Benefit from the bull and bear markets with one pattern

The symmetrical wedge is one of the most powerful patterns I know. It occurs when the price moves between two converging trendlines, shaping a wedge. A breakout of one of its trendlines indicates the beginning of a new trend.

In this post, I will show you how to use symmetrical wedges to benefit from all types of markets in any direction.

Symmetrical Wedge Strategy

I. What is a Symmetrical Wedge Pattern?

A symmetrical wedge pattern forms when the price of an asset is moving in a contracting range represented by two trendlines. One slopes downward, connecting the lower highs, and the other slopes upward, connecting the higher lows. This creates a wedge shape that becomes narrower over time as the price consolidates.

This pattern reflects a balance between buyers and sellers, with neither side gaining control, leading to reduced volatility. As the price approaches the wedge’s apex, a breakout is inevitable, and its direction will determine the future trend.

Here is a screenshot of a symmetrical wedge that occurred on the Nasdaq in the 4-hour timeframe:

Symmetrical Wedge
Symmetrical Wedge

II. How to Identify a Symmetrical Wedge?

Key Features of the Symmetrical Wedge

Before diving into the strategy, correctly identifying a symmetrical wedge on the chart is indispensable. Here are the key characteristics of this pattern which must be satisfied:

  • Descending top line
    The upper trendline descends, linked by a series of lower highs.

  • Ascending bottom line
    The low trendline rises, connected by a series of higher lows.

  • Converging lines
    The two trend trendlines converge toward each other, forming a wedge-like shape.

  • Price compression
    The price evolves inside both trend lines, narrowing over time as the price consolidates.

  • Neutral pattern
    The price tightening ranges horizontally, making the wedge horizontal.

The following chart shows a symmetrical wedge meeting the previous criteria:

Symmetrical Wedge Recognition
Symmetrical Wedge Recognition

III. Understanding the Symmetrical Wedge Breakouts

One key aspect of the symmetrical wedge pattern is the breakout. It refers to the point at which the price moves beyond one of the trendlines (upper or lower), signaling a potential new trend direction.

A. Bullish Breakout

A bullish breakout occurs when the price breaks above the upper trendline of the wedge. This indicates that buyers have gained control, and the price would start a new bullish trend.

Here is an example of a symmetrical wedge bullish breakout:

Symmetrical Wedge Bullish Breakout
Symmetrical Wedge Bullish Breakout

B. Bearish Breakout

A bearish breakout occurs when the price breaks below the lower trendline of the wedge. This suggests that sellers have taken control, and the price would start a new bearish trend.

Here is an example of a symmetrical wedge bearish breakout:

Symmetrical Wedge Bearish Breakout
Symmetrical Wedge Bearish Breakout

IV. The two symmetrical wedge strategies

The symmetrical wedge is neutral, so you can exploit its bullish and bearish breakouts to buy and sell the market. Since this pattern can occur after a bull and bear market, you can bet on the trend continuation or trend reversal.

Here are the two trading strategies you can operate using symmetrical wedges:

A. Trend continuation

The trend continuation refers to the idea that the market trend will persist in the same direction after a temporary pause or consolidation. When the price breaks a key level, you can enter a trade to benefit from the future continuation movement. The symmetrical wedges will help you detect these key-level breakouts.

Uptrend continuation

The uptrend continuation signal occurs after the price breaks up the upper line of the symmetrical wedge, which presupposes the uptrend restarting. This signal needs to happen in a long-term bull trend to be valid.

Symmetrical Wedge Uptrend Continuation
Symmetrical Wedge Uptrend Continuation

Downtrend continuation

The downtrend continuation signal occurs after the price breaks down the down line of the symmetrical wedge, which presupposes the downtrend restarting. This signal needs to happen in a long-term bear trend to be valid.

Symmetrical Wedge Downtrend Continuation
Symmetrical Wedge Downtrend Continuation

B. Trend reversal

A trend reversal occurs when the direction of the market trend changes. This means that the previously trending market begins to move in the opposite direction.

Bullish reversal

A bullish reversal refers to a change in the market’s direction from a downtrend to an uptrend. The bullish reversal signal occurs after the price breaks up the upper line of the symmetrical wedge in a long-term bearish trend.

Symmetrical Wedge Bullish Reversal
Symmetrical Wedge Bullish Reversal

Bearish reversal

A bearish reversal refers to a change in the market’s direction from an uptrend to a downtrend. The bearish reversal signal occurs after the price breaks down the down line of the symmetrical wedge in a long-term bullish trend.

Symmetrical Wedge Bearish Reversal
Symmetrical Wedge Bearish Reversal

V. How to Trade the Symmetrical Wedge Breakouts?

The symmetrical wedge breakout strategy revolves around waiting for the breakout and capitalizing on the ensuing trend. I will show you how to trade this pattern effectively:

1. Identify the Symmetrical Wedge Pattern

First, spot the symmetrical wedge by drawing two trendlines: one connecting the lower highs and the other connecting the higher lows. Ensure that the lines converge and the price tightening ranges horizontally, forming a wedge.

Symmetrical Wedge
Symmetrical Wedge

2. Wait for the Breakout

Patience is key with the symmetrical wedge pattern. Wait for the price to break above or below the trendlines before making your trade. It’s crucial not to jump into the trade before the breakout.

