How to trade descending brodening wedge chart pattern

How to Trade Descending Broadening Wedge Chart Pattern

Good knowledge of how to trade the descending broadening wedge chart pattern will do a lot for you.

First off, the knowledge will enable you spot this pattern easily on crypto, forex, and stock charts.

And that means an improved trading experience.

There’s also the advantage of not mistaking other patterns for it since it’s similar to a wide range.

You won’t force patterns to align with your trendline but have a laid-back approach when drawing them.

And you know why that is?

One more reliable chart pattern has been added to your trading arsenal.

Yes! I’m not mincing words when I say this bullish megaphone pattern is reliable.

It has a 72% to 80% chance of breaking upwards thereby leading to a reversal. And that’s still a high success rate just like the ascending broadening wedge.

So you’ll agree it’s worth learning how to trade it in the first place.

In this guide, you’ll find well-detailed steps on how to trade the descending broadening wedge pattern.

Go through each section carefully and practice at the end.

What is a Descending Broadening Wedge Pattern?

The descending broadening wedge is a chart pattern whose support and resistance lines widen as they descend.

Envision it and you’ll also come to understand why the pattern has a resemblance to a megaphone.

The start or apex of the pattern has a narrow width while its end has a wide width.

What this causes is a slight divergence of both lines.

So, what does a descending broadening wedge indicate?

This pattern indicates falling prices and heightened selling pressure.

Buyers are paying less for the crypto asset while sellers are showing more aggression. Bears take profit even at lower prices.

Therefore, this pattern has a lower high and lower low formation.

Read Also: Higher High Lower Low Pattern Trading Strategy

But then there’s light at the end of the tunnel since it’s a reversal pattern.

Price would often have an upward breakout after prolonged consolidation.

The breakout hints intense buying pressure has stepped into the market despite the gradual fall in price.

It’s worth noting that the RSI or MACD might hint at a potential breakout via a bullish divergence.

These indicators reveal buying volume has stepped into the market even though it’s not reflected in price.

On the other hand, you’ll know an upward breakout might occur if volume dries up gradually during the pattern’s formation.

A downward breakout can be expected if volume increases within the pattern since it shows bearish momentum isn’t dwindling drastically.

Is a Descending Broadening Wedge Bullish?

If you’re still wondering, ‘is the descending broadening pattern bullish or bearish?’

The answer is, that this is a bullish formation.

That’s because price has a higher chance of reversing a trend than continuing it.

In a downtrend, we could see prices rally after a while.

This upward break may also occur in an uptrend even though there are rare cases of finding the pattern in bull markets.

But if you do spot it in uptrends, it means the falling megaphone pattern has served as a continuation pattern.

How to Trade the Descending Broadening Wedge Pattern

The descending broadening wedge rules are what you need to trade this pattern correctly.

These rules are defined steps towards choosing a strategy that makes you the most money.

That being said, here’s how to trade the descending broadening wedge pattern.

  • Spot the trend.
  • Map out the pattern.
  • Choose a trading strategy.
  • Manage risks.

1. Spot the Trend:

A descending broadening wedge pattern is best spotted in a downtrend.

It’ll occur more frequently in falling trends than rising ones.

As such, you’re better off looking out for them in downtrends.

Note that the timeframe you use determines what the current trend is.

For instance, it might be a short-term downtrend on timeframes between M3 and M15. Or a medium-term trend between M30 and H1.

Therefore, you’ll have to define the trend based on your trading strategy.

Are you a scalper, swing trader, or investor?

Alternatively, you could resort to higher timeframes such as D1 and WK1.

This is because the major trend has been defined. And other trends you may find within them will either be an impulse or corrective moves of the main trend.

The Bitcoin/USDT 4-hour chart below is of a downtrend. It has lower highs and lower lows.

How to spot the trend in broadening wedge pattern

Proceed to step two once you know the trend.

2. Map out the Pattern:

A quick way to spot the falling megaphone pattern is to look out for price action that broadens as it grows.

Also, check for a rounding bottom or inverse head and shoulders pattern.

Check the start of the pattern into a range and how price reacts to the level.

You’ll be looking for lower highs and lower lows but one that tilts downwards as it diverges.

So note these key elements.

  • Lower highs and lower lows into a zone.
  • Small apex and wide end.
  • Steeper resistance line than support line.

Trading the pattern live requires you spot it early before price leaves the zone.

Hence, pay attention to the first two highs and lows in the formation.

Their formation would often validate that its the pattern.

