A Wedge reversal (three or four pushes each with a new extreme) forming at the top or bottom of a trend is probably the most successful setup for a swing trade.
The most crucial prerequisite for a Wedge reversal is a clear trend channel line overshoot and in particular a second overshoot. Other strengtheners / requirements are:
- Strong reversal bar (with an average size), that isn’t overlapped by prior bars or swing points
- Strong close entry bar (a strong open/close trend bar), preferably larger than the reversal bar
- One push move off the Wedge signal bar, that takes out a prior swing point
- The 1st pullback after the Wedge (W1P) doesn’t take out the entry bar by more than a couple of ticks
- Test of high/low bull/bear close of the prior trend during the W1P
- Breakout test of the entry price of the reversal bar during the W1P
A pullback after a Wedge reversal gives you a measure of the market’s strength – what bulls and bears “have” and everyone in the market gets that same information, which is why I prefer to enter on pullbacks. When everyone in the market reads the exact same thing, price will take off.
This is why a 1st pullback after a Wedge (W1P) is extremely suitable for swing trading.
Here are a couple of pieces from my favorite trading blog “Nine Transitions”.
Unfortunately Cad (the owner) stopped blogging a couple of years ago.
The ideal wedge has a clear overshoot on the third or fourth push and ends up in a clear reversal bar. The reversal bar’s entry bar is a strong trend bar. A weak pullback gives a W1P that gives you an entry into the now reversed trend.
Well formed wedges with strong overshoots clear bars and strong reversal bars almost never fail.
The reason I take W1P almost every time and Wedges only when the signal bars are very well formed is simply that I have a lot more information about the strength and sustainability of the reversal.
Here are a several examples from the last couple of weeks. The cyan colored dot marks the Wedge. I also marked up strengtheners for the Wedges and the W1Ps, like Double Bottoms/Tops, failed Breakouts, Breakout Tests etc.
Either use a bar stop on the W1P or for a higher probability trade (but lower reward/risk) use a stop beyond the Wedge reversal signal.
Read more about reversals here: