Bulkowski’s Falling Wedge

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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. For more information see pages 795 to 810 of the book Encyclopedia of Chart Patterns, Second Edition and the following...



Important Results Identification Guidelines Trading Tips Example

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

Characteristic	Discussion
Price trend	Can be any direction leading to the pattern
Shape	A narrowing and descending triangle shape.
Trendlines	Price bounces between 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 downward 68% of the time.
Confirmation	The pattern confirms as a valid one when price closes outside one of the trendlines.

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 breakout day gap 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.

Falling wedge chart pattern measure rule

The Measure Rule

Dip

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.