Depending on the chart, the descending broadening wedge is a bullish trend reversal or bullish continuation chart pattern that features an expanding wave in the downward trend. It is a sign that the market is about to reverse its short-term bearish trend.
Chart patterns are frequently used by retail traders to forecast the market. These patterns are distinctive because they are symmetrical and because they are natural patterns.
You will discover everything there is to know about the descending broadening wedge pattern in this post, along with a trading method.
How to Spot the Descending Broadening Wedge Pattern?
One kind of wedge pattern is the descending broadening wedge. A wedge is a pattern or structure that has a thick end and a thin end. Because it demonstrates the expansion of the price wave, a descending broadening wedge’s starting point will be narrow and its final point will be thick.
Follow these steps to locate this pattern on the chart:
- Decide where the wave began. Lower lows and lower highs are what the price wave should do.
- The size of each new wave should be bigger than the one before it.
- Draw two trendlines that connect at the wave’s swing high and swing low positions.
- This wedge pattern’s beginning and finishing points ought to be narrow and thick, respectively.
- The descending broadening wedge pattern requires a minimum of three waves.
These straightforward criteria can help you see this pattern on the price chart. For a better explanation, refer to the figure below.
Validity of a descending broadening wedge is determined by how well the two upward lines oscillate. The resistance line is above, while the support line is below. To verify the pattern, at least two of these lines had to be touched. NB: If the price line touches the support or resistance at least three times, the line is considered “valid.” This suggests that the descending broadening wedge pattern is legitimate if the price strikes the resistance line twice and the support line at least three times (or at least twice along the support line and three times along the resistance line).
The desire of the buyers to seize control rather than the fatigue of the selling stream is indicated by a descending broadening wedge. The two lines’ divergence in the same direction (an increase in price magnitude) tells us that the price is still falling with progressively little changes. The sellers succeed in forcing a price reversal on the resistance line, but they falter when a new low is formed. The resistance is formed by the highest point on the resistance line of the descending broadening wedge during the first correction. After reaching a new low, there is a second, larger wave of drop that indicates the sellers’ loss of control. After the emergence of new lowest points, a third wave develops, but the sellers once more regain control.
Volumes do not act in any particular way during the creation of a descending broadening wedge, but they rise sharply when the support line breaks.
Descending Broadening Wedge as Bullish Reversal Chart Pattern
This pattern is a bullish reversal pattern that develops at the bottoms of the waves. The resistance line’s breach formally validates the pattern. The height at which the descending broadening wedge developed serves as a benchmark for the price target. Frequently, the price objective is attained faster the steeper the trend lines of the falling broadening wedge are.
After an upswing, the descending broadening wedge has the following statistics:
- The exit is bullish 80% of the time.
- A descending broadening wedge is a reversal pattern in 75% of instances.
- When the resistance line is breached, the price objective of a descending broadening wedge is attained 60% of the time.
- The price pulls back in support at the resistance line of the descending broadening wedge in 21% of instances.
Descending Broadening Wedge as Bullish Continuation Pattern
This pattern, a bullish continuation pattern, develops amid a bullish movement’s correction. after a correction, the bullish movement resumed. The resistance line’s breach formally validates the pattern. Plotting the maximum height of the wedge onto the breaking point provides the price goal. The performance of the pattern suffers on pullbacks.
After a bullish trend, the descending broadening wedge has the following statistics:
- 79 percent of the time, the exit is bullish.
- A descending broadening wedge develops in a consolidation movement in 23% of instances.
- When the resistance line is broken, the pattern’s price objective is usually reached (81% of the time).
- On the resistance line of the descending broadening wedge, the price pulls back in 40% of instances.
Example in Spotting The Descending Broadening Wedge
Two downward-moving, non-parallel trend lines make up the descending broadening wedge (DBW). According to the chart below, the formation started on October 21, 2021, and on November 4, 2021, a bullish breakout occurred. As the wedge widens over time, the lower trendline becomes a little bit steeper.
Each trendline must be tested at least twice, or hit by the price’s lower lows and lower highs, in order to be drawn as one of the two trendlines that make up the pattern.
The Breakout of Descending Broadening Wedge
As was previously said, if the wedge is created from a downhill slope, the breakout is upward and bullish. Most of the time, it moves in the opposite direction of the prior trend.
In this instance, the prior trend was a partial or transient drop. When the prices cross a top trendline and turn downward, the drop should start. Before an upward breakout, there is a partial slump.
