Wedge Pattern Trading 2.0 – Broadening Wedges

Now that you’re familiar with rising and falling wedges, it is just as important to consider learning how to trade other wedge patterns, such as broadening ones and while they’re not as common as their standard brothers, it’s still something to pay attention to if you’re looking to make some sats. 

More typically found in FX markets, broadening wedge patterns are similar to flag patterns in that they give us an indication of market exhaustion by either the bulls or the bears. 

Through this article you’ll see that by applying some of the same strategies as Forex traders, we can apply them to our crypto charts, with a few simple differences. 

First, let’s take a look at the Symmetrical Broadening Wedge and how you can trade it.

Identifying a Symmetrical Broadening Wedge

Pictured: Symmetrical Broadening Wedge

From the image above, you’ll notice similarities to standard wedge patterns in that we have:

• Peaks and valleys
• Trend lines,
• Support and resistance
• Areas of consolidation where price action occurs
• and of course a “broadening wedge” where our S&R levels are diverging away from one another

Unlike standard wedge patterns, this same pattern can occur at the bottom of a downtrend, or the top of an uptrend without changing its shape. However, the same principal rings true in that if we find it at the top of and uptrend, it could signify a bearish reversal and if found at the bottom of a downtrend, could signify a bullish reversal.

One option to trade the symmetrical broadening wedge, without waiting for a major change in direction is the swing trade the formation once it’s been identified and enter long positions when the price hits a lower trend line and/or short positions when the price hits and upper trendline. 

These formations are relatively rare during normal market conditions over the long-term, since most markets tend to trend in one direction or another over time.

Take Profit Levels

If you were swing trading this formation and looking for take profit levels once (and if) the formation broke to the up or downside, the general rule of thumb is to take the first swing distance as your take profit level 1 (T1). 

If you were looking for a more aggressive take profit level (which we don’t generally recommend in crypto, at least), you would take the final short or long length and add that to the distance beyond where the price broke outside of the formation. 

Ascending Broadening Wedge 

Ascending broadening wedges are reversal chart patterns that are formed by a bullish widening channel, where you will see a clear trading volumes increase during the formation of the wedge. 

The broadening aspect of them suggests increasing price volatility and increasing volume this spells out opportunity for those who are able to successfully identify the occurrence of the formation. 

A break through the support line provides a good sell signal, with a first price target that is equal to the chart pattern’s low. 

Identifying An Ascending Broadening Wedge.

Very similar to the ascending wedge pattern, we are looking for higher highs and higher lows in a tight range, while again we see that our trend line are divergerging from one another. The higher highs make a rising trend line, this forms the upper boundary to our pattern. The higher lows make a lower rising trend line, this forms the lower boundary to our pattern.

We are also looking for a confirmation of the pattern by observing three peaks and three valleys with tops and bottoms forming the trendlines.

Both the upper and lower trendlines should rise. The upper trendline should rise more steeply than the lower trendline thus forming the broadening wedge.

Trading the Ascending Wedge

Ascending Broadening Wedges tend to breakout in the direction of the previous price trend and act as a often act as as continuation of the trend and as we mentioned above, this is confirmed by the increase is trading volume at the time. 

Just like the symmetrical triangle, another way to trade this formation as a swing trader, is to trade each HH & HL, once the pattern has been confirmed. 

We can also trade upward breakouts. Following the swing up from the lower to the upper trendline should price close above the third touch to the upper trendline then this provides a confirmation entry point.

The target is the full height of the pattern, from the lowest low to the highest high forming the trendlines. Watch out for price reversing at the upper trendline on the fourth touch.

As we mentioned above, you’ll already have an idea of the way you think the wedge will break by looking at the overall trend of the market and the time frame you are trading on. So if we were expecting a trend reversal, the first thing we look for is a confirmation and a retest of the broken wedge level.

Q: Why do we wait for a confirmation, rather than just jumping in to the trade beforehand?
A: Because it gives you a better chance of a successful trade and R:R

In the image above, we can see the stages of the trade playing out where we break the wedge and confirm a close below support, we re-test the wedge where we can then exit our position if you were long, locking in the profits OR, we open a short position and ride that sucker down by using the guide below.

Descending Broadening Wedge 

Identifying the descending broadening wedge is easy. Just like it’s ascending bro’s, we look first for diverging trend lines, connected by three peaks and valleys, with lower highs and lows occuring at each touch.

Both the upper and lower trendlines should fall. The lower trend line should fall more steeply than the upper trendline thus forming the broadening wedge.

Trading The Descending Broadening Wedge

As with all the other wedge formations, you can choose to swing trade high and low swings for more consitent, quicker return IF you have successfully identified the pattern. 

In this case below, you would have your confirmation of the continuation pattern after price has broken resistance at the bottom of the wedge after your third touch of the trend line and your Take profit 1 level would be the first swing high point, marked at B.

If you were more risk inclined and/or a scalper, you could continue trading the swings until you get to the final take profit level, outlined below in the second image.

We generally wouldn’t suggest that however…

For your second and final take profit level, a break through the resistance line provides a good signal to trade into a continuation of the trend with a price target equal to the height that separates the pattern’s high and low. We know that this is a continuation pattern from the original confirmation and break of the downward trend line and as we always do, we take profit along the way and simply move our stop loss up and enjoy the free trade. 

From this second take profit (Target 2) level, we would be happy with the way the trade played out and close our positions and wait for the expected pull back to assess our position and wait for our next play and trade. 

Right Angled Ascending Broadening Wedge

We’ve looked at a number of bullish broadening patterns, so now let’s take a look at the final (and mostly bearish) broadening wedge pattern, the right-angled broadening wedge. 

A right-angled ascending broadening wedge is a downward reversal pattern.The pattern is formed by two diverging lines, the support is a horizontal line and the resistance is an oblique bullish one, so very much like an inverted descending triangle. 

There is some added risk with this pattern and not one that we particularly look for when trading. Why? Because this pattern represents some nervousness and buyer exchaustion in the market and if it isn’t spotted quickly and stop losses aren’t placed, there’s every chance you’ll get trapped or stopped out at a loss. 

What About Stop Losses?

Pretty basic stuff, place your stop losses just below the bottom trend line and swing low (if going long) and just above the top trend line and swing high if going short. 

Uses With Indicators

While identifying trading patterns is a great way to assess a potentiallly profitable trade, it’s also a great way to confirm you bias by pairing these patterns with some indicators to help show us we’re on the right track. 

Because we’re looking to see if these patterns are continuations or reversales, it’s important to choose the right indicators for the job.