What is a Falling Wedge?
The meaning of falling wedge chart pattern refers to a technical analysis tool used to identify the reversal of a downward trend. It is characterized by two converging lines, with prices tending to fall from the top line and rally up towards the bottom line. The falling wedge chart pattern typically signals a bullish formation as it indicates that buying pressure is growing stronger and pushing prices higher. A break above the upper resistance line of a falling wedge pattern usually indicates that an uptrend is beginning and that prices may move further higher in the near future.
In order for the falling wedge chart pattern to be valid, it must last at least two weeks. Additionally, the measured move of a falling wedge should be considered when trading as it provides an estimated target price. The measured move is calculated by taking the distance between the highest peak and lowest trough on the chart pattern and adding that value to the breakout point to calculate a potential target price. Understanding the measured move of a falling wedge pattern can be an effective tool for traders looking to maximize profits and limit losses during their trading activities. When used in combination with other technical analysis tools, the falling wedge chart pattern can provide valuable insight into trends in the market.
It is worth noting that falling wedge chart patterns are generally considered short-term patterns, meaning that they can be used to identify potential buying opportunities but may not accurately signal a long-term trend reversal. Additionally, due to the nature of the pattern, false breakouts are common and should be identified and managed appropriately. As such, further risk management techniques may be necessary for traders who use falling wedge chart patterns as part of their trading system. By recognizing and managing risks associated with the pattern, traders can maximize gains.
Simplified Example
A falling wedge is like a slide that is getting steeper and steeper. At the beginning, the slide is not too steep and you can easily go down it. But as you keep sliding, the slope gets steeper and steeper, and it becomes harder and harder to keep sliding down. In the stock market, a falling wedge is a pattern where the stock's price is going down, but at a slower rate. This is similar to the slide getting less steep as you go down. This pattern can sometimes indicate that the stock's price will start going up again soon, like reaching the end of the slide.
The History of Falling Wedge
The term "falling wedge" found its roots in the early to mid-20th century, likely originating within the realm of commodity trading as a tool to spot potential reversals in price trends. Its adoption expanded across diverse markets, including stocks, forex, and cryptocurrencies. Though its exact genesis remains uncertain, traders likely coined the term through collaborative discussions, noting the distinctive shape of the pattern and its predictive nature in signaling potential trend reversals. The phrase "falling wedge" fittingly encapsulates the converging, downward-sloping trendlines characterizing the pattern, gaining widespread acknowledgment and application in technical analysis.
Examples
In April 2020, the S&P 500 began a falling wedge pattern that lasted until August. The index gradually declined until mid-July before bouncing back slightly, only to decline again and finish at the low end of the wedge in August.
A similar falling wedge pattern was seen in gold prices during the summer of 2018. Prices moved lower within a steadily narrowing range, eventually breaking out and continuing their downward trend in September of that year.
In April 2019, oil prices also showed signs of a falling wedge pattern as they continued to decline from their highs reached earlier that year. Prices dropped within an increasingly tighter trading range before finally breaking lower and continuing on their downward trend in June 2019.