A wedge pattern is formed when investors test a current trend in a stock or commodity's price (in our case, the commodity would be a type of cryptocurrency). The wedge shape occurs when this investor testing makes the current trend line move in a different direction than that defined by the current trend. That is to say, if the general trend in value is upward, the wedge will be in a downward direction, and vice versa. Small and gradually tapering up-and-down fluctuations in price, if outlined by straight lines along the peaks and valleys of these fluctuations, will form non-parallel lines that don't quite converge, thus giving the trend a wedge” shape. (If the lines come closer to actually meeting in a point, or converging, this creates what is called a “triangle” pattern; to learn more about those, we strongly recommend you take a look at our article on that pattern type.) One other distinction wedge patterns have as compared to triangles is that wedges tend to take place over longer periods of time than triangles do. A triangle pattern can form in as little as a week or so, where wedge pattern durations are generally measured in months.
Let's take a look at what a wedge pattern looks like on a chart:
Illustration © Investopedia
You'll see that the image above is labeled as a Falling Wedge pattern. The names of wedge patterns can be a little confusing to new investors, and we'll touch upon that in more detail here in a moment. But, as you can see in the illustration, the general trend before the wedge began to form was upward, with the fluctuations that actually formed the wedge moving in a downward direction. Therefore, the shape of the pattern is called a “falling wedge.” That's not to say the market itself is falling; this is very important, and it's where some confusion in interpretation can come into play.
In order to clarify the two major types of wedge patterns, let's take a look at another illustration:
Once again, the name of the wedge pattern refers to the shape and tilt of the pattern only, and not the direction the market is actually taking. Therefore, a Rising wedge indicates a downward-trending, or “bear” market, whereas a Falling wedge represents an upward-trending, or “bull” market. Once investors have tested the trend—thus forming the wedge shape—the market tends to continue in the direction it was already headed. Analysts note that, for the most part, wedges are “continuation” patterns, because the trend coming before them tends to continue. Do be aware, however, that the minority of wedges can be “reversal” patterns, in which an upward trend can become a downward one, and vice versa. As a result, it's always best to wait out a wedge pattern until it's completed before making any investment decisions.
There's also one more type of wedge pattern, called the Level wedge. Like the rising and falling types, this pattern represents a brief respite from the trend preceding it, and once it's formed, the trend will continue in that direction. The difference is that level wedges don't have much of a tilt to them; they're more or less horizontal.
Much like other patterns that can form on market value charts, wedge patterns represent investors buying and selling in order to test a current trend. With that in mind, most investors—though they may take part in the trades that cause the fluctuations shown in a wedge pattern—will wait until the trend has restored itself before making any major buying or selling decisions.
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