General Information:
 

Falling Wedges are bullish biased patterns that are characterized by a series of lower highs and lower lows that converge in a downward pattern. Two trendlines can be drawn connecting the highs and the lows resulting in a downward right-angled sloping triangle. These downward trendlines should be tested several times with the most reliable formations touching the trendlines at least 5 times. The time length or duration of the pattern should be at least three weeks, anything shorter is probably a Pennant. The volume tends to decrease during the formation of the pattern

 

If one misses the breakdown, he/she may have a second chance to short the stock on a retest or pullback to the pattern – this happens about half the time per the statistics below. Upside breakouts generally occur about 2/3 of the way through the pattern to the apex. Also note that upside breakouts do not need to be confirmed with high volume, as stocks can fall under their own weight. Falling Wedges can are prone to premature breakouts either up or down as is any pattern and this does not signal the end to the pattern. In fact, statistical information from “Encyclopedia of Chart Patterns” by Thomas N Bulkowski, shows that 27% of Falling Wedges are subject to a premature breakdown. If a Rising Wedge is broken to the upside via a Breakaway Gap, the likely hood of a nice run-up is enhanced and I would consider this have an even better chance of success. A generic price target would be a rise to the top of the pattern – however many breakouts find temporary resistance at the 38.2% Fibonacci retracement level so be aware of this as they are mostly temporary. Also note that while these patterns can be very profitable, they are quite rare with only 132 examples found in 797 stocks from 1991 – 1998, “Encyclopedia of Chart Patterns” by Thomas N Bulkowski.

 

All the statistical information for the chart patterns is referenced form the book: Encyclopedia of Chart Patterns by Thomas N. Bulkowski - Publisher: John Wiley & Sons. Click the title to buy this excellent book.

Statistics for Falling Wedges based on a population of 132 examples in 797 stocks from 1991 - 1998

 

Falling Wedges have a low general failure rate based on statistics, and has one of the lowest general failure rates of all the stock patterns. However, it is still best to wait for the upside breakout confirmation to go long.
 

The other things that stand out is the high “most likely” rise of 20 - 30% as well as the high 88% meeting their price targets.

 

 

Comments on the above table:

 

The majority of Falling Wedges have a downward volume trend as do most technical patterns, so this is not surprising.

 

However, the statistics show that Falling Wedges tend to go up the same amount percentage wise whether they breakout on very high volume or very low volume, 40% and 42% respectively. These statistics are very interesting to me and show me that what I thought previously about volume importance was not correct.

 

Therefore, don’t ‘freak out’ if you buy a Falling Wedge after it breaks out, but it’s on low volume – the statistics seem to say that it doesn’t matter.
 

Comments on the above data:

 

Even though the average time for pullback completion takes about 12 days, note that pullback will begin much sooner than this, such as only a few days after breakout. Therefore, if you go-long a stock after it breaks out of a Falling Wedge pattern, don’t ‘freak out’ and sell early if it starts to pullback in a few days, or if the volume is low upon breakout.

 

For swing trading, it is so important to let your winners run and sell you losers quickly. Most novice traders hold on to their losers too long - why does this happen??? After a trader has a string of losses, he/she surrenders to emotion which causes the trader to lose objectivity. In this example, once the trader surrenders to emotion, he/she will feel a psychological need to quickly lock in some profits to feel better to make up for the losses i.e. the trader does not let his winners run.
 

Do not fall into this destructive trap – sell your losers quickly and let your winners run – trade objectively, not emotionally. It’s also a lot easier to let a position run rather than constantly trading in and out of positions quickly – at least it is for me and is the reason I do not day trade.