The Wedge model in Crypto is extremely important to help investors analyze and predict market trends. This model is divided into the rising wedge model, the falling wedge model, and the expanding wedge model. More specifically about the model and how to use it, please join Crypto Trading to learn in the article below.
Basic Theory of Wedge Model
What do you know about the Wedge model? Below are the concepts, components, and classifications of the model.
What is the Wedge model?
The wedge model is also known as the Wedge Pattern in English. The pattern often appears after each uptrend or downtrend and gives a forecast about the possibility of continuation or reversal of the trend.
After hearing the concept of the wedge pattern, many people will be confused with rising flag pattern or double top and double bottom chart patterns. However, these 3 patterns are completely different. If the double top 2 bottom pattern is a reversal pattern, the bullish flag pattern is a continuation pattern, then the wedge pattern predicts both the possibility of continuation and reversal of the trend.
If the price breaks upwards, it is an uptrend. Conversely, if the price breaks downwards, it is called a downtrend.
See also: Reversal candlestick pattern: everything should know
The main components that make up the Wedge model
The wedge pattern is formed in the accumulation phase of the price narrowed by 2 trend lines. Therefore, the pattern consists of 2 main components, which are 2 trend lines: the support line and the resistance line:
– The resistance line is the area where the price of a Cryptocurrency is trending up but is expected to quickly change direction to a downtrend. In this price area, selling pressure is more dominant than buying pressure.
– The support line is the area where the price of a Cryptocurrency is in a downtrend but is expected to reverse to an uptrend. At this price zone, the buying force will prevail over the selling force.
The two trend lines in a wedge pattern will either rise simultaneously or fall simultaneously.
Classification Wedge model
The wedge model is divided into 3 types. Including rising wedge pattern, falling wedge pattern, and expanding wedge pattern.
Rising Wedge Pattern
Rising Wedge pattern in English. This pattern appears when the two resistance and support lines slope up and converge at a point that is diagonally higher than the body.
Thus, the wedge pattern only appears when the price line touches each trendline at least twice. That is, there must be at least 4 intersection points.
The rising wedge pattern can appear in both uptrends and downtrends. When the pattern is broken, it will be a bearish reversal signal. Investors can rely on this signal to place a “Sell” order.
In case the rising wedge pattern appears after an uptrend, it is a sign that the price is reversing to the downside. Conversely, when the rising wedge pattern appears after a downtrend, it is a sign that the market will continue to fall further.
Falling wedge pattern
The Falling Wedge pattern is also known as the Falling Wedge. This pattern appears when the support line and the resistance line both slope down. These two lines of the pattern will intersect at a point slanted downward.
For this pattern, the price of the cryptocurrency will break out in the opposite direction of the wedge’s slope. The pattern can be created at the end of an uptrend or a downtrend.
In case the falling wedge pattern appears in an uptrend, it shows that the bullish force will continue to return. If it appears in a downtrend, it shows that the market’s uptrend is coming.
The pattern appears when there are at least 2 points of contact between the price and each resistance and support line.
Expanding Wedge Pattern
The Expanding Wedge pattern is also known as the Broadening Wedge. The pattern is shown when the price of a cryptocurrency tends to gradually widen from left to right. The support and resistance lines can slope up or down without any trend.
When an expanding wedge pattern appears, the buying and selling volume of the cryptocurrency will continuously decrease or increase frequently. It can change from increasing to decreasing and then from decreasing to increasing.
The expanding wedge pattern appears when there is both an increase in price at the top and a decrease in price at the bottom.
See more: OKX: open an OKX account – Reputable crypto exchange
How to Trade Crypto with Wedge Pattern Effectively
You have grasped the concept and classification of the model. So how to trade with this model effectively? There are 2 ways to use this model to trade: to determine the entry point and to determine the stop loss and take profit points.
Use the Wedge model to determine the exact entry point
With this form of use, you determine the entry point in the following 2 ways:
Method 1: Investors place orders right at the point where the price starts to break out. If it is a rising wedge pattern, you place orders when the price starts to break the support level. As for the falling wedge pattern, you place orders when the price starts to break the resistance level.
Method 2: You wait until the confirmation candle appears right after the breakout candle. At this time, you enter the order at the closing price of the confirmation candle. In this case, the candle will decrease if it is a rising wedge pattern and increase if it is a falling wedge pattern.
Comparing the above two methods, determining the entry point using the second method will be safer and reduce risks. Therefore, it will be suitable for new investors who do not have much experience.
However, because of safety, the profit earned is not much.
Use a wedge pattern to determine stop loss and take profit points
In the process of investing in Crypto trading, determining the correct stop loss and taking profit points is extremely important. It directly affects the success of the transaction process. Investors proceed to set stop loss and take profit points as follows:
The ideal stop loss point is the point above the highest peak of the rising wedge pattern. For the falling wedge pattern, the stop loss point is the point below the bottom closest to the order point.
The ideal take profit point is located at a distance equal to the width of the wedge from the breakout point.
Conclude
The above article has provided you with all the necessary knowledge about the Wedge model such as concepts, classifications, and trading methods. Please refer to it carefully, and combine it with chart observations and other financial tools and indicators to apply in your trading process. You can learn about other coin trading technical analysis tools and indicators on the Crypto Trading page!
FAQs
Is the wedge pattern a continuation pattern or a reversal pattern?
The pattern is both a continuation and a reversal pattern.
Is the wedge pattern used to predict the market in the short term or long term?
Using the model to predict the market in the short term or long term depends on the purpose of each investor. The model can be applied in both short-term and long-term investments.
Are wedge and triangle patterns the same?
In terms of shape, these two patterns are quite similar. However, in the wedge pattern, the two trend lines will slope up or down. Meanwhile, in the triangle pattern, one line will slope up or down. The remaining line of the pattern will go in the opposite direction or go sideways.
