Bearish Wedge: Continuation or Reversal Pattern

Bearish Wedge: Continuation or Reversal Pattern

In the context of high volatility and external risks, Russian traders particularly value chart patterns that enable them to predict the future development of trends. One such tool is the bearish wedge—a pattern that forms after a downward movement, signaling a potential continuation or conclusion of the trend. A deep understanding of this model, its structure, formation conditions, psychological underpinnings, and confirming signals allows for the development of effective trading strategies across various markets.

1. Definition and Variations of the Pattern

1.1 Structure of the Bearish Wedge

A bearish wedge is a narrowing channel formed by two converging lines of support and resistance. During the formation of the wedge, the price moves downward, with both highs and lows declining, creating a gradually narrowing range. This reflects a slowdown in the downward trend and the accumulation of momentum for future movement.

1.2 Types of Wedges

There are two main types of bearish wedges:

• Ascending Wedge: The support and resistance lines have an upward slope, creating a narrowing effect from above.
• Symmetrical Wedge: The lines converge symmetrically, resembling a triangle.

1.3 Distinction from Flags and Triangles

A bearish flag is a horizontal consolidation following a sharp decline; in a bearish wedge, the boundaries narrow, indicating a gradual decrease in volatility. A descending triangle has a horizontal base, while the wedge narrows from both sides. These distinctions are critical for accurate identification and strategy selection.

2. Conditions for Formation and Verification

2.1 Preceding Downtrend

For a reliable signal, the wedge must form after an extended and clear downward movement. A minimum of 5-7 bars on the H4-D1 charts provides adequate context for the pattern's development. In the absence of a trend, the figure often turns into a simple range.

2.2 Touches of Boundaries

Verification requires at least three touches on each line. Ideally, the rolling touches reach 4-6 times. This indicates the strength of support and resistance within the wedge.

2.3 Angle of Inclination and Duration

The angle of the lines should be within 20-45°. Steeper or flatter wedges lose informational value. The ideal duration for formation is 5-25 days on the D1 chart or 20-60 bars on the H4 chart.

2.4 Volume Diminution

Trading volumes within the wedge typically decrease, reflecting reduced selling activity. The contrast in volume at the initial and final stages of formation helps assess the strength and readiness of the market for a breakout.

3. Psychology and Volume Confirmation

3.1 Exhaustion of Sellers

The first stage of wedge formation involves active selling. However, as the range narrows, the size of the candlestick bodies decreases, indicating that sellers are exhausting their reserves and taking profits.

3.2 Pressure from Buyers

Close to the narrow end of the wedge, buyers begin to enter the market at lower prices, which is reflected by an increase in volume. Their activity becomes crucial for the subsequent breakout upwards.

3.3 Role of Major Participants

Institutional players use the bearish wedge to accumulate long positions. Accumulation of large orders within the wedge often occurs with reduced volume until the breakout, after which there is a sharp increase in activity.

4. Breakout and Retest Signals

4.1 Upward Breakout

The main signal is a closing bar above the upper boundary of the wedge. The volume should be no less than 130-150% of the average during the formation period.

4.2 Retest of the Line

After the breakout, the price often returns to test the broken trendline as support. A successful retest is a reliable moment to open an additional long position.

4.3 False Breakouts

In the absence of volume and a retest, the breakout may turn out to be false. Statistically, such signals have a less than 40% success rate.

5. Technical Indicators

5.1 RSI

An RSI below 30 prior to the breakout indicates market oversold conditions; the exit of the indicator from this zone during the breakout strengthens the signal.

5.2 MACD

The crossing of the MACD signal lines upwards during or immediately after the breakout indicates a change in momentum and confirms the signal.

5.3 ADX

An ADX level below 20 in the middle of formation reflects trend weakness; an ADX rise above 25 after the breakout confirms a new trend.

5.4 Fibonacci

Applying Fibonacci levels of 38.2%, 50%, and 61.8% to the decline preceding the wedge helps identify potential resistance zones after the breakout.

6. Trading Strategies and Risk Management

6.1 Aggressive Entry

Enter long immediately after the breakout bar closes. Set the stop-loss below the minimum of the last bar of the wedge. The target is the height of the wedge projected upwards.

6.2 Conservative Approach

Enter after retesting the upper boundary of the wedge. Set the stop-loss below the retest point, providing a more reliable defense against false breakouts.

6.3 Target Calculation

The minimum target zone is the height of the wedge from the breakout point. The optimal target is the nearest key resistance level or Fibonacci level.

6.4 Risk Management

A risk-reward ratio of at least 1:2 is recommended. The risk per trade should be 1-2% of the deposit. Utilizing ATR×1.5 for stop-loss calculation enables consideration of current volatility.

7. Timeframes and Practical Cases

7.1 Sberbank Stocks (D1)

In April 2025, a wedge between 260-278 ₽ formed on the daily chart of Sberbank over three weeks. The breakout with +60% volume resulted in a rise to 310 ₽ (+12%).

7.2 RTS Futures (H4)

In May 2024, a wedge between 115,000-120,000 p. formed over 40 bars on the H4 chart. The breakout coincided with the release of key economic indicators and led to an 8% increase.

7.3 Brent (W1)

From June to September 2023, Brent formed a wedge between 75-88 $. The breakout against the backdrop of an OPEC+ decision resulted in a rise to 102 $ (+16%).

8. Comparative Analysis

9. Common Mistakes

• Ignoring volume confirmation.
• Entering before retest.
• Too narrow stop-loss without considering ATR.
• Trading on lower timeframes.
• Neglecting the preceding trend.

10. Conclusion and Recommendations

The bearish wedge is a versatile technical analysis pattern that can serve as both a continuation and reversal figure. Its strength lies in graphic clarity, volume confirmation, and the psychological logic of market participants' behavior. For Russian traders, the wedge is particularly valuable due to its versatility and clarity in conditions of high volatility.

Proper application of the pattern requires stringent verification, filtering of signals by volume and indicators, adaptive risk management, and consideration of the macroeconomic context. Only by adhering to all these conditions does the bearish wedge become a reliable navigator in the world of trading.