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Ending Diagonal Pattern Explained for Beginners

Ending diagonal pattern has different names.  Some conventional traders call it “wedge” while others prefer using the original name of the pattern when diving deep into technical analysis. No matter what term you are going to use, they all have the same meaning, which is reversal ahead.

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At some point, all traders will have to deal with the Wave Principles.  At least, they are supposed to know how to identify different types of motivating waves and ending diagonal in particular. It helps to identify the trend moving too far as well as the one running out of steam. In other words, the ending diagonal might be a great tool to prevent losses as well as manage trading risks.

The Core Elements of the Ending Diagonal Pattern

The pattern consists of several essential elements. They are generally five waves labeled from 1 to 5. Every single wave is divided into three other waves, which makes using the pattern a bit complex for beginners, as they may find themselves lost in a huge number of waves occurring on the chart.

However, the process will look easier once you have learned basic rules to identify the pattern. Those rules include the following:

  • Waves 1 and 4 overlap the price.
  • Wave 3 should never be shorter than waves 1 and 5.
  • As a rule, wave 1 is the longest one (but not necessarily).
  • Wave 5 is an impulse wave.
  • Wave 2 is not supposed to form a triangle.
  • Waves 1, 3, and 5 create a king of a zigzag.

At first, traders can take the ending diagonal as a motive wave. However, the pattern is quite different, as it may end up with zigzags. If you come across a pretty ugly structure plotted by the pattern, you should not be confused. It happens from time to time. Once again, zigzags are the main cause considering the chances of doubled zigzags being formatted.

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Ending Diagonal Pattern Types and Models

The ending diagonal is available in two different variations. They include:

  1. Contracting comes with the longest wave 1.
  2. Expanding ending has the shortest first wave.  

No matter what type of ending diagonal you observe, it is not supposed to have the shortest wave 3 (remembering the rules of the pattern described earlier). When it comes to real-trading conditions, traders are recommended to use contracting ending diagonal, as it appears to be safer.

To reduce the risk, it is better to trade a smaller portion of the funds on your balance. With all open trades, it is better to have only 5% of your account involved.

How to Trade Ending Diagonal Pattern

To set up for a trade, we need to identify the wave 5 making a zigzag or just after it has already formed a shape. Now, you need to do the following:

  1. Connect the wave 2 and 4 tops with a trend line.
  2. Enter on a break located above the trend line expecting for the wave 5 low to take place.
  3. Use the wave 5 low swings to place a stop loss below it.
  4. The profit limit should be set at the point where wave 1 starts.

The Bottom Line

The ending diagonal pattern forms a zigzag or impulse at the end of each wave. Apart from zigzags, it may come up with formations that look even more compels. Patter positioning and the number of waves will define the correction duration that is after the ending diagonal.

If you decide to use this particular pattern, keep in mind that it serves only for traders to follow the core buy and sell rules. You should not expect every trade to be the winning one. Responsible trading and proper risk management are the vital phases of your efficient trading strategy. 

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.