<p>The Wedge Pattern, also known as a Diamond Top or Bottom, is a chart pattern that occurs when an asset's price moves between two converging trendlines, forming a triangle shape. Both trendlines slope in the same direction, with the upper trendline being steeper than the lower one. This pattern is a type of <a href="/NewSite/encyclopedia/triangle-pattern/" class="ency-link">triangle pattern</a> and is considered an intermediate-level technical analysis tool.</p>

<h2>How It Works</h2>
<p>To identify a Wedge Pattern, follow these steps:</p>
<ol>
  <li>Draw a trendline along the lower highs (for a bearish wedge) or upper lows (for a bullish wedge).</li>
  <li>Draw another trendline along the higher highs (for a bearish wedge) or lower lows (for a bullish wedge), making it steeper than the first trendline.</li>
  <li>Observe the price action as it moves between these two trendlines, forming a triangle shape.</li>
  <li>For a valid wedge pattern, the price should touch the trendlines at least twice before breaking out.</li>
</ol>
<p>Once the price breaks out of the wedge, traders typically look for a continuation of the trend that was in place before the pattern formed.</p>

<h2>Why It Matters</h2>
<p>The Wedge Pattern is significant for several reasons:</p>
<ol>
  <li><strong>Reversal Indicator:</strong> Wedge patterns often signal a trend reversal, as the price breaks out of the triangle in the direction of the less steep trendline.</li>
  <li><strong>Consolidation Period:</strong> Wedges can represent a period of consolidation before the previous trend resumes, providing traders with an opportunity to enter or exit positions.</li>
  <li><strong>Risk-Reward Ratio:</strong> The shape of the wedge can help traders determine the risk-reward ratio for their trades. The steeper the wedge, the more aggressive the potential move once the pattern breaks.</li>
</ol>
<p>Understanding and recognizing Wedge Patterns can help traders make more informed decisions about when to enter or exit trades, and manage their risk effectively.</p>