It can be found at the end of a trend but also after a price correction during an ongoing bullish trend. The falling wedge pattern is known for providing a favourable risk-reward ratio, which is an important factor for traders looking to make profitable trades. It also helps traders manage their risks and maximise their profit potential by offering clear stop, entry and limit levels. The falling wedge pattern is popularly known as the descending wedge pattern.

On the other hand, the second option gives you an entry at a better price. A stop-loss order should be placed within the wedge, near the upper line. Any close within the territory of a wedge invalidates the pattern.

Falling Wedge

Beware breakouts on low volume—they have a higher chance of failure. Place stop losses below key support levels, such as the most recent higher low or the lower wedge trendline. The upper and lower trendlines combine to create a series of lower highs and lower lows within the wedge shape.

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What is the Falling Wedge Pattern?

Although both lines point in the same direction, the lower line rises at a steeper angle than the upper one. Prices usually decline after breaking through the lower boundary line. As far as volumes are concerned, they keep on declining with each new price advance or wave up, indicating that the demand is weakening at the higher price level. A rising wedge is more reliable when found in a bearish market.

The consolidation phase is used by the buyers to regroup and attract new buying interest, which will be used to defeat the bears and push the price action further higher. Yes, the falling wedge is considered a reliably profitable chart pattern in technical analysis. It has a high probability of predicting bullish breakouts and upside price moves. The pattern has clearly defined support/resistance lines and breakout rules which provides an edge in trading. When confirmed with rising volume on the breakout, falling wedges can signal high-probability upside moves making them a reliable bullish pattern. Together with the rising wedge formation, these two create a powerful pattern that signals a change in the trend direction.

Trading with Falling Wedge Pattern

The falling wedge pattern occurs when the asset’s price is moving in an overall bullish trend before the price action corrects lower. Within this pull back, two converging trend lines are drawn. The consolidation part ends when the price action bursts through the upper trend line, or wedge’s resistance. It is a bullish pattern that starts wide at the top and contracts as prices move lower.

Still, because there’s confusion in identifying falling wedges, it is advisable to use other technical indicators in order to confirm the trend reversal. The best indicator type for a falling wedge pattern is the divergence on price-momentum oscillators such as the Stochastic Oscillator or the Relative Strength Index (RSI). This is known as a “fakeout” and occurs frequently in the financial markets. The fakeout situation emphasises the significance of placing stops in the right place, providing a little extra time before the trade is potentially closed out. Investors set a stop below the wedge’s lowest traded price or even below the wedge itself. The Rising and Falling Wedge patterns provide traders with several distinct advantages.

How to Identify a Falling Wedge Pattern

Wedges can offer an invaluable early warning sign of a price reversal or continuation. Learn all about the falling wedge pattern and rising wedge pattern here, including how to spot them, how to trade them and more. Another notable characteristic of a falling wedge is that the upper resistance line tends to have a steeper descending angle than the lower support line. Traders can use trendline analysis to connect the lower highs and lower lows to make the pattern easier to spot. A break and close above the resistance trendline would signal the entry into the market. Traders can look to the starting point of the descending wedge pattern and measure the vertical distance between support and resistance.

• 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 try out the IG trading platform with a demo account.
• It’s generally wise to wait for confirmation before trading the first breakout from a falling wedge pattern.
• Only risk capital should be used for trading and only those with sufficient risk capital should consider trading.
• If the falling wedge appears in a downtrend, it is considered a reversal pattern.
• This shows that price momentum on the downside is declining.

Once the pattern has completed it breaks out of the wedge, usually in the opposite direction. The bullish bias of a falling wedge cannot be confirmed until a breakout. Until it breaks out, ride the downside using puts and shorts. 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. Decreasing volume as the falling wedge forms reflects diminishing selling pressure and consolidation. The upper and lower trendlines of the wedge may become areas of future support or resistance.

What is the other term for a Falling Wedge Pattern?

In general, a falling wedge pattern is considered to be a reversal pattern, although there are examples when it facilitates a continuation of the same trend. 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. Wedges are the type of continuation as well as the reversal chart patterns.