Now let’s discuss the wedge trading process on an example of a falling continuation wedge on GBP/USD. Total approach and its basics to trading is the same as with other patterns – combine all tools that you know to get as clear context for trading as possible. Chart #5 | GBP/USD Weekly The major idea is to catch early signs of possible breakout and possess ourselves with as tight of a reasonable stop loss as possible. Also – to confirm the theoretical direction of a breakout with some clues. This is the task. For instance, we start to watch for this wedge at “A” point at the end of 2005. Then we see a move up and the market has hit the upper border of the wedge – we do not see anything special. Only single detail has attracted our attention – long white candle (we remember that it is called a Marubozu, right?). This looked like shift in momentum, but we didn’t have much confidence with that yet. Anyway this was insufficient to call this “context” at all. Also we know that this is just the 4th swing. But a bit later in March 2006 we have seen something. First, the market has shown bullish engulfing and it’s low almost coincided with the low of the Marubozu and we know that the low of a white Marubozu itself is a support area. Second, the trend has turned bullish and held bullish during whole 5th swing to the downside. The market has formed an engulfing pattern precisely near the area of 0.618-0.786 Fib support from the recent swing high. And the last one - appearing of an engulfing near Fib support and Marubozu support tells that there is a strong possibly that the market will not reach the low border of the wedge, and this is the 5th swing… That’s quite enough to make an attempt with a long position. It does not matter how you’ve entered on the top of engulfing or waited for some retracement to enter. More important is that we use this pattern for stop placement. Our logic here is as follows: if the market will break this pattern, then the trend turns bearish again and it could reach the lower border of the wedge. Currently the 5th swing is forming. If the market will not show any exit from the wedge, we may see a sideways consolidation, or even a wedge failure. So, placing your stop order here looks reasonable, although is better to place it closer to “A” point – low of previous swing, just to let market breath. If, for instance, the market will erase engulfing, reach the lower border and only after that will show breakout, then you may enter again with the same logic and algorithm. The market should show you some signs, that bulls have taken the control.