![]() This is primarily due to the well known fact that a falling share price will have less volume on the pull backs and more on the runs. Trading in the opposite direction, indicated by the green dots, will usually have a reduced level of volume. Looking at the image above, you'll notice the trading area indicated by red dots will typically have higher volume and consequently, trading put options or short selling will be more profitable. When we have a falling wedge chart pattern, the falls of the share price when bouncing off the upper trend line will offer better option trading opportunities for a while because they are in harmony with the overall trend, while the upward price action will see increasingly less probability of success because the overall momentum of the price action is still downwards. This is a warning sign that at some point in the near future, the channel will either continue, or more likely, break down. If you're well into the channel - and particularly if it has formed 5 or more 'waves' in true Elliott Wave fashion, then you may notice that the peaks and troughs are now converging together. Before this happens however, it's not uncommon to have previously identified the price action as a channel.Ī good channel pattern can be traded both upwards and downwards but as the saying goes "all good things must come to an end". Another typical feature of wedge chart patterns is, that the further the price action drives into the apex, the more the trading volume for the stock will begin to decline. ![]() As the constriction takes hold, it no longer becomes profitable for directional traders to enter directional positions within this pattern. You will also notice that as the price action moves further into the wedge, the range of price movement between support and resistance is constantly reduced. In above chart we see both support and resistance lines converging toward each other.
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