Falling Wedge Pattern
Description
A falling wedge is a bullish chart pattern characterized by a narrowing price range with lower highs and lower lows, but with the lower trendline falling at a steeper angle than the upper trendline. Despite its downward slope, this pattern often signals a potential reversal to the upside, especially when it forms in a larger uptrend.
How to Identify
- Look for a series of lower highs and lower lows, forming two converging trendlines.
- The lower trendline should have a steeper angle than the upper trendline.
- The pattern should contain at least three swing highs and three swing lows.
- Volume typically decreases as the pattern progresses.
- The pattern can occur in both uptrends (as a continuation) and downtrends (as a reversal).
Trading Strategies
Breakout Trading
The most common strategy is to enter a long position when the price breaks out above the upper trendline.
- Entry: When price closes above the upper trendline
- Stop Loss: Just below the last swing low within the pattern
- Take Profit: Project the height of the wedge from the breakout point upwards
Anticipation Trading
More aggressive traders might enter a long position near the lower trendline, anticipating the reversal.
- Entry: When price approaches the lower trendline
- Stop Loss: Just below the lower trendline
- Take Profit: At or above the upper trendline
Risk Management
While falling wedges are generally bullish, they can sometimes continue the downtrend. Always use stop-loss orders to protect your positions. Be cautious of false breakouts, and consider waiting for a confirming candle or increased volume on the breakout before entering a trade. The longer the pattern takes to form and the more touch points on the trendlines, the more significant the eventual breakout is likely to be.
Example
In this example, we can see the price forming lower highs and lower lows, but with the lower trendline falling at a steeper angle. The price eventually breaks out above the upper trendline, signaling a potential reversal of the prior downtrend.