Wedge (Technical Analysis) - Explained
What is a Wedge Method?
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Table of ContentsWhat is a Wedge Method of Technical Analysis? How Does the Wedge in Technical Analysis Work?Wedge AdvantagesRising WedgeFalling Wedge
What is a Wedge Method of Technical Analysis?
In trading, a wedge refers to a method of analysis that takes the form of a triangular shape. Technical analysts use a wedge to depict trends in the market, a wedge has an arrow shape. It is a representation of short and middle-term reversal in the movement of price in the market. Using the wedge, price patterns are drawn on a chart to form an arrow, major movements and trends in prices are represented using a wedge.
How Does the Wedge in Technical Analysis Work?
A wedge is a method of charting that analysts employ when depicting major price movements in the market. Just like a normal wedge, analysts converge price trends as an arrow, suing the wedge. When there is an upward movement on a wedge, it signifies a bullish market while a downward movement is a bearish market.
In technical analysis, analysts use a wedge to depict price movements and major trends in the market. Here are the advantages of wedge;
- A wedge provides a general outlook of market trends.
- The point of reversal which forms a convergence for price trends give the formation of a wedge.
- Investors are able to derive cogent market insights through the technical analysis depicted on a wedge.
- Bearish and bullish patterns in the market are detected through a wedge.
- Upper and lower trendlines are important to investors, especially when making investment decisions.
A wedge pattern is commonly formed when securities, stocks and assets are being traded in the market. As depicted on a wedge pattern, a sustained upward movement in the prices of assets or securities is always followed by a reversal, the reversal however occurs at the peak. When there is an upward movement on the wedge pattern, it indicates a bullish market, the point of reversal is however a bearish pattern. Short selling, margin borrowing, among others are the major trends of a bearish trade.
In a falling wedge, when there is a sustained decline in the price of security, at a certain time, the lines drawn above and below the wedge chart will convergence. The convergence signifies a reversal from a bearish pattern with points that a bullish pattern will commence. When this happens, the reversal would cause an increase in the price trend. This price trend helps investors make strategic decisions as regards investment option.