What is Falling Wedge Chart Pattern?
It is a chart pattern, formed by price action, which is contained with in a converging and descending trend lines. This is created when there is profit booking in an up trend.
They are the pressure areas in a stock chart where some bulls are pessimistic and wants to sell to book some profits. Where as most bulls are optimistic about the market and keep buying slowly on every fall. In the beginning of the pattern there is more bearish activity. As the price falls further there is more bullish activity. This results in lower low swing lows and lower low swing highs with diminishing range. Both the support and resistance lines are sloping downwards and converging.
It is a bullish continuation chart pattern. It is so named because the pattern is in the form of a wedge pointing down with the price appearing to fall down, hence the name Falling Wedge Chart Pattern.
Trend is your friend. Dance with the friend. Tune to the trend.
This pattern is formed because of tug of war between the two great forces which move the price up and down, that is demand and supply.
These are pressure areas where bulls are weaker than bears in the beginning but become stronger than bears at the end of the pattern. These are target areas where some traders book profit while most bulls are buying.
As the target area is approached there is increased selling due to profit booking. This brings down the price. As the price falls substantially it becomes an opportunity for the bulls to buy the stock. This creates a swing bottom and the price goes up.
As the price climbs up those who wanted to book profit early but failed to do, think that now is the opportunity to sell their shares. This creates a swing top and the price falls down.
This drama continues to create lower and lower swing highs and lower and lower swing lows which appear to be bearish. This is an apparent but minor trend reversal. But the strong bullish under current is expressed in the fact that each subsequent range diminishes in size indicating decrease in the momentum of fall.
These contracting ranges (diminishing ranges) with reduced volume gives us the clue that the apparent down trend is loosing steam. So it is not a classical down trend. But a corrective reaction in an uptrend. So be prepared for the upward break out in the direction of the previous trend.
If subsequent lower swing highs are joined and extended we get down sloping trend line which forms the upper border of the wedge. Like wise if subsequent lower swing lows are joined and extended we get down sloping trend line which forms the lower border of the wedge.
These two trend lines if extended join on right side. This completes the formation of Falling Wedge.
The slope of the lower support trend line is less steeper than the slope of the upper resistance trend line. This also indicates that the bearish force is less stronger than underlying bullish force.
After all the selling is exhausted the bullish activity becomes apparent. When the last range becomes smaller than all the ranges, the price breaks out of the falling wedge pattern towards the up side. Thus the up trend resumes and continues.
Study the charts given below.
This chart shows a Falling Wedge Chart Pattern.
Pattern trading is one of the strategies of making money in stock trading. Among the chart patterns falling wedge formation gives opportunity to enter or re-enter a bullish run.
Falling Wedge Chart Pattern Formation is a bullish continuation pattern and so it appears in an up trend. In a bullish market, when the price reaches a relatively minor resistance area or a minor target area, there is going to be a sell off which will later be completely absorbed by the buying force.
When there is a sell off the price falls forming lower low swing highs and lower low swing lows. Although this pattern appears to be bearish, the contracting ranges gives a clue that the momentum of the fall is reducing.
The steep upper trend line which forms the upper border of this falling wedge formation and the not so steep lower trend line which forms the lower border of this formation clearly tells that the support created by buyers is stronger than the resistance created by sellers.
One more clue that the market is only pull back and not bearish, is given by volume. When ever the price is falling the volume drops and when ever the price is rising there is increase in volume of shares traded.
After analyzing this pattern get ready to go long above the high of the candlestick which closes above the upper down sloping trend line. Protect the trade by placing a stop loss sell order below the low of the previous swing low. If you want to be aggressive you may place the stop loss sell order below the low of the candle which closes below the upper down sloping trend line.
There are many more chart pattern formation used in pattern trading. Some of them are listed below. You may click on the name of each chart pattern listed below to learn and understand more about them.
Continuation Chart Patterns