This article explains the structure of a falling wedge formation, its importance as well as technical approach to trading this pattern. We will discuss the rising wedge pattern in a separate blog post. The falling wedge pattern is a bullish trend reversal chart pattern that signals the end of the previous trend and the beginning of an upward trend. The rising wedge pattern is characterized by a chart pattern which forms when the market makes higher highs and higher lows with a contracting range. When this pattern is found in an uptrend, it is considered a reversal pattern, as the contraction of the range indicates that the uptrend is losing strength.
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What is a falling wedge pattern?
This particular chart pattern implies a period of consolidation before the prices break out. With each successive price increase or wave upwards, volumes continue to decline, showing that market demand is waning at the price that is higher. When a bearish market is established, a rising wedge pattern is comparatively more accurate. Sometimes, what may appear to be a rising wedge pattern during a bullish trend, might in fact be a flag pattern or a pennant pattern, which takes roughly four weeks to form.
- These trades would seek to profit on the potential that prices will fall.
- As you can see in the chart above, every time the price touches the main trend line and a falling wedge pattern appears – a buying opportunity emerges.
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- This pattern shows up in charts when the price moves upward with higher highs and lower lows converging toward a single point known as the apex.
- Market volatility, volume and system availability may delay account access and trade executions.
Then, if the previous support fails to turn into a new resistance level, you close your trade. To design your wedge trading strategy, you’ll need to decide when to open your position, when to take profit and when to cut your losses. Once you have identified the falling wedge, one method you can use to enter the pattern is to place a buy order (long entry) on the break of the top side of the wedge. In order to avoid false breakouts, you should wait for a candle to close above the top trend line before entering. When the price of a security has been declining over time, a wedge pattern might form just before the trend reaches its lowest. The traders should take a long position when the prices break above the upper converging trend line.
Identifying the falling wedge pattern in a downtrend
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If the falling wedge appears in a downtrend, it is considered a reversal pattern. It occurs when the price is making lower highs and lower lows which form two contracting lines. The falling wedge usually precedes a reversal to the upside, and this means that you can look for potential buying opportunities. Because the falling wedge is a bullish chart pattern, aggressive traders will typically wait for price to break above the upper resistance line before they will execute a long position.
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When the prices break from the support line then the continuation of the downtrend. This results in the breaking of the prices from the upper or the lower trend lines but usually, the prices break out in the opposite direction from the trend line. As a reversal signal, it is formed at a bottom of a downtrend, indicating that an uptrend would come next. We will help to challenge your ideas, skills, and perceptions of the stock market. Every day people join our community and we welcome them with open arms.
The falling wedge pattern is a technical formation that signals the end of the consolidation phase that facilitated a pull back lower. As outlined earlier, falling wedges can be both a reversal and continuation pattern. In essence, both continuation and reversal scenarios are inherently bullish.
How to trade the Descending Triangle pattern?
Then, superimpose that same distance ahead of the current price but only once there has been a breakout. Usually, a rising wedge pattern is bearish, indicating that a stock that has been on the rise is on the verge of having a breakout reversal, and therefore likely to slide. A falling wedge pattern is seen as a bullish signal as it reflects that a sliding price is starting to lose momentum, and that buyers are starting to move in to slow down the fall. The reversal is either bearish or bullish, depending on how the trend lines converge, what the trading volume is, and whether the wedge is falling or rising. One of the key features of the falling wedge pattern is the volume, which decreases as the channel converges. Following the consolidation of the energy within the channel, the buyers are able to shift the balance to their advantage and launch the price action higher.
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Strategies to trade wedge patterns
Like head and shoulders, triangles and flags, wedges often lead to breakouts. In the case of rising wedges, this breakout is usually bearish. The falling (or descending) wedge can also be used as either a continuation or reversal pattern, depending on where it is found on a price chart.