What Is The Falling Wedge Chart Pattern?
A Falling Wedge is a bullish chart pattern, commonly found either at the bottom of a trend as a reversal pattern or mid-trend as a continuation pattern.
Resistance and support converge together with a downward diagonal slope until a breakout occurs.
How To Identify The Falling Wedge Pattern?
Price action follows two downward sloping trend lines which converge to form a wedge shape.
Price must also fill out the pattern, touching one trend line at least three times and the other at least two times. Volume declines leading to the breakout.
What Is The Psychology Behind the Falling Wedge Pattern?
The Falling Wedge pattern is a bullish chart pattern that can provide traders with valuable insights into the market’s psychology.
It’s characterized by a trendline that connects a series of lower highs and lower lows, with the trendline slope narrowing towards a point of convergence.
As price approaches the apex of the wedge, it becomes increasingly difficult for sellers to push the price lower, resulting in a period of consolidation.
Eventually, the price breaks out of the wedge, signaling a potential trend reversal and the start of a new bullish trend.
The psychology behind the falling wedge pattern is that sellers are becoming increasingly exhausted, while buyers are gaining momentum.
As the price approaches the point of convergence, sellers are finding it more difficult to push the price lower, as buyers are stepping in to buy at lower prices.
This creates a situation where the supply of sellers is decreasing, while the demand for buyers is increasing, which ultimately results in a breakout to the upside.
How To Trade The Falling Wedge Pattern?
To trade the falling wedge pattern, traders typically wait for the price to break through the upper trendline with a strong volume surge.
The breakout should ideally occur on higher than average trading volume, as this confirms that there is significant buying pressure behind the move.
Traders may enter a long position once the price breaks above the upper trendline, with a stop loss placed below the lower trendline.
The profit target can be set based on the height of the pattern, with the expectation that the price will move at least the same distance as the pattern’s height in the direction of the breakout.
Alternatively, traders may wait for a pullback to the breakout level before entering a long position. This approach can provide a better risk-to-reward ratio, as the entry price is closer to the breakout level and the stop loss can be placed tighter.
However, it may also result in missing out on some of the initial gains from the breakout. Ultimately, the best approach will depend on the trader’s risk tolerance, trading style, and market conditions.
It’s worth noting that the falling wedge pattern can also result in a false breakout, where the price briefly breaks through the trendline before reversing course.
Falling Wedge Performance Expectations Explained
A bullish breakout can be expected 68% of the time.
A valid falling wedge has a minimum duration of three weeks.
To find potential targets, measure from the lowest trough to highest peak.
Multiply the measurement by 62% for breakouts or 29% for breakdowns. Apply the results to the point of breakout.