The Descending Broadening Wedge is basically the opposite of the Ascending Broadening Wedge. It is generally formed during a downtrend. Divergent to the Falling Wedge, where the price action contracts as the pattern matures, the Descending Broadening Wedge widens as the two trend lines that have formed diverge from one another.
The descending broadening wedge is measured to be a reversal pattern, and is bullish in nature. Although the pattern is typically a signal of reversal, continuation of the downtrend is still possible.
On a continuation, the wedge will still slope to the downside, but the down-slope will characteristically be found as a pullback within an uptrend. On a reversal, the pattern will slope to the downside within a downtrend . In spite of of continuation or reversal, descending broadening wedges are always bullish in nature.
Success Ratio of the trend:
Like any other reversals, there needs to be an established trend to reverse. The descending broadening wedge can form on any time frame, and can mark the reversal of a short, intermediate, or long term trend.
The odds of a breakout to the upside are at 80%, leaving only 20% odds of a break to the downside. It is possible that the overall trend may actually be consumed entirely by the pattern and on other occasions the pattern forms after an extended decline.
How to spot descending broadening wedge?
minimum of two highs are necessary to draw the upper resistance trend line. In order to make the descending broadening wedge a valid pattern, price action should be creating lower highs.
A minimum of two lows are required to draw the lower support trend line. Price action should be creating lower lows in order for the pattern to be valid.
Expansion of Price action:
The distance connecting the resistance and support lines will expand or widen as the pattern matures.
Break in Resistance Line:
Substantiation of the bullish move is when the resistance line is broken to the upside, and the candle for the current time frame has closed passed the break.
In order to make a safe move, wait for a break of the previous lower high. Once this resistance is broken down, then there will be a reaction pull to reset the new-found support level.(broken resistance line)
How to Trade the descending Broadening Wedge?
Enter the market by placing a buy order (long entry) on the break of the top side of the wedge.
Avoid false breakouts by waiting for the candle to close above the top trend line and then enter.
The Copper daily chart below portrays the buy order and the area where the price has broken the upper trend line of the wedge:
1 -Long entry is made
No 2: This is the area where price has broken the upper trend line of the wedge
2 -Stop loss, below bottom of the broadening wedge (The chart below portrays that the stop loss should be placed below the bottom side of the broadening wedge.)
The profit target is calculated by taking the height of the back of the wedge and by extending that distance up from trend line breakout.
No: 3 Back of the wedge
No: 4 Distance from entry (buy order) to Target Point-3 (this is the same height as the back of the wedge number 3)
Target Point-3 Take profit
An outline of the topic discussed above:
The descending broadening wedge pattern indicates a likely buying opportunity either after a downtrend or during an existing uptrend .
Descending broadening wedge has the appearance of bearish megaphone pattern.
When the price breaks above the top side of the wedge or when the price finds support at the upper trend line, the entry (buy order) is placed.
The stop loss should have placed below the back of the wedge
By taking into account, the height of the back of the wedge and by extending that distance up from the trend line breakout, the take profit target is calculated.
The descending broadening wedge pattern can extend for long periods on rising unpredictability. As the two “arms” are moving apart there’s no “crossing point” to the pattern like there is with a pennant, a wedge or triangle. This makes it difficult to guess when the pattern might conclude.
It is expected to be irregular. The chief hint is the two lines moving apart from one another with clear support/resistance.