Trading rising wedge patterns: How to spot crypto trend reversals

Short-duration crypto traders need fast data to make decisions. To get the info they need, these traders commonly spend their time studying price charts with crypto technical analysis tools. Visual cues on crypto price movements and recent market activity make it easier to predict likely outcomes and take decisive action.

For example, the rising wedge pattern is a popular image that many traders look for to gauge the market's mood. On the surface, rising wedge patterns appear to be a bullish signal, but that can be a cover for underlying weakness. Learning the intricacies of wedge pattern trading will help you spot opportunities and risks and plan accordingly.

What’s a rising wedge pattern?

Crypto rising wedge patterns are visual formations on price charts that sometimes appear when a cryptocurrency makes a series of higher highs and higher lows. A key feature in this pattern is that prices on the low end of the range (aka support) rise faster than those at the top (aka resistance). The narrowing price range creates a “wedge-like” shape where the two lines meet, pointing up and to the right.

Although the form of a rising wedge suggests upward momentum, it doesn’t need to happen within the context of a larger bull trend. Rising wedge patterns can appear during sustained downtrends and bear markets.

Is a rising wedge pattern bullish or bearish?

Rising wedge patterns are deceptive because they make it look like prices will continue to trend upward. In reality, these bearish technical indicators are warnings of a potential price dump.

Even though prices increase within a rising wedge, the range narrows at the top. This suggests buyers are thinning out and fewer people are willing to enter a cryptocurrency position. Without enough demand, crypto prices will lose buying pressure and fall below the support level.

In the context of a bullish market, rising wedge patterns are “reversal signals,” meaning market pressures are shifting from buying to selling. The same image in a downtrend is a “continuation pattern” because it confirms the overall bearish momentum.

Even though rising wedge patterns have a strong downward bias, bearish chart patterns don’t always follow a textbook formula. To manage risk, traders often wait for prices to break below the support line before making a move.

Volume bars measuring average trading activity also help traders analyze a rising wedge pattern. If volume decreases as prices rise, it strongly suggests that sellers are in a stronger position.

4 ways to identify a rising wedge pattern on a crypto chart

It’s easy to mistake an uptrend for a rising wedge pattern if traders aren’t thorough with their technical analysis. These four common features in rising wedge patterns can pull real indicators away from misleading signals.

Look for incline in the support line

If support isn’t steeper than resistance, be suspicious. The nonnegotiable trait in all rising wedge patterns is a series of higher highs and higher lows, with the support line rising faster than the resistance line. There’s no standard number of times prices have to bounce between these lines, but seeing at least two higher highs and two higher lows is a good rule of thumb.

Estimate the convergence point

One way to confirm that support is steeper than resistance is to project these lines into the future. There has to be a point where support and resistance lines cross. A cryptocurrency’s price could break out of the pattern before that convergence takes place, but a true rising wedge always has a projected apex.

Adjust timeframes

A rising wedge could happen on any timeframe, and the “ideal” setting depends on a trader’s strategy. Longer timeframes like four hours, one day, or one week have more data and may give more accurate signals, but short-duration traders can still use 15 minutes or one hour of data to find these patterns. Just keep in mind that shorter timeframes are more prone to random “market noise,” or changes in price that aren’t part of a trend.

Double-check volume levels

Even if a cryptocurrency’s price movements look like a rising wedge, volume levels can strengthen or weaken that interpretation. Classic rising wedge patterns should have volume levels that steadily decrease to suggest waning interest from buyers. If volume bars rise as prices increase, there’s a greater chance this upward movement is part of a healthy price rise.

How traders use the rising wedge pattern

Traditionally, traders looking at a rising wedge pattern anticipate a price breakdown and, once confirmed, enter a short position directly or through derivatives like short perpetuals. Unlike buying and holding cryptocurrencies, short-selling bets against a cryptocurrency’s price and earns value as the digital asset loses it.

