In a downtrend, a falling wedge describes a decline on a strong volume to a new low. Following this, there will be numerous days of trade leading to lower highs and lower lows with the volume generally contracting. Then, a break will lead to a higher point on strong volume. Despite all other chart patterns being one or the other, falling wedge can be reversal or continuation patterns which is an important note to remember.
Normally, they are a small section of a much larger reversal trend so the effects of the movements are relatively small. If you take the breakout level and add the height of the pattern, you will get the technical targets. The trend line is considered to be from the point of initial consolidation right up and through the reaction high.
In terms of its appearance, the wedge is actually very similar to the symmetrical triangle because they both have trend lines that eventually meet to form an apex. However, they are easily distinguished because wedges will always have a slant either downwards or upwards. During the formation, the volume will diminish but will then rise again during its resolve.
Although it can be found in downtrends, you are more likely to see a falling wedge on an uptrend and will therefore be bullish.
Upper Resistance Line - For the resistance line to form, there needs to be two or more reaction highs and each high should be higher than the next.
Previous Trend - There needs to be a trend prior to the pattern if it is to qualify as a reversal pattern and, wherever possible, an extended downtrend will eventually form the falling wedge. Ultimately, it needs to be at least three months old but many prefer closer to half a year.
Lower Support Line - For the support line to form, there needs to be two or more reaction lows and each low needs to be higher than the next.
Resistance Break - When the resistance line is finally broken, bullish confirmation will have finally arrived. Despite this, many choose to wait until the break has led it above the previous highs just to be sure because there can sometimes be a stutter after the break.
Contraction - As mentioned previously, the apex will be formed by the two lines converging. For this reason, the penetration of reaction lows to previous lows is shallower. Among other things, this indicates that selling pressure has decreased and the lower support line’s slope will then be altered.
Volume - With rising wedges, the volume isn't too important but the same cannot be said for falling wedges. If the volume does not expand, the breakout will not be as successful and will actually be prone to failure.