Accordingly, extend your trendline to the lows and highs of the pattern.

3. Choose a Trading Strategy:

Three trading strategies are available for the taking depending on your risk appetite.

You could choose to long, short, or trade both ways.

And the same goes for either trading the price action within the pattern, waiting for a breach of the resistance line, or both.

The choice is yours.

But note that it’s better to short while trading the descending broadening wedge.

It’s also ideal to wait for a breach and retest of the wedge’s trendline as support before making entires.

With that in mind, here’s a brief overview of each strategy.

Strategy 1: Short from Resistance to Support

A short on Bitcoin, Ethereum, Binance Coin, etc. can be taken from resistance to the wedge’s support.

You’ll have to ensure price has made at least two highs and lows. This confirms the pattern you’ve spotted is a broadening wedge.

And once you do, you can short on the rally to the next high.

Bearish candlesticks like shooting star, hanging man, bearish engulfing, and dark cloud cover will give you a confirmation to go short.

You may also spot an evening star.

Patterns such as double tops, rounding tops, head & shoulders, etc. can also hint you take the trade.

Take a closer look at the chart below for better insight.

Once you’ve taken a position, your target is the next low hinted by the wedge’s support line.

Here’s a Bitcoin/USDT 4-hour chart showing resistance levels to make short entries. You can also place a stop at the highs of the candle.

Strategy 2: Long from Support to Resistance

Longing from support and taking profit at resistance is a risky way to trade.

The reason lies in the bearish momentum which could propel prices even lower. There could be false breakouts.

With proper risk management in place, you can still long from support and take profit at resistance.

Here you’ll be on the lookout for bullish candlestick patterns that’ll confirm your entry.

These candles include a hammer, inverted hammer, bullish engulfing, piercing pattern, etc.

Patterns within this formation would also prove useful. They include the rounding bottom, double bottom, and an inverse head & shoulders pattern.

What you’re trying to do here is get a confluence of signals to go long or take the trade.

Strategy 3: Trade the Breakout

A breakout will occur at some point from the wedge.

There’s a high chance it’ll be an upward break but you’ll have to prepare in case the market does otherwise. And that is breakout downwards.

This breakout may be hinted if price makes a partial decline to the support line. And that could yield a double bottom formation.

Read Also: How to Trade 3 Bar Play Candlestick Pattern

To trade the breakout, wait for a candle close above the pattern’s resistance line.

You may also want to wait until there is a retest of the level before making your entry.

Waiting for a restest could lead to missed entries but that saves you from entering false breakouts.

On the other hand, a breakout where the moving average is also acting as support to the candle hints a continued move in the direction of the break.

Your profit target would be the highest peak in the falling broadening wedge.

4. Manage Risks:

Risks need to be managed properly irrespective of the trading strategy you choose.

It begins with using a stop loss.

This stop should be placed above the resistance line for shorts. And below support line for longs.

Falling broadening wedge pattern trading strategy

Breakout traders can have stops below the previous high or below the pattern’s resistance.

It’s also important that your stop is not placed too close to your entry price.

That’ll give your trades good room before price advances or declines to your target.

Descending Broadening Wedge Pattern Target

The descending broadening wedge pattern price target can be measured in two ways.

These are:

  • Transposing the height of the entire pattern.
  • Checking out minor support and resistance levels within the pattern.

What do these two methods entail? Check the tips below.

1. Transpose the Height of the Entire Pattern:

This price target is gotten by measuring from the start of the pattern.

That is, the highest high that began the formation.

The height is then transposed on the pattern’s resistance.

Price may travel as far as the highs before stalling or continuing in the same direction.

The Bitcoin/USDT 30-minute chart below shows how the top crypto could ascend to the $48,000 zone upon breakout.

Descending Broadening Wedge price objective

2. Check Out Minor Support and Resistance Levels Within the Pattern

Price is expected to travel at least the same height as the pattern.

But that does not mean its move will not be obstructed every now and then.

The minor support and resistance levels within the pattern will stall its movement if not halt it completely.

That’s why you could use these levels for exits.

Here’s an example of levels that could serve as entry and exit points.

Stops can also be placed as the price advances higher.

These stops will ensure you don’t run into profit and then losses.

How Do You Measure a Descending Broadening Wedge?

A descending broadening wedge has a measure rule.

The pattern’s measurement depends on the direction of the breakout.

For an upward breakout, the highest high of the pattern becomes your profit target.

A downward breakout requires that you determine the values of the highest high (A) and lowest low (B).

