Penny Stocks & Chart Patterns
In this Penny Stocks Chart School series, we’ll discuss some of the most popular trading patterns active traders use. If you’re putting money into the stock market today, it is in one of the most volatile environments in recent history.
Unique economic conditions, high inflation, and headline risk bring plenty of fluctuation to the stock market today. Therefore, technical analysis is important if you’re not looking to invest in penny stocks and trade them instead.
Finding catalysts like news or corporate filings is an excellent first step in identifying momentum. But once that gets priced in, a lot of the short-term action can be translated by reading chart patterns. Today we answer the question: What is an ascending triangle chart pattern?
Descending Wedge Definition & Example
The descending wedge or “falling wedge” stock chart pattern is a technical analysis tool that can be used to identify potential trading opportunities. It is typically seen during a bearish trend, but it can signal that a stock is about to reverse course.
What does a descending wedge look like?
It doesn’t matter if you’re trading penny stocks or Apple (NASDAQ: AAPL); the descending wedge pattern is the same.
To identify a descending wedge pattern, you need to look for two critical elements on the stock chart—first, a downward-sloping trendline and then a similar support line. The trendline is formed by connecting the highs on the chart, while the support line is formed by connecting the lows. As the stock price moves down, these lines will converge, creating a wedge shape on the chart. There’s no relative time frame necessary to confirm this pattern, but rather being able to identify it on your chart. Whether you use a 1-minute, 3-minute, or 1-day chart, descending wedge patterns form the same way. Below is an image of such a pattern using the image below:
One of the key characteristics of the descending wedge pattern is that the rate of decline is slowing. This is indicated by the converging trendline and support line, which shows that the stock is losing momentum as it moves down. This can signify that the stock is about to reverse course and start moving up, which can provide a trading opportunity for investors.
To confirm the descending wedge pattern, you should look for other technical indicators that support the idea that the stock is about to turn around. For example, you can look for signs of support at the support line, such as an increase in trading volume or a bounce off the support line. You can also look for other bullish indicators, such as a rising relative strength index (RSI) or a break above the downward-sloping trendline.
Descending Wedge Volume Profile
A Volume Profile (VP) is another charting tool that shows the amount of trading activity at different price levels within a given period. In the case of a descending wedge chart pattern, the VP would likely show a decrease in trading activity.
This happens as the price moves down and hits the lower trendline of the wedge. This decrease in volume can sometimes be seen as a sign that the downtrend is losing momentum. Ultimately, the VP is just one tool traders can use to help make decisions about a stock. So it’s important to consider it in the context of other technical and fundamental factors.
One way to set profit targets using a descending wedge stock chart pattern is to first identify the pattern on the chart. Once the pattern has been identified, traders can use the upper trendline of the wedge as a reference point for setting a profit target. This can be done by measuring the distance between the upper trendline and the bottom of the pattern and then projecting that distance above the upper trendline to find a potential target price.
This method is not foolproof. It’s essential to keep in mind that the market is constantly changing. So past performance is not necessarily indicative of future results. As such, using multiple tools and techniques when making trading decisions is always a good idea.
The descending wedge stock chart pattern can be a valuable tool for identifying potential trading opportunities. By looking for the characteristic downward-sloping trendline and support line, as well as other bullish indicators, you can identify stocks that may be ready to reverse course and start moving up.
More About Penny Stocks
This is part of our series about Penny Stock Chart Patterns. We’ll discuss more bullish and bearish patterns so that you can be prepared for all market conditions. You’ll also want to understand other nuances of trading penny stocks or higher-priced stocks in general. If you’re getting your feet wet, check out some of these articles below:
- Buy Penny Stocks Like Hedge Funds Do: A How-To Guide
- 10 Secret Ways To Find The Best Penny Stocks To Buy In 2022 [Updated]
- Trading Options 101: A Beginner’s Guide
- Penny Stocks: 7 Day Trading Strategies for Beginners
- Are Penny Stocks Good For Beginners? [Answered]
- What Are Penny Stocks? A Beginner’s Guide To Making Money Trading
New To Trading Penny Stocks?
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