What it is and when it applies
This page helps you decide whether to go long when price closes above the upper line of a falling wedge, or to pass. A falling wedge is a decline held between two down-sloping lines that converge. Price makes lower highs and lower lows, and the lows fall more slowly than the highs, so the range narrows. This setup buys the close above the upper line.
The usual explanation is that each push down gets shorter, so sellers are running out. A narrowing range does show smaller swings, which is the part it gets right. It breaks where the same shape is also a pause before more decline, and a wedge can break downward. This page cites no test showing that falling wedges resolve upward more often than chance.
It fits a coin that has been falling and now moves in a tightening channel. It does not fit a sideways range, a vertical crash with no pauses, or a wedge you can only draw by cutting through many candle bodies. Whether a chart has a valid wedge is your call, and two careful traders can draw different lines.
Before you enter
The break is wrong if a candle closes back below the upper line, read at that candle's own time. That close is the exit by hand. The stop order is the backstop and goes lower: just below the wedge's last swing low, the lowest low of its final down-leg, named in the plan before the break. The examples assume a buffer of 0.5 x ATR(14), an assumed example and not a rule. A wider buffer takes a bigger move to reach and shrinks the position, and a tighter one does the reverse. Stop-loss placement explains the level, the close and the order.
Size comes from the order's distance, never from the line. Write in the plan whether you will be at the screen at each close. If not, the order is the only exit, and the size already allows for it.
This manual's house constraints are a planned loss of 1-2% of the account per trade and a 3x maximum leverage. They are choices, not a recommended allocation, and less, or no position, is always allowed. Sizing inputs:
- Account risk: the planned loss in cash, 1-2% of equity or lower.
- Entry price: the assumed fill, near the breakout close or the retest close.
- Stop price: the last swing low minus the buffer.
- Cost allowance: a per-unit amount for fees and slippage, added to the stop distance, plus funding for the planned hold. The examples assume 0.3 per unit, an illustrative figure (trading costs and liquidity covers it).
- Leverage cap: the leverage setting, and all open position values plus this one over account equity, 3 or less.
- Liquidation distance: the ticket's estimated liquidation price, below the stop for a long. If the gap is not wide, lower the leverage setting.
Units = planned loss / (entry minus stop, plus allowance), rounded down (position sizing has the sum). Units x (distance + allowance) is the planned loss if the stop fills at its price. A gap, slippage or funding can make the realised loss larger.
For arithmetic only, assume a 10,000 account and a planned loss of 1%, or 100. The wedge's last swing low is 93.5 and ATR(14) is 2, so the stop is 92.5. A candle closes at 102 above an upper line that sits at 100 at that candle. Entry at 102 is 9.5 from the stop, 9.8 with the allowance. The size is 100 / 9.8, about 10.2, so 10 units, worth 1,020, or 0.10 of the account. The planned loss with costs is 10 x 9.8 = 98.0, and costs are 3% of it.
Conditions
Each of these must be checkable on the chart.
- Two down-sloping lines converge, each with at least two touches and one with three or more, a common convention. Anchors are dated and written down before the break and drawn the same way, through bodies or wicks (trendlines and channels covers it). Price made lower highs and lower lows inside them during a decline, not inside a range.
- A candle closes above the upper line by a rule you fixed. The plain close is the usual convention. A margin, such as 0.5 x ATR(14) as an assumed example, or two closes in a row are variations that reject more breaks and enter later (breakouts and retests covers all three).
- If your plan has a volume condition, the breakout candle meets it, measured against the average of the closed candles before it. The multiple is your number, and this page cites no test of any.
- There is room: the reward to the next resistance, after costs, passes a test you wrote before the trade. This manual sets no minimum ratio. Risk to reward gives the break-even share to compare against.
The volatility scanner lists coins by recent movement. The manual route is ATR as a share of price on the chart you trade.
