The broadening Wedge

One of my favorite price patterns for forex is the broadening wedge, simply because they happen so often and can signify so much when found in various contexts. When occurring after a trend is well developed, they can imply that things are about to cool off. You can find these, pennants, flags, reverse pennants etc., within a trend in order to assess future movement and potentially weasel your way into a trade.

But what makes these so special is that when found in a well developed trend, they break out to the upside and you’ve got a clearance thrust underway (in which the underlying trend becomes more parabolic). I’ve been writing a lot about trend following techniques these days and thought this deserved a place in the pile.

The figure below shows cable vs the dollar in today’s pattern. Outcome of this?

1. Price consolidates beyond the breaking point (~1.6226) and makes one final (appx 2X the range on the current break to peak) push to the target (green line) before collapsing back below the upper trendline.
2. Price makes an immediate retreat well back into the range (red line, target)

I shoot for a conservative approach in terms of trading something like this. If I’m not long into the break, then wait it out and look for reversal structures circa the high target or a pickup (short term long) circa the low (red line).

We are now in the 4 day block around the end of the month (2 to close, 2 to open), where volatility generally picks up. Just some quick notes to wrap up the week.