April 1, 2024

Breakout or Breakdown: Explaining the Rising Wedge Pattern in Crypto Trading

dYdX

When a cryptocurrency's price consistently hits higher highs, falling for the fear of missing out (FOMO) is common for traders. It's tempting to rush into the hottest trade, but not all crypto rallies are as they appear, and there's no knowing when a recent rocket ship ride is running out of fuel. 

However, crypto traders use a few technical indicators to evaluate upswings and distinguish between genuine and fake price pumps. For example, the rising wedge pattern is a well-known warning signal suggesting there's more bearish than bullish sentiment in a sudden upsurge.

In this guide, we’ll discuss the meaning of a rising wedge pattern, what it looks like on crypto charts, and how traders can use it to protect their portfolios.

What is a rising wedge in crypto?

A rising wedge is a technical chart pattern that looks like a narrowing, upward-sloping price channel, and it often signals a downward (aka bearish) trend reversal. While this pattern exists for other tradable assets (e.g., the rising wedge stock pattern for equities), the crypto rising wedge focuses exclusively on the prices of digital assets like Bitcoin (BTC) and Ethereum (ETH)

When a rising wedge pattern starts, a cryptocurrency repeatedly reaches higher prices and bounces off higher lows before reaching an apex point. Traders draw a resistance line at the top and a support line at the bottom of a cryptocurrency's candlestick chart to visualize the rising wedge pattern and predict when it's nearing its end. Generally, they expect a cryptocurrency's price to slip below the support line after reaching a rising wedge pattern's peak.

Key characteristics of an ascending wedge 

On the surface, an ascending wedge pattern resembles an upward (aka bullish) price trend. A cryptocurrency’s market price in an ascending wedge constantly hits higher levels and never falls below prior price lows before bouncing back. Although a cryptocurrency's price keeps posting higher values, the support line tends to rise steeper than the top resistance line, giving this pattern its signature "ascending" shape.    

Another hallmark feature of ascending wedges is they tend to correspond with a decline in average trading activity (aka volume). Traders look at the volume bar graphs at the bottom of a cryptocurrency's price chart and compare these levels with the current price action and historical averages. If volumes appear muted versus prior times in a cryptocurrency's price history, there's a good chance a recent uptrend qualifies as a rising wedge. 

Is the ascending wedge bullish or bearish?

The ascending wedge pattern is one of the most deceptive images in technical crypto trading. Although it appears a cryptocurrency has strong bullish momentum in an ascending wedge channel, this pattern traditionally serves as a major warning signal and a bearish trend reversal indicator. 

Some crypto traders consider ascending wedges "bull traps" since they trick bullish traders into buying a cryptocurrency in an uptrend, only to drown later in a dramatic price plunge. The divergence between lower-than-average volume and steadily climbing prices shows there isn't much demand propping up a cryptocurrency's recent rise, making it more likely for moderate selling pressure to crush a cryptocurrency's price. 

Is a rising wedge pattern the same as a rising flag pattern? 

Rising wedges and bull flags look and sound similar, but they're associated with different price dynamics in the cryptocurrency market. 

Unlike a rising wedge, a bull flag is traditionally interpreted as a bullish continuation pattern, meaning traders expect a cryptocurrency’s price to continue rising after this image appears on a chart. 

Instead of rising steadily in a narrowing wedge formation, bull flags start with long, high-volume green candlesticks symbolizing the flagpole. Following this dramatic upsurge, this chart pattern enters a short consolidation phase on lower volume. This consolidation period resembles a rectangular flag and often has a slight downtrend. After bouncing between support and resistance in the narrow flag range a few times, traders expect a bull flag to post a price surge similar to the prior flagpole on higher-than-average volume. Momentum traders typically wait for a cryptocurrency's price to break above resistance in a flag to confirm a trend continuation and enter a long position.

How to use an expanding wedge pattern in crypto trading

Because rising wedge patterns may be bearish indicators, some traders use them as a warning to get out of long positions before a crash, while others prepare to profit from an upcoming price plunge. 

Whether traders prefer shorting digital assets or opening derivatives positions such as puts or short perpetual contracts, they usually enter these positions as the rising wedge reaches its apex and the price falls below the support line with higher-than-average volume. This price breakdown confirms the rising wedge pattern is playing out as expected, and there's a high probability for short positions to gain in the short term. 

To predict the downtrend’s length from a rising wedge pattern, traders often measure the width between the rising wedge's lowest and highest prices and subtract this number from the highest price. There's no guarantee a cryptocurrency's price will fall to these low levels after a rising wedge, but this technique gives traders an idea of where to consider taking profits in short positions. 

