Good day everyone...
My Homework post for week 5 on the topic Trading using Wedge Pattern as taught by professor @sachin08 was not curated till it expired. I got a good grade of 8.3/10 as seen in the screenshot below
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Below is the link to the assignment
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https://steemit.com/hive-108451/@feyol55/trading-using-wedge-pattern-or-crypto-academy-or-s5w5-or-homework-post-for-sachin08
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Good day my amiable professors and my fellow steemians, this is my homework post for the topic : Trading using Wedge Pattern as taught by professor @sachin08.
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**<center><div class="phishy">HOMEWORK QUESTION</div></center>**
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1. Explain Wedge Pattern in your own word.
2. Explain both types of Wedges and How to identify them in detail. (Screenshots required)
3. Do the breakout of these Wedge Patterns produce False Signals sometimes? If yes, then Explain how to filter out these False signals.
4. Show full trade setup using this pattern for both types of Wedges.( Entry Point, Take Profit, Stop Loss, Breakout)
5. Conclusion.
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**<center><div class="phishy">1. EXPLAIN WEDGE PATTERN IN YOUR OWN WORD</div></center>**
> **WEDGE PATTERN**
Wedge Pattern is another kind of unique pattern formed by price action on the market chart specifically. Traders (specifically Technical Analysis Traders) also use this pattern to trade, it helps them spot an entry point into the market and make good profit. This Wedge are primarily formed when prices move or consolidate in between coverging trendlines connecting the highs and lows to form a support and resistance. The moment price breaks any of the trendlines, that signals a reversal in trend and the trader should be ready to place a trade in the direction of breakout.
<center>[IMAGE SOURCE](https://tradingsim.com/blog/how-to-trade-rising-and-falling-wedges/)</center>
However, when a Wedge Pattern is spotted on the chart, it's an indication that there is pause in the current market trend and traders are still deciding on the next direction of the market price which could be either bullish or bearish.
We have basically two types of these patterns on the chart, they are the Rising Wedge and the falling Wedge. These two types of Wedge are usually formed on the market chart, and it is to be noted that not all Wedges signals a reversal, sometimes there could also be a continuation of trend, the ability to differentiate this now depends on how the trader is able to discern a false breakout and i won't fail to mention that the volume of these market price decreases the moment price starts forming a Wedge Pattern.
Now having introduced to us what the Wedge Pattern is, let's take deeper look at the two types Wedge Patterns we have.
**<center><div class="phishy">2. EXPLAIN BOTH TYPES OF WEDGES AND HOW TO IDENTIFY THEM IN DETAIL (SCREENSHOTS REQUIRED</div></center>**
We have two types of Wedges as explained in number one question above. They are the Rising Wedge and the Falling Wedge, let's take a look at each of them now.
> **RISING WEDGE**
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SCREENSHOT TAKEN ON MT5 APP
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The rising Wedge is formed when prices slopes upward, this prices then decreases in volume and consolidates in between two trendlines flanking the upward price at the support and resistance level. During the formation of the rising Wedge, the higher lows and higher highs are connected together by two converging lines respectively. Although rising Wedge can be seen in a downward trend but it is more noticeable when the market is going bullish. Once this wedge Pattern is formed, a trader should be prepared for a possible breakout most likely in opposite direction of the moving trend. This is known as bearish reversal. When a rising Wedge Pattern is formed, there is a more possibility or chances of experiencing a breakout in the opposite direction meaning prices will fall, so this particular pattern is best traded by placing a 'SELL ENTRY' at the point of breakout.
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**CHARACTERISTICS OF RISING WEDGE**
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* THE MOVEMENT OF TRENDLINES
The prices are usually flanked by two up-sloping trendlines that may converge or intercept, these trendlines connects the higher - lows and higher - highs.
* No OF TOUCHES
A rising Wedge Pattern is characterised by multiple touches on the trendlines. The rising wedge must make a minimum of 5 touches in total for an easy identification, out of these 5 touches, 3 can be on the trendline and 2 on other trendlines.
* TREND/BREAKOUT VOLUME
The rising Wedge can also be identified by it's volume. As explained earlier, volume of prices basically reduces/decreases when a rising wedge is formed while the breakout volume is usually below average.
These 3 characteristics must be clearly seen to ascertain a rising wedge pattern.
