Falling Wedge: Definition, Importance, and Usage

Does Сhart Pattern Work in Crypto?

The major criticism against using chart patterns in cryptocurrencies is that they show past results, not future performance. Despite this, combining chart patterns with different indicators can predict - to a large extent - the future direction of a cryptocurrency. As we will see in this article, the falling wedge pattern (also referred to as FWP in this article) is a crypto pattern that can be used to predict a cryptocurrency’s next move.

FWP is a good example of the fact that patterns work quite successfully in cryptocurrency markets as well. It successfully helps traders in identifying either bullish or bearish reversal pattern on the chart, which can play an important role in forming a trading strategy. The FWP provides insight into potential bullish and bearish signals, aiding traders in navigating the often volatile and unpredictable world of cryptocurrency trading. It equips traders with a strategy to effectively time their entry and exit points in response to these signals.

What Is a Falling Wedge Chart Pattern?

One thing that characterizes wedges is their converging lines. In the falling wedge, the trend lines point downwards. Like its bearish counterpart, the falling wedge can either be a sign of a continuation or a reversal. This leads to some confusion when identifying and defining the pattern. Therefore, it is critical to aid the pattern with the analysis of market conditions and some knowledge how to use the trading volume indicator.

An important factor that determines the nature of the pattern (continuation or reversal) is the direction of the trend when a descending wedge appears. For instance, how do you identify a bearish chart pattern? When the previous candlesticks before the falling wedge breakout are bearish, it is a sign of a reversal. In the same way, when the previous candlesticks are bullish, and the FWP shows up, it is a sign that the bulls are just catching their breath and the bullish trend will continue.

A falling wedge pattern has the following three essential qualities:

• The lower highs and lower lows of the price action indicate that it is currently in a downtrend;
• Two trend lines—the top and lower trend lines—are convergent;
• As the channel goes on, the volume gets progressively lower.

The first two components of a falling wedge must exist, but the third component, a decrease in volume, adds further legality and validity to the pattern and is therefore highly beneficial. Interestingly, this decrease in volume can be seen as a bearish pattern, indicating a strong downtrend. However, it's important to note that this is often a precursor to a bullish reversal pattern. The decreasing volume suggests that the selling pressure is starting to weaken, and the bears may be losing control of the market.

What Sentiment Does This Pattern Show?

The down wedge pattern is a bullish pattern. It is usually seen as a change in sentiment in an oversold asset or a slight reduction of volume in a bullish market. This pattern often presents a buying opportunity for traders, especially when it occurs after a strong downtrend.

How to Spot It on Charts

A price pattern is not created at random on a cryptocurrency chart. Like the rising wedge chart pattern, the FWP, which appears after a negative trend, represents a story about what bulls and bears are doing and what they may do in the future.

After a major negative event, a bullish wedge pattern develops when selling pressure mounts on an asset, causing the price to fall. Volume typically reduces after a while, and this is when buyers, who have been holding cash or stablecoins, pounce on the asset with full buying power, hereby causing a reversal. This is a clear example of bullish signals overpowering bearish signals, leading to a market correction. It's a sign that the bears are losing their grip on the market, and the bulls are ready to take control.

As explained earlier, the three things that should be present on the chart if it is to be a downward wedge pattern are

• The lower highs and lower lows of the price action indicate the market is currently oversold;
• Two trend lines—the top and lower—are convergent;
• Reducing volume

Once these three criteria are in place, you can be certain it is a FWP. The shape of the pattern and the rate at which the volume decreases can provide additional confirmation of the pattern. It's a clear visual representation of the shifting market dynamics, with the converging trend lines reflecting the decreasing momentum of the bears and the potential for a bullish reversal.

Significance

The falling wedge model is a significant tool in technical analysis of financial markets. It is particularly used to predict and interpret potential price reversals and bullish trends. Its importance can be highlighted in three main ways:

• Predicting reversals: the falling wedge is often seen in downtrends and considered a bullish pattern. This means that if a falling wedge forms during a downtrend, it could signal that the trend is about to reverse into an uptrend.
• Bullish pattern: it can also form during an uptrend, acting as a pause or period of consolidation before the trend continues. This can provide traders with a good entry point.
• Risk management: the boundaries of the falling wedge can be used to set stop losses and take profit levels. For instance, a trader might set a stop loss just outside the wedge and a take profit at a previous high.

