Falling Wedge Definition
The Falling Wedge is a bullish pattern that begins wide at the top and contracts as prices move lower. This price pattern forms when the market makes lower lows and lower highs with a contracting range. When you find this pattern in a downtrend it is considered a reversal pattern, as the contraction of the range indicates the downtrend is losing steam.
Falling Wedge Key Points
- The Falling Wedge is a bullish chart pattern that is used to predict the reversal of the current downtrend.
- It is characterized by a contracting range, or a descending wedge where the market makes lower lows and lower highs.
- When the price breaks above the upper trendline of the wedge, it signals a potential reversal to the upside.
What is a Falling Wedge?
A Falling Wedge is a chart pattern used in technical analysis, formed by price moves that allow for a downward trendline and a converging trendline to be drawn. The pattern indicates a potential reversal of the current downtrend, suggesting that the price could start moving upwards. This pattern is typically seen in downtrends and is considered to be a bullish signal.
Why is a Falling Wedge important?
The Falling Wedge is important because it can provide traders with a signal to potentially enter a long position or exit a short position. The pattern suggests that the selling pressure is starting to diminish, and a reversal to the upside may be on the horizon. This can provide traders with an opportunity to enter a trade at a relatively low price before the potential upward price movement.
When does a Falling Wedge occur?
A Falling Wedge occurs during a downtrend when the price is making lower highs and lower lows with a contracting range. The pattern begins to form when the price starts to consolidate, with the highs and the lows coming together in a ‘wedge’ shape. The completion of the pattern occurs when the price breaks above the upper trendline of the wedge, indicating a potential reversal to the upside.
How to identify a Falling Wedge?
Identifying a Falling Wedge involves looking for specific characteristics on a price chart. These include:
1. A downward price trend leading into the wedge. The wedge is considered a reversal pattern, and so a prior trend is necessary for reversal.
2. The price making lower highs and lower lows with a contracting range.
3. Two converging trendlines that can be drawn, one connecting the lower highs and one connecting the lower lows.
4. A break above the upper trendline, signaling the completion of the pattern and a potential reversal to the upside.
Who uses the Falling Wedge?
The Falling Wedge is used by technical traders and analysts who use chart patterns to predict future price movements. It is particularly useful for traders who specialize in trend reversal strategies. These traders look for potential signs of a trend reversal to time their trades, and the Falling Wedge can provide such a signal.
