I will describe Broadening Wedge reversal pattern, based on Three Indians
Trading against the trend is often compared to a try to stop an approaching tram. At best, your nails will be harmed. Nevertheless, all trends reverse sooner or later. You just need to know the signs to save your limbs. Finally, everything can turn out like in a fairy tale: you extend your hand and the tram stops. One of these signs is a deeper, compared to the previous one, correction in the current trend. Big traders showed their will to break it and are trying to find out whether their opponents have enough power to extend the present move. If they have run out of power, it is time to go ahead for a counter attack and impose your own conditions.
In the previous articles, I explained in detail Three Little Indians reversal pattern and its varieties, without any regard to the rollback depth. If we take it into account, we’ll get a completely different view on trading with this pattern. If the second Indian is followed by a deeper correction than the first one, it builds the ground for emerging Broadening Wedge pattern and makes the trend more likely to reverse.
Remember, wedges, as a rule, suggest a higher volatility, that is a more intensive fight between sellers and buyers. To identify Broadening Wedge correctly you need to repaint the marking: the correction extreme after the first high becomes point 1, the second Indian – point 2; following it rollback – point 3, the third high in the bullish market (low in the bearish one) – point 4. Now, you only need to wait until point 5 emerges that must be lower than point 3, provided the original uptrend (it will be higher, if the trend is downward).
Trading with Broadening Wedge pattern based on Three Little Indians is the same as the application of the formation, based on 1-2-3. Traders use Fibonacci grid applied to wave 4-5, besides, rollbacks to the levels of 23.6%, 38.2% and 50% suggest considering sales on the price rebounds from the resistance levels; as in the example of GBP/JPY. Conservative approach suggests going short if the quotes go back to the previous price levels (if the price reaches 50% and goes back to, and then sell). Protective stop order is set in the zone of the retracement high. Remember, if the currency pair reaches 78.6% and 88.6%, Broadening Wedge becomes a continuation pattern.
Trading with this pattern is easily combined with other technical tools, both indicators and price action patterns. For example, if traders think that Fibonacci levels are not a sufficient signal to enter a trade, they can also apply Three Indians during a correction to open short positions. The pattern should preferably emerge close to an important resistance level. Asin the case with AUD/USD, when the price went back to the low of the second Indian bar, trader could press SELL. The stop order was set above the retracement high.
Broadening Wedge, based on either 1-2-3, or Three Little Indians is a strong reversal pattern. If you use it in applied trading, you can make it far more efficient. Then, you won’t be afraid of extending your arm to stop the approaching tram.
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Price chart of AUDUSD in real time mode
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