Falling wedge pattern 

What is the Falling Wedge Pattern? 

It is a pattern that appears on the chart as a downward-sloping wedge, consisting of a narrower trading area within a descending range, where lower highs and lower lows form but converge to create the wedge.  

The pattern’s emergence is preceded by a price drop or a downward movement, and it signals the continuation of an uptrend or the reversal of a downtrend to an uptrend.  

The wedge shape, which narrows downwards, indicates that the downward momentum is weakening, and that bears (sellers) are under pressure to end their selling.  

The Falling Wedge can appear in various markets such as stocks, currencies, and commodities, and it can also develop during a market correction within an uptrend, providing opportunities to capture small profits. 

How to Identify the Falling Wedge Pattern on the Chart 

First, determine the current trend. If the pattern appears within an uptrend, it is a continuation signal. If it appears within a downtrend, it is a reversal signal. 

Second, draw a trend line connecting the lower highs and another trend line connecting the lower lows. These lines should converge to form a narrow, downward-sloping wedge. 

Third, look for divergence between the price action and any oscillator you are using, such as the Relative Strength Index (RSI) or Stochastic Oscillator. This divergence indicates weakening downward momentum, which strengthens the pattern’s credibility. 

Fourth, confirm the pattern using other technical indicators and tools that confirm the oversold signal, increasing the likelihood of an upward reversal. 

Finally, wait for a breakout above the resistance level, specifically a break above the upper trend line of the wedge. Then, you can enter a buy position. 

Falling Wedge Pattern vs. Rising Wedge Pattern 

The Rising Wedge Pattern is the complete opposite of the Falling Wedge Pattern, signaling a potential reversal towards a downtrend.  

It forms when two upward-sloping trend lines meet, with the lower line rising at a faster pace than the upper line. This indicates that bulls (buyers) are no longer making strong purchases and that bears (sellers) are about to take control. This pattern offers selling opportunities when the price breaks below the lower trend line. 

Aspect	Falling Wedge	Rising Wedge
Uptrend Direction	Indicates a continuation.	Signals a bearish reversal.
Downtrend Direction	Signals a bullish reversal.	Indicates a continuation.
Breakout Direction	Breaks out to the upside.	Breaks out to the downside.
Volume	Decreases during formation, rises on breakout.	Decreases during formation, rises on breakout.

Falling Wedge Pattern Technical Analysis using Technical Indicators 

• Moving Averages: 

The Falling Wedge Pattern can be combined with major averages like the 50-day or 200-day Moving Average. 

If the price approaches the breakout point from the wedge, breaking above a significant moving average, such as the 200-day Moving Average, is a strong confirmation of the bullish reversal and increased momentum. 

The best entry point for a long trade is typically when the price breaks above the key moving average in addition to the breakout from the Falling Wedge. 

• Volume Analysis: 

During the consolidation period that forms the Falling Wedge, the trading volume usually decreases. Confirm this decrease during the pattern’s formation. 

Watch the trading volume at the moment of the breakout. If you notice a spike, this confirms that the bullish reversal is supported by strong buying demand, increasing the likelihood of the continuation of the rise. 

• Fibonacci Retracement Levels: 

You can use Fibonacci levels, such as 38.2% or 61.8%, to identify potential support and resistance areas during the consolidation period (“correction”). 

Do this by placing the Fibonacci levels across the price swing that preceded the wedge formation. 

If the breakout from the wedge occurs near an important Fibonacci level, this strengthens the bullish reversal signal. 

• Moving Average Convergence Divergence (MACD): 

You can also use the MACD indicator to gauge price momentum. 

If the MACD line crosses above the signal line concurrently with a breakout from the Falling Wedge, this confirms that the bullish momentum is increasing and reinforces the probability of a trend reversal. 

• Relative Strength Index (RSI): 

The RSI gives a strong signal for oversold points. 

If the RSI indicates that an asset is in an Oversold Zone (by dropping below 30), concurrent with the price approaching the breakout point from the wedge, this suggests that the downward momentum is weakening and an upward reversal is about to occur. 

Benefits of Trading the Falling Wedge Pattern 

1. The frequent appearance of this pattern across various financial markets, including stocks, commodities, forex, and cryptocurrencies, provides traders with extensive trading opportunities. 

2. The pattern enables traders to plan their trades with precision because it provides clear levels for stop-loss orders, entry points, and profit targets. 

3. The pattern’s feature of having a “potential gains greater than potential losses” ratio is attractive to traders and is a key factor in successful trading strategies. 

4. The pattern allows traders who missed the initial move a chance to join the continuing uptrend. 

5. The pattern helps traders estimate the potential price target and plan for profit-taking orders in advance. 

Limitations of Trading the Falling Wedge Pattern 

1. The Falling Wedge Pattern may be difficult for novice traders to recognize, as they might mistake any consolidation pattern for a falling wedge, potentially leading to incorrect trading decisions. 

2. The pattern can produce misleading signals, which may lead to unexpected market movements. 

3. The pattern requires careful analysis of the broader market context to interpret its signal correctly, whether it signals a reversal or a continuation of the trend. 

4. The price may return to test the upper trend line after the breakout, which makes placing a stop-loss order essential. Improper placement of stop-loss orders can lead to premature exits from the trade. 

Falling Wedge Pattern vs. Descending Triangle 

Although the two patterns may look alike, the formation is not exactly identical, and the key difference lies in the breakout direction and market sentiment. 

The Falling Wedge consists of two downward-sloping, converging trend lines, forming lower and converging highs and lows, which signals a potential bullish reversal with a breakout to the upside. 

The Descending Triangle, however, consists of a flat horizontal support line and a downward-sloping resistance line, which signals a continuation of the downtrend with a breakout to the downside. 

In nutshell 

Despite the importance of the Falling Wedge Pattern in technical analysis, combining it with other technical analysis tools is essential and enhances the pattern’s strength and reliability. This is in addition to analyzing trading volume and the broader market context, and placing stop-loss orders to manage risk and protect your capital. 

If you are a beginner trader, the best way to refine your trading strategies is to start with a demo account. This allows you to observe how other technical indicators interact with the Falling Wedge Pattern in a risk-free environment before risking real money. You can start with Naqdi free demo account now!