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Falling wedge

The falling (or descending) wedge can also be used as either a continuation or reversal pattern, depending on where it is found on a price chart. This lesson shows you how to identify the pattern and how you can use it to look for possible buying opportunities.

Identifying the falling wedge pattern in an downtrend

If the falling wedge appears in a downtrend, it is considered a reversal pattern. It occurs when the price is making lower highs and lower lows which form two contracting lines. The falling wedge usually precedes a reversal to the upside, and this means that you can look for potential buying opportunities.

The chart below shows an example of a falling wedges in a downtrend:

Identifying the falling wedge pattern in an uptrend

A falling wedge found in an uptrend is considered a continuation pattern that occurs as the market contracts temporarily. It indicates the resumption of the uptrend. Again, this means that you can look for potential buying opportunities.

The chart below shows a falling wedge in an uptrend:

Trading the falling wedge: method one

Once you have identified the falling wedge, one method you can use to enter the pattern is to place a buy order (long entry) on the break of the top side of the wedge. In order to avoid false breakouts, you should wait for a candle to close above the top trend line before entering.

The chart below demonstrate the buy order and the area where the price has broken the upper trend line of the wedge:

  1. Long entry
  2. Area where price has broken the upper trend line of the wedge

The chart below shows where to place the stop loss. This should be placed below the bottom side of the falling wedge.

  1. Long entry
  2. Area where price has broken the upper trend line of the wedge

2. Stop loss, below bottom of the wedge

Finally, the last chart shows the profit target. This is measured by taking the height of the back of the wedge and by extending that distance up from the trend line breakout.

  1. Long entry
  2. Area where price has broken the upper trend line of the wedge
  3. Back of the wedge
  4. Distance from entry (buy order) to 3 (this is the same height as the back of the wedge 3)

2. Stop loss, below bottom of the wedge

3. Take profit

Trading the falling wedge: method two

The second way to trade the falling wedge is to wait for the price to trade above the trend line (broken resistance), as in the first example. Then, you should place a buy order on the retest of the trend line (broken resistance now becomes support).

The chart below shows where to place the buy order:

  1. The price finds support at the upper side of the falling wedge
  1. Long entry

As the following chart shows, the stop loss would go below the new support area:

  1. The price finds support at the upper side of the falling wedge
  1. Long entry
  2. Stop loss

Finally, the last chart shows the profit target. As in method one, this is done by taking the height of the back of the wedge and by extending that distance up from the entry:

 

  1. The price finds support at the upper side of the falling wedge
  2. Back of the wedge
  3. Distance from entry (buy order) to take profit 3 (this is the same height as the back of the wedge 2)
  1. Long entry
  2. Stop loss
  3. Profit target

 

Summary

  • … the falling wedge pattern signals a possible buying opportunity either after a downtrend or during an existing uptrend.
  • … the entry (buy order) is placed when either the price breaks above the top side of the wedge, or when the price finds support at the upper trend line.
  • … the stop loss is placed below the back of the wedge.
  • … the profit target is measured by taking the height of the back of the wedge and by extending that distance up from the trend line breakout.