Falling Wedge Chart Pattern

Identifying the falling wedge pattern in a downtrend

In a downtrend, the falling wedge is known as a reversal pattern.

When the price makes lower highs and lower lows, it forms two contracting lines, which gives rise to this pattern.

Buying opportunities: We can look for potential buying opportunities as the falling wedge usually precedes a reversal to the upside.

Identifying the falling wedge pattern in an uptrend

In an uptrend, a falling wedge is a continuation pattern that gives rise when the market contracts temporarily.

It notifies the restoration of the uptrend, which gives rise to possible buying opportunities.

Trading Advantages for Wedge Patterns

A wedge chart pattern is among the most widely occurring chart patterns. It can be seen in various trading instruments such as stocks, currency pairs, futures, options, and more when a security trades sideways and then begins to trend downward after a support level is broken. This pattern is a falling wedge because it looks like an inverted V on a chart.

There are two main advantages of falling wedge pattern trading. Its smooth and continuous shape makes it less likely to show reversals at a sizeable relative scale. The descending wedge pattern trend shows much more clearly, which is convenient for us to set risk control and trade strategy. And it seems that the falling wedge pattern has a relatively considerable bullish/bearish pressure, so falling wedges with a longer duration tend to generate larger targets.

Descending broadening wedge patterns has a few advantages over other reversal patterns. The downward breakout is one of the most reliable, creating big price downtrends. The reaction low occurs within 2 to 3 days after the price breaks out. Many reversals generate trading opportunities.

How To Identify A Falling Wedge Pattern?

A falling wedge chart pattern is known as a continuation and reversal pattern. The easiest way to spot a falling or descending wedge pattern is by looking for two converging trend lines that have been forming over time. Each time these trend lines converge, they form what is known as a wedge that gives rise to its name. One could use a falling wedge pattern as an indicator or confirmation tool when entering trades in bearish markets where you may find yourself using indicators such as support levels or momentum oscillators in conjunction with this trading method. When executed correctly, a descending wedge pattern can provide you with decent returns if done so during trending periods.

Practice Session:

Exercise 1: Identify the falling wedge in a downtrend. Show exercise

The chart below depicts an illustration of falling wedges in a downtrend:

 

Practice Session

Exercise 2: Identify the falling wedge in an uptrend. Show exercise

Trading The Falling Wedge: Technique 1

Enter the market by placing a buy order (long entry) on the break of the top side of the wedge.

Avoid false breakouts by waiting for the candle to close above the top trend line and enter.

The chart below depicts the buy order and the area where the price has broken the upper trend line of the wedge:

1 -Long entry

Number 1: Area where price has broken the upper trend line of the wedge

2 -Stop loss below the bottom of the wedge (The chart below depicts that the stop loss should be placed below the bottom side of the falling wedge.)

The profit target is measured by taking the height of the back of the wedge and by extending that distance up from the trend line breakout.

Number 2: Back of the wedge

Number 3: Distance from entry (buy order) to Target Point-3 (this is the same height as the back of the wedge number 2)

Target Point-3 Take profit.

Practice Session:

Technique 1:

Exercise 3: Where would you place the entry, stop loss and take profit? Show exercise

Trading The Falling Wedge: Technique 2

As in the first illustration, wait for the price to trade above the trend line (broken resistance).

Place a buy order on the retest of the trend line (broken resistance now becomes support).

Number 1: The price finds support at the upper side of the falling wedge

1 -Long entry

Number 1: The price finds support at the upper side of the falling wedge

Number 2: Back of the wedge

Number 3: Distance from entry (buy order) to take profit tp3 (this is the same height as the back of the wedge number 2)

 

Profit Target:

Place a buy order on the retest of the trend line (broken resistance now becomes support).

Similar to technique 1, the measurement is done by taking the height of the back of the wedge and by extending that distance up from the entry:

Practice Session

Technique 2

Exercise 4: Where would you place the entry, stop loss and take profit? Show exercise

 

Nut Shell

An overview of the lesson discussed so far

The falling wedge pattern signals a possible buying opportunity after a downtrend or an existing uptrend.

The entry (buy order) is placed when the price breaks above the top side of the wedge or when the price finds support at the upper trend line.

The stop loss is placed below the back of the wedge.

The take profit target is measured by taking the height of the back of the wedge and by extending that distance up from the trend line breakout.