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Written by and copyright © 2005-2010 by Thomas N. Bulkowski. All rights reserved.
For more information on this pattern, read
Encyclopedia of Chart Patterns, Second Edition  ,
pictured on the right, pages 795 to 810. That chapter gives a complete review of the chart pattern, including tour, identification guidelines, focus on failures, performance statistics, trading tactics, and sample trade. Below is just a sliver of the information contained in the book.
The falling wedge is a very poor performer as far as bullish chart patterns go. The break even
failure rate is high and the average rise is low. The only variation that works well is a downward breakout in a bear
market.
Falling Wedge
Important Bull Market Results
Overall performance rank for up/down breakouts (1 is best): 20 out of
23; 17 out of 21
Break even failure rate for up/down breakouts: 11%; 15%
Average rise/decline: 32%; 15%
Throwback/pullback rate: 56%, 69%
Percentage meeting price target for up/down breakouts: 70%, 30%
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Identification Guidelines
| Characteristic | Discussion |
| Price trend | Can be any direction leading to the pattern. |
| Shape | Price follows two down-sloping and converging trendlines. |
| Touches | Price should touch each trendline at least five times to outline a good pattern. That’s 3 touches of one trendline and 2 of the opposite. |
| Duration | 3 weeks is the minimum duration, otherwise it’s a pennant. |
| Volume trend | Trends downward 72% of the time until the breakout. |
| Breakout | Can be in any direction but is upward 68% of the time. |
| Confirmation | The pattern confirms as a valid one when price closes outside one of the trendlines. |
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Trading Tips
| Trading Tactic | Explanation |
| Measure rule | See the figure to the right. For upward breakouts, the highest peak in the pattern
(A) is the price target. Alternatively, compute the height from the highest peak (A) to the lowest valley
(B) and then multiply it by the above “percentage meeting price target.” Add it to (upward breakouts) or subtract it
from (downward breakouts) the breakout price (the point at which price crosses the trendline, shown here as a blue line) to get a price target,
(C). |
| Dip | See the figure to the right. After a downward breakout, price sometimes curls around the front of the wedge and soars upward. The busted
pattern presents a profit opportunity from the long side. |
| Breakout | The average distance from the breakout is 57% to 59% of the way to the triangle apex (where the trendlines join). |
| Confirmation | Wait for a close outside one of the trendlines before taking a position. |
| Gap | A gap on the breakout day suggest a better performing wedge. |
| Height | Tall patterns perform better than do short ones. |
| Breakout volume | Wedges with heavy breakout day volume perform better. |
| Yearly low | Breakouts within a third of the yearly low do well. |
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 The Measure Rule
 Dip
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Example
The above figure shows an example of a falling wedge chart pattern. After a strong upward trend, the wedge forms,
dropping price to 50. Then price breaks out upward and climbs to B, short of the target
price of A predicted by the measure rule. Price throws back to the breakout and continues
down. This is a good example of why I avoid wedges.
Other Examples
-- Thomas Bulkowski
Copyright © 2005-2010 by Thomas N. Bulkowski. All rights reserved. Government Sign: Department of Redundancy Department
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