The falling wedge pattern is among the many bullish signals that you can rely on to plan your short-term trades. It is easy to identify on candlestick charts if you know the key indicators to look for. However, once you spot the falling wedge, you need to confirm the pattern with other technical indicators to get a better idea of where the market is headed.
In this article, we examine the meaning and appearance of the falling wedge chart pattern, how to interpret it and how you can trade it.
What is the falling wedge pattern?
The falling wedge pattern is one of the many bullish signals that is formed when the prices consolidate, and the trading volume falls. It is most commonly used as a reversal indicator because it typically occurs at the end of a prevailing downtrend. However, the falling wedge may also be spotted during a bull market, in which case it is regarded as a continuation of the current uptrend.
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Types of wedge patterns
Wedge patterns, characterised by converging price action, manifest primarily in two forms: rising and falling.
1. Rising wedge patterns
Also known as ascending wedge patterns, these formations exhibit a series of higher highs and higher lows, with each successive upward move demonstrating diminishing momentum.
How it forms?
Similar to other chart patterns like head and shoulders or flags, rising wedges often precede a breakout. However, in this instance, the breakout typically signals a reversal of the prevailing uptrend.
When it appears?
- Within an uptrend: A rising wedge can indicate waning bullish sentiment, as price action, despite advancing, exhibits decreasing strength.
- Within a downtrend: This pattern may signify a temporary pause before the resumption of the downward trend.
What it means?
While the initial price action might suggest continued upward momentum, the shortening of each upward move signifies diminishing buying pressure and potential for a bearish reversal.
2. Falling wedge patterns
Also known as descending wedge patterns, these formations are characterised by a series of lower lows with decreasing downward momentum.
How it forms?
A falling wedge is the inverse of a rising wedge. It frequently precedes a breakout, which in this case, typically signals a reversal of the prevailing downtrend.
When it appears?
- Within an uptrend: A falling wedge can indicate a temporary pause before the resumption of the uptrend.
- Within a downtrend: This pattern may signal waning bearish sentiment, as price action, despite declining, exhibits decreasing strength.
What it means?
While the initial price action might suggest continued downward momentum, the shortening of each downward move signifies increasing buying pressure and potential for a bullish reversal.
