Falling Wedge Screener: How to Find Potential Breakout Stocks

The falling wedge screener is a bullish chart pattern that indicates an approaching breakout, potentially altering the downward trend to an upward trend. This type of pattern is classified by two downward-sloping parallel trend lines that converge towards a point where the price action gradually develops lower highs and lower lows. While the price is still dropping inside the wedge, the space between the wedge is also decreasing in width, which signals that the selling pressure is weakening and an upward breakout might be imminent that will put the control back in the buyers’ hands.

Investors and traders use the falling wedge pattern in different markets to anticipate a breakout. A falling wedge screener can thus help identify stocks portraying this pattern and reduce the number of potential investment opportunities. This pattern has a reliable history of predicting trend reversals, so it plays an essential role in any technical stock analysis. Therefore, a falling wedge pattern is helpful in breakout trading strategies for capturing potential gains as it indicates an upward trend. Now that you understand a falling wedge pattern let us look at the details. 

Understanding the Falling Wedge Pattern

Breakout pattern trading is only fruitful if the pattern is known to be true to its definition in the stock charts when it follows specific set rules and indicating factors. Likewise, a falling wedge pattern has a few indicators that help traders and investors anticipate a trend reversal. For the falling wedge to be legitimate, the price must trade in a downward trend, and there must always be two converging lines. The key features for indicating the falling wedge pattern are explained here:

Converging Trendlines

The falling wedge pattern is seen between two converging trend lines. One trendline connects to the series of lower highs, and the other trendline connects to the slope’s lower lows. The overall pattern converges downward, which creates a narrowing and funnelling wedge shape, suggesting that the downward momentum may soon be outlived. 

Decreasing Volumes

The converging wedge pattern and the decreasing price are indicators of decreasing stock volumes. This means that the market is less volatile regarding the stock and that selling pressure is weakening. Ultimately, this will pave the way for a potential breakout in the stock price. 

Signal Reversal

As the price breaks through the upper trend line, the narrative is expected to be reversed, and a downward trend is seen to be transformed into an upward trend. 

These are the three key points for understanding and anticipating a falling wedge pattern. Unlike other patterns, the pattern’s development has no set duration.

How to Set Up a Falling Wedge Screener

Setting up a falling wedge screener can help traders and investors identify a potential breakout developing in forex, stocks, or futures markets. There are a few different platforms that you can use for this purpose, such as TradingView, Finviz, and MetaTrader. Here is a step-by-step guide for you to follow when you want to set a falling wedge screener in your preferred market:

Step 1: Login and Select Asset Class

The first step is to log in on your desired platform. If you do not already have an account, you must sign up and verify your identity. Next, select the asset class in which you want to set up a falling wedge screener. Before you sign up, make sure that the platform offers the asset class you are interested in. 

Step 2: Define Screening Criteria 

To capture a falling wedge pattern, you will need to set criteria for your asset. The screening criteria may involve different parameters according to the platform, but the most common ones include the following:

Set alerts for when there are:

By setting criteria, the platform will act as a screener for a falling wedge pattern in your selected asset class. Furthermore, you can also use specific criteria to set screeners for other stock chart patterns. 

Step 3: Set Breakout Notifications

After setting the screener, the most important step is to set notifications so that you can act promptly when a falling wedge screener develops or has developed. You can set email and SMS notifications. 

Step 4: Review and Save Settings

Lastly, review and save your settings for consistent use. Revisit and revise your settings consistently based on your experiences to maximise your profits. 

Although there is no straightforward screener setup guide, as it depends on your desired asset class, your expectations from the asset, and the type of pattern you are looking for, you can use the above-mentioned generic steps to set up screeners on any platform.

Using Indicators to Confirm the Pattern

Using indicators can help validate the pattern, which is very important. In case of a falling wedge pattern, indicators like RSI, MACD, and moving averages can help in confirming an anticipated breakout. Here, we look at what each of these indicators can mean:

RSI

An RSI for breakouts, or Relative Strength Index, is commonly used to identify oversold or overbought assets and confirm a falling wedge pattern. An RSI value typically below 30 indicates that the asset is overbought, and a trend reversal might be near. 

MACD

Another indicator that confirms a falling wedge pattern is a MACD or moving average convergence divergence. In a falling wedge pattern, investors look for the MACD line to cross over the signal line. This crossover indicates that the momentum is shifting from bearish to bullish, ultimately indicating that the breakout is imminent and will hold. 

Moving Averages 

Moving Averages, or MAs, are great indicators for confirming a falling wedge pattern. Investors look for a price to move above 20 or 50-day MAs. For long-term confirmation, traders look for prices to rise above the 200-day MA, confirming a potential trend reversal. 

Using a falling wedge screener in addition to these indicators can provide traders with a comprehensive view of the potential breakout’s validity, highlighting the probability of trend reversal.

Finding Potential Breakout Stocks

Investors use a falling wedge screener to actively screen stocks that display characteristics of this bullish chart pattern. The assets should meet the following criteria for a falling wedge pattern: a downward-sloping trendline, decreasing volume, and a narrowing price range. After potentially finding breakout stocks, the next step is to enter at the right moment. 

Key Entry Points 

In this scenario, traders look for a breakout above the pattern’s upper trendline as the right time to enter. An ideal entry point would be a strong, bullish candle that closes above the upper trendline, which would confirm the breakout. 

