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.

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.

Source: www.dailyfx.com

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:

  1. The lower highs and lower lows of the price action indicate that it is currently in a downtrend;
  2. Two trend lines — the top and lower trend lines — are convergent;
  3. 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.

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.

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.

Source: learn.bybit.com

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

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

Once these three criteria are in place, you can be certain it is a FWP.

Significance

The bullish pattern can either indicate a reversal or continuation, but is widely used to detect bullish sentiments from a downtrend.

Is the Falling Wedge Pattern Accurate?

Although there are many patterns used to detect the start of bullish trends, the Falling wedge is one of the most accurate ways to time the bottom of a cryptocurrency.

Source: dailypriceaction.com

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 trendline with a bullish candle.

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.

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.

Learn more in the full article → https://redot.com/blog/falling-wedge-definition-importance-and-usage/

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