How to Trade Wedge Chart Patterns

Looking at the wedge chart pattern, it’s easy to see why it’s so popular with traders. This is because it’s easy to identify, and therefore has a bit “self-fulfilling prophecy” aspect to it. The fact that it also has a simple measuring tool built into it doesn’t hurt either, as it is very simple to use as a tool.

Identifying a wedge

The first thing that we need to do is identify what a wedge actually is. A wedge is simply two trendlines that converge towards an apex. In other words, price is compressing from both selling and buying pressure. It’s like a triangle but doesn’t converge in a horizontal manner. In other words, you may have an uptrend line as per usual, but at the top of trading during the last several candlesticks, the sellers are becoming a bit more aggressive, compressing the market.

To get an idea of what a wedge looks like, take a look at the following chart:On the chart, you can see that the New Zealand dollar has been rising for quite some time, and the red uptrend line shows where there was support on the last move towards the top of the chart. However, you can also see that the sellers were becoming a bit more aggressive, compressing market action on the way up. The highs were getting higher than the ones before but slowing down in terms of momentum. The two red lines show what a wedge looks like.

In this example, it’s what is known as a “rising wedge.” A rising wedge shows compression in and uptrend that signals that there could be something wrong. We are losing some of our momentum, and as a result the highs just aren’t as impressive as they once were. The beauty of this pattern is that a break down below the uptrend line signals that we are going to the bottom of the pattern itself, denoted by the blue line. Beyond that, what’s even more important is that at the very least most traders around the world will see that the trend line had been broken. So even if they are trading wedge patterns, almost all traders pay attention to trendlines. When they get broken, the catch is everybody’s attention.

The stop loss would be placed on the other side of the pattern, and in this case it’s an easy 1:2 risk to reward ratio. By paying attention to the wedge, you are noticing that the market is running out of momentum, and that an eminent reversal may be coming.

Wedges can be bullish as well

Like almost all chart patterns, there is the opposite as well. In that case, you are talking about the “falling wedge.” As you can see on the chart below, the US dollar had been falling against the Canadian dollar quite sharply, and then drifted a bit lower. Notice that the trajectory of the lows weren’t as strong as previous, and then of course the highs were becoming as aggressive as well.As you draw the two trendlines, you can see that a wedge is most certainly forming. Beyond that, we reached the blue line which represents the top of the wedge almost immediately on the breakout. The stop loss would have been on the other side of the wedge, which also would’ve been supported by the hammer that made up the last candle of the wedge before the breakout. If you look forward several days, you can see that the same area offered support on a pullback at least twice.

Yet another way to trade charts

Wedges are simply another tool that you can use to trade your charts. Wedges are fairly common, and also represent trendline breaks, so even if your competitors aren’t paying attention to wedges, they most certainly are paying attention to those trendlines as that is about as basic as it gets. This is why wedge patterns are so potent.

Trading the FOMC Meeting

The Federal Open Market Committee (FOMC) meets eight times a year to discuss and set US monetary policy. Each meeting is an important date on most traders’ economic calendars. Speculation in the run-up to the meeting and the fallout afterwards can spur flurries of volatility as markets react to the decisions made by this branch of the Federal Reserve.

Anticipation typically ramps up as the date approaches, partly because of the relative secrecy of the meetings. They are closed to outsiders, with only the seven governors of the board and five Federal Reserve Bank presidents in attendance. The general outcome and the key decisions are announced at a press conference immediately afterwards, but the full minutes are not published until three weeks have passed – another date on which you can generally expect increased market movement.

What does the FOMC decide?

In regards to potential trading opportunities, the markets primarily tend to rise or fall in reaction to prospective changes to interest rates. The FOMC takes a position on what kind of intervention (if any) the US economy needs after reviewing a raft of economic data. It introduces policies to either raise or lower interest rates depending on whether it wants to slow or drive inflation to balance out the money supply and ensure price stability. The Fed targets an annual inflation rate of 2%.

The outcome of the FOMC meeting is therefore an opportunity for traders to get a glimpse into the official view of the health of the US economy. The committee takes several key economic barometers into account, including job gains, the unemployment rate, growth of household spending, business fixed investment and, of course, inflation.

The FOMC meeting remains an important economic event outside of the US too. Because the US is the largest economy in the world, the FOMC has a trickle-down effect that ripples beyond its national borders. It’s important to consider as well that the committee also scrutinises global economic trends and developments when discussing policy; the committee leaning hawkish or dovish can be a useful insight into where other central banks may land.

Which financial instruments are directly affected by the FOMC?

The four major asset classes that are impacted by the FOMC are:

Dollar currency pairs. Speaking generally, higher interest rates drive the value of a currency up. This is because a higher rate tends to attract foreign investment, buoying demand.

Indices. Rising interest rates put pressure on consumer and business spending, pushing down share prices. US indices therefore often feel the impact of FOMC speculation.

Bonds. When interest rates fall, bond prices rise and vice versa.

Gold and the dollar have a broadly inverse relationship, meaning a weakened dollar can boost the precious metal’s value. Moreover, gold’s status as a stable safe-haven asset can attract investors in the event that the FOMC decision forecasts stormy times ahead for the global or US economy.

FOMC trading considerations

Trading the FOMC as a risk event can offer opportunities to day traders in particular. Speculation as to the Fed’s moves is often so charged weeks in advance of the meeting that any expected adjustment to interest rates is already priced into the market by the time of the announcement.

This means that if the unexpected happens, the market reaction can be dramatic. To take advantage of this turmoil, it’s essential to have a good understanding of the prevailing sentiment and to be able to act quickly if the Fed surprises and destabilises the markets.

Traders with a longer-term outlook should also be aware of the market-moving potential of the FOMC. The actual effect of any changes to interest rates typically takes over 12 months to be felt fully across the economy. Therefore, this time lag should be factored into any investment decisions when researching a potential instrument.

Are you ready to take a position on the next FOMC meeting? Trade the dollar, CFDs on US indices and movements on gold with an award-winning broker. Open your FXTM account today.

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