Bullish falling wedge is one of the patterns that indicates a change in trend direction. This pattern is also considered a Reversal pattern. For more details about the bullish falling wedge, you can read the following article. Also read other articles such as Bullish Triangle: Characteristics, Requirements, Types, and Benefits.
What Is A Bullish Falling Wedge Pattern
Falling Wedge is a bullish pattern. Together with the rising wedge formation, they create a strong pattern that signals a change in trend direction. In general, the Falling Wedge pattern is considered a Reversal pattern, although there are examples that facilitate the continuation of the same trend.
Falling Wedge is an upward price pattern that represents a story about the market where the bulls are preparing for another push.
In cryptocurrency trading, buying an asset from a logical position is more likely to bring success than buying an asset randomly without applying technical analysis.
Therefore, keeping the Falling Wedge pattern as a key pattern in your trading checklist is a great way to make money from the crypto market.
This article explains the bullish indication of the Falling Wedge pattern on crypto charts, along with its use as a trend continuation and reversal pattern.
Falling wedge is a repeating pattern that forms when the price bounces between two converging trendlines that are sloping downward.
This pattern is usually found at the end of a downtrend in an asset's price, and it is formed with support and resistance lines sloping downwards.
The movement of the resistance line, on the other hand, is smaller than that of the support line pattern.
How to Read Bullish Falling Wedge
The most common Falling Wedge formation occurs in a clean uptrend. Price action is trading higher, but buyers lose momentum at one point and bears take temporary control of price action. The second phase is when the consolidation phase begins, which makes price action lower.
It is important to note the difference between a descending channel and a Falling Wedge. In a channel, price action creates a series of lower highs and lower lows while in a descending wedge we also have lower highs but the lows are printed at higher prices.
For this reason, we have two trend lines that do not run parallel.
In the chart above we see EUR/USD on the daily chart. Price action is moving in an uptrend, pushing higher and creating new short-term lows.
The pair price then starts moving lower, the consolidation phase begins as buyers use this time to regroup and prepare for further pressure higher. In parallel, you see that volume decreases.
Just before the breakout occurs and as the two trendlines approach each other, buyers force a breakout of the wedge, surging higher to create a new low. A surge in volume occurs with the breakout.
The Falling Wedge pattern is a technical formation that signals the end of a consolidation phase that facilitates a pull back down. As previously described, the Falling Wedge can be a Reversal and continuation pattern.
In essence, both continuation and reversal scenarios are inherently bullish. Thus, the Falling Wedge can be described as the “calm before the storm”.
The consolidation phase is used by buyers to regroup and attract new buying interest, which will be used to defeat the bears and push price action higher.
Therefore, the Falling Wedge is an important technical formation that signals that a correction, or consolidation, has just ended as the asset's price leaves the wedge to the upside and, in most cases, a continuation of the overall trend is underway.
Characteristics of the Bullish Falling Wedge Pattern
Price patterns on cryptocurrency charts don’t form randomly. Instead, they tell a story about buyer and seller activity.
Likewise, the Falling Wedge pattern, which occurs after a bearish trend, tells a story about what bulls and bears are doing — and what they might do next.
Bullish trends form after significant events, encouraging buyers to purchase an asset in the hope of future price appreciation.
However, it’s often difficult for investors to hold these positions for long. They typically book profits after a few gains, often adding more positions when the price is discounted.
As a result, the bearish wedge pattern we see after a bullish trend is partly the result of buyers taking profits. Once the profit-taking is over and the price drops, investors will start buying again.
The approach to trading with the falling wedge pattern is to look for the moment when the correction is over and the bullish trend is likely to continue.
The global financial markets are driven by institutional traders who need liquidity. There must be enough buyers to sell and enough sellers to buy.
Therefore, a pattern like the Falling Wedge suggests that institutional traders who have created an uptrend may open another long position, continuing the trend after the discount.
The above chart shows a Falling Wedge pattern that appears after a bearish trend. Bitcoin price moved sharply down from $64,000 to $30,000, but despite strong selling pressure, it did not break below $30,000. As a result, the price remained corrective and formed a Falling Wedge.
In this pattern, new lower lows and lower highs are formed as the price remains within the support and resistance of the converging trend lines.
In addition to swing levels, investors should monitor how volume changes.
As price moves into a consolidation phase, volume will decrease due to less trading activity. However, once a breakout occurs, it should be supported by higher volume.
The image above shows the same BTC/USD chart with trading volume added.
