The falling wedge
The price falls, but inside a wedge that keeps narrowing. Many see fading selling pressure and expect an upside breakout.
The falling wedge is the mirror image of the rising one. The price falls, but each new low is only slightly lower than the last.
What it's about
Both boundaries fall and converge. Sellers push the price down with more and more effort. When the price rises above the upper line, the wedge counts as complete.
How to recognise it
- At least two falling highs and two falling lows.
- The upper line falls more steeply than the lower one.
- The swings get smaller.
- A close above the upper line counts as a breakout.
How the price target is estimated
The start of the wedge counts as a rough target. If it began at €18, many expect a rise back there after the breakout.
Where it misleads you
A falling wedge can also just keep falling. Buying before the breakout means betting on a pattern that isn't complete. And with companies in real trouble, every wedge is just a pause before the next decline.
An example trade with made up numbers
Ida has €10,000 in her account and risks at most €150 per trade. A stock breaks upwards out of a falling wedge. Ida buys at €15.40 and sets her stop loss at €14.40. With that distance, she buys 150 shares for €2,310. Costs: €1 each to buy and sell, plus about 2 cents of spread per share on each order.
If it works: The price reaches the start of the wedge at €18 and Ida sells. Ida is €390 ahead. After €2 in fees and €6 in spread, €382 is left.
If it goes wrong: The breakout fails and the stop fills at €14.30. That's a €165 loss, €173 with costs.
Ida put her stop below the last low in the wedge. If the price gets there, the breakout has failed.
Falling wedges count as reversal patterns at the end of a decline, or as continuation patterns when they appear as a pullback in an uptrend. Many watch for rising volume on the breakout.
Summary
- In a falling wedge the price falls, but with fading strength.
- Only the breakout above the upper line completes the pattern.
- The start of the wedge counts as a rough target.
Did you get it?
Why does a falling wedge count as a possible turning sign?
Because each new low is only slightly lower.
When is the wedge complete?
When the price closes above the upper line.
Where do many set their stop?
Below the last low in the wedge.
Sources and further reading
- StockCharts ChartSchool, Falling Wedge. View source ↗
- Thomas N. Bulkowski: Encyclopedia of Chart Patterns, 3rd edition 2021.
Related
- Rising wedgeChart pattern
- Double bottomChart pattern
- What chart patterns can doLesson