The rising wedge is a bearish pattern that starts with a wide bottom section and the volatility contracts as the price moves higher leading to a narrower trading range. Unlike other patterns, you will need to see an upward slope on the wedge which will lead to a bearish bias.
Prior Trend – To be a reversal pattern you must have a prior trend and for this setup you would need a rising wedge forming over a 3-6-month period. Sometimes the trend is only contained within the wedge but there are other occasions the pattern will form after an extended advance.
Upper Resistance Line – You need two or more reaction highs to form the upper resistance line and ideally you want three or more
Lower Support Line - With the lower again you want two or more reaction lows which should be lower than the previous low.
Contraction – This is the narrowing of the wedge where the upper and lower lines converge as the pattern develops. The price spikes become shorter and shorter during this pattern which makes the rallies look ever more unconvincing. This creates an upper resistance line that does not keep up with the lower support line which indicates a supply overhang the further the price rises.
Support Break – Only until after the support has been broken do you have a confirmation and in the above example this is the level where you would sell. Some cautious traders will wait until it drops below the last highest bottom before they get a confirmation of the pattern.
Volume – Generally volume will decrease when the price increases and then the volume will greatly expand after the support has been broken.
This chart pattern is one of the harder patterns to spot and trade as it takes months to build and may not be fully confirmed until the last few phases. Unfortunately, with this pattern you do not get an indication of any price targets or other ways to estimate the decline.
The above example is a descending wedge on gold back in June. This is a continuation pattern and the rice rises into the start of the wedge to the top side. There is a slight break of the pattern but this has come up due to it taking place over the weekend and there was increased volatility when the markets reopened. The main break is to the upside confirming the continuation pattern and it also has a strong break out candle. The price then rises after the break allowing a profit of over 10 USD per ounce.