Bullish Breakouts: Channel Down and Falling Wedge Patterns

This bullish expanding falling wedge pattern seems to start off as some kind of H&S pattern where the head and the top of the right shoulder form the top rail. The bottom rail is formed from the right shoulder crotch, at the neckline, and the last reversal point is made from the low that is achieved from the breakout of the neckline. The common thread for this pattern is that the price objective of the H&S falls short making the last low higher than if the H&S reached it’s full price potential.

On the other hand, the second option gives you an entry at a better price. A stop-loss order should be placed within the wedge, near the upper line. Any close within the territory of a wedge invalidates the pattern. You can see that in this case the price action pulled back and closed at the wedge’s resistance, before eventually continuing higher on the next day. When the price of a security has been declining over time, a wedge pattern might form just before the trend reaches its lowest. As you might know, there are three different types of triangle patterns, which means that the falling wedge will differ in different regards.

Can the Falling Wedge Be a Bullish Pattern?

In the context of a reversal pattern, it suggests an upcoming reversal of a preceding downtrend, marking the final low. As a continuation pattern, it slopes down against the prevailing uptrend, implying that the uptrend will continue after a brief period of consolidation or pullback. When the price breaks the upper trend line, the security is expected to reverse and trend higher. Traders identifying bullish reversal signals would want to look for trades that benefit from the security’s rise in price. For example, Bitcoin started forming a falling wedge pattern after it surged to almost $14k in June of 2019. Investors who could point it out saved their investment, but those who couldn’t, lost a significant amount.

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Falling Wedge Pattern Explained

Our chat rooms will provide you with an opportunity to learn how to trade stocks, options, and futures. You’ll see how other members are doing it, share charts, share ideas and gain knowledge. To get confirmation of a bullish bias look for price to break the resistance trend line with a convincing breakout. The ideal place to set a target will be at the upper level where the falling wedge started from, with a stop loss a few pips below the final low before the breakout occurred. Setting the stop loss a sufficient distance away allowed the market to eventually break through resistance (legitimately) and resume the long-term uptrend. To qualify as a reversal pattern, a Falling Wedge should ideally form after an extended downtrend that’s at least three months old.

As the pattern matures the support and resistance lines come together to form that cone shape. The more shallow the lows; the more of a decrease in selling pressure there is. Because the falling wedge is a bullish chart pattern, aggressive traders will typically wait for price to break above the upper resistance line before they will execute a long position. Conservative traders, on the other hand, will generally wait for price to retest the upper resistance line from above before they will execute a long trade. Just keep in mind though, that a retest of the breakout level might not always happen and result in a trader missing an entry. A wedge is a price pattern marked by converging trend lines on a price chart.

Real-Life Example: 1INCH

Notice that the $XLI chart had lower lows and lower highs for several weeks before the descending upper trend line was finally broken. The break above the resistance line is a signal that the downtrend has been broken and the potential for n uptrend has begun. A rising wedge is formed when the price consolidates between upward sloping support and resistance lines. One benefit of trading any breakout is that it has to be clear when a potential move is made invalid – and trading wedges is no different. You can place a stop-loss above the previous support level, and if that support fails to turn into a new level of resistance, you can close your trade. This means that the distance between where a trader would enter the trade and the price where they would open a stop-loss order is relatively tight.

This also holds true at first, when the market forms the first highs and lows of the pattern. The original definition of the pattern dictates that the slope of both lines should preferably be sloping with the same angle. Still, if the support line, which is the lower one, falls with a less steep angle than the upper line, it shows us that the bearish forces are falling short on the low. When the wedge starts to form you should be able to draw a line that connects the local highs, and another one that connects the local lows. This means that the distance the market can move gets smaller and smaller the further it moves into the wedge.

Definition and Meaning of Falling Wedges

Both of the boundary lines of a falling wedge tilt downwards from the left to the right. This pattern normally develops when the price of an asset has been growing over time, although it may also happen during a downward trend. By right approach, we simply mean that you have made sure to validate your methods and approach on historical data, to make sure that they actually have worked in the past.

Here is another example of a falling wedge pattern but this time it formed during a corrective phase in Gold which signaled a potential trend continuation once the pattern completed. Traders can make use of falling wedge technical analysis to spot reversals in the market. The USD/CHF chart below presents such a case, with the market continuing its downward trajectory by making new lows. Price action then start to trade sideways in more of a consolidation pattern before reversing sharply higher. The falling wedge pattern is interpreted as both a bullish continuation and bullish reversal pattern which gives rise to some confusion in the identification of the pattern. Both scenarios contain different market conditions which must be taken into consideration.

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A rising wedge formed after an uptrend usually leads to a REVERSAL (downtrend) while a rising wedge formed during a downtrend typically results in a CONTINUATION (downtrend). People come here to learn, hang out, practice, trade stocks, and more. Our trade rooms are a great place to get live group mentoring and training. To be seen as a reversal pattern it has to be a part of a trend to reverse.