What is Falling Wedge Pattern & How to Trade it?

The falling wedge is a common price chart pattern characterized by converging trend lines and a series of lower lows accompanied by lower highs. Generally, a falling wedge is analyzed as a bullish chart pattern that indicates a reversal in the market. 

Here is an example of what a falling wedge candlestick pattern looks like. Please note that besides the price action, a proper falling wedge pattern is also characterized by declining trading volume.

In a clean example of a falling wedge pattern, there is a breakout above the upper trend line, which happens when the two trend lines are close to converging. 

How to identify a falling wedge candlestick pattern?

Ideally, there should be at least two reaction highs forming the upper trend line, but three is better. Each subsequent reaction high should be lower than the previous. The same applies for the lower trend line — there should be two, ideally three, reaction lows, with each lower than the previous.

This results in two trend lines that are converging towards each other, forming a pattern that resembles a cone. While the reaction lows should be getting lower, the price drops should be getting shallower.

When it comes to the falling wedge pattern, descending trading volume is also an important factor to consider. Ideally, you want to see descending trading volume as the wedge forms, which will allow for a big volume expansion and a stronger breakout once the upper trend line is pierced.

How to trade a falling wedge pattern?

If a falling wedge pattern forms while the price of an asset is in an uptrend, it is typically analyzed as a signal that the uptrend will continue once the pattern resolves.

When a falling wedge pattern emerges during a general downtrend, it indicates a decrease in the downward momentum. This could predict a surge in the price if the price breaks out upwards from the pattern. 

Setting a stop loss

Traders who are trading a daily timeframe typically wait for a daily close above the falling wedge to confirm that it is indeed a breakout. If you’re going long after the price breaks upwards from a falling wedge, consider setting up a stop loss within the falling wedge pattern. If the price moves downwards and closes within the falling wedge, the pattern is generally considered invalidated. The stop loss can be set quite close to the upper trend line.

Taking profits

For your take profit, you can measure the distance between the two trend lines when the falling wedge pattern first formed. If you add that distance to the point of the breakout, you can arrive at your take profit point. Since the exact point of a falling wedge pattern’s formation is subject to some interpretation, this is obviously not an exact science, but it’s a good starting point when trying to determine where your take profit should be.

In the image below, the blue line represents the distance between the two trend lines at the pattern’s formation and the take profit would be set at the dotted line. 

Falling wedge FAQs

Now, let’s take a quick look at some of the most common questions traders have regarding the falling wedge candlestick pattern.

Is the falling wedge pattern bullish or bearish?

The falling wedge pattern is typically seen as a bullish formation, signaling a potential price movement upwards. 

Does the falling wedge pattern indicate a trend continuation or a reversal?

Generally, the falling wedge is analyzed as signaling a reversal in the price trend. However, if a falling wedge forms within a clear uptrend, it is sometimes also analyzed as a trend continuation signal. In this context, a falling wedge is generally analyzed as a short consolidation before the the price continues trending up. 

Does volume matter in a falling wedge?

Yes, volume is important when it comes to the strength of signal provided by a falling wedge pattern. In a textbook falling wedge pattern, there is declining trending volume which expands upwards as the price breaches the upper trend line of the falling wedge.

How to tell when there’s a breakout from a falling wedge?

Sometimes, the price can rise above the upper trend line of a falling wedge, but not convincingly enough to be viewed as a bullish confirmation. To confirm a bullish break to the upside, look for an increase in trading volume and a convincing break above the upper trend line, which should ideally also be higher than the previous high within the falling wedge pattern.

The bottom line

The falling wedge is a frequently analyzed candlestick chart pattern. It is typically viewed as a bullish signal, and is characterized by converging trend lines which follow along a series of lower lows and lower highs that get increasingly shallower.

Let’s summarize some of the most important takeaways when it comes to analyzing and trading a falling wedge candlestick pattern:

• To identify a falling wedge, there should ideally be three or more reaction highs, with each lower than the previous. The same applies to the reaction lows, which are followed by the lower trend line.
• If a candle closes inside the falling wedge pattern after there is a break of the wedge to the upside, the falling wedge pattern is generally considered to be invalidated.
• Typically, the falling wedge pattern is analyzed as a reversal signal. However, if the asset is in a clear uptrend, it can also signal a relatively short consolidation which is then followed by a continuation of the upward trend.
• Look for declining trending volume as the falling wedge pattern forms. This will allow for a stronger volume expansion and price breakout if the upper trend line of the falling wedge is pierced. 

If you want to learn more about commonly analyzed chart patterns, make sure to check out our candlestick pattern cheat sheet.