Reasons to pass
Passing is a valid result. Pass when:
- the lines were drawn or adjusted after the move, or cut through many candle bodies
- the close is inside the wedge, or only a wick is above the line
- your volume condition is not met
- the size the stop allows is below the exchange minimum
- costs come to more than one fifth of the planned loss
- the reward to the next resistance fails your written test
- you cannot name the last swing low before the break
- the book near the line is thin enough that your own order would move it, or the context chart has closed under a support level your plan names
Entry
Entry on the break close
The trigger is a decision-timeframe candle that closes above the upper line by your rule. Place a limit order at or just below that close, or a market order if getting in matters more than the fill price. The stop is a reduce-only stop-market sell below the last swing low minus the buffer. A stop-limit with its limit below the trigger caps the fill price but can sit unfilled in a gap (order types explains).
Entry on the retest
After a break, price may come back to the line. Inside a window you fixed (assume 10 candles), with no close below the line since the break, a candle trades down to within a distance you fixed of the line (assume 0.5 x ATR(14)), or through it, and closes back above it. The first such candle is the trigger; buy near its close. The stop stays at the same flat price, so a retest entry lower than the break entry means a shorter distance and a larger position for the same planned loss. A retest may never come, and one that closes below the line means the break failed. Cancel when the window ends.
Execution assumptions
Assume a limit order that fills at its price, 0.3 per unit for fees and slippage, and a stop-market that fills at the next available price. If price runs away without a fill, do not chase: the stop does not move, so the distance and the reward both change. If a candle closes back below the line first, cancel.
Hypothetical walkthrough
Hypothetical walkthrough. Invented prices and an invented outcome, chosen to teach the decision. Not a recorded trade, and not evidence of how often this setup works.
The plan is written before the break: if a 4-hour candle closes above the upper line, with volume above 1.5 times the average of the 20 closed candles before it, buy 10 units near 102 with a stop at 92.5. The planned loss with costs is 98.0. With the next resistance at 114, the reward after costs is 11.7 against 9.8, about 1:1.2 if every unit closes there.
Now change one fact. That 20-candle average is 1,000 and the breakout candle trades 1,200, which is 1.2 times. The reader's own condition, whose multiple is not a rule of this manual, is not met, so the plan waits or passes and the pass is logged with its reason. The outcome was chosen to show a clean close above the line ending in a pass because a condition written beforehand was missing.
Exits
Stop. Keep the reduce-only stop below the last swing low minus the buffer. A decision-timeframe close back below the upper line means the break failed: close by hand, then cancel the order once you are flat. The order stays as the backstop while that close is pending or you are away.
Taking profit. The first target is the next overhead resistance, found by looking left and marked before entry. Close part there and write the rest of the plan before the order (taking profit covers partial exits and the R arithmetic). After a partial, resize the stop to the units left. Once the first target fills, the stop can move to entry or just below the latest higher low. It only moves toward price.
Trailing the rest. With no fixed target, the Chandelier Exit trend ride can take over once its line passes the first stop. It exits on a candle close beyond the line, with a reduce-only stop-market raised behind it. Switch it on before entry, and leave it off in a range, for a line wider than the plan accepts, or when you cannot watch each close, since the ride's exit is a close taken by hand.
Common pitfalls
- Buying inside the wedge. That is a guess that a break will come. Wait for the close above the line.
- Calling a wick a break. A wick above the line that closes under it is not a close beyond it.
- Drawing the wedge after the move. Lines fitted in hindsight always look right, so date the anchors before the break.
- Putting the stop inside the wedge. A retest can trade there while the idea is alive.
- Chasing a break that has run. The stop distance grows and the size shrinks. Wait for a retest or pass.
- Assuming wedges break up. Write the failure condition before the order.
What this cannot tell you
- Whether this wedge resolves up or down. The lines describe past swings, and this page cites no test of the direction wedges break.
- How far price runs after a break. The resistance band is a reference, and a band can hold.
- Whether the break volume is real. An exchange's volume figure can include wash trading.
- Where the stop fills. A fast market can fill it past the trigger and make the realised loss larger.
Questions
Does a falling wedge always break upward?
No. The common expectation is an upward break, and this page cites no test of it. The setup treats a close back below the line as the failure.
Is a falling wedge the same as a leading diagonal?
Only some are. Wave traders call a falling wedge a leading diagonal when it sits in a wave 1 or wave A position, and an ending diagonal when it ends a wave 5 or wave C, and each label comes with wave rules of its own. The Elliott wave page covers wave positions and the diagonal exception to its rules. The lines and the close here need no count.