Falling wedge
Identifying the falling wedge pattern in an downtrend
In a downtrend, the falling wedge is known as a reversal pattern.
When the price makes lower highs and lower lows, it forms two contracting lines which gives rise to this pattern.
Buying opportunities: We can look for potential buying opportunities as the falling wedge usually precedes a reversal to the upside.
Identifying the falling wedge pattern in an uptrend
In an uptrend, a falling wedge is known as a continuation pattern that gives rise when the market contracts temporarily.
It notifies the restoration of the uptrend which gives rise to possible buying opportunities.
Practice session:
Exercise 1: Identify the falling wedge in a downtrend. Show exercise
The chart below depicts an illustration of a falling wedges in a downtrend:
Practice session
Exercise 2: Identify the falling wedge in an uptrend. Show exercise
Trading the falling wedge: Technique 1
Enter the market by placing a buy order (long entry) on the break of the top side of the wedge.
Avoid false breakouts by waiting for the candle to close above the top trend line and then enter.
The chart below depicts the buy order and the area where the price has broken the upper trend line of the wedge:
1 -Long entry
Number 2: Area where price has broken the upper trend line of the wedge
2 -Stop loss, below bottom of the wedge (The chart below depicts that the stop loss should be placed below the bottom side of the falling wedge.)
The profit target is measured by taking the height of the back of the wedge and by extending that distance up from trend line breakout.
Number 3: Back of the wedge
Number 4: Distance from entry (buy order) to Target Point-3 (this is the same height as the back of the wedge number 3)
Target Point-3 Take profit
Practice session:
Technique 1:
Exercise 3: Where would you place the entry, stop loss and take profit? Show exercise
Trading the falling wedge: Technique 2
Wait for the price to trade above the trend line (broken resistance), as in the first illustration.
Place a buy order on the retest of the trend line (broken resistance now becomes support).
Number 1: The price finds support at the upper side of the falling wedge
1 -Long entry
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)
The chart below depicts that the stop loss would go below the new support area.
Profit Target:
Place a buy order on the retest of the trend line (broken resistance now becomes support).
The chart below depicts the profit target.
Similar to technique 1, the measurement is done by taking the height of the back of the wedge and by extending that distance up from the entry:
Practice session
Technique 2
Exercise 4: Where would you place the entry, stop loss and take profit? Show exercise
Nut Shell
An overview of the lesson discussed so far….
· 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 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 take 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.