Falling wedge pattern

A falling wedge is a bullish chart pattern bounded by two downward-sloping trend lines. The upper line, through the highs, is steeper than the lower line, through the lows. Each new sell-off takes price to a new low, but by a smaller distance than the one before.

The pattern appears in two places. At the end of a downtrend it is read as a reversal. Inside an uptrend it is a pullback, and a breakout continues the trend.

On Charts the trend line tool draws both sides of the wedge. What to check:

• Two falling trend lines – both slope down. If the lower line is flat, the pattern is a descending triangle, not a wedge.
• Convergence – the lines get closer as the pattern develops and would meet at a point to the right, the apex.
• Touches – at least two highs on the upper line and two lows on the lower one. Thomas Bulkowski asks for five touches in total before he counts a wedge.
• Price fills the wedge – it moves from line to line. Large empty areas inside mean the lines are forced.
• Volume – usually declines while the wedge forms and rises on the breakout.
• Breakout – a candle close above the upper trend line.

A falling wedge is read as bullish, whatever the trend before it. Sellers still make new lows, but each one gains less ground. When price closes above the upper line, the sequence of lower highs is broken.

The bullish reading is cancelled if price closes below the lower trend line. The wedge has then failed: the decline is accelerating, not fading.

A falling wedge gives a long trade, and only after the breakout.

• Entry – on the candle close above the upper trend line, or on a retest of that line from above.
• Stop – below the last low inside the wedge.
• Target – the top of the wedge, the high where the pattern began. Another common measure is the height of the wedge at its widest part, added to the breakout price.
• Example – a wedge starts at a high of 150 and narrows down to a low of 110.5. Price closes above the upper line at 123. The stop goes below 110.5, and the target is the 150 high.
• The target is an estimate. The nearest resistance on the way is a common place to take part of the profit.

Both patterns have falling highs. The difference is the lower line. In a descending triangle the lows hold one horizontal support, and the pattern is usually read as bearish: sellers press lower on every bounce while buyers defend a single level. In a falling wedge the lows fall too, but more slowly than the highs, and the pattern is read as bullish.

The side to watch follows from that: the support of a descending triangle for a break down, the upper line of a falling wedge for a break up.

A bull flag starts with a sharp rally, the flagpole, followed by a short pullback between two parallel lines. A falling wedge needs no flagpole, takes longer to form, and its lines converge instead of running in parallel.

Both are watched for a break upward. A bull flag is a continuation pattern only. A falling wedge can also be a reversal at the end of a downtrend.

• Buying inside the wedge – until the upper line breaks, the sequence of lower lows is intact.
• Forcing the lines – trend lines that cut through candle bodies or rest on a single touch do not define a wedge.
• Confusing a wedge with a falling channel – in a channel the lines are parallel, and price is simply trending down.
• Stop inside the pattern – a retest of the broken line is normal. A stop below the last low leaves room for it.
• Ignoring the higher timeframe – a falling wedge on a 15-minute chart inside a strong daily downtrend is often only a pause.