Here we can see that volume was higher at the start of the Falling Wedge pattern, but the volume bars started moving lower as the wedge expanded. Once price moved up out of the wedge pattern with a bullish breakout, volume started to increase again.
Bullish Falling Wedge Type
A Falling Wedge is a Reversal pattern, but investors can use it both as a Reversal and as a continuation of a trend.
Falling Wedge Continuation Pattern
Cryptocurrency prices move by creating swing lows and swing highs. As a result, investors experience small bearish swings within a major bullish trend. Therefore, Reversals from small swing levels are ultimately a continuation of the major trend.
Let’s take a look at the chart below: In the chart above, the main bullish trend is marked in green where price is moving up by creating higher highs.
However, when we look into the bearish correction, we see a Falling Wedge pattern starting to form, with the main trend continuing after the breakout. Therefore, even though the falling wedge pattern appears after a bearish trend, it is still within the long-term bullish trend.
The image above provides a practical example of a wedge pattern as a continuation of a bullish trend on a real chart. Here, the BTC/USDT market trend is bullish, as the falling breakout from a small bearish swing continued the trend and made a new higher high.
Therefore, the continuation of the trend is confirmed after the price moves above the Falling Wedge with a bullish candle.
The image above shows how to open a buy trade from a breakout
Falling Wedge. In this method, the buy setup is valid as long as the price remains above the low of the wedge pattern. In addition, the stop-loss should be below the swing low, with some buffer.
Since the Falling Wedge pattern is a strong bullish continuation pattern, it often produces more profits. Therefore, traders can hold the buy position until the price reaches a significant resistance level.
Falling Wedge Reversal Pattern
With cryptocurrency trading, the Falling Wedge Reversal pattern from a significant price level can provide more profits than in traditional markets. However, finding the right pattern from an ideal location is important.
The Falling Wedge pattern appears at a swing low, indicating that the bearish is losing momentum.
Therefore, the first sign of a highly profitable wedge pattern is to find it after a significant down move.
It is difficult to determine whether a bearish trend will continue or reverse, so finding the pattern below increases the likelihood of a trend reversal.
Look at the chart to see a strong downtrend at the beginning that lost momentum at the bottom.
The above chart explains how we can gauge the strength of a bearish trend by looking at swing lows. If bears become unable to make new lower lows with a large range, it is a sign that they are losing momentum.
Therefore, to trade the Falling Wedge pattern as a primary market Reversal strategy, we need to ensure the following confirmations:
- The Falling Wedge pattern appears at the bottom of a downtrend.
- The downtrend becomes weaker before forming a wedge pattern.
- There were at least three touches on the trendline level of the Falling Wedge.
- The price reached an important demand zone, from where bulls usually open their orders.
Let's see how the Falling Wedge pattern works on a real chart:
On the daily LTC/USDT chart above, the price Dropped from the $400.00 resistance level but lost its momentum at $105.00.
Meanwhile, the price formed a wedge pattern supported by decreasing volume. As a result, after the bullish breakout occurs, the trend will shift from bearish to bullish.
The Falling Wedge Reversal pattern trading approach is similar to the continuation system. The trade entry becomes valid when the price moves above the Falling Wedge pattern with a strong bullish breakout. Again, the stop-loss should be below the support level, with some buffer.
Trading on higher time frames often allows traders to hold onto profits for years.
However, taking some profits from strong resistance levels is important.
The image above shows how to open a buy trade from the support level using the Falling Wedge pattern. The image clearly shows that the volume decreased with the formation of the wedge, which is a sign of lower trading activity.
However, as soon as the price broke above the SL level, the volume began to increase. On the other hand, there is no guarantee that the price will return to the support level after breaking above the falling wedge.
In this case, the trader can open the first buy entry immediately after the breakout, and the second entry after the completion of the correction.
Also read :
Advantages of Using a Bullish Falling Wedge
The following are the advantages of using the bullish falling wedge. The advantages are:
- This pattern appears quite often in the financial markets, so it is quite promising for traders.
- If you miss the initial opportunity, the pattern allows and helps traders to enter the trending market and profit from its price movements.
- This pattern presents direct entry, exit and stop limits.
- The Falling Wedge pattern represents an excellent opportunity for a favorable risk-reward ratio.
After learning about the bullish falling wedge, you can learn other materials about the types of candlestick patterns through the GIC Journal. Also, make sure to register yourself so you can enjoy all the benefits of trading at GIC!
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