Just like the rising wedge, the falling wedge can either be a reversal or continuation signal.
As a reversal signal, they form it at the bottom of a downtrend, indicating that an uptrend would come next.
As a continuation signal, they form it during an uptrend, implying that the upward price action would resume.
Unlike the rising wedge, the falling wedge is a bullish chart pattern.
In this example, the falling wedge serves as a reversal signal.
After a downtrend, the price made lower highs and lower lows.
Notice how the falling trend line connecting the highs is steeper than the trend line connecting the lows.
Upon breaking above the top of the wedge, the pair made a nice move upwards that was approximately equal to the height of the formation.
In this case, the price rally went a few more pips beyond that target!
Let’s take a look at an example where the falling wedge serves as a continuation signal.
Like we mentioned earlier, when the falling wedge forms during an uptrend, it usually signals that the trend will resume later on.
In this case, the price consolidated for a bit after a strong rally.
This could mean that buyers simply paused to catch their breath and probably recruited more people to join the bull camp.
Hmm, it looks like the pair is revving up for a strong move.
Which way would it go?
See how the price broke to the top side and went on to climb higher?
If we had placed an entry order above that falling trend line connecting the pair’s highs, we would’ve been able to jump in on the strong uptrend and catch some pips!
A good upside target would be the height of the wedge formation.
If you want to go for more pips, you can lock in some profits at the target by closing down a portion of your position, and then letting the rest of your position ride.
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