You can then find the difference between A and B. This result gives you the height (C).

C can then be multiplied by the ‘percentage that hits price target’ before a final subtraction from B.

The answer to this computation gives you your price target.

But what exactly is the ‘percentage that hits price target?’

It’s the number of trades out of a given set that advances to the price target after a breakout.

This percentage is given as 83% in downward breakouts and 32% in upward breakouts.

Depending on the direction of break, you can choose one of these values to multiply with C. And then subtract their result from B.

Descending Broadening Wedge Stats

Here are some statistics about the descending broadening wedge.

In a downtrend:

  • Price breaks upwards 80% of the time.
  • The trend could reverse 75% of the time.
  • The price target is hit after a breach of resistance 60% of the time.
  • 21% of the time there could be a retest of the wedge’s resistance as support.
  • Partial declines may work 79% of the time.
  • Partial rises may work 36% of the time.

In an uptrend:

  • There’s a 79% chance for price to break upwards.
  • 81% chance that price target is hit after a breach of resistance.
  • 40% chance there could be a retest of the wedge’s support as resistance.

Descending Broadening Wedge Examples

Here are some descending broadening wedge examples.

They’ll help you understand different ways to monetize this pattern and even develop other trading strategies for them.

Example 1:

This example shows a Bitcoin/USDT 2-hour chart.

The chart indicates a false breakout from the pattern which required drawing a new resistance line.

An entry could be made on the retest of the second upper line and a stop loss at the low of the candle.

There’s an outline of two possible profit targets.

The first target is the highest high of the pattern. The second is the nearest resistance after the pattern.

You could raise your stop loss after the breach of target 1 to protect open profit. And then ride the trend to target 2.

Descending broadening wedge examples

Example 2:

This Bitcoin/USDT 3-hour chart shows an entry after consolidation. The breakout candle at the zone would trigger your entry.

Also, place a stop below the candles in that region.

The target, on the other hand, is the price objective of the pattern. Several candles hinted of price’s reversal.

Some of these candles are the northern doji and bearish engulfing.

Example 3:

The Bitcoin/USDT 2-hour chart below shows a partial decline to the wedge’s support line.

This was the first clue that bullish sentiment is increasing.

While an entry after the breakout would pose a poor risk to reward, you would’ve aimed for the next resistance level.

Frequently Asked Questions

Here are answers to some frequently asked questions.

The section cover concerns or queries you may have regarding this formation.

1. Who Discovered the Broadening Wedge Pattern?

Tom Bulkowski is one of the earliest writers about chart patterns.

In his book, Encyclopedia of Chart Patterns, the author expatiates on the descending broadening wedge.

Japanese Candlestick Charting Techniques is another trading book that talks about patterns.

Check it out!.

2. Differences Between Descending Broadening Wedge and Falling Wedge:

There’s a visible difference between the descending broadening wedge and falling wedge pattern.

They’re both wedges but the former grows larger at its ends while the latter grows smaller at its ends.

It’s like they’re doing the opposite of each other.

Create a mirror image of a broadening wedge and you’ll agree it looks like a falling wedge.

Differences between descending broadening wedge and falling wedge

3. Differences Between Descending Broadening Wedge and Falling Channel

A descending broadening wedge does not have an equal distance between its highs and lows.

The reason lies in the faster downward movement of the resistance line than the support line.

On the contrary, a falling channel descends at the same pace on both its channel line and trendline.

Thus, price may travel the same distance from its lows to highs and vice versa.

Differences between descending broadening wedge and falling channel

4. Differences Between Descending Broadening Wedge and Descending Triangle:

A descending broadening wedge has dynamic support and resistance lines.

Whereas a descending triangle has static support and dynamic resistance.

Another notable difference between both patterns is their breakout direction.

A falling broadening wedge often breaks upwards while a descending triangle breaks downwards.

This means the first is a bullish pattern while the second is a bearish pattern.

Both patterns can reverse or continue a trend in rare cases.

Differences between descending broadening wedge and descending triangle

Final Words

Every technical analyst needs to know how to trade the descending broadening wedge.

And if you pay close attention to formations, here’s one more pattern to master.

It might become a part of your daily trading strategy given how often they spring up on charts.

The best part is you can trade this formation like any other out there. The main job lies in spotting it as the correct pattern.

Once you do, you’ll be able to take out every drop of profit it offers.

Now if you do encounter problems while trading this pattern, do well to reach out via the comment section.

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