Falling Wedge can be categorised as a reversal or continuation pattern.
As a reversal pattern, Falling Wedge normally occurs after an established downtrend. The slope of Falling Wedge will be downward, which is in the same direction as the prevailing trend.
As a continuation pattern, Falling Wedge occurs after following an uptrend. The slope of Falling Wedge will still be downward, but this slope will be against the prevailing uptrend.
Regardless of whether it occurs as reversal or continuation pattern, Falling Wedge is regarded as bullish pattern.
However, Falling Wedge is not seen as a popular pattern, as the failure rate of this pattern is quite high and more difficult to trade.
The Formation of Falling Wedge
Falling Wedge Pattern contains at least two lower highs (peaks) and two lower lows (troughs). When the peak as well as trough points are connected by separate lines and then extended to the right, they would respectively form a descending upper line and a descending lower line, whereby the upper line should have a sharper slope than the lower line. As such, both lines would converge and look slanted in a downward direction, creating a pattern that looks like a Falling Wedge.
In this case, the descending upper line acts as resistance, whereas the descending lower line as support.
When the lower line (support) is noticeably flatter as the pattern develops, it indicates that selling pressure is weakening, as sellers are not really able to push the price down further each time the price is under pressure.
The completion of the pattern occurs when prices break out through the upper line (i.e. breakout to the upside) with a high volume.
Continue to Part 2: Important Characteristics of Falling Wedge pattern.
To find out more about other Chart Patterns, please refer to:
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