A Guide to Trading Bullish and Bearish Pennants

Since no chart pattern is perfect and analysis is often subjective, using descending triangles has limitations. A false breakdown may occur, or trend lines may need to be redrawn if the price action breaks out in the opposite direction. If a breakdown doesn’t occur, the stock could rebound to re-test the upper trend line resistance before making another move lower to re-test lower trend line support levels. The more often that the price touches the support and resistance levels, the more reliable the chart pattern. Technical analysis or Charting allows investors to use a range of patterns to assist them with timing their entry to and exit from positions.

In order to achieve an equal slope, the trend lines should be intersecting. This particular chart pattern implies a period of consolidation before the prices break out. Both of the trend lines in the falling wedge are sloping downwards, with a shrinking channel signaling an impending decline. The price shows a dramatic surge upwards through the top line of the falling wedge on significant volume, while the trend lines move closer to merging. This catches investors and traders off guard, resulting in a breakout and continuing uptrend. When the market produces lower lows and lower highs with a narrowing range, the chart pattern known as a falling wedge is formed.

Falling Wedge Patterns

However, a descending triangle pattern can also be bullish, with a breakout in the opposite direction, and is known as a reversal pattern. The rising wedge pattern is characterized by a chart pattern which forms when the market makes higher highs and higher lows with a contracting range. When this pattern is found in an uptrend, it is considered a reversal pattern, as the contraction of the range indicates that the uptrend is losing strength. The falling wedge pattern is a continuation pattern formed when price bounces between two downward sloping, converging trendlines.

Like rising wedges, the falling wedge can be one of the most difficult chart patterns to accurately recognize and trade. When lower highs and lower lows form, as in a falling wedge, the security is trending lower. The falling wedge indicates a decrease in downside momentum and alerts investors and traders to a potential trend reversal. Even though selling pressure may diminish, demand wins out only when resistance is broken. As with most patterns, it’s important to wait for a breakout and combine other aspects of technical analysis to confirm signals. A Rising Wedge is a bearish chart pattern that forms during a downtrend in price action that has upward trend lines.

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The ascending triangle has a horizontal trend line on the highs and a rising trend line on the lows. Traders often initiate a short position following a high volume breakdown from lower trend line support in a descending triangle chart pattern. For example, Bitcoin started forming a falling wedge pattern after it surged to almost $14k in June of 2019. Investors who could point it out saved their investment, but those who couldn’t, lost a significant amount.

This article provides a technical approach to trading the falling wedge, using forex and gold examples, and highlights key points to keep in mind when trading this pattern. The most common reversal pattern is the rising and falling wedge, which typically occurs at the end of a trend. The pattern consists of two trendiness which contract price leading to an apex and then a breakout appears.

Rising Wedge Pattern in Uptrend

Traders can make use of falling wedge technical analysis to spot reversals in the market. The USD/CHF chart below presents such a case, with the market continuing its downward trajectory by making new lows. Price action then start to trade sideways in more of a consolidation pattern before reversing sharply higher. The differentiating factor that separates the continuation and reversal pattern is the direction of the trend when the falling wedge appears.

A falling wedge is essentially the exact opposite of a rising wedge. So it also often leads to breakouts – but while ascending wedges lead to bearish moves, downward ones lead to bullish moves. Traders can use trendline analysis to connect the lower highs and lower lows to make the pattern easier to spot. A break and close above the resistance trendline would signal the entry into the market. In the Gold chart below, it is clear to see that price breaks out of the descending wedge to the upside only to return back down.

Types of Wedge Pattern

As the pattern matures the support and resistance lines come together to form that cone shape. The more shallow the lows; the more of a decrease in selling pressure there is. Wedges can offer an invaluable early warning sign of a price reversal or continuation.

Technical traders have the opportunity to make substantial profits over a brief period. They often watch for a move below the lower support trend line, suggesting that downward momentum is building and a breakdown is imminent. Traders often enter into short positions to further lower the asset’s price. Since crypto is one of the most popular trading assets, it is quite usual to observe wedge patterns forming in its charts. A wedge formation is described as a pattern that is formed at the upper side or the lower side of a trend. It is a type of pattern development in which trade operations are limited to convergent straight lines, thereby making a pattern.

Identifying it in an uptrend

Now, as prices continue into the shape that is going to become the falling wedge, we also see how volatility levels become lower and lower. Coming from a bearish trend, most market participants have bearish outlooks, and expect the market to continue falling. This also holds true at first, when the market forms the first highs and lows of the pattern. One of the biggest challenges breakout traders face, is that of 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. The original definition of the pattern dictates that the slope of both lines should preferably be sloping with the same angle.

• As you can see, the price came from a downtrend before consolidating and sketching higher highs and even higher lows.
• Then, if the previous support fails to turn into a new resistance level, you close your trade.
• Due to the confident mindset of the investors who anticipate the trend to persist, these reversals can be rather severe.
• As with any trade, proper position sizing and a stop loss should be used to minimize losing trades.
• Never give up on this difficult way which we are going to overcome together!
• The falling wedge pattern occurs when the asset’s price is moving in an overall bullish trend before the price action corrects lower.