Bapital Logo
Patrick Stockdale
Written by Patrick Stockdale | May 8, 2022

What Is A Falling Wedge Chart Pattern?

In technical analysis, a falling wedge chart pattern, also known as a "bullish wedge", is a chart pattern formation that forms when two declining converging lines connect the lower swing lows and the lower swing highs in the prices of a financial market together.

The falling wedge chart pattern is a bullish signal and it indicates that the price of a market will increase and go higher once the pattern is successfully completed and the price breaks out from the pattern.

The falling wedge is most commonly found as a bullish price reversal pattern meaning it can signal a change in the trend direction from bearish to bullish.

A falling wedge can also be used as a bullish continuation pattern meaning it forms in the middle of a bullish trend and signals a continuation in the direction of the bullish trend and indicates further price increase.

Falling Wedge Pattern Components

Components of a falling wedge pattern

In order to identify a falling wedge chart pattern, there will need to be two components visible on the price chart.

The 2 components of a falling wedge chart pattern are:

  • A declining resistance line: This is the declining resistance level that connects the lower price swing high levels or peaks on the chart.
  • A declining but tightening support line: This is a declining but tightening support level that connects the lower swing lows or the troughs of the prices in a market.

Drawing a falling wedge chart pattern involves combining these components of the declining resistance level and the declining but tightening support line together.

Falling Wedge Chart Pattern Examples

Below are visual examples of the falling wedge chart pattern.

Example Of A Falling Wedge As A Reversal Pattern

Falling wedge as a reversal pattern example

In the daily price chart of Netflix stock, a falling wedge reversal pattern formed.

The initial bearish trend trended lower and formed a falling wedge as its price declined.

Once the price of Netflix broke out of the pattern, it lead to a bullish trend which reversed the previous bearish price trend.

Example Of A Falling Wedge As A Continuation Pattern

Falling wedge as a continuation pattern example

On the Ford stock daily price chart, a falling wedge continuation pattern forms.

As evident from the price chart, the falling wedge forms in the middle of an already established bullish price trend.

The price of Ford paused and temporarily falls, creating a falling wedge during the consolidation period.

Once the price of Ford breaks out of the pattern, it leads to a continuation in the bullish trend and a continued price increase.

Example Of A Falling Wedge Chart Pattern In Stocks

Falling wedge pattern in stocks

In the hourly price chart of Affirm Holdings stock, a falling wedge forms. The price of Affirm breaks out of the pattern and it leads to a further bullish price trend.

This also shows that a falling wedge can form on any price chart timeframe.

Example Of A Falling Wedge Chart Pattern In Commodities

Falling wedge in the commodities market example

In the Soybeans price chart, a falling wedge pattern forms. It leads to a large bullish price move in Soybeans once the price breaks out of the pattern to the upside.

Falling Wedge Pattern Timeframes

A falling wedge chart pattern can form on any timeframe price chart without any restrictions.

Examples of common timeframes that trades will trade the falling wedge pattern include:

  • 1-minute price charts: High frequency traders and scalpers will use the 1-minute price chart to find the falling wedge pattern.
  • 30-minute price charts: Day traders will usually use the 30-minute price chart to find and trade the falling wedge chart pattern.
  • Daily price charts: Swing traders will usually use the daily price chart to find and trade the falling wedge chart pattern.
  • Weekly price charts: Longer-term traders will use the weekly price chart to find and trade the falling wedge pattern.

How To Find Falling Wedge Patterns

The methods for finding a falling wedge chart pattern on a price chart are:

  • Use a falling wedge pattern scanner: Traders can use chart pattern scanner software to automatically scan for falling wedge patterns in various markets.
  • Read technical analysis newsletters: Traders can find these patterns in technical analysis and trading newsletters by professional traders and chartists.
  • Scan the price charts manually: Traders can manually scroll through the price chart of markets to manually find these falling wedge patterns.

Falling Wedge Pattern Benefits

The benefits of the falling wedge pattern are:

  • It helps capture large bullish price moves: A falling wedge pattern can help traders capture large bullish price trends when the price of a security breaks out from the pattern to the upside.
  • It offers a high reward to risk ratio: A falling wedge can offer a high reward to risk ratio typically risking $1 to make $4+ per trade.
  • It helps with understanding the price action: A falling wedge can help traders understand what is happening in a market where the pattern is forming.
  • Risk is tight: The construction of a falling wedge pattern generally means the risk level is very tight with stop-loss orders placed near the buy entry point.
  • It works in multiple markets and on multiple timeframes: Falling wedge patterns can be found and traded in any financial market and on any timeframe of price chart without restrictions.

Falling Wedge Pattern Limitations

The limitations of the falling wedge chart pattern are:

  • It can create many false signals: A falling wedge can make many false breakouts before the real price breakout occurs. This can frustrate traders trying to catch the real bullish breakout when it occurs.
  • It is hard to find: Traders can find it difficult to find a falling wedge pattern on a price chart as it generally forms during choppy and volatile price action which makes it less clear to see.
  • It fails regularly: A falling wedge pattern can fail often and not successfully breakout to the upside at all.

Falling Wedge Formation Duration

The length of time a falling wedge pattern takes to form will depend on the timeframe of the price chart used to find these patterns.

Typically, a falling wedge takes between 40 minutes and 100 minutes to form on a 1-minute price chart.

It takes between 1 month and 4 months to form on a daily price chart and it takes between 30 weeks and 120 weeks to form on a weekly price chart.

Frequently Asked Questions About The Falling Wedge Pattern

Below are frequently asked questions about the falling wedge chart pattern.

Is A Falling Wedge Pattern A Bullish Or Bearish Signal?

A falling wedge pattern is a bullish signal that indicates that the price of a security may increase in a bullish direction once the pattern is completed and the price breaks out.

Is A Falling Wedge A Reversal Or Continuation Pattern?

A falling wedge can be both a continuation pattern and a reversal pattern.

A falling wedge can be a reversal pattern meaning it occurs at the end of a bearish trend and the price of a market reverses and trends in a bullish direction.

The falling wedge can be a continuation pattern when it forms in the middle of a bullish trend and the temporary pause to create the falling wedge pattern leads to a breakout and a continuation of the already established bullish trend.

What Does A Falling Wedge Tell You?

A falling wedge indicates that the price of a security is reaching an oversold level and that a bullish price bounce or price increase may occur soon.

The price action generally starts to consolidate before a potential bullish price move occurs.

Can Other Technical Indicators And Chart Patterns Be Used With A Falling Wedge?

Yes, traders often use other technical indicators and chart patterns with the falling wedge pattern as part of their trading strategy.

Examples of technical indicators used with the falling wedge pattern include:

  • Relative Strength Index
  • Moving Average
  • MACD
  • Stochastics

Traders also use other chart patterns on top of the falling wedge pattern like basic support levels.

Using support levels can sometimes increase the accuracy of the falling wedge pattern.