When a falling wedge pattern appears in a forex chart it hints at bullish sentiment. Like the rising wedge , this pattern is quite common at all time scales. It comes in two forms:. The first case is signaling a continuation of the main trend. The second case is signaling a reversal could be on the cards. Traders use the context in which the wedge pattern appears to decide one case from the other. The falling wedge is very similar to other three-point chart patterns like pennants and triangles.
It forms when the price is trapped between two converging lines; an upper resistance and a lower support line. The price is making lower highs and lower lows while at the same time volatility is falling. The price should be narrowing into a tight range. The pattern ends often with a strong breakout. The continuation falling wedge is similar in shape to the pennant. By convention shorter duration wedge patterns are usually classed pennants rather than wedges.
To trade a falling wedge as a trend continuation buy side it should have certain features. Firstly the pattern has to appear inside a solid uptrend. You can confirm this with the simple moving average line. For example, if the pattern is 50 bars, use the slope of the simple moving average SMA as a guide.
The pattern should be a brief downward retracement of the main trend. You can use the Fibonacci retracement tool to judge the size with respect to the trend or just do it by sight. Once established, the falling wedge is traded using a breakout strategy.
This is done in much the same way as the pennant trade or the triangle trade. However spotting them in live charts is tricky and prone to mistakes. Firstly a reversal wedge should appear within a bearish trend. Additionally the configuration should be bigger and more prominent than a continuation wedge.
By that I mean the main area of the trend should start funneling downwards into a narrowing range. Volatility will be dropping off at the scale of the trend and below. When trading we check this with the ATR indicator using various different periods or just by sight. A chart pattern is only as good as its forecasting ability. To understand the reliability of the falling wedge specifically in forex, I looked at five currency pairs each over a ten year period.
I checked for patterns of up to 50 bars in duration using a detection indicator. On the four hour chart H4 , there were a total of patterns over the entire period. The ones that appeared in bearish trends or flat markets were ignored. The trend was measured as the slope of the simple moving average SMA using a simple 10 point box filter. Of the remaining wedges that were in bull trends, the correction was measured just after the pattern completed.
Where there was a bullish continuation, this was counted as a correct case. Where there was a bearish correction, this was counted as incorrect.
The table below shows the results. What this shows is that historically the falling wedge has had better than even chances of correctly predicating a bullish continuation on major forex pairs.
However there is quite a bit of variation across pairs. On the hourly chart H1 , there was less variation but the odds were slightly less favorable than on the four hour chart. The odds of a bullish continuation following a falling wedge were The falling wedge is similar to other three-point chart patterns such as triangles and pennants. Like the triangle, the falling wedge has proven useful as a continuation signal. We usually trade it in the same way, as a breakout. On major forex pairs the falling wedge has correctly predicted the resumption of a bullish trend with odds that are slightly better than chance alone.
How do you know when it is too far and what retracement tool? I have the indicator, but how do you get the lines to display like you have in the charts? Usually you can do it just by looking at the chart to see how strong and how far the retracement wedge has already gone. Leave this field empty. It comes in two forms: In an uptrend a falling wedge can form as a minor downward correction In a down trend a falling wedge can develop as the trend is about to reverse The first case is signaling a continuation of the main trend.
Identifying the Falling Wedge Pattern The falling wedge is very similar to other three-point chart patterns like pennants and triangles. Want to stay up to date? Just add your email address below and get updates to your inbox. Leave this field empty if you're human: The Bullish Breakaway A bullish breakaway is a chart reversal pattern that can appear in either a bullish or bearish market But it can be useful when used alongside other Evening Star Candlestick Pattern As a trading pattern, the preferred way to trade the evening star is when it appears in the bullish Leave a Reply Cancel reply.