Wednesday, December 28, 2011

Broadening Formations

*Occurs during high volatility.
*A period of great movement but little direction.
*Identified by a series of higher pivot highs and lower pivot lows.
*Considered a rare formation.
*Can be a period of consolidation or reversal.
*Considered difficult to spot.
*False Break-Outs and confusing price action are often prevalent.
*Can be powerful continuation or reversal patterns.

Variations Right Angled, Descending Wedge(falling wedge), Ascending Wedge (rising wedge).

Rules (Falling Wedge):
1. Must be a prior downtrend to reverse.
2. There must be 2 reaction highs from the peak to form the resistance trendline.
3. Similarly there must be 2 reaction lows with the 2nd low lower than the 1st.
4. As the pattern matures the upper and lower trendlines should converge (ie come together). Ideally there will be a 3rd shallower low before breakout to the upside occurs.
5. There is a convincing breakout to the upside through resistance trendline.
6. Volume pickup also occurs at the breakout. Low volume moves are prone to a higher rate of failure.
alternatively watch for a breakout above a previous high.
Unlike symmetrical triangles falling wedges have a definite slope to the downside and a definite bias to the upside.

By Neal Vanderstelt
Forex Trader, Market Analyst, Trading System Designer

1 comment: