![]() ![]() The upper and lower trendlines combine to create a series of lower highs and lower lows within the wedge shape. Identify a Series of Lower Highs and Lows Volume should ideally spike on the upside break from the wedge. Rising volume may indicate a fakeout, so be wary. Low volume highlights consolidation before a potential bullish breakout. Confirm Decreasing VolumeĬheck that volume decreases as the wedge takes shape, reflecting diminishing interest from sellers. Together, they form the converging wedge shape. The lower trendline shows buying support. The upper trendline reflects selling pressure. ![]() Then draw an upper trendline that slopes down more steeply, touching at least two lower highs. Connect the Downward Sloping Trendlinesĭraw a lower trendline first, connecting a minimum of two reaction lows. Without a preceding downtrend, the pattern may be less reliable. The prior downtrend provides the context for the eventual wedge breakout. Check for a series of lower highs and lower lows that signify a bearish trend. Look for a Prior Downtrendįalling wedges take shape during a strong downtrend-the longer the trend, the better. ![]() To spot a falling wedge on a chart, pay attention to the following five steps: 1. Eventually breaks out upward from the wedge shape. ![]() Price contracts as the pattern develops, showing decreasing volume.The upper trendline has a steeper slope than the lower trendline.Bound by two downward sloping trendlines that converge.Forms during a downtrend as prices make lower lows.Here are the main features that define a falling wedge pattern: The breakout from the pattern typically happens in an upward direction. The pattern looks like a wedge shape as the trendlines converge at the bottom.įalling wedges signal a potential reversal of the downtrend, especially when accompanied by increasing volume. What is the Falling Wedge Pattern?Ī falling wedge is a bullish chart pattern that appears in a downtrend as the trading range narrows between two downward sloping trendlines. This comprehensive guide will teach you everything you need to know about spotting, confirming, and profiting from falling wedges. The falling wedge is a bullish pattern, whether it forms after an established downtrend or during an uptrend, so the next time you spot this pattern on your favorite market exercise caution if you are holding a short position or prepare for an opportunity to get long.The falling wedge is one of the most powerful bullish chart patterns used by technical analysts and traders. A target could again have been placed at the level where the rising wedge started from with a stop loss below the final lower low.Īlways make sure that your potential reward is larger than the risk you are taking on and if your stop loss ends up being too far away, then consider placing your stop below a previous swing long that was formed on the way up before the resistance line was broken. That being said, there was additional confirmation that this falling wedge was about to end when the MACD-Histogram started picking up momentum divergence between the lower lows at the support line.Īlso note how momentum increased dramatically once price broke above the resistance line, which signaled an end to the pattern. This is a great example where conservative traders would not have had an opportunity to enter if they waited for a retest of the breakout level. My final chart shows the same falling wedge in Gold that led to a trend continuation when it ended. This occurrence does not necessarily always happen but is another confirmation signal to look out for since the MACD-Histogram also showed a wedge-like formation. Note that the example above also shows a decline in the MACD-Histogram’s peaks before the patter ends. Once this pattern ends there will usually be an increase in momentum once price breaks above the resistance line. Traders Tip: When you are following a falling wedge in real-time, it can be a good idea to watch for momentum divergence on a MACD-Histogram between the lower lows, and use it as an additional confirmation method that a falling wedge might be nearing an end. The ideal place to set a target will be at the upper level where the falling wedge started from, with a stop loss a few pips below the final low before the breakout occurred. Just keep in mind though, that a retest of the breakout level might not always happen and result in a trader missing an entry. 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. Practice This Strategy How to Trade the Falling Wedge Patternīecause 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. ![]()
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