Basics of technical analysis: Falling wedge pattern in crypto

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In this new series, we will learn some of the basic chart patterns and terminologies that can help us in our technical analysis before we venture into trading a particular crypto asset. For today, let’s discuss the falling wedge pattern. 

<source: Daily Fx>

Price patterns aren’t random formations on a crypto asset chart; instead, they represent a story about buyers’ and sellers’ activity. A falling wedge pattern, too, shows what bulls and bears are doing and what they might do next.

What is a falling wedge pattern?

A falling wedge pattern signifies a bullish momentum in the near future. It can be defined as a continuation pattern that gets formed when the price bounces between two converging trendlines. In some cases, it may also represent a bullish reversal pattern.

The falling wedge pattern represents a deeper correction in the market as swing levels squeeze toward each other. The pattern occurs very frequently in crypto markets. One can find levels that can be used to cut losses and take profits easily using this pattern. It also offers a good reward-to-risk ratio. One should, however, note that the pattern has weaker accuracy in lower time frames (hourly and daily).

How do we identify a falling wedge pattern?

A falling wedge that appears after a bearish trend is a continuation pattern, and the one that appears after a bullish trend is a reversal pattern. Our task lies in identifying the point at which the pattern would complete itself, i.e., the correction would be over, the price would find a dip, and investors would start buying again. 

To identify a falling wedge pattern, draw lines linking lower highs and lower lows using a trendline. The two lines will be sloping downwards and converging. Investors should also monitor the trading volumes. The trading volume should lessen during the falling wedge formation as the price has entered a consolidation stage before the bullish breakout.

How to trade a falling wedge pattern?

<source: Daily Fx>

Traders can put a stop loss below the lowest traded price in the wedge or even below the wedge if it suits their risk profile. To set target levels, traders need to measure the vertical distance between the support and resistance lines at the starting point of the wedge. They should then superimpose this distance at the current price, where the top end of the line will be the target. There is, however, one condition that the price must break out of the wedge pattern at least once before. 

Falling wedge patterns can be pretty rewarding, but the most crucial is identifying the pattern correctly. 

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Disclaimer: This article was authored by Giottus Crypto Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.