Falling wedge patterns are bigger overall patterns that form a big bearish move to the downside. They form by connecting two to three points on support and resistance levels. Price action forms a big down channel. The price becomes bullish once it breaks out of the wedge. Look for a retest of the wedge after the breakout; if it holds, you’ll have bullish confirmation.
What Is a Falling Wedge Pattern?
A falling wedge pattern consists of multiple candlesticks that form a big sloping wedge. The bearish candlestick pattern turns bullish when the price breaks out of the wedge. These patterns form by connecting at least two to three lower highs and two to three lower lows, becoming trend lines.
These are bullish reversal patterns found on daily charts and intraday. The name might throw you off because it sounds bearish, but it is not.
Once the pattern has been completed, it breaks out of the wedge, usually in the opposite direction. Hence, it is known as a reversal pattern. The bullish bias 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 regardless, it’s always considered bullish. Combine this information with other trading tools to help better understand what the chart tells you. As always, WAIT for confirmation of the trade idea.
Falling Wedge Basics
It is wide at the top and contracts to form a point as the price moves lower, giving it its cone shape. To be seen as a reversal pattern, it must be part of a trend that reverses. 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 examining charts, it can take up to six months to form. When considering a shorter timeframe for day trading intraday, it may only take a few hours for a falling wedge to form.
When trading this pattern, it is essential to have confirmation of the breakout, so the trader does not get caught in a trap. These patterns are formed by support and resistance, and the price will return to retest those levels to see if they hold.
Falling Wedge Trading Strategy
- Watch for a falling wedge pattern to form by connecting 2-3 peaks and valleys.
- Connect the peaks and valleys via trend lines.
- Once the price breaks out of the base of the wedge, take a long entry.
- Use a candlestick close below the base of the wedge as your stop.
Falling Wedge Pattern Confirmation
Trend lines are used not only to form patterns but also to serve as support and resistance. These patterns can be really hard to trade. To confirm a bullish bias, look for the price to break the resistance trend line with a convincing breakout. Once resistance is broken, the previous level becomes a form of support.
There may be a correction to test the newfound support level and ensure it holds, indicating a valid breakout. This phenomenon is frequently observed in day trading, where previous resistance levels become support and vice versa. It helps identify the ranges in which the stock is trading.
Falling Wedge Pattern Example
FW pattern on the chart of $X – the target is the 50% Fibonacci Retracement. The blue line shows the retracement level. There was a major double bottom formation that took place before the price moved up to the top of the falling wedge.
CLVS Example
This is a nice falling wedge formation on CLVS using TradingView. You’ll notice that the falling wedge formed a large handle, creating a cup and handle formation. The handle formed after a prolonged period. This wasn’t a typical cup-and-handle formation. Inside the FW was an inverse head and shoulders pattern leading up to the top of the angular resistance.
NVCN Example
This is an example of a falling wedge pattern on $NVCN, as shown on the 5-minute chart. This is using the ThinkorSwim platform. Notice that this formation occurred intraday near the open, while bouncing off moving average support levels. Once confirmation of support holds, the price will often break out of the wedge. You’ll notice the lower highs and lower lows converging and forming the hammer base.
Traders could look to take a long entry when the price breaks above the top of the hammer, or they can wait for the price to break out of the wedge and confirmation to hold. Stop loss would be placed below the wedge’s apex or the hammer.
This is an example of a falling wedge pattern on a chart of $GLD using TrendSpider. The lower trendline indicates a major level of support that extends into the future. Note that the falling wedge didn’t quite reach the lower trendline. Before the falling wedge formation, there was a rising wedge. This often happens on charts where the patterns will reverse when the trends change.
Final Thoughts on Falling Wedge Patterns
Support and resistance are key parts of trading falling wedge patterns. They form two lines: upper resistance and lower support lines.
At least two reaction highs are needed to form the upper resistance line. If you have three highs, even better, each high should be lower than the preceding highs.
It would be best to have at least two reaction lows to form the lower support line. The reaction lows need to be lower than the lows before it.
That is how the FW patterns get their shape. The support and resistance lines form cone shapes as the pattern matures. The shallower the lows, the greater the decrease in selling pressure. Use proper risk management techniques when trading a falling wedge pattern.
Frequently Asked Questions
A falling wedge pattern is a bullish reversal pattern. It starts as a bearish downward trend but creates a bullish reversal once the price breaks out of the base of the wedge.
The falling wedge pattern happens when the security's price trends in a bearish direction, with two to three lower highs forming. It reverses to bullish once the price breaks out of the last lower high formation.
A falling wedge pattern is a bullish chart formation after a downtrend. The rising wedge pattern is a bearish chart formation after an uptrend.
A falling channel creates a series of lower highs and lower lows. A falling wedge has lower highs, but the lows are printed at higher prices.
A falling wedge pattern is a reliable bullish breakout pattern with a 65%-75% success rate. These patterns do fail at times.
