Falling Wedge Pattern Trading 4-Step Strategy for Cheesy Profits

15 Price Action Patterns Insiders are Using If a hedge fund managers were using 15 specific price action patterns would you want to know?

The falling wedge pattern trading strategy is a reversal trading strategy that has the potential to generate big profits. Wedge trading is one of the most effective methods for identifying breakouts and finding profitable trading opportunities. When it comes to price action trading, the most important thing is recognizing identifiable patterns in the market.

Before we begin, we at Trading Strategy Guides want to thank you for checking out our content. If you like what you are reading, feel free to check out the TSG blog for any specific trading information youโ€™re looking for.

If youโ€™re new to trading, we highly recommend you read the Beginnerโ€™s Guide to Financial Markets, where youโ€™ll learn the basics of what trading is all about.

Our team at Trading Strategy Guides has dedicated a lot of time to teaching you the most popular and profitable price patterns, similar to the Head and Shoulders Price Pattern Strategy.

Now, letโ€™s get started on the Falling Wedge Pattern Trading Strategy.

Intro: Falling Wedge Pattern Trading

In this guide, weโ€™ll teach you how to distinguish, the falling wedge pattern and the symmetrical wedge pattern. They are almost identical patterns, but not quite the same.

Like most price patterns, youโ€™ll be able to trade this pattern with any market and any time frame. No matter what type of trader you are โ€“ swing trader, day trader, and scalper โ€“ you can make big profits trading the falling wedge pattern.

Regardless of the market conditions, observing a falling wedge pattern provides a clear bullish signal due to its unique shape and price pattern. Going forward, weโ€™re going to focus on recognizing the falling wedge pattern and the symmetrical wedge pattern, and then we want to focus on how to effectively trade the strategy.

Note* No technical indicators are required to trade the wedge trading strategy. This is because weโ€™re dealing with a pure price action trading strategy.

Before we start covering in-depth the rules of the strategy, weโ€™re going to define and learn how to recognize each one. Also, read about the Forex Mentors and the best investment you can make.

Falling Wedge Pattern Explained

Itโ€™s important to recognize that the falling wedge pattern, it has two parts in its price pattern structure:

  • The primary characteristic of a falling wedge pattern is that we need to have a bearish trend before the pattern develops. This is because itโ€™s a reversal pattern.
  • Part two is the actual falling wedge pattern which looks like a triangle that is pointing down.

Now, how to recognize the price structure of a falling wedge pattern?

Falling Wedge Pattern Trading
Falling wedge pattern

You need to have a series of lower highs followed by a series of lower lows, the more the better. Each lower point should be lower than the previous lows and each higher point should be lower than the previous high.

Check out this article on a step-by-step guide to a chart pattern trading strategy!

However, as we approach the end of the falling wedge pattern youโ€™ll notice the price will fail to make lower lows.

While the falling wedge pattern develops, youโ€™ll notice the length of the swing waves become tighter and tighter. Especially as we move to the downside. And at some point in the future, the two trendlines that connect the highs and the lows will converge.

The falling wedge pattern is not confirmed until itโ€™s breaking to the upside resistance.

Falling Wedge Chart Pattern
Falling wedge pattern

We can definitely say there are some characteristics in common between a falling wedge pattern and a bullish flag pattern but the difference is that the flag pattern is more of a short-term aggressive pattern while a wedge pattern is more of a long-term price action. We also have training for the best short-term trading strategy.

Before jumping into the rules of wedge trading strategies, we still need to define our second favorite pattern the symmetrical wedge pattern.

Symmetrical Wedge Pattern Explained

The symmetrical wedge pattern is another simple price action pattern. It is constructed much the same as the falling wedge pattern. The symmetrical wedge pattern has the shape of a symmetrical triangle. It can be recognized by the distinct shape created by two diverging trendlines.

This is identified by drawing two trendlines:

  • One downward resistance trendline connects a series of sequentially lower peaks.
  • One upward support trendline that connects a series of sequentially higher lows.

At some point in the future, the two trendlines that connect the highs and the lows will meet together at the right side of the pattern.

Symmetrical Wedge Pattern
Symmetrical wedge pattern

There are many opportunities to trade the symmetrical wedge pattern. This pattern can appear at the end of a bullish trend as well as at the end of a bearish trend. More than simply being a reversal pattern, this can also be traded as a continuation pattern.

Often times, a breakout of either of the two trendlines will lead to a volatile directional move. Your job as a trader is to patiently wait and only enter once the breakout occurs.

Symmetrical Wedge Chart Pattern
Symmetrical wedge pattern

Now, letโ€™s see how you can effectively trade the falling wedge pattern and the symmetrical wedge pattern. Simply follow the wedge trading strategy rules below.

