Get started

Descending Broadening Wedge

Broadening Wedges - Advanced AnalysisIn our previous post in this series about chart patterns we described the characteristics, rules, and causes of triangle patterns (if you haven't seen it, see the related idea below). In this post, we perform an advanced analysis of broadening wedges patterns. We provide a description of each pattern and its implications. We also review the literature in order to find their deterministic cause. 1. Broadening Wedges Broadening wedges are characterized by price variations laying within one support and resistance, both having the same direction and broadening over time. As such the apex of the support/resistance in a broadening wedge is located to the left. Broadening wedges must not be confused with other broadening formations. While they all have a broadening characteristic they can have different identification rules Broadening wedges are classified depending on the direction of the support/resistance. 1.1 Ascending Ascending broadening wedges mostly occur during uptrends with rising local maxima (higher highs) forming an upward sloping resistance and raising local minimas (higher lows) forming an upward slopping support. The slope of both the support & the resistance should be significantly different from 0. Bulkowski suggests the price needs to test the support and resistance three times each. Additionally, the resistance should be steeper than the support. Volume tends to increase during the formation of such pattern. Ascending broadening wedges have a bearish bias with breakouts mostly occurring downward. Downward breakouts are often followed by a decrease in price. Example of an ascending broadening wedge followed by a downward breakout on SOLUSDT 4h. 1.2 Descending Descending broadening wedges mostly occur during downtrends with declining local maxima (lower highs) forming a downward sloping resistance and declining local minimas (lower lows) forming a downward slopping support. The slope of both the support & the resistance should be significantly different from 0. Similarly to ascending broadening wedges, Bulkowski suggests the price needs to test the support and resistance three times each. Additionally, the support should be steeper than the resistance. Volume tends to increase during the formation of such pattern. Descending broadening wedges have a bullish bias with breakouts mostly occurring upward. Upward breakouts are often followed by an increase in price. Example of an ascending broadening wedge followed by a downward breakout on AVAX 1h. 2. Partial Rises/Declines Partial rises/declines are phenomena described by Bulkowski in broadening formations and are described as being common. Partial rises/declines often indicate the direction of a breakout. Partial rises commonly occur in broadening ascending wedges, price bounces off the support, moves towards the resistance without reaching it, and go back to the support. We can expect a potential downward breakout after that. Note that a partial rise always starts from the test of the support. Partial declines commonly occur in broadening descending wedges. The price bounces off the resistance, moves towards the support without reaching it, and then goes back to the resistance where we can expect a potential breakout upwards. Note that a partial decline always starts from the test of the resistance. Partial rises and declines can offer a better price to buy/sell instead of waiting for a breakout. 3. Measure Rule The measure rule for broadening wedges allows us to determine the position of a take-profit/stop-loss. For a broadening ascending wedge the measure rule would place our take profit at the lowest low inside the formation. Selling directly after a partial rise would allow for higher profits. For a broadening descending wedge the measure rule would place our take profit at the highest high inside the formation. Selling directly after a partial decline would allow for higher profits. Certain analysts close trades caused by partial rises/declines when the price reaches the support/resistance of the wedge, opening a new position in the case of a breakout while using the metric rule for setting their take profit. 4. Causes Of Broadening Wedges Bulkowski offers a description of the causes of broadening wedges in the market in terms of the market participant's behavior. The cause of an ascending broadening wedge is a surge from an initial buying impulse, driving the price higher. Momentum traders follow the initial impulse further pushing prices up. Contrarian traders judge the price to be trading above its intrinsic value, selling and thus creating a decline in prices. However, before the decline reaches the previously established low, certain market participants buy again. These participants can be composed of initial buyers, accumulating positions, or late traders seeing the potential to buy at a better price. This allows the creation of a new impulse, with only a divergence left. This scenario eventually repeats itself with increased volume, causing impulses and retracements of higher magnitude reinforcing a positive feedback loop until the price is judged overbought even by initial buyers. A broadening falling wedge follows the same scenario structure but with sellers instead of buyers. 5. Other Observations The amplitude of the cyclical variations within a broadening wedge increases over time, thus potentially highlighting volatility clusters in higher time-frames. Another interesting observation that can be made is that prices within a broadening wedge are subject to heteroscedasticity (variability is not constant, it increases inside a broadening wedge), while prices inside a channel are homoscedastic (variability remains constant). This concept is inherent to regression analysis. 6. Conclusion In this post we described broadening wedge patterns in depth. We have highlighted partial rises/declines as well as how the measure rule applies to such patterns. We then focused on showing how market participants act during the formation of broadening wedges. Note that unlike triangles patterns we did not find a significant amount of studies mentioning such patterns, nor any agent models developed to describe their occurrence. 7. References (1) Bulkowski, T. N. (2021). Encyclopedia of chart patterns. John Wiley & Sons.
Editors' picks
LEducation
by LuxAlgo
47
Hidden Bearish Divergence at a 50% RetraceI think XRP has had enough upside from here and will reverse between the 50% and 61.8% retraces. A few days ago i was Bullish on XRP at the bottom of a descending broadening channel but we have since reached the top of this channel and are now showing signs of 4 hour hidden bearish divergence on the RSI. If this continues and we see a reversal from here then i'll expect XRP to go as low as 37 cents near the 886 retracement on the daily timeframe.
FTX:XRPPERPShort
by RizeSenpai
XRPUSDT Ripple - Descending Triangle-We have 3 touches at the bottom and 2 touches at the top of the triangle. -Descending patterns are usually bearish signs, but there is a chance to interpret this patttern as a descending wedge, which is bullish. - Volume is decreasing, which leads to explosive moves in the future. - For expected duration of the trade, probability, stop loss, profit target, entry price and risk to reward ratio (RRR) - please check my signature below ↓ - If you want to see more of these ideas, hit "Like" & "Follow"! -Keep this triangle in mind if you are in a long position. -Also check my idea about XRP - Road to 100 USD below.
by UnknownUnicorn2537518
7
ETH/ USD... 4-Hour Forming a Descending Broadening Wedge...28%+Hello Traders, May have found a bullish sign on the 4-hour chart. Looks to be forming a descending broadening wedge. This should finish forming as the weekend comes and passes, Monday looking for a breakout to the upside, depending on a number of fundamental factors. But based on the chart, if we can break above the trendline going into Sunday late evening and holding above it through Monday Morning/ Afternoon, we should see a continued move to the upside. Shooting for a 28% gain. Good luck, and happy Memorial Day Weekend. FYI, Holidays are always unpredictable. Trade safe and take care.
COINBASE:ETHUSDLong
by MarkStPeter
TOMOUSDT, signal for reversal !!!Plan: resistance level breakout --> wait for the price to bounce off from support level --> wait for the rejection candle pattern to form e.g. bullish engulfing, pinbar, etc --> BUY **Disclaimer** the content on this analysis is subject to change at any time without notice and is provided for the sole purpose of assisting traders to make independent investment decisions. Traders!! if you like my ideas and do take the same trade as I do, please write it in a comment so we can manage the trade together. _____________________________________________________________________________________________________________________ Thank you for your support ;) GWBFX
TLong
by GWBFX