5 Easy Steps to Trade the Forex Falling Wedge Price Pattern

-In well-established uptrends, falling wedges usually mark the halfway point of a major move.

- As continuation patterns, falling wedges have a high probability of breaking out in direction of the trend

- Stops and limits can be easily determined ahead of time.

A popular chart pattern used by many FOREX traders is the falling wedge. The reason this pattern is especially beneficial to traders is its ability to give traders who had missed a previous up move another chance to rejoin the trend. The falling wedge is a continuation pattern that also has the added benefit of providing excellent risk to reward forex trade setups. Though, upon first glance, it resembles a triangle pattern, there are significant differences

Learn Forex: Narrowing Descending Channel

First of all wedge pattern differs from its cousin, the triangle, in that it is composed of many more candles that can take a lot longer to develop before a breakout. Next, it is made up of converging trendlines that slant in a downward slant, which differs from the downtrend resistance and uptrend support of triangles. As there are three main types of triangles, there are two types of wedges; falling and rising. We will focus our attention on the falling wedge as it is a great way for traders to get into an established uptrend.

When a trader sees a falling wedge near the top of an uptrend, the first instinct may be to short the currency pair. However, after a bit of time, the pair fails to make substantial new lows and then starts to make higher lows in a narrowing range. A sudden surge in price above topside resistance follows and the trend resumes. Based on research by Thomas Bulkowski, author of The Encyclopedia of Chart Patterns, falling wedges break upward 68% of the time. With this type of predictive ability. How do we trade a falling wedge?

Learn Forex: Trading Falling Wedge

(Created using FXCM’s Marketscope 2.0 charts)

There are five simple steps to trading a falling wedge. Following an established uptrend, identify price churning in a channel bound by converging and descending trendlines. Usually, three to five overlapping swings happen within a narrowing channel, but the currency pair moves down very slowly.

After prices grinds slowly lower, selling pressure begins to dissipate as sellers lose interest. Bargain hunters who were waiting to get back into the strong uptrend at better prices begin to take control and eventually push prices above the resistance trend line. Once a higher low appears within the pattern, measure the height of the pattern to obtain a profit limit target. When the currency pair breaks out above the resistance trendline, enter a trade long about four pips above the last swing high that was formed within the pattern.

This reduces the chance of getting caught in a false breakout by giving added confirmation that the move may continue. Finally, set a limit equal to the height of the pattern. Place a protective stop four pips below lowest swing in the pattern. In the event that the pattern may fail, a relatively small amount of risk was taken in relation to the larger potential gain.

In sum, falling wedges can help a trader spot strong uptrends that they can join. This pattern is attractive as it has a well-defined risk reward profile and keeps traders on the right side of the trend.

 

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