Trade the 1st Pullback after a Wedge – the W1P!

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:

  1. Strong reversal bar (with an average size), that isn’t overlapped by prior bars or swing points
  2. Strong close entry bar (a strong open/close trend bar), preferably larger than the reversal bar
  3. One push move off the Wedge signal bar, that takes out a prior swing point
  4. The 1st pullback after the Wedge (W1P) doesn’t take out the entry bar by more than a couple of ticks
  5. Test of high/low bull/bear close of the prior trend during the W1P
  6. 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.
https://ninetrans.blogspot.com/2011/03/wedges-without-overshoots-reversal-bars.html

Well formed wedges with strong overshoots clear bars and strong reversal bars almost never fail.
https://ninetrans.blogspot.com/2011/04/failed-wedges.html

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.
https://ninetrans.blogspot.com/2011/02/wedge-reversals-and-w1p.html

https://ninetrans.blogspot.com/search?q=wedge
https://ninetrans.blogspot.com/search?q=w1p


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.


Stop Placement

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:

Reversals

 

3 Replies to “Trade the 1st Pullback after a Wedge – the W1P!”

  1. Hello Dandan,
    Glad you like the post.
    Check out the two bullish wedges on the last day on that chart.
    Yes, a 2nd overshoot is a 4th push, or a variant like the 2nd example.
    best regards
    Thomas

  2. Hi Thomas,

    Awesome post. I really love this post and the carefully curated posts of Cad.
    The only thing I didn’t understand (and didn’t see explained (I think)) was this segment:

    “and in particular a second overshoot. ”

    What do you mean by second overshoot? Do you mean a 3-legged wedge with the last one overshooting AND then a 4th leg overshooting a (newly) drawn trend channel line using any two of the prior three legs?

    Sorry, a bit confused. 🙂

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