One of the most commonly found patterns on a technical analysis chart is the wedge pattern. Although there are some common theories about this pattern that experienced traders use to inform their executed trades, these may not always hold true in every eventuality.
Any binary options trader worth their salt will know how to identify a wedge pattern on a technical analysis chart and will be aware of what the outcome of a wedge should be. It is known that a falling wedge is actually rising and a rising wedge is actually falling in many cases, however this does not always hold true in practice.
There is a particular type of triangular consolidation which makes a wedge a reversal pattern no longer. This consolidation pattern makes a rising wedge go even higher while a falling wedge will sink to even lower levels. This triangle type is known as a contracting triangle variation and it means that its pattern ends either above or below the end of the previous wave.
These triangles can be tricky to trade as a normal trader reaction would be to sell or to buy put options at the point that the rising wedge breaks the 2-4 trend line however with this triangle type, the price will come back, taking the wedge’s higher values, so you need to be aware that the wedge will actually go higher and instead, buy call options, reversing the trade.
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How to Identify a Wedge Pattern and Running Triangles
The wedge pattern will generally form at the end of a trend or an impulsive move, however they may also occur at the start of one. If a wedge forms at the end of a new move, usually the wedge will not retrace more than half of the entire distance from the start of the wedge to its end. Using a Fibonacci retracement tool, an investor can measure the entire wedge, starting at the 38.2% retracement level and purchase call options if the prior wedge was bullish in nature or buy put options if it was bearish as generally, the wedge will be the 1st wave of an impulsive move that will only continue in the same direction.
To get a clue about the nature of the first wave, you should check to see if the second and fourt waves in the wedge overlap. If they do, your count is incorrect as an overlap is not permitted in a 1st wave wedge move.
A running triangle has a wedge shape with its final wave being very small. This gives it its distinctive shape.
How to Trade Wedges and Running Triangles
Wedges are not easy to trade, and investors should bear in mind that it is only if the 2-4 trend line has been broken and the market retraces back to the wedge forming a new high for a rising wedge that call options should be purchased. If the market retraces back to the wedge forming a new low for a falling wedge, you should trade put options for the best results.
When it comes to setting the expiry date, it is not as complicated. The first move of this pattern is a fake one, meaning that the move which follows either the new high or new low will be the genuine one and that will always be a lot more powerful. An investor can avoid making a bad trade by realising that a rising wedge will not always be falling and, conversely, a falling wedge will not always be rising. It is by acknowledging this principle that an experienced trader can derive a competitive advantage over other investors in the market.
Other educational articles
- What is the Zig Zag Indicator in Binary Options Trading?
- What is the Trend Following Binary Options Trading Strategy?
- Use the Straddle Strategy for a Possible Put and Call Double-Win
- What are Wedges in Binary Options Trading?
- Introduction to Fibonacci Retracements
- What is the Flag Pattern in Binary Options?
- The High Sensitivity of Economic Activity to Financial Frictions (PDF) – Robert E. Hall, The Economic Journal, 121 (May)
- Rising wedge, falling wedge (PDF) – Yann CORDIER, CFTe, MFTA