![]() This also holds true at first, when the market forms the first highs and lows of the pattern. ![]() The initial phaseĬoming from a bearish trend, most market participants have bearish outlooks, and expect the market to continue falling. Having said that, here is what a falling wedge might tell us about how market players act at the moment. Even if it’s impossible to ascertain one type of market structure that applies to every single occurrence of a price pattern, we can learn a lot from trying to understand the psychology behind a move. ![]() With the exact definition of the pattern covered, we’ll now look at what might be going on as the pattern forms. The stock market is a perfect example of this, where the continuous improvements of the economy over time drives the bullish trend. In many cases, a long term trend is also a sign that there are underlying, fundamental reasons for the trend, which also makes it more probable that the trend will continue into the future. This has partly to do with the fact that many market players grow accustomed to the fact that the market is advancing in one particular direction, and therefore assume that prices will continue in that direction. In general terms, trends that have been persisting for longer periods of time, will be more robust and harder to break than trends that haven’t been in play for so long. One more thing you should keep in mind, is that there must be a bearish trend in place for the pattern to qualify as a reversal pattern In just a bit we’re going to look closer at what you may do to prevent acting on false breakouts. As you might have guessed, a false breakout is when the market breaks out past a breakout level, but then reverses and goes in the opposite direction of the initial breakout.īeing so ubiquitous, false breakouts can be incredibly expensive if not dealt with correctly. One of the biggest challenges breakout traders face, is that of false breakouts. Being a bullish pattern, most breakouts are expected to occur to the upside, which becomes the signal that the bullish phase will continue or begin, depending on the preceding trend. The final part of a falling wedge is the breakout. This shows that fewer and fewer people are willing to bet on a continuation of the bearish price swing, and that the market might not have what it takes in terms of bearish sentiment to continue the bearish price swing for much longer. Many traders prefer that the volume is decreasing as the pattern forms and the market goes further and further into the wedge. Some traders choose to interpret this as a bullish sign. Still, if the support line, which is the lower one, falls with a less steep angle than the upper line, it shows us that the bearish forces are falling short on the low. The original definition of the pattern dictates that the slope of both lines should preferably be sloping with the same angle. In other words, market volatility decreases significantly. This means that the distance the market can move gets smaller and smaller the further it moves into the wedge. ![]() Both these lines should be sloping downwards, and converge. When the wedge starts to form you should be able to draw a line that connects the local highs, and another one that connects the local lows. The image below breaks down the pattern to make it easier to get an overview of all the criteria you need to consider. As its name suggests, it resembles a wedge where both lines are falling. The definition of the pattern isn’t that hard to remember. Like we just mentioned, the falling wedge is a bullish price pattern that usually signals the end of the on-going bearish trend, or the continuation of the bearish market mode, depending on the prevailing trend direction. With all this to cover, let’s begin! Definition and Meaning of Falling Wedges
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