Useful Knowledge

Wedge formations 

The wedge formation resembles a triangle and depicts a price development containing two steeply converging trend lines1. Figure "falling wedge" shows an ideal example of a wedge in which the price fluctuations decline until eventually there is a breakout out of the wedge formation. The wedge ideally forms in a period of between one and three months. It is slanted in the direction of an established trend and is generally interpreted as a trend-continuation formation. A falling wedge, as depicted in figure 1, would accordingly be bullish, while a rising wedge, as shown in figure 2, would be bearish. More rarely, the wedge occurs at a peak or trough to signal a trend reversal. 

Falling wedge

Rising wedge

Trend channels

A trend channel describes the often-observed phenomenon in which prices within a trend continually oscillate between two parallel lines1. As long as the trend lines that form the trend channel are not broken, this means it makes sense to speculate that the pattern will continue. Figure 3 shows a rising trend channel. When prices reach the lower trend line, it can be speculated that the trend channel will remain intact and that prices will trend upwards again. On the other hand, when the upper (dotted) trend channel line is reached, it can be speculated that prices will fall back slightly. Conservative traders will always speculate in the direction of the primary trend. Speculation against the predominant trend would be an approach taken by traders with a more aggressive trading style2. Figure "rising trend channel" illustrates a falling trend channel. When the upper resistance line is reached, traders could speculate on falling prices as described above. 

Rising trend channel

Falling trend channel

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1Murphy (2002, S. 93ff.).

2Murphy (2002, S. 95).

 

Literatur: Murphy John J. (2001), „Technische Analyse der Finanzmärkte.“ 2. Auflage: (München: Finanzbuch Verlag).

 

The formations described here are outlined only in brief. No conclusions are drawn as to their accuracy or correctness. They do not constitute a recommendation of Deutsche Bank AG.