Falling Wedge Pattern: what is it?

A rising wedge occurs when the price makes multiple swings to new highs, yet the price waves are getting smaller. Essentially, the price action is moving in an uptrend, but contracting price action shows that the upward momentum is slowing down. Now that we have had a closer look at the definition and psychology, it’s time to have a quick look at how many traders approach the rising wedge pattern. Many traders prefer that the volume is decreasing as the pattern forms and the market goes further and further into the wedge. Wedge patterns are frequently, but not always, trend reversal patterns. These predictable price patterns were invented in the early days of technical analysis.

falling wedge pattern meaning

As you may have guessed, the approach to placing a stop loss for a falling wedge is very similar. It all comes down to the time frame that is respecting the levels the best. In the illustration above, we have a consolidation period where the bears are clearly in control. We know this to be true because the market is making lower highs and lower lows. The illustration below shows the characteristics of the rising wedge.

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Prices usually decline after breaking through the lower boundary line. As far as volumes are concerned, they keep on declining with each new price advance or wave up, indicating that the demand is weakening at the higher price level. In a bullish trend what seems to be a Rising Wedge may actually be a Flag or a Pennant (stepbrother of a wedge) requiring about 4 weeks to complete. https://www.xcritical.com/ As a bullish descending wedge pattern, you should notice that volume is increasing as the stock puts in new lows. As this “effort” to push the stock downward increases along the lows, you’ll notice that the result of the price action is diminishing. Our web-based trading platform allows traders to automatically scan for wedge patterns using our pattern recognition scanner.

The red areas show the amount we are willing to cover with our stop loss order. The best way to think about this is by imagining effort versus result. Before a trend changes, the effort to push the stock any higher or lower becomes thwarted. Thus, you have a series of higher highs in an ascending wedge, but those highs are waning. In this post, we’ll uncover a few of the simplest ways to spot these patterns.

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No matter your experience level, download our free trading guides and develop your skills. Trade up today – join thousands of traders who choose a mobile-first broker. Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

falling wedge pattern meaning

Wedge-shaped patterns in particular are considered significantly important indicators of a plausible price action reversal, which can prove to be beneficial during trading. In an uptrend, the falling wedge denotes the continuance of an uptrend. 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.

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The can either appear as a bullish wedge or bearish wedge depending on the context. Thus, a wedge on the chart could have continuation or reversal characteristics depending on the trend direction and wedge type. The falling wedge pattern is characterized by a chart pattern which forms when the market makes lower lows and lower highs with a contracting range. When this pattern is found in a downward trend, it is considered a reversal pattern, as the contraction of the range indicates the downtrend is losing steam. When the higher trend line is broken, the price is predicted to rise. The rising wedge pattern is characterized by a chart pattern which forms when the market makes higher highs and higher lows with a contracting range.

falling wedge pattern meaning

Of all the reversal patterns we can use in the Forex market, the rising and falling wedge patterns are two of my favorite. They can offer massive profits along with precise falling wedge pattern entries for the trader who uses patience to their advantage. Confirmation through volume analysis and other technical indicators is advisable for trading decisions.

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In different cases, wedge patterns play the role of a trend reversal pattern. In order to identify a trend reversal, you will want to look for trends that are experiencing a slowdown in the primary trend. This slowdown can often terminate with the development of a wedge pattern. Wedges are a common continuation and reversal pattern that tend to occur in many financial markets such as stocks, forex, commodities, indices and treasuries. Sometimes they may occur with great frequency, and at other times the pattern may not be seen for extended periods of time. When a rising wedge occurs in an uptrend, it shows slowing momentum and may forecast a future drop in price.

Setting the stop loss a sufficient distance away allowed the market to eventually break through resistance (legitimately) and resume the long-term uptrend. This usually occurs when a security’s price has been rising over time, but it can also occur in the midst of a downward trend as well. Depending on the wedge type, the signal line is either the upper or the lower line of the pattern. Although the illustrations above show more of a rounded retest, there are many times when the retest of the broken level will occur immediately following the break. Put simply, waiting for a retest of the broken level will give you a more favorable risk to reward ratio. Because the two levels are not parallel it’s considered a terminal pattern.

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