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.
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What Are Falling Wedge Patterns?
A falling wedge pattern consists of multiple 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.
These are bullish reversal patterns that can be found on daily charts and intraday. The name might throw you off because it sounds like it could be bearish but it is not.
Once the pattern has completed it breaks out of the wedge, usually in the opposite direction. Hence known as a reversal pattern. The bullish bias of a falling wedge cannot be confirmed until a breakout. Until it breaks out, ride the downside using puts and shorts.
They can also be part of a continuation pattern but not matter what it’s always considered bullish. Be sure to combine this information with other trading tools to help get more understanding of what the chart is telling you. As always WAIT for confirmation of the trade idea.
Falling wedge pattern on $X – target is the 50% retracement
Basics
Wide at the top and contract to form the point as price moves lower; this is what gives it its 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; then it would break up from there.
This pattern typically takes a few months to form if trading on a daily chart. While looking at charts notice it can even take up to 6 months to form. When looking at a shorter time while day trading intraday, it may only take a few hours for a falling wedge to form.
When trading this pattern it is important to have confirmation of the breakout so it does not get the trader 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.
FW pattern on $NVCN on the 5min, looking for a breakout
How to Trade Falling Wedge Patterns
- Watch for a falling wedge pattern to form by connecting 2-3 peaks and valleys
- 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
Support and resistance are a key part of trading falling wedge patterns. They form two lines; the upper resistance line and lower support line.
At least 2 reaction highs are needed to form the upper resistance line. If you have 3 highs; 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 is how the falling wedge patterns get their shape. As the pattern matures the support and resistance lines come together to form that cone shape. The more shallow the lows; the more of a decrease in selling pressure there is.
Resistance Breakout Confirmation and Trend Lines
Trend lines are used not only to form the patterns, but also become support and resistance. Falling wedge patterns can be really hard to trade.
To get confirmation of a bullish bias look for price to break the resistance trend line with a convincing breakout.
Once resistance is broken, previous 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. This can be seen frequently when day trading; when previous resistance becomes support and vise versa. Helps identify the ranges in which the stock is trading in.
