The Wedge formation is pattern that looks a lot like the Contracting Triangle but unlike the triangle, the Wedge has a definite slope and a definite bias. The Rising Wedge slopes upward, wide at the bottom and keeps contracting as long as it goes up and the entire pattern is expected to be retraced once the lower line connecting the swing lows are connected. Other theories like Elliott Wave dictates 5 distinct legs must be visible before the pattern can be completed. That means 3 touch points on the upper boundary and 2 on the lower boundary. Exactly the opposite is applicable in case of the Falling Wedge.
Most Used Trends of Wedge Pattern
Advantages & Limitations of Wedge Pattern
As the Wedge pattern comes among the worst performing ones, the only real advantage seems to be the definite bias. The pattern acts both as a reversal and a continuation pattern but in both cases, the bias of the Falling Wedge remains bullish and that of the Rising Wedge remains bearish. The major problem of the pattern emerges from the high failure rate of the breakdown and the sharp pullbacks or throwbacks. The initial target after a breakout/breakdown is the origin point of the pattern but frequently the trend is reversed before that is achieved.