Trading the Falling Wedge Pattern

The second phase is when the consolidation phase starts, which takes the price action lower. It’s important to note a difference between a descending channel and falling wedge. In a channel, the price action creates a series of the lower highs and lower lows while in the descending wedge we have the lower highs as well but the lows are printed at higher prices.

Both scenarios contain different market conditions that must be taken into consideration. It is created when a market consolidates between two converging support and resistance lines. To create a falling wedge, the support and resistance lines have to both point in a downwards direction. Because the falling wedge is a bullish chart pattern, aggressive traders will typically wait for price to break above the upper resistance line before they will execute a long position.

Wedge vs. Triangle Charts

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Symmetrical triangle patterns can sometimes also be referred to as wedge chart patterns, depending on the circumstances. Due to shrinking prices, volume continues to decline and trading activities slow down. Then, the breaking point arrives and the trading activities change. It is more likely for the prices to drift laterally and saucer-out as they exit the precise boundary lines of the falling wedge pattern before resuming the primary trend.

Is a Wedge a Continuation or a Reversal Pattern?

Ideally, the volume on the breakout should be significantly higher than the volume seen during the formation of the falling wedge pattern. This high volume confirms that the breakout is not just a temporary fluctuation but a real change in the trend. Wedge-shaped patterns in particular are considered significantly important indicators of a plausible price action reversal, which can prove to be beneficial during trading. Wedge patterns are frequently, but not always, trend reversal patterns. Essentially in wedge patterns, the breakout direction is predictable but it is difficult to know the breakout direction in the case of a triangle pattern.

In order to achieve an equal slope, the trend lines should be intersecting. This particular chart pattern implies a period of consolidation before the prices break out. With each successive price increase or wave upwards, volumes continue to decline, showing that market demand is waning at the price that is higher.

Overall guidelines to identify the pattern

Conservative traders, on the other hand, will generally wait for price to retest the upper resistance line from above before they will execute a long trade. Just keep in mind though, that a retest of the breakout level might not always happen and result in a trader missing an entry. The descending wedge pattern appears within an uptrend when price tends to consolidate, or trade in a more sideways fashion.

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.

Best Swing Trading Strategies (Backtests & Trading Rules)

When the price of a security has been declining over time, a wedge pattern might form just before the trend reaches its lowest. The image below shows an example of the stop loss placement in relation to the falling wedge. As should be clear, it’s placed slightly below the support level, to give the market enough room for its random swings. Coming from a bearish trend, most market participants have bearish outlooks, and expect the market to continue falling. This also holds true at first, when the market forms the first highs and lows of the pattern.

In a bullish trend what seems to be a Rising Wedge may actually be a Flag or a Pennant (stepbrother of a wedge) requiring about 4 weeks to complete. The trend lines converging the support and resistance level in a wedge pattern slope in the same direction, however, they may differ in magnitude. Support and resistance are a key part of trading falling wedge patterns. They form two lines; the upper resistance line and lower support line.

What Are Falling Wedge Patterns?

When a stock or index price move has fallen over time, it can create a wedge pattern as the chart begins to converge on the way down. Traders can look to the beginning of the descending wedge pattern and measure the peak to trough distance between support and resistance to spot the pattern. They can offer an invaluable early warning sign of a price reversal or continuation.