The wedge pattern is one of the simplest technical chart patterns to learn. A wedge can either be the signal of an upside or downside breakout depending on the market trend prior to the wedge formation. I am going to use a USD/JPY breakout that I spotted to show you how the wedge pattern looks and what to look for prior to the breakout. There are traders who only trade this pattern in the Forex Market. This is a pattern that has caught me some pips. If you spot these patterns, contact me and lets catch some pips together.
Leading up to the Wedge
When we look at the chart above we can see that there is a long-term downtrend in the market. I made the downtrend yellow. Notice every time the price hits the yellow line it drops lower. During this period of time, a trader should stay short in the market.
The price action starts to change after the downtrend on this chart. After the downtrend, we can see that the chart is holding the blue support line which is a great signal to exit the short. It also appears that the market is begging to move higher.
We can see in this chart that the price traded in a close range in-between the blue (support) line and red (resistance) line in this chart. This creates a wedge pattern signaling that something big is going to happen in the near future. Then with some news we see an upside breakout outside the wedge.
The Fundamentals Behind this Wedge
The hesitation inside the wedge was traders not sure what was going to happen with an upcoming United States fed meeting. In the macro economics section, I talk about the importance of federal banks and how they control interest rates. This particular upside breakout was traders reaction to Janet Yellen’s speech about rising interest rates. She hinted that the US is strongly considering raising interest rates.
The important thing to remember about chart patterns is that they are formed by the market makers with their current information. There is normally a change in the fundamentals that causes market makers that change the market direction.