How to use the Broadening Wedge Descending (Bullish) Pattern in trading

How to use the Broadening Wedge Descending (Bullish) Pattern in trading

Once the price breaks out from the top pattern boundary, day traders and swing traders should trade with an UP trend. Consider buying a security or a call option at the upward breakout price level. To identify an exit, compute the target price for by adding the height of the pattern to the upward Breakout level. Pattern height is the difference between the highest high and the lowest low. The upward Breakout level is the highest high.

To limit potential loss when the price suddenly goes in the wrong direction, consider placing a stop order to sell at or below the breakout price.

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The Broadening Wedge Descending pattern forms when the price of a security makes lower lows (1, 3, 5) and lower highs (2, 4), forming a downtrend. This pattern may form when large investors spread out their selling over a period of time.

When the initial selling occurs, other market participants react to the falling price and jump on the bandwagon to participate. Then the value investors begin to buy, believing the price has fallen too much, which also spurs the original large investor to resume buying again as well.