Falling wedge patterns play an instrumental role in technical analysis. Novice traders interested in becoming efficient crypto chart readers should prioritize this important indicator.
As a bullish price pattern, the falling wedge is a representation of a story about the market in which positive market sentiment has led to a further push towards the upside.
In the trading of highly risky assets such as cryptocurrencies where prices of coins hit uptrends and downtrends within minutes, it is important to buy an asset from an analytical position.
This way, you have a great chance of realizing gains from your trades rather than following recommendations from friends and acquaintances to adding an asset to your portfolio without applying the needed technical analysis.
As a result, being able to read crypto charts to find falling wedge patterns will be highly invaluable to seeing you make decent returns from your crypto holdings.
In this article, JPEX gives an in-depth overview of the falling wedge pattern in crypto charts. By reading this piece in its entirety, you will also know more about the two types of falling wedge patterns which are reversal patterns and trend continuation patterns.
Is a Falling Wedge Pattern Bearish or Bullish?
Despite the fact that it appears after a bearish trend, falling wedge patterns are bullish. It signals the loss in momentum of bulls which indicates bears have taken over the market for a short period.
As a result, the price of the cryptocurrency starts making new lower lows at a corrective pace.
Unlike non-volatile assets such as precious metals, stocks, and commodities, the prices of cryptocurrencies are rarely seen moving in a straight line. Like certain assets in the financial economy, they tend to form a zigzag shape during trading sessions.
Swing lows and highs are formed even if the price of a digital asset remains within a particular trend. Therefore, in bullish trends, investors normally encounter brief bearish corrections which lead to patterns such as the channel, flag, triangle, or wedge.
The aforementioned are signs which indicate profit-taking which ultimately leads to a significant reduction in the buying of coins. What makes the falling wedge pattern unique from others such as a traditional descending channel is its ability to produce highly accurate trades.
Although the falling wedge and descending channel are bullish reversal patterns (they hit a downtrend before the actual pattern), it is clear as a day that the falling wedge provides better accuracy of a trend than its counterpart, the descending channel.
From the chart, there is a lower correction of price due to the maintenance of an equal distance between the swing lows and highs for the descending channel.
In contrast, the swing levels are not maintained equally but rather squeeze towards each other in the
From the images above, we can see as the price moves forward, there is a formation of lower highs which is a sign of bulls losing momentum. However, there are no formations of lower lows which mean there is a continuing pattern of holders letting go of their BTC holdings.
As prices test the horizontal support which meets the diagonal line at a junction to the far right, the level becomes weaker.
Once the price dips below the descending triangle pattern, you should know it is likely to decline further into the existing trend.
If you want to use the descending triangle pattern in your trading, you need to make sure the factors below are met.
- Locate a downtrend.
- Once a swing low has been formed, the price of the coin should move higher with a corrective momentum of less than 38% of the previous bearish trend.
- Instead of stretching the bearish movement, the prices push to a level in the middle of equal lows and lower highs.
- Once the price of the coin declines under equal lows, there is a confirmation of the descending triangle, and traders, as well as investors, can open bearish positions after the bullish corrective phase.
Based on the example above, let us examine the differences between the descending triangle and the falling wedge.
- The descending triangle has equal lows while the falling wedge comprises lower lows and higher highs.
- The descending triangle appears after a bearish trend and signals a probable continuation while falling wedge pop-ups in a downtrend and show a bullish reversal.
- The descending triangle has a lesser profit potential than the falling wedge since it does not begin from the start of a trend.
The Bottom Line
While thousands of novice traders find it difficult to select the better falling wedge pattern in the highly unpredictable crypto finance market, the aforementioned rules and concepts can be applied which could lead to significant money-making opportunities.
Overall, if you want to find a great way to spot trend reversals as well as locate profitable ways to buy before new trends set in, you need the falling wedge pattern.
alling wedge – a sign of a much deeper correction.