Wedge Trading Strategy Rule โ€“ Buying Opportunities

As a general rule, we have to keep in mind that, the longer the market consolidates between the upper and lower limits of the falling wedge pattern and the symmetrical wedge pattern, the higher the odds of a breakout happening sooner rather than later.

First, weโ€™re going to focus on the falling wedge pattern because it has the potential of outstanding profits to be made.

Step #1: Wait until you can Spot on the Price Chart the Structure of a Falling Wedge Pattern and Draw the two trendlines that connects the highs and the lows.

Weโ€™re just looking for that visual representation of a falling wedge pattern. So, the more compressed the pattern is the better. Eventually, weโ€™ll break to the upside. The volatility behind the breakout will push the price higher very fast.

Falling Wedge Chart Example
Falling wedge pattern

Note** Often times youโ€™ll find that the shape and the price structure of a falling wedge pattern can vary from pattern to pattern. Ideally, as long as we follow the definition given earlier, weโ€™re good to trade any falling wedge pattern that respects those rules

Next, we need to figure out where we need to get into the trade, which brings us to the next step:

Step #2: Buy when we break and Close above the Downward Resistance Trendline

Itโ€™s important before the breakout to see the price contracting within the two trendlines. So when the price hits the resistance trendline the sellers will step in and when the price hits the support trendline the buyers will step in.

Ultimately, weโ€™re getting the price squeezed inside this range-bound action.

As we get tighter and tighter thatโ€™s what weโ€™re focused on as the buildup in pressure will eventually lead to a breakout. In order to avoid possible false breakouts, weโ€™re also going to wait for a close above the upper slope before we actually buy.

Falling Wedge Pattern Target
Falling wedge pattern

Note *** We need to have enough energy and enough momentum to break above the upper resistance level of a falling wedge pattern. If you still have problems identifying a genuine breakout we highly recommend having a quick look at our Breakout Trading Strategy Used by Professional Traders.

Now that weโ€™re in a trade we need to find our target, which brings us to the next step.

Step #3: Take profit once we Break Above of the Origins (Starting Point) of the Falling Wedge Pattern

The starting point of the falling wedge pattern is our first wall of resistance and obviously, we want to cash I our profits at the first trouble area. This is a more conservative target.

Descending Wedge Bearish
Falling wedge pattern

Alternatively, you can trail your stop loss below each swing low and try to catch as much as possible from the new trend.

Descending Wedge Bullish
Falling wedge pattern

Now that we have a good understanding of where to take profits, there is still one more thing left that we need to take care of, which is the Stop Loss placement.

Step #4: Place the Protective SL below the last swing low before the Breakout

The place weโ€™re going to hide our stop loss is quite intuitive to figure out. The last swing low before the breakout can provide us with a very attractive low risk in comparison with the potential profit available.

A break below the last swing low will invalidate the falling wedge price structure so we want to minimize our losses and get out of the trade.

Falling Wedge Take Profit
Falling wedge pattern

Note* The above was an example of a buy tradeโ€ฆ For a sell trade, we need to trade the โ€œcousinโ€ pattern which is the rising wedge pattern. Use the same rules โ€“ but in reverse โ€“ for a sell trade.

Rising Wedge Entry
Falling wedge pattern

The symmetrical wedge pattern follows the same wedge trading strategy rule, but the only difference is that we have a more practical way to measure our profit target.

As for our profit target, weโ€™re going to measure the distance between the highest point and lowest point of our symmetrical wedge pattern and youโ€™re going to add that distance to wherever the breakout price is.

Symmetrical Wedge Pattern Entry
Falling wedge pattern

Summary: Falling Wedge Pattern Trading Strategy

The reason why weโ€™ve chosen to use the falling wedge pattern and the symmetrical wedge pattern is that people wonโ€™t realize what is developing until after the breakout, but if you train your eyes to spot these price patterns in advance big profits are waiting for you down the line. You can also trade with the breakout triangle strategy.

The psychology behind the falling wedge pattern is that as the price action narrows down the buyers become more aggressive while the sellers donโ€™t have enough power to continue pressing down the paddle.

If you compress an object hard enough after it reaches a maximum level of compression it will snap back hard. The same principle can be applied to the falling wedge pattern which is the reason why it has such a tremendous potential to make substantial profits.

Thank you for reading!

Please leave a comment below if you have any questions about Wedge Trading Strategy!

If you are interested in Fibs check out our Fibonacci trading strategies.

Further Reading

If you found the Wedge Pattern Trading Strategy helpful, be sure to check out our recommended further reading:

  • What is Prop Trading: Gain a deeper understanding of prop trading and its potential benefits for achieving financial stability.
  • What is Trading: Learn about the various financial markets and trading techniques to help you make informed investment decisions.
  • Forex For Beginners: Discover the basics of Forex trading and how to become a skilled Forex trader.
  • Risk Management Formula: Learn how to effectively build a strategy around risk management.
  • Forex Day Trading: Master the art of day trading in the Forex market with our comprehensive guide to becoming a successful prop trader.

