A falling wedge, also known as the descending wedge, is usually considered a bullish pattern. The pattern often appears in a downtrend as a signal of an upcoming trend reversal. In a rising trend, the falling wedge is usually considered a continuation pattern. The connected lows of the formation represent a support trend line, while the connected highs of the pattern present a resistance line. The highs and lows of the pattern are moving lower, but the highs are moving down at a noticeably higher speed. The converging falling support and resistance lines form a downward-pointing triangle. The pattern is an inversion of the rising wedge pattern.

A falling wedge pattern is considered a bullish signal with a higher probability of an upward breakout, but traders usually watch other technical indicators to confirm the breakout direction. Moving averages, Relative Strength Index (RSI), MACD, bullish divergence, and Fibonacci retracement techniques are very helpful in analyzing the falling wedge pattern behavior. Considering technical indicators, chart patterns, and support and resistance levels in the bigger time frame is extremely important.

In a rising trend, a falling wedge pattern may appear after a temporary price retreat. As a bullish pattern, when a falling wedge appears in a rising trend, it is considered as a continuation signal.

After the breakout, when the price moves above the resistance line, it becomes a new support line and the price often retests the former resistance line before moving up toward the price target. In case the price moves below the support line, it becomes a new resistance line and might be retested as well.

The image on the left shows how to calculate the falling wedge pattern price target. The distance between points A and B equals the height of the widest part of the wedge. Adding this distance to the breakout level (D) gives the estimated target price level ©. Similarly, to calculate the price target for a down breakout, the height of the widest part of the wedge AB should be subtracted from the breakout price. According to the “Encyclopedia of Chart Patterns” by Tom Bulkowski, the price breakouts are up 68% of the time and meet the target of about 62% and about 29% for down breakouts with an average profit of about 38%.

The question is how we can conclude that the target is not met and how to exit the trade in this case. The market price always fluctuates and will move in the opposite direction for a while. It does not necessarily mean that the target will not be met. If, for example, after the breakout of a monthly falling wedge pattern, a weekly price wave moves in the opposite direction, a trader should stick to the plan and wait for the target price. In this example, only if the monthly wave turns in the wrong direction before reaching the target price, we consider that the target was not met. In this case, a trader should use other techniques to close the open transaction. In the up breakout example above, the price crossing below the 100-day moving average signal can be used as a sell signal. Other technical signals, such as Parabolic SAR System, can be used to exit the trade in this case as well.