The Wedge Consolidation Pattern

by Ed Khan

The Wedge Consolidation Pattern (WCP) – is method number one of candlestick pattern analysis, which can indicate the lowest probability of a sweeping flat. Who might benefit from this? All trend traders, whose stop-losses are triggered by a sweeping flat.

This is how The Wedge Consolidation Pattern looks like:

The WCP is not a certain shape. It is a fundamental tenet, that could be found in the many shapes of candlestick patterns.

The WCP is a multifaced creature)). The larger the timeframe of the chart reflecting WCP, the more reliable the signal.

You can apply this principle to your favorite shapes. And as an example,  I will analyze below, my favorite two figures that I use to define WCP.

1. DOUBLE INBAR (Inside Bar Pattern)

InBar is one of my favorite and the most reliable patterns. The Wedge Consolidation Pattern is its double version consists of three candlesticks.

  • The first is the longest1я самая большая
  • The second is formed within the range of the first one
  • The third candlestick sits within the range of the second.

After the breakout of the 3rd candlestick, the price usually skyrocketed, without a pullback. My personal rating of the strength of the Double InBar as a WCP: 7 out of 10 (it does not reach ten, because there are only 3 candles in the pattern; such a limited number of candles cannot give a forecast of precise accuracy).

Though. Good to know: the higher the timeframe, the greater the accuracy! Double InBar on D1 - is a real bomb!😍

2.  FRACTAL CHANNEL

Bill Williams' Fractal is a pattern of 5 candles, the middle of which has the highest high (then it is a bullish fractal) or low (bearish fractal).

This is only one fractal.

The fractal channel itself (which upper boundary links the tops of all bullish fractals, and the lower boundary links the bottoms of all bearish fractals) consists of a large number of candles! It stretches from the past into the boundless future. It has no beginning or end, it is constantly moving forward along with the price.

The CWP in this fractal channel is formed by three contractions in a row (when the distance between the upper and lower boundaries narrows). At the breakout of the last, narrowest contraction, the price is explowding💥.

Because the number of candles in such a WCP is always more than 10 (it can even go up to 100!), it is rated 9 out of 10. It is a high-precision signal!

Verdict

So, how to work with these Narrowing Channels (and any others that meet the condition of sequential narrowing)?

The answer is obvious: adjust the stop-losses!🤪 Now we don't have to guess the direction of the price.

The entry point is set in the direction of the breakout of the last (narrowest) range. The remaining adjusted stop-loss (not activated) now is the main stop-loss.

Should we set take profit? Yes. Its beauty is that it can be set much further than a stop loss. It could be started 1:1 ratio (then we might use light Martingale). But most likely it will be a 3:1 ratio.

Perfect reversal logic!

When the stop loss is triggered, we place the order in the opposite direction. It is the alternation of longs and shorts. Closing position at the first take profit completes this trade.

In general ... If you are trading with the trend, the WEDGE CONSOLIDATION PATTERN will indicate when the fuel is being added to the fire of volatility!

Censirely,

Ed Khan