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Falling Wedge Pattern

The falling wedge pattern can be either a bullish continuation pattern or a bullish reversal pattern. It is a continuation pattern when it appears in an uptrend, signaling that the uptrend will resume after a breakout above the pattern. It is a reversal pattern when it appears in a downtrend, indicating the downtrend will reverse after a breakout. To identify the pattern, look for lower highs and lower lows converging within an uptrend or downtrend on a chart. The breakout above resistance signals a long entry trade, with targets set using price measurements within the pattern.

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658 views5 pages

Falling Wedge Pattern

The falling wedge pattern can be either a bullish continuation pattern or a bullish reversal pattern. It is a continuation pattern when it appears in an uptrend, signaling that the uptrend will resume after a breakout above the pattern. It is a reversal pattern when it appears in a downtrend, indicating the downtrend will reverse after a breakout. To identify the pattern, look for lower highs and lower lows converging within an uptrend or downtrend on a chart. The breakout above resistance signals a long entry trade, with targets set using price measurements within the pattern.

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MOHD TARMIZI
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HOW TO IDENTIFY A FALLING WEDGE PATTERN

The falling wedge pattern is interpreted as both a bullish continuation and bullish reversal pattern which gives rise to some confusion in the
identification of the pattern. Both scenarios contain different market conditions which must be taken into consideration.

The differentiating factor that separates the continuation and reversal pattern is the direction of the trend when the falling wedge appears. A falling
wedge is a continuation pattern if it appears in an uptrend and is a reversal pattern when it appears in a downtrend.

Continuation or (Reversal) Pattern:

1. Identify an uptrend or (downtrend)


2. Link lower highs and lower lows using a trend line. The two lines will slope downwards and converge
3. Look for divergence between price and an oscillator like the RSI or stochastic indicator
4. Oversold signal can be confirmed by other technical tools like oscillators
5. Look for break above resistance for a long entry

HOW TO TRADE THE FALLING WEDGE PATTERN


Below are various ways to trade the falling wedge using technical analysis:

1) Falling Wedge Continuation Pattern

The descending wedge pattern appears within an uptrend when price tends to consolidate, or trade in a more sideways fashion. Connecting the
lower highs and lower lows will reveal the slight downward slant to the wedge pattern before price eventually rises, resulting in a falling wedge
breakout to resume the larger uptrend.

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. or even below the wedge itself.

Setting the stop loss a sufficient distance away allowed the market to eventually break through resistance (legitimately) and resume the long-term
uptrend.
Measuring Technique to Set Target Levels

Traders can look to the starting point of the descending wedge pattern and measure the vertical distance between support and resistance. Then,
superimpose that same distance ahead of the current price but only once there has been a breakout. The top end of the line will be the target.

2) Falling Wedge Reversal Pattern

Traders can make use of falling wedge technical analysis to spot reversals in the market. The USD/CHF chart below presents such a case, with the
market continuing its downward trajectory by making new lows. Price action then start to trade sideways in more of a consolidation pattern before
reversing sharply higher.

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. A stop loss can be placed below the recent swing low, while the target can be placed
according to the measurement technique discussed above; or at a previous level of resistance - while adhering to positive risk to reward ratio.

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