Technical Analysis: Ascending Wedges
09 Apr 2021
In this article, we will be looking at the ascending wedge formation. Ascending wedge formations (AWs) are commonly found within cryptocurrencies, although they are typically considered bearish formations.
Below we can see an example of an AW.
Pre - trend
AWs can have both a positive and negative pre-trend, although the end result of a negative breakout is just as likely with both pre-trends. The pre-trend is shown with the red lines in the picture below.
With the positive pre-trend, an AW is typically seen as a reversal pattern. With the negative pre-trend, an AW is seen as a continuation pattern.
Movement within the AW
AWs typically see an (A), (B), (C), (D), (E) move consisting of five waves. On the fifth wave, a break below the descending support or a break above the ascending resistance will occur. The breakout is typically a negative break as demonstrated below.
Negative breakout targets / profit taking levels
The first target for the negative breakout of the AW is the 0.5 Fib level which is drawn with the following origin points:
Origin point one - (D) the peak price of the AW
Origin point two - (A) the origin point of the ascending support / triangle
Once the 0.5 level has been hit, the AW may potentially revisit the (B) level, forming a head and shoulders, further verifying the AW formation.
A degree of profit taking is wise at this point, especially if the market sentiment as a whole is bullish when this formation has occurred.
Profit taking / support level one
The second target is the 1 level or (A). Once this level has been hit chart re-evaluation will be required.
If the head and shoulders formation has taken place alongside the AW, this is the final target. Movements below the (A) level without some form of automatic retracement are unlikely.
Once the (A) level has been reached, the profit taking % is typically at 100% with the short completely closed.
Profit taking / support level two
When a positive breakout occurs the cryptocurrency will break above the ascending resistance. From here there will likely be a retest of the ascending resistance.
Positive breakout target
When a positive breakout of an AW occurs, this typically signifies major interest in a cryptocurrency, therefore the target should be somewhat ambitious.
Using the same Fibonacci retracement, the target should be the 1.618 level.
The positive breakout situation is demonstrated below.
AW positive breakout
In conclusion, the AW is a powerful formation commonly used by cryptocurrency traders. The formation should be at the forefront of your TA drawing arsenal.
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