Before reading this lesson, you should have previously read through:

The falling (or descending) wedge can also be used as either a continuation or reversal pattern, depending on where it is found on a price chart. This lesson shows you how to identify the pattern and how you can use it to look for possible buying opportunities.

Identifying the falling wedge pattern in an downtrend

If the falling wedge appears in a downtrend, it is considered a reversal pattern. It occurs when the price is making lower highs and lower lows which form two contracting lines. The falling wedge usually precedes a reversal to the upside, and this means that you can look for potential buying opportunities.

The chart below shows an example of a falling wedges in a downtrend:

Descending wedge

In the following exercise, you can practice how to identify the falling wedge in a downtrend:

Exercise 1: Identify the falling wedge in a downtrend Show exercise

Identifying the falling wedge pattern in an uptrend

A falling wedge found in an uptrend is considered a continuation pattern that occurs as the market contracts temporarily. It indicates the resumption of the uptrend. Again, this means that you can look for potential buying opportunities.

The chart below shows a falling wedge in an uptrend:

Descending wedge 4

In the following exercise, you can practice how to identify falling wedges in uptrends:

Exercise 2: Identify the falling wedge in an uptrend Show exercise

Trading the falling wedge: method one

Once you have identified the falling wedge, one method you can use to enter the pattern is to place a buy order (long entry) on the break of the top side of the wedge. In order to avoid false breakouts, you should wait for a candle to close above the top trend line before entering.

The chart below demonstrate the buy order and the area where the price has broken the upper trend line of the wedge:

Descending wedge method 1 entry

el1 Long entry
number_2 Area where price has broken the upper trend line of the wedge

The chart below shows where to place the stop loss. This should be placed below the bottom side of the falling wedge.

Descending wedge method 1 stop loss

el1 Long entry
number_2 Area where price has broken the upper trend line of the wedge
sl2 Stop loss, below bottom of the wedge

Finally, the last chart shows the profit target. This is measured by taking the height of the back of the wedge and by extending that distance up from the trend line breakout.


Descending wedge method 1 take profit

el1 Long entry
number_2 Area where price has broken the upper trend line of the wedge
sl2 Stop loss, below bottom of the wedge
number_3 Back of the wedge
number_4 Distance from entry (buy order) to tp3 (this is the same height as the back of the wedge number_3)
tp3 Take profit

In the following exercise, you can practice where to place the entry, stop loss and take profit when trading a falling wedge according to method one:

Exercise 3: Where would you place the entry, stop loss and take profit? Show exercise

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Trading the falling wedge: method two

The second way to trade the falling wedge is to wait for the price to trade above the trend line (broken resistance), as in the first example. Then, you should place a buy order on the retest of the trend line (broken resistance now becomes support).

The chart below shows where to place the buy order:

Descending wedge method 2 entry

number_1 The price finds support at the upper side of the falling wedge
el1 Long entry

As the following chart shows, the stop loss would go below the new support area:

Descending wedge method 2 stop loss

number_1 The price finds support at the upper side of the falling wedge
el1 Long entry
sl2 Stop loss

Finally, the last chart shows the profit target. As in method one, this is done by taking the height of the back of the wedge and by extending that distance up from the entry:

Descending wedge method 2 take profit

number_1 The price finds support at the upper side of the falling wedge
number_2 Back of the wedge
number_3 Distance from entry (buy order) to take profit tp3 (this is the same height as the back of the wedge number_2)
el1 Long entry
sl2 Stop loss
tp3 Profit target

In the following exercise, you can practice where to place the entry, stop loss and take profit when trading a falling wedge according to method two:

Exercise 4: Where would you place the entry, stop loss and take profit? Show exercise

Summary

  • … the falling wedge pattern signals a possible buying opportunity either after a downtrend or during an existing uptrend.
  • … the entry (buy order) is placed when either the price breaks above the top side of the wedge, or when the price finds support at the upper trend line.
  • … the stop loss is placed below the back of the wedge.
  • … the profit target is measured by taking the height of the back of the wedge and by extending that distance up from the trend line breakout.

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