Also known under the descending wedge name, the falling wedge pattern is a bullish instrument that makes it possible to identify potential bullish momentum that may occur in the nearest future. It also refers to the continuous type of pattern that is plotted during the price bouncing between two converging trend lines that are sloping.
In this article, we will discuss several technical approaches to trade falling wedge. We will use gold and forex trading as an example to pinpoint the key aspects and issues to take into account then trading this pattern. But first, we need to clarify the difference between the falling and rising wedge.
As stated earlier, the descending wedge applies to a bullish or continuous pattern that is formed with the price captured and bouncing between the two sloping trendlines. While being a bullish formation, the pattern indicates not only a continuous trend but also a future reversal. The signal will depend on where a descending wedge is plotted within a given trend.
A rising wedge is usually formed during the downtrend as the pattern to oppose descending wedge. It is crucial to understand the difference between two patterns in order to apply them properly on a trading chart and make correct decisions based on true signals.
The pattern can be used to identify not only bullish continuation patterns but also a bullish reversal. It makes it simpler to identify it on a chart. On the other hand, both outcomes may come up with different conditions and scenarios, as they depend on various market conditions that must be taken into account during a trade.
The first thing to consider is the differentiating factor. Once the falling wedge has been formed, the differentiation factor divides reversal and continuous patterns following the direction of the trend. The next two things you need to keep in mind are:
We decided to describe two major ways of how you may trade the descending wedge. No matter which one you are going to choose, use it together with technical analysis.
If the price shows its ability to consolidate, it creates perfect conditions for the pattern to be formed during the uptrend. When the lower lows and highs are connected, the slightest slant downwards the pattern will eventually lead to the descending wedge breakout, bit only in before the price is about to rise. As a result, we will resume the larger uptrend in the future.
Like with every pattern, risk management is vital. In this case, we recommend placing stop loss in a safe distance reserving enough space for the market to break through the resistance level in case of a longer-term uptrend.
This method will apply to those who want to spot market reversals with the use of technical analysis. To make things easier for traders as well as to make the pattern simpler to spot, it is a good idea to connect lower lows and highs with the trendline analysis. The best moment to enter the market will be defined by the close and break above the resistance level. What’s more, you may use the recent swing low to place a stop loss.
Note: please, keep in mind that the signal, generated by the pattern, requires confirmation. If you see higher volumes traded with the market moving up, the signal is true.
To make fewer mistakes and prevent yourself from greater risks in the form of false signals, you need to take into account the following pros and cons:
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.