Falling Wedge as a Reversal Pattern

 Hello Dear Traders,

By now, you must have understood the importance of learning, applying, and continuously improving the knowledge and strategies necessary for success in financial trading. When combined with the right knowledge and strategies, financial trading not only provides an additional source of income but also offers a path to achieving true financial freedom. This freedom represents the flexibility to work whenever and wherever you want, financial security, and a sustainable standard of living in the long term. Becoming a successful trader requires continuous learning and discipline. Technical analysis, fundamental analysis, and keeping up with market news are key to making safe trading decisions. In this article, we will discuss the Falling Wedge pattern, a multifunctional type of Wedge pattern in technical analysis.

What is the Falling Wedge Pattern?

I mentioned earlier that the Wedge pattern is multifunctional. Have you ever wondered why? There are two types of this pattern. One is the Rising Wedge, and the other is the Falling Wedge pattern. Both patterns can give different signals depending on the trend in which they are observed. For now, we will examine the Falling Wedge pattern in a downtrend.

The Falling Wedge is a reversal pattern that forms in a downtrend. If this pattern were to form in an uptrend, it would be considered a continuation pattern. Therefore, the trend in which this pattern forms is crucial and determines the market direction. When the Falling Wedge pattern appears in a bearish trend, it is believed that a trend reversal will occur and a new bullish trend will begin. The Falling Wedge pattern is also known as the "Descending Wedge pattern." In English, it can be referred to as the "Descending Wedge pattern." Both the "Falling Wedge" and "Descending Wedge" terms are used to describe this pattern, where prices are in a downtrend and squeezed between two converging trend lines. This pattern is often considered a bullish reversal signal.

Falling Wedge as a Reversal Pattern in a Downtrend.

For thorough information on the different types of Wedge patterns and the signals they provide based on trends, you can refer to the following articles:

URL 1: Current article: Falling Wedge as a reversal pattern

URL 2: Falling Wedge as continuation pattern

URL 3: Rising Wedge as a reversal pattern

URL 4: Rising Wedge as a continuation pattern

How Does the Falling Wedge Pattern Form?

The Falling Wedge pattern usually forms during a notable downtrend. Prices first decline significantly in a bear market. After a while, a slowdown in this decline is observed. Over time, the price drop weakens even further, and as a result, the Falling Wedge pattern becomes noticeable. Price movements begin to get squeezed between two trend lines. These are the Upper trend line and the Lower trend line. Now, let's take a closer look at the key elements of the Falling Wedge pattern:

Upper Trend Line (Descending Resistance Line): The upper trend line is an oblique line that connects points where prices make lower peaks. In other words, this line connects the progressively lower peaks of the pattern and forms the upper boundary of the pattern. This line also functions as resistance. To draw the upper trend line, we need to connect at least two or more declining peaks that have formed since the beginning of the pattern. Normally, the upper trend line has a steeper slope, which causes prices to show a tendency to pull back as they approach this line.

Lower Trend Line (Descending Support Line): The lower trend line is a sloping line that connects points where prices form progressively lower lows. This line defines the lower boundary of the pattern and serves as a support level. To draw the lower trend line, we need to connect at least two or more declining low points that have formed since the beginning of the pattern. Compared to the upper trend line, the lower trend line has a more horizontal slope and tends to act as a support level as prices approach it.

Converging Price Range: Over time, price movements narrow between these two trend lines, meaning the price range becomes increasingly smaller. Prices move closer to the upper and lower trend lines with each new low and high. This indicates that the price range is narrowing and approaching a breaking point. The converging price range refers to price movements getting squeezed between the upper and lower trend lines.

In this way, the Falling Wedge pattern is formed by two downward-sloping and converging trend lines. Converging trend lines emerge when the rate of decline in the low prices is slower compared to the high prices. All these developments occur within a downtrend.

How to Trade the Falling Wedge Pattern?

The Falling Wedge pattern, which appears at certain intervals in Forex trading, can offer valuable opportunities for our trading strategies. This pattern indicates that prices are in a downtrend but are likely to reverse into an uptrend soon. When correctly identified and analyzed, the Falling Wedge pattern becomes a powerful tool for determining entry points and increasing profits. The Falling Wedge pattern encountered in a bearish trend is considered a bullish signal for trend followers. When this pattern emerges, we might consider opening a long position. The Falling Wedge pattern is completed when the price breaks upwards through the upper trend line. This breakout indicates that the current downtrend is ending and a new uptrend may be beginning. An increase in trading volume at the time of the breakout reinforces the validity of the breakout. Higher volume indicates that more buyers are entering the market.

• Entry Point: When the upper trend line is broken upwards, we can either open a long position immediately or wait for a pullback retest.
• Stop Loss: It is advisable to place a stop loss order slightly below the lower trend line of the pattern.
• Target: To determine the target price, measure the widest distance at the beginning of the pattern. Add this distance above the breakout point to calculate the target price.

In the hourly chart of the EUR/GBP currency pair below, the Falling Wedge pattern has appeared during a visible downtrend, leading to a reversal of the trend. The formation of this pattern indicates that prices were moving within a gradually narrowing range and that the rate of decline was slowing. With the breakout above the upper trend line, prices began to rise, signaling the start of a new uptrend. This chart is one of the clearest and most instructive examples of the Falling Wedge pattern providing a trend reversal signal within a bearish trend.

The Falling Wedge pattern in a downtrend.

Keep in mind: Forex trading carries risk. Price fluctuations can lead to unexpected outcomes. Like any technical analysis tool, the Falling Wedge pattern can provide false signals. Therefore, it should not be used in isolation, and fundamental analysis should not be neglected.

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