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Guide to Understand Ascending Broadening Wedge Pattern

10 Oct 2023

Introduction:

Intraday and swing traders rely heavily on technical analysis to predict short-term price movements in the stock markets. What helps them determine exact entry and exit trading points are various chart patterns and technical indicators. They reflect market volatility, the ongoing trend, the possibility of a trend reversal, breakouts, etc.

Among several chart patterns and technical indicators, the ascending broadening wedge pattern can provide crucial insights into the market trends. Also known as the expanding wedge pattern, it offers valuable clues about potential trend reversals and continuations.

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This article explores the ascending broadening wedge pattern, including its definition, characteristics, significance, and how to use it to make informed trading decisions.

What is an ascending broadening wedge pattern?

The ascending broadening wedge pattern occurs in price charts, particularly for stocks, commodities, and forex trades. It is characterized by two diverging trendlines, with the upper trendline sloping upwards and the lower trendline sloping downwards. This pattern resembles a megaphone or an expanding triangle, with one of the converging trendlines indicating higher highs and the other reflecting lower lows.

Unlike symmetrical wedges with converging trendlines, the ascending broadening wedge pattern had diverging trendlines. They are wider at the top than at the bottom, giving the pattern a broadening appearance. The formation of the ascending broadening wedge pattern indicates increasing volatility in the market and the potential trend reversal or price breakouts.

Below are the key characteristics of the ascending broadening wedge pattern:

Diverging trendlines

As mentioned, the defining feature of the ascending broadening wedge pattern is the diverging trendlines, with the upper trendline sloping upwards and the lower trendline sloping downwards. The upper trendline can be drawn by connecting higher highs during a price swing and the lower trendline can be drawn by connecting the lower lows during a price swing.

Higher volatility

The expanding price range and diverging trendlines indicate higher volatility in the underlying asset. As a trader, you must be prepared for increased price swings if trading within the ascending, broadening wedge pattern.

Expanding range

As the ascending broadening wedge pattern unfolds, the range between the high and low points during a trading window widens. This expansion in price points reflects growing volatility in the market.

Decreasing volume

As we move up during the ascending broadening wedge pattern, the volatility in the stock slowly dies down as the volume tends to decrease. The decline in the volume indicates that the market participants, such as traders, need to be more informed.

Time frames

The ascending broadening wedge pattern can develop over various time frames, from intraday to weekly to monthly. This pattern can be useful for traders with different trading horizons.

Bullish or bearish markets

The ascending broadening wedge pattern can develop during both bullish and bearish market conditions. This pattern is formed during bullish markets with two diverging bearish lines, and vice versa.

Interpreting the ascending broadening wedge pattern

You can read an ascending broadening wedge pattern to come to the following conclusions:

  • Trend reversal

The ascending broadening wedge pattern can indicate the forthcoming trend reversal. If this pattern occurs during a downtrend or bearish market conditions, and the price of the stock moves above the upper trendline, it indicates a potential bullish reversal. You can interpret such an occurrence as an opportunity to enter long positions.

On the other hand, if the ascending broadening wedge pattern occurs during an uptrend or bullish market conditions, and the price of the stock moves below the lower trendline, it indicates a potential bearish reversal. You can interpret such an occurrence as an opportunity to exit your long position or enter new short positions.

  • Trend continuation

In some cases, the ascending broadening wedge pattern can also indicate the continuation of the ongoing trend. If this pattern occurs during a bullish or bearish trend, and the price of the stock refuses to break the upper or lower trendline, it indicates that the existing market trend is likely to continue. You can use this occurrence to adjust your trading strategies accordingly.

To conclude

The ascending broadening wedge pattern can be a valuable tool in a trader’s bag. You can interpret this pattern to determine trend reversals or continuations and adjust your trading strategies accordingly. However, like any other technical pattern, this pattern is not 100% accurate, and hence, you must confirm your trading points with several other technical indicators.

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