Source: Tiger Trade app
The Falling Wedge is a technical pattern consisting of two trendlines: an ascending support line and a descending resistance line. These two lines gradually converge to form a wedge shape.
This pattern commonly appears on price charts of stocks or other assets, indicating a potential bullish reversal signal.
The characteristics of the Falling Wedge are as follows:
Support Line: The support line is an ascending trendline connecting consecutive lower lows, suggesting a weakening downtrend.
Resistance Line: The resistance line is a descending trendline connecting consecutive lower highs, indicating a gradual reduction in selling pressure.
Gradual Convergence: The support and resistance lines gradually converge, forming a wedge shape, which indicates that the price may break above the resistance line and continue to rise in the future.
Volume: When the Falling Wedge pattern appears, the trading volume usually decreases gradually, indicating relatively calm market trading activity.
Here's an example:
Netflix Inc. (NFLX): A clear Falling Wedge pattern appeared between July and September 2018. When the price action broke out of the Falling Wedge pattern, it signaled a reversal, and the stock price subsequently rebounded.
Source：Tiger trade app
Please note that the above example is for illustration purposes only and does not constitute investment advice for the future.
In the Falling Wedge pattern, you should also pay attention to the following aspects:
Confirm the pattern: Ensure that the Falling Wedge pattern is effectively confirmed by at least two or more higher lows and lower highs between the support and resistance lines.
Trend confirmation: Observe the price action before and after the pattern's appearance. Falling Wedges typically occur during a downtrend, suggesting a potential bullish reversal signal.
Volume: Pay attention to the volume trend when the Falling Wedge pattern appears. The volume usually decreases as the wedge narrows and may increase when the price breaks above the resistance line, which can be a confirmation signal of pattern validity.
Breakout confirmation: When the price breaks above the resistance line and confirms an uptrend, the validity of the Falling Wedge pattern is more reliable.
Target price: Based on the height of the Falling Wedge and the breakout point's location, you can estimate the target level for future prices.
Stop-loss strategy: Set reasonable stop-loss points when conducting trades to mitigate potential risks.
The Falling Wedge indicates a shift in market sentiment, with bullish forces gradually gaining strength while bearish forces weaken, suggesting a potential bullish reversal trend.
However, when making investment decisions, you should combine this pattern with other technical indicators and trend confirmations and adopt appropriate risk management strategies.
Only when the price genuinely breaks above the resistance line and confirms an uptrend can you more reliably confirm the validity of the Falling Wedge pattern.