The example above is a falling wedge at the end of a downtrend where you can see the upper resistance line that failed to break, subsequently producing the falling wedge consolidation. If you prefer to use a stop-loss, place it below the resistance-turned-support line, or below the previous wedge support. You enter at the point where the new support line has been established. As the example shows, it is common that a wedge break returns to retest resistance-turned-support, as impatient traders stuck in the channel exit quickly. The other option, usually viewed as more conservative, is to wait until the resistance on the falling wedge is breached (as noted above). This is a Forex chart shared as a demo on another site. Determine your point of entry by projecting Wave E’s impact with the A-C support. A safety precaution is to establish a tight stop-loss just below support at the time you enter. This is often considered the more “aggressive” play, as there is downside risk if the support is breached. One option is to enter when your A-C support line is touched by Wave E. There are two common points of entry traders look for when acting on a falling wedge pattern. Entering and Exiting The Falling Wedge Pattern You can dissect a long-term chart and identify falling wedges and other sub-patterns that contribute to the macro-level pattern that is broader in scope. Sometimes, as opposed to a reversal, a falling wedge break leads to an extended drop until bullish traders regain support at the next pattern level in the chart. The same logic applies to patterns of waves being micro-and-macro patterns in relation to other pattern segments. Remember from the Introduction to Elliott Wave Theory that every wave has sub-waves and every wave is a sub-wave of larger-scale waves. This breach of support can lead to further delays if the price does not bounce quickly, as the support becomes resistance and short traders lean into it to establish positions. The break leads to the breach of channel lows and the E-wave extension. In many instances, you won’t determine that a wedge pattern is in place until after what appears to be a pennant or triangle support is broken. Wedges often extend or contribute to other patterns. Your cash is freed up for more timely trades. However, detecting the developing consolidation allows you to exit with limited damage and await a better time for entry. At this point, it is difficult for someone with an “investment” mindset or someone who believes that strong profits are coming to exit due to opportunity cost (missing other better opportunities while the pattern consolidates). When you trade into the start of a falling wedge, you are likely to get trapped in a period of long consolidation that offers limited price swings for entry and exit. To reap the rewards of the bullish falling wedge, you have to overcome its many obstacles. Connect Wave B to the initial swing high to establish your two points of trendline resistance that await a retest for validation. Even then, it is safest to wait until a reversal of point C occurs and you have two clear support points (A and C) to connect. You cannot begin to accurately count waves in a falling wedge until you determine that a reversal on a corrective wave (A) does not reach a new high (B). Notice in the chart above that the falling wedge is often a component of a “flag pattern,” which means it has a “pole” caused by an upward price move (before correction) or downward price move (before the wedge conclusion and reversal). The wedge consolidates, but the final down wave moves slightly below previous lows on the support trendline, but with low volume.Ī long-term falling wedge pattern plays out over a 3 to 6 month period though they can last even longer. The triangle pattern condenses more quickly and constricts to a point. Among the difficulties in spotting a falling wedge is that its structure closely resembles the more bearish descending triangle pattern. This chart shows the A-B-C-D-E waves common to the falling wedge.
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