As a word of caution, before making trade decisions, as an investor, you should focus on where the major trends are heading as well as the performance of trading volume.
Pros and Cons of Falling Wedge Patterns
To help you understand why expert traders use falling wedge patterns and why you should know how to identify falling wedge patterns, let us analyze the pros and cons of this important indicator.
Pros of Falling Wedge Patterns
- This bullish pattern offers a positive risk-to-reward ratio.
- It is easy to find take-profit and stop-loss levels.
- The falling wedge pattern works as a trend continuation and trend reversal pattern.
- Across the financial markets (centralized and decentralized), you will come across the falling wedge pattern.
Cons of Falling Wedge Pattern
- Due to the complexity of technical analysis, novice traders find it difficult to differentiate between a falling wedge pattern and the other price patterns.
- During a lower time frame, the falling wedge pattern’s accuracy rate weakens.
- Additional confirmation is needed when trades are being opened.
How to Identify Falling Wedge Patterns
When you come across a price pattern on a chart of a cryptocurrency such as Bitcoin (BTC), Ethereum (ETH), Cardano (ADA), Ripple (XRP), Dogecoin, (DOGE), and others, do not be tempted to believe they were formed randomly.
The charts tell the story of the buying and selling activities of traders. In the same way, the falling wedge pattern which follows a bearish trend tells the story of what bears and bulls are doing, and what could happen next.
There is the formation of a bullish trend for a digital currency when price drivers such as exchange listings, staking, and acceptance as a payment method by a mainstream company leads to the pouring of liquidity into an asset.
With that said, investors do not hold onto their buying positions for long. They sell off their holdings for profits after seeing a rise in price in the short term.
Selling leads to a plunge in the price of assets. Once the price is discounted, investors make a turnaround and add more positions of the same asset into their portfolios.
Therefore, it should be noted that the bearish wedge pattern seen on crypto charts after a bullish trend partially emanates from profit-taking on the part of buyers.
Since bulls follow bears and vice versa, once individual whales and institutional investors take their profits which plummets prices to new high lows, investors throw money behind the coin all over again.
With the falling wedge pattern, the trading approach is to identify when a correction is over. Once you find this, you will know when the bullish trend is about to resume.
Institutional investors drive the global financial markets. There have to be enough sellers to buy and enough buyers to sell.
As a result, a pattern like the falling wedge signals the creators of the bullish trend, institutional investors might be opening another buying position which resumed the trend after a substantial decline in an asset’s price.
Source: BTC/USD Chart by TradingView
The image above depicts a falling wedge pattern that appears after a bearish trend. Staying on the chart, it could be seen that the largest digital asset by market capitalization, Bitcoin suffered a 53% decline from a new high of $64,863.10 on April 14, 2021, to a new high low of $30,681.50 on May 19, 2021.
Despite the strong selling pressure which resulted from Elon Musk’s announcement of the delisting of Bitcoin as a payment method for Tesla products on Wednesday, May 10 which deepened throughout the rest of the month, BTC did not break below $30,000.
As a result of this, BTCs price remained corrective and formed a falling wedge. From the pattern in the chart, there is the formation of a new lower low and lower high. The price of BTC remains inside the converging trend line support and resistance.
As an investor, alongside swing levels, you should monitor the constant changes in trading volume. As BTCs price moves into a phase of consolidation, the resultant effect should be a reduction in volume due to decreased trading activity.
Evidently, BTC had a trading volume of around $77.45 billion during its high of around $64,000. When the price plunged to around $30,000, there was a 62% rise in trading activity to approximately $126 billion. On the last day of May, BTC’s trading volume was in the region of $39 billion, per data from CoinMarketCap. This was a 69% decrease in trading activity in 12 days.
However, increased investor interest should result positively in the price of BTC once the breakout happens. From the chart, the breakout happened on July 21, 2021. On the day, trading volume was about $28.2 billion and led prices to move upwards of $32,000.
