Chart pattern: Falling wedge
What is a falling wedge?
A falling wedge is a bullish chart pattern (said to be "of reversal"). It is formed by two converging bearish lines.
A falling wedge is confirmed/valid if it has a good oscillation between the two falling straight lines. The upper line is the resistance line; the lower line is the support line.
Each of these lines must have been touched at least twice to validate the pattern.
NB: a line is said to be "valid" if the price line touches the support or resistance at least 3 times.
This implies that the rising wedge pattern is considered valid if the price touches the support line at least 3 times and the resistance line twice (or the support line at least twice and the resistance line 3 times).
A rising wedge marks the exhaustion of the selling trend. The convergence of the two lines in the same direction (a decrease in price magnitude) tells us that prices continue to fall with lower and lower movement magnitude. Sellers are finding it increasingly difficult to bring the price under the resistance line. The highest point reached during the first correction on the falling wedge’s resistance line forms the resistance. A second wave of decline then occurs, but of a lesser magnitude, signalling an inadequacy of sellers. A third wave is then formed thereafter but prices fall less and less in contact with the resistance. Volumes are then at their lowest point and decrease as the waves increase. The movement then has almost no selling force, which brings about a bullish reversal.
A break of the resistance line definitively validates the pattern. This break out is generally accompanied by high volumes. The price objective is determined by the highest point that caused the wedge to form.
NB: it is often observed that the steeper the falling wedge’s trend lines, the faster the price objective is reached.
Graphical representation of a falling wedge
Falling wedge statistics
- In 82% of cases, the exit is bullish.
- In 55% of cases, a falling wedge is a reversal pattern.
- In 63% of cases, the pattern’s price objective is achieved when the resistance line is broken.
- In 53% of cases, the price makes a support pullback on the falling wedge’s resistance line.
- In 27% of cases, false breaks (false exits) appear.
Notes on falling wedges
- The contact points on the falling lines must be significant because otherwise it might be a flag.
- The steeper the falling wedge’s trend lines (falling strongly), the more severe the upward movement is at the breakout (exit from the chart pattern).
- False breaks (or false exits) give an indication of the direction of exit. If a false bullish break occurs, the exit will be downwards in only 3% of cases. Exploiting a false bullish break is therefore statistically low risk.
- Retracements are generally twice as fast as the falling wedge was in its formation
- Pullbacks are detrimental to the pattern’s performance.
- The break out point (exit) generally occurs at 60% of the length of the falling wedge.
- Very wide falling wedges give better performance than narrow falling wedges.
For your information: A falling wedge is a reversal chart pattern. Its opposite is a rising wedge.