The formation of wedges can signal breakouts in upward or downwardtrending markets. They are similar to triangles in terms of theirapplication. The Wedge formation is a variation on the ascending ordescending triangle in which both the angled sides of the triangle aresloping against the dominant trend in the market. The wedge formationis used in the same manner as the triangle formations discussed in theprevious articles. It shows consolidation of the market in either an upor down trend, and once the support or resistance provided by the wedgeis broken, it most often signals a continuation of the trend in itsoriginal direction.
The chart below showed a downward-sloping bullish wedge of USD/JPYat the end of year 2003. Notice that there was a plummet before thewedge formation, confirming the strong downtrend. The price then fellfurther down with narrower range, which formed the wedge. At thebeginning of February 2004, the price broke above the wedge edge andsurged to a peak around 112.00.


Below is a chart of a rising wedge. The price of EUR/USDconsolidated from March 2004 to October 2004. It finally surged above1.2550 in October 2004, where it broke through the upper wedge edge andcontinued to rise further. Generally speaking, traders can notice thedominant trend and the break out usually favors the dominant trenddirection. Nonetheless, wedges are signs of price consolidation, theydo not exactly indicate which direction the price is going to breakthrough.