How to Trade Falling Wedge Pattern

Wedges and triangles are technical indicators formed by converging the support and resistance trend lines. While they may have similar characteristics, both of them are different. • Because falling wedges are generally just the starting points for larger
reversal patterns, the implied technical targets are modest. One benefit of trading any breakout is that it has to be clear when a potential move is made invalid – and trading wedges is no different. You can place a stop-loss above the previous support level, and if that support fails to turn into a new level of resistance, you can close your trade.

It can be found at the end of a trend but also after a price correction during an ongoing bullish trend. While this article will focus on the falling wedge as a reversal pattern, it can also fit into the continuation category. As a continuation pattern, the falling wedge will still slope down, but the slope will be against the prevailing uptrend. As a reversal pattern, the falling wedge slopes down and with the prevailing trend. Regardless of the type (reversal or continuation), falling wedges are regarded as bullish patterns.

quiz: Understanding Rounded top and bottom pattern

For example, if you have a rising wedge, the signal line is the lower level, which connects the bottoms of the wedge. If you have a falling wedge, the signal line is the upper level, which connects the formation’s tops. Another thing to consider when trading a wedge is a fake breakout aka Fakeout. I got a more detailed article about this pattern in my post about powerful price action signals. When taking the traders who are trading the uptrend into account, you have to consider, that they are rising their stops under the recent lows.

When the falling wedge breakout indeed occurs, there’s a buying opportunity and a sign of a potential trend reversal. Both of these patterns can be a great way to spot reversals in the market. Like the strategies and patterns we trade, there are certain confluence factors that must be respected. The chart above shows a large rising wedge that had formed on the EURUSD daily time frame over the course of ten months.

quiz: Understanding rising wedge

This is why learning how to draw key support and resistance levels is so important, regardless of the pattern or strategy you are trading. It’s important to keep in mind that although the swing lows and swing highs make for ideal places to look for support and resistance, every pattern will be different. Some key levels may line up perfectly with these lows and highs while others may deviate somewhat. Notice how we simply use the lows of each swing to identify potential areas of support. These levels provide an excellent starting point to begin identifying possible areas to take profit on a short setup.

The change in lows indicates a fall in selling pressure, and it creates a support line with a smaller slope than the resistance line. The pattern is confirmed when the resistance is broken convincingly. In some cases, traders should wait for a break above the previous high. If the rising wedge forms after an uptrend, it’s usually a bearish reversal pattern. The key to identifying a falling wedge is to look for a support level that the price action bounces off of repeatedly. Once you have identified a falling wedge, you can use a number of different indicators to detect whether it is bullish or bearish.

Predicting the breakout direction of the rising wedge and falling wedge patterns

By using the tips above, you can trade this pattern successfully and potentially make profits in a market that is otherwise heading lower. A falling wedge typically forms during a downtrend and signals that sellers are losing steam and that a bullish reversal may be on the horizon. This narrowing of the price range signals that prices are beginning to consolidate before making a move higher. 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.

This provides us with a new swing high which we can use to “hide” our stop loss. Finding an appropriate place for the stop loss is a little trickier than identifying a favorable entry. This is because every wedge is unique and will, therefore, be marked by different highs and lows than that of the last pattern. Up to this point, we have covered how to identify the two patterns, how to confirm the breakout as well as where to look for an entry. Now let’s discuss how to manage your risk using two stop loss strategies. As a reversal signal, it is formed at a bottom of a downtrend, indicating that an uptrend would come next.

Option Trading

• Falling wedges can be either reversal or continuation patterns. When they
occur in downtrends they are always reversal patterns. 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. The second way to trade the falling wedge pattern is to find a long bullish trend and buy the asset when the market contracts throughout the trend. Typically, the falling wedge pattern comes at the end of a downtrend where the previous trend makes its final move.

• These trades would seek to profit on the potential that prices will fall.
• This results in the breaking of the prices from the upper trend line.
• This is measured by taking the height of the back of the wedge and by extending that distance up from the trend line breakout.
• The falling wedge pattern occurs when the asset’s price is moving in an overall bullish trend before the price action corrects lower.

The falling wedge is the inverse of the rising wedge where the bears are in control, making lower highs and lower lows. This also means that the pattern is likely to break to the upside. Look for a series of lower highs and lower lows that converges into a point.

What the Falling Wedge Tells Us

It also gives you a smaller SL, because you place your stop above the recent sell signal and not above the previous high (which is also possible). Elearnmarkets (ELM) is a complete financial market portal where the market experts have taken the onus to spread financial education. ELM constantly experiments with new education methodologies and technologies to make financial education effective, affordable and accessible to all. Paying attention to volume figures is really important at this stage. Get virtual funds, test your strategy and prove your skills in real market conditions.