Symmetrical Wedge Bullish Breakout
Symmetrical Wedge Bullish Breakout

3. Confirm the Breakout

Sometimes, the price moves briefly beyond the trendline and reverses. So, it is essential to look for confirmation before entering the trade. A breakout is validated when the candle following the breakout closes in the same direction.

Breakup validation

A breakup is validated if the next candle closes above the line:

Symmetrical Wedge Breakup Validation
Symmetrical Wedge Breakup Validation

Breakdown validation

A breakdown is validated if the candle closes under the line:

Symmetrical Wedge Breakdown Validation
Symmetrical Wedge Breakdown Validation

4. Validate the volume

Breakouts with higher-than-average volume are more likely to sustain the move. That means many traders agreed with the new direction. Checking the increasing volumes is one of the best ways to avoid false breakouts.

Buyer volumes

You should see buyer volumes before and during the bullish breakout of the symmetrical wedge top line:

Symmetrical Wedge Buyer Volumes
Symmetrical Wedge Buyer Volumes

Seller volumes

You should see seller volumes before and during the bearish breakout of the symmetrical wedge bottom line:

Symmetrical Wedge Seller Volumes
Symmetrical Wedge Seller Volumes

5. Check the market strength

You can use strength indicators to check the market’s strength. Verify that the strength increases before opening a long entry and decreases before opening a short entry. Many indicators, such as RSI, MACD, and Stochastic, allow for strength measurement.

Market Strengthening

The following chart shows a strengthening in the market, confirming a long signal:

Symmetrical Wedge Breakup MACD
Symmetrical Wedge Breakup MACD

Market Weakening

The following chart shows a weakening in the market, confirming a short signal:

Symmetrical Wedge Breakdown MACD
Symmetrical Wedge Breakdown MACD

6. Enter the Trade

Once the breakout is confirmed, enter the trade toward the breakout.

Entry opening

  • Bullish breakout
    A bullish breakout of the symmetrical wedge upper line means an uptrend is coming. So you can buy the market.

  • Bearish breakout
    A bearish breakout of the symmetrical wedge downline means a downtrend is coming. So you can sell the market.

Retest

Sometimes, the price retraces and retests the level after the breakout. The signal is confirmed if the level holds and the price moves toward the breakout again. The retest does not happen every time, but it allows you to reinforce your position or enter the trade if you have missed the breakout signal.

Symmetrical Wedge Top Line Retest
Symmetrical Wedge Top Line Retest
Symmetrical Wedge Bottom Line Retest
Symmetrical Wedge Bottom Line Retest

7. Set the Stop-Loss

The market will not give you the right every time. Setting a stop-loss is vital to protect your capital. You must place a stop-loss just outside the opposite side of the wedge to manage risk. Many traders think they should set their stop-loss beside the opposite wedge line, but I discovered a better way.

Here’s how you can determine the best position for your stop-loss based on the direction of your trade:

Long entry

Place the stop-loss below the last low construction point of the symmetrical wedge. Then, add a distance corresponding to an ATR 14 under this point. The following chart shows you where to place the stop-loss for a long entry:

Symmetrical Wedge Long Stoploss
Symmetrical Wedge Long Stoploss

Short entry

Place the stop-loss above the last high construction point of the symmetrical wedge. Then, add a distance corresponding to an ATR 14 under this point. The following chart shows you where to place the stop-loss for a long entry:

Symmetrical Wedge Short Stoploss
Symmetrical Wedge Short Stoploss

8. Set the Target

Correctly setting your target will determine the money you will make with your trading. The trading strategy you have chosen will strongly impact the expected gains. Generally, long strategies offer more potential gain than short strategies. Besides, the success rate of the uptrend continuation signals is greater than the bullish reversal.

When trading the symmetrical wedge breakout strategy, you can set profit targets based on the height of the wedge. Many traders measure the distance between the widest part of the wedge to evaluate its height. I prefer to take the distance between the highest and lowest points of the figure.

After evaluating the wedge’s height, you have to project this distance to find the target. The direction of the projection depends on the direction of your trade. Here are the long and short target calculations:

Long entry

To determine the target for a long entry, you will need to project up the height from the last high construction point of the wedge:

Symmetrical Wedge Long Target
Symmetrical Wedge Long Target

Short entry

To determine the target for a short entry, you will need to project down the height from the last low construction point of the wedge:

Alternatively, trailing stops can capture more of the move if the price continues to trend strongly after the target.

Symmetrical Wedge Short Target
Symmetrical Wedge Short Target

VI. Tips for Success with the Symmetrical Wedge Strategy

Here are some tips that will help you better trade the symmetrical wedges:

  • Focus on the long-term trend
    Even if symmetrical wedges provide good reversal signals, trade in the trend is often more profitable.

  • Consider the market strength
    Evaluating the market strength will help you avoid false signals and increase your success rate.

  • Wait for breakout confirmation
    Waiting for breakout validation increases your entry price but improves the probability of winning.

  • Select the best configurations
    The symmetrical wedge is a frequent figure. You should only select the best configuration.

  • Associate signal with news
    Important news can trigger strong price movements. A signal associated with an event can help you evaluate the duration of this movement.

  • Gradually enter the trade
    Gradually entering a trade allows adjusting your position depending on the signal confirmation.

  • Adapt the position size
    You should determine your position size depending on the stop-loss level to limit your risk.

VII. Symmetrical Wedge Summary