Is the Falling Wedge Pattern Accurate?

The falling wedge pattern, like all technical analysis patterns, is not 100% accurate and doesn't guarantee a certain outcome. Its effectiveness depends on various factors such as the market conditions, the specific asset being traded, volume during the pattern formation, and the overall trend in which the pattern occurs.

However, the pattern is generally considered reliable. A breakout above the upper trend line of the wedge, on high volume, can be a strong bullish signal. This is especially true when the pattern is used as part of a comprehensive wedge trading strategy, which takes into account other factors such as resistance levels and target levels.

As with any trading strategy, it's important to manage risk appropriately. Traders typically use stop losses and take profits to manage their risk when trading on such patterns.

When Should You Trade the Falling Wedge Pattern?

There must be at least three taps at the trend line levels to validate a falling wedge formation. Traders may use the falling wedge pattern once the price crosses the pattern's resistance trend line with a bullish candle. This is often seen as a bullish reversal pattern, indicating a potential shift from a bear market to a bull market. It's a signal that the market may be about to turn, offering traders the chance to get in at the start of a potential uptrend.

How To Trade a Falling Wedge in a Downtrend?

When this pattern is seen in a downtrend, more often than not, it depicts a reversal. It acts as a way to time market bottoms, or near-bottoms.

To time this strategy to perfection, a break out and volume are two extra confirmations a trader should wait for. The following could be a general trading approach for bullish wedges:

• Drawing trendlines along lower highs and lower lows to emphasise the wedge pattern is the first and most crucial step in finding it on the chart.
• Keep an eye out for when the price breaks out of the wedge and confirm the breakout by ensuring the price has truly gone past the trendlines.
• Consider opening a buy trade if the price climbs higher than the upper trendline. After a breakout, the price occasionally returns to retest the wedge. Take this as a starting point.
• Put a stop-loss order for the trade on the side of the wedge opposite the point where the price breaks out. A few potential places for the stop-loss objective are shown on the chart.
• The next step is choosing a profit target for your trade. The thickest area of the wedge is often the expected profit target. The predicted target profit margin is shown by the rectangle at the bottom of the wedge. The price objective is then estimated by adding this rectangle to the wedge's breakout point. This target level is an important part of your trading strategy, as it helps you determine when to exit the trade to maximize your profits.

Trading the Breakout

1. Find the wedge on a graph. To emphasize the pattern, draw trendlines through swing highs and swing lows.
2. Keep a lookout for the breakout. In other words, the price alters from the drawn wedge pattern.
3. Third, verify the breakout. Check to see if the price has left the wedge. Verify that you have established the trendlines according to your preferences (they are commonly drawn along and connect highs and lows).
4. Make a trade. This is the final step in your trading strategy, and it's where you put all your analysis into action. It's critical to remember that while the falling wedge can provide valuable insights into market conditions, it's just one tool in your trading toolbox. Always consider other factors and indicators before making a trade.

Continuation and reversal Trend

Continuation

A cryptocurrency's price changes by making swing lows and highs. Investors consequently see brief bearish fluctuations inside a broad bullish trend. A shift from a minor swing level, therefore, signals the continuance of the main trend.

The main bullish trend, where the price is rising by making higher highs, is indicated in green in the above image. The descending wedge pattern, however, starts to form when we examine within the bearish corrective, and following a breakthrough, the main trend resumes. The FWP, therefore, falls inside the long-term bullish trend even though it emerges after a bearish trend.

Reversal

Cryptocurrency trading offers the most gains when a falling wedge reversal pattern is formed from a key price level. For this to occur, it's critical to identify the proper patterns from suitable locations.

These patterns show that as bears appear in a swing low, they lose momentum. Consider it more beneficial if you discover a falling wedge reversal pattern following a significant price decline. It is challenging to forecast whether the bearish trends will change or stay the same. As a result, the likelihood of a trend reversal improves when it is discovered near the bottom. Such reversal signals and an understanding of limit levels and resistance levels can be particularly useful.

Pros & Cons of FWP in Crypto

Benefits of Using this Pattern

1. In the case of a continuation pattern, this pattern aids traders to enter a trending market and profit from its price movement if they have missed their initial opportunity.
2. The pattern is quite common in the financial markets, which is good news for traders.
3. The pattern has clear entry, exit, and stop-loss targets.
4. The falling wedge trading pattern offers a great chance for a good risk-reward ratio. This is particularly true when the pattern is used as part of a comprehensive trading strategy that takes into account other factors such as trading volume and market conditions.

Risk of Using this Pattern

1. The pattern may not make sense to you if you are a beginner trader.
2. People frequently misidentify this pattern; thus, you might need assistance from oscillators and technical indicators to acquire more confirmation. This is where using a volume indicator can provide additional confirmation of the pattern.

Comparing the FWP with Other Patterns

Falling Wedge vs. Descending Triangle

Unlike the Falling wedge patterns, the descending triangle shows bearish sentiments. Also, while the falling wedge can start a trend, the descending triangle is seen in the middle of another chart pattern, and so the profit potential is much lesser than the falling wedge.

How do you trade a descending triangle?

The first thing to note is to look for a downtrend.

Then ensure that the support remains the same, while we have lower highs. If not, it is not a descending triangle.

The tipping point will be seen in the equal lows. Once the price breaks downwards, you have a confirmation for the descending triangle.

Falling wedge vs bull pattern

Both the falling wedge and bull flag indicate a bullish trend, albeit in different ways. The former is seen at the bottom of a downtrend, while the bull flag is seen after a long bullish trend.

Another key difference is in the distance between lows and highs. There is an equal distance between the lows and highs in a bull flag pattern, while the falling wedge has a squeezing pattern.

Finally, the profits from a falling wedge are potentially higher than the bull pattern.

Final Thoughts

The falling wedge might be one of the trickiest chart formations to precisely identify and trade, similar to the bearish falling wedge pattern (rising wedge).

The collapsing wedge helps technicians recognize a drop in downside momentum and recognize the possibility of a trend reversal. Even though there may be less selling pressure, demand does not triumph until volume indicates so. As with most patterns, it's crucial to wait for a breakout and incorporate signals from many other indicators.

Frequently Asked Questions

What sentiment do falling wedges show?

Falling wedges are a prime sign of a bullish market. It shows a shift in sentiment from bearish to bullish, signaling potential price reversals or continuation of an uptrend. It represents a struggle between buyers and sellers where buyers gradually gain control, eventually leading to a price breakout upwards.

How to trade a bullish falling wedge?

Keep an eye out for when the price breaks out of the wedge and confirm the breakout by ensuring the price has truly gone past the trendlines.

Consider opening a buy trade if the price climbs higher than the upper trendline. After a breakout, the price occasionally returns to retest the wedge. Take this as a starting point. This is often seen as a bullish reversal pattern, indicating a potential shift from a bear market to a bull market.

What happens in a falling wedge?

It can either be a sign of a breakout or a continuation. This is where understanding the market condition and the trading volume becomes crucial. A volume indicator can provide additional confirmation of the pattern.

Is the FWP good?

Yes. If you are looking for a sign of a bullish breakout, this pattern can be your go-to pattern. However, you should combine it with other indicators for a more accurate result. This is particularly true when the pattern is used as part of a comprehensive trading strategy.

*This communication is intended as strictly informational, and nothing herein constitutes an offer or a recommendation to buy, sell, or retain any specific product, security or investment, or to utilise or refrain from utilising any particular service. The use of the products and services referred to herein may be subject to certain limitations in specific jurisdictions. This communication does not constitute and shall under no circumstances be deemed to constitute investment advice. This communication is not intended to constitute a public offering of securities within the meaning of any applicable legislation.