The falling wedge is a bullish pattern that signals continuation or a reversal depending on the prevailing trend; however, in most cases, the pattern signals a reversal. In terms of its appearance, the pattern is widest at the top and becomes narrower as it moves downward, with tighter price action. The falling wedge pattern can be identified with the following steps:
In an ideal scenario, an extended downward trend with a definitive bottom should precede the wedge. This downward trend should prevail for a minimum of 3 months. The wedge pattern itself normally takes a quarter to half a year to form. The upper resistance level should have a minimum of two high points with the second point lower than the previous and so on. Similarly, there should be at least two lows with each low lower than the previous one.
As the pattern continues to develop, the resistance and support should appear to converge. The change in lows indicates a fall in selling pressure, and it creates a support line with a smaller slope than the resistance line. The pattern is confirmed when the resistance is broken convincingly. In some cases, traders should wait for a break above the previous high.
Another important factor in pattern confirmation is volume. If there is no expansion in volume, then the breakout will not be convincing. The falling wedge is not an easy pattern to trade because recognizing it is difficult.