Source: BTC/USD Chart by TradingView
The image above and the one before are the same. The only difference is the inclusion of trading volume which can be found as a histogram below the chart with the title “Volume is decreasing”. From the chart, we can bear witness to the fact that volume was higher at the start of the falling wedge pattern on May 19, 2021. From the day, due to negative market sentiment, the image shows lower volume bars as the extension of the wedge pattern ensues. Once favorable market sentiment returned which saw a bullish breakout (prices moved up from the wedge pattern), there is a rise in volume again.
How to Trade Falling Wedge Patterns
A falling wedge is seen in technical analysis as a reversal pattern. With that said, investors can use it as a continuation of a trend and reversal.
Falling Wedge Reversal Patterns
In trading cryptocurrencies, a falling wedge reversal pattern from a crucial price level may provide relatively higher profits than it would in highly non-volatile markets.
However, the most important thing is to find the right pattern from the perfect location. The falling wedge pattern normally appears as swing lows which signals the loss of momentum by bears.
As a result, the first indication of a highly profitable wedge pattern is to locate it after substantial downward movement.
Despite the difficulty in determining whether the bearish trend will reverse or continue, detecting the pattern at the bottom increases a trend reversal probability.
From the chart below, you can see a strong downtrend at the start which is losing momentum at the base.
The image above also reveals how traders can look at swing lows as a factor to measure the strength of a bearish trend. As demonstrated by the chart, bears are unable to make new lower lows within a long distance. This signals the loss of momentum.
Therefore, if any trader wants to use the falling market wedge pattern as one of the major market reversal strategies, the following confirmations must be maintained.
- Firstly, the price of a coin has reached a significant demand zone which is the beginning of a new bullish pattern.
- Secondly, there should be a minimum of three (3) touches at the levels of the trend line of the falling wedge.
- Thirdly, there should be a weaker downtrend before the formation of the wedge pattern.
- Lastly, the falling wedge pattern should appear at the base of a downtrend.
The chart below gives a pictorial representation of what a falling wedge pattern looks like on a real chart.
Source: LTC/USDT Chart by TradingView
From the chart above, LTC reached a new high of $412.96 on May 10, 2021, during the peak of the markets. The delisting of market leader BTC as a payment method by billionaire businessman Elon Musk coupled with the crackdown on the use of all forms of digital assets from China and other unfriendly crypto countries led to the loss of momentum from the $400 resistance level.
On May 19, 2021, LTC/USDT was around $151.17 but lost its momentum, and plunged further to $105.
As depicted by the graph, there was a formation of a wedge pattern which corresponds to a decline in trading volume.
Once the bullish breakout occurred in the middle of June, the trend flipped from bearish to bullish.
The falling wedge reversal pattern approach in the trading of digital assets is similar to the continuation pattern.
Investors can execute trade orders when the price moves over the falling wedge pattern as this is a sign of a strong bullish breakout. The stop–loss should fall under the support level, with some buffer. You should note that traders can hold gains for years if they trade in higher time frames.
With that said, you should always make it a point to take some profits from strong resistance levels since no one can accurately predict the volatile nature of digital currencies.
Source: LTC/USDT Chart by TradingView
The image above gives us a representation using the falling wedge pattern to enter the trade through the support level. From the graph, we can see that the formation of the wedge leads to a decline in trading volume which signals decreased investor activity. However, once the price of LTC breaks above the support level, there is a spike in trading volume.
On the other hand, you should know that making trading decisions on crypto-assets is based on possibilities and not certainties. As a result, there is no certainty of prices coming back to the region of the support level after making a successful breakout beyond the falling wedge.
In such a situation, right after the breakout, traders can open the first buy entry, and right after the completion of the correction, the second entry can be opened.
Falling Wedge Continuation Patterns
Cryptocurrency prices move by creating swing lows and highs. Therefore, within a bullish trend, investors encounter minor bearish swings.
As a result, a reversal from a minor swing level leads to the continuation of a major trend.
