Falling Wedge
19 hours agoA falling wedge is a chart pattern created by drawing two descending trend lines, one for the highs and another for the lows. This pattern is classified as a bullish reversal chart pattern.
The trend line for the highs has a steeper slope than the one for the lows, indicating that the highs are decreasing at a faster rate than the lows. To establish a reliable falling wedge pattern, at least five reversals are needed—two for one trend line and three for the other.
The resulting shape forms a gradually narrowing wedge, which is how the pattern gets its name. Although the trend lines of a falling wedge are descending, they are sometimes mistakenly viewed as continuation patterns within a broader downward trend.
This apparent downward price trend encourages bearish traders to keep selling, while bullish traders continue to buy, which helps maintain a strong lower support line. As the price consistently holds above this support level, selling pressure diminishes, leading to a breakout above the upper resistance line and initiating a strong upward trend.
The falling wedge should be interpreted as a strong buy signal, indicating that a trend reversal is on the horizon. It is the opposite of a rising wedge.
Falling wedges often occur after a climax trough, sometimes referred to as a "panic," which is a sudden reversal of an uptrend, typically accompanied by heavy trading volume. In this context, the price within the falling wedge is generally not expected to drop below the panic value, ultimately resulting in a breakout through the upper trend line.
During the formation of the pattern, volume is likely to decrease. However, wedges that experience high volume at the breakout point are expected to perform better. Additionally, gaps prior to the breakout are believed to enhance performance.
In the rare case where a falling wedge follows an uptrend, the pattern indicates a gradual price decline. In most instances, the price will break through the upper line, continuing the previous trend while maintaining the structure as much as possible.
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