Although there’s a standard playbook you can use to profit from rising wedge patterns, there’s always a chance it won’t play out as expected, and traders who don’t prepare for these scenarios are at risk of losing money. To avoid overrelying on rising wedge patterns, study other popular metrics like the relative strength index (RSI) and moving average convergence divergence (MACD) before entering a trade.

Here are a few specific ways traders can maximize their profits and minimize risk from a rising wedge pattern.

Entry strategies

To avoid jumping into a fakeout, wait for a clean break below the support line to enter a short position. More conservative traders often wait for the price to rise and dip below the support trendline again before entering a trade, and aggressive traders are more likely to place their shorts at the high end of the wedge’s convergence before confirming the breakdown.

Stop-loss placement

Stop-loss orders automatically pull crypto traders out of positions if their ideas don’t play out. In the case of rising wedge patterns, stop losses keep traders from losing money in short positions when a cryptocurrency’s price unexpectedly moves higher. Often, traders will place a stop-loss above the most recent high or somewhere back inside the wedge. More aggressive traders, however, might place their stop-losses slightly above the convergence point to give this pattern extra time to play out.

Profit targets

Traditionally, you can estimate a rising wedge’s potential profit by measuring the height of the wedge at its widest point, then placing it at the convergence point. The bottom of this line represents the max potential profit from the trade, and traders can decide where to put take-profit orders based on their risk tolerance.

This isn’t the only tool you can use to measure a rising wedge pattern’s potential profit, however. Some traders use prior support zones or moving-average trendlines to identify where the price is likely to bounce. More advanced indicators, like Ichimoku clouds or Fibonacci levels, can also help you identify where you’re most comfortable exiting a position, depending on your profit goals.

Common mistakes when trading rising wedges

Identifying and interpreting rising wedge patterns is relatively straightforward, but its simplicity doesn’t mean there aren’t risks. To make the most of this pattern, you’ll need to consult multiple metrics and put robust protections in place.

Here are a few mistakes crypto traders of all skill levels make when it comes to trading rising wedges.

Trading before confirmation

Until a cryptocurrency’s price drops below the apex, there’s a 50/50 chance you’ll short a false flag. The only way to increase the odds of a profitable trade is to wait for the price to move decisively below the support line before entering a short. This approach might forfeit potentially higher profits, but it’s safer than opening a trade too soon.

Ignoring volume charts

In a classic rising wedge, volume decreases as a crypto’s price increases. Higher-than-average volumes could be a warning signal that buyers aren’t as exhausted as they may seem. If you don’t catch steady or increasing volumes while observing what looks like a rising wedge pattern, you could miss a major signal to wait.

Overleveraging

Trading on leverage amplifies your potential gains, but it also puts you at risk of losing your entire position (aka liquidation) on small price moves. Even if a rising wedge pattern plays out as expected, temporary market noise or price retracements could be enough to cancel an overleveraged position.

Misidentifying channels as wedges

A cryptocurrency’s price hits higher highs and lower lows in both rising channels and rising wedges. However, the support and resistance lines for a rising channel run parallel to each other, suggesting further bullish movement. Look for convergence points and the relative steepness of the support line to tell the difference between a wedge and a channel.

Forcing a pattern where it doesn’t exist

If you expect a bearish breakdown, confirmation bias could lead you to force unnatural lines or ignore other signals while you’re doing a technical analysis. Traders need to put their hopes aside and look directly at the facts to avoid seeing rising wedges where they don’t exist.

Keep tabs on crypto trading with CoinTracker

Active crypto traders can make hundreds or thousands of transactions every year. Aside from swaps based on market data like rising wedge patterns, activities like yield farming, bridging, or even sending coins to other wallets could all count as taxable transfers. As the number of crypto transactions you make rises, you’ll need reliable software like CoinTracker’s Portfolio Tracker to accurately record all of these details.

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Tax time is approaching – are you prepared? Let us guide you through crypto tax essentials so you can stay on top of your filings.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.