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How to trade chart patterns (Part 4)


As we know, one of premise of technical analysis is history repeats itseilf. In other words, human behavior tends not to change. Then technical analysts study chart patterns, which reveal the psychology of the market. Chart patterns worked well in the past. They are assumed to work well in the future. Hence, the future is predictable. In this topic, we will define chart patterns and how to trade based on those patterns.

Falling Wedge Continuation

A bullish falling wedge is a bullish pattern. The prior trend is an uptrend. It begins wide at the top and contracts as prices move lower. Then it forms a cone or a wedge that slopes down as the reaction highs and reaction lows converge. Bullish confirmation does not occur until the resistance line is broken. Hence, we need to wait for a true break for further confirmation. The falling wedge is either a continuation pattern or reversal pattern. Regardless of the type, falling wedges are regarded as bullish patterns.

Falling Wedge reversal

This pattern is the same with falling wedge continuation exeption for one thing the prior trend is a downtrend. It warns a decrease in downside momentum and alert technicians to a potential trend reversal. Sellers are losing their interest. However, demand does not win out until resistance is broken. Hence, it is important to wait for a breakout.

Trading wedge pattern

The example below describes how to trade a falling wedge reversal. A buy order should be placed above an eventual breakout point near 1.5900.