Hello Dear Readers,
Financial markets have always been intriguing due to the wealth-building opportunities and capital appreciation they offer to participants. The opportunities presented by these markets span a wide range, from stocks to currency exchange rates, from commodities to cryptocurrencies. This diversity allows us to diversify our portfolios and earn profits even under different market conditions. The ever-changing nature of the markets provides the opportunity to score big gains with the right analysis and strategies. Therefore, being able to predict market movements and accurately analyze trends and formations is a critical skill. Market followers analyze market movements using technical analysis tools and chart patterns. These tools help us improve gains from market fluctuations and take the necessary steps toward financial success. Among these analytical tools, the "Falling Wedge" pattern also offers great advantages in trading. In this article, we will present a descriptive overview of the characteristics of the Falling Wedge pattern and its use in trading.
Features of
the Falling Wedge Pattern
We
discussed the Falling Wedge pattern, a type of the multifunctional Wedge
pattern in our previous article. The Falling Wedge pattern can be either a
reversal or a continuation pattern, depending on the trend in which it appears.
Therefore, whether it is the Rising Wedge pattern or the Falling Wedge pattern,
we can describe these patterns as multifunctional. To avoid confusion, let's
explain simply: If the Falling Wedge pattern appears in a downtrend (bearish
trend), it is classified as a reversal pattern. If the Falling Wedge pattern
appears in an uptrend (bullish trend), it is known as a continuation pattern.
In our previous article, we examined the Falling Wedge pattern as reversal pattern, and now we will analyze it as a continuation pattern.
If the Falling Wedge pattern appears in an uptrend (bullish
trend), it is a continuation pattern. When this pattern emerges in a bull
market, it is known as a temporary correction. This is sometimes considered a
period where the bulls take a rest and gather strength. With the appearance of
the pattern, prices start to fall for a short period. This decline gradually
narrows, and price fluctuations diminish. As a result, the Wedge pattern
appears on the price chart. The Falling Wedge pattern can be more easily
recognized by the following features in its structure:
Descending Upper Line: The descending upper trendline is a
sloping line that connects the lower highs. This line is drawn by passing
through at least two peak points of the price. The upper trendline is inclined
and moves downward over time. The price testing this line multiple times
increases the validity and strength of the line. This line acts as a resistance
before the price breaks upwards.
Descending Lower Line: The descending lower trendline is a
sloping line that connects the lower lows. This line joins the trough points of
the pattern and usually forms the level where the price finds support.
Similarly, it is drawn by passing through at least two trough points of the
price. These troughs define the lowest points reached after each price rise.
The lower trendline is inclined, moves downward over time, and serves as a
support that holds the price.
Narrowing Price Range: The narrowing range is the area where
the descending upper and lower trendlines come closer to each other over time,
and price movements become confined. At the beginning of the formation, price
movements occur within a broader range, but this range narrows as the formation
progresses. The upper and lower trendlines approach each other, and price
movement becomes constrained. This compression indicates that price movements
are occurring within an increasingly narrow range and that a breakout point is
approaching. The narrowing range ends, and the formation is complete when the
price breaks above the upper trendline.
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| Falling Wedge as a Bullish Continuation Pattern. |
The Falling Wedge pattern is a formation where prices move
downward within a narrowing range, but the expectation is that this movement
will eventually result in an upward breakout. When observed in an uptrend, this
pattern is generally considered a continuation pattern, and it is predicted
that prices will continue in the direction of the trend.
Using the Falling Wedge Pattern in Trading
The Falling Wedge pattern observed in an uptrend plays a highly
influential role in financial trading. This pattern reflects a temporary
decline in prices within an upward trend, but eventually, a breakout to the
upside occurs. That is, during a generally rising period, a short-term
correction or retracement happens. During this process, prices retreat to form
a falling wedge shape, but this retracement usually indicates weak selling demand and suggests that buyers have the strength to push prices higher again.
The appearance of the Falling Wedge pattern within an uptrend often attracts
the attention of trend followers. This pattern indicates that despite
short-term market fluctuations, the overall upward trend will be maintained and
that strong buyers are present in the market. The confinement of prices within
a Falling Wedge suggests that selling pressure is weakening and that buyers are
preparing to push prices higher again. When it occurs in an uptrend, this
pattern is commonly understood as a continuation pattern, and an upward
breakout is expected. The formation is completed when the price breaks above
the upper trendline, and normally a buying signal is generated at this point. A
notable increase in trading volume is observed during the breakout. This
increase confirms the validity of the breakout.
- Buy: When the price breaks above the upper trendline, this breakout point is usually considered the entry point.
- Stop Loss: The stop loss order is placed just below the lowest point of the pattern.
- Target: The target price can be set as the same amount above the breakout level as the width of the pattern at its beginning.
In the 4-hour chart of the Canadian Dollar/Japanese Yen
currency pair below, you can observe the Falling Wedge pattern forming within
an uptrend. During the formation, you can see that prices experienced a
temporary pause in the overall uptrend, entering a correction phase. In this
correction phase, prices create a falling wedge shape by making lower highs and
lower lows. The price's confinement in this area before breaking the upper
trendline indicates that buyers are gathering strength and the impact of sellers
is weakening. This situation provides trend followers with a clue about the
direction of the trend. A strong upward move is expected once the price breaks
above the upper trendline. The breakout above the upper trendline signifies
that the formation is complete and that the price uptrend will continue. This
breakout indicates that buyers have regained control of the market and that the
uptrend will persist. You can see that the price began to rise rapidly
following this breakout on the chart. This is clear evidence of how strong a
continuation signal the Falling Wedge pattern provides. The Falling Wedge
pattern observed in the 4-hour chart of the Canadian Dollar/Japanese Yen
currency pair is one of the most obvious examples of a continuation signal in
an uptrend.
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| Falling Wedge Continuation Signal in CAD/JPY 4H Chart |
Recognizing the Falling Wedge pattern is crucial for both
long-term trading strategies and short-term trading. This pattern provides
short-term traders with the opportunity to capitalize on buying opportunities
even during temporary periods of market weakness. The Falling Wedge pattern is
supportive of the overall uptrend and often signals that prices will resume
their rise after breaking above the upper boundary of the falling channel.
Therefore, accurately analyzing the Falling Wedge pattern observed in an
uptrend helps traders identify the most suitable entry points and manage their
risks.
Don't forget: Every trade in the Forex market carries a
certain amount of risk. Technical analysis tools can contribute to our trading,
but no analysis method provides 100% certain results. The Falling Wedge pattern
is subject to this rule as well. Market conditions can vary continuously, so do
not neglect risk management and always consider various factors, including
fundamental analysis, when making trading decisions.
For more information on the different types of the Wedge
pattern and the signals they provide depending on the trends in which they
form, you can check out the following articles:
- URL 1: Falling Wedge as reversal pattern
- URL 2: The article you are currently reading: Falling Wedge as a continuation pattern
- URL 3: Rising Wedge as a reversal pattern
- URL 4: Rising Wedge as a continuation pattern
We are Open to Questions and Feedback: This article is written by a human, so there may be grammatical errors. Please be understanding and notify us of any errors you encounter. You can write in the comments section or send a message to our email address on the contact page, available 24/7. Additionally, if you have any questions regarding financial trading, please do not hesitate to ask. We wish you good trading.