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Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30+ years of stock market experience and widely regarded as a leading expert on chart patterns. He may be reached at

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Chart Patterns: After the Buy
Getting Started in Chart Patterns, Second Edition book.
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Bulkowski's Falling Wedge

Class Elliott Wave Fundamentals Psychology Quiz Research Setups Software Tutorials More...
Busted
Patterns
Candles Chart
Patterns
Event
Patterns
Small Patterns
Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 09/30/2016
18,308 164.70 0.9%
8,079 93.93 1.2%
668 -5.06 -0.8%
5,312 42.85 0.8%
2,168 17.14 0.8%
YTD
5.1%
7.6%
15.6%
6.1%
6.1%
Tom's Targets    Overview: 09/30/2016
18,600 or 17,800 by 10/15/2016
8,350 or 7,700 by 10/15/2016
650 or 710 by 10/15/2016
5,450 or 5,100 by 10/15/2016
2,225 or 2,100 by 10/15/2016

Written by and copyright © 2005-2016 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information.

For more information on this pattern, read Encyclopedia of Chart Patterns Second EditionEncyclopedia of Chart Patterns 2nd Edition book., pictured on the right, pages 795 to 810.

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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 for Falling Wedge

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%

The above numbers are based on hundreds of perfect trades. See the glossary for definitions.

Falling Wedge 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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Falling Wedge 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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Falling Wedge 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.

-- Thomas Bulkowski

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Other Falling Wedge Examples

See Also

Written by and copyright © 2005-2016 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Government Sign: Department of Redundancy Department