The formation of wedges can signal breakouts in upward or downward trending markets. They are similar to triangles in terms of their application.

The Wedge formation is a variation on the ascending or descending triangle in which both the angled sides of the triangle are sloping against the dominant trend in the market.

The wedge formation is used in the same manner as the triangle formations discussed in the previous articles. It shows consolidation of the market in either an up or down trend, and once the support or resistance provided by the wedge is broken, it most often signals a continuation of the trend in its original direction.

The chart below showed a downward-sloping bullish wedge of USD/JPY at the end of year 2003. Notice that there was a plummet before the wedge formation, confirming the strong downtrend. The price then fell further down with narrower range, which formed the wedge. At the beginning of February 2004, the price broke above the wedge edge and surged to a peak around 112.00.

Below is a chart of a rising wedge. The price of EUR/USD consolidated from March 2004 to October 2004. It finally surged above 1.2550 in October 2004, where it broke through the upper wedge edge and continued to rise further. Generally speaking, traders can notice the dominant trend and the break out usually favors the dominant trend direction. Nonetheless, wedges are signs of price consolidation, they do not exactly indicate which direction the price is going to break through.