swing trading

Falling Wedge Chart Pattern - How It Works and How Traders Can Use It

Stock Market Guides is not a financial advisor. Our content is strictly educational and should not be considered financial advice.

When it comes to the stock market, sometimes you might hear the term "falling wedge" mentioned. It refers to a stock chart pattern that is popular among active stock traders.

This article will explain what a falling wedge chart pattern is and how traders might be able to benefit from using it.

 

What Exactly Is a Falling Wedge?

A falling wedge is a stock chart pattern characterized by two trendlines that converge to form the shape of a falling wedge. One is a downward sloping line of resistance along the top that connects the price peaks. The other is an upward sloping line of support along the bottom that connects the price troughs.

The upper and lower lines of the falling wedge pattern are not symmetrical. The upper line has a steeper slope than the lower line, so it has the appearance of an asymmetrical wedge that leans downward.

 

 

That image is a graphical icon that gives an idea visually of what a falling wedge chart pattern looks like.

 

What Does a Falling Wedge Look Like On A Stock Chart?

The image below is an example of a falling wedge pattern as shown on one of our stock charts.

 

 

There are golden lines on our charts that automatically outline chart patterns when they're detected.

You can see the downward sloping top line where the resistance level is and the upward sloping bottom support level. The formation of those trend lines looks like a falling wedge.

 

How Do Traders Use a Falling Wedge?

The appearance of the falling wedge pattern indicates that the stock is experiencing a consolidation period. The price is making a series of higher lows (indicating buying pressure) and lower highs (indicating selling pressure). The price range between the highs and lows is therefore getting tighter and tighter.

Traders are typically waiting to see the price surge upward out of the falling wedge. When the period of price consolidation ends, if the price makes a strong move upward past the upper resistance line, that can be considered a breakout entry signal. Traders might anticipate a continuation of upward price movement after the breakout.

 

Is a Falling Wedge Bullish or Bearish?

Falling wedges are generally considered bullish chart patterns, meaning that the presence of a falling wedge on a stock chart might be an indication that the stock price is on the verge of going up.

Since a falling wedge is typically considered bullish, it means traders might try to capitalize by going long (meaning that they would be buying instead of shorting).

 

How Do You Find Stocks That Have Falling Wedge Patterns?

You can find them by using our Falling Wedge scanner. It's a free tool we offer here at Stock Market Guides. It uses our proprietary scanning technology to find stocks that are in a falling wedge chart pattern.

Here's how the scanner results look:

 

That tool ensures that you don't have to waste time flipping through stock charts manually to find stocks with a falling wedge pattern.

We also have a scanner that finds stocks with a symmetrical wedge chart pattern.

 

Example of a Falling Wedge Trading Strategy

For this example of a falling wedge trading strategy, we're going to use a daily chart, where each price bar represents one day of price activity. That means it would be a swing trading strategy where the trade is designed to last more than one day but not for the long haul.

 

Entry for the Falling Wedge Trading Strategy

The entry for this Falling Wedge trading strategy will be as follows:

The entry criterion for our Falling Wedge trading strategy is very simple. You can see in the stock chart below for META that the entry price would be right around $592, where that upper golden line is.

 

 

Exit for the Falling Wedge Trading Strategy

There are a lot of possibilities here for the exit.

One benefit of using a stock chart pattern as a basis for making trades is that the pattern itself can help you determine exits in some cases.

For any given trading strategy, it can be helpful to define three different criteria for the exit: profit target, stop loss, and time limit.

Not everyone uses all three, and that's totally fine. Ultimately, you can set these values however you want. But for the purposes of this strategy example, we will define all three:

 

1. Profit Target

We will set the profit target at 2 ATRs away from the entry price.

ATR is an indicator in the stock market that measures a stock's recent price volatility. Most trading platforms have it available as an indicator you can enable.

Our profit target criterion indicates that we will take the ATR value of the stock, multiply it by two, and add it to the price we paid when we bought the stock. That will be our profit target and we can set up a sell limit order at that price.

2. Stop Loss

We will set the stop loss at 0.5 ATRs below the support line (the bottom trendline of the falling wedge). This means we take the ATR value of the stock, multiply it by 0.5, and subtract it from the price of the lower trendline from that day.

That will be our stop loss and we can set up a stop order at that price.

3. Time Limit

We will set the time limit as one week since this is a swing trade. If the stock has not hit either the profit target or stop loss by the time limit, then we will close the trade manually at the opening bell seven calendar days after entry.

 

How Well Do Falling Wedges Actually Work?

The idea of a falling wedge trading strategy sounds nice to many people because it offers a clear, easy-to-understand way to find and manage a trade setup.

But does it actually work? Can traders indeed generate profits by trading falling wedge chart patterns?

That's exactly what our company can help answer for you, since our scanner technology has allowed us to do our own research on that precise question.

The answer is that trades based on a falling wedge are not always profitable, but for certain stocks they might indeed have a track record of success according to our backtest research.

Here is some data that shows how a proprietary falling wedge trading strategy we created has performed historically according to backtests:

 

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Anyone who signs up for our swing trading scanner service will be able to see stocks that qualify for that trading strategy in real time.

 

Learning More About Falling Wedges

You can contact us any time if you would like to ask any questions about falling wedges or anything else related to the stock market.