What Are Falling Wedge Patterns and How to Trade Them?
Falling wedge patterns are bigger overall patterns that form a big bearish move to the downside. They form by connecting 2-3 points on both support and resistance levels. Price action forms a big down channel. It becomes bullish once price breaks out of the wedge. Look for a retest of the wedge after breakout and if it holds then you’ll have bullish confirmation. Watch our video on how to identify and trade falling wedge patterns.
What Is a Falling Wedge Pattern & How to Identify These Patterns?
A falling wedge pattern consists of a bunch of candlesticks that form a big sloping wedge. It is a bearish candlestick pattern that turns bullish when price breaks out of wedge. Falling wedge patterns form by connecting at least two to three lower highs and two to three lower lows which become trend lines. They can be found on daily charts and even intraday.
They are bullish reversal patterns. The falling wedge pattern name might throw you off because it sounds like it’d be bearish but it isn’t. Watch our video above to learn more about falling wedges.When the pattern has completed it breaks out of the wedge, usually in the opposite direction. This is why it’s known as a reversal pattern. The bullish bias of a falling wedge can’t be confirmed until a breakout. Until it breaks out, you can ride the wedge to the downside.
They are one of Bullish Bears Dan’s favorite patterns!
They can also be part of a continuation pattern but not matter what it’s always considered bullish. Knowing what Japanese candlesticks patterns are telling you is imperative when trading stocks.
Basics of Falling Wedge Patterns
Falling wedge patterns are wide at the top and contract to form the point as price moves lower. That’s what gives it it’s cone shape.
To be seen as a reversal pattern it has to be a part of a trend to reverse. In a perfect world, the falling wedge would form after an extended downturn to mark the final low. From there it would break up.
This pattern typically takes a few months to form if you are trading a daily chart. When you’re looking at charts you’ll notice it can even take up to 6 months to form. During intra-day trading, it may only take a few hours for a falling wedge to form.
It’s important to have confirmation of the breakout so you’re not caught in a trap. These patterns are formed by support and resistance and price will move back to retest those levels to see if they hold.
Support and resistance are a huge part of trading. Especially when trading wedges or triangles. They’re the levels traders pay a ton of attention to. Watch for traders “lining up for the trade”
You can use moving averages such as the simple moving average formula as well as the VWAP trading strategy. These indicators not only form support and resistance but buy and sell signals.
Candlesticks such as long legged doji candlesticks and gravestone doji candlesticks can form these levels. The real bodies and wicks of bullish candlesticks and bearish candlesticks form key levels of support and resistance also.
They are only confirmed by breaking out of right angle resistance. That resistance then becomes support. Sometimes falling wedges will re-test the right angle of the wedge before running again!
Click here to read our post on how to draw support and resistance to learn more about the proper way to draw these lines. Take our candlesticks patterns course.
How to Trade Falling Wedge Patterns
- How to trade falling wedge patterns:
- Watch for a falling wedge pattern to form by connecting two to three sloping peaks and valleys (lower highs and lower lows).
- Connect the peaks and valleys via trend lines.
- Once price breaks out of the base of the wedge take long entry.
- Use candlestick close below base of wedge as your stop.
As we stated above, support and resistance are a key part of trading falling wedge patterns. They form two lines. The upper resistance line and the lower support line.
You need at least 2 reaction highs to form the upper resistance line. If you have 3 highs that’s even better. Each high should be lower than the preceding highs.
To form the lower support line you need at least 2 reaction lows. The reaction lows need to be lower than the lows before it.
That’s how the falling wedge patterns get their shape. The support and resistance lines come together to form that cone shape as the pattern matures. The more shallow the lows the more of a decrease in selling pressure there is.
Resistance Breakout Confirmation and Trend Lines
As you’ve seen on the charts, trend lines are used not only to form the patterns but become support and resistance. Falling wedge patterns can be really hard to trade.
To get confirmation of a bullish bias you need price to break the trend line that is resistance. It can’t be a sort of breakout though. You need a convincing breakout of resistance.
Once resistance is broken, that level now becomes support. There can sometimes be a correction to test the newfound support level just to make sure it holds and is a valid breakout.
Hence why we stress knowing how to properly draw trend lines.
Trading options with falling wedge patterns? Check out our options market hours post so you know when you can or can’t trade these setups!
Patterns Inside Patterns
Falling wedge patterns may look like triangles or pennants. That’s why you’ve heard us say, if you’ve watched our candlesticks videos, not to get caught up in the minutia of exactly what a pattern is.
The important thing is to know what the patterns means and the story that it tells. Because these patterns can take a few months to trade, learning how to find and trade the other patterns forming inside the larger patterns is key to your trading success.