Now let's take a look at the falling Wedge Pattern.
> **FALLING WEDGE**
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SCREENSHOT TAKEN ON MT5 APP
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The falling Wedge Pattern is formed when prices slopes downward following a downward trend, the prices after this trend begin to consolidate in between this two trendlines connecting the Lower lows and Lower Highs. This trendlines slopes downward aiming to converge or intercept each other. These trendlines also forms the support and resistance level. This wedge pattern predominantly is more noticeable where prices are in a downward trend and it signals the trader that a Bullish reversal is imminent, this bullish reversal can only happen after there is a breakout on this trendlines. Although a breakout after the formation of this pattern can dictate a trend reversal but in some few exceptional cases, it could also signal a trend continuation using this pattern formation, a trader can place a 'BUY ENTRY' at the point of a breakout.
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**CHARACTERISTICS OF FALLING WEDGE**
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* THE MOVEMENT OF TRENDLINE
The prices are usually flanked by two down - sloping trendlines that aims to converge or intercept each other. These trendlines connects the lower lows and lower highs.
* No OF TOUCHES
There should be multiple touches on the trendlines with a minimum of 5 (i.e 3 on one side of the Trendline and the remaining 2 at the other side).
* TREND VOLUME
Another characteristics of the falling wedge pattern is that volume move downwards as this pattern is being formed.
Using this 3 criterium, a trader can effectively identify a falling Wedge Pattern.
**<center><div class="phishy">3. DO THE BREAKOUT OF THESE WEDGE PATTERNS PRODUCE FALSE SIGNALS SOMETIMES ? IF YES THEN EXPLAIN HOW TO FILTER OUT THESE FALSE SIGNALS</div></center>**
Yes, it does... Sometimes on the chart, the wedge pattern will be formed but the eventual breakout of price will not correspond with the particular wedge pattern that was formed. Now let me use this image below to explain better
SCREENSHOT TAKEN ON MT5 APP
Looking at the image above, you would notice that the wedge pattern is a rising wedge pattern, base on technical analysis, one would expect price to eventually break the support line but instead there was a false breakout whereby the price went up instead and broke the resistance line. Some few exceptional case like this do happen but one can spot this false breakout by using some indicators.
As you can see on the image above, I used the parabolic sar indicator, this indicator showed that price is still going up, meaning the breakout would most likely happen at the resistance level. So using this indicator has given me a clue that it is a false breakout.
**<center><div class="phishy">4. SHOW FULL TRADE SET UP USING THIS PATTERN FOR BOTH TYPES OF WEDGES (ENTRY POINT, TAKE PROFIT, STOP LOSS, BREAKOUT)</div></center>**
> RISING WEDGE TRADE SET UP
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SCREENSHOT TAKEN ON MT5 APP
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The image above depicts a typical trade set up for rising Wedge Pattern. Looking at the image critically, we can see that price consolidated in between the two convergence trending lines which marks the resistance and support level. Also, price enventually broke out at the support level which serves as 'entry point'. Also this pattern and breakout is further confirmed by the decreasing volume as seen on the chart. To cap it all, I indicated on the image the stop loss and take profit zones. For a rising Wedge that has a breakout at the support level, the stop loss needs to be positioned above the entry point.
> FALLING WEDGE TRADE SET UP
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SCREENSHOT TAKEN ON MT5 APP
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The image above depicts a typical trade set up for the falling Wedge Pattern. Looking at the image, we can observe that price consolidated in-between the two converging trendlines which marks the resistance and support level. After the short consolidation, price broke out as expected at the resistance level which also serves as our 'ENTRY POINT'. This set up is also confirmed by the decreasing volume of price movement as seen on the chart.
Furthermore, I also indicated on the image, the stop loss and take profit zones. It is to be noted that for a falling Wedge that has a breakout at the resistance level, the stop loss needs to be positioned below the entry point.
**<center><div class="phishy">CONCLUSION</div></center>**
The Rising and Falling Wedge Pattern are unique patterns that can help traders to understand the market structure better and also knowing this particular pattern can help one to make good entries and maximize profit. So it's important one needs to learn how to identify this Wedge Pattern on the chart and also one needs to learn how to make use of indicators to filter out the false breakouts.
This week's topic is really an interesting and an eye opening one, I sincerely appreciate professor @sachin08 for putting this wonderful piece together.