Wedges breaking into another direction
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The most common definition of wedges is that a falling wedge is rising and the other way around, but can we really solely rely on that information. There is definitely more to it, so let us see what lies behind.
For example, we can come across an unusual triangular consolidation whereby the wedge cannot be identified as a reversal pattern, but yet the falling wedge is way beyond the lower level we expected, and the rising wedge also breaks higher. When we have such a triangle on our chart, it represents a running variation of the contracting triangle which also indicates that the pattern will end up either below or above the point where the previous wave ended.
When such a triangle is spotted by traders, they are usually misled by the fact that the b-d trend line is broken, so they automatically buy put options in order to get rid of the seemingly non-promising option. If you are one of these traders, please make sure to keep observing the chart, and if you see that the trend is moving backward, you should know that the wedge is going to take an extreme path and explode higher, which means that you should be quick to buy call options. Maybe it sounds complicated, but once you see the chart in front of you and notice the trend movements in this way you will know what to do.
Wedges usually can be spotted at the end of an impulsive trend or even at the beginning of one. In either case, identifying a wedge can help you predict the next market movement. For example, if a wedge appears at the end of an impulsive move, you can expect a retraction of the wedge up to 50% but not more counting the distance from where the wedge starts to where it ends. What comes in handy here, is, of course, the Fibonacci Retracement tool which allows you to measure the wedge precisely. If you measure the level of 38.2%, it is your turn to start lacing call option if the former wedge was bullish. And if it was a bearish trend, you simply place put options as it will keep on going in the same direction as intended (since it means that the wedge is actually the first wave of an impulsive move). How to know if it acts as the first wave of an impulsive move is by simply looking whether wave 2 and wave 4 are overlapping in the wedge. If you see them overlap, you should know that you are not dealing with a first wave wedge, because overlapping of these two waves is not a feature of wedges. The wedges take the form of triangles, whereby they are distinguished by their place of formation.
If you have a corrective count and you marked the waves with numbers, you can count on coming across a wedge that is a triangle.
Spotting Running Triangles
Only running triangles can assume the role of wedges, and that is their main feature to identify them. It is characterized by a small fifth wave. There is a substantial difference that traders need to understand when they have triangular wedge. Namely, there is no need to look for a rising wedge that will break the lower level, since the triangular wedge does not work that way.
When there is a regular wedge, as we already explained here on Binary Option Academy, looking for a 2-4 trend line to break before placing put options when the wedge is bullish and call options when the wedge is bearish is completely legit and helps traders to make the right trading decisions. Regular wedges are not to be confused with the triangular ones.
Nevertheless, wedges are still complex, and only when the 2-4 trend line is broken, the market can retract back making a new extreme high if we have an upward wedge or an extreme low if the wedge is a falling wedge. Naturally, the first example would require buying call options, and the second one put options.
Expiration Periods and Wedges
The expiration date can be easily selected since the first move is not real. This means that only the move that appears after the extreme high or low breakthrough is the actual move that we are interested in. With a little bit of experience and a little bit of logic and concentration, you will come to the conclusion that rising wedges are not always going to fall, as well as falling wedges will not always move upwards, which is sufficient information to keep you away from poor trading decisions. This information gives you a clear advantage in the market, you just have to tell apart the different forms of wedges and know how they behave.
Please bear in mind that the market is defined by the interaction of other traders, which means that their actions also determine the supply and demand chain which is the essence of market movement. What I am trying to say is that they probably will be misguided by the traditional wedge theory and you will have plenty of offers to buy the options you want, as well as to sell quickly an option that is going to drop in value.
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