A Wedge is determined by Trend Lines meeting on a price chart. The highs and lows of a price series, from 10 to 50 periods, are connected by these Trend Lines.
The wedge appears as the lines approaching the convergence as these lines show either the rising or falling and differing rates. These are useful indicators of a possible price action reversal.
Interpreting a Wedge Pattern
* A sell signal is given if the pattern happens in a downtrend as the price falls below the support line;
* A buy signal if it happens during an uptrend as the price exceeds resistance line (a certain deviation is possible).
After a Wedge forms, the price changes in the same direction in which it moved before the pattern. Calculate the target level through the following:
If a downtrend:
T = BP – (TS – PS)
For an uptrend:
T = BP + (PS – TS)
In the formula:
T is the target price;
BP – breakdown point;
TS is the starting point of the trend;
PS is the starting point of the template.