Triangle wedge formations indicate consolidation periods in the markets. Even in strong trends, the price will eventually stray away from its typical high-low structure. Let us take the falling wedge, for instance. While the pattern is forming, we assume the bearish trend is still intact, with more sellers than buyers.
Yet, a point arrives where an increasing number of buyers come in. You will notice that the lower highs become shallower, closing at almost the same level. The last point on the wedge is a ‘trick’ that ‘fools’ traders into thinking the downtrend has resumed, only for the price to move in the opposite direction.
Consolidation usually occurs for two reasons. Firstly, traders are taking profits by closing their positions. This causes the price to retrace since fewer buy or sell orders are present than initially.
The second more significant reason is indecision. Once a ‘big move’ has happened, everyone is eager to know whether it will move in its previous direction or go in a new one. For the so-called ‘smart’ money or institutional traders, it’s an opportunity for accumulation or distribution as they enter larger positions. This happens at the last phase of triangle wedge patterns.
This is where some traders assume the price is moving in a new direction (for triangles) or the old direction (for wedges). It is believed that smart money needs these opposing orders to strengthen their own, causing the breakout.
The whole point of triangle wedge patterns is that consolidation is necessary because of the natural market order. It is rare to find moments where the price moves in a relatively straight line with shallow or retracements. A pause is innate for securing profits and determining the next direction. Of course, the market consolidates in various patterns (like double tops/bottoms and flags), one being triangles and wedges.