The falling wedge pattern or descending pattern is one of the beneficial patterns that alerts the investors concerning the future bullish moment. This article is a technical approach to trading this pattern and even highlights some points that need to be remembered before trading in this pattern.
So, dive deep into it to know more.
What Is A Falling Wedge Pattern?
The falling wedge pattern is a continuation pattern. It is formed when the price bounces between two downward sloping and converging trendlines. Although it is a formation of a bullish chart, it indicates both reversal and continuation patterns. It depends on where it appears in the trend.
How To Identify A Falling Wedge Pattern?
The falling wedge pattern is explained both as a bullish and bearish pattern. That is why people often get confused while identifying the pattern. Both the scenarios comprise different market conditions that need to be taken into consideration before investing.
However, you can evaluate it with the help of the direction of the trend when this pattern appears. If the pattern appears in an uptrend, it is the continuation pattern. Whereas a downtrend indicates a downtrend.
How To Trade In The Falling Wedge Pattern?
You can trade in the falling wedge pattern using the following technical analysis:
Falling Wedge Continuation Pattern
As discussed above, the descending wedge pattern appears within an uptrend during consolidation in prices. When you connect with the lower highs and lower lows, there is a slight downward slant to the wedge pattern. It happens before the prices rise eventually. As a result, the breakout helps in resuming the larger uptrends.
Moreover, traders look to the starting point of this pattern to measure the vertical distance between support and resistance. Then, you need to overlap the same distance ahead of the currency price. However, you have to know that the breakout will happen only once. So, keep the top end of the line in the target.
Falling Wedge Reversal Pattern
You can use falling wedge technical analysis to spot the reversals in the market. You can also use trendline analysis to connect both lower highs and lows to make the pattern effortless to spot. When there is a break and close above the resistance, the trendline will signal the entry into the market.
For confirmation, traders have to look to the volume indicator to see higher volume in the move up. Further, you can even assume divergence when the market is making lower lows, but the indicator is showing higher lows. It indicates a possible reversal.
Advantages and Disadvantages Of A Falling Wedge Pattern
This pattern has multiple advantages:
- It occurs frequently in the market.
- It allows traders to get into the trending market after they have missed the initial move.
- It presents transparent stop, entry, and limit levels.
- It provides opportunities for a favorable risk-reward ratio.
Despite these advantages, this pattern also has some limitations that are as follows:
- It can be a little ambiguous to novice traders.
- Further verification using other technical indicators and oscillators is required.
- It is mostly incorrectly identified.
- It signifies both reversal and continuation pattern
Although it is arduous to find the ideal pattern during appropriate market conditions, investors never apply the above-mentioned rules and concepts to find lucrative trading opportunities.
Above all, these patterns are considered the most efficient way of identifying trend reversals and even acquiring profitable techniques to buy before the emergence of a new trend. However, it is significant to be aware of some factors that can confirm the pattern. These points are as follows:
- The falling wedge bullish pattern appears in the swing low of a downtrend.
- The trendline levels should have at least three touches to confirm the pattern as a wedge.
- Once the price breaks out, the pattern becomes tradable above the trendline resistance with a sturdy bullish candle.
- The trading entry is only confirmed after a valid breakout and bearish correction. However, sometimes, you might witness a higher move in the prices without noticing any retracement.
- The ideal way to stop a loss is to reduce it in the short term with some fluctuations in the buffer.
Therefore, this way you will be able to trade in the falling wedge pattern effortlessly.