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Thomas N. Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with almost 30 years of stock market experience and widely regarded as a leading expert on chart patterns. His four books, including the best selling Encyclopedia of Chart Patterns, have been translated into six languages. He may be reached at

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Bulkowski’s Falling Wedge

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As of 09/02/2010
10,320.10 50.63 0.5%
4,342.03 58.62 1.4%
396.87 -0.49 -0.1%
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1,090.10 9.81 0.9%
 
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Mkt Overview: 08/29/2010

CPI: on 08/27/2010

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 chart pattern

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%

Identification Guidelines

CharacteristicDiscussion
Price trendCan be any direction leading to the pattern.
ShapePrice follows two down-sloping and converging trendlines.
TouchesPrice 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.
Duration3 weeks is the minimum duration, otherwise it’s a pennant.
Volume trendTrends downward 72% of the time until the breakout.
BreakoutCan be in any direction but is upward 68% of the time.
ConfirmationThe pattern confirms as a valid one when price closes outside one of the trendlines.
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Trading Tips

Trading TacticExplanation
Measure ruleSee 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).
DipSee 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.
BreakoutThe average distance from the breakout is 57% to 59% of the way to the triangle apex (where the trendlines join).
ConfirmationWait for a close outside one of the trendlines before taking a position.
GapA gap on the breakout day suggest a better performing wedge.
HeightTall patterns perform better than do short ones.
Breakout volumeWedges with heavy breakout day volume perform better.
Yearly lowBreakouts within a third of the yearly low do well.
Falling wedge chart pattern measure rule
The Measure Rule

Falling wedge chart pattern price dip

Dip

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Example

Falling wedge chart pattern 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

See Also

-- Thomas Bulkowski

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Copyright © 2005-2010 by Thomas N. Bulkowski. All rights reserved. Government Sign: Department of Redundancy Department