What is Falling wedge?

The falling wedge (descending wedge) pattern is a significant trend that predicts an upward trend in the future. It starts broad at the top and then narrows as the price drops. The price action forms a downward-sloping cone as the reaction highs and lows merge.

A falling wedge pattern forms when a market becomes centered between two intertwined resistance and support lines. The resistance line's slope must be greater than the support line's. If the resistance and support lines are pointing down, it could also be indicated as a falling wedge.

The falling wedge has the following key aspects:

• As the trend line advances, the volume decreases.
• A breakout across the upper trend line precedes it.
• Its trend lines are convergent.

Depending on where a falling wedge appears on the price chart, it can be understood as a continuation or reversal formation on the trendline. If the falling wedge appears downtrend – it’s a reversal pattern, if it appears uptrend – it’s a continuation pattern. Different market conditions must be taken into consideration in both instances.

A falling wedge marks the end of the period of consolidation. So, it’s like a signal that warns buyers that they should reorganize and attract new buying interests in order to push the price action higher.

Thus, a falling wedge is a key technical pattern that indicates that the adjustment or consolidation has just occurred, as the asset's price has left the wedge to the upside and the broader trend is continuing.

How to Recognize a Falling Wedge?

To spot a falling wedge you should follow these steps:

• Identify whether there is an uptrend or a downtrend.
• Connect the lower highs with the lower lows with the help of a trend line (it will show convergence and create a downward slope).
• Identify the divergence between the price and an oscillator.
• Find the resistance point’s break (it will indicate entry into the market).

Even though the breakout is one of the ways of verifying the move, not all wedges result in a breakout. Typically, you should be aiming for a significant move beyond the support line if it’s a rising wedge or a move beyond the resistance trend line if it’s a falling wedge.

Another indicator of a wedge being near a breakout is falling volume as the market consolidates. Following a breakthrough, a spike in volume is a solid sign that a bigger move is on the way.

Traders should especially be concerned if the rising wedge moves upwards a past support level. However, note that the general rule that support can convert into resistance during a breakout also applies here. Therefore, if you want to confirm the move before opening your position, you could wait for the breakout to begin, then return, and bounce of the rising wedge’s previous support level.