Risk Management Strategies 

A true confirmation of a falling wedge breakout strategy is dependent on a few factors, which is why managing the risk involved with false breakouts is of utmost importance. Here, we discuss a few strategies that can protect you against losing capital. 

Setting up a stop-loss order when the price falls below a certain limit can help prevent a false breakout. 

A low-volume breakout can indicate a weaker breakout that may not be sustained, so monitor the volume closely when a breakout is potentially developing. 

Updating the screening criteria according to circumstances affecting your asset class is another way to manage your risk. 

Traders can more confidently act on potential breakouts by combining a falling wedge screener with important indicators like RSI, MCAD, and MAs, optimal entry points, and risk management strategies. 

Best Falling Wedge Screener Platform

Quite a few platforms are in the market for setting up a screener for a falling wedge pattern. Here, we present an overview of some of the best trading platforms for screening a falling wedge pattern, their prominent features, benefits, and usability:

TradingView

Finviz

StockCharts

MetaTrader 4/5 

TC2000

These were some of the specifications of various screener platforms, but the best choice depends on your specific needs and trading style. Before settling on a platform, make sure you understand its strengths and pitfalls and, most importantly, the fees it charges.

Case Studies and Real-World Examples

A falling wedge pattern is often seen in financial markets worldwide and can set the tone for a potential bullish breakout. Following are a few successful breakout case studies:

In 2020, Tesla showcased a falling wedge pattern after a period of declining prices. Over the course of a couple of weeks, the trendlines converged, hinting at a potential breakout. The breakout occurred as the price reached above the upper trendline of the wedge. Investors who entered at this point saw a strong bullish run in which TSLA’s prices accelerated.

After a continuous downtrend, the USD/EUR pair also exhibited a falling wedge pattern. The pair broke above the upper trendline, which was supported by an increase in volume and a bullish MACD crossover, giving weight to a potential breakout. 

These are just a few real-world falling wedge pattern examples. They show how correct anticipation of a breakout through a falling wedge pattern can be useful for traders and investors. The main thing to keep in mind is that a breakout should be confirmed with various matrices and indicators before entering a trade to maximise profit and minimise loss. 

Tips for Trading Falling Wedge Patterns

A falling wedge pattern is a profitable strategy in trading, but it is crucial to get it right. Here, we bring you tips for trading falling wedges that you can use for careful execution of a trade based on this pattern and risk management. 

Confirm the Breakout

The first and foremost tip for trading a falling wedge pattern is to confirm the breakout. Too often, traders and investors get impatient and enter a trade because of a potential breakout, which is not advisable. Always confirm a potential breakout using the pattern’s identifying characteristics, which in this case are converging trendlines and decreasing volumes. Here, patience is important to avoid a premature entry point that could result in loss. 

Use Supporting Indicators

After confirming a pattern using its characteristics, one should then use supporting indicators to add more weight to the prediction. In case of a falling wedge pattern, the supporting indicators include the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD). 

Risk Management 

The most effective risk management technique is using Stop-Loss orders for your trades. This automated process will save you big time in volatile markets and unexpected downtrends. 

Diversify Portfolio

Another risk management tip is diversifying the portfolio and never trading all your capital in a single trade. This will help you mitigate risk and conserve capital if one breakout fails. 

Monitor Volume 

Strong buying interest is seen when the volume increases as the price breaks above the upper trendline. This could potentially indicate a trend reversal, which is why volumes significantly confirm breakouts. 

These are a few wedge pattern trading tips for you to use and profit from a breakout. Remember that these tips will only work after you practice patience in trading and always plan an exit strategy. 

Limitations of Falling Wedge Screeners

Entering a trade based on potential breakouts predicted through falling wedge screeners may result in loss because, like all chart patterns, this pattern also has some limitations that you should be aware of:

False Breakouts

This is the most important limitation of a falling wedge screener. A false breakout happens when a price seemingly breaks above the upper trendline but quickly falls back. False breakouts are very common in markets and can be avoided by validating the breakout through supporting indicators like RSI and MACD.  

Market Volatility 

A volatile market can affect the reliability of pattern-based strategies because price movements are unpredictable, and the patterns may break unexpectedly. This can lead to a false breakout or multiple trend reversals in a short period of time. Risk mitigation is crucial in volatile markets, and one way to mitigate risk is by using Stop-Loss orders. 

Pattern Reliability Issues 

A falling wedge pattern might not always be the most reliable pattern, especially in markets where trends are not well-defined. The success of any trend is also based on the individual asset and the condition of the market. This is why relying solely on the results of a screener without any additional analysis might be a bad strategy. 

Conclusion

In conclusion, a falling wedge pattern is a powerful pattern that can predict a potential breakout and give investors and traders successful entry points into the trade. Many different trading platforms can help the user create a falling wedge screener according to a set of criteria to anticipate the pattern. However, using only a falling wedge screener is not enough and can lead to false breakouts. This is why validating the pattern with supporting indicators is crucial. 

Practising breakout trading safely includes diversifying your portfolio, using Stop-Loss orders, and confirming the breakout before jumping in. Use demo accounts on platforms to familiarise yourself with screener functionality and refine strategies for increased confidence in trade. By following the information mentioned in this article, traders can leverage a falling wedge screener as part of their approach to successful breakout trading.