What Does a Falling Wedge Mean in Trading?

A falling wedge pattern is a trend that can be identified by its curved shape. The trend will be towards a decline in the price of a stock, asset, or currency. A falling wedge is often a sign of a reversal or a pause in the current trend.

The falling wedge pattern can be used Technical Indicators in both long and short trades. A falling wedge can be a good indication that a trend is coming to an end and a reversal is on the horizon. Let’s look at the chart below to see how a falling wedge pattern works.

In this example, the price of the stock has been increasing as it trends higher and higher over time. Then, we notice that there is a divergence in the price and MACD (moving average convergence divergence) indicator.

Rising Wedge Bullish or Bearish

This creates an opening for a short trade to be entered. The stock price then pulls back which MACD Indicator Settings creates the falling wedge pattern. In this case, the stock continues to fall after reversing out of the pattern and goes on to make new lows in prices.

What Does a Falling Wedge Mean in Trading?

How do you use this pattern? You can use a moving average of some sort to help confirm your trade entry and exit points. The two lines that are used most often are 50 day moving average and 200 day moving average. You can also use other indicators as well like MACD or RSI (relative strength index).

These tools will help you identify entry points for your trade as well as exit points when using a stop loss order or other Richard Dennis type of stop order like a trailing stop or GTC (good till canceled).

There are many ways to use these tools together but the most common methods are using them in conjunction with each other or using one tool alone such as using only MACD or only RSI indicators on your charting platform software like NinjaTrader or Trade Station for example.

What the Falling Wedge Tells Us

The chart above shows the price action of a falling wedge pattern. This is just one example of the many types of wedge patterns that can be found on the charts. In this case, there are three different falling wedge patterns that were identified by drawing trend lines from left to right on the chart.

The first line was drawn from the high at point 1 to point 2 and then continued to point 3 and then again to point 4. The second line was drawn from point 1 to point 3 and then again to points 4, 5 and 6. The third line was drawn from points 1, 2 and 3 down to points 4, 5, 6 and 7. The fourth line was then drawn by connecting points 8 through 10 which created a symmetrical triangle pattern as well as two falling wedge patterns in one chart space.

Download