In the previous illustration, on October 21, 2021, the price of Bitcoin (BTC) relative to the dollar reached $67,035. On January 11, 2021, it fell to $30,084.60.
On January 14, 2021, the BTCUSD reached a peak of $40,283.24 before starting to somewhat drop. The wedge-like price action’s lower trendline started at $34,259,89, while its higher trendline was at $39,051.19.
11 days before the upward breakout, on January 16, 2021, to January 27, 2021, the descending broadening wedge (DBW) pattern develops. There is a good chance that the price decline will soon end as the asset gets ready to start the upward run once the trader notices the partial decline and the DBW.
We should also take into account the possibility that the DBW could signal a bearish reversal even though the trend before it can also be positive before the descending broadening wedge forms (according to the graph below).
The third chart’s above-mentioned shape, however, is not flawless, and the trader may consider it to be a failure. After the breakout, the price movement was constrained to 5%. When a stock price encounters overhead resistance, it should typically move in the opposite direction.
The Descending Broadening Wedge: What Does It Tell Traders?
The finest trading approach is price action trading. However, screen time is the only way to learn price action. Price action refers to how a price responds to specific levels or circumstances, such as chart patterns.
Due to the abundance of erroneous signals and trade ideas on the currency chart, descending broadening wedge patterns can also be mastered using the price action technique. By selecting the profitable trades from the crowd, you can also make money. And you may only filter when you have prior trading experience with this chart pattern.
Let me demonstrate. It is known that institutional traders always take advantage of individual traders’ stop losses. They will purchase when you sell a currency or asset, and they will dispose of it when you purchase it.
It follows that the price will make a significant decision when it makes lower lows and every wave after that is bigger than the wave before it. But they would get rid of the retail traders before making a choice. For instance, the final wave of a descending broadening wedge pattern will be larger than the others.
due to the market’s elimination of retail traders through significant price movements in the opposite direction. Additionally, due to a series of lower lows, the price is already oversold. A bullish trend reversal will now take place.
How Should I Trade the Descending Broadening Wedge?
A trading strategy includes tactics for risk management as well as entry, stop loss, and take profit levels.
I’ll walk you through a straightforward trading strategy for this chart pattern. To boost your chances of succeeding, you can combine this method with additional technical analysis.
- Create two trendlines that intersect the peaks and troughs of waves. Within the wedge pattern, there must be a minimum of three waves.
- Watch for a large candlestick to break through the top trendline.
- There are two possibilities following the breakthrough. To acquire a high-risk/high-reward trade scenario, you can either execute a buy trade right after the breakout or wait for the market to retrace following a breakthrough. Although the latter option is a little more conservative, it is a great choice to make.
- Put your stop-loss order below the last lower low the price wave made.
- The take profit level should be adjusted to the descending broadening wedge pattern’s initial point.
This straightforward trading method uses this chart pattern. However, you can also include additional confluences, such as important levels or supply and demand indicators.
Examples of Descending Broadening Wedge Chart Pattern Trading
Using a 2-hour chart of Bitcoin/USDT as an example According to the chart, there was a false breakout from the pattern, necessitating the creation of a new resistance line. With a stop loss at the candle’s low, an entry might be made on the retest of the second upper line.
Two possible profit targets are outlined. The pattern’s highest high serves as the first objective. After the pattern, the second is the closest resistance. After the breach of objective 1, you could increase your stop loss to safeguard open profit. then continue along the trend to target 2.
Another illustration is the entry following consolidation on the 3-hour chart of Bitcoin/USDT. Your entrance would be signaled by the breakout candle at the zone.
Additionally, put a stop there beneath the candles. On the other hand, the pattern’s price objective serves as the target. Numerous candles provided a price reversal hint. These candles include bearish engulfing and the northern doji.
Conclusion
Two trend lines that are dropping and diverging combine to form this pattern. Price moves repeatedly between the higher resistance and lower support trend lines as the trading range widens during the downturn in price, forming a descending expanding wedge. To be regarded as a valid pattern, price must contact each line two or three times. This pattern resembles the downward and rightward pointing megaphone.
As it develops, a descending broadening wedge is viewed as a bullish pattern, but it is not confirmed as a buy signal until the pattern starts to produce short-term higher lows and higher highs, the upper resistance trend line is broken, and the price starts to move upward and above the upper trend line. Trading volumes become most significant as the descending expanding wedge pattern develops and breaks out above the upper trend line; this should occur on rising volume, indicating that the chart is beginning to enter an accumulation cycle.