Many traders find wedge patterns to identify upcoming trend reversals in the stock market with two types of wedge patterns, rising and falling, Let’s talk here about falling wedge pattern.
Understanding the Falling Wedge Pattern
When the price of a stock falls for a long period, a wedge pattern can be form just as the price makes its final declining move. Trend lines drawn above highs and below lows on a price chart pattern may converge as price declines lose steam and buyers step in to slow the pace of the decline. Before the lines converge, the price may break above the upper trend line.
When the price breaks the upper trendline, the price is expect to reverse and go higher. Traders who identify bullish reversal signals would want to look for trades that benefit from an increase in the security’s price.
How to use the Falling Wedge for Profitable Trading.
The image above is a perfect example of a falling wedge pattern where two converging trend lines have formed a falling wedge pattern and stock prices have fallen over a period of time.
Once the Share Price breaks the upper trendline and closes above it. It is a signal of bullishness as you can see in the picture.
sometimes the price can break the above trend line and go back into the channel, but to secure the trend we have to wait for confirmation.
How to Confirm the Trend Breakout?
Once the price moves above the upper trend line, wait for the second candle to form above the trend line. Regardless of whether the color of the candle is green or red as shown in the image below.
Where to set your target and stoploss?
Your target should be equal to height of the back of the wedge. you can find the example as horizontal line in picture below.
Your stop loss should be placed at the upper side of the wedge line, but you can also use the retracement levels and the past highs and lows of the wedge.
Key Takeaways
- Traders use wedge patterns to mainly identify upcoming trend reversals and to make trading decisions in the stock market.
- There are two types of wedge patterns – a rising wedge and a falling wedge, each providing a different signal depending on the direction of the breakout.
- Traders use various technical indicators such as moving averages, RSI and price divergences to identify potential entry and exit points.
- Successful implementation of this strategy requires discipline, risk management and a thorough understanding of market dynamics and principles of technical analysis.
