The image shown above is an example of a rising wedge.
A wedge is a convergence of prices where the trendlines are not parallel to each other. It consist of a series of higher highs and higher lows. Eventually, a breakout occurs where price move towards the flatter trendline before resuming its prevailing trend. If the prevailing trend is upwards, prices will bounce off the flatter trendline and move upwards. The flatter trendline is considered the more dominant trendline. Prices tend to move towards the parallel trendline.
Wedges can be further classified into two types. Rising wedges and falling wedges. Rising wedges are temporary bearish signs and falling wedges are temporary bullish signs.
Source: Yahoo Finance
The above image is an example of a falling wedge.
How option traders can take advantage of wedges?
Option traders can initiate bullish or bearish position in falling wedges and rising wedges respectively.
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