The falling wedge pattern indicates a bullish trend. When these two patterns are combined with a rising wedge formation, they form a solid bullish flag pattern that suggests a change in trend direction. A falling wedge pattern is generally regarded as a reversal pattern, though it can also facilitate the continuation of the same trend.
Where Is the Falling Wedge Found?
The falling wedge pattern appears when the asset’s price moves in quite an overall bullish trend before correcting lower. Two converging trend lines are drawn within this pullback. When the price action breaks through to the upper trend line and the wedge’s resistance, the consolidation phase comes to an end.
The volume decreases as the channel converges, a crucial feature of a falling wedge pattern. Following the channel’s consolidation of energy, buyers can tilt the balance to their advantage and initiate the price action higher.
As a result, a falling wedge pattern has three distinct characteristics:
- Price action is currently in a downtrend (lower highs as well as lower lows);
- There are two converging trend lines (upper and lower);
- As the channel progresses, the volume decreases.
The first two elements are required features of a falling wedge, while an occurrence of decreasing volume is highly beneficial because it adds legitimacy and plausibility to the pattern.
Identifying the Falling Wedge
The far more pervasive falling wedge formation takes place during a strong uptrend. The price action trades higher, but the buyers lose momentum at one point, and indeed, the bears take momentary control of the price.
Phase 2 would be when the consolidation phase begins, which causes the price action to fall. There is a difference between this type of descending channel and a falling wedge. This same price action creates a series of lower highs and lower lows in a channel, whereas, in a descending wedge, the lows are printed at higher prices. As a result, we have two trend lines that are not parallel.
Prices are now in a bullish flag pattern, pressing higher and making new short-term lows. The pair’s price then begins to fall, indicating that the consolidation phase has started, as buyers use this time to regroup and start preparing for another push higher.
Simultaneously, you can see that the volume is decreasing. Just before the breakout, as the two trend lines approach each other, buyers push the wedge higher to establish a new low. The surge in volume happens simultaneously with the breakout.
Trading in the Falling Wedge
Once you’ve identified a falling wedge that meets all of your criteria, you should begin focusing on the critical parts of a trade: entry, stop loss, locking in profits, and the overall risk involved with such a trading opportunity.
You need to pay close attention to volume figures at this stage. The continuous trend of decreasing volume is significant because it indicates that buyers, who remain in control despite the pullback, are not investing significant resources just yet.
A daily close above the wedge is required to confirm a wedge break to the upside, which is exactly what happened. You have two options at this point:
- As soon as the close occurs, you enter a trade.
- You are waiting for a possible pullback to recheck the broken resistance for the price action.
The first option is safer because there is no guarantee that the pullback will occur. On the other hand, the second option provides you with an entry point at a lower cost. In this case, we’ll take option number one.
A stop-loss order must be placed near the upper line of the wedge. Any close within a wedge’s territory invalidates the pattern. As you can see, the price action, in this case, pulled back and closed at the wedge’s resistance before ultimately continuing higher the next day. Finally, you must determine your take profit order, calculated by measuring the distance between the two converging lines when the pattern forms.
