Description:
The wedge pattern depicts a narrowing range between highs and lows on a price chart. As this pattern evolves, it forms converging trend lines, indicating a potential breakout or breakdown. A falling wedge occurs when both trend lines slope downward, suggesting a gradual decrease in volatility within a downtrend. Traders often anticipate a bullish reversal when the price breaks above the upper trend line, signaling the potential end of the downward movement and a shift toward an upward trend. This breakout is typically accompanied by increasing trading volume, reinforcing the validity of the pattern and the potential for a sustained upward move in price.
Input Parameters:
- Period: Defines the lookback period.
- Bands: Select from different band types such as ATR, St.Dev, Constant, or Percentage bands.
Use Cases:
- Trend Reversal Confirmation: Traders often use the falling wedge pattern as a signal for a potential trend reversal in a downtrend. When the price forms a falling wedge after a prolonged decline, it indicates that selling pressure may be weakening, and buyers could be gaining strength. Traders may look for confirmation signals such as a breakout above the upper trend line accompanied by increased volume to enter long positions, anticipating a reversal in the downtrend and a potential uptrend.
- Entry and Exit Points: Falling wedge patterns can also serve as entry and exit points for traders. As the price approaches the apex of the wedge, volatility tends to decrease, presenting an opportunity for traders to enter positions with relatively lower risk. Traders may enter long positions when the price breaks above the upper trend line with strong volume confirmation. Conversely, traders who entered long positions may consider exiting if the price fails to break out and instead breaks below the lower trend line, indicating a continuation of the downtrend.
- Price Target Estimation: The falling wedge pattern can provide traders with a target price projection upon a breakout. To estimate the potential price target, traders often measure the height of the widest part of the wedge (the distance between the highest and lowest points within the pattern) and add it to the breakout point. This projected target can provide traders with an idea of the potential magnitude of the upward move following the breakout, helping them set profit targets and manage risk accordingly. However, it's essential to combine this projection with other technical analysis tools and market factors for a comprehensive trading strategy
This feature can be used in:
- Market Scanner
- Smart Checklist
Do you want to learn more? Check out our Learning Center Article.