FALLING WEDGE SETUP HOW TO
FALLING WEDGE SETUP SERIES

FALLING WEDGE SETUP SERIES

Clear series of contracting lower highs and lowsĮxample 2: Falling Wedge on EUR/USD 4-Hour Chart.

Wedge slopes down within strong prior downtrend.

This daily chart of eBay (NASDAQ: EBAY) highlights a high probability falling wedge within a downtrend.

FALLING WEDGE SETUP HOW TO

Here are two annotated charts illustrating how to trade actual falling wedges, with key things to look for:Įxample 1: Bullish Falling Wedge on eBay Daily Chart Knowing key levels improves risk management on trades and helps spot potential reversals to exit or re-enter in the direction of the trend. Previous pattern highs can act as upside profit targets. The upper and lower trendlines of the wedge may become areas of future support or resistance. High volume breakouts tend to attract momentum traders. The biggest moves emerge from falling wedges with the highest volume spikes on the breakout.īeware breakouts on low volume-they have a higher chance of failure. Volume confirms the vitality of breakouts. They require less monitoring than moving stops manually. Trailing stops help maximize profit potential while minimizing downside risk. This locks in profits while allowing room for the upside move to continue. Trail Your Stop HigherĪfter entry, raise the stop under swing highs or areas of potential support. The remainder of the position can be trailed with a stop loss. For example, close 50% when the profit target is reached, then close 25% at the next level, etc.īooking profits along the way helps lock in gains. Book Partial ProfitsĬonsider scaling out of winning trades incrementally. Use proper risk management for your trading size and style. Stops protect capital in case the breakout fails. Place stop losses below key support levels, such as the most recent higher low or the lower wedge trendline. A valid breakout occurs when price closes above the upper trendline on increased volume.įor extra confirmation, wait for a close above the previous contraction high within the pattern. Wait patiently for an upside breakout before taking action.

Follow these best practices: Confirm the Breakout When executed properly, trading falling wedge patterns can produce sizable profits. Fewer than five may be considered less reliable.īest Practices for Trading Falling Wedges The more contact points, the more valid the pattern becomes. Aim for a Minimum of 5 Contact Pointsĭraw the trendlines so they connect at least five minor highs and lows. This shows the market is narrowing during consolidation.Įach lower high and low should be smaller than the preceding one, reflecting the contracting range. The upper and lower trendlines combine to create a series of lower highs and lower lows within the wedge shape. Identify a Series of Lower Highs and Lows Volume should ideally spike on the upside break from the wedge. Rising volume may indicate a fakeout, so be wary. Low volume highlights consolidation before a potential bullish breakout. Confirm Decreasing VolumeĬheck that volume decreases as the wedge takes shape, reflecting diminishing interest from sellers. Together, they form the converging wedge shape. The lower trendline shows buying support. The upper trendline reflects selling pressure. Then draw an upper trendline that slopes down more steeply, touching at least two lower highs. Connect the Downward Sloping Trendlinesĭraw a lower trendline first, connecting a minimum of two reaction lows. Without a preceding downtrend, the pattern may be less reliable. The prior downtrend provides the context for the eventual wedge breakout. Check for a series of lower highs and lower lows that signify a bearish trend. Look for a Prior Downtrendįalling wedges take shape during a strong downtrend-the longer the trend, the better. To spot a falling wedge on a chart, pay attention to the following five steps: 1. Eventually breaks out upward from the wedge shape.Price contracts as the pattern develops, showing decreasing volume.The upper trendline has a steeper slope than the lower trendline.Bound by two downward sloping trendlines that converge.Forms during a downtrend as prices make lower lows.

Here are the main features that define a falling wedge pattern: The breakout from the pattern typically happens in an upward direction. The pattern looks like a wedge shape as the trendlines converge at the bottom.įalling wedges signal a potential reversal of the downtrend, especially when accompanied by increasing volume. What is the Falling Wedge Pattern?Ī falling wedge is a bullish chart pattern that appears in a downtrend as the trading range narrows between two downward sloping trendlines. This comprehensive guide will teach you everything you need to know about spotting, confirming, and profiting from falling wedges. The falling wedge is one of the most powerful bullish chart patterns used by technical analysts and traders.

Falling wedge setup