The Falling Wedge: How to Spot and Trade this Bullish Pattern Stock Market Research

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In an uptrend, a rising wedge pattern is a reversal pattern that happens when the price makes greater highs and greater lows. Since a reversal pattern happens when the price pattern suggests a shift in the direction of the trend, a rising wedge in an uptrend is aptly deemed so. It allows traders to enter the market with short-term holdings. As with the rising wedges, trading falling wedge is one of the more challenging patterns to trade. A falling wedge pattern indicates a continuation or a reversal depending on the current trend. In terms of its appearance, the pattern is widest at the top and becomes narrower as it moves downward.

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The falling wedge pattern is considered bullish as it suggests that buying pressure is increasing and the price may break out of the wedge to the upside. The pattern is typically confirmed when the price breaks above the resistance trendline of the wedge. Like rising wedges, the falling wedge can be one of the most difficult chart patterns to accurately recognize and trade. When lower highs and lower lows form, as in a falling wedge, the security is trending lower.

This ensures that the breakout level is hit fewer times by accident, which in theory makes those few times it’s actually crosses more reliable. 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. One of the biggest challenges breakout traders face, is that of false breakouts. As you might have guessed, a false breakout is when the market breaks out past a breakout level, but then reverses and goes in the opposite direction of the initial breakout.

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You can apply the general rule here – first is that the former levels of support will become new resistance levels, and vice versa. Secondly, the range of the former channel can show the size of a subsequent move. To design a wedge trading strategy, you need to determine when to open your position, when to take profit and when to cut your losses. The original definition of the falling wedge includes a recommendation with regards to volume, and dictates that it’s preferable if it falls as the pattern is forming.

How to trade when you see the Falling Wedge pattern?

Often times they resemble geometrical figures of different kinds, such as triangles or rectangles. Here is another example of a falling wedge pattern but this time it formed during a corrective phase in Gold which signaled a potential trend continuation once the pattern completed. Traders can use trendline analysis to connect the lower highs and lower lows to make the pattern easier to spot.

For ascending wedges, for example, traders will often watch out for a move beyond a previous support point. Alternatively, you can use the general rule that support turns into resistance in a breakout, meaning the market may bounce off previous support levels on its way down. As a result, you can wait for a breakout to begin, then wait for it to return and bounce off the previous support area in the ascending wedge.

Overall guidelines to identify the pattern

Wedge-shaped patterns in particular are considered significantly important indicators of a plausible price action reversal, which can prove to be beneficial during trading. 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. 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 place a stop-loss above the previous support level, and if that support fails to turn into a new level of resistance, you can close your trade.

• Rising wedges usually form during an uptrend and it is denoted by the formation higher highs(HHs) and Higher…
• In this article, we’ll discuss what the falling wedge pattern is, how to identify it and use it on Redot.
• Both lines have now been surpassed, meaning that the pattern has broken.
• We want the everyday person to get the kind of training in the stock market we would have wanted when we started out.
• The reversal is either bearish or bullish, depending on how the trend lines converge, what the trading volume is, and whether the wedge is falling or rising.

This will enable you to ensure that the move is confirmed before opening your position. A falling wedge reversal pattern is one of the technical analysis charting patterns that happens when there is a sharp decline followed by a period of consolidation. In the Gold chart below, it is clear to see that price breaks out of the descending wedge to the upside only to return back down. This is a fake breakout or “fakeout” and is a reality in the financial markets. The fakeout scenario underscores the importance of placing stops in the right place – allowing some breathing room before the trade is potentially closed out. Traders can place a stop below the lowest traded price in the wedge or even below the wedge itself.

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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. My final chart shows the same falling wedge in Gold that led to a trend continuation when it ended. 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.