How to Trade Wedge Patterns for Consistent Profits
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Message from the Author
I've been involved in trading financial markets since 2003 and actively trading Forex since 2007 and I’m absolutely thrilled to be your coach throughout this course on wedge breakouts.
I've been consistently profitable in the Forex market since 2010 but this wasn't always the case. In fact the first three years were a struggle. I jumped from strategy to strategy, tried every time frame and even bought several expert advisors – I didn't make a dime but I sure did lose a few.
It wasn't until I discovered the power of price action in 2010 that I began to profit consistently. As a matter of fact, within 4 short weeks of learning about strategies like the wedge breakout, I saw my profit curve start to rise, fast!
I want you to think of this course as more of an “execution plan” rather than just educational material. In other words start putting what you learn here to work right away in your demo account. You may need to go through the material a few times to fully understand the strategy, and that's okay, but there's no faster way to learn something new than through practice.
Speaking of practice, you should always practice on a demo account until you’re comfortable and confident enough to move to a live account. Unfortunately there is no set way of knowing exactly when you are ready to make the move to trading real money. However from my own experience I can tell you that you will know when it's time to make the move once your trading becomes effortless. That is, your demo account consistently grows without much effort on your part.
By the end of this execution plan you will have an in-depth understanding of what wedge breakouts are, why they’re so effective, how to identify quality setups and of course how to enter and exit the market for a profit.
DPA Founder and Coach
How to Get the Most Out of This Course
As mentioned previously, I want you to think of this as more of an execution plan by which you can put these practices to use in your own trading. Therefore the best way to digest this course is through a 5-part process.
Study – Read through the entire course from start to finish. This will get your mind engaged and set the stage for the next step. You may need to read through the course two or three times to fully understand each topic.
Plan – Begin writing a draft trading plan for trading wedge patterns. This doesn’t have to be anything formal or even lengthy. Even half a page is better than nothing. If you need some guidance on writing a trading plan, visit this lesson.
Finalize – Compare your trading plan to the course material to see if any changes need to be made. Don't feel it necessary to have it perfect at this point. You don't want to get caught up in analyzing every little detail of your plan; revisions can come later.
Trade – Once satisfied, start looking for wedge patterns on the 4-hour and daily time frames as part of your routine. If you spot one that compliments your trading plan, trade it on a demo account according to the guidelines in this course. Be sure not to deviate from your trading plan. After the trade you will want to review the outcome to analyze what worked well and what didn’t work so well.
Revise - This is where you can begin to perfect your trading plan. Review past trades as well as the content in this course to compare and contrast. Note where changes can be effected and then implement those changes in your plan to be tested the following week.
Like anything in life, practice makes perfect. The more you study this material, analyze your charts and improve your trading plan, the more effective you will become as a price action trader.
Getting Started: The Two "Best" Time Frames
The two time frames we will be focusing on in this course are the:
- 4 hour
Although I occasionally glance at the 1-hour and even the weekly time frame, I do 99% of my trading on the daily and 4-hour charts.
These higher time frames provide a more user-friendly trading environment. They accomplish this by doing the following:
- Act as a natural news filter
- Make it easier to develop a directional bias
- Produce quality setups instead of quantity
- Help you reduce trade frequency (over-trading)
Getting Started: Using a Proper Risk to Reward Ratio
Using a proper risk to reward ratio is a key element to becoming a consistently profitable Forex trader. A proper risk to reward ratio means that you never risk more than half the potential reward.
This means that if your profit target is 200 pips away, your maximum stop loss distance should be 100 pips. It's okay if your reward is greater (300 pip target and 100 pip stop loss) but it can never be less than twice the distance of your stop loss.
We can represent a risk to reward ratio as an R-multiple. So a 200 pip target and 100 pip stop loss becomes a 1:2 risk to reward ratio, or simply 2R. A 250 pip target with a 100 pip stop loss would be represented as 2.5R.
LESSON 1: What is a Breakout?
A breakout occurs when a currency pair breaks through a key level of support or resistance. This can happen at a key horizontal level or trend line support or resistance.
For purposes of this course, we'll only be identifying breakouts that occur via wedge patterns. The same rules apply in that a level which is broken becomes its inverse. For example, a broken resistance level becomes support just as a broken support level becomes resistance.
- The amount of time it took to form the pattern
- The number of touches from support and resistance
The number of times a market has touched a level and the amount of time the level has been of significance plays a major role in how reliable a breakout from that level might be.
As a general rule, a level must have at least 3 touches for any breakout to be considered "tradable".
LESSON 2: Supply and Demand
Supply and demand are the two forces which cause a market to move up and down. They can be easily translated into support and resistance, which can be used to enter and exit trades.
Supply is when there are more units available at higher prices, thus pushing the market lower.
Demand is when there are fewer units available at higher prices, thus pushing the market higher.
We can use the concept of supply and demand to formulate ideas about where a market is likely to reverse. This allows us to identify key horizontal levels in the market as well as channels and wedges.
LESSON 3: What is a Wedge?
Wedges, also called triangles, are consolidation patterns which typically occur after an extended move up or down. They are also considered continuation patterns in that the market generally breaks in the direction of the preceding trend.
Although typically a continuation pattern, it's important to wait until the market closes outside of support or resistance on the 4 hour or daily time frame before considering an entry.
You need three or more touches off of support or resistance before the breakout in order for the pattern to become "tradable".
LESSON 4: Identifying Quality Wedge Patterns
The best way to identify wedge patterns in the Forex market is to look for areas of consolidation where the market is making higher lows and lower highs. Again, you need at least 3 touches on each side for it to become a tradable pattern.
The levels should be placed at the extremes of each candle while attempting to get the most touches possible. This is the most conservative approach and will help you avoid false breakouts.
LESSON 5: How to Enter a Wedge Breakout
In order to trade a wedge breakout, you need to wait for the market to break support or resistance. This means that the market must close outside of support or resistance on the 4 hour or daily time frame, depending on which time frame you're using to identify the pattern.There are two main ways to enter a wedge break:
- Enter on a 4 hour or daily close
- Enter on a retest of the broken level
Just know that there's no guarantee that the market will retest the broken level, so there is a chance of missing the trade if you go with this approach.
LESSON 6: Where to Place Your Stop Loss
A stop loss will protect you if the market moves against your position. You want to be sure to place your stop loss at a level where if hit, you no longer want to be in the trade. In other words, if the market reaches your stop loss the trade setup has been invalidated.
1) Above or below the bar which broke the level
This is the more aggressive approach. It's best used when the bar is much larger than any of the surrounding bars.
2) Above or below the last swing high or low respectively
This is the more conservative approach and is recommended in most situations.
LESSON 7: Know When to Take Profit
The first profit target for any wedge breakout should be the first swing high (for breakouts to the upside) or swing low (for breaks to the downside) that started the pattern.
The great thing about this approach is that you will always have a clear target.
The second target should be a price action level you identify in the market. There is often an obvious level at which you can identify a second profit target.
It's important at this stage to evaluate your risk to reward ratio to ensure it's at least a 2R. This should be done before entering the trade.
See the next lesson on measured objectives for an additional method of identifying a profit target.
LESSON 8: Utilizing a Measured Objective
Using a measured objective provides you with a way of identifying a profit target by using the first move of a wedge pattern.
The measured objective is found by taking the distance in pips of the very first move of a wedge pattern, and then projecting it to a future point in the market once the pattern breaks.
Although it can be quite accurate, a measured objective should be viewed as a possible target area and not an exact level in the market.
To your success