Rising wedges are often associated with bearish price momentum, but there's always a chance of false breakouts when using technical indicators. To avoid getting trapped in a losing position, traders research other fundamental and technical indicators to confirm an underlying bearish sentiment in the crypto market. 

Even when traders decide to enter a short position during a rising wedge, they often set automatic stop-loss orders above this pattern's highest price to quickly exit a losing trade. These orders immediately fill at a trader's desired price to cut losses when a rising wedge pattern doesn't resolve in a traditional drawdown.

Find more technical analysis tips on dYdX Academy 

For more tutorials on crypto trading and interpreting technical chart patterns, check out dYdX Academy for free Web3 educational content. From using indicators like the MACD to spotting warning signs of bull and bear traps, dYdX Academy has more beginner-friendly information on professional technical trading techniques. 

Eligible traders can also implement their technical trading skills with a dYdX trading account. On our decentralized derivatives exchange, they enjoy deep liquidity for Bitcoin and altcoin perpetuals, plus up to 20x leverage, advanced order types, and slippage tolerance controls. Find out more about dYdX's latest products and upgrades on our official blog, and eligible traders can start trading on dYdX today.  

Legitimacy and Disclaimer

Crypto-assets can be highly volatile and trading crypto-assets involves risk of loss, particularly when using leverage. Investment into crypto-assets may not be regulated and may not be adequate for retail investors. Do your own research and due diligence before engaging in any activity involving crypto-assets.

dYdX is a decentralised, disintermediated and permissionless protocol, and is not available in the U.S. or to U.S. persons as well as in other restricted jurisdictions. The dYdX Foundation does not operate or participate in the operation of any component of the dYdX Chain’s infrastructure.

The dYdX Foundation’s purpose is to support the current implementation and any future implementations of the dYdX protocol and to foster community-driven growth in the dYdX ecosystem.

The dYdX Chain software is open-source software to be used or implemented by any party in accordance with the applicable license. At no time should the dYdX Chain and/or its software or related components be deemed to be a product or service provided or made available in any way by the dYdX Foundation. Interactions with the dYdX Chain software or any implementation thereof are permissionless and disintermediated, subject to the terms of the applicable licenses and code. Users who interact with the dYdX Chain software (or any implementations thereof) will not be interacting with the dYdX Foundation in any way whatsoever. The dYdX Foundation does not make any representations, warranties or covenants in connection with the dYdX Chain software (or any implementations and/or components thereof), including (without limitation) with regard to their technical properties or performance, as well as their actual or potential usefulness or suitability for any particular purpose, and users agree to rely on the dYdX Chain software (or any implementations and/or components thereof) “AS IS, WHERE IS”.

Nothing in this post should be used or considered as legal, financial, tax, or any other advice, nor as an instruction or invitation to act by anyone.  Users should conduct their own research and due diligence before making any decisions. The dYdX Foundation may alter or update any information in this post in the future at its sole discretion and assumes no obligation to publicly disclose any such change. This post is solely based on the information available to the dYdX Foundation at the time it was published and should only be read and taken into consideration at the time it was published and on the basis of the circumstances that surrounded it. The dYdX Foundation makes no guarantees of future performance and is under no obligation to undertake any of the activities contemplated herein.

dYdX is a decentralised, disintermediated and permissionless protocol, and is not available in the U.S. or to U.S. persons as well as in other restricted jurisdictions. The dYdX Foundation does not operate or participate in the operation of any component of the dYdX Chain's infrastructure.

Nothing in this website should be used or considered as legal, financial, tax, or any other advice, nor as an instruction or invitation to act in any way by anyone. You should perform your own research and due diligence before engaging in any activity involving crypto-assets due to high volatility and risks of loss.

Depositing into the MegaVault carries risks. Do your own research and make sure to understand the risks before depositing funds. MegaVault returns are not guaranteed and may fluctuate over time depending on multiple factors. MegaVault returns may be negative and you may lose your entire investment.

The dYdX Foundation does not operate or has control over the MegaVault and has not been involved in the development, deployment and operation of  any component of the dYdX Unlimited software (including the MegaVault).

Crypto-assets can be highly volatile and trading crypto-assets involves risk of loss, particularly when using leverage. Investment into crypto-assets may not be regulated and may not be adequate for retail investors. Do your own research and due diligence before engaging in any activity involving crypto-assets.

Leaving site