Wedge Pattern Trading Strategy Video

Frequently Asked Questions

Q: What is a wedge pattern in trading?

A wedge pattern in trading is a technical analysis pattern that is formed by price movements that are converging to a point. It is formed when the highs and lows of price movements are moving in a narrowing range, forming a triangle shape. Wedges can be either rising (bullish) or falling (bearish).

Q: What is the difference between a rising and falling wedge pattern?

A rising wedge pattern is a bearish reversal pattern that occurs in an uptrend. It is characterized by higher highs and higher lows that are converging to form a triangle shape. On the other hand, a falling wedge pattern is a bullish reversal pattern that occurs in a downtrend. It is characterized by lower highs and lower lows that are converging to form a triangle shape.

Q: How can I trade a wedge pattern?

You can trade a wedge pattern by looking for a breakout in the direction of the trend. If the wedge pattern is bullish, you can enter a long position when the price breaks above the upper trend line. If the wedge pattern is bearish, you can enter a short position when the price breaks below the lower trend line. It is important to wait for a confirmation of the breakout with a close above or below the trend line.

Q: What are some common mistakes to avoid when trading wedge patterns?

Some common mistakes to avoid when trading wedge patterns include: not waiting for a confirmation of the breakout, entering a position too early, not setting stop-loss orders, and not considering the broader market context

Q: What are some other technical analysis patterns that traders use?

Some other technical analysis patterns that traders use include: triangles, double tops and bottoms, head and shoulders, and channels. Each pattern has its own unique characteristics and signals, and traders use them to help make trading decisions.

What is a rising wedge pattern?

A rising wedge pattern is a bearish chart pattern where the price forms higher highs and higher lows, but in a narrowing range. This indicates that buyers are losing momentum and the price is likely to break down.

What is a falling wedge pattern?

A falling wedge pattern is a bullish chart pattern where the price forms lower highs and lower lows but is in a narrowing range. This indicates that sellers are losing momentum and the price is likely to break out to the upside.

What are some common strategies for trading wedge patterns?

Some common strategies for trading wedge patterns include waiting for a breakout confirmation, using price action analysis to identify key levels of support and resistance, and using technical indicators to confirm the direction of the breakout.

How do I identify wedge patterns?

If youโ€™re looking to identify a wedge pattern, keep an eye out for a series of higher highs and higher lows that gradually converge into a narrower range for a rising wedge pattern. Conversely, a falling wedge pattern will show a series of lower highs and lower lows that converge into a narrower range. To make the identification process easier, you can also use technical analysis tools like trendlines and moving averages.

What is the difference between a wedge and a triangle?

While both a wedge and a triangle are chart patterns that indicate a potential trend reversal or continuation, the main difference is the shape of the pattern. A triangle has two trend lines that converge to form a triangle shape. A wedge has trend lines that either converge (a falling wedge) or diverge (a rising wedge). Triangles tend to be longer-term patterns. Wedges are typically shorter-term patterns. Donโ€™t forget itโ€™s important to analyze the specific market and context in order to properly interpret either pattern.

What is the difference between a falling wedge pattern and a megaphone pattern?

The falling wedge is a bullish reversal pattern characterized by converging, downward-sloping trendlines, indicating a potential shift from a downtrend to an uptrend. Volume typically decreases as the pattern forms. Conversely, the megaphone pattern, or broadening formation, displays diverging trendlines, signaling increased market uncertainty and potential for heightened volatility. While the falling wedge suggests a potential trend reversal, the megaphone pattern implies rising market indecision and volatility.

How useful was this post?

Click on a star to rate it!

Average rating 0 / 5. Vote count: 0

No votes so far! Be the first to rate this post.

As you found this post useful...

Follow us on social media!

We are sorry that this post was not useful for you!

Let us improve this post!

Tell us how we can improve this post?

15 Price Action Patterns Insiders are Using If a hedge fund managers were using 15 specific price action patterns would you want to know?

5 Comments

Leave a Reply to AlexCancel Reply

Your email address will not be published. Required fields are marked *

  1. I am a beginner with a small account. Iโ€™ve been a beginner for about two years and my account wasnโ€™t always this small but always modest. This is by far the best guide I have ever foundโ€™ and I have been looking hard. I am delighted to have found you. I am looking forward to all that I will be learning from you.

Disclaimer: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. No information or opinion contained on this site should be taken as a solicitation or offer to buy or sell any currency, equity or other financial instruments or services. Past performance is no indication or guarantee of future performance.