Let us analyze the chart below to gain an extensive understanding of continuation patterns.
In the image above, we can see that the parts marked green represent a major bullish trend. In such a case, the creation of higher highs follows the increasing price.
With that said, if we take a closer look at the bearish correction which is denoted by the color red, we can see the formation of a falling wedge pattern, with a major trend following a breakout.
As a result, despite the falling wedge pattern appearing after a bearish trend, it is still inside the long-term bullish trend.
Source: BTC/USD Chart by TradingView
The image above gives a pictorial sample of what a falling wedge continuation pattern looks like. From the example, it is visible to the naked eye that there is a continuation of a bullish trend after the formation of a wedge pattern.
On the chart of the pair BTC/USD, the market trend is bullish. This is because the falling wedge breakout from the minor bearish swing resumes the trend and makes new higher highs.
Therefore, there is confirmation of the trend continuation once the price moves over the falling wedge with a bullish candle.
Source: BTC/USD Chart by TradingView
If you choose to use this method, you should note that you have a legitimate chance of realizing gains if you enter the market at a time when the price remains over the wedge patterns low. Additionally, the stop-loss should be under the swing low and should come with some buffer.
Because the falling wedge pattern is a strong bullish continuation pattern, traders who choose this strategy stand a chance of seeing more profits. As a result, traders can go long on a coin until the price reaches a peak resistance level.
Falling Wedge Patterns and Other Bullish Reversal Patterns
As one of the bullish reversal patterns, the falling wedge pattern is formed after downward pressure which emanates from large selling by whales and institutional investors.
With that said, you should know that several patterns work like the falling wedge. As a result, traders should know the significant differences between other patterns and the falling wedge to gain an in-depth insight into trading accuracy.
Descending Triangle vs. Falling Wedge
As you learn more about crypto charts, you will realize descending triangles and falling wedges look similar. Their similarities normally confuse traders that attempt to select the correct pattern for their investing activities.
Among others, the biggest similarity between the descending triangle and falling wedge is in their price implications which allow investors to understand the market’s current activity and what may happen after that.
Usually appearing after a bearish trend, these patterns show that bears and bulls are both losing their velocity.
Despite their similarities, the directions of prices after the formation of the two patterns are not the same.
Any bearish breakout after a descending triangle signals an increasing probability that there could be a continuation of the existing bearish trend.
From the images above, we can see as the price moves forward, there is a formation of lower highs which is a sign of bulls losing momentum. However, there are no formations of lower lows which mean there is a continuing pattern of holders letting go of their BTC holdings.
As prices test the horizontal support which meets the diagonal line at a junction to the far right, the level becomes weaker.
Once the price dips below the descending triangle pattern, you should know it is likely to decline further into the existing trend.
If you want to use the descending triangle pattern in your trading, you need to make sure the factors below are met.
- Locate a downtrend.
- Once a swing low has been formed, the price of the coin should move higher with a corrective momentum of less than 38% of the previous bearish trend.
- Instead of stretching the bearish movement, the prices push to a level in the middle of equal lows and lower highs.
- Once the price of the coin declines under equal lows, there is a confirmation of the descending triangle, and traders, as well as investors, can open bearish positions after the bullish corrective phase.
Based on the example above, let us examine the differences between the descending triangle and the falling wedge.
- The descending triangle has equal lows while the falling wedge comprises lower lows and higher highs.
- The descending triangle appears after a bearish trend and signals a probable continuation while falling wedge pop-ups in a downtrend and show a bullish reversal.
- The descending triangle has a lesser profit potential than the falling wedge since it does not begin from the start of a trend.
The Bottom Line
While thousands of novice traders find it difficult to select the better falling wedge pattern in the highly unpredictable crypto finance market, the aforementioned rules and concepts can be applied which could lead to significant money-making opportunities.
Overall, if you want to find a great way to spot trend reversals as well as locate profitable ways to buy before new trends